XNAS:MOFG MidWestOne Financial Group Inc Quarterly Report 10-Q Filing - 3/31/2012

Effective Date 3/31/2012

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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 March 31, 2012
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 May 1, 2012, there were 8,468,384 shares of common stock, $1.00 par value per share, outstanding.
 
 
 
 
 



MIDWESTONE FINANCIAL GROUP, INC.
Form 10-Q Quarterly Report
Table of Contents
 
 
 
 
Page No.
PART I
 
 
 
 
 
 
 
 
 
Item 1.
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Item 2.
 
 
 
 
 
 
 
Item 3.
 
 
 
 
 
 
 
Item 4.
 
 
 
 
 
 
 
Part II
 
 
 
 
 
 
 
 
 
Item 1.
 
 
 
 
 
 
 
Item 1A.
 
 
 
 
 
 
 
Item 2.
 
 
 
 
 
 
 
Item 3.
 
 
 
 
 
 
 
Item 4.
 
 
 
 
 
 
 
Item 5.
 
 
 
 
 
 
 
Item 6.
 
 
 
 
 
 
 
 
 
 




PART I – FINANCIAL INFORMATION
Item 1.   Financial Statements.

MIDWESTONE FINANCIAL GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
 
 
March 31, 2012
 
December 31, 2011
(dollars in thousands)
(unaudited)
 
 
ASSETS
 
 
 
Cash and due from banks
$
27,329

  
$
28,155

Interest-bearing deposits in banks
21,631

  
4,468

Federal funds sold
3,073

  

Cash and cash equivalents
52,033

  
32,623

Investment securities:
  
 
 
Available for sale
551,823

  
534,080

Held to maturity (fair value of $7,053 as of March 31, 2012 and $2,042 as of December 31, 2011)
7,017

  
2,036

Loans held for sale
943

  
1,955

Loans
981,146

  
986,173

Allowance for loan losses
(15,679
)
 
(15,676
)
Net loans
965,467

  
970,497

Loan pool participations, net
45,908

  
50,052

Premises and equipment, net
25,595

  
26,260

Accrued interest receivable
9,639

  
10,422

Intangible assets, net
10,053

  
10,247

Bank-owned life insurance
27,953

  
27,723

Other real estate owned
3,773

  
4,033

Assets held for sale
764

 

Deferred income taxes
3,430

  
3,654

Other assets
21,446

  
21,662

Total assets
$
1,725,844

  
$
1,695,244

LIABILITIES AND SHAREHOLDERS' EQUITY
 
 
 
Deposits:
  
 
 
Non-interest-bearing demand
$
164,936

  
$
161,287

Interest-bearing checking
536,495

  
499,905

Savings
79,412

  
71,823

Certificates of deposit under $100,000
337,589

  
346,858

Certificates of deposit $100,000 and over
226,221

  
226,769

Total deposits
1,344,653

  
1,306,642

Federal funds purchased

 
8,920

Securities sold under agreements to repurchase
50,314

  
48,287

Federal Home Loan Bank borrowings
136,041

  
140,014

Deferred compensation liability
3,613

  
3,643

Long-term debt
15,464

  
15,464

Accrued interest payable
1,641

  
1,530

Other liabilities
14,848

  
14,250

Total liabilities
1,566,574

  
1,538,750

Shareholders' equity:
  
 
 
Preferred stock, no par value, with a liquidation preference of $1,000.00 per share; authorized 500,000 shares; no shares issued and outstanding at March 31, 2012 and December 31, 2011
$

 
$

Common stock, $1.00 par value; authorized 15,000,000 shares at March 31, 2012 and December 31, 2011; issued 8,690,398 shares at March 31, 2012 and December 31, 2011; outstanding 8,464,820 shares at March 31, 2012 and 8,529,530 shares at December 31, 2011
8,690

  
8,690

Additional paid-in capital
80,187

  
80,333

Treasury stock at cost, 225,578 shares as of March 31, 2012 and 160,868 shares at December 31, 2011
(3,446
)
 
(2,312
)
Retained earnings
70,008

  
66,299

Accumulated other comprehensive income
3,831

  
3,484

Total shareholders' equity
159,270

  
156,494

Total liabilities and shareholders' equity
$
1,725,844

  
$
1,695,244


See accompanying notes to consolidated financial statements.  

