FORM 10-Q
| FORM 10-Q | ||
| x | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
| o | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
| Commission file number 000-24630 |
MIDWESTONE FINANCIAL GROUP, INC.
Registrant’s telephone number: 319-356-5800
| Iowa | 42-1206172 | |
| (State of Incorporation) | (I.R.S. Employer Identification No.) |
| Large accelerated filer | o | Accelerated filer | x | |||
| Non-accelerated filer | o | Smaller reporting company | ||||
MIDWESTONE FINANCIAL GROUP, INC.
Form 10-Q Quarterly Report
Table of Contents
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| PART I | ||||
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| Item 4. | ||||
| PART II | ||||
| Item 1. | ||||
| Item 1A. | ||||
| Item 2. | ||||
| Item 3. | ||||
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| Item 6. | ||||
Cash and due from banks Interest-bearing deposits in banks Federal funds sold Cash and cash equivalents Investment securities: Available for sale Held to maturity (fair value of $6,299 as of March 31, 2010 and $8,118 as of December 31, 2009) Loans held for sale Loans Allowance for loan losses Net loans Loan pool participations, net Premises and equipment, net Accrued interest receivable Other intangible assets, net Bank-owned life insurance Other real estate owned Deferred income taxes Other assets Total assets Deposits: Noninterest bearing demand Interest-bearing checking Savings Certificates of deposit under $100,000 Certificates of deposit $100,000 and over Total deposits Federal funds purchased Securities sold under agreements to repurchase Federal Home Loan Bank borrowings Deferred compensation liability Long-term debt Accrued interest payable Other liabilities Total liabilities Shareholders’ equity: Preferred stock, no par value, with a liquidation preference of $1,000 per share; authorized 500,000 shares; issued 16,000 shares as of March 31, 2010 and December 31, 2009 Common stock, $1 par value; authorized 15,000,000 shares at March 31, 2010 and December 31, 2009; issued 8,690,398 shares at March 31, 2010 and December 31, 2009; outstanding 8,609,804 shares at March 31, 2010 and 8,605,333 shares at December 31, 2009 Additional paid-in capital Treasury stock at cost, 80,594 shares as of March 31, 2010 and 85,065 shares at December 31, 2009 Retained earnings Accumulated other comprehensive income (loss) Total shareholders’ equity Total liabilities and shareholders’ equity (unaudited) (dollars in thousands, except per share amounts) Interest income: Interest and fees on loans Interest and discount on loan pool participations Interest on bank deposits Interest on federal funds sold Interest on investment securities: Taxable securities Tax-exempt securities Total interest income Interest expense: Interest on deposits: Interest-bearing checking Savings Certificates of deposit under $100,000 Certificates of deposit $100,000 and over Total interest expense on deposits Interest on federal funds purchased Interest on securities sold under agreements to repurchase Interest on Federal Home Loan Bank borrowings Interest on notes payable Interest on long-term debt Total interest expense Net interest income Provision for loan losses Net interest income after provision for loan losses Noninterest income: Trust and investment fees Service charges and fees on deposit accounts Mortgage origination and loan servicing fees Other service charges, commissions and fees Bank-owned life insurance income Investment securities losses, net: Impairment losses on investment securities Less noncredit-related losses Net impairment losses Gain on sale of available for sale securities Loss on sale of premises and equipment Total noninterest income Noninterest expense: Salaries and employee benefits Net occupancy and equipment expense Professional fees Data processing expense FDIC Insurance expense Other operating expense Total noninterest expense Income before income tax expense Income tax expense Net income Less: Preferred stock dividends and discount accretion Net income available to common shareholders Share and Per share information: Ending number of shares outstanding Average number of shares outstanding Diluted average number of shares Earnings per common share - basic Earnings per common share - diluted Dividends paid per common share (unaudited) (dollars in thousands, except per share amounts) Balance at December 31, 2008 Comprehensive income: Net income Change in net unrealized gains arising during the period on securities available for sale, net of tax Total comprehensive income Dividends paid on common stock ($0.15 per share) Issuance of preferred shares (16,000 shares) Common warrants issued Preferred stock discount accretion Stock compensation Balance at March 31, 2009 Balance at December 31, 2009 Comprehensive income: Net income Change in net unrealized gains arising during the period on securities available for sale, net of tax Total comprehensive income Dividends paid on common stock ($0.05 per share) Dividends paid on preferred stock Stock options exercised (1,945 shares) Release/lapse of restriction on 2,546 RSUs Preferred stock discount accretion Stock compensation Balance at March 31, 2010 (unaudited) (dollars in thousands) Cash flows from operating activities: Net income Adjustments to reconcile net income to net cash provided by operating activities: Provision for loan losses Depreciation, amortization and accretion Loss on sale of premises and equipment Deferred income taxes Stock-based compensation Net gains on sale of available for sale securities Gain on sale of other real estate owned Writedown of other real estate owned Other than temporary impairment of investment securities Decrease in loans held for sale Net change in: Decrease in accrued interest receivable (Increase) decrease in other assets (Decrease) increase in deferred compensation liability Decrease in accounts payable, accrued expenses, and other liabilities Net cash provided by operating activities Cash flows from investing activities: Available for sale securities: Sales Maturities Purchases Held to maturity securities: Maturities Purchases Loans made to customers, net of collections Loan pool participations, net Purchases of premises and equipment Proceeds from sale of other real estate owned Proceeds from sale of premises and equipment Activity in bank-owned life insurance: Purchases Increase in cash value Net cash provided (used) in investing activities (unaudited) (dollars in thousands) Cash flows from financing activities: Net increase in deposits Net decrease in federal funds purchased Net (decrease) increase in securities sold under agreements to repurchase Proceeds from Federal Home Loan Bank borrowings Repayment of Federal Home Loan Bank borrowings Stock options exercised Payments on long-term debt Dividends paid Issuance of preferred stock Net cash provided by financing activities Net increase in cash and cash equivalents Cash and cash equivalents at beginning of period Cash and cash equivalents at end of period Supplemental disclosures of cash flow information: Cash paid during the period for: Interest Income taxes Supplemental Schedule of non-cash Investing Activities: Transfer of loans to other real estate owned Federal income tax expense for the three months and six months ended Preferred Stock: On January 23, 2009, the shareholders of the Company approved a proposal to amend the Number of warrants granted Exercise price Grant date fair market value Estimated forfeiture rate Risk-free interest rate Expected life, in years Expected volatility Expected dividend yield Estimated fair value per warrant Weighted average number of shares outstanding during the period Weighted average number of shares outstanding during the period including all dilutive potential shares Net income Preferred stock dividend accrued and discount accretion Net income available to common stockholders Earnings per share - basic Earnings per share - diluted U.S. Government agencies and corporations State and political subdivisions Mortgage-backed securities and collateralized mortgage obligations Corporate debt securities Common stocks Total U.S. Government agencies and corporations State and political subdivisions Mortgage-backed securities and collateralized mortgage obligations Corporate debt securities Common stocks Total Mortgage-backed securities State and political subdivisions Corporate debt securities Total peri od. U.S. Government agencies and corporations State and political subdivisions Mortgage-backed securities and collateralized mortgage obligations Corporate debt securities Common stocks Total U.S. Government agencies and corporations State and political subdivisions Mortgage-backed securities and collateralized mortgage obligations Corporate debt securities Common stocks Total decreased accumulated other comprehensive income at the beginning of the quarter ended tax, 2009 Beginning balance Additional credit losses: Securities with no previous other than temporary impairment Securities with previous other than temporary impairments Ending balance inco me: Due in one year or less Due after one year through five years Due after five years through ten years Due after ten years Mortgage-backed and collateralized mortgage obligations Total Available for sale fixed maturity securities: Gross realized gains Gross realized losses Equity securities: Gross realized gains Gross realized losses about the assumptions market participants would use in pricing the asset or liability developed based on the best information available in the circumstances. In that regard, FASB ASC Topic 820 establishes a fair value hierarchy for valuation inputs that gives the highest priority to quoted prices in active markets for identical assets or liabilities and the lowest priority to unobservable inputs. The fair value hierarchy is as follows: Assets: Available for sale debt securities: U.S. Government agencies and corporations State and policitical subdivisions Residential mortgage-backed securities Commercial mortgage-backed securities Corporate debt securities Collateralized debt obligations Total available for sale debt securities Available for sale equity securities: Financial services industry Total available for sale equity securities: Total securities available for sale Assets: Available for sale debt securities: U.S. Government agencies and corporations State and policitical subdivisions Residential mortgage-backed securities Corporate debt securities Collateralized debt obligations Total available for sale debt securities Available for sale equity securities: Financial services industry Total available for sale equity securities: Total securities available for sale Level 3 fair value at December 31, 2009 Transfers into Level 3 Transfers out of Level 3 Total gains (losses): Included in earnings Included in other comprehensive income Purchases, issuances, sales, and settlements: Purchases Issuances Sales Settlements Level 3 fair value at March 31, 2010 of collateral was determined based on appraisals. In some cases, adjustments were made to the Assets: Collateral dependent impaired loans Loans held for sale Federal Home Loan Bank stock Other real estate owned Assets: Collateral dependent impaired loans Loans held for sale Federal Home Loan Bank stock Other real estate owned Financial assets: Cash and cash equivalents Investment securities Loans held for sale Loans, net Loan pool participations Other real estate owned Accrued interest receivable Federal Home Loan Bank stock Financial liabilities: Deposits Federal funds purchased and securities sold under agreements to repurchase Federal Home Loan Bank borrowings Long-term debt Accrued interest payable Amount of loans outstanding at end of period (net of unearned interest) (1) Average amount of loans outstanding for the period (net of unearned interest) Allowance for loan losses at beginning of period Charge-offs: Agricultural Commercial and financial Real estate: Construction, one- to four- family residential Construction, land development and commercial Mortgage, farmland Mortgage, one- to four- family first liens Mortgage, one- to four- family junior liens Mortgage, multifamily Mortgage, commercial Loans to individuals Obligations of state and political subdivisions Total charge-offs Recoveries: Agricultural Commercial and financial Real estate: Construction, one- to four- family residential Construction, land development and commercial Mortgage, farmland Mortgage, one- to four- family first liens Mortgage, one- to four- family junior liens Mortgage, multifamily Mortgage, commercial Loans to individuals Obligations of state and political subdivisions Total recoveries Net loans charged off Provision for loan losses Allowance for loan losses at end of period Net loans charged off (recovered) to average loans Allowance for loan losses to total loans at end of period Nonperforming loans: Agricultural Commercial and financial Real estate: Construction, one- to four- family residential Construction, land development and commercial Mortgage, farmland Mortgage, one- to four- family first liens Mortgage, one- to four- family junior liens Mortgage, multifamily Mortgage, commercial Loans to individuals Obligations of state and political subdivisions Total impaired loans 90 days or more past due and still accruing: Agricultural Commercial and financial Real estate: Construction, one- to four- family residential Construction, land development and commercial Mortgage, farmland Mortgage, one- to four- family first liens Mortgage, one- to four- family junior liens Mortgage, multifamily Mortgage, commercial Loans to individuals Obligations of state and political subdivisions Total 90 days or more past due and still accruing Total nonperforming loans Other real estate owned and repossessed assets Total nonperforming loans and nonperforming other assets Ratios: Nonperforming loans to loans, before allowance for loan losses Nonperforming loans and nonperforming other assets to loans, before allowance for loan losses In June 2009, the FASB issued an accounting standard which amended current GAAP related to the accounting for transfers and servicing of financial assets and extinguishments of liabilities, including the removal of the concept of a qualifying special-purpose entity from GAAP. This new accounting standard also clarified that a transferor must evaluate whether it has maintained effective control of a financial asset by considering its continuing direct or indirect involvement with the transferred financial asset. This accounting standard was effective for financial asset transfers occurring after Management evaluated subsequent events through the date the consolidated financial statements Net Income Average Assets Average Shareholders’ Equity Return on Average Assets Return on Average Shareholders’ Equity Return on Average Tangible Common Equity Total Equity to Assets (end of period) Tangible Common Equity to Tangible Assets (end of period) Tangible Common Equity: Average total shareholders’ equity Less: Average preferred stock Average goodwill and intangibles Average tangible common equity Net income available to common shareholders Return on average tangible common equity Net interest margin is tax-equivalent net interest income as a percentage of average earning assets. decreased 2009, due to the continued repricing of new time certificates and FHLB advances at lower interest rates. Average earning assets: Loans (tax equivalent) (1)(2)(3) Loan pool participations (4) Investment securities: Taxable investments Tax exempt investments (2) Total investment securities Federal funds sold and interest-bearing balances Total earning assets Cash and due from banks Premises and equipment Allowance for loan losses Other assets Total assets Average interest-bearing liabilities: Savings and interest-bearing demand deposits Time Certificates of deposit Total deposits Federal funds purchased and repurchase agreements Federal Home Loan Bank borrowings Long-term debt and other Total interest-bearing liabilities Net interest spread Demand deposits Other liabilities Shareholders’ equity Total liabilities and shareholders’ equity Interest income/earning assets (2) Interest expense/earning assets Net interest margin (2)(5) Non-GAAP to GAAP Reconciliation: Tax Equivalent Adjustment: Loans Securities Total tax equivalent adjustment Net Interest Income Increase (decrease) in interest income Loans (tax equivalent) Loan pool participations Investment securities: Taxable investments Tax exempt investments Total investment securities Federal funds sold and interest-bearing balances Change in interest income Increase (decrease) in interest expense Savings and interest-bearing demand deposits Time Certificates of deposit Total deposits Federal funds purchased and repurchase agreements Federal Home Loan Bank borrowings Other long-term debt Change in interest expense Increase (decrease) in net interest income Percentage decrease in net interest income over prior period As the table below illustrates, the increase in net interest income was predominantly rate r elated. second quarter of 2010. Trust and investment fees Service charges and fees on deposit accounts Mortgage origination and loan servicing fees Other service charges, commissions and fees Bank owned life insurance income Impairment losses on investment securities, net Gain on sale of available for sale securities Loss on sale of premises and equipment Total noninterest income a net loss of Salaries and employee benefits Net occupancy and equipment expense Professional fees Data processing expense FDIC insurance expense Other operating expense Total noninterest expense Fed funds purchased increased See Note 6 “Investments” for additional information related to investment securities. Agricultural Commercial and financial Real estate: Construction, one- to four- family residential Construction, land development and commercial Mortgage, farmland Mortgage, one- to four- family first liens Mortgage, one- to four- family junior liens Mortgage, multifamily Mortgage, commercial Loans to individuals Obligations of state and political subdivisions Total loans approximately March 31, 2010 Other intangible assets: Insurance agency intangible Core deposit premium Trade name intangible Customer list intangible Total 39. Tangible Common Equity: Total shareholders’ equity Less: Preferred stock Goodwill and intangibles Tangible common equity Tangible Assets: Total assets Less: Goodwill and intangibles Tangible assets Tangible common equity to tangible assets Tier 1 capital Total shareholders’ equity Plus: Long term debt (qualifying restricted core capital) Less: Net unrealized gains on securities available for sale Disallowed goodwill and intangibles Tier 1 capital Risk-weighted assets Tier 1 capital to risk-weighted assets March 31, 2010: Total capital to risk-weighted assets: Consolidated MidWestOne Bank Tier 1 capital to risk-weighted assets: Consolidated MidWestOne Bank Tier 1 capital to average assets: Consolidated MidWestOne Bank December 31, 2009: Total capital to risk-weighted assets: Consolidated MidWestOne Bank Tier 1 capital to risk-weighted assets: Consolidated MidWestOne Bank Tier 1 capital to average assets: Consolidated MidWestOne Bank Liquidity management involves meeting the cash flow requirements of depositors and borrowers. We conduct liquidity management on both a daily and long-term basis; and adjust our investments in liquid assets based on expected loan demand, projected loan maturities and payments, estimated cash flows from the loan pool participations, expected deposit flows, yields available on interest-bearing deposits, and the objectives of its asset/liability management program. We had liquid assets (cash and cash percent underlying collateral, economic conditions, historical loss experience, and other factors that warrant recognition in providing for an adequate allowance for loan losses. In the event that our evaluation of the level of the allowance for loan losses is inadequate, we would need to increase our provision for loan losses. March 31, 2010 Dollar change Percent change December 31, 2009 Dollar change Percent change common stock. Description Incorporated by Reference to:Financial Statements.MIDWESTONE FINANCIAL GROUP, INC. AND SUBSIDIARIES March 31,
2010 December 31,
2009 (dollars in thousands) (unaudited) ASSETS $ 18,185 $ 25,452 18,587 2,136 5,226 — 41,998 27,588 375,174 362,903 6,186 8,009 759 1,208 954,689 966,998 (14,553 ) (13,957 ) 940,136 953,041 81,518 83,052 28,656 28,969 10,515 11,534 11,916 12,172 18,285 18,118 2,547 3,635 4,861 5,163 19,510 19,391 $ 1,542,061 $ 1,534,783 LIABILITIES AND SHAREHOLDERS’ EQUITY $ 133,171 $ 133,990 423,666 401,264 62,528 62,989 390,328 394,369 183,592 187,256 1,193,285 1,179,868 — 1,875 39,565 43,098 127,700 130,200 3,810 3,832 15,576 15,588 2,071 2,248 5,896 5,866 1,387,903 1,382,575 $ 15,716 $ 15,699 8,690 8,690 81,183 81,179 (1,121 ) (1,183 ) 49,436 48,079 254 (256 ) 154,158 152,208 $ 1,542,061 $ 1,534,783 June 30,
2010 December 31, 2009 (dollars in thousands) (unaudited) ASSETS Cash and due from banks $ 19,984 $ 25,452 Interest-bearing deposits in banks 6,187 2,136 Federal funds sold — — Cash and cash equivalents 26,171 27,588 Investment securities: Available for sale 417,468 362,903 Held to maturity (fair value of $5,434 as of June 30, 2010 and $8,118 as of December 31, 2009) 5,350 &n bsp; 8,009 Loans held for sale 1,217 1,208 Loans 956,187 966,998 Allowance for loan losses (14,823 ) (13,957 ) Net loans 941,364 953,041 Loan pool participations, net 76,889 83,052 Premises and equipment, net 27,849 28,969 Accrued interest receivable 9,900 11,534 Other intangible assets, net 11,661 12,172 Bank-owned life insurance 18,402 18,118 Other real estate owned 2,634 3,635 Deferred income taxes 4,681 5,163 Other assets 19,962 19,391 Total assets $ 1,563,548 $ 1,534,783 LIABILITIES AND SHAREHOLDERS' EQUITY Deposits: Non-interest bearing demand $ 139,667 $ 133,990 Interest-bearing checking 422,480 401,264 Savings 67,258 62,989 Certificates of deposit under $100,000 391,567 394,369 Certificates of deposit $100,000 and over 174,615 187,256 Total deposits 1,195,587 1,179,868 Federal funds purchased 9,842 1,875 Securities sold under agreements to repurchase 38,553 43,098 Federal Home Loan Bank borrowings 132,200 130,200 Deferred compensation liability 3,786 ; 3,832 Long-term debt 15,564 15,588 Accrued interest payable 1,847 2,248 Other liabilities 8,782 5,866 Total liabilities 1,406,161 1,382,575 Shareholders' equity: Preferred stock, no par value, with a liquidation preference of $1,000 per share; authorized 500,000 shares; issued 16,000 shares as of June 30, 2010 and December 31, 2009 $ 15,733 $ 15,699 Common stock, $1 par value; authorized 15,000,000 shares at June 30, 2010 and December 31, 2009; issued 8,690,398 shares at June 30, 2010 and December 31, 2009; outstanding 8,612,582 shares at June 30, 2010 and 8,605,333 shares at December 31, 2009 8,690 8,690 Additional paid-in capital 81,192 81,179 Treasury stock at cost, 77,816 shares as of June 30, 2010 and 85,065 shares at December 31, 2009 (1,082 ) (1,183 ) Retained earnings 51,393 48,079 Accumulated other comprehensive income (loss) 1,461 (256 ) Total shareholders' equity 157,387 152,208 Total liabilities and shareholders' equity $ 1,563,548 $ 1,534,783 Three Months Ended
March 31, 2010 2009 $ 13,704 $ 14,911 899 1,015 10 — — 9 2,225 1,975 990 970 17,828 18,880 1,070 1,137 36 62 2,543 3,179 967 1,309 4,616 5,687 1 10 76 124 1,207 916 13 3 148 186 6,061 6,926 11,767 11,954 1,500 2,350 10,267 9,604 1,234 1,107 864 911 500 771 584 525 167 224 (189 ) — — — (189 ) — 237 — (77 ) — 3,320 3,538 5,790 5,753 1,776 1,707 749 1,082 457 516 692 898 1,584 1,967 11,048 11,923 2,539 1,219 535 43 $ 2,004 $ 1,176 $ 217 $ 131 $ 1,787 $ 1,045 8,609,804 8,603,055 8,607,853 8,603,055 8,611,511 8,603,548 $ 0.21 $ 0.12 0.21 0.12 0.05 0.15 2010 2009 2010 2009 Interest income: Interest and fe es on loans $ 13,761 $ 14,785 $ 27,465 $ 29,696 Interest and discount on loan pool participations 909 664 1,808 1,679 Interest on bank deposits 17 1 27 1 Interest on federal funds sold 4 29 4 38 Interest on investment securities: Taxable securities 2,445 2,147 4,670 4,122 Tax-exempt securities 986 1,000 1,976 1,970 Total interest income 18,122 18,626 35,950 37,506 Interest expense: Interest on deposits: Interest-bearing checking 1,133 1,235 2,203 2,372 Savings 43 63 79 125 Certificates of deposit under $100,000 2,455 3,167 4,998 6,346 Certificates of deposit $100,000 and over 918 1,330 1,885 2,639 Total interest expense on deposits 4,549 5,795 9,165 11,482 Interest on federal funds purchased 1 — 2 10 Interest on securities sold under agreements to repurchase 70 127 146 251 Interest on Federal Home Loan Bank borrowings 1,183 1,666 2,390 2,582 Interest on notes payable 11 33 24 36 Interest on long-term debt 152 161 300 347 Total interest expense 5,966 7,782 12,027 14,708 Net interest income 12,156 10,844 23,923 22,798 Provision for loan losses 1,500 1,500 3,000 3,850 Net interest income after provision for loan losses 10,656 9,344 20,923 18,948 Noninterest income: Trust and investment fees 1,214 964 2,448 2,071 Service charges and fees on deposit accounts 1,034 990 1,898 1,901 Mortgage origination and loan servicing fees 525 860 1,025 1,631 Other service charges, commissions and fees 576 510 1,160 1,035 Bank-owned life insurance income 147 198 314 422 Investment securities losses, net: Impairment losses on investment securities — (614 ) (189 ) (614 ) Less noncredit-related losses — — — — Net impairment losses — (614 ) (189 ) (614 ) Gain on sale of available for sale securities 233 1 470 1 Gain (loss) on sale of premises and equipment (204 ) 5 (281 ) 5 Total noninterest income 3,525 2,914 6,845 6,452 Noninterest expense: Salaries and employee benefits 5,691 5,847 11,481 11,600 Net occupancy and equipment expense 1,630 1,647 3,406 3,354 Professional fees 659 842 1,408 1,924 Data processing expense 414 491 871 1,007 FDIC Insurance expense 705 1,055 1,397 1,953 Other operating expense &n bsp; 1,563 1,443 3,147 3,410 Total noninterest expense 10,662 11,325 21,710 23,248 Income before income tax expense 3,519 933 6,058 2,152 Income tax expense 914 150 1,449 193 Net income $ 2,605 $ 783 $ 4,609 $ 1,959 Less: Preferred stock dividends and discount accretion $ 217 $ 216 $ 434 $ 347 Net income available to common shareholders $ 2,388 $ 567 $ 4,175 $ 1,612 Share and Per share information: Ending number of shares outstanding 8,612,582 8,605,202 8,612,582 8,605,202 Average number of shares outstanding 8,612,582 8,605,202 8,610,231 8,604,134 Diluted average number of shares 8,643,233 8,621,752 8,628,756 8,620,684 Earnings per common share - basic $ 0.27 $ 0.07 $ 0.48 $ 0.19 Earnings per common share - diluted 0.27 0.07 0.48 0.19 Dividends paid per common share 0.05 0.05 0.10 0.20 SHAREHOLDERS’SHAREHOLDERS' EQUITY Preferred
Stock Common
Stock Additional
Paid-in
Captial Treasury
Stock Retained
Earnings Accumulated
Other
Comprehensive
Income (loss) Total $ — $ 8,690 $ 80,757 $ (1,215 ) $ 43,683 $ (1,573 ) $ 130,342 — — — — 1,176 — 1,176 — — — — — 668 668 — — — — 1,176 668 1,844 — — — — (1,312 ) — (1,312 ) 15,642 — — — — — 15,642 — — 358 — — — 358 9 — — — — — 9 — — 25 — — — 25 $ 15,651 $ 8,690 $ 81,140 $ (1,215 ) $ 43,547 $ (905 ) $ 146,908 $ 15,699 $ 8,690 $ 81,179 $ (1,183 ) $ 48,079 $ (256 ) $ 152,208 — — — — 2,004 — 2,004 — — — — — 510 510 — — — — 2,004 510 2,514 — — — — (430 ) — (430 ) — — — — (200 ) — (200 ) — — (11 ) 27 — — 16 — — (35 ) 35 — — — 17 — — — (17 ) — — — — 50 — — — 50 $ 15,716 $ 8,690 $ 81,183 $ (1,121 ) $ 49,436 $ 254 $ 154,158 Total Balance at December 31, 2008 $ — $ 8,690 $ 80,757 $ (1,215 ) $ 43,683 $ (1,573 ) $ 130,342 Cumulative effect of FAS ASC 320, net of tax — — — — 3,266 (3,266 ) — Comprehensive income: Net income — — — — 1,959 — 1,959 Change in net unrealized gains arising during the period on securities available for sale, net of tax — — — — — 1,170 1,170 Tot al comprehensive income — — — — 5,225 (2,096 ) 3,129 Dividends paid on common stock ($0.20 per share) — — — — (1,742 ) — (1,742 ) Dividends paid on preferred stock — &mda sh; — — (220 ) — (220 ) Release/lapse of restriction of 2,147 RSUs — — (30 ) 30 — — — Issuance of preferred shares (16,000 shares) 15,642 — — — — — 15,642 Common warrants issued — — 358 — — — 358 Preferred stock discount accretion 25 — — — (25 ) — — Stock compensation — — 39 — — — 39 Balance at June 30, 2009 $ 15,667 $ 8,690 $ 81,124 $ (1,185 ) $ 46,921 $ (3,669 ) $ 147,548 Balance at December 31, 2009 $ 15,699 $ 8,690 $ 81,179 $ (1,183 ) $ 48,079 $ (256 ) $ 152,208 Comprehensive income: Net income — — &nb sp; — — 4,609 — 4,609 Change in net unrealized gains arising during the period on securities available for sale, net of tax — — — — — 1,717 1,717 Total compre hensive income — — — — 4,609 1,717 6,326 Dividends paid on common stock ($0.10 per share) — — — — (861 ) — (861 ) Dividends paid on preferred stock — — — — (400 ) — (400 ) Stock options exercised (1,945 shares) — — (11 ) 27 — — 16 Release/lapse of restriction on 5,404 RSUs — — (74 ) 74 — — — Preferred stock discount accretion 34 — — — (34 ) — — Stock compensation — — 98 — — — 98 Balance at June 30, 2010 $ 15,733 $ 8,690 $ 81,192 $ (1,082 ) $ 51,393 $ 1,461 $ 157,387 Three Months Ended
March 31, 2010 2009 $ 2,004 $ 1,176 1,500 2,350 1,576 5 77 — (8 ) (63 ) 50 25 (237 ) — (64 ) — 12 — 189 — 449 2,275 1,019 1,273 (119 ) 3,786 (22 ) 61 (147 ) (3,986 ) 6,279 6,902 6,674 — 19,440 15,977 (38,091 ) (29,737 ) 1,810 — — — 11,328 10,026 1,534 (2,348 ) (1,041 ) (1,569 ) 1,217 82 544 — — — (167 ) (225 ) 3,248 (7,794 ) 2010 2009 Cash flows from operating activities: Net income $ 4,609 $ 1,959 Adjustments to reconcile net income to net cash provided by operating activities: Provision for loan losses 3,000 3,850 Depreciation, amortization and accretion 3,003 1,263 Loss on sale of premises and equipment 281 1 Deferred income taxes (553 ) 722 Stock-based compensation 98 39 Net gains on sale of available for sale securities (470 ) — Net gains on sale of other real estate owned (53 ) (10 ) Writedown of other real estate owned 112 — Other-than-temporary impairment of investment securities 189 614 (Increase) decrease in l oans held for sale (9 ) 1,546 Net change in: Decrease in accrued interest receivable 1,634 1,493 Decrease (increase) in other assets (571 ) 3,173 (Decrease) increase in deferred compensation liability (46 ) 2,265 (Decrease) increase in accounts payable, accrued expenses, and other liabilities 2,515 (6,166 ) Net cash provided by operating activities 13,739 10,749 Cash flows from inve sting activities: Available for sale securities: Sales 14,458 — Maturities 49,369 44,800 Purchases (116,428 ) (122,154 ) Held to maturity securities: &nbs p; Maturities 2,647 700 Purchases — (950 ) Loans made to customers, net of collections 8,076 22,440 Loan pool participations, net 6,163 4,143 Purchases of premises and equipment (2,182 ) (2,461 ) Proceeds from sale of other real estate owned 1,543 320 Proceeds from sale of premises and equipment 1,610 15 Activity in bank-owned life insurance: Purchases — — Increase in cash value (284 ) (422 ) Net cash used in investing activities (35,028 ) (53,569 ) Three Months Ended
March 31, 2010 2009 13,417 22,034 (1,875 ) (13,050 ) (3,533 ) 10,327 10,000 6,000 (12,500 ) (5,000 ) 16 — (12 ) (13 ) (630 ) (1,312 ) — 16,000 4,883 34,986 14,410 34,094 27,588 32,926 $ 41,998 $ 67,020 $ 6,238 $ 8,199 $ 600 $ (417 ) $ 78 $ 258 2010 2009 Cash flows from financing activities: Net increase in deposits 15,719 68,343 Net increase (decrease) in federal funds purchased 7,967 (13,050 ) Net decrease in securities sold under agreements to repurchase (4,545 ) (7,748 ) Pr oceeds from Federal Home Loan Bank advances 25,000 10,000 Repayment of Federal Home Loan Bank advances (23,000 ) (17,500 ) Stock options exercised 16 — Payments on long-term debt (24 ) (26 ) Dividends paid (1,261 ) (1,962 ) Issuance of preferred stock and warrants — 16,000 Net cash provided by financing activities 19,872 54,057 Net increase (decrease) in cash and cash equivalents (1,417 ) 11,237 Cash and cash equivalents at beginning of period 27,588 32,926 Cash and cash equivalents at end of period $ 26,171 $ 44,163 Supplemental disclosures of cash flow information: Cash paid during the period for: Interest $ 12,428 $ 17,502 Income taxes $ 1,683 $ (46 ) Supplemental schedule of non-cash investing activities: Transfer of loans to other real estate owned $ 601 $ 367 1.Introductory Noteoperatesop erates an insurance agency business through three offices located in central and east-central Iowa.”& rdquo; As a result of the Merger, Former MidWestOne merged with and into the Company and ceased to exist as a legal entity, and we changed our name from ISB Financial Corp. to MidWestOne Financial Group, Inc. All references in this document to the “Company” and “MidWestOne” refer to the surviving organization in the Merger.2.Basis of PresentationMarch 31,June 30, 2010 and 2009 include the accounts and transactions of the Company and its wholly-owned subsidiaries MidWestOneMidWestOne Bank and MidWestOne Insurance Services, Inc. All material intercompany balances and transactions have been eliminated in consolidation.ManagementMana gement 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,June 30, 2010, and the results of operations and cash flows for the three months and six months ended March 31,June 30, 2010 and 2009.March 31,June 30, 2010 may not be indicative of results for the year ending December 31, 2010, or for any other period.3.Consolidated Statements of Cash Flows4.Income TaxesMarch 31,June 30, 2010 and 2009 was computed using the consolidated effective federal tax rate. The Company also recognized income tax expense pertaining to state franchise taxes payable by the subsidiary bank.5.Shareholders’ Equity and Earnings per Common ShareCompany’sCompany's articles of incorporation to authorize the issuance of up to 500,000 shares of preferred stock. On February 6, 2009, the Company issued 16,000 shares of Fixed Rate Cumulative Perpetual Preferred Stock, Series A, together with a ten-year warrant to acquire 198,675 shares of common stock, to the U.S. Department of the Treasury (the “Treasury”) under the Capital Purchase Program (the “CPP”) for an aggregate purchase price of $16.0 million. Upon issuance, the fair valuespreferredp referred stock is non-voting, other than class voting rights on any authorization or issuance of shares ranking senior to the senior preferred stock, any amendment to the rights of senior preferred stock, or any merger, exchange, or similar transaction that would adversely affect the rights of the senior preferred stock. If dividends are not paid in full for six dividend periods, whether or not consecutive, the Treasury will have the right to elect two directors to the Company’sCompany's Board. The right to elect directors would end when full dividends have been paid for four consecutive dividend periods. Effective February 17, 2009, the American Recovery and Reinvestment Act of 2009 (“ARRA”) eliminated the restrictions on a CPP participant’sparticipant's ability to repay the Treasury’sTreasury's investment until the third anniversary of the date of the Treasury’sTreasury's investment. Prior to ARRA, CPP participants were prohibited from redeeming the Treasury’sTreasury's senior preferred stock except with the proceeds of an offeringofferin g of qualifying Tier 1 capital. ARRA now allows CPP participants, such as the Company, the option to repay the Treasury’sTreasury's investment under the CPP at any time without regard to whether the Company has raised new capital, subject to consultation with the Federal Reserve and the Federal Deposit Insurance Corporation (the “FDIC”). If the Company were to repay the Treasury’sTreasury's investment, it would be permitted to redeem the warrant issued to Treasury for fair market value.outstanding.outstandin g. The U.S. Congress and the Treasury may create additional provisions that could become retroactively applicable to the senior preferred stock.Company’sCompany's articles of incorporation to increase the number of authorized shares of common stock from 10,000,000 to 15,000,000.Treasury’sTreasury's investment in full, the Company would be permitted to redeem the warrant issued to Treasury at its then current fair market value. If the warrant is not redeemed at such time, however, it will remain outstanding and transferable by the Treasury.warrantswarran ts was calculated using the Binomial Option Pricing Model. The inputs to the model are consistent with those utilized by the Company for a 10-year employee stock option. 198,675 $ 12.08 $ 7.32 0 % 2.93 % 10 40.7 % 3.86 % $ 1.39 Number of warrants granted 198,675 Exercise price $ 12.08 &nbs p; Grant date fair market value $ 7.32 Estimated forfeiture rate 0% Risk-free interest rate 2.93 % Expected life, in years 10 Expected volatility 40.7 % Expected dividend yield 3.86 % Estimated fair value per warrant $ 1.39 March 31,June 30, 2010 and 2009 was 8,607,8538,612,582 and 8,603,055,8,605,202, respectively. The weighted average number of shares outstanding for the six months ended June 30, 2010 and 2009 was 8,610,231 and 8,604,134, respectively. Diluted earnings per share amounts are computed by dividing net income available to common shareholders by the weighted average number of shares outstanding and all dilutive potential shares outstanding during the period. The computation of diluted earnings per share used a weighted average diluted number of shares outstanding of 8,611,5118,643,233 and 8,603,5488,621,752 for the three months ended March 31,June 30, 2010 and 2009, respectively, and 8,628,756 and 8,620,684 for the six months ended June 30, 2010 and 2009, respectively. The following table presents the computation of earnings per common share for the respective periods:Earnings per Share Information Three Months Ended
March 31, (dollars in thousands, except per share amounts) 2010 2009 8,607,853 8,603,055 8,611,511 8,603,548 $ 2,004 $ 1,176 (217 ) (131 ) $ 1,787 $ 1,045 $ 0.21 $ 0.12 $ 0.21 $ 0.12 6.Investments Earnings per Share Information (dollars in thousands, except per share amounts) 2010 2009 2010 2009 Weighted average number of shares outstanding during the period 8,612,582 8,605,202 8,610,231 8,604,134 Weighted average number of shares outstanding during the period including all dilutive potential shares 8,643,233 8,621,752 8,628,756 8,620,684 Net income $ 2,605 $ 783 4,609 $ 1,959 Preferred stock dividend accrued and discount accretion (217 ) (216 ) (434 ) (347 ) Net income available to common stockholders $ 2,388 $ 567 $ 4,175 $ 1,612 Earnings per share - basic &n bsp; $ 0.27 $ 0.07 0.48 0.19 Earnings per share - diluted $ 0.27 $ 0.07 0.48 0.19 As of March 31, 2010 Amortized
Cost Gross
Unrealized
Gains Gross
Unrealized
Losses Estimated
Fair Value(in thousands) $ 70,308 $ 1,540 $ — $ 71,848 154,752 5,144 (76 ) 159,820 124,593 2,785 (315 ) 127,063 15,529 447 (1,185 ) 14,791 365,182 9,916 (1,576 ) 373,522 1,572 278 (198 ) 1,652 $ 366,754 $ 10,194 $ (1,774 ) $ 375,174 As of December 31, 2009 Amortized
Cost Gross
Unrealized
Gains Gross
Unrealized
Losses Estimated
Fair Value(in thousands) $ 79,503 $ 1,789 $ (101 ) $ 81,191 151,628 3,801 (205 ) 155,224 105,865 2,760 (49 ) 108,576 16,778 488 (1,104 ) 16,162 353,774 8,838 (1,459 ) 361,153 1,529 298 (77 ) 1,750 $ 355,303 $ 9,136 $ (1,536 ) $ 362,903 As of June 30, 2010 (in thousands) U.S. Government agencies and corporations $ 99,358 $ 2,143 $ — $ 101,501 State and political subdivisions 160,829 5,864 (79 ) 166,614 Mortgage-backed securities and collateralized mortgage obligations 132,470 3,885 (658 ) 135,697 Corporate debt securities 12,983 439 (1,186 ) 12,236 405,640 12,331 (1,923 ) 416,048 Common stocks 1,476 187 (243 ) 1,420 Total $ 407,116 $ 12,518 $ (2,166 ) $ 417,468 As of December 31, 2009 (in thousands) U.S. Government agencies and corporations $ 79,503 $ 1,789 $ (101 ) $ 81,191 State and political subdivisions 151,628 3,801 (205 ) 155,224 Mortgage-backed securities and collate ralized mortgage obligations 105,865 2,760 (49 ) 108,576 Corporate debt securities 16,778 488 (1,104 ) 16,162 353,774 8,838 (1,459 ) 361,153 Common stocks 1,529 298 (77 ) 1,750 Total $ 355,303 $ 9,136 $ (1,536 ) $ 362,903 As of March 31, 2010 Amortized
Cost Gross
Unrealized
Gains Gross
Unrealized
Losses Estimated
Fair Value(in thousands) $ 70 $ 5 $ — $ 75 5,251 108 — 5,359 865 — — 865 $ 6,186 $ 113 $ — $ 6,299 As of June 30, 2010 (in thousands) Mortgage-backed securities $ 61 $ 5 $ — $ 66 State and political subdivisions 4,423 79 — 4,502 Corporate debt securities 866 — — 866 Total $ 5,350 $ 84 $ — $ 5,434 As of December 31, 2009 (in thousands) Mortgage-backed securities $ 71 $ 5 $ — $ 76 State and political subdivisions 7,074 104 — 7,178 Corporate debt securities 864 — — 864 Total $ 8,009 $ 109 $ — $ 8,118 March 31,June 30, 2010 and December 31, 2009.2009. This temporary impairment represents the estimated amount of loss that would be realized if the securities were sold on the valuation date. Securities which were temporarily impaired are shown below, along with the length of the impairment period.March 31,June 30, 2010 and December 31, 2009, aggregated by investment category and length of time that individual securities have been in a continuous loss position: As of March 31, 2010 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) — $ — $ — $ — $ — $ — $ — 22 4,462 43 3,951 33 8,413 76 7 54,400 315 — — 54,400 315 4 — — 587 1,185 587 1,185 3 198 198 — — 198 198 36 $ 59,060 $ 556 $ 4,538 $ 1,218 $ 63,598 $ 1,774 As of December 31, 2009 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) 3 $ 10,120 $ 101 $ — $ — $ 10,120 $ 101 65 11,709 116 4,616 89 16,325 205 1 4,972 49 — — 4,972 49 4 — — 857 1,104 857 1,104 4 218 77 — — 218 77 77 $ 27,019 $ 343 $ 5,473 $ 1,193 $ 32,492 $ 1,536 As of June 30, 2010 Less than 12 Months 12 Months or More Total (in thousands, except number of securities) U.S. Government agencies and corporations — $ — $ — $ — $ — $ — $ — State and political subdivisions 32 7,570 31 3,932 48 11,502 79 Mortgage-backed securities and collateralized mortgage obligations 4 20,389 658 — — 20,389 658 Corporate debt securities 4 586 1,186 — — 586 1,186 Common stocks 4 158 243 — — 158 243 Total 44 $ 28,703 $ 2,118 $ 3,932 $ 48 $ 32,635 $ 2,166 As of December 31, 2009 Less than 12 Months 12 Months or More Total (in thousands, except number of securities) U.S. Government agencies and corporations 3 $ 10,120 $ 101 $ — $ — $ 10,120 $ 101 State and political subdivisions 65 11,709 116 4,616 89 16,325 205 Mortgage-backed securities and collateralized mortgage obligations 1 4,972 49 — — 4,972 49 Corporate debt securities 4 — — 857 1,104 857 1,104 Common stocks 4 218 77 — — 218 77 Total 77 $ 27,019 $ 343 $ 5,473 & nbsp; $ 1,193 $ 32,492 $ 1,536 Company’sCompany's assessment of other-than-temporary impairment (“OTTI”) is based on its reasonable judgment of the specific facts and circumstances impacting each individual security at the time such assessments are made. The Company reviews and considers factual information, including expected cash flows, the structure of the security, the credit quality of the underlying assets and the current and anticipated market conditions. As of April 1, 2009 the Company adopted the amended provisions of FASB ASC Topic 320. This changed the accounting for other-than-temporary impairments of debt securities and separates the impairment into credit-related and other factors. In accordance with the new guidance, the noncredit-related portion of other than temporary impairmentOTTI losses recognized in prior year earnings was reclassified as a cumulative effect adjustment that increased retained earnings and2009.2009. In 2008, $6.2 million in other than temporary impairment chargesOTTI losses were recognized, of which $5.2 million related to noncredit-related impairment on debt securities. Therefore, the cumulative effect adjustment made to retained earnings at April 1, 2009 totaled $5.2 million, or $3.3 million net of tax.securitiessecuriti es 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. The Company’sCompany's mortgage-backed securities portfolio consisted of securities predominantly underwritten to the standards of, and guaranteed by, the government-sponsored agencies of FHLMC, FNMA and GNMA.March 31,June&nb sp;30, 2010, approximately 71%65% of the municipal obligations held by the Company were Iowa based. The Company does not intend to sell these municipal obligations, and it is more likely than not that the Company will not be required to sell them until the recovery of its cost. Due to the issuers’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’smanagement's intent andissuers’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,June 30, 2010 and December 31, 2009.March 31,June 30, 2010, the Company owned six collateralized debt obligations backed by pools of trust preferred securities with an original cost basis of $9.75 million. They are secured by trust preferred securities of banks and insurance companies throughout the United States, and were rated as investment grade securities when purchased between March 2006 and December 2007. However, as the banking climate deteriorated over the past several years, the securities experienced cash flow problems and pre-tax OTTI chargeslosses of $6.2 million during 2008, $1.6 million during 2009, and $0.2 million during the first quarter of 2010. The book value of these securities as of this dateJune 30, 2010 totaled $1.8 million. All of the Company’sCompany's trust preferred collateralized debt obligations are in mezzanine tranches and are currently rated less than investment grade by Moody’sMoody's Investor Services. The market for these securities is considered to be inactive according to the guidance issued in FASB ASC Topic 820,“Fair Value Measurements and Disclosures,” which the Company adopted as of April 1, 2009. The Company used a discounted cash flow model to determine the estimated fair value of its pooled trust preferred collateralized debt obligations and to assess OTTI. The discounted cash flow analysis was performed in accordance with FASB ASC Topic 325. The assumptions used in preparing the discounted cash flow model include the following: estimated discount rates (using(us ing yields of comparable traded instruments adjusted for illiquidity and other risk factors), estimated deferral and default rates on collateral, and estimated cash flows. As part of its analysis of the collateralized debt obligations, the Company subjects the securities to a stress scenario which involves a level of deferrals or defaults in the collateral pool in excess of what the Company believes is likely.March 31,June 30, 2010, the analysis of five of the Company’sCompany's six investments in pooled trust preferred securities indicated that the unrealized loss was temporary and that it is more likely than not that the Company would be able to recover the cost basis of thesethes e securities. However, the Company determined that a portion of the unrealized loss on the remaining investment in $1.5 million of pooled trust preferred securities was other-than-temporary. The amount of actual and projected deferrals and/or defaults by the financial institutions underlying these pooled trust preferred securities increased significantly since the beginning of 2010. The increase in nonperforming collateral resulted in an other-than-temporaryother-than-temporary impairment of this security. The Company follows the provisions of FASB ASC Topic 320 in determining the amount of the OTTI recorded to earnings. The Company performed a discounted cash flow analysis, using the factors noted above, to determine the amount of theand determined that no additional OTTI that was applicable to either credit losses or other factors. The amount associated with credit losses, $189,000, was then realized through an impairment loss charged to earningsexisted for the three months ended March 31, 2010.June 30, 2010, thus no impairment loss was charged to earnings.income:(in thousands) Three months
ending
March 31, 2010 $ — — 189 $ 189 (in thousands) Beginning balance $ 189 $ — Additional credit losses: Securities with no previous other than temporary impairment — — &nb sp; Securities with previous other than temporary impairments — 189 Ending balance $ 189 $ 189 Company’sCompany's investment securities could decline in the future if the overall economy and the financial condition of some of the issuers continue to deteriorate further and the liquidity of these securities remains low. As a result, there is a risk that additional other-than-temporary impairments may occur in the future and any such amounts could be material to the Company’sCompany's consolidated statements of operations.March 31,June 30, 2010 is as follows: Available For Sale Held to Maturity Amortized
Cost Fair Value Amortized
Cost Fair Value (in thousands) $ 46,558 $ 47,089 $ 1,405 $ 1,414 101,820 105,167 3,550 3,634 64,324 66,726 296 311 27,887 27,477 865 865 124,593 127,063 70 75 $ 365,182 $ 373,522 $ 6,186 $ 6,299 Available For Sale Held to Maturity Fair Value Fair Value (in thousands) Due in on e year or less $ 46,545 $ 47,046 $ 1,790 $ 1,808 Due after one year through five years 116,220 120,101 2,633 2,694 Due after five years through ten years 80,503 83,208 — — Due after ten years 29,902 29,996 866 866 Mortgage-backed securiti es and collateralized mortgage obligations 132,470 135,697 61 66 Total $ 405,64 0 $ 416,048 $ 5,350 $ 5,434 mortgage-backedmortgage-ba cked securities, actual maturities will differ from contractual maturities because borrowers have the right to prepay obligations with or without prepayment penalties.March 31,June 30, 2010 and December 31, 2009 was $8.9$9.6 million and $9.0 million, respectively. 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 bankBank 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. Redemption of this investment is at the option of the FHLB.three-monthsthree months and six months ended March 31,June 30, 2010 and 2009, are as follows: Three Months Ended
March 31, 2010 2009 (in thousands) $ 197 $ — (189 ) — 8 — 49 — (9 ) — 40 — $ 48 $ — 7.Fair Value Measurements 2010 2009 2010 2009 (in thousands) Available for sale fixed maturity securities: Gross realized gains $ 233 $ 1 $ 430 $ 1 Gross realized losses — — (189 ) — 233 1 241 1 Equity securities: Gross realized gains — — 49 — Gross realized losses — (614 ) (9 ) (614 ) — (614 ) 40 ( 614 ) $ 233 $ (613 ) $ 281 $ (613 ) liabilities;liabilitie s; it isentity’sentity's own assumptions•Level 1 Inputs – Unadjusted quoted prices in active markets for identical assets or liabilities that the reporting entity has the ability to access at measurement date.•Level 2 Inputs – Inputs other than quoted prices included in Level 1 that are observable for the asset or liability, either directly or indirectly. These might include quoted prices for similar assets or liabilities in active markets, quoted prices for identical or similar assets or liabilities in markets that are not active, inputs other than quoted prices that are observable for the asset (such as interest rates, volatilities, prepayment speeds, credit risks, etc.) or inputs that are derived principally from or corroborated by market data by correlation or other means.•Level 3 Inputs – Unobservable inputs for determining the fair values of assets or liabilities that reflect an entity’s own assumptions about the assumptions that market participants would use in pricing the assets or liabilities.Company’sCompany's policy to maximize the use of observable inputs and minimize the use of unobservable inputs when developing fair value measurements. Recent market conditions have led to diminished, and in some cases, non-existent trading in certain of the financial asset classes. The Company is required to use observable inputs, to the extent available, in the fair value estimation process unless that data results from forced liquidations or distressed sales. Despite the Company’sCompany's best efforts to maximize the use of relevant observable inputs, the current market environment has diminished the observability of trades and assumptions that have historically been available. A description of the valuation methodologies used for instruments measured at fair value, as well as the general classification of such instruments pursuant to the valuation hierarchy, is set forth below. These valuation methodologies were applied to all of the Company’sCompany's financial assets and liabilities carried at fair value effective January 1, 2008.ValuationValuation methods for instruments measured at fair value on a recurring basis. – - The Company’sCompany's investment securities classified as available for sale include: debt securities issued by the U.S. Treasury and other U.S. government corporations and agencies, debt securities issued by state and political subdivisions, mortgage-backed securities, collateralized mortgage obligations, corporate debt securities, and equityequi ty securities. Quoted exchange prices are available for equity securities, which are classified as Level 1. Debt securities issued by the U.S. Treasury and other U.S. government corporations and agencies and mortgage-backed obligations are priced utilizing industry-standard models that consider various assumptions, including time value, yield curves, volatility factors, prepayment speeds, default rates, loss severity, current market and contractual prices for the underlying financial instruments, as well as other relevant economic measures. Substantially all of these assumptions are observable in the marketplace, can be derived from observable data, or are supported by observable levels at which transactions are executed in the marketplace and are classified as Level 2. Municipal securities are valued using a type of matrix, or grid, pricing in which securities are benchmarked against the treasury rate based on credit rating. These model and matrix measurements are classified as LevelLeve l 2 in the fair value hierarchy.poolspoo ls of trust preferred securities issued by financial institutions and insurance companies. The Company has determined that the observable market data associated with these assets do not represent orderly transactions in accordance with FASB ASC Topic 820 and reflect forced liquidations or distressed sales. Based on the lack of observable market data, the Company estimated fair value based on the observable data available and reasonable unobservable market data. The Company estimated fair value based on a discounted cash flow model which used appropriately adjusted discount rates reflecting credit and liquidity risks.recurringrecur ring basis as of March 31,June 30, 2010, segregated by the level of valuation inputs within the fair value hierarchy utilized to measure fair value: Fair Value Measurement at March 31, 2010 Using (in thousands) Total Quoted Prices in
Active Markets for
Identical Assets
(Level 1) Significant Other
Observable
Inputs
(Level 2) Significant
Unobservable
Inputs
(Level 3) $ 71,848 $ — $ 71,848 $ — 159,820 — 159,820 — 69,477 — 69,477 — 57,586 — 57,586 — 14,204 — 14,204 — 587 — — 587 373,522 — 372,935 587 1,652 1,652 — — 1,652 1,652 — — $ 375,174 $ 1,652 $ 372,935 $ 587 Fair Value Measurement at December 31, 2009 Using (in thousands) Total Quoted Prices in
Active Markets for
Identical Assets
(Level 1) Significant Other
Observable
Inputs
(Level 2) Significant
Unobservable
Inputs
(Level 3) $ 81,191 $ — $ 81,191 $ — 155,224 — 155,224 — 108,576 — 108,576 — 15,305 — 15,305 — 857 — — 857 361,153 — 360,296 857 1,750 1,750 — — 1,750 1,750 — — $ 362,903 $ 1,750 $ 360,296 $ 857 Fair Value Measurement at June 30, 2010 Using (in thousands) Total Assets: Available for sale debt securities: U.S. Government agencies and corporations $ 101,501 $ — $ 101,501 $ — State and policitical subdivisions 166,614 — 166,614 — Residential mortgage-backed securities 57,929 — 57,929 — Commercial mortgage-backed securities 77,768 — 77,768 — Corporate debt securities 11,650 — 11,650 — Collateralized debt obligations 586 — — 586 Total available for sale debt securities 416,048 &n bsp; — 415,462 586 Available for sale equity securities: Financial services industry 1,420 1,420 — — Total available for sale equity securities: 1,420 1,420 — — Total securities available for sale $ 417,468 $ 1,420 $ 415,462 $ 586 Fair Value Measurement at December 31, 2009 Using (in thousands) Total Assets: Available for sale debt securities: U.S. Government agencies and corporations $ 81,191 $ — $ 81,191 $ — State and policitical subdivisions 155,224 — 155,224 — Residential mortgage-backed securities 108,576 — 108,576 — Corporate debt securities 15,305 — 15,305 — Collateralized debt obligations 857 — — 857 Total available for sale debt securities 361,153 — 360,296 857 Available for sale equity securities: Financial services industry 1,750 1,750 — — Total available for sale equity securi ties: 1,750 1,750 — — Total securities available for sale $ 362,903 $ 1,750 $ 360,296 $ 857 Collateralized
Debt
Obligations (in thousands) $ 857 — — (189 ) (81 ) — — — — $ 587 (in thousands) Level 3 fair value at December 31, 2009 $ 857 Transfers into Level 3 — Transfers out of Level 3 — Total gains (losses): Included in earnings (189 ) Included in other comprehensive income (82 ) Purchases, issuances, sales, and settlements: Purchases — Issuances — Sales — Settlements — Level 3 fair value at June 30, 2010 $ 586 write-downwrite-d own that is reflected directly in the Company’sCompany's consolidated statements of operations. – - From time to time, a loan is considered impaired and an allowance for credit losses is established. The specific reserves for collateral dependent impaired loans are based on the fair value of the collateral less estimated costs to sell. The fair valueappraisedappra ised values duesdue to various factors, including age of the appraisal, age of comparables included in the appraisal, and known changes in the market and in the collateral. Because many of these inputs are unobservable the valuations are classified as Level 3. – - Loans held for sale are carried at the lower of cost or fair value. The fair value of loans held for sale is based on what secondary markets are currently offering for portfolios with similar characteristics. As such, the Company classifies loans held for sale subjected to nonrecurring fair value adjustments as Level 2.–- Stock held in the Federal Home Loan Bank of Des Moines (“FHLB”),FHLB, which is held for regulatory purposes, is carried in other assets. This investment generally has restrictions on the sale and/or liquidation of stock and the carrying value is approximately equal to fair value. Fair value measurements for this security are classified as Level 3 because of its undeliverable nature and related credit risk.–- Other real estate represents property acquired through foreclosures and settlements of loans. Property acquired is carried at the lower of the carrying amount of the loan at the time of acquisition, or the estimated fair value of the property, less disposal costs. The Company considers third party appraisals as well as independent fair value assessments from realtorsreal estate brokers or persons involved in selling OREO in determining the fair value of particular properties. Accordingly, the valuation of OREO is subject to significant external and internal judgment. The Company also periodically reviews OREO to determine whether the property continues to be carried at the lower of its recorded book value or fair value of the property, less disposal costs. Because many of these inputs are unobservable, the valuations are classified as Level 3.Company’sCompany's estimated fair value amounts of its financial instruments recorded at fair value on a nonrecurring basis. It is management’smanagement's belief that the fair values presented below are reasonable based on the valuation techniques and data available to the Company as of March 31,June 30, 2010 and December 31, 2009, as more fully described below. The operations of the Company are managed from a going concern basis and not a liquidation basis. As a result, the ultimate value realized forfrom the financial instruments presented could be substantially different differ entCompany’sCompany's inherent value is the Bank’sBank's capitalization and franchise value. Neither of these components has been given consideration in the presentation of fair values below. Fair Value Measurements at March 31, 2010 Using (in thousands) Total Quoted Prices in
Active Markets for
Identical Assets
(Level 1) Significant Other
Observable
Inputs
(Level 2) Significant
Unobservable
Inputs
(Level 3) $ 4,291 $ — $ — $ 4,291 $ 759 $ — $ 759 $ — $ 8,901 $ — $ — $ 8,901 $ 2,547 $ — $ — $ 2,547 Fair Value Measurements at December 31, 2009 Using (in thousands) Total Quoted Prices in
Active Markets for
Identical Assets
(Level 1) Significant Other
Observable
Inputs
(Level 2) Significant
Unobservable
Inputs
(Level 3) $ 2,818 $ — $ — $ 2,818 $ 1,208 $ — $ 1,208 $ — $ 8,973 $ — $ — $ 8,973 $ 3,635 $ — $ — $ 3,635 Fair Value Measurements at June 30, 2010 Using (in thousands) Total Assets: Collateral dependent impaired loans $ 998 $ — $ — $ 998 Loans held for sale 1,217 — 1,217 — Federal Home Loan Bank stock 9,636 — — 9,636 Other real estate owned 2,634 — — 2,634 Fair Value Measurements at December 31, 2009 Using (in thousands) Total Assets: Collateral dependent impaired loans $ 2,818 $ — $ — $ 2,818 Loans held for sale 1,208 — 1,208 — Federal Home Loan Bank stock 8,973 — — 8,973 Other real estate owned 3,635 — — 3,635 March 31,June 30, 2010 and December 31, 2009.2009. The information presented is subject to change over time based on a variety of factors. March 31, 2010 December 31, 2009 Carrying
Amount Estimated
Fair Value Carrying
Amount Estimated
Fair Value(in thousands) $ 41,998 $ 41,998 $ 27,588 $ 27,588 381,360 381,473 370,912 371,021 759 759 1,208 1,208 940,136 940,602 953,041 953,647 81,518 81,518 83,052 83,052 2,547 2,547 3,635 3,635 10,515 10,515 11,534 11,534 8,901 8,901 8,973 8,973 1,193,285 1,197,263 1,179,868 1,185,450 39,565 39,565 44,973 44,973 127,700 130,553 130,200 133,098 15,576 10,046 15,588 10,070 2,071 2,071 2,248 2,248 June 30, 2010 December 31, 2009 (in thousands) Financial assets: Cash and cash equivalents $ 26,171 $ 26,171 $ 27,588 $ 27,588 Investment securities 422,818 422,902 370,912 371,021 Loans held for sale 1,217 1,217 1,208 &nbs p; 1,208 Loans, net 941,364 940,768 953,041 953,647 Loan pool participations, net 76,889 76,889 83,052 83,052 Other real estate owned 2,634 2,634 3,635 3,635 Accrued interest receivable 9,900 9,900 11,534 11,534 Federal Home Loan Bank stock 9,636 9,636 8,973 8,973 Financial liabilities: Deposits 1,195,587 1,198,327 1,179,868 1,185,450 Federal funds purchased and securities sold under agreements to repurchase 48,395 55,781 44,973 44,973 Federal Home Loan Bank borrowings 132,200 136,089 130,200 133,098 Long-term debt 15,564 10,237 15,588 10,070 Accru ed interest payable 1,847 1,847 2,248 2,248 fromfr om benchmarking the security against similar securities.participationsparticipation carrying values represent the discounted price paid by us to acquire our participation interests in the various loan pools purchased, which approximate fair value.analyses,analysis, based on the Company’sCompany's current incremental borrowing rates for similar types of borrowing arrangements.8.Allowance for Loan Losses and Nonperforming Assetsbelievesbeliev es the uncollectability of a loan balance is confirmed. Subsequent recoveries of loans previously charged-off, if any, are credited to the allowance when realized. The allowance for loan losses is evaluated on a quarterly basis by management and is based upon management’smanagement's periodic review of the collectability of the loans in light of historical experience, the nature and volume of the loan portfolio, adverse situations that may affect the borrower’sborrower's ability to repay, estimated value of any underlying collateral and prevailing economic conditions. This evaluation is inherently subjective, as it requires estimates that are susceptible to significant revision as more information becomes available. Three months ended
March 31, 2010 2009 (dollars in thousands) $ 954,689 $ 1,004,144 $ 959,568 $ 1,014,703 $ 13,957 $ 10,977 500 — 538 247 — — — — — — 1 117 — 32 — — — — 41 58 — — 1,080 454 5 19 12 16 — — — — — — 1 6 54 6 — 15 94 — 10 6 — �� 176 68 904 386 1,500 2,350 $ 14,553 $ 12,941 0.38 % 0.16 % 1.52 % 1.29 % 2010 2009 2010 2009 (dollars in thousands) $ 956,187 $ 990,653 956,187 990,653 Average amount of loans outstanding for the period (net of unearned interest) $ 957,302 $ 999,576 958,429 1,007,098 Allowance for loan losses at beginning of period $ 14,553 $ 12,941 13,957 10,977 Charge-offs: Agricultural 500 58 1,000 58 Commercial and financial 567 562 1,105 809 Real estate: Construction, one- to four- family residential — — — — Construction, land development and commercial 25 95 25 95 Mortgage, farmland — 120 — 120 Mortgage, one- to four- family first liens 50 125 51 242 Mortgage, one- to four- family junior liens 15 — 15 32 Mortgage, multifamily — 5 — 5 Mortgage, commercial 83 52 83 52 Loans to individuals 25 — 66 58 Obligations of state and political subdivisions — — — — Total charge-offs 1,265 1,017 2,345 1,471 Recoveries: Agricultural — — 5 19 Commercial and financial 12 29 24 45 Real estate: Construction, one- to four- family residential — — — — Construction, land development and commercial — — — — Mortgage, farmland — — — — Mortgage, one- to four- family first liens 1 3 2 9 Mortgage, one- to four- family junior liens 1 5 55 11 Mortgage, multifamily — — & mdash; 15 Mortgage, commercial 14 — 108 — Loans to individuals 7 4 17 10 Obligations of state and political subdivisions — — — — Total recoveries 35 41 211 109 Net loans charged off 1,230 976 2,134 1,362 Pro vision for loan losses 1,500 1,500 3,000 3,850 Allowance for loan losses at end of period $ 14,823 $ 13,465 14,823 13,465 Net loans charged off to average loans 0.52 % 0.39 % 0.45 % 0.27 % Allowance for loan losses to total loans at end of period 1.55 % 1.36 % 1.55 % 1.36 % (1) Loans do not include, and the allowance for loan losses does not include, loan pool participations. Company’sCompany's nonperforming assets at the dates indicated: March 31, 2010 December 31, 2009 Non-
Accrual Troubled Debt
Restructures Non-
Accrual Troubled Debt
Restructures (in thousands) $ 5,195 $ — $ 3,498 $ — 2,259 597 2,386 676 461 — 463 — — 426 — 434 197 — 43 — 1,965 315 2,073 49 104 52 157 — — — — — 545 2,147 1,168 1,368 64 28 97 28 — — — — $ 10,790 $ 3,565 $ 9,885 $ 2,555 $ 14,355 $ 12,440 625 — 320 256 — 138 123 — 301 — 487 927 48 85 — — — — 81 33 — — $ 1,985 $ 1,439 $ 16,340 $ 13,879 2,547 3,635 $ 18,887 $ 17,514 1.71 % 1.44 % 1.98 % 1.81 % June 30, 2010 December 31, 2009 (in thousands) Nonperforming loans: Agricultural $ 3,329 $ 3,323 $ 3,498 $ — Commercial and financial 1,791 597 2,386 676 Real estate: Construction, one- to four- family residential 192 — 463 — Construction, land development and commercial 123 — — 434 Mortgage, farmland 2,853 348 43 — Mortgage, one- to four- family first liens 1,730 49 2,073 49 Mortgage, one- to four- family junior liens 104 51 157 — Mortgage, multifamily — — — — Mortgage, commercial 362 2,041 1,168 1,368 Loans to individuals 41 — 97 28 Obligations of state and political subdivisions — — — — $ 10,525 $ 6,409 $ 9,885 $ 2,555 Total impaired loans $ 16,934 $ 12,440 90 days or more past due and still accruing: Agricultural 716 & nbsp; — Commercial and financial 822 256 Real estate: Construction, one- to four- family residential — 138 Construction, land development and commercial 16 — Mortgage, farmland 309 — Mortgage, one- to four- family first liens 858 927 Mortgage, one- to four- family junior liens 140 85 Mortgage, multifamily — — Mortgage, commercial — — Loans to individuals 93 33 Obligations of state and political subdivisions — — Total 90 days or more past due and still accruing $ 2,954 $ 1,439 Total nonperforming loans $ 19,888 $ 13,879 Other real estate owned and repossessed assets 2,634 3,635 Total nonperforming loans and nonperforming other assets $ 22,522 $ 17,514 Ratios: Nonperforming loans to loans, before allowance for loan losses 2.08 % 1.44 % Nonperforming loans and nonperfo rming other assets to loans, before allowance for loan losses 2.36 % 1.81 % March 31,June 30, 2010 and December 31, 2009 was $1,230,000$1,187,000 and $727,000, respectively. Nonperforming loans of $3.7$3.2 million and $1.2 million at March 31,June 30, 2010 and December 31, 2009, respectively, were not subject to a related allowance for credit losses because the net realizable value of loan collateral, guarantees and other factors exceed the loan carrying value.9.Effect of New Financial Accounting Standards2009.2009. The adoption of this accounting standard did not have a material impact on our financial condition, results of operations, or disclosures.VIE’sVIE's economic performance, and (2) the obligation to absorb losses of the VIE that could potentially be significant to the VIE or the right to receive benefits of the VIE that could potentially be significant to the VIE. The amendments were effective for the Company as of January 1, 2010 and it did not have a material effect on its consolidated financial statements.FASB ASUAccounting Standard Update (“ASU”) No. 2009-16,Transfers and Servicing (Topic 860): Accounting for Transfers of Financial Assets. The guidance enhances information reported to users of financial statements by providing greater transparency about transfers of financial assets, including securitization transactions, and where companies have continuing exposure to the risks related to transferred financial assets. This standard iswas effective for the Company as of January 1, 2010 withwi th adoption applied prospectively for transfers that occur on or after that date. The adoption of this accounting standard did not have a material impact on our financial condition, results of operations, or disclosures.FASB ASU No. 2010-06,Fair Value Measurements and Disclosures (Topic 820): Improving Disclosures about Fair Value Measurements, which clarifies and expands disclosure requirements related to fair value measurements. Disclosures are required for significant transfers between levels in the fair value hierarchy. Activity in Level 3 fair value measurements is to be presented on a gross, rather than net, basis. The update clarifies how the appropriate level of disaggregation should be determined and emphasizes that information sufficient to permit reconciliation between fair value measurements and line items on the financial statements should be provided. The update is effective for interim and annual reporting periods beginning after December 15, 2009 except for the expanded disclosures related to activity in Level 3 fair value measurements which are effective one year later. The Company adopted ASU 2010-06 for the period beginning January 1, 2010 and it did not have a material effect on its consolidated financial statements.10.Use of Estimates in the Preparation of Financial Statements11.Subsequent Eventswerewe re available to be issued. Events or transactions occurring after March 31,June 30, 2010 but prior to the date the consolidated financial statements were available to be issued that provided additional evidence about conditions that existed at March 31,June 30, 2010 have been recognized in the consolidated financial statements for the period ended March 31, 2010.June 30, 2010. Events or transactions that provided evidence about conditions that did not exist at March 31,June& nbsp;30, 2010 but arose before the consolidated financial statements were available to be issued have not been recognized in the consolidated financial statements for the period ended March 31, 2010.activelyactive ly engaged in many areas of commercial banking, including: acceptance of demand, savings and time deposits; making commercial, real estate, agricultural and consumer loans, and other banking services tailored for its individual customers. The Wealth Management Division of the Bank administers estates, personal trusts, conservatorships, pension and profit-sharing accounts along with providing other management services to customers.depositdep osit generation, especially transaction accounts, and quality loan growth with emphasis on growing commercial loan balances. We seek to maintain a disciplined pricing strategy on deposit generation that will allow us to compete for high quality loans while maintaining an appropriate spread over funding costs.wellwel l as changes in market interest rates, government policies and actions of regulatory authorities.March 31,June 30, 2010 and March 31,June 30, 2009SummaryFor the quarter ended WeJune 30, 2010 we earned net income of $2.0$2.6 million, of which $1.8$2.4 million was available to common shareholders, compared with$0.8 million, of which $0.6 million was available to common shareholders, for the quarter ended March 31, 2010, compared with $1.2 million, of which $1.0 million was available to common shareholders, for the quarter ended March 31,June 30, 2009, an increase of 70.4%232.7% and 71.0%321.2%, respectively.respectively. Basic and diluted earnings per common share for the firstsecond quarter of 2010 were $0.21 versus $0.12 for$0.27 versus $0.07 for the firstsecond quarter of 2009. Our return on average assets for the firstsecond quarter of 2010 was 0.53% compared0.67% compared with a return of 0.32% for0.20% for the same period in 2009. Our return on average shareholders’shareholders' equity was 5.28%6.74% for the quarter ended March 31,June 30, 2010 versus 3.38%2.14% for the quarter ended March 31, 2009.June 30, 2009. The return on average tangible common equity was 5.76%7.52% for the first quartersecond q uarter of 2010 compared with 3.58%1.92% for the same period in 2009.firstsecond quarter of 2010 and 2009. Quarter Ended March 31, ($ amounts in thousands) 2010 2009 $ 2,004 $ 1,176 1,527,170 1,504,685 153,798 141,152 0.53 % 0.32 % 5.28 % 3.38 % 5.76 % 3.58 % 10.00 % 9.53 % 8.26 % 7.73 % Three Months Ended June 30, ($ amounts in thousands) 2010 2009 Net Income $ 2,605 $ 783 Average Assets 1,561,819 1,567,387 Average Shareholders' Equity 155,088 146,974 Return on Average Assets 0.67 % 0.20 % Return on Average Shareholders' Equity 6.74 % 2.14 % Return on Average Tangible Common Equity 7.52 % 1.92 % Total Equity to Assets (end of period) 10.07 % 9.38 % Tangible Common Equity to Tangible Assets (end of period) 8.37 % 7.63 % For the Three Months Ended March 31, (in thousands) 2010 2009 $ 153,798 $ 141,152 (15,708 ) (9,601 ) (12,371 ) (13,244 ) 125,719 118,307 1,787 1,045 5.76 % 3.58 % For the Three Months Ended June 30, (in thousands) 2010 2009 Tangible Common Equity: Average total shareholders' equity $ 155,088 $ 146,974 Less: Average preferred stock (15,724 ) (15,656 ) Average goodwill and intangibles (11,965 ) (13,032 ) Average tangible common equity $ 127,399 $ 118,286 Net income available to common shareholders $ 2,388 $ 567 7.52 % 1.92 % (1) Annualized pre-taxpretax yields than fully taxabletaxa ble assets. A tax-equivalent analysis is performed by adding the tax savings to the earnings on tax favorable assets. After factoring in the tax favorable effects of these assets, the yields may be more appropriately evaluated against alternative earning assets. In addition to yield, various other risks are factored into the evaluation process.March 31,June 30, 2010 declined $0.2 increased $1.3 million to $11.8$12.2 millioncompared to $12.0with$10.8 millionfor the quarter ended March 31, 2009.June 30, 2009. Our total interest income of $17.8$18.1 million was $1.1$0.5 millionlower in the firstsecond quarter of 2010 compared with the same period in 2009. Most of the decrease in interest income was due to reduced interest on loans and loan pool participations.loans. The decrease in interest income was largelymore than offset by reduced interest expense on deposits. Total interest expense for the first quartersecond quart er of 2010$0.912.5%23.3%, compared with the same period in 2009 due primarily to lower interest rates in 2010. Our net interest margin on a tax-equivalent basis for the firstsecond quarter of 2010 decreasedincreased to 3.50%3.48% compared with 3.60% 3.11%in the firstsecond quarter of 2009. Net interest margin is a measure of the net return on interest-earning assets and is computed by dividing annualized net interest income on a tax-equivalent basis by the average of total interest-earning assets for the period. Our overall yield on earning assets declined to 5.22%5.11% for the firstsecond quarter of 2010 from 5.58%5.21% for the firstsecond quarter of 2009. This decline was due primarily to lower rates being received on newly originated loans and purchases of investment securities. The average cost of interest-bearing liabilities decreased in the firstsecond quarter of 2010 to 2.01%1.91% from 2.29%2.45% for the firstsecond quarter of 2009.quartersquarter ended March 31,June 30, 2010 and 2009. Dividing annualized income or expense by the average balances of assets or liabilities results in average yields or costs. Average information is provided on a daily average basis. Three Months Ended March 31, 2010 2009 Average
Balance Interest
Income/
Expense Average
Rate/
Yield Average
Balance Interest
Income/
Expense Average
Rate/
Yield (dollars in thousands) $ 959,568 $ 13,789 5.83 % $ 1,014,703 $ 15,008 6.00 % 84,267 899 4.33 96,731 1,015 4.26 260,356 2,225 3.47 180,712 1,975 4.43 118,290 1,523 5.22 �� 110,316 1,493 5.49 378,646 3,748 4.01 291,028 3,468 4.83 11,369 10 0.36 15,553 9 0.23 $ 1,433,850 $ 18,446 5.22 % $ 1,418,015 $ 19,500 5.58 % 20,008 27,226 28,949 29,177 (16,552 ) (14,093 ) 60,915 44,360 $ 1,527,170 $ 1,504,685 $ 468,409 $ 1,106 0.96 % $ 434,879 1,199 1.12 % 569,336 3,510 2.50 562,659 4,488 3.23 1,037,745 4,616 1.80 997,538 5,687 2.31 40,661 77 0.77 50,978 134 1.07 128,689 1,207 3.80 159,321 916 2.33 16,446 161 3.97 16,590 189 4.62 $ 1,223,541 $ 6,061 2.01 % $ 1,224,427 $ 6,926 2.29 % 3.21 % 3.28 % 135,771 130,826 14,060 8,280 153,798 141,152 $ 1,527,170 $ 1,504,685 $ 1,433,850 $ 18,446 5.22 % $ 1,418,015 $ 19,500 5.58 % $ 1,433,850 $ 6,061 1.71 % $ 1,418,015 $ 6,926 1.98 % $ 12,385 3.50 % $ 12,574 3.60 % $ 85 $ 97 533 523 618 620 $ 11,767 $ 11,954 Three Months Ended June 30, 2010 2009 (dollars in thousands) Average earning assets: $ 957,302 $ 13,841 5.80 % $ 999,576 $ 14,881 5.97 % 81,499 909 4.47 94,548 664 2.82 Investment securities: Taxable investments 295,687 2,445 3.32 217,227 2,147 & nbsp; 3.96 112,257 1,494 5.34 112,704 1,537 5.47 Total investment securities 407,944 3,939 3.87 329,931 3,684 4.64 Federal funds sold and interest-bearing balances 23,294 21 0.36 57,926 30 0.21 Total earning assets $ 1,470,039 $ 18,710 5.11 % $ 1,481,981 $ 19,259 5.21 % Cash and due from banks 19,061 23,521 Premises and equipment 28,423 29,932 Allowance for loan losses (17,053 ) (15,261 ) Other assets 61,349 47,214 Total assets $ 1,561,819 $ 1,567,387 Average interest-bearing liabilities: Savings and interest-bearing demand deposits $ 493,198 $ 1,1 76 0.96 % $ 467,095 $ 1,298 1.11 % Certificates of deposit 571,702 3,373 2.37 589,504 4,497 3.06 Total deposit s 1,064,900 4,549 1.71 1,056,599 5,795 2.20 Federal funds purchased and repurchase agreements 39,268 71 0.73 46,556 127 1.09 Federal Home Loan Bank borrowings 132,755 1,183 3.57 156,543 1,666 4.27 Long-term debt and other 16,409 163 3.98 16,548 194 4.70 Total interest-bearing liabilities $ 1,253,332 $ 5,966 1.91 % $ 1,276,246 $ 7,782 2.45 % Net interest spread 3.20 % 2.77 % Demand deposits 137,489 131,157 Other liabilities 15,910 13,010 Shareholders' equity 155,088 146,974 Total liabilities and shareholders' equity $ 1,561,819 $ 1,567,387 $ 1,470,039 $ 18,710 5.11 % $ 1,481,981 $ 19,259 5.21 % Interest expense/earning assets $ 1,470,039 $ 5,966 1.63 % $ 1,481,981 $ 7,782 2.10 % $ 12,744 3.48 % $ 11,477 3.11 % Non-GAAP to GAAP Reconciliation: Tax Equivalent Adjustment: Loans $ 80 $ 96 Securities 508 537 Total tax equivalent adjustment 588 633 Net Interest Income $ 12,156 $ 10,844 (1) Loan fees included in interest income are not material. (2) Computed on a tax-equivalent basis, assuming a federal income tax rate of 34%. (3) Non-accrual loans have been included in average loans, net of unearned discount. (4) Includes interest income and discount realized on loan pool participations. (5) Net interest margin is tax-equivalent net interest income as a percentage of average earning assets. Three Months Ended June 30, 2010 Compared to 2009 Change due to Volume Rate/Yield Net (in thousands) Inc rease (decrease) in interest income: Loans (tax equivalent) $ (619 ) $ (421 ) $ (1,040 ) Loan pool participations (75 ) 320 245 Investment securities: Taxable investments 544 (246 ) 298 Tax exempt investments (6 ) (37 ) (43 ) Total investment securiti es 538 (283 ) 255 & nbsp; Federal funds sold and interest-bearing balances 38 (47 ) (9 ) Change in interest income (118 ) (431 ) (549 ) Increase (decrease) in interest expense: Savings and interest-bearing demand deposits 79 (201 ) (122 ) Certificates of deposit (132 ) (992 ) (1,124 ) Total deposits (53 ) (1,193 ) (1,246 ) Federal funds purchased and repurchase agreements (18 ) (38 ) (56 ) Federal Home Loan Bank borrowings (233 ) (250 ) (483 ) Other long-term debt (2 ) (29 ) (31 ) Change in interest expense (306 ) (1,510 ) (1,816 ) Increase in net interest income $ 188 $ 1,079 $ 1,267 Percentage increase in net interest income over prior period 11.04 % Three Months Ended June 30, 2010 2009 % Change (dollars in thousands) Trust and investment fees $ 1,214 $ 964 25.9 % Service charges and fees on deposit accounts 1,034 990 4.4 Mortgage origination and loan servicing fees 525 860 (39.0 ) Other service charges, commissions and fees 576 510 ; 12.9 Bank owned life insurance income 147 198 (25.8 ) Impairment losses on investment securities, net — (614 ) (100.0 ) Gain on sale of available for sale securities 233 1 NM&n bsp; Loss on sale of premises and equipment (204 ) 5 NM Total noninterest income $ 3,525 $ 2,914 21.0 % NM - Percentage change not considered meaningful. Three Months Ended June 30, 2010 2009 % Change (dollars in thousands) Salaries and employee benefits $ 5,691 $ 5,847 (2.7 )% Net occupancy and equipment expense 1,630 1,647 (1.0 ) Professional fees 659 842 (21.7 ) Data processing expense 414 491 (15.7 ) FDIC insurance expense 705 1,055 (33.2 ) Other operating expense 1,563 1,443 8.3 &n bsp; Total noninterest expense $ 10,662 $ 11,325 (5.9 )% Six Months Ended June 30, ($ amounts in thousands) 2010 2009 Net Income $ 4,609 $ 1,959 Average Assets 1,544,560 1,536,153 Average Shareholders' Equity 153,950 144,080 Return on Average Assets 0.60 % 0.26 % Return on Average Shareholders' Equity 6.04 % 2.74 % Return on Average Tangible Common Equity 6.67 % 2.74 % Total Equity to Assets (end of period) 10.07 % 9.38 % Tangible Common Equity to Tangible Assets (end of period) 8.37 % 7.63 % For the Six Months Ended June 30, (in thousands) 2010 2009 Tangible Common Equity: Average total shareholders' equity $ 153,950 $ 144,079 Less: Average preferred stock (15,716 ) (12,635 ) Average goodwill and intangibles (12,071 ) (13,169 ) Average tangible common equity $ 126,163 $ 118,275 Net income available to common shareholders $ 4,175 $ 1,612 6.67 % 2.74 % (1) Annualized Six Months Ended June 30, 2010 2009 (dollars in thousands) Average earning assets: $ 958,429 $ 27,630 5.81 % $ 1,007,098 $ 29,889 5.98 % 82,876 1,808 4.40 95,634 1,679 3.54 Investment securities: Taxable investments 278,119 4,670 3.39 199,070 4,122 4.18 115,257 3,017 5.28 111,517 3,030 5.48 Total investment securities 393,376 7,687 3.94 310,587 7,152 4.64 Federal funds sold and interest-bearing balances 17,412 31 0.36 37,689 39 0.21 Total earning assets $ 1,452,093 $ 37,156 5.16 % $ 1,451,008 $ 38,759 5.39 % Cash and due from banks 19,507 24,196 Premises and equipment 28,682 29,561 Allowance for loan losses (16,804 ) (14,681 ) Other assets 61,082 46,069 Total assets $ 1,544,560 $ 1,536,153 Average interest-bearing liabilities: Savings and interest-bearing demand deposits $ 480,835 $ 2,282 0.96 % $ 451,076 $ 2,497 1.12 % Certificates of deposit 570,376 6,883 2.43 576,156 8,985 3.14 To tal deposits 1,051,211 9,165 1.76 1,027,232 11,482 2.25 Federal funds purchased and repurchase agreements 39,961 148 0.75 48,755 261 1.08 Federal Home Loan Bank borrowings 130,733 2,390 3.69 157,924 2,582 3.30 Long-term debt and other 16,427 324 3.98 16,569 383 4.66 Total interest-bearing liabilities $ 1,238,332 $ 12,027 1.96 % $ 1,250,480 $ 14,708 2.37 % 3.20 % 3.01 % Demand deposits 136,820 130,993 Other liabilities 15,458 &nbs p; 10,601 Shareholders' equity 153,950 144,079 Total liabilities and shareholders' equity $ 1,544,560 $ 1,536,153 & nbsp; $ 1,452 ,093 $ 37,156 5.16 % $ 1,451,008 $ 38,759 5.39 % Interest expense/earning assets $ 1,452,093 $ 12,027 1.67 % $ 1,451,008 $ 14,708 2.04 % $ 25,129 3.49 % $ 24,051 3.34 % Non-GAAP to GAAP Reconciliation: Tax Equivalent Adjustment: Loans $ 165 $ 193 Securities 1,041 1,060 Total tax equivalent adjustment 1,206 1,253 Net Interest Income $ 23,923 $ 22,798 (1) Loan fees included in interest income are not material. (2) Computed on a tax-equivalent basis, assuming a federal income tax rate of 34%. (3) Non-accrual loans have been included in average loans, net of unearned discount. (4) Includes interest income and discount realized on loan pool participations. (5) Net interest margin is tax-equivalent net interest income as a percentage of average earning assets. Three Months Ended March 31, 2010 Compared to 2009 Change due to Volume Rate/Yield Net (in thousands) $ (800 ) $ (419 ) $ (1,219 ) (133 ) 17 (116 ) 495 (245 ) 250 92 (62 ) 30 587 (307 ) 280 (1 ) 2 1 (347 ) (707 ) (1,054 ) 108 (201 ) (93 ) 54 (1,032 ) (978 ) 162 (1,233 ) (1,071 ) (24 ) (33 ) (57 ) (127 ) 418 291 (2 ) (26 ) (28 ) 9 (874 ) (865 ) $ (356 ) $ 167 $ (189 ) (1.50 ) Six Months Ended June 30, 2010 Compared to 2009 Change due to Volume Rate/Yield Net (in thousands) Increase (decrease) in interest income: Loans (tax equivalent) $ (1,418 ) $ (841 ) $ (2,259 ) Loan pool participations (158 ) 287 129 Investment securities: Taxab le investments 1,046 (498 ) 548 Tax exempt investments 142 (155 ) (13 ) Total investment securities 1,188 (653 ) 535 Federal funds sold and interest-bearing balances 24 (32 ) (8 ) & nbsp; Change in interest income (364 ) (1,239 ) (1,603 ) Increase (decrease) in interest expense: Savings and interest-bearing demand deposits 185 (400 ) (215 ) Certificates of deposit (89 ) & nbsp; (2,013 ) (2,102 ) Total deposits 96 (2,413 ) (2,317 ) Federal funds purchased and repurchase agreements (42 ) (71 ) (113 ) Federal Home Loan Bank borrowings (612 ) 420 (192 ) Other long-term debt (3 ) (56 ) (59 ) Change in interest expense (561 ) (2,120 ) ( 2,681 ) Increase in net interest income $ 197 $ 881 $ 1,078 Percentage increase in net interest income over prior period 4.48 % $1.2$2.3 million, or 8.1%7.6%, in the first quarterhalf of 2010 compared towith the same period in 2009. Average loans were $55.1$958.4 million, or 5.4%4.8%, lower in the first quarterhalf of 2010 compared with 2009. The decrease in average loan volume was attributable to declining utilization rates on lines of credit and pay-downs on term debt as the volume of refinancing activity, which resulted in a large amount of adjustable rate residential real estate loans that were held in our portfolio being refinanced into fixed-rate loans that are sold in the secondary market rather than held in our portfolio.economic environment has caused many customers to actively reduce their borrowing position. The yield on our loan portfolio is affected by the amount of nonaccrual loans (which do not earn interest income), the mix of the portfolio (real estate loans generally have a lower overallovera ll yield than commercial and agricultural loans), the effects of competition and the interest rate environment on the amounts and volumes of new loan originations, and the mix of variable rate versus fixed rate loans in our portfolio. The average rate on loans decreased slightly from 6.00%5.98% in the first quarterhalf of 2009 to 5.83%5.81% in the first quarterhalf of 2010.$0.9$1.8 millionfor the first quarterhalf of 2010 compared with $1.0$1.7 million for the first quarterhalf of 2009, a decreasean increase of $0.1 million. Former MidWestOne had engaged in this business since 1988 and we continued the business following the merger. These loan pool participations are pools of performing, sub-performing and nonperforming loans purchased at varying discounts from the aggregate outstanding principal amount of the underlying loans. The loan pools are held and serviced by a third-party independent servicing corporation. We invest in the pools that are purchased by the servicer from nonaffiliated banking organizations and from the FDIC acting as receiver of failed banks and savings associations.$0.1 million. We have very minimal exposure in the loan pools to consumer real estate, subprime credit or construction and real estate development loans. Currently, we hold $83.7$79.0 millionin loan pool participations.Income is derived from this investment in the form of interest collected and the repayment of principal in excess of the purchase cost, which is referred to as “discount recovery.” The loan pool participations were historically a high-yield activity, but this yield has fluctuated from period to period based on the amount of cash collections, discount recovery, and net collection expenses of the servicer in any given period. The net “all-in” yield on loan pool participations was 4.98% 5.03%for the first quarterhalf of 2010, downup from 5.48%4.80% for the same period of 2009. The net yield was lowerhigher in the first quartersix months of 2010 than for the first quartersix months of 2009 primarily due to elevateda stabilization of charge-off levels and payment collections in the portfolio as well as slowed collections, as borrowers saw their ability to refinance debt decline due toduring the continued tightness in the credit markets.$3.7$7.7 millionin the first quartersix months of 2010 compared with $3.5$7.2 million for the first quartersix months of 2009, an increase of $280,000,$0.5 million, or 8.1%7.5%, mainly due to a higher investment balance, and despite a lower yield on investments in 2010. The average balanceb alance of investments in the first quarterhalf of 2010 was $378.6$393.4 million compared with $291.0$310.6 millionin the first quarterhalf of 2009. The tax-equivalent yield on our investment portfolio in the first quarterhalf of 2010 decreased to 4.01%3.94% from 4.83%4.64% in the comparable period of 2009 reflecting reinvestment of maturing securities and purchases of new securities at lower market interest rates.$1.1$2.3 million, or 18.8%20.2%, lower in the first quarterhalf of 2010 compared with the same period in 2009 mainly due to the decrease in interest rates during 2009. The weighted average rate paid on interest-bearing deposits was 1.80%1.76% in the th e first quartersix months of 2010 compared with 2.31%2.25% in the first quartersix months of 2009. This decline reflects the overall reduction in market interest rates on deposits throughout the markets in which we operate. Average interest-bearing deposits for the first quartersix months of 2010 were $40.2were $24.0 million, or 4.0%2.3%, greater compared with the same period in 2009. was $206,000 higher was $0.3 million lower in the first quartersix months of 2010 compared with the same period in 2009. Interest on borrowed funds totaled $1.4$2.9 million for the first quarterhalf of 2010.2010, compared with $3.2 million for the same period of 2009. Average borrowed funds for the first quarterhalf of 2010 were $41.1$36.1 million lower compared towith the same period in 2009. The majority of the difference was due to a reduction in the level of federal funds purchased, repurchase agreements, and FHLB borrowings. Elimination of the purchase accounting benefit on FHLB borrowings related to the March 2008 merger in the first quarter of 2009 led to the weighted average rate on borrowed funds increasing to 3.15% 3.08%for the first quarterhalf of 2010 compared with 2.21% forwith 2.91% for the first quarterhalf of 2009.The provision for loan losses is a current charge against income and represents an amount which management believes is sufficient to maintain an adequate allowance for known and probable losses. In assessing the adequacy of the allowance for loan losses, management considers the size and quality of the loan portfolio measured against prevailing economic conditions, regulatory guidelines, historical loan loss experience and credit quality of the portfolio. When a determination is made by management to charge off a loan balance, such write-off is charged against the allowance for loan losses.$1.5$3.0 million in the first quarterhalf of 2010 compared with a $2.4$3.9 million provision in the first quarterhalf of 2009. Net loans charged off in the first quartersix months of 2010 totaled $0.9$2.1 million compared with net loans charged off of $0.4$1.4 million in in the first quartersix months of 2009. The decrease in the provision in the first quarterhalf of 2010 compared with the same period in 2009 reflects our belief that existing identified potential problem credits have been adequately reserved for. We continue to increase our loan loss allowance by maintaining a provision for loan losses that is greater than outour net charge-off activity. We determine an appropriate provision based on our evaluation of the adequacy of the allowance for loan losses in relationship to a continuing review of problem loans, current economic conditions, actual loss experience and industry trends. We believe that the allowance for loan losses was adequate based on the inherent risk in the portfolio as of March 31, 2010;June 30, 2010; however, there is no assurance losses will not exceed the allowance and any growthg rowth in the loan portfolio, and the uncertainty of the general economy may require that management continue to evaluate the adequacy of the allowance for loan losses and make additional provisions in future periods as deemed necessary.Sensitive assets include nonaccrual loans, loans on the Bank’s watch loan reports and other loans identified as having more than reasonable potential for loss. We review sensitive assets on at least a quarterly basis for changes in the customers’ ability to pay and changes in valuation of underlying collateral in order to estimate probable losses. We also periodically review a watch loan list which is comprised of loans that have been restructured or involve customers in industries which have been adversely affected by market conditions. The majority of these loans are being repaid in conformance with their contracts. Three months ended March 31, 2010 2009 % Change (dollars in thousands) $ 1,234 $ 1,107 11.5 % 864 911 (5.2 ) 500 771 (35.1 ) 584 525 11.2 167 224 (25.4 ) (189 ) — NM 237 — NM (77 ) — NM $ 3,320 $ 3,538 (6.2 )% NM - Percentage change not considered meaningful. Six Months Ended June 30, 2010 2009 % Change (dollars in thousands) Trust and investment fees $ 2,448 $ 2,071 18.2 % Service charges and fees on deposit accounts 1,898 1,901 (0.2 ) Mortgage origination and loan servicing fees 1,025 1,631 (37.2 ) Other service charges, commissions and fees 1,160 1,035 12.1 Bank owned life insurance income 314 422 (25.6 ) Impairment losses on investment securities, net (189 ) (614 ) (69.2 ) Gain on sale of available for sale securities 470 1 NM Loss on sale of premises and equipment (281 ) 5 NM Total noninterest income $ 6,845 $ 6,452 6.1 % NM - Percentage change not considered meaningful. decreased $0.2increased $0.4 million for the first quarterhalf of 2010 compared towith the same period for 2009. The decreaseincrease in 2010 is largely due to the $0.3net gain on sales of securities of $0.5 million decline compared with $1,000 for the first half of 2009, combined with lower year-to-date 2010 impairment losses of $0.2 million, which was $0.4 million lower than the $0.6 million of charges realized in mortgagethe same period of 2009. Trust and investment fees increased by $0.3 million, from $2.1 million for the six months ended June 30, 2009 to $2.4 million for the same period of 2010.fees betweenfees. For the two comparative periods. Other than temporary impairment charges on investment securitiesfirst six months of $0.2 million was more than offset by gains of the sale of available for sale investment securities. The impairment charge recognized in 2010, resulted from our investment in collateralized debt obligations backed by groups of trust preferred securities issued by multiple banks and insurance companies.Mortgagemortgage origination and loan servicing fees were $0.5declined to the quarter ended March 31, 2010, a decline of $0.3 million from $0.8 million at March 31, 2009. The decrease in mortgage origination fees was attributable to lower refinancing volume of single family residential loans, as the bulk of creditworthy borrowers had already taken advantage of the historicallyhistoricall y low interest rates before the start of 2010. Trust and investment fees increased $0.1 million, or 11.5%, to $1.2 million for the three months ended March 31, 2010, compared to $1.1 million for the same period of 2009. The sale of an unused bank office building in Oskaloosa, Iowa, during the first quarter of 2010 resulted in$77,000. Management’s$0.1 million. In addition, a $0.1 million writedown was made in connection with the anticipated closure and disposal of a branch bank building located in Burlington, Iowa. Management's strategic goal is for noninterest income to constitute 30% of total revenues (net interest income plus noninterest expense)income) over time. As of March 31,For the six months ended June 30, 2010 noninterest income comprised 22.0% 22.2%of total revenues, compared to 22.8%with22.1% as of March 31, 2009.June 30, 2009. Three months ended March 31, 2010 2009 % Change (dollars in thousands) $ 5,790 $ 5,753 0.6 % 1,776 1,707 4.0 749 1,082 (30.8 ) 457 516 (11.4 ) 692 898 (22.9 ) 1,584 1,967 (19.5 ) $ 9,464 $ 9,956 (4.9 )% NM - Percentage change not considered meaningful. Six Months Ended June 30, 2010 2009 % Change (dollars in thousands) Salaries and employee benefits $ 11,481 $ 11,600 (1.0 )% Net occupancy and equipment expense 3,406 3,354 1.6 Professional fees 1,408 1,924 (26.8 ) Data processing expense 871 1,007 (13.5 ) FDIC insurance expense 1,397 &n bsp; 1,953 (28.5 ) Other operating expense 3,147 3,410 (7.7 ) Total noninterest expense $ 21,710 $ 23,248 & nbsp; (6.6 )% quarterhalf of 2010 was $11.0$21.7 million compared with $11.9$23.2 million for the first quarterhalf of 2009, a decrease of $0.9$1.5 million, or 7.3%6.6%. Noninterest expense includes salaries and employee benefits, occupancy and equipment expense, FDIC insurance premiums, professional fees and data processing expense. The primary reason for the decrease in noninterest expense was the drop in all categories of noninterest expense, with the exception of a small increases in salaries and employee benefits and net occupancy, for the threesix months ended March 31,June 30, 2010, compared with the same period in 2009. FDIC insurance saw a moderate decline of $0.6 million to $1.4 million from $2.0 million for the first half of 2010 compared towith the same period in 2009. Professional fees decreased by $0.3$0.5 million from $1.1$1.9 million to $0.8$1.4 millionfor the quartersix months ended March 31,June 30, 2009 and 2010, respectively, due to lower costs associated with Sarbanes OxleySarbanes-Oxley compliance efforts. FDIC insurance also sawData processing expense continued its downward trend as a moderate declineresult of $0.2 million to $0.7 million from $0.9 million for the first quarter of 2010 compared to the same periodcost-saving steps taken and efficiencies gained in late 2009. Salaries and employee benefits and net occupancy and equipment expenses both saw small increases between the comparative periods.We are currently evaluating the potential for restructuring our branch footprint in 2010 and decreasing associated expenses to further reduce operating costs.21.1%23.9% for the first quarterhalf of 2010, and 3.5% 9.0%for the same period of 2009. The increase in the effective rate in 2010 was primarily due to the relative amount of tax-exempt income on tax-exempt bonds to total net income. Income tax expense increased $492,000$1.2 million to $535,000 in$1.4 million in the first quarterhalf of 2010 compared to $43,000with $0.2 million for the same period of 2009.FDIC AssessmentsOn November 12, 2009, the FDIC adopted a final rule that required insured depository institutions to prepay on December 30, 2009, their estimated quarterly risk-based assessments for the fourth quarter of 2009 and for all of 2010, 2011, and 2012. On December 31, 2009, the Bank paid the FDIC $9.2 million in prepaid assessments. The FDIC determined each institution’s prepaid assessment based on the institution’s: (i) actual September 30, 2009 assessment base, increased quarterly by a five percent annual growth rate through the fourth quarter of 2012; and (ii) total base assessment rate in effect on September 30, 2009, increased by an annualized three basis points beginning in 2011. The FDIC began to offset prepaid assessments on March 31, 2010, representing payment of the regular quarterly risk-based deposit insurance assessment for the fourth quarter of 2009. Any prepaid assessment not exhausted after collection of the amount due on June 30, 2013, will be returned to the institution.$1.54$1.56 billion as of March 31,June 30, 2010 from $1.53$1.53 billion on December 31, 2009.2009. This growth resulted primarily from increased interest-bearing deposits in banks and investment in securities, somewhat offset by a decrease in loans as many customers actively reduce their borrowing position due to refinancing activity of portfolio loans, mostly consisting of single family residential loans that are then sold ont o the secondary market.current economic environment. There has also been a decrease in loan pool participation balances. The asset growth was primarily funded by an increase in deposits.both deposits and fed funds purchased. Total deposits at March 31,June 30, 2010 were $1.19$1.20 billion compared with $1.18$1.18 billion at December 31, 2009, up $13.4$15.7 million, or 1.1%1.3%, primarily due to increased consumer and public fund deposits. $375.2$417.5 million as of March 31, 2010.June 30, 2010. This was an increase of $12.3$54.6 million, or 3.4%15.0%, from December 31, 2009.2009. The increase was primarily due to net investment purchases of $12.0$52.6 million during during the period. Investment securities classified as held to maturity decreased to $6.2$5.4 million as of March 31,June 30, 2010 as a result of security maturities. The investment portfolio consists mainly of U.S. government agency securities, mortgage-backed securities and obligations of states and political subdivisions.March 31,June 30, 2010, we owned $1.8 million of collateralized debt obligations with an amortized cost of $1.8 millionthat were backed bysecurities.securiti es. We continue to monitor the values of these debt securities for purposes of determining other-than-temporary impairment in future periods given the instability in the financial markets and continue to obtain updated cash flow analysis as required. March 31, 2010 December 31, 2009 Balance % of Total Balance % of Total (in thousands) $ 89,825 9.4 % $ 92,727 9.6 % 201,637 21.1 203,539 21.0 21,063 2.2 20,785 2.1 56,389 5.9 58,652 6.1 87,947 9.2 88,747 9.2 157,005 16.4 161,065 16.7 71,733 7.5 73,665 7.6 31,745 3.3 32,455 3.4 198,667 20.8 196,025 20.3 23,074 2.4 23,262 2.4 15,604 1.6 16,076 1.7 $ 954,689 100.0 % $ 966,998 100.0 % June 30, 2010 December 31, 2009 Balance % of Total Balance % of Total (in thousands) Agricultural $ 89,748 9.4 % $ 92,727 9.6 % Commercial and financial 201,407 21.1 203,539 21.0 Real estate: Construction, one- to four- family residential 20,891 2.2 20,785 2.1 Construction, land development and commercial 53,226 5.6 58,652 6.1 Mortgage, farmland 85,933 9.0 88,747 9.2 Mortgage, one- to four- family first liens 161,368 16.9 161,065 16.7 Mortgage, one- to four- family junior liens 71,526 7.5 73,665 7.6 Mortgage, multifamily 31,394 3.3 32,455 3.4 &nb sp; Mortgage, commercial 202,177 21.1 196,025 20.3 Loans to individuals 23,735 2.5 23,262 2.4 Obligations of state and political subdivisions 14,782 1.5 16,076 1.7 Total loans $ 956,187 100.0 % $ 966,998 100.0 % by $12.3by $10.8 mi llion, to $956.2 million to $954.7 million as of March 31,June 30, 2010 as compared to December 31, 2009.2009. We experienced a $4.8$5.1 million, or 1.6%1.7%, decrease in the commercial, financial and agricultural sectors, along with a $4.9$5.3 million, or 0.9%6.7%, decrease in real estate mortgageconstruction loans, which resulted primarily from the continued refinancing activity seen duelower line-of-credit utilization and pay-downs on term debt, as the economic environment has caused many customers to historically low interest rates, which resulted in adjustable rate residentialactively reduce their borrowing po sition. Additionally, real estate loans that were held in our portfolio being refinanced into fixed-rate loans that are sold in the secondary market rather than held in our portfolio. Additionally, construction real estate decreased $2.0mortgage increased $0.4 million, or 2.5%0.1%; loans to individuals decreased $0.2increased $0.5 million, or 0.8%, and;2.0%; and, obligations of state and political subdivisions declined $0.5$1.3 million, or 2.9%8.0%. As of March 31,June 30, 2010, our bank loan (excluding loan pool participations) to deposit ratio was 80.0% compared with a year-end 2009 bank loan to deposit ratio of 82.0%. We anticipate that the loan to deposit ratio will continue to decline in future periods, as loans continue to pay down and deposits remain steady or increase. As of March 31,June 30, 2010, our largest category of bank loans was commercial real estate, comprising comprising 42%of the portfolio,p ortfolio, of which which 9% was farmland, 8% construction, and 3% multifamily. Residential real estate loans was the next largest category at24%, commercial loans 23%, agricultural loans 9%, and consumer loans 2%. All of these percentages relate to our direct loans and do not include loan pool participations.March 31,June 30, 2010, we had loan pool participations, net, totaling $81.5$76.9 million, down from $83.1$83.1 millionat December 31, 2009.2009. Loan pools are participation interests in performing, sub-performing and nonperforming loans that have been purchased from various non-affiliated banking organizations. Former MidWestOne had engaged in this activity since 1988, and we continued this line of business following the merger. We have identified a maximum for loanhave not actively pursued new pool participation balances of not more than $110.0 million. The most recently purchased pools have performed well and we believepurchases in the business still has merit over the long term.past three months. The loan pool investment balances shown as an asset on our Consolidated Balance Sheets represent the discounted purchase cost of the loan pool participations. We acquired no new loan pool participations during the first quarter of 2010. As of March 31,June 30, 2010, the categories of loans by collateral type in the loan pools were commercial real estate - 54%52%, commercial loans - 11%10%, agricultural and agricultural real estate –- 10%, single-family residential real estate - 11% and other loans - 14%17%. We have minimal exposure in the loan pools to consumer real estateMarch 31,June 30, 2010, such cost basis was $83.2$79.0 million, while the contractual outstanding principal amount of the underlying loanslo ans as of such date was approximately $177.3$169.3 million. TheThe discounted cost basis inherently reflects the assessed collectability of the underlying loans. We do not include any amounts related to the loan pool participations in our totals of nonperforming loans.March 31,June 30, 2010, loans in the southeast region of the United States represented approximately 40%37% of the total. The northeast was the next largest area with 32%36%, the central region with 19%18%, the southwest region with 8% 8% and northwest represented a minimal amount of the portfolio at 1%1%. The highest concentration of assets is in Florida at approximately 18%18% of the basis total, with the next highest state level being Ohio at 11%11%, then Pennsylvania at7%6%6%. As of March 31,June 30, 2010, approximately 56%59% of the loans were contractually current or less than 90 days past-due, while 44%41% were contractually past-due 90 days or more. It should be noted that many of the loans were acquired in a contractually past due status, which is reflected in the discounted purchase price of the loans. Performance status is monitored on a monthly basis. The 44%41% contractually past-due includes loans inin litigation and foreclosed property. As of March 31,June 30, 2010, loans in litigation totaled approximately $17.6$13.1 million, while foreclosed property was approximately $11.4$13.1 million. As of March 31,June 30, 2010, our investment basis in our loan pool participations was approximately 46.9%46.5% of the “face” amount of the underlying loans.$11.9$11.7 million as of March 31,June 30, 2010 from $12.2$12.2 million as of December 31, 2009 as a result of normal amortization. Amortization of intangibleintangi ble assets is recorded using an accelerated method based on the estimated life of the intangible. The following table summarizes the amounts and carrying values of intangible assets as of March 31, 2010. Gross
Carrying
Amount Accumulated
Amortization Unamortized
Intangible
Assets(in thousands) 1,320 292 1,028 5,433 1,858 3,575 7,040 — 7,040 330 57 273 $ 14,123 $ 2,207 $ 11,916 (in thousands) June 30, 2010 Other intangible assets: Insurance agency intangible $ 1,320 $ 337 $ 983 Core deposit premium 5,433 2,062 3,371 Trade name intangible 7,040 — 7,040 Customer list intangible 330 63 267 &n bsp; Total $ 14,123 $ 2,462 $ 11,661 March 31,June 30, 2010 were $1.19 were $1.20 billion comparedcompared with $1.18$1.18 billionas of December 31, 2009, an increase of $13.4 million. Certificates$15.7 million. Certificates of deposit were the largest category of deposits at March 31,June 30, 2010, representing approximately 48.1%47.4% of total deposits. Total certificates of deposit were $573.9$566.2 million at March 31,June 30, 2010, down $7.7$15.4 million, or 1.3%2.7%, from $581.6$581.6 million atDecember 31, 2009.2009. Included in total certificates of deposit at March 31,June 30, 2010 was $23.9 was $27.7 million of of brokered deposits in the Certificate of Deposit Account Registry Service (CDARS)(CDA RS) program, a decreasean increase of $0.5$3.3 million, or 2.0%13.5%, from the $24.4$24.4 million atDecember 31, 2009.2009. Based on historical experience, management anticipates that many of the maturing certificates of deposit will be renewed upon maturity. Maintaining competitive market interest rates will facilitate our retention of certificates of deposit. Interest-bearing checking deposits were $423.7$422.5 millionat March 31,June 30, 2010, an increase of $22.4of $21.2 million, or 5.6%5.0%, from $401.3$401.3 millionat December 31, 2009.2009. The increased balances were primarily in our “Power Checking” account product. Approximately 84.6% Approximately 85.4%of our total deposits are considered “core” deposits.$127.7$132.2 million as of March 31,June 30, 2010 compared with $130.2$130.2 million as of December 31, 2009.2009. We utilize FHLB borrowings as a supplement to customer deposits to fund earning assets and to assist in managing interest rate risk.thattha t have been issued to a statutory trust that issued trust$15.6$15.6 millionas of March 31,June 30, 2010, unchanged from December 31, 2009.2009. These junior subordinated debentures were assumed by us from Former MidWestOne in the merger. Former MidWestOne had issued these junior subordinated debentures on September 20, 2007, to MidWestOne Capital Trust II. The junior subordinatedsubo rdinated debentures mature on December 15, 2037, do not require any principalprincipal amortization and are callable at par at our option on the fifth anniversary of the date of issuance. The interest rate is fixed at 6.48% for five years on $7.7 million of the issuance and is variable quarterly at the three month LIBOR plus 1.59% on the remainder. $18.9$22.5 million as of March 31,June 30, 2010, up $1.4$5.0 millioncompared to December 31, 2009.2009. This increase was due to an increase in nonperforming loans of $2.5$6.0 million coupled with a decrease in other real estate owned of $1.1 million.$1.0 million. The balance of other real estate owned at March 31,June 30, 2010 was $2.5$2.6 million compared to $3.6$3.6 million at year-end 2009. Nonperforming loans totaled $16.3$19.9 million (1.71% (2.08% of total bank loans) as of March 31,June 30, 2010, compared to $13.9$13.9 million (1.44% (1.44% of total bank loans) as of December 31, 2009.2009. See Note 8 “Allowance for Loan Losses and Nonperforming Assets” for additional information related to nonperforming assets.$10.8$10.5 million in nonaccrual loans, $3.6$6.4 million in troubled debt restructures and $2.0$3.0 million in loans past due 90 days or more and still accruing. This compares with $9.9$9.9 million $2.6, $2.6 million and $1.4$1.4 million, respectively, as of December 31, 2009.2009. The Company experienced a $1.0$3.8 million increase increase in restructured loans, which grew from $2.6$2.6 million at December 31, 2009 to $3.6$6.4 million at March 31, 2010.June 30, 2010. This increase stems fromis primarily attributable to the restructuringaddition of one consumer loan, three residential real estatetwo agricultural loans totaling $0.4$3.3 million and two commercial real estate loans totaling $0.5 million.to the troubled debt restructures. During the same period, loans and leases past due 90 days or more and still accruingaccruing interest increased by $0.6$1.6 million from $1.4$1.4 million atDecember 31, 2009 to $2.0$3.0 million at March 31,June 30, 2010. Much of this increase is due to the addition of a $583,000 commercial loan relationship to the classifications during the second quarter of 2010.Additionally, loans past-due 30 to 89 days (not included in the nonperforming loan totals) were $11.1$8.9 million as of March 31,June 30, 2010 compared with $10.1$10.1 million as of December 31, 2009. Other real estate owned totaled $2.52009, a decrease of $1.2 million as of March 31, 2010 and $3.6 million at December 31, 2009. or 11.4%.March 31, 2010.June 30, 2010. Other real estate is carried at appraised value less estimated cost of disposal at date of acquisition. Additional discounts could be required to market and sell the properties, resulting in a write down through expense.March 31,June 30, 2010 was $14.6$14.8 million, which was 1.52%1.55% of total bank loans (excluding loan pools), as of that date. This compares with an allowance for loan losses of $14.0of $14.0 millionas of December 31, 2009, which was 1.44% of total bank loans. Gross charge-offs for the first quarterhalf of 2010 totaled $1.1$2.3 million, while recoveries of previously charged-off loans totaled $0.2 million.$0.2 million. Annualized net loan charge offs to average bank loans asfor the first half of March 31, 2010 was 0.38% 0.45%compared to 0.48%for the year ended December 31, 2009.2009. As of March 31,June 30, 2010, the allowance for loan losses was 89.1%74.5% of nonperforming bank loans compared with 100.6% as of December 31, 2009.2009. While nonperforming loan levels increased during the first quarter,half, the increase has been primarily in credits that our management had already identified as weak and for which we believeit believes adequate provisions already had been made. Based on the inherent risk in the loan portfolio, we believe that as of March 31,June 30, 2010, the allowance for loan losses was adequate; however, there is no assurance losses will not exceed the allowance and any growth in the loan portfolio and the uncertainty of the general economy may require that management continue to evaluate the adequacy of the allowance for loan losses and make additional provisions in future periods as deemed necessary. See Note 8 “Allowance for Loan Losses and Nonperforming Assets” for additional information related to the allowance for loan losses.pass percentage factorreserve level for each loan type. There were no changes to the other five factors during the first quarterhalf of 2010. Classified loans are reviewed per the requirements of FASB ASC Topics 310 and 450. All classified loans are reviewed for impairment per FASB ASC Topic 310.Bank’sBank's Board of Directors on a quarterly basis. At March 31,June 30, 2010, there were sixfive owner occupied 1-4 family loans with a LTV of 100% or greater. In addition, there are 4443 home equity lines of credit without credit enhancement that have LTV of 100% or greater. We have the first lien on threefour of these equity lines and other financial institutions have the first lien on the remaining 41.March 31,June 30, 2010, reported troubled debt restructurings were not a material portion of the loan portfolio. We review loans 90+ days past due that are still accruingshareholders’shareholders' equity was 10.00%10.07% of total assets as of March 31,June 30, 2010 and was 9.92%as of December 31, 2009.2009. Tangible common equity to tangible assets was 8.26%8.37% as of March 31,June 30, 2010 and 8.16% as of December 31, 2009.2009. Our Tier 1 capital to risk-weighted assets ratio was 13.06% 13.10% a s of June 30, 2010 and was 12.66%as of March 31, 2010 and was 12.66% as of December 31, 2009.2009. Risk-based capital guidelines require the classification of assets and some off-balance-sheet items in terms of credit-risk exposure and the measuring of capital as a percentage of the risk-adjusted asset totals. We believe that, as of March 31,June 30, 2010, the Company and the Bank met all capital adequacy requirements to which we are subject. As of that date, the Bank was “well capitalized” under regulatory prompt corrective action provisions. At March 31, At December 31, (in thousands) 2010 2009 $ 154,158 $ 152,208 (15,716 ) (15,699 ) (12,016 ) (12,272 ) 126,426 124,237 $ 1,542,061 $ 1,534,783 (12,016 ) (12,272 ) 1,530,045 1,522,511 8.26 % 8.16 % At March 31, At December 31, (in thousands) 2010 2009 $ 154,158 $ 152,208 15,464 15,464 (2,016 ) (1,505 ) (11,789 ) (12,286 ) 155,817 153,881 1,193,520 1,215,240 13.06 % 12.66 % At June 30, At December 31, (in thousands) 2010 2009 Tangible Common Equity: Total shareholders' equity $ 157,387 $ 152,208 Less: Preferred stock (15,733 ) (15,699 ) Goodwill and intangibles (11,761 ) (12,272 ) Tangible common equity $ 129,893 $ 124,237 Tangible Assets: Total assets $ 1,563,548 $ 1,534,783 Less: Goodwill and intangibles (11,761 ) (12,272 ) Tangible assets $ 1,551,787 $ 1,522,511 Tangible common equity to tangible assets 8.37 % 8.16 % At June 30, At December 31, (in thousands) 2010 2009 Tier 1 capital Total shareholders' equity $ 157,387 $ 152,208 Plus: Long term debt (qualifying restricted core capital) 15,464 15,464 Less: Net unrealized gains on securities available for sale (3,259 ) (1,505 ) Disallowed goodwill and intangibles (11,795 ) (12,286 ) Tier 1 capital $ 157,797 $ 153,881 Risk-weighted assets $ 1,204,596 $ 1,215,240 Tier 1 capital to risk-weighted assets 13.10 % 12.66 % $1,000$1,000 per share, or $16.0 million inin the aggregate. The senior preferred stock is non-voting,non-voti ng, other than class voting rights on any authorization or issuance of shares ranking senior to the senior preferred stock, any amendment to the rights of senior preferred stock, or any merger, exchange, or similar transaction that would adversely affect the rights of the senior preferred stock. If dividends are not paid in full for six dividend periods, whether or not consecutive, the U.S. Treasury will have the right to elect two directors to the Company’sCompany's Board. The right to elect directors would end when full dividends have been paid for four consecutive dividend periods. In addition, on February 6, 2009, we issued to the U.S. Treasury a warrant to purchase 198,675 shares of our common stock at a strike price of $12.08 per share at any time on or before February 6, 2019. If we repay the U.S. Treasury’sTreasury's investment in full,shelf-registrationshelf-registration statement registering for future sale up to $25.0 million of securities from time to time in one or more offerings. Given the growth opportunities and the difficult credit market, we believe that it is prudent to have all options available to raise additional capital. On April 22,July 29, 2010, the Company’sCompany's Board of Directors declared a quarterly dividend for the secondthird quarter of 2010 of $0.05 per common share, which is consistent with the dividend per common share paid in the first quarterand second quarters of 2010. Actual Minimum Required
for Capital
Adequacy Purposes Minimum Required
to be Well
Capitalized Amount Ratio Amount Ratio Amount Ratio (dollars in thousands) $ 154,158 12.92 % $ 95,482 8.00 % N/A N/A 157,281 13.46 % 93,460 8.00 % $ 116,825 10.00 % 155,817 13.06 % 47,741 4.00 % N/A N/A 144,137 12.34 % 46,730 4.00 % 70,095 6.00 % 155,817 10.28 % 60,615 4.00 % N/A N/A 144,137 9.56 % 60,325 4.00 % 75,407 5.00 % $ 169,149 13.92 % $ 97,219 8.00 % N/A N/A 156,413 12.94 % 96,727 8.00 % $ 120,909 10.00 % 153,881 12.66 % 48,610 4.00 % N/A N/A 141,287 11.69 % 48,363 4.00 % 72,545 6.00 % 153,881 10.01 % 61,505 4.00 % N/A N/A 141,287 9.23 % 61,215 4.00 % 76,518 5.00 % Actual Amount Ratio Amount Ratio Amount Ratio (dollars in thousands) June 30, 2010: Total risk-based capital to risk-weighted assets: Consolidated $ 172,620 14.33 % $ 96,368 & nbsp; 8.00 % N/A N/A MidWestOne Bank 162,439 13.58 % 95,675 8.00 % $ 119,594 10.00 % Tier 1 capital to risk-weighted assets: Consolidated 157,797 13.10 % 48,184 4.00 % N/A N/A Mid WestOne Bank 147,465 12.33 % 47,838 4.00 % 71,757 6.00 % Tier 1 capital to average assets: Consolidated 157,797 10.18 % 62,001 4.00 % N/A N/A MidWestOne Bank 147,465 9.55 % 61,739 4.00 % 77,174 5.00 % December 31, 2009: Total risk-based capital to risk-weighted assets: Consolidated $ 169,149 13.92 % $ 97,219 8.00 % N/A N/A MidWestOne Bank 156,413 12.94 % 96,727 8.00 % $ 120,909 10.00 % Tier 1 capital to risk-weighted assets: Consolidated 153,881 12.66 % 48,610 4.00 % N/A N/A MidWestOne Bank 141,287 11.69 % 48,363 4.00 % 72,545 6.00 % Tier 1 capital to average assets: Consolidated 153,881 10.01 % 61,505 4.00 % N/A N/A MidWestOne Bank 141,287 9.23 % 61,215 4.00 % 76,518 5.00 % N/A - Minimum to be considered well capitalized is not applicable to the consolidated entity. Liquidityequivalents)equivalents) of $42.0$26.2 millionas of March 31,June 30, 2010, compared with $27.6with $27.6 millionas of December 31, 2009.2009. Investment securities classified as available for sale, totaling $375.2$417.5 million and $362.9$362.9 million as as of March 31,June 30, 2010 and December 31, 2009, respectively, could be sold to meet liquidity needs if necessary. Additionally, our bank subsidiary maintains unsecured lines of credit with several correspondent banks and secured lines with the Federal Reserve Bank discount window and the Federal Home Loan Bank of Des Moines that would allow it to borrow federal funds on a short-term basis, if necessary. ManagementMarch 31,June 30, 2010 to meet the needs of borrowers and depositors.proceeds from the sale of loans,federal funds purchased, proceeds from the maturity and sale of investment securities, and funds provided by operations. While scheduled loan amortization and maturing interest-bearing deposits are relatively predictable sources of funds, deposit flows and loan prepayments are greatly influenced by economic conditions, the general level of interest rates, and competition. We utilized particular sources of funds based on comparative costs and availability. This included fixed-rate FHLB borrowings that were obtained at a more favorable cost than deposits. We generally managed the pricing of our deposits to maintain a steady deposit base but had from time to time decided not to pay rates on deposits as high as its competition.March 31,June 30, 2010, we had $15.6$15.6 millionof long-term debt outstanding. This amount represents indebtedness payable under junior subordinated debentures issued to a subsidiary trust that issued trust preferred securities in a pooled offering. The junior subordinated debentures have a 35-year term. One-half of the balance has a fixed interest raterate of 6.48 percent until December 15, 2012; the other one-half has a variable rate of three-month LIBOR plus 1.59 percent.PoliciesWe have identifiedEstimatesfollowing criticalapplication of certain accounting policies, some of which require numerous estimates and practices relativestrategic or economic assumptions that may prove inaccurate or be subject to variations which may significantly affect our reported results and financial position for the current per iod or future periods. The use of estimates, assumptions, and judgments are necessary when financial assets and liabilities are required to be recorded at, or adjusted to reflect, fair value. Current economic conditions may require the use of additional estimates, and some estimates may be subject to a greater degree of uncertainty due to the reportingcurrent instability of our resultsthe economy. The Company has identified several policies as being critical because they require management to make particularly difficult, subjective and/or complex judgments about matters that are inherently uncertain and because of operation and financial condition.the likelihood that materially different amounts would be reported under different conditions or using different assumptions. These accounting policies relate to the allowance for loan losses, participation interests in loan pools, application of purchase accounting, goodwill and intangible assets, and fair value of available for sale investment securities.management’smanagement's estimate of probable credit losses. The allowance for loan losses is established through a provision for loss based on our evaluation of the risk inherent in the loan portfolio, the composition of the portfolio, specific impaired loans, and current economic conditions. Such evaluation, which includes a review of all loans on whichwhic h full collectability may not be reasonably assured, considers, among other matters, the estimated net realizable value or the fair value of theborrowers’borrowers' current financial situation, the underlying collateral, current economic conditions, historical collection experience, and other factors relative to the collection process. If the estimated net realizable value of the loan pool participations is overstated, our yield on the loan pools would be reduced.determineddete rmined based on the expectedidentifiedidentifi ed purchase accounting as a critical accounting policy.purchasepurc hase business combinations and deemed to have indefinite lives are not subject to amortization and are instead tested for impairment at least annually. Core deposit and customer relationship intangibles arising from acquisitions are being amortized over their estimated useful lives of up to 10 years.shareholders’shareholders' equity, providing an indication that goodwill may be impaired as of such date. Thus, we performed an impairment analysis as a result of the significant decline in our stock price. Based on this analysis, we wrote offoff $27.3 million of goodwillgoodwill in the fourth quarter of 2008, which represented all of the goodwill that resulted from the Merger. Such charge had no effect on the Company’sCompany's or the Bank’sBank's cash balances or liquidity. In addition, because goodwill and other intangible assets are not included in the calculation of regulatory capital, the Company’sCompany's and the Bank’sBank's December 31, 2008 regulatory ratios were not adversely affected by this non-cash expense and exceeded the minimum amounts required to be considered “well-capitalized.”thesethe se intangible assets involves the use of significant estimates and assumptions. These estimates and assumptions include, among other things, the estimated cost to service deposits acquired discount rates, estimated attrition rates and useful lives, future economic and market conditions, comparison of our market value to book value and determination of appropriate market comparables. Actual future results may differ from those estimates. We assess these intangible assets for impairment annually or more often if conditions indicate a possible impairment. Each quarter we evaluate the estimated useful lives of intangible assets and whether events or changes in circumstances warrant a revision to the remaining periods of amortization. In accordance with FASB ASC 350,Accounting for the Impairment or Disposal of Long-Lived Assets, recoverability of these assets is measured byb y comparison of the carrying amount of the asset to the future undiscounted cash flows the asset is expected to generate. If the asset is considered to be impaired, the amount of any impairment is measured as the difference between the carrying value and the fair value of the impaired asset.determinede termine whether the decline is temporary or “other-than-temporary.” Declines in the fair value of available for sale securities below their cost that are deemed “other-than-temporary” are reflected in earnings as impairment losses. In determining whether other-than-temporary impairment exists, management considers whether: (1) we have the intent to sell the security, (2) it is more likely than not that we will be required to sell the security before recovery of the amortized cost basis and (3) we do not expect to recover the entire amortized cost basis of the security.customer’scustomer's creditworthiness on a case-by-case basis. As of March 31,June 30, 2010, outstanding commitments to extend credit totaled approximately $175.0approximately $167.2 million.Commitments under standby and performance letters of credit outstanding aggregated $3.9 $4.0 million asas of March 31, 2010.June 30, 2010. We do not anticipate any losses as a result of these transactions.businessb usiness activities.quarterhalf of 2010, has made liquidity risk (namely, funding liquidity risk) a more prevalent concern among financial institutions. In general, liquidity risk is the risk of being unable to fund an entity’sentity's obligations to creditors (including, in the case of banks, obligations to depositors) as such obligations become due and/or fund its acquisition of assets.customers’customers' credit needs, and to meet maturing obligations and existing commitments. Our liquidity principally depends on cash flows from operating activities, investment in and maturity of assets, changes in balances of deposits and borrowings, and our ability to borrow funds.$6.3$13.7 millionin the first half of 2010, compared with $10.7 million in the first quarter of 2010, compared with $6.9 million in the first quarterhalf of 2009. Proceeds from sale of loans held for sale, net of funds used to originate loans held for sale,Depreciation, amortization and accretion were a source of inflow for the first quarterhalf of 2010, as was a net change in accrued interest receivable of $1.0 million.$1.6 million.inflowsoutflows from investing activities were $3.2$35.0 millionin the threesix months ended March 31,June 30, 2010, compared to net cash outflows of $7.8$53.6 million in the comparable three-monthsix-month period of 2009. In the first threesix months of 2010, securities transactions accounted for a net outflow of $10.2$50.0 million, and net principal received on loans accounted for net inflows of $11.3 million.$8.1 million. Cash inflows for loan pool participations were $1.5$6.2 million during the first threesix months of 2010 compared to a $2.3$4.1 million outflow inflow during the same period of 2009.threesix months of 2010 was $4.9 million.$19.9 million. The largest cash outflow from financing activities in the first quarterhalf of 2010 consisted of $3.5$4.5 million in of net decrease in securities sold under agreements to repurchase. The largest financing cash inflow during the threesix months ended March 31,June 30, 2010 was the $13.4$15.7 million increase in deposits. Cash inflows from financing activities in the first quarter of 2009 were $35.0 million, which included the $16.0 million that we received from our issuance of shares of senior preferred stock and a warrant to purchase common stock to the U.S. Treasury pursuant to the Capital Purchase Program. In addition, net increases occurred in deposits and securities sold under agreements to repurchase of $22.0 million and $10.3 million, respectively.Bank’sBank's Fed Funds position. The principal function of these funds is to maintain short-term liquidity. Unsecured Fed Funds purchased lines are viewed as a volatile liability and are not used as a long-term funding solution, especially when used to fund long-term assets. Multiple correspondent relationships are preferable and Fed Funds sold exposure to any one customer is continuously monitored. The current Fed Funds purchased limit is 10% of total assets, or the amount of established Fed Funds lines, whichever is smaller. Currently, our subsidiary bank has unsecured Fed Fund lines totaling $55 million, which are tested annually to ensure availability.The current FHLB advance limit is 25% of total assets. Currently, the Bank has a $205.2$194.4 million advance limit with $127.7of collateral pledged to the FHLB and $132.2 million in$77.5$60.6 million available for liquidity needs. These borrowings are secured by various real estate loans (residential, commercial and agricultural).March 31, 2010.June 30, 2010.$13.5$11.8 million available for liquidity purposes.TheBank’sBank's Asset/Liability Management Policy.regulatoryreg ulatory authorities, the amounts of and rates at which assets and liabilities reprice, variances in prepayment of loans and securities other than those that are assumed, early withdrawal of deposits, exercise of call options on borrowings or securities, competition, a general rise or decline in interest rates, changes in the slope of the yield-curve, changes in historical relationships between indices (such as LIBOR and prime), and balance sheet growth or contraction. Our asset and liability committee (ALCO) seeks to manage interest rate risk under a variety of rate environments by structuring our balance sheet and off-balance sheet positions. The risk is monitored and managed within approved policy limits.changes.chan ges. For various assumed hypothetical changes in market interest rates, numerous other assumptions are made, such as prepayment speeds on loans and securities backed by mortgages, the slope of the Treasury yield curve, the rates and volumes of our deposits, and the rates and volumes of our loans. This analysis measures the estimated change in net interest income in the event of hypothetical changes in interest rates. The following table presents our projected changes in net interest income for the various interest rate shock levels at March 31, 2010.June 30, 2010. Immediate Change in Rates -200 -100 +100 +200 (dollars in thousands) $ 835 $ 1,125 $ (1,716 ) $ (2,366 ) 1.7 % 2.3 % -3.5 % -4.9 % $ 885 $ 1,373 $ (1,995 ) $ (3,310 ) 1.8 % 2.8 % -4.1 % -6.8 % Immediate Change in Rates -200 -100 +100 +200 (dollars in thousands) June 30, 2010 Dollar change $ 1,424 $ 1,222 $ (1,476 ) $ (2,175 ) Percent change 2.9 % 2.5 % (3.0 )% (4.4 )% December 31, 2009 Dollar change $ 885 $ 1,373 $ (1,995 ) $ (3,310 ) Percent change 1.8 % 2.8 % (4.1 )% (6.8 )% March 31,June 30, 2010, the effect of an immediate and sustained 200 basis point increase in interest rates would decrease our net interest income by approximately $2.4 million.$2.2 million. The effect of an immediate and sustained 200 basis point decrease in rates would increase our net interest income by approximately $0.8 million.$1.4 million. An increase in interest rates would cause our interest-bearing liabilities to reprice more quickly than interest-earninginterest-earnin g assets, thus reducing net interest income. Conversely, a decrease in interest rates would cause an increase in net interest income as interest-bearing liabilitiesquestionablequestio nable value as many interest bearing liabilities and interest earning assets cannot re-price significantly lower than current levels.March 31, 2010. BasedJune 30, 2010. Bas ed on this evaluation, our chief executive officer and chief financial officer believe that the disclosure controls and procedures were effective as of the end of the period covered by this Report with respect to timely communication to them and other members of management responsible for preparing periodic reports and material information required to be disclosed in this Report as it relates to the Company and our consolidated subsidiaries.Company’sCompany's or any system of disclosure controls and procedures is subject to certain limitations, including the exercise of judgment in designing, implementing, and evaluating the controls and procedures, the assumptions used in identifying the likelihood of future events, and the inability to eliminate misconduct completely. As a result, there can be no assurance thatth at our disclosure controls and procedures will prevent all errors or fraud or ensure that all material information will be made known to appropriate management in a timely fashion. By their nature, our or any system of disclosure controls and procedures can provide only reasonable assurance regarding management’smanagement's control objectives.report,Report, other than those concerning historical financial information, may be considered forward-looking statements, which speak only as of the date of this document and are based on current expectations and involve a number of assumptions. These include, among other things, statements regarding future results or expectations. The Company intendsWe intend such forward-looking statements to be covered by the safe harbor provisions for forward-looking statements contained in thet he Private Securities Litigation Reform Act of 1995 and isare including this statement for purposes of these safe harbor provisions. The Company’sOur ability to predict results, or the actual effect of future plans or strategies, is inherently uncertain. Factors that could cause actual results to differ from those set forth in the forward-looking statements or that could have a material effect on the operations and future prospects of the Company include, but are not limited to: (1) the strength of the local and national economy; (2) changes in interest rates, legislative/regulatory changes (including the impact of the Dodd-Frank Wall Street Reform and Consumer Protection Act and the extensive regulations to be promulgated thereunder), monetary and fiscal policies of the U.S. government, including policies of the U.S. Treasury and the Federal Reserve Board; (3) the loss of key executives or employees; (4) changes in the quality and composition of the Company’sCompany's loan and securities portfolios; demand for loan products; deposit flows; competition; demand for financial services in the Company’s respectiveour market areas; implementation of new technologies; ability to develop and maintain secure and reliable electronic systems; and accounting principles, policies, and guidelines; (5) expected revenue synergies and cost savings from the merger may not be fully realized or realized within the expected time frame; and (6) other risk factors detailed from time to time in filings made by the Company with the SEC.The Company believesWe believe that there are no threatened or pending proceedings against the Company or its subsidiaries, which, if determined adversely, would have a material adverse effect on the business or financial condition of the Company.There have been no material changes from1A,1A. “Risk Factors” of our Form 10-K for the annual period ended December 31, 2009.2009, we also face the risk set forth below. Please refer to that sectionPart I, Item 1A. “Risk Factors” of our Form 10-K for 2009 for disclosures regarding theadditional risks and uncertainties related to our business.March 31,June 30, 2010, we did not have in effect an approved share repurchase program.First,Firs t, no dividends on our common stock may be paid unless all accrued dividends on Treasury’sTreasury's senior preferred stock have been paid in full. Second, until the third anniversary of the date of Treasury’sTreasury's investment, we may not increase the dividends paid on its common stock beyond $0.1525 per share without first obtaining the consent of Treasury.None.Exhibit 31.1 Certification of Chief Executive Officer pursuant to Rule 13a-14(a) and Rule 15d-14(a) Filed herewith 31.2 Certification of Chief Financial Officer pursuant to Rule 13a-14(a) and Rule 15d-14(a) Filed herewith 32.1 Certification of Chief Executive Officer pursuant to 18 U.S.C.;U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 Filed herewith 32.2 Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 Filed herewith Dated: May 5,August 4, 2010 By: Charles N. Funk President and Chief Executive OfficerO fficer�� By: Gary J. Ortale Executive Vice President and Chief Financial Officer 34