Notes to Consolidated Financial Statements
(Unaudited)
1. Principles of Consolidation and
Presentation
MidWest
One
Financial Group, Inc. (the “Company,” which is also referred to herein as “we,” “our” or “us”) is an Iowa corporation incorporated in 1983, a bank holding company under the Bank Holding Company Act of 1956, as amended, and a financial holding company under the Gramm-Leach-Bliley Act of 1999. Our principal executive offices are located at 102 South Clinton Street, Iowa City, Iowa 52240.
On August 21, 2018, the Company entered into a merger agreement with ATBancorp, an Iowa corporation, pursuant to which ATBancorp will merge with and into the Company. In connection with the merger, American Trust & Savings Bank, an Iowa state chartered bank and wholly owned subsidiary of ATBancorp, and American Bank & Trust Wisconsin, a Wisconsin state chartered bank and wholly owned subsidiary of ATBancorp, will merge with and into MidWest
One
Bank, which will continue as the surviving bank. The merger agreement also provides that each of the outstanding shares of ATBancorp common stock will be converted into the right of ATBancorp shareholders to receive
117.5500
shares of Company common stock and
$992.51
in cash. The corporate headquarters of the combined company will be in Iowa City, Iowa. The merger is anticipated to be completed in the first quarter of 2019. For further information, please refer to the
Current Report on Form 8-K
filed by the Company with the SEC on August 22, 2018.
The Company owns
all
of the common stock of MidWest
One
Bank, an Iowa state non-member bank chartered in 1934 with its main office in Iowa City, Iowa (the “Bank”), and
all
of the common stock of MidWest
One
Insurance Services, Inc., Oskaloosa, Iowa. We operate primarily through MidWest
One
Bank, our bank subsidiary, and MidWest
One
Insurance Services, Inc., our wholly owned subsidiary that operates an insurance agency business through six offices located in central and east-central Iowa.
The accompanying unaudited consolidated financial statements have been prepared in accordance with the instructions to Form 10-Q and, therefore, do not include all the information and notes necessary for complete financial statements in conformity with U.S. generally accepted accounting principles (“GAAP”). The information in this Quarterly Report on Form 10-Q is written with the presumption that the users of the interim financial statements have read or have access to the most recent Annual Report on Form 10-K of the Company, filed with the Securities and Exchange Commission (SEC) on
March 1, 2018
, which contains the latest audited financial statements and notes thereto, together with Management’s Discussion and Analysis of Financial Condition and Results of Operations as of
December 31, 2017
and for the year then ended. Management believes that the disclosures in this Form 10-Q are adequate to make the information presented not misleading. In the opinion of management, the accompanying consolidated financial statements contain all adjustments (consisting of only normal recurring accruals) necessary to present fairly the Company’s financial position as of
September 30, 2018
and
December 31, 2017
, and the results of operations and cash flows for the
three and nine months
ended
September 30, 2018
and
2017
. All significant intercompany accounts and transactions have been eliminated in consolidation.
The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect: (1) the reported amounts of assets and liabilities, (2) the disclosure of contingent assets and liabilities at the date of the financial statements, and (3) the reported amounts of revenues and expenses during the reporting period. These estimates are based on information available to management at the time the estimates are made. Actual results could differ from those estimates. The results for the
three and nine months
ended
September 30, 2018
may not be indicative of results for the year ending
December 31, 2018
, or for any other period.
All significant accounting policies followed in the preparation of the quarterly financial statements are disclosed in the Annual Report on Form 10-K for the year ended
December 31, 2017
.
In the consolidated statements of cash flows, cash and cash equivalents include cash and due from banks, interest-bearing deposits in banks, and federal funds sold.
Certain reclassifications have been made to prior periods’ consolidated financial statements to present them on a basis comparable with the current period’s consolidated financial statements.
2. Effect of New Financial Accounting Standards
Accounting Guidance Adopted in 2018
In May 2014, the Financial Accounting Standards Board (the “FASB”) issued Accounting Standards Update (“ASU”) No. 2014-09,
Revenue from Contract with Customers (Topic 606).
Subsequent to the issuance of ASU 2014-09, the FASB
issued targeted updates to clarify specific implementation issues including ASU No. 2016-08, “
Principal versus Agent Considerations (Reporting Revenue Gross versus Net)
,” ASU No. 2016-10, “
Identifying Performance Obligations and Licensing,
” ASU No. 2016-12, “
Narrow-Scope Improvements and Practical Expedients,
” and ASU No. 2016-20 “
Technical Corrections and Improvements to Topic 606, Revenue from Contracts with Customers.
” For financial reporting purposes, the standard allows for either full retrospective adoption, meaning the standard is applied to all of the periods presented, or modified retrospective adoption, meaning the standard is applied only to the most current period presented in the financial statements with the cumulative effect of initially applying the standard recognized at the date of initial application. Since the guidance does not apply to revenue associated with financial instruments, including loans and securities that are accounted for under other sections of GAAP, the new guidance did not have a material impact on revenue most closely associated with financial instruments, including interest income and expense. The Company completed its overall assessment of revenue streams and review of related contracts potentially affected by the ASU, including trust and asset management fees, service charges on deposit accounts, sales of other real estate, and debit card interchange fees. Based on this assessment, the Company concluded that ASU 2014-09 did not materially change the method in which the Company currently recognizes revenue for these revenue streams. The Company also completed its evaluation of certain costs related to these revenue streams to determine whether such costs should be presented as expenses or contra-revenue (i.e., gross versus net). Based on its evaluation, the Company determined that ASU 2014-09 also did not materially change the method in which the Company currently recognizes costs for these revenue streams. The Company adopted this update on January 1, 2018, utilizing the modified retrospective transition method. Since there was no net income impact upon adoption of the new guidance, a cumulative effect adjustment to opening retained earnings was not deemed necessary. See
Note 14 “Revenue Recognition”
for more information.
In January 2016, the FASB issued Accounting Standards Update No. 2016-01,
Financial Instruments-Overall: Recognition and Measurement of Financial Assets and Financial Liabilities.
The guidance in this update makes changes to the current GAAP model primarily affect the accounting for equity investments, financial liabilities under the fair value option, and the presentation and disclosure requirements for financial instruments. In addition, the FASB clarified guidance related to the valuation allowance assessment when recognizing deferred tax assets resulting from unrealized losses on available-for-sale debt securities. The accounting for other financial instruments, such as loans, investments in debt securities, and financial liabilities is largely unchanged. The treatment of gains and losses for all equity securities, including those without a readily determinable market value, is expected to result in additional volatility in the income statement, with the loss of mark to market via equity for these investments. Additionally, changes in the allowable method for determining the fair value of financial instruments in the financial statement footnotes (“exit price” only) require changes to current methodologies of determining these values, and how they are disclosed in the financial statement footnotes. The new standard applies to public business entities in fiscal years beginning after December 15, 2017, including interim periods within those fiscal years. The Company adopted this update on January 1, 2018. With the elimination of the classification of available for sale equity securities, the net unrealized gain or loss on these securities that had been included in accumulated other comprehensive income at December 31, 2017, in the amount of
$57,000
, has been transferred to retained earnings, as shown in the consolidated statements of shareholders’ equity. Changes in the fair value of equity securities with readily determinable fair values are now reflected in the noninterest income portion of the consolidated statements of income, in the other gains (losses) line item. In accordance with the ASU requirements, the Company measured the fair value of its loan portfolio as of
September 30, 2018
using an exit price notion. See
Note 13. “Estimated Fair Value of Financial Instruments and Fair Value Measurements”
to our consolidated financial statements.
Accounting Guidance Pending Adoption at
September 30, 2018
In February 2016, the FASB issued Accounting Standards Update No. 2016-02,
Leases (Topic 842)
. The guidance in this update is meant to increase transparency and comparability among organizations by recognizing lease assets and lease liabilities on the balance sheet and disclosing key information about leasing arrangements. The core principle of Topic 842 is that a lessee should recognize the assets and liabilities that arise from leases. All leases create an asset and a liability for the lessee in accordance with FASB Concepts Statement No. 6,
Elements of Financial Statements
, and, therefore, recognition of those lease assets and lease liabilities represents an improvement over previous GAAP, which did not require lease assets and lease liabilities to be recognized for most leases. Disclosures are required by lessees and lessors to meet the objective of enabling users of financial statements to assess the amount, timing, and uncertainty of cash flows arising from leases. To meet that objective, qualitative disclosures along with specific quantitative disclosures are required. The new standard applies to public business entities in fiscal years beginning after December 15, 2018, including interim periods within those fiscal years, with early adoption permitted. The Company has several lease agreements, such as branch locations, which are currently considered operating leases, and therefore not recognized on the Company’s consolidated balance sheets. The Company expects the new guidance will require these lease agreements to now be recognized on the consolidated balance sheets as right-of-use assets and a corresponding lease liability. Therefore, the Company’s preliminary evaluation indicates the provisions of ASU No. 2016-02 are expected to impact the Company’s consolidated statements of income, along with the Company’s regulatory capital ratios. However, the Company continues
to evaluate the extent of potential impact the new guidance will have on the Company’s consolidated financial statements, and does not expect to early adopt the standard.
In June 2016, the FASB issued Accounting Standards Update No. 2016-13,
Financial Instruments-Credit Losses (Topic 326) - Measurement of Credit Losses on Financial Instruments
. The new guidance introduces an approach based on expected losses to estimate credit losses on certain types of financial instruments. It also modifies the impairment model for available-for-sale debt securities and provides for a simplified accounting model for purchased financial assets with credit deterioration since their origination. The amendment requires the use of a new model covering current expected credit losses (CECL), which will apply to: (1) financial assets subject to credit losses and measured at amortized cost, and (2) certain off-balance sheet credit exposures. Upon initial recognition of the exposure, the CECL model requires an entity to estimate the credit losses expected over the life of an exposure (or pool of exposures). The estimate of expected credit losses (ECL) should consider historical information, current information, and reasonable and supportable forecasts, including estimates of prepayments. The new guidance also amends the current available for sale (AFS) security other-than-temporary impairment (OTTI) model for debt securities. The new model will require an estimate of ECL only when the fair value is below the amortized cost of the asset. The length of time the fair value of an AFS debt security has been below the amortized cost will no longer impact the determination of whether a credit loss exists. As such, it is no longer an other-than-temporary model. Finally, the purchased financial assets with credit deterioration (PCD) model applies to purchased financial assets (measured at amortized cost or AFS) that have experienced more than insignificant credit deterioration since origination. This represents a change from the scope of what are considered purchased credit-impaired assets under today’s model. Different than the accounting for originated or purchased assets that do not qualify as PCD, the initial estimate of expected credit losses for a PCD would be recognized through an allowance for loan and lease losses with an offset to the cost basis of the related financial asset at acquisition. The new standard applies to public business entities that are SEC filers in fiscal years beginning after December 15, 2019, including interim periods within those fiscal years, with early adoption permitted for fiscal years beginning after December 31, 2018, including interim periods within those fiscal years, and is expected to increase the allowance for loan losses upon adoption. The Company has formed a working group to evaluate the impact of the standard’s adoption on the Company’s consolidated financial statements, and has selected a software vendor to assist with implementation. The team meets periodically to discuss the latest developments, ensure progress is being made, and keep current on evolving interpretations and industry practices related to ASU 2016-13. The Company’s preliminary evaluation indicates the provisions of ASU No. 2016-13 are expected to impact the Company’s consolidated financial statements, in particular the level of the reserve for credit losses. The Company is continuing to evaluate the extent of the potential impact.
In August 2018, the FASB issued Accounting Standards Update No. 2018-13,
Fair Value Measurement (Topic 820): Disclosure Framework-Changes to the Disclosure Requirements for Fair Value Measurement.
The amendments in this update modify the disclosure requirements on fair value measurements in Topic 820, Fair Value Measurement, including the consideration of costs and benefits. Four disclosure requirements were removed, three were modified, and two were added. In addition, the amendments eliminate “
at a minimum”
from the phrase “
an entity shall disclose at a minimum”
to promote the appropriate exercise of discretion by entities when considering fair value measurement disclosures and to clarify that materiality is an appropriate consideration of entities and their auditors when evaluating disclosure requirements. The amendments in this update are effective for all entities for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2019. The amendments on changes in unrealized gains and losses, the range and weighted average of significant unobservable inputs used to develop Level 3 fair value measurements, and the narrative description of measurement uncertainty should be applied prospectively for only the most recent interim or annual period presented in the initial fiscal year of adoption. All other amendments should be applied retrospectively to all periods presented upon their effective date. Early adoption is permitted. An entity is permitted to early adopt any removed or modified disclosures and delay adoption of the additional disclosures until their effective date. The Company is considering the early adoption of removed and modified disclosures. The adoption of this standard is not expected to have a material effect on the Company’s consolidated financial statements.
3. Investment Securities
The amortized cost and fair value of debt securities available for sale, with gross unrealized gains and losses, were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of September 30, 2018
|
|
(in thousands)
|
Amortized
Cost
|
|
Gross
Unrealized
Gains
|
|
Gross
Unrealized
Losses
|
|
Estimated
Fair Value
|
|
U.S. Government agencies and corporations
|
$
|
5,561
|
|
|
$
|
—
|
|
|
$
|
42
|
|
|
$
|
5,519
|
|
|
State and political subdivisions
|
115,251
|
|
|
716
|
|
|
831
|
|
|
115,136
|
|
|
Mortgage-backed securities
|
53,664
|
|
|
112
|
|
|
1,880
|
|
|
51,896
|
|
|
Collateralized mortgage obligations
|
179,748
|
|
|
3
|
|
|
8,874
|
|
|
170,877
|
|
|
Corporate debt securities
|
65,842
|
|
|
8
|
|
|
1,512
|
|
|
64,338
|
|
|
Total
|
$
|
420,066
|
|
|
$
|
839
|
|
|
$
|
13,139
|
|
|
$
|
407,766
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31, 2017
|
|
(in thousands)
|
Amortized
Cost
|
|
Gross
Unrealized
Gains
|
|
Gross
Unrealized
Losses
|
|
Estimated
Fair Value
|
|
U.S. Government agencies and corporations
|
$
|
15,716
|
|
|
$
|
—
|
|
|
$
|
90
|
|
|
$
|
15,626
|
|
|
State and political subdivisions
|
139,561
|
|
|
2,475
|
|
|
197
|
|
|
141,839
|
|
|
Mortgage-backed securities
|
48,744
|
|
|
181
|
|
|
428
|
|
|
48,497
|
|
|
Collateralized mortgage obligations
|
173,339
|
|
|
29
|
|
|
5,172
|
|
|
168,196
|
|
|
Corporate debt securities
|
71,562
|
|
|
31
|
|
|
427
|
|
|
71,166
|
|
|
Total
|
$
|
448,922
|
|
|
$
|
2,716
|
|
|
$
|
6,314
|
|
|
$
|
445,324
|
|
The amortized cost and fair value of debt securities held to maturity, with gross unrealized gains and losses, were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of September 30, 2018
|
|
(in thousands)
|
Amortized
Cost
|
|
Gross
Unrealized
Gains
|
|
Gross
Unrealized
Losses
|
|
Estimated
Fair Value
|
|
State and political subdivisions
|
$
|
125,783
|
|
|
$
|
155
|
|
|
$
|
3,743
|
|
|
$
|
122,195
|
|
|
Mortgage-backed securities
|
11,467
|
|
|
1
|
|
|
564
|
|
|
10,904
|
|
|
Collateralized mortgage obligations
|
19,373
|
|
|
—
|
|
|
1,104
|
|
|
18,269
|
|
|
Corporate debt securities
|
35,110
|
|
|
98
|
|
|
519
|
|
|
34,689
|
|
|
Total
|
$
|
191,733
|
|
|
$
|
254
|
|
|
$
|
5,930
|
|
|
$
|
186,057
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31, 2017
|
|
(in thousands)
|
Amortized
Cost
|
|
Gross
Unrealized
Gains
|
|
Gross
Unrealized
Losses
|
|
Estimated
Fair Value
|
|
U.S. Government agencies and corporations
|
$
|
10,049
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
10,049
|
|
|
State and political subdivisions
|
126,413
|
|
|
804
|
|
|
1,631
|
|
|
125,586
|
|
|
Mortgage-backed securities
|
1,906
|
|
|
4
|
|
|
13
|
|
|
1,897
|
|
|
Collateralized mortgage obligations
|
22,115
|
|
|
—
|
|
|
707
|
|
|
21,408
|
|
|
Corporate debt securities
|
35,136
|
|
|
548
|
|
|
281
|
|
|
35,403
|
|
|
Total
|
$
|
195,619
|
|
|
$
|
1,356
|
|
|
$
|
2,632
|
|
|
$
|
194,343
|
|
Investment securities with a carrying value of
$217.8 million
and
$237.4 million
at
September 30, 2018
and
December 31, 2017
, respectively, were pledged on public deposits, securities sold under agreements to repurchase and for other purposes, as required or permitted by law.
As of
September 30, 2018
, the Company owned
$0.4 million
of equity securities in banks and financial service-related companies, and
$2.4 million
of mutual funds invested in debt securities and other debt instruments that will cause units of the fund to be deemed to be qualified under the Community Reinvestment Act. Prior to January 1, 2018, we accounted for our marketable equity securities at fair value with unrealized gains and losses recognized in accumulated other comprehensive income on the balance sheet. Realized gains and losses on marketable equity securities sold or impaired were recognized in noninterest income. Effective with the January 1, 2018 adoption of ASU 2016-01, both the realized
and unrealized net gains and losses on equity securities are required to be recognized in the statement of income. A breakdown between net realized and unrealized gains and losses is provided later in this financial statement footnote. These net changes are included in the other gains line item in the noninterest income section of the
Consolidated Statements of Income
.
The summary of investment securities shows that some of the securities in the available for sale and held to maturity investment portfolios had unrealized losses, or were temporarily impaired, as of
September 30, 2018
and
December 31, 2017
. This temporary impairment represents the estimated amount of loss that would be realized if the securities were sold on the valuation date.
