Iowa City-based MidWestOne Financial Group, the holding company for MidWestOne Bank, reported a net loss of $19.8 million for the third quarter ending Sept. 30 after having to make a goodwill write-down.
Without that write-down, the bank would’ve reported an $11.7 million profit.
The goodwill is largely a result of MidwestOne’s acquisitions. Banks usually purchase other banks at a price higher than its net worth.
The difference between the selling price and the acquired bank’s net worth is goodwill.
“We feel like we had a pretty good quarter,” said Charles Funk, the bank’s CEO.
The goodwill write-down, totaling $31.5 million, happens when the market value of the bank — the value dictated by the stock price — is more than the bank’s net worth.
A significant loss in MidwestOne’s stock price during the third quarter caused the write-down. It went from 21.24 per share midway through the quarter to 16.80 per share a few days before the quarter ended.
“Our share price, like most bank stocks, has been hit pretty hard post-pandemic,” MidWestOne Chief Financial Officer Barry Ray said.
“Most banks, including ours, haven’t really enjoyed the recovery that the broader market has. ... That’s really what triggers our need to assess goodwill.”
The timing was far from ideal. If the price’s precipitous drop came a week later, when the bank would have been into another financial quarter, officials said the write-down might not have been necessary.
“Our stock price hit its low at the absolute worst time for us from an accounting point of view,” Funk said.
Bank officials said “it really doesn’t impact” regular customers. The write-down affects the bank’s earnings and value but not its amount of tangible capital — “capital that generates revenue,” as Funk phrased it.
“The headline is always worse than the effect on the actual company when you write goodwill down,” Funk said.
“It doesn’t affect our capital. It doesn’t affect our liquidity. It doesn’t affect our cash position. There’s no adverse impact on our balance sheet from this goodwill write-off.”
MidwestOne’s return on tangible equity was 12.56 percent. That’s down from 13.5 percent in the second quarter of 2020 and 15.57 percent in the third quarter of 2019.
“That’s not best-in-class, but that’s definitely a respectable return,” Funk said.
Should the market value of the bank exceed its net worth again, Ray said MidWestOne still has goodwill it can write down.
Whether the Iowa City-based bank needs to do another goodwill write-down largely “will depend on our share price,” Ray said.
“That’s not the only factor for certain, but it is a big factor,” Ray said.
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So far, MidwestOne’s stock has gone from 17.87 on Sept. 30 — the last day of the third quarter — to 21.11 the morning of Oct. 30.
MidWestOne has $5.2 billion in assets as of June 30, according to data from the Federal Deposit Insurance Corp., and has branches in Iowa, Minnesota, Wisconsin, Colorado and Florida.
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