midwestone 063011 10Q
 
 
 
 
 
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 June 30, 2011
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 000-24630
 
 
 
 
MIDWESTONE FINANCIAL GROUP, INC.
 
 
 
 
102 South Clinton Street
Iowa City, IA 52240
(Address of principal executive offices, including Zip Code)
  
 
 
 
Registrant's telephone number: 319-356-5800
Iowa
42-1206172
(State of Incorporation)
(I.R.S. Employer Identification No.)
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 definition 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 August 2, 2011, there were 8,628,221 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, 2011
 
December 31, 2010
(dollars in thousands)
(unaudited)
 
 
ASSETS
 
 
 
Cash and due from banks
$
23,193

  
$
13,720

Interest-bearing deposits in banks
18,153

  
6,077

Federal funds sold
419

  
726

Cash and cash equivalents
41,765

  
20,523

Investment securities:
  
 
 
Available for sale
501,211

  
461,954

Held to maturity (fair value of $2,502 as of June 30, 2011 and $4,086 as of December 31, 2010)
2,493

  
4,032

Loans held for sale
312

  
702

Loans
958,199

  
938,035

Allowance for loan losses
(15,603
)
 
(15,167
)
Net loans
942,596

  
922,868

Loan pool participations, net
56,664

  
65,871

Premises and equipment, net
25,472

  
26,518

Accrued interest receivable
9,199

  
10,648

Other intangible assets, net
10,695

  
11,143

Bank-owned life insurance
27,227

  
26,772

Other real estate owned
3,418

  
3,850

Deferred income taxes
3,370

  
6,430

Other assets
20,951

  
19,948

Total assets
$
1,645,373

  
$
1,581,259

LIABILITIES AND SHAREHOLDERS' EQUITY
 
 
 
Deposits:
  
 
 
Non-interest-bearing demand
$
153,617

  
$
129,978

Interest-bearing checking
461,197

  
442,878

Savings
77,329

  
74,826

Certificates of deposit under $100,000
369,023

  
380,082

Certificates of deposit $100,000 and over
195,121

  
191,564

Total deposits
1,256,287

  
1,219,328

Securities sold under agreements to repurchase
48,189

  
50,194

Federal Home Loan Bank borrowings
144,961

  
127,200

Deferred compensation liability
3,681

  
3,712

Long-term debt
15,464

  
15,464

Accrued interest payable
1,777

  
1,872

Other liabilities
6,377

  
5,023

Total liabilities
1,476,736

  
1,422,793

 
 
 
 
Shareholders' equity:
  
 
 
Preferred stock, no par value, with a liquidation preference of $1,000.00 per share; authorized 500,000 shares; issued 16,000 shares as of June 30, 2011 and December 31, 2010
$
15,802

 
$
15,767

Common stock, $1.00 par value; authorized 15,000,000 shares at June 30, 2011 and December 31, 2010; issued 8,690,398 shares at June 30, 2011 and December 31, 2010; outstanding 8,628,221 shares at June 30, 2011 and 8,614,790 shares at December 31, 2010
8,690

  
8,690

Additional paid-in capital
81,232

  
81,268

Treasury stock at cost, 62,177 shares as of June 30, 2011 and 75,608 shares at December 31, 2010
(865
)
 
(1,052
)
Retained earnings
60,449

  
55,619

Accumulated other comprehensive income (loss)
3,329

  
(1,826
)
Total shareholders' equity
168,637

  
158,466

Total liabilities and shareholders' equity
$
1,645,373

  
$
1,581,259


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,
 
  
2011
 
2010
 
2011
 
2010
Interest income:
  
 
 
 
 
 
 
 
Interest and fees on loans
  
$
12,976

 
$
13,761

 
$
25,776

 
$
27,465

Interest and discount on loan pool participations
  
436

 
909

 
790

 
1,808

Interest on bank deposits
  
8

 
17

 
16

 
27

Interest on federal funds sold
  
1

 
4

 
1

 
4

Interest on investment securities:
  
  
 
 
 
 
 
 
Taxable securities
  
2,866

 
2,445

 
5,554

 
4,670

Tax-exempt securities
  
1,072

 
986

 
2,107

 
1,976

Total interest income
  
17,359

 
18,122

 
34,244

 
35,950

 
 
 
 
 
 
 
 
 
Interest expense:
  
 
 
 
 
 
 
