Document
 
 
 
 
 
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, 2016
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 November 1, 2016, there were 11,435,860 shares of common stock, $1.00 par value per share, outstanding.
 
 
 
 
 

Table of Contents

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.
 
 
 
 
 
 
 
 
 
 


Table of Contents

PART I – FINANCIAL INFORMATION
Item 1.   Financial Statements.

MIDWESTONE FINANCIAL GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
 
September 30, 2016
 
December 31, 2015
(dollars in thousands, except per share amounts)
(unaudited)
 
 
ASSETS
 
 
 
Cash and due from banks
$
45,612

 
$
44,199

Interest-bearing deposits in banks
6,341

 
2,731

Federal funds sold
5

 
167

Cash and cash equivalents
51,958

 
47,097

Investment securities:
 
 
 
Available for sale
436,239

 
427,241

Held to maturity (fair value of $153,474 as of September 30, 2016 and $118,234 as of December 31, 2015)
151,110

 
118,423

Loans held for sale
2,742

 
3,187

Loans
2,141,832

 
2,151,942

Allowance for loan losses
(21,395
)
 
(19,427
)
Net loans
2,120,437

 
2,132,515

Premises and equipment, net
75,127

 
76,202

Accrued interest receivable
13,139

 
13,736

Goodwill
64,654

 
64,548

Other intangible assets, net
16,095

 
19,141

Bank-owned life insurance
46,905

 
46,295

Other real estate owned
3,452

 
8,834

Deferred income taxes
1,231

 
947

Other assets
18,885

 
21,809

Total assets
$
3,001,974

 
$
2,979,975

LIABILITIES AND SHAREHOLDERS' EQUITY
 
 
 
Deposits:
 
 
 
Non-interest-bearing demand
$
493,820

 
$
559,586

Interest-bearing checking
1,114,536

 
1,064,350

Savings
196,426

 
189,489

Certificates of deposit under $100,000
332,194

 
348,268

Certificates of deposit $100,000 and over
308,956

 
301,828

Total deposits
2,445,932

 
2,463,521

Federal funds purchased
19,309

 
1,500

Securities sold under agreements to repurchase
63,469

 
67,463

Federal Home Loan Bank borrowings
100,000

 
87,000

Junior subordinated notes issued to capital trusts
23,667

 
23,587

Long-term debt
18,750

 
22,500

Deferred compensation liability
5,209

 
5,132

Accrued interest payable
1,552

 
1,507

Other liabilities
14,502

 
11,587

Total liabilities
2,692,390

 
2,683,797

Shareholders' equity:
 
 
 
Preferred stock, no par value; authorized 500,000 shares; no shares issued and outstanding at September 30, 2016 and December 31, 2015
$
—

 
$
—

Common stock, $1.00 par value; authorized 15,000,000 shares at September 30, 2016 and December 31, 2015; issued 11,713,481 shares at September 30, 2016 and at December 31, 2015; outstanding 11,435,860 shares at September 30, 2016 and 11,408,773 shares at December 31, 2015
11,713

 
11,713

Additional paid-in capital
163,492

 
163,487

Treasury stock at cost, 277,621 shares as of September 30, 2016 and 304,708 shares at December 31, 2015
(5,776
)
 
(6,331
)
Retained earnings
134,935

 
123,901

Accumulated other comprehensive income
5,220

 
3,408

Total shareholders' equity
309,584

 
296,178

Total liabilities and shareholders' equity
$
3,001,974

 
$
2,979,975

See accompanying notes to consolidated financial statements.  

