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EX-32.2 - SECTION 906 CFO CERTIFICATION - MidWestOne Financial Group, Inc.exhibit322.htm
EX-31.2 - SECTION 302 CFO CERTIFICATION - MidWestOne Financial Group, Inc.exhibit312.htm
EX-31.1 - SECTION 302 CEO CERTIFICATION - MidWestOne Financial Group, Inc.exhibit311.htm
EX-32.1 - SECTION 906 CEO CERTIFICATION - MidWestOne Financial Group, Inc.exhibit321.htm
 
 
 
 
 
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, 2010
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).    o  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, 2010, there were 8,613,982 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
 
 
June 30,
2010
 
December 31, 2009
(dollars in thousands)
(unaudited)
 
 
ASSETS
 
 
 
Cash and due from banks
$
19,984
 
  
$
25,452
 
Interest-bearing deposits in banks
6,187
 
  
2,136
 
Federal funds sold
 
  
 
Cash and cash equivalents
26,171
 
  
27,588
 
Investment securities:
  
 
 
Available for sale
417,468
 
  
362,903
 
Held to maturity (fair value of $5,434 as of June 30, 2010 and $8,118 as of December 31, 2009)
5,350
 
  
8,009
 
Loans held for sale
1,217
 
  
1,208
 
Loans
956,187
 
  
966,998
 
Allowance for loan losses
(14,823
)
 
(13,957
)
Net loans
941,364
 
  
953,041
 
Loan pool participations, net
76,889
 
  
83,052
 
Premises and equipment, net
27,849
 
  
28,969
 
Accrued interest receivable
9,900
 
  
11,534
 
Other intangible assets, net
11,661
 
  
12,172
 
Bank-owned life insurance
18,402
 
  
18,118
 
Other real estate owned
2,634
 
  
3,635
 
Deferred income taxes
4,681
 
  
5,163
 
Other assets
19,962
 
  
19,391
 
Total assets
$
1,563,548
 
  
$
1,534,783
 
LIABILITIES AND SHAREHOLDERS' EQUITY
  
 
 
Deposits:
  
 
 
Non-interest bearing demand
$
139,667
 
  
$
133,990
 
Interest-bearing checking
422,480
 
  
401,264
 
Savings
67,258
 
  
62,989
 
Certificates of deposit under $100,000
391,567
 
  
394,369
 
Certificates of deposit $100,000 and over
174,615
 
  
187,256
 
Total deposits
1,195,587
 
  
1,179,868
 
Federal funds purchased
9,842
 
  
1,875
 
Securities sold under agreements to repurchase
38,553
 
  
43,098
 
Federal Home Loan Bank borrowings
132,200
 
  
130,200
 
Deferred compensation liability
3,786
 
  
3,832
 
Long-term debt
15,564
 
  
15,588
 
Accrued interest payable
1,847
 
  
2,248
 
Other liabilities
8,782
 
  
5,866
 
Total liabilities
1,406,161
 
  
1,382,575
 
 
 
 
 
Shareholders' equity:
  
 
 
Preferred stock, no par value, with a liquidation preference of $1,000 per share; authorized 500,000
 
  
 
 shares; issued 16,000 shares as of June 30, 2010 and December 31, 2009
$
15,733
 
 
$
15,699
 
Common stock, $1 par value; authorized 15,000,000 shares at June 30, 2010 and December 31, 2009;
 
 
 
issued 8,690,398 shares at June 30, 2010 and December 31, 2009; outstanding 8,612,582 shares
 
 
 
at June 30, 2010 and 8,605,333 shares at December 31, 2009
8,690
 
  
8,690
 
Additional paid-in capital
81,192
 
  
81,179
 
Treasury stock at cost, 77,816 shares as of June 30, 2010 and 85,065 shares at December 31, 2009
(1,082
)
 
(1,183
)
Retained earnings
51,393
 
  
48,079
 
Accumulated other comprehensive income (loss)
1,461
 
  
(256
)
Total shareholders' equity
157,387
 
  
152,208
 
Total liabilities and shareholders' equity
$
1,563,548
 
  
$
1,534,783
 
 
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
June 30,
 
Six Months Ended
June 30,
 
  
2010
 
2009
 
2010
 
2009
Interest income:
  
 
 
 
 
 
 
 
Interest and fees on loans
  
$
13,761
 
 
$
14,785
 
 
$
27,465
 
 
$
29,696
 
Interest and discount on loan pool participations
  
909
 
 
664
 
 
1,808
 
 
1,679
 
Interest on bank deposits
  
17
 
 
1
 
 
27
 
 
1
 
Interest on federal funds sold
  
4
 
 
29
 
 
4
 
 
38
 
Interest on investment securities:
  
  
 
 
 
 
 
 
Taxable securities
  
2,445
 
 
2,147
 
 
4,670
 
 
4,122
 
Tax-exempt securities
  
986
 
 
1,000
 
 
1,976
 
 
1,970
 
Total interest income
  
18,122
 
 
18,626
 
 
35,950
 
 
37,506
 
 
 