The following tables present information pertaining to securities with gross unrealized losses as of
September 30, 2018
and
December 31, 2017
, aggregated by investment category and length of time that individual securities have been in a continuous loss position:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of September 30, 2018
|
|
|
Number
of
Securities
|
|
Less than 12 Months
|
|
12 Months or More
|
|
Total
|
|
Available for Sale
|
|
Fair
Value
|
|
Unrealized
Losses
|
|
Fair
Value
|
|
Unrealized
Losses
|
|
Fair
Value
|
|
Unrealized
Losses
|
|
(in thousands, except number of securities)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Government agencies and corporations
|
2
|
|
|
$
|
539
|
|
|
$
|
14
|
|
|
$
|
4,980
|
|
|
$
|
28
|
|
|
$
|
5,519
|
|
|
$
|
42
|
|
|
State and political subdivisions
|
115
|
|
|
46,374
|
|
|
697
|
|
|
5,350
|
|
|
134
|
|
|
51,724
|
|
|
831
|
|
|
Mortgage-backed securities
|
26
|
|
|
40,039
|
|
|
1,613
|
|
|
7,591
|
|
|
267
|
|
|
47,630
|
|
|
1,880
|
|
|
Collateralized mortgage obligations
|
41
|
|
|
44,912
|
|
|
1,269
|
|
|
116,814
|
|
|
7,605
|
|
|
161,726
|
|
|
8,874
|
|
|
Corporate debt securities
|
12
|
|
|
50,439
|
|
|
1,149
|
|
|
12,230
|
|
|
363
|
|
|
62,669
|
|
|
1,512
|
|
|
Total
|
196
|
|
|
$
|
182,303
|
|
|
$
|
4,742
|
|
|
$
|
146,965
|
|
|
$
|
8,397
|
|
|
$
|
329,268
|
|
|
$
|
13,139
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31, 2017
|
|
|
Number
of
Securities
|
|
Less than 12 Months
|
|
12 Months or More
|
|
Total
|
|
|
|
Fair
Value
|
|
Unrealized
Losses
|
|
Fair
Value
|
|
Unrealized
Losses
|
|
Fair
Value
|
|
Unrealized
Losses
|
|
(in thousands, except number of securities)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Government agencies and corporations
|
3
|
|
|
$
|
15,626
|
|
|
$
|
90
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
15,626
|
|
|
$
|
90
|
|
|
State and political subdivisions
|
34
|
|
|
11,705
|
|
|
167
|
|
|
1,800
|
|
|
30
|
|
|
13,505
|
|
|
197
|
|
|
Mortgage-backed securities
|
20
|
|
|
37,964
|
|
|
359
|
|
|
3,961
|
|
|
69
|
|
|
41,925
|
|
|
428
|
|
|
Collateralized mortgage obligations
|
35
|
|
|
37,881
|
|
|
489
|
|
|
122,757
|
|
|
4,683
|
|
|
160,638
|
|
|
5,172
|
|
|
Corporate debt securities
|
12
|
|
|
55,340
|
|
|
298
|
|
|
8,778
|
|
|
129
|
|
|
64,118
|
|
|
427
|
|
|
Other equity securities
|
1
|
|
|
—
|
|
|
—
|
|
|
1,944
|
|
|
56
|
|
|
1,944
|
|
|
56
|
|
|
Total
|
105
|
|
|
$
|
158,516
|
|
|
$
|
1,403
|
|
|
$
|
139,240
|
|
|
$
|
4,967
|
|
|
$
|
297,756
|
|
|
$
|
6,370
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of September 30, 2018
|
|
|
Number
of
Securities
|
|
Less than 12 Months
|
|
12 Months or More
|
|
Total
|
|
Held to Maturity
|
|
Fair
Value
|
|
Unrealized
Losses
|
|
Fair
Value
|
|
Unrealized
Losses
|
|
Fair
Value
|
|
Unrealized
Losses
|
|
(in thousands, except number of securities)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
State and political subdivisions
|
257
|
|
|
$
|
54,969
|
|
|
$
|
1,271
|
|
|
$
|
33,512
|
|
|
$
|
2,472
|
|
|
$
|
88,481
|
|
|
$
|
3,743
|
|
|
Mortgage-backed securities
|
6
|
|
|
10,016
|
|
|
524
|
|
|
820
|
|
|
40
|
|
|
10,836
|
|
|
564
|
|
|
Collateralized mortgage obligations
|
7
|
|
|
—
|
|
|
—
|
|
|
18,259
|
|
|
1,104
|
|
|
18,259
|
|
|
1,104
|
|
|
Corporate debt securities
|
13
|
|
|
18,126
|
|
|
345
|
|
|
2,722
|
|
|
174
|
|
|
20,848
|
|
|
519
|
|
|
Total
|
283
|
|
|
$
|
83,111
|
|
|
$
|
2,140
|
|
|
$
|
55,313
|
|
|
$
|
3,790
|
|
|
$
|
138,424
|
|
|
$
|
5,930
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31, 2017
|
|
|
Number
of
Securities
|
|
Less than 12 Months
|
|
12 Months or More
|
|
Total
|
|
|
|
Fair
Value
|
|
Unrealized
Losses
|
|
Fair
Value
|
|
Unrealized
Losses
|
|
Fair
Value
|
|
Unrealized
Losses
|
|
(in thousands, except number of securities)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
State and political subdivisions
|
167
|
|
|
$
|
33,237
|
|
|
$
|
393
|
|
|
$
|
25,843
|
|
|
$
|
1,238
|
|
|
$
|
59,080
|
|
|
$
|
1,631
|
|
|
Mortgage-backed securities
|
4
|
|
|
349
|
|
|
2
|
|
|
887
|
|
|
11
|
|
|
1,236
|
|
|
13
|
|
|
Collateralized mortgage obligations
|
7
|
|
|
5,221
|
|
|
90
|
|
|
16,168
|
|
|
617
|
|
|
21,389
|
|
|
707
|
|
|
Corporate debt securities
|
3
|
|
|
3,093
|
|
|
4
|
|
|
2,617
|
|
|
277
|
|
|
5,710
|
|
|
281
|
|
|
Total
|
181
|
|
|
$
|
41,900
|
|
|
$
|
489
|
|
|
$
|
45,515
|
|
|
$
|
2,143
|
|
|
$
|
87,415
|
|
|
$
|
2,632
|
|
The Company's assessment of OTTI is based on its reasonable judgment of the specific facts and circumstances impacting each individual debt security at the time such assessments are made. The Company reviews and considers factual information, including expected cash flows, the structure of the debt security, the creditworthiness of the issuer, the type of underlying assets and the current and anticipated market conditions.
At
September 30, 2018
and
December 31, 2017
, the Company’s mortgage-backed securities 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-sponsored agencies: the Federal Home Loan Mortgage Corporation, the Federal National Mortgage Association, and the Government National Mortgage Association. The receipt of principal, at par, and interest on mortgage-backed securities is guaranteed by the respective government-sponsored agency guarantor, such that the Company believes that its mortgage-backed securities and collateralized mortgage obligations do not expose the Company to credit-related losses.
At
September 30, 2018
, approximately
53%
of the municipal bonds held by the Company were Iowa-based, and approximately
24%
were Minnesota-based. The Company does not intend to sell these municipal obligations, and it is more likely than not that the Company will not be required to sell them until the recovery of their cost. Due to the issuers’ continued satisfaction of their obligations under the securities in accordance with their contractual terms and the expectation that they will continue to do so, management’s intent and ability to hold these securities for a period of time sufficient to allow for any anticipated recovery in fair value, as well as the evaluation of the fundamentals of the issuers’ financial conditions and other objective evidence, the Company believed that the municipal obligations identified in the tables above were temporarily impaired as of
September 30, 2018
and
December 31, 2017
.
At
September 30, 2018
and
December 31, 2017
, all but one of the Company’s corporate bonds held an investment grade rating from Moody’s, S&P or Kroll, or carried a guarantee from an agency of the US government. We have evaluated financial statements of the company issuing the non-investment grade bond and found the company’s earnings and equity position to be satisfactory and in line with industry norms. Therefore, we expect to receive all contractual payments. The internal evaluation of the non-investment grade bond along with the investment grade ratings on the remainder of the corporate portfolio lead us to conclude that all of the corporate bonds in our portfolio will continue to pay according to their contractual terms. Since the Company has the ability and intent to hold securities until price recovery, we believe that there is no other-than-temporary-impairment in the corporate bond portfolio.
It is reasonably possible that the fair values of the Company’s investment securities could decline in the future if interest rates increase or the overall economy or the financial conditions of the issuers deteriorate. As a result, there is a risk that OTTI may be recognized in the future, and any such amounts could be material to the Company’s consolidated statements of income.
Unless certain conditions are met, investment securities classified as held to maturity may not be sold without calling into question the Company’s intent to hold other debt securities so classified (“tainting”). One acceptable condition, outlined in Accounting Standards Codification 320-10-25-6(a), is the significant deterioration of an issuer’s creditworthiness. During the first quarter of 2017,
$1.2 million
of debt securities from a single issuer in the state and political subdivisions category were identified by the Company as having an elevated level of credit risk and were internally classified as “watch.” Given the significant deterioration of the issuer’s creditworthiness, the Company sold the debt securities in March 2017. The Company believes the sale was in accordance with applicable accounting guidance and did not taint the remainder of the held to maturity portfolio.
The contractual maturity distribution of investment debt securities at
September 30, 2018
, is summarized as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Available For Sale
|
|
Held to Maturity
|
|
(in thousands)
|
Amortized
Cost
|
|
Fair Value
|
|
Amortized
Cost
|
|
Fair Value
|
|
Due in one year or less
|
$
|
27,913
|
|
|
$
|
27,866
|
|
|
$
|
734
|
|
|
$
|
736
|
|
|
Due after one year through five years
|
99,630
|
|
|
98,105
|
|
|
24,275
|
|
|
23,867
|
|
|
Due after five years through ten years
|
55,757
|
|
|
55,700
|
|
|
97,511
|
|
|
95,353
|
|
|
Due after ten years
|
3,354
|
|
|
3,322
|
|
|
38,373
|
|
|
36,928
|
|
|
Debt securities without a single maturity date
|
233,412
|
|
|
222,773
|
|
|
30,840
|
|
|
29,173
|
|
|
Total
|
$
|
420,066
|
|
|
$
|
407,766
|
|
|
$
|
191,733
|
|
|
$
|
186,057
|
|
Mortgage-backed securities and collateralized mortgage obligations are collateralized by mortgage loans and guaranteed by U.S. government agencies. Our experience has indicated that principal payments will be collected sooner than scheduled because of prepayments. Therefore, these securities are not scheduled in the maturity categories indicated above.
Realized gains and losses on sales are determined on the basis of specific identification of investments based on the trade date. Realized gains (losses) on investments due to sale or call, including impairment losses for the
three and nine months
ended
September 30, 2018
and
2017
, were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30,
|
|
Nine Months Ended September 30,
|
|
(in thousands)
|
2018
|
|
2017
|
|
2018
|
|
2017
|
|
Debt securities available for sale:
|
|
|
|
|
|
|
|
|
Gross realized gains
|
$
|
194
|
|
|
$
|
179
|
|
|
203
|
|
|
199
|
|
|
Gross realized losses
|
(2
|
)
|
|
(3
|
)
|
|
(2
|
)
|
|
(3
|
)
|
|
Net realized gain
|
$
|
192
|
|
|
$
|
176
|
|
|
$
|
201
|
|
|
$
|
196
|
|
|
Debt securities held to maturity:
|
|
|
|
|
|
|
|
|
Gross realized gains
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
43
|
|
|
Gross realized losses
|
—
|
|
|
—
|
|
|
(4
|
)
|
|
—
|
|
|
Net realized gain (loss)
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
(4
|
)
|
|
$
|
43
|
|
|
Total net realized gain on sale or call of debt securities
|
$
|
192
|
|
|
$
|
176
|
|
|
$
|
197
|
|
|
$
|
239
|
|
The following tables present the net gains and losses on equity investments during the
three and nine months
ended
September 30, 2018
, disaggregated into realized and unrealized gains and losses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30,
|
|
Nine Months Ended September 30,
|
|
(in thousands)
|
2018
|
2017
|
|
2018
|
2017
|
|
Net losses recognized
|
$
|
(10
|
)
|
$
|
—
|
|
|
$
|
(34
|
)
|
$
|
—
|
|
|
Less: Net gains and losses recognized due to sales
|
—
|
|
—
|
|
|
—
|
|
—
|
|
|
Unrealized losses on securities still held at the reporting date
|
$
|
(10
|
)
|
$
|
—
|
|
|
$
|
(34
|
)
|
$
|
—
|
|
Gains and losses on equity securities is included in other gain (loss) on the consolidated statements of income.
4. Loans Receivable and the Allowance for Loan Losses
The composition of allowance for loan losses and loans by portfolio segment and based on impairment method are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance for Loan Losses and Recorded Investment in Loan Receivables
|
|
|
As of September 30, 2018 and December 31, 2017
|
|
(in thousands)
|
Agricultural
|
|
Commercial and Industrial
|
|
Commercial Real Estate
|
|
Residential Real Estate
|
|
Consumer
|
|
Total
|
|
September 30, 2018
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans receivable
|
|
|
|
|
|
|
|
|
|
|
|
|
Individually evaluated for impairment
|
$
|
6,711
|
|
|
$
|
12,924
|
|
|
$
|
17,375
|
|
|
$
|
3,981
|
|
|
$
|
8
|
|
|
$
|
40,999
|
|
|
Collectively evaluated for impairment
|
96,496
|
|
|
510,357
|
|
|
1,223,311
|
|
|
450,246
|
|
|
38,788
|
|
|
2,319,198
|
|
|
Purchased credit impaired loans
|
—
|
|
|
52
|
|
|
13,104
|
|
|
4,296
|
|
|
—
|
|
|
17,452
|
|
|
Total
|
$
|
103,207
|
|
|
$
|
523,333
|
|
|
$
|
1,253,790
|
|
|
$
|
458,523
|
|
|
$
|
38,796
|
|
|
$
|
2,377,649
|
|
|
Allowance for loan losses:
|
|
|
|
|
|
|
|
|
|
|
|
|
Individually evaluated for impairment
|
$
|
195
|
|
|
$
|
3,059
|
|
|
$
|
4,183
|
|
|
$
|
143
|
|
|
$
|
—
|
|
|
$
|
7,580
|
|
|
Collectively evaluated for impairment
|
2,532
|
|
|
5,183
|
|
|
12,563
|
|
|
2,356
|
|
|
251
|
|
|
22,885
|
|
|
Purchased credit impaired loans
|
—
|
|
|
—
|
|
|
343
|
|
|
470
|
|
|
—
|
|
|
813
|
|
|
Total
|
$
|
2,727
|
|
|
$
|
8,242
|
|
|
$
|
17,089
|
|
|
$
|
2,969
|
|
|
$
|
251
|
|
|
$
|
31,278
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in thousands)
|
Agricultural
|
|
Commercial and Industrial
|
|
Commercial Real Estate
|
|
Residential Real Estate
|
|
Consumer
|
|
Total
|
|
December 31, 2017
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans receivable
|
|
|
|
|
|
|
|
|
|
|
|
|
Individually evaluated for impairment
|
$
|
2,969
|
|
|
$
|
9,734
|
|
|
$
|
10,386
|
|
|
$
|
3,722
|
|
|
$
|
—
|
|
|
$
|
26,811
|
|
|
Collectively evaluated for impairment
|
102,543
|
|
|
493,844
|
|
|
1,147,133
|
|
|
460,475
|
|
|
36,158
|
|
|
2,240,153
|
|
|
Purchased credit impaired loans
|
—
|
|
|
46
|
|
|
14,452
|
|
|
5,233
|
|
|
—
|
|
|
19,731
|
|
|
Total
|
$
|
105,512
|
|
|
$
|
503,624
|
|
|
$
|
1,171,971
|
|
|
$
|
469,430
|
|
|
$
|
36,158
|
|
|
$
|
2,286,695
|
|
|
Allowance for loan losses:
|
|
|
|
|
|
|
|
|
|
|
|
|
Individually evaluated for impairment
|
$
|
140
|
|
|
$
|
1,126
|
|
|
$
|
2,157
|
|
|
$
|
226
|
|
|
$
|
—
|
|
|
$
|
3,649
|
|
|
Collectively evaluated for impairment
|
2,650
|
|
|
7,392
|
|
|
11,144
|
|
|
2,182
|
|
|
244
|
|
|
23,612
|
|
|
Purchased credit impaired loans
|
—
|
|
|
—
|
|
|
336
|
|
|
462
|
|
|
—
|
|
|
798
|
|
|
Total
|
$
|
2,790
|
|
|
$
|
8,518
|
|
|
$
|
13,637
|
|
|
$
|
2,870
|
|
|
$
|
244
|
|
|
$
|
28,059
|
|
As of
September 30, 2018
, the gross purchased credit impaired loans included above were
$18.3 million
, with a discount of
$0.9 million
.
Loans with unpaid principal in the amount of
$459.1 million
and
$477.6 million
at
September 30, 2018
and
December 31, 2017
, respectively, were pledged to the Federal Home Loan Bank (the “FHLB”) as collateral for borrowings.
