Edgar Filing: MidWestOne Financial Group, Inc.

PART I — Item 1. Financial Statements

MIDWESTONE FINANCIAL GROUP, INC.

AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CONDITION

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, 2008

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

Registrant’s telephone number: 319-356-5800

(State of Incorporation)	(I.R.S. Employer Identification No.)
Iowa	42-1206172

Indicate by check mark whether the registrant (1) has filed all reports required 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.

Yes x No o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company (as defined in Rule 12b-2 of the Exchange Act).

Large Accelerated Filer o	Accelerated Filer o	Non-accelerated Filer o
Smaller Reporting Company x

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

Yes o No x

As of August 8, 2008, there were 8,656,110 shares of common stock $1 par value outstanding.

	June 30,			December 31,
	2008			2007
(dollars in thousands)	(unaudited)
ASSETS
Cash and due from banks	$	41,764		$	16,294
Interest-bearing deposits in banks		131			84
Federal funds sold		34,529			17,842
Cash and cash equivalents		76,424			34,220
Investment securities:
Available for sale at fair value		281,195			232,125
Held to maturity (fair value of $8,628 as of June 30, 2008
and $101 as of December 31, 2007)		8,682			95
Loans		988,517			404,263
Allowance for loan losses		(10,622	)		(5,466	)
Net loans		977,895			398,797
Loan pool participations		89,108			-
Premises and equipment, net		27,258			11,802
Accrued interest receivable		10,622			4,639
Goodwill		20,766			4,356
Other intangible assets, net		13,808			268
Bank-owned life insurance		17,032			8,613
Other real estate owned		1,547			-
Other assets		20,065			7,068
Total assets	$	1,544,402		$	701,983

LIABILITIES AND SHAREHOLDERS' EQUITY
Deposits:
Non-interest bearing demand	$	140,566		$	66,340
Interest-bearing checking		229,860			135,628
Savings		198,489			79,663
Certificates of deposit under $100,000		420,301			167,045
Certificates of deposit $100,000 and over		146,444			77,939
Total deposits		1,135,660			526,615
Federal funds purchased		16,615			-
Securities sold under agreements to repurchase		44,147			45,997
Federal Home Loan Bank advances		159,836			47,000
Notes payable		983			1,742
Long-term debt		15,261			-
Accrued interest payable		4,681			1,734
Other liabilities		7,295			1,503
Total liabilities		1,384,478			624,591

Shareholders' equity:
Common stock, $1 par value; authorized 10,000,000 shares; issued
8,690,398 shares as of June 30, 2008 and 5,165,308 as
of December 31, 2007		8,690			5,165
Additional paid-in capital		78,386			100
Treasury stock at cost, 35,000 shares as of June 30, 2008 and -0- shares as
of December 31,2007		(525	)		-
Retained earnings		76,114			72,333
Accumulated other comprehensive loss		(2,741	)		(206	)
Total shareholders' equity		159,924			77,392
Total liabilities and shareholders' equity	$	1,544,402		$	701,983

See accompanying notes to consolidated financial statements.

PART I — Item 1. Financial Statements, Continued

MIDWESTONE FINANCIAL GROUP, INC.

AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF INCOME

(unaudited)	Quarter Ended					Six Months Ended
(dollars in thousands, except per share amounts)	June 30,					June 30,
	2008			2007		2008			2007
Interest income:
Interest and fees on loans	$	14,849		$	6,954	$	23,396		$	13,539
Interest and discount on loan pool participations		1,796			-		1,917			-
Interest on bank deposits		17			2		18			3
Interest on federal funds sold		148			83		228			195
Interest on investment securities:
Available for sale		3,177			2,549		5,914			5,003
Held to maturity		87			1		103			3
Total interest income		20,074			9,589		31,576			18,743

Interest expense:
Interest on deposits:
Interest-bearing checking		573			447		1,049			868
Savings		853			345		1,186			689
Certificates of deposit under $100,000		3,629			1,896		5,987			3,669
Certificates of deposit $100,000 and over		1,637			984		2,651			1,864
Total interest expense on deposits		6,692			3,672		10,873			7,090
Interest on federal funds purchased		14			27		31			57
Interest on securities sold under agreements to repurchase		267			511		602			1,024
Interest on Federal Home Loan Bank advances		1,502			505		2,284			1,010
Interest on notes payable		21			22		29			49
Interest on long-term debt		206			-		246			-
Total interest expense		8,702			4,737		14,065			9,230
Net interest income		11,372			4,852		17,511			9,513
Provision for loan losses		758			150		828			300
Net interest income after provision for loan losses		10,614			4,702		16,683			9,213

Noninterest income:
Trust and investment fees		1,050			865		2,073			1,828
Service charges and fees on deposit accounts		1,199			527		1,844			971
Mortgage origination fees and gains on sales of mortgage loans		381			207		630			709
Other service charges, commissions and fees		992			511		1,410			1,006
Bank-owned life insurance income		150			76		233			161
Gain (loss) sale of available for sale securities		68			-		206			(299	)
Impairment losses on investment securities		(567	)		-		(567	)		-
Total noninterest income		3,273			2,186		5,829			4,376

Noninterest expense:
Salaries and employee benefits		5,924			2,757		9,103			5,412
Net occupancy and equipment expense		1,570			736		2,503			1,459
Professional fees		340			110		463			199
Data processing expense		709			572		992			835
Other operating expense		1,432			547		2,402			1,352
Total noninterest expense		9,975			4,730		15,463			9,269
Income before income tax expense		3,912			2,158		7,049			4,320
Income tax expense		949			554		1,811			1,118
Net income	$	2,963		$	1,604	$	5,238		$	3,202

Earnings per common share - basic	$	0.34		$	0.31	$	0.72		$	0.62
Earnings per common share - diluted	$	0.34		$	0.31	$	0.72		$	0.62

See accompanying notes to consolidated financial statements.

PART I — Item 1. Financial Statements, Continued

MIDWESTONE FINANCIAL GROUP, INC.

AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY

													Accumulated
(unaudited)				Additional									Other
(in thousands, except per share	Common			Paid-in			Treasury			Retained			Comprehensive
amounts)	Stock			Captial			Stock			Earnings			Loss			Total

Balance at December 31, 2006	$	5,176			14			-			69,539			(1,520	)		73,209

Comprehensive income:
Net income		-			-			-			3,202			-			3,202
Unrealized gains arising during the period on securities available for sale		-			-			-			-			(1,347	)		(1,347	)
Total comprehensive income		-			-			-			3,202			(1,347	)		1,855
Dividends paid ($0.32 per share)		-			-			-			(1,656	)		-			(1,656	)
Stock options exercised (25 shares)		-			1						-			-			1
Repurchase of 19,605 shares of common stock		(19	)		(15	)					(496	)		-			(530	)

Balance at June 30, 2007	$	5,157			-			-			70,589			(2,867	)		72,879

Balance at December 31, 2007	$	5,165			100			-			72,333			(206	)		77,392

Comprehensive income:
Net income		-			-			-			5,238			-			5,238
Unrealized gains arising during the period on securities available for sale		-			-			-			-			(2,469	)		(2,469	)
Reclassification adjustment for realized gains
Reclassification adjustment for realized gains on securities available for sale, net of tax		-			-			-			-			(66	)		(66	)
Total comprehensive income		-			-			-			5,238			(2,535	)		2,703
Dividends paid ($.15 per share)											(1,324	)					(1,324	)
Stock options exercised (5,302 shares)		5			41			-			-			-			46
Treasury Stock Purchased (35,000 shares)								(525	)								(525	)
Shares issued in merger (3,519,788 shares)		3,520			78,245			-			-			-			81,765
Cumulative effect adjustment for postretirement split dollar life insurance benefits		-			-			-			(133	)		-			(133	)

Balance at June 30, 2008	$	8,690			78,386			(525	)		76,114			(2,741	)		159,924

See accompanying notes to consolidated financial statements.

