MOFG 10-Q Quarterly Report Sept. 30, 2022

MIDWESTONE FINANCIAL GROUP, INC.

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mofg-20220930

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, 2022


☐			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 1, 2022, there were 15,623,530 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	FHLBC	Federal Home Loan Bank of Chicago
AFS	Available for Sale	FHLBDM	Federal Home Loan Bank of Des Moines
AOCI	Accumulated Other Comprehensive Income	FHLMC	Federal Home Loan Mortgage Corporation
ASC	Accounting Standards Codification	FNBF	First National Bank in Fairfield
ASU	Accounting Standards Update	FNBM	First National Bank of Muscatine
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	IOFB	Iowa First Bancshares Corp.
CECL	Current Expected Credit Loss	LIBOR	The London Inter-bank Offered Rate
CMO	Collateralized Mortgage Obligations	MBS	Mortgage-Backed Securities
COVID-19	Coronavirus Disease 2019	PCD	Purchase Credit Deteriorated
CRA	Community Reinvestment Act	PPP	Paycheck Protection Program
CRE	Commercial Real Estate	ROU	Right-of-Use
DCF	Discounted Cash Flows	RPA	Credit Risk Participation Agreement
Dodd-Frank Act	Dodd-Frank Wall Street Reform and Consumer Protection Act	RRE	Residential Real Estate
ECL	Expected Credit Losses	SBA	U.S. Small Business Administration
EVE	Economic Value of Equity	SEC	U.S. Securities and Exchange Commission
FASB	Financial Accounting Standards Board	SOFR	Secured Overnight Financing Rate
FDIC	Federal Deposit Insurance Corporation	TDR	Troubled Debt Restructuring
FHLB	Federal Home Loan Bank

Table of Contents

Item 1. Financial Statements (unaudited).

MIDWEST ONE FINANCIAL GROUP, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS


	September 30, 2022		December 31, 2021
(unaudited) (dollars in thousands, except per share amounts)
ASSETS
Cash and due from banks	$	77,513	$	42,949
Interest earning deposits in banks	1,001		160,881

Total cash and cash equivalents	78,514		203,830
Debt securities available for sale at fair value	1,153,304		2,288,110
Held to maturity securities at amortized cost	1,146,583		—
Total securities	2,299,887		2,288,110
Loans held for sale	2,320		12,917
Gross loans held for investment	3,761,664		3,252,194
Unearned income, net	( 15,375 )		( 7,182 )
Loans held for investment, net of unearned income	3,746,289		3,245,012
Allowance for credit losses	( 52,100 )		( 48,700 )
Total loans held for investment, net	3,694,189		3,196,312
Premises and equipment, net	87,732		83,492
Goodwill	62,477		62,477
Other intangible assets, net	32,086		19,885
Foreclosed assets, net	103		357
Other assets	233,753		157,748
Total assets	$	6,491,061	$	6,025,128

LIABILITIES AND SHAREHOLDERS' EQUITY
Noninterest-bearing deposits	$	1,139,694	$	1,005,369
Interest-bearing deposits	4,337,088		4,109,150
Total deposits	5,476,782		5,114,519
Short-term borrowings	304,536		181,368
Long-term debt	154,190		154,879
Other liabilities	83,324		46,887
Total liabilities	6,018,832		5,497,653

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 15,622,825 and 15,671,147	16,581		16,581
Additional paid-in capital	301,418		300,940
Retained earnings	276,998		243,365
Treasury stock at cost, 958,192 and 909,870 shares	( 26,145 )		( 24,546 )
Accumulated other comprehensive loss	( 96,623 )		( 8,865 )
Total shareholders' equity	472,229		527,475
Total liabilities and shareholders' equity	$	6,491,061	$	6,025,128

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)	2022		2021		2022		2021
Interest income
Loans, including fees	$	40,451	$	36,115	$	104,515	$	107,393
Taxable investment securities	10,635		6,655		28,334		18,231
Tax-exempt investment securities	2,326		2,428		7,076		7,532
Other	9		21		77		54
Total interest income	53,421		45,219		140,002		133,210
Interest expense
Deposits	5,035		3,150		11,118		10,167
Short-term borrowings	767		132		1,115		421
Long-term debt	1,886		1,597		4,975		5,160
Total interest expense	7,688		4,879		17,208		15,748
Net interest income	45,733		40,340		122,794		117,462
Credit loss expense (benefit)	638		( 1,080 )		3,920		( 7,958 )
Net interest income after credit loss expense (benefit)	45,095		41,420		118,874		125,420
Noninterest income
Investment services and trust activities	2,876		2,915		8,557		8,560
Service charges and fees	2,075		1,613		5,449		4,575
Card revenue	1,898		1,820		5,426		5,269
Loan revenue	1,722		1,935		9,538		9,816
Bank-owned life insurance	579		532		1,668		1,612


Investment securities gains, net	( 163 )		36		272		105
Other	3,601		331		5,669		1,287
Total noninterest income	12,588		9,182		36,579		31,224
Noninterest expense
Compensation and employee benefits	20,046		17,350		57,665		51,671
Occupancy expense of premises, net	2,577		2,547		7,609		7,063
Equipment	2,358		1,973		6,366		5,627
Legal and professional	2,012		1,272		6,800		3,430
Data processing	1,731		1,406		4,199		4,005
Marketing	1,139		1,022		3,325		2,901
Amortization of intangibles	1,789		1,264		4,299		4,112
FDIC insurance	415		435		1,255		1,192
Communications	302		275		840		1,055
Foreclosed assets, net	42		43		( 66 )		226

Other	2,212		2,191		6,056		4,866
Total noninterest expense	34,623		29,778		98,348		86,148
Income before income tax expense	23,060		20,824		57,105		70,496
Income tax expense	4,743		4,513		12,272		15,266
Net income	$	18,317	$	16,311	$	44,833	$	55,230

Per common share information
Earnings - basic	$	1.17	$	1.03	$	2.86	$	3.47
Earnings - diluted	$	1.17	$	1.03	$	2.86	$	3.46
Dividends paid	$	0.2375	$	0.2250	$	0.7125	$	0.6750

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)	2022		2021		2022		2021
Net income	$	18,317	$	16,311	$	44,833	$	55,230

Other comprehensive loss, net of tax:
Unrealized loss from available for sale debt securities:
Unrealized net holding loss on debt securities available for sale arising during the period	( 42,935 )		( 8,591 )		( 121,179 )		( 28,501 )
Reclassification adjustment for losses (gains) included in net income	163		( 36 )		( 272 )		( 105 )
Income tax benefit	10,823		2,251		31,358		7,466
Unrealized net loss on available for sale debt securities, net of reclassification adjustments	( 31,949 )		( 6,376 )		( 90,093 )		( 21,140 )
Reclassification of available for sale debt securities to held to maturity:
Amortization of the net unrealized loss from the reclassification of available for sale debt securities to held to maturity	746		—		3,152		—
Income tax expense	( 189 )		—		( 817 )		—
Amortization of net unrealized loss from the reclassification of available for sale debt securities to held to maturity, net	557		—		2,335		—





Other comprehensive loss, net of tax	( 31,392 )		( 6,376 )		( 87,758 )		( 21,140 )
Comprehensive (loss) income	$	( 13,075 )	$	9,935	$	( 42,925 )	$	34,090

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, 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















Balance at June 30, 2022	$	16,581	$	300,859	$	262,395	$	( 25,772 )	$	( 65,231 )	$	488,832
Net Income	—		—		18,317		—		—		18,317
Other comprehensive loss	—		—		—		—		( 31,392 )		( 31,392 )
Release/lapse of restriction on RSUs ( 2,280 shares, net)	—		( 81 )		( 4 )		58		—		( 27 )
Repurchase of common stock ( 14,586 shares)	—		—		—		( 431 )		—		( 431 )
Share-based compensation	—		640		—		—		—		640
Dividends paid on common stock ($ 0.2375 per share)	—		—		( 3,710 )		—		—		( 3,710 )
Balance at September 30, 2022	$	16,581	$	301,418	$	276,998	$	( 26,145 )	$	( 96,623 )	$	472,229

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, 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

Balance at December 31, 2021	$	16,581	$	300,940	$	243,365	$	( 24,546 )	$	( 8,865 )	$	527,475
Net income	—		—		44,833		—		—		44,833
Other comprehensive loss	—		—		—		—		( 87,758 )		( 87,758 )
Release/lapse of restriction on RSUs ( 43,079 shares, net)	—		( 1,359 )		( 42 )		1,131		—		( 270 )
Repurchase of common stock ( 91,401 shares)	—		—		—		( 2,730 )		—		( 2,730 )
Share-based compensation	—		1,837		—		—		—		1,837
Dividends paid on common stock ($ 0.7125 per share)	—		—		( 11,158 )		—		—		( 11,158 )
Balance at September 30, 2022	$	16,581	$	301,418	$	276,998	$	( 26,145 )	$	( 96,623 )	$	472,229

Table of Contents

MIDWEST ONE FINANCIAL GROUP, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS


	Nine Months Ended September 30,
(unaudited) (dollars in thousands)	2022		2021
Cash flows from operating activities:
Net income	$	44,833	$	55,230
Adjustments to reconcile net income to net cash provided by operating activities:
Credit loss expense (benefit)	3,920		( 7,958 )

Depreciation, amortization, and accretion	7,511		71


Net change in premises and equipment due to writedown or sale	500		295
Share-based compensation	1,837		1,522
Net gain on sale or call of debt securities available for sale	( 272 )		( 105 )



Net change in foreclosed assets due to writedown or sale	( 71 )		163
Net gain on sale of loans held for sale	( 1,705 )		( 6,696 )
Origination of loans held for sale	( 81,490 )		( 236,326 )
Proceeds from sales of loans held for sale	93,792		244,299
Increase in cash surrender value of bank-owned life insurance	( 1,668 )		( 1,339 )
Decrease in deferred income taxes, net	4,082		2,013
Bargain purchase gain	( 1,257 )		—
Change in:
Other assets	( 34,484 )		7,514
Other liabilities	36,791		( 11,494 )
Net cash provided by operating activities	$	72,319	$	47,189
Cash flows from investing activities:

Purchases of equity securities	$	( 1,250 )	$	—
Proceeds from sales of debt securities available for sale	129,823		42,193
Proceeds from maturities and calls of debt securities available for sale	133,018		304,443
Purchases of debt securities available for sale	( 386,278 )		( 856,739 )

Proceeds from maturities and calls of debt securities held to maturity	108,180		—
Net (increase) decrease in loans held for investment	( 215,738 )		225,479
Purchases of premises and equipment	( 1,980 )		( 1,477 )
Proceeds from sale of foreclosed assets	345		1,983
Proceeds from sale of premises and equipment	23		16
Net cash acquired in business acquisition	31,375		—


Net cash used in investing activities	$	( 202,482 )	$	( 284,102 )
Cash flows from financing activities:
Net (decrease) increase in:
Deposits	$	( 101,501 )	$	410,598
Short-term borrowings	121,627		( 43,281 )
Payments of subordinated debt issuance costs	—		( 9 )
Redemption of subordinated debentures	—		( 10,835 )
Payments on finance lease liability	( 121 )		( 107 )

Payments of Federal Home Loan Bank borrowings	( 21,000 )		( 43,000 )
Proceeds from other long-term debt	25,000		—
Payments of other long-term debt	( 5,000 )		—

Taxes paid relating to the release/lapse of restriction on RSUs	( 270 )		( 118 )
Dividends paid	( 11,158 )		( 10,753 )


Repurchase of common stock	( 2,730 )		( 9,727 )
Net cash provided by financing activities	$	4,847	$	292,768
Net (decrease) increase in cash and cash equivalents	$	( 125,316 )	$	55,855
Cash and cash equivalents:
Beginning of Period	203,830		82,659
Ending balance	$	78,514	$	138,514

Table of Contents





	Nine Months Ended September 30,
(unaudited) (dollars in thousands)	2022		2021
Supplemental disclosures of cash flow information:
Cash paid during the period for interest	$	17,628	$	17,500
Cash paid during the period for income taxes	8,229		14,300
Supplemental schedule of non-cash investing and financing activities:
Transfer of loans to foreclosed assets, net	$	20	$	284

Investment securities purchased but not settled	—		1,835
Transfer of premises and equipment to assets held for sale	1,349		—
Transfer of debt securities available for sale to debt securities held to maturity	1,253,179		—
Supplemental schedule of non-cash investing activities from acquisition:
Non-cash assets acquired:
Investment securities	$	119,820	$	—
Total loans held for investment, net	281,326		—
Premises and equipment	7,363		—
Core deposit intangible	16,500		—
Bank-owned life insurance	7,862		—
Other assets	3,766		—
Total non-cash assets acquired	$	436,637	$	—
Liabilities assumed:
Deposits	$	463,638	$	—
Short-term borrowings	1,541		—
FHLB borrowings	250		—
Other liabilities	1,326		—
Total liabilities assumed	$	466,755	$	—

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. (the "Company"), 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.

On June 9, 2022, the Company acquired Iowa First Bancshares Corp., a bank holding company whose wholly-owned banking subsidiaries were First National Bank of Muscatine and First National Bank in Fairfield, community banks located in Muscatine and Fairfield, Iowa, respectively. Immediately following the completion of the acquisition, First National Bank of Muscatine and First National Bank in Fairfield were merged with and into the Bank. As consideration for the merger, we paid cash in the amount of $ 46.7 million.

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, 2021, filed with the SEC on March 10, 2022.

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, 2022 may not be indicative of results for the year ending December 31, 2022, 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, 2021, filed with the SEC on March 10, 2022, except for the policies related to held to maturity debt securities and acquired loans.

Held to Maturity Debt Securities - Certain debt securities that the Company has the positive intent and ability to hold to maturity are classified as held to maturity and recorded at amortized cost.

A debt security is placed on nonaccrual status at the time any principal or interest payments become 90 days delinquent. Interest accrued but not received for a security placed on nonaccrual is reversed against interest income.

The Company evaluates debt securities held to maturity for current expected credit losses. Held-to-maturity securities are evaluated on a quarterly basis using historical probability of default and loss given default information specific to the investment category. If this evaluation determines that credit losses exist, an allowance for credit loss is recorded and included in earnings as a component of credit loss expense. The Company's mortgage-backed securities and collateralized mortgage obligations are issued by U.S. government agencies and U.S. government-sponsored enterprises and are implicitly guaranteed by the U.S. government, and as such are excluded from the credit loss evaluation.

Accrued interest receivable on held to maturity debt securities is recorded within 'Other Assets,' and is excluded from the estimate of credit losses.

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Acquired Loans - Acquired loans are separated into two categories based on the credit risk characteristics of the underlying borrowers as either PCD, for loans which have experienced more than insignificant credit deterioration since origination, or loans with no credit deterioration (non-PCD). At the date of acquisition, an ACL on PCD loans is determined and added to the amortized cost basis of the individual loans. The difference between the initial amortized cost basis and the par value of the loan is a noncredit discount or premium, which is amortized into interest income over the life of the loan. The ACL on PCD loans is recorded in the acquisition accounting and no provision for credit losses is recognized at the acquisition date. Subsequent changes to the ACL are recorded through provision expense. For non-PCD loans, an ACL is established immediately after the acquisition through a charge to the provision for credit losses.

Segment Reporting

The Company’s activities are considered to be one reportable segment for financial reporting purposes. The Company is engaged in the business of commercial and retail banking and trust and investment management services with operations throughout central and eastern Iowa, the Minneapolis/St. Paul metropolitan area of Minnesota, southwestern 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, 2022

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. Certain optional expedients and exceptions for contract modifications and hedging relationships were amended in ASU 2021-01, Reference Rate Reform (Topic 848): Scope Refinement , issued on January 7, 2021. Entities may apply the provision as of the beginning of the reporting period when the election is made and are available until December 31, 2022. The adoption of ASU ASU 2020-04 is not expected to have a material impact on the Company’s consolidated financial statements.