1


MIDWESTONE FINANCIAL GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
 
(unaudited)
(dollars in thousands, except per share amounts)
  
Three Months Ended March 31,
 
  
2012
 
2011
Interest income:
  
 
 
 
Interest and fees on loans
  
$
13,080

 
$
12,800

Interest and discount on loan pool participations
  
454

 
354

Interest on bank deposits
  
10

 
8

Interest on investment securities:
  
  
 
 
Taxable securities
  
2,752

 
2,688

Tax-exempt securities
  
1,219

 
1,035

Total interest income
  
17,515

 
16,885

Interest expense:
  
 
 
 
Interest on deposits:
  
 
 
 
Interest-bearing checking
  
829

 
1,008

Savings
  
37

 
59

Certificates of deposit under $100,000
  
1,590

 
2,187

Certificates of deposit $100,000 and over
  
773

 
848

Total interest expense on deposits
  
3,229

 
4,102

Interest on federal funds purchased
  
3

 

Interest on securities sold under agreements to repurchase
  
55

 
74

Interest on Federal Home Loan Bank borrowings
  
803

 
945

Interest on notes payable
  
9

 
10

Interest on long-term debt
  
168

 
162

Total interest expense
  
4,267

 
5,293

Net interest income
  
13,248

 
11,592

Provision for loan losses
  
579

 
900

Net interest income after provision for loan losses
  
12,669

 
10,692

Noninterest income:
  
 
 
 
Trust, investment, and insurance fees
  
1,253

 
1,273

Service charges and fees on deposit accounts
  
767

 
851

Mortgage origination and loan servicing fees
  
767

 
877

Other service charges, commissions and fees
  
710

 
679

Bank-owned life insurance income
  
230

 
229

Gain on sale and call of available for sale securities
  
316

 

Gain (loss) on sale of premises and equipment
  
158

 
(48
)
Total noninterest income
  
4,201

 
3,861

Noninterest expense:
  
 
 
 
Salaries and employee benefits
  
5,972

 
5,870

Net occupancy and equipment expense
  
1,644

 
1,617

Professional fees
  
732

 
677

Data processing expense
  
446

 
450

FDIC insurance expense
  
310

 
597

Amortization of intangible assets
 
194

 
224

Other operating expense
  
1,505

 
1,199

Total noninterest expense
  
10,803

 
10,634

Income before income tax expense
  
6,067

 
3,919

Income tax expense
  
1,635

 
1,014

Net income
  
$
4,432

 
$
2,905

Less: Preferred stock dividends and discount accretion
  
$

 
$
217

Net income available to common shareholders
  
$
4,432

 
$
2,688

Share and Per share information:
  
 
 
 
Ending number of shares outstanding
  
8,464,820

 
8,624,392

Average number of shares outstanding
  
8,497,919

 
8,621,720

Diluted average number of shares
  
8,528,828

 
8,682,381

Earnings per common share - basic
  
$
0.52

 
$
0.31

Earnings per common share - diluted
  
0.52

 
0.31

Dividends paid per common share
  
0.09

 
0.05

See accompanying notes to consolidated financial statements.

2



MIDWESTONE FINANCIAL GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
 
(unaudited)
(dollars in thousands)
  
Three Months Ended March 31,
 
  
2012
 
2011
Net income
 
$
4,432

 
$
2,905

 
 
 
 
 
Other comprehensive income, before tax:
 
 
 
 
Unrealized holding gains arising during period
 
859

 
793

Less: Reclassification adjustment for gains included in net income
 
(316
)
 

Unrealized gains on available for sale securities
 
543

 
793

Other comprehensive income, before tax
 
543

 
793

Income tax expense related to items of other comprehensive income
 
196

 
297

Other comprehensive income, net of tax
 
347

 
496

Comprehensive income
 
$
4,779

 
$
3,401

See accompanying notes to consolidated financial statements.


3


MIDWESTONE FINANCIAL GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY

(unaudited)
(dollars in thousands, except per share amounts)
  
Preferred
Stock
  
Common
Stock
  
Additional
Paid-in
Capital
 
Treasury
Stock
 
Retained
Earnings
 
Accumulated
Other
Comprehensive
Income (loss)
 
Total
Balance at December 31, 2010
  
$
15,767

  
$
8,690

  
$
81,268

 
$
(1,052
)
 
$
55,619

 
$
(1,826
)
 
$
158,466

Net income
  

  

  

 

 
2,905

 

 
2,905

Dividends paid on common stock ($0.05 per share)
  

 

 

 

 
(431
)
 

 
(431
)
Dividends paid on preferred stock
 

 

 

 

 
(200
)
 

 
(200
)
Stock options exercised (1,682 shares)
 

 

 
(6
)
 
14

 

 

 
8

Release/lapse of restriction on RSUs (8,600 shares)
  

 

 
(120
)
 
120

 

 

 

Preferred stock discount accretion
  
17

 

 

 

 
(17
)
 

 

Stock compensation
  

 

 
71

 

 

 

 
71

Other comprehensive income
 

 

 

 

 

