MIDWESTONE FINANCIAL GROUP, INC. – 10-Q – 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 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 an 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 2012 Annual Report on Form 10-K. Results of operations for the three month period ended March 31, 2013 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, 2012.  

Comparison of Operating Results for the Three Months Ended March 31, 2013 and

March 31, 2012

Summary

 For the three months ended March 31, 2013 we earned net income of $4.8 million, compared with $4.4 million, for the three months ended March 31, 2012, an increase of 8.1%. Basic and diluted earnings per common share for the first quarter of 2013 were each $0.56 versus $0.52 for each in the first quarter of 2012. Our annualized return on average assets (the "ROAA") for the first three months of 2013 was 1.09% compared with a return of 1.05% for the same period in 2012. Our annualized return on average shareholders' equity (the "ROAE") was 11.09% for the three months ended March 31, 2013 versus 11.29% for the three                                         30

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  months ended March 31, 2012. The annualized return on average tangible equity (the "ROATE") was 11.98% for the first quarter of 2013 compared with 12.41% for the same period in 2012. The following table presents selected financial results and measures for the first quarter of 2013 and 2012.                                                       Three Months Ended March 31, ($ amounts in thousands)                                 2013               2012 Net Income                                         $       4,790$       4,432 Average Assets                                         1,774,931           1,691,513 Average Shareholders' Equity                             175,213             157,933 Return on Average Assets* (ROAA)                            1.09 %              1.05 % Return on Average Shareholders' Equity* (ROAE)             11.09 %             11.29 % Return on Average Tangible Equity* (ROATE)                 11.98 %             12.41 % Total Equity to Assets (end of period)                      9.90 %              9.23 % Tangible Equity to Tangible Assets (end of period)          9.43 %              8.70 % * Annualized   We have traditionally disclosed certain non-GAAP ratios to evaluate and measure our financial condition, including our return on average tangible equity and the ratio of our tangible 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)                                 2013                   2012 Net Income: Net income                             $           4,790       $           4,432 Average Tangible Equity: Average total shareholders' equity     $         175,213       $         157,933 Less: Average goodwill and intangibles            (9,369 )               (10,129 ) Average tangible equity                $         165,844       $         147,804 ROATE (annualized)                                 11.98 %                 12.41 %                                        As of March 31, (in thousands)                     2013          2012 Tangible Equity: Total shareholders' equity        176,865       159,270 Intangibles                        (9,303 )     (10,053 ) Tangible equity                   167,562       149,217 Tangible Assets: Total assets                    1,785,645     1,725,844 Less: Intangibles                  (9,303 )     (10,053 ) Tangible assets                 1,776,342     1,715,791

Tangible equity/tangible assets 9.43 % 8.70 %

     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. Our net interest income for the three months ended March 31, 2013 increased $0.5 million to $13.8 million compared with $13.2 million for the three months ended March 31, 2012. Our total interest income of $17.2 million was $0.3 million lower in the first quarter of 2013 compared with the same period in 2012. Most of the decrease in total interest income was attributable to                                         31

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  a decrease in loan interest income due to the general low interest rate environment. This decrease was partially offset by increased loan pool participation income due to the payoff of several loans in the portfolio at a value greater than their net book value. Income from investment securities was relatively unchanged, despite an increase in the average balance of investment securities, reflecting reinvestment of maturing securities and purchases of new securities at lower market interest rates.The decrease in total interest income was more than offset by reduced interest expense on deposits and other interest-bearing liabilities, including FHLB borrowings. Total interest expense for the first quarter of 2013 decreased $0.9 million, or 20.3%, compared with the same period in 2012, due primarily to lower average interest rates in 2013. Our net interest margin on a tax-equivalent basis for the first quarter of 2013 was relatively stable at 3.51% compared with 3.52% in the first quarter of 2012. 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 4.33% for the first quarter of 2013 from 4.60% for the first quarter of 2012. 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 three months of 2013 to 0.98% from 1.26% for the first three months of 2012, due to the continued repricing of new time deposits and other interest-bearing liabilities, including FHLB borrowings at lower interest rates.                                         32

