midwestone 033113 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, 2013
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 May 6, 2013, there were 8,459,582 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
 
 
March 31, 2013
 
December 31, 2012
(dollars in thousands)
(unaudited)
 
 
ASSETS
 
 
 
Cash and due from banks
$
21,399

  
$
30,197

Interest-bearing deposits in banks
533

  
16,242

Federal funds sold
—

  
752

Cash and cash equivalents
21,932

  
47,191

Investment securities:
  
 
 
Available for sale
572,461

  
557,541

Held to maturity (fair value of $32,579 as of March 31, 2013 and $32,920 as of December 31, 2012)
32,545

  
32,669

Loans held for sale
872

  
1,195

Loans
1,041,783

  
1,035,284

Allowance for loan losses
(16,260
)
 
(15,957
)
Net loans
1,025,523

  
1,019,327

Loan pool participations, net
32,379

  
35,650

Premises and equipment, net
25,425

  
25,609

Accrued interest receivable
9,443

  
10,292

Intangible assets, net
9,303

  
9,469

Bank-owned life insurance
28,907

  
28,676

Other real estate owned
3,025

  
3,278

Assets held for sale
764

 
764

Deferred income taxes
1,287

  
776

Other assets
21,779

  
20,382

Total assets
$
1,785,645

  
$
1,792,819

LIABILITIES AND SHAREHOLDERS' EQUITY
 
 
 
Deposits:
  
 
 
Non-interest-bearing demand
$
175,510

  
$
190,491

Interest-bearing checking
590,899

  
582,283

Savings
95,760

  
91,603

Certificates of deposit under $100,000
298,112

  
312,489

Certificates of deposit $100,000 and over
213,364

  
222,867

Total deposits
1,373,645

  
1,399,733

Federal funds purchased
1,569

 
—

Securities sold under agreements to repurchase
54,277

  
68,823

Federal Home Loan Bank borrowings
152,147

  
120,120

Deferred compensation liability
3,533

  
3,555

Long-term debt
15,464

  
15,464

Accrued interest payable
1,492

  
1,475

Other liabilities
6,653

  
9,717

Total liabilities
1,608,780

  
1,618,887

Shareholders' equity:
  
 
 
Preferred stock, no par value; authorized 500,000 shares; no shares issued and outstanding at March 31, 2013 and December 31, 2012
$
—

 
$
—

Common stock, $1.00 par value; authorized 15,000,000 shares at March 31, 2013 and December 31, 2012; issued 8,690,398 shares at March 31, 2013 and December 31, 2012; outstanding 8,498,484 shares at March 31, 2013 and 8,480,488 shares at December 31, 2012
8,690

  
8,690

Additional paid-in capital
80,243

  
80,383

Treasury stock at cost, 191,914 shares as of March 31, 2013 and 209,910 shares at December 31, 2012
(3,039
)
 
(3,316
)
Retained earnings
83,722

  
79,995

Accumulated other comprehensive income
7,249

  
8,180

Total shareholders' equity
176,865

  
173,932

Total liabilities and shareholders' equity
$
1,785,645

  
$
1,792,819


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 share and per share amounts)
  
Three Months Ended March 31,
 
  
2013
 
2012
Interest income:
  
 
 
 
Interest and fees on loans
  
$
12,114

 
$
13,080

Interest and discount on loan pool participations
  
1,080

 
454

Interest on bank deposits
  
5

 
10

Interest on investment securities:
  
 
 
 
Taxable securities
  
2,630

 
2,752

Tax-exempt securities
  
1,361

 
1,219

Total interest income
  
17,190

 
17,515

Interest expense:
  
 
 
 
Interest on deposits:
  
 
 
 
Interest-bearing checking
  
671

 
829

Savings
  
36

 
37

Certificates of deposit under $100,000
  
1,239

 
1,590

Certificates of deposit $100,000 and over
  
633

 
773

Total interest expense on deposits
  
2,579

 
3,229

Interest on federal funds purchased
  
9

 
3

Interest on securities sold under agreements to repurchase
  
36

 
55

Interest on Federal Home Loan Bank borrowings
  
692

 
803

Interest on notes payable
  
8

 
9

Interest on long-term debt
  
75

 
168

Total interest expense
  
3,399

 
4,267

Net interest income
  
13,791

 
13,248

Provision for loan losses
  
200

 
579

Net interest income after provision for loan losses
  
13,591

 
12,669

Noninterest income:
  
