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EX-31.1 - EXHIBIT 31.1 - MidWestOne Financial Group, Inc.exhibit3112011q1.htm
EX-32.1 - EXHIBIT 32.1 - MidWestOne Financial Group, Inc.exhibit3212011q1.htm
EX-31.2 - EXHIBIT 31.2 - MidWestOne Financial Group, Inc.exhibit3122011q1.htm
EX-32.2 - EXHIBIT 32.2 - MidWestOne Financial Group, Inc.exhibit3222011q1.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 March 31, 2011
OR
o
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from              to             
 
Commission file number 000-24630
 
 
 
 
MIDWESTONE FINANCIAL GROUP, INC.
 
 
 
 
102 South Clinton Street
Iowa City, IA 52240
(Address of principal executive offices, including Zip Code)
  
 
 
 
Registrant's telephone number: 319-356-5800
Iowa
42-1206172
(State of Incorporation)
(I.R.S. Employer Identification No.)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    x  Yes    o  No
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    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 May 3, 2011, there were 8,627,971 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,
2011
 
December 31, 2010
(dollars in thousands)
(unaudited)
 
 
ASSETS
 
 
 
Cash and due from banks
$
19,085
 
  
$
13,720
 
Interest-bearing deposits in banks
4,318
 
  
6,077
 
Federal funds sold
264
 
  
726
 
Cash and cash equivalents
23,667
 
  
20,523
 
Investment securities:
  
 
 
Available for sale
501,946
 
  
461,954
 
Held to maturity (fair value of $3,716 as of March 31, 2011 and $4,086 as of December 31, 2010)
3,672
 
  
4,032
 
Loans held for sale
279
 
  
702
 
Loans
938,523
 
  
938,035
 
Allowance for loan losses
(15,398
)
 
(15,167
)
Net loans
923,125
 
  
922,868
 
Loan pool participations, net
62,207
 
  
65,871
 
Premises and equipment, net
25,916
 
  
26,518
 
Accrued interest receivable
9,580
 
  
10,648
 
Other intangible assets, net
10,919
 
  
11,143
 
Bank-owned life insurance
27,001
 
  
26,772
 
Other real estate owned
3,874
 
  
3,850
 
Deferred income taxes
6,097
 
  
6,430
 
Other assets
19,948
 
  
19,948
 
Total assets
$
1,618,231
 
  
$
1,581,259
 
LIABILITIES AND SHAREHOLDERS' EQUITY
 
 
 
Deposits:
  
 
 
Non-interest-bearing demand
$
144,724
 
  
$
129,978
 
Interest-bearing checking
472,257
 
  
442,878
 
Savings
75,439
 
  
74,826
 
Certificates of deposit under $100,000
379,326
 
  
380,082
 
Certificates of deposit $100,000 and over
191,412
 
  
191,564
 
Total deposits
1,263,158
 
  
1,219,328
 
Federal funds purchased
 
  
 
Securities sold under agreements to repurchase
46,325
 
  
50,194
 
Federal Home Loan Bank borrowings
117,200
 
  
127,200
 
Deferred compensation liability
3,698
 
  
3,712
 
Long-term debt
15,464
 
  
15,464
 
Accrued interest payable
1,964
 
  
1,872
 
Other liabilities
9,107
 
  
5,023
 
Total liabilities
1,456,916
 
  
1,422,793
 
 
 
 
 
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 March 31, 2011 and December 31, 2010
$
15,784
 
 
$
15,767
 
Common stock, $1 par value; authorized 15,000,000 shares at March 31, 2011 and December 31, 2010; issued 8,690,398 shares at March 31, 2011 and December 31, 2010; outstanding 8,624,392 share at March 31, 2011 and 8,614,790 shares at December 31, 2010
8,690
 
  
8,690
 
Additional paid-in capital
81,213
 
  
81,268
 
Treasury stock at cost, 66,006 shares as of March 31, 2011 and 75,608 shares at December 31, 2010
(918
)
 
(1,052
)
Retained earnings
57,876
 
  
55,619
 
Accumulated other comprehensive income (loss)
(1,330
)
  