On March 31, 2022, the FASB issued ASU 2022-02, Financial Instruments - Credit Losses (Topic 326): Troubled Debt Restructurings and Vintage Disclosures. For creditors that have adopted the CECL accounting guidance within ASU 2016-13, the amendments eliminate the accounting guidance for TDRs within ASC 310-40, while also enhancing the disclosure requirements for certain loan refinancings and restructurings when a borrower is experiencing financial difficulty. In addition, public business entities must also disclose current-period gross write-offs by year of origination for financing receivables and net investments in leases within the scope of ASC 326-20. The amendments are effective for fiscal years beginning after December 15, 2022 and should be applied prospectively, with an option to apply a modified retrospective transition approach for the recognition and measurement of TDRs. The Company is currently evaluating the impact of ASU 2022-02.

2. Business Combinations

On June 9, 2022, the Company acquired 100 % of the equity of IOFB through a merger and acquired its wholly-owned subsidiaries FNBM and FNBF for cash consideration of $ 46.7 million. The primary reasons for the acquisition were to enter the Muscatine, Iowa market and increase our presence in Fairfield, Iowa. Immediately following the completion of the acquisition, First National Bank of Muscatine and First National Bank in Fairfield were merged with and into the Bank.

The assets acquired and liabilities assumed have been accounted for under the acquisition method of accounting. The assets and liabilities, both tangible and intangible, were recorded at their fair values as of the June 9, 2022 acquisition date net of any applicable tax effects using a methodology similar to the Company's legacy assets and liabilities (refer to Note 14. Fair Value of Financial Instruments and Fair Value Measurements for additional information regarding the fair value methodology). Initial accounting for the assets acquired and liabilities assumed was incomplete at September 30, 2022. Thus, such amounts recognized in the financial statements have been determined to be provisional. The bargain purchase gain, which is recorded in 'Other' noninterest income, was generated as a result of the estimated fair value of identifiable net assets acquired exceeding the merger consideration, based on provisional fair values. The revenue and earnings amount specific to IOFB since the acquisition date that are included in the consolidated results for the three and nine months ended September 30, 2022 are not readily determinable. The disclosures of these amounts are impracticable due to the merging of certain processes and systems at the acquisition date.

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The table below summarizes the amounts recognized as of the acquisition date for each major class of assets acquired and liabilities assumed, including the fair value purchase accounting adjustments that were recorded in the third quarter of 2022, as the accounting for the assets acquired and liabilities assumed was incomplete.


(in thousands)	June 9, 2022
	As Reported at June 30, 2022	Fair Value Adjustments	As Reported at September 30, 2022
Merger consideration
Cash consideration	46,672	—	46,672
Identifiable net assets acquired, at fair value
Assets acquired
Cash and due from banks	10,192	—	10,192
Interest earning deposits in banks	67,855	—	67,855
Debt securities	119,230	590	119,820
Loans held for investment	281,470	( 143 )	281,326
Premises and equipment	7,363	—	7,363
Core deposit intangible	16,500	—	16,500
Other assets	12,218	( 590 )	11,628
Total assets acquired	514,828	( 143 )	514,684
Liabilities assumed
Deposits	( 463,638 )	—	( 463,638 )
Other liabilities	( 3,117 )	—	( 3,117 )
Total liabilities assumed	( 466,755 )	—	( 466,755 )
Identifiable net assets acquired, at fair value	48,073		47,929
Bargain Purchase Gain	1,401	( 143 )	1,257

Of the $ 281.3 million net loans acquired, $ 11.0 million exhibited credit deterioration on the date of purchase. The following table provides a summary of these PCD loans at acquisition:


(in thousands)	June 9, 2022

Par value of PCD loans acquired		$	15,396
PCD ACL at acquisition		( 3,371 )
Non-credit discount on PCD loans		( 1,005 )
Purchase price of PCD loans		$	11,020

For illustrative purposes only, the following table presents certain unaudited pro forma information for the three and nine months ended September 30, 2022 and 2021. This unaudited, estimated pro forma information was calculated as if IOFB had been acquired as of the beginning of the year prior to the date of acquisition. This unaudited pro forma information combines the historical results of IOFB and the Company and includes adjustments for the estimated impact of certain fair value purchase accounting, interest expense, acquisition-related expenses, and income tax expense for the respective periods. The pro forma information is not indicative of what would have occurred had the acquisition occurred as of the beginning of the year prior to the acquisition. Additionally, MidWest One expects to achieve further operating cost savings and other business synergies, including revenue growth as a result of the acquisition, which are not reflected in the pro forma amounts that follow. As a result, actual amounts would have differed from the unaudited pro forma information presented.


	Three Months Ended				Nine Months Ended
	September 30,				September 30,
(in thousands, except per share amounts)	2022		2021		2022		2021
Total revenues	$	55,954	$	56,205	$	165,053	$	165,616
Net Income	$	17,111	$	17,723	$	46,663	$	55,356
EPS - basic	$	1.10	$	1.12	$	2.98	$	3.47
EPS - diluted	$	1.09	$	1.12	$	2.97	$	3.47

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The following table summarizes the IOFB acquisition-related expenses, which are included in the respective income statement line items, for the periods indicated:


	Three Months Ended				Nine Months Ended
	September 30,				September 30,
(in thousands)	2022		2021		2022		2021
Noninterest Expense
Compensation and employee benefits	$	132	$	—	$	282	$	—
Occupancy expense of premises, net	—		—		1		—
Equipment	14		—		25		—
Legal and professional	193		—		894		—
Data processing	304		—		380		—
Marketing	90		—		162		—
Communications	—		—		3		—
Other	30		—		45		—
Total IOFB acquisition-related expenses	$	763	$	—	$	1,792	$	—

3. Debt Securities

On January 1, 2022, the Company transferred, at fair value, $ 1.25 billion of mortgage-backed securities, collateralized mortgage obligations, and securities issued by state and political subdivisions from the available for sale classification to the held to maturity classification. The net unrealized after tax loss of $ 11.5 million associated with those re-classified securities remained in accumulated other comprehensive loss and will be amortized over the remaining life of the securities. At September 30, 2022, there was $ 9.1 million of net unrealized after tax loss remaining in accumulated other comprehensive loss. No gains or losses were recognized in earnings at the time of the transfer.

The following tables summarize the amortized cost, gross unrealized gains and losses and the resulting fair value of debt securities for the periods indicated. There were no held to maturity debt securities as of December 31, 2021.


	As of September 30, 2022
(in thousands)	Amortized Cost (1)		Gross Unrealized Gains		Gross Unrealized Losses		Allowance for Credit Loss related to Debt Securities		Fair Value
Available for Sale
U.S. Government agencies and corporations	$	7,560	$	—	$	221	$	—	$	7,339
State and political subdivisions	307,415		4		23,906		—		283,513
Mortgage-backed securities	6,320		9		246		—		6,083
Collateralized mortgage obligations	177,474		—		24,386		—		153,088
Corporate debt securities	772,241		262		69,222		—		703,281
Total available for sale debt securities	$	1,271,010	$	275	$	117,981	$	—	$	1,153,304

Held to Maturity

State and political subdivisions	$	540,221	$	—	$	106,460	$	—	$	433,761
Mortgage-backed securities	82,858		—		14,118		—		68,740
Collateralized mortgage obligations	523,504		—		100,434		—		423,070

Total held to maturity debt securities	$	1,146,583	$	—	$	221,012	$	—	$	925,571
(1) Amortized cost for the held to maturity securities includes $ 0.3 million of unamortized gain in state and political subdivisions, $ 29 thousand of unamortized losses in mortgage-backed securities and $ 12.6 million of unamortized losses in collateralized mortgage obligations related to the re-classification of securities from available for sale to held to maturity on January 1, 2022.

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	As of December 31, 2021
(in thousands)	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses		Allowance for Credit Loss related to Debt Securities		Fair Value
Available for Sale
U.S. Government agencies and corporations	$	265	$	1	$	—	$	—	$	266
State and political subdivisions	760,894		10,484		5,636		—		765,742
Mortgage-backed securities	100,325		932		631		—		100,626
Collateralized mortgage obligations	785,945		1,274		18,320		—		768,899
Corporate debt securities	652,677		6,305		6,405		—		652,577
Total debt securities	$	2,300,106	$	18,996	$	30,992	$	—	$	2,288,110

Investment securities with a fair value of $ 649.6 million and $ 582.2 million at September 30, 2022 and December 31, 2021, respectively, were pledged on public deposits, securities sold under agreements to repurchase and for other purposes, as required or permitted by law.

Accrued interest receivable on available for sale debt securities and held to maturity debt securities is recorded within 'Other Assets,' and is excluded from the estimate of credit losses. At September 30, 2022 the accrued interest receivable on available for sale debt securities and held to maturity debt securities totaled $ 7.9 million and $ 3.8 million, respectively. At December 31, 2021 the accrued interest receivable on available for sale debt securities totaled $ 9.5 million. There was no accrued interest receivable on held to maturity debt securities at December 31, 2021.

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, 2022, aggregated by investment category and length of time in a continuous loss position:


		As of September 30, 2022
	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)

U.S. Government agencies and corporations	8	$	7,339	$	221	$	—	$	—	$	7,339	$	221
State and political subdivisions	421	266,471		21,464		11,000		2,442		277,471		23,906
Mortgage-backed securities	25	5,503		245		46		1		5,549		246
Collateralized mortgage obligations	20	82,403		6,497		70,685		17,889		153,088		24,386
Corporate debt securities	158	533,326		48,999		123,017		20,223		656,343		69,222
Total	632	$	895,042	$	77,426	$	204,748	$	40,555	$	1,099,790	$	117,981

As of September 30, 2022, 8 U.S. Government agencies and corporations securities with total unrealized losses of $ 0.2 million were held by the Company. Management considered the implied U.S. government guarantee of these agency and corporation securities. 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, 2022, 421 state and political subdivisions securities with total unrealized losses of $ 23.9 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, 2022, 25 mortgage-backed securities and 20 collateralized mortgage obligations with unrealized losses totaling $ 24.6 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, 2022, 158 corporate debt securities with total unrealized losses of $ 69.2 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

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information available. Based on this evaluation, management concluded that the decline in fair value was not attributable to 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, 2021, aggregated by investment category and length of time in a continuous loss position:


		As of December 31, 2021
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	136	$	311,960	$	5,216	$	15,343	$	420	$	327,303	$	5,636
Mortgage-backed securities	6	43,319		631		80		—		43,399		631
Collateralized mortgage obligations	44	605,729		15,693		61,984		2,627		667,713		18,320
Corporate debt securities	52	303,750		4,567		27,071		1,838		330,821		6,405
Total	238	$	1,264,758	$	26,107	$	104,478	$	4,885	$	1,369,236	$	30,992

The Company evaluates debt securities held to maturity for current expected credit losses. There were no debt securities held to maturity classified as nonaccrual or past due as of September 30, 2022. Held-to-maturity securities are evaluated on a quarterly basis using historical probability of default and loss given default information specific to the investment category. If this evaluation determines that credit losses exist, an allowance for credit loss is recorded and included in earnings as a component of credit loss expense. Based on this evaluation, management concluded that no allowance for credit loss for these securities was required.

Proceeds and gross realized gains and losses on debt securities available for sale for the three and nine months ended September 30, 2022 and 2021, were as follows:


	Three Months Ended				Nine Months Ended
(in thousands)	September 30, 2022		September 30, 2021		September 30, 2022		September 30, 2021
Proceeds from sales of debt securities available for sale	$	17,570	$	782	$	129,823	$	42,193

Gross realized gains from sales of debt securities available for sale	—		32		—		856
Gross realized losses from sales of debt securities available for sale	( 167 )		—		( 167 )		( 791 )
Net realized gain from sales of debt securities available for sale (1)	$	( 167 )	$	32	$	( 167 )	$	65

(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 thousand and $ 439 thousand for the three and nine months ended September 30, 2022, respectively, and $ 4 thousand and $ 40 thousand for the three and nine months ended September 30, 2021, respectively.

The contractual maturity distribution of investment debt securities at September 30, 2022, 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				Held to Maturity
(in thousands)	Amortized Cost		Fair Value		Amortized Cost		Fair Value
Due in one year or less	$	60,695	$	60,639	$	5,423	$	5,332
Due after one year through five years	717,493		658,337		88,646		78,298
Due after five years through ten years	262,787		235,708		212,757		175,456
Due after ten years	46,241		39,449		233,395		174,675
	$	1,087,216	$	994,133	$	540,221	$	433,761
Mortgage-backed securities	6,320		6,083		82,858		68,740
Collateralized mortgage obligations	177,474		153,088		523,504		423,070
Total	$	1,271,010	$	1,153,304	$	1,146,583	$	925,571

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4. 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, 2022		December 31, 2021
Agricultural	$	116,229	$	103,417
Commercial and industrial	1,041,662		902,314
Commercial real estate:
Construction & development	276,941		172,160
Farmland	183,581		144,673
Multifamily	222,592		244,503
Commercial real estate-other	1,226,983		1,143,205
Total commercial real estate	1,910,097		1,704,541
Residential real estate:
One- to four- family first liens	446,373		333,308
One- to four- family junior liens	157,276		133,014
Total residential real estate	603,649		466,322
Consumer	74,652		68,418
Loans held for investment, net of unearned income	3,746,289		3,245,012
Allowance for credit losses	( 52,100 )		( 48,700 )
Total loans held for investment, net	$	3,694,189	$	3,196,312

Loans with unpaid principal in the amount of $ 843.9 million and $ 816.0 million at September 30, 2022 and December 31, 2021, 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, 2022
Agricultural	$	115,372	$	150	$	34	$	673	$	116,229	$	—
Commercial and industrial	1,037,526		536		193		3,407		1,041,662		—
Commercial real estate:
Construction and development	276,918		—		23		—		276,941		—
Farmland	182,171		268		—		1,142		183,581		—
Multifamily	221,204		12		—		1,376		222,592		—
Commercial real estate-other	1,217,329		5,534		180		3,940		1,226,983		—
Total commercial real estate	1,897,622		5,814		203		6,458		1,910,097		—
Residential real estate:
One- to four- family first liens	440,206		3,684		353		2,130		446,373		936
One- to four- family junior liens	156,074		253		56		893		157,276		—
Total residential real estate	596,280		3,937		409		3,023		603,649		936
Consumer	74,443		117		67		25		74,652		—
Total	$	3,721,243	$	10,554	$	906	$	13,586	$	3,746,289	$	936

December 31, 2021
Agricultural	$	102,352	$	244	$	—	$	821	$	103,417	$	—
Commercial and industrial	899,423		529		134		2,228		902,314		—
Commercial real estate:
Construction and development	171,169		396		—		595		172,160		—
Farmland	141,814		116		—		2,743		144,673		—
Multifamily	243,117		—		1,386		—		244,503		—
Commercial real estate-other	1,129,073		8,417		306		5,409		1,143,205		—
Total commercial real estate	1,685,173		8,929		1,692		8,747		1,704,541		—
Residential real estate:
One- to four- family first liens	330,992		1,057		1,057		202		333,308		—
One- to four- family junior liens	132,392		261		135		226		133,014		—
Total residential real estate	463,384		1,318		1,192		428		466,322		—
Consumer	68,326		66		14		12		68,418		—
Total	$	3,218,658	$	11,086	$	3,032	$	12,236	$	3,245,012	$	—

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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:


	Nonaccrual				Nonaccrual with no Allowance for Credit Losses				90 Days or More Past Due And Accruing
(in thousands)	September 30, 2022		December 31, 2021		September 30, 2022		December 31, 2021		September 30, 2022		December 31, 2021

Agricultural	$	1,089	$	2,090	$	794	$	1,341	$	—	$	—
Commercial and industrial	4,545		3,803		408		1,341		—		—
Commercial real estate:
Construction and development	—		595		—		595		—		—
Farmland	3,674		5,499		3,385		4,156		—		—
Multifamily	2,308		987		1,676		323		—		—
Commercial real estate-other	10,019		16,544		8,487		1,063		—		—
Total commercial real estate	16,001		23,625		13,548		6,137		—		—
Residential real estate:
One- to four- family first liens	2,105		1,275		624		345		936		—
One- to four- family junior liens	1,201		713		—		—		—		—
Total residential real estate	3,306		1,988		624		345		936		—
Consumer	86		34		—		—		—		—
Total	$	25,027	$	31,540	$	15,374	$	9,164	$	936	$	—

The interest income recognized on loans that were on nonaccrual for the three months ended September 30, 2022 and September 30, 2021 was $ 70 thousand and $ 268 thousand, respectively. The interest income recognized on loans that were on nonaccrual for the nine months ended September 30, 2022 and September 30, 2021 was $ 345 thousand and $ 446 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.