1
Table of Contents

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,
 
 
2016
 
2015
 
2016
 
2015
Interest income:
 
 
 
 
 
 
 
 
Interest and fees on loans
 
$
24,343

 
$
26,697

 
$
74,094

 
$
60,959

Interest and discount on loan pool participations
 
—

 
—

 
—

 
798

Interest on bank deposits
 
63

 
13

 
141

 
29

Interest on federal funds sold
 
3

 
—

 
4

 
—

Interest on investment securities:
 
 
 
 
 
 
 
 
Taxable securities
 
2,088

 
1,914

 
5,924

 
5,721

Tax-exempt securities
 
1,394

 
1,365

 
4,251

 
4,149

Total interest income
 
27,891

 
29,989

 
84,414

 
71,656

Interest expense:
 
 
 
 
 
 
 
 
Interest on deposits:
 
 
 
 
 
 
 
 
Interest-bearing checking
 
810

 
706

 
2,346

 
1,903

Savings
 
50

 
48

 
216

 
128

Certificates of deposit under $100,000
 
801

 
641

 
2,089

 
1,758

Certificates of deposit $100,000 and over
 
813

 
1,090

 
2,171

 
2,083

Total interest expense on deposits
 
2,474

 
2,485

 
6,822

 
5,872

Interest on federal funds purchased
 
5

 
19

 
30

 
33

Interest on securities sold under agreements to repurchase
 
36

 
51

 
121

 
124

Interest on Federal Home Loan Bank borrowings
 
469

 
334

 
1,387

 
1,086

Interest on other borrowings
 
4

 
6

 
16

 
16

Interest on junior subordinated notes issued to capital trusts
 
215

 
191

 
608

 
399

Interest on subordinated notes
 
—

 
—

 
—

 
162

Interest on long-term debt
 
107

 
144

 
354

 
240

Total interest expense
 
3,310

 
3,230

 
9,338

 
7,932

Net interest income
 
24,581

 
26,759

 
75,076

 
63,724

Provision for loan losses
 
1,005

 
2,141

 
3,241

 
3,642

Net interest income after provision for loan losses
 
23,576

 
24,618

 
71,835

 
60,082

Noninterest income:
 
 
 
 
 
 
 
 
Trust, investment, and insurance fees
 
1,306

 
1,428

 
4,244

 
4,642

Service charges and fees on deposit accounts
 
1,346

 
1,297

 
3,887

 
3,098

Loan origination and servicing fees
 
1,162

 
1,025

 
2,636

 
2,096

Other service charges and fees
 
1,307

 
1,342

 
4,115

 
3,155

Bank-owned life insurance income
 
324

 
344

 
1,040

 
964

Gain on sale or call of available for sale securities
 
—

 
—

 
467

 
1,011

Loss on sale of premises and equipment
 
(37
)
 
(5
)
 
(53
)
 
(15
)
Other gain (loss)
 
306

 
29

 
1,378

 
(396
)
Total noninterest income
 
5,714

 
5,460

 
17,714

 
14,555

Noninterest expense:
 
 
 
 
 
 
 
 
Salaries and employee benefits
 
11,641

 
12,191

 
37,607

 
29,054

Net occupancy and equipment expense
 
3,293

 
2,719

 
9,870

 
6,585

Professional fees
 
1,014

 
959

 
3,181

 
3,868

Data processing expense
 
599

 
928

 
3,981

 
2,028

FDIC insurance expense
 
412

 
431

 
1,231

 
1,058

Amortization of intangible assets
 
970

 
800

 
3,046

 
2,136

Other operating expense
 
2,510

 
2,314

 
7,784

 
6,638

Total noninterest expense
 
20,439

 
20,342

 
66,700

 
51,367

Income before income tax expense
 
8,851

 
9,736

 
22,849

 
23,270

Income tax expense
 
2,629

 
2,121

 
6,328

 
6,390

Net income
 
$
6,222

 
$
7,615

 
$
16,521

 
$
16,880

Share and per share information:
 
 
 
 
 
 
 
 
Ending number of shares outstanding
 
11,435,860

 
11,406,431

 
11,435,860

 
11,406,431

Average number of shares outstanding
 
11,435,860

 
11,406,132

 
11,428,063

 
10,010,926

Diluted average number of shares
 
11,461,108

 
11,434,186

 
11,451,958

 
10,038,093

Earnings per common share - basic
 
$
0.54

 
$
0.67

 
$
1.45

 
$
1.69

Earnings per common share - diluted
 
0.54

 
0.67

 
1.44

 
1.68

Dividends paid per common share
 
0.16

 
0.15

 
0.48

 
0.45

See accompanying notes to consolidated financial statements.

