MidWestOne Financial Group - 10-Q quarterly report FY

UNITED STATES SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

OR

For the transition period from _______ to _______

Commission file number 000-24630

102 South Clinton Street

Iowa City, IA 52240

Registrant’s telephone number: 319-356-5800

Indicate by check mark whether the registrant (1) has filed all reports required 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.

YesxNo o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company (as defined in Rule 12b-2 of the Exchange Act).

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

As of November 5, 2008, there were 8,646,328 shares of common stock $1 par value outstanding.

See accompanying notes to consolidated financial statements.

 

See accompanying notes to consolidated financial statements.

See accompanying notes to consolidated financial statements.

 

Notes to Consolidated Financial Statements

(Unaudited)

The accompanying consolidated financial statements have been prepared by the Company pursuant to the rules and regulations of the Securities and Exchange Commission. Certain information and footnote disclosures normally included in financial statements prepared in accordance with U. S. generally accepted accounting principles have been condensed or omitted pursuant to such rules and regulations. 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 September 30, 2008, and the results of operations and cash flows for the three months and the nine months ended September 30, 2008 and 2007.

The results for the three months or the nine months ended September 30, 2008 may not be indicative of results for the year ending December 31, 2008, or for any other period.

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.

Basic earnings per common share computations are based on the weighted average number of shares of common stock actually outstanding during the period. The weighted average number of shares outstanding for the three months ended September 30, 2008 and 2007 was 8,646,328 and 5,156,927, respectively. The weighted average number of shares outstanding for the nine-month period ended September 30, 2008 and 2007 was 7,707,301 and 5,163,943, respectively. Diluted earnings per share amounts are computed by dividing net income by the weighted average number of shares outstanding and all dilutive potential shares outstanding during the period. The computation of diluted earnings per share used a weighted average diluted number of shares outstanding of 8,646,328 and 5,157,688 for the three months ended September 30, 2008 and 2007, respectively. For the nine months ended September 30, 2008 and 2007, weighted average diluted shares outstanding were 7,707,301 and 5,170,613, respectively. The following table presents the computation of earnings per common share for the respective periods:

Effective January 1, 2008, the Company adopted the provisions of SFAS No. 157, “Fair Value Measurements,” for financial assets and liabilities. In accordance with Financial Accounting Standards Board Staff Positions (FSP) No. 157-2, “Effective Date of FASB Statement No. 157,” the Company will delay application of SFAS 157 for non-financial assets and non-financial liabilities until January 1, 2009. These include foreclosed real estate, long-lived assets, goodwill and core deposit premium; which are recorded at fair value only upon impairment. SFAS 157 defines fair value, establishes a framework for measuring fair value in generally accepted accounting principles and expands disclosures about fair value measurements.

SFAS 157 defines fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants. 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 shall not be 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 seller in the principal market that are (i) independent, (ii) knowledgeable, (iii) able to transact and (iv) willing to transact.

SFAS 157 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, SFAS 157 establishes a fair value hierarchy for valuation inputs that gives the highest priority to quoted prices in active markets for identical assets or liabilities and the lowest priority to unobservable inputs. The fair value hierarchy is as follows:

 

 

A description of the valuation methodologies used for instruments measured at fair value, as well as the general classification of such instruments pursuant to the valuation hierarchy, is set forth below. These valuation methodologies were applied to all of the Company’s financial assets and liabilities carried at fair value effective January 1, 2008.

The following table summarizes financial assets and financial liabilities measured at fair value on a recurring basis as of September 30, 2008, segregated by the level of valuation inputs within the fair value hierarchy utilized to measure fair value:

The following table summarizes financial assets and financial liabilities measured at fair value on a non recurring basis as of September 30, 2008, segregated by the level of valuation inputs within the fair value hierarchy utilized to measure fair value.

 

The preparation of financial statements in conformity with U.S. generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reported period. Actual results could differ from those estimates. A significant estimate that is particularly sensitive to change is the allowance for loan losses.