Table of Contents

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, 2022. As of September 30, 2022, there were no 'loss' rated credits.


	Term Loans by Origination Year												Revolving Loans
September 30, 2022 (in thousands)	2022		2021		2020		2019		2018		Prior				Total
Agricultural
Pass	$	16,714	$	14,661	$	5,835	$	3,097	$	1,036	$	1,142	$	63,727		$	106,212
Special mention / watch	241		905		139		163		—		607		2,419			4,474
Substandard	298		649		774		118		191		310		3,203			5,543
Doubtful	—		—		—		—		—		—		—			—
Total	$	17,253	$	16,215	$	6,748	$	3,378	$	1,227	$	2,059	$	69,349		$	116,229
Commercial and industrial
Pass	$	228,482	$	238,257	$	160,159	$	52,391	$	29,047	$	121,704	$	167,813		$	997,853
Special mention / watch	3,338		3,512		2,846		391		3,065		17,829		1,469			32,450
Substandard	568		83		2,426		1,029		1,048		3,591		2,614			11,359
Doubtful	—		—		—		—		—		—		—			—
Total	$	232,388	$	241,852	$	165,431	$	53,811	$	33,160	$	143,124	$	171,896		$	1,041,662
CRE - Construction and development
Pass	$	108,284	$	109,184	$	37,144	$	2,218	$	1,483	$	1,853	$	15,031		$	275,197
Special mention / watch	38		505		—		—		—		—		—			543
Substandard	1,194		—		—		—		—		7		—			1,201
Doubtful	—		—		—		—		—		—		—			—
Total	$	109,516	$	109,689	$	37,144	$	2,218	$	1,483	$	1,860	$	15,031		$	276,941
CRE - Farmland
Pass	$	43,681	$	53,774	$	30,467	$	8,911	$	8,549	$	14,414	$	3,145		$	162,941
Special mention / watch	2,831		2,259		1,524		—		615		84		2,335			9,648
Substandard	335		1,991		2,634		2,462		1,542		2,028		—			10,992
Doubtful	—		—		—		—		—		—		—			—
Total	$	46,847	$	58,024	$	34,625	$	11,373	$	10,706	$	16,526	$	5,480		$	183,581
CRE - Multifamily
Pass	$	23,929	$	66,582	$	87,045	$	17,281	$	2,577	$	6,039	$	1,369		$	204,822
Special mention / watch	—		—		—		206		5,957		1,201		—			7,364
Substandard	300		8,395		1,711		—		—		—		—			10,406
Doubtful	—		—		—		—		—		—		—			—
Total	$	24,229	$	74,977	$	88,756	$	17,487	$	8,534	$	7,240	$	1,369		$	222,592
CRE - other
Pass	$	245,620	$	316,315	$	319,946	$	79,653	$	32,736	$	82,887	$	52,542		$	1,129,699
Special mention / watch	9,326		2,649		6,052		4,231		10,314		13,769		435			46,776
Substandard	610		1,080		22,733		19,472		1,738		4,778		97			50,508
Doubtful	—		—		—		—		—		—		—			—
Total	$	255,556	$	320,044	$	348,731	$	103,356	$	44,788	$	101,434	$	53,074		$	1,226,983
RRE - One- to four- family first liens
Performing	$	122,746	$	107,385	$	65,596	$	27,284	$	24,040	$	84,019	$	12,262		$	443,332
Nonperforming	—		103		5		42		302		2,589		—			3,041
Total	$	122,746	$	107,488	$	65,601	$	27,326	$	24,342	$	86,608	$	12,262		$	446,373
RRE - One- to four- family junior liens
Performing	$	29,804	$	24,315	$	9,618	$	3,111	$	4,067	$	6,830	$	78,329		$	156,074
Nonperforming	—		24		—		204		757		117		100			1,202
Total	$	29,804	$	24,339	$	9,618	$	3,315	$	4,824	$	6,947	$	78,429		$	157,276
Consumer
Performing	$	25,966	$	22,714	$	9,384	$	4,126	$	2,101	$	6,462	$	3,812		$	74,565
Nonperforming	—		—		60		12		8		7		—			87
Total	$	25,966	$	22,714	$	9,444	$	4,138	$	2,109	$	6,469	$	3,812		$	74,652

Total by Credit Quality Indicator Category
Pass	$	666,710	$	798,773	$	640,596	$	163,551	$	75,428	$	228,039	$	303,627		$	2,876,724
Special mention / watch	15,774		9,830		10,561		4,991		19,951		33,490		6,658			101,255
Substandard	3,305		12,198		30,278		23,081		4,519		10,714		5,914			90,009
Doubtful	—		—		—		—		—		—		—			—
Performing	178,516		154,414		84,598		34,521		30,208		97,311		94,403			673,971
Nonperforming	—		127		65		258		1,067		2,713		100			4,330
Total	$	864,305	$	975,342	$	766,098	$	226,402	$	131,173	$	372,267	$	410,702		$	3,746,289

Table of Contents

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, 2021. As of December 31, 2021, there were no 'loss' rated credits.


	Term Loans by Origination Year												Revolving Loans
December 31, 2021 (in thousands)	2021		2020		2019		2018		2017		Prior				Total
Agricultural
Pass	$	20,145	$	8,604	$	4,367	$	1,260	$	885	$	947	$	58,119		$	94,327
Special mention / watch	1,255		148		245		—		17		993		1,685			4,343
Substandard	649		827		126		221		4		278		2,642			4,747
Doubtful	—		—		—		—		—		—		—			—
Total	$	22,049	$	9,579	$	4,738	$	1,481	$	906	$	2,218	$	62,446		$	103,417
Commercial and industrial
Pass	$	297,285	$	199,324	$	56,258	$	35,522	$	60,294	$	75,342	$	132,323		$	856,348
Special mention / watch	4,268		2,342		781		470		4,304		14,274		6,938			33,377
Substandard	8		1,772		1,255		772		37		2,922		5,823			12,589
Doubtful	—		—		—		—		—		—		—			—
Total	$	301,561	$	203,438	$	58,294	$	36,764	$	64,635	$	92,538	$	145,084		$	902,314
CRE - Construction and development
Pass	$	90,662	$	37,098	$	4,942	$	1,611	$	1,543	$	578	$	33,197		$	169,631
Special mention / watch	874		—		169		—		—		—		—			1,043
Substandard	—		879		596		—		—		11		—			1,486
Doubtful	—		—		—		—		—		—		—			—
Total	$	91,536	$	37,977	$	5,707	$	1,611	$	1,543	$	589	$	33,197		$	172,160
CRE - Farmland
Pass	$	51,682	$	33,870	$	18,674	$	5,105	$	5,060	$	10,240	$	1,812		$	126,443
Special mention / watch	3,105		3,824		—		734		292		223		—			8,178
Substandard	1,580		2,004		1,681		2,562		1,667		558		—			10,052
Doubtful	—		—		—		—		—		—		—			—
Total	$	56,367	$	39,698	$	20,355	$	8,401	$	7,019	$	11,021	$	1,812		$	144,673
CRE - Multifamily
Pass	$	97,188	$	96,389	$	19,234	$	2,754	$	4,555	$	3,813	$	273		$	224,206
Special mention / watch	7,871		—		—		6,000		1,859		544		—			16,274
Substandard	663		2,049		—		—		—		1,311		—			4,023
Doubtful	—		—		—		—		—		—		—			—
Total	$	105,722	$	98,438	$	19,234	$	8,754	$	6,414	$	5,668	$	273		$	244,503
CRE - other
Pass	$	325,902	$	384,591	$	94,449	$	37,960	$	60,890	$	60,543	$	45,910		$	1,010,245
Special mention / watch	5,302		26,239		5,172		11,243		2,557		1,905		1,768			54,186
Substandard	4,182		48,885		12,497		5,401		973		6,836		—			78,774
Doubtful	—		—		—		—		—		—		—			—
Total	$	335,386	$	459,715	$	112,118	$	54,604	$	64,420	$	69,284	$	47,678		$	1,143,205
RRE - One- to four- family first liens
Performing	$	115,539	$	77,086	$	27,279	$	24,697	$	16,425	$	65,676	$	5,331		$	332,033
Nonperforming	352		20		45		295		—		563		—			1,275
Total	$	115,891	$	77,106	$	27,324	$	24,992	$	16,425	$	66,239	$	5,331		$	333,308
RRE - One- to four- family junior liens
Performing	$	29,904	$	13,335	$	4,295	$	5,109	$	3,574	$	5,104	$	70,980		$	132,301
Nonperforming	31		—		156		198		16		207		105			713
Total	$	29,935	$	13,335	$	4,451	$	5,307	$	3,590	$	5,311	$	71,085		$	133,014
Consumer
Performing	$	33,124	$	14,386	$	5,917	$	4,080	$	1,686	$	5,778	$	3,412		$	68,383
Nonperforming	—		—		15		—		13		7		—			35
Total	$	33,124	$	14,386	$	5,932	$	4,080	$	1,699	$	5,785	$	3,412		$	68,418

Total by Credit Quality Indicator Category
Pass	$	882,864	$	759,876	$	197,924	$	84,212	$	133,227	$	151,463	$	271,634		$	2,481,200
Special mention / watch	22,675		32,553		6,367		18,447		9,029		17,939		10,391			117,401
Substandard	7,082		56,416		16,155		8,956		2,681		11,916		8,465			111,671
Doubtful	—		—		—		—		—		—		—			—
Performing	178,567		104,807		37,491		33,886		21,685		76,558		79,723			532,717
Nonperforming	383		20		216		493		29		777		105			2,023
Total	$	1,091,571	$	953,672	$	258,153	$	145,994	$	166,651	$	258,653	$	370,318		$	3,245,012

Table of Contents

Allowance for Credit Losses

At September 30, 2022, the economic forecast used by the Company showed the following: (1) Midwest unemployment – increases 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 - increases over the next four forecasted quarters; (4) Year-to-year change in U.S. GDP - decline in the first forecasted quarter, with increases in the next three forecasted quarters; (5) Year-to-year change in National Home Price Index – increases over the next two forecasted quarters, with a decline in the third and fourth forecasted quarter; and (6) Rental Vacancy - increases over the next four forecasted quarters. The increase in the ACL between the nine months ended September 30, 2021 and the nine months ended September 30, 2022 is primarily driven by the initial allowance for credit losses of $ 3.4 million recorded for the PCD loans acquired, as well as $ 3.1 million related to the acquired non-PCD loans, coupled with the additional reserve taken to support loan growth. Net loan charge-offs were $ 0.6 million for the three-months ended September 30, 2022 as compared to net loan recoveries of $ 0.9 million for the three-months ended September 30, 2021. Net loan charge-offs were $ 3.1 million for the nine months ended September 30, 2022 as compared to net loan recoveries of $ 0.2 million for the nine months ended September 30, 2021.

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 $ 14.5 million at September 30, 2022 and $ 10.4 million at December 31, 2021 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, 2022 and 2021
(in thousands)	Agricultural		Commercial and Industrial		Commercial Real Estate		Residential Real Estate		Consumer		Total
For the Three Months Ended September 30, 2022
Beginning balance	$	987	$	21,166	$	24,399	$	5,174	$	624	$	52,350

Charge-offs	( 248 )		( 280 )		( 135 )		( 52 )		( 255 )		( 970 )
Recoveries	1		295		6		48		32		382
Credit loss expense (benefit) (1)	241		3,075		( 3,322 )		138		206		338
Ending balance	$	981	$	24,256	$	20,948	$	5,308	$	607	$	52,100

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 expense (benefit) (1)	44		1,058		( 2,226 )		5		139		( 980 )
Ending balance	$	1,060	$	15,775	$	26,329	$	4,105	$	631	$	47,900
(1) The difference in the credit loss expense reported herein as compared to the Consolidated Statements of Income is associated with the credit loss expense (benefit) of $ 0.3 million and $( 0.1 ) million related to off-balance sheet credit exposures for the three months ended September 30, 2022 and September 30, 2021, respectively.


	For the Nine Months Ended September 30, 2022 and 2021
(in thousands)	Agricultural		Commercial and Industrial		Commercial Real Estate		Residential Real Estate		Consumer		Total
For the Nine Months Ended September 30, 2022
Beginning balance	$	667	$	17,294	$	26,120	$	4,010	$	609	$	48,700
PCD allowance established in acquisition	512		1,473		1,227		159		—		$	3,371
Charge-offs	( 249 )		( 843 )		( 2,319 )		( 90 )		( 540 )		( 4,041 )
Recoveries	9		613		154		68		106		950
Credit loss expense (benefit) (1)	42		5,719		( 4,234 )		1,161		432		3,120
Ending balance	$	981	$	24,256	$	20,948	$	5,308	$	607	$	52,100

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
(1) The difference in the credit loss expense reported herein as compared to the Consolidated Statements of Income is associated with the credit loss expense (benefit) of $ 0.8 million and $( 0.2 ) million related to off-balance sheet credit exposures for the nine months ended September 30, 2022 and September 30, 2021, respectively.

Table of Contents

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


	As of September 30, 2022
(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	$	3,239	$	3,978	$	24,509	$	1,898	$	—	$	33,624
Collectively evaluated for impairment	112,990		1,037,684		1,885,588		601,751		74,652		3,712,665
Total	$	116,229	$	1,041,662	$	1,910,097	$	603,649	$	74,652	$	3,746,289
Allowance for credit losses:
Individually evaluated for impairment	$	483	$	1,998	$	1,368	$	244	$	—	$	4,093
Collectively evaluated for impairment	498		22,258		19,580		5,064		607		48,007
Total	$	981	$	24,256	$	20,948	$	5,308	$	607	$	52,100


	As of December 31, 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	$	1,341	$	3,005	$	23,118	$	570	$	—	$	28,034
Collectively evaluated for impairment	102,076		899,309		1,681,423		465,752		68,418		3,216,978

Total	$	103,417	$	902,314	$	1,704,541	$	466,322	$	68,418	$	3,245,012
Allowance for credit losses:
Individually evaluated for impairment	$	—	$	681	$	2,193	$	224	$	—	$	3,098
Collectively evaluated for impairment	667		16,613		23,927		3,786		609		45,602

Total	$	667	$	17,294	$	26,120	$	4,010	$	609	$	48,700

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, 2022
(in thousands)	Primary Type of Collateral
	Real Estate		Equipment		Other		Total		ACL Allocation
Agricultural	$	581	$	2,658	$	—	$	3,239	$	483
Commercial and industrial	1,410		1,819		749		3,978		1,998
Commercial real estate:
Construction and development	905		—		—		905		268
Farmland	6,197		—		—		6,197		—
Multifamily	2,308		—		—		2,308		356
Commercial real estate-other	14,824		—		275		15,099		744
Residential real estate:
One- to four- family first liens	1,177		—		—		1,177		64
One- to four- family junior liens	—		—		721		721		180
Consumer	—		—		—		—		—
Total	$	27,402	$	4,477	$	1,745	$	33,624	$	4,093


	As of December 31, 2021
(in thousands)	Primary Type of Collateral
	Real Estate		Equipment		Other		Total		ACL Allocation
Agricultural	$	916	$	425	$	—	$	1,341	$	—
Commercial and industrial	408		374		2,223		3,005		681
Commercial real estate:
Construction and development	595		—		—		595		—
Farmland	5,185		—		—		5,185		22
Multifamily	987		—		—		987		387
Commercial real estate-other	16,130		—		221		16,351		1,784
Residential real estate:
One- to four- family first liens	410		—		—		410		64
One- to four- family junior liens	—		—		160		160		160
Consumer	—		—		—		—		—
Total	$	24,631	$	799	$	2,604	$	28,034	$	3,098

