MIDWESTONE FINANCIAL GROUP, INC. This section should be read in conjunction with the following parts of this Form 10-K: Part II, Item 8 "Financial Statements and Supplementary Data," Part II, Item 7A, "Quantitative and Qualitative Disclosures About Market Risk,"
and
Part I, Item 1 "Business." For a discussion on the comparison of results of
operations for the years ended
Overview
We are headquartered inIowa 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 forMidWestOne Bank , anIowa state non-member bank with its main office inIowa City, Iowa . We also were the holding company forMidWestOne Insurance Services, Inc. , until its dissolution in 2019. OnMay 1, 2019 , the Company acquiredATBancorp , a bank holding company whose wholly-owned banking subsidiaries were ATSB and ABTW, community banks headquartered inDubuque, Iowa , andCuba City, Wisconsin , respectively. As consideration for the merger, we issued 4,117,536 shares of our common stock with a value of$116 million and paid cash in the amount of$34.8 million . The effects of this acquisition are one of the primary causes of the stated changes in our operating results for the year endedDecember 31, 2020 compared to the year endedDecember 31, 2019 , unless otherwise noted. The Bank operates a total of 56 banking offices, which are located throughout central and easternIowa , theMinneapolis/St. Paul metropolitan area ofMinnesota , southwesternWisconsin , southwesternFlorida , andDenver, Colorado . The Bank is focused on delivering relationship-based business and personal banking products and services. The Bank provides commercial loans, real estate loans, agricultural loans, credit card loans, and consumer loans. The Bank also provides deposit products including demand and interest checking accounts, savings accounts, money market accounts, and time deposits. Complementary to our loan and deposit products, the Bank also provides products and services including treasury management, Zelle, online and mobile banking, credit and debit cards, ATMs, and safe deposit boxes. The Bank also has a trust department through which it offers services including the administration of estates, personal trusts, and conservatorships and the management of real property. Finally, the Bank's investment services department offers financial planning, investment advisory, and retail securities brokerage services (the latter of which is provided through an agreement with a third-party registered broker-dealer). Our results of operations are significantly affected by our net interest income. Results of operations are also affected by noninterest income and expense, credit loss expense and income tax expense. Significant external factors that impact our results of operations include general economic and competitive conditions, as well as changes in market interest rates, government policies, and actions of regulatory authorities.
Financial Summary
Balance Sheet
Total assets increased to$5.56 billion atDecember 31, 2020 from$4.65 billion atDecember 31, 2019 . Total securities held for investment increased$871.4 million , or 110.9%, from$786.0 million atDecember 31, 2019 , to$1.66 billion atDecember 31, 2020 . Gross loans held for investment increased$27.6 million , or 0.8%, from$3.47 billion atDecember 31, 2019 , to$3.50 billion atDecember 31, 2020 . As ofDecember 31, 2020 , the allowance for credit losses was$55.5 million , or 1.59% of total loans, compared with$29.1 million , or 0.84% of total loans, atDecember 31, 2019 . Nonperforming assets totaled$45.0 million atDecember 31, 2020 , a decrease of 0.7% as compared to$45.3 million atDecember 31, 2019 . Total deposits atDecember 31, 2020 , were$4.55 billion , an increase of$818.4 million , or 21.9%, fromDecember 31, 2019 . Long-term debt decreased to$208.7 million atDecember 31, 2020 from$231.7 million atDecember 31, 2019 . The Company is well-capitalized with a total risk-based capital ratio of 13.41% atDecember 31, 2020 . 29
-------------------------------------------------------------------------------- Table of Contents Income Statement Net income for the year endedDecember 31, 2020 was$6.6 million , a decrease of$37.0 million , or 84.8%, compared to$43.6 million of net income for 2019, with diluted earnings per share of$0.41 and$2.93 for the comparative annual periods, respectively. Net interest income for the year endedDecember 31, 2020 , was$153.0 million , an increase of$9.3 million , or 6.5%, as compared to$143.7 million for the year endedDecember 31, 2019 . Interest income was$184.8 million in 2020, compared to$182.4 million in 2019. The increase was primarily a result of increased volume of debt securities from the Company's investment of net deposit inflows, partially offset by a decrease in yield. Interest expense was$31.8 million in 2020, compared to$38.8 million in 2019. The decrease in interest expense was primarily due to the decline in interest rates experienced in 2020 in response to the COVID-19 pandemic. Credit loss expense was$28.4 million in 2020, an increase of$21.2 million , from$7.2 million in 2019. The increase reflected the impact of the current and forecasted economic conditions, primarily driven by the COVID-19 pandemic, on our allowance model. In addition, upon the Company's adoption of the CECL accounting guidance onJanuary 1, 2020 , the methodology for estimating the total amount of the credit loss expense changed. Specifically, for the year endedDecember 31, 2020 , we utilized the current expected credit loss methodology, as compared to incurred loss methodology that was utilized in the prior year comparable period. For the year endedDecember 31, 2020 , noninterest income increased to$38.6 million , an increase of$7.4 million , or 23.6%, from$31.2 million during 2019. The largest driver of the increase was an increase of$6.4 million , or 168.8%, in loan revenue, which reflected robust production from the Company's residential mortgage business. Noninterest expense increased to$149.9 million for the year endedDecember 31, 2020 compared with$117.5 million for the year endedDecember 31, 2019 , an increase of$32.4 million , or 27.5%. The increase in noninterest expense was due primarily to the goodwill impairment of$31.5 million that was recorded in the third quarter of 2020. Both noninterest income and noninterest expense for the year endedDecember 31, 2020 were also impacted by the acquisition ofATBancorp , which resulted in overall higher noninterest income and noninterest expenses in 2020 as compared to 2019, offset in part by a reduction in merger-related costs between these years. COVID-19 Update The outbreak of the COVID-19 pandemic inthe United States had an adverse impact on our financial condition and results of operations as of and for the year endedDecember 31, 2020 , and is expected to have a complex and an adverse impact on the economy, the banking industry and the Company in future fiscal periods, all subject to a high degree of uncertainty.
Effects on our Market Areas
Our commercial and consumer banking products and services are offered primarily inIowa ,Minnesota ,Wisconsin ,Florida andColorado , where individual and governmental responses to the COVID-19 pandemic led to a broad curtailment of economic activity beginning inMarch 2020 . More recently, we've seen in our markets a variety of responses to the COVID-19 pandemic as the economy continues to re-open, which have included social distancing protocols, limitations on the numbers of customers at restaurants and retail stores, limitations of social gathering sizes, safety practices for the at-risk and elderly, as well as other safeguarding practices. The Bank's banking offices have remained open during these orders because the Bank is deemed to be an essential business. Based on the current environment, it is unclear how the states in our market areas will continue to change policies in response to the COVID-19 pandemic and the impact of these policies on our customers and regional economies. TheU.S. experienced a substantial decline nationally in economic condition in 2020.The U.S. Bureau of Economic Analysis released an advanced estimate indicating a decline in GDP of 2.3% in 2020. The national unemployment rate has fluctuated throughout 2020 and continues to remain elevated at 6.7% inDecember 2020 , as compared to 3.6% inDecember 2019 per theU.S. Department of Labor . Policy and Regulatory Developments Federal, state, and local governments and regulatory authorities throughout 2020 have enacted and issued a range of policy responses to the COVID-19 pandemic, including policies such as: •The Federal Reserve decreased the range for the federal funds target rate by 0.5% onMarch 3, 2020 , and by another 1.0% onMarch 16, 2020 , reaching a current range of 0.0 - 0.25%. •Congress, the President, and the FRB have also taken several actions designed to cushion the economic fallout. The CARES Act was signed into law at the end ofMarch 2020 as a$2 trillion legislative package, which included$349 30 -------------------------------------------------------------------------------- Table of Contents billion in funding for the PPP loan program administered through the SBA. An additional$310 billion in funding for PPP loans was authorized inApril 2020 . •Federal banking regulators onApril 7, 2020 issued a revised Interagency Statement on Loan Modifications and Reporting for Financial Institutions, which, among other things, encouraged financial institutions to work prudently with borrowers who are or may be unable to meet their contractual payment obligations because of the effects of COVID-19, and stated that institutions generally do not need to categorize COVID-19-related modifications as TDRs and that the agencies will not direct supervised institutions to automatically categorize all COVID-19 related loan modifications as TDRs. See Note 4. Loans Receivable and the Allowance for Credit Losses for additional information on TDRs. •President Trump onDecember 27, 2020 signed a new COVID-19 relief bill into law, which included as part of the bill up to$284.5 billion of a second wave of PPP funding and extended the deadlines related to COVID-19 related loan modifications. •The SBA issued guidance that amended the threshold for PPP loans that qualify for the simplified forgiveness application from$50,000 or less to$150,000 or less. Our Response In the first quarter of 2020, we activated our business continuity plan upon theWorld Health Organization's declaration of COVID-19 as a global pandemic. Shortly after enacting the plan, the Company deployed a successful remote working strategy. As ofDecember 31, 2020 , the majority of our employees had returned to work in our banking offices with no disruption to our operations. Our response to COVID-19 continues to be focused on how we can best serve our employees, customers, and communities. The Bank has utilized a combination of digital banking, voice, branch drive-thru and other channels in order to meet the needs of our customers. In addition, we have implemented additional safety measures to achieve appropriate social distancing for both customers and employees throughout our locations, with all of our locations having capacity restrictions and requirements to wear protective face coverings, among other social distancing requirements for both customers and employees. We have also increased our cleaning services and implemented business travel restrictions. We continue to work with our customers to understand the level of impact to their business operations as the pandemic continues to determine how best to serve them in these unprecedented times. We also continue to lend to qualified businesses for working capital and general business purposes, while also meeting the needs of our individual customers. Further, we implemented a loan payment deferral program and assisted our clients through the PPP.