 
496

 
496

Balance at March 31, 2011
  
$
15,784

 
$
8,690

 
$
81,213

 
$
(918
)
 
$
57,876

 
$
(1,330
)
 
$
161,315

Balance at December 31, 2011
  
$

  
$
8,690

  
$
80,333

 
$
(2,312
)
 
$
66,299

 
$
3,484

 
$
156,494

Net income
  

  

  

 

 
4,432

 

 
4,432

Dividends paid on common stock ($0.085 per share)
  

  

  

 

 
(723
)
 

 
(723
)
Stock options exercised (11,553 shares)
  

  

  
(47
)
 
134

 

 

 
87

Release/lapse of restriction on RSUs (13,170 shares)
  

  

  
(164
)
 
173

 

 

 
9

Repurchase of common stock (86,083 shares)
 

 

 

 
(1,441
)
 

 

 
(1,441
)
Stock compensation
  

  

  
65

 

 

 

 
65

Other comprehensive income
 

 

 

 

 

 
347

 
347

Balance at March 31, 2012
  
$

  
$
8,690

  
$
80,187

 
$
(3,446
)
 
$
70,008

 
$
3,831

 
$
159,270

See accompanying notes to consolidated financial statements.  

4


MIDWESTONE FINANCIAL GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
 
(unaudited) (dollars in thousands)
Three Months Ended March 31,
 
2012
 
2011
Cash flows from operating activities:
 
 
 
Net income
$
4,432

 
$
2,905

Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
Provision for loan losses
579

 
900

Depreciation, amortization and accretion
1,377

 
1,447

(Gain) loss on sale of premises and equipment
(158
)
 
48

Deferred income taxes
28

 
36

Stock-based compensation
74

 
71

Net gain on sale or call of available for sale securities
(316
)
 

Net gain on sale of other real estate owned
(67
)
 
(90
)
Net gain on sale of loans held for sale
(503
)
 
(288
)
Origination of loans held for sale
(32,308
)
 
(22,625
)
Proceeds from sales of loans held for sale
33,823

 
23,336

Decrease in accrued interest receivable
783

 
1,068

Increase in cash value of bank-owned life insurance
(230
)
 
(229
)
Decrease in other assets
216

 

Decrease in deferred compensation liability
(30
)
 
(14
)
Increase in accrued interest payable, accounts payable, accrued expenses, and other liabilities
709

 
4,176

Net cash provided by operating activities
8,409

 
10,741

Cash flows from investing activities:
 
 
 
Proceeds from sales of available for sale securities
14,558

 

Proceeds from maturities and calls of available for sale securities
19,134

 
34,396

Purchases of available for sale securities
(51,162
)
 
(74,236
)
Proceeds from maturities and calls of held to maturity securities
20

 
361

Purchase of held to maturity securities
(5,000
)
 

Decrease (increase) in loans
3,795

 
(1,291
)
Decrease in loan pool participations, net
4,144

 
3,664

Purchases of premises and equipment
(1,157
)
 
(183
)
Proceeds from sale of other real estate owned
983

 
200

Proceeds from sale of premises and equipment
645

 
154

Net cash used in investing activities
(14,040
)
 
(36,935
)
Cash flows from financing activities:
 
 
 
Net increase in deposits
38,011

 
43,830

Decrease in federal funds purchased
(8,920
)
 

Increase (decrease) in securities sold under agreements to repurchase
2,027

 
(3,869
)
Proceeds from Federal Home Loan Bank borrowings

 
10,000

Repayment of Federal Home Loan Bank borrowings
(4,000
)
 
(20,000
)
Stock options exercised
87

 
8

Dividends paid
(723
)
 
(631
)
Repurchase of common stock
(1,441
)
 

Net cash provided by financing activities
25,041

 
29,338

Net increase in cash and cash equivalents
19,410

 
3,144

Cash and cash equivalents at beginning of period
32,623

 
20,523

Cash and cash equivalents at end of period
$
52,033

 
$
23,667

Supplemental disclosures of cash flow information:
 
 
 
Cash paid during the period for interest
$
1,095

 
$
5,200

Cash paid during the period for income taxes
$
815

 
$
143

Supplemental schedule of non-cash investing activities:
 
 
 
Transfer of loans to other real estate owned
$
656

 
$
134

Transfer of property to assets held for sale
$
764

 
$

See accompanying notes to consolidated financial statements.