PART I — Item 1. Financial Statements, Continued

*MIDWESTONE* FINANCIAL GROUP, INC.**
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS

(unaudited)	Six Months Ended
(dollars in thousands)	June 30,
	2008			2007
Cash flows from operating activities:
Net income	$	5,238		$	3,202
Adjustments to reconcile net income to net cash provided by operating activities
Depreciation and amortization		988			645
Provision for loan losses		828			300
Deferred income taxes		(399	)		-
Gain on sale of available for sale investment securities		(206	)		-
Impairment losses on investment securities		567			-
Gain on sale of premises and equipment		(5	)		-
Amortization of investment securities and loan premiums		350			5
Accretion of investment securities and loan discounts		(141	)		-
Decrease in accrued interest receivable		695			369
Increase in other assets		(1,283	)		(84	)
Decrease in accrued interest payable		(1,046	)		-
(Decrease) increase in other liabilities		(391	)		113
Net cash provided by operating activities		5,195			4,550

Cash flows from investing activities:
Investment securities available for sale:
Proceeds from sales		9,889			14,526
Proceeds from maturities		37,384			36,251
Purchases		(31,060	)		(35,201	)
Investment securities held to maturity:
Proceeds from maturities		1,965			9
Net (increase) in loans		(44,747	)		(13,343	)
Purchases of loan pool participatons		(9,631	)		-
Principal recovery on loan pool participations		11,399
Purchases of premises and equipment		(1,560	)		(535	)
Proceeds from disposal of premises and equipment		1,388			-
Net cash acquired in merger		17,997			-
Activity in bank-owned life insurance:
Purchases		43			-
Increase in cash value		(325	)		(161	)
Net cash (used in) provided by investing activities		(7,258	)		1,546

Cash flows from financing activities:
Net increase in deposits		22,317			26,315
Net increase in federal funds purchased		10,615			-
Net decrease in securities sold under agreements to repurchase		(1,850	)		(9,069	)
Proceeds from Federal Home Loan Bank advances		34,000			10,975
Repayment of Federal Home Loan Bank advances		(17,277	)		(15,995	)
Net decrease increase in notes payable		(1,735	)		-
Dividends paid		(1,324	)		(1,656	)
Proceeds from exercise of stock options		46			1
Repurchase of common stock		(525	)		(530	)
Net cash provided by financing activities		44,267			10,041

Net increase in cash and cash equivalents		42,204			16,137
Cash and cash equivalents at beginning of period		34,220			17,449
Cash and cash equivalents at end of period	$	76,424		$	33,586

Supplemental disclosures of cash flow information:
Cash paid during the period for:
Interest	$	14,967		$	9,092
Income taxes	$	2,581		$	1,179

See accompanying notes to consolidated financial statements.

MidWestOne Financial Group, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

(Unaudited)

1.	Introductory Note

On March 14, 2008, MidWestOne Financial Group, Inc. merged with and into ISB Financial Corp. in accordance with the Agreement and Plan of Merger dated as of September 11, 2007 (the “Merger”). As a result of the Merger, MidWestOne Financial Group, Inc. (“Former MidWestOne”) ceased to exist as a legal entity and ISB Financial Corp. survived the merger and changed its name to “MidWestOne Financial Group, Inc.” The surviving organization is referred to in this document as the “Company.”

Prior to the merger, ISB Financial Corp.’s wholly-owned bank subsidiaries were Iowa State Bank & Trust Co. and First State Bank. Subsequent to the merger, the Company added MidWestOne Bank, MidWestOne Investment Services, Inc. and MidWestOne Insurance Services, Inc. as wholly-owned subsidiaries.

2.	Basis of Presentation

The accompanying consolidated statement of income for the three months ended June 30, 2008 include the accounts and transactions of the Company and its wholly-owned subsidiaries, Iowa State Bank & Trust Co., First State Bank, MidWestOne Bank, MidWestOne Insurance and Services, Inc. The consolidated statement of income for the three months ended June 30, 2007 includes the results of the Company, Iowa State Bank & Trust Co. and First State Bank. The consolidated statements of income and cash flows for the six months ended June 30, 2008 includes the results of operations for the Company and Iowa State Bank & Trust Co. and First State Bank and also includes the results of operations of MidWestOne Bank and MidWestOne Insurance Services from March 15, 2008 through June 30, 2008. The consolidated statements of income and cash flows for the six months ended June 30, 2007 include the results of operations for the Company, Iowa State Bank & Trust Co. and First State Bank. The consolidated statements of condition as of June 30, 2008 include the accounts and transactions of the Company and its wholly-owned subsidiaries, Iowa State Bank & Trust Co., MidWestOne Bank, First State Bank, and MidWestOne Insurance Services, Inc. The consolidated statements of condition as of December 31, 2007 include the accounts of ISB Financial Corp. and its wholly-owned subsidiaries Iowa State Bank & Trust Co. and First State Bank. 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, 2008, and the results of operations and cash flows for the three months and the six months ended June 30, 2008 and 2007.

The results for the three months or the six months ended June 30, 2008 may not be indicative of results for the year ending December 31, 2008, or for any other period.

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 the six months ended June 30, 2008 and 2007 was computed using the consolidated effective federal tax rate. The Company also recognized income tax expense pertaining to state franchise taxes payable individually by the subsidiary banks. The Company adopted Financial Accounting Standards Board (“FASB”) Interpretation No. 48 “Accounting for Uncertainty in Income Taxes - an Interpretation of FASB Statement No. 109” (“FIN 48”) effective January 1, 2007. The Company did not recognize any increase or decrease for unrecognized tax benefits as a result of the adoption of FIN 48. There were no unrecognized tax benefits or any interest or penalties on any unrecognized tax benefits as of June 30, 2008.

5.	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, 2008 and 2007 was 8,680,792 and 5,160,868, respectively. The weighted average number of shares outstanding for the six-month periods ended June 30, 2008 and 2007 was 7,251,827 and 5,167,510, respectively. Diluted earnings per share amounts are computed by dividing net income 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 number of shares outstanding of 8,680,792 and 5,160,868 for the three months ended June 30, 2008 and 2007, respectively. For the six months ended June 30, 2008 and 2007, weighted average diluted shares outstanding were 7,251,827 and 5,167,510, respectively. The following table presents the computation of earnings per common share for the respective periods:

	Three Months Ended				Six Months Ended
	June 30,				June 30,
Earnings per Share Information:	2008		2007		2008		2007
Weighted average number of shares outstanding during the period		8,680,792		5,160,868		7,251,827		5,167,510

Weighted average number of shares
outstanding during the period
including all dilutive potential shares		8,680,792		5,160,868		7,251,827		5,167,510

Net earnings	$	2,963,000	$	1,604,000	$	5,238,000	$	3,202,000

Earnings per share - basic	$	0.34	$	0.31	$	0.72	$	0.62

Earnings per share - diluted	$	0.34	$	0.31	$	0.72	$	0.62

6.	Fair Value Measurements

Effective January 1, 2008, the Company adopted the provisions of SFAS No. 157, “Fair Value Measurements,” for financial assets and liabilities. In accordance with Financial Accounting Standards Board Staff Positions (FSP) No. 157-2, “Effective Date of FASB Statement No. 157,” the Company will delay application of SFAS 157 for non-financial assets and non-financial liabilities until January 1, 2009. These include foreclosed real estate, long-lived assets, goodwill and core deposit premium; which are recorded at fair value only upon impairment. SFAS 157 defines fair value, establishes a framework for measuring fair value in generally accepted accounting principles and expands disclosures about fair value measurements.

