midwestone 093012 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 September 30, 2012
OR
o
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from              to             
 
Commission file number 000-24630
 
 
 
 
MIDWESTONE FINANCIAL GROUP, INC.
(Exact name of Registrant as specified in its charter)
 
 
 
 
Iowa
42-1206172
(State of Incorporation)
(I.R.S. Employer Identification No.)
102 South Clinton Street
Iowa City, IA 52240
(Address of principal executive offices, including Zip Code)
319-356-5800
(Registrant's telephone number, including area code)
  
 
 
 
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 October 31, 2012, there were 8,492,040 shares of common stock, $1.00 par value per share, outstanding.
 
 
 
 
 

Table of Contents

MIDWESTONE FINANCIAL GROUP, INC.
Form 10-Q Quarterly Report
Table of Contents
 
 
 
 
Page No.
PART I
 
 
 
 
 
 
 
 
 
Item 1.
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Item 2.
 
 
 
 
 
 
 
Item 3.
 
 
 
 
 
 
 
Item 4.
 
 
 
 
 
 
 
Part II
 
 
 
 
 
 
 
 
 
Item 1.
 
 
 
 
 
 
 
Item 1A.
 
 
 
 
 
 
 
Item 2.
 
 
 
 
 
 
 
Item 3.
 
 
 
 
 
 
 
Item 4.
 
 
 
 
 
 
 
Item 5.
 
 
 
 
 
 
 
Item 6.
 
 
 
 
 
 
 
 
 
 


Table of Contents

PART I – FINANCIAL INFORMATION
Item 1.   Financial Statements.

MIDWESTONE FINANCIAL GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
 
 
September 30, 2012
 
December 31, 2011
(dollars in thousands)
(unaudited)
 
 
ASSETS
 
 
 
Cash and due from banks
$
27,074

  
$
28,155

Interest-bearing deposits in banks
23,172

  
4,468

Cash and cash equivalents
50,246

  
32,623

Investment securities:
  
 
 
Available for sale
509,906

  
534,080

Held to maturity (fair value of $26,168 as of September 30, 2012 and $2,042 as of December 31, 2011)
25,912

  
2,036

Loans held for sale
1,656

  
1,955

Loans
1,011,264

  
986,173

Allowance for loan losses
(15,827
)
 
(15,676
)
Net loans
995,437

  
970,497

Loan pool participations, net
37,902

  
50,052

Premises and equipment, net
25,513

  
26,260

Accrued interest receivable
11,192

  
10,422

Intangible assets, net
9,663

  
10,247

Bank-owned life insurance
28,400

  
27,723

Other real estate owned
3,117

  
4,033

Assets held for sale
764

 
—

Deferred income taxes
—

  
3,654

Other assets
21,922

  
21,662

Total assets
$
1,721,630

  
$
1,695,244

LIABILITIES AND SHAREHOLDERS' EQUITY
 
 
 
Deposits:
  
 
 
Non-interest-bearing demand
$
171,023

  
$
161,287

Interest-bearing checking
519,790

  
499,905

Savings
85,800

  
71,823

Certificates of deposit under $100,000
320,135

  
346,858

Certificates of deposit $100,000 and over
231,895

  
226,769

Total deposits
1,328,643

  
1,306,642

Federal funds purchased
—

 
8,920

Securities sold under agreements to repurchase
62,440

  
48,287

Federal Home Loan Bank borrowings
130,094

  
140,014

Deferred compensation liability
3,575

  
3,643

Long-term debt
15,464

  
15,464

Accrued interest payable
1,644

  
1,530

Deferred income taxes
370

 
—

Other liabilities
7,876

  
14,250

Total liabilities
1,550,106

  
1,538,750

Shareholders' equity:
  
 
 
Preferred stock, no par value; authorized 500,000 shares; no shares issued and outstanding at September 30, 2012 and December 31, 2011
$
—

 
$
—

Common stock, $1.00 par value; authorized 15,000,000 shares at September 30, 2012 and December 31, 2011; issued 8,690,398 shares at September 30, 2012 and December 31, 2011; outstanding 8,487,518 shares at September 30, 2012 and 8,529,530 shares at December 31, 2011
8,690

  
8,690

Additional paid-in capital
80,310

  
80,333

Treasury stock at cost, 202,880 shares as of September 30, 2012 and 160,868 shares at December 31, 2011
(3,102
)
 
(2,312
)
Retained earnings
76,443

  
66,299

Accumulated other comprehensive income
9,183

  
3,484

Total shareholders' equity
171,524

  
156,494

Total liabilities and shareholders' equity
$
1,721,630

  
$
1,695,244


See accompanying notes to consolidated financial statements.  

