Document
 
 
 
 
 
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 June 30, 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 August 1, 2017, there were 12,218,528 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
 
June 30, 2017
 
December 31, 2016
(dollars in thousands, except per share amounts)
(unaudited)
 
 
ASSETS
 
 
 
Cash and due from banks
$
46,234

 
$
41,464

Interest-bearing deposits in banks
3,164

 
1,764

Cash and cash equivalents
49,398

 
43,228

Investment securities:
 
 
 
Available for sale
442,958

 
477,518

Held to maturity (fair value of $183,296 as of June 30, 2017 and $164,792 as of December 31, 2016)
182,478

 
168,392

Loans held for sale
1,636

 
4,241

Loans
2,197,503

 
2,165,143

Allowance for loan losses
(22,510
)
 
(21,850
)
Net loans
2,174,993

 
2,143,293

Premises and equipment, net
74,711

 
75,043

Accrued interest receivable
12,606

 
13,871

Goodwill
64,654

 
64,654

Other intangible assets, net
13,518

 
15,171

Bank-owned life insurance
47,877

 
47,231

Other real estate owned
1,486

 
2,097

Deferred income taxes
5,482

 
6,523

Other assets
19,248

 
18,313

Total assets
$
3,091,045

 
$
3,079,575

LIABILITIES AND SHAREHOLDERS' EQUITY
 
 
 
Deposits:
 
 
 
Non-interest-bearing demand
$
476,031

 
$
494,586

Interest-bearing checking
1,131,151

 
1,136,282

Savings
203,967

 
197,698

Certificates of deposit under $100,000
325,847

 
326,832

Certificates of deposit $100,000 and over
356,713

 
325,050

Total deposits
2,493,709

 
2,480,448

Federal funds purchased
45,319

 
35,684

Securities sold under agreements to repurchase
60,182

 
82,187

Federal Home Loan Bank borrowings
90,000

 
115,000

Junior subordinated notes issued to capital trusts
23,743

 
23,692

Long-term debt
15,000

 
17,500

Deferred compensation liability
5,224

 
5,180

Accrued interest payable
1,551

 
1,472

Other liabilities
13,445

 
12,956

Total liabilities
2,748,173

 
2,774,119

Shareholders' equity:
 
 
 
Preferred stock, no par value; authorized 500,000 shares; no shares issued and outstanding at June 30, 2017 and December 31, 2016
$
—

 
$
—

Common stock, $1.00 par value; authorized 30,000,000 shares at June 30, 2017 and 15,000,000 shares at December 31, 2016; issued 12,463,481 shares at June 30, 2017 and 11,713,481 shares at December 31, 2016; outstanding 12,218,528 shares at June 30, 2017 and 11,436,360 shares at December 31, 2016
12,463

 
11,713

Additional paid-in capital
187,062

 
163,667

Treasury stock at cost, 244,953 shares as of June 30, 2017 and 277,121 shares as of December 31, 2016
(5,141
)
 
(5,766
)
Retained earnings
147,015

 
136,975

Accumulated other comprehensive income (loss)
1,473

 
(1,133
)
Total shareholders' equity
342,872

 
305,456

Total liabilities and shareholders' equity
$
3,091,045

 
$
3,079,575

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 June 30,
 
Six Months Ended June 30,
 
 
2017
 
2016
 
2017
 
2016
Interest income:
 
 
 
 
 
 
 
 
Interest and fees on loans
 
$
25,650

 
$
24,635

 
$
49,929

 
$
49,751

Interest on bank deposits
 
26

 
70

 
31

 
78

Interest on federal funds sold
 
1

 
1

 
1

 
1

Interest on investment securities:
 
 
 
 
 
 
 
 
Taxable securities
 
2,590

 
1,912

 
5,308

 
3,836

Tax-exempt securities
 
1,587

 
1,420

 
3,152

 
2,857

Total interest income
 
29,854

 
28,038

 
58,421

 
56,523

Interest expense:
 