Financial Condition & Results of Operations
Net Interest Income. The Company's net interest income was impacted by the COVID-19 pandemic in a variety of ways. For example, in response to the pandemic, inMarch 2020 the FRB began utilizing a variety of monetary policy tools to stimulate the economy and influence overall growth and distribution of credit, bank loans, investments and deposits, and also to affect interest rates charged on loans or paid on deposits, each of which are tools utilized by the FRB to regulate the money supply and credit conditions. These specific tactics included reducing the reserve requirement ratio to zero, reducing the target federal funds rate 1.5% to a level of 0-0.25%, and commencing quantitative easing by purchasing longer-termTreasury and mortgage-backed securities. These actions reduced both short-term and long-term interest rates and added significantly to the country's money supply. Thus, the rate at which we originated new loans and repriced existing loans was generally lower than existing loan portfolio rates, reducing loan interest income. Further, in keeping with guidance from regulators, the Company actively worked and continues to work with COVID-19 affected borrowers to defer their loan principal and/or interest payments. At this time, the Company is unable to project the materiality of these actions on the Company's results of operations, but the Company recognizes that the economic impact from COVID-19 may affect its borrowers' ability to repay the deferred principal and interest in future periods, which would reduce interest income. The aforementioned increase in the country's money supply, in combination with the fiscal stimulus and general economic uncertainty amid the COVID-19 pandemic, weakened customer loan demand and line utilization, but increased customer deposit balances. As a result, the Company invested the net deposit inflows into debt securities, which negatively impacted the Company's earning asset mix and reduced net interest income. In addition, a severe and sustained economic downturn could impact the debt securities issuers' ability to make payments on debt or to raise additional funds to continue operations, which could result in a reduction in interest income from debt securities and increased credit loss expense. With respect to interest expense, the reduction in short-term interest rates led to a corresponding reduction in the rates we pay for customer deposit accounts and short-term borrowings. We also utilized excess liquidity to pay-down certain long-term, higher rate debt at maturity. Finally, the Company's funding mix changed favorably toward lower cost deposit products. However, an extended recession could cause large numbers of our deposit customers to withdraw their funds, which could increase our reliance on more volatile or expensive funding sources. 31 -------------------------------------------------------------------------------- Table of Contents Credit Loss Expense. The Company's credit loss expense was impacted by COVID-19. Pertaining to ourDecember 31, 2020 financial condition and results of operations, COVID-19, as well as other factors, such as changes in our modeling assumptions, had an impact on our ACL. Our ACL calculation and credit loss expense are significantly impacted by changes in forecasted economic conditions. Significant worsening of forecasted conditions is possible and would result in further increases in the ACL and credit loss expense in future periods. Noninterest Income. The Company's fee income was affected due to COVID-19. For example, in keeping with guidance from regulators, during the second and third quarters of 2020, the Company worked with COVID-19 affected customers and temporarily waived fees from a variety of sources, such as, but not limited to, insufficient funds and overdraft fees, ATM fees, and account maintenance fees. This suspension was one contributing factor to the change in noninterest income between 2019 and 2020, as discussed further below. Noninterest Expense. We experienced increases in noninterest expenses that resulted from COVID-19 for additional cleaning services, protective equipment, supplies, and expanded IT equipment and network/information services. The PPP impacted noninterest expense by impacting the timing of compensation and benefit expense as PPP loan origination costs are deferred and amortized over the life of the loan to which they relate. In addition, PPP led to increased information service expenses.Credit Administration . Section 4013 of the CARES Act, "Temporary Relief From Troubled Debt Restructurings," allows financial institutions the option to temporarily suspend certain requirements under GAAP related to TDRs for a limited period of time during the COVID-19 pandemic. InMarch 2020 , various regulatory agencies, including the FRB and theFDIC , issued an interagency statement, effective immediately, on loan modifications and reporting for financial institutions working with customers affected by COVID-19. The agencies confirmed with the staff of the FASB that short-term modifications made on a good faith basis in response to COVID-19 to borrowers who were current prior to any relief are not to be considered TDRs. This includes short-term (e.g., six months) modifications, such as payment deferrals, fee waivers, extensions of repayment terms, or other delays in payment that are insignificant. Borrowers considered current are those that are less than 30 days past due on their contractual payments at the time a modification program is implemented. The relief related to TDRs was extended by the CAA, which was signed into law onDecember 27, 2020 . As discussed as part of the CAA, relief will continue until the earlier of 60 days after the date the COVID-19 national emergency comes to an end orJanuary 1, 2022 . As ofDecember 31, 2020 , the total amount of the eligible loans in deferral (deferral of principal and/or interest) that met the requirements set forth under the interagency statement and therefore were not considered TDRs was 68 loans, totaling$39.3 million . We anticipate that the current and future economic conditions will continue to have an impact on the initial modifications that were made that qualified under such criteria. As such, we expect the Company's financial statements will be materially impacted by the CARES Act, the interagency guidance, and the CAA, of which at this time the total impact cannot be quantified. The Bank is a participating lender in the PPP. The PPP loans have a two-year term and earn interest at 1%. Loans funded through the PPP program are fully guaranteed by theU.S. government if certain criteria are met. The Company believes that the majority of these loans will ultimately be forgiven by the SBA in accordance with the terms of the program. Should those circumstances change, the Company could be required to establish additional allowance for credit loss through additional credit loss expense charged to earnings. During 2020, the Company funded 2,681 PPP loans totaling$348.5 million . As ofDecember 31, 2020 , there were 2,410 loans totaling$259.3 million , including$5.3 million of unamortized net fees, outstanding. The Company remains committed to supporting our customers and communities and is participating in the second wave of PPP funding, with an expectation that the volume of second wave funding will be lower than the first round. Loan Portfolio. COVID-19 has impacted loan growth in 2020, and we anticipate that loan growth will be impacted in the future as a result of COVID-19 and the related decline in economic conditions in our market areas. While all industries have experienced adverse impacts as a result of the COVID-19 pandemic, we consider certain industries to be "vulnerable" to significant impact including non-essential retail, restaurants, hotels, CRE-retail, and arts, entertainment & gaming industries, which represented approximately 14% of our loan portfolio as ofDecember 31, 2020 . In addition, we anticipate the COVID-19 pandemic will impact the value of certain collateral securing our loans.Goodwill and Other Intangible Assets. Due to the economic impact that COVID-19 has had on the Company, management concluded that factors, such as the decline in macroeconomic conditions and a sustained decrease in share price, led to the occurrence of a triggering event for goodwill impairment. The Company completed an interim goodwill assessment as ofSeptember 30, 2020 that contemplated a single reporting unit. Based upon our interim assessment, we recorded a goodwill impairment charge of$31.5 million , as our estimated fair value was less than our book value on that date. This non-cash charge was reflected within "Noninterest expense" in the Consolidated Statements of Income and had no impact on our regulatory capital ratios, cash flows or liquidity position. 32 -------------------------------------------------------------------------------- Table of Contents Capital and Liquidity As ofDecember 31, 2020 , all of our capital ratios, and the Bank's capital ratios, were in excess of all regulatory requirements. While we believe that we have sufficient capital to withstand an extended economic recession brought about by COVID-19, our reported and regulatory capital ratios could be adversely impacted by further credit losses. OnJuly 28, 2020 , the Company completed the private placement of$65.0 million of its subordinated notes, of which$63.75 million have been exchanged for subordinated notes registered under the Securities Act of 1933. The 5.75% fixed-to-floating rate subordinated notes are dueJuly 30, 2030 . For regulatory capital purposes, the subordinated notes have been structured to qualify initially as Tier 2 Capital for the Company. We rely on cash on hand as well as dividends from the Bank to service our debt. If our capital deteriorates such that our Bank is unable to pay dividends to us for an extended period of time, we may not be able to service our debt. If an extended recession causes large numbers of our deposit customers to withdraw their funds, we might become more reliant on volatile or more expensive sources of funding. As stated above, liquidity was also impacted by the actions of the federal, state, and local governments and other regulatory authorities in response to COVID-19. Specifically, the FRB's use of a variety of monetary policy tools to stimulate the economy and influence overall growth and distribution of credit, bank loans, investments and deposits, and also to affect interest rates charged on loans or paid on deposits, included tactics such as the reduction in the reserve requirement ratio to zero, reduction in the target federal funds rate, and also commencing quantitative easing by purchasing longer-termTreasury and mortgage-backed securities. These aforementioned monetary policy tools utilized by the FRB significantly added to the country's money supply. This increase in the money supply, coupled with general economic uncertainty amid the COVID-19 pandemic, weakened customer loan demand and line utilization, but increased customer deposits balances. As a result, the Company invested the net deposit inflows into debt securities. Further, we also utilized excess liquidity to pay-down certain long-term, higher rate debt at maturity. InMarch 2020 , the Company temporarily suspended its share repurchase program in light of market conditions associated with the COVID-19 pandemic. During the fourth quarter of 2020, the Company's board of directors authorized resuming repurchases under the Company's share repurchase program. 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.
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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 methodologies revert back to historical loss driver information on
a straight-line basis over four quarters when it can no longer develop
reasonable and supportable forecasts. The Company adjusted in the first quarter
of 2020 the reversion period from the previously disclosed six quarters to four
quarters based upon current forecasted conditions.
