UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q


	~~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, ~~2018~~2019



☐	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, IA52240

(Address of principal executive offices, including zip code)

~~319-356-5800~~(319) 356-5800

(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. ~~(Check one):~~



Large accelerated filer	☐	Accelerated filer	☒x
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 ~~October 31, 2018~~November 5, 2019, there were ~~12,221,547~~16,160,632 shares of common stock, $1.00 par value per share, outstanding.

MIDWESTONE FINANCIAL GROUP, INC.

Form 10-Q Quarterly Report

Table of Contents



		Page No.
PART I

Item 1.	Financial Statements	1

	Consolidated Balance Sheets	1

	Consolidated Statements of Income~~Income~~	2

	Consolidated Statements of Comprehensive Income	3

	Consolidated Statements of Shareholders' Equity	4

	Consolidated Statements of Cash Flows	56

	Notes to Consolidated Financial Statements	78

Item 2.	Management's Discussion and Analysis of Financial Condition and Results of Operations	3941

Item 3.	Quantitative and Qualitative Disclosures about Market Risk	62

Item 4.	Controls and Procedures	6465

Part II

Item 1.	Legal Proceedings	6566

Item 1A.	Risk Factors	6566

Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	6566

Item 3.	Defaults Upon Senior Securities	6566

Item 4.	Mine Safety Disclosures	6566

Item 5.	Other Information	66

Item 6.	Exhibits	67

	Signatures	68

PART I – FINANCIAL INFORMATION

Glossary of Acronyms, Abbreviations, and Terms

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."



AFS	Available for Sale	FHLB	Federal Home Loan Bank of Des Moines
ALLL	Allowance for Loan and Lease Losses	FHLMC	Federal Home Loan Mortgage Corporation
ASU	Accounting Standards Update	FRB	Federal Reserve Board
ABTW	American Bank and Trust-Wisconsin of Cuba City, Wisconsin	FNMA	Federal National Mortgage Association
ATM	Automated Teller Machine	GAAP	U.S. Generally Accepted Accounting Principles
ATSB	American Trust & Savings Bank of Dubuque, Iowa	GNMA	Government 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	HTM	Held to Maturity
BOLI	Bank Owned Life Insurance	ICS	Insured Cash Sweep
CDARS	Certificate of Deposit Account Registry Service	LIBOR	The London Inter-bank Offered Rate is an interest-rate average calculated from estimates submitted by the leading banks in London
CECL	Current Expected Credit Loss	MBS	Mortgage-Backed Securities
CMOs	Collateralized Mortgage Obligations	OTTI	Other-Than-Temporary Impairment
CRA	Community Reinvestment Act	PCD	Purchased Financial Assets With Credit Deterioration
Dodd-Frank Act	Dodd-Frank Wall Street Reform and Consumer Protection Act	PCI	Purchased Credit Impaired
ECL	Expected Credit Losses	ROU	Right-of-Use
EVE	Economic Value of Equity	RPA	Credit Risk Participation Agreement
FASB	Financial Accounting Standards Board	SEC	U.S. Securities and Exchange Commission
FDIC	Federal Deposit Insurance Corporation	TDR	Troubled Debt Restructuring

Table of Contents

Item 1. Financial Statements.

MIDWESTONE FINANCIAL GROUP, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS


	September 30, 2018			December 31, 2017			September 30, 2019			December 31, 2018
(dollars in thousands)	(unaudited)						(unaudited)
ASSETS
Cash and due from banks	$	49,229		$	44,818		$	79,776		$	43,787
Interest-earning deposits in banks	4,150			5,474
Interest earning deposits in banks							6,413			1,693
Federal funds sold	—			680			478			—
Total cash and cash equivalents	53,379			50,972			86,667			45,480
Equity securities at fair value	2,797			2,336
Debt securities available for sale at fair value	407,766			445,324			503,278			414,101
Held to maturity securities at amortized cost (fair value of $186,057 at September 30, 2018 and $194,343 at December 31, 2017)	191,733			195,619
Held to maturity securities at amortized cost (fair value of $193,337 at September 30, 2019 and $192,564 at December 31, 2018)							190,309			195,822
Total securities held for investment							693,587			609,923
Loans held for sale	1,124			856			7,906			666
Gross loans held for investment							3,545,993			2,405,001
Unearned income, net							(21,265		)	(6,222		)
Loans held for investment, net of unearned income	2,377,649			2,286,695			3,524,728			2,398,779
Allowance for loan losses	(31,278		)	(28,059		)	(31,532		)	(29,307		)
Total loans held for investment, net	2,346,371			2,258,636			3,493,196			2,369,472
Premises and equipment, net	76,497			75,969			91,190			75,773
Interest receivable	14,800			14,732
Goodwill	64,654			64,654			93,258			64,654
Other intangible assets, net	10,378			12,046			33,635			9,875
Bank-owned life insurance	60,609			59,831
Foreclosed assets, net	549			2,010			4,366			535
Deferred income taxes, net	9,993			6,525
Other assets	27,315			22,761			144,482			115,102
Total assets	$	3,267,965		$	3,212,271		$	4,648,287		$	3,291,480
LIABILITIES AND SHAREHOLDERS' EQUITY
Deposits:
Non-interest-bearing demand	$	458,576		$	461,969
Interest-bearing checking	1,236,922			1,228,112
Savings	211,591			213,430
Certificates of deposit under $100,000	348,099			324,681
Certificates of deposit $100,000 and over	377,071			377,127
Noninterest bearing deposits							$	673,777		$	439,133
Interest bearing deposits							3,035,935			2,173,796
Total deposits	2,632,259			2,605,319			3,709,712			2,612,929
Federal funds purchased	19,056			1,000
Securities sold under agreements to repurchase	68,922			96,229
Federal Home Loan Bank borrowings	143,000			115,000
Junior subordinated notes issued to capital trusts	23,865			23,793
Short-term borrowings							155,101			131,422
Long-term debt	8,750			12,500			244,677			168,726
Deferred compensation liability	5,305			5,199
Interest payable	2,054			1,428
Other liabilities	15,565			11,499			40,912			21,336
Total liabilities	2,918,776			2,871,967			4,150,402			2,934,413
Shareholders' equity:
Preferred stock, no par value; authorized 500,000 shares; no shares issued and outstanding at September 30, 2018 and December 31, 2017	$	—		$	—
Common stock, $1.00 par value; authorized 30,000,000 shares at September 30, 2018 and December 31, 2017; issued 12,463,481 shares at September 30, 2018 and December 31, 2017; 12,221,107 outstanding shares at September 30, 2018 and 12,219,611 shares at December 31, 2017	12,463			12,463
Shareholders' equity
Preferred stock, no par value; authorized 500,000 shares; no shares issued and outstanding at September 30, 2019 and December 31, 2018							—			—
Common stock, $1.00 par value; authorized 30,000,000 shares at September 30, 2019 and December 31, 2018; issued 16,581,017 shares at September 30, 2019 and 12,463,481 shares at December 31, 2018; outstanding 16,179,734 shares at September 30, 2019 and 12,180,015 shares at December 31, 2018							16,581			12,463
Additional paid-in capital	187,581			187,486			297,144			187,813
Treasury stock at cost, 242,374 shares as of September 30, 2018 and 243,870 shares as of December 31, 2017	(5,474		)	(5,121		)
Retained earnings	163,709			148,078			191,007			168,951
Accumulated other loss	(9,090		)	(2,602		)
Treasury stock at cost, 401,283 shares as of September 30, 2019 and 283,466 shares as of December 31, 2018							(9,933		)	(6,499		)
Accumulated other comprehensive income (loss)							3,086			(5,661		)
Total shareholders' equity	349,189			340,304			497,885			357,067
Total liabilities and shareholders' equity	$	3,267,965		$	3,212,271		$	4,648,287		$	3,291,480

See accompanying notes to consolidated financial statements.

MIDWESTONE 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) 2018 2017 2018 2017
Interest income:
Loans $ 28,088
$ 26,206
$ 82,141
$ 76,135
Bank deposits 12
19
38
50
Federal funds sold —
—
1
1
Taxable securities 2,965
2,589
8,793
7,897
Tax-exempt securities 1,395
1,547
4,452
4,699
Total interest income 32,460
30,361
95,425
88,782
Interest expense:
Interest on deposits:
Interest-bearing checking 1,622
913
3,998
2,623
Savings 63
53
189
155
Certificates of deposit under $100,000 1,270
893
3,399
2,638
Certificates of deposit $100,000 and over 1,670
1,041
4,584
2,953
Total interest expense on deposits 4,625
2,900
12,170
8,369
Federal funds purchased 144
81
480
152
Securities sold under agreements to repurchase 173
53
451
125
Federal Home Loan Bank borrowings 741
474
1,873
1,321
Other borrowings 3
3
9
9
Junior subordinated notes issued to capital trusts 313
243
878
704
Long-term debt 100
115
309
338
Total interest expense 6,099
3,869
16,170
11,018
Net interest income 26,361
26,492
79,255
77,764
Provision for loan losses 950
4,384
4,050
6,665
Net interest income after provision for loan losses 25,411
22,108
75,205
71,099
Noninterest income:
Trust, investment, and insurance fees 1,526
1,454
4,703
4,594
Service charges and fees on deposit accounts 1,148
1,295
3,474
3,835
Loan origination and servicing fees 891
1,012
2,738
2,532
Other service charges and fees 1,502
1,625
4,464
4,580
Bank-owned life insurance income 399
344
1,229
990
Gain on sale or call of debt securities 192
176
197
239
Other gain 326
10
338
66
Total noninterest income 5,984
5,916
17,143
16,836
Noninterest expense:
Salaries and employee benefits 13,051
12,039
37,647
35,712
Occupancy and equipment, net 3,951
2,986
10,440
9,323
Professional fees 1,861
933
3,614
2,991
Data processing 697
723
2,076
1,982
FDIC insurance 393
238
1,104
957
Amortization of intangibles 547
759
1,793
2,412
Other 2,311
2,066
7,026
6,666
Total noninterest expense 22,811
19,744
63,700
60,043
Income before income tax expense 8,584
8,280
28,648
27,892
Income tax expense 1,806
1,938
5,921
7,603
Net income $ 6,778
$ 6,342
$ 22,727
$ 20,289
Per share information:
Earnings per common share - basic $ 0.55
$ 0.52
$ 1.86
$ 1.69
Earnings per common share - diluted 0.55
0.52
1.86
1.69
Dividends paid per common share 0.195
0.170
0.585
0.500



	Three Months Ended						Nine Months Ended
	September 30,						September 30,
(unaudited) (dollars in thousands, except per share amounts)	2019			2018			2019		2018
Interest income
Loans, including fees	$	49,169		$	28,088		$	118,257	$	82,141
Taxable investment securities	3,376			2,715			9,592		8,253
Tax-exempt investment securities	1,401			1,395			4,231		4,452
Other	130			12			335		39
Total interest income	54,076			32,210			132,415		94,885
Interest expense
Deposits	8,238			4,625			21,676		12,170
Short-term borrowings	522			321			1,479		941
Long-term debt	2,058			1,153			5,194		3,059
Total interest expense	10,818			6,099			28,349		16,170
Net interest income	43,258			26,111			104,066		78,715
Provision for loan losses	4,264			950			6,554		4,050
Net interest income after provision for loan losses	38,994			25,161			97,512		74,665
Noninterest income
Investment services and trust activities	2,339			1,222			5,619		3,679
Service charges and fees	2,068			1,512			5,380		4,601
Card revenue	1,655			1,069			4,452		3,128
Loan revenue	991			891			2,032		2,738
Bank-owned life insurance	514			399			1,376		1,229
Insurance commissions	—			304			734		1,024
Investment securities gains, net	23			192			72		197
Other	414			456			2,545		823
Total noninterest income	8,004			6,045			22,210		17,419
Noninterest expense
Compensation and employee benefits	17,426			13,051			46,414		37,647
Occupancy expense of premises, net	2,294			2,643			6,300		6,431
Equipment	2,181			1,341			5,466		4,132
Legal and professional	1,996			1,861			6,252		3,614
Data processing	1,234			697			3,087		2,076
Marketing	1,167			672			2,642		1,982
Amortization of intangibles	2,583			547			3,965		1,793
FDIC insurance	(42		)	393			762		1,104
Communications	489			341			1,208		1,011
Foreclosed assets, net	265			(131		)	407		(25		)
Other	1,849			1,207			4,596		3,671
Total noninterest expense	31,442			22,622			81,099		63,436
Income before income tax expense	15,556			8,584			38,623		28,648
Income tax expense	3,256			1,806			8,364		5,921
Net income	$	12,300		$	6,778		$	30,259	$	22,727
Per common share information
Earnings - basic	$	0.76		$	0.55		$	2.10	$	1.86
Earnings - diluted	0.76			0.55			2.09		1.86
Dividends paid	0.2025			0.195			0.6075		0.5850

See accompanying notes to consolidated financial statements.

MIDWESTONE FINANCIAL GROUP, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME


	Three Months Ended						Nine Months Ended						Three Months Ended						Nine Months Ended
	September 30,						September 30,						September 30,						September 30,
(unaudited) (dollars in thousands)	2018			2017			2018			2017			2019			2018			2019			2018
Net income	$	6,778		$	6,342		$	22,727		$	20,289		$	12,300		$	6,778		$	30,259		$	22,727

Other comprehensive income, available for sale debt securities:
Other comprehensive income (loss), debt securities available for sale:
Unrealized holding gains (losses) arising during period	(2,085		)	(1,158		)	(8,501		)	3,154			1,999			(2,085		)	11,904			(8,501		)
Reclassification adjustment for gains included in net income	(192		)	(176		)	(201		)	(196		)	(19		)	(192		)	(68		)	(201		)
Income tax (expense) benefit	594			526			2,271			(1,160		)	(517		)	594			(3,089		)	2,271
Other comprehensive income (loss) on available for sale debt securities	(1,683		)	(808		)	(6,431		)	1,798
Other comprehensive income (loss) on debt securities available for sale													1,463			(1,683		)	8,747			(6,431		)
Other comprehensive income (loss), net of tax	(1,683		)	(808		)	(6,431		)	1,798			1,463			(1,683		)	8,747			(6,431		)
Comprehensive income	$	5,095		$	5,534		$	16,296		$	22,087		$	13,763		$	5,095		$	39,006		$	16,296

See accompanying notes to consolidated financial statements.