(1,826
)
Total shareholders' equity
161,315
 
  
158,466
 
Total liabilities and shareholders' equity
$
1,618,231
 
  
$
1,581,259
 
 
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,
 
  
2011
 
2010
Interest income:
  
 
 
 
Interest and fees on loans
  
$
12,800
 
 
$
13,704
 
Interest and discount on loan pool participations
  
354
 
 
899
 
Interest on bank deposits
  
8
 
 
10
 
Interest on federal funds sold
  
 
 
 
Interest on investment securities:
  
  
 
 
Taxable securities
  
2,688
 
 
2,225
 
Tax-exempt securities
  
1,035
 
 
990
 
Total interest income
  
16,885
 
 
17,828
 
 
 
 
 
 
Interest expense:
  
 
 
 
Interest on deposits:
  
 
 
 
Interest-bearing checking
  
1,008
 
 
1,070
 
Savings
  
59
 
 
36
 
Certificates of deposit under $100,000
  
2,187
 
 
2,543
 
Certificates of deposit $100,000 and over
  
848
 
 
967
 
Total interest expense on deposits
  
4,102
 
 
4,616
 
Interest on federal funds purchased
  
 
 
1
 
Interest on securities sold under agreements to repurchase
  
74
 
 
76
 
Interest on Federal Home Loan Bank borrowings
  
945
 
 
1,207
 
Interest on notes payable
  
10
 
 
13
 
Interest on long-term debt
  
162
 
 
148
 
Total interest expense
  
5,293
 
 
6,061
 
Net interest income
  
11,592
 
 
11,767
 
Provision for loan losses
  
900
 
 
1,500
 
Net interest income after provision for loan losses
  
10,692
 
 
10,267
 
 
 
 
 
 
Noninterest income:
  
 
 
 
Trust and investment fees
  
1,273
 
 
1,234
 
Service charges and fees on deposit accounts
  
851
 
 
864
 
Mortgage origination and loan servicing fees
  
877
 
 
500
 
Other service charges, commissions and fees
  
679
 
 
584
 
Bank-owned life insurance income
  
229
 
 
167
 
Investment securities losses, net:
  
  
 
 
Impairment losses on investment securities
  
 
 
(189
)
Less non-credit-related losses
  
 
 
 
Net impairment losses
  
 
 
(189
)
Gain on sale of available for sale securities
  
 
 
237
 
Loss on sale of premises and equipment
  
(48
)
 
(77
)
Total noninterest income
  
3,861
 
 
3,320
 
 
 
 
 
 
Noninterest expense:
  
 
 
 
Salaries and employee benefits
  
5,870
 
 
5,790
 
Net occupancy and equipment expense
  
1,617
 
 
1,776
 
Professional fees
  
677
 
 
749
 
Data processing expense
  
450
 
 
457
 
FDIC Insurance expense
  
597
 
 
692
 
Other operating expense
  
1,423
 
 
1,584
 
Total noninterest expense
  
10,634
 
 
11,048
 
Income before income tax expense
  
3,919
 
 
2,539
 
Income tax expense
  
1,014
 
 
535
 
Net income
  
$
2,905
 
 
$
2,004
 
Less: Preferred stock dividends and discount accretion
  
$
217
 
 
$
217
 
Net income available to common shareholders
  
$
2,688
 
 
$
1,787
 
Share and Per share information:
  
 
 
 
Ending number of shares outstanding
  
8,624,392
 
 
8,609,804
 
Average number of shares outstanding
  
8,621,720
 
 
8,607,853
 
Diluted average number of shares
  
8,682,381
 
 
8,611,511
 
Earnings per common share - basic
  
$
0.31
 
 
$
0.21
 
Earnings per common share - diluted
  
0.31
 
 
0.21
 
Dividends paid per common share
  
0.05
 
 
0.05
 
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, 2009
  
$
15,699
 
  
$
8,690
 
  
$
81,179
 
 
$
(1,183
)
 
$
48,079
 
 
$
(256
)
 
$
152,208
 
Comprehensive income:
  
 
  
 
  
 
 
 
 
 
 