 
 
 
Trust, investment, and insurance fees
  
1,349

 
1,253

Service charges and fees on deposit accounts
  
707

 
767

Mortgage origination and loan servicing fees
  
1,044

 
767

Other service charges, commissions and fees
  
572

 
710

Bank-owned life insurance income
  
231

 
230

Gain on sale or call of available for sale securities (Includes $80 reclassified from accumulated other comprehensive income for net gains on available for sale securities for the three months ended March 31, 2013)
  
80

 
316

Gain (loss) on sale of premises and equipment
  
(2
)
 
158

Total noninterest income
  
3,981

 
4,201

Noninterest expense:
  
 
 
 
Salaries and employee benefits
  
6,293

 
5,972

Net occupancy and equipment expense
  
1,688

 
1,644

Professional fees
  
683

 
732

Data processing expense
  
391

 
446

FDIC insurance expense
  
294

 
310

Amortization of intangible assets
 
166

 
194

Other operating expense
  
1,479

 
1,505

Total noninterest expense
  
10,994

 
10,803

Income before income tax expense
  
6,578

 
6,067

Income tax expense (Includes $31 income tax expense reclassified from accumulated other comprehensive income for the three months ended March 31, 2013)
  
1,788

 
1,635

Net income
  
$
4,790

 
$
4,432

Share and Per share information:
  
 
 
 
Ending number of shares outstanding
  
8,498,484

 
8,464,820

Average number of shares outstanding
  
8,493,376

 
8,497,919

Diluted average number of shares
  
8,536,495

 
8,528,828

Earnings per common share - basic
  
$
0.56

 
$
0.52

Earnings per common share - diluted
  
0.56

 
0.52

Dividends paid per common share
  
0.13

 
0.09

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 March 31,
 
  
2013
 
2012
Net income
 
$
4,790

 
$
4,432

 
 
 
 
 
Other comprehensive income (loss), available for sale securities:
 
 
 
 
Unrealized holding gains (losses) arising during period
 
(1,410
)
 
859

Reclassification adjustment for gains included in net income
 
(80
)
 
(316
)
Income tax (expense) benefit
 
559

 
(196
)
Other comprehensive income (loss) on available for sale securities
 
(931
)
 
347

 
 
 
 
 
Other comprehensive income (loss), net of tax
 
(931
)
 
347

Comprehensive income
 
$
3,859

 
$
4,779

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 share and 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, 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, net of tax
 
—

 
—

 
—

 
—

 
—

 
347

 
347

Balance at March 31, 2012
  
$
—

 
$
8,690

 
$
80,187

 
$
(3,446
)
 
$
70,008

 
$
3,831

 
$
159,270

Balance at December 31, 2012
  
$
—

  
$
8,690

  
$
80,383

 
$
(3,316
)
 
$
79,995

 
$
8,180

 
$
173,932

Net income
  
—

  
—

  
—

 
—

 
4,790

 
—

 
4,790

Dividends paid on common stock ($0.125 per share)
  
—

  
—

  
—

 
—

 
(1,063
)
 
—

 
(1,063
)
Stock options exercised (1,875 shares)
  
—

  
—

  
1

 
30

 
—

 
—

 
31

Release/lapse of restriction on RSUs (17,295 shares)
  
—

  
—

  
(211
)
 
247

 
—

 
—

 
36

Stock compensation
  
—

  
—

  
70

 
—

 
—

 
—

 
70

Other comprehensive loss, net of tax
 
—

 
—

 
—

 
—

 
—

 
(931
)
 
(931
)
Balance at March 31, 2013
  
$
—

  
$
8,690

  
$
80,243

 
$
(3,039
)
 
$
83,722

 
$
7,249

 
$
176,865

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)
Three Months Ended March 31,
 
2013
 
2012
Cash flows from operating activities:
 
 
 
Net income
$
4,790

 
$
4,432

Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
Provision for loan losses
200

 
579

Depreciation, amortization and accretion
1,366

 
1,377

(Gain) loss on sale of premises and equipment
2

 
(158
)
Deferred income taxes
48

 
28

Stock-based compensation
70

 
74

Net gain on sale or call of available for sale securities
(80
)
 
(316
)
Net gain on sale of other real estate owned
(45
)
 
(67
)
Net gain on sale of loans held for sale
(545
)
 
(503
)
Writedown of other real estate owned
33

 
—

Origination of loans held for sale
(26,892
)
 