MIDWESTONE FINANCIAL GROUP, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY

(unaudited)
(dollars in thousands, except per share amounts)

Preferred
Stock

Common
Stock

Additional
Paid-in
Capital

Treasury
Stock

Retained
Earnings

Accumulated
Other
Comprehensive
Income (Loss)
Total
Balance at December 31, 2016 $ —

$ 11,713

$ 163,667

$ (5,766 )
$ 136,975

$ (1,133 )
$ 305,456
Net income —

—

—

—

20,289

—

20,289
Issuance of common stock (750,000 shares), net of expenses of $1,328 —
750
23,610
—
—
—
24,360
Dividends paid on common stock ($0.50 per share) —
—
—
—
(5,984 ) —

(5,984 )
Stock options exercised (8,250 shares) —
—
(81 ) 172
—
—
91
Release/lapse of restriction on RSUs (26,875 shares) —
—
(560 ) 453
—
—

(107 )
Stock compensation —
—
660
—
—

660
Other comprehensive income, net of tax —
—
—
—
—
1,798
1,798
Balance at September 30, 2017 $ —
$ 12,463
$ 187,296
$ (5,141 ) $ 151,280
$ 665

$ 346,563
Balance at December 31, 2017 $ —
$ 12,463
$ 187,486
$ (5,121 ) $ 148,078
$ (2,602 ) $ 340,304
Cumulative effect of changes in accounting principles⁽¹⁾
—
—
—
—
57
(57 ) —
Net income —
—
—
—
22,727
—
22,727
Dividends paid on common stock ($0.585 per share) —
—
—
—
(7,153 ) —
(7,153 )
Stock options exercised (9,700 shares) —
—
(68 ) 204
—
—
136
Release/lapse of restriction on RSUs (28,525 shares) —
—
(609 ) 524
—
—
(85 )
Repurchase of common stock (33,998 shares) —
—
—
(1,081 ) —
—
(1,081 )
Stock compensation —
—
772
—
—
—
772
Other comprehensive loss, net of tax —
—
—
—
—
(6,431 ) (6,431 )
Balance at September 30, 2018 $ —
$ 12,463
$ 187,581
$ (5,474 ) $ 163,709
$ (9,090 ) $ 349,189



	For the Nine Months Ended September 30, 2019
(unaudited) (dollars in thousands, except per share amounts)	Preferred Stock		Common Stock		Additional Paid-in Capital			Treasury Stock			Retained Earnings			Accumulated Other Comprehensive Income (Loss)			Total
Balance at December 31, 2018	$	—	$	12,463	$	187,813		$	(6,499	)	$	168,951		$	(5,661	)	$	357,067
Net income	—		—		—			—			7,285			—			7,285
Dividends paid on common stock ($0.2025 per share)	—		—		—			—			(2,465		)	—			(2,465		)
Release/lapse of restriction on RSUs (24,550 shares)	—		—		(570		)	501			—			—			(69		)
Repurchase of common stock (49,216 shares)	—		—		—			(1,299		)	—			—			(1,299		)
Stock-based compensation	—		—		292			—			—			—			292
Other comprehensive income, net of tax	—		—		—			—			—			3,038			3,038
Balance at March 31, 2019	—		12,463		187,535			(7,297		)	173,771			(2,623		)	363,849
Net income	—		—		—			—			10,674			—			10,674
Issuance of common stock due to business combination (4,117,536 shares), net of expenses of $323	—		4,118		109,228			—			—			—			113,346
Dividends paid on common stock ($0.2025 per share)	—		—		—			—			(2,461		)	—			(2,461		)
Release/lapse of restriction on RSUs (8,260 shares)	—		—		(196		)	177			—			—			(19		)
Repurchase of common stock (56,985 shares)	—		—		—			(1,596		)	—			—			(1,596		)
Share-based compensation	—		—		312			—			—			—			312
Other comprehensive income, net of tax	—		—		—			—			—			4,246			4,246
Balance at June 30, 2019	—		16,581		296,879			(8,716		)	181,984			1,623			488,351
Net income	—		—		—			—			12,300			—			12,300
Acquisition accounting adjustment for restricted shares	—		—		8			—			—			—			8
Dividends paid on common stock ($0.2025 per share)	—		—		—			—			(3,277		)	—			(3,277		)
Repurchase of common stock (41,426 shares)	—		—		—			(1,217		)	—			—			(1,217		)
Share-based compensation	—		—		257			—			—			—			257
Other comprehensive income, net of tax	—		—		—			—			—			1,463			1,463
Balance at September 30, 2019	$	—	$	16,581	$	297,144		$	(9,933	)	$	191,007		$	3,086		$	497,885



	For the Nine Months Ended September 30, 2018
(unaudited) (dollars in thousands, except per share amounts)	Preferred Stock		Common Stock		Additional Paid-in Capital			Treasury Stock			Retained Earnings			Accumulated Other Comprehensive Loss			Total
Balance at December 31, 2017	$	—	$	12,463	$	187,486		$	(5,121	)	$	148,078		$	(2,602	)	$	340,304
Cumulative effect of changes in accounting principles⁽¹⁾	—		—		—			—			57			(57		)	—
Net income	—		—		—			—			7,793			—			7,793
Dividends paid on common stock ($0.195 per share)	—		—		—			—			(2,386		)	—			(2,386		)
Stock options exercised (9,700 shares)	—		—		(68		)	204			—			—			136
Release/lapse of restriction on RSUs (22,200 shares)	—		—		(467		)	387			—			—			(80		)
Repurchase of common stock (33,998 shares)	—		—		—			(1,082		)	—			—			(1,082		)
Stock-based compensation	—		—		237			—			—			—			237
Other comprehensive loss, net of tax	—		—		—			—			—			(3,545		)	(3,545		)
Balance at March 31, 2018	—		12,463		187,188			(5,612		)	153,542			(6,204		)	341,377
Net income	—		—		—			—			8,156			—			8,156
Dividends paid on common stock ($0.195 per share)	—		—		—			—			(2,383		)	—			(2,383		)
Release/lapse of restriction on RSUs (6,325 shares)	—		—		(142		)	138			—			—			(4		)
Share-based compensation	—		—		258			—			—			—			258
Other comprehensive loss, net of tax	—		—		—			—			—			(1,203		)	(1,203		)
Balance at June 30, 2018	—		12,463		187,304			(5,474		)	159,315			(7,407		)	346,201
Net income	$	—	—		—			—			6,778			—			6,778
Dividends paid on common stock ($0.195 per share)	—		—		—			—			(2,384		)	—			(2,384		)
Share-based compensation	—		—		277			—			—			—			277
Other comprehensive loss, net of tax	—		—		—			—			—			(1,683		)	(1,683		)
Balance at September 30, 2018	$	—	$	12,463	$	187,581		$	(5,474	)	$	163,709		$	(9,090	)	$	349,189

(1) ~~See~~Reclassification due to adoption of ASU 2016-01, ~~Note 2. “Effect~~Financial Instruments-Overall, Recognition and Measurement of ~~New~~ Financial ~~Accounting Standards”~~Assets and Financial Liabilities ~~for additional information.~~.

See accompanying notes to consolidated financial statements.

MIDWESTONE FINANCIAL GROUP, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS


	Nine Months Ended September 30,						Nine Months Ended September 30,
(unaudited) (dollars in thousands)	2018			2017			2019			2018
Cash flows from operating activities:
Net income	$	22,727		$	20,289		$	30,259		$	22,727
Adjustments to reconcile net income to net cash provided by operating activities:
Provision for loan losses	4,050			6,665			6,554			4,050
Depreciation of premises and equipment	3,217			3,088			3,542			3,145
Amortization of other intangibles	1,793			2,412
Amortization of premiums and discounts on investment securities, net	729			913
(Gain) loss on sale of premises and equipment	616			(2		)
Deferred income taxes	(1,184		)	(554		)
Amortization of discount on long-term debt							50			72
Amortization of intangible assets							3,965			1,793
Amortization of net premiums on debt securities available for sale							565			729
Amortization of operating lease right-of-use assets							755			—
Loss on sale of premises and equipment							55			616
Excess tax benefit from share-based award activity	(14		)	(91		)	—			(14		)
Stock-based compensation	772			660			861			772
Net losses on equity securities	34			—
Net (gains) losses on equity securities							(101		)	34
Net gain on sale or call of debt securities available for sale	(201		)	(196		)	(68		)	(201		)
Net (gain) loss on sale or call of debt securities held to maturity	4			(43		)
Net gain on sale of other real estate owned	(240		)	(45		)
Net (gain) loss on call of debt securities held to maturity							(4		)	4
Net (gain) loss on sale of foreclosed assets, net							25			(240		)
Net gain on sale of loans held for sale	(1,214		)	(1,337		)	(1,553		)	(1,214		)
Writedown of other real estate owned	5			23
Writedown of foreclosed assets							170			5
Origination of loans held for sale	(49,091		)	(65,078		)	(87,369		)	(49,091		)
Proceeds from sales of loans held for sale	50,037			70,044			83,030			50,037
Increase in interest receivable	(68		)	—
Increase in cash surrender value of bank-owned life insurance	(1,229		)	(990		)
Increase in other assets	(4,554		)	(2,224		)
Increase (decrease) in deferred compensation liability	106			(22		)
Increase in interest payable, accounts payable, accrued expenses, and other liabilities	4,692			445
Change in:
Cash surrender value of bank-owned life insurance							(1,376		)	(1,229		)
Deferred income taxes							752			(1,184		)
Other assets							9,288			(4,622		)
Oher liabilities							(10,099		)	4,798
Net cash provided by operating activities	30,987			33,957			39,301			30,987
Cash flows from investing activities:
Proceeds from sales of equity securities							43			—
Purchases of equity securities	(508		)	(7		)	(8		)	(508		)
Proceeds from sales of debt securities available for sale	16,494			22,546			125,433			16,494
Proceeds from maturities and calls of debt securities available for sale	51,338			53,171			66,940			51,338
Purchases of debt securities available for sale	(39,289		)	(23,038		)	(170,660		)	(39,289		)
Proceeds from sales of debt securities held to maturity	—			1,153			1,381			—
Proceeds from maturities and calls of debt securities held to maturity	4,220			12,370			4,540			4,220
Purchase of debt securities held to maturity	(553		)	(28,546		)	—			(553		)
Net increase in loans	(92,320		)	(100,880		)
Net (increase) decrease in loans							4,043			(92,320		)
Purchases of premises and equipment	(5,196		)	(3,035		)	(1,242		)	(5,196		)
Proceeds from sale of other real estate owned	2,231			983
Proceeds from sale of foreclosed assets							1,321			2,231
Proceeds from sale of premises and equipment	906			32			312			906
Proceeds of principal and earnings from bank-owned life insurance	452			—			—			452
Purchases of bank owned life insurance	—			(11,211		)
Payments to acquire intangible assets	(125		)	—			—			(125		)
Net cash used in investing activities	(62,350		)	(76,462		)
Proceeds from sale of intangible assets							99			—
Net cash acquired in business acquisition							37,054			—
Net cash provided by (used in) investing activities							69,256			(62,350		)
Cash flows from financing activities:
Net increase in deposits	26,940			9,967			17,688			26,940
Increase (decrease) in federal funds purchased	18,056			(18,976		)
Increase (decrease) in securities sold under agreements to repurchase	(27,307		)	5,777
Proceeds from Federal Home Loan Bank borrowings	110,000			145,000
Repayment of Federal Home Loan Bank borrowings	(82,000		)	(115,000		)
Net change in short-term borrowings							(37,082		)	(9,251		)
Net change in long-term debt							(35,250		)	24,250
Proceeds from stock options exercised	136			1			—			136
Excess tax benefit from share-based award activity	14			91			—			14
Taxes paid relating to net share settlement of equity awards	(85		)	(108		)	(88		)	(85		)
Payments on long-term debt	(3,750		)	(3,750		)
Dividends paid	(7,153		)	(5,984		)	(8,203		)	(7,153		)
Proceeds from issuance of common stock	—			25,688
Payment of stock issuance costs	—			(1,328		)	(323		)	—
Repurchase of common stock	(1,081		)	—			(4,112		)	(1,081		)
Net cash provided by financing activities	33,770			41,378
Net increase (decrease) in cash and cash equivalents	2,407			(1,127		)
Net cash provided by (used in) financing activities							(67,370		)	33,770
Net increase in cash and cash equivalents							41,187			2,407
Cash and cash equivalents at beginning of period	50,972			43,228			45,480			50,972
Cash and cash equivalents at end of period	$	53,379		$	42,101		$	86,667		$	53,379


(unaudited) (dollars in thousands)	Nine Months Ended September 30,				Nine Months Ended September 30,
	2018		2017		2019		2018
Supplemental disclosures of cash flow information:
Cash paid during the period for interest	$	15,544	$	11,041	$	26,910	$	15,544
Cash paid during the period for income taxes	$	4,420	$	8,460	1,915		4,420
Supplemental schedule of non-cash investing activities:
Transfer of loans to other real estate owned	$	535	$	207
Supplemental schedule of non-cash investing and financing activities:
Transfer of loans to foreclosed assets, net					$	2,256	$	535
Initial recognition of operating lease right of use asset					2,892		—
Initial recognition of operation lease liability					2,892		—
Transfer due to cumulative effective of change in accounting principles. See Note 2. “Effect of New Financial Accounting Standards” for additional information.	$	57	$	—	—		57

Supplemental Schedule of non-cash Investing Activities from Acquisition:
Noncash assets acquired:
Debt securities available for sale					$	99,056	$	—
Loans					1,138,928		—
Premises and equipment					18,623		—
Goodwill					28,604		—
Core deposit intangible					23,539		—
Trust customer list intangible					4,285		—
Bank-owned life insurance					18,759		—
Foreclosed assets					3,091		—
Other assets					20,677		—
Total noncash assets acquired					1,355,562		—

Liabilities assumed:
Deposits					1,079,094		—
Short-term borrowings					100,761		—
FHLB borrowings					42,770		—
Junior subordinated notes issued to capital trusts					17,555		—
Subordinated debentures					10,909		—
Other liabilities					27,850		—
Total liabilities assumed					$	1,278,939	$	—

See accompanying notes to consolidated financial statements.

MidWestOne Financial Group, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

(Unaudited)

1. Principles of Consolidation and Presentation

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

On August 21, 2018, the Company entered into a merger agreement with ATBancorp, an Iowa corporation, pursuant to which ATBancorp will merge with and into the Company. In connection with the merger, American Trust & Savings Bank, an Iowa state chartered bank and wholly owned subsidiary of ATBancorp, and American Bank & Trust Wisconsin, a Wisconsin state chartered bank and wholly owned subsidiary of ATBancorp, will merge with and into MidWest~~One~~ Bank, which will continue as the surviving bank. The merger agreement also provides that each of the outstanding shares of ATBancorp common stock will be converted into the right of ATBancorp shareholders to receive 117.5500 shares of Company common stock and $992.51 in cash. The corporate headquarters of the combined company will be in Iowa City, Iowa. The merger is anticipated to be completed in the first quarter of 2019. For further information, please refer to the ~~Current Report on Form 8-K~~ ~~filed by the Company with the SEC on August 22, 2018.~~

The Company owns all of the common stock of MidWestOne Bank, an Iowa state non-member bank chartered in 1934 with its main office in Iowa City, Iowa (the “Bank”)~~, and all of the common stock of MidWestOne~~ ~~Insurance Services, Inc., Oskaloosa, Iowa.~~. We operate primarily through MidWestOne Bank, our bank ~~subsidiary,~~subsidiary.

On May 1, 2019, the Company acquired ATBancorp, a bank holding company and ~~MidWest~~the parent company of ATSB, a commercial bank headquartered in Dubuque, Iowa, and ABTW, a commercial bank headquartered in Cuba City, Wisconsin. The primary reasons for the acquisition were to expand the Company’s business into new markets and grow the size of the Company’s business. As consideration for the merger, we issued 4,117,536 shares of our common stock with a value of $116.0 million, and paid cash in the amount of $34.8 million. See ~~One~~Note 3. “Business Combinations” for additional information.

