midwestone 093013 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, 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 001-35968
 
 
 
 
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 definitions 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 30, 2013, there were 8,470,058 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, 2013
 
December 31, 2012
(dollars in thousands)
(unaudited)
 
 
ASSETS
 
 
 
Cash and due from banks
$
25,288

  
$
30,197

Interest-bearing deposits in banks
778

  
16,242

Federal funds sold
—

  
752

Cash and cash equivalents
26,066

  
47,191

Investment securities:
  
 
 
Available for sale
490,148

  
557,541

Held to maturity (fair value of $30,743 as of September 30, 2013 and $32,920 as of December 31, 2012)
32,825

  
32,669

Loans held for sale
206

  
1,195

Loans
1,076,837

  
1,035,284

Allowance for loan losses
(16,505
)
 
(15,957
)
Net loans
1,060,332

  
1,019,327

Loan pool participations, net
28,071

  
35,650

Premises and equipment, net
26,535

  
25,609

Accrued interest receivable
10,554

  
10,292

Intangible assets, net
8,971

  
9,469

Bank-owned life insurance
29,367

  
28,676

Other real estate owned
1,917

  
3,278

Assets held for sale
—

 
764

Deferred income taxes
7,217

  
776

Other assets
16,316

  
20,382

Total assets
$
1,738,525

  
$
1,792,819

LIABILITIES AND SHAREHOLDERS' EQUITY
 
 
 
Deposits:
  
 
 
Non-interest-bearing demand
$
201,886

  
$
190,491

Interest-bearing checking
576,318

  
582,283

Savings
94,043

  
91,603

Certificates of deposit under $100,000
270,275

  
312,489

Certificates of deposit $100,000 and over
179,129

  
222,867

Total deposits
1,321,651

  
1,399,733

Federal funds purchased
8,395

 
—

Securities sold under agreements to repurchase
58,663

  
68,823

Federal Home Loan Bank borrowings
145,187

  
120,120

Deferred compensation liability
3,492

  
3,555

Long-term debt
15,464

  
15,464

Accrued interest payable
1,267

  
1,475

Other liabilities
8,872

  
9,717

Total liabilities
1,562,991

  
1,618,887

Shareholders' equity:
  
 
 
Preferred stock, no par value; authorized 500,000 shares; no shares issued and outstanding at September 30, 2013 and December 31, 2012
$
—

 
$
—

Common stock, $1.00 par value; authorized 15,000,000 shares at September 30, 2013 and December 31, 2012; issued 8,690,398 shares at September 30, 2013 and December 31, 2012; outstanding 8,470,058 shares at September 30, 2013 and 8,480,488 shares at December 31, 2012
8,690

  
8,690

Additional paid-in capital
80,314

  
80,383

Treasury stock at cost, 220,340 shares as of September 30, 2013 and 209,910 shares at December 31, 2012
(3,796
)
 
(3,316
)
Retained earnings
88,110

  
77,125

Accumulated other comprehensive income
2,216

  
11,050

Total shareholders' equity
175,534

  
173,932

Total liabilities and shareholders' equity
$
1,738,525

  
$
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 per share amounts)
  
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
  
2013
 
2012
 
2013
 
2012
Interest income:
  
 
 
 
 
 
 
 
Interest and fees on loans
  
$
12,215

 
$
12,760

 
$
36,606

 
$
38,639

Interest and discount on loan pool participations
  
226

 
886

 
1,916

 
1,741

Interest on bank deposits
  
2

 
7

 
8

 
29

Interest on federal funds sold
  
—

 
—

 
—

 
1

Interest on investment securities:
  
  
 
 
 
 
 
 
Taxable securities
  
2,395

 
2,654

 
7,571

 
8,224

Tax-exempt securities
  
1,278

 
1,279

 
3,973

 
3,744

Total interest income
  
16,116

 
17,586

 
50,074

 
52,378

Interest expense:
  
 
 
 
 
 
 
 
Interest on deposits:
  
 
 
 
 
 
 
