UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
Washington,
D.C. 20549
FORM
10-K
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ANNUAL
REPORT PURSUANT TO SECTION 13 OR 15(d) OF
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THE
SECURITIES EXCHANGE ACT OF
1934
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For
fiscal year ended December 31, 2008
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TRANSITION
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
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SECURITIES
EXCHANGE ACT OF 1934
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For
transition period
from to
Commission
File Number: 000-24630
MidWestOne Financial Group,
Inc.
(Exact
name of Registrant as specified in its charter)
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42-1206172
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(I.R.S.
Employer Identification Number)
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of
incorporation or organization)
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102
South Clinton Street, Iowa City, Iowa 52240
(Address
of principal executive offices, including Zip Code)
(319)
356-5800
(Registrant’s
telephone number, including Area Code)
Securities
registered pursuant to Section 12(b) of the Act:
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Title of Class
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Name of each exchange on which
registered
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Common
Stock, $1.00 par value
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The
Nasdaq Stock Market
LLC
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Securities
registered pursuant to Section 12(g) of the Act:
None
(Title of
Class)
Indicate
by check mark if the registrant is a well-known seasoned issuer, as defined in
Rule 405 of the Securities Act. ¨ Yes x No
Indicate
by check mark if registrant is not required to file reports pursuant to Section
13 or Section 15(d) of the Act. o Yes x No
Indicate
by check mark whether the registrant (1) has filed all reports required to be
filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the registrant was required
to file such reports), and (2) has been subject to such filing requirements for
the past 90 days. x Yes ¨ No
Indicate
by check mark if disclosure of delinquent filers pursuant to Item 405 of
Regulation S-K is not contained herein, and will not be contained, to the best
of registrant’s knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. ¨
Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer, or a smaller reporting
company. See definition of “large accelerated filer,” “accelerated
filer” and “small reporting company” in Rule 12b-2 of the Exchange
Act.
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Large
accelerated filer ¨
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Accelerated
filer x
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Non-accelerated
filer ¨
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(Do
not check if a smaller reporting company)
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Smaller
reporting company ¨
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Indicate
by check mark whether the Registrant is a shell company (as defined in
Rule 12b-2 of the Act). ¨ Yes x No
The
aggregate market value of the voting and non-voting common equity held by
non-affiliates of the registrant, based on the last sales price quoted on the
Nasdaq Global Select Market on June 30, 2008, the last business day of the
registrant’s most recently completed second fiscal quarter, was approximately
$111.2 million. The number of shares outstanding of the
registrant’s common stock, par value $1.00 per share, was 8,603,055 at
March 1, 2009.
DOCUMENTS INCORPORATED BY
REFERENCE
Portions
of the Company’s Proxy Statement for the 2009 Annual Meeting of Shareholders,
which will be filed pursuant to Regulation 14A of the Securities Exchange Act of
1934, are incorporated by reference into Part III hereof, to the extent
indicated herein.
PART I
Merger
Transaction
On March
14, 2008, the Company (which was at such time named ISB Financial Corp.)
consummated its merger with the former MidWestOne Financial Group, Inc. (“Former
MidWestOne”), pursuant
to and in accordance with the Agreement and Plan of Merger dated as of
September 11, 2007 (the “Merger”). As a result of the
Merger, Former MidWestOne merged with and into the
Company and ceased to exist as a legal entity, and the Company changed its name
from ISB Financial Corp. to MidWestOne Financial Group,
Inc. All references in this document to the “Company” and
“MidWestOne” refer to
the surviving organization in the Merger.
Prior to
the Merger, Former MidWestOne’s common stock was
registered under Section 12(b) of the Securities Exchange Act of 1934, as
amended (the “Exchange Act”), and listed on The Nasdaq Stock Market LLC under
the ticker symbol “OSKY.” Prior to the Merger, the Company’s common
stock was not listed on any national securities exchange and was not registered
under the Exchange Act, and thus the Company was not subject to the periodic
reporting requirements of the Exchange Act. In connection with the
Merger, the Company filed a registration statement on Form S-4 to register the
shares of common stock to be issued to the holders of Former MidWestOne common stock in the
Merger pursuant to the Securities Act of 1933, as amended (the “Securities
Act”), and received approval to list its common stock on The Nasdaq Stock Market
LLC under the ticker symbol “MOFG.”
For
purposes of Rule 12g-3(a) under the Exchange Act, the Company is deemed to
be the successor issuer to Former MidWestOne. As a result,
the Company’s common stock is deemed to be registered under the Exchange Act due
to the fact that Former MidWestOne’s common stock was registered under the
Exchange Act. In addition, the Company, as the successor issuer to
Former MidWestOne, upon
consummation of the Merger inherited Former MidWestOne’s status as a “smaller
reporting company,” as such term is defined in Rule 12b-2 under the
Exchange Act. For the year ended December 31, 2008, the Company
is no longer considered to be a smaller reporting company because its public
float as of the last business day of its most recently competed second fiscal
quarter (June 30, 2008) exceeded $75 million. However,
pursuant to the transition rules for companies that are required to transition
from the scaled disclosure model for smaller reporting companies to
the larger reporting system, the Company is not required to satisfy
the larger reporting company disclosure requirements until the Form 10-Q
for the first quarter of 2009. Accordingly, the Company has prepared
this Annual Report on Form 10-K using the scaled disclosure requirements
set forth in Regulation S-K.
For
accounting purposes, the Company was deemed to be the acquirer in the
Merger. Accordingly, the financial information herein for years prior
to December 31, 2008 is the information for the Company (formerly
ISB Financial Corp.) prior to the Merger and does not include financial
information for the Former MidWestOne.
General
The
Company was incorporated in the state of Iowa in 1983 and is headquartered in
Iowa City, Iowa. It is a bank holding company registered under the
Bank Holding Company Act of 1956 and has elected to be a financial holding
company pursuant to the provisions of the Gramm-Leach-Bliley Act of
1999. Prior to the Merger, the Company operated primarily through two bank
subsidiaries—Iowa State Bank & Trust Company, an Iowa state non-member bank
chartered in 1934 with its main office in Iowa City, Iowa, and First State Bank,
an Iowa state non-member bank with its main office in Conrad, Iowa, which was
acquired by the Company in 1998. Prior to the Merger, Former
MidWestOne,
incorporated in Iowa in 1973 and headquartered in Oskaloosa, Iowa, was a
registered bank holding company that had elected to be a financial holding
company. Former MidWestOne operated primarily
through its bank subsidiary, MidWestOne Bank, Oskaloosa, Iowa,
MidWestOne Insurance
Services, Inc. (f/k/a Cook & Son Agency, Inc.), an insurance agency that was
acquired in 2005, and MidWestOne Investment Services, Inc., through which Former
MidWestOne offered
retail brokerage (through an arrangement with a third-party registered
broker-dealer) and financial planning services.
Initially
following the Merger, the Company continued operating through its three bank
subsidiaries—Iowa State Bank & Trust Company, First State Bank and
MidWestOne Bank—but in
August 2008 consolidated the three bank subsidiaries under the charter of
Iowa State Bank & Trust Company and renamed the surviving bank “MidWestOne Bank.” The
operations of MidWestOne Investment Services also
have been transferred to MidWestOne Bank and MidWestOne Investment Services has
been dissolved; the brokerage and financial planning services previously offered
by MidWestOne
Investment Services are now offered through MidWestOne Bank. All
references herein to “MidWestOne Bank” or the “Bank” are
to the surviving bank subsidiary; references to “Former MidWestOne Bank” are to the bank
subsidiary of the former MidWestOne as it existed prior to the
Merger. The Company retained all of the offices previously operated
by the three bank subsidiaries, except that it sold its Wapello branch on
October 17, 2008, pursuant to which the buyer assumed approximately $8.6
million in deposits and paid a premium of 6%. The Company retained
the loans associated with the branch and will service them through its branch
location in Burlington, Iowa. MidWestOne Bank continues to offer
substantially the same services provided by the three bank subsidiaries prior to
the Merger and the subsequent bank charter consolidation.
The
Company maintained MidWestOne Insurance Services, Inc.
as a separate subsidiary following the Merger. MidWestOne Insurance Services is a
full-service insurance agency that offers a wide range of insurance plans to
individuals and businesses. In December 2008, MidWestOne
Insurance Services acquired Butler-Brown Insurance, a full-service insurance
agency in Oskaloosa, to expand its insurance agency
business. MidWestOne Insurance Services operates through three
offices.
MidWestOne Bank operates a total of
29 branch locations, plus its specialized Home Loan Center, in 15 counties
throughout central and east-central Iowa. MidWestOne Bank provides full
service retail banking in the communities in which its branch offices are
located. Deposit products offered include checking and other demand deposit
accounts, NOW accounts, savings accounts, money market accounts, certificates of
deposit, individual retirement accounts and other time
deposits. MidWestOne Bank offers commercial
and industrial, agricultural, real estate mortgage and consumer
loans. Other products and services include debit cards, automated teller
machines, on-line banking and safe deposit boxes. The principal
service consists of making loans to and accepting deposits from individuals,
businesses, governmental units and institutional customers. MidWestOne Bank also has a trust and
investment department through which it offers a variety of trust and investment
services, including administering estates, personal trusts, conservatorships,
pension and profit-sharing funds and providing property management, farm
management, custodial services, financial planning, investment management
and retail brokerage (through an agreement with a third-party registered
broker-dealer).
Operating
Strategy
The
Company’s operating strategy is based upon a sophisticated community banking
model delivering a complete line of financial products and services while
following three guiding principles: hire excellent employees; take care of
customers; and conduct business with the utmost integrity.
Management
believes the personal and professional service offered to customers provides an
appealing alternative to the “megabanks” that have resulted from large
out-of-state national banks acquiring Iowa-based community banks. While
the Company employs a community banking philosophy, management believes its
size, combined with its complete line of financial products and services, is
sufficient to effectively compete in the relevant market areas. To remain
price competitive, management also believes the Company must manage expenses and
remain disciplined in its asset/liability management practices.
Market
Areas
The
principal offices of the Company and MidWestOne Bank are in Iowa City,
Iowa. The city of Iowa City is located in east-central Iowa,
approximately 220 miles west of Chicago, Illinois, and approximately 115 miles
east of Des Moines, Iowa. It is strategically situated approximately
60 miles west of the Mississippi River on Interstate 80 and is the home of the
University of Iowa, a public university with approximately 21,000 undergraduate
students and 9,000 graduate and professional students. Iowa City is
the home of the University of Iowa Hospitals and Clinics, a 680-bed
comprehensive academic medical center and regional referral center with more
than 760 staff physicians and dentists, 480 resident physicians and dentists and
180 fellow physicians and 1,565 nurses. The U.S. Census Bureau
estimates that, as of 2006, the city of Iowa City had a total population of
approximately 63,000 and the Iowa City MSA had a total population of
approximately 140,000. Iowa City is the sixth largest city in the
state of Iowa. According to the FDIC, as of June 30, 2008,
MidWestOne Bank had the
second highest deposit market share in the Iowa City MSA at approximately
18%.
MidWestOne Bank operates branch
offices and a loan production office in 15 counties in central and east-central
Iowa. According to the FDIC, in nine of those 15 counties, MidWestOne Bank held between 8% and
25% of the deposit market share. In another county, MidWestOne Bank held 42% of the
deposit market share.
Lending
Activities
General
The
Company provides a range of commercial and retail lending services to
businesses, individuals and government agencies. These credit activities
include commercial, financial and agricultural loans; real estate construction
loans; commercial and residential real estate loans; and consumer
loans.
The
Company markets its services to qualified lending customers. Lending
officers actively solicit the business of new companies entering their market
areas as well as long-standing members of the business communities in which the
Company operates. Through professional service, competitive pricing and
innovative structure, the Company has been successful in attracting new lending
customers. The Company also actively pursues consumer lending
opportunities. With convenient locations, advertising and customer
communications, the Company has been successful in capitalizing on the credit
needs of its market areas.
Management
emphasizes credit quality and seeks to avoid undue concentrations of loans to a
single industry or based on a single class of collateral. The Company has
established lending policies that include a number of underwriting factors to be
considered in making a loan, including location, loan-to-value ratio, cash flow,
interest rate and credit history of the borrower.