On June 30, 2019, the Company sold substantially all of the assets used by MidWestOne Insurance Services, Inc.~~, our wholly owned subsidiary that operates an~~ to sell insurance ~~agency business through six offices located~~products. The Company recognized a pre-tax gain of $1.1 million from the sale which was reported in ~~central and east-central Iowa.~~“Other” noninterest income on the Company’s consolidated statements of income.

The accompanying unaudited consolidated financial statements have been prepared in accordance with the instructions to Form 10-Q and, therefore, do not include all the information and notes necessary for complete financial statements in conformity with ~~U.S. generally accepted accounting principles (“GAAP”).~~GAAP. The information in this Quarterly Report on Form 10-Q is written with the presumption that the users of the interim financial statements have read or have access to the most recent Annual Report on Form 10-K of the Company, filed with the ~~Securities and Exchange Commission (SEC)~~SEC on March ~~1, 2018,~~8, 2019, which contains the latest audited financial statements and notes thereto, together with Management’s Discussion and Analysis of Financial Condition and Results of Operations as of December 31, ~~2017~~2018 and for the year then ended. Management believes that the disclosures in this Form 10-Q are adequate to make the information presented not misleading. In the opinion of management, the accompanying consolidated financial statements contain all adjustments (consisting of only normal recurring accruals) necessary to present fairly the Company’s financial position as of September 30, ~~2018~~2019 and December 31, ~~2017,~~2018, and the results of operations and cash flows for the three and nine months ended September 30, ~~2018~~2019 and ~~2017~~2018. All significant intercompany accounts and transactions have been eliminated in consolidation.

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 three and nine months ended September 30, ~~2018~~2019 may not be indicative of results for the year ending December 31, ~~2018,~~2019, 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, ~~2017~~2018.

In the consolidated statements of cash flows, cash and cash equivalents include cash and due from banks, interest-bearing deposits in banks, and federal funds sold.

Certain reclassifications have been made to prior periods’ consolidated financial statements to present them on a basis comparable with the current period’s consolidated financial statements.

2. Effect of New Financial Accounting Standards

Accounting Guidance Adopted in ~~2018~~

~~In May 2014, the Financial Accounting Standards Board (the “FASB”) issued Accounting Standards Update (“ASU”) No. 2014-09,~~ ~~Revenue from Contract with Customers (Topic 606).~~ ~~Subsequent to the issuance of ASU 2014-09, the FASB~~

~~issued targeted updates to clarify specific implementation issues including ASU No. 2016-08, “Principal versus Agent Considerations (Reporting Revenue Gross versus Net),” ASU No. 2016-10, “Identifying Performance Obligations and Licensing,” ASU No. 2016-12, “Narrow-Scope Improvements and Practical Expedients,” and ASU No. 2016-20 “Technical Corrections and Improvements to Topic 606, Revenue from Contracts with Customers.~~” For financial reporting purposes, the standard allows for either full retrospective adoption, meaning the standard is applied to all of the periods presented, or modified retrospective adoption, meaning the standard is applied only to the most current period presented in the financial statements with the cumulative effect of initially applying the standard recognized at the date of initial application. Since the guidance does not apply to revenue associated with financial instruments, including loans and securities that are accounted for under other sections of GAAP, the new guidance did not have a material impact on revenue most closely associated with financial instruments, including interest income and expense. The Company completed its overall assessment of revenue streams and review of related contracts potentially affected by the ASU, including trust and asset management fees, service charges on deposit accounts, sales of other real estate, and debit card interchange fees. Based on this assessment, the Company concluded that ASU 2014-09 did not materially change the method in which the Company currently recognizes revenue for these revenue streams. The Company also completed its evaluation of certain costs related to these revenue streams to determine whether such costs should be presented as expenses or contra-revenue (i.e., gross versus net). Based on its evaluation, the Company determined that ASU 2014-09 also did not materially change the method in which the Company currently recognizes costs for these revenue streams. The Company adopted this update on January 1, 2018, utilizing the modified retrospective transition method. Since there was no net income impact upon adoption of the new guidance, a cumulative effect adjustment to opening retained earnings was not deemed necessary. See ~~Note 14 “Revenue Recognition”~~ ~~for more information.~~

~~In January 2016, the FASB issued Accounting Standards Update No. 2016-01,~~ ~~Financial Instruments-Overall: Recognition and Measurement of Financial Assets and Financial Liabilities.~~ The guidance in this update makes changes to the current GAAP model primarily affect the accounting for equity investments, financial liabilities under the fair value option, and the presentation and disclosure requirements for financial instruments. In addition, the FASB clarified guidance related to the valuation allowance assessment when recognizing deferred tax assets resulting from unrealized losses on available-for-sale debt securities. The accounting for other financial instruments, such as loans, investments in debt securities, and financial liabilities is largely unchanged. The treatment of gains and losses for all equity securities, including those without a readily determinable market value, is expected to result in additional volatility in the income statement, with the loss of mark to market via equity for these investments. Additionally, changes in the allowable method for determining the fair value of financial instruments in the financial statement footnotes (“exit price” only) require changes to current methodologies of determining these values, and how they are disclosed in the financial statement footnotes. The new standard applies to public business entities in fiscal years beginning after December 15, 2017, including interim periods within those fiscal years. The Company adopted this update on January 1, 2018. With the elimination of the classification of available for sale equity securities, the net unrealized gain or loss on these securities that had been included in accumulated other comprehensive income at December 31, 2017, in the amount of $57,000, has been transferred to retained earnings, as shown in the consolidated statements of shareholders’ equity. Changes in the fair value of equity securities with readily determinable fair values are now reflected in the noninterest income portion of the consolidated statements of income, in the other gains (losses) line item. In accordance with the ASU requirements, the Company measured the fair value of its loan portfolio as of September 30, 2018 using an exit price notion. See ~~Note 13. “Estimated Fair Value of Financial Instruments and Fair Value Measurements”~~ ~~to our consolidated financial statements.~~

~~Accounting Guidance Pending Adoption at September 30, 2018~~2019

In February 2016, the FASB issued ~~Accounting Standards Update~~ASU No. 2016-02, Leases (Topic 842). The guidance in this update is meant to increase transparency and comparability among organizations by recognizing ~~lease~~ROU assets and lease liabilities on the balance sheet and disclosing key information about leasing arrangements. The core principle of Topic 842 is that a lessee should recognize the assets and liabilities that arise from leases. All leases create an asset and a liability for the lessee in accordance with FASB Concepts Statement No. 6, Elements of Financial Statements, and, therefore, recognition of those lease assets

and lease liabilities represents an improvement over previous GAAP, which did not require lease assets and lease liabilities to be recognized for most leases. Disclosures are required by lessees and lessors to meet the objective of enabling users of financial statements to assess the amount, timing, and uncertainty of cash flows arising from leases. To meet that objective, qualitative disclosures along with specific quantitative disclosures are required. The ~~new standard applies~~Company adopted this update on January 1, 2019, utilizing the cumulative effect approach, and also elected certain relief options offered in ASU 2016-02 including the package of practical expedients, the option not to ~~public business~~separate lease and non-lease components and instead to account for them as a single lease component, and the option not to recognize ROU assets and lease liabilities that arise from short-term leases (i.e., leases with terms of twelve months or less). The Company elected the hindsight practical expedient, which allows entities ~~in fiscal years beginning after December 15, 2018, including interim periods within those fiscal years, with early adoption permitted.~~to use hindsight when determining lease term and impairment of ROU assets. The Company has several lease agreements, such as branch locations, which are ~~currently~~ considered operating leases, and ~~therefore not~~are now recognized on the Company’s consolidated balance sheets. The ~~Company expects the~~ new guidance ~~will require~~requires these lease agreements to ~~now~~ be recognized on the consolidated balance sheets as ~~right-of-use assets~~a ROU asset and a corresponding lease liability. ~~Therefore,~~See Note 18 “Leases” for more information. The Company also implemented internal controls and key system functionality to enable the ~~Company’s preliminary evaluation indicates the provisions~~preparation of ~~ASU No. 2016-02 are expected to impact the Company’s consolidated statements~~financial information on adoption. The adoption of ~~income, along with the Company’s regulatory capital ratios. However, the Company continues~~

~~to evaluate the extent of potential impact the new guidance will~~this standard did not have a material effect on the Company’s consolidated financial ~~statements, and does not expect to early adopt the standard.~~statements.

Accounting Guidance Pending Adoption at September 30, 2019

In June 2016, the FASB issued ~~Accounting Standards Update~~ASU No. 2016-13, Financial Instruments-Credit Losses (Topic 326) - Measurement of Credit Losses on Financial Instruments. The new guidance introduces an approach based on expected losses to estimate credit losses on certain types of financial instruments. It also modifies the impairment model for available-for-sale debt securities and provides for a simplified accounting model for purchased financial assets with credit deterioration since their origination. The amendment requires the use of a new model covering ~~current expected credit losses (CECL),~~CECL, which will apply to: (1) financial assets subject to credit losses and measured at amortized cost, and (2) certain off-balance sheet credit exposures. Upon initial recognition of the exposure, the CECL model requires an entity to estimate the credit losses expected over the life of an exposure (or pool of exposures). The estimate of ~~expected credit losses (ECL)~~ECL should consider historical information, current information, and reasonable and supportable forecasts, including estimates of prepayments. The new guidance also amends the current ~~available for sale (AFS)~~AFS security ~~other-than-temporary impairment (OTTI)~~OTTI model for debt securities. The new model will require an estimate of ECL only when the fair value is below the amortized cost of the asset. The length of time the fair value of an AFS debt security has been below the amortized cost will no longer impact the determination of whether a credit loss exists. As such, it is no longer an other-than-temporary model. Finally, the ~~purchased financial assets with credit deterioration (PCD)~~PCD model applies to purchased financial assets (measured at amortized cost or AFS) that have experienced more than insignificant credit deterioration since origination. This represents a change from the scope of what are considered purchased credit-impaired assets under ~~today’s~~the current model. Different than the accounting for originated or purchased assets that do not qualify as PCD, the initial estimate of expected credit losses for a PCD would be recognized through an allowance for loan and lease losses with an offset to the cost basis of the related financial asset at acquisition. The new standard applies to public business entities that are SEC filers (other than smaller reporting companies) in fiscal years beginning after December 15, 2019, including interim periods within those fiscal years, with early adoption permitted for fiscal years beginning after December 31, 2018, including interim periods within those fiscal years, and is expected to increase the ~~allowance for loan losses~~ALLL upon adoption. The Company has formed a working group to evaluate the impact of the standard’s adoption on the Company’s consolidated financial statements, and has selected a software vendor to assist with implementation. The ~~team~~group meets periodically to discuss the latest developments, ensure ~~progress~~implementation of CECL accounting guidance is ~~being made,~~progressing, and keep current on evolving interpretations and industry practices related to ASU 2016-13. The Company’s preliminary evaluation indicates that the provisions of ASU No. 2016-13 are expected to impact the Company’s consolidated financial statements, in particular ~~the level~~its estimate of ~~the reserve for~~loan credit losses. The Company is continuing to evaluate the extent of the potential impact.

In August 2018, the FASB issued ~~Accounting Standards Update~~ASU No. 2018-13, Fair Value Measurement (Topic 820): Disclosure Framework-Changes to the Disclosure Requirements for Fair Value Measurement. The amendments in this update modify the disclosure requirements on fair value measurements in Topic 820, Fair Value Measurement, including the consideration of costs and benefits. Four disclosure requirements were removed, three were modified, and two were added. In addition, the amendments eliminate “at a minimum” from the phrase “an entity shall disclose at a minimum” to promote the appropriate exercise of discretion by entities when considering fair value measurement disclosures and to clarify that materiality is an appropriate consideration of entities and their auditors when evaluating disclosure requirements. The amendments in this update are effective for all entities for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2019. The amendments on changes in unrealized gains and losses, the range and weighted average of significant unobservable inputs used to develop Level 3 fair value measurements, and the narrative description of measurement uncertainty should be applied prospectively for only the most recent interim or annual period presented in the initial fiscal year of adoption. All other amendments should be applied retrospectively to all periods presented upon their effective date. Early adoption is permitted. An entity is permitted to early adopt any removed or modified disclosures

and delay adoption of the additional disclosures until their effective date. ~~The Company is considering the early adoption of removed and modified disclosures.~~ The adoption of this standard is not expected to have a material effect on the Company’s consolidated financial statements.

In May 2019, the FASB issued ASU No. 2019-05, “Financial Instruments - Credit Losses (Topic 326); Targeted Transition Relief.” This ASU allows entities to irrevocably elect, upon adoption of ASU 2016-13, the fair value option on financial instruments that (1) were previously recorded at amortized cost and (2) are within the scope of ASC 326-20 if the instruments are eligible for the fair value option under ASC 825-10. The fair value option election does not apply to held to maturity debt securities. Entities are required to make this election on an instrument-by-instrument basis. ASU 2019-05 has the same effective date as ASU 2016- 13 (i.e., the first quarter of 2020). The Company does not expect to elect the fair value option, and therefore, ASU 2019-05 is not expected to impact the Company’s consolidated financial statements.

3. ~~Investment~~Business Combinations

On May 1, 2019, the Company acquired ATBancorp and its wholly-owned banking subsidiaries ATSB and ABTW. The primary reasons for the acquisition were to expand the Company’s operations into new markets and grow the size of the Company’s business. At the effective time of the merger, each share of common stock of ATBancorp converted into (1) 117.55 shares of common stock of the Company, and (2) $992.51 in cash.

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 May 1, 2019 acquisition date. Initial accounting for the merger consideration, assets acquired and liabilities assumed was incomplete at September 30, 2019. Thus, such amounts recognized in the financial statements have been determined only provisionally. The application of the acquisition method of accounting resulted in the recognition of goodwill of $28.6 million and other intangible assets of $27.8 million. The goodwill represents the excess merger consideration over the fair value of net assets acquired and is not deductible for income tax purposes.

The table below summarizes the amounts recognized as of the acquisition date for each major class of assets acquired and liabilities assumed:



(in thousands)	May 1, 2019
Merger consideration
Share consideration	$	113,677
Cash consideration	34,766
Total merger consideration			$	148,443
Identifiable net assets acquired, at fair value
Assets acquired
Cash and cash equivalents	$	71,820
Debt securities available for sale	99,056
Loans	1,138,928
Premises and equipment	18,623
Other intangible assets	27,824
Foreclosed assets	3,091
Other assets	39,436
Total assets acquired			1,398,778
Liabilities assumed
Deposits	$	1,079,094
Short-term borrowings	100,761
Long-term debt	71,234
Other liabilities	27,850
Total liabilities assumed			1,278,939
Fair value of net assets acquired			119,839
Goodwill			$	28,604

See Note 7. “Goodwill and Other Intangible Assets” for further discussion of the accounting for goodwill and other intangible assets.

The operating results of the Company reported herein include the operating results produced by the acquired assets and assumed liabilities for the period May 1, 2019 to September 30, 2019. Disclosure of the amount of ATBancorp’s revenue

and net income (excluding integration costs) included in the Company’s consolidated statements of income is impracticable due to the integration of the operations and accounting for this acquisition.

