midwestone 033114 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, 2014
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 or other jurisdiction of incorporation or organization)
(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 April 30, 2014, there were 8,475,291 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, 2014
 
December 31, 2013
(dollars in thousands, except per share amounts)
(unaudited)
 
 
ASSETS
 
 
 
Cash and due from banks
$
25,571

  
$
24,516

Interest-bearing deposits in banks
9,504

  
374

Federal funds sold
181

  
—

Cash and cash equivalents
35,256

  
24,890

Investment securities:
  
 
 
Available for sale
496,918

  
498,561

Held to maturity (fair value of $32,304 as of March 31, 2014 and $30,191 as of December 31, 2013)
33,963

  
32,625

Loans held for sale
89

  
357

Loans
1,072,951

  
1,088,412

Allowance for loan losses
(16,425
)
 
(16,179
)
Net loans
1,056,526

  
1,072,233

Loan pool participations, net
23,400

  
25,533

Premises and equipment, net
29,885

  
27,682

Accrued interest receivable
9,289

  
10,409

Intangible assets, net
8,669

  
8,806

Bank-owned life insurance
29,827

  
29,598

Other real estate owned
1,996

  
1,770

Deferred income taxes
4,165

  
8,194

Other assets
15,930

  
14,560

Total assets
$
1,745,913

  
$
1,755,218

LIABILITIES AND SHAREHOLDERS' EQUITY
 
 
 
Deposits:
  
 
 
Non-interest-bearing demand
$
206,037

  
$
222,359

Interest-bearing checking
620,027

  
592,673

Savings
101,816

  
94,559

Certificates of deposit under $100,000
243,727

  
256,283

Certificates of deposit $100,000 and over
204,069

  
209,068

Total deposits
1,375,676

  
1,374,942

Federal funds purchased
—

 
5,482

Securities sold under agreements to repurchase
52,293

  
61,183

Federal Home Loan Bank borrowings
108,900

  
106,900

Deferred compensation liability
3,447

  
3,469

Long-term debt
15,464

  
15,464

Accrued interest payable
700

  
765

Other liabilities
6,290

  
8,997

Total liabilities
1,562,770

  
1,577,202

Shareholders' equity:
  
 
 
Preferred stock, no par value; authorized 500,000 shares; no shares issued and outstanding at March 31, 2014 and December 31, 2013
$
—

 
$
—

Common stock, $1.00 par value; authorized 15,000,000 shares at March 31, 2014 and December 31, 2013; issued 8,690,398 shares at March 31, 2014 and December 31, 2013; outstanding 8,471,761 shares at March 31, 2014 and 8,481,799 shares at December 31, 2013
8,690

  
8,690

Additional paid-in capital
80,338

  
80,506

Treasury stock at cost, 218,637 shares as of March 31, 2014 and 208,599 shares at December 31, 2013
(4,080
)
 
(3,702
)
Retained earnings
95,218

  
91,473

Accumulated other comprehensive income
2,977

  
1,049

Total shareholders' equity
183,143

  
178,016

Total liabilities and shareholders' equity
$
1,745,913

  
$
1,755,218


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 March 31,
 
  
2014
 
2013
Interest income:
  
 
 
 
Interest and fees on loans
  
$
11,940

 
$
12,114

Interest and discount on loan pool participations
  
280

 
1,080

Interest on bank deposits
  
4

 
5

Interest on investment securities:
  
 
 
 
Taxable securities
  
2,316

 
2,630

Tax-exempt securities
  
1,381

 
1,361

Total interest income
  
15,921

 
17,190

Interest expense:
  
 
 
 
Interest on deposits:
  
 
 
