Attached files

file filename
EX-32.2 - EXHIBIT 32.2 - MidWestOne Financial Group, Inc.exhibit3222017q1.htm
EX-32.1 - EXHIBIT 32.1 - MidWestOne Financial Group, Inc.exhibit3212017q1.htm
EX-31.2 - EXHIBIT 31.2 - MidWestOne Financial Group, Inc.exhibit3122017q1.htm
EX-31.1 - EXHIBIT 31.1 - MidWestOne Financial Group, Inc.exhibit3112017q1.htm
EX-3.1 - EXHIBIT 3.1 - MidWestOne Financial Group, Inc.exhibit31.htm
 
 
 
 
 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
 
 
 
 
 
FORM 10-Q
 
 
 
 
 
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2017
OR
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.    ☒  Yes    ☐  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).    ☒  Yes    ☐  No
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer
 ☐
 
Accelerated filer
Non-accelerated filer
 ☐  (Do not check if a smaller reporting company)
 
Smaller reporting company
 
 
 
Emerging growth company
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    ☐  Yes    ☒  No

As of May 1, 2017, there were 12,210,971 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
 
March 31, 2017
 
December 31, 2016
(dollars in thousands, except per share amounts)
(unaudited)
 
 
ASSETS
 
 
 
Cash and due from banks
$
33,893

 
$
41,464

Interest-bearing deposits in banks
19,338

 
1,764

Federal funds sold
1,239

 

Cash and cash equivalents
54,470

 
43,228

Investment securities:
 
 
 
Available for sale
471,561

 
477,518

Held to maturity (fair value of $172,640 as of March 31, 2017 and $164,792 as of December 31, 2016)
174,668

 
168,392

Loans held for sale
381

 
4,241

Loans
2,165,044

 
2,165,143

Allowance for loan losses
(22,217
)
 
(21,850
)
Net loans
2,142,827

 
2,143,293

Premises and equipment, net
75,031

 
75,043

Accrued interest receivable
12,696

 
13,871

Goodwill
64,654

 
64,654

Other intangible assets, net
14,322

 
15,171

Bank-owned life insurance
47,559

 
47,231

Other real estate owned
1,696

 
2,097

Deferred income taxes
6,121

 
6,523

Other assets
17,529

 
18,313

Total assets
$
3,083,515

 
$
3,079,575

LIABILITIES AND SHAREHOLDERS' EQUITY
 
 
 
Deposits:
 
 
 
Non-interest-bearing demand
$
481,718

 
$
494,586

Interest-bearing checking
1,164,293

 
1,136,282

Savings
203,139

 
197,698

Certificates of deposit under $100,000
326,766

 
326,832

Certificates of deposit $100,000 and over
354,977

 
325,050

Total deposits
2,530,893

 
2,480,448

Federal funds purchased

 
35,684

Securities sold under agreements to repurchase
67,591

 
82,187

Federal Home Loan Bank borrowings
95,000

 
115,000

Junior subordinated notes issued to capital trusts
23,718

 
23,692

Long-term debt
16,250

 
17,500

Deferred compensation liability
5,200

 
5,180

Accrued interest payable
1,405

 
1,472

Other liabilities
15,944

 
12,956

Total liabilities
2,756,001

 
2,774,119

Shareholders' equity:
 
 
 
Preferred stock, no par value; authorized 500,000 shares; no shares issued and outstanding at March 31, 2017 and December 31, 2016
$

 
$

Common stock, $1.00 par value; authorized 15,000,000 shares at March 31, 2017 and December 31, 2016; issued 12,213,481 shares at March 31, 2017 and 11,713,481 shares at December 31, 2016; outstanding 11,959,521 shares at March 31, 2017 and 11,436,360 shares at December 31, 2016
12,213

 
11,713

Additional paid-in capital
179,014

 
163,667

Treasury stock at cost, 253,960 shares as of March 31, 2017 and 277,121 shares as of December 31, 2016
(5,328
)
 
(5,766
)
Retained earnings
141,797

 
136,975

Accumulated other comprehensive income
(182
)
 
(1,133
)
Total shareholders' equity
327,514

 
305,456

Total liabilities and shareholders' equity
$
3,083,515

 
$
3,079,575

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 March 31,
 
 
2017
 
2016
Interest income:
 
 
 
 
Interest and fees on loans
 
$
24,279

 
$
25,116

Interest on bank deposits
 
5

 
8

Interest on investment securities:
 