SFAS 157 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 shall not be 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 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.

SFAS 157 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, SFAS 157 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 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.

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.

Securities Available for Sale. Investment securities classified as available for sale are reported at fair value utilizing Level 2 inputs. For these securities, the Company obtains fair value measurements from an independent pricing service. The fair value measurements consider observable data that may include dealer quotes, market spreads, cash flows, the U.S. Treasury yield curve, live trading levels, trade execution data, market consensus prepayment speeds, credit information and the bond’s terms and conditions, among other things. Included in the securities available for sale are common stock equities, which are reported at fair value using Level 1 inputs.

The following table summarizes financial assets and financial liabilities measured at fair value on a recurring basis as of June 30, 2008, segregated by the level of valuation inputs within the fair value hierarchy utilized to measure fair value:

		Level 1 Inputs			Level 2 Inputs			Level 3 Inputs			Total Fair Value
Securities available for sale		$	3,313		$	277,882		$	-		$	281,195

Federal Home Loan Bank Stock. Federal Home Loan Bank Stock classified as available for sale represents our carrying value which is approximately equal to fair value. Fair value measurements for these securities are classified as Level 3 based on the undeliverable nature related to credit risk.

Collateral Dependent Impaired Loans. While the overall loan portfolio is not carried at fair value, adjustments are recorded on certain loans to reflect partial write-downs that are based on underlying collateral. In determining the value of real estate collateral, the Company relies on external appraisals and assessment of property values by the Company staff. In the case of non-real estate collateral, reliance is placed on a variety of sources, including external estimates of value and judgments based on the experience and expertise of internal specialists. Because many of the inputs are not observable, the measurements are classified as Level 3.

The following table summarizes financial assets and financial liabilities measured at fair value on a non recurring basis as of June 30, 2008, segregated by the level of valuation inputs within the fair value hierarchy utilized to measure fair value.

	Level 1		Level 2		Level 3		Total
	Inputs		Inputs		Inputs		Fair Value
Federal Home Loan Bank Stock	$	-	$	-	$	9,763	$	9,763
Collateral Dependent Impaired Loans	$	-	$	-	$	4,106	$	4,106

7.	Effect of New Financial Accounting Standards

In September 2006, the Financial Accounting Standards Board (“FASB”) issued Statement No. 157, “Fair Value Measurements” (“SFAS No. 157”). SFAS No. 157 establishes a framework for measuring fair value in U.S. generally accepted accounting principles and expands disclosures about fair value measurements. It applies whenever other standards require or permit assets or liabilities to be measured at fair value. It does not expand the use of fair value in any new circumstances. SFAS No. 157 was effective for the Company beginning January 1, 2008. The adoption of this statement did not have a material effect on the Company’s financial condition or results of operations.

In September 2006, the Emerging Issues Task Force (“EITF”) Issue No. 06-4, “Accounting for Deferred Compensation and Postretirement Benefit Aspects of Endorsement Split-Dollar Life Insurance Arrangements,” (the “Issue”) was ratified. The Issue addresses accounting for separate agreements that split life insurance policy benefits between an employer and employee. The Issue requires the employer to recognize a liability for future benefits payable to the employee under these agreements. The effects of applying this Issue must be recognized through either a change in accounting principle through an adjustment to equity or through the retrospective application to all prior periods. The Issue was effective for the Company beginning January 1, 2008. The Company recognized a liability of $133,000 for a split-dollar life insurance arrangement with the adoption of EITF Issue No. 06-4 by recording a cumulative effect through shareholders’ equity.

In February 2007, the FASB issued Statement No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities” (“SFAS No. 159”). SFAS No. 159 allows companies to elect fair-value measurement of specified financial instruments and warranty and insurance contracts when an eligible asset or liability is initially recognized or when an event, such as a business combination, triggers a new basis of accounting for that asset or liability. The election, called the “fair value option,” will enable some companies to reduce the volatility in reported earnings caused by measuring related assets and liabilities differently. The election is available for eligible assets or liabilities on a contract-by-contract basis without electing it for identical assets or liabilities under certain restrictions. SFAS No. 159 was effective January 1, 2008. The adoption of SFAS No. 159 did not have an effect on the Company’s financial condition or results of operations.

In December 2007, the FASB issued Statement No. 141 (Revised 2007) “Business Combinations” (“SFAS No. 141R”) and Statement No. 160, “Noncontrolling Interests in Consolidated Financial Statements, an amendment of ARB No. 51” (“SFAS No. 160”). SFAS No. 141R and SFAS No. 160 require significant changes in the accounting and reporting for business acquisitions and the reporting of a noncontrolling interest in a subsidiary. Among many changes under SFAS No. 141R, an acquirer will record 100% of all assets and liabilities at fair value at the acquisition date with changes possibly recognized in earnings, and acquisition related costs will be expensed rather than capitalized. SFAS No. 160 establishes new accounting and reporting standards for the noncontrolling interest in a subsidiary. Key changes under the standard are that noncontrolling interests in a subsidiary will be reported as part of equity, losses allocated to a noncontrolling interest can result in a deficit balance, and changes in ownership interests that do not result in a change of control are accounted for as equity transactions and upon a loss of control, gain or loss is recognized and the remaining interest is remeasured at fair value on the date control is lost. SFAS No. 141R and SFAS No. 160 apply prospectively to business combinations for which the acquisition date is on or after the beginning of the first annual reporting period beginning on or after December 15, 2008. Early adoption is not permitted. The Company will adopt these statements on January 1, 2009.

In March 2008, the FASB issued Statement No. 161 “Disclosures about Derivative Instruments and Hedging Activities” (“SFAS No. 161”). SFAS No. 161 requires companies with derivative instruments to disclose information that should enable financial-statement users to understand how and why a company uses derivative instruments, how derivative instruments and related hedged items are accounted for under SFAS No. 133, and how derivative instruments and related hedged items affect a company’s financial position, financial performance and cash flows. SFAS No. 161 is effective for financial statements issued for fiscal years beginning after November 15, 2008. The Company does not anticipate that the adoption of this statement will have a material effect on its financial condition or results of operation.

In April 2008, the FASB issued FASB Staff Position (FSP) FAS 142-3, “Determination of the Useful Life of Intangible Assets.” This FSP is an amendment of SFAS No. 142, Goodwill and Other Intangible Assets. FSP FAS 142-3 amends the factors that should be considered in developing renewal or extension assumptions used to determine the useful life of a recognized intangible asset. The objective of the FSP is to improve the consistency between the useful life of a recognized intangible asset and the period of expected cash flows. This FSP is effective for the Company beginning January 1, 2009. The Company does not expect the adoption of the Statement will have a material impact on its financial condition or results of operations.