 
 
 
 
 
 
 
Interest expense:
  
 
 
 
 
 
 
 
Interest on deposits:
  
 
 
 
 
 
 
 
Interest-bearing checking
  
1,133
 
 
1,235
 
 
2,203
 
 
2,372
 
Savings
  
43
 
 
63
 
 
79
 
 
125
 
Certificates of deposit under $100,000
  
2,455
 
 
3,167
 
 
4,998
 
 
6,346
 
Certificates of deposit $100,000 and over
  
918
 
 
1,330
 
 
1,885
 
 
2,639
 
Total interest expense on deposits
  
4,549
 
 
5,795
 
 
9,165
 
 
11,482
 
Interest on federal funds purchased
  
1
 
 
 
 
2
 
 
10
 
Interest on securities sold under agreements to repurchase
  
70
 
 
127
 
 
146
 
 
251
 
Interest on Federal Home Loan Bank borrowings
  
1,183
 
 
1,666
 
 
2,390
 
 
2,582
 
Interest on notes payable
  
11
 
 
33
 
 
24
 
 
36
 
Interest on long-term debt
  
152
 
 
161
 
 
300
 
 
347
 
Total interest expense
  
5,966
 
 
7,782
 
 
12,027
 
 
14,708
 
Net interest income
  
12,156
 
 
10,844
 
 
23,923
 
 
22,798
 
Provision for loan losses
  
1,500
 
 
1,500
 
 
3,000
 
 
3,850
 
Net interest income after provision for loan losses
  
10,656
 
 
9,344
 
 
20,923
 
 
18,948
 
 
 
 
 
 
 
 
 
 
Noninterest income:
  
 
 
 
 
 
 
 
Trust and investment fees
  
1,214
 
 
964
 
 
2,448
 
 
2,071
 
Service charges and fees on deposit accounts
  
1,034
 
 
990
 
 
1,898
 
 
1,901
 
Mortgage origination and loan servicing fees
  
525
 
 
860
 
 
1,025
 
 
1,631
 
Other service charges, commissions and fees
  
576
 
 
510
 
 
1,160
 
 
1,035
 
Bank-owned life insurance income
  
147
 
 
198
 
 
314
 
 
422
 
Investment securities losses, net:
  
  
 
 
 
  
 
 
Impairment losses on investment securities
  
 
 
(614
)
 
(189
)
 
(614
)
Less noncredit-related losses
  
 
 
 
 
 
 
 
Net impairment losses
  
 
 
(614
)
 
(189
)
 
(614
)
Gain on sale of available for sale securities
  
233
 
 
1
 
 
470
 
 
1
 
Gain (loss) on sale of premises and equipment
  
(204
)
 
5
 
 
(281
)
 
5
 
Total noninterest income
  
3,525
 
 
2,914
 
 
6,845
 
 
6,452
 
 
 
 
 
 
 
 
 
 
Noninterest expense:
  
 
 
 
 
 
 
 
Salaries and employee benefits
  
5,691
 
 
5,847
 
 
11,481
 
 
11,600
 
Net occupancy and equipment expense
  
1,630
 
 
1,647
 
 
3,406
 
 
3,354
 
Professional fees
  
659
 
 
842
 
 
1,408
 
 
1,924
 
Data processing expense
  
414
 
 
491
 
 
871
 
 
1,007
 
FDIC Insurance expense
  
705
 
 
1,055
 
 
1,397
 
 
1,953
 
Other operating expense
  
1,563
 
 
1,443
 
 
3,147
 
 
3,410
 
Total noninterest expense
  
10,662
 
 
11,325
 
 
21,710
 
 
23,248
 
Income before income tax expense
  
3,519
 
 
933
 
 
6,058
 
 
2,152
 
Income tax expense
  
914
 
 
150
 
 
1,449
 
 
193
 
Net income
  
$
2,605
 
 
$
783
 
 
$
4,609
 
 
$
1,959
 
Less: Preferred stock dividends and discount accretion
  
$
217
 
 
$
216
 
 
$
434
 
 
$
347
 
Net income available to common shareholders
  
$
2,388
 
 
$
567
 
 
$
4,175
 
 
$
1,612
 
Share and Per share information:
  
 
 
 
 
 
 
 
Ending number of shares outstanding
  
8,612,582
 
 
8,605,202
 
 
8,612,582
 
 
8,605,202
 
Average number of shares outstanding
  
8,612,582
 
 
8,605,202
 
 
8,610,231
 
 
8,604,134
 
Diluted average number of shares
  
8,643,233
 
 
8,621,752
 
 
8,628,756
 
 
8,620,684
 
Earnings per common share - basic
  
$
0.27
 
 
$
0.07
 
 
$
0.48
 
 
$
0.19
 
Earnings per common share - diluted
  
0.27
 
 
0.07
 
 
0.48
 
 
0.19
 
Dividends paid per common share
  
0.05
 
 
0.05
 
 
0.10
 
 
0.20
 
See accompanying notes to consolidated financial statements.