The changes in the allowance for loan losses by portfolio segment were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance for Loan Loss Activity
|
|
|
For the Three Months Ended September 30, 2018 and 2017
|
|
(in thousands)
|
Agricultural
|
|
Commercial and Industrial
|
|
Commercial Real Estate
|
|
Residential Real Estate
|
|
Consumer
|
|
Total
|
|
2018
|
|
|
|
|
|
|
|
|
|
|
|
|
Beginning balance
|
$
|
2,656
|
|
|
$
|
8,557
|
|
|
$
|
16,341
|
|
|
$
|
2,990
|
|
|
$
|
256
|
|
|
$
|
30,800
|
|
|
Charge-offs
|
(365
|
)
|
|
(108
|
)
|
|
(17
|
)
|
|
—
|
|
|
(327
|
)
|
|
(817
|
)
|
|
Recoveries
|
41
|
|
|
78
|
|
|
77
|
|
|
131
|
|
|
18
|
|
|
345
|
|
|
Provision
|
395
|
|
|
(285
|
)
|
|
688
|
|
|
(152
|
)
|
|
304
|
|
|
950
|
|
|
Ending balance
|
$
|
2,727
|
|
|
$
|
8,242
|
|
|
$
|
17,089
|
|
|
$
|
2,969
|
|
|
$
|
251
|
|
|
$
|
31,278
|
|
|
2017
|
|
|
|
|
|
|
|
|
|
|
|
|
Beginning balance
|
$
|
2,666
|
|
|
$
|
7,959
|
|
|
$
|
9,013
|
|
|
$
|
2,650
|
|
|
$
|
222
|
|
|
$
|
22,510
|
|
|
Charge-offs
|
(318
|
)
|
|
(534
|
)
|
|
—
|
|
|
(75
|
)
|
|
(51
|
)
|
|
(978
|
)
|
|
Recoveries
|
150
|
|
|
113
|
|
|
201
|
|
|
126
|
|
|
4
|
|
|
594
|
|
|
Provision
|
67
|
|
|
2,157
|
|
|
1,166
|
|
|
915
|
|
|
79
|
|
|
4,384
|
|
|
Ending balance
|
$
|
2,565
|
|
|
$
|
9,695
|
|
|
$
|
10,380
|
|
|
$
|
3,616
|
|
|
$
|
254
|
|
|
$
|
26,510
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance for Loan Loss Activity
|
|
|
For the Nine Months Ended September 30, 2018 and 2017
|
|
(in thousands)
|
Agricultural
|
|
Commercial and Industrial
|
|
Commercial Real Estate
|
|
Residential Real Estate
|
|
Consumer
|
|
Total
|
|
2018
|
|
|
|
|
|
|
|
|
|
|
|
|
Beginning balance
|
$
|
2,790
|
|
|
$
|
8,518
|
|
|
$
|
13,637
|
|
|
$
|
2,870
|
|
|
$
|
244
|
|
|
$
|
28,059
|
|
|
Charge-offs
|
(633
|
)
|
|
(198
|
)
|
|
(281
|
)
|
|
(107
|
)
|
|
(365
|
)
|
|
(1,584
|
)
|
|
Recoveries
|
56
|
|
|
260
|
|
|
193
|
|
|
208
|
|
|
36
|
|
|
753
|
|
|
Provision
|
514
|
|
|
(338
|
)
|
|
3,540
|
|
|
(2
|
)
|
|
336
|
|
|
4,050
|
|
|
Ending balance
|
$
|
2,727
|
|
|
$
|
8,242
|
|
|
$
|
17,089
|
|
|
$
|
2,969
|
|
|
$
|
251
|
|
|
$
|
31,278
|
|
|
2017
|
|
|
|
|
|
|
|
|
|
|
|
|
Beginning balance
|
$
|
2,003
|
|
|
$
|
6,274
|
|
|
$
|
9,860
|
|
|
$
|
3,458
|
|
|
$
|
255
|
|
|
$
|
21,850
|
|
|
Charge-offs
|
(1,202
|
)
|
|
(1,063
|
)
|
|
(106
|
)
|
|
(155
|
)
|
|
(211
|
)
|
|
(2,737
|
)
|
|
Recoveries
|
164
|
|
|
215
|
|
|
216
|
|
|
126
|
|
|
11
|
|
|
732
|
|
|
Provision
|
1,600
|
|
|
4,269
|
|
|
410
|
|
|
187
|
|
|
199
|
|
|
6,665
|
|
|
Ending balance
|
$
|
2,565
|
|
|
$
|
9,695
|
|
|
$
|
10,380
|
|
|
$
|
3,616
|
|
|
$
|
254
|
|
|
$
|
26,510
|
|
Loan Portfolio Segment Risk Characteristics
Agricultural
- Agricultural loans, most of which are secured by crops, livestock, and machinery, are provided to finance capital improvements and farm operations as well as acquisitions of livestock and machinery. The ability of the borrower to repay may be affected by many factors outside of the borrower’s control including adverse weather conditions, loss of livestock due to disease or other factors, declines in market prices for agricultural products and the impact of government regulations. The ultimate repayment of agricultural loans is dependent upon the profitable operation or management of the agricultural entity. Collateral for these loans generally includes accounts receivable, inventory, equipment and real estate. However, depending on the overall financial condition of the borrower, some loans are made on an unsecured basis. The collateral securing these loans may depreciate over time, may be difficult to appraise and may fluctuate in value based on the success of the business.
Commercial and Industrial
- Commercial and industrial loans are primarily made based on the reported cash flow of the borrower and secondarily on the underlying collateral provided by the borrower. The collateral support provided by the borrower for most of these loans and the probability of repayment are based on the liquidation of the pledged collateral and enforcement of a personal guarantee, if any exists. The primary repayment risks of commercial and industrial loans are that the cash flows of the borrower may be unpredictable, and the collateral securing these loans may fluctuate in value. The size of the loans the Company can offer to commercial customers is less than the size of the loans that competitors with larger lending limits can offer. This may limit the Company’s ability to establish relationships with the largest businesses in the areas in which the Company operates. As a result, the Company may assume greater lending risks than financial institutions that have a lesser concentration of such loans and tend to make loans to larger businesses. Collateral for these loans generally includes accounts receivable, inventory, equipment and real estate. However, depending on the overall financial condition of the borrower, some loans are made on an unsecured basis. The collateral securing these loans may depreciate over time, may be difficult to appraise and may fluctuate in value based on the success of the business. In addition, a decline in the U.S. economy could harm or continue to harm the businesses of the Company’s commercial and industrial customers and reduce the value of the collateral securing these loans.
Commercial Real Estate
- The Company offers mortgage loans to commercial and agricultural customers for the acquisition of real estate used in their businesses, such as offices, warehouses and production facilities, and to real estate investors for the acquisition of apartment buildings, retail centers, office buildings and other commercial buildings. The market value of real estate securing commercial real estate loans can fluctuate significantly in a short period of time as a result of market conditions in the geographic area in which the real estate is located. Adverse developments affecting real estate values in one or more of the Company’s markets could increase the credit risk associated with its loan portfolio. Additionally, real estate lending typically involves higher loan principal amounts than other loans, and the repayment of the loans generally is dependent, in large part, on sufficient income from the properties securing the loans to cover operating expenses and debt service. Economic events or governmental regulations outside of the Company’s control or that of the borrower could negatively impact the future cash flow and market values of the affected properties.
Residential Real Estate
- The Company generally retains short-term residential mortgage loans that are originated for its own portfolio but sells most long-term loans to other parties while retaining servicing rights on the majority of those loans. The market value of real estate securing residential real estate loans can fluctuate as a result of market conditions in the geographic area in which the real estate is located. Adverse developments affecting real estate values in one or more of the Company’s markets could increase the credit risk associated with its loan portfolio. Additionally, real estate lending typically involves higher loan principal amounts than other loans, and the repayment of the loans generally is dependent, in large part, on the borrower’s continuing financial stability, and is therefore more likely to be affected by adverse personal circumstances.
Consumer
- Consumer loans typically have shorter terms, lower balances, higher yields and higher risks of default than real estate-related loans. Consumer loan collections are dependent on the borrower’s continuing financial stability, and are therefore more likely to be affected by adverse personal circumstances. Collateral for these loans generally includes automobiles, boats, recreational vehicles, mobile homes, and real estate. However, depending on the overall financial condition of the borrower, some loans are made on an unsecured basis. The collateral securing these loans may depreciate over time, may be difficult to recover and may fluctuate in value based on condition. In addition, a decline in the United States economy could result in reduced employment, impacting the ability of customers to repay their obligations.
Purchased Loans Policy
All purchased loans (nonimpaired and impaired) are initially measured at fair value as of the acquisition date in accordance with applicable authoritative accounting guidance. Credit discounts are included in the determination of fair value. An allowance for loan losses is not recorded at the acquisition date for loans purchased.
Individual loans acquired through the completion of a transfer, including loans that have evidence of deterioration of credit quality since origination and for which it is probable, at acquisition, that the Company will be unable to collect all contractually required payments receivable, are referred to herein as “purchased credit impaired loans.” In determining the acquisition date fair value and estimated credit losses of purchased credit impaired loans, and in subsequent accounting, the Company accounts for loans individually. Contractually required payments for interest and principal that exceed the undiscounted cash flows expected at acquisition, or the “nonaccretable difference,” are not recognized as a yield adjustment or as a loss accrual or valuation allowance. Expected cash flows at the purchase date in excess of the fair value of loans, if any, are recorded as interest income over the expected life of the loans if the timing and amount of future cash flows are reasonably estimable. Subsequent to the purchase date, increases in cash flows over those expected at the purchase date are recognized as interest income prospectively. The present value of any decreases in expected cash flows after the purchase date is recognized by recording an allowance for loan losses and a provision for loan losses. If the Company does not have the information necessary to reasonably estimate cash flows to be expected, it may use the cost-recovery method or cash-basis method of income recognition.
Charge-off Policy
The Company requires a loan to be charged-off, in whole or in part, as soon as it becomes apparent that some loss will be incurred, or when its collectability is sufficiently questionable that it no longer is considered a bankable asset. The primary considerations when determining if and how much of a loan should be charged-off are as follows: (1) the potential for future cash flows; (2) the value of any collateral; and (3) the strength of any co-makers or guarantors.
When it is determined that a loan requires a partial or full charge-off, a request for approval of a charge-off is submitted to the Company's President, Executive Vice President and Chief Credit Officer, and the Senior Regional Loan officer. The Bank's board of directors formally approves all loan charge-offs. Once a loan is charged-off, it cannot be restructured and returned to the Company's books.
Allowance for Loan and Lease Losses
The Company requires the maintenance of an adequate allowance for loan and lease losses (“ALLL”) in order to cover estimated probable losses without eroding the Company’s capital base. Calculations are done at each quarter end, or more frequently if warranted, to analyze the collectability of loans and to ensure the adequacy of the allowance. In line with FDIC directives, the ALLL calculation does not include consideration of loans held for sale or off-balance-sheet credit exposures (such as unfunded letters of credit). Determining the appropriate level for the ALLL relies on the informed judgment of management, and as such, is subject to inexactness. Given the inherently imprecise nature of calculating the necessary ALLL, the Company’s policy permits the actual ALLL to be between
20%
above and
5%
below the “indicated reserve.”
Loans Reviewed Individually for Impairment
The Company identifies loans to be reviewed and evaluated individually for impairment based on current information and events and the probability that the borrower will be unable to repay all amounts due according to the contractual terms of the loan agreement. Specific areas of consideration include: size of credit exposure, risk rating, delinquency, nonaccrual status, and loan classification.
The level of individual impairment is measured using one of the following methods: (1) the fair value of the collateral less costs to sell; (2) the present value of expected future cash flows, discounted at the loan's effective interest rate; or (3) the loan's observable market price. Loans that are deemed fully collateralized or have been charged down to a level corresponding with any of the three measurements require no assignment of reserves from the ALLL.
A loan modification is a change in an existing loan contract that has been agreed to by the borrower and the Bank, which may or may not be a troubled debt restructure or “TDR.” All loans deemed TDR are considered impaired. A loan is considered a TDR when, for economic or legal reasons related to a borrower’s financial difficulties, a concession is granted to the borrower that would not otherwise be considered. Both financial distress on the part of the borrower and the Bank’s granting of a concession, which are detailed further below, must be present in order for the loan to be considered a TDR.
All of the following factors are indicators that the debtor is experiencing financial difficulties (one or more items may be present):
|
|
•
|
The debtor is currently in default on any of its debt.
|
|
|
•
|
The debtor has declared or is in the process of declaring bankruptcy.
|
|
|
•
|
There is significant doubt as to whether the debtor will continue to be a going concern.
|
|
|
•
|
Currently, the debtor has securities being held as collateral that have been delisted, are in the process of being delisted, or are under threat of being delisted from an exchange.
|
|
|
•
|
Based on estimates and projections that only encompass the current business capabilities, the debtor forecasts that its entity-specific cash flows will be insufficient to service the debt (both interest and principal) in accordance with the contractual terms of the existing agreement through maturity.
|
|
|
•
|
Absent the current modification, the debtor cannot obtain funds from sources other than the existing creditors at an effective interest rate equal to the current market interest rate for similar debt for a non-troubled debtor.
|
The following factors are potential indicators that a concession has been granted (one or multiple items may be present):
|
|
•
|
The borrower receives a reduction of the stated interest rate for the remaining original life of the debt.
|
|
|
•
|
The borrower receives an extension of the maturity date or dates at a stated interest rate lower that the current market interest rate for new debt with similar risk characteristics.
|
|
|
•
|
The borrower receives a reduction of the face amount or maturity amount of the debt as stated in the instrument or other agreement.
|
|
|
•
|
The borrower receives a deferral of required payments (principal and/or interest).
|
|
|
•
|
The borrower receives a reduction of the accrued interest.
|
The following table sets forth information on the Company’s TDRs by class of loan occurring during the stated periods:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30,
|
|
|
2018
|
|
2017
|
|
|
Number of Contracts
|
|
Pre-Modification Outstanding Recorded Investment
|
|
Post-Modification Outstanding Recorded Investment
|
|
Number of Contracts
|
|
Pre-Modification Outstanding Recorded Investment
|
|
Post-Modification Outstanding Recorded Investment
|
|
(dollars in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
Troubled Debt Restructurings
(1)
:
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended September 30,
|
|
|
2018
|
|
2017
|
|
(dollars in thousands)
|
Number of Contracts
|
|
Pre-Modification Outstanding Recorded Investment
|
|
Post-Modification Outstanding Recorded Investment
|
|
Number of Contracts
|
|
Pre-Modification Outstanding Recorded Investment
|
|
Post-Modification Outstanding Recorded Investment
|
|
Troubled Debt Restructurings
(1)
:
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial and industrial
|
|
|
|
|
|
|
|
|
|
|
|
|
Extended maturity date
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
6
|
|
|
$
|
2,037
|
|
|
$
|
2,083
|
|
|
Commercial real estate:
|
|
|
|
|
|
|
|
|
|
|
|
|
Farmland
|
|
|
|
|
|
|
|
|
|
|
|
|
Extended maturity date
|
1
|
|
|
86
|
|
|
86
|
|
|
2
|
|
|
176
|
|
|
176
|
|
|
Commercial real estate-other
|
|
|
|
|
|
|
|
|
|
|
|
|
Extended maturity date
|
—
|
|
|
—
|
|
|
—
|
|
|
1
|
|
|
968
|
|
|
968
|
|
|
Other
|
—
|
|
|
—
|
|
|
—
|
|
|
1
|
|
|
10,546
|
|
|
10,923
|
|
|
Total
|
1
|
|
|
$
|
86
|
|
|
$
|
86
|
|
|
10
|
|
|
$
|
13,727
|
|
|
$
|
14,150
|
|
(1) TDRs may include multiple concessions, and the disclosure classifications are based on the primary concession provided to the borrower.
Loans by class modified as TDRs within 12 months of modification and for which there was a payment default during the stated periods were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30,
|
|
Nine Months Ended September 30,
|
|
|
2018
|
|
2017
|
|
2018
|
|
2017
|
|
(dollars in thousands)
|
Number of Contracts
|
|
Recorded Investment
|
|
Number of Contracts
|
|
Recorded Investment
|
|
Number of Contracts
|
|
Recorded Investment
|
|
Number of Contracts
|
|
Recorded Investment
|
|
Troubled Debt Restructurings
(1)
That Subsequently Defaulted:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial and industrial
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Extended maturity date
|
—
|
|
|
$
|
—
|
|
|
—
|
|
|
$
|
—
|
|
|
—
|
|
|
$
|
—
|
|
|
4
|
|
|
$
|
1,504
|
|
|
Commercial real estate:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial real estate-other
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Extended maturity date
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
1
|
|
|
968
|
|
|
Total
|
—
|
|
|
$
|
—
|
|
|
—
|
|
|
$
|
—
|
|
|
—
|
|
|
$
|
—
|
|
|
5
|
|
|
$
|
2,472
|
|
(1) TDRs may include multiple concessions, and the disclosure classifications are based on the primary concession provided to the borrower.
Loans Reviewed Collectively for Impairment
All loans not evaluated individually for impairment will be separated into homogeneous pools to be collectively evaluated. Loans will be first grouped into the various loan types (i.e. commercial, agricultural, consumer, etc.) and further segmented within each subset by risk classification (i.e. pass, special mention/watch, and substandard). Homogeneous loans past due 60-89 days and 90 days or more are classified special mention/watch and substandard, respectively, for allocation purposes.
The Company’s historical loss experience for each group segmented by loan type is calculated for the prior
20
quarters as a starting point for estimating losses. In addition, other prevailing qualitative or environmental factors likely to cause probable losses to vary from historical data are incorporated in the form of adjustments to increase or decrease the loss rate applied to each group. These adjustments are documented and fully explain how the current information, events, circumstances, and conditions impact the historical loss measurement assumptions.
Although not a comprehensive list, the following are considered key factors and are evaluated with each calculation of the ALLL to determine if adjustments to historical loss rates are warranted:
|
|
•
|
Changes in national and local economic and business conditions and developments that affect the collectability of the portfolio, including the condition of various market segments.
|
|
|
•
|
Changes in the quality and experience of lending staff and management.
|
|
|
•
|
Changes in lending policies and procedures, including changes in underwriting standards and collection, charge-off, and recovery practices not considered elsewhere in estimating credit losses.
|
|
|
•
|
Changes in the volume and severity of past due loans, classified loans and non-performing loans.
|
|
|
•
|
The existence and potential impact of any concentrations of credit.
|
|
|
•
|
Changes in the nature and terms of loans such as growth rates and utilization rates.
|
|
|
•
|
Changes in the value of underlying collateral for collateral-dependent loans, considering the Company’s disposition bias.
|
|
|
•
|
The effect of other external factors such as the legal and regulatory environment.
|
The Company may also consider other qualitative factors for additional allowance allocations, including changes in the Company’s loan review process. Changes in the criteria used in this evaluation or the availability of new information could cause the allowance to be increased or decreased in future periods. In addition, bank regulatory agencies, as part of their examination process, may require adjustments to the allowance for loan losses based on their judgments and estimates.
