Edgar Filing: MidWestOne Financial Group, Inc.

midwestone 033112 10Q

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549




	FORM 10-Q



x	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended March 31, 2012



o	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from to



	Commission file number 000-24630

MIDWESTONE FINANCIAL GROUP, INC.

102 South Clinton Street

Iowa City, IA 52240

(Address of principal executive offices, including Zip Code)

Registrant's telephone number: 319-356-5800



Iowa	42-1206172
(State of Incorporation)	(I.R.S. Employer Identification 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 o No

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). x Yes o No

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definition of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):



Large accelerated filer	o	Accelerated filer	x
Non-accelerated filer	o (Do not check if a smaller reporting company)	Smaller reporting company	o

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). o Yes x No

As of May 1, 2012, there were 8,468,384 shares of common stock, $1.00 par value per share, outstanding.

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MIDWESTONE FINANCIAL GROUP, INC.

Form 10-Q Quarterly Report

Table of Contents



		Page No.
PART I

Item 1.	Financial Statements	1

	Consolidated Balance Sheets	1

	Consolidated Statements of Operations	2

	Consolidated Statements of Comprehensive Income	3

	Consolidated Statements of Shareholders' Equity	4

	Consolidated Statements of Cash Flows	5

	Notes to Consolidated Financial Statements	6

Item 2.	Management's Discussion and Analysis of Financial Condition and Results of Operations	29

Item 3.	Quantitative and Qualitative Disclosures about Market Risk	45

Item 4.	Controls and Procedures	47

Part II

Item 1.	Legal Proceedings	49

Item 1A.	Risk Factors	49

Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	49

Item 3.	Defaults Upon Senior Securities	49

Item 4.	Mine Safety Disclosures	49

Item 5.	Other Information	49

Item 6.	Exhibits	50

	Signatures	51

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PART I – FINANCIAL INFORMATION

Item 1. Financial Statements.

MIDWESTONE FINANCIAL GROUP, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS



	March 31, 2012			December 31, 2011
(dollars in thousands)	(unaudited)
ASSETS
Cash and due from banks	$	27,329		$	28,155
Interest-bearing deposits in banks	21,631			4,468
Federal funds sold	3,073			—
Cash and cash equivalents	52,033			32,623
Investment securities:
Available for sale	551,823			534,080
Held to maturity (fair value of $7,053 as of March 31, 2012 and $2,042 as of December 31, 2011)	7,017			2,036
Loans held for sale	943			1,955
Loans	981,146			986,173
Allowance for loan losses	(15,679		)	(15,676		)
Net loans	965,467			970,497
Loan pool participations, net	45,908			50,052
Premises and equipment, net	25,595			26,260
Accrued interest receivable	9,639			10,422
Intangible assets, net	10,053			10,247
Bank-owned life insurance	27,953			27,723
Other real estate owned	3,773			4,033
Assets held for sale	764			—
Deferred income taxes	3,430			3,654
Other assets	21,446			21,662
Total assets	$	1,725,844		$	1,695,244
LIABILITIES AND SHAREHOLDERS' EQUITY
Deposits:
Non-interest-bearing demand	$	164,936		$	161,287
Interest-bearing checking	536,495			499,905
Savings	79,412			71,823
Certificates of deposit under $100,000	337,589			346,858
Certificates of deposit $100,000 and over	226,221			226,769
Total deposits	1,344,653			1,306,642
Federal funds purchased	—			8,920
Securities sold under agreements to repurchase	50,314			48,287
Federal Home Loan Bank borrowings	136,041			140,014
Deferred compensation liability	3,613			3,643
Long-term debt	15,464			15,464
Accrued interest payable	1,641			1,530
Other liabilities	14,848			14,250
Total liabilities	1,566,574			1,538,750
Shareholders' equity:
Preferred stock, no par value, with a liquidation preference of $1,000.00 per share; authorized 500,000 shares; no shares issued and outstanding at March 31, 2012 and December 31, 2011	$	—		$	—
Common stock, $1.00 par value; authorized 15,000,000 shares at March 31, 2012 and December 31, 2011; issued 8,690,398 shares at March 31, 2012 and December 31, 2011; outstanding 8,464,820 shares at March 31, 2012 and 8,529,530 shares at December 31, 2011	8,690			8,690
Additional paid-in capital	80,187			80,333
Treasury stock at cost, 225,578 shares as of March 31, 2012 and 160,868 shares at December 31, 2011	(3,446		)	(2,312		)
Retained earnings	70,008			66,299
Accumulated other comprehensive income	3,831			3,484
Total shareholders' equity	159,270			156,494
Total liabilities and shareholders' equity	$	1,725,844		$	1,695,244

See accompanying notes to consolidated financial statements.

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MIDWESTONE FINANCIAL GROUP, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS



(unaudited) (dollars in thousands, except per share amounts)	Three Months Ended March 31,
	2012		2011
Interest income:
Interest and fees on loans	$	13,080	$	12,800
Interest and discount on loan pool participations	454		354
Interest on bank deposits	10		8
Interest on investment securities:
Taxable securities	2,752		2,688
Tax-exempt securities	1,219		1,035
Total interest income	17,515		16,885
Interest expense:
Interest on deposits:
Interest-bearing checking	829		1,008
Savings	37		59
Certificates of deposit under $100,000	1,590		2,187
Certificates of deposit $100,000 and over	773		848
Total interest expense on deposits	3,229		4,102
Interest on federal funds purchased	3		—
Interest on securities sold under agreements to repurchase	55		74
Interest on Federal Home Loan Bank borrowings	803		945
Interest on notes payable	9		10
Interest on long-term debt	168		162
Total interest expense	4,267		5,293
Net interest income	13,248		11,592
Provision for loan losses	579		900
Net interest income after provision for loan losses	12,669		10,692
Noninterest income:
Trust, investment, and insurance fees	1,253		1,273
Service charges and fees on deposit accounts	767		851
Mortgage origination and loan servicing fees	767		877
Other service charges, commissions and fees	710		679
Bank-owned life insurance income	230		229
Gain on sale and call of available for sale securities	316		—
Gain (loss) on sale of premises and equipment	158		(48		)
Total noninterest income	4,201		3,861
Noninterest expense:
Salaries and employee benefits	5,972		5,870
Net occupancy and equipment expense	1,644		1,617
Professional fees	732		677
Data processing expense	446		450
FDIC insurance expense	310		597
Amortization of intangible assets	194		224
Other operating expense	1,505		1,199
Total noninterest expense	10,803		10,634
Income before income tax expense	6,067		3,919
Income tax expense	1,635		1,014
Net income	$	4,432	$	2,905
Less: Preferred stock dividends and discount accretion	$	—	$	217
Net income available to common shareholders	$	4,432	$	2,688
Share and Per share information:
Ending number of shares outstanding	8,464,820		8,624,392
Average number of shares outstanding	8,497,919		8,621,720
Diluted average number of shares	8,528,828		8,682,381
Earnings per common share - basic	$	0.52	$	0.31
Earnings per common share - diluted	0.52		0.31
Dividends paid per common share	0.09		0.05

See accompanying notes to consolidated financial statements.

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MIDWESTONE FINANCIAL GROUP, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME



(unaudited) (dollars in thousands)	Three Months Ended March 31,
	2012			2011
Net income	$	4,432		$	2,905

Other comprehensive income, before tax:
Unrealized holding gains arising during period	859			793
Less: Reclassification adjustment for gains included in net income	(316		)	—
Unrealized gains on available for sale securities	543			793
Other comprehensive income, before tax	543			793
Income tax expense related to items of other comprehensive income	196			297
Other comprehensive income, net of tax	347			496
Comprehensive income	$	4,779		$	3,401

See accompanying notes to consolidated financial statements.

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MIDWESTONE FINANCIAL GROUP, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY



(unaudited) (dollars in thousands, except per share amounts)	Preferred Stock		Common Stock		Additional Paid-in Capital			Treasury Stock			Retained Earnings			Accumulated Other Comprehensive Income (loss)			Total
Balance at December 31, 2010	$	15,767	$	8,690	$	81,268		$	(1,052	)	$	55,619		$	(1,826	)	$	158,466
Net income	—		—		—			—			2,905			—			2,905
Dividends paid on common stock ($0.05 per share)	—		—		—			—			(431		)	—			(431		)
Dividends paid on preferred stock	—		—		—			—			(200		)	—			(200		)
Stock options exercised (1,682 shares)	—		—		(6		)	14			—			—			8
Release/lapse of restriction on RSUs (8,600 shares)	—		—		(120		)	120			—			—			—
Preferred stock discount accretion	17		—		—			—			(17		)	—			—
Stock compensation	—		—		71			—			—			—			71
Other comprehensive income	—		—		—			—			—			496			496
Balance at March 31, 2011	$	15,784	$	8,690	$	81,213		$	(918	)	$	57,876		$	(1,330	)	$	161,315
Balance at December 31, 2011	$	—	$	8,690	$	80,333		$	(2,312	)	$	66,299		$	3,484		$	156,494
Net income	—		—		—			—			4,432			—			4,432
Dividends paid on common stock ($0.085 per share)	—		—		—			—			(723		)	—			(723		)
Stock options exercised (11,553 shares)	—		—		(47		)	134			—			—			87
Release/lapse of restriction on RSUs (13,170 shares)	—		—		(164		)	173			—			—			9
Repurchase of common stock (86,083 shares)	—		—		—			(1,441		)	—			—			(1,441		)
Stock compensation	—		—		65			—			—			—			65
Other comprehensive income	—		—		—			—			—			347			347
Balance at March 31, 2012	$	—	$	8,690	$	80,187		$	(3,446	)	$	70,008		$	3,831		$	159,270

See accompanying notes to consolidated financial statements.

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MIDWESTONE FINANCIAL GROUP, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS



(unaudited) (dollars in thousands)	Three Months Ended March 31,
	2012			2011
Cash flows from operating activities:
Net income	$	4,432		$	2,905
Adjustments to reconcile net income to net cash provided by operating activities:
Provision for loan losses	579			900
Depreciation, amortization and accretion	1,377			1,447
(Gain) loss on sale of premises and equipment	(158		)	48
Deferred income taxes	28			36
Stock-based compensation	74			71
Net gain on sale or call of available for sale securities	(316		)	—
Net gain on sale of other real estate owned	(67		)	(90		)
Net gain on sale of loans held for sale	(503		)	(288		)
Origination of loans held for sale	(32,308		)	(22,625		)
Proceeds from sales of loans held for sale	33,823			23,336
Decrease in accrued interest receivable	783			1,068
Increase in cash value of bank-owned life insurance	(230		)	(229		)
Decrease in other assets	216			—
Decrease in deferred compensation liability	(30		)	(14		)
Increase in accrued interest payable, accounts payable, accrued expenses, and other liabilities	709			4,176
Net cash provided by operating activities	8,409			10,741
Cash flows from investing activities:
Proceeds from sales of available for sale securities	14,558			—
Proceeds from maturities and calls of available for sale securities	19,134			34,396
Purchases of available for sale securities	(51,162		)	(74,236		)
Proceeds from maturities and calls of held to maturity securities	20			361
Purchase of held to maturity securities	(5,000		)	—
Decrease (increase) in loans	3,795			(1,291		)
Decrease in loan pool participations, net	4,144			3,664
Purchases of premises and equipment	(1,157		)	(183		)
Proceeds from sale of other real estate owned	983			200
Proceeds from sale of premises and equipment	645			154
Net cash used in investing activities	(14,040		)	(36,935		)
Cash flows from financing activities:
Net increase in deposits	38,011			43,830
Decrease in federal funds purchased	(8,920		)	—
Increase (decrease) in securities sold under agreements to repurchase	2,027			(3,869		)
Proceeds from Federal Home Loan Bank borrowings	—			10,000
Repayment of Federal Home Loan Bank borrowings	(4,000		)	(20,000		)
Stock options exercised	87			8
Dividends paid	(723		)	(631		)
Repurchase of common stock	(1,441		)	—
Net cash provided by financing activities	25,041			29,338
Net increase in cash and cash equivalents	19,410			3,144
Cash and cash equivalents at beginning of period	32,623			20,523
Cash and cash equivalents at end of period	$	52,033		$	23,667
Supplemental disclosures of cash flow information:
Cash paid during the period for interest	$	1,095		$	5,200
Cash paid during the period for income taxes	$	815		$	143
Supplemental schedule of non-cash investing activities:
Transfer of loans to other real estate owned	$	656		$	134
Transfer of property to assets held for sale	$	764		$	—

See accompanying notes to consolidated financial statements.

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MidWestOne Financial Group, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

(Unaudited)

1.Principles of Consolidation and Presentation

MidWestOne Financial Group, Inc. (“MidWestOne” or the “Company,” which is also referred to herein as “we,” “our” or “us”) is an Iowa corporation incorporated in 1983, a bank holding company under the Bank Holding Company Act of 1956 and a financial holding company under the Gramm-Leach-Bliley Act of 1999. Our principal executive offices are located at 102 South Clinton Street, Iowa City, Iowa 52240.

The Company owns 100% of the outstanding common stock of MidWestOne Bank, an Iowa state non-member bank chartered in 1934 with its main office in Iowa City, Iowa (the “Bank”), and 100% of the common stock of MidWestOne Insurance Services, Inc., Oskaloosa, Iowa. We operate primarily through our bank subsidiary, MidWestOne Bank, and MidWestOne Insurance Services, Inc., our wholly-owned subsidiary that operates an insurance agency business, through three offices located in central and east-central Iowa.

The accompanying unaudited consolidated financial statements have been prepared in accordance with the instructions to Form 10-Q and, therefore, do not include all the information and notes necessary for complete financial statements in conformity with U.S. generally accepted accounting principles. The information in this Quarterly Report on Form 10-Q is written with the presumption that the users of the interim financial statements have read or have access to the most recent Annual Report on Form 10-K of MidWestOne, which contains the latest audited financial statements and notes thereto, together with Management's Discussion and Analysis of Financial Condition and Results of Operations as of December 31, 2011 and for the year then ended. Management believes that the disclosures are adequate to make the information presented not misleading. In the opinion of management, the accompanying consolidated financial statements contain all adjustments (consisting of only normal recurring accruals) necessary to present fairly the financial position as of March 31, 2012, and the results of operations and cash flows for the three months ended March 31, 2012 and 2011. All significant intercompany accounts and transactions have been eliminated in consolidation.

The preparation of financial statements in conformity with U.S. generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities at the date of the financial statements and the reported amount of revenues and expenses during the reporting period. These estimates are based on information available to management at the time the estimates are made. Actual results could differ from those estimates. In the opinion of management, the accompanying unaudited consolidated financial statements contain all adjustments, consisting of normal recurring items, considered necessary for fair presentation. The results for the three months ended March 31, 2012 may not be indicative of results for the year ending December 31, 2012, or for any other period.

All significant accounting policies followed in the preparation of the quarterly financial statements are disclosed in the December 31, 2011 Annual Report on Form 10-K. In the consolidated statements of cash flows, cash and cash equivalents include cash and due from banks, interest-bearing deposits in banks, and federal funds sold.

2.Shareholders' Equity

Preferred Stock: The number of authorized shares of preferred stock for the Company is 500,000. None are currently issued or outstanding.

Common Stock: The number of authorized shares of common stock for the Company is 15,000,000.

On October 18, 2011, our Board of Directors amended the Company's existing $1.0 million share repurchase program, originally authorized on July 26, 2011, by increasing the remaining amount of authorized repurchases to $5.0 million, and extending the expiration of the program to December 31, 2012. Pursuant to the program, we may repurchase shares from time to time in the open market, and the method, timing and amounts of repurchase will be solely in the discretion of the Company's management. The repurchase program does not require us to acquire a specific number of shares. Therefore, the amount of shares repurchased pursuant to the program will depend on several factors, including market conditions, capital and liquidity requirements, and alternative uses for cash available.

3.Earnings per Common Share

Basic earnings per common share computations are based on the weighted average number of shares of common stock actually outstanding during the period. The weighted average number of shares outstanding for the three months ended March 31, 2012 and 2011 was 8,497,919 and 8,621,720, respectively. Diluted earnings per share amounts are computed by dividing net income available to common shareholders by the weighted average number of shares outstanding and all

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dilutive potential shares outstanding during the period. The computation of diluted earnings per share used a weighted average diluted number of shares outstanding of 8,528,828 and 8,682,381 for the three months ended March 31, 2012 and 2011, respectively.

The following table presents the computation of earnings per common share for the respective periods:



	Three Months Ended March 31,
(dollars in thousands, except per share amounts)	2012		2011
Weighted average number of shares outstanding during the period	8,497,919		8,621,720
Weighted average number of shares outstanding during the period including all dilutive potential shares	8,528,828		8,682,381
Net income	$	4,432	$	2,905
Preferred stock dividend accrued and discount accretion	—		(217		)
Net income available to common stockholders	$	4,432	$	2,688
Earnings per share - basic	$	0.52	$	0.31
Earnings per share - diluted	$	0.52	$	0.31

4.Investment Securities

A summary of investment securities available for sale is as follows:



	As of March 31, 2012
	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses		Estimated Fair Value
(in thousands)
U.S. Government agencies and corporations	$	68,943	$	1,045	$	73	$	69,915
State and political subdivisions	214,524		10,390		249		224,665
Mortgage-backed securities and collateralized mortgage obligations	237,913		6,495		7		244,401
Corporate debt securities	11,978		227		989		11,216
Total debt securities	533,358		18,157		1,318		550,197
Other equity securities	1,200		426		—		1,626
Total	$	534,558	$	18,583	$	1,318	$	551,823



	As of December 31, 2011
	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses		Estimated Fair Value
(in thousands)
U.S. Government agencies and corporations	$	55,851	$	1,142	$	12	$	56,981
State and political subdivisions	209,094		10,222		55		219,261
Mortgage-backed securities and collateralized mortgage obligations	238,641		6,161		—		244,802
Corporate debt securities	12,578		203		1,176		11,605
Total debt securities	516,164		17,728		1,243		532,649
Other equity securities	1,194		237		—		1,431
Total	$	517,358	$	17,965	$	1,243	$	534,080

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A summary of investment securities held to maturity is as follows:



	As of March 31, 2012
	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses		Estimated Fair Value
(in thousands)
State and political subdivisions	$	6,100	$	31	$	—	$	6,131
Mortgage-backed securities	45		5		—		50
Corporate debt securities	872		—		—		872
Total	$	7,017	$	36	$	—	$	7,053



	As of December 31, 2011
	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses		Estimated Fair Value
(in thousands)
State and political subdivisions	$	1,119	$	2	$	—	$	1,121
Mortgage-backed securities	46		4		—		50
Corporate debt securities	871		—		—		871
Total	$	2,036	$	6	$	—	$	2,042

The summary of available for sale investment securities shows that some of the securities in the available for sale investment portfolio had unrealized losses, or were temporarily impaired, as of March 31, 2012 and December 31, 2011. This temporary impairment represents the estimated amount of loss that would be realized if the securities were sold on the valuation date.