8.	Use of Estimates in the Preparation of Financial Statements

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 and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reported period. Actual results could differ from those estimates. A significant estimate that is particularly sensitive to change is the allowance for loan losses.

9.	Business Combinations

On March 14, 2008, the Company and Former MidWestOne completed their merger. The former MidWestOne was the parent company of MidWestOne Bank, MidWestOne Investment Services, Inc. and MidWestOne Insurance Services, Inc. The Company merged with Former MidWestOne in order to create a strong, independent financial services institution headquartered in Iowa that has the increased resources of the combined institution and the potential to achieve greater earnings and balance sheet growth. The Company believes its customer base will appreciate the expanded geographic presence of the combined geographic presence and that its shareholders will benefit from owning stock in a company with greater capital and resources. The Company issued 3,519,788 shares of common stock in exchange for 100% of common stock of Former MidWestOne with a market value of approximately $81.8 million. Former MidWestOne had assets in excess of $760 million and 19 banking offices located in Iowa.

The following is Former MidWestOne’s condensed balance sheet showing the estimated fair values of assets acquired and liabilities assumed as of the date of acquisition. Given the timing of the transaction closing, the purchase price allocation has not been finalized. The Company is in the process of obtaining third-party valuations of certain tangible assets and liabilities, and intangible assets; thus the allocation of the purchase price is subject to refinement. The Company anticipates that the valuations will be finalized in the 3rd quarter of 2008.

Condensed Balance Sheet

Cash & Cash Equivalents	$	20,351
Investment Securities		80,978
Loans (net)		536,223
Loan Pools		90,876
Other Assets		42,954
Other Intangible Assets		13,507
Total Assets	$	784,289

Deposits	$	586,721
Fed Funds Purchased		6,000
FHLB Advances		96,113
Other Borrowed Money		1,500
Trust Preferred		15,245
Other Liabilities		10,519
Total Liabilites		716,098

Net Assets Acquired		68,791

Capitalized Merger Costs		3,238

Value of Shares Issed		81,765

Goodwill (shares isued to Former MidWestOne
shareholders less net assets acquired plus merger costs)	$	16,212

The Company is in the process of finalizing the purchase price allocations related to the Merger on March 14, 2008. The following is a summary of the original purchase price estimates and the subsequent adjustments through June 30, 2008.

	Original			Updated
Category	Estimate			Amount			Net Change

Purchase Accounting Valuations:
Investment securities	$	-		$	825		$	825
Loans		(8,382	)		2,939			11,321
Loan pool participations		(1,237	)		(3,090	)		(1,853	)
Fixed assets		2,000			2,000			-

Time deposits		(105	)		(3,001	)		(2,896	)
Federal Home Loan Bank advances		602			1,513			911
Trust preferred securities		(312	)		(219	)		93

Core Deposit Intangible		10,589			5,737			(4,852	)

Trade Name Intangible		-			7,040			7,040

Goodwill		30,446			16,212			(14,234	)

Total Allocations	$	33,601		$	29,956		$	(3,645	)

Assuming the Merger of Former MidWestOne occurred on January 1, 2008, the following summarizes the unaudited pro forma combined operating results for the three months and six months ended June 30, 2008 and 2007:

	Six Months Ended June 30,
(dollars in thousands, except per share)	2008		2007
Pro forma Interest Income	$	40,681	$	41,169
Pro forma Interest Expense		18,224		19,868
Pro forma Net Interest Income		22,457		21,301
Pro forma Provision for Loan Losses		1,080		876
Pro forma Noninterest Income		7,303		7,439
Pro forma Noninterest Expense		20,975		20,003
Pro forma Income before Tax		7,705		7,861
Pro forma Income Tax		2,472		2,348
Pro forma Net Income	$	5,233	$	5,513

Pro forma earnings per share - basic	$	0.60	$	0.63

Proforma earnings per share - diluted	$	0.60	$	0.63

	Three Months Ended June 30,
(dollars in thousands, except per share)		2008		2007
Pro forma Interest Income	$	20,074	$	21,120
Pro forma Interest Expense		8,702		10,138
Pro forma Net Interest Income		11,373		10,982
Pro forma Provision for Loan Losses		758		329
Pro forma Noninterest Income		3,273		3,716
Pro forma Noninterest Expense		9,975		9,880
Pro forma Income before Tax		3,912		4,489
Pro forma Income Tax		949		1,322
Pro forma Net Income	$	2,963	$	3,167

Pro forma earnings per share - basic	$	0.34	$	0.36

Proforma earnings per share - diluted	$	0.34	$	0.36

10.	Goodwill and Other Intangible Assets

Goodwill is subject to impairment testing annually under the provisions of Financial Accounting Standards Board Statement No. 142 “Goodwill and other intangible assets” (“SFAS 142”). The Company has historically tested goodwill for impairment at the end on the third quarter. SFAS 142 does provide that goodwill should be tested more frequently upon the occurrence of certain defined events or a change in circumstances. A significant change in the business climate is one of these defined events. Due to the decline in the Company’s stock price to a level below its book value, the Company evaluated its goodwill for impairment at the end of the second quarter of 2008. Goodwill was determined to not be impaired at that time and no impairment write-down of goodwill was recorded. Management will continue to evaluate goodwill for potential impairment given the uncertain business climate and the level of the Company’s stock price relative to book value.

PART I — Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.

OVERVIEW

The following discussion is provided for the consolidated operations of MidWestOne Financial Group, Inc. (the “Company”), which includes its wholly-owned banking subsidiaries: Iowa State Bank & Trust Co. and First State Bank for the three months and the six months ended June 30, 2008 compared to the same periods in 2007. The merger of the Former MidWestOne was completed as of the close of business on March 14, 2008. The results of operations for the quarter ended June 30, 2008 include the Company and its subsidiaries and the results of operations of the subsidiaries of the Former MidWestOne. The subsidiaries of the Former MidWestOne are MidWestOne Bank, its wholly-owned insurance agency, MidWestOne Insurance Services, Inc., and its wholly-owned investment brokerage subsidiary, MidWestOne Investment Services, Inc. The results of operations for the six months ended June 30, 2008 include the Company and its subsidiaries plus the results of operations of the subsidiaries of the Former MidWestOne from March 15 through June 30, 2008. The discussion also focuses on the consolidated financial condition of the Company and its subsidiaries as of June 30, 2008 compared with December 31, 2007. The consolidated financial condition as of June 30, 2008 reflects the inclusion of the additional assets and liabilities of the Former MidWestOne in the Company’s totals.

The Company is a community-based financial holding company headquartered in Iowa City, IA. The Company through its wholly-owned subsidiaries provides a wide range of services, including traditional banking services, trust services, residential mortgage services, insurance brokerage and retail securities brokerage services. The Company provides a full range of services to individual and corporate customers located primarily in the eastern half of Iowa.

