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Application of Purchase Accounting

 

We completed the acquisition of the former MidwestOne Financial Group, Inc., which generated significant amounts of goodwill and intangible assets and related amortization.  The values assigned to goodwill and intangibles, as well as their related useful lives, are subject to judgment and estimation by our management.  Goodwill and intangibles related to acquisitions are determined and based on purchase price allocations.  Valuation of intangible assets is generally based on the estimated cash flows related to those assets, while the initial value assigned to goodwill is the residual of the purchase price over the fair value of all identifiable assets acquired and liabilities assumed.  If the carrying value of the goodwill exceeded the implied fair value of the goodwill, an impairment loss would be recorded in an amount equal to that excess.  Performing such a discounted cash flow analysis involves the use of estimates and assumptions.  Useful lives are determined based on the expected future period of the benefit of the asset, the assessment of which considers various characteristics of the asset, including the historical cash flows.  Due to the number of estimates involved related to the allocation of purchase price and determining the appropriate useful lives of intangible assets, we have identified purchase accounting as a critical accounting policy.

 

Goodwill and Intangible Assets

 

Goodwill and intangible assets arise from purchase business combinations.  On March 14, 2008, we completed our merger with the former MidWestOne.  We were deemed to be the purchaser for accounting purposes and thus recognized goodwill and other intangible assets in connection with the merger.  The goodwill was assigned to our one reporting unit, banking.  As a general matter, goodwill and other intangible assets generated from purchase business combinations and deemed to have indefinite lives are not subject to amortization and are instead tested for impairment at least annually.  Core deposit and customer relationship intangibles arising from acquisitions are being amortized over their estimated useful lives of up to 10 years.

 

In 2008, the extreme volatility in the banking industry that first started to surface in the latter part of 2007 had a significant impact on banking companies and the price of banking stocks, including our common stock.  At December 31, 2008, our market capitalization was less than our total shareholders’ equity, providing an indication that goodwill may be impaired as of such date.  Thus, the Company performed an impairment analysis as a result of the significant decline in its stock price.  Based on this analysis, we wrote off $27.3 million of goodwill in the fourth quarter of 2008, which represented all of the goodwill that resulted from the Merger.  Such charge had no effect on the Company’s or the Bank’s cash balances or liquidity.  In addition, because goodwill and other intangible assets are not included in the calculation of regulatory capital, the Company’s and the Bank’s December 31, 2008 regulatory ratios were not adversely affected by this non-cash expense and exceeded the minimum amounts required to be considered “well-capitalized.”

 

Our other intangible assets are core deposit and customer relationship intangibles.  The establishment and subsequent amortization of these intangible assets requires several assumptions including, among other things, the estimated cost to service deposits acquired, discount rates, estimated attrition rates and useful lives.  We assess these intangible assets for impairment quarterly.  If the value of the core deposit intangible or the customer relationship intangible is determined to be less than the carrying value in future periods, a writedown would be taken through a charge to our earnings.  The most significant element in evaluation of these intangibles is the attrition rate of the acquired deposits or loans.  If such attrition rate were to accelerate from that which we expected, the intangible may have to be reduced by a charge to earnings.  The attrition rate related to deposit flows or loan flows is influenced by many factors, the most significant of which are alternative yields for loans and deposits available to customers and the level of competition from other financial institutions and financial services companies.

 

Fair Value of Available for Sale Securities

 

 

 

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Summary of Performance

 

For the year ended December 31, 2008, the Company recorded a net loss of $24,562,000, or a loss of $3.09 per share basic and diluted.  This compares with net income of $6,648,000, or $1.29 per share basic and diluted, for the year ended December 31, 2007.  The Company’s significant net loss in 2008 was primarily attributable to two one-time charges totaling $33.5 million that were recognized in the fourth quarter.  The first was a $27.3 million non-cash goodwill impairment charge; this goodwill represented all of the goodwill that was recognized as a result of the Merger.  The second was a $6.2 million (pre-tax) “other than temporary impairment” charge to the Company’s investment securities portfolio as a result of the decline in the market value of certain debt securities secured by pools of trust preferred securities issued by multiple banks and insurance companies.  If these two charges were excluded from the Company’s earnings, the Company would have had earnings for the year ended December 31, 2008 of $6.6 million, or $0.76 basic and diluted earnings per share.  The Company’s net interest income for the year ended December 31, 2008 was $39,811,000 as compared to net interest income for the year ended December 31, 2007 of $19,267,000, an increase of 106.6% that resulted primarily from the Merger.  This increase in net interest income was offset in part, however, by an increase in noninterest expense (excluding the aggregate $27.3 million charge due to the goodwill impairment) of $20,960,000 and an increase in the provision for loan losses of $3,866,000.

 

Total assets of the Company increased $806,979,000, or 115.0%, to $1,508,962,000 as of December 31, 2008 from $701,983,000 as of December 31, 2007, with $784,461,000 of the increase in total assets resulting from the Merger.  The Company’s total loans outstanding (excluding loan pool participations) increased $613,260,000, or 152.7%, to $1,014,814,000 at December 31, 2008 from $401,554,000 at December 31, 2007.  Approximately 87.4% of the increase in total loans was a result of the Merger; the remainder came from organic loan growth generated by the Company in 2008.  The Company’s deposits increased $601,574,000, or 114.2%, to $1,128,189,000 as of December 31, 2008 from $526,615,000 at December 31, 2007.  Approximately 95.5% of the increase in deposits was a result of the Merger; the remainder came from organic deposit growth generated by the Company in 2008.

 

Various operating and equity ratios for the Company are presented in the table below for the years indicated.  Due to the significant net loss recognized by the Company for the year ended December 31, 2008 as a result of the $27.3 million goodwill impairment charge and the $6.2 million other-than-temporary impairment charge to the Company’s investment securities portfolio, the Company’s return on average assets and return on equity were negative in 2008, as shown in the table below.  The dividend payout ratio represents the percentage of the Company’s prior year’s net income that is paid to shareholders in the form of cash dividends. Average equity to average assets is a measure of capital adequacy that presents the percentage of average total shareholders’ equity compared to the average assets of the Company. The equity to assets ratio expresses this ratio using the period-end amounts instead of on an average basis.

 

		12/31/08				12/31/07				12/31/06				12/31/05
Return on average total assets			(1.61	) %			0.98	%			0.87	%			1.06	%
Return on average equity			(15.96	)			8.83				8.16				10.27
Dividend payout ratio			59.49				57.90				23.96				20.53
Average equity to average assets			10.10				10.94				10.62				10.32
Equity to assets ratio (at period end)			8.66				11.02				10.95				10.30

 

Results of Operations

 

Net Interest Income

 

Net interest income is the total of interest income earned on earning assets less interest expense paid on interest bearing liabilities. Net interest income is affected by changes in the volume and yields on earning assets and the volume and rates paid on interest-bearing liabilities. Net interest margin is a measurement, expressed as a ratio, of the net return on interest earning assets computed by dividing net interest income on a tax-equivalent basis by the annual average balance of all interest earning assets.

 

Net interest income for the year ended December 31, 2008 totaled $39,811,000, an increase of $20,544,000, or 106.6%, compared with the $19,267,000 of net interest income for the year ended December 31, 2007. This increase was due primarily to the greater loan volumes as a result of the Merger followed by a wider net interest margin resulting from a steepening of the yield curve between December 31, 2007 and December 31, 2008.  The net interest margin (on a tax-equivalent basis) increased during 2008 to 3.28% compared with 3.27% for 2007 as the increase in net interest income was proportionately greater than the increase in average earning assets.

 

 

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The provision for loan losses recorded by the Company for 2008 was $4,366,000, an increase of $3,866,000, or 773.2%, compared with the provision of $500,000 for 2007. Management determined an appropriate provision based on its evaluation of the adequacy of the allowance for loan losses in relationship to a continuing review of current collection risks within its loan portfolio, identified problem loans, the current local and national economic conditions, actual loss experience, regulatory policies, and industry trends. The increase in the provision is directly attributable to increased loan charge-offs in 2008, the size of the loan portfolio increasing by over 150% (which was primarily attributable to the Merger) and a higher level of nonperforming assets reflecting stress in the local and national economy.

 

Noninterest Income

 

Noninterest income, which includes realized gains and losses on investment securities (including other than temporary impairments of such assets), decreased $2,748,000, or 31.2%, for the year ended December 31, 2008 to $6,058,000. This compares with noninterest income of $8,806,000 for 2007. The Company recognized losses of $6,540,000 from the sale of investment securities available for sale and from other than temporary impairment charges during the year ended December 31, 2008 compared with realized losses on sales of investment securities of only $256,000 for the same period during 2007.  Other than temporary impairment charges recorded in 2008 of $6,194,000 were taken on certain debt securities secured by pools of trust preferred securities.   Excluding all security losses recognized, noninterest income was $12,598,000 for the year ended December 31, 2008 compared with $9,062,000 for 2007, an increase of $3,536,000, or 39.0%.  Trust and investment fees increased $323,000, or 8.8%, for the year ended December 31, 2008 to $4,011,000 from $3,688,000 for the year ended December 31, 2007.  This increase was due primarily to an increase in the amount of assets under management for both the Trust Department and the Investor Center.  Service charges on deposit accounts increased $3,529,000, or 169.5%, for the year ended December 31, 2008, with much of the additional income due to increased volume of deposit accounts as a result of the Merger.  Income from the sale of mortgage loans and servicing fees decreased $301,000, or 24.9%, reflecting the decreased level of new mortgage loan originations, which was offset in part by an increase in customers refinancing mortgage loans to take advantage of overall lower market interest rates.  Depending on future interest rates, the level of refinancing activity may change. Other service fees and commissions totaled $1,527,000 for the year ended December 31, 2008, a decrease of $219,000, or 12.5%, compared to the year ended December 31, 2007.  This decrease was primarily due to decreases in a number of smaller fee areas of the Company—credit life sales, debit/credit card fees, and commissions from realty sales.