1
Table of Contents

MIDWESTONE FINANCIAL GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
 
(unaudited)
(dollars in thousands, except per share amounts)
  
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
  
2012
 
2011
 
2012
 
2011
Interest income:
  
 
 
 
 
 
 
 
Interest and fees on loans
  
$
12,760

 
$
13,128

 
$
38,639

 
$
38,904

Interest and discount on loan pool participations
  
886

 
311

 
1,741

 
1,101

Interest on bank deposits
  
7

 
9

 
29

 
25

Interest on federal funds sold
  
—

 
—

 
1

 
1

Interest on investment securities:
  
  
 
 
 
 
 
 
Taxable securities
  
2,654

 
2,703

 
8,224

 
8,257

Tax-exempt securities
  
1,279

 
1,092

 
3,744

 
3,199

Total interest income
  
17,586

 
17,243

 
52,378

 
51,487

Interest expense:
  
 
 
 
 
 
 
 
Interest on deposits:
  
 
 
 
 
 
 
 
Interest-bearing checking
  
691

 
954

 
2,281

 
2,956

Savings
  
36

 
47

 
105

 
164

Certificates of deposit under $100,000
  
1,433

 
1,903

 
4,519

 
6,210

Certificates of deposit $100,000 and over
  
715

 
827

 
2,242

 
2,514

Total interest expense on deposits
  
2,875

 
3,731

 
9,147

 
11,844

Interest on federal funds purchased
  
6

 
2

 
11

 
5

Interest on securities sold under agreements to repurchase
  
43

 
65

 
145

 
206

Interest on Federal Home Loan Bank borrowings
  
767

 
869

 
2,353

 
2,682

Interest on notes payable
  
8

 
9

 
26

 
29

Interest on long-term debt
  
168

 
165

 
503

 
490

Total interest expense
  
3,867

 
4,841

 
12,185

 
15,256

Net interest income
  
13,719

 
12,402

 
40,193

 
36,231

Provision for loan losses
  
575

 
750

 
1,729

 
2,550

Net interest income after provision for loan losses
  
13,144

 
11,652

 
38,464

 
33,681

Noninterest income:
  
 
 
 
 
 
 
 
Trust, investment, and insurance fees
  
1,294

 
1,159

 
3,767

 
3,588

Service charges and fees on deposit accounts
  
846

 
973

 
2,424

 
2,779

Mortgage origination and loan servicing fees
  
919

 
531

 
2,514

 
1,790

Other service charges, commissions and fees
  
303

 
648

 
1,636

 
2,004

Bank-owned life insurance income
  
225

 
227

 
676

 
681

Gain on sale or call of available for sale securities
  
8

 
345

 
741

 
430

Gain (loss) on sale of premises and equipment
  
—

 
48

 
4,205

 
(195
)
Total noninterest income
  
3,595

 
3,931

 
15,963

 
11,077

Noninterest expense:
  
 
 
 
 
 
 
 
Salaries and employee benefits
  
6,207

 
5,703

 
24,167

 
17,312

Net occupancy and equipment expense
  
1,537

 
1,537

 
4,741

 
4,652

Professional fees
  
612

 
799

 
2,137

 
2,164

Data processing expense
  
443

 
406

 
1,258

 
1,282

FDIC insurance expense
  
326

 
331

 
929

 
1,284

Amortization of intangible assets
 
195

 
223

 
584

 
671

Other operating expense
  
1,393

 
1,312

 
4,280

 
3,875

Total noninterest expense
  
10,713

 
10,311

 
38,096

 
31,240

Income before income tax expense
  
6,026

 
5,272

 
16,331

 
13,518

Income tax expense
  
1,576

 
1,434

 
3,937

 
3,552

Net income
  
$
4,450

 
$
3,838

 
$
12,394

 
$
9,966

Less: Preferred stock dividends and discount accretion
  
$
—

 
$
210

 
$
—

 
$
645

Net income available to common shareholders
  
$
4,450

 
$
3,628

 
$
12,394

 
$
9,321

Share and Per share information:
  
 
 
 
 
 
 
 
Ending number of shares outstanding
  
8,487,518

 
8,583,337

 
8,487,518

 
8,583,337

Average number of shares outstanding
  
8,483,918

 
8,610,837

 
8,484,404

 
8,620,083

Diluted average number of shares
  
8,534,908

 
8,640,231

 
8,526,161

 
8,646,816

Earnings per common share - basic
  
$
0.52

 
$
0.42

 
$
1.46

 
$
1.08

Earnings per common share - diluted
  
0.52

 
0.42

 
1.45

 
1.08

Dividends paid per common share
  
0.10

 
0.06

 
0.27

 
0.16

See accompanying notes to consolidated financial statements.