 
 
 
 
 
 
 
Interest on deposits:
 
 
 
 
 
 
 
 
Interest-bearing checking
 
912

 
776

 
1,710

 
1,536

Savings
 
51

 
60

 
102

 
166

Certificates of deposit under $100,000
 
886

 
719

 
1,745

 
1,288

Certificates of deposit $100,000 and over
 
995

 
719

 
1,912

 
1,358

Total interest expense on deposits
 
2,844

 
2,274

 
5,469

 
4,348

Interest on federal funds purchased
 
25

 
—

 
71

 
25

Interest on securities sold under agreements to repurchase
 
34

 
32

 
72

 
85

Interest on Federal Home Loan Bank borrowings
 
404

 
467

 
847

 
918

Interest on other borrowings
 
3

 
6

 
6

 
12

Interest on junior subordinated notes issued to capital trusts
 
240

 
196

 
461

 
393

Interest on long-term debt
 
113

 
123

 
223

 
247

Total interest expense
 
3,663

 
3,098

 
7,149

 
6,028

Net interest income
 
26,191

 
24,940

 
51,272

 
50,495

Provision for loan losses
 
1,240

 
1,171

 
2,281

 
2,236

Net interest income after provision for loan losses
 
24,951

 
23,769

 
48,991

 
48,259

Noninterest income:
 
 
 
 
 
 
 
 
Trust, investment, and insurance fees
 
1,528

 
1,440

 
3,140

 
2,938

Service charges and fees on deposit accounts
 
1,257

 
1,283

 
2,540

 
2,541

Loan origination and servicing fees
 
718

 
855

 
1,520

 
1,474

Other service charges and fees
 
1,497

 
1,378

 
2,955

 
2,808

Bank-owned life insurance income
 
318

 
332

 
646

 
716

Gain on sale or call of available for sale securities
 
20

 
223

 
20

 
467

Gain on sale of held to maturity securities
 
—

 
—

 
43

 
—

Gain (loss) on sale of premises and equipment
 
8

 
(40
)
 
6

 
(251
)
Other gain
 
37

 
124

 
50

 
1,307

Total noninterest income
 
5,383

 
5,595

 
10,920

 
12,000

Noninterest expense:
 
 
 
 
 
 
 
 
Salaries and employee benefits
 
11,789

 
13,321

 
23,673

 
25,966

Net occupancy and equipment expense
 
3,033

 
3,326

 
6,337

 
6,577

Professional fees
 
1,036

 
1,221

 
2,058

 
2,167

Data processing expense
 
548

 
809

 
1,259

 
3,382

FDIC insurance expense
 
352

 
398

 
719

 
819

Amortization of intangible assets
 
804

 
1,015

 
1,653

 
2,076

Other operating expense
 
2,402

 
2,725

 
4,600

 
5,274

Total noninterest expense
 
19,964

 
22,815

 
40,299

 
46,261

Income before income tax expense
 
10,370

 
6,549

 
19,612

 
13,998

Income tax expense
 
3,136

 
1,794

 
5,665

 
3,699

Net income
 
$
7,234

 
$
4,755

 
$
13,947

 
$
10,299

Share and per share information:
 
 
 
 
 
 
 
 
Ending number of shares outstanding
 
12,218,528

 
11,435,860

 
12,218,528

 
11,435,860

Average number of shares outstanding
 
12,200,689

 
11,431,252

 
11,855,108

 
11,424,122

Diluted average number of shares
 
12,219,238

 
11,453,831

 
11,878,315

 
11,448,677

Earnings per common share - basic
 
$
0.59

 
$
0.42

 
$
1.18

 
$
0.90

Earnings per common share - diluted
 
0.59

 
0.42

 
1.17

 
0.90

Dividends paid per common share
 
0.165

 
0.16

 
0.33

 
0.32

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 June 30,
 
Six Months Ended June 30,
 
 
2017
 
2016
 
2017
 
2016
Net income
 
$
7,234

 
$
4,755

 
$
13,947

 
$
10,299

 
 