 

Noninterest Expense

 

Noninterest expense totaled $66,515,000 for the year ended December 31, 2008 compared with $18,620,000 for 2007, an increase of $47,895,000, or 257.2%. Over one-half of this increase is attributable to the write-off of $27,295,000 of goodwill in the fourth quarter of 2008, which represented all of the goodwill that resulted from the Merger. Salaries and employee benefits increased $9,977,000, or 91.3%, due primarily to the Merger (increased staffing and severance payments) and to normal annual compensation adjustments, greater health insurance costs and increased incentives.  Net occupancy and equipment expense increased $3,107,000, or 104.3%, to $6,085,000 for the year ended December 31, 2008 from $2,978,000 for the same period in 2007.  This increase resulted primarily from the Merger as well as expenses due to two natural disasters (a Category 5 tornado and a “once-in-500-years” flood) that impacted our Parkersburg, Waterloo and Coralville offices.  Professional and other outside services increased $1,791,000, or 87.1%, to $3,848,000 for the year ended December 31, 2008 from $2,057,000 for the same period in 2007. This increase resulted primarily from the Merger as well as increased core processing costs, expenses relating to the third-party implementation of Sarbanes-Oxley controls documentation and increased accounting and audit fees.  Other operating expense increased $4,949,000, or 186.1%, to $7,608,000 for the year ended December 31, 2008 compared to $2,659,000 for the same period in 2007.  This increase resulted primarily from costs associated with the Merger and includes marketing, charitable donations and public relations expense, loan collection and legal costs, office supplies and printing costs, telecommunications expense and the charge-off of fraudulent, forged or otherwise uncollectible items.

 

Income Tax Expense

 

 

 

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Financial Condition

 

Loans (Excluding Loan Pool Participations)

 

The Company’s loan portfolio increased $613,260,000, or 152.7%, to $1,014,814,000 on December 31, 2008 from $401,554,000 on December 31, 2007. $530,703,000 of this increase was a result of the Merger.  As of December 31, 2008, the Company’s loan (including loan pool participations, net) to deposit ratio was 98.2%, compared with 76.3% at December 31, 2007 while its loan (excluding loan pool participations, net) to deposit ratio as of December 31, 2008 was 90.0% compared with 76.3% at December 31, 2007.

 

The Company’s loan portfolio largely reflects the profile of the communities in which it operates.  Total commercial, financial and agricultural loans increased $196,209,000 or 190.4%, from $103,029,000 at December 31, 2007 to $299,238,000 at December 31, 2008.  Total real estate loans (including 1-4 family residential and commercial construction) were $685,780,000 as of December 31, 2008 compared with $288,975,000 as of December 31, 2007.  Real estate loans were the Company’s largest category of loans, comprising 67.5% of total loans at December 31, 2008 and 72.0% at December 31, 2007.  Commercial, financial and agricultural loans are the next largest category of loans at December 31, 2008, totaling $299,238,000 or 29.5% of total loans compared with $103,029,000 or 25.7% of loans at December 31, 2007. The remaining 3.0% of the portfolio as of December 31, 2008 consisted of $29,796,000 in consumer and other loans compared with $9,550,000 as of December 31, 2007.

 

The following table shows the composition of the Company’s loan portfolio as of the dates indicated.

 

		12/31/2008								12/31/2007								12/31/2006								12/31/2005
						% of								% of								% of								% of
		Amount				Total				Amount				Total				Amount				Total				Amount				Total
(in thousands)
Commercial, Financial and Agricultural		$	299,238				29.5	%		$	103,029				25.7	%		$	89,284				23.6	%		$	83,291				22.5	%
Real estate:
Construction			99,617				9.8				28,774				7.2				31,133				8.2				34,461				9.3
Mortgage			586,163				51.7				260,201				64.8				248,308				65.6				242,710				65.4
Loans to Individuals			23,857				2.4				8,895				2.2				9,475				2.5				10,126				2.7
All Other			5,939				0.6				655				0.2				412				0.1				261				0.1
Total loans		$	1,014,814				100.0	%		$	401,554				100.0	%		$	378,612				100.0	%		$	370,849				100.0	%
Total assets		$	1,508,962							$	701,983							$	668,671							$	669,769
Loans to total assets							67.4	%							57.2	%							56.6	%							55.4	%

The following table sets forth the remaining maturities for certain loan categories as of December 31, 2008

																		Total for Loans								Total for Loans
																		Due Within								Due After
						Due in												One Year Having:								One Year Having:
		Due Within				One to				Due After								Fixed				Variable				Fixed				Variable
		One Year				Five Years				Five Years				Total				Rates				Rates				Rates				Rates
(in thousands)
Commercial, Financial and Agricultural		$	170,202			$	119,233			$	9,803			$	299,238			$	40,216			$	129,986			$	115,467			$	13,569
Real estate:
Construction			65,380				33,350				887				99,617				43,673				21,707				20,149				14,088
Mortgage			119,281				416,852				50,030				586,163				49,210				70,071				325,166				141,716
Loans to Inidviduals			5,872				17,426				559				23,857				4,329				1,541				17,829				158
All Other			1,026				3,914				999				5,939				936				92				2,641				2,270
Total loans		$	361,761			$	590,775			$	62,278			$	1,014,814			$	138,364			$	223,397			$	481,252			$	171,801

 

Loan Pool Participations

 

As of December 31, 2008, the Company had loan pool participations of $92,932,000 net of an allowance for loan losses of $2,134,000.  Loan pools are participation interest in performing, sub-performing and non-performing loans that have been purchased from various non-affiliated banking organizations.  The former MidWestOne has engaged in this activity since 1988.  The loan pool investment balance shown as an asset on the Company’s Consolidated Balance Sheet represents the discounted purchase cost of the loan pool participations.  The Company acquired new loan pool participations totaling $28,332,000 during the period from the Merger to December 31, 2008.  As of December 31, 2008, the categories of loans by collateral type in the loan pools were commercial real estate - 55.0%, commercial loans - 10.0%, agricultural and agricultural real estate - 7.3%, single-family residential real estate – 12.1% and other loans – 15.6%. The Company has minimal exposure in loan pools to consumer real estate subprime credit or to construction and real estate development loans.

 

The loans in the pools provide some geographic diversification to the Company’s balance sheet. As of December 31, 2008, loans in the southeast region of the United States represented approximately 39% of the total. The central region was the next largest area with 30%, the northeast region with 23%, followed by the northwest region with 5% and southwest with 3%.  The highest concentration of assets in any one State is in Florida at approximately 19% of the basis total, with the next highest State level being Ohio at 9% followed by Pennsylvania at 8%.  As of December 31, 2008, approximately 59% of the loans were contractually current or less than 90 days past-due, while 41% were contractually past-due 90 days or more. It should be noted that many of the loans were acquired in a contractually past due status, which is reflected in the discounted purchase price of the loans. Performance status is monitored on a monthly basis. The 41% contractually past-due includes loans in litigation and foreclosed property.  As of December 31, 2008, loans in litigation totaled approximately $21,564,000, while foreclosed property was approximately $6,479,000.  As of December 31, 2008, the Company’s investment basis in loan pool participations was approximately 53.0% of the “face” amount of the underlying loans.

 

Loan Quality

 

 

 

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The following table provides information on the Company’s non-performing loans as of the dates indicated.

 

	December 31,
		2008				2007				2006				2005				2004
(in thousands)
90 days past due		$	3,024			$	514			$	395			$	302			$	151
Restructured			424				-				-				-				-
Nonaccrual			11,785				782				371				455				395
Total non-performing loans		$	15,233			$	1,296			$	766			$	757			$	546
Ratio of nonperforming loans to total loans			1.50	%			0.32	%			0.20	%			0.20	%			0.16	%

 

The allowance for loan losses was $10,977,000 on December 31, 2008 and totaled $5,466,000 as of December 31, 2007. The allowance represented 1.08% of total loans at December 31, 2008 and 1.36% of loans on December 31, 2007.  Additions to the allowance for the year ended December 31, 2008 were the result of growth in commercial, financial and agricultural loans as well as 1-4 family residential loans and the increase in nonperforming loans and stress in the local and national economy.  The allowance as a percentage of non-performing loans was 72.1% on December 31, 2008 and 421.8% on December 31, 2007.  The decrease in the percentage of the allowance relative to non-performing loans from December 31, 2007 to December 31, 2008 reflects the increase in nonaccrual loans mentioned earlier.  Net loan charge offs were $4,333,000 or 0.43% of loans for the year ended December 31, 2008.  This compares with net loan charge-offs of $332,000 or 0.08% of loans for the year ended December 31, 2007.  The allowance for loan losses is maintained at a level considered by management to be adequate to provide for loan losses inherent in the portfolio at the balance sheet date.