Discounted Cash Flow Method
The Company uses the DCF method to estimate expected credit losses for the
agricultural, commercial and industrial, CRE - construction and development, CRE
- farmland, CRE - multifamily, CRE - other, RRE - owner-occupied one-to-four
family first liens, RRE - 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
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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 InMay 2019 , we completed the acquisition ofATBancorp , which generated significant amounts of fair value adjustments to assets and liabilities. 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. 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 AssetsGoodwill and intangible assets arise from business combinations.Goodwill represented$62.5 million of our$5.56 billion total assets atDecember 31, 2020 . 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. Due to the continued economic impact that COVID-19 has had on the Company, management concluded that factors, such as the decline in macroeconomic conditions and a sustained decrease in share price, led to the occurrence of a triggering event and therefore an interim impairment test over goodwill was performed as ofSeptember 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. No goodwill impairment charge was recorded in 2019 as a result of the Company's internal assessment. Other intangible assets represented$25.2 million of our$5.56 billion total assets atDecember 31, 2020 . 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 35 -------------------------------------------------------------------------------- Table of Contents 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 Our consolidated net income for the year endedDecember 31, 2020 was$6.6 million , a decrease of$37.0 million , or 84.8%, compared to$43.6 million for 2019. The decrease in net income was due primarily to an increase of$32.4 million , or 27.5%, in noninterest expense, coupled with an increase of$21.2 million , or 296.3%, in credit loss expense. Noninterest expense increased primarily as a result of the$31.5 million goodwill impairment that was recorded in the third quarter of 2020. Offsetting these amounts was a$9.3 million , or 6.5%, increase in net interest income and a$7.4 million , or 23.6%, increase in noninterest income. Both basic and diluted earnings per common share for the year endedDecember 31, 2020 were$0.41 as compared with basic and diluted earnings per common share of$2.93 for the year endedDecember 31, 2019 . Our return on average shareholders' equity was 1.28% for the year endedDecember 31, 2020 compared with 9.65% for the year endedDecember 31, 2019 .
Various operating and equity ratios for the Company are presented in the table below for the years indicated:
As of or For the Years Ended December 31,
(dollars in thousands, except per share amounts) 2020 2019 2018
Net Income $6,623 $43,630 $30,351
Return on Average Assets 0.13% 1.04% 0.93%
Return on Average Equity 1.28 9.65 8.78
Return on Average Tangible Equity(1) 10.80 13.98 11.87
Efficiency Ratio (1) 56.92 57.56 61.23
Dividend Payout Ratio 214.63 27.65 31.45
Common Equity Ratio 9.27 10.94 10.85
Tangible Common Equity Ratio (1) 7.82 8.50 8.78
Book Value per Share $32.17 $31.49 $29.32
Tangible Book Value per Share (1) $26.69 $23.81 $23.20 (1)A non-GAAP financial measure - see the "Non-GAAP Presentations" section for a reconciliation to the most comparable GAAP equivalent.
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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.
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.
Year ended December 31,
2020 2019 2018
Interest
Income/ Average Interest Average Interest Average
(dollars in thousands) Average Balance Expense Yield/Cost Average Balance Income/Expense Yield/Cost Average Balance Income/Expense Yield/Cost
ASSETS
Loans, including fees (1)(2)(3)
4.53 % $ 3,157,127 $ 164,948 5.22 % $ 2,354,354 $ 112,233 4.77 %
Taxable investment securities 797,954 17,610 2.21 465,484 13,132 2.82 428,757 11,027 2.57
Tax-exempt investment securities (2) 342,000 10,395 3.04 204,375 7,177 3.51 207,605 7,342 3.54
Total securities held for investment (2) 1,139,954 28,005 2.46 669,859 20,309 3.03 636,362 18,369 2.89
Other 73,255 262 0.36 21,289 450 2.11 3,372 62 1.84
Total interest earning assets (2) $ 4,765,154 $ 189,019 3.97 % $ 3,848,275 $ 185,707 4.83 % $ 2,994,088 $ 130,664 4.36 %
Other assets 370,687 352,765 255,630
Total assets $ 5,135,841 $ 4,201,040 $ 3,249,718
LIABILITIES AND SHAREHOLDERS' EQUITY
Interest checking deposits $ 1,108,997 $ 4,435 0.40 % $ 806,624 $ 4,723 0.59 % $ 672,069 $ 2,907 0.43 %
Money market deposits 844,137 3,696 0.44 766,812 7,549 0.98 543,359 3,020 0.56
Savings deposits 454,000 1,386 0.31 329,199 1,092 0.33 214,244 254 0.12
Time deposits 945,234 14,402 1.52 873,978 16,563 1.90 723,830 11,150 1.54
Total interest bearing deposits 3,352,368 23,919 0.71 2,776,613 29,927 1.08 2,153,502 17,331 0.80
Short-term borrowings 157,346 914 0.58 124,956 1,847 1.48 105,094 1,315 1.25
Long-term debt 220,448 6,990 3.17 224,149 7,017 3.13 169,540 4,195 2.47
Total borrowed funds 377,794 7,904 2.09 349,105 8,864 2.54 274,634 5,510 2.01
Total interest-bearing liabilities
0.85 % $ 3,125,718 $ 38,791 1.24 % $ 2,428,136 $ 22,841 0.94 %
Noninterest bearing deposits 832,038 586,100 455,223
Other liabilities 58,186 37,204 20,625
Shareholders' equity 515,455 452,018 345,734
Total liabilities and shareholders'
equity $ 5,135,841 $ 4,201,040 $ 3,249,718
Net interest income (2) $ 157,196 $ 146,916 $ 107,823
Net interest spread (2) 3.12 % 3.59 % 3.42 %
Net interest margin (2) 3.30 % 3.82 % 3.60 %
Total deposits(4) $ 4,184,406 $ 23,919 0.57 % $ 3,362,713 $ 29,927 0.89 % $ 2,608,725 $ 17,331 0.66 %
Cost of funds(5) 0.70 % 1.05 % 0.79 %
(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
thousand for the years ended
purchase discount accretion was
years ended
(4) 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.
(5) Cost of funds is calculated as total interest expense divided by the sum of average
total deposits and borrowed funds.
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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.
Years Ended
Year 2020 to 2019 Change due to Year 2019 to 2018 Change due to
(dollars in thousands) Volume Yield/Cost Net Volume Yield/Cost Net
Increase (decrease) in interest income
Loans, including fees(1) $ 19,294 $ (23,490) $ (4,196) $ 41,135 $ 11,580 $ 52,715
Taxable investment securities 7,814 (3,336) 4,478 988 1,117 2,105
Tax-exempt investment securities (1) 4,291 (1,073) 3,218 (113) (52) (165)
Total securities held for investment (1) 12,105 (4,409) 7,696 875 1,065 1,940 Other 418 (606) (188) 378 10 388 Change in interest income (1) 31,817 (28,505) 3,312 42,388 12,655 55,043 Increase (decrease) in interest expense Interest checking deposits 1,471 (1,759) (288) 654 1,162 1,816 Money market deposits 688 (4,541) (3,853) 1,596 2,933 4,529 Savings deposits 367 (73) 294 197 641 838 Time deposits 1,272 (3,433) (2,161) 2,565 2,848 5,413 Total interest bearing deposits 3,798 (9,806) (6,008) 5,012 7,584 12,596 Short-term borrowings 392 (1,325) (933) 271 261 532 Long-term debt (117) 90 (27) 1,547 1,275 2,822 Total borrowed funds 275 (1,235) (960) 1,818 1,536 3,354 Change in interest expense 4,073 (11,041) (6,968) 6,830 9,120 15,950 Change in net interest income (1)$ 27,744 $ (17,464) $ 10,280 $ 35,558 $ 3,535 $ 39,093 Percentage increase (decrease) in net interest income over prior period 7.0 % 36.3 % (1) Tax equivalent. Our net interest income for the year endedDecember 31, 2020 , was$153.0 million , an increase of$9.3 million , or 6.5%, as compared to$143.7 million for the year endedDecember 31, 2019 . The increase in net interest income was primarily due to a decline in interest expense of$7.0 million , or 18.0% to$31.8 million for the year 2020 and an increase of$2.3 million , or 1.3%, in interest income to$184.8 million for the year 2020. The decline in interest expense was primarily due to a decline in interest expense on interest-bearing deposits of$6.0 million , or 20.1% to$23.9 million as a result of lower rates paid on such deposits that more than offset the increase in the volume of deposits, which stemmed from increases in the country's overall money supply as a result of the FRB's utilization of a variety of monetary policy tools to stimulate the economy and influence overall growth and distribution of credit, bank loans, investments and deposits, coupled with general uncertainty amid the COVID-19 pandemic. In addition, the decline in interest expense was also due to a decrease in interest expense on borrowed funds of$1.0 million , or 10.8%, to$7.9 million . The increase in interest income was primarily due to increased volume of securities held for investment that was primarily attributable to the Company's investment of net deposit inflows, partially offset by a decrease in yield, which resulted in a net increase in investment security interest income of$7.0 million , or 37.4%, to$25.9 million . This increase was partially offset by a decline in loan interest income of$4.5 million , or 2.8%, to$158.7 million for the year 2020 compared to the year 2019. The aforementioned increase in the country's overall money supply also played a role in the decline in loan interest income, as such increase, coupled with the general economic uncertainty amid the COVID-19 pandemic, weakened customer loan demand and line utilization. Loan purchase discount accretion contributed$9.1 million to net interest income for the year endedDecember 31, 2020 , compared to$14.0 million for the year endedDecember 31, 2019 . Net fee accretion for PPP loans for the year 2020 was$5.4 million , compared to none for the year 2019. The tax equivalent net interest margin for 2020 was 3.30%, down 52 basis points from the net interest margin of 3.82% for 2019. The yield on loans decreased 69 basis points, approximately 7 basis points of which was attributable to PPP loans, which have a coupon rate of 1%. The tax equivalent yield on investment securities decreased by 57 basis points. Combined, the resulting yield on interest-earning assets for the year endedDecember 31, 2020 was 86 basis points lower than the year endedDecember 31, 2019 , and reflected the origination and re-pricing of loans at generally lower coupon rates compared to existing portfolio coupon rates, as well as a shift in earning asset mix to a greater proportion of investment securities, which generally have lower yields than loans. The cost of interest-bearing deposits decreased 37 basis points, while the average cost of borrowings was lower by 45 basis points for the full year 2020 as compared to the full year of 2019. The FRB decreased the target federal funds interest rate by a total of 25 basis points in each of August, September and October of 2019, and an additional 150 basis points inMarch 2020 in response to the COVID-19 pandemic, which contributed to the decreased interest rates for the year endedDecember 31, 2020 , as compared to the year endedDecember 31, 2019 . 