The items listed above are used to determine the pass percentage for loans evaluated under ASC 450, and as such, are applied to the loans risk rated pass. Due to the inherent risks associated with special mention/watch risk-rated loans (i.e. early stages of financial deterioration, technical exceptions, etc.), this subset is reserved at a level that will cover losses above a pass allocation for loans that had a loss in the last
20
quarters in which the loan was risk-rated special mention/watch at the time of the loss. Substandard loans carry greater risk than special mention/watch loans, and as such, this subset is reserved at a level that will cover losses above a pass allocation for loans that had a loss in the last
20
quarters in which the loan was risk-rated substandard at the time of the loss. Ongoing analysis is performed to support these factor multiples.
The following tables set forth the risk category of loans by class of loans and credit quality indicator based on the most recent analysis performed, as of
September 30, 2018
and
December 31, 2017
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in thousands)
|
Pass
|
|
Special Mention/ Watch
|
|
Substandard
|
|
Doubtful
|
|
Loss
|
|
Total
|
|
September 30, 2018
|
|
|
|
|
|
|
|
|
|
|
|
|
Agricultural
|
$
|
78,007
|
|
|
$
|
17,266
|
|
|
$
|
7,934
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
103,207
|
|
|
Commercial and industrial
|
482,136
|
|
|
21,166
|
|
|
20,027
|
|
|
4
|
|
|
—
|
|
|
523,333
|
|
|
Commercial real estate:
|
|
|
|
|
|
|
|
|
|
|
|
|
Construction and development
|
221,114
|
|
|
1,078
|
|
|
1,132
|
|
|
—
|
|
|
—
|
|
|
223,324
|
|
|
Farmland
|
69,824
|
|
|
6,970
|
|
|
8,941
|
|
|
—
|
|
|
—
|
|
|
85,735
|
|
|
Multifamily
|
124,092
|
|
|
1,391
|
|
|
1,180
|
|
|
—
|
|
|
—
|
|
|
126,663
|
|
|
Commercial real estate-other
|
748,837
|
|
|
44,603
|
|
|
24,628
|
|
|
—
|
|
|
—
|
|
|
818,068
|
|
|
Total commercial real estate
|
1,163,867
|
|
|
54,042
|
|
|
35,881
|
|
|
—
|
|
|
—
|
|
|
1,253,790
|
|
|
Residential real estate:
|
|
|
|
|
|
|
|
|
|
|
|
|
One- to four- family first liens
|
333,974
|
|
|
2,289
|
|
|
6,492
|
|
|
—
|
|
|
—
|
|
|
342,755
|
|
|
One- to four- family junior liens
|
113,526
|
|
|
687
|
|
|
1,555
|
|
|
—
|
|
|
—
|
|
|
115,768
|
|
|
Total residential real estate
|
447,500
|
|
|
2,976
|
|
|
8,047
|
|
|
—
|
|
|
—
|
|
|
458,523
|
|
|
Consumer
|
38,621
|
|
|
148
|
|
|
—
|
|
|
27
|
|
|
—
|
|
|
38,796
|
|
|
Total
|
$
|
2,210,131
|
|
|
$
|
95,598
|
|
|
$
|
71,889
|
|
|
$
|
31
|
|
|
$
|
—
|
|
|
$
|
2,377,649
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in thousands)
|
Pass
|
|
Special Mention/ Watch
|
|
Substandard
|
|
Doubtful
|
|
Loss
|
|
Total
|
|
December 31, 2017
|
|
|
|
|
|
|
|
|
|
|
|
|
Agricultural
|
$
|
80,377
|
|
|
$
|
21,989
|
|
|
$
|
3,146
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
105,512
|
|
|
Commercial and industrial
|
453,363
|
|
|
23,153
|
|
|
27,102
|
|
|
6
|
|
|
—
|
|
|
503,624
|
|
|
Commercial real estate:
|
|
|
|
|
|
|
|
|
|
|
|
|
Construction and development
|
162,968
|
|
|
1,061
|
|
|
1,247
|
|
|
—
|
|
|
—
|
|
|
165,276
|
|
|
Farmland
|
76,740
|
|
|
10,357
|
|
|
771
|
|
|
—
|
|
|
—
|
|
|
87,868
|
|
|
Multifamily
|
131,507
|
|
|
2,498
|
|
|
501
|
|
|
—
|
|
|
—
|
|
|
134,506
|
|
|
Commercial real estate-other
|
731,231
|
|
|
34,056
|
|
|
19,034
|
|
|
—
|
|
|
—
|
|
|
784,321
|
|
|
Total commercial real estate
|
1,102,446
|
|
|
47,972
|
|
|
21,553
|
|
|
—
|
|
|
—
|
|
|
1,171,971
|
|
|
Residential real estate:
|
|
|
|
|
|
|
|
|
|
|
|
|
One- to four- family first liens
|
340,446
|
|
|
2,776
|
|
|
9,004
|
|
|
—
|
|
|
—
|
|
|
352,226
|
|
|
One- to four- family junior liens
|
114,763
|
|
|
952
|
|
|
1,489
|
|
|
—
|
|
|
—
|
|
|
117,204
|
|
|
Total residential real estate
|
455,209
|
|
|
3,728
|
|
|
10,493
|
|
|
—
|
|
|
—
|
|
|
469,430
|
|
|
Consumer
|
36,059
|
|
|
—
|
|
|
68
|
|
|
31
|
|
|
—
|
|
|
36,158
|
|
|
Total
|
$
|
2,127,454
|
|
|
$
|
96,842
|
|
|
$
|
62,362
|
|
|
$
|
37
|
|
|
$
|
—
|
|
|
$
|
2,286,695
|
|
Included within the special mention/watch, substandard, and doubtful categories at
September 30, 2018
and
December 31, 2017
are purchased credit impaired loans totaling
$11.1 million
and
$12.6 million
, respectively.
Below are descriptions of the risk classifications of our loan portfolio.
Special Mention/Watch
- A special mention/watch asset has potential weaknesses that deserve management’s close attention. If left uncorrected, these potential weaknesses may result in deterioration of the repayment prospects for the asset or in the Company’s credit position at some future date. Special mention/watch assets are not adversely classified and do not expose the Company to sufficient risk to warrant adverse classification.
Substandard
- Substandard loans are inadequately protected by the current net worth and paying capacity of the obligor or of the collateral pledged, if any. Loans so classified have a well-defined weakness or weaknesses that jeopardize the liquidation of the debt. They are characterized by the distinct possibility that the Company will sustain some loss if the deficiencies are not corrected.
Doubtful
- Loans classified as doubtful have all the weaknesses inherent in those classified as substandard with the added characteristic that the weaknesses make collection or liquidation in full, on the basis of currently known facts, conditions and values, highly questionable and improbable.
Loss
- Loans classified as loss are considered uncollectible and of such little value that their continuance as bankable assets is not warranted. This classification does not mean that the loan has absolutely no recovery or salvage value but rather it is not practical or desirable to defer writing off this basically worthless asset even though partial recovery may be effected in the future.
The following table presents loans individually evaluated for impairment, excluding purchased credit impaired loans, by class of loan, as of
September 30, 2018
and
December 31, 2017
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2018
|
|
December 31, 2017
|
|
(in thousands)
|
Recorded Investment
|
|
Unpaid Principal Balance
|
|
Related Allowance
|
|
Recorded Investment
|
|
Unpaid Principal Balance
|
|
Related Allowance
|
|
With no related allowance recorded:
|
|
|
|
|
|
|
|
|
|
|
|
|
Agricultural
|
$
|
5,161
|
|
|
$
|
5,661
|
|
|
$
|
—
|
|
|
$
|
1,523
|
|
|
$
|
2,023
|
|
|
$
|
—
|
|
|
Commercial and industrial
|
3,796
|
|
|
3,990
|
|
|
—
|
|
|
7,588
|
|
|
7,963
|
|
|
—
|
|
|
Commercial real estate:
|
|
|
|
|
|
|
|
|
|
|
|
|
Construction and development
|
84
|
|
|
84
|
|
|
—
|
|
|
84
|
|
|
84
|
|
|
—
|
|
|
Farmland
|
3,539
|
|
|
3,539
|
|
|
—
|
|
|
287
|
|
|
287
|
|
|
—
|
|
|
Multifamily
|
821
|
|
|
821
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
Commercial real estate-other
|
6,290
|
|
|
6,800
|
|
|
—
|
|
|
5,746
|
|
|
6,251
|
|
|
—
|
|
|
Total commercial real estate
|
10,734
|
|
|
11,244
|
|
|
—
|
|
|
6,117
|
|
|
6,622
|
|
|
—
|
|
|
Residential real estate:
|
|
|
|
|
|
|
|
|
|
|
|
|
One- to four- family first liens
|
2,677
|
|
|
2,737
|
|
|
—
|
|
|
2,449
|
|
|
2,482
|
|
|
—
|
|
|
One- to four- family junior liens
|
344
|
|
|
345
|
|
|
—
|
|
|
26
|
|
|
26
|
|
|
—
|
|
|
Total residential real estate
|
3,021
|
|
|
3,082
|
|
|
—
|
|
|
2,475
|
|
|
2,508
|
|
|
—
|
|
|
Consumer
|
8
|
|
|
8
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
Total
|
$
|
22,720
|
|
|
$
|
23,985
|
|
|
$
|
—
|
|
|
$
|
17,703
|
|
|
$
|
19,116
|
|
|
$
|
—
|
|
|
With an allowance recorded:
|
|
|
|
|
|
|
|
|
|
|
|
|
Agricultural
|
$
|
1,550
|
|
|
$
|
1,920
|
|
|
$
|
195
|
|
|
$
|
1,446
|
|
|
$
|
1,446
|
|
|
$
|
140
|
|
|
Commercial and industrial
|
9,128
|
|
|
9,258
|
|
|
3,059
|
|
|
2,146
|
|
|
2,177
|
|
|
1,126
|
|
|
Commercial real estate:
|
|
|
|
|
|
|
|
|
|
|
|
|
Construction and development
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
Farmland
|
2,123
|
|
|
2,123
|
|
|
662
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
Multifamily
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
Commercial real estate-other
|
4,518
|
|
|
12,184
|
|
|
3,521
|
|
|
4,269
|
|
|
11,536
|
|
|
2,157
|
|
|
Total commercial real estate
|
6,641
|
|
|
14,307
|
|
|
4,183
|
|
|
4,269
|
|
|
11,536
|
|
|
2,157
|
|
|
Residential real estate:
|
|
|
|
|
|
|
|
|
|
|
|
|
One- to four- family first liens
|
960
|
|
|
960
|
|
|
143
|
|
|
979
|
|
|
979
|
|
|
185
|
|
|
One- to four- family junior liens
|
—
|
|
|
—
|
|
|
—
|
|
|
268
|
|
|
268
|
|
|
41
|
|
|
Total residential real estate
|
960
|
|
|
960
|
|
|
143
|
|
|
1,247
|
|
|
1,247
|
|
|
226
|
|
|
Consumer
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
Total
|
$
|
18,279
|
|
|
$
|
26,445
|
|
|
$
|
7,580
|
|
|
$
|
9,108
|
|
|
$
|
16,406
|
|
|
$
|
3,649
|
|
|
Total:
|
|
|
|
|
|
|
|
|
|
|
|
|
Agricultural
|
$
|
6,711
|
|
|
$
|
7,581
|
|
|
$
|
195
|
|
|
$
|
2,969
|
|
|
$
|
3,469
|
|
|
$
|
140
|
|
|
Commercial and industrial
|
12,924
|
|
|
13,248
|
|
|
3,059
|
|
|
9,734
|
|
|
10,140
|
|
|
1,126
|
|
|
Commercial real estate:
|
|
|
|
|
|
|
|
|
|
|
|
|
Construction and development
|
84
|
|
|
84
|
|
|
—
|
|
|
84
|
|
|
84
|
|
|
—
|
|
|
Farmland
|
5,662
|
|
|
5,662
|
|
|
662
|
|
|
287
|
|
|
287
|
|
|
—
|
|
|
Multifamily
|
821
|
|
|
821
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
Commercial real estate-other
|
10,808
|
|
|
18,984
|
|
|
3,521
|
|
|
10,015
|
|
|
17,787
|
|
|
2,157
|
|
|
Total commercial real estate
|
17,375
|
|
|
25,551
|
|
|
4,183
|
|
|
10,386
|
|
|
18,158
|
|
|
2,157
|
|
|
Residential real estate:
|
|
|
|
|
|
|
|
|
|
|
|
|
One- to four- family first liens
|
3,637
|
|
|
3,697
|
|
|
143
|
|
|
3,428
|
|
|
3,461
|
|
|
185
|
|
|
One- to four- family junior liens
|
344
|
|
|
345
|
|
|
—
|
|
|
294
|
|
|
294
|
|
|
41
|
|
|
Total residential real estate
|
3,981
|
|
|
4,042
|
|
|
143
|
|
|
3,722
|
|
|
3,755
|
|
|
226
|
|
|
Consumer
|
8
|
|
|
8
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
Total
|
$
|
40,999
|
|
|
$
|
50,430
|
|
|
$
|
7,580
|
|
|
$
|
26,811
|
|
|
$
|
35,522
|
|
|
$
|
3,649
|
|
The following table presents the average recorded investment and interest income recognized for loans individually evaluated for impairment, excluding purchased credit impaired loans, by class of loan, during the stated periods:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30,
|
|
Nine Months Ended September 30,
|
|
|
2018
|
|
2017
|
|
2018
|
|
2017
|
|
(in thousands)
|
Average Recorded Investment
|
|
Interest Income Recognized
|
|
Average Recorded Investment
|
|
Interest Income Recognized
|
|
Average Recorded Investment
|
|
Interest Income Recognized
|
|
Average Recorded Investment
|
|
Interest Income Recognized
|
|
With no related allowance recorded:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Agricultural
|
$
|
4,864
|
|
|
$
|
71
|
|
|
$
|
881
|
|
|
$
|
17
|
|
|
$
|
3,480
|
|
|
$
|
180
|
|
|
$
|
674
|
|
|
$
|
50
|
|
|
Commercial and industrial
|
3,961
|
|
|
36
|
|
|
2,878
|
|
|
77
|
|
|
3,563
|
|
|
150
|
|
|
2,899
|
|
|
124
|
|
|
Commercial real estate:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Construction and development
|
84
|
|
|
—
|
|
|
423
|
|
|
—
|
|
|
84
|
|
|
—
|
|
|
434
|
|
|
2
|
|
|
Farmland
|
3,274
|
|
|
44
|
|
|
212
|
|
|
—
|
|
|
1,745
|
|
|
86
|
|
|
1,193
|
|
|
58
|
|
|
Multifamily
|
822
|
|
|
10
|
|
|
—
|
|
|
—
|
|
|
618
|
|
|
30
|
|
|
—
|
|
|
—
|
|
|
Commercial real estate-other
|
6,326
|
|
|
77
|
|
|
2,148
|
|
|
18
|
|
|
5,428
|
|
|
201
|
|
|
1,894
|
|
|
63
|
|
|
Total commercial real estate
|
10,506
|
|
|
131
|
|
|
2,783
|
|
|
18
|
|
|
7,875
|
|
|
317
|
|
|
3,521
|
|
|
123
|
|
|
Residential real estate:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
One- to four- family first liens
|
2,578
|
|
|
34
|
|
|
2,183
|
|
|
23
|
|
|
1,942
|
|
|
53
|
|
|
2,197
|
|
|
69
|
|
|
One- to four- family junior liens
|
323
|
|
|
1
|
|
|
13
|
|
|
—
|
|
|
301
|
|
|
1
|
|
|
13
|
|
|
—
|
|
|
Total residential real estate
|
2,901
|
|
|
35
|
|
|
2,196
|
|
|
23
|
|
|
2,243
|
|
|
54
|
|
|
2,210
|
|
|
69
|
|
|
Consumer
|
4
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
2
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
Total
|
$
|
22,236
|
|
|
$
|
273
|
|
|
$
|
8,738
|
|
|
$
|
135
|
|
|
$
|
17,163
|
|
|
$
|
701
|
|
|
$
|
9,304
|
|
|
$
|
366
|
|
|
With an allowance recorded:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Agricultural
|
$
|
1,974
|
|
|
$
|
—
|
|
|
$
|
1,446
|
|
|
$
|
11
|
|
|
$
|
2,108
|
|
|
$
|
—
|
|
|
$
|
1,460
|
|
|
$
|
33
|
|
|
Commercial and industrial
|
8,905
|
|
|
43
|
|
|
8,458
|
|
|
85
|
|
|
7,778
|
|
|
89
|
|
|
8,423
|
|
|
163
|
|
|
Commercial real estate:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Construction and development
|
—
|
|
|
—
|
|
|
311
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
232
|
|
|
—
|
|
|
Farmland
|
2,123
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
1,584
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
Multifamily
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
Commercial real estate-other
|
4,536
|
|
|
16
|
|
|
12,863
|
|
|
—
|
|
|
4,443
|
|
|
—
|
|
|
12,881
|
|
|
44
|
|
|
Total commercial real estate
|
6,659
|
|
|
16
|
|
|
13,174
|
|
|
—
|
|
|
6,027
|
|
|
—
|
|
|
13,113
|
|
|
44
|
|
|
Residential real estate:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
One- to four- family first liens
|
963
|
|
|
9
|
|
|
1,361
|
|
|
9
|
|
|
969
|
|
|
27
|
|
|
1,392
|
|
|
26
|
|
|
One- to four- family junior liens
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
Total residential real estate
|
963
|
|
|
9
|
|
|
1,361
|
|
|
9
|
|
|
969
|
|
|
27
|
|
|
1,392
|
|
|
26
|
|
|
Consumer
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
Total
|
$
|
18,501
|
|
|
$
|
68
|
|
|
$
|
24,439
|
|
|
$
|
105
|
|
|
$
|
16,882
|
|
|
$
|
116
|
|
|
$
|
24,388
|
|
|
$
|
266
|
|
|
Total:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Agricultural
|
$
|
6,838
|
|
|
$
|
71
|
|
|
$
|
2,327
|
|
|
$
|
28
|
|
|
$
|
5,588
|
|
|
$
|
180
|
|
|
$
|
2,134
|
|
|
$
|
83
|
|
|
Commercial and industrial
|
12,866
|
|
|
79
|
|
|
11,336
|
|
|
162
|
|
|
11,341
|
|
|
239
|
|
|
11,322
|
|
|
287
|
|
|
Commercial real estate:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Construction and development
|
84
|
|
|
—
|
|
|
734
|
|
|
—
|
|
|
84
|
|
|
—
|
|
|
666
|
|
|
2
|
|
|
Farmland
|
5,397
|
|
|
44
|
|
|
212
|
|
|
—
|
|
|
3,329
|
|
|
86
|
|
|
1,193
|
|
|
58
|
|
|
Multifamily
|
822
|
|
|
10
|
|
|
—
|
|
|
—
|
|
|
618
|
|
|
30
|
|
|
—
|
|
|
—
|
|
|
Commercial real estate-other
|
10,862
|
|
|
93
|
|
|
15,011
|
|
|
18
|
|
|
9,871
|
|
|
201
|
|
|
14,775
|
|
|
107
|
|
|
Total commercial real estate
|
17,165
|
|
|
147
|
|
|
15,957
|
|
|
18
|
|
|
13,902
|
|
|
317
|
|
|
16,634
|
|
|
167
|
|
|
Residential real estate:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
One- to four- family first liens
|
3,541
|
|
|
43
|
|
|
3,544
|
|
|
32
|
|
|
2,911
|
|
|
80
|
|
|
3,589
|
|
|
95
|
|
|
One- to four- family junior liens
|
323
|
|
|
1
|
|
|
13
|
|
|
—
|
|
|
301
|
|
|
1
|
|
|
13
|
|
|
—
|
|
|
Total residential real estate
|
3,864
|
|
|
44
|
|
|
3,557
|
|
|
32
|
|
|
3,212
|
|
|
81
|
|
|
3,602
|
|
|
95
|
|
|
Consumer
|
4
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
2
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
Total
|
$
|
40,737
|
|
|
$
|
341
|
|
|
$
|
33,177
|
|
|
$
|
240
|
|
|
$
|
34,045
|
|
|
$
|
817
|
|
|
$
|
33,692
|
|
|
$
|
632
|
|
The following table presents the contractual aging of the recorded investment in past due loans by class of loans at
September 30, 2018
and