 
 
 
Taxable securities
 
2,718

 
1,924

Tax-exempt securities
 
1,565

 
1,437

Total interest income
 
28,567

 
28,485

Interest expense:
 
 
 
 
Interest on deposits:
 
 
 
 
Interest-bearing checking
 
798

 
760

Savings
 
51

 
106

Certificates of deposit under $100,000
 
859

 
569

Certificates of deposit $100,000 and over
 
917

 
639

Total interest expense on deposits
 
2,625

 
2,074

Interest on federal funds purchased
 
46

 
25

Interest on securities sold under agreements to repurchase
 
38

 
53

Interest on Federal Home Loan Bank borrowings
 
443

 
451

Interest on other borrowings
 
3

 
6

Interest on junior subordinated notes issued to capital trusts
 
221

 
197

Interest on long-term debt
 
110

 
124

Total interest expense
 
3,486

 
2,930

Net interest income
 
25,081

 
25,555

Provision for loan losses
 
1,041

 
1,065

Net interest income after provision for loan losses
 
24,040

 
24,490

Noninterest income:
 
 
 
 
Trust, investment, and insurance fees
 
1,612

 
1,498

Service charges and fees on deposit accounts
 
1,283

 
1,258

Loan origination and servicing fees
 
802

 
619

Other service charges and fees
 
1,458

 
1,430

Bank-owned life insurance income
 
328

 
384

Gain on sale or call of available for sale securities
 

 
244

Gain on sale of held to maturity securities
 
43

 

Loss on sale of premises and equipment
 
(2
)
 
(211
)
Other gain
 
13

 
1,183

Total noninterest income
 
5,537

 
6,405

Noninterest expense:
 
 
 
 
Salaries and employee benefits
 
11,884

 
12,645

Net occupancy and equipment expense
 
3,304

 
3,251

Professional fees
 
1,022

 
946

Data processing expense
 
711

 
2,573

FDIC insurance expense
 
367

 
421

Amortization of intangible assets
 
849

 
1,061

Other operating expense
 
2,198

 
2,549

Total noninterest expense
 
20,335

 
23,446

Income before income tax expense
 
9,242

 
7,449

Income tax expense
 
2,529

 
1,905

Net income
 
$
6,713

 
$
5,544

Share and per share information:
 
 
 
 
Ending number of shares outstanding
 
11,959,521

 
11,425,035

Average number of shares outstanding
 
11,505,687

 
11,416,993

Diluted average number of shares
 
11,555,356

 
11,442,931

Earnings per common share - basic
 
$
0.58

 
$
0.49

Earnings per common share - diluted
 
0.58

 
0.48

Dividends paid per common share
 
0.165

 
0.160

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 March 31,
 
 
2017
 
2016
Net income
 
$
6,713

 
$
5,544

 
 
 
 
 
Other comprehensive income, available for sale securities:
 
 
 
 
Unrealized holding gains arising during period
 
1,567

 
2,978

Reclassification adjustment for gains included in net income
 

 
(244
)
Income tax expense
 
(616
)
 
(1,016
)
Other comprehensive income on available for sale securities
 
951

 
1,718

Other comprehensive income, net of tax
 
951

 
1,718

Comprehensive income
 
$
7,664

 
$
7,262

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, 2015
 
$


$
11,713


$
163,487


$
(6,331
)

$
123,901


$
3,408


$
296,178

Net income
 








5,544




5,544

Dividends paid on common stock ($0.16 per share)
 

 

 

 

 
(1,827
)
 


(1,827
)
Release/lapse of restriction on RSUs (17,708 shares)
 

 

 
(352
)
 
330

 

 


(22
)
Stock compensation
 

 

 
186

 

 

 



186

Other comprehensive income, net of tax
 

 

 

 

 

 
1,718

 
1,718

Balance at March 31, 2016
 
$

 
$
11,713

 
$
163,321

 
$
(6,001
)
 
$
127,618

 
$
5,126


$
301,777

Balance at December 31, 2016
 
$

 
$
11,713

 
$
163,667

 
$
(5,766
)
 
$
136,975

 
$
(1,133
)
 
$
305,456

Net income
 

 

 

 

 
6,713

 

 
6,713

Issuance of common stock (500,000 shares), net of expenses of $983,000
 

 
500

 
15,642

 

 

 