Commercial,
Financial and Agricultural Loans
Commercial and Financial.
The Company has a strong commercial loan base. The Company focuses
on, and tailors its commercial loan programs to, small- to mid-sized businesses
in its market areas. The Company’s loan portfolio includes loans to
wholesalers, manufacturers, contractors, business services companies and
retailers. The Company provides a wide range of business loans, including
lines of credit for working capital and operational purposes and term loans for
the acquisition of equipment. Although most loans are made on a secured
basis, loans may be made on an unsecured basis where warranted by the overall
financial condition of the borrower. Terms of commercial business loans
generally range from one to five years.
The
Company’s commercial and financial loans are primarily made based on the
reported cash flow of the borrower and secondarily on the underlying collateral
provided by the borrower. The collateral support provided by the borrower
for most of these loans and the probability of repayment is based on the
liquidation of the pledged collateral and enforcement of a personal guarantee,
if any exists. The primary repayment risks of commercial loans are that
the cash flows of the borrower may be unpredictable, and the collateral securing
these loans may fluctuate in value.
As of
December 31, 2008, commercial and financial loans comprised approximately 21% of
the total loan portfolio.
Agricultural Loans. Due
to the rural market areas in and around which the Company operates, agricultural
loans are an important part of the Company’s business. Agricultural loans
include loans made to finance agricultural production and other loans to farmers
and farming operations. Agricultural loans comprised approximately 9% of
the total loan portfolio at December 31, 2008.
Agricultural
loans, most of which are secured by crops and machinery, are provided to finance
capital improvements and farm operations as well as acquisitions of livestock
and machinery. The ability of the borrower to repay may be affected by
many factors outside of the borrower’s controls including adverse weather
conditions, loss of livestock due to disease or other factors, declines in
market prices for agricultural products and the impact of government
regulations. The ultimate repayment of agricultural loans is dependent
upon the profitable operation or management of the agricultural
entity.
The
agricultural loan department works closely with all of its customers, including
companies and individual farmers, and reviews the preparation of budgets and
cash flow projections for the ensuing crop year. These budgets and cash
flow projections are monitored closely during the year and reviewed with the
customers at least once annually. The Company also works closely with
governmental agencies to help agricultural customers obtain credit enhancement
products such as loan guarantees or interest assistance.
Real
Estate Loans
Construction Loans. The
Company offers loans both to individuals that are constructing personal
residences and to real estate developers and building contractors for the
acquisition of land for development and the construction of homes and commercial
properties. These loans are in-market to known and established
borrowers. Construction loans generally have a short term, such as
one to two years. As of December 31, 2008, construction loans constituted
approximately 10% of total loans.
Mortgage Loans. The
Company offers residential, commercial and agricultural mortgage loans. As
of December 31, 2008, the Company had $685.8 million in combined residential,
commercial and agricultural mortgage loans outstanding, which represented
approximately 68% of the total loan portfolio.
Residential
mortgage lending is a focal point for the Company, as residential real estate
loans constituted approximately 26% of total loans at December 31,
2008. Included in this category of loans are home equity loans made
to individuals. As long-term interest rates remained at relatively
low levels during 2007 and 2008, many customers opted for mortgage loans that
have a fixed rate with fifteen or thirty year maturities. The Company
generally retains short-term residential mortgage loans that it originates for
its own portfolio but sells most long-term loans to other parties while
retaining servicing rights on the majority of those. The Company
performs loan servicing activity for third parties. At December 31,
2008, the Company serviced approximately $85.7 million in mortgage loans for
others. The Company does not offer subprime mortgage loans and does
not operate a wholesale mortgage business.
The
Company also offers mortgage loans to its commercial and agricultural customers
for the acquisition of real estate used in their business, such as offices,
warehouses and production facilities, and to real estate investors for the
acquisition of apartment buildings, retail centers, office buildings and other
commercial buildings. As of December 31, 2008, commercial and agricultural
real estate loans constituted approximately 42% of total loans.
Consumer
Lending
The
Company’s consumer lending department provides all types of consumer loans,
including personal loans (secured or unsecured) and automobile loans.
Consumer loans typically have shorter terms, lower balances, higher yields
and higher risks of default than one- to four-family residential real estate
mortgage loans. Consumer loan collections are dependent on the borrower’s
continuing financial stability, and are therefore more likely to be affected by
adverse personal circumstances. As of December 31, 2008, consumer loans
comprised only 2% of the total loan portfolio.
Loan
Pool Participations
The
Company holds in its portfolio a significant amount of participation interests
in pools of loans that are owned and serviced by States Resources Corporation, a
third-party loan servicing organization located in Omaha, Nebraska (the
“Servicer”). The Company does not have any ownership interest in or
control over the Servicer. The loans in those pools are purchased at
varying discounts to their outstanding principal amount. Former
MidWestOne began the
program of acquiring participation interests from the Servicer in 1988 and the
Company has continued with this program since the Merger (although these loan
participations constitute a smaller percentage of the Company’s total loan
portfolio than they did of Former MidWestOne’s total loan
portfolio).
The
Servicer generally acquires the underlying loans from large nonaffiliated
banking organizations and from the FDIC when it auctions off assets of failed
financial institutions for which it has been appointed
receiver. Thus, the purchased loan pools generally consist of loans
that were originated throughout the United States. The sellers of the
loans generally offer the loans through a sealed bid auction. A
sealed bid auction requires each bidder to submit a confidential bid on the
subject loan pool, with the loan pool being awarded to the highest
bidder. If the Servicer is the winning bidder in an auction, it
acquires the loans without recourse against the sellers and, accordingly, the
risk of noncollectibility for the participation interest purchased by the
Company is, for the most part, assumed by the Company.
Each pool
of loans in which the Company acquires a participation interest has a different
composition and different characteristics. The pools in which the Company
currently owns a participation interest are comprised primarily of performing,
past-due and nonperforming loans secured by commercial real estate and other
commercial assets. The price bid and paid for such a loan pool is
determined based on the credit quality of the loans in the particular pool, the
amounts the Servicer believes can be collected on such pool and the risks
associated with the collection of such amounts.
In
considering an investment in a loan pool, the Servicer generally
evaluates the loans underlying the pool being auctioned and makes
recommendations to the Company concerning the creditworthiness of the borrowers
of the underlying loans. The Servicer performs a comprehensive analysis of
the loan pool in an attempt to ensure proper valuation and adequate safeguards
in the event of default. In many cases, substantial uncertainties may
exist regarding the collectibility of the various loans in the pool. The
Company makes its own decisions as to whether or not to participate in a
particular loan pool that has been recommended by the Servicer based on the
Company’s experience with the various categories and qualities of the underlying
loans.
Upon the
acquisition of a participation interest in a loan pool, the Company assumes the
risk, to the extent of the Company’s participation interest, that the Servicer
will be unable to recover an amount equal to the purchase price plus the
carrying costs, if any, and collection costs on such accounts. The extent
of such risk is dependent on a number of factors, including the Servicer’s
ability to locate the debtors, the debtors’ financial condition, the possibility
that a debtor may file for protection under applicable bankruptcy laws, the
Servicer’s ability to locate the collateral, if any, for the loan and to obtain
possession of such collateral, the value of such collateral, and the length of
time it takes to realize the ultimate recovery either through collection
procedures or through a resale of the loans following a
restructuring.
A cost
“basis” is assigned to each individual loan acquired on a cents per dollar basis
(discounted price), which is based on the Servicer’s assessment of the recovery
potential of each such loan in relation to the total discounted price paid to
acquire the pool. This methodology assigns a higher basis to performing
loans with greater potential collectibility and a lower basis to those loans
identified as having little or no potential for collection.
Loan pool
participations are shown on the Company’s balance sheet as a separate asset
category; they are not included within the loan balance on the Company’s balance
sheet. The original carrying value of loan pool participation interests
represent the discounted price paid by the Company to acquire its participation
interests in various loan pools purchased by the Servicer. The
Company’s investment balance is reduced as the Servicer collects principal
payments on the loans and remits the proportionate share of such payments to the
Company.
Loan
pools are accounted for in accordance with the provisions of Statement of
Position 03-3, “Accounting for Certain Loans or Debt Securities Acquired in a
Transfer” (“SOP 03-3”) issued by the Accounting Standards Executive Committee of
the American Institute of Certified Public Accountants. According to
SOP 03-3, in order to apply the interest method of recognition to these types of
loans, there must be sufficient information to reasonably estimate the amount
and timing of the cash flows expected to be collected. When that is
not the case, the loan is accounted for on nonaccrual status applying cash basis
income recognition to the loan.
In each
case, where changed circumstances or new information lead the Servicer to
believe that collection of the loan or recovery of the basis through collateral
would be less than originally determined, the cost basis assigned to the loan is
written down or written off through a charge against discount income. The
Servicer and representatives of the Company continually evaluate at least
quarterly the collectability of the loans and the recovery of the underlying
basis. On a quarterly basis, those loans that are determined to have a
possible recovery of less than the assigned basis amount are placed on a “watch
list.” The amount of basis exceeding the estimated recovery amount on the
“watch list” loans is written off by a charge against discount
income.
Interest
income and discount on loan pool participations recorded by the Company is net
of collection expenses incurred by the Servicer and net of the servicing fee and
share of recovery profit paid to the Servicer. Collection costs include
salary and benefits paid by the Servicer to its employees, legal fees, costs to
maintain and insure real estate owned, and other operating expenses. Under
the terms of the Company’s agreement with the Servicer, the Servicer receives a
servicing fee based on one percent of the gross monthly collections of principal
and interest, net of collection costs. Additionally, the Servicer receives
a tiered percentage share of the recovery profit in excess of the investors’
required return on investment on each individual loan pool. The Servicer’s
percentage share of recovery profit is linked to a ten-tier index and ranges
from zero to twenty-seven percent depending upon the return on investment
achieved. The investor’s minimum required return on investment is based on
the two-year treasury rate at the time a loan pool is purchased plus 4.0
percent. For every one percent increase obtained over the investor’s
minimum required return, the Servicer percentage moves up one tier level.
In the event that the return on a particular pool does not exceed the required
return on investment, the Servicer does not receive a percentage share of the
recovery profit. Discount income is added to interest income and reflected
as one amount on the Company’s consolidated statement of income.
The
Servicer provides the Company with monthly reports
detailing collections of principal and interest, face value of loans collected
and those written off, actual operating expenses incurred, remaining asset
balances (both in terms of cost basis and principal amount of loans), a
comparison of actual collections and expenses with target collections and
budgeted expenses, and summaries of remaining collection targets. The
Servicer also provides aging reports and “watch lists” for the loan pools.
Monthly meetings are held between the Company and representatives of the
Servicer to review collection efforts and results, to discuss future plans of
action and to discuss potential opportunities. Additionally, the Company’s
and the Servicer’s personnel communicate on almost a daily basis to discuss
various issues regarding the loan pools. Company representatives visit the
Servicer’s operation on a regular basis; and the Company’s loan review officer
and its internal auditor perform asset reviews and audit procedures on a regular
basis.
The
Company’s overall cost basis in its loan pool participations represents a
discount from the aggregate outstanding principal amount of the loans underlying
the pools. For example, as of December 31, 2008, such cost basis was $92.9
million, while the contractual outstanding principal amount of the underlying
loans as of such date was approximately $175.3 million. The discounted
cost basis inherently reflects the assessed collectibility of the underlying
loans. The Company does not include any amounts related to the loan pool
participations in its totals of nonperforming loans.
As part
of the ongoing collection process, the Servicer may, from time to time,
foreclose on real estate mortgages and acquire title to property in satisfaction
of such debts. This real estate may be held by the Servicer as “real
estate owned” for a period of time until it can be sold. Because the
Company’s investments in loan pools are classified separately from the Company’s
loan portfolio, the Company does not include the real estate owned that is held
by the Servicer with the amount of any other real estate that the Company may
hold directly as a result of its own foreclosure activities.
