Edgar Filing: MidWestOne Financial Group, Inc.

midwestone 033112 10Q

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549




	FORM 10-Q



x	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended March 31, 2012



o	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from to



	Commission file number 000-24630

MIDWESTONE FINANCIAL GROUP, INC.

102 South Clinton Street

Iowa City, IA 52240

(Address of principal executive offices, including Zip Code)

Registrant's telephone number: 319-356-5800



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

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. x Yes o No

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). x Yes o No

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definition of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):



Large accelerated filer	o	Accelerated filer	x
Non-accelerated filer	o (Do not check if a smaller reporting company)	Smaller reporting company	o

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). o Yes x No

As of May 1, 2012, there were 8,468,384 shares of common stock, $1.00 par value per share, outstanding.

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MIDWESTONE FINANCIAL GROUP, INC.

Form 10-Q Quarterly Report

Table of Contents



		Page No.
PART I

Item 1.	Financial Statements	1

	Consolidated Balance Sheets	1

	Consolidated Statements of Operations	2

	Consolidated Statements of Comprehensive Income	3

	Consolidated Statements of Shareholders' Equity	4

	Consolidated Statements of Cash Flows	5

	Notes to Consolidated Financial Statements	6

Item 2.	Management's Discussion and Analysis of Financial Condition and Results of Operations	29

Item 3.	Quantitative and Qualitative Disclosures about Market Risk	45

Item 4.	Controls and Procedures	47

Part II

Item 1.	Legal Proceedings	49

Item 1A.	Risk Factors	49

Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	49

Item 3.	Defaults Upon Senior Securities	49

Item 4.	Mine Safety Disclosures	49

Item 5.	Other Information	49

Item 6.	Exhibits	50

	Signatures	51

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PART I – FINANCIAL INFORMATION

Item 1. Financial Statements.

MIDWESTONE FINANCIAL GROUP, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS



	March 31, 2012			December 31, 2011
(dollars in thousands)	(unaudited)
ASSETS
Cash and due from banks	$	27,329		$	28,155
Interest-bearing deposits in banks	21,631			4,468
Federal funds sold	3,073			—
Cash and cash equivalents	52,033			32,623
Investment securities:
Available for sale	551,823			534,080
Held to maturity (fair value of $7,053 as of March 31, 2012 and $2,042 as of December 31, 2011)	7,017			2,036
Loans held for sale	943			1,955
Loans	981,146			986,173
Allowance for loan losses	(15,679		)	(15,676		)
Net loans	965,467			970,497
Loan pool participations, net	45,908			50,052
Premises and equipment, net	25,595			26,260
Accrued interest receivable	9,639			10,422
Intangible assets, net	10,053			10,247
Bank-owned life insurance	27,953			27,723
Other real estate owned	3,773			4,033
Assets held for sale	764			—
Deferred income taxes	3,430			3,654
Other assets	21,446			21,662
Total assets	$	1,725,844		$	1,695,244
LIABILITIES AND SHAREHOLDERS' EQUITY
Deposits:
Non-interest-bearing demand	$	164,936		$	161,287
Interest-bearing checking	536,495			499,905
Savings	79,412			71,823
Certificates of deposit under $100,000	337,589			346,858
Certificates of deposit $100,000 and over	226,221			226,769
Total deposits	1,344,653			1,306,642
Federal funds purchased	—			8,920
Securities sold under agreements to repurchase	50,314			48,287
Federal Home Loan Bank borrowings	136,041			140,014
Deferred compensation liability	3,613			3,643
Long-term debt	15,464			15,464
Accrued interest payable	1,641			1,530
Other liabilities	14,848			14,250
Total liabilities	1,566,574			1,538,750
Shareholders' equity:
Preferred stock, no par value, with a liquidation preference of $1,000.00 per share; authorized 500,000 shares; no shares issued and outstanding at March 31, 2012 and December 31, 2011	$	—		$	—
Common stock, $1.00 par value; authorized 15,000,000 shares at March 31, 2012 and December 31, 2011; issued 8,690,398 shares at March 31, 2012 and December 31, 2011; outstanding 8,464,820 shares at March 31, 2012 and 8,529,530 shares at December 31, 2011	8,690			8,690
Additional paid-in capital	80,187			80,333
Treasury stock at cost, 225,578 shares as of March 31, 2012 and 160,868 shares at December 31, 2011	(3,446		)	(2,312		)
Retained earnings	70,008			66,299
Accumulated other comprehensive income	3,831			3,484
Total shareholders' equity	159,270			156,494
Total liabilities and shareholders' equity	$	1,725,844		$	1,695,244

See accompanying notes to consolidated financial statements.