38 -------------------------------------------------------------------------------- Table of Contents Credit Loss Expense We recorded credit loss expense of$28.4 million during 2020 compared to$7.2 million in 2019, an increase of$21.2 million , or 296.3%. The increase in credit loss expense reflects the impact that the COVID-19 pandemic had on current and forecasted economic conditions utilized in our ACL model. 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 inU.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, impacts the recorded credit loss expense. In addition, upon the Company's adoption of the CECL accounting guidance onJanuary 1, 2020 , the methodology for estimating the total amount of the credit loss expense changed. Specifically, for the year endedDecember 31, 2020 , we utilized the current expected credit loss methodology, as compared to incurred loss methodology that was utilized in the prior year comparable period. The total amount of net loans charged off in the year endedDecember 31, 2020 was lower at$5.3 million , as compared to$7.4 million in the year endedDecember 31, 2019 . Noninterest Income The following table sets forth the various categories of noninterest income for the years endedDecember 31, 2020 , 2019, and 2018. For the Year Ended December 31, (dollars in thousands) 2020 2019 $ Change % Change 2019 2018 $ Change % Change Investment services and trust activities$ 9,632 $ 8,040 $ 1,592 19.8 %$ 8,040 $ 4,953 $ 3,087 62.3 % Service charges and fees 6,178 7,452 (1,274) (17.1) 7,452 6,157 1,295 21.0 Card revenue 5,719 5,594 125 2.2 5,594 4,223 1,371 32.5 Loan revenue 10,185 3,789 6,396 168.8 3,789 3,622 167 4.6 Bank-owned life insurance 2,226 1,877 349 18.6 1,877 1,610 267 16.6 Insurance commissions - 734 (734) (100.0) 734 1,284 (550) (42.8) Investment securities gains, net 184 90 94 104.4 90 193 (103) (53.4) Other 4,496 3,670 826 22.5 3,670 1,173 2,497 212.9 Total noninterest income$ 38,620 $ 31,246 $ 7,374 23.6 %$ 31,246 $ 23,215 $ 8,031 34.6 % Total noninterest income for the year endedDecember 31, 2020 was$38.6 million , an increase of$7.4 million , or 23.6%, from$31.2 million during the same period of 2019. The largest driver of the increase was an increase of$6.4 million , or 168.8%, in loan revenue, which reflected robust production from the Company's residential mortgage business as low interest rates drove new purchase and refinance volumes coupled with the inclusion of a full year of the acquiredATBancorp operations. Similarly, the$1.6 million increase in 2020 from investment services and trust activities reflected the first full year of acquiredATBancorp operations in the Company's results. Finally, 'Other' noninterest income increased$0.8 million due primarily to a$1.9 million increase in commercial loan swap program revenue offset by a$1.1 million pre-tax gain on sale ofMidWestOne Insurance Services, Inc. assets recognized inJune 2019 with no such gain recognized in 2020.The MidWestOne Insurance Services, Inc. subsidiary was dissolved effectiveDecember 2019 . Partially offsetting these increases was a reduction of service charges and fees income of$1.3 million and a decline of$0.7 million in insurance commissions that stemmed from the aforementioned sale and dissolution of the insurance subsidiary in 2019. 39 -------------------------------------------------------------------------------- Table of Contents Noninterest Expense The following table sets forth the various categories of noninterest expense for the years endedDecember 31, 2020 , 2019, and 2018. For the Year Ended December 31, (dollars in thousands) 2020 2019 $ Change % Change 2019 2018 $ Change % Change Compensation and employee benefits$ 66,397 $ 65,660 $ 737 1.1 %$ 65,660 $ 49,758 $ 15,902 32.0 % Occupancy expense of premises, net 9,348 8,647 701 8.1 8,647 7,597 1,050 13.8 Equipment 7,865 7,717 148 1.9 7,717 5,565 2,152 38.7 Legal and professional 6,153 8,049 (1,896) (23.6) 8,049 4,641 3,408 73.4 Data processing 5,362 4,579 783 17.1 4,579 2,951 1,628 55.2 Marketing 3,815 3,789 26 0.7 3,789 2,660 1,129 42.4 Amortization of intangibles 6,976 5,906 1,070 18.1 5,906 2,296 3,610 157.2 FDIC insurance 1,858 690 1,168 169.3 690 1,533 (843) (55.0) Communications 1,746 1,701 45 2.6 1,701 1,353 348 25.7 Foreclosed assets, net 150 580 (430) (74.1) 580 21 559 2,661.9 Other 8,723 10,217 (1,494) (14.6) 10,217 4,840 5,377 111.1 Goodwill impairment 31,500 - 31,500 N/A - - - N/A Total noninterest expense$ 149,893 $ 117,535 $ 32,358 27.5 %$ 117,535 $ 83,215 $ 34,320 41.2 % For the Year Ended December 31, (dollars in thousands) 2020 2019 2018 Merger-related expenses: Compensation and employee benefits $ -$ 5,435 $ - Equipment 7 483 2 Legal and professional - 2,762 680 Data processing 44 90 100 Other 10 360 15
Total impact of merger-related expenses to noninterest expense
$ 61
Noninterest expense was$149.9 million for the year endedDecember 31, 2020 , an increase of$32.4 million , or 27.5%, from$117.5 million for the year endedDecember 31, 2019 . The increase in noninterest expense was primarily due to a$31.5 million goodwill impairment charge that was recorded in the third quarter of 2020. Excluding the goodwill impairment charge, noninterest expense increased$0.9 million , or 0.7%, and was impacted by the acquisition ofATBancorp that was completed onMay 1, 2019 , which resulted in overall higher noninterest expenses in 2020 as compared to 2019, offset by a reduction in merger-related costs between these years. Full-time equivalent employee levels were 757, 771, and 597 atDecember 31, 2020 , 2019 and 2018, respectively. Income Tax Expense Our effective tax rate, or income taxes divided by income before taxes, was 50.3% for 2020 compared with 13.1% for 2019. Excluding non-deductible goodwill impairment, the effective income tax rate for the full year 2020 was 14.9%, reflecting benefits related to general business and renewable energy tax credits and tax exempt interest. 40
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Financial Condition
Following is a table that represents the major categories of the Company's
balance sheet:
December 31, December 31,
(dollars in thousands) 2020 2019 $ Change % Change
Assets
Cash and cash equivalents$ 82,659 $ 73,484 $ 9,175 12.5 % Loans held for sale 59,956 5,400 54,556 1,010.3 Debt securities available for sale 1,657,381 785,977 871,404 110.9 Loans held for investment, net of unearned income 3,482,223 3,451,266 30,957 0.9 Allowance for credit losses (55,500) (29,079) (26,421) 90.9 Total loans held for investment, net 3,426,723 3,422,187 4,536 91.8 Other assets 329,929 366,525 (36,596) (10.0) Total assets$ 5,556,648 $ 4,653,573 $ 903,075 19.4 % Liabilities and Shareholders' Equity Total deposits$ 4,547,049 $ 3,728,655 $ 818,394 21.9 % Total borrowings 439,480 371,009 68,471 18.5 Other liabilities 54,869 44,927 9,942 22.1 Total shareholders' equity 515,250 508,982 6,268 1.2
Total liabilities and shareholders' equity
4,653,573$ 903,075 19.4 % Debt Securities The composition of debt securities available for sale was as follows: December 31, (dollars in thousands) 2020 2019 Debt securities available for sale U.S. Government agencies and corporations$ 361 - %$ 441 0.1 % States and political subdivisions 628,346 37.9 257,205 32.7 Mortgage-backed securities 94,018 5.7 43,530 5.5 Collateralized mortgage obligations 565,836 34.1 292,946 37.3 Corporate debt securities 368,820 22.3 191,855 24.4
Fair value of debt securities available for sale
100.0 %$ 785,977 100.0 % Our investment securities portfolio is managed to provide both a source of 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. Debt securities available for sale are carried at fair value. As ofDecember 31, 2020 , the fair value of our debt securities available for sale was$1.7 billion , an increase of$871.4 million from$786.0 million atDecember 31, 2019 , primarily driven by the increased levels of deposit balances. There were$34.6 million of gross unrealized gains and$1.3 million of gross unrealized losses in our debt securities available for sale portfolio for a net unrealized gain of$33.3 million atDecember 31, 2020 . During the quarter endedDecember 31, 2019 , the Company transferred all of its debt securities classified as held to maturity to available for sale. As ofDecember 31, 2020 and 2019, the Company's mortgage-backed and collateralized mortgage obligations portfolios consisted of securities predominantly backed by one- to four-family mortgage loans and underwritten to the standards of and guaranteed by the following government agencies and government-sponsored enterprises: FHLMC, theFNMA , and the GNMA. The receipt of principal, at par, and interest on these securities is guaranteed by the respective government agency or government-sponsored enterprise, 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 credit rating agencies. 41 -------------------------------------------------------------------------------- Table of Contents The maturities, carrying values and weighted average yields of debt securities as ofDecember 31, 2020 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 Debt securities available for sale:U.S. Government agencies and corporations $ - - %$ 361 2.05 % $ - - % $ - - % States and political subdivisions (1) 9,879 3.12 83,247 2.98 199,172 2.37 336,048 2.43 Mortgage-backed securities (2) - - 11,228 2.48 2,419 2.48 80,371 1.81 Collateralized mortgage obligations (2) - - 19 2.94 4,027 1.48 561,790 1.49 Corporate debt securities 31,471 2.78 210,606 2.14 120,923 3.72 5,820 4.18 Total debt securities available for sale$ 41,350 2.86 %$ 305,461 2.38 %$ 326,541 2.86 %$ 984,029 1.85 %
(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.