 
 
 
 
 
 
 
Other comprehensive income, available for sale securities:
 
 
 
 
 
 
 
 
Unrealized holding gains arising during period
 
2,745

 
891

 
4,312

 
3,869

Reclassification adjustment for gains included in net income
 
(20
)
 
(223
)
 
(20
)
 
(467
)
Income tax expense
 
(1,070
)
 
(389
)
 
(1,686
)
 
(1,405
)
Other comprehensive income on available for sale securities
 
1,655

 
279

 
2,606

 
1,997

Other comprehensive income, net of tax
 
1,655

 
279

 
2,606

 
1,997

Comprehensive income
 
$
8,889

 
$
5,034

 
$
16,553

 
$
12,296

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, 2015
 
$
—


$
11,713


$
163,487


$
(6,331
)

$
123,901


$
3,408


$
296,178

Net income
 
—


—


—


—


10,299


—


10,299

Dividends paid on common stock ($0.32 per share)
 
—

 
—

 
—

 
—

 
(3,657
)
 
—


(3,657
)
Stock options exercised (2,900 shares)
 
—

 
—

 
(22
)
 
60

 
—

 
—

 
38

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

 
—

 
(520
)
 
495

 
—

 
—


(25
)
Stock compensation
 
—

 
—

 
365

 
—

 
—

 



365

Other comprehensive income, net of tax
 
—

 
—

 
—

 
—

 
—

 
1,997

 
1,997

Balance at June 30, 2016
 
$
—

 
$
11,713

 
$
163,310

 
$
(5,776
)
 
$
130,543

 
$
5,405


$
305,195

Balance at December 31, 2016
 
$
—

 
$
11,713

 
$
163,667

 
$
(5,766
)
 
$
136,975

 
$
(1,133
)
 
$
305,456

Net income
 
—

 
—

 
—

 
—

 
13,947

 
—

 
13,947

Issuance of common stock (750,000 shares), net of expenses of $1,328,000
 
—

 
750

 
23,610

 
—

 
—

 
—

 
24,360

Dividends paid on common stock ($0.33 per share)
 
—

 
—

 
—

 
—

 
(3,907
)
 
—

 
(3,907
)
Stock options exercised (8,250 shares)
 
—

 
—

 
(81
)
 
172

 
—

 
—

 
91

Release/lapse of restriction on RSUs (26,875 shares)
 
—

 
—

 
(560
)
 
453

 
—

 
—

 
(107
)
Stock compensation
 
—

 
—

 
426

 
—

 
—

 
—

 
426

Other comprehensive income, net of tax
 
—

 
—

 
—

 
—

 
—

 
2,606

 
2,606

Balance at June 30, 2017
 
$
—

 
$
12,463

 
$
187,062

 
$
(5,141
)
 
$
147,015

 
$
1,473

 
$
342,872

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)
Six Months Ended June 30,
 
2017
 
2016
Cash flows from operating activities:
 
 
 
Net income
$
13,947

 
$
10,299

Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
Provision for loan losses
2,281

 
2,236

Depreciation of premises and equipment
2,058

 
2,297

Amortization of other intangibles
1,653

 
2,076

Amortization of premiums and discounts on investment securities, net
650

 
916

(Gain) loss on sale of premises and equipment
(6
)
 
251

Deferred income taxes
(554
)
 
(468
)
Excess tax benefit from share-based award activity
(91
)
 
(13
)
Stock-based compensation
426

 
365

Net gain on sale or call of available for sale securities
(20
)
 
(467
)
Net gain on sale or call of held to maturity securities
(43
)
 
—

Net gain on sale of other real estate owned
(30
)
 
(601
)
Net gain on sale of loans held for sale
(799
)
 
(993
)
Writedown of other real estate owned
23

 
—

Origination of loans held for sale
(41,284
)
 