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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 three months ended March 31, 2013 and 2012. 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,                                                2013                                      2012                                                Interest     Average                      Interest     Average                                  Average        Income/      Rate/         Average        Income/      Rate/                                  Balance        Expense      Yield         Balance        Expense      Yield (dollars in thousands) Average earning assets: Loans (1)(2)(3)               $ 1,034,560$  12,308       4.82 %    $   981,352$  13,275       5.44 % Loan pool participations (4)       36,590         1,080      11.97           50,609           454       3.61 Investment securities: Taxable investments               440,320         2,630       2.42          401,809         2,752       2.75 Tax exempt investments (2)        166,393         1,965       4.79          146,222         1,775       4.88 Total investment securities       606,713         4,595       3.07          548,031         4,527       3.32 Federal funds sold and interest-bearing balances           7,738             5       0.26           18,352            10       0.22 Total interest-earning assets $ 1,685,601$  17,988       4.33 %    $ 1,598,344$  18,266       4.60 %  Cash and due from banks            22,046                                    21,896 Premises and equipment             25,574                                    26,350 Allowance for loan losses         (18,388 )                                 (18,067 ) Other assets                       60,098                                    62,990 Total assets                  $ 1,774,931$ 1,691,513  Average interest-bearing liabilities: Savings and interest-bearing demand deposits               $   675,885$     707       0.42 %    $   580,231$     866       0.60 % Certificates of deposit           525,957         1,872       1.44          572,494         2,363       1.66 Total deposits                  1,201,842         2,579       0.87        1,152,725         3,229       1.13 Federal funds purchased and repurchase agreements              63,328            45       0.29           51,821            58       0.45 Federal Home Loan Bank borrowings                        121,856           692       2.30          138,643           803       2.33 Long-term debt and other           16,038            83       2.10           16,131           177       4.41 Total borrowed funds              201,222           820       1.65          206,595         1,038       2.02 Total interest-bearing liabilities                   $ 1,403,064$   3,399       0.98 %    $ 1,359,320$   4,267       1.26 %  Net interest spread(2)                                        3.35 %                                    3.34 %  Demand deposits                   182,453                                   157,877 Other liabilities                  14,201                                    16,383 Shareholders' equity              175,213                                   157,933 Total liabilities and shareholders' equity          $ 1,774,931$ 1,691,513  Interest income/earning assets (2)                    $ 1,685,601$  17,988       4.33 %    $ 1,598,344$  18,266       4.60 % Interest expense/earning assets                        $ 1,685,601$   3,399       0.82 %    $ 1,598,344$   4,267       1.08 % Net interest margin (2)(5)                    $  14,589       3.51 %                    $  13,999       3.52 %  Non-GAAP to GAAP Reconciliation: Tax Equivalent Adjustment: Loans                                         $     194$     195 Securities                                          604                                       556 Total tax equivalent adjustment                                          798                                       751 Net Interest Income                           $  13,791$  13,248         (1) Loan fees included in interest income are not material. 

Computed on a tax-equivalent basis, assuming a federal income tax rate

(2) of 34%.

Non-accrual loans have been included in average loans, net of unearned

     (3) discount.          Includes interest income and discount realized on loan pool      (4) participations.          Net interest margin is tax-equivalent net interest income as a      (5) percentage of average earning assets.                                            33

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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 during the three months ended March 31, 2013, compared to the same period in 2012, 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,                                                                   2013

