MidWestOne Financial Group, Inc. - Annual Report: 2008 (Form 10-K)
UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
Washington,
D.C. 20549
FORM
10-K
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ANNUAL
REPORT PURSUANT TO SECTION 13 OR 15(d) OF
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THE
SECURITIES EXCHANGE ACT OF
1934
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For
fiscal year ended December 31, 2008
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¨
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TRANSITION
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
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SECURITIES
EXCHANGE ACT OF 1934
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For
transition period
from to
Commission
File Number: 000-24630
MidWestOne Financial Group,
Inc.
(Exact
name of Registrant as specified in its charter)
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42-1206172
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(I.R.S.
Employer Identification Number)
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of
incorporation or organization)
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102
South Clinton Street, Iowa City, Iowa 52240
(Address
of principal executive offices, including Zip Code)
(319)
356-5800
(Registrant’s
telephone number, including Area Code)
Securities
registered pursuant to Section 12(b) of the Act:
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Title of Class
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Name of each exchange on which
registered
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Common
Stock, $1.00 par value
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The
Nasdaq Stock Market
LLC
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Securities
registered pursuant to Section 12(g) of the Act:
None
(Title of
Class)
Indicate
by check mark if the registrant is a well-known seasoned issuer, as defined in
Rule 405 of the Securities Act. ¨ Yes x No
Indicate
by check mark if registrant is not required to file reports pursuant to Section
13 or Section 15(d) of the Act. o Yes x No
Indicate
by check mark whether the registrant (1) has filed all reports required to be
filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the registrant was required
to file such reports), and (2) has been subject to such filing requirements for
the past 90 days. x Yes ¨ No
Indicate
by check mark if disclosure of delinquent filers pursuant to Item 405 of
Regulation S-K is not contained herein, and will not be contained, to the best
of registrant’s knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. ¨
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 definition of “large accelerated filer,” “accelerated
filer” and “small reporting company” in Rule 12b-2 of the Exchange
Act.
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Large
accelerated filer ¨
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Accelerated
filer x
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Non-accelerated
filer ¨
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(Do
not check if a smaller reporting company)
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Smaller
reporting company ¨
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Indicate
by check mark whether the Registrant is a shell company (as defined in
Rule 12b-2 of the Act). ¨ Yes x No
The
aggregate market value of the voting and non-voting common equity held by
non-affiliates of the registrant, based on the last sales price quoted on the
Nasdaq Global Select Market on June 30, 2008, the last business day of the
registrant’s most recently completed second fiscal quarter, was approximately
$111.2 million. The number of shares outstanding of the
registrant’s common stock, par value $1.00 per share, was 8,603,055 at
March 1, 2009.
DOCUMENTS INCORPORATED BY
REFERENCE
Portions
of the Company’s Proxy Statement for the 2009 Annual Meeting of Shareholders,
which will be filed pursuant to Regulation 14A of the Securities Exchange Act of
1934, are incorporated by reference into Part III hereof, to the extent
indicated herein.
PART I
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Item
1.
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Business.
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Merger
Transaction
On March
14, 2008, the Company (which was at such time named ISB Financial Corp.)
consummated its merger with the former MidWestOne Financial Group, Inc. (“Former
MidWestOne”), pursuant
to and in accordance with the Agreement and Plan of Merger dated as of
September 11, 2007 (the “Merger”). As a result of the
Merger, Former MidWestOne merged with and into the
Company and ceased to exist as a legal entity, and the Company changed its 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.
Prior to
the Merger, Former MidWestOne’s common stock was
registered under Section 12(b) of the Securities Exchange Act of 1934, as
amended (the “Exchange Act”), and listed on The Nasdaq Stock Market LLC under
the ticker symbol “OSKY.” Prior to the Merger, the Company’s common
stock was not listed on any national securities exchange and was not registered
under the Exchange Act, and thus the Company was not subject to the periodic
reporting requirements of the Exchange Act. In connection with the
Merger, the Company filed a registration statement on Form S-4 to register the
shares of common stock to be issued to the holders of Former MidWestOne common stock in the
Merger pursuant to the Securities Act of 1933, as amended (the “Securities
Act”), and received approval to list its common stock on The Nasdaq Stock Market
LLC under the ticker symbol “MOFG.”
For
purposes of Rule 12g-3(a) under the Exchange Act, the Company is deemed to
be the successor issuer to Former MidWestOne. As a result,
the Company’s common stock is deemed to be registered under the Exchange Act due
to the fact that Former MidWestOne’s common stock was registered under the
Exchange Act. In addition, the Company, as the successor issuer to
Former MidWestOne, upon
consummation of the Merger inherited Former MidWestOne’s status as a “smaller
reporting company,” as such term is defined in Rule 12b-2 under the
Exchange Act. For the year ended December 31, 2008, the Company
is no longer considered to be a smaller reporting company because its public
float as of the last business day of its most recently competed second fiscal
quarter (June 30, 2008) exceeded $75 million. However,
pursuant to the transition rules for companies that are required to transition
from the scaled disclosure model for smaller reporting companies to
the larger reporting system, the Company is not required to satisfy
the larger reporting company disclosure requirements until the Form 10-Q
for the first quarter of 2009. Accordingly, the Company has prepared
this Annual Report on Form 10-K using the scaled disclosure requirements
set forth in Regulation S-K.
For
accounting purposes, the Company was deemed to be the acquirer in the
Merger. Accordingly, the financial information herein for years prior
to December 31, 2008 is the information for the Company (formerly
ISB Financial Corp.) prior to the Merger and does not include financial
information for the Former MidWestOne.
General
The
Company was incorporated in the state of Iowa in 1983 and is headquartered in
Iowa City, Iowa. It is a bank holding company registered under the
Bank Holding Company Act of 1956 and has elected to be a financial holding
company pursuant to the provisions of the Gramm-Leach-Bliley Act of
1999. Prior to the Merger, the Company operated primarily through two bank
subsidiaries—Iowa State Bank & Trust Company, an Iowa state non-member bank
chartered in 1934 with its main office in Iowa City, Iowa, and First State Bank,
an Iowa state non-member bank with its main office in Conrad, Iowa, which was
acquired by the Company in 1998. Prior to the Merger, Former
MidWestOne,
incorporated in Iowa in 1973 and headquartered in Oskaloosa, Iowa, was a
registered bank holding company that had elected to be a financial holding
company. Former MidWestOne operated primarily
through its bank subsidiary, MidWestOne Bank, Oskaloosa, Iowa,
MidWestOne Insurance
Services, Inc. (f/k/a Cook & Son Agency, Inc.), an insurance agency that was
acquired in 2005, and MidWestOne Investment Services, Inc., through which Former
MidWestOne offered
retail brokerage (through an arrangement with a third-party registered
broker-dealer) and financial planning services.
Initially
following the Merger, the Company continued operating through its three bank
subsidiaries—Iowa State Bank & Trust Company, First State Bank and
MidWestOne Bank—but in
August 2008 consolidated the three bank subsidiaries under the charter of
Iowa State Bank & Trust Company and renamed the surviving bank “MidWestOne Bank.” The
operations of MidWestOne Investment Services also
have been transferred to MidWestOne Bank and MidWestOne Investment Services has
been dissolved; the brokerage and financial planning services previously offered
by MidWestOne
Investment Services are now offered through MidWestOne Bank. All
references herein to “MidWestOne Bank” or the “Bank” are
to the surviving bank subsidiary; references to “Former MidWestOne Bank” are to the bank
subsidiary of the former MidWestOne as it existed prior to the
Merger. The Company retained all of the offices previously operated
by the three bank subsidiaries, except that it sold its Wapello branch on
October 17, 2008, pursuant to which the buyer assumed approximately $8.6
million in deposits and paid a premium of 6%. The Company retained
the loans associated with the branch and will service them through its branch
location in Burlington, Iowa. MidWestOne Bank continues to offer
substantially the same services provided by the three bank subsidiaries prior to
the Merger and the subsequent bank charter consolidation.
The
Company maintained MidWestOne Insurance Services, Inc.
as a separate subsidiary following the Merger. MidWestOne Insurance Services is a
full-service insurance agency that offers a wide range of insurance plans to
individuals and businesses. In December 2008, MidWestOne
Insurance Services acquired Butler-Brown Insurance, a full-service insurance
agency in Oskaloosa, to expand its insurance agency
business. MidWestOne Insurance Services operates through three
offices.
MidWestOne Bank operates a total of
29 branch locations, plus its specialized Home Loan Center, in 15 counties
throughout central and east-central Iowa. MidWestOne Bank provides full
service retail banking in the communities in which its branch offices are
located. Deposit products offered include checking and other demand deposit
accounts, NOW accounts, savings accounts, money market accounts, certificates of
deposit, individual retirement accounts and other time
deposits. MidWestOne Bank offers commercial
and industrial, agricultural, real estate mortgage and consumer
loans. Other products and services include debit cards, automated teller
machines, on-line banking and safe deposit boxes. The principal
service consists of making loans to and accepting deposits from individuals,
businesses, governmental units and institutional customers. MidWestOne Bank also has a trust and
investment department through which it offers a variety of trust and investment
services, including administering estates, personal trusts, conservatorships,
pension and profit-sharing funds and providing property management, farm
management, custodial services, financial planning, investment management
and retail brokerage (through an agreement with a third-party registered
broker-dealer).
Operating
Strategy
The
Company’s operating strategy is based upon a sophisticated community banking
model delivering a complete line of financial products and services while
following three guiding principles: hire excellent employees; take care of
customers; and conduct business with the utmost integrity.
Management
believes the personal and professional service offered to customers provides an
appealing alternative to the “megabanks” that have resulted from large
out-of-state national banks acquiring Iowa-based community banks. While
the Company employs a community banking philosophy, management believes its
size, combined with its complete line of financial products and services, is
sufficient to effectively compete in the relevant market areas. To remain
price competitive, management also believes the Company must manage expenses and
remain disciplined in its asset/liability management practices.
Market
Areas
The
principal offices of the Company and MidWestOne Bank are in Iowa City,
Iowa. The city of Iowa City is located in east-central Iowa,
approximately 220 miles west of Chicago, Illinois, and approximately 115 miles
east of Des Moines, Iowa. It is strategically situated approximately
60 miles west of the Mississippi River on Interstate 80 and is the home of the
University of Iowa, a public university with approximately 21,000 undergraduate
students and 9,000 graduate and professional students. Iowa City is
the home of the University of Iowa Hospitals and Clinics, a 680-bed
comprehensive academic medical center and regional referral center with more
than 760 staff physicians and dentists, 480 resident physicians and dentists and
180 fellow physicians and 1,565 nurses. The U.S. Census Bureau
estimates that, as of 2006, the city of Iowa City had a total population of
approximately 63,000 and the Iowa City MSA had a total population of
approximately 140,000. Iowa City is the sixth largest city in the
state of Iowa. According to the FDIC, as of June 30, 2008,
MidWestOne Bank had the
second highest deposit market share in the Iowa City MSA at approximately
18%.
MidWestOne Bank operates branch
offices and a loan production office in 15 counties in central and east-central
Iowa. According to the FDIC, in nine of those 15 counties, MidWestOne Bank held between 8% and
25% of the deposit market share. In another county, MidWestOne Bank held 42% of the
deposit market share.
Lending
Activities
General
The
Company provides a range of commercial and retail lending services to
businesses, individuals and government agencies. These credit activities
include commercial, financial and agricultural loans; real estate construction
loans; commercial and residential real estate loans; and consumer
loans.
The
Company markets its services to qualified lending customers. Lending
officers actively solicit the business of new companies entering their market
areas as well as long-standing members of the business communities in which the
Company operates. Through professional service, competitive pricing and
innovative structure, the Company has been successful in attracting new lending
customers. The Company also actively pursues consumer lending
opportunities. With convenient locations, advertising and customer
communications, the Company has been successful in capitalizing on the credit
needs of its market areas.
Management
emphasizes credit quality and seeks to avoid undue concentrations of loans to a
single industry or based on a single class of collateral. The Company has
established lending policies that include a number of underwriting factors to be
considered in making a loan, including location, loan-to-value ratio, cash flow,
interest rate and credit history of the borrower.
Commercial,
Financial and Agricultural Loans
Commercial and Financial.
The Company has a strong commercial loan base. The Company focuses
on, and tailors its commercial loan programs to, small- to mid-sized businesses
in its market areas. The Company’s loan portfolio includes loans to
wholesalers, manufacturers, contractors, business services companies and
retailers. The Company provides a wide range of business loans, including
lines of credit for working capital and operational purposes and term loans for
the acquisition of equipment. Although most loans are made on a secured
basis, loans may be made on an unsecured basis where warranted by the overall
financial condition of the borrower. Terms of commercial business loans
generally range from one to five years.
The
Company’s 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 loans are that
the cash flows of the borrower may be unpredictable, and the collateral securing
these loans may fluctuate in value.
As of
December 31, 2008, commercial and financial loans comprised approximately 21% of
the total loan portfolio.
Agricultural Loans. Due
to the rural market areas in and around which the Company operates, agricultural
loans are an important part of the Company’s business. Agricultural loans
include loans made to finance agricultural production and other loans to farmers
and farming operations. Agricultural loans comprised approximately 9% of
the total loan portfolio at December 31, 2008.
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 controls 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.
The
agricultural loan department works closely with all of its customers, including
companies and individual farmers, and reviews the preparation of budgets and
cash flow projections for the ensuing crop year. These budgets and cash
flow projections are monitored closely during the year and reviewed with the
customers at least once annually. The Company also works closely with
governmental agencies to help agricultural customers obtain credit enhancement
products such as loan guarantees or interest assistance.
Real
Estate Loans
Construction Loans. The
Company offers loans both to individuals that are constructing personal
residences and to real estate developers and building contractors for the
acquisition of land for development and the construction of homes and commercial
properties. These loans are in-market to known and established
borrowers. Construction loans generally have a short term, such as
one to two years. As of December 31, 2008, construction loans constituted
approximately 10% of total loans.
Mortgage Loans. The
Company offers residential, commercial and agricultural mortgage loans. As
of December 31, 2008, the Company had $685.8 million in combined residential,
commercial and agricultural mortgage loans outstanding, which represented
approximately 68% of the total loan portfolio.
Residential
mortgage lending is a focal point for the Company, as residential real estate
loans constituted approximately 26% of total loans at December 31,
2008. Included in this category of loans are home equity loans made
to individuals. As long-term interest rates remained at relatively
low levels during 2007 and 2008, many customers opted for mortgage loans that
have a fixed rate with fifteen or thirty year maturities. The Company
generally retains short-term residential mortgage loans that it originates for
its own portfolio but sells most long-term loans to other parties while
retaining servicing rights on the majority of those. The Company
performs loan servicing activity for third parties. At December 31,
2008, the Company serviced approximately $85.7 million in mortgage loans for
others. The Company does not offer subprime mortgage loans and does
not operate a wholesale mortgage business.
The
Company also offers mortgage loans to its 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. As of December 31, 2008, commercial and agricultural
real estate loans constituted approximately 42% of total loans.
Consumer
Lending
The
Company’s consumer lending department provides all types of consumer loans,
including personal loans (secured or unsecured) and automobile loans.
Consumer loans typically have shorter terms, lower balances, higher yields
and higher risks of default than one- to four-family residential real estate
mortgage loans. Consumer loan collections are dependent on the borrower’s
continuing financial stability, and are therefore more likely to be affected by
adverse personal circumstances. As of December 31, 2008, consumer loans
comprised only 2% of the total loan portfolio.
Loan
Pool Participations
The
Company holds in its portfolio a significant amount of participation interests
in pools of loans that are owned and serviced by States Resources Corporation, a
third-party loan servicing organization located in Omaha, Nebraska (the
“Servicer”). The Company does not have any ownership interest in or
control over the Servicer. The loans in those pools are purchased at
varying discounts to their outstanding principal amount. Former
MidWestOne began the
program of acquiring participation interests from the Servicer in 1988 and the
Company has continued with this program since the Merger (although these loan
participations constitute a smaller percentage of the Company’s total loan
portfolio than they did of Former MidWestOne’s total loan
portfolio).
The
Servicer generally acquires the underlying loans from large nonaffiliated
banking organizations and from the FDIC when it auctions off assets of failed
financial institutions for which it has been appointed
receiver. Thus, the purchased loan pools generally consist of loans
that were originated throughout the United States. The sellers of the
loans generally offer the loans through a sealed bid auction. A
sealed bid auction requires each bidder to submit a confidential bid on the
subject loan pool, with the loan pool being awarded to the highest
bidder. If the Servicer is the winning bidder in an auction, it
acquires the loans without recourse against the sellers and, accordingly, the
risk of noncollectibility for the participation interest purchased by the
Company is, for the most part, assumed by the Company.
Each pool
of loans in which the Company acquires a participation interest has a different
composition and different characteristics. The pools in which the Company
currently owns a participation interest are comprised primarily of performing,
past-due and nonperforming loans secured by commercial real estate and other
commercial assets. The price bid and paid for such a loan pool is
determined based on the credit quality of the loans in the particular pool, the
amounts the Servicer believes can be collected on such pool and the risks
associated with the collection of such amounts.
In
considering an investment in a loan pool, the Servicer generally
evaluates the loans underlying the pool being auctioned and makes
recommendations to the Company concerning the creditworthiness of the borrowers
of the underlying loans. The Servicer performs a comprehensive analysis of
the loan pool in an attempt to ensure proper valuation and adequate safeguards
in the event of default. In many cases, substantial uncertainties may
exist regarding the collectibility of the various loans in the pool. The
Company makes its own decisions as to whether or not to participate in a
particular loan pool that has been recommended by the Servicer based on the
Company’s experience with the various categories and qualities of the underlying
loans.
Upon the
acquisition of a participation interest in a loan pool, the Company assumes the
risk, to the extent of the Company’s participation interest, that the Servicer
will be unable to recover an amount equal to the purchase price plus the
carrying costs, if any, and collection costs on such accounts. The extent
of such risk is dependent on a number of factors, including the Servicer’s
ability to locate the debtors, the debtors’ financial condition, the possibility
that a debtor may file for protection under applicable bankruptcy laws, the
Servicer’s ability to locate the collateral, if any, for the loan and to obtain
possession of such collateral, the value of such collateral, and the length of
time it takes to realize the ultimate recovery either through collection
procedures or through a resale of the loans following a
restructuring.
A cost
“basis” is assigned to each individual loan acquired on a cents per dollar basis
(discounted price), which is based on the Servicer’s assessment of the recovery
potential of each such loan in relation to the total discounted price paid to
acquire the pool. This methodology assigns a higher basis to performing
loans with greater potential collectibility and a lower basis to those loans
identified as having little or no potential for collection.
Loan pool
participations are shown on the Company’s balance sheet as a separate asset
category; they are not included within the loan balance on the Company’s balance
sheet. The original carrying value of loan pool participation interests
represent the discounted price paid by the Company to acquire its participation
interests in various loan pools purchased by the Servicer. The
Company’s investment balance is reduced as the Servicer collects principal
payments on the loans and remits the proportionate share of such payments to the
Company.
Loan
pools are accounted for in accordance with the provisions of Statement of
Position 03-3, “Accounting for Certain Loans or Debt Securities Acquired in a
Transfer” (“SOP 03-3”) issued by the Accounting Standards Executive Committee of
the American Institute of Certified Public Accountants. According to
SOP 03-3, in order to apply the interest method of recognition to these types of
loans, there must be sufficient information to reasonably estimate the amount
and timing of the cash flows expected to be collected. When that is
not the case, the loan is accounted for on nonaccrual status applying cash basis
income recognition to the loan.
In each
case, where changed circumstances or new information lead the Servicer to
believe that collection of the loan or recovery of the basis through collateral
would be less than originally determined, the cost basis assigned to the loan is
written down or written off through a charge against discount income. The
Servicer and representatives of the Company continually evaluate at least
quarterly the collectability of the loans and the recovery of the underlying
basis. On a quarterly basis, those loans that are determined to have a
possible recovery of less than the assigned basis amount are placed on a “watch
list.” The amount of basis exceeding the estimated recovery amount on the
“watch list” loans is written off by a charge against discount
income.
Interest
income and discount on loan pool participations recorded by the Company is net
of collection expenses incurred by the Servicer and net of the servicing fee and
share of recovery profit paid to the Servicer. Collection costs include
salary and benefits paid by the Servicer to its employees, legal fees, costs to
maintain and insure real estate owned, and other operating expenses. Under
the terms of the Company’s agreement with the Servicer, the Servicer receives a
servicing fee based on one percent of the gross monthly collections of principal
and interest, net of collection costs. Additionally, the Servicer receives
a tiered percentage share of the recovery profit in excess of the investors’
required return on investment on each individual loan pool. The Servicer’s
percentage share of recovery profit is linked to a ten-tier index and ranges
from zero to twenty-seven percent depending upon the return on investment
achieved. The investor’s minimum required return on investment is based on
the two-year treasury rate at the time a loan pool is purchased plus 4.0
percent. For every one percent increase obtained over the investor’s
minimum required return, the Servicer percentage moves up one tier level.
In the event that the return on a particular pool does not exceed the required
return on investment, the Servicer does not receive a percentage share of the
recovery profit. Discount income is added to interest income and reflected
as one amount on the Company’s consolidated statement of income.
The
Servicer provides the Company with monthly reports
detailing collections of principal and interest, face value of loans collected
and those written off, actual operating expenses incurred, remaining asset
balances (both in terms of cost basis and principal amount of loans), a
comparison of actual collections and expenses with target collections and
budgeted expenses, and summaries of remaining collection targets. The
Servicer also provides aging reports and “watch lists” for the loan pools.
Monthly meetings are held between the Company and representatives of the
Servicer to review collection efforts and results, to discuss future plans of
action and to discuss potential opportunities. Additionally, the Company’s
and the Servicer’s personnel communicate on almost a daily basis to discuss
various issues regarding the loan pools. Company representatives visit the
Servicer’s operation on a regular basis; and the Company’s loan review officer
and its internal auditor perform asset reviews and audit procedures on a regular
basis.
The
Company’s overall cost basis in its loan pool participations represents a
discount from the aggregate outstanding principal amount of the loans underlying
the pools. For example, as of December 31, 2008, such cost basis was $92.9
million, while the contractual outstanding principal amount of the underlying
loans as of such date was approximately $175.3 million. The discounted
cost basis inherently reflects the assessed collectibility of the underlying
loans. The Company does not include any amounts related to the loan pool
participations in its totals of nonperforming loans.
As part
of the ongoing collection process, the Servicer may, from time to time,
foreclose on real estate mortgages and acquire title to property in satisfaction
of such debts. This real estate may be held by the Servicer as “real
estate owned” for a period of time until it can be sold. Because the
Company’s investments in loan pools are classified separately from the Company’s
loan portfolio, the Company does not include the real estate owned that is held
by the Servicer with the amount of any other real estate that the Company may
hold directly as a result of its own foreclosure activities.
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
the Company’s loan pool participations, many of which have exceeded contractual
maturity dates, is approximately three to five years. Company
management has reviewed the recoverability of the underlying loans and believes
that the carrying value does not exceed the fair value of its investment in loan
pool participations.
Other
Products and Services
Deposit
Products
Management
believes the Company offers competitive deposit products and programs that
address the needs of customers in each of the local markets served. The
deposit products are offered to individuals, non-profit organizations,
partnerships, small businesses, corporations and public entities. These
products include non-interest bearing and interest bearing demand deposits,
savings accounts, money market accounts and time certificates of
deposit.
Trust
and Investment Services
The
Company offers trust and investment services in its market areas to help its
business and individual clients in meeting their financial goals and preserving
wealth. Our services include administering estates, personal trusts,
conservatorships, pension and profit-sharing funds and providing property
management, farm management, investment advisory, retail securities brokerage,
financial planning and custodial services. Licensed brokers (who are
registered representatives of a third-party registered broker-dealer) serve
selected branches and provide investment-related services including securities
trading, financial planning, mutual funds sales, fixed and variable annuities
and tax-exempt and conventional unit trusts.
Insurance
Services
The
Company, through its insurance subsidiary, MidWestOne Insurance Services,
offers property and casualty insurance products to individuals and small
businesses in markets served by the Company.
Liquidity
and Funding
A
discussion of the Company’s liquidity and funding programs has been
included in Item 7. Management’s Discussion and Analysis of
Financial Condition and Results of Operations under “Liquidity and
Funding.”
Competition
The
Company encounters competition in all areas of its business pursuits. To
compete effectively, grow its market share, maintain flexibility and keep pace
with changing economic and social conditions, the Company continuously refines
and develops its products and services. The principal methods of
competing in the financial services industry are through service, convenience
and price.
The
banking industry is highly competitive, and the Company faces strong direct
competition for deposits, loans, and other financial-related services. The
offices in central and east-central Iowa compete with other commercial banks,
thrifts, credit unions, stockbrokers, finance divisions of auto and farm
equipment companies, agricultural suppliers, and other agricultural-related
lenders. Some of these competitors are local, while others are statewide
or nationwide. The Company competes for deposits principally by offering
depositors a wide variety of deposit programs, convenient office locations,
hours and other services, and for loan originations primarily through interest
rates and loan fees it charges, the variety of its loan products and the
efficiency and quality of services it provides to borrowers, with an emphasis on
building long-lasting relationships. Some of the financial institutions
and financial service organizations with which the Company competes are not
subject to the same degree of regulation as that imposed on federally insured
Iowa-chartered banks. As a result, such competitors have advantages over
the Company in providing certain services. As of December 31, 2008, there
were approximately 100 other banks having 346 offices or branches operating
within the 15 counties in which he Company has locations. Based on deposit
information collected by the FDIC as of June 30, 2008, the Company maintained
approximately 4.8% of the bank deposits within the 15 counties in which it
operates. New competitors may develop that are substantially larger and
have significantly greater resources than the Company. Currently, major
competitors in some of the Company’s markets include Wells Fargo Bank, U.S.
Bank, Regions Bank and Bank of the West.
The
Company also faces competition with respect to its investments in loan pool
participations. The Company’s financial success to date regarding loan
pools is largely attributable to the Servicer’s ability to determine which loan
pools to bid on and ultimately purchase, the availability of assets to fund the
purchases and the Servicer’s ability to collect on the underlying assets.
Investments in loan pools have become increasingly popular in recent
years, leading financial institutions and other competitors to become active at
loan pool auctions conducted by the FDIC and other sellers. There is
no assurance that the Company, through the Servicer, will be able to bid
successfully in the future. Certain existing competitors of the
Company are substantially larger and have significantly greater financial
resources than the Company. Increased participation by new
institutions or other investors may also create increased buying interest which
could also result in higher bid prices for the type of loan pools considered for
investment by the Company. In addition, new and existing competitors
may develop due diligence procedures comparable to the Servicer’s
procedures. The emergence of such competition could have a material
adverse effect on the Company’s business and financial results. The
Company expects that its success in the future will depend more on the
performance of MidWestOne Bank and MidWestOne Insurance Services and
less on the investments in loan pool participations.
Supervision
and Regulation
General
Financial
institutions, their holding companies and their affiliates are extensively
regulated under federal and state law. As a result, the growth and
earnings performance of the Company may be affected not only by management
decisions and general economic conditions, but also by the requirements of
federal and state statutes and by the regulations and policies of various bank
regulatory authorities, including the Iowa Superintendent of Banking
(the “Iowa Superintendent”), the Board of Governors of the Federal
Reserve System (the “Federal Reserve”) and the
FDIC. Furthermore, taxation laws administered by the Internal Revenue
Service and state taxing authorities and securities laws administered by the SEC
and state securities authorities have an impact on the business of the
Company. The effect of these statutes, regulations and regulatory
policies may be significant and cannot be predicted with a high degree of
certainty.
Federal
and state laws and regulations generally applicable to financial institutions
regulate, among other things, the scope of business, the kinds and amounts of
investments, reserve requirements, capital levels relative to operations, the
nature and amount of collateral for loans, the establishment of branches,
mergers and consolidations and the payment of dividends. This system
of supervision and regulation establishes a comprehensive framework for the
respective operations of the Company and its subsidiaries and is intended
primarily for the protection of the FDIC-insured deposits and depositors of the
Bank, rather than shareholders. In addition to this generally
applicable regulatory framework, recent turmoil in the credit markets prompted
the enactment of unprecedented legislation that has given the U.S. Treasury a
wide array of powers and discretion to implement programs and make direct equity
investments in qualifying financial institutions to help restore confidence and
stability in the U.S. financial markets, which imposes additional requirements
on institutions in which the U.S. Treasury invests.
The
following is a summary of the material elements of the regulatory framework that
applies to the Company and its subsidiaries. It does not describe all
of the statutes, regulations and regulatory policies that apply, nor does it
restate all of the requirements of those that are described. As such,
the following is qualified in its entirety by reference to applicable
law. Any change in statutes, regulations or regulatory policies may
have a material effect on the business of the Company and its
subsidiaries.
The
Company
General. The
Company, as the sole shareholder of the Bank, is a bank holding
company. As a bank holding company, the Company is registered with,
and is subject to regulation by, the Federal Reserve under the Bank Holding
Company Act of 1956, as amended (the “BHCA”). In accordance with
Federal Reserve policy, the Company is expected to act as a source of financial
strength to the Bank and to commit resources to support the Bank in
circumstances where the Company might not otherwise do so. Under the
BHCA, the Company is subject to periodic examination by the Federal
Reserve. The Company is also required to file with the Federal
Reserve periodic reports of the Company’s operations and such additional
information regarding the Company and its subsidiaries as the Federal Reserve
may require.
Acquisitions, Activities and Change
in Control. The primary purpose of a bank holding company is
to control and manage banks. The BHCA generally requires the prior
approval of the Federal Reserve for any merger involving a bank holding company
or any acquisition by a bank holding company of another bank or bank holding
company. Subject to certain conditions (including deposit
concentration limits established by the BHCA), the Federal Reserve may allow a
bank holding company to acquire banks located in any state of the United
States. In approving interstate acquisitions, the Federal Reserve is
required to give effect to applicable state law limitations on the aggregate
amount of deposits that may be held by the acquiring bank holding company and
its insured depository institution affiliates in the state in which the target
bank is located (provided that those limits do not discriminate against
out-of-state depository institutions or their holding companies) and state laws
that require that the target bank have been in existence for a minimum period of
time (not to exceed five years) before being acquired by an out-of-state bank
holding company.
The BHCA
generally prohibits the Company from acquiring direct or indirect ownership or
control of more than 5% of the voting shares of any company that is not a bank
and from engaging in any business other than that of banking, managing and
controlling banks or furnishing services to banks and their
subsidiaries. This general prohibition is subject to a number of
exceptions. The principal exception allows bank holding companies to
engage in, and to own shares of companies engaged in, certain businesses found
by the Federal Reserve to be “so closely related to
banking . . . as to be a proper incident
thereto.” This authority would permit the Company to engage in a
variety of banking-related businesses, including the ownership and operation of
a thrift, or any entity engaged in consumer finance, equipment leasing, the
operation of a computer service bureau (including software development) and
mortgage banking and brokerage. The BHCA generally does not place
territorial restrictions on the domestic activities of non-bank subsidiaries of
bank holding companies.
Additionally,
bank holding companies that meet certain eligibility requirements prescribed by
the BHCA and elect to operate as financial holding companies may engage in, or
own shares of companies engaged in, a wider range of nonbanking activities,
including securities and insurance underwriting and sales, merchant banking and
any other activity that the Federal Reserve, in consultation with the Secretary
of the Treasury, determines by regulation or order is financial in nature,
incidental to any such financial activity or complementary to any such financial
activity and does not pose a substantial risk to the safety or soundness of
depository institutions or the financial system generally. The
Company has elected (and the Federal Reserve has accepted the Company’s
election) to operate as a financial holding company.
Federal
law also prohibits any person or company from acquiring “control” of an
FDIC-insured depository institution or its holding company without prior notice
to the appropriate federal bank regulator. “Control” is conclusively
presumed to exist upon the acquisition of 25% or more of the outstanding voting
securities of a bank or bank holding company, but may arise under certain
circumstances between 10% and 24.99% ownership.
Capital
Requirements. Bank holding companies are required to maintain
minimum levels of capital in accordance with Federal Reserve capital adequacy
guidelines. If capital levels fall below the minimum required levels,
a bank holding company, among other things, may be denied approval to acquire or
establish additional banks or non-bank businesses.
The
Federal Reserve’s capital guidelines establish the following minimum regulatory
capital requirements for bank holding companies: (i) a risk-based requirement
expressed as a percentage of total assets weighted according to risk; and (ii) a
leverage requirement expressed as a percentage of total assets. The
risk-based requirement consists of a minimum ratio of total capital to total
risk-weighted assets of 8% and a minimum ratio of Tier 1 capital to total
risk-weighted assets of 4%. The leverage requirement consists of a
minimum ratio of Tier 1 capital to total assets of 3% for the most highly
rated companies, with a minimum requirement of 4% for all others. For
purposes of these capital standards, Tier 1 capital consists primarily of
permanent shareholders’ equity less intangible assets (other than certain loan
servicing rights and purchased credit card relationships). Total
capital consists primarily of Tier 1 capital plus certain other debt and
equity instruments that do not qualify as Tier 1 capital and a portion of
the company’s allowance for loan and lease losses.
The
risk-based and leverage standards described above are minimum
requirements. Higher capital levels will be required if warranted by
the particular circumstances or risk profiles of individual banking
organizations. For example, the Federal Reserve’s capital guidelines
contemplate that additional capital may be required to take adequate account of,
among other things, interest rate risk, or the risks posed by concentrations of
credit, nontraditional activities or securities trading
activities. Further, any banking organization experiencing or
anticipating significant growth would be expected to maintain capital ratios,
including tangible capital positions (i.e., Tier 1 capital less all
intangible assets), well above the minimum levels. As of December 31,
2008, the Company had regulatory capital in excess of the Federal Reserve’s
minimum requirements.
Emergency Economic Stabilization Act
of 2008. Recent events in the U.S. and global financial
markets, including the deterioration of the worldwide credit markets, have
created significant challenges for financial institutions such as the
Bank. Dramatic declines in the housing market during the past year,
marked by falling home prices and increasing levels of mortgage foreclosures,
have resulted in significant write-downs of asset values by financial
institutions, including government-sponsored entities and major commercial and
investment banks. In addition, many lenders and institutional
investors have reduced, and in some cases, ceased to provide, funding to
borrowers, including other financial institutions, as a result of concern about
the stability of the financial markets and the strength of
counterparties.
In
response to the crises affecting the U.S. banking system and financial markets
and in an effort to bolster the distressed economy and improve consumer
confidence in the financial system, on October 3, 2008, the U.S. Congress
passed, and President Bush signed into law, the Emergency Economic Stabilization
Act of 2008 (the “EESA”). The EESA authorizes the Secretary of
the U.S. Treasury (the “Treasury”) to implement various temporary emergency
programs designed to strengthen the capital positions of financial institutions
and stimulate the availability of credit within the U.S. financial
system. Financial institutions participating in certain of the
programs established under the EESA will be required to adopt the Treasury’s
standards for executive compensation and corporate governance.
The TARP Capital Purchase
Program. On October 14, 2008, the Treasury announced that it
would provide Tier 1 capital (in the form of perpetual preferred stock
together with a warrant to acquire shares of common stock) to eligible financial
institutions. This program, known as the TARP Capital Purchase
Program (the “CPP”), allocates $250 billion from the $700 billion authorized by
the EESA to the Treasury for the purchase of senior preferred shares from
qualifying financial institutions (the “CPP Preferred
Stock”). Eligible institutions can sell CPP Preferred Stock to the
Treasury in amounts equal to between 1% and 3% of the institution’s
risk-weighted assets. The Company elected to participate in the CPP
and, on February 6, 2009, consummated the sale of $16 million of CPP
Preferred Stock, together with a warrant to acquire 198,675 shares of Company
common stock, to Treasury. For further discussion of the Company’s
participation in the CPP, see below under “Recent Developments—Participation in the Capital
Purchase Program.”