2
Table of Contents

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,
 
 
2016
 
2015
 
2016
 
2015
Net income
 
$
6,222

 
$
7,615

 
$
16,521

 
$
16,880

 
 
 
 
 
 
 
 
 
Other comprehensive income, available for sale securities:
 
 
 
 
 
 
 
 
Unrealized holding gains (losses) arising during period
 
(304
)
 
2,196

 
3,565

 
(78
)
Reclassification adjustment for gains included in net income
 
—

 
—

 
(467
)
 
(1,011
)
Income tax (expense) benefit
 
119

 
(833
)
 
(1,286
)
 
403

Other comprehensive income (loss) on available for sale securities
 
(185
)
 
1,363

 
1,812

 
(686
)
Other comprehensive income (loss), net of tax
 
(185
)
 
1,363

 
1,812

 
(686
)
Comprehensive income
 
$
6,037

 
$
8,978

 
$
18,333

 
$
16,194

See accompanying notes to consolidated financial statements.


3
Table of Contents

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, 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 income, net of tax
 
—

 
—

 
—

 
—

 
—

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

 
$
11,713

 
$
163,323

 
$
(6,380
)
 
$
117,374

 
$
4,636


$
290,666

Balance at December 31, 2015
 
$
—

 
$
11,713

 
$
163,487

 
$
(6,331
)
 
$
123,901

 
$
3,408

 
$
296,178

Net income
 
—

 
—

 
—

 
—

 
16,521

 
—

 
16,521

Dividends paid on common stock ($0.48 per share)
 
—

 
—

 
—

 
—

 
(5,487
)
 
—

 
(5,487
)
Stock options exercised (2,900 shares)
 
—

 
—

 
(22
)
 
60

 
—

 
—

 
38

Release/lapse of restriction on RSUs (25,633 shares)
 
—

 
—

 
(520
)
 
495

 
—

 
—

 
(25
)
Stock compensation
 
—

 
—

 
547

 
—

 
—

 
—

 
547

Other comprehensive income, net of tax
 
—

 
—

 
—

 
—

 
—

 
1,812

 
1,812

Balance at September 30, 2016
 
$
—

 
$
11,713

 
$
163,492

 
$
(5,776
)
 
$
134,935

 
$
5,220

 
$
309,584

See accompanying notes to consolidated financial statements.  

4
Table of Contents

MIDWESTONE FINANCIAL GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
 
(unaudited) (dollars in thousands)
Nine Months Ended September 30,
 
2016
 
2015
Cash flows from operating activities:
 
 
 
Net income
$
16,521

 
$
16,880

Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
Provision for loan losses
3,241

 
3,642

Depreciation, amortization and accretion
7,726

 
5,952

Loss on sale of premises and equipment
53

 
15

Deferred income taxes
(1,676
)
 
(169
)
Stock-based compensation
547

 
462

Net gain on sale or call of available for sale securities
(467
)
 
(1,011
)
Net gain on sale of other real estate owned
(750
)
 
(108
)
Net gain on sale of loans held for sale
(2,160
)
 
(1,240
)
Writedown of other real estate owned
546

 
—

Origination of loans held for sale
(89,005
)
 
(99,302
)
Proceeds from sales of loans held for sale
91,610

 
97,232

Decrease in accrued interest receivable
597

 
339

Increase in cash surrender value of bank-owned life insurance
(1,040
)
 
(964
)
Decrease in other assets
2,924

 
4,734

Increase in deferred compensation liability
77

 
94

Increase (decrease) in accrued interest payable, accounts payable, accrued expenses, and other liabilities
2,960

 
(4,489
)
Net cash provided by operating activities
31,704

 
22,067

Cash flows from investing activities:
 
 
 
Proceeds from sales of available for sale securities
23,384

 
112,054

Proceeds from maturities and calls of available for sale securities
68,180

 
64,921

Purchases of available for sale securities
(98,108
)
 
(11
)
Proceeds from maturities and calls of held to maturity securities
10,662

 
3,077

Purchase of held to maturity securities
(43,482
)
 