The
underlying loans in the loan pool participations include both fixed rate and
variable rate instruments. No amounts for interest due are reflected
in the carrying value of the loan pool participations. Based on
historical experience, the average period of collectibility for loans underlying
the Company’s loan pool participations, many of which have exceeded contractual
maturity dates, is approximately three to five years. Company
management has reviewed the recoverability of the underlying loans and believes
that the carrying value does not exceed the fair value of its investment in loan
pool participations.
Other
Products and Services
Deposit
Products
Management
believes the Company offers competitive deposit products and programs that
address the needs of customers in each of the local markets served. The
deposit products are offered to individuals, non-profit organizations,
partnerships, small businesses, corporations and public entities. These
products include non-interest bearing and interest bearing demand deposits,
savings accounts, money market accounts and time certificates of
deposit.
Trust
and Investment Services
The
Company offers trust and investment services in its market areas to help its
business and individual clients in meeting their financial goals and preserving
wealth. Our services include administering estates, personal trusts,
conservatorships, pension and profit-sharing funds and providing property
management, farm management, investment advisory, retail securities brokerage,
financial planning and custodial services. Licensed brokers (who are
registered representatives of a third-party registered broker-dealer) serve
selected branches and provide investment-related services including securities
trading, financial planning, mutual funds sales, fixed and variable annuities
and tax-exempt and conventional unit trusts.
Insurance
Services
The
Company, through its insurance subsidiary, MidWestOne Insurance Services,
offers property and casualty insurance products to individuals and small
businesses in markets served by the Company.
Liquidity
and Funding
A
discussion of the Company’s liquidity and funding programs has been
included in Item 7. Management’s Discussion and Analysis of
Financial Condition and Results of Operations under “Liquidity and
Funding.”
Competition
The
Company encounters competition in all areas of its business pursuits. To
compete effectively, grow its market share, maintain flexibility and keep pace
with changing economic and social conditions, the Company continuously refines
and develops its products and services. The principal methods of
competing in the financial services industry are through service, convenience
and price.
The
banking industry is highly competitive, and the Company faces strong direct
competition for deposits, loans, and other financial-related services. The
offices in central and east-central Iowa compete with other commercial banks,
thrifts, credit unions, stockbrokers, finance divisions of auto and farm
equipment companies, agricultural suppliers, and other agricultural-related
lenders. Some of these competitors are local, while others are statewide
or nationwide. The Company competes for deposits principally by offering
depositors a wide variety of deposit programs, convenient office locations,
hours and other services, and for loan originations primarily through interest
rates and loan fees it charges, the variety of its loan products and the
efficiency and quality of services it provides to borrowers, with an emphasis on
building long-lasting relationships. Some of the financial institutions
and financial service organizations with which the Company competes are not
subject to the same degree of regulation as that imposed on federally insured
Iowa-chartered banks. As a result, such competitors have advantages over
the Company in providing certain services. As of December 31, 2008, there
were approximately 100 other banks having 346 offices or branches operating
within the 15 counties in which he Company has locations. Based on deposit
information collected by the FDIC as of June 30, 2008, the Company maintained
approximately 4.8% of the bank deposits within the 15 counties in which it
operates. New competitors may develop that are substantially larger and
have significantly greater resources than the Company. Currently, major
competitors in some of the Company’s markets include Wells Fargo Bank, U.S.
Bank, Regions Bank and Bank of the West.
The
Company also faces competition with respect to its investments in loan pool
participations. The Company’s financial success to date regarding loan
pools is largely attributable to the Servicer’s ability to determine which loan
pools to bid on and ultimately purchase, the availability of assets to fund the
purchases and the Servicer’s ability to collect on the underlying assets.
Investments in loan pools have become increasingly popular in recent
years, leading financial institutions and other competitors to become active at
loan pool auctions conducted by the FDIC and other sellers. There is
no assurance that the Company, through the Servicer, will be able to bid
successfully in the future. Certain existing competitors of the
Company are substantially larger and have significantly greater financial
resources than the Company. Increased participation by new
institutions or other investors may also create increased buying interest which
could also result in higher bid prices for the type of loan pools considered for
investment by the Company. In addition, new and existing competitors
may develop due diligence procedures comparable to the Servicer’s
procedures. The emergence of such competition could have a material
adverse effect on the Company’s business and financial results. The
Company expects that its success in the future will depend more on the
performance of MidWestOne Bank and MidWestOne Insurance Services and
less on the investments in loan pool participations.
Supervision
and Regulation
General
Financial
institutions, their holding companies and their affiliates are extensively
regulated under federal and state law. As a result, the growth and
earnings performance of the Company may be affected not only by management
decisions and general economic conditions, but also by the requirements of
federal and state statutes and by the regulations and policies of various bank
regulatory authorities, including the Iowa Superintendent of Banking
(the “Iowa Superintendent”), the Board of Governors of the Federal
Reserve System (the “Federal Reserve”) and the
FDIC. Furthermore, taxation laws administered by the Internal Revenue
Service and state taxing authorities and securities laws administered by the SEC
and state securities authorities have an impact on the business of the
Company. The effect of these statutes, regulations and regulatory
policies may be significant and cannot be predicted with a high degree of
certainty.
Federal
and state laws and regulations generally applicable to financial institutions
regulate, among other things, the scope of business, the kinds and amounts of
investments, reserve requirements, capital levels relative to operations, the
nature and amount of collateral for loans, the establishment of branches,
mergers and consolidations and the payment of dividends. This system
of supervision and regulation establishes a comprehensive framework for the
respective operations of the Company and its subsidiaries and is intended
primarily for the protection of the FDIC-insured deposits and depositors of the
Bank, rather than shareholders. In addition to this generally
applicable regulatory framework, recent turmoil in the credit markets prompted
the enactment of unprecedented legislation that has given the U.S. Treasury a
wide array of powers and discretion to implement programs and make direct equity
investments in qualifying financial institutions to help restore confidence and
stability in the U.S. financial markets, which imposes additional requirements
on institutions in which the U.S. Treasury invests.
The
following is a summary of the material elements of the regulatory framework that
applies to the Company and its subsidiaries. It does not describe all
of the statutes, regulations and regulatory policies that apply, nor does it
restate all of the requirements of those that are described. As such,
the following is qualified in its entirety by reference to applicable
law. Any change in statutes, regulations or regulatory policies may
have a material effect on the business of the Company and its
subsidiaries.
The
Company
General. The
Company, as the sole shareholder of the Bank, is a bank holding
company. As a bank holding company, the Company is registered with,
and is subject to regulation by, the Federal Reserve under the Bank Holding
Company Act of 1956, as amended (the “BHCA”). In accordance with
Federal Reserve policy, the Company is expected to act as a source of financial
strength to the Bank and to commit resources to support the Bank in
circumstances where the Company might not otherwise do so. Under the
BHCA, the Company is subject to periodic examination by the Federal
Reserve. The Company is also required to file with the Federal
Reserve periodic reports of the Company’s operations and such additional
information regarding the Company and its subsidiaries as the Federal Reserve
may require.
Acquisitions, Activities and Change
in Control. The primary purpose of a bank holding company is
to control and manage banks. The BHCA generally requires the prior
approval of the Federal Reserve for any merger involving a bank holding company
or any acquisition by a bank holding company of another bank or bank holding
company. Subject to certain conditions (including deposit
concentration limits established by the BHCA), the Federal Reserve may allow a
bank holding company to acquire banks located in any state of the United
States. In approving interstate acquisitions, the Federal Reserve is
required to give effect to applicable state law limitations on the aggregate
amount of deposits that may be held by the acquiring bank holding company and
its insured depository institution affiliates in the state in which the target
bank is located (provided that those limits do not discriminate against
out-of-state depository institutions or their holding companies) and state laws
that require that the target bank have been in existence for a minimum period of
time (not to exceed five years) before being acquired by an out-of-state bank
holding company.
The BHCA
generally prohibits the Company from acquiring direct or indirect ownership or
control of more than 5% of the voting shares of any company that is not a bank
and from engaging in any business other than that of banking, managing and
controlling banks or furnishing services to banks and their
subsidiaries. This general prohibition is subject to a number of
exceptions. The principal exception allows bank holding companies to
engage in, and to own shares of companies engaged in, certain businesses found
by the Federal Reserve to be “so closely related to
banking . . . as to be a proper incident
thereto.” This authority would permit the Company to engage in a
variety of banking-related businesses, including the ownership and operation of
a thrift, or any entity engaged in consumer finance, equipment leasing, the
operation of a computer service bureau (including software development) and
mortgage banking and brokerage. The BHCA generally does not place
territorial restrictions on the domestic activities of non-bank subsidiaries of
bank holding companies.
Additionally,
bank holding companies that meet certain eligibility requirements prescribed by
the BHCA and elect to operate as financial holding companies may engage in, or
own shares of companies engaged in, a wider range of nonbanking activities,
including securities and insurance underwriting and sales, merchant banking and
any other activity that the Federal Reserve, in consultation with the Secretary
of the Treasury, determines by regulation or order is financial in nature,
incidental to any such financial activity or complementary to any such financial
activity and does not pose a substantial risk to the safety or soundness of
depository institutions or the financial system generally. The
Company has elected (and the Federal Reserve has accepted the Company’s
election) to operate as a financial holding company.
Federal
law also prohibits any person or company from acquiring “control” of an
FDIC-insured depository institution or its holding company without prior notice
to the appropriate federal bank regulator. “Control” is conclusively
presumed to exist upon the acquisition of 25% or more of the outstanding voting
securities of a bank or bank holding company, but may arise under certain
circumstances between 10% and 24.99% ownership.
Capital
Requirements. Bank holding companies are required to maintain
minimum levels of capital in accordance with Federal Reserve capital adequacy
guidelines. If capital levels fall below the minimum required levels,
a bank holding company, among other things, may be denied approval to acquire or
establish additional banks or non-bank businesses.
The
Federal Reserve’s capital guidelines establish the following minimum regulatory
capital requirements for bank holding companies: (i) a risk-based requirement
expressed as a percentage of total assets weighted according to risk; and (ii) a
leverage requirement expressed as a percentage of total assets. The
risk-based requirement consists of a minimum ratio of total capital to total
risk-weighted assets of 8% and a minimum ratio of Tier 1 capital to total
risk-weighted assets of 4%. The leverage requirement consists of a
minimum ratio of Tier 1 capital to total assets of 3% for the most highly
rated companies, with a minimum requirement of 4% for all others. For
purposes of these capital standards, Tier 1 capital consists primarily of
permanent shareholders’ equity less intangible assets (other than certain loan
servicing rights and purchased credit card relationships). Total
capital consists primarily of Tier 1 capital plus certain other debt and
equity instruments that do not qualify as Tier 1 capital and a portion of
the company’s allowance for loan and lease losses.
The
risk-based and leverage standards described above are minimum
requirements. Higher capital levels will be required if warranted by
the particular circumstances or risk profiles of individual banking
organizations. For example, the Federal Reserve’s capital guidelines
contemplate that additional capital may be required to take adequate account of,
among other things, interest rate risk, or the risks posed by concentrations of
credit, nontraditional activities or securities trading
activities. Further, any banking organization experiencing or
anticipating significant growth would be expected to maintain capital ratios,
including tangible capital positions (i.e., Tier 1 capital less all
intangible assets), well above the minimum levels. As of December 31,
2008, the Company had regulatory capital in excess of the Federal Reserve’s
minimum requirements.
Emergency Economic Stabilization Act
of 2008. Recent events in the U.S. and global financial
markets, including the deterioration of the worldwide credit markets, have
created significant challenges for financial institutions such as the
Bank. Dramatic declines in the housing market during the past year,
marked by falling home prices and increasing levels of mortgage foreclosures,
have resulted in significant write-downs of asset values by financial
institutions, including government-sponsored entities and major commercial and
investment banks. In addition, many lenders and institutional
investors have reduced, and in some cases, ceased to provide, funding to
borrowers, including other financial institutions, as a result of concern about
the stability of the financial markets and the strength of
counterparties.