Compared to 2012 Change due to

                                                                 Volume              Rate/Yield         Net (in thousands) Increase (decrease) in interest income: Loans, tax equivalent                                      $       3,611$      (4,578 )$  (967 ) Loan pool participations                                            (837 )               1,463          626 Investment securities: Taxable investments                                                1,123                (1,245 )       (122 ) Tax exempt investments                                               400                  (210 )        190 Total investment securities                                        1,523                (1,455 )         68 Federal funds sold and interest-bearing balances                     (15 )                  10           (5 ) Change in interest income                                          4,282                (4,560 )       (278 ) Increase (decrease) in interest expense: Savings and interest-bearing demand deposits                         684                  (843 )       (159 ) Certificates of deposit                                             (187 )                (304 )       (491 ) Total deposits                                                       497                (1,147 )       (650 ) Federal funds purchased and repurchase agreements                     59                   (72 )        (13 ) Federal Home Loan Bank borrowings                                   (100 )                 (11 )       (111 ) Other long-term debt                                                  (1 )                 (93 )        (94 ) Total borrowed funds                                                 (42 )                (176 )       (218 ) Change in interest expense                                           455                (1,323 )       (868 ) Change in net interest income                              $       3,827$      (3,237 )$   590 Percentage change in net interest income over prior period                                             4.21 %   Interest income and fees on loans on a tax-equivalent basis decreased $1.0 million, or 7.3%, in the first quarter of 2013 compared to the same period in 2012. Average loans were $53.2 million, or 5.4%, higher in the first quarter of 2013 compared with 2012. 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 5.44% in the first quarter of 2012 to 4.82% in first quarter of 2013, 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 $1.1 million for the first quarter of 2013 compared with $0.5 million for the first quarter of 2012, an increase of $0.6 million. Average loan pool participations were $14.0 million, or 27.7%, lower in the first quarter of 2013 compared with 2012. The decrease in average loan pool volume was due to loan pay downs and charge-offs, and will continue as the Company exits this line of business. The net "all-in" yield on loan pool participations was 11.97% for the first quarter of 2013, up from 3.61% for the same period of 2012. The net yield was higher in the first quarter of 2013 than for the first quarter of 2012 primarily due to the payoff of several loans in the portfolio at a value greater than their net book value, a trend we do not expect to continue in the future, despite recent results, as the percentage of creditworthy borrowers in the portfolio decreases. Interest income on investment securities on a tax-equivalent basis totaled $4.6 million in the first three months of 2013 compared with $4.5 million for the same period of 2012. The average balance of investments in the first quarter of 2013 was $606.7 million compared with $548.0 million in the first quarter of 2012, an increase of $58.7 million, or 10.7%. The increase in average balance resulted from our investment in securities of a portion of the excess liquidity provided by a combination of decreasing cash and cash equivalents and loan pool balances. The tax-equivalent yield on our investment portfolio in the first                                         34

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  quarter of 2013 decreased to 3.07% from 3.32% in the comparable period of 2012, reflecting reinvestment of maturing securities and purchases of new securities at lower market interest rates. Interest expense on deposits was $0.7 million, or 20.1%, lower in the first three months of 2013 compared with the same period in 2012, mainly due to the decrease in interest rates being paid during 2013. The weighted average rate paid on interest-bearing deposits was 0.87% in the first quarter of 2013 compared with 1.13% in the first quarter of 2012. This decline reflects the overall reduction in 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 three months of 2013 increased $49.1 million, or 4.3%, compared with the same period in 2012. Interest expense on borrowed funds was $0.2 million lower in the first three months of 2013 compared with the same period in 2012. Interest on borrowed funds totaled $0.8 million for the first quarter of 2013. Average borrowed funds for the first quarter of 2013 were $5.4 million lower compared with the same period in 2012. This decrease was due primarily to a decrease in the level of FHLB borrowings, somewhat offset by an increase in federal funds purchased and repurchase agreements. The weighted average rate on borrowed funds decreased to 1.65% for the first quarter of 2013 compared with 2.02% for the first quarter of 2012, reflecting the replacement of maturing higher-rate borrowings with those in the current lower-rate environment. Provision for Loan Losses We recorded a provision for loan losses of $0.2 million in the first quarter of 2013 compared with a $0.6 million provision in the first quarter of 2012, a decrease of $0.4 million, or 65.5%. Net loans recovered in the first quarter of 2013 totaled $0.1 million compared with net loans charged off of $0.6 million in the first quarter of 2012. The decreased provision reflects management's belief that the regional economy has generally stablized and is showing signs of renewed growth, and the effects of a significant loan recovery during the first quarter of 2013. We believe that the allowance for loan losses was appropriate based on the inherent risk in the portfolio as of March 31, 2013; 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 higher 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. Noninterest Income                                                        Three Months Ended March 31,                                                2013         2012       $ Change      % Change (dollars in thousands) Trust, investment, and insurance fees       $  1,349$  1,253$      96         7.7  % Service charges and fees on deposit accounts                                         707          767           (60 )      (7.8 ) Mortgage origination and loan servicing fees                                           1,044          767           277        36.1 Other service charges, commissions and fees      572          710          (138 )     (19.4 ) Bank owned life insurance income                 231          230             1         0.4 Gain on sale or call of available for sale securities                                        80          316          (236 )     (74.7 ) Gain (loss) on sale of premises and equipment                                         (2 )        158          (160 )     NM Total noninterest income                    $  3,981$  4,201$    (220 )      (5.2 )% Noninterest income as a % of total revenue*     22.1 %       22.0 % NM - Percentage change not considered meaningful. * - Total revenue is net interest income plus noninterest income minus gain/loss on securities and premises and equipment.   Total noninterest income decreased $0.2 million for the first quarter of 2013 compared with the same period for 2012. The decrease in 2013 is primarily due to the decreased net gains on the sale or call of securities available for sale, the net loss on sale of premises and equipment, and a decrease in other service charges, commissions and fees between the comparative periods. Other service charges, commissions and fees decreased by $0.1 million, or 19.4%, to $0.6 million for the three months ended March 31, 2013, compared to $0.7 million for the same period last year, due to a general decline in fee levels. Net gains on the sale or call of securities available for sale for the first quarter of 2013 were $0.1 million, compared to $0.3 million for the same period of 2012. The gain was attributable to the gain on sale of a bond due to recent credit downgrades. Net gains on the sale of premises                                         35