(32,308
)
Proceeds from sales of loans held for sale
27,760

 
33,823

Decrease in accrued interest receivable
849

 
783

Increase in cash surrender value of bank-owned life insurance
(231
)
 
(230
)
(Increase) decrease in other assets
(1,397
)
 
216

Decrease in deferred compensation liability
(22
)
 
(30
)
Increase (decrease) in accrued interest payable, accounts payable, accrued expenses, and other liabilities
(3,047
)
 
709

Net cash provided by operating activities
2,859

 
8,409

Cash flows from investing activities:
 
 
 
Proceeds from sales of available for sale securities
1,080

 
14,558

Proceeds from maturities and calls of available for sale securities
19,265

 
19,134

Purchases of available for sale securities
(37,236
)
 
(51,162
)
Proceeds from maturities and calls of held to maturity securities
126

 
20

Purchase of held to maturity securities
—

 
(5,000
)
(Increase) decrease in loans
(6,460
)
 
3,795

Decrease in loan pool participations, net
3,271

 
4,144

Purchases of premises and equipment
(436
)
 
(1,157
)
Proceeds from sale of other real estate owned
329

 
983

Proceeds from sale of premises and equipment
4

 
645

Net cash used in investing activities
(20,057
)
 
(14,040
)
Cash flows from financing activities:
 
 
 
Net increase (decrease) in deposits
(26,088
)
 
38,011

Increase (decrease) in federal funds purchased
1,569

 
(8,920
)
Increase (decrease) in securities sold under agreements to repurchase
(14,546
)
 
2,027

Proceeds from Federal Home Loan Bank borrowings
40,000

 
—

Repayment of Federal Home Loan Bank borrowings
(8,000
)
 
(4,000
)
Stock options exercised
67

 
87

Dividends paid
(1,063
)
 
(723
)
Repurchase of common stock
—

 
(1,441
)
Net cash (used in) provided by financing activities
(8,061
)
 
25,041

Net increase (decrease) in cash and cash equivalents
(25,259
)
 
19,410

Cash and cash equivalents at beginning of period
47,191

 
32,623

Cash and cash equivalents at end of period
$
21,932

 
$
52,033

Supplemental disclosures of cash flow information:
 
 
 
Cash paid during the period for interest
$
3,382

 
$
1,095

Cash paid during the period for income taxes
$
1,800

 
$
815

Supplemental schedule of non-cash investing activities:
 
 
 
Transfer of loans to other real estate owned
$
64

 
$
656

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. (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 the Company, 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, 2012 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, 2013, and the results of operations and cash flows for the three months ended March 31, 2013 and 2012. 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 months ended March 31, 2013 may not be indicative of results for the year ending December 31, 2013, or for any other period.
All significant accounting policies followed in the preparation of the quarterly financial statements are disclosed in the December 31, 2012 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. As of March 31, 2013, none were issued or outstanding.
Common Stock: As of March 31, 2013, the number of authorized shares of common stock for the Company was 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.

On January 15, 2013, the Company's board of directors announced the renewal of the Company's share repurchase program, extending the expiration of the program to December 31, 2014 and increasing the remaining amount of authorized repurchases under the program to $5.0 million from the approximately $2.4 million of authorized repurchases that had previously remained. Pursuant to the program, the Company may continue to 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 the Company 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. As of March 31, 2013 the remaining amount available for share repurchases under the program was $5.0 million.


6
Table of Contents

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 by the weighted average number of shares outstanding and all dilutive potential shares outstanding during the period.
The following table presents the computation of earnings per common share for the respective periods:
 
 
  
Three Months Ended March 31,
 
(dollars in thousands, except share and per share amounts)
  
2013
 
2012
 
Basic earnings per common share computation
 
 
 
 
 
Numerator:
 
 
 
 
 
Net income
 
$
4,790

 
$
4,432

 
 
 
 
 
 
 
Denominator:
 
 
 
 
 
Weighted average shares outstanding
 
8,493,376

 
8,497,919

 
Basic earnings per common share
 
$
0.56

 
$
0.52

 
 
 
 
 
 
 
Diluted earnings per common share computation
 
 
 
 
 
Numerator:
 
 
 
 
 
Net income
 
$
4,790

 
$
4,432

 
 
 
 
 
 
 
Denominator:
 
 
 
 
 