 

The following table sets forth loans charged-off and recovered by the type of loan and an analysis of the allowance for loan losses for the years indicated.

 

		Year ended December 31,
		2008				2007				2006				2005				2004
(in thousands)
Amount of loans outstanding at end of period (net of unearned interest) (1)		$	1,014,814			$	401,554			$	378,612			$	370,849			$	335,551
Average amount of loans outstanding for the period (net of unearned interest)		$	893,451			$	390,862			$	379,554			$	354,169			$	336,190
Allowance for loan losses at beginning of period		$	5,466			$	5,298			$	5,227			$	4,894			$	5,553
Charge-offs:
Commercial, Financial and Agricultural			2,944				356				413				29				613
Real estate:
Construction			780				-				-				-				-
Mortgage			922				36				63				99				241
Loans to Individuals			276				88				106				36				103
All Other			-				-				-				11				10
Total charge-offs			4,922				480				582				175				967
Recoveries:
Commercial, Financial and Agricultural			274				120				34				129				51
Real estate:
Construction			3				-				-				-				-
Mortgage			85				-				29				46				24
Loans to Individuals			227				28				40				31				37
All Other			-				-				-				2				1
Total recoveries			589				148				103				208				113
Net loans charged off (recovered)			4,333				332				479				(33	)			854
Provision for loan losses			4,366				500				550				300				195
Allowance from acquired bank			5,478				-				-				-				-
Allowance for loan losses at end of period		$	10,977			$	5,466			$	5,298			$	5,227			$	4,894
Net loans charged off (recovered) to average loans			0.48	%			0.08	%			0.13	%			(0.01	)  %			0.26	%
Allowance for loan losses to total loans at end of period			1.08	%			1.36	%			1.40	%			1.41	%			1.46	%

(1)  Loans do not include, and the allowance for loan losses does not include, loan pool participations.

 

The Company has allocated the allowance for loan losses to provide for loan losses within the categories of loans set forth in the table below. The allocation of the allowance and the ratio of loans within each category to total loans as of December 31 are as follows:

 

		2008								2007								2006								2005								2004
						Percent of								Percent of								Percent of								Percent of								Percent of
						Loans to								Loans to								Loans to								Loans to								Loans to
		Allowance				Total				Allowance				Total				Allowance				Total				Allowance				Total				Allowance				Total
		Amount				Loans				Amount				Loans				Amount				Loans				Amount				Loans				Amount				Loans
(in thousands)
Commercial, Financial and Agricultural		$	3,127				28.5	%		$	1,663				30.4	%		$	2,389				23.6	%		$	2,299				22.5	%		$	2,117				20.7	%
Real estate:
Construction			791				7.2	%			408				7.5	%			553				8.2				589				9.3				604				10.0
Mortgage			1,394				12.7	%			3,063				56.0	%			2,258				65.6				2,189				65.4				2,004				66.1
Loans to Individuals			187				1.7	%			300				5.5	%			98				2.5				126				2.7				163				3.1
All Other			-				-				32				0.6	%			-				0.1				24				0.1				6				0.1
Allowance from acquired bank			5,478				49.9	%
Total		$	10,977				100.0	%		$	5,466				100	%		$	5,298				100.0	%		$	5,227				100.0	%		$	4,894				100.0	%

 

The allowance for loan losses increased $5,511,000 in 2008. Of the $5,511,000 increase, $5,478,000 represented the allowance brought to the merger from the acquired bank. Provisions for loan losses totaled $4,366,000 in 2008 and slightly exceeded net loans charged off during the year of $4,333,000.

 

Watch loans increased by $34.2 million from December 31, 2007 to 2008 and totaled $53.4 million. Again, the increase was primarily tied to the acquired bank’s Watch totals being included in the 2008 figure. For comparison purposes, the Watch loan totals for the former ISB Financial Corp and MidWestOne Financial Group, Inc combined at year end 2007 was $51.6 million. Using this same comparison, noteworthy changes in Watch loans as of December 31, 2008 are as follows: agricultural loans decreased from $13.6 to $6.4 million, commercial loans increased from $8.2 to $11.4 million, and commercial real estate loans (including construction and development) increased from $18.4 to $23.0 million.

 

Substandard loans increased by $53.1 million from December 31, 2007 to 2008 and totaled $61.2 million. Again, the acquired bank’s Substandard totals being included in the 2008 figure played a part in the increase; however, a majority of the jump was due to management’s evaluation of its loan portfolio and the recognition of the uncertain economic times. For comparison purposes, the Substandard loan totals for the former ISB Financial Corp. and MidWestOne Financial Group, Inc combined at year end 2007 was $18.7 million. Using this same comparison, noteworthy changes in Substandard loans as of December 31, 2008 are as follows: agricultural loans increased from $2.7 to $8.7 million, commercial loans increased from $6.1 to $14.6 million, commercial real estate loans (including construction and development) increased from $6.0 to $28.5 million, and residential real estate loans increased from $2.9 to $7.7 million.

 

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The subprime mortgage banking environment has been experiencing considerable strain from rising delinquencies and liquidity pressures and some subprime mortgage lenders have failed. The increased scrutiny of the subprime lending market and heightened perceptions of the risks associated with bank loan portfolios are factors that have had a negative impact on general market conditions. The Company’s underwriting standards have been structured to limit exposure to the types of loans that are currently experiencing high foreclosures and loss rates. Management believes that the Company’s mortgage loan portfolio has minimal exposure to loans generally considered to be subprime loans.

 

In addition, there has been a slowdown in the housing market in the Company’s trade area. This has been evidenced by reduced levels of new and existing home sales, stagnant to declining property values, a decline in building permits, and an increase in the time houses remain on the market. The Company will continue to monitor adequacy of the allowance on a quarterly basis and will consider the impact of economic conditions on the borrowers’ ability to repay, loan collateral values, past collection experience, the risk characteristics of the loan portfolio and such other factors that deserve current recognition.

 

Investment Securities

 

The Company manages its investment portfolio to provide both a source of liquidity and earnings.  The portfolio largely consisted of U.S. Government agency securities, corporate securities, mortgage-backed securities, and municipal bonds.  Investment securities available for sale totaled $272,380,000 on December 31, 2008 compared to $232,125,000 at December 31, 2007.  The Company’s investment in available for sale securities balances increased moderately with the Merger.  Securities classified as held to maturity increased to a balance of $8,125,000 on December 31, 2008, up from $95,000 at December 31, 2007; this increase also a result of the Merger.

 

See Note 2 “Investment Securities,” and Note 14 “Estimated Fair Values of Financial Instruments and Fair Value Measurements” for additional information related to the investment portfolio.

 

Our investment portfolio includes $3,552,187 in pooled trust preferred collateralized debt obligations that are backed by trust preferred securities issued by banks, thrifts and insurance companies.  The market for these securities at December 31, 2008 was not active and markets for similar securities are also not active. The valuation of these securities involves evaluating all relevant credit and structural aspects, determining appropriate performance assumptions and performing a discounted cash flow analysis. This evaluation includes detailed credit, performance and structural evaluations for each piece of collateral. Other factors in the valuation include terms of the structure, the cash flow waterfall (for both interest and principal), the over collateralization test and events of default/liquidation.  Based on our cash flow analysis, we determined that all contractual cash flows may not be received, and a $6,194,000 other-than-temporary impairment charge was recorded at December 31, 2008.   Any future deferrals or defaults for our pooled trust preferred collateralized debt obligations could result in an additional other-than-temporary impairment charge.

 

 

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The following table sets forth certain information with respect to the book value of the Company’s investment portfolio.

 

Book value:
		December 31,
		2008				2007				2006				2005				2004
(in thousands)
Securities available for sale:
U.S. treasury		$	-			$	-			$	-			$	1,982			$	3,960
U.S. government agency securities and corporations			73,600				66,891				85,462				69,800				76,017
States and political subdivisions			113,843				82,412				69,744				64,529				66,059
Mortgage-backed and  collateralized mortgage obligations			73,077				69,128				76,973				99,731				108,335
Other securities			11,860				13,694				7,307				1,116				965
Total securities available for sale			272,380				232,125				239,486				237,158				255,336
Securities held to maturity:
U.S. treasury			-				-				-				-				-
U.S. government agency securities and corporations			-				-				-				-				-
States and political subdivisions			8,029				95				113				175				242
Mortgage-backed and collateralized mortgage obligations			96				-				-				-				-
Other securities			-				-				-				-				-
Total securities held to maturity			8,125				95				113				175				242
Total investment securities		$	280,505			$	232,220			$	239,599			$	237,333			$	255,578

 

The following table sets forth the contractual maturities of investment securities as of December 31, 2008, and the weighted average yields (for tax-exempt obligations on a fully tax-equivalent basis assuming a 34% tax rate) of such securities. As of December 31, 2008, the Company held no securities with a book value exceeding 10% of shareholders’ equity.

