Business Combination

9 Months Ended

Sep. 30, 2015

Business Combinations [Abstract]

Business Combination

Note 11. Business Combination

Effective July 16, 2015, the Company completed its previously reported acquisition of St. James Federal Savings and Loan Association, St. James, Minnesota (St. James), in a conversion merger transaction. As a result of the conversion merger transaction, St. James converted from a mutual to stock institution and merged with and into the Bank, with the Bank as the surviving institution. The Company acquired 100% of the voting shares of St. James. The Company issued and sold 78,736 shares of common stock at a price of $27.36 per share, which reflected a 5% discount on the 30 day average price as prescribed in the merger agreement. The shares were offered to depositor and borrower members of St. James in a subscription offering and to stockholders of the Company and members of the general public in a community offering. The Company’s ESOP acquired 8%, or 6,299 shares, of the newly issued shares using funds borrowed from the Company. The fair value of consideration paid to the prior depositors and borrowers of St. James was determined to approximate zero. Gross offering proceeds totaled approximately $2,154, including $172 purchased by the Company’s ESOP. As a result of the stock offering, the Company had 814,758 shares of common stock outstanding as of the close of business on July 16, 2015. St. James’ sole office, located in St. James, Minnesota, has become a branch office of the Bank. The Company’s primary reasons for the acquisition are to provide for asset growth, improve capital and competitive positions, and increase the limit on loans to one borrower.

The Company has determined that the acquisition constitutes a business combination as defined by the Financial Accounting Standards Board (FASB) Accounting Standards Codification (ASC) Topic 805, Business Combinations. Accordingly, the assets acquired and liabilities assumed are presented at their estimated fair values as required by the guidance. Fair values were determined based on the requirements of ASC Topic 820, Fair Value Measurements.

The determination of these fair values required management to make estimates about discount rates, future expected cash flows, market conditions and other future events which are highly subjective in nature. The assets acquired and liabilities assumed in the transaction are presented at estimated fair value on the acquisition date.

The Company recorded the following assets and liabilities as of July 16, 2015. The discounts and premiums resulting from the fair value adjustments will be accreted or amortized over the anticipated lives of the underlying assets and liabilities. The excess fair value of assets acquired over liabilities assumed, resulted in a $2,848 bargain purchase gain. The merger resulted in a gain because of the legal and financial barriers that St. James would have incurred to convert to a stock form of ownership in a stand-alone transaction, including the related transaction costs associated with a conversion and stock issuance. The bargain purchase gain was recorded in non-interest income in the Company’s consolidated statements of income for the three and nine months ended September 30, 2015.

	July 16, 2015
Recognized amounts of identifiable assets acquired and liabilities assumed
Fair value of assets acquired
Cash	$	1,337
Certificates of deposit		5,616
Securities – available for sale		995
Loans		17,506
Premises and equipment		366
Real estate owned		35
Accrued interest and other assets		131
Core deposit intangible		208
Total assets acquired	$	26,194
Fair value of liabilities assumed
Deposits	$	23,043
Deferred tax liability		238
Accrued interest and other liabilities		65
Total liabilities assumed	$	23,346
Net assets acquired	$	2,848

The fair value of the loan portfolio was estimated by performing a discounted cash flow analysis. The valuation was performed at the loan level on real estate loans and at the cohort level for all other loan types, and is based on the objective attributes of the loans in the portfolio (e.g., the rate of interest on the loan, the original term of the loan, the current term of the loan, etc.) and current statistical performance variables used in the market place.

The analysis was based on the contractually specified amounts of principal and interest to be received modified by our estimates of prepayment, default and loss severity to be experienced prospectively. The prepayment, default and loss severity assumptions were applied at the loan level based on the characteristics of the loan.

The composition of the acquired loans at July 16, 2015 was as follows:

	Contractual Amount		Fair Value Adjustments			Fair Value
Residential real estate	$	6,480	$	74		$	6,554
Revolving, open end residential real estate		336		(1	)		335
Agricultural real estate		5,437		57			5,494
Agricultural operating and term		2,588		2			2,590
Commercial real estate		1,262		2			1,264
Automobile loans		721		(8	)		713
Other consumer		602		(46	)		556
Total	$	17,426	$	80		$	17,506

The Company estimates that $79 of the contractual amounts receivable for loans acquired will not be collected.

The following table presents pro forma financial information assuming the acquisition occurred on January 1, 2014:

	Three Months Ended September 30,				Nine Months Ended September 30,
	2015		2014		2015		2014
Revenues (interest and noninterest income)	$	3,614	$	3,403	$	10,419	$	9,547
Net income	$	542	$	507	$	1,641	$	888
Diluted net income per share	$	0.66	$	0.61	$	1.96	$	1.06
Diluted weighted-average shares	$	0.66	$	0.61	$	1.96	$	1.06

The bargain purchase gain is excluded from the pro forma table above.

To determine pro forma information, the Company adjusted its three and nine months ended September 30, 2015 and three and nine months ended September 30, 2014 historical results to include the historical results of St. James.

Stock issuance costs incurred totaled $1,147. The stock issuance costs were offset against the proceeds of the offering, which was recognized as paid-in capital.

Merger costs of $332 and $334 were expensed during the three and nine months ended September 30, 2015, respectively. Merger costs of $9 and $27 were expensed during the three and nine months ended September 30, 2014.