The following presents information pertaining to securities with gross unrealized losses as of March 31, 2012 and December 31, 2011, aggregated by investment category and length of time that individual securities have been in a continuous loss position:



		As of March 31, 2012
	Number of Securities	Less than 12 Months				12 Months or More				Total
	Number of Securities	Fair Value		Unrealized Losses		Fair Value		Unrealized Losses		Fair Value		Unrealized Losses
(in thousands, except number of securities)
U.S. Government agencies and corporations	2	$	11,415	$	73	$	—	$	—	$	11,415	$	73
State and political subdivisions	29	9,943		247		172		2		10,115		249
Mortgage-backed securities and collateralized mortgage obligations	1	3,375		7		—		—		3,375		7
Corporate debt securities	6	2,089		23		805		966		2,894		989
Total	38	$	26,822	$	350	$	977	$	968	$	27,799	$	1,318


		As of December 31, 2011
	Number of Securities	Less than 12 Months				12 Months or More				Total
	Number of Securities	Fair Value		Unrealized Losses		Fair Value		Unrealized Losses		Fair Value		Unrealized Losses
(in thousands, except number of securities)
U.S. Government agencies and corporations	1	$	5,412	$	12	$	—	$	—	$	5,412	$	12
State and political subdivisions	14	3,449		46		866		9		4,315		55
Corporate debt securities	6	4,975		210		806		966		5,781		1,176
Total	21	$	13,836	$	268	$	1,672	$	975	$	15,508	$	1,243

The Company's assessment of other-than-temporary impairment ("OTTI") is based on its reasonable judgment of the specific facts and circumstances impacting each individual security at the time such assessments are made. The Company reviews and considers factual information, including expected cash flows, the structure of the security, the credit quality of the underlying assets and the current and anticipated market conditions.

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At March 31, 2012, approximately 61% of the municipal bonds held by the Company were Iowa based. The Company does not intend to sell these municipal obligations, and it is not more likely than not that the Company will be required to sell them before the recovery of its cost. Due to the issuers' continued satisfaction of their obligations under the securities in accordance with their contractual terms and the expectation that they will continue to do so, management's intent and ability to hold these securities for a period of time sufficient to allow for any anticipated recovery in fair value, as well as the evaluation of the fundamentals of the issuers' financial condition and other objective evidence, the Company believes that the municipal obligations identified in the tables above were temporarily depressed as of March 31, 2012 and December 31, 2011.

The receipt of principal, at par, and interest on mortgage-backed securities is guaranteed by the respective government-sponsored agency guarantor, such that the Company believes that its mortgage-backed securities do not expose the Company to credit-related losses. The Company's mortgage-backed securities portfolio consisted of securities predominantly underwritten to the standards of and guaranteed by the government-sponsored agencies of FHLMC, FNMA and GNMA.

At March 31, 2012, the Company owned six collateralized debt obligations backed by pools of trust preferred securities with an original cost basis of $9.75 million. The book value of these securities as of March 31, 2012 totaled $1.8 million, after other-than-temporary impairment charges of $6.2 million during 2008, $1.6 million during 2009, and $0.2 million in 2010. All of the Company's trust preferred collateralized debt obligations are in mezzanine tranches and are currently rated less than investment grade by Moody's Investor Services. They are secured by trust preferred securities of banks and insurance companies throughout the United States, and were rated as investment grade securities when purchased between March 2006 and December 2007. However, as the banking climate eroded during 2008, the securities experienced cash flow problems and a pre-tax charge to earnings of $6.2 million was recorded in the fourth quarter of 2008. Due to continued market deterioration in these securities during 2009 and 2010, additional pre-tax charges to earnings of $1.6 million was recorded during 2009 and $0.2 million in 2010. No additional charges have been recognized during 2011 or 2012.The market for these securities is considered to be inactive according to the guidance issued in ASC Topic 820, “Fair Value Measurements and Disclosures.” The Company uses a discounted cash flow model to determine the estimated fair value of its pooled trust preferred collateralized debt obligations and to assess other-than-temporary impairment. The discounted cash flow analysis was performed in accordance with ASC Topic 325. The assumptions used in preparing the discounted cash flow model include the following: estimated discount rates (using yields of comparable traded instruments adjusted for illiquidity and other risk factors), estimated deferral and default rates on collateral, and estimated cash flows. The Company also reviewed a stress test of these securities to determine the additional deferrals or defaults in the collateral pool in excess of what the Company believes is probable, before the payments on the individual securities are negatively impacted.

As of March 31, 2012, the Company also owned $1.6 million of equity securities in banks and financial service-related companies. Equity securities are considered to have other-than-temporary impairment whenever they have been in a loss position, compared to current book value, for twelve consecutive months, and the Company does not expect them to recover to their original cost basis. For the first quarter of 2012 and 2011, no impairment charges were recorded, as the affected equity securities were not deemed impaired due to stabilized market prices in relation to the Company's original purchase price.

It is reasonably possible that the fair values of the Company's investment securities could decline in the future if the overall economy and the financial condition of some of the issuers deteriorate and the liquidity of these securities remains depressed. As a result, there is a risk that other-than-temporary impairments may occur in the future and any such amounts could be material to the Company's consolidated statements of operations.

A summary of the contractual maturity distribution of debt investment securities at March 31, 2012 is as follows:



	Available For Sale				Held to Maturity
	Amortized Cost		Fair Value		Amortized Cost		Fair Value
(in thousands)
Due in one year or less	$	26,288	$	26,437	$	235	$	235
Due after one year through five years	102,267		105,648		865		867
Due after five years through ten years	103,567		108,808		—		—
Due after ten years	63,323		64,903		5,872		5,901
Mortgage-backed securities and collateralized mortgage obligations	237,913		244,401		45		50
Total	$	533,358	$	550,197	$	7,017	$	7,053

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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. Equity securities available for sale with an amortized cost of $1.2 million and a fair value of $1.6 million are excluded from this table.

Other investment securities include investments in Federal Home Loan Bank (“FHLB”) stock. The carrying value of the FHLB stock at March 31, 2012 and December 31, 2011 was $12.1 million and $12.2 million, respectively, which is included in the Other Assets line of the consolidated balance sheets. This security is not readily marketable and ownership of FHLB stock is a requirement for membership in the FHLB Des Moines. The amount of FHLB stock the Bank is required to hold is directly related to the amount of FHLB advances borrowed. Because there are no available market values, this security is carried at cost and evaluated for potential impairment each quarter. Redemption of this investment is at the option of the FHLB.

Realized gains and losses on sales are determined on the basis of specific identification of investments based on the trade date. Realized gains on investments, including impairment losses for the three months ended March 31, 2012 and 2011, are as follows:



	Three Months Ended March 31,
	2012		2011
(in thousands)
Available for sale fixed maturity securities:
Gross realized gains	$	314	$	—
Gross realized losses	—		—
Other-than-temporary impairment	—		—
	314		—
Equity securities:
Gross realized gains	2		—
Gross realized losses	—		—
Other-than-temporary impairment	—		—
	2		—
	$	316	$	—

5.Loans Receivable and the Allowance for Loan Losses

The composition of loans and loan pool participations, and changes in the allowance for loan losses by portfolio segment are as follows:



	Allowance for Loan Losses and Recorded Investment in Loan Receivables
	As of March 31, 2012 and December 31, 2011
(in thousands)	Agricultural		Commercial and Industrial		Commercial Real Estate		Residential Real Estate		Consumer		Unallocated		Total
March 31, 2012
Allowance for loan losses:
Individually evaluated for impairment	$	196	$	497	$	241	$	73	$	7	$	—	$	1,014
Collectively evaluated for impairment	927		4,190		4,610		2,661		371		1,906		14,665
Total	$	1,123	$	4,687	$	4,851	$	2,734	$	378	$	1,906	$	15,679
Loans acquired with deteriorated credit quality (loan pool participations)	$	7	$	152	$	633	$	312	$	39	$	991	$	2,134
Loans receivable
Individually evaluated for impairment	$	3,453	$	2,998	$	6,020	$	1,116	$	25	$	—	$	13,612
Collectively evaluated for impairment	81,653		240,707		388,773		237,261		19,140		—		967,534
Total	$	85,106	$	243,705	$	394,793	$	238,377	$	19,165	$	—	$	981,146
Loans acquired with deteriorated credit quality (loan pool participations)	$	87	$	3,175	$	29,469	$	4,988	$	113	$	10,210	$	48,042

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(in thousands)	Agricultural		Commercial and Industrial		Commercial Real Estate		Residential Real Estate		Consumer		Unallocated		Total
December 31, 2011
Allowance for loan losses:
Individually evaluated for impairment	$	247	$	793	$	272	$	252	$	8	$	—	$	1,572
Collectively evaluated for impairment	962		4,587		4,899		3,249		159		248		14,104
Total	$	1,209	$	5,380	$	5,171	$	3,501	$	167	$	248	$	15,676
Loans acquired with deteriorated credit quality (loan pool participations)	$	7	$	219	$	666	$	346	$	56	$	840	$	2,134
Loans receivable
Individually evaluated for impairment	$	4,776	$	2,550	$	9,619	$	2,736	$	58	$	—	$	19,739
Collectively evaluated for impairment	84,522		238,636		386,420		236,112		20,744		—		966,434
Total	$	89,298	$	241,186	$	396,039	$	238,848	$	20,802	$	—	$	986,173
Loans acquired with deteriorated credit quality (loan pool participations)	$	90	$	3,793	$	30,523	$	5,694	$	124	$	11,962	$	52,186



	Allowance for Loan Loss Activity
	For the Three Months Ended March 31, 2012 and 2011
(in thousands)	Agricultural			Commercial and Industrial			Commercial Real Estate			Residential Real Estate			Consumer			Unallocated			Total
2012
Beginning balance	$	1,209		$	5,380		$	5,171		$	3,501		$	167		$	248		$	15,676
Charge-offs	—			(912		)	(26		)	(175		)	(11		)	—			(1,124		)
Recoveries	507			15			3			12			11			—			548
Provision	(593		)	204			(297		)	(604		)	211			1,658			579
Ending balance	$	1,123		$	4,687		$	4,851		$	2,734		$	378		$	1,906		$	15,679
2011
Beginning balance	$	827		$	4,540		$	5,255		$	2,776		$	323		$	1,446		$	15,167
Charge-offs	(75		)	(219		)	(447		)	(70		)	(21		)	—			(832		)
Recoveries	—			143			1			15			4			—			163
Provision	696			605			641			(422		)	(56		)	(564		)	900
Ending balance	$	1,448		$	5,069		$	5,450		$	2,299		$	250		$	882		$	15,398

Loan Portfolio Segment Risk Characteristics

Agricultural - Agricultural loans, most of which are secured by crops and machinery, are provided to finance capital improvements and farm operations as well as acquisitions of livestock and machinery. The ability of the borrower to repay may be affected by many factors outside of the borrower's control including adverse weather conditions, loss of livestock due to disease or other factors, declines in market prices for agricultural products and the impact of government regulations. The ultimate repayment of agricultural loans is dependent upon the profitable operation or management of the agricultural entity. Collateral for these loans generally includes accounts receivable, inventory, equipment and real estate. However, depending on the overall financial condition of the borrower, some loans are made on an unsecured basis. The collateral securing these loans may depreciate over time, may be difficult to appraise and may fluctuate in value based on the success of the business.

Commercial and Industrial - Commercial and industrial loans are primarily made based on the reported cash flow of the borrower and secondarily on the underlying collateral provided by the borrower. The collateral support provided by the borrower for most of these loans and the probability of repayment is based on the liquidation of the pledged collateral and enforcement of a personal guarantee, if any exists. The primary repayment risks of commercial and industrial loans are that the cash flows of the borrower may be unpredictable, and the collateral securing these loans may fluctuate in value. The size of the loans the Company can offer to commercial customers is less than the size of the loans that competitors with larger lending limits can offer. This may limit the Company's ability to establish relationships with the area's largest businesses. As a result, the Company may assume greater lending risks than financial institutions that have a lesser concentration of such loans and tend to make loans to larger businesses. Collateral for these loans generally includes accounts receivable, inventory, equipment and real estate. However, depending on the overall financial condition of the borrower, some loans are made on an unsecured basis. The collateral securing these loans may depreciate over time, may be difficult to appraise and may fluctuate in value based on the success of the business. In addition, if the United States economy does not meaningfully improve, this could harm or continue to harm the businesses of our commercial and industrial customers and reduce the value of the collateral securing these loans.

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Commercial Real Estate - The Company offers mortgage loans to commercial and agricultural customers for the acquisition of real estate used in their business, such as offices, warehouses and production facilities, and to real estate investors for the acquisition of apartment buildings, retail centers, office buildings and other commercial buildings. The market value of real estate securing commercial real estate loans can fluctuate significantly in a short period of time as a result of market conditions in the geographic area in which the real estate is located. Adverse developments affecting real estate values in one or more of the Company's markets could increase the credit risk associated with its loan portfolio. Additionally, real estate lending typically involves higher loan principal amounts and the repayment of the loans generally is dependent, in large part, on sufficient income from the properties securing the loans to cover operating expenses and debt service. Economic events or governmental regulations outside of the control of the borrower or lender could negatively impact the future cash flow and market values of the affected properties.

Residential Real Estate - The Company generally retains short-term residential mortgage loans that are originated for its own portfolio but sells most long-term loans to other parties while retaining servicing rights on the majority of those. The market value of real estate securing residential real estate loans can fluctuate as a result of market conditions in the geographic area in which the real estate is located. Adverse developments affecting real estate values in one or more of the Company's markets could increase the credit risk associated with its loan portfolio. Additionally, real estate lending typically involves higher loan principal amounts and the repayment of the loans generally is dependent, in large part, on the borrower's continuing financial stability, and is therefore more likely to be affected by adverse personal circumstances.

Consumer - Consumer loans typically have shorter terms, lower balances, higher yields and higher risks of default. Consumer loan collections are dependent on the borrower's continuing financial stability, and are therefore more likely to be affected by adverse personal circumstances. Collateral for these loans generally includes automobiles, boats, recreational vehicles, mobile homes, and real estate. However, depending on the overall financial condition of the borrower, some loans are made on an unsecured basis. The collateral securing these loans may depreciate over time, may be difficult to recover and may fluctuate in value based on condition. In addition, a decline in the United States economy could result in reduced employment, impacting the ability of customers to repay their obligations.

Loans acquired with deteriorated credit quality (loan pool participations) - The underlying loans in the loan pool participations include both fixed-rate and variable-rate instruments. No amounts for interest due are reflected in the carrying value of the loan pool participations. Based on historical experience, the average period of collectibility for loans underlying loan pool participations, many of which have exceeded contractual maturity dates, is approximately three to five years. Loan pool balances are affected by the payment and refinancing activities of the borrowers resulting in pay-offs of the underlying loans and reduction in the balances. Collections from the individual borrowers are managed by the loan pool servicer and are affected by the borrower's financial ability and willingness to pay, foreclosure and legal action, collateral value, and the economy in general.

Charge-off Policy

The Company requires a loan to be charged-off as soon as it becomes apparent that some loss will be incurred, or when its collectability is sufficiently questionable that it no longer is considered a bankable asset. The primary considerations when determining if and how much of a loan should be charged-off are as follows: (1) the potential for future cash flows; (2) the value of any collateral; and (3) the strength of any co-makers or guarantors.

When it is determined that a loan requires partial or full charge-off, a request for approval of a charge-off is submitted to the Bank's President, Executive Vice President and Chief Credit Officer, and the Senior Regional Loan officer. The Bank's Board of Directors formally approves all loan charge-offs retroactively at the next regularly scheduled meeting. Once a loan is charged-off, it cannot be restructured and returned to the Bank's books.

The Allowance for Loan and Lease Losses - Bank Loans

The Company requires the maintenance of an adequate allowance for loan and lease losses (“ALLL”) in order to cover estimated losses without eroding the Company's capital base. Calculations are done at each quarter end, or more frequently if warranted, to analyze the collectability of loans and to ensure the adequacy of the allowance. In line with FDIC directives, the ALLL calculation does not include consideration of loans held for sale or off-balance-sheet credit exposures (such as unfunded letters of credit). Determining the appropriate level for the ALLL relies on the informed judgment of management, and as such, is subject to inaccuracy. Given the inherently imprecise nature of calculating the necessary ALLL, the Company's policy permits an "unallocated" allowance between 15% above and 5% below the “indicated reserve.” These unallocated amounts are present due to the inherent imprecision in the ALLL calculation.

Loans Reviewed Individually for Impairment

The Company identifies loans to be reviewed and evaluated individually for impairment, based on current information

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and events, and the probability that the borrower will be unable to repay all amounts due according to the contractual terms of the loan agreement. Specific areas of consideration include: size of credit exposure, risk rating, delinquency, nonaccrual status, and loan classification.

The level of individual impairment is measured using one of the following methods: (1) the fair value of the collateral less costs to sell; (2) the present value of expected future cash flows, discounted at the loan's effective interest rate; or (3) the loan's observable market price. Loans that are deemed fully collateralized or have been charged down to a level corresponding with any three of the measurements require no assignment of reserves from the ALLL.

All loans deemed troubled debt restructure or “TDR” are considered impaired. A loan is considered a TDR when the Bank, for economic or legal reasons related to a borrower's financial difficulties, grants a concession to the borrower that the Bank would not otherwise consider. All of the following factors are indicators that the Bank has granted a concession (one or multiple items may be present):


•	The borrower receives a reduction of the stated interest rate for the remaining original life of the debt.


•	The borrower receives an extension of the maturity date or dates at a stated interest rate lower than the current market interest rate for new debt with similar risk characteristics.


•	The borrower receives a reduction of the face amount or maturity amount of the debt as stated in the instrument or other agreement.


•	The borrower receives a deferral of required payments (principal and/or interest).


•	The borrower receives a reduction of the accrued interest.

The following table sets forth information on the Company's troubled debt restructurings by class of financing receivable occurring during the stated periods:



	Three Months Ended March 31,
	2012					2011
	Number of Contracts	Pre-Modification Outstanding Recorded Investment*		Post-Modification Outstanding Recorded Investment		Number of Contracts	Pre-Modification Outstanding Recorded Investment*		Post-Modification Outstanding Recorded Investment
(dollars in thousands)
Troubled Debt Restructurings:
Agricultural	—	$	—	$	—	—	$	—	$	—
Commercial and industrial	—	—		—		—	—		—
Credit cards	—	—		—		—	—		—
Overdrafts	—	—		—		—	—		—
Commercial real estate:
Construction and development	—	—		—		—	—		—
Farmland	2	2,475		2,475		—	—		—
Multifamily	—	—		—		—	—		—
Commercial real estate-other	—	—		—		4	803		803
Total commercial real estate	2	2,475		2,475		4	803		803
Residential real estate:
One- to four- family first liens	—	—		—		—	—		—
One- to four- family junior liens	—	—		—		—	—		—
Total residential real estate	—	—		—		—	—		—
Consumer	—	—		—		—	—		—
Total	2	$	2,475	$	2,475	4	$	803	$	803
* - Includes accrued interest receivable.

During the three months ended March 31, 2012, the Company restructured two loans by granting concessions to borrowers experiencing financial difficulties. Both are farmland loans and were granted interest rate reductions by court order as part of a Chapter 12 bankruptcy. One commercial real estate loan that was a new TDR in the past 12 months due to a below market interest rate was on non-accrual at March 31, 2012.

During the three months ended March 31, 2011, the Company restructured four loans by granting concessions to borrowers experiencing financial difficulties. Four commercial real estate loans to the same borrower were classified as new TDRs during that time period due to the extension of a forbearance agreement and the granting of a below market interest rate. These four credits also experienced a payment default during the three months ended March 31, 2011.

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Loans by class of financing receivable modified as TDRs within the previous 12 months and for which there was a payment default during the stated periods were:



	Three Months Ended March 31,
	2012			2011
	Number of Contracts	Recorded Investment		Number of Contracts	Recorded Investment
(dollars in thousands)
Troubled Debt Restructurings That Subsequently Defaulted:
Agricultural	—	$	—	—	$	—
Commercial and industrial	—	—		—	—
Credit cards	—	—		—	—
Overdrafts	—	—		—	—
Commercial real estate:
Construction and development	—	—		—	—
Farmland	—	—		—	—
Multifamily	—	—		—	—
Commercial real estate-other	1	580		4	802
Total commercial real estate	1	580		4	802
Residential real estate:
One- to four- family first liens	—	—		—	—
One- to four- family junior liens	—	—		—	—
Total residential real estate	—	—		—	—
Consumer	—	—		—	—
Total	1	$	580	4	$	802

Loans Reviewed Collectively for Impairment

All loans not evaluated individually for impairment are grouped together by type (i.e. commercial, agricultural, consumer, etc.) and further segmented within each subset by risk classification (i.e. pass, special mention, and substandard). Homogeneous loans past due 60-89 days and 90+ days, are classified special mention and substandard, respectively, for allocation purposes.

The Company's historical loss experiences for each loan type segment is calculated using the fiscal quarter end data for the most recent 20 quarters as a starting point for estimating losses. In addition, other prevailing qualitative or environmental factors likely to cause estimated losses to vary from historical data are incorporated in the form of adjustments to increase or decrease the loss rate applied to a group(s). These adjustments are documented, and fully explain how the current information, events, circumstances, and conditions impact the historical loss measurements assumptions.

Although not a comprehensive list, the following are considered key factors and are evaluated with each calculation of the ALLL to determine if adjustments to estimated loss rates are warranted:


•	Changes in lending policies and procedures, including changes in underwriting standards and collection, charge-off, and recovery practices not considered elsewhere in estimating credit losses.


•	Changes in international, national, regional, and local economic and business conditions and developments that affect the collectability of the portfolio, including the condition of various market segments.


•	Changes in the nature and volume of the portfolio and in the terms of loans.


•	Changes in the experience, ability and depth of lending management and other relevant staff.


•	Changes in the volume and severity of past due loans, the volume of nonaccrual loans, and the volume and severity of adversely classified or graded loans.


•	Changes in the quality of the institution's loan review system.


•	Changes in the value of underlying collateral for collateral-dependent loans.


•	The existence and effect of any concentrations of credit, and changes in the level of such concentrations.


•	The effect of other external factors, such as competition and legal and regulatory requirements, on the level of estimated credit losses in the bank's existing portfolio.

The items listed above are used to determine the pass percentage for loans evaluated collectively and, as such, are applied to the loans risk rated pass. Due to the inherent risks associated with special mention risk rated loans (i.e. early stages of financial deterioration, technical exceptions, etc.), this subset is reserved at two times the pass allocation factor to reflect

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this increased risk exposure. In addition, loans classified as substandard loans carry exponentially greater risk than special mention loans, and as such, this subset is reserved at six times the pass allocation. Further, loans identified as substandard “performing collateral deficient” are reserved at 12 times the pass allocation due to the perceived additional risk for such credits.

The Allowance for Loan and Lease Losses - Loan Pool Participations

The Company requires that the loan pool participation ALLL will be at least sufficient to cover the next quarter's estimated charge-offs as presented by the servicer. Currently, charge-offs are netted against the income the Company receives, thus the balance in the loan pool participation reserve is not affected and remains stable. In essence, a provision for loan losses is made that is equal to the quarterly charge-offs, which is deducted from income received from the loan pool participations. By maintaining a sufficient reserve to cover the next quarter's charge-offs, the Company will have sufficient reserves in place should no income be collected from the loan pool participations during the quarter. In the event the estimated charge-offs provided by the servicer are greater than the loan pool participation ALLL, an additional provision is made to cover the difference between the current ALLL and the estimated charge-offs provided by the servicer.

Loans Reviewed Individually for Impairment

The loan servicer reviews the portfolio quarterly on a loan-by-loan basis, and loans that are deemed to be impaired are charged-down to their estimated value during the next calendar quarter. All loans that are to be charged-down are reserved against in the ALLL adequacy calculation. Loans that continue to have an investment basis that have been charged-down are monitored, and if additional impairment is noted the reserve requirement is increased on the individual loan.

Loans Reviewed Collectively for Impairment

The Company utilizes the annualized average of portfolio loan (not loan pool) historical loss per risk category over a two-year period of time. Supporting documentation for the technique used to develop the historical loss rate for each group of loans is required to be maintained. It is management's assessment that the two-year rate is most reflective of the estimated credit losses in the current loan pool portfolio.

The following table sets forth the composition of each class of the Company's loans by internally assigned credit quality indicators at March 31, 2012 and December 31, 2011:



	Pass		Special Mention/ Watch		Substandard		Doubtful		Loss		Total
(in thousands)
March 31, 2012
Agricultural	$	80,442	$	620	$	4,044	$	—	$	—	$	85,106
Commercial and industrial	216,572		9,823		15,858		—		—		242,253
Credit cards	1,056		—		—		—		—		1,056
Overdrafts	232		87		222		—		—		541
Commercial real estate:
Construction and development	60,971		8,766		6,028		—		—		75,765
Farmland	65,401		2,946		2,692		—		—		71,039
Multifamily	33,528		315		—		—		—		33,843
Commercial real estate-other	188,939		20,579		4,628		—		—		214,146
Total commercial real estate	348,839		32,606		13,348		—		—		394,793
Residential real estate:
One- to four- family first liens	171,691		4,803		2,106		—		—		178,600
One- to four- family junior liens	59,451		40		286		—		—		59,777
Total residential real estate	231,142		4,843		2,392		—		—		238,377
Consumer	18,921		26		73		—		—		19,020
Total	$	897,204	$	48,005	$	35,937	$	—	$	—	$	981,146
Loans acquired with deteriorated credit quality (loan pool participations)	$	25,819	$	—	$	22,191	$	—	$	32	$	48,042

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	Pass		Special Mention/ Watch		Substandard		Doubtful		Loss		Total
(in thousands)
December 31, 2011
Agricultural	$	82,529	$	1,328	$	5,441	$	—	$	—	$	89,298
Commercial and industrial	206,053		16,611		17,326		—		—		239,990
Credit cards	934		—		—		—		—		934
Overdrafts	560		179		146		—		—		885
Commercial real estate:
Construction and development	57,940		9,121		6,197		—		—		73,258
Farmland	68,119		3,193		3,142		—		—		74,454
Multifamily	34,142		318		259		—		—		34,719
Commercial real estate-other	189,077		18,149		6,382		—		—		213,608
Total commercial real estate	349,278		30,781		15,980		—		—		396,039
Residential real estate:
One- to four- family first liens	164,504		6,564		4,361		—		—		175,429
One- to four- family junior liens	62,493		336		590		—		—		63,419
Total residential real estate	226,997		6,900		4,951		—		—		238,848
Consumer	19,969		49		161		—		—		20,179
Total	$	886,320	$	55,848	$	44,005	$	—	$	—	$	986,173
Loans acquired with deteriorated credit quality (loan pool participations)	$	26,677	$	—	$	25,477	$	—	$	32	$	52,186

Special Mention/Watch - A special mention/watch asset has potential weaknesses that deserve management's close attention. If left uncorrected, these potential weaknesses may result in deterioration of the repayment prospects for the asset or in the institution's credit position at some future date. Special mention/watch assets are not adversely classified and do not expose an institution to sufficient risk to warrant adverse classification.

Substandard - Substandard loans are inadequately protected by the current net worth and paying capacity of the obligor or of the collateral pledged, if any. Loans so classified have a well-defined weakness or weaknesses that jeopardize the liquidation of the debt. They are characterized by the distinct possibility that the bank will sustain some loss if the deficiencies are not corrected.

Doubtful - Loans classified doubtful have all the weaknesses inherent in those classified substandard with the added characteristic that the weaknesses make collection or liquidation in full, on the basis of currently known facts, conditions and values, highly questionable and improbable.

Loss - Loans classified loss are considered uncollectible and of such little value that their continuance as bankable assets is not warranted. This classification does not mean that the loan has absolutely no recovery or salvage value but rather it is not practical or desirable to defer writing off this basically worthless asset even though partial recovery may be effected in the future.

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The following table sets forth the amounts and categories of the Company's impaired loans as of March 31, 2012 and December 31, 2011:



	March 31, 2012						December 31, 2011
	Recorded Investment		Unpaid Principal Balance		Related Allowance		Recorded Investment		Unpaid Principal Balance		Related Allowance
(in thousands)
With no related allowance recorded:
Agricultural	$	1,600	$	2,100	$	—	$	2,928	$	2,892	$	—
Commercial and industrial	1,328		2,002		—		1,129		1,129		—
Credit cards	—		—		—		—		—		—
Overdrafts	—		—		—		—		—		—
Commercial real estate:
Construction and development	707		1,068		—		831		831		—
Farmland	—		—		—		3,730		3,723		—
Multifamily	—		—		—		—		—		—
Commercial real estate-other	723		823		—		2,456		2,454		—
Total commercial real estate	1,430		1,891		—		7,017		7,008		—
Residential real estate:
One- to four- family first liens	325		325		—		1,319		1,318		—
One- to four- family junior liens	—		—		—		72		72		—
Total residential real estate	325		325		—		1,391		1,390		—
Consumer	—		—		—		26		26		—
Total	$	4,683	$	6,318	$	—	$	12,491	$	12,445	$	—
With an allowance recorded:
Agricultural	$	1,853	$	1,853	$	196	$	1,713	$	1,884	$	247
Commercial and industrial	1,670		1,745		497		1,432		1,421		793
Credit cards	—		—		—		—		—		—
Overdrafts	—		—		—		—		—		—
Commercial real estate:
Construction and development	854		981		115		856		854		129
Farmland	2,657		2,657		78		326		326		14
Multifamily	—		—		—		259		259		10
Commercial real estate-other	1,079		1,079		48		1,175		1,172		119
Total commercial real estate	4,590		4,717		241		2,616		2,611		272
Residential real estate:
One- to four- family first liens	791		791		73		1,247		1,255		216
One- to four- family junior liens	—		—		—		92		91		36
Total residential real estate	791		791		73		1,339		1,346		252
Consumer	25		25		7		32		32		8
Total	$	8,929	$	9,131	$	1,014	$	7,132	$	7,294	$	1,572
Total:
Agricultural	$	3,453	$	3,953	$	196	$	4,641	$	4,776	$	247
Commercial and industrial	2,998		3,747		497		2,561		2,550		793
Credit cards	—		—		—		—		—		—
Overdrafts	—		—		—		—		—		—
Commercial real estate:
Construction and development	1,561		2,049		115		1,687		1,685		129
Farmland	2,657		2,657		78		4,056		4,049		14
Multifamily	—		—		—		259		259		10
Commercial real estate-other	1,802		1,902		48		3,631		3,626		119
Total commercial real estate	6,020		6,608		241		9,633		9,619		272
Residential real estate:
One- to four- family first liens	1,116		1,116		73		2,566		2,573		216
One- to four- family junior liens	—		—		—		164		163		36
Total residential real estate	1,116		1,116		73		2,730		2,736		252
Consumer	25		25		7		58		58		8
Total	$	13,612	$	15,449	$	1,014	$	19,623	$	19,739	$	1,572

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The following table sets forth the average recorded investment and interest income recognized for each category of the Company's impaired loans during the stated periods:



	Three Months Ended March 31,
	2012				2011
	Average Recorded Investment		Interest Income Recognized		Average Recorded Investment		Interest Income Recognized
(in thousands)
With no related allowance recorded:
Agricultural	$	1,600	$	12	$	3,439	$	12
Commercial and industrial	1,327		31		851		7
Credit cards	—		—		—		—
Overdrafts	—		—		—		—
Commercial real estate:
Construction and development	707		—		695		—
Farmland	—		—		4,204		23
Multifamily	—		—		—		—
Commercial real estate-other	731		—		3,651		34
Total commercial real estate	1,438		—		8,550		57
Residential real estate:
One- to four- family first liens	325		—		1,549		(2		)
One- to four- family junior liens	—		—		11		—
Total residential real estate	325		—		1,560		(2		)
Consumer	—		—		52		—
Total	$	4,690	$	43	$	14,452	$	74
With an allowance recorded:
Agricultural	$	1,853	$	10	1,733		10
Commercial and industrial	1,677		3		1,496		6
Credit cards	—		—		—		—
Overdrafts	—		—		—		—
Commercial real estate:
Construction and development	854		7		2,059		(10		)
Farmland	2,657		29		350		2
Multifamily	—		—		—		—
Commercial real estate-other	1,086		11		1,204		30
Total commercial real estate	4,597		47		3,613		22
Residential real estate:
One- to four- family first liens	792		8		1,018		9
One- to four- family junior liens	—		—		66		1
Total residential real estate	792		8		1,084		10
Consumer	25		1		28		1
Total	$	8,944	$	69	$	7,954	$	49
Total:
Agricultural	$	3,453	$	22	5,172		22
Commercial and industrial	3,004		34		2,347		13
Credit cards	—		—		—		—
Overdrafts	—		—		—		—
Commercial real estate:
Construction and development	1,561		7		2,754		(10		)
Farmland	2,657		29		4,554		25
Multifamily	—		—		—		—
Commercial real estate-other	1,817		11		4,855		64
Total commercial real estate	6,035		47		12,163		79
Residential real estate:
One- to four- family first liens	1,117		8		2,567		7
One- to four- family junior liens	—		—		77		1
Total residential real estate	1,117		8		2,644		8
Consumer	25		1		80		1
Total	$	13,634	$	112	$	22,406	$	123

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The following table sets forth the composition of the Company's past due and nonaccrual loans at March 31, 2012 and December 31, 2011:



	30 - 59 Days Past Due		60 - 89 Days Past Due		90 Days or More Past Due		Total Past Due		Current		Total Loans Receivable		Recorded Investment > 90 Days Past Due and Accruing
(in thousands)
March 31, 2012
Agricultural	$	70	$	73	$	160	$	303	$	84,803	$	85,106	$	—
Commercial and industrial	2,551		451		1,693		4,695		237,558		242,253		60
Credit cards	4		—		—		4		1,052		1,056		—
Overdrafts	216		2		4		222		319		541		—
Commercial real estate:
Construction and development	184		—		1,159		1,343		74,422		75,765		—
Farmland	161		—		290		451		70,588		71,039		—
Multifamily	—		—		—		—		33,843		33,843		—
Commercial real estate-other	439		244		1,384		2,067		212,079		214,146		60
Total commercial real estate	784		244		2,833		3,861		390,932		394,793		60
Residential real estate:
One- to four- family first liens	2,580		1,218		1,273		5,071		173,529		178,600		308
One- to four- family junior liens	294		40		257		591		59,186		59,777		112
Total residential real estate	2,874		1,258		1,530		5,662		232,715		238,377		420
Consumer	76		26		33		135		18,885		19,020		—
Total	$	6,575	$	2,054	$	6,253	$	14,882	$	966,264	$	981,146	$	540
December 31, 2011
Agricultural	$	55	$	284	$	176	$	515	$	88,783	$	89,298	$	—
Commercial and industrial	390		1,732		1,709		3,831		236,159		239,990		537
Credit cards	5		—		—		5		929		934		—
Overdrafts	92		21		32		145		740		885		—
Commercial real estate:
Construction and development	148		—		1,159		1,307		71,951		73,258		—
Farmland	—		—		2,765		2,765		71,689		74,454		—
Multifamily	259		—		—		259		34,460		34,719		—
Commercial real estate-other	686		203		1,555		2,444		211,164		213,608		49
Total commercial real estate	1,093		203		5,479		6,775		389,264		396,039		49
Residential real estate:
One- to four- family first liens	2,316		1,373		1,916		5,605		169,824		175,429		262
One- to four- family junior liens	87		114		292		493		62,926		63,419		206
Total residential real estate	2,403		1,487		2,208		6,098		232,750		238,848		468
Consumer	211		47		34		292		19,887		20,179		—
Total	$	4,249	$	3,774	$	9,638	$	17,661	$	968,512	$	986,173	$	1,054

Non-accrual and Delinquent Loans

Loans are placed on non-accrual when (1) payment in full of principal and interest is no longer expected or (2) principal or interest has been in default for 90 days or more (unless the loan is both well secured with marketable collateral and in the process of collection). All loans rated doubtful or worse are placed on non-accrual.

A non-accrual asset may be restored to an accrual status when (1) all past due principal and interest has been paid (excluding renewals and modifications that involve the capitalizing of interest) or (2) the loan becomes well secured and is in the process of collection. An established track record of performance is also considered when determining accrual status.

Delinquency status of a loan is determined by the number of days that have elapsed past the loan's payment due date, using the following classification groupings: 30-59 days, 60-89 days and 90 days or more. Loans shown in the 30-59 days and 60-89 days columns in the table above reflect contractual delinquency status only, and include loans considered nonperforming due to classification as a TDR or being placed on non-accrual.

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The following table sets forth the composition of the Company's recorded investment in loans on nonaccrual status as of March 31, 2012 and December 31, 2011:



	March 31, 2012		December 31, 2011
(in thousands)
Agricultural	$	151	$	1,453
Commercial and industrial	1,933		1,494
Credit cards	—		—
Overdrafts	—		—
Commercial real estate:
Construction and development	1,159		1,159
Farmland	325		2,927
Multifamily	—		259
Commercial real estate-other	1,568		1,507
Total commercial real estate	3,052		5,852
Residential real estate:
One- to four- family first liens	988		1,959
One- to four- family junior liens	174		125
Total residential real estate	1,162		2,084
Consumer	33		34
Total	$	6,331	$	10,917

As of March 31, 2012, the Company has no commitments to lend additional funds to any borrowers who have nonperforming loans.

Loan Pool Participations

ASC Topic 310 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 acquired in a transfer if those differences are attributable, at least in part, to credit quality. Loan pool loans were evaluated individually when purchased for application of ASC Topic 310, 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 were met, the individual loan utilized the accounting treatment required by ASC Topic 310 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 were not met, the loan is accounted for on the cash-basis of accounting.

The loan servicer reviews the portfolio quarterly on a loan-by-loan basis, and loans that are deemed to be impaired are charged-down to their estimated value. As of March 31, 2012, approximately 52% of the loans were contractually current or less than 90 days past-due, while 48% were contractually past-due 90 days or more. 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 48% contractually past-due includes loans in litigation and foreclosed property.

6.Income Taxes

Federal income tax expense for the three months ended March 31, 2012 and 2011 was computed using the consolidated effective federal tax rate. The Company also recognized income tax expense pertaining to state franchise taxes payable by the subsidiary bank.

7.Fair Value Measurements

ASC Topic 820 defines fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants. A fair value measurement assumes that the transaction to sell the asset or transfer the liability occurs in the principal market for the asset or liability or, in the absence of a principal market, the most advantageous market for the asset or liability. The price in the principal (or most advantageous) market used to measure the fair value of the asset or liability is not adjusted for transaction costs. An orderly transaction is a transaction that assumes exposure to the market for a period prior to the measurement date to allow for marketing activities that are usual and customary for transactions involving such assets and liabilities; it is not a forced transaction. Market participants are buyers and sellers in the principal market that are (i) independent, (ii) knowledgeable, (iii) able to transact and (iv) willing to transact.

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ASC Topic 820 requires the use of valuation techniques that are consistent with the market approach, the income approach and/or the cost approach. The market approach uses prices and other relevant information generated by market transactions involving identical or comparable assets and liabilities. The income approach uses valuation techniques to convert future amounts, such as cash flows or earnings, to a single present amount on a discounted basis. The cost approach is based on the amount that currently would be required to replace the service capacity of an asset (replacement cost). Valuation techniques should be consistently applied. Inputs to valuation techniques refer to the assumptions that market participants would use in pricing the asset or liability. Inputs may be observable, meaning those that reflect the assumptions market participants would use in pricing the asset or liability developed based on market data obtained from independent sources, or unobservable, 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, ASC Topic 820 establishes a fair value hierarchy for valuation inputs that gives the highest priority to quoted prices in active markets for identical assets or liabilities and the lowest priority to unobservable inputs. The fair value hierarchy is as follows:


•	Level 1 Inputs – Unadjusted quoted prices for identical assets or liabilities in active markets that the reporting entity has the ability to access at the measurement date.

•

Level 2 Inputs – Inputs other than quoted prices included in Level 1 that are observable for the asset or liability, either directly or indirectly. These might include quoted prices for similar assets or liabilities in active markets, quoted prices for identical or similar assets or liabilities in markets that are not active, inputs other than quoted prices that are observable for the asset (such as interest rates, volatilities, prepayment speeds, credit risks, etc.) or inputs that are derived principally from or corroborated by market data by correlation or other means.


•	Level 3 Inputs – Unobservable inputs for determining the fair values of assets or liabilities that reflect an entity's own assumptions about the assumptions that market participants would use in pricing the assets or liabilities.

It is the Company's policy to maximize the use of observable inputs and minimize the use of unobservable inputs when developing fair value measurements. Recent market conditions have led to diminished, and in some cases, non-existent trading in certain of the financial asset classes. The Company is required to use observable inputs, to the extent available, in the fair value estimation process unless that data results from forced liquidations or distressed sales. Despite the Company's best efforts to maximize the use of relevant observable inputs, the current market environment has diminished the observability of trades and assumptions that have historically been available. A description of the valuation methodologies used for instruments measured at fair value, as well as the general classification of such instruments pursuant to the valuation hierarchy, is set forth below.

Valuation methods for instruments measured at fair value on a recurring basis.

Securities Available for Sale - The Company's investment securities classified as available for sale include: debt securities issued by the U.S. Treasury and other U.S. government corporations and agencies, debt securities issued by state and political subdivisions, mortgage-backed securities, collateralized mortgage obligations, corporate debt securities, and equity securities. Quoted exchange prices are available for equity securities, which are classified as Level 1. The Company utilizes an independent pricing service to obtain the fair value of debt securities. On a quarterly basis, the Company selects a sample of 30 securities from our primary pricing service and compares them to a secondary independent pricing service to validate value. In addition, the Company periodically reviews the pricing methodology utilized by the primary independent service for reasonableness. Debt securities issued by the U.S. Treasury and other U.S. government corporations and agencies and mortgage-backed obligations are priced utilizing industry-standard models that consider various assumptions, including time value, yield curves, volatility factors, prepayment speeds, default rates, loss severity, current market and contractual prices for the underlying financial instruments, as well as other relevant economic measures. Substantially all of these assumptions are observable in the marketplace, can be derived from observable data, or are supported by observable levels at which transactions are executed in the marketplace and are classified as Level 2. Municipal securities are valued using a type of matrix, or grid, pricing in which securities are benchmarked against the treasury rate based on credit rating. These model and matrix measurements are classified as Level 2 in the fair value hierarchy. On an annual basis, a group of selected municipal securities are priced by a securities dealer and that price is used to verify the primary independent service's valuation.

The Company classifies its pooled trust preferred collateralized debt obligations as Level 3. The portfolio consists of six investments in collateralized debt obligations backed by pools of trust preferred securities issued by financial institutions and insurance companies. The Company has determined that the observable market data associated with these assets do not represent orderly transactions in accordance with ASC Topic 820 and reflect forced liquidations or distressed sales. Based on the lack of observable market data, the Company estimated fair value based on the observable data available and reasonable unobservable market data. The Company estimated fair value based on a discounted cash flow model which used appropriately adjusted discount rates reflecting credit and liquidity risks.

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Mortgage Servicing Rights - The Company recognizes the rights to service mortgage loans for others on residential real estate loans internally originated and then sold. Mortgage servicing rights are recorded at fair value based on assumptions through a third-party valuation service. The valuation model incorporates assumptions that market participants would use in estimating future net servicing income, such as the servicing cost per loan, the discount rate, the escrow float rate, an inflation rate, ancillary income, prepayment speeds and default rates and losses. Because many of these inputs are unobservable, the valuations are classified as Level 3.

The following table summarizes financial assets and financial liabilities measured at fair value on a recurring basis as of March 31, 2012 and December 31, 2011, segregated by the level of valuation inputs within the fair value hierarchy utilized to measure fair value:



	Fair Value Measurement at March 31, 2012 Using
(in thousands)	Total		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
Assets:
Available for sale debt securities:
U.S. Government agencies and corporations	$	69,915	$	—	$	69,915	$	—
State and political subdivisions	224,665		—		224,665		—
Mortgage-backed securities and collateralized mortgage obligations	244,401		—		244,401		—
Corporate debt securities	10,411		—		10,411		—
Collateralized debt obligations	805		—		—		805
Total available for sale debt securities	550,197		—		549,392		805
Available for sale equity securities:
Financial services industry	1,626		1,626		—		—
Total available for sale equity securities	1,626		1,626		—		—
Total securities available for sale	$	551,823	$	1,626	$	549,392	$	805

Mortgage servicing rights	$	1,323	$	—	$	—	$	1,323

	Fair Value Measurement at December 31, 2011 Using
(in thousands)	Total		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
Assets:
Available for sale debt securities:
U.S. Government agencies and corporations	$	56,981	$	—	$	56,981	$	—
State and political subdivisions	219,261		—		219,261		—
Mortgage-backed securities and collateralized mortgage obligations	244,802		—		244,802		—
Corporate debt securities	10,799		—		10,799		—
Collateralized debt obligations	806		—		—		806
Total available for sale debt securities	532,649		—		531,843		806
Available for sale equity securities:
Financial services industry	1,431		1,431		—		—
Total available for sale equity securities	1,431		1,431		—		—
Total securities available for sale	$	534,080	$	1,431	$	531,843	$	806

Mortgage servicing rights	$	1,265	$	—	$	—	$	1,265

There were no transfers of assets between levels 1 and 2 during the three months ended March 31, 2012.

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The following table presents additional information about assets measured at fair market value on a recurring basis for which the Company has utilized Level 3 inputs to determine fair value:



	Collateralized Debt Obligations			Mortgage Servicing Rights
(in thousands)
Level 3 fair value at December 31, 2011	$	806		$	1,265
Transfers into Level 3	—			—
Transfers out of Level 3	—			—
Total gains (losses):
Included in earnings	—			(104		)
Included in other comprehensive income	(1		)	—
Purchases, issuances, sales, and settlements:
Purchases	—			—
Issuances	—			162
Sales	—			—
Settlements	—			—
Level 3 fair value at March 31, 2012	$	805		$	1,323

The following table presents the amount of gains and losses included in earnings for the three months ended March 31, 2012 that are attributable to the change in unrealized gains and losses relating to those assets still held at March 31, 2012, and the line item in the consolidated financial statements in which they are included:



	Collateralized Debt Obligations			Mortgage Servicing Rights
(in thousands)
Total gains (losses) for the period in earnings*	$	—		$	58

Change in unrealized gains (losses) for the period included in comprehensive net income	(1		)	—
* - included in mortgage origination and loan servicing fees in the consolidated statement of operations.

Changes in the fair value of available for sale securities are included in other comprehensive income to the extent the changes are not considered other-than-temporary impairments. Other-than-temporary impairment tests are performed on a quarterly basis and any decline in the fair value of an individual security below its cost that is deemed to be other-than-temporary results in a write-down that is reflected directly in the Company's consolidated statements of operations.

Valuation methods for instruments measured at fair value on a nonrecurring basis

Collateral Dependent 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 is determined based on appraisals. In some cases, adjustments are made to the appraised values due to various factors, including age of the appraisal, age of comparables included in the appraisal, and known changes in the market and in the collateral. Because many of these inputs are unobservable, the valuations are classified as Level 3.

Other Real Estate Owned (OREO) - Other real estate owned represents property acquired through foreclosures and settlements of loans. Property acquired is carried at the lower of the carrying amount of the loan at the time of acquisition, or the estimated fair value of the property, less disposal costs. The Company considers third-party appraisals as well as independent fair value assessments from real estate brokers or persons involved in selling OREO in determining the fair value of particular properties. Accordingly, the valuation of OREO is subject to significant external and internal judgment. The Company also periodically reviews OREO to determine whether the property continues to be carried at the lower of its recorded book value or fair value of the property, less disposal costs. Because many of these inputs are unobservable, the valuations are classified as Level 3.

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The following table discloses the Company's estimated fair value amounts of its assets recorded at fair value on a nonrecurring basis. It is management's belief that the fair values presented below are reasonable based on the valuation techniques and data available to the Company as of March 31, 2012 and December 31, 2011, as more fully described previously.



	Fair Value Measurements at March 31, 2012 Using
(in thousands)	Total		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
Assets:
Collateral dependent impaired loans:
Agricultural	—		—		—		—
Commercial and industrial	912		—		—		912
Credit cards	—		—		—		—
Overdrafts	—		—		—		—
Commercial real estate:
Construction and development	775		—		—		775
Farmland	—		—		—		—
Multifamily	—		—		—		—
Commercial real estate-other	296		—		—		296
Total commercial real estate	1,071		—		—		1,071
Residential real estate:
One- to four- family first liens	214		—		—		214
One- to four- family junior liens	—		—		—		—
Total residential real estate	214		—		—		214
Consumer	—		—		—		—
Total collateral dependent impaired loans	2,197		—		—		2,197
Other real estate owned	3,773		—		—		3,773

	Fair Value Measurements at December 31, 2011 Using
(in thousands)	Total		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
Assets:
Collateral dependent impaired loans	$	3,662	$	—	$	—	$	3,662
Other real estate owned	4,033		—		—		4,033

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The following presents the carrying amount and estimated fair value of the financial instruments held by the Company at March 31, 2012 and December 31, 2011. The information presented is subject to change over time based on a variety of factors. The operations of the Company are managed from a going concern basis and not a liquidation basis. As a result, the ultimate value realized from the financial instruments presented could be substantially different when actually recognized over time through the normal course of operations. Additionally, a substantial portion of the Company's inherent value is the Bank's capitalization and franchise value. Neither of these components has been given consideration in the presentation of fair values below.



	March 31, 2012										December 31, 2011
	Carrying Amount		Estimated Fair Value		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)		Carrying Amount		Estimated Fair Value
(in thousands)
Financial assets:
Cash and cash equivalents	$	52,033	$	52,033	$	52,033	$	—	$	—	$	32,623	$	32,623
Investment securities:
Available for sale	551,823		551,823		1,626		549,392		805
Held to maturity	7,017		7,053		—		7,053		—
Total investment securities	558,840		558,876		1,626		556,445		805		536,116		536,122
Loans held for sale	943		960		—		960		—		1,955		1,997
Loans, net:
Agricultural	83,818		83,226		—		—		83,226
Commercial and industrial	237,119		236,641		—		—		236,641
Credit cards	1,030		1,030		—		—		1,030
Overdrafts	362		362		—		—		362
Commercial real estate:
Construction and development	74,061		73,822		—		—		73,822
Farmland	70,675		70,333		—		—		70,333
Multifamily	33,470		33,488		—		—		33,488
Commercial real estate-other	210,969		211,440		—		—		211,440
Total commercial real estate	389,175		389,083		—		—		389,083
Residential real estate:
One- to four- family first liens	176,182		174,650		—		—		174,650
One- to four- family junior liens	58,998		59,106		—		—		59,106
Total residential real estate	235,180		233,756		—		—		233,756
Consumer	18,783		18,789		—		—		18,789
Total loans, net	965,467		962,887		—		—		962,887		970,497		971,613
Loan pool participations, net	45,908		45,908		—		—		45,908		50,052		50,052
Accrued interest receivable	9,639		9,639		9,639		—		—		10,422		10,422
Federal Home Loan Bank stock	12,127		12,127		—		12,127		—		12,218		12,218
Financial liabilities:
Deposits:
Non-interest bearing demand	164,936		164,936		—		—		164,936
Interest-bearing demand	536,495		540,125		—		—		540,125
Savings	79,412		79,402		—		—		79,402
Certificates of deposit under $100,000	337,589		340,668		—		—		340,668
Certificates of deposit $100,000 and over	226,221		228,734		—		—		228,734
Total deposits	1,344,653		1,353,865		—		—		1,353,865		1,306,642		1,310,671
Federal funds purchased and securities sold under agreements to repurchase	50,314		50,314		50,314		—		—		57,207		57,207
Federal Home Loan Bank borrowings	136,041		139,696		—		—		139,696		140,014		144,078
Long-term debt	15,464		9,964		—		—		9,964		15,464		10,076
Accrued interest payable	1,641		1,641		1,641		—		—		1,530		1,530

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•	Cash and cash equivalents, non-interest-bearing demand deposits, federal funds purchased, securities sold under repurchase agreements, and accrued interest are instruments with carrying values that approximate fair value.


•	Investment securities available for sale are measured at fair value on a recurring basis. Held to maturity securities are carried at amortized cost. Fair value is based upon quoted prices, if available. If a quoted price is not available, the fair value is obtained from benchmarking the security against similar securities by using a third-party pricing service.


•	Loans held for sale are carried at the lower of cost or fair value, with fair value being based on recent observable loan sales. The portfolio has historically consisted primarily of residential real estate loans.

•

For variable-rate loans that reprice frequently and with no significant change in credit risk, fair values are based on carrying values. The fair values for other loans are determined using estimated future cash flows, discounted at the interest rates currently being offered for loans with similar terms to borrowers with similar credit quality. The Company does record nonrecurring fair value adjustments to loans to reflect (1) partial write-downs that are based on the observable market price or appraised value of the collateral or (2) the full charge-off of the loan carrying value.


•	Loan pool participation carrying values represent the discounted price paid by us to acquire our participation interests in the various loan pools purchased, which approximate fair value.


•	The fair value of Federal Home Loan Bank stock is estimated at its carrying value and redemption price of $100 per share.

•

Deposit liabilities are carried at historical cost. The fair value of demand deposits, savings accounts and certain money market account deposits is the amount payable on demand at the reporting date. The fair value of fixed maturity certificates of deposit is estimated using the rates currently offered for deposits of similar remaining maturities. If the fair value of the fixed maturity certificates of deposit is calculated at less than the carrying amount, the carrying value of these deposits is reported as the fair value.


•	Federal Home Loan Bank borrowings and long-term debt are recorded at historical cost. The fair value of these items is estimated using discounted cash flow analysis, based on the Company's current incremental borrowing rates for similar types of borrowing arrangements.

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The following presents the valuation technique(s), observable inputs, and quantitative information about the unobservable inputs used for fair value measurements of the financial instruments held by the Company at March 31, 2012, categorized within Level 3 of the fair value hierarchy.



	Quantitative Information About Level 3 Fair Value Measurements
(in thousands)	Fair Value at March 31, 2012		Valuation Techniques(s)	Unobservable Input	Range (Weighted Average)

Collateralized debt obligations	$	805	Discounted cash flows	Pretax discount rate	15.00	%
				Actual defaults	13.94 - 20.94% (15.52%)
				Actual deferrals	6.30 - 23.71% (11.32%)
Collateral dependent impaired loans:
Agricultural	—		Modified appraised value	Third party appraisal	NM *
				Appraisal discount	NM *
Commercial and industrial	912		Modified appraised value	Third party appraisal	NM *
				Appraisal discount	NM *
Credit cards	—			N/A - Unsecured
Overdrafts	—			N/A - Unsecured
Construction & development	775		Modified appraised value	Third party appraisal	NM *
				Appraisal discount	NM *
Farmland	—		Modified appraised value	Third party appraisal	NM *
				Appraisal discount	NM *
Multifamily	—		Modified appraised value	Third party appraisal	NM *
				Appraisal discount	NM *
Commercial Real Estate-other	296		Modified appraised value	Third party appraisal	NM *
				Appraisal discount	NM *
Residential real estate one- to four-	214		Modified appraised value	Third party appraisal	NM *
family first liens				Appraisal discount	NM *
Residential real estate one- to four-	—		Modified appraised value	Third party appraisal	NM *
family junior liens				Appraisal discount	NM *
Consumer	—		Modified appraised value	Third party appraisal	NM *
				Appraisal discount	NM *
Mortgage servicing rights	1,323		Discounted cash flows	Constant prepayment rate	13.01 - 17.04% (14.23%)
				Pretax discount rate	11.00 - 14.00% (11.24%)
Other real estate owned	3,773		Modified appraised value	Third party appraisal	NM *
				Appraisal discount	NM *
* - Not Meaningful. Third party appraisals are obtained as to the value of the underlying asset, but disclosure of this information would not provide meaningful information, as the range will vary widely from loan to loan. Types of discounts considered include age of the appraisal, local market conditions, current condition of the property, and estimated sales costs. These discounts will also vary from loan to loan, thus providing a range would not be meaningful.

Changes in assumptions or estimation methodologies may have a material effect on these estimated fair values.