Weighted average shares outstanding, included all dilutive potential shares
 
8,536,495

 
8,528,828

 
Diluted earnings per common share
 
$
0.56

 
$
0.52


4.Investment Securities
A summary of investment securities available for sale is as follows:
 
 
As of March 31, 2013
 
 
Amortized
Cost
  
Gross
Unrealized
Gains
  
Gross
Unrealized
Losses
 
Estimated
Fair Value
 
(in thousands)
 
  
 
  
 
 
 
 
U.S. Government agencies and corporations
$
67,828

  
$
999

  
$
46

 
$
68,781

 
State and political subdivisions
210,282

  
11,096

  
359

 
221,019

 
Mortgage-backed securities and collateralized mortgage obligations
244,283

  
5,607

  
299

 
249,591

 
Corporate debt securities
30,666

  
375

  
754

 
30,287

 
Total debt securities
553,059

  
18,077

  
1,458

 
569,678

 
Other equity securities
2,639

  
147

  
3

 
2,783

 
Total
$
555,698

  
$
18,224

  
$
1,461

 
$
572,461

 
 
 
As of December 31, 2012
 
 
Amortized
Cost
  
Gross
Unrealized
Gains
  
Gross
Unrealized
Losses
 
Estimated
Fair Value
 
(in thousands)
 
  
 
  
 
 
 
 
U.S. Government agencies and corporations
$
68,707

  
$
1,132

  
$
56

 
$
69,783

 
State and political subdivisions
206,392

  
11,752

  
125

 
218,019

 
Mortgage-backed securities and collateralized mortgage obligations
236,713

  
6,433

  
28

 
243,118

 
Corporate debt securities
25,839

  
360

  
1,259

 
24,940

 
Total debt securities
537,651

  
19,677

  
1,468

 
555,860

 
Other equity securities
1,637

  
109

  
65

 
1,681

 
Total
$
539,288

  
$
19,786

  
$
1,533

 
$
557,541

 

7
Table of Contents

A summary of investment securities held to maturity is as follows:
 
 
As of March 31, 2013
 
 
Amortized
Cost
  
Gross
Unrealized
Gains
  
Gross
Unrealized
Losses
  
Estimated
Fair Value
 
(in thousands)
 
  
 
  
 
  
 
 
State and political subdivisions
$
19,262

  
$
173

  
$
159

  
$
19,276

 
Mortgage-backed securities
10,024

  
29

  
—

  
10,053

 
Corporate debt securities
3,259

  
—

  
9

  
3,250

 
Total
$
32,545

  
$
202

  
$
168

  
$
32,579

 
 
 
As of December 31, 2012
 
 
Amortized
Cost
  
Gross
Unrealized
Gains
  
Gross
Unrealized
Losses
  
Estimated
Fair Value
 
(in thousands)
 
  
 
  
 
  
 
 
State and political subdivisions
$
19,278

  
$
199

  
$
57

  
$
19,420

 
Mortgage-backed securities
10,133

  
121

  
—

  
10,254

 
Corporate debt securities
3,258

  
—

  
12

  
3,246

 
Total
$
32,669

  
$
320

  
$
69

  
$
32,920

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 March 31, 2013 and December 31, 2012. 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, 2013 and December 31, 2012, aggregated by investment category and length of time that individual securities have been in a continuous loss position:  
 
 
 
  
As of March 31, 2013
 
Number
of
Securities
  
Less than 12 Months
  
12 Months or More
  
Total
 
Available for Sale
  
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

  
$
15,350

  
$
46

  
$
—

  
$
—

  
$
15,350

  
$
46

 
State and political subdivisions
48

  
15,707

  
359

  
—

  
—

  
15,707

  
359

 
Mortgage-backed securities and collateralized mortgage obligations
6

  
44,924

  
299

  
—

  
—

  
44,924

  
299

 
Corporate debt securities
8

  
14,706

  
51

  
1,069

  
703

  
15,775

  
754

 
Other equity securities
1

  
996

  
3

  
—

  
—

  
996

  
3

 
Total
65

  
$
91,683

  
$
758

  
$
1,069

  
$
703

  
$
92,752

  
$
1,461

 
 
 
  
As of December 31, 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)
 
  
 
  
 
  
 
  
 
  
 
  
 