Natural disasters in late May and early June 2008 affected the Company’s operations. On May 25, 2008, the Parkersburg branch of First State Bank was destroyed by a tornado that leveled much of the community. The branch has reopened in temporary facilities and rebuilding efforts have begun. The facility was insured, which is expected to cover most of the reconstruction cost. Flooding in eastern Iowa in early June inundated the Waterloo office of MidWestOne Bank and the Coralville office of Iowa State Bank & Trust Company. The Waterloo office remains closed with the customers being serviced by the nearby Cedar Falls location. Management is currently exploring options for the Waterloo office. The Coralville office was relocated to a temporary facility. Re-opening of the Coralville office is anticipated during the fourth quarter of 2008. The monetary effect of the flooding has not been quantified as the extent of the damage and the costs necessary to reconstruct or replace have not been fully determined. Neither the Waterloo nor the Coralville office was covered by flood insurance.

On July 9, 2008, the Company announced that it had entered into an agreement to divest itself of its branch location in Wapello, Iowa. Community Bank of Muscatine, Iowa, will assume approximately $9.5 million in deposits of the Wapello branch and will retain the existing employees. The Company will retain the loans associated with the branch. Subject to purchaser’s regulatory approval, the transaction is expected to close early in fourth quarter of 2008. The sale agreement provides that the Company will receive upon closing a premium of 6% of the deposits assumed by the purchaser.

The merger of the Company’s three bank subsidaires was completed effective August 9, 2008. The resulting institution is named MidWestOne Bank with headquarters in Iowa City, IA.

RESULTS OF OPERATIONS

Quarter Ended June 30, 2008

Summary

The Company earned net income of $3.0 million for the quarter ended June 30, 2008, compared with $1.6 million for the quarter ended June 30, 2007, an increase of 88%. Net income for the quarter ended June 30, 2008 was reduced by an “other than temporary impairment” loss on equity securities held by the Company. The amount of the loss was $567,000, which net of tax effect, resulted in a reduction in net income of $374,000 or $0.04 per share. Basic and diluted earnings per share for the second quarter of 2008 were $.34 versus $.31 for the second quarter of 2007. The Company’s return on average assets for the second quarter of 2008 was 0.79% compared with a return of 0.95% for the same period in 2007. The Company’s return on average equity was 7.65% for the quarter ended June 30, 2008 versus 8.77% for the quarter ended June 30, 2007. Return on average tangible equity was 9.79% for the second quarter of 2008 compared with 9.36% for the same period in 2007.

Second quarter results were affected by a write-down of equity securities held in the Company’s investment portfolio that were determined to be an “other than temporary impairment” loss. This write-down was attributable to the decline in the market prices of these stocks, which were below their historical cost. They were adjusted to reflect the June 30, 2008, market values in accordance with generally accepted accounting principles.

The following table presents selected financial results and measures for the second quarter of 2008 and 2007.

	Quarter Ended June 30,
($ amounts in thousands)	2008			2007
Net Income	$	2,963		$	1,604
Average Assets		1,500,285			674,235
Average Shareholders’ Equity		155,414			73,393
Return on Average Assets		0.79	%		0.95	%
Return on Average Equity		7.65	%		8.77	%
Return on Average Tangible Equity		9.79	%		9.36	%
Equity to Assets (end of period)		10.31	%		10.71	%
Tangible Equity to Assets (end of period)		8.30	%		10.09	%

Net Interest Income

Net interest income is computed by subtracting total interest expense from total interest income. Fluctuations in net interest income can result from the changes in the volumes of assets and liabilities as well as changes in interest rates. The Company’s net interest income for the quarter ended June 30, 2008 increased $6.5 million, or 134%, to $11.4 million from $4.9 million from the quarter ended June 30, 2007. Total interest income was $10.5 million greater in the second quarter of 2008 compared with the same period in 2007. Most of the increase in interest income was due to increased interest on loans, which was mainly attributable to increased volumes attributable to the merger. The increase in interest income was offset by increased interest expense on deposits and borrowed funds. Total interest expense for the second quarter of 2008 increased $4.0 million, or 84%, compared with the same period in 2007 due primarily to increased volumes. The Company’s net interest margin on a federal tax-equivalent basis for the second quarter of 2008 increased to 3.45% compared with 3.09% in the second quarter of 2007. Net interest margin is a measure of the net return on interest-earning assets and is computed by dividing annualized net interest income by the average of total interest-earning assets for the period. The Company’s overall yield on earning assets declined to 5.96% for the second quarter of 2008 compared with 6.08% for the second quarter of 2007. The rate on interest-bearing liabilities decreased in the second quarter of 2008 to 2.84% compared to 3.43% for the second quarter of 2007.

The following table presents a comparison of the average balance of earning assets, interest-bearing liabilities, interest income and expense, and average yields and costs for the quarter ended June 30, 2008 and 2007. Interest income on tax-exempt securities and loans is reported on a fully tax-equivalent basis assuming a 34% tax rate. Dividing annualized income or expense by the average balances of assets or liabilities results in average yields or costs.

	Quarter ended June 30,
	2008							2007
	Average				Average			Average				Average
(in thousands)	Balance		Interest		Rate			Balance		Interest		Rate
Average earning assets:
Loans		967,578		14,849		6.17	%		391,292		6,954		7.21	%
Loan pool participations		85,666		1,796		8.43	%		-		-		0.00	%
Investment securities:
Available for sale		303,132		3,797		5.04	%		231,311		2,551		4.47	%
Held to maurity		9,955		87		3.51	%		-		-		0.00	%
FHLB and Other Stock		3,115		17		2.19	%		3,031		0		0.00	%
Federal funds sold		27,113		148		2.20	%		5,604		83		6.01	%
Total earning assets		1,396,559		20,694		5.96	%		631,238		9,589		6.16	%

Average interest-bearing liabilities:
Interest-bearing demand deposits		283,445		573		0.81	%		214,386		447		0.85	%
Savings deposits		139,952		853		2.45	%		29,502		345		4.74	%
Certificates of deposit		581,096		5,266		3.64	%		207,711		2,880		5.02	%
Federal funds purchased		2,141		14		2.63	%		3,517		27		3.11	%
Securities sold under agreements to repurchase		50,133		267		2.14	%		46,531		511		4.45	%
Federal Home Loan Bank advances		160,918		1,523		3.81	%		45,549		508		4.50	%
Long-term debt		15,454		206		5.36	%		1,538		22		5.65	%
Total interest-bearing liabilities		1,233,139		8,702		2.84	%		548,734		4,737		3.50	%

Net interest income				11,992							4,852
Net interest margin						3.45	%						3.09	%

Interest income and fees on loans increased $7.9 million, or 124%, in the second quarter of 2008 compared to the same period in 2007. Average loans were $576.3 million, or 146% higher in the first quarter of 2008 compared with 2007, which contributed to the growth in interest income. The increase in average loan volume was primarily attributable to the Merger. The yield on the Company’s loan portfolio is affected by the amount of nonaccrual loans (which do not earn interest income), the mix of the portfolio (real estate loans generally have a lower overall yield than commercial and agricultural loans), the effects of competition and the interest rate environment on the amounts and volumes of new loan originations, and the mix of variable rate versus fixed rate loans in the Company’s portfolio. The average rate on loans decreased from 7.21% in the second quarter of 2007 to 6.17% in second quarter of 2008, primarily due to the overall decline in market interest rates between the periods.