In
response to the crises affecting the U.S. banking system and financial markets
and in an effort to bolster the distressed economy and improve consumer
confidence in the financial system, on October 3, 2008, the U.S. Congress
passed, and President Bush signed into law, the Emergency Economic Stabilization
Act of 2008 (the “EESA”). The EESA authorizes the Secretary of
the U.S. Treasury (the “Treasury”) to implement various temporary emergency
programs designed to strengthen the capital positions of financial institutions
and stimulate the availability of credit within the U.S. financial
system. Financial institutions participating in certain of the
programs established under the EESA will be required to adopt the Treasury’s
standards for executive compensation and corporate governance.
The TARP Capital Purchase
Program. On October 14, 2008, the Treasury announced that it
would provide Tier 1 capital (in the form of perpetual preferred stock
together with a warrant to acquire shares of common stock) to eligible financial
institutions. This program, known as the TARP Capital Purchase
Program (the “CPP”), allocates $250 billion from the $700 billion authorized by
the EESA to the Treasury for the purchase of senior preferred shares from
qualifying financial institutions (the “CPP Preferred
Stock”). Eligible institutions can sell CPP Preferred Stock to the
Treasury in amounts equal to between 1% and 3% of the institution’s
risk-weighted assets. The Company elected to participate in the CPP
and, on February 6, 2009, consummated the sale of $16 million of CPP
Preferred Stock, together with a warrant to acquire 198,675 shares of Company
common stock, to Treasury. For further discussion of the Company’s
participation in the CPP, see below under “Recent Developments—Participation in the Capital
Purchase Program.”
Dividend
Payments. The Company’s ability to pay dividends to its
shareholders may be affected by both general corporate law considerations and
policies of the Federal Reserve applicable to bank holding
companies. As an Iowa corporation, the Company is subject to the
limitations of Iowa law, which allows the Company to pay dividends unless, after
such dividend, (i) the Company would not be able to pay its debts as they become
due in the usual course of business or (ii) the Company’s total assets would be
less than the sum of its total liabilities plus any amount that would be needed,
if the Company were to be dissolved at the time of the dividend payment, to
satisfy the preferential rights upon dissolution of shareholders whose rights
are superior to the rights of the shareholders receiving the
distribution. Additionally, policies of the Federal Reserve caution
that a bank holding company should not pay cash dividends unless its net income
available to common shareholders over the past year has been sufficient to fully
fund the dividends and the prospective rate of earnings retention appears
consistent with its capital needs, asset quality and overall financial
condition. The Federal Reserve also possesses enforcement powers over
bank holding companies and their non-bank subsidiaries to prevent or remedy
actions that represent unsafe or unsound practices or violations of applicable
statutes and regulations. Among these powers is the ability to
proscribe the payment of dividends by banks and bank holding
companies.
In
addition to the foregoing, as discussed below in more detail under “Recent
Developments—Participation in
the Capital Purchase Program,” the Company’s participation in the CPP
further restricts its ability to pay dividends. For example, the
terms of the CPP Preferred Stock provide that no dividends on any common or
preferred stock that ranks equal to or junior to the CPP Preferred Stock may be
paid unless and until all accrued and unpaid dividends for all past dividend
periods on the CPP Preferred Stock have been fully paid.
Federal Securities
Regulation. The Company’s common stock is registered under the
Securities Act and the Exchange Act. Consequently, the Company is
subject to the information, proxy solicitation, insider trading and other
restrictions and requirements of the SEC under the Exchange Act.
The
Bank
The Bank
is an Iowa-chartered bank, the deposit accounts of which are insured by the FDIC
to the maximum extent provided under federal law and FDIC
regulations. As an Iowa-chartered bank, the Bank is subject to the
examination, supervision, reporting and enforcement requirements of the Iowa
Superintendent, the chartering authority for Iowa banks, and the FDIC,
designated by federal law as the primary federal regulator of state-chartered,
FDIC-insured banks that, like the Bank, are not members of the Federal Reserve
System (“non-member banks”).
Deposit
Insurance. As an FDIC-insured institution, the Bank is
required to pay deposit insurance premium assessments to the
FDIC. The FDIC has adopted a risk-based assessment system whereby
FDIC-insured depository institutions pay insurance premiums at rates based on
their risk classification. An institution’s risk classification is
assigned based on its capital levels and the level of supervisory concern the
institution poses to the regulators. Under the regulations of the
FDIC, as presently in effect, insurance assessments range from 0.12% to 0.50% of
total deposits for the first quarter 2009 assessment period only (subject to the
application of assessment credits, if any, issued by the FDIC in
2008). Effective April 1, 2009, insurance assessments will range from
0.07% to 0.78% of total deposits, depending on an institution’s risk
classification, its levels of unsecured debt and secured liabilities, and, in
certain cases, its level of brokered deposits. In addition, the FDIC
recently passed an interim rule authorizing the FDIC to impose an emergency
special assessment equal to 0.20% of total deposits on June 30, 2009 (that will
be collected on September 30, 2009), and further authorizing the FDIC to impose
additional emergency special assessments after June 30, 2009, of up to 0.10% of
total deposits, whenever the FDIC estimates that the reserve ratio of the
Deposit Insurance Fund (“DIF”) will fall to a
level that the FDIC believes would adversely affect public confidence in federal
deposit insurance or to a level that will be close to zero or negative at the
end of a calendar quarter. The interim rule, however, is subject to a
30-day comment period that will expire on April 2, 2009, and may be subject to
change before any special assessments are imposed on insured depository
institutions.
FICO
Assessments. The Financing Corporation (“FICO”) is a
mixed-ownership governmental corporation chartered by the former Federal Home
Loan Bank Board pursuant to the Federal Savings and Loan Insurance Corporation
Recapitalization Act of 1987 to function as a financing vehicle for the
recapitalization of the former Federal Savings and Loan Insurance
Corporation. FICO issued 30-year non-callable bonds of approximately
$8.2 billion that mature by 2019. Since 1996, federal
legislation has required that all FDIC-insured depository institutions pay
assessments to cover interest payments on FICO’s outstanding
obligations. These FICO assessments are in addition to amounts
assessed by the FDIC for deposit insurance. During the year ended
December 31, 2008, the FICO assessment rate was approximately 0.01% of
deposits.
Supervisory
Assessments. All Iowa banks are required to pay supervisory
assessments to the Iowa Superintendent to fund the operations of that
agency. The amount of the assessment is calculated on the basis of
the Bank’s total assets. During the year ended December 31, 2008, the
Bank paid supervisory assessments to the Iowa Superintendent totaling
$155,617.
Capital
Requirements. Banks are generally required to maintain capital
levels in excess of other businesses. The FDIC has established the
following minimum capital standards for state-chartered insured non-member
banks, such as the Bank: (i) a leverage requirement consisting of a minimum
ratio of Tier 1 capital to total assets of 3% for the most highly-rated
banks, with a minimum requirement of at least 4% for all others; and (ii) a
risk-based capital requirement consisting of a minimum ratio of total capital to
total risk-weighted assets of 8% and a minimum ratio of Tier 1 capital to
total risk-weighted assets of 4%. In general, the components of
Tier 1 capital and total capital are the same as those for bank holding
companies discussed above.
The
capital requirements described above are minimum requirements. Higher
capital levels may be required if warranted by the particular circumstances or
risk profiles of individual institutions. For example, regulations of
the FDIC provide that additional capital may be required to take adequate
account of, among other things, interest rate risk or the risks posed by
concentrations of credit, nontraditional activities or securities trading
activities.
Further,
federal law and regulations provide various incentives for financial
institutions to maintain regulatory capital at levels in excess of minimum
regulatory requirements. For example, a financial institution that is
“well-capitalized” may qualify for exemptions from prior notice or application
requirements otherwise applicable to certain types of activities and may qualify
for expedited processing of other required notices or
applications. Additionally, one of the criteria that determines a
bank holding company’s eligibility to operate as a financial holding company is
a requirement that all of its financial institution subsidiaries be
“well-capitalized.” Under the regulations of the FDIC, in order to be
“well-capitalized,” a financial institution must maintain a ratio of total
capital to total risk-weighted assets of 10% or greater, a ratio of Tier 1
capital to total risk-weighted assets of 6% or greater and a ratio of
Tier 1 capital to total assets of 5% or greater.
Federal
law also provides the federal banking regulators with broad power to take prompt
corrective action to resolve the problems of undercapitalized
institutions. The extent of the regulators’ powers depends on whether
the institution in question is “adequately capitalized,” “undercapitalized,”
“significantly undercapitalized” or “critically undercapitalized,” in each case
as defined by regulation. Depending upon the capital category to
which an institution is assigned, the regulators’ corrective powers include:
(i) requiring the institution to submit a capital restoration plan;
(ii) limiting the institution’s asset growth and restricting its
activities; (iii) requiring the institution to issue additional capital
stock (including additional voting stock) or to be acquired;
(iv) restricting transactions between the institution and its affiliates;
(v) restricting the interest rate the institution may pay on deposits;
(vi) ordering a new election of directors of the institution;
(vii) requiring that senior executive officers or directors be dismissed;
(viii) prohibiting the institution from accepting deposits from
correspondent banks; (ix) requiring the institution to divest certain
subsidiaries; (x) prohibiting the payment of principal or interest on
subordinated debt; and (xi) ultimately, appointing a receiver for the
institution.
As of
December 31, 2008, the Bank exceeded its minimum regulatory capital requirements
under the FDIC’s capital adequacy guidelines and was deemed to be
“well-capitalized,” as defined by FDIC regulations. Notwithstanding its
compliance with the specified regulatory thresholds, however, the Bank’s board
of directors recently adopted a capital policy pursuant to which it will
maintain a ratio of Tier 1 capital to total assets of 8% or greater. The Bank’s
capital policy also provides that it will maintain a ratio of total capital to
total risk-weighted assets of at least 10% (which is the same threshold as is
required to be deemed well-capitalized under FDIC
regulations).
Dividend
Payments. The primary source of funds for the Company is
dividends from the Bank. Under the Iowa Banking Act, Iowa-chartered
banks generally may pay dividends only out of undivided profits. In
addition, the Iowa Superintendent may restrict the declaration or payment of a
dividend by an Iowa-chartered bank, such as the Bank.
The
payment of dividends by any financial institution is affected by the requirement
to maintain adequate capital pursuant to applicable capital adequacy guidelines
and regulations, and a financial institution generally is prohibited from paying
any dividends if, following payment thereof, the institution would be
undercapitalized. As described above, the Bank exceeded its minimum
capital requirements under applicable guidelines as of December 31,
2008. Notwithstanding the availability of funds for dividends,
however, the FDIC may prohibit the payment of any dividends by the Bank if
the FDIC determines such payment would constitute an unsafe or unsound
practice. In addition, the Bank’s board of
directors will not cause the Bank to pay a dividend to the Company if such
dividend would cause the Bank to fall out of compliance with the ratios set
forth in the Bank’s recently adopted
capital policy, as described above.
Insider
Transactions. The Bank is subject to certain restrictions
imposed by federal law on extensions of credit to the Company, on investments in
the stock or other securities of the Company and the acceptance of the stock or
other securities of the Company as collateral for loans made by the
Bank. Certain limitations and reporting requirements are also placed
on extensions of credit by the Bank to its directors and officers, to directors
and officers of the Company, to principal shareholders of the Company and to
“related interests” of such directors, officers and principal
shareholders. In addition, federal law and regulations may affect the
terms upon which any person who is a director or officer of the Company or the
Bank or a principal shareholder of the Company may obtain credit from banks with
which the Bank maintains a correspondent relationship.
Safety and Soundness
Standards. The federal banking agencies have adopted
guidelines that establish operational and managerial standards to promote the
safety and soundness of federally insured depository
institutions. The guidelines set forth standards for internal
controls, information systems, internal audit systems, loan documentation,
credit underwriting, interest rate exposure, asset growth, compensation, fees
and benefits, asset quality and earnings.
In
general, the safety and soundness guidelines prescribe the goals to be achieved
in each area, and each institution is responsible for establishing its own
procedures to achieve those goals. If an institution fails to comply
with any of the standards set forth in the guidelines, the institution’s primary
federal regulator may require the institution to submit a plan for achieving and
maintaining compliance. If an institution fails to submit an
acceptable compliance plan, or fails in any material respect to implement a
compliance plan that has been accepted by its primary federal regulator, the
regulator is required to issue an order directing the institution to cure the
deficiency. Until the deficiency cited in the regulator’s order is
cured, the regulator may restrict the institution’s rate of growth, require the
institution to increase its capital, restrict the rates the institution pays on
deposits or require the institution to take any action the regulator deems
appropriate under the circumstances. Noncompliance with the standards
established by the safety and soundness guidelines may also constitute grounds
for other enforcement action by the federal banking regulators, including cease
and desist orders and civil money penalty assessments.
Branching
Authority. The Bank has the authority under Iowa law to
establish branches anywhere in the State of Iowa, subject to receipt of all
required regulatory approvals.
Federal
law permits state and national banks to merge with banks in other states subject
to: (i) regulatory approval; (ii) federal and state deposit
concentration limits; and (iii) state law limitations requiring the merging bank
to have been in existence for a minimum period of time (not to exceed five
years) prior to the merger. The establishment of new interstate
branches or the acquisition of individual branches of a bank in another state
(rather than the acquisition of an out-of-state bank in its entirety) is
permitted only in those states the laws of which expressly authorize such
expansion.
State Bank Investments and
Activities. The Bank generally is permitted to make
investments and engage in activities directly or through subsidiaries as
authorized by Iowa law. However, under federal law and FDIC
regulations, FDIC-insured state banks are prohibited, subject to certain
exceptions, from making or retaining equity investments of a type, or in an
amount, that are not permissible for a national bank. Federal law and
FDIC regulations also prohibit FDIC-insured state banks and their subsidiaries,
subject to certain exceptions, from engaging as principal in any activity that
is not permitted for a national bank unless the bank meets, and continues to
meet, its minimum regulatory capital requirements and the FDIC determines the
activity would not pose a significant risk to the deposit insurance fund of
which the bank is a member. These restrictions have not had, and are
not currently expected to have, a material impact on the operations of the
Bank.
Federal Reserve
System. Federal Reserve regulations, as presently in effect,
require depository institutions to maintain reserves against their transaction
accounts (primarily NOW and regular checking accounts), as follows: for
transaction accounts aggregating $44.4 million or less, the reserve requirement
is 3% of total transaction accounts; and for transaction accounts aggregating in
excess of $44.4 million, the reserve requirement is $1.023 million plus 10%
of the aggregate amount of total transaction accounts in excess of
$44.4 million. The first $10.3 million of otherwise
reservable balances are exempted from the reserve requirements. These
reserve requirements are subject to annual adjustment by the Federal
Reserve. The Bank is in compliance with the foregoing
requirements.
Employees
On
December 31, 2008, the Company had 411 full-time equivalent
employees. The Company provides its employees with a comprehensive
program of benefits, some of which are on a contributory basis, including
comprehensive medical and dental plans, life insurance, long-term and short-term
disability coverage, a 401(k) plan, and an employee stock ownership
plan. None of the Company’s employees are represented by
unions. Management considers its relationship with its employees to
be good.
Company
Website
The
Company maintains an internet website for MidWestOne Bank at
www.midwestone.com. The Company will make available, free of charge,
on this site its annual report on Form 10-K, quarterly reports on Form 10-Q,
current reports on Form 8-K and other reports filed or furnished pursuant to
Section 13(a) or 15(d) of the Exchange Act as soon as reasonably practicable
after it electronically files such material with, or furnishes it to, the
SEC.
Recent
Developments
Participation
in the Capital Purchase Program
On
February 6, 2009, the Company, pursuant to the CPP implemented under the
EESA, entered into a Letter Agreement, which includes the Securities Purchase
Agreement – Standard Terms (collectively, the “Purchase Agreement”), with the
Treasury pursuant to which the Company issued and sold to the
Treasury 16,000 shares of the Company’s Fixed Rate Cumulative Perpetual
Preferred Stock, Series A, together with a warrant to purchase 198,675 shares of
the Company’s common stock, for an aggregate purchase price of $16 million in
cash. The warrant has a ten-year term and is immediately exercisable
upon its issuance, with an exercise price equal to $12.08 per share of the
common stock.
The
Series A Preferred Stock qualifies as Tier 1 capital and pays cumulative
dividends
at a rate of 5% per annum for the first five years, and 9% per
annum thereafter. The Series A Preferred Stock may be redeemed by the
Company at any time subject to the approval of the Treasury and the
Company’s
regulators. Any redemption of the Series A Preferred Stock
will be at the per share liquidation amount of $1,000 per share, plus any
accrued and unpaid dividends.
Prior to
the third anniversary of the Treasury’s purchase of the Series A Preferred
Stock, unless the Series A Preferred Stock has been redeemed or Treasury has
transferred all of the Series A Preferred Stock to one or more third parties,
the consent of the Treasury will be required for the Company to increase the
dividend paid on its common stock above its most recent quarterly dividend of
$0.1525 per share or repurchase shares of its common stock (other than in
connection with benefit plans). The Series A Preferred Stock is
non-voting except for class voting rights on matters that would adversely affect
the rights of the holders of the Series A Preferred Stock.
Participants
in the TARP Capital Purchase Program were required to accept several
compensation-related limitations associated with this Program. Each of our
senior executive officers in February 2009 agreed in writing to accept the
compensation standards in existence at that time under the CPP and thereby cap
or waive,
during the period during which the Treasury continues to hold an equity interest
in the Company, some of their contractual or legal rights. The
compensation-related limitations include the following: limits on
compensation to exclude incentives to take unnecessary and excessive risks; a
clawback with respect to incentive compensation based on statements of earnings,
gains or other criteria that are later proven to be materially inaccurate; and a
prohibition on golden parachute payments. EESA also limits the
deductibility of compensation earned by each of our senior executive
officers to $500,000 per year.
The
American Recovery and Reinvestment Act of 2009
On
February 17, 2009, President Obama signed into law the American Recovery and
Reinvestment Act of 2009 (“ARRA”). ARRA provides for large amounts of
new government spending and programs. In addition, ARRA imposes
extensive new executive compensation and corporate governance limitations on
current and future participants in the CPP, which are in addition to those
previously announced by Treasury. Thus, the newly enacted
compensation-related limitations are applicable to the Company and, to the
extent Treasury may implement these restrictions unilaterally, the Company will
apply these provisions. The new restrictions include additional
limits on executive compensation such as prohibiting the payment or accrual of
any bonus, retention award or incentive compensation to our most highly
compensated employee (which is our President and Chief Executive Officer) except
for the payment of long-term restricted stock that does not fully vest until
such time as Treasury no longer owns any of our equity or debt securities; prohibiting
the payment of “golden parachutes” to our senior executive officers and
next five most highly compensated employees; prohibiting any
compensation plan that would encourage the manipulation of earnings; and
extending the clawback required by EESA to the top 20 most highly compensated
employees (in addition to our senior executive officers). ARRA also
requires compliance with new corporate governance standards including an annual
“say on pay” shareholder vote, the adoption of policies regarding excessive or
luxury expenditures, and a certification by our Chief Executive Officer and
Chief Financial Officer that we have complied with the standards in the
ARRA. These new limits will remain in place until the Company has
redeemed the CPP Preferred Stock sold to Treasury, which is now permitted under
ARRA without penalty and without the need to raise new capital, subject to
Treasury’s consultation with the Company’s federal bank regulators.
The full
impact of the ARRA is not yet certain because it calls for additional regulatory
action. The Company will continue to monitor the effect of the ARRA and the
anticipated regulations.
Temporary
Liquidity Guarantee Program
In
connection with the recently enacted EESA and in conjunction with the Treasury’s
actions to address the current credit and liquidity crisis in financial markets,
the FDIC announced the Temporary Liquidity Guarantee Program, which temporarily
provides to participating institutions unlimited deposit insurance coverage for
non-interest bearing transaction accounts maintained at FDIC insured
institutions (the “transaction account guarantee program”), and provide a
limited guarantee on certain newly-issued senior unsecured debt (the “debt
guarantee program”). Institutions that did not opt out of the two
guarantee programs are subject to the following assessments for participation:
(i) for the debt guarantee program, between 50 and 100 basis points per
annum for eligible senior unsecured debt (depending on the maturity date) issued
between October 14, 2008 and June 30, 2009; and (ii) for the transaction
account guarantee program, 10 basis points per annum on amounts in excess of
$250,000 in non-interest bearing transaction accounts through and including
December 31, 2009. The Bank decided to continue to participate in
these programs and did not opt out. As a result, the Bank is
incurring fees associated with the programs (although, as of December 31,
2008, it had not issued any debt that is covered by the debt guarantee
program).
Financial
Stability Plan
On
February 10, 2009, Treasury outlined a comprehensive plan consisting of
multiple components designed to help restore stability to the U.S. financial
system. As outlined by Treasury, this plan, referred to as the
Financial Stability Plan, will include: the Capital Assistance Program pursuant
to which certain financial institutions will be permitted to sell convertible
preferred stock to Treasury; a public-private investment fund designed to
provide greater means for financial institutions to cleanse their balance sheets
of non-performing legacy assets; a consumer and business lending initiative of
up to $1 trillion; a housing support and foreclosure prevention program;
and a small business and community lending initiative. Because only a
general outline of the Financial Stability Plan has been disclosed thus far, it
is difficult to predict at this point what effect, if any, such programs will
have on the U.S. financial system generally or MidWestOne’s business
specifically.
Increase
in FDIC Deposit Insurance Premiums
On
February 27, 2009, the FDIC issued a proposed rule that would impose a
significant “emergency special assessment” on all FDIC-insured depository
institutions equal to 0.20% of deposits, regardless of their risk
level. The FDIC has proposed this special assessment in an effort to
increase the DIF, which declined from 0.76% of total insured deposits as of
September 30, 2008, to 0.40% of total insured deposits as of
December 31, 2008. The proposed special assessment would be
on total deposits as of June 30, 2009, to be collected on
September 30, 2009. It is important to note that the rule
proposing the special assessment has not been finalized and may
change. For example, it has been reported that the FDIC Chairman
would consider reducing the special assessment rate to 0.10% if legislation is
passed that allows it to borrow as much as $100 billion from
Treasury. However, if the rule is finalized in its current form, we
anticipate that this one-time special assessment could cost us an additional
$2.3 million in deposit insurance premiums in 2009.
Although
the proposed assessment is only a one-time assessment, the FDIC notes in the
proposed rule that if the DIF’s reserve ratio were to fall below a level “that
the Board believes would adversely affect public confidence or to a level which
shall be close to zero or negative at the end of a calendar quarter,” an
additional emergency special assessment of up to 0.10% may be imposed by a vote
of the FDIC’s
Board.
Cautionary
Note Regarding Forward-Looking Statements
This
report contains certain “forward-looking statements” within the meaning of such
term in the Private Securities Litigation Reform Act of 1995. The Company and
its representatives may, from time to time, make written or oral statements that
are “forward-looking” and provide information other than historical information.
These statements involve known and unknown risks, uncertainties and other
factors that may cause actual results to be materially different from any
results, levels of activity, performance or achievements expressed or implied by
any forward-looking statement. These factors include, among other things, the
factors listed below.
Forward-looking
statements, which may be based upon beliefs, expectations and assumptions of the
Company’s management and on information currently available to management, are
generally identifiable by the use of words such as “believe”, “expect”,
“anticipate”, “should”, “could”, “would”, “plans”, “intend”, “project”,
“estimate’, “forecast”, “may” or similar expressions. These forward-looking
statements are subject to certain risks and uncertainties that could cause
actual results to differ materially from those expressed in, or implied by,
these statements. The Company wishes to caution readers not to place undue
reliance on any such forward-looking statements, which speak only as of the date
made. Additionally, the Company undertakes no obligation to update any statement
in light of new information or future events.