2


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, 2008
  
$
 
  
$
8,690
 
  
$
80,757
 
 
$
(1,215
)
 
$
43,683
 
 
$
(1,573
)
 
$
130,342
 
Cumulative effect of FAS ASC 320, net of tax
 
 
 
 
 
 
 
 
 
3,266
 
 
(3,266
)
 
 
Comprehensive income:
  
 
  
 
  
 
 
 
 
 
 
 
 
 
Net income
  
 
  
 
  
 
 
 
 
1,959
 
 
 
 
1,959
 
Change in net unrealized gains arising during the period on securities available for sale, net of tax
  
 
  
 
  
 
 
 
 
 
 
1,170
 
 
1,170
 
Total comprehensive income
  
 
 
 
 
 
 
 
 
5,225
 
 
(2,096
)
 
3,129
 
Dividends paid on common stock ($0.20 per share)
  
 
 
 
 
 
 
 
 
(1,742
)
 
 
 
(1,742
)
Dividends paid on preferred stock
 
 
 
 
 
 
 
 
 
(220
)
 
 
 
(220
)
Release/lapse of restriction of 2,147 RSUs
 
 
 
 
 
(30
)
 
30
 
 
 
 
 
 
 
Issuance of preferred shares (16,000 shares)
  
15,642
 
 
 
 
 
 
 
 
 
 
 
 
15,642
 
Common warrants issued
  
 
 
 
 
358
 
 
 
 
 
 
 
 
358
 
Preferred stock discount accretion
  
25
 
 
 
 
 
 
 
 
(25
)
 
 
 
 
Stock compensation
  
 
 
 
 
39
 
 
 
 
 
 
 
 
39
 
Balance at June 30, 2009
  
$
15,667
 
 
$
8,690
 
 
$
81,124
 
 
$
(1,185
)
 
$
46,921
 
 
$
(3,669
)
 
$
147,548
 
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
  
 
  
 
  
 
 
 
 
4,609
 
 
1,717
 
 
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
 
See accompanying notes to consolidated financial statements.  

3


MIDWESTONE FINANCIAL GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
 
(unaudited)
(dollars in thousands)
Six Months Ended
June 30,
 
2010
 
2009
Cash flows from operating activities:
 
 
 
Net income
$
4,609
 
 
$
1,959
 
Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
Provision for loan losses
3,000
 
 
3,850
 
Depreciation, amortization and accretion
3,003
 
 
1,263
 
Loss on sale of premises and equipment
281
 
 
1
 
Deferred income taxes
(553
)
 
722
 
Stock-based compensation
98
 
 
39
 
Net gains on sale of available for sale securities
(470
)
 
 
Net gains on sale of other real estate owned
(53
)
 
(10
)
Writedown of other real estate owned
112
 
 
 
Other-than-temporary impairment of investment securities
189
 
 
614
 
(Increase) decrease in loans held for sale
(9
)
 
1,546
 
Net change in:
 
 
 
Decrease in accrued interest receivable
1,634
 
 
1,493
 
Decrease (increase) in other assets
(571
)
 
3,173
 
(Decrease) increase in deferred compensation liability
(46
)
 
2,265
 
(Decrease) increase in accounts payable, accrued expenses, and other liabilities
2,515
 
 
(6,166
)
Net cash provided by operating activities
13,739
 
 
10,749
 
 
 
 
 
Cash flows from investing activities:
 
 
 
Available for sale securities:
 
 
 
Sales
14,458
 
 
 
Maturities
49,369
 
 
44,800
 
Purchases
(116,428
)
 
(122,154
)
Held to maturity securities:
 
 
 
Maturities
2,647
 
 
700
 
Purchases
 
 
(950
)
Loans made to customers, net of collections
8,076
 
 
22,440
 
Loan pool participations, net
6,163
 
 
4,143
 
Purchases of premises and equipment
(2,182
)
 
(2,461
)
Proceeds from sale of other real estate owned
1,543
 
 
320
 
Proceeds from sale of premises and equipment
1,610
 
 
15
 
Activity in bank-owned life insurance:
 
 
 
Purchases
 
 
 
Increase in cash value
(284
)
 
(422
)
Net cash used in investing activities
(35,028
)
 
(53,569
)
See accompanying notes to consolidated financial statements.

4


 
MIDWESTONE FINANCIAL GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
 
(unaudited)
(dollars in thousands)
Six Months Ended
June 30,
 
2010
 
2009
Cash flows from financing activities:
 
 
 
Net increase in deposits
15,719
 
 
68,343
 
Net increase (decrease) in federal funds purchased
7,967
 
 
(13,050
)
Net decrease in securities sold under agreements to repurchase
(4,545
)
 
(7,748
)
Proceeds from Federal Home Loan Bank advances
25,000
 
 
10,000
 
Repayment of Federal Home Loan Bank advances
(23,000
)
 
(17,500
)
Stock options exercised
16
 
 
 
Payments on long-term debt
(24
)
 
(26
)
Dividends paid
(1,261
)
 
