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EX-31.2 - EXHIBIT 31.2 - MidWestOne Financial Group, Inc.exhibit3122015q3.htm
EX-32.1 - EXHIBIT 32.1 - MidWestOne Financial Group, Inc.exhibit3212015q3.htm
EX-31.1 - EXHIBIT 31.1 - MidWestOne Financial Group, Inc.exhibit3112015q3.htm
EX-32.2 - EXHIBIT 32.2 - MidWestOne Financial Group, Inc.exhibit3222015q3.htm
 
 
 
 
 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
 
 
 
 
 
FORM 10-Q
 
 
 
 
 
x
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2015
OR
o
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from              to             
 
Commission file number 001-35968
 
 
 
 
MIDWESTONE FINANCIAL GROUP, INC.
(Exact name of Registrant as specified in its charter)
 
 
 
 
Iowa
42-1206172
(State or other jurisdiction of incorporation or organization)
(I.R.S. Employer Identification No.)
102 South Clinton Street
Iowa City, IA 52240
(Address of principal executive offices, including zip code)
319-356-5800
(Registrant’s telephone number, including area code)
  
 
 
 
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    x  Yes    o  No
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    x  Yes    o  No
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer
 o
 
Accelerated filer
x
Non-accelerated filer
 o  (Do not check if a smaller reporting company)
 
Smaller reporting company
o

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    o  Yes    x  No

As of October 28, 2015, there were 11,406,431 shares of common stock, $1.00 par value per share, outstanding.
 
 
 
 
 



MIDWESTONE FINANCIAL GROUP, INC.
Form 10-Q Quarterly Report
Table of Contents
 
 
 
 
Page No.
PART I
 
 
 
 
 
 
 
 
 
Item 1.
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Item 2.
 
 
 
 
 
 
 
Item 3.
 
 
 
 
 
 
 
Item 4.
 
 
 
 
 
 
 
Part II
 
 
 
 
 
 
 
 
 
Item 1.
 
 
 
 
 
 
 
Item 1A.
 
 
 
 
 
 
 
Item 2.
 
 
 
 
 
 
 
Item 3.
 
 
 
 
 
 
 
Item 4.
 
 
 
 
 
 
 
Item 5.
 
 
 
 
 
 
 
Item 6.
 
 
 
 
 
 
 
 
 
 




PART I – FINANCIAL INFORMATION
Item 1.   Financial Statements.

MIDWESTONE FINANCIAL GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
 
September 30, 2015
 
December 31, 2014
(dollars in thousands, except per share amounts)
(unaudited)
 
 
ASSETS
 
 
 
Cash and due from banks
$
50,793

 
$
23,028

Interest-bearing deposits in banks
41,202

 
381

Federal funds sold
339

 

Cash and cash equivalents
92,334

 
23,409

Investment securities:
 
 
 
Available for sale
415,042

 
474,942

Held to maturity (fair value of $102,468 as of September 30, 2015 and $51,253 as of December 31, 2014)
102,920

 
51,524

Loans held for sale
4,111

 
801

Loans
2,137,212

 
1,132,519

Allowance for loan losses
(18,871
)
 
(16,363
)
Net loans
2,118,341

 
1,116,156

Loan pool participations, net

 
19,332

Premises and equipment, net
74,989

 
37,770

Accrued interest receivable
13,230

 
10,898

Goodwill
63,192

 

Other intangible assets, net
20,276

 
8,259

Bank-owned life insurance
45,962

 
38,142

Other real estate owned
8,299

 
1,916

Deferred income taxes
2,256

 
3,078

Other assets
20,888

 
14,075

Total assets
$
2,981,840

 
$
1,800,302

LIABILITIES AND SHAREHOLDERS' EQUITY
 
 
 
Deposits:
 
 
 
Non-interest-bearing demand
$
532,058

 
$
214,461

Interest-bearing checking
828,296

 
618,540

Savings
425,740

 
102,527

Certificates of deposit under $100,000
368,620

 
235,395

Certificates of deposit $100,000 and over
313,364

 
237,619

Total deposits
2,468,078

 
1,408,542

Federal funds purchased

 
17,408

Securities sold under agreements to repurchase
69,228

 
60,821

Federal Home Loan Bank borrowings
87,000

 
93,000

Junior subordinated notes issued to capital trusts
23,560

 
15,464

Long-term debt
23,750

 

Deferred compensation liability
5,143

 
3,393

Accrued interest payable
1,578

 
863

Other liabilities
12,837

 
8,080

Total liabilities
2,691,174

 
1,607,571

Shareholders' equity:
 
 
 
Preferred stock, no par value; authorized 500,000 shares; no shares issued and outstanding at September 30, 2015 and December 31, 2014
$

 
$

Common stock, $1.00 par value; authorized 15,000,000 shares at September 30, 2015 and December 31, 2014; issued 11,713,481 shares at September 30, 2015 and 8,690,398 shares at December 31, 2014; outstanding 11,406,431 shares at September 30, 2015 and 8,355,666 shares at December 31, 2014
11,713

 
8,690

Additional paid-in capital
163,323

 
80,537

Treasury stock at cost, 307,050 shares as of September 30, 2015 and 334,732 shares at December 31, 2014
(6,380
)
 
(6,945
)
Retained earnings
117,374

 
105,127

Accumulated other comprehensive income
4,636

 
5,322

Total shareholders' equity
290,666

 
192,731

Total liabilities and shareholders' equity
$
2,981,840

 
$
1,800,302

See accompanying notes to consolidated financial statements.  