The
Company’s ability to predict results or the actual effect of future plans or
strategies is inherently uncertain. Factors that could have an impact on the
Company’s ability to achieve operating results, growth plan goals and future
prospects include, but are not limited to, the following:
|
|
·
|
Credit
quality deterioration or pronounced and sustained reduction in real estate
market values could cause an increase in the allowance for credit losses
and a reduction in net earnings.
|
|
|
·
|
Management’s
ability to reduce and effectively manage interest rate risk and the impact
of interest rates in general on the volatility of the Company’s net
interest income.
|
|
|
·
|
Changes
in the economic environment, competition, or other factors that may affect
the Company’s ability to acquire loans or influence the anticipated growth
rate of loans and deposits and the quality of the loan portfolio and loan
and deposit pricing.
|
|
|
·
|
Fluctuations
in the value of the Company’s investment
securities.
|
|
|
·
|
The
ability to attract and retain key executives and employees experienced in
banking and financial services.
|
|
|
·
|
The
sufficiency of the allowance for loan losses to absorb the amount of
actual losses inherent in the existing loan
portfolio.
|
|
|
·
|
The
Company’s ability to adapt successfully to technological changes to
compete effectively in the
marketplace.
|
|
|
·
|
Credit
risks and risks from concentrations (by geographic area and by industry)
within the Company’s loan
portfolio.
|
|
|
·
|
The
effects of competition from other commercial banks, thrifts, mortgage
banking firms, consumer finance companies, credit unions, securities
brokerage firms, insurance companies, money market and other mutual funds,
and other financial institutions operating in the Company’s market or
elsewhere or providing similar
services.
|
|
|
·
|
The
failure of assumptions underlying the establishment of allowances for loan
losses and estimation of values of collateral and various financial assets
and liabilities.
|
|
|
·
|
Volatility
of rate sensitive deposits.
|
|
|
·
|
Operational
risks, including data processing system failures or
fraud.
|
|
|
·
|
Asset/liability
matching risks and liquidity risks.
|
|
|
·
|
The
costs, effects and outcomes of existing or future
litigation.
|
|
|
·
|
Governmental
monetary and fiscal policies, as well as legislative and regulatory
changes, that may result in the imposition of costs and constraints on the
Company.
|
|
|
·
|
Changes
in general economic or industry conditions, nationally or in the
communities in which the Company conducts
business.
|
|
|
·
|
Changes
in accounting policies and practices, as may be adopted by state and
federal regulatory agencies and the Financial Accounting Standards
Board.
|
These
risks and uncertainties should be considered when evaluating the forward-looking
statement and undue reliance should not be placed on such statements. The
Company cautions that the foregoing list of important factors may not be
all-inclusive and specifically declines to undertake any obligation to publicly
revise any forward-looking statements that have been made to reflect any events
or circumstances after the date of such statements or to reflect the occurrence
of anticipated or unanticipated events.
As
discussed above under Item 1. Business – “Merger Transaction,” the Company is
eligible to use the scaled disclosure requirements applicable to smaller
reporting companies in this Annual Report on Form 10-K. Accordingly,
the Company is not required to provide the information under this
item.
|
Item
1B.
|
Unresolved
Staff Comments.
|
None.
The
Company’s headquarters and the Bank’s main office are located at 102 South
Clinton Street, Iowa City, Iowa. This building is owned by the
Company and approximately 39,400 of its 63,800 sq ft are being leased out to
unrelated third parties. The Company currently operates 28 additional branches
throughout central and east-central Iowa totaling approximately 125,000 square
feet. The table below sets forth the locations of the Bank’s branch
offices:
|
822
12th St.
Belle
Plaine, Iowa
|
802
13th St.*
Belle
Plaine, Iowa
|
|
3225
Division St.
Burlington,
Iowa
|
323
Jefferson St.
Burlington,
Iowa
|
|
120
W. Center St.
Conrad,
Iowa
|
110
1st Ave.
Coralville,
Iowa
|
|
101
W. Second St., Suite 100†
Davenport,
Iowa
|
2408
W. Burlington
Fairfield,
Iowa
|
|
58
East Burlington
Fairfield,
Iowa
|
926
Ave. G
Ft.
Madison, Iowa
|
|
4510
Prairie Pkwy.
Cedar
Falls, Iowa
|
100
Eddystone Dr.
Hudson,
Iowa
|
|
325
S. Clinton St.
Iowa
City, Iowa
|
1906
Keokuk St.
Iowa
City, Iowa
|
|
2233
Rochester Ave.
Iowa
City, Iowa
|
202
Main St.
Melbourne,
Iowa
|
|
10030
Hwy. 149
North
English, Iowa
|
465
Hwy. 965 NE, Suite A
North
Liberty, Iowa
|
|
124
South First St.
Oskaloosa,
Iowa
|
222
First Ave. East*
Oskaloosa,
Iowa
|
|
301
A Ave. West*
Oskaloosa,
Iowa
|
116
W. Main St.
Ottumwa,
Iowa
|
|
1001
Hwy. 57
Parkersburg,
Iowa
|
700
Main St.
Pella,
Iowa
|
|
500
Oskaloosa St.*
Pella,
Iowa
|
112
North Main St.
Sigourney,
Iowa
|
|
3110
Kimball Ave.
Waterloo,
Iowa
|
305
W. Rainbow Dr.
West
Liberty,
Iowa
|
* Drive
up location only.
† Leased
office.
In
addition to the Bank’s branch offices, the insurance and investment divisions
lease two properties totaling approximately 3,900 square feet. The
Bank also currently operates one additional branch in a temporary facility and
has one branch temporarily closed as discussed further below. The
Bank owns 48 ATMs that are located within the communities served by branch
offices. We believe each of our facilities is suitable and adequate
to meet our current operational needs.
Natural
disasters in late May and early June 2008 affected the Company’s
properties. On May 25, 2008, the Parkersburg branch was destroyed by
a tornado that leveled much of the community. The branch has reopened
in a temporary facility and rebuilding efforts have
begun. Construction of the permanent facility is expected to be
completed in spring 2009. The facility was insured, which is expected
to cover most of the reconstruction cost. Flooding in eastern Iowa in
early June inundated the Waterloo and Coralville branch offices. The
Waterloo office, re-opened on February 23, 2009, has secured a leased space
in Waterloo. This leased facility will replace the previously flooded
location. The Coralville office was relocated to a temporary facility
until October 2008 when the newly remodeled office reopened. Neither
the Waterloo nor the Coralville office was covered by flood
insurance.
|
Item
3.
|
Legal
Proceedings.
|
The
Company and its subsidiaries are from time to time parties to various legal
actions arising in the normal course of business. The Company
believes that there is no threatened or pending proceeding against the Company
or its subsidiaries, which, if determined adversely, would have a material
adverse effect on the business or financial condition of the
Company.
|
Item
4.
|
Submission
of Matters to a Vote of Security
Holders.
|
No matter
was submitted to a vote of security holders during the quarter ended
December 31, 2008.
PART II
|
Item 5.
|
Market
For Registrant’s Common Equity, Related Stockholder Matters and Issuer
Purchases of Equity Securities.
|
Prior to
the Merger, the Company’s common stock was quoted on the Pink Sheets under the
symbol “ISBO.PK.” In connection with the Merger, the Company received
approval to list its common stock on the Nasdaq Global Select Market under the
symbol “MOFG,” and trading commenced on March 17, 2008. The following
table sets forth for the periods indicated the high and low reported bid prices
per share of the Company’s common stock as reported by Pink Sheets from January
1, 2007 through March 16, 2008 and the intra-day high and low sales prices per
share of the Company’s common stock as reported on the Nasdaq Global Select
Market beginning March 17, 2008, along with the cash dividends per share
declared during such periods. With respect to the high and low bid
information for the period from January 1, 2007 through March 16, 2008, the per
share prices reflect inter-dealer prices without adjustments for markups,
markdowns or commissions and may not necessarily represent actual
transactions.
|
|
|
High
|
|
|
Low
|
|
|
Cash
Dividend
Declared
|
|
|
2007
|
|
|
|
|
|
|
|
|
|
|
First
Quarter
|
|
$ |
27.50 |
|
|
$ |
26.75 |
|
|
$ |
0.32 |
|
|
Second
Quarter
|
|
$ |
27.00 |
|
|
$ |
26.00 |
|
|
|
— |
|
|
Third
Quarter
|
|
$ |
27.50 |
|
|
$ |
24.25 |
|
|
|
— |
|
|
Fourth
Quarter
|
|
$ |
25.00 |
|
|
$ |
18.50 |
|
|
$ |
0.33 |
|
|
2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
First
Quarter
|
|
$ |
19.24 |
|
|
$ |
16.00 |
|
|
|
— |
|
|
Second
Quarter
|
|
$ |
17.25 |
|
|
$ |
11.94 |
|
|
$ |
0.1525 |
|
|
Third
Quarter
|
|
$ |
14.95 |
|
|
$ |
12.00 |
|
|
$ |
0.1525 |
|
|
Fourth
Quarter
|
|
$ |
14.47 |
|
|
$ |
8.35 |
|
|
$ |
0.1525 |
|
As of
December 31, 2008, there were 8,603,055 shares of common stock outstanding
held by approximately 580 holders of record. Additionally, there are
an estimated 1,310 beneficial holders whose stock was held in street name by
brokerage houses and other nominees as of that date.
Dividends. The
Company may pay dividends on its common stock as and when declared by the
Company’s board of directors out of any funds legally available for the payment
of such dividends, subject to any and all preferences and rights of any
preferred stock or a series thereof. The amount of dividend payable
will depend upon the earnings and financial condition of the Company and other
factors, including applicable governmental regulations and
policies.
As
discussed above, the Company consummated the sale of $16 million of senior
preferred stock to Treasury pursuant to the Capital Purchase Program on February
6, 2009. The terms of the senior preferred stock place certain
restrictions on the Company’s ability to pay dividends on its common
stock. First, no dividends on the Company’s common stock may be paid
unless all accrued dividends on Treasury’s senior preferred stock have been paid
in full. Second, until the third anniversary of the date of
Treasury’s investment, the Company may not increase the dividends paid on its
common stock beyond its most recent quarterly dividend of $0.1525 per share
without first obtaining the consent of Treasury.
Repurchases of Company Equity
Securities. On April 8, 2008, the Company’s Board of Directors
authorized a stock repurchase program of up to $5,000,000 worth of common stock
through December 31, 2008. During the fourth quarter of 2008, the Company
repurchased 30,000 shares of common stock on the open market for a total of
$369,650. The table set forth below provides certain information with
respect to these repurchases:
|
|
|
Total
Number
of
Shares
Purchased
|
|
|
Average
Price
Paid
Per
Share
|
|
|
#
Purchased
as
Part of
Publicly
Announced
Plan
|
|
|
Maximum
Amount
that
May
Yet Be
Purchased
Under
Plan
|
|
|
October
1-31, 2008
|
|
|
- |
|
|
|
n/a |
|
|
|
n/a |
|
|
$ |
4,117,150 |
|
|
November
1-30, 2008
|
|
|
15,000 |
|
|
|
13.45 |
|
|
|
15,000 |
|
|
|
3,915,400 |
|
|
December
1-31, 2008
|
|
|
15,000 |
|
|
|
11.19 |
|
|
|
15,000 |
|
|
|
3,747,500 |
|
|
Total
|
|
|
30,000 |
|
|
|
12.32 |
|
|
|
30,000 |
|
|
|
3,747,500 |
|
The
Company’s 2008 repurchase program expired on December 31, 2008. No
new repurchase program has been approved. Because of the Company’s
participation in the Treasury’s Capital Purchase Program, it will not be
permitted to repurchase any shares of its common stock, other than in connection
with benefit plans consistent with past practice, until such time as the
Treasury no longer holds any equity securities in the Company.
Securities Authorized for Issuance
Under Equity Compensation Plans. The table below sets forth the following
information as of December 31, 2008 for: (i) all equity compensation
plans previously approved by the Company’s shareholders; and (ii) all
equity compensation plans not previously approved by the Company’s
shareholders:
(a) the
number of securities to be issued upon the exercise of outstanding options,
warrants and rights;
(b) the
weighted-average exercise price of such outstanding options, warrants and
rights; and
(c) other
than securities to be issued upon the exercise of such outstanding options,
warrants and rights, the number of securities remaining available for future
issuance under the plans.
|
|
|
Number of securities to be
issued upon exercise of
outstanding options
|
|
|
Weighted-average exercise
price of outstanding options
|
|
|
Number of securities
remaining available for
future issuance under
equity compensation plans
(excluding securities
reflected in column (a))
|
|
|
|
|
(a)
|
|
|
(b)
|
|
|
(c)
|
|
|
Equity
compensation plans approved by securityholders
|
|
268,218
|
|
|
18.10
|
|
|
473,082
|
|
|
Equity
compensation plans not approved by
securityholders
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
Total
|
|
|
268,218 |
|
|
|
18.10 |
|
|
|
473,082 |
|
|
Item 6.
|
Selected
Financial Data.
|
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 7.
|
Management’s
Discussion and Analysis of Financial Condition and Results of
Operations.
|
The
following presents management’s discussion and analysis of the Company’s
consolidated results of operations, financial position and changes in
condition. This review highlights the major factors affecting results
of operations and any significant changes in financial condition for the
two-year period ended December 31, 2008. It should be read in
conjunction with the accompanying Consolidated Financial Statements included
herein at pages F-1 through F-55 and other financial statistics appearing
elsewhere in this annual report, as well as the section titled “Caution
Regarding Forward-Looking Statements” set forth above in
Item 1. Business.
Overview
The following discussion is provided for the consolidated operations
of the Company, which as of December 31, 2008, includes its wholly-owned banking
subsidiary, MidWestOne
Bank, and its insurance subsidiary, MidWestOne Insurance Services,
Inc. On March 14, 2008, the Company (which was at such time named ISB
Financial Corp.) consummated its merger with the Former
MidWestOne. At the time of the Merger, the Company had two
wholly-owned banking subsidiaries—Iowa State Bank & Trust Company and First
State Bank. At the time of the Merger, Former MidWestOne had one bank subsidiary,
MidWestOne Bank; an
insurance subsidiary, MidWestOne Insurance Services, Inc.;
and an investment brokerage subsidiary, MidWestOne Investment Services,
Inc., the operations of which were transferred to MidWestOne Bank substantially
contemporaneous with the Merger. The Company operated the three bank
subsidiaries from March 15, 2008 to August 9, 2008, at which time the three
banks were consolidated under the charter of Iowa State Bank & Trust Company
with the surviving bank renamed MidWestOne Bank. MidWestOne
Insurance Services continues to operate as a separate subsidiary of the
Company. The results of operations for the year ended December 31, 2007
include the Company’s operations for such year and its two bank
subsidiaries. The results of operations for the year ended December 31,
2008 include the Company and its two bank subsidiaries for the entire year plus
the results of operation for the Former MidWestOne and its subsidiaries
from March 15, 2008 through December 31, 2008. Because the Company
was deemed to be the acquirer for purposes of applying purchase accounting, the
discussion below compares the consolidated financial condition and results of
operations of the Company and its subsidiaries as of and for the year
ended December 31, 2008 the consolidated financial condition and
results of operations of the Company (which at the time was referred to as
ISB Financial Corp.) and its two subsidiaries as of and for the year ended
December 31, 2007.
As
explained above, because the Merger was consummated in 2008, the Company’s
financial information for fiscal year 2007 does not include any of the financial
information attributable to the Former MidWestOne or its subsidiaries, but
the Company’s financial information for fiscal year 2008 does include the Former
MidWestOne operations
(except, as noted above, for the operations of the Former MidWestOne between January 1,
2008 and March 14, 2008). Prior to the Merger, the Company and
the Former MidWestOne
were comparable in total size; thus, the comparison of the Company’s 2008
financial information to its 2007 financial information often shows significant
changes, which generally makes the year-to-year changes significantly larger
than they generally would be expected for a company that has not undergone a
significant merger during the year.
Critical
Accounting Estimates
The
Company has identified five critical accounting policies and practices relative
to the reporting of its results of operation and financial condition. These five
accounting policies relate to the allowance for loan losses, participation
interests in loan pools, application of purchase accounting, goodwill and
intangible assets, and fair value of available for sale investment
securities.
Allowance
for Loan Losses
The
allowance for loan losses is based on management’s estimate. Management believes
the allowance for loan losses is adequate to absorb probable losses in the
existing portfolio. In evaluating the portfolio, management takes into
consideration numerous factors, including current economic conditions, prior
loan loss experience, the composition of the loan portfolio, and management’s
estimate of probable credit losses. The allowance for loan losses is established
through a provision for loss based on management’s evaluation of the risk
inherent in the loan portfolio, the composition of the portfolio, specific
impaired loans, and current economic conditions. Such evaluation, which includes
a review of all loans on which full collectability may not be reasonably
assured, considers, among other matters, the estimated net realizable value or
the fair value of the underlying collateral, economic conditions, historical
loss experience, and other factors that warrant recognition in providing for an
adequate allowance for loan losses. In the event that management’s evaluation of
the level of the allowance for loan losses is inadequate, the Company would need
to increase its provision for loan losses.
Participation
Interests in Loan Pools
The loan
pool accounting practice relates to management’s estimate that the investment
amount reflected on the Company’s financial statements does not exceed the
estimated net realizable value or the fair value of the underlying collateral
securing the purchased loans. In evaluating the purchased loan pool, management
takes into consideration many factors, including the borrowers’ current
financial situation, the underlying collateral, current economic conditions,
historical collection experience, and other factors relative to the collection
process. If the estimated net realizable value of the loan pool participations
is overstated, the Company’s yield on the loan pools would be reduced.
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
Securities
available for sale are reported at fair value, with unrealized gains and losses
reported as a separate component of accumulated other comprehensive income, net
of deferred income taxes. Declines in fair value of individual securities, below
their amortized cost, are evaluated by management to determine whether the
decline is temporary or “other than temporary.” Declines in the fair value of
available for sale securities below their cost that are deemed “other than
temporary” are reflected in earnings as impairment losses. In estimating “other
than temporary” impairment losses, management considers a number of factors
including: (1) the length of time and extent to which the fair value has been
less than cost; (2) the financial condition and near-term prospects of the
issuer; and (3) the intent and ability of the Company to retain its investment
in the issuer for a period of time sufficient to allow for any anticipated
recovery in fair value.
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.
Total interest income increased $31,901,000, or 83.3%, for the year
ended December 31, 2008 compared with the year ended December 31, 2007.
This increase in interest income was experienced in all earning asset
categories (loans, investment securities and federal funds sold and
interest-bearing balances) and was primarily a result of the Merger.
Interest income on loans totaled $53,104,000 for 2008, an increase of
$25,540,000 or 92.7%, compared to 2007. The higher interest income on loans
was due primarily to growth in loan volumes as a result of the Merger, partially
offset by lower market interest rates. The decrease in the national
prime rate has affected the Company as the overall average rate on the total
loan portfolio decreased to 5.94% for the year ended December 31, 2008 compared
with 7.11% for the year ended December 31, 2007. The average volume of
loans outstanding for 2008 was $502,589,000 greater than the average volume of
loans for 2007. Most of this increase was due to the
Merger. Interest income on investment securities increased
$2,109,000, or 20.7%, in 2008 to $12,302,000. This compares with $10,193,000 in
2007. The average balance of investment securities increased
$47,462,000. Most of this increase was a result of the Merger, but
such increase was partially offset by the proceeds from maturing investment
securities utilized to fund loan growth. The average tax-equivalent yield on the
investment portfolio decreased slightly to 4.90% for the year ended December 31,
2008 compared to 4.91% for the year ended December 31, 2007, as higher-yielding
securities matured and were replaced with securities having a lower interest
rate due to the overall decline in market interest rates in 2008. The
overall yield on earning assets decreased to 5.68% for the year ended December
31, 2008 from 6.25% for the year ended December 31, 2007, while total earning
assets averaged $1,262,392,000 for the year ended December 31, 2008, or
$624,871,000 higher than for the year ended December 31, 2007.
The
growth in deposits and federal funds purchased, which growth was attributable
primarily to the Merger, contributed to an increase in total interest expense
for the year ended December 31, 2008 when compared to the year ended December
31, 2007. Total interest expense increased $11,357,000, or 59.7%, for 2008 to
$30,395,000, up from $19,038,000 for 2007. Total deposits averaged $453,402,000
higher for 2008 compared with 2007, while the average rate paid on these
deposits during 2008 decreased to 2.59% from 3.35% for 2007. Interest expense on
deposits was $23,157,000 for the year ended December 31, 2008, an increase of
$8,359,000, or 56.5%,
from the $14,798,000 in interest expense for the year ended December 31, 2007.
The primary factor contributing to this increase in interest expense on deposits
was the large increase in the balance of outstanding deposits resulting from the
Merger. This increase in interest expense was offset partially by
decreases in the average rate paid on deposits due to the overall declined in
market interest rates in 2008. For the year ended December 31, 2008, the Company
averaged $55,069,000 in federal funds purchased and repurchase agreements
compared with $49,629,000 for 2007. Interest expense on federal funds purchased
and repurchase agreements decreased $992,000 to $1,122,000 for 2008 compared
with $2,114,000 for 2007. This was also primarily due to the Merger, offset
partially by decreases in market interest rates. The interest rates on federal
funds purchased and repurchase agreements correlate directly with the actions
taken by the Federal Reserve in lowering the discount rate during 2008. The
average rate paid by the Company on federal funds purchased and repurchase
agreements decreased to 2.04% for the year ended December 31, 2008 compared with
4.26% for the year ended December 31, 2007, which decreased interest expense.
The average balance of Federal Home Loan Bank advances was $91,803,000 higher
for the year ended December 31, 2008, while the average rate paid decreased to
3.93% for 2008 from 4.58% for 2007. The increase in Federal Home Loan Bank
advances was due primarily to the Merger.
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 years indicated. Interest income on tax-exempt
securities is reported on a fully tax-equivalent basis assuming a 34% tax rate.
Dividing income or expense by the average balances of assets or liabilities
results in such yields and costs. Nonaccrual loans are included in the loan
category.
|
|
|
Year ended December 31,
|
|
|
|
|
2008
|
|
|
2007
|
|
|
|
|
|
|
|
Interest
|
|
|
Average
|
|
|
|
|
|
Interest
|
|
|
Average
|
|
|
|
|
Average
|
|
|
Income(2)/
|
|
|
Rate/
|
|
|
Average
|
|
|
Income/
|
|
|
Rate/
|
|
|
|
|
Balance
|
|
|
Expense
|
|
|
Yield
|
|
|
Balance
|
|
|
Expense
|
|
|
Yield
|
|
|
|
|
(dollars in thousands)
|
|
|
Average
earning assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans(1)
|
|
$ |
893,451 |
|
|
$ |
53,104 |
|
|
|
5.94 |
% |
|
$ |
390,862 |
|
|
$ |
27,771 |
|
|
|
7.11 |
% |
|
Loan
pool participations
|
|
|
72,558 |
|
|
|
4,459 |
|
|
|
6.15 |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
Investment
securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Taxable
investments
|
|
|
180,787 |
|
|
|
8,222 |
|
|
|
4.55 |
|
|
|
163,608 |
|
|
|
7,552 |
|
|
|
4.62 |
|
|
Tax
exempt investments
|
|
|
102,035 |
|
|
|
5,625 |
|
|
|
5.51 |
|
|
|
71,752 |
|
|
|
4,001 |
|
|
|
5.58 |
|
|
Total
investment securities
|
|
|
282,822 |
|
|
|
13,847 |
|
|
|
4.90 |
|
|
|
235,360 |
|
|
|
11,553 |
|
|
|
4.91 |
|
|
Federal
funds sold and interest-bearing balances
|
|
|
13,561 |
|
|
|
341 |
|
|
|
2.51 |
|
|
|
11,299 |
|
|
|
548 |
|
|
|
4.85 |
|
|
Total
earning assets
|
|
$ |
1,262,392 |
|
|
$ |
71,751 |
|
|
|
5.68 |
% |
|
$ |
637,521 |
|
|
$ |
39,872 |
|
|
|
6.25 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average
interest-bearing liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Savings
and interest-bearing demand deposits
|
|
$ |
392,603 |
|
|
$ |
5,511 |
|
|
|
1.40 |
% |
|
$ |
193,044 |
|
|
$ |
3,109 |
|
|
|
1.61 |
% |
|
Time
Certificates of deposit
|
|
|
502,220 |
|
|
|
17,646 |
|
|
|
3.51 |
|
|
|
248,377 |
|
|
|
11,689 |
|
|
|
4.71 |
|
|
Total
deposits
|
|
|
894,823 |
|
|
|
23,157 |
|
|
|
2.59 |
|
|
|
441,421 |
|
|
|
14,798 |
|
|
|
3.35 |
|
|
Federal
funds purchased and repurchase agreements
|
|
|
55,069 |
|
|
|
1,122 |
|
|
|
2.04 |
|
|
|
49,629 |
|
|
|
2,114 |
|
|
|
4.26 |
|
|
Federal
Home Loan Bank advances
|
|
|
135,984 |
|
|
|
5,348 |
|
|
|
3.93 |
|
|
|
44,181 |
|
|
|
2,023 |
|
|
|
4.58 |
|
|
Long-term
debt and other
|
|
|
11,968 |
|
|
|
768 |
|
|
|
6.42 |
|
|
|
1,582 |
|
|
|
103 |
|
|
|
6.51 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
interest-bearing liabilities
|
|
$ |
1,097,844 |
|
|
$ |
30,395 |
|
|
|
2.77 |
% |
|
$ |
536,813 |
|
|
$ |
19,038 |
|
|
|
3.55 |
% |
|
Net
interest income
|
|
|
|
|
|
$ |
41,356 |
|
|
|
2.92 |
% |
|
|
|
|
|
$ |
20,834 |
|
|
|
2.71 |
% |
|
Net
interest margin (3)
|
|
|
|
|
|
|
|
|
|
|
3.28 |
% |
|
|
|
|
|
|
|
|
|
|
3.27 |
% |
(1) Loan
fees included in interest income are not material.
(2)
Includes interest income and discount realized on loan pool
participations.
(3) Net
interest margin is net interest income (computed on a tax-equivalent basis)
divided by average total earning assets.
The
following table sets forth an analysis of volume and rate changes in interest
income and interest expense on the Company’s average earning assets and average
interest-bearing liabilities reported on a fully tax-equivalent basis assuming a
34% tax rate. The table distinguishes between the changes related to average
outstanding balances (changes in volume holding the initial interest rate
constant) and the changes related to average interest rates (changes in average
rate holding the initial outstanding balance constant). The change in interest
due to both volume and rate has been allocated to volume and rate changes in
proportion to the relationship of the absolute dollar amounts of the change in
each.
|
|
|
Year ended December 31,
|
|
|
|
|
2008 Compared to 2007
|
|
|
|
|
Increase/ (Decrease) Due to
|
|
|
|
|
Volume
|
|
|
Rate
|
|
|
Net
|
|
|
|
|
(in
thousands)
|
|
|
Interest
income from average earning assets:
|
|
|
|
|
|
|
|
|
|
|
Loans
|
|
$ |
29,022 |
|
|
$ |
(3,689 |
) |
|
$ |
25,333 |
|
|
Investment
securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Taxable
investments
|
|
|
779 |
|
|
|
(109 |
) |
|
|
670 |
|
|
Tax
exempt investments
|
|
|
1,669 |
|
|
|
(45 |
) |
|
|
1,624 |
|
|
Total
investment securities
|
|
|
2,448 |
|
|
|
(154 |
) |
|
|
2,294 |
|
|
Federal
funds sold and interest-bearing balances
|
|
|
147 |
|
|
|
(354 |
) |
|
|
(207 |
) |
|
Total
income from earning assets
|
|
|
31,618 |
|
|
|
(4,198 |
) |
|
|
27,420 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
expense from average interest-bearing liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Savings
and interest-bearing demand deposits
|
|
|
(3,969 |
) |
|
|
6,371 |
|
|
|
2,402 |
|
|
Time
Certificates of deposit
|
|
|
7,921 |
|
|
|
(1,964 |
) |
|
|
5,957 |
|
|
Total
deposits
|
|
|
3,952 |
|
|
|
4,407 |
|
|
|
8,359 |
|
|
Federal
funds purchased and repurchase agreements
|
|
|
264 |
|
|
|
(1,256 |
) |
|
|
(992 |
) |
|
Federal
Home Loan Bank advances
|
|
|
3,567 |
|
|
|
(242 |
) |
|
|
3,325 |
|
|
Other
long-term debt
|
|
|
666 |
|
|
|
(1 |
) |
|
|
665 |
|
|
Total
expense form interest-bearing liabilities
|
|
|
8,449 |
|
|
|
2,908 |
|
|
|
11,357 |
|
|
Net
interest income
|
|
$ |
23,169 |
|
|
$ |
(7,106 |
) |
|
$ |
16,063 |
|
|
|
|
Year ended December 31,
|
|
|
|
|
2007
|
|
|
2006
|
|
|
|
|
|
|
|
Interest
|
|
|
Average
|
|
|
|
|
|
Interest
|
|
|
Average
|
|
|
|
|
Average
|
|
|
Income/
|
|
|
Rate/
|
|
|
Average
|
|
|
Income/
|
|
|
Rate/
|
|
|
|
|
Balance
|
|
|
Expense
|
|
|
Yield
|
|
|
Balance
|
|
|
Expense
|
|
|
Yield
|
|
|
|
|
(dollars
in thousands)
|
|
|
Average
earning assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans
|
|
$ |
390,862 |
|
|
$ |
27,771 |
|
|
|
7.11
|
% |
|
$ |
381,269 |
|
|
$ |
26,024 |
|
|
|
6.83
|
% |
|
Investment
securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Taxable
investments
|
|
|
163,608 |
|
|
|
7,552 |
|
|
|
4.62 |
|
|
|
183,057 |
|
|
|
7,076 |
|
|
|
3.87 |
|
|
Tax
exempt investments
|
|
|
71,752 |
|
|
|
4,001 |
|
|
|
5.58 |
|
|
|
62,888 |
|
|
|
3,181 |
|
|
|
5.06 |
|
|
Total
investment securities
|
|
|
235,360 |
|
|
|
11,553 |
|
|
|
4.91 |
|
|
|
245,945 |
|
|
|
10,257 |
|
|
|
4.17 |
|
|
Federal
funds sold and interest-bearing balances
|
|
|
11,299 |
|
|
|
548 |
|
|
|
4.85 |
|
|
|
7,285 |
|
|
|
283 |
|
|
|
3.88 |
|
|
Total
earning assets
|
|
$ |
637,521 |
|
|
$ |
39,872 |
|
|
|
6.25
|
% |
|
$ |
634,499 |
|
|
$ |
36,564 |
|
|
|
5.76
|
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average
interest-bearing liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Savings
and interest-bearing demand deposits
|
|
$ |
193,044 |
|
|
$ |
3,109 |
|
|
|
1.61
|
% |
|
$ |
205,074 |
|
|
$ |
3,042 |
|
|
|
1.48
|
% |
|
Time
Certificates of deposit
|
|
|
248,377 |
|
|
|
11,689 |
|
|
|
4.71 |
|
|
|
228,309 |
|
|
|
9,306 |
|
|
|
4.08 |
|
|
Total
deposits
|
|
|
441,421 |
|
|
|
14,798 |
|
|
|
3.35 |
|
|
|
433,383 |
|
|
|
12,348 |
|
|
|
2.85 |
|
|
Federal
funds purchased and repurchase agreements
|
|
|
49,629 |
|
|
|
2,114 |
|
|
|
4.26 |
|
|
|
48,378 |
|
|
|
1,878 |
|
|
|
3.88 |
|
|
Federal
Home Loan Bank advances
|
|
|
44,181 |
|
|
|
2,023 |
|
|
|
4.58 |
|
|
|
53,730 |
|
|
|
2,435 |
|
|
|
4.53 |
|
|
Other
long-term debt
|
|
|
1,582 |
|
|
|
103 |
|
|
|
6.51 |
|
|
|
1,463 |
|
|
|
98 |
|
|
|
6.70 |
|
|
Total
interest-bearing liabilities
|
|
$ |
536,813 |
|
|
$ |
19,038 |
|
|
|
3.55
|
% |
|
$ |
536,954 |
|
|
$ |
16,759 |
|
|
|
3.12
|
% |
|
Net
interest income
|
|
|
|
|
|
$ |
20,834 |
|
|
|
2.71
|
% |
|
|
|
|
|
$ |
19,805 |
|
|
|
2.64
|
% |
|
Net
interest margin (1)
|
|
|
|
|
|
|
|
|
|
|
3.27
|
% |
|
|
|
|
|
|
|
|
|
|
3.12
|
% |
(1) Net
interest margin is net interest income (computed on a tax-equivalent basis)
divided by average total earning assets.
|
|
|
Year ended December 31,
|
|
|
|
|
2007 Compared to 2006
|
|
|
|
|
Increase/ (Decrease) Due to
|
|
|
|
|
Volume
|
|
|
Rate
|
|
|
Net
|
|
|
|
|
(in thousands)
|
|
|
Interest
income from average earning assets:
|
|
|
|
|
|
|
|
|
|
|
Loans
|
|
$ |
665 |
|
|
$ |
1,082 |
|
|
$ |
1,747 |
|
|
Investment
securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Taxable
investments
|
|
|
(575 |
) |
|
|
1,051 |
|
|
|
476 |
|
|
Tax
exempt investments
|
|
|
475 |
|
|
|
345 |
|
|
|
820 |
|
|
Total
investment securities
|
|
|
(100 |
) |
|
|
1,396 |
|
|
|
1,296 |
|
|
Federal
funds sold and interest-bearing balances……
|
|
|
183 |
|
|
|
82 |
|
|
|
265 |
|
|
Total
income from earning assets
|
|
|
747 |
|
|
|
2,561 |
|
|
|
3,308 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
expense from average interest-bearing liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Savings
and interest-bearing demand deposits
|
|
|
(145 |
) |
|
|
212 |
|
|
|
67 |
|
|
Time
Certificates of deposit
|
|
|
864 |
|
|
|
1,519 |
|
|
|
2,383 |
|
|
Total
deposits
|
|
|
719 |
|
|
|
1,731 |
|
|
|
2,450 |
|
|
Federal
funds purchased and repurchase agreements
|
|
|
50 |
|
|
|
186 |
|
|
|
236 |
|
|
Federal
Home Loan Bank advances
|
|
|
(438 |
) |
|
|
26 |
|
|
|
(412 |
) |
|
Other
long-term debt
|
|
|
8 |
|
|
|
(3 |
) |
|
|
5 |
|
|
Total
expense form interest-bearing liabilities
|
|
|
338 |
|
|
|
1,941 |
|
|
|
2,279 |
|
|
Net
interest income
|
|
$ |
409 |
|
|
$ |
620 |
|
|
$ |
1,029 |
|
Provision
for Loan Losses
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
Income
taxes decreased $2,755,000 for the year ended December 31, 2008 compared with
2007 due to a decrease in the amount of pre-tax income. The Company’s
consolidated income tax rate varies from the statutory rate mainly due to the
amount of tax-exempt income and the non-deductible goodwill charge. The
effective income tax as a percentage of income before tax was 1.8% for the year
ended December 31, 2008, compared with 25.8% for 2007.
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
Total
loans increased 154.8% during the year ended December 31, 2008 to
$1,014,814,000. Non-performing loans as of December 31, 2008 totaled
$15,233,000 or 1.5% of total loans. This represents an increase of
$14,451,000 or 1,115.1%, when compared with the December 31, 2007 amount of
$1,296,000 or 0.32% of total loans. Non-performing loans consist of
nonaccrual loans, loans past due 90 days and still accruing, and troubled debt
restructurings. Nonaccrual loans increased $11,003,000 to a December
31, 2008 total of $11,785,000. Loans past due 90 days and over as of
December 31, 2008 totaled $3,024,000, an increase of $2,510,000 compared with
the December 31, 2007 total. While there were no troubled debt
restructurings at December 31, 2007, there was $424,000 in troubled debt
restructurings on December 31, 2008.
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
|
|
|