Table of Contents

Troubled Debt Restructurings

TDRs totaled $ 9.1 million and $ 20.0 million as of September 30, 2022 and December 31, 2021, respectively. As of September 30, 2022, the Company had $ 9 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,
	2022					2021
	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 - Extended maturity date





Commercial real estate-other	3	$	894	$	894	2	$	9,717	$	9,623














Total	3	$	894	$	894	2	$	9,717	$	9,623


	Nine Months Ended September 30,
	2022					2021
	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



Farmland	—	$	—	$	—	2	$	1,982	$	1,982


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



CONCESSION - Extended maturity date
Agricultural	1	12		12		—	—		—
Commercial and industrial	4	512		502		—	—		—

Farmland	4	988		888		—	—		—

Commercial real estate-other	3	894		894		2	9,717		9,623
One- to four- family first liens	—	—		—		2	178		178



CONCESSION - Other
Agricultural	1	140		140		—	—		—


Farmland	3	1,529		1,529		—	—		—

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


Total	16	$	4,075	$	3,965	9	$	12,242	$	12,148

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,
	2022			2021			2022			2021
	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

Commercial and industrial	—	$	—	—	$	—	1	$	403	—	$	—

Farmland	—	—		—	—		3	490		—	—

Commercial real estate-other	2	432		—	—		3	7,820		—	—














Total	2	$	432	—	$	—	7	$	8,713	—	$	—

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5. 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, 2022						As of December 31, 2021
	Notional Amount		Fair Value				Notional Amount		Fair Value
(in thousands)			Assets		Liabilities				Assets		Liabilities
Designated as hedging instruments:
Fair value hedges:
Interest rate swaps	$	24,217	$	2,690	$	—	$	24,802	$	424	$	1,400


Total	$	24,217	$	2,690	$	—	$	24,802	$	424	$	1,400

Not designated as hedging instruments:
Interest rate swaps	$	332,073	$	22,093	$	22,095	$	356,636	$	5,352	$	5,363
RPAs - protection sold	4,040		—		—		4,229		—		—
RPAs - protection purchased	9,474		—		—		9,629		—		2
Interest rate lock commitments	3,685		—		37		17,438		330		—
Interest rate forward loan sales contracts	4,450		87		—		22,710		—		( 24 )
Total	$	353,722	$	22,180	$	22,132	$	410,642	$	5,682	$	5,341

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.

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 Hedging Relationships
	For the Three Months Ended September 30,								For the Nine Months Ended September 30,
	2022				2021				2022				2021
(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 hedges are recorded	$	24	$	—	$	( 110 )	$	—	$	( 147 )	$	—	$	( 329 )	$	—

Gain (loss) on fair value hedging relationships in subtopic 815-20:
Interest contracts:
Hedged items	( 1,149 )		—		( 199 )		—		( 3,665 )		—		( 1,254 )		—
Derivative designated as hedging instruments	1,175		—		157		—		3,519		—		910		—

As of September 30, 2022, 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	$	21,557	$	( 2,687 )

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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.

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)		2022		2021		2022		2021
Interest rate swaps	Other income	$	2	$	5	$	10	$	40
RPAs	Other income	—		1		1		2
Interest rate lock commitments	Loan revenue	( 149 )		316		( 367 )		316
Interest rate forward loan sales contracts	Loan revenue	91		( 107 )		63		( 107 )
Total		$	( 56 )	$	215	$	( 293 )	$	251

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, 2022 and December 31, 2021, 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 Recognized		Gross Amounts Offset in the Balance Sheet		Net Amounts presented in the Balance Sheet		Financial Instruments		Cash Collateral Received / Paid		Net Assets /Liabilities
As of September 30, 2022
Asset Derivatives	$	24,870	$	—	$	24,870	$	—	$	20,518	$	4,352
Liability Derivatives	22,132		—		22,132		—		3,330		18,802

As of December 31, 2021
Asset Derivatives	$	6,106	$	—	$	6,106	$	—	$	—	$	6,106
Liability Derivatives	6,741		—		6,741		—		3,250		3,491

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, 2022, the Company had no derivatives with a fair value in a net liability position with its institutional derivative counterparties.

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6. Goodwill and Intangible Assets

The carrying amount of goodwill was $ 62.5 million at September 30, 2022 and December 31, 2021.

As indicated in Note 2. Business Combinations , the Company acquired a core deposit intangible on June 9, 2022 with an estimated fair value of $ 16.5 million, which will be amortized over its estimated useful life of 10 years. 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, 2022						As of December 31, 2021
(in thousands)	Gross Carrying Amount		Accumulated Amortization		Net Carrying Amount		Gross Carrying Amount		Accumulated Amortization		Net Carrying Amount
Core deposit intangible	$	58,245	$	( 34,244 )	$	24,001	$	41,745	$	( 30,629 )	$	11,116
Customer relationship intangible	5,265		( 4,314 )		951		5,265		( 3,692 )		1,573
Other	2,700		( 2,606 )		94		2,700		( 2,544 )		156
	$	66,210	$	( 41,164 )	$	25,046	$	49,710	$	( 36,865 )	$	12,845

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, 2022 and the succeeding annual periods:


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

2022	$	1,578	$	175	$	17	$	1,770
2023	5,677		518		51		6,246
2024	4,705		239		24		4,968
2025	3,751		19		2		3,772
2026	2,797		—		—		2,797
Thereafter	5,493		—		—		5,493
Total	$	24,001	$	951	$	94	$	25,046

7. Other Assets

The components of the Company's other assets as of September 30, 2022 and December 31, 2021 were as follows:


(in thousands)	September 30, 2022		December 31, 2021
Bank-owned life insurance	$	94,902	$	85,372
Interest receivable	26,362		20,117
FHLB stock	16,961		10,157
Mortgage servicing rights	13,329		6,532
Operating lease right-of-use assets, net	2,738		2,840
Federal and state income taxes, current	—		178
Federal and state income taxes, deferred	40,862		13,893
Derivative assets	24,870		6,106
Other receivables/assets	13,729		12,553
	$	233,753	$	157,748

The acquisition of IOFB on June 9, 2022 by the Company resulted in an increase in the cash surrender value of bank-owned life insurance, the fair value of the Company's mortgage servicing rights, and interest receivable. See Note 2. Business Combinations for further details.

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8. Deposits

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


(in thousands)	September 30, 2022		December 31, 2021
Noninterest bearing deposits	$	1,139,694	$	1,005,369
Interest checking deposits	1,705,289		1,619,136
Money market deposits	991,783		939,523
Savings deposits	700,843		628,242
Time deposits under $250	537,616		505,392
Time deposits of $250 or more	401,557		416,857
Total deposits	$	5,476,782	$	5,114,519

The Company had $ 4.0 million and $ 3.4 million in reciprocal time deposits as of September 30, 2022 and December 31, 2021, respectively. Included in money market deposits at September 30, 2022 and December 31, 2021 were $ 39.3 million and $ 35.4 million, respectively, of reciprocal deposits. These reciprocal deposits are part of the IntraFi Network Deposits program, which is used by financial institutions to spread deposits that exceed the FDIC insurance coverage limits out to numerous institutions in order to provide insurance coverage for all participating deposits.

As of September 30, 2022 and December 31, 2021, the Company had public entity deposits that were collateralized by investment securities of $ 353.0 million and $ 303.3 million, respectively.

9. Short-Term Borrowings

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


	September 30, 2022				December 31, 2021
(in thousands)	Weighted Average Rate		Balance		Weighted Average Rate		Balance
Securities sold under agreements to repurchase	0.82	%	$	137,536	0.24	%	$	181,368
Federal Home Loan Bank advances	3.29		167,000		—		—



Total	2.18	%	$	304,536	0.24	%	$	181,368

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 4. 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 $ 155.0 million from multiple correspondent banking relationships. There were no borrowings from such lines at either September 30, 2022 or December 31, 2021.

Other - At September 30, 2022 and December 31, 2021, the Company had no Federal Reserve Discount Window borrowings, while the financing capacity was $ 104.3 million as of September 30, 2022 and $ 60.2 million as of December 31, 2021. As of September 30, 2022 and December 31, 2021, the Bank had municipal securities with a market value of $ 113.5 million and $ 65.2 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. The credit agreement was amended on September 30, 2022 such that the revolving commitment matures on September 30, 2023, with no updates made to the fee structure or the interest rates. Fees are paid on the average daily unused revolving commitment in the amount of 0.30 % per annum. Interest is payable at a rate equal to the monthly reset term SOFR rate plus 1.55 %. The Company had no balance outstanding under this revolving credit facility as of both September 30, 2022 and December 31, 2021.

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10. 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, 2022
ATBancorp Statutory Trust I	$	7,732	$	6,918	Three-month LIBOR + 1.68 %	4.97	%	06/15/2036	06/15/2011
ATBancorp Statutory Trust II	12,372		10,954		Three-month LIBOR + 1.65 %	4.94	%	09/15/2037	06/15/2012
Barron Investment Capital Trust I	2,062		1,824		Three-month LIBOR + 2.15 %	5.75	%	09/23/2036	09/23/2011
Central Bancshares Capital Trust II	7,217		6,912		Three-month LIBOR + 3.50 %	6.79	%	03/15/2038	03/15/2013
MidWestOne Statutory Trust II	15,464		15,464		Three-month LIBOR + 1.59 %	4.88	%	12/15/2037	12/15/2012
Total	$	44,847	$	42,072

December 31, 2021
ATBancorp Statutory Trust I	$	7,732	$	6,888	Three-month LIBOR + 1.68 %	1.88	%	06/15/2036	06/15/2011
ATBancorp Statutory Trust II	12,372		10,908		Three-month LIBOR + 1.65 %	1.85	%	09/15/2037	06/15/2012
Barron Investment Capital Trust I	2,062		1,800		Three-month LIBOR + 2.15 %	2.37	%	09/23/2036	09/23/2011
Central Bancshares Capital Trust II	7,217		6,880		Three-month LIBOR + 3.50 %	3.70	%	03/15/2038	03/15/2013
MidWestOne Statutory Trust II	15,464		15,464		Three-month LIBOR + 1.59 %	1.79	%	12/15/2037	12/15/2012
Total	$	44,847	$	41,940

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 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, 2022, 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

On June 7, 2022, the Company entered into an unsecured note payable with a correspondent bank with a maturity date of June 30, 2027. Payments of principal and interest are payable quarterly, and began on September 30, 2022. Interest is payable at the monthly reset term SOFR plus 1.55 %. As of September 30, 2022, $ 20.0 million of that note was outstanding.

Other long-term borrowings were as follows as of September 30, 2022 and December 31, 2021:


	September 30, 2022				December 31, 2021
(in thousands)	Weighted Average Rate		Balance		Weighted Average Rate		Balance
Finance lease payable	8.89	%	$	830	8.89	%	$	951
FHLB borrowings	2.69		27,314		2.76		48,113
Note payable to unaffiliated bank	4.06		20,000		—		—
Total	3.37	%	$	48,144	2.88	%	$	49,064

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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 4. Loans Receivable and the Allowance for Credit Losses of the notes to the unaudited consolidated financial statements. At September 30, 2022, FHLB long-term borrowings included advances from the FHLBC, which were collateralized by investment securities. See Note 3. Debt Securities of the notes to the unaudited consolidated financial statements.

As of September 30, 2022, FHLB borrowings were as follows:


(in thousands)	Weighted Average Rate		Amount
Due in 2022	2.31	%	$	10,000
Due in 2023	2.79	%	11,000
Due in 2024	3.11	%	6,250



Total			27,250
Valuation adjustment from acquisition accounting			64
Total			$	27,314

11. 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)	2022		2021		2022		2021
Basic Earnings Per Share:
Net income	$	18,317	$	16,311	$	44,833	$	55,230
Weighted average shares outstanding	15,623,498		15,840,769		15,657,917		15,938,889
Basic earnings per common share	$	1.17	$	1.03	$	2.86	$	3.47

Diluted Earnings Per Share:
Net income	$	18,317	$	16,311	$	44,833	$	55,230
Weighted average shares outstanding, including all dilutive potential shares	15,654,443		15,863,247		15,686,098		15,963,229
Diluted earnings per common share	$	1.17	$	1.03	$	2.86	$	3.46

12. 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, 2022 and December 31, 2021, 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, 2022 and December 31, 2021, 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, 2022
Consolidated:
Total capital/risk weighted assets	$ 643,365	12.10 %	$ 558,195	10.50 %	N/A	N/A
Tier 1 capital/risk weighted assets	529,960	9.97	451,872	8.50	N/A	N/A
Common equity tier 1 capital/risk weighted assets	487,888	9.18	372,130	7.00	N/A	N/A
Tier 1 leverage capital/average assets	529,960	8.24	257,135	4.00	N/A	N/A
MidWest One Bank:
Total capital/risk weighted assets	$ 646,372	12.17 %	$ 557,477	10.50 %	$ 530,931	10.00 %
Tier 1 capital/risk weighted assets	597,967	11.26	451,291	8.50	424,744	8.00
Common equity tier 1 capital/risk weighted assets	597,967	11.26	371,651	7.00	345,105	6.50
Tier 1 leverage capital/average assets	597,967	9.31	257,021	4.00	321,276	5.00

At December 31, 2021
Consolidated:
Total capital/risk weighted assets	$ 615,060	13.09 %	$ 493,283	10.50 %	N/A	N/A
Tier 1 capital/risk weighted assets	508,687	10.83	399,324	8.50	N/A	N/A
Common equity tier 1 capital/risk weighted assets	466,747	9.94	328,855	7.00	N/A	N/A
Tier 1 leverage capital/average assets	508,687	8.67	234,745	4.00	N/A	N/A
MidWest One Bank:
Total capital/risk weighted assets	$ 584,348	12.46 %	$ 492,436	10.50 %	$ 468,987	10.00 %
Tier 1 capital/risk weighted assets	542,975	11.58	398,639	8.50	375,189	8.00
Common equity tier 1 capital/risk weighted assets	542,975	11.58	328,291	7.00	304,841	6.50
Tier 1 leverage capital/average assets	542,975	9.25	234,686	4.00	293,358	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.

13. 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, 2022		December 31, 2021
(in thousands)
Commitments to extend credit	$	1,159,323	$	1,014,397
Commitments to sell loans	2,320		12,917
Standby letters of credit	19,026		16,342
Total	$	1,180,669	$	1,043,656

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 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.

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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, 2022, the liability for off-balance-sheet credit losses totaled $ 4.8 million, whereas the total amount of the liability as of December 31, 2021 was $ 4.0 million. The total amount recorded in credit loss expense (benefit) for the nine months ended September 30, 2022 was an expense of $ 0.8 million, while a credit loss benefit of $ 0.2 million was recorded for the nine months ended September 30, 2021.

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 8 % are agriculturally related. The concentrations of credit by type of loan are set forth in Note 4. 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 14 % and 10 %, respectively, as of September 30, 2022.

14. 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 2021 Annual Report on Form 10-K, filed with the SEC on March 10, 2022.

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 "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.

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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, 2022 Using
(in thousands)	Total		Level 1		Level 2		Level 3
Assets:
Available for sale debt securities:
U.S. Government agencies and corporations	$	7,339	$	—	$	7,339	$	—
State and political subdivisions	283,513		—		283,513		—
Mortgage-backed securities	6,083		—		6,083		—
Collateralized mortgage obligations	153,088		—		153,088		—
Corporate debt securities	703,281		—		703,281		—
Derivative assets	24,870		—		24,870		—
Mortgage servicing rights	13,329		—		13,329		—

Liabilities:
Derivative liabilities	$	22,132	$	—	$	22,095	$	37


	Fair Value Measurement at December 31, 2021 Using
(in thousands)	Total		Level 1		Level 2		Level 3
Assets:
Debt securities available for sale:
U.S. Government agencies and corporations	$	266	$	—	$	266	$	—
State and political subdivisions	765,742		—		765,742		—
Mortgage-backed securities	100,626		—		100,626		—
Collateralized mortgage obligations	768,899		—		768,899		—
Corporate debt securities	652,577		—		652,577		—
Derivative assets	6,106		—		5,776		330
Mortgage servicing rights	6,532		—		6,532		—

Liabilities:
Derivative liabilities	$	6,741	$	—	$	6,741	$	—

There were no transfers of assets between Level 3 and other levels of the fair value hierarchy during the nine months ended September 30, 2022 or the year ended December 31, 2021. Changes in the fair value of available for sale debt securities are included in other comprehensive income.