1


MIDWESTONE FINANCIAL GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
 
(unaudited) (dollars in thousands, except per share amounts)
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
 
2015
 
2014
 
2015
 
2014
Interest income:
 
 
 
 
 
 
 
 
Interest and fees on loans
 
$
26,697

 
$
12,151

 
$
60,959

 
$
36,096

Interest and discount on loan pool participations
 

 
325

 
798

 
1,137

Interest on bank deposits
 
13

 
15

 
29

 
24

Interest on investment securities:
 
 
 
 
 
 
 
 
Taxable securities
 
1,914

 
2,170

 
5,721

 
6,760

Tax-exempt securities
 
1,365

 
1,335

 
4,149

 
4,076

Total interest income
 
29,989

 
15,996

 
71,656

 
48,093

Interest expense:
 
 
 
 
 
 
 
 
Interest on deposits:
 
 
 
 
 
 
 
 
Interest-bearing checking
 
706

 
532

 
1,903

 
1,624

Savings
 
48

 
36

 
128

 
108

Certificates of deposit under $100,000
 
995

 
687

 
2,112

 
2,018

Certificates of deposit $100,000 and over
 
1,165

 
551

 
2,158

 
1,445

Total interest expense on deposits
 
2,914

 
1,806

 
6,301

 
5,195

Interest on federal funds purchased
 
19

 
2

 
33

 
8

Interest on securities sold under agreements to repurchase
 
51

 
28

 
124

 
87

Interest on Federal Home Loan Bank borrowings
 
334

 
519

 
1,086

 
1,626

Interest on other borrowings
 
6

 
5

 
16

 
18

Interest on junior subordinated notes issued to capital trusts
 
191

 
69

 
399

 
210

Interest on subordinated notes
 

 

 
162

 

Interest on long-term debt
 
144

 

 
240

 

Total interest expense
 
3,659

 
2,429

 
8,361

 
7,144

Net interest income
 
26,330

 
13,567

 
63,295

 
40,949

Provision for loan losses
 
2,141

 
150

 
3,642

 
900

Net interest income after provision for loan losses
 
24,189

 
13,417

 
59,653

 
40,049

Noninterest income:
 
 
 
 
 
 
 
 
Trust, investment, and insurance fees
 
1,428

 
1,442

 
4,642

 
4,390

Service charges and fees on deposit accounts
 
1,297

 
918

 
3,098

 
2,394

Mortgage origination and loan servicing fees
 
1,025

 
449

 
2,096

 
1,204

Other service charges, commissions and fees
 
1,371

 
625

 
2,759

 
1,796

Bank-owned life insurance income
 
344

 
423

 
964

 
877

Gain on sale or call of available for sale securities
 

 
145

 
1,011

 
1,119

Gain (loss) on sale of premises and equipment
 
(5
)
 
4

 
(15
)
 
(1
)
Total noninterest income
 
5,460

 
4,006

 
14,555

 
11,779

Noninterest expense:
 
 
 
 
 
 
 
 
Salaries and employee benefits
 
11,762

 
6,337

 
28,625

 
18,531

Net occupancy and equipment expense
 
2,719

 
1,546

 
6,585

 
4,785

Professional fees
 
959

 
724

 
3,868

 
2,078

Data processing expense
 
928

 
357

 
2,028

 
1,172

FDIC insurance expense
 
431

 
241

 
1,058

 
724

Amortization of intangible assets
 
800

 
136

 
2,136

 
410

Other operating expense
 
2,314

 
1,478

 
6,638

 
4,150

Total noninterest expense
 
19,913

 
10,819

 
50,938

 
31,850

Income before income tax expense
 
9,736

 
6,604

 
23,270

 
19,978

Income tax expense
 
2,121

 
1,715

 
6,390

 
5,363

Net income
 
$
7,615

 
$
4,889

 
$
16,880

 
$
14,615

Share and per share information:
 
 
 
 
 
 
 
 
Ending number of shares outstanding
 
11,406,431

 
8,348,464

 
11,406,431

 
8,348,464

Average number of shares outstanding
 
11,406,132

 
8,366,858

 
10,010,926

 
8,423,188

Diluted average number of shares
 
11,434,186

 
8,391,353

 
10,038,093

 
8,449,748

Earnings per common share - basic
 
$
0.67

 
$
0.59

 
$
1.69

 
$
1.74

Earnings per common share - diluted
 
0.67

 
0.59

 
1.68

 
1.73

Dividends paid per common share
 
0.150

 
0.145

 
0.450

 
0.435

See accompanying notes to consolidated financial statements.