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  and equipment decreased by $0.2 million, to a small net loss, as the first quarter of 2012 included a gain on the sale of vacant property originally acquired for a potential bank branch location. These decreases were partially offset by an increase in mortgage origination and loan servicing fees of $0.3 million, or 36.1%, to $1.0 million for the three months ended March 31, 2013, compared to $0.8 million for the same period last year. Going forward we expect that maintaining this level of fee income will be more dependent on the volume of new loan originations and less on refinance transactions, as many creditworthy borrowers have already taken advantage of the current historically low market rates. Trust, investment, and insurance fees increased $0.1 million, or 7.7%, primarily due to increased sales efforts in these business areas. Management's strategic goal is for noninterest income to constitute 30% of total revenues (net interest income plus noninterest income) over time. For the three months ended March 31, 2013, noninterest income comprised 22.1% of total revenues, compared with 22.0% for the same period in 2012. While our emphasis on trust, investment, and insurance fees has shown some improvement in this category of noninterest income, the effects of decreased service charges and fees on deposit accounts, and other service charges, commissions and fees, has significantly inhibited material improvement. Management continues to evaluate options for increasing noninterest income. Noninterest Expense                                              Three Months Ended March 31,                                       2013        2012       $ Change    % Change (dollars in thousands) Salaries and employee benefits      $  6,293$  5,972$    321        5.4  % Net occupancy and equipment expense    1,688       1,644          44        2.7 Professional fees                        683         732         (49 )     (6.7 ) Data processing expense                  391         446         (55 )    (12.3 ) FDIC insurance expense                   294         310         (16 )     (5.2 ) Amortization of intangible assets        166         194         (28 )    (14.4 ) Other operating expense                1,479       1,505         (26 )     (1.7 ) Total noninterest expense           $ 10,994$ 10,803$    191        1.8  %   Noninterest expense for the first quarter of 2013 was $11.0 million compared with $10.8 million for the first quarter of 2012, an increase of $0.2 million, or 1.8%. The primary reason for the increase in noninterest expense was an increase in salaries and employee benefits of $0.3 million, or 5.4%, primarily due to annual salary increases for employees that were effective at the beginning of 2013, and increased benefit costs.With the exception of a small increase in occupancy expense, all other noninterest expense categories experienced a decline for the first quarter of 2013, compared with the first quarter of 2012. Income Tax Expense Our effective tax rate, or income taxes divided by income before taxes, was 27.2% for the first quarter of 2013, and 26.9% for the same period of 2012. Income tax expense increased to $1.8 million in the first quarter of 2013 compared with $1.6 million for the same period of 2012. Income tax expense and the effective tax rate increased due 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, 2010March 28, 2013 the FDIC announced that the balance of any prepaid assessments would be returned to institutions by June 30, 2013. As of March 31, 2013, $3.7 million of the Bank's prepaid assessments balance remained, and the Company expects to receive substantially all of this balance back.  FINANCIAL CONDITION Our total assets remained steady at $1.79 billion as of March 31, 2013, the same as at December 31, 2012. Increased balances in both available for sale securities and loans were offset by a decrease in cash and cash equivalents and loan pool participations. Deposit balances and repurchase agreements both decreased, while FHLB borrowings and federal funds purchased increased. Total deposits at March 31, 2013 were $1.37 billion compared with $1.40 billion at December 31, 2012, down $26.1 million,                                         36