2
Table of Contents

MIDWESTONE FINANCIAL GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
 
(unaudited)
(dollars in thousands)
  
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
  
2012
 
2011
 
2012
 
2011
Net income
 
$
4,450

 
$
3,838

 
$
12,394

 
$
9,966

 
 
 
 
 
 
 
 
 
Other comprehensive income, before tax:
 
 
 
 
 
 
 
 
Unrealized holding gains arising during period
 
1,453

 
4,268

 
3,868

 
12,573

Less: Reclassification adjustment for gains included in net income
 
(8
)
 
(345
)
 
(741
)
 
(430
)
Unrealized gains on available for sale securities
 
1,445

 
3,923

 
3,127

 
12,143

 
 
 
 
 
 
 
 
 
Reclassification of pension plan expense due to plan settlement
 
—

 
—

 
5,969

 
—

Defined benefit pension plans
 
—

 
—

 
5,969

 
—

Other comprehensive income, before tax
 
1,445

 
3,923

 
9,096

 
12,143

Income tax expense related to items of other comprehensive income
 
540

 
1,470

 
3,397

 
4,535

Other comprehensive income, net of tax
 
905

 
2,453

 
5,699

 
7,608

Comprehensive income
 
$
5,355

 
$
6,291

 
$
18,093

 
$
17,574

See accompanying notes to consolidated financial statements.


3
Table of Contents

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
  
—

  
—

  
—

 
—

 
9,966

 
—

 
9,966

Dividends paid on common stock ($0.16 per share)
  
—

 
—

 
—

 
—

 
(1,378
)
 
—

 
(1,378
)
Dividends paid on preferred stock
 
—

 
—

 
—

 
—

 
(513
)
 
—

 
(513
)
Stock options exercised (3,488 shares)
 
—

 
—

 
(9
)
 
49

 
—

 
—

 
40

Release/lapse of restriction on RSUs (10,850 shares)
  
—

 
—

 
(138
)
 
140

 
—

 
—

 
2

Preferred stock discount accretion
  
233

 
—

 
—

 
—

 
(233
)
 
—

 
—

Redemption of preferred stock
 
(16,000
)
 
—

 
—

 
—

 
—

 
—

 
(16,000
)
Repurchase of common stock warrant
 
—

 
—

 
(1,000
)
 
—

 
—

 
—

 
(1,000
)
Repurchase of common stock (45,039 shares)
 
—

 
—

 
—

 
(658
)
 
—

 
—

 
(658
)
Stock compensation
  
—

 
—

 
164

 
—

 
—

 
—

 
164

Other comprehensive income
 
—

 
—

 
—

 
—

 
—

 
7,608

 
7,608

Balance at September 30, 2011
  
$
—

 
$
8,690

 
$
80,285

 
$
(1,521
)
 
$
63,461

 
$
5,782

 
$
156,697

Balance at December 31, 2011
  
$
—

  
$
8,690

  
$
80,333

 
$
(2,312
)
 
$
66,299

 
$
3,484

 
$
156,494

Net income
  
—

  
—

  
—

 
—

 
12,394

 
—

 
12,394

Dividends paid on common stock ($0.265 per share)
  
—

  
—

  
—

 
—

 
(2,250
)
 
—

 
(2,250
)
Stock options exercised (38,204 shares)
  
—

  
—

  
(21
)
 
442

 
—

 
—

 
421

Release/lapse of restriction on RSUs (15,810 shares)
  
—

  
—

  
(201
)
 
213

 
—

 
—

 
12

Repurchase of common stock (86,083 shares)
 
—

 
—

 
—

 
(1,445
)
 
—

 
—

 
(1,445
)
Stock compensation
  
—

  
—

  
199

 
—

 
—

 
—

 
199

Other comprehensive income
 
—

 
—

 
—

 
—

 
—

 
5,699

 
5,699

Balance at September 30, 2012
  
$
—

  
$
8,690

  
$
80,310

 
$
(3,102
)
 
$
76,443

 
$
9,183

 
$
171,524

See accompanying notes to consolidated financial statements.  