2


MIDWESTONE FINANCIAL GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
 
(unaudited)
(dollars in thousands)
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
 
2015
 
2014
 
2015
 
2014
Net income
 
$
7,615

 
$
4,889

 
$
16,880

 
$
14,615

 
 
 
 
 
 
 
 
 
Other comprehensive income, available for sale securities:
 
 
 
 
 
 
 
 
Unrealized holding gains (losses) arising during period
 
2,196

 
(212
)
 
(78
)
 
6,641

Reclassification adjustment for gains included in net income
 

 
(145
)
 
(1,011
)
 
(1,119
)
Income tax (expense) benefit
 
(833
)
 
132

 
403

 
(2,097
)
Other comprehensive income (loss) on available for sale securities
 
1,363

 
(225
)
 
(686
)
 
3,425

Other comprehensive income (loss), net of tax
 
1,363

 
(225
)
 
(686
)
 
3,425

Comprehensive income
 
$
8,978

 
$
4,664

 
$
16,194

 
$
18,040

See accompanying notes to consolidated financial statements.


3


MIDWESTONE FINANCIAL GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY

(unaudited)
(dollars in thousands, except per share amounts)
 
Preferred
Stock
 
Common
Stock
 
Additional
Paid-in
Capital
 
Treasury
Stock
 
Retained
Earnings
 
Accumulated
Other
Comprehensive
Income (Loss)
 
Total
Balance at December 31, 2013
 
$


$
8,690


$
80,506


$
(3,702
)

$
91,473


$
1,049


$
178,016

Net income
 








14,615




14,615

Dividends paid on common stock ($0.435 per share)
 

 

 

 

 
(3,656
)
 


(3,656
)
Stock options exercised (7,207 shares)
 

 

 
(8
)
 
140

 

 

 
132

Release/lapse of restriction on RSUs (27,266 shares)
 

 

 
(431
)
 
455

 

 


24

Repurchase of common stock (165,766 shares)
 

 

 

 
(3,987
)
 

 

 
(3,987
)
Stock compensation
 

 

 
371

 

 

 


371

Other comprehensive income, net of tax
 

 

 

 

 

 
3,425

 
3,425

Balance at September 30, 2014
 
$

 
$
8,690

 
$
80,438

 
$
(7,094
)
 
$
102,432

 
$
4,474


$
188,940

Balance at December 31, 2014
 
$

 
$
8,690

 
$
80,537

 
$
(6,945
)
 
$
105,127

 
$
5,322

 
$
192,731

Net income
 

 

 

 

 
16,880

 

 
16,880

Issuance of common stock due to business combination (2,723,083 shares)
 

 
2,723

 
75,172

 

 

 

 
77,895

Issuance of common stock - private placement (300,000 shares), net of expenses
 

 
300

 
7,600

 

 

 

 
7,900

Dividends paid on common stock ($0.45 per share)
 

 

 

 

 
(4,633
)
 

 
(4,633
)
Stock options exercised (5,769 shares)
 

 

 
(32
)
 
120

 

 

 
88

Release/lapse of restriction on RSUs (23,123 shares)
 

 

 
(416
)
 
445

 

 

 
29

Stock compensation
 

 

 
462

 

 

 

 
462

Other comprehensive loss, net of tax
 

 

 

 

 

 
(686
)
 
(686
)
Balance at September 30, 2015
 
$

 
$
11,713

 
$
163,323

 
$
(6,380
)
 
$
117,374

 
$
4,636

 
$
290,666

See accompanying notes to consolidated financial statements.  

4


MIDWESTONE FINANCIAL GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
 
(unaudited) (dollars in thousands)
Nine Months Ended September 30,
 
2015
 
2014
Cash flows from operating activities:
 
 
 
Net income
$
16,880

 
$
14,615

Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
Provision for loan losses
3,642

 
900

Depreciation, amortization and accretion
5,952

 
3,237

Loss on sale of premises and equipment
15

 
1

Deferred income taxes
(169
)
 
2,313

Stock-based compensation
462

 
371

Net gain on sale or call of available for sale securities
(1,011
)
 
(1,119
)
Net loss on sale of other real estate owned
(108
)
 
(59
)
Net gain on sale of loans held for sale
(1,240
)
 
(363
)
Writedown of other real estate owned

 
49

Origination of loans held for sale
(99,302
)
 
(30,452
)
Proceeds from sales of loans held for sale
97,232

 
30,414

(Increase) decrease in accrued interest receivable
339

 
(389
)
Increase in cash surrender value of bank-owned life insurance
(964
)
 
(877
)
(Increase) decrease in other assets
4,734

 
(476
)
Increase (decrease) in deferred compensation liability
94

 
(64
)
Decrease in accrued interest payable, accounts payable, accrued expenses, and other liabilities
(4,489
)
 
(619
)
Net cash provided by operating activities
22,067

 
17,482

Cash flows from investing activities:
 
 
 
Proceeds from sales of available for sale securities
112,054

 
28,450

Proceeds from maturities and calls of available for sale securities
64,921

 
50,760

Purchases of available for sale securities
(11
)
 
(65,653
)
Proceeds from maturities and calls of held to maturity securities
3,077

 
914

Purchase of held to maturity securities
(12,394
)
 
(12,386
)
Net increase in loans
(89,521
)
 
(14,447
)
Decrease in loan pool participations, net
19,332

 
5,056

Purchases of premises and equipment
(11,558
)
 
(8,363
)
Proceeds from sale of other real estate owned
2,812

 
585

Proceeds from sale of premises and equipment
33

 
17

Proceeds of principal and earnings from bank-owned life insurance

 
488

Net cash paid in business acquisition (Note 2)
(35,596
)
 

Net cash provided by (used in) investing activities
53,149

 
(14,579
)
Cash flows from financing activities:
 
 
 
Net increase in deposits
10,369

 
56,623

Decrease in federal funds purchased
(17,408
)
 
(3,734
)
Increase (decrease) in securities sold under agreements to repurchase
(7,717
)
 
210

Proceeds from Federal Home Loan Bank borrowings
24,000

 
26,000

Repayment of Federal Home Loan Bank borrowings
(30,000
)
 
(32,000
)
Stock options exercised
117

 
156

Redemption of subordinated note
(12,669
)
 

Proceeds from long-term debt
25,000

 

Payments on long-term debt
(1,250
)
 

Dividends paid
(4,633
)
 
(3,656
)
Issuance of common stock, net of expenses
7,900

 

Repurchase of common stock

 
(3,987
)
Net cash provided by (used in) financing activities
(6,291
)
 
39,612

Net increase in cash and cash equivalents
68,925

 
42,515

Cash and cash equivalents at beginning of period
23,409

 
24,890

Cash and cash equivalents at end of period
$
92,334

 
$
67,405


5


MIDWESTONE FINANCIAL GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS - (Continued)
 
(unaudited) (dollars in thousands)
Nine Months Ended September 30,
 
2015
 
2014
Supplemental disclosures of cash flow information:
 
 
 
Cash paid during the period for interest
$
7,646

 
$
7,019

Cash paid during the period for income taxes
$
4,650

 
$
1,787

Supplemental schedule of non-cash investing activities:
 
 
 
Transfer of loans to other real estate owned
$
667

 
$
641

 
 
 
 
Supplemental Schedule of non-cash Investing Activities from Acquisition:
 
 
 
Noncash assets acquired:
 
 
 
Investment securities
$
160,775

 

Loans
916,973

 

Premises and equipment
27,908

 

Goodwill
63,192

 

Core deposit intangible
12,773

 

Trade name intangible
1,380

 

FDIC indemnification asset
3,753

 

Other real estate owned
8,420

 

Other assets
15,944

 

Total noncash assets acquired
1,211,118

 

 
 
 
 
Liabilities assumed:
 
 
 
Deposits
1,049,167

 

Short-term borrowings
16,124

 

Junior subordinated notes issued to capital trusts
8,050

 

Subordinated note payable
12,669

 

Other liabilities
11,617

 

Total liabilities assumed
1,097,627

 

See accompanying notes to consolidated financial statements.

6


MidWestOne Financial Group, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(Unaudited)

1.    Principles of Consolidation and Presentation
MidWestOne 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 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 May 1, 2015, the Company completed its merger with Central Bancshares, Inc. (“Central”), pursuant to which Central was merged with and into the Company. In connection with the merger, Central Bank, a Minnesota-chartered commercial bank and wholly-owned subsidiary of Central, became a wholly-owned subsidiary of the Company.
The Company issued 2,723,083 shares of common stock and paid $64.0 million in cash, for total consideration of $141.9 million in connection with the merger. The results of operations acquired from Central have been included in the Company’s results of operations for the time period since the date of acquisition.
The Company owns all of the common stock of MidWestOne Bank, an Iowa state non-member bank chartered in 1934 with its main office in Iowa City, Iowa, all of the common stock of Central Bank, a Minnesota state non-member bank chartered in 1988 with its main office in Golden Valley, Minnesota, and all of the common stock of MidWestOne Insurance Services, Inc., Oskaloosa, Iowa. We operate primarily through our bank subsidiaries, MidWestOne Bank and Central Bank, and MidWestOne 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, 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, 2014 and for the year then ended. Management believes that the disclosures 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, 2015, and the results of operations and cash flows for the three and nine months ended September 30, 2015 and 2014. 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, 2015 may not be indicative of results for the year ending December 31, 2015, 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, 2014. In the consolidated statements of cash flows, cash and cash equivalents include cash and due from banks and interest-bearing deposits in banks.
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.    Business Combination
On May 1, 2015, the Company acquired all of the voting equity interests of Central, a bank holding company and the parent company of Central Bank, a commercial bank headquartered in Golden Valley, Minnesota, through the merger of Central with and into the Company. Among other things, this transaction provides the Company with the opportunity to expand the business into new markets and grow the size of the business. At the effective time of the merger, each share of common stock of Central converted into a pro rata portion of (1) 2,723,083 shares of common stock of the Company, and (2) $64.0 million in cash.