 
Interest-bearing checking
  
545

 
671

Savings
  
36

 
36

Certificates of deposit under $100,000
  
697

 
1,239

Certificates of deposit $100,000 and over
  
445

 
633

Total interest expense on deposits
  
1,723

 
2,579

Interest on federal funds purchased
  
1

 
9

Interest on securities sold under agreements to repurchase
  
30

 
36

Interest on Federal Home Loan Bank borrowings
  
562

 
692

Interest on other borrowings
  
6

 
8

Interest on long-term debt
  
72

 
75

Total interest expense
  
2,394

 
3,399

Net interest income
  
13,527

 
13,791

Provision for loan losses
  
450

 
200

Net interest income after provision for loan losses
  
13,077

 
13,591

Noninterest income:
  
 
 
 
Trust, investment, and insurance fees
  
1,518

 
1,349

Service charges and fees on deposit accounts
  
628

 
707

Mortgage origination and loan servicing fees
  
437

 
1,044

Other service charges, commissions and fees
  
619

 
572

Bank-owned life insurance income
  
229

 
231

Gain on sale or call of available for sale securities (Includes $783 and $80 reclassified from accumulated other comprehensive income for net gains on available for sale securities for the three months ended March 31, 2014 and 2013, respectively)
  
783

 
80

Gain (loss) on sale of premises and equipment
  
3

 
(2
)
Total noninterest income
  
4,217

 
3,981

Noninterest expense:
  
 
 
 
Salaries and employee benefits
  
6,134

 
6,293

Net occupancy and equipment expense
  
1,605

 
1,688

Professional fees
  
575

 
683

Data processing expense
  
424

 
391

FDIC insurance expense
  
243

 
294

Amortization of intangible assets
 
137

 
166

Other operating expense
  
1,274

 
1,479

Total noninterest expense
  
10,392

 
10,994

Income before income tax expense
  
6,902

 
6,578

Income tax expense (Includes $305 and $31 income tax expense reclassified from accumulated other comprehensive income for the three months ended March 31, 2014 and 2013, respectively)
  
1,929

 
1,788

Net income
  
$
4,973

 
$
4,790

Share and per share information:
  
 
 
 
Ending number of shares outstanding
  
8,471,761

 
8,498,484

Average number of shares outstanding
  
8,475,593

 
8,493,376

Diluted average number of shares
  
8,507,973

 
8,536,495

Earnings per common share - basic
  
$
0.59

 
$
0.56

Earnings per common share - diluted
  
0.58

 
0.56

Dividends paid per common share
  
0.145

 
0.125

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,
 
  
2014
 
2013
Net income
 
$
4,973

 
$
4,790

 
 
 
 
 
Other comprehensive income (loss), available for sale securities:
 
 
 
 
Unrealized holding gains (losses) arising during period
 
3,888

 
(1,410
)
Reclassification adjustment for gains included in net income
 
(783
)
 
(80
)
Income tax (expense) benefit
 
(1,177
)
 
559

Other comprehensive income (loss) on available for sale securities
 
1,928

 
(931
)
Other comprehensive income (loss), net of tax
 
1,928

 
(931
)
Comprehensive income
 
$
6,901

 
$
3,859

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, 2012
  
$
—

  
$
8,690

  
$
80,383

 
$
(3,316
)
 
$
77,125

 
$
11,050

 
$
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
)
 
$
80,852

 
$
10,119

 
$
176,865

Balance at December 31, 2013
  
$
—

  
$
8,690

  
$
80,506

 
$
(3,702
)
 
$
91,473

 
$
1,049

 
$
178,016

Net income
  
—

  
—

  
—

 
—

 
4,973

 
—

 
4,973

Dividends paid on common stock ($0.145 per share)
  
—

  
—

  
—

 
—

 
(1,228
)
 
—

 
(1,228
)
Stock options exercised (2,310 shares)
  
—

  
—

  
(1
)
 
42

 
—

 
—

 
41

Release/lapse of restriction on RSUs (19,111 shares)
  
—

  
—

  
(276
)
 
296

 
—

 
—

 
20

Repurchase of common stock (29,466 shares)
 
—

 
—

 
—

 
(716
)
 