As ofDecember 31, 2020 , no non-agency issuer's securities exceeded 10% of the Company's total shareholders' equity. Loans The composition of our loan portfolio by type of loan was as follows: As of December 31, 2020 2019 2018 2017 2016 % of % of % of % of % of (dollars in thousands) Amount Total Amount Total Amount Total Amount Total Amount Total Agricultural$ 116,392 3.3 %$ 140,446 4.1 %$ 96,956 4.1 %$ 105,512 4.6 %$ 113,343 5.2 % Commercial and industrial 1,055,488 30.3 835,236 24.2 533,188 22.2 503,624 22.0 460,970 21.3 Commercial real estate: Construction & development 181,291 5.2 298,077 8.6 217,617 9.1 165,276 7.3 126,685 5.9 Farmland 144,970 4.2 181,885 5.3 88,807 3.7 87,868 3.8 94,979 4.4 Multifamily 256,525 7.4 227,407 6.6 134,741 5.6 134,506 5.9 136,003 6.3 Commercial real estate-other 1,149,575 33.0 1,107,490 32.1 826,163 34.4 784,321 34.3 706,576 32.6 Total commercial real estate 1,732,361 49.8 1,814,859 52.6 1,267,328 52.8 1,171,971 51.3 1,064,243 49.2 Residential real estate: One- to four-family first liens 355,684 10.2 407,418 11.8 341,830 14.3 352,226 15.4 372,233 17.2 One- to four-family junior liens 143,422 4.1 170,381 4.9 120,049 5.0 117,204 5.1 117,763 5.4 Total residential real estate 499,106 14.3 577,799 16.7 461,879 19.3 469,430 20.5 489,996 22.6 Consumer 78,876 2.3 82,926 2.4 39,428 1.6 36,158 1.6 36,591 1.7 Loans held for investment, net of unearned income$ 3,482,223 100.0 %$ 3,451,266 100.0 %$ 2,398,779 100.0 %$ 2,286,695 100.0 %$ 2,165,143 100.0 % Loans held for sale$ 59,956 $ 5,400 $ 666 $ 856 $ 4,241 Loans held for investment, net of unearned income, increased$31.0 million , or 0.9%, to$3.48 billion as ofDecember 31, 2020 from$3.45 billion atDecember 31, 2019 , primarily as a result of the Company's participation in the PPP, offset in part by loan paydowns. Excluding the impact of PPP, organic loan growth was negatively impacted by COVID-19, as the increase in the country's overall money supply that stemmed from the FRB's utilization of a variety of monetary policy tools to stimulate the economy and influence overall growth and distribution of credit, bank loans, investments and deposits, coupled with general economic uncertainty, weakened customer loan demand and line utilization. As ofDecember 31, 2020 , the amortized cost basis of PPP loans was$259.3 million , or 7.4% of loans held for investment, net of unearned income. Commitments under standby letters of credit, unused lines of credit and other conditionally approved credit lines totaled approximately$991.4 million and$900.8 million as ofDecember 31, 2020 and 2019, respectively. 42 -------------------------------------------------------------------------------- Table of Contents Our loan to deposit ratio decreased to 76.58% at year end 2020 from 92.56% at the end of 2019, with our target range for this ratio being between 80% and 90%. The loan to deposit ratio was below our target range at year-end 2020 as a result of loan payoffs experienced during the year coupled with lower loan demand and line utilization. In addition, deposit growth fueled by government stimulus was principally utilized to purchase debt securities and payoff long-term debt. The following table sets forth remaining maturities and rate types of loans atDecember 31, 2020 : Maturities Within Maturities After Due In One Year One Year Due Within One to Due After Fixed Variable Fixed Variable (dollars in thousands) One Year Five Years Five Years Total Rates Rates Rates Rates Agricultural$ 81,194 $ 29,327 $ 5,871 $ 116,392 $ 25,223 $ 55,971 $ 29,714 $ 5,484 Commercial and industrial 164,252 507,906 383,330 1,055,488 45,519 118,733 609,151 282,085 Commercial real estate: Construction & development 49,811 109,680 21,800 181,291 27,725 22,086 73,001 58,479 Farmland 18,946 65,972 60,052 144,970 16,525 2,421 81,442 44,582 Multifamily 21,209 122,972 112,344 256,525 11,555 9,654 132,904 102,412 Commercial real estate-other 159,986 438,763 550,826 1,149,575 140,053 19,933 456,685 532,904 Total commercial real estate 249,952 737,387 745,022 1,732,361 195,858 54,094 744,032 738,377 Residential real estate: One- to four- family first liens 19,160 75,645 260,879 355,684 9,509 9,651 154,346 182,178 One- to four- family junior liens 4,885 20,479 118,058 143,422 2,882 2,003 48,553 89,984 Total residential real estate 24,045 96,124 378,937 499,106 12,391 11,654 202,899 272,162 Consumer 11,370 50,649 16,857 78,876 5,953 5,417 66,262 1,244 Total loans$ 530,813 $ 1,421,393 $ 1,530,017 $ 3,482,223 $ 284,944 $ 245,869 $ 1,652,058 $ 1,299,352 Of the$1.55 billion of variable rate loans, approximately$804.5 million , or 52.1%, are subject to interest rate floors, with a weighted average floor rate of 4.05%. Nonperforming Assets The following table sets forth information concerning nonperforming loans by class of receivable atDecember 31, 2020 andDecember 31, 2019 : December 31, 2020 December 31, 2019 90+ Days 90+ Days Past Due and Past Due and Still Still Accruing Accruing (dollars in thousands) Nonaccrual Interest Total Nonaccrual Interest Total Agricultural $ 2,584 $ -$ 2,584 $ 2,893 $ -$ 2,893 Commercial and industrial 7,326 106 7,432 13,276 - 13,276 Commercial real estate: Construction & development 1,145 - 1,145 1,494 - 1,494 Farmland 8,319 - 8,319 10,402 - 10,402 Multifamily 746 - 746 - - - Commercial real estate-other 19,134 - 19,134 10,141 - 10,141 Total commercial real estate 29,344 - 29,344 22,037 - 22,037 Residential real estate: One- to four- family first liens 1,895 625 2,520 2,556 99 2,655 One- to four- family junior liens 722 - 722 513 25 538 Total residential real estate 2,617 625 3,242 3,069 124 3,193 Consumer 79 8 87 206 12 218 Total (1) $ 41,950$ 739 $ 42,689 $ 41,481 $ 136 $ 41,617
(1) Starting in the second quarter of 2020, performing troubled debt restructured loans held for investment are no longer included in nonperforming assets. Prior period information has been adjusted to exclude these loans.
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The gross interest income that would have been recorded in the years ended
December 31, 2020 , 2019 and 2018 if the nonaccrual and TDRs had been current in
accordance with their original terms was $3.8 million , $5.8 million , and $2.4
million , respectively. The amount of interest collected on those loans that was
included in interest income was $1.4 million , $2.4 million , and $0.9 million for
the years ended December 31, 2020 , 2019 and 2018, respectively.
The following table sets forth information concerning nonperforming assets and
performing TDRs at December 31 for each of the years indicated:
December 31,
(dollars in thousands) 2020 2019 2018 2017 2016
Nonaccrual loans held for investment $ 41,950 $ 41,481
739 136 365 207 485
Foreclosed assets, net 2,316 3,706 535 2,010 2,097
Total nonperforming assets (1) $ 45,005 $ 45,323 Nonperforming assets ratio(2) 1.29 % 1.31 % 0.87 % 0.74 % 1.07 % Performing troubled debt restructured$ 2,630 $ 4,372
(1) Starting in the second quarter of 2020, performing troubled debt restructured loans held for investment are no longer included in nonperforming assets. Prior period information has been adjusted to exclude these loans. (2) Nonperforming assets ratio is calculated as total nonperforming assets divided by the sum of loans held for investment, net of unearned income and foreclosed assets, net at the end of the period.