4
Table of Contents

MIDWESTONE FINANCIAL GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
 
(unaudited) (dollars in thousands)
Nine Months Ended September 30,
 
2012
 
2011
Cash flows from operating activities:
 
 
 
Net income
$
12,394

 
$
9,966

Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
Provision for loan losses
1,729

 
2,550

Depreciation, amortization and accretion
4,047

 
3,673

(Gain) loss on sale of premises and equipment
(4,205
)
 
195

Deferred income taxes
628

 
7

Stock-based compensation
199

 
164

Net gain on sale or call of available for sale securities
(741
)
 
(430
)
Net gain on sale of other real estate owned
(95
)
 
(192
)
Net gain on sale of loans held for sale
(1,466
)
 
(792
)
Writedown of other real estate owned
326

 
9

Origination of loans held for sale
(112,979
)
 
(64,775
)
Proceeds from sales of loans held for sale
114,744

 
64,580

Recognition of previously deferred expense related to pension plan settlement
3,002

 
—

Pension plan contribution
(3,031
)
 
—

Increase in accrued interest receivable
(770
)
 
(237
)
Increase in cash surrender value of bank-owned life insurance
(677
)
 
(682
)
Increase in other assets
(260
)
 
(1,164
)
Decrease in deferred compensation liability
(68
)
 
(50
)
Increase (decrease) in accrued interest payable, accounts payable, accrued expenses, and other liabilities
(263
)
 
2,257

Net cash provided by operating activities
12,514

 
15,079

Cash flows from investing activities:
 
 
 
Proceeds from sales of available for sale securities
16,232

 
—

Proceeds from maturities and calls of available for sale securities
97,424

 
105,909

Purchases of available for sale securities
(87,255
)
 
(124,636
)
Proceeds from maturities and calls of held to maturity securities
556

 
1,545

Purchase of held to maturity securities
(24,429
)
 
—

Increase in loans
(28,258
)
 
(20,726
)
Decrease in loan pool participations, net
12,150

 
12,413

Purchases of premises and equipment
(2,777
)
 
(1,342
)
Proceeds from sale of other real estate owned
2,274

 
1,069

Proceeds from sale of premises and equipment
5,220

 
296

Net cash used in investing activities
(8,863
)
 
(25,472
)
Cash flows from financing activities:
 
 
 
Net increase in deposits
22,001

 
47,339

Decrease in federal funds purchased
(8,920
)
 
—

Increase (decrease) in securities sold under agreements to repurchase
14,153

 
(8,265
)
Proceeds from Federal Home Loan Bank borrowings
20,000

 
51,000

Repayment of Federal Home Loan Bank borrowings
(30,000
)
 
(39,000
)
Stock options exercised
433

 
42

Dividends paid
(2,250
)
 
(1,891
)
Repurchase of common stock
(1,445
)
 
(658
)
Redemption of preferred stock
—

 
(16,000
)
Repurchase of common stock warrant
—

 
(1,000
)
Net cash provided by financing activities
13,972

 
31,567

Net increase in cash and cash equivalents
17,623

 
21,174

Cash and cash equivalents at beginning of period
32,623

 
20,523

Cash and cash equivalents at end of period
$
50,246

 
$
41,697

Supplemental disclosures of cash flow information:
 
 
 
Cash paid during the period for interest
$
12,071

 
$
15,410

Cash paid during the period for income taxes
$
4,455

 
$
2,204

Supplemental schedule of non-cash investing activities:
 
 
 
Transfer of loans to other real estate owned
$
1,589

 
$
952

Transfer of property to assets held for sale
$
764

 
$
—

See accompanying notes to consolidated financial statements.

5
Table of Contents

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 September 30, 2012, and the results of operations and cash flows for the three and nine months ended September 30, 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. The results for the three and nine months ended September 30, 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. Diluted earnings per share amounts are computed by dividing net income available to common shareholders by the weighted average number of shares outstanding and all dilutive potential shares outstanding during the period.