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MIDWESTONE FINANCIAL GROUP, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS



(unaudited) (dollars in thousands, except per share amounts)	Three Months Ended March 31,
	2012		2011
Interest income:
Interest and fees on loans	$	13,080	$	12,800
Interest and discount on loan pool participations	454		354
Interest on bank deposits	10		8
Interest on investment securities:
Taxable securities	2,752		2,688
Tax-exempt securities	1,219		1,035
Total interest income	17,515		16,885
Interest expense:
Interest on deposits:
Interest-bearing checking	829		1,008
Savings	37		59
Certificates of deposit under $100,000	1,590		2,187
Certificates of deposit $100,000 and over	773		848
Total interest expense on deposits	3,229		4,102
Interest on federal funds purchased	3		—
Interest on securities sold under agreements to repurchase	55		74
Interest on Federal Home Loan Bank borrowings	803		945
Interest on notes payable	9		10
Interest on long-term debt	168		162
Total interest expense	4,267		5,293
Net interest income	13,248		11,592
Provision for loan losses	579		900
Net interest income after provision for loan losses	12,669		10,692
Noninterest income:
Trust, investment, and insurance fees	1,253		1,273
Service charges and fees on deposit accounts	767		851
Mortgage origination and loan servicing fees	767		877
Other service charges, commissions and fees	710		679
Bank-owned life insurance income	230		229
Gain on sale and call of available for sale securities	316		—
Gain (loss) on sale of premises and equipment	158		(48		)
Total noninterest income	4,201		3,861
Noninterest expense:
Salaries and employee benefits	5,972		5,870
Net occupancy and equipment expense	1,644		1,617
Professional fees	732		677
Data processing expense	446		450
FDIC insurance expense	310		597
Amortization of intangible assets	194		224
Other operating expense	1,505		1,199
Total noninterest expense	10,803		10,634
Income before income tax expense	6,067		3,919
Income tax expense	1,635		1,014
Net income	$	4,432	$	2,905
Less: Preferred stock dividends and discount accretion	$	—	$	217
Net income available to common shareholders	$	4,432	$	2,688
Share and Per share information:
Ending number of shares outstanding	8,464,820		8,624,392
Average number of shares outstanding	8,497,919		8,621,720
Diluted average number of shares	8,528,828		8,682,381
Earnings per common share - basic	$	0.52	$	0.31
Earnings per common share - diluted	0.52		0.31
Dividends paid per common share	0.09		0.05

See accompanying notes to consolidated financial statements.

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MIDWESTONE FINANCIAL GROUP, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME



(unaudited) (dollars in thousands)	Three Months Ended March 31,
	2012			2011
Net income	$	4,432		$	2,905

Other comprehensive income, before tax:
Unrealized holding gains arising during period	859			793
Less: Reclassification adjustment for gains included in net income	(316		)	—
Unrealized gains on available for sale securities	543			793
Other comprehensive income, before tax	543			793
Income tax expense related to items of other comprehensive income	196			297
Other comprehensive income, net of tax	347			496
Comprehensive income	$	4,779		$	3,401

See accompanying notes to consolidated financial statements.

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MIDWESTONE FINANCIAL GROUP, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY



(unaudited) (dollars in thousands, except per share amounts)	Preferred Stock		Common Stock		Additional Paid-in Capital			Treasury Stock			Retained Earnings			Accumulated Other Comprehensive Income (loss)			Total
Balance at December 31, 2010	$	15,767	$	8,690	$	81,268		$	(1,052	)	$	55,619		$	(1,826	)	$	158,466
Net income	—		—		—			—			2,905			—			2,905
Dividends paid on common stock ($0.05 per share)	—		—		—			—			(431		)	—			(431		)
Dividends paid on preferred stock	—		—		—			—			(200		)	—			(200		)
Stock options exercised (1,682 shares)	—		—		(6		)	14			—			—			8
Release/lapse of restriction on RSUs (8,600 shares)	—		—		(120		)	120			—			—			—
Preferred stock discount accretion	17		—		—			—			(17		)	—			—
Stock compensation	—		—		71			—			—			—			71
Other comprehensive income	—		—		—			—			—			496			496
Balance at March 31, 2011	$	15,784	$	8,690	$	81,213		$	(918	)	$	57,876		$	(1,330	)	$	161,315
Balance at December 31, 2011	$	—	$	8,690	$	80,333		$	(2,312	)	$	66,299		$	3,484		$	156,494
Net income	—		—		—			—			4,432			—			4,432
Dividends paid on common stock ($0.085 per share)	—		—		—			—			(723		)	—			(723		)
Stock options exercised (11,553 shares)	—		—		(47		)	134			—			—			87
Release/lapse of restriction on RSUs (13,170 shares)	—		—		(164		)	173			—			—			9
Repurchase of common stock (86,083 shares)	—		—		—			(1,441		)	—			—			(1,441		)
Stock compensation	—		—		65			—			—			—			65
Other comprehensive income	—		—		—			—			—			347			347
Balance at March 31, 2012	$	—	$	8,690	$	80,187		$	(3,446	)	$	70,008		$	3,831		$	159,270

See accompanying notes to consolidated financial statements.