5


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 U.S. 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, 2011 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 March 31, 2012, and the results of operations and cash flows for the three months ended March 31, 2012 and 2011. All significant intercompany accounts and transactions have been eliminated in consolidation.
The preparation of financial statements in conformity with U.S. 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 months ended March 31, 2012 may not be indicative of results for the year ending December 31, 2012, or for any other period.
All significant accounting policies followed in the preparation of the quarterly financial statements are disclosed in the December 31, 2011 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
Preferred Stock: The number of authorized shares of preferred stock for the Company is 500,000. None are currently issued or outstanding.
Common Stock: The number of authorized shares of common stock for the Company is 15,000,000.
On October 18, 2011, our Board of Directors amended the Company's existing $1.0 million share repurchase program, originally authorized on July 26, 2011, by increasing the remaining amount of authorized repurchases to $5.0 million, and extending the expiration of the program to December 31, 2012. Pursuant to the program, we may repurchase shares from time to time in the open market, and the method, timing and amounts of repurchase will be solely in the discretion of the Company's management. The repurchase program does not require us to acquire a specific number of shares. Therefore, the amount of shares repurchased pursuant to the program will depend on several factors, including market conditions, capital and liquidity requirements, and alternative uses for cash available.

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 March 31, 2012 and 2011 was 8,497,919 and 8,621,720, 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

6


dilutive potential shares outstanding during the period. The computation of diluted earnings per share used a weighted average diluted number of shares outstanding of 8,528,828 and 8,682,381 for the three months ended March 31, 2012 and 2011, respectively.
The following table presents the computation of earnings per common share for the respective periods:
 
 
  
Three Months Ended March 31,
 
(dollars in thousands, except per share amounts)
  
2012
 
2011
 
Weighted average number of shares outstanding during the period
  
8,497,919

 
8,621,720

 
Weighted average number of shares outstanding during the period including all dilutive potential shares
  
8,528,828

 
8,682,381

 
Net income
  
$
4,432

 
$
2,905

 
Preferred stock dividend accrued and discount accretion
  

 
(217
)
 
Net income available to common stockholders
  
$
4,432

 
$
2,688

 
Earnings per share - basic
  
$
0.52

 
$
0.31

 
Earnings per share - diluted
  
$
0.52

 
$
0.31


4.Investment Securities
A summary of investment securities available for sale is as follows:
 
 
As of March 31, 2012
 
 
Amortized
Cost
  
Gross
Unrealized
Gains
  
Gross
Unrealized
Losses
 
Estimated
Fair Value
 
(in thousands)
 
  
 
  
 
 
 
 
U.S. Government agencies and corporations
$
68,943

  
$
1,045

  
$
73

 
$
69,915

 
State and political subdivisions
214,524

  
10,390

  
249

 
224,665

 
Mortgage-backed securities and collateralized mortgage obligations
237,913

  
6,495

  
7

 
244,401

 
Corporate debt securities
11,978

  
227

  
989

 
11,216

 
Total debt securities
533,358

  
18,157

  
1,318

 
550,197

 
Other equity securities
1,200

  
426

  

 
1,626

 
Total
$
534,558

  
$
18,583

  
$
1,318

 
$
551,823

 
 
 
As of December 31, 2011
 
 
Amortized
Cost
  
Gross
Unrealized
Gains
  
Gross
Unrealized
Losses
 
Estimated
Fair Value
 
(in thousands)
 
  
 
  
 
 
 
 
U.S. Government agencies and corporations
$
55,851

  
$
1,142

  
$
12

 
$
56,981

 
State and political subdivisions
209,094

  
10,222

  
55

 
219,261

 
Mortgage-backed securities and collateralized mortgage obligations
238,641

  
6,161

  

 
244,802

 
Corporate debt securities
12,578

  
203

  
1,176

 
11,605

 
Total debt securities
516,164

  
17,728

  
1,243

 
532,649

 
Other equity securities
1,194

  
237

  

 
1,431

 
Total
$
517,358

  
$
17,965

  
$
1,243

 
$
534,080


 

7


A summary of investment securities held to maturity is as follows:
 
 
As of March 31, 2012
 
 
Amortized
Cost
  
Gross
Unrealized
Gains
  
Gross
Unrealized
Losses
  
Estimated
Fair Value
 
(in thousands)
 
  
 
  
 
  
 
 
State and political subdivisions
$
6,100

  
$
31

  
$

  
$
6,131

 
Mortgage-backed securities
45

  
5

  

  
50

 
Corporate debt securities
872

  

  

  
872

 
Total
$
7,017

  
$
36

  
$

  
$
7,053

 
 
 
As of December 31, 2011
 
 
Amortized
Cost
  
Gross
Unrealized
Gains
  
Gross
Unrealized
Losses
  
Estimated
Fair Value
 
(in thousands)
 
  
 
  
 
  
 
 
State and political subdivisions
$
1,119

  
$
2

  
$

  
$
1,121

 
Mortgage-backed securities
46

  
4

  

  
50

 
Corporate debt securities
871

  

  

  
871

 
Total
$
2,036

  
$
6

  
$

  
$
2,042

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 March 31, 2012 and December 31, 2011. This temporary impairment represents the estimated amount of loss that would be realized if the securities were sold on the valuation date. 
The following presents information pertaining to securities with gross unrealized losses as of March 31, 2012 and December 31, 2011, aggregated by investment category and length of time that individual securities have been in a continuous loss position:  
 
 
 
  
As of March 31, 2012
 
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

  
$
11,415

  
$
73

  
$

  
$

  
$
11,415

  
$
73

 
State and political subdivisions
29

  
9,943

  
247

  
172

  
2

  
10,115

  
249

 
Mortgage-backed securities and collateralized mortgage obligations
1

  
3,375

  
7

  

  

  
3,375

  
7

 
Corporate debt securities
6

  
2,089

  
23

  
805

  
966

  
2,894

  
989

 
Total
38

  
$
26,822

  
$
350

  
$
977

  
$
968

  
$
27,799

  
$
1,318

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
  
As of December 31, 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

  
$
5,412

  
$
12

  
$

  
$

  
$
5,412

  
$
12

 
State and political subdivisions
14

  
3,449

  
46

  
866

  
9

  
4,315

  
55

 
Corporate debt securities
6

  
4,975

  
210

  
806

  
966

  
5,781

  
1,176

 
Total
21

  
$
13,836

  
$
268

  
$
1,672

  
$
975

  
$
15,508

  
$
1,243

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. 


8


At March 31, 2012, approximately 61% of the municipal bonds held by the Company were Iowa based. The Company does not intend to sell these municipal obligations, and it is not more likely than not that the Company will be required to sell them before the recovery of its 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 condition and other objective evidence, the Company believes that the municipal obligations identified in the tables above were temporarily depressed as of March 31, 2012 and December 31, 2011.
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 predominantly underwritten to the standards of and guaranteed by the government-sponsored agencies of FHLMC, FNMA and GNMA.
At March 31, 2012, the Company owned six collateralized debt obligations backed by pools of trust preferred securities with an original cost basis of $9.75 million. The book value of these securities as of March 31, 2012 totaled $1.8 million, after other-than-temporary impairment charges of $6.2 million during 2008, $1.6 million during 2009, and $0.2 million in 2010. 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. 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, as the banking climate eroded during 2008, the securities experienced cash flow problems and a pre-tax charge to earnings of $6.2 million was recorded in the fourth quarter of 2008. Due to continued market deterioration in these securities during 2009 and 2010, additional pre-tax charges to earnings of $1.6 million was recorded during 2009 and $0.2 million in 2010. No additional charges have been recognized during 2011 or 2012.The market for these securities is considered to be inactive according to the guidance issued in ASC Topic 820, “Fair Value Measurements and Disclosures.” The Company uses a discounted cash flow model to determine the estimated fair value of its pooled trust preferred collateralized debt obligations and to assess other-than-temporary impairment. The discounted cash flow analysis was performed in accordance with 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. The Company also reviewed a stress test of these securities to determine the additional deferrals or defaults in the collateral pool in excess of what the Company believes is probable, before the payments on the individual securities are negatively impacted.
As of March 31, 2012, the Company also owned $1.6 million of equity securities in banks and financial service-related companies. Equity securities are considered to have other-than-temporary impairment 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 first quarter of 2012 and 2011, 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 the overall economy and the financial condition of some of the issuers deteriorate and the liquidity of these securities remains depressed. As a result, there is a risk that other-than-temporary impairments may occur in the future and any such amounts could be material to the Company's consolidated statements of operations.
 
A summary of the contractual maturity distribution of debt investment securities at March 31, 2012 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
$
26,288

  
$
26,437

  
$
235

  
$
235

 
Due after one year through five years
102,267

  
105,648

  
865

  
867

 
Due after five years through ten years
103,567

  
108,808

  

  

 
Due after ten years
63,323

  
64,903

  
5,872

  
5,901

 
Mortgage-backed securities and collateralized mortgage obligations
237,913

  
244,401

  
45

  
50

 
Total
$
533,358

  
$
550,197

  
$
7,017

  
$
7,053



9


Mortgage-backed and collateralized mortgage obligations are collateralized by mortgage loans guaranteed by U.S. government agencies. 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 $1.2 million and a fair value of $1.6 million are excluded from this table.
Other investment securities include investments in Federal Home Loan Bank (“FHLB”) stock. The carrying value of the FHLB stock at March 31, 2012 and December 31, 2011 was $12.1 million and $12.2 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 on investments, including impairment losses for the three months ended March 31, 2012 and 2011, are as follows:  
 
 
Three Months Ended March 31,
 
 
2012
 
2011
 
(in thousands)
 
 
 
 
Available for sale fixed maturity securities:
 
 
 
 
Gross realized gains
$
314

 
$

 
Gross realized losses

 

 
Other-than-temporary impairment

 

 
 
314

 

 
Equity securities:
 
 
 
 
Gross realized gains
2

 

 
Gross realized losses

 

 
Other-than-temporary impairment

 

 
 
2

 

 
 
$
316

 
$


5.Loans Receivable and the Allowance for Loan Losses
The composition of loans and loan pool participations, 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 March 31, 2012 and December 31, 2011
 
(in thousands)
Agricultural
 
Commercial and Industrial
 
Commercial Real Estate
 
Residential Real Estate
 
Consumer
 
Unallocated
 
Total
 
March 31, 2012
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Allowance for loan losses:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Individually evaluated for impairment
$
196

 
$
497

 
$
241

 
$
73

 
$
7

 
$

 
$
1,014

 
Collectively evaluated for impairment
927

 
4,190

 
4,610

 
2,661

 
371

 
1,906

 
14,665

 
Total
$
1,123

 
$
4,687

 
$
4,851

 
$
2,734

 
$
378

 
$
1,906

 
$
15,679

 
Loans acquired with deteriorated credit quality (loan pool participations)
$
7

 
$
152

 
$
633

 
$
312

 
$
39

 
$
991

 
$
2,134

 
Loans receivable
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Individually evaluated for impairment
$
3,453

 
$
2,998

 
$
6,020

 
$
1,116

 
$
25

 
$

 
$
13,612

 
Collectively evaluated for impairment
81,653

 
240,707

 
388,773

 
237,261

 
19,140

 

 
967,534

 
Total
$
85,106

 
$
243,705

 
$
394,793

 
$
238,377

 
$
19,165

 
$

 
$
981,146

 
Loans acquired with deteriorated credit quality (loan pool participations)
$
87

 
$
3,175

 
$
29,469

 
$
4,988

 
$
113

 
$
10,210

 
$
48,042


10


 
(in thousands)
Agricultural
 
Commercial and Industrial
 
Commercial Real Estate
 
Residential Real Estate
 
Consumer
 
Unallocated
 
Total
 
December 31, 2011
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Allowance for loan losses:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Individually evaluated for impairment
$
247

 
$
793

 
$
272

 
$
252

 
$
8

 
$

 
$
1,572

 
Collectively evaluated for impairment
962

 
4,587

 
4,899

 
3,249

 
159

 
248

 
14,104

 
Total
$
1,209

 
$
5,380

 
$
5,171

 
$
3,501

 
$
167

 
$
248

 
$
15,676

 
Loans acquired with deteriorated credit quality (loan pool participations)
$
7

 
$
219

 
$
666

 
$
346

 
$
56

 
$
840

 
$
2,134

 
Loans receivable
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Individually evaluated for impairment
$
4,776

 
$
2,550

 
$
9,619

 
$
2,736

 
$
58

 
$

 
$
19,739

 
Collectively evaluated for impairment
84,522

 
238,636

 
386,420

 
236,112

 
20,744

 

 
966,434

 
Total
$
89,298

 
$
241,186

 
$
396,039

 
$
238,848

 
$
20,802

 
$

 
$
986,173

 
Loans acquired with deteriorated credit quality (loan pool participations)
$
90

 
$
3,793

 
$
30,523

 
$
5,694

 
$
124

 
$
11,962

 
$
52,186


 
 
Allowance for Loan Loss Activity
 
 
For the Three Months Ended March 31, 2012 and 2011
 
(in thousands)
Agricultural
 
Commercial and Industrial
 
Commercial Real Estate
 
Residential Real Estate
 
Consumer
 
Unallocated
 
Total
 
2012
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Beginning balance
$
1,209

 
$
5,380

 
$
5,171

 
$
3,501

 
$
167

 
$
248

 
$
15,676

 
Charge-offs

 
(912
)
 
(26
)
 
(175
)
 
(11
)
 

 
(1,124
)
 
Recoveries
507

 
15

 
3

 
12

 
11

 

 
548

 
Provision
(593
)
 
204

 
(297
)
 
(604
)
 
211

 
1,658

 
579

 
Ending balance
$
1,123

 
$
4,687

 
$
4,851

 
$
2,734

 
$
378

 
$
1,906

 
$
15,679

 
2011
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Beginning balance
$
827

 
$
4,540

 
$
5,255

 
$
2,776

 
$
323

 
$
1,446

 
$
15,167

 
Charge-offs
(75
)
 
(219
)
 
(447
)
 
(70
)
 
(21
)
 

 
(832
)
 
Recoveries

 
143

 
1

 
15

 
4

 

 
163

 
Provision
696

 
605

 
641

 
(422
)
 
(56
)
 
(564
)
 
900

 
Ending balance
$
1,448

 
$
5,069

 
$
5,450

 
$
2,299

 
$
250

 
$
882

 
$
15,398

Loan Portfolio Segment Risk Characteristics
Agricultural - Agricultural loans, most of which are secured by crops and machinery, are provided to finance capital improvements and farm operations as well as acquisitions of livestock and machinery. The ability of the borrower to repay may be affected by many factors outside of the borrower's control including adverse weather conditions, loss of livestock due to disease or other factors, declines in market prices for agricultural products and the impact of government regulations. The ultimate repayment of agricultural loans is dependent upon the profitable operation or management of the agricultural entity. Collateral for these loans generally includes accounts receivable, inventory, equipment and real estate. However, depending on the overall financial condition of the borrower, some loans are made on an unsecured basis. The collateral securing these loans may depreciate over time, may be difficult to appraise and may fluctuate in value based on the success of the business.

Commercial and Industrial - Commercial and industrial loans are primarily made based on the reported cash flow of the borrower and secondarily on the underlying collateral provided by the borrower. The collateral support provided by the borrower for most of these loans and the probability of repayment is based on the liquidation of the pledged collateral and enforcement of a personal guarantee, if any exists. The primary repayment risks of commercial and industrial loans are that the cash flows of the borrower may be unpredictable, and the collateral securing these loans may fluctuate in value. The size of the loans the Company can offer to commercial customers is less than the size of the loans that competitors with larger lending limits can offer. This may limit the Company's ability to establish relationships with the area's largest businesses. As a result, the Company may assume greater lending risks than financial institutions that have a lesser concentration of such loans and tend to make loans to larger businesses. Collateral for these loans generally includes accounts receivable, inventory, equipment and real estate. However, depending on the overall financial condition of the borrower, some loans are made on an unsecured basis. The collateral securing these loans may depreciate over time, may be difficult to appraise and may fluctuate in value based on the success of the business. In addition, if the United States economy does not meaningfully improve, this could harm or continue to harm the businesses of our commercial and industrial customers and reduce the value of the collateral securing these loans.


11


Commercial Real Estate - The Company offers mortgage loans to commercial and agricultural customers for the acquisition of real estate used in their business, such as offices, warehouses and production facilities, and to real estate investors for the acquisition of apartment buildings, retail centers, office buildings and other commercial buildings. The market value of real estate securing commercial real estate loans can fluctuate significantly in a short period of time as a result of market conditions in the geographic area in which the real estate is located. Adverse developments affecting real estate values in one or more of the Company's markets could increase the credit risk associated with its loan portfolio. Additionally, real estate lending typically involves higher loan principal amounts and the repayment of the loans generally is dependent, in large part, on sufficient income from the properties securing the loans to cover operating expenses and debt service. Economic events or governmental regulations outside of the control of the borrower or lender could negatively impact the future cash flow and market values of the affected properties.

Residential Real Estate - The Company generally retains short-term residential mortgage loans that are originated for its own portfolio but sells most long-term loans to other parties while retaining servicing rights on the majority of those. The market value of real estate securing residential real estate loans can fluctuate as a result of market conditions in the geographic area in which the real estate is located. Adverse developments affecting real estate values in one or more of the Company's markets could increase the credit risk associated with its loan portfolio. Additionally, real estate lending typically involves higher loan principal amounts and the repayment of the loans generally is dependent, in large part, on the borrower's continuing financial stability, and is therefore more likely to be affected by adverse personal circumstances.

Consumer - Consumer loans typically have shorter terms, lower balances, higher yields and higher risks of default. Consumer loan collections are dependent on the borrower's continuing financial stability, and are therefore more likely to be affected by adverse personal circumstances. Collateral for these loans generally includes automobiles, boats, recreational vehicles, mobile homes, and real estate. However, depending on the overall financial condition of the borrower, some loans are made on an unsecured basis. The collateral securing these loans may depreciate over time, may be difficult to recover and may fluctuate in value based on condition. In addition, a decline in the United States economy could result in reduced employment, impacting the ability of customers to repay their obligations.

Loans acquired with deteriorated credit quality (loan pool participations) - The underlying loans in the loan pool participations include both fixed-rate and variable-rate instruments. No amounts for interest due are reflected in the carrying value of the loan pool participations. Based on historical experience, the average period of collectibility for loans underlying loan pool participations, many of which have exceeded contractual maturity dates, is approximately three to five years. Loan pool balances are affected by the payment and refinancing activities of the borrowers resulting in pay-offs of the underlying loans and reduction in the balances. Collections from the individual borrowers are managed by the loan pool servicer and are affected by the borrower's financial ability and willingness to pay, foreclosure and legal action, collateral value, and the economy in general.
Charge-off Policy
The Company requires a loan to be charged-off as soon as it becomes apparent that some loss will be incurred, or when its collectability is sufficiently questionable that it no longer is considered a bankable asset. The primary considerations when determining if and how much of a loan should be charged-off are as follows: (1) the potential for future cash flows; (2) the value of any collateral; and (3) the strength of any co-makers or guarantors.

When it is determined that a loan requires partial or full charge-off, a request for approval of a charge-off is submitted to the Bank's President, Executive Vice President and Chief Credit Officer, and the Senior Regional Loan officer. The Bank's Board of Directors formally approves all loan charge-offs retroactively at the next regularly scheduled meeting. Once a loan is charged-off, it cannot be restructured and returned to the Bank's books.
The Allowance for Loan and Lease Losses - Bank Loans
The Company requires the maintenance of an adequate allowance for loan and lease losses (“ALLL”) in order to cover estimated losses without eroding the Company's capital base. Calculations are done at each quarter end, or more frequently if warranted, to analyze the collectability of loans and to ensure the adequacy of the allowance. In line with FDIC directives, the ALLL calculation does not include consideration of loans held for sale or off-balance-sheet credit exposures (such as unfunded letters of credit). Determining the appropriate level for the ALLL relies on the informed judgment of management, and as such, is subject to inaccuracy. Given the inherently imprecise nature of calculating the necessary ALLL, the Company's policy permits an "unallocated" allowance between 15% above and 5% below the “indicated reserve.” These unallocated amounts are present due to the inherent imprecision in the ALLL calculation.

Loans Reviewed Individually for Impairment
The Company identifies loans to be reviewed and evaluated individually for impairment, based on current information

12


and events, and the probability that the borrower will be unable to repay all amounts due according to the contractual terms of the loan agreement. Specific areas of consideration include: size of credit exposure, risk rating, delinquency, nonaccrual status, and loan classification.

The level of individual impairment is measured using one of the following methods: (1) the fair value of the collateral less costs to sell; (2) the present value of expected future cash flows, discounted at the loan's effective interest rate; or (3) the loan's observable market price. Loans that are deemed fully collateralized or have been charged down to a level corresponding with any three of the measurements require no assignment of reserves from the ALLL.

All loans deemed troubled debt restructure or “TDR” are considered impaired. A loan is considered a TDR when the Bank, for economic or legal reasons related to a borrower's financial difficulties, grants a concession to the borrower that the Bank would not otherwise consider. All of the following factors are indicators that the Bank has granted a concession (one or multiple items may be present):

The borrower receives a reduction of the stated interest rate for the remaining original life of the debt.
The borrower receives an extension of the maturity date or dates at a stated interest rate lower than the current market interest rate for new debt with similar risk characteristics.
The borrower receives a reduction of the face amount or maturity amount of the debt as stated in the instrument or other agreement.
The borrower receives a deferral of required payments (principal and/or interest).
The borrower receives a reduction of the accrued interest.

The following table sets forth information on the Company's troubled debt restructurings by class of financing receivable occurring during the stated periods:
 
 
Three Months Ended March 31,
 
 
2012
 
2011
 
 
Number of Contracts
 
Pre-Modification Outstanding Recorded Investment*
 
Post-Modification Outstanding Recorded Investment
 
Number of Contracts
 
Pre-Modification Outstanding Recorded Investment*
 
Post-Modification Outstanding Recorded Investment
 
(dollars in thousands)
 
 
 
 
 
 
 
 
 
 
 
 
Troubled Debt Restructurings:
 
 
 
 
 
 
 
 
 
 
 
 
Agricultural

 
$

 
$

 

 
$

 
$

 
Commercial and industrial

 

 

 

 

 

 
Credit cards

 

 

 

 

 

 
Overdrafts

 

 

 

 

 

 
Commercial real estate:
 
 
 
 
 
 
 
 
 
 
 
 
Construction and development

 

 

 

 

 

 
Farmland
2

 
2,475

 
2,475

 

 

 

 
Multifamily

 

 

 

 

 

 
Commercial real estate-other

 

 

 
4

 
803

 
803

 
Total commercial real estate
2

 
2,475

 
2,475

 
4

 
803

 
803

 
Residential real estate:
 
 
 
 
 
 
 
 
 
 
 
 
One- to four- family first liens

 

 

 

 

 

 
One- to four- family junior liens

 

 

 

 

 

 
Total residential real estate

 

 

 

 

 

 
Consumer

 

 

 

 

 

 
Total
2

 
$
2,475

 
$
2,475