—

 
—

 
(716
)
Stock compensation
  
—

  
—

  
109

 
—

 
—

 
—

 
109

Other comprehensive income, net of tax
 
—

 
—

 
—

 
—

 
—

 
1,928

 
1,928

Balance at March 31, 2014
  
$
—

  
$
8,690

  
$
80,338

 
$
(4,080
)
 
$
95,218

 
$
2,977

 
$
183,143

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,
 
2014
 
2013
Cash flows from operating activities:
 
 
 
Net income
$
4,973

 
$
4,790

Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
Provision for loan losses
450

 
200

Depreciation, amortization and accretion
1,149

 
1,366

(Gain) loss on sale of premises and equipment
(3
)
 
2

Deferred income taxes
2,852

 
48

Stock-based compensation
109

 
70

Net gain on sale or call of available for sale securities
(783
)
 
(80
)
Net gain on sale of other real estate owned
(5
)
 
(45
)
Net gain on sale of loans held for sale
(76
)
 
(545
)
Writedown of other real estate owned
—

 
33

Origination of loans held for sale
(4,184
)
 
(26,892
)
Proceeds from sales of loans held for sale
4,528

 
27,760

Decrease in accrued interest receivable
1,120

 
849

Increase in cash surrender value of bank-owned life insurance
(229
)
 
(231
)
Increase in other assets
(1,370
)
 
(1,397
)
Decrease in deferred compensation liability
(22
)
 
(22
)
Decrease in accrued interest payable, accounts payable, accrued expenses, and other liabilities
(2,772
)
 
(3,047
)
Net cash provided by operating activities
5,737

 
2,859

Cash flows from investing activities:
 
 
 
Proceeds from sales of available for sale securities
3,250

 
1,080

Proceeds from maturities and calls of available for sale securities
13,368

 
19,265

Purchases of available for sale securities
(11,529
)
 
(37,236
)
Proceeds from maturities and calls of held to maturity securities
228

 
126

Purchase of held to maturity securities
(1,564
)
 
—

Decrease (increase) in loans
15,029

 
(6,460
)
Decrease in loan pool participations, net
2,133

 
3,271

Purchases of premises and equipment
(2,775
)
 
(436
)
Proceeds from sale of other real estate owned
7

 
329

Proceeds from sale of premises and equipment
3

 
4

Net cash provided by (used in) investing activities
18,150

 
(20,057
)
Cash flows from financing activities:
 
 
 
Net increase (decrease) in deposits
734

 
(26,088
)
Increase (decrease) in federal funds purchased
(5,482
)
 
1,569

Decrease in securities sold under agreements to repurchase
(8,890
)
 
(14,546
)
Proceeds from Federal Home Loan Bank borrowings
12,000

 
40,000

Repayment of Federal Home Loan Bank borrowings
(10,000
)
 
(8,000
)
Stock options exercised
61

 
67

Dividends paid
(1,228
)
 
(1,063
)
Repurchase of common stock
(716
)
 
—

Net cash (used in) financing activities
(13,521
)
 
(8,061
)
Net increase (decrease) in cash and cash equivalents
10,366

 
(25,259
)
Cash and cash equivalents at beginning of period
24,890

 
47,191

Cash and cash equivalents at end of period
$
35,256

 
$
21,932

Supplemental disclosures of cash flow information:
 
 
 
Cash paid during the period for interest
$
2,459

 
$
3,382

Cash paid during the period for income taxes
$
150

 
$
1,800

Supplemental schedule of non-cash investing activities:
 
 
 
Transfer of loans to other real estate owned
$
228

 
$
64

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, 2013 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, 2014, and the results of operations and cash flows for the three months ended March 31, 2014 and 2013. 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 ("GAAP")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, 2014 may not be indicative of results for the year ending December 31, 2014, or for any other period.
All significant accounting policies followed in the preparation of the quarterly financial statements are disclosed in the Annual Report on Form 10-K for the year ended December 31, 2013. 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, 2014, none were issued or outstanding.
Common Stock: As of March 31, 2014, the number of authorized shares of common stock for the Company was 15,000,000.
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, 2014 the remaining amount available for share repurchases under the program was $3.3 million.

3.Earnings per Common Share
Basic per-share amounts are computed by dividing net income (the numerator) by the weighted-average number of common shares outstanding (the denominator). Diluted per share amounts assume issuance of all common stock issuable

6
Table of Contents

upon conversion or exercise of other securities, unless the effect is to reduce the loss or increase the income per common share from continuing operations.
The following table presents the computation of earnings per common share for the respective periods:
 
 
  
Three Months Ended March 31,
 
(dollars in thousands, except per share amounts)
  
2014
 
2013
 
Basic earnings per common share computation
 
 
 
 
 
Numerator:
 
 
 
 
 
Net income
 
$
4,973

 
$
4,790

 
 
 
 
 
 
 
Denominator:
 
 
 
 
 
Weighted average shares outstanding
 
8,475,593

 
8,493,376

 
Basic earnings per common share
 
$
0.59

 
$
0.56

 
 
 
 
 
 
 
Diluted earnings per common share computation
 
 
 
 
 
Numerator:
 
 
 
 
 
Net income
 
$
4,973

 
$
4,790

 
 
 
 
 
 
 
Denominator:
 
 
 
 
 
Weighted average shares outstanding, included all dilutive potential shares
 
8,507,973

 
8,536,495

 
Diluted earnings per common share
 
$
0.58

 
$
0.56


4.Investment Securities
The amortized cost and fair value of investment securities available for sale, with gross unrealized gains and losses, are as follows:
 
 
As of March 31, 2014
 
 
Amortized
Cost
  
Gross
Unrealized
Gains
  
Gross
Unrealized
Losses
 
Estimated
Fair Value
 
(in thousands)
 
  
 
  
 
 
 
 
U.S. Government agencies and corporations
$
49,782

  
$
461

  
$
747

 
$
49,496

 
State and political subdivisions
205,439

  
6,480

  
1,485

 
210,434

 
Mortgage-backed securities
35,111

  
1,669

  
—

 
36,780

 
Collateralized mortgage obligations
164,597

 
936

 
3,018

 
162,515

 
Corporate debt securities
34,549

  
259

  
191

 
34,617

 
Total debt securities
489,478

  
9,805

  
5,441

 
493,842

 
Other equity securities
2,666

  
458

  
48

 
3,076

 
Total
$
492,144

  
$
10,263

  
$
5,489

 
$
496,918

 
 
 
As of December 31, 2013
 
 
Amortized
Cost
  
Gross
Unrealized
Gains
  
Gross
Unrealized
Losses
 
Estimated
Fair Value
 
(in thousands)
 
  
 
  
 
 
 
 
U.S. Government agencies and corporations
$
45,279

  
$
527

  
$
867

 
$
44,939

 
State and political subdivisions
207,734

  
5,625

  
2,563

 
210,796

 
Mortgage-backed securities
37,593

  
1,692

  
—

 
39,285

 
Collateralized mortgage obligations
171,714

 
1,003

 
3,494

 
169,223

 
Collateralized debt obligations
2,111

 
190

 
984

 
1,317

 
Corporate debt securities
29,802

  
284

  
142

 
29,944

 
Total debt securities
494,233

  
9,321

  
8,050

 
495,504

 
Other equity securities
2,659

  
453

  
55

 
3,057

 
Total
$
496,892

  
$
9,774

  
$
8,105

 
$
498,561

 

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Table of Contents

The amortized cost and fair value of investment securities held to maturity, with gross unrealized gains and losses, are as follows:
 
 
As of March 31, 2014
 
 
Amortized
Cost
  
Gross
Unrealized
Gains
  
Gross
Unrealized
Losses
  
Estimated
Fair Value
 
(in thousands)
 
  
 
  
 
  
 