Interest and discount income on loan pool participations was $1.8 million for the second quarter of 2008. These loan pool participations are pools of performing and distressed and nonperforming loans that Former MidWestOne purchased at varying discounts from the aggregate outstanding principal amount of the underlying loans. The loan pools are held and serviced by a third-party independent servicing corporation. The Company invests in the pools that are purchased by the servicer from nonaffiliated banking organizations and from the FDIC acting as receiver of failed banks and savings associations. Currently, the Company holds $89.1 million in loan pool participations. The interest and discount income recognized by the Company is net of associated collection costs.

Income is derived from this investment in the form of interest collected and the repayment of the principal in excess of the purchase cost which is herein referred to as “discount recovery.” The loan pool participations were historically a high-yield activity for Former MidWestOne, but this yield has fluctuated from period to period based on the amount of cash collections, discount recovery, and net collection expenses of the servicer in any given period. The income and yield on loan pool participations may vary in future periods due to the volume and discount rate on loan pools purchased. Former MidWestOne adopted SOP 03-3 on January 1, 2005. All loans that Former MidWestOne purchased prior to January 1, 2005 continue to utilize the cash basis for recognition of interest income and discount recovery. The loan pool participations purchased subsequent to January 1, 2005 that are subject to the “accretable yield” income recognition requirements of SOP 03-3 have not generated amounts of income significantly greater than what would have been recognized under the cash basis. Loan pool participations that are not subject to the “accretable yield” requirements also utilize the cash basis for recognition of interest income and discount recovery.

Interest income on investment securities increased $1.3 million, or 41.3%, in the second quarter of 2008, compared with the first quarter of 2007 mainly due to higher volume of securities in the portfolio as a result of the Merger, as well as a slightly higher yield in 2008. Interest income on investment securities totaled $3.3 million in the second quarter of 2008 compared with $2.7 million for the second quarter of 2007. The average balance of investments in the second quarter of 2008 was $313.1 million compared with $231.0 million in the second quarter of 2007, reflecting the Merger. The tax-equivalent yield on the Company’s investment portfolio in the second quarter of 2008 increased to 4.99% from 4.47% in the comparable period of 2007 reflecting reinvestment of maturing securities and purchases of new securities at higher market interest rates.

Interest expense on deposits was $3.0 million, or 82%, greater in the second quarter of 2008 compared with the same period in 2007 mainly due to the increased volume of deposits following the Merger. Offsetting this increase in deposits was a decrease in interest rates paid on deposits as the weighted average rate paid on interest-bearing deposits was 3.25% in the second quarter of 2008 compared with 3.63% in the second quarter of 2007. This decline reflected the reduction in interest rates on deposits throughout the markets. The recent reductions in market interest rates have enabled the Company to substantially reduce the rates it pays on deposit accounts. Average interest-bearing deposits for the second quarter of 2008 were $552.9 million greater compared with the same period in 2007 as a result of the Merger.

Interest expense on borrowed funds was $1.2 million greater in the second quarter of 2008 compared with the same period in 2007. Interest on borrowed funds totaled $1.7 million for the second quarter of 2008. The Company’s average borrowed funds balances were greater in 2008 mainly due to the Merger, which resulted in additional interest expense. Lower market interest rates in 2008 helped to offset the higher volume of borrowed funds. Average borrowed funds for the second quarter of 2008 were $129.3 million greater compared to the same period in 2007. The majority the difference was created through advances by the Federal Home Loan Bank. The weighted average rate paid on borrowed funds increased to 4.91% in the second quarter of 2008 compared with 4.65% in the second quarter of 2007.

Provision for Loan Losses

The Company recorded a provision for loan losses of $758,000 in the second quarter of 2008 compared with a $150,000 provision in the second quarter of 2007. Net loans charged off in the second quarter of 2008 totaled $90,000 compared with net loans charged off of $15,000 in the second quarter of 2007. Management determines an appropriate provision based on its evaluation of the adequacy of the allowance for loan losses in relationship to a continuing review of problem loans, the current economic conditions, actual loss experience and industry trends. Management believes that the allowance for loan losses was adequate based on the inherent risk in the portfolio as of June 30, 2008; however, there is no assurance losses will not exceed the allowance and any growth in the loan portfolio and the uncertainty of the general economy require that management continue to evaluate the adequacy of the allowance for loan losses and make additional provisions in future periods as deemed necessary.

Noninterest Income

Noninterest income results from the charges and fees collected by the Company from its customers for various services performed, miscellaneous other income, and gains (or losses) from the sale of investment securities held in the available for sale category. Total noninterest income was $1.1 million, or 50%, greater in the second quarter of 2008 compared with the same period in 2007. Most of the change between the periods is due to the merger. During the second quarter of 2008, the Company recognized an “other than temporary impairment” write-down of $567,000 on equity securities held as available for sale investments. This write-down was attributable to the decline in market prices of these stocks, which were below their historical cost. They were adjusted to reflect their June 30, 2008, market values in accordance with generally accepted accounting principles. Security losses totaled $499,000 in the second quarter of 2008 compared with no gain or loss recognized in the second quarter of 2007.

Noninterest Expense

Noninterest expense for the second quarter of 2008 was $10.0 million and included all the costs incurred to operate the Company except for interest expense, the loan loss provision and income taxes. Noninterest expense for the second quarter of 2008 increased $5,245,000 over the second quarter of 2007 primarily due to the merger with Former MidWestOne. The Company’s three subsidiary banks were merged on August 9, 2008, which will facilitate the realization of anticipated cost saves in the future. Minimal cost savings have been recognized during the second quarter of 2008. It is anticipated that personnel costs and other operating expenses will be reduced in future periods following the merger of the banking subsidiaries of the Company.

Income Tax Expense

The Company incurred income tax expense of $949,000 for the second quarter ended June 30, 2008 compared with $554,000 for the same period of 2007. The effective income tax rates for the three months ended June 30, 2008 and 2007 was 24.2% and 25.7%, respectively. The effective tax rate varies from the statutory rate due to state taxes and the amount of tax-exempt income on municipal bonds earned during the period. Tax-exempt income on municipal bonds is greater in comparison to previous periods as the market yields on recently purchased bonds has increased and the Company has a higher volume of municipal bonds.

Six Months Ended June 30, 2008

Summary

The Company earned net income of $5.2 million for the six months ended June 30, 2008, compared with $3.2 million for the six months ended June 30, 2007, an increase of 64%. The increase in net income was primarily due to the merger. Basic and diluted earnings per share for the first half of 2008 were $0.72 versus $0.62 for the first half of 2007. The Company’s return on average assets for the first half of 2008 was 0.90% compared with a return of 0.96% for the first half of 2007. The Company’s return on average equity was 8.71% for the six months ended June 30, 2008 versus 8.85% for the six months ended June 30, 2007. Return on tangible equity was 10.62% for the first half of 2008 compared with 9.45% for the same period in 2007.

The following table presents selected financial results and measures for the first half of 2008 and 2007.

	Six Months Ended June 30,
(Dollar amounts in thousands)	2008			2007
Net Income	$	5,238		$	3,202
Average Assets		1,172,241	*		669,978
Average Shareholders’ Equity		121,344	*		72,932
Return on Average Assets		0.90	%		0.96	%
Return on Average Equity		8.71	%		8.85	%
Return on Average Tangible Equity		10.62	%		9.45	%
Equity to Assets (end of period)		10.31	%		10.71	%
Tangible Equity to Assets (end of period)		8.03	%		10.09	%

* Note - Averages for the six months reflect the inclusion of and the increase in average assets and shareholders’ equity resulting from the merger with Former MidWestOne from March 15, 2008 through June 30, 2008.