Total nonperforming assets were$45.0 million atDecember 31, 2020 , compared to$45.3 million atDecember 31, 2019 , a$0.3 million , or 0.7%, decrease. Nonperforming loans increased slightly from$41.6 million , or 1.21% of total loans, atDecember 31, 2019 , to$42.7 million , or 1.23% of total loans, atDecember 31, 2020 , while foreclosed assets, net, decreased$1.4 million , or 37.5%, during 2020. The COVID-19 pandemic negatively impacted nonperforming asset volumes atDecember 31, 2020 , as the Company saw a deterioration of certain credits. However, the effects of such deterioration were more than offset by the resolution of existing nonperforming assets. Foreclosed assets, net, are carried at the lower of cost or fair value less estimated costs of disposal. Additional discounts could be required to market and sell the properties, resulting in a write down through expense. The nonperforming assets ratio declined 2 basis points from 1.31% atDecember 31, 2019 , to 1.29% atDecember 31, 2020 . Loan Review and Classification Process for Agricultural Loans, Commercial and Industrial Loans, 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. All of this information is used in the determination of the initial loan risk rating. The Bank's loan review department undertakes independent credit reviews of relationships based on either criteria established by loan policy, risk-focused sampling, or random sampling. Loan policy requires all credit relationships with total exposure of$5.0 million or more, as determined semi-annually as of month-end December and June, to be reviewed no less than annually. In addition, all classified (loan grades 6 through 8) and watch (loan grade 5) rated credits over$1.0 million are to be reviewed no less than annually. The individual loan reviews consider such items as: loan type; nature, type and estimated value of collateral; borrower and/or guarantor estimated financial strength; most recently available financial information; related loans and total borrower exposure; and current and anticipated performance of the loan. The results of such reviews are presented to both executive management and the audit committee of the Company's board of directors. Through the review of delinquency reports, updated financial statements or other relevant information, the lending officer and/or loan review personnel may determine that a loan relationship has weakened to the point that a watch (loan grade 5) or classified (loan grades 6 through 8) status is warranted. When a loan relationship with total related exposure of$1.0 million or 44 -------------------------------------------------------------------------------- Table of Contents greater is adversely graded (loan grade 5 or above), or is classified as a TDR (regardless of size), the lending officer is then charged with preparing a loan strategy summary worksheet that outlines the background of the credit problem, current repayment status of the loans, current collateral evaluation and a workout plan of action. This plan may include goals to improve the credit rating, assist the borrower in moving the loans to another institution and/or collateral liquidation. All such reports are first presented to regional management and then to the loan strategy committee. Copies of the minutes of these committee meetings are presented to the board of directors of the Bank. Depending upon the individual facts and circumstances and the result of the classified/watch review process, loan officers and/or loan review personnel may categorize the loan relationship as impaired. Once that determination has occurred, the credit analyst will complete an evaluation of the collateral (for collateral-dependent loans) based upon the estimated collateral value, adjusting for current market conditions and other local factors that may affect collateral value. Loan review personnel may also complete an independent impairment analysis when deemed necessary. These judgmental evaluations may produce an initial specific allowance for placement in the Company's allowance for credit losses calculation. Impairment analysis for the underlying collateral value is completed in the last month of the quarter. The impairment analysis worksheets are reviewed by theCredit Administration department prior to quarter-end. The board of directors of the Bank on a quarterly basis reviews the classified/watch reports including changes in credit grades of 5 or higher as well as all impaired loans, the related allowances and foreclosed assets, net. The review process also provides for the upgrade of loans that show improvement since the last review. All requests for an upgrade of a credit are approved by the loan strategy committee before the rating can be changed. Enhanced Credit Monitoring In response to the current economic environment, beginning in the second quarter of 2020, we performed a quarterly additional risk rating review, which encompassed all loans greater than$1 million from industry groups identified as "vulnerable" to significant impact from COVID-19 (e.g. non-essential retail, restaurants, hotels, CRE-retail, and arts, entertainment and gaming industries), in addition to the top 30 largest loan relationships. The additional risk rating review allows us to build on our existing portfolio monitoring processes, while also creating enhanced monitoring procedures to increase the penetration of our portfolio and ultimately the transparency of the risk profile of the portfolio. Loan Modifications We restructure loans for our customers who appear to be able to meet the terms of their loan over the long term, but who may be unable to meet the terms of the loan in the near term due to individual circumstances. We consider the customer's past performance, previous and current credit history, the individual circumstances surrounding the current difficulties and their plan to meet the terms of the loan in the future prior to restructuring the terms of the loan. See Note 1. Nature of Business and Significant Accounting Policies
for
additional information on factors considered related to concessions. Generally, short-term deferral of required payments would not be considered a concession. Once a restructured loan has gone 90 days or more past due or is placed on nonaccrual status, it is included in the 90 days or more past due or nonaccrual totals. During the year endedDecember 31, 2020 , the Company modified 22 loans that were considered TDRs. Refer above to Note 4. Loans Receivable and the Allowance for Credit Losses for details pertaining to the modifications that were a result of COVID-19 that were not deemed to be TDRs. 45 -------------------------------------------------------------------------------- Table of Contents Allowance for Credit Losses The following table shows activity affecting the allowance for credit losses: Year ended December 31, (dollars in thousands) 2020 2019 2018 2017 2016 Loans held for investment, net of unearned income$ 3,482,223 $
3,451,266
$ 3,551,945 $
3,157,127
Allowance for loan losses at beginning of period$ 29,079 $ 29,307 $ 28,059 $ 21,850 $ 19,427 Charge-offs: Agricultural$ 1,051 $ 1,130 $ 656 $ 1,202 $ 1,204 Commercial and industrial 2,502 4,774 2,752 2,338 3,066 Commercial real estate: Construction & development - - - 257 734 Farmland 267 650 - - - Multifamily - - - - - Commercial real estate-other 2,050 887 2,901 7,674 197 Total commercial real estate 2,317 1,537 2,901 7,931 931 Residential real estate: One- to four- family first liens 151 61 83 250 462 One- to four- family junior liens 35 168 30 55 320 Total residential real estate 186 229 113 305 782 Consumer 737 720 618 257 98 Total charge-offs$ 6,793 $ 8,390 $ 7,040 $ 12,033 $ 6,081 Recoveries: Agricultural$ 130 $ 32 $ 67 $ 187 $ 33 Commercial and industrial 1,055 195 291 232 124 Commercial real estate: Construction & development - 6 60 167 54 Farmland 8 202 - 24 1 Multifamily - - - - - Commercial real estate-other 116 103 230 100 137 Total commercial real estate 124 311 290 291 192 Residential real estate: One- to four- family first liens 17 47 139 24 82 One- to four- family junior liens 32 58 149 156 75 Total residential real estate 49 105 288 180 157 Consumer 170 361 52 18 15 Total recoveries$ 1,528 $ 1,004 $ 988 $ 908 $ 521 Net loans charged off$ 5,265 $ 7,386 $ 6,052 $ 11,125 $ 5,560 Credit loss expense$ 27,702 $
7,158
$ 3,984 $
- $ - $ - $ -
Allowance for credit losses at end of period
Net charge-off ratio(1) 0.15 % 0.23 % 0.26 % 0.51 % 0.26 %
Allowance for credit losses ratio(2) 1.59 % 0.84 % 1.22 % 1.23 % 1.01 %
Adjusted allowance for credit losses ratio(3) 1.72 % 0.84 % 1.22 % 1.23 % 1.01 %
(1) Net charge-off ratio is calculated as net charge-offs divided by average loans held for investment, net of unearned income during the
period.
(2) 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.
(3) Non-GAAP financial measure. See the "Non-GAAP Presentations" section for a reconciliation to the most comparable GAAP equivalent.
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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 as of December 31 for each of the years indicated:
December 31,
2020 2019 2018 2017 2016
Percent of Percent of Percent of Percent of Percent of
Allowance Loans to Allowance Loans to Allowance Loans to Allowance Loans to Allowance Loans to
(dollars in thousands) Amount Total Loans Amount Total Loans Amount Total Loans Amount Total Loans Amount Total Loans
Agricultural $ 1,346 3.3 % $ 3,748 4.1 % $ 3,637 4.1 % $ 2,790 4.6 % $ 2,003 5.2 %
Commercial and industrial 15,689 30.3 8,394 24.2 7,478 22.2 8,518 22.0 6,274 21.3
Commercial real estate 32,640 49.8 13,804 52.6 15,635 52.8 13,637 51.3 9,860 49.2
Residential real estate 4,882 14.3 2,685 16.7 2,349 19.3 2,870 20.5 3,458 22.6
Consumer 943 2.3 448 2.4 208 1.6 244 1.6 255 1.7
Total $ 55,500 100.0 % $ 29,079 100.0 % $ 29,307 100.0 % $ 28,059 100.0 % $ 21,850 100.0 %
CECL Adoption and ACL Framework: The framework requires that management's
estimate reflects credit losses over the full remaining expected life of each
credit, which includes the acquired loan portfolio that was previously excluded,
and considers expected future changes in macroeconomic conditions. The adoption
resulted in the recognition on January 1, 2020 of cumulative effect adjustments
of $4.0 million related to the allowance for credit losses for loans and $3.4
million related to the liability for off-balance sheet credit exposures. See
Note 1. Nature of Business and Significant Accounting Policies for
additional information on the Company's adoption of CECL.
Actual Results: Our ACL as of December 31, 2020 was $55.5 million , which was
1.59% of loans held for investment, net of unearned income, as of that date.
This compares with an ALL of $29.1 million as of December 31, 2019 , which was
0.84% of loans held for investment, net of unearned income. The ACL at
December 31, 2020 does not include a reserve for the PPP loans as they are fully
guaranteed by the SBA. When adjusted for the impact of PPP loans, the ratio of
the ACL as a percentage of loans held for investment, net of unearned income, as
of December 31, 2020 was 1.72%, an increase of 88 basis points from the prior
year's ratio of 0.84% (a non-GAAP financial measure - see "Non-GAAP
Presentations"). The increase in the ACL is due in part to the adoption of the
CECL accounting guidance, which included the one-time cumulative effect
adjustment previously described. In addition, the adoption of CECL resulted in a
higher allowance estimate for acquired loans, while under the prior methodology
the allowance estimate for acquired loans was partially offset by purchase
discounts. The increase in the ACL also reflects changes in current and
forecasted conditions, which were negatively impacted by the COVID-19 pandemic,
as well as changes to modeling assumptions. The liability for off-balance sheet
credit exposures totaled $4.1 million as of December 31, 2020 and is included in
'Other liabilities' on the balance sheet.
The Company recorded credit loss expense related to loans of $27.7 million for
the year ended December 31, 2020 as compared to $7.2 million for the year ended
December 31, 2019 . Gross charge-offs for the year ended December 31, 2020 were
$6.8 million , while there were $1.5 million in recoveries of previously
charged-off loans. The ratio of net loan charge offs to average loans for the
year ended December 31, 2020 declined to 0.15% compared to 0.23% for the year
ended December 31, 2019 and was the lowest level experienced over the last five
years.