 
State and political subdivisions
$
21,441

  
$
1

  
$
869

  
$
20,573

 
Mortgage-backed securities
27

  
4

  
—

  
31

 
Collateralized mortgage obligations
9,232

 
—

 
533

 
8,699

 
Corporate debt securities
3,263

  
—

  
262

  
3,001

 
Total
$
33,963

  
$
5

  
$
1,664

  
$
32,304

 
 
 
As of December 31, 2013
 
 
Amortized
Cost
  
Gross
Unrealized
Gains
  
Gross
Unrealized
Losses
  
Estimated
Fair Value
 
(in thousands)
 
  
 
  
 
  
 
 
State and political subdivisions
$
19,888

  
$
—

  
$
1,326

  
$
18,562

 
Mortgage-backed securities
28

  
3

  
—

  
31

 
Collateralized mortgage obligations
9,447

 
—

 
834

 
8,613

 
Corporate debt securities
3,262

  
—

  
277

  
2,985

 
Total
$
32,625

  
$
3

  
$
2,437

  
$
30,191

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, 2014 and December 31, 2013. 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, 2014 and December 31, 2013, aggregated by investment category and length of time that individual securities have been in a continuous loss position:  
 
 
 
  
As of March 31, 2014
 
 
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
4

  
$
26,962

  
$
747

  
$
—

  
$
—

  
$
26,962

  
$
747

 
State and political subdivisions
118

  
34,552

  
1,078

  
4,902

  
407

  
39,454

  
1,485

 
Collateralized mortgage obligations
18

 
90,698

 
1,851

 
21,285

 
1,167

 
111,983

  
3,018

 
Corporate debt securities
5

  
13,420

  
90

  
3,720

  
101

  
17,140

  
191

 
Other equity securities
1

  
952

  
48

  
—

  
—

  
952

  
48

 
Total
146

  
$
166,584

  
$
3,814

  
$
29,907

  
$
1,675

  
$
196,491

  
$
5,489

 
 
 
  
As of December 31, 2013
 
 
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
3

  
$
21,977

  
$
867

  
$
—

  
$
—

  
$
21,977

  
$
867

 
State and political subdivisions
171

  
54,153

  
2,331

  
1,799

  
232

  
55,952

  
2,563

 
Collateralized mortgage obligations
18

 
110,142

 
3,164

 
5,047

 
330

 
115,189

  
3,494

 
Collateralized debt obligations
3

 
—

 
—

 
934

 
984

 
934

  
984

 
Corporate debt securities
3

  
7,430

  
93

  
1,561

  
49

  
8,991

  
142

 
Other equity securities
1

  
945

  
55

  
—

  
—

  
945

  
55

 
Total
199

  
$
194,647

  
$
6,510

  
$
9,341

  
$
1,595

  
$
203,988

  
$
8,105


8
Table of Contents

 
 
 
  
As of March 31, 2014
 
 
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
31

  
$
18,070

  
$
769

  
$
1,772

  
$
100

  
$
19,842

  
$
869

 
Collateralized mortgage obligations
1

 
8,699

 
533

 
—

 
—

 
8,699

  
533

 
Corporate debt securities
2

  
3,001

  
262

  
—

  
—

  
3,001

  
262

 
Total
34

  
$
29,770

  
$
1,564

  
$
1,772

  
$
100

  
$
31,542

  
$
1,664

 
 
 
  
As of December 31, 2013
 
 
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
30

 
$
17,420

 
$
1,195

 
$
1,142

 
$
131

  
$
18,562

  
$
1,326

 
Collateralized mortgage obligations
1

 
8,613

 
834

 
—

 
—

 
8,613

  
834

 
Corporate debt securities
2

 
2,984

 
277

 
—

 
—

  
2,984

  
277

 
Total
33

  
$
29,017

  
$
2,306

  
$
1,142

  
$
131

  
$
30,159

  
$
2,437

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 March 31, 2014 and December 31, 2013, 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 March 31, 2014, 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, 2014 and December 31, 2013.
At December 31, 2013, the Company owned five collateralized debt obligations backed by pools of trust preferred securities with an original cost basis of $8.8 million. The amortized cost of these securities as of December 31, 2013 totaled $2.1 million, after OTTI charges had been recognized. During the quarter ended March 31, 2014, the Company sold these investment securities at a net gain of $0.8 million.
As of March 31, 2014, the Company also owned $2.1 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. 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 three months ended March 31, 2014 and the full year of 2013, 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.