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MIDWESTONE FINANCIAL GROUP, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS



(unaudited) (dollars in thousands)	Three Months Ended March 31,
	2012			2011
Cash flows from operating activities:
Net income	$	4,432		$	2,905
Adjustments to reconcile net income to net cash provided by operating activities:
Provision for loan losses	579			900
Depreciation, amortization and accretion	1,377			1,447
(Gain) loss on sale of premises and equipment	(158		)	48
Deferred income taxes	28			36
Stock-based compensation	74			71
Net gain on sale or call of available for sale securities	(316		)	—
Net gain on sale of other real estate owned	(67		)	(90		)
Net gain on sale of loans held for sale	(503		)	(288		)
Origination of loans held for sale	(32,308		)	(22,625		)
Proceeds from sales of loans held for sale	33,823			23,336
Decrease in accrued interest receivable	783			1,068
Increase in cash value of bank-owned life insurance	(230		)	(229		)
Decrease in other assets	216			—
Decrease in deferred compensation liability	(30		)	(14		)
Increase in accrued interest payable, accounts payable, accrued expenses, and other liabilities	709			4,176
Net cash provided by operating activities	8,409			10,741
Cash flows from investing activities:
Proceeds from sales of available for sale securities	14,558			—
Proceeds from maturities and calls of available for sale securities	19,134			34,396
Purchases of available for sale securities	(51,162		)	(74,236		)
Proceeds from maturities and calls of held to maturity securities	20			361
Purchase of held to maturity securities	(5,000		)	—
Decrease (increase) in loans	3,795			(1,291		)
Decrease in loan pool participations, net	4,144			3,664
Purchases of premises and equipment	(1,157		)	(183		)
Proceeds from sale of other real estate owned	983			200
Proceeds from sale of premises and equipment	645			154
Net cash used in investing activities	(14,040		)	(36,935		)
Cash flows from financing activities:
Net increase in deposits	38,011			43,830
Decrease in federal funds purchased	(8,920		)	—
Increase (decrease) in securities sold under agreements to repurchase	2,027			(3,869		)
Proceeds from Federal Home Loan Bank borrowings	—			10,000
Repayment of Federal Home Loan Bank borrowings	(4,000		)	(20,000		)
Stock options exercised	87			8
Dividends paid	(723		)	(631		)
Repurchase of common stock	(1,441		)	—
Net cash provided by financing activities	25,041			29,338
Net increase in cash and cash equivalents	19,410			3,144
Cash and cash equivalents at beginning of period	32,623			20,523
Cash and cash equivalents at end of period	$	52,033		$	23,667
Supplemental disclosures of cash flow information:
Cash paid during the period for interest	$	1,095		$	5,200
Cash paid during the period for income taxes	$	815		$	143
Supplemental schedule of non-cash investing activities:
Transfer of loans to other real estate owned	$	656		$	134
Transfer of property to assets held for sale	$	764		$	—

See accompanying notes to consolidated financial statements.

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MidWestOne Financial Group, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

(Unaudited)

1.Principles of Consolidation and Presentation

MidWestOne Financial Group, Inc. (“MidWestOne” or the “Company,” which is also referred to herein as “we,” “our” or “us”) is an Iowa corporation incorporated in 1983, a bank holding company under the Bank Holding Company Act of 1956 and a financial holding company under the Gramm-Leach-Bliley Act of 1999. Our principal executive offices are located at 102 South Clinton Street, Iowa City, Iowa 52240.

The Company owns 100% of the outstanding common stock of MidWestOne Bank, an Iowa state non-member bank chartered in 1934 with its main office in Iowa City, Iowa (the “Bank”), and 100% of the common stock of MidWestOne Insurance Services, Inc., Oskaloosa, Iowa. We operate primarily through our bank subsidiary, MidWestOne Bank, and MidWestOne Insurance Services, Inc., our wholly-owned subsidiary that operates an insurance agency business, through three offices located in central and east-central Iowa.

The accompanying unaudited consolidated financial statements have been prepared in accordance with the instructions to Form 10-Q and, therefore, do not include all the information and notes necessary for complete financial statements in conformity with U.S. generally accepted accounting principles. The information in this Quarterly Report on Form 10-Q is written with the presumption that the users of the interim financial statements have read or have access to the most recent Annual Report on Form 10-K of MidWestOne, which contains the latest audited financial statements and notes thereto, together with Management's Discussion and Analysis of Financial Condition and Results of Operations as of December 31, 2011 and for the year then ended. Management believes that the disclosures are adequate to make the information presented not misleading. In the opinion of management, the accompanying consolidated financial statements contain all adjustments (consisting of only normal recurring accruals) necessary to present fairly the financial position as of March 31, 2012, and the results of operations and cash flows for the three months ended March 31, 2012 and 2011. All significant intercompany accounts and transactions have been eliminated in consolidation.