 
Interest-bearing checking
  
544

 
691

 
1,815

 
2,281

Savings
  
34

 
36

 
105

 
105

Certificates of deposit under $100,000
  
987

 
1,433

 
3,347

 
4,519

Certificates of deposit $100,000 and over
  
493

 
715

 
1,695

 
2,242

Total interest expense on deposits
  
2,058

 
2,875

 
6,962

 
9,147

Interest on federal funds purchased
  
10

 
6

 
37

 
11

Interest on securities sold under agreements to repurchase
  
31

 
43

 
96

 
145

Interest on Federal Home Loan Bank borrowings
  
671

 
767

 
2,068

 
2,353

Interest on notes payable
  
7

 
8

 
22

 
26

Interest on long-term debt
  
74

 
168

 
224

 
503

Total interest expense
  
2,851

 
3,867

 
9,409

 
12,185

Net interest income
  
13,265

 
13,719

 
40,665

 
40,193

Provision for loan losses
  
250

 
575

 
1,050

 
1,729

Net interest income after provision for loan losses
  
13,015

 
13,144

 
39,615

 
38,464

Noninterest income:
  
 
 
 
 
 
 
 
Trust, investment, and insurance fees
  
1,297

 
1,294

 
4,069

 
3,767

Service charges and fees on deposit accounts
  
786

 
846

 
2,236

 
2,424

Mortgage origination and loan servicing fees
  
1,083

 
919

 
2,844

 
2,514

Other service charges, commissions and fees
  
406

 
303

 
1,574

 
1,636

Bank-owned life insurance income
  
230

 
225

 
691

 
676

Impairment losses on investment securities
  
—

 
(337
)
 
—

 
(337
)
Gain on sale or call of available for sale securities (Includes $84 reclassified from accumulated other comprehensive income for net gains on available for sale securities for the nine months ended September 30, 2013)
  
—

 
8

 
84

 
741

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

 
(4
)
 
4,205

Total noninterest income
  
3,800

 
3,258

 
11,494

 
15,626

Noninterest expense:
  
 
 
 
 
 
 
 
Salaries and employee benefits
  
6,099

 
6,207

 
18,565

 
24,167

Net occupancy and equipment expense
  
1,580

 
1,537

 
4,806

 
4,741

Professional fees
  
615

 
612

 
2,016

 
2,137

Data processing expense
  
364

 
443

 
1,092

 
1,258

FDIC insurance expense
  
255

 
326

 
845

 
929

Amortization of intangible assets
 
166

 
195

 
498

 
584

Other operating expense
  
1,204

 
1,393

 
4,040

 
4,280

Total noninterest expense
  
10,283

 
10,713

 
31,862

 
38,096

Income before income tax expense
  
6,532

 
5,689

 
19,247

 
15,994

Income tax expense (Includes $32 income tax expense reclassified from accumulated other comprehensive income for the nine months ended September 30, 2013)
  
1,668

 
1,451

 
5,062

 
3,812

Net income
  
$
4,864

 
$
4,238

 
$
14,185

 
$
12,182

Share and Per share information:
  
 
 
 
 
 
 
 
Ending number of shares outstanding
  
8,470,058

 
8,487,518

 
8,470,058

 
8,487,518

Average number of shares outstanding
  
8,468,755

 
8,483,918

 
8,478,928

 
8,484,404

Diluted average number of shares
  
8,517,645

 
8,534,908

 
8,524,451

 
8,526,161

Earnings per common share - basic
  
$
0.57

 
$
0.50

 
$
1.67

 
$
1.44

Earnings per common share - diluted
  
0.57

 
0.50

 
1.66

 
1.43

Dividends paid per common share
  
0.13

 
0.10

 
0.38

 
0.27

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,
 
  
2013
 
2012
 
2013
 
2012
Net income
 
$
4,864

 
$
4,238

 
$
14,185

 
$
12,182

 
 
 
 
 
 
 
 
 
Other comprehensive income (loss), available for sale securities:
 
 
 
 
 
 
 
 
Unrealized holding gains (losses) arising during period
 
(1,045
)
 
1,790

 
(14,013
)
 
4,205

Reclassification adjustment for gains included in net income
 
—

 
(8
)
 
(84
)
 
(741
)
Income tax (expense) benefit
 
387

 
(665
)
 
5,263

 
(1,295
)
Other comprehensive income (loss) on available for sale securities
 
(658
)
 
1,117

 
(8,834
)
 
2,169

 
 
 
 
 
 
 
 
 
Other comprehensive income, pension plan:
 
 
 
 
 
 
 
 
Reclassification of pension plan expense due to plan settlement
 
—

 
—

 
—

 
5,968

Income tax benefit
 
—

 
—

 
—

 
(2,226
)
Defined benefit pension plans
 
—

 
—

 
—

 
3,742

Other comprehensive income (loss), net of tax
 
(658
)
 
1,117

 
(8,834
)
 