6
Table of Contents

The following table presents the computation of earnings per common share for the respective periods:
 
 
  
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
(dollars in thousands, except per share amounts)
  
2012
 
2011
 
2012
 
2011
 
Weighted average number of shares outstanding during the period
  
8,483,918

 
8,610,837

 
8,484,404

 
8,620,083

 
Weighted average number of shares outstanding during the period including all dilutive potential shares
  
8,534,908

 
8,640,231

 
8,526,161

 
8,646,816

 
Net income
  
$
4,450

 
$
3,838

 
$
12,394

 
$
9,966

 
Preferred stock dividend accrued and discount accretion
  
—

 
(210
)
 
—

 
(645
)
 
Net income available to common stockholders
  
$
4,450

 
$
3,628

 
$
12,394

 
$
9,321

 
Earnings per share - basic
  
$
0.52

 
$
0.42

 
$
1.46

 
$
1.08

 
Earnings per share - diluted
  
$
0.52

 
$
0.42

 
$
1.45

 
$
1.08


4.Investment Securities
A summary of investment securities available for sale is as follows:
 
 
As of September 30, 2012
 
 
Amortized
Cost
  
Gross
Unrealized
Gains
  
Gross
Unrealized
Losses
 
Estimated
Fair Value
 
(in thousands)
 
  
 
  
 
 
 
 
U.S. Government agencies and corporations
$
51,686

  
$
1,224

  
$
—

 
$
52,910

 
State and political subdivisions
210,923

  
12,442

  
36

 
223,329

 
Mortgage-backed securities and collateralized mortgage obligations
213,879

  
6,695

  
—

 
220,574

 
Corporate debt securities
11,941

  
382

  
967

 
11,356

 
Total debt securities
488,429

  
20,743

  
1,003

 
508,169

 
Other equity securities
1,628

  
114

  
5

 
1,737

 
Total
$
490,057

  
$
20,857

  
$
1,008

 
$
509,906

 
 
 
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

 
A summary of investment securities held to maturity is as follows:
 
 
As of September 30, 2012
 
 
Amortized
Cost
  
Gross
Unrealized
Gains
  
Gross
Unrealized
Losses
  
Estimated
Fair Value
 
(in thousands)
 
  
 
  
 
  
 
 
State and political subdivisions
$
12,412

  
$
194

  
$
1

  
$
12,605

 
Mortgage-backed securities
10,243

  
64

  
—

  
10,307

 
Corporate debt securities
3,257

  
—

  
1

  
3,256

 
Total
$
25,912

  
$
258

  
$
2

  
$
26,168

 

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Table of Contents

 
 
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 investment securities shows that some of the securities in the available for sale and held to maturity investment portfolios had unrealized losses, or were temporarily impaired, as of September 30, 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 September 30, 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 September 30, 2012
 
Number
of
Securities
  
Less than 12 Months
  
12 Months or More
  
Total
 
 
  
Fair
Value
  
Unrealized
Losses 
  
Fair
Value
  
Unrealized
Losses 
  
Fair
Value
  
Unrealized
Losses 
 
(in thousands, except number of securities)
 
  
 
  
 
  
 
  
 
  
 
  
 
 
State and political subdivisions
13

  
3,773

  
35

  
173

  
1

  
3,946

  
36

 
Corporate debt securities
4

  
—

  
—

  
805

  
967

  
805

  
967

 
Other equity securities
1

  
236

  
5

  
—

  
—

  
236

  
5

 
Total
18

  
$
4,009

  
$
40

  
$
978

  
$
968

  
$
4,987

  
$
1,008

 
 
 
  
As of December 31, 2011
 
 
Number
of
Securities
  
Less than 12 Months
  
12 Months or More
  
Total
 
 
  
Fair
Value
  
Unrealized
Losses 
  
Fair
Value
  
Unrealized
Losses 
  
Fair
Value
  
Unrealized
Losses 
 
(in thousands, except number of securities)
 
  
 
  
 
  
 
  
 
  
 
  
 
 
U.S. Government agencies and corporations
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. 
At September 30, 2012, approximately 59% 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 September 30, 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 following government-sponsored agencies: FHLMC, FNMA and GNMA.

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Table of Contents

At September 30, 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 September 30, 2012 totaled $1.8 million, after other-than-temporary impairment charges during 2008, 2009, and 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. Due to continued market deterioration in these securities during 2009 and 2010, additional pre-tax charges to earnings were recorded. 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 September 30, 2012, the Company also owned $1.7 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 three quarters 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 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 September 30, 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
$
25,349

  
$
25,672

  
$
525

  
$
526

 
Due after one year through five years
82,539

  
86,692

  
2,431

  
2,430

 
Due after five years through ten years
106,049

  
112,557

  
—

  
—

 
Due after ten years
60,613

  
62,674

  
12,713

  
12,905

 
Mortgage-backed securities and collateralized mortgage obligations
213,879

  
220,574

  
10,243

  
10,307

 
Total
$
488,429

  
$
508,169

  
$
25,912

  
$
26,168


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 $1.6 million and a fair value of $1.7 million are also excluded from this table.
Other investment securities include investments in Federal Home Loan Bank (“FHLB”) stock. The carrying value of the FHLB stock at September 30, 2012 and December 31, 2011 was $11.9 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.