The preparation of financial statements in conformity with U.S. generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities at the date of the financial statements and the reported amount of revenues and expenses during the reporting period. These estimates are based on information available to management at the time the estimates are made. Actual results could differ from those estimates. In the opinion of management, the accompanying unaudited consolidated financial statements contain all adjustments, consisting of normal recurring items, considered necessary for fair presentation. The results for the three months ended March 31, 2012 may not be indicative of results for the year ending December 31, 2012, or for any other period.

All significant accounting policies followed in the preparation of the quarterly financial statements are disclosed in the December 31, 2011 Annual Report on Form 10-K. In the consolidated statements of cash flows, cash and cash equivalents include cash and due from banks, interest-bearing deposits in banks, and federal funds sold.

2.Shareholders' Equity

Preferred Stock: The number of authorized shares of preferred stock for the Company is 500,000. None are currently issued or outstanding.

Common Stock: The number of authorized shares of common stock for the Company is 15,000,000.

On October 18, 2011, our Board of Directors amended the Company's existing $1.0 million share repurchase program, originally authorized on July 26, 2011, by increasing the remaining amount of authorized repurchases to $5.0 million, and extending the expiration of the program to December 31, 2012. Pursuant to the program, we may repurchase shares from time to time in the open market, and the method, timing and amounts of repurchase will be solely in the discretion of the Company's management. The repurchase program does not require us to acquire a specific number of shares. Therefore, the amount of shares repurchased pursuant to the program will depend on several factors, including market conditions, capital and liquidity requirements, and alternative uses for cash available.

3.Earnings per Common Share

Basic earnings per common share computations are based on the weighted average number of shares of common stock actually outstanding during the period. The weighted average number of shares outstanding for the three months ended March 31, 2012 and 2011 was 8,497,919 and 8,621,720, respectively. Diluted earnings per share amounts are computed by dividing net income available to common shareholders by the weighted average number of shares outstanding and all

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dilutive potential shares outstanding during the period. The computation of diluted earnings per share used a weighted average diluted number of shares outstanding of 8,528,828 and 8,682,381 for the three months ended March 31, 2012 and 2011, respectively.

The following table presents the computation of earnings per common share for the respective periods:



	Three Months Ended March 31,
(dollars in thousands, except per share amounts)	2012		2011
Weighted average number of shares outstanding during the period	8,497,919		8,621,720
Weighted average number of shares outstanding during the period including all dilutive potential shares	8,528,828		8,682,381
Net income	$	4,432	$	2,905
Preferred stock dividend accrued and discount accretion	—		(217		)
Net income available to common stockholders	$	4,432	$	2,688
Earnings per share - basic	$	0.52	$	0.31
Earnings per share - diluted	$	0.52	$	0.31

4.Investment Securities

A summary of investment securities available for sale is as follows:



	As of March 31, 2012
	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses		Estimated Fair Value
(in thousands)
U.S. Government agencies and corporations	$	68,943	$	1,045	$	73	$	69,915
State and political subdivisions	214,524		10,390		249		224,665
Mortgage-backed securities and collateralized mortgage obligations	237,913		6,495		7		244,401
Corporate debt securities	11,978		227		989		11,216
Total debt securities	533,358		18,157		1,318		550,197
Other equity securities	1,200		426		—		1,626
Total	$	534,558	$	18,583	$	1,318	$	551,823



	As of December 31, 2011
	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses		Estimated Fair Value
(in thousands)
U.S. Government agencies and corporations	$	55,851	$	1,142	$	12	$	56,981
State and political subdivisions	209,094		10,222		55		219,261
Mortgage-backed securities and collateralized mortgage obligations	238,641		6,161		—		244,802
Corporate debt securities	12,578		203		1,176		11,605
Total debt securities	516,164		17,728		1,243		532,649
Other equity securities	1,194		237		—		1,431
Total	$	517,358	$	17,965	$	1,243	$	534,080

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A summary of investment securities held to maturity is as follows:



	As of March 31, 2012
	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses		Estimated Fair Value
(in thousands)
State and political subdivisions	$	6,100	$	31	$	—	$	6,131
Mortgage-backed securities	45		5		—		50
Corporate debt securities	872		—		—		872
Total	$	7,017	$	36	$	—	$	7,053



	As of December 31, 2011
	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses		Estimated Fair Value
(in thousands)
State and political subdivisions	$	1,119	$	2	$	—	$	1,121
Mortgage-backed securities	46		4		—		50
Corporate debt securities	871		—		—		871
Total	$	2,036	$	6	$	—	$	2,042

The summary of available for sale investment securities shows that some of the securities in the available for sale investment portfolio had unrealized losses, or were temporarily impaired, as of March 31, 2012 and December 31, 2011. This temporary impairment represents the estimated amount of loss that would be realized if the securities were sold on the valuation date.