(1,962
)
Issuance of preferred stock and warrants
 
 
16,000
 
Net cash provided by financing activities
19,872
 
 
54,057
 
 
 
 
 
Net increase (decrease) in cash and cash equivalents
(1,417
)
 
11,237
 
Cash and cash equivalents at beginning of period
27,588
 
 
32,926
 
Cash and cash equivalents at end of period
$
26,171
 
 
$
44,163
 
 
 
 
 
Supplemental disclosures of cash flow information:
 
 
 
Cash paid during the period for:
 
 
 
Interest
$
12,428
 
 
$
17,502
 
Income taxes
$
1,683
 
 
$
(46
)
 
 
 
 
Supplemental schedule of non-cash investing activities:
 
 
 
Transfer of loans to other real estate owned
$
601
 
 
$
367
 
 
See accompanying notes to consolidated financial statements.

5


MidWestOne Financial Group, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(Unaudited)
 
1.    
Introductory Note
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., Pella, 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.
 
On March 14, 2008, we consummated a merger-of-equals transaction with the former MidWestOne Financial Group, Inc., Oskaloosa, Iowa (“Former MidWestOne”), pursuant to and in accordance with the Agreement and Plan of Merger dated as of September 11, 2007 (the “Merger”). Prior to the Merger, we operated under the name “ISB Financial Corp.” As a result of the Merger, Former MidWestOne merged with and into the Company and ceased to exist as a legal entity, and we changed our name from ISB Financial Corp. to MidWestOne Financial Group, Inc. All references in this document to the “Company” and “MidWestOne” refer to the surviving organization in the Merger.
 
2.    
Basis of Presentation
The accompanying consolidated statements of operations for the three months and six months ended June 30, 2010 and 2009 include the accounts and transactions of the Company and its wholly-owned subsidiaries MidWestOne Bank and MidWestOne Insurance Services, Inc. All material intercompany balances and transactions have been eliminated in consolidation.
 
The accompanying consolidated financial statements have been prepared by the Company pursuant to the rules and regulations of the Securities and Exchange Commission. Certain information and footnote disclosures normally included in financial statements prepared in accordance with U. S. generally accepted accounting principles have been condensed or omitted pursuant to such rules and regulations. 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, 2010, and the results of operations and cash flows for the three months and six months ended June 30, 2010 and 2009.
 
The results for the three months and six months ended June 30, 2010 may not be indicative of results for the year ending December 31, 2010, or for any other period.
 
Certain amounts in the consolidated financial statements have been reclassified to conform to current year presentations.
 
3.    
Consolidated Statements of Cash Flows
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.
 
4.    
Income Taxes
Federal income tax expense for the three months and six months ended June 30, 2010 and 2009 was computed using the consolidated effective federal tax rate. The Company also recognized income tax expense pertaining to state franchise taxes payable by the subsidiary bank.
 
5.    
Shareholders' Equity and Earnings per Common Share
Preferred Stock: On January 23, 2009, the shareholders of the Company approved a proposal to amend the Company's articles of incorporation to authorize the issuance of up to 500,000 shares of preferred stock. On February 6, 2009, the Company issued 16,000 shares of Fixed Rate Cumulative Perpetual Preferred Stock, Series A, together with a ten-year warrant to acquire 198,675 shares of common stock, to the U.S. Department of the Treasury (the “Treasury”) under the Capital Purchase Program (the “CPP”) for an aggregate purchase price of $16.0 million. Upon issuance, the fair values

6


of the senior preferred stock and the common stock warrants were computed as if the securities were issued on a stand-alone basis. The value of the senior preferred stock was estimated based on the net present value of the future senior preferred stock cash flows using a discount rate of 12%. The allocated carrying value of the senior preferred stock and common stock warrants on the date of issuance (based on their relative fair values) were $15.6 million and $0.4 million, respectively. The preferred stock discount, $358,000, is being accreted on a 5% level yield basis over 60 months. The senior preferred stock has no par value per share and a liquidation preference of $1,000 per share, or $16.0 million in the aggregate. Dividends are payable quarterly at the rate of 5% per annum until the fifth anniversary date of the issuance and at a rate of 9% per annum thereafter. The dividends are computed on the basis of a 360-day year consisting of twelve 30-day months. The dividends are payable quarterly in arrears on February 15, May 15, August 15, and November 15 of each year.
 
The senior preferred stock is non-voting, other than class voting rights on any authorization or issuance of shares ranking senior to the senior preferred stock, any amendment to the rights of senior preferred stock, or any merger, exchange, or similar transaction that would adversely affect the rights of the senior preferred stock. If dividends are not paid in full for six dividend periods, whether or not consecutive, the Treasury will have the right to elect two directors to the Company's Board. The right to elect directors would end when full dividends have been paid for four consecutive dividend periods. Effective February 17, 2009, the American Recovery and Reinvestment Act of 2009 (“ARRA”) eliminated the restrictions on a CPP participant's ability to repay the Treasury's investment until the third anniversary of the date of the Treasury's investment. Prior to ARRA, CPP participants were prohibited from redeeming the Treasury's senior preferred stock except with the proceeds of an offering of qualifying Tier 1 capital. ARRA now allows CPP participants, such as the Company, the option to repay the Treasury's investment under the CPP at any time without regard to whether the Company has raised new capital, subject to consultation with the Federal Reserve and the Federal Deposit Insurance Corporation (the “FDIC”). If the Company were to repay the Treasury's investment, it would be permitted to redeem the warrant issued to Treasury for fair market value.
 