 
 
 
Net income
  
 
  
 
  
 
 
 
 
2,004
 
 
 
 
2,004
 
Change in net unrealized gains arising during the period on securities available for sale, net of tax
  
 
  
 
  
 
 
 
 
 
 
510
 
 
510
 
Total comprehensive income
  
 
 
 
 
 
 
 
 
2,004
 
 
510
 
 
2,514
 
Dividends paid on common stock ($0.05 per share)
  
 
 
 
 
 
 
 
 
(430
)
 
 
 
(430
)
Dividends paid on preferred stock
 
 
 
 
 
 
 
 
 
(200
)
 
 
 
(200
)
Stock options exercised (1,945 shares)
 
 
 
 
 
(11
)
 
27
 
 
 
 
 
 
16
 
Release/lapse of restriction on 2,546 RSUs
  
 
 
 
 
(35
)
 
35
 
 
 
 
 
 
 
Preferred stock discount accretion
  
17
 
 
 
 
 
 
 
 
(17
)
 
 
 
 
Stock compensation
  
 
 
 
 
50
 
 
 
 
 
 
 
 
50
 
Balance at March 31, 2010
  
$
15,716
 
 
$
8,690
 
 
$
81,183
 
 
$
(1,121
)
 
$
49,436
 
 
$
254
 
 
$
154,158
 
Balance at December 31, 2010
  
$
15,767
 
  
$
8,690
 
  
$
81,268
 
 
$
(1,052
)
 
$
55,619
 
 
$
(1,826
)
 
$
158,466
 
Comprehensive income:
  
 
  
 
  
 
 
 
 
 
 
 
 
 
Net income
  
 
  
 
  
 
 
 
 
2,905
 
 
 
 
2,905
 
Change in net unrealized gains arising during the period on securities available for sale, net of tax
  
 
  
 
  
 
 
 
 
 
 
496
 
 
496
 
Total comprehensive income
  
 
  
 
  
 
 
 
 
2,905
 
 
496
 
 
3,401
 
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 8,600 RSUs
  
 
  
 
  
(120
)
 
120
 
 
 
 
 
 
 
Preferred stock discount accretion
  
17
 
  
 
  
 
 
 
 
(17
)
 
 
 
 
Stock compensation
  
 
  
 
  
71
 
 
 
 
 
 
 
 
71
 
Balance at March 31, 2011
  
$
15,784
 
  
$
8,690
 
  
$
81,213
 
 
$
(918
)
 
$
57,876
 
 
$
(1,330
)
 
$
161,315
 
See accompanying notes to consolidated financial statements.  

3


MIDWESTONE FINANCIAL GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
 
(unaudited) (dollars in thousands)
Three Months Ended March 31,
 
2011
 
2010
Cash flows from operating activities:
 
 
 
Net income
$
2,905
 
 
$
2,004
 
Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
Provision for loan losses
900
 
 
1,500
 
Depreciation, amortization and accretion
1,447
 
 
1,576
 
Loss on sale of premises and equipment
48
 
 
77
 
Deferred income taxes
36
 
 
(8
)
Stock-based compensation
71
 
 
50
 
Net gains on sale of available for sale securities
 
 
(237
)
Net gains on sale of other real estate owned
(90
)
 
(64
)
Writedown of other real estate owned
 
 
12
 
Other-than-temporary impairment of investment securities
 
 
189
 
Decrease in loans held for sale
423
 
 
449
 
Decrease in accrued interest receivable
1,068
 
 
1,019
 
Decrease (increase) in other assets
 
 
(119
)
Decrease in deferred compensation liability
(14
)
 
(22
)
(Decrease) increase in accounts payable, accrued expenses, and other liabilities
4,176
 
 
(147
)
Net cash provided by operating activities
10,970
 
 
6,279
 
 
 
 
 
Cash flows from investing activities:
 
 
 
Sales of available for sale securities
 
 
6,674
 
Maturities of available for sale securities
34,396
 
 
19,440
 
Purchases of available for sale securities
(74,236
)
 
(38,091
)
Maturities of held to maturity securities
361
 
 
1,810
 
Purchases of held to maturity securities
 
 
 