The following presents information pertaining to securities with gross unrealized losses as of March 31, 2012 and December 31, 2011, aggregated by investment category and length of time that individual securities have been in a continuous loss position:



		As of March 31, 2012
	Number of Securities	Less than 12 Months				12 Months or More				Total
	Number of Securities	Fair Value		Unrealized Losses		Fair Value		Unrealized Losses		Fair Value		Unrealized Losses
(in thousands, except number of securities)
U.S. Government agencies and corporations	2	$	11,415	$	73	$	—	$	—	$	11,415	$	73
State and political subdivisions	29	9,943		247		172		2		10,115		249
Mortgage-backed securities and collateralized mortgage obligations	1	3,375		7		—		—		3,375		7
Corporate debt securities	6	2,089		23		805		966		2,894		989
Total	38	$	26,822	$	350	$	977	$	968	$	27,799	$	1,318


		As of December 31, 2011
	Number of Securities	Less than 12 Months				12 Months or More				Total
	Number of Securities	Fair Value		Unrealized Losses		Fair Value		Unrealized Losses		Fair Value		Unrealized Losses
(in thousands, except number of securities)
U.S. Government agencies and corporations	1	$	5,412	$	12	$	—	$	—	$	5,412	$	12
State and political subdivisions	14	3,449		46		866		9		4,315		55
Corporate debt securities	6	4,975		210		806		966		5,781		1,176
Total	21	$	13,836	$	268	$	1,672	$	975	$	15,508	$	1,243

The Company's assessment of other-than-temporary impairment ("OTTI") is based on its reasonable judgment of the specific facts and circumstances impacting each individual security at the time such assessments are made. The Company reviews and considers factual information, including expected cash flows, the structure of the security, the credit quality of the underlying assets and the current and anticipated market conditions.

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At March 31, 2012, approximately 61% of the municipal bonds held by the Company were Iowa based. The Company does not intend to sell these municipal obligations, and it is not more likely than not that the Company will be required to sell them before the recovery of its cost. Due to the issuers' continued satisfaction of their obligations under the securities in accordance with their contractual terms and the expectation that they will continue to do so, management's intent and ability to hold these securities for a period of time sufficient to allow for any anticipated recovery in fair value, as well as the evaluation of the fundamentals of the issuers' financial condition and other objective evidence, the Company believes that the municipal obligations identified in the tables above were temporarily depressed as of March 31, 2012 and December 31, 2011.

The receipt of principal, at par, and interest on mortgage-backed securities is guaranteed by the respective government-sponsored agency guarantor, such that the Company believes that its mortgage-backed securities do not expose the Company to credit-related losses. The Company's mortgage-backed securities portfolio consisted of securities predominantly underwritten to the standards of and guaranteed by the government-sponsored agencies of FHLMC, FNMA and GNMA.

At March 31, 2012, the Company owned six collateralized debt obligations backed by pools of trust preferred securities with an original cost basis of $9.75 million. The book value of these securities as of March 31, 2012 totaled $1.8 million, after other-than-temporary impairment charges of $6.2 million during 2008, $1.6 million during 2009, and $0.2 million in 2010. All of the Company's trust preferred collateralized debt obligations are in mezzanine tranches and are currently rated less than investment grade by Moody's Investor Services. They are secured by trust preferred securities of banks and insurance companies throughout the United States, and were rated as investment grade securities when purchased between March 2006 and December 2007. However, as the banking climate eroded during 2008, the securities experienced cash flow problems and a pre-tax charge to earnings of $6.2 million was recorded in the fourth quarter of 2008. Due to continued market deterioration in these securities during 2009 and 2010, additional pre-tax charges to earnings of $1.6 million was recorded during 2009 and $0.2 million in 2010. No additional charges have been recognized during 2011 or 2012.The market for these securities is considered to be inactive according to the guidance issued in ASC Topic 820, “Fair Value Measurements and Disclosures.” The Company uses a discounted cash flow model to determine the estimated fair value of its pooled trust preferred collateralized debt obligations and to assess other-than-temporary impairment. The discounted cash flow analysis was performed in accordance with ASC Topic 325. The assumptions used in preparing the discounted cash flow model include the following: estimated discount rates (using yields of comparable traded instruments adjusted for illiquidity and other risk factors), estimated deferral and default rates on collateral, and estimated cash flows. The Company also reviewed a stress test of these securities to determine the additional deferrals or defaults in the collateral pool in excess of what the Company believes is probable, before the payments on the individual securities are negatively impacted.

As of March 31, 2012, the Company also owned $1.6 million of equity securities in banks and financial service-related companies. Equity securities are considered to have other-than-temporary impairment whenever they have been in a loss position, compared to current book value, for twelve consecutive months, and the Company does not expect them to recover to their original cost basis. For the first quarter of 2012 and 2011, no impairment charges were recorded, as the affected equity securities were not deemed impaired due to stabilized market prices in relation to the Company's original purchase price.

It is reasonably possible that the fair values of the Company's investment securities could decline in the future if the overall economy and the financial condition of some of the issuers deteriorate and the liquidity of these securities remains depressed. As a result, there is a risk that other-than-temporary impairments may occur in the future and any such amounts could be material to the Company's consolidated statements of operations.