7


This business combination was accounted for under the acquisition method of accounting. Accordingly, the results of operations of the acquired company have been included in the Company’s results of operations since the date of acquisition. Under this method of accounting, assets and liabilities acquired are recorded at their estimated fair values. The excess cost over fair value of net assets acquired is recorded as goodwill. As the consideration paid for Central exceeded the net assets acquired, goodwill of $63.2 million was recorded on the acquisition. Goodwill recorded in this transaction, which reflects the entry into the geographically new markets served by Central, has been provisionally allocated to our Central Bank segment. Goodwill recorded in the transaction is not tax deductible. The fair value of certain assets and liabilities and results recognized in the financial statements for the business combination have been determined only provisionally as of the third quarter of 2015. The following acquired assets and liabilities are included within the consolidated financial statements as of September 30, 2015 as provisional amounts as the Company continues to gather information to estimate the fair value as of the date of acquisition: 1) deferred taxes remain provisional as the Company continues the process of transitioning Central Bank from an S-Corp to a C-Corp. The Company expects to obtain the additional information needed to finalize this amount in the first quarter of 2016, following the filing of the income tax return for pre-merger Central. All other amounts recognized for the business combination in the financial statements have been determined to be final as of September 30, 2015.
Estimated fair values of assets acquired and liabilities assumed in the Central transaction, as of the closing date of the transaction, were as follows:
 
(in thousands)
 
May 1, 2015
 
ASSETS
 
 
 
Cash and due from banks
 
$
28,404

 
Investment securities
 
160,775

 
Loans
 
916,973

 
Premises and equipment
 
27,908

 
Goodwill
 
63,192

 
Core deposit intangible
 
12,773

 
Trade name intangible
 
1,380

 
FDIC indemnification asset
 
3,753

 
Other real estate owned
 
8,420

 
Other assets
 
15,944

 
Total assets
 
1,239,522

 
LIABILITIES
 
 
 
Deposits
 
1,049,167

 
Short-term borrowings
 
16,124

 
Junior subordinated notes issued to capital trusts
 
8,050

 
Subordinated notes payable
 
12,669

 
Accrued expenses and other liabilities
 
11,617

 
Total liabilities
 
1,097,627

 
Total identifiable net assets
 
141,895

 
 
 
 
 
Consideration:
 
 
 
Market value of common stock at $29.31 per share at May 1, 2015 (2,723,083 shares of common stock issued)
 
79,814

 
Stock illiquidity discount due to restrictions
 
(1,919
)
 
Cash paid
 
64,000

 
Total fair value of consideration
 
$
141,895

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 without evidence of significant credit deterioration.
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.

8


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.
For purchased non-credit impaired loans, the difference between the estimated fair value of the loans (computed on a loan-by-loan basis) and the principal outstanding is accreted over the remaining life of the loans.
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. 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.
The following table presents the purchased loans as of the acquisition date:
 
(in thousands)
 
Purchased Credit Impaired Loans
 
Purchased Non-Credit Impaired Loans
 
Contractually required principal payments
 
$
36,886

 
$
905,314

 
Nonaccretable difference
 
(6,675
)
 

 
Principal cash flows expected to be collected
 
30,211

 
905,314

 
Accretable difference
 
(1,882
)
 
(16,670
)
 
Fair value of acquired loans
 
$
28,329

 
$
888,644

Disclosures required by ASC 805-20-50-1(a) concerning the FDIC indemnification assets have not been included due to the immateriality of the amount involved. See Note 6. “Loans Receivable and the Allowance for Loan Losses” to our consolidated financial statements for additional information related to the FDIC indemnification asset.
ASC 805-30-30-7 requires that the consideration transfered in a business combination should be measured at fair value. Since the common shares issued as part of the consideration of the merger included a restriction on their sale, pledge or other disposition, an illiquidity discount has been assigned to the shares based upon the volatility of the underlying shares’ daily returns and the period of restriction.
The Company recorded $0.2 million and $3.4 million in pre-tax merger-related expenses for the three and nine months ended 2015, respectively, including professional and legal fees of $0.2 million and $1.9 million, respectively, to directly consummate the merger. These amounts are included in professional fees in the Company’s consolidated statements of operations. The remainder of merger-related expenses primarily relate to retention and severance compensation costs, which are included in salaries and employee benefits in the consolidated statements of operations, and service contract termination costs, which are included in other operating expenses.
During the measurement period, specifically the three months ended September 30, 2015, the Company recognized adjustments to the provisional amounts reported at June 30, 2015, which reflect new information that existed as of May 1, 2015 that, if known, would have affected the measurement of the amounts recognized as of that date. In its interim financial statements for the nine months ended September 30, 2015, the Company adjusted the provisional amounts for the trade name, stock illiquidity discount, FDIC indemnification asset and other real estate owned. The results of these adjustments are reflected in the $6.7 million increase to goodwill during the quarter ended September 30, 2015. The provisional adjustments had no significant impact on earnings for the three and six months ending June 30, 2015 and in accordance with ASU 2015-16 were recorded in earnings during the three months ending September 30, 2015.