5,911

Comprehensive income
 
$
4,206

 
$
5,355

 
$
5,351

 
$
18,093

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, 2011
  
$
—

  
$
8,690

  
$
80,333

 
$
(2,312
)
 
$
63,646

 
$
6,137

 
$
156,494

Net income
  
—

  
—


—


—


12,182


—


12,182

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, net of tax
 
—

 
—

 
—

 
—

 
—

 
5,911

 
5,911

Balance at September 30, 2012
  
$
—

 
$
8,690

 
$
80,310

 
$
(3,102
)
 
$
73,578

 
$
12,048

 
$
171,524

Balance at December 31, 2012
  
$
—

  
$
8,690

  
$
80,383

 
$
(3,316
)
 
$
77,125

 
$
11,050

 
$
173,932

Net income
  
—

  
—

  
—

 
—

 
14,185

 
—

 
14,185

Dividends paid on common stock ($0.375 per share)
  
—

  
—

  
—

 
—

 
(3,200
)
 
—

 
(3,200
)
Stock options exercised (30,678 shares)
  
—

  
—

  
(76
)
 
202

 
—

 
—

 
126

Release/lapse of restriction on RSUs (19,585 shares)
  
—

  
—

  
(267
)
 
285

 
—

 
—

 
18

Repurchase of common stock (40,713 shares)
 
—

 
—

 
—

 
(967
)
 
—

 
—

 
(967
)
Stock compensation
  
—

  
—

  
274

 
—

 
—

 
—

 
274

Other comprehensive loss, net of tax
 
—

 
—

 
—

 
—

 
—

 
(8,834
)
 
(8,834
)
Balance at September 30, 2013
  
$
—

  
$
8,690

  
$
80,314

 
$
(3,796
)
 
$
88,110

 
$
2,216

 
$
175,534

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,
 
2013
 
2012
Cash flows from operating activities:
 
 
 
Net income
$
14,185

 
$
12,182

Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
Provision for loan losses
1,050

 
1,729

Depreciation, amortization and accretion
3,976

 
4,047

(Gain) loss on sale of premises and equipment
4

 
(4,205
)
Deferred income taxes
(1,178
)
 
503

Stock-based compensation
274

 
199

Net gain on sale or call of available for sale securities
(84
)
 
(741
)
Net (gain) loss on sale of other real estate owned
169

 
(95
)
Net gain on sale of loans held for sale
(1,123
)
 
(1,466
)
Writedown of other real estate owned
33

 
326

Other-than-temporary impairment of investment securities
—

 
337

Origination of loans held for sale
(73,405
)
 
(112,979
)
Proceeds from sales of loans held for sale
75,517

 
114,744

Recognition of previously deferred expense related to pension plan settlement
—

 
3,002

Pension plan contribution
—

 
(3,031
)
Increase in accrued interest receivable
(262
)
 
(770
)
Increase in cash surrender value of bank-owned life insurance
(691
)
 
(677
)
(Increase) decrease in other assets
4,066

 
(260
)
Decrease in deferred compensation liability
(63
)
 
(68
)
Decrease in accrued interest payable, accounts payable, accrued expenses, and other liabilities
(1,053
)
 
(263
)
Net cash provided by operating activities
21,415

 
12,514

Cash flows from investing activities:
 
 
 
Proceeds from sales of available for sale securities
12,205

 
16,232

Proceeds from maturities and calls of available for sale securities
83,241

 
97,424

Purchases of available for sale securities
(43,637
)
 
(87,255
)
Proceeds from maturities and calls of held to maturity securities
1,029

 
556

Purchase of held to maturity securities
(1,185
)
 
(24,429
)
Increase in loans
(42,228
)
 
(28,258
)
Decrease in loan pool participations, net
7,579

 
12,150

Purchases of premises and equipment
(2,785
)
 
(2,777
)
Proceeds from sale of other real estate owned
1,332

 
2,274

Proceeds from sale of premises and equipment
15

 
5,220

Proceeds from sale of assets held for sale
764

 
—

Net cash provided by (used in) investing activities
16,330

 
(8,863
)
Cash flows from financing activities:
 
 
 
Net increase (decrease) in deposits
(78,082
)
 
22,001

Increase (decrease) in federal funds purchased
8,395

 
(8,920
)
Increase (decrease) in securities sold under agreements to repurchase
(10,160
)
 
14,153

Proceeds from Federal Home Loan Bank borrowings
151,000

 
20,000

Repayment of Federal Home Loan Bank borrowings
(126,000
)
 