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, 2022		December 31, 2021		Valuation Techniques(s)	Unobservable Input	Range of Inputs			Weighted Average
Interest rate lock commitments	$	( 37 )	$	330	Quoted or published market prices of similar instruments, adjusted for factors such as pull-through rate assumptions	Pull-through rate	69 %	-	100 %	86 %

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, 2022 Using
(in thousands)	Total		Level 1		Level 2		Level 3
Collateral dependent individually analyzed loans	$	8,912	$	—	$	—	$	8,912
Foreclosed assets, net	103		—		—		103


	Fair Value Measurement at December 31, 2021 Using
(in thousands)	Total		Level 1		Level 2		Level 3
Collateral dependent individually analyzed loans	$	15,772	$	—	$	—	$	15,772
Foreclosed assets, net	357		—		—		357

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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, 2022		December 31, 2021		Valuation Techniques(s)	Unobservable Input	Range of Inputs			Weighted Average
Collateral dependent individually analyzed loans	$	8,912	$	15,772	Fair value of collateral	Valuation adjustments	— %	-	91 %	45 %
Foreclosed assets, net	$	103	$	357	Fair value of collateral	Valuation adjustments	8 %	-	8 %	8 %

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

Carrying Amount and Estimated Fair Value of Financial Instruments

The carrying amount and estimated fair value of financial instruments at September 30, 2022 and December 31, 2021 were as follows:


	September 30, 2022
(in thousands)	Carrying Amount		Estimated Fair Value		Level 1		Level 2		Level 3
Financial assets:
Cash and cash equivalents	$	78,514	$	78,514	$	78,514	$	—	$	—
Debt securities available for sale	1,153,304		1,153,304		—		1,153,304		—
Debt securities held to maturity	1,146,583		925,571		—		925,571		—
Loans held for sale	2,320		2,014		—		2,014		—
Loans held for investment, net	3,694,189		3,671,008		—		—		3,671,008
Interest receivable	26,362		26,362		—		26,362		—
FHLB stock	16,961		16,961		—		16,961		—
Derivative assets	24,870		24,870		—		24,870		—
Financial liabilities:
Noninterest bearing deposits	1,139,694		1,139,694		1,139,694		—		—
Interest bearing deposits	4,337,088		4,313,894		3,397,915		915,979		—
Short-term borrowings	304,536		304,536		304,536		—		—
Finance leases payable	830		830		—		830		—
FHLB borrowings	27,314		27,021		—		27,021		—
Junior subordinated notes issued to capital trusts	42,072		38,601		—		38,601		—
Subordinated debentures	63,974		63,750		—		63,750		—
Other long-term debt	20,000		20,000		—		20,000		—
Derivative liabilities	22,132		22,132		—		22,095		37


	December 31, 2021
(in thousands)	Carrying Amount		Estimated Fair Value		Level 1		Level 2		Level 3
Financial assets:
Cash and cash equivalents	$	203,830	$	203,830	$	203,830	$	—	$	—

Debt securities available for sale	2,288,110		2,288,110		—		2,288,110		—


Loans held for sale	12,917		12,970		—		12,970		—
Loans held for investment, net	3,196,312		3,207,314		—		—		3,207,314
Interest receivable	20,117		20,117		—		20,117		—
FHLB stock	10,157		10,157		—		10,157		—
Derivative assets	6,106		6,106		—		5,776		330
Financial liabilities:
Noninterest bearing deposits	1,005,369		1,005,369		1,005,369		—		—
Interest bearing deposits	4,109,150		4,105,858		3,186,901		918,957		—
Short-term borrowings	181,368		181,368		181,368		—		—
Finance leases payable	951		951		—		951		—
FHLB borrowings	48,113		48,947		—		48,947		—
Junior subordinated notes issued to capital trusts	41,940		35,545		—		35,545		—
Subordinated debentures	63,875		68,207		—		68,207		—

Derivative liabilities	6,741		6,741		—		6,741		—

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15. 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. 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.

Supplemental balance sheet information related to leases was as follows:


(in thousands)	Classification	September 30, 2022			December 31, 2021
Operating lease right-of-use assets	Other assets	$	2,738		$	2,840
Finance lease right-of-use asset	Premises and equipment, net	374			446
Total right-of-use assets		$	3,112		$	3,286

Operating lease liability	Other liabilities	$	3,620		$	3,778
Finance lease liability	Long-term debt	830			951
Total lease liabilities		$	4,450		$	4,729

Weighted-average remaining lease term
Operating leases		8.98 years			9.13 years
Finance lease		3.92 years			4.67 years
Weighted-average discount rate
Operating leases		4.15		%	4.13		%
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)	2022		2021		2022		2021
Lease Costs
Operating lease cost	$	290	$	301	$	874	$	894
Variable lease cost	7		( 3 )		49		89

Interest on lease liabilities (1)	19		23		58		69
Amortization of right-of-use assets	24		24		72		72
Net lease cost	$	340	$	345	$	1,053	$	1,124

Other Information
Cash paid for amounts included in the measurement of lease liabilities:
Operating cash flows from operating leases	$	553	$	553	$	1,689	$	1,655
Operating cash flows from finance lease	19		23		58		69
Finance cash flows from finance lease	41		37		121		107

Supplemental non-cash information on lease liabilities:
Right-of-use assets obtained in exchange for new operating lease liabilities	599		232		638		232

(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.

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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, 2022 and the succeeding annual periods were as follows:


(in thousands)	Finance Leases		Operating Leases

December 31, 2022	$	61	$	293
December 31, 2023	245		1,109
December 31, 2024	250		827
December 31, 2025	255		357
December 31, 2026	171		262
Thereafter	—		1,875
Total undiscounted lease payment	$	982	$	4,723
Amounts representing interest	( 152 )		( 1,103 )
Lease liability	$	830	$	3,620

16. Subsequent Events

The Company has evaluated events that have occurred subsequent to September 30, 2022 and has concluded there are no other subsequent events that would require recognition in the accompanying consolidated financial statements.

On October 18, 2022, the board of directors of the Company declared a cash dividend of $ 0.2375 per share payable on December 15, 2022 to shareholders of record as of the close of business on December 1, 2022.

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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 risks of mergers (including with IOFB), 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, or uncertainties, including the impact of inflationary pressures on economic conditions and our business, resulting in an increase in the allowance for credit losses, an increase in the credit loss expense, and a reduction in net earnings;

• the effects of actual and expected increases in inflation and 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, including the new 1.0% excise tax on stock buybacks by publicly traded companies;

• 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, thrifts, mortgage banking firms, consumer finance companies, credit unions, securities brokerage firms, insurance companies, money market and other mutual funds, financial technology companies, 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, including the war in Ukraine, 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;

• effects of the ongoing COVID-19 pandemic, including its effects on the economic environment, our customers, employees and supply chain; 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, Naples and Fort Myers, Florida, and Denver, Colorado.

On June 9, 2022, the Company completed the acquisition of IOFB, a bank holding company headquartered in Muscatine, Iowa, and the parent company of FNBM and FNBF. Immediately following the completion of the acquisition, FNBM and FNBF were merged with and into the Bank. As consideration for the merger, we paid cash of $46.7 million. The acquisition added to the Company's existing presence in Fairfield, Iowa and expanded the Company's footprint into Muscatine, Iowa.

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, 2021, filed with the SEC on March 10, 2022. Results of operations for the three and nine months ended September 30, 2022 are not necessarily indicative of results to be attained for any other period.

FINANCIAL SUMMARY

The Company reported net income for the three months ended September 30, 2022 of $18.3 million, an increase of $2.0 million, compared to $16.3 million of net income for the three months ended September 30, 2021, with diluted earnings per share of $1.17 and $1.03 for the respective annual periods.

The period as of and for the three and nine months ended September 30, 2022 was also highlighted by the following results:

Balance Sheet:

• Total assets increased to $6.49 billion at September 30, 2022 from $6.03 billion at December 31, 2021, with the completion of the IOFB acquisition in the second quarter of 2022 contributing largely to this increase.

• At September 30, 2022 the total amount of the held to maturity debt securities was $1.15 billion and the total amount of the debt securities available for sale was $1.15 billion. There were no held to maturity debt securities at December 31, 2021, while the total amount of the debt securities available for sale was $2.29 billion.

• Gross loans held for investment increased $509.5 million, from $3.25 billion at December 31, 2021, to $3.76 billion at September 30, 2022. This increase was primarily driven by the loans acquired in the IOFB acquisition, coupled with organic loan growth and increased revolving line of credit utilization.

• The allowance for credit losses was $52.1 million, or 1.39% of total loans as of September 30, 2022, compared with $48.7 million, or 1.50% of total loans, at December 31, 2021.

• Nonperforming assets declined $5.8 million, from $31.9 million at December 31, 2021, to $26.1 million at September 30, 2022.

• Total deposits increased $362.3 million from $5.11 billion at December 31, 2021, to $5.48 billion at September 30, 2022. This increase was primarily due to the close of the IOFB acquisition during the second quarter of 2022.

• Short-term borrowings increased to $304.5 million at September 30, 2022, from $181.4 million at December 31, 2021, and long-term debt decreased to $154.2 million at September 30, 2022 from $154.9 million at December 31, 2021.

• The Company is well-capitalized with a total risk-based capital ratio of 12.10% at September 30, 2022.

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Income Statement:

Three Months Ended:

• Tax equivalent net interest income (a non-GAAP financial measure - see the "Non-GAAP Presentations" section for a reconciliation to the most comparable GAAP equivalent) was $47.0 million for the third quarter of 2022, an increase of $5.5 million, from $41.5 million in the third quarter of 2021. The increase in tax equivalent net interest income was due primarily to an increase of $4.5 million in loan interest income and an increase of $3.9 million in interest income earned from investment securities. The increase in loan interest income was reflective of a higher volume of loans, coupled with an increase of $1.2 million in loan purchase discount accretion, and partially offset by a $3.6 million reduction in net PPP fees. The increase in interest income from investment securities reflected both a larger volume of securities and an increase in yield from such securities. Partially offsetting these identified increases in tax equivalent interest income were increases in interest expense on interest-bearing deposits and borrowed funds of $1.9 million and $0.9 million, respectively.

• Credit loss expense of $0.6 million was recorded during the third quarter of 2022, as compared to a credit loss benefit of $1.1 million during the third quarter of 2021. Credit loss expense in the current quarter was primarily attributable to loan growth.

• Noninterest income increased $3.4 million, from $9.2 million in the third quarter of 2021 to $12.6 million in the third quarter of 2022. The increase was primarily due to increases of $3.3 million and $0.5 million in other income and service charges and fees, respectively. The increase in other income stemmed primarily from a one-time settlement and the increase in service charges and fees was primarily attributable to the acquisition of IOFB.

• Noninterest expense increased $4.8 million, from $29.8 million in the third quarter of 2021, to $34.6 million in the third quarter of 2022 due to an overall increase in all noninterest expense categories, except FDIC insurance and foreclosed assets, net. These increases primarily reflected a full quarter of costs associated with the acquisition of IOFB, including merger-related expenses.

Nine Months Ended:

• Tax equivalent net interest income (a non-GAAP financial measure - see the "Non-GAAP Presentations" section for a reconciliation to the most comparable GAAP equivalent) was $126.4 million for the nine months ended September 30, 2022, which was a $5.5 million increase from $120.9 million for the nine months ended September 30, 2021. The increase in tax equivalent net interest income was due primarily to an increase of $9.6 million in interest income from investment securities, which reflected both a larger volume of and increased yield from such securities. Partially offsetting such increase was a decline of $2.7 million in loan interest income that stemmed from reduced net PPP fee accretion, which more than offset the increase in loan volumes and loan purchase discount accretion, in addition to increases in interest expense on interest-bearing deposits and borrowed funds of $1.0 million and $0.5 million, respectively.

• Credit loss expense of $3.9 million was recorded in the first nine months of 2022, as compared to credit loss benefit of $8.0 million for the first nine months of 2021. Credit loss expense in the first nine months of 2022 reflected $3.1 million related to the acquired IOFB non-PCD loans, $0.2 million related to unfunded loan commitments established in the IOFB acquisition, as well as a reserve taken to support loan growth. The credit loss benefit recorded in the first nine months of 2021 was reflective of overall improvements in the forecasted economic conditions due to less economic uncertainty from the COVID-19 pandemic, as well as stabilization in the credit risk profile.

• Noninterest income increased $5.4 million, from $31.2 million for the first nine months of 2021 to $36.6 million in the first nine months of 2022. The increase was primarily due to increases of $4.4 million and $0.9 million in other noninterest income and service charges and fees, respectively. The increase in other noninterest income was primarily due to a one-time settlement and a bargain purchase gain of $1.3 million recognized in connection with the IOFB acquisition. The increase in service charges and fees was primarily attributable to the acquisition of IOFB.

• Noninterest expense increased $12.2 million, from $86.1 million for the first nine months ended September 30, 2021, to $98.3 million in the first nine months of 2022. The increase in noninterest expense was due to an overall increase in all noninterest expense categories, except communications and foreclosed assets, net. These increases primarily reflected costs associated with the acquisition of IOFB, including merger-related expenses, coupled with normal annual salary and employee benefit increases, a decline in the benefit received from loan origination costs, and elevated legal expenses related to litigation, loan legal expenses and executive recruitment.

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, 2021,

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filed with the SEC on March 10, 2022, and there have been no material changes in these critical accounting policies since December 31, 2021.

RESULTS OF OPERATIONS

Comparison of Operating Results for the Three Months Ended September 30, 2022 and September 30, 2021

Summary


	As of or for the Three Months Ended September 30,
(dollars in thousands, except per share amounts)	2022			2021
Net Interest Income	$	45,733		$	40,340
Noninterest Income	12,588			9,182
Total Revenue, Net of Interest Expense	58,321			49,522
Credit Loss Expense (Benefit)	638			(1,080)
Noninterest Expense	34,623			29,778
Income Before Income Tax Expense	23,060			20,824
Income Tax Expense	4,743			4,513
Net Income	18,317			16,311
Diluted Earnings Per Share	$	1.17		$	1.03




Return on Average Assets	1.13		%	1.11		%
Return on Average Equity	14.56			12.00
Return on Average Tangible Equity (1)	19.32			15.06
Efficiency Ratio (1)	53.67			56.34
Dividend Payout Ratio	20.30			21.84

Common Equity Ratio	7.28			9.03
Tangible Common Equity Ratio (1)	5.90			7.71
Book Value per Share	$	30.23		$	33.71
Tangible Book Value per Share (1)	24.17			28.40
(1) A non-GAAP financial measure. See "Non-GAAP Financial Measures" for a reconciliation to the most comparable GAAP equivalents.