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

OVERVIEW

On October 17, 2008, the Company sold its branch location in Wapello, Iowa, to Community Bank of Muscatine, Iowa. Community Bank assumed approximately $8.6 million in deposits. The Company retained the loans associated with the branch and will service them through its branch location in Burlington, Iowa. A premium of 6% of the deposits was received by the Company and will be recognized as income in the fourth quarter of 2008.

Recent events in the U.S. and global financial markets, including the deterioration of the worldwide credit markets, have created significant challenges for financial institutions such as the Company. Dramatic declines in the housing market during the past year, marked by falling home prices and increasing levels of mortgage foreclosures, have resulted in significant write-downs of asset values by many financial institutions, including government-sponsored entities and major commercial and investment banks. In addition, many lenders and institutional investors have reduced, and in some cases, ceased to provide funding to borrowers, including other financial institutions, as a result of concern about the stability of the financial markets and the strength of counterparties.

In response to the crises affecting the U.S. banking system and financial markets and attempt to bolster the distressed economy and improve consumer confidence in the financial system, on October 3, 2008, the U.S. Congress passed, and the President signed into law, the Emergency Economic Stabilization Act of 2008 (the “Stabilization Act”). The Stabilization Act authorizes the Secretary of the U.S. Treasury and the Federal Deposit Insurance Corporation (the “FDIC”) to implement various temporary emergency programs designed to strengthen the capital positions of financial institutions and stimulate the availability of credit within the U.S. financial system. Pursuant to the Stabilization Act, the U.S. Treasury will have the authority to, among other things, purchase up to $700 billion of mortgages, mortgage-backed securities and certain other financial instruments from financial institutions for the purpose of stabilizing and providing liquidity to the U.S. financial markets.

On October 14, 2008, the U.S. Treasury announced that it will purchase equity stakes in eligible financial institutions that wish to participate. This program, known as the Capital Purchase Program, allocates $250 billion from the $700 billion authorized by the Stabilization Act to the U.S. Treasury for the purchase of senior preferred shares from qualifying financial institutions. Eligible institutions will be able to sell equity interests to the U.S. Treasury in amounts equal to between 1% and 3% of the institution’s risk-weighted assets. In conjunction with the purchase of preferred stock, the U.S. Treasury will receive warrants to purchase common stock from the participating institutions with an aggregate market price equal to 15% of the preferred investment. Participating financial institutions will be required to adopt the U.S. Treasury’s standards for executive compensation and corporate governance for the period during which the U.S. Treasury holds equity issued under the Capital Purchase Program. Many financial institutions have already announced that they will participate in the Capital Purchase Program. While the Company’s management believes that the Company has sufficient capital to support continued growth, the Company has filed an application to participate in the Capital Purchase Program.

Also on October 14, 2008, using the systemic risk exception to the FDIC Improvement Act of 1991, the U.S. Treasury authorized the FDIC to provide a 100% guarantee of newly-issued senior unsecured debt and deposits in non-interest bearing accounts at FDIC insured institutions. Initially, all eligible financial institutions will automatically be covered under this program, known as the Temporary Liquidity Guarantee Program, without incurring any fees for a period of 30 days. Coverage under the Temporary Liquidity Guarantee Program after the initial 30-day period is available to insured financial institutions at a cost of 75 basis points per annum for senior unsecured debt and 10 basis points per annum for non-interest bearing deposits. After the initial 30-day period, institutions will continue to be covered under the Temporary Liquidity Guarantee Program unless they inform the FDIC that they have decided to opt out of the program. The Company is assessing its participation in the Temporary Liquidity Guarantee Program and anticipates that it will participate in the insurance program covering the non-interest bearing deposits but not participate in the program to guarantee unsecured senior debt.

 

RESULTS OF OPERATIONS

Quarter Ended September 30, 2008

 

Summary

The Company earned net income of $1.7 million for the quarter ended September 30, 2008, compared with $1.8 million for the quarter ended September 30, 2007, a decrease of 7%. Basic and diluted earnings per share for the third quarter of 2008 were $.20 versus $.36 for the third quarter of 2007. The Company’s return on average assets for the third quarter of 2008 was 0.44% compared with a return of 1.07% for the same period in 2007. The Company’s return on average equity was 4.23% for the quarter ended September 30, 2008 versus 9.84% for the quarter ended September 30, 2007. Return on tangible equity was 5.46% for the third quarter of 2008 compared with 10.50% for the same period in 2007.