Economic Forecast: At December 31, 2020 , the economic forecast used by the
Company showed the following: (1) Midwest unemployment - slight increase over
the next three forecasted quarters, with a decline in the fourth forecasted
quarter; (2) Year-to-year change in national retail sales - increases over the
next four forecasted quarters; (3) Year-to-year change in CRE Index - decreases
over the next four forecasted quarters; (4) Year-to-year change in U.S. GDP - a
decrease in the first forecasted quarter, followed by increases in the following
three quarters; (5) Year-to-year change in National Home Price Index - increases
over the next four forecasted quarters; and (6) Rental Vacancy - an increase
over the forecasted four quarters. These loss drivers saw overall economic
improvement when compared to the previously disclosed third quarter 2020
results, but are consistently worse when compared to recent historical trends
over the past several years, largely as a result of the COVID-19 pandemic.
Loan Policy: We specifically evaluate all nonaccrual loans greater than $250,000
individually on a quarterly basis to estimate the appropriate allowance due to
collateral deficiency or insufficient cash-flow based on a discounted cash-flow
analysis. At December 31, 2020 , TDRs were not a material portion of the loan
portfolio. We review loans 90 days or more past due that are still accruing
interest no less than quarterly to determine if the asset is both well secured
and in the process of collection. If not, such loans are placed on non-accrual
status.
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Based on the inherent risk in the loan portfolio, management believed that as of
December 31, 2020 , the ACL was adequate; however, there is no assurance losses
will not exceed the allowance, and any growth in the loan portfolio or
uncertainty in the general economy will require that management continue to
evaluate the adequacy of the ACL and make additional provisions in future
periods as deemed necessary. See Note 4. Loans Receivable and the Allowance
for Credit Losse s for additional information related to the allowance for
credit losses.
Goodwill and Other Intangible Assets
Goodwill was $62.5 million as of December 31, 2020 , a decline of $29.4 million ,
or 32.0%, from $91.9 million at December 31, 2019 due to the $31.5 million
goodwill impairment that was recorded in the third quarter of 2020, offset in
part by the $2.1 million purchase accounting adjustment from the merger with
ATBancorp that was finalized in the first quarter of 2020. Other intangible
assets were $25.2 million at December 31, 2020 , a decrease of $7.0 million , or
21.7%, from $32.2 million at December 31, 2019 due to the additional
amortization of these assets.
Deposits
The composition of deposits was as follows:
As of December 31, 2020 As of December 31, 2019
(in thousands) Balance % of Total Balance % of Total
Noninterest bearing deposits $ 910,655 20.0 % $ 662,209 17.8 %
Interest checking deposits 1,351,641 29.8 % 962,830 25.7 %
Money market deposits 918,654 20.2 % 763,028 20.5 %
Savings deposits 529,751 11.7 % 387,142 10.4 %
Time deposits under $250,000 581,471 12.8 % 682,232 18.3 %
Time deposits of $250,000 or more 254,877 5.6 % 271,214 7.3 %
Total deposits $ 4,547,049 100.0 % $ 3,728,655 100.0 %
Deposits increased $818.4 million from December 31, 2019 , or 21.9%, reflecting
the combination of fiscal stimulus and general economic uncertainty amid the
COVID-19 pandemic. Approximately 81.3% of our total deposits were considered
"core" deposits as of December 31, 2020 , compared to 74.2% at December 31, 2019 .
We consider core deposits to be the total of all deposits other than
certificates of deposit and brokered money market deposits.
The following table shows the composition and average balance of deposits for
the indicated years:
Year Ended December 31,
2020 2019 2018 2017 2016
Average % Average Average % Average
Average % Average Average % Average Average % Average
(dollars in thousands) Balance Total Rate Balance Total Rate
Balance Total Rate Balance Total Rate Balance Total Rate
Non-interest-bearing deposits $ 832,038 19.9 % N/A $ 586,100 17.4 % NA $ 455,223 17.5 % NA $ 471,170 18.8 % NA $ 512,383 21.0 % NA
Interest-bearing checking and
money market 1,953,134 46.7 0.42 % 1,573,436 46.8 0.78 % 1,215,428 46.6 0.49 % 1,152,350 46.0 0.32 % 1,087,757 44.5 0.29 % Savings deposits 454,000 10.8 0.31 329,199 9.8 0.33 214,244 8.2 0.12 205,204 8.2 0.10 195,237 8.0 0.14 Time deposits 945,234 22.6 1.52 873,978 26.0 1.90 723,830 27.7 1.54 674,757 27.0 1.13 649,986 26.5 0.92 Total deposits$ 4,184,406 100.0 % 0.57 %$ 3,362,713 100.0 % 0.89 %$ 2,608,725 100.0 % 0.66 %$ 2,503,481 100.0 % 0.46 %$ 2,445,363 100.0 % 0.38 % Time deposits of$100,000 and over atDecember 31, 2020 had the following maturities: (in thousands) Three months or less$ 147,576 Over three through six months 106,596 Over six months through one year 81,179 Over one year 117,570 Total$ 452,921 48
-------------------------------------------------------------------------------- Table of Contents Short-Term Borrowings Federal funds purchased: The Bank purchases federal funds for short-term funding needs from correspondent and regional banks. As ofDecember 31, 2020 and 2019, the Bank had no federal funds purchased. Securities Sold Under Agreements to Repurchase: Securities sold under agreement to repurchase rose$57.0 million , or 48.6%, to$174.3 million as ofDecember 31, 2020 , compared with$117.2 million as ofDecember 31, 2019 . Securities sold under agreements to repurchase are agreements in which the Company acquires funds by selling investment securities to another party under a simultaneous agreement to repurchase the same investment securities at a specified price and date. The Company enters into repurchase agreements and also offers a demand deposit account product to customers that sweeps their balances in excess of an agreed upon target amount into overnight repurchase agreements. As such, the balance of these borrowings vary according to the liquidity needs of the customers participating in these sweep accounts. Federal Home Loan Bank Advances: The Bank utilizes FHLB short-term advances for short-term funding needs. As ofDecember 31, 2020 and 2019, FHLB advances were$56.5 million and$22.1 million , respectively. Line of Credit: The Bank entered into a line of credit agreement with a correspondent bank under which the Company is able to borrow up to$25.0 million from an unsecured revolving credit facility. The Company had nothing outstanding under this revolving credit facility as of bothDecember 31, 2020 and 2019. See Note 11. Short-Term Borrowings to our consolidated financial statements for additional information related to short-term borrowings. Long-Term Debt Finance Lease Payable: The Company has one existing finance lease for a banking office location, with a present value liability of$1.1 million as ofDecember 31, 2020 , as compared to$1.2 million as ofDecember 31, 2019 . Junior Subordinated Notes Issued to Capital Trusts: Junior subordinated notes that have been issued to capital trusts that issued trust preferred securities were$41.8 million as ofDecember 31, 2020 , compared to$41.6 million as ofDecember 31, 2019 . Subordinated Debentures: OnMay 1, 2019 , the Company assumed$10.9 million in aggregate principal amount of subordinated debentures as a result of the merger withATBancorp . In addition, onJuly 28, 2020 , the Company completed a private placement offering of$65.0 million aggregate principal amount of 5.75% fixed-to-floating rate subordinated notes, of which$63.75 million have been exchanged for subordinated notes registered under the Securities Act of 1933. As a result of the offering, the balance of subordinated debentures increased to$74.6 million atDecember 31, 2020 , as compared to$10.9 million atDecember 31, 2019 . Federal Home Loan Bank Borrowings: FHLB borrowings totaled$91.2 million as ofDecember 31, 2020 , compared to$145.7 million as ofDecember 31, 2019 , a decrease of$54.5 million , or 37.4% due to maturities of FHLB advances. We utilize FHLB borrowings as a supplement to customer deposits to fund interest earning assets and to assist in managing interest rate risk. Other Long-Term Debt: OnApril 30, 2015 , the Company entered into a$35.0 million unsecured note payable with a correspondent bank with a maturity date ofJune 30, 2020 . The Company drew$25.0 million on the note prior toJune 30, 2015 , at which time the ability to obtain additional advances ceased. The note was paid-off onJune 30, 2020 . OnApril 30, 2019 , the Company entered into a$35.0 million unsecured note in connection with theATBancorp acquisition, with a maturity date ofApril 30, 2024 . The note was paid-off onNovember 3, 2020 . See Note 12. Long-Term Debt to our consolidated financial statements for additional information related to long-term debt. 49 -------------------------------------------------------------------------------- Table of Contents The following table sets forth the distribution of borrowed funds and weighted average interest rates. December 31, 2020 2019 2018 Weighted Weighted Weighted (dollars in thousands) Balance Average Rate Balance Average Rate Balance Average Rate Federal funds purchased, repurchase agreements, and FHLB overnight advances$ 230,789 0.28 %$ 139,349 1.17 %$ 131,422 1.70 % FHLB borrowings 91,198 1.92 145,700 2.25 136,000 2.45 Junior subordinated notes issued to capital trusts 41,763 2.17 41,587 3.85 23,888 4.97 Subordinated debentures 74,634 5.86 10,899 6.50 - - Finance lease payable 1,096 8.89 1,224 8.89 - - Other long-term debt - - 32,250 3.44 7,500 3.78 Total$ 439,480 1.77 %$ 371,009 2.27 %$ 298,810 2.35 %
The following table sets forth the maximum amount of borrowed funds outstanding at any month-end for the periods presented.