9


The following table provides the unaudited pro forma information for the results of operations for the three and nine months ended September 30, 2015 and 2014, as if the acquisition had occurred January 1, 2014. The pro forma results combine the historical results of Central into the Company’s consolidated statement of income including the impact of certain purchase accounting adjustments, including loan discount accretion, investment securities discount accretion, intangible assets amortization, deposit premium accretion and borrowing discount amortization. The pro forma results have been prepared for comparative purposes only and are not necessarily indicative of the results that would have been obtained had the acquisition actually occurred on January 1, 2014. No assumptions have been applied to the pro forma results of operations regarding possible revenue enhancements, expense efficiencies or asset dispositions. The merger-related expenses that have been recognized are included in net income in the table below.
 
 
 
Pro Forma
 
 
 
Three Months Ended
 
Nine Months Ended
 
 
 
September 30,
 
September 30,
 
(in thousands)
 
2015
 
2014
 
2015
 
2014
 
Total revenues (net interest income plus noninterest income)
 
$
31,258

 
$
32,075

 
$
95,175

 
$
96,954

 
Net income
 
$
6,455

 
$
6,333

 
$
17,052

 
$
17,101

The pro forma information above excludes the impact of any provision recorded related to renewing Central loans. Revenues and earnings included in the consolidated statements of operations of the acquired company since the acquisition date for the three months ended September 30, 2015 were $14.8 million and $2.4 million, respectively, and $25.3 million and $4.5 million for the nine months ended September 30, 2015, respectively.

3.    Shareholders’ Equity
Preferred Stock: The number of authorized shares of preferred stock for the Company is 500,000. As of September 30, 2015, none were issued or outstanding.
Common Stock: As of September 30, 2015, the number of authorized shares of common stock for the Company was 15,000,000. As of September 30, 2015, 11,406,431 shares were outstanding.
On May 1, 2015, in connection with the Central merger, the Company issued 2,723,083 shares of its common stock. On June 22, 2015, the Company entered into a Securities Purchase Agreement with certain institutional accredited investors, pursuant to which, on June 23, 2015, the Company sold an aggregate of 300,000 newly issued shares of the Company’s common stock, $1.00 par value per share, at a purchase price of $28.00 per share. Each of the purchasers was an existing shareholder of the Company.
On July 17, 2014, the board of directors of the Company approved a share repurchase program, allowing for the repurchase of up to $5.0 million of stock through December 31, 2016. The repurchase program replaced the Company’s prior repurchase program, pursuant to which the Company had repurchased approximately $3.7 million of common stock since January 1, 2013. Pursuant to the repurchase program, the Company may continue to repurchase shares from time to time in the open market, and the method, timing and amounts of repurchase will be solely in the discretion of the Company’s management. The repurchase program does not require the Company to acquire a specific number of shares. Therefore, the amount of shares repurchased pursuant to the program will depend on several factors, including market conditions, capital and liquidity requirements, and alternative uses for cash available. During the third quarter of 2015 the Company repurchased no common stock. Of the $5.0 million of stock authorized under the repurchase plan, $3.8 million remained available for possible future repurchases as of September 30, 2015.

4.    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.

10


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)
 
2015
 
2014
 
2015
 
2014
 
Basic earnings per common share computation
 
 
 
 
 
 
 
 
 
Numerator:
 
 
 
 
 
 
 
 
 
Net income
 
$
7,615

 
$
4,889

 
$
16,880

 
$
14,615

 
Denominator:
 
 
 
 
 
 
 
 
 
Weighted average shares outstanding
 
11,406,132

 
8,366,858

 
10,010,926

 
8,423,188

 
Basic earnings per common share
 
$
0.67

 
$
0.59

 
$
1.69

 
$
1.74

 
 
 
 
 
 
 
 
 
 
 
Diluted earnings per common share computation
 
 
 
 
 
 
 
 
 
Numerator:
 
 
 
 
 
 
 
 
 
Net income
 
$
7,615

 
$
4,889

 
$
16,880

 
$
14,615

 
Denominator:
 
 
 
 
 
 
 
 
 
Weighted average shares outstanding, including all dilutive potential shares
 
11,434,186

 
8,391,353

 
10,038,093

 
8,449,748

 
Diluted earnings per common share
 
$
0.67

 
$
0.59

 
$
1.68

 
$
1.73


5.    Investment Securities
The amortized cost and fair value of investment securities available for sale, with gross unrealized gains and losses, are as follows:
 
 
As of September 30, 2015
 
 
Amortized
Cost
 
Gross
Unrealized
Gains
 
Gross
Unrealized
Losses
 
Estimated
Fair Value
 
(in thousands)
 
 
 
 
 
 
 
 
U.S. Government agencies and corporations
$
26,760

 
$
335

 
$

 
$
27,095

 
State and political subdivisions
172,734

 
6,696

 
189

 
179,241

 
Mortgage-backed securities
59,766

 
750

 
122

 
60,394

 
Collateralized mortgage obligations
106,187

 
613

 
877

 
105,923

 
Corporate debt securities
40,880

 
262

 

 
41,142

 
Total debt securities
406,327

 
8,656

 
1,188

 
413,795

 
Other equity securities
1,248

 
28

 
29

 
1,247

 
Total
$
407,575

 
$
8,684

 
$
1,217

 
$
415,042

 
 
 
As of December 31, 2014
 
 
Amortized
Cost
 
Gross
Unrealized
Gains
 
Gross
Unrealized
Losses
 
Estimated
Fair Value
 
(in thousands)
 
 
 
 
 
 
 
 
U.S. Government agencies and corporations
$
49,392

 
$
248

 
$
265

 
$
49,375

 
State and political subdivisions
187,276

 
8,113

 
190

 
195,199

 
Mortgage-backed securities
30,965

 
1,498

 

 
32,463

 
Collateralized mortgage obligations
147,412

 
813

 
2,093

 
146,132

 
Corporate debt securities
48,656

 
188

 
103

 
48,741

 
Total debt securities
463,701

 
10,860

 
2,651

 
471,910

 
Other equity securities
2,686

 
380

 
34

 
3,032

 
Total
$
466,387

 
$
11,240

 
$
2,685

 
$
474,942

 

11


The amortized cost and fair value of investment securities held to maturity, with gross unrealized gains and losses, are as follows:
 
 
As of September 30, 2015
 
 
Amortized
Cost
 
Gross
Unrealized
Gains
 
Gross
Unrealized
Losses
 
Estimated
Fair Value
 
(in thousands)
 
 
 
 
 
 
 
 
State and political subdivisions
$
57,112

 
$
458

 
$
257

 
$
57,313

 
Mortgage-backed securities
4,175

 
6

 
31

 
4,150

 
Collateralized mortgage obligations
24,082

 
19

 
239

 
23,862

 
Corporate debt securities
17,551

 

 
408

 
17,143

 
Total
$
102,920

 
$
483

 
$
935

 
$
102,468

 
 
 
As of December 31, 2014
 
 
Amortized
Cost
 
Gross
Unrealized
Gains
 
Gross
Unrealized
Losses
 
Estimated
Fair Value
 
(in thousands)
 
 
 
 
 
 
 
 
State and political subdivisions
$
39,704

 
$
370

 
$
252

 
$
39,822

 
Mortgage-backed securities
22

 
3

 

 
25

 
Collateralized mortgage obligations
8,531

 

 
233

 
8,298

 
Corporate debt securities
3,267

 

 
159

 
3,108

 
Total
$
51,524

 
$
373

 
$
644

 
$
51,253

Investment securities with a carrying value of $291.5 million and $200.7 million at September 30, 2015 and December 31, 2014, respectively, were pledged on public deposits, securities sold under agreements to repurchase and for other purposes, as required or permitted by law.
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, 2015 and December 31, 2014. This temporary impairment represents the estimated amount of loss that would be realized if the securities were sold on the valuation date. 
The following presents information pertaining to securities with gross unrealized losses as of September 30, 2015 and December 31, 2014, aggregated by investment category and length of time that individual securities have been in a continuous loss position:  
 
 
 
 
As of September 30, 2015
 
 
Number
of
Securities
 
Less than 12 Months
 
12 Months or More
 
Total
 
Available for Sale
 
Fair
Value
 
Unrealized
Losses 
 
Fair
Value
 
Unrealized
Losses 
 
Fair
Value
 
Unrealized
Losses 
 
(in thousands, except number of securities)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
State and political subdivisions
39

 
$
7,909

 
$
81

 
$
3,388

 
$
108

 
$
11,297

 
$
189

 
Mortgage-backed securities
20

 
31,802

 
122

 

 

 
31,802

 
122

 
Collateralized mortgage obligations
12

 
15,397

 
58

 
35,358

 
819

 
50,755

 
877

 
Other equity securities
1

 

 

 
971

 
29

 
971

 
29

 
Total
72

 
$
55,108

 
$
261

 
$
39,717

 
$
956

 
$
94,825

 
$
1,217


12


 
 
 
 
As of December 31, 2014
 
 
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
4

 
$
9,946

 
$
11

 
$
15,018

 
$
254

 
$
24,964

 
$
265

 
State and political subdivisions
46

 
3,024

 
18

 
10,728

 
172

 
13,752

 
190

 
Collateralized mortgage obligations
14

 
14,971

 
123

 
68,370

 
1,970

 
83,341

 
2,093

 
Corporate debt securities
7

 
23,024

 
50

 
3,400

 
53

 
26,424

 
103

 
Other equity securities
1

 

 

 
966

 
34

 
966

 
34

 
Total
72

 
$
50,965

 
$
202

 
$
98,482

 
$
2,483

 
$
149,447

 
$
2,685

 
 
 
 
As of September 30, 2015
 
 
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
56

 
$
19,277

 
$
227

 
$
1,347

 
$
30

 
$
20,624

 
$
257

 
Mortgage-backed securities
5

 
3,972

 
31

 

 

 
3,972

 
31

 
Collateralized mortgage obligations
5

 
12,449

 
124

 
7,672

 
115

 
20,121

 
239

 
Corporate debt securities
6

 
3,700

 
223

 
700

 
185

 
4,400

 
408

 
Total
72

 
$
39,398

 
$
605

 
$
9,719

 
$
330

 
$
49,117

 
$
935

 
 
 
 
As of December 31, 2014
 
 
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
29

 
$
5,322

 
$
190

 
$
9,144

 
$
62

 
$
14,466

 
$
252

 
Collateralized mortgage obligations
1

 

 

 
8,298

 
233

 
8,298

 
233

 
Corporate debt securities
2

 
2,358

 
27

 
750

 
132

 
3,108

 
159

 
Total
32

 
$
7,680

 
$
217

 
$
18,192

 
$
427

 
$
25,872

 
$
644

The Company’s assessment of other-than-temporary impairment (“OTTI”) is based on its reasonable judgment of the specific facts and circumstances impacting each individual security at the time such assessments are made. The Company reviews and considers factual information, including expected cash flows, the structure of the security, the creditworthiness of the issuer, the type of underlying assets, if any, and the current and anticipated market conditions. 
At September 30, 2015 and December 31, 2014, 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 (“FHLMC”), the Federal National Mortgage Association (“FNMA”), and the Government National Mortgage Association (“GNMA”). 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 do not expose the Company to credit-related losses.
At September 30, 2015, approximately 58% of the municipal bonds held by the Company were Iowa-based, and approximately 20% were Minnesota-based. The Company does not intend to sell these municipal obligations, and it is not more likely than not that the Company will be required to sell them before 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 at fair value, as well as the evaluation of the fundamentals of the issuers’ financial conditions and other objective evidence, the Company believes that the municipal obligations identified in the tables above were temporarily impaired as of September 30, 2015 and December 31, 2014.
As of September 30, 2015, the Company also owned $1.0 million of equity securities in banks and financial service-related companies, and $1.0 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. Equity securities are considered

13


to have OTTI whenever they have been in a loss position, compared to current book value, for twelve consecutive months, and the Company does not expect them to recover to their original cost basis. For the nine months ended September 30, 2015 and the full year of 2014, no impairment charges were recorded, as the affected equity securities were not deemed impaired due to stabilized market prices in relation to the Company’s original purchase price.
The following table provides a roll forward of credit losses on fixed maturity securities recognized in net income:
 
 
For the Three Months Ended September 30,
 
For the Nine Months Ended September 30,
 
 
2015
 
2014
 
2015
 
2014
 
(in thousands)
 
 
 
 
 
 
 
 
Beginning balance
$

 
$

 
$

 
$
6,639

 
Additional credit losses:
 
 
 
 
 
 
 
 
Reductions to credit losses:
 
 
 
 
 
 
 
 
Securities with other than temporary impairment, due to sale

 

 

 
(6,639
)
 
Ending balance
$


$

 
$

 
$

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 additional OTTI may be recognized in the future and any such amounts could be material to the Company’s consolidated statements of operations.
The contractual maturity distribution of investment debt securities at September 30, 2015, is summarized as follows:
 
 
Available For Sale
 
Held to Maturity
 
 
Amortized
Cost
 
Fair Value
 
Amortized
Cost
 
Fair Value
 
(in thousands)
 
 
 
 
 
 
 
 
Due in one year or less
$
35,588

 
$
35,983

 
$
421

 
$
422

 
Due after one year through five years
76,655

 
78,800

 
5,361

 
5,355

 
Due after five years through ten years
108,632

 
112,894

 
44,256

 
44,233

 
Due after ten years
19,499

 
19,801

 
24,625

 
24,446

 
Debt securities without a single maturity date
165,953

 
166,317