Net income and earnings per share were lower in the third quarter of 2008 compared with the second quarter of 2008 primarily as the result of nonrecurring events. First, the Company recognized $400,000 of flood loss expense incurred by two of its branch locations. Additionally, the Company reduced the carrying value of a truck stop/convenience store held as other real estate by $500,000 during the third quarter. The reduction in earnings per share related to these losses was $0.08. Net interest income in the third quarter was $423,000 lower compared with second quarter primarily due to reduced income on the Company’s loan pool participations. Noninterest income was also lower in the third quarter due to reduced brokerage and investment service fees and commissions as the recent general decline in stock prices had a large effect on trailing commissions earned. Net income for the quarter ended June 30, 2008 was $3.0 million, or $0.34 basic and diluted earnings per share.

The following table presents selected financial results and measures for the third quarter of 2008 and 2007.

Net Interest Income

Net interest income is computed by subtracting total interest expense from total interest income. Fluctuations in net interest income can result from the changes in the volumes of assets and liabilities as well as changes in interest rates. The Company’s net interest income for the quarter ended September 30, 2008 increased $6.0 million, or 122%, to $10.9 million from $4.9 million from the quarter ended September 30, 2007. Total interest income was $9.6 million greater in the third quarter of 2008 compared with the same period in 2007. Most of the increase in interest income was due to increased interest on loans, which was mainly attributable to increased volumes attributable to the merger. The increase in interest income was offset by increased interest expense on deposits and borrowed funds. Total interest expense for the third quarter of 2008 increased $3.6 million, or 75%, compared with the same period in 2007 due primarily to increased volumes related to the merger. The Company’s net interest margin on a federal tax-equivalent basis for the third quarter of 2008 increased to 3.25% compared with 3.24% in the third quarter of 2007. Net interest margin is a measure of the net return on interest-earning assets and is computed by dividing annualized net interest income by the average of total interest-earning assets for the period. The Company’s overall yield on earning assets declined to 5.67% for the third quarter of 2008 compared with 6.24% for the third quarter of 2007. The rate on interest-bearing liabilities decreased in the third quarter of 2008 to 2.84% compared to 3.58% for the third quarter of 2007.

The following table presents a comparison of the average balance of earning assets, interest-bearing liabilities, interest income and expense, and average yields and costs for the quarter ended September 30, 2008 and 2007. Interest income on tax-exempt securities and loans is reported on a fully tax-equivalent basis assuming a 34% tax rate. Dividing annualized income or expense by the average balances of assets or liabilities results in average yields or costs.

Income is derived from this investment in the form of interest collected and the repayment of the principal in excess of the purchase cost which is herein 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 income and yield on loan pool participations may vary in future periods due to the volume and discount rate on loan pools purchased.

Provision for Loan Losses

The Company recorded a provision for loan losses of $838,000 in the third quarter of 2008 compared with a $75,000 provision in the third quarter of 2007. Net loans charged off in the third quarter of 2008 totaled $409,000 compared with net loans charged off of $231,000 in the third quarter of 2007. The increase in the provision in the third quarter of 2008 compared with the same period in 2007 reflects the increase in net charge-offs as well as a higher level of nonperforming loans and general concerns with the overall economic situation. Management determines an appropriate provision based on its evaluation of the adequacy of the allowance for loan losses in relationship to a continuing review of problem loans, the current economic conditions, actual loss experience and industry trends. Management believed that the allowance for loan losses was adequate based on the inherent risk in the portfolio as of September 30, 2008; 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 require that management continue to evaluate the adequacy of the allowance for loan losses and make additional provisions in future periods as deemed necessary.