Dividend
Payments. The Company’s ability to pay dividends to its
shareholders may be affected by both general corporate law considerations and
policies of the Federal Reserve applicable to bank holding
companies. As an Iowa corporation, the Company is subject to the
limitations of Iowa law, which allows the Company to pay dividends unless, after
such dividend, (i) the Company would not be able to pay its debts as they become
due in the usual course of business or (ii) the Company’s total assets would be
less than the sum of its total liabilities plus any amount that would be needed,
if the Company were to be dissolved at the time of the dividend payment, to
satisfy the preferential rights upon dissolution of shareholders whose rights
are superior to the rights of the shareholders receiving the
distribution. Additionally, policies of the Federal Reserve caution
that a bank holding company should not pay cash dividends unless its net income
available to common shareholders over the past year has been sufficient to fully
fund the dividends and the prospective rate of earnings retention appears
consistent with its capital needs, asset quality and overall financial
condition. The Federal Reserve also possesses enforcement powers over
bank holding companies and their non-bank subsidiaries to prevent or remedy
actions that represent unsafe or unsound practices or violations of applicable
statutes and regulations. Among these powers is the ability to
proscribe the payment of dividends by banks and bank holding
companies.
In
addition to the foregoing, as discussed below in more detail under “Recent
Developments—Participation in
the Capital Purchase Program,” the Company’s participation in the CPP
further restricts its ability to pay dividends. For example, the
terms of the CPP Preferred Stock provide that no dividends on any common or
preferred stock that ranks equal to or junior to the CPP Preferred Stock may be
paid unless and until all accrued and unpaid dividends for all past dividend
periods on the CPP Preferred Stock have been fully paid.
Federal Securities
Regulation. The Company’s common stock is registered under the
Securities Act and the Exchange Act. Consequently, the Company is
subject to the information, proxy solicitation, insider trading and other
restrictions and requirements of the SEC under the Exchange Act.
The
Bank
The Bank
is an Iowa-chartered bank, the deposit accounts of which are insured by the FDIC
to the maximum extent provided under federal law and FDIC
regulations. As an Iowa-chartered bank, the Bank is subject to the
examination, supervision, reporting and enforcement requirements of the Iowa
Superintendent, the chartering authority for Iowa banks, and the FDIC,
designated by federal law as the primary federal regulator of state-chartered,
FDIC-insured banks that, like the Bank, are not members of the Federal Reserve
System (“non-member banks”).
Deposit
Insurance. As an FDIC-insured institution, the Bank is
required to pay deposit insurance premium assessments to the
FDIC. The FDIC has adopted a risk-based assessment system whereby
FDIC-insured depository institutions pay insurance premiums at rates based on
their risk classification. An institution’s risk classification is
assigned based on its capital levels and the level of supervisory concern the
institution poses to the regulators. Under the regulations of the
FDIC, as presently in effect, insurance assessments range from 0.12% to 0.50% of
total deposits for the first quarter 2009 assessment period only (subject to the
application of assessment credits, if any, issued by the FDIC in
2008). Effective April 1, 2009, insurance assessments will range from
0.07% to 0.78% of total deposits, depending on an institution’s risk
classification, its levels of unsecured debt and secured liabilities, and, in
certain cases, its level of brokered deposits. In addition, the FDIC
recently passed an interim rule authorizing the FDIC to impose an emergency
special assessment equal to 0.20% of total deposits on June 30, 2009 (that will
be collected on September 30, 2009), and further authorizing the FDIC to impose
additional emergency special assessments after June 30, 2009, of up to 0.10% of
total deposits, whenever the FDIC estimates that the reserve ratio of the
Deposit Insurance Fund (“DIF”) will fall to a
level that the FDIC believes would adversely affect public confidence in federal
deposit insurance or to a level that will be close to zero or negative at the
end of a calendar quarter. The interim rule, however, is subject to a
30-day comment period that will expire on April 2, 2009, and may be subject to
change before any special assessments are imposed on insured depository
institutions.
FICO
Assessments. The Financing Corporation (“FICO”) is a
mixed-ownership governmental corporation chartered by the former Federal Home
Loan Bank Board pursuant to the Federal Savings and Loan Insurance Corporation
Recapitalization Act of 1987 to function as a financing vehicle for the
recapitalization of the former Federal Savings and Loan Insurance
Corporation. FICO issued 30-year non-callable bonds of approximately
$8.2 billion that mature by 2019. Since 1996, federal
legislation has required that all FDIC-insured depository institutions pay
assessments to cover interest payments on FICO’s outstanding
obligations. These FICO assessments are in addition to amounts
assessed by the FDIC for deposit insurance. During the year ended
December 31, 2008, the FICO assessment rate was approximately 0.01% of
deposits.
Supervisory
Assessments. All Iowa banks are required to pay supervisory
assessments to the Iowa Superintendent to fund the operations of that
agency. The amount of the assessment is calculated on the basis of
the Bank’s total assets. During the year ended December 31, 2008, the
Bank paid supervisory assessments to the Iowa Superintendent totaling
$155,617.
Capital
Requirements. Banks are generally required to maintain capital
levels in excess of other businesses. The FDIC has established the
following minimum capital standards for state-chartered insured non-member
banks, such as the Bank: (i) a leverage requirement consisting of a minimum
ratio of Tier 1 capital to total assets of 3% for the most highly-rated
banks, with a minimum requirement of at least 4% for all others; and (ii) a
risk-based capital requirement consisting of a minimum ratio of total capital to
total risk-weighted assets of 8% and a minimum ratio of Tier 1 capital to
total risk-weighted assets of 4%. In general, the components of
Tier 1 capital and total capital are the same as those for bank holding
companies discussed above.
The
capital requirements described above are minimum requirements. Higher
capital levels may be required if warranted by the particular circumstances or
risk profiles of individual institutions. For example, regulations of
the FDIC provide that additional capital may be required to take adequate
account of, among other things, interest rate risk or the risks posed by
concentrations of credit, nontraditional activities or securities trading
activities.
Further,
federal law and regulations provide various incentives for financial
institutions to maintain regulatory capital at levels in excess of minimum
regulatory requirements. For example, a financial institution that is
“well-capitalized” may qualify for exemptions from prior notice or application
requirements otherwise applicable to certain types of activities and may qualify
for expedited processing of other required notices or
applications. Additionally, one of the criteria that determines a
bank holding company’s eligibility to operate as a financial holding company is
a requirement that all of its financial institution subsidiaries be
“well-capitalized.” Under the regulations of the FDIC, in order to be
“well-capitalized,” a financial institution must maintain a ratio of total
capital to total risk-weighted assets of 10% or greater, a ratio of Tier 1
capital to total risk-weighted assets of 6% or greater and a ratio of
Tier 1 capital to total assets of 5% or greater.
Federal
law also provides the federal banking regulators with broad power to take prompt
corrective action to resolve the problems of undercapitalized
institutions. The extent of the regulators’ powers depends on whether
the institution in question is “adequately capitalized,” “undercapitalized,”
“significantly undercapitalized” or “critically undercapitalized,” in each case
as defined by regulation. Depending upon the capital category to
which an institution is assigned, the regulators’ corrective powers include:
(i) requiring the institution to submit a capital restoration plan;
(ii) limiting the institution’s asset growth and restricting its
activities; (iii) requiring the institution to issue additional capital
stock (including additional voting stock) or to be acquired;
(iv) restricting transactions between the institution and its affiliates;
(v) restricting the interest rate the institution may pay on deposits;
(vi) ordering a new election of directors of the institution;
(vii) requiring that senior executive officers or directors be dismissed;
(viii) prohibiting the institution from accepting deposits from
correspondent banks; (ix) requiring the institution to divest certain
subsidiaries; (x) prohibiting the payment of principal or interest on
subordinated debt; and (xi) ultimately, appointing a receiver for the
institution.
As of
December 31, 2008, the Bank exceeded its minimum regulatory capital requirements
under the FDIC’s capital adequacy guidelines and was deemed to be
“well-capitalized,” as defined by FDIC regulations. Notwithstanding its
compliance with the specified regulatory thresholds, however, the Bank’s board
of directors recently adopted a capital policy pursuant to which it will
maintain a ratio of Tier 1 capital to total assets of 8% or greater. The Bank’s
capital policy also provides that it will maintain a ratio of total capital to
total risk-weighted assets of at least 10% (which is the same threshold as is
required to be deemed well-capitalized under FDIC
regulations).
Dividend
Payments. The primary source of funds for the Company is
dividends from the Bank. Under the Iowa Banking Act, Iowa-chartered
banks generally may pay dividends only out of undivided profits. In
addition, the Iowa Superintendent may restrict the declaration or payment of a
dividend by an Iowa-chartered bank, such as the Bank.
The
payment of dividends by any financial institution is affected by the requirement
to maintain adequate capital pursuant to applicable capital adequacy guidelines
and regulations, and a financial institution generally is prohibited from paying
any dividends if, following payment thereof, the institution would be
undercapitalized. As described above, the Bank exceeded its minimum
capital requirements under applicable guidelines as of December 31,
2008. Notwithstanding the availability of funds for dividends,
however, the FDIC may prohibit the payment of any dividends by the Bank if
the FDIC determines such payment would constitute an unsafe or unsound
practice. In addition, the Bank’s board of
directors will not cause the Bank to pay a dividend to the Company if such
dividend would cause the Bank to fall out of compliance with the ratios set
forth in the Bank’s recently adopted
capital policy, as described above.
Insider
Transactions. The Bank is subject to certain restrictions
imposed by federal law on extensions of credit to the Company, on investments in
the stock or other securities of the Company and the acceptance of the stock or
other securities of the Company as collateral for loans made by the
Bank. Certain limitations and reporting requirements are also placed
on extensions of credit by the Bank to its directors and officers, to directors
and officers of the Company, to principal shareholders of the Company and to
“related interests” of such directors, officers and principal
shareholders. In addition, federal law and regulations may affect the
terms upon which any person who is a director or officer of the Company or the
Bank or a principal shareholder of the Company may obtain credit from banks with
which the Bank maintains a correspondent relationship.
Safety and Soundness
Standards. The federal banking agencies have adopted
guidelines that establish operational and managerial standards to promote the
safety and soundness of federally insured depository
institutions. The guidelines set forth standards for internal
controls, information systems, internal audit systems, loan documentation,
credit underwriting, interest rate exposure, asset growth, compensation, fees
and benefits, asset quality and earnings.
In
general, the safety and soundness guidelines prescribe the goals to be achieved
in each area, and each institution is responsible for establishing its own
procedures to achieve those goals. If an institution fails to comply
with any of the standards set forth in the guidelines, the institution’s primary
federal regulator may require the institution to submit a plan for achieving and
maintaining compliance. If an institution fails to submit an
acceptable compliance plan, or fails in any material respect to implement a
compliance plan that has been accepted by its primary federal regulator, the
regulator is required to issue an order directing the institution to cure the
deficiency. Until the deficiency cited in the regulator’s order is
cured, the regulator may restrict the institution’s rate of growth, require the
institution to increase its capital, restrict the rates the institution pays on
deposits or require the institution to take any action the regulator deems
appropriate under the circumstances. Noncompliance with the standards
established by the safety and soundness guidelines may also constitute grounds
for other enforcement action by the federal banking regulators, including cease
and desist orders and civil money penalty assessments.
Branching
Authority. The Bank has the authority under Iowa law to
establish branches anywhere in the State of Iowa, subject to receipt of all
required regulatory approvals.
Federal
law permits state and national banks to merge with banks in other states subject
to: (i) regulatory approval; (ii) federal and state deposit
concentration limits; and (iii) state law limitations requiring the merging bank
to have been in existence for a minimum period of time (not to exceed five
years) prior to the merger. The establishment of new interstate
branches or the acquisition of individual branches of a bank in another state
(rather than the acquisition of an out-of-state bank in its entirety) is
permitted only in those states the laws of which expressly authorize such
expansion.
State Bank Investments and
Activities. The Bank generally is permitted to make
investments and engage in activities directly or through subsidiaries as
authorized by Iowa law. However, under federal law and FDIC
regulations, FDIC-insured state banks are prohibited, subject to certain
exceptions, from making or retaining equity investments of a type, or in an
amount, that are not permissible for a national bank. Federal law and
FDIC regulations also prohibit FDIC-insured state banks and their subsidiaries,
subject to certain exceptions, from engaging as principal in any activity that
is not permitted for a national bank unless the bank meets, and continues to
meet, its minimum regulatory capital requirements and the FDIC determines the
activity would not pose a significant risk to the deposit insurance fund of
which the bank is a member. These restrictions have not had, and are
not currently expected to have, a material impact on the operations of the
Bank.
Federal Reserve
System. Federal Reserve regulations, as presently in effect,
require depository institutions to maintain reserves against their transaction
accounts (primarily NOW and regular checking accounts), as follows: for
transaction accounts aggregating $44.4 million or less, the reserve requirement
is 3% of total transaction accounts; and for transaction accounts aggregating in
excess of $44.4 million, the reserve requirement is $1.023 million plus 10%
of the aggregate amount of total transaction accounts in excess of
$44.4 million. The first $10.3 million of otherwise
reservable balances are exempted from the reserve requirements. These
reserve requirements are subject to annual adjustment by the Federal
Reserve. The Bank is in compliance with the foregoing
requirements.
Employees
On
December 31, 2008, the Company had 411 full-time equivalent
employees. The Company provides its employees with a comprehensive
program of benefits, some of which are on a contributory basis, including
comprehensive medical and dental plans, life insurance, long-term and short-term
disability coverage, a 401(k) plan, and an employee stock ownership
plan. None of the Company’s employees are represented by
unions. Management considers its relationship with its employees to
be good.
Company
Website
The
Company maintains an internet website for MidWestOne Bank at
www.midwestone.com. The Company will make available, free of charge,
on this site its annual report on Form 10-K, quarterly reports on Form 10-Q,
current reports on Form 8-K and other reports filed or furnished pursuant to
Section 13(a) or 15(d) of the Exchange Act as soon as reasonably practicable
after it electronically files such material with, or furnishes it to, the
SEC.
Recent
Developments
Participation
in the Capital Purchase Program
On
February 6, 2009, the Company, pursuant to the CPP implemented under the
EESA, entered into a Letter Agreement, which includes the Securities Purchase
Agreement – Standard Terms (collectively, the “Purchase Agreement”), with the
Treasury pursuant to which the Company issued and sold to the
Treasury 16,000 shares of the Company’s Fixed Rate Cumulative Perpetual
Preferred Stock, Series A, together with a warrant to purchase 198,675 shares of
the Company’s common stock, for an aggregate purchase price of $16 million in
cash. The warrant has a ten-year term and is immediately exercisable
upon its issuance, with an exercise price equal to $12.08 per share of the
common stock.
The
Series A Preferred Stock qualifies as Tier 1 capital and pays cumulative
dividends
at a rate of 5% per annum for the first five years, and 9% per
annum thereafter. The Series A Preferred Stock may be redeemed by the
Company at any time subject to the approval of the Treasury and the
Company’s
regulators. Any redemption of the Series A Preferred Stock
will be at the per share liquidation amount of $1,000 per share, plus any
accrued and unpaid dividends.
Prior to
the third anniversary of the Treasury’s purchase of the Series A Preferred
Stock, unless the Series A Preferred Stock has been redeemed or Treasury has
transferred all of the Series A Preferred Stock to one or more third parties,
the consent of the Treasury will be required for the Company to increase the
dividend paid on its common stock above its most recent quarterly dividend of
$0.1525 per share or repurchase shares of its common stock (other than in
connection with benefit plans). The Series A Preferred Stock is
non-voting except for class voting rights on matters that would adversely affect
the rights of the holders of the Series A Preferred Stock.
Participants
in the TARP Capital Purchase Program were required to accept several
compensation-related limitations associated with this Program. Each of our
senior executive officers in February 2009 agreed in writing to accept the
compensation standards in existence at that time under the CPP and thereby cap
or waive,
during the period during which the Treasury continues to hold an equity interest
in the Company, some of their contractual or legal rights. The
compensation-related limitations include the following: limits on
compensation to exclude incentives to take unnecessary and excessive risks; a
clawback with respect to incentive compensation based on statements of earnings,
gains or other criteria that are later proven to be materially inaccurate; and a
prohibition on golden parachute payments. EESA also limits the
deductibility of compensation earned by each of our senior executive
officers to $500,000 per year.
The
American Recovery and Reinvestment Act of 2009
On
February 17, 2009, President Obama signed into law the American Recovery and
Reinvestment Act of 2009 (“ARRA”). ARRA provides for large amounts of
new government spending and programs. In addition, ARRA imposes
extensive new executive compensation and corporate governance limitations on
current and future participants in the CPP, which are in addition to those
previously announced by Treasury. Thus, the newly enacted
compensation-related limitations are applicable to the Company and, to the
extent Treasury may implement these restrictions unilaterally, the Company will
apply these provisions. The new restrictions include additional
limits on executive compensation such as prohibiting the payment or accrual of
any bonus, retention award or incentive compensation to our most highly
compensated employee (which is our President and Chief Executive Officer) except
for the payment of long-term restricted stock that does not fully vest until
such time as Treasury no longer owns any of our equity or debt securities; prohibiting
the payment of “golden parachutes” to our senior executive officers and
next five most highly compensated employees; prohibiting any
compensation plan that would encourage the manipulation of earnings; and
extending the clawback required by EESA to the top 20 most highly compensated
employees (in addition to our senior executive officers). ARRA also
requires compliance with new corporate governance standards including an annual
“say on pay” shareholder vote, the adoption of policies regarding excessive or
luxury expenditures, and a certification by our Chief Executive Officer and
Chief Financial Officer that we have complied with the standards in the
ARRA. These new limits will remain in place until the Company has
redeemed the CPP Preferred Stock sold to Treasury, which is now permitted under
ARRA without penalty and without the need to raise new capital, subject to
Treasury’s consultation with the Company’s federal bank regulators.
The full
impact of the ARRA is not yet certain because it calls for additional regulatory
action. The Company will continue to monitor the effect of the ARRA and the
anticipated regulations.
Temporary
Liquidity Guarantee Program
In
connection with the recently enacted EESA and in conjunction with the Treasury’s
actions to address the current credit and liquidity crisis in financial markets,
the FDIC announced the Temporary Liquidity Guarantee Program, which temporarily
provides to participating institutions unlimited deposit insurance coverage for
non-interest bearing transaction accounts maintained at FDIC insured
institutions (the “transaction account guarantee program”), and provide a
limited guarantee on certain newly-issued senior unsecured debt (the “debt
guarantee program”). Institutions that did not opt out of the two
guarantee programs are subject to the following assessments for participation:
(i) for the debt guarantee program, between 50 and 100 basis points per
annum for eligible senior unsecured debt (depending on the maturity date) issued
between October 14, 2008 and June 30, 2009; and (ii) for the transaction
account guarantee program, 10 basis points per annum on amounts in excess of
$250,000 in non-interest bearing transaction accounts through and including
December 31, 2009. The Bank decided to continue to participate in
these programs and did not opt out. As a result, the Bank is
incurring fees associated with the programs (although, as of December 31,
2008, it had not issued any debt that is covered by the debt guarantee
program).
Financial
Stability Plan
On
February 10, 2009, Treasury outlined a comprehensive plan consisting of
multiple components designed to help restore stability to the U.S. financial
system. As outlined by Treasury, this plan, referred to as the
Financial Stability Plan, will include: the Capital Assistance Program pursuant
to which certain financial institutions will be permitted to sell convertible
preferred stock to Treasury; a public-private investment fund designed to
provide greater means for financial institutions to cleanse their balance sheets
of non-performing legacy assets; a consumer and business lending initiative of
up to $1 trillion; a housing support and foreclosure prevention program;
and a small business and community lending initiative. Because only a
general outline of the Financial Stability Plan has been disclosed thus far, it
is difficult to predict at this point what effect, if any, such programs will
have on the U.S. financial system generally or MidWestOne’s business
specifically.
Increase
in FDIC Deposit Insurance Premiums
On
February 27, 2009, the FDIC issued a proposed rule that would impose a
significant “emergency special assessment” on all FDIC-insured depository
institutions equal to 0.20% of deposits, regardless of their risk
level. The FDIC has proposed this special assessment in an effort to
increase the DIF, which declined from 0.76% of total insured deposits as of
September 30, 2008, to 0.40% of total insured deposits as of
December 31, 2008. The proposed special assessment would be
on total deposits as of June 30, 2009, to be collected on
September 30, 2009. It is important to note that the rule
proposing the special assessment has not been finalized and may
change. For example, it has been reported that the FDIC Chairman
would consider reducing the special assessment rate to 0.10% if legislation is
passed that allows it to borrow as much as $100 billion from
Treasury. However, if the rule is finalized in its current form, we
anticipate that this one-time special assessment could cost us an additional
$2.3 million in deposit insurance premiums in 2009.
Although
the proposed assessment is only a one-time assessment, the FDIC notes in the
proposed rule that if the DIF’s reserve ratio were to fall below a level “that
the Board believes would adversely affect public confidence or to a level which
shall be close to zero or negative at the end of a calendar quarter,” an
additional emergency special assessment of up to 0.10% may be imposed by a vote
of the FDIC’s
Board.
Cautionary
Note Regarding Forward-Looking Statements
This
report contains certain “forward-looking statements” within the meaning of such
term in the Private Securities Litigation Reform Act of 1995. The Company and
its representatives may, from time to time, make written or oral statements that
are “forward-looking” and provide information other than historical 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 based upon beliefs, expectations and assumptions of the
Company’s 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. The Company wishes to caution readers not to place undue
reliance on any such forward-looking statements, which speak only as of the date
made. Additionally, the Company undertakes no obligation to update any statement
in light of new information or future events.
The
Company’s ability to predict results or the actual effect of future plans or
strategies is inherently uncertain. Factors that could have an impact on the
Company’s ability to achieve operating results, growth plan goals and future
prospects include, but are not limited to, the following:
|
|
·
|
Credit
quality deterioration or pronounced and sustained reduction in real estate
market values could cause an increase in the allowance for credit losses
and a reduction in net earnings.
|
|
|
·
|
Management’s
ability to reduce and effectively manage interest rate risk and the impact
of interest rates in general on the volatility of the Company’s net
interest income.
|
|
|
·
|
Changes
in the economic environment, competition, or other factors that may affect
the Company’s 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.
|
|
|
·
|
Fluctuations
in the value of the Company’s investment
securities.
|
|
|
·
|
The
ability to attract and retain key executives and employees experienced in
banking and financial services.
|
|
|
·
|
The
sufficiency of the allowance for loan losses to absorb the amount of
actual losses inherent in the existing loan
portfolio.
|
|
|
·
|
The
Company’s ability to adapt successfully to technological changes to
compete effectively in the
marketplace.
|
|
|
·
|
Credit
risks and risks from concentrations (by geographic area and by industry)
within the Company’s loan
portfolio.
|
|
|
·
|
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 other mutual funds,
and other financial institutions operating in the Company’s market or
elsewhere or providing similar
services.
|
|
|
·
|
The
failure of assumptions underlying the establishment of allowances for loan
losses and estimation of values of collateral and various financial assets
and liabilities.
|
|
|
·
|
Volatility
of rate sensitive deposits.
|
|
|
·
|
Operational
risks, including data processing system failures or
fraud.
|
|
|
·
|
Asset/liability
matching risks and liquidity risks.
|
|
|
·
|
The
costs, effects and outcomes of existing or future
litigation.
|
|
|
·
|
Governmental
monetary and fiscal policies, as well as legislative and regulatory
changes, that may result in the imposition of costs and constraints on the
Company.
|
|
|
·
|
Changes
in general economic or industry conditions, nationally or in the
communities in which the Company conducts
business.
|
|
|
·
|
Changes
in accounting policies and practices, as may be adopted by state and
federal regulatory agencies and the Financial Accounting Standards
Board.
|
These
risks and uncertainties should be considered when evaluating the forward-looking
statement and undue reliance should not be placed on such statements. The
Company cautions that the foregoing list of important factors may not be
all-inclusive and specifically declines to undertake any obligation to publicly
revise any forward-looking statements that have been made to reflect any events
or circumstances after the date of such statements or to reflect the occurrence
of anticipated or unanticipated events.
|
Item
1A.
|
Risk
Factors.
|
As
discussed above under Item 1. Business – “Merger Transaction,” the Company is
eligible to use the scaled disclosure requirements applicable to smaller
reporting companies in this Annual Report on Form 10-K. Accordingly,
the Company is not required to provide the information under this
item.
|
Item
1B.
|
Unresolved
Staff Comments.
|
None.
|
Item
2.
|
Properties.
|
The
Company’s headquarters and the Bank’s main office are located at 102 South
Clinton Street, Iowa City, Iowa. This building is owned by the
Company and approximately 39,400 of its 63,800 sq ft are being leased out to
unrelated third parties. The Company currently operates 28 additional branches
throughout central and east-central Iowa totaling approximately 125,000 square
feet. The table below sets forth the locations of the Bank’s branch
offices:
|
822
12th St.
Belle
Plaine, Iowa
|
802
13th St.*
Belle
Plaine, Iowa
|
|
3225
Division St.
Burlington,
Iowa
|
323
Jefferson St.
Burlington,
Iowa
|
|
120
W. Center St.
Conrad,
Iowa
|
110
1st Ave.
Coralville,
Iowa
|
|
101
W. Second St., Suite 100†
Davenport,
Iowa
|
2408
W. Burlington
Fairfield,
Iowa
|
|
58
East Burlington
Fairfield,
Iowa
|
926
Ave. G
Ft.
Madison, Iowa
|
|
4510
Prairie Pkwy.
Cedar
Falls, Iowa
|
100
Eddystone Dr.
Hudson,
Iowa
|
|
325
S. Clinton St.
Iowa
City, Iowa
|
1906
Keokuk St.
Iowa
City, Iowa
|
|
2233
Rochester Ave.
Iowa
City, Iowa
|
202
Main St.
Melbourne,
Iowa
|
|
10030
Hwy. 149
North
English, Iowa
|
465
Hwy. 965 NE, Suite A
North
Liberty, Iowa
|
|
124
South First St.
Oskaloosa,
Iowa
|
222
First Ave. East*
Oskaloosa,
Iowa
|
|
301
A Ave. West*
Oskaloosa,
Iowa
|
116
W. Main St.
Ottumwa,
Iowa
|
|
1001
Hwy. 57
Parkersburg,
Iowa
|
700
Main St.
Pella,
Iowa
|
|
500
Oskaloosa St.*
Pella,
Iowa
|
112
North Main St.
Sigourney,
Iowa
|
|
3110
Kimball Ave.
Waterloo,
Iowa
|
305
W. Rainbow Dr.
West
Liberty,
Iowa
|
* Drive
up location only.
† Leased
office.
In
addition to the Bank’s branch offices, the insurance and investment divisions
lease two properties totaling approximately 3,900 square feet. The
Bank also currently operates one additional branch in a temporary facility and
has one branch temporarily closed as discussed further below. The
Bank owns 48 ATMs that are located within the communities served by branch
offices. We believe each of our facilities is suitable and adequate
to meet our current operational needs.
Natural
disasters in late May and early June 2008 affected the Company’s
properties. On May 25, 2008, the Parkersburg branch was destroyed by
a tornado that leveled much of the community. The branch has reopened
in a temporary facility and rebuilding efforts have
begun. Construction of the permanent facility is expected to be
completed in spring 2009. The facility was insured, which is expected
to cover most of the reconstruction cost. Flooding in eastern Iowa in
early June inundated the Waterloo and Coralville branch offices. The
Waterloo office, re-opened on February 23, 2009, has secured a leased space
in Waterloo. This leased facility will replace the previously flooded
location. The Coralville office was relocated to a temporary facility
until October 2008 when the newly remodeled office reopened. Neither
the Waterloo nor the Coralville office was covered by flood
insurance.
|
Item
3.
|
Legal
Proceedings.
|
The
Company and its subsidiaries are from time to time parties to various legal
actions arising in the normal course of business. The Company
believes that there is no threatened or pending proceeding against the Company
or its subsidiaries, which, if determined adversely, would have a material
adverse effect on the business or financial condition of the
Company.
|
Item
4.
|
Submission
of Matters to a Vote of Security
Holders.
|
No matter
was submitted to a vote of security holders during the quarter ended
December 31, 2008.
PART II
|
Item 5.
|
Market
For Registrant’s Common Equity, Related Stockholder Matters and Issuer
Purchases of Equity Securities.
|
Prior to
the Merger, the Company’s common stock was quoted on the Pink Sheets under the
symbol “ISBO.PK.” In connection with the Merger, the Company received
approval to list its common stock on the Nasdaq Global Select Market under the
symbol “MOFG,” and trading commenced on March 17, 2008. The following
table sets forth for the periods indicated the high and low reported bid prices
per share of the Company’s common stock as reported by Pink Sheets from January
1, 2007 through March 16, 2008 and the intra-day high and low sales prices per
share of the Company’s common stock as reported on the Nasdaq Global Select
Market beginning March 17, 2008, along with the cash dividends per share
declared during such periods. With respect to the high and low bid
information for the period from January 1, 2007 through March 16, 2008, the per
share prices reflect inter-dealer prices without adjustments for markups,
markdowns or commissions and may not necessarily represent actual
transactions.
|
High
|
Low
|
Cash
Dividend
Declared
|
||||||||||
|
2007
|
||||||||||||
|
First
Quarter
|
$ | 27.50 | $ | 26.75 | $ | 0.32 | ||||||
|
Second
Quarter
|
$ | 27.00 | $ | 26.00 | — | |||||||
|
Third
Quarter
|
$ | 27.50 | $ | 24.25 | — | |||||||
|
Fourth
Quarter
|
$ | 25.00 | $ | 18.50 | $ | 0.33 | ||||||
|
2008
|
||||||||||||
|
First
Quarter
|
$ | 19.24 | $ | 16.00 | — | |||||||
|
Second
Quarter
|
$ | 17.25 | $ | 11.94 | $ | 0.1525 | ||||||
|
Third
Quarter
|
$ | 14.95 | $ | 12.00 | $ | 0.1525 | ||||||
|
Fourth
Quarter
|
$ | 14.47 | $ | 8.35 | $ | 0.1525 | ||||||
As of
December 31, 2008, there were 8,603,055 shares of common stock outstanding
held by approximately 580 holders of record. Additionally, there are
an estimated 1,310 beneficial holders whose stock was held in street name by
brokerage houses and other nominees as of that date.
Dividends. The
Company may pay dividends on its common stock as and when declared by the
Company’s board of directors out of any funds legally available for the payment
of such dividends, subject to any and all preferences and rights of any
preferred stock or a series thereof. The amount of dividend payable
will depend upon the earnings and financial condition of the Company and other
factors, including applicable governmental regulations and
policies.
As
discussed above, the Company consummated the sale of $16 million of senior
preferred stock to Treasury pursuant to the Capital Purchase Program on February
6, 2009. The terms of the senior preferred stock place certain
restrictions on the Company’s ability to pay dividends on its common
stock. First, no dividends on the Company’s 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, the Company may not increase the dividends paid on its
common stock beyond its most recent quarterly dividend of $0.1525 per share
without first obtaining the consent of Treasury.
Repurchases of Company Equity
Securities. On April 8, 2008, the Company’s Board of Directors
authorized a stock repurchase program of up to $5,000,000 worth of common stock
through December 31, 2008. During the fourth quarter of 2008, the Company
repurchased 30,000 shares of common stock on the open market for a total of
$369,650. The table set forth below provides certain information with
respect to these repurchases:
|
Total
Number
of
Shares
Purchased
|
Average
Price
Paid
Per
Share
|
#
Purchased
as
Part of
Publicly
Announced
Plan
|
Maximum
Amount
that
May
Yet Be
Purchased
Under
Plan
|
|||||||||||||
|
October
1-31, 2008
|
- | n/a | n/a | $ | 4,117,150 | |||||||||||
|
November
1-30, 2008
|
15,000 | 13.45 | 15,000 | 3,915,400 | ||||||||||||
|
December
1-31, 2008
|
15,000 | 11.19 | 15,000 | 3,747,500 | ||||||||||||
|
Total
|
30,000 | 12.32 | 30,000 | 3,747,500 | ||||||||||||
The
Company’s 2008 repurchase program expired on December 31, 2008. No
new repurchase program has been approved. Because of the Company’s
participation in the Treasury’s Capital Purchase Program, it will not be
permitted to repurchase any shares of its common stock, other than in connection
with benefit plans consistent with past practice, until such time as the
Treasury no longer holds any equity securities in the Company.
Securities Authorized for Issuance
Under Equity Compensation Plans. The table below sets forth the following
information as of December 31, 2008 for: (i) all equity compensation
plans previously approved by the Company’s shareholders; and (ii) all
equity compensation plans not previously approved by the Company’s
shareholders:
(a) the
number of securities to be issued upon the exercise of outstanding options,
warrants and rights;
(b) the
weighted-average exercise price of such outstanding options, warrants and
rights; and
(c) other
than securities to be issued upon the exercise of such outstanding options,
warrants and rights, the number of securities remaining available for future
issuance under the plans.
|
Number of securities to be
issued upon exercise of
outstanding options
|
Weighted-average exercise
price of outstanding options
|
Number of securities
remaining available for
future issuance under
equity compensation plans
(excluding securities
reflected in column (a))
|
||||||||||
|
(a)
|
(b)
|
(c)
|
||||||||||
|
Equity
compensation plans approved by securityholders
|
268,218
|
18.10
|
473,082
|
|||||||||
|
Equity
compensation plans not approved by
securityholders
|
- | - | - | |||||||||
|
Total
|
268,218 | 18.10 | 473,082 | |||||||||
|
Item 6.
|
Selected
Financial Data.
|
The
Company is not required to provide the information under this item because, as
discussed above, it is eligible to use the scaled disclosure model for smaller
reporting companies in this Annual Report on Form 10-K.
|
Item 7.
|
Management’s
Discussion and Analysis of Financial Condition and Results of
Operations.
|
The
following presents management’s discussion and analysis of the Company’s
consolidated results of operations, financial position and changes in
condition. This review highlights the major factors affecting results
of operations and any significant changes in financial condition for the
two-year period ended December 31, 2008. It should be read in
conjunction with the accompanying Consolidated Financial Statements included
herein at pages F-1 through F-55 and other financial statistics appearing
elsewhere in this annual report, as well as the section titled “Caution
Regarding Forward-Looking Statements” set forth above in
Item 1. Business.
Overview
As
explained above, because the Merger was consummated in 2008, the Company’s
financial information for fiscal year 2007 does not include any of the financial
information attributable to the Former MidWestOne or its subsidiaries, but
the Company’s financial information for fiscal year 2008 does include the Former
MidWestOne operations
(except, as noted above, for the operations of the Former MidWestOne between January 1,
2008 and March 14, 2008). Prior to the Merger, the Company and
the Former MidWestOne
were comparable in total size; thus, the comparison of the Company’s 2008
financial information to its 2007 financial information often shows significant
changes, which generally makes the year-to-year changes significantly larger
than they generally would be expected for a company that has not undergone a
significant merger during the year.
Critical
Accounting Estimates
The
Company has identified five critical accounting policies and practices relative
to the reporting of its results of operation and financial condition. These five
accounting policies relate to the allowance for loan losses, participation
interests in loan pools, application of purchase accounting, goodwill and
intangible assets, and fair value of available for sale investment
securities.
Allowance
for Loan Losses
The
allowance for loan losses is based on management’s estimate. Management believes
the allowance for loan losses is adequate to absorb probable losses in the
existing portfolio. In evaluating the portfolio, management takes into
consideration numerous factors, including current economic conditions, prior
loan loss experience, the composition of the loan portfolio, and management’s
estimate of probable credit losses. The allowance for loan losses is established
through a provision for loss based on management’s evaluation of the risk
inherent in the loan portfolio, the composition of the portfolio, specific
impaired loans, and current economic conditions. Such evaluation, which includes
a review of all loans on which full collectability may not be reasonably
assured, considers, among other matters, the estimated net realizable value or
the fair value of the underlying collateral, economic conditions, historical
loss experience, and other factors that warrant recognition in providing for an
adequate allowance for loan losses. In the event that management’s evaluation of
the level of the allowance for loan losses is inadequate, the Company would need
to increase its provision for loan losses.
Participation
Interests in Loan Pools
The loan
pool accounting practice relates to management’s estimate that the investment
amount reflected on the Company’s financial statements does not exceed the
estimated net realizable value or the fair value of the underlying collateral
securing the purchased loans. In evaluating the purchased loan pool, management
takes into consideration many factors, including the borrowers’ current
financial situation, the underlying collateral, current economic conditions,
historical collection experience, and other factors relative to the collection
process. If the estimated net realizable value of the loan pool participations
is overstated, the Company’s yield on the loan pools would be reduced.