A summary of the contractual maturity distribution of debt investment securities at March 31, 2012 is as follows:



	Available For Sale				Held to Maturity
	Amortized Cost		Fair Value		Amortized Cost		Fair Value
(in thousands)
Due in one year or less	$	26,288	$	26,437	$	235	$	235
Due after one year through five years	102,267		105,648		865		867
Due after five years through ten years	103,567		108,808		—		—
Due after ten years	63,323		64,903		5,872		5,901
Mortgage-backed securities and collateralized mortgage obligations	237,913		244,401		45		50
Total	$	533,358	$	550,197	$	7,017	$	7,053

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Mortgage-backed and collateralized mortgage obligations are collateralized by mortgage loans guaranteed by U.S. government agencies. Experience has indicated that principal payments will be collected sooner than scheduled because of prepayments. Therefore, these securities are not scheduled in the maturity categories indicated above. Equity securities available for sale with an amortized cost of $1.2 million and a fair value of $1.6 million are excluded from this table.

Other investment securities include investments in Federal Home Loan Bank (“FHLB”) stock. The carrying value of the FHLB stock at March 31, 2012 and December 31, 2011 was $12.1 million and $12.2 million, respectively, which is included in the Other Assets line of the consolidated balance sheets. This security is not readily marketable and ownership of FHLB stock is a requirement for membership in the FHLB Des Moines. The amount of FHLB stock the Bank is required to hold is directly related to the amount of FHLB advances borrowed. Because there are no available market values, this security is carried at cost and evaluated for potential impairment each quarter. Redemption of this investment is at the option of the FHLB.

Realized gains and losses on sales are determined on the basis of specific identification of investments based on the trade date. Realized gains on investments, including impairment losses for the three months ended March 31, 2012 and 2011, are as follows:



	Three Months Ended March 31,
	2012		2011
(in thousands)
Available for sale fixed maturity securities:
Gross realized gains	$	314	$	—
Gross realized losses	—		—
Other-than-temporary impairment	—		—
	314		—
Equity securities:
Gross realized gains	2		—
Gross realized losses	—		—
Other-than-temporary impairment	—		—
	2		—
	$	316	$	—

5.Loans Receivable and the Allowance for Loan Losses

The composition of loans and loan pool participations, and changes in the allowance for loan losses by portfolio segment are as follows:



	Allowance for Loan Losses and Recorded Investment in Loan Receivables
	As of March 31, 2012 and December 31, 2011
(in thousands)	Agricultural		Commercial and Industrial		Commercial Real Estate		Residential Real Estate		Consumer		Unallocated		Total
March 31, 2012
Allowance for loan losses:
Individually evaluated for impairment	$	196	$	497	$	241	$	73	$	7	$	—	$	1,014
Collectively evaluated for impairment	927		4,190		4,610		2,661		371		1,906		14,665
Total	$	1,123	$	4,687	$	4,851	$	2,734	$	378	$	1,906	$	15,679
Loans acquired with deteriorated credit quality (loan pool participations)	$	7	$	152	$	633	$	312	$	39	$	991	$	2,134
Loans receivable
Individually evaluated for impairment	$	3,453	$	2,998	$	6,020	$	1,116	$	25	$	—	$	13,612
Collectively evaluated for impairment	81,653		240,707		388,773		237,261		19,140		—		967,534
Total	$	85,106	$	243,705	$	394,793	$	238,377	$	19,165	$	—	$	981,146
Loans acquired with deteriorated credit quality (loan pool participations)	$	87	$	3,175	$	29,469	$	4,988	$	113	$	10,210	$	48,042

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(in thousands)	Agricultural		Commercial and Industrial		Commercial Real Estate		Residential Real Estate		Consumer		Unallocated		Total
December 31, 2011
Allowance for loan losses:
Individually evaluated for impairment	$	247	$	793	$	272	$	252	$	8	$	—	$	1,572
Collectively evaluated for impairment	962		4,587		4,899		3,249		159		248		14,104
Total	$	1,209	$	5,380	$	5,171	$	3,501	$	167	$	248	$	15,676
Loans acquired with deteriorated credit quality (loan pool participations)	$	7	$	219	$	666	$	346	$	56	$	840	$	2,134
Loans receivable
Individually evaluated for impairment	$	4,776	$	2,550	$	9,619	$	2,736	$	58	$	—	$	19,739
Collectively evaluated for impairment	84,522		238,636		386,420		236,112		20,744		—		966,434
Total	$	89,298	$	241,186	$	396,039	$	238,848	$	20,802	$	—	$	986,173
Loans acquired with deteriorated credit quality (loan pool participations)	$	90	$	3,793	$	30,523	$	5,694	$	124	$	11,962	$	52,186