(47,588
)
Proceeds from sales of loans held for sale
44,688

 
46,720

Decrease in accrued interest receivable
1,265

 
1,565

Increase in cash surrender value of bank-owned life insurance
(646
)
 
(716
)
(Increase) decrease in other assets
(935
)
 
342

Increase in deferred compensation liability
44

 
58

Increase in accrued interest payable, accounts payable, accrued expenses, and other liabilities
568

 
3,973

Net cash provided by operating activities
23,195

 
20,252

Cash flows from investing activities:
 
 
 
Proceeds from sales of available for sale securities
9,999

 
23,384

Proceeds from maturities and calls of available for sale securities
41,162

 
51,873

Purchases of available for sale securities
(12,841
)
 
(15,818
)
Proceeds from sales of held to maturity securities
1,153

 
—

Proceeds from maturities and calls of held to maturity securities
2,998

 
9,259

Purchase of held to maturity securities
(18,292
)
 
(16,821
)
Net increase in loans
(34,188
)
 
(17,610
)
Purchases of premises and equipment
(1,697
)
 
(3,964
)
Proceeds from sale of other real estate owned
825

 
6,252

Proceeds from sale of premises and equipment
28

 
1,233

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

 
430

Net cash provided by (used in) investing activities
(10,853
)
 
38,218

Cash flows from financing activities:
 
 
 
Net increase in deposits
13,261

 
40

Increase (decrease) in federal funds purchased
9,635

 
(1,500
)
Decrease in securities sold under agreements to repurchase
(22,005
)
 
(7,005
)
Proceeds from Federal Home Loan Bank borrowings
50,000

 
30,000

Repayment of Federal Home Loan Bank borrowings
(75,000
)
 
(10,000
)
Proceeds from stock options exercised
1

 
38

Excess tax benefit from share-based award activity
91

 
13

Taxes paid relating to net share settlement of equity awards
(108
)
 
(38
)
Payments on long-term debt
(2,500
)
 
(2,500
)
Dividends paid
(3,907
)
 
(3,657
)
Proceeds from issuance of common stock
25,688

 
—

Payment of stock issuance costs
(1,328
)
 
—

Net cash provided by (used in) financing activities
(6,172
)
 
5,391

Net increase in cash and cash equivalents
6,170

 
63,861

Cash and cash equivalents at beginning of period
43,228

 
47,097

Cash and cash equivalents at end of period
$
49,398

 
$
110,958


5
Table of Contents

(unaudited) (dollars in thousands)
Six Months Ended June 30,
 
2017
 
2016
Supplemental disclosures of cash flow information:
 
 
 
Cash paid during the period for interest
$
7,070

 
$
5,915

Cash paid during the period for income taxes
$
5,975

 
$
4,225

Supplemental schedule of non-cash investing activities:
 
 
 
Transfer of loans to other real estate owned
$
207

 
$
960

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, 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 June 30, 2017, and the results of operations and cash flows for the three and six months ended June 30, 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 and six months ended June 30, 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.
The Company adopted ASU 2017-08, “Premium Amortization on Purchased Callable Debt Securities” during the second quarter of 2017. Since the Company was already amortizing premiums on callable investment securities between the date of purchase and the first call date, there was no cumulative effect adjustment necessary to 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.


7
Table of Contents

2.    Shareholders’ Equity
Preferred Stock: The number of authorized shares of preferred stock for the Company is 500,000. As of June 30, 2017, none were issued or outstanding.
Common Stock: As of June 30, 2017, the number of authorized shares of common stock for the Company was 30,000,000. 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 June 30, 2017, 12,218,528 shares were outstanding.
On March 17, 2017, the Company entered into an underwriting agreement to offer and sell, through an underwriter, up to 750,000 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. This included 250,000 shares of the Company’s common stock granted as a 30-day option to purchase 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 second 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 June 30, 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 June 30,
 