Loans made to customers, net of collections
(1,291
)
 
11,328
 
Loan pool participations, net
3,664
 
 
1,534
 
Purchases of premises and equipment
(183
)
 
(1,041
)
Proceeds from sale of other real estate owned
200
 
 
1,217
 
Proceeds from sale of premises and equipment
154
 
 
544
 
Purchases of bank-owned life insurance
 
 
 
Increase in cash value of bank-owned life insurance
(229
)
 
(167
)
Net cash (used) provided in investing activities
(37,164
)
 
3,248
 
 
 
 
 
Cash flows from financing activities:
 
 
 
Net increase in deposits
43,830
 
 
13,417
 
Net decrease in federal funds purchased
 
 
(1,875
)
Net decrease in securities sold under agreements to repurchase
(3,869
)
 
(3,533
)
Proceeds from Federal Home Loan Bank borrowings
10,000
 
 
10,000
 
Repayment of Federal Home Loan Bank borrowings
(20,000
)
 
(12,500
)
Stock options exercised
8
 
 
16
 
Payments on long-term debt
 
 
(12
)
Dividends paid
(631
)
 
(630
)
Net cash provided by financing activities
29,338
 
 
4,883
 
 
 
 
 
Net increase in cash and cash equivalents
3,144
 
 
14,410
 
Cash and cash equivalents at beginning of period
20,523
 
 
27,588
 
Cash and cash equivalents at end of period
$
23,667
 
 
$
41,998
 
 
 
 
 
Supplemental disclosures of cash flow information:
 
 
 
Cash paid during the period for interest
$
5,200
 
 
$
6,238
 
Cash paid during the period for income taxes
$
143
 
 
$
600
 
 
 
 
 
Supplemental schedule of non-cash investing activities:
 
 
 
Transfer of loans to other real estate owned
$
134
 
 
$
78
 
See accompanying notes to consolidated financial statements.

4


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.
 
2.
Principles of Consolidation and Presentation
The accompanying unaudited consolidated financial statements have been prepared in accordance with the instructions to Form 10-Q and, therefore, do not include all the information and notes necessary for complete financial statements in conformity with generally accepted accounting principles. The information in this Quarterly Report on Form 10-Q is written with the presumption that the users of the interim financial statements have read or have access to the most recent Annual Report on Form 10-K of MidWestOne, which contains the latest audited financial statements and notes thereto, together with Management's Discussion and Analysis of Financial Condition and Results of Operations as of December 31, 2010 and for the year then ended. Management believes that the disclosures are adequate to make the information presented not misleading. In the opinion of management, the accompanying consolidated financial statements contain all adjustments (consisting of only normal recurring accruals) necessary to present fairly the financial position as of March 31, 2011, and the results of operations and cash flows for the three months ended March 31, 2011 and 2010. All significant intercompany accounts and transactions have been eliminated in consolidation.
The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities at the date of the financial statements and the reported amount of revenues and expenses during the reporting period. These estimates are based on information available to management at the time the estimates are made. Actual results could differ from those estimates. In the opinion of management, the accompanying unaudited consolidated financial statements contain all adjustments, consisting of normal recurring items, considered necessary for fair presentation. The results for the three months ended March 31, 2011 may not be indicative of results for the year ending December 31, 2011, or for any other period.
All significant accounting policies followed in the preparation of the quarterly financial statements are disclosed in the December 31, 2010 Annual Report on Form 10-K. In the consolidated statements of cash flows, cash and cash equivalents include cash and due from banks, interest-bearing deposits in banks, and federal funds sold.
 
3.
Shareholders' Equity and Earnings per Common Share
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 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

5


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. The Company has 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 an agreed upon 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: The number of authorized shares of common stock for the Company is15,000,000.
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, 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.
 
 
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 March 31, 2011 and 2010 was 8,621,720 and 8,607,853, 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 8,682,381 and 8,611,511 for the three months ended March 31, 2011 and 2010, respectively.