 
16,142

Dividends paid on common stock ($0.165 per share)
 

 

 

 

 
(1,891
)
 

 
(1,891
)
Stock options exercised (5,800 shares)
 

 

 
(74
)
 
121

 

 

 
47

Release/lapse of restriction on RSUs (20,200 shares)
 

 

 
(420
)
 
317

 

 

 
(103
)
Stock compensation
 

 

 
199

 

 

 

 
199

Other comprehensive income, net of tax
 

 

 

 

 

 
951

 
951

Balance at March 31, 2017
 
$

 
$
12,213

 
$
179,014

 
$
(5,328
)
 
$
141,797

 
$
(182
)
 
$
327,514

See accompanying notes to consolidated financial statements.  

4


MIDWESTONE FINANCIAL GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
 
(unaudited) (dollars in thousands)
Three Months Ended March 31,
 
2017
 
2016
Cash flows from operating activities:
 
 
 
Net income
$
6,713

 
$
5,544

Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
Provision for loan losses
1,041

 
1,065

Depreciation of premises and equipment
1,040

 
1,130

Amortization of other intangibles
849

 
1,061

Amortization of premiums and discounts on investment securities, net
373

 
484

Loss on sale of premises and equipment
2

 
211

Deferred income taxes
(289
)
 
(303
)
Excess tax benefit from share-based award activity
(75
)
 
(16
)
Stock-based compensation
199

 
186

Net gain on sale or call of available for sale securities

 
(244
)
Net gain on sale or call of held to maturity securities
(43
)
 

Net gain on sale of other real estate owned
(19
)
 
(408
)
Net gain on sale of loans held for sale
(323
)
 
(431
)
Writedown of other real estate owned
23

 

Origination of loans held for sale
(18,770
)
 
(23,365
)
Proceeds from sales of loans held for sale
22,953

 
25,816

Decrease in accrued interest receivable
1,175

 
1,773

Increase in cash surrender value of bank-owned life insurance
(328
)
 
(384
)
Decrease in other assets
784

 
83

Increase in deferred compensation liability
20

 
54

Increase (decrease) in accrued interest payable, accounts payable, accrued expenses, and other liabilities
2,921

 
(179
)
Net cash provided by operating activities
18,246

 
12,077

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

 
19,690

Proceeds from maturities and calls of available for sale securities
15,005

 
22,633

Purchases of available for sale securities
(7,813
)
 
(2
)
Proceeds from sales of held to maturity securities
1,153

 

Proceeds from maturities and calls of held to maturity securities
1,047

 
2,494

Purchase of held to maturity securities
(8,474
)
 
(2,399
)
Net increase in loans
(672
)
 
(21,104
)
Purchases of premises and equipment
(1,004
)
 
(1,854
)
Proceeds from sale of other real estate owned
494

 
3,481

Proceeds from sale of premises and equipment

 
1,273

Proceeds of principal and earnings from bank-owned life insurance

 
426

Net cash provided by (used in) investing activities
(264
)
 
24,638

Cash flows from financing activities:
 
 
 
Net increase (decrease) in deposits
50,445

 
(33,914
)
Decrease in federal funds purchased
(35,684
)
 
(1,500
)
Decrease in securities sold under agreements to repurchase
(14,596
)
 
(9,594
)
Proceeds from Federal Home Loan Bank borrowings
50,000

 
30,000

Repayment of Federal Home Loan Bank borrowings
(70,000
)
 
(5,000
)
Proceeds from stock options exercised
123

 

Excess tax benefit from share-based award activity
75

 
16

Taxes paid relating to net share settlement of equity awards
(104
)
 
(38
)
Payments on long-term debt
(1,250
)
 
(1,250
)
Dividends paid
(1,891
)
 
(1,827
)
Issuance of common stock, net of expenses
16,142

 

Net cash used in financing activities
(6,740
)
 
(23,107
)
Net increase in cash and cash equivalents
11,242

 
13,608

Cash and cash equivalents at beginning of period
43,228

 
47,097

Cash and cash equivalents at end of period
$
54,470

 
$
60,705


5


(unaudited) (dollars in thousands)
Three Months Ended March 31,
 
2017
 
2016
Supplemental disclosures of cash flow information:
 
 
 
Cash paid during the period for interest
$
3,553

 
$
2,928

Cash paid during the period for income taxes
$

 
$
10

Supplemental schedule of non-cash investing activities:
 
 
 
Transfer of loans to other real estate owned
$
97

 
$
408

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, 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.
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 (the “Bank”), and all of the common stock of MidWestOne Insurance Services, Inc., Oskaloosa, Iowa. We operate primarily through MidWestOne Bank, our bank subsidiary, 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.
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. On April 1, 2016, Central Bank merged with and into MidWestOne Bank.
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, 2016 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 March 31, 2017, and the results of operations and cash flows for the three months ended March 31, 2017 and 2016. 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 months ended March 31, 2017 may not be indicative of results for the year ending December 31, 2017, or for any other period.
The Company adopted ASU 2016-09, "Improvements to Employee Share-Based Payment Accounting," on January 1, 2017. The Company elected to account for forfeitures when they occur and recognize them in compensation cost at that time. There was no effect due to this accounting policy election on the Company’s consolidated financial statements.
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, 2016. 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.    Shareholders’ Equity
Preferred Stock: The number of authorized shares of preferred stock for the Company is 500,000. As of March 31, 2017, none were issued or outstanding.
Common Stock: As of March 31, 2017, the number of authorized shares of common stock for the Company was 15,000,000. At the Company’s 2017 annual meeting of shareholders, the Company’s shareholders approved an increase in the number of authorized shares of common stock to 30,000,000, which became effective on April 21, 2017. As of March 31, 2017, 11,959,521 shares were outstanding.

7


On March 17, 2017, the Company entered into an underwriting agreement to offer and sell, through an underwriter, 500,000 newly issued shares of the Company’s common stock, $1.00 par value per share, at a public purchase price of $34.25 per share. The Company also granted the underwriter a 30-day option to purchase an additional 250,000 shares of the Company’s common stock, also at a public purchase price of $34.25 per share, to cover over-allotments, if any. On April 6, 2017, the underwriter purchased the full amount of its over-allotment option of 250,000 shares.
On July 21, 2016, 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, 2018. During the first quarter of 2017 the Company repurchased no common stock. Of the $5.0 million of stock authorized under the repurchase plan, $5.0 million remained available for possible future repurchases as of March 31, 2017.

3.    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 March 31,
 
(dollars in thousands, except per share amounts)
 
2017
 
2016
 
Basic earnings per common share computation
 
 
 
 
 
Numerator:
 
 
 
 
 
Net income
 
$
6,713

 
$
5,544

 
Denominator:
 
 
 
 
 
Weighted average shares outstanding
 
11,505,687

 
11,416,993

 
Basic earnings per common share
 
$
0.58

 
$
0.49

 
 
 
 
 
 
 
Diluted earnings per common share computation
 
 
 
 
 
Numerator:
 
 
 
 
 
Net income
 
$
6,713

 
$
5,544

 
Denominator:
 
 
 
 
 
Weighted average shares outstanding, including all dilutive potential shares
 
11,555,356

 
11,442,931

 
Diluted earnings per common share
 
$
0.58

 
$
0.48


4.    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 March 31, 2017
 
 
Amortized
Cost
 
Gross
Unrealized
Gains
 
Gross
Unrealized
Losses
 
Estimated
Fair Value
 
(in thousands)
 
 
 
 
 
 
 
 
U.S. Government agencies and corporations
$
5,826

 
$
18

 
$

 
$
5,844

 
State and political subdivisions
159,767

 
3,848

 
201

 
163,414

 
Mortgage-backed securities
55,961

 
319

 
173

 
56,107

 
Collateralized mortgage obligations
168,542

 
131

 
4,053

 
164,620

 
Corporate debt securities
79,509

 
107

 
334

 
79,282

 
Total debt securities
469,605

 
4,423

 
4,761

 
469,267

 
Other equity securities
2,261

 
83

 
50

 
2,294

 
Total
$
471,866

 
$
4,506

 
$
4,811

 
$
471,561

 

8


 
 
As of December 31, 2016
 
 
Amortized
Cost
 
Gross
Unrealized
Gains
 
Gross
Unrealized
Losses
 
Estimated
Fair Value
 
(in thousands)
 
 
 
 
 
 
 
 
U.S. Government agencies and corporations
$
5,895

 
$
10

 
$

 
$
5,905

 
State and political subdivisions
162,145

 
3,545

 
418

 
165,272

 
Mortgage-backed securities
61,606

 
315

 
567

 
61,354

 
Collateralized mortgage obligations
175,506

 
148

 
4,387

 
171,267

 
Corporate debt securities
72,979

 
76

 
602

 
72,453

 
Total debt securities
478,131

 
4,094

 
5,974

 
476,251

 
Other equity securities
1,259

 
66

 
58

 
1,267

 
Total
$
479,390

 
$
4,160

 
$
6,032

 
$
477,518

 
The amortized cost and fair value of investment securities held to maturity, with gross unrealized gains and losses, are as follows:
 
 
As of March 31, 2017
 
 
Amortized
Cost
 
Gross
Unrealized
Gains
 
Gross
Unrealized
Losses
 
Estimated
Fair Value
 
(in thousands)
 
 
 
 
 
 
 
 
State and political subdivisions
$
114,758

 
$
412

 
$
1,868

 
$
113,302

 
Mortgage-backed securities
2,361

 
4

 
20

 
2,345

 
Collateralized mortgage obligations
25,039

 

 
536

 
24,503

 
Corporate debt securities
32,510

 
364

 
384

 
32,490

 
Total
$
174,668

 
$
780

 
$
2,808

 
$
172,640

 
 
 
As of December 31, 2016
 
 
Amortized
Cost
 
Gross
Unrealized
Gains
 
Gross
Unrealized
Losses
 
Estimated
Fair Value
 
(in thousands)
 
 
 
 
 
 
 
 
State and political subdivisions
$
107,941

 
$
156

 
$
2,713

 
$
105,384

 
Mortgage-backed securities
2,398

 
5

 
34

 
2,369

 
Collateralized mortgage obligations
26,036

 

 
598

 
25,438

 
Corporate debt securities
32,017

 
149

 
565

 
31,601

 
Total
$
168,392

 
$
310

 
$
3,910

 
$
164,792

Investment securities with a carrying value of $226.7 million and $212.1 million at March 31, 2017 and December 31, 2016, 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 March 31, 2017 and December 31, 2016. This temporary impairment represents the estimated amount of loss that would be realized if the securities were sold on the valuation date. 

9


The following tables present information pertaining to securities with gross unrealized losses as of March 31, 2017 and December 31, 2016, aggregated by investment category and length of time that individual securities have been in a continuous loss position:  
 
 
 
 
As of March 31, 2017
 
 
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
33

 
$
11,702

 
$
184

 
$
438

 
$
17

 
$
12,140

 
$
201

 
Mortgage-backed securities
14

 
35,781

 
172

 
23

 
1

 
35,804

 
173

 
Collateralized mortgage obligations
28

 
125,595

 
3,064

 
20,821

 
989

 
146,416

 
4,053

 
Corporate debt securities
9

 
45,061

 
334

 

 

 
45,061

 
334

 
Other equity securities
1

 

 

 
1,950

 
50

 
1,950

 
50

 
Total
85

 
$
218,139

 
$
3,754

 
$
23,232

 
$
1,057

 
$
241,371

 
$
4,811

 
 
 
 
As of December 31, 2016
 
 
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
63

 
$
24,574

 
$
389

 
$
427

 
$
29

 
$
25,001

 
$
418

 
Mortgage-backed securities
20

  
40,752

  
566

  
23

  
1

  
40,775

  
567

 
Collateralized mortgage obligations
29

 
140,698

 
3,544

 
16,776

 
843

 
157,474

 
4,387

 
Corporate debt securities
11

 
54,891

 
602

 

 

 
54,891

 
602

 
Other equity securities
1

 

 

 
942

 
58

 
942

 
58

 
Total
124

 
$
260,915

 
$
5,101

 
$
18,168

 
$
931

 
$
279,083

 
$
6,032

 
 
 
 
As of March 31, 2017
 
 
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
138

 
$
51,790

 
$
1,868

 
$

 
$

 
$
51,790

 
$
1,868

 
Mortgage-backed securities
4

 
1,513

 
20

 

 

 
1,513

 
20

 
Collateralized mortgage obligations
7

 
18,230

 
325

 
6,240

 
211

 
24,470

 
536

 
Corporate debt securities
6

 
8,468

 
29

 
2,536

 
355

 
11,004

 
384

 
Total
155

 
$
80,001

 
$
2,242

 
$
8,776

 
$
566

 
$
88,777

 
$
2,808

 
 
 
 
As of December 31, 2016
 
 
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
180

 
$
65,174

 
$
2,713

 
$

 
$

 
$
65,174

 
$
2,713

 
Mortgage-backed securities
5

 
2,246

 
34

 

 

  
2,246

  
34

 
Collateralized mortgage obligations
7

 
18,964

 
369

 
6,435

 
229

 
25,399

 
598

 
Corporate debt securities
11

 
19,198

 
187

 
2,512

 
378

 
21,710

 
565

 
Total
203

 
$
105,582

 
$
3,303

 
$
8,947

 
$
607

 
$
114,529

 
$
3,910

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 and the current and anticipated market conditions.
At March 31, 2017 and December 31, 2016, 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

10


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 March 31, 2017, 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 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 March 31, 2017 and December 31, 2016.
At March 31, 2017 and December 31, 2016, 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 believe the low market value of this investment is temporary and 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.
As of March 31, 2017, the Company also owned $0.3 million of equity securities in banks and financial service-related companies, and $2.0 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 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 three months ended March 31, 2017 and the full year of 2016, 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.
As part of the Company’s annual review and analysis of municipal investments, $1.2 million of municipal bonds from a single issuer in the held to maturity portfolio, which did not carry a credit rating from one of the major statistical rating agencies, were identified as having an elevated level of credit risk. While the instruments were currently making payments as agreed, certain financial trends were identified that provided material doubt as to the ability of the entity to continue to service the debt in the future. The investment securities were classified as “watch,” and the Company’s asset and liability management committee were notified of the situation. In early March 2017 the Company learned of a potential buyer for the investments and a bid to purchase was received and accepted. Investment securities designated as held to maturity may generally not be sold without calling into question the Company’s stated intention to hold other debt securities to maturity in the future (“tainting”), unless certain conditions are met that provide for an exception to accounting policy. One of these exceptions, as outlined under Accounting Standards Codification (“ASC”) 320-10-25-6(a), allows for the sale of an investment that is classified as held to maturity due to significant deterioration of the issuer’s creditworthiness. Since the bonds had been internally classified as “watch” due to credit deterioration, the Company believes that the sale was in accordance with the allowable provisions of ASC 320-10-25-6(a), and as such, does not “taint” the remainder of the held to maturity portfolio. A small gain was realized on the sale.
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 operations.

11


The contractual maturity distribution of investment debt securities at March 31, 2017, 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
$
16,828

 
$
16,879

 
$
2,385

 
$
2,383

 
Due after one year through five years
131,814

 
133,139

 
14,300

 
14,311

 
Due after five years through ten years
86,998

 
88,991

 
73,777

 
73,853

 
Due after ten years
9,462

 
9,531

 
56,806

 
55,245

 
Debt securities without a single maturity date
224,503

 
220,727

 
27,400

 
26,848

 
Total
$
469,605

 
$
469,267

 
$
174,668

 
$
172,640

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. Equity securities available for sale with an amortized cost of $2.3 million and a fair value of $2.3 million are also excluded from this table.
Proceeds from the sales of investment securities available for sale during the three months ended March 31, 2017 and March 31, 2016 were zero and $19.7 million, respectively.
Realized gains and losses on sales are determined on the basis of specific identification of investments based on the trade date. Gross realized gains on fixed maturity available for sale investment securities for the three months ended March 31, 2017 and 2016 were zero and $244,000, respectfully, while gross realized gains on fixed maturity held to maturity investment securities were $43,000 and zero, respectfully.  

5.    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 March 31, 2017 and December 31, 2016
 
(in thousands)
Agricultural
 
Commercial and Industrial
 
Commercial Real Estate
 
Residential Real Estate
 
Consumer
 
Total
 
March 31, 2017
 
 
 
 
 
 
 
 
 
 
 
 
Allowance for loan losses:
 
 
 
 
 
 
 
 
 
 
 
 
Individually evaluated for impairment
$
418

 
$
1,006

 
$
1,629

 
$
253

 
$

 
$
3,306

 
Collectively evaluated for impairment
2,042

 
5,006

 
7,825

 
3,196

 
221

 
18,290

 
Purchased credit impaired loans

 
9

 
297

 
315

 

 
621

 
Total
$
2,460

 
$
6,021

 
$
9,751

 
$
3,764

 
$
221

 
$
22,217

 
Loans receivable
 
 
 
 
 
 
 
 
 
 
 
 
Individually evaluated for impairment
$
3,569

 
$
17,164

 
$
13,487

 
$
3,959

 
$

 
$
38,179

 
Collectively evaluated for impairment
105,213

 
441,225

 
1,048,865

 
474,565

 
35,074

 
2,104,942

 
Purchased credit impaired loans

 
60

 
15,991

 
5,872

 

 
21,923

 
Total
$
108,782

 
$
458,449

 
$
1,078,343

 
$
484,396

 
$
35,074

 
$
2,165,044

 
(in thousands)
Agricultural
 
Commercial and Industrial
 
Commercial Real Estate
 
Residential Real Estate
 
Consumer
 
Total
 
December 31, 2016
 
 
 
 
 
 
 
 
 
 
 
 
Allowance for loan losses:
 
 
 
 
 
 
 
 
 
 
 
 
Individually evaluated for impairment
$
62

 
$
2,066

 
$
1,924

 
$
299

 
$

 
$
4,351

 
Collectively evaluated for impairment
1,941

 
4,199

 
7,692

 
2,791

 
255

 
16,878

 
Purchased credit impaired loans

 
9

 
244

 
368

 

 
621

 
Total
$
2,003

 
$
6,274

 
$
9,860

 
$
3,458

 
$
255

 
$
21,850

 
Loans receivable
 
 
 
 
 
 
 
 
 
 
 
 
Individually evaluated for impairment
$
5,339

 
$
11,434

 
$
11,450

 
$
3,955

 
$

 
$
32,178

 
Collectively evaluated for impairment
108,004

 
449,380

 
1,036,049

 
480,143

 
36,591

 
2,110,167

 
Purchased credit impaired loans

 
156

 
16,744

 
5,898

 

 
22,798

 
Total
$
113,343

 
$
460,970

 
$
1,064,243

 
$
489,996

 
$
36,591

 
$
2,165,143


12


Included above as of March 31, 2017, are loans with a contractual balance of $29.0 million and a recorded balance of $28.5 million, which are covered under loss sharing agreements with the FDIC. The agreements cover certain losses and expenses and expire at various dates through October 7, 2021. The related FDIC indemnification asset is reported separately in Note 7. “Other Assets.”
As of March 31, 2017, the purchased credit impaired loans included above were $24.9 million, net of a discount of $3.0 million.
Loans with unpaid principal in the amount of $505.2 million and $498.3 million at March 31, 2017 and December 31, 2016, 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 March 31, 2017 and 2016
 
(in thousands)
Agricultural
 
Commercial and Industrial
 
Commercial Real Estate
 
Residential Real Estate
 
Consumer
 
Unallocated
 
Total
 
2017
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Beginning balance
$
2,003

 
$
6,274

 
$
9,860

 
$
3,458

 
$
255

 
$

 
$
21,850

 
Charge-offs
(537
)
 
(65
)
 
(61
)
 
(28
)
 
(25
)
 

 
(716
)
 
Recoveries
10

 
19

 
10

 

 
3

 

 
42

 
Provision
984

 
(207
)
 
(58
)
 
334

 
(12
)
 

 
1,041

 
Ending balance
$
2,460

 
$
6,021

 
$
9,751

 
$
3,764

 
$
221

 
$

 
$
22,217

 
2016
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Beginning balance
$
1,417

 
$
5,451

 
$
8,556

 
$
3,968

 
$
409

 
$
(374
)
 
$
19,427

 
Charge-offs
(125
)
 
(10
)
 
(40
)
 
(159
)
 
(50
)
 

 
(384
)
 
Recoveries
6

 
12

 
53

 
64

 
2

 

 
137

 
Provision
937

 
(773
)
 
1,144

 
(444
)
 
(173
)
 
374

 
1,065

 
Ending balance
$
2,235

 
$
4,680

 
$
9,713

 
$
3,429

 
$
188

 
$

 
$
20,245


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

13


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

14


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.”
As part of the merger between MidWestOne Bank and Central Bank, management developed a single methodology for determining the amount of the ALLL that would be needed at the combined bank. The new methodology is a hybrid of the methods used at MidWestOne Bank and Central Bank prior to the bank merger, and the results from the new ALLL model are consistent with the results that the two banks calculated individually. The refined allowance calculation allocates the portion of allowance that was previously deemed to be unallocated to instead be included in management’s determination of appropriate qualitative factors.
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.

15