December 31, 2017
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in thousands)
|
30 - 59 Days Past Due
|
|
60 - 89 Days Past Due
|
|
90 Days or More Past Due
|
|
Total Past Due
|
|
Current
|
|
Total Loans Receivable
|
|
September 30, 2018
|
|
|
|
|
|
|
|
|
|
|
|
|
Agricultural
|
$
|
72
|
|
|
$
|
100
|
|
|
$
|
230
|
|
|
$
|
402
|
|
|
$
|
102,805
|
|
|
$
|
103,207
|
|
|
Commercial and industrial
|
1,206
|
|
|
315
|
|
|
6,701
|
|
|
8,222
|
|
|
515,111
|
|
|
523,333
|
|
|
Commercial real estate:
|
|
|
|
|
|
|
|
|
|
|
|
|
Construction and development
|
—
|
|
|
10
|
|
|
83
|
|
|
93
|
|
|
223,231
|
|
|
223,324
|
|
|
Farmland
|
—
|
|
|
—
|
|
|
141
|
|
|
141
|
|
|
85,594
|
|
|
85,735
|
|
|
Multifamily
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
126,663
|
|
|
126,663
|
|
|
Commercial real estate-other
|
4,198
|
|
|
101
|
|
|
3,814
|
|
|
8,113
|
|
|
809,955
|
|
|
818,068
|
|
|
Total commercial real estate
|
4,198
|
|
|
111
|
|
|
4,038
|
|
|
8,347
|
|
|
1,245,443
|
|
|
1,253,790
|
|
|
Residential real estate:
|
|
|
|
|
|
|
|
|
|
|
|
|
One- to four- family first liens
|
3,381
|
|
|
313
|
|
|
965
|
|
|
4,659
|
|
|
338,096
|
|
|
342,755
|
|
|
One- to four- family junior liens
|
225
|
|
|
94
|
|
|
377
|
|
|
696
|
|
|
115,072
|
|
|
115,768
|
|
|
Total residential real estate
|
3,606
|
|
|
407
|
|
|
1,342
|
|
|
5,355
|
|
|
453,168
|
|
|
458,523
|
|
|
Consumer
|
138
|
|
|
3
|
|
|
31
|
|
|
172
|
|
|
38,624
|
|
|
38,796
|
|
|
Total
|
$
|
9,220
|
|
|
$
|
936
|
|
|
$
|
12,342
|
|
|
$
|
22,498
|
|
|
$
|
2,355,151
|
|
|
$
|
2,377,649
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Included in the totals above are the following purchased credit impaired loans
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
17,452
|
|
|
$
|
17,452
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2017
|
|
|
|
|
|
|
|
|
|
|
|
|
Agricultural
|
$
|
95
|
|
|
$
|
118
|
|
|
$
|
168
|
|
|
$
|
381
|
|
|
$
|
105,131
|
|
|
$
|
105,512
|
|
|
Commercial and industrial
|
1,434
|
|
|
1,336
|
|
|
1,576
|
|
|
4,346
|
|
|
499,278
|
|
|
503,624
|
|
|
Commercial real estate:
|
|
|
|
|
|
|
|
|
|
|
|
|
Construction and development
|
57
|
|
|
97
|
|
|
82
|
|
|
236
|
|
|
165,040
|
|
|
165,276
|
|
|
Farmland
|
217
|
|
|
—
|
|
|
373
|
|
|
590
|
|
|
87,278
|
|
|
87,868
|
|
|
Multifamily
|
—
|
|
|
25
|
|
|
—
|
|
|
25
|
|
|
134,481
|
|
|
134,506
|
|
|
Commercial real estate-other
|
74
|
|
|
—
|
|
|
1,852
|
|
|
1,926
|
|
|
782,395
|
|
|
784,321
|
|
|
Total commercial real estate
|
348
|
|
|
122
|
|
|
2,307
|
|
|
2,777
|
|
|
1,169,194
|
|
|
1,171,971
|
|
|
Residential real estate:
|
|
|
|
|
|
|
|
|
|
|
|
|
One- to four- family first liens
|
3,854
|
|
|
756
|
|
|
1,019
|
|
|
5,629
|
|
|
346,597
|
|
|
352,226
|
|
|
One- to four- family junior liens
|
325
|
|
|
770
|
|
|
271
|
|
|
1,366
|
|
|
115,838
|
|
|
117,204
|
|
|
Total residential real estate
|
4,179
|
|
|
1,526
|
|
|
1,290
|
|
|
6,995
|
|
|
462,435
|
|
|
469,430
|
|
|
Consumer
|
79
|
|
|
15
|
|
|
29
|
|
|
123
|
|
|
36,035
|
|
|
36,158
|
|
|
Total
|
$
|
6,135
|
|
|
$
|
3,117
|
|
|
$
|
5,370
|
|
|
$
|
14,622
|
|
|
$
|
2,272,073
|
|
|
$
|
2,286,695
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Included in the totals above are the following purchased credit impaired loans
|
$
|
164
|
|
|
$
|
756
|
|
|
$
|
553
|
|
|
$
|
1,473
|
|
|
$
|
18,258
|
|
|
$
|
19,731
|
|
Non-accrual and Delinquent Loans
Loans are placed on non-accrual when (1) payment in full of principal and interest is no longer expected or (2) principal or interest has been in default for 90 days or more (unless the loan is both well secured with marketable collateral and in the process of collection). All loans rated doubtful or worse, and certain loans rated substandard, are placed on non-accrual.
A non-accrual asset may be restored to an accrual status when (1) all past due principal and interest has been paid (excluding renewals and modifications that involve the capitalizing of interest) or (2) the loan becomes well secured with marketable collateral and is in the process of collection. An established track record of performance is also considered when determining accrual status.
Delinquency status of a loan is determined by the number of days that have elapsed past the loan’s payment due date, using the following classification groupings: 30-59 days, 60-89 days and 90 days or more. Once a TDR has gone 90 days or more past due or is placed on nonaccrual status, it is included in the 90 days or more past due or nonaccrual totals.
The following table sets forth the composition of the Company’s recorded investment in loans on nonaccrual status and past due 90 days or more and still accruing by class of loans, excluding purchased credit impaired loans, as of
September 30, 2018
and
December 31, 2017
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2018
|
|
December 31, 2017
|
|
(in thousands)
|
Non-Accrual
|
|
Loans Past Due 90 Days or More and Still Accruing
|
|
Non-Accrual
|
|
Loans Past Due 90 Days or More and Still Accruing
|
|
Agricultural
|
$
|
662
|
|
|
$
|
—
|
|
|
$
|
168
|
|
|
$
|
—
|
|
|
Commercial and industrial
|
11,208
|
|
|
—
|
|
|
7,124
|
|
|
—
|
|
|
Commercial real estate:
|
|
|
|
|
|
|
|
|
Construction and development
|
100
|
|
|
—
|
|
|
188
|
|
|
—
|
|
|
Farmland
|
2,367
|
|
|
—
|
|
|
386
|
|
|
—
|
|
|
Multifamily
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
Commercial real estate-other
|
4,816
|
|
|
—
|
|
|
5,279
|
|
|
—
|
|
|
Total commercial real estate
|
7,283
|
|
|
—
|
|
|
5,853
|
|
|
—
|
|
|
Residential real estate:
|
|
|
|
|
|
|
|
|
One- to four- family first liens
|
1,277
|
|
|
171
|
|
|
1,228
|
|
|
205
|
|
|
One- to four- family junior liens
|
413
|
|
|
—
|
|
|
346
|
|
|
2
|
|
|
Total residential real estate
|
1,690
|
|
|
171
|
|
|
1,574
|
|
|
207
|
|
|
Consumer
|
86
|
|
|
—
|
|
|
65
|
|
|
—
|
|
|
Total
|
$
|
20,929
|
|
|
$
|
171
|
|
|
$
|
14,784
|
|
|
$
|
207
|
|
Not included in the loans above as of
September 30, 2018
and
December 31, 2017
were purchased credit impaired loans with an outstanding balance of
$0.3 million
and
$0.7 million
, net of a discount of
zero
and
$0.1 million
, respectively.
As of
September 30, 2018
, the Company had
$0.1 million
in commitments to lend additional funds to borrowers who have a nonperforming loan.
Purchased Loans
Purchased loans acquired in a business combination are recorded and initially measured at their estimated fair value as of the acquisition date. Credit discounts are included in the determination of fair value. An allowance for loan losses is not carried over. These purchased loans are segregated into two types: purchased credit impaired loans and purchased non-credit impaired loans.
|
|
•
|
Purchased non-credit impaired loans are accounted for in accordance with ASC 310-20 “
Nonrefundable Fees and Other Costs
” as these loans do not have evidence of significant credit deterioration since origination and it is probable all contractually required payments will be received from the borrower.
|
|
|
•
|
Purchased credit impaired loans are accounted for in accordance with ASC 310-30 “
Loans and Debt Securities Acquired with Deteriorated Credit Quality
” as they display significant credit deterioration since origination and it is probable, as of the acquisition date, that the Company will be unable to collect all contractually required payments from the borrower.
|
For purchased non-credit impaired loans the accretable discount is the discount applied to the expected cash flows of the portfolio to account for the differences between the interest rates at acquisition and rates currently expected on similar portfolios in the marketplace. As the accretable discount is accreted to interest income over the expected average life of the portfolio, the result will be interest income on loans at the estimated current market rate. We record a provision for the acquired portfolio as the loans acquired in the Central Bancshares, Inc. (“Central”) merger, which occurred in 2015, renew and the discount is accreted.
For purchased credit impaired loans the difference between contractually required payments at acquisition and the cash flows expected to be collected is referred to as the non-accretable difference. Further, any excess of cash flows expected at acquisition over the estimated fair value is referred to as the accretable yield and is recognized into interest income over the expected remaining life of the loan if the timing and amount of the future cash flows are reasonably estimable. This discount includes an adjustment on loans that are not accruing or paying contractual interest so that interest income will be recognized at the estimated current market rate.
Subsequent to the purchase date, increases in cash flows over those expected at the purchase date are recognized as interest income prospectively. The present value of any decreases in expected cash flows after the purchase date is recognized by recording an allowance for credit losses and a provision for loan losses.
Changes in the accretable yield for loans acquired and accounted for under ASC 310-30 were as follows for the
three and nine months
ended
September 30, 2018
and
2017
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30,
|
|
Nine Months Ended September 30,
|
|
(in thousands)
|
2018
|
|
2017
|
|
2018
|
|
2017
|
|
Balance at beginning of period
|
$
|
311
|
|
|
$
|
1,371
|
|
|
$
|
840
|
|
|
$
|
1,961
|
|
|
Accretion
|
(223
|
)
|
|
(350
|
)
|
|
(873
|
)
|
|
(1,241
|
)
|
|
Reclassification (to) from nonaccretable difference
|
(7
|
)
|
|
63
|
|
|
114
|
|
|
364
|
|
|
Balance at end of period
|
$
|
81
|
|
|
$
|
1,084
|
|
|
$
|
81
|
|
|
$
|
1,084
|
|
5. Derivatives and Hedging Activities
FASB ASC 815,
Derivatives and Hedging
(“ASC 815”), provides the disclosure requirements for derivatives and hedging activities with the intent to provide users of financial statements with an enhanced understanding of: (a) how and why an entity uses derivative instruments, (b) how the entity accounts for derivative instruments and related hedged items, and (c) how derivative instruments and related hedged items affect an entity’s financial position, financial performance, and cash flows. Further, qualitative disclosures are required that explain the Company’s objectives and strategies for using derivatives, as well as quantitative disclosures about the fair value of and gains and losses on derivative instruments, and disclosures about credit-risk-related contingent features in derivative instruments.
As required by ASC 815, the Company records all derivatives on the balance sheet at fair value. The accounting for changes in the fair value of derivatives depends on the intended use of the derivative, whether the Company has elected to designate a derivative in a hedging relationship and apply hedge accounting and whether the hedging relationship has satisfied the criteria necessary to apply hedge accounting. Derivatives designated and qualifying as a hedge of the exposure to changes in the fair value of an asset, liability, or firm commitment attributable to a particular risk, such as interest rate risk, are considered fair value hedges. Derivatives designated and qualifying as a hedge of the exposure to variability in expected future cash flows, or other types of forecasted transactions, are considered cash flow hedges. Hedge accounting generally provides for the matching of the timing of gain or loss recognition on the hedging instrument with the recognition of the changes in the fair value of the hedged asset or liability that are attributable to the hedged risk in a fair value hedge or the earnings effect of the hedged forecasted transactions in a cash flow hedge. The Company may enter into derivative contracts that are intended to economically hedge certain of its risk, even though hedge accounting does not apply or the Company elects not to apply hedge accounting.
The Company does not use derivatives for trading or speculative purposes.
In accordance with the FASB’s fair value measurement guidance, the Company made an accounting policy election to measure the credit risk of its derivative financial instruments that are subject to master netting agreements on a net basis by counterparty portfolio.
The Company is exposed to certain risks arising from both its business operations and economic conditions. The Company principally manages its exposures to a wide variety of business and operational risks through management of its core business activities. The Company manages economic risks, including interest rate, liquidity, and credit risk primarily by managing the amount, sources, and duration of its assets and liabilities and the use of derivative financial instruments. Specifically, the Company enters into derivative financial instruments to manage exposures that arise from business activities that result in the receipt or payment of future known and uncertain cash amounts, the value of which are determined by interest rates. The Company’s derivative financial instruments are used to manage differences in the amount, timing, and duration of the Company’s known or expected cash receipts and its known or expected cash payments principally related to the Company’s loans and borrowings.
The following table presents the total notional and gross fair value of the Company’s derivatives as of
September 30, 2018
and
December 31, 2017
. The derivative asset and liability balances are presented on a gross basis, prior to the application of master netting agreements, as included in other assets and other liabilities, respectively, on the consolidated balance sheets.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of September 30, 2018
|
|
As of December 31, 2017
|
|
|
|
|
|
Fair Value
|
|
|
|
Fair Value
|
|
(in thousands)
|
|
Notional
Amount
|
|
Derivative
Assets
|
|
Derivative
Liabilities
|
|
Notional
Amount
|
|
Derivative
Assets
|
|
Derivative
Liabilities
|
|
Derivatives designated as hedging instruments:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair value hedges:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest rate swaps
|
|
$
|
7,855
|
|
|
$
|
100
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivatives not designated as hedging instruments:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest rate swaps
|
|
$
|
13,840
|
|
|
$
|
105
|
|
|
$
|
125
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
Risk participation agreements (RPAs)
|
|
10,112
|
|
|
—
|
|
|
53
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
Total derivatives not designated as hedging instruments
|
|
$
|
23,952
|
|
|
$
|
105
|
|
|
$
|
178
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Derivatives Designated as Hedging Instruments
The Company is exposed to changes in the fair value of certain of its fixed-rate assets due to changes in benchmark interest rates. The Company uses interest rate swaps to manage its exposure to changes in fair value on these instruments attributable to changes in the designated benchmark interest rate, LIBOR. Interest rate swaps designated as fair value hedges involve the payment of fixed-rate amounts to a counterparty in exchange for the Company receiving variable-rate payments over the life of the agreements without the exchange of the underlying notional amount. For derivatives designated and that qualify as fair value hedges, the gain or loss on the derivative as well as the offsetting loss or gain on the hedged item attributable to the hedged risk are recognized in interest income.