(12,394
)
Net (increase) decrease in loans
7,054

 
(89,521
)
Decrease in loan pool participations, net
—

 
19,332

Purchases of premises and equipment
(4,594
)
 
(11,558
)
Proceeds from sale of other real estate owned
7,369

 
2,812

Proceeds from sale of premises and equipment
2,260

 
33

Proceeds of principal and earnings from bank-owned life insurance
430

 
—

Net cash paid in business acquisition (Note 2)
—

 
(35,596
)
Net cash provided by (used in) investing activities
(26,845
)
 
53,149

Cash flows from financing activities:
 
 
 
Net increase (decrease) in deposits
(17,589
)
 
10,369

Increase (decrease) in federal funds purchased
17,809

 
(17,408
)
Decrease in securities sold under agreements to repurchase
(3,994
)
 
(7,717
)
Proceeds from Federal Home Loan Bank borrowings
30,000

 
24,000

Repayment of Federal Home Loan Bank borrowings
(17,000
)
 
(30,000
)
Proceeds and effect of tax from share-based compensation
13

 
117

Redemption of subordinated note
—

 
(12,669
)
Proceeds from long-term debt
—

 
25,000

Payments on long-term debt
(3,750
)
 
(1,250
)
Dividends paid
(5,487
)
 
(4,633
)
Issuance of common stock, net of expenses
—

 
7,900

Net cash provided by (used in) financing activities
2

 
(6,291
)
Net increase in cash and cash equivalents
4,861

 
68,925

Cash and cash equivalents at beginning of period
47,097

 
23,409

Cash and cash equivalents at end of period
$
51,958

 
$
92,334


5
Table of Contents

(unaudited) (dollars in thousands)
Nine Months Ended September 30,
 
2016
 
2015
Supplemental disclosures of cash flow information:
 
 
 
Cash paid during the period for interest
$
9,293

 
$
7,646

Cash paid during the period for income taxes
$
5,965

 
$
4,650

Supplemental schedule of non-cash investing activities:
 
 
 
Transfer of loans to other real estate owned
$
1,783

 
$
667

 
 
 
 
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
—

 
64,654

Core deposit intangible
—

 
12,773

Trade name intangible
—

 
1,380

FDIC indemnification asset
—

 
3,753

Other real estate owned
—

 
8,420

Other assets
—

 
14,482

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
Table of Contents

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.
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 our bank subsidiary, MidWestOne 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.
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 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 holding company 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 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, 2015 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, 2016, and the results of operations and cash flows for the three and nine months ended September 30, 2016 and 2015. 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, 2016 may not be indicative of results for the year ending December 31, 2016, 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, 2015. 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.    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 provided the Company with the opportunity to expand its 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
Table of Contents

This business combination was accounted for under the acquisition method of accounting. Accordingly, the results of operations of Central 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 $64.7 million has been recorded on the acquisition. Goodwill recorded in this transaction reflects the entry into the geographically new markets served by Central. Goodwill recorded in the transaction is not tax deductible. The amounts recognized for the business combination in the financial statements have been determined to be final as of March 31, 2016.
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
 
64,654

 
Core deposit intangible
 
12,773

 
Trade name intangible
 
1,380

 
FDIC indemnification asset
 
3,753

 
Other real estate owned
 
8,420

 
Other assets
 
14,482

 
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), net of stock illiquidity discount due to restrictions
 
77,895

 
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.
•
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.

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

 
$
888,644

(1) Included in the accretable discount for purchased non-credit impaired loans is approximately $10.4 million of estimated undiscounted principal losses.
Disclosures required by ASC 805-20-50-1(a) concerning the Federal Deposit Insurance Corporation (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 $0.2 million in pretax merger-related expenses for the three months ended September 30, 2016 and 2015, respectively, and $4.2 million and $3.4 million for the nine months ended September 30, 2016 and 2015, respectively. For the three months ended September 30, 2016 these expenses included data processing fees of $0.1 million. This amount is included in data processing fees in the Company’s consolidated statements of operations. For the three months ended September 30, 2015, the expenses included professional and legal fees of $0.2 million. This amount is included in professional fees in the Company’s consolidated statements of operations. For the nine months ended September 30, 2016 and 2015, respectively, merger-related expenses included $0.3 million and $1.9 million of professional and legal fees, $1.7 million and $0.5 million of retention and severance compensation costs, and $1.9 million of data processing service contract termination costs for the nine months ended September 30, 2016, which are included in data processing expense.
The following table provides the unaudited pro forma information for the results of operations for the three and nine months ended September 30, 2015, as if the acquisition had occurred January 1, 2015. 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, 2015. No assumptions have been applied to the pro forma results of operations regarding possible revenue enhancements, expense efficiencies or asset dispositions. Net income in the table below includes merger expenses.
 