8.Variable Interest Entities

Loan Pool Participations

MidWestOne has invested in certain participation certificates of loan pools which are purchased, held and serviced by a third-party independent servicing corporation. MidWestOne's portfolio holds approximately 95% of participation interests in pools of loans owned and serviced by States Resources Corporation (“SRC”), a third-party loan servicing organization in Omaha, Nebraska. SRC's owner holds the rest. The Company does not have any ownership interest in or exert any control over SRC, and thus it is not included in the consolidated financial statements.

These pools of loans were purchased from large nonaffiliated banking organizations and from the FDIC acting as receiver of failed banks and savings associations. As loan pools were put out for bid (generally in a sealed bid auction) the servicer's due diligence teams evaluated the loans and determined their interest in bidding on the pool. After the due diligence, MidWestOne management reviewed the status and decided if it wished to continue in the process. If the decision to consider a bid was made, the servicer conducted additional analysis to determine the appropriate bid price. This analysis involved discounting loan cash flows with adjustments made for expected losses, changes in collateral values as well as targeted rates of return. A cost or investment basis was assigned to each individual loan at cents per dollar (discounted price) based on the servicer's assessment of the recovery potential of each loan.

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Once a bid was awarded to the Company's servicer, the Company assumed the risk of profit or loss but on a non-recourse basis so the risk is limited to its initial investment. The extent of the risk is also dependent upon: the debtor or guarantor's financial condition, the possibility that a debtor or guarantor may file for bankruptcy protection, the servicer's ability to locate any collateral and obtain possession, the value of such collateral, and the length of time it takes to realize the recovery either through collection procedures, legal process, or resale of the loans after a restructure.

Loan pool participations are shown on the Company's consolidated balance sheets as a separate asset category. The original carrying value or investment basis of loan pool participations is the discounted price paid by the Company to acquire its interests, which, as noted, is less than the face amount of the underlying loans. MidWestOne's investment basis is reduced as SRC recovers principal on the loans and remits its share to the Company or as loan balances are written off as uncollectible.

9.Effect of New Financial Accounting Standards

In May 2011, the FASB issued ASU No. 2011-04, Fair Value Measurement (Topic 820): Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRSs, which changed the wording used to describe many of the requirements in U.S. generally accepted accounting principles (GAAP) for measuring fair value and for disclosing information about fair value measurements. For many of the requirements, the FASB did not intend for the amendments to result in a change in the application of the requirements in Topic 820. Some of the amendments clarified the FASB’s intent about the application of existing fair value measurement requirements, while other amendments changed a particular principle or requirement for measuring fair value or for disclosing information about fair value measurements. The amendments in this update were to be applied prospectively, and early application by public entities was not permitted. For public entities, the amendments were effective during interim and annual periods beginning after December 15, 2011. The Company adopted this guidance effective January 1, 2012, and the adoption did not have a material effect on the Company's consolidated financial statements.

In June 2011, the FASB issued ASU No. 2011-05, Comprehensive Income (Topic 220): Presentation of Comprehensive Income. The objective of this update is to improve the comparability, consistency, and transparency of financial reporting and to increase the prominence of items reported in other comprehensive income. To increase the prominence of items reported in other comprehensive income and to facilitate convergence of U.S. GAAP and International Financial Reporting Standards (IFRS), the FASB decided to eliminate the option to present components of other comprehensive income as part of the statement of changes in stockholders’ equity, among other amendments in this update. The amendments require that all nonowner changes in stockholders’ equity be presented either in a single continuous statement of comprehensive income or in two separate but consecutive statements. The amendments in this update are to be applied retrospectively, with early adoption permitted. For public entities, the amendments are effective for fiscal years, and interim periods within those years, beginning after December 15, 2011. The Company early adopted this amendment effective September 30, 2011, and it did not have a material effect on the consolidated financial statements.

In December 2011, the FASB issued Accounting Standards Update No. 2011-12, Comprehensive Income (Topic 220): Deferral of the Effective Date for Amendments to the Presentation of Reclassifications of Items Out of Accumulated Other Comprehensive Income in Accounting Standards Update No. 2011-05. Update 2011-12 defers those changes outlined in Update 2011-05 that relate to how and where reclassification adjustments are presented. While the FASB is considering the operational concerns about the presentation requirements for classification adjustments, entities will continue to report reclassifications out of accumulated comprehensive income consistent with the presentation requirements in effect before Update 2011-05. The amendments are effective at the same time as the amendments in Update 2011-05, and did not have a material effect on the consolidated financial statements.

10.Subsequent Events

Management evaluated subsequent events through the date the consolidated financial statements were issued. Events or transactions occurring after March 31, 2012, but prior to the date the consolidated financial statements were available to be issued, that provided additional evidence about conditions that existed at March 31, 2012 have been recognized in the consolidated financial statements for the period ended March 31, 2012. Events or transactions that provided evidence about conditions that did not exist at March 31, 2012, but arose before the consolidated financial statements were issued, have not been recognized in the consolidated financial statements for the period ended March 31, 2012.

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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.

OVERVIEW

The Company provides financial services to individuals, businesses, governmental units and institutional customers in east central Iowa. The Bank has office locations in Belle Plaine, Burlington, Cedar Falls, Conrad, Coralville, Davenport, Fairfield, Fort Madison, Iowa City, Melbourne, North English, North Liberty, Oskaloosa, Ottumwa, Parkersburg, Pella, Sigourney, Waterloo and West Liberty, Iowa. MidWestOne Insurance Services, Inc. provides personal and business insurance services in Pella, Melbourne and Oskaloosa, Iowa. The Bank is actively engaged in many areas of commercial banking, including: acceptance of demand, savings and time deposits; making commercial, real estate, agricultural and consumer loans; and other banking services tailored for its individual customers. The Wealth Management Division of the Bank administers estates, personal trusts, conservatorships, pension and profit-sharing accounts along with providing brokerage and other investment management services to customers.

We operate as an independent community bank that offers a broad range of customer-focused financial services as an alternative to large regional and multi-state banks in our market area. Management has invested in the infrastructure and staffing to support our strategy of serving the financial needs of businesses, individuals and municipalities in our market area. We focus our efforts on core deposit generation, especially transaction accounts, and quality loan growth with emphasis on growing commercial loan balances. We seek to maintain a disciplined pricing strategy on deposit generation that will allow us to compete for high quality loans while maintaining an appropriate spread over funding costs.

Our results of operations depend primarily on our net interest income, which is the difference between the interest income on our earning assets, such as loans and securities, and the interest expense paid on our deposits and borrowings. Results of operations are also affected by non-interest income and expense, the provision for loan losses and income tax expense. Significant external factors that impact our results of operations include general economic and competitive conditions, as well as changes in market interest rates, government policies, and actions of regulatory authorities.

The following discussion and analysis should be read in conjunction with the consolidated financial statements and related notes and with the statistical information and financial data appearing in this report as well as our 2011 Annual Report on Form 10-K. Results of operations for the three-month period ended March 31, 2012 are not necessarily indicative of results to be attained for any other period.

Critical Accounting Estimates

Critical accounting estimates are those which are both most important to the portrayal of our financial condition and results of operations, and require our management's most difficult, subjective or complex judgments, often as a result of the need to make estimates about the effect of matters that are inherently uncertain. Our critical accounting estimates relate to the allowance for loan losses, participation interests in loan pools, intangible assets, and fair value of available for sale investment securities, all of which involve significant judgment by our management. Information about our critical accounting estimates is included under Item 7, "Management's Discussion and Analysis of Financial Condition and Results of Operations" in our Annual Report on Form 10-K for the year ended December 31, 2011.

RESULTS OF OPERATIONS

Comparison of Operating Results for the Three Months Ended March 31, 2012 and March 31, 2011

Summary

For the quarter ended March 31, 2012 we earned net income of $4.4 million, all of which was available to common shareholders, compared with $2.9 million, of which $2.7 million was available to common shareholders, for the quarter ended March 31, 2011, an increase of 52.6% and 64.9%, respectively. Basic and diluted earnings per common share for the first quarter of 2012 were $0.52 versus $0.31 for the first quarter of 2011. Our annualized return on average assets for the first quarter of 2012 was 1.05% compared with a return of 0.74% for the same period in 2011. Our annualized return on average shareholders' equity was 11.29% for the quarter ended March 31, 2012 versus 7.41% for the quarter ended March 31, 2011. The annualized return on average tangible common equity was 12.41% for the first quarter of 2012 compared with 8.71% for the same period in 2011.

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The following table presents selected financial results and measures for the first quarter of 2012 and 2011.



	Three Months Ended March 31,
($ amounts in thousands)	2012			2011
Net Income	$	4,432		$	2,905
Average Assets	1,691,513			1,589,542
Average Shareholders' Equity	157,933			158,891
Return on Average Assets*	1.05		%	0.74		%
Return on Average Shareholders' Equity*	11.29		%	7.41		%
Return on Average Tangible Common Equity*	12.41		%	8.71		%
Total Equity to Assets (end of period)	9.23		%	9.97		%
Tangible Common Equity to Tangible Assets (end of period)	8.70		%	8.37		%
* - Annualized

We have traditionally disclosed certain non-GAAP ratios to evaluate and measure our financial condition, including our return on average tangible common equity and the ratio of our tangible common equity to tangible assets. We believe these ratios provide investors with information regarding our financial condition and how we evaluate our financial condition internally. The following tables provide a reconciliation of the non-GAAP measures to the most comparable GAAP equivalents.



	For the Three Months Ended March 31,
(in thousands)	2012			2011
Average Tangible Common Equity:
Average total shareholders' equity	$	157,933		$	158,891
Less: Average preferred stock	—			(15,775		)
Average goodwill and intangibles	(10,129		)	(11,208		)
Average tangible common equity	$	147,804		$	131,908

Net Income Available to Common Shareholders:
Net income available to common shareholders	$	4,432		$	2,688
Plus: Intangible amortization, net of tax ⁽¹⁾	128			148
Adjusted net income available to common shareholders	$	4,560		$	2,836
Annualized return on average tangible common equity	12.41		%	8.71		%
(1) Computed assuming a federal income tax rate of 34%



	As of March 31,
(in thousands)	2012		2011
Tangible Common Equity:
Total shareholders' equity	159,270		161,315
Less: Preferred equity	—		(15,784	)
Goodwill and intangibles	(10,053	)	(11,019	)
Tangible common equity	149,217		134,512

Tangible Assets:
Total assets	1,725,844		1,618,231
Less: Goodwill and intangibles	(10,053	)	(11,019	)
Tangible assets	1,715,791		1,607,212
Tangible common equity/tangible assets	8.70	%	8.37	%

Net Interest Income

Net interest income is the difference between interest income and fees earned on earning assets and interest expense incurred on interest-bearing liabilities. Interest rate levels and volume fluctuations within earning assets and interest-bearing liabilities impact net interest income. Net interest margin is net interest income as a percentage of average earning assets.

Certain assets with tax favorable treatment are evaluated on a tax-equivalent basis. Tax-equivalent basis assumes a federal income tax rate of 34%. Tax favorable assets generally have lower contractual pretax yields than fully taxable assets. A tax-equivalent analysis is performed by adding the tax savings to the earnings on tax-favorable assets. After factoring in the tax-favorable effects of these assets, the yields may be more appropriately evaluated against alternative earning assets. In addition to

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yield, various other risks are factored into the evaluation process.

Our net interest income for the quarter ended March 31, 2012 increased $1.7 million to $13.2 million compared with $11.6 million for the quarter ended March 31, 2011. Our total interest income of $17.5 million was $0.6 million higher in the first quarter of 2012 compared with the same period in 2011. Most of the increase in interest income was due to increased interest on loans and interest income on loan pool participations. The increased loan interest was due primarily to a higher average balance, while the improvement in loan pool participation income was due to a higher net "all in" yield resulting from the sale of several foreclosed real estate properties in the portfolio at a value greater than their net book value. In addition, we experienced an increase in interest on investment securities as a result of higher average balances. The overall increase in interest income was complimented by reduced interest expense on deposits and FHLB advances. Total interest expense for the first quarter of 2012 decreased $1.0 million, or 19.4%, compared with the same period in 2011, due primarily to lower average interest rates in 2012. Our net interest margin on a tax-equivalent basis for the first quarter of 2012 increased to 3.52% compared with 3.31% in the first quarter of 2011. Net interest margin is a measure of the net return on interest-earning assets and is computed by dividing annualized net interest income on a tax-equivalent basis by the average of total interest-earning assets for the period. Our overall yield on earning assets declined to 4.60% for the first quarter of 2012 from 4.75% for the first quarter of 2011. This decline was due primarily to lower rates being received on newly originated loans and purchases of investment securities. The average cost of interest-bearing liabilities decreased in the first quarter of 2012 to 1.26% from 1.67% for the first quarter of 2011, due to the continued repricing of new time certificates and FHLB advances at lower interest rates. We expect to experience net interest margin compression during 2012, with interest rates at generational lows, despite the increased margin this quarter.

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The following table shows the consolidated average balance sheets, detailing the major categories of assets and liabilities, the interest income earned on interest-earning assets, the interest expense paid for the interest-bearing liabilities, and the related interest rates for the quarters ended March 31, 2012 and 2011. Dividing annualized income or expense by the average balances of assets or liabilities results in average yields or costs. Average information is provided on a daily average basis.



	Three Months Ended March 31,
	2012							2011
	Average Balance			Interest Income/ Expense		Average Rate/ Yield		Average Balance			Interest Income/ Expense		Average Rate/ Yield
(dollars in thousands)
Average earning assets:
Loans ^(1)(2)(3)	$	981,352		$	13,275	5.44	%	$	929,247		$	12,883	5.62	%
Loan pool participations ⁽⁴⁾	50,609			454		3.61		66,347			354		2.16
Investment securities:
Taxable investments	401,809			2,752		2.75		365,856			2,688		2.98
Tax exempt investments ⁽²⁾	146,222			1,775		4.88		119,103			1,568		5.34
Total investment securities	548,031			4,527		3.32		484,959			4,256		3.56
Federal funds sold and interest-bearing balances	18,352			10		0.22		14,849			8		0.22
Total interest-earning assets	$	1,598,344		$	18,266	4.60	%	$	1,495,402		$	17,501	4.75	%

Cash and due from banks	21,896							18,621
Premises and equipment	26,350							26,346
Allowance for loan losses	(18,067		)					(17,723		)
Other assets	62,990							66,896
Total assets	$	1,691,513						$	1,589,542

Average interest-bearing liabilities:
Savings and interest-bearing demand deposits	$	580,231		$	866	0.60	%	$	527,181		$	1,067	0.82	%
Certificates of deposit	572,494			2,363		1.66		569,264			3,035		2.16
Total deposits	1,152,725			3,229		1.13		1,096,445			4,102		1.52
Federal funds purchased and repurchase agreements	51,821			58		0.45		46,779			74		0.64
Federal Home Loan Bank borrowings	138,643			803		2.33		123,600			945		3.10
Long-term debt and other	16,131			177		4.41		16,234			172		4.30
Total borrowed funds	206,595			1,038		2.02		186,613			1,191		2.59
Total interest-bearing liabilities	$	1,359,320		$	4,267	1.26	%	$	1,283,058		$	5,293	1.67	%

Net interest spread⁽²⁾						3.34	%						3.08	%

Demand deposits	157,877							136,922
Other liabilities	16,383							10,671
Shareholders' equity	157,933							158,891
Total liabilities and shareholders' equity	$	1,691,513						$	1,589,542

Interest income/earning assets ⁽²⁾	$	1,598,344		$	18,266	4.60	%	$	1,495,402		$	17,501	4.75	%
Interest expense/earning assets	$	1,598,344		$	4,267	1.08	%	$	1,495,402		$	5,293	1.44	%
Net interest margin ⁽²⁾⁽⁵⁾				$	13,999	3.52	%				$	12,208	3.31	%

Non-GAAP to GAAP Reconciliation:
Tax Equivalent Adjustment:
Loans				$	195						$	83
Securities				556							533
Total tax equivalent adjustment				751							616
Net Interest Income				$	13,248						$	11,592



	(1)	Loan fees included in interest income are not material.
	(2)	Computed on a tax-equivalent basis, assuming a federal income tax rate of 34%.
	(3)	Non-accrual loans have been included in average loans, net of unearned discount.
	(4)	Includes interest income and discount realized on loan pool participations.
	(5)	Net interest margin is tax-equivalent net interest income as a percentage of average earning assets.

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The following table sets forth an analysis of volume and rate changes in interest income and interest expense on our average earning assets and average interest-bearing liabilities reported on a fully tax-equivalent basis assuming a 34% tax rate. The table distinguishes between the changes related to average outstanding balances (changes in volume holding the initial interest rate constant) and the 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.



	Three Months Ended March 31,
	2012 Compared to 2011 Change due to
	Volume			Rate/Yield			Net
(in thousands)
Increase (decrease) in interest income:
Loans, tax equivalent	$	914		$	(522	)	$	392
Loan pool participations	(55		)	155			100
Investment securities:
Taxable investments	298			(234		)	64
Tax exempt investments	333			(126		)	207
Total investment securities	631			(360		)	271
Federal funds sold and interest-bearing balances	2			(1		)	1
Change in interest income	1,492			(728		)	764
Increase (decrease) in interest expense:
Savings and interest-bearing demand deposits	121			(322		)	(201		)
Certificates of deposit	17			(690		)	(673		)
Total deposits	138			(1,012		)	(874		)
Federal funds purchased and repurchase agreements	9			(25		)	(16		)
Federal Home Loan Bank borrowings	136			(278		)	(142		)
Other long-term debt	(2		)	7			5
Total borrowed funds	143			(296		)	(153		)
Change in interest expense	281			(1,308		)	(1,027		)
Increase in net interest income	$	1,211		$	580		$	1,791
Percentage increase in net interest income over prior period							14.67		%

Interest income and fees on loans on a tax-equivalent basis increased $0.4 million, or 3.0%, in the first quarter of 2012 compared with the same period in 2011. Average loans were $52.1 million, or 5.6%, higher in the first quarter of 2012 compared with 2011. We believe the increase in average loan balances was attributable to a gradual improvement in general economic conditions, resulting in the willingness of borrowers to consider incurring more debt to support growth in their businesses. The yield on our loan portfolio is affected by the amount of nonaccrual loans (which do not earn interest income), the mix of the portfolio (real estate loans generally have a lower overall yield than commercial and agricultural loans), the effects of competition and the interest rate environment on the amounts and volumes of new loan originations, and the mix of variable-rate versus fixed-rate loans in our portfolio. The average rate on loans decreased from 5.62% in the first quarter of 2011 to 5.44% in first quarter of 2012, primarily due to new and renewing loans being made at lower interest rates than those paying down.

Interest and discount income on loan pool participations was $0.5 million for the first quarter of 2012 compared with $0.4 million for the first quarter of 2011, an increase of $0.1 million. The Company entered into this business upon consummation of its merger with the Former MidWestOne in March 2008. These loan pool participations are pools of performing, subperforming and nonperforming loans purchased at varying discounts from the aggregate outstanding principal amount of the underlying loans. The loan pools are held and serviced by a third-party independent servicing corporation. As previously announced, the Company has decided to exit this line of business as current balances pay down. We have minimal exposure in the loan pools to consumer real estate, subprime credit or construction and real estate development loans. Average loans pools were $15.7 million, or 23.7%, lower in the first quarter of 2012 compared with 2011. The decrease in average loan pool volume was due to loan pay downs and charge-offs.

Income is derived from this investment in the form of interest collected and the repayment of principal in excess of the purchase cost, which is referred to as “discount recovery.” The loan pool participations were historically a high-yield activity, but this yield has fluctuated from period to period based on the amount of cash collections, discount recovery, and net collection expenses of the servicer in any given period. The net “all-in” yield on loan pool participations was 3.61% for the first quarter of 2012, up from 2.16% for the same period of 2011. The net yield was higher in the first quarter of 2012 than for the first quarter of 2011 primarily due to the sale of several foreclosed real estate properties in the portfolio at a value greater than their net book

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value, a trend we do not expect to continue in the future.

Interest income on investment securities on a tax-equivalent basis totaled $4.5 million in the first quarter of 2012 compared with $4.3 million for the same period of 2011. The average balance of investments in the first quarter of 2012 was $548.0 million compared with $485.0 million in the first quarter of 2011, an increase of $63.0 million, or 13.0%. The increase in average balance resulted from our investment in securities of a portion of the excess liquidity provided by a combination of decreasing loan pool balances and increasing deposits. The tax-equivalent yield on our investment portfolio in the first quarter of 2012 decreased to 3.32% from 3.56% in the comparable period of 2011, reflecting reinvestment of maturing securities and purchases of new securities at lower market interest rates.

Interest expense on deposits was $0.9 million, or 21.3%, lower in the first quarter of 2012 compared with the same period in 2011, mainly due to the decrease in interest rates being paid during 2012. The weighted average rate paid on interest-bearing deposits was 1.13% in the first quarter of 2012 compared with 1.52% in the first quarter of 2011. This decline reflects the overall reduction in market interest rates on deposits throughout the markets in which we operate, and the gradual downward repricing of time deposits as higher rate certificates mature. Average interest-bearing deposits for the first quarter of 2012 increased $56.3 million, or 5.1% compared with the same period in 2011.

Interest expense on borrowed funds was $0.2 million lower in the first quarter of 2012 compared with the same period in 2011. Interest on borrowed funds totaled $1.0 million for the first quarter of 2012. Average borrowed funds for the first quarter of 2012 were $20.0 million higher compared with the same period in 2011. The majority of this increase was due to an increase in the level of FHLB borrowings and repurchase agreements. The weighted average rate on borrowed funds decreased to 2.02% for the first quarter of 2012 compared with 2.59% for the first quarter of 2011, reflecting the replacement of maturing higher-rate borrowings with those in the current lower-rate environment.

Provision for Loan Losses

The provision for loan losses is a current charge against income and represents an amount which management believes is sufficient to maintain an adequate allowance for known and probable losses. In assessing the adequacy of the allowance for loan losses, management considers the size and quality of the loan portfolio measured against prevailing economic conditions, regulatory guidelines, historical loan loss experience and credit quality of the portfolio. When a determination is made by management to charge off a loan balance, such write-off is charged against the allowance for loan losses.

We recorded a provision for loan losses of $0.6 million in the first quarter of 2012 compared with a $0.9 million provision in the first quarter of 2011, a decrease of $0.3 million, or 35.7%. Net loans charged off in the first quarter of 2012 totaled $0.6 million compared with net loans charged off of $0.7 million in the first quarter of 2011. We determine an appropriate provision based on our evaluation of the adequacy of the allowance for loan losses in relationship to a continuing review of problem loans, current economic conditions, actual loss experience and industry trends. We believe that the allowance for loan losses was adequate based on the inherent risk in the portfolio as of March 31, 2012; however, there is no assurance losses will not exceed the allowance and any growth in the loan portfolio, and the uncertainty of the general economy may require that management continue to evaluate the adequacy of the allowance for loan losses and make additional provisions in future periods as deemed necessary.

Sensitive assets include nonaccrual loans, loans on the Bank's watch loan reports and other loans identified as having more than reasonable potential for loss. We review sensitive assets on at least a quarterly basis for changes in the customers' ability to pay and changes in the valuation of underlying collateral in order to estimate probable losses. We also periodically review a watch loan list which is comprised of loans that have been restructured or involve customers in industries which have been adversely affected by market conditions. The majority of these loans are being repaid in conformance with their contracts.

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Noninterest Income



	Three Months Ended March 31,
	2012			2011			$ Change			% Change
(dollars in thousands)
Trust, investment, and insurance fees	$	1,253		$	1,273		$	(20	)	(1.6	)%
Service charges and fees on deposit accounts	767			851			(84		)	(9.9	)
Mortgage origination and loan servicing fees	767			877			(110		)	(12.5	)
Other service charges, commissions and fees	710			679			31			4.6
Bank owned life insurance income	230			229			1			0.4
Gain on sale of available for sale securities	316			—			316			NM
Gain (loss) on sale of premises and equipment	158			(48		)	206			NM
Total noninterest income	$	4,201		$	3,861		$	340		8.8	%
Noninterest income as a % of total revenue*	22.0		%	25.2		%
NM - Percentage change not considered meaningful.
* - Total revenue is net interest income plus noninterest income minus gain/loss or impairment on securities and premises and equipment..

Total noninterest income increased $0.3 million for the first quarter of 2012 compared with the same period for 2011. The increase in 2012 is primarily due to increased net gains on the sale of securities available for sale and net gains on the sale of fixed assets. Net gains on the sale of securities available for sale for the first quarter of 2012 were $0.3 million, compared to no gain or loss realized for the same period of 2011. The gains were primarily attributable to the gain on sale of a group of securities, and partially to acceleration of bond discount due to the early redemption of certain bonds with a call feature. Net gains on the sale of fixed assets were $0.2 million for the first three months of 2012, compared to a small net loss for the same period last year. The current period gain was primarily due to the sale of vacant property originally acquired for a potential bank branch location.

These increases were partially offset by decreased mortgage origination and loan servicing fees of $0.8 million for the first quarter of 2012, down from $0.9 million for the same period last year. This decline was attributable to a lower mortgage servicing rights value adjustment of $0.1 million during the first quarter of 2012 compared to $0.4 million for the same period of 2011, partially offset by an increase in mortgage origination fees from $0.3 million for the first quarter of 2011 to $0.5 million for the same period of 2012. Service charges and fees on deposit accounts declined $0.1 million for the first quarter of 2012 compared with the same period for 2011. The decrease was primarily due to lower NSF check fees. Management's strategic goal is for noninterest income to constitute 30% of total revenues (net interest income plus noninterest income) over time. For the quarter ended March 31, 2012, noninterest income comprised 22.0% of total revenues, compared with 25.2% for the same quarter in 2011. Management continues to evaluate options for increasing noninterest income, with particular emphasis on trust, investment, and insurance fees.

Noninterest Expense



	Three Months Ended March 31,
	2012		2011		$ Change			% Change
(dollars in thousands)
Salaries and employee benefits	$	5,972	$	5,870	$	102		1.7	%
Net occupancy and equipment expense	1,644		1,617		27			1.7
Professional fees	732		677		55			8.1
Data processing expense	446		450		(4		)	(0.9	)
FDIC insurance expense	310		597		(287		)	(48.1	)
Amortization of intangible assets	194		224		(30		)	(13.4	)
Other operating expense	1,505		1,199		306			25.5
Total noninterest expense	$	10,803	$	10,634	$	169		1.6	%

Noninterest expense for the first quarter of 2012 was $10.8 million compared with $10.6 million for the first quarter of 2011, an increase of $0.2 million, or 1.6%. The primary reasons for the increase in noninterest expense were an increase in other operating expenses from $1.2 million in the first quarter of 2011 to $1.5 million for the same period of 2012, and an increase in salaries and employee benefits to $6.0 million for the first quarter of 2012 from $5.9 million for the first quarter of 2011. The primary area of increase in other operating expense was the establishment of an allowance for losses on off-balance-sheet credit exposures, mainly commercial letters of credit, in the amount of $0.2 million. The increase in salaries and employee benefits were primarily due to annual salary increases for employees that were effective at the beginning of 2012.

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These increases were partially offset by lower FDIC insurance expense, which went from $0.6 million for the first quarter of 2011, to $0.3 million for the comparable period of 2011 (See "FDIC Assessments" below).

Anticipated Impact of Future Events

As initially disclosed in the Company's Quarterly Report on Form 10-Q for the period ended September 30, 2011, during recent efforts to fully terminate the Bank's noncontributory defined benefit pension plan and with recent volatility in the financial markets, a widened funding gap between the plan's accumulated benefit obligation and the fair value of plan assets has been noted. While initially estimated not to exceed $5.0 million, current estimates have placed the pre-tax termination expense as high as $6.0 million. The Company expects to complete the termination process in the second quarter of 2012, at which time the actual expense will be recorded, in accordance with generally accepted accounting principles.

The Company entered into an agreement in January 2011 to sell the location of our Home Mortgage Center to the University of Iowa, and a gain on sale in the estimated amount of $4.0 million is expected. There are several contingencies to be met before the sale is finalized. The Company anticipates the transaction to be finalized in the second quarter of 2012, at which time the actual gain will be recorded, in accordance with generally accepted accounting principles.

Income Tax Expense

Our effective tax rate, or income taxes divided by income before taxes, was 26.9% for the first quarter of 2012, and 25.9% for the same period of 2011. The increase in the effective tax rate was the result of a lower proportion of our income being attributable to interest from tax-exempt bonds. Income tax expense increased $0.6 million to $1.6 million in the first quarter of 2012 compared with $1.0 million income tax expense for the same period of 2011, due primarily to increased taxable income.

FDIC Assessments

On November 12, 2009, the FDIC adopted a final rule that required insured depository institutions to prepay on December 30, 2009, their estimated quarterly risk-based assessments for the fourth quarter of 2009 and for all of 2010, 2011, and 2012. On December 31, 2009, the Bank paid the FDIC $9.2 million in prepaid assessments. The FDIC determined each institution's prepaid assessment based on the institution's: (i) actual September 30, 2009 assessment base, increased quarterly by a five percent annual growth rate through the fourth quarter of 2012; and (ii) total base assessment rate in effect on September 30, 2009, increased by an annualized three basis points beginning in 2011. The FDIC began to offset prepaid assessments on March 31, 2010, representing payment of the regular quarterly risk-based deposit insurance assessment for the fourth quarter of 2009.

On February 7, 2011, the FDIC Board of Directors adopted a final rule which redefined the deposit insurance assessment base as required by the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 (the "Dodd-Frank Act"). The new rule: (i) made changes to assessment rates from being based on adjusted domestic deposits to average consolidated total assets minus average tangible equity; (ii) implements the Dodd-Frank Act's Deposit Insurance Fund (the "DIF") dividend provisions; and (iii) revised the risk-based assessment system for all large (greater than $10 billion in assets) insured depository institutions. Changes pursuant to the rule were effective April 1, 2011, and resulted in a reduction in the Bank's assessments. Any prepaid assessment not exhausted after collection of the amount due on June 30, 2013, will either be returned to the Bank or credited towards future assessments. As of March 31, 2012, $4.8 million of the Bank's prepaid assessments balance remained.

FINANCIAL CONDITION

Our total assets increased to $1.73 billion as of March 31, 2012 from $1.70 billion on December 31, 2011. This growth resulted primarily from increased investment in securities along with cash and cash equivalents, somewhat offset by a decrease in bank loans and loan pool participation balances. The asset growth was funded by an increase in deposit balances and repurchase agreements, partially offset by a decrease in Federal Home Loan Bank borrowings. Total deposits at March 31, 2012 were $1.34 billion compared with $1.31 billion at December 31, 2011, up $0.04 billion, or 2.9%, primarily due to increased consumer and public fund deposits in savings and demand accounts. Federal Home Loan Bank borrowings decreased $4.0 million from $140.0 million at December 31, 2011, to $136.0 million at March 31, 2012, while repurchase agreements were $50.3 million at March 31, 2012, an increase of $2.0 million, from $48.3 million at December 31, 2011.

Investment Securities

Investment securities available for sale totaled $551.8 million as of March 31, 2012. This was an increase of $17.7 million, or 3.3%, from December 31, 2011. The increase was primarily due to investment purchases of $51.2 million, somewhat offset by security maturities or calls during the period of $19.1 million. Investment securities classified as held to maturity increased to $7.0 million as of March 31, 2012 as a result of the purchase of $5.0 million of tax-exempt obligations of states and political subdivisions. The investment portfolio consists mainly of U.S. government agency securities (12.5%), mortgage-backed securities (43.7%), and obligations of states and political subdivisions (41.3%).

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As of March 31, 2012, we owned collateralized debt obligations with an amortized cost of $1.8 million that were backed by pools of trust preferred securities issued by various commercial banks (approximately 80%) and insurance companies (approximately 20%). No real estate holdings secure these debt securities. We continue to monitor the values of these debt securities for purposes of determining other-than-temporary impairment in future periods given the instability in the financial markets, and continue to obtain updated cash flow analysis as required. See Note 4 “Investment Securities” for additional information related to investment securities.

Loans

The following table shows the composition of the bank loans (before deducting the allowance for loan losses), as of the periods shown:



	March 31, 2012				December 31, 2011
	Balance		% of Total		Balance		% of Total
(dollars in thousands)
Agricultural	$	85,106	8.7	%	$	89,298	9.1	%
Commercial and industrial	242,253		24.7		239,990		24.3
Credit cards	1,056		0.1		934		0.1
Overdrafts	541		0.1		885		0.1
Commercial real estate:
Construction and development	75,765		7.7		73,258		7.4
Farmland	71,039		7.2		74,454		7.6
Multifamily	33,843		3.5		34,719		3.5
Commercial real estate-other	214,146		21.8		213,608		21.7
Total commercial real estate	394,793		40.2		396,039		40.2
Residential real estate:
One- to four- family first liens	178,600		18.2		175,429		17.8
One- to four- family junior liens	59,777		6.1		63,419		6.4
Total residential real estate	238,377		24.3		238,848		24.2
Consumer	19,020		1.9		20,179		2.0
Total loans	$	981,146	100.0	%	$	986,173	100.0	%

Total bank loans (excluding loan pool participations and loans held for sale) decreased by $5.0 million, to $981.1 million as of March 31, 2012 as compared to December 31, 2011. As of March 31, 2012, our bank loan (excluding loan pool participations) to deposit ratio was 73.0% compared with a year-end 2011 bank loan to deposit ratio of 75.5%. We anticipate that the loan to deposit ratio will stabilize in future periods, with loans showing overall measured growth and deposits remain steady or increasing.

We have minimal direct exposure to subprime mortgages in our loan portfolio. Our loan policy provides a guideline that real estate mortgage borrowers have a Beacon score of 640 or greater. Exceptions to this guideline have been noted but the overall exposure is deemed minimal by management. Mortgages we originate and sell on the secondary market are typically underwritten according to the guidelines of secondary market investors. These mortgages are sold on a non-recourse basis. See Note 5 “Loans Receivable and the Allowance for Loan Losses” for additional information related to loans.

Loan Pool Participations

As of March 31, 2012, we had loan pool participations, net, totaling $45.9 million, down from $50.1 million at December 31, 2011. Loan pool participations are participation interests in performing, subperforming and nonperforming loans that have been purchased from various non-affiliated banking organizations. The Company entered into this business upon consummation of its merger with the Former MidWestOne in March 2008. As previously announced, the Company has decided to exit this line of business as current balances pay down. The loan pool investment balances shown as an asset on our Consolidated Balance Sheets represent the discounted purchase cost of the loan pool participations. As of March 31, 2012, the categories of loans by collateral type in the loan pools were commercial real estate - 59%, commercial loans - 7%, agricultural and agricultural real estate - 6%, single-family residential real estate - 7% and other loans - 21%. We have minimal exposure in the loan pools to consumer real estate subprime credit or to construction and real estate development loans. See Note 5 “Loans Receivable and the Allowance for Loan Losses” for additional information related to loan pools.

Our overall cost basis in the loan pool participations represents a discount from the aggregate outstanding principal amount of the loans underlying the pools. For example, as of March 31, 2012, such cost basis was $48.0 million, while the contractual outstanding principal amount of the underlying loans as of such date was approximately $121.0 million, resulting in an investment basis of 39.7% of the "face amount" of the underlying loans. The discounted cost basis inherently reflects the assessed collectability of the underlying loans. We do not include any amounts related to the loan pool participations in our totals of nonperforming loans.

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The loans in the pools provide some geographic diversification to our balance sheet. As of March 31, 2012, loans in the southeast region of the United States represented approximately 42% of the total. The northeast was the next largest area with 34%, the central region with 19%, the southwest region with 4% and northwest represented a minimal amount of the portfolio at 1%. The highest concentration of assets is in Florida at approximately 25% of the basis total, with the next highest state level being Ohio at 15%, then Pennsylvania and New Jersey, both at approximately 10%. As of March 31, 2012, approximately 52% of the loans were contractually current or less than 90 days past-due, while 48% 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 48% contractually past-due includes loans in litigation and foreclosed property. As of March 31, 2012, loans in litigation totaled approximately $5.3 million, while foreclosed property was approximately $10.2 million.

Intangible Assets

Intangible assets decreased to $10.1 million as of March 31, 2012 from $10.2 million as of December 31, 2011 as a result of normal amortization. Amortization of intangible assets is recorded using an accelerated method based on the estimated life of the intangible.

The following table summarizes the amounts and carrying values of intangible assets as of March 31, 2012.



	Gross Carrying Amount		Accumulated Amortization		Unamortized Intangible Assets
(in thousands)
March 31, 2012
Intangible assets:
Insurance agency intangible	$	1,320	$	624	$	696
Core deposit premium	5,433		3,340		2,093
Trade name intangible	7,040		—		7,040
Customer list intangible	330		106		224
Total	$	14,123	$	4,070	$	10,053

Deposits

Total deposits as of March 31, 2012 were $1.34 billion compared with $1.31 billion as of December 31, 2011. Certificates of deposit were the largest category of deposits at March 31, 2012, representing approximately 41.9% of total deposits. Total certificates of deposit were $563.8 million at March 31, 2012, down $9.8 million, or 1.7%, from $573.6 million at December 31, 2011. Included in total certificates of deposit at March 31, 2012 was $27.0 million of brokered deposits in the Certificate of Deposit Account Registry Service (CDARS) program, a decrease of $1.8 million, or 6.3%, from the $28.8 million at December 31, 2011. Based on historical experience, management anticipates that many of the maturing certificates of deposit will be renewed upon maturity. Maintaining competitive market interest rates will facilitate our retention of certificates of deposit. Interest-bearing checking deposits were $536.5 million at March 31, 2012, an increase of $36.6 million, or 7.3%, from $499.9 million at December 31, 2011. The increased balances in non-certificate deposit accounts were primarily in public funds and consumer accounts. Included in interest-bearing checking deposits at March 31, 2012 was $20.6 million of brokered deposits in the Insured Cash Sweep (ICS) program, an increase of $0.6 million, or 3.0%, from the $20.0 million at December 31, 2011. We expect continued growth in ICS balances as we market the account type to a wider range of customers. Approximately 83.2% of our total deposits are considered “core” deposits.

Federal Home Loan Bank Borrowings

FHLB borrowings totaled $136.0 million as of March 31, 2012 compared with $140.0 million as of December 31, 2011. We utilize FHLB borrowings as a supplement to customer deposits to fund earning assets and to assist in managing interest rate risk. During the second quarter of 2011, we restructured three FHLB advances totaling $9.0 million. Restructuring the debt involved paying off the existing advances (including payment of early termination fees), and the simultaneous issuance of a new advances with a longer term but substantially lower effective cost. Early termination fees are being amortized over the life of the new borrowings.

Long-term Debt

Long-term debt in the form of junior subordinated debentures that have been issued to a statutory trust that issued trust preferred securities was $15.5 million as of March 31, 2012, unchanged from December 31, 2011. These junior subordinated debentures were assumed by us from Former MidWestOne in the merger. Former MidWestOne had issued these junior subordinated debentures on September 20, 2007, to MidWestOne Capital Trust II. The junior subordinated debentures mature on December 15, 2037, do not require any principal amortization and are callable at par at our option on or after September 20, 2012. The interest

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rate is fixed at 6.48% until December 15, 2012 on $7.7 million of the issuance and is variable quarterly at the three-month LIBOR plus 1.59% on the remainder. After December 15, 2012, the interest rate on the entire issuance becomes variable quarterly at the three month LIBOR plus 1.59%.

Nonperforming Assets

The following table sets forth information concerning nonperforming loans by portfolio class at March 31, 2012 and December 31, 2012:



	90 Days or More Past Due and Still Accruing Interest		Restructured		Nonaccrual		Total
(in thousands)
March 31, 2012
Agricultural	$	—	$	3,323	$	151	$	3,474
Commercial and industrial	60		481		1,933		2,474
Credit cards	—		—		—		—
Overdrafts	—		—		—		—
Commercial real estate:							—
Construction and development	—		79		1,159		1,238
Farmland	—		2,367		325		2,692
Multifamily	—		—		—		—
Commercial real estate-other	60		782		1,568		2,410
Total commercial real estate	60		3,228		3,052		6,340
Residential real estate:
One- to four- family first liens	308		577		988		1,873
One- to four- family junior liens	112		—		174		286
Total residential real estate	420		577		1,162		2,159
Consumer	—		25		33		58
Total	$	540	$	7,634	$	6,331	$	14,505



	90 Days or More Past Due and Still Accruing Interest		Restructured		Nonaccrual		Total
(in thousands)
December 31, 2011
Agricultural	$	—	$	3,323	$	1,453	$	4,776
Commercial and industrial	537		48		1,494		2,079
Credit cards	—		—		—		—
Overdrafts	—		—		—		—
Commercial real estate:
Construction and development	—		79		1,159		1,238
Farmland	—		—		2,927		2,927
Multifamily	—		—		259		259
Commercial real estate-other	49		2,081		1,507		3,637
Total commercial real estate	49		2,160		5,852		8,061
Residential real estate:
One- to four- family first liens	262		579		1,959		2,800
One- to four- family junior liens	206		—		125		331
Total residential real estate	468		579		2,084		3,131
Consumer	—		25		34		59
Total	$	1,054	$	6,135	$	10,917	$	18,106

Our nonperforming assets totaled $18.3 million as of March 31, 2012, a decrease of $3.9 million compared to December 31, 2011. The balance of other real estate owned at March 31, 2012 was $3.8 million, down from $4.0 million at year-end 2011. Nonperforming loans totaled $14.5 million (1.5% of total bank loans) as of March 31, 2012, compared to $18.1 million (1.8% of

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total bank loans) as of December 31, 2011. See Note 5 “Loans Receivable and the Allowance for Loan Losses” for additional information related to nonperforming assets.

The nonperforming loans consisted of $6.3 million in nonaccrual loans, $7.6 million in troubled debt restructures and $0.5 million in loans past due 90 days or more and still accruing. This compares with $10.9 million, $6.1 million and $1.1 million, respectively, as of December 31, 2011. Nonaccrual loans decreased $4.6 million, or 42.0%, at March 31, 2012 compared to December 31, 2011. The decrease in nonaccrual loans was primarily due to the payoff of a $1.4 million agricultural credit that had been on nonaccrual, and the movement of two nonaccrual farmland loans totaling $2.5 million to troubled debt restructure due to a court-ordered interest rate reduction in connection with a Chapter 12 bankruptcy. The Company experienced a $1.5 million, or 24.4%, increase in restructured loans, from December 31, 2011 to March 31, 2012, primarily due to the addition of the two farmland loans totaling $2.5 million, and the movement of a $1.0 million commercial real estate credit out of troubled debt restructure. During the same period, loans past due 90 days or more and still accruing interest decreased by $0.5 million, or 48.8%, from December 31, 2011 to March 31, 2012. Additionally, loans past-due 30 to 89 days (not included in the nonperforming loan totals) were $7.9 million as of March 31, 2012 compared with $7.0 million as of December 31, 2011, an increase of $0.9 million or 13.4%.

All of the other real estate property was acquired through foreclosures and we are actively working to sell all properties held as of March 31, 2012. Other real estate is carried at appraised value less estimated cost of disposal at date of acquisition. Additional discounts could be required to market and sell the properties, resulting in a write down through expense.

Loan Review and Classification Process for Agricultural, Commercial and Industrial, and Commercial Real Estate Loans:

The Company maintains a loan review and classification process which involves multiple officers of the Company and is designed to assess the general quality of credit underwriting and to promote early identification of potential problem loans. All Commercial and Agricultural loan officers are charged with the responsibility of risk rating all loans in their portfolios and updating the ratings, positively or negatively, on an ongoing basis as conditions warrant. A monthly loan officer validation worksheet documents this process. Risk ratings are selected from an 8-point scale with ratings as follows: ratings 1- 4 Satisfactory (pass), rating 5 Watch (potential weakness), rating 6 Substandard (well-defined weakness), rating 7 Doubtful, and rating 8 Loss.

When a loan officer originates a new loan, based upon proper loan authorization, he or she documents the credit file with an offering sheet summary, supplemental underwriting analysis, relevant financial information and collateral evaluations. All of this information is used in the determination of the initial loan risk rating. The Company's Loan Review department undertakes independent credit reviews of relationships based on either criteria established by Loan Policy, risk-focused sampling, or random sampling. Loan Policy requires the top 50 lending relationships by total exposure be reviewed no less than annually as well as all classified and Watch rated credits over $250,000. The individual loan reviews consider such items as: loan type; nature, type and estimated value of collateral; borrower and/or guarantor estimated financial strength; most recently available financial information; related loans and total borrower exposure; and current/anticipated performance of the loan. The results of such reviews are presented to Executive Management.

Through the review of delinquency reports, updated financial statements or other relevant information in the normal course of business, the lending officer and/or Loan Review personnel may determine that a loan relationship has weakened to the point that a criticized (loan grade 5) or classified (loan grade 6 through 8) status is warranted. When a loan relationship with total related exposure of $1.0 million or greater is adversely graded (5 or above), or is classified as a Troubled Debt Restructure (regardless of size), the lending officer is then charged with preparing a Loan Strategy Summary worksheet that outlines the background of the credit problem, current repayment status of the loans, current collateral evaluation and a workout plan of action. This plan may include goals to improve the credit rating, assisting the borrower in moving the loans to another institution and/or collateral liquidation. All such reports are first presented to Regional Management and then to the Board of Directors by the Executive Vice President, Chief Credit Officer (or a designee).

Depending upon the individual facts and circumstances and the result of the Classified/Watch review process, loan officers and/or Loan Review personnel may categorize the loan relationship as impaired. Once that determination has occurred, the loan officer, in conjunction with Regional Management, will complete an evaluation of the collateral (for collateral-dependent loans) based upon appraisals on file adjusting for current market conditions and other local factors that may affect collateral value. Loan Review personnel may also complete an independent impairment analysis when deemed necessary. These judgmental evaluations may produce an initial specific allowance for placement in the Company's Allowance for Loan & Lease Losses calculation. As soon as practical, updated appraisals on the collateral backing that impaired loan relationship are ordered. When the updated appraisals are received, Regional Management, with assistance from the Loan Review department, reviews the appraisal and updates the specific allowance analysis for each loan relationship accordingly. The Board of Directors on a quarterly basis reviews the Classified/Watch reports including changes in credit grades of 5 or higher as well as all impaired loans, the related allowances and OREO.

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In general, once the specific allowance has been finalized, Regional and Executive Management will consider a charge-off prior to the calendar quarter-end in which that reserve calculation is finalized.

The review process also provides for the upgrade of loans that show improvement since the last review.

Restructured Loans

We restructure loans for our customers who appear to be able to meet the terms of their loan over the long term, but who may be unable to meet the terms of the loan in the near term due to individual circumstances. We consider the customer's past performance, previous and current credit history, the individual circumstances surrounding the current difficulties and their plan to meet the terms of the loan in the future prior to restructuring the terms of the loan. All of the following factors are indicators that the Bank has granted a concession (one or multiple items may be present):


•	The borrower receives a reduction of the stated interest rate for the remaining original life of the debt.


•	The borrower receives an extension of the maturity date or dates at a stated interest rate lower than the current market interest rate for new debt with similar risk characteristics.


•	The borrower receives a reduction of the face amount or maturity amount of the debt as stated in the instrument or other agreement.


•	The borrower receives a deferral of required payments (principal and/or interest).


•	The borrower receives a reduction of the accrued interest.

Generally, loans are restructured through short-term interest rate relief, short-term principal payment relief or short-term principal and interest payment relief. Once a restructured loan has gone 90 days or more past due or is placed on nonaccrual status, it is included in the 90+ day past due or nonaccrual totals above.

During the three months ended March 31, 2012, the Company restructured two loans by granting concessions to borrowers experiencing financial difficulties. Both are farmland loans and were granted interest rate reductions by court order as part of a Chapter 12 bankruptcy. A commercial real estate loan that was a new TDR in the past 12 months due to a below market interest rate was on non-accrual at quarter-end.

During the three months ended March 31, 2011, the Company restructured four loans by granting concessions to borrowers experiencing financial difficulties. Four commercial real estate loans to the same borrower were classified as new TDRs due to the extension of a forbearance agreement and the granting of a below market interest rate. These four credits also experienced a payment default during the three months ended March 31, 2011.

We consider all TDRs, regardless of whether they are performing in accordance with the modified terms, to be impaired loans when determining our allowance for loan losses. A summary of restructured loans as of March 31, 2012 and December 31, 2011 is as follows:



	March 31,		December 31,
	2012		2011
(in thousands)
Restructured Loans (TDRs):
In compliance with modified terms	$	7,634	$	6,135
Not in compliance with modified terms - on nonaccrual status	580		1,035
Total restructured loans	$	8,214	$	7,170

Allowance for Loan Losses

Our Allowance for Loan Losses (“ALLL”) as of March 31, 2012 was $15.7 million, which was 1.6% of total bank loans (excluding loan pools) as of that date. This compares with an ALLL of $15.7 million as of December 31, 2011, which was 1.6% of total bank loans as of that date. Gross charge-offs for the three months of 2012 totaled $1.1 million, while recoveries of previously charged-off loans totaled $0.5 million. Annualized net loan charge offs to average bank loans for the first three months of 2012 was 0.2% compared to 0.3% for the year ended December 31, 2011. As of March 31, 2012, the ALLL was 108.1% of nonperforming loans compared with 86.6% as of December 31, 2011. While nonperforming loan levels generally increased during the first six months of 2011, they have steadily improved during the second half of 2011 and into the most recent quarter. Past increases were primarily in credits that our management had already identified as weak. Based on the inherent risk in the loan portfolio, we believe that as of March 31, 2012, the ALLL was adequate; however, there is no assurance losses will not exceed the allowance and any growth in the loan portfolio and the uncertainty of the general economy may require that management continue to evaluate the adequacy of the ALLL and make additional provisions in future periods as deemed necessary. See Note 5 “Loans Receivables and

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the Allowance for Loan Losses” for additional information related to the allowance for loan losses.

During the first quarter of 2012 we changed the historical charge-off component of the ALLL calculation from a five-year annual average to a rolling 20 quarter annual average. The historical charge-off portion is one of several factors used in establishing our reserve level for each loan type. We also enhanced our method for determining the loan type categories that individual loans are included in for ALLL purposes, which provides a more granular and accurate basis for computing the ALLL. Finally, all credit relationships with a balance less than $200,000 are now evaluated for ALLL adequacy purposes based solely on delinquency status, unless the loan has been placed on nonaccrual or is classified as a TDR. There were no other changes to our ALLL calculation during the first three months of 2012. Classified loans are reviewed per the requirements of FASB ASC Topics 310 and 450. All classified loans are reviewed for impairment in accordance with FASB ASC Topic 310.

We currently track the loan to value (LTV) ratio of loans in our portfolio, and those loans in excess of internal and supervisory guidelines are presented to the Bank's Board of Directors on a quarterly basis. At March 31, 2012, there were eight owner-occupied 1-4 family loans with a LTV of 100% or greater. In addition, there were 24 home equity loans without credit enhancement that had LTV of 100% or greater. We have the first lien on four of these equity loans and other financial institutions have the first lien on the remaining 20.

We review all impaired and nonperforming loans individually on a quarterly basis to determine their level of impairment due to collateral deficiency or insufficient cash-flow based on a discounted cash-flow analysis. At March 31, 2012, reported troubled debt restructurings were not a material portion of the loan portfolio. We review loans 90+ days past due that are still accruing interest no less than quarterly to determine if there is a strong reason that the credit should not be placed on non-accrual. All commercial and agricultural lenders are required to review their portfolios on a monthly basis and document that either no downgrades are necessary or report credits that they feel warrant a downgrade to Loan Review for inclusion in the allowance for loan loss calculation. Periodic loan file examinations are conducted by Loan Review staff to ensure the accuracy of loan officer credit classifications.

Capital Resources

Total shareholders' equity was 9.23% of total assets as of March 31, 2012 and was 9.23% as of December 31, 2011. Tangible common equity to tangible assets was 8.70% as of March 31, 2012 and 8.68% as of December 31, 2011. Our Tier 1 capital to risk-weighted assets ratio was 12.56% as of March 31, 2012 and was 12.40% as of December 31, 2011. Risk-based capital guidelines require the classification of assets and some off-balance-sheet items in terms of credit-risk exposure and the measuring of capital as a percentage of the risk-adjusted asset totals. We believe that, as of March 31, 2012, the Company and the Bank met all capital adequacy requirements to which we are subject. As of that date, the Bank was “well capitalized” under regulatory prompt corrective action provisions.

We have traditionally disclosed certain non-GAAP ratios to evaluate and measure our financial condition, including our tangible common equity to tangible assets and Tier 1 capital to risk-weighted assets ratios. We believe these ratios provide investors with information regarding our financial condition and how we evaluate our financial condition internally.

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The following tables provide a reconciliation of the non-GAAP measures to the most comparable GAAP equivalents.



	At March 31,			At December 31,
(in thousands)	2012			2011
Tangible Common Equity:
Total shareholders' equity	$	159,270		$	156,494
Less: Intangibles	(10,053		)	(10,247		)
Tangible common equity	$	149,217		$	146,247
Tangible Assets:
Total assets	$	1,725,844		$	1,695,244
Less: Intangibles	(10,053		)	(10,247		)
Tangible assets	$	1,715,791		$	1,684,997
Tangible common equity to tangible assets	8.70		%	8.68		%

	At March 31,			At December 31,
(in thousands)	2012			2011
Tier 1 capital
Total shareholders' equity	$	159,270		$	156,494
Plus: Long term debt (qualifying restricted core capital)	15,464			15,464
Net unrealized gains on securities available for sale	(3,831		)	(3,328		)
Less: Disallowed Intangibles	(10,185		)	(10,374		)
Tier 1 capital	$	160,718		$	158,256
Risk-weighted assets	$	1,279,844		$	1,276,512
Tier 1 capital to risk-weighted assets	12.56		%	12.40		%

On January 17, 2012, 22,600 restricted stock units were granted to certain directors and officers. During the first three months of 2012, 13,170 shares were issued in connection with the vesting of previously awarded grants of restricted stock units, of which 1,025 shares were surrendered by grantees to satisfy tax requirements. In addition, 11,553 shares were issued in connection with the exercise of previously issued stock options, with 2,325 shares of stock surrendered in connection with the exercises.

The following table provides the capital levels and minimum required capital levels for the Company and the Bank:



	Actual				For Capital Adequacy Purposes		To Be Well Capitalized Under Prompt Corrective Action Provisions
	Amount		Ratio		Ratio		Ratio
(dollars in thousands)
March 31, 2012
Consolidated:
Total risk based capital	$	176,933	13.82	%	8.00	%	—	%
Tier 1 risk based capital	160,718		12.56	%	4.00	%	—	%
Leverage ratio	160,718		9.62	%	4.00	%	—	%
MidWestOne Bank:
Total risk based capital	155,065		12.28	%	8.00	%	10.00	%
Tier 1 risk based capital	139,248		11.02	%	4.00	%	6.00	%
Leverage ratio	139,248		8.43	%	4.00	%	5.00	%

December 31, 2011
Consolidated:
Total risk based capital	$	174,342	13.66	%	8.00	%	—	%
Tier 1 risk based capital	158,256		12.40	%	4.00	%	—	%
Leverage ratio	158,256		9.60	%	4.00	%	—	%
MidWestOne Bank:
Total risk based capital	155,039		12.33	%	8.00	%	10.00	%
Tier 1 risk based capital	139,292		11.07	%	4.00	%	6.00	%
Leverage ratio	139,292		8.54	%	4.00	%	5.00	%

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Liquidity

Liquidity management involves meeting the cash flow requirements of depositors and borrowers. We conduct liquidity management on both a daily and long-term basis; and adjust our investments in liquid assets based on expected loan demand, projected loan maturities and payments, estimated cash flows from the loan pool participations, expected deposit flows, yields available on interest-bearing deposits, and the objectives of our asset/liability management program. We had liquid assets (cash and cash equivalents) of $52.0 million as of March 31, 2012, compared with $32.6 million as of December 31, 2011. Investment securities classified as available for sale, totaling $551.8 million and $534.1 million as of March 31, 2012 and December 31, 2011, respectively, could be sold to meet liquidity needs if necessary. Additionally, our bank subsidiary maintains unsecured lines of credit with several correspondent banks and secured lines with the Federal Reserve Bank discount window and the Federal Home Loan Bank of Des Moines that would allow it to borrow funds on a short-term basis, if necessary. Management believes that the Company had sufficient liquidity as of March 31, 2012 to meet the needs of borrowers and depositors.

Our principal sources of funds were deposits, proceeds from the maturity and sale of investment securities, principal repayments on loan pools, and funds provided by operations. While scheduled loan amortization and maturing interest-bearing deposits are relatively predictable sources of funds, deposit flows and loan prepayments are greatly influenced by economic conditions, the general level of interest rates, and competition. We utilize particular sources of funds based on comparative costs and availability. This includes fixed-rate FHLB borrowings that can generally be obtained at a more favorable cost than deposits. We generally manage the pricing of our deposits to maintain a steady deposit base but from time to time may decide, as we have done in the past, not to pay rates on deposits as high as our competition.

As of March 31, 2012, we had $15.5 million of long-term debt outstanding. This amount represents indebtedness payable under junior subordinated debentures issued to a subsidiary trust that issued trust preferred securities in a pooled offering. The junior subordinated debentures have a 35-year term. One-half of the balance has a fixed interest rate of 6.48% until December 15, 2012; the other one-half has a variable rate of three-month LIBOR plus 1.59%. After December 15, 2012, the interest rate on the entire issuance becomes variable quarterly at the three-month LIBOR plus 1.59%.

Inflation

The effects of price changes and inflation can vary substantially for most financial institutions. While management believes that inflation affects the growth of total assets, it is difficult to assess the overall impact. Management believes this to be the case due to the fact that generally neither the timing nor the magnitude of the inflationary changes in the consumer price index (“CPI”) coincides with changes in interest rates. The price of one or more of the components of the CPI may fluctuate considerably and thereby influence the overall CPI without having a corresponding effect on interest rates or upon the cost of those goods and services normally purchased by us. In years of high inflation and high interest rates, intermediate and long-term interest rates tend to increase, thereby adversely impacting the market values of investment securities, mortgage loans and other long-term fixed rate loans held by financial institutions. In addition, higher short-term interest rates caused by inflation tend to increase financial institutions' cost of funds. In other years, the reverse situation may occur.

Off-Balance-Sheet Arrangements

We are a party to financial instruments with off-balance-sheet risk in the normal course of business to meet the financing needs of our customers, which include commitments to extend credit, commitments to originate residential mortgage loans held for sale, commercial letters of credit, and standby letters of credit. Commitments to extend credit are agreements to lend to customers at predetermined interest rates, as long as there is no violation of any condition established in the contracts. Our exposure to credit loss in the event of nonperformance by the other party to the commitments to extend credit is represented by the contractual amount of those instruments. We use the same credit policies in making commitments as we do for on-balance-sheet instruments.

Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any conditions established in the contract. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. Since many of the commitments are expected to expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements. We evaluate each customer's creditworthiness on a case-by-case basis. As of March 31, 2012, outstanding commitments to extend credit totaled approximately $257.6 million. We have established a reserve of $0.2 million for potential losses as a result of these transactions. Commitments under standby and performance letters of credit outstanding aggregated $4.3 million as of March 31, 2012. We do not anticipate any losses as a result of these transactions.

Residential mortgage loans sold to others are predominantly conventional residential first lien mortgages originated under our usual underwriting procedures, and are most often sold on a nonrecourse basis. At March 31, 2012, there were approximately $16.0 million of mandatory commitments with investors to sell not yet originated residential mortgage loans. We do not anticipate any losses as a result of these transactions.

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Item 3. Quantitative and Qualitative Disclosures about Market Risk.

In general, market risk is the risk of change in asset values due to movements in underlying market rates and prices. Interest rate risk is the risk to earnings and capital arising from movements in interest rates. Interest rate risk is the most significant market risk affecting MidWestOne as other types of market risk, such as foreign currency exchange rate risk and commodity price risk, do not arise in the normal course of our business activities.

In addition to interest rate risk, the current economic environment, particularly certain dislocations in the credit markets that have prevailed since 2008, has made liquidity risk (namely, funding liquidity risk) a more prevalent concern among financial institutions. In general, liquidity risk is the risk of being unable to fund an entity's obligations to creditors (including, in the case of banks, obligations to depositors) as such obligations become due and/or fund its acquisition of assets.

Liquidity Risk

Liquidity refers to our ability to fund operations, to meet depositor withdrawals, to provide for our customers' credit needs, and to meet maturing obligations and existing commitments. Our liquidity principally depends on cash flows from operating activities, investment in and maturity of assets, changes in balances of deposits and borrowings, and our ability to borrow funds.

Net cash inflows from operating activities were $8.4 million in the first three months of 2012, compared with $10.7 million in the first three months of 2011. Net income, and depreciation, amortization and accretion add backs were the primary contributors for the first three months of 2012, as was an increase in other liabilities of $0.7 million.

Net cash outflows from investing activities were $14.0 million in the first quarter of 2012, compared to net cash outflows of $36.9 million in the comparable three-month period of 2011. In the first three months of 2012, loans made to customers, net of collections, accounted for net inflows of $3.8 million, and securities transactions accounted for a net outflow of $22.5 million. Cash inflows from loan pool participations were $4.1 million during the first three months of 2012 compared to a $3.7 million inflow during the same period of 2011.

Net cash provided by financing activities in the first three months of 2012 was $25.0 million. The largest financing cash inflows during the three months ended March 31, 2012 were the $38.0 million net increase in deposits and a $2.0 million net increase in repurchase agreements. The largest cash outflows from financing activities in the first three months of 2012 consisted of an $8.9 million decrease in Federal Funds purchased and $4.0 million repayment of FHLB borrowings.

To further mitigate liquidity risk, the Bank has several sources of liquidity in place to maximize funding availability and increase the diversification of funding sources. The criteria for evaluating the use of these sources include: volume concentration (percentage of liabilities), cost, volatility, and the fit with the current management plan. These acceptable sources of liquidity include:

•Fed Funds Lines

•FHLB Borrowings

•Brokered Deposits

•Brokered Repurchase Agreements

•Federal Reserve Bank Discount Window

Fed Funds Lines:

Routine liquidity requirements are met by fluctuations in the Bank's Fed Funds position. The principal function of these funds is to maintain short-term liquidity. Unsecured Fed Funds purchased lines are viewed as a volatile liability and are not used as a long-term funding solution, especially when used to fund long-term assets. Multiple correspondent relationships are preferable and Fed Funds sold exposure to any one customer is continuously monitored. The current Fed Funds purchased limit is 10% of total assets, or the amount of established Fed Funds lines, whichever is smaller. Currently, the Bank has unsecured Fed Fund lines totaling $55.0 million, which are tested semi-annually to ensure availability.

FHLB Borrowings:

FHLB borrowings provide both a source of liquidity and long-term funding for the Bank. Use of this type of funding is coordinated with both the strategic balance sheet growth projections and the current and future interest rate risk profile of the Bank. Factors that are taken into account when contemplating use of FHLB borrowings are the effective interest rate, the collateral requirements, community investment program credits, and the implications and cost of having to purchase incremental FHLB stock. As of March 31, 2012, the Bank had $168.5 million of collateral pledged to the FHLB and $136.0 million in outstanding borrowings, leaving $32.5 million available for liquidity needs. These borrowings are secured by various real estate loans (residential, commercial and agricultural).

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Brokered Deposits:

The Bank has brokered CD lines/deposit relationships available to help diversify its various funding sources. Brokered deposits offer several benefits relative to other funding sources, such as: maturity structures which cannot be duplicated in the current deposit market, deposit gathering which does not cannibalize the existing deposit base, the unsecured nature of these liabilities, and the ability to quickly generate funds. However, brokered deposits are often viewed as a volatile liability by banking regulators and market participants. This viewpoint, and the desire to not develop a large funding concentration in any one area, is reflected in an internal policy stating that the Bank limit the use of brokered deposits as a funding source to no more than 10% of total liabilities. Board approval is required to exceed these limits. The Bank will also have to maintain a “well capitalized” standing, as an “adequately capitalized" rating would require an FDIC waiver, and an “undercapitalized” rating would prohibit the Bank from using brokered deposits altogether.

Brokered Repurchase Agreements:

Brokered repurchase agreements may be established with approved brokerage firms and banks. Repurchase agreements create rollover risk (the risk that a broker will discontinue the relationship due to market factors) and are not used as a long-term funding solution, especially when used to fund long-term assets. Collateral requirements and availability are evaluated and monitored. The current policy limit for brokered repurchase agreements is 10% of total assets. There were no outstanding brokered repurchase agreements at March 31, 2012.

Federal Reserve Bank Discount Window:

The FRB Discount Window is another source of liquidity, particularly during difficult economic times. The Bank has a borrowing capacity with the Federal Reserve Bank of Chicago limited only by the amount of municipal securities pledged against the line. As of March 31, 2012, the Bank has municipal securities with an approximate market value of $12.9 million pledged for liquidity purposes.

Interest Rate Risk

The nature of the banking business, which involves paying interest on deposits at varying rates and terms and charging interest on loans at other rates and terms, creates interest rate risk. As a result, net interest margin and earnings and the market value of assets and liabilities are subject to fluctuations arising from the movement of interest rates. We manage several forms of interest rate risk, including asset/liability mismatch, basis risk and prepayment risk. A key management objective is to maintain a risk profile in which variations in net interest income stay within the limits and guidelines of the Bank's Asset/Liability Management Policy.

Like most financial institutions, our net income can be significantly influenced by a variety of external factors, including: overall economic conditions, policies and actions of regulatory authorities, the amounts of and rates at which assets and liabilities reprice, variances in prepayment of loans and securities other than those that are assumed, early withdrawal of deposits, exercise of call options on borrowings or securities, competition, a general rise or decline in interest rates, changes in the slope of the yield-curve, changes in historical relationships between indices (such as LIBOR and prime), and balance sheet growth or contraction. Our asset and liability committee (ALCO) seeks to manage interest rate risk under a variety of rate environments by structuring our balance sheet and off-balance sheet positions in such a way that changes in interest rates do not have a large negative impact. The risk is monitored and managed within approved policy limits.

We use a third-party service to model and measure our exposure to potential interest rate changes. For various assumed hypothetical changes in market interest rates, numerous other assumptions are made, such as prepayment speeds on loans and securities backed by mortgages, the slope of the Treasury yield curve, the rates and volumes of our deposits, and the rates and volumes of our loans. This analysis measures the estimated change in net interest income in the event of hypothetical changes in interest rates. The following table presents our projected changes in net interest income for the various interest rate shock levels at March 31, 2012 and December 31, 2011.

Analysis of Net Interest Income Sensitivity



	Immediate Change in Rates
	-200			-100			+100			+200
(dollars in thousands)
March 31, 2012
Dollar change	$	1,024		$	26		$	(637	)	$	(426	)
Percent change	1.9		%	—		%	(1.2		)%	(0.8		)%
December 31, 2011
Dollar change	$	1,350		$	526		$	(689	)	$	(691	)
Percent change	2.5		%	1.0		%	(1.3		)%	(1.3		)%

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As shown above, at March 31, 2012, the effect of an immediate and sustained 200 basis point increase in interest rates would decrease our net interest income by approximately $0.4 million. The effect of an immediate and sustained 200 basis point decrease in rates would increase our net interest income by approximately $1.0 million. In a rising rate environment, our interest-bearing liabilities would reprice more quickly than interest-earning assets, thus reducing net interest income. Conversely, a decrease in interest rates would result in an increase in net interest income as interest-bearing liabilities would decline more rapidly than interest-earning assets. In the current low interest rate environment, model results of a 200 basis point drop in interest rates are of questionable value as many interest-bearing liabilities and interest-earning assets cannot re-price significantly lower than current levels. As part of a strategy to mitigate net interest margin compression in a low interest rate environment, management has incorporated interest rate floors on most newly originated floating rate loans. While incorporating interest rate floors on loans has been successful in maintaining our net interest margin in the current low rate environment, the coupon rates on these loans will lag when interest rates rise. These loans have floor rates that are between zero and 2.0% above the fully indexed rate. Therefore, interest rates must rise up to 2.0% before some of these loans would experience an increase in the coupon rate.

Computations of the prospective effects of hypothetical interest rate changes were based on numerous assumptions. Actual values may differ from those projections set forth above. Further, the computations do not contemplate any actions we could have undertaken in response to changes in interest rates.

Item 4. Controls and Procedures.

Disclosure Controls and Procedures

Under supervision and with the participation of certain members of our management, including our chief executive officer and chief financial officer, we completed an evaluation of the effectiveness of the design and operation of our disclosure controls and procedures (as defined in SEC Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934) as of March 31, 2012. Based on this evaluation, our chief executive officer and chief financial officer believe that the disclosure controls and procedures were effective as of the end of the period covered by this report with respect to timely communication to them and other members of management responsible for preparing periodic reports and material information required to be disclosed in this report as it relates to the Company and our consolidated subsidiaries.

The effectiveness of our or any system of disclosure controls and procedures is subject to certain limitations, including the exercise of judgment in designing, implementing, and evaluating the controls and procedures, the assumptions used in identifying the likelihood of future events, and the inability to eliminate misconduct completely. As a result, there can be no assurance that our disclosure controls and procedures will prevent all errors or fraud or ensure that all material information will be made known to appropriate management in a timely fashion. By their nature, our or any system of disclosure controls and procedures can provide only reasonable assurance regarding management's control objectives.

Changes in Internal Control over Financial Reporting

There was no change in our internal control over financial reporting during the last fiscal quarter that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

Cautionary Note Regarding Forward-Looking Statements

Statements made in this report contain certain “forward-looking statements” within the meaning of such term in the Private Securities Litigation Reform Act of 1995. We and our authorized representatives may, from time to time, make written or oral statements that are “forward-looking” and provide information other than 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 our management and on information currently available to management, are generally identifiable by the use of words such as “believe”, “expect”, “anticipate”, “should”, “could”, “would”, “plans”, “intend”, “project”, “estimate", “forecast”, “may” or similar expressions. These forward-looking statements are subject to certain risks and uncertainties that could cause actual results to differ materially from those expressed in, or implied by, these statements. Readers are cautioned not to place undue reliance on any such forward-looking statements, which speak only as of the date made. Additionally, we undertake no obligation to update any statement in light of new information or future events, except as required under federal securities law.

Factors that could cause actual results to differ materially from the results anticipated or projected include, but are not limited to, the following: (1) 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; (2) our management's ability to reduce and effectively manage interest rate risk and the impact of interest rates in general on the volatility of our net interest income; (3)

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changes in the economic environment, competition, or other factors that may affect our ability to acquire loans or influence the anticipated growth rate of loans and deposits and the quality of the loan portfolio and loan and deposit pricing; (4) fluctuations in the value of our investment securities; (5) governmental monetary and fiscal policies; (6) legislative and regulatory changes, including changes in banking, securities and tax laws and regulations and their application by our regulators (particularly with respect to the Dodd-Frank Wall Street Reform and Consumer Protection Act and the extensive regulations to be promulgated thereunder), and changes in the scope and cost of Federal Deposit Insurance Corporation insurance and other coverages; (7) the ability to attract and retain key executives and employees experienced in banking and financial services; (8) the sufficiency of the allowance for loan losses to absorb the amount of actual losses inherent in our existing loan portfolio; (9) our ability to adapt successfully to technological changes to compete effectively in the marketplace; (10) credit risks and risks from concentrations (by geographic area and by industry) within our loan portfolio; (11) the effects of competition from other commercial banks, thrifts, mortgage banking firms, consumer finance companies, credit unions, securities brokerage firms, insurance companies, money market and other mutual funds, and other financial institutions operating in our markets or elsewhere or providing similar services; (12) the failure of assumptions underlying the establishment of allowances for loan losses and estimation of values of collateral and various financial assets and liabilities; (13) volatility of rate-sensitive deposits; (14) operational risks, including data processing system failures or fraud; (15) asset/liability matching risks and liquidity risks; (16) the risks of mergers, acquisitions and divestitures, including, without limitation, the related time and costs of implementing such transactions, integrating operations as part of these transactions and possible failures to achieve expected gains, revenue growth and/or expense savings from such transactions; (17) the costs, effects and outcomes of existing or future litigation; (18) changes in general economic or industry conditions, nationally or in the communities in which we conduct business; (19) changes in accounting policies and practices, as may be adopted by state and federal regulatory agencies and the Financial Accounting Standards Board; and (20) other risk factors detailed from time to time in SEC filings made by the Company.

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PART II – OTHER INFORMATION

Item 1. Legal Proceedings.

The Company and its subsidiaries are from time to time parties to various legal actions arising in the normal course of business. We believe that there are no threatened or pending proceedings against the Company or its subsidiaries, which, if determined adversely, would have a material adverse effect on the business or financial condition of the Company.

Item 1A. Risk Factors.

There have been no material changes from the risk factors set forth in Part I, Item 1A. “Risk Factors” of our Annual Report on Form 10-K for the period ended December 31, 2011. Please refer to that section of our Form 10-K for disclosures regarding the risks and uncertainties related to our business.

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.

The following table sets forth information about the Company's purchase of its common stock during the three-month period ended March 31, 2012.



Period	Total Number of Shares Purchased	Average Price Paid per Share		Total Number of Shares Purchased as Part of Publicly Announced Programs	Approximate Dollar Value of Shares that May Yet Be Purchased Under the Program
January 1 - 31, 2012	42,700	$	16.29	42,700	$	3,464,852
February 1 - 29, 2012	34,433	17.15		34,433	2,874,346
March 1 - 31, 2012	8,950	17.71		8,950	2,715,851
Total	86,083	$	16.78	86,083	$	2,715,851

Item 3. Defaults Upon Senior Securities.

None.

Item 4. Mine Safety Disclosures.

Not Applicable.

Item 5. Other Information.

None.

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Item 6. Exhibits.



Exhibit Number			Description	Incorporated by Reference to:

31.1			Certification of Chief Executive Officer pursuant to Rule 13a-14(a) and Rule 15d-14(a)	Filed herewith

31.2			Certification of Chief Financial Officer pursuant to Rule 13a-14(a) and Rule 15d-14(a)	Filed herewith

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

101.INS			XBRL Instance Document ⁽¹⁾	Filed herewith

101.SCH			XBRL Taxonomy Extension Schema Document ⁽¹⁾	Filed herewith

101.CAL			XBRL Taxonomy Extension Calculation Linkbase Document ⁽¹⁾	Filed herewith

101.DEF			XBRL Taxonomy Extension Definition Linkbase Document ⁽¹⁾	Filed herewith

101.LAB			XBRL Taxonomy Extension Label Linkbase Document ⁽¹⁾	Filed herewith

101.PRE			XBRL Taxonomy Extension Presentation Linkbase Document ⁽¹⁾	Filed herewith

(1	)	These interactive data files shall not be deemed filed for purposes of Section 11 or 12 of the Securities Act of 1933, as amended, or Section 18 of the Securities Exchange Act of 1934, as amended, or otherwise subject to liability under those sections.

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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.



		MIDWESTONE FINANCIAL GROUP, INC.

Dated:	May 3, 2012	By:	/s/ CHARLES N. FUNK
			Charles N. Funk
			President and Chief Executive Officer

		By:	/s/ GARY J. ORTALE
			Gary J. Ortale
			Executive Vice President and Chief Financial Officer