 
U.S. Government agencies and corporations
2

  
$
15,359

  
$
56

  
$
—

  
$
—

  
$
15,359

  
$
56

 
State and political subdivisions
27

  
7,221

  
125

  
—

  
—

  
7,221

  
125

 
Mortgage-backed securities and collateralized mortgage obligations
2

  
10,919

  
28

  
—

  
—

  
10,919

  
28

 
Corporate debt securities
9

  
14,672

  
242

  
755

  
1,017

  
15,427

  
1,259

 
Other equity securities
1

  
754

  
65

  
—

  
—

  
754

  
65

 
Total
41

  
$
48,925

  
$
516

  
$
755

  
$
1,017

  
$
49,680

  
$
1,533


8
Table of Contents

 
 
 
  
As of March 31, 2013
 
Number
of
Securities
  
Less than 12 Months
  
12 Months or More
  
Total
 
Held to Maturity
  
Fair
Value
  
Unrealized
Losses 
  
Fair
Value
  
Unrealized
Losses 
  
Fair
Value
  
Unrealized
Losses 
 
(in thousands, except number of securities)
 
  
 
  
 
  
 
  
 
  
 
  
 
 
State and political subdivisions
14

  
10,129

  
159

  
—

  
—

  
10,129

  
159

 
Corporate debt securities
1

  
2,375

  
9

  
—

  
—

  
2,375

  
9

 
Total
15

  
$
12,504

  
$
168

  
$
—

  
$
—

  
$
12,504

  
$
168

 
 
 
  
As of December 31, 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
11

 
3,672

 
57

 
—

 
—

  
3,672

  
57

 
Corporate debt securities
1

 
2,371

 
12

 
—

 
—

  
2,371

  
12

 
Total
12

  
$
6,043

  
$
69

  
$
—

  
$
—

  
$
6,043

  
$
69

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 March 31, 2013, approximately 62% 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, 2013 and December 31, 2012.
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. At March 31, 2013 and December 31, 2012, 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.
At March 31, 2013, the Company owned six collateralized debt obligations backed by pools of trust preferred securities with an original cost basis of $9.8 million. The book value of these securities as of March 31, 2013 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. As of March 31, 2013, no additional charges had been recognized during 2011, 2012, or 2013. 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, 2013, the Company also owned $1.8 million of equity securities in banks and financial service-related companies, and $1.0 million of mutual funds invested in debt securities and other debt instruments that will cause shares of the fund to be deemed to be qualified under the Community Reinvestment Act (the "CRA"). Equity securities are

9
Table of Contents

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 2013 and the full year of 2012, 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 March 31, 2013 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
$
21,531

  
$
21,770

  
$
525

  
$
526

 
Due after one year through five years
97,829

  
101,814

  
2,759

  
2,750

 
Due after five years through ten years
129,891

  
135,637

  
7,172

  
7,319

 
Due after ten years
59,525

  
60,866

  
12,065

  
11,931

 
Mortgage-backed securities and collateralized mortgage obligations
244,283

  
249,591

  
10,024

  
10,053

 
Total
$
553,059

  
$
569,678

  
$
32,545

  
$
32,579


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 $2.6 million and a fair value of $2.8 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 March 31, 2013 and December 31, 2012 was $12.2 million and $11.1 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 for the three months ended March 31, 2013 and 2012 are as follows:  
 
 
Three Months Ended March 31,
 
 
2013
 
2012
 
(in thousands)
 
 
 
 
Available for sale fixed maturity securities:
 
 
 
 
Gross realized gains
$
80

 
$
314

 
Gross realized losses
—

 
—

 
Other-than-temporary impairment
—

 
—

 
 
80

 
314

 
Equity securities:
 
 
 
 
Gross realized gains
—

 
2

 
Gross realized losses
—

 
—

 
Other-than-temporary impairment
—

 
—

 
 
—

 
2

 
 
$
80

 
$
316



10
Table of Contents

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 March 31, 2013 and December 31, 2012
 
(in thousands)
Agricultural
 
Commercial and Industrial
 
Commercial Real Estate
 
Residential Real Estate
 
Consumer
 
Unallocated
 
Total
 
March 31, 2013
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Allowance for loan losses:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Individually evaluated for impairment
$
155

 
$
312

 
$
339

 
$
180

 
$
5

 
$
—

 
$
991

 
Collectively evaluated for impairment
816

 
4,084

 
5,555

 
2,904

 
253

 
1,657

 
15,269

 
Total
$
971

 
$
4,396

 
$
5,894

 
$
3,084

 
$
258

 
$
1,657

 
$
16,260

 
Loans acquired with deteriorated credit quality (loan pool participations)
$
3

 
$
68

 
$
681

 
$
240

 
$
5

 
$
1,137

 
$
2,134

 
Loans receivable
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Individually evaluated for impairment
$
3,234

 
$
2,121

 
$
4,494

 
$
1,510

 
$
58

 
$
—

 
$
11,417

 
Collectively evaluated for impairment
77,261

 
240,510

 
440,822

 
252,438

 
19,335

 
—

 
1,030,366

 
Total
$
80,495

 
$
242,631

 
$
445,316

 
$
253,948

 
$
19,393

 
$
—

 
$
1,041,783

 
Loans acquired with deteriorated credit quality (loan pool participations)
$
59

 
$
1,816

 
$
22,826

 
$
4,590

 
$
65

 
$
5,157

 
$
34,513

 
(in thousands)
Agricultural
 
Commercial and Industrial
 
Commercial Real Estate
 
Residential Real Estate
 
Consumer
 
Unallocated
 
Total
 
December 31, 2012
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Allowance for loan losses:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Individually evaluated for impairment
$
159

 
$
295

 
$
293

 
$
136

 
$
6

 
$
—

 
$
889

 
Collectively evaluated for impairment
867

 
4,304

 
5,474

 
2,871

 
350

 
1,202

 
15,068

 
Total
$
1,026

 
$
4,599

 
$
5,767

 
$
3,007

 
$
356

 
$
1,202

 
$
15,957

 
Loans acquired with deteriorated credit quality (loan pool participations)
$
4

 
$
77

 
$
673

 
$
240

 
$
15

 
$
1,125

 
$
2,134

 
Loans receivable
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Individually evaluated for impairment
$
3,323

 
$
1,806

 
$
5,342

 
$
886

 
$
37

 
$
—

 
$
11,394

 
Collectively evaluated for impairment
81,403

 
236,810

 
434,642

 
251,990

 
19,045

 
—

 
1,023,890

 
Total
$
84,726

 
$
238,616

 
$
439,984

 
$
252,876

 
$
19,082

 
$
—

 
$
1,035,284

 
Loans acquired with deteriorated credit quality (loan pool participations)
$
76

 
$
2,379

 
$
24,346

 
$
4,788

 
$
67

 
$
6,128

 
$
37,784


The changes in the allowance for loan losses by portfolio segment are as follows:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Allowance for Loan Loss Activity
 
 
For the Three Months Ended March 31, 2013 and 2012
 
(in thousands)
Agricultural
 
Commercial and Industrial
 
Commercial Real Estate
 
Residential Real Estate
 
Consumer
 
Unallocated
 
Total
 
2013
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Beginning balance
$
1,026

 
$
4,599

 
$
5,767

 
$
3,007

 
$
356

 
$
1,202

 
$
15,957

 
Charge-offs
(39
)
 
(173
)
 
—

 
(112
)
 
(49
)
 
—

 
(373
)
 
Recoveries
5

 
9

 
457

 
2

 
3

 
—

 
476

 
Provision
(21
)
 
(39
)
 
(330
)
 
187

 
(52
)
 
455

 
200

 
Ending balance
$
971

 
$
4,396

 
$
5,894

 
$
3,084

 
$
258

 
$
1,657

 
$
16,260

 
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

Loan Portfolio Segment Risk Characteristics
Agricultural - Agricultural loans, most of which are secured by crops, livestock, and machinery, are provided to finance capital improvements and farm operations as well as acquisitions of livestock and machinery. The ability of the borrower

11
Table of Contents

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 are 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.

Commercial Real Estate - The Company offers mortgage loans to commercial and agricultural customers for the acquisition of real estate used in their businesses, 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.

12
Table of Contents

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. 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 probable 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 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 that 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.


13
Table of Contents

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,
 
 
2013
 
2012
 
 
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:
 
 
 
 
 
 
 
 
 
 
 
 
Commercial and industrial
 
 
 
 
 
 
 
 
 
 
 
 
Amortization or maturity date change
1
 
158

 
158

 
0
 
—

 
—

 
Commercial real estate:
 
 
 
 
 
 
 
 
 
 
 
 
Farmland
 
 
 
 
 
 
 
 
 
 
 
 
Interest rate reduction
0
 
—

 
—

 
2
 
2,475

 
2,475

 
Commercial real estate-other
 
 
 
 
 
 
 
 
 
 
 
 
Amortization or maturity date change
2
 
165

 
136

 
0
 
—

 
—