 
 
 
Pro Forma
 
 
 
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
 
 
 
 
 
(in thousands)
 
 
2015
 
2015
 
Total revenues (net interest income plus noninterest income)
 
 
$
31,258

 
$
95,175

 
Net income
 
 
$
6,455

 
$
17,052

The pro forma information above excludes the impact of any provision recorded related to renewing Central loans.

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Table of Contents

Revenues and earnings of the acquired company for the current period have not been disclosed as it is not practicable because Central Bank was merged into MidWestOne Bank on April 1, 2016, and separate financial information is not readily available.

3.    Shareholders’ Equity
Preferred Stock: The number of authorized shares of preferred stock for the Company is 500,000. As of September 30, 2016, none were issued or outstanding.
Common Stock: As of September 30, 2016, the number of authorized shares of common stock for the Company was 15,000,000. As of September 30, 2016, 11,435,860 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, at a purchase price of $28.00 per share. Each of the purchasers was an existing shareholder of the Company.
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 third quarter of 2016 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 September 30, 2016.

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.
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)
 
2016
 
2015
 
2016
 
2015
 
Basic earnings per common share computation
 
 
 
 
 
 
 
 
 
Numerator:
 
 
 
 
 
 
 
 
 
Net income
 
$
6,222

 
$
7,615

 
$
16,521

 
$
16,880

 
Denominator:
 
 
 
 
 
 
 
 
 
Weighted average shares outstanding
 
11,435,860

 
11,406,132

 
11,428,063

 
10,010,926

 
Basic earnings per common share
 
$
0.54

 
$
0.67

 
$
1.45

 
$
1.69

 
 
 
 
 
 
 
 
 
 
 
Diluted earnings per common share computation
 
 
 
 
 
 
 
 
 
Numerator:
 
 
 
 
 
 
 
 
 
Net income
 
$
6,222

 
$
7,615

 
$
16,521

 
$
16,880

 
Denominator:
 
 
 
 
 
 
 
 
 
Weighted average shares outstanding, including all dilutive potential shares
 
11,461,108

 
11,434,186

 
11,451,958

 
10,038,093

 
Diluted earnings per common share
 
$
0.54

 
$
0.67

 
$
1.44

 
$
1.68



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Table of Contents

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, 2016
 
 
Amortized
Cost
 
Gross
Unrealized
Gains
 
Gross
Unrealized
Losses
 
Estimated
Fair Value
 
(in thousands)
 
 
 
 
 
 
 
 
U.S. Government agencies and corporations
$
5,958

 
$
86

 
$
—

 
$
6,044

 
State and political subdivisions
158,902

 
6,910

 
3

 
165,809

 
Mortgage-backed securities
42,592

 
980

 
3

 
43,569

 
Collateralized mortgage obligations
172,031

 
789

 
648

 
172,172

 
Corporate debt securities
46,902

 
493

 
29

 
47,366

 
Total debt securities
426,385

 
9,258

 
683

 
434,960

 
Other equity securities
1,257

 
42

 
20

 
1,279

 
Total
$
427,642

 
$
9,300

 
$
703

 
$
436,239

 
 
 
As of December 31, 2015
 
 
Amortized
Cost
 
Gross
Unrealized
Gains
 
Gross
Unrealized
Losses
 
Estimated
Fair Value
 
(in thousands)
 
 
 
 
 
 
 