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  or 1.9%, primarily due to decreases in commercial and business accounts, mainly in commercial NOW and money market accounts. FHLB borrowings increased $32.0 million from $120.1 million at December 31, 2012, to $152.1 million at March 31, 2013, while repurchase agreements were $54.3 million at March 31, 2013, a decrease of $14.5 million, from $68.8 million at December 31, 2012. Investment Securities Investment securities available for sale totaled $572.5 million as of March 31, 2013. This was an increase of $14.9 million, or 2.7%, from December 31, 2012. The increase was primarily due to investment maturities or calls during the period of $20.3 million being more than offset by security purchases of $37.2 million during the period. Due to the increased uncertainty that Basel III capital requirements will be adopted as originally proposed, management decided that placing new investment security purchases in the available for sale classification was the most prudent course of action. Investment securities classified as held to maturity were relatively unchanged at $32.5 million as of March 31, 2013. The investment portfolio consists mainly of U.S. government agency securities (11.4%), mortgage-backed securities (42.9%), and obligations of states and political subdivisions (39.7%). As of March 31, 2013, 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" to our consolidated financial statements 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, 2013             December 31, 2012                                     Balance      % of Total      Balance      % of Total (dollars in thousands) Agricultural                      $    80,495          7.7 %   $    84,726          8.2 % Commercial and industrial             241,347         23.2         237,193         22.9 Credit cards                            1,040          0.1           1,001          0.1 Overdrafts                                396          0.1             759          0.1 Commercial real estate: Construction and development           81,993          7.9          86,794          8.4 Farmland                               79,839          7.7          81,063          7.8 Multifamily                            47,529          4.6          47,758          4.6 Commercial real estate-other          235,955         22.6         224,369         21.7 Total commercial real estate          445,316         42.8         439,984         42.5 Residential real estate: One- to four- family first liens      200,504         19.2         197,742  

19.1

One- to four- family junior liens 53,444 5.1 55,134

        5.3 Total residential real estate         253,948         24.3         252,876         24.4 Consumer                               19,241          1.8          18,745          1.8 Total loans                       $ 1,041,783        100.0 %   $ 1,035,284        100.0 %   Total bank loans (excluding loan pool participations and loans held for sale) increased by $6.5 million, to $1.04 billion as of March 31, 2013 as compared to December 31, 2012. As of March 31, 2013, our bank loan (excluding loan pool participations) to deposit ratio was 75.8% compared with a year-end 2012 bank loan to deposit ratio of 74.0%. We anticipate that the loan to deposit ratio will remain relatively stable in future periods, with loans showing overall measured growth and deposits remaining 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" to our consolidated financial statements for additional information related to loans.                                         37

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  Loan Pool Participations As of March 31, 2013, we had loan pool participations, net, totaling $32.4 million, down from $35.7 million at December 31, 2012. 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, 2013, the categories of loans by collateral type in the loan pool participations were commercial real estate - 66%, commercial loans - 5%, single-family residential real estate - 13% and other loans - 16%. We have minimal exposure in the loan pool participations 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" to our consolidated financial statements for additional information related to loan pool participations. 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, 2013, such cost basis was $34.5 million, while the contractual outstanding principal amount of the underlying loans as of such date was approximately $93.2 million, resulting in an investment basis of 37.0% 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. As of March 31, 2013, loans in the southeast region of the United States represented approximately 44% of the total. The northeast was the next largest area with 32%, the central region with 20%, the southwest region with 3% and the northwest represented a minimal amount of the portfolio at 1%. The highest concentration of assets is in Florida at approximately 20% of the basis total, with the next highest state level being Ohio at 11%, then New Jersey at approximately 9%. As of March 31, 2013, approximately 66% of the loans were contractually current or less than 90 days past due, while 34% 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 34% contractually past due includes loans in litigation and foreclosed property. As of March 31, 2013, loans in litigation totaled approximately $3.8 million, while foreclosed property was approximately $5.2 million. Intangible Assets Intangible assets decreased to $9.3 million as of March 31, 2013 from $9.5 million as of December 31, 2012 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, 2013.                               Gross                        Unamortized                              Carrying     Accumulated       Intangible                               Amount      Amortization        Assets (in thousands) March 31, 2013 Intangible assets: Insurance agency intangible $   1,320    $         759    $         561 Core deposit premium            5,433            3,933            1,500 Trade name intangible           7,040                -            7,040 Customer list intangible          330              128              202 Total                       $  14,123$       4,820$       9,303   Deposits Total deposits as of March 31, 2013 were $1.37 billion compared with $1.40 billion as of December 31, 2012. Certificates of deposit were the largest category of deposits at March 31, 2013, representing approximately 37.2% of total deposits. Total certificates of deposit were $511.5 million at March 31, 2013, down $23.9 million, or 4.5%, from $535.4 million at December 31, 2012. Included in total certificates of deposit at March 31, 2013 was $20.3 million of brokered deposits in the Certificate of Deposit Account Registry Service (CDARS) program, a decrease of $2.2 million, or 9.7%, from the $22.4 million at December 31, 2012. 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 $590.9 million at March 31, 2013, an increase of $8.6 million, or 1.5%, from $582.3 million at December 31, 2012. 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, 2013 was $14.7 million of brokered deposits in the Insured Cash Sweep (ICS) program, a decrease of $6.0 million, or 29.1%, from the $20.8 million at December 31, 2012. The decrease during the period was                                         38