 

		Maturity
										After One but								After Five but
		Within One Year								Within Five Years								Within Ten Years								After Ten Years
		Amount				Yield				Amount				Yield				Amount				Yield				Amount				Yield
		(dollars in thousands)
Securities available for sale:
U.S. government agency securities and corporations		$	10,174				4.26	%		$	52,494				4.69	%		$	10,751				5.07	%		$	-				-	%
States and political subdivisions			14,518				5.18				46,864				5.10				44,432				5.09				10,777				5.21
Mortgage-backed and
collateralized mortgage obligations			507				4.36				13,980				4.08				12,387				5.26				46,055				5.23
Other securities			999				5.00				7,593				4.59				-				-				850				3.24
Total securities available for sale			26,197				4.80				120,931				4.77				67,570				5.12				57,682				5.20
Securities held to maturity:
Mortgage-backed and
collateralized mortgage obligations			-				-				-				-				-				-				96				6.01
Obligations of states and political
subdivisions			1,541				5.13				5,794				5.41				694				5.79				-				-
Total securities held to maturity			1,541				5.13				5,794				5.41				694				5.79				96				6.01
Total investment securities		$	27,738				4.82	%		$	126,726				4.80	%		$	68,264				5.12	%		$	57,778				5.20	%

Goodwill and Other Intangible Assets

 

Goodwill and intangible assets totaled $13,424,000 and $4,356,000 at December 31, 2008 and 2007.   During 2008, the Company acquired the former MidWestOne and recognized goodwill and other intangible assets in connection with the merger of $22,940,000 and $13,203,000, respectively.  Given the extreme volatility in the banking industry and the price of banking stocks, including our common stock, we performed an impairment analysis as a result of the decline in our stock to prices significantly below our book value.  As a result, we recorded a goodwill impairment charge of $27,295,000, which represented all of our goodwill at December 31, 2008.  We recorded no impairment charges during 2008 related to our other intangible assets.  Other intangible assets declined during the year ended December 31, 2008 to $13,424,000, primarily related to core deposit amortization during the year.

 

Deposits

 

Total deposits were $1,128,189,000 on December 31, 2008 compared with $526,615,000 as of December 31, 2007, an increase of $601,574,000 or 114.2%.  Deposit growth occurred almost equally between the savings and interest bearing demand deposits category and the time certificates of deposit category.  As of December 31, 2008, time certificates of deposit were the largest component of the Company’s deposit base representing approximately 49.3% of total deposits.  This compares with 46.5% of total deposits on December 31, 2007.  Savings and interest-bearing demand deposits were the next largest category at 39.7%, while noninterest-bearing demand deposits comprised 11.0% of total deposits at December 31, 2008.

 

		December 31,
		2008								2007								2006								2005								2004
		Average								Average								Average								Average								Average
		Balance				Rate				Balance				Rate				Balance				Rate				Balance				Rate				Balance				Rate
(in thousands)
Non-interest bearing demand deposits		$	118,764				N/A			$	63,463				N/A			$	62,650				N/A			$	70,642				N/A			$	75,306				N/A
Savings and interest-bearing demand (NOW and  money market)			392,603				1.40	%			193,044				1.61	%			205,074				1.48	%			193,981				0.92	%			180,070				0.62	%
Time deposits			502,220				3.51				248,377				4.71				228,309				4.08				210,069				3.05				206,786				2.57
Total deposits		$	1,013,587				2.28	%		$	504,884				2.93	%		$	496,033				2.49	%		$	474,692				1.73	%		$	462,162				1.39	%

 

 The following table summarizes certificates of deposit in amounts of $100,000 or more by time remaining until maturity.  These time deposits were made by individuals, corporations and public entities, all of which were located in the Company’s market area or were State of Iowa public funds.

 

		December 31,				December 31,				December 31,
		2008				2007				2006
(in thousands)
Three months or less		$	41,732			$	24,522			$	19,689
Over three through six months			24,930				21,328				15,747
Over six months through one year			48,244				23,778				22,574
Over one year			38,415				8,311				12,220
Total		$	153,321			$	77,939			$	70,230

 

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Federal Home Loan Bank Advances and Other Borrowings

 

As of December 31, 2008, the Company’s subsidiary bank had borrowed $158,782,000 in fixed-rate advances from the Federal Home Loan Bank of Des Moines.  Advances from the Federal Home Loan Bank at December 31, 2008 increased $111,782,000 from December 31, 2007 primarily the result of the Merger but also to take advantage of the lower interest rate environment.  The Company utilizes Federal Home Loan Bank advances as an alternate source of funds to supplement deposits.

 

The following table summarizes the outstanding amount of and the average rate on borrowed funds as of December 31, 2008, 2007 and 2006

		December 31,
		2008								2007								2006
						Average								Average								Average
		Balance				Rate				Balance				Rate				Balance				Rate
(in thousands)
Federal Home Loan Bank advances		$	158,782				4.21	%		$	47,000				4.05	%		$	46,020				4.44	%
Long-term debt			15,640				5.02				-				-				-				-
Federal funds purchased and repurchase agreements			57,299				0.92				45,997				3.11				51,929				3.72
Total		$	231,721				3.45	%		$	92,997				3.59	%		$	97,949				4.06	%

The maximum amount of borrowed funds outstanding at any month end for the years ended December 31, 2008, 2007 and 2006

		December 31,
		2008				2007				2006
(in thousands)
Federal Home Loan Bank advances		$	159,100			$	48,500			$	62,700
Long-term debt			15,640				-				-
Federal funds purchased and repurchase agreements..			60,762				58,749				53,949
Total		$	235,502			$	107,249			$	116,649

The following table sets forth the average amount of and the average rate paid on borrowed funds for the years months ended ended December 31, 2008, 2007 and 2006.

		Year ended December 31,
		2008								2007								2006
		Average				Average				Average				Average				Average				Average
		Balance				Rate				Balance				Rate				Balance				Rate
(in thousands)
Federal Home Loan Bank advances		$	154,218				3.47	%		$	44,181				4.58	%		$	53,730				4.53	%
Long-term debt			12,337				5.02				-				-				-				-
Federal funds purchased and repurchase agreements			60,366				1.87				49,629				4.26				48,378				3.88
Total		$	226,921				3.13	%		$	93,810				4.41	%		$	102,108				4.22	%

 

Contractual Obligations and Other Commitments

 

The following table summarizes contractual obligations and other commitments as of December 31, 2008:

 

Payments due by Period:
						Less than				1 to 3				3 to 5				More than
Contractual obligations		Total				1 year				years				years				5 years
(in thousands)
Time certificates of deposit		$	556,271			$	377,416			$	142,860			$	35,036			$	959
Federal funds purchased and repurchase agreements			57,299				57,299				-				-				-
Federal Home Loan Bank Advances			158,782				55,482				89,000				14,300				-
Long-term debt			15,640				-				-				-				15,640
Lines of Credit			147,997				96,902				22,088				4,735				24,272
Noncancelable operating leases and capital
lease obligations			321				34				71				77				139
Total		$	936,310			$	587,133			$	254,019			$	54,148			$	41,010

Amount of Commitment - Expiration by Period:

Commitments to lend to borrowers		$	168,047			$	115,586			$	52,461			$	-			$	-
Commitments to purchase loans			9,188				9,188				-				-				-
Standy letters of credit			5,303				4,088				1,215				-				-
Total		$	182,538			$	128,862			$	53,676			$	-			$	-

 

 

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Capital Resources

 

The Company issued 3,519,788 shares of common stock to shareholders of the Former MidWestOne on March 14, 2008, in connection with the Merger.  The market value of the transaction was $81.8 million based on a per share price of Company common stock of $23.23.  This per share price was determined utilizing the median price to book of a peer group of publicly-traded Midwestern banking organizations as of the date the merger agreement was executed by the Company and the Former MidWestOne.  This peer group median price of 159% of book was applied to the Company’s book value as of the merger announcement date to determine the per share price, as the Company’s common stock was not listed on a national securities exchange and was not registered with the SEC prior to the Merger.  In the Merger, the Company also issued stock options to the holders of the outstanding options to acquire shares of Former MidWestOne common stock.  The fair value of the new options is determined to be a component of the purchase price with the amount of $2.4 million added to shareholders’ equity.  A total of 393,404 stock options were issued by the Company.

 

As of December 31, 2008, total shareholders’ equity was $130,342,000.  Total equity increased by $52,950,000 during the year ended December 31, 2008 from $77,392,000 at December 31, 2007, primarily as a result of the issuance of 3,519,788 shares of Company common stock in the Merger.  The increase in total shareholders’ equity resulting from the issuance of newly-issued shares in the merger was offset to a significant extent by the following three items: (i) a non-cash goodwill impairment charge of $27.3 million in the fourth quarter of 2008; (ii) the recognition of an “other than temporary impairment” charge of $6.2 million (on a pre-tax basis) on the Company’s investment portfolio in the fourth quarter of 2008; and (iii) a $2.4 million reduction to shareholders’ equity necessary to reflect the amount by which the Company’s defined benefit pension plan became underfunded in 2008 due to a decline in the value of the plan’s investment portfolio during the year.