For illustrative purposes only, the following table presents certain unaudited pro forma financial information for the periods indicated. This unaudited estimated pro forma financial information was calculated as if ATBancorp had been acquired as of January 1, 2018. This unaudited pro forma information combines the historical results of ATBancorp with the Company’s consolidated historical results and includes certain adjustments reflecting the estimated impact of certain fair value adjustments 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. The unaudited pro forma information does not consider any changes to the provision for loan losses resulting from recording loan assets at fair value. Additionally, the Company expects to achieve cost savings and other business synergies 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.



	Unaudited Pro Forma
	Three Months Ended				Nine Months Ended
	September 30,				September 30,
(in thousands, except per share)	2019		2018		2019		2018
Total revenues (net interest income plus noninterest income)	$	46,022	$	79,176	$	144,222	$	179,327
Net income	$	10,564	$	25,954	$	29,373	$	49,418
Earnings per share - basic	$	0.64	$	1.59	$	1.80	$	3.02
Earnings per share - diluted	$	0.64	$	1.59	$	1.80	$	3.02

The following table summarizes ATBancorp acquisition-related expenses for the periods indicated:



	Three Months Ended				Nine Months Ended
	September 30,				September 30,
(in thousands)	2019		2018		2019		2018
Noninterest Expense
Compensation and employee benefits	$	1,584	$	—	$	2,614	$	—
Legal and professional	163		571		2,115		574
Data processing	567		17		812		17
Other	233		16		307		16
Total ATBancorp acquisition-related expenses	$	2,547	$	604	$	5,848	$	607

4. Debt Securities

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

As of September 30, 2018
(in thousands)
Amortized
Cost

Gross
Unrealized
Gains

Gross
Unrealized
Losses

Estimated
Fair Value
U.S. Government agencies and corporations $ 5,561
$ —
$ 42
$ 5,519
State and political subdivisions 115,251
716
831
115,136
Mortgage-backed securities 53,664
112
1,880
51,896
Collateralized mortgage obligations 179,748
3
8,874
170,877
Corporate debt securities 65,842
8
1,512
64,338
Total $ 420,066
$ 839
$ 13,139
$ 407,766



	As of September 30, 2019
(in thousands)	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses		Estimated Fair Value
U.S. Government agencies and corporations	$	455	$	1	$	—	$	456
State and political subdivisions	110,502		1,799		92		112,209
Mortgage-backed securities	23,894		418		16		24,296
Collateralized mortgage obligations	212,566		1,623		1,145		213,044
Corporate debt securities	151,685		1,637		49		153,273
Total debt securities	$	499,102	$	5,478	$	1,302	$	503,278

As of December 31, 2017
(in thousands)
Amortized
Cost

Gross
Unrealized
Gains

Gross
Unrealized
Losses

Estimated
Fair Value
U.S. Government agencies and corporations $ 15,716
$ —
$ 90
$ 15,626
State and political subdivisions 139,561
2,475
197
141,839
Mortgage-backed securities 48,744
181
428
48,497
Collateralized mortgage obligations 173,339
29
5,172
168,196
Corporate debt securities 71,562
31
427
71,166
Total $ 448,922
$ 2,716
$ 6,314
$ 445,324



	As of December 31, 2018
(in thousands)	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses		Estimated Fair Value
U.S. Government agencies and corporations	$	5,522	$	—	$	27	$	5,495
State and political subdivisions	121,403		877		379		121,901
Mortgage-backed securities	51,625		100		1,072		50,653
Collateralized mortgage obligations	176,134		220		6,426		169,928
Corporate debt securities	67,077		64		1,017		66,124
Total debt securities	$	421,761	$	1,261	$	8,921	$	414,101

The amortized cost and fair value of ~~debt~~HTM securities, ~~held to maturity,~~ with gross unrealized gains and losses, were as follows:

As of September 30, 2018
(in thousands)
Amortized
Cost

Gross
Unrealized
Gains

Gross
Unrealized
Losses

Estimated
Fair Value
State and political subdivisions $ 125,783
$ 155
$ 3,743
$ 122,195
Mortgage-backed securities 11,467
1
564
10,904
Collateralized mortgage obligations 19,373
—
1,104
18,269
Corporate debt securities 35,110
98
519
34,689
Total $ 191,733
$ 254
$ 5,930
$ 186,057



	As of September 30, 2019
(in thousands)	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses		Estimated Fair Value
State and political subdivisions	$	127,856	$	2,221	$	48	$	130,029
Mortgage-backed securities	10,647		286		2		10,931
Collateralized mortgage obligations	16,127		42		154		16,015
Corporate debt securities	35,679		798		115		36,362
Total debt securities	$	190,309	$	3,347	$	319	$	193,337

As of December 31, 2017
(in thousands)
Amortized
Cost

Gross
Unrealized
Gains

Gross
Unrealized
Losses

Estimated
Fair Value
U.S. Government agencies and corporations $ 10,049
$ —
$ —
$ 10,049
State and political subdivisions 126,413
804
1,631
125,586
Mortgage-backed securities 1,906
4
13
1,897
Collateralized mortgage obligations 22,115
—
707
21,408
Corporate debt securities 35,136
548
281
35,403
Total $ 195,619
$ 1,356
$ 2,632
$ 194,343



	As of December 31, 2018
(in thousands)	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses		Estimated Fair Value
State and political subdivisions	$	131,177	$	314	$	2,437	$	129,054
Mortgage-backed securities	11,016		1		331		10,686
Collateralized mortgage obligations	18,527		—		669		17,858
Corporate debt securities	35,102		331		467		34,966
Total debt securities	$	195,822	$	646	$	3,904	$	192,564

~~Investment~~Debt securities with a carrying value of ~~$217.8~~$262.6 million and ~~$237.4~~$197.2 million at September 30, ~~2018~~2019 and December 31, ~~2017~~2018, respectively, were pledged on public deposits, securities sold under agreements to repurchase and for other purposes, as required or permitted by law.

~~As of September 30, 2018, the Company owned $0.4 million of equity securities in banks and financial service-related companies, and $2.4 million of mutual funds invested in~~Certain debt securities AFS and other debt instruments that will cause units of the fund to be deemed to be qualified under the Community Reinvestment Act. Prior to January 1, 2018, we accounted for our marketable equity securities at fair value with unrealized gains and losses recognized in accumulated other comprehensive income on the balance sheet. Realized gains and losses on marketable equity securities sold or impaired were recognized in noninterest income. Effective with the January 1, 2018 adoption of ASU 2016-01, both the realized

and unrealized net gains and losses on equity securities are required to be recognized in the statement of income. A breakdown between net realized and unrealized gains and losses is provided later in this financial statement footnote. These net changes are included in the other gains line item in the noninterest income section of the ~~Consolidated Statements of Income~~.

~~The summary of investment securities shows that some of the securities in the available for sale and held to maturity investment portfolios had unrealized losses, or~~HTM were temporarily impaired as of September 30, ~~2018~~2019 and December 31, ~~2017~~2018. This temporary impairment represents the estimated amount of loss that would be realized if the securities were sold on the valuation date.

The following tables present information pertaining to debt securities with gross unrealized losses as of September 30, ~~2018~~2019 and December 31, ~~2017~~2018, aggregated by investment category and length of time that individual securities have been in a continuous loss position:

As of September 30, 2018

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 2
$ 539
$ 14
$ 4,980
$ 28
$ 5,519
$ 42
State and political subdivisions 115
46,374
697
5,350
134
51,724
831
Mortgage-backed securities 26
40,039
1,613
7,591
267
47,630
1,880
Collateralized mortgage obligations 41
44,912
1,269
116,814
7,605
161,726
8,874
Corporate debt securities 12
50,439
1,149
12,230
363
62,669
1,512
Total 196
$ 182,303
$ 4,742
$ 146,965
$ 8,397
$ 329,268
$ 13,139



		As of September 30, 2019
	Number of Securities	Less than 12 Months				12 Months or More				Total
Available for Sale	Number of Securities	Fair Value		Unrealized Losses		Fair Value		Unrealized Losses		Fair Value		Unrealized Losses
(in thousands, except number of securities)
State and political subdivisions	18	$	8,985	$	86	$	2,205	$	6	$	11,190	$	92
Mortgage-backed securities	7	3,210		11		1,266		5		4,476		16
Collateralized mortgage obligations	22	37,504		204		61,254		941		98,758		1,145
Corporate debt securities	5	4,519		7		13,058		42		17,577		49
Total	52	$	54,218	$	308	$	77,783	$	994	$	132,001	$	1,302

As of December 31, 2017

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)
U.S. Government agencies and corporations 3
$ 15,626
$ 90
$ —
$ —
$ 15,626
$ 90
State and political subdivisions 34
11,705
167
1,800
30
13,505
197
Mortgage-backed securities 20
37,964
359
3,961
69
41,925
428
Collateralized mortgage obligations 35
37,881
489
122,757
4,683
160,638
5,172
Corporate debt securities 12
55,340
298
8,778
129
64,118
427
Other equity securities 1
—
—
1,944
56
1,944
56
Total 105
$ 158,516
$ 1,403
$ 139,240
$ 4,967
$ 297,756
$ 6,370



		As of December 31, 2018
	Number of Securities	Less than 12 Months				12 Months or More				Total
	Number of Securities	Fair Value		Unrealized Losses		Fair Value		Unrealized Losses		Fair Value		Unrealized Losses
(in thousands, except number of securities)
U.S. Government agencies and corporations	2	$	—	$	—	$	5,495	$	27	$	5,495	$	27
State and political subdivisions	75	27,508		121		12,140		258		39,648		379
Mortgage-backed securities	24	1,893		15		44,882		1,057		46,775		1,072
Collateralized mortgage obligations	40	3,906		75		134,742		6,351		138,648		6,426
Corporate debt securities	11	—		—		58,040		1,017		58,040		1,017
Total	152	$	33,307	$	211	$	255,299	$	8,710	$	288,606	$	8,921

As of September 30, 2018

Number
of
Securities
Less than 12 Months 12 Months or More Total
Held to Maturity
Fair
Value

Unrealized
Losses

Fair
Value

Unrealized
Losses

Fair
Value

Unrealized
Losses
(in thousands, except number of securities)
State and political subdivisions 257
$ 54,969
$ 1,271
$ 33,512
$ 2,472
$ 88,481
$ 3,743
Mortgage-backed securities 6
10,016
524
820
40
10,836
564
Collateralized mortgage obligations 7
—
—
18,259
1,104
18,259
1,104
Corporate debt securities 13
18,126
345
2,722
174
20,848
519
Total 283
$ 83,111
$ 2,140
$ 55,313
$ 3,790
$ 138,424
$ 5,930



		As of September 30, 2019
	Number of Securities	Less than 12 Months				12 Months or More				Total
Held to Maturity	Number of Securities	Fair Value		Unrealized Losses		Fair Value		Unrealized Losses		Fair Value		Unrealized Losses
(in thousands, except number of securities)
State and political subdivisions	14	$	2,886	$	16	$	2,107	$	32	$	4,993	$	48
Mortgage-backed securities	4	—		—		1,059		2		1,059		2
Collateralized mortgage obligations	5	3,472		46		7,437		108		10,909		154
Corporate debt securities	3	496		4		2,788		111		3,284		115
Total	26	$	6,854	$	66	$	13,391	$	253	$	20,245	$	319

As of December 31, 2017

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 167
$ 33,237
$ 393
$ 25,843
$ 1,238
$ 59,080
$ 1,631
Mortgage-backed securities 4
349
2
887
11
1,236
13
Collateralized mortgage obligations 7
5,221
90
16,168
617
21,389
707
Corporate debt securities 3
3,093
4
2,617
277
5,710
281
Total 181
$ 41,900
$ 489
$ 45,515
$ 2,143
$ 87,415
$ 2,632



		As of December 31, 2018
	Number of Securities	Less than 12 Months				12 Months or More				Total
	Number of Securities	Fair Value		Unrealized Losses		Fair Value		Unrealized Losses		Fair Value		Unrealized Losses
(in thousands, except number of securities)
State and political subdivisions	223	$	20,905	$	130	$	56,154	$	2,307	$	77,059	$	2,437
Mortgage-backed securities	6	9,486		298		1,138		33		10,624		331
Collateralized mortgage obligations	8	—		—		17,849		669		17,849		669
Corporate debt securities	5	8,177		181		5,685		286		13,862		467
Total	242	$	38,568	$	609	$	80,826	$	3,295	$	119,394	$	3,904

The ~~Company's~~Company’s assessment of OTTI is based on its reasonable judgment of the specific facts and circumstances impacting each individual debt security at the time such assessments are made. The Company reviews and considers factual information, including expected cash flows, the structure of the debt security, the creditworthiness of the issuer, the type of underlying assets and the current and anticipated market conditions.

At September 30, 2018 and December 31, 2017, the Company’s mortgage-backed securities and collateralized mortgage obligations portfolios consisted of securities predominantly backed by one- to four-family mortgage loans and underwritten to the standards of and guaranteed by the following government-sponsored agencies: the Federal Home Loan Mortgage Corporation, the Federal National Mortgage Association, and the Government National Mortgage Association. The receipt of principal, at par, and interest on mortgage-backed securities is guaranteed by the respective government-sponsored agency guarantor, such that the Company believes that its mortgage-backed securities and collateralized mortgage obligations do not expose the Company to credit-related losses.

~~At September 30, 2018,~~2019, approximately 53% of the municipal bonds held by the Company were Iowa-based, and approximately ~~24%~~21% were Minnesota-based. The Company does not intend to sell these municipal obligations, and it is more likely than not that the Company will not be required to sell them until the recovery of their cost. Due to the issuers’ continued satisfaction of their obligations under the securities in accordance with their contractual terms and the expectation that they will continue to do so, management’s intent and ability to hold these securities for a period of time sufficient to allow for any anticipated recovery in fair value, as well as the evaluation of the fundamentals of the issuers’ financial conditions and other objective evidence, the Company believed that the municipal obligations identified in the tables above were only temporarily impaired as of September 30, ~~2018~~2019 and December 31, ~~2017.~~2018.

At September 30, ~~2018~~2019 and December 31, ~~2017,~~2018, the Company’s MBS and CMOs portfolios consisted of securities predominantly backed by one- to four-family mortgage loans and underwritten to the standards of and guaranteed by the following government-sponsored agencies: the FHLMC, the FNMA, and the GNMA. The receipt of principal, at par, and interest on MBS is guaranteed by the respective government-sponsored agency guarantor, such that the Company believes that its MBS and CMOs do not expose the Company to credit-related losses.

At September 30, 2019, all but two, and on December 31, 2018, all but one, of the Company’s corporate bonds held an investment grade rating from Moody’s, S&P or Kroll, or carried a guarantee from an agency of the US government. We have evaluated financial statements of the ~~company~~companies issuing the non-investment grade ~~bond~~bonds and found the ~~company’s~~companies’ earnings and equity ~~position~~positions to be satisfactory and in line with industry norms. Therefore, we expect to receive all contractual payments. The internal evaluation of the non-investment grade ~~bond~~bonds along with the investment grade ratings on the remainder of the corporate portfolio lead us to conclude that all of the corporate bonds in our portfolio will continue to pay according to their contractual terms. Since the Company has the ability and intent to hold securities until price recovery, we believe that there is no ~~other-than-temporary-impairment~~OTTI in the corporate bond portfolio.