(30,000
)
Stock options exercised
144

 
433

Dividends paid
(3,200
)
 
(2,250
)
Repurchase of common stock
(967
)
 
(1,445
)
Net cash (used in) provided by financing activities
(58,870
)
 
13,972

Net (decrease) increase in cash and cash equivalents
(21,125
)
 
17,623

Cash and cash equivalents at beginning of period
47,191

 
32,623

Cash and cash equivalents at end of period
$
26,066

 
$
50,246

Supplemental disclosures of cash flow information:
 
 
 
Cash paid during the period for interest
$
9,617

 
$
12,071

Cash paid during the period for income taxes
$
6,070

 
$
4,455

Supplemental schedule of non-cash investing activities:
 
 
 
Transfer of loans to other real estate owned
$
173

 
$
1,589

Transfer of property to assets held for sale
$
—

 
$
764

See accompanying notes to consolidated financial statements.

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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 September 30, 2013, and the results of operations and cash flows for the three and nine months ended September 30, 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 and nine months ended September 30, 2013 may not be indicative of results for the year ending December 31, 2013, or for any other period.
During the quarter ended June 30, 2013, the Company identified an immaterial error in its accounting for other-than-temporary impairment on its portfolio of collateralized debt obligations. This error related to the identification of credit-related impairments subsequent to the Company's adoption of Financial Accounting Standards Board (FASB) Staff Position (FSP) No. FAS 115-2 and FAS 124-2, “Recognition and Presentation of Other-Than-Temporary Impairments” as of April 1, 2009.
As a result, the Company has adjusted prior period amounts for the immaterial error. Specifically, on the Company's consolidated statement of shareholders' equity the balance of retained earnings was reduced by $2,653,000, from $66,299,000 to $63,646,000, and accumulated other comprehensive income was increased by $2,653,000, from $3,484,000 to $6,137,000, as of December 31, 2011, to reflect the effect of the error in the years ended December 31, 2009, 2010, and 2011. On the Company's consolidated balance sheets, retained earnings and accumulated other comprehensive income as of December 31, 2012, were decreased and increased, respectively, by $2,870,000. Of the adjustment amounts as of December 31, 2011 and 2012, $2,322,000 relates to the after-tax effect of credit impairments that should have been recognized in the Company's consolidated statements of operations for the year ended December 31, 2009. Downward adjustments of $212,000 to the Company's net income in the consolidated statements of operations for the three- and nine-month periods ended September 30, 2012 were necessary as a result of this correction.
The correction will also result in the following adjustments to historical amounts which will be part of comparative amounts in future filings: (i) on the Company's consolidated statement of shareholders' equity, the balance of retained earnings will be reduced by $2,647,000, from $55,619,000 to $52,972,000, and accumulated other comprehensive income will be increased by $2,647,000, from $(1,826,000) to $821,000, as of December 31, 2010, to reflect the effect of the error in the years ended December 31, 2009 and 2010; (ii) on the Company's consolidated statements of operations, net income for the year ended December 31, 2011 will be reduced $6,000, from $13,317,000 to $13,311,000, with no change in the reported basic or diluted earnings per share for such time period; (iii) on the Company's consolidated statements of operations, net income for the year ended December 31, 2012 will be reduced $217,000, from $16,751,000 to

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$16,534,000, with basic earnings per share decreasing from $1.97 to $1.95 and diluted earnings per share decreasing from $1.96 to $1.94 during such period; (iv) corresponding adjustments to the Company's comprehensive income will be made for the years ended December 31, 2012 and 2011; and (v) amounts in relevant footnotes for all periods to be presented will be corrected for the effects of this immaterial error.
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 September 30, 2013, none were issued or outstanding.
Common Stock: As of September 30, 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 September 30, 2013 the remaining amount available for share repurchases under the program was $4.0 million.

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 September 30,
 
Nine Months Ended September 30,
 
(dollars in thousands, except per share amounts)
  
2013
 
2012
 
2013
 
2012
 
Basic earnings per common share computation
 
 
 
 
 
 
 
 
 
Numerator:
 
 
 
 
 
 
 
 
 
Net income
 
$
4,864

 
$
4,238

 
$
14,185

 
$
12,182

 
 
 
 
 
 
 
 
 
 
 
Denominator:
 
 
 
 
 
 
 
 
 
Weighted average shares outstanding
 
8,468,755

 
8,483,918

 
8,478,928

 
8,484,404

 
Basic earnings per common share
 
$
0.57

 
$
0.50

 
$
1.67

 
$
1.44

 
 