 

Shareholders’ equity as a percentage of total assets was 8.6% on December 31, 2008, versus 11.0% on December 31, 2007.  Tangible shareholders’ equity as a percentage of total assets was 7.8% at December 31, 2008 and 10.5% at December 31, 2007.  Tangible equity is the ratio of shareholders’ equity less goodwill and other intangible assets in proportion to total assets less goodwill and intangible assets.  The decline in shareholders’ equity as a percentage of total assets is primarily attributable to the three adjustments referred to in the preceding paragraph (goodwill impairment, other-than-temporary impairment charge to investment portfolio, and adjustment to reflect underfunded status of defined benefit pension plan).  The decline in tangible shareholders’ equity to total assets is primarily attributable to the three aforementioned charges/adjustments as well as to the recognition of intangibles (other than goodwill) of approximately $13.4 million in connection with the Merger.

 

The Company’s Tier 1 risk-based capital ratio was 10.24% as of December 31, 2008, and the total risk-based capital ratio was 11.27%.  Risk-based capital guidelines require the classification of assets and some off-balance-sheet items in terms of credit-risk exposure and the measuring of capital as a percentage of the risk-adjusted asset totals.  Tier 1 capital is the Company’s total common shareholders’ equity reduced by goodwill, plus the capital attributable to the trust preferred securities issued by a subsidiary trust of the Company.  Total capital adds the allowance for loan losses to the Tier 1 capital amount.  As of December 31, 2007, the Company’s Tier 1 risk-based capital ratio was 15.35%, and the total risk-based capital ratio was 16.49%.  The Company’s Tier 1 risk-based capital ratio and total risk-based capital ratios as of December 31, 2008 exceeded the minimum regulatory requirements to be considered “well-capitalized” of 6.0% and 10.0%, respectively.  The Company’s Tier 1 leverage ratio, which measures Tier 1 capital in relation to average total assets, was 8.72% as of December 31, 2008 and 10.67% at December 31, 2007, exceeding the regulatory minimum requirement to be considered “well-capitalized” of 5.0%.

 

The Company’s common stock book value per share was $15.15 at December 31, 2008, which compares with $14.98 per share at December 31, 2007.  Tangible book value per share was $13.58 on December 31, 2008 compared with $14.14 on December 31, 2007.

 

 

 

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		Actual				Pro Forma				Minimum to Be
		December 31, 2008				December 31, 2008				“Well-Capitalized”
Total Tier 1 Capital			$130,896				$146,896				N/A
Total Tier 2 Capital			13,115				13,115				N/A
Total Capital			144,011				160,011				N/A
Tier 1 Leverage Ratio			8.72%				9.69%				5.00%
Tier 1 Risk-Based Ratio			10.24%				11.35%				6.00%
Total Risk-Based Ratio			11.27%				12.36%				10.00%

 

Liquidity and Funding

 

Liquidity management involves the ability to meet the cash flow requirements of depositors and borrowers. Liquidity management is conducted by the Company on both a daily and long-term basis. The Company adjusted its investments in liquid assets based upon management’s assessment of expected loan demand, projected loan sales, expected deposit flows, yields available on interest-bearing deposits, and the objectives of its asset/liability management program. Excess liquidity was invested generally in short-term U.S. Government and agency securities, short-term state and political subdivision securities, and other investment securities.

 

Liquid assets of cash on hand, balances due from other banks, and federal funds sold were maintained to meet customer needs. The Company had liquid assets of $32,926,000 as of December 31, 2008, compared with $34,220,000 as of December 31, 2007.  Investment securities classified as available for sale and loans maturing within one year totaled $387,958,000 and $167,285,000 as of December 31, 2008 and December 31, 2007, respectively.  Assets maturing within one year, combined with liquid assets, were 37.3% of total deposits at December 31, 2008 and 38.3% of total deposits at December 31, 2007.

 

The Company’s principal sources of funds were deposits, advances from the Federal Home Loan Bank, principal repayments on loans, proceeds from the sale of loans, proceeds from the maturity and sale of investment securities, its commercial bank line of credit, and funds provided by operations. While scheduled loan amortization and maturing interest-bearing deposits are relatively predictable sources of funds, deposit flows and loan prepayments are greatly influenced by economic conditions, the general level of interest rates, and competition. The Company utilized particular sources of funds based on comparative costs and availability. This included fixed-rate advances from the Federal Home Loan Bank that were obtained at a more favorable cost than deposits. The Company generally managed the pricing of its deposits to maintain a steady deposit base but had from time to time decided not to pay rates on deposits as high as its competition.

 

The Company previously had an outstanding $5 million credit facility with a correspondent lender (which the Company assumed from the Former MidWestOne in the Merger). The credit facility matured on June 30, 2008, at which time no amounts were outstanding thereunder. The Company elected not to renew the credit facility; thus, it no longer existed as of December 31, 2008.

 

As of December 31, 2008, the Company had $15,640,000 of long-term debt outstanding. This amount represents amounts indebtedness payable under junior subordinated debentures issued to a subsidiary trust that issued trust preferred securities in a pooled offering. The junior subordinated debentures have a 35-year term. One-half of the balance has a fixed interest rate of 6.48 percent until December 15, 2012; the other one-half has a variable rate of three-month LIBOR plus 1.59 percent.

 

Net cash provided by operations was another major source of liquidity. The net cash provided by operating activities was $1,626,000 through the year ended December 31, 2008 and $7,315,000 for the year ended December 31, 2007.

 

As of December 31, 2008, the Company had outstanding commitments to extend credit to borrowers of $168,047,000, issued standby letters of credit of $5,303,000 and had commitments to sell loans of $5,279,000.  Certificates of deposit maturing in one year or less totaled $375,826,000 as of December 31, 2008.  Management believes that a significant portion of these deposits will remain with the Company.

 

Asset and Liability Management

 

 

 

 

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As of December 31, 2008, the Company’s cumulative gap ratios for assets and liabilities repricing within three months and within one year were 1.03 and 1.02 respectively, meaning slightly more assets than liabilities were repriceable within these periods. The positive gap position was largely the result of the significant number of prime-based commercial and agricultural loans now in the Company’s portfolio and the inclusion of only 25% of the interest-bearing demand deposit accounts, money market accounts, and savings accounts as immediately repriceable.

 

The following table sets forth the scheduled repricing or maturity of the Company’s consolidated assets and liabilities as of December 31, 2008, based on the assumptions described below. The effect of these assumptions is to quantify the dollar amount of items that are interest rate sensitive and can be repriced within each of the periods specified. The table does not necessarily indicate the impact of general interest rate movements on the Company’s interest margin because the repricing of certain categories of assets and liabilities is subject to competitive and other pressures beyond the Company’s control. As a result, certain assets and liabilities indicated as maturing or otherwise repricing within a stated period may, in fact, mature or reprice at different times and at different volumes.

 

		Three				Over Three				One to				Three
		Months				Months				Three				Years
		or Less				to One Year				Years				or More				Total
(in thousands)
Interest earning assets:
Loans		$	313,294			$	245,814			$	386,371			$	168,855			$	1,114,334
Investment securities:
Taxable investments			40,001				46,489				75,556				29,178				191,224
Tax exempt investments			4,300				13,700				28,337				54,115				100,452
Total investment securities			44,301				60,189				103,893				83,293				291,676
Federal funds sold and interest-bearing balances			543				-				-				-				543
Total interest earning assets			358,138				306,003				490,264				252,148				1,406,553
Interest-bearing liabilities:
Savings and interest-bearing demand deposits			161,731				-				88,860				329,701				580,292
Time Certificates of deposit			130,281				244,351				144,359				35,838				554,829
Total deposits			292,012				244,351				233,219				365,539				1,135,121
Federal funds purchased and repurchase agreements			55,743				56,257				-				-				112,000
Federal Home Loan Bank advances			-				-				84,000				19,300				103,300
Other long-term debt			-				-				-				18,329				18,329
Total interest-bearing liabilities			347,755				300,608				317,219				403,168				1,368,750
Interest sensitivity gap per period		$	10,383			$	5,395			$	173,045			$	(151,020	)
Cumulative Interest sensitivity gap		$	10,383			$	15,778			$	188,823			$	37,803
Interest sensitivity gap ratio			1.03				1.02				1.55				0.63
Cumulative Interest sensitivity gap ratio			1.03				1.02				1.20				1.03

In the table above, NOW accounts and savings deposits are allocated across the repricing buckets based on deposit studies of account behavior.

 

Recent Accounting Pronouncements

 

Statements of Financial Accounting Standards

 

In December 2007, the FASB issued SFAS No. 160, Noncontrolling Interests in Consolidated Financial Statements – an amendment of ARB No. 51 (“SFAS No. 160”).  The objective of this statement is to improve the relevance, comparability and transparency of the financial information that a reporting entity provides in its consolidated financial statements by establishing accounting and reporting standards. SFAS No. 160 is effective for fiscal years beginning after December 15, 2008.  We do not anticipate that the adoption of SFAS No. 160 will have a material impact on our consolidated financial statements.

 

In December 2007, the FASB issued SFAS No. 141R, Business Combinations (“SFAS No. 141R”).  The objective of this statement is to improve the relevance, representational faithfulness and comparability of the information that a reporting entity provides in its financial reports about a business combination and its effects.  SFAS No. 141R establishes principles and requirements for how the acquirer recognizes and measures in its financial statements the identifiable assets acquired, the liabilities assumed and any noncontrolling interest in the acquiree, recognizes and measures the goodwill acquired in the business combination or a gain from a bargain purchase and determines what information to disclose to enable users of the financial statements to evaluate the nature and financial effects of the business combination.  SFAS No. 141R applies 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. 