 
U.S. Treasury securities
$
6,931

 
$
—

 
$
21

 
$
6,910

 
U.S. Government agencies and corporations
26,600

 
99

 
46

 
26,653

 
State and political subdivisions
176,794

 
6,662

 
72

 
183,384

 
Mortgage-backed securities
56,950

 
569

 
457

 
57,062

 
Collateralized mortgage obligations
107,613

 
321

 
1,530

 
106,404

 
Corporate debt securities
45,602

 
50

 
86

 
45,566

 
Total debt securities
420,490

 
7,701

 
2,212

 
425,979

 
Other equity securities
1,250

 
50

 
38

 
1,262

 
Total
$
421,740

 
$
7,751

 
$
2,250

 
$
427,241

 
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, 2016
 
 
Amortized
Cost
 
Gross
Unrealized
Gains
 
Gross
Unrealized
Losses
 
Estimated
Fair Value
 
(in thousands)
 
 
 
 
 
 
 
 
State and political subdivisions
$
92,224

 
$
1,917

 
$
173

 
$
93,968

 
Mortgage-backed securities
2,752

 
54

 
—

 
2,806

 
Collateralized mortgage obligations
27,110

 
213

 
23

 
27,300

 
Corporate debt securities
29,024

 
669

 
293

 
29,400

 
Total
$
151,110

 
$
2,853

 
$
489

 
$
153,474

 
 
 
As of December 31, 2015
 
 
Amortized
Cost
 
Gross
Unrealized
Gains
 
Gross
Unrealized
Losses
 
Estimated
Fair Value
 
(in thousands)
 
 
 
 
 
 
 
 
State and political subdivisions
$
66,454

 
$
928

 
$
110

 
$
67,272

 
Mortgage-backed securities
3,920

 
4

 
38

 
3,886

 
Collateralized mortgage obligations
30,505

 
1

 
459

 
30,047

 
Corporate debt securities
17,544

 
—

 
515

 
17,029

 
Total
$
118,423

 
$
933

 
$
1,122

 
$
118,234


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Table of Contents

Investment securities with a carrying value of $164.6 million and $321.6 million at September 30, 2016 and December 31, 2015, 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, 2016 and December 31, 2015. This temporary impairment represents the estimated amount of loss that would be realized if the securities were sold on the valuation date. 
The following tables present information pertaining to securities with gross unrealized losses as of September 30, 2016 and December 31, 2015, aggregated by investment category and length of time that individual securities have been in a continuous loss position:  
 
 
 
 
As of September 30, 2016
 
 
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
1

 
$
—

 
$
—

 
$
453

 
$
3

 
$
453

 
$
3

 
Mortgage-backed securities
5

 
215

 
2

 
88

 
1

 
303

 
3

 
Collateralized mortgage obligations
13

 
89,323

 
348

 
18,162

 
300

 
107,485

 
648

 
Corporate debt securities
2

 
12,139

 
29

 
—

 
—

 
12,139

 
29

 
Other equity securities
1

 
—

 
—

 
980

 
20

 
980

 
20

 
Total
22

 
$
101,677

 
$
379

 
$
19,683

 
$
324

 
$
121,360

 
$
703

 
 
 
 
As of December 31, 2015
 
 
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. Treasury securities
1

 
$
6,910

 
$
21

 
$
—

 
$
—

 
$
6,910

 
$
21

 
U.S. Government agencies and corporations
1

 
4,890

 
46

 
—

 
—

 
4,890

 
46

 
State and political subdivisions
22

 
8,419

 
24

 
3,177

 
48

 
11,596

 
72

 
Mortgage-backed securities
27

  
37,753

  
457

  
—

  
—

  
37,753

  
457

 
Collateralized mortgage obligations
23

 
56,447

 
420

 
31,253

 
1,110

 
87,700

 
1,530

 
Corporate debt securities
8

 
30,496

 
86

 
—

 
—

 
30,496

 
86

 
Other equity securities
1

 
—

 
—

 
962

 
38

 
962

 
38

 
Total
83

 
$
144,915

 
$
1,054

 
$
35,392

 
$
1,196

 
$
180,307

 
$
2,250

 
 
 
 