It is reasonably possible that the fair values of the Company’s ~~investment~~debt securities could decline in the future if interest rates increase or the overall economy or the financial conditions of the issuers deteriorate. As a result, there is a risk that OTTI may be recognized in the future, and any such amounts could be material to the Company’s consolidated statements of income.

Unless certain conditions are met, investment securities classified as held to maturity may not be sold without calling into question the Company’s intent to hold other debt securities so classified (“tainting”). One acceptable condition, outlined in Accounting Standards Codification 320-10-25-6(a), is the significant deterioration of an issuer’s creditworthiness. During the first quarter of 2017, $1.2 million of debt securities from a single issuer in the state and political subdivisions category were identified by the Company as having an elevated level of credit risk and were internally classified as “watch.” Given the significant deterioration of the issuer’s creditworthiness, the Company sold the debt securities in March 2017. The Company believes the sale was in accordance with applicable accounting guidance and did not taint the remainder of the held to maturity portfolio.

The contractual maturity distribution of investment debt securities at September 30, ~~2018~~2019, is summarized as follows:

Available For Sale Held to Maturity
(in thousands)
Amortized
Cost
Fair Value
Amortized
Cost
Fair Value
Due in one year or less $ 27,913
$ 27,866
$ 734
$ 736
Due after one year through five years 99,630
98,105
24,275
23,867
Due after five years through ten years 55,757
55,700
97,511
95,353
Due after ten years 3,354
3,322
38,373
36,928
Debt securities without a single maturity date 233,412
222,773
30,840
29,173
Total $ 420,066
$ 407,766
$ 191,733
$ 186,057



	Available For Sale				Held to Maturity
(in thousands)	Amortized Cost		Fair Value		Amortized Cost		Fair Value
Due in one year or less	$	9,359	$	9,362	$	1,918	$	1,925
Due after one year through five years	18,094		18,189		21,985		22,081
Due after five years through ten years	149,934		151,204		34,248		34,877
Due after ten years	85,255		87,183		105,384		107,508
Debt securities without a single maturity date	236,460		237,340		26,774		26,946
Total	$	499,102	$	503,278	$	190,309	$	193,337

~~Mortgage-backed securities~~MBS and ~~collateralized mortgage obligations~~CMOs are collateralized by mortgage loans and guaranteed by U.S. government agencies. Our experience has indicated that principal payments will be collected sooner than scheduled because of prepayments. Therefore, these securities are not ~~scheduled~~reflected in the maturity categories indicated above.

Realized gains and losses on sales and calls are determined on the basis of specific identification of investments based on the trade date. Realized gains (losses) on ~~investments~~debt securities due to sale or call, including impairment losses, for the three and nine months ended September 30, ~~2018~~2019 and ~~2017,~~2018, were as follows:

Three Months Ended September 30, Nine Months Ended September 30,
(in thousands) 2018 2017 2018 2017
Debt securities available for sale:
Gross realized gains $ 194
$ 179
203
199
Gross realized losses (2 ) (3 ) (2 ) (3 )
Net realized gain $ 192
$ 176
$ 201
$ 196
Debt securities held to maturity:
Gross realized gains $ —
$ —
$ —
$ 43
Gross realized losses —
—
(4 ) —
Net realized gain (loss) $ —
$ —
$ (4 ) $ 43
Total net realized gain on sale or call of debt securities $ 192
$ 176
$ 197
$ 239

~~The following tables present the net gains and losses on equity investments during the three and nine months ended September 30, 2018, disaggregated into realized and unrealized gains and losses:~~

Three Months Ended September 30, Nine Months Ended September 30,
(in thousands) 2018 2017 2018 2017
Net losses recognized $ (10 ) $ —
$ (34 ) $ —
Less: Net gains and losses recognized due to sales —
—
—
—
Unrealized losses on securities still held at the reporting date $ (10 ) $ —
$ (34 ) $ —



	Three Months Ended September 30,						Nine Months Ended September 30,
(in thousands)	2019			2018			2019			2018
Debt securities available for sale:
Gross realized gains	$	18		$	194		$	124		$	203
Gross realized losses	(1		)	(2		)	(56		)	(2		)
Net realized gains	$	17		$	192		$	68		$	201
Debt securities held to maturity:
Gross realized gains	$	11		$	—		$	12		$	—
Gross realized losses	(5		)	—			(8		)	(4		)
Net realized gain (loss)	$	6		$	—		$	4		$	(4	)
Total net realized gain on sale or call of debt securities	$	23		$	192		$	72		$	197

~~Gains and losses on equity securities is included in other gain (loss) on the consolidated statements of income.~~

4.5. Loans Receivable and the Allowance for Loan Losses

The composition of loans held for investment, net of unearned income, and the allowance for loan losses ~~and loans~~ by portfolio segment and ~~based on~~ impairment method are as follows:

Allowance for Loan Losses and Recorded Investment in Loan Receivables
As of September 30, 2018 and December 31, 2017
(in thousands) Agricultural Commercial and Industrial Commercial Real Estate Residential Real Estate Consumer Total
September 30, 2018
Loans receivable
Individually evaluated for impairment $ 6,711
$ 12,924
$ 17,375
$ 3,981
$ 8
$ 40,999
Collectively evaluated for impairment 96,496
510,357
1,223,311
450,246
38,788
2,319,198
Purchased credit impaired loans —
52
13,104
4,296
—
17,452
Total $ 103,207
$ 523,333
$ 1,253,790
$ 458,523
$ 38,796
$ 2,377,649
Allowance for loan losses:
Individually evaluated for impairment $ 195
$ 3,059
$ 4,183
$ 143
$ —
$ 7,580
Collectively evaluated for impairment 2,532
5,183
12,563
2,356
251
22,885
Purchased credit impaired loans —
—
343
470
—
813
Total $ 2,727
$ 8,242
$ 17,089
$ 2,969
$ 251
$ 31,278



	Recorded Investment in Loan Receivables and Allowance for Loan Losses
	As of September 30, 2019 and December 31, 2018
(in thousands)	Agricultural		Commercial and Industrial		Commercial Real Estate		Residential Real Estate		Consumer		Total
September 30, 2019
Loans held for investment, net of unearned income
Individually evaluated for impairment	$	3,954	$	11,516	$	8,379	$	611	$	21	$	24,481
Collectively evaluated for impairment	147,047		859,365		1,797,714		587,313		85,262		3,476,701
Purchased credit impaired loans	983		311		17,776		4,432		44		23,546
Total	$	151,984	$	871,192	$	1,823,869	$	592,356	$	85,327	$	3,524,728
Allowance for loan losses:
Individually evaluated for impairment	$	147	$	2,749	$	979	$	75	$	—	$	3,950
Collectively evaluated for impairment	3,981		6,244		13,776		2,087		376		26,464
Purchased credit impaired loans	—		1		716		401		—		1,118
Total	$	4,128	$	8,994	$	15,471	$	2,563	$	376	$	31,532

(in thousands) Agricultural Commercial and Industrial Commercial Real Estate Residential Real Estate Consumer Total
December 31, 2017
Loans receivable
Individually evaluated for impairment $ 2,969
$ 9,734
$ 10,386
$ 3,722
$ —
$ 26,811
Collectively evaluated for impairment 102,543
493,844
1,147,133
460,475
36,158
2,240,153
Purchased credit impaired loans —
46
14,452
5,233
—
19,731
Total $ 105,512
$ 503,624
$ 1,171,971
$ 469,430
$ 36,158
$ 2,286,695
Allowance for loan losses:
Individually evaluated for impairment $ 140
$ 1,126
$ 2,157
$ 226
$ —
$ 3,649
Collectively evaluated for impairment 2,650
7,392
11,144
2,182
244
23,612
Purchased credit impaired loans —
—
336
462
—
798
Total $ 2,790
$ 8,518
$ 13,637
$ 2,870
$ 244
$ 28,059



(in thousands)	Agricultural		Commercial and Industrial		Commercial Real Estate		Residential Real Estate		Consumer		Total
December 31, 2018
Loans held for investment, net of unearned income
Individually evaluated for impairment	$	4,090	$	8,957	$	7,957	$	1,760	$	24	$	22,788
Collectively evaluated for impairment	92,866		524,182		1,246,589		455,941		39,404		2,358,982
Purchased credit impaired loans	—		49		12,782		4,178		—		17,009
Total	$	96,956	$	533,188	$	1,267,328	$	461,879	$	39,428	$	2,398,779
Allowance for loan losses:
Individually evaluated for impairment	$	322	$	2,159	$	2,683	$	120	$	—	$	5,284
Collectively evaluated for impairment	3,315		5,318		12,232		1,753		208		22,826
Purchased credit impaired loans	—		1		720		476		—		1,197
Total	$	3,637	$	7,478	$	15,635	$	2,349	$	208	$	29,307

~~As of September 30, 2018, the gross purchased credit impaired loans included above were $18.3 million, with a discount of $0.9 million.~~

Loans with unpaid principal in the amount of ~~$459.1~~$964.0 million and ~~$477.6~~$444.6 million at September 30, ~~2018~~2019 and December 31, ~~2017~~2018, respectively, were pledged to the ~~Federal Home Loan Bank (the “FHLB”)~~FHLB as collateral for borrowings.

The changes in the ~~allowance for loan losses~~ALLL by portfolio segment were as follows:

Allowance for Loan Loss Activity
For the Three Months Ended September 30, 2018 and 2017
(in thousands) Agricultural Commercial and Industrial Commercial Real Estate Residential Real Estate Consumer Total
2018
Beginning balance $ 2,656
$ 8,557
$ 16,341
$ 2,990
$ 256
$ 30,800
Charge-offs (365 ) (108 ) (17 ) —
(327 ) (817 )
Recoveries 41
78
77
131
18
345
Provision 395
(285 ) 688
(152 ) 304
950
Ending balance $ 2,727
$ 8,242
$ 17,089
$ 2,969
$ 251
$ 31,278
2017
Beginning balance $ 2,666
$ 7,959
$ 9,013
$ 2,650
$ 222
$ 22,510
Charge-offs (318 ) (534 ) —
(75 ) (51 ) (978 )
Recoveries 150
113
201
126
4
594
Provision 67
2,157
1,166
915
79
4,384
Ending balance $ 2,565
$ 9,695
$ 10,380
$ 3,616
$ 254
$ 26,510




	Allowance for Loan Loss Activity
	For the Three Months Ended September 30, 2019 and 2018
(in thousands)	Agricultural			Commercial and Industrial			Commercial Real Estate			Residential Real Estate			Consumer			Total
2019
Beginning balance	$	3,720		$	7,633		$	13,655		$	3,377		$	306		$	28,691
Charge-offs	(986		)	(328		)	—			(121		)	(200		)	(1,635		)
Recoveries	22			9			8			49			124			212
Provision (negative provision)	1,372			1,680			1,808			(742		)	146			4,264
Ending balance	$	4,128		$	8,994		$	15,471		$	2,563		$	376		$	31,532
2018
Beginning balance	$	2,656		$	8,557		$	16,341		$	2,990		$	256		$	30,800
Charge-offs	(365		)	(108		)	(17		)	—			(327		)	(817		)
Recoveries	41			78			77			131			18			345
Provision (negative provision)	395			(285		)	688			(152		)	304			950
Ending balance	$	2,727		$	8,242		$	17,089		$	2,969		$	251		$	31,278

Allowance for Loan Loss Activity
For the Nine Months Ended September 30, 2018 and 2017
(in thousands) Agricultural Commercial and Industrial Commercial Real Estate Residential Real Estate Consumer Total
2018
Beginning balance $ 2,790
$ 8,518
$ 13,637
$ 2,870
$ 244
$ 28,059
Charge-offs (633 ) (198 ) (281 ) (107 ) (365 ) (1,584 )
Recoveries 56
260
193
208
36
753
Provision 514
(338 ) 3,540
(2 ) 336
4,050
Ending balance $ 2,727
$ 8,242
$ 17,089
$ 2,969
$ 251
$ 31,278
2017
Beginning balance $ 2,003
$ 6,274
$ 9,860
$ 3,458
$ 255
$ 21,850
Charge-offs (1,202 ) (1,063 ) (106 ) (155 ) (211 ) (2,737 )
Recoveries 164
215
216
126
11
732
Provision 1,600
4,269
410
187
199
6,665
Ending balance $ 2,565
$ 9,695
$ 10,380
$ 3,616
$ 254
$ 26,510




	Allowance for Loan Loss Activity
	For the Nine Months Ended September 30, 2019 and 2018
(in thousands)	Agricultural			Commercial and Industrial			Commercial Real Estate			Residential Real Estate			Consumer			Total
2019
Beginning balance	$	3,637		$	7,478		$	15,635		$	2,349		$	208		$	29,307
Charge-offs	(1,137		)	(2,441		)	(960		)	(171		)	(469		)	(5,178		)
Recoveries	31			158			272			67			321			849
Provision	1,597			3,799			524			318			316			6,554
Ending balance	$	4,128		$	8,994		$	15,471		$	2,563		$	376		$	31,532
2018
Beginning balance	$	2,790		$	8,518		$	13,637		$	2,870		$	244		$	28,059
Charge-offs	(633		)	(198		)	(281		)	(107		)	(365		)	(1,584		)
Recoveries	56			260			193			208			36			753
Provision (negative provision)	514			(338		)	3,540			(2		)	336			4,050
Ending balance	$	2,727		$	8,242		$	17,089		$	2,969		$	251		$	31,278

Loan Portfolio Segment Risk Characteristics

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

basis. The collateral securing these loans may depreciate over time, may be difficult to appraise and may fluctuate in value based on the success of the business.

Commercial and Industrial - Commercial and industrial loans are primarily made based on the reported cash flow of the borrower and secondarily on the underlying collateral provided by the borrower. The collateral support provided by the borrower for most of these loans and the probability of repayment are based on the liquidation of the pledged collateral and enforcement of a personal guarantee, if any exists. The primary repayment risks of commercial and industrial loans are that the cash flows of the borrower may be unpredictable, and the collateral securing these loans may fluctuate in value. The size of the loans the Company can offer to commercial customers is less than the size of the loans that competitors with larger lending limits can offer. This may limit the Company’s ability to establish relationships with the largest businesses in the areas in which the Company operates. As a result, the Company may assume greater lending risks than financial institutions that have a lesser concentration of such loans and tend to make loans to larger businesses. Collateral for these loans generally includes accounts receivable, inventory, equipment and real estate. However, depending on the overall financial condition of the borrower, some loans are made on an unsecured basis. The collateral securing these loans may depreciate over time, may be difficult to appraise and may fluctuate in value based on the success of the business. In addition, a decline in the U.S. economy could harm or continue to harm the businesses of the Company’s commercial and industrial customers and reduce the value of the collateral securing these loans.