Year Ended December 31,
(dollars in thousands) 2020 2019 2018
Federal funds purchased, repurchase agreements, and FHLB
overnight advances $ 230,789 $ 159,236 $ 131,420
Line of credit 10,000 - -
FHLB borrowings 140,691 160,755 148,000
Junior subordinated notes issued to capital trusts 41,763 44,030 23,888
Subordinated debentures 74,761 10,903 -
Finance lease payable 1,215 1,329 -
Other long-term debt 32,250
41,250 12,500
Total $ 531,469 $ 417,503 $ 315,808 The following table sets forth the average amount of and the average rate paid on borrowed funds.
Year Ended December 31,
2020 2019 2018
Average Average Average Average Average Average
(dollars in thousands) Balance Rate Balance Rate Balance Rate
Federal funds purchased, repurchase
agreements, and FHLB overnight
advances $ 154,149 0.53 % $ 124,956 1.46 % $ 105,094 1.24 %
Line of credit 3,197 2.88 - - - -
FHLB borrowings 114,325 2.00 151,764 2.30 133,814 1.95
Junior subordinated notes issued to
capital trusts 41,676 3.37 35,956 5.15 23,841 4.97
Subordinated debentures 38,254 6.09 7,304 6.31 - -
Finance lease payable 1,161 8.79 1,282 8.81 - -
Other long-term debt 25,032 2.57 27,844 3.97 10,596 3.77
Total $ 377,794 2.03 % $ 349,106 2.53 % $ 273,345 2.01 %
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.
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The following table summarizes the Bank's commitments by expiration period, as
of December 31, 2020 :
Less than 1 to 3 3 to 5 More than
(in thousands) Total 1 year years years 5 years
Commitments to extend credit $ 897,274 $ 321,966 $ 252,364 $ 47,801 $ 275,143
Commitments to sell loans 59,956 59,956 - - -
Standby letters of credit 34,212 24,025 8,055 579 1,553
Total $ 991,442 $ 405,947 $ 260,419 $ 48,380 $ 276,696
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, 2020 :
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 $ 836,348 $ 651,374
230,789 - - -
FHLB borrowings 91,198 43,085 42,101 6,012 -
Junior subordinated notes issued to
capital trusts 41,763 - - - 41,763
Subordinated debentures 74,634 - 10,882 - 63,752
Noncancellable operating leases and
finance lease obligations 7,274 1,347 2,410 1,439 2,078
Total $ 1,282,006 $ 926,595 $ 216,004 $ 30,743 $ 108,664
Shareholders' Equity & Capital Adequacy
Total shareholders' equity was $515.3 million as of December 31, 2020 , compared
to $509.0 million as of December 31, 2019 , an increase of $6.3 million , or
1.23%. The total shareholders' equity to total assets ratio was 9.27% at
December 31, 2020 , down from 10.94% at December 31, 2019 . Dividends per common
share were $0.88 and $0.81 for the years ended December 31, 2020 and 2019,
respectively.
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, 2020 , 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.
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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, 2020 , May 15, 2020 , August 15, 2020 , and November 15,
2020 in the amounts of 48,066, 17,083, 6,579, and 437 respectively.
Additionally, during the year ended 2020, 39,005 shares of common stock were
issued in connection with the vesting of previously awarded grants of restricted
stock units, of which 4,973 shares were surrendered by grantees to satisfy tax
requirements, and 1,396 unvested restricted stock units were forfeited.
During the fourth quarter of 2020, the Company's board of directors authorized
resuming repurchases under of the Company's share repurchase program. The
Company previously announced the temporary suspension of its share repurchase
program in light of market conditions associated with the COVID-19 pandemic.
See Note 15. Stock Compensation Plans to our consolidated financial
statements for additional information related to our stock compensation program.
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.
Generally, the government's response to the COVID-19 pandemic in the form of
fiscal stimulus payments to individuals, coupled with economic uncertainty
stemming from the pandemic, increased liquidity during 2020.
Cash and cash equivalents are summarized in the table below:
Year Ended December 31,
2020 2019 2018
(dollars in thousands)
Cash and due from banks $ 65,078 $ 67,174 $ 43,787
Interest-bearing deposits 17,409 6,112 1,693
Federal funds sold 172 198 -
Total $ 82,659 $ 73,484 $ 45,480
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 Discount Window 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.
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Net cash provided by operations was another major source of liquidity. The net
cash provided by operating activities was $9.2 million for the year ended
December 31, 2020 and $47.3 million for the year ended December 31, 2019 .
As of December 31, 2020 , we had outstanding commitments to extend credit to
borrowers of $897.3 million , standby letters of credit of $34.2 million , and
commitments to sell loans of $60.0 million . Certificates of deposit maturing in
one year or less totaled $651.4 million as of December 31, 2020 . We believe that
a significant portion of these deposits will remain with us upon maturity.
Dividends
Our ability to pay dividends to our shareholders is affected by both corporate
law considerations and policies of the FRB applicable to bank holding companies.
The FRB requires notification and must provide approval before any declaration
and payment of a dividend can occur in a period in which quarterly and/or
cumulative twelve-month net earnings are insufficient to fund the dividend
amount, among other requirements. Under such circumstances, we may not pay a
dividend if the FRB objects or until such time as we receive approval from the
FRB. Due to the impact of the goodwill impairment charge on our earnings during
the third quarter of 2020, we were required to receive approval from the FRB, as
described above, prior to declaring a dividend. Such approval was received from
the FRB prior to the declaration of a cash dividend of $0.22 per share by the
board of directors of the Company on October 28, 2020 .
Inflation
The effects of price changes and inflation can vary substantially for most
financial institutions. While management believes that inflation affects the
growth of total assets, it is difficult to assess its overall impact on the
Company. The price of one or more of the components of the Consumer Price Index
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. In years of high inflation
and high interest rates, intermediate and long-term interest rates tend to
increase, thereby adversely impacting the market values of investment
securities, mortgage loans and other long-term fixed rate loans held by
financial institutions. In addition, higher short-term interest rates caused by
inflation tend to increase financial institutions' cost of funds. In other
years, the reverse situation may occur.
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, efficiency ratio, and the adjusted
allowance for credit losses 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) 2020 2019 2018
Net income $ 6,623 $ 43,630 $ 30,351
Intangible amortization, net of tax(1) 5,232 4,430 1,722
Goodwill impairment 31,500 - -
Tangible net income $ 43,355 $ 48,060 $ 32,073
Average shareholders' equity $ 515,455 $
452,018
Average intangible assets, net (113,978) (108,242) (75,531) Average tangible equity$ 401,477 $ 343,776 $ 270,203 Return on average equity 1.28 % 9.65 % 8.78 % Return on average tangible equity(2) 10.80 %
13.98 % 11.87 %
(1) Computed on a tax-equivalent basis, assuming an income tax rate of 25%.
(2) Tangible net income divided by average tangible equity
53-------------------------------------------------------------------------------- Table of Contents Tangible Common Equity / Tangible Book Value Per Share/ Tangible Common Equity Ratio As of December 31, (Dollars in thousands, except per share data) 2020 2019 2018 Total shareholders' equity$ 515,250 $ 508,982 $ 357,067 Intangible assets, net (87,719) (124,136) (74,529) Tangible common equity$ 427,531 $ 384,846 $ 282,538 Total assets$ 5,556,648 $ 4,653,573 $ 3,291,480 Intangible assets, net (87,719) (124,136) (74,529) Tangible assets$ 5,468,929 $ 4,529,437 $ 3,216,951 Book value per share$ 32.17 $ 31.49 $ 29.32 Tangible book value per share(1)$ 26.69 $ 23.81 $ 23.20 Shares outstanding 16,016,780 16,162,176 12,180,015 Equity to assets ratio 9.27 % 10.94 % 10.85 % Tangible common equity ratio(2) 7.82 % 8.50 % 8.78 %
(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) 2020 2019 2018
Net interest income $ 152,964 $ 143,650 $ 105,268
Tax equivalent adjustments:
Loans(1) 2,096 1,785 1,040
Securities(1) 2,136 1,481 1,515
Net interest income, tax equivalent $ 157,196 $ 146,916 $ 107,823
Loan purchase discount accretion (9,098) (13,977) (2,720)
Core net interest income $ 148,098 $ 132,939 $ 105,103
Net interest margin 3.21 % 3.73 % 3.52 %
Net interest margin, tax equivalent(2) 3.30 % 3.82 % 3.60 %
Core net interest margin(3) 3.11 % 3.45 % 3.51 %
Average interest earning assets $ 4,765,154 $ 3,848,275 $ 2,994,088
(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) 2020 2019 2018
Total noninterest expense $ 149,893 $ 117,535 $ 83,215
Amortization of intangibles (6,976) (5,906) (2,296)
Merger-related expenses (61) (9,130) (797)
Goodwill impairment (31,500) - -
Noninterest expense used for efficiency ratio $ 111,356 Net interest income, tax equivalent (1)$ 157,196 $ 146,916 $ 107,823 Noninterest income 38,620 31,246 23,215 Investment securities gains, net (184) (90) (193) Net revenues used for efficiency ratio$ 195,632
Efficiency ratio(2) 56.92 % 57.56 % 61.23 %
(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.
54
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Table of Contents
Adjusted Allowance for Credit
Losses Ratio For the Year Ended December 31,
(Dollars in thousands) 2020 2019 2018 2017 2016
Loans held for investment, net of
unearned income $ 3,482,223 $ 3,451,266 $ 2,398,779 $ 2,286,695 $ 2,165,143
PPP loans $ (259,261) $ - $ - $ - $ -
Core loans $ 3,222,962 $ 3,451,266 $ 55,500 $ 29,079
Allowance for credit losses ratio 1.59 % 0.84 % 1.22 % 1.23 % 1.01 % Adjusted allowance for credit losses ratio(1) 1.72 % 0.84 % 1.22 % 1.23 % 1.01 %
(1) Allowance for credit losses divided by core loans.
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