6


The following table presents the computation of earnings per common share for the respective periods:
 
Earnings per Share Information
  
Three Months Ended March 31,
 
 
(dollars in thousands, except per share amounts)
  
2011
 
2010
 
 
Weighted average number of shares outstanding during the period
  
8,621,720
 
 
8,607,853
 
 
 
Weighted average number of shares outstanding during the period including all dilutive potential shares
  
8,682,381
 
 
8,611,511
 
 
 
Net income
  
$
2,905
 
 
$
2,004
 
 
 
Preferred stock dividend accrued and discount accretion
  
(217
)
 
(217
)
 
 
Net income available to common stockholders
  
$
2,688
 
 
$
1,787
 
 
 
Earnings per share - basic
  
$
0.31
 
 
$
0.21
 
 
 
Earnings per share - diluted
  
$
0.31
 
 
$
0.21
 
 
 
4.
Investments
A summary of investment securities available for sale is as follows:
 
 
As of March 31, 2011
 
 
 
Amortized
Cost
  
Gross
Unrealized
Gains
  
Gross
Unrealized
Losses
 
Estimated
Fair Value
 
 
(in thousands)
 
  
 
  
 
 
 
 
 
U.S. Government agencies and corporations
$
76,149
 
  
$
1,147
 
  
$
(269
)
 
$
77,027
 
 
 
State and political subdivisions
191,404
 
  
4,313
 
  
(1,020
)
 
194,697
 
 
 
Mortgage-backed securities and collateralized mortgage obligations
219,645
 
  
3,066
 
  
(790
)
 
221,921
 
 
 
Corporate debt securities
7,376
 
  
319
 
  
(836
)
 
6,859
 
 
 
 
494,574
 
  
8,845
 
  
(2,915
)
 
500,504
 
 
 
Other equity securities
1,183
 
  
259
 
  
 
 
1,442
 
 
 
Total
$
495,757
 
  
$
9,104
 
  
$
(2,915
)
 
$
501,946
 
 
 
 
 
As of December 31, 2010
 
 
 
Amortized
Cost
  
Gross
Unrealized
Gains
  
Gross
Unrealized
Losses
 
Estimated
Fair Value
 
 
(in thousands)
 
  
 
  
 
 
 
 
 
U.S. Government agencies and corporations
$
79,181
 
  
$
1,492
 
  
$
(339
)
 
$
80,334
 
 
 
State and political subdivisions
187,847
 
  
3,994
 
  
(1,753
)
 
190,088
 
 
 
Mortgage-backed securities and collateralized mortgage obligations
177,453
 
  
2,743
 
  
(412
)
 
179,784
 
 
 
Corporate debt securities
10,896
 
  
349
 
  
(973
)
 
10,272
 
 
 
 
455,377
 
  
8,578
 
  
(3,477
)
 
460,478
 
 
 
Other equity securities
1,183
 
  
296
 
  
(3
)
 
1,476
 
 
 
Total
$
456,560
 
  
$
8,874
 
  
$
(3,480
)
 
$
461,954
 
 
 
 
A summary of investment securities held to maturity is as follows:
 
 
As of March 31, 2011
 
 
 
Amortized
Cost
  
Gross
Unrealized
Gains
  
Gross
Unrealized
Losses
  
Estimated
Fair Value
 
 
(in thousands)
 
  
 
  
 
  
 
 
 
State and political subdivisions
$
2,756
 
  
$
39
 
  
$
 
  
$
2,795
 
 
 
Mortgage-backed securities
48
 
  
5
 
  
 
  
53
 
 
 
Corporate debt securities
868
 
  
 
  
 
  
868
 
 
 
Total
$
3,672
 
  
$
44
 
  
$
 
  
$
3,716
 
 

7


 
 
 
As of December 31, 2010
 
 
 
Amortized
Cost
  
Gross
Unrealized
Gains
  
Gross
Unrealized
Losses
  
Estimated
Fair Value
 
 
(in thousands)
 
  
 
  
 
  
 
 
 
State and political subdivisions
$
3,115
 
  
$
49
 
  
$
 
  
$
3,164
 
 
 
Mortgage-backed securities
50
 
  
5
 
  
 
  
55
 
 
 