Net Interest Income

The Company’s net interest income for the six months ended June 30, 2008 increased $8.0 million, or 84%, to $17.5 million from $9.5 million from the six months ended June 30, 2007. Total interest income was $12.8 million greater in the first six months of 2008 compared with the same period in 2007. Most of the increase in interest income was due to increased interest on loans and loan pools, which was mainly attributable to increased volumes of loans and loan pools reflecting the merger. The increase in interest income was offset by increased interest expense on deposits and borrowed funds related to the merger. Total interest expense for the first half of 2008 increased $4.9 million, or 53%, compared with the same period in 2007 due primarily to increased volumes. The Company’s net interest margin on a federal tax-equivalent basis for the first six months of 2008 increased to 3.42% compared with 3.21% for the six months ended June 30, 2007. The Company’s overall yield on earning assets declined to 6.18% for the first six months of 2008 compared with 6.24% for the six months ended June 30, 2007. The rate on interest-bearing liabilities decreased in the first half of 2008 to 2.33% compared to 3.53% for the first half of 2007.

The following table presents a comparison of the average balance of earning assets, interest-bearing liabilities, interest income and expense, and average yields and costs for the six months ended June 30, 2008 and 2007. Interest income on tax-exempt securities and loans is reported on a fully tax-equivalent basis assuming a 34% tax rate. Dividing annualized income or expense by the average balances of assets or liabilities results in average yields or costs. Average balances for the six months ended June 30, 2008 reflect the additional assets and liabilities of the acquired subsidiaries from March 15, 2008 through June 30, 2008.

	Six Months Ended June 30,
	2008							2007
	Average				Average			Average				Average
(in thousands)	Balance		Interest		Rate			Balance		Interest		Rate
Average earning assets:
Loans	$	719,688	$	23,396	$	6.57	%	$	361,398	$	13,539		7.55	%
Loan pool participations		66,088		1,917		5.87	%		-		-		0.00	%
Interest-bearing deposits		78		18		46.66	%		111		3		5.45	%
Investment securities:
Available for sale		222,156		5,908		5.38	%		232,924		5,003		4.33	%
Held to maurity		7,611		103		2.74	%		-		0		0.00	%
FHLB and Other Stock		3,079		6		0.39	%		-		-		0.00	%
Federal funds sold		15,300		228		3.01	%		7,639		195		5.15	%
Total earning assets	$	1,034,000	$	31,576		6.18	%	$	585,117	$	18,743		6.24	%

Average interest-bearing liabilities:
Interest-bearing demand deposits	$	311,495	$	1,049		0.68	%	$	214,032	$	868		0.82	%
Savings deposits		106,923		1,186		2.24	%		29,668		689		4.68	%
Certificates of deposit		578,541		8,638		3.02	%		205,060		5,533		5.44	%
Federal funds purchased		14,616		31		0.43	%		2,044		57		5.62	%
Securities sold under agreements to repurchase		49,910		602		2.44	%		46,965		1,024		4.40	%
Federal Home Loan Bank advances		148,711		2,284		3.11	%		44,862		1,010		4.54	%
Notes payable		1,238		29		4.74	%		1,742		49		2.81	%
Long-term debt		7,809		246		6.37	%		-		-		0.00	%
Total interest-bearing liabilities	$	1,219,243	$	14,065		2.33	%	$	544,237	$	9,230		3.53	%

Net interest income			$	17,511						$	10,299
Net interest margin						3.42	%						3.29	%

Interest income and fees on loans increased $9.8 million, or 73%, in the first six months of 2008 compared to the same period in 2007. Average loans were $332.7 million, or 86% higher in the six months of 2008 compared with 2007, which contributed to the growth in interest income. The increase in average loan volume was primarily attributable to the Merger. The yield on the Company’s loan portfolio is affected by the amount of nonaccrual loans (which do not earn interest income), the mix of the portfolio (real estate loans generally have a lower overall yield than commercial and agricultural loans), the effects of competition and the interest rate environment on the amounts and volumes of new loan originations, and the mix of variable rate versus fixed rate loans in the Company’s portfolio. The average rate on loans decreased from 7.55% in the first six months of 2007 to 6.57% in the first six months of 2008, primarily due to the overall decline in market interest rates between the periods.

Interest and discount income on loan pool participations was $1.8 million for the first six months of 2008. These loan pool participations are pools of performing and distressed and nonperforming loans that Former MidWestOne purchased at varying discounts from the aggregate outstanding principal amount of the underlying loans. The loan pools are held and serviced by a third-party independent servicing corporation. The Company invests in the pools that are purchased by the servicer from nonaffiliated banking organizations and from the FDIC acting as receiver of failed banks and savings associations. Currently, the Company holds $89.1 million in loan pool participations.

Interest income on investment securities increased $1.0 million, or 20%, in the six months ended June 30, 2008, compared with the first half of 2007 mainly due to higher volume of securities in the portfolio as a result of the Merger, as well as a slightly higher yield in 2008. Interest income on investment securities totaled $6.0 million in the first half of 2008 compared with $5.0 million for the first half of 2007. The average balance of investments in the first half of 2008 was $229.7 million compared with $232.9 million in the first half of 2007. The tax-equivalent yield on the Company’s investment portfolio in the first half of 2008 increased to 5.29% from 4.86% in the comparable period of 2007 reflecting reinvestment of maturing securities and purchases of new securities at higher market interest rates.

Interest expense on deposits was $3.8 million, or 53%, greater in the first half of 2008 compared with the same period in 2007 mainly due to the increased volume of deposits following the Merger. Offsetting this increase in deposit volumes was a decrease in interest rates paid on deposits as the weighted average rate paid on interest-bearing deposits was 2.21% in the first half of 2008 compared with 3.32% in the first half of 2007. This decline reflected the reduction in interest rates on deposits throughout the markets. The recent reductions in market interest rates have enabled the Company to substantially reduce the rates it pays on deposit accounts. Average interest-bearing deposits for the first half of 2008 were $548.2 million greater compared with the same period in 2007 as a result of the Merger.

Interest expense on borrowed funds was $1.5 million greater in the first half of 2008 compared with the same period in 2007. Interest on borrowed funds totaled $2.6 million for the first half of 2008. The Company’s average borrowed funds balances were greater in 2008 mainly due to the Merger, which resulted in additional interest expense. Lower market interest rates in 2008 helped to offset the higher volume of borrowed funds. Average borrowed funds for the first half of 2008 were $111.2 million greater compared to the same period in 2007. The weighted average rate paid on borrowed funds increased to 4.66% percent in the first six months of 2008 compared with 4.48% in the first six months of 2007.

Provision for Loan Losses

The Company recorded a provision for loan losses of $828,000 in the first half of 2008 compared with a $300,000 provision in the first half of 2007. Net loans charged off in the first half of 2008 totaled $393,000 compared with net recoveries of loans previously charged off of $15,000 in the first half of 2007. Management determines an appropriate provision based on its evaluation of the adequacy of the allowance for loan losses in relationship to a continuing review of problem loans, the current economic conditions, actual loss experience and industry trends. Management believes that the allowance for loan losses was adequate based on the inherent risk in the portfolio as of June 30, 2008; however, there is no assurance losses will not exceed the allowance and any growth in the loan portfolio and the uncertainty of the general economy require that management continue to evaluate the adequacy of the allowance for loan losses and make additional provisions in future periods as deemed necessary.