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

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

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

Purchased Loans Policy

All purchased loans (nonimpaired and impaired) are initially measured at fair value as of the acquisition date in accordance with applicable authoritative accounting guidance. Credit discounts are included in the determination of fair value. An ~~allowance for loan losses~~ALLL is not recorded at the acquisition date for loans purchased.

Individual loans acquired through the completion of a transfer, including loans that have evidence of deterioration of credit quality since origination and for which it is probable, at acquisition, that the Company will be unable to collect all contractually required payments receivable, are referred to herein as ~~“purchased credit impaired~~PCI loans.” In determining the acquisition date fair value and estimated credit losses of ~~purchased credit impaired~~PCI loans, and in subsequent accounting, the Company accounts for loans individually. Contractually required payments for interest and principal that exceed the undiscounted cash flows expected at acquisition, or the “nonaccretable difference,” are not recognized as a yield adjustment or as a loss accrual or valuation allowance. Expected cash flows at the purchase date in excess of the fair value of loans, if any, are recorded as interest income over the expected life of the loans if the timing and amount of future cash flows are reasonably estimable. Subsequent to the purchase date, increases in cash flows over those expected at the purchase date are recognized as interest income

prospectively. The present value of any decreases in expected cash flows after the purchase date is recognized by recording an ~~allowance for loan losses~~ALLL and a provision for loan losses. If the Company does not have the information necessary to reasonably estimate cash flows to be expected, it may use the cost-recovery method or cash-basis method of income recognition.

Charge-off Policy

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

When it is determined that a loan requires a partial or full charge-off, a request for approval of a charge-off is submitted to the ~~Company's~~Company’s President, ~~Executive~~Senior Vice President and Chief Credit Officer, and the Senior Regional Loan officer. The ~~Bank's~~Bank’s board of directors formally approves all loan charge-offs. Once a loan is charged-off, it cannot be restructured and returned to the ~~Company's~~Company’s books.

Allowance for Loan and Lease Losses

The Company requires the maintenance of an adequate ~~allowance for loan and lease losses (“ALLL”)~~ALLL in order to cover estimated probable losses without eroding the Company’s capital base. Calculations are done at each quarter end, or more frequently if warranted, to analyze the collectability of loans and to ensure the adequacy of the allowance. In line with FDIC ~~directives,~~guidance, the ALLL calculation does not include consideration of loans held for sale or off-balance-sheet credit exposures (such as unfunded letters of credit). Determining the appropriate level for the ALLL relies on the informed judgment of management, and as such, is subject to inexactness. Given the inherently imprecise nature of calculating the necessary ALLL, the Company’s policy permits the actual ALLL to be between 20% above and 5% below the “indicated reserve.”

Loans Reviewed Individually for Impairment

The Company identifies loans to be reviewed and evaluated individually for impairment based on current information and events and the probability that the borrower will be unable to repay all amounts due according to the contractual terms of the loan agreement. Specific areas of consideration include: size of credit exposure, risk rating, delinquency, nonaccrual status, and loan classification.

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

A loan modification is a change in an existing loan contract that has been agreed to by the borrower and the Bank, which may or may not be a ~~troubled debt restructure or “TDR.”~~TDR. All loans deemed TDR are considered impaired. A loan is considered a TDR when, for economic or legal reasons related to a borrower’s financial difficulties, a concession is granted to the borrower that would not otherwise be considered. Both financial distress on the part of the borrower and the Bank’s granting of a concession, which are detailed further below, must be present in order for the loan to be considered a TDR.

All of the following factors are indicators that the ~~debtor~~borrower is experiencing financial difficulties (one or more items may be present):

The ~~debtor~~borrower is currently in default on any of its debt.

The ~~debtor~~borrower has declared or is in the process of declaring bankruptcy.

There is significant doubt as to whether the ~~debtor~~borrower will continue to be a going concern.

Currently, the ~~debtor~~borrower has securities being held as collateral that have been delisted, are in the process of being delisted, or are under threat of being delisted from an exchange.

Based on estimates and projections that only encompass the current business capabilities, the ~~debtor~~borrower forecasts that its entity-specific cash flows will be insufficient to service the debt (both interest and principal) in accordance with the contractual terms of the existing agreement through maturity.

Absent the current modification, the ~~debtor~~borrower cannot obtain funds from sources other than the existing creditors at an effective interest rate equal to the current market interest rate for similar debt for a non-troubled ~~debtor.~~borrower.

The following factors are potential 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 that the current market interest rate for new debt with similar risk characteristics.

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

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

The borrower receives a reduction of the accrued interest.

The following table sets forth information on the Company’s TDRs by class of loan occurring during the stated periods:

Three Months Ended September 30,
2018 2017
Number of Contracts Pre-Modification Outstanding Recorded Investment Post-Modification Outstanding Recorded Investment Number of Contracts Pre-Modification Outstanding Recorded Investment Post-Modification Outstanding Recorded Investment
(dollars in thousands)

Troubled Debt Restructurings⁽¹⁾:

Total —
$ —
$ —
—
$ —
$ —



	Three Months Ended September 30,
	2019					2018
	Number of Contracts	Pre-Modification Outstanding Recorded Investment		Post-Modification Outstanding Recorded Investment		Number of Contracts	Pre-Modification Outstanding Recorded Investment		Post-Modification Outstanding Recorded Investment
(dollars in thousands)
Troubled Debt Restructurings⁽¹⁾:
Agricultural
Extended maturity date	7	$	341	$	341	—	$	—	$	—
Commercial and industrial
Extended maturity date	1	1,863		1,863		—	—		—
Farmland
Extended maturity date	1	$	158	$	158	—	$	—	$	—
One- to four- family junior liens
Extended maturity date	1	$	5	$	5	—	$	—	$	—
Total	10	$	2,367	$	2,367	—	$	—	$	—

Nine Months Ended September 30,
2018 2017
(dollars in thousands) 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

Troubled Debt Restructurings⁽¹⁾:

Commercial and industrial
Extended maturity date —
$ —
$ —
6
$ 2,037
$ 2,083
Commercial real estate:
Farmland
Extended maturity date 1
86
86
2
176
176
Commercial real estate-other
Extended maturity date —
—
—
1
968
968
Other —
—
—
1
10,546
10,923
Total 1
$ 86
$ 86
10
$ 13,727
$ 14,150




	Nine Months Ended September 30,
	2019					2018
(dollars in thousands)	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
Troubled Debt Restructurings⁽¹⁾:
Agricultural
Extended maturity date	7	$	341	$	341	—	$	—	$	—
Commercial and industrial
Extended maturity date	1	$	1,863	$	1,863	—	$	—	$	—
Commercial real estate:
Farmland
Extended maturity date	1	$	158	$	158	1	$	86	$	86
Residential real estate:
One- to four- family first liens
Extended maturity date	3	240		239		—	—		—
One- to four- family junior liens
Extended maturity date	3	81		81		—	—		—
Total	15	$	2,683	$	2,682	1	$	86	$	86

(1) TDRs may include multiple concessions, and the disclosure classifications are based on the primary concession provided to the borrower.

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

Three Months Ended September 30, Nine Months Ended September 30,
2018 2017 2018 2017
(dollars in thousands) Number of Contracts Recorded Investment Number of Contracts Recorded Investment Number of Contracts Recorded Investment Number of Contracts Recorded Investment

Troubled Debt Restructurings⁽¹⁾ That Subsequently Defaulted:

Commercial and industrial
Extended maturity date —
$ —
—
$ —
—
$ —
4
$ 1,504
Commercial real estate:
Commercial real estate-other
Extended maturity date —
—
—
—
—
—
1
968
Total —
$ —
—
$ —
—
$ —
5
$ 2,472



	Three Months Ended September 30,						Nine Months Ended September 30,
	2019			2018			2019			2018
(dollars in thousands)	Number of Contracts	Recorded Investment		Number of Contracts	Recorded Investment		Number of Contracts	Recorded Investment		Number of Contracts	Recorded Investment
Troubled Debt Restructurings⁽¹⁾ That Subsequently Defaulted:
Agricultural
Extended maturity date	6	$	315	—	$	—	6	$	315	—	$	—
Farmland
Extended maturity date	1	158		—	—		1	158		—	—
Residential real estate:
One- to four- family first liens
Extended maturity date	3	239		—	—		3	239		—	—
One- to four- family junior liens
Extended maturity date	2	30		—	—		2	30		—	—
Total	12	$	742	—	$	—	12	$	742	—	$	—

(1) TDRs may include multiple concessions, and the disclosure classifications are based on the primary concession provided to the borrower.

Loans Reviewed Collectively for Impairment

All loans not evaluated individually for impairment will be separated into homogeneous pools to be collectively evaluated. Loans will be first grouped into the various loan types (i.e. commercial, agricultural, consumer, etc.) and further segmented within each subset by risk classification (i.e. pass, special mention/watch, and substandard). Homogeneous loans past due 60-89 days and 90 days or more are classified special mention/watch and substandard, respectively, for allocation purposes.

The Company’s historical loss experience for each group segmented by loan type is calculated for the prior 20 quarters as a starting point for estimating losses. In addition, other prevailing qualitative or environmental factors likely to cause probable losses to vary from historical data are incorporated in the form of adjustments to increase or decrease the loss rate applied to each group. These adjustments are documented and fully explain how the current information, events, circumstances, and conditions impact the historical loss measurement assumptions.

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

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

Changes in the quality and experience of lending staff and management.

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

Changes in the volume and severity of past due loans, classified loans and non-performing loans.

The existence and potential impact of any concentrations of credit.

Changes in the nature and terms of loans such as growth rates and utilization rates.

Changes in the value of underlying collateral for collateral-dependent loans, considering the Company’s disposition bias.

The effect of other external factors such as the legal and regulatory environment.

The Company may also consider other qualitative factors for additional ~~allowance~~ALLL allocations, including changes in the Company’s loan review process. Changes in the criteria used in this evaluation or the availability of new information could cause the ~~allowance~~ALLL to be increased or decreased in future periods. In addition, bank regulatory agencies, as part of their examination process, may require adjustments to the ~~allowance for loan losses~~ALLL based on their judgments and estimates.

~~The items listed above are used to determine the pass percentage for loans evaluated under ASC 450, and as such, are applied~~In addition to the ~~loans risk rated pass. Due~~qualitative factors identified above, the Bank applies a qualitative adjustment to ~~the inherent risks associated with special mention/watch~~each Watch and Substandard risk-rated loans (i.e. early stages of financial deterioration, technical exceptions, etc.), this subset is reserved at a level that will cover losses above a pass allocation for loans that had a loss in the last 20 quarters in which the loan was risk-rated special mention/watch at the time of the loss. Substandard loans carry greater risk than special mention/watch loans, and as such, this subset is reserved at a level that will cover losses above a pass allocation for loans that had a loss in the last 20 quarters in which the loan was risk-rated substandard at the time of the loss. Ongoing analysis is performed to support these factor multiples.portfolio segment.

The following tables set forth the risk category of loans by class of ~~loans~~receivable and credit quality indicator based on the most recent analysis performed, as of September 30, ~~2018~~2019 and December 31, ~~2017:~~2018:

(in thousands) Pass Special Mention/ Watch Substandard Doubtful Loss Total
September 30, 2018
Agricultural $ 78,007
$ 17,266
$ 7,934
$ —
$ —
$ 103,207
Commercial and industrial 482,136
21,166
20,027
4
—
523,333
Commercial real estate:
Construction and development 221,114
1,078
1,132
—
—
223,324
Farmland 69,824
6,970
8,941
—
—
85,735
Multifamily 124,092
1,391
1,180
—
—
126,663
Commercial real estate-other 748,837
44,603
24,628
—
—
818,068
Total commercial real estate 1,163,867
54,042
35,881
—
—
1,253,790
Residential real estate:
One- to four- family first liens 333,974
2,289
6,492
—
—
342,755
One- to four- family junior liens 113,526
687
1,555
—
—
115,768
Total residential real estate 447,500
2,976
8,047
—
—
458,523
Consumer 38,621
148
—
27
—
38,796
Total $ 2,210,131
$ 95,598
$ 71,889
$ 31
$ —
$ 2,377,649



(in thousands)	Pass		Special Mention/ Watch		Substandard		Doubtful		Loss		Total
September 30, 2019
Agricultural	$	127,438	$	16,027	$	8,519	$	—	$	—	$	151,984
Commercial and industrial	826,058		24,213		20,874		2		45		871,192
Commercial real estate:
Construction and development	284,223		10,854		1,509		—		—		296,586
Farmland	148,480		23,104		16,810		—		—		188,394
Multifamily	225,753		9,237		1,155		—		—		236,145
Commercial real estate-other	1,036,451		45,281		21,012		—		—		1,102,744
Total commercial real estate	1,694,907		88,476		40,486		—		—		1,823,869
Residential real estate:
One- to four- family first liens	406,413		3,898		5,711		172		—		416,194
One- to four- family junior liens	174,669		744		749		—		—		176,162
Total residential real estate	581,082		4,642		6,460		172		—		592,356
Consumer	85,118		—		188		21		—		85,327
Total	$	3,314,603	$	133,358	$	76,527	$	195	$	45	$	3,524,728

(in thousands) Pass Special Mention/ Watch Substandard Doubtful Loss Total
December 31, 2017
Agricultural $ 80,377
$ 21,989
$ 3,146
$ —
$ —
$ 105,512
Commercial and industrial 453,363
23,153
27,102
6
—
503,624
Commercial real estate:
Construction and development 162,968
1,061
1,247
—
—
165,276
Farmland 76,740
10,357
771
—
—
87,868
Multifamily 131,507
2,498
501
—
—
134,506
Commercial real estate-other 731,231
34,056
19,034
—
—
784,321
Total commercial real estate 1,102,446
47,972
21,553
—
—
1,171,971
Residential real estate:
One- to four- family first liens 340,446
2,776
9,004
—
—
352,226
One- to four- family junior liens 114,763
952
1,489
—
—
117,204
Total residential real estate 455,209
3,728
10,493
—
—
469,430
Consumer 36,059
—
68
31
—
36,158
Total $ 2,127,454
$ 96,842
$ 62,362
$ 37
$ —
$ 2,286,695



(in thousands)	Pass		Special Mention/ Watch		Substandard		Doubtful		Loss		Total
December 31, 2018
Agricultural	$	74,126	$	12,960	$	9,870	$	—	$	—	$	96,956
Commercial and industrial	499,042		13,583		20,559		4		—		533,188
Commercial real estate:
Construction and development	215,625		1,069		923		—		—		217,617
Farmland	72,924		4,818		11,065		—		—		88,807
Multifamily	133,310		1,431		—		—		—		134,741
Commercial real estate-other	766,702		38,275		21,186		—		—		826,163
Total commercial real estate	1,188,561		45,593		33,174		—		—		1,267,328
Residential real estate:
One- to four- family first liens	335,233		2,080		4,256		261		—		341,830
One- to four- family junior liens	118,146		426		1,477		—		—		120,049
Total residential real estate	453,379		2,506		5,733		261		—		461,879
Consumer	39,357		22		24		25		—		39,428
Total	$	2,254,465	$	74,664	$	69,360	$	290	$	—	$	2,398,779

Included within the special mention/watch, substandard, and doubtful categories at September 30, ~~2018~~2019 and December 31, ~~2017~~2018 are ~~purchased credit impaired~~PCI loans totaling ~~$11.1~~$14.4 million and ~~$12.6~~$8.9 million, respectively.

Below are descriptions of the risk classifications of our loan portfolio.

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 effected in the future.

The following table presents loans individually evaluated for impairment ~~excluding purchased credit impaired loans,~~ by class of ~~loan,~~receivable, as of September 30, ~~2018~~2019 and December 31, ~~2017:~~2018:

September 30, 2018 December 31, 2017
(in thousands) Recorded Investment Unpaid Principal Balance Related Allowance Recorded Investment Unpaid Principal Balance Related Allowance
With no related allowance recorded:
Agricultural $ 5,161
$ 5,661
$ —
$ 1,523
$ 2,023
$ —
Commercial and industrial 3,796
3,990
—
7,588
7,963
—
Commercial real estate:
Construction and development 84
84
—
84
84
—
Farmland 3,539
3,539
—
287
287
—
Multifamily 821
821
—
—
—
—
Commercial real estate-other 6,290
6,800
—
5,746
6,251
—
Total commercial real estate 10,734
11,244
—
6,117
6,622
—
Residential real estate:
One- to four- family first liens 2,677
2,737
—
2,449
2,482
—
One- to four- family junior liens 344
345
—
26
26
—
Total residential real estate 3,021
3,082
—
2,475
2,508
—
Consumer 8
8
—
—
—
—
Total $ 22,720
$ 23,985
$ —
$ 17,703
$ 19,116
$ —
With an allowance recorded:
Agricultural $ 1,550
$ 1,920
$ 195
$ 1,446
$ 1,446
$ 140
Commercial and industrial 9,128
9,258
3,059
2,146
2,177
1,126
Commercial real estate:
Construction and development —
—
—
—
—
—
Farmland 2,123
2,123
662
—
—
—
Multifamily —
—
—
—
—
—
Commercial real estate-other 4,518
12,184
3,521
4,269
11,536
2,157
Total commercial real estate 6,641
14,307
4,183
4,269
11,536
2,157
Residential real estate:
One- to four- family first liens 960
960
143
979
979
185
One- to four- family junior liens —
—
—
268
268
41
Total residential real estate 960
960
143
1,247
1,247
226
Consumer —
—
—
—
—
—
Total $ 18,279
$ 26,445
$ 7,580
$ 9,108
$ 16,406
$ 3,649
Total:
Agricultural $ 6,711
$ 7,581
$ 195
$ 2,969
$ 3,469
$ 140
Commercial and industrial 12,924
13,248
3,059
9,734
10,140
1,126
Commercial real estate:
Construction and development 84
84
—
84
84
—
Farmland 5,662
5,662
662
287
287
—
Multifamily 821
821
—
—
—
—
Commercial real estate-other 10,808
18,984
3,521
10,015
17,787
2,157
Total commercial real estate 17,375
25,551
4,183
10,386
18,158
2,157
Residential real estate:
One- to four- family first liens 3,637
3,697
143
3,428
3,461
185
One- to four- family junior liens 344
345
—
294
294
41
Total residential real estate 3,981
4,042
143
3,722
3,755
226
Consumer 8
8
—
—
—
—
Total $ 40,999
$ 50,430
$ 7,580
$ 26,811
$ 35,522
$ 3,649



	September 30, 2019						December 31, 2018
(in thousands)	Recorded Investment		Unpaid Principal Balance		Related Allowance		Recorded Investment		Unpaid Principal Balance		Related Allowance
With no related allowance recorded:
Agricultural	$	2,260	$	2,765	$	—	$	1,999	$	2,511	$	—
Commercial and industrial	6,636		9,472		—		2,761		2,977		—
Commercial real estate:
Construction and development	—		—		—		84		84		—
Farmland	2,409		2,410		—		110		110		—
Multifamily	—		—		—		—		—		—
Commercial real estate-other	1,400		1,907		—		1,533		2,046		—
Total commercial real estate	3,809		4,317		—		1,727		2,240		—
Residential real estate:
One- to four- family first liens	347		347		—		617		644		—
One- to four- family junior liens	—		—		—		292		293		—
Total residential real estate	347		347		—		909		937		—
Consumer	21		21		—		24		24		—
Total	$	13,073	$	16,922	$	—	$	7,420	$	8,689	$	—
With an allowance recorded:
Agricultural	$	1,694	$	1,987	$	147	$	2,091	$	2,097	$	322
Commercial and industrial	4,880		5,006		2,749		6,196		8,550		2,159
Commercial real estate:
Construction and development	—		—		—		—		—		—
Farmland	642		670		138		2,123		2,123		662
Multifamily	—		—		—		—		—		—
Commercial real estate-other	3,928		3,958		841		4,107		4,365		2,021
Total commercial real estate	4,570		4,628		979		6,230		6,488		2,683
Residential real estate:
One- to four- family first liens	264		264		75		851		851		120
One- to four- family junior liens	—		—		—		—		—		—
Total residential real estate	264		264		75		851		851		120
Consumer	—		—		—		—		—		—
Total	$	11,408	$	11,885	$	3,950	$	15,368	$	17,986	$	5,284
Total:
Agricultural	$	3,954	$	4,752	$	147	$	4,090	$	4,608	$	322
Commercial and industrial	11,516		14,478		2,749		8,957		11,527		2,159
Commercial real estate:
Construction and development	—		—		—		84		84		—
Farmland	3,051		3,080		138		2,233		2,233		662
Multifamily	—		—		—		—		—		—
Commercial real estate-other	5,328		5,865		841		5,640		6,411		2,021
Total commercial real estate	8,379		8,945		979		7,957		8,728		2,683
Residential real estate:
One- to four- family first liens	611		611		75		1,468		1,495		120
One- to four- family junior liens	—		—		—		292		293		—
Total residential real estate	611		611		75		1,760		1,788		120
Consumer	21		21		—		24		24		—
Total	$	24,481	$	28,807	$	3,950	$	22,788	$	26,675	$	5,284

The following table presents the average recorded investment and interest income recognized for loans individually evaluated for impairment ~~excluding purchased credit impaired loans,~~ by class of ~~loan,~~receivable, during the stated periods:

Three Months Ended September 30, Nine Months Ended September 30,
2018 2017 2018 2017
(in thousands) Average Recorded Investment Interest Income Recognized Average Recorded Investment Interest Income Recognized Average Recorded Investment Interest Income Recognized Average Recorded Investment Interest Income Recognized
With no related allowance recorded:
Agricultural $ 4,864
$ 71
$ 881
$ 17
$ 3,480
$ 180
$ 674
$ 50
Commercial and industrial 3,961
36
2,878
77
3,563
150
2,899
124
Commercial real estate:
Construction and development 84
—
423
—
84
—
434
2
Farmland 3,274
44
212
—
1,745
86
1,193
58
Multifamily 822
10
—
—
618
30
—
—
Commercial real estate-other 6,326
77
2,148
18
5,428
201
1,894
63
Total commercial real estate 10,506
131
2,783
18
7,875
317
3,521
123
Residential real estate:
One- to four- family first liens 2,578
34
2,183
23
1,942
53
2,197
69
One- to four- family junior liens 323
1
13
—
301
1
13
—
Total residential real estate 2,901
35
2,196
23
2,243
54
2,210
69
Consumer 4
—
—
—
2
—
—
—
Total $ 22,236
$ 273
$ 8,738
$ 135
$ 17,163
$ 701
$ 9,304
$ 366
With an allowance recorded:
Agricultural $ 1,974
$ —
$ 1,446
$ 11
$ 2,108
$ —
$ 1,460
$ 33
Commercial and industrial 8,905
43
8,458
85
7,778
89
8,423
163
Commercial real estate:
Construction and development —
—
311
—
—
—
232
—
Farmland 2,123
—
—
—
1,584
—
—
—
Multifamily —
—
—
—
—
—
—
—
Commercial real estate-other 4,536
16
12,863
—
4,443
—
12,881
44
Total commercial real estate 6,659
16
13,174
—
6,027
—
13,113
44
Residential real estate:
One- to four- family first liens 963
9
1,361
9
969
27
1,392
26
One- to four- family junior liens —
—
—
—
—
—
—
—
Total residential real estate 963
9
1,361
9
969
27
1,392
26
Consumer —
—
—
—
—
—
—
—
Total $ 18,501
$ 68
$ 24,439
$ 105
$ 16,882
$ 116
$ 24,388
$ 266
Total:
Agricultural $ 6,838
$ 71
$ 2,327
$ 28
$ 5,588
$ 180
$ 2,134
$ 83
Commercial and industrial 12,866
79
11,336
162
11,341
239
11,322
287
Commercial real estate:
Construction and development 84
—
734
—
84
—
666
2
Farmland 5,397
44
212
—
3,329
86
1,193
58
Multifamily 822
10
—
—
618
30
—
—
Commercial real estate-other 10,862
93
15,011
18
9,871
201
14,775
107
Total commercial real estate 17,165
147
15,957
18
13,902
317
16,634
167
Residential real estate:
One- to four- family first liens 3,541
43
3,544
32
2,911
80
3,589
95
One- to four- family junior liens 323
1
13
—
301
1
13
—
Total residential real estate 3,864
44
3,557
32
3,212
81
3,602
95
Consumer 4
—
—
—
2
—
—
—
Total $ 40,737
$ 341
$ 33,177
$ 240
$ 34,045
$ 817
$ 33,692
$ 632



	Three Months Ended September 30,								Nine Months Ended September 30,
	2019				2018				2019				2018
(in thousands)	Average Recorded Investment		Interest Income Recognized		Average Recorded Investment		Interest Income Recognized		Average Recorded Investment		Interest Income Recognized		Average Recorded Investment		Interest Income Recognized
With no related allowance recorded:
Agricultural	$	2,260	$	11	$	4,864	$	71	$	1,962	$	—	$	3,480	$	180
Commercial and industrial	5,199		2		3,961		36		4,961		—		3,563		150
Commercial real estate:
Construction and development	—		—		84		—		—		—		84		—
Farmland	2,410		—		3,274		44		1,710		—		1,745		86
Multifamily	—		—		822		10		—		—		618		30
Commercial real estate-other	1,541		7		6,326		77		1,361		20		5,428		201
Total commercial real estate	3,951		7		10,506		131		3,071		20		7,875		317
Residential real estate:
One- to four- family first liens	347		—		2,578		34		260		—		1,942		53
One- to four- family junior liens	—		—		323		1		—		—		301		1
Total residential real estate	347		—		2,901		35		260		—		2,243		54
Consumer	21		—		4		—		16		—		2		—
Total	$	11,778	$	20	$	22,236	$	273	$	10,270	$	20	$	17,163	$	701
With an allowance recorded:
Agricultural	$	1,527	$	—	$	1,974	$	—	$	1,378	$	31	$	2,108	$	—
Commercial and industrial	4,577		16		8,905		43		3,386		—		7,778		89
Commercial real estate:
Construction and development	—		—		—		—		—		—		—		—
Farmland	649		—		2,123		—		586		5		1,584		—
Multifamily	—		—		—		—		—		—		—		—
Commercial real estate-other	2,507		82		4,536		16		1,834		93		4,443		—
Total commercial real estate	3,156		82		6,659		16		2,420		98		6,027		—
Residential real estate:
One- to four- family first liens	265		2		963		9		266		7		969		27
One- to four- family junior liens	—		—		—		—		—		—		—		—
Total residential real estate	265		2		963		9		266		7		969		27
Consumer	—		—		—		—		—		—		—		—
Total	$	9,525	$	100	$	18,501	$	68	$	7,450	$	136	$	16,882	$	116
Total:
Agricultural	$	3,787	$	11	$	6,838	$	71	$	3,340	$	31	$	5,588	$	180
Commercial and industrial	9,776		18		12,866		79		8,347		—		11,341		239
Commercial real estate:
Construction and development	—		—		84		—		—		—		84		—
Farmland	3,059		—		5,397		44		2,296		5		3,329		86
Multifamily	—		—		822		10		—		—		618		30
Commercial real estate-other	4,048		89		10,862		93		3,195		113		9,871		201
Total commercial real estate	7,107		89		17,165		147		5,491		118		13,902		317
Residential real estate:
One- to four- family first liens	612		2		3,541		43		526		7		2,911		80
One- to four- family junior liens	—		—		323		1		—		—		301		1
Total residential real estate	612		2		3,864		44		526		7		3,212		81
Consumer	21		—		4		—		16		—		2		—
Total	$	21,303	$	120	$	40,737	$	341	$	17,720	$	156	$	34,045	$	817

The following table presents the contractual aging of the recorded investment in past due loans by class of ~~loans~~receivable at September 30, ~~2018~~2019 and December 31, ~~2017:~~2018:

(in thousands) 30 - 59 Days Past Due 60 - 89 Days Past Due 90 Days or More Past Due Total Past Due Current Total Loans Receivable
September 30, 2018
Agricultural $ 72
$ 100
$ 230
$ 402
$ 102,805
$ 103,207
Commercial and industrial 1,206
315
6,701
8,222
515,111
523,333
Commercial real estate:
Construction and development —
10
83
93
223,231
223,324
Farmland —
—
141
141
85,594
85,735
Multifamily —
—
—
—
126,663
126,663
Commercial real estate-other 4,198
101
3,814
8,113
809,955
818,068
Total commercial real estate 4,198
111
4,038
8,347
1,245,443
1,253,790
Residential real estate:
One- to four- family first liens 3,381
313
965
4,659
338,096
342,755
One- to four- family junior liens 225
94
377
696
115,072
115,768
Total residential real estate 3,606
407
1,342
5,355
453,168
458,523
Consumer 138
3
31
172
38,624
38,796
Total $ 9,220
$ 936
$ 12,342
$ 22,498
$ 2,355,151
$ 2,377,649

Included in the totals above are the following purchased credit impaired loans $ —
$ —
$ —
$ —
$ 17,452
$ 17,452

December 31, 2017
Agricultural $ 95
$ 118
$ 168
$ 381
$ 105,131
$ 105,512
Commercial and industrial 1,434
1,336
1,576
4,346
499,278
503,624
Commercial real estate:
Construction and development 57
97
82
236
165,040
165,276
Farmland 217
—
373
590
87,278
87,868
Multifamily —
25
—
25
134,481
134,506
Commercial real estate-other 74
—
1,852
1,926
782,395
784,321
Total commercial real estate 348
122
2,307
2,777
1,169,194
1,171,971
Residential real estate:
One- to four- family first liens 3,854
756
1,019
5,629
346,597
352,226
One- to four- family junior liens 325
770
271
1,366
115,838
117,204
Total residential real estate 4,179
1,526
1,290
6,995
462,435
469,430
Consumer 79
15
29
123
36,035
36,158
Total $ 6,135
$ 3,117
$ 5,370
$ 14,622
$ 2,272,073
$ 2,286,695

Included in the totals above are the following purchased credit impaired loans $ 164
$ 756
$ 553
$ 1,473
$ 18,258
$ 19,731



