midwestone 33115 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, 2015
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 29, 2015, there were 8,374,598 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, 2015
 
December 31, 2014
(dollars in thousands, except per share amounts)
(unaudited)
 
 
ASSETS
 
 
 
Cash and due from banks
$
18,954

  
$
23,028

Interest-bearing deposits in banks
1,013

  
381

Federal funds sold
1,489

  
—

Cash and cash equivalents
21,456

  
23,409

Investment securities:
  
 
 
Available for sale
408,950

  
474,942

Held to maturity (fair value of $54,574 as of March 31, 2015 and $51,253 as of December 31, 2014)
54,293

  
51,524

Loans held for sale
2,281

  
801

Loans
1,176,327

  
1,132,519

Allowance for loan losses
(16,526
)
 
(16,363
)
Net loans
1,159,801

  
1,116,156

Loan pool participations, net
18,230

  
19,332

Premises and equipment, net
39,443

  
37,770

Accrued interest receivable
9,358

  
10,898

Intangible assets, net
8,151

  
8,259

Bank-owned life insurance
38,437

  
38,142

Other real estate owned
1,652

  
1,916

Deferred income taxes
2,392

  
3,078

Other assets
13,533

  
14,075

Total assets
$
1,777,977

  
$
1,800,302

LIABILITIES AND SHAREHOLDERS' EQUITY
 
 
 
Deposits:
  
 
 
Non-interest-bearing demand
$
212,711

  
$
214,461

Interest-bearing checking
628,990

  
618,540

Savings
106,380

  
102,527

Certificates of deposit under $100,000
229,543

  
235,395

Certificates of deposit $100,000 and over
230,629

  
237,619

Total deposits
1,408,253

  
1,408,542

Federal funds purchased
8,900

 
17,408

Securities sold under agreements to repurchase
55,326

  
60,821

Federal Home Loan Bank borrowings
78,000

  
93,000

Deferred compensation liability
3,402

  
3,393

Long-term debt
15,464

  
15,464

Accrued interest payable
932

  
863

Other liabilities
10,308

  
8,080

Total liabilities
1,580,585

  
1,607,571

Shareholders' equity:
  
 
 
Preferred stock, no par value; authorized 500,000 shares; no shares issued and outstanding at March 31, 2015 and December 31, 2014
$
—

 
$
—

Common stock, $1.00 par value; authorized 15,000,000 shares at March 31, 2015 and December 31, 2014; issued 8,690,398 shares at March 31, 2015 and December 31, 2014; outstanding 8,370,309 shares at March 31, 2015 and 8,355,666 shares at December 31, 2014
8,690

  
8,690

Additional paid-in capital
80,380

  
80,537

Treasury stock at cost, 320,089 shares as of March 31, 2015 and 334,732 shares at December 31, 2014
(6,651
)
 
(6,945
)
Retained earnings
108,667

  
105,127

Accumulated other comprehensive income
6,306

  
5,322

Total shareholders' equity
197,392

  
192,731

Total liabilities and shareholders' equity
$
1,777,977

  
$
1,800,302


See accompanying notes to consolidated financial statements.  

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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,
 
 
2015
 
2014
Interest income:
 
 
 
 
Interest and fees on loans
 
$
12,577

 
$
11,940

Interest and discount on loan pool participations
 
620

 
280

Interest on bank deposits
 
1

 
4

Interest on investment securities:
 
 
 
 
Taxable securities
 
1,894

 
2,316

Tax-exempt securities
 
1,390

 
1,381

Total interest income
 
16,482

 
15,921

Interest expense:
 
 
 
 
Interest on deposits:
 
 
 
 
Interest-bearing checking
 
535

 
545

Savings
 
36

 
36

Certificates of deposit under $100,000
 
626

 
697

Certificates of deposit $100,000 and over
 
526

 
445

Total interest expense on deposits
 
1,723

 
1,723

Interest on federal funds purchased
 
12

 
1

Interest on securities sold under agreements to repurchase
 
30

 
30

Interest on Federal Home Loan Bank borrowings
 
399

 
562

Interest on other borrowings
 
4

 
6

Interest on long-term debt
 
72

 
72

Total interest expense
 
2,240

 
2,394

Net interest income
 
14,242

 
13,527

Provision for loan losses
 
600

 
450

Net interest income after provision for loan losses
 
13,642

 
13,077

Noninterest income:
 
 
 
 
Trust, investment, and insurance fees
 
1,581

 
1,518

Service charges and fees on deposit accounts
 
733

 
628

Mortgage origination and loan servicing fees
 
238

 
437

Other service charges, commissions and fees
 
603

 
619

Bank-owned life insurance income
 
295

 
229

Gain on sale or call of available for sale securities (Includes $555 and $783 reclassified from accumulated other comprehensive income for net gains on available for sale securities for the three months ended March 31, 2015 and 2014, respectively)
 
555

 
783

Gain on sale of premises and equipment
 
3

 
3

Total noninterest income
 
4,008

 
4,217

Noninterest expense:
 
 
 
 
Salaries and employee benefits
 
6,869

 
6,134

Net occupancy and equipment expense
 
1,524

 
1,605

Professional fees
 
680

 
575

Data processing expense
 
432

 
424

FDIC insurance expense
 
239

 
243

Amortization of intangible assets
 
108

 
137

Other operating expense
 
1,327

 
1,274

Total noninterest expense
 
11,179

 
10,392

Income before income tax expense
 
6,471

 
6,902

Income tax expense (Includes $216 and $305 income tax expense reclassified from accumulated other comprehensive income for the three months ended March 31, 2015 and 2014, respectively)
 
1,675

 
1,929

Net income
 
$
4,796

 
$
4,973

Share and per share information:
 
 
 
 
Ending number of shares outstanding
 
8,370,309

 
8,471,761

Average number of shares outstanding
 
8,363,861

 
8,475,593

Diluted average number of shares
 
8,394,026

 
8,507,973

Earnings per common share - basic
 
$
0.57

 
$
0.59

Earnings per common share - diluted
 
0.57

 
0.58

Dividends paid per common share
 
0.150

 
0.145

See accompanying notes to consolidated financial statements.

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Table of Contents

MIDWESTONE FINANCIAL GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
 
(unaudited)
(dollars in thousands)
  
Three Months Ended March 31,
 
  
2015
 
2014
Net income
 
$
4,796

 
$
4,973

 
 
 
 
 
Other comprehensive income, available for sale securities:
 
 
 
 
Unrealized holding gains arising during period
 
2,156

 
3,888

Reclassification adjustment for gains included in net income
 
(555
)
 
(783
)
Income tax expense
 
(617
)
 
(1,177
)
Other comprehensive income on available for sale securities
 
984

 
1,928

Other comprehensive income, net of tax
 
984

 
1,928

Comprehensive income
 
$
5,780

 
$
6,901

See accompanying notes to consolidated financial statements.


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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, 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

Balance at December 31, 2014
 
$
—

 
$
8,690

 
$
80,537

 
$
(6,945
)
 
$
105,127

 
$
5,322

 
$
192,731

Net income
 
—

 
—

 
—

 
—

 
4,796

 
—

 
4,796

Dividends paid on common stock ($0.15 per share)
 
—

 
—

 
—

 
—

 
(1,256
)
 
—

 
(1,256
)
Release/lapse of restriction on RSUs (15,853 shares)
 
—

 
—

 
(283
)
 
294

 
—

 
—

 
11

Stock compensation
 
—

 
—

 
126

 
—

 
—

 
—

 
126

Other comprehensive income, net of tax
 
—

 
—

 
—

 
—

 
—

 
984

 
984

Balance at March 31, 2015
 
$
—

 
$
8,690

 
$
80,380

 
$
(6,651
)
 
$
108,667

 
$
6,306

 
$
197,392

See accompanying notes to consolidated financial statements.  

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Table of Contents

MIDWESTONE FINANCIAL GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
 
(unaudited) (dollars in thousands)
Three Months Ended March 31,
 
2015
 
2014
Cash flows from operating activities:
 
 
 
Net income
$
4,796

 
$
4,973

Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
Provision for loan losses
600

 
450

Depreciation, amortization and accretion
929

 
1,149

Loss on sale of premises and equipment
(3
)
 
(3
)
Deferred income taxes
69

 
2,852

Stock-based compensation
126

 
109

Net gain on sale or call of available for sale securities
(555
)
 
(783
)
Net gain on sale of other real estate owned
(16
)
 
(5
)
Net gain on sale of loans held for sale
(80
)
 
(76
)
Origination of loans held for sale
(13,791
)
 
(4,184
)
Proceeds from sales of loans held for sale
12,391

 
4,528

Decrease in accrued interest receivable
1,540

 
1,120

Increase in cash surrender value of bank-owned life insurance
(295
)
 
(229
)
(Increase) decrease in other assets
542

 
(1,370
)
Increase (decrease) in deferred compensation liability
9

 
(22
)
         Increase (decrease) in accrued interest payable, accounts payable, accrued expenses, and other liabilities
2,297

 
(2,772
)
Net cash provided by operating activities
8,559

 
5,737

Cash flows from investing activities:
 
 
 
Proceeds from sales of available for sale securities
48,261

 
3,250

Proceeds from maturities and calls of available for sale securities
19,581

 
13,368

Purchases of available for sale securities
(7
)
 
(11,529
)
Proceeds from maturities and calls of held to maturity securities
257

 
228

Purchase of held to maturity securities
(3,034
)
 
(1,564
)
         (Increase) decrease in loans
(44,245
)
 
15,029

Decrease in loan pool participations, net
1,102

 
2,133

Purchases of premises and equipment
(2,180
)
 
(2,775
)
Proceeds from sale of other real estate owned
280

 
7

Proceeds from sale of premises and equipment
10

 
3

Net cash provided by investing activities
20,025

 
18,150

Cash flows from financing activities:
 
 
 
Net increase (decrease) in deposits
(289
)
 
734

Decrease in federal funds purchased
(8,508
)
 
(5,482
)
Decrease in securities sold under agreements to repurchase
(5,495
)
 
(8,890
)
Proceeds from Federal Home Loan Bank borrowings
—

 
12,000

Repayment of Federal Home Loan Bank borrowings
(15,000
)
 
(10,000
)
Stock options exercised
11

 
61

Dividends paid
(1,256
)
 
(1,228
)
Repurchase of common stock
—

 
(716
)
Net cash used in financing activities
(30,537
)
 
(13,521
)
Net increase (decrease) in cash and cash equivalents
(1,953
)
 
10,366

Cash and cash equivalents at beginning of period
23,409

 
24,890

Cash and cash equivalents at end of period
$
21,456

 
$
35,256

Supplemental disclosures of cash flow information:
 
 
 
Cash paid during the period for interest
$
2,171

 
$
2,459

Cash paid during the period for income taxes
$
200

 
$
150

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

 
$
228

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 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, 2014 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 Company's financial position as of March 31, 2015, and the results of operations and cash flows for the three months ended March 31, 2015 and 2014. 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 months ended March 31, 2015 may not be indicative of results for the year ending December 31, 2015, 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, 2014. In the consolidated statements of cash flows, cash and cash equivalents include cash and due from banks and interest-bearing deposits in banks.
On April 23, 2015, the Company held a special meeting of shareholders, at which the Company’s shareholders voted to approve the merger agreement with Central Bancshares, Inc., a Minnesota corporation ("Central Bancshares"), pursuant to which Central Bancshares will merge with and into the Company. In connection with the merger, Central Bank, a Minnesota-chartered commercial bank and wholly-owned subsidiary of Central Bancshares, will become a wholly-owned subsidiary of the Company. The corporate headquarters of the combined company will be in Iowa City, Iowa.
Subject to the terms and conditions of the merger agreement, each share of common stock of Central Bancshares will automatically be converted into the right to receive a pro rata portion of (i) 2,723,083 shares of common stock of the Company and (ii) $64.0 million in cash, subject to certain adjustments as described in the merger agreement. The transaction is expected to be completed in May 2015.

2.    Shareholders' Equity
Preferred Stock: The number of authorized shares of preferred stock for the Company is 500,000. As of March 31, 2015, none were issued or outstanding.
Common Stock: As of March 31, 2015, the number of authorized shares of common stock for the Company was 15,000,000. As of March 31, 2015, 8,370,309 shares were outstanding.
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 replaced the Company's prior repurchase program, pursuant to which the Company had repurchased approximately $3.7 million of

6
Table of Contents

common stock since January 1, 2013. Pursuant to the new 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. During the first quarter 2015 the Company repurchased no common stock. Of the $5.0 million of stock authorized under the repurchase plan, $3.8 million remained available for possible future repurchases as of March 31, 2015.

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 March 31,
 
(dollars in thousands, except per share amounts)
 
2015
 
2014
 
Basic earnings per common share computation
 
 
 
 
 
Numerator:
 
 
 
 
 
Net income
 
$
4,796

 
$
4,973

 
Denominator:
 
 
 
 
 
Weighted average shares outstanding
 
8,363,861

 
8,475,593

 
Basic earnings per common share
 
$
0.57

 
$
0.59

 
 
 
 
 
 
 
Diluted earnings per common share computation
 
 
 
 
 
Numerator:
 
 
 
 
 
Net income
 
$
4,796

 
$
4,973

 
Denominator:
 
 
 
 
 
Weighted average shares outstanding, including all dilutive potential shares
 
8,394,026

 
8,507,973

 
Diluted earnings per common share
 
$
0.57

 
$
0.58


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, 2015
 
 
Amortized
Cost
  
Gross
Unrealized
Gains
  
Gross
Unrealized
Losses
 
Estimated
Fair Value
 
(in thousands)
 
  
 
  
 
 
 
 
U.S. Government agencies and corporations
$
26,766

  
$
229

  
$
28

 
$
26,967

 
State and political subdivisions
182,978

  
8,558

  
114

 
191,422

 
Mortgage-backed securities
28,971

  
1,522

  
—

 
30,493

 
Collateralized mortgage obligations
115,443

 
808

 
1,191

 
115,060

 
Corporate debt securities
43,392

  
373

  
24

 
43,741

 
Total debt securities
397,550

  
11,490

  
1,357

 
407,683

 
Other equity securities
1,243

  
46

  
22

 
1,267

 
Total
$
398,793

  
$
11,536

  
$
1,379

 
$
408,950

 

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As of December 31, 2014
 
 
Amortized
Cost
  
Gross
Unrealized
Gains
  
Gross
Unrealized
Losses
 
Estimated
Fair Value
 
(in thousands)
 
  
 
  
 
 
 
 
U.S. Government agencies and corporations
$
49,392

  
$
248

  
$
265

 
$
49,375

 
State and political subdivisions
187,276

  
8,113

  
190

 
195,199

 
Mortgage-backed securities
30,965

  
1,498

  
—

 
32,463

 
Collateralized mortgage obligations
147,412

 
813

 
2,093

 
146,132

 
Corporate debt securities
48,656

  
188

  
103

 
48,741

 
Total debt securities
463,701

  
10,860

  
2,651

 
471,910

 
Other equity securities
2,686

  
380

  
34

 
3,032

 
Total
$
466,387

  
$
11,240

  
$
2,685

 
$
474,942

 
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, 2015
 
 
Amortized
Cost
  
Gross
Unrealized
Gains
  
Gross
Unrealized
Losses
  
Estimated
Fair Value
 
(in thousands)
 
  
 
  
 
  
 
 
State and political subdivisions
$
42,252

  
$
654

  
$
147

  
$
42,759

 
Mortgage-backed securities
21

  
3

  
—

  
24

 
Collateralized mortgage obligations
8,288

 
—

 
91

 
8,197

 
Corporate debt securities
3,732

  
—

  
138

  
3,594

 
Total
$
54,293

  
$
657

  
$
376

  
$
54,574

 
 
 
As of December 31, 2014
 
 
Amortized
Cost
  
Gross
Unrealized
Gains
  
Gross
Unrealized
Losses
  
Estimated
Fair Value
 
(in thousands)
 
  
 
  
 
  
 
 
State and political subdivisions
$
39,704

  
$
370

  
$
252

  
$
39,822

 
Mortgage-backed securities
22

  
3

  
—

  
25

 
Collateralized mortgage obligations
8,531

 
—

 
233

 
8,298

 
Corporate debt securities
3,267

  
—

  
159

  
3,108

 
Total
$
51,524

  
$
373

  
$
644

  
$
51,253

Investment securities with a carrying value of $182.1 million and $200.7 million at March 31, 2015 and December 31, 2014, 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 March 31, 2015 and December 31, 2014. 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 March 31, 2015 and December 31, 2014, aggregated by investment category and length of time that individual securities have been in a continuous loss position:  
 
 
 
 
As of March 31, 2015
 
 
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
1

  
$
—

  
$
—

  
$
7,726

  
$
28

  
$
7,726

  
$
28

 
State and political subdivisions
26

 
3,209

 
31

 
2,946

 
83

 
6,155

 
114

 
Collateralized mortgage obligations
10

 
11,952

 
81

 
48,729

 
1,110

 
60,681

 
1,191

 
Corporate debt securities
3

 
5,117

 
3

 
3,308

 
21

 
8,425

 
24

 
Other equity securities
1

 
—

 
—

 
978

 
22

 
978

 
22

 
Total
41

 
$
20,278

 
$
115

 
$
63,687

 
$
1,264

 
$
83,965

 
$
1,379

 
 
 
 
As of December 31, 2014
 
 
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
4

 
$
9,946

  
$
11

  
$
15,018

  
$
254

  
$
24,964

  
$
265

 
State and political subdivisions
46

 
3,024

 
18

 
10,728

 
172

 
13,752

 
190

 
Collateralized mortgage obligations
14

 
14,971

 
123

 
68,370

 
1,970

 
83,341

 
2,093

 
Corporate debt securities
7

 
23,024

 
50

 
3,400

 
53

 
26,424

 
103

 
Other equity securities
1

 
—

 
—

 
966

 
34

 
966

 
34

 
Total
72

 
$
50,965

 
$
202

 
$
98,482

 
$
2,483

 
$
149,447

 
$
2,685

 
 
 
 
As of March 31, 2015
 
 
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
19

 
$
4,375

 
$
135

 
$
1,687

 
$
12

 
$
6,062

 
$
147

 
Collateralized mortgage obligations
1

 
8,197

 
91

 
—

 
—

 
8,197

 
91

 
Corporate debt securities
2

 
2,379

 
5

 
750

 
133

 
3,129

 
138

 
Total
22

 
$
14,951

 
$
231

 
$
2,437

 
$
145

 
$
17,388

 
$
376

 
 
 
 
As of December 31, 2014
 
 
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
29

 
$
5,322

 
$
190

 
$
9,144

 
$
62

 
$
14,466

 
$
252

 
Collateralized mortgage obligations
1

 
—

 
—

 
8,298

 
233

 
8,298

 
233

 
Corporate debt securities
2

 
2,358

 
27

 
750

 
132

 
3,108

 
159

 
Total
32

 
$
7,680

 
$
217

 
$
18,192

 
$
427

 
$
25,872

 
$
644

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, if any, and the current and anticipated market conditions. 
At March 31, 2015 and December 31, 2014, the Company's mortgage-backed securities and collateralized mortgage obligations portfolios 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 National Mortgage Association ("FNMA"), and the Government

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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 March 31, 2015, 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 their 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 conditions and other objective evidence, the Company believes that the municipal obligations identified in the tables above were temporarily depressed as of March 31, 2015 and December 31, 2014.
As of March 31, 2015, the Company also owned $0.3 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, 2015 and the full year of 2014, 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 March 31,
 
 
2015
 
2014
 
(in thousands)
 
 
 
 
Beginning balance
$
—

 
$
6,639

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

 
—

 
Securities with other than temporary impairment, due to sale
—

 
(6,639
)
 
Ending balance
$
—

 
$
—

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 conditions of the issuers deteriorate. 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, 2015, 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
$
25,853

 
$
26,079

 
$
190

 
$
190

 
Due after one year through five years
91,538

 
93,854

 
3,030

 
3,026

 
Due after five years through ten years
102,394

 
107,758

 
20,111

 
20,410

 
Due after ten years
33,351

 
34,439

 
22,653

 
22,727

 
Debt securities without a single maturity date
144,414

 
145,553

 
8,309

 
8,221

 
Total
$
397,550

 
$
407,683

 
$
54,293

 
$
54,574


Mortgage-backed securities and collateralized mortgage obligations are collateralized by mortgage loans and guaranteed by U.S. government agencies. Experience has indicated that principal payments will be collected sooner than scheduled because of prepayments. Therefore, these securities are not scheduled in the maturity categories indicated above. Equity securities available for sale with an amortized cost of $1.2 million and a fair value of $1.3 million are also excluded from this table.
Other investment securities include investments in Federal Home Loan Bank (“FHLB”) stock. The carrying value of the FHLB stock at March 31, 2015 was $8.0 million and at December 31, 2014 was $8.6 million, which is included in the Other Assets line of the consolidated balance sheets. This security is not readily marketable and ownership of FHLB

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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, 2015 and 2014 are as follows:  
 
 
Three Months Ended March 31,
 
 
2015
 
2014
 
(in thousands)
 
 
 
 
Available for sale fixed maturity securities:
 
 
 
 
Gross realized gains
$
441

 
$
929

 
Gross realized losses
(74
)
 
(146
)
 
Other-than-temporary impairment
—

 
—

 
 
367

 
783

 
Equity securities:
 
 
 
 
Gross realized gains
188

 
—

 
Gross realized losses
—

 
—

 
Other-than-temporary impairment
—

 
—

 
 
188

 
—

 
Total net realized gains and losses
$
555

 
$
783


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, 2015 and December 31, 2014
 
(in thousands)
Agricultural
 
Commercial and Industrial
 
Commercial Real Estate
 
Residential Real Estate
 
Consumer
 
Unallocated
 
Total
 
March 31, 2015
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Allowance for loan losses:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Individually evaluated for impairment
$
78

 
$
261

 
$
185

 
$
323

 
$
1

 
$
—

 
$
848

 
Collectively evaluated for impairment
1,534

 
5,257

 
5,571

 
2,760

 
284

 
272

 
15,678

 
Total
$
1,612

 
$
5,518

 
$
5,756

 
$
3,083

 
$
285

 
$
272

 
$
16,526

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

 
$
62

 
$
637

 
$
77

 
$
2

 
$
1,356

 
$
2,134

 
Loans receivable
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Individually evaluated for impairment
$
2,901

 
$
2,850

 
$
3,941

 
$
2,692

 
$
31

 
$
—

 
$
12,415

 
Collectively evaluated for impairment
108,058

 
319,271

 
439,508

 
272,374

 
24,701

 
—

 
1,163,912

 
Total
$
110,959

 
$
322,121

 
$
443,449

 
$
275,066

 
$
24,732

 
$
—

 
$
1,176,327

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

 
$
806

 
$
13,397

 
$
3,131

 
$
4

 
$
3,023

 
$
20,364


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(in thousands)
Agricultural
 
Commercial and Industrial
 
Commercial Real Estate
 
Residential Real Estate
 
Consumer
 
Unallocated
 
Total
 
December 31, 2014
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Allowance for loan losses:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Individually evaluated for impairment
$
88

 
$
206

 
$
226

 
$
623

 
$
2

 
$
—

 
$
1,145

 
Collectively evaluated for impairment
1,418

 
5,574

 
4,173

 
2,544

 
321

 
1,188

 
15,218

 
Total
$
1,506

 
$
5,780

 
$
4,399

 
$
3,167

 
$
323

 
$
1,188

 
$
16,363

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

 
$
70

 
$
669

 
$
82

 
$
9

 
$
1,304

 
$
2,134

 
Loans receivable
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Individually evaluated for impairment
$
3,027

 
$
3,168

 
$
3,916

 
$
3,341

 
$
34

 
$
—

 
$
13,486

 
Collectively evaluated for impairment
101,782

 
301,732

 
422,605

 
269,270

 
23,644

 
—

 
1,119,033

 
Total
$
104,809

 
$
304,900

 
$
426,521

 
$
272,611

 
$
23,678

 
$
—

 
$
1,132,519

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

 
$
935

 
$
14,246

 
$
3,340

 
$
12

 
$
2,929

 
$
21,466

Loans with unpaid principal in the amount of $401.7 million and $404.4 million at March 31, 2015 and December 31, 2014, respectively, were pledged to the FHLB as collateral for borrowings.

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, 2015 and 2014
 
(in thousands)
Agricultural
 
Commercial and Industrial
 
Commercial Real Estate
 
Residential Real Estate
 
Consumer
 
Unallocated
 
Total
 
2015
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Beginning balance
$
1,506

 
$
5,780

 
$
4,399

 
$
3,167

 
$
323

 
$
1,188

 
$
16,363

 
Charge-offs
—

 
(247
)
 
—

 
(510
)
 
(33
)
 
—

 
(790
)
 
Recoveries
—

 
339

 
—

 
4

 
10

 
—

 
353

 
Provision
106

 
(354
)
 
1,357

 
422

 
(15
)
 
(916
)
 
600

 
Ending balance
$
1,612

 
$
5,518

 
$
5,756

 
$
3,083

 
$
285

 
$
272

 
$
16,526

 
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

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,

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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 other 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 other 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 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 a 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

13
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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. 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.

The following table sets forth information on the Company's TDRs(1) by class of financing receivable occurring during the stated periods:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Three Months Ended March 31,
 
 
2015
 
2014
 
 
Number of Contracts
 
Pre-Modification Outstanding Recorded Investment
 
Post-Modification Outstanding Recorded Investment
 
Number of Contracts
 
Pre-Modification Outstanding Recorded Investment
 
Post-Modification Outstanding Recorded Investment
 
(dollars in thousands)
 
 
 
 
 
 
 
 
 
 
 
 
Total
—