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Table of Contents

The following table provides a roll forward of credit losses on fixed maturity securities recognized in net income:
 
 
For the Three Months Ended March 31,
 
 
2014
 
2013
 
(in thousands)
 
 
 
 
Beginning balance
$
6,639

 
$
7,379

 
Reductions to credit losses:
 
 
 
 
Securities with other than temporary impairment, due to sale
(6,639
)
 
—

 
Ending balance
$
—

 
$
7,379

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 additional OTTI may be recognized in the future and any such amounts could be material to the Company's consolidated statements of operations.
 
The contractual maturity distribution of investment debt securities at March 31, 2014, is summarized as follows:
 
 
Available For Sale
  
Held to Maturity
 
 
Amortized
Cost
  
Fair Value
  
Amortized
Cost
  
Fair Value
 
(in thousands)
 
  
 
  
 
  
 
 
Due in one year or less
$
25,143

  
$
25,414

  
$
185

  
$
185

 
Due after one year through five years
103,167

  
105,580

  
2,574

  
2,539

 
Due after five years through ten years
107,538

  
109,924

  
8,548

  
8,365

 
Due after ten years
53,922

  
53,629

  
13,397

  
12,485

 
Debt securities without a single maturity date
199,708

  
199,295

  
9,259

  
8,730

 
Total
$
489,478

  
$
493,842

  
$
33,963

  
$
32,304


Mortgage-backed securities 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 $3.1 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 both March 31, 2014 and December 31, 2013 was $9.2 million, 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, 2014 and 2013 are as follows:  
 
 
Three Months Ended March 31,
 
 
2014
 
2013
 
(in thousands)
 
 
 
 
Available for sale fixed maturity securities:
 
 
 
 
Gross realized gains
$
929

 
$
80

 
Gross realized losses
(146
)
 
—

 
Other-than-temporary impairment
—

 
—

 
 
783

 
80

 
Equity securities:
 
 
 
 
Gross realized gains
—

 
—

 
Gross realized losses
—

 
—

 
Other-than-temporary impairment
—

 
—

 
 
—

 
—

 
Total net realized gains and losses
$
783

 
$
80


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Table of Contents


5.Loans Receivable and the Allowance for Loan Losses
The composition of allowance for loan losses, 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, 2014 and December 31, 2013
 
(in thousands)
Agricultural
 
Commercial and Industrial
 
Commercial Real Estate
 
Residential Real Estate
 
Consumer
 
Unallocated
 
Total
 
March 31, 2014
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Allowance for loan losses:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Individually evaluated for impairment
$
176

 
$
770

 
$
292

 
$
254

 
$
2

 
$
—

 
$
1,494

 
Collectively evaluated for impairment
858

 
4,634

 
4,198

 
2,735

 
292

 
2,214

 
14,931

 
Total
$
1,034

 
$
5,404

 
$
4,490

 
$
2,989

 
$
294

 
$
2,214

 
$
16,425

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

 
$
58

 
$
613

 
$
89

 
$
9

 
$
1,362

 
$
2,134

 
Loans receivable
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Individually evaluated for impairment
$
3,108

 
$
3,757

 
$
4,994

 
$
1,817

 
$
29

 
$
—

 
$
13,705

 
Collectively evaluated for impairment
85,046

 
269,504

 
417,753

 
268,312

 
18,631

 
—

 
1,059,246

 
Total
$
88,154

 
$
273,261

 
$
422,747

 
$
270,129

 
$
18,660

 
$
—

 
$
1,072,951

 
Loans acquired with deteriorated credit quality (loan pool participations)
$
47

 
$
1,200

 
$
16,420

 
$
3,669

 
$
14

 
$
4,184

 
$
25,534

 
(in thousands)
Agricultural
 
Commercial and Industrial
 
Commercial Real Estate
 
Residential Real Estate
 
Consumer
 
Unallocated
 
Total
 
December 31, 2013
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Allowance for loan losses:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Individually evaluated for impairment
$
125