 
 
 
 
 
 
 
 
 
Diluted earnings per common share computation
 
 
 
 
 
 
 
 
 
Numerator:
 
 
 
 
 
 
 
 
 
Net income
 
$
4,864

 
$
4,238

 
$
14,185

 
$
12,182

 
 
 
 
 
 
 
 
 
 
 
Denominator:
 
 
 
 
 
 
 
 
 
Weighted average shares outstanding, included all dilutive potential shares
 
8,517,645

 
8,534,908

 
8,524,451

 
8,526,161

 
Diluted earnings per common share
 
$
0.57

 
$
0.50

 
$
1.66

 
$
1.43



7
Table of Contents

4.Investment Securities
A summary of investment securities available for sale is as follows:
 
 
As of September 30, 2013
 
 
Amortized
Cost
  
Gross
Unrealized
Gains
  
Gross
Unrealized
Losses
 
Estimated
Fair Value
 
(in thousands)
 
  
 
  
 
 
 
 
U.S. Government agencies and corporations
$
51,202

  
$
587

  
$
778

 
$
51,011

 
State and political subdivisions
200,133

  
6,143

  
2,486

 
203,790

 
Mortgage-backed securities and collateralized mortgage obligations
203,679

  
3,247

  
2,384

 
204,542

 
Corporate debt securities
28,925

  
276

  
1,291

 
27,910

 
Total debt securities
483,939

  
10,253

  
6,939

 
487,253

 
Other equity securities
2,652

  
282

  
39

 
2,895

 
Total
$
486,591

  
$
10,535

  
$
6,978

 
$
490,148

 
 
 
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
26,438

  
360

  
1,858

 
24,940

 
Total debt securities
538,250

  
19,677

  
2,067

 
555,860

 
Other equity securities
1,637

  
109

  
65

 
1,681

 
Total
$
539,887

  
$
19,786

  
$
2,132

 
$
557,541

 
A summary of investment securities held to maturity is as follows:
 
 
As of September 30, 2013
 
 
Amortized
Cost
  
Gross
Unrealized
Gains
  
Gross
Unrealized
Losses
  
Estimated
Fair Value
 
(in thousands)
 
  
 
  
 
  
 
 
State and political subdivisions
$
19,894

  
$
—

  
$
1,278

  
$
18,616

 
Mortgage-backed securities
9,670

  
3

  
752

  
8,921

 
Corporate debt securities
3,261

  
—

  
55

  
3,206

 
Total
$
32,825

  
$
3

  
$
2,085

  
$
30,743

 
 
 
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 September 30, 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. 

8
Table of Contents

The following presents information pertaining to securities with gross unrealized losses as of September 30, 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 September 30, 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
3

  
$
22,083

  
$
778

  
$
—

  
$
—

  
$
22,083

  
$
778

 
State and political subdivisions
134

  
43,345

  
2,486

  
—

  
—

  
43,345

  
2,486

 
Mortgage-backed securities and collateralized mortgage obligations
14

  
95,204

  
2,384

  
—

  
—

  
95,204

  
2,384

 
Corporate debt securities
8

  
14,266

  
180

  
1,260

  
1,111

  
15,526

  
1,291

 
Other equity securities
1

  
960

  
39

  
—

  
—

  
960

  
39

 
Total
160

  
$
175,858

  
$
5,867

  
$
1,260

  
$
1,111

  
$
177,118

  
$
6,978

 
 
 
  
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

  
1,616

  
15,427

  
1,858

 
Other equity securities
1

  
754

  
65

  
—

  
—

  
754

  
65

 
Total
41

  
$
48,925

  
$
516

  
$
755

  
$
1,616

  
$
49,680

  
$
2,132

 
 
 
  
As of September 30, 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
30

  
$
18,616

  
$
1,278

  
$
—

  
$
—

  
$
18,616

  
$
1,278

 
Mortgage-backed securities and collateralized mortgage obligations
1

  
8,883

  
752

  
—

  
—

  
8,883

  
752

 
Corporate debt securities
1

  
2,329

  
55

  
—

  
—

  
2,329

  
55

 
Total
32

  
$
29,828

  
$
2,085

  
$
—

  
$
—

  
$
29,828

  
$
2,085

 
 
 
  
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 creditworthiness of the issuer, the type of underlying assets and the current and anticipated market conditions. 
At September 30, 2013, approximately 60% 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