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Table of Contents

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 for the three and nine months ended September 30, 2012 and 2011 are as follows:  
 
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
 
2012
 
2011
 
2012
 
2011
 
(in thousands)
 
 
 
 
 
 
 
 
Available for sale fixed maturity securities:
 
 
 
 
 
 
 
 
Gross realized gains
$
8

 
$
345

 
$
360

 
$
430

 
Gross realized losses
—

 
—

 
—

 
—

 
Other-than-temporary impairment
—

 
—

 
—

 
—

 
 
8

 
345

 
360

 
430

 
Equity securities:
 
 
 
 
 
 
 
 
Gross realized gains
—

 
—

 
381

 
—

 
Gross realized losses
—

 
—

 
—

 
—

 
Other-than-temporary impairment
—

 
—

 
—

 
—

 
 
—

 
—

 
381

 
—

 
 
$
8

 
$
345

 
$
741

 
$
430


5.Loans Receivable and the Allowance for Loan Losses
The composition of loans and loan pool participations by portfolio segment are as follows:
 
 
Allowance for Loan Losses and Recorded Investment in Loan Receivables
 
 
As of September 30, 2012 and December 31, 2011
 
(in thousands)
Agricultural
 
Commercial and Industrial
 
Commercial Real Estate
 
Residential Real Estate
 
Consumer
 
Unallocated
 
Total
 
September 30, 2012
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Allowance for loan losses:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Individually evaluated for impairment
$
171

 
$
500

 
$
303

 
$
121

 
$
6

 
$
—

 
$
1,101

 
Collectively evaluated for impairment
842

 
4,267

 
5,551

 
2,759

 
250

 
1,057

 
14,726

 
Total
$
1,013

 
$
4,767

 
$
5,854

 
$
2,880

 
$
256

 
$
1,057

 
$
15,827

 
Loans acquired with deteriorated credit quality (loan pool participations)
$
6

 
$
123

 
$
649

 
$
271

 
$
20

 
$
1,065

 
$
2,134

 
Loans receivable
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Individually evaluated for impairment
$
3,323

 
$
2,413

 
$
6,332

 
$
1,031

 
$
39

 
$
—

 
$
13,138

 
Collectively evaluated for impairment
79,594

 
235,074

 
415,368

 
248,646

 
19,444

 
—

 
998,126

 
Total
$
82,917

 
$
237,487

 
$
421,700

 
$
249,677

 
$
19,483

 
$
—

 
$
1,011,264

 
Loans acquired with deteriorated credit quality (loan pool participations)
$
79

 
$
2,650

 
$
28,842

 
$
2,769

 
$
71

 
$
5,625

 
$
40,036

 
(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



10
Table of Contents

The changes in the allowance for loan losses by portfolio segment are as follows:
 
 
Allowance for Loan Loss Activity
 
 
For the Three Months Ended September 30, 2012 and 2011
 
(in thousands)
Agricultural
 
Commercial and Industrial
 
Commercial Real Estate
 
Residential Real Estate
 
Consumer
 
Unallocated
 
Total
 
2012
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Beginning balance
$
954

 
$
4,946

 
$
4,602

 
$
2,894

 
$
365

 
$
1,976

 
$
15,737

 
Charge-offs
—

 
(607
)
 
(23
)
 
(168
)
 
(9
)
 
—

 
(807
)
 
Recoveries
—

 
310

 
11

 
—

 
1

 
—

 
322

 
Provision
59

 
118

 
1,264

 
154

 
(101
)
 
(919
)
 
575

 
Ending balance
$
1,013

 
$
4,767

 
$
5,854

 
$
2,880

 
$
256

 
$
1,057

 
$
15,827

 
2011
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Beginning balance
$
1,328

 
$
5,001

 
$
5,715

 
$
2,675

 
$
360

 
$
524

 
$
15,603

 
Charge-offs
(32
)
 
(459
)
 
(147
)
 
(82
)
 
(62
)
 
—

 
(782
)
 
Recoveries
5

 
26

 
33

 
8

 
20

 
—

 
92

 
Provision
49

 
240