	Allowance for Loan Loss Activity
	For the Three Months Ended March 31, 2012 and 2011
(in thousands)	Agricultural			Commercial and Industrial			Commercial Real Estate			Residential Real Estate			Consumer			Unallocated			Total
2012
Beginning balance	$	1,209		$	5,380		$	5,171		$	3,501		$	167		$	248		$	15,676
Charge-offs	—			(912		)	(26		)	(175		)	(11		)	—			(1,124		)
Recoveries	507			15			3			12			11			—			548
Provision	(593		)	204			(297		)	(604		)	211			1,658			579
Ending balance	$	1,123		$	4,687		$	4,851		$	2,734		$	378		$	1,906		$	15,679
2011
Beginning balance	$	827		$	4,540		$	5,255		$	2,776		$	323		$	1,446		$	15,167
Charge-offs	(75		)	(219		)	(447		)	(70		)	(21		)	—			(832		)
Recoveries	—			143			1			15			4			—			163
Provision	696			605			641			(422		)	(56		)	(564		)	900
Ending balance	$	1,448		$	5,069		$	5,450		$	2,299		$	250		$	882		$	15,398

Loan Portfolio Segment Risk Characteristics

Agricultural - 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 control 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. Collateral for these loans generally includes accounts receivable, inventory, equipment and real estate. However, depending on the overall financial condition of the borrower, some loans are made on an unsecured basis. The collateral securing these loans may depreciate over time, may be difficult to appraise and may fluctuate in value based on the success of the business.

Commercial and Industrial - Commercial and industrial 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 and industrial loans are that the cash flows of the borrower may be unpredictable, and the collateral securing these loans may fluctuate in value. The size of the loans the Company can offer to commercial customers is less than the size of the loans that competitors with larger lending limits can offer. This may limit the Company's ability to establish relationships with the area's largest businesses. As a result, the Company may assume greater lending risks than financial institutions that have a lesser concentration of such loans and tend to make loans to larger businesses. Collateral for these loans generally includes accounts receivable, inventory, equipment and real estate. However, depending on the overall financial condition of the borrower, some loans are made on an unsecured basis. The collateral securing these loans may depreciate over time, may be difficult to appraise and may fluctuate in value based on the success of the business. In addition, if the United States economy does not meaningfully improve, this could harm or continue to harm the businesses of our commercial and industrial customers and reduce the value of the collateral securing these loans.

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Commercial Real Estate - The Company offers mortgage loans to 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. The market value of real estate securing commercial real estate loans can fluctuate significantly in a short period of time as a result of market conditions in the geographic area in which the real estate is located. Adverse developments affecting real estate values in one or more of the Company's markets could increase the credit risk associated with its loan portfolio. Additionally, real estate lending typically involves higher loan principal amounts and the repayment of the loans generally is dependent, in large part, on sufficient income from the properties securing the loans to cover operating expenses and debt service. Economic events or governmental regulations outside of the control of the borrower or lender could negatively impact the future cash flow and market values of the affected properties.

Residential Real Estate - The Company generally retains short-term residential mortgage loans that are originated for its own portfolio but sells most long-term loans to other parties while retaining servicing rights on the majority of those. The market value of real estate securing residential real estate loans can fluctuate as a result of market conditions in the geographic area in which the real estate is located. Adverse developments affecting real estate values in one or more of the Company's markets could increase the credit risk associated with its loan portfolio. Additionally, real estate lending typically involves higher loan principal amounts and the repayment of the loans generally is dependent, in large part, on the borrower's continuing financial stability, and is therefore more likely to be affected by adverse personal circumstances.

Consumer - Consumer loans typically have shorter terms, lower balances, higher yields and higher risks of default. Consumer loan collections are dependent on the borrower's continuing financial stability, and are therefore more likely to be affected by adverse personal circumstances. Collateral for these loans generally includes automobiles, boats, recreational vehicles, mobile homes, and real estate. However, depending on the overall financial condition of the borrower, some loans are made on an unsecured basis. The collateral securing these loans may depreciate over time, may be difficult to recover and may fluctuate in value based on condition. In addition, a decline in the United States economy could result in reduced employment, impacting the ability of customers to repay their obligations.

Loans acquired with deteriorated credit quality (loan pool participations) - 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 loan pool participations, many of which have exceeded contractual maturity dates, is approximately three to five years. Loan pool balances are affected by the payment and refinancing activities of the borrowers resulting in pay-offs of the underlying loans and reduction in the balances. Collections from the individual borrowers are managed by the loan pool servicer and are affected by the borrower's financial ability and willingness to pay, foreclosure and legal action, collateral value, and the economy in general.

Charge-off Policy

The Company requires a loan to be charged-off as soon as it becomes apparent that some loss will be incurred, or when its collectability is sufficiently questionable that it no longer is considered a bankable asset. The primary considerations when determining if and how much of a loan should be charged-off are as follows: (1) the potential for future cash flows; (2) the value of any collateral; and (3) the strength of any co-makers or guarantors.