Application
of Purchase Accounting
We completed the acquisition of the former
MidwestOne Financial Group, Inc., which generated significant amounts of
goodwill and intangible assets and related amortization. The values
assigned to goodwill and intangibles, as well as their related useful lives, are
subject to judgment and estimation by our management. Goodwill and
intangibles related to acquisitions are determined and based on purchase price
allocations. Valuation of intangible assets is generally based on the
estimated cash flows related to those assets, while the initial value assigned
to goodwill is the residual of the purchase price over the fair value of all
identifiable assets acquired and liabilities assumed. If the carrying
value of the goodwill exceeded the implied fair value of the goodwill, an
impairment loss would be recorded in an amount equal to that excess.
Performing such a discounted cash flow analysis involves the use of estimates
and assumptions. Useful lives are determined based on the expected future
period of the benefit of the asset, the assessment of which considers various
characteristics of the asset, including the historical cash flows. Due to
the number of estimates involved related to the allocation of purchase price and
determining the appropriate useful lives of intangible assets, we have
identified purchase accounting as a critical accounting
policy.
Goodwill
and Intangible Assets
Goodwill
and intangible assets arise from purchase business combinations. On
March 14, 2008, we completed our merger with the former MidWestOne. We were
deemed to be the purchaser for accounting purposes and thus recognized goodwill
and other intangible assets in connection with the merger. The
goodwill was assigned to our one reporting unit, banking. As a
general matter, goodwill and other intangible assets generated from purchase
business combinations and deemed to have indefinite lives are not subject to
amortization and are instead tested for impairment at least
annually. Core deposit and customer relationship intangibles arising
from acquisitions are being amortized over their estimated useful lives of up to
10 years.
In 2008,
the extreme volatility in the banking industry that first started to surface in
the latter part of 2007 had a significant impact on banking companies and the
price of banking stocks, including our common stock. At
December 31, 2008, our market capitalization was less than our total
shareholders’ equity, providing an indication that goodwill may be impaired as
of such date. Thus, the Company performed an impairment analysis as a
result of the significant decline in its stock price. Based on this
analysis, we wrote off $27.3 million of goodwill in the fourth quarter of
2008, which represented all of the goodwill that resulted from the
Merger. Such charge had no effect on the Company’s or the Bank’s cash
balances or liquidity. In addition, because goodwill and other
intangible assets are not included in the calculation of regulatory capital, the
Company’s and the Bank’s December 31, 2008 regulatory ratios were not adversely
affected by this non-cash expense and exceeded the minimum amounts required to
be considered “well-capitalized.”
Our other intangible
assets are core deposit and customer relationship intangibles. The
establishment and subsequent amortization of these intangible assets requires
several assumptions including, among other things, the estimated cost to service
deposits acquired, discount rates, estimated attrition rates and useful
lives. We assess these intangible assets for impairment
quarterly. If the value of the core deposit intangible or the
customer relationship intangible is determined to be less than the
carrying value in future periods, a writedown would be taken through a
charge to our earnings. The most significant element in evaluation of
these intangibles is the attrition rate of the acquired deposits or
loans. If such attrition rate were to accelerate from that which we
expected, the intangible may have to be reduced by a charge to
earnings. The attrition rate related to deposit flows or loan flows
is influenced by many factors, the most significant of which are alternative
yields for loans and deposits available to customers and the level of
competition from other financial institutions and financial services
companies.
Fair
Value of Available for Sale Securities
Securities
available for sale are reported at fair value, with unrealized gains and losses
reported as a separate component of accumulated other comprehensive income, net
of deferred income taxes. Declines in fair value of individual securities, below
their amortized cost, are evaluated by management to determine whether the
decline is temporary or “other than temporary.” Declines in the fair value of
available for sale securities below their cost that are deemed “other than
temporary” are reflected in earnings as impairment losses. In estimating “other
than temporary” impairment losses, management considers a number of factors
including: (1) the length of time and extent to which the fair value has been
less than cost; (2) the financial condition and near-term prospects of the
issuer; and (3) the intent and ability of the Company to retain its investment
in the issuer for a period of time sufficient to allow for any anticipated
recovery in fair value.
Summary
of Performance
For the
year ended December 31, 2008, the Company recorded a net loss of $24,562,000, or
a loss of $3.09 per share basic and diluted. This compares with net
income of $6,648,000, or $1.29 per share basic and diluted, for the year ended
December 31, 2007. The Company’s significant net loss in 2008 was
primarily attributable to two one-time charges totaling $33.5 million that were
recognized in the fourth quarter. The first was a $27.3 million
non-cash goodwill impairment charge; this goodwill represented all of the
goodwill that was recognized as a result of the Merger. The second
was a $6.2 million (pre-tax) “other than temporary impairment” charge to the
Company’s investment securities portfolio as a result of the decline in the
market value of certain debt securities secured by pools of trust preferred
securities issued by multiple banks and insurance companies. If these
two charges were excluded from the Company’s earnings, the Company would have
had earnings for the year ended December 31, 2008 of $6.6 million, or $0.76
basic and diluted earnings per share. The Company’s net interest
income for the year ended December 31, 2008 was $39,811,000 as compared to net
interest income for the year ended December 31, 2007 of $19,267,000, an increase
of 106.6% that resulted primarily from the Merger. This increase in
net interest income was offset in part, however, by an increase in noninterest
expense (excluding the aggregate $27.3 million charge due to the goodwill
impairment) of $20,960,000 and an increase in the provision for loan losses of
$3,866,000.
Total
assets of the Company increased $806,979,000, or 115.0%, to $1,508,962,000 as of
December 31, 2008 from $701,983,000 as of December 31, 2007, with $784,461,000
of the increase in total assets resulting from the Merger. The
Company’s total loans outstanding (excluding loan pool participations) increased
$613,260,000, or 152.7%, to $1,014,814,000 at December 31, 2008 from
$401,554,000 at December 31, 2007. Approximately 87.4% of the
increase in total loans was a result of the Merger; the remainder came from
organic loan growth generated by the Company in 2008. The Company’s
deposits increased $601,574,000, or 114.2%, to $1,128,189,000 as of December 31,
2008 from $526,615,000 at December 31, 2007. Approximately 95.5% of
the increase in deposits was a result of the Merger; the remainder came from
organic deposit growth generated by the Company in 2008.
Various
operating and equity ratios for the Company are presented in the table below for
the years indicated. Due to the significant net loss recognized by
the Company for the year ended December 31, 2008 as a result of the $27.3
million goodwill impairment charge and the $6.2 million other-than-temporary
impairment charge to the Company’s investment securities portfolio, the
Company’s return on average assets and return on equity were negative in 2008,
as shown in the table below. The dividend payout ratio represents the
percentage of the Company’s prior year’s net income that is paid to shareholders
in the form of cash dividends. Average equity to average assets is a measure of
capital adequacy that presents the percentage of average total shareholders’
equity compared to the average assets of the Company. The equity to assets ratio
expresses this ratio using the period-end amounts instead of on an average
basis.
|
12/31/08
|
12/31/07
|
12/31/06
|
12/31/05
|
|||||||||||||
|
Return
on average total assets
|
(1.61 | ) % | 0.98 | % | 0.87 | % | 1.06 | % | ||||||||
|
Return
on average equity
|
(15.96 | ) | 8.83 | 8.16 | 10.27 | |||||||||||
|
Dividend
payout ratio
|
59.49 | 57.90 | 23.96 | 20.53 | ||||||||||||
|
Average
equity to average assets
|
10.10 | 10.94 | 10.62 | 10.32 | ||||||||||||
|
Equity
to assets ratio (at period end)
|
8.66 | 11.02 | 10.95 | 10.30 | ||||||||||||
Results
of Operations
Net
Interest Income
Net
interest income is the total of interest income earned on earning assets less
interest expense paid on interest bearing liabilities. Net interest income is
affected by changes in the volume and yields on earning assets and the volume
and rates paid on interest-bearing liabilities. Net interest margin is a
measurement, expressed as a ratio, of the net return on interest earning assets
computed by dividing net interest income on a tax-equivalent basis by the annual
average balance of all interest earning assets.
Net
interest income for the year ended December 31, 2008 totaled $39,811,000, an
increase of $20,544,000, or 106.6%, compared with the $19,267,000 of net
interest income for the year ended December 31, 2007. This increase was due
primarily to the greater loan volumes as a result of the Merger followed by
a wider net interest margin resulting from a steepening of the yield curve
between December 31, 2007 and December 31, 2008. The net interest
margin (on a tax-equivalent basis) increased during 2008 to 3.28% compared
with 3.27% for 2007 as the increase in net interest income was proportionately
greater than the increase in average earning assets.
The
growth in deposits and federal funds purchased, which growth was attributable
primarily to the Merger, contributed to an increase in total interest expense
for the year ended December 31, 2008 when compared to the year ended December
31, 2007. Total interest expense increased $11,357,000, or 59.7%, for 2008 to
$30,395,000, up from $19,038,000 for 2007. Total deposits averaged $453,402,000
higher for 2008 compared with 2007, while the average rate paid on these
deposits during 2008 decreased to 2.59% from 3.35% for 2007. Interest expense on
deposits was $23,157,000 for the year ended December 31, 2008, an increase of
$8,359,000, or 56.5%,
from the $14,798,000 in interest expense for the year ended December 31, 2007.
The primary factor contributing to this increase in interest expense on deposits
was the large increase in the balance of outstanding deposits resulting from the
Merger. This increase in interest expense was offset partially by
decreases in the average rate paid on deposits due to the overall declined in
market interest rates in 2008. For the year ended December 31, 2008, the Company
averaged $55,069,000 in federal funds purchased and repurchase agreements
compared with $49,629,000 for 2007. Interest expense on federal funds purchased
and repurchase agreements decreased $992,000 to $1,122,000 for 2008 compared
with $2,114,000 for 2007. This was also primarily due to the Merger, offset
partially by decreases in market interest rates. The interest rates on federal
funds purchased and repurchase agreements correlate directly with the actions
taken by the Federal Reserve in lowering the discount rate during 2008. The
average rate paid by the Company on federal funds purchased and repurchase
agreements decreased to 2.04% for the year ended December 31, 2008 compared with
4.26% for the year ended December 31, 2007, which decreased interest expense.
The average balance of Federal Home Loan Bank advances was $91,803,000 higher
for the year ended December 31, 2008, while the average rate paid decreased to
3.93% for 2008 from 4.58% for 2007. The increase in Federal Home Loan Bank
advances was due primarily to the Merger.
The
following table presents a comparison of the average balance of earning assets,
interest-bearing liabilities, interest income and expense, and average yields
and costs for the years indicated. Interest income on tax-exempt
securities is reported on a fully tax-equivalent basis assuming a 34% tax rate.
Dividing income or expense by the average balances of assets or liabilities
results in such yields and costs. Nonaccrual loans are included in the loan
category.
|
Year ended December 31,
|
||||||||||||||||||||||||
|
2008
|
2007
|
|||||||||||||||||||||||
|
Interest
|
Average
|
Interest
|
Average
|
|||||||||||||||||||||
|
Average
|
Income(2)/
|
Rate/
|
Average
|
Income/
|
Rate/
|
|||||||||||||||||||
|
Balance
|
Expense
|
Yield
|
Balance
|
Expense
|
Yield
|
|||||||||||||||||||
|
(dollars in thousands)
|
||||||||||||||||||||||||
|
Average
earning assets:
|
||||||||||||||||||||||||
|
Loans(1)
|
$ | 893,451 | $ | 53,104 | 5.94 | % | $ | 390,862 | $ | 27,771 | 7.11 | % | ||||||||||||
|
Loan
pool participations
|
72,558 | 4,459 | 6.15 | - | - | - | ||||||||||||||||||
|
Investment
securities:
|
||||||||||||||||||||||||
|
Taxable
investments
|
180,787 | 8,222 | 4.55 | 163,608 | 7,552 | 4.62 | ||||||||||||||||||
|
Tax
exempt investments
|
102,035 | 5,625 | 5.51 | 71,752 | 4,001 | 5.58 | ||||||||||||||||||
|
Total
investment securities
|
282,822 | 13,847 | 4.90 | 235,360 | 11,553 | 4.91 | ||||||||||||||||||
|
Federal
funds sold and interest-bearing balances
|
13,561 | 341 | 2.51 | 11,299 | 548 | 4.85 | ||||||||||||||||||
|
Total
earning assets
|
$ | 1,262,392 | $ | 71,751 | 5.68 | % | $ | 637,521 | $ | 39,872 | 6.25 | % | ||||||||||||
|
Average
interest-bearing liabilities:
|
||||||||||||||||||||||||
|
Savings
and interest-bearing demand deposits
|
$ | 392,603 | $ | 5,511 | 1.40 | % | $ | 193,044 | $ | 3,109 | 1.61 | % | ||||||||||||
|
Time
Certificates of deposit
|
502,220 | 17,646 | 3.51 | 248,377 | 11,689 | 4.71 | ||||||||||||||||||
|
Total
deposits
|
894,823 | 23,157 | 2.59 | 441,421 | 14,798 | 3.35 | ||||||||||||||||||
|
Federal
funds purchased and repurchase agreements
|
55,069 | 1,122 | 2.04 | 49,629 | 2,114 | 4.26 | ||||||||||||||||||
|
Federal
Home Loan Bank advances
|
135,984 | 5,348 | 3.93 | 44,181 | 2,023 | 4.58 | ||||||||||||||||||
|
Long-term
debt and other
|
11,968 | 768 | 6.42 | 1,582 | 103 | 6.51 | ||||||||||||||||||
|
Total
interest-bearing liabilities
|
$ | 1,097,844 | $ | 30,395 | 2.77 | % | $ | 536,813 | $ | 19,038 | 3.55 | % | ||||||||||||
|
Net
interest income
|
$ | 41,356 | 2.92 | % | $ | 20,834 | 2.71 | % | ||||||||||||||||
|
Net
interest margin (3)
|
3.28 | % | 3.27 | % | ||||||||||||||||||||
(1) Loan
fees included in interest income are not material.
(2)
Includes interest income and discount realized on loan pool
participations.
(3) Net
interest margin is net interest income (computed on a tax-equivalent basis)
divided by average total earning assets.
The
following table sets forth an analysis of volume and rate changes in interest
income and interest expense on the Company’s 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.
|
Year ended December 31,
|
||||||||||||
|
2008 Compared to 2007
|
||||||||||||
|
Increase/ (Decrease) Due to
|
||||||||||||
|
Volume
|
Rate
|
Net
|
||||||||||
|
(in
thousands)
|
||||||||||||
|
Interest
income from average earning assets:
|
||||||||||||
|
Loans
|
$ | 29,022 | $ | (3,689 | ) | $ | 25,333 | |||||
|
Investment
securities:
|
||||||||||||
|
Taxable
investments
|
779 | (109 | ) | 670 | ||||||||
|
Tax
exempt investments
|
1,669 | (45 | ) | 1,624 | ||||||||
|
Total
investment securities
|
2,448 | (154 | ) | 2,294 | ||||||||
|
Federal
funds sold and interest-bearing balances
|
147 | (354 | ) | (207 | ) | |||||||
|
Total
income from earning assets
|
31,618 | (4,198 | ) | 27,420 | ||||||||
|
Interest
expense from average interest-bearing liabilities:
|
||||||||||||
|
Savings
and interest-bearing demand deposits
|
(3,969 | ) | 6,371 | 2,402 | ||||||||
|
Time
Certificates of deposit
|
7,921 | (1,964 | ) | 5,957 | ||||||||
|
Total
deposits
|
3,952 | 4,407 | 8,359 | |||||||||
|
Federal
funds purchased and repurchase agreements
|
264 | (1,256 | ) | (992 | ) | |||||||
|
Federal
Home Loan Bank advances
|
3,567 | (242 | ) | 3,325 | ||||||||
|
Other
long-term debt
|
666 | (1 | ) | 665 | ||||||||
|
Total
expense form interest-bearing liabilities
|
8,449 | 2,908 | 11,357 | |||||||||
|
Net
interest income
|
$ | 23,169 | $ | (7,106 | ) | $ | 16,063 | |||||
|
Year ended December 31,
|
||||||||||||||||||||||||
|
2007
|
2006
|
|||||||||||||||||||||||
|
Interest
|
Average
|
Interest
|
Average
|
|||||||||||||||||||||
|
Average
|
Income/
|
Rate/
|
Average
|
Income/
|
Rate/
|
|||||||||||||||||||
|
Balance
|
Expense
|
Yield
|
Balance
|
Expense
|
Yield
|
|||||||||||||||||||
|
(dollars
in thousands)
|
||||||||||||||||||||||||
|
Average
earning assets:
|
||||||||||||||||||||||||
|
Loans
|
$ | 390,862 | $ | 27,771 | 7.11 | % | $ | 381,269 | $ | 26,024 | 6.83 | % | ||||||||||||
|
Investment
securities:
|
||||||||||||||||||||||||
|
Taxable
investments
|
163,608 | 7,552 | 4.62 | 183,057 | 7,076 | 3.87 | ||||||||||||||||||
|
Tax
exempt investments
|
71,752 | 4,001 | 5.58 | 62,888 | 3,181 | 5.06 | ||||||||||||||||||
|
Total
investment securities
|
235,360 | 11,553 | 4.91 | 245,945 | 10,257 | 4.17 | ||||||||||||||||||
|
Federal
funds sold and interest-bearing balances
|
11,299 | 548 | 4.85 | 7,285 | 283 | 3.88 | ||||||||||||||||||
|
Total
earning assets
|
$ | 637,521 | $ | 39,872 | 6.25 | % | $ | 634,499 | $ | 36,564 | 5.76 | % | ||||||||||||
|
Average
interest-bearing liabilities:
|
||||||||||||||||||||||||
|
Savings
and interest-bearing demand deposits
|
$ | 193,044 | $ | 3,109 | 1.61 | % | $ | 205,074 | $ | 3,042 | 1.48 | % | ||||||||||||
|
Time
Certificates of deposit
|
248,377 | 11,689 | 4.71 | 228,309 | 9,306 | 4.08 | ||||||||||||||||||
|
Total
deposits
|
441,421 | 14,798 | 3.35 | 433,383 | 12,348 | 2.85 | ||||||||||||||||||
|
Federal
funds purchased and repurchase agreements
|
49,629 | 2,114 | 4.26 | 48,378 | 1,878 | 3.88 | ||||||||||||||||||
|
Federal
Home Loan Bank advances
|
44,181 | 2,023 | 4.58 | 53,730 | 2,435 | 4.53 | ||||||||||||||||||
|
Other
long-term debt
|
1,582 | 103 | 6.51 | 1,463 | 98 | 6.70 | ||||||||||||||||||
|
Total
interest-bearing liabilities
|
$ | 536,813 | $ | 19,038 | 3.55 | % | $ | 536,954 | $ | 16,759 | 3.12 | % | ||||||||||||
|
Net
interest income
|
$ | 20,834 | 2.71 | % | $ | 19,805 | 2.64 | % | ||||||||||||||||
|
Net
interest margin (1)
|
3.27 | % | 3.12 | % | ||||||||||||||||||||
(1) Net
interest margin is net interest income (computed on a tax-equivalent basis)
divided by average total earning assets.
|
Year ended December 31,
|
||||||||||||
|
2007 Compared to 2006
|
||||||||||||
|
Increase/ (Decrease) Due to
|
||||||||||||
|
Volume
|
Rate
|
Net
|
||||||||||
|
(in thousands)
|
||||||||||||
|
Interest
income from average earning assets:
|
||||||||||||
|
Loans
|
$ | 665 | $ | 1,082 | $ | 1,747 | ||||||
|
Investment
securities:
|
||||||||||||
|
Taxable
investments
|
(575 | ) | 1,051 | 476 | ||||||||
|
Tax
exempt investments
|
475 | 345 | 820 | |||||||||
|
Total
investment securities
|
(100 | ) | 1,396 | 1,296 | ||||||||
|
Federal
funds sold and interest-bearing balances……
|
183 | 82 | 265 | |||||||||
|
Total
income from earning assets
|
747 | 2,561 | 3,308 | |||||||||
|
Interest
expense from average interest-bearing liabilities:
|
||||||||||||
|
Savings
and interest-bearing demand deposits
|
(145 | ) | 212 | 67 | ||||||||
|
Time
Certificates of deposit
|
864 | 1,519 | 2,383 | |||||||||
|
Total
deposits
|
719 | 1,731 | 2,450 | |||||||||
|
Federal
funds purchased and repurchase agreements
|
50 | 186 | 236 | |||||||||
|
Federal
Home Loan Bank advances
|
(438 | ) | 26 | (412 | ) | |||||||
|
Other
long-term debt
|
8 | (3 | ) | 5 | ||||||||
|
Total
expense form interest-bearing liabilities
|
338 | 1,941 | 2,279 | |||||||||
|
Net
interest income
|
$ | 409 | $ | 620 | $ | 1,029 | ||||||
The
provision for loan losses recorded by the Company for 2008 was $4,366,000, an
increase of $3,866,000, or 773.2%, compared with the provision of $500,000 for
2007. Management determined an appropriate provision based on its evaluation of
the adequacy of the allowance for loan losses in relationship to a continuing
review of current collection risks within its loan portfolio, identified problem
loans, the current local and national economic conditions, actual loss
experience, regulatory policies, and industry trends. The increase in the
provision is directly attributable to increased loan charge-offs in 2008, the
size of the loan portfolio increasing by over 150% (which was primarily
attributable to the Merger) and a higher level of nonperforming assets
reflecting stress in the local and national economy.
Noninterest
Income
Noninterest
income, which includes realized gains and losses on investment securities
(including other than temporary impairments of such assets), decreased
$2,748,000, or 31.2%, for the year ended December 31, 2008 to $6,058,000. This
compares with noninterest income of $8,806,000 for 2007. The Company recognized
losses of $6,540,000 from the sale of investment securities available for sale
and from other than temporary impairment charges during the year ended December
31, 2008 compared with realized losses on sales of investment securities of only
$256,000 for the same period during 2007. Other than temporary
impairment charges recorded in 2008 of $6,194,000 were taken on certain debt
securities secured by pools of trust preferred
securities. Excluding all security losses recognized,
noninterest income was $12,598,000 for the year ended December 31, 2008 compared
with $9,062,000 for 2007, an increase of $3,536,000, or 39.0%. Trust
and investment fees increased $323,000, or 8.8%, for the year ended December 31,
2008 to $4,011,000 from $3,688,000 for the year ended December 31,
2007. This increase was due primarily to an increase in the amount of
assets under management for both the Trust Department and the Investor
Center. Service charges on deposit accounts increased $3,529,000, or
169.5%, for the year ended December 31, 2008, with much of the additional income
due to increased volume of deposit accounts as a result of the
Merger. Income from the sale of mortgage loans and servicing fees
decreased $301,000, or 24.9%, reflecting the decreased level of new mortgage
loan originations, which was offset in part by an increase in customers
refinancing mortgage loans to take advantage of overall lower market interest
rates. Depending on future interest rates, the level of refinancing
activity may change. Other service fees and commissions totaled $1,527,000 for
the year ended December 31, 2008, a decrease of $219,000, or 12.5%, compared to
the year ended December 31, 2007. This decrease was primarily due to
decreases in a number of smaller fee areas of the Company—credit life sales,
debit/credit card fees, and commissions from realty sales.
Noninterest
Expense
Noninterest
expense totaled $66,515,000 for the year ended December 31, 2008 compared with
$18,620,000 for 2007, an increase of $47,895,000, or 257.2%. Over
one-half of this increase is attributable to the write-off of
$27,295,000 of goodwill in the fourth quarter of 2008, which represented
all of the goodwill that resulted from the Merger. Salaries and employee
benefits increased $9,977,000, or 91.3%, due primarily to the Merger (increased
staffing and severance payments) and to normal annual compensation adjustments,
greater health insurance costs and increased incentives. Net
occupancy and equipment expense increased $3,107,000, or 104.3%, to $6,085,000
for the year ended December 31, 2008 from $2,978,000 for the same period in
2007. This increase resulted primarily from the Merger as well as
expenses due to two natural disasters (a Category 5 tornado and a
“once-in-500-years” flood) that impacted our Parkersburg, Waterloo and
Coralville offices. Professional and other outside services increased
$1,791,000, or 87.1%, to $3,848,000 for the year ended December 31, 2008 from
$2,057,000 for the same period in 2007. This increase resulted primarily from
the Merger as well as increased core processing costs, expenses relating to the
third-party implementation of Sarbanes-Oxley controls documentation and
increased accounting and audit fees. Other operating expense
increased $4,949,000, or 186.1%, to $7,608,000 for the year ended December 31,
2008 compared to $2,659,000 for the same period in 2007. This
increase resulted primarily from costs associated with the Merger and includes
marketing, charitable donations and public relations expense, loan collection
and legal costs, office supplies and printing costs, telecommunications expense
and the charge-off of fraudulent, forged or otherwise uncollectible items.
Income
Tax Expense
Income
taxes decreased $2,755,000 for the year ended December 31, 2008 compared with
2007 due to a decrease in the amount of pre-tax income. The Company’s
consolidated income tax rate varies from the statutory rate mainly due to the
amount of tax-exempt income and the non-deductible goodwill charge. The
effective income tax as a percentage of income before tax was 1.8% for the year
ended December 31, 2008, compared with 25.8% for 2007.
Financial
Condition
Loans
(Excluding Loan Pool Participations)
The
Company’s loan portfolio increased $613,260,000, or 152.7%, to $1,014,814,000 on
December 31, 2008 from $401,554,000 on December 31, 2007. $530,703,000 of this
increase was a result of the Merger. As of December 31, 2008, the
Company’s loan (including loan pool participations, net) to deposit ratio was
98.2%, compared with 76.3% at December 31, 2007 while its loan (excluding loan
pool participations, net) to deposit ratio as of December 31, 2008 was 90.0%
compared with 76.3% at December 31, 2007.
The
Company’s loan portfolio largely reflects the profile of the communities in
which it operates. Total commercial, financial and agricultural loans
increased $196,209,000 or 190.4%, from $103,029,000 at December 31, 2007 to
$299,238,000 at December 31, 2008. Total real estate loans (including
1-4 family residential and commercial construction) were $685,780,000 as of
December 31, 2008 compared with $288,975,000 as of December 31,
2007. Real estate loans were the Company’s largest category of loans,
comprising 67.5% of total loans at December 31, 2008 and 72.0% at December 31,
2007. Commercial, financial and agricultural loans are the next
largest category of loans at December 31, 2008, totaling $299,238,000 or 29.5%
of total loans compared with $103,029,000 or 25.7% of loans at December 31,
2007. The remaining 3.0% of the portfolio as of December 31, 2008 consisted of
$29,796,000 in consumer and other loans compared with $9,550,000 as of December
31, 2007.
The
following table shows the composition of the Company’s loan portfolio as of the
dates indicated.
|
12/31/2008
|
12/31/2007
|
12/31/2006
|
12/31/2005
|
|||||||||||||||||||||||||||||
|
% of
|
% of
|
% of
|
% of
|
|||||||||||||||||||||||||||||
|
Amount
|
Total
|
Amount
|
Total
|
Amount
|
Total
|
Amount
|
Total
|
|||||||||||||||||||||||||
| (in thousands) | ||||||||||||||||||||||||||||||||
|
Commercial,
Financial and Agricultural
|
$ | 299,238 | 29.5 | % | $ | 103,029 | 25.7 | % | $ | 89,284 | 23.6 | % | $ | 83,291 | 22.5 | % | ||||||||||||||||
|
Real
estate:
|
||||||||||||||||||||||||||||||||
|
Construction
|
99,617 | 9.8 | 28,774 | 7.2 | 31,133 | 8.2 | 34,461 | 9.3 | ||||||||||||||||||||||||
|
Mortgage
|
586,163 | 51.7 | 260,201 | 64.8 | 248,308 | 65.6 | 242,710 | 65.4 | ||||||||||||||||||||||||
|
Loans
to Individuals
|
23,857 | 2.4 | 8,895 | 2.2 | 9,475 | 2.5 | 10,126 | 2.7 | ||||||||||||||||||||||||
|
All
Other
|
5,939 | 0.6 | 655 | 0.2 | 412 | 0.1 | 261 | 0.1 | ||||||||||||||||||||||||
|
Total
loans
|
$ | 1,014,814 | 100.0 | % | $ | 401,554 | 100.0 | % | $ | 378,612 | 100.0 | % | $ | 370,849 | 100.0 | % | ||||||||||||||||
|
Total
assets
|
$ | 1,508,962 | $ | 701,983 | $ | 668,671 | $ | 669,769 | ||||||||||||||||||||||||
|
Loans
to total assets
|
67.4 | % | 57.2 | % | 56.6 | % | 55.4 | % | ||||||||||||||||||||||||
The
following table sets forth the remaining maturities for certain loan categories
as of December 31, 2008
|
Total for Loans
|
Total for Loans
|
|||||||||||||||||||||||||||||||
|
Due Within
|
Due After
|
|||||||||||||||||||||||||||||||
|
Due in
|
One Year Having:
|
One Year Having:
|
||||||||||||||||||||||||||||||
|
Due Within
|
One to
|
Due After
|
Fixed
|
Variable
|
Fixed
|
Variable
|
||||||||||||||||||||||||||
|
One Year
|
Five Years
|
Five Years
|
Total
|
Rates
|
Rates
|
Rates
|
Rates
|
|||||||||||||||||||||||||
|
(in thousands)
|
|
|||||||||||||||||||||||||||||||
|
Commercial,
Financial and Agricultural
|
$ | 170,202 | $ | 119,233 | $ | 9,803 | $ | 299,238 | $ | 40,216 | $ | 129,986 | $ | 115,467 | $ | 13,569 | ||||||||||||||||
|
Real
estate:
|
||||||||||||||||||||||||||||||||
|
Construction
|
65,380 | 33,350 | 887 | 99,617 | 43,673 | 21,707 | 20,149 | 14,088 | ||||||||||||||||||||||||
|
Mortgage
|
119,281 | 416,852 | 50,030 | 586,163 | 49,210 | 70,071 | 325,166 | 141,716 | ||||||||||||||||||||||||
|
Loans
to Inidviduals
|
5,872 | 17,426 | 559 | 23,857 | 4,329 | 1,541 | 17,829 | 158 | ||||||||||||||||||||||||
|
All
Other
|
1,026 | 3,914 | 999 | 5,939 | 936 | 92 | 2,641 | 2,270 | ||||||||||||||||||||||||
|
Total
loans
|
$ | 361,761 | $ | 590,775 | $ | 62,278 | $ | 1,014,814 | $ | 138,364 | $ | 223,397 | $ | 481,252 | $ | 171,801 | ||||||||||||||||
Loan
Pool Participations
As of
December 31, 2008, the Company had loan pool participations of $92,932,000 net
of an allowance for loan losses of $2,134,000. Loan pools are
participation interest in performing, sub-performing and non-performing loans
that have been purchased from various non-affiliated banking
organizations. The former MidWestOne has engaged in this activity
since 1988. The loan pool investment balance shown as an asset on the
Company’s Consolidated Balance Sheet represents the discounted purchase cost of
the loan pool participations. The Company acquired new loan pool
participations totaling $28,332,000 during the period from the Merger to
December 31, 2008. As of December 31, 2008, the categories of loans by
collateral type in the loan pools were commercial real estate - 55.0%,
commercial loans - 10.0%, agricultural and agricultural real estate - 7.3%,
single-family residential real estate – 12.1% and other loans – 15.6%.
The Company has minimal exposure in loan pools to consumer real estate subprime
credit or to construction and real estate development loans.
The loans
in the pools provide some geographic diversification to the Company’s balance
sheet. As of December 31, 2008, loans in the southeast region of the United
States represented approximately 39% of the total. The central region was the
next largest area with 30%, the northeast region with 23%, followed by the
northwest region with 5% and southwest with 3%. The highest
concentration of assets in any one State is in Florida at approximately 19% of
the basis total, with the next highest State level being Ohio at 9% followed by
Pennsylvania at 8%. As of December 31, 2008, approximately 59% of the
loans were contractually current or less than 90 days past-due, while 41% were
contractually past-due 90 days or more. It should be noted that many of the
loans were acquired in a contractually past due status, which is reflected in
the discounted purchase price of the loans. Performance status is monitored on a
monthly basis. The 41% contractually past-due includes loans in litigation and
foreclosed property. As of December 31, 2008, loans in litigation totaled
approximately $21,564,000, while foreclosed property was approximately
$6,479,000. As of December 31, 2008, the Company’s investment basis in
loan pool participations was approximately 53.0% of the “face” amount of the
underlying loans.
Loan
Quality
Total
loans increased 154.8% during the year ended December 31, 2008 to
$1,014,814,000. Non-performing loans as of December 31, 2008 totaled
$15,233,000 or 1.5% of total loans. This represents an increase of
$14,451,000 or 1,115.1%, when compared with the December 31, 2007 amount of
$1,296,000 or 0.32% of total loans. Non-performing loans consist of
nonaccrual loans, loans past due 90 days and still accruing, and troubled debt
restructurings. Nonaccrual loans increased $11,003,000 to a December
31, 2008 total of $11,785,000. Loans past due 90 days and over as of
December 31, 2008 totaled $3,024,000, an increase of $2,510,000 compared with
the December 31, 2007 total. While there were no troubled debt
restructurings at December 31, 2007, there was $424,000 in troubled debt
restructurings on December 31, 2008.
The
following table provides information on the Company’s non-performing loans as of
the dates indicated.
|
December 31,
|
||||||||||||||||||||
|
2008
|
2007
|
2006
|
2005
|
2004
|
||||||||||||||||
|
(in thousands)
|
|
|||||||||||||||||||
|
90
days past due
|
$ | 3,024 | $ | 514 | $ | 395 | $ | 302 | $ | 151 | ||||||||||
|
Restructured
|
424 | - | - | - | - | |||||||||||||||
|
Nonaccrual
|
11,785 | 782 | 371 | 455 | 395 | |||||||||||||||
|
Total
non-performing loans
|
$ | 15,233 | $ | 1,296 | $ | 766 | $ | 757 | $ | 546 | ||||||||||
|
Ratio
of nonperforming loans to total loans
|
1.50 | % | 0.32 | % | 0.20 | % | 0.20 | % | 0.16 | % | ||||||||||
The
allowance for loan losses was $10,977,000 on December 31, 2008 and totaled
$5,466,000 as of December 31, 2007. The allowance represented 1.08% of total
loans at December 31, 2008 and 1.36% of loans on December 31,
2007. Additions to the allowance for the year ended December 31, 2008
were the result of growth in commercial, financial and agricultural loans as
well as 1-4 family residential loans and the increase in nonperforming loans and
stress in the local and national economy. The allowance as a
percentage of non-performing loans was 72.1% on December 31, 2008 and 421.8% on
December 31, 2007. The decrease in the percentage of the allowance
relative to non-performing loans from December 31, 2007 to December 31, 2008
reflects the increase in nonaccrual loans mentioned earlier. Net loan
charge offs were $4,333,000 or 0.43% of loans for the year ended December 31,
2008. This compares with net loan charge-offs of $332,000 or 0.08% of
loans for the year ended December 31, 2007. The allowance for loan
losses is maintained at a level considered by management to be adequate to
provide for loan losses inherent in the portfolio at the balance sheet
date.
The
following table sets forth loans charged-off and recovered by the type of loan
and an analysis of the allowance for loan losses for the years
indicated.
|
Year ended December 31,
|
||||||||||||||||||||
|
2008
|
2007
|
2006
|
2005
|
2004
|
||||||||||||||||
|
(in thousands)
|
|
|||||||||||||||||||
|
Amount
of loans outstanding at end of period (net of unearned
interest) (1)
|
$ | 1,014,814 | $ | 401,554 | $ | 378,612 | $ | 370,849 | $ | 335,551 | ||||||||||
|
Average
amount of loans outstanding for the period (net of unearned
interest)
|
$ | 893,451 | $ | 390,862 | $ | 379,554 | $ | 354,169 | $ | 336,190 | ||||||||||
|
Allowance
for loan losses at beginning of period
|
$ | 5,466 | $ | 5,298 | $ | 5,227 | $ | 4,894 | $ | 5,553 | ||||||||||
|
Charge-offs:
|
||||||||||||||||||||
|
Commercial,
Financial and Agricultural
|
2,944 | 356 | 413 | 29 | 613 | |||||||||||||||
|
Real
estate:
|
||||||||||||||||||||
|
Construction
|
780 | - | - | - | - | |||||||||||||||
|
Mortgage
|
922 | 36 | 63 | 99 | 241 | |||||||||||||||
|
Loans
to Individuals
|
276 | 88 | 106 | 36 | 103 | |||||||||||||||
|
All
Other
|
- | - | - | 11 | 10 | |||||||||||||||
|
Total
charge-offs
|
4,922 | 480 | 582 | 175 | 967 | |||||||||||||||
|
Recoveries:
|
||||||||||||||||||||
|
Commercial,
Financial and Agricultural
|
274 | 120 | 34 | 129 | 51 | |||||||||||||||
|
Real
estate:
|
||||||||||||||||||||
|
Construction
|
3 | - | - | - | - | |||||||||||||||
|
Mortgage
|
85 | - | 29 | 46 | 24 | |||||||||||||||
|
Loans
to Individuals
|
227 | 28 | 40 | 31 | 37 | |||||||||||||||
|
All
Other
|
- | - | - | 2 | 1 | |||||||||||||||
|
Total
recoveries
|
589 | 148 | 103 | 208 | 113 | |||||||||||||||
|
Net
loans charged off (recovered)
|
4,333 | 332 | 479 | (33 | ) | 854 | ||||||||||||||
|
Provision
for loan losses
|
4,366 | 500 | 550 | 300 | 195 | |||||||||||||||
|
Allowance
from acquired bank
|
5,478 | - | - | - | - | |||||||||||||||
|
Allowance
for loan losses at end of period
|
$ | 10,977 | $ | 5,466 | $ | 5,298 | $ | 5,227 | $ | 4,894 | ||||||||||
|
Net
loans charged off (recovered) to average loans
|
0.48 | % | 0.08 | % | 0.13 | % | (0.01 | ) % | 0.26 | % | ||||||||||
|
Allowance
for loan losses to total loans at end of period
|
1.08 | % | 1.36 | % | 1.40 | % | 1.41 | % | 1.46 | % | ||||||||||
(1) Loans
do not include, and the allowance for loan losses does not include, loan pool
participations.
The
Company has allocated the allowance for loan losses to provide for loan losses
within the categories of loans set forth in the table below. The allocation of
the allowance and the ratio of loans within each category to total loans as of
December 31 are as follows:
|
2008
|
2007
|
2006
|
2005
|
2004
|
||||||||||||||||||||||||||||||||||||
|
Percent of
|
Percent of
|
Percent of
|
Percent of
|
Percent of
|
||||||||||||||||||||||||||||||||||||
|
Loans to
|
Loans to
|
Loans to
|
Loans to
|
Loans to
|
||||||||||||||||||||||||||||||||||||
|
Allowance
|
Total
|
Allowance
|
Total
|
Allowance
|
Total
|
Allowance
|
Total
|
Allowance
|
Total
|
|||||||||||||||||||||||||||||||
|
Amount
|
Loans
|
Amount
|
Loans
|
Amount
|
Loans
|
Amount
|
Loans
|
Amount
|
Loans
|
|||||||||||||||||||||||||||||||
| (in thousands) | ||||||||||||||||||||||||||||||||||||||||
|
Commercial,
Financial and Agricultural
|
$ | 3,127 | 28.5 | % | $ | 1,663 | 30.4 | % | $ | 2,389 | 23.6 | % | $ | 2,299 | 22.5 | % | $ | 2,117 | 20.7 | % | ||||||||||||||||||||
|
Real
estate:
|
||||||||||||||||||||||||||||||||||||||||
|
Construction
|
791 | 7.2 | % | 408 | 7.5 | % | 553 | 8.2 | 589 | 9.3 | 604 | 10.0 | ||||||||||||||||||||||||||||
|
Mortgage
|
1,394 | 12.7 | % | 3,063 | 56.0 | % | 2,258 | 65.6 | 2,189 | 65.4 | 2,004 | 66.1 | ||||||||||||||||||||||||||||
|
Loans
to Individuals
|
187 | 1.7 | % | 300 | 5.5 | % | 98 | 2.5 | 126 | 2.7 | 163 | 3.1 | ||||||||||||||||||||||||||||
|
All
Other
|
- | - | 32 | 0.6 | % | - | 0.1 | 24 | 0.1 | 6 | 0.1 | |||||||||||||||||||||||||||||
|
Allowance
from acquired bank
|
5,478 | 49.9 | % | |||||||||||||||||||||||||||||||||||||
|
Total
|
$ | 10,977 | 100.0 | % | $ | 5,466 | 100 | % | $ | 5,298 | 100.0 | % | $ | 5,227 | 100.0 | % | $ | 4,894 | 100.0 | % | ||||||||||||||||||||
The
allowance for loan losses increased $5,511,000 in 2008. Of the $5,511,000
increase, $5,478,000 represented the allowance brought to the merger from the
acquired bank. Provisions for loan losses totaled $4,366,000 in 2008 and
slightly exceeded net loans charged off during the year of
$4,333,000.
Watch
loans increased by $34.2 million from December 31, 2007 to 2008 and totaled
$53.4 million. Again, the increase was primarily tied to the acquired bank’s
Watch totals being included in the 2008 figure. For comparison purposes,
the Watch loan totals for the former ISB Financial Corp and MidWestOne Financial Group, Inc combined at year end
2007 was $51.6 million. Using this same comparison, noteworthy changes in Watch
loans as of December 31, 2008 are as follows: agricultural loans decreased from
$13.6 to $6.4 million, commercial loans increased from $8.2 to $11.4 million,
and commercial real estate loans (including construction and development)
increased from $18.4 to $23.0 million.
Substandard
loans increased by $53.1 million from December 31, 2007 to 2008 and totaled
$61.2 million. Again, the acquired bank’s Substandard totals being included in
the 2008 figure played a part in the increase; however, a majority of the jump
was due to management’s evaluation of its loan portfolio and the recognition of
the uncertain economic times. For comparison purposes, the Substandard loan
totals for the former ISB Financial Corp. and MidWestOne Financial Group, Inc combined at year end
2007 was $18.7 million. Using this same comparison, noteworthy changes in
Substandard loans as of December 31, 2008 are as follows: agricultural loans
increased from $2.7 to $8.7 million, commercial loans increased from $6.1 to
$14.6 million, commercial real estate loans (including construction and
development) increased from $6.0 to $28.5 million, and residential real estate
loans increased from $2.9 to $7.7 million.
The
subprime mortgage banking environment has been experiencing considerable strain
from rising delinquencies and liquidity pressures and some subprime mortgage
lenders have failed. The increased scrutiny of the subprime lending market and
heightened perceptions of the risks associated with bank loan portfolios are
factors that have had a negative impact on general market conditions. The
Company’s underwriting standards have been structured to limit exposure to the
types of loans that are currently experiencing high foreclosures and loss rates.
Management believes that the Company’s mortgage loan portfolio has minimal
exposure to loans generally considered to be subprime loans.
In
addition, there has been a slowdown in the housing market in the Company’s trade
area. This has been evidenced by reduced levels of new and existing home sales,
stagnant to declining property values, a decline in building permits, and an
increase in the time houses remain on the market. The Company will continue to
monitor adequacy of the allowance on a quarterly basis and will consider the
impact of economic conditions on the borrowers’ ability to repay, loan
collateral values, past collection experience, the risk characteristics of the
loan portfolio and such other factors that deserve current
recognition.
Investment
Securities
The
Company manages its investment portfolio to provide both a source of liquidity
and earnings. The portfolio largely consisted of U.S. Government
agency securities, corporate securities, mortgage-backed securities, and
municipal bonds. Investment securities available for sale totaled
$272,380,000 on December 31, 2008 compared to $232,125,000 at December 31,
2007. The Company’s investment in available for sale securities
balances increased moderately with the Merger. Securities classified
as held to maturity increased to a balance of $8,125,000 on December 31, 2008,
up from $95,000 at December 31, 2007; this increase also a result of the
Merger.
See Note 2 “Investment Securities,” and
Note 14 “Estimated
Fair Values of Financial
Instruments and Fair Value Measurements” for additional information related to
the investment portfolio.
Our investment portfolio includes
$3,552,187 in pooled trust preferred collateralized debt obligations that are
backed by trust preferred securities issued by banks, thrifts and insurance companies. The market
for these securities at December 31, 2008 was not active and markets for similar
securities are also not active. The valuation of these securities
involves evaluating all relevant credit and structural aspects, determining
appropriate performance assumptions and performing a discounted cash flow
analysis. This evaluation includes detailed credit, performance and structural
evaluations for each piece of collateral. Other factors in the valuation include
terms of the structure, the cash flow waterfall (for both interest and
principal), the over collateralization test and events of
default/liquidation.
Based on our cash flow analysis, we determined that
all contractual cash flows may not be received, and a $6,194,000
other-than-temporary impairment charge was recorded at December 31,
2008. Any
future deferrals or defaults for our pooled trust preferred
collateralized debt obligations could result in an additional
other-than-temporary impairment charge.
The
following table sets forth certain information with respect to the book value of
the Company’s investment portfolio.
|
Book
value:
|
||||||||||||||||||||
|
December 31,
|
||||||||||||||||||||
|
2008
|
2007
|
2006
|
2005
|
2004
|
||||||||||||||||
|
(in
thousands)
|
|
|||||||||||||||||||
|
Securities
available for sale:
|
||||||||||||||||||||
|
U.S.
treasury
|
$ | - | $ | - | $ | - | $ | 1,982 | $ | 3,960 | ||||||||||
|
U.S.
government agency securities and corporations
|
73,600 | 66,891 | 85,462 | 69,800 | 76,017 | |||||||||||||||
|
States
and political subdivisions
|
113,843 | 82,412 | 69,744 | 64,529 | 66,059 | |||||||||||||||
|
Mortgage-backed
and collateralized mortgage obligations
|
73,077 | 69,128 | 76,973 | 99,731 | 108,335 | |||||||||||||||
|
Other
securities
|
11,860 | 13,694 | 7,307 | 1,116 | 965 | |||||||||||||||
|
Total
securities available for sale
|
272,380 | 232,125 | 239,486 | 237,158 | 255,336 | |||||||||||||||
|
Securities
held to maturity:
|
||||||||||||||||||||
|
U.S.
treasury
|
- | - | - | - | - | |||||||||||||||
|
U.S.
government agency securities and corporations
|
- | - | - | - | - | |||||||||||||||
|
States
and political subdivisions
|
8,029 | 95 | 113 | 175 | 242 | |||||||||||||||
|
Mortgage-backed
and collateralized mortgage obligations
|
96 | - | - | - | - | |||||||||||||||
|
Other
securities
|
- | - | - | - | - | |||||||||||||||
|
Total
securities held to maturity
|
8,125 | 95 | 113 | 175 | 242 | |||||||||||||||
|
Total
investment securities
|
$ | 280,505 | $ | 232,220 | $ | 239,599 | $ | 237,333 | $ | 255,578 | ||||||||||
The
following table sets forth the contractual maturities of investment securities
as of December 31, 2008, and the weighted average yields (for tax-exempt
obligations on a fully tax-equivalent basis assuming a 34% tax rate) of such
securities. As of December 31, 2008, the Company held no securities with a book
value exceeding 10% of shareholders’ equity.
|
Maturity
|
||||||||||||||||||||||||||||||||
|
After One but
|
After Five but
|
|||||||||||||||||||||||||||||||
|
Within One Year
|
Within Five Years
|
Within Ten Years
|
After Ten Years
|
|||||||||||||||||||||||||||||
|
Amount
|
Yield
|
Amount
|
Yield
|
Amount
|
Yield
|
Amount
|
Yield
|
|||||||||||||||||||||||||
|
(dollars in thousands)
|
||||||||||||||||||||||||||||||||
|
Securities
available for sale:
|
||||||||||||||||||||||||||||||||
|
U.S.
government agency securities and corporations
|
$ | 10,174 | 4.26 | % | $ | 52,494 | 4.69 | % | $ | 10,751 | 5.07 | % | $ | - | - | % | ||||||||||||||||
|
States
and political subdivisions
|
14,518 | 5.18 | 46,864 | 5.10 | 44,432 | 5.09 | 10,777 | 5.21 | ||||||||||||||||||||||||
|
Mortgage-backed
and
|
||||||||||||||||||||||||||||||||
|
collateralized
mortgage obligations
|
507 | 4.36 | 13,980 | 4.08 | 12,387 | 5.26 | 46,055 | 5.23 | ||||||||||||||||||||||||
|
Other
securities
|
999 | 5.00 | 7,593 | 4.59 | - | - | 850 | 3.24 | ||||||||||||||||||||||||
|
Total
securities available for sale
|
26,197 | 4.80 | 120,931 | 4.77 | 67,570 | 5.12 | 57,682 | 5.20 | ||||||||||||||||||||||||
|
Securities
held to maturity:
|
||||||||||||||||||||||||||||||||
|
Mortgage-backed
and
|
||||||||||||||||||||||||||||||||
|
collateralized
mortgage obligations
|
- | - | - | - | - | - | 96 | 6.01 | ||||||||||||||||||||||||
|
Obligations
of states and political
|
||||||||||||||||||||||||||||||||
|
subdivisions
|
1,541 | 5.13 | 5,794 | 5.41 | 694 | 5.79 | - | - | ||||||||||||||||||||||||
|
Total
securities held to maturity
|
1,541 | 5.13 | 5,794 | 5.41 | 694 | 5.79 | 96 | 6.01 | ||||||||||||||||||||||||
|
Total
investment securities
|
$ | 27,738 | 4.82 | % | $ | 126,726 | 4.80 | % | $ | 68,264 | 5.12 | % | $ | 57,778 | 5.20 | % | ||||||||||||||||
Goodwill
and Other Intangible Assets
Goodwill
and intangible assets totaled $13,424,000 and $4,356,000 at December 31, 2008
and 2007. During 2008, the Company acquired the former MidWestOne and recognized goodwill and other
intangible assets in connection with the merger of $22,940,000 and $13,203,000,
respectively. Given the extreme volatility in the banking industry
and the price of banking stocks, including our common stock, we performed an
impairment analysis as a result of the decline in our stock to prices
significantly below our book value. As a result, we recorded a goodwill
impairment charge of $27,295,000, which represented all of our goodwill at
December 31, 2008. We recorded no impairment charges during 2008 related
to our other intangible assets. Other intangible assets declined during
the year ended December 31, 2008 to $13,424,000, primarily related to core
deposit amortization during the year.
Deposits
Total
deposits were $1,128,189,000 on December 31, 2008 compared with $526,615,000 as
of December 31, 2007, an increase of $601,574,000 or 114.2%. Deposit
growth occurred almost equally between the savings and interest bearing demand
deposits category and the time certificates of deposit category. As
of December 31, 2008, time certificates of deposit were the largest component of
the Company’s deposit base representing approximately 49.3% of total
deposits. This compares with 46.5% of total deposits on December 31,
2007. Savings and interest-bearing demand deposits were the next
largest category at 39.7%, while noninterest-bearing demand deposits comprised
11.0% of total deposits at December 31, 2008.
|
December 31,
|
||||||||||||||||||||||||||||||||||||||||
|
2008
|
2007
|
2006
|
2005
|
2004
|
||||||||||||||||||||||||||||||||||||
|
Average
|
Average
|
Average
|
Average
|
Average
|
||||||||||||||||||||||||||||||||||||
|
Balance
|
Rate
|
Balance
|
Rate
|
Balance
|
Rate
|
Balance
|
Rate
|
Balance
|
Rate
|
|||||||||||||||||||||||||||||||
|
(in
thousands)
|
|
|||||||||||||||||||||||||||||||||||||||
|
Non-interest
bearing demand deposits
|
$ | 118,764 | N/A | $ | 63,463 | N/A | $ | 62,650 | N/A | $ | 70,642 | N/A | $ | 75,306 | N/A | |||||||||||||||||||||||||
|
Savings
and interest-bearing demand (NOW and money
market)
|
392,603 | 1.40 | % | 193,044 | 1.61 | % | 205,074 | 1.48 | % | 193,981 | 0.92 | % | 180,070 | 0.62 | % | |||||||||||||||||||||||||
|
Time
deposits
|
502,220 | 3.51 | 248,377 | 4.71 | 228,309 | 4.08 | 210,069 | 3.05 | 206,786 | 2.57 | ||||||||||||||||||||||||||||||
|
Total
deposits
|
$ | 1,013,587 | 2.28 | % | $ | 504,884 | 2.93 | % | $ | 496,033 | 2.49 | % | $ | 474,692 | 1.73 | % | $ | 462,162 | 1.39 | % | ||||||||||||||||||||
The
following table summarizes certificates of deposit in amounts of $100,000 or
more by time remaining until maturity. These time deposits were made
by individuals, corporations and public entities, all of which were located in
the Company’s market area or were State of Iowa public funds.
|
December 31,
|
December 31,
|
December 31,
|
||||||||||
|
2008
|
2007
|
2006
|
||||||||||
|
(in thousands)
|
|
|
|
|||||||||
|
Three
months or less
|
$ | 41,732 | $ | 24,522 | $ | 19,689 | ||||||
|
Over
three through six months
|
24,930 | 21,328 | 15,747 | |||||||||
|
Over
six months through one year
|
48,244 | 23,778 | 22,574 | |||||||||
|
Over
one year
|
38,415 | 8,311 | 12,220 | |||||||||
|
Total
|
$ | 153,321 | $ | 77,939 | $ | 70,230 | ||||||
Federal
Home Loan Bank Advances and Other Borrowings
As of
December 31, 2008, the Company’s subsidiary bank had borrowed $158,782,000 in
fixed-rate advances from the Federal Home Loan Bank of Des
Moines. Advances from the Federal Home Loan Bank at December 31, 2008
increased $111,782,000 from December 31, 2007 primarily the result of the Merger
but also to take advantage of the lower interest rate
environment. The Company utilizes Federal Home Loan Bank advances as
an alternate source of funds to supplement deposits.
The
following table summarizes the outstanding amount of and the average rate on
borrowed funds as of December 31, 2008, 2007 and 2006
|
December
31,
|
||||||||||||||||||||||||
|
2008
|
2007
|
2006
|
||||||||||||||||||||||
|
Average
|
Average
|
Average
|
||||||||||||||||||||||
|
Balance
|
Rate
|
Balance
|
Rate
|
Balance
|
Rate
|
|||||||||||||||||||
|
(in
thousands)
|
|
|||||||||||||||||||||||
|
Federal
Home Loan Bank advances
|
$ | 158,782 | 4.21 | % | $ | 47,000 | 4.05 | % | $ | 46,020 | 4.44 | % | ||||||||||||
|
Long-term
debt
|
15,640 | 5.02 | - | - | - | - | ||||||||||||||||||
|
Federal
funds purchased and repurchase agreements
|
57,299 | 0.92 | 45,997 | 3.11 | 51,929 | 3.72 | ||||||||||||||||||
|
Total
|
$ | 231,721 | 3.45 | % | $ | 92,997 | 3.59 | % | $ | 97,949 | 4.06 | % | ||||||||||||
The
maximum amount of borrowed funds outstanding at any month end for the years
ended December 31, 2008, 2007 and 2006
|
December 31,
|
||||||||||||
|
2008
|
2007
|
2006
|
||||||||||
|
(in
thousands)
|
|
|||||||||||
|
Federal
Home Loan Bank advances
|
$ | 159,100 | $ | 48,500 | $ | 62,700 | ||||||
|
Long-term debt
|
15,640 | - | - | |||||||||
|
Federal
funds purchased and repurchase agreements..
|
60,762 | 58,749 | 53,949 | |||||||||
|
Total
|
$ | 235,502 | $ | 107,249 | $ | 116,649 | ||||||
The
following table sets forth the average amount of and the average rate paid on
borrowed funds for the years months ended ended December 31, 2008, 2007 and
2006.
|
Year ended December 31,
|
||||||||||||||||||||||||
|
2008
|
2007
|
2006
|
||||||||||||||||||||||
|
Average
|
Average
|
Average
|
Average
|
Average
|
Average
|
|||||||||||||||||||
|
Balance
|
Rate
|
Balance
|
Rate
|
Balance
|
Rate
|
|||||||||||||||||||
|
(in
thousands)
|
|
|||||||||||||||||||||||
|
Federal
Home Loan Bank advances
|
$ | 154,218 | 3.47 | % | $ | 44,181 | 4.58 | % | $ | 53,730 | 4.53 | % | ||||||||||||
|
Long-term debt
|
12,337 | 5.02 | - | - | - | - | ||||||||||||||||||
|
Federal
funds purchased and repurchase agreements
|
60,366 | 1.87 | 49,629 | 4.26 | 48,378 | 3.88 | ||||||||||||||||||
|
Total
|
$ | 226,921 | 3.13 | % | $ | 93,810 | 4.41 | % | $ | 102,108 | 4.22 | % | ||||||||||||
Contractual
Obligations and Other Commitments
The
following table summarizes contractual obligations and other commitments as of
December 31, 2008:
|
Payments
due by Period:
|
||||||||||||||||||||
|
Less than
|
1 to 3
|
3 to 5
|
More than
|
|||||||||||||||||
|
Contractual obligations
|
Total
|
1 year
|
years
|
years
|
5 years
|
|||||||||||||||
| (in thousands) |
|
|||||||||||||||||||
|
Time certificates of
deposit
|
$ | 556,271 | $ | 377,416 | $ | 142,860 | $ | 35,036 | $ | 959 | ||||||||||
|
Federal
funds purchased and repurchase agreements
|
57,299 | 57,299 | - | - | - | |||||||||||||||
|
Federal
Home Loan Bank Advances
|
158,782 | 55,482 | 89,000 | 14,300 | - | |||||||||||||||
|
Long-term
debt
|
15,640 | - | - | - | 15,640 | |||||||||||||||
|
Lines
of Credit
|
147,997 | 96,902 | 22,088 | 4,735 | 24,272 | |||||||||||||||
|
Noncancelable
operating leases and capital
|
||||||||||||||||||||
|
lease
obligations
|
321 | 34 | 71 | 77 | 139 | |||||||||||||||
|
Total
|
$ | 936,310 | $ | 587,133 | $ | 254,019 | $ | 54,148 | $ | 41,010 | ||||||||||
Amount
of Commitment - Expiration by Period:
|
Commitments
to lend to borrowers
|
$ | 168,047 | $ | 115,586 | $ | 52,461 | $ | - | $ | - | ||||||||||
|
Commitments
to purchase loans
|
9,188 | 9,188 | - | - | - | |||||||||||||||
|
Standy
letters of credit
|
5,303 | 4,088 | 1,215 | - | - | |||||||||||||||
|
Total
|
$ | 182,538 | $ | 128,862 | $ | 53,676 | $ | - | $ | - |
Capital
Resources
The
Company issued 3,519,788 shares of common stock to shareholders of the Former
MidWestOne on March 14,
2008, in connection with the Merger. The market value of the transaction
was $81.8 million based on a per share price of Company common stock of $23.23.
This per share price was determined utilizing the median price to book of
a peer group of publicly-traded Midwestern banking organizations as of the date
the merger agreement was executed by the Company and the Former MidWestOne.
This peer group median price of 159% of book was applied to the Company’s
book value as of the merger announcement date to determine the per share price,
as the Company’s common stock was not listed on a national securities exchange
and was not registered with the SEC prior to the Merger. In the
Merger, the Company also issued stock options to the holders of the outstanding
options to acquire shares of Former MidWestOne common stock. The fair
value of the new options is determined to be a component of the purchase price
with the amount of $2.4 million added to shareholders’ equity. A total of
393,404 stock options were issued by the Company.
As of
December 31, 2008, total shareholders’ equity was $130,342,000. Total
equity increased by $52,950,000 during the year ended December 31, 2008 from
$77,392,000 at December 31, 2007, primarily as a result of the issuance of
3,519,788 shares of Company common stock in the Merger. The increase
in total shareholders’ equity resulting from the issuance of newly-issued shares
in the merger was offset to a significant extent by the following three items:
(i) a non-cash goodwill impairment charge of $27.3 million in the fourth quarter
of 2008; (ii) the recognition of an “other than temporary impairment” charge of
$6.2 million (on a pre-tax basis) on the Company’s investment portfolio in the
fourth quarter of 2008; and (iii) a $2.4 million reduction to shareholders’
equity necessary to reflect the amount by which the Company’s defined benefit
pension plan became underfunded in 2008 due to a decline in the value of the
plan’s investment portfolio during the year.
Shareholders’
equity as a percentage of total assets was 8.6% on December 31, 2008, versus
11.0% on December 31, 2007. Tangible shareholders’ equity as a
percentage of total assets was 7.8% at December 31, 2008 and 10.5% at December
31, 2007. Tangible equity is the ratio of shareholders’ equity less
goodwill and other intangible assets in proportion to total assets less goodwill
and intangible assets. The decline in shareholders’ equity as a
percentage of total assets is primarily attributable to the three adjustments
referred to in the preceding paragraph (goodwill impairment,
other-than-temporary impairment charge to investment portfolio, and adjustment
to reflect underfunded status of defined benefit pension plan). The
decline in tangible shareholders’ equity to total assets is primarily
attributable to the three aforementioned charges/adjustments as well as to the
recognition of intangibles (other than goodwill) of approximately $13.4 million
in connection with the Merger.
The
Company’s Tier 1 risk-based capital ratio was 10.24% as of December 31, 2008,
and the total risk-based capital ratio was 11.27%. 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. Tier 1 capital is the Company’s total
common shareholders’ equity reduced by goodwill, plus the capital attributable
to the trust preferred securities issued by a subsidiary trust of the
Company. Total capital adds the allowance for loan losses to the Tier
1 capital amount. As of December 31, 2007, the Company’s Tier 1
risk-based capital ratio was 15.35%, and the total risk-based capital ratio was
16.49%. The Company’s Tier 1 risk-based capital ratio and total
risk-based capital ratios as of December 31, 2008 exceeded the minimum
regulatory requirements to be considered “well-capitalized” of 6.0% and 10.0%,
respectively. The Company’s Tier 1 leverage ratio, which measures
Tier 1 capital in relation to average total assets, was 8.72% as of December 31,
2008 and 10.67% at December 31, 2007, exceeding the regulatory minimum
requirement to be considered “well-capitalized” of 5.0%.
The
Company’s common stock book value per share was $15.15 at December 31, 2008,
which compares with $14.98 per share at December 31, 2007. Tangible
book value per share was $13.58 on December 31, 2008 compared with $14.14 on
December 31, 2007.
As
previously discussed, on February 6, 2009, the Company completed the sale of
16,000 shares of Series A Preferred Stock and a warrant to acquire 198,675
shares of Company common stock to Treasury pursuant to the Capital Purchase
Program for an aggregate purchase price of $16 million. The proceeds
of this transaction qualify as Tier 1 capital. The following table
shows the pro forma effects on capital and our regulatory capital ratios of our
participation in the Capital Purchase Program as of December 31, 2008.
|
Actual
|
Pro Forma
|
Minimum to Be
|
||||||||||
|
December 31, 2008
|
December 31, 2008
|
“Well-Capitalized”
|
||||||||||
|
Total Tier 1 Capital
|
$130,896
|
$146,896
|
N/A
|
|||||||||
|
Total Tier 2
Capital
|
13,115
|
13,115
|
N/A
|
|||||||||
|
Total
Capital
|
144,011
|
160,011
|
N/A
|
|||||||||
|
|
||||||||||||
|
Tier
1 Leverage Ratio
|
8.72%
|
9.69%
|
5.00%
|
|||||||||
|
Tier
1 Risk-Based Ratio
|
10.24%
|
11.35%
|
6.00%
|
|||||||||
|
Total
Risk-Based Ratio
|
11.27%
|
12.36%
|
10.00%
|
|||||||||
Liquidity
and Funding
Liquidity
management involves the ability to meet the cash flow requirements of depositors
and borrowers. Liquidity management is conducted by the Company on both a daily
and long-term basis. The Company adjusted its investments in liquid assets based
upon management’s assessment of expected loan demand, projected loan sales,
expected deposit flows, yields available on interest-bearing deposits, and the
objectives of its asset/liability management program. Excess liquidity was
invested generally in short-term U.S. Government and agency securities,
short-term state and political subdivision securities, and other investment
securities.
Liquid
assets of cash on hand, balances due from other banks, and federal funds sold
were maintained to meet customer needs. The Company had liquid assets of
$32,926,000 as of December 31, 2008, compared with $34,220,000 as of
December 31, 2007. Investment securities classified as available for
sale and loans maturing within one year totaled $387,958,000 and $167,285,000 as
of December 31, 2008 and December 31, 2007, respectively. Assets
maturing within one year, combined with liquid assets, were 37.3% of total
deposits at December 31, 2008 and 38.3% of total deposits at December 31,
2007.
The
Company’s principal sources of funds were deposits, advances from the Federal
Home Loan Bank, principal repayments on loans, proceeds from the sale of loans,
proceeds from the maturity and sale of investment securities, its commercial
bank line of credit, 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. The
Company utilized particular sources of funds based on comparative costs and
availability. This included fixed-rate advances from the Federal Home Loan Bank
that were obtained at a more favorable cost than deposits. The Company generally
managed the pricing of its deposits to maintain a steady deposit base but had
from time to time decided not to pay rates on deposits as high as its
competition.
The
Company previously had an outstanding $5 million credit facility with a
correspondent lender (which the Company assumed from the Former MidWestOne in
the Merger). The credit facility matured on June 30, 2008, at which time no
amounts were outstanding thereunder. The Company elected not to renew the credit
facility; thus, it no longer existed as of December 31, 2008.
As of December 31, 2008, the Company had $15,640,000 of long-term
debt outstanding. This amount represents amounts indebtedness payable under
junior subordinated debentures issued to a subsidiary trust that issued trust
preferred securities in a pooled offering. The junior subordinated debentures
have a 35-year term. One-half of the balance has a fixed interest rate of 6.48
percent until December 15, 2012; the other one-half has a variable rate of
three-month LIBOR plus 1.59 percent.
Net cash
provided by operations was another major source of liquidity. The net cash
provided by operating activities was $1,626,000 through the year ended December
31, 2008 and $7,315,000 for the year ended December 31, 2007.
As of
December 31, 2008, the Company had outstanding commitments to extend credit to
borrowers of $168,047,000, issued standby letters of credit of $5,303,000 and
had commitments to sell loans of $5,279,000. Certificates of deposit
maturing in one year or less totaled $375,826,000 as of December 31,
2008. Management believes that a significant portion of these
deposits will remain with the Company.
Asset
and Liability Management
The
Company’s strategy with respect to asset-liability management was to maximize
net interest income while limiting exposure to risks associated with volatile
interest rates. This strategy was implemented by the Banks’ asset/liability
committees that took action based upon its analysis of expected changes in the
composition and volumes of the balance sheet and the fluctuations in market
interest rates. One of the measures of interest-rate sensitivity is the gap
ratio. This ratio indicates the amount of interest-earning assets repricing
within a given period in comparison to the amount of interest-bearing
liabilities repricing within the same period of time. A gap ratio of 1.0
indicates a matched position, in which case the effect on net interest income
due to interest rate movements will be minimal. A gap ratio of less than 1.0
indicates that more liabilities than assets reprice within the time period and a
ratio greater than 1.0 indicates that more assets reprice than liabilities.
As of
December 31, 2008, the Company’s cumulative gap ratios for assets and
liabilities repricing within three months and within one year were 1.03 and 1.02
respectively, meaning slightly more assets than liabilities were repriceable
within these periods. The positive gap position was largely the result of the
significant number of prime-based commercial and agricultural loans now in the
Company’s portfolio and the inclusion of only 25% of the interest-bearing demand
deposit accounts, money market accounts, and savings accounts as immediately
repriceable.
The
following table sets forth the scheduled repricing or maturity of the Company’s
consolidated assets and liabilities as of December 31, 2008, based on the
assumptions described below. The effect of these assumptions is to quantify the
dollar amount of items that are interest rate sensitive and can be repriced
within each of the periods specified. The table does not necessarily indicate
the impact of general interest rate movements on the Company’s interest margin
because the repricing of certain categories of assets and liabilities is subject
to competitive and other pressures beyond the Company’s control. As a result,
certain assets and liabilities indicated as maturing or otherwise repricing
within a stated period may, in fact, mature or reprice at different times and at
different volumes.
|
Three
|
Over Three
|
One to
|
Three
|
|||||||||||||||||
|
Months
|
Months
|
Three
|
Years
|
|||||||||||||||||
|
or Less
|
to One Year
|
Years
|
or More
|
Total
|
||||||||||||||||
|
(in
thousands)
|
|
|||||||||||||||||||
|
Interest
earning assets:
|
||||||||||||||||||||
|
Loans
|
$ | 313,294 | $ | 245,814 | $ | 386,371 | $ | 168,855 | $ | 1,114,334 | ||||||||||
|
Investment
securities:
|
||||||||||||||||||||
|
Taxable
investments
|
40,001 | 46,489 | 75,556 | 29,178 | 191,224 | |||||||||||||||
|
Tax
exempt investments
|
4,300 | 13,700 | 28,337 | 54,115 | 100,452 | |||||||||||||||
|
Total
investment securities
|
44,301 | 60,189 | 103,893 | 83,293 | 291,676 | |||||||||||||||
|
Federal
funds sold and interest-bearing balances
|
543 | - | - | - | 543 | |||||||||||||||
|
Total
interest earning assets
|
358,138 | 306,003 | 490,264 | 252,148 | 1,406,553 | |||||||||||||||
|
Interest-bearing
liabilities:
|
||||||||||||||||||||
|
Savings
and interest-bearing demand deposits
|
161,731 | - | 88,860 | 329,701 | 580,292 | |||||||||||||||
|
Time
Certificates of deposit
|
130,281 | 244,351 | 144,359 | 35,838 | 554,829 | |||||||||||||||
|
Total
deposits
|
292,012 | 244,351 | 233,219 | 365,539 | 1,135,121 | |||||||||||||||
|
Federal
funds purchased and repurchase agreements
|
55,743 | 56,257 | - | - | 112,000 | |||||||||||||||
|
Federal
Home Loan Bank advances
|
- | - | 84,000 | 19,300 | 103,300 | |||||||||||||||
|
Other
long-term debt
|
- | - | - | 18,329 | 18,329 | |||||||||||||||
|
Total
interest-bearing liabilities
|
347,755 | 300,608 | 317,219 | 403,168 | 1,368,750 | |||||||||||||||
|
Interest
sensitivity gap per period
|
$ | 10,383 | $ | 5,395 | $ | 173,045 | $ | (151,020 | ) | |||||||||||
|
Cumulative
Interest sensitivity gap
|
$ | 10,383 | $ | 15,778 | $ | 188,823 | $ | 37,803 | ||||||||||||
|
Interest
sensitivity gap ratio
|
1.03 | 1.02 | 1.55 | 0.63 | ||||||||||||||||
|
Cumulative
Interest sensitivity gap ratio
|
1.03 | 1.02 | 1.20 | 1.03 | ||||||||||||||||
In the
table above, NOW accounts and savings deposits are allocated across the
repricing buckets based on deposit studies of account behavior.
Recent
Accounting Pronouncements
Statements
of Financial Accounting Standards
In December 2007, the FASB issued SFAS
No. 160, Noncontrolling
Interests in Consolidated Financial Statements – an amendment of ARB No.
51 (“SFAS No. 160”).
The objective of this statement is to improve the relevance, comparability and
transparency of the financial information that a reporting entity provides in
its consolidated financial statements by establishing accounting and reporting
standards. SFAS No. 160 is effective for fiscal years beginning after December
15, 2008. We do not anticipate that the adoption of SFAS No. 160 will have
a material impact on our consolidated financial statements.
In December 2007, the FASB issued SFAS
No. 141R, Business
Combinations (“SFAS No.
141R”). The objective of this statement is to improve the relevance,
representational faithfulness and comparability of the information that a
reporting entity provides in its financial reports about a business combination
and its effects. SFAS No. 141R establishes principles and requirements for
how the acquirer recognizes and measures in its financial statements the
identifiable assets acquired, the liabilities assumed and any noncontrolling
interest in the acquiree, recognizes and measures the goodwill acquired in the
business combination or a gain from a bargain purchase and determines what
information to disclose to enable users of the financial statements to evaluate
the nature and financial effects of the business combination. SFAS No.
141R applies prospectively to business combinations for which the acquisition
date is on or after the beginning of the first annual reporting period beginning
on or after December 15, 2008.
In March 2008, the FASB issued SFAS No.
161, Disclosures about
Derivative Instruments and Hedging Activities – an amendment of FASB Statement
No. 133 (“SFAS No.
161”). The objective of this statement is to enhance disclosures to
provide adequate information about how derivative and hedging activities affect
an entity’s financial position, financial performance and cash flows. This
statement requires enhanced disclosures about an entity’s derivative and hedging
activities and thereby improves the transparency of financial reporting.
Under SFAS No. 161, entities will be required to provide enhanced disclosures
about how and why an entity utilizes derivative instruments, how derivative
instruments and related hedged items are accounted for under SFAS No. 133 and
its related interpretations and how derivative instruments and related hedged
items affect an entity’s financial position, financial performance and cash
flows. SFAS No. 161 is effective for financial statements issued for
fiscal years beginning after November 15, 2008. We do not anticipate that the adoption
of SFAS No. 161 will have a material impact on our consolidated financial
statements.
In May
2008, the FASB issued SFAS No. 162, The Hierarchy of Generally Accepted
Accounting Principles (“SFAS No. 162”). SFAS No. 162 identifies
the sources of accounting principles and the framework for selecting the
principles to be used in the preparation of financial statements of
nongovernmental entities that are presented in conformity with generally
accepted accounting principles. SFAS No. 162 directs the hierarchy to the
entity, rather than the independent auditors, as the entity is responsible for
selecting accounting principles for financial statements that are presented in
conformity with generally accepted accounting principles. SFAS No. 162 is
effective 60 days following SEC approval of the Public Company Accounting
Oversight Board amendments to remove the hierarchy of generally accepted
accounting principles from the auditing standards. We do not anticipate
that the adoption of SFAS No. 162 will have a material impact on our
consolidated financial statements.
|
Item
7A.
|
Quantitative
and Qualitative Disclosures About Market
Risk.
|
The
Company is not required to provide the information under this item because, as
discussed above, it is eligible to use the scaled disclosure model for smaller
reporting companies in this Annual Report on Form 10-K.
|
Item
8.
|
Financial
Statements and Supplementary Data.
|
See
Consolidated Financial Statements on pages F-1 through F-55.
|
Item
9.
|
Changes
in and Disagreements With Accountants on Accounting and Financial
Disclosure.
|
None.
|
Item
9A.
|
Controls
and Procedures.
|
Disclosure Controls and
Procedures
Under
supervision and with the participation of certain members of the Company’s
management, including the chief executive officer and the principal financial
officer, the Company completed an evaluation of the effectiveness of the design
and operation of its disclosure controls and procedures (as defined in SEC
Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934).
Based on this evaluation, the Company’s chief executive and principal financial
officer believe that the disclosure controls and procedures were effective as of
the end of the period covered by this Report with respect to timely
communication to them and other members of management responsible for preparing
periodic reports and material information required to be disclosed in this
Report as it relates to the Company and its consolidated
subsidiaries.
The
effectiveness of the Company’s or any system of disclosure controls and
procedures is subject to certain limitations, including the exercise of judgment
in designing, implementing, and evaluating the controls and procedures, the
assumptions used in identifying the likelihood of future events, and the
inability to eliminate misconduct completely. As a result, there can be no
assurance that the Company’s disclosure controls and procedures will prevent all
errors or fraud or ensure that all material information will be made known to
appropriate management in a timely fashion. By their nature, the Company’s 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 the Company’s internal control over financial reporting during the
Company’s last fiscal quarter that has materially affected, or is reasonably
likely to materially affect, the Company’s internal control over financial
reporting.
Management’s Report on Internal
Control over Financial Reporting
Management
is responsible for establishing and maintaining adequate internal control over
financial reporting (as defined in Rule 13a-15(f) under the Exchange Act)
for the Company. The Company’s internal control system was designed to provide
reasonable assurance to the Company’s management and board of directors
regarding the preparation and fair presentation of published financial
statements in accordance with U.S. generally accepted accounting principles. All
internal control systems, no matter how well designed, have inherent
limitations. Therefore, even those systems determined to be effective can
provide only reasonable assurance with respect to financial statement
preparation and presentation.
Management
maintains a comprehensive system of controls intended to ensure that
transactions are executed in accordance with management’s authorization, assets
are safeguarded, and financial records are reliable. Management also takes steps
to ensure that information and communication flows are effective and to monitor
performance, including performance of internal control procedures.
Management
assessed the effectiveness of the Company’s internal control over financial
reporting as of December 31, 2008 based on the criteria for effective
internal control described in Internal Control—Integrated
Framework issued by the Committee of Sponsoring Organizations of the
Treadway Commission. Based on this assessment, management believes that, as of
December 31, 2008, the Company’s internal control over financial reporting
is effective.
Report
of Independent Registered Public Accounting Firm
The Board
of Directors and Stockholders
MidWestOne Financial Group,
Inc.:
We have
audited MidWestOne
Financial Group Inc.’s (the Company) internal control over financial
reporting as of December 31, 2008, based on criteria established in Internal Control – Integrated
Framework issued by the Committee of Sponsoring Organizations of the
Treadway Commission (COSO). MidWestOne Financial Group Inc.’s
management is responsible for maintaining effective internal control over
financial reporting and for its assessment of the effectiveness of internal
control over financial reporting, included in the accompanying Management’s Report on Internal
Control over Financial Reporting. Our responsibility is to express an
opinion on the Company’s internal control over financial reporting based on our
audit.
We
conducted our audit in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether effective
internal control over financial reporting was maintained in all material
respects. Our audit included obtaining an understanding of internal control over
financial reporting, assessing the risk that a material weakness exists, and
testing and evaluating the design and operating effectiveness of internal
control based on the assessed risk. Our audit also included performing such
other procedures as we considered necessary in the circumstances. We believe
that our audit provides a reasonable basis for our opinion.
A
company’s internal control over financial reporting is a process designed to
provide reasonable assurance regarding the reliability of financial reporting
and the preparation of financial statements for external purposes in accordance
with generally accepted accounting principles. A company’s internal control over
financial reporting includes those policies and procedures that (1) pertain
to the maintenance of records that, in reasonable detail, accurately and fairly
reflect the transactions and dispositions of the assets of the company;
(2) provide reasonable assurance that transactions are recorded as
necessary to permit preparation of financial statements in accordance with
generally accepted accounting principles, and that receipts and expenditures of
the company are being made only in accordance with authorizations of management
and directors of the company; and (3) provide reasonable assurance
regarding prevention or timely detection of unauthorized acquisition, use, or
disposition of the company’s assets that could have a material effect on the
financial statements.
Because
of its inherent limitations, internal control over financial reporting may not
prevent or detect misstatements. Also, projections of any evaluation of
effectiveness to future periods are subject to the risk that controls may become
inadequate because of changes in conditions, or that the degree of compliance
with the policies or procedures may deteriorate.
In our
opinion, MidWestOne
Financial Group, Inc. maintained, in all material respects, effective
internal control over financial reporting as of December 31, 2008, based on
criteria established in Internal Control – Integrated
Framework issued by the Committee of Sponsoring Organizations of the
Treadway Commission (COSO).
We also
have audited, in accordance with the standards of the Public Company Accounting
Oversight Board (United States), the consolidated balance sheet of MidWestOne Financial Group, Inc. and
subsidiaries as of December 31, 2008, and the related consolidated
statements of operations, shareholders’ equity and other comprehensive
income (loss), and cash flows for the year ended December 31, 2008, and our
report dated March 16, 2009 expressed an unqualified opinion on those
consolidated financial statements.
/s/ KPMG
LLP
Des
Moines, Iowa
March 16,
2009
Item
9B. Other
Information.
None.
PART III
Item
10. Directors,
Executive Officers and Corporate Governance.
The
information required by Item 10 will be included in the Company’s 2009 Proxy
Statement (the “Proxy Statement”) under the heading “Information About Our
Directors and Executive Officers” and is incorporated herein by
reference. The Proxy Statement will be filed with the Securities and
Exchange Commission pursuant to Regulation 14A within 120 days of the end of the
Company’s 2008 fiscal year
Item
11. Executive
Compensation.
The
information required by Item 11 will be included in the Proxy Statement under
the headings “Director Compensation” and “Named Executive Officer Compensation”
and is incorporated herein by reference.
|
Item
12.
|
Security
Ownership of Certain Beneficial Owners and Management and Related
Stockholder Matters.
|
The
information required by Item 12 will be included in the Proxy Statement under
the headings “Security Ownership” and “Equity Compensation Plan Information,”
and is incorporated herein by reference.
Item
13. Certain
Relationships and Related Transactions, and Director Independence.
The
information required by Item 13 will be included in the Proxy Statement under
the heading “Related Person Transactions,” and is incorporated herein by
reference.
Item
14. Principal
Accountant Fees and Services.
The
information required by Item 14 will be included in the Proxy Statement under
the heading “Ratification of Selection of Independent Auditors” and is
incorporated by reference herein.
Item
15. Exhibits
and Financial Statement Schedules.
Financial
Statements and Schedules
See
Consolidated Financial Statements on pages F-1 through F-55.
Exhibits
The
exhibits required by Item 601 of Regulation S-K are included with this Form 10-K
and are listed on the “Index to Exhibits” immediately following the signature
page.
SIGNATURES
Pursuant
to the requirements of Section 13 or 15(d) 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.
|
||
|
Dated: March
16th,
2009
|
By:
|
/s/
Charles N. Funk
|
|
Charles
N. Funk
|
||
|
President
and Chief Executive Officer
|
||
|
By:
|
/s/
Gary J. Ortale
|
|
|
Gary
J. Ortale
|
||
|
Senior
Vice President, Chief Risk Officer and Interim Chief Financial
Officer
|
||
Pursuant
to the requirements of the Securities Exchange Act of 1934, this report has been
signed below by the following persons on behalf of the Registrant and in the
capacities indicated.
|
Signature
|
Title
|
Date
|
||
|
/s/
Charles N. Funk
|
President
and Chief Executive Officer
|
March
16th,
2009
|
||
|
Charles
N. Funk
|
(principal
executive officer)
|
|||
|
/s/
Gary J. Ortale
|
Senior
Vice President, Chief Risk
|
March
16th,
2009
|
||
|
Gary
J. Ortale
|
Officer
and Interim Chief Financial Officer
|
|||
|
(principal
financial officer and principal accounting officer)
|
||||
|
/s/
W. Richard Summerwill
|
Chairman
of the Board
|
March
16th,
2009
|
||
|
W.
Richard Summerwill
|
||||
|
/s/
Charles S. Howard
|
Vice
Chairman of the Board
|
March
16th,
2009
|
||
|
Charles
S. Howard
|
||||
|
/s/
Richard R. Donohue
|
Director
|
March
16th,
2009
|
||
|
Richard
R. Donohue
|
||||
|
/s/
John S. Koza
|
Director
|
March
16th,
2009
|
||
|
John
S. Koza
|
||||
|
/s/
Sally K. Mason
|
Director
|
March
16th,
2009
|
||
|
Sally
K. Mason
|
||||
|
/s/
Kevin W. Monson
|
Director
|
March
16th,
2009
|
||
|
Kevin
W. Monson
|
||||
|
/s/
John P. Pothoven
|
Director
|
March
16th,
2009
|
||
|
John
P. Pothoven
|
||||
|
/s/
James G. Wake
|
Director
|
March
16th,
2009
|
||
|
James
G. Wake
|
|
/s/
Robert D. Wersen
|
Director
|
March
16th,
2009
|
||
|
Robert
D. Wersen
|
||||
|
/s/
Stephen L. West
|
Director
|
March
16th,
2009
|
||
|
Stephen
L. West
|
||||
|
/s/
R. Scott Zaiser
|
|
Director
|
|
March
16th,
2009
|
|
R.
Scott Zaiser
|
EXHIBIT
INDEX
|
Exhibit
Number
|
Description
|
Incorporated by Reference
to:
|
||
|
2.1
|
Agreement
and Plan of Merger, dated September 11, 2007, between ISB Financial
Corp. and MidWestOne Financial Group,
Inc.
|
Appendix
A of the Joint Proxy Statement-Prospectus constituting part of the
Company’s Amendment No. 2 to Registration Statement on Form S-4
(File No. 333-147628) filed with the SEC on January 22,
2008
|
||
|
3.1
|
Amended
and Restated Articles of Incorporation of MidWestOne Financial Group,
Inc. filed with the Secretary of State of the State of Iowa on
March 14, 2008
|
Exhibit 3.3
to the Company’s Amendment No. 2 to Registration Statement on
Form S-4 (File No. 333-147628) filed with the SEC on
January 22, 2008
|
||
|
3.2
|
Articles
of Amendment (First Amendment) to the Amended and Restated Articles of
Incorporation of MidWestOne Financial Group,
Inc. filed with the Secretary of State of the State of Iowa on
January 23, 2009
|
Exhibit
3.1 to the Company’s Current Report on Form 8-K filed with the SEC on
January 23, 2009
|
||
|
3.3
|
Articles
of Amendment (Second Amendment) to the Amended and Restated Articles of
Incorporation of MidWestOne Financial Group,
Inc. filed with the Secretary of State of the State of Iowa on
February 4, 2009 (containing the Certificate of Designations for the
Company’s Fixed Rate Cumulative Perpetual Preferred Stock,
Series A)
|
Exhibit
3.1 to the Company’s Current Report on Form 8-K filed with the SEC on
February 6, 2009
|
||
|
3.4
|
Amended
and Restated By-laws of MidWestOne Financial Group,
Inc.
|
Exhibit
3.2 to the Company’s Current Report on Form 8-K filed with the SEC on
January 23, 2009
|
||
|
4.1
|
Reference
is made to Exhibits 3.1 through 3.4 hereof.
|
N/A
|
||
|
4.2
|
Form
of Stock Certificate representing MidWestOne Financial Group,
Inc. Fixed Rate Cumulative Perpetual Preferred Stock,
Series A
|
Exhibit
4.1 to the Company’s Current Report on Form 8-K filed with the SEC on
February 6, 2009
|
||
|
4.3
|
Warrant
to Purchase Common Stock of MidWestOne Financial Group,
Inc., dated February 6, 2009
|
Exhibit
4.2 to the Company’s Current Report on Form 8-K filed with the SEC on
February 6, 2009
|
||
|
10.1
|
States
Resources Loan Participating and Servicing Agreement, dated
February 5, 1999 between States Resources Corp. and MidWestOne Financial Group,
Inc. (as successor in interest to Mahaska Investment
Company)
|
Exhibit 10.3.4
of former MidWestOne Financial Group,
Inc.’s Form 10-K for the year ended December 31,
1999
|
||
|
10.2
|
Second
Amended and Restated Credit Agreement, dated November 30, 2003,
between MidWestOne Financial Group,
Inc. and Harris Trust and Savings Bank
|
Exhibit
10.5.1 of former MidWestOne Financial Group,
Inc.’s Form 10-K for the year ended December 31,
2003
|
|
Exhibit
Number
|
Description
|
Incorporated by Reference
to:
|
||
|
10.3
|
First
Amendment to the Second Amended and Restated Credit Agreement, dated
November 30, 2004, between MidWestOne Financial Group,
Inc. and Harris Trust and Savings Bank
|
Exhibit
10.5.1 of former MidWestOne Financial Group,
Inc.’s Form 10-K for the year ended December 31,
2004
|
||
|
10.4
|
Second
Amendment to the Second Amended and Restated Credit Agreement, dated
April 12, 2005, between MidWestOne Financial Group,
Inc. and Harris Trust and Savings Bank
|
Exhibit
10.5.1 of former MidWestOne Financial Group,
Inc.’s Form 10-Q for the quarter ended June 30,
2005
|
||
|
10.5
|
Third
Amendment to the Second Amended and Restated Credit Agreement, dated
March 3, 2006, between MidWestOne Financial Group,
Inc. and Harris Trust and Savings Bank
|
Exhibit
10.5 of the Company’s Registration Statement on Form S-4 (File
No. 333-147628) filed with the SEC on November 27,
2007
|
||
|
10.6
|
Fourth
Amendment to the Second Amended and Restated Credit Agreement, dated
April 28, 2006, between MidWestOne Financial Group,
Inc. and Harris N.A. (as successor in interest to Harris Trust and Savings
Bank)
|
Exhibit
10.5.1 of former MidWestOne Financial Group,
Inc.’s Form 10-Q for the quarter ended June 30,
2006
|
||
|
10.7
|
Fifth
Amendment to the Second Amended and Restated Credit Agreement, dated
November 27, 2006, between MidWestOne Financial Group,
Inc. and Harris N.A. (as successor in interest to Harris Trust and Savings
Bank)
|
Exhibit
10.5.1 of former MidWestOne Financial Group,
Inc.’s Form 10-K for the year ended December 31,
2006
|
||
|
10.8
|
Sixth
Amendment to the Second Amended and Restated Credit Agreement, dated
April 30, 2007, between MidWestOne Financial Group,
Inc. and Harris N.A. (as successor in interest to Harris Trust and Savings
Bank)
|
Exhibit
10.8 of the Company’s Registration Statement on Form S-4 (File
No. 333-147628) filed with the SEC on November 27,
2007
|
||
|
10.9
|
Seventh
Amendment to the Second Amended and Restated Credit Agreement, dated
June 30, 2007, between MidWestOne Financial Group,
Inc. and Harris N.A. (as successor in interest to Harris Trust and Savings
Bank)
|
Exhibit
10.5.1 of former MidWestOne Financial Group,
Inc.’s Form 10-Q for the quarter ended June 30,
2007
|
||
|
10.10
|
MidWestOne Financial Group,
Inc. Employee Stock Ownership Plan & Trust, as amended and
restated
|
Exhibit
10.1 former MidWestOne Financial Group,
Inc.’s Form 10-K for the year ended December 31,
2006
|
||
|
10.11
|
First
Amended and Restated ISB Financial Corp. (now known as MidWestOne Financial Group,
Inc.) Stock Option Plan
|
Exhibit
10.18 of the Company’s Registration Statement on Form S-4 (File
No. 333-147628) filed with the SEC on November 27,
2007
|
||
|
10.12
|
|
Mahaska
Investment Company 1998 Stock Incentive Plan
|
|
Exhibit
10.2.3 of former MidWestOne Financial Group,
Inc.’s Form 10-K for the year ended December 31,
1997
|
|
10.13
|
MidWestOne
Financial Group, Inc. 2006 Stock Incentive Plan
|
Former
MidWestOne
Financial Group, Inc.’s Definitive Proxy Statement on Schedule 14A
filed with the SEC on March 21,
2006
|
|
Exhibit
Number
|
Description
|
Incorporated by Reference
to:
|
||
|
10.14
|
ISB
Financial Corp. (now known as MidWestOne Financial Group,
Inc.) 2008 Equity Incentive Plan
|
Appendix
F of the Joint Proxy Statement-Prospectus constituting part of the
Company’s Amendment No. 2 to Registration Statement on Form S-4
(File No. 333-147628) filed with the SEC on January 22,
2008
|
||
|
10.15
|
Employment
Agreement between ISB Financial Corp. (now known as MidWestOne Financial Group,
Inc.) and Charles N. Funk, dated September 11, 2007
|
Exhibit
10.22 of the of the Company’s Registration Statement on Form S-4
(File No. 333-147628) filed with the SEC on November 27,
2007
|
||
|
10.16
|
Employment
Agreement between ISB Financial Corp. (now known as MidWestOne Financial Group,
Inc.) and David A. Meinert, dated September 11, 2007
|
Exhibit
10.23 of the Company’s Registration Statement on Form S-4 (File
No. 333-147628) filed with the SEC on November 27,
2007
|
||
|
10.17
|
Executive
Deferred Compensation Agreement between Mahaska Investment Company (now
known as MidWestOne Financial Group,
Inc.) and David A. Meinert, dated January 1,
2003
|
Exhibit 10.20
of the Company’s Registration Statement on Form S-4 (File
No. 333-147628) filed with the SEC on November 27,
2007
|
||
|
10.18
|
Amendment
and Restatement of the Executive Salary Continuation Agreement between
MidWestOne
Financial Group, Inc. and David A. Meinert, dated July 1,
2004
|
Exhibit 10.21
of the Company’s Registration Statement on Form S-4 (File
No. 333-147628) filed with the SEC on November 27,
2007
|
||
|
10.19
|
Separation
and Release Agreement between MidWestOne Financial Group,
Inc. and David A. Meinert, dated December 22,
2008
|
Exhibit
10.1 to the Company’s Current Report on Form 8-K filed with the SEC
on December 29, 2009
|
||
|
10.20
|
Employment
Agreement between ISB Financial Corp. (now known as MidWestOne Financial Group,
Inc.) and Kent L. Jehle, dated September 11, 2007
|
Exhibit
10.24 of the of the Company’s Registration Statement on Form S-4
(File No. 333-147628) filed with the SEC on November 27,
2007
|
||
|
10.21
|
Letter
Agreement between ISB Financial Corp. (now known as MidWestOne Financial Group,
Inc.) and W. Richard Summerwill, dated September 11,
2007
|
Exhibit
10.25 of the Company’s Registration Statement on Form S-4 (File
No. 333-147628) filed with the SEC on November 27,
2007
|
||
|
10.22
|
Letter
Agreement between ISB Financial Corp. (now known as MidWestOne Financial Group,
Inc.) and Charles S. Howard, dated September 11, 2007
|
Exhibit
10.26 of the Company’s Registration Statement on Form S-4 (File
No. 333-147628) filed with the SEC on November 27,
2007
|
||
|
10.23
|
Supplemental
Retirement Agreement between Iowa State Bank & Trust Company (now
known as MidWestOne Bank) and W.
Richard Summerwill, dated January 1, 1998
|
Exhibit 10.11
of the Company’s Registration Statement on Form S-4 (File
No. 333-147628) filed with the SEC on November 27,
2007
|
||
|
10.24
|
|
Supplemental
Retirement Agreement between Iowa State Bank & Trust Company (now
known as MidWestOne Bank) and Charles
N. Funk, dated November 1, 2001
|
|
Exhibit 10.13
of the Company’s Registration Statement on Form S-4 (File
No. 333-147628) filed with the SEC on November 27,
2007
|
|
Exhibit
Number
|
Description
|
Incorporated
by Reference to:
|
||
|
10.25
|
Supplemental
Retirement Agreement between Iowa State Bank & Trust Company (now
known as MidWestOne Bank) and Gary J.
Ortale, dated January 1, 1998
|
Exhibit 10.14
of the Company’s Registration Statement on Form S-4 (File
No. 333-147628) filed with the SEC on November 27,
2007
|
||
|
10.26
|
Amended
and Restated Supplemental Retirement Agreement between Iowa State Bank
& Trust Company (now known as MidWestOne Bank) and John S.
Koza, dated January 1, 1998
|
Exhibit 10.15
of the Company’s Registration Statement on Form S-4 (File
No. 333-147628) filed with the SEC on November 27,
2007
|
||
|
10.27
|
Supplemental
Retirement Agreement between Iowa State Bank & Trust Company (now
known as MidWestOne Bank) and Kent L.
Jehle, dated January 1, 1998, as amended by the First Amendment to
the Supplemental Retirement Agreement, dated January 1,
2003
|
Exhibit 10.16
of the Company’s Registration Statement on Form S-4 (File
No. 333-147628) filed with the SEC on November 27,
2007
|
||
|
10.28
|
Second
Supplemental Retirement Agreement between Iowa State Bank & Trust
Company (now known as MidWestOne Bank) and Kent L.
Jehle, dated January 1, 2002
|
Exhibit 10.17
of the Company’s Registration Statement on Form S-4 (File
No. 333-147628) filed with the SEC on November 27,
2007
|
||
|
10.29
|
Letter
Agreement, dated February 6, 2009, between MidWestOne Financial Group,
Inc. and United States Department of the Treasury, which includes the
Securities Purchase Agreement attached thereto, with respect to the
issuance and sale of the Fixed Rate Cumulative Perpetual Preferred Stock,
Series A, and the Warrant to Purchase Common Stock pursuant to the
TARP Capital Purchase Program
|
Exhibit
10.1 to the Company’s Current Report on Form 8-K filed with the SEC
on February 6, 2009
|
||
|
10.30
|
Form
of Waiver entered into by each of the Company’s Senior Executive Officers
with respect to the Company’s participation in the TARP Capital Purchase
Program
|
Exhibit
10.2 to the Company’s Current Report on Form 8-K filed with the SEC
on February 6, 2009
|
||
|
10.31
|
Form
of Omnibus Amendment to Benefit Plans and Other Executive Compensation
Arrangements entered into by each of the Company’s Senior Executive
Officers with respect to the Company’s participation in the TARP Capital
Purchase Program
|
Exhibit
10.3 to the Company’s Current Report on Form 8-K filed with the SEC
on February 6, 2009
|
||
|
21.1
|
Subsidiaries
of MidWestOne
Financial Group, Inc.
|
Filed
herewith
|
||
|
23.1
|
Consent
of KPMG LLP
|
Filed
herewith
|
||
|
23.2
|
|
Consent
of McGladrey & Pullen LLP
|
|
Filed
herewith
|
|
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
|
|
Exhibit
Number
|
Description
|
Incorporated by Reference
to:
|
||
|
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
|
Report
of Independent Registered Public Accounting Firm
The Board
of Directors and Stockholders
MidWestOne Financial Group,
Inc.:
We have
audited the accompanying consolidated balance sheet of MidWestOne Financial Group, Inc.
and subsidiaries (the Company) as of December 31, 2008, and the
related consolidated statements of operations, shareholders’ equity and other
comprehensive income (loss), and cash flows for the year ended December 31,
2008. These consolidated financial statements are the responsibility of the
Company’s management. Our responsibility is to express an opinion on these
consolidated financial statements based on our audit.
We
conducted our audit in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audit provides a
reasonable basis for our opinion.
In our
opinion, the consolidated financial statements referred to above present fairly,
in all material respects, the financial position of MidWestOne Financial Group, Inc. and
subsidiaries as of December 31, 2008, and the results of their operations
and their cash flows for the year ended December 31, 2008, in conformity
with U.S. generally accepted accounting principles.
We also
have audited, in accordance with the standards of the Public Company Accounting
Oversight Board (United States), MidWestOne Financial Group, Inc.’s
internal control over financial reporting as of December 31, 2008, based on
criteria established in Internal Control – Integrated
Framework issued by the Committee of Sponsoring Organizations of the
Treadway Commission (COSO), and our report dated March 16, 2009 expressed an
unqualified opinion on the effectiveness of the Company’s internal control over
financial reporting.
/s/ KPMG
LLP
Des
Moines, Iowa
March 16,
2009
F-1
Report
of Independent Registered
Public
Accounting Firm
To the
Board of Directors
ISB
Financial Corp. and Subsidiaries
Iowa
City, Iowa
We have
audited the consolidated balance sheet of ISB Financial Corp. and Subsidiaries
(n/k/a MidWestOne
Financial Group, Inc.) as of December 31, 2007, and the related consolidated
statements of operations, shareholders’ equity and other comprehensive income
(loss), and cash flows for each of the two years in the period ended December
31, 2007. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We
conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our
opinion, the consolidated financial statements referred to above present fairly,
in all material respects, the financial position of ISB Financial Corp. and
Subsidiaries (n/k/a MidWestOne Financial Group, Inc.) as
of December 31, 2007, and the results of their operations and their cash
flows for each of the two years in the period ended December 31, 2007, in
conformity with U.S. generally accepted accounting
principles.
| /s/ McGladrey & Pullen, LLP | |
|
McGladrey
& Pullen LLP
|
Cedar
Rapids, Iowa
March 13,
2008
McGladrey
& Pullen, LLP is an independent member firm of RSM International,
an
affiliation of separate and independent legal entities.
F-2
MidWestOne
Financial Group, Inc. and Subsidiaries
Consolidated
Balance Sheets
December
31, 2008 and 2007
(in
thousands, except
per share amounts)
|
Assets
|
2008
|
2007
|
||||||
|
Cash
and due from banks
|
$ | 32,383 | $ | 16,294 | ||||
|
Interest-bearing
deposits in banks
|
543 | 84 | ||||||
| Cash and cash equivalents | 32,926 | 16,378 | ||||||
|
Investment
securities:
|
||||||||
|
Available
for sale
|
272,380 | 232,125 | ||||||
|
Held
to maturity (fair value 2008 $8,120; 2007 $101)
|
8,125 | 95 | ||||||
|
Federal
funds sold
|
- | 17,842 | ||||||
|
Loans
held for sale
|
5,279 | 2,709 | ||||||
|
Loans
|
1,014,814 | 401,554 | ||||||
|
Allowance
for loan losses
|
(10,977 | ) | (5,466 | ) | ||||
|
Net
loans
|
1,003,837 | 396,088 | ||||||
|
Loan
pool participations, net
|
92,932 | - | ||||||
|
Premises
and equipment, net
|
28,748 | 11,802 | ||||||
|
Accrued
interest receivable
|
11,736 | 4,639 | ||||||
| Goodwill | - | 4,356 | ||||||
|
Other
intangible assets, net
|
13,424 | 168 | ||||||
|
Bank-owned
life insurance
|
17,340 | 8,613 | ||||||
|
Other
real estate owned
|
996 | - | ||||||
|
Deferred
income taxes
|
5,595 | 1,836 | ||||||
|
Other
assets
|
15,644 | 5,232 | ||||||
|
Total
assets
|
$ | 1,508,962 | $ | 701,983 | ||||
See
accompanying notes to consolidated financial statements.
F-3
MidWestOne
Financial Group, Inc. and
Subsidiaries
Consolidated
Balance Sheets
December
31, 2008 and 2007
(in
thousands, except
per share amounts)
|
Liabilities and Shareholders' Equity
|
2008
|
2007
|
||||||
|
Liabilities:
|
||||||||
|
Deposits:
|
||||||||
|
Non-interest
bearing demand
|
$ | 123,558 | $ | 66,340 | ||||
|
Interest-bearing
checking
|
389,227 | 186,601 | ||||||
|
Savings
|
59,133 | 28,690 | ||||||
|
Certificates
of deposit under $100,000
|
402,950 | 167,045 | ||||||
|
Certificates
of deposits $100,000 and over
|
153,321 | 77,939 | ||||||
|
Total
deposits
|
1,128,189 | 526,615 | ||||||
|
Federal
funds purchased
|
13,050 | - | ||||||
|
Securities
sold under agreements to repurchase
|
44,249 | 45,997 | ||||||
|
Federal
Home Loan Bank borrowings
|
158,782 | 47,000 | ||||||
|
Deferred
compensation liability
|
1,586 | 1,391 | ||||||
|
Long-term
debt
|
15,640 | - | ||||||
|
Accrued
interest payable
|
2,770 | 1,734 | ||||||
|
Other
liabilities
|
14,354 | 1,854 | ||||||
|
Total
liabilities
|
1,378,620 | 624,591 | ||||||
|
Commitments
and Contingencies
|
||||||||
|
Shareholders'
Equity
|
||||||||
|
Capital
stock, common, $1 par value; authorized 10,000,000
shares; issued 2008 8,690,398 shares; 2007 5,165,308
shares
|
8,690 | 5,165 | ||||||
|
Additional
paid-in capital
|
80,757 | 100 | ||||||
|
Treasury
stock, at cost; 87,343 shares and 0 shares at December 31, 2008 and 2007,
respectively
|
(1,215 | ) | - | |||||
|
Retained
earnings
|
43,683 | 72,333 | ||||||
|
Accumulated
other comprehensive (loss)
|
(1,573 | ) | (206 | ) | ||||
|
Total
shareholders' equity
|
130,342 | 77,392 | ||||||
|
Total
liabilities and shareholders' equity
|
$ | 1,508,962 | $ | 701,983 | ||||
See
accompanying notes to consolidated financial statements.
F-4
MidWestOne
Financial Group, Inc. and Subsidiaries
Consolidated
Statements of Operations
Years
Ended December 31, 2008, 2007 and 2006
(in
thousands, except per share amounts)
|
2008
|
2007
|
2006
|
||||||||||
|
Interest
income:
|
||||||||||||
|
Interest
and fees on loans
|
$ | 53,104 | $ | 27,564 | $ | 25,850 | ||||||
|
Interest
and discount on loan pool participations
|
4,459 | - | - | |||||||||
|
Interest
on bank deposits
|
26 | - | - | |||||||||
|
Interest
on federal funds sold
|
315 | 548 | 283 | |||||||||
|
Interest
on investment securities:
|
||||||||||||
|
Available
for sale
|
12,011 | 10,187 | 8,893 | |||||||||
|
Held
to maturity
|
291 | 6 | 282 | |||||||||
|
Total
interest income
|
70,206 | 38,305 | 35,308 | |||||||||
|
Interest
expense:
|
||||||||||||
|
Interest
on deposits:
|
||||||||||||
|
Interest-bearing
checking
|
4,149 | 2,950 | 2,885 | |||||||||
|
Savings
|
1,362 | 159 | 157 | |||||||||
|
Certificates
of deposit under $100,000
|
14,369 | 8,250 | 6,350 | |||||||||
|
Certificates
of deposit $100,000 and over
|
3,277 | 3,439 | 2,956 | |||||||||
|
Total
interest on deposits
|
23,157 | 14,798 | 12,348 | |||||||||
|
Interest
on federal funds purchased
|
67 | 61 | 165 | |||||||||
|
Interest
on securities sold under agreements to repurchase
|
1,055 | 2,053 | 1,713 | |||||||||
|
Interest
on Federal Home Loan Bank advances
|
5,348 | 2,126 | 2,533 | |||||||||
|
Interest
on long-term debt
|
631 | - | - | |||||||||
|
Other
borrowings
|
137 | - | - | |||||||||
|
Total interest expense
|
30,395 | 19,038 | 16,759 | |||||||||
|
Net
interest income
|
39,811 | 19,267 | 18,549 | |||||||||
|
Provision
for loan losses
|
4,366 | 500 | 550 | |||||||||
|
Net
interest income after provision for loan losses
|
35,445 | 18,767 | 17,999 | |||||||||
|
Other
income:
|
||||||||||||
|
Trust
and investment fees
|
4,011 | 3,688 | 2,889 | |||||||||
|
Service
charges and fees on deposit accounts
|
5,611 | 2,082 | 1,935 | |||||||||
|
Mortgage
origination fees and gains on sales of mortgage loans
|
907 | 1,208 | 963 | |||||||||
|
Other
service charges, commissions and fees
|
1,527 | 1,746 | 1,577 | |||||||||
|
Bank-owned
life insurance income
|
542 | 338 | 316 | |||||||||
|
Loss
from sale of available for sale securities
|
(346 | ) | (256 | ) | (108 | ) | ||||||
|
Impairment
losses on investment securities
|
(6,194 | ) | - | - | ||||||||
|
Total
other income
|
6,058 | 8,806 | 7,572 | |||||||||
|
Other
expenses:
|
||||||||||||
|
Salaries
and employee benefits
|
20,903 | 10,926 | 10,081 | |||||||||
|
Net
occupancy and equipment expense
|
6,085 | 2,978 | 2,811 | |||||||||
|
Professional
and other outside services
|
3,848 | 2,057 | 2,236 | |||||||||
|
Other
operating expense
|
7,608 | 2,659 | 2,552 | |||||||||
|
Amortization
expense
|
776 | - | - | |||||||||
|
Goodwill
impairment
|
27,295 | - | - | |||||||||
|
Total
other expenses
|
66,515 | 18,620 | 17,680 | |||||||||
|
Income
(loss) before income taxes
|
(25,012 | ) | 8,953 | 7,891 | ||||||||
|
Federal
and state income tax expense (benefit)
|
(450 | ) | 2,305 | 2,093 | ||||||||
|
Net
income (loss)
|
$ | (24,562 | ) | $ | 6,648 | $ | 5,798 | |||||
|
Earnings
(Loss) per share:
|
||||||||||||
|
Basic
|
$ | (3.09 | ) | $ | 1.29 | $ | 1.11 | |||||
|
Diluted
|
$ | (3.09 | ) | $ | 1.29 | $ | 1.11 | |||||
See
accompanying notes to consolidated financial statements.
F-5
Consolidated
Statements of Shareholders' Equity and Other Comprehensive Income
(Loss)
Years
Ended December 31, 2008, 2007 and 2006
(in
thousands, except share amounts)
|
Accumulated
|
||||||||||||||||||||||||
|
Additional
|
Other
|
|||||||||||||||||||||||
|
Common
|
Paid-In
|
Treasury
|
Retained
|
Comprehensive
|
||||||||||||||||||||
|
Stock
|
Capital
|
Stock
|
Earnings
|
Income
(Loss)
|
Total
|
|||||||||||||||||||
|
Balance,
December 31, 2005
|
$ | 1,744 | $ | 3,568 | $ | - | $ | 66,660 | $ | (3,013 | ) | $ | 68,959 | |||||||||||
|
Comprehensive
income:
|
||||||||||||||||||||||||
|
Net
income
|
- | - | - | 5,798 | - | 5,798 | ||||||||||||||||||
|
Change
in net unrealized losses on securities available-for-sale, net of
reclassification adjustment and tax effect
|
- | - | - | - | 1,493 | 1,493 | ||||||||||||||||||
|
Total
comprehensive income
|
7,291 | |||||||||||||||||||||||
|
Cash
dividends paid ($0.95 per share)
|
- | - | - | (1,657 | ) | - | (1,657 | ) | ||||||||||||||||
|
Stock
options exercised for 4,630 shares
|
5 | 78 | - | - | - | 83 | ||||||||||||||||||
|
Stock
compensation
|
- | 1 | - | - | - | 1 | ||||||||||||||||||
|
Repurchase
of 26,683 shares of common stock
|
(27 | ) | (1,260 | ) | - | (181 | ) | - | (1,468 | ) | ||||||||||||||
|
Stock
split, 3,454,066 shares issued
|
3,454 | (2,373 | ) | - | (1,081 | ) | - | - | ||||||||||||||||
|
Balance,
December 31, 2006
|
5,176 | 14 | - | 69,539 | (1,520 | ) | 73,209 | |||||||||||||||||
|
Comprehensive
income:
|
||||||||||||||||||||||||
|
Net
income
|
- | - | - | 6,648 | - | 6,648 | ||||||||||||||||||
|
Change
in net unrealized losses on securities available-for-sale, net of
reclassification adjustment and tax effect
|
- | - | - | - | 1,314 | 1,314 | ||||||||||||||||||
|
Total
comprehensive income
|
7,962 | |||||||||||||||||||||||
|
Cash
dividends paid ($0.65 per share)
|
- | - | - | (3,359 | ) | - | (3,359 | ) | ||||||||||||||||
|
Stock
options exercised for 8,425 shares
|
8 | 99 | - | - | - | 107 | ||||||||||||||||||
|
Stock
compensation
|
- | 2 | - | - | - | 2 | ||||||||||||||||||
|
Repurchase
of 19,605 shares of common stock
|
(19 | ) | (15 | ) | - | (495 | ) | - | (529 | ) | ||||||||||||||
|
Balance,
December 31, 2007
|
5,165 | 100 | - | 72,333 | (206 | ) | 77,392 | |||||||||||||||||
See
accompanying notes to consolidated financial statements.
F-6
MidWestOne
Financial Group, Inc. and Subsidiaries
Consolidated
Statements of Shareholders' Equity and Other Comprehensive Income
(Loss) (Continued)
Years
Ended December 31, 2008, 2007 and 2006
(in
thousands, except share amounts)
|
Accumulated
|
||||||||||||||||||||||||
|
Additional
|
Other
|
|||||||||||||||||||||||
|
Common
|
Paid-In
|
Treasury
|
Retained
|
Comprehensive
|
||||||||||||||||||||
|
Stock
|
Capital
|
Stock
|
Earnings
|
Income (Loss)
|
Total
|
|||||||||||||||||||
|
Balance,
December 31, 2007
|
$ | 5,165 | $ | 100 | $ | - | $ | 72,333 | $ | (206 | ) | $ | 77,392 | |||||||||||
|
Comprehensive
income (loss):
|
||||||||||||||||||||||||
|
Net
loss
|
- | - | - | (24,562 | ) | - | (24,562 | ) | ||||||||||||||||
|
Change
in net unrealized pension liability, net of tax
|
- | - | - | - | (2,425 | ) | (2,425 | ) | ||||||||||||||||
|
Change
in net realized gains (losses) arising during the period on
securities avaiable for sale, net of tax
|
- | - | - | - | 1,058 | 1,058 | ||||||||||||||||||
|
Total
comprehensive income
|
(25,929 | ) | ||||||||||||||||||||||
|
Cash
dividends paid ($0.46 per share)
|
- | - | - | (3,955 | ) | - | (3,955 | ) | ||||||||||||||||
|
Stock
options exercised (7,959 shares)
|
5 | 29 | 38 | - | - | 72 | ||||||||||||||||||
|
Treasury
stock purchased
|
- | - | (1,253 | ) | - | - | (1,253 | ) | ||||||||||||||||
|
Fractional
shares paid out in merger
|
- | (3 | ) | - | - | - | (3 | ) | ||||||||||||||||
|
Shares
issued in merger (3,519,788 shares)
|
3,520 | 78,245 | - | - | - | 81,765 | ||||||||||||||||||
|
Stock
compensation
|
- | 21 | - | - | 21 | |||||||||||||||||||
|
Stock
option value allocated to transaction purchase price
|
- | 2,365 | - | - | - | 2,365 | ||||||||||||||||||
|
Cumulative
effect adjustment for postretirement split dollar life insurance
benefits
|
- | - | - | (133 | ) | - | (133 | ) | ||||||||||||||||
|
Balance,
December 31, 2008
|
$ | 8,690 | $ | 80,757 | $ | (1,215 | ) | $ | 43,683 | $ | (1,573 | ) | $ | 130,342 | ||||||||||
See
accompanying notes to consolidated financial statements.
F-7
MidWestOne
Financial Group, Inc. and Subsidiaries
Consolidated
Statements of Cash Flows
Years
Ended December 31, 2008, 2007 and 2006
(in
thousands)
|
2008
|
2007
|
2006
|
||||||||||
|
Cash
Flows from Operating Activities
|
||||||||||||
|
Net
income (loss)
|
$ | (24,562 | ) | $ | 6,648 | $ | 5,798 | |||||
|
Adjustments
to reconcile net income to net cash provided by operating
activities:
|
||||||||||||
|
Depreciation
|
2,424 | 1,325 | 1,251 | |||||||||
|
Amortization
|
776 | - | 15 | |||||||||
|
Loss on
disposal of premises and equipment
|
516 | - | - | |||||||||
|
Provision
for loan losses
|
4,366 | 500 | 550 | |||||||||
|
Deferred
income taxes
|
(3,213 | ) | (269 | ) | 24 | |||||||
|
Stock
option expense
|
21 | 2 | 1 | |||||||||
|
Investment
security losses
|
346 | 256 | 108 | |||||||||
|
Writedown
of Other Real Estate Owned
|
516 | - | - | |||||||||
|
Other
than temporary impairment on investment securities
|
6,194 | - | - | |||||||||
|
Goodwill
impairment
|
27,295 | - | - | |||||||||
|
Originations
of loans held for sale
|
(60,227 | ) | (74,032 | ) | (61,108 | ) | ||||||
|
Proceeds
from loans held for sale
|
57,657 | 73,745 | 59,975 | |||||||||
|
Net
change in:
|
||||||||||||
|
Increase
in accrued interest receivable
|
(7,097 | ) | (71 | ) | (533 | ) | ||||||
|
Decrease
(increase) in other assets
|
327 | (1,156 | ) | 1,672 | ||||||||
|
Increase
in deferred compensation
|
195 | - | - | |||||||||
|
Increase(decrease)
in accounts payable, accrued expenses and other
liabilities
|
(3,908 | ) | 367 | 1,131 | ||||||||
|
Net
cash provided by operating activities
|
1,626 | 7,315 | 8,884 | |||||||||
|
Cash
Flows from Investing Activities
|
||||||||||||
|
Available
for sale securities:
|
||||||||||||
|
Sales
|
10,550 | 28,774 | 8,519 | |||||||||
|
Maturities
|
45,678 | 64,409 | 48,257 | |||||||||
|
Purchases
|
(25,021 | ) | (83,959 | ) | (56,838 | ) | ||||||
|
Maturities
of held to maturity securities
|
- | 18 | 62 | |||||||||
|
Federal
funds sold, net
|
17,842 | (14,667 | ) | 11,325 | ||||||||
|
Loans
made to customers, net of collections
|
(77,891 | ) | (23,274 | ) | (8,301 | ) | ||||||
|
Loan
participation pools, net
|
(2,056 | ) | - | - | ||||||||
|
Purchase
of premises and equipment
|
(3,227 | ) | (1,037 | ) | (1,283 | ) | ||||||
|
Proceeds
from the sale of Other Real Estate Owned
|
817 | - | - | |||||||||
|
Net
cash acquired in merger
|
20,351 | - | - | |||||||||
|
Purchase
of Butler Brown Insurance Agency, net of cash acquired
|
(993 | ) | - | - | ||||||||
|
Activity
in bank-owned life insurance:
|
||||||||||||
|
Purchases
|
(63 | ) | (118 | ) | (61 | ) | ||||||
|
Increase
in cash value
|
(528 | ) | (338 | ) | (316 | ) | ||||||
|
Net
cash provided by (used in) investing activities
|
(14,541 | ) | (30,192 | ) | 1,364 | |||||||
|
Net
increase in deposits
|
14,853 | 33,714 | 320 | |||||||||
|
Net increase
(decrease)
in federal funds purchased and securities sold under agreements to
repurchase
|
5,302 | (5,932 | ) | 6,881 | ||||||||
|
Proceeds
from Federal Home Loan Bank borrowings
|
40,869 | 28,995 | 12,770 | |||||||||
|
Repayment
of Federal Home Loan Bank borrowings
|
(25,200 | ) | (28,015 | ) | (26,450 | ) | ||||||
|
Stock
options exercised
|
72 | 107 | 83 | |||||||||
|
Repurchase
of common stock
|
(1,253 | ) | (529 | ) | (1,468 | ) | ||||||
|
Payments
on notes payable
|
(1,182 | ) | - | - | ||||||||
|
Payments on
long-term debt
|
(43 | ) | - | - | ||||||||
|
Dividends
paid
|
(3,955 | ) | (3,359 | ) | (1,657 | ) | ||||||
|
Net
cash provided by (used in) financing activities
|
29,463 | 24,981 | (9,521 | ) |
See
accompanying notes to consolidated financial statements.
F-8
MidWestOne Financial Group, Inc. and
Subsidiaries
Consolidated
Statements of Cash Flows (Continued)
Years
Ended December 31, 2008, 2007 and 2006
(in
thousands)
|
2008
|
2007
|
2006
|
||||||||||
|
Increase
in cash and cash equivalents
|
$ | 16,548 | $ | 2,104 | $ | 727 | ||||||
|
Cash
and Cash Equivalents
|
||||||||||||
|
Beginning
balance
|
16,378 | 14,274 | 13,547 | |||||||||
|
Ending
balance
|
$ | 32,926 | $ | 16,378 | $ | 14,274 | ||||||
|
Supplemental
Disclosures
|
||||||||||||
|
Cash
payments for:
|
||||||||||||
|
Interest
paid to depositors
|
$ | 22,122 | $ | 14,969 | $ | 11,721 | ||||||
|
Interest
paid on other obligations
|
7,237 | 4,254 | 4,429 | |||||||||
|
Income
taxes
|
3,903 | 2,572 | 1,645 | |||||||||
|
Supplemental
Schedule of non-cash Investing Activities:
|
||||||||||||
|
Fair
market value of liabilities assumed
|
$ | 720,318 | - | - | ||||||||
|
Fair
market value of assets acquired, including goodwill
|
805,562 | - | - | |||||||||
See
accompanying notes to consolidated financial statements.
F-9
MidWestOne
Financial Group, Inc. and
Subsidiaries
Notes
to Consolidated Financial Statements
|
Note
1.
|
Nature
of Business and Significant Accounting
Policies
|
Nature of business:
On March 14, 2008, MidWestOne Financial Group, Inc.
merged with and into ISB Financial Corp. in accordance with the Agreement and
Plan of Merger dated as of September 11, 2007. As a result of the
merger, MidWestOne
Financial Group, Inc (“Former MidWestOne”) ceased to exist as a
legal entity and ISB Financial Corp. survived the merger and changed its name to
“MidWestOne Financial
Group, Inc.” The surviving organization is referred to in this
document as the “Company”. Prior to the merger, ISB Financial Corp’s
wholly owned bank subsidiaries were Iowa State Bank & Trust Co. and First
State Bank. Subsequent to the merger, the Company added MidWestOne Bank, MidWestOne
Investment Services, Inc. and MidWestOne Insurance Services, Inc
as wholly owned subsidiaries. The Company is a financial services
holding company headquartered in Iowa City, Iowa that owns 100% of the
outstanding common stock of MidWestOne Bank, Iowa City and 100%
of the common stock of MidWestOne Insurance Services, Inc., Pella, Iowa.
MidWestOne Bank (the
“Bank”) is also headquartered in Iowa City and provides 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,
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 administers estates, personal trusts, conservatorships, pension and
profit-sharing accounts along with providing other management services to
customers.
Accounting estimates:
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 amount 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
reporting period. Actual results could differ from those estimates.
Certain significant
estimates: The allowance for loan losses, unrealized gains and losses on
debt securities available for sale, annual impairment testing of goodwill,
estimated discount rate and expected long-term rate of return used in actuarial
determination of pension plan asset or liability, and the fair values of
investment securities and other financial instruments involve certain
significant estimates made by management. These estimates are reviewed by
management routinely and it is reasonably possible that circumstances that exist
may change in the near-term future and that the effect could be material to the
financial statements.
Principles of
consolidation: The consolidated statements of operations and cash flows
for the year ended December 31, 2008 includes the results of operations for the
Company and MidWestOne Bank and MidWestOne Insurance Services, Inc. from March
15, 2008 through December 31, 2008. The consolidated statements of
operations and cash flows for the years ended December 31, 2007 and 2006 include
the results of operation for the Company, Iowa State Bank & Trust Co. and
First State Bank. The consolidated balance sheets as of December 31, 2008
include the accounts and transactions of the Company and its wholly-owned
subsidiaries, MidWestOne Bank and MidWestOne Insurance Services, Inc., as well
as its former wholly-owned subsidiaries Iowa State Bank & Trust Co., First
State Bank and MidWestOne Investment Services. The consolidated balance sheets
as of December 31, 2007 include the accounts of ISB Financial Corp. and its
wholly-owned subsidiaries Iowa State Bank & Trust Co. and First State
Bank. All significant inter-company accounts and transactions have been
eliminated in consolidation.
Presentation of cash
flows: For purposes of reporting cash flows, cash and due from banks
includes cash on hand and amounts due from banks . Cash flows from loans
originated by the Bank deposits and federal funds purchased and sold and
securities sold under agreements to repurchase are reported net.
Reclassification:
Certain amounts in the 2007 consolidated financial statements have been
reclassified to conform to the 2008 presentation.
Investment
securities: Certain debt securities that the Company has the positive
intent and ability to hold to maturity are classified as held to maturity and
recorded at amortized cost. Securities not classified as held to maturity,
including equity securities with readily determinable fair values, are
classified as available for sale and recorded at fair value, with unrealized
gains and losses excluded from earnings and reported in other comprehensive
income.
F-10
MidWestOne
Financial Group, Inc. and
Subsidiaries
Notes
to Consolidated Financial Statements
|
Note
1.
|
Nature
of Business and Significant Accounting Policies
(Continued)
|
Purchase
premiums and discounts are recognized in interest income using the interest
method over the terms of the securities. Declines in the fair value of held to
maturity and available for sale securities below their cost, that are deemed to
be other than temporary, are reflected in earnings as realized losses. In
determining whether other than temporary impairment exists, management
considers: (1) the length of time and the extent of which the fair value has
been less than cost, (2) the financial condition and near-term prospects of the
issuer and (3) the intent and ability of the Company to retain its investment in
the issuer for a period of time sufficient to allow for any anticipated recovery
in fair value. Gains and losses on the sale of securities are recorded on the
trade date and are determined using the specific identification
method.
Loans: Loans are stated at the
principal amount outstanding, net of deferred loan fees and allowance for loan
losses. Interest on loans is credited to income as earned based on the principal
amount outstanding. Deferred loan fees are amortized using the level yield
method over the remaining maturities on the loans.
The
accrual of interest on mortgage and commercial loans is discontinued at the time
the loan is 90-days past due, unless the credit is well secured and in process
of collection. Credit card loans and other personal loans are typically charged
off no later than 180-days past due. Past due status is based on contractual
terms of the loan. In all cases, loans are placed on nonaccrual or charged off
at an earlier date, if collection of principal or interest is considered
doubtful.
All
interest accrued but not collected for loans that are placed on nonaccrual or
charged off is reversed against interest income. The interest on these loans is
accounted for on the cash-basis or cost-recovery method, until qualifying for
return to accrual. Loans are returned to accrual status when all the principal
and interest amounts contractually due are brought current and future payments
are reasonably assured.
Loan Pool
Participations
The
Company acquired its loan pool participations from the former MidwestOne
during the merger. The Company continues to invest
in participations in pools of loans acquired from the FDIC and
other sources at substantial discounts. The pools consist of loans
to borrowers located throughout the United States.
The
Company carries its investment in the loan pools as a separate earning
asset on the balance sheet. Principal or interest
restructures, write-downs, or write-offs within the pools are not included
in the Company's disclosures for its loan portfolio. The loan pools are
managed by a non-affiliate Servicer operating in Omaha,
Nebraska.
Each pool
has a different composition and different characteristics. The composition
of a loan pool is generally determined by the seller based on its desire to
maximize the price it receives for all loans among the various pools. Many
of the pools consist of loans primarily secured by single-family,
multi-family, and small commercial real estate. Some pools may consist of a
large number of small consumer loans that are secured by other assets such
as automobiles or mobile homes, while other pools may consist of small to
medium balance commercial loans. Some may contain a mixture of such loans
and other types of loans.
The
Company invests in pools consisting of both performing loans and past-due
nonperforming loans. The price bid and paid for such a loan pool is
determined based on the composition of the particular pool, the amounts the
Servicer believes can be collected on such a pool, and the risks associated
with the collection of such amounts.
Upon the
acquisition of a participation interest in a loan pool, the Company assumes
the risk of loss. The extent of such risk is dependent on a number of
factors, including the Servicer's ability to locate the debtors, the
debtors' financial condition, the possibility that a debtor may file for
protection under applicable bankruptcy laws, the Servicer's ability to
locate the collateral, if any, for the loan and to obtain possession of
such collateral, the value of such collateral, and the length of time it
takes to realize the ultimate recovery either through collection procedures
or through a resale of the loans following a restructure.
F-11
MidWestOne
Financial Group, Inc. and
Subsidiaries
Notes
to Consolidated Financial Statements
|
Note
1.
|
Nature
of Business and Significant Accounting Policies
(Continued)
|
A cost
"basis" is assigned to each individual loan acquired on a cents per dollar
(discounted price) based on the Servicer's assessment of the recovery
potential of each such loan. This methodology assigns a higher basis to
performing loans with greater potential collectability and a lower basis to
those loans identified as having little or no potential for
collection.
Loan pool
participations are shown on the Company's balance sheet as a separate asset
category. The original carrying value of loan pool participations
represents the discounted price paid by the Company to acquire its
participation interests in various loan pools purchased by the Servicer.
The Company's investment balance is reduced as the Servicer collects principal
payments on the loans and remits the proportionate share of such payments
to the Company.
The loan
pools acquired are accounted for in accordance with the provisions of
Statement of Position 03-3 ("SOP 03-3") issued by the Accounting Standards
Executive Committee of the American Institute of Certified Public
Accountants.
SOP 03-3
provides updated guidance on the accounting for purchased loans that show
evidence of deterioration of credit quality since origination and for which
it is probable, at acquisition, that the purchaser will be unable to
collect all contractually required payments receivable. SOP 03-3 generally
requires that the excess of the estimated cash flows expected
to be collected on the loan over the initial investment be accreted over
the estimated remaining life of loan. According to the SOP 03-3, in order
to apply the interest method of recognition to these types of loans, there
must be sufficient information to reasonably estimate the amount and timing
of the cash flows expected to be collected. When that is not the case, the
loan should be accounted for as a nonaccrual status applying the cash basis
income recognition to the loan.
The
Company has developed and implemented procedures to determine if accretion
of the discount ("accretable yield") on the purchased loans in a pool is
required under SOP 03-3. Given the impaired nature of the loan pools
typically purchased, the individual loans are evaluated for SOP 03-3
purposes by the end of a six-month window from the date of purchase. This
provides time for the Servicer to assess the quality of the loans and
assign basis to each loan within the pool. Purchased loans are evaluated
individually with a determination made utilizing various criteria
including: past-due status, late payments, legal status of the loan (not in
foreclosure, judgment against the borrower, or referred to legal counsel),
frequency of payments made, collateral adequacy and the borrower's
financial condition. If all the criteria are met, the individual loan will
utilize the accounting treatment required by SOP 03-3 with the accretable
yield difference between the expected cash flows and the purchased basis
accreted into income on the level yield basis over the anticipated life of
the loan. If any of the six criteria are not met, the loan is accounted for
on the cash-basis of accounting.
In the
event that a prepayment is received on a loan accounted for under SOP 03-3,
the accretable yield is recomputed and the revised amount accreted over the
estimated remaining life of the loan on the level yield basis. If a loan
subject to accretable yield under SOP 03-3 fails to make timely payments,
it is subject to classification and an allowance for loss would be
established.
Collection
expenses incurred by the Servicer are netted against discount income.
Discount income is added to interest income and reflected as one amount on
the Company's consolidated statements of income.
Interest
income is only recognized when collected and actually remitted to the
Company by the Servicer for those loans subject to nonaccrual status in
accordance with SOP 03-3. Many of the pools that have been purchased by the
Servicer do not include purchased interest in the cost basis; thus,
interest collected does not have a cost basis and represents profit.
Interest income collected by the Servicer is reflected in the Company's
consolidated financial statements as interest income
included as part of interest income and discount on loan
pool participations.
Loans held for sale:
Loans originated and intended for sale in the secondary market are carried at
the lower of aggregate cost or estimated fair value, as determined by aggregate
outstanding commitments from investors or current investor yield requirements.
Net unrealized losses, if any, are recognized through a valuation allowance by
charges to income.
Mortgage
loans held for sale are generally sold with the mortgage servicing rights
released. Gains or losses on sales of mortgage loans with servicing released are
recognized based on the difference between the selling price and the carrying
value of the related mortgage loans sold.
F-12
MidWestOne
Financial Group, Inc. and
Subsidiaries
Notes
to Consolidated Financial Statements
|
Note
1.
|
Nature
of Business and Significant Accounting Policies
(Continued)
|
Allowance for loan
losses: The allowance for loan losses is established as losses are
estimated to have occurred through a provision for loan losses charged to
earnings. Loan losses are charged against the allowance when management believes
the uncollectibility of a loan balance is confirmed. Subsequent recoveries, if
any, are credited to the allowance.
The
allowance for loan losses is evaluated on a quarterly basis by management and is
based upon management’s periodic review of the collectiblity of the loans in
light of historical experience, the nature and volume of the 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, as it requires estimates that are
susceptible to significant revision as more information becomes
available.
The
allowance consists of specific, general and unallocated components. The specific
component relates to loans that are classified as doubtful, substandard or
special mention. For such loans that are also classified as impaired, an
allowance is established when the discounted cash flows (or collateral value or
observable market price) of the impaired loan is lower than the carrying value
of that loan. The general component covers nonclassified loans and is based on
historical loss experience adjusted for qualitative factors. An unallocated
component is maintained to cover uncertainties that could affect management’s
estimate of probable losses. The unallocated component of the allowance reflects
that margin of imprecision inherent in the underlying assumptions used in the
methodologies for estimating specific and general losses in the
portfolio.
F-13
MidWestOne
Financial Group, Inc. and
Subsidiaries
Notes
to Consolidated Financial Statements
|
Note
1.
|
Nature
of Business and Significant Accounting Policies
(Continued)
|
A loan is
considered impaired when, based on current information and events, it is
probable that the Banks will be unable to collect the scheduled payments of
principal or interest when due according to the contractual terms of the loan
agreement. Factors considered by management in determining impairment include:
payment status, collateral value and the probability of collecting scheduled
principal and interest payments when due. Loans that experience insignificant
payment delays and payment shortfalls generally are not classified as impaired.
Management determines the significance of payment delays and payment shortfalls
on a case-by-case basis, taking into consideration all of the circumstances
surrounding the loan and the borrower, including the length of the delay, the
reasons for the delay, the borrower’s prior payment record and the amount of the
shortfall in relation to the principal and interest owed. Impairment is measured
on a loan-by-loan basis for commercial, construction and commercial real estate
loans by either the present value of expected future cash flows discounted at
the loan’s effective interest rate, the loan’s obtainable market price or the
fair value of the collateral, if the loan is collateral dependent.
Large
groups of smaller-balance, homogeneous loans are collectively evaluated for
impairment. Accordingly, the Banks do not separately identify individual
consumer and residential loans for impairment disclosures.
Transfers of financial
assets: Revenue from the origination and sale of loans in the secondary
market is recognized upon the transfer of financial assets and accounted for as
sales when control over the assets has been surrendered. Control over
transferred assets is deemed to be surrendered when: (1) the assets have been
isolated from the Banks, (2) the transferee has the right to pledge or exchange
the assets it received and no condition both constrains the transferee from
taking advantage of its right to pledge or exchange and provides more than a
trivial benefit to the transferor and (3) the Banks do not maintain effective
control over the transferred assets through an agreement to repurchase them
before their maturity or the ability to unilaterally cause the holder to return
specific assets.
Revenue recognition:
Trust fees, deposit account service charges and other fees are recognized when
the services are provided or when customers use the services.
Credit-related financial
instruments: In the ordinary course of business, the Banks have entered
into commitments to extend credit, including commitments under credit card
arrangements, commercial letters of credit and standby letters of credit. Such
financial instruments are recorded when they are funded.
Property and
equipment: Property and equipment are stated at cost less accumulated
depreciation. The estimated useful lives and primary method of depreciation for
the principal items are as follows:
|
Type of Assets
|
Years
|
Depreciation Method
|
||
|
Buildings
and leasehold improvements
|
10
– 30
|
Straight-line
|
||
|
Furniture
and equipment
|
3 –
10
|
Straight-line
|
Charges
for maintenance and repairs are expense as incurred. When assets are
retired or disposed of the related cost and accumulated depreciation are removed
from the respective accounts and the resulting gain or loss is
recorded.
Other real estate
owned: Real estate parcels acquired in satisfaction of loans are included
in other assets at the lower of cost or fair value less estimated costs of
disposal. When a property is acquired, the excess of the recorded investment in
the property over its estimated fair value, less estimated costs of disposal, if
any, is charged to the allowance for loan losses. Subsequent declines in the
estimated fair value are recorded in a valuation allowance account. Additions to
or reductions from valuation allowances, along with net operating results of the
property, are included in other operating expenses. Other real estate owned was
$996,000 as of December 31, 2008 and none as of December 31, 2007,
respectively.
F-14
MidWestOne
Financial Group, Inc. and
Subsidiaries
Notes
to Consolidated Financial Statements
|
Note
1.
|
Nature
of Business and Significant Accounting Policies
(Continued)
|
Bank-owned life
insurance: Bank-owned life insurance is carried at cash surrender value
with increases/decreases reflected as income/expense in the statement of
income. Emerging Issues task Force (“EITF”) No. 06-4 “Accounting for
Deferred Compensation and Postretirement Benefit Aspects of Endorsement
Split-Dollar Insurance Arrangements” finalized the accounting treatment for
these policies and is effective for fiscal years beginning after December 15,
2007. As permitted by EITF 06-4, the Company recognized this change
in accounting principle as of January 1, 2008, through a cumulative-effect
charge to retained earnings totaling $133,000.
F-15
MidWestOne
Financial Group, Inc. and
Subsidiaries
Notes
to Consolidated Financial Statements
|
Note
1.
|
Nature
of Business and Significant Accounting Policies
(Continued)
|
Employee benefit
plans: Annual expense of a defined benefit pension plan includes service
cost (measured by projected unit credit method), interest on the projected
benefit obligation, actual return on plan assets and other amortization and
deferred amounts specified by Financial Accounting Standards Board Statements
No. 87 and No. 158.
Deferred
benefits under a salary continuation plan are charged to expense during the
period the participating employees attain full eligibility.
Stock-based
compensation: The Company adopted SFAS No. 123(R) on January 1, 2006
using the prospective method in which compensation cost is recognized over the
service period for all awards granted subsequent to the Company’s adoption of
SFAS No. 123(R). Prior to the adoption of SFAS No. 123(R), the Company accounted
for stock-based compensation under the intrinsic value method, as outlined under
the provisions of Accounting Principles Board Opinion No. 25 and its
related interpretations. Accordingly, no compensation cost was recognized for
grants issued prior to the adoption of SFAS No. 123(R) since the options were
granted with an exercise price equal to market value at the date of
grant.
Income taxes: The Company files a
consolidated federal income tax return. Income tax expense is generally
allocated as if the Company and its subsidiaries file separate income tax
returns. For State purposes, the bank files a franchise tax return and the
remaining entities file a consolidated income tax return. Deferred tax assets
and liabilities are recognized for the future tax consequences attributable to
temporary differences between the financial statement carrying amount and of
existing assets and liabilities and their respective tax bases. Deferred tax
assets and liabilities are measured using enacted tax rates expected to apply to
taxable income in the years in which those temporary differences are expected to
be recovered or settled. The effect on deferred tax assets and liabilities of a
change in tax rates is recognized in income in the period that includes the
enactment date. Deferred tax assets are reduced by a valuation allowance when,
in the opinion of management, it is more likely than not that some portion or
all of the deferred tax assets will not be realized.
The FASB
issued Interpretation No 48 Accounting for
Uncertainty in Income Taxes - an Interpretation of FASB Statement No. 109 (FIN
48) in June 2006. The Interpretation provides clarification on accounting
for uncertainty in income taxes recognized in an enterprises financial
statements in accordance with FASB Statement No. 109, Accounting for Income Taxes. The Interpretation prescribes a
recognition threshold and measurement attribute for the financial statement
recognition and measurement of a tax position taken or expected to be taken in a
tax return. The implementation of FIN 48 by the Company on January 1, 2007,
resulted in no material increase or decrease for unrecognized tax benefits.
Additionally, there were no material unrecognized tax benefits or any interest
or penalties on any unrecognized tax benefits as of December 31, 2008 and
2007.
Interest
and penalties related to income taxes are recorded as miscellaneous expense in
the statements of income.
Earnings per share:
Basic per-share amounts are computed by dividing net income (the numerator) by
the weighted-average number of common shares outstanding (the denominator).
Diluted per share amounts assume the conversion, exercise or issuance of all
potential common stock, unless the effect is to reduce the loss or increase the
income per common share from continuing operations.
F-16
MidWestOne
Financial Group, Inc. and
Subsidiaries
Notes
to Consolidated Financial Statements
Following
is a reconciliation of the denominator:
|
Note
1.
|
Nature
of Business and Significant Accounting Policies
(Continued)
|
|
Year Ended December 31,
|
||||||||||||
|
2008
|
2007
|
2006
|
||||||||||
| (in thousands, except per share amounts) | ||||||||||||
|
Basic
EPS computation
|
||||||||||||
|
Numerator:
|
||||||||||||
|
Net
income (loss)
|
$ | (24,562 | ) | $ | 6,648 | $ | 5,798 | |||||
|
Denominator:
|
||||||||||||
|
Weighted
average shares outstanding
|
7,946 | 5,171 | 5,205 | |||||||||
|
Basic
EPS
|
$ | (3.09 | ) | $ | 1.29 | $ | 1.11 | |||||
|
Diluted
EPS computation
|
||||||||||||
|
Numerator:
|
||||||||||||
|
Net
income (loss)
|
$ | (24,562 | ) | $ | 6,648 | $ | 5,798 | |||||
|
Denominator:
|
||||||||||||
|
Weighted
average shares outstanding
|
7,946 | 5,171 | 5,205 | |||||||||
|
Weighted
average dilutive shares outstanding
|
||||||||||||
|
for
stock options
|
- | 2 | 9 | |||||||||
| 7,946 | 5,173 | 5,214 | ||||||||||
|
Diluted
EPS
|
$ | (3.09 | ) | $ | 1.29 | $ | 1.11 | |||||
Due to
our net loss for the year ended December 31, 2008, no potentially dilutive
shares were included as such shares would be anti-dilutive.
Goodwill: Goodwill
represents the cost in excess of the fair value of assets acquired in business
combinations. Goodwill has an indefinite life, but is tested for impairment
annually or more frequently if events or changes in circumstances indicate that
the asset might be impaired. The annual impairment test consists of a comparison
of the fair value of the intangible asset to its carrying amount. If the
carrying amount were to exceed the fair value, an impairment loss would be
recognized. The Company established September 30 as the date for its annual
impairment test; however, quarterly impairment tests have been completed at each
calendar quarter-end in 2008 starting with June 30 given the adverse changes in
the business climate and declines in the market value of our stock to levels
below our book value. The December 31, 2008 impairment test indicated and
concluded that all goodwill existing at the time of the merger on March 14 had
subsequently become impaired. Therefore, at December 31 the Company
recorded a $27,295,000 charge to earnings.
Trust assets: Trust
assets, other than cash deposits held by the Banks in fiduciary or agency
capacities for its customers, are not included in the accompanying financial
statements because such accounts are not assets of the Banks.
Comprehensive income:
Accounting principles generally require that recognized revenue, expenses, gains
and losses be included in net income. Although certain changes in assets and
liabilities, such as unrealized gains and losses on available-for-sale
securities are reported as a separate component of the equity section of the
balance sheet, such items, along with net income, are components of
comprehensive income.
F-17
MidWestOne
Financial Group, Inc. and
Subsidiaries
Notes
to Consolidated Financial Statements
|
Note
1.
|
Nature
of Business and Significant Accounting Policies
(Continued)
|
The
components of other comprehensive income and related tax effects are as
follows:
|
Year Ended December 31,
|
||||||||||||
|
2008
|
2007
|
2006
|
||||||||||
| (in thousands) |
|
|||||||||||
|
Unrealized
holding gains on available for sale securities
|
$ | 1,310 | $ | 1,863 | $ | 2,266 | ||||||
|
Reclassification
adjustment for losses realized in income
|
346 | 256 | 108 | |||||||||
| Unrealized loss on pension | (3,845 | ) | — | — | ||||||||
| (2,189 | ) | 2,119 | 2,374 | |||||||||
|
Tax
effects
|
(822 | ) | 805 | 881 | ||||||||
|
Other
comprehensive income
|
$ | (1,367 | ) | $ | 1,314 | $ | 1,493 | |||||
The
components of accumulated other comprehensive income, included in shareholders’
equity, are as follows:
|
Year Ended December 31,
|
||||||||||||
| 2008 | 2007 | 2006 | ||||||||||
| (in thousands) |
|
|||||||||||
|
Net
unrealized gains (losses) on securities available for sale
|
$ | 1,335 | $ | (321 | ) | $ | (2,440 | ) | ||||
| Unrealized loss on pension | (3,845 | ) | — | — | ||||||||
| (2,510 | ) | (321 | ) | (2,440 | ) | |||||||
|
Tax
effects
|
(937 | ) | (115 | ) | (920 | ) | ||||||
|
Accumulated
other comprehensive income (loss)
|
$ | (1,573 | ) | $ | (206 | ) | $ | (1,520 | ) | |||
F-18
MidWestOne
Financial Group, Inc. and
Subsidiaries
Notes
to Consolidated Financial Statements
|
Note
2.
|
Investment
Securities
|
The
amortized cost and fair value of investment securities available for sale, with
gross unrealized gains and losses, are as follows:
|
Gross
|
Gross
|
|||||||||||||||
|
Amortized
|
Unrealized
|
Unrealized
|
||||||||||||||
|
Cost
|
Gains
|
Losses
|
Fair Value
|
|||||||||||||
| (in thousands) | ||||||||||||||||
|
December
31, 2008:
|
||||||||||||||||
|
U.S.
Government agencies and corporations
|
$ | 70,447 | $ | 3,153 | $ | - | $ | 73,600 | ||||||||
|
State
and political subdivisions
|
114,261 | 827 | (1,245 | ) | 113,843 | |||||||||||
|
Mortgage-backed
securities and collateralized mortgage
obligations
|
71,618 | 1,607 | (148 | ) | 73,077 | |||||||||||
|
Corporate
debt securities
|
12,263 | 6 | (2,831 | ) | 9,438 | |||||||||||
| 268,589 | 5,593 | (4,224 | ) | 269,958 | ||||||||||||
|
Other
equity securities
|
2,656 | - | (234 | ) | 2,422 | |||||||||||
|
Total
|
$ | 271,245 | $ | 5,593 | $ | (4,458 | ) | $ | 272,380 | |||||||
|
December
31, 2007:
|
||||||||||||||||
|
U.S.
Government agencies and corporations
|
$ | 65,937 | $ | 1,013 | $ | (59 | ) | $ | 66,891 | |||||||
|
State
and political subdivisions
|
82,876 | 299 | (763 | ) | 82,412 | |||||||||||
|
Mortgage-backed
and collateralized mortgage obligations
|
69,079 | 374 | (325 | ) | 69,128 | |||||||||||
|
Other
securities
|
14,554 | 368 | (1,228 | ) | 13,694 | |||||||||||
|
Total
|
$ | 232,446 | $ | 2,054 | $ | (2,375 | ) | $ | 232,125 | |||||||
F-19
MidWestOne
Financial Group, Inc. and
Subsidiaries
Notes
to Consolidated Financial Statements
|
Note
2.
|
Investment
Securities (Continued)
|
The
amortized cost and fair value of investment securities held-to-maturity, with
gross unrealized gains and losses, are as follows:
|
Gross
|
Gross
|
|||||||||||||||
|
Amortized
|
Unrealized
|
Unrealized
|
||||||||||||||
| (in thousands) |
Cost
|
Gains
|
Losses
|
Fair Value
|
||||||||||||
|
December 31,
2008:
|
||||||||||||||||
|
Mortgage-backed
securities
|
$ | 96 | $ | 3 | $ | - | $ | 99 | ||||||||
|
State
and political subdivisions
|
8,029 | 1 | (9 | ) | 8,021 | |||||||||||
| $ | 8,125 | $ | 4 | $ | (9 | ) | $ | 8,120 | ||||||||
|
December
31, 2007:
|
||||||||||||||||
|
State
and political subdivisions
|
$ | 95 | $ | 6 | $ | - | $ | 101 | ||||||||
Investment
securities with a carrying value of $88,576,000 and $76,885,000 at December 31,
2008 and 2007, respectively, were pledged on public deposits, securities sold
under agreements to repurchase and for other purposes, as required or permitted
by law.
Gross
unrealized losses and fair value, aggregated by investment category and length
of time that individual securities have been in a continuous unrealized loss
position are summarized as follows:
F-20
MidWestOne
Financial Group, Inc. and
Subsidiaries
Notes
to Consolidated Financial Statements
|
Note
2.
|
Investment
Securities (Continued)
|
December
31, 2008:
|
Less than 12 Months
|
12 Months or More
|
Total
|
||||||||||||||||||||||
|
Gross
|
Gross
|
Gross
|
||||||||||||||||||||||
|
Fair
|
Unrealized
|
Fair
|
Unrealized
|
Fair
|
Unrealized
|
|||||||||||||||||||
|
Value
|
Losses
|
Value
|
Losses
|
Value
|
Losses
|
|||||||||||||||||||
|
(In
Thousands)
|
||||||||||||||||||||||||
|
U.S.
Government agencies
|
$ | - | $ | - | $ | - | $ | - | $ | - | $ | - | ||||||||||||
|
State
and political subdivisions
|
47,187 | 1,015 | 7,379 | 239 | 54,566 | 1,254 | ||||||||||||||||||
|
Mortgage-backed
and collateralized
mortgage obligations
|
14,983 | 148 | - | - | 14,983 | 148 | ||||||||||||||||||
|
Corporate
debt securities
|
6,653 | 2,509 | 730 | 322 | 7,383 | 2,831 | ||||||||||||||||||
|
Other
equity securities
|
2,422 | 234 | - | - | 2,422 | 234 | ||||||||||||||||||
| $ | 71,245 | $ | 3,906 | $ | 8,109 | $ | 561 | $ | 79,354 | $ | 4,467 | |||||||||||||
December
31, 2007:
|
Less than 12 Months
|
12 Months or More
|
Total
|
||||||||||||||||||||||
|
Gross
|
Gross
|
Gross
|
||||||||||||||||||||||
|
Fair
|
Unrealized
|
Fair
|
Unrealized
|
Fair
|
Unrealized
|
|||||||||||||||||||
|
Value
|
Losses
|
Value
|
Losses
|
Value
|
Losses
|
|||||||||||||||||||
|
(In Thousands)
|
||||||||||||||||||||||||
|
|
||||||||||||||||||||||||
|
U.S.
Government agencies
|
$ | - | $ | - | $ | 11,939 | $ | 59 | $ | 11,939 | $ | 59 | ||||||||||||
|
State
and political subdivisions
|
12,016 | 178 | 33,220 | 585 | 45,236 | 763 | ||||||||||||||||||
|
Mortgage-backed
and collateralized mortgage obligations
|
- | - | 30,956 | 325 | 30,956 | 325 | ||||||||||||||||||
|
Other
securities
|
8,617 | 1,066 | 239 | 162 | 8,856 | 1,228 | ||||||||||||||||||
| $ | 20,633 | $ | 1,244 | $ | 76,354 | $ | 1,131 | $ | 96,987 | $ | 2,375 | |||||||||||||
In
reaching the conclusion that the impairment disclosed above is “other
than temporary”, the Company evaluated the nature of U.S. Treasury securities,
U.S. Government securities, mortgage-backed securities, collateralized mortgage
obligations, corporate debt securities and other securities, and the credit
ratings of the state and municipal bonds. In the case of the corporate debt
securities, the Company determined that impairment was apparent and was due to
the deterioration in the credit quality of the issuers and the default and
deferral of interest payments by some of the issuers. The Company, therefore,
recognized a $6.2 million impairment in income.
F-21
MidWestOne
Financial Group, Inc. and
Subsidiaries
Notes
to Consolidated Financial Statements
|
Note
2.
|
Investment
Securities (Continued)
|
The
contractual maturity distribution of investment securities at December 31, 2008,
is summarized as follows:
|
Available-For-Sale
|
Held-To-Maturity
|
|||||||||||||||
|
Amortized
|
Amortized
|
|||||||||||||||
|
Cost
|
Fair Value
|
Cost
|
Fair Value
|
|||||||||||||
| (in thousands) | ||||||||||||||||
|
Due
in one year or less
|
$ | 22,900 | $ | 23,120 | $ | 1,600 | $ | 1,550 | ||||||||
|
Due
after one year through five years
|
104,709 | 106,951 | 5,735 | 5,769 | ||||||||||||
|
Due
after five years through ten years
|
54,538 | 55,183 | 694 | 702 | ||||||||||||
|
Due
after ten years
|
14,824 | 11,627 | - | - | ||||||||||||
|
Mortgage-backed
and collateralized mortgage obligations
|
71,618 | 73,077 | 96 | 99 | ||||||||||||
| $ | 268,589 | $ | 269,958 | $ | 8,125 | $ | 8,120 | |||||||||
Mortgage-backed
and collateralized mortgage obligations are collateralized by mortgage loans
guaranteed by U.S. Government agencies. Experience has indicated that principal
payments will be collected sooner than scheduled because of prepayments.
Therefore, these securities are not scheduled in the maturity categories
indicated above. Other equity securities available for sale with an amortized
cost of $2,656,000 and a fair value of $2,422,000 are excluded from this
table.
Proceeds
from the sale of investment securities available for sale during 2008, 2007 and
2006 were $10,550,000, $28,774,000 and $8,519,000, respectivley.
Realized
gains and losses on sales of investment securities are as follows:
|
Year Ended December 31,
|
||||||||||||
|
2008
|
2007
|
2006
|
||||||||||
| (in thousands) | ||||||||||||
|
Gross
gains
|
$ | 259 | $ | 45 | $ | 50 | ||||||
|
Gross
losses
|
(605 | ) | (301 | ) | (158 | ) | ||||||
|
Other
than temporary impairment
|
(6,194 | ) | - | - | ||||||||
| $ | (6,540 | ) | $ | (256 | ) | $ | (108 | ) | ||||
F-22
MidWestOne
Financial Group, Inc. and Subsidiaries
Notes
to Consolidated Financial Statements
|
Note
3.
|
Loans
|
The
composition of the net loans is as follows:
|
December 31,
|
||||||||
|
2008
|
2007
|
|||||||
| (in thousands) | ||||||||
|
Commercial,
financial and agricultural
|
$ | 299,238 | $ | 103,029 | ||||
|
Real
estate:
|
||||||||
|
Construction
|
99,617 | 28,774 | ||||||
|
Mortgage
|
586,163 | 260,201 | ||||||
|
Loans
to individuals
|
23,857 | 8,895 | ||||||
|
All
other
|
5,939 | 655 | ||||||
|
Total
|
$ | 1,014,814 | $ | 401,554 | ||||
Changes
in the allowance for loan losses are as follows:
|
Year Ended December 31,
|
||||||||||||
|
2008
|
2007
|
2006
|
||||||||||
| (in thousands) | ||||||||||||
|
Balance,
beginning
|
$ | 5,466 | $ | 5,298 | $ | 5,227 | ||||||
|
Provision
expense
|
4,366 | 500 | 550 | |||||||||
|
Recoveries
of amounts charged-off
|
570 | 148 | 103 | |||||||||
|
Loans
charged-off
|
(4,903 | ) | (480 | ) | (582 | ) | ||||||
|
Allowance
from acquired bank
|
5,478 | - | - | |||||||||
|
Balance,
ending
|
$ | 10,977 | $ | 5,466 | $ | 5,298 | ||||||
Total
nonperfoming loans and assets at December 31, 2008 and 2007,
were:
|
|
2008
|
2007
|
||||||
|
(in
thousands)
|
||||||||
|
Impaired
loans:
|
||||||||
|
Nonaccrual
|
$ | 11,785 | 782 | |||||
|
Restructured
|
424 | - | ||||||
|
Total
impaired loans
|
12,209 | 782 | ||||||
|
Loans
past due 90 days and more
|
3,024 | 514 | ||||||
|
Total
nonperforming loans
|
15,233 | 1,296 | ||||||
|
Other
real estate owned
|
996 | - | ||||||
|
Total
nonperforming assets
|
$ | 16,229 | 1,296 | |||||
The
average balances of nonperforming loans for the years ended December 31,
2008 and 2007, were $17.7 and $1.5 million, respectively. The allowance for
credit losses related to nonperforming loans at December 31, 2008 and 2007,
was $868,000 and $102,000, respectively. Nonperforming loans of $3.8 million and
$0 at December 31, 2008 and 2007, respectively, were not subject to a
related allowance for credit losses because of the net realizable value of loan
collateral, guarantees and other factors. As of December 31, 2008, the
Company has no commitments to lend additional funds to any borrowers who have
nonperforming loans.
F-23
MidWestOne
Financial Group, Inc. and Subsidiaries
Notes
to Consolidated Financial Statements
|
Note
3.
|
Loans
(Continued)
|
A summary
of the changes in the carrying value of loan pool participations for the year
ended December 31, 2008, were as follows:
|
2008
|
||||
| (in thousands) | ||||
|
Balance
at beginning of year
|
$ | - | ||
|
Acquired
in the merger
|
89,457 | |||
|
Purchases
|
28,332 | |||
|
Principal
payments
|
(22,601 | ) | ||
|
Net
charge-offs
|
(2,256 | ) | ||
|
Balance
at end of year
|
$ | 92,932 | ||
|
Total
face value at end of year
|
$ | 175,319 | ||
Statement of Position (SOP) 03-3, Accounting for Certain Loans or Debt Securities
Acquired in a Transfer addresses accounting for differences between
contractual cash flows and cash flows expected to be collected from an
investor’s
initial investment in loans or debt securities (loans) acquired in a transfer if
those differences are attributable, at least in part, to credit quality.
The
Company evaluates all loans under the SOP 03-3 criteria and determined that
certain loans did not meet the criteria for level-yield income recognition
required by SOP 03-3. The outstanding balance of those loans was
$133,737,000 with a carrying value of $64,975,000 as of December 31,
2008. Additionally, the Company purchased $19,088,000 in loans during the
third and fourth quarters of 2008 that were in the process of being evaluated
under SOP 03-3 as of December 31, 2008 in accordance with the Company’s
accounting policy on loan pool participations.
F-24
MidWestOne
Financial Group, Inc. and Subsidiaries
Notes
to Consolidated Financial Statements
|
Note
3.
|
Loans
(Continued)
|
The
outstanding balances and carrying values as of December 31 of the loans
purchased that met the level-yield income recognition criteria under SOP 03-3
are as follows:
|
December
31,
|
||||
|
2008
|
||||
| (in thousands) | ||||
|
Agricultural
|
$ | 54 | ||
|
Commercial
|
250 | |||
|
Real
estate:
|
||||
|
1-4
family residences
|
501 | |||
|
Agricultural
|
234 | |||
|
Land
Development
|
4 | |||
|
Multifamily
residences
|
1,029 | |||
|
Commercial
|
5,842 | |||
|
Total
real estate
|
7,610 | |||
|
Loans
to individuals
|
30 | |||
|
Total
|
$ | 7,944 | ||
|
Carrying
amount, net of allowance of $182.
|
$ | 7,762 | ||
Changes
in accretable yield on the loans that met the level-yield income recognition
criteria under SOP 03-3 were as follows:
|
Accretable Yield
|
||||
|
December 31,
|
||||
|
2008
|
||||
| (in thousands) | ||||
|
Balance
at beginning of year
|
$ | - | ||
|
Acquired
in the merger
|
1,475 | |||
|
Additions
|
1,497 | |||
|
Accretion
|
(789 | ) | ||
|
Reclassifications
(to)/from nonaccretable differences
|
(8 | ) | ||
|
Balance
at end of year
|
$ | 2,175 | ||
|
Cash
flows expected to be collected at acquisition
|
$ | 16,622 | ||
|
Basis
in acquired loans at acquistion
|
12,502 | |||
F-25
MidWestOne
Financial Group, Inc. and Subsidiaries
Notes
to Consolidated Financial Statements
|
Note
4.
|
Premises and
Equipment
|
Premises and
equipment is as follows:
|
December 31,
|
||||||||
|
2008
|
2007
|
|||||||
| (in thousands) | ||||||||
|
Land
|
$ | 3,130 | $ | 2,428 | ||||
|
Buildings
and leasehold improvements
|
27,197 | 11,535 | ||||||
|
Furniture
and equipment
|
10,493 | 9,180 | ||||||
| 40,820 | 23,143 | |||||||
|
Accumulated
depreciation and amortization
|
12,072 | 11,341 | ||||||
| $ | 28,748 | $ | 11,802 | |||||
Premises and
equipment depreciation and amortization expense for the years ended December 31,
2008, 2007, and 2006 expense was $2,424,000, $1,325,000, and $1,251,000
respectively.
F-26
MidWestOne
Financial Group, Inc. and Subsidiaries
Notes
to Consolidated Financial Statements
|
Note
5.
|
Business
Combinations
|
On March
14, 2008, the Company and Former MidWestOne completed their merger.
Former MidWestOne was
the parent company of MidWestOne Bank, MidWestOne Investment Services, Inc.
and MidWestOne
Insurance Services, Inc. The Company merged with Former MidWestOne in order to create a
strong, independent financial services institution headquartered in Iowa that
has the increased resources of the combined institution and the potential to
achieve greater earnings and balance sheet growth. The Company issued 3,519,788
shares of common stock in exchange for 100% of common stock of Former
MidWestOne with a
market value of approximately $81.8 million. The Company also issued replacement
stock options to the holders of the currently outstanding options of the former
MidWestOne in conjunction with the business combination. The fair value of the
replacement options is a component of the purchase price. A total of 393,404
replacement options were issued on March 14, 2008, having a fair value of $2.4
million. The Company incurred $1.1 million in transaction costs in the business
combination. Former MidWestOne had assets in excess of $760 million and 19
banking offices located in Iowa.
The
following is Former MidWestOne’s condensed balance sheet
showing the fair values of assets acquired and liabilities assumed as of the
date of acquisition.
|
Condensed
Balance Sheet
|
||||
|
Cash
& Cash Equivalents
|
$
|
20,351
|
||
|
Investment
Securities
|
85,490
|
|||
|
Loans
(net)
|
535,179
|
|||
|
Loan
Pools
|
90,876
|
|||
|
Other
Assets
|
37,524
|
|||
|
Other
Intangible Assets
|
13,203
|
|||
|
Total
Assets
|
|
782,623
|
||
|
Deposits
|
|
586,721
|
||
|
Fed
Funds Purchased
|
6,000
|
|||
|
FHLB
Advances
|
96,113
|
|||
|
Other
Borrowed Money
|
1,500
|
|||
|
Trust
Preferred
|
15,683
|
|||
|
Other
Liabilities
|
14,301
|
|||
|
Total
Liabilites
|
720,318
|
|||
|
Net
Assets Acquired
|
62,305
|
|||
|
Purchase
Price
|
85,244
|
|||
|
Goodwill
|
$
|
22,939
|
||
Assuming
the Merger of Former MidWestOne occurred on January 1,
2008, the following summarizes the unaudited pro forma combined operating
results for the years ended December 31, 2008 and 2007:
|
Years
Ended December 31,
|
||||||||
|
(dollars
in thousands, except per share)
|
||||||||
|
2008
|
2007
|
|||||||
|
Pro
forma interest income
|
$ | 80,643 | 88,571 | |||||
|
Pro
forma interest expense
|
35,365 | 45,388 | ||||||
|
Pro
forma net interest income
|
45,278 | 43,183 | ||||||
|
Pro
forma provision for loan losses
|
4,618 | 1,482 | ||||||
|
Pro
forma noninterest income
|
7,114 | 14,706 | ||||||
|
Pro
forma noninterest expense
|
70,694 | 41,039 | ||||||
|
Pro
forma income before tax
|
(22,920 | ) | 15,368 | |||||
|
Pro
forma income tax (benefit)
|
(188 | ) | 4,458 | |||||
|
Pro
forma net income (loss)
|
$ | (23,108 | ) | 10,910 | ||||
|
Pro
forma earnings (loss) per share - basic
|
$ | (2.67 | ) | $ | 1.26 | |||
|
Proforma
earnings (loss) per share - diluted
|
$ | (2.67 | ) | $ | 1.25 | |||
Insurance
Agency Acquisition
On
November 21, 2008, the Company entered into an agreement to acquire the Butler
Brown Insurance agency in Oskaloosa, Ia. This acquisition will expand
the Company’s insurance agency business in one of its primary market
areas. Butler Brown resulted in a cash payment of $1,091,000 and the
recognition of an identifiable intangible asset to be amortized over ten years,
for $867,000.
F-27
|
Note
6.
|
Goodwill
and Other Intangible Assets
|
Although
goodwill totaled $27.3 million as recently as September 30, 2008 and $4.4
million as of December 31, 2007 with the increase being the result of the
Merger, goodwill is subject to impairment testing at least annually under the
provisions of Financial Accounting Standards Board Statement No. 142 (“SFAS
142”).
The
Company tested goodwill for impairment during the quarter ended December 31,
2008 and determined that there was impairment due to the extreme volatility in
the banking industry and the resulting impact this volatility has had on the
Company’s
stock price by December 31, 2008. Consequently, an impairment charge
totaling $27.3 million was taken during the fourth quarter.
Other
intangible assets increased to $13.4 million as of December 31, 2008 as a result
of the merger. Amortization of intangible assets is recorded using an
accelerated method based on the estimated life of the core deposit intangible,
customer list intangible and insurance agency intangible. Projections of
amortization expense are based on existing asset balances and the remaining
useful lives. The following table summarizes the amounts and carrying values of
intangible assets as of December 31, 2008 and 2007.
|
Weighted
|
Gross
|
Unamortized
|
||||||||||||||
|
Average
|
Carrying
|
Accumulated
|
Intangible
|
|||||||||||||
|
Useful Life
|
Amount
|
Amortization
|
Assets
|
|||||||||||||
|
(years)
|
(in thousands)
|
|||||||||||||||
|
December 31,
2008
|
||||||||||||||||
|
Other
intangible assets:
|
||||||||||||||||
|
Mortgage
servicing rights
|
6
|
$ | 321 | 204 | 117 | |||||||||||
|
Insurance
agency intangible
|
15
|
1,320 | 52 | 1,268 | ||||||||||||
|
Core
deposit premium
|
10
|
5,433 | 741 | 4,692 | ||||||||||||
|
Trade
name intangible
|
-
|
7,040 | - | 7,040 | ||||||||||||
|
Customer
list intangible
|
15
|
330 | 23 | 307 | ||||||||||||
|
Total
|
$ | 14,444 | $ | 1,020 | $ | 13,424 | ||||||||||
|
December 31,
2007
|
||||||||||||||||
|
Other
intangible assets:
|
||||||||||||||||
|
Mortgage
servicing rights
|
$ | 321 | 88 | 233 | ||||||||||||
|
Insurance
agency intangible
|
53 | 18 | 35 | |||||||||||||
|
Total
|
$ | 374 | $ | 106 | $ | 268 | ||||||||||
The
following table summarizes future amortization expense of intangible assets.
Amortization of intangible assets is recorded using an accelerated method based
on the estimated useful lives of the respective intangible assets.
|
Mortgage
|
Insurance
|
Core
|
Customer
|
|||||||||||||||||
|
Servicing
|
Agency
|
Deposit
|
List
|
|||||||||||||||||
|
(in
thousands)
|
Rights
|
Intangible
|
Premium
|
Intangible
|
Totals
|
|||||||||||||||
|
Year
ended December 31,
|
||||||||||||||||||||
|
2009
|
$ | 117 | 125 | 914 | 27 | 1,183 | ||||||||||||||
|
2010
|
- | 125 | 815 | 26 | 966 | |||||||||||||||
|
2011
|
- | 124 | 716 | 24 | 864 | |||||||||||||||
|
2012
|
- | 115 | 617 | 23 | 755 | |||||||||||||||
|
2013
|
- | 114 | 519 | 22 | 655 | |||||||||||||||
|
Thereafter
|
- | 665 | 1,111 | 185 | 1,961 | |||||||||||||||
|
Total
|
$ | 117 | $ | 1,268 | $ | 4,692 | $ | 307 | $ | 6,384 | ||||||||||
F-28
MidWestOne
Financial Group, Inc. and Subsidiaries
Notes
to Consolidated Financial Statements
|
Note
7.
|
Loans
Serviced for Others
|
Loans
serviced for others are not included in the accompanying consolidated balance
sheets. The unpaid principal balances of mortgage and other loans serviced for
others were $85,749,000 and $96,866,000 at December 31, 2008 and 2007,
respectively.
|
Note
8.
|
Certificates
of Deposit
|
At
December 31, 2008, the scheduled maturities of certificates of deposits (in
thousands) are as follows:
|
2009
|
$ | 375,826 | ||
|
2010
|
67,051 | |||
|
2011
|
77,575 | |||
|
2012
|
10,417 | |||
|
2013
|
24,612 | |||
|
Thereafter
|
790 | |||
| $ | 556,271 |
|
Note
9.
|
Federal
Home Loan Bank and Other Borrowings
|
The
Bank is a member of The Federal Home Loan Bank of Des Moines and, as
of December 31, 2008 and 2007, held Federal Home Loan Bank (FHLB) stock totaling
$9,075,000 and $2,995,000, respectively, which is recorded in other assets.
Advances from the FHLB are collateralized primarily by 1-4 unit residential,
commercial, and agricultural, real estate first mortgages equal to various
percentages of the total outstanding notes. As of December 31, 2008 and
2007, the borrowings were as follows:
|
2008
|
2007
|
|||||||
| (in thousands) | ||||||||
|
Due
in 2008, 3.40% to 5.25%
|
$ | - | $ | 11,000 | ||||
|
Due
in 2008, 5.41%, callable quarterly
|
- | 3,000 | ||||||
|
Due
in 2009, 3.54% to 7.07%
|
50,982 | 15,000 | ||||||
|
Due
in 2009, 5.40% to 5.81%, callable quarterly
|
4,500 | 4,000 | ||||||
|
Due
in 2010, 2.86% to 5.44%
|
37,000 | 14,000 | ||||||
|
Due
in 2010, 2.63% to 5.41%, callable quarterly
|
11,000 | - | ||||||
|
Due
in 2011, 2.89% to 5.02%
|
41,000 | - | ||||||
|
Due
in 2012, 3.83% to 4.33%
|
8,000 | - | ||||||
|
Due
in 2013, 4.04% to 5.35%
|
6,300 | - | ||||||
| $ | 158,782 | $ | 47,000 | |||||
Securities
sold under repurchase agreements with balances of $44,249,000 and $45,997,000 as
of December 31, 2008 and 2007, respectively, are used by the Company to
acquire funds from customers where the customer is required or desires to have
their funds supported by collateral consisting of U.S. Treasury securities, U.S.
Government agencies or other types of securities. The repurchase agreement is a
promise to sell these securities to a customer at a certain price and repurchase
them within one to four days after the transaction date at that same price plus
interest accrued at an agreed upon rate. The weighted average interest rate on
these agreements was 1.18% and 3.60% at December 31, 2008 and 2007,
respectively.
F-29
MidWestOne
Financial Group, Inc. and Subsidiaries
Notes
to Consolidated Financial Statements
|
Note
10.
|
Long
Term Debt
|
In
connection with the merger of the former MidwestOne, the Company acquired
$15,640,000 in long-term subordinated debt from the former MidwestOne's
participation in the issuance of a pooled trust preferred security. The trust
preferred has a 35 year maturity, does not require any principal amortization
and is callable in five years at par at the issuer's option. The interest rate
is fixed on $7,820,000 of the issuance and variable on the remaining balance of
the issuance. The fixed interest rate is at 6.48 percent and the variable rate
is based on the three month LIBOR rate plus 1.59 percent with interest payable
quarterly. Beginning on December 15, 2012 the interest rate on the entire
balance of the debt is variable based on the three month LIBOR rate plus 1.59
percent. At December 31, 2008 the interest rate was at 5.03 percent. During
the year the interest rate ranged from 5.03 percent to 5.43
percent. Interest expense recorded during 2008 and 2007 was $631,000
and $0, respectively.
|
Note
11.
|
Income
Taxes
|
Income
taxes for the years ended December 31, 2008, 2007 and 2006 are summarized as
follows:
|
December 31,
|
||||||||||||
|
|
2008
|
2007
|
2006
|
|||||||||
|
(in
thousands)
|
||||||||||||
|
Current:
|
||||||||||||
|
Federal
|
$ | 2,128 | $ | 2,170 | $ | 1,711 | ||||||
|
State
|
635 | 404 | 358 | |||||||||
|
Deferred
|
(3,213 | ) | (269 | ) | 24 | |||||||
| $ | (450 | ) | $ | 2,305 | $ | 2,093 | ||||||
The
income tax provisions for the years ended December 31, 2008, 2007 and 2006 are
less than the amounts computed by applying the maximum effective federal income
tax rate of 34% to the income before income taxes because of the following
items:
|
2008
|
2007
|
2006
|
||||||||||
|
Amount
|
Amount
|
Amount
|
||||||||||
|
(in
thousands)
|
||||||||||||
|
Expected
provision
|
$ | (8,504 | ) | $ | 3,044 | $ | 2,683 | |||||
|
Tax-exempt
interest, net
|
(1,418 | ) | (881 | ) | (715 | ) | ||||||
|
Life
insurance
|
(179 | ) | (115 | ) | (107 | ) | ||||||
| State income taxes, net of federal income tax benefit | 137 | 267 | 236 | |||||||||
|
Non-deductible
goodwill impairment
|
9,280 | - | - | |||||||||
|
Other
|
234 | (10 | ) | (4 | ) | |||||||
| $ | (450 | ) | $ | 2,305 | $ | 2,093 | ||||||
F-30
MidWestOne
Financial Group, Inc. and Subsidiaries
Notes
to Consolidated Financial Statements
|
Note
11.
|
Income
Taxes (Continued)
|
Net
deferred tax assets consist of the following components:
|
December
31,
|
||||||||
|
|
2008
|
2007
|
||||||
|
(in
thousands)
|
||||||||
|
Deferred
income tax assets:
|
||||||||
|
Allowance
for loan losses
|
$ | 4,892 | $ | 2,039 | ||||
|
Deferred
compensation
|
1,865 | 601 | ||||||
|
Net
operating loss
|
2,032 | 3 | ||||||
|
Unrealized
losses on investment securities
|
- | 115 | ||||||
|
Impairment
losses on securities
|
2,455 | - | ||||||
|
Pension
liability
|
1,420 | - | ||||||
|
Nonaccrual
interest
|
262 | 5 | ||||||
|
Other
|
240 | 51 | ||||||
|
Gross
deferred tax assets
|
13,166 | 2,814 | ||||||
|
Deferred
income tax liabilities:
|
||||||||
|
Premises and
equipment depreciation and amortization
|
816 | 523 | ||||||
|
Federal
Home Loan Bank stock
|
130 | 21 | ||||||
|
Pension
asset
|
- | 244 | ||||||
|
Purchase
accounting adjustments
|
3,460 | - | ||||||
|
Mortgage
servicing rights
|
44 | 87 | ||||||
|
Prepaid
expenses
|
444 | 28 | ||||||
|
Unrealized
gains on investment securities
|
483 | - | ||||||
|
Deferred
loan fees
|
18 | 18 | ||||||
|
Other
|
- | 57 | ||||||
|
Gross
deferred tax liabilities
|
5,395 | 978 | ||||||
|
Net
deferred income tax asset
|
7,771 | 1,836 | ||||||
|
Valuation
allowance
|
2,176 | - | ||||||
|
Net
deferred tax asset
|
$ | 5,595 | $ | 1,836 | ||||
The
Company has recorded a deferred tax asset for the future tax benefits of Iowa
net operating loss carry forwards and certain impairment losses on investment
securities. The Iowa net operating loss carry forwards will expire, if not
utilized, between 2009 and 2024. The Company has recorded a valuation allowance
to reduce the net operating loss carry forwards and certain impairment losses on
securities. At December 31, 2008 and 2007, the Company believes it is more
likely than not that the Iowa net operating loss carry forwards and certain
impairment losses on securities will not be realized. A valuation
allowance related to the remaining deferred tax assets has not been provided
because management believes it is more likely than not that the results of
future operations will generate sufficient taxable income to realize the
deferred tax assets.
The Company had no material unrecognized tax benefits at the time of
implementation of FIN 48, or as of December 31, 2008 and 2007.
F-31
MidWestOne
Financial Group, Inc. and Subsidiaries
Notes
to Consolidated Financial Statements
|
Note
12.
|
Employee
Benefit Plans, Pension Curtailment, and Adoption of SFAS No.
158
|
Prior to
the Merger Iowa State Bank & Trust Company sponsored a noncontributory
defined benefit pension plan for substantially all its employees. Effective
December 31, 2007 the Bank elected to curtail the plan by limiting this employee
benefit to those employees vested as of December 31, 2007 and freezing future
benefit accruals under the plan. The Company adopted SFAS No. 158, Employers Accounting for Defined
Benefit Plans and Other Postretirement Plans as of December 31, 2007. The
following table sets forth the plan's funded status and amounts recognized in
the accompanying financial statements as of December 31, 2008, 2007 and
2006:
|
2008
|
2007
|
2006
|
||||||||||
| (in thousands) | ||||||||||||
|
Change
in projected benefit obligation
|
||||||||||||
|
Projected
benefit obligation at the beginning of year
|
$ | 10,049 | $ | 12,211 | $ | 12,013 | ||||||
|
Service
cost
|
- | 471 | 455 | |||||||||
|
Interest
cost
|
611 | 687 | 651 | |||||||||
|
Actuarial
(gain) or loss
|
330 | (581 | ) | (508 | ) | |||||||
|
Benefits
paid
|
(419 | ) | (402 | ) | (400 | ) | ||||||
|
Curtailment
|
- | (2,337 | ) | - | ||||||||
|
Projected
benefit obligation at the end of year
|
$ | 10,571 | $ | 10,049 | $ | 12,211 | ||||||
|
Change
in plan assets
|
||||||||||||
|
Fair
value of plan assets at the beginning of year
|
$ | 10,703 | $ | 10,489 | $ | 9,888 | ||||||
|
Actual
return on plan assets
|
(2,605 | ) | 616 | 1,001 | ||||||||
|
Benefits
paid
|
(419 | ) | (402 | ) | (400 | ) | ||||||
|
Employer
contribution
|
- | - | - | |||||||||
|
Fair
value of assets at the end of the period
|
$ | 7,679 | $ | 10,703 | $ | 10,489 | ||||||
F-32
MidWestOne
Financial Group, Inc. and Subsidiaries
Notes
to Consolidated Financial Statements
|
Note
12.
|
Employee
Benefit Plans and Pension Curtailment
(Continued)
|
|
2008
|
2007
|
2006
|
||||||||||
| (in thousands) | ||||||||||||
|
Funded
status (plan assets less than benefit obligations) at end of
years
|
$ | (2,892 | ) | $ | 653 | $ | (1,722 | ) | ||||
|
Unrecognized
transitional net assets
|
- | - | (289 | ) | ||||||||
|
Unrecognized
prior service cost
|
- | - | 16 | |||||||||
|
Unrecognized
net actuarial (gain) loss
|
- | - | 2,533 | |||||||||
|
Net
amount recognized
|
$ | (2,892 | ) | $ | 653 | $ | 538 | |||||
|
Recognized
on balance sheet
|
||||||||||||
|
Other
assets (liabilities)
|
$ | (2,892 | ) | $ | 653 | $ | 538 | |||||
|
Recognized
in accumulated other comprehensive income after SFAS
No.158
|
||||||||||||
|
Transition
obligation (asset)
|
$ | (207 | ) | (248 | ) | - | ||||||
|
Prior
service cost (credit)
|
- |
-
|
- | |||||||||
|
Net
loss
|
4,052 | 248 | - | |||||||||
|
Deferred
tax effect
|
(1,420 | ) | - | - | ||||||||
|
Total
|
$ | 2,425 | $ | 0 | $ | - | ||||||
|
Benefit
obligation assumptions as of December 31st:
|
||||||||||||
|
Discount
Rate
|
6.00 | % | 6.00 | % | 5.75 | % | ||||||
|
Expected
return on plan assets
|
8.50 | % | 8.50 | % | 8.50 | % | ||||||
|
Rate
of compensation increase
|
N/A
|
4.50 | % | 4.50 | % | |||||||
|
Net
periodic benefit cost assumptions as of December 31st:
|
||||||||||||
|
Discount
rate
|
6.00 | % | 5.75 | % | 5.75 | % | ||||||
|
Expected
return on plan assets
|
8.50 | % | 8.50 | % | 8.50 | % | ||||||
|
Rate
of compensation increase
|
N/A
|
4.50 | % | 4.50 | % | |||||||
F-33
MidWestOne
Financial Group, Inc. and Subsidiaries
Notes
to Consolidated Financial Statements
|
Note
12.
|
Employee
Benefit Plans and Pension Curtailment
(Continued)
|
| (in thousands) | ||||||||||||
|
Components
of net periodic pension cost
|
2008
|
2007
|
2006
|
|||||||||
|
Service
cost
|
$ | - | $ | 471 | $ | 456 | ||||||
|
Interest
cost
|
611 | 687 | 651 | |||||||||
|
Expected
return on plan assets
|
(893 | ) | (875 | ) | (821 | ) | ||||||
|
Amortization
of net actuarial loss
|
- | 74 | 101 | |||||||||
|
Amortization
of prior service cost
|
- | 3 | 3 | |||||||||
|
Amortization
of transition asset
|
(41 | ) | (41 | ) | (41 | ) | ||||||
|
Curtailment
|
- | (434 | ) | - | ||||||||
|
Total
net periodic pension cost (benefit)
|
$ | (323 | ) | $ | (115 | ) | $ | 349 | ||||
Estimated
future pension benefit payments, are expected to be paid as
follows:
|
2009
|
$ | 417 | ||
|
2010
|
424 | |||
|
2011
|
413 | |||
|
2012
|
427 | |||
|
2013
|
474 | |||
|
Five
years thereafter
|
3,113 | |||
| $ | 5,268 |
The
accumulated benefit obligation for the defined benefit pension plan was $11
million, $10.0 million, and $9.9 million at December 31, 2008, 2007 and
2006. The Bank did not make a contribution to the plan in 2008, 2007 or 2006.
The Bank’s pension plan weighted-average asset allocations by asset category are
as follows:
|
Target
|
||||||||||||||||
|
Allocation
|
December
31,
|
|||||||||||||||
|
2008
|
2008
|
2007
|
2006
|
|||||||||||||
|
Mutual
funds - equity
|
55 - 75 | % | 59 | % | 65 | % | 65 | % | ||||||||
|
Mutual
funds - fixed income
|
20 - 55 | % | 41 | % | 34 | % | 33 | % | ||||||||
|
Cash
and equivalents
|
0 - 10 | % | 0 | % | 1 | % | 2 | % | ||||||||
| 100 | % | 100 | % | 100 | % | |||||||||||
Pension
plan assets are allocated by an automated system that determines a target
allocation based on expected returns consistent with the Bank’s risk tolerance.
The allocations may vary within a range.
F-34
MidWestOne
Financial Group, Inc. and Subsidiaries
Notes
to Consolidated Financial Statements
|
Note
12.
|
Employee
Benefit Plans and Pension Curtailment
(Continued)
|
The
adoption of SFAS No. 158 at December 31, 2007 had no affect on the Company’s
financial position or results of operations for the year ended December 31,
2007.
The
Company has a salary reduction profit-sharing 401(k) plan covering all employees
fulfilling minimum age and service requirements. Employee contributions to the
plan are optional. Employer contributions are discretionary and may be made to
the plan in an amount equal to a percentage of the employee's salary. The 401(k)
contribution expense for this plan totaled $505,000, $265,000 and $230,000 for
the years ended December 31, 2008, 2007 and 2006,
respectively.
The
Company has an employee stock ownership plan (ESOP) covering all employees
fulfilling minimum age and service requirements. Employer
contributions are discretionary and may be made to the plan in an amount equal
to a percentage of the employee's salary. The ESOP contribution expense for this
plan totaled $452,000, for the year ended December 31, 2008.
The
Company has a salary continuation plan for several officers and directors. This
plan provides annual payments of various amounts upon retirement or death. The
Company accrues the expense for these benefits by charges to operating expense
during the period the respective officer or director attains full eligibility.
The amount charged to operating expense during the years ended December 31,
2008, 2007 and 2006 totaled $225,000, $326,000 and $123,000, respectively. To
provide the retirement benefits, the Company carries life insurance policies
with cash values totaling $11,557,000, $3,077,000 and $2,817,000 at December 31,
2008, 2007 and 2006, respectively.
|
Note
13.
|
Stock
Compensation Plans
|
The
Company has an Equity Incentive Plan for designated employees and directors of,
and service providers to, the Company and subsidiaries whereby the Company may
grant options to purchase common stock, with a maximum term of ten years, at the
fair value of the stock on the date of the grant. The company may also grant
restricted stock units under the Plan. The Company maintains its 2008 Equity
Incentive Plan as a means to attract, retain and reward certain designated
employees and directors of, and service providers to, the Company and its
subsidiaries. Under the terms of the 2008 Equity Incentive Plan, the Company may
grant stock options, stock appreciation rights, stock awards (including
restricted stock units) and cash incentive awards, to eligible
individuals. As of December 31, 2008, 473,082 shares of the Company’s
common stock remained available for awards under the 2008 Equity Incentive
Plan.
The
compensation committee of the Company’s board of directors granted 17,000 stock
options to officers of the company, and awarded 8,500 shares of restricted stock
to directors and officers of the Company as of the close of business April 1,
2008, pursuant to the 2008 Stock Incentive Plan. The award price was $16.69 per
share based on the closing market price of the Company’s common stock on that
date. An additional 500 shares of restricted stock was granted to a
new director as of the close of business July 16, 2008, at an award price of
$13.49 per share based on the closing market price of the Company’s common stock
on that date. The awards will vest ratably over a period of four
years. During 2008 500 stock options and 300 shares of
restricted stock were forfeited. During 2007, 450 shares were granted, 8,425
were exercised and no shares were forfeited
The stock
options have a maximum term of ten years, an exercise price equal to the fair
market value of a share of stock on the date of grant and vest 25% per year over
a four-year period, with the first vesting date being the one-year anniversary
of the grant date. Each restricted stock unit entitles the recipient to receive
one share of stock on the vesting date. The restricted stock units vest 25% per
year over a four-year period, with the first vesting date being the one-year
anniversary of the grant date. Effective January 1, 2006, the Company
adopted SFAS No. 123(R), Share-Based Payment, which requires that compensation
cost relating to share-based payment transactions be recognized in the financial
statements with measurement based upon the fair value of the equity or liability
instruments issued. For the years ended December 31, 2008 and 2007, the Company
recognized $66,000 and $2,000, respectively, in compensation expense for stock options and restricted stock
units.
F-35
MidWestOne
Financial Group, Inc. and Subsidiaries
Notes
to Consolidated Financial Statements
|
Note
14.
|
Regulatory
Capital Requirements and Restrictions on Subsidiary
Cash
|
The
Company (on a consolidated basis) and the Banks are subject to various
regulatory capital requirements administered by the federal banking agencies.
Failure to meet minimum capital requirements can initiate certain mandatory and
possibly additional discretionary actions by regulators that, if undertaken,
could have a direct material effect on the Company’s and Banks’ financial
statements. Under capital adequacy guidelines and the regulatory framework for
prompt corrective action, the Company and the Banks must meet specific capital
guidelines that involve quantitative measures of their assets, liabilities and
certain off-balance-sheet items as calculated under regulatory accounting
practices. The capital amounts and classifications are also subject to
qualitative judgments by the regulators about components, risk weightings and
other factors. Prompt corrective action provisions are not applicable to bank
holding companies.
Quantitative
measures established by regulation to ensure capital adequacy require the
Company and the Banks to maintain minimum amounts and ratios (set forth in the
following table) of total and Tier 1 capital (as defined in the regulations) to
risk-weighted assets (as defined) and of Tier 1 capital (as defined) to average
assets (as defined). Management believes, as of December 31, 2008 and 2007,
that the Company and the Banks met all capital adequacy requirements to which
they are subject.
As of
December 31, 2008, the most recent notification from the Federal Deposit
Insurance Corporation categorized the Banks as well capitalized under the
regulatory framework for prompt corrective action. To be categorized as well
capitalized, an institution must maintain minimum total risk-based, Tier 1
risk-based and Tier 1 leverage ratios as set forth in the following tables.
There are no conditions or events since the notification that management
believes have changed the Banks’ category. Notwithstanding
its compliance with the specified regulatory thresholds, however, the Bank’s
board of directors, subsequent to December 31, 2008, adopted a capital policy
pursuant to which it will maintain a ratio of Tier 1 capital to total assets of
8% or greater, which ratio is greater than the ratio required to be “well
capitalized” under the regulatory framework for prompt corrective action. This
capital policy also provides that the Bank will maintain a ratio of total
capital to total risk-weighted assets of at least 10%, which is equal to the
threshold for being “well capitalized” under the regulatory framework for prompt
corrective action. The Company’s and the Banks’ actual capital amounts
and ratios as of December 31, 2008 and 2007 are also presented in the
table.
F-36
MidWestOne
Financial Group, Inc. and Subsidiaries
Notes
to Consolidated Financial Statements
Note
14. Regulatory
Capital Requirements and Restrictions on Subsidiary Cash
(Continued)
A
comparison of the Company’s and the Banks’ capital with the regulatory
requirements is presented below:
|
To
Be Well
|
||||||||||||||||
|
Capitalized
|
||||||||||||||||
|
For
|
Under
Prompt
|
|||||||||||||||
|
Capital
|
Corrective
|
|||||||||||||||
|
Adequacy
|
Action
|
|||||||||||||||
|
Actual
|
Purposes
|
Provisions
|
||||||||||||||
|
Amount
|
Ratio
|
Ratio
|
Ratio
|
|||||||||||||
| (in thousands) | ||||||||||||||||
|
At
December 31, 2008:
|
||||||||||||||||
|
Consolidated:
|
||||||||||||||||
|
Total
risk based capital
|
$ | 144,011 | 11.27 | % | 8 | % | - | |||||||||
|
Tier
1 risk based capital
|
130,896 | 10.24 | 4 | - | ||||||||||||
|
Leverage
ratio
|
130,896 | 8.72 | 4 | - | ||||||||||||
|
MidWestOne
Bank:
|
||||||||||||||||
|
Total
risk based capital
|
$ | 127,092 | 10.05 | % | 8 | % | 10 | % | ||||||||
|
Tier
1 risk based capital
|
113,977 | 9.01 | 4 | 6 | ||||||||||||
|
Leverage
ratio
|
113,977 | 7.60 | 4 | 5 | ||||||||||||
|
At
December 31, 2007:
|
||||||||||||||||
|
Consolidated:
|
||||||||||||||||
|
Total
risk based capital
|
$ | 78,533 | 16.49 | % | 8 | % | - | |||||||||
|
Tier
1 risk based capital
|
73,066 | 15.35 | 4 | - | ||||||||||||
|
Leverage
ratio
|
73,066 | 10.67 | 4 | - | ||||||||||||
|
Iowa
State Bank & Trust Company:
|
||||||||||||||||
|
Total
risk based capital
|
$ | 52,190 | 13.01 | % | 8 | % | 10 | % | ||||||||
|
Tier
1 risk based capital
|
48,186 | 12.01 | 4 | 6 | ||||||||||||
|
Leverage
ratio
|
48,186 | 8.34 | 4 | 5 | ||||||||||||
|
First
State Bank:
|
||||||||||||||||
|
Total
risk based capital
|
$ | 9,688 | 13.68 | % | 8 | % | 10 | % | ||||||||
|
Tier
1 risk based capital
|
8,796 | 12.42 | 4 | 6 | ||||||||||||
|
Leverage
ratio
|
8,796 | 8.48 | 4 | 5 | ||||||||||||
F-37
MidWestOne
Financial Group, Inc. and Subsidiaries
Notes
to Consolidated Financial Statements
|
Note
14.
|
Regulatory
Capital Requirements and Restrictions on Subsidiary Cash
(Continued)
|
The
ability of the Company to pay dividends to its shareholders is dependent upon
dividends paid by the Bank. The Bank is subject to certain statutory and
regulatory restrictions on the amount it may pay in dividends. In
addition, as previously noted, subsequent to December 31, 2008, the Bank’s board
of directors adopted a capital policy requiring it to maintain a ratio of Tier 1
capital to total assets of at least 8% and a ratio of total capital to
risk-based capital of at least 10% Maintenance of these ratios also could limit
the ability of the Bank to pay dividends to the Company.
The Banks
are required to maintain reserve balances in cash on hand or on deposit with
Federal Reserve Banks. Reserve balances totaled $10,976,000 and $3,532,000 as of
December 31, 2008 and 2007, respectively.
F-38
MidWestOne
Financial Group, Inc. and Subsidiaries
Notes
to Consolidated Financial Statements
|
Note
15.
|
Commitments
and Contingencies
|
Financial instruments with
off-balance sheet risk: The Bank is party to financial instruments with
off-balance sheet risk in the normal course of business to meet the financing
needs of its customers. These financial instruments include commitments to
extend credit and standby letters of credit. These instruments involve, to
varying degrees, elements of credit risk in excess of the amount recognized in
the balance sheets.
The Bank
uses the same credit policies in making commitments and conditional obligations
as it does for on-balance sheet instruments. A summary of the Bank’s commitments
at December 31, 2008 and 2007 is as follows:
|
2008
|
2007
|
|||||||
| (in thousands) | ||||||||
|
Commitments
to extend credit
|
$ | 168,047 | $ | 111,233 | ||||
|
Standby
letters of credit
|
5,303 | 1,920 | ||||||
| $ | 173,350 | $ | 113,153 | |||||
F-39
MidWestOne
Financial Group, Inc. and Subsidiaries
Notes
to Consolidated Financial Statements
|
Note
15.
|
Commitments
and Contingencies (Continued)
|
The
Bank’s exposure to credit loss in the event of nonperformance by the other party
to the financial instrument for commitments to extend credit is represented by
the contractual amount of those instruments. Commitments to extend credit are
agreements to lend to a customer as long as there is no violation of any
condition established in the contract. Since many of the commitments are
expected to expire without being drawn upon, the total commitment amounts do not
necessarily represent future cash requirements. The Bank evaluates each
customer's creditworthiness on a case-by-case basis. The amount of collateral
obtained, if deemed necessary by the Bank upon extension of credit, is based on
management's credit evaluation of the party. Collateral held varies, but may
include accounts receivable, crops, livestock, inventory, property and
equipment, residential real estate and income-producing commercial
properties.
Standby
letters of credit are conditional commitments issued by the Bank to guarantee
the performance of a customer to a third party. Those guarantees are primarily
issued to support public and private borrowing arrangements and, generally, have
terms of one year or less. The credit risk involved in issuing letters of credit
is essentially the same as that involved in extending loan facilities to
customers. The Bank hold collateral, which may include accounts receivable,
inventory, property, equipment and income-producing properties, supporting those
commitments, if deemed necessary. In the event the customer does not perform in
accordance with the terms of the agreement with the third party, the Bank would
be required to fund the commitment. The maximum potential amount of future
payments the Banks could be required to make is represented by the contractual
amount shown in the summary above. If the commitment is funded, the Bank would
be entitled to seek recovery from the customer. At December 31, 2008, 2007 and
2006, no amounts have been recorded as liabilities for the Banks’ potential
obligations under these guarantees.
Contingencies: In the
normal course of business, the Banks are involved in various legal proceedings.
In the opinion of management, any liability resulting from such proceedings
would not have a material adverse effect on the accompanying financial
statements.
Concentrations of credit
risk: Substantially all of the Banks’ loans, commitments to extend credit
and standby letters of credit have been granted to customers in the Banks’
market areas. Although the loan portfolio of the Banks’ are diversified,
approximately 68% of the loans are real estate loans and approximately 9% are
agriculturally related. The concentrations of credit by type of loan are set
forth in Note 3. Commitments to extend credit are primarily related to
commercial loans and home equity loans. Standby letters of credit were granted
primarily to commercial borrowers. Investments in securities issued by state and
political subdivisions involve certain governmental entities within Iowa.
Investment securities of Iowa political subdivisions totaled $104,051,000 as of
December 31, 2008. No individual municipality exceeded
$5,000,000.
F-40
MidWestOne
Financial Group, Inc. and Subsidiaries
Notes
to Consolidated Financial Statements
|
Note
16.
|
Related
Party Transactions
|
Certain
directors of the Company and certain principal officers are customers of, and
have banking transactions with, the Bank in the ordinary course of business.
Such indebtedness has been incurred on substantially the same terms, including
interest rates and collateral, as those prevailing at the time for comparable
transactions with unrelated persons.
The
following is an analysis of the changes in the loansand loan commitments to
related parties:
|
Year
Ended December 31,
|
||||||||
|
2008
|
2007
|
|||||||
| (in thousands) | ||||||||
|
Balance,
beginning
|
$ | 6,852 | $ | 5,555 | ||||
|
Acquired
bank
|
19,214 | - | ||||||
|
Advances
|
7,026 | 1,357 | ||||||
|
Collections
|
(637 | ) | (60 | ) | ||||
|
Balance,
ending
|
$ | 32,455 | $ | 6,852 | ||||
None of
these loans are past due, nonaccrual or restructured to provide a reduction or
deferral of interest or principal because of deterioration in the financial
position of the borrower.
Deposits
from related parties are accepted subject to the same interest rates and terms
as those from nonrelated parties.
F-41
MidWestOne
Financial Group, Inc. and Subsidiaries
Notes
to Consolidated Financial Statements
|
Note
17.
|
Estimated
Fair Value of Financial Instruments and Fair Value
Measurements
|
Effective
January 1, 2008, the Company partially adopted the provisions of SFAS No. 157,
Fair Value Measurements
for assets and liabilities measured and reported at fair value. SFAS 157 defines
fair value, establishes a framework for measuring fair value and expands
disclosures about fair value measurements. The FASB has deferred the effective
date of SFAS No. 157 until 2009 for nonfinancial assets and liabilities which
are recognized at fair value on a nonrecurring basis. For the Company, this
deferral applies to other real estate owned and intangible assets.
SFAS 157
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.
SFAS 157 requires the use of valuation techniques that are consistent with the
market approach, the income approach and/or the cost approach. 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, meaning 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, SFAS 157 establishes a fair value hierarchy for
valuation inputs that gives the highest priority to quoted prices in active
markets for identical assets or liabilities and the lowest priority to
unobservable inputs. The fair value hierarchy is as follows:
Level 1:
Quoted prices (unadjusted) for identical assets or liabilities in active markets
that the entity has the ability to access as of the measurement
date.
F-42
MidWestOne
Financial Group, Inc. and Subsidiaries
Notes
to Consolidated Financial Statements
Note
17. Estimated Fair Value of
Financial Instruments and Fair Value Measurements (Continued)
Level 2:
Significant other observable inputs other than Level 1 prices such as quoted
prices for similar assets or liabilities; quoted prices in markets that are not
active; or other inputs that are observable or can be corroborated by observable
market data.
Level 3:
Significant unobservable inputs that reflect a reporting entity’s own
assumptions about the assumptions that market participants would use in pricing
an asset or liability.
A
description of the valuation methodologies used for assets and liabilities
measured at fair value on a recurring basis, as well as the general
classification of such instruments pursuant to the valuation hierarchy, is set
forth below:
Securities Available for Sale
– Where quoted prices are available in an active market, securities are
classified within level 1 of the valuation hierarchy. Level 1 securities would
include highly liquid government bonds and exchange traded equities. If quoted
market prices are not available, then fair values are estimated by using pricing
models, quoted prices of securities with similar characteristics or discounted
cash flow. Level 2 securities would include U.S. agency securities,
mortgage-backed agency securities, obligations of states and political
subdivisions and certain corporate, asset backed and other securities. In
certain cases where there is limited activity or less transparency around inputs
to the valuation, securities are classified within level 3 of the valuation
hierarchy.
The
following table summarizes assets and liabilities measured at fair value on a
recurring basis as of December 31, 2008, segregated by the level of the
valuation inputs within the fair value hierarchy utilized to measure fair
value:
|
Fair
Value Measurements at December 31, 2008 Using
|
||||||||||||||||
| (in thousands) |
December
31,
2008
|
Quoted
Prices in
Active
Markets for
Identical
Assets
(Level
1)
|
Significant
Other
Observable
Inputs
(Level
2)
|
Significant
Unobservable
Inputs
(Level
3)
|
||||||||||||
|
Assets:
|
||||||||||||||||
|
Securities
available for sale
|
$ | 272,380 | $ | 1,958 | $ | 266,870 | $ | 3,552 | ||||||||
F-43
MidWestOne
Financial Group, Inc. and Subsidiaries
Notes
to Consolidated Financial Statements
|
Note
17.
|
Estimated
Fair Value of Financial Instruments and Fair Value Measurements
(Continued)
|
The
following table presents additional information about assets measured at fair
value on a recurring basis for which the Company has utilized Level 3 inputs to
determine fair value:
|
Securities
|
||||
| (in thousands) |
Available
for Sale
|
|||
|
Beginning
balance, January 1, 2008
|
$ | 9,746 | ||
|
Total
losses:
|
||||
|
Included
in earnings
|
6,194 | |||
|
Ending
balance, December 31, 2008
|
$ | 3,552 | ||
Assets and liabilities
recorded at fair value on a nonrecurring basis: A description of the
valuation methodologies used for assets and liabilities measured at fair value
on a nonrecurring basis, as well as the general classification of such
instruments pursuant to the valuation hierarchy, is set forth
below.
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 the fair value of the collateral less estimated costs to sell. The fair
value of collateral was determined based on appraisals. In some cases,
adjustments were made to the appraised values dues 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.
Federal Home Loan Bank Stock
– Federal Home Loan Bank Stock carried in other assets represents our
carrying value which is approximately equal to fair value. Fair value
measurements for these securities are classified as level 3 based on the
undeliverable nature related to credit risk.
|
Fair
Value Measurements at December 31, 2008 Using
|
||||||||||||||||
|
Quoted
Prices in
|
Significant
Other
|
Significant
|
||||||||||||||
|
Active
Markets for
|
Observable
|
Unobservable
|
||||||||||||||
|
December
31,
|
Identical
Assets
|
Inputs
|
Inputs
|
|||||||||||||
| (in thousands) |
2008
|
(Level
1)
|
(Level
2)
|
(Level
3)
|
||||||||||||
|
Assets:
|
||||||||||||||||
|
Collateral
Dependant Impaired Loans
|
$ | 4,665 | $ | - | $ | - | $ | 4,665 | ||||||||
|
Federal
Home Loan Bank Stock
|
$ | 9,075 | - | - | $ | 9,075 | ||||||||||
F-44
MidWestOne
Financial Group, Inc. and Subsidiaries
Notes
to Consolidated Financial Statements
|
Note
17.
|
Estimated
Fair Value of Financial Instruments and Fair Value Measurements
(Continued)
|
SFAS No.
107, Disclosures About Fair
Value of Financial Instruments, requires disclosure of fair value
information about financial instruments, whether or not recognized in the
balance sheet, for which it is practicable to estimate that value. In cases
where quoted market prices are not available, fair values are based on estimates
using present value or other valuation techniques. Those techniques are
significantly affected by the assumptions used, including the discount rate and
estimates of future cash flows. In that regard, the derived fair value estimates
cannot be substantiated by comparison to independent markets and, in many cases,
are not necessarily indicative of the amounts that the Company could realize in
a current market exchange. SFAS No. 107 excludes all nonfinancial instruments
from its disclosure requirements. Accordingly, the aggregate fair value amounts
presented do not represent the underlying value of the Company.
The Banks
determine estimated fair values using the best available data and an estimation
methodology suitable for each category of financial instruments. For those loans
and deposits with variable interest rates, it is presumed that estimated fair
values generally approximate the recorded book balances. The estimation
methodologies used at December 31, 2008 and 2007 were as follows:
|
o
|
Cash
and due from banks, noninterest-bearing demand deposits, federal funds
sold and purchased, securities sold under repurchase agreements and
accrued interest are instruments with carrying values that approximate
market value.
|
|
o
|
Loans
held for sale have an estimated fair value based on quoted market prices
of similar loans sold on the secondary
market.
|
|
o
|
Financial
instruments actively traded in a secondary market have been valued using
quoted available market prices.
|
|
o
|
Fixed
rate financial instruments with stated final maturities have been valued
using present value discounted cash flows with a discount rate
approximating current market for similar assets and
liabilities.
|
|
o
|
Variable
rate financial instruments with no stated maturities have an estimated
fair value equal to both the amount payable on demand and the recorded
book balance.
|
Changes
in assumptions or estimation methodologies may have a material effect on these
estimated fair values.
F-45
MidWestOne
Financial Group, Inc. and Subsidiaries
Notes
to Consolidated Financial Statements
|
Note
17.
|
Estimated
Fair Value of Financial Instruments and Fair Value Measurements
(Continued)
|
The
carrying or face amount and estimated fair value of financial instruments were
as follows:
|
2008
|
2007
|
|||||||||||||||
|
Carrying
|
Estimated
|
Carrying
|
Estimated
|
|||||||||||||
|
Amount
|
Fair
Value
|
Amount
|
Fair
Value
|
|||||||||||||
| (in thousands) | ||||||||||||||||
|
Financial
assets:
|
||||||||||||||||
|
Cash
and cash equivalents
|
$ | 32,926 | $ | 32,926 | $ | 16,378 | $ | 16,378 | ||||||||
|
Investment
securities
|
280,505 | 280,505 | 232,220 | 232,226 | ||||||||||||
|
Federal
funds sold
|
- | - | 17,842 | 17,842 | ||||||||||||
|
Loans
held for sale
|
5,279 | 5,279 | 2,709 | 2,709 | ||||||||||||
|
Loans,
net
|
1,003,837 | 1,006,905 | 396,088 | 395,764 | ||||||||||||
|
Loan
pool participations
|
92,932 | 92,932 | - | - | ||||||||||||
|
Accrued
interest receivable
|
11,736 | 11,736 | 4,639 | 4,639 | ||||||||||||
|
Financial
liabilities:
|
||||||||||||||||
|
Deposits
|
$ | 1,128,189 | $ | 1,130,628 | $ | 526,615 | $ | 527,123 | ||||||||
|
Federal
funds purchased and
|
||||||||||||||||
|
securities
sold under agreements
|
||||||||||||||||
|
to
repurchase
|
57,299 | 57,359 | 45,997 | 45,997 | ||||||||||||
|
Federal
Home Loan Bank borrowings
|
158,782 | 163,224 | 47,000 | 47,442 | ||||||||||||
|
Long-term
debt
|
15,640 | 16,481 | - | - | ||||||||||||
|
Accrued
interest payable
|
2,770 | 2,770 | 1,734 | 1,734 | ||||||||||||
|
Note
18.
|
Common
Stock Split
|
On July
11, 2006, the Company’s Board of Directors declared a three-for-one stock split
to be effected in the form of a stock dividend. Accordingly, an additional
3,454,066 shares of common stock were issued and distributed on August 18, 2006
to shareholders of record on August 8, 2006. All stock options have been
retroactively restated for the stock split in accordance with the terms of the
plan.
F-46
MidWestOne
Financial Group, Inc. and Subsidiaries
Notes
to Consolidated Financial Statements
|
Note
19.
|
Parent
Company Only Financial Information
|
Following
is condensed financial information of MidWestOne Financial Group, Inc as of
December 31, 2008 and ISB Financial Corp. as of December 31, 2007 (parent
company only):
|
2008
|
2007
|
|||||||
| (in thousands) | ||||||||
|
Balance
Sheets
|
||||||||
|
As
of December 31:
|
||||||||
|
Assets
|
||||||||
|
Cash
|
$ | 8,798 | $ | 12,626 | ||||
|
Equipment
|
168 | 26 | ||||||
|
Investment
in subsidiaries
|
130,267 | 61,255 | ||||||
|
Marketable
equity securities, available for sale
|
2,422 | 2,628 | ||||||
|
Buildings
& Improvements
|
380 | - | ||||||
|
Income
tax receivable
|
1,330 | - | ||||||
|
Deferred
income taxes
|
315 | - | ||||||
|
Other
assets
|
3,788 | 869 | ||||||
|
Total
assets
|
$ | 147,468 | $ | 77,404 | ||||
|
Liabilities
and Shareholders' Equity
|
||||||||
|
Liabilities
|
||||||||
|
Long-term
debt
|
$ | 15,640 | $ | - | ||||
|
Other
liabilities
|
1,486 | 12 | ||||||
|
Total
liabilities
|
17,126 | 12 | ||||||
|
Shareholders'
equity:
|
||||||||
|
Capital
stock, common
|
8,690 | 5,165 | ||||||
|
Additional
paid-in capital
|
80,757 | 100 | ||||||
|
Treasury
stock
|
(1,215 | ) | - | |||||
|
Retained
earnings
|
43,683 | 72,333 | ||||||
|
Accumulated
other comprehensive (loss)
|
(1,573 | ) | (206 | ) | ||||
|
Total
shareholders' equity:
|
130,342 | 77,392 | ||||||
|
Total
liabilities and shareholders' equity
|
$ | 147,468 | $ | 77,404 | ||||
|
Statements
of Income (Loss)
|
2008
|
2007
|
2006
|
|||||||||
|
Year
Ended December 31:
|
||||||||||||
|
Dividends
received from subsidiaries
|
$ | 4,900 | $ | 5,250 | $ | 5,175 | ||||||
|
Interest
income and dividends on marketable equity securities
|
397 | 649 | 468 | |||||||||
|
Investment
securities gains (losses)
|
(424 | ) | — | 50 | ||||||||
|
Interest
on debt
|
(635 | ) | — | — | ||||||||
|
Operating
expenses
|
(1,644 | ) | (113 | ) | (93 | ) | ||||||
|
Income
before income taxes and equity in
|
||||||||||||
|
subsidiaries'
undistributed income
|
2,594 | 5,786 | 5,600 | |||||||||
|
Income
tax expense (benefit)
|
(668 | ) | 171 | 138 | ||||||||
| 3,262 | 5,615 | 5,462 | ||||||||||
|
Equity
in subsidiaries' undistributed income (loss)
|
(27,824 | ) | 1,033 | 336 | ||||||||
|
Net
income (loss)
|
$ | (24,562 | ) | $ | 6,648 | $ | 5,798 | |||||
F-47
MidWestOne
Financial Group, Inc. and Subsidiaries
Notes
to Consolidated Financial Statements
|
Note
19.
|
Parent
Company Only Financial Information
(Continued)
|
|
2008
|
2007
|
2006
|
||||||||||
| (in thousands) | ||||||||||||
|
Statements
of Cash Flows
|
||||||||||||
|
Year
ended December 31:
|
||||||||||||
|
Cash
flows from operating activities:
|
||||||||||||
|
Net
income
|
$ | (24,562 | ) | $ | 6,648 | $ | 5,798 | |||||
|
Adjustments
to reconcile net income to net cash provided
|
||||||||||||
|
by
operating activities:
|
||||||||||||
|
Undistributed
(earnings) loss of subsidiaries
|
27,824 | (1,033 | ) | (336 | ) | |||||||
|
Income
taxes
|
(957 | ) | - | - | ||||||||
|
Depreciation
|
124 | 5 | 5 | |||||||||
|
Amortization
|
257 | - | - | |||||||||
|
Stock
option expense
|
21 | - | - | |||||||||
|
Investments
security gains
|
(369 | ) | - | - | ||||||||
|
Other
than temporary impairment on investment securities
|
567 | - | (50 | ) | ||||||||
|
(Increase)
in accrued interest receivable
|
46 | 4 | 19 | |||||||||
|
Increase
in other assets
|
(1,171 | ) | (6 | ) | - | |||||||
|
Increase
(decrease) in other liabilities
|
(716 | ) | (126 | ) | 7 | |||||||
|
Net
cash provided by operating activities
|
1,064 | 5,492 | 5,443 | |||||||||
|
Cash
flows from investing activities:
|
||||||||||||
|
Proceeds
from sales of investment securities
|
922 | - | 224 | |||||||||
|
Purchase
of investment securities
|
(547 | ) | (789 | ) | (1,177 | ) | ||||||
|
Capitalized
merger costs
|
- | (788 | ) | - | ||||||||
|
Merger
with MidWestOne Bank
|
865 | - | - | |||||||||
|
Purchase
of Butler Brown Insurance Agency
|
(993 | ) | - | - | ||||||||
|
Purchase
of building and equipment, net
|
- | (21 | ) | - | ||||||||
|
Net
cash provided by (used in) investing activities
|
247 | (1,598 | ) | (953 | ) | |||||||
|
Cash
flows from financing activities:
|
||||||||||||
|
Stock
options exercised
|
72 | 107 | 83 | |||||||||
|
Fractional
shares paid out in merger
|
(3 | ) | - | - | ||||||||
|
Repurchase
of common stock
|
(1,253 | ) | (529 | ) | (1,468 | ) | ||||||
|
Dividends
paid
|
(3,955 | ) | (3,359 | ) | (1,657 | ) | ||||||
|
Net
cash (used in) financing activities
|
(5,139 | ) | (3,781 | ) | (3,042 | ) | ||||||
|
Increase
(decrease) in cash
|
(3,828 | ) | 113 | 1,448 | ||||||||
|
Cash
Balance:
|
||||||||||||
|
Beginning
|
12,626 | 12,513 | 11,065 | |||||||||
|
Ending
|
$ | 8,798 | $ | 12,626 | $ | 12,513 | ||||||
F-48
MidWestOne
Financial Group, Inc. and Subsidiaries
Notes
to Consolidated Financial Statements
|
Note
20.
|
Segment
Reporting
|
Our
activities are considered to be a single industry segment for financial
reporting purposes. We are engaged in the business of commercial and
retail banking, investment management and insurance services with operations
throughout central and eastern Iowa. Substantially all income is
derived from a diverse base of commercial, mortgage and retail lending
activities, loan pools and investments.
|
Note
21.
|
Subsequent
Event
|
On
October
14, 2008, the Treasury announced that it would provide Tier 1 capital in the
form of perpetual preferred stock together with a warrant to acquire shares of
common stock to eligible financial institutions. This program, is known as the
TARP Capital Purchase Program (the“CPP”).
The Company elected to participate in the CPP and, on February 6, 2009,
consummated the sale of $16 million of CPP Preferred Stock, together with a
warrant to acquire 198,675 shares of Company common stock, to
Treasury.
F-49
MidWestOne
Financial Group, Inc. and Subsidiaries
Notes
to Consolidated Financial Statements
Note
22. Quarterly
Results of Operations (unaudited)
|
Quarter
Ended
|
||||||||||||||||
|
December
|
September
|
June
|
March
|
|||||||||||||
|
(in
thousands, except per share amounts)
|
||||||||||||||||
|
2008
|
||||||||||||||||
|
Interest
income
|
$ | 19,192 | 19,438 | 20,074 | 11,502 | |||||||||||
|
Interest
expense
|
7,844 | 8,489 | 8,702 | 5,387 | ||||||||||||
|
Net
interest income
|
11,348 | 10,949 | 11,372 | 6,115 | ||||||||||||
|
Provision
for loan losses
|
2,700 | 838 | 758 | 70 | ||||||||||||
|
Noninterest
income
|
(2,875 | ) | 3,024 | 3,273 | 2,556 | |||||||||||
|
Noninterest
expense
|
40,016 | 10,954 | 9,975 | 5,464 | ||||||||||||
|
|
||||||||||||||||
|
Income
(loss) before income taxes
|
(34,243 | ) | 2,181 | 3,912 | 3,137 | |||||||||||
|
Income
tax expense (benefit)
|
(2,739 | ) | 477 | 949 | 862 | |||||||||||
|
Net
income (loss)
|
$ | (31,504 | ) | 1,704 | 2,963 | 2,275 | ||||||||||
|
|
||||||||||||||||
|
Net
income (loss) per share - basic
|
$ | (3.66 | ) | $ | 0.20 | $ | 0.34 | $ | 0.39 | |||||||
|
Net
income (loss) per share - diluted
|
$ | (3.66 | ) | $ | 0.20 | $ | 0.34 | $ | 0.39 | |||||||
|
2007
|
||||||||||||||||
|
Interest
income
|
$ | 9,794 | 9,768 | 9,589 | 9,154 | |||||||||||
|
Interest
expense
|
4,861 | 4,947 | 4,737 | 4,493 | ||||||||||||
|
Net
interest income
|
4,933 | 4,821 | 4,852 | 4,661 | ||||||||||||
|
Provision
for loan losses
|
75 | 125 | 150 | 150 | ||||||||||||
|
Noninterest
income
|
2,312 | 2,118 | 2,186 | 2,190 | ||||||||||||
|
Noninterest
expense
|
4,700 | 4,651 | 4,730 | 4,539 | ||||||||||||
|
Income
before income taxes
|
2,470 | 2,163 | 2,158 | 2,162 | ||||||||||||
|
Income
taxes
|
639 | 548 | 554 | 564 | ||||||||||||
|
Net
income
|
$ | 1,831 | 1,615 | 1,604 | 1,598 | |||||||||||
|
Net
income per share - basic
|
$ | 0.36 | $ | 0.31 | $ | 0.31 | $ | 0.31 | ||||||||
|
Net
income per share - diluted
|
$ | 0.36 | $ | 0.31 | $ | 0.31 | $ | 0.31 | ||||||||
F-50