The CPP requires that the Company be subject to specified standards for executive compensation and corporate governance as long as any obligation arising from financial assistance provided under the statute remains outstanding. The U.S. Congress and the Treasury may create additional provisions that could become retroactively applicable to the senior preferred stock.
 
Common Stock: On January 23, 2009, the shareholders of the Company approved a proposal to amend the Company's articles of incorporation to increase the number of authorized shares of common stock from 10,000,000 to 15,000,000.
 
Common Stock Warrant: In connection with the CPP described above, a warrant exercisable for 198,675 shares of Company common stock was issued to the Treasury. The warrant entitles the Treasury to purchase 198,675 shares of common stock at $12.08 per share at any time on or before February 6, 2019. As noted above, under ARRA, if the Company repays the Treasury's investment in full, the Company would be permitted to redeem the warrant issued to Treasury at its then current fair market value. If the warrant is not redeemed at such time, however, it will remain outstanding and transferable by the Treasury.
 
As holder of the common stock warrant, the Treasury is not entitled to vote, to receive dividends, or to exercise any other rights of common shareholders for any purpose until such warrants have been duly exercised. The Treasury has agreed not to exercise voting power with respect to any shares of common stock issued upon exercise. The Company has filed and will maintain at all times during the period the senior preferred stock is outstanding and during the period the warrant is exercisable, a “shelf” registration statement relating to the issuance of common shares underlying the warrant for the benefit of the warrant holder.
 
The fair value of the warrants was calculated using the Binomial Option Pricing Model. The inputs to the model are consistent with those utilized by the Company for a 10-year employee stock option.
 

7


 
Number of warrants granted
 
198,675
 
 
 
Exercise price
 
$
12.08
 
 
 
Grant date fair market value
 
$
7.32
 
 
 
Estimated forfeiture rate
 
0%
 
 
Risk-free interest rate
 
2.93
%
 
 
Expected life, in years
 
10
 
 
 
Expected volatility
 
40.7
%
 
 
Expected dividend yield
 
3.86
%
 
 
Estimated fair value per warrant
 
$
1.39
 
 
 
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 June 30, 2010 and 2009 was 8,612,582 and 8,605,202, respectively. The weighted average number of shares outstanding for the six months ended June 30, 2010 and 2009 was 8,610,231 and 8,604,134, 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 8,643,233 and 8,621,752 for the three months ended June 30, 2010 and 2009, respectively, and 8,628,756 and 8,620,684 for the six months ended June 30, 2010 and 2009, respectively. The following table presents the computation of earnings per common share for the respective periods:
 
 
Earnings per Share Information
  
Three Months Ended
June 30,
 
Six Months Ended
June 30,
 
 
(dollars in thousands, except per share amounts)
  
2010
 
2009
 
2010
 
2009
 
 
Weighted average number of shares outstanding during the period
  
8,612,582
 
 
8,605,202
 
 
8,610,231
 
  
8,604,134
 
 
 
Weighted average number of shares outstanding during the period including all dilutive potential shares
  
8,643,233
 
 
8,621,752
 
 
8,628,756
 
  
8,620,684
 
 
 
Net income
  
$
2,605
 
 
$
783
 
 
4,609
 
  
$
1,959
 
 
 
Preferred stock dividend accrued and discount accretion
  
(217
)
 
(216
)
 
(434
)
  
(347
)
 
 
Net income available to common stockholders
  
$
2,388
 
 
$
567
 
 
$
4,175
 
  
$
1,612
 
 
 
Earnings per share - basic
  
$
0.27
 
 
$
0.07
 
 
0.48
 
  
0.19
 
 
 
Earnings per share - diluted
  
$
0.27
 
 
$
0.07
 
 
0.48
 
  
0.19
 
 
 
6.    
Investments
A summary of investment securities available for sale is as follows:
 
 
As of June 30, 2010
 
 
 
Amortized
Cost
  
Gross
Unrealized
Gains
  
Gross
Unrealized
Losses
 
Estimated
Fair Value
 
 
(in thousands)
 
  
 
  
 
 
 
 
 
U.S. Government agencies and corporations
$
99,358
 
  
$
2,143
 
  
$
 
 
$
101,501
 
 
 
State and political subdivisions
160,829
 
  
5,864
 
  
(79
)
 
166,614
 
 
 
Mortgage-backed securities and collateralized mortgage obligations
132,470
 
  
3,885
 
  
(658
)
 
135,697
 
 
 
Corporate debt securities
12,983
 
  
439
 
  
(1,186
)
 
12,236
 
 
 
 
405,640
 
  
12,331
 
  
(1,923
)
 
416,048
 
 
 
Common stocks
1,476
 
  
187
 
  
(243
)
 
1,420
 
 
 
Total
$
407,116
 
  
$
12,518
 
  
$
(2,166
)
 
$
417,468
 
 
 

8


 
 
As of December 31, 2009
 
 
 
Amortized
Cost
  
Gross
Unrealized
Gains
  
Gross
Unrealized
Losses
 
Estimated
Fair Value
 
 
(in thousands)
 
  
 
  
 
 
 
 
 
U.S. Government agencies and corporations
$
79,503
 
  
$
1,789
 
  
$
(101
)
 
$
81,191
 
 
 
State and political subdivisions
151,628
 
  
3,801
 
  
(205
)
 
155,224
 
 
 
Mortgage-backed securities and collateralized mortgage obligations
105,865
 
  
2,760
 
  
(49
)
 
108,576
 
 
 
Corporate debt securities
16,778
 
  
488
 
  
(1,104
)
 
16,162
 
 
 
 
353,774
 
  
8,838
 
  
(1,459
)
 
361,153
 
 
 
Common stocks
1,529
 
  
298
 
  
(77
)
 
1,750
 
 
 
Total
$
355,303
 
  
$
9,136
 
  
$
(1,536
)
 
$
362,903
 
 
 
A summary of investment securities held to maturity is as follows:
 
 
As of June 30, 2010
 
 
 
Amortized
Cost
  
Gross
Unrealized
Gains
  
Gross
Unrealized
Losses
  
Estimated
Fair Value
 
 
(in thousands)
 
  
 
  
 
  
 
 
 
Mortgage-backed securities
$
61
 
  
$
5
 
  
$
 
  
$
66
 
 
 
State and political subdivisions
4,423
 
  
79
 
  
 
  
4,502
 
 
 
Corporate debt securities
866
 
  
 
  
 
  
866
 
 
 
Total
$
5,350
 
  
$
84
 
  
$
 
  
$
5,434
 
 
 
 
 
As of December 31, 2009
 
 
 
Amortized
Cost
  
Gross
Unrealized
Gains
  
Gross
Unrealized
Losses
  
Estimated
Fair Value
 
 
(in thousands)
 
  
 
  
 
  
 
 
 
Mortgage-backed securities
$
71
 
  
$
5
 
  
$
 
  
$
76
 
 
 
State and political subdivisions
7,074
 
  
104
 
  
 
  
7,178
 
 
 
Corporate debt securities
864
 
  
 
  
 
  
864
 
 
 
Total
$
8,009
 
  
$
109
 
  
$
 
  
$
8,118
 
 
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, 2010 and December 31, 2009. 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.

9


The following presents information pertaining to securities with gross unrealized losses as of June 30, 2010 and December 31, 2009, aggregated by investment category and length of time that individual securities have been in a continuous loss position:
 
 
 
 
  
As of June 30, 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
 
  
$
 
  
$
 
  
$
 
  
$
 
  
$
 
  
$
 
 
 
State and political subdivisions
32
 
  
7,570
 
  
31
 
  
3,932
 
  
48
 
  
11,502
 
  
79
 
 
 
Mortgage-backed securities and collateralized mortgage obligations
4
 
  
20,389
 
  
658
 
  
 
  
 
  
20,389
 
  
658
 
 
 
Corporate debt securities
4
 
  
586
 
  
1,186
 
  
 
  
 
  
586
 
  
1,186
 
 
 
Common stocks
4
 
  
158
 
  
243
 
  
 
  
 
  
158
 
  
243
 
 
 
Total
44
 
  
$
28,703
 
  
$
2,118
 
  
$
3,932
 
  
$
48
 
  
$
32,635
 
  
$
2,166
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
  
As of December 31, 2009
 
 
 
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
3
 
  
$
10,120
 
  
$
101
 
  
$
 
  
$
 
  
$
10,120
 
  
$
101
 
 
 
State and political subdivisions
65
 
  
11,709
 
  
116
 
  
4,616
 
  
89
 
  
16,325
 
  
205
 
 
 
Mortgage-backed securities and collateralized mortgage obligations
1
 
  
4,972
 
  
49
 
  
 
  
 
  
4,972
 
  
49
 
 
 
Corporate debt securities
4
 
  
 
  
 
  
857
 
  
1,104
 
  
857
 
  
1,104
 
 
 
Common stocks
4
 
  
218
 
  
77
 
  
 
  
 
  
218
 
  
77
 
 
 
Total
77
 
  
$
27,019
 
  
$
343
 
  
$
5,473
 
  
$
1,193
 
  
$
32,492
 
  
$
1,536
 
 
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. As of April 1, 2009 the Company adopted the amended provisions of FASB ASC Topic 320. This changed the accounting for other-than-temporary impairments of debt securities and separates the impairment into credit-related and other factors. In accordance with the new guidance, the noncredit-related portion of OTTI losses recognized in prior year earnings was reclassified as a cumulative effect adjustment that increased retained earnings and decreased accumulated other comprehensive income at the beginning of the quarter ended June 30, 2009. In 2008, $6.2 million in OTTI losses were recognized, of which $5.2 million related to noncredit-related impairment on debt securities. Therefore, the cumulative effect adjustment made to retained earnings at April 1, 2009 totaled $5.2 million, or $3.3 million net of tax,
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.
The Company believes that the decline in the value of certain municipal obligations 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, 2010, approximately 65% of the municipal obligations 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. 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

10


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, 2010 and December 31, 2009.
At June 30, 2010, 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, as the banking climate deteriorated over the past several years, the securities experienced cash flow problems and pre-tax OTTI losses of $6.2 million during 2008, $1.6 million during 2009, and $0.2 million during the first quarter of 2010. The book value of these securities as of June 30, 2010 totaled $1.8 million. 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,” which the Company adopted as of April 1, 2009. 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, 2010, 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 amount of actual and projected deferrals and/or defaults by the financial institutions underlying these pooled trust preferred securities increased since the beginning of 2010. 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 months ended June 30, 2010, thus no impairment loss was charged to earnings.
The following table provides a roll forward of credit losses on fixed maturity securities recognized in net income:
 
 
(in thousands)
  
Three Months
Ended
June 30, 2010
 
Six Months
Ended
June 30, 2010
 
 
Beginning balance
  
$
189
 
 
$
 
 
 
Additional credit losses:
  
 
 
 
 
 
Securities with no previous other than temporary impairment
  
 
 
 
 
 
Securities with previous other than temporary impairments
  
 
 
189
 
 
 
Ending balance
  
$
189
 
 
$
189
 
 
 
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 other-than-temporary impairments may occur in the future and any such amounts could be material to the Company's consolidated statements of operations.

11


A summary of the contractual maturity distribution of debt investment securities at June 30, 2010 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
$
46,545
 
  
$
47,046
 
  
$
1,790
 
  
$
1,808
 
 
 
Due after one year through five years
116,220
 
  
120,101
 
  
2,633
 
  
2,694
 
 
 
Due after five years through ten years
80,503
 
  
83,208
 
  
 
  
 
 
 
Due after ten years
29,902
 
  
29,996
 
  
866
 
  
866
 
 
 
Mortgage-backed securities and collateralized mortgage obligations
132,470
 
  
135,697
 
  
61
 
  
66
 
 
 
Total
$
405,640
 
  
$
416,048
 
  
$
5,350
 
  
$
5,434
 
 
 
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, 2010 and December 31, 2009 was $9.6 million and $9.0 million, respectively. 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. 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 months and six months ended June 30, 2010 and 2009, are as follows:
 
 
 
Three Months Ended
June 30,
 
Six Months Ended
June 30,
 
 
 
2010
 
2009
 
2010
 
2009
 
 
(in thousands)
 
 
 
 
 
 
 
 
 
Available for sale fixed maturity securities:
 
 
 
 
 
 
 
 
 
Gross realized gains
$
233
 
 
$
1
 
 
$
430
 
 
$
1
 
 
 
Gross realized losses
 
 
 
 
(189
)
 
 
 
 
 
233
 
 
1
 
 
241
 
 
1
 
 
 
Equity securities:
 
 
 
 
 
 
 
 
 
Gross realized gains
 
 
 
 
49
 
 
 
 
 
Gross realized losses
 
 
(614
)
 
(9
)
 
(614
)
 
 
 
 
 
(614
)
 
40
 
 
(614
)
 
 
 
$
233
 
 
$
(613
)
 
$
281
 
 
$
(613
)
 
 
7.    
Fair Value Measurements
Effective January 1, 2008, the Company adopted the provisions of FASB ASC 820, Fair Value Measurements, for non-financial assets and liabilities. These include foreclosed real estate, long-lived assets and other intangibles, which are recorded at fair value only upon impairment. FASB ASC Topic 820 defines fair value, establishes a framework for measuring fair value in generally accepted accounting principles and expands disclosures about fair value measurements.
 
FASB ASC Topic 820 defines fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants. A fair value measurement assumes that the transaction to sell the asset or transfer the liability occurs in the principal market for the asset or liability or, in the absence of a principal market, the most advantageous market for the asset or liability. The price in the principal (or most advantageous) market used to measure the fair value of the asset or liability is not adjusted for transaction costs. An orderly transaction is a transaction that assumes exposure to the market for a period prior to the measurement date to allow for marketing activities that are usual and customary for transactions involving such assets and liabilities; it is

12


not a forced transaction. Market participants are buyers and sellers in the principal market that are (i) independent, (ii) knowledgeable, (iii) able to transact and (iv) willing to transact.
 
FASB ASC Topic 820 requires the use of valuation techniques that are consistent with the market approach, the income approach and/or the cost approach. The market approach uses prices and other relevant information generated by market transactions involving identical or comparable assets and liabilities. The income approach uses valuation techniques to convert future amounts, such as cash flows or earnings, to a single present amount on a discounted basis. The cost approach is based on the amount that currently would be required to replace the service capacity of an asset (replacement cost). Valuation techniques should be consistently applied. Inputs to valuation techniques refer to the assumptions that market participants would use in pricing the asset or liability. Inputs may be observable, meaning those that reflect the assumptions market participants would use in pricing the asset or liability developed based on market data obtained from independent sources, or unobservable, meaning those that reflect the reporting entity's own assumptions about the assumptions market participants would use in pricing the asset or liability developed based on the best information available in the circumstances. In that regard, FASB ASC Topic 820 establishes a fair value hierarchy for valuation inputs that gives the highest priority to quoted prices in active markets for identical assets or liabilities and the lowest priority to unobservable inputs. The fair value hierarchy is as follows:
 
 
•    
Level 1 Inputs – Unadjusted quoted prices in active markets for identical assets or liabilities that the reporting entity has the ability to access at measurement the date.
 
•    
Level 2 Inputs – Inputs other than quoted prices included in Level 1 that are observable for the asset or liability, either directly or indirectly. These might include quoted prices for similar assets or liabilities in active markets, quoted prices for identical or similar assets or liabilities in markets that are not active, inputs other than quoted prices that are observable for the asset (such as interest rates, volatilities, prepayment speeds, credit risks, etc.) or inputs that are derived principally from or corroborated by market data by correlation or other means.
 
•    
Level 3 Inputs – Unobservable inputs for determining the fair values of assets or liabilities that reflect an entity's own assumptions about the assumptions that market participants would use in pricing the assets or liabilities.
 
It is the Company's policy to maximize the use of observable inputs and minimize the use of unobservable inputs when developing fair value measurements. Recent market conditions have led to diminished, and in some cases, non-existent trading in certain of the financial asset classes. The Company is required to use observable inputs, to the extent available, in the fair value estimation process unless that data results from forced liquidations or distressed sales. Despite the Company's best efforts to maximize the use of relevant observable inputs, the current market environment has diminished the observability of trades and assumptions that have historically been available. A description of the valuation methodologies used for instruments measured at fair value, as well as the general classification of such instruments pursuant to the valuation hierarchy, is set forth below. These valuation methodologies were applied to all of the Company's financial assets and liabilities carried at fair value effective January 1, 2008.
 
Valuation methods for instruments measured at fair value on a recurring basis.
Securities Available for Sale - The Company's investment securities classified as available for sale include: debt securities issued by the U.S. Treasury and other U.S. government corporations and agencies, debt securities issued by state and political subdivisions, mortgage-backed securities, collateralized mortgage obligations, corporate debt securities, and equity securities. Quoted exchange prices are available for equity securities, which are classified as Level 1. Debt securities issued by the U.S. Treasury and other U.S. government corporations and agencies and mortgage-backed obligations are priced utilizing industry-standard models that consider various assumptions, including time value, yield curves, volatility factors, prepayment speeds, default rates, loss severity, current market and contractual prices for the underlying financial instruments, as well as other relevant economic measures. Substantially all of these assumptions are observable in the marketplace, can be derived from observable data, or are supported by observable levels at which transactions are executed in the marketplace and are classified as Level 2. Municipal securities are valued using a type of matrix, or grid, pricing in which securities are benchmarked against the treasury rate based on credit rating. These model and matrix measurements are classified as Level 2 in the fair value hierarchy.
 

13


The Company classifies its pooled trust preferred collateralized debt obligations as Level 3. The portfolio consists of six investments in collateralized debt obligations backed by pools of trust preferred securities issued by financial institutions and insurance companies. The Company has determined that the observable market data associated with these assets do not represent orderly transactions in accordance with FASB ASC Topic 820 and reflect forced liquidations or distressed sales. Based on the lack of observable market data, the Company estimated fair value based on the observable data available and reasonable unobservable market data. The Company estimated fair value based on a discounted cash flow model which used appropriately adjusted discount rates reflecting credit and liquidity risks.
 
The following table summarizes financial assets and financial liabilities measured at fair value on a recurring basis as of June 30, 2010, segregated by the level of valuation inputs within the fair value hierarchy utilized to measure fair value:
 
 
 
Fair Value Measurement at June 30, 2010 Using
 
(in thousands)
Total
 
Quoted Prices in
Active Markets for
Identical Assets
(Level 1)
 
Significant  Other
Observable
Inputs
(Level 2)
 
Significant
Unobservable
Inputs
(Level 3)
 
Assets:
 
 
 
 
 
 
 
 
Available for sale debt securities:
 
 
 
 
 
 
 
 
U.S. Government agencies and corporations
$
101,501
 
 
$
 
 
$
101,501
 
 
$
 
 
State and policitical subdivisions
166,614
 
 
 
 
166,614
 
 
 
 
Residential mortgage-backed securities
57,929
 
 
 
 
57,929
 
 
 
 
Commercial mortgage-backed securities
77,768
 
 
 
 
77,768
 
 
 
 
Corporate debt securities
11,650
 
 
 
 
11,650
 
 
 
 
Collateralized debt obligations
586