The table below presents the effect of the Company’s derivative financial instruments designated as hedging instruments on the consolidated statements of income for the
three and nine months
ended
September 30, 2018
and
September 30, 2017
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Location and Amount of Gain or Loss Recognized in Income on Fair Value Hedging Relationships
|
|
|
For the Three Months Ended September 30,
|
|
For the Nine Months Ended September 30,
|
|
|
2018
|
|
2017
|
|
2018
|
|
2017
|
|
(in thousands)
|
Interest Income (Expense)
|
|
Other Gain (Loss)
|
|
Interest Income (Expense)
|
|
Other Gain (Loss)
|
|
Interest Income (Expense)
|
|
Other Gain (Loss)
|
|
Interest Income (Expense)
|
|
Other Gain (Loss)
|
|
Total amounts of income and expense line items presented in the Consolidated Statements of Income in which the effects of fair value hedges are recorded
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
(1
|
)
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The effects of fair value hedging:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gain (Loss) on fair value hedging relationships in subtopic 815-20:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest contracts:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Hedged items
|
(126
|
)
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(101
|
)
|
|
—
|
|
|
—
|
|
|
—
|
|
|
Derivative designated as hedging instruments
|
126
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
100
|
|
|
—
|
|
|
—
|
|
|
—
|
|
As of
September 30, 2018
, the following amounts were recorded on the balance sheet related to cumulative basis adjustment for fair value hedges:
|
|
|
|
|
|
|
|
|
|
|
|
Line Item in the Balance
Sheet in Which the
Hedged Item is Included
|
|
Carrying Amount of the
Hedged Assets
|
|
Cumulative Amount of Fair Value
Hedging Adjustment Included in the Carrying Amount of the Hedged Asset
|
|
(in thousands)
|
|
|
|
|
|
Loans
|
|
$
|
7,754
|
|
|
$
|
(101
|
)
|
Derivatives Not Designated as Hedging Instruments
Interest Rate Swaps
-The Company enters into interest rate derivatives, including interest rate swaps with its customers, to allow them to hedge against the risk of rising interest rates by providing fixed rate loans. To economically hedge against the interest rate risks in the products offered to its customers, the Company enters into mirrored interest rate contracts with institutional counterparties, with one designated as a central counterparty. The following table represents the notional amounts and the gross fair values of interest rate derivative contracts outstanding as of
September 30, 2018
and
December 31, 2017
respectively.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2018
|
|
|
Customer Counterparties
|
|
Financial Counterparties
|
|
|
|
|
Fair Value
|
|
|
|
Fair Value
|
|
(in thousands)
|
Notional Amount
|
|
Assets
|
|
Liabilities
|
|
Notional Amount
|
|
Assets
|
|
Liabilities
|
|
Swaps
|
$
|
6,920
|
|
|
$
|
105
|
|
|
$
|
—
|
|
|
$
|
6,920
|
|
|
$
|
—
|
|
|
$
|
125
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2017
|
|
|
Customer Counterparties
|
|
Financial Counterparties
|
|
|
|
|
Fair Value
|
|
|
|
Fair Value
|
|
(in thousands)
|
Notional Amount
|
|
Assets
|
|
Liabilities
|
|
Notional Amount
|
|
Assets
|
|
Liabilities
|
|
Swaps
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Credit Risk Participation Agreements
-The Company may periodically enter into RPAs to manage the credit exposure on interest rate contracts associated with a syndicated loan. The Company may enter into protection purchased RPAs with institutional counterparties to decrease or increase its exposure to a borrower. Under the RPA, the Company will receive or make payment if a borrower defaults on the related interest rate contract. The Company manages its credit risk on RPAs by monitoring the creditworthiness of the borrowers and institutional counterparties, which is based on the normal credit review process. The notional amount of the RPAs reflects the Company’s pro-rata share of the derivative instrument. The following table represents the notional amounts and the gross fair values of RPAs purchased and sold outstanding as of
September 30, 2018
and
December 31, 2017
respectively.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2018
|
|
December 31, 2017
|
|
|
|
|
Fair Value
|
|
|
|
Fair Value
|
|
(in thousands)
|
Notional Amount
|
|
Assets
|
|
Liabilities
|
|
Notional Amount
|
|
Assets
|
|
Liabilities
|
|
RPAs - protection purchased
|
$
|
10,112
|
|
|
$
|
—
|
|
|
$
|
53
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
The following table presents the net gains (losses) recognized on the consolidated statements of income related to the derivatives not designated as hedging instruments for the
three and nine months
ended
September 30, 2018
and
September 30, 2017
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Location in the Consolidated Statements of Income
|
|
For the Three Months Ended September 30,
|
|
For the Nine Months Ended September 30,
|
|
(in thousands)
|
|
|
2018
|
|
2017
|
|
2018
|
|
2017
|
|
Interest rate swaps
|
|
Other gain (loss)
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
(20
|
)
|
|
$
|
—
|
|
|
RPAs
|
|
Other gain (loss)
|
|
147
|
|
|
—
|
|
|
147
|
|
|
—
|
|
|
Total
|
|
|
|
$
|
147
|
|
|
$
|
—
|
|
|
$
|
127
|
|
|
$
|
—
|
|
Offsetting of Derivatives
The table below presents a gross presentation, the effects of offsetting, and a net presentation of the Company’s derivatives as of
September 30, 2018
and
December 31, 2017
. The net amounts of derivative assets or liabilities can be reconciled to the tabular disclosure of fair value. The tabular disclosure of fair value provides the location that derivative assets and liabilities are presented on the consolidated balance sheets.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross Amounts Not Offset in the Balance Sheet
|
|
|
|
(in thousands)
|
Gross Amounts of Recognized Assets (Liabilities)
|
|
Gross Amounts Offset in the Balance Sheet
|
|
Net Amounts of Assets (Liabilities) presented in the Balance Sheet
|
|
Financial Instruments
|
|
Cash Collateral Received (Paid)
|
|
Net Assets (Liabilities)
|
|
As of September 30, 2018
|
|
|
|
|
|
|
|
|
|
|
|
|
Asset Derivatives
|
$
|
205
|
|
|
$
|
—
|
|
|
$
|
205
|
|
|
$
|
100
|
|
|
$
|
—
|
|
|
$
|
105
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liability Derivatives
|
(178
|
)
|
|
—
|
|
|
(178
|
)
|
|
100
|
|
|
—
|
|
|
(78
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31, 2017
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivatives
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liability Derivatives
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Credit-risk-related Contingent Features
The Company has an unsecured federal funds line with its derivative counterparty.The Company has an agreement with its derivative counterparty that contains a provision under which if the Company defaults on any of its indebtedness, including default where repayment of the indebtedness has not been accelerated by the lender, then the Company could also be declared in default on its derivative obligations. The Company also has an agreement with its derivative counterparty that contains a provision under which the Company could be declared in default on its derivative obligations if repayment of the underlying indebtedness is accelerated by the lender due to the Company's default on the indebtedness.
As of
September 30, 2018
, the fair value of derivatives in a net liability position, which includes accrued interest but excludes any adjustment for nonperformance risk, related to these agreements was
$179,000
. As of
September 30, 2018
, the Company has minimum collateral posting thresholds with certain of its derivative counterparties, and has not posted any collateral related to these agreements. If the Company had breached any of these provisions at
September 30, 2018
, it could have been required to settle its obligations under the agreements at their termination value of
$179,000
.
6. Goodwill and Intangible Assets
The excess of the cost of an acquisition over the fair value of the net assets acquired, including core deposit, trade name, and client relationship intangibles, consists of goodwill. Under ASC Topic 350, goodwill and the non-amortizing portion of the trade name intangible are subject to at least annual assessments for impairment by applying a fair value based test. The Company reviews goodwill and the non-amortizing portion of the trade name intangible at the reporting unit level to determine potential impairment annually on October 1, or more frequently if events or changes in circumstances indicate that the carrying value may not be recoverable, by comparing the carrying value of the reporting unit with the fair value of the reporting unit.
No
impairment was recorded on either the goodwill or the trade name intangible assets during the
nine months
ended
September 30, 2018
. The carrying amount of goodwill was
$64.7 million
at
September 30, 2018
, the same as at
December 31, 2017
.
During the second quarter of 2018, the Company recognized a
$125,000
customer list intangible due to the purchase of a registered investment adviser in the Denver, Colorado area.
The following table presents the changes in the carrying amount of intangibles (excluding goodwill), gross carrying amount, accumulated amortization, and net book value as of and for the
nine months
ended
September 30, 2018
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in thousands)
|
|
Insurance Agency Intangible
|
|
Core Deposit Intangible
|
|
Indefinite-Lived Trade Name Intangible
|
|
Finite-Lived Trade Name Intangible
|
|
Customer List Intangible
|
|
Total
|
|
September 30, 2018
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, beginning of period
|
|
$
|
148
|
|
|
$
|
4,011
|
|
|
$
|
7,040
|
|
|
$
|
744
|
|
|
$
|
103
|
|
|
$
|
12,046
|
|
|
Finite-lived intangible assets acquired
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
125
|
|
|
125
|
|
|
Amortization expense
|
|
(28
|
)
|
|
(1,600
|
)
|
|
—
|
|
|
(143
|
)
|
|
(22
|
)
|
|
(1,793
|
)
|
|
Balance at end of period
|
|
$
|
120
|
|
|
$
|
2,411
|
|
|
$
|
7,040
|
|
|
$
|
601
|
|
|
$
|
206
|
|
|
$
|
10,378
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross carrying amount
|
|
$
|
1,320
|
|
|
$
|
18,206
|
|
|
$
|
7,040
|
|
|
$
|
1,380
|
|
|
$
|
455
|
|
|
$
|
28,401
|
|
|
Accumulated amortization
|
|
(1,200
|
)
|
|
(15,795
|
)
|
|
—
|
|
|
(779
|
)
|
|
(249
|
)
|
|
(18,023
|
)
|
|
Net book value
|
|
$
|
120
|
|
|
$
|
2,411
|
|
|
$
|
7,040
|
|
|
$
|
601
|
|
|
$
|
206
|
|
|
$
|
10,378
|
|
7. Other Assets
The components of the Company’s other assets were as follows:
|
|
|
|
|
|
|
|
|
|
|
(in thousands)
|
September 30, 2018
|
|
December 31, 2017
|
|
Federal Home Loan Bank Stock
|
$
|
13,260
|
|
|
$
|
11,324
|
|
|
Prepaid expenses
|
2,286
|
|
|
2,992
|
|
|
Mortgage servicing rights
|
2,711
|
|
|
2,316
|
|
|
Assets held for sale
|
895
|
|
|
—
|
|
|
Federal & state income taxes receivable, current
|
322
|
|
|
3,120
|
|
|
Accounts receivable & other miscellaneous assets
|
7,841
|
|
|
3,009
|
|
|
|
$
|
27,315
|
|
|
$
|
22,761
|
|
The
Bank is a member of the FHLB of Des Moines, and ownership of FHLB stock is a requirement for such membership. The amount of FHLB stock the Bank is required to hold is directly related to the amount of FHLB advances borrowed. Because this security is not readily marketable and there are no available market values, this security is carried at cost and evaluated for potential impairment each quarter. Redemption of this investment is at the option of the FHLB.
Mortgage servicing rights are recorded at fair value based on assumptions provided by a third-party valuation service. The valuation model incorporates assumptions that market participants would use in estimating future net servicing income, such as the servicing cost per loan, the discount rate, the escrow float rate, an inflation rate, ancillary income, prepayment speeds and default rates and losses.
In the third quarter of 2018, the Company listed a former branch facility for sale as well as a former building used in the past for overflow office capacity. As such, these assets were marked down to fair value after selling costs and moved on the balance sheet from premises and equipment to assets held for sale.
8. Short-Term Borrowings
Short-term borrowings were as follows as of
September 30, 2018
and
December 31, 2017
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2018
|
|
December 31, 2017
|
|
(in thousands)
|
|
Weighted Average Cost
|
|
Balance
|
|
Weighted Average Cost
|
|
Balance
|
|
Federal funds purchased
|
|
2.39
|
%
|
|
$
|
19,056
|
|
|
1.77
|
%
|
|
$
|
1,000
|
|
|
Securities sold under agreements to repurchase
|
|
0.97
|
|
|
68,922
|
|
|
0.71
|
|
|
96,229
|
|
|
Total
|
|
1.28
|
%
|
|
$
|
87,978
|
|
|
0.73
|
%
|
|
$
|
97,229
|
|
At
September 30, 2018
and
December 31, 2017
, the Company had
no
borrowings through the Federal Reserve Discount Window, while the borrowing capacity was
$11.4 million
as of
September 30, 2018
and
December 31, 2017
. As of
September 30, 2018
and
December 31, 2017
, the Bank had municipal securities pledged with a market value of
$12.6 million
and
$12.8 million
, respectively, to the Federal Reserve to secure potential borrowings. The Company also has various other unsecured federal funds agreements with correspondent banks as well as the FHLB. As of
September 30,
2018
and
December 31, 2017
, there were
$19.1 million
and
$1.0 million
of borrowings through these correspondent bank federal funds agreements, respectively.
Securities sold under agreements to repurchase are agreements in which the Company acquires funds by selling assets to another party under a simultaneous agreement to repurchase the same assets at a specified price and date. The Company enters into repurchase agreements and also offers a demand deposit account product to customers that sweeps their balances in excess of an agreed upon target amount into overnight repurchase agreements. All securities sold under agreements to repurchase are recorded on the face of the balance sheet.
On
April 30, 2015
, the Company entered into a
$5.0 million
unsecured line of credit with a correspondent bank. Interest is payable at a rate of
one-month LIBOR
plus
2.00%
. The line was renewed in May 2018, and matures on
April 30, 2019
. The Company had
no
balance outstanding under this agreement as of
September 30, 2018
.
9. Junior Subordinated Notes Issued to Capital Trusts
The Company has established three statutory business trusts under the laws of the state of Delaware: Central Bancshares Capital Trust II, Barron Investment Capital Trust I, and MidWestOne Statutory Trust II. The trusts exist for the exclusive purposes of (i) issuing trust securities representing undivided beneficial interests in the assets of the respective trust; (ii) investing the gross proceeds of the trust securities in junior subordinated deferrable interest debentures (junior subordinated notes issued by the Company); and (iii) engaging in only those activities necessary or incidental thereto. For regulatory capital purposes, these trust securities qualify as a component of Tier 1 capital.
The table below summarizes the outstanding junior subordinated notes and the related trust preferred securities issued by each trust as of
September 30, 2018
and
December 31, 2017
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Face Value
|
|
Book Value
|
|
Interest Rate
|
|
Interest Rate at
|
|
Maturity Date
|
|
Callable Date
|
|
(in thousands)
|
|
|
|
|
9/30/2018
|
|
|
|
September 30, 2018
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Central Bancshares Capital Trust II
(1) (2)
|
|
$
|
7,217
|
|
|
$
|
6,716
|
|
|
Three-month LIBOR + 3.50%
|
|
5.83
|
%
|
|
03/15/2038
|
|
03/15/2013
|
|
Barron Investment Capital Trust I
(1) (2)
|
|
2,062
|
|
|
1,685
|
|
|
Three-month LIBOR + 2.15%
|
|
4.52
|
%
|
|
09/23/2036
|
|
09/23/2011
|
|
MidWestOne Statutory Trust II
(1)
|
|
15,464
|
|
|
15,464
|
|
|
Three-month LIBOR + 1.59%
|
|
3.92
|
%
|
|
12/15/2037
|
|
12/15/2012
|
|
Total
|
|
$
|
24,743
|
|
|
$
|
23,865
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Face Value
|
|
Book Value
|
|
Interest Rate
|
|
Interest Rate at
|
|
Maturity Date
|
|
Callable Date
|
|
(in thousands)
|
|
|
|
|
12/31/2017
|
|
|
|
December 31, 2017
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Central Bancshares Capital Trust II
(1) (2)
|
|
$
|
7,217
|
|
|
$
|
6,674
|
|
|
Three-month LIBOR + 3.50%
|
|
5.09
|
%
|
|
03/15/2038
|
|
03/15/2013
|
|
Barron Investment Capital Trust I
(1) (2)
|
|
2,062
|
|
|
1,655
|
|
|
Three-month LIBOR + 2.15%
|
|
3.82
|
%
|
|
09/23/2036
|
|
09/23/2011
|
|
MidWestOne Statutory Trust II
(1)
|
|
15,464
|
|
|
15,464
|
|
|
Three-month LIBOR + 1.59%
|
|
3.18
|
%
|
|
12/15/2037
|
|
12/15/2012
|
|
Total
|
|
$
|
24,743
|
|
|
$
|
23,793
|
|
|
|
|
|
|
|
|
|
(1) All distributions are cumulative and paid in cash quarterly.
(2) Central Bancshares Capital Trust II and Barron Investment Capital Trust I were established by Central prior to the Company’s merger with Central, and the junior subordinated notes issued by Central were assumed by the Company.
The trust preferred securities are subject to mandatory redemption, in whole or in part, upon repayment of the junior subordinated notes at the stated maturity date or upon redemption of the junior subordinated notes. Each trust’s ability to pay amounts due on the trust preferred securities is solely dependent upon the Company making payment on the related junior subordinated notes. The Company’s obligation under the junior subordinated notes and other relevant trust agreements, in aggregate, constitutes a full and unconditional guarantee by the Company of each trust’s obligations under the trust preferred securities issued by each trust. The Company has the right to defer payment of interest on the junior subordinated notes and, therefore, distributions on the trust preferred securities, for up to
five years
, but not beyond the stated maturity date in the table above. During any such deferral period the Company may not pay cash dividends on its stock and generally may not repurchase its stock.