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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,
	2022						2021
	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)	$	3,673,379	$	41,124	4.44	%	$	3,356,680	$	36,622	4.33	%
Taxable investment securities	1,939,517		10,635		2.18		1,628,605		6,655		1.62
Tax-exempt investment securities (2)(4)	431,898		2,922		2.68		459,717		3,043		2.63
Total securities held for investment (2)	2,371,415		13,557		2.27		2,088,322		9,698		1.84
Other	6,070		9		0.59		44,915		21		0.19
Total interest earning assets (2)	$	6,050,864	$	54,690	3.59	%	$	5,489,917	$	46,341	3.35	%
Other assets	406,783						321,311
Total assets	$	6,457,647					$	5,811,228

LIABILITIES AND SHAREHOLDERS' EQUITY
Interest checking deposits	$	1,725,000	$	1,463	0.34	%	$	1,434,560	$	1,056	0.29	%
Money market deposits	1,016,005		1,268		0.50		955,174		506		0.21
Savings deposits	710,836		297		0.17		606,449		316		0.21
Time deposits	913,307		2,007		0.87		890,866		1,272		0.57
Total interest bearing deposits	4,365,148		5,035		0.46		3,887,049		3,150		0.32
Securities sold under agreements to repurchase	144,628		228		0.63		170,384		104		0.24

Other short-term borrowings	83,086		539		2.57		12,100		28		0.92
Total short-term borrowings	227,714		767		1.34		182,484		132		0.29
Long-term debt	159,125		1,886		4.70		163,817		1,597		3.87
Total borrowed funds	386,839		2,653		2.72		346,301		1,729		1.98
Total interest bearing liabilities	$	4,751,987	$	7,688	0.64	%	$	4,233,350	$	4,879	0.46	%

Noninterest bearing deposits	1,142,334						995,786
Other liabilities	64,063						43,040
Shareholders’ equity	499,263						539,052
Total liabilities and shareholders’ equity	$	6,457,647					$	5,811,228
Net interest income (2)			$	47,002					$	41,462
Net interest spread (2)					2.95	%					2.89	%
Net interest margin (2)					3.08	%					3.00	%

Total deposits (5)	$	5,507,482	$	5,035	0.36	%	$	4,882,835	$	3,150	0.26	%
Cost of funds (6)					0.52	%					0.37	%


(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 $35 thousand and $3.5 million for the three months ended September 30, 2022 and September 30, 2021, respectively. Loan purchase discount accretion was $2.0 million and $0.8 million for the three months ended September 30, 2022 and September 30, 2021, respectively. Tax equivalent adjustments were $0.7 million and $0.5 million for the three months ended September 30, 2022 and September 30, 2021, respectively. The federal statutory tax rate utilized was 21%.
(4)			Interest income includes tax equivalent adjustments of $0.6 million and $0.6 million for the three months ended September 30, 2022 and September 30, 2021, 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,
	2022 Compared to 2021 Change due to
(in thousands)	Volume		Yield/Cost		Net
Increase (decrease) in interest income:
Loans, including fees (1)	$	3,547	$	955	$	4,502
Taxable investment securities	1,416		2,564		3,980
Tax-exempt investment securities (1)	(180)		59		(121)
Total securities held for investment (1)	1,236		2,623		3,859
Other	(30)		18		(12)
Change in interest income (1)	4,753		3,596		8,349
Increase (decrease) in interest expense:
Interest checking deposits	220		187		407
Money market deposits	33		729		762
Savings deposits	49		(68)		(19)
Time deposits	33		702		735
Total interest-bearing deposits	335		1,550		1,885
Securities sold under agreements to repurchase	(18)		142		124

Other short-term borrowings	392		119		511
Total short-term borrowings	374		261		635
Long-term debt	(47)		336		289
Total borrowed funds	327		597		924
Change in interest expense	662		2,147		2,809
Change in net interest income	$	4,091	$	1,449	$	5,540
Percentage (decrease) in net interest income over prior period					13.4		%
(1) Tax equivalent, using a federal statutory tax rate of 21%.

Our tax equivalent net interest income for the third quarter of 2022 was $47.0 million, an increase of $5.5 million, or 13.4%, as compared to $41.5 million for the third quarter of 2021. The increase in tax equivalent net interest income in the third quarter of 2022 as compared to the third quarter of 2021 was due primarily to an increase of $8.3 million, or 18.0%, in interest income, which more than offset the increase of $2.8 million, or 57.6%, in interest expense. The change in interest income was due primarily to an increase of $4.5 million, or 12.3%, in loan interest income, and an increase of $3.9 million, or 39.8%, in interest income from investment securities. The increase in loan interest income reflected a higher volume of loans stemming from the IOFB acquisition and organic loan growth, coupled with an increase of $1.2 million in loan purchase discount accretion, and partially offset by a $3.6 million reduction in net PPP fees due to loan forgiveness. The increase in interest income from investment securities reflected both a larger volume of and increased yield from such securities. The increase in interest expense was due to increases of $1.9 million, or 59.8%, and $0.9 million, or 53.4%, in interest expense on interest-bearing deposits and borrowed funds, respectively.

The tax equivalent net interest margin for the third quarter of 2022 was 3.08%, or 8 basis points higher than the tax equivalent net interest margin of 3.00% for the third quarter of 2021 as the change in interest-earning asset yields outpaced the change in funding costs. The yield on interest-earning assets for the third quarter of 2022 was 24 basis points higher than the third quarter of 2021 as the tax equivalent yield on investment securities increased 43 basis points and the tax equivalent yield on loans increased 11 basis points. The cost of average interest-bearing deposits increased 14 basis points in the third quarter of 2022, compared to the third quarter of 2021 while the cost of average borrowed funds was 74 basis point higher for the third quarter of 2022, compared to the third quarter of 2021. The increase in the cost of average borrowed funds was a result of higher market interest rates, which reflected recent increases in the target federal funds rate.

Credit Loss Expense (Benefit)

Credit loss expense of $0.6 million was recorded during the third quarter of 2022, as compared to a credit loss benefit of $1.1 million during the third quarter of 2021. Credit loss expense in the current quarter was primarily attributable to loan growth. Net loan charge-offs were $0.6 million in the third quarter of 2022 as compared to net loan recoveries of $0.9 million in the third quarter of 2021. The economic forecast factors utilized by the Company for its loan credit loss estimation process are: (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)	2022		2021		$ Change		% Change
Investment services and trust activities	$	2,876	$	2,915	$	(39)	(1.3)	%
Service charges and fees	2,075		1,613		462		28.6
Card revenue	1,898		1,820		78		4.3
Loan revenue	1,722		1,935		(213)		(11.0)
Bank-owned life insurance	579		532		47		8.8

Investment securities gains, net	(163)		36		(199)		(552.8)
Other	3,601		331		3,270		987.9
Total noninterest income	$	12,588	$	9,182	$	3,406	37.1	%

Total noninterest income for the third quarter of 2022 increased $3.4 million, or 37.1%, to $12.6 million from $9.2 million in the third quarter of 2021. The increase in noninterest income was primarily due increases of $3.3 million and $0.5 million in other income and service charges and fees, respectively. The increase in other income stemmed primarily from a one-time settlement and the increase in service charges and fees was primarily attributable to the acquisition of IOFB. Partially offsetting the increases above was a $0.2 million reduction in loan revenue, which reflected a decline in the volume of mortgage originations due to increased mortgage rates, which resulted in less gain on sale revenue, partially offset by an increase in the fair value of our mortgage servicing rights.

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)	2022		2021		$ Change		% Change
Compensation and employee benefits	$	20,046	$	17,350	$	2,696	15.5	%
Occupancy expense of premises, net	2,577		2,547		30		1.2
Equipment	2,358		1,973		385		19.5
Legal and professional	2,012		1,272		740		58.2
Data processing	1,731		1,406		325		23.1
Marketing	1,139		1,022		117		11.4
Amortization of intangibles	1,789		1,264		525		41.5
FDIC insurance	415		435		(20)		(4.6)
Communications	302		275		27		9.8
Foreclosed assets, net	42		43		(1)		(2.3)
Other	2,212		2,191		21		1.0


Total noninterest expense	$	34,623	$	29,778	$	4,845	16.3	%


	Three Months Ended September 30,
Merger-related expenses:	2022		2021
(dollars in thousands)
Compensation and employee benefits	$	132	$	—

Equipment	14		—
Legal and professional	193		—
Data processing	304		—
Marketing	90		—

Other	30		—
Total impact of merger-related expenses to noninterest expense	$	763	$	—

Noninterest expense for the third quarter of 2022 increased $4.8 million, or 16.3%, to $34.6 million from $29.8 million for the third quarter of 2021. The increase in noninterest expense was due to an overall increase in all noninterest expense categories, except FDIC insurance and foreclosed assets, net. These increases primarily reflected costs associated with the acquisition of IOFB, including merger-related expenses. Also contributing to the increase in compensation and employee benefits was normal annual salary and employee benefit increases. In addition to the identified increases above, legal and professional expense reflected elevated legal expenses related to litigation, loan legal expenses, and executive recruitment. Partially offsetting the increases identified above was a decline of $0.4 million in operating losses, which are 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 20.6% for the three months ended September 30, 2022, as compared to an effective tax rate of 21.7% for the three months ended September 30, 2021. The effective tax rate for the full year 2022 is expected to be in the range of 20-22%.

Comparison of Operating Results for the Nine Months Ended September 30, 2022 and September 30, 2021

Summary


	As of and for the Nine Months Ended September 30,
(dollars in thousands, except per share amounts)	2022			2021
Net Interest Income	$	122,794		$	117,462
Noninterest Income	36,579			31,224
Total Revenue, Net of Interest Expense	159,373			148,686
Credit Loss Expense (Benefit)	3,920			(7,958)
Noninterest Expense	98,348			86,148
Income Before Income Tax Expense	57,105			70,496
Income Tax Expense	12,272			15,266
Net Income	44,833			55,230
Diluted Earnings Per Share	$	2.86		$	3.46




Return on Average Assets	0.97		%	1.29		%
Return on Average Equity	11.81			14.03
Return on Average Tangible Equity (1)	15.28			17.69
Efficiency Ratio (1)	56.70			53.95
Dividend Payout Ratio	24.91			19.45

Common Equity Ratio	7.28			9.03
Tangible Common Equity Ratio (1)	5.90			7.71
Book Value per Share	$	30.23		$	33.71
Tangible Book Value per Share (1)	24.17			28.40

(1) A non-GAAP financial measure. See "Non-GAAP Financial Measures" for a reconciliation to the most comparable GAAP equivalents.

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Net Interest Income


	Nine Months Ended September 30,
	2022						2021
(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)	$	3,416,600	$	106,297	4.16	%	$	3,394,066	$	108,950	4.29	%
Taxable investment securities	1,899,907		28,334		1.99		1,501,252		18,231		1.62
Tax-exempt investment securities (2)(4)	440,542		8,895		2.70		466,209		9,442		2.71
Total securities held for investment (2)	2,340,449		37,229		2.13		1,967,461		27,673		1.88
Other	25,972		77		0.40		43,250		54		0.17
Total interest-earning assets (2)	$	5,783,021	$	143,603	3.32	%	$	5,404,777	$	136,677	3.38	%

Other assets	369,369						324,045
Total assets	$	6,152,390					$	5,728,822

LIABILITIES AND SHAREHOLDERS' EQUITY
Interest checking deposits	$	1,642,849	$	3,713	0.30	%	$	1,418,339	$	3,142	0.30	%
Money market deposits	991,338		2,338		0.32		936,932		1,486		0.21
Savings deposits	671,917		863		0.17		585,334		926		0.21
Time deposits	877,923		4,204		0.64		875,027		4,613		0.70
Total interest-bearing deposits	4,184,027		11,118		0.36		3,815,632		10,167		0.36
Securities sold under agreements to repurchase	152,663		435		0.38		171,848		321		0.25

Other short-term borrowings	42,952		680		2.12		20,235		100		0.66
Total short-term borrowings	195,615		1,115		0.76		192,083		421		0.29
Long-term debt	148,053		4,975		4.49		186,323		5,160		3.70
Total borrowed funds	343,668		6,090		2.37		378,406		5,581		1.97
Total interest-bearing liabilities	$	4,527,695	$	17,208	0.51	%	$	4,194,038	$	15,748	0.50	%

Noninterest bearing deposits	1,062,156						962,852
Other liabilities	54,775						45,671
Shareholders' equity	507,764						526,261
Total liabilities and shareholders' equity	$	6,152,390					$	5,728,822
Net interest income (2)			$	126,395					$	120,929
Net interest spread (2)					2.81	%					2.88	%









Net interest margin (2)					2.92	%					2.99	%

Total deposits (5)	$	5,246,183	$	11,118	0.28	%	$	4,778,484	$	10,167	0.28	%
Cost of funds (6)					0.41	%					0.41	%


(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 $0.7 million and $9.3 million for the nine months ended September 30, 2022 and September 30, 2021, respectively. Loan purchase discount accretion was $3.3 million and $2.7 million for the nine months ended September 30, 2022 and September 30, 2021, respectively. Tax equivalent adjustments were $1.8 million and $1.6 million for the nine months ended September 30, 2022 and September 30, 2021, respectively. The federal statutory tax rate utilized was 21%.
(4)			Interest income includes tax equivalent adjustments of $1.8 million and $1.9 million for the nine months ended September 30, 2022 and September 30, 2021, 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,
	2022 Compared to 2021 Change due to
(in thousands)	Volume		Yield/Cost		Net
Increase (decrease) in interest income:
Loans, including fees (1)	$	709	$	(3,362)	$	(2,653)
Taxable investment securities	5,431		4,672		10,103
Tax-exempt investment securities (1)	(513)		(34)		(547)
Total securities held for investment (1)	4,918		4,638		9,556
Other	(29)		52		23
Change in interest income (1)	5,598		1,328		6,926
Increase (decrease) in interest expense:
Interest checking deposits	571		—		571
Money market deposits	85		767		852
Savings deposits	126		(189)		(63)
Time deposits	14		(423)		(409)
Total interest-bearing deposits	796		155		951
Securities sold under agreements to repurchase	(39)		153		114

Other short-term borrowings	195		385		580
Total short-term borrowings	156		538		694
Long-term debt	(1,170)		985		(185)
Total borrowed funds	(1,014)		1,523		509
Change in interest expense	(218)		1,678		1,460
Change in net interest income	$	5,816	$	(350)	$	5,466
Percentage (decrease) increase in net interest income over prior period					4.5		%
(1) Tax equivalent, using a federal statutory tax rate of 21%.

Our tax equivalent net interest income for the nine months ended September 30, 2022 was $126.4 million, which was a $5.5 million increase from $120.9 million for the nine months ended September 30, 2021. The increase in tax equivalent net interest income during the nine months ended September 30, 2022, as compared to the nine months ended September 30, 2021, was due to the $6.9 million increase in interest income, which more than offset the increase in interest expense of $1.5 million. Contributing to the interest income increase was a $9.6 million, or 34.5%, increase in interest income from investment securities, which reflected both a larger volume of and increased yield from such securities. Partially offsetting the higher interest income from investment securities was a decline of $2.7 million, or (2.4)%, in loan interest income that stemmed primarily from the $8.8 million reduction in net PPP fee accretion that more than offset the loan volume increase and the $0.6 million increase in loan purchase discount accretion. The increase in interest expense was due to increases of $1.0 million, or 9.4%, and $0.5 million, or 9.1%, in interest expense on interest-bearing deposits and borrowed funds, respectively.

The tax equivalent net interest margin for the nine months ended September 30, 2022 was 2.92%, or 7 basis points lower than the tax equivalent net interest margin of 2.99% for the nine months ended September 30, 2021. The tax equivalent yield on loans decreased 13 basis points, which was partially offset by an increased tax equivalent yield on investment securities of 25 basis points. Combined, the resulting yield on interest-earning assets for the nine months ended September 30, 2022 was 6 basis points lower than the nine months ended September 30, 2021, which primarily reflected lower loan fee accretion and the shift in earning asset mix to a greater proportion of investment securities, which generally have lower yields than loans. The cost of average borrowed funds was higher by 40 basis points for the nine months ended September 30, 2022, compared to the nine months ended September 30, 2021, with no change in the cost of interest-bearing deposits. The increase in the cost of average borrowed funds was a result of higher market interest rates which reflect the recent increases in the target federal funds rate, which was in the range of 3.00% - 3.25% at September 30, 2022.

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Credit Loss Expense (Benefit)

Credit loss expense of $3.9 million was recorded in the first nine months of 2022, as compared to credit loss benefit of $8.0 million for the first nine months of 2021, an increase of $11.9 million, or 149.1%. Credit loss expense in the first nine months of 2022 reflected $3.1 million related to the acquired IOFB non-PCD loans, $0.2 million related to unfunded loan commitments established in the IOFB acquisition, as well as a reserve taken to support loan growth. The credit loss benefit recorded in the first nine months of 2021 was reflective of overall improvements in the forecasted economic conditions due to less economic uncertainty from the COVID-19 pandemic, as well as stabilization in the credit risk profile. Net loan charge-offs in the first nine months of 2022 were $3.1 million, as compared to net loan recoveries of $0.2 million in the first nine months of 2021. 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)	2022		2021		$ Change		% Change
Investment services and trust activities	$	8,557	$	8,560	$	(3)	—	%
Service charges and fees	5,449		4,575		874		19.1
Card revenue	5,426		5,269		157		3.0
Loan revenue	9,538		9,816		(278)		(2.8)
Bank-owned life insurance	1,668		1,612		56		3.5

Investment securities gains, net	272		105		167		159.0
Other	5,669		1,287		4,382		340.5
Total noninterest income	$	36,579	$	31,224	$	5,355	17.2	%

Total noninterest income for the first nine months of 2022 increased $5.4 million, or 17.2%, to $36.6 million from $31.2 million during the same period of 2021. The increase in noninterest income was primarily due to increases of $4.4 million and $0.9 million in other noninterest income and service charges and fees, respectively. The increase in other noninterest income was primarily due to a one-time settlement and a bargain purchase gain of $1.3 million recognized in connection with the IOFB acquisition. The increase in service charges and fees was primarily attributable to the acquisition of IOFB. Partially offsetting the increases above was a $0.3 million reduction in loan revenue, which reflected a decline in the volume of mortgage originations, partially offset by an increase in the fair value of our mortgage servicing rights.

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)	2022		2021		$ Change		% Change
Compensation and employee benefits	$	57,665	$	51,671	$	5,994	11.6	%
Occupancy expense of premises, net	7,609		7,063		546		7.7
Equipment	6,366		5,627		739		13.1
Legal and professional	6,800		3,430		3,370		98.3
Data processing	4,199		4,005		194		4.8
Marketing	3,325		2,901		424		14.6
Amortization of intangibles	4,299		4,112		187		4.5
FDIC insurance	1,255		1,192		63		5.3
Communications	840		1,055		(215)		(20.4)
Foreclosed assets, net	(66)		226		(292)		(129.2)
Other	6,056		4,866		1,190		24.5


Total noninterest expense	$	98,348	$	86,148	$	12,200	14.2	%

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	Nine Months Ended September 30,
Merger-related expenses:	2022		2021
(dollars in thousands)
Compensation and employee benefits	$	282	$	—
Occupancy expense of premises, net	1		—
Equipment	25		—
Legal and professional	894		—
Data processing	380		—
Marketing	162		—
Communications	3		—
Other	45		—
Total impact of merger-related expenses to noninterest expense	$	1,792	$	—

Noninterest expense for the nine months ended September 30, 2022 was $98.3 million, an increase of $12.2 million, or 14.2%, from $86.1 million for the nine months ended September 30, 2021. The increase in noninterest expense was due to an overall increase in all noninterest expense categories, except communications and foreclosed assets, net. These increases primarily reflected costs associated with the acquisition of IOFB, including merger-related expenses. Also contributing to the increase in compensation and employee benefits was normal annual salary and employee benefit increases, coupled with a decline of $1.4 million in the benefit received from loan origination costs, which are deferred and amortized over the life of the loan to which they relate. In addition to the identified increases above, occupancy expense also reflected an increase of $0.3 million from the write-down of fixed assets transferred to held for sale, while legal and professional expense reflected elevated legal expenses related to litigation, loan legal expenses, and executive recruitment.

Income Tax Expense

Our effective income tax rate, or income taxes divided by income before taxes, was 21.5% for the first nine months of 2022, as compared to an effective tax rate of 21.7% for the first nine months of 2021. The effective tax rate for the full year 2022 is expected to be in the range of 20-22%.

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FINANCIAL CONDITION

The table below presents the major categories of the Company's balance sheet as of the dates indicated:


(dollars in thousands)	September 30, 2022		December 31, 2021		$ Change		% Change
ASSETS
Cash and cash equivalents	$	78,514	$	203,830	$	(125,316)	(61.5)	%
Loans held for sale	2,320		12,917		(10,597)		(82.0)
Debt securities available for sale at fair value	1,153,304		2,288,110		(1,134,806)		(49.6)
Held to maturity securities at amortized cost	1,146,583		—		1,146,583		nm (1)
Loans held for investment, net of unearned income	3,746,289		3,245,012		501,277		15.4
Allowance for credit losses	(52,100)		(48,700)		(3,400)		7.0
Total loans held for investment, net	3,694,189		3,196,312		497,877		15.6
Other assets	416,151		323,959		92,192		28.5
Total assets	$	6,491,061	$	6,025,128	$	465,933	7.7	%
LIABILITIES AND SHAREHOLDERS' EQUITY
Total deposits	$	5,476,782	$	5,114,519	$	362,263	7.1	%
Total borrowings	458,726		336,247		122,479		36.4
Other liabilities	83,324		46,887		36,437		77.7
Total shareholders' equity	472,229		527,475		(55,246)		(10.5)
Total liabilities and shareholders' equity	$	6,491,061	$	6,025,128	$	465,933	7.7	%

(1) Percentage change is not meaningful.

Debt Securities

The composition of debt securities available for sale and held to maturity as of the dates indicated was as follows:


	September 30, 2022				December 31, 2021
(dollars in thousands)	Balance		% of Total		Balance		% of Total
Available for Sale
U.S. Government agencies and corporations	$	7,339	0.6	%	$	266	—	%
States and political subdivisions	283,513		24.6		765,742		33.5
Mortgage-backed securities	6,083		0.5		100,626		4.4
Collateralized mortgage obligations	153,088		13.3		768,899		33.6
Corporate debt securities	703,281		61.0		652,577		28.5
Fair value of debt securities available for sale	$	1,153,304	100.0	%	$	2,288,110	100.0	%

Held to Maturity

States and political subdivisions	$	540,221	47.1		$	—	—	%
Mortgage-backed securities	82,858		7.2		—		—	%
Collateralized mortgage obligations	523,504		45.7		—		—	%

Amortized cost of debt securities held to maturity	$	1,146,583	100.0	%	$	—	—	%

On January 1, 2022, the Company re-classified, at fair value, from available for sale to held to maturity, $1.25 billion of mortgage-backed securities, collateralized mortgage obligations, and securities issued by state and political subdivisions. The net unrealized after tax loss of $11.5 million associated with those re-classified securities remained in accumulated other comprehensive loss and will be amortized over the remaining life of the securities. No gains or losses were recognized in earnings at the time of the transfer.

As of September 30, 2022, there were $0.3 million of gross unrealized gains and $118.0 million of gross unrealized losses in our debt securities available for sale portfolio for a net unrealized loss of $117.7 million. As of September 30, 2022 there were no gross unrealized gains and there was $221.0 million of gross unrealized losses in our held to maturity debt securities for a net unrealized loss of $221.0 million.

See Note 3. Debt Securities to our consolidated financial statements for additional information related to debt securities.

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Loans

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


	September 30, 2022				December 31, 2021
(dollars in thousands)	Balance		% of Total		Balance		% of Total
Agricultural	$	116,229	3.1	%	$	103,417	3.2	%


Commercial and industrial	1,041,662		27.8		902,314		27.8







Commercial real estate	1,910,097		51.0		1,704,541		52.5



Residential real estate	603,649		16.1		466,322		14.4
Consumer	74,652		2.0		68,418		2.1
Loans held for investment, net of unearned income	$	3,746,289	100.0	%	$	3,245,012	100.0	%
Loans held for sale	$	2,320			$	12,917

Loans held for investment, net of unearned income at September 30, 2022, increased $501.3 million, or 15.4%, from December 31, 2021 to $3.75 billion, driven primarily by the loans acquired in the IOFB acquisition, coupled with organic loan growth and increased revolving line of credit utilization, partially offset by PPP loan forgiveness. As of September 30, 2022, 10 PPP loans totaling $0.2 million, including $17.0 thousand of unamortized net fees, were outstanding, as compared to 217 PPP loans totaling, $30.8 million, including $0.9 million of unamortized net fees that were outstanding as of December 31, 2021. See Note 4. Loans Receivable and the Allowance for Credit Losses to our consolidated financial statements for additional information related to our loan portfolio and Note 2. Business Combinations for additional information regarding the IOFB acquired loans.

Commitments under standby letters of credit, unused lines of credit and other conditionally approved credit lines totaled approximately $1.2 billion and $1.0 billion as of September 30, 2022 and December 31, 2021, respectively.

Our loan to deposit ratio increased to 68.40% as of September 30, 2022 as compared to 63.45% as of December 31, 2021. The loan to deposit ratio increased when compared to the prior year-end due to the loans acquired in the IOFB acquisition, organic loan growth and increased revolving line of credit utilization, which more than offset the increase in total deposits.

Nonperforming Assets

The following table sets forth information concerning nonperforming loans by class of receivable and our nonperforming assets at September 30, 2022 and December 31, 2021:


(in thousands)	September 30, 2022			December 31, 2021

Nonaccrual loans held for investment	$	25,027		$	31,540
Accruing loans contractually past due 90 days or more	936			—
Total nonperforming loans	25,963			31,540
Foreclosed assets, net	103			357
Total nonperforming assets	26,066			31,897

Nonaccrual loans ratio (1)	0.67		%	0.97		%
Nonperforming loans ratio (2)	0.69		%	0.97		%
Nonperforming assets ratio (3)	0.40		%	0.53		%

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

When compared to December 31, 2021, overall asset quality was improved. The nonperforming loans ratio declined 28 basis points from the prior year-end to 0.69%, while the nonperforming assets ratio declined 13 basis points from the prior year-end to 0.40%.

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.

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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. 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 at least 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 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, 2022, the Company classified three and sixteen loans, respectively, as TDRs, due to the Company granting a concession to a borrower experiencing financial difficulty. The aggregate post-modification outstanding recorded

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investment of the loans classified as TDRs during three and nine months ended September 30, 2022 was $0.9 million and $4.0 million, respectively.

Allowance for Credit Losses

The following table sets forth the allowance for credit losses by loan portfolio segments compared to the percentage of loans to total loans by loan portfolio segment for the periods indicated:


	September 30, 2022					December 31, 2021
(dollars in thousands)	Allowance for Credit Losses			% of Loans in Each Segment to Total Loans		Allowance for Credit Losses			% of Loans in Each Segment to Total Loans
Agricultural	$	981		3.1	%	$	667		3.2	%
Commercial and industrial	24,256			27.8	%	17,294			27.8	%
Commercial real estate	20,948			51.0	%	26,120			52.5	%
Residential real estate	5,308			16.1	%	4,010			14.4	%
Consumer	607			2.0	%	609			2.1	%
Total	$	52,100		100.0	%	$	48,700		100.0	%

Allowance for credit losses ratio (1)	1.39		%			1.50		%
Adjusted allowance for credit losses ratio (2)	1.39		%			1.52		%
Allowance for credit losses to nonaccrual loans ratio (3)	208.18		%			154.41		%

(1) Allowance for credit losses ratio is calculated as allowance for credit losses divided by loans held for investment, net of unearned income at the end of the period.
(2) Non-GAAP financial measure. See the “Non-GAAP Presentations” section for a reconciliation to the most comparable GAAP equivalent.
(3) Allowance for credit losses to nonaccrual loans ratio is calculated as allowance for credit losses divided by nonaccrual loans at the end of the period.

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The following table sets forth the net (charge-offs) recoveries by loan portfolio segments for the periods indicated:



	For the Three Months Ended September 30, 2022 and 2021
(in thousands)	Agricultural			Commercial and Industrial			Commercial Real Estate			Residential Real Estate			Consumer			Total
For the Three Months Ended September 30, 2022
Charge-offs	$	(248)		$	(280)		$	(135)		$	(52)		$	(255)		$	(970)
Recoveries	1			295			6			48			32			382
Net (charge-offs) recoveries	$	(247)		$	15		$	(129)		$	(4)		$	(223)		$	(588)

Net (charge-off) recovery ratio (1)	(0.03)		%	—		%	(0.01)		%	—		%	(0.02)		%	(0.06)		%

For the Three Months Ended September 30, 2021
Charge-offs	$	(16)		$	(24)		$	(37)		$	(1)		$	(156)		$	(234)
Recoveries	19			954			76			25			40			1,114
Net (charge-offs) recoveries	$	3		$	930		$	39		$	24		$	(116)		$	880

Net (charge-off) recovery ratio (1)	—		%	0.11		%	—		%	—		%	(0.01)		%	0.10		%

	For the Nine Months Ended September 30, 2022 and 2021
(in thousands)	Agricultural			Commercial and Industrial			Commercial Real Estate			Residential Real Estate			Consumer			Total
For the Nine Months Ended September 30,
Charge-offs	$	(249)		$	(843)		$	(2,319)		$	(90)		$	(540)		$	(4,041)
Recoveries	9			613			154			68			106			950
Net (charge-offs) recoveries	$	(240)		$	(230)		$	(2,165)		$	(22)		$	(434)		$	(3,091)

Net (charge-off) recovery ratio (1)	(0.01)		%	(0.01)		%	(0.08)		%	—		%	(0.02)		%	(0.12)		%

For the Nine Months Ended September 30, 2021
Charge-offs	$	(170)		$	(885)		$	(453)		$	(107)		$	(462)		$	(2,077)
Recoveries	67			1,560			391			81			136			2,235
Net (charge-offs) recoveries	$	(103)		$	675		$	(62)		$	(26)		$	(326)		$	158

Net (charge-off) recovery ratio (1)	—		%	0.03		%	—		%	—		%	(0.01)		%	0.01		%

(1) Net (charge-off) recovery ratio is calculated as the annualized net (charge-offs) recoveries divided by average loans held for investment, net of unearned income and average loans held for sale, during the period.

Actual Results: Our ACL as of September 30, 2022 was $52.1 million, which was 1.39% of loans held for investment, net of unearned income as of that date. This compares with an ACL of $48.7 million as of December 31, 2021, which was 1.50% of loans held for investment, net of unearned income. The ACL at September 30, 2022 and December 31, 2021 does not include a reserve for the PPP loans as they are fully guaranteed by the SBA. The increase in the ACL primarily reflected $3.1 million of credit loss expense related to the acquired IOFB non-PCD loans, in addition to the initial allowance for credit losses of $3.4 million recorded for the IOFB PCD loans acquired, as well as a reserve taken to support loan growth. The liability for off-balance sheet credit exposures totaled $4.8 million, which included $0.2 million of unfunded loan commitments that were established in the IOFB acquisition, as of September 30, 2022 as compared to $4.0 million at December 31, 2021 and is included in 'Other liabilities' on the balance sheet.

The Company recorded a credit loss expense related to loans of $3.1 million for the nine months ended September 30, 2022 as compared to a credit loss benefit related to loans of $7.8 million for the nine months ended September 30, 2021. Gross charge-offs for the first nine months of 2022 totaled $4.0 million, while there were $1.0 million in gross recoveries of previously charged-off loans. The ratio of annualized net charge-offs to average loans for the first nine months of 2022 was 0.12% compared to a net recovery ratio of 0.01% for the nine months ended September 30, 2021.

Economic Forecast: At September 30, 2022, the economic forecast used by the Company showed the following: (1) Midwest unemployment – increases 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 - increases over the next four forecasted quarters; (4) Year-to-year change in U.S. GDP - decline in the first forecasted quarter, with increases in the next three forecasted quarters; (5) Year-to-year change in National Home Price Index – increases over the next two forecasted quarters, with a decline in the third and fourth forecasted quarter; and (6) Rental Vacancy - increases over the next four forecasted quarters.

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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. In addition, PCD loans, reasonably expected TDRs and executed non-performing TDRs greater than $250,000 are evaluated individually to determine the required ACL. TDRs performing in accordance with their modified contractual terms for a reasonable period of time may be included in the Company’s existing pools based on the underlying risk characteristics of the loan to measure the ACL. 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, 2022, the ACL was adequate; however, there is no assurance losses will not exceed the ACL. In addition, growth in the loan portfolio or general economic deterioration may require the recognition of additional credit loss expense in future periods. See Note 4. 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, 2022				As of December 31, 2021
(in thousands)	Balance		% of Total		Balance		% of Total
Noninterest bearing deposits	$	1,139,694	20.8	%	$	1,005,369	19.6	%
Interest checking deposits	1,705,289		31.2		1,619,136		31.6
Money market deposits	991,783		18.1		939,523		18.4
Savings deposits	700,843		12.8		628,242		12.3
Total non-maturity deposits	4,537,609		82.9		4,192,270		81.9
Time deposits of $250 and under	537,616		9.8		505,392		9.9
Time deposits of over $250	401,557		7.3		416,857		8.2
Total time deposits	939,173		17.1		922,249		18.1
Total deposits	$	5,476,782	100.0	%	$	5,114,519	100.0	%

Deposits increased $362.3 million from December 31, 2021, or 7.1%, reflecting growth from the acquisition of IOFB, partially offset primarily by a reduction in public time deposits greater than $250k. Approximately 92.7% of our total deposits were considered “core” deposits as of September 30, 2022, compared to 91.8% at December 31, 2021. We consider core deposits to be the total of all deposits other than time deposits greater than $250k and non-reciprocal brokered money market deposits. See Note 8. Deposits to our consolidated financial statements for additional information related to our deposits and Note 2. Business Combinations for additional information related to the IOFB deposits assumed.

Short-Term Borrowings and Long-Term Debt

The following table sets forth the composition of short-term borrowings and long-term debt for the periods presented.


(dollars in thousands)	September 30, 2022		December 31, 2021
Securities sold under agreements to repurchase	$	137,536	$	181,368
Federal home loan bank advances	167,000		—



Total short-term borrowings	$	304,536	$	181,368

Junior subordinated notes issued to capital trusts	42,072		41,940
Subordinated debentures	63,974		63,875
Finance lease payable	830		951
Federal home loan bank borrowings	27,314		48,113
Other long-term debt	20,000		—
Total long-term debt	$	154,190	$	154,879

See Note 9. Short-Term Borrowings and Note 10. Long-Term Debt to our unaudited consolidated financial statements for additional information related to short-term borrowings and long-term debt.

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Capital Resources

Shareholder's Equity and Capital Adequacy

The following table summarizes certain equity capital ratios and book value per share amounts of the Company as of or for the periods presented:


	September 30, 2022			December 31, 2021
Total shareholders’ equity to total assets ratio	7.28		%	8.75		%
Tangible common equity ratio (1)	5.90		%	7.49		%
Total risk-based capital ratio	12.10		%	13.09		%
Tier 1 risk-based capital ratio	9.97		%	10.83		%
Common equity tier 1 risk-based capital ratio	9.18		%	9.94		%
Tier 1 leverage ratio	8.24		%	8.67		%
Book value per share	$	30.23		$	33.66
Tangible book value per share (1)	$	24.17		$	28.40
(1) A non-GAAP financial measure - see the “Non-GAAP Presentations” section for a reconciliation to the most comparable GAAP equivalent.

Shareholders' Equity: Total shareholders’ equity was $472.2 million as of September 30, 2022, compared to $527.5 million as of December 31, 2021, a decrease of $55.2 million, or 10.5%, primarily due to a decrease in AOCI that was largely a result of the unrealized loss on available for sale debt securities, which was partially offset by an increase in retained earnings.

Capital Adequacy: 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, 2022, 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 12. Regulatory Capital Requirements and Restrictions on Subsidiary Cash to our unaudited consolidated financial statements for additional information related to our capital.

Stock Compensation

Restricted stock units were granted to certain officers and directors of the Company on February 15, 2022, May 15, 2022, and August 15, 2022 in the aggregate amount of 67,608, 9,615, and 4,509, respectively. Additionally, during the first nine months of 2022, 51,713 shares of common stock were issued in connection with the vesting of previously awarded grants of restricted stock units, of which 8,634 shares were surrendered by grantees to satisfy tax requirements, and 1,074 unvested restricted stock units were forfeited.

Liquidity

Liquidity management involves meeting the cash flow requirements of depositors and borrowers. We conduct liquidity management on both a daily and long-term basis, and adjust our investments in liquid assets based on expected loan demand, projected loan maturities and payments, 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.

Cash and cash equivalents are summarized in the table below. Since December 31, 2021, interest-bearing deposits have been used to fund loan growth.


(dollars in thousands)	As of September 30, 2022		As of December 31, 2021
Cash and due from banks	$	77,513	$	42,949
Interest-bearing deposits	1,001		160,881

Total	$	78,514	$	203,830

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

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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 $72.3 million for the nine months ended September 30, 2022 and $47.2 million for the nine months ended September 30, 2021.

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. Inflation and related increases in market rates by the Federal Reserve generally decrease the market value of investments and loans held and may adversely affect liquidity, earnings and shareholders' equity. Ongoing higher inflation levels and higher interest rates could have a negative impact on both our consumer and commercial borrowers. We anticipate our noninterest income may be adversely affected in future periods as a result of increasing interest rates and inflationary pressure, which has begun to and will continue to adversely affect mortgage originations and mortgage banking revenue. Additionally, the economic impact of the recent rise in inflation and rising interest rates could place increased demand on our liquidity if we experience significant credit deterioration and as we meet borrowers' needs. There is also a risk that interest rate increases to fight inflation could lead to a recession.

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.

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 13. Commitments and Contingencies to our unaudited consolidated financial statements.

Contractual Obligations

There have been no material changes to the Company's contractual obligations existing at December 31, 2021, as disclosed in the Annual Report on Form 10-K, filed with the SEC on March 10, 2022.

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.

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	Three Months Ended						Nine Months Ended
Return on Average Tangible Equity	September 30, 2022			September 30, 2021			September 30, 2022			September 30, 2021
(Dollars in thousands)
Net income	$	18,317		$	16,311		$	44,833		$	55,230
Intangible amortization, net of tax (1)	1,342			948			3,224			3,084

Tangible net income	$	19,659		$	17,259		$	48,057		$	58,314

Average shareholders' equity	$	499,263		$	539,052		$	507,764		$	526,261
Average intangible assets, net	(95,499)			(84,288)			(87,318)			(85,579)
Average tangible equity	$	403,764		$	454,764		$	420,446		$	440,682

Return on average equity	14.56		%	12.00		%	11.81		%	14.03		%
Return on average tangible equity (2)	19.32		%	15.06		%	15.28		%	17.69		%

(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, 2022			December 31, 2021
(Dollars in thousands, except per share data)
Total shareholders’ equity	$	472,229		$	527,475
Intangible assets, net	(94,563)			(82,362)
Tangible common equity	$	377,666		$	445,113

Total assets	$	6,491,061		$	6,025,128
Intangible assets, net	(94,563)			(82,362)
Tangible assets	$	6,396,498		$	5,942,766

Book value per share	$	30.23		$	33.66
Tangible book value per share (1)	$	24.17		$	28.40
Shares outstanding	15,622,825			15,671,147

Equity to assets ratio	7.28		%	8.75		%
Tangible common equity ratio (2)	5.90		%	7.49		%

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


	Three Months Ended						Nine Months Ended
Net Interest Margin, Tax Equivalent/Core Net Interest Margin	September 30, 2022			September 30, 2021			September 30, 2022			September 30, 2021
(dollars in thousands)
Net interest income	$	45,733		$	40,340		$	122,794		$	117,462
Tax equivalent adjustments:
Loans (1)	673			507			1,782			1,557
Securities (1)	596			615			1,819			1,910
Net interest income, tax equivalent	$	47,002		$	41,462		$	126,395		$	120,929
Loan purchase discount accretion	(2,015)			(774)			(3,275)			(2,745)
Core net interest income	$	44,987		$	40,688		$	123,120		$	118,184

Net interest margin	3.00		%	2.92		%	2.84		%	2.91		%
Net interest margin, tax equivalent (2)	3.08		%	3.00		%	2.92		%	2.99		%
Core net interest margin (3)	2.95		%	2.94		%	2.85		%	2.92		%
Average interest earning assets	$	6,050,864		$	5,489,917		$	5,783,021		$	5,404,777

(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.

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	Three Months Ended						Nine Months Ended
Efficiency Ratio	September 30, 2022			September 30, 2021			September 30, 2022			September 30, 2021
(dollars in thousands)
Total noninterest expense	$	34,623		$	29,778		$	98,348		$	86,148
Amortization of intangibles	(1,789)			(1,264)			(4,299)			(4,112)
Merger-related expenses	(763)			—			(1,792)			—

Noninterest expense used for efficiency ratio	$	32,071		$	28,514		$	92,257		$	82,036

Net interest income, tax equivalent (1)	$	47,002		$	41,462		$	126,395		$	120,929
Noninterest income	12,588			9,182			36,579			31,224
Investment security gains, net	163			(36)			(272)			(105)
Net revenues used for efficiency ratio	$	59,753		$	50,608		$	162,702		$	152,048

Efficiency ratio (2)	53.67		%	56.34		%	56.70		%	53.95		%
(1) The federal statutory tax rate utilized was 21%.
(2) Noninterest expense adjusted for amortization of intangibles and merger-related expenses 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, 2022			December 31, 2021
(dollars in thousands)
Loans held for investment, net of unearned income	$	3,746,289		$	3,245,012
PPP loans	(195)			(30,841)
Core loans	$	3,746,094		$	3,214,171

Allowance for credit losses	$	52,100		$	48,700

Allowance for credit losses ratio	1.39		%	1.50		%
Adjusted allowance for credit losses ratio (1)	1.39		%	1.52		%
(1) Allowance for credit losses divided by core loans.

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 $72.3 million in the first nine months of 2022, compared with $47.2 million in the first nine months of 2021. Net cash outflows from investing activities were $202.5 million in the first nine months of 2022, compared to net cash outflows of $284.1 million in the comparable nine-month period of 2021. Net cash inflows from financing activities in the first nine months of 2022 were $4.8 million, compared with net cash inflows of $292.8 million for the same period of 2021.

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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

• Federal Home Loan Bank Advances

• 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, 2022, the Bank maintains several unsecured federal funds lines totaling $155.0 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 periods of economic uncertainty or stress. 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, 2022, the Bank had municipal securities with an approximate market value of $113.5 million pledged for liquidity purposes, and had a borrowing capacity of $104.3 million. There were no outstanding borrowings through the FRB Discount Window at September 30, 2022.

Federal Home Loan Bank Advances - The Bank has a secured line of credit with the FHLBDM. The principal function of these funds is to maintain short-term liquidity. 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.

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, 2022, the Bank had $27.3 million in outstanding FHLB borrowings, leaving $357.4 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, 2022.

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, 2022, the Company had $4.0 million of reciprocal time deposits through the CDARS program and $39.3 million of reciprocal non-maturity deposits through the ICS program that qualified for the brokered deposit exemption. These reciprocal deposits are part of the IntraFi Network Deposits program, which is used by financial institutions to spread deposits that exceed the FDIC insurance coverage limits out to numerous institutions in order to provide insurance coverage for all participating deposits.

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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, 2022.

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.

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.

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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, or an immediate increase of 100 basis points or 200 basis points (the effects of which were not meaningful as of December 31, 2021 in the low interest rate environment):


	Immediate Change in Rates
(dollars in thousands)	-200			-100			+100			+200
September 30, 2022
Dollar change	$	1,984		$	3,332		$	(5,233)		$	(10,629)
Percent change	1.2		%	2.0		%	(3.1)		%	(6.4)		%
December 31, 2021
Dollar change	N/A			N/A			$	(996)		$	(2,237)
Percent change	N/A			N/A			(0.7)		%	(1.5)		%

As of September 30, 2022, 26.7% of the Company’s earning asset balances will reprice or are expected to pay down in the next twelve months, and 51.9% 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, the Chief Financial Officer, and the Chief Accounting 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, the Chief Financial Officer, and the Chief Accounting Officer, to allow timely decisions regarding required disclosure. Based on this evaluation, the Chief Executive Officer, the Chief Financial Officer, and the Chief Accounting Officer, have concluded that the Company’s disclosure controls and procedures were effective as of September 30, 2022.

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

Changes in Internal Control over Financial Reporting

There 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, 2022 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, 2021. 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.

Repurchase of Equity Securities

The following table sets forth information about the Company’s purchases of its common stock during the third quarter of 2022:


	Total Number of Shares Purchased (1)	Average Price Paid per Share		Total Number of Shares Purchased as Part of Publicly Announced Programs (2)	Approximate Dollar Value of Shares That May Yet Be Purchased Under the Program
July 1 - 31, 2022	14,586	$	29.51	14,586	$	3,042,363
August 1 - 31, 2022	833	32.92		—	3,042,363
September 1 - 30, 2022	—	—		—	3,042,363
Total	15,419	$	29.70	14,586	$	3,042,363

(1) Common shares repurchased by the Company during the three months ended September 30, 2022 totaled 14,586 shares repurchased under the share repurchase program, as well as 833 shares surrendered by employees of the Company to pay withholding taxes on vesting of restricted stock unit awards.

(2) On June 22, 2021, the Board of Directors of the Company approved a share repurchase program, allowing for the repurchase of up to $15.0 million of the Company's common stock through December 31, 2023. This new repurchase program replaced the Company’s prior repurchase program, which was due to expire on December 31, 2021. Since June 23, 2021 and through September 30, 2022, the Company repurchased 403,368 shares of common stock for approximately $12.0 million, leaving $3.0 million available to be repurchased.

Pursuant to the Company’s share repurchase program approved on June 22, 2021, the Company has purchased no shares of common stock subsequent to September 30, 2022 and through November 1, 2022 for a total cost of none inclusive of transaction costs, leaving $3.0 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, as Amended of MidWest One Financial Group, Inc. as of October 18, 2022

Exhibit 3.1 to the Company’s Current Report on Form 8-K filed with the SEC on October 19, 2022

10.1

Letter Agreement which revises the Amended and Restated Employment Agreement between MidWest One Financial Group, Inc. and Len D. Devaisher, dated September 27, 2022

Exhibit 10.1 to the Company's Current Report on Form 8-K filed with the SEC on September 29, 2022

10. 2

Employment Agreement between MidWest One Financial Group, Inc. and Charles N. Reeves, dated November 1, 2022

Exhibit 10.1 to the Company's Current Report on Form 8-K filed with the SEC on October 19, 2022

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

31.3

Certification of Principal Accounting 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

32.3

Certification of Principal Accounting 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, 2022, 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 3, 2022

By:

/s/ CHARLES N. REEVES

Charles N. Reeves

Chief Executive Officer

(Principal Executive Officer)

By:

/s/ BARRY S. RAY

Barry S. Ray

Chief Financial Officer

(Principal Financial Officer)

By:

/s/ JOHN J. RUPPEL

John J. Ruppel

Chief Accounting Officer

(Principal Accounting Officer)

TABLE OF CONTENTS

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, as Amended of MidWestOneFinancial Group, Inc. as of October 18, 2022 Exhibit 3.1 to the Companys Current Report on Form 8-K filed with the SEC on October 19, 2022 10.1 Letter Agreement which revises the Amended and Restated Employment Agreement between MidWestOneFinancial Group, Inc. and Len D. Devaisher, dated September 27, 2022 Exhibit 10.1 to the Company's Current Report on Form 8-K filed with the SEC on September 29, 2022 10.2 Employment Agreement between MidWestOneFinancial Group, Inc. and Charles N. Reeves, dated November 1, 2022 Exhibit 10.1 to the Company's Current Report on Form 8-K filed with the SEC on October 19, 2022 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 31.3 Certification of Principal Accounting 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 32.3 Certification of Principal Accounting 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, 2022

Exhibits