Six Months Ended June 30,
 
(dollars in thousands, except per share amounts)
 
2017
 
2016
 
2017
 
2016
 
Basic earnings per common share computation
 
 
 
 
 
 
 
 
 
Numerator:
 
 
 
 
 
 
 
 
 
Net income
 
$
7,234

 
$
4,755

 
$
13,947

 
$
10,299

 
Denominator:
 
 
 
 
 
 
 
 
 
Weighted average shares outstanding
 
12,200,689

 
11,431,252

 
11,855,108

 
11,424,122

 
Basic earnings per common share
 
$
0.59

 
$
0.42

 
$
1.18

 
$
0.90

 
 
 
 
 
 
 
 
 
 
 
Diluted earnings per common share computation
 
 
 
 
 
 
 
 
 
Numerator:
 
 
 
 
 
 
 
 
 
Net income
 
$
7,234

 
$
4,755

 
$
13,947

 
$
10,299

 
Denominator:
 
 
 
 
 
 
 
 
 
Weighted average shares outstanding, including all dilutive potential shares
 
12,219,238

 
11,453,831

 
11,878,315

 
11,448,677

 
Diluted earnings per common share
 
$
0.59

 
$
0.42

 
$
1.17

 
$
0.90



8
Table of Contents

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 June 30, 2017
 
 
Amortized
Cost
 
Gross
Unrealized
Gains
 
Gross
Unrealized
Losses
 
Estimated
Fair Value
 
(in thousands)
 
 
 
 
 
 
 
 
U.S. Government agencies and corporations
$
5,768

 
$
10

 
$
—

 
$
5,778

 
State and political subdivisions
147,392

 
4,474

 
27

 
151,839

 
Mortgage-backed securities
53,654

 
490

 
29

 
54,115

 
Collateralized mortgage obligations
167,130

 
118

 
2,858

 
164,390

 
Corporate debt securities
64,331

 
326

 
155

 
64,502

 
Total debt securities
438,275

 
5,418

 
3,069

 
440,624

 
Other equity securities
2,263

 
101

 
30

 
2,334

 
Total
$
440,538

 
$
5,519

 
$
3,099

 
$
442,958

 
 
 
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 June 30, 2017
 
 
Amortized
Cost
 
Gross
Unrealized
Gains
 
Gross
Unrealized
Losses
 
Estimated
Fair Value
 
(in thousands)
 
 
 
 
 
 
 
 
State and political subdivisions
$
121,162

 
$
1,577

 
$
657

 
$
122,082

 
Mortgage-backed securities
2,202

 
7

 
5

 
2,204

 
Collateralized mortgage obligations
24,076

 
3

 
357

 
23,722

 
Corporate debt securities
35,038

 
601

 
351

 
35,288

 
Total
$
182,478

 
$
2,188

 
$
1,370

 
$
183,296

 
 
 
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


9
Table of Contents

Investment securities with a carrying value of $172.0 million and $212.1 million at June 30, 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 June 30, 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. 
The following tables present information pertaining to securities with gross unrealized losses as of June 30, 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 June 30, 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
11

 
$
9,175

 
$
24

 
$
451

 
$
3

 
$
9,626

 
$
27

 
Mortgage-backed securities
11

 
11,495

 
28

 
23

 
1

 
11,518

 
29

 
Collateralized mortgage obligations
29

 
112,364

 
1,857

 
27,948

 
1,001

 
140,312

 
2,858

 
Corporate debt securities
4

 
18,769

 
155

 
—

 
—

 
18,769

 
155

 
Other equity securities
1

 
—

 
—

 
1,970

 
30

 
1,970

 
30

 
Total
56

 
$
151,803

 
$
2,064

 
$
30,392

 
$
1,035

 
$
182,195

 
$
3,099

 
 
 
 
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 June 30, 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
77

 
$
29,935

 
$
581

 
$
1,943

 
$
76

 
$
31,878

 
$
657

 
Mortgage-backed securities
3

 
1,155

 
5

 
—

 
—

 
1,155

 
5

 
Collateralized mortgage obligations
6

 
11,787

 
220

 
6,105

 
137

 
17,892

 
357

 
Corporate debt securities
4

 
3,416

 
4

 
2,544

 
347

 
5,960

 
351

 
Total
90

 
$
46,293

 
$
810

 
$
10,592

 
$
560

 
$
56,885

 
$
1,370

 
 
 
 
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


10
Table of Contents

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 June 30, 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 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 June 30, 2017, approximately 56% 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 believed that the municipal obligations identified in the tables above were temporarily impaired as of June 30, 2017 and December 31, 2016.
At June 30, 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 June 30, 2017, the Company also owned $0.4 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 six months ended June 30, 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.
During the first quarter of 2017 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
Table of Contents

The contractual maturity distribution of investment debt securities at June 30, 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
$
12,458

 
$
12,566

 
$
2,385

 
$
2,385

 
Due after one year through five years
121,620

 
123,272

 
18,752

 
18,941

 
Due after five years through ten years
75,303

 
78,015

 
79,287

 
80,684

 
Due after ten years
8,110

 
8,266

 
55,776

 
55,360

 
Debt securities without a single maturity date
220,784

 
218,505

 
26,278

 
25,926

 
Total
$
438,275

 
$
440,624

 
$
182,478

 
$
183,296

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 six months ended June 30, 2017 and June 30, 2016 were $10.0 million and $23.4 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 and six months ended June 30, 2017 and 2016 were $20,000 and $467,000, 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 June 30, 2017 and December 31, 2016
 
(in thousands)
Agricultural
 
Commercial and Industrial
 
Commercial Real Estate
 
Residential Real Estate
 
Consumer
 
Total
 
June 30, 2017
 
 
 
 
 
 
 
 
 
 
 
 
Allowance for loan losses:
 
 
 
 
 
 
 
 
 
 
 
 
Individually evaluated for impairment
$
400

 
$
2,125

 
$
697

 
$
236

 
$
—

 
$
3,458

 
Collectively evaluated for impairment
2,266

 
5,834

 
7,969

 
1,958

 
222

 
18,249

 
Purchased credit impaired loans
—

 
—

 
347

 
456

 
—

 
803

 
Total
$
2,666

 
$
7,959

 
$
9,013

 
$
2,650

 
$
222

 
$
22,510

 
Loans receivable
 
 
 
 
 
 
 
 
 
 
 
 
Individually evaluated for impairment
$
3,044

 
$
11,700

 
$
16,697

 
$
3,752

 
$
—

 
$
35,193

 
Collectively evaluated for impairment
104,607

 
473,896

 
1,052,889

 
474,273

 
34,666

 
2,140,331

 
Purchased credit impaired loans
—

 
41

 
15,977

 
5,961

 
—

 
21,979

 
Total
$
107,651

 
$
485,637

 
$
1,085,563

 
$
483,986

 
$
34,666

 
$
2,197,503

 
(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
Table of Contents

Included above as of June 30, 2017, are loans with a contractual balance of $27.6 million and a recorded balance of $27.2 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.” The FDIC loss sharing agreement was terminated on July 14, 2017, at which time the loans were reclassified to non-covered assets (see Note 15. “Subsequent Events”).
As of June 30, 2017, the gross purchased credit impaired loans included above were $24.5 million, with a discount of $2.6 million.
Loans with unpaid principal in the amount of $485.0 million and $498.3 million at June 30, 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 June 30, 2017 and 2016
 
(in thousands)
Agricultural
 
Commercial and Industrial
 
Commercial Real Estate
 
Residential Real Estate
 
Consumer
 
Unallocated
 
Total
 
2017
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Beginning balance
$
2,460

 
$
6,021

 
$
9,751

 
$
3,764

 
$
221

 
$
—

 
$
22,217

 
Charge-offs
(347
)
 
(464