Noninterest Income

Noninterest income results from the charges and fees collected by the Company from its customers for various services performed, miscellaneous other income, and gains (or losses) from the sale of investment securities held in the available for sale category. Total noninterest income was $712,000, or 31%, greater in the third quarter of 2008 compared with the same period in 2007. Most of the change between the periods is due to the merger. Security gains totaled $9,000 in the third quarter of 2008 compared with no gain or loss recognized in the third quarter of 2007. Noninterest income was negatively impacted in the third quarter due to reduced brokerage and investment service fees and commissions as the recent general decline in stock prices had a large effect on trailing commissions earned.

Noninterest Expense

Income Tax Expense

The Company incurred income tax expense of $477,000 for the third quarter ended September 30, 2008 compared with $638,000 for the same period in 2007. The effective income tax rates as a percentage of income before taxes for the three months ended September 30, 2008 and 2007 were 21.9% and 25.8%, respectively. The effective tax rate varies from the statutory rate due to state taxes and the amount of tax-exempt income on municipal bonds earned during the period. Tax-exempt income on municipal bonds is greater in comparison to previous periods as the market yields on recently purchased bonds has increased and the Company has a higher volume of municipal bonds.

Nine Months Ended September 30, 2008

Summary

The Company earned net income of $6.9 million for the nine months ended September 30, 2008, compared with $4.8 million for the nine months ended September 30, 2007, an increase of 44%. The increase in net income was primarily due to the merger. Basic and diluted earnings per share for the first nine months of 2008 were $0.90 versus $0.93 for the first nine months of 2007. The Company’s return on average assets for the first nine months of 2008 was 0.70% compared with a return of 0.96% for the first nine months of 2007. The Company’s return on average equity was 6.61% for the nine months ended September 30, 2008 versus 8.79% for the nine months ended September 30, 2007. Return on tangible equity was 8.91% for the first nine months of 2008 compared with 9.39% for the same period in 2007.

The following table presents selected financial results and measures for the first nine months of 2008 and 2007.

Net Interest Income

The Company’s net interest income for the nine months ended September 30, 2008 increased $14.1 million, or 99%, to $28.5 million from $14.2 million from the nine months ended September 30, 2007. Total interest income was $22.5 million greater in the first nine months of 2008 compared with the same period in 2007. Most of the increase in interest income was due to increased interest on loans and loan pools, which was mainly attributable to increased volumes of loans and loan pools reflecting the merger. The increase in interest income was offset by increased interest expense on deposits and borrowed funds related to the merger. Total interest expense for the first nine months of 2008 increased $8.4 million, or 59%, compared with the same period in 2007 due primarily to increased volumes. The Company’s net interest margin on a federal tax-equivalent basis for the first nine months of 2008 increased to 3.31% compared with 3.25% for the nine months ended September 30, 2007. The Company’s overall yield on earning assets decreased to 5.83% for the first nine months of 2008 compared with 6.23% for the nine months ended September 30, 2007. The rate on interest-bearing liabilities decreased in the first nine months of 2008 to 2.49% compared to 3.54% for the first nine months of 2007.

The following table presents a comparison of the average balance of earning assets, interest-bearing liabilities, interest income and expense, and average yields and costs for the nine months ended September 30, 2008 and 2007. Interest income on tax-exempt securities and loans is reported on a fully tax-equivalent basis assuming a 34% tax rate. Dividing annualized income or expense by the average balances of assets or liabilities results in average yields or costs. Average balances for the nine months ended September 30, 2008 reflect the additional assets and liabilities of the acquired subsidiaries from March 15, 2008 through September 30, 2008.

 

Provision for Loan Losses

The Company recorded a provision for loan losses of $1.67 million in the first nine months of 2008 compared with a $425,000 provision in the first nine months of 2007. The increase in the provision for loan losses is attributable to increased loan charge-offs in 2008, growth in the loan portfolio and higher levels of nonperforming assets reflecting stress in the local and national economy. Net loans charged off in the same period in 2008 totaled $698,000 compared with net charge offs of $102,000 in the same period of 2007. Management determined an appropriate provision based on its evaluation of the adequacy of the allowance for loan losses in relationship to a continuing review of problem loans, the current economic conditions, actual loss experience and industry trends. Management believed that the allowance for loan losses was adequate based on the inherent risk in the portfolio as of September 30, 2008; 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 require that management continue to evaluate the adequacy of the allowance for loan losses and make additional provisions in future periods as deemed necessary.