9
Table of Contents

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, 2013 and December 31, 2012.
At September 30, 2013 and December 31, 2012, the Company's mortgage-backed securities portfolio consisted of securities predominantly backed by one- to four- family mortgage loans and underwritten to the standards of and guaranteed by the following government-sponsored agencies: FHLMC, FNMA and GNMA. 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 September 30, 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 September 30, 2013 totaled $2.4 million, after OTTI charges have been recognized. 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, additional pre-tax charges to earnings were recorded from 2009 to 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 OTTI. 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, 2013, the Company also owned $1.9 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 units of the fund to be deemed to be qualified under the Community Reinvestment Act (the "CRA"). Equity securities are considered to have OTTI 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 nine months 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.
The following table provides a roll forward of credit losses on fixed maturity securities recognized in net income:
 
 
For the Three Months Ended September 30,
 
For the Nine Months Ended September 30,
 
 
2013
 
2012
 
2013
 
2012
 
(in thousands)
 
 
 
 
 
 
 
 
Beginning balance
$
7,379

 
$
7,034

 
$
7,379

 
$
7,034

 
Additional credit losses:
 
 
 
 
 
 
 
 
Securities with no previous other than temporary impairment
—

 
—

 
—

 
—

 
Securities with previous other than temporary impairments
—

 
337

 
—

 
337

 
Ending balance
$
7,379


$
7,371

 
$
7,379

 
$
7,371

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

10
Table of Contents

A summary of the contractual maturity distribution of debt investment securities at September 30, 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
$
15,706

  
$
15,910

  
$
185

  
$
184

 
Due after one year through five years
105,380

  
108,449

  
2,574

  
2,517

 
Due after five years through ten years
104,048

  
105,438

  
7,587

  
7,370

 
Due after ten years
55,126

  
52,914

  
12,809

  
11,751

 
Mortgage-backed securities and collateralized mortgage obligations
203,679

  
204,542

  
9,670

  
8,921

 
Total
$
483,939

  
$
487,253

  
$
32,825

  
$
30,743


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 $2.7 million and a fair value of $2.9 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, 2013 and December 31, 2012 was $10.8 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 and nine months ended September 30, 2013 and 2012 are as follows:  
 
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
 
2013
 
2012
 
2013
 
2012
 
(in thousands)
 
 
 
 
 
 
 
 
Available for sale fixed maturity securities:
 
 
 
 
 
 
 
 
Gross realized gains
$
—

 
$
8

 
$
144

 
$
360

 
Gross realized losses
—

 
—

 
(60
)
 
—

 
Other-than-temporary impairment
—

 
(337
)
 
—

 
(337
)
 
 
—

 
(329
)
 
84

 
23

 
Equity securities:
 
 
 
 
 
 
 
 
Gross realized gains
—

 
—

 
—

 
381

 
Gross realized losses
—

 
—

 
—

 
—

 
Other-than-temporary impairment
—

 
—

 
—

 
—

 
 
—

 
—

 
—

 
381

 
 
$
—

 
$
(329
)
 
$
84

 
$
404



11
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 September 30, 2013 and December 31, 2012
 
(in thousands)
Agricultural
 
Commercial and Industrial
 
Commercial Real Estate
 
Residential Real Estate
 
Consumer
 
Unallocated
 
Total
 
September 30, 2013
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Allowance for loan losses:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Individually evaluated for impairment
$
140

 
$
217

 
$
653

 
$
214

 
$
18

 
$
—

 
$
1,242

 
Collectively evaluated for impairment
918

 
4,462

 
5,334

 
3,178

 
321

 
1,050

 
15,263

 
Total
$
1,058

 
$
4,679

 
$
5,987

 
$
3,392

 
$
339

 
$
1,050

 
$
16,505

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

 
$
66

 
$
700

 
$
124

 
$
5

 
$
1,236

 
$
2,134

 
Loans receivable
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Individually evaluated for impairment
$
3,164

 
$
2,078

 
$
5,008

 
$
1,569

 
$
72

 
$
—

 
$
11,891

 
Collectively evaluated for impairment
87,858

 
261,206

 
428,628

 
268,355

 
18,899

 
—

 
1,064,946

 
Total
$
91,022

 
$
263,284

 
$
433,636

 
$
269,924

 
$
18,971

 
$
—

 
$
1,076,837

 
Loans acquired with deteriorated credit quality (loan pool participations)
$
53

 
$
1,563

 
$
19,912

 
$
4,013

 
$
60

 
$
4,604

 
$
30,205

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