Corporate debt securities
867
 
  
 
  
 
  
867
 
 
 
Total
$
4,032
 
  
$
54
 
  
$
 
  
$
4,086
 
 
The summary of available for sale investment securities shows that some of the securities in the available for sale investment portfolio had unrealized losses, or were temporarily impaired, as of March 31, 2011 and December 31, 2010. This temporary impairment represents the estimated amount of loss that would be realized if the securities were sold on the valuation date. Securities which were temporarily impaired are shown below, along with the length of the impairment period.
The following presents information pertaining to securities with gross unrealized losses as of March 31, 2011 and December 31, 2010, aggregated by investment category and length of time that individual securities have been in a continuous loss position:  
 
 
 
  
As of March 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
3
 
  
$
22,488
 
  
$
269
 
  
$
 
  
$
 
  
$
22,488
 
  
$
269
 
 
 
State and political subdivisions
75
 
  
45,110
 
  
1,019
 
  
112
 
  
1
 
  
45,222
 
  
1,020
 
 
 
Mortgage-backed securities and collateralized mortgage obligations
8
 
  
61,080
 
  
790
 
  
 
  
 
  
61,080
 
  
790
 
 
 
Corporate debt securities
4
 
  
 
  
 
  
936
 
  
836
 
  
936
 
  
836
 
 
 
Common stocks
 
  
 
  
 
  
 
  
 
  
 
  
 
 
 
Total
90
 
  
$
128,678
 
  
$
2,078
 
  
$
1,048
 
  
$
837
 
  
$
129,726
 
  
$
2,915
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
  
As of December 31, 2010
 
 
 
Number
of
Securities
  
Less than 12 Months
  
12 Months or More
  
Total
 
 
 
  
Fair
Value
  
Unrealized
Losses 
  
Fair
Value
  
Unrealized
Losses 
  
Fair
Value
  
Unrealized
Losses 
 
 
(in thousands, except number of securities)
 
  
 
  
 
  
 
  
 
  
 
  
 
 
 
U.S. Government agencies and corporations
2
 
  
$
12,828
 
  
$
339
 
  
$
 
  
$
 
  
$
12,828
 
  
$
339
 
 
 
State and political subdivisions
93
 
  
53,326
 
  
1,750
 
  
112
 
  
3
 
  
53,438
 
  
1,753
 
 
 
Mortgage-backed securities and collateralized mortgage obligations
9
 
  
77,115
 
  
412
 
  
 
  
 
  
77,115
 
  
412
 
 
 
Corporate debt securities
4
 
  
799
 
  
973
 
  
 
  
 
  
799
 
  
973
 
 
 
Common stocks
1
 
  
71
 
  
3
 
  
 
  
 
  
71
 
  
3
 
 
 
Total
109
 
  
$
144,139
 
  
$
3,477
 
  
$
112
 
  
$
3
 
  
$
144,251
 
  
$
3,480
 
 
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 OTTI 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 non-credit-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.

8


All of the Company's mortgage-backed securities are issued by government-sponsored agencies. The receipt of principal, at par, and interest on mortgage-backed securities is guaranteed by the respective government-sponsored agency guarantor, such that the Company believes that its mortgage-backed securities do not expose the Company to credit-related losses. The Company's mortgage-backed securities portfolio consisted of securities underwritten to the standards of, and guaranteed by, the government-sponsored agencies of FHLMC, FNMA and GNMA.
The Company believes that the decline in the value of certain obligations of state and political subdivisions was primarily related to an overall widening of market spreads for many types of fixed income products since 2008, reflecting, among other things, reduced liquidity and the downgrades on the underlying credit default insurance providers. At March 31, 2011, approximately 61% 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 at maturity. Due to the issuers' continued satisfaction of their obligations under the securities in accordance with their contractual terms and the expectation that they will continue to do so, management's intent and ability to hold these securities for a period of time sufficient to allow for any anticipated recovery in fair value, as well as the evaluation of the fundamentals of the issuers' financial condition and other objective evidence, the Company believes that the municipal obligations identified in the tables above were temporarily depressed as of March 31, 2011 and December 31, 2010.
At March 31, 2011, the Company owned six collateralized debt obligations backed by pools of trust preferred securities with an original cost basis of $9.75 million. They are secured by trust preferred securities of banks and insurance companies throughout the United States, and were rated as investment grade securities when purchased between March 2006 and December 2007. However, due to several impairment charges recognized since 2008, the book value of these securities at March 31, 2011 had been reduced to $1.8 million. Two of the securities have been written down to a value of zero, with the remaining four having an average cost basis of 29.5% of their original face value. All of the Company's trust preferred collateralized debt obligations are in mezzanine tranches and are currently rated less than investment grade by Moody's Investor Services. The market for these securities is considered to be inactive according to the guidance issued in FASB ASC Topic 820, “Fair Value Measurements and Disclosures,” 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 March 31, 2011, the analysis of the Company's six investments in pooled trust preferred securities indicated that the unrealized loss was temporary and that it is more likely than not that the Company would be able to recover the cost basis of these securities.  The pace of new deferrals and/or defaults by the financial institutions underlying these pooled trust preferred securities has begun to slow in recent quarters, although they remain at high levels. The Company follows the provisions of FASB ASC Topic 320 in determining the amount of the OTTI recorded to earnings. The Company performed a discounted cash flow analysis, using the factors noted above, and determined that no additional OTTI existed for the three months ended March 31, 2011, thus no impairment loss was charged to earnings.
 
It is reasonably possible that the fair values of the Company's investment securities could decline in the future if the overall economy and the financial condition of some of the issuers deteriorate further and the liquidity of these securities remains low. As a result, there is a risk that additional OTTI may occur in the future and any such amounts could be material to the Company's consolidated statements of operations.
A summary of the contractual maturity distribution of debt investment securities at March 31, 2011 is as follows:
 
 
Available For Sale
  
Held to Maturity
 
 
 
Amortized
Cost
  
Fair Value
  
Amortized
Cost
  
Fair Value
 
 
(in thousands)
 
  
 
  
 
  
 
 
 
Due in one year or less
$
19,883
 
  
$
20,071
 
  
$
910
 
  
$
913
 
 
 
Due after one year through five years
111,852
 
  
114,569
 
  
1,846
 
  
1,882
 
 
 
Due after five years through ten years
96,045
 
  
97,507
 
  
 
  
 
 
 
Due after ten years
47,149
 
  
46,436
 
  
868
 
  
868
 
 
 
Mortgage-backed securities and collateralized mortgage obligations
219,645
 
  
221,921
 
  
48
 
  
53
 
 
 
Total
$
494,574
 
  
$
500,504
 
  
$
3,672
 
  
$
3,716
 
 

9


 
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 March 31, 2011 and December 31, 2010 was $10.7 million and $10.6 million, respectively, which is included in the Other Assets line of the consolidated balance sheets. This security is not readily marketable and ownership of FHLB stock is a requirement for membership in the FHLB Des Moines. The amount of FHLB stock the Bank is required to hold is directly related to the amount of FHLB advances borrowed. Because there are no available market values, this security is carried at cost and evaluated for potential impairment each quarter. Redemption of this investment is at the option of the FHLB.
Realized gains and losses on sales are determined on the basis of specific identification of investments based on the trade date. Realized gains (losses) on investments, including impairment losses for the three months ended March 31, 2011 and 2010, are as follows:  
 
 
Three Months Ended March 31,
 
 
 
2011
 
2010
 
 
(in thousands)
 
 
 
 
 
Available for sale fixed maturity securities:
 
 
 
 
 
Gross realized gains
$
 
 
$
197
 
 
 
Gross realized losses
 
 
 
 
 
Other-than temporary impairment
 
 
(189
)
 
 
 
 
 
8
 
 
 
Equity securities:
 
 
 
 
 
Gross realized gains
 
 
49
 
 
 
Gross realized losses
 
 
(9
)
 
 
Other-than temporary impairment
 
 
 
 
 
 
 
 
40
 
 
 
 
$
 
 
$
48
 
 
 