 
$
559

 
$
513

 
$
220

 
$
6

 
$
—

 
$
1,423

 
Collectively evaluated for impairment
1,233

 
4,421

 
4,781

 
2,965

 
269

 
1,087

 
14,756

 
Total
$
1,358

 
$
4,980

 
$
5,294

 
$
3,185

 
$
275

 
$
1,087

 
$
16,179

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

 
$
64

 
$
627

 
$
88

 
$
6

 
$
1,346

 
$
2,134

 
Loans receivable
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Individually evaluated for impairment
$
3,146

 
$
3,521

 
$
5,079

 
$
1,664

 
$
50

 
$
—

 
$
13,460

 
Collectively evaluated for impairment
94,021

 
260,130

 
429,345

 
272,462

 
18,994

 
—

 
1,074,952

 
Total
$
97,167

 
$
263,651

 
$
434,424

 
$
274,126

 
$
19,044

 
$
—

 
$
1,088,412

 
Loans acquired with deteriorated credit quality (loan pool participations)
$
49

 
$
1,302

 
$
18,168

 
$
3,823

 
$
18

 
$
4,307

 
$
27,667


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, 2014 and 2013
 
(in thousands)
Agricultural
 
Commercial and Industrial
 
Commercial Real Estate
 
Residential Real Estate
 
Consumer
 
Unallocated
 
Total
 
2014
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Beginning balance
$
1,358

 
$
4,980

 
$
5,294

 
$
3,185

 
$
275

 
$
1,087

 
$
16,179

 
Charge-offs
—

 
(170
)
 
(73
)
 
(62
)
 
(23
)
 
—

 
(328
)
 
Recoveries
5

 
113

 
—

 
3

 
3

 
—

 
124

 
Provision
(329
)
 
481

 
(731
)
 
(137
)
 
39

 
1,127

 
450

 
Ending balance
$
1,034

 
$
5,404

 
$
4,490

 
$
2,989

 
$
294

 
$
2,214

 
$
16,425

 
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


11
Table of Contents

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 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 largest businesses in the areas in which the Company operates. 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 U.S. economy does not continue to improve, this could harm or continue to harm the businesses of the Company's 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 than non-real estate loans, 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 Company's control or that of the borrower 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 loans. 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 than non-real estate loans, 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 than real estate related loans. Consumer loan collections are dependent on the borrower's continuing financial stability, and are therefore more likely to be affected by adverse personal circumstances. 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

12
Table of Contents

five years. Loan pool balances are affected by the payment and refinancing activities of the borrowers resulting in pay-offs of the underlying loans and reduction in the balances. Collections from the individual borrowers are managed by the loan pool servicer and are affected by the borrower's financial ability and willingness to pay, foreclosure and legal action, collateral value, and the economy in general.
Charge-off Policy
The Company requires a loan to be charged-off as soon as it becomes apparent that some loss will be incurred, or when its collectability is sufficiently questionable that it no longer is considered a bankable asset. The primary considerations when determining if and how much of a loan should be charged-off are as follows: (1) the potential for future cash flows; (2) the value of any collateral; and (3) the strength of any co-makers or guarantors.

When it is determined that a loan requires partial or full charge-off, a request for approval of a charge-off is submitted to the Bank's President, Executive Vice President and Chief Credit Officer, and the Senior Regional Loan officer. The Bank's board of directors formally approves all loan charge-offs. 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 Federal Deposit Insurance Corporation (the "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 due to those overall factors impacting the ALLL that are not captured in detailed loan category calculations.

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 of the three 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 potential 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.

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Table of Contents


The following tables set forth information on the Company's TDRs by class of financing receivable occurring during the stated periods: