midwestone 063014 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 June 30, 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 July 30, 2014, there were 8,399,414 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
 
 
June 30, 2014
 
December 31, 2013
(dollars in thousands, except per share amounts)
(unaudited)
 
 
ASSETS
 
 
 
Cash and due from banks
$
21,527

  
$
24,516

Interest-bearing deposits in banks
755

  
374

Cash and cash equivalents
22,282

  
24,890

Investment securities:
  
 
 
Available for sale
472,136

  
498,561

Held to maturity (fair value of $41,568 as of June 30, 2014 and $30,191 as of December 31, 2013)
42,697

  
32,625

Loans held for sale
1,947

  
357

Loans
1,085,921

  
1,088,412

Allowance for loan losses
(16,432
)
 
(16,179
)
Net loans
1,069,489

  
1,072,233

Loan pool participations, net
21,472

  
25,533

Premises and equipment, net
32,461

  
27,682

Accrued interest receivable
9,310

  
10,409

Intangible assets, net
8,532

  
8,806

Bank-owned life insurance
30,052

  
29,598

Other real estate owned
1,820

  
1,770

Deferred income taxes
3,377

  
8,194

Other assets
14,332

  
14,560

Total assets
$
1,729,907

  
$
1,755,218

LIABILITIES AND SHAREHOLDERS' EQUITY
 
 
 
Deposits:
  
 
 
Non-interest-bearing demand
$
205,388

  
$
222,359

Interest-bearing checking
578,584

  
592,673

Savings
103,679

  
94,559

Certificates of deposit under $100,000
242,096

  
256,283

Certificates of deposit $100,000 and over
217,905

  
209,068

Total deposits
1,347,652

  
1,374,942

Federal funds purchased
4,731

 
5,482

Securities sold under agreements to repurchase
57,293

  
61,183

Federal Home Loan Bank borrowings
103,900

  
106,900

Deferred compensation liability
3,434

  
3,469

Long-term debt
15,464

  
15,464

Accrued interest payable
745

  
765

Other liabilities
10,172

  
8,997

Total liabilities
1,543,391

  
1,577,202

Shareholders' equity:
  
 
 
Preferred stock, no par value; authorized 500,000 shares; no shares issued and outstanding at June 30, 2014 and December 31, 2013
$
—

 
$
—

Common stock, $1.00 par value; authorized 15,000,000 shares at June 30, 2014 and December 31, 2013; issued 8,690,398 shares at June 30, 2014 and December 31, 2013; outstanding 8,396,191 shares at June 30, 2014 and 8,481,799 shares at December 31, 2013
8,690

  
8,690

Additional paid-in capital
80,323

  
80,506

Treasury stock at cost, 294,207 shares as of June 30, 2014 and 208,599 shares at December 31, 2013
(5,950
)
 
(3,702
)
Retained earnings
98,754

  
91,473

Accumulated other comprehensive income
4,699

  
1,049

Total shareholders' equity
186,516

  
178,016

Total liabilities and shareholders' equity
$
1,729,907

  
$
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 June 30,
 
Six Months Ended June 30,
 
  
2014
 
2013
 
2014
 
2013
Interest income:
  
 
 
 
 
 
 
 
Interest and fees on loans
  
$
12,005

 
$
12,277

 
$
23,945

 
$
24,391

Interest and discount on loan pool participations
  
532

 
610

 
812

 
1,690

Interest on bank deposits
  
5

 
1

 
9

 
6

Interest on investment securities:
  
  
 
 
 
 
 
 
Taxable securities
  
2,274

 
2,546

 
4,590

 
5,176

Tax-exempt securities
  
1,360

 
1,334

 
2,741

 
2,695

Total interest income
  
16,176

 
16,768

 
32,097

 
33,958

Interest expense:
  
 
 
 
 
 
 
 
Interest on deposits:
  
 
 
 
 
 
 
 
Interest-bearing checking
  
547

 
600

 
1,092

 
1,271

Savings
  
36

 
35

 
72

 
71

Certificates of deposit under $100,000
  
634

 
1,121

 
1,331

 
2,360

Certificates of deposit $100,000 and over
  
449

 
569

 
894

 
1,202

Total interest expense on deposits
  
1,666

 
2,325

 
3,389

 
4,904

Interest on federal funds purchased
  
5

 
18

 
6

 
27

Interest on securities sold under agreements to repurchase
  
29

 
29

 
59

 
65

Interest on Federal Home Loan Bank borrowings
  
545

 
705

 
1,107

 
1,397

Interest on other borrowings
  
7

 
7

 
13

 
15

Interest on long-term debt
  
69

 
75

 
141

 
150

Total interest expense
  
2,321

 
3,159

 
4,715

 
6,558

Net interest income
  
13,855

 
13,609

 
27,382

 
27,400

Provision for loan losses
  
300

 
600

 
750

 
800

Net interest income after provision for loan losses
  
13,555

 
13,009

 
26,632

 
26,600

Noninterest income:
  
 
 
 
 
 
 
 
Trust, investment, and insurance fees
  
1,430

 
1,423

 
2,948

 
2,772

Service charges and fees on deposit accounts
  
848

 
743

 
1,476

 
1,450

Mortgage origination and loan servicing fees
  
318

 
717

 
755

 
1,761

Other service charges, commissions and fees
  
552

 
596

 
1,171

 
1,168

Bank-owned life insurance income
  
225

 
230

 
454

 
461

Gain on sale or call of available for sale securities (Includes $191 and $4 reclassified from accumulated other comprehensive income for net gains on available for sale securities for the three months ended June 30, 2014 and 2013, respectively, and $974 and $84 reclassified from accumulated other comprehensive income for net gains on available for sale securities for the six months ended June 30, 2014 and 2013, respectively)
  
191

 
4

 
974

 
84

Loss on sale of premises and equipment
  
(8
)
 
—

 
(5
)
 
(2
)
Total noninterest income
  
3,556

 
3,713

 
7,773

 
7,694

Noninterest expense:
  
 
 
 
 
 
 
 
Salaries and employee benefits
  
6,060

 
6,173

 
12,194

 
12,466

Net occupancy and equipment expense
  
1,634

 
1,538

 
3,239

 
3,226

Professional fees
  
779

 
718

 
1,354

 
1,401

Data processing expense
  
391

 
337

 
815

 
728

FDIC insurance expense
  
240

 
296

 
483

 
590

Amortization of intangible assets
 
137

 
166

 
274

 
332

Other operating expense
  
1,398

 
1,357

 
2,672

 
2,836

Total noninterest expense
  
10,639

 
10,585

 
21,031

 
21,579

Income before income tax expense
  
6,472

 
6,137

 
13,374

 
12,715

Income tax expense (Includes $74 and $2 income tax expense reclassified from accumulated other comprehensive income for the three months ended June 30, 2014 and 2013, respectively, and $380 and $33 income tax expense reclassified from accumulated other comprehensive income for the six months ended June 30, 2014 and 2013, respectively)
  
1,719

 
1,606

 
3,648

 
3,394

Net income
  
$
4,753

 
$
4,531

 
$
9,726

 
$
9,321

Share and per share information:
  
 
 
 
 
 
 
 
Ending number of shares outstanding
  
8,396,191

 
8,466,471

 
8,396,191

 
8,466,471

Average number of shares outstanding
  
8,428,307

 
8,474,925

 
8,451,819

 
8,484,100

Diluted average number of shares
  
8,452,291

 
8,517,292

 
8,479,989

 
8,526,961

Earnings per common share - basic
  
$
0.56

 
$
0.54

 
$
1.15

 
$
1.10

Earnings per common share - diluted
  
0.56

 
0.53

 
1.14

 
1.09

Dividends paid per common share
  
0.145

 
0.125

 
0.290

 
0.250

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 June 30,
 
Six Months Ended June 30,
 
  
2014
 
2013
 
2014
 
2013
Net income
 
$
4,753

 
$
4,531

 
$
9,726

 
$
9,321

 
 
 
 
 
 
 
 
 
Other comprehensive income (loss), available for sale securities:
 
 
 
 
 
 
 
 
Unrealized holding gains (losses) arising during period
 
2,965

 
(11,558
)
 
6,853

 
(12,968
)
Reclassification adjustment for gains included in net income
 
(191
)
 
(4
)
 
(974
)
 
(84
)
Income tax (expense) benefit
 
(1,052
)
 
4,317

 
(2,229
)
 
4,876

Other comprehensive income (loss) on available for sale securities
 
1,722

 
(7,245
)
 
3,650

 
(8,176
)
Other comprehensive income (loss), net of tax
 
1,722

 
(7,245
)
 
3,650

 
(8,176
)
Comprehensive income (loss)
 
$
6,475

 
$
(2,714
)
 
$
13,376

 
$
1,145

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
  
—

  
—


—


—


9,321


—


9,321

Dividends paid on common stock ($0.25 per share)
  
—

 
—

 
—

 
—

 
(2,121
)
 
—


(2,121
)
Stock options exercised (22,193 shares)
 
—

 
—

 
(39
)
 
143

 
—

 
—

 
104

Release/lapse of restriction on RSUs (19,385 shares)
  
—

 
—

 
(259
)
 
282

 
—

 
—


23

Repurchase of common stock (40,713 shares)
 
—

 
—

 
—

 
(967
)
 
—

 
—

 
(967
)
Stock compensation
  
—

 
—

 
167

 
—

 
—

 
—


167

Other comprehensive loss, net of tax
 
—

 
—

 
—

 
—

 
—

 
(8,176
)
 
(8,176
)
Balance at June 30, 2013
  
$
—

 
$
8,690

 
$
80,252

 
$
(3,858
)
 
$
84,325

 
$
2,874

 
$
172,283

Balance at December 31, 2013
  
$
—

  
$
8,690

  
$
80,506

 
$
(3,702
)
 
$
91,473

 
$
1,049

 
$
178,016

Net income
  
—

  
—

  
—

 
—

 
9,726

 
—

 
9,726

Dividends paid on common stock ($0.29 per share)
  
—

  
—

  
—

 
—

 
(2,445
)
 
—

 
(2,445
)
Stock options exercised (3,310 shares)
  
—

  
—

  
(10
)
 
60

 
—

 
—

 
50

Release/lapse of restriction on RSUs (26,641 shares)
  
—

  
—

  
(418
)
 
443

 
—

 
—

 
25

Repurchase of common stock (113,566 shares)
 
—

 
—

 
—

 
(2,751
)
 
—

 
—

 
(2,751
)
Stock compensation
  
—

  
—

  
245

 
—

 
—

 
—

 
245

Other comprehensive income, net of tax
 
—

 
—

 
—

 
—

 
—

 
3,650

 
3,650

Balance at June 30, 2014
  
$
—

  
$
8,690

  
$
80,323

 
$
(5,950
)
 
$
98,754

 
$
4,699

 
$
186,516

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)
Six Months Ended June 30,
 
2014
 
2013
Cash flows from operating activities:
 
 
 
Net income
$
9,726

 
$
9,321

Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
Provision for loan losses
750

 
800

Depreciation, amortization and accretion
2,179

 
2,709

Loss on sale of premises and equipment
5

 
2

Deferred income taxes
2,588

 
(76
)
Stock-based compensation
245

 
167

Net gain on sale or call of available for sale securities
(974
)
 
(84
)
Net (gain) loss on sale of other real estate owned
8

 
(39
)
Net gain on sale of loans held for sale
(189
)
 
(838
)
Writedown of other real estate owned
49

 
33

Origination of loans held for sale
(16,381
)
 
(52,325
)
Proceeds from sales of loans held for sale
14,980

 
53,054

Decrease in accrued interest receivable
1,099

 
754

Increase in cash surrender value of bank-owned life insurance
(454
)
 
(461
)
Decrease in other assets
228

 
3,309

Decrease in deferred compensation liability
(35
)
 
(42
)
Increase (decrease) in accrued interest payable, accounts payable, accrued expenses, and other liabilities
1,155

 
(590
)
Net cash provided by operating activities
14,979

 
15,694

Cash flows from investing activities:
 
 
 
Proceeds from sales of available for sale securities
15,870

 
12,205

Proceeds from maturities and calls of available for sale securities
36,210

 
59,139

Purchases of available for sale securities
(19,606
)
 
(37,243
)
Proceeds from maturities and calls of held to maturity securities
465

 
540

Purchase of held to maturity securities
(10,533
)
 
(1,185
)
Decrease (increase) in loans
1,675

 
(26,372
)
Decrease in loan pool participations, net
4,061

 
5,933

Purchases of premises and equipment
(5,892
)
 
(2,025
)
Proceeds from sale of other real estate owned
212

 
586

Proceeds from sale of premises and equipment
3

 
12

Proceeds from sale of assets held for sale
—

 
764

Net cash provided by investing activities
22,465

 
12,354

Cash flows from financing activities:
 
 
 
Net decrease in deposits
(27,290
)
 
(62,797
)
Increase (decrease) in federal funds purchased
(751
)
 
2,235

Decrease in securities sold under agreements to repurchase
(3,890
)
 
(11,146
)
Proceeds from Federal Home Loan Bank borrowings
19,000

 
94,000

Repayment of Federal Home Loan Bank borrowings
(22,000
)
 
(71,000
)
Stock options exercised
75

 
127

Dividends paid
(2,445
)
 
(2,121
)
Repurchase of common stock
(2,751
)
 
(967
)
Net cash used in financing activities
(40,052
)
 
(51,669
)
Net decrease in cash and cash equivalents
(2,608
)
 
(23,621
)
Cash and cash equivalents at beginning of period
24,890

 
47,191

Cash and cash equivalents at end of period
$
22,282

 
$
23,570

Supplemental disclosures of cash flow information:
 
 
 
Cash paid during the period for interest
$
4,735

 
$
6,786

Cash paid during the period for income taxes
$
464

 
$
4,038

Supplemental schedule of non-cash investing activities:
 
 
 
Transfer of loans to other real estate owned
$
319

 
$
76

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 six 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 ("GAAP"). 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 June 30, 2014, and the results of operations and cash flows for the three and six months ended June 30, 2014 and 2013. All significant intercompany accounts and transactions have been eliminated in consolidation.
The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect: (1) the reported amounts of assets and liabilities, (2) the disclosure of contingent assets and liabilities at the date of the financial statements, and (3) the reported amounts 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 six months ended June 30, 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 and interest-bearing deposits in banks.

2.Shareholders' Equity
Preferred Stock: The number of authorized shares of preferred stock for the Company is 500,000. As of June 30, 2014, none were issued or outstanding.
Common Stock: As of June 30, 2014, the number of authorized shares of common stock for the Company was 15,000,000. As of June 30, 2014, 8,396,191 shares were outstanding.
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. As of June 30, 2014 the remaining amount available for share repurchases under the program was $1.3 million.
On July 17, 2014, the board of directors of the Company approved a new share repurchase program, allowing for the repurchase of up to $5.0 million of stock through December 31, 2016. The new repurchase program replaces the Company's prior repurchase program. 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.

6
Table of Contents

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 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 June 30,
 
Six Months Ended June 30,
 
(dollars in thousands, except per share amounts)
  
2014
 
2013
 
2014
 
2013
 
Basic earnings per common share computation
 
 
 
 
 
 
 
 
 
Numerator:
 
 
 
 
 
 
 
 
 
Net income
 
$
4,753

 
$
4,531

 
$
9,726

 
$
9,321

 
 
 
 
 
 
 
 
 
 
 
Denominator:
 
 
 
 
 
 
 
 
 
Weighted average shares outstanding
 
8,428,307

 
8,474,925

 
8,451,819

 
8,484,100

 
Basic earnings per common share
 
$
0.56

 
$
0.54

 
$
1.15

 
$
1.10

 
 
 
 
 
 
 
 
 
 
 
Diluted earnings per common share computation
 
 
 
 
 
 
 
 
 
Numerator:
 
 
 
 
 
 
 
 
 
Net income
 
$
4,753

 
$
4,531

 
$
9,726

 
$
9,321

 
 
 
 
 
 
 
 
 
 
 
Denominator:
 
 
 
 
 
 
 
 
 
Weighted average shares outstanding, included all dilutive potential shares
 
8,452,291

 
8,517,292

 
8,479,989

 
8,526,961

 
Diluted earnings per common share
 
$
0.56

 
$
0.53

 
$
1.14

 
$
1.09


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 June 30, 2014
 
 
Amortized
Cost
  
Gross
Unrealized
Gains
  
Gross
Unrealized
Losses
 
Estimated
Fair Value
 
(in thousands)
 
  
 
  
 
 
 
 
U.S. Government agencies and corporations
$
49,459

  
$
409

  
$
549

 
$
49,319

 
State and political subdivisions
193,111

  
7,891

  
535

 
200,467

 
Mortgage-backed securities
39,794

  
1,888

  
—

 
41,682

 
Collateralized mortgage obligations
145,269

 
971

 
3,115

 
143,125

 
Corporate debt securities
34,282

  
291

  
131

 
34,442

 
Total debt securities
461,915

  
11,450

  
4,330

 
469,035

 
Other equity securities
2,673

  
467

  
39

 
3,101

 
Total
$
464,588

  
$
11,917

  
$
4,369

 
$
472,136

 

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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

 
The amortized cost and fair value of investment securities held to maturity, with gross unrealized gains and losses, are as follows:
 
 
As of June 30, 2014
 
 
Amortized
Cost
  
Gross
Unrealized
Gains
  
Gross
Unrealized
Losses
  
Estimated
Fair Value
 
(in thousands)
 
  
 
  
 
  
 
 
State and political subdivisions
$
30,403

  
$
61

  
$
469

  
$
29,995

 
Mortgage-backed securities
23

  
3

  
—

  
26

 
Collateralized mortgage obligations
9,007

 
—

 
487

 
8,520

 
Corporate debt securities
3,264

  
—

  
237

  
3,027

 
Total
$
42,697

  
$
64

  
$
1,193

  
$
41,568

 
 
 
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

Investment securities with a carrying value of $173.9 million and $202.8 million at June 30, 2014 and December 31, 2013, respectively, were pledged on public deposits, securities sold under agreements to repurchase and for other purposes, as required or permitted by law.
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 June 30, 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. 

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

  
$
—

  
$
—

  
$
22,259

  
$
549

  
$
22,259

  
$
549

 
State and political subdivisions
70

  
7,189

  
30

  
15,865

  
505

  
23,054

  
535

 
Collateralized mortgage obligations
16

 
42,577

 
754

 
52,778

 
2,361

 
95,355

  
3,115

 
Corporate debt securities
4

  
8,333

  
53

  
3,620

  
78

  
11,953

  
131

 
Other equity securities
1

  
961

  
39

  
—

  
—

  
961

  
39

 
Total
94

  
$
59,060

  
$
876

  
$
94,522

  
$
3,493

  
$
153,582

  
$
4,369

 
 
 
  
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

 
 
 
  
As of June 30, 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
39

  
$
3,727

  
$
48

  
$
13,313

  
$
421

  
$
17,040

  
$
469

 
Collateralized mortgage obligations
1

 
—

 
—

 
8,520

 
487

 
8,520

  
487

 
Corporate debt securities
2

  
650

  
230

  
237

  
7

  
887

  
237

 
Total
42

  
$
4,377

  
$
278

  
$
22,070

  
$
915

  
$
26,447

  
$
1,193

 
 
 
  
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 June 30, 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: the Federal Home Loan Mortgage Corporation (FHLMC), the Federal

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National Mortgage Association (FNMA), and the Government National Mortgage Association (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 June 30, 2014, approximately 61% of the municipal bonds held by the Company were Iowa based. The Company does not intend to sell these municipal obligations, and it is not more likely than not that the Company will be required to sell them before the recovery of its cost. Due to the issuers' continued satisfaction of their obligations under the securities in accordance with their contractual terms and the expectation that they will continue to do so, management's intent and ability to hold these securities for a period of time sufficient to allow for any anticipated recovery in fair value, as well as the evaluation of the fundamentals of the issuers' financial condition and other objective evidence, the Company believes that the municipal obligations identified in the tables above were temporarily depressed as of June 30, 2014 and December 31, 2013.
At December 31, 2013, the Company owned five collateralized debt obligations ("CDOs") 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 June 30, 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 six months ended June 30, 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.
The following table provides a roll forward of credit losses on fixed maturity securities recognized in net income:
 
 
For the Three Months Ended June 30,
 
For the Six Months Ended June 30,
 
 
2014
 
2013
 
2014
 
2013
 
(in thousands)
 
 
 
 
 
 
 
 
Beginning balance
$
—

 
$
7,379

 
$
6,639

 
$
7,379

 
Reductions to credit losses:
 
 
 
 
 
 
 
 
Securities with other than temporary impairment, due to sale
—

 
—

 
(6,639
)
 
—

 
Ending balance
$
—


$
7,379

 
$
—

 
$
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 June 30, 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
$
27,752

  
$
28,201

  
$
185

  
$
185

 
Due after one year through five years
94,605

  
96,848

  
2,726

  
2,716

 
Due after five years through ten years
107,401

  
111,352

  
12,280

  
12,228

 
Due after ten years
47,094

  
47,827

  
18,476

  
17,893

 
Debt securities without a single maturity date
185,063

  
184,807

  
9,030

  
8,546

 
Total
$
461,915

  
$
469,035

  
$
42,697

  
$
41,568


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

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Table of Contents

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 June 30, 2014 was $9.0 million and at 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 and six months ended June 30, 2014 and 2013 are as follows:  
 
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
 
2014
 
2013
 
2014
 
2013
 
(in thousands)
 
 
 
 
 
 
 
 
Available for sale fixed maturity securities:
 
 
 
 
 
 
 
 
Gross realized gains
$
191

 
$
64

 
$
1,120

 
$
144

 
Gross realized losses
—

 
(60
)
 
(146
)
 
(60
)
 
Other-than-temporary impairment
—

 
—

 
—

 
—

 
 
191

 
4

 
974

 
84

 
Equity securities:
 
 
 
 
 
 
 
 
Gross realized gains
—

 
—

 
—

 
—

 
Gross realized losses
—

 
—

 
—

 
—

 
Other-than-temporary impairment
—

 
—

 
—

 
—

 
 
—

 
—

 
—

 
—

 
Total net realized gains and losses
$
191

 
$
4

 
$
974

 
$
84


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 June 30, 2014 and December 31, 2013
 
(in thousands)
Agricultural
 
Commercial and Industrial
 
Commercial Real Estate
 
Residential Real Estate
 
Consumer
 
Unallocated
 
Total
 
June 30, 2014
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Allowance for loan losses:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Individually evaluated for impairment
$
134

 
$
393

 
$
259

 
$
175

 
$
1

 
$
—

 
$
962

 
Collectively evaluated for impairment
1,011

 
4,790

 
4,475

 
2,854

 
228

 
2,112

 
15,470

 
Total
$
1,145

 
$
5,183

 
$
4,734

 
$
3,029

 
$
229

 
$
2,112

 
$
16,432

 
Loans acquired with deteriorated credit quality (loan pool participations)
$
1

 
$
50

 
$
597

 
$
90

 
$
8

 
$
1,388

 
$
2,134

 
Loans receivable
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Individually evaluated for impairment
$
3,052

 
$
3,512

 
$
4,617

 
$
1,776

 
$
27

 
$
—

 
$
12,984

 
Collectively evaluated for impairment
86,451

 
279,326

 
420,347

 
267,988

 
18,825

 
—

 
1,072,937

 
Total
$
89,503

 
$
282,838

 
$
424,964

 
$
269,764

 
$
18,852

 
$
—

 
$
1,085,921

 
Loans acquired with deteriorated credit quality (loan pool participations)
$
11

 
$
1,099

 
$
15,682

 
$
3,467

 
$
13

 
$
3,334

 
$
23,606


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Table of Contents

 
(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