 
Interest on deposits:
  
 
 
 
 
 
 
 
Interest-bearing checking
  
994

 
1,133

 
2,002

 
2,203

Savings
  
58

 
43

 
117

 
79

Certificates of deposit under $100,000
  
2,120

 
2,455

 
4,307

 
4,998

Certificates of deposit $100,000 and over
  
839

 
918

 
1,687

 
1,885

Total interest expense on deposits
  
4,011

 
4,549

 
8,113

 
9,165

Interest on federal funds purchased
  
3

 
1

 
3

 
2

Interest on securities sold under agreements to repurchase
  
67

 
70

 
141

 
146

Interest on Federal Home Loan Bank borrowings
  
868

 
1,183

 
1,813

 
2,390

Interest on notes payable
  
10

 
11

 
20

 
24

Interest on long-term debt
  
163

 
152

 
325

 
300

Total interest expense
  
5,122

 
5,966

 
10,415

 
12,027

Net interest income
  
12,237

 
12,156

 
23,829

 
23,923

Provision for loan losses
  
900

 
1,500

 
1,800

 
3,000

Net interest income after provision for loan losses
  
11,337

 
10,656

 
22,029

 
20,923

 
 
 
 
 
 
 
 
 
Noninterest income:
  
 
 
 
 
 
 
 
Trust, investment, and insurance fees
  
1,156

 
1,214

 
2,429

 
2,448

Service charges and fees on deposit accounts
  
955

 
1,034

 
1,806

 
1,898

Mortgage origination and loan servicing fees
  
382

 
525

 
1,259

 
1,025

Other service charges, commissions and fees
  
677

 
576

 
1,356

 
1,160

Bank-owned life insurance income
  
225

 
147

 
454

 
314

Impairment losses on investment securities
  

 

 

 
(189
)
Gain on sale of available for sale securities
  
85

 
233

 
85

 
470

Loss on sale of premises and equipment
  
(195
)
 
(204
)
 
(243
)
 
(281
)
Total noninterest income
  
3,285

 
3,525

 
7,146

 
6,845

 
 
 
 
 
 
 
 
 
Noninterest expense:
  
 
 
 
 
 
 
 
Salaries and employee benefits
  
5,739

 
5,691

 
11,609

 
11,481

Net occupancy and equipment expense
  
1,498

 
1,630

 
3,115

 
3,406

Professional fees
  
688

 
659

 
1,365

 
1,408

Data processing expense
  
426

 
414

 
876

 
871

FDIC Insurance expense
  
356

 
705

 
953

 
1,397

Other operating expense
  
1,588

 
1,563

 
3,011

 
3,147

Total noninterest expense
  
10,295

 
10,662

 
20,929

 
21,710

Income before income tax expense
  
4,327

 
3,519

 
8,246

 
6,058

Income tax expense
  
1,104

 
914

 
2,118

 
1,449

Net income
  
$
3,223

 
$
2,605

 
$
6,128

 
$
4,609

Less: Preferred stock dividends and discount accretion
  
$
218

 
$
217

 
$
435

 
$
434

Net income available to common shareholders
  
$
3,005

 
$
2,388

 
$
5,693

 
$
4,175

Share and Per share information:
  
 
 
 
 
 
 
 
Ending number of shares outstanding
  
8,628,221

 
8,612,582

 
8,628,221

 
8,612,582

Average number of shares outstanding
  
8,627,810

 
8,612,582

 
8,624,782

 
8,610,231

Diluted average number of shares
  
8,674,558

 
8,643,233

 
8,678,787

 
8,628,756

Earnings per common share - basic
  
$
0.35

 
$
0.27

 
$
0.66

 
$
0.48

Earnings per common share - diluted
  
0.35

 
0.27

 
0.66

 
0.48

Dividends paid per common share
  
0.05

 
0.05

 
0.10

 
0.10

See accompanying notes to consolidated financial statements.