 

In March 2008, the FASB issued SFAS No. 161, Disclosures about Derivative Instruments and Hedging Activities – an amendment of FASB Statement No. 133 (“SFAS No. 161”).  The objective of this statement is to enhance disclosures to provide adequate information about how derivative and hedging activities affect an entity’s financial position, financial performance and cash flows.  This statement requires enhanced disclosures about an entity’s derivative and hedging activities and thereby improves the transparency of financial reporting.  Under SFAS No. 161, entities will be required to provide enhanced disclosures about how and why an entity utilizes derivative instruments, how derivative instruments and related hedged items are accounted for under SFAS No. 133 and its related interpretations and how derivative instruments and related hedged items affect an entity’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.  We do not anticipate that the adoption of SFAS No. 161 will have a material impact on our consolidated financial statements.

 

 

 

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Item 7A.

Quantitative and Qualitative Disclosures About Market Risk.

 

The Company is not required to provide the information under this item because, as discussed above, it is eligible to use the scaled disclosure model for smaller reporting companies in this Annual Report on Form 10-K.

 

Item 8.

Financial Statements and Supplementary Data.

 

See Consolidated Financial Statements on pages F-1 through F-55.

 

Item 9.

Changes in and Disagreements With Accountants on Accounting and Financial Disclosure.

 

None.

 

Item 9A.

Controls and Procedures.

 

Disclosure Controls and Procedures

 

Under supervision and with the participation of certain members of the Company’s management, including the chief executive officer and the principal financial officer, the Company completed an evaluation of the effectiveness of the design and operation of its disclosure controls and procedures (as defined in SEC Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934). Based on this evaluation, the Company’s chief executive and principal financial officer believe that the disclosure controls and procedures were effective as of the end of the period covered by this Report with respect to timely communication to them and other members of management responsible for preparing periodic reports and material information required to be disclosed in this Report as it relates to the Company and its consolidated subsidiaries.

 

The effectiveness of the Company’s or any system of disclosure controls and procedures is subject to certain limitations, including the exercise of judgment in designing, implementing, and evaluating the controls and procedures, the assumptions used in identifying the likelihood of future events, and the inability to eliminate misconduct completely. As a result, there can be no assurance that the Company’s disclosure controls and procedures will prevent all errors or fraud or ensure that all material information will be made known to appropriate management in a timely fashion. By their nature, the Company’s or any system of disclosure controls and procedures can provide only reasonable assurance regarding management’s control objectives.

 

Changes in Internal Control over Financial Reporting

 

There was no change in the Company’s internal control over financial reporting during the Company’s last fiscal quarter that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.

 

Management’s Report on Internal Control over Financial Reporting

 

Management is responsible for establishing and maintaining adequate internal control over financial reporting (as defined in Rule 13a-15(f) under the Exchange Act) for the Company. The Company’s internal control system was designed to provide reasonable assurance to the Company’s management and board of directors regarding the preparation and fair presentation of published financial statements in accordance with U.S. generally accepted accounting principles. All internal control systems, no matter how well designed, have inherent limitations. Therefore, even those systems determined to be effective can provide only reasonable assurance with respect to financial statement preparation and presentation.

 

Management maintains a comprehensive system of controls intended to ensure that transactions are executed in accordance with management’s authorization, assets are safeguarded, and financial records are reliable. Management also takes steps to ensure that information and communication flows are effective and to monitor performance, including performance of internal control procedures.

 

Management assessed the effectiveness of the Company’s internal control over financial reporting as of December 31, 2008 based on the criteria for effective internal control described in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on this assessment, management believes that, as of December 31, 2008, the Company’s internal control over financial reporting is effective.

We have audited MidWestOne Financial Group Inc.’s (the Company) internal control over financial reporting as of December 31, 2008, based on criteria established in Internal Control – Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). MidWestOne Financial Group Inc.’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management’s Report on Internal Control over Financial Reporting. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit.

 

We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audit also included performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.

 

A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.

 

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

 

In our opinion, MidWestOne Financial Group, Inc. maintained, in all material respects, effective internal control over financial reporting as of December 31, 2008, based on criteria established in Internal Control – Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).

 

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheet of MidWestOne Financial Group, Inc. and subsidiaries as of December 31, 2008, and the related consolidated statements of operations, shareholders’ equity and other comprehensive income (loss), and cash flows for the year ended December 31, 2008, and our report dated March 16, 2009 expressed an unqualified opinion on those consolidated financial statements.

 

/s/ KPMG LLP

 

Des Moines, Iowa

March 16, 2009

 

Item 9B.                Other Information.

 

None.

 

 

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PART III

 

Item 10.                Directors, Executive Officers and Corporate Governance.

 

The information required by Item 10 will be included in the Company’s 2009 Proxy Statement (the “Proxy Statement”) under the heading “Information About Our Directors and Executive Officers” and is incorporated herein by reference.  The Proxy Statement will be filed with the Securities and Exchange Commission pursuant to Regulation 14A within 120 days of the end of the Company’s 2008 fiscal year

 

Item 11.                Executive Compensation.

 

The information required by Item 11 will be included in the Proxy Statement under the headings “Director Compensation” and “Named Executive Officer Compensation” and is incorporated herein by reference.

 

Item 12.

Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters.

 

The information required by Item 12 will be included in the Proxy Statement under the headings “Security Ownership” and “Equity Compensation Plan Information,” and is incorporated herein by reference.

 

Item 13.                Certain Relationships and Related Transactions, and Director Independence.

 

The information required by Item 13 will be included in the Proxy Statement under the heading “Related Person Transactions,” and is incorporated herein by reference.

 

Item 14.                Principal Accountant Fees and Services.

 

The information required by Item 14 will be included in the Proxy Statement under the heading “Ratification of Selection of Independent Auditors” and is incorporated by reference herein.

 

Item 15.                Exhibits and Financial Statement Schedules.

 

Financial Statements and Schedules

 

See Consolidated Financial Statements on pages F-1 through F-55.

 

Exhibits

 

The exhibits required by Item 601 of Regulation S-K are included with this Form 10-K and are listed on the “Index to Exhibits” immediately following the signature page.

 

 

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SIGNATURES

 

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

	MidWestOne Financial Group, Inc.
Dated:  March 16th, 2009	By:	/s/ Charles N. Funk
		Charles N. Funk
		President and Chief Executive Officer
	By:	/s/ Gary J. Ortale
		Gary J. Ortale
		Senior Vice President, Chief Risk Officer and Interim Chief Financial Officer

 

Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities indicated.

 

Signature		Title		Date
/s/ Charles N. Funk		President and Chief Executive Officer		March 16th, 2009
Charles N. Funk		(principal executive officer)
/s/ Gary J. Ortale		Senior Vice President, Chief Risk		March 16th, 2009
Gary J. Ortale		Officer and Interim  Chief Financial Officer
		(principal financial officer and principal accounting officer)
/s/ W. Richard Summerwill		Chairman of the Board		March 16th, 2009
W. Richard Summerwill
/s/ Charles S. Howard		Vice Chairman of the Board		March 16th, 2009
Charles S. Howard
/s/ Richard R. Donohue		Director		March 16th, 2009
Richard R. Donohue
/s/ John S. Koza		Director		March 16th, 2009
John S. Koza
/s/ Sally K. Mason		Director		March 16th, 2009
Sally K. Mason
/s/ Kevin W. Monson		Director		March 16th, 2009
Kevin W. Monson
/s/ John P. Pothoven		Director		March 16th, 2009
John P. Pothoven
/s/ James G. Wake		Director		March 16th, 2009
James G. Wake

 

 

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/s/ Robert D. Wersen		Director		March 16th, 2009
Robert D. Wersen
/s/ Stephen L. West		Director		March 16th, 2009
Stephen L. West
/s/ R. Scott Zaiser		Director		March 16th, 2009
R. Scott Zaiser

 

 

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EXHIBIT INDEX

 

Exhibit Number		Description		Incorporated by Reference to:
2.1		Agreement and Plan of Merger, dated September 11, 2007, between ISB Financial Corp. and MidWestOne Financial Group, Inc.		Appendix A of the Joint Proxy Statement-Prospectus constituting part of the Company’s Amendment No. 2 to Registration Statement on Form S-4 (File No. 333-147628) filed with the SEC on January 22, 2008
3.1		Amended and Restated Articles of Incorporation of MidWestOne Financial Group, Inc. filed with the Secretary of State of the State of Iowa on March 14, 2008		Exhibit 3.3 to the Company’s Amendment No. 2 to Registration Statement on Form S-4 (File No. 333-147628) filed with the SEC on January 22, 2008
3.2		Articles of Amendment (First Amendment) to the Amended and Restated Articles of Incorporation of MidWestOne Financial Group, Inc. filed with the Secretary of State of the State of Iowa on January 23, 2009		Exhibit 3.1 to the Company’s Current Report on Form 8-K filed with the SEC on January 23, 2009
3.3		Articles of Amendment (Second Amendment) to the Amended and Restated Articles of Incorporation of MidWestOne Financial Group, Inc. filed with the Secretary of State of the State of Iowa on February 4, 2009 (containing the Certificate of Designations for the Company’s Fixed Rate Cumulative Perpetual Preferred Stock, Series A)		Exhibit 3.1 to the Company’s Current Report on Form 8-K filed with the SEC on February 6, 2009
3.4		Amended and Restated By-laws of MidWestOne Financial Group, Inc.		Exhibit 3.2 to the Company’s Current Report on Form 8-K filed with the SEC on January 23, 2009
4.1		Reference is made to Exhibits 3.1 through 3.4 hereof.		N/A
4.2		Form of Stock Certificate representing MidWestOne Financial Group, Inc. Fixed Rate Cumulative Perpetual Preferred Stock, Series A		Exhibit 4.1 to the Company’s Current Report on Form 8-K filed with the SEC on February 6, 2009
4.3		Warrant to Purchase Common Stock of MidWestOne Financial Group, Inc., dated February 6, 2009		Exhibit 4.2 to the Company’s Current Report on Form 8-K filed with the SEC on February 6, 2009
10.1		States Resources Loan Participating and Servicing Agreement, dated February 5, 1999 between States Resources Corp. and MidWestOne Financial Group, Inc. (as successor in interest to Mahaska Investment Company)		Exhibit 10.3.4 of former MidWestOne Financial Group, Inc.’s Form 10-K for the year ended December 31, 1999
10.2		Second Amended and Restated Credit Agreement, dated November 30, 2003, between MidWestOne Financial Group, Inc. and Harris Trust and Savings Bank		Exhibit 10.5.1 of former MidWestOne Financial Group, Inc.’s Form 10-K for the year ended December 31, 2003

 

 

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Exhibit Number		Description		Incorporated by Reference to:
10.3		First Amendment to the Second Amended and Restated Credit Agreement, dated November 30, 2004, between MidWestOne Financial Group, Inc. and Harris Trust and Savings Bank		Exhibit 10.5.1 of former MidWestOne Financial Group, Inc.’s Form 10-K for the year ended December 31, 2004
10.4		Second Amendment to the Second Amended and Restated Credit Agreement, dated April 12, 2005, between MidWestOne Financial Group, Inc. and Harris Trust and Savings Bank		Exhibit 10.5.1 of former MidWestOne Financial Group, Inc.’s Form 10-Q for the quarter ended June 30, 2005
10.5		Third Amendment to the Second Amended and Restated Credit Agreement, dated March 3, 2006, between MidWestOne Financial Group, Inc. and Harris Trust and Savings Bank		Exhibit 10.5 of the Company’s Registration Statement on Form S-4 (File No. 333-147628) filed with the SEC on November 27, 2007
10.6		Fourth Amendment to the Second Amended and Restated Credit Agreement, dated April 28, 2006, between MidWestOne Financial Group, Inc. and Harris N.A. (as successor in interest to Harris Trust and Savings Bank)		Exhibit 10.5.1 of former MidWestOne Financial Group, Inc.’s Form 10-Q for the quarter ended June 30, 2006
10.7		Fifth Amendment to the Second Amended and Restated Credit Agreement, dated November 27, 2006, between MidWestOne Financial Group, Inc. and Harris N.A. (as successor in interest to Harris Trust and Savings Bank)		Exhibit 10.5.1 of former MidWestOne Financial Group, Inc.’s Form 10-K for the year ended December 31, 2006
10.8		Sixth Amendment to the Second Amended and Restated Credit Agreement, dated April 30, 2007, between MidWestOne Financial Group, Inc. and Harris N.A. (as successor in interest to Harris Trust and Savings Bank)		Exhibit 10.8 of the Company’s Registration Statement on Form S-4 (File No. 333-147628) filed with the SEC on November 27, 2007
10.9		Seventh Amendment to the Second Amended and Restated Credit Agreement, dated June 30, 2007, between MidWestOne Financial Group, Inc. and Harris N.A. (as successor in interest to Harris Trust and Savings Bank)		Exhibit 10.5.1 of former MidWestOne Financial Group, Inc.’s Form 10-Q for the quarter ended June 30, 2007
10.10		MidWestOne Financial Group, Inc. Employee Stock Ownership Plan & Trust, as amended and restated		Exhibit 10.1 former MidWestOne Financial Group, Inc.’s Form 10-K for the year ended December 31, 2006
10.11		First Amended and Restated ISB Financial Corp. (now known as MidWestOne Financial Group, Inc.) Stock Option Plan		Exhibit 10.18 of the Company’s Registration Statement on Form S-4 (File No. 333-147628) filed with the SEC on November 27, 2007
10.12		Mahaska Investment Company 1998 Stock Incentive Plan		Exhibit 10.2.3 of former MidWestOne Financial Group, Inc.’s Form 10-K for the year ended December 31, 1997
10.13		MidWestOne Financial Group, Inc. 2006 Stock Incentive Plan		Former MidWestOne Financial Group, Inc.’s Definitive Proxy Statement on Schedule 14A filed with the SEC on March 21, 2006

 

 

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Exhibit Number		Description		Incorporated by Reference to:
10.14		ISB Financial Corp. (now known as MidWestOne Financial Group, Inc.) 2008 Equity Incentive Plan		Appendix F of the Joint Proxy Statement-Prospectus constituting part of the Company’s Amendment No. 2 to Registration Statement on Form S-4 (File No. 333-147628) filed with the SEC on January 22, 2008
10.15		Employment Agreement between ISB Financial Corp. (now known as MidWestOne Financial Group, Inc.) and Charles N. Funk, dated September 11, 2007		Exhibit 10.22 of the of the Company’s Registration Statement on Form S-4 (File No. 333-147628) filed with the SEC on November 27, 2007
10.16		Employment Agreement between ISB Financial Corp. (now known as MidWestOne Financial Group, Inc.) and David A. Meinert, dated September 11, 2007		Exhibit 10.23 of the Company’s Registration Statement on Form S-4 (File No. 333-147628) filed with the SEC on November 27, 2007
10.17		Executive Deferred Compensation Agreement between Mahaska Investment Company (now known as MidWestOne Financial Group, Inc.) and David A. Meinert, dated January 1, 2003		Exhibit 10.20 of the Company’s Registration Statement on Form S-4 (File No. 333-147628) filed with the SEC on November 27, 2007
10.18		Amendment and Restatement of the Executive Salary Continuation Agreement between MidWestOne Financial Group, Inc. and David A. Meinert, dated July 1, 2004		Exhibit 10.21 of the Company’s Registration Statement on Form S-4 (File No. 333-147628) filed with the SEC on November 27, 2007
10.19		Separation and Release Agreement between MidWestOne Financial Group, Inc. and David A. Meinert, dated December 22, 2008		Exhibit 10.1 to the Company’s Current Report on Form 8-K filed with the SEC on December 29, 2009
10.20		Employment Agreement between ISB Financial Corp. (now known as MidWestOne Financial Group, Inc.) and Kent L. Jehle, dated September 11, 2007		Exhibit 10.24 of the of the Company’s Registration Statement on Form S-4 (File No. 333-147628) filed with the SEC on November 27, 2007
10.21		Letter Agreement between ISB Financial Corp. (now known as MidWestOne Financial Group, Inc.) and W. Richard Summerwill, dated September 11, 2007		Exhibit 10.25 of the Company’s Registration Statement on Form S-4 (File No. 333-147628) filed with the SEC on November 27, 2007
10.22		Letter Agreement between ISB Financial Corp. (now known as MidWestOne Financial Group, Inc.) and Charles S. Howard, dated September 11, 2007		Exhibit 10.26 of the Company’s Registration Statement on Form S-4 (File No. 333-147628) filed with the SEC on November 27, 2007
10.23		Supplemental Retirement Agreement between Iowa State Bank & Trust Company (now known as MidWestOne Bank) and W. Richard Summerwill, dated January 1, 1998		Exhibit 10.11 of the Company’s Registration Statement on Form S-4 (File No. 333-147628) filed with the SEC on November 27, 2007
10.24		Supplemental Retirement Agreement between Iowa State Bank & Trust Company (now known as MidWestOne Bank) and Charles N. Funk, dated November 1, 2001		Exhibit 10.13 of the Company’s Registration Statement on Form S-4 (File No. 333-147628) filed with the SEC on November 27, 2007

 

 

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Exhibit Number		Description		Incorporated by Reference to:
10.25		Supplemental Retirement Agreement between Iowa State Bank & Trust Company (now known as MidWestOne Bank) and Gary J. Ortale, dated January 1, 1998		Exhibit 10.14 of the Company’s Registration Statement on Form S-4 (File No. 333-147628) filed with the SEC on November 27, 2007
10.26		Amended and Restated Supplemental Retirement Agreement between Iowa State Bank & Trust Company (now known as MidWestOne Bank) and John S. Koza, dated January 1, 1998		Exhibit 10.15 of the Company’s Registration Statement on Form S-4 (File No. 333-147628) filed with the SEC on November 27, 2007
10.27		Supplemental Retirement Agreement between Iowa State Bank & Trust Company (now known as MidWestOne Bank) and Kent L. Jehle, dated January 1, 1998, as amended by the First Amendment to the Supplemental Retirement Agreement, dated January 1, 2003		Exhibit 10.16 of the Company’s Registration Statement on Form S-4 (File No. 333-147628) filed with the SEC on November 27, 2007
10.28		Second Supplemental Retirement Agreement between Iowa State Bank & Trust Company (now known as MidWestOne Bank) and Kent L. Jehle, dated January 1, 2002		Exhibit 10.17 of the Company’s Registration Statement on Form S-4 (File No. 333-147628) filed with the SEC on November 27, 2007
10.29		Letter Agreement, dated February 6, 2009, between MidWestOne Financial Group, Inc. and United States Department of the Treasury, which includes the Securities Purchase Agreement attached thereto, with respect to the issuance and sale of the Fixed Rate Cumulative Perpetual Preferred Stock, Series A, and the Warrant to Purchase Common Stock pursuant to the TARP Capital Purchase Program		Exhibit 10.1 to the Company’s Current Report on Form 8-K filed with the SEC on February 6, 2009
10.30		Form of Waiver entered into by each of the Company’s Senior Executive Officers with respect to the Company’s participation in the TARP Capital Purchase Program		Exhibit 10.2 to the Company’s Current Report on Form 8-K filed with the SEC on February 6, 2009
10.31		Form of Omnibus Amendment to Benefit Plans and Other Executive Compensation Arrangements entered into by each of the Company’s Senior Executive Officers with respect to the Company’s participation in the TARP Capital Purchase Program		Exhibit 10.3 to the Company’s Current Report on Form 8-K filed with the SEC on February 6, 2009
21.1		Subsidiaries of MidWestOne Financial Group, Inc.		Filed herewith
23.1		Consent of KPMG LLP		Filed herewith
23.2		Consent of McGladrey & Pullen LLP		Filed herewith
31.1		Certification of Chief Executive Officer pursuant to Rule 13a-14(a) and Rule 15d-14(a)		Filed herewith
31.2		Certification of Chief Financial Officer pursuant to Rule 13a-14(a) and Rule 15d-14(a)		Filed herewith

 

 

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Exhibit Number		Description		Incorporated by Reference to:
32.1		Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002		Filed herewith
32.2		Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002		Filed herewith

 

 

 

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Report of Independent Registered Public Accounting Firm

 

The Board of Directors and Stockholders

MidWestOne Financial Group, Inc.:

 

We have audited the accompanying consolidated balance sheet of MidWestOne Financial Group, Inc. and subsidiaries (the Company) as of December 31, 2008, and the related consolidated statements of operations, shareholders’ equity and other comprehensive income (loss), and cash flows for the year ended December 31, 2008. These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audit.

 

We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion.

 

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of MidWestOne Financial Group, Inc. and subsidiaries as of December 31, 2008, and the results of their operations and their cash flows for the year ended December 31, 2008, in conformity with U.S. generally accepted accounting principles.

 

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), MidWestOne Financial Group, Inc.’s internal control over financial reporting as of December 31, 2008, based on criteria established in Internal Control – Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO), and our report dated March 16, 2009 expressed an unqualified opinion on the effectiveness of the Company’s internal control over financial reporting.

 

/s/ KPMG LLP

 

Des Moines, Iowa

March 16, 2009

 

F-1

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Report of Independent Registered

Public Accounting Firm

To the Board of Directors

ISB Financial Corp. and Subsidiaries

Iowa City, Iowa

We have audited the consolidated balance sheet of ISB Financial Corp. and Subsidiaries (n/k/a MidWestOne Financial Group, Inc.) as of December 31, 2007, and the related consolidated statements of operations, shareholders’ equity and other comprehensive income (loss), and cash flows for each of the two years in the period ended December 31, 2007. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of ISB Financial Corp. and Subsidiaries (n/k/a MidWestOne Financial Group, Inc.) as of December 31, 2007, and the results of their operations and their cash flows for each of the two years in the period ended December 31, 2007, in conformity with U.S. generally accepted accounting principles.

	/s/ McGladrey & Pullen, LLP
	McGladrey & Pullen LLP

 

Cedar Rapids, Iowa

March 13, 2008

McGladrey & Pullen, LLP is an independent member firm of RSM International,

an affiliation of separate and independent legal entities.

 

F-2

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MidWestOne Financial Group, Inc. and Subsidiaries

Consolidated Balance Sheets

December 31, 2008  and 2007

(in thousands, except per share amounts)

Assets		2008				2007
Cash and due from banks		$	32,383			$	16,294
Interest-bearing deposits in banks			543				84
Cash and cash equivalents			32,926				16,378
Investment securities:
Available for sale			272,380				232,125
Held to maturity (fair value 2008 $8,120; 2007 $101)			8,125				95
Federal funds sold			-				17,842
Loans held for sale			5,279				2,709
Loans			1,014,814				401,554
Allowance for loan losses			(10,977	)			(5,466	)
Net loans			1,003,837				396,088
Loan pool participations, net			92,932				-
Premises and equipment, net			28,748				11,802
Accrued interest receivable			11,736				4,639
Goodwill			-				4,356
Other intangible assets, net			13,424				168
Bank-owned life insurance			17,340				8,613
Other real estate owned			996				-
Deferred income taxes			5,595				1,836
Other assets			15,644				5,232
Total assets		$	1,508,962			$	701,983

See accompanying notes to consolidated financial statements.

 

F-3

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MidWestOne Financial Group, Inc. and Subsidiaries

 

Consolidated Balance Sheets

December 31, 2008  and 2007

(in thousands, except per share amounts)

Liabilities and Shareholders' Equity		2008				2007
Liabilities:
Deposits:
Non-interest bearing demand		$	123,558			$	66,340
Interest-bearing checking			389,227				186,601
Savings			59,133				28,690
Certificates of deposit under $100,000			402,950				167,045
Certificates of deposits $100,000 and over			153,321				77,939
Total deposits			1,128,189				526,615
Federal funds purchased			13,050				-
Securities sold under agreements to repurchase			44,249				45,997
Federal Home Loan Bank borrowings			158,782				47,000
Deferred compensation liability			1,586				1,391
Long-term debt			15,640				-
Accrued interest payable			2,770				1,734
Other liabilities			14,354				1,854
Total liabilities			1,378,620				624,591
Commitments and Contingencies
Shareholders' Equity
Capital stock, common, $1 par value; authorized 10,000,000 shares;  issued 2008  8,690,398 shares; 2007 5,165,308 shares			8,690				5,165
Additional paid-in capital			80,757				100
Treasury stock, at cost; 87,343 shares and 0 shares at December 31, 2008 and 2007, respectively			(1,215	)			-
Retained earnings			43,683				72,333
Accumulated other comprehensive (loss)			(1,573	)			(206	)
Total shareholders' equity			130,342				77,392
Total liabilities and shareholders' equity		$	1,508,962			$	701,983

See accompanying notes to consolidated financial statements.

 

F-4

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MidWestOne Financial Group, Inc. and Subsidiaries

Consolidated Statements of Operations

Years Ended December 31, 2008, 2007 and 2006

(in thousands, except per share amounts)

 

		2008				2007				2006
Interest income:
Interest and fees on loans		$	53,104			$	27,564			$	25,850
Interest and discount on loan pool participations			4,459				-				-
Interest on bank deposits			26				-				-
Interest on federal funds sold			315				548				283
Interest on investment securities:
Available for sale			12,011				10,187				8,893
Held to maturity			291				6				282
Total interest income			70,206				38,305				35,308
Interest expense:
Interest on deposits:
Interest-bearing checking			4,149				2,950				2,885
Savings			1,362				159				157
Certificates of deposit under $100,000			14,369				8,250				6,350
Certificates of deposit $100,000 and over			3,277				3,439				2,956
Total interest on deposits			23,157				14,798				12,348
Interest on federal funds purchased			67				61				165
Interest on securities sold under agreements to repurchase			1,055				2,053				1,713
Interest on Federal Home Loan Bank advances			5,348				2,126				2,533
Interest on long-term debt			631				-				-
Other borrowings			137				-				-
Total interest expense			30,395				19,038				16,759
Net interest income			39,811				19,267				18,549
Provision for loan losses			4,366				500				550
Net interest income after provision for loan losses			35,445				18,767				17,999
Other income:
Trust and investment fees			4,011				3,688				2,889
Service charges and fees on deposit accounts			5,611				2,082				1,935
Mortgage origination fees and gains on sales of mortgage loans			907				1,208				963
Other service charges, commissions and fees			1,527				1,746				1,577
Bank-owned life insurance income			542				338				316
Loss from sale of available for sale securities			(346	)			(256	)			(108	)
Impairment losses on investment securities			(6,194	)			-				-
Total other income			6,058				8,806				7,572
Other expenses:
Salaries and employee benefits			20,903				10,926				10,081
Net occupancy and equipment expense			6,085				2,978				2,811
Professional and other outside services			3,848				2,057				2,236
Other operating expense			7,608				2,659				2,552
Amortization expense			776				-				-
Goodwill impairment			27,295				-				-
Total other expenses			66,515				18,620				17,680
Income (loss) before income taxes			(25,012	)			8,953				7,891
Federal and state income tax expense (benefit)			(450	)			2,305				2,093
Net income (loss)		$	(24,562	)		$	6,648			$	5,798
Earnings (Loss) per share:
Basic		$	(3.09	)		$	1.29			$	1.11
Diluted		$	(3.09	)		$	1.29			$	1.11

See accompanying notes to consolidated financial statements.

 

F-5

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