10. Federal Home Loan Bank Borrowings and Long-Term Debt
Federal Home Loan Bank borrowings and long-term debt were as follows as of
September 30, 2018
and
December 31, 2017
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2018
|
|
December 31, 2017
|
|
(in thousands)
|
Weighted Average Cost
|
|
Balance
|
|
Weighted Average Cost
|
|
Balance
|
|
FHLB Borrowings
|
2.20
|
%
|
|
$
|
143,000
|
|
|
1.72
|
%
|
|
$
|
115,000
|
|
|
Note payable to unaffiliated bank
|
3.85
|
|
|
8,750
|
|
|
3.32
|
|
|
12,500
|
|
|
Total
|
2.30
|
%
|
|
$
|
151,750
|
|
|
1.88
|
%
|
|
$
|
127,500
|
|
The Company utilizes FHLB borrowings as a supplement to customer deposits to fund interest-earning assets and to assist in managing interest rate risk. As a member of the Federal Home Loan Bank of Des Moines, the Bank may borrow funds from the FHLB in amounts up to
35%
of the Bank’s total assets, provided the Bank is able to pledge an adequate amount of qualified assets to secure the borrowings. Advances from the FHLB are collateralized primarily by one- to four-family residential, commercial and agricultural real estate first mortgages equal to various percentages of the total outstanding notes. See
Note 4 “Loans Receivable and the Allowance for Loan Losses”
of the notes to the consolidated financial statements.
On
April 30, 2015
, the Company entered into a
$35.0 million
unsecured note payable with a correspondent bank with a maturity date of
June 30, 2020
. The Company drew
$25.0 million
on the note prior to June 30, 2015, at which time the ability to obtain additional advances ceased. Payments of principal and interest are payable
quarterly
, which began on
September 30, 2015
. As of
September 30, 2018
,
$8.8 million
of that note was outstanding.
11. Income Taxes
Income tax expense for the
three and nine months
ended
September 30, 2018
and
2017
was equal to or less than the amount computed by applying the maximum effective federal income tax rate of
21%
and
35%
, respectively, to the income before income taxes, because of the following items:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Three Months Ended September 30,
|
|
For the Nine Months Ended September 30,
|
|
|
2018
|
|
2017
|
|
2018
|
|
2017
|
|
(in thousands)
|
Amount
|
|
% of Pretax Income
|
|
Amount
|
|
% of Pretax Income
|
|
Amount
|
|
% of Pretax Income
|
|
Amount
|
|
% of Pretax Income
|
|
Income tax based on statutory rate
|
$
|
1,803
|
|
|
21.0
|
%
|
|
$
|
2,898
|
|
|
35.0
|
%
|
|
$
|
6,016
|
|
|
21.0
|
%
|
|
$
|
9,762
|
|
|
35.0
|
%
|
|
Tax-exempt interest
|
(468
|
)
|
|
(5.4
|
)
|
|
(808
|
)
|
|
(9.7
|
)
|
|
(1,459
|
)
|
|
(5.0
|
)
|
|
(2,389
|
)
|
|
(8.6
|
)
|
|
Bank-owned life insurance
|
(84
|
)
|
|
(1.0
|
)
|
|
(121
|
)
|
|
(1.5
|
)
|
|
(257
|
)
|
|
(0.9
|
)
|
|
(346
|
)
|
|
(1.2
|
)
|
|
State income taxes, net of federal income tax benefit
|
445
|
|
|
5.2
|
|
|
366
|
|
|
4.4
|
|
|
1,540
|
|
|
5.4
|
|
|
1,214
|
|
|
4.4
|
|
|
Non-deductible acquisition expenses
|
124
|
|
|
1.4
|
|
|
—
|
|
|
—
|
|
|
124
|
|
|
0.4
|
|
|
—
|
|
|
—
|
|
|
General business credits
|
(22
|
)
|
|
(0.2
|
)
|
|
(405
|
)
|
|
(4.9
|
)
|
|
(62
|
)
|
|
(0.2
|
)
|
|
(445
|
)
|
|
(1.6
|
)
|
|
Other
|
8
|
|
|
—
|
|
|
8
|
|
|
0.1
|
|
|
19
|
|
|
—
|
|
|
(193
|
)
|
|
(0.7
|
)
|
|
Total income tax expense
|
$
|
1,806
|
|
|
21.0
|
%
|
|
$
|
1,938
|
|
|
23.4
|
%
|
|
$
|
5,921
|
|
|
20.7
|
%
|
|
$
|
7,603
|
|
|
27.3
|
%
|
In December 2017, the SEC staff issued Staff Accounting Bulletin No. 118 (SAB 118), which provides guidance regarding how a company is to reflect provisional amounts when necessary information is not yet available, prepared or analyzed sufficiently to complete its accounting for the effect of the changes in Public Law 115-97, commonly referred to as the Tax Cuts and Jobs Act (the “Tax Act”). During the first quarter of 2018, the income tax expense recorded during the fourth quarter of 2017 was determined to be final.
12. Earnings per Share
Basic per-share amounts are computed by dividing net income (the numerator) by the weighted-average number of common shares outstanding (the denominator). Diluted per-share amounts assume issuance of all common stock issuable upon conversion or exercise of other securities, unless the effect is to reduce the loss or increase the income per common share from continuing operations.
The following table presents the computation of earnings per common share for the respective periods:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30,
|
|
Nine Months Ended September 30,
|
|
(dollars in thousands, except per share amounts)
|
|
2018
|
|
2017
|
|
2018
|
|
2017
|
|
Basic earnings per common share computation
|
|
|
|
|
|
|
|
|
|
Numerator:
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
6,778
|
|
|
$
|
6,342
|
|
|
$
|
22,727
|
|
|
$
|
20,289
|
|
|
Denominator:
|
|
|
|
|
|
|
|
|
|
Weighted average shares outstanding
|
|
12,221,107
|
|
|
12,218,528
|
|
|
12,220,673
|
|
|
11,977,579
|
|
|
Basic earnings per common share
|
|
$
|
0.55
|
|
|
$
|
0.52
|
|
|
$
|
1.86
|
|
|
$
|
1.69
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted earnings per common share computation
|
|
|
|
|
|
|
|
|
|
Numerator:
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
6,778
|
|
|
$
|
6,342
|
|
|
$
|
22,727
|
|
|
$
|
20,289
|
|
|
Denominator:
|
|
|
|
|
|
|
|
|
|
Weighted average shares outstanding, including all dilutive potential shares
|
|
12,239,864
|
|
|
12,238,991
|
|
|
12,237,462
|
|
|
11,999,608
|
|
|
Diluted earnings per common share
|
|
$
|
0.55
|
|
|
$
|
0.52
|
|
|
$
|
1.86
|
|
|
$
|
1.69
|
|
13. Estimated
Fair Value of Financial Instruments and Fair Value Measurements
Fair value is the exchange price that would be received for an asset or paid to transfer a liability (exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. Market participants are defined as buyers and sellers in the principal (or most advantageous) market for the asset or liability that have all of the following characteristics: 1) an unrelated party; 2) knowledgeable (having a reasonable understanding about the asset or liability and the transaction based on all available information; including information that might be obtained through due diligence efforts that are usual or customary); 3) able to transact; and 4) willing to transact (motivated but not forced or otherwise compelled to do so).
The FASB states “valuation techniques that are appropriate in the circumstances and for which sufficient data are available shall be used to measure fair value.” The valuation techniques for measuring fair value are consistent with the three traditional approaches to value: the market approach, the income approach, and the cost or asset approach.
In applying valuation techniques, the use of relevant inputs (both observable and unobservable) based on the facts and circumstances must be used. The FASB has defined a fair value hierarchy for these inputs which prioritizes the inputs into three broad levels:
|
|
•
|
Level 1 Inputs
– Quoted prices (unadjusted) for identical assets or liabilities in active markets. A quoted price in an active market provides the most reliable evidence of fair value and is used to measure fair value whenever available. A contractually binding sales price also provides reliable evidence of fair value.
|
|
|
•
|
Level 2 Inputs
– Inputs to the valuation methodology include quoted prices for similar assets or liabilities in active markets; inputs to the valuation methodology include quoted prices for identical or similar assets or liabilities in markets that are not active; or inputs to the valuation methodology that utilize model-based techniques for which all significant assumptions are observable in the market.
|
|
|
•
|
Level 3 Inputs
– Inputs to the valuation methodology are unobservable and significant to the fair value measurement; inputs to the valuation methodology that utilize model-based techniques for which significant assumptions are not observable in the market; or inputs to the valuation methodology that require significant management judgment or estimation, some of which may be internally developed.
|
Unobservable inputs should be used only to the extent that relevant observable inputs are not available; this allows for situations where there is little, if any, market activity for the asset or liability at the measurement date. Unobservable inputs should reflect the reporting entity’s own assumptions about the assumptions that market participants would use in pricing the asset or liability, including assumptions about risk.
It is the Company’s policy to maximize the use of observable inputs and minimize the use of unobservable inputs when developing fair value measurements. The Company is required to use observable inputs, to the extent available, in the fair value estimation process unless that data results from forced liquidations or distressed sales. The Company used the following methods and significant assumptions to estimate fair value:
Investment Securities
- The fair value for investment securities are determined by quoted market prices, if available (Level 1). The Company utilizes an independent pricing service to obtain the fair value of debt securities. On a quarterly basis, the Company selects a sample of
30
securities from its primary pricing service and compares them to a secondary independent pricing service to validate value. In addition, the Company periodically reviews the pricing methodology utilized by the primary independent service for reasonableness. Debt securities issued by the U.S. Treasury and other U.S. Government agencies and corporations, mortgage-backed securities, and collateralized mortgage obligations are priced utilizing industry-standard models that consider various assumptions, including time value, yield curves, volatility factors, prepayment speeds, default rates, loss severity, current market and contractual prices for the underlying financial instruments, as well as other relevant economic measures. Substantially all of these assumptions are observable in the marketplace, can be derived from observable data, or are supported by observable levels at which transactions are executed in the marketplace (Level 2). Municipal securities are valued using a type of matrix, or grid, pricing in which securities are benchmarked against the treasury rate based on credit rating (Level 2). On an annual basis, a group of selected municipal securities have their credit rating evaluated by a securities dealer and that information is used to verify the primary independent service’s rating and pricing.
Loans Held for Sale
- Loans held for sale are carried at the lower of cost or fair value, with fair value being based on binding contracts from third party investors (Level 2). The portfolio has historically consisted primarily of residential real estate loans.
Loans, Net
- The estimated fair value of loans, net, was performed using the income approach, with the market approach used for certain nonperforming loans, resulting in a Level 3 fair value classification. The application of the income approach establishes value by methods that discount or capitalize earnings and/or cash flow, by a discount or capitalization rate that reflects market rate of return expectations, market conditions, and the relative risk of the investment. Generally, this can be accomplished by the discounted cash flow method. For loans that exhibited some characteristics of performance and where it appears that the borrower may have adequate cash flows to service the loan, a discounted cash flow analysis was used. The discounted cash flow analysis was based on the contractual maturity of the loan and market indications of rates, prepayment speeds, defaults and credit risk. For loans with balloon or interest only payment structures, the repayment was extended by assuming a renewal period beyond the current contractual maturity date. For loans analyzed using the asset approach, the fair value was determined based on the estimated values of the underlying collateral. For impaired loans, the estimated net sales proceeds was used to determine the fair value of the loans when deemed appropriate. The implied sales proceeds value provides a better indication of value than the income stream as these loans are not performing or exhibit strong signs indicative of nonperformance.
Collateral Dependent Impaired Loans
- From time to time, a loan is considered impaired and an allowance for credit losses is established. The specific reserves for collateral dependent impaired loans are based on the fair value of the collateral less estimated costs to sell, based on appraisals. These appraisals may utilize a single valuation approach or a combination of approaches including comparable sales and the income approach. Adjustments are routinely made in the appraisal process by the independent appraisers to adjust for differences between the comparable sales and income data available for similar loans and collateral underlying such loans, and resulted in a Level 3 classification for inputs for determining fair value. Non-real estate collateral may be valued using an appraisal, net book value per the borrower’s financial statements, or aging reports, adjusted or discounted based on management’s historical knowledge, changes in market conditions from the time of valuation, and management’s expertise and knowledge of the client and the client’s business, resulting in a Level 3 fair value classification. Impaired loans are evaluated on a quarterly basis for additional impairment and adjusted in accordance with the allowance policy.
Other Real Estate Owned (“OREO”)
- OREO represents property acquired through foreclosures and settlements of loans. Property acquired through or in lieu of foreclosure are initially recorded at fair value less estimated selling cost at the date of foreclosure, establishing a new cost basis. These assets are subsequently accounted for at the lower of cost or fair value less estimated costs to sell. Fair value is commonly based on recent real estate appraisals which are updated no less frequently than every 18 months. These appraisals may utilize a single valuation approach or a combination of approaches, including comparable sales and the income approach. Adjustments are routinely made in the appraisal process by the independent appraisers to adjust for differences between the comparable sales and income data available for similar loans and the collateral underlying such loans, resulting in a Level 3 classification for inputs for determining fair value. Real estate owned properties are evaluated on a quarterly basis for additional impairment and adjusted accordingly.
Appraisals for both collateral dependent impaired loans and OREO are performed by certified general appraisers (for commercial properties) or certified residential appraisers (for residential properties) whose qualifications and licenses have been reviewed and verified by the Company. Once received, a member of the Special Assets Department reviews the assumptions and approaches utilized in the appraisal as well as the overall resulting fair value in comparison with independent data sources such as recent market data or industry-wide statistics.
Interest Rate Swaps
- Interest rate swaps are valued by the Company's swap dealers using cash flow valuation techniques with observable market data inputs. The fair values estimated by the Company's swap dealers use interest rates that are observable or that can be corroborated by observable market data and, therefore, are classified within Level 2 of the valuation hierarchy. The Company has entered into collateral agreements with its swap dealers which entitle it to receive collateral to cover market values on derivatives which are in asset position, thus a credit risk adjustment on interest rate swaps is not warranted.
Credit Risk Participation Agreements
— The Company enters into credit risk participation agreements (“RPAs”) with institutional counterparties, under which the Company assumes its pro-rata share of the credit exposure associated with a borrower’s performance related to interest rate derivative contracts. The fair value of RPAs is calculated by determining the total expected asset or liability exposure of the derivatives to the borrowers and applying the borrowers’ credit spread to that exposure. Total expected exposure incorporates both the current and potential future exposure of the derivatives, derived from using observable inputs, such as yield curves and volatilities. Accordingly, RPAs fall within Level 2.
The following table summarizes assets and liabilities measured at fair value on a recurring basis as of
September 30, 2018
and
December 31, 2017
. The assets and liabilities are segregated by the level of valuation inputs within the fair value hierarchy utilized to measure fair value:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value Measurement at September 30, 2018 Using
|
|
(in thousands)
|
Fair Value
|
|
Quoted Prices in
Active Markets for
Identical Assets
(Level 1)
|
|
Significant Other
Observable
Inputs
(Level 2)
|
|
Significant
Unobservable
Inputs
(Level 3)
|
|
Assets:
|
|
|
|
|
|
|
|
|
Available for sale debt securities:
|
|
|
|
|
|
|
|
|
U.S. Government agencies and corporations
|
$
|
5,519
|
|
|
$
|
—
|
|
|
$
|
5,519
|
|
|
$
|
—
|
|
|
State and political subdivisions
|
115,136
|
|
|
—
|
|
|
115,136
|
|
|
—
|
|
|
Mortgage-backed securities
|
51,896
|
|
|
—
|
|
|
51,896
|
|
|
—
|
|
|
Collateralized mortgage obligations
|
170,877
|
|
|
—
|
|
|
170,877
|
|
|
—
|
|
|
Corporate debt securities
|
64,338
|
|
|
—
|
|
|
64,338
|
|
|
—
|
|
|
Total available for sale debt securities
|
$
|
407,766
|
|
|
$
|
—
|
|
|
$
|
407,766
|
|
|
$
|
—
|
|
|
Derivatives:
|
|
|
|
|
|
|
|
|
Interest rate swaps
|
$
|
205
|
|
|
$
|
—
|
|
|
$
|
205
|
|
|
$
|
—
|
|
|
RPAs
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
Total derivative assets
|
$
|
205
|
|
|
$
|
—
|
|
|
$
|
205
|
|
|
$
|
—
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities:
|
|
|
|
|
|
|
|
|
Derivatives:
|
|
|
|
|
|
|
|
|
Interest rate swaps
|
$
|
125
|
|
|
$
|
—
|
|
|
$
|
125
|
|
|
$
|
—
|
|
|
RPAs
|
53
|
|
|
—
|
|
|
53
|
|
|
—
|
|
|
Total derivative liabilities
|
$
|
178
|
|
|
$
|
—
|
|
|
$
|
178
|
|
|
$
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value Measurement at December 31, 2017 Using
|
|
(in thousands)
|
Fair Value
|
|
Quoted Prices in
Active Markets for
Identical Assets
(Level 1)
|
|
Significant Other
Observable
Inputs
(Level 2)
|
|
Significant
Unobservable
Inputs
(Level 3)
|
|
Assets:
|
|
|
|
|
|
|
|
|
Available for sale debt securities:
|
|
|
|
|
|
|
|
|
U.S. Government agencies and corporations
|
$
|
15,626
|
|
|
$
|
—
|
|
|
$
|
15,626
|
|
|
$
|
—
|
|
|
State and political subdivisions
|
141,839
|
|
|
—
|
|
|
141,839
|
|
|
—
|
|
|
Mortgage-backed securities
|
48,497
|
|
|
—
|
|
|
48,497
|
|
|
—
|
|
|
Collateralized mortgage obligations
|
168,196
|
|
|
—
|
|
|
168,196
|
|
|
—
|
|
|
Corporate debt securities
|
71,166
|
|
|
—
|
|
|
71,166
|
|
|
—
|
|
|
Total available for sale debt securities
|
$
|
445,324
|
|
|
$
|
—
|
|
|
$
|
445,324
|
|
|
$
|
—
|
|
There were
no
transfers of assets between Level 3 and other levels of the fair value hierarchy during the
three and nine months
ended
September 30, 2018
or the year ended
December 31, 2017
.
Changes in the fair value of available for sale debt securities are included in other comprehensive income, and changes in the fair value of equity securities are included in noninterest income.
The following table discloses the Company’s estimated fair value amounts of its assets recorded at fair value on a nonrecurring basis. It is management’s belief that the fair values presented below are reasonable based on the valuation techniques and data available to the Company as of
September 30, 2018
and
December 31, 2017
, as more fully described above.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value Measurement at September 30, 2018 Using
|
|
(in thousands)
|
Fair Value
|
|
Quoted Prices in
Active Markets for
Identical Assets
(Level 1)
|
|
Significant Other
Observable
Inputs
(Level 2)
|
|
Significant
Unobservable
Inputs
(Level 3)
|
|
Assets:
|
|
|
|
|
|
|
|
|
Collateral dependent impaired loans
|
$
|
8,362
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
8,362
|
|
|
Other real estate owned
|
$
|
549
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
549
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value Measurement at December 31, 2017 Using
|
|
(in thousands)
|
Fair Value
|
|
Quoted Prices in
Active Markets for
Identical Assets
(Level 1)
|
|
Significant Other
Observable
Inputs
(Level 2)
|
|
Significant
Unobservable
Inputs
(Level 3)
|
|
Assets:
|
|
|
|
|
|
|
|
|
Collateral dependent impaired loans
|
$
|
3,927
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
3,927
|
|
|
Other real estate owned
|
$
|
2,010
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
2,010
|
|
The following presents the valuation technique(s), unobservable inputs, and quantitative information about the unobservable inputs used for fair value measurements of the financial instruments held by the Company at
September 30, 2018
, categorized within Level 3 of the fair value hierarchy:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quantitative Information About Level 3 Fair Value Measurements
|
|
|
|
|
|
(dollars in thousands)
|
Fair Value at September 30, 2018
|
|
Valuation Techniques(s)
|
|
Unobservable Input
|
|
Range of Inputs
|
|
Weighted Average
|
|
Collateral dependent impaired loans
|
$
|
8,362
|
|
|
Modified appraised value
|
|
Third party appraisal
|
|
NM *
|
-
|
NM *
|
|
NM *
|
|
|
|
|
|
|
Appraisal discount
|
|
NM *
|
-
|
NM *
|
|
NM *
|
|
Other real estate owned
|
$
|
549
|
|
|
Modified appraised value
|
|
Third party appraisal
|
|
NM *
|
-
|
NM *
|
|
NM *
|
|
|
|
|
|
|
Appraisal discount
|
|
NM *
|
-
|
NM *
|
|
NM *
|
* Not Meaningful. Third party appraisals are obtained as to the value of the underlying asset, but disclosure of this information would not provide meaningful information, as the range will vary widely from loan to loan. Types of discounts considered include age of the appraisal, local market conditions, current condition of the property, and estimated sales costs. These discounts will also vary from loan to loan, thus providing a range would not be meaningful.
Due to the adoption of ASU 2016-01 as of January 1, 2018, the estimated fair value amounts shown for
December 31, 2017
are not comparable to those for
September 30, 2018
, due to a change in the required methodology (“exit price” only) for determining current estimated fair value. The carrying amount and estimated fair value of financial instruments not carried at fair value, at
September 30, 2018
and
December 31, 2017
are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2018
|
|
(in thousands)
|
Carrying
Amount
|
|
Estimated
Fair Value
|
|
Quoted
Prices in
Active
Markets for
Identical Assets
(Level 1)
|
|
Significant Other
Observable
Inputs
(Level 2)
|
|
Significant
Unobservable
Inputs
(Level 3)
|
|
Financial assets:
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
$
|
53,379
|
|
|
$
|
53,379
|
|
|
$
|
53,379
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
Investment securities:
|
|
|
|
|
|
|
|
|
|
|
Equity securities
|
2,797
|
|
|
2,797
|
|
|
2,797
|
|
|
—
|
|
|
—
|
|
|
Debt securities available for sale
|
407,766
|
|
|
407,766
|
|
|
—
|
|
|
407,766
|
|
|
—
|
|
|
Debt securities held to maturity
|
191,733
|
|
|
186,057
|
|
|
—
|
|
|
186,057
|
|
|
—
|
|
|
Total investment securities
|
602,296
|
|
|
596,620
|
|
|
2,797
|
|
|
593,823
|
|
|
—
|
|
|
Loans held for sale
|
1,124
|
|
|
1,145
|
|
|
—
|
|
|
1,145
|
|
|
—
|
|
|
Loans held for investment, net
|
2,346,371
|
|
|
2,283,363
|
|
|
—
|
|
|
—
|
|
|
2,283,363
|
|
|
Interest receivable
|
14,800
|
|
|
14,800
|
|
|
14,800
|
|
|
—
|
|
|
—
|
|
|
Federal Home Loan Bank stock
|
13,260
|
|
|
13,260
|
|
|
—
|
|
|
13,260
|
|
|
—
|
|
|
Derivative assets
|
205
|
|
|
205
|
|
|
—
|
|
|
205
|
|
|
—
|
|
|
Financial liabilities:
|
|
|
|
|
|
|
|
|
|
|
Deposits:
|
|
|
|
|
|
|
|
|
|
|
Non-interest bearing demand
|
458,576
|
|
|
458,576
|
|
|
458,576
|
|
|
—
|
|
|
—
|
|
|
Interest-bearing checking
|
1,236,922
|
|
|
1,236,922
|
|
|
1,236,922
|
|
|
—
|
|
|
—
|
|
|
Savings
|
211,591
|
|
|
211,591
|
|
|
211,591
|
|
|
—
|
|
|
—
|
|
|
Certificates of deposit under $100,000
|
348,099
|
|
|
342,998
|
|
|
—
|
|
|
342,998
|
|
|
—
|
|
|
Certificates of deposit $100,000 and over
|
377,071
|
|
|
373,313
|
|
|
—
|
|
|
373,313
|
|
|
—
|
|
|
Total deposits
|
2,632,259
|
|
|
2,623,400
|
|
|
1,907,089
|
|
|
716,311
|
|
|
—
|
|
|
Federal funds purchased and securities sold under agreements to repurchase
|
87,978
|
|
|
87,978
|
|
|
87,978
|
|
|
—
|
|
|
—
|
|
|
Federal Home Loan Bank borrowings
|
143,000
|
|
|
141,110
|
|
|
—
|
|
|
141,110
|
|
|
—
|
|
|
Junior subordinated notes issued to capital trusts
|
23,865
|
|
|
21,058
|
|
|
—
|
|
|
21,058
|
|
|
—
|
|
|
Long-term debt
|
8,750
|
|
|
8,750
|
|
|
—
|
|
|
8,750
|
|
|
—
|
|
|
Derivative liabilities
|
178
|
|
|
178
|
|
|
—
|
|
|
178
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2017
|
|
(in thousands)
|
Carrying
Amount
|
|
Estimated
Fair Value
|
|
Quoted
Prices in
Active
Markets for
Identical Assets
(Level 1)
|
|
Significant Other
Observable
Inputs
(Level 2)
|
|
Significant
Unobservable
Inputs
(Level 3)
|
|
Financial assets:
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
$
|
50,972
|
|
|
$
|
50,972
|
|
|
$
|
50,972
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
Investment securities:
|
|
|
|
|
|
|
|
|
|
|
Equity securities
|
2,336
|
|
|
2,336
|
|
|
2,336
|
|
|
—
|
|
|
—
|
|
|
Debt securities available for sale
|
445,324
|
|
|
445,324
|
|
|
—
|
|
|
445,324
|
|
|
—
|
|
|
Debt securities held to maturity
|
195,619
|
|
|
194,343
|
|
|
—
|
|
|
194,343
|
|
|
—
|
|
|
Total investment securities
|
643,279
|
|
|
642,003
|
|
|
2,336
|
|
|
639,667
|
|
|
—
|
|
|
Loans held for sale
|
856
|
|
|
871
|
|
|
—
|
|
|
—
|
|
|
871
|
|
|
Loans held for investment, net
|
2,258,636
|
|
|
2,256,726
|
|
|
—
|
|
|
2,256,726
|
|
|
—
|
|
|
Interest receivable
|
14,732
|
|
|
14,732
|
|
|
14,732
|
|
|
—
|
|
|
—
|
|
|
Federal Home Loan Bank stock
|
11,324
|
|
|
11,324
|
|
|
—
|
|
|
11,324
|
|
|
—
|
|
|
Financial liabilities:
|
|
|
|
|
|
|
|
|
|
|
Deposits:
|
|
|
|
|
|
|
|
|
|
|
Non-interest bearing demand
|
461,969
|
|
|
461,969
|
|
|
461,969
|
|
|
—
|
|
|
—
|
|
|
Interest-bearing checking
|
1,228,112
|
|
|
1,228,112
|
|
|
1,228,112
|
|
|
—
|
|
|
—
|
|
|
Savings
|
213,430
|
|
|
213,430
|
|
|
213,430
|
|
|
—
|
|
|
—
|
|
|
Certificates of deposit under $100,000
|
324,681
|
|
|
321,197
|
|
|
—
|
|
|
321,197
|
|
|
—
|
|
|
Certificates of deposit $100,000 and over
|
377,127
|
|
|
374,685
|
|
|
—
|
|
|
374,685
|
|
|
—
|
|
|
Total deposits
|
2,605,319
|
|
|
2,599,393
|
|
|
1,903,511
|
|
|
695,882
|
|
|
—
|
|
|
Federal funds purchased and securities sold under agreements to repurchase
|
97,229
|
|
|
97,229
|
|
|
97,229
|
|
|
—
|
|
|
—
|
|
|
Federal Home Loan Bank borrowings
|
115,000
|
|
|
114,945
|
|
|
—
|
|
|
114,945
|
|
|
—
|
|
|
Junior subordinated notes issued to capital trusts
|
23,793
|
|
|
19,702
|
|
|
—
|
|
|
19,702
|
|
|
—
|
|
|
Long-term debt
|
12,500
|
|
|
12,500
|
|
|
—
|
|
|
12,500
|
|
|
—
|
|
14. Revenue Recognition
On January 1, 2018, the Company adopted ASU No. 2014-09 “Revenue from Contracts with Customers” (Topic 606) and all subsequent ASUs that modified Topic 606. As stated in
Note 2. “Effect of New Financial Accounting Standards,”
the implementation of the new standard did not have a material impact on the measurement or recognition of revenue; as such, a cumulative effect adjustment to opening retained earnings was not deemed necessary. Results for reporting periods beginning after January 1, 2018 are presented under Topic 606, while prior period amounts were not adjusted and continue to be reported in accordance with our historic accounting under Topic 605.
Topic 606 does not apply to revenue associated with financial instruments, including revenue from loans and securities. In addition, certain noninterest income streams such as fees associated with mortgage servicing rights, financial guarantees, derivatives, and certain credit card fees are also not in scope of the new guidance. Topic 606 is applicable to noninterest revenue streams such as trust and asset management fees, service charges on deposit accounts, sales of other real estate, and debit card interchange fees. However, the recognition of these revenue streams did not change significantly upon adoption of Topic 606. Substantially all of the Company’s revenue is generated from contracts with customers. Noninterest revenue streams in-scope of Topic 606 are discussed below.
Trust and Asset Management
Trust and asset management income is primarily comprised of fees earned from the management and administration of trusts and other customer assets. The Company’s performance obligation is generally satisfied over time, and the resulting fees are recognized monthly, based upon the month-end market value of the assets under management and the applicable fee rate. Payment is generally received a few days after month end through a direct charge to customers’ accounts. The Company does not earn performance-based incentives. Optional services such as real estate sales and tax return preparation services are also available to existing trust and asset management customers. The Company’s performance obligation for these transactional-based services is generally satisfied, and related revenue recognized, at a point in time (i.e., as incurred). Payment is received shortly after services are rendered.
Service Charges on Deposit Accounts
Service charges on deposit accounts consist of account analysis fees (i.e., net fees earned on analyzed business and public checking accounts), monthly service fees, check orders, and other deposit account related fees. The Company’s performance obligation for account analysis fees and monthly service fees is generally satisfied, and the related revenue recognized, over the period in which the service is provided. Check orders and other deposit account related fees are largely transactional based, and therefore, the Company’s performance obligation is satisfied, and related revenue recognized, at a point in time. Payment for service charges on deposit accounts is primarily received immediately or in the following month through a direct charge to customers’ accounts.
Fees, Exchange, and Other Service Charges
Fees, exchange, and other service charges are primarily comprised of debit and credit card income, ATM fees, merchant services income, and other service charges. Debit and credit card income is primarily comprised of interchange fees earned whenever the Company’s debit and credit cards are processed through card payment networks such as Visa. ATM fees are primarily generated when a Company cardholder uses a non-Company ATM or a non-Company cardholder uses a Company ATM. Merchant services income mainly represents fees charged to merchants to process their debit and credit card transactions, in addition to account management fees. Other service charges include revenue from processing wire transfers, bill pay service, cashier’s checks, and other services. The Company’s performance obligation for fees, exchange, and other service charges are largely satisfied, and related revenue recognized, when the services are rendered or upon completion. Payment is typically received immediately or in the following month.
Gains/Losses on Sales of OREO
Gain or loss from the sale of OREO occurs when control of the property transfers to the buyer, which generally occurs at the time of an executed deed. When the Company finances the sale of OREO to the buyer, the Company assesses whether the buyer is committed to perform their obligations under the contract and whether collectability of the transaction price is probable. Once these criteria are met, the OREO asset is derecognized and the gain or loss on sale is recorded upon the transfer of control of the property to the buyer. In determining the gain or loss on the sale, the Company adjusts the transaction price and related gain (loss) on sale if a significant financing component is present. OREO sales for the
nine months
ended
September 30, 2018
and
September 30, 2017
were not financed by the Bank.
Other
Other noninterest income consists of other recurring revenue streams such as safe deposit box rental fees, and other miscellaneous revenue streams. Safe deposit box rental fees are charged to the customer on an annual basis and recognized upon receipt of payment. The Company determined that since rentals and renewals occur fairly consistently over time, revenue is recognized on a basis consistent with the duration of the performance obligation.
Contract Balances
A contract asset balance occurs when an entity performs a service for a customer before the customer pays consideration (resulting in a contract receivable) or before payment is due (resulting in a contract asset). A contract liability balance is an entity’s obligation to transfer a service to a customer for which the entity has already received payment (or payment is due) from the customer. The Company’s noninterest revenue streams are largely based on transactional activity, or standard month-end revenue accruals such as asset management fees based on month-end market values. Consideration is often received immediately or shortly after the Company satisfies its performance obligation and revenue is recognized. The Company does not typically enter into long-term revenue contracts with customers, and therefore, does not experience significant contract balances. As of
September 30, 2018
and
December 31, 2017
, the Company did not have any significant contract balances.
Contract Acquisition Costs
In connection with the adoption of Topic 606, an entity is required to capitalize, and subsequently amortize into expense, certain incremental costs of obtaining a contract with a customer if these costs are expected to be recovered. The incremental costs of obtaining a contract are those costs that an entity incurs to obtain a contract with a customer that it would not have incurred if the contract had not been obtained (for example, sales commission). The Company utilizes the practical expedient which allows entities to immediately expense contract acquisition costs when the asset that would have resulted from capitalizing these costs would have been amortized in one year or less. Upon adoption of Topic 606, the Company did not capitalize any contract acquisition cost.
15. Operating Segments
The Company’s activities are considered to be a single industry segment for financial reporting purposes. The Company is engaged in the business of commercial and retail banking, investment management and insurance services with operations throughout central and eastern Iowa, the Twin Cities area of Minnesota and Wisconsin, Florida, and Denver,
Colorado. Substantially all income is derived from a diverse base of commercial, mortgage and retail lending activities, and investments.
16. Proposed Merger
On August 21, 2018, the Company entered into a merger agreement with ATBancorp, an Iowa corporation, pursuant to which ATBancorp will merge with and into the Company. In connection with the merger, American Trust & Savings Bank, an Iowa state chartered bank and wholly owned subsidiary of ATBancorp, and American Bank & Trust Wisconsin, a Wisconsin state chartered bank and wholly owned subsidiary of ATBancorp, will merge with and into MidWest
One
Bank, which will continue as the surviving bank. The merger agreement also provides that each of the outstanding shares of ATBancorp common stock will be converted into the right of ATBancorp shareholders to receive
117.5500
shares of Company common stock and
$992.51
in cash. The corporate headquarters of the combined company will be in Iowa City, Iowa. The merger is anticipated to be completed in the first quarter of 2019.
17. Subsequent Events
Management evaluated subsequent events through the date the consolidated financial statements were issued. Events or transactions occurring after
September 30, 2018
, but prior to the date the consolidated financial statements were issued, that provided additional evidence about conditions that existed at
September 30, 2018
have been recognized in the consolidated financial statements for the
three and nine months
ended
September 30, 2018
. Events or transactions that provided evidence about conditions that did not exist at
September 30, 2018
, but arose before the consolidated financial statements were issued, have not been recognized in the consolidated financial statements for the
three and nine months
ended
September 30, 2018
.
On
October 16, 2018
, the Board of Directors of the Company approved a new share repurchase program, allowing for the repurchase of up to
$5.0 million
of common stock through
December 31, 2020
. The new repurchase program replaces the Company's prior repurchase program, pursuant to which the Company had repurchased
33,998
shares of common stock for approximately
$1.1 million
since the plan was announced in July 2016. The prior program had authorized the repurchase of
$5.0 million
of stock and was due to expire on December 31, 2018.
On
October 16, 2018
, the board of directors of the Company declared a cash dividend of
$0.195
per share payable on
December 15, 2018
to shareholders of record as of the close of business on
December 1, 2018
.