2

Table of Contents

MIDWESTONE FINANCIAL GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
AND OTHER COMPREHENSIVE INCOME (LOSS)
 
(unaudited)
(dollars in thousands, except per share amounts)
  
Preferred
Stock
  
Common
Stock
  
Additional
Paid-in
Captial
 
Treasury
Stock
 
Retained
Earnings
 
Accumulated
Other
Comprehensive
Income (loss)
 
Total
Balance at December 31, 2009
  
$
15,699

  
$
8,690

  
$
81,179

 
$
(1,183
)
 
$
48,079

 
$
(256
)
 
$
152,208

Comprehensive income:
  
 
  
 
  
 
 
 
 
 
 
 
 
 
Net income
  

  

  

 

 
4,609

 

 
4,609

Change in net unrealized gains arising during the period on securities available for sale, net of tax
  

  

  

 

 

 
1,717

 
1,717

Total comprehensive income
  
 
 
 
 
 
 
 
 
 
 
 
 
6,326

Dividends paid on common stock ($0.10 per share)
  

 

 

 

 
(861
)
 

 
(861
)
Dividends paid on preferred stock
 

 

 

 

 
(400
)
 

 
(400
)
Stock options exercised (1,945 shares)
 

 

 
(11
)
 
27

 

 

 
16

Release/lapse of restriction on 5,404 RSUs
  

 

 
(74
)
 
74

 

 

 

Preferred stock discount accretion
  
34

 

 

 

 
(34
)
 

 

Stock compensation
  

 

 
98

 

 

 

 
98

Balance at June 30, 2010
  
$
15,733

 
$
8,690

 
$
81,192

 
$
(1,082
)
 
$
51,393

 
$
1,461

 
$
157,387

Balance at December 31, 2010
  
$
15,767

  
$
8,690

  
$
81,268

 
$
(1,052
)
 
$
55,619

 
$
(1,826
)
 
$
158,466

Comprehensive income:
  
 
  
 
  
 
 
 
 
 
 
 
 
 
Net income
  

  

  

 

 
6,128

 

 
6,128

Change in net unrealized gains arising during the period on securities available for sale, net of tax
  

  

  

 

 

 
5,155

 
5,155

Total comprehensive income
  
 
 
 
 
 
 
 
 
 
 
 
 
11,283

Dividends paid on common stock ($0.10 per share)
  

  

  

 

 
(863
)
 

 
(863
)
Dividends paid on preferred stock
  

  

  

 

 
(400
)
 

 
(400
)
Stock options exercised (3,488 shares)
  

  

  
(9
)
 
49

 

 

 
40

Release/lapse of restriction on 10,650 RSUs
  

  

  
(135
)
 
138

 

 

 
3

Preferred stock discount accretion
  
35

  

  

 

 
(35
)
 

 

Stock compensation
  

  

  
108

 

 

 

 
108

Balance at June 30, 2011
  
$
15,802

  
$
8,690

  
$
81,232

 
$
(865
)
 
$
60,449

 
$
3,329

 
$
168,637

See accompanying notes to consolidated financial statements.  

3

Table of Contents

MIDWESTONE FINANCIAL GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
 
(unaudited) (dollars in thousands)
Six Months Ended June 30,
 
2011
 
2010
Cash flows from operating activities:
 
 
 
Net income
$
6,128

 
$
4,609

Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
Provision for loan losses
1,800

 
3,000

Depreciation, amortization and accretion
2,588

 
3,003

Loss on sale of premises and equipment
243

 
281

Deferred income taxes
(5
)
 
(553
)
Stock-based compensation
108

 
98

Net gains on sale of available for sale securities
(85
)
 
(470
)
Net gains on sale of other real estate owned
(158
)
 
(53
)
Writedown of other real estate owned

 
112

Other-than-temporary impairment of investment securities

 
189

Decrease (increase) in loans held for sale
390

 
(9
)
Decrease in accrued interest receivable
1,449

 
1,634

Increase in other assets
(1,003
)
 
(541
)
Decrease in deferred compensation liability
(31
)
 
(46
)
Increase in accounts payable, accrued expenses, and other liabilities
1,259

 
2,515

Net cash provided by operating activities
12,683

 
13,769

Cash flows from investing activities:
 
 
 
Sales of available for sale securities

 
14,458

Maturities of available for sale securities
64,238

 
49,369

Purchases of available for sale securities
(96,412
)
 
(116,428
)
Maturities of held to maturity securities
1,540

 
2,647

Loans made to customers, net of collections
(21,716
)
 
8,076

Decrease in loan pool participations, net
9,207

 
6,163

Purchases of premises and equipment
(531
)
 
(2,182
)
Proceeds from sale of other real estate owned
778

 
1,543

Proceeds from sale of premises and equipment
175

 
1,610

Purchases of bank-owned life insurance

 

Increase in cash value of bank-owned life insurance
(454
)
 
(314
)
Net cash used in investing activities
(43,175
)
 
(35,058
)
Cash flows from financing activities:
 
 
 
Net increase in deposits
36,959

 
15,719

Net increase in federal funds purchased

 
7,967

Net decrease in securities sold under agreements to repurchase
(2,005
)
 
(4,545
)
Proceeds from Federal Home Loan Bank borrowings
51,000

 
25,000

Repayment of Federal Home Loan Bank borrowings
(33,000
)
 
(23,000
)
Stock options exercised
43

 
16

Payments on long-term debt

 
(24
)
Dividends paid
(1,263
)
 
(1,261
)
Net cash provided by financing activities
51,734

 
19,872

Net increase (decrease) in cash and cash equivalents
21,242

 
(1,417
)
Cash and cash equivalents at beginning of period
20,523

 
27,588

Cash and cash equivalents at end of period
$
41,765

 
$
26,171

Supplemental disclosures of cash flow information:
 
 
 
Cash paid during the period for interest
$
10,509

 
$
12,428

Cash paid during the period for income taxes
$
857

 
$
1,683

Supplemental schedule of non-cash investing activities:
 
 
 
Transfer of loans to other real estate owned
$
188

 
$
601

See accompanying notes to consolidated financial statements.

4

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. (“MidWestOne” or 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 100% of the outstanding 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 100% 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 three offices located in central and east-central Iowa.
The accompanying unaudited consolidated financial statements have been prepared in accordance with the instructions to Form 10-Q and, therefore, do not include all the information and notes necessary for complete financial statements in conformity with generally accepted accounting principles. 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 MidWestOne, 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, 2010 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 financial position as of June 30, 2011, and the results of operations and cash flows for the three and six months ended June 30, 2011 and 2010. All significant intercompany accounts and transactions have been eliminated in consolidation.
The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities at the date of the financial statements and the reported amount 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. In the opinion of management, the accompanying unaudited consolidated financial statements contain all adjustments, consisting of normal recurring items, considered necessary for fair presentation. The results for the three and six months ended June 30, 2011 may not be indicative of results for the year ending December 31, 2011, or for any other period.
All significant accounting policies followed in the preparation of the quarterly financial statements are disclosed in the December 31, 2010 Annual Report on Form 10-K. 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.

2.Shareholders' Equity
Repurchase of Preferred Stock and Common Stock Warrant: On July 6, 2011, the Company announced that it had repurchased the 16,000 shares of Fixed Rate Cumulative Perpetual Preferred Stock, Series A ("Preferred Stock"), issued to the U.S. Department of the Treasury (the “Treasury”) under the Capital Purchase Program (the “CPP”) for an aggregate repurchase price of $16.0 million. As a result of the repurchase of the Preferred Stock, the Company accelerated the amortization of the issuance discount on the Preferred Stock in the amount of $193,000, which along with accrued dividends paid of $113,000, will reduce net income available to common shareholders in the results of operations of the third quarter of 2011 in the same manner as that for preferred dividends. It is projected that the acceleration of the issuance discount amortization will reduce net earnings available to common shareholders by approximately 2 cents per share.
On July 27, 2011, the Company announced that it had repurchased the common stock warrant issued to the Treasury as part of the CPP for $1.0 million. The warrant had allowed Treasury to purchase 198,675 shares of MidWestOne common stock at $12.08 per share.
Common Stock: The number of authorized shares of common stock for the Company is 15,000,000.

3.Earnings per Common Share
Basic earnings per common share computations are based on the weighted average number of shares of common stock actually outstanding during the period. The weighted average number of shares outstanding for the three months ended

5

Table of Contents

June 30, 2011 and 2010 was 8,627,810 and 8,612,582, respectively. The weighted average number of shares outstanding for the six months ended June 30, 2011 and 2010 was 8,624,782 and 8,610,231, respectively. Diluted earnings per share amounts are computed by dividing net income available to common shareholders by the weighted average number of shares outstanding and all dilutive potential shares outstanding during the period. The computation of diluted earnings per share used a weighted average diluted number of shares outstanding of 8,674,558 and 8,643,233 for the three months ended June 30, 2011 and 2010, respectively, and 8,678,787 and 8,628,756 for the six months ended June 30, 2011 and 2010, respectively.
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)
  
2011
 
2010
 
2011
 
2010
 
Weighted average number of shares outstanding during the period
  
8,627,810

 
8,612,582

 
8,624,782

 
8,610,231

 
Weighted average number of shares outstanding during the period including all dilutive potential shares
  
8,674,558

 
8,643,233

 
8,678,787

 
8,628,756

 
Net income
  
$
3,223

 
$
2,605

 
$
6,128

 
$
4,609

 
Preferred stock dividend accrued and discount accretion
  
(218
)
 
(217
)
 
(435
)
 
(434
)
 
Net income available to common stockholders
  
$
3,005

 
$
2,388

 
$
5,693

 
$
4,175

 
Earnings per share - basic
  
$
0.35

 
$
0.27

 
$
0.66

 
$
0.48

 
Earnings per share - diluted
  
$
0.35

 
$
0.27

 
$
0.66

 
$
0.48


4.Investment Securities
A summary of investment securities available for sale is as follows:
 
 
As of June 30, 2011
 
 
Amortized
Cost
  
Gross
Unrealized
Gains
  
Gross
Unrealized
Losses
 
Estimated
Fair Value
 
(in thousands)
 
  
 
  
 
 
 
 
U.S. Government agencies and corporations
$
67,051

  
$
1,586

  
$
(22
)
 
$
68,615

 
State and political subdivisions
194,286

  
6,609

  
(247
)
 
200,648

 
Mortgage-backed securities and collateralized mortgage obligations
218,667

  
5,934

  
(39
)
 
224,562

 
Corporate debt securities
6,405

  
257

  
(801
)
 
5,861

 
 
486,409

  
14,386

  
(1,109
)
 
499,686

 
Other equity securities
1,188

  
337

  

 
1,525

 
Total
$
487,597

  
$
14,723

  
$
(1,109
)
 
$
501,211

 
 
 
As of December 31, 2010
 
 
Amortized
Cost
  
Gross
Unrealized
Gains
  
Gross
Unrealized
Losses
 
Estimated
Fair Value
 
(in thousands)
 
  
 
  
 
 
 
 
U.S. Government agencies and corporations
$
79,181

  
$
1,492

  
$
(339
)
 
$
80,334

 
State and political subdivisions
187,847

  
3,994

  
(1,753
)
 
190,088

 
Mortgage-backed securities and collateralized mortgage obligations
177,453

  
2,743

  
(412
)
 
179,784

 
Corporate debt securities
10,896

  
349

  
(973
)
 
10,272

 
 
455,377

  
8,578

  
(3,477
)
 
460,478

 
Other equity securities
1,183

  
296

  
(3
)
 
1,476

 
Total
$
456,560

  
$
8,874

  
$
(3,480
)
 
$
461,954


 

6

Table of Contents

A summary of investment securities held to maturity is as follows:
 
 
As of June 30, 2011
 
 
Amortized
Cost
  
Gross
Unrealized
Gains
  
Gross
Unrealized
Losses
  
Estimated
Fair Value
 
(in thousands)
 
  
 
  
 
  
 
 
State and political subdivisions
$
1,577

  
$
4

  
$

  
$
1,581

 
Mortgage-backed securities
47

  
5

  

  
52

 
Corporate debt securities
869

  

  

  
869

 
Total
$
2,493

  
$
9

  
$

  
$
2,502

 
 
 
As of December 31, 2010
 
 
Amortized
Cost
  
Gross
Unrealized
Gains
  
Gross
Unrealized
Losses
  
Estimated
Fair Value
 
(in thousands)
 
  
 
  
 
  
 
 
State and political subdivisions
$
3,115

  
$
49

  
$

  
$
3,164

 
Mortgage-backed securities
50

  
5

  

  
55

 
Corporate debt securities
867

  

  

  
867

 
Total
$
4,032

  
$
54

  
$

  
$
4,086

The summary of available for sale investment securities shows that some of the securities in the available for sale investment portfolio had unrealized losses, or were temporarily impaired, as of June 30, 2011 and December 31, 2010. This temporary impairment represents the estimated amount of loss that would be realized if the securities were sold on the valuation date. Securities which were temporarily impaired are shown below, along with the length of the impairment period.
The following presents information pertaining to securities with gross unrealized losses as of June 30, 2011 and December 31, 2010, aggregated by investment category and length of time that individual securities have been in a continuous loss position:  
 
 
 
  
As of June 30, 2011
 
Number
of
Securities
  
Less than 12 Months
  
12 Months or More
  
Total
 
 
  
Fair
Value
  
Unrealized
Losses 
  
Fair
Value
  
Unrealized
Losses 
  
Fair
Value
  
Unrealized
Losses 
 
(in thousands, except number of securities)
 
  
 
  
 
  
 
  
 
  
 
  
 
 
U.S. Government agencies and corporations
1

  
$
7,420

  
$
(22
)
  
$

  
$

  
$
7,420

  
$
(22
)
 
State and political subdivisions
38

  
15,489

  
(247
)
  

  

  
15,489

  
(247
)
 
Mortgage-backed securities and collateralized mortgage obligations
1

  
8,548

  
(39
)
  

  

  
8,548

  
(39
)
 
Corporate debt securities
4

  

  

  
971

  
(801
)
  
971

  
(801
)
 
Common stocks

  

  

  

  

  

  

 
Total
44

  
$
31,457

  
$
(308
)
  
$
971

  
$
(801
)
  
$
32,428

  
$
(1,109
)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
  
As of December 31, 2010
 
 
Number
of
Securities
  
Less than 12 Months
  
12 Months or More
  
Total
 
 
  
Fair
Value
  
Unrealized
Losses 
  
Fair
Value
  
Unrealized
Losses 
  
Fair
Value
  
Unrealized
Losses 
 
(in thousands, except number of securities)
 
  
 
  
 
  
 
  
 
  
 
  
 
 
U.S. Government agencies and corporations
2

  
$
12,828

  
$
(339
)
  
$

  
$

  
$
12,828

  
$
(339
)
 
State and political subdivisions
93

  
53,326

  
(1,750
)
  
112

  
(3
)
  
53,438

  
(1,753
)
 
Mortgage-backed securities and collateralized mortgage obligations
9

  
77,115

  
(412
)
  

  

  
77,115

  
(412
)
 
Corporate debt securities
4

  
799

  
(973
)
  

  

  
799

  
(973
)
 
Common stocks
1

  
71

  
(3
)
  

  

  
71

  
(3
)
 
Total
109

  
$
144,139

  
$
(3,477
)
  
$
112

  
$
(3
)
  
$
144,251

  
$
(3,480
)


7

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 credit quality of the underlying assets and the current and anticipated market conditions.
All of the Company's mortgage-backed securities are issued by government-sponsored agencies. The receipt of principal, at par, and interest on mortgage-backed securities is guaranteed by the respective government-sponsored agency guarantor, such that the Company believes that its mortgage-backed securities do not expose the Company to credit-related losses. The Company's mortgage-backed securities portfolio consisted of securities underwritten to the standards of, and guaranteed by, the government-sponsored agencies of FHLMC, FNMA and GNMA.
The Company believes that the decline in the value of certain obligations of state and political subdivisions was primarily related to an overall widening of market spreads for many types of fixed income products since 2008, reflecting, among other things, reduced liquidity and the downgrades on the underlying credit default insurance providers. At June 30, 2011, approximately 60% of the municipal bonds held by the Company were Iowa 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 its cost at maturity. 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 condition and other objective evidence, the Company believes that the municipal obligations identified in the tables above were temporarily depressed as of June 30, 2011 and December 31, 2010.
At June 30, 2011, the Company owned six collateralized debt obligations backed by pools of trust preferred securities with an original cost basis of $9.75 million. They are secured by trust preferred securities of banks and insurance companies throughout the United States, and were rated as investment grade securities when purchased between March 2006 and December 2007. However, due to several impairment charges recognized since 2008, the book value of these securities at June 30, 2011 had been reduced to $1.8 million. Two of the securities have been written down to a value of zero, with the remaining four having an average cost basis of 29.5% of their original face value. All of the Company's trust preferred collateralized debt obligations are in mezzanine tranches and are currently rated less than investment grade by Moody's Investor Services. The market for these securities is considered to be inactive according to the guidance issued in FASB ASC Topic 820, “Fair Value Measurements and Disclosures.” The Company used a discounted cash flow model to determine the estimated fair value of its pooled trust preferred collateralized debt obligations and to assess OTTI. The discounted cash flow analysis was performed in accordance with FASB ASC Topic 325. The assumptions used in preparing the discounted cash flow model include the following: estimated discount rates (using yields of comparable traded instruments adjusted for illiquidity and other risk factors), estimated deferral and default rates on collateral, and estimated cash flows. As part of its analysis of the collateralized debt obligations, the Company subjects the securities to a stress scenario which involves a level of deferrals or defaults in the collateral pool in excess of what the Company believes is likely.
At June 30, 2011, the analysis of the Company's six investments in pooled trust preferred securities indicated that the unrealized loss was temporary and that it is more likely than not that the Company would be able to recover the cost basis of these securities.  The pace of new deferrals and/or defaults by the financial institutions underlying these pooled trust preferred securities has slowed in recent quarters, although they remain at high levels. The Company follows the provisions of FASB ASC Topic 320 in determining the amount of the OTTI recorded to earnings. The Company performed a discounted cash flow analysis, using the factors noted above, and determined that no additional OTTI existed for the three and six months ended June 30, 2011, thus no impairment loss was charged to earnings.
 
It is reasonably possible that the fair values of the Company's investment securities could decline in the future if the overall economy and the financial condition of some of the issuers deteriorate further and the liquidity of these securities remains low. As a result, there is a risk that additional OTTI may occur in the future and any such amounts could be material to the Company's consolidated statements of operations.

8

Table of Contents

A summary of the contractual maturity distribution of debt investment securities at June 30, 2011 is as follows:
 
 
Available For Sale
  
Held to Maturity
 
 
Amortized
Cost
  
Fair Value
  
Amortized
Cost
  
Fair Value
 
(in thousands)
 
  
 
  
 
  
 
 
Due in one year or less
$
22,046

  
$
22,386

  
$
455

  
$
455

 
Due after one year through five years
112,905

  
116,758

  
1,122

  
1,126

 
Due after five years through ten years
81,538

  
84,158

  

  

 
Due after ten years
51,253

  
51,822

  
869

  
869

 
Mortgage-backed securities and collateralized mortgage obligations
218,667

  
224,562

  
47

  
52

 
Total
$
486,409

  
$
499,686

  
$
2,493

  
$
2,502


For mortgage-backed securities, actual maturities will differ from contractual maturities because borrowers have the right to prepay obligations with or without prepayment penalties.
Other investment securities include investments in Federal Home Loan Bank (“FHLB”) stock. The carrying value of the FHLB stock at June 30, 2011 and December 31, 2010 was $12.1 million and $10.6 million, respectively, which is included in the Other Assets line of the consolidated balance sheets. This security is not readily marketable and ownership of FHLB stock is a requirement for membership in the FHLB Des Moines. The amount of FHLB stock the Bank is required to hold is directly related to the amount of FHLB advances borrowed. Because there are no available market values, this security is carried at cost and evaluated for potential impairment each quarter. Redemption of this investment is at the option of the FHLB.
Realized gains and losses on sales are determined on the basis of specific identification of investments based on the trade date. Realized gains (losses) on investments, including impairment losses for the three and six months ended June 30, 2011 and 2010, are as follows:  
 
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
 
2011
 
2010
 
2011
 
2010
 
(in thousands)
 
 
 
 
 
 
 
 
Available for sale fixed maturity securities:
 
 
 
 
 
 
 
 
Gross realized gains
$
85

 
$
233

 
$
85

 
$
430

 
Gross realized losses

 

 

 

 
Other-than temporary impairment

 

 

 
(189
)
 
 
85

 
233

 
85

 
241

 
Equity securities:
 
 
 
 
 
 
 
 
Gross realized gains

 

 

 
49

 
Gross realized losses

 

 

 
(9
)
 
Other-than temporary impairment

 

 

 

 
 

 

 

 
40

 
 
$
85

 
$
233

 
$
85

 
$
281




9

Table of Contents

5.Loans Receivable and the Allowance for Loan Losses
The composition of loans and loan pools, and changes in the allowance for loan losses by portfolio segment are as follows:
 
 
Allowance for Loan Losses and Recorded Investment in Loan Receivables
 
 
As of June 30, 2011 and December 31, 2010
 
(in thousands)
Agricultural
 
Commercial and Financial
 
Commercial Real Estate
 
Residential Real Estate
 
Consumer
 
Unallocated
 
Total
 
June 30, 2011
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Allowance for loan losses:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Ending balance
$
1,328

 
$
5,001

 
$
5,715

 
$
2,675

 
$
360

 
$
524

 
$
15,603

 
Ending balance: Individually evaluated for impairment
267

 
530

 
342

 
192

 
8

 

 
$
1,339

 
Ending balance: Collectively evaluated for impairment
1,061

 
4,471

 
5,373

 
2,483

 
352

 
524

 
$
14,264

 
Ending balance: Loans acquired with deteriorated credit quality (loan pools)
9

 
262

 
569

 
372

 
114

 
808

 
$
2,134

 
Loans receivable
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Ending balance
$
81,277

 
$
230,066

 
$
398,757

 
$
226,928

 
$
21,171

 
$

 
$
958,199

 
Ending balance: Individually evaluated for impairment
$
1,723

 
$
1,214

 
$
3,184

 
$
1,221

 
$
26

 
$

 
$
7,368

 
Ending balance: Collectively evaluated for impairment
$
79,554

 
$
228,852

 
$
395,573

 
$
225,707

 
$
21,145

 
$

 
$
950,831

 
Ending balance: Loans acquired with deteriorated credit quality (loan pools)
$
121

 
$
4,805

 
$
34,979

 
$
6,585

 
$
210

 
$
12,098

 
$
58,798


 
(in thousands)
Agricultural
 
Commercial and Financial
 
Commercial Real Estate
 
Residential Real Estate
 
Consumer
 
Unallocated
 
Total
 
December 31, 2010
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Allowance for loan losses:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Ending balance
$
827

 
$
4,540

 
$
5,255

 
$
2,776

 
$
323

 
$
1,446

 
$
15,167

 
Ending balance: Individually evaluated for impairment
$

 
$

 
$
100

 
$
10

 
$

 
$

 
$
110

 
Ending balance: Collectively evaluated for impairment
$
827

 
$
4,540

 
$
5,155

 
$
2,766

 
$
323

 
$
1,446

 
$
15,057

 
Ending balance: Loans acquired with deteriorated credit quality (loan pools)
$
27

 
$
368

 
$
658

 
$
259

 
$
164

 
$
658

 
$
2,134

 
Loans receivable
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Ending balance
$
84,590

 
$
212,230

 
$
393,242

 
$
225,994

 
$
21,979

 
$

 
$
938,035

 
Ending balance: Individually evaluated for impairment
$

 
$

 
$
447

 
$
16

 
$

 
$

 
$
463

 
Ending balance: Collectively evaluated for impairment
$
84,590

 
$
212,230

 
$
392,795

 
$
225,978

 
$
21,979

 
$

 
$
937,572

 
Ending balance: Loans acquired with deteriorated credit quality (loan pools)
$
409

 
$
6,611

 
$
40,549

 
$
7,376

 
$
312

 
$
12,748

 
$
68,005

 
 
Allowance for Loan Loss Activity
 
 
For the Three Months Ended June 30, 2011 and 2010
 
(in thousands)
Agricultural
 
Commercial and Financial
 
Commercial Real Estate
 
Residential Real Estate
 
Consumer
 
Unallocated
 
Total
 
2011
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Beginning balance
$
1,448

 
$
5,069

 
$
5,450

 
$
2,299

 
$
250

 
$
882

 
$
15,398

 
Charge-offs
(318
)
 
(375
)
 
(551
)
 
(36
)
 
(33
)
 

 
(1,313
)
 
Recoveries
62

 
326

 
115

 
1

 
114

 

 
618

 
Provision
136

 
(19
)
 
701

 
411

 
29

 
(358
)
 
900

 
Ending balance
$
1,328

 
$
5,001

 
$
5,715

 
$
2,675

 
$
360

 
$
524

 
$
15,603

 
2010
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Beginning balance
$
1,256

 
$
3,699

 
$
6,217

 
$
2,401

 
$
465

 
$
515

 
$
14,553

 
Charge-offs
(500
)
 
(492
)
 
(108
)
 
(140
)
 
(25
)
 

 
(1,265
)
 
Recoveries

 
11

 
15

 
1

 
8

 

 
35

 
Provision
269

 
842

 
(295
)
 
618

 
(119
)
 
185

 
1,500

 
Ending balance
$
1,025

 
$
4,060

 
$
5,829

 
$
2,880

 
$
329

 
$
700

 
$
14,823






10

Table of Contents

 
 
Allowance for Loan Loss Activity