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  primarily due to the reduction in funds held for one depositor on a short term basis. We expect gradual growth in ICS balances as we market the account type to a wider range of customers. Approximately 84.5% of our total deposits are considered "core" deposits. Federal Home Loan Bank Borrowings FHLB borrowings totaled $152.1 million as of March 31, 2013 compared with $120.1 million as of December 31, 2012. We utilize FHLB borrowings as a supplement to customer deposits to fund earning assets and to assist in managing interest rate risk. 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, 2013, unchanged from December 31, 2012. 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 supporting the trust preferred securities have a maturity date of December 15, 2042, and do not require any principal amortization. They became callable on December 15, 2012 at par, and are callable, in whole or in part, on any interest payment date thereafter, at the Company's option. The interest rate was fixed on $7.8 million of the debt until December 15, 2012, at an interest rate of 6.48%, after which the rate became variable, as is the case with the remaining balance of the debt. The variable rate is based on the three month LIBOR rate plus 1.59% with interest payable quarterly. At March 31, 2013, the interest rate was at 1.87%. Nonperforming Assets The following table sets forth information concerning nonperforming loans by class of financing receivable at March 31, 2013 and December 31, 2012:                                          90 Days or                                           More Past                                            Due and                                             Still                                           Accruing                                           Interest      Restructured       Nonaccrual        Total (in thousands) March 31, 2013 Agricultural                             $       -     $       3,209     $         25     $   3,234 Commercial and industrial                       60             1,063              548         1,671 Credit cards                                     6                 -                -             6 Overdrafts                                       -                 -                -             - Commercial real estate: Construction and development                   243                77              149           469 Farmland                                         -             2,316               32         2,348 Multifamily                                      -                 -                -             - Commercial real estate-other                     -               397            1,003         1,400 Total commercial real estate                   243             2,790            1,184         4,217 Residential real estate: One- to four- family first liens               301               472              444         1,217 One- to four- family junior liens               55               151              148           354 Total residential real estate                  356               623              592         1,571 Consumer                                         2                23               36            61 Total                                    $     667$       7,708$      2,385$  10,760                                           39

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  Table of Contents                                           90 Days or                                           More Past                                            Due and                                             Still                                           Accruing                                           Interest      Restructured       Nonaccrual        Total (in thousands) December 31, 2012 Agricultural                             $       -     $       3,323     $         64     $   3,387 Commercial and industrial                       85               953              757         1,795 Credit cards                                    30                 -                -            30 Overdrafts                                       -                 -                -             - Commercial real estate: Construction and development                     -                78              149           227 Farmland                                         -             2,316               33         2,349 Multifamily                                      -                 -                -             - Commercial real estate-other                    67                 -            1,128         1,195 Total commercial real estate                    67             2,394            1,310         3,771 Residential real estate: One- to four- family first liens               311               313              550         1,174 One- to four- family junior liens               75               138              223           436 Total residential real estate                  386               451              773         1,610 Consumer                                         4                23               34            61 Total                                    $     572$       7,144$      2,938$  10,654   Our nonperforming assets totaled $13.8 million as of March 31, 2013, a decrease of $0.1 million compared to December 31, 2012. The balance of other real estate owned at March 31, 2013 was $3.0 million, down from $3.3 million at year-end 2012.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, 2013. 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. Nonperforming loans totaled $10.8 million (1.03% of total bank loans) as of March 31, 2013, compared to $10.7 million (1.03% of total bank loans) as of December 31, 2012. See Note 5 "Loans Receivable and the Allowance for Loan Losses" to our consolidated financial statements for additional information related to nonperforming assets. At March 31, 2013, nonperforming loans consisted of $2.4 million in nonaccrual loans, $7.7 million in troubled debt restructures and $0.7 million in loans past due 90 days or more and still accruing. This compares with $2.9 million, $7.1 million and $0.6 million, respectively, as of December 31, 2012. Nonaccrual loans decreased $0.6 million, or 18.8%, at March 31, 2013 compared to December 31, 2012. The decrease in nonaccrual loans was primarily due to normal collection activity. The Company experienced a $0.6 million, or 7.9%, increase in restructured loans, from December 31, 2012 to March 31, 2013, primarily resulting from the addition of five loans (one commercial and industrial, two commercial real estate, and two residential real estate), along with two previously restructured loans (one commercial and one residential real estate) that were classified as TDRs in the quarter due to payment default. During the same period, loans past due 90 days or more and still accruing interest were relatively unchanged from December 31, 2012 to March 31, 2013. Additionally, loans past-due 30 to 89 days (not included in the nonperforming loan totals) were $6.5 million as of March 31, 2013 compared with $6.1 million as of December 31, 2012, an increase of $0.4 million or 5.3%. 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;                                         40

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  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. 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 in the previous table. During the three months ended March 31, 2013, the Company restructured five loans by granting concessions to borrowers experiencing financial difficulties. A commercial and industrial loan with a balance of $0.2 million and two commercial real estate loans totaling $0.2 million were granted amortization or maturity concessions, while a residential first lien and a residential junior lien totaling $0.1 million were both granted interest rate concessions. Two previously restructured loans (a commercial and industrial loan and a residential first lien totaling $0.3 million) were classified as TDRs in the quarter due to payment defaults.                                         41

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  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, 2013 and December 31, 2012 is as follows:                                                         March 31,         December 31,                                                            2013               2012 (in thousands) Restructured Loans (TDRs): In compliance with modified terms                    $        7,708     $   

7,144

 Not in compliance with modified terms - on nonaccrual status                                               548                551 Total restructured loans                             $        8,256$        7,695   Allowance for Loan Losses Our allowance for loan losses ("ALLL") as of March 31, 2013 was $16.3 million, which was 1.56% of total bank loans (excluding loan pool participations) as of that date. This compares with an ALLL of $16.0 million as of December 31, 2012, which was 1.54% of total bank loans as of that date. Gross charge-offs for the first three months of 2013 totaled $0.4 million, while recoveries of previously charged-off loans totaled $0.5 million. Annualized net loan recoveries to average bank loans for the first three months of 2013 was 0.04% compared to net loan charge offs 0.21% for the year ended December 31, 2012. As of March 31, 2013, the ALLL was 151.1% of nonperforming loans compared with 149.8% as of December 31, 2012. Based on the inherent risk in the loan portfolio, we believe that as of March 31, 2013, 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 the Allowance for Loan Losses" to our consolidated financial statements for additional information related to the allowance for loan losses. There were no changes to our ALLL calculation during the first three months of 2013. Classified and impaired loans are reviewed per the requirements of FASB ASC Topics 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, 2013, there were seven owner-occupied 1-4 family loans with a LTV of 100% or greater. In addition, there were 38 home equity loans without credit enhancement that had LTV of 100% or greater. We have the first lien on 18 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, 2013, 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. Capital Resources Total shareholders' equity was 9.90% of total assets as of March 31, 2013 and was 9.70% as of December 31, 2012. Tangible equity to tangible assets was 9.43% as of March 31, 2013 and 9.22% as of December 31, 2012. Our Tier 1 capital to risk-weighted assets ratio was 13.08% as of March 31, 2013 and was 12.78% as of December 31, 2012. 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, 2013, the Company and the Bank met all capital adequacy requirements to which we were subject. As of that date, the Bank was "well capitalized" under regulatory prompt corrective action provisions. Basel III is currently the subject of notices of proposed rulemakings released in June of 2012 by the respective U.S. federal banking agencies. The comment period for these notices of proposed rulemakings ended on October 22, 2012, but final regulations have not yet been released. Basel III was intended to be implemented beginning January 1, 2013 and to be fully-phased in on a global basis on January 1, 2019. However, on November 9, 2012, the U.S. federal bank regulatory agencies announced that the implementation of the proposed rules to effect Basel III in the United States was indefinitely delayed. Basel III would require capital to be held in the form of tangible common equity, generally increase the required capital ratios, phase out certain kinds of intangibles treated as capital and certain types of instruments, like trust preferred securities, and change the risk weightings of assets used to determine required capital ratios.                                         42

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  We have traditionally disclosed certain non-GAAP ratios and amounts to evaluate and measure our financial condition, including our Tier 1 capital to risk-weighted assets ratios. We believe this ratio provides 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.                                                        At March 31,      At December 31, (in thousands)                                             2013                2012 Tier 1 capital Total shareholders' equity                           $      176,865$        173,932 Plus: Long term debt (qualifying restricted core capital)                                                     15,464         

15,464

      Net unrealized gains on securities available for sale                                                     (7,253 )             (8,180 ) Less: Disallowed Intangibles                                 (9,471 )             (9,617 ) Tier 1 capital                                       $      175,605$        171,599 Risk-weighted assets                                 $    1,342,860$      1,343,194 Tier 1 capital to risk-weighted assets                        13.08 %       

12.78 %

    On February 15, 2013, 15,700 restricted stock units were granted to certain officers of the Company. During the first three months of 2013, 17,295 shares were issued in connection with the vesting of previously awarded grants of restricted stock units, of which 1,174 shares were surrendered by grantees to satisfy tax requirements. In addition, 2,502 shares were issued in connection with the exercise of previously issued stock options, with no 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:                                                                             

To Be Well Capitalized

                                                            For Capital 

Adequacy Under Prompt Corrective

                                         Actual                   Purposes               Action Provisions                                   Amount       Ratio        Amount        Ratio         Amount         Ratio (dollars in thousands) At March 31, 2013 Consolidated: Total capital/risk based        $ 192,478      14.33 %   $   107,429       8.00 %         N/A           N/A Tier 1 capital/risk based         175,604      13.08          53,714       4.00           N/A           N/A Tier 1 capital/adjusted average   175,604      10.01          70,172       4.00           N/A           N/A MidWestOne Bank: Total capital/risk based        $ 171,104      12.86 %   $   106,447       8.00 %   $     133,058      10.00 % Tier 1 capital/risk based         154,448      11.61          53,223       4.00            79,835       6.00 Tier 1 capital/adjusted average   154,448       8.87          69,682       4.00            87,103       5.00 At December 31, 2012 Consolidated: Total capital/risk based        $ 188,427      14.03 %   $   107,456       8.00 %         N/A           N/A Tier 1 capital/risk based         171,599      12.78          53,728       4.00           N/A           N/A Tier 1 capital/adjusted average   171,599       9.82          69,932       4.00           N/A           N/A MidWestOne Bank: Total capital/risk based        $ 169,819      12.77 %   $   106,398       8.00 %   $     132,998      10.00 % Tier 1 capital/risk based         153,174      11.52          53,199       4.00            79,799       6.00

Tier 1 capital/adjusted average 153,174 8.83 69,386 4.00

            86,733       5.00   

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 $21.9 million as of March 31, 2013, compared with $47.2 million as of December 31, 2012. Investment securities classified as available for sale, totaling $572.5 million and $557.5 million as of March 31, 2013 and December 31, 2012, 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 FHLB 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, 2013 to meet the needs of borrowers and depositors.                                         43

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  Our principal sources of funds were FHLB borrowings, proceeds from the maturity and sale of investment securities, principal repayments on loan pool participations, 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 of comparable maturity. 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, 2013, 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 were issued with a 35-year term. The interest rate on the debt is variable rate, based on the three month LIBOR rate plus 1.59% with interest payable quarterly. At March 31, 2013, the interest rate was at 1.87%. 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, 2013, outstanding commitments to extend credit totaled approximately $255.5 million. We have established a reserve of $0.2 million, which represents our estimate of probable losses as a result of these transactions. This reserve is not part of our allowance for loan losses. Commitments under standby and performance letters of credit outstanding aggregated $4.3 million as of March 31, 2013. 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, 2013, there were approximately $9.6 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.