Noninterest Income

Noninterest income results from the charges and fees collected by the Company from its customers for various services performed, miscellaneous other income, and gains (or losses) from the sale of investment securities held in the available for sale category. Total noninterest income was $2.33 million, or 36%, greater in the first nine months of 2008 compared with the same period in 2007. Most of the increase between the first nine months of 2008 in comparison to the same period of 2007 was due to the merger. Results for the first nine months of 2008 were affected by a $567,000 write-down of equity securities held in the Company’s investment portfolio that were determined to be an “other than temporary impairment” loss. This write-down was attributable to the decline in the market prices of these stocks, which were below their historical cost. This charge to year-to-date 2008 earnings resulted in a reduction in earnings per share of $0.04 for the nine months ended September 30, 2008.

Noninterest Expense

Income Tax Expense

The Company incurred income tax expense of $2.29 million for the nine months ended September 30, 2008 compared with $1.67 million for the nine months ended September 30, 2007. The effective income tax rates as a percentage of income before taxes for the first nine months of 2008 and 2007 were 24.8% and 25.7%, respectively. The effective tax rate varies from the statutory rate due to state taxes and the amount of tax-exempt income on municipal bonds earned during the period. Tax-exempt income on municipal bonds is greater in comparison to previous periods as the market yields on recently purchased bonds has increased and the Company has a higher volume of municipal bonds.

FINANCIAL CONDITION

Investment Securities

Investment securities available for sale totaled $279.3 million as of September 30, 2008. This was an increase of $44.0 million from December 31, 2007. The increase in the balance was due primarily to the Merger. Investment securities classified as held to maturity increased to $8.5 million as of September 30, 2008, also as a result of the merger. The investment portfolio consisted mainly of U.S. Government Agency securities, mortgage-backed securities and obligations of states and political subdivisions. The Company holds no Fannie Mae or Freddie Mac common or preferred stock.

During the second quarter of 2008, the Company recognized an other than temporary impairment (“OTTI”) write-down of $567,000 on equity securities held in the available for sale investments category. This write-down was attributable to the decline in the market prices of these stocks, which were below their historical cost.

As of September 30, 2008, the Company holds six different Collateralized Debt Obligations (“CDO’s”) with a purchase cost of approximately $9.7 million. The underlying assets in the CDO’s are primarily pooled trust preferred securities issued by various commercial banks in the United States (approximately 80%) and some insurance companies (approximately 20%). No real estate holding secure these CDO’s. These securities were purchased at various dates between March 2006 and December 2007 and classified as available for sale. As a result of the challenges experienced in the financial markets, the CDO’s have experienced a significant decline in estimated market value. The estimated fair market value of these CDO’s was $4.3 million as of September 30, 2008. In accordance with the provisions of FASB 115, the unrealized losses on the CDO’s was recognized and deducted from the book value and from shareholders’ equity (net of tax effect). Given the magnitude and duration of the loss, a discounted cash flow analysis of the CDO’s was prepared as of September 30, 2008, in accordance with Emerging Issues Task Force 99-20, “Recognition of Interest Income and Impairment on purchased Beneficial Interests and Beneficial Interests That Continue to Be Held by a Transfer in Securitized Financial Assets” to determine if an OTTI was required. The discounted cash flow analysis demonstrated that the value of the securities was substantiated and that no OTTI was required at this time. Management will continue to monitor the values of these CDO’s for purposes of determining OTTI in future periods given the instability in the financial markets and will continue to obtain updated cash flow analysis as required.

Loans

The Company has minimal direct exposure to subprime mortgages in its loan portfolio. The Company’s 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 originated by the Company and sold on the secondary market are typically underwritten according to the guidelines of the secondary market investors. These mortgages are on a non-recourse basis, thereby eliminating any subprime exposure.