When it is determined that a loan requires partial or full charge-off, a request for approval of a charge-off is submitted to the Bank's President, Executive Vice President and Chief Credit Officer, and the Senior Regional Loan officer. The Bank's Board of Directors formally approves all loan charge-offs retroactively at the next regularly scheduled meeting. Once a loan is charged-off, it cannot be restructured and returned to the Bank's books.

The Allowance for Loan and Lease Losses - Bank Loans

The Company requires the maintenance of an adequate allowance for loan and lease losses (“ALLL”) in order to cover estimated losses without eroding the Company's capital base. Calculations are done at each quarter end, or more frequently if warranted, to analyze the collectability of loans and to ensure the adequacy of the allowance. In line with FDIC directives, the ALLL calculation does not include consideration of loans held for sale or off-balance-sheet credit exposures (such as unfunded letters of credit). Determining the appropriate level for the ALLL relies on the informed judgment of management, and as such, is subject to inaccuracy. Given the inherently imprecise nature of calculating the necessary ALLL, the Company's policy permits an "unallocated" allowance between 15% above and 5% below the “indicated reserve.” These unallocated amounts are present due to the inherent imprecision in the ALLL calculation.

Loans Reviewed Individually for Impairment

The Company identifies loans to be reviewed and evaluated individually for impairment, based on current information

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and events, and the probability that the borrower will be unable to repay all amounts due according to the contractual terms of the loan agreement. Specific areas of consideration include: size of credit exposure, risk rating, delinquency, nonaccrual status, and loan classification.

The level of individual impairment is measured using one of the following methods: (1) the fair value of the collateral less costs to sell; (2) the present value of expected future cash flows, discounted at the loan's effective interest rate; or (3) the loan's observable market price. Loans that are deemed fully collateralized or have been charged down to a level corresponding with any three of the measurements require no assignment of reserves from the ALLL.

All loans deemed troubled debt restructure or “TDR” are considered impaired. A loan is considered a TDR when the Bank, for economic or legal reasons related to a borrower's financial difficulties, grants a concession to the borrower that the Bank would not otherwise consider. All of the following factors are indicators that the Bank has granted a concession (one or multiple items may be present):


•	The borrower receives a reduction of the stated interest rate for the remaining original life of the debt.


•	The borrower receives an extension of the maturity date or dates at a stated interest rate lower than the current market interest rate for new debt with similar risk characteristics.


•	The borrower receives a reduction of the face amount or maturity amount of the debt as stated in the instrument or other agreement.


•	The borrower receives a deferral of required payments (principal and/or interest).


•	The borrower receives a reduction of the accrued interest.

The following table sets forth information on the Company's troubled debt restructurings by class of financing receivable occurring during the stated periods:



	Three Months Ended March 31,
	2012					2011
	Number of Contracts	Pre-Modification Outstanding Recorded Investment*		Post-Modification Outstanding Recorded Investment		Number of Contracts	Pre-Modification Outstanding Recorded Investment*		Post-Modification Outstanding Recorded Investment
(dollars in thousands)
Troubled Debt Restructurings:
Agricultural	—	$	—	$	—	—	$	—	$	—
Commercial and industrial	—	—		—		—	—		—
Credit cards	—	—		—		—	—		—
Overdrafts	—	—		—		—	—		—
Commercial real estate:
Construction and development	—	—		—		—	—		—
Farmland	2	2,475		2,475		—	—		—
Multifamily	—	—		—		—	—		—
Commercial real estate-other	—	—		—		4	803		803
Total commercial real estate	2	2,475		2,475		4	803		803
Residential real estate:
One- to four- family first liens	—	—		—		—	—		—
One- to four- family junior liens	—	—		—		—	—		—
Total residential real estate	—	—		—		—	—		—
Consumer	—	—		—		—	—		—
Total	2	$	2,475	$	2,475	4	$	803	$	803
* - Includes accrued interest receivable.

During the three months ended March 31, 2012, the Company restructured two loans by granting concessions to borrowers experiencing financial difficulties. Both are farmland loans and were granted interest rate reductions by court order as part of a Chapter 12 bankruptcy. One commercial real estate loan that was a new TDR in the past 12 months due to a below market interest rate was on non-accrual at March 31, 2012.

During the three months ended March 31, 2011, the Company restructured four loans by granting concessions to borrowers experiencing financial difficulties. Four commercial real estate loans to the same borrower were classified as new TDRs during that time period due to the extension of a forbearance agreement and the granting of a below market interest rate. These four credits also experienced a payment default during the three months ended March 31, 2011.

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Loans by class of financing receivable modified as TDRs within the previous 12 months and for which there was a payment default during the stated periods were:



	Three Months Ended March 31,
	2012			2011
	Number of Contracts	Recorded Investment		Number of Contracts	Recorded Investment
(dollars in thousands)
Troubled Debt Restructurings That Subsequently Defaulted:
Agricultural	—	$	—	—	$	—
Commercial and industrial	—	—		—	—
Credit cards	—	—		—	—
Overdrafts	—	—		—	—
Commercial real estate:
Construction and development	—	—		—