UNITED STATES
SECURITIES AND EXCHAN GEEXCHANGE COMMISSION
WASHINGTON, D.C. 20549
 
   
 FORM 10-Q 
   
 
xQUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2010March 31, 2011
OR
oTRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from             to             
 Commission file number 000-24630 
   
MIDWESTONE FINANCIAL GROUP, INC.
 
   
102 South Clinton Street
Iowa City, IA 52240
(Address of principal executive offices, including Zip Code)
  
   
Registrant's telephone number: 319-356-5800
Iowa42-1206172
(State of Incorporation)(I.R.S. Employer Identification No.)
Indicate by check mark whether the registrant (1)&nbs p;has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    x  Yes    o  No
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the p recedingpreceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    o  Yes    o  No
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definition of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer
 o
&nbs p;  Accelerated filerx
Non-accelerated filer
 o  (Do not check if a smaller reporting company)
  Smaller reporting companyo
 
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    o  Yes    x  No
 
As of November 2, 2010,May 3, 2011, there were 8,613,9828,627,971 shares of common stock, $1.00 par value per share, outstanding.
     
Table of Contents

MIDWESTONE FINANCIAL GROUP, INC.
Form 10-Q Quarterly Report
Table of Contents
    Page No.
PART I    
     
Item 1. 
Financial Statements
 
1
     
  
Consolidated Balance Sheets
 
1
     
  
Consolidat edConsolidated Statements of Operations
 
2
     
  
Consolidated Statements of Shareholders' Equity and Other Comprehensive Income (Loss)
 
3
     
  
Consolidated Statements of Cash Flows
 
4
     
  
Notes to Consolidated Financial Statements
 
65
     
Item 2. 
Management's Discussion and Analysis of Financial Condition and Results of Operations
 
2126
     
Item 3. 
Quantitative and Qualitative Disclosures about Market Risk
 
40
     
Item 4. 
Controls and Procedures
 
42
     
Part II    
     
Item 1. 
Legal Proceedings
 
43
     
Item 1A. 
Risk Factors
 
43
     
Item 2. 
Unregistered Sales of Equity Securities and Use of Proceeds
 
43
     
Item 3. 
Defaults Upon Senior Sec uritiesSecurities
 
44
     
Item 4. 
[Removed and Reserved]
 
44
     
Item 5. 
Other Information
 
44
     
Item 6. 
Exhibits
 
4544
     
  
Signatures
 
4645
 
Table of Contents

PART I – FINANCIAL INFORMATION
Item 1.   Financial Statements.
 
MIDWESTONE FINANCIAL GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
 
September 30,
2010		 December 31, 2009March 31,
2011		 December 31, 2010
(dollars in thousands)(unaudited)  (unaudited)  
ASSETS      
Cash and due from banks$20,372   $25,452 $19,085   $13,720 
Interest-bearing deposits in banks5,375   ; 2,136 4,318   6,077 
Federal funds sold—   — 264   726 
Cash and cash equivalents25,747   27,588 23,667   20,523 
Investment securities:        
Available for sale407,808   362,903 501,946   461,954 
Held to maturity (fair value of $4,307 as of September 30, 2010 and $8,118 as of December 31, 2009)4,231   8,009 
Held to maturity (fair value of $3,716 as of March 31, 2011 and $4,086 as of December 31, 2010)3,672   4,032 
Loans held for sale4,936   1,208 279   702 
Loans956,324   966,998 938,523   938,035 
Allowance for loan losses(14,859) (13,957)(15,398) (15,167)
Net loans941,465   953,041 923,125   922,868 
Loan pool participations, net71,160   83,052 62,207   65,871 
Premises and equipment, net27,431   28,969 25,916   26,518 
Accrued interest receivable11,796   11,534 9,580   10,648 
Other intangible assets, net11,406   12,172 10,919   11,143 
Bank-owned life insurance18,559   18,118 27,001   26,772 
Other real estate owned4,738   3,635 3,874   3,850 
Deferred income taxes4,131   5,163 6,097   6,430 
Other assets20,120   19,391 19,948   19,948 
Total assets$1,553,528   $1,534,783 $1,618,231   $1,581,259 
LIABILITIES AND SHAREHOLDERS' EQUITY       
Deposits:        
Non-interest-bearing demand$137,260   $133,990 $144,724   $129,978 
Interest-bearing checking422,684   401,264 472,257   442,878 
Savings65,182   62,989 75,439   74,826 
Certificates of deposit under $100,000378,892   394,369 379,326   380,082 
Certificates of deposit $100,000 and over179,038   187,256 191,412   191,564 
Total deposits1,183,056   1,179,868 1,263,158   1,219,328 
Federal funds purchased1,700   1,875 —   — 
Securities sold under agreements to repurchase42,779   43,098 46,325   50,194 
Federal Home Loan Bank borrowings136,200   130,200 117,200   127,200 
Deferred compensation liability3,761   3,832 3,698   3,712 
Long-term debt15,552   15,588 15,464   15,464 
Accrued interest payable2,021   2,248 1,964   1,872 
Other liabilities7,343   5,866 9,107   5,023 
Total liabilities1,392,412   1,382,575 1,456,916   1,422,793 
      
Shareholders' equity:        
Preferred stock, no par value, with a liquidation preference of $1,000 per share; authorized 500,000    
&n bsp;shares; issued 16,000 shares as of September 30, 2010 and December 31, 2009$15,749  $15,699 
Common stock, $1 par value; authorized 15,000,000 shares at September 30, 2010 and December 31, 2009;   
issued 8,690,398 shares at September 30, 2010 and December 31, 2009; outstanding 8,613,982 shares   
at September 30, 2010 and 8,605,333 shares at December 31, 20098,690   8,690 
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, 2011 and December 31, 2010$15,784  $15,767 
Common stock, $1 par value; authorized 15,000,000 shares at March 31, 2011 and December 31, 2010; issued 8,690,398 shares at March 31, 2011 and December 31, 2010; outstanding 8,624,392 share at March 31, 2011 and 8,614,790 shares at December 31, 20108,690   8,690 
Additional paid-in capital81,229   81,179 81,213   81,268 
Treasury stock at cost, 76,416 shares as of September 30, 2010 and 85,065 shares at December 31, 2009(1,063) (1,183)
Treasury stock at cost, 66,006 shares as of March 31, 2011 and 75,608 shares at December 31, 2010(918) (1,052)
Retained earnings53,531   48,079 57,876   55,619 
Accumulated other comprehensive income (loss)2,980   (256)(1,330)  (1,826)
Total shareholders' equity161,116   152,208 161,315   158,466 
Total liabilities and shareholders' equity$1,553,528   $1,534,783 $1,618,231   $1,581,259 
 
See accompanying notes to consolidated financial statements.  

1
Table of Contents

MIDWESTONE FINANCIAL GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
 
(unaudited)
(dollars in thousands, except per share amounts)
  
Three Months Ended
September 30,
 
Nine Months Ended
September 30,
  
Three Months Ended
March 31,
  2010 2009 2010 2009  2011 2010
Interest income:              
Interest and fees on loans & nbsp;$13,777  $14,669  $41,242  $44,365   $12,800  $13,704 
Interest and discount on loan pool partic ipations  552  28  2,360  1,707 
Interest and discount on loan pool participations  354  899 
Interest on bank deposits  2  3  29  4   8  10 
Interest on federal funds sold  —  6  4  44   —  — 
Interest on investment securities:                
Taxable securities  2,445  2,307  7,115  6,429   2,688  2,225 
Tax-exempt securities  946  1,018  2,922  2,988   1,035  990 
Total interest income  17,722  18,031  53,672  55,537   16,885  17,828 
          
Interest expense:              
Interest on deposi ts:    &nbs p;    
Interest on deposits:     
Interest-bearing checking  1,010  1,078  3,213  3,450   1,008  1,070 
Savings   47  49  126  174   59  36 
Certificates of deposit under $100,000  2,311  2,909  7,309  9,255   2,187  2,543 
Certificates of deposit $100,000 and over  859  1,266  2,744  3,905   848  967 
Total interest expense on deposits  4,227  5,302  13,392  16,784   4,102  4,616 
Interest on federal funds purchased  4  1  6  11   —  1 
Interest on securities sold under agreements to repurchase  75  97  221  348   74  76 
Interest on Federal Home Loan Bank borrowings  1,170  1,533  3,560  4,115   945  1,207 
Interest on notes payable  10  13  34  49   10  13 
Interest on long-term debt  157  158  457  505   162  148 
Total interest expense  5,643  7,104  17,670  21,812   5,293  6,061 
Net interest income  12,079  10,927  36,002  33,725   11,592  11,767 
Provision for loan losses  1,250  2,125  4,250  5,975   900  1,500 
Net interest income after provision for loan losses  10,829  8,802  31,752  27,750   10,692  10,267 
            
Noninterest income:              
Trust and investment fees  1,049  1,050  3,497  3,121   1,273  1,234 
Service charges and fees on deposit accounts  1,118  1,074  3,016  2,975   851  864 
Mortgage origination and loan servicing fees  958  613  1,983  2,244   877  500 
Other service charges, commissions and fees  633  568  1,793  1,603   679  584 
Bank-owned life insurance income&nbs p; 158  154  472  576   229  167 
Investment securities losses, net:                 
Impairment losses on investment securities  —  (1,388) (189) (2,002)  —  (189)
Less non-credit-related losses  —  —  —  &mdash ;   —  — 
Net impairment losses  —  (1,388) (189) (2,002)  —  (189)
Gain (loss) on sale of available for sale securities  (158) 491  312  491 
Gain on sale of available for sale securities  —  237 
Loss on sale of premises and equipment  (1) (9) (282) (3)  (48) (77)
Total noninterest income  3,757  2,553  10,602  9,005   3,861  3,320 
            
Noninterest expense:              
Salaries and employee benefits  5,838  5,863  17,319  17,463   5,870  5,790 
Net occupancy and equipment expense  1,598  1,729  5,004  5,083   1,617  1,776 
Professional fees  696  727  2,104  2,651   677  749 
Data processing expense  421  438  1,292  1,445   450  457 
FDIC Insurance expense  726  615  2,123  2,568   597  692 
Other operating expense  1,605  1,785  4,752  5,195   1,423  1,584 
Total noninterest expense  10,884  11,157  32,594  34,405   10,634  11,048 
Income before income tax expense  3,702  198  9,760  2,350   3,919  2,539 
Income tax expense  916  (636) 2,365  (443)  1,014  535 
Net income  $2,786  $834  $7,395  $2,793   $2,905  $2,004 
Less: Preferred stock dividends and discount accretion  $216  $216  $650  $563   $217  $217 
Net income available to common shareholders  $2,570  $618  $6,745  $2,230   $2,688  $1,787 
Share and Per share information:     &nbs p;        
Ending number of shares outstanding  8,613,982  8,605,333  8,613,982  8,605,333   8,624,392  8,609,804 
Average number of shares outstanding  8,613,754  8,605,312  8,611,418  8,604,531   8,621,720  8,607,853 
Diluted average number of shares  8,642,424  8,605,732  8,633,509  8,604,557   8,682,381  8,611,511 
Earnings per common share - basic  $0.30  $0.07  $0.78  $0.26   $0.31  $0.21 
Earnings per common share - diluted  0.30  0.07  0.78  0.26   0.31  0.21 
Dividends paid per common share  0.05  0.05  0.15  0.25   0.05  0.05 
See accompanying notes to consolidated financial statements.

2
Table of Contents

MIDWESTONE FINANCIAL GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
AND OTHER COMPREHENSIVE INCOME (LOSS)
 
(unaudited)
(dollars in thousands, except per share amounts)
  
Preferred
Stock
  
Common
Stock
  
Additional
Paid-in
Captial
 
Treasury
Stock
 
Retained
Earnings
 
Accumulated
Other
Comprehensive
Income (loss)
 Total  
Preferred
Stock
  
Common
Stock
  
Additional
Paid-in
Captial
 
Treasury
Stock
 
Retained
Earnings
 
Accumulated
Other
Comprehensive
Income (loss)
 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  —   —   —  —  2,793  —  2,793 
Change in net unrealized gains arising during the period on securities available for sale, net of tax  —   —   —  —  —  5,328  5,328 
Total comprehensive in come  —  —  —  —  6,059  2,062  8,121 
Dividends paid on common stock ($0.20 per share)  —  —  —  —  (2,172) —  (2,172)
Dividends pa id on preferred stock —  —  —  —  (420) —  (420)
Release/lapse of restriction of 2,147 RSUs —  —  (32) 32  —  —  — 
Issuance of preferred shares (16,000 shares)  15,642  —  —  —  —  —  15,642 
Common warrants issued  —  —  358  —  —  —  358 
Preferred stock discount accretion  41  —  —  —  (41) —  — 
Stock compensation  —  —  39  —  —  —  39 
Balance at September 30, 2009  $15,683  $8,690  $81,122  $(1,183) $47,109  $489  $151,910 
Balance at December 31, 2009  $15,699   $8,690   $81,179  $(1,183) $48,079  $(256) $152,208   $15,699   $8,690   $81,179  $(1,183) $48,079  $(256) $152,208 
Comprehensive income:                                  
Net income  —   —   —  —  7,395  —  7,395   —   —   —  —  2,004  —  2,004 
Change in net unrealized gains arising during the period on securities available for sale, net of tax  —   —   —  —  —  3,236  3,236   —   —   —  —  —  510  510 
Total comprehensive income  —   —   —  —�� 7,395  3,236  10,631   —  —  —  —  2,004  510  2,514 
Dividends paid on common stock ($0.15 per share)  —   —   —  —  (1,293) —  (1,293)
Dividends paid on common stock ($0.05 per share)  —  —  —  —  (430) —  (430)
Dividends paid on preferred stock  —   —   —  —  (600) —&nbs p; (600) —  —  —  —  (200) —  (200)
Stock options exercised (3,145 shares)  —   —   (19) 42  —  —  23 
Release/lapse of restriction on 5,604 RSUs  —   —   (78) 78  —  —  — 
Stock options exercised (1,945 shares) —  —  (11) 27  —  —  16 
Release/lapse of restriction on 2,546 RSUs  —  —  (35) 35  —  —  — 
Preferred stock discount accretion  50   —   —  —  (50) —  —   17  —  —  —  (17) —  — 
Stock compensation  —   —   147  —  —  —  147   —  —  50  —  —  —  50 
Balance at September 30, 2010  $15,749   $8,690   $81,229  $(1,0 63) $53,531  $2,980  $161,116 
Balance at March 31, 2010  $15,716  $8,690  $81,183  $(1,121) $49,436  $254  $154,158 
Balance at December 31, 2010  $15,767   $8,690   $81,268  $(1,052) $55,619  $(1,826) $158,466 
Comprehensive income:                 
Net income  —   —   —  —  2,905  —  2,905 
Change in net unrealized gains arising during the period on securities available for sale, net of tax  —   —   —  —  —  496  496 
Total comprehensive income  —   —   —  —  2,905  496  3,401 
Dividends paid on common stock ($0.05 per share)  —   —   —  —  (431) —  (431)
Dividends paid on preferred stock  —   —   —  —  (200) —  (200)
Stock options exercised (1,682 shares)  —   —   (6) 14  —  —  8 
Release/lapse of restriction on 8,600 RSUs  —   —   (120) 120  —  —  — 
Preferred stock discount accretion  17   —   —  —  (17) —  — 
Stock compensation  —   —   71  —  —  —  71 
Balance at March 31, 2011  $15,784   $8,690   $81,213  $(918) $57,876  $(1,330) $161,315 
See accompanying notes to consolidated financial statements.  

3
Table of Contents

MIDWESTONE FINANCIAL GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
 
(unaudited)
(dollars in thousands)
Nine Months Ended
September 30,
Three Months Ended March 31,
2010 20092011 2010
Cash flows from operating activities:      
Net income$7,395  $2,793 $2,905  $2,004 
Adjustments to reconcile net income to net cash provided by operating activities:   ;    
Provision for loan losses4,250  5,975 900  1,500 
Depreciation, amortization and accretion4,423  3,328 1,447  1,576 
Loss on sale of premises and equipme nt282  3 
Loss on sale of premises and equipment48  77 
Deferred income taxes(895) 1,800 36  (8)
Stock-based compensation147  39 71  50 
Net gains on sale of available for sale securities(312) (491)—  (237)
Net (gains) losses on sale of other real estate owned(23) 9 
Net gains on sale of other real estate owned(90) (64)
Writedown of other real estate owned112  230 —  12 
Other-than-temporary impairment of investment securities189  2,002 —  189 
(Increase) decrease in loans held for sale(3,728) 4,164 
Net change in:   
Increase in accrued interest receivable(262) (646)
Decrease in loans held for sale423  449 
Decrease in accrued interest receivable1,068  1,019 
Decrease (increase) in other assets(821) 2,547 —  (119)
(Decrease) increase in deferred compensation liability(71) 2,253 
Decrease in deferred compensation liability(14) (22)
(Decrease) increase in accounts payable, accrued expenses, and other liabilities1,342  (7,277)4,176  (147)
Net cash provided by operating activities12,028  16,729 10,970  6,279 
      
Cash flows from investing activities:      
Available for sale securities:   
Sales16,742  34,741 
Maturities70,628  60,938 
Purchases(128,595) (165,677)
Held to maturity securities:   
Maturities3,766  1,522 
Purchases—  (950)
Sales of available for sale securities—  6,674 
Maturities of available for sale securities34,396  19,440 
Purchases of available for sale securities(74,236) (38,091)
Maturities of held to maturity securities361  1,810 
Purchases of held to maturity securities—  — 
Loans made to customers, net of collections3,997  35,727 (1,291) 11,328 
Loan pool participations, net11,892  4,225 3,664  1,534 
Purchases of premises and equipment(2,676) (2,776)(183) (1,041)
Proceeds from sale of other real estate owned2,137  322 200  1,217 
Proceeds from sale of premises and equipment1,893  28 154  544 
Activity in bank-owned life insurance:   
Purchases—  — 
Increase in cash value(441) (577)
Net cash used in investing activities(20,657) (32,477)
Purchases of bank-owned life insurance—  — 
Increase in cash value of bank-owned life insurance(229) (167)
Net cash (used) provided in investing activities(37,164) 3,248 
   
Cash flows from financing activities:   
Net increase in deposits43,830  13,417 
Net decrease in federal funds purchased—  (1,875)
Net decrease in securities sold under agreements to repurchase(3,869) (3,533)
Proceeds from Federal Home Loan Bank borrowings10,000  10,000 
Repayment of Federal Home Loan Bank borrowings(20,000) (12,500)
Stock options exercised8  16 
Payments on long-term debt—  (12)
Dividends paid(631) (630)
Net cash provided by financing activities29,338  4,883 
   
Net increase in cash and cash equivalents3,144  14,410 
Cash and cash equivalents at beginning of period20,523  27,588 
Cash and cash equivalents at end of period$23,667  $41,998 
   
Supplemental disclosures of cash flow information:   
Cash paid during the period for interest$5,200  $6,238 
Cash paid during the period for income taxes$143  $600 
   
Supplemental schedule of non-cash investing activities:   
Transfer of loans to other real estate owned$134  $78 
See accompanying notes to consolidated financial statements.

4
Table of Contents

MIDWESTONE FINANCIAL GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
(dollars in thousands)
Nine Months Ended
September 30,
 2010 2009
Cash flows from financing activities:   
Net increase in deposits3,188  24,625 
Net decrease in federal funds purchased(175) (13,050)
Net (decrease) increase in securities sold under agreements to repurchase(319) 6,148 
Proceeds from Federal Home Loan Bank borrowings35,000  24,000 
Repayment of Federal Home Loan Bank borrowings(29,000) (45,000)
Stock options exercised23 ��— 
Payments on long-term debt(36) (39)
Dividends paid(1,893) (2,592)
Issuance of preferred stock and warrants—  16,000 
Net cash provided by financing activities6,788  10,092 
    
Net decrease in cash and cash equivalents(1,841) (5,656)
Cash and cash equivalents at beginning of period27,588  32,926 
Cash and cash equivalents at end of period$25,747  $27,270 
    
Supplemental disclosures of cash flow information:   
Cash paid during the period for:   
Interest$17,897  $24,607 
Income taxes$3,725  $846 
    
Supplemental schedule of non-cash investing activities:   
Transfer of loans to other real estate owned$3,329  $2,173 
See accompanying notes to consolidated financial statements.

5
Table of Contents

MidWestOne Financial Group, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(Unaudited)
 
1.Introductory Note
MidWestOne Financial Group, Inc. (“MidWestOne” or the “Company,” which is also referred to herein as &ldqu o;we,“we,” “our” or “us”) is an Iowa corporation incorporated in 1983, a bank holding company under the Bank Holding Company Act of 1956 and a financial holding company under the Gramm-Leach-Bliley Act of 1999. Our principal executive offices are located at 102 South Clinton Street, Iowa City, Iowa 52240.
The Company owns 100% of the outstanding common stock of MidWestOne Bank, an Iowa state non-member bank chartered in 1934 with its main office in Iowa City, Iowa (the “Bank”), and 100% of the common stock of MidWestOne Insurance Services, Inc., Pella, Iowa. We operate primarily through our bank subsidiary, MidWestOne Bank, and MidWestOne Insurance Services, Inc., our wholly-owned subsidiary that operates an insurance agency business through three offices located in central and east-central Iowa.
 
On March 14, 2008, we consummated a merger-of-equals transaction with the former MidWestOne Financial Group, Inc., Oskaloosa, Iowa (“Former MidWestOne”), pursuant to and in accordance with the Agreement and Plan of Merger dated as of September 11, 2007 (the “Merger”). Prior to the Merger, we operated under the name “ISB Financial Corp.” 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
Principles of Consolidation andPresentation
The accompanying consolidated statements of operations for the three months and nine months ended September 30, 2010 and 2009 include the accounts and transactions of the Company and its wholly-owned subsidiaries MidWestOne Bank and MidWestOne Insuran ce Services, Inc. All material intercompany balances and transactions have been eliminated in consolidation.
The accompanyingunaudited consolidated financial statements have been prepared by the Company pursuant to the rules and regulations of the Securities and Exchange Commission. Certain information and footnote disclosures normally included in financial statements prepared in accordance with U. S.the instructions to Form 10-Q and, therefore, do not include all the information and notes necessary for complete financial statements in conformity with generally accepted accounting principlesprinciples. The information in this Quarterly Report on Form 10-Q is written with the presumption that the users of the interim financial statements have been condensedread or omitted pursuanthave access to such rulesthe most recent Annual Report on Form 10-K of MidWestOne, which contains the latest audited financial statements and regulations.notes thereto, together with Management's Discussion and Analysis of Financial Condition and Results of Operations as of December 31, 2010 and for the year then ended. Management believes that the disclosures are adequate to make the information presented not misleading. In the opinion of management, the accompanying consolidated financial statements contain all adjustments (consisting of only normal recurring accruals) necessary to pr esentpresent fairly the financial position as of September 30, 2010March 31, 2011, and the results of operations and cash flows for the three months and nine months ended September 30, 2010March 31, 2011 and 20092010. All significant intercompany accounts and transactions have been eliminated in consolidation.
The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities at the date of the financial statements and the reported amount of revenues and expenses during the reporting period. These estimates are based on information available to management at the time the estimates are made. Actual results could differ from those estimates. In the opinion of management, the accompanying unaudited consolidated financial statements contain all adjustments, consisting of normal recurring items, considered necessary for fair presentation. The results for the three months and nine months ended September 30, 2010March 31, 2011 may not be indicative of results for the year ending December 31, 20102011, or for any other period.
3.    Consolidated Statements of Cash Flows
All significant accounting policies followed in the preparation of the quarterly financial statements are disclosed in the December 31, 2010 Annual Report on Form 10-K. In the consolidated statements of cash flows, cash and cash equivalents include cash and due from banks, interest-bearing deposits in banks, and federal funds sold.
4.    Income Taxes
Federal income tax expense for the three months and nine months ended September 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.    3.Shareholders' Equity and Earnings per Common Share
Preferred Stock: On January 23, 2009, the shareholders of the Company approved a proposal to amend the Company'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 Purc hasePurchase Program (the “CPP”) for an aggregate purchase price of $16.0 million. Upon issuance, the fair values of the senior preferred stock and the common stock warrants were computed as if the securities were issued on a stand-alone basis. The value of the senior preferred stock was estimated based on the net present value of the future senior preferred stock cash flows using a discount rate of 12%. The allocated carrying value of the senior preferred

6
Table of Contents

stock and common stock warrants on the date of issuance (based on their relative fair values) were $15.6 million and $0.4 million, respectively. The preferred stock discount, $358,000, is being accreted on a 5% level yield basis over 60 months. The senior preferred stock has no par value per share and a liquidation preference of $1,000 per share, or $16.0 million in the aggregate. Dividends are payable quarterly at the rate of 5% per annum until the fifth anniversary date of the issuance and at a rate of 9% per annum thereafter. The dividends are computed on the basis of a 360-day year consisting of twelve 30-day months. The dividends are payable quarterly in arrears on February 15, May 15, August 15, and November 15 of each year.
The senior preferred 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

5
Table of Contents

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'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's ability to repay the Treasury's investment until the third anniversary of the date of the Treasury's investment. Prior to ARRA, CPP participants were prohibited from redeeming the Treasury's sen ior preferred stock except with the proceeds of an offering of qualifying Tier 1 capital. ARRA now allows CPP participants, such as theThe Company has the option to repay the Treasury'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's investment, it would be permitted to redeem the warrant issued to Treasury for an agreed upon fair market value.
The CPP requires that the Company be subject to specified standards for executive compensation and corporate governance as long as any obligation arising from financial assistance provided under the statute remains outstanding. The U.S. Congress and the Treasury may create additional provisions that could become retroactively applicable to the senior preferred stock.
Common Stock: On January 23, 2009, the shareholders of the Company approved a proposal to amend the Company's articles of incorporation to increase theThe number of authorized shares of common stock from 10,000,000 to 15,000,000.for the Company is15,000,000.
Common Stock Warrant: In connection with the CPP described above, a warrant exercisable for 198,675 shares of Company common stock was issued to the Treasury. The warrant entitles the Treasury to purchase 198,675 shares of common stock at $12.08 per share at any time on or before February 6, 2019. As noted above, under ARRA, if the Company repays the Treasury'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.
As holder of the common stock warrant, the Treasury is not entitled to vote, to receive dividends, or to exercise any other rights of common shareholders for any purpose until such warrants have been duly exercised. The Treasury has agreed not to exercise voting power with respect to any shares of common stock issued upon exercise. The Company has filed and will maintain at all times during the period the senior preferred stock is outstanding and during the period the warrant is exercisable, a “shelf” registration statement relating to the issuance of common shares underlying the warrant for the benefit of the warrant holder.
The fair value of the warrants 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.
 
 Number of warrants granted 198,675  
 Exercise price $12.08  
 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  
 

7
Table of Contents

Earnings per Common Share: Basic earnings per common share computations are based on the weighted average number of shares of common stock actually outstanding during the period. The weighted average number of shares outstanding for the three months ended September 30, 2010March 31, 2011 and 20092010 was 8,613,7548,621,720 and 8,605,312, respectively. The weighted average number of shares outstanding for the nine months ended September 30, 2010 and 2009 was 8,611,418 and 8,604,5318,607,853, 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 8,642,4248,682,381 and 8,605,7328,611,511 for the three months ended September 30, 2010March 31, 2011 and 2009, respectively, and 8,633,509 and 8,604,557 for the nine months ended September 30, 2010 and 2009, respectively.

6
Table of Contents

The following table presents the computation of earnings per common share for the respective periods:
 Earnings per Share Information  
Three Months Ended
September 30,
 
Nine Months Ended
September 30,
 
 (dollars in thousands, except per share amounts)  2010 2009 2010 2009 
 Weighted average number of shares outstanding during the period  8,613,754  8,605,312  8,611,418   8,604,531  
 Weighted average number of shares outstanding during the period including all dilutive potential shares  8,642,424  8,605,732  8,633,509   8,604,557  
 Net income  $2,786  $834  7,395   $2,793  
 Preferred stock dividend accrued and discount accretion  (216) (216) (650)  (563) 
 Net income available to common stockholders  $2,570  $618  $6,745   $2,230  
 Earnings per share - basic  $0.30  $0.07  0.78   0.26  
 Earnings per share - diluted  $0.30  $0.07  0.78   0.26  
 Earnings per Share Information  Three Months Ended March 31, 
 (dollars in thousands, except per share amounts)  2011 2010 
 Weighted average number of shares outstanding during the period  8,621,720  8,607,853  
 Weighted average number of shares outstanding during the period including all dilutive potential shares  8,682,381  8,611,511  
 Net income  $2,905  $2,004  
 Preferred stock dividend accrued and discount accretion  (217) (217) 
 Net income available to common stockholders  $2,688  $1,787  
 Earnings per share - basic  $0.31  $0.21  
 Earnings per share - diluted  $0.31  $0.21  
 
6.    4.Investments
A summary of investment securities available for sale is as follows:
  As of September 30, 2010 
  
Amortized
Cost
  
Gross
Unrealized
Gains
  
Gross
Unrealized
Losses
 
Estimated
Fair Value
 
 (in thousands)          
 U.S. Government agencies and corporations$91,167   $2,289   $—  $93,456  
 State and political subdivisions170,226   7,362   (333) 177,255  
 Mortgage-backed securities and collateralized mortgage obligations121,549   4,023   (31) 125,541  
 Corporate debt securities10,927   460   (1,186) 10,201  
  393,869   14,134   (1,550) 406,453  
 Common stocks1,177   183   (5) 1,355  
 Total$395,046   $14,317   $(1,555) $407,808  
  As of March 31, 2011 
  
Amortized
Cost
  
Gross
Unrealized
Gains
  
Gross
Unrealized
Losses
 
Estimated
Fair Value
 
 (in thousands)          
 U.S. Government agencies and corporations$76,149   $1,147   $(269) $77,027  
 State and political subdivisions191,404   4,313   (1,020) 194,697  
 Mortgage-backed securities and collateralized mortgage obligations219,645   3,066   (790) 221,921  
 Corporate debt securities7,376   319   (836) 6,859  
  494,574   8,845   (2,915) 500,504  
 Other equity securities1,183   259   —  1,442  
 Total$495,757   $9,104   $(2,915) $501,946  
 
  As of December 31, 2009 
  
Amortized
Cost
  
Gross
Unrealized
Gains
  
Gross
Unrealized
Losses
 
Estimated
Fair Value
 
 (in thousands)          
 U.S. Government agencies and corporations$79,503   $1,789   $(101) $81,191  
 State and political subdivisions151,628   3,801   (205) 155,224  
 Mortgage-backed securities and collateralized mortgage obligations105,865   2,760   (49) 108,576  
 Corporate debt securities16,778   488   (1,104) 16,162  
  353,774   8,838   (1,459) 361,153  
 Common stocks1,529   298   (77) 1,750  
 Total$355,303   $9,136   $(1,536) $362,903  
  As of December 31, 2010 
  
Amortized
Cost
  
Gross
Unrealized
Gains
  
Gross
Unrealized
Losses
 
Estimated
Fair Value
 
 (in thousands)          
 U.S. Government agencies and corporations$79,181   $1,492   $(339) $80,334  
 State and political subdivisions187,847   3,994   (1,753) 190,088  
 Mortgage-backed securities and collateralized mortgage obligations177,453   2,743   (412) 179,784  
 Corporate debt securities10,896   349   (973) 10,272  
  455,377   8,578   (3,477) 460,478  
 Other equity securities1,183   296   (3) 1,476  
 Total$456,560   $8,874   $(3,480) $461,954  
 
 

8
Table of Contents

A summary of investment securities held to maturity is as follows:
  As of September 30, 2010 
  
Amortized
Cost
  
Gross
Unrealized
Gains
  
Gross
Unrealized
Losses
  
Estimated
Fair Value
 
 (in thousands)           
 Mortgage-backed securities$51   $4   $—   $55  
 State and political subdivisions3,314   72   —   3,386  
 Corporate debt securities866   —   &m dash;   866  
 Total$4,231   $76   $—   $4,307  
  As of March 31, 2011 
  
Amortized
Cost
  
Gross
Unrealized
Gains
  
Gross
Unrealized
Losses
  
Estimated
Fair Value
 
 (in thousands)           
 State and political subdivisions$2,756   $39   $—   $2,795  
 Mortgage-backed securities48   5   —   53  
 Corporate debt securities868   —   —   868  
 Total$3,672   $44   $—   $3,716  

7
Table of Contents

 
  As of December 31, 2009 
  
Amortized
Cost
  
Gross
Unrealized
Gains
  
Gross
Unrealized
Losses
  
Estimated
Fair Value
 
 (in thousands)           
 Mortgage-backed securities$71   $5   $—   $76  
 State and political subdivisions7,074   104   —   7,178  
 Corporate debt securities864   —   —   864  
 Total$8,009   $109   $—   $8,118  
  As of December 31, 2010 
  
Amortized
Cost
  
Gross
Unrealized
Gains
  
Gross
Unrealized
Losses
  
Estimated
Fair Value
 
 (in thousands)           
 State and political subdivisions$3,115   $49   $—   $3,164  
 Mortgage-backed securities50   5   —   55  
 Corporate debt securities867   —   —   867  
 Total$4,032   $54   $—   $4,086  
The summary of available for sale investment securities shows that some of the securities in the available for sale investment portfolio had unrealized losses, or were temporarily impaired, as of September 30, 2010March 31, 2011 and December 31, 20092010. 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, alo ngalong with the length of the impairment period.
The following presents information pertaining to securities with gross unrealized losses as of September 30, 2010March 31, 2011 and December 31, 20092010, aggregated by investment category and length of time that individual securities have been in a continuous loss position:

9
Table of Contents

     As of September 30, 2010 
 
Number
of
Securities
  Less than 12 Months&nbs p; 12 Months or More  Total 
    
Fair
Value
  
Unrealized
Losses 
  
Fair
Value
  
Unrealized
Losses 
  
Fair
Value
  
Unrealized
Losses 
 
 (in thousands, except number of securities)    &n bsp;               
 U.S. Government agencies and corporations—   $—   $—   $—   $—   $—   $—  
 State and political subdivisions13   12,180   332   114   1   12,294   333  
 Mortgage-backed securities and collateralized mortgage obligations1   6,249   31   —   —   6,249   31  
 Corporate debt securities5   —   —   586   1,186   586   1,186  
 Common stocks3   76   5   —   —   ; 76   5  
 Total22   $18,505   $368   $700   $1,187   $19,205   $1,555  
                
    & nbsp;           
     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)                    
 U.S. Government agencies and corporations3   $10,120   $101   $—   $—   $10,120   $101  
 State and political subdivisions65   11,709   116   4,616   89   16,325   205  
 Mortgage-backed securities and collateralized mortgage obligations1   4,972   49 &n bsp; —   —   4,972   49  
 Corporate debt securities4   —   —   857   1,104   857   1,104  
 Common stocks4   218   77   —   —   218   77  
 Total77   $27,019   $343   $5,473   $1,193   $32,492   $1,536  
     As of March 31, 2011 
 
Number
of
Securities
  Less than 12 Months  12 Months or More  Total 
    
Fair
Value
  
Unrealized
Losses 
  
Fair
Value
  
Unrealized
Losses 
  
Fair
Value
  
Unrealized
Losses 
 
 (in thousands, except number of securities)                    
 U.S. Government agencies and corporations3   $22,488   $269   $—   $—   $22,488   $269  
 State and political subdivisions75   45,110   1,019   112   1   45,222   1,020  
 Mortgage-backed securities and collateralized mortgage obligations8   61,080   790   —   —   61,080   790  
 Corporate debt securities4   —   —   936   836   936   836  
 Common stocks—   —   —   —   —   —   —  
 Total90   $128,678   $2,078   $1,048   $837   $129,726   $2,915  
                
                
     As of December 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)                    
 U.S. Government agencies and corporations2   $12,828   $339   $—   $—   $12,828   $339  
 State and political subdivisions93   53,326   1,750   112   3   53,438   1,753  
 Mortgage-backed securities and collateralized mortgage obligations9   77,115   412   —   —   77,115   412  
 Corporate debt securities4   799   973   —   —   799   973  
 Common stocks1   71   3   —   —   71   3  
 Total109   $144,139   $3,477   $112   $3   $144,251   $3,480  
The Company's assessment of other-than-temporary impairment (“OTTI”) is based on its reasonable judgment of the specific facts and circumstances impacting each individual security at the time such assessments are made. The Company reviews and considers factual information, including expected cash flows, the structure of the security, the 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 impairmentsOTTI of debt securities and separates the impairment into credit-related and other factors. In accordance with the new guidance, the noncredit-related portion of OTTI losses recognized in prior year earnings was reclassified as a cumulative effect adjustment that increased retained earnings and decreased accumulated other comprehensive income at the beginning of the quarter ended June 30, 2009. In 2008, $6.2 million in OTTI losses were recognized, of which $5.2 million related to non-credit-relate dnon-credit-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.

8
Table of Contents

All of the Company's mortgage-backed securities are issued by government-sponsored agencies. The receipt of principal, at par, and interest on mortgage-backed securities is guaranteed by the respective government-sponsored agency guarantor, such that the Company believes that its mortgage-backed securities do not expose the Company to credit-related losses. The Company'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.
The Company believes that the decline in the value of certain obl igationsobligations of state and political subdivisions was primarily related to an overall widening of market spreads for many types of fixed income products since 2008, reflecting, among other things, reduced liquidity and the downgrades on the underlying credit default insurance providers. At September 30, 2010March 31, 2011, approximately 63%61% 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 at maturity. Due to the issuers' continued satisfaction of their obligations under the securities in accordance with their contractual terms and the expectation that they will continue to do so, management's intent and ability to hold these securities for a period of time sufficient to allow for any anticipated recovery in fair value, as well as the evaluation of the fundamentals of the issuers' financial condition and other objective evidence, the Company believes that the municipal obligations identified in the tables above were temporarily depressed as of September 30, 2010March 31, 2011 and December 31, 20092010.

10
Table of Contents

At September 30, 2010March 31, 2011, 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, asdue to several impairment charges recognized since 2008, the banking climate deteriorated over the past several years, the securities experienced cash flow problems and pre-tax OTTI losses of $6.2 million during 2008, $1.6 million during 2009, and $0.2 million during the first quarter of 2 010. The book value of these securities asat March 31, 2011 had been reduced to $1.8 million. Two of September 30, 2010 totaled $1.8 million.the securities have been written down to a value of zero, with the remaining four having an average cost basis of 29.5% of their original face value. All of the Company's trust preferred collateralized debt obligations are in mezzanine tranches and are currently rated less than investment grade by Moody's Investor Services. 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 AS CASC Topic 325. The assumptions used in preparing the discounted cash flow model include the following: estimated discount rates (using yields of comparable traded instruments adjusted for illiquidity and other risk factors), estimated deferral and default rates on collateral, and estimated cash flows. 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.
At September 30, 2010March 31, 2011, the analysis of the Company's six investments in pooled trust preferred securities indicated that the unrealized loss was tem porarytemporary and that it is more likely than not that the Company would be able to recover the cost basis of these securities.  The amountpace of actual and projectednew deferrals and/or defaults by the financial institutions underlying these pooled trust preferred securities increased since the beginning of 2010.has begun to slow in recent quarters, although they remain at high levels. 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, and determined that no additional OTTI existed for the three months ended September 30, 2010March 31, 2011, thus no impairment loss was charged to earnings.
The following table provides a r oll forward of credit losses on fixed maturity securities recognized in net income:
 (in thousands)  
Three Months
Ended
September 30, 2010
 
Nine Months
Ended
September 30, 2010
 
 Beginning balance  $189  $—  
 Additional credit losses:      
 Securities with no previous other than temporary impairment  —  —  
 Securities with previous other than temporary impairments  —  189  
 Ending balance  $189  $189  
 
It is reasonably possible that the fair values of the Company's investment securities could decline in the future if the overall economy and the financial condition of some of the issuers deteriorate further and the liquidity of these se curitiessecurities remains low. As a result, there is a risk that additional other-than-temporary impairmentsOTTI may occur in the future and any such amounts could be material to the Company's consolidated statements of operations.
A summary of the contractual maturity distribution of debt investment securities at September 30, 2010March 31, 2011 is as follows:
  Available For Sale  Held to Maturity 
  
Amortized
Cost
  Fair Value  
Amortized
Cost
  Fair Value 
 (in thousands)           
 Due in one year or less$41,922   $42,360   $1,065    ;$1,078  
 Due after one year through five years112,107   116,055   2,249   ; 2,308  
 Due after five years through ten years82,669   86,269   —   —  
 Due after ten years35,622   36,229   866   866  
 Mortgage-backed securities and collateralized mortgage obligations121,549   125,540   51   55  
 Total$393,869   $406,453   $4,231   $4,307  
  Available For Sale  Held to Maturity 
  
Amortized
Cost
  Fair Value  
Amortized
Cost
  Fair Value 
 (in thousands)           
 Due in one year or less$19,883   $20,071   $910   $913  
 Due after one year through five years111,852   114,569   1,846   1,882  
 Due after five years through ten years96,045   97,507   —   —  
 Due after ten years47,149   46,436   868   868  
 Mortgage-backed securities and collateralized mortgage obligations219,645   221,921   48   53  
 Total$494,574   $500,504   $3,672   $3,716  

119
Table of Contents

For mortgage-backed securities, actual maturities will differ from contractual maturities because borrowers have the right to prepay obligations with or without prepayment penalties.
Other investment securities include investments in Federal Home Loan Bank (“FHLB”) stock. The carrying value of the FH LBFHLB stock at September 30, 2010March 31, 2011 and December 31, 20092010 was $10.510.7 million and $9.010.6 million, respectively, which is included in the Other Assets line of the consolidated balance sheets. This security is not readily marketable and ownership of FHLB stock is a requirement for membership in the FHLB Des Moines. The amount of FHLB stock the Bank is required to hold is directly related to the amou ntamount of FHLB advances borrowed. Because there are no available market values, this security is carried at cost.cost and evaluated for potential impairment each quarter. Redemption of this investment is at the option of the FHLB.
Realized gains and losses on sales are determined on the basis of specific identification of investments based on the trade date. Realized gains (losses) on investments, including impairment losses for the three months and nine months ended September 30, 2010March 31, 2011 and 20092010, are as follows:
  
Three Months Ended
September 30,
 
Nine Months Ended
September 30,
 
  2010 2009 2010 2009 
 (in thousands)        
 Available for sale fixed maturity securities:        
 Gross realized gains$44  $466  $474  $466  
 Gross realized losses—  (1,319) (189) (1,319) 
  44  (853) 285  (853) 
 Equity securities:        
 Gross realized gains1  25  50  25  
 Gross realized losses(203) (69) (212) (683) 
  (202) (44) (162) (658) 
  $(158) $(897) $123  $(1,511) 
  Three Months Ended March 31, 
  2011 2010 
 (in thousands)    
 Available for sale fixed maturity securities:    
 Gross realized gains$—  $197  
 Gross realized losses—  —  
 Other-than temporary impairment—  (189) 
  —  8  
 Equity securities:    
 Gross realized gains—  49  
 Gross realized losses—  (9) 
 Other-than temporary impairment—  —  
  —  40  
  $—  $48  
5.Loans Receivable and the Allowance for Loan Losses
The composition of loans and loan pools, and changes in the allowance for loan losses by portfolio segment are as follows:
  Allowance for Loan Losses and Recorded Investment in Loan Receivables
  As of March 31, 2011 and December 31, 2010
 (in thousands)Agricultural Commercial and Financial Commercial Real Estate Residential Real Estate Consumer Unallocated Total
 March 31, 2011             
 Allowance for loan losses:             
 Ending balance$1,448  $5,069  $5,450  $2,299  $250  $882  $15,398 
               
 Ending balance: Individually evaluated for impairment276  614  768  163  9  —  $1,830 
               
 Ending balance: Collectively evaluated for impairment1,172  4,455  4,682  2,136  241  882  $13,568 
               
 Ending balance: Loans acquired with deteriorated credit quality (loan pools)13  316  658  244  139  764  $2,134 
               
 Loans receivable             
 Ending balance$80,406  $220,173  $392,035  $224,732  $21,177  $—  $938,523 
               
 Ending balance: Individually evaluated for impairment$1,723  $1,482  $3,591  $1,066  $27  $—  $7,889 
               
 Ending balance: Collectively evaluated for impairment$78,683  $218,691  $388,444  $223,666  $21,150  $—  $930,634 
               
 Ending balance: Loans acquired with deteriorated credit quality (loan pools)$256  $5,742  $38,181  $7,181  $248  $12,733  $64,341 
               

10
Table of Contents

 (in thousands)Agricultural Commercial and Financial Commercial Real Estate Residential Real Estate Consumer Unallocated Total
 December 31, 2010             
 Allowance for loan losses:             
 Ending balance$827  $4,540  $5,255  $2,776  $323  $1,446  $15,167 
               
 Ending balance: Individually evaluated for impairment$—  $—  $100  $10  $—  $—  $110 
               
 Ending balance: Collectively evaluated for impairment$827  $4,540  $5,155  $2,766  $323  $1,446  $15,057 
               
 Ending balance: Loans acquired with deteriorated credit quality (loan pools)$27  $368  $658  $259  $164  $658  $2,134 
               
 Loans receivable             
 Ending balance$84,590  $212,230  $393,242  $225,994  $21,979  $—  $938,035 
               
 Ending balance: Individually evaluated for impairment$—  $—  $447  $16  $—  $—  $463 
               
 Ending balance: Collectively evaluated for impairment$84,590  $212,230  $392,795  $225,978  $21,979  $—  $937,572 
               
 Ending balance: Loans acquired with deteriorated credit quality (loan pools)$409  $6,611  $40,549  $7,376  $312  $12,748  $68,005 
               
  Allowance for Loan Loss Activity
  For the Three Months Ended March 31, 2011 and 2010
 (in thousands)Agricultural Commercial and Financial Commercial Real Estate Residential Real Estate Consumer Unallocated Total
 2011             
 Beginning balance$827  $4,540  $5,255  $2,776  $323  $1,446  $15,167 
 Charge-offs(75) (219) (447) (70) (21) —  (832)
 Recoveries—  143  1  15  4  —  163 
 Provision696  605  641  (422) (56) (564) 900 
 Ending balance$1,448  $5,069  $5,450  $2,299  $250  $882  $15,398 
               
 2010             
 Beginning balance$1,099  $3,468  $6,407  $2,412  $396  $175  $13,957 
 Charge-offs(500) (538) —  (1) (41) —  (1,080)
 Recoveries5  12  94  55  10  —  176 
 Provision652  757  (284) (65) 100  340  1,500 
 Ending balance$1,256  $3,699  $6,217  $2,401  $465  $515  $14,553 
               
Loan Portfolio Segment Risk Characteristics
Agricultural - Agricultural loans, most of which are secured by crops and machinery, are provided to finance capital improvements and farm operations as well as acquisitions of livestock and machinery.  The ability of the borrower to repay may be affected by many factors outside of the borrower's control including adverse weather conditions, loss of livestock due to disease or other factors, declines in market prices for agricultural products and the impact of government regulations.  The ultimate repayment of agricultural loans is dependent upon the profitable operation or management of the agricultural entity. Collateral for these loans generally includes accounts receivable, inventory, equipment and real estate. However, depending on the overall financial condition of the borrower, some loans are made on an unsecured basis. The collateral securing these loans may depreciate over time, may be difficult to appraise and may fluctuate in value based on the success of the business.
Commercial and Financial - Commercial and financial loans are primarily made based on the reported cash flow of the borrower and secondarily on the underlying collateral provided by the borrower.  The collateral support provided by the borrower for most of these loans and the probability of repayment is based on the liquidation of the pledged collateral and enforcement of a personal guarantee, if any exists.  The primary repayment risks of commercial and financial loans are that the cash flows of the borrower may be unpredictable, and the collateral securing these loans may fluctuate in value. The size of the loans the Company can offer to commercial customers is less than the size of the loans that competitors with larger lending limits can offer. This may limit the Company's ability to establish relationships with the area's largest businesses. As a result, the Company may assume greater lending risks than financial institutions that have a lesser concentration of such loans and tend to make loans to larger businesses. Collateral for these loans generally includes accounts receivable, inventory, equipment and real estate. However, depending on the overall financial condition of the borrower, some loans are made on an unsecured basis. The collateral securing these loans may depreciate over

11
Table of Contents

time, may be difficult to appraise and may fluctuate in value based on the success of the business. In addition, a continued decline in the United States economy could harm or continue to harm the businesses of our commercial and financial customers and reduce the value of the collateral securing these loans.
Commercial Real Estate - The Company offers mortgage loans to commercial and agricultural customers for the acquisition of real estate used in their business, such as offices, warehouses and production facilities, and to real estate investors for the acquisition of apartment buildings, retail centers, office buildings and other commercial buildings. The market value of real estate securing commercial real estate loans can fluctuate significantly in a short period of time as a result of market conditions in the geographic area in which the real estate is located. Adverse developments affecting real estate values in one or more of the Company's markets could increase the credit risk associated with its loan portfolio. Additionally, real estate lending typically involves higher loan principal amounts and the repayment of the loans generally is dependent, in large part, on sufficient income from the properties securing the loans to cover operating expenses and debt service. Economic events or governmental regulations outside of the control of the borrower or lender could negatively impact the future cash flow and market values of the affected properties.
Residential Real Estate - The Company generally retains short-term residential mortgage loans that are originated for its own portfolio but sells most long-term loans to other parties while retaining servicing rights on the majority of those. The market value of real estate securing residential real estate loans can fluctuate as a result of market conditions in the geographic area in which the real estate is located. Adverse developments affecting real estate values in one or more of the Company's markets could increase the credit risk associated with its loan portfolio. Additionally, real estate lending typically involves large loan principal amounts and the repayment of the loans generally is dependent, in large part, on the borrower's continuing financial stability, and are therefore more likely to be affected by adverse personal circumstances.
Consumer - Consumer loans typically have shorter terms, lower balances, higher yields and higher risks of default.  Consumer loan collections are dependent on the borrower's continuing financial stability, and are therefore more likely to be affected by adverse personal circumstances. Collateral for these loans generally includes automobiles, boats, recreational vehicles, mobile homes, and real estate. However, depending on the overall financial condition of the borrower, some loans are made on an unsecured basis. The collateral securing these loans may depreciate over time, may be difficult to recover and may fluctuate in value based on condition. In addition, a continued decline in the United States economy could result in reduced employment, impacting the ability of customers to repay their obligations.
Loans acquired with deteriorated credit quality (loan pools) - The underlying loans in the loan pool participations include both fixed-rate and variable-rate instruments. No amounts for interest due are reflected in the carrying value of the loan pool participations.  Based on historical experience, the average period of collectibility for loans underlying loan pool participations, many of which have exceeded contractual maturity dates, is approximately three to five years. Loan pool balances are affected by the payment and refinancing activities of the borrowers resulting in pay-offs of the underlying loans and reduction in the balances. Collections from the individual borrowers are managed by the loan pool servicer and are affected by the borrower's financial ability and willingness to pay, foreclosure and legal action, collateral value, and the economy in general.
Charge-off Policy
The Company requires a loan to be charged-off as soon as it becomes apparent that some loss will be incurred, or when its collectability is sufficiently questionable that it no longer is considered a bankable asset. The primary considerations when determining if and how much of a loan should be charged-off are as follows: (1) the potential for future cash flows; (2) the value of any collateral; and (3) the strength of any co-makers or guarantors.
When it is determined that a loan requires partial or full charge-off, a request for approval of a charge-off is submitted to the Bank's President, Executive Vice President of Lending, and the Senior Regional Loan officer. The Bank's Board of Directors formally approves all loan charge-offs retroactively at the next regularly scheduled meeting. Once a loan is charged-off, it cannot be restructured and returned to the Bank's books.
The Allowance for Loan and Lease Losses - Bank Loans
The Company requires the maintenance of an adequate allowance for loan and lease losses (“ALLL”) in order to cover estimated losses without impacting the Company's capital base. Calculations are done at each quarter end, or more frequently if warranted, to analyze the collectability of loans and to ensure the adequacy of the allowance. In line with FDIC directives, the ALLL calculation does not include consideration of loans held for sale or off-balance-sheet credit exposures (such as unfunded letters of credit). Determining the appropriate level for the ALLL relies on the informed judgment of management, and as such, is subject to inaccuracy. Given the inherently imprecise nature of calculating the necessary ALLL, the Company's policy permits an "unallocated" allowance between 15% above and 5% below the “indicated reserve.”

12
Table of Contents

Loans Reviewed Individually for Impairment
During the first quarter of 2011, the Company expanded its procedure for reviewing individual loans for potential impairment and determining the necessary allocation of the allowance for loan losses to impaired loans. Previously, only loans already identified as impaired were individually reviewed each quarter for further impairment. Effective March 31, 2011, in addition to loans already identified as impaired, all non-accrual and troubled debt restructures are evaluated for potential impairment due to collateral deficiency or insufficient cash-flow using an individual discounted cash-flow analysis at the loan's effective interest rate. Loans that are deemed fully collateralized or have been charged down to a level corresponding with either of the measurements require no assignment of reserves from the ALLL.
All loans deemed troubled debt restructure or “TDR” are considered impaired, and are evaluated for collateral and cash-flow sufficiency. A loan is considered a TDR when the Bank, for economic or legal reasons related to a borrower's financial difficulties, grants a concession to the borrower that the Bank would not otherwise consider. All of the following factors are indicators that the Bank has granted a concession (one or multiple items may be present):
The borrower receives a reduction of the stated interest rate for the remaining original life of the debt.
The borrower receives an extension of the maturity date or dates at a stated interest rate lower than the current market interest rate for new debt with similar risk characteristics.
The borrower receives a reduction of the face amount or maturity amount of the debt as stated in the instrument or other agreement.
The borrower receives a deferral of required payments (principal and/or interest).
The borrower receives a reduction of the accrued interest.
As of March 31, 2011, the Company had 15 loans classified as TDRs with an outstanding balance of $6.7 million.
Loans Reviewed Collectively for Impairment
All loans not evaluated individually for impairment are grouped together by type (i.e. commercial, agricultural, consumer, etc.) and further segmented within each subset by risk classification (i.e. pass, special mention, and substandard). Loans past due 60-89 days and 90+ days, are classified special mention and substandard, respectively, for allocation purposes.
The Company's historical loss experiences for each loan type segment are calculated using the fiscal year end data for the most recent five years as a starting point for estimating losses. In addition, other prevailing qualitative or environmental factors likely to cause estimated losses to vary from historical data are to be incorporated in the form of adjustments to increase or decrease the loss rate applied to a group(s). These adjustments are required to be documented, and fully explain how the current information, events, circumstances, and conditions impact the historical loss measurement assumptions.
Although not a comprehensive list, the following are considered key factors and are evaluated with each calculation of the ALLL to determine if adjustments to estimated loss rates are warranted:
Changes in lending policies and procedures, including changes in underwriting standards and collection, charge-off, and recovery practices not considered elsewhere in estimating credit losses.
Changes in international, national, regional, and local economic and business conditions and developments that affect the collectability of the portfolio, including the condition of various market segments.
Changes in the nature and volume of the portfolio and in the terms of loans.
Changes in the experience, ability and depth of lending management and other relevant staff.
Changes in the volume and severity of past due loans, the volume of nonaccrual loans, and the volume and severity of adversely classified or graded loans.
Changes in the quality of the institution's loan review system.
Changes in the value of underlying collateral for collateral-dependent loans.
The existence and effect of any concentrations of credit, and changes in the level of such concentrations.
The effect of other external factors such as competition and legal and regulatory requirements, on the level of estimated credit losses in the bank's existing portfolio.
The items discussed above are used to determine the pass percentage for loans evaluated collectively and, as such, are applied to the loans risk rated pass. Due to the inherent risks associated with special mention risk rated loans (i.e. early stages of financial deterioration, technical exceptions, etc.), an allocation factor of two times that of the pass allocation is applied to this subset to reflect this increased risk exposure. In addition, loans classified as substandard carry an even greater level of risk than special mention loans, and an allocation factor of six times that of the pass allocation is applied to this subset of loans. Further, loans classified as substandard and are "performing collateral deficient" have an allocation factor of 12 times that of the pass allocation applied due to the perceived additional risk for these credits.

13
Table of Contents

The Allowance for Loan and Lease Losses - Loan Pools
The Company requires that the loan pool ALLL will be at least sufficient to cover the next quarter's estimated charge-offs as presented by the servicer. Currently, charge-offs are netted against the income the Company receives, thus the balance in the loan pool reserve is not affected and remains stable. In essence, a provision for loan losses is made that is equal to the quarterly charge-offs, which is deducted from income received from the loan pools. By maintaining a sufficient reserve to cover the next quarter charge-offs, the Company will have sufficient reserves in place should no income be collected from the loan pools during the quarter. In the event the estimated charge-offs provided by the servicer is greater than the loan pool ALLL, an additional provision to cover the difference between the current ALLL and the estimated charge-offs provided by the servicer is made.
Loans Reviewed Individually for Impairment
The loan servicer reviews the portfolio quarterly on a loan-by-loan basis, and loans that are deemed to be impaired are charged-down to their estimated value during the next calendar quarter. All loans that are to be charged-down are reserved against in the ALLL adequacy calculation. Loans that continue to have an investment basis that have been charged-down are monitored, and if additional impairment is noted the reserve requirement is increased on the individual loan.
Loans Reviewed Collectively for Impairment
The Company utilizes the annualized average of portfolio loan (not loan pool) historical loss per risk category over a two year period of time. Supporting documentation for the technique used to develop the historical loss rate for each group of loans is required to be maintained. It is management's assessment that the two year rate is most reflective of the estimated credit losses in the current loan pool portfolio.

14
Table of Contents

The following table sets forth the composition of the Company's loans by internally assigned credit quality indicators at March 31, 2011 and December 31, 2010:
  Pass Special Mention/ Watch Substandard Doubtful Loss Total
 (in thousands)           
 March 31, 2011           
 Agricultural$66,638  $2,436  $11,332  $—  $—  $80,406 
 Commercial and financial182,122  18,210  18,485  —  —  218,817 
 Credit cards896  —  —  —  —  896 
 Overdrafts440  121  77  —  —  638 
 Commercial real estate:           
 Construction & development50,754  6,296  14,539  —  —  71,589 
 Farmland59,958  3,456  5,556  —  —  68,970 
 Multifamily33,548  332  180  —  —  34,060 
 Commercial real estate-other188,919  18,561  9,936  —  —  217,416 
 Total commercial real estate333,179  28,645  30,211  —  —  392,035 
 Residential real estate:           
 One- to four- family first liens146,738  7,099  5,241  —  —  159,078 
 One- to four- family junior liens64,849  414  391  —  —  65,654 
 Total residential real estate211,587  7,513  5,632  —  —  224,732 
 Consumer20,703  51  245  —  —  20,999 
 Total$815,565  $56,976  $65,982  $—  $—  $938,523 
             
 Loans acquired with deteriorated credit quality (loan pools)$37,551  $—  $26,688  $—  $102  $64,341 
             
 December 31, 2010           
 Agricultural$73,244  $2,577  $8,769  $—  $—  $84,590 
 Commercial and financial175,871  18,015  17,448  —  —  211,334 
 Credit cards655  —  —  —  —  655 
 Overdrafts290  75  126  —  —  491 
 Commercial real estate:           
 Construction & development50,980  17,104  5,231  —  —  73,315 
 Farmland67,223  3,858  5,264  —  —  76,345 
 Multifamily32,933  335  183  —  —  33,451 
 Commercial real estate-other183,675  17,374  9,082  —  —  210,131 
 Total commercial real estate334,811  38,671  19,760  —  —  393,242 
 Residential real estate:           
 One- to four- family first liens144,898  6,209  5,775  —  —  156,882 
 One- to four- family junior liens68,241  364  507  —  —  69,112 
 Total residential real estate213,139  6,573  6,282  —  —  225,994 
 Consumer21,338  120  271    —  21,729 
 Total$819,348  $66,031  $52,656  $—  $—  $938,035 
             
 Loans acquired with deteriorated credit quality (loan pools)$39,928  $—  $27,956  $—  $121  $68,005 
             
Special Mention/Watch - A special mention/watch asset has potential weaknesses that deserve management's close attention. If left uncorrected, these potential weaknesses may result in deterioration of the repayment prospects for the asset or in the institution's credit position at some future date. Special mention/watch assets are not adversely classified and do not expose an institution to sufficient risk to warrant adverse classification.
Substandard - Substandard loans are inadequately protected by the current net worth and paying capacity of the obligor or of the collateral pledged, if any. Loans so classified have a well defined weakness or weaknesses that jeopardize the liquidation of the debt. They are characterized by the distinct possibility that the bank will sustain some loss if the deficiencies are not corrected.

15
Table of Contents

Doubtful - Loans classified doubtful have all the weaknesses inherent in those classified substandard with the added characteristic that the weaknesses make collection or liquidation in full, on the basis of currently known facts, conditions and values, highly questionable and improbable.
Loss - Loans classified loss are considered uncollectible and of such little value that their continuance as bankable assets is not warranted. This classification does not mean that the loan has absolutely no recovery or salvage value but rather it is not practical or desirable to defer writing off this basically worthless asset even though partial recovery may be effected in the future.

16
Table of Contents

The following table sets forth the amounts and categories of the Company's impaired loans as of March 31, 2011 and December 31, 2010:
  March 31, 2011 December 31, 2010
  Recorded Investment Unpaid Principal Balance Related Allowance Recorded Investment Unpaid Principal Balance Related Allowance
 (in thousands)           
 With no related allowance recorded:           
 Agricultural$3,468  $3,465  $—  $3,294  $3,271  $— 
 Commercial and financial859  856  —  1,486  1,749  — 
 Credit cards—  —  —  —  —  — 
 Overdrafts—  —  —  —  —  — 
 Commercial real estate:           
 Construction & development695  695  —  387  387  — 
 Farmland4,176  4,168  —  3,875  3,866  — 
 Multifamily—  —  —  —  —  — 
 Commercial real estate-other3,644  3,610  —  1,917  1,918  — 
 Total commercial real estate8,515  8,473  —  6,179  6,171  — 
 Residential real estate:           
 One- to four- family first liens1,537  1,537  —  964  964  — 
 One- to four- family junior liens11  11  —  11  11  — 
 Total residential real estate1,548  1,548  —  975  975  — 
 Consumer51  51  —  52  52  — 
 Total$14,441  $14,393  $—  $11,986  $12,218  $— 
             
 With an allowance recorded:           
 Agricultural$1,726  $1,723  $276  $—  $—  $— 
 Commercial and financial1,493  1,482  614  —  —  — 
 Credit cards—  —  —  —  —  — 
 Overdrafts—  —  —  —  —  — 
 Commercial real estate:           
 Construction & development2,072  2,070  588  451  447  100 
 Farmland348  348  60  —  —  — 
 Multifamily—  —  —  —  —  — 
 Commercial real estate-other1,177  1,173  120  —  —  — 
 Total commercial real estate3,597  3,591  768  451  447  100 
 Residential real estate:           
 One- to four- family first liens1,004  1,002  150  —  —  — 
 One- to four- family junior liens64  64  13  16  16  10 
 Total residential real estate1,068  1,066  163  16  16  10 
 Consumer27  27  9  —  —  — 
 Total$7,911  $7,889  $1,830  $467  $463  $110 
             
 Total:           
 Agricultural$5,194  $5,188  $276  $3,294  $3,271  $— 
 Commercial and financial2,352  2,338  614  1,486  1,749  — 
 Credit cards—  —  —  —  —  — 
 Overdrafts—  —  —  —  —  — 
 Commercial real estate:           
 Construction & development2,767  2,765  588  838  834  100 
 Farmland4,524  4,516  60  3,875  3,866  — 
 Multifamily—  —  —  —  —  — 
 Commercial real estate-other4,821  4,783  120  1,917  1,918  — 
 Total commercial real estate12,112  12,064  768  6,630  6,618  100 
 Residential real estate:           
 One- to four- family first liens2,541  2,539  150  964  964  — 
 One- to four- family junior liens75  75  13  27  27  10 
 Total residential real estate2,616  2,614  163  991  991  10 
 Consumer78  78  9  52  52  — 
 Total$22,352  $22,282  $1,830  $12,453  $12,681  $110 
             

17
Table of Contents

The following table sets forth the amounts and categories of the Company's impaired loans as of March 31, 2011 and 2010:
  March 31, 2011 March 31, 2010
  Average Recorded Investment Interest Income Recognized Average Recorded Investment Interest Income Recognized
 (in thousands)       
 With no related allowance recorded:       
 Agricultural$3,439  $12  $1,698  $(99)
 Commercial and financial851  7  843  (5)
 Credit cards—  —  —  — 
 Overdrafts—  —  —  — 
 Commercial real estate:       
 Construction & development695  —  —  — 
 Farmland4,204  23  1,365  13 
 Multifamily—  —  —  — 
 Commercial real estate-other3,651  34  357  (91)
 Total commercial real estate8,550  57  1,722  (78)
 Residential real estate:       
 One- to four- family first liens1,549  (2) 466  30 
 One- to four- family junior liens11  —  —  — 
 Total residential real estate1,560  (2) 466  30 
 Consumer52  —  —  — 
 Total$14,452  $74  $4,729  $(152)
         
 With an allowance recorded:       
 Agricultural$1,733  $10  3,497  (178)
 Commercial and financial1,496  6  220  (4)
 Credit cards—  —  —  — 
 Overdrafts—  —  —  — 
 Commercial real estate:       
 Construction & development2,059  (10) —  — 
 Farmland350  2  —  — 
 Multifamily—  —  —  — 
 Commercial real estate-other1,204  30  39  (1)
 Total commercial real estate3,613  22  39  (1)
 Residential real estate:       
 One- to four- family first liens1,018  9  281  2 
 One- to four- family junior liens66  1  62  1 
 Total residential real estate1,084  10  343  3 
 Consumer28  1  76  1 
 Total$7,954  $49  $4,175  $(179)
         
 Total:       
 Agricultural$5,172  $22  5,195  (277)
 Commercial and financial2,347  13  1,063  (9)
 Credit cards—  —  —  — 
 Overdrafts—  —  —  — 
 Commercial real estate:       
 Construction & development2,754  (10) —  — 
 Farmland4,554  25  1,365  13 
 Multifamily—  —  —  — 
 Commercial real estate-other4,855  64  396  (92)
 Total commercial real estate12,163  79  1,761  (79)
 Residential real estate:       
 One- to four- family first liens2,567  7  747  32 
 One- to four- family junior liens77  1  62  1 
 Total residential real estate2,644  8  809  33 
 Consumer80  1  76  1 
 Total$22,406  $123  $8,904  $(331)
         

18
Table of Contents

The following table sets forth the composition of the Company's past due and nonaccrual loans at March 31, 2011 and December 31, 2010:
  30 - 59 Days Past Due 60 - 89 Days Past Due 90 Days or More Past Due Total Past Due Current Total Loans Receivable Recorded Investment > 90 Days and Accruing
 (in thousands)             
 March 31, 2011             
 Agricultural$56  $37  $2,443  $2,536  $77,870  $80,406  $678 
 Commercial and financial1,741  1,568  1,138  4,447  214,370  218,817  210 
 Credit cards—  1  1  2  894  896  2 
 Overdrafts73  3  1  77  561  638  — 
 Commercial real estate:             
 Construction & development640  —  2,573  3,213  68,376  71,589  255 
 Farmland150  —  2,868  3,018  65,952  68,970  — 
 Multifamily—  —  —  —  34,060  34,060  — 
 Commercial real estate-other1,193  753  1,479  3,425  213,991  217,416  303 
 Total commercial real estate1,983  753  6,920  9,656  382,379  392,035  558 
 Residential real estate:             
 One- to four- family first liens1,876  467  2,832  5,175  153,903  159,078  721 
 One- to four- family junior liens336  81  89  506  65,148  65,654  62 
 Total residential real estate2,212  548  2,921  5,681  219,051  224,732  783 
 Consumer66  32  73  171  20,828  20,999  13 
 Total$6,131  $2,942  $13,497  $22,570  $915,953  $938,523  $2,244 
               
 December 31, 2010             
 Agricultural$2,910  $45  $257  $3,212  $81,378  $84,590  $12 
 Commercial and financial1,671  911  1,026  3,608  207,726  211,334  56 
 Credit cards—  —  —  —  655  655  — 
 Overdrafts109  15  2  126  365  491  — 
 Commercial real estate:             
 Construction & development633  214  1,220  2,067  71,248  73,315  710 
 Farmland—  —  2,869  2,869  73,476  76,345  — 
 Multifamily—  —  —  —  33,451  33,451  — 
 Commercial real estate-other417  42  1,290  1,749  208,382  210,131  — 
 Total commercial real estate1,050  256  5,379  6,685  386,557  393,242  710 
 Residential real estate:             
 One- to four- family first liens2,389  801  2,972  6,162  150,720  156,882  696 
 One- to four- family junior liens520  85  109  714  68,398  69,112  82 
 Total residential real estate2,909  886  3,081  6,876  219,118  225,994  778 
 Consumer45  147  132  324  21,405  21,729  23 
 Total$8,694  $2,260  $9,877  $20,831  $917,204  $938,035  $1,579 
               
Non-accrual and Delinquent Loans
Loans are placed on non-accrual when (1) payment in full of principal and interest is no longer expected or (2) principal or interest has been in default for 90 days or more (unless the loan is both well secured with marketable collateral and in the process of collection). All loans rated doubtful or worse are placed on non-accrual.
A non-accrual asset may be restored to an accrual status when (1) all past due principal and interest has been paid (excluding renewals and modifications that involve the capitalizing of interest) or (2) the loan becomes well secured and is in the process of collection. An established track record of performance is also considered when determining accrual status.
Delinquency status of a loan is determined by the number of days that have elapsed past the loan's payment due date, using the following classification groupings: 30-59 days, 60-89 days and 90 days or more. Loans shown in the 30-59 days and 60-89 days columns in the table above, reflect contractual delinquency status only, and include loans considered nonperforming due to classification as a TDR of being place on non-accrual.

19
Table of Contents

The following table sets forth the composition of the Company's recorded investment in loans on nonaccrual status as of March 31, 2011 and December 31, 2010:
  March 31, 2011 December 31, 2010 
 (in thousands)    
 Agricultural$1,865  $1,805  
 Commercial and financial1,461  1,553  
 Credit cards—  —  
 Overdrafts—  —  
 Commercial real estate:    
 Construction & development2,318  765  
 Farmland3,007  3,008  
 Multifamily—  —  
 Commercial real estate-other3,134  2,773  
 Total commercial real estate8,459  6,546  
 Residential real estate:    
 One- to four- family first liens2,629  2,361  
 One- to four- family junior liens27  27  
 Total residential real estate2,656  2,388  
 Consumer90  113  
 Total$14,531  $12,405  
      
As of March 31, 2011, the Company has no commitments to lend additional funds to any borrowers who have nonperforming loans.
6.Income Taxes
Federal income tax expense for the three months ended March 31, 2011 and 2010 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.
 
7.Fair Value Measurements
Effective January 1, 2008, the Company ado ptedadopted the provisions of FASB ASC 820, Fair Value Measurements, for non-financial assets and liabilities. These include foreclosed real estate, long-lived assets and other intangibles, which are recorded at fair value only upon impairment. FASB ASC Topic 820 defines fair value, establishes a framework for measuring fair value in generally accepted accounting principles and expands disclosures about fair value measurements.
FASB ASC Topic 820 defines fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants. A fair value measurement assumes that the transaction to sell the asset or transfer the liability occurs in the principal market for the asset or liability or, in the absence of a principal market, the most advantageous market for the asset or liability. The price in the principal (or most advantageous) market used to measure the fair value of the asset or liability is not adjusted for transaction costs. An orderly transaction is a transaction that assumes exposure to the market for a period prior to the measurement date to allow for marketing activities that are usual and customary for transactions involving such assets and liabilities; it is not a forced transaction. Market participants are buyers and sellers in the principal market that are (i) independent, (ii) knowledgeable, (iii) able to transact and (iv) willing to transact.
FASB ASC Topic 820 requires the use of valuation techniques that are consistent with the market approach, the income approach and/or the cost approach. The market approach uses prices and other relevant information generated by market transactions involving identical or comparable assets and liabilities. The income approach uses valuation techniques to convert future amounts, such as cash flows or earnings, to a single present amount on a discounted basis. The cost approach is based on the amount that currently would be required to replace the service capacity of an asset (replacement cost). Valuation techniques should be consistently applied. Inputs to valuation techniques refer to the assumptions that market participants would use in pricing the asset or liability. Inputs may be observable, meaning those that reflect the assumptions market participants would use in pricing the asset or liability developed based on market data obtained from independent sources, or unobservable, mean ingmeaning those that reflect the reporting entity's own assumptions 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

20
Table of Contents

highest priority to quoted prices in active markets for identical assets or

12
Table of Contents

liabilities and the lowest priority to unobservable inpu ts.inputs. The fair value hierarchy is as follows:
Level 1 Inputs – Unadjusted quoted prices in active markets for identical assets or liabilities that the reporting entity has the ability to access at the 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 1 Inputs – Unadjusted quoted prices in active markets for identical assets or liabilities that the reporting entity has the ability to access at mea surement the 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 ot her 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 entit y'sLevel 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.
It is the Company'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's best efforts to maximize the use of relevant observable inputs, the current market environment has diminished the observability of trades an dand 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's financial assets and liabilities carried at fair value effective January 1, 2008.
Valuation methods for instruments measured at fair value on a recurring basis.
Securities Available for Sale - The Company'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 equity 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.rating, maturity, and potential call dates. These model and matrix measurements are classified as Level 2 in the fair value hierarchy.
The Company classifies its pooled trust preferred collateralized debt obligations as Level 3. The portfolio consists of six investments in collateralized debt obligations backed by pools 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.
Mortgage Servicing Rights - The Company recognizes the rights to service mortgage loans for others on residential real estate loans internally originated and then sold. Mortgage servicing rights are recorded at fair value based on comparable market quotes and assumptions, through a third-party valuation service. The valuation model incorporates assumptions that market participants would use in estimating future net servicing income, such as the servicing cost per loan, the discount rate, the escrow float rate, an inflation rate, ancillary income, prepayment speeds and default rates and losses. Because many of these inputs are unobservable, the valuations are classified as Level 3.
Federal Home Loan Bank Stock - Ownership of FHLB stock is required as a condition of membership in the FHLB-Des Moines, and is carried on the balance sheet in other assets. This investment generally has restrictions on the sale and/or liquidation of stock and because there are no available market values, this security is carried at cost and evaluated for potential impairment each quarter. Redemption of this investment is at the option of the FHLB. Fair value measurements for this security are classified as Level 3 because of its undeliverable nature and related credit risk.

1321
Table of Contents

Th eThe following table summarizes financial assets and financial liabilities measured at fair value on a recurring basis as of September 30, 2010March 31, 2011 and December 31, 20092010, segregated by the level of valuation inputs within the fair value hierarchy utilized to measure fair value:
  Fair Value Measurement at September 30, 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)
 Assets:       
 Available for sale debt securities:       
 U.S. Government agencies and corporations$93,456  $—  $93,456  $— 
 State and political subdivisions177,255  —  177,255  — 
 Residential mortgage-backed securities125,541  —  125,541  — 
 Corporate debt securities9,615  —  9,615  — 
 Collateralized debt obligations586  —  —  586 
 Total available for sale debt securities406,453  —  405,867  586 
 Available for sale equity securities:       
 Financial services industry1,355  1,355  —  — 
 Total available for sale equity securities1,355  1,355  —  — 
 Total securities available for sale$407,808  $1,355 &n bsp;$405,867  $586 
         
         
  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)
 Assets:       
 Available for sale debt securities:       
 U.S. Government agencies and corporations$81,191  $—  $81,191  $— 
 State and political subdivisions155,224  —  155,224  — 
 Residential mortgage-backed securities108,576  —  108,576  — 
 Corporate debt securities15,305  —  15,305  — 
 Collateralized debt obligations857  —  —  857 
 Total available for sale debt securities361,153  —  360,296  857 
 Available for sale equity securities:       
 Financial services industry1,750  1,750  —  — 
 Total available for sale equity securities1,750  1,750  —  — 
 Total securities available for sale$362,903  $1,750  $360,296  $857 
  Fair Value Measurement at March 31, 2011 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)
 Assets:       
 Available for sale debt securities:       
 U.S. Government agencies and corporations$77,027  $—  $77,027  $— 
 State and political subdivisions194,697  —  194,697  — 
 Residential mortgage-backed securities221,921  —  221,921  — 
 Corporate debt securities5,923  —  5,923  — 
 Collateralized debt obligations936  —  —  936 
 Total available for sale debt securities500,504  —  499,568  936 
 Available for sale equity securities:       
 Financial services industry1,442  1,442  —  — 
 Total available for sale equity securities1,442  1,442  —  — 
 Total securities available for sale$501,946  $1,442  $499,568  $936 
         
 Mortgage servicing rights$1,190  $—  $—  $1,190 
         
 Federal Home Loan Bank stock$10,733  $—  $—  $10,733 
         
  Fair Value Measurement at December 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)
 Assets:       
 Available for sale debt securities:       
 U.S. Government agencies and corporations$80,334  $—  $80,334  $— 
 State and political subdivisions190,088  —  190,088  — 
 Residential mortgage-backed securities179,784  —  179,784  — 
 Corporate debt securities9,473  —  9,473  — 
 Collateralized debt obligations799  —  —  799 
 Total available for sale debt securities460,478  —  459,679  799 
 Available for sale equity securities:       
 Financial services industry1,476  1,476  —  — 
 Total available for sale equity securities1,476  1,476  —  — 
 Total securities available for sale$461,954  $1,476  $459,679  $799 
         
 Mortgage servicing rights$835  $—  $—  $835 
         
 Federal Home Loan Bank stock$10,587  $—  $—  $10,587 

1422
Table of Contents

The following table presents additional information about assets measured at fa irfair market value on a recurring basis for which the Company has utilized Level 3 inputs to determine fair value:
 
    
Collateralized
Debt
Obligations
 
 (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 September 30, 2010  $586  
    
Collateralized
Debt
Obligations
 
Mortgage
Servicing
Rights
 
 (in thousands)      
 Level 3 fair value at December 31, 2010  $799  $835  
 Transfers into Level 3  —  —  
 Transfers out of Level 3  —  —  
 Total gains (losses):      
 Included in earnings  —  355  
 Included in other comprehensive income  137  —  
 Purchases, issuances, sales, and settlements:      
 Purchases  —  —  
 Issuances  —  —  
 Sales  —  —  
 Settlements  —  —  
 Level 3 fair value at March 31, 2011  $936  $1,190  
Changes in the fair value of available for sale securities are included in other comprehensive income to the extent the changes are not considered other-than-temporary impairments. Other-than-temporary impairment tests are performed on a quarterly basis and any decline in the fair value of an individual security below its cost that is deemed to be other-than-temporary results in a write-down that is reflected directly in the Company's consolidated statements of operations.
Valuation methods for instruments measured at fair value on a nonrecurring basis
Impaired Loans - 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 either the fair value of the collateral less estimated costs to sell.sell, or the present value of expected future cash flows as discounted at the loan's effective interest rate. The fair value of collateral was determined based on appraisals. In some cases, adjustments were made to the appraised values due 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 - 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.
Federal Home Loan Bank Stock - Stoc k held in the 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 Owned (OREO) - 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 a ppraisalsappraisals as well as independent fair value assessments from real 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.

23
Table of Contents

The following table discloses the Company's estimated fair value amounts of its financial instruments recorded at fair value on a nonrecurring basis. It is management's belief that the fair values presented below are reasonab lereasonable based on the valuation techniques and data available to the Company as of September 30, 2010March 31, 2011 and December 31, 20092010, as more fully described below.
  Fair Value Measurements at March 31, 2011 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)
 Assets:          
 Impaired loans with an allowance recorded$7,889   $—   $—   $7,889 
 Loans held for sale279   —   279   — 
 Other real estate owned3,874   —   —   3,874 
         
         
  Fair Value Measurements at December 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)
 Assets:          
 Impaired loans with an allowance recorded$463   $—   $—   $463 
 Loans held for sale702   —   702   — 
 Other real estate owned3,850   —   —   3,850 
The following presents the carrying amount and estimated fair value of the financial instruments held by the Company at March 31, 2011 and December 31, 2010. The information presented is subject to change over time based on a variety of factors. The operations of the Company are managed from a going concern basis and not a liquidation basis. As a result, the ultimate value realized from the financial instruments presented could be

15
Table of Contents

substantially different when actually recognized over time through the normal course of operations. Additionally, a substantial portion of the Company's inherent value is the Bank's capitalization and franchise value. Neither of these components has been given consideration in the presentation of fair values below.
  Fair Value Measurements at September 30, 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)
 Assets:          
 Collateral dependent impaired loans$683   $—   $—   $683 
 Loans held for sale4,936   —   4,936   — 
 Federal Ho me Loan Bank stock10,478   —   —   10,478 
 Other real estate owned4,738   —   —   4,738 
         
         
  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)
 Assets:          
 Collateral dependent impaired loans$2,818   $—   $—   $2,818 
 Loans held for sale1,208  & nbsp;—   1,208   — 
 Federal Home Loan Bank stock8,973   — �� —   8,973 
 Other real estate owned3,635   —   —   3,635 
The following presents the carrying amount and estimated fair value of the financial instruments held by the Company at September 30, 2010 and December 31, 2009. The information presented is subject to change over time based on a variety of factors.
  September 30, 2010  December 31, 2009
  
Carrying
Amount
  
Estimated
Fair Value
  
Carrying
Amount
  
Estimated
Fair Value
 (in thousands)          
 Financial as sets:    &n bsp;     
 Cash and cash equivalents$25,747   $25,747   $27,588   $27,588 
 Investment securities412,039   412,115   370,912   371,021 
 Loans held for sale4,936   4,936   1,208   1,208 
 Loans, net941,465   941,304   953,041   953,647 
 Loan pool participations, net71,160   71,160   83,052   83,052 
 Other real estate owned4,738   4,738   3,635   3,635 
 Accrued interest receivable11,796   11,796   11,534   11,534 
 Federal Home Loan Bank stock10,478   10,478   8,973   8,973 
 Financial liabilities:          
 Deposits1,183,056   1,187,445   1,179,868   1,185,450 
 Federal funds purchased and securities sold under agreements to repurchase44,479   44,479   44,973   44,973 
 Federal Home Loan Bank borrowings136,200   140,604   130,200   133,098 
 Long-term debt15,552   10,107   15,588   10,070 
 Accrued interest payable2,021   2,021   2,248   2,248 
  March 31, 2011  December 31, 2010
  
Carrying
Amount
  
Estimated
Fair Value
  
Carrying
Amount
  
Estimated
Fair Value
 (in thousands)          
 Financial assets:          
 Cash and cash equivalents$23,667   $23,667   $20,523   $20,523 
 Investment securities505,618   505,662   465,986   466,062 
 Loans held for sale279   279   702   702 
 Loans, net923,125   920,545   922,868   922,817 
 Loan pool participations, net62,207   62,207   65,871   65,871 
 Other real estate owned3,874   3,874   3,850   3,850 
 Accrued interest receivable9,580   9,580   10,648   10,648 
 Federal Home Loan Bank stock10,733   10,733   10,587   10,587 
 Mortgage servicing rights1,190   1,190   835   835 
 Financial liabilities:          
 Deposits1,263,158   1,264,236   1,219,328   1,223,584 
 Federal funds purchased and securities sold under agreements to repurchase46,325   46,325   50,194   50,194 
 Federal Home Loan Bank borrowings117,200   119,377   127,200   130,005 
 Long-term debt15,464   9,897   15,464   9,930 
 Accrued interest payable1,964   1,964   1,872   1,872 
 
•    Cash and cash equivalents, non-interest-bearing demand deposits, federal funds purchased, securities sold under repurchase agreements, and accrued interest are instruments with carrying values that approximate fair value.
Cash and cash equivalents, non-interest-bearing demand deposits, federal funds purchased, securities sold under repurchase agreements, and accrued interest are instruments with carrying values that approximate fair value.
•    Investment securities available for sale are recorded at fair value on a recurring basis. Fair value measurement is based upon quoted prices, if available. If a quoted price is not available, the fair value is
Investment securities available for sale are recorded at fair value on a recurring basis. Fair value measurement is based upon quoted prices, if available. If a quoted price is not available, the fair value is obtained from benchmarking the security against similar securities.

1624
Table of Contents

obtained from benchmarkingMortgage servicing rights are recorded at fair value on a recurring basis. Fair value measurement is based upon comparable market quotes and assumptions, through a third-party valuation service.
Loans held for sale have an estimated fair value based on quoted market prices of similar loans sold on the security againstsecondary market.
For variable-rate loans that reprice frequently and with no significant change in credit risk, fair values are based on carrying values. The fair values for other loans are determined using estimated future cash flows, discounted at the interest rates currently being offered for loans with similar securities.terms to borrowers with similar credit quality. The Company does record nonrecurring fair value adjustments to loans to reflect (1) partial write-downs that are based on the observable market price or appraised value of the collateral or (2) the full charge-off of the loan carrying value.
Loan pool participation carrying values represent the discounted price paid by us to acquire our participation interests in the various loan pools purchased, which approximate fair value.
•    Loans held for sale have an estimated fair value based on quoted market prices of similar loans sold on the secondary market.
Deposit liabilities are carried at historical cost. The fair value of demand deposits, savings accounts and certain money market account deposits is the amount payable on demand at the reporting date. The fair value of fixed maturity certificates of deposit is estimated using the rates currently offered for deposits of similar remaining maturities. If the fair value of the fixed maturity certificates of deposit is calculated at less than the carrying amount, the carrying value of these deposits is reported as the fair value.
•    For v ariable-rate loans that reprice frequently and with no significant change in credit risk, fair values are based on carrying values. The fair values for other loans are determined using estimated future cash flows, discounted at the interest rates currently being offered for loans with similar terms to borrowers with similar credit quality. The Company does record nonrecurring fair value adjustments to loans to reflect (1) partial write-downs that are based on the observable market price or appraised value of the collateral or (2) the full charge-off of the loan carrying value.
& bull;    Loan pool participation carrying values represent the discounted price paid by us to acquire our participation interests in the various loan pools purchased, which approximate fair value.
•    Deposit liabilities are carried at historical cost. The fair value of demand deposits, savings account s and certain money market account deposits is the amount payable on demand at the reporting date. The fair value of fixed maturity certificates of deposit is estimated using the rates currently offered for deposits of similar remaining maturities. If the fair value of the fixed maturity certificates of deposit is calculated at less than the carrying amount, the carrying value of these deposits is reported as the fair value.
•    Federal Home Loan Bank borrowings and long-term debt are recorded at historical cost. The fair value of these items are estimated using discounted cash flow analysis, based on the Company's current incremental borrowing rates for similar types of borrowing arrangements.
Changes in assumptions or estimation methodologies may have a material effect on these estimated fair values.
 
8.Allowance for Loan Losses and Nonperforming AssetsVariable Interest Entities
The allowance forLoan Pool Participations
MidWestOne has invested in certain participation certificates of loan losses is established as lossespools which are estimated to have occurred through a provision for loan losses charged to earnings. Loan losses are charged againstheld and serviced by the allowance when management believes the uncollectabilitythird-party independent servicing corporation. MidWestOne's portfolio holds approximately 95% of a loan balance is confirmed. Subsequent recoveriesparticipation interests in pools of loans owned and serviced by States Resources Corporation (“SRC”), a third-party loan servicing organization located in Omaha, Nebraska. SRC's owner holds the rest. The Company does not have any ownership interest in or control over SRC. As previously charged-off,announced, the Company has decided to exit this line of business as current balances pay down.
These pools of loans were purchased from large nonaffiliated banking organizations and from the FDIC acting as receiver of failed banks and savings associations. As loan pools were put out for bid (generally in a sealed bid auction) the servicer's due diligence teams evaluated the loans and determined their interest in bidding on the pool. After the due diligence, MidWestOne management reviewed the status and decided if any, are creditedit wished to continue in the process. If the decision to consider a bid was made, the servicer conducted additional analysis to determine the appropriate bid price. This analysis involved discounting loan cash flows with adjustments made for expected losses, changes in collateral values as well as targeted rates of return. A cost or investment basis was assigned to each individual loan at cents per dollar (discounted price) based on the servicer's assessment of the recovery potential of each loan.
Once a bid was awarded to the allowance when realized. The allowance for loan losses is evaluatedCompany's servicer, the Company assumed the risk of profit or loss but on a quarterlynon-recourse basis by management andso the risk is base d upon management's periodic reviewlimited to its initial investment. The extent of the collectabilityrisk is also dependent upon: the debtor or guarantor's financial condition, the possibility that a debtor or guarantor may file for bankruptcy protection, the servicer's ability to locate any collateral and obtain possession, the value of such collateral, and the length of time it takes to realize the recovery either through collection procedures, legal process, or resale of the loans in lightafter a restructure.
Loan pool participations are shown on the Company's consolidated balance sheets as a separate asset category. The original carrying value or investment basis of historical experience,loan pool participations is the nature and volumediscounted price paid by the Company to acquire its interests, which, as noted, is less than the face amount of the underlying loans. MidWestOne's investment basis is reduced as SRC recovers principal on the loans and remits its share to the Company or as loan portfolio, adverse situations that may affect the borrower's ability to repay, estimated value of any underlying collateral and prevailing economic conditions. This evaluation is inherently subjective,balances are written off as it requires estimates that are susceptible to significant revision as more information becomes available.

17
Table of Contents

The following is an analysis of activity in the allowance for loan losses for the periods indicated:
  
Three Months Ended
September 30,
 
Nine Months&nbs p;Ended
September 30,
  2010 2009 2010 2009
 (dollars in thousands)       
 
Amount of loans outstanding at end of period (net of unearned interest) (1)
$956,324  $973,468  956,324  973,468 
 Average amount of loans outstanding for the period (net of unearned interest)$960,037  $983,999  958,971  999,313 
 Allowance for loan losses at beginning of period$14,823  $13,465  13,957  10,977 
&nbs p;        
 Charge-offs:       
 Agricultural197  17  1,197  75 
 Commercial and financial311  831  1,416  1,640 
 Real estate:       
 Construction, one- to four- family residential—  —  —  — 
 Construction, land development and commercial406  278  431  373 
 Mortgage, farmland—  —  —  120 
 Mortgage, one- to four- family first liens82  918  133  1,160 
 Mortgage, one- to four- family junior liens85  46  100  78 
 Mo rtgage, multifamily—  —  —  5 
 Mortgage, commercial104  3  187  55 
 Loans to individuals82  47  148  105 
 Obligations of state and political subdivisions—  —  —  — 
 Total charge-offs1,267  2,140  3,612  3,611 
         
 Recoveries:       
&nbs p;Agricultural—  —  5  19 
 Commercial an d financial32  24  56  69 
 Real estate:   ;     
 Construction, one- to four- family residential—  —  —  — 
&nb sp;Construction, land development and commercial4  —  4  — 
 Mortgage, farmland—  —  —  — 
 Mortgage, one- to four- family first liens—  21  2  30 
 Mortgage, one- to four- family junior liens1  3  56  14 
 Mortgage, multifamily—  —  —  15 
 Mortgage, commercial8  —  116  — 
 Loans to individuals8  8  25  18 
 Obligations of state and political subdivisions—  —  —  — 
 Total recoveries53  56  264  165 
 Net loans charged off1,214  2,084  3,348  3,446 
 Provision for loan losses1,250  2,125  4,250  5,975 
 Allowance for loan losses at end of period$14,859  $13,506  14,859  13,506 
          
 Net loans charged off to average loans0.50% 0.84% 0.48% 0.47%
 Allow ance for loan losses to total loans at end of period1.55% 1.39% 1.55% 1.39%
(1)Loans do not include, and the allowance for loan losses does not include, loan pool participations.

18
Table of Contents

The following table sets forth the amounts and categories of the Company's nonperforming assets at the dates indicated:
  September 30, 2010 December 31, 2009
  
Non-
Accrual
 
Troubled Debt
Restructures
 
Non-
Accrual
 
Troubled Debt
Restructures
 (in thousands)       
 Nonperforming loans:       
 Agricultural$3,494  $3,323  $3,498  $— 
 Commercial and financial1,381  597  2,386  676 
 Real estate:       
 Construction, one- to four- family residential—  —  463  — 
 Construction, land development and commercial879  —  —  434 
 Mortgage, farmland3,126  348  43  — 
 Mortgage, one- to four- family first liens1,643  48  2,073  49 
 Mortgage, one- to four- family junior liens58  50  157  — 
 Mortgage, multifamily610  —  —  — 
 Mortgage, commercial1,373  1,913  1,168  1,368 
 Loans to individuals146  ; —  97  28 
 Obligations of state and political subdivisions—  —  —  — 
  $12,710  $6,279  $9,885  $2,555 
 Total impaired loans  $18,989    $12,440 
         
 90 days or more past due and still accruing:       
 Agricultural  149    — 
 Commercial and financial  57    256 
 Real estate:       
 Construction, one- to four- family residential  —    138 
 Construction, land development and commercial  —    — 
 Mort gage, farmland  222    — 
 Mortgage, one- to four- family first liens  365    927 
 Mortgage, one- to four- family junior liens  75    85 
 Mortgage, multifamily  79    &mdas h; 
 Mortgage, commercial  115    — 
 Loans to individuals  117    33 
 Obligations of state and political subdivisions  —    — 
 Total 90 days or more past due and still accruing  $1,179    $1,439 
 Total nonperforming loans  $20,168    $13,879 
         
 Other real estate owned and repossessed assets  4,738    3,635 
         
 Total nonperforming loans and nonperforming other assets  $24,906    $17,514 
         
 Ratios:       
 Nonperforming loans to loans, before allowance for loan losses  2.11%   1.44%
 Nonperforming loans and nonperforming other assets to loans, before allowance for loan losses  2.60%   1.81%
The allowance for loan loss es related to nonperforming loans at September 30, 2010 and December 31, 2009 was $1.0 million and $0.7 million, respectively. Nonperforming loans of $9.5 million and $1.2 million at September 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.uncollectible.
 

19
Table of Contents

9.Effect of New Financial Accounting Standards
In June 2009, the FASB issued an accounting standard which am ended 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 December 31, 2009. The adoption of this accounting standard did not have a material impact on our financial condition, results of operations, or disclosures.
In June 2009, the FASB issued an accounting standard which requires a qualitative rather than a quantitative analysis to determine the primary beneficiary of a variable interest entity (“VIE”) for consolidation purposes. The primary beneficiary of a VIE is the enterprise that has: (1) the power to direct the activities of the VIE that most significantly impact the VIE'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.
In December 2009, the FASB issued Accounting 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 was effective for the Company as of January 1, 2010 with 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, res ults of operations, or disclosures.
In January 2010, the FASB issued 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

25
Table of Contents

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.
In April 2010,2011, the FASB issued ASU No. 2010-18,2011-02, Receivables (Topic 310): EffectA Creditor's Determination of Whether a Loan Modification When the Loan Is Part ofRestructuring is a Pool That is Accounted for as a Single AssetTroubled Debt Restructuring, which clarifies the accounting for acquired loans that have evidence ofwhether a deterioration in credit quality since origination (referred to as “Subtopic 310-30 Loans”). Under this ASU, an entity may not apply troubled debt restructuring (“TDR”) accounting guidance to individual Subtopic 310-30 loans that are part of a pool, even if the modification of those loans would otherwise be consideredconstitutes a troubled debt restructuring. OnceThe update clarifies the guidance on a poolcreditor's evaluation of whether it has granted a concession and on a creditor's evaluation of whether a debtor is established, individual loans should not be removedexperiencing financial difficulties. In addition, under this ASU a creditor is precluded from using the pool unlesseffective interest rate test in the entity sells, forecloses, or writes off the loan. Entities would continue to considerdebtor's guidance on restructuring of payables when evaluating whether the pool of loans is impaired if expected cash flowsa restructuring constitutes a troubled debt restructuring. The amendments in this update are effective for the pool change. Subtopic 310-30 loans thatfirst interim or annual period beginning on or after June 15, 2011, and are accounted for individually would continue to be subjectapplied retrospectively to TDR accounting guidance.  A one-time election to terminate accounting for loans as a pool, which may be made on a pool-by-pool basis, is provided upon adoptionthe beginning of the ASU.annual period of adoption. This ASU is effective for the t hirdthird quarter Form 10-Q.  Adoption of this ASU2011 and is not expected to have a material effect on the Company's consolidated financial statements.
 
In July 2010, the FASB issued ASU No. 2010-20, Disclosures about the Credit Quality of Financing Receivables and the Allowance for Credit Losses, which requires significant new disclosures about the allowance for credit losses and the credit quality of financing receivables. The requirements are intended to enhance transparency regarding credit losses and the credit quality of loan and lease receivables. Under this statement, allowance for credit losses and fair value are to be disc losed by portfolio segment, while credit quality information, impaired financing receivables and nonaccrual status are to be presented by class of financing receivable.  Disclosure of the nature and extent, the financial impact and segment information of troubled debt restructurings will also be required.  The disclosures are to be presented at the level of disaggregation that management uses when assessing and monitoring the portfolio's risk and performance. This ASU is effective for interim and annual reporting periods after December 15, 2010.  The Company will include these disclosures in the notes to the consolidated financial statements beginning in the fourth

20
Table of Contents

quarter of 2010.
10.Use of Estimates in the Preparation of Financial Statements
The preparation of financial statements in conformity with U.S. generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reported period. Actual results could differ from those estimates. Significant estimates that are particularly sensitive to change are the allowance for loan losses and the fair value of available for sale securities.
11.    Subsequent Events
Management evaluated subsequent events through the date the consolidated financial statements were available to be issued. Events or transactions occurring after September 30, 2010March 31, 2011, but prior to the date the consolidated financial statements were available to be issued, that provided additional evidence about conditions that existed at September 30, 2010March 31, 2011 have been recognized in the consolidated financial statements for the period ended September 30, 2010March 31, 2011. Events or transactions that provided evidence about conditions that did not exist at September 30, 2010March 31, 2011, 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 September 30, 2010March 31, 2011.
 
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
 
OVERVIEW
The Company provides financial services to individuals, businesses, governmental units and institutional customers in east central Iowa. The Bank has office locations in Belle Plaine, Burlington, Cedar Falls, Conrad, Coralville, Davenport, Fairfield, Fort Madison, Hudson,Iowa City, Melbourne, North English, North Liberty, Oskaloosa, Ottumwa, Parkersburg, Pella, Sigourney, Waterloo and West Liberty, Iowa. MidWestOne Insurance Services, Inc. provides personal and business insurance services in Pella, Melbourne and Oskaloosa, Iowa. The Bank is actively 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 admi nistersadministers estates, personal trusts, conservatorships, pension and profit-sharing accounts along with providing brokerage activities and other investment management services to customers.
We operate as an independent community bank that offers a broad range of customer-focused financial services as an alternative to large regional and multi-state banks in our market area. Management has invested in the infrastructure and staffing to support our strategy of serving the financial needs of businesses, individuals and municipalities in our market area. We focus our efforts on core deposit 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 sp readspread over funding costs.
Our results of operations depend primarily on our net interest income, which is the difference between the interest income on our earning assets, such as loans and securities, and the interest expense paid on our deposits and borrowings. Results of operations are also affected by non-interest income and expense, the provision for loan losses and income tax expense. Significant external factors that impact our results of operations include general economic and competitive conditions, as well as changes in market interest rates, government policies, and actions of regulatory authorities.
The following discussion and analysis should be read in conjunction with the consolidated financial statements and related notes and with the statistical information and financial data appearing in this report as well as our 20092010 Annual Report on Form 10-K. Results of operations for the three- and ninethree-month periodsperiod ended September 30, 2010March 31, 2011 are not necessarily indicative of results to be attained for any other period.
Critical Accounting Estimates
Critical accounting estimates are those which are both most important to the portrayal of our financial condition and results of operations, and require our management's most difficult, subjective or complex judgments, often as a result of the need to make

26
Table of Contents

estimates about the effect of matters that are inherently uncertain. Our critical accounting estimates 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, all of which involve significant judgment by our management. Information about our critical accounting estimates is included under Item 7, "Management's Discussion and Analysis of Financial Condition and Results of Operations" in our Annual Report on Form 10-K for the year ended December 31, 20092010.

21
Table of Contents

Recent Legislation Impacting the Financial Services Industry
On July 21 2010, sweeping financial regulatory reform legislation entitled the “Dodd-Frank Wall Street Reform and Consumer Protection Act” (the “Dodd-Frank Act”) was signed into law. The Dodd-Frank Act implements far-reaching changes across the financial regulatory landscape, including provisions that, among other things:
•    Create a Financial Services Oversight Council to identify emerging systemic risks and improve interagency cooperation;
•    Centralize responsibilit y for consumer financial protection by creating a new agency, the Consumer Financial Protection Bureau, responsible for implementing, examining and enforcing compliance with federal consumer financial laws;
•    Establish strengthened capital standards for banks and bank holding companies, and disallow trust preferred securities from being included in a bank's Tier 1 capital determination (subject to a grandfather provision for existing trust preferred securities);
•    Contain a series of provisions covering mortgage loan origination standards affecting, among other things, originator compensation, minimum repayment standards and prepayments;
•    Require financial holding companies, such as the Company, to be well-capitalized and well-managed as of July 21, 2011. Bank holding companies and banks must also be both well-capitalized and well-managed in order to acquire banks located outside their home state;
•    Grant the Federal Reserve the power to regulate debit card interchange fees;
•    Implement corporate governance revisions, including with regard to executive compensation and proxy access by shareholders, that apply to all public companies, not just financial institutions;
•    Make permanent the $250,000 limit for federal deposit insurance and increase the cash limit of Securities Investor Protection Corporation protection from $100,000 to $250,000 and provide unlimited federal deposit insurance until January 1, 2013 for non-interest bearing demand transaction accounts at all insured depository institutions;
•    Repeal the federal prohibitions on the payment of intere st on demand deposits, thereby permitting depository institutions to pay interest on business transaction and other accounts; and
•    Increase the authority of the Federal Reserve to examine the Company and its nonbank subsidiaries.
Many aspects of the Dodd-Fr ank Act are subject to rulemaking and will take effect over several years, making it difficult to anticipate the overall financial impact on the Company, its customers or the financial industry more generally. Provisions in the legislation that affect deposit insurance assessments, payment of interest on demand deposits and interchange fees could increase the costs associated with deposits as well as place limitations on certain revenues those deposits may generate. Provisions in the legislation that revoke the Tier 1 capital treatment of trust preferred securities and otherwise require revisions to the capital requirements of the Company and the Bank could require them to seek other sources of capital in the future.
 
RESULTS OF OPERATIONS
Comparison of Operating Results for the Three Months Ended September 30, 2010March 31, 2011 and September 30, 2009March 31, 2010
Summary
For the quarter ended September 30, 2010March 31, 2011 we earned net income of $2.82.9 million, of which $2.62.7 million was available to common shareholders, compared with $0.82.0 million, of which $0.61.8 million was available to common shareholders, for the quarter ended September 30, 2009March 31, 2010, an increase of 234.1%45.0% and 315.9%50.4%, respectively. Basic and diluted earnings per common share for the thirdfirst quarter of 20102011 were $0.300.31 versus $0.070.21 for the thirdfirst quarter of 20092010. Our return on average assets for the thirdfirst quarter of 20102011 was 0.71%0.74% compared with a return of 0.21%0.53% for the same period in 20092010. Our return on average shareholders' equity was 6.94%7.41% for the quarter ended September 30, 2010March 31, 2011 versus 2.21%5.28% for the quarter ended September 30, 2009March 31, 2010. The return on average tangible common equity was 7.74%8.26% for the thirdfirst quarter of 20102011 compared with 2.02%5.76% for the same period in 20092010.

22
Table of Contents

The following table presents selected fina ncialfinancial results and measures for the thirdfirst quarter of 20102011 and 20092010.
Three Months Ended September 30,Three Months Ended March 31,
($ amounts in thousands)2010 20092011 2010
Net Income$2,786  $834 $2,905  $2,004 
Average Assets1,562,276  1,550,847 1,589,542  1,527,170 
Average Shareholders' Equity159,252  149,769 158,891  153,798 
Return on Average Assets0.71% 0.21%0.74% 0.53%
Return on Average Shareholders' Equity6.94% 2.21%7.41% 5.28%
Return on Average Tangible Common Equity7.74% 2.02%8.26% 5.74%
Total Equity to Assets (end of period)10.37% 9.93%9.97% 10.00%
Tangible Common Equity to Tangible Assets (end of period)8.68% 8.15%8.37% 8.26%
We have traditionally disclosed certain non-GAAP ratios to evaluate and measure our financial condition, including our return on average tangible c ommoncommon equity. We believe these ratios provide investors with information regarding our financial condition and how we evaluate our financial condition internally. The following table providestables provide a reconciliation of the non-GAAP measuremeasures to the most comparable GAAP equivalent.equivalents.
 
 For the Three Months Ended March 31,
(in thousands)2011 2010
Average Tangible Common Equity:   
Average total shareholders' equity$158,891  $153,798 
Less: Average preferred stock(15,775) (15,708)
Average goodwill and intangibles(11,208) (12,371)
Average tangible common equity$131,908  $125,719 
    
Net income available to common shareholders$2,688  $1,787 
    
Annualized return on average tangible common equity8.26% 5.74%

27
Table of Contents

 For the Three Months Ended September 30,
(in thousands)2010 2009
Tangible Common Equity:   
Average total shareholders' equity$159,252  $149,769 
Less: Average preferred stock(15,741) (15,675)
Average goodwill and intangibles(11,711) (12,720)
Average tangible common equity$131,800  $121,374 
    
Net income available to common shareholders$2,570  $618 
    
Annualized return on average tangible common equity7.74% 2.02%
 As of March 31,
(in thousands)2011 2010
Tangible Common Equity:   
Total shareholders' equity161,315  154,158 
Less: Preferred equity(15,784) (15,716)
         Goodwill and intangibles(11,019) (12,016)
Tangible common equity134,512  126,426 
    
Tangible Assets:   
Total assets1,618,231  1,542,061 
Less: Goodwill and intangibles(11,019) (12,016)
Tangible assets1,607,212  1,530,045 
    
Tangible common equity/tangible assets8.37% 8.26%
 
Net Interest Income
Net interest income is the difference between interest income and fees earned on earning assets and interest expense incurred on interest-bearing liabilities. Interest rate levels and volume fluctuations within earning assets and interest-bearing liabilities impact net interest income. Net interest margin is tax-equivalent net interest income as a percentage of average earning assets.
Certain assets with tax favorable treatment are evaluated on a tax-equivalent basis. Tax-equivalent basis assumes a federal income tax rate of 34%. Tax favorable assets generally have lower contractual pr etaxpretax yields than fully taxable 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.
Our net interest income for the quarter ended September 30, 2010March 31, 2011 increaseddecreased $1.20.2 million to $12.111.6 million compared with $10.911.8 million for the quarter ended September 30, 2009March 31, 2010. Our total interest income of $17.716.9 million was $0.30.9 million lower in the thirdfirst quarter of 20102011 compared with the same period in 20092010. Most of the decrease in interest income was due to reduced interest on loans somewhat offset by increasedand interest income on loan pool participations.participations, due primarily to lower average rates. The decrease in interest income was more thanpartially offset by reduced interest expense on deposits.deposits and FHLB advances. Total interest expense for the thirdfirst quarter of 20102011 decreased $1.50.8 million, or 20.6%12.7%, compared with the same period in 20092010, due primarily to lower average interest rates in 20102011. Our net interest margin on a tax-equivalent basis for the thirdfirst quarter of 2011 decreased to 3.31% compared with 3.50% in the first quarter of 2010 increased to 3.41% compared with 3.13% in the third 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 4.93%4.75% for the thirdfirst quarter of 2011 from 5.22% for the first quarter of 2010 from 5.05% for the third quarter of 2009. This decline was due primarily to lower rates being received on newly originated loans and purchases of investment securities.securities, and decreased income from the loan pool participations. The average cost of interest-bearing liabilities decreased in the thirdfirst quarter of 2011 to 1.67% from 2.01% for the first quarter of 2010 to 1.80% from 2.25% for the third quarter of 2009, due to the continued repricing of new time certificates and FHLB advances at lower interest rates. We expect to continue battling margin compression as 2011 unfolds with short term interest rates at generational lows.

2328
Table of Contents

The following table shows the consolidated average balance sheets, detailing the major categories of assets and liabilities, the interest income earned on interest-earning assets, the interest expense paid for the interest-bearing liabilities, and the related interest rates for the quarter ended September 30, 2010March 31, 2011 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 September 30,
 2010 2009
 
Average
Balance
 
Interest
Income/
Expense
 
Average
Rate/
Yield
 
Average
Balance
 
Interest
Income/
Expense
 
Average
Rate/
Yield
(dollars in thousands)           
Average earning assets:           
Loans (tax equivalent) (1)(2)(3)
$960,037  $13,857  5.73% $983,999  $14,744  5.94%
Loan pool participations (4)
76,573  552  2.86  89,942  28  0.12 
Investment securities:           
Taxable investments317,466  2,445  3.06  260,273  2,307  3.52 
Tax exempt investments (2)
108,534  1,433  5.24  118,485  1,565  5.24 
Total investment securities426,000  3,878  3.61  378,758  3,872  4.06 
Federal funds sold and interest-bearing balances8,829  2  0.09  13,127  9  0.27 
Total earning assets$1,471,439  $18,289  4.93% $1,465,826  $18,653  5.05%
            
Cash and due from banks18,690      21,645     
Premises and equipment27,726      29,799     
Allowance for loan losses(17,112)     (15,654)    
Other assets61,533      49,231     
Total assets$1,562,276      $1,550,847     
            
Average interest-bearing liabilities:           
Savings and interest-bearing demand deposits$485,624  $1,057  0.86% $461,467  $1,127  0.97%
Certificates of deposit561,702  3,170  2.24  585,892  4,175  2.83 
Total deposits1,047,326  4,227  1.60  1,047,359  5,302  2.01 
Federal funds purchased and repurchase agreements47,204  79  0.66  42,462  98  0.92 
Federal Home Loan Bank borrowings136,135  1,170  3.41  146,418  1,533  4.15 
Long-term debt and other16,378  167  4.05  16,510  171  4.11 
Total borrowed funds199,717  1,416  2.81  205,390  1,802  3.48 
Total interest- bearing liabilities$1,247,043  $5,643  1.80% $1,252,749  $7,104  2.25%
            
Net interest spread(2)
    3.13%     2.80%
            
Demand deposits138,005      132,262     
Other liabilities17,976      16,067     
Shareholders' equity159,252      149,769     
Total liabilities and shareholders' equity$1,562,276      $1,550,847     
            
Interest income/earning assets (2)
$1,471,439  $18,289  4.93% $1,465,826  $18,653  5.05%
Interest expense/earning assets$1,471,439  $5,643  1.52% $1,465,826  $7,104  1.92%
Net interest margin (2)(5)
  $12,646  3.41%  & nbsp;$11,549  3.13%
            
Non-GAAP to GAAP Reconciliation:           
Tax Equivalent Adjustment:           
Loans  $80      $75   
Securities  487      547   
Total tax equivalent adjustment  567      622   
Net Interest Income  $12,079      $10,927   
(1)Loan fees included in interest income are not mate rial.
(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.

24
Table of Contents

The following table sets forth an analysis of volume and rate changes in interest income and interest expense on our average earning assets and average interest-bearing liabilities reported on a fully tax-equivalent basis assuming a 34% tax rate. The table distinguishes between the changes related to average outstanding balances (changes in volume holding the initial interest rate constant) and the c hanges related to average interest rates (changes in average rate holding the initial outstanding balance constant). The change in interest due to both volume and rate has been allocated to volume and rate changes in proportion to the relationship of the absolute dollar amounts of the change in each.
 Three Months Ended September 30,
 2010 Compared to 2009 Change due to
 Volume Rate/Yield Net
(in thousands)     
Increase (decrease) in interest income:     
Loans (tax equivalent)$(3 54) $(533) $(887)
Loan pool participations(4) 528  524 
Investment s ecurities:     
Taxable investments342  (204) 138 
Tax exempt investments(131) (1) (132)
      
Total investment securities211  (205) 6 
      
Federal funds sold and interest-bearing balances(2) (5) (7)
      
Change in interest income(149) (215) (364)
      
Increase (decrease) in interest expense:     
Savings and inter est-bearing demand deposits65  (135) (70)
Certificates of deposit(166) (839) (1,005)
      
Total deposits(101) (974) (1,075)
      
Federal funds purchased and repurchase agreements13  (32) (19)
Federal Home Loan Bank borrowin gs(102) (261) (363)
Other long-term debt(1) (3) (4)
      
Total Borrowed Funds(90) (296) (386)
      
Change in interest expense(191) (1,270) (1,461)
      
Increase in net interest income$42  $1,055  $1,097 
      
Percentage increase in net interest income over prior period    9.50%
Interest income and fees on loans on a tax-equivalent basis decreased $0.9 million, or 6.0%, in the third quarter of 2010 compared with the same period in 2009. Average loans were $24.0 million, or 2.4%, lower in the third quarter 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 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 overall 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 from5.94% in the third quarter of 2009 to 5.73%in third quarter of 2010.
Interest and discount income on loan pool participations was $0.6 million for the third quarter of 2010 compared with $28,000 for the third quarter of 2009, an increase of $0.5 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. We have very minimal exposure in the loan pools to consumer real estate, subprime credit or construction and real estate development loans. Average loans pools were $13.4 million, or 14.9%, lower in the third quarter of 2010 compared with 2009. The decrease in average loan pool volume was due to normal repayment activity, as no new pools have been purchased since January 2010.

25
Table of Contents

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 3.52% for the third quarter of 2010, up from 1.39% for the same period of 2009. The net yield was higher in the third quarter of 2010 than for the third quarter of 2009 primarily due to a stabilization of charge-off levels and payment collections in the portfolio.
The income and yield on loan pool participations may vary in future periods due to the volume and accretable yield on loan pools purchased.
Interest income on investment securities on a tax-equivalent basis totaled $3.9 millionin the third quarter of both 2010 and 2009. The average balance of investments in the third quarter of 2010 was $426.0 million compared with $378.8 millionin the third quarter of 2009. The tax-equivalent yield on our investment portfolio in the third quarter of 2010 decreased to 3.61% from 4.06% in the comparable period of 2009 reflecting reinvestment of maturing securities and purchases of new securities at lower market interest rates.
Interest expense on depo sits was $1.1 million, or 20.3%, lower in the third quarter of 2010 compared with the same period in 2009, mainly due to the decrease in interest rates during 2010. The weighted average rate paid on interest-bearing deposits was 1.60% in the third quarter of 2010 compared with 2.01% in the third quarter 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 third quarter of 2010 were virtually unchanged compared with the same period in 2009.
Interest expense on borrowed funds was $0.4 million lower in the third quarter of 2010 compared with the same period in 2009. Interest on borrowed funds totaled $1.4 million for the third quarter of 2010. Average borrowed f unds for the third quarter of 2010 were $5.7 million lower compared with the same period in 2009. The majority of the difference was due to a reduction in the level of FHLB borrowings. The weighted average rate on borrowed funds decreased to 2.81%for the third quarter of 2010 compared with 3.48% for the third quarter of 2009, reflecting the replacement of maturing higher-rate borrowings with those in the current lower-rate environment.
Provision for Loan Losses
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 t he 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.
We recorded a provision for loan losses of $1.3 million in the third quarter of 2010 compared with a$2.1 million provision in the third quarter of 2009. Net loans charged off in the third quarter of 2010 totaled $1.2 million compared with net loans charged off of $2.1 million in the third quarter of 2009. We continue to increase our loan loss allowance by maintaining a provision for loan losses that is greater than our 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 expe rience and industry trends. We believe that the allowance for loan losses was adequate based on the inherent risk in the portfolio as of September 30, 2010; 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.
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 chang es in the customers' ability to pay and changes in the 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.

26
Table of Contents

Noninterest Income
 Three Months Ended September 30,
 2010 2009  % Change
(dollars in thousands)      
Trust and investment fees$1,049  $1,050   (0.1)%
Service charges and fees on deposit accounts1,118  1,074   4.1 
Mortgage origination and loan servicing fees958  613   56.3 
Other service charges, commissions and fees633  568   11.4 
Bank owned life insurance income158  154   2.6 
Impairment losses on investment securities, net—  (1,388)  NM       
Gain (loss) on sale of available for sale securities( 158) 491   (132.2)
Loss on sale of premises and equipment(1) (9)  (88.9)
Total noninterest income$3,757  $2,553   47.2 %
      
NM - Percentage change not considered meaningfu l.     
Total noninterest income increased $1.2 million for the third quarter of 2010 compared with the same period for 2009. The increase in 2010 is largely due to the absence of any impairment losses combined with increased mortgage origination and loan servicing fees. We did not recognize any impairment losses on our investment securities portfolio during the third quarter compared with a $1.4 million loss for the third quarter a year ago. Mortgage origination and loan servicing fees totaled $1.0 million for the third quarter of 2010, up from $0.6 million for the same period last year. The increase in mortgage origination and loan servicing fees was attributable to higher refinancing activity in single-family residential loans during the third quarter of 2010 compared to the same period of 2009.
These improvements were partially offset by net losses on the sale of available for sale securities of $0.2 million for the third quarter of 2010, compared with net gains of $0.5 million for the same period of 2009. Management's strategic goal is for noninterest income to constitute 30% of total revenues (net interest income plus noninterest income) over time. For the quarter ended September 30, 2010 noninterest income comprised 23.7% of total revenues, compared with 18.9% for the same quarter in 2009.
Noninterest Expense
 Three Months Ended September 30,
 2010  2009  % Change
(dollars in thousands)       
Salaries and employee benefits$5,838   $5,863   (0.4)%
Net occupancy and equipment expense1,598   1,729   (7.6)
Professional fees696   727   (4.3)
Data processing expense421   438   (3.9)
FDIC insurance expense726   615   18.0 
Other operating expense1,605   1,785   (10.1)
Total noninterest expense$10,884   $11 ,157   (2.4)%
Noninterest expense for the third quarter of 2010 was $10.9 million compared with $11.2 million for the third quarter of 2009, a decrease of $0.3 million, or 2.4%. Noninterest expense includes salaries and employee benefits, occupancy and equipment expense, FDIC insurance premiums, professional fees and data processing expense. The primary reasons for the lower noninterest expense for the quarter were a decrease in other operating expenses from $1.8 million in the third quarter of 2009 to $1.6 million for the same period of 2010, and a decrease in net occupancy and equipment expense from $1.7 million for the third quarter of 2009 to $1.6 million for the third quarter of 2010. These decreases were the result of management's cost control and efficiency efforts.
On September 22, 2010 we announced that our bank subs idiary, MidWestOne Bank, would be closing its branch office located at 100 Eddystone Drive in Hudson, Iowa on December 31, 2010. This action was taken as the result of management's careful review of branch locations, balancing the need to reduce operating costs with impact on customer service. Customers from the affected office will be served by other Cedar Valley branch locations in Cedar Falls, Waterloo, and Parkersburg.

27
Table of Contents

Income Tax Expense
Our effective tax rate, or income taxes divided by income before taxes, was 24.7% for the third quarter of 2010, and (321.2)%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 income. Income tax expense increased$1.6 million to $0.9 million in the third quarter of 2010 compared with a $0.6 million income tax benefit for the same period of 2009, due primarily to increased net income.
FDIC Assessments
On 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.
Comparison of Operating Results for the Nine Months Ended September 30, 2010 and September 30, 2009
Summary
For the nine months ended September 30, 2010 we earned net income of $7.4 million, of which $6.7 million was available to common shareholders, compared with $2.8 million, of which $2.2 million was available to common shareholders, for the nine months ended September 30, 2009, an increase of 164.8% and 202.5%, respectively. Basic and diluted earnings per common share for the first nine months of 2010 were $0.78 versus $0.26 for the first nine months of 2009. Our return on average assets for the first nine months of 2010 was 0.64% compared with a return of 0.24% for the same period in 2009. Our return on average shareholders' equity was 6.35% for the nine months ended September 30, 2010 versus 2.56% for the nine months ended September 30, 2009. The return on average tangible common equity was 7.04% for the nine months of 2010 compared with 2.49% for the same period in 2009.
The following table presents selected financial results and measures for the first nine months of 2010 and 2009.
  
Nine Months Ended September 30,
($ amounts in thousands)2010  2009
Net Income$7,395   $2,793 
Average Assets1,550,484   1,541,141 
Average Shareholders' Equity155,739   145,997 
Return on Average Assets0.64%  0.24%
Return on Average Shareholders' Equity6.35%  2.56%
Return on Average Tangible Common Equity7.04%  2.49%
Total Equity to Assets (end of period)10.37%  9.93%
Tangible Common Equity to Tangible Assets (end of period)8.68%  8.15%
We have traditionally disclosed certain non-GAAP ratios to evaluate and measure our financial conditi on, including our return on average tangible common equity. We believe these ratios provide investors with information regarding our financial condition and how we evaluate our financial condition internally. The following table provides a reconciliation of the non-GAAP measure to the most comparable GAAP equivalent.

28
Table of Contents

 For the Nine Months Ended September 30,
(in thousands)2010 2009
Tangible Common Equity:   
Average total shareholders' equity$155,739  $145,997 
Less: Average preferred stock(15,724) (13,660)
Average goodwill and intangibles(11,921) (12,661)
Average tangible common equity$128,094  $119,676 
    
Net income available to common shareholders$6,745  $2,230 
    
Return on average tangible common equity (1)
7.04% 2.49%
(1) Annualized   
Net Interest Income
Our net interest income for the nine months ended September 30, 2010 increased $2.3 million to $36.0 million compared with $33.7 million for the nine months ended September 30, 2009. Our total interest income of $53.7 million was $1.9 million lower in the first nine months of 2010 compared with the same period in 2009. Most of the decrease in interest income was due to reduced interest on loans, somewhat offset by increased interest income on loan pool participations and investment securities. The decrease in interest income was more than offset by reduced interest expense on deposits. Total interest expense for the first nine months of 2010 decreased $4.1 million, or 19.0%, 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 nine months of 2010 increased to 3.46% compared with 3.27% in the nine months 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 5.08% for the nine months of 2010 from 5.27% for the nine months of 2009. The average cost of interest-bearing liabilities decreased to 1.90% in the first nine months of 2010 from 2.33% for the first nine months of 2009.

29
Table o f Contents

The following table shows the consolidated average balance sheets, detailing the major categories of assets and liabilities, the interest income earned on interest-earning assets, the interest expense paid for the interest-bearing liabilities, and the related interest rates for thenine months ended September 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.
Nine Months Ended September 30,Three Months Ended March 31,
2010 20092011 2010
Average
Balance
 
Interest
Income/
Expense
 
Average
Rate/
Yield
 
Average
Balance
 
Interest
Income/
Expense
 
Average
Rate/
Yield
Average
Balance
 
Interest
Income/
Expense
 
Average
Rate/
Yield
 
Average
Balance
 
Interest
Income/
Expense
 
Average
Rate/
Yield
(dollars in thousands)                      
Average earning assets:                      
Loans (tax equivalent) (1)(2)(3)
$958,971  $41,487  5.78% $999,313  $44,633  5.97%$929,247  $12,883  5.62% $959,568  $13,789  5.83%
Loan pool participations (4)
80,752  2,360  3.91  93,716  1,707  2.44 66,347  354  2.16  84,267  899  4.33 
Investment securities:                      
Taxable investments291,522  7,115  3.26  219,696& nbsp; 6,429  3.91 365,856  2,688  2.98  260,356  2,225  3.47 
Tax exempt investments (2)
112,991  4,450  5.27  113,865  4,595  5.40 119,103  1,568  5.34  118,290  1,523  5.22 
Total investment securities404,513  11,565  3.82  333,561  11,024  4.42 484,959  4,256  3.56  378,646  3,748  4.01 
Federal funds sold and interest-bearing balances14,477  33  0.30  29,412  48  0.22 14,849  8  0.22  11,369  10  0.36 
Total earning assets$1,458,713  $55,445  5.08% $1,456,002  $57,412  5.27%
Total interest-earning assets$1,495,402  $17,501  4.75% $1,433,850  $18,446  5.22%
                      
Cash and due from banks19,243      23,333     18,621      20,008     
Premises and equipment28,357      29,641     26,346      28,949     
Allowance for loan losses(16,908)     (15,009)    (17,723)     (16,552)    
Other assets61,079      47,174     66,896      60,915     
Total assets$1,550,484      $1,541,141     $1,589,542      $1,527,170     
                      
Average interest-bearing liabilities:                      
Savings and interest-bearing demand deposits$482,448  $3,339  0.93% $454,578  $3,624  1.07%$527,181  $1,067  0.82% $468,409  $1,106  0.96%
Certificates of deposit567,453  10,053  2.37  579,437  13,160  3.04 569,264  3,035  2.16  569,336  3,510  2.50 
Total deposits1,049,901  13,392  1.71  1,034,015  16,784  2.17 1,096,445  4,102  1.52  1,037,745  4,616  1.80 
Federal funds purchased and repurchase agreements42,402  227  0.72  46,634  359  1.03 46,779  74  0.64  40,661  77  0.77 
Federal Home Loan Bank borrowings132,553  3,560  3.59  154,047  4,115  3.57 123,600  945  3.10  128,689  1,207  3.80 
Long-term debt and other16,411  491  4.00  16,549  554  4.48 16,234  172  4.30  16,446  161  3.97 
Total borrowed funds191,366  4,278  2.99  217,230  5,028  3.09 186,613  1,191  2.59  185,796  1,445  3.15 
Total interest-bearing liabilities$1,241,267  $17,670  1.90% $1,251,245  $21,812  2.33%$1,283,058  $5,293  1.67% $1,223,541  $6,061  2.01%
;           
           
Net interest spread (2)
    3.18%     2.94%    3.08%     3.21%
                      
Demand deposits137,224      131,421     136,922      135,771     
Other liabilities16,254      12,478     10,671      14,060     
Shareholders' equity155,739      145,997     158,891      153,798     
Total liabilities and shareholders' equity$1,550,484    ;   $1,541,141     $1,589,542      $1,527,170     
     &n bsp;                
Interest income/earning assets (2)
$1,458,713  $55,445  5.08% $1,456,002  $57,412  5.27%$1,495,402  $17,501  4.75% $1,433,850  $18,446  5.22%
Interest expense/earning assets$1,458,713  $17,670  1.62% $1,456,002  $21,812  2.00 $1,495,402  $5,293  1.44% $1,433,850  $6,061  1.71%
Net interest margin (2)(5)
  $37,775  3.46%   $35,600  3.27%  $12,208  3.31%   $12,385  3.50%
                      
Non-GAAP to GAAP Reconciliation:                      
Tax Equivalent Adjustment:                      
Loans  $245      $268     $83      $85   
Securities  1,528      1,607     533      533   
Total tax equivalent adjustment  1,773      1,875     616      618   
Net Interest Income  $36,002      $33,725     $11,592      $11,767   
 (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.
 

3029
Table of Contents

The follow ingfollowing table sets forth an analysis of volume and rate changes in interest income and interest expense on our average earning assets and average interest-bearing liabilities reported on a fully tax-equivalent basis assuming a 34% tax rate. The table distinguishes between the changes related to average outstanding balances (changes in volume holding the initial interest rate constant) and the changes related to average interest rates (changes in average rate holding the initial outstanding balance constant). The change in interest due to both volume and rate has been allocated to volume and rate changes in proportion to the relationship of the absolute dollar amounts of the change in each. As the table below illustrates, the increase in net interest income was predominantly rate related.
Nine Months Ended September 30,Three Months Ended March 31,
2010 Compared to 2009 Change due to2011 Compared to 2010 Change due to
Volume Rate/Yield NetVolume Rate/Yield Net
(in thousands)      
Increase (decrease) in interest income:          
Loans (tax equivalent)$(1,770) $(1,376) $(3,146)$(428) $(478) $(906)
Loan pool participations(194) 847  653 (163) (382) (545)
Investment securities:          
Taxable investments1,393  (707) 686 708  (245) 463 
Tax exempt investments(35) (110) (145)11  34  45 
          
Total investment securities1,358  (817) 541 719  (211) 508 
          
Federal funds sold and interest-bearing balances(69) 54  (15)8  (10) (2)
          
Change in interest income(675) (1,292) (1,967)136  (1,081) (945)
          
Increase (decrease) in interest expense:   &nbs p;      
Savings and interest-bearing demand deposits248  (533) (285)282  (321) (39)
Certificates of deposit(267) (2,840) (3,107)—  (475) (475)
          
Total deposits(19) (3,373) (3,392)282  (796) (514)
          
Federal funds purchased and repurchase agreements(30) (102) (132)32  (35) (3)
Federal Home Loan Bank borrowings(577) 22  (555)(46) (216) (262)
Other long-term debt(5) (58) (63)(2) 13  11 
          
Total borrowed funds(612) (138) (750)
Total Borrowed Funds(16) (238) (254)
          
Change in interest expense(631) (3,511) (4,142)266  (1,034) (768)
          
Increase (decrease) in net interest income$(44) $2,219  $2,175 
Decrease in net interest income$(130) $(47) $(177)
          
Percentage increase in net interest income over prior period    6.11%
Percentage decrease in net interest income over prior period    (1.43)%
Interest income and fees on loans on a tax-equivalent basis decreased $3.10.9 million, or 7.0%6.6%, in the nine monthsfirst quarter of 20102011 compared with the same period in 20092010. Average loans were $959.030.3 million, or 4.0%3.2%, lower in the first nine monthsfirst quarter of 20102011 compared with 20092010. The decrease in average loan volume was attributable to declining utilization rates on lines of credit and pay-downs on term debt during 2010, as the 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 overall 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 ratevariable-rate versus fixed ratefixed-rate loans in our portfolio. The average rate on loans decreased slightly from 5.97%5.83% in the first nine monthsfirst of 2009 to5.78%in the first nine monthsquarter of 2010. to 5.62%in first quarter of 2011, primarily due to new and renewing loans being made at lower interest rates than those paying down.
Interest and discount income on loan pool participations was $2.40.4 million for the first nine monthsfirst quarter of 20102011 compared with $1.7 mil lion0.9 million for the first nine monthsfirst quarter of 20092010, an increasea decrease of $0.70.5 million. The Company entered into this business upon consummation of its merger with the Former MidWestOne had engaged in this business since 1988 and we continued the business following the merger.March 2008. 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 inAs previously announced, the pools that are purchased by the servicer from nonaffiliated banking organizations and from the FDIC actingCompany has decided to exit this line of business as receiver of failed banks and savings associations.current balances pay down. We have very minimal exposure in the loan pools to consumer real estate, subprime credit or construction and real estate development loans. Average loans pools were $13.017.9 million, or 13.8%21.3%, lower in the first nine monthsfirst quarter of 20102011 compared with 20092010. The decrease in average loan pool volume was due to normal repayment activity, as no new pools have been purchased since January 2010.loan pay downs.

31
Table of Contents

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

30
Table of Contents

expenses of the servicer in any given period. The net “all-in” yield on loan pool participations was 4.55%2.16% for the nine monthsfirst quarter of 20102011, updown from 3.69%4.98% for the same period of 20092010. The net yield was high erlower in the first ninefirst monthsquarter of 20102011 than for the first nine months of 2009 primarily due to a stabilization of charge-off levels and payment collections in the portfolio during the thirdfirst quarter of 2010.
The income and yield on loan pool participations may vary in future periods primarily due to increased charge-off levels in the volume and accretable yield on loan pools purchased.portfolio.
Interest income on investment securities on a tax-equivalent basis totaled $11.64.3 million in the first ninefirst monthsquarter of 20102011 compared with $11.03.7 million for the first nine monthssame period of2009, an increase of $0.6 million, or4.9%, due to a higher investment balance, and despite a lower yield on investments in 2010. The average balance of investments in the first nine monthsfirst quarter of 20102011 was $404.5485.0 million compared with $333.6378.6 millionin the first in the first nine monthsquarter of 20092010, an increase of $106.3 million, or 28.1%. The increase in average balance resulted from excess liquidity provided by a combination of decreasing loan balances and increasing deposits. The tax-equivalent yield on our investment portfolio in the first nine monthsfirst quarter of 20102011 decreased to 3.82%3.56% from 4.42%4.01% in the comparable period of 20092010 reflecting reinvestment of maturing securities and purchases of new securities at lower market interest rates.
Interest expense on deposits was $3.40.5 million, or 20.2%11.1%, lower in the first nine monthsfirst quarter of 20102011 compared with the same period in 20092010, mainly due to the decrease in interest rates being paid during 20092011. The weighted average rate paid on interest-bearing deposits was 1.71%1.52% in the firstnine monthsquarter of 20102011 compared with 2.17%1.80% in the first ninefirst monthsquarter of 20092010. This decline reflects the overall reduction in market interest rates on deposits throughout the markets in which we operate.operate, and the gradual downward repricing of time deposits as higher rate certificates mature. Average interest-bearing deposits for the first ninefirst monthsquarter of 20102011 wereincreased $15.958.7 million, or 1.5%5.7%, greater compared with the same period in 20092010.
Interest expense on borrowed funds was $0.70.3 million lowlowerer in the first ninefirst monthsquarter of 20102011, compared with the same period in 20092010. Interest on borrowed funds totaled $4.31.2 million for the first nine monthsfirst quarter of 2010, compared with $5.0 million for the same period of 20092011. Average borrowed funds for the first nine monthsfirst quarter of 20102011 were $25.90.8 million lowerhigher compared with the same period in 20092010. The majority of the difference was due to an increase in repurchase agreements, partially offset by a reduction in the level of federal funds purchased, repurchase agreements, and FHLB borrowings. The weighted average rate on borrowed funds decreased to 2.99%2.59%for the first nine monthsfirst quarter of 2011 compared with 3.15% for the first quarter of 2010 compared, reflecting the replacement of maturing higher-rate borrowings with 3.09% forthose in the first nine months of 2009.current lower-rate environment.
Provision for Loan Losses
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.
We recorded a provision for loan losses of $4.30.9 million in the first nine monthsfirst quarter of 20102011 compared with a $6.01.5 million provision in the first nine monthsfirst quarter of 20092010. Net loans charged off in the first ninefirst monthsquarter of 20102011 totaled $3.30.7 million, compared with net loans charged off of $3.40.9 million in the first ninefirst months of 2009. The decrease in the provision in the nine monthsquarter 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 our 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 September 30, 2010March 31, 2011; 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 t hatthat 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 the 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.

3231
Table of Contents

Noninterest Income
Nine Months Ended September 30,Three Months Ended March 31,
2010 2009  % Change2011 2010  % Change
(dollars in thousands)            
Trust and investment fees$3,497  $3,121   12.0 %$1,273  $1,234   3.2 %
Service charges and fees on deposit accounts3,016  2,975   1.4 851  864   (1.5)
Mortgage origination and loan servicing fees1,983  2,244   (11.6)877  500   75.4 
Other service charges, commissions and fees1,793  1,603   11.9 679  584   16.3 
Bank owned life insurance income472  576   (18.1)229  167   37.1 
Impairment losses on investment securities, net(189) (2,002)  (90.6)—  (189)  NM       
Gain on sale of available for sale securities312  491   (36.5)
Gain (loss) on sale of available for sale securities—  237   NM       
Loss on sale of premises and equipment(282) (3)  NM       (48) (77)  (37.7)
Total noninterest income$10,602  $9,005   17.7 %$3,861  $3,320   16.3 %
          
Noninterest income as a % of total revenue*25.0% 22.0%  
     
NM - Percentage change not considered meaningful.          
* - Total revenue includes net interest income and noninterest income.     
Total noninterest income increased $1.60.5 million for the first nine monthsfirst quarter of 20102011 compared with the same period for 20092010. The increase in 20102011 is largelyprimarily due to increased mortgage origination and loan servicing fees combined with the lower year-to-dateabsence of any impairment charges on our investment securities portfolio. Mortgage origination and loan servicing fees totaled 2010$0.9 million for the first quarter of 2011, up from $0.5 million for the same period last year. We did not recognize any impairment losses ofon our investment securities portfolio during the first quarter compared with a $0.2 million, which was $1.8 million lower than loss for the $2.0 millionfirst quarter a year ago. The increase in mortgage origination and loan servicing fees was attributable to higher refinancing activity in single-family residential loans during the first quarter of charges recognized in2011 compared to the same period of 20092010. Trust and investment fees increased byDecreasing levels of refinancing activity has occurred since the beginning of $0.4 million2011, from and we expect this trend to continue.
$3.1 millionThese improvements were partially offset by the absence of net gains or losses on the sale of available for sale securities for the ninefirst months endedquarter of September 30, 20092011 to, compared with net gains of $3.50.2 million for the same period of 2010.
These improvements were partially offset by lower mortgage origination and loan servicing fees and increased losses on the sale of fixed assets. For the first nine months of 2010, mortgage origination and loan servicing fees declined to $2.0 million, down $0.3 million, or 11.6%, from the comparable period in 2009. The decrease in mortgage origination fees was attributable to lower year-to-date refinancing volume of single family residential loans during 2010 than during the same period of 2009. The sale of an unused bank office building in Oskaloosa, Iowa, during the first quarter of 2010 resulted in a net loss of $77,000. During the second quarter of 2010, an unused former branch bank building in Waterloo, Iowa was sold at a net loss of $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 s trategicstrategic goal is for noninterest income to constitute 30% of total revenues (net interest income plus noninterest income) over time. For the nine monthsquarter ended September 30, 2010March 31, 2011, noninterest income comprised 22.7%25.0% of total revenues, compared with 21.1%22.0% as offor the same quarter in September 30, 20092010.
Noninterest Expense
Nine Months Ended September 30,Three Months Ended March 31,
2010  2009  % Change2011  2010  % Change
(dollars in thousands)              
Salaries and employee benefits$17,319   $17,463   (0.8)%$5,870   $5,790   1.4 %
Net occupancy and equipment expense5,004   5,083   (1.6)1,617   1,776   (9.0)
Professional fees2,104   2,651   (20.6)677   749   (9.6)
Data processing expense1,292   1,445   (10.6)450   457   (1.5)
FDIC insurance expense2,123   2,568   (17.3)597   692   (13.7)
Other operating expense4,752   5,195   (8.5)1,423   1,584   (10.2)
Total noninterest expense$32,594   $34,405   (5.3)%$10,634   $11,048   (3.7)%
Noninterest expense for the first nine monthsfirst quarter of 20102011 was $32.610.6 million, compared with $34.411.0 million for the first nine monthsfirst quarter of 20092010, a decrease of $1.80.4 million, or 5.3%3.7%. Noninterest expense includes salaries and employee benefits, occupancy and equipment expense, FDIC insurance premiums, professional fees and data processing expense. The primary reasonreasons for the lower noninterest expense for the quarter were a decrease in noninterest expense was the drop in all categories of noninterest expense. The most significant changes were in professional fees, which declined $0.5 millionother operating expenses from $2.71.6 million in the first quarter of 2010 to $2.11.4 million for the same period of 2011, and a decrease in net occupancy and equipment expense from $1.8 million for the ninefirst months endedquarter of September 30, 2009 and 2010, and FDIC insurance expense, which decreased $0.5 million to $2.1 million from $2.61.6 million for the nine monthsfirst quarter of 2010 compared with the same period in 20092011. The lower professional fees weredecrease in other operating expenses was primarily due to lowerdecreased costs associated with Sarbanes-Oxley complianceother real estate owned, while the lower net occupancy and equipment expenses were the result of management's cost control and efficiency efforts, notably the closing of three branch facilities in late 2010. Management expects noninterest expense categories to remain stable throughout 2011, with the exception of FDIC insurance expense, which were high in 2009 dueis anticipated to that being our first full year as an SEC reporting company.trend lower.

3332
Table of Contents

Income Tax Expense
Our effective tax rate, or income taxes divided by income before taxes, was 24.2%25.9% for the nine monthsfirst quarter of 20102011, and (18.9)%21.1% for the same period of 20092010. The increase in the effective tax rate in 20102011 was primarily due to the relative amount of tax-exempt income on tax-exempt bonds to total net income. Income tax expense increased $2.80.5 million to $2.41.0 million in the first nine monthsfirst quarter of 20102011, compared with an$0.5 million income tax benefit of $0.4 millionexpense for the same period of 20092010, due primarily to increased net income.
FDIC Assessments
On 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 (which has a remaining balance of $6.0 million at March 31, 2011). 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. On February 7, 2011, the FDIC Board of Directors adopted a final rule which redefines the deposit insurance assessment base as required by the Dodd-Frank Wall Street Reform and Consumer Protection Act (the "Dodd-Frank Act"). The new rule makes changes to assessment rates from being based on adjusted domestic deposits to average consolidated total assets minus average tangible equity; implements Dodd-Frank's Deposit Insurance Fund (the "DIF") dividend provisions; and revises the risk-based assessment system for all large (greater than $10 billion in assets) insured depository institutions. Changes pursuant to the rule are effective April 1, 2011, and are expected to result in a modest reduction in the Bank's prospective assessments. Any prepaid assessment not exhausted after collection of the amount due on June 30, 2013, will either be returned to the institution or credited towards future assessments.
 
FINANCIAL CONDITION
Our total assets increased slightly to $1.551.62 billion as of September 30, 2010March 31, 2011 from $1.531.58 billion on December 31, 20092010. This growth resulted primarily from increased investment in securities, somewhat offset by a decrease in loans as many customers actively reduced their borrowing position due to the current economic environment. There has also been a decrease in loan pool participation balances.balances, with portfolio loans remaining virtually unchanged. The asset growth was primarily funded by an increase in both deposits and Federal Home Loan Bankpartially offset by a decrease in FHLB borrowings. Total deposits at September 30, 2010March 31, 2011 were $1.181.26 billion compared with $1.181.22 billion at December 31, 20092010, up $3.243.8 million, or 0.3%3.6%, primarily due to increased consumer and public fund deposits. Federal Home Loan Bank borrowings increaseddecreased $6.010.0 million from $130.2127.2 million at December 31, 20092010, to $136.2117.2 million at September 30, 2010, while securities sold under agreement to repurchase declined by $0.3 million to $42.8 million at September 30, 2010March 31, 2011.
Investment Securities
Investment securities available for sale totaled $407.8501.9 million as of September 30, 2010March 31, 2011. This was an increase of $44.940.0 million, or 12.4%8.7%, from December 31, 20092010. The increase was primarily due to net investment purchases of $41.239.8 million during the period. Investment securities classified as held to maturity decreased to $4.23.7 million as of September 30, 2010March 31, 2011 as a result of s ecuritysecurity maturities. The investment portfolio consists mainly of U.S. government agency securities, mortgage-backed securities and obligations of states and political subdivisions.
As of September 30, 2010March 31, 2011, we owned collateralized debt obligations with an amortized cost of $1.8 million that were backed by pools of trust preferred securities issued by various commercial banks (approximately 80%) and insurance companies (approximately 20%). No real estate holdings secure these debt securities. 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. See Note 64 “Investments” for additional information related to investment securities.

33
Table of Contents

Loans
The following table shows the composition of the bank loans (before deducting the allowance for loan losses), as of the periods shown:
 September 30, 2010 December 31, 2009
 Balance  % of Total Balance  % of Total
(dollars in thousands)         
Agricultural$90,028   9.4% $92,727   9.6%
Commercial and financial201,738   21.1  203,539   21.0 
Real estate:         
Construction, one- to four- family residential20,637   2.2  20,785   2.1 
Construction, land development and commercial52,202   5.4  58,652   6.1 
Mortgage, farmland85,203   8.9  88,747   9.2 
Mortgage, one- to four- family first liens158,779   16.6  161,065   16.7 
Mortgage, one- to four- family junior liens71,352   7.5  73,665   7.6 
Mortgage, multifamily32,478   3.4  32,455   3.3 
Mortgage, commercial205,849   21.5  196,025   20.3 
Loans to in dividuals22,962   2.4  23,262   2.4 
Obligations of state and political subdivisions15,096   1.6  16,076   1.7 
Total loans$956,324   100.0% $966,998   100.0%
 March 31, 2011 December 31, 2010
 Balance  % of Total Balance  % of Total
(dollars in thousands)         
Agricultural$80,406   8.6% $84,590   9.0%
Commercial and financial218,817   23.3  211,334   22.5 
Credit cards896  0.1  655  0.1 
Overdrafts638   0.1  491   0.1 
Commercial real estate:         
Construction & development71,589   7.6  73,315   7.8 
Farmland68,970  7.3  76,345  8.1 
Multifamily34,060  3.6  33,451  3.6 
Commercial real estate-other217,416  23.2  210,131  22.4 
        
Total commercial real estate392,035   41.8  393,242   41.9 
Residential real estate:         
One- to four- family first liens159,078   16.9  156,882   16.7 
One- to four- family junior liens65,654   7.0  69,112   7.4 
        
Total residential real estate224,732   23.9  225,994   24.1 
Consumer20,999   2.2  21,729   2.3 
        
Total loans$938,523   100.0% $938,035   100.0%
        
Total bank loans (excluding loan pool participations and loans held for sale) decreased byincreased by $10.70.5 million, to $956.3938.5 millionas of September 30, 2010March 31, 2011 as compared to December 31, 2009. We experienced a $4.5 million, or 1.5%, decrease in the comm ercial, financial and agricultural sectors, along with a $6.6 million, or 8.3%, decrease in real estate construction loans,

34
Table of Contents

which resulted primarily from the continued lower line-of-credit utilization and pay-downs on term debt, as the economic environment has caused many customers to actively reduce their borrowing position. Additionally, real estate mortgage loans increased $1.7 million, or 0.3%; loans to individuals decreased $0.3 million, or 1.3%; and, obligations of state and political subdivisions declined $1.0 million, or 6.1%2010. As of September  30, 2010March 31, 2011, our bank loan (excluding loan pool participations) to deposit ratio was 80.8%74.3% compared with a year-end 20092010 bank loan to deposit ratio of 82.0%76.9%. We anticipate that the loan to deposit ratio will continue to declineremain steady in future periods, as loans continue to pay downmeasured growth and deposits remain steady or increase.
We have minimal direct exposure to subprime mortgages in our loan portfolio. Our loan policy prov idesprovides a guideline that real estate mortgage borrowers have a Beacon score of 640 or greater. Exceptions to this guideline have been noted but the overall exposure is deemed minimal by management. Mortgages we originate and sell on the secondary market are typically underwritten according to the guidelines of secondary market investors. These mortgages are sold on a non-recourse basis. See Note 5 “Loans Receivable and the Allowance for Loan Losses” for additional information related to loans.
Loan Review and Classification Process for Agricultural, Commercial and Financial, and Commercial Real Estate Loans:
The Company maintains a loan review and classification process which involves multiple officers of the Company and is designed to assess the general quality of credit underwriting and to promote early identification of potential problem loans. All Commercial and Agricultural loan officers are charged with the responsibility of risk rating all loans in their portfolios and updating the ratings, positively or negatively, on an ongoing basis as conditions warrant. A monthly loan officer validation worksheet documents this process. Risk ratings are selected from an 8-point scale with ratings as follows: ratings 1- 4 Satisfactory (pass), rating 5 Watch (potential weakness), rating 6 Substandard (well-defined weakness), rating 7 Doubtful, and rating 8 Loss.
When a loan officer originates a new loan, based upon proper loan authorization, he or she documents the credit file with an offering sheet summary, supplemental underwriting analysis, relevant financial information and collateral evaluations. All of this information is used in the determination of the initial loan risk rating. The Company's Loan Review department undertakes independent credit reviews of relationships based on either criteria established by Loan Policy, risk-focused sampling, or random sampling. Loan Policy requires the top 50 lending relationships by total exposure be reviewed no less than annually as well as those credits rated Watch ($250,000 and greater) and Substandard (or worse, $100,000 and greater). The individual loan reviews analyze such items as: loan type; nature, type and estimated value of collateral; borrower and/or guarantor estimated financial strength; most recently available financial information; related loans and total borrower exposure; and current/anticipated performance of the loan. The results of such reviews are presented to Executive Management.
Through the review of delinquency reports, updated financial statements or other relevant information in the normal course of business, the lending officer and/or Loan Review personnel may determine that a loan relationship has weakened to the point that a criticized (loan grade 5) or classified (loan grade 6 through 8) status is warranted. When a loan relationship with total related

34
Table of Contents

exposure of $1.0 million or greater is adversely graded (5 or above), or is classified as a Troubled Debt Restructure (regardless of size), the lending officer is then charged with preparing a Loan Strategy Summary worksheet that outlines the background of the credit problem, current repayment status of the loans, current collateral evaluation and a workout plan of action. This plan may include goals to improve the credit rating, assisting the borrower in moving the loans to another institution and/or collateral liquidation. All such reports are first presented to Regional Management and then to the Board of Directors by the Executive Vice President of Lending (or a designee).
Depending upon the individual facts, circumstances, and the result of the Classified/Watch review process, Loan officers and/or Loan Review personnel may categorize the loan relationship as impaired. Once that determination has occurred, the Loan Officer, in conjunction with Regional Management, will complete an evaluation of the collateral (for collateral-dependent loans) based upon appraisals on file adjusting for current market conditions and other local factors that may affect collateral value. Loan Review personnel may also complete an independent impairment analysis when deemed necessary. These judgmental evaluations may produce an initial specific allowance for placement in the Company's Allowance for Loan & Lease Losses calculation. As soon as practical, updated appraisals on the collateral backing that impaired loan relationship are ordered. When the updated appraisals are received, Regional Management, with assistance from Loan Review department, reviews the appraisal and updates the specific allowance analysis for each loan relationship accordingly. The Board of Directors on a quarterly basis reviews the Classified/Watch reports including changes in credit grades of 5 or higher as well as all impaired loans, the related allowances and OREO.
In general, once the specific allowance has been finalized, Regional and Executive Management will consider a charge-off prior to the following calendar quarter-end in which that reserve calculation is finalized.
The review process also provides for the upgrade of loans that show improvement since the last review.
Loan Pool Participations
As of September 30, 2010March 31, 2011, we had loan pool participations, net, totaling $71.262.2 million, down from $83.165.9 million at December 31, 20092010. Loan pools are participation interests in performing, sub-performing and nonperforming loans that have been pu rchasedpurchased from various non-affiliated banking organizations. The Company entered into this business upon consummation of its merger with the Former MidWestOne had engaged in this activity since 1988, and we continuedMarch 2008. As previously announced, the Company has decided to exit this line of business following the merger. We have not purchased any new loan pools since January 2010, and do not intend to pursue any future purchases at this time.as current balances pay down. The loan pool investment balances shown as an asset on our Consolidated Balance Sheets represent the discounted purchase cost of the loan pool participations. As of September 30, 2010March 31, 2011, the categories of loans by collateral type in the loan poolspools were commercial real estateestate - 52%50%, commercial loans - 9%, agricultural and agricultural real estate - 10%8%, single-family residential real estate - 13%11% and other loans - 16%22%. We have minimal exposure in the loan pools to consumer real estate subprime credit or to construction and real estate development loans. See Note 5 “Loans Receivable and the Allowance for Loan Losses” for additional information related to loan pools.
Our overall cost basis in the loan pool participations represents a discount from the aggregate outstanding principal amount of the loans underlying the pools. For example, as of September 30, 2010March 31, 2011, such cost basis was $73.364.3 million, while the contractual outstanding principal amount of the underlying loans as of such date was approximately $160.3148.5 million, resulting in an investment basis of 43.3% million.of the "face amount" of the underlying loans. The 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.
The loans in the pools provide some geographic diversification to our balance sheet. As of Sept ember 30, 2010March 31, 2011, loans in the southeast region of thethe United States represented approximately 42% of the total. The northeast was the next largest area with 32%33%, the central region with 19%18%, the southwest region with 6% and northwest represented a minimal amount of the portfolio at 1%. The highest concentrationconcentration of assets is in Florida at approximately 19%18% of the basis total, with the next highest state level being Ohio at 11%, then Pennsylvania at approximately 7%8%, followed by New Jersey at 6%7%. As of September 30, 2010March 31, 2011, approximately 74% 53% of the loans were contractually current or less than 90 days past-due, while 26%47% were contractuallycontractually 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 26%The 47% contractually past-due includes loans inin litigation and foreclosed property. As of September 30, 2010March 31, 2011, loans in litigation totaled approximately $13.7approximately $11.2 million, while foreclosed property was approximately $12.0 million. As of September 30, 2010, our investment basis in our loan pool participations was approximately 45.7% of the “face” amount of the underlying loans.$12.7 million.
Other Intangible Assets
Other intangible assets decreased to $11.410.9 million as of September 30, 2010March 31, 2011 from $12.211.1 million as of December 31, 20092010 as a result of normal amortization. Amortization of intangible assets is recorded using an accelerated method based on the estimated life of the intangible.

35
Table of Contents

The following table summarizes the amounts and carrying values of intangible assets as of September 30, 2010March 31, 2011.
Gross
Carrying
Amount
  
Accumulated
Amortization
  
Unamortized
Intangible
Assets
Gross
Carrying
Amount
  
Accumulated
Amortization
  
Unamortized
Intangible
Assets
(in thousands)              
September 30, 2010       
March 31, 2011       
Other intangible assets:       ;        
Insurance agency intangible$1,320   $381   $939 $1,320   $473   $847 
Core depos it premium5,433   2,266   3,167 
Core deposit premium5,433   2,649   2,784 
Trade name intangible7,040   —   7,040 7,040   —   7,040 
Customer list intangible330   70   260 330   82   248 
          
Total$14,123   $2,717   $11,406 $14,123   $3,204   $10,919 
 
Deposits
Total deposits as of September 30, 2010March 31, 2011 were $1.181.26 billion compared with $1.181.22 billion as of December 31, 20092010. Certificates of deposit were the largest category of deposits at September 30, 2010March 31, 2011, representing approximately 47.2%45.2% of total deposits. Total certificates of deposit were $557.9570.7 million at September 30, 2010March 31, 2011, down $23.70.9 million, or 4.1%0.2%, from $581.6571.6 million at December 31, 20092010. Includ edIncluded in total certificates of deposit at September 30, 2010March 31, 2011 was $28.332.8 million of brokered deposits in the Certificate of Deposit Account Registry Service (CDARS) program, an increasea decrease of $3.90.2 million, or 16.0%0.6%, from the $24.433.0 million at December 31, 20092010. 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 $422.7472.3 million at September 30, 2010March 31, 2011, an increase of $21.429.4 million, or 5.3%6.6%, from $401.3 mil lion442.9 million at December 31, 20092010. The increased balances were primarily in our “Power Checking” account product. Approximately 84.9%84.8% of our total deposits are considered “core” deposits.
Federal Home Loan Bank Borrowings
FHLB borrowings totaled $136.2117.2 million as of September 30, 2010March 31, 2011 compared with $130.2127.2 million as of December 31, 20092010. We utilize FHLB borrowings as a supplement to customer deposits to fund earning assets and to assist in managing interest rate risk. Non-callable FHLB Advances were increased in order to extend liability maturities at interest rates that are historically very attractive.
Long-term Debt
Long-term debt in the form of junior subordinated debentures that have been issued to a statutory trust that issued trust preferred securities was $15.615.5 million as of September 30, 2010March 31, 2011, unchanged from December 31, 20092010. 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 ju niorjunior subordinated debentures mature on December 15, 2037, do not require any principal amortization and are callable at par at our option on the fifth anniversary of the date of issuance.or after September 20, 2012. The interest rate is fixed at 6.48% for five yearsuntil December 15, 2012 on $7.7 million of the issuance and is variable quarterly at the three month LIBOR plus 1.59% on the remainder. After December 15, 2012, the interest rate on the entire issuance becomes variable quarterly at the three month LIBOR plus 1.59%.
Nonperforming Assets
Our nonperforming assets totaled$24.927.3 million as of September 30, 2010March 31, 2011, up $7.43.7 millioncompared to December 31, 2009. This increase was due to an increase in nonperforming loans of $6.3 million coupled with an increase in other real estate owned of$1.1 million2010. The balance of other real estate owned at September 30, 2010March 31, 2011 was $4.73.9 million compared, equal to $3.63.9 million at year-end 20092010. Nonperforming loans totaled $20.223.4 million (2.11%2.5% of total bank loans) as of September 30, 2010March 31, 2011, com paredcompared to $13.919.8 million (1.44%2.1% of total bank loans) as of December 31, 20092010. See Note 8 “Allowance5 “Loans Receivable and the Allowance for Loan Losses and Nonperforming Assets”Losses” for additional information related to nonperforming assets.
The nonperforming l oansloans consisted of $12.714.5 million in nonaccrual loans, $6.36.7 million in troubled debt restructures and $1.22.2 million in loans past due 90 days or more and still accruing. This compares with $9.912.4 million, $2.65.8 million and $1.41.6 million, respectively, as of December 31, 20092010. Nonaccrual loans increased $2.82.1 million to, or $12.7 million17.1%, at September 30, 2010March 31, 2011, compared to $9.9 million at December 31, 2009. This increase in nonaccrual loans was attributable to the addition of two agriculturally related loans totaling $7.0 million. The Company experienced a $3.7 million increase in restructured loans, which grew from $2.6 million at December 31, 2009 to $6.3 million at September 30, 2010. This increase is primarily attributable to the addition of two agriculturalone construction and development loan and one commercial loan totaling $2.5 million being added to nonaccrual loans. The Company experienced a $0.9 million, or 14.9%, increase in restructured loans, from December 31, 2010 to March 31, 2011. This increase is primarily attributable to a commercial loan totaling $3.3$0.8 million being added to the troubled debt restructures. The four additional

36
Table of Contents

agricultural loans noted above have significant exposure to the hog industry.restructures. During the same period, loans and leases past due 90 days or more and still accruingaccruing interest decreased increased by $0.20.7 million, or 42.1%, from$1.4 million at December 31, 20092010 to $1.2 million at September 30, 2010March 31, 2011. Additionally, loans past-due 30 to 89 days (not included in the nonperforming loan totals) were $8.77.0 million as of September 30, 2010March 31, 2011 compared with $10.110.5 million as of December 31, 20092010, a decrease of $1.41.9 million or 13.7%17.2%.

36
Table of Contents

All of the other real estate property was acquired through foreclosures and we are actively working to sell all properties held as of September 30, 2010March 31, 2011. 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. See Note 5 “Loans Receivables and the Allowance for Loan Losses” for additional information related to nonperforming assets.
Allowance for Loan Losses
Our allowanceAllowance for loan lossesLoan Losses (“ALLL”) as of September 30, 2010March 31, 2011 was $14.915.4 million, which was 1.55%1.6% of total bank loans (excluding loan pools), as of that date. This compares with an allowance for loan losses ofALLL of $14.015.2 millionas of December 31, 20092010, which was 1.44%1.6% of total bank loans.loans as of that date. Gross charge-offs for the ninefirstthree months of 20102011 totaled $3.60.8 million, while recoveries of previously charged-off loans totaled $0.30.2 million. Annualized net loan charge offs to average bank loans for the first ninethree months of 20102011 was 0.48%0.3%compared to 0.48%0.5%for the year ended December 31, 20092010. As of September 30, 2010March 31, 2011, the allowance for loan lossesALLL was73.7%65.7% of nonperforming bank loans compared with 100.6%74.6% as of December 31, 20092010. While nonperforming loan levels increased during the ninethree months, the incr easeincrease has been primarily in credits that our management had already identified as weak and for which it believes adequate provisions already had been made.weak. Due to the early identification of potential problem loans, we expected to have a decline in the ratio of the allowance for loan lossesALLL to nonperforming loans. Based on the inherent risk in the loan portfolio, we believe that as of September 30, 2010March 31, 2011, the allowance for loan lossesALLL 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 lossesALLL and make additional provisions in future periods as deemed necessary. See Note 8 “Allowance5 “Loans Receivables and the Allowance for Loan Losses and Nonperforming Assets”Losses” for additional inform ationinformation related to the allowance for loan losses.
During the first quarter of 2010,2011, as we do each year, we updated the Allowance for Loan Losses (“ALLL”)ALLL calculation to reflect current historical net charge-offs. We use a five year average percentage in the historical charge-off portion of the ALLL calculation. The historical charge-off portion is one of six factors used in establishing our reserve level for each loan type. There were no changes to the other five factors during the ninethree months of 20102011. Classified loans are reviewed per the requirements of FASB A SCASC Topics 310 and 450. All classified loans are reviewed for impairment in accordance with FASB ASC Topic 310.
We currently track the loan to value (LTV) ratio of loans in our portfolio, and those loans in excess of internal and supervisory guidelines are presented to the Bank's Board of Directors on a quarterly basis. At September 30, 2010March 31, 2011, there were sevensix owner occupied 1-4 family loans with a LTV of 100% or greater. In addition, there are 4031 home equity lines of credit without credit enhancement that have LTV of 100% or greater. We have the first lien on threetwo of these equity lines and other financial institutions have the first lien on the remaining 37.29.
We monitorreview all impaired and report our troubled debt restructuringnonperforming loans individually on a quarterly basis.basis for their level of impairment due to collateral deficiency or insufficient cash-flow based on a discounted cash-flow analysis. At September 30, 2010March 31, 2011, reported troubled debt restructurings were not a material portion of the loan portfolio. We review loans 90+ days past due that are still accruing interest no less than quarterly to determine if there is a strong reason that the credit should not be placed on non-accrual. All commercial and agricultural lenders are required to review their portfolios on a monthly basis and document that either no downgrades are necessary or report credits that they feel warrant a downgrade to Loan Review for inclusion in the allowance for loan loss calculation. Periodic loan file examinations are conducted by Loan Review staff to ensure the accur acyaccuracy of loan officer credit classifications.
Capital Resources
Total shareholders' equity was 10.37%9.97% of total assets as of September 30, 2010March 31, 2011 and was 9.92%10.02% as of December 31, 20092010. Tangible common equity to tangible assets was 8.68%8.37% as of September 30, 2010March 31, 2011 and 8.16%8.37% as of December 31, 20092010. Our Tier 1 capital to risk-weighted assets ratio was 13.39%13.50% as of September 30, 2010March 31, 2011 and was 12.66%13.37% as of December 31, 20092010. 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 September 30, 2010March 31, 2011, 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.
We have traditionally disclosed certain non-GAAP ratios to evaluate and measure our financial condition, including our tangible common equity to tangible assets and Tier 1 capital to risk-weighted assets ratios. We believe these ratios provide investors with information regarding our financial condition and how we evaluate our financial condition internally.

37
Table of Contents

The f ollowing table providesfollowing tables provide a reconciliation of the non-GAAP measuremeasures to the most comparable GAAP equivalent.
equivalents.
At September 30, At December 31,At March 31, At December 31,
(in thousands)2010 20092011 2010
      
Tangible Common Equity:      
Total shareholders' equity$161,116  $152,208 $161,315  $158,466 
Less: Preferred stock(15,749) (15,699)(15,784) (15,767)
Goodwill and intangibles(11,506) (12,272)(11,019) (11,243)
      
Tangible common equity$133,861  $124,237 $134,512  $131,456 
      
Tangible Assets:      
Total assets$1,553,528  $1,534,783 $1,618,231  $1,581,259 
Less: Goodwill and intangibles(11,506) (12,272)(11,019) (11,243)
      
Tangible assets$1,542,022  $1,522,511 $1,607,212  $1,570,016 
      
Tangible common equity to tangible assets8.68% 8.16%8.37% 8.37%
      
      
At September 30, At December 31,At March 31, At December 31,
(in thousands)2010 20092011 2010
      
Tier 1 capital      
Total shareholders' equity$161,116  $152,208 $161,315  $158,466 
Plus: Long term debt (qualifying restricted core capital)15,464  15,464 15,464  15,464 
   
Less: Net unrealized gains on securities available for sale(4,742) (1,505)
Disallowed goodwill and intangibles(11,141) (12,286)
Net unrealized gains on securities available for sale1,330  1,826 
Less: Disallowed goodwill and intangibles(11,138) (11,327)
      
Tier 1 capital$160,697  $153,881 $166,971  $164,429 
      
Risk-weighted assets$1,199,746  $1,215,240 $1,237,197  $1,230,264 
      
Tier 1 capital to risk-weighted assets13.39% 12.66%13.50% 13.37%
TheAs of March 31, 2011, we had outstanding 16,000 shares of Series A senior preferred stock, which has no par value per share and a liquidation preference of $1,000 per share, or $16.0 million in the aggregate. All of the shares of the Series A senior preferred stock are held by the U.S. Treasury. The senior preferred 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 U.S. Treasury will have the right to elect two directors to the Company'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,in connection with the issuance of the senior preferred stock, 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's investment in full, we would be permitted to redeem the warrant issued to the U.S. 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 U.S. Treasury. All of the capital from Treasury wasis treated as Tier 1 capital for regulatory purposes.The Company's management is currently evaluating the Company's plan for potentially redeeming the $16.0 million of senior preferred stock issued to the U.S. Treasury in February 2009 pursuant to the TARP Capital Purchase Program, including performing financial analysis as to the impact that any such redemption would have on its regulatory capital levels. Any such redemption, however, would be subject to the prior approval of the U.S. Treasury and the Federal Reserve. If the Company were to repay the Treasury's investment, it would be permitted to redeem the warrant issued to Treasury for an agreed upon fair market value.
On January 21, 2010, 33,00018, 2011, 15,000 restricted stock units were granted to certain directors and officers, and on July 29, 2010, 500 restricted stock units were issued to an officer.officers. During the first ninethree months of 20102011, 5,6048,600 shares were issued in connection with the vesting of previously awarded grants of restricted stock units, of which 100680 shares were surrendered by a granteegrantees to satisfy tax requirements. In addition, 3,1451,682 shares were issued in connection with the exercise of previously issued stock options.
On February 11, 2010, we filed a universal shelf-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 OctoberApril 21, 2010,2011, the Company's Board of Directors declared a quarterly dividend for the fourthsecond quarter of 20102011 orof $0.05 per common share, which is consistent with the dividend per common share paid in the first three quartersquarter of 20102011.

38
Table of Contents

CapitalThe following table provides the capital levels and minimum required levels:capital levels for the Company and the Bank:
Actual 
Minimum Required
for Capital
Adequacy
Purposes
 
Minimum Required
to be 
Well Capitalized
Actual 
Minimum Required
for Capital
Adequacy
Purposes
 
Minimum Required
to be 
Well Capitalized
Amount  Ratio Amount  Ratio Amount  RatioAmount  Ratio Amount  Ratio Amount  Ratio
(dollars in thousands)                            
September 30, 2010:              
March 31, 2011              
Total risk-based capital to risk-weighted assets:                            
Consolidated$175,799   14.65% $95,980   8.00% N/A     N/A      $182,538   14.75% $98,976   8.00% N/A     N/A      
MidWestOne Bank151,531   12.83% 94,499   8.00% $118,124   10.00%160,713   13.22% 97,268   8.00% $121,585   10.00%
Tier 1 capital to risk-weighted assets:                            
Consolidated160,697   13.39% 47,990   4.00% N/A     N/A      166,971   13.50% 49,488   4.00% N/A     N/A      
MidWestOne Bank136,740   1 1.58% 47,249   4.00% 70,874   6.00%145,486   11.97% 48,634   4.00% 72,951   6.00%
Tier 1 capital to average assets:                            
Consolidated160,697   10.52% 61,085   4.00% N/A     N/A      166,971   10.58% 63,136   4.00% N/A     N/A      
MidWestOne Bank136,740   8.85% 61,774   4.00% 77,217   5.00%145,486   9.37% 32,123   4.00% 77,654   5.00%
                      
December 31, 2009:              
December 31, 2010              
Total risk-based capital to risk-weighted assets:                            
Consolidated$169,149   13.92% $97,219   8.00% N/A     N/A      $179,963   14.63% $98,421   8.00% N/A     N/A      
MidWestOne Bank156,413   12.94% 96,727   8.00% $120,909   10.00%156,602   13.21% 94,833   8.00% $118,542   10.00%
Tier 1 capital to risk-weighted assets:                            
Consolidated153,881   12.66% 48,610   4.00% N/A     N/A      164,429   13.37% 49,211   4.00% N/A     N/A      
MidWestOne Bank141,287   11.69% 48,363   4.00% 72,545   6.00%141,754   11.96% 47,417   4.00% 71,125   6.00%
Tier 1 capital to average assets:                            
Consolidated153,881   10.01% 61,505   4.00% N/A     N/A      164,429   10.45% 62,932   4.00% N/A     N/A      
MidWestOne Bank141,287   9.23% 6 1,215   4.00% 76,518   5.00%141,754   9.14% 62,041   4.00% 77,551   5.00%
                      
N/A - Minimum to be considered well capitalized is not applicable to the consolidated entity.N/A - Minimum to be considered well capitalized is not applicable to the consolidated entity.  N/A - Minimum to be considered well capitalized is not applicable to the consolidated entity.  
Liquidity
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 our asset/liability management program. We had liquid assets (cash and cash equivalents) of $25.723.7 million as of September 30, 2010March 31, 2011, compared with $27.620.5 million as of December 31, 20092010. Investment securities classified as available for sale, totaling $407.8501.9 million and $362.9 millio n462.0 million as of September 30, 2010March 31, 2011 and December 31, 20092010, 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 funds on a short-term basis, if necessary. Management believes that the Company had sufficient liquidity as of September 30, 2010March 31, 2011 to meet the needs of borrowers and depositors.
Our principal sources of funds were deposits, FHLB borrowings, principal repayments on loans, federal funds purchased, proceeds from the maturity and sale of investment securities, FHLB borrowings, principal repayments on loan pools, 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 dep ositdeposit base but had from time to time decided not to pay rates on deposits as high as our competition.
As of September 30, 2010March 31, 2011, we had $15.615.5 million of 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 fi xedfixed interest rate of 6.48 percent6.48% until December 15, 2012; the other one-half has a variable rate of three-month LIBOR plus 1.59 percent1.59%. After December 15, 2012, the interest rate on the entire issuance becomes variable quarterly at the three month LIBOR plus 1.59%.
Inflation
The effects of price changes and inflation can vary substantially for most financial institutions. While management believes

39
Table of Contents

that inflation affects the growth of total assets, it is difficult to assess the overall impact. Management believes this to be the case due to the fact that generally neither the timing nor the magnitude of the inflationary changes in the consumer price index (“CPI”) coincides with changes in interest rates. The price of one or more of the components of the CPI may fluctuate considerably and thereby influence the overall CPI without having a corresponding effect on interest rates or upon the cost of those goods and services normally purchased by us. In years of high inflation and high interest rates, intermediate and long-term interest rates tend to increase, thereby adversely impacting the market values of investment securities, mortgage loans and other long-term fixed rate loans held by financial institutions. In addition, higher short-term interest rates caused by inflation tend to increase financial institutions' cost of funds. In other years, the reverse situation may occur.
Off-Balance - -SheetOff-Balance-Sheet Arrangements
We are a party to financial instruments with off-balance-sheet risk in the normal course of business to meet the financing needs of our customers, which include commitments to extend credit. Our exposure to credit loss in the event of nonperformance by the other party to the commitments to extend credit is represented by the contractual amount of those instruments. We use the same credit policies in making commitments as we do for on-balance-sheet instruments.
Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any conditions established in the contract. Commitme ntsCommitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. Since many of the commitments are expected to expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements. We evaluate each customer's creditworthiness on a case-by-case basis. As of September 30, 2010March 31, 2011, outstanding commitments to extend credit totaled approximately $168.1$200.9 million. Commitments under standby and performance letters of credit outstanding aggregated $3.9$3.8 million as of September 30, 2010March 31, 2011. We do not anticipate any losses as a result of these transactions.
 
Item 3. Quantitative and Qualitative Disclosures about Market Risk.
In general, market risk is the risk of change in asset values due to movements in underlying market rates and prices. Interest rate risk is the risk to earnings and capital arising from movements in interest rates. Interest rate risk is the most significant market risk affecting MidWestOne as other types of market risk, such as foreign currency exchange rate risk and commodity price risk, do not arise in the normal course of our business activities.
In addition to interest rate risk, the current challenging economic environment, particularly the severe dislocations in the credit markets that prevailed throughout 2008, 2009, and 2009,2010, and continued during the first ninethree months of 20102011, 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'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.
Liquidity Risk
Liquidity refers to our ability to fund operations, to meet depositor withdrawals, to provide for our 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.
Net cash inflows from operating activiti esactivities were $12.011.0 million in the first ninethree months of 20102011, compared with $16.76.3 million in the ninethree months of 20092010. Net income, depreciation, amortization and accretion were a source of inflow for the first ninethree months of 20102011, as was a net change in accounts payable, accrued expenses, and other liabilities of $1.34.2 million.
Net cash outflows from investing activities were $20.737.2 million in the first ninethree months of 20102011, compared to net cash outflowsinflows of $32.53.2 million in the comparable ninethree-month period of 20092010. In the first ninethree months of 20102011, securities transactions accounted for a net outflow of $37.539.5 million, and loans made to customers, net principal received on loansof collections, accounted for net inflowsoutflows of $4.01.3 million. Cash inflows for loan pool participations were $11.93.7 million during the first ninethree months of 20102011 compared to a $4.21.5 million inflow during the same period of 20092010.
Net cash provided by financing activities in the first ninethree months of 20102011 was $6.829.3 million. The largest cash outflow from financing activities in the first ninethree months of 20102011 consisted of a $1.910.0 million of dividends paid.net decrease in FHLB borrowings. The largest financing cash inflow during the ninethree months ended September 30, 2010March 31, 2011 was the $6.043.8 million net increase in FHLB borrowings.deposits.
To further mitigate liquidity risk, the Bank has several sources of liquidity in place to maximize funding availability and increase the diversification of funding sources. The criteria for evaluating the use of these sources include - volume concentration (percentage of liabilities), cost, volatility, and the fit with the current Asset/Liability management plan. These acceptable sources of liquidity include:
 

40
Table of Contents

•Fed Funds Lines
•FHLB Borrowings
•Brokered Repurchase Agreements
•Federal Reserve Bank Discount Window

40
Table of Contents

Fed Funds Lines:
Routine liquidity requirements are met by fluctuations in the Bank's Fed Funds position. The principal function of these funds is to maintain short-term liquidity. Unsecured Fed F undsFunds 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, the Bank has unsecured Fed Fund lines totaling $55 million, which are tested annually to ensure availability.
FHLB Borrowings:
FHLB borrowings provide both a source of liquidity and long-term funding for the Bank. Use of this type of funding is coordinated with both the strategic balance sheet growth projections and the current and future interest rate risk profile of the Bank. Factors that are taken into account when contemplating use of FHLB borrowings are the effective interest rate, the collateral requirements, community investment program credits, and the implications and cost of having to purchase incremental FHLB stock. Currently, the Bank has a $190.2$238.6 million of collateral pledged to the FHLB and $136.2117.2 million in outstanding borrowings, leaving $54.0$118.1 million available for liquidity needs. These borrowings are secured by various real estate loans (residential, commercial and agricultural).
Brokered Repurchase Agreements:
Brokered repurchase agreements may be established with approved brokerage firms and banks. Repurchase agreements create rollover risk (the risk that a broker will discontinue the relationship due to market factors) and are not used as a long-term funding solution, especially when used to fund long-term assets. Collateral requirements and availability are evaluated and monitored. The current policy limit for brokered repurchase agreements is 10% of total assets. There were no outstanding brokered repurchase agreements at September 30, 2010March 31, 2011.
Federal Reserve Bank Discount Window:
The FRB Discount Window is another source of liquidity, particularly during difficult economic times. The Bank has a borrowing capacity with the Federal Reserve Bank of Chicago limited only by the amount of municipal securities pledged against the line. Currently, the Bank owns municipal securities with an approximate market value of $11.6$13.6 million available for liquidity purposes.pledged.
Interest Rate Risk
The nature of t hethe banking business, which involves paying interest on deposits at varying rates and terms and charging interest on loans at other rates and terms, creates interest rate risk. As a result, net interest margin and earnings and the market value of assets and liabilities are subject to fluctuations arising from the movement of interest rates. We manage several forms of interest rate risk, including asset/liability mismatch, basis risk and prepayment risk. A key management objective is to maintain a risk profile in which variations in net interest income stay within the limits and guidelines of the Bank's Asset/Liability Management Policy.
Like most financial institutions, our net income can be significantly influenced by a variety of external factors, including: overall economic conditions, policies and actions of regulatory authorities, the amounts of an dand 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.positions in such a way that changes in interest rates do not have a large negative impact. The risk is monitored and managed within approved policy limits.
We use a third-party computer software simulation modeling program to measure our exposure to potential interest rate changes. For various assumed hypothetical changes in market interes tinterest 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 September 30, 2010March 31, 2011 and December 31, 20092010.

41
Table of Contents

Analysis of Net Interest Income Sensitivity
  Immediate Change in Rates 
  -200 -100 +100 +200 
 (dollars in thousands)        
 September 30, 2010        
 Dollar change$1,640  $817  $(1,178) $(1,331) 
 Percent change3.4% 1.7% (2.4)% (2.8)% 
          
 December 31, 2009& nbsp;       
 Dollar change$885  $1,373  $(1,995) $(3,310) 
 Percent change1.8% 2.8% (4.1)% (6.8)% 
  Immediate Change in Rates 
  -200 -100 +100 +200 
 (dollars in thousands)        
 March 31, 2011        
 Dollar change$859  $1,289  $(1,595) $(2,150) 
 Percent change1.7% 2.6% (3.2)% (4.3)% 
          
 December 31, 2010        
 Dollar change$1,459  $1,297  $(1,275) $(1,610) 
 Percent change3.0% 2.7% (2.6)% (3.3)% 
As shown above, at September 30, 2010March 31, 2011, the effect of an immediate and sustained 200 basis point increase in interest rates would decrease our net interest income by approximately $1.32.2 million. The effect of an immediate and sustained 200 basis point decrease in rates would increase our net interest income by approximately $1.60.9 million. An increase in interest rates would causeIn a rising rate environment, our interest-bearing liabilities towould reprice more quickly than interest-earning assets, thus reducing net interest income. Conversely, a decrease in interest rates would causeresult in an increase in net interest income as interest-bearing liabilities would decline more rapidly than interest-earning assets. In the current low interest rate environment, model results of a 200 basis point drop in interest rates are of questionable value as many interest-bearing liabilities and interest-earning assets cannot re-price significantly lower than current levels.
Computations of the prospective effects of hypothetical interest rate changes were based on numerous assumptions. Actual values may differ from those projections set forth above. Further, the computations do not contemplate any actions we could have undertaken in response to changes in interest rates.
 
Item 4. Controls and Procedures.
&n bsp;
Disclosure Controls and Procedures
Under supervision and with the participation of certain members of our management, including theour chief executive officer and the chief financial officer, we completed an evaluation of the effectiveness of the design and operation of our disclosure controls and procedures (as defined in SEC Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934) as of September 30, 2010March 31, 2011. Based on this evaluation, our chief executive officer and chief financial officer believe that the disclosure controls and procedures were effe ctiveeffective 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.
The effectiveness of our 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 that 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 fas hion.fashion. By their nature, our or any system of disclosure controls and procedures can provide only reasonable assurance regarding management's control objectives.
Changes in Internal Control over Financial Reporting
There was no change in our internal control over financial reporting during the last fiscal quarter that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
 

42
Table of Contents

Cautionary Note Regarding Forward-Looking Statements
Statements made in this Report contain certain “forward-looking statements” within the meaning of such term in the Private Securities Litigation Reform Act of 1995. We and our authorized representatives may, from time to time, make written or oral statements that are “forward-looking” and provide information other than those concerning historical financial information,information. These statements involve known and unknown risks, uncertainties and other factors that may cause actual results to be materially different from any results, levels of activity, performance or achievements expressed or implied by any forward-looking statement. These factors include, among other things, the factors listed below. Forward-looking statements, which may be consideredbased upon beliefs, expectations and assumptions of our management and on information currently available to management, are generally identifiable by the use of words such as “believe”, “expect”, “anticipate”, “should”, “could”, “would”, “plans”, “intend”, “project”, “estimate', “forecast”, “may” or similar expressions.  These forward-looking statements are subject to certain risks and uncertainties that could cause actual results to differ materially from those expressed in, or implied by, these statements. Readers are cautioned not to place undue reliance on any such forward-looking statements, which speak only as of the date made. Additionally, we undertake no obligation to update any statement in light of this document and are based on current expectations and involve a number of assumptions. These include, amo ng other things, statements regardingnew information or future results or expectations. We intend such forward-looking statements to be covered by the safe harbor provisions for forward-looking statements contained in the Private Securities Litigation Reform Act of 1995 and are including this statement for purposes of these safe harbor provisions. Our ability to predict results, or the actual effect of future plans or strategies, is inherently uncertain. events, except as required under federal securities law.
Factors that could cause actual results to differ materially from those set forth in the forward-looking statementsresults anticipated or that could have a material effect on the operations and future prospects of the Companyprojected include, but are not limited to:to, the following: (1) credit quality deterioration or pronounced and sustained reduction in real estate market values could cause an increase in the strength of the localallowance for credit losses and national economy;a reduction in net earnings; (2) changes inour management's ability to reduce and effectively manage interest rates, legislative/regulatory changes (including, but not limited to,rate risk and the impact of interest rates in general on the volatility of our net interest income; (3) changes in the economic environment, competition, or other factors that may affect our ability to acquire loans or influence the anticipated growth rate of loans and deposits and the quality of the loan portfolio and loan and deposit pricing; (4) fluctuations in the value of our investment securities; (5) governmental monetary and fiscal policies; (6) legislative and regulatory changes, including changes in banking, securities and tax laws and regulations and their application by our regulators (particularly with respect to 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, includi ng policies of the U.S. Treasury and the Federal Reserve Board; (3) the loss of key executives or employees; (4) changes in the qualityscope and compositioncost of Federal Deposit Insurance Corporation insurance and other coverages; (7) the ability to attract and retain key executives and employees experienced in banking and financial services; (8) the sufficiency of the allowance for loan losses to absorb the amount of actual losses inherent in our existing loan portfolio; (9) our ability to adapt successfully to technological changes to compete effectively in the marketplace; (10) credit risks and risks from concentrations (by geographic area and by industry) within our loan portfolio; (11) the effects of competition from other commercial banks, thrifts, mortgage banking firms, consumer finance companies, credit unions, securities brokerage firms, insurance companies, money market and securities portfolios; demandother mutual funds, and other financial institutions operating in our markets or elsewhere or providing similar services; (12) the failure of assumptions underlying the establishment of allowances for loan products; deposit flows; competition; demand forlosses and estimation of values of collateral and various financial servicesassets and liabilities; (13) volatility of rate-sensitive deposits; (14) operational risks, including data processing system failures or fraud; (15) asset/liability matching risks and liquidity risks; (16) the risks of mergers, acquisitions and divestitures, including, without limitation, the related time and costs of implementing such transactions, integrating operations as part of these transactions and possible failures to achieve expected gains, revenue growth and/or expense savings from such transactions; (17) the costs, effects and outcomes of existing or future litigation; (18) changes in our market areas; implementation of new technologies; ability to develop and maintain secure and reliable electronic systems; andgeneral economic or industry conditions, nationally or in the communities in which we conduct business; (19) changes in accounting principles, policies and guidelines; (5) expected revenue synergiespractices, as may be adopted by state and cost savings fromfederal regulatory agencies and the merger may not be fully realized or realized within the expected time frame;Financial Accounting Standards Board; and (6)(20) other risk factors detailed from time to time in SEC filings made by the Company with the SEC.
Company.
 
PART II – OTHER INFORMATION
Item 1. Legal Proceedings.
The Company and its subsidiaries are from time to time parties to various legal actions arising in the normal course of business. We believe that there are no threatened or pending proceedings against the Company or its subsidiaries, which, if determined adversely, would h avehave a material adverse effect on the business or financial condition of the Company.
 
Item 1A. Risk Factors.
In addition toThere have been no material changes from the risk factors set forth in Part I, Item 1A. “Risk Factors” of our Annual Report on Form 10-K for the annual period ended December&nb sp;31, 20092010, we also face the risk set forth below..  Please refer to Part I, Item 1A. “Risk Factors”that section of our Form 10-K for 2009 for disclosures regarding additionalthe risks and uncertainties related to our business.
 
Recently enacted regulatory reforms could have a significant impact on our business, financial condition and results of operations.
&nbs p;
On July 21, 2010, President Obama signed into law the Dodd-Frank Wall Street Reform and Consumer Protection Act (the “Dodd-Frank Act”), which is perhaps the most significant financial reform since the Great Depression.  While the provisions of the Act receiving the most public attention have generally been those more likely to affect larger institutions, the Dodd-Frank Act also contains many provisions which will affect smaller institutions such as ours in substantial ways.  Compliance with the Dodd-Frank Act's provisions may curtail our revenue opportunities, increase our operating costs, require us to hold higher levels of regulatory capital and/or liquidity or otherwise adversely affect our business or financial results in the future.  Our management is actively reviewing the provisions of the Dodd-Frank Act and assessing its probable impact on our busi ness, financial condition, and result of operations.  However, because many aspects of the Dodd-Frank Act are subject to future rulemaking, it is difficult to precisely anticipate its overall financial impact on the Company and the Bank at this time.
 

43
Table of Contents

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.
We did not repurchase any of our equity securities during the quarter covered by this report. As of September 30, 2010March 31, 2011, we did not have in effect an approved share repurchase program.
As discussed above, on February 6, 2009, we consummated the sale of $16.0 million of senior preferred stock to the Treasury pursuant to the Capital Purchase Program. The terms of the senior preferred stock place certain restrictions on our ability to pay dividends on our common stock. First, no dividends on our common stock may be paid unless all accrued dividends on Treasury's senior preferred stock have been paid in full. Second, until the third anniversary of the date of Treasury'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.

43
Table of Contents

 
Item 3. Defaults Upon Senior Securities.
None.
 
Item 4. [Removed and Reserved].
 
Item 5. Other Information.
None.
 

44
Table of Contents

Item 6. Exhibits.
Exhibit
Number
  Description  Incorporated by Reference to:
   
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
&nbs p;  
32.1   Certification of Chief Executive Officer pursuant to 18 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

4544
Table of Contents

SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
 
   
MIDWESTONE FINANCIAL GROUP, INC.
  
&nbs p;      
Dated:November 3, 2010May 5, 2011 By: 
/s/ CHARLES N. FUNK
  
     Charles N. Funk  
     President and Chief Executive Officer 
       
   By: 
/s/ GARY J. ORTALE
  
     Gary J. Ortale  
     Executive Vice President and Chief Financial Officer 
 

4645