Loan Pool Participations

As of September 30, 2008, the Company had loan pool participations of $100.9 million. Loan pools are participation interest in performing, sub-performing and non-performing loans that have been purchased from various non-affiliated banking organizations. Former MidWestOne has engaged in this activity since 1988. The loan pool investment balance shown as an asset on the Company’s Statement of Condition represented the discounted purchase cost of the loan pool participations. The Company acquired new loan pool participations totaling $18.6 million during the third quarter of 2008. As of September 30, 2008, the categories of loans by collateral type in the loan pools were commercial real estate - 54%, commercial loans - 13%, agricultural and agricultural real estate - 8%, single-family residential real estate - 13% and other loans - 12%. The Company has minimal exposure in loan pools to consumer real estate subprime credit or to construction and real estate development loans.

The loans in the pools provide some geographic diversification to the Company’s balance sheet. As of September 30, 2008, loans in the southeast portion of the United States represented approximately 40% of the total. The northeast was the next largest area with 33%, central with 22%, southwest had 3% and northwest was 2%. The highest concentration of assets is in Florida at approximately 19% of the basis total, with the next highest state level being Ohio at 10% and then Pennsylvania and New Jersey both at 8%. As of September 30, 2008, approximately 65% of the loans were contractually current or less than 90 days past-due, while 35% 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 35% contractually past-due includes loans in litigation and foreclosed property. As of September 30, 2008, loans in litigation totaled approximately $21.4 million, while foreclosed property was approximately $5.5 million. As of September 30, 2008, the Company’s investment basis in loan pool participations was approximately 54.4% of the “face” amount of the underlying loans.

Goodwill and Other Intangible Assets

Goodwill totaled $27.0 million as of September 30, 2008 and $4.4 million as of December 31, 2007. The increase in goodwill was due to the Merger. As of September 30, 2008 the Company has not finalized the valuation of certain tangible and intangible assets given the timing of the transaction. The Company expects to finalize the valuation in the fourth quarter of 2008; thus the allocation of purchase price is subject to refinement.

Goodwill is subject to impairment testing annually under the provisions of Financial Accounting Standards Board Statement No. 142 (“SFAS 142”). The Company has historically tested goodwill for impairment at the end on the third quarter. Goodwill was determined to not be impaired as of September 30, 2008, and no impairment write-down of goodwill was required. Management will continue to evaluate goodwill for potential impairment given the uncertain business climate and the level of the Company’s stock price relative to book value.

Other intangible assets increased to $13.5 million as of September 30, 2008 as a result of the merger. Amortization of intangible assets is recorded using an accelerated method based on the estimated life of the core deposit intangible. Projections of amortization expense are based on existing asset balances and the remaining useful lives. The following table summarizes the amounts and carrying values of intangible assets as of September 30, 2008 and December 31, 2007.

Deposits

Total deposits as of September 30, 2008 were $1.12 billion compared with $526.6 million as of December 31, 2007, an increase of $593.4 million, which was largely due to the Merger. Certificates of deposit were the largest category of deposits at September 30, 2008 representing approximately 50% of total deposits. 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 the Company’s retention of certificates of deposit.

Federal Home Loan Bank Advances

The Company had approximately $2.3 million of federal funds purchased at September 30, 2008. The Company had no federal funds purchased as of December 31, 2007. During the first nine months of 2008, the Company had an average balance of federal funds purchased of $12.0 million. Advances from the Federal Home Loan Bank totaled $158.7 million as of September 30, 2008 compared with $47.0 million as of December 31, 2007. The increase in Federal Home Loan Bank advances was mainly due to the Merger. The Company also increased its utilization of Federal Home Loan Bank advances to take advantage of low interest rates on longer-term advance funding. The Company utilizes Federal Home Loan Bank advances as a supplement to customer deposits to fund earning assets and to assist in managing interest rate risk.

 

 

Long-term Debt

Nonperforming Assets

The Company’s nonperforming assets totaled $12.6 million (1.14% of total loans) as of September 30, 2008, compared to $11.0 million on June 30, 2008 (1.15% of total loans) and $1.3 million (.32% of total loans) as of December 31, 2007. All nonperforming asset totals and related ratios exclude the loan pool participations. The following table presents the categories of nonperforming assets as of September 30, 2008 compared with June 30, 2008 and December 31, 2007: