MOFG 10-Q Quarterly Report Sept. 30, 2021

MIDWESTONE FINANCIAL GROUP, INC.

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mofg-20210930

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q


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

For the quarterly period ended September 30, 2021


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

For the transition period from to


			Commission file number			001-35968

MIDWESTONE FINANCIAL GROUP, INC.

(Exact name of Registrant as specified in its charter)


Iowa						42-1206172
(State or other jurisdiction of incorporation or organization)						(I.R.S. Employer Identification No.)

102 South Clinton Street , Iowa City , IA 52240						( 319 ) 356-5800
(Address of principal executive offices, including zip code)						(Registrant’s telephone number, including area code)

Securities registered pursuant to Section 12(b) of the Act:

Title of each class

Trading Symbol(s)

Name of each exchange on which registered

Common stock, $1.00 par value

MOFG

The Nasdaq Stock Market LLC

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. x Yes ☐ No

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). x Yes ☐ No

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer

☐

Accelerated filer

Non-accelerated filer

☐

Smaller reporting company

☐

Emerging growth company

☐

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) 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). ☐ Yes x No

As of November 2, 2021, there were 15,691,751 shares of common stock, $1.00 par value per share, outstanding.

Table of Contents

MIDWEST ONE FINANCIAL GROUP, INC.

Form 10-Q Quarterly Report

Table of Contents

Page No.

PART I

Item 1.

Financial Statements (unaudited)

Consolidated Balance Sheets

Consolidated Statements of Income

Consolidated Statements of Comprehensive Income

Consolidated Statements of Shareholders' Equity

Consolidated Statements of Cash Flows

Notes to Consolidated Financial Statements

Item 2.

Management's Discussion and Analysis of Financial Condition and Results of Operations

Item 3.

Quantitative and Qualitative Disclosures about Market Risk

Item 4.

Controls and Procedures

Part II

Item 1.

Legal Proceedings

Item 1A.

Risk Factors

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

Item 3.

Defaults Upon Senior Securities

Item 4.

Mine Safety Disclosures

Item 5.

Other Information

Item 6.

Exhibits

Signatures

Table of Contents

PART I – FINANCIAL INFORMATION

Glossary of Acronyms, Abbreviations, and Terms

As used in this report, references to "MidWest One ", "we", "our", "us", the "Company", and similar terms refer to the consolidated entity consisting of MidWest One Financial Group, Inc. and its wholly-owned subsidiaries. MidWest One Bank or the "Bank" refers to MidWest One 's bank subsidiary, MidWest One Bank.

The acronyms, abbreviations, and terms listed below are used in various sections of this Form 10-Q, including "Item 1. Financial Statements" and "Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations."


ACL	Allowance for Credit Losses	FDIC	Federal Deposit Insurance Corporation
AFS	Available for Sale	FHLB	Federal Home Loan Bank
AOCI	Accumulated Other Comprehensive Income	FHLBC	Federal Home Loan Bank of Chicago
ASC	Accounting Standards Codification	FHLBDM	Federal Home Loan Bank of Des Moines
ASU	Accounting Standards Update	FHLMC	Federal Home Loan Mortgage Corporation
ATM	Automated Teller Machine	FNMA	Federal National Mortgage Association
Basel III Rules	A comprehensive capital framework and rules for U.S. banking organizations approved by the FRB and the FDIC in 2013	FRB	Board of Governors of the Federal Reserve System
BHCA	Bank Holding Company Act of 1956, as amended	GAAP	U.S. Generally Accepted Accounting Principles
BOLI	Bank Owned Life Insurance	GLBA	Gramm-Leach-Bliley Act of 1999
CAA	Consolidated Appropriations Act, 2021	GNMA	Government National Mortgage Association
CARES Act	Coronavirus Aid, Relief and Economic Security Act	ICS	Insured Cash Sweep
CDARS	Certificate of Deposit Account Registry Service	LIBOR	The London Inter-bank Offered Rate
CECL	Current Expected Credit Loss	MBS	Mortgage-Backed Securities
CMO	Collateralized Mortgage Obligations	PPP	Paycheck Protection Program
COVID-19	Coronavirus Disease 2019	ROU	Right-of-Use
CRA	Community Reinvestment Act	RPA	Credit Risk Participation Agreement
CRE	Commercial Real Estate	RRE	Residential Real Estate
DCF	Discounted Cash Flows	SBA	U.S. Small Business Administration
Dodd-Frank Act	Dodd-Frank Wall Street Reform and Consumer Protection Act	SEC	U.S. Securities and Exchange Commission
ECL	Expected Credit Losses	SOFR	Secured Overnight Financing Rate
EVE	Economic Value of Equity	TDR	Troubled Debt Restructuring
FASB	Financial Accounting Standards Board

Table of Contents

Item 1. Financial Statements (unaudited).

MIDWEST ONE FINANCIAL GROUP, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS


	September 30, 2021		December 31, 2020
(unaudited) (dollars in thousands, except per share amounts)
ASSETS
Cash and due from banks	$	53,562	$	65,078
Interest earning deposits in banks	84,952		17,409
Federal funds sold	—		172
Total cash and cash equivalents	138,514		82,659
Debt securities available for sale at fair value	2,136,902		1,657,381
Loans held for sale	58,679		59,956
Gross loans held for investment	3,278,150		3,496,790
Unearned income, net	( 9,506 )		( 14,567 )
Loans held for investment, net of unearned income	3,268,644		3,482,223
Allowance for credit losses	( 47,900 )		( 55,500 )
Total loans held for investment, net	3,220,744		3,426,723
Premises and equipment, net	84,130		86,401
Goodwill	62,477		62,477
Other intangible assets, net	21,130		25,242
Foreclosed assets, net	454		2,316
Other assets	152,393		153,493
Total assets	$	5,875,423	$	5,556,648

LIABILITIES AND SHAREHOLDERS' EQUITY
Noninterest bearing deposits	$	999,887	$	910,655
Interest bearing deposits	3,957,894		3,636,394
Total deposits	4,957,781		4,547,049
Short-term borrowings	187,508		230,789
Long-term debt	154,860		208,691
Other liabilities	45,010		54,869
Total liabilities	5,345,159		5,041,398

Shareholders' equity
Preferred stock, no par value; authorized 500,000 shares; no shares issued and outstanding	—		—
Common stock, $ 1.00 par value; authorized 30,000,000 shares; issued shares of 16,581,017 and 16,581,017 ; outstanding shares of 15,729,451 and 16,016,780	16,581		16,581
Additional paid-in capital	300,327		300,137
Retained earnings	232,639		188,191
Treasury stock at cost, 851,566 and 564,237 shares	( 22,735 )		( 14,251 )
Accumulated other comprehensive income	3,452		24,592
Total shareholders' equity	530,264		515,250
Total liabilities and shareholders' equity	$	5,875,423	$	5,556,648

See accompanying notes to consolidated financial statements.

Table of Contents

MIDWEST ONE FINANCIAL GROUP, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF INCOME


	Three Months Ended				Nine Months Ended
	September 30,				September 30,
(unaudited) (dollars in thousands, except per share amounts)	2021		2020		2021		2020
Interest income
Loans, including fees	$	36,115	$	38,191	$	107,393	$	120,417
Taxable investment securities	6,655		4,574		18,231		12,937
Tax-exempt investment securities	2,428		2,360		7,532		5,730
Other	21		29		54		233
Total interest income	45,219		45,154		133,210		139,317
Interest expense
Deposits	3,150		5,296		10,167		19,654
Short-term borrowings	132		175		421		772
Long-term debt	1,597		1,874		5,160		4,964
Total interest expense	4,879		7,345		15,748		25,390
Net interest income	40,340		37,809		117,462		113,927
Credit loss (benefit) expense	( 1,080 )		4,992		( 7,958 )		31,410
Net interest income after credit loss (benefit) expense	41,420		32,817		125,420		82,517
Noninterest income
Investment services and trust activities	2,915		2,361		8,560		7,114
Service charges and fees	1,613		1,491		4,575		4,607
Card revenue	1,820		1,600		5,269		4,202
Loan revenue	1,935		3,252		9,816		6,285
Bank-owned life insurance	532		530		1,612		1,685


Investment securities gains, net	36		106		105		154
Other	331		230		1,287		3,947
Total noninterest income	9,182		9,570		31,224		27,994
Noninterest expense
Compensation and employee benefits	17,350		16,460		51,671		48,759
Occupancy expense of premises, net	2,547		2,278		7,063		6,872
Equipment	1,973		1,935		5,627		5,825
Legal and professional	1,272		1,184		3,430		4,101
Data processing	1,406		1,308		4,005		3,902
Marketing	1,022		857		2,901		2,829
Amortization of intangibles	1,264		1,631		4,112		5,407
FDIC insurance	435		470		1,192		1,363
Communications	275		428		1,055		1,334
Foreclosed assets, net	43		13		226		185
Goodwill impairment	—		31,500		—		31,500
Other	2,191		1,875		4,866		5,901
Total noninterest expense	29,778		59,939		86,148		117,978
Income (loss) before income tax expense	20,824		( 17,552 )		70,496		( 7,467 )
Income tax expense	4,513		2,272		15,266		2,620
Net income (loss)	$	16,311	$	( 19,824 )	$	55,230	$	( 10,087 )

Per common share information
Earnings (loss) - basic	$	1.03	$	( 1.23 )	$	3.47	$	( 0.63 )
Earnings (loss) - diluted	$	1.03	$	( 1.23 )	$	3.46	$	( 0.63 )
Dividends paid	$	0.2250	$	0.2200	$	0.6750	$	0.6600

See accompanying notes to consolidated financial statements.

Table of Contents

MIDWEST ONE FINANCIAL GROUP, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME


	Three Months Ended				Nine Months Ended
	September 30,				September 30,
(unaudited) (dollars in thousands)	2021		2020		2021		2020
Net income (loss)	$	16,311	$	( 19,824 )	$	55,230	$	( 10,087 )

Other comprehensive income (loss), net of tax:
Unrealized (loss) gain from debt securities available for sale:
Unrealized net holding (loss) gain on debt securities available for sale arising during the period	( 8,591 )		1,726		( 28,501 )		21,917
Reclassification adjustment for gains included in net income	( 36 )		( 106 )		( 105 )		( 154 )
Income tax benefit (expense)	2,251		( 423 )		7,466		( 5,680 )
Unrealized net (loss) gain on debt securities available for sale, net of reclassification adjustment	( 6,376 )		1,197		( 21,140 )		16,083
Unrealized gain (loss) from cash flow hedging instruments:
Unrealized net holding gains (losses) in cash flow hedging instruments arising during the period	—		8		—		( 1,009 )
Reclassification adjustment for net loss in cash flow hedging instruments included in income	—		88		—		145
Income tax benefit (expense)	—		( 25 )		—		225
Unrealized net gains (losses) on cash flow hedge instruments, net of reclassification adjustment	—		71		—		( 639 )
Other comprehensive (loss) income, net of tax	( 6,376 )		1,268		( 21,140 )		15,444
Comprehensive income (loss)	$	9,935	$	( 18,556 )	$	34,090	$	5,357

See accompanying notes to consolidated financial statements.

Table of Contents

MIDWEST ONE FINANCIAL GROUP, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY


Three Months Ended September 30,
	Common Stock
(unaudited) (dollars in thousands, except per share amounts)	Par Value		Additional Paid-in Capital		Retained Earnings		Treasury Stock		Accumulated Other Comprehensive Income (Loss)		Total















Balance at June 30, 2020	$	16,581	$	299,542	$	198,382	$	( 12,272 )	$	18,548	$	520,781
Net loss	—		—		( 19,824 )		—		—		( 19,824 )
Other comprehensive income	—		—		—		—		1,268		1,268


Share-based compensation	—		397		—		—		—		397

Dividends paid on common stock ($ 0.2200 per share)	—		—		( 3,541 )		—		—		( 3,541 )

Balance at September 30, 2020	$	16,581	$	299,939	$	175,017	$	( 12,272 )	$	19,816	$	499,081



























Balance at June 30, 2021	$	16,581	$	299,888	$	219,884	$	( 15,888 )	$	9,828	530,293
Net Income	—		—		16,311		—		—		16,311
Other comprehensive loss	—		—		—		—		( 6,376 )		( 6,376 )
Release/lapse of restriction on RSUs ( 1,260 shares, net)	—		( 32 )		( 1 )		33		—		—
Repurchase of common stock ( 235,277 shares)	—		—		—		( 6,880 )		—		( 6,880 )
Share-based compensation	—		471		—		—		—		471
Dividends paid on common stock ($ 0.2250 per share)	—		—		( 3,555 )		—		—		( 3,555 )
Balance at September 30, 2021	$	16,581	$	300,327	$	232,639	$	( 22,735 )	$	3,452	$	530,264

Nine Months Ended September 30,
	Common Stock
(unaudited) (dollars in thousands, except per share amounts)	Par Value		Additional Paid-in Capital		Retained Earnings		Treasury Stock		Accumulated Other Comprehensive Income (Loss)		Total
Balance at December 31, 2019	$	16,581	$	297,390	$	201,105	$	( 10,466 )	$	4,372	508,982
Cumulative effect of change in accounting principle (1)	—		—		( 5,362 )		—		—		( 5,362 )
Net Loss	—		—		( 10,087 )		—		—		( 10,087 )
Other comprehensive income	—		—		—		—		15,444		15,444
Acquisition fair value finalization (2)	—		2,355		—		—		—		2,355
Release/lapse of restriction on RSUs ( 32,488 shares, net)	—		( 937 )		—		798		—		( 139 )
Repurchase of common stock ( 95,340 shares)	—		—		—		( 2,604 )		—		( 2,604 )
Share-based compensation	—		1,131		—		—		—		1,131
Dividends paid on common stock ($ 0.6600 per share)	—		—		( 10,639 )		—		—		( 10,639 )
Balance at September 30, 2020	$	16,581	$	299,939	$	175,017	$	( 12,272 )	$	19,816	$	499,081

Balance at December 31, 2020	$	16,581	$	300,137	$	188,191	$	( 14,251 )	$	24,592	515,250
Net income	—		—		55,230		—		—		55,230
Other comprehensive loss	—		—		—		—		( 21,140 )		( 21,140 )
Release/lapse of restriction on RSUs ( 49,311 shares, net)	—		( 1,332 )		( 29 )		1,243		—		( 118 )
Repurchase of common stock ( 336,640 shares)	—		—		—		( 9,727 )		—		( 9,727 )
Share-based compensation	—		1,522		—		—		—		1,522
Dividends paid on common stock ($ 0.6750 per share)	—		—		( 10,753 )		—		—		( 10,753 )
Balance at September 30, 2021	$	16,581	$	300,327	$	232,639	$	( 22,735 )	$	3,452	$	530,264

(1) Reclassification pursuant to adoption of ASU 2016-13, Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments.

(2) Relates to the finalization of the purchase accounting adjustments for the ATBancorp acquisition. This purchase accounting adjustment had a $ 2.06 million impact on goodwill, $ 296 thousand impact on deferred income taxes, with the offsetting impact being to additional paid-in capital.

Table of Contents

MIDWEST ONE FINANCIAL GROUP, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS


	Nine Months Ended September 30,
(unaudited) (dollars in thousands)	2021		2020
Cash flows from operating activities:
Net income (loss)	$	55,230	$	( 10,087 )
Adjustments to reconcile net income (loss) to net cash provided by operating activities:
Credit loss (benefit) expense	( 7,958 )		31,410
Goodwill impairment	—		31,500
Depreciation, amortization, and accretion	71		4,054


Net change in premises and equipment due to writedown or sale	295		55
Share-based compensation	1,522		1,131
Net gain on sale or call of debt securities available for sale	( 105 )		( 132 )



Net change in foreclosed assets due to writedown or sale	163		125
Net gain on sale of loans held for sale	( 6,696 )		( 5,519 )
Origination of loans held for sale	( 236,326 )		( 286,551 )
Proceeds from sales of loans held for sale	244,299		284,374
Increase in cash surrender value of bank-owned life insurance	( 1,339 )		( 1,317 )
Decrease (increase) in deferred income taxes, net	2,013		( 7,105 )
Change in:
Other assets	7,514		( 8,393 )
Other liabilities	( 11,494 )		8,495
Net cash provided by operating activities	$	47,189	$	42,040
Cash flows from investing activities:


Proceeds from sales of debt securities available for sale	$	42,193	$	27,020
Proceeds from maturities and calls of debt securities available for sale	304,443		169,210
Purchases of debt securities available for sale	( 856,739 )		( 746,101 )


Net decrease (increase) in loans held for investment	225,479		( 81,867 )
Purchases of premises and equipment	( 1,477 )		( 1,514 )
Proceeds from sale of foreclosed assets	1,983		2,922
Proceeds from sale of premises and equipment	16		49



Net cash used in investing activities	$	( 284,102 )	$	( 630,281 )
Cash flows from financing activities:
Net increase (decrease) in:
Deposits	$	410,598	$	604,699
Short-term borrowings	( 43,281 )		44,544
Proceeds from issuance of subordinated debt	—		65,000
Payments of subordinated debt issuance costs	( 9 )		( 1,248 )
Redemption of subordinated debentures	( 10,835 )		—
Payments on finance lease liability	( 107 )		( 94 )

Payments of Federal Home Loan Bank borrowings	( 43,000 )		( 44,400 )

Payments of other long-term debt	—		( 5,500 )

Taxes paid relating to the release/lapse of restriction on RSUs	( 118 )		( 139 )
Dividends paid	( 10,753 )		( 10,639 )


Repurchase of common stock	( 9,727 )		( 2,604 )
Net cash provided by financing activities	$	292,768	$	649,619
Net increase in cash and cash equivalents	$	55,855	$	61,378
Cash and cash equivalents:
Beginning of Period	82,659		73,484
Ending balance	$	138,514	$	134,862

Supplemental disclosures of cash flow information:
Cash paid during the period for interest	$	17,500	$	25,478
Cash paid during the period for income taxes	14,300		8,970
Supplemental schedule of non-cash investing and financing activities:
Transfer of loans to foreclosed assets, net	$	284	$	65
Investment securities purchased but not settled	1,835		10,690

See accompanying notes to consolidated financial statements.

Table of Contents

MidWest One Financial Group, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

(Unaudited)

1. Nature of Business and Significant Accounting Policies

Nature of Business

MidWest One Financial Group, Inc., an Iowa corporation formed in 1983, is a bank holding company under the BHCA and a financial holding company under the GLBA. Our principal executive offices are located at 102 South Clinton Street, Iowa City, Iowa 52240.

The Company owns all of the outstanding common stock of MidWest One Bank, an Iowa state non-member bank chartered in 1934 with its main office in Iowa City, Iowa. We operate primarily through MidWest One Bank, our bank subsidiary.

Basis of Presentation

The accompanying interim condensed consolidated financial statements are prepared in accordance with GAAP for interim financial information and pursuant to the requirements for reporting on Form 10-Q and Article 10 of Regulation S-X of the Securities Exchange Act of 1934. Accordingly, certain disclosures accompanying annual consolidated financial statements are omitted. In the opinion of management, all significant intercompany accounts and transactions have been eliminated and adjustments, consisting solely of normal recurring accruals and considered necessary for the fair presentation of financial statements for the interim periods, have been included. The current period's results of operations are not necessarily indicative of the results that ultimately may be achieved for the year. The interim condensed consolidated financial statements and notes thereto should be read in conjunction with the audited consolidated financial statements and notes thereto included in our Form 10-K for the year ended December 31, 2020, filed with the SEC on March 11, 2021.

Use of Estimates

The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect: (1) the reported amounts of assets and liabilities, (2) the disclosure of contingent assets and liabilities at the date of the financial statements, and (3) the reported amounts of revenues and expenses during the reporting period. These estimates are based on information available to management at the time the estimates are made. Actual results could differ from those estimates. The results for the nine months ended September 30, 2021 may not be indicative of results for the year ending December 31, 2021, or for any other period.

All significant accounting policies followed in the preparation of the quarterly financial statements are disclosed in the Annual Report on Form 10-K for the year ended December 31, 2020, filed with the SEC on March 11, 2021.

Segment Reporting

The Company’s activities are considered to be one reportable segment. The Company is engaged in the business of commercial and retail banking, and trust and investment services, with operations throughout Iowa, the Minneapolis/St. Paul metropolitan area of Minnesota, western Wisconsin, Naples and Fort Myers, Florida, and Denver, Colorado. Substantially all income is derived from a diverse base of commercial, mortgage and retail lending activities, and investments.

Effect of New Financial Accounting Standards

Accounting Guidance Pending Adoption at September 30, 2021

On March 12, 2020, the FASB issued ASU 2020-04, Reference Rate Reform (ASC 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting . ASC 848 contains optional expedients and exceptions for applying GAAP to contracts, hedging relationships, and other transactions affected by reference rate reform. Entities may apply the provision as of the beginning of the reporting period when the election is made until December 31, 2022. The Company is currently evaluating the impact of ASU 2020-04.

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2. Debt Securities

The amortized cost and fair value of investment debt securities AFS, with gross unrealized gains and losses, were as follows:


	As of September 30, 2021
(in thousands)	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses		Allowance for Credit Loss related to Debt Securities		Fair Value

U.S. Government agencies and corporations	$	286	$	2	$	—	$	—	$	288
State and political subdivisions	696,306		9,671		4,696		—		701,281
Mortgage-backed securities	108,445		1,280		494		—		109,231
Collateralized mortgage obligations	860,623		2,564		9,354		—		853,833
Corporate debt securities	466,570		8,380		2,681		—		472,269
Total debt securities	$	2,132,230	$	21,897	$	17,225	$	—	$	2,136,902


	As of December 31, 2020
(in thousands)	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses		Allowance for Credit Loss related to Debt Securities		Fair Value

U.S. Government agencies and corporations	$	355	$	6	$	—	$	—	$	361
State and political subdivisions	611,666		17,163		483		—		628,346
Mortgage-backed securities	92,261		1,758		1		—		94,018
Collateralized mortgage obligations	559,718		6,332		214		—		565,836
Corporate debt securities	360,103		9,333		616		—		368,820
Total debt securities	$	1,624,103	$	34,592	$	1,314	$	—	$	1,657,381

Investment securities with a fair value of $ 542.4 million and $ 434.7 million at September 30, 2021 and December 31, 2020, respectively, were pledged on public deposits, securities sold under agreements to repurchase and for other purposes, as required or permitted by law.

The following table presents debt securities AFS in an unrealized loss position for which an allowance for credit losses has not been recorded at September 30, 2021, aggregated by investment category and length of time in a continuous loss position:


		As of September 30, 2021
	Number of Securities	Less than 12 Months				12 Months or More				Total
Available for Sale		Fair Value		Unrealized Losses		Fair Value		Unrealized Losses		Fair Value		Unrealized Losses
(in thousands, except number of securities)


State and political subdivisions	127	$	254,630	$	4,447	$	12,474	$	249	$	267,104	$	4,696
Mortgage-backed securities	7	45,955		494		44		—		45,999		494
Collateralized mortgage obligations	35	607,333		8,913		25,716		441		633,049		9,354
Corporate debt securities	25	126,945		1,866		18,094		815		145,039		2,681
Total	194	$	1,034,863	$	15,720	$	56,328	$	1,505	$	1,091,191	$	17,225

As of September 30, 2021, 127 state and political subdivisions securities with total unrealized losses of $ 4.7 million were held by the Company. Management evaluated these securities through a process that included consideration of credit agency ratings and payment history. In addition, management may evaluate securities by considering the yield spread to treasury securities and the most recent financial information available. Based on this evaluation, management concluded that the decline in fair value was not attributable to credit losses.

As of September 30, 2021, 7 mortgage-backed securities and 35 collateralized mortgage obligations with unrealized losses totaling $ 9.8 million were held by the Company. Management evaluated the payment history of these securities. In addition, management considered the implied U.S. government guarantee of these agency securities and the level of credit enhancement for non-agency securities. Based on this evaluation, management concluded that the decline in fair value was not attributable to credit losses.

As of September 30, 2021, 25 corporate debt securities with total unrealized losses of $ 2.7 million were held by the Company. Management evaluated these securities by considering credit agency ratings and payment history. In addition, management may evaluate securities by considering the yield spread to treasury securities and the most recent financial information available. Based on this evaluation, management concluded that the decline in fair value was not attributable to credit losses.

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Accrued interest receivable on available for sale debt securities, which is recorded within 'Other Assets,' totaled $ 8.1 million at September 30, 2021 and $ 7.3 million at December 31, 2020 and is excluded from the estimate of credit losses.

The following table presents debt securities AFS in an unrealized loss position for which an allowance for credit losses has not been recorded at December 31, 2020, aggregated by investment category and length of time in a continuous loss position:


		As of December 31, 2020
Available for Sale	Number of Securities	Less than 12 Months				12 Months or More				Total
		Fair Value		Unrealized Losses		Fair Value		Unrealized Losses		Fair Value		Unrealized Losses
(in thousands, except number of securities)


State and political subdivisions	27	$	31,489	$	157	$	4,065	$	326	$	35,554	$	483
Mortgage-backed securities	7	315		1		—		—		315		1
Collateralized mortgage obligations	8	133,032		214		—		—		133,032		214
Corporate debt securities	15	35,995		523		3,311		93		39,306		616
Total	57	$	200,831	$	895	$	7,376	$	419	$	208,207	$	1,314

Proceeds and gross realized gains and losses on debt securities available for sale for the three and nine months ended September 30, 2021 and 2020 were as follows:


	Three Months Ended				Nine Months Ended
(in thousands)	September 30, 2021		September 30, 2020		September 30, 2021		September 30, 2020
Proceeds from sales of debt securities available for sale	$	782	$	4,885	$	42,193	$	27,020

Gross realized gains from sales of debt securities available for sale	32		105		856		255
Gross realized losses from sales of debt securities available for sale	—		( 10 )		( 791 )		( 123 )
Net realized gain from sales of debt securities available for sale (1)	$	32	$	95	$	65	$	132

(1) The difference in investment security gains, net reported herein as compared to the Consolidated Statements of Income is associated with the net realized gain from the call or maturity of debt securities of $ 4.0 thousand and $ 40.0 thousand for the three and nine months ended ended September 30, 2021, respectively, and $ 11.0 thousand and $ 22.0 thousand for the three and nine months ended September 30, 2020, respectively.

The contractual maturity distribution of investment debt securities at September 30, 2021, is shown below. Expected maturities of MBS and CMO may differ from contractual maturities because the mortgages underlying the securities may be called or prepaid without any penalties. Therefore, these securities are not included in the maturity categories in the following summary.


	Available For Sale
(in thousands)	Amortized Cost		Fair Value
Due in one year or less	$	47,732	$	48,263
Due after one year through five years	309,686		314,874
Due after five years through ten years	477,290		479,402
Due after ten years	328,454		331,299
	$	1,163,162	$	1,173,838
Mortgage-backed securities	108,445		109,231
Collateralized mortgage obligations	860,623		853,833
Total	$	2,132,230	$	2,136,902

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3. Loans Receivable and the Allowance for Credit Losses

The composition of loans by class of receivable was as follows:


	As of
(in thousands)	September 30, 2021		December 31, 2020
Agricultural	$	106,356	$	116,392
Commercial and industrial	927,258		1,055,488
Commercial real estate:
Construction & development	146,417		181,291
Farmland	130,936		144,970
Multifamily	273,347		256,525
Commercial real estate-other	1,148,658		1,149,575
Total commercial real estate	1,699,358		1,732,361
Residential real estate:
One- to four- family first liens	334,267		355,684
One- to four- family junior liens	133,869		143,422
Total residential real estate	468,136		499,106
Consumer	67,536		78,876
Loans held for investment, net of unearned income	3,268,644		3,482,223
Allowance for credit losses	( 47,900 )		( 55,500 )
Total loans held for investment, net	$	3,220,744	$	3,426,723

Loans with unpaid principal in the amount of $ 815.0 million and $ 830.2 million at September 30, 2021 and December 31, 2020, respectively, were pledged to the FHLB as collateral for borrowings.

Non-accrual and Delinquent Status

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

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

Loans are considered past due or delinquent when the contractual principal or interest due in accordance with the terms of the loan agreement or any portion thereof remains unpaid after the due date of the scheduled payment.

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The following table presents the amortized cost basis of loans based on delinquency status:


			Age Analysis of Past-Due Financial Assets								90 Days or More Past Due And Accruing
(in thousands)	Current		30 - 59 Days Past Due		60 - 89 Days Past Due		90 Days or More Past Due		Total
September 30, 2021
Agricultural	$	105,402	$	152	$	—	$	802	$	106,356	$	—
Commercial and industrial	924,379		351		313		2,215		927,258		50
Commercial real estate:
Construction and development	145,714		107		—		596		146,417		—
Farmland	127,930		—		119		2,887		130,936		—
Multifamily	271,960		—		1,387		—		273,347		—
Commercial real estate-other	1,142,251		948		—		5,459		1,148,658		—
Total commercial real estate	1,687,855		1,055		1,506		8,942		1,699,358		—
Residential real estate:
One- to four- family first liens	330,912		2,280		845		230		334,267		—
One- to four- family junior liens	133,481		261		20		107		133,869		1
Total residential real estate	464,393		2,541		865		337		468,136		1
Consumer	67,458		41		23		14		67,536		—
Total	$	3,249,487	$	4,140	$	2,707	$	12,310	$	3,268,644	$	51

December 31, 2020
Agricultural	$	115,284	$	8	$	45	$	1,055	$	116,392	$	—
Commercial and industrial	1,051,727		477		333		2,951		1,055,488		106
Commercial real estate:
Construction and development	180,059		586		42		604		181,291		—
Farmland	138,798		226		324		5,622		144,970		—
Multifamily	256,525		—		—		—		256,525		—
Commercial real estate-other	1,132,015		11,514		318		5,728		1,149,575		—
Total commercial real estate	1,707,397		12,326		684		11,954		1,732,361		—
Residential real estate:
One- to four- family first liens	351,370		2,062		566		1,686		355,684		625
One- to four- family junior liens	142,663		377		234		148		143,422		—
Total residential real estate	494,033		2,439		800		1,834		499,106		625
Consumer	78,747		43		39		47		78,876		8
Total	$	3,447,188	$	15,293	$	1,901	$	17,841	$	3,482,223	$	739

The following table presents the amortized cost basis of loans on non-accrual status, amortized cost basis of loans on non-accrual status with no allowance for credit losses recorded, and loans past due 90 days or more and still accruing by class of loan as of September 30, 2021 and December 31, 2020:


	Nonaccrual				Nonaccrual with no Allowance for Credit Losses				90 Days or More Past Due And Accruing
(in thousands)	September 30, 2021		December 31, 2020		September 30, 2021		December 31, 2020		September 30, 2021		December 31, 2020

Agricultural	$	2,120	$	2,584	$	1,366	$	1,599	$	—	$	—
Commercial and industrial	4,145		7,326		1,341		4,349		50		106
Commercial real estate:
Construction and development	607		1,145		596		900		—		—
Farmland	6,755		8,319		5,338		7,266		—		—
Multifamily	1,009		746		331		39		—		—
Commercial real estate-other	16,811		19,134		1,076		2,497		—		—
Total commercial real estate	25,182		29,344		7,341		10,702		—		—
Residential real estate:
One- to four- family first liens	1,532		1,895		339		75		—		625
One- to four- family junior liens	628		722		—		1		1		—
Total residential real estate	2,160		2,617		339		76		1		625
Consumer	50		79		8		13		—		8
Total	$	33,657	$	41,950	$	10,395	$	16,739	$	51	$	739

The interest income recognized on loans that were on nonaccrual for the three months ended September 30, 2021 and September 30, 2020 was $ 453 thousand and $ 130 thousand, respectively. The interest income recognized on loans that were on

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nonaccrual for the nine months ended September 30, 2021 and September 30, 2020 was $ 1.1 million and $ 526 thousand, respectively.

Credit Quality Information

The Company aggregates loans into risk categories based on relevant information about the ability of borrowers to service their debt, such as: current financial information, historical payment experience, credit documentation, and other factors. The Company analyzes loans individually to classify the loans as to credit risk. This analysis includes non-homogenous loans, such as agricultural, commercial and industrial, and commercial real estate loans. Loans not meeting the criteria described below that are analyzed individually are considered to be pass-rated. The Company uses the following definitions for risk ratings:

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

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

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

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

Homogenous loans, including residential real estate and consumer loans, are not individually risk rated. Instead, these loans are categorized based on performance: performing and nonperforming. Nonperforming loans include those loans on nonaccrual and loans greater than 90 days past due and on accrual.

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The following table sets forth the amortized cost basis of loans by class of receivable by credit quality indicator and vintage based on the most recent analysis performed, as of September 30, 2021. As of September 30, 2021, there were no 'loss' rated credits.


	Term Loans by Origination Year												Revolving Loans
September 30, 2021 (in thousands)	2021		2020		2019		2018		2017		Prior				Total
Agricultural
Pass	$	21,302	$	9,886	$	4,979	$	1,440	$	1,126	$	1,407	$	55,410		$	95,550
Special mention / watch	1,220		405		275		—		75		1,000		4,066			7,041
Substandard	673		759		133		229		6		278		1,687			3,765
Doubtful	—		—		—		—		—		—		—			—
Total	$	23,195	$	11,050	$	5,387	$	1,669	$	1,207	$	2,685	$	61,163		$	106,356
Commercial and industrial
Pass	$	245,228	$	236,565	$	80,280	$	41,016	$	65,928	$	98,838	$	136,230		$	904,085
Special mention / watch	5,485		1,900		704		143		296		139		1,892			10,559
Substandard	1,104		2,154		1,046		924		220		3,016		4,149			12,613
Doubtful	—		—		—		—		1		—		—			1
Total	$	251,817	$	240,619	$	82,030	$	42,083	$	66,445	$	101,993	$	142,271		$	927,258
CRE - Construction and development
Pass	$	53,757	$	54,553	$	7,950	$	3,266	$	1,872	$	922	$	20,967		$	143,287
Special mention / watch	622		—		172		406		—		—		—			1,200
Substandard	—		894		1,025		—		—		11		—			1,930
Doubtful	—		—		—		—		—		—		—			—
Total	$	54,379	$	55,447	$	9,147	$	3,672	$	1,872	$	933	$	20,967		$	146,417
CRE - Farmland
Pass	$	31,894	$	36,063	$	19,419	$	5,175	$	6,014	$	12,113	$	1,489		$	112,167
Special mention / watch	1,727		4,092		587		1,421		295		225		75			8,422
Substandard	2,599		2,050		1,465		1,971		1,667		595		—			10,347
Doubtful	—		—		—		—		—		—		—			—
Total	$	36,220	$	42,205	$	21,471	$	8,567	$	7,976	$	12,933	$	1,564		$	130,936
CRE - Multifamily
Pass	$	85,674	$	130,248	$	25,013	$	2,800	$	6,492	$	4,929	$	7,589		$	262,745
Special mention / watch	—		—		—		5,983		—		558		—			6,541
Substandard	—		2,737		—		—		—		1,324		—			4,061
Doubtful	—		—		—		—		—		—		—			—
Total	$	85,674	$	132,985	$	25,013	$	8,783	$	6,492	$	6,811	$	7,589		$	273,347
CRE - other
Pass	$	243,842	$	435,676	$	104,778	$	41,412	$	66,205	$	81,287	$	44,819		$	1,018,019
Special mention / watch	5,842		25,278		2,507		10,024		1,832		2,166		1,459			49,108
Substandard	4,309		50,557		12,568		6,163		979		6,955		—			81,531
Doubtful	—		—		—		—		—		—		—			—
Total	$	253,993	$	511,511	$	119,853	$	57,599	$	69,016	$	90,408	$	46,278		$	1,148,658
RRE - One- to four- family first liens
Performing	$	96,842	$	83,033	$	31,181	$	27,093	$	18,761	$	71,848	$	3,978		$	332,736
Nonperforming	478		47		—		188		164		654		—			1,531
Total	$	97,320	$	83,080	$	31,181	$	27,281	$	18,925	$	72,502	$	3,978		$	334,267
RRE - One- to four- family junior liens
Performing	$	26,283	$	14,437	$	4,860	$	6,132	$	4,364	$	5,471	$	71,692		$	133,239
Nonperforming	—		—		139		166		17		203		105			630
Total	$	26,283	$	14,437	$	4,999	$	6,298	$	4,381	$	5,674	$	71,797		$	133,869
Consumer
Performing	$	26,150	$	18,297	$	7,134	$	5,164	$	2,044	$	5,800	$	2,897		$	67,486
Nonperforming	—		—		16		8		14		12		—			50
Total	$	26,150	$	18,297	$	7,150	$	5,172	$	2,058	$	5,812	$	2,897		$	67,536

Total by Credit Quality Indicator Category
Pass	$	681,697	$	902,991	$	242,419	$	95,109	$	147,637	$	199,496	$	266,504		$	2,535,853
Special mention / watch	14,896		31,675		4,245		17,977		2,498		4,088		7,492			82,871
Substandard	8,685		59,151		16,237		9,287		2,872		12,179		5,836			114,247
Doubtful	—		—		—		—		1		—		—			1
Performing	149,275		115,767		43,175		38,389		25,169		83,119		78,567			533,461
Nonperforming	478		47		155		362		195		869		105			2,211
Total	$	855,031	$	1,109,631	$	306,231	$	161,124	$	178,372	$	299,751	$	358,504		$	3,268,644

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The following table sets forth the amortized cost basis of loans by class of receivable by credit quality indicator and vintage based on the most recent analysis performed, as of December 31, 2020. As of December 31, 2020, there were no 'loss' rated credits.


	Term Loans by Origination Year												Revolving Loans
December 31, 2020 (in thousands)	2020		2019		2018		2017		2016		Prior				Total
Agricultural
Pass	$	17,836	$	6,959	$	2,764	$	2,145	$	1,386	$	1,833	$	60,802		$	93,725
Special mention / watch	4,892		1,083		117		108		553		1,103		7,210			15,066
Substandard	4,075		650		258		183		121		226		2,086			7,599
Doubtful	1		—		—		—		—		1		—			2
Total	$	26,804	$	8,692	$	3,139	$	2,436	$	2,060	$	3,163	$	70,098		$	116,392
Commercial and industrial
Pass	$	546,171	$	105,523	$	57,055	$	61,753	$	38,695	$	92,526	$	120,498		$	1,022,221
Special mention / watch	3,410		572		497		2,261		611		112		4,796			12,259
Substandard	5,014		1,539		928		656		461		3,261		9,144			21,003
Doubtful	—		—		—		1		—		3		1			5
Total	$	554,595	$	107,634	$	58,480	$	64,671	$	39,767	$	95,902	$	134,439		$	1,055,488
CRE - Construction and development
Pass	$	109,885	$	25,972	$	14,994	$	2,696	$	679	$	876	$	22,519		$	177,621
Special mention / watch	843		298		542		—		9		3		—			1,695
Substandard	597		1,132		220		—		—		26		—			1,975
Doubtful	—		—		—		—		—		—		—			—
Total	$	111,325	$	27,402	$	15,756	$	2,696	$	688	$	905	$	22,519		$	181,291
CRE - Farmland
Pass	$	48,378	$	25,022	$	9,577	$	10,490	$	8,378	$	13,003	$	1,263		$	116,111
Special mention / watch	8,088		4,583		935		660		361		237		—			14,864
Substandard	3,924		2,627		4,386		1,728		166		1,128		36			13,995
Doubtful	—		—		—		—		—		—		—			—
Total	$	60,390	$	32,232	$	14,898	$	12,878	$	8,905	$	14,368	$	1,299		$	144,970
CRE - Multifamily
Pass	$	164,817	$	18,992	$	17,805	$	10,706	$	10,201	$	19,581	$	11,558		$	253,660
Special mention / watch	345		—		—		—		59		—		—			404
Substandard	1,099		—		—		—		1,362		—		—			2,461
Doubtful	—		—		—		—		—		—		—			—
Total	$	166,261	$	18,992	$	17,805	$	10,706	$	11,622	$	19,581	$	11,558		$	256,525
CRE - other
Pass	$	487,771	$	129,388	$	60,957	$	83,393	$	66,369	$	91,698	$	45,129		$	964,705
Special mention / watch	71,141		14,870		12,415		5,953		3,756		4,335		455			112,925
Substandard	48,690		7,162		6,370		1,222		579		6,997		925			71,945
Doubtful	—		—		—		—		—		—		—			—
Total	$	607,602	$	151,420	$	79,742	$	90,568	$	70,704	$	103,030	$	46,509		$	1,149,575
RRE - One- to four- family first liens
Performing	$	117,923	$	46,581	$	42,875	$	30,628	$	37,407	$	68,501	$	9,249		$	353,164
Nonperforming	239		1		596		303		148		1,233		—			2,520
Total	$	118,162	$	46,582	$	43,471	$	30,931	$	37,555	$	69,734	$	9,249		$	355,684
RRE - One- to four- family junior liens
Performing	$	19,818	$	7,973	$	12,140	$	6,152	$	3,467	$	5,354	$	87,795		$	142,699
Nonperforming	7		—		223		17		116		190		170			723
Total	$	19,825	$	7,973	$	12,363	$	6,169	$	3,583	$	5,544	$	87,965		$	143,422
Consumer
Performing	$	30,755	$	13,662	$	10,341	$	4,960	$	2,656	$	6,306	$	10,118		$	78,798
Nonperforming	2		21		13		5		13		24		—			78
Total	$	30,757	$	13,683	$	10,354	$	4,965	$	2,669	$	6,330	$	10,118		$	78,876

Total by Credit Quality Indicator Category
Pass	$	1,374,858	$	311,856	$	163,152	$	171,183	$	125,708	$	219,517	$	261,769		$	2,628,043
Special mention / watch	88,719		21,406		14,506		8,982		5,349		5,790		12,461			157,213
Substandard	63,399		13,110		12,162		3,789		2,689		11,638		12,191			118,978
Doubtful	1		—		—		1		—		4		1			7
Performing	168,496		68,216		65,356		41,740		43,530		80,161		107,162			574,661
Nonperforming	248		22		832		325		277		1,447		170			3,321
Total	$	1,695,721	$	414,610	$	256,008	$	226,020	$	177,553	$	318,557	$	393,754		$	3,482,223

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Allowance for Credit Losses

At September 30, 2021, the economic forecast used by the Company showed the following: (1) Midwest unemployment – decreases over the next four forecasted quarters; (2) Year-to-year change in national retail sales - increases over the next four forecasted quarters; (3) Year-to-year change in CRE Index - decreases over the next two forecasted quarters, followed by an increase in the third and fourth forecasted quarters; (4) Year-to-year change in U.S. GDP - increases over the next four forecasted quarters; (5) Year-to-year change in National Home Price Index – increases over the next four forecasted quarters; and (6) Rental Vacancy - increases over the next four forecasted quarters. The economic forecast loss driver data generally exhibited improvements in the economic forecast and stabilization of the credit profile outlook when compared to the previously disclosed second quarter of 2021 results.

We have made a policy election to report interest receivable as a separate line on the balance sheet. Accrued interest receivable, which is recorded within 'Other Assets', totaled $ 10.8 million at September 30, 2021 and $ 14.2 million at December 31, 2020 and is excluded from the estimate of credit losses. The changes in the allowance for credit losses by portfolio segment were as follows:



	For the Three Months Ended September 30, 2021 and 2020
(in thousands)	Agricultural		Commercial and Industrial		Commercial Real Estate		Residential Real Estate		Consumer		Total
For the Three Months Ended September 30, 2021
Beginning balance	$	1,013	$	13,787	$	28,516	$	4,076	$	608	$	48,000
Charge-offs	( 16 )		( 24 )		( 37 )		( 1 )		( 156 )		( 234 )
Recoveries	19		954		76		25		40		1,114
Credit loss (benefit) expense (1)	44		1,058		( 2,226 )		5		139		( 980 )
Ending balance	$	1,060	$	15,775	$	26,329	$	4,105	$	631	$	47,900

For the Three Months Ended September 30, 2020
Beginning balance	$	1,408	$	18,709	$	28,221	$	6,074	$	1,232	$	55,644

Charge-offs	( 746 )		( 983 )		( 275 )		( 83 )		( 101 )		( 2,188 )
Recoveries	103		180		9		14		41		347
Credit loss (benefit) expense (1)	649		( 1,267 )		2,966		2,273		76		4,697
Ending balance	$	1,414	$	16,639	$	30,921	$	8,278	$	1,248	$	58,500
(1) The difference in the credit loss expense reported herein as compared to the Consolidated Statements of Income is associated with the credit loss (benefit) expense of $( 0.1 ) million and $ 0.3 million related to off-balance sheet credit exposures for the three months ended September 30, 2021 and September 30, 2020, respectively.


	For the Nine Months Ended September 30, 2021 and 2020
(in thousands)	Agricultural		Commercial and Industrial		Commercial Real Estate		Residential Real Estate		Consumer		Total
For the Nine Months Ended September 30, 2021
Beginning balance	$	1,346	$	15,689	$	32,640	$	4,882	$	943	$	55,500
Charge-offs	( 170 )		( 885 )		( 453 )		( 107 )		( 462 )		( 2,077 )
Recoveries	67		1,560		391		81		136		2,235
Credit loss (benefit) expense (1)	( 183 )		( 589 )		( 6,249 )		( 751 )		14		( 7,758 )
Ending balance	$	1,060	$	15,775	$	26,329	$	4,105	$	631	$	47,900

For the Nine Months Ended September 30, 2020
Beginning balance	$	3,748	$	8,394	$	13,804	$	2,685	$	448	$	29,079
Day 1 transition adjustment from adoption of ASC 326	( 2,557 )		2,728		1,300		2,050		463		3,984
Charge-offs	( 939 )		( 2,356 )		( 1,787 )		( 186 )		( 520 )		( 5,788 )
Recoveries	129		559		28		29		137		882
Credit loss expense	1,033		7,314		17,576		3,700		720		30,343
Ending balance	$	1,414	$	16,639	$	30,921	$	8,278	$	1,248	$	58,500
(1) The difference in the credit loss expense reported herein as compared to the Consolidated Statements of Income is associated with the credit loss (benefit) expense of $( 0.2 ) million and $ 1.1 million related to off-balance sheet credit exposures for the nine months ended September 30, 2021 and September 30, 2020, respectively.

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The composition of allowance for credit losses by portfolio segment based on evaluation method were as follows:


	As of September 30, 2021
(in thousands)	Agricultural		Commercial and Industrial		Commercial Real Estate		Residential Real Estate		Consumer		Total
Loans held for investment, net of unearned income
Individually evaluated for impairment	$	1,366	$	3,084	$	24,650	$	570	$	8	$	29,678
Collectively evaluated for impairment	104,990		924,174		1,674,708		467,566		67,528		3,238,966
Total	$	106,356	$	927,258	$	1,699,358	$	468,136	$	67,536	$	3,268,644
Allowance for credit losses:
Individually evaluated for impairment	$	—	$	708	$	2,008	$	230	$	—	$	2,946
Collectively evaluated for impairment	1,060		15,067		24,321		3,875		631		44,954
Total	$	1,060	$	15,775	$	26,329	$	4,105	$	631	$	47,900


	As of December 31, 2020
(in thousands)	Agricultural		Commercial and Industrial		Commercial Real Estate		Residential Real Estate		Consumer		Total
Loans held for investment, net of unearned income
Individually evaluated for impairment	$	2,088	$	6,582	$	28,235	$	427	$	8	$	37,340
Collectively evaluated for impairment	114,304		1,048,906		1,704,126		498,679		78,868		3,444,883

Total	$	116,392	$	1,055,488	$	1,732,361	$	499,106	$	78,876	$	3,482,223
Allowance for credit losses:
Individually evaluated for impairment	$	66	$	799	$	2,031	$	179	$	—	$	3,075
Collectively evaluated for impairment	1,280		14,890		30,609		4,703		943		52,425

Total	$	1,346	$	15,689	$	32,640	$	4,882	$	943	$	55,500

The following table presents the amortized cost basis of collateral dependent loans, by the primary collateral type, which are individually evaluated to determine expected credit losses, and the related ACL allocated to these loans:


	As of September 30, 2021
(in thousands)	Primary Type of Collateral
	Real Estate		Equipment		Other		Total		ACL Allocation
Agricultural	$	934	$	432	$	—	$	1,366	$	—
Commercial and industrial	407		391		2,286		3,084		708
Commercial real estate:
Construction and development	595		—		—		595		—
Farmland	6,438		—		—		6,438		53
Multifamily	1,009		—		—		1,009		401
Commercial real estate-other	16,387		—		221		16,608		1,554
Residential real estate:
One- to four- family first liens	404		—		—		404		64
One- to four- family junior liens	166		—		—		166		166
Consumer	—		8		—		8		—
Total	$	26,340	$	831	$	2,507	$	29,678	$	2,946

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	As of December 31, 2020
(in thousands)	Primary Type of Collateral
	Real Estate		Equipment		Other		Total		ACL Allocation
Agricultural	$	516	$	824	$	748	$	2,088	$	66
Commercial and industrial	667		3,037		2,878		6,582		799
Commercial real estate:
Construction and development	899		—		—		899		—
Farmland	7,850		—		—		7,850		88
Multifamily	746		—		—		746		202
Commercial real estate-other	18,740		—		—		18,740		1,741
Residential real estate:
One- to four- family first liens	204		—		—		204		132
One- to four- family junior liens	223		—		—		223		47
Consumer	—		8		—		8		—
Total	$	29,845	$	3,869	$	3,626	$	37,340	$	3,075

Troubled Debt Restructurings

TDRs totaled $ 19.8 million and $ 11.0 million as of September 30, 2021 and December 31, 2020, respectively. As of September 30, 2021, the Company had $ 8 thousand of commitments to lend additional funds to borrowers with loans classified as TDR.

The following table sets forth information on the Company's TDRs by class of financing receivable occurring during the stated periods. TDRs include multiple concessions, and the disclosure classifications in the table are based on the primary concession provided to the borrower.


	Three Months Ended September 30,
	2021					2020
	Number of Contracts	Pre-Modification Outstanding Recorded Investment		Post-Modification Outstanding Recorded Investment		Number of Contracts	Pre-Modification Outstanding Recorded Investment		Post-Modification Outstanding Recorded Investment
(dollars in thousands)
CONCESSION - Interest rate reduction

Commercial and industrial	—	$	—	$	—	1	$	143	$	143








CONCESSION - Extended maturity date





Commercial real estate-other	2	9,717		9,623		—	—		—
One- to four- family first liens	—	—		—		1	128		132



CONCESSION - Other
Agricultural	—	—		—		1	59		69


Farmland	—	—		—		1	150		161





Total	2	$	9,717	$	9,623	4	$	480	$	505

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	Nine Months Ended September 30,
	2021					2020
	Number of Contracts	Pre-Modification Outstanding Recorded Investment		Post-Modification Outstanding Recorded Investment		Number of Contracts	Pre-Modification Outstanding Recorded Investment		Post-Modification Outstanding Recorded Investment
(dollars in thousands)
CONCESSION - Interest rate reduction

Commercial and industrial	—	$	—	$	—	1	$	143	$	143

Farmland	2	1,982		1,982		—	—		—


One- to four- family first liens	1	171		171		—	—		—



CONCESSION - Extended maturity date





Commercial real estate-other	2	9,717		9,623		3	759		808
One- to four- family first liens	2	178		178		3	274		278



CONCESSION - Other
Agricultural	—	—		—		2	267		278


Farmland	—	—		—		3	504		514

Commercial real estate-other	1	44		44		—	—		—
One- to four- family first liens	1	150		150		—	—		—


Total	9	$	12,242	$	12,148	12	$	1,947	$	2,021

Loans by class of financing receivable modified as TDRs that redefaulted within 12 months subsequent to restructure during the stated periods were as follows:


	Three Months Ended September 30,						Nine Months Ended September 30,
	2021			2020			2021			2020
	Number of Contracts	Recorded Investment		Number of Contracts	Recorded Investment		Number of Contracts	Recorded Investment		Number of Contracts	Recorded Investment
(dollars in thousands)











CONCESSION - Extended maturity date






One- to four- family first liens	—	—		2	$	203	—	—		2	$	203



CONCESSION - Other
Agricultural	—	—		1	59		—	—		1	59


Farmland	—	—		1	150		—	—		1	150





Total	—	$	—	4	$	412	—	$	—	4	$	412

Modifications in response to COVID-19:

The Company began offering short-term loan modifications to assist borrowers during the COVID-19 pandemic. The CARES Act, as extended by the CAA, along with a joint interagency statement issued by the federal banking agencies, provide that short-term modifications made in response to COVID-19 do not need to be accounted for as a TDR. Accordingly, the Company does not account for such loan modifications as TDRs. The Company's loan modifications allow for the initial deferral of three months of principal and/or interest. The deferred interest is due and payable at the end of the deferral period, and the deferred principal is due and payable on the maturity date. At September 30, 2021, the outstanding balance of loans modified as a result of the COVID-19 pandemic totaled $ 4.5 million. The program is ongoing and additional loans continue to be granted deferrals.

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4. Derivatives, Hedging Activities and Balance Sheet Offsetting

The following table presents the total notional amounts and gross fair values of the Company’s derivatives as of the dates indicated. The derivative asset and liability balances are presented on a gross basis, prior to the application of master netting agreements, as included in other assets and other liabilities, respectively, on the consolidated balance sheets.

The fair values of the Company's derivative instrument assets and liabilities are summarized as follows:


	As of September 30, 2021						As of December 31, 2020
	Notional Amount		Fair Value				Notional Amount		Fair Value
(in thousands)			Assets		Liabilities				Assets		Liabilities
Designated as hedging instruments:
Fair value hedges:
Interest rate swaps	$	24,994	$	381	$	1,542	$	25,559	$	34	$	2,452


Total	$	24,994	$	381	$	1,542	$	25,559	$	34	$	2,452

Not designated as hedging instruments:
Interest rate swaps	$	351,227	$	6,014	$	6,023	$	347,380	$	10,758	$	10,807
RPAs - protection sold	4,291		—		—		4,471		4		—
RPAs - protection purchased	9,680		—		2		9,825		—		8
Interest rate lock commitments	23,839		316		—		—		—		—
Interest rate forward loan sales contracts	24,217		—		107		—		—		—
Total	$	413,254	$	6,330	$	6,132	$	361,676	$	10,762	$	10,815

Derivatives Designated as Hedging Instruments

The Company uses derivative instruments to hedge its exposure to economic risks, including interest rate, liquidity, and credit risk. Certain hedging relationships are formally designated and qualify for hedge accounting under GAAP as fair value or cash flow hedges.

Fair Value Hedges - Derivatives are designated as fair value hedges to limit the Company's exposure to changes in the fair value of assets or liabilities due to movements in interest rates. The Company entered into pay-fixed receive-floating interest rate swaps to manage its exposure to changes in fair value in certain fixed-rate assets. The gain or loss on the derivative as well as the offsetting loss or gain on the hedged item attributable to the hedged risk are recognized in interest income.

Cash Flow Hedges - Derivatives are designated as cash flow hedges in order to minimize the variability in cash flows of earning assets or forecasted transactions caused by movement in interest rates. In February 2020, the Company entered into a pay-fixed receive-variable interest rate swap with a notional amount of $ 30.0 million to hedge against adverse fluctuations in interest rates by reducing exposure to variability in cash flows relating to interest payments on the Company's variable rate debt. The interest rate swap was designated as a cash flow hedge. The gain or loss on the derivative was recorded in accumulated other comprehensive income and subsequently reclassified into interest expense in the same period(s) during which the hedged transaction affects earnings. The Company terminated its cash flow hedge in the fourth quarter of 2020.

The table below presents the effect of cash flow hedge accounting on AOCI for three and nine months ended September 30, 2021 and 2020.


	Amount of Gain (Loss) Recognized in AOCI on Derivative				Location of Gain (Loss) Reclassified from AOCI into Income	Amount of Gain (Loss) Reclassified from AOCI into Income
	Three Months Ended September 30,					Three Months Ended September 30,
(in thousands)	2021		2020			2021		2020
Interest rate swaps	$	—	$	8	Interest Expense	$	—	$	( 88 )

	Amount of Gain (Loss) Recognized in AOCI on Derivative				Location of Gain (Loss) Reclassified from AOCI into Income	Amount of Gain (Loss) Reclassified from AOCI into Income
	Nine Months Ended September 30,					Nine Months Ended September 30,
(in thousands)	2021		2020			2021		2020
Interest rate swaps	$	—	$	( 1,009 )	Interest Expense	$	—	$	( 145 )

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The table below presents the effect of the Company’s derivative financial instruments designated as hedging instruments on the consolidated statements of income for the periods indicated:


	Location and Amount of Gain or Loss Recognized in Income on Fair Value and Cash Flow Hedging Relationships
	For the Three Months Ended September 30,								For the Nine Months Ended September 30,
	2021				2020				2021				2020
(in thousands)	Interest Income		Other Income		Interest Income		Other Income		Interest Income		Other Income		Interest Income		Other Income
Total amounts of income and expense line items presented in the consolidated statements of income in which the effects of fair value or cash flow hedges are recorded	$	( 110 )	$	—	$	( 102 )	$	—	$	( 329 )	$	—	$	( 229 )	$	—

The effects of fair value and cash flow hedging:
Gain (loss) on fair value hedging relationships in subtopic 815-20:
Interest contracts:
Hedged items	( 199 )		—		( 174 )		—		( 1,254 )		—		1,814		—
Derivative designated as hedging instruments	157		—		180		—		910		—		( 1,813 )		—

Income statement effect of cash flow hedging relationships in subtopic 815-20:
Interest contracts:
Amount reclassified from AOCI into income	—		—		( 88 )		—		—		—		( 145 )		—

As of September 30, 2021, the following amounts were recorded on the balance sheet related to cumulative basis adjustment for fair value hedges:


Line Item in the Balance Sheet in Which the Hedged Item is Included	Carrying Amount of the Hedged Assets		Cumulative Amount of Fair Value Hedging Adjustment Included in the Carrying Amount of the Hedged Asset
(in thousands)
Loans	$	26,177	$	1,165

Derivatives Not Designated as Hedging Instruments

Interest Rate Swaps - The Company periodically enters into commercial loan interest rate swap agreements in order to provide commercial loan customers with the ability to convert from variable to fixed interest rates. These derivative contracts relate to transactions in which the Company enters into an interest rate swap with a customer, while simultaneously entering into an offsetting interest rate swap with an institutional counterparty.

Credit Risk Participation Agreements - The Company enters into RPAs to manage the credit exposure on interest rate contracts associated with a syndicated loan. The Company may enter into protection purchased RPAs with institutional counterparties to decrease or increase its exposure to a borrower. Under the RPA, the Company will receive or make payment if a borrower defaults on the related interest rate contract. The notional amount of the RPAs reflects the Company’s pro-rata share of the derivative instrument.

Interest Rate Forward Loan Sales Contracts & Interest Rate Lock Commitments - The Company enters into forward delivery contracts to sell residential mortgage loans at specific prices and dates in order to hedge the interest rate risk in its portfolio of mortgage loans held for sale and its residential mortgage interest rate lock commitments. At September 30, 2021, the Bank had commitments to originate mortgage loans held for sale totaling $ 23.8 million and forward sales commitments of $ 24.2 million, which are used to hedge both on-balance sheet and off-balance sheet exposures. At December 31, 2020, the Bank had $ 13.0 million of commitments to originate mortgage loans held for sale and no forward sales commitments.

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The following table presents the net gains (losses) recognized on the consolidated statements of income related to the derivatives not designated as hedging instruments for the periods indicated:


	Location in the Consolidated Statements of Income	For the Three Months Ended September 30,				For the Nine Months Ended September 30,
(in thousands)		2021		2020		2021		2020
Interest rate swaps	Other income	$	5	$	( 90 )	$	40	$	33
RPAs	Other income	1		( 3 )		2		94
Interest rate lock commitments	Loan revenue	316		—		316		—
Interest rate forward loan sales contracts	Loan revenue	( 107 )		—		( 107 )		—
Total		$	215	$	( 93 )	$	251	$	127

Offsetting of Derivatives

The Company has entered into agreements with certain counterparty financial institutions, which include master netting agreements. However, the Company has elected to account for all derivatives with counterparty institutions on a gross basis. The Company manages the risk of default by its borrower counterparties through its normal loan underwriting and credit monitoring policies and procedures.

The table below presents gross derivatives and the respective collateral received or pledged in the form of other financial instruments as of September 30, 2021 and December 31, 2020, which are generally marketable securities and/or cash. The collateral amounts in the table below are limited to the outstanding balances of the related asset or liability (after netting is applied); thus instances of over-collateralization are not shown. Further, the net amounts of derivative assets or liabilities can be reconciled to the tabular disclosure of fair value. The tabular disclosure of fair value provides the location that derivative assets and liabilities are presented on the consolidated balance sheets.


							Gross Amounts Not Offset in the Balance Sheet
(in thousands)	Gross Amounts of Recognized Assets (Liabilities)		Gross Amounts Offset in the Balance Sheet		Net Amounts of Assets (Liabilities) presented in the Balance Sheet		Financial Instruments		Cash Collateral Received (Paid)		Net Assets (Liabilities)
As of September 30, 2021
Asset Derivatives	$	6,711	$	—	$	6,711	$	—	$	—	$	6,711
Liability Derivatives	( 7,674 )		—		( 7,674 )		—		( 4,630 )		( 3,044 )

As of December 31, 2020
Asset Derivatives	$	10,796	$	—	$	10,796	$	—	$	—	$	10,796
Liability Derivatives	( 13,267 )		—		( 13,267 )		—		( 13,267 )		—

Credit-risk-related Contingent Features

The Company has an unsecured federal funds line with its institutional derivative counterparty. The Company has an agreement with its institutional derivative counterparty that contains a provision under which if the Company defaults on any of its indebtedness, including default where repayment of the indebtedness has not been accelerated by the lender, then the Company could also be declared in default on its derivative obligations. The Company also has an agreement with its derivative counterparty that contains a provision under which the Company could be declared in default on its derivative obligations if repayment of the underlying indebtedness is accelerated by the lender due to the Company’s default on the indebtedness.

As of September 30, 2021, the fair value of derivatives in a net liability position, which includes accrued interest but excludes any adjustment for nonperformance risk, related to these agreements was $ 6.3 million. As of September 30, 2021, the Company had minimum collateral posting thresholds with certain of its derivative counterparties and had posted $ 4.6 million of collateral related to these agreements. If the Company had breached any of these provisions at September 30, 2021, it could have been required to settle its obligations under the agreements at their termination value of $ 6.3 million.

5. Goodwill and Intangible Assets

The carrying amount of goodwill was $ 62.5 million at September 30, 2021 and December 31, 2020.

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The following table presents the gross carrying amount, accumulated amortization, and net carrying amount of other intangible assets at the dates indicated:


	As of September 30, 2021						As of December 31, 2020
(in thousands)	Gross Carrying Amount		Accumulated Amortization		Net Carrying Amount		Gross Carrying Amount		Accumulated Amortization		Net Carrying Amount
Core deposit intangible	$	41,745	$	( 29,649 )	$	12,096	$	41,745	$	( 26,440 )	$	15,305
Customer relationship intangible	5,265		( 3,451 )		1,814		5,265		( 2,630 )		2,635
Other	2,700		( 2,520 )		180		2,700		( 2,438 )		262
	$	49,710	$	( 35,620 )	$	14,090	$	49,710	$	( 31,508 )	$	18,202

Indefinite-lived trade name intangible	$	7,040					$	7,040

The following table provides the estimated future amortization expense for the remaining three months ending December 31, 2021 and the succeeding annual periods:


(in thousands)	Core Deposit Intangible		Customer Relationship Intangible		Other		Total

2021	$	981	$	241	$	24	$	1,246
2022	3,487		797		79		4,363
2023	2,833		518		51		3,402
2024	2,180		239		24		2,443
2025	1,526		19		2		1,547
Thereafter	1,089		—		—		1,089
Total	$	12,096	$	1,814	$	180	$	14,090

6. Other Assets

The components of the Company's other assets as of September 30, 2021 and December 31, 2020 were as follows:


(in thousands)	September 30, 2021		December 31, 2020

Bank-owned life insurance	$	84,822	$	83,483
Interest receivable	19,076		21,706
FHLB stock	10,319		13,784
Mortgage servicing rights	5,634		5,137
Operating lease right-of-use assets, net	3,093		3,613
Federal and state income taxes, current	1,433		—
Federal and state income taxes, deferred	9,298		3,845
Derivative assets	6,711		10,796
Other receivables/assets	12,007		11,129
	$	152,393	$	153,493

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7. Deposits

The following table presents the composition of our deposits as of the dates indicated:


(in thousands)	September 30, 2021		December 31, 2020
Noninterest bearing deposits	$	999,887	$	910,655
Interest checking deposits	1,464,389		1,351,641
Money market deposits	989,095		918,654
Savings deposits	616,924		529,751
Time deposits under $250	522,907		581,471
Time deposits of $250 or more	364,579		254,877
Total deposits	$	4,957,781	$	4,547,049

The Company had $ 5.6 million and $ 7.8 million in reciprocal time deposits through the CDARS program as of September 30, 2021 and December 31, 2020, respectively. Included in interest-bearing checking and money market deposits at September 30, 2021 and December 31, 2020 were $ 52.6 million and $ 14.8 million, respectively, of reciprocal deposits in the ICS program. The CDARS and ICS programs coordinate, on a reciprocal basis, a network of banks to spread deposits exceeding the FDIC insurance coverage limits out to numerous institutions in order to provide insurance coverage for all participating deposits.

As of September 30, 2021 and December 31, 2020, the Company had public entity deposits that were collateralized by investment securities of $ 265.9 million and $ 156.7 million, respectively.

8. Short-Term Borrowings

The following table summarizes our short-term borrowings as of the dates indicated:


	September 30, 2021				December 31, 2020
(in thousands)	Weighted Average Rate		Balance		Weighted Average Rate		Balance
Securities sold under agreements to repurchase	0.25	%	$	187,508	0.28	%	$	174,289
Federal Home Loan Bank advances	—		—		0.29		56,500



Total	0.25	%	$	187,508	0.28	%	$	230,789

Securities Sold Under an Agreement to Repurchase - Securities sold under agreements to repurchase are agreements in which the Company acquires funds by selling assets to another party under a simultaneous agreement to repurchase the same assets at a specified price and date. The Company enters into repurchase agreements and also offers a demand deposit account product to customers that sweeps their balances in excess of an agreed upon target amount into overnight repurchase agreements. All securities sold under agreements to repurchase are recorded on the face of the balance sheet.

Federal Home Loan Bank Advances - The Bank has a secured line of credit with the FHLBDM. Advances from the FHLBDM are collateralized primarily by one- to four-family residential, commercial and agricultural real estate first mortgages equal to various percentages of the total outstanding notes. See Note 3. Loans Receivable and the Allowance for Credit Losses of the notes to the consolidated financial statements.

Federal Funds Purchased - The Bank has unsecured federal funds lines totaling $ 170.0 million from multiple correspondent banking relationships. There were no borrowings from such lines at either September 30, 2021 or December 31, 2020.

Other - At September 30, 2021 and December 31, 2020, the Company had no Federal Reserve Discount Window borrowings, while the financing capacity was $ 62.7 million as of September 30, 2021 and $ 67.7 million as of December 31, 2020. As of September 30, 2021 and December 31, 2020, the Bank had municipal securities with a market value of $ 67.8 million and $ 72.0 million, respectively, pledged to the Federal Reserve Bank of Chicago to secure potential borrowings.

The Company has a credit agreement with a correspondent bank with a revolving commitment of $ 25.0 million. Prior to September 30, 2021, interest on the outstanding balance was payable at a rate of one-month LIBOR plus 1.75 %. Fees are paid on the average daily unused revolving commitment in the amount of 0.30 % per annum. On October 22, 2021, the credit agreement was amended such that, commencing September 30, 2021, interest is payable on the $ 25.0 million revolving commitment at an annual rate equal to the monthly reset term SOFR rate plus 1.70 %. There were no changes to the fees paid on the average daily unused revolving commitment as part of the amendment. The amended credit agreement matures on September 30, 2022. The Company had no balance outstanding under this revolving credit facility as of both September 30, 2021 and December 31, 2020.

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9. Long-Term Debt

Junior Subordinated Notes Issued to Capital Trusts

The table below summarizes the terms of each issuance of junior subordinated notes outstanding as of the dates indicated:


(in thousands)	Face Value		Book Value		Interest Rate	Rate		Maturity Date	Callable Date
September 30, 2021
ATBancorp Statutory Trust I	$	7,732	$	6,879	Three-month LIBOR + 1.68 %	1.80	%	06/15/2036	06/15/2011
ATBancorp Statutory Trust II	12,372		10,893		Three-month LIBOR + 1.65 %	1.77	%	09/15/2037	06/15/2012
Barron Investment Capital Trust I	2,062		1,792		Three-month LIBOR + 2.15 %	2.28	%	09/23/2036	09/23/2011
Central Bancshares Capital Trust II	7,217		6,868		Three-month LIBOR + 3.50 %	3.62	%	03/15/2038	03/15/2013
MidWestOne Statutory Trust II	15,464		15,464		Three-month LIBOR + 1.59 %	1.71	%	12/15/2037	12/15/2012
Total	$	44,847	$	41,896

December 31, 2020
ATBancorp Statutory Trust I	$	7,732	$	6,850	Three-month LIBOR + 1.68 %	1.90	%	06/15/2036	06/15/2011
ATBancorp Statutory Trust II	12,372		10,850		Three-month LIBOR + 1.65 %	1.87	%	09/15/2037	06/15/2012
Barron Investment Capital Trust I	2,062		1,767		Three-month LIBOR + 2.15 %	2.39	%	09/23/2036	09/23/2011
Central Bancshares Capital Trust II	7,217		6,832		Three-month LIBOR + 3.50 %	3.72	%	03/15/2038	03/15/2013
MidWestOne Statutory Trust II	15,464		15,464		Three-month LIBOR + 1.59 %	1.81	%	12/15/2037	12/15/2012
Total	$	44,847	$	41,763

The trust preferred securities are subject to mandatory redemption, in whole or in part, upon repayment of the junior subordinated notes at the stated maturity date or upon redemption of the junior subordinated notes. Each trust’s ability to pay amounts due on the trust preferred securities is solely dependent upon the Company making payment on the related junior subordinated notes. The Company’s obligation under the junior subordinated notes and other relevant trust agreements, in aggregate, constitutes a full and unconditional guarantee by the Company of each trust’s obligations under the trust preferred securities issued by each trust. The Company has the right to defer payment of interest on the junior subordinated notes and, therefore, distributions on the trust preferred securities, for up to five years , but not beyond the stated maturity date in the table above. During any such deferral period the Company may not pay cash dividends on its stock and generally may not repurchase its stock.

Subordinated Debentures

On May 1, 2019, with the acquisition of ATBancorp, the Company assumed $ 10.9 million of subordinated debentures (the "ATB Debentures"). The ATB Debentures had a stated maturity of May 31, 2023, and bore interest at a fixed annual rate of 6.50 %, with interest payable semi-annually. The Company redeemed the debentures, in whole, on May 31, 2021. At the time of redemption, we were permitted to treat 20 % of the ATB Debentures as Tier 2 capital under the applicable rules and regulations of the Federal Reserve. The amount of ATB Debentures qualifying as Tier 2 regulatory capital would have been phased-out completely starting in the second quarter of 2022.

On July 28, 2020, the Company completed the private placement offering of $ 65.0 million of its subordinated notes, of which $ 63.75 million have been exchanged for subordinated notes registered under the Securities Act of 1933. The 5.75 % fixed-to-floating rate subordinated notes are due July 30, 2030. At September 30, 2021, 100 % of the subordinated notes qualified as Tier 2 capital. Per applicable Federal Reserve rules and regulations, the amount of the subordinated notes qualifying as Tier 2 regulatory capital will be phased-out by 20 % of the amount of the subordinated notes in each of the five years beginning on the fifth anniversary preceding the maturity date of the subordinated notes.

Other Long-Term Debt

Long-term borrowings were as follows as of September 30, 2021 and December 31, 2020:


	September 30, 2021				December 31, 2020
(in thousands)	Weighted Average Rate		Balance		Weighted Average Rate		Balance
Finance lease payable	8.89	%	$	989	8.89	%	$	1,096
FHLB borrowings	2.76		48,132		1.92		91,198

Total	2.88	%	$	49,121	2.00	%	$	92,294

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As a member of the FHLBDM, the Bank may borrow funds from the FHLB in amounts up to 45 % of the Bank’s total assets, provided the Bank is able to pledge an adequate amount of qualified assets to secure the borrowings. Advances from the FHLB are collateralized primarily by one- to four-family residential, commercial and agricultural real estate first mortgages equal to various percentages of the total outstanding notes. See Note 3. Loans Receivable and the Allowance for Credit Losses of the notes to the consolidated financial statements. At September 30, 2021, FHLB long-term borrowings included advances from the FHLBC, which were collateralized by investment securities. See Note 2. Debt Securities of the notes to the consolidated financial statements.

As of September 30, 2021, FHLB borrowings were as follows:


(in thousands)	Weighted Average Rate		Amount
Due in 2021	—	%	$	—
Due in 2022	2.68	%	31,000
Due in 2023	2.79	%	11,000
Due in 2024	3.15	%	6,000


Total			48,000
Valuation adjustment from acquisition accounting			132
Total			$	48,132

10. Earnings per Share

The following table presents the computation of basic and diluted earnings per common share for the periods indicated:


	Three Months Ended September 30,				Nine Months Ended September 30,
(dollars in thousands, except per share amounts)	2021		2020		2021		2020
Basic Earnings (Loss) Per Share:
Net income (loss)	$	16,311	$	( 19,824 )	$	55,230	$	( 10,087 )
Weighted average shares outstanding	15,840,769		16,099,324		15,938,889		16,111,591
Basic earnings (loss) per common share	$	1.03	$	( 1.23 )	$	3.47	$	( 0.63 )

Diluted Earnings (Loss) Per Share:
Net income (loss)	$	16,311	$	( 19,824 )	$	55,230	$	( 10,087 )
Weighted average shares outstanding, including all dilutive potential shares	15,863,247		16,099,324		15,963,229		16,111,591
Diluted earnings (loss) per common share	$	1.03	$	( 1.23 )	$	3.46	$	( 0.63 )

The weighted average shares that have an antidilutive effect in the calculation of diluted earnings per common share and have been excluded from the computation above were as follows:


	Three Months Ended September 30,		Nine Months Ended September 30,
	2021	2020	2021	2020
Dilutive shares (1)	—	7,132	—	6,820
(1) Dilutive potential shares that were excluded from the computation of diluted earnings per common share for the three and nine months ended September 30, 2020 as a result of the reported net loss available to common shareholders.

11. Regulatory Capital Requirements and Restrictions on Subsidiary Cash

Regulatory Capital and Reserve Requirement - The Company (on a consolidated basis) and the Bank are subject to various regulatory capital requirements administered by the federal banking agencies. Failure to meet minimum capital requirements can initiate certain mandatory and possibly additional discretionary actions by regulators that, if undertaken, could have a direct material effect on the Company's consolidated financial statements. The capital amounts and classification are also subject to qualitative judgments by the regulators about components, risk weightings and other factors.

As of September 30, 2021 and December 31, 2020, the Bank was not required to maintain reserve balances in cash on hand or on deposit with Federal Reserve Banks, and therefore the total amount held in reserve for each of these periods was zero dollars.

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A comparison of the Company's and the Bank's capital with the corresponding minimum regulatory requirements in effect as of September 30, 2021 and December 31, 2020, is presented below:


	Actual		For Capital Adequacy Purposes With Capital Conservation Buffer (1)		To Be Well Capitalized Under Prompt Corrective Action Provisions
(dollars in thousands)	Amount	Ratio	Amount	Ratio	Amount	Ratio
At September 30, 2021
Consolidated:
Total capital/risk weighted assets	$ 603,666	13.58 %	$ 466,739	10.50 %	N/A	N/A
Tier 1 capital/risk weighted assets	497,955	11.20	377,837	8.50	N/A	N/A
Common equity tier 1 capital/risk weighted assets	456,059	10.26	311,160	7.00	N/A	N/A
Tier 1 leverage capital/average assets	497,955	8.70	229,025	4.00	N/A	N/A
MidWest One Bank:
Total capital/risk weighted assets	$ 579,124	13.05 %	$ 465,857	10.50 %	$ 443,674	10.00 %
Tier 1 capital/risk weighted assets	538,413	12.14	377,123	8.50	354,939	8.00
Common equity tier 1 capital/risk weighted assets	538,413	12.14	310,572	7.00	288,388	6.50
Tier 1 leverage capital/average assets	538,413	9.41	228,764	4.00	285,955	5.00

At December 31, 2020
Consolidated:
Total capital/risk weighted assets	$ 572,437	13.41 %	$ 448,068	10.50 %	N/A	N/A
Tier 1 capital/risk weighted assets	456,526	10.70	362,722	8.50	N/A	N/A
Common equity tier 1 capital/risk weighted assets	414,763	9.72	298,712	7.00	N/A	N/A
Tier 1 leverage capital/average assets	456,526	8.50	214,795	4.00	N/A	N/A
MidWest One Bank:
Total capital/risk weighted assets	$ 547,558	12.89 %	$ 446,113	10.50 %	$ 424,870	10.00 %
Tier 1 capital/risk weighted assets	500,981	11.79	361,139	8.50	339,896	8.00
Common equity tier 1 capital/risk weighted assets	500,981	11.79	297,409	7.00	276,165	6.50
Tier 1 leverage capital/average assets	500,981	9.35	214,251	4.00	271,992	5.00

(1) Includes a capital conservation buffer of 2.50 %.

Subordinated Notes - The Company completed a private placement of $ 65.0 million aggregate principal amount of 5.75 % fixed-to-floating rate subordinated notes on July 28, 2020. The subordinated notes are intended to qualify as Tier 2 capital for regulatory purposes, and the Company is using the net proceeds from the offering for general corporate purposes and to support its organic growth plans, including maintaining its regulatory capital ratios.

ATBancorp Subordinated Debenture Redemption: On May 31, 2021, the Company redeemed, in whole, $ 10.8 million of ATB Debentures. The amount of ATB Debentures qualifying as Tier 2 regulatory capital would have been phased-out completely starting in the second quarter of 2022. See Note 9. Long-Term Debt of the notes to the consolidated financial statements.

12. Commitments and Contingencies

Credit-related financial instruments - The Bank is a party to financial instruments with off-balance-sheet risk in the normal course of business to meet the financing needs of its customers. These financial instruments include commitments to extend credit, commitments to sell loans, and standby letters of credit. These instruments involve, to varying degrees, elements of credit risk in excess of the amount recognized in the balance sheets.

The Bank uses the same credit policies in making commitments and conditional obligations as it does for on-balance-sheet instruments. The following table summarizes the Bank's commitments as of the dates indicated:


	September 30, 2021		December 31, 2020
(in thousands)
Commitments to extend credit	$	950,157	$	897,274
Commitments to sell loans	58,679		59,956
Standby letters of credit	19,551		34,212
Total	$	1,028,387	$	991,442

The Bank’s exposure to credit loss in the event of nonperformance by the counterparty to the financial instrument for commitments to extend credit is represented by the contractual amount of those instruments. Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract. Since many of the commitments are expected to expire without being drawn upon, the total commitment amounts do not necessarily represent

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future cash requirements. The Bank evaluates each customer’s creditworthiness on a case-by-case basis. The amount of collateral obtained, if deemed necessary by the Bank upon extension of credit, is based on management’s credit evaluation of the party. Collateral held varies, but may include accounts receivable, crops, livestock, inventory, property and equipment, residential real estate and income-producing commercial properties.

Commitments to sell loans are agreements to sell loans held for sale to third parties at an agreed upon price.

Standby letters of credit are conditional commitments issued to guarantee the performance of a customer to a third party. Those guarantees are primarily issued to support public and private borrowing arrangements and, generally, have terms of one year or less. The credit risk involved in issuing letters of credit is essentially the same as that involved in extending loan facilities to customers. The Bank holds collateral, which may include accounts receivable, inventory, property, equipment and income-producing properties, that support those commitments, if deemed necessary. In the event the customer does not perform in accordance with the terms of the agreement with the third party, the Bank would be required to fund the commitment. The maximum potential amount of future payments the Bank could be required to make is represented by the contractual amount shown in the summary above. If the commitment is funded, the Bank would be entitled to seek recovery from the customer.

Liability for Off-Balance Sheet Credit Losses - The Company records a liability for off-balance sheet credit losses through a charge to credit loss expense (or a reversal of credit loss expense) on the Company's consolidated statements of income and other liabilities on the Company's consolidated balance sheets. At September 30, 2021, the liability for off-balance-sheet credit losses totaled $ 3.9 million, whereas the total amount of the liability as of December 31, 2020 was $ 4.1 million. The total amount recorded in credit loss (benefit) expense for the nine months ended September 30, 2021 was a benefit of $ 0.2 million, while credit loss expense of $ 1.1 million was recorded for the nine months ended September 30, 2020.

Litigation - In the normal course of business, the Company and its subsidiaries have been named, from time to time, as defendants in various legal actions. Certain of the actual or threatened legal actions may include claims for substantial compensatory and/or punitive damages or claims for indeterminate amounts of damages. Management, after consulting with legal counsel, is of the opinion that the ultimate liability, if any, resulting from these pending or threatened actions and proceedings will not have a material effect on the financial statements of the Company.

Concentrations of credit risk - Substantially all of the Bank’s loans, commitments to extend credit and standby letters of credit have been granted to customers in the Bank’s market areas. Although the loan portfolio of the Bank is diversified, approximately 62 % of the loans are real estate loans, excluding farmland, and approximately 7 % are agriculturally related. The concentrations of credit by type of loan are set forth in Note 3. Loans Receivable and the Allowance for Credit Losses . Commitments to extend credit are primarily related to commercial loans and home equity loans. Standby letters of credit were granted primarily to commercial borrowers. Investments in securities issued by state and political subdivisions involve certain governmental entities within Iowa and Minnesota. The carrying value of investment securities of Iowa and Minnesota political subdivisions totaled 18 % and 13 %, respectively, as of September 30, 2021.

13. Fair Value of Financial Instruments and Fair Value Measurements

Fair value is the exchange price that would be received for an asset or paid to transfer a liability (exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. There are three levels of inputs that may be used to measure fair values:

• Level 1 – Quoted prices (unadjusted) for identical assets or liabilities in active markets that the entity has the ability to access as of the measurement date.

• Level 2 – Significant other observable inputs other than Level 1 prices, such as quoted prices for similar assets or liabilities, quoted prices in markets that are not active, or other inputs that are observable or can be corroborated by observable market data.

• Level 3 – Significant unobservable inputs that reflect a company’s own assumptions about the assumptions that market participants would use in pricing an asset or liability.

For additional information regarding the valuation methodologies used to measure the Company's assets recorded at fair value, and for estimating fair value for financial instruments not recorded at fair value, see Note 1. Nature of Business and Significant Accounting Policies and Note 20. Estimated Fair Value of Financial Instruments and Fair Value Measurements to the consolidated financial statements in the Company's 2020 Annual Report on Form 10-K, filed with the SEC on March 11, 2021.

The Company uses fair value to measure certain assets and liabilities on a recurring basis, primarily available for sale debt securities, derivatives and mortgage servicing rights. For assets measured at the lower of cost or fair value, the fair value measurement criteria may or may not be met during a reporting period, and such measurements are therefore considered

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"nonrecurring" for purposes of disclosing the Company's fair value measurements. Fair value is used on a nonrecurring basis to adjust carrying values for collateral dependent individually analyzed loans and other real estate owned.

Recurring Basis

The following table summarizes assets and liabilities measured at fair value on a recurring basis as of the dates indicated, by level within the fair value hierarchy:


	Fair Value Measurement at September 30, 2021 Using
(in thousands)	Total		Level 1		Level 2		Level 3
Assets:
Available for sale debt securities:
U.S. Government agencies and corporations	$	288	$	—	$	288	$	—
State and political subdivisions	701,281		—		701,281		—
Mortgage-backed securities	109,231		—		109,231		—
Collateralized mortgage obligations	853,833		—		853,833		—
Corporate debt securities	472,269		—		472,269		—
Derivative assets	6,711		—		6,395		316
Mortgage servicing rights	5,634		—		5,634		—

Liabilities:
Derivative liabilities	$	7,674	$	—	$	7,674	$	—


	Fair Value Measurement at December 31, 2020 Using
(in thousands)	Total		Level 1		Level 2		Level 3
Assets:
Debt securities available for sale:
U.S. Government agencies and corporations	$	361	$	—	$	361	$	—
State and political subdivisions	628,346		—		628,346		—
Mortgage-backed securities	94,018		—		94,018		—
Collateralized mortgage obligations	565,836		—		565,836		—
Corporate debt securities	368,820		—		368,820		—
Derivative assets	10,796		—		10,796		—
Mortgage servicing rights	5,137		—		5,137		—

Liabilities:
Derivative liabilities	$	13,267	$	—	$	13,267	$	—

There were no transfers of assets between Level 3 and other levels of the fair value hierarchy during the three and nine months ended September 30, 2021 or the year ended December 31, 2020.

Changes in the fair value of available for sale debt securities are included in other comprehensive income.

The fair values of the interest rate lock commitments and interest rate forward loan sales contracts are estimated using quoted or published market prices for similar instruments, adjusted for factors such as pull-through rate assumptions based on historical information, where appropriate. The pull-through rate assumptions are considered Level 3 valuation inputs and are significant to the interest rate lock commitment valuation; as such, the interest rate lock commitment derivatives are classified as Level 3.

The following table presents the valuation technique, significant unobservable inputs, and quantitative information about the unobservable inputs used for fair value measurements of the financial instruments held by the Company and categorized within Level 3 of the fair value hierarchy as of the dates indicated:


	Fair Value at
(dollars in thousands)	September 30, 2021		December 31, 2020		Valuation Techniques(s)	Unobservable Input	Range of Inputs					Weighted Average
Interest rate lock commitments	$	316	$	—	Quoted or published market prices of similar instruments, adjusted for factors such as pull-through rate assumptions	Pull-through rate	88	%	-	100	%	88	%

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Nonrecurring Basis

The following table presents assets measured at fair value on a nonrecurring basis as of the dates indicated:


	Fair Value Measurement at September 30, 2021 Using
(in thousands)	Total		Level 1		Level 2		Level 3
Collateral dependent individually analyzed loans	$	16,340	$	—	$	—	$	16,340
Foreclosed assets, net	454		—		—		454


	Fair Value Measurement at December 31, 2020 Using
(in thousands)	Total		Level 1		Level 2		Level 3
Collateral dependent individually analyzed loans	$	34,265	$	—	$	—	$	34,265
Foreclosed assets, net	2,316		—		—		2,316

The following table presents the valuation technique(s), unobservable inputs, and quantitative information about the unobservable inputs used for fair value measurements of the financial instruments held by the Company and categorized within Level 3 of the fair value hierarchy as of the dates indicated:


	Fair Value at
(dollars in thousands)	September 30, 2021		December 31, 2020		Valuation Techniques(s)	Unobservable Input	Range of Inputs					Weighted Average
Collateral dependent individually analyzed loans	$	16,340	$	34,265	Fair value of collateral	Valuation adjustments	7	%	-	55	%	25	%
Foreclosed assets, net	$	454	$	2,316	Fair value of collateral	Valuation adjustments	8	%	-	66	%	24	%

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

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Carrying Amount and Estimated Fair Value of Financial Instruments

The carrying amount and estimated fair value of financial instruments at September 30, 2021 and December 31, 2020 were as follows:


	September 30, 2021
(in thousands)	Carrying Amount		Estimated Fair Value		Level 1		Level 2		Level 3
Financial assets:
Cash and cash equivalents	$	138,514	$	138,514	$	138,514	$	—	$	—
Debt securities available for sale	2,136,902		2,136,902		—		2,136,902		—
Loans held for sale	58,679		58,786		—		58,786		—
Loans held for investment, net	3,220,744		3,238,812		—		—		3,238,812
Interest receivable	19,076		19,076		—		19,076		—
FHLB stock	10,319		10,319		—		10,319		—
Derivative assets	6,711		6,711		—		6,395		316
Financial liabilities:
Noninterest bearing deposits	999,887		999,887		999,887		—		—
Interest bearing deposits	3,957,894		3,956,787		3,070,408		886,379		—
Short-term borrowings	187,508		187,508		187,508		—		—
Finance leases payable	989		989		—		989		—
FHLB borrowings	48,132		49,369		—		49,369		—
Junior subordinated notes issued to capital trusts	41,896		35,382		—		35,382		—
Subordinated debentures	63,843		68,411		—		68,411		—

Derivative liabilities	7,674		7,674		—		7,674		—


	December 31, 2020
(in thousands)	Carrying Amount		Estimated Fair Value		Level 1		Level 2		Level 3
Financial assets:
Cash and cash equivalents	$	82,659	$	82,659	$	82,659	$	—	$	—

Debt securities available for sale	1,657,381		1,657,381		—		1,657,381		—

Loans held for sale	59,956		60,039		—		60,039		—
Loans held for investment, net	3,426,723		3,469,515		—		—		3,469,515
Interest receivable	21,706		21,706		—		21,706		—
FHLB stock	13,784		13,784		—		13,784		—
Derivative assets	10,796		10,796		—		10,796		—
Financial liabilities:
Noninterest bearing deposits	910,655		910,655		910,655		—		—
Interest bearing deposits	3,636,394		3,640,365		2,800,046		840,319
Short-term borrowings	230,789		230,789		230,789		—		—
Finance leases payable	1,096		1,096		—		1,096		—
FHLB borrowings	91,198		93,380		—		93,380
Junior subordinated notes issued to capital trusts	41,763		33,986		—		33,986
Subordinated debentures	74,634		77,228		—		77,228

Derivative liabilities	13,267		13,267		—		13,267		—

14. Leases

Substantially all of the leases in which the Company is the lessee are comprised of real estate property for banking offices and office space with terms extending through 2025. We do not have any subleased properties. Substantially all of our leases are classified as operating leases, with the Company only holding one existing finance lease for a banking office location with a lease term through 2025.

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Supplemental balance sheet information related to leases was as follows:


(in thousands)	Classification	September 30, 2021			December 31, 2020
Lease Right-of-Use Assets
Operating lease right-of-use assets	Other assets	$	3,093		$	3,613
Finance lease right-of-use asset	Premises and equipment, net	470			542
Total right-of-use assets		$	3,563		$	4,155

Lease Liabilities
Operating lease liability	Other liabilities	$	4,038		$	4,583
Finance lease liability	Long-term debt	989			1,096
Total lease liabilities		$	5,027		$	5,679

Weighted-average remaining lease term
Operating leases		8.95 years			8.82 years
Finance lease		4.92 years			5.67 years

Weighted-average discount rate
Operating leases		4.05		%	3.92		%
Finance lease		8.89		%	8.89		%

The following table represents lease costs and other lease information. As the Company elected, for all classes of underlying assets, not to separate lease and non-lease components and instead to account for them as a single lease component, the variable lease cost primarily represents variable payments such as common area maintenance and utilities.


	Three Months Ended				Nine Months Ended
	September 30,				September 30,
(in thousands)	2021		2020		2021		2020
Lease Costs
Operating lease cost	$	301	$	209	$	894	$	937
Variable lease cost	( 3 )		42		89		189

Interest on lease liabilities (1)	23		25		69		78
Amortization of right-of-use assets	24		24		72		72
Net lease cost	$	345	$	300	$	1,124	$	1,276

Other Information
Cash paid for amounts included in the measurement of lease liabilities:
Operating cash flows from operating leases	$	553	$	443	$	1,655	$	1,598
Operating cash flows from finance lease	23		25		69		78
Finance cash flows from finance lease	37		32		107		94

Supplemental non-cash information on lease liabilities:
Right-of-use assets obtained in exchange for new operating lease liabilities	232		39		232		132

(1) Included in long-term debt interest expense in the Company’s consolidated statements of income. All other lease costs in this table are included in occupancy expense of premises, net.

Future minimum payments for finance leases and operating leases with initial or remaining terms of one year or more for the remaining three months ending December 31, 2021 and the succeeding annual periods were as follows:


(in thousands)	Finance Leases		Operating Leases

December 31, 2021	$	59	$	295
December 31, 2022	240		1,060
December 31, 2023	245		947
December 31, 2024	250		717
December 31, 2025	255		247
Thereafter	171		1,973
Total undiscounted lease payment	$	1,220	$	5,239
Amounts representing interest	( 231 )		( 1,201 )
Lease liability	$	989	$	4,038

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15. Subsequent Events

The Company has evaluated events that have occurred subsequent to September 30, 2021 and has concluded there are no other subsequent events that would require recognition in the accompanying consolidated financial statements.

On October 19, 2021, the board of directors of the Company declared a cash dividend of $ 0.2250 per share payable on December 15, 2021 to shareholders of record as of the close of business on December 1, 2021.

On October 22, 2021, the Company entered into an amended credit agreement with a correspondent bank, effective September 30, 2021, that provides a revolving commitment of up to $ 25.0 million. Interest is payable on the $ 25.0 million revolving commitment at an annual rate equal to the monthly reset term SOFR rate plus 1.70 %, with a maturity date of September 30, 2022. The Company had no balance outstanding under the terms of the credit agreement as of September 30, 2021.

On November 1, 2021, the Company and Iowa First Bancshares Corp. (IOFB), the holding company for First National Bank in Fairfield (FNBF) and First National Bank of Muscatine (FNBM), jointly announced the signing of a definitive merger agreement pursuant to which the Company will acquire IOFB, FNBM, and FNBF. Under terms of the definitive merger agreement, the aggregate consideration to be paid by MidWest One for IOFB will consist of cash consideration of $ 47.6 million, subject to adjustment. The acquisition is expected to close during the first quarter of 2022 and is subject to approval by IOFB’s shareholders and regulatory agencies, as well as other customary closing conditions.

Pursuant to the Company’s share repurchase program approved on June 22, 2021, the Company has purchased 37,700 shares of common stock subsequent to September 30, 2021 and through November 2, 2021 for a total cost of $ 1.2 million inclusive of transaction costs, leaving $ 6.4 million remaining available under the program.

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

CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS

This Form 10-Q contains certain “forward-looking statements” within the meaning of such term in the Private Securities Litigation Reform Act of 1995. We and our representatives may, from time to time, make written or oral statements that are “forward-looking” and provide information other than historical information. These statements involve known and unknown risks, uncertainties and other factors that may cause actual results to be materially different from any results, levels of activity, performance or achievements expressed or implied by any forward-looking statement. These factors include, among other things, the factors listed below. Forward-looking statements, which may be based upon beliefs, expectations and assumptions of our management and on information currently available to management, are generally identifiable by the use of words such as “believe,” “expect,” “anticipate,” “should,” “could,” “would,” “plans,” “intend,” “project,” “estimate,” “forecast,” “may” or similar expressions. These forward-looking statements are subject to certain risks and uncertainties that could cause actual results to differ materially from those expressed in, or implied by, these statements. Readers are cautioned not to place undue reliance on any such forward-looking statements, which speak only as of the date made. Additionally, we undertake no obligation to update any statement in light of new information or future events, except as required under federal securities law.

Our ability to predict results or the actual effect of future plans or strategies is inherently uncertain. Factors that could have an impact on our ability to achieve operating results, growth plan goals and future prospects include, but are not limited to, the following:

• the effects of the COVID-19 pandemic, including its effects on the economic environment, our customers and our operations, including due to supply chain disruptions, as well as any changes to federal, state, or local government laws, regulations, or orders in connection with the pandemic;

• government intervention in the U.S. financial system in response to the COVID-19 pandemic, including the effects of recent legislative, tax, accounting and regulatory actions and reforms;

• the impact of the COVID-19 pandemic on our financial results, including possible lost revenue and increased expenses (including the cost of capital), as well as possible goodwill impairment charges;

• the risks of mergers (including with Iowa First Bancshares Corp.), including, without limitation, the related time and costs of implementing such transactions, integrating operations as part of these transactions and possible failures to achieve expected gains, revenue growth and/or expense savings from such transactions;

• credit quality deterioration or pronounced and sustained reduction in real estate market values causing an increase in the allowance for credit losses, an increase in the credit loss expense, and a reduction in net earnings;

• the effects of interest rates, including on our net income and the value of our securities portfolio;

• changes in the economic environment, competition, or other factors that may affect our ability to acquire loans or influence the anticipated growth rate of loans and deposits and the quality of the loan portfolio and loan and deposit pricing;

• fluctuations in the value of our investment securities;

• governmental monetary and fiscal policies;

• changes in and uncertainty related to benchmark interest rates used to price loans and deposits, including the expected elimination of LIBOR, and the adoption of a substitute;

• legislative and regulatory changes, including changes in banking, securities, trade, and tax laws and regulations and their application by our regulators;

• the ability to attract and retain key executives and employees experienced in banking and financial services;

• the sufficiency of the allowance for credit losses to absorb the amount of actual losses inherent in our existing loan portfolio;

• our ability to adapt successfully to technological changes to compete effectively in the marketplace;

• credit risks and risks from concentrations (by geographic area and by industry) within our loan portfolio;

• the effects of competition from other commercial banks and other financial institutions operating in our markets or elsewhere or providing similar services;

• the failure of assumptions underlying the establishment of allowances for credit losses and estimation of values of collateral and various financial assets and liabilities;

• volatility of rate-sensitive deposits;

• operational risks, including data processing system failures or fraud;

• asset/liability matching risks and liquidity risks;

• the costs, effects and outcomes of existing or future litigation;

• changes in general economic, political, or industry conditions, nationally, internationally or in the communities in which we conduct business;

• changes in accounting policies and practices, as may be adopted by state and federal regulatory agencies and the FASB;

• war or terrorist activities, widespread disease or pandemic, or other adverse external events, which may cause deterioration in the economy or cause instability in credit markets;

• the effects of cyber-attacks;

• the imposition of tariffs or other domestic or international governmental policies impacting the value of the agricultural or other products of our borrowers; and

• other factors and risks described under “Risk Factors” in this Form 10-Q and in other reports we file with the SEC.

We qualify all of our forward-looking statements by the foregoing cautionary statements. Because of these risks and other uncertainties, our actual future results, performance or achievement, or industry results, may be materially different from the results indicated by these forward-looking statements. In addition, our past results of operations are not necessarily indicative of our future results.

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OVERVIEW

The Company provides financial services to individuals, businesses, governmental units and institutional customers located primarily in the upper Midwest through its bank subsidiary, MidWest One Bank. The Bank has locations throughout central and eastern Iowa, the Minneapolis/St. Paul metropolitan area of Minnesota, southwestern Wisconsin, southwestern Florida, and Denver, Colorado.

The Bank is focused on delivering relationship-based business and personal banking products and services. The Bank provides commercial loans, real estate loans, agricultural loans, credit card loans, and consumer loans. The Bank also provides deposit products including demand and interest checking accounts, savings accounts, money market accounts, and time deposits. Complementary to our loan and deposit products, the Bank also provides products and services including treasury management, Zelle, online and mobile banking, credit and debit cards, ATMs, and safe deposit boxes. The Bank also has a trust department through which it offers services including the administration of estates, personal trusts, and conservatorships and the management of real property. Finally, the Bank’s investment services department offers financial planning, investment advisory, and retail securities brokerage services (the latter of which is provided through an agreement with a third-party registered broker-dealer).

Our results of operations are significantly affected by our net interest income. Results of operations are also affected by noninterest income and expense, credit loss expense 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 the statistical information and financial data appearing in this report as well as our Annual Report on Form 10-K for the year ended December 31, 2020, filed with the SEC on March 11, 2021. Results of operations for the three and nine months ended September 30, 2021 are not necessarily indicative of results to be attained for any other period.

COVID-19 Update

Our response to COVID-19 continues to be focused on how we can best serve our employees, customers, and communities. The Bank has utilized a combination of digital banking, voice, branch drive-thru and other channels in order to meet the needs of our customers. We implemented additional safety measures to achieve appropriate social distancing for both customers and employees throughout our locations. We have continued to adjust procedures and restrictions based on local conditions and generally in alignment with guidance from the Centers for Disease Control.

Loan Payment Deferral Program Update: The federal government has taken several actions designed to cushion the economic impact as a result of COVID-19 and related restrictions. The CARES Act and guidance from the FRB and the FDIC allow financial institutions the option to temporarily suspend certain requirements under GAAP related to TDRs for a limited period of time during the COVID-19 pandemic and that short-term modifications made on a good faith basis in response to COVID-19 to borrowers who were current prior to any relief are not to be considered TDRs. This includes short-term (e.g., six months) modifications, such as payment deferrals, fee waivers, extensions of repayment terms, or other delays in payment that are insignificant. Borrowers considered current are those that are less than 30 days past due on their contractual payments at the time a modification program is implemented.

As of September 30, 2021, the outstanding balance of loans modified as a result of the COVID-19 pandemic was $4.5 million, as compared to $44.1 million as of December 31, 2020.

PPP Loans: The Bank was a participating lender in the PPP. The PPP loans have a two-year or five-year term and earn interest at 1%. Loans funded through the PPP are fully guaranteed by the U.S. government if certain criteria are met. The Company believes that the majority of these loans will be forgiven by the SBA in accordance with the terms of the program. Should those circumstances change, the Company could be required to establish additional allowance for credit loss through additional credit loss expense charged to earnings.

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The following table presents PPP loan measures as of the dates indicated:


	September 30, 2021									December 31, 2020
	Round 1			Round 2			Total			Round 1			Round 2			Total
(Dollars in millions)	#	$		#	$		#	$		#	$		#	$		#	$
Total PPP Loans Funded	2,681	$	348.5	2,175	$	149.3	4,856	$	497.8	2,681	$	348.5	—	$	—	2,681	$	348.5
PPP Loan Forgiveness	2,478	323.7		1,514	72.9		3,992	396.6		253	70.1		—	—		253	70.1
Outstanding PPP Loans (1)	184	16.3		661	73.1		845	89.4		2,410	259.3		—	—		2,410	259.3

Unearned Income	$0.1			$2.8			$2.9			$5.3			$—			$5.3

(1) Outstanding loans are presented net of unearned income.

Critical Accounting Estimates

Management has identified the accounting policies related to the ACL, fair value of assets acquired and liabilities assumed in a business combination, and the annual impairment testing of goodwill and other intangible assets to be critical accounting policies. 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, 2020, filed with the SEC on March 11, 2021, and there have been no material changes in these critical accounting policies since December 31, 2020.

RESULTS OF OPERATIONS

Comparison of Operating Results for the Three Months Ended September 30, 2021 and September 30, 2020

Summary

Overall: Our consolidated net income for the three months ended September 30, 2021 was $16.3 million, an increase of $36.1 million, from the net loss of $19.8 million for the three months ended September 30, 2020. The increase in net income was due primarily to a goodwill impairment charge of $31.5 million that was recorded in the third quarter of 2020, which did not recur in the three months ended September 30, 2021. In addition, the increase in net income for the three months ended September 30, 2021 was due in part to a decline in credit loss expense of $6.1 million, or 121.6%, coupled with a $2.5 million, or 6.7%, increase in net interest income. Partially offsetting the identified increases to core earnings was a $2.2 million, or 98.6%, increase in income tax expense, a $1.3 million, or 4.7%, increase in noninterest expense when excluding the impact of the goodwill impairment, and a $0.4 million, or 4.1%, decrease in noninterest income.

Credit Loss (Benefit) Expense: The credit loss benefit of $1.1 million recorded in the third quarter of 2021 reflected overall improvements in forecasted economic conditions and stabilization of the credit risk profile. In addition, during the third quarter of 2021, net loan recoveries were $0.9 million, as compared to net loan charge-offs of $1.8 million in the third quarter of 2020. The Company recorded credit loss expense of $5.0 million in the third quarter of 2020 primarily due to the impact of economic uncertainty stemming from the COVID-19 pandemic on forecasted economic conditions.

Noninterest Income : Noninterest income decreased $0.4 million primarily due to a decline in mortgage origination fee income of $1.3 million, partially offset by an increase of $0.6 million in investment services and trust activities revenue driven by positive improvements in the financial markets and increased assets under administration and a $0.2 million increase in card revenue, which reflected an increase in transaction volumes in the third quarter of 2021 when compared to the third quarter of 2020.

Noninterest Expense: The $30.2 million decline in noninterest expense was primarily due to a $31.5 million goodwill impairment charge recorded in the third quarter of 2020 that did not recur in the third quarter of 2021. Excluding the goodwill impairment, noninterest expense increased $1.3 million in the third quarter of 2021 as compared to the third quarter of 2020, largely due to increases of $0.9 million, $0.3 million, and $0.3 million of compensation and employee benefits, occupancy expense of premises, net, and 'Other' noninterest expense, respectively. The increase in compensation and employee benefits was primarily due to an increase of $0.7 million of incentive and commission expense. Occupancy expense of premises, net increased $0.3 million, primarily as a result of the disposal and writedown of fixed assets, while 'Other' noninterest expense increased primarily as a result of $0.7 million of expenses incurred for the settlement of litigation claims. Partially offsetting the identified increases in noninterest expense was a decline of $0.4 million in the amortization of intangibles, which reflected the accelerated amortization methodology utilized for certain finite-lived intangible assets.

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Financial Performance: Both basic and diluted earnings per common share for the three months ended September 30, 2021 were $1.03 as compared with both basic and diluted loss per common share of $1.23 for the three months ended September 30, 2020. Our annualized return on average shareholders' equity was 12.00% for the three months ended September 30, 2021 compared with (14.88)% for the three months ended September 30, 2020.

Selected financial performance and capital ratios for the Company are presented in the table below as of or for the quarters ended September 30, 2021 and 2020.


	As of or for the Three Months Ended September 30,
(dollars in thousands, except per share amounts)	2021			2020
Net Income	$	16,311		$	(19,824)



Return on Average Assets	1.11		%	(1.48)		%
Return on Average Equity	12.00			(14.88)
Return on Average Tangible Equity (1)	15.06			12.56
Efficiency Ratio (1)	56.34			55.37
Dividend Payout Ratio	21.84			nm (2)

Common Equity Ratio	9.03			9.36
Tangible Common Equity Ratio (1)	7.71			7.82
Book Value per Share	$	33.71		$	31.00
Tangible Book Value per Share (1)	28.40			25.45
(1) A non-GAAP financial measure. See "Non-GAAP Financial Measures" for a reconciliation to the most comparable GAAP equivalents.
(2) Ratio has been determined to be not meaningful ("nm") for this period.

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Net Interest Income

The following table shows 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 interest-bearing liabilities, and the related yields and costs for the periods indicated.


	Three Months Ended September 30,
	2021						2020
	Average Balance		Interest Income/ Expense		Average Yield/ Cost		Average Balance		Interest Income/ Expense		Average Yield/ Cost
(dollars in thousands)
ASSETS
Loans, including fees (1)(2)(3)	$	3,356,680	$	36,622	4.33	%	$	3,576,642	$	38,727	4.31	%
Taxable investment securities	1,628,605		6,655		1.62		864,864		4,574		2.10
Tax-exempt investment securities (2)(4)	459,717		3,043		2.63		405,517		2,968		2.91
Total securities held for investment (2)	2,088,322		9,698		1.84		1,270,381		7,542		2.36
Other	44,915		21		0.19		88,152		29		0.13
Total interest earning assets (2)	$	5,489,917	$	46,341	3.35	%	$	4,935,175	$	46,298	3.73	%
Other assets	321,311						376,211
Total assets	$	5,811,228					$	5,311,386

LIABILITIES AND SHAREHOLDERS' EQUITY
Interest checking deposits	$	1,434,560	$	1,056	0.29	%	$	1,174,033	$	1,049	0.36	%
Money market deposits	955,174		506		0.21		847,059		622		0.29
Savings deposits	606,449		316		0.21		473,000		351		0.30
Time deposits	890,866		1,272		0.57		931,655		3,274		1.40
Total interest bearing deposits	3,887,049		3,150		0.32		3,425,747		5,296		0.62
Short-term borrowings	182,484		132		0.29		165,840		175		0.42
Long-term debt	163,817		1,597		3.87		231,406		1,874		3.22
Total borrowed funds	346,301		1,729		1.98		397,246		2,049		2.05
Total interest bearing liabilities	$	4,233,350	$	4,879	0.46	%	$	3,822,993	$	7,345	0.76	%

Noninterest bearing deposits	995,786						891,425
Other liabilities	43,040						67,111
Shareholders’ equity	539,052						529,857
Total liabilities and shareholders’ equity	$	5,811,228					$	5,311,386
Net interest income (2)			$	41,462					$	38,953
Net interest spread (2)					2.89	%					2.97	%
Net interest margin (2)					3.00	%					3.14	%

Total deposits (5)	$	4,882,835	$	3,150	0.26	%	$	4,317,172	$	5,296	0.49	%
Cost of funds (6)					0.37	%					0.62	%


(1)			Average balance includes nonaccrual loans.
(2)			Tax equivalent. The federal statutory tax rate utilized was 21%.
(3)			Interest income includes net loan fees, loan purchase discount accretion and tax equivalent adjustments. Net loan fees were $3.5 million and $1.1 million for the three months ended September 30, 2021 and September 30, 2020, respectively. Loan purchase discount accretion was $774 thousand and $1.9 million for the three months ended September 30, 2021 and September 30, 2020, respectively. Tax equivalent adjustments were $507 thousand and $536 thousand for the three months ended September 30, 2021 and September 30, 2020, respectively. The federal statutory tax rate utilized was 21%.
(4)			Interest income includes tax equivalent adjustments of $615 thousand and $608 thousand for the three months ended September 30, 2021 and September 30, 2020, respectively. The federal statutory tax rate utilized was 21%.
(5)			Total deposits is the sum of total interest-bearing deposits and noninterest bearing deposits. The cost of total deposits is calculated as annualized interest expense on deposits divided by average total deposits.
(6)			Cost of funds is calculated as annualized total interest expense divided by the sum of average total deposits and borrowed funds.

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The following table shows changes to tax equivalent net interest income attributable to (i) changes in volume and (ii) changes in rate. Changes attributable to both rate and volume have been allocated proportionately to the change due to volume and the change due to rate.


	Three Months Ended September 30,
	2021 Compared to 2020 Change due to
(in thousands)	Volume		Yield/Cost		Net
Increase (decrease) in interest income:
Loans, including fees (1)	$	(2,292)	$	187	$	(2,105)
Taxable investment securities	3,315		(1,234)		2,081
Tax-exempt investment securities (1)	376		(301)		75
Total securities held for investment (1)	3,691		(1,535)		2,156
Other	(18)		10		(8)
Change in interest income (1)	1,381		(1,338)		43
Increase (decrease) in interest expense:
Interest checking deposits	224		(217)		7
Money market deposits	71		(187)		(116)
Savings deposits	87		(122)		(35)
Time deposits	(138)		(1,864)		(2,002)
Total interest-bearing deposits	244		(2,390)		(2,146)
Short-term borrowings	16		(59)		(43)
Long-term debt	(612)		335		(277)
Total borrowed funds	(596)		276		(320)
Change in interest expense	(352)		(2,114)		(2,466)
Change in net interest income	$	1,733	$	776	$	2,509
Percentage (decrease) in net interest income over prior period					6.4		%
(1) Tax equivalent, using a federal statutory tax rate of 21%.

Our tax equivalent net interest income for the third quarter of 2021 was $41.5 million, an increase of $2.5 million, or 6.4%, as compared to $39.0 million for the third quarter of 2020. The increase in tax equivalent net interest income in the third quarter of 2021 as compared to the third quarter of 2020 was due primarily to an increase of $2.2 million, or 28.6%, in interest income earned from investment securities and a decline of $2.5 million, or 33.6%, in interest expense, partially offset by a decline of $2.1 million, or 5.4%, in loan interest income. The increase in interest income earned from investment securities reflected the larger volume of securities held for investment from the Company's investment of net deposit inflows, partially offset by a decrease in yield. The decline in interest expense was primarily due to a decline in interest expense on interest-bearing deposits of $2.1 million, or 40.5%, to $3.2 million as a result of lower rates paid on such deposits that more than offset the increase in the volume of deposits. Loan purchase discount accretion added $0.8 million to net interest income in the third quarter of 2021 compared to $1.9 million in the third quarter of 2020. Net fee accretion for PPP loans for the third quarter of 2021 was $3.6 million, compared to $1.3 million in the third quarter of 2020.

The tax equivalent net interest margin for the third quarter of 2021 was 3.00%, or 14 basis points lower than the tax equivalent net interest margin of 3.14% for the third quarter of 2020. The tax equivalent yield on investment securities decreased by 52 basis points, while tax equivalent yield on loans increased 2 basis points. Combined, the resulting yield on interest-earning assets for the third quarter of 2021 was 38 basis points lower than the third quarter of 2020, which primarily reflected the shift in earning asset mix to a greater proportion of investment securities, which generally have lower yields than loans. The cost of interest-bearing deposits decreased 30 basis points, while the average cost of borrowings was 7 basis point lower for the third quarter of 2021, compared to the third quarter of 2020.

Credit Loss (Benefit) Expense

We recorded a credit loss benefit during the third quarter of 2021 of $1.1 million, as compared to credit loss expense of $5.0 million for the third quarter of 2020, a decrease of $6.1 million, or 121.6%. In the third quarter of 2020, the Company recorded a credit loss expense primarily due to the impact of economic uncertainty stemming from the COVID-19 pandemic on forecasted economic conditions. The decline in credit loss expense in the third quarter of 2021 reflected overall improvements in forecasted economic conditions and stabilization of the credit risk profile, coupled with net loan recoveries of $0.9 million in the third quarter of 2021 as compared to net loan charge-offs of $1.8 million in the third quarter of 2020. Specifically, the economic forecast utilized by the Company is sensitive to changes in the following loss drivers: (1) Midwest unemployment, (2) year-to-year change in national retail sales, (3) year-to-year change in the CRE Index, (4) year-to-year change in U.S. GDP, (5) year-to-year change in the National Home Price Index, and (6) Rental Vacancy.

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Noninterest Income

The following table presents significant components of noninterest income and the related dollar and percentage change from period to period:


	Three Months Ended September 30,
(dollars in thousands)	2021		2020		$ Change		% Change
Investment services and trust activities	$	2,915	$	2,361	$	554	23.5	%
Service charges and fees	1,613		1,491		122		8.2
Card revenue	1,820		1,600		220		13.8
Loan revenue	1,935		3,252		(1,317)		(40.5)
Bank-owned life insurance	532		530		2		0.4

Investment securities gains, net	36		106		(70)		(66.0)
Other	331		230		101		43.9
Total noninterest income	$	9,182	$	9,570	$	(388)	(4.1)	%

Total noninterest income for the third quarter of 2021 decreased $0.4 million, or 4.1%, to $9.2 million from $9.6 million in the third quarter of 2020. The decline in noninterest income was primarily due to a decline in loan revenue of $1.3 million, partially offset by a cumulative increase of $1.0 million in all other sources of noninterest income, excluding investment securities gains, net. The decline in loan revenue was primarily due to a $1.3 million decrease in mortgage origination fee income. Partially offsetting the decline of noninterest income were increases of $0.6 million and $0.2 million in investment services and trust activities revenue and card revenue, respectively. The increase in investment services and trust activities revenue was driven by positive improvements in the financial markets and increased assets under administration, while the increase in card revenue reflected an increase in transaction volumes in third quarter of 2021 when compared to the third quarter of 2020.

Noninterest Expense

The following table presents significant components of noninterest expense and the related dollar and percentage change from period to period:


	Three Months Ended September 30,
(dollars in thousands)	2021		2020		$ Change		% Change
Compensation and employee benefits	$	17,350	$	16,460	$	890	5.4	%
Occupancy expense of premises, net	2,547		2,278		269		11.8
Equipment	1,973		1,935		38		2.0
Legal and professional	1,272		1,184		88		7.4
Data processing	1,406		1,308		98		7.5
Marketing	1,022		857		165		19.3
Amortization of intangibles	1,264		1,631		(367)		(22.5)
FDIC insurance	435		470		(35)		(7.4)
Communications	275		428		(153)		(35.7)
Foreclosed assets, net	43		13		30		230.8
Other	2,191		1,875		316		16.9
Total core noninterest expense	$	29,778	$	28,439	$	1,339	4.7	%
Goodwill impairment	—		31,500		(31,500)		100.0
Total noninterest expense	$	29,778	$	59,939	$	(30,161)	(50.3)	%

Noninterest expense for the third quarter of 2021 was $29.8 million, a decrease of $30.2 million, or 50.3%, from $59.9 million for the third quarter of 2020, primarily due to a $31.5 million goodwill impairment charge recorded in the third quarter of 2020 that did not recur in the third quarter of 2021. Excluding the goodwill impairment, noninterest expense increased $1.3 million, or 4.7%, in the third quarter of 2021 as compared to the third quarter of 2020, largely due to increases of $0.9 million, $0.3 million, and $0.3 million of compensation and employee benefits, occupancy expense of premises, net, and 'Other' noninterest expense, respectively. The increase in compensation and employee benefits was primarily due to an increase of $0.7 million of incentive and commission expense. The increase in occupancy expense of premises, net was mostly due to the disposal and writedown of fixed assets totaling $0.3 million, while the increase in 'Other' noninterest expense was primarily due to $0.7 million of expenses incurred for the settlement of litigation claims. Partially offsetting the identified increases in noninterest expense was a decline of $0.4 million in the amortization of intangibles, which reflected the accelerated amortization methodology utilized for certain finite-lived intangible assets and a $0.5 million reduction in tax credit partnership investment amortization, which is recorded in 'Other' noninterest expense.

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Income Tax Expense

Our effective income tax rate, or income taxes divided by income before taxes, was 21.7% for the three months ended September 30, 2021, as compared to an effective tax rate of (12.9)% for the three months ended September 30, 2020. The effective tax rate for the full year 2021 is expected to be in the range of 20-22%.

Comparison of Operating Results for the Nine Months Ended September 30, 2021 and September 30, 2020

Summary

Overall: Our consolidated net income for the nine months ended September 30, 2021 was $55.2 million, an increase of $65.3 million from net loss of $10.1 million for the nine months ended September 30, 2020. The increase in net income was due primarily to a decrease of $39.4 million in credit loss expense, coupled with a decrease of $31.8 million, or 27.0%, in noninterest expense primarily driven by the $31.5 million goodwill impairment charge that was recorded in the third quarter of 2020. Partially offsetting the identified increases to net income was an increase in income tax expense of $12.6 million.

Credit Loss (Benefit) Expense: The credit loss benefit of $8.0 million recorded in the first nine months of 2021 reflected overall improvements in forecasted economic conditions and stabilization of the credit risk profile. In addition, during the first nine months of 2021, net loan recoveries were $0.2 million, as compared to net loan charge-offs of $4.9 million during the first nine months of 2020. The Company recorded credit loss expense of $31.4 million in the first nine months of 2020 primarily due to the impact of economic uncertainty stemming from the COVID-19 pandemic on forecasted economic conditions.

Noninterest Income: The increase in noninterest income was primarily due to increased loan revenue of $3.5 million, which reflected a $1.3 million increase in mortgage origination fee income, as well as an increase of $2.2 million stemming from the fair value of our mortgage servicing rights. Also contributing to the increase in noninterest income were increases of $1.4 million and $1.1 million of revenue from investment services and trust activities and card revenue, respectively. Partially offsetting the identified increases in noninterest income was a decrease in other noninterest income of $2.7 million, which was primarily due to a decline in income from our commercial loan back-to-back swap program.

Noninterest Expense: The decline in noninterest expense of $31.8 million was due primarily to a $31.5 million goodwill impairment charge recorded in the third quarter of 2020 that did not recur in 2021. Excluding the goodwill impairment, noninterest expense declined $0.3 million, largely as a result of decreases of $1.3 million, $1.0 million, and $0.7 million in the amortization of intangibles, 'Other' noninterest expense, and legal and professional noninterest expenses, respectively. The decline in the amortization of intangibles reflected the accelerated amortization methodology utilized for certain finite-lived intangible assets. The decline in 'Other' noninterest expense was principally due to a $1.3 million reduction in tax credit partnership investment amortization, while the decline in legal and professional expenses reflected a decline in loan legal expenses and a decline in non-recurring audit fees. Partially offsetting the identified decreases in noninterest expense was an increase of $2.9 million in compensation and employee benefits expense that stemmed primarily from increased incentive and commission expense, normal annual increases in compensation, increased share-based compensation expense, and a decline in deferred compensation and employee benefits stemming from loan origination costs.

Financial Performance: Basic earnings per common share were $3.47, while diluted earnings per common share were $3.46 for the nine months ended September 30, 2021. In comparison, basic and diluted loss per common share was $0.63 for the nine months ended September 30, 2020. Our annualized return on average shareholders' equity was 14.03% for the nine months ended September 30, 2021 compared with (2.60)% for the nine months ended September 30, 2020.

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Selected financial performance and capital ratios for the Company are presented in the table below as of or for the nine months ended September 30, 2021 and 2020.


	As of and for the Nine Months Ended September 30,
(dollars in thousands, except per share amounts)	2021			2020
Net Income	$	55,230		$	(10,087)



Return on Average Assets	1.29		%	(0.27)		%
Return on Average Equity	14.03			(2.60)
Return on Average Tangible Equity (1)	17.69			8.58
Efficiency Ratio (1)	53.95			55.95
Dividend Payout Ratio	19.45			nm (2)

Common Equity Ratio	9.03			9.36
Tangible Common Equity Ratio (1)	7.71			7.82
Book Value per Share	$	33.71		$	31.00
Tangible Book Value per Share (1)	28.40			25.45

(1) A non-GAAP financial measure. See "Non-GAAP Financial Measures" for a reconciliation to the most comparable GAAP equivalents.
(2) Ratio has been determined to be not meaningful ("nm") for this period.

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Net Interest Income


	Nine Months Ended September 30,
	2021						2020
(dollars in thousands)	Average Balance		Interest Income/ Expense		Average Yield/ Cost		Average Balance		Interest Income/ Expense		Average Yield/ Cost
ASSETS
Loans, including fees (1)(2)(3)	$	3,394,066	$	108,950	4.29	%	$	3,548,968	$	121,957	4.59	%
Taxable investment securities	1,501,252		18,231		1.62		721,266		12,937		2.40
Tax-exempt investment securities (2)(4)	466,209		9,442		2.71		305,514		7,215		3.15
Total securities held for investment (2)	1,967,461		27,673		1.88		1,026,780		20,152		2.62
Other	43,250		54		0.17		70,983		233		0.44
Total interest-earning assets (2)	$	5,404,777	$	136,677	3.38	%	$	4,646,731	$	142,342	4.09	%

Other assets	324,045						380,961
Total assets	$	5,728,822					$	5,027,692

LIABILITIES AND SHAREHOLDERS' EQUITY
Interest checking deposits	$	1,418,339	$	3,142	0.30	%	$	1,052,816	$	3,477	0.44	%
Money market deposits	936,932		1,486		0.21		814,669		3,152		0.52
Savings deposits	585,334		926		0.21		435,612		1,107		0.34
Time deposits	875,027		4,613		0.70		973,044		11,918		1.64
Total interest-bearing deposits	3,815,632		10,167		0.36		3,276,141		19,654		0.80
Short-term borrowings	192,083		421		0.29		149,041		772		0.69
Long-term debt	186,323		5,160		3.70		219,455		4,964		3.02
Total borrowed funds	378,406		5,581		1.97		368,496		5,736		2.08
Total interest-bearing liabilities	$	4,194,038	$	15,748	0.50	%	$	3,644,637	$	25,390	0.93	%

Noninterest bearing deposits	962,852						805,641
Other liabilities	45,671						58,618
Shareholders' equity	526,261						518,796
Total liabilities and shareholders' equity	$	5,728,822					$	5,027,692
Net interest income (2)			$	120,929					$	116,952
Net interest spread (2)					2.88	%					3.16	%









Net interest margin (2)					2.99	%					3.36	%

Total deposits (5)	$	4,778,484	$	10,167	0.28	%	$	4,081,782	$	19,654	0.64	%
Cost of funds (6)					0.41	%					0.76	%


(1)			Average balance includes nonaccrual loans.
(2)			Tax equivalent. The federal statutory tax rate utilized was 21%.
(3)			Interest income includes net loan fees, loan purchase discount accretion and tax equivalent adjustments. Net loan fees were $9.3 million and $1.8 million for the nine months ended September 30, 2021 and September 30, 2020, respectively. Loan purchase discount accretion was $2.7 million and $7.6 million for the nine months ended September 30, 2021 and September 30, 2020, respectively. Tax equivalent adjustments were $1.6 million and $1.5 million for the nine months ended September 30, 2021 and September 30, 2020, respectively. The federal statutory tax rate utilized was 21%.
(4)			Interest income includes tax equivalent adjustments of $1.9 million and $1.5 million for the nine months ended September 30, 2021 and September 30, 2020, respectively. The federal statutory tax rate utilized was 21%.
(5)			Total deposits is the sum of total interest-bearing deposits and noninterest bearing deposits. The cost of total deposits is calculated as annualized interest expense on deposits divided by average total deposits.
(6)			Cost of funds is calculated as annualized total interest expense divided by the sum of average total deposits and borrowed funds.

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	Nine Months Ended September 30,
	2021 Compared to 2020 Change due to
(in thousands)	Volume		Yield/Cost		Net
Increase (decrease) in interest income:
Loans, including fees (1)	$	(5,208)	$	(7,799)	$	(13,007)
Taxable investment securities	10,542		(5,248)		5,294
Tax-exempt investment securities (1)	3,348		(1,121)		2,227
Total securities held for investment (1)	13,890		(6,369)		7,521
Other	(70)		(109)		(179)
Change in interest income (1)	8,612		(14,277)		(5,665)
Increase (decrease) in interest expense:
Interest checking deposits	975		(1,310)		(335)
Money market deposits	425		(2,091)		(1,666)
Savings deposits	316		(497)		(181)
Time deposits	(1,092)		(6,213)		(7,305)
Total interest-bearing deposits	624		(10,111)		(9,487)
Short-term borrowings	180		(531)		(351)
Long-term debt	(817)		1,013		196
Total borrowed funds	(637)		482		(155)
Change in interest expense	(13)		(9,629)		(9,642)
Change in net interest income	$	8,625	$	(4,648)	$	3,977
Percentage (decrease) increase in net interest income over prior period					3.4		%
(1) Tax equivalent, using a federal statutory tax rate of 21%.

Our tax equivalent net interest income for the nine months ended September 30, 2021 was $120.9 million, an increase of $4.0 million, or 3.4%, as compared to $117.0 million for the nine months ended September 30, 2020. The increase in tax equivalent net interest income for the nine months ended September 30, 2021 as compared to the nine months ended September 30, 2020 was due primarily to a decline in interest expenses of $9.6 million, or 38.0%, and an increase of $7.5 million, or 37.3%, in interest income earned from investment securities. The decline in interest expense was primarily due to a decline in interest expense on interest-bearing deposits of $9.5 million, or 48.3%, to $10.2 million as a result of lower rates paid on such deposits that more than offset the increase in the volume of deposits. The increase in interest income earned from investment securities reflected the larger volume of securities held for investment from the Company's investment of net deposit inflows, partially offset by a decrease in yield. Partially offsetting the contributing factors to the increase in net interest income identified above was a decline of $13.0 million in loan interest income due to lower loan purchase discount accretion, which decreased $4.9 million, reduced loan demand and line utilization, coupled with the origination of new loans and repricing of variable rate loans at lower rates. The identified decline in interest income from loans was partially offset by a net increase in loan fees of $7.5 million, which was primarily due to PPP fee accretion.

The tax equivalent net interest margin for the nine months ended September 30, 2021 was 2.99%, or 37 basis points lower than the tax equivalent net interest margin of 3.36% for the nine months ended September 30, 2020. The tax equivalent yield on investment securities decreased by 74 basis points, while the yield on loans decreased 30 basis points. Combined, the resulting yield on interest-earning assets for the nine months ended September 30, 2021 was 71 basis points lower than the nine months ended September 30, 2020, and reflected a shift in earning asset mix to a greater proportion of investment securities, which generally have lower yields than loans, as well as the origination and re-pricing of loans at generally lower coupon rates compared to existing portfolio coupon rates. The cost of interest-bearing deposits decreased 44 basis points, while the average cost of borrowings was lower by 11 basis points for the nine months ended September 30, 2021, compared to the nine months ended September 30, 2020. Our lower deposit costs in the nine months ended September 30, 2021 as compared to the nine months ended September 30, 2020 were a result of lower market interest rates as a result of the continuation of the target federal funds interest rate of 0.0% - 0.25% in response to the COVID-19 pandemic, as well as the origination and re-pricing of time deposits at lower rates than the existing portfolio.

Credit Loss (Benefit) Expense

We recorded a credit loss benefit of $8.0 million in the first nine months of 2021, as compared to credit loss expense of $31.4 million for the first nine months of 2020, a decrease of $39.4 million, or 125.4%. The Company recorded credit loss expense in the first, second, and third quarters of 2020 primarily due to the impact of economic uncertainty stemming from the COVID-19

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pandemic on forecasted economic conditions. The credit loss benefit recorded in the first nine months of 2021 reflected overall improvements in forecasted economic conditions and stabilization of the credit risk profile, coupled with net loan recoveries of $0.2 million in the first nine months of 2021, as compared to net loan charge-offs of $4.9 million in the first nine months of 2020. Specifically, the economic forecast utilized by the Company is sensitive to changes in the following loss drivers: (1) Midwest unemployment, (2) year-to-year change in national retail sales, (3) year-to-year change in the CRE Index, (4) year-to-year change in U.S. GDP, (5) year-to-year change in the National Home Price Index, and (6) Rental Vacancy.

Noninterest Income

The following table presents the significant components of noninterest income and the related dollar and percentage change from period to period:


	Nine Months Ended September 30,
(dollars in thousands)	2021		2020		$ Change		% Change
Investment services and trust activities	$	8,560	$	7,114	$	1,446	20.3	%
Service charges and fees	4,575		4,607		(32)		(0.7)
Card revenue	5,269		4,202		1,067		25.4
Loan revenue	9,816		6,285		3,531		56.2
Bank-owned life insurance	1,612		1,685		(73)		(4.3)

Investment securities gains, net	105		154		(49)		(31.8)
Other	1,287		3,947		(2,660)		(67.4)
Total noninterest income	$	31,224	$	27,994	$	3,230	11.5	%

Total noninterest income for the first nine months of 2021 increased $3.2 million, or 11.5%, to $31.2 million from $28.0 million during the same period of 2020. This increase was due to increases in loan revenue, investment services and trust activities, and card revenue of $3.5 million, $1.4 million, and $1.1 million, respectively. The increase in loan revenue was primarily due to an increase of $1.3 million in mortgage origination fee income, as well as an increase of $2.2 million stemming from the fair value of our mortgage servicing rights. Investment services and trust activities revenue was positively impacted by improvements in the financial markets and increased assets under administration, while the increase in card revenue reflects an increase in transaction volumes in the first nine months of 2021, as compared to first nine months of 2020. Partially offsetting the identified increases in noninterest income was a decrease in 'Other' noninterest income of $2.7 million, which was primarily due to a decline in income from our commercial loan back-to-back swap program.

Noninterest Expense

The following table presents the significant components of noninterest expense and the related dollar and percentage change from period to period:


	Nine Months Ended September 30,
(dollars in thousands)	2021		2020		$ Change		% Change
Compensation and employee benefits	$	51,671	$	48,759	$	2,912	6.0	%
Occupancy expense of premises, net	7,063		6,872		191		2.8
Equipment	5,627		5,825		(198)		(3.4)
Legal and professional	3,430		4,101		(671)		(16.4)
Data processing	4,005		3,902		103		2.6
Marketing	2,901		2,829		72		2.5
Amortization of intangibles	4,112		5,407		(1,295)		(24.0)
FDIC insurance	1,192		1,363		(171)		(12.5)
Communications	1,055		1,334		(279)		(20.9)
Foreclosed assets, net	226		185		41		22.2
Other	4,866		5,901		(1,035)		(17.5)
Total core noninterest expense	$	86,148	$	86,478	$	(330)	(0.4)	%
Goodwill impairment	—		31,500		(31,500)		100.0
Total noninterest expense	$	86,148	$	117,978	$	(31,830)	(27.0)	%

Noninterest expense for the nine months ended September 30, 2021 was $86.1 million, a decrease of $31.8 million, or 27.0%, from $118.0 million for the nine months ended September 30, 2020, primarily due to a $31.5 million goodwill impairment charge recorded in the third quarter of 2020 that did not recur in 2021. Excluding the goodwill impairment, noninterest expense declined $0.3 million, or 0.4%, in the nine months ended September 30, 2021 as compared to the nine months ended September 30, 2020, largely due to decreases of $1.3 million, $1.0 million, and $0.7 million in the amortization of intangibles, 'Other' noninterest expense, and legal and professional noninterest expenses, respectively. The decline in the amortization of

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intangibles reflected the accelerated amortization methodology utilized for certain finite-lived intangible assets. The decline in 'Other' noninterest expense was principally due to a reduction in tax credit partnership investment amortization of $1.3 million, which was partially offset by $0.7 million of expenses incurred for the settlement of litigation claims in the nine months ended September 30, 2021. The decline in legal and professional expenses reflected a decline in loan legal expenses, as well as a decline in non-recurring audit fees. Partially offsetting the identified decreases in noninterest expense was an increase of $2.9 million in compensation and employee benefits expense that stemmed primarily from increased incentive and commission expense, normal annual increases in compensation, increased share-based compensation expense, and a decline in deferred compensation and employee benefits stemming from loan origination cost.

Income Tax Expense

Our effective income tax rate, or income taxes divided by income before taxes, was 21.7% for the first nine months of 2021, as compared to an effective tax rate of (35.1)% for the first nine months of 2020. The effective tax rate for the full year 2021 is currently expected to be in the range of 20-22%.

FINANCIAL CONDITION

Following is a table that represents the major categories of the Company's balance sheet as of the dates indicated:


(dollars in thousands)	September 30, 2021		December 31, 2020		$ Change		% Change
ASSETS
Cash and cash equivalents	$	138,514	$	82,659	$	55,855	67.6	%
Loans held for sale	58,679		59,956		(1,277)		(2.1)
Debt securities available for sale at fair value	2,136,902		1,657,381		479,521		28.9
Loans held for investment, net of unearned income	3,268,644		3,482,223		(213,579)		(6.1)
Allowance for credit losses	(47,900)		(55,500)		7,600		(13.7)
Total loans held for investment, net	3,220,744		3,426,723		(205,979)		(6.0)
Other assets	320,584		329,929		(9,345)		(2.8)
Total assets	$	5,875,423	$	5,556,648	$	318,775	5.7	%
LIABILITIES AND SHAREHOLDERS' EQUITY
Total deposits	$	4,957,781	$	4,547,049	$	410,732	9.0	%
Total borrowings	342,368		439,480		(97,112)		(22.1)
Other liabilities	45,010		54,869		(9,859)		(18.0)
Total shareholders' equity	530,264		515,250		15,014		2.9
Total liabilities and shareholders' equity	$	5,875,423	$	5,556,648	$	318,775	5.7	%

Debt Securities Available for Sale

The composition of debt securities available for sale as of the dates indicated was as follows:


	September 30, 2021				December 31, 2020
(dollars in thousands)	Balance		% of Total		Balance		% of Total
U.S. Government agencies and corporations	$	288	—	%	$	361	—	%
States and political subdivisions	701,281		32.8		628,346		37.9
Mortgage-backed securities	109,231		5.1		94,018		5.7
Collateralized mortgage obligations	853,833		40.0		565,836		34.1
Corporate debt securities	472,269		22.1		368,820		22.3
Fair value of debt securities available for sale	$	2,136,902	100.0	%	$	1,657,381	100.0	%

As of September 30, 2021, the fair value of debt securities available for sale was $2.1 billion, an increase of $479.5 million from $1.7 billion as of December 31, 2020. The increase was primarily driven by the excess liquidity generated by the increased levels of deposit balances that were deployed into investment security purchases. There were $21.9 million of gross unrealized gains and $17.2 million of gross unrealized losses in our debt securities available for sale portfolio for a net unrealized gain of $4.7 million at September 30, 2021.

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Loans

The composition of our loan portfolio by type of loan was as follows:


	September 30, 2021				December 31, 2020
(dollars in thousands)	Balance		% of Total		Balance		% of Total
Agricultural	$	106,356	3.3	%	$	116,392	3.3	%


Commercial and industrial	927,258		28.4		1,055,488		30.3


Commercial real estate:
Construction and development	146,417		4.5		181,291		5.2
Farmland	130,936		4.0		144,970		4.2
Multifamily	273,347		8.4		256,525		7.4
Commercial real estate-other	1,148,658		35.0		1,149,575		33.0
Total commercial real estate	1,699,358		51.9		1,732,361		49.8
Residential real estate:
One- to four-family first liens	334,267		10.2		355,684		10.2
One- to four-family junior liens	133,869		4.1		143,422		4.1
Total residential real estate	468,136		14.3		499,106		14.3
Consumer	67,536		2.1		78,876		2.3
Loans held for investment, net of unearned income	$	3,268,644	100.0	%	$	3,482,223	100.0	%
Loans held for sale	$	58,679			$	59,956

Loans held for investment, net of unearned income, decreased $213.6 million, or 6.1%, from a balance of $3.48 billion at December 31, 2020, to $3.27 billion at September 30, 2021, primarily as a result of PPP loan forgiveness, net loan pay-downs, and lower revolving line of credit utilization. As of September 30, 2021, the amortized cost basis of PPP loans was $89.4 million, or 2.7% of loans held for investment, as compared to $259.3 million, or 7.4% of loans held for investment, at December 31, 2020, which are included in the agricultural and commercial and industrial loan portfolios. See Note 3. Loans Receivable and the Allowance for Credit Losses to our consolidated financial statements for additional information related to our loan portfolio.

Commitments under standby letters of credit, unused lines of credit and other conditionally approved credit lines totaled approximately $969.7 million and $931.5 million as of September 30, 2021 and December 31, 2020, respectively.

Our loan to deposit ratio decreased to 65.93% as of September 30, 2021 as compared to 76.58% as of December 31, 2020. The loan to deposit ratio fell when compared to the prior year-end due to PPP loan forgiveness, net loan pay-downs, and lower revolving line of credit utilization. In addition, deposit growth fueled by the government stimulus and PPP loan proceeds, which were generally deposited into customer accounts at the Bank, were principally utilized to purchase debt securities.

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Nonperforming Assets

The following table sets forth information concerning nonperforming loans by class of receivable and our nonperforming assets at September 30, 2021 and December 31, 2020:


	September 30, 2021							December 31, 2020
(in thousands)	Nonaccrual		90+ Days Past Due and Still Accruing Interest		Total			Nonaccrual		90+ Days Past Due and Still Accruing Interest		Total
Agricultural	$	2,120	$	—	$	2,120		$	2,584	$	—	$	2,584
Commercial and industrial	4,145		50		4,195			7,326		106		7,432
Commercial real estate:
Construction and development	607		—		607			1,145		—		1,145
Farmland	6,755		—		6,755			8,319		—		8,319
Multifamily	1,009		—		1,009			746		—		746
Commercial real estate-other	16,811		—		16,811			19,134		—		19,134
Total commercial real estate	25,182		—		25,182			29,344		—		29,344
Residential real estate:
One- to four- family first liens	1,532		—		1,532			1,895		625		2,520
One- to four- family junior liens	628		1		629			722		—		722
Total residential real estate	2,160		1		2,161			2,617		625		3,242
Consumer	50		—		50			79		8		87
Total nonperforming loans	$	33,657	$	51	$	33,708		$	41,950	$	739	$	42,689
Foreclosed assets, net					454							2,316
Total nonperforming assets					$	34,162						$	45,005

Nonperforming loans ratio (1)					1.03		%					1.23		%
Nonperforming assets ratio (2)					0.58		%					0.81		%

(1) Nonperforming loans ratio is calculated as total nonperforming loans divided by loans held for investment, net of unearned income, at the end of the period.
(2) Nonperforming assets ratio is calculated as total nonperforming assets divided by total assets at the end of the period.

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

The Bank maintains a loan review and classification process which involves multiple officers of the Bank 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. 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, they document 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 Bank’s loan review department undertakes independent credit reviews of relationships based on either criteria established by loan policy, risk-focused sampling, or random sampling. Credit relationships with larger exposure may pose incrementally higher risks. As a result, the Bank's loan review department is required to review all credit relationships with total exposure of $5.0 million or more, as determined semi-annually as of month-end in December and June, no less than annually. In addition, the individual loan reviews consider such items as: loan type; nature, type and estimated value of collateral; borrower and/or guarantor estimated financial strength; most recently available financial information; related loans and total borrower exposure; and current and anticipated performance of the loan. The results of such reviews are presented to both executive management and the audit committee of the Company's board of directors.

Through the review of delinquency reports, updated financial statements or other relevant information, the lending officer and/or loan review personnel may determine that a loan relationship has weakened to the point that a watch (loan grade 5) or classified (loan grades 6 through 8) status is warranted. At least quarterly, the loan strategy committee will meet to discuss loan relationships with total related exposure of $1.0 million or above that are Watch rated credits, loan relationships with total related exposure of $500 thousand and above that are Substandard or worse rated credits, as well as loan relationships with total related exposure of $250 thousand and above that are on non-accrual. Credits below these designated thresholds are reviewed upon request. The lending officer is 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, assist the borrower in moving the loans to another institution and/or collateral

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liquidation. All such reports are presented to the loan strategy committee. Copies of the minutes of these committee meetings are presented to the board of directors of the Bank.

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 a loan relationship as requiring an individual analysis. Once that determination has occurred, the credit analyst will complete an individually analyzed worksheet that contains an evaluation of the collateral (for collateral-dependent loans) based upon the estimated collateral value, adjusting for current market conditions and other local factors that may affect collateral value. Loan review personnel may also complete an independent individual analysis when deemed necessary. These judgmental evaluations may produce an initial specific allowance for placement in the Company’s allowance for credit losses calculation. An analysis for the underlying collateral value of each individually analyzed loan relationship is completed in the last month of the quarter. The individually analyzed worksheets are reviewed by the Credit Administration department prior to quarter-end. The board of directors of the Bank on a quarterly basis reviews the classified/watch reports including changes in credit grades of 5 or higher as well as all individually analyzed loans, the related allowances and foreclosed assets, net.

The review process also provides for the upgrade of loans that show improvement since the last review. All requests for an upgrade of a credit are approved by the proper authority based upon the aggregate credit exposure before the rating can be changed.

Loan Modifications

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. The following factors are indicators that a concession has been granted (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, short-term deferral of required payments would not be considered a concession. During the three and nine months ended September 30, 2021, the Company classified two loans and nine loans as TDRs, respectively, due to the Company granting a concession to a borrower experiencing financial difficulty. The aggregate post-modification outstanding recorded investment of the loans classified as TDRs during three and nine months ended September 30, 2021 was $9.6 million and $12.1 million, respectively.

Refer above to the "COVID-19 Update" section for details pertaining to the modifications that were a result of COVID-19 that were not deemed to be TDRs.

Allowance for Credit Losses

Our ACL as of September 30, 2021 was $47.9 million, which was 1.47% of loans held for investment, net of unearned income. This compares with an ACL of $55.5 million as of December 31, 2020, which was 1.59% of loans held for investment, net of unearned income. The ACL at September 30, 2021 does not include an allowance amount for PPP loans as they are fully guaranteed by the SBA. When adjusted for the impact of PPP loans, the ratio of the ACL as a percentage of loans held for investment, net of unearned income as of September 30, 2021 was 1.51% and as of December 31, 2020 was 1.72% (a non-GAAP financial measure - see "Non-GAAP Financial Measures"). The decrease in the ACL reflects overall improvements in forecasted economic conditions and stabilization of the credit risk profile. The liability for off-balance sheet credit exposures totaled $3.9 million as of September 30, 2021 as compared to $4.1 million at December 31, 2020 and is included in 'Other liabilities' on the balance sheet.

The Company recorded a credit loss benefit related to loans of $7.8 million for the nine months ended September 30, 2021 as compared to a credit loss expense related to loans of $30.3 million for the nine months ended September 30, 2020. Gross charge-offs for the first nine months of 2021 totaled $2.1 million, while there were $2.2 million in gross recoveries of

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previously charged-off loans. The ratio of annualized net loan (recoveries) charge offs to average loans for the first nine months of 2021 was (0.01)% compared to 0.18% for the nine months ended September 30, 2020.

Economic Forecast: At September 30, 2021, the economic forecast used by the Company showed the following: (1) Midwest unemployment – decreases over the next four forecasted quarters; (2) Year-to-year change in national retail sales - increases over the next four forecasted quarters; (3) Year-to-year change in CRE Index - decreases over the next two forecasted quarters, followed by an increase in the third and fourth forecasted quarters; (4) Year-to-year change in U.S. GDP - increases over the next four forecasted quarters; (5) Year-to-year change in National Home Price Index – increases over the next four forecasted quarters; and (6) Rental Vacancy - increases over the next four forecasted quarters. The economic forecast loss driver data overall exhibited improvements in the economic forecast and stabilization of the credit profile outlook when compared to the previously disclosed second quarter of 2021 results.

Loan Policy: We review all nonaccrual loans greater than $250,000 individually on a quarterly basis to estimate the appropriate allowance due to collateral deficiency. At September 30, 2021, TDRs were not a material portion of the loan portfolio. We review loans 90 days or more past due that are still accruing interest no less than quarterly to determine if the asset is both well secured and in the process of collection. If not, such loans are placed on non-accrual status.

Based on the inherent risk in the loan portfolio, management believed that as of September 30, 2021, the ACL was adequate; however, there is no assurance losses will not exceed the allowance, and any growth in the loan portfolio or uncertainty in the general economy will require that management continue to evaluate the adequacy of the ACL and make additional provisions in future periods as deemed necessary. See Note 3. Loans Receivable and the Allowance for Credit Losses to our unaudited consolidated financial statements for additional information related to the allowance for credit losses.

Deposits

The composition of deposits was as follows:


	As of September 30, 2021				As of December 31, 2020
(in thousands)	Balance		% of Total		Balance		% of Total
Noninterest bearing deposits	$	999,887	20.2	%	$	910,655	20.0	%
Interest checking deposits	1,464,389		29.5		1,351,641		29.7
Money market deposits	989,095		20.0		918,654		20.2
Savings deposits	616,924		12.4		529,751		11.7
Total non-maturity deposits	4,070,295		82.1		3,710,701		81.6
Time deposits of $250 and under	522,907		10.5		581,471		12.8
Time deposits of over $250	364,579		7.4		254,877		5.6
Total time deposits	887,486		17.9		836,348		18.4
Total deposits	$	4,957,781	100.0	%	$	4,547,049	100.0	%

Deposits increased $410.7 million from December 31, 2020, or 9.0%, reflecting the combination of fiscal stimulus and the deposit of PPP loan proceeds, which were generally deposited into customer accounts at the Bank. Approximately 82.1% of our total deposits were considered “core” deposits as of September 30, 2021, compared to 81.6% at December 31, 2020. We consider core deposits to be the total of all deposits other than time deposits and non-reciprocal brokered money market deposits. See Note 7. Deposits to our consolidated financial statements for additional information related to our deposits.

Short-Term Borrowings

Federal funds purchased - The Bank purchases federal funds for short-term funding needs from correspondent and regional banks. As of September 30, 2021 and December 31, 2020, the Bank had no federal funds purchased.

Securities Sold Under Agreements to Repurchase - Securities sold under agreements to repurchase rose $13.2 million, or 7.6%, to $187.5 million as of September 30, 2021 , compared with $174.3 million a s of December 31, 2020. Securities sold under agreements to repurchase are agreements in which the Company acquires funds by selling investment securities to another party under a simultaneous agreement to repurchase the same investment securities at a specified price and date. The Company enters into repurchase agreements and also offers a demand deposit account product to customers that sweeps their balances in excess of an agreed upon target amount into overnight repurchase agreements. The balance of these borrowings vary according to the liquidity needs of the customers participating in these sweep accounts.

Federal Home Loan Bank Advances - The Bank utilizes FHLB short-term advances for short-term funding needs. The Company had no short-term advances as of September 30, 2021 , compared with $56.5 million as of December 31, 2020.

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The Bank maintains a credit agreement with a correspondent bank under which the Company is able to borrow up to $25.0 million from an unsecured revolving credit facility. The Company had no balance outstanding under this revolving credit facility as of both September 30, 2021 and December 31, 2020.

See Note 8. Short-Term Borrowings to our unaudited consolidated financial statements for additional information related to short-term borrowings.

Long-Term Debt

Finance Lease Payable - The Company has one existing finance lease for a branch location, with a present value liability balance of $1.0 million as of September 30, 2021 and $1.1 million as of December 31, 2020.

Junior Subordinated Notes Issued to Capital Trusts - Junior subordinated notes that have been issued to capital trusts that issued trust preferred securities were $41.9 million as of September 30, 2021 and $41.8 million as of December 31, 2020.

Subordinated Debentures - On May 1, 2019, the Company assumed $10.9 million in aggregate principal amount of subordinated debentures as a result of the merger with ATBancorp. The Company redeemed the ATB Debentures, in whole, on May 31, 2021. In addition, on July 28, 2020, the Company completed the private placement offering of $65.0 million aggregate principal amount of 5.75% fixed-to-floating rate subordinated notes, of which $63.75 million have been exchanged for subordinated notes registered under the Securities Act of 1933. The balance of subordinated debt was $63.8 million as of September 30, 2021, as compared to $74.6 million at December 31, 2020.

Federal Home Loan Bank Borrowings - FHLB borrowings totaled $48.1 million as of September 30, 2021 , compared with $91.2 million as of December 31, 2020, a decrease of $43.1 million, or 47.2%, due to maturities of FHLB advances. We utilize FHLB borrowings as a supplement to customer deposits to fund interest-earning assets and to assist in managing interest rate risk.

See Note 9. Long-Term Debt to our unaudited consolidated financial statements for additional information related to long-term debt.

Capital Resources

Shareholder's Equity

Total shareholders’ equity was $530.3 million as of September 30, 2021, compared to $515.3 million as of December 31, 2020, an increase of $15.0 million, or 2.9%, primarily as a result of an increase in retained earnings, partially offset by decreased AOCI and an increase in treasury stock. The total shareholders’ equity to total assets ratio was 9.03% at September 30, 2021, down from 9.27% at December 31, 2020. The tangible common equity ratio (a non-GAAP financial measure -see "Non-GAAP Financial Measures") was 7.71% at September 30, 2021, compared with 7.82% at December 31, 2020. Book value was $33.71 per share at September 30, 2021, an increase from $32.17 per share at December 31, 2020. Tangible book value per share (a non-GAAP financial measure - see "Non-GAAP Financial Measures") was $28.40 at September 30, 2021, an increase from $26.69 per share at December 31, 2020.

Capital Adequacy

Our Tier 1 capital to risk-weighted assets ratio was 11.20% as of September 30, 2021 and was 10.70% as of December 31, 2020. 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. Management believed that, as of September 30, 2021, 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. See Note 11. Regulatory Capital Requirements and Restrictions on Subsidiary Cash to our unaudited consolidated financial statements for additional information related to our capital.

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Stock Compensation

Restricted stock units were granted to certain officers and directors of the Company on February 15, 2021, May 15, 2021, and August 15, 2021, in the aggregate amounts of 65,168, 11,231, and 7,667, respectively. Additionally, during the first nine months of 2021, 53,583 shares of common stock were issued in connection with the vesting of previously awarded grants of restricted stock units, of which 4,272 shares were surrendered by grantees to satisfy tax requirements, and 9,544 unvested restricted stock units were forfeited.

Liquidity

Liquidity Management

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, expected deposit flows, yields available on interest-bearing deposits, and the objectives of our asset/liability management program. Excess liquidity is invested generally in short-term U.S. government and agency securities, short- and medium-term state and political subdivision securities, and other investment securities. Our most liquid assets are cash and due from banks, interest-bearing bank deposits, and federal funds sold. The balances of these assets are dependent on our operating, investing, and financing activities during any given period.

Generally, the government’s response to the COVID-19 pandemic in the form of fiscal stimulus payments to individuals, coupled with economic uncertainty stemming from the pandemic, has resulted in increased liquidity throughout 2020 and into 2021.

Cash and cash equivalents are summarized in the table below:


(dollars in thousands)	As of September 30, 2021		As of December 31, 2020
Cash and due from banks	$	53,562	$	65,078
Interest-bearing deposits	84,952		17,409
Federal funds sold	—		172
Total	$	138,514	$	82,659

Generally, our principal sources of funds are deposits, advances from the FHLB, principal repayments on loans, proceeds from the sale of loans, proceeds from the maturity and sale of investment securities, our federal funds lines, and funds provided by operations. While scheduled loan amortization and maturing interest-bearing deposits are relatively predictable sources of funds, deposit flows and loan prepayments are greatly influenced by economic conditions, the general level of interest rates, and competition. We utilized particular sources of funds based on comparative costs and availability. The Bank maintains unsecured lines of credit with several correspondent banks and secured lines with the Federal Reserve Bank of Chicago and the FHLB that would allow us to borrow funds on a short-term basis, if necessary. We also hold debt securities classified as available for sale that could be sold to meet liquidity needs if necessary.

Net cash provided by operations was another major source of liquidity. The net cash provided by operating activities was $47.2 million for the nine months ended September 30, 2021 and $42.0 million for the nine months ended September 30, 2020.

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 its overall impact on the Company. The price of one or more of the components of the Consumer Price Index may fluctuate considerably and thereby influence the overall Consumer Price Index 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

During the normal course of business, we are a party to financial instruments with off-balance-sheet risk in order to meet the financing needs of our customers. These financial instruments include commitments to extend credit, commitments to sell loans, and standby letters of credit. We follow the same credit policy (including requiring collateral, if deemed appropriate) to make such commitments as is followed for those loans that are recorded in our financial statements.

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Our exposure to credit losses in the event of nonperformance is represented by the contractual amount of the commitments. Management does not expect any significant losses as a result of these commitments, and also expects to have sufficient liquidity available to cover these off-balance-sheet instruments. Off-balance-sheet transactions are more fully discussed in Note 12. Commitments and Contingencies to our unaudited consolidated financial statements.

Contractual Obligations

Outside the redemption on May 31, 2021 of the ATB Debentures, which had been assumed by the Company upon the acquisition of ATBancorp, there have been no material changes to the Company's contractual obligations existing at December 31, 2020, as disclosed in the Annual Report on Form 10-K, filed with the SEC on March 11, 2021.

Non-GAAP Financial Measures

Certain ratios and amounts not in conformity with GAAP are provided to evaluate and measure the Company’s operating performance and financial condition, including return on average tangible equity, tangible common equity, tangible book value per share, tangible common equity ratio, net interest margin (tax equivalent), core net interest margin, efficiency ratio, adjusted allowance for credit losses ratio, and core earnings. Management believes these ratios and amounts provide investors with useful information regarding the Company’s profitability, financial condition and capital adequacy, consistent with how management evaluates the Company’s financial performance. The following tables provide a reconciliation of each non-GAAP measure to the most comparable GAAP equivalent.


	Three Months Ended						Nine Months Ended
Return on Average Tangible Equity	September 30, 2021			September 30, 2020			September 30, 2021			September 30, 2020
(Dollars in thousands)
Net income (loss)	$	16,311		$	(19,824)		$	55,230		$	(10,087)
Intangible amortization, net of tax (1)	948			1,223			3,084			4,055
Goodwill impairment	—			31,500			—			31,500
Tangible net income	$	17,259		$	12,899		$	58,314		$	25,468

Average shareholders' equity	$	539,052		$	529,857		$	526,261		$	518,796
Average intangible assets, net	(84,288)			(121,306)			(85,579)			(122,518)
Average tangible equity	$	454,764		$	408,551		$	440,682		$	396,278

Return on average equity	12.00		%	(14.88)		%	14.03		%	(2.60)		%
Return on average tangible equity (2)	15.06		%	12.56		%	17.69		%	8.58		%

(1) Computed assuming a combined marginal income tax rate of 25%.
(2) Annualized tangible net income divided by average tangible equity.


Tangible Common Equity/Tangible Book Value per Share / Tangible Common Equity Ratio	September 30, 2021			December 31, 2020
(Dollars in thousands, except per share data)
Total shareholders’ equity	$	530,264		$	515,250
Intangible assets, net	(83,607)			(87,719)
Tangible common equity	$	446,657		$	427,531

Total assets	$	5,875,423		$	5,556,648
Intangible assets, net	(83,607)			(87,719)
Tangible assets	$	5,791,816		$	5,468,929

Book value per share	$	33.71		$	32.17
Tangible book value per share (1)	$	28.40		$	26.69
Shares outstanding	15,729,451			16,016,780

Equity to assets ratio	9.03		%	9.27		%
Tangible common equity ratio (2)	7.71		%	7.82		%

(1) Tangible common equity divided by shares outstanding.
(2) Tangible common equity divided by tangible assets.

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	Three Months Ended						Nine Months Ended
Net Interest Margin, Tax Equivalent/Core Net Interest Margin	September 30, 2021			September 30, 2020			September 30, 2021			September 30, 2020
(dollars in thousands)
Net interest income	$	40,340		$	37,809		$	117,462		$	113,927
Tax equivalent adjustments:
Loans (1)	507			536			1,557			1,540
Securities (1)	615			608			1,910			1,485
Net interest income, tax equivalent	$	41,462		$	38,953		$	120,929		$	116,952
Loan purchase discount accretion	(774)			(1,923)			(2,745)			(7,556)
Core net interest income	$	40,688		$	37,030		$	118,184		$	109,396

Net interest margin	2.92		%	3.05		%	2.91		%	3.27		%
Net interest margin, tax equivalent (2)	3.00		%	3.14		%	2.99		%	3.36		%
Core net interest margin (3)	2.94		%	2.99		%	2.92		%	3.14		%
Average interest earning assets	$	5,489,917		$	4,935,175		$	5,404,777		$	4,646,731

(1) The federal statutory tax rate utilized was 21%.
(2) Annualized tax equivalent net interest income divided by average interest earning assets.
(3) Annualized core net interest income divided by average interest earning assets.


	Three Months Ended						Nine Months Ended
Efficiency Ratio	September 30, 2021			September 30, 2020			September 30, 2021			September 30, 2020
(dollars in thousands)
Total noninterest expense	$	29,778		$	59,939		$	86,148		$	117,978
Amortization of intangibles	(1,264)			(1,631)			(4,112)			(5,407)
Merger-related expenses	—			—			—			(61)
Goodwill impairment	—			(31,500)			—			(31,500)
Noninterest expense used for efficiency ratio	$	28,514		$	26,808		$	82,036		$	81,010

Net interest income, tax equivalent (1)	$	41,462		$	38,953		$	120,929		$	116,952
Noninterest income	9,182			9,570			31,224			27,994
Investment security gains, net	(36)			(106)			(105)			(154)
Net revenues used for efficiency ratio	$	50,608		$	48,417		$	152,048		$	144,792

Efficiency ratio (2)	56.34		%	55.37		%	53.95		%	55.95		%
(1) The federal statutory tax rate utilized was 21%.
(2) Noninterest expense adjusted for amortization of intangibles, merger-related expenses, and goodwill impairment divided by the sum of tax equivalent net interest income, noninterest income and net investment securities gains.


Adjusted Allowance for Credit Losses Ratio	September 30, 2021			December 31, 2020
(dollars in thousands)
Loans held for investment, net of unearned income	$	3,268,644		$	3,482,223
PPP loans	(89,354)			(259,260)
Core loans	$	3,179,290		$	3,222,963

Allowance for credit losses	$	47,900		$	55,500

Allowance for credit losses ratio	1.47		%	1.59		%
Adjusted allowance for credit losses ratio (1)	1.51		%	1.72		%
(1) Allowance for credit losses divided by core loans.

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	Three Months Ended				Nine Months Ended
Core Earnings	September 30, 2021		September 30, 2020		September 30, 2021		September 30, 2020
(dollars in thousands, except per share data)
Net income (loss)	$	16,311	$	(19,824)	$	55,230	$	(10,087)
Goodwill impairment	—		31,500		—		31,500
Core earnings	$	16,311	$	11,676	$	55,230	$	21,413

Weighted average diluted common shares outstanding	15,863,247		16,099,324		15,963,229		16,111,591

Earnings (loss) per common share
Earnings (loss) per common share - diluted	$	1.03	$	(1.23)	$	3.46	$	(0.63)
Core earnings per common share - diluted (1)	$	1.03	$	0.73	$	3.46	$	1.33
(1) Core earnings divided by weighted average diluted common shares outstanding.

Item 3. Quantitative and Qualitative Disclosures about Market Risk.

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

In addition to interest rate risk, economic conditions in recent years have made liquidity risk (namely, funding liquidity risk) a more prevalent concern among financial institutions. In general, liquidity risk is the risk of being unable to fund an entity’s obligations to creditors (including, in the case of banks, obligations to depositors) as such obligations become due and/or fund its acquisition of assets.

Liquidity Risk

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

Net cash inflows from operating activities were $47.2 million in the first nine months of 2021, compared with $42.0 million in the first nine months of 2020. Net cash outflows from investing activities were $284.1 million in the first nine months of 2021, compared to net cash outflows of $630.3 million in the comparable nine-month period of 2020. Net cash inflows from financing activities in the first nine months of 2021 were $292.8 million, compared with net cash inflows of $649.6 million for the same period of 2020.

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

• Federal Funds Lines

• Federal Reserve Bank Discount Window

• FHLB Borrowings

• Brokered Deposits

• Brokered Repurchase Agreements

Federal Funds Lines - Routine liquidity requirements are met by fluctuations in the federal funds position of the Bank. The principal function of these funds is to maintain short-term liquidity. Unsecured federal funds purchased lines are viewed as a volatile liability and are not used as a long-term funding solution, especially when used to fund long-term assets. The current federal funds purchased limit is 10% of total assets, or the amount of established federal funds lines, whichever is smaller. As of September 30, 2021, the Bank maintains several unsecured federal funds lines totaling $170.0 million, which lines are tested annually to ensure availability.

Federal Reserve Bank Discount Window - The Federal Reserve Bank Discount Window is another source of liquidity, particularly during difficult economic times. The Bank has a borrowing capacity with the Federal Reserve Bank of Chicago limited by the amount of municipal securities pledged against the line. As of September 30, 2021, the Bank had municipal

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securities with an approximate market value of $67.8 million pledged for liquidity purposes, and had a borrowing capacity of $62.7 million. There were no outstanding borrowings through the FRB Discount Window at September 30, 2021.

FHLB Borrowings - FHLB borrowings provide both a source of liquidity and long-term funding for the Bank. Use of this type of funding is coordinated with both the strategic balance sheet growth projections and interest rate risk profile of the Bank. Factors that are taken into account when contemplating use of FHLB borrowings are the effective interest rate, the collateral requirements, community investment program credits, and the implications and cost of having to purchase incremental FHLB stock. The current FHLB borrowing limit is 45% of total assets. As of September 30, 2021, the Bank had $48.1 million in outstanding FHLB borrowings, leaving $471.7 million available for liquidity needs, based on collateral capacity. These borrowings are secured by various real estate loans (residential, commercial and agricultural).

Brokered Deposits and Reciprocal Deposits - The Bank has brokered time deposit and non-maturity deposit relationships available to diversify its funding sources. Brokered deposits offer several benefits relative to other funding sources, such as: maturity structures which cannot be duplicated in the current retail market, deposit gathering which does not cannibalize the existing deposit base, the unsecured nature of these liabilities, and the ability to quickly generate funds. The Bank’s internal policy limits the use of brokered deposits as a funding source to no more than 10% of total assets. Board approval is required to exceed this limit. The Bank will also have to maintain a “well capitalized” standing to access brokered deposits, as an “adequately capitalized” rating would require an FDIC waiver to do so, and an “undercapitalized” rating would prohibit it from using brokered deposits altogether. The Company did not hold any brokered deposits at September 30, 2021.

Under a final rule that was issued by the FDIC in December 2018, financial institutions that are considered "well capitalized" qualify for the exemption of certain reciprocal deposits from being considered brokered deposits. Such exemption is limited to the lesser of 20 percent of total liabilities or $5 billion, with some exceptions for financial institutions that do not meet such criteria. At September 30, 2021, the Company had $5.6 million of reciprocal time deposits through the CDARS program and $52.6 million of reciprocal non-maturity deposits through the ICS program that qualified for the brokered deposit exemption.

Brokered Repurchase Agreements - Brokered repurchase agreements may be established with approved brokerage firms and banks. Repurchase agreements create rollover risk (the risk that a broker will discontinue the relationship due to market factors) and are not used as a long-term funding solution, especially when used to fund long-term assets. Collateral requirements and availability are evaluated and monitored. The current policy limit for brokered repurchase agreements is 10% of total assets. There were no outstanding brokered repurchase agreements at September 30, 2021.

Interest Rate Risk

Interest rate risk is defined as the exposure of net interest income and fair value of financial instruments (interest-earning assets, deposits and borrowings) to movements in interest rates. The Company’s results of operations depend to a large degree on its net interest income and its ability to manage interest rate risk. The Company considers interest rate risk to be a significant market risk. The major sources of the Company’s interest rate risk are timing differences in the maturity and re-pricing characteristics of assets and liabilities, changes in the shape of the yield curve, changes in customer behavior and changes in relationships between rate indices (basis risk). Management measures these risks and their impact in various ways, including through the use of income simulation and valuation analyses. Multiple interest rate scenarios are used in this analysis which include changes in interest rates, spread narrowing and widening, yield curve twists and changes in assumptions about customer behavior in various interest rate scenarios. A mismatch between maturities, interest rate sensitivities and prepayment characteristics of assets and liabilities results in interest-rate risk. Like most financial institutions, we have material interest-rate risk exposure to changes in both short-term and long-term interest rates, as well as variable interest rate indices (e.g., the prime rate, LIBOR, or SOFR).

The Bank’s asset and liability committee meets regularly and is responsible for reviewing its interest rate sensitivity position and establishing policies to monitor and limit exposure to interest rate risk. Our asset and liability committee seeks to manage interest rate risk under a variety of rate environments by structuring our balance sheet and off-balance-sheet positions in such a way that changes in interest rates do not have a large negative impact. The risk is monitored and managed within approved policy limits.

We use a third-party service to model and measure our exposure to potential interest rate changes. For various assumed hypothetical changes in market interest rates, numerous other assumptions are made, such as prepayment speeds on loans and securities backed by mortgages, the slope of the Treasury yield-curve, the rates and volumes of our deposits, and the rates and volumes of our loans. There are two primary tools used to evaluate interest rate risk: net interest income simulation and economic value of equity ("EVE"). In addition, interest rate gap is reviewed to monitor asset and liability repricing over various time periods.

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Net Interest Income Simulation - Management utilizes net interest income simulation models to estimate the near-term effects of changing interest rates on its net interest income. Net interest income simulation involves projecting net interest income under a variety of scenarios, which include varying the level of interest rates and shifts in the shape of the yield curve. Management exercises its best judgment in making assumptions regarding events that management can influence, such as non-contractual deposit re-pricings, and events outside management’s control, such as customer behavior on loan and deposit activity and the effect that competition has on both loan and deposit pricing. These assumptions are subjective and, as a result, net interest income simulation results will differ from actual results due to the timing, magnitude and frequency of interest rate changes, changes in market conditions, customer behavior and management strategies, among other factors. We perform various sensitivity analyses on assumptions of deposit attrition and deposit re-pricing.

The following table presents the anticipated effect on net interest income over a twelve month period if short- and long-term interest rates were to sustain an immediate decrease of 100 basis points or 200 basis points (the effects of which are not meaningful as of September 30, 2021 in the current low interest rate environment), or an immediate increase of 100 basis points or 200 basis points:


	Immediate Change in Rates
(dollars in thousands)	-200	-100	+100			+200
September 30, 2021
Dollar change	N/A	N/A	$	223		$	91
Percent change	N/A	N/A	0.2		%	0.1		%
December 31, 2020
Dollar change	N/A	N/A	$	2,667		$	4,167
Percent change	N/A	N/A	1.8		%	2.8		%

As of September 30, 2021, 39.4% of the Company’s earning asset balances will reprice or are expected to pay down in the next twelve months, and 49.7% of the Company’s deposit balances are low cost or no cost deposits.

Economic Value of Equity - Management also uses EVE to measure risk in the balance sheet that might not be taken into account in the net interest income simulation analysis. Net interest income simulation highlights exposure over a relatively short time period, while EVE analysis incorporates all cash flows over the estimated remaining life of all balance sheet positions. The valuation of the balance sheet, at a point in time, is defined as the discounted present value of asset cash flows minus the discounted present value of liability cash flows. EVE analysis addresses only the current balance sheet and does not incorporate the run-off replacement assumptions that are used in the net interest income simulation model. As with the net interest income simulation model, EVE analysis is based on key assumptions about the timing and variability of balance sheet cash flows and does not take into account any potential responses by management to anticipated changes in interest rates.

Interest Rate Gap - The interest rate gap is the difference between interest-earning assets and interest-bearing liabilities re-pricing within a given period and represents the net asset or liability sensitivity at a point in time. An interest rate gap measure could be significantly affected by external factors such as loan prepayments, early withdrawals of deposits, changes in the correlation of various interest-bearing instruments, competition, or a rise or decline in interest rates.

Item 4. Controls and Procedures.

Disclosure Controls and Procedures

The Company’s management, including the Chief Executive Officer and Senior Executive Vice President and Chief Financial Officer, evaluated the effectiveness of the Company’s disclosure controls and procedures (as defined in Rule 13a-15(e) or Rule 15d-15(e) under the Exchange Act) that are designed to ensure that information required to be disclosed by the Company in the reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to the Company’s management, including the Company’s Chief Executive Officer and Senior Executive Vice President and Chief Financial Officer, to allow timely decisions regarding required disclosure. Based on this evaluation, the Chief Executive Officer and Senior Executive Vice President and Chief Financial Officer have concluded that the Company’s disclosure controls and procedures were effective as of September 30, 2021.

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

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Changes in Internal Control over Financial Reporting

There were no changes in the Company’s internal controls over financial reporting (as defined in Rule 13a-15(f) and Rule 15d-15(f) under the Exchange Act) that occurred during the quarter ended September 30, 2021 that have materially affected or are reasonably likely to materially affect the Company's internal control over financial reporting.

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PART II – OTHER INFORMATION

Item 1. Legal Proceedings.

We and our subsidiaries are from time to time parties to various legal actions arising in the normal course of business. We believe that there is no threatened or pending proceeding, other than ordinary routine litigation incidental to the Company’s business, against us or our subsidiaries or of which our property is the subject, which, if determined adversely, would have a material adverse effect on our consolidated business or financial condition.

Item 1A. Risk Factors.

There have been no material changes to the risk factors set forth under Part I, Item 1A "Risk Factors" in the Company's Form 10-K for the fiscal year ended December 31, 2020. Please refer to that section of our Form 10-K for disclosures regarding the risks and uncertainties related to our business.

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

The following table sets forth information about the Company’s purchases of its common stock during the third quarter of 2021:


	Total Number of Shares Purchased (1)	Average Price Paid per Share		Total Number of Shares Purchased as Part of Publicly Announced Programs (1)	Approximate Dollar Value of Shares That May Yet Be Purchased Under the Program
July 1 - 31, 2021	78,377	$	28.66	78,377	$	12,228,674
August 1 - 31, 2021	91,200	29.75		91,200	9,515,067
September 1 - 30, 2021	65,700	29.24		65,700	7,594,127
Total	235,277	$	29.24	235,277	$	7,594,127

(1) Common shares repurchased by the Company during the quarter related to shares repurchased under the share repurchase program. Under the prior repurchase program, which authorized the repurchase of $10.0 million of common stock, the Company had repurchased 297,158 shares of common stock for approximately $7.9 million since the plan was announced in August 2019, leaving $2.1 million available to be repurchased under that repurchase program as of June 22, 2021, the end of such program.

On June 22, 2021, the Board of Directors of the Company approved a new share repurchase program, allowing for the repurchase of up to $15.0 million of the Company's common stock through December 31, 2023. The new repurchase program replaced the Company’s prior repurchase program, which was due to expire on December 31, 2021. For the period June 23, 2021 through September 30, 2021, the Company repurchased 253,067 shares of common stock for approximately $7.4 million, leaving $7.6 million available to be repurchased.

Item 3. Defaults Upon Senior Securities.

None.

Item 4. Mine Safety Disclosures.

Not Applicable.

Item 5. Other Information.

None.

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Item 6. Exhibits.

Exhibit

Number

Description

Incorporated by Reference to:

3.1

Amended and Restated Articles of Incorporation of MidWest One Financial Group, Inc. filed with the Secretary of State of the State of Iowa on March 14, 2008

Exhibit 3.3 to the Company’s Amendment No. 1 to Registration Statement on Form S-4 (File No. 333-147628) filed with the SEC on January 14, 2008

3.2

Articles of Amendment (First Amendment) to the Amended and Restated Articles of Incorporation of MidWest One Financial Group, Inc. filed with the Secretary of State of the State of Iowa on January 23, 2009

Exhibit 3.1 to the Company’s Current Report on Form 8-K filed with the SEC on January 23, 2009

3.3

Articles of Amendment (Second Amendment) to the Amended and Restated Articles of Incorporation of MidWest One Financial Group, Inc. filed with the Secretary of State of the State of Iowa on February 4, 2009 (containing the Certificate of Designations for the Company’s Fixed Rate Cumulative Perpetual Preferred Stock, Series A)

Exhibit 3.1 to the Company’s Current Report on Form 8-K filed with the SEC on February 6, 2009

3.4

Articles of Amendment (Third Amendment) to the Amended and Restated Articles of Incorporation of MidWest One Financial Group, Inc., filed with the Secretary of State of the State of Iowa on April 21, 2017

Exhibit 3.1 to the Company’s Form 10-Q for the quarter ended March 31, 2017, filed with the SEC on May 4, 2017

3.5

Third Amended and Restated Bylaws of MidWest One Financial Group, Inc.

Exhibit 3.1 to the Company’s Current Report on Form 8-K filed with the SEC on January 25, 2021

10.1

Eighth Amendment to the Credit Agreement by and between MidWest One Financial Group, Inc. and U.S. Bank National Association dated October 22, 2021.

Filed herewith

31.1

Certification of Principal Executive Officer pursuant to Rule 13a-14(a) and Rule 15d-14(a)

Filed herewith

31.2

Certification of Principal Financial Officer pursuant to Rule 13a-14(a) and Rule 15d-14(a)

Filed herewith

32.1

Certification of Principal Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

Filed herewith

32.2

Certification of Principal Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

Filed herewith

101

The following financial statements from the Company’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2021, formatted in Inline XBRL: (i) Consolidated Balance Sheets, (ii) Consolidated Statements of Income, (iii) Consolidated Statements of Comprehensive Income, (iv) Consolidated Statements of Shareholders’ Equity, (v) Consolidated Statements of Cash Flows, and (vi) Notes to Consolidated Financial Statements, tagged as blocks of text and including detailed tags.

Filed herewith

101.SCH

Inline XBRL Taxonomy Extension Schema Document

Filed herewith

101.CAL

Inline XBRL Taxonomy Extension Calculation Linkbase Document

Filed herewith

101.DEF

Inline XBRL Taxonomy Extension Definition Linkbase Document

Filed herewith

101.LAB

Inline XBRL Taxonomy Extension Label Linkbase Document

Filed herewith

101.PRE

Inline XBRL Taxonomy Extension Presentation Linkbase Document

Filed herewith

104

Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101)

Filed herewith

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SIGNATURES

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

M ID W EST O NE F INANCIAL G ROUP , I NC .

Dated:

November 4, 2021

By:

/s/ CHARLES N. FUNK

Charles N. Funk

Chief Executive Officer

(Principal Executive Officer)

By:

/s/ BARRY S. RAY

Barry S. Ray

Senior Executive Vice President and Chief Financial Officer

(Principal Financial and Accounting Officer)

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Part I Financial Information Item 1. Financial Statements (unaudited)Item 2. Management S Discussion and Analysis Of Financial Condition and Results Of Operations Item 3. Quantitative and Qualitative Disclosures About Market Risk Item 4. Controls and Procedures Part II Other Information Item 1. Legal Proceedings Item 1A. Risk Factors Item 2. Unregistered Sales Of Equity Securities and Use Of Proceeds Item 3. Defaults Upon Senior Securities Item 4. Mine Safety Disclosures Item 5. Other Information Item 6. Exhibits

Exhibits

3.1 Amended and Restated Articles of Incorporation of MidWestOneFinancial Group, Inc. filed with the Secretary of State of the State of Iowa on March14, 2008 Exhibit3.3 to the Companys Amendment No.1 to Registration Statement on FormS-4 (File No.333-147628) filed with the SEC on January14, 2008 3.2 Articles of Amendment (First Amendment) to the Amended and Restated Articles of Incorporation of MidWestOneFinancial Group, Inc. filed with the Secretary of State of the State of Iowa on January 23, 2009 Exhibit 3.1 to the Companys Current Report on Form8-K filed with the SEC on January23, 2009 3.3 Articles of Amendment (Second Amendment) to the Amended and Restated Articles of Incorporation of MidWestOneFinancial Group, Inc. filed with the Secretary of State of the State of Iowa on February4, 2009 (containing the Certificate of Designations for the Companys Fixed Rate Cumulative Perpetual Preferred Stock, SeriesA) Exhibit 3.1 to the Companys Current Report on Form8-K filed with the SEC on February 6, 2009 3.4 Articles of Amendment (Third Amendment) to the Amended and Restated Articles of Incorporation of MidWestOneFinancial Group, Inc., filed with the Secretary of State of the State of Iowa on April 21, 2017 Exhibit 3.1 to the Companys Form 10-Q for the quarter ended March 31, 2017, filed with the SEC on May 4, 2017 3.5 Third Amended and Restated Bylaws of MidWestOneFinancial Group, Inc. Exhibit 3.1 to the Companys Current Report on Form 8-K filed with the SEC on January 25, 2021 10.1 Eighth Amendment to the Credit Agreement by and between MidWestOneFinancial Group, Inc. and U.S. Bank National Association dated October 22, 2021. Filed herewith 31.1 Certification of Principal Executive Officer pursuant to Rule13a-14(a) and Rule15d-14(a) Filed herewith 31.2 Certification of Principal Financial Officer pursuant to Rule13a-14(a) and Rule15d-14(a) Filed herewith 32.1 Certification of Principal Executive Officer pursuant to 18U.S.C. Section1350, as adopted pursuant to Section906 of the Sarbanes-Oxley Act of 2002 Filed herewith 32.2 Certification of Principal Financial Officer pursuant to 18U.S.C. Section1350, as adopted pursuant to Section906 of the Sarbanes-Oxley Act of 2002 Filed herewith

MOFG 10-Q Quarter ended Sept. 30, 2021

Exhibits