5.
Loans Receivable and the Allowance for Loan Losses
The composition of loans and loan pools, and changes in the allowance for loan losses by portfolio segment are as follows:
 
 
Allowance for Loan Losses and Recorded Investment in Loan Receivables
 
 
As of March 31, 2011 and December 31, 2010
 
(in thousands)
Agricultural
 
Commercial and Financial
 
Commercial Real Estate
 
Residential Real Estate
 
Consumer
 
Unallocated
 
Total
 
March 31, 2011
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Allowance for loan losses:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Ending balance
$
1,448
 
 
$
5,069
 
 
$
5,450
 
 
$
2,299
 
 
$
250
 
 
$
882
 
 
$
15,398
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Ending balance: Individually evaluated for impairment
276
 
 
614
 
 
768
 
 
163
 
 
9
 
 
 
 
$
1,830
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Ending balance: Collectively evaluated for impairment
1,172
 
 
4,455
 
 
4,682
 
 
2,136
 
 
241
 
 
882
 
 
$
13,568
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Ending balance: Loans acquired with deteriorated credit quality (loan pools)
13
 
 
316
 
 
658
 
 
244
 
 
139
 
 
764
 
 
$
2,134
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Loans receivable
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Ending balance
$
80,406
 
 
$
220,173
 
 
$
392,035
 
 
$
224,732
 
 
$
21,177
 
 
$
 
 
$
938,523
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Ending balance: Individually evaluated for impairment
$
1,723
 
 
$
1,482
 
 
$
3,591
 
 
$
1,066
 
 
$
27
 
 
$
 
 
$
7,889
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Ending balance: Collectively evaluated for impairment
$
78,683
 
 
$
218,691
 
 
$
388,444
 
 
$
223,666
 
 
$
21,150
 
 
$
 
 
$
930,634
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Ending balance: Loans acquired with deteriorated credit quality (loan pools)
$
256
 
 
$
5,742
 
 
$
38,181
 
 
$
7,181
 
 
$
248
 
 
$
12,733
 
 
$
64,341
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 

10


 
(in thousands)
Agricultural
 
Commercial and Financial
 
Commercial Real Estate
 
Residential Real Estate
 
Consumer
 
Unallocated
 
Total
 
December 31, 2010
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Allowance for loan losses:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Ending balance
$
827
 
 
$
4,540
 
 
$
5,255
 
 
$
2,776
 
 
$
323
 
 
$
1,446
 
 
$
15,167
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Ending balance: Individually evaluated for impairment
$
 
 
$
 
 
$
100
 
 
$
10
 
 
$
 
 
$
 
 
$
110
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Ending balance: Collectively evaluated for impairment
$
827
 
 
$
4,540
 
 
$
5,155
 
 
$
2,766
 
 
$
323
 
 
$
1,446
 
 
$
15,057
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Ending balance: Loans acquired with deteriorated credit quality (loan pools)
$
27
 
 
$
368
 
 
$
658
 
 
$
259
 
 
$
164
 
 
$
658
 
 
$
2,134
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Loans receivable
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Ending balance
$
84,590
 
 
$
212,230
 
 
$
393,242
 
 
$
225,994
 
 
$
21,979
 
 
$
 
 
$
938,035
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Ending balance: Individually evaluated for impairment
$
 
 
$
 
 
$
447
 
 
$
16
 
 
$
 
 
$
 
 
$
463
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Ending balance: Collectively evaluated for impairment
$
84,590
 
 
$
212,230
 
 
$
392,795
 
 
$
225,978
 
 
$
21,979
 
 
$
 
 
$
937,572
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Ending balance: Loans acquired with deteriorated credit quality (loan pools)
$
409
 
 
$
6,611
 
 
$
40,549
 
 
$
7,376
 
 
$
312
 
 
$
12,748
 
 
$
68,005
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Allowance for Loan Loss Activity
 
 
For the Three Months Ended March 31, 2011 and 2010
 
(in thousands)
Agricultural
 
Commercial and Financial
 
Commercial Real Estate
 
Residential Real Estate
 
Consumer
 
Unallocated
 
Total
 
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
 
 
$