As of September 30, 2016
 
 
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
34

 
$
14,646

 
$
173

 
$
—

 
$
—

 
$
14,646

 
$
173

 
Collateralized mortgage obligations
1

 
—

 
—

 
6,889

 
23

 
6,889

 
23

 
Corporate debt securities
3

 
2,383

 
2

 
2,598

 
291

 
4,981

 
293

 
Total
38

 
$
17,029

 
$
175

 
$
9,487

 
$
314

 
$
26,516

 
$
489


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Table of Contents

 
 
 
 
As of December 31, 2015
 
 
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
32

 
$
9,345

 
$
93

 
$
2,040

 
$
17

 
$
11,385

 
$
110

 
Mortgage-backed securities
5

 
3,723

 
38

 
—

 
—

  
3,723

  
38

 
Collateralized mortgage obligations
7

 
22,571

 
320

 
7,416

 
139

 
29,987

 
459

 
Corporate debt securities
6

 
15,606

 
309

 
680

 
206

 
16,286

 
515

 
Total
50

 
$
51,245

 
$
760

 
$
10,136

 
$
362

 
$
61,381

 
$
1,122

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 September 30, 2016 and December 31, 2015, the Company’s mortgage-backed securities and collateralized mortgage obligations portfolios consisted of securities predominantly backed by one- to four-family mortgage loans and underwritten to the standards of and guaranteed by the following government-sponsored agencies: the Federal Home Loan Mortgage Corporation, the Federal National Mortgage Association, and the Government National Mortgage Association. The receipt of principal, at par, and interest on mortgage-backed securities is guaranteed by the respective government-sponsored agency guarantor, such that the Company believes that its mortgage-backed securities and collateralized mortgage obligations do not expose the Company to credit-related losses.
At September 30, 2016, approximately 58% of the municipal bonds held by the Company were Iowa-based, and approximately 21% 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 believes that the municipal obligations identified in the tables above were temporarily impaired as of September 30, 2016 and December 31, 2015.
At September 30, 2016 and December 31, 2015, 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 of in the corporate bond portfolio.
As of September 30, 2016, the Company also owned $0.3 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 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, 2016 and the full year of 2015, 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.
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.
The contractual maturity distribution of investment debt securities at September 30, 2016, is summarized as follows:

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Table of Contents

 
 
Available For Sale
 
Held to Maturity
 
 
Amortized
Cost
 
Fair Value
 
Amortized
Cost
 
Fair Value
 
(in thousands)
 
 
 
 
 
 
 
 
Due in one year or less
$
11,122

 
$
11,190

 
$
2,385

 
$
2,383

 
Due after one year through five years
95,185

 
97,648

 
9,154

 
9,317

 
Due after five years through ten years
95,093

 
99,660

 
62,172

 
63,958

 
Due after ten years
10,362

 
10,721

 
47,537

 
47,710

 
Debt securities without a single maturity date
214,623

 
215,741

 
29,862

 
30,106

 
Total
$
426,385

 
$
434,960

 
$
151,110

 
$
153,474

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 $1.3 million and a fair value of $1.3 million are also excluded from this table.
Proceeds from the sales of investment securities available for sale during the nine months ended September 30, 2016 and September 30, 2015 were $23.4 million and $112.1 million, respectively.
Realized gains and losses on sales are determined on the basis of specific identification of investments based on the trade date. Realized gains on investments for the three and nine months ended September 30, 2016 and 2015 are as follows:  
 
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
 
2016
 
2015
 
2016
 
2015
 
(in thousands)
 
 
 
 
 
 
 
 
Available for sale fixed maturity securities:
 
 
 
 
 
 
 
 
Gross realized gains
$
—

 
$
—

 
$
467

 
$
1,265

 
Gross realized losses
—

 
—

 
—

 
(442
)
 
Other-than-temporary impairment
—

 
—

 
—

 
—

 
 
—

 
—

 
467

 
823

 
Equity securities:
 
 
 
 
 
 
 
 
Gross realized gains
—

 
—

 
—

 
188

 
Gross realized losses
—

 
—

 
—

 
—

 
Other-than-temporary impairment
—

 
—

 
—