Noninterest Income

Noninterest Expense

Noninterest expense for the six months of 2008 was $15.5 million and included all the costs incurred to operate the Company except for interest expense, the loan loss provision and income taxes. Operating expenses for the subsidiaries of Former MidWestOne were included for the period from March 15, 2008 through June 30, 2008, which is the primary result of the increase from the comparable period. It is anticipated that personnel costs and other operating expenses will be reduced in future periods as the banking subsidiaries of the Company are merged.

Income Tax Expense

The Company incurred income tax expense of $1.81 million for the six months ended June 30, 2008 compared with $1.12 million for the six months ended June 30, 2007. The effective income tax rates for the first six months of 2008 and 2007 was 25.7% and 25.9%, respectively. The effective tax rate varies from the statutory rate due to state taxes and the amount of tax-exempt income on municipal bonds earned during the period. Tax-exempt income on municipal bonds is greater in comparison to previous periods as the market yields on recently purchased bonds has increased and the Company has a higher volume of municipal bonds.

FINANCIAL CONDITION

Total assets as of June 30, 2008 were $1.54 billion compared with $702.0 million as of December 31, 2007, an increase of $842.4 million. The increase reflects the assets contributed by Former MidWestOne in the Merger, which was completed on March 14, 2008.

Investment Securities

Investment securities available for sale totaled $281.2 million as of June 30, 2008. This was an increase of $49.1 million from December 31, 2007. The increase in the balance was due primarily to the Merger. Investment securities classified as held to maturity increased to $8.7 million as of June 30, 2008, also as a result of the merger. The investment portfolio consisted mainly of U.S. Government Agency securities, mortgage-backed securities and obligations of states and political subdivisions.

During the second quarter of 2008, the Company recognized an “other than temporary impairment” write-down of $567,000 on equity securities held in the available for sale investments category. This write-down was attributable to the decline in the market prices of these stocks, which were below their historical cost. These equity securities are all publicly-traded stocks of companies in the financial services industy. The value of these holdings declined in concert with the market decline in financial services stocks during the past nine months.

Loans

Total loans (excluding loan pool participations) were $988.5 million as of June 30, 2008, compared with $404.3 million as of December 31, 2007, an increase of $584.2 million. The increase was primarily due to the Merger. As of June 30, 2008 the Company’s loan to deposit ratio was 87.0% compared with a year-end 2007 loan to deposit ratio of 76.3%, reflecting the higher loan to deposit ratio of Former MidWestOne. Management anticipates that the loan to deposit ratio will be reduced in future periods. Prior to the Merger, real estate loans made up a significant portion of each of the Company’s and Former MidWestOne’s loan portfolios. As of June 30, 2008, loans secured by commercial real estate comprised the largest category in the portfolio at approximately 41% of total loans. Residential real estate loans were the next largest category at 27%. Commercial loans made up approximately 21% of the total loan portfolio. Agricultural loans were approximately 9% of the total loan portfolio, with the remaining 2% of the portfolio in consumer loans. All of these percentages relate to our direct loans and do not include loan pool participations. Included in commercial real estate are construction and development loans totaling approximately $84 million, or 9% of total loans.

The Company has minimal direct exposure to subprime mortgages in its loan portfolio. The Company’s loan policy provides a guideline that real estate mortgage borrowers have a Beacon score of 640 or greater. Exceptions to this guideline have been noted but the overall exposure is deemed minimal by management. Mortgages originated by the Company and sold on the secondary market are typically underwritten according to the guidelines of the secondary market investors. These mortgages are on a non-recourse basis, thereby eliminating any subprime exposure.

Loan Pool Participations

As of June 30, 2008, the Company had loan pool participations of $89.1 million. Loan pools are participation interest in performing, sub-performing and non-performing loans that have been purchased from various non-affiliated banking organizations. Former MidWestOne has engaged in this activity since 1988. The loan pool investment balance shown as an asset on the Company’s Statement of Condition represented the discounted purchase cost of the loan pool participations. The Company acquired new loan pool participations totaling $9.6 million during the second quarter of 2008. As of June 30, 2008, the categories of loans by collateral type in the loan pools were commercial real estate - 51%, commercial loans - 12%, agricultural and agricultural real estate - 9%, single-family residential real estate - 14% and other loans - 14%. The Company has minimal exposure in loan pools to consumer real estate subprime credit or to construction and real estate development loans.

Goodwill and Other Intangible Assets

Goodwill totaled $20.8 million as of June 30, 2008 and $4.4 million as of December 31, 2007. The increase in goodwill was due to the Merger. As of June 30, 2008 the Company has not finalized the valuation of certain tangible and intangible assets given the timing of the transaction. The Company is in the process of obtaining third-party valuations of certain tangible assets and liabilities, and intangible assets; thus the allocation of the purchase price is subject to refinement.

Goodwill is subject to impairment testing annually under the provisions of Financial Accounting Standards Board Statement No. 142 (“SFAS 142”). The Company has historically tested goodwill for impairment at the end on the third quarter. SFAS 142 does provide that goodwill should be tested more frequently upon the occurrence of certain defined events or a change in circumstances. A significant change in the business climate is one of these defined events. Due to the decline in the Company’s stock price to a level below its book value, the Company evaluated its goodwill for impairment at the end of the second quarter of 2008. Goodwill was determined to not be impaired at that time and no impairment write-down of goodwill was recorded. Management will continue to evaluate goodwill for potential impairment given the uncertain business climate and the level of the Company’s stock price relative to book value.

Other intangible assets increased to $13.8 million as of June 30, 2008 as a result of the Merger. The Company has not finalized the valuation of the intangible assets given the timing of the transaction. The Company is in the process of finalizing its third-party valuation of the intangibles assets; thus the allocation of purchase price is subject to refinement. Amortization of intangible assets is recorded using an accelerated method based on the estimated life of the respective intangible. Projections of amortization expense are based on existing asset balances and the remaining useful lives. The following table summarizes the amounts and carrying values of intangible assets as of June 30, 2008 and December 31, 2007.

	Weighted	Gross					Unamortized
	Average	Carrying		Accumulated			Intangible
	Useful Life	Amount		Amortization			Assets
	(years)	(in thousands)
June 30, 2008
Other intangible assets:
Mortgage servicing rights	6	$	321		147			174
Insurance agency intangible	6	$	53		22			31
Core deposit premium	10	$	5,737		(112	)		5,849
Trade name intangible	-	$	7,040		-			7,040
Customer list intangible	15	$	730		16			714
Total		$	13,881	$	73		$	13,808

December 31, 2007
Other intangible assets:
Mortgage servicing rights	6	$	321		88			233
Insurance agency intangible	6	$	53		18			35
Total		$	374	$	106		$	268

The following table summarizes future amortization expense of intangible assets. Amortization of intangible assets is recorded using an accelerated method based on the estimated useful lives of the respective intangible assets.

Mortgage

Insurance

Core

Cutomer

Servicing

Agency

Deposit

List

(in thousands)

Rights

Intangible

Premium

Intangible

Totals

Six months ended December 31, 2008

(112

)

(16

)

Year ended December 31,