(in thousands)	30 - 59 Days Past Due		60 - 89 Days Past Due		90 Days or More Past Due		Total Past Due		Current		Total Loans Receivable
September 30, 2019
Agricultural	$	2,842	$	217	$	798	$	3,857	$	148,127	$	151,984
Commercial and industrial	2,252		487		6,140		8,879		862,313		871,192
Commercial real estate:
Construction and development	1,282		559		176		2,017		294,569		296,586
Farmland	342		303		3,846		4,491		183,903		188,394
Multifamily	794		—		—		794		235,351		236,145
Commercial real estate-other	604		1,237		2,919		4,760		1,097,984		1,102,744
Total commercial real estate	3,022		2,099		6,941		12,062		1,811,807		1,823,869
Residential real estate:
One- to four- family first liens	2,169		405		1,744		4,318		411,876		416,194
One- to four- family junior liens	395		—		140		535		175,627		176,162
Total residential real estate	2,564		405		1,884		4,853		587,503		592,356
Consumer	55		92		194		341		84,986		85,327
Total	$	10,735	$	3,300	$	15,957	$	29,992	$	3,494,736	$	3,524,728

Included in the totals above are the following purchased credit impaired loans	$	70	$	104	$	5,150	$	5,324	$	18,222	$	23,546

December 31, 2018
Agricultural	$	97	$	130	$	248	$	475	$	96,481	$	96,956
Commercial and industrial	2,467		9		4,475		6,951		526,237		533,188
Commercial real estate:
Construction and development	42		—		93		135		217,482		217,617
Farmland	44		—		529		573		88,234		88,807
Multifamily	—		—		—		—		134,741		134,741
Commercial real estate-other	436		2,655		1,327		4,418		821,745		826,163
Total commercial real estate	522		2,655		1,949		5,126		1,262,202		1,267,328
Residential real estate:
One- to four- family first liens	1,876		1,332		977		4,185		337,645		341,830
One- to four- family junior liens	406		114		474		994		119,055		120,049
Total residential real estate	2,282		1,446		1,451		5,179		456,700		461,879
Consumer	47		16		24		87		39,341		39,428
Total	$	5,415	$	4,256	$	8,147	$	17,818	$	2,380,961	$	2,398,779

Included in the totals above are the following purchased credit impaired loans	$	295	$	—	$	—	$	295	$	16,714	$	17,009

Non-accrual and Delinquent Loans

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

A non-accrual ~~asset~~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.

Delinquency status of a loan is determined by the number of days that have elapsed past the loan’s payment due date, using the following classification groupings: 30-59 days, 60-89 days and 90 days or more. Once a TDR has gone 90 days or more past due or is placed on nonaccrual status, it is included in the 90 days or more past due or nonaccrual totals.

The following table sets forth the composition of the Company’s recorded investment in loans on nonaccrual status and past due 90 days or more and still accruing by class of ~~loans, excluding purchased credit impaired loans,~~receivable as of September 30, ~~2018~~2019 and December 31, ~~2017:~~2018:

September 30, 2018 December 31, 2017
(in thousands) Non-Accrual Loans Past Due 90 Days or More and Still Accruing Non-Accrual Loans Past Due 90 Days or More and Still Accruing
Agricultural $ 662
$ —
$ 168
$ —
Commercial and industrial 11,208
—
7,124
—
Commercial real estate:
Construction and development 100
—
188
—
Farmland 2,367
—
386
—
Multifamily —
—
—
—
Commercial real estate-other 4,816
—
5,279
—
Total commercial real estate 7,283
—
5,853
—
Residential real estate:
One- to four- family first liens 1,277
171
1,228
205
One- to four- family junior liens 413
—
346
2
Total residential real estate 1,690
171
1,574
207
Consumer 86
—
65
—
Total $ 20,929
$ 171
$ 14,784
$ 207



	September 30, 2019				December 31, 2018
(in thousands)	Nonaccrual		Loans Past Due 90 Days or More and Still Accruing		Non-Accrual		Loans Past Due 90 Days or More and Still Accruing
Agricultural	$	2,481	$	—	$	1,622	$	—
Commercial and industrial	12,020		—		9,218		—
Commercial real estate:
Construction and development	632		—		99		—
Farmland	8,081		—		2,751		—
Multifamily	—		—		—		—
Commercial real estate-other	5,337		—		4,558		—
Total commercial real estate	14,050		—		7,408		—
Residential real estate:
One- to four- family first liens	2,734		236		1,049		341
One- to four- family junior liens	368		—		465		24
Total residential real estate	3,102		236		1,514		365
Consumer	315		—		162		—
Total	$	31,968	$	236	$	19,924	$	365

Not included in the loans above as of September 30, 2018 and December 31, 2017 were purchased credit impaired loans with an outstanding balance of $0.3 million and $0.7 million, net of a discount of zero and $0.1 million, respectively.

As of September 30, ~~2018,~~2019, the Company had ~~$0.1 million in~~0 commitments to lend additional funds to borrowers who have a nonperforming loan.

Purchased Loans

Purchased loans acquired in a business combination are recorded and initially measured at their estimated fair value as of the acquisition date. Credit discounts are included in the determination of fair value. An ~~allowance for loan losses~~ALLL is not carried over. These purchased loans are segregated into two types: ~~purchased credit impaired~~PCI loans and purchased non-credit impaired loans.


•	Purchased non-credit impaired loans are accounted for in accordance with ASC 310-20 “Nonrefundable Fees and Other Costs” as these loans do not have evidence of significant credit deterioration since origination and it is probable all contractually required payments will be received from the borrower.


•	~~Purchased credit impaired~~PCI loans are accounted for in accordance with ASC 310-30 “Loans and Debt Securities Acquired with Deteriorated Credit Quality” as they display significant credit deterioration since origination and it is probable, as of the acquisition date, that the Company will be unable to collect all contractually required payments from the borrower.

For purchased non-credit impaired loans, the accretable discount is the discount applied to the expected cash flows of the portfolio to account for the differences between the interest rates at acquisition and rates currently expected on similar portfolios in the marketplace. As the accretable discount is accreted to interest income over the expected average life of the portfolio, the result will be interest income on loans at the estimated current market rate. We record a provision for the acquired portfolio as the loans acquired ~~in the Central Bancshares, Inc. (“Central”) merger, which occurred in 2015,~~ renew and the discount is accreted. At acquisition, purchased non-credit impaired loans acquired in the ATBancorp transaction had contractually required principal payments of $1.15 billion and an accretable discount of $25.5 million.

For ~~purchased credit impaired~~PCI loans the difference between contractually required payments at acquisition and the cash flows expected to be collected is referred to as the non-accretable difference. Further, any excess of cash flows expected at acquisition over the estimated fair value is referred to as the accretable yield and is recognized into interest income over the expected remaining life of the loan if the timing and amount of the future cash flows are reasonably estimable. ~~This discount includes~~

The Company updates its cash flow projections for PCI loans on an ~~adjustment on loans that are not accruing or paying contractual interest so that interest income will be recognized at the estimated current market rate.~~

~~Subsequent to the purchase date,~~annual basis. Any increases in expected cash flows ~~over those expected at~~after the ~~purchase~~acquisition date and subsequent re-measurement periods are ~~recognized~~recorded as interest income prospectively. ~~The present value of any~~Any decreases in expected cash flows after the ~~purchase~~acquisition date isand subsequent re-measurement periods are recognized by recording ~~an allowance for credit losses and~~ a provision for loan losses.

The following table summarizes the outstanding balance and carrying amount of our PCI loans as of the dates indicated:



	September 30, 2019		December 31, 2018
(in thousands)
Agricultural	$	1,000	$	—
Commercial and industrial	595		165
Commercial real estate	20,533		13,600
Residential real estate	4,465		4,172
Consumer	60		—
Outstanding balance	26,653		17,937
Carrying amount	23,546		17,009
Allowance for loan losses	1,118		1,197
Carrying amount, net of allowance for loan losses	$	22,428	$	15,812

PCI loans acquired by the Company during the current period are not accounted under the ASC 310-30 income recognition model described above because the Company cannot reasonably estimate cash flows expected to be collected. The following table summarizes the carrying amounts of such loans:



	Nine Months Ended September 30,
	2019
(in thousands)
Loans acquired during the period	$	12,116
Loans at end of period	7,800

Changes in the accretable yield for loans acquired and accounted for under ASC 310-30 were as follows for the three and nine months ended September 30, ~~2018~~2019 and ~~2017:~~2018:

Three Months Ended September 30, Nine Months Ended September 30,
(in thousands) 2018 2017 2018 2017
Balance at beginning of period $ 311
$ 1,371
$ 840
$ 1,961
Accretion (223 ) (350 ) (873 ) (1,241 )
Reclassification (to) from nonaccretable difference (7 ) 63
114
364
Balance at end of period $ 81
$ 1,084
$ 81
$ 1,084



	Three Months Ended September 30,						Nine Months Ended September 30,
(in thousands)	2019			2018			2019			2018
Balance at beginning of period	$	3,384		$	3,654		$	3,840		$	4,304
Accretion	(156		)	(223		)	(612		)	(873		)
Balance at end of period	$	3,228		$	3,431		$	3,228		$	3,431

5.6. Derivatives, ~~and~~ Hedging Activities

~~FASB ASC 815,~~ ~~Derivatives~~ and ~~Hedging~~ (“ASC 815”), provides the disclosure requirements for derivatives and hedging activities with the intent to provide users of financial statements with an enhanced understanding of: (a) how and why an entity uses derivative instruments, (b) how the entity accounts for derivative instruments and related hedged items, and (c) how derivative instruments and related hedged items affect an entity’s financial position, financial performance, and cash flows. Further, qualitative disclosures are required that explain the Company’s objectives and strategies for using derivatives, as well as quantitative disclosures about the fair value of and gains and losses on derivative instruments, and disclosures about credit-risk-related contingent features in derivative instruments.

As required by ASC 815, the Company records all derivatives on the balance sheet at fair value. The accounting for changes in the fair value of derivatives depends on the intended use of the derivative, whether the Company has elected to designate a derivative in a hedging relationship and apply hedge accounting and whether the hedging relationship has satisfied the criteria necessary to apply hedge accounting. Derivatives designated and qualifying as a hedge of the exposure to changes in the fair value of an asset, liability, or firm commitment attributable to a particular risk, such as interest rate risk, are considered fair value hedges. Derivatives designated and qualifying as a hedge of the exposure to variability in expected future cash flows, or other types of forecasted transactions, are considered cash flow hedges. Hedge accounting generally provides for the matching of the timing of gain or loss recognition on the hedging instrument with the recognition of the changes in the fair value of the hedged asset or liability that are attributable to the hedged risk in a fair value hedge or the earnings effect of the hedged forecasted transactions in a cash flow hedge. The Company may enter into derivative contracts that are intended to economically hedge certain of its risk, even though hedge accounting does not apply or the Company elects not to apply hedge accounting.

~~The Company does not use derivatives for trading or speculative purposes.~~

In accordance with the FASB’s fair value measurement guidance, the Company made an accounting policy election to measure the credit risk of its derivative financial instruments that are subject to master netting agreements on a net basis by counterparty portfolio.

The Company is exposed to certain risks arising from both its business operations and economic conditions. The Company principally manages its exposures to a wide variety of business and operational risks through management of its core business activities. The Company manages economic risks, including interest rate, liquidity, and credit risk primarily by managing the amount, sources, and duration of its assets and liabilities and the use of derivative financial instruments. Specifically, the Company enters into derivative financial instruments to manage exposures that arise from business activities that result in the receipt or payment of future known and uncertain cash amounts, the value of which are determined by interest rates. The Company’s derivative financial instruments are used to manage differences in the amount, timing, and duration of the Company’s known or expected cash receipts and its known or expected cash payments principally related to the Company’s loans and borrowings.

Balance Sheet Offsetting

The following table presents the total notional amounts and gross fair ~~value~~values of the Company’s derivatives as of ~~September 30, 2018 and December 31, 2017.~~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.

As of September 30, 2018 As of December 31, 2017
Fair Value Fair Value
(in thousands)
Notional
Amount

Derivative
Assets

Derivative
Liabilities

Notional
Amount

Derivative
Assets

Derivative
Liabilities
Derivatives designated as hedging instruments:
Fair value hedges:
Interest rate swaps $ 7,855
$ 100
$ —
$ —
$ —
$ —

Derivatives not designated as hedging instruments:
Interest rate swaps $ 13,840
$ 105
$ 125
$ —
$ —
$ —
Risk participation agreements (RPAs) 10,112
—
53
—
—
—
Total derivatives not designated as hedging instruments $ 23,952
$ 105
$ 178
$ —
$ —
$ —



	As of September 30, 2019						As of December 31, 2018
			Fair Value						Fair Value
(in thousands)	Notional Amount		Derivative Assets		Derivative Liabilities		Notional Amount		Derivative Assets		Derivative Liabilities
Derivatives designated as hedging instruments:
Fair value hedges:
Interest rate swaps	$	16,842	$	—	$	1,637	$	8,927	$	—	$	223

Derivatives not designated as hedging instruments:
Interest rate swaps	$	66,863	$	2,403	$	2,667	$	13,830	$	321	$	359
RPAs	14,811		38		175		10,112		—		85
Total derivatives not designated as hedging instruments	$	81,674	$	2,441	$	2,842	$	23,942	$	321	$	444

Derivatives Designated as Hedging Instruments

The Company is exposed to changes in the fair value of certain of its fixed-rate assets due to changes in benchmark interest rates. The Company uses interest rate swaps to manage its exposure to changes in fair value on these instruments

attributable to changes in the designated benchmark interest rate, LIBOR. Interest rate swaps designated as fair value hedges involve the payment of fixed-rate amounts to a counterparty in exchange for the Company receiving variable-rate payments over the life of the agreements without the exchange of the underlying notional amount. For derivatives designated and that qualify as fair value hedges, 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 ~~three and nine months ended September 30, 2018 and September 30, 2017:~~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,
2018 2017 2018 2017
(in thousands) Interest Income (Expense) Other Gain (Loss) Interest Income (Expense) Other Gain (Loss) Interest Income (Expense) Other Gain (Loss) Interest Income (Expense) Other Gain (Loss)
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 $ —
$ —
$ —
$ —
$ (1 ) $ —
$ —
$ —

The effects of fair value hedging:
Gain (Loss) on fair value hedging relationships in subtopic 815-20:
Interest contracts:
Hedged items (126 ) —
—
—
(101 ) —
—
—
Derivative designated as hedging instruments 126
—
—
—
100
—
—
—



	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,
	2019					2018					2019					2018
(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	$	(1	)	$	—	$	—		$	—	$	(2	)	$	—	$	(1	)	$	—

The effects of fair value hedging:
Gain (loss) on fair value hedging relationships in subtopic 815-20:
Interest contracts:
Hedged items	617			—		(126		)	—		1,412			—		(101		)	—
Derivative designated as hedging instruments	(618		)	—		126			—		(1,414		)	—		100			—

As of September 30, ~~2018,~~2019, 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 $ 7,754
$ (101 )



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	$	18,478	$	1,633

Derivatives Not Designated as Hedging Instruments

Interest Rate Swaps -The Company enters into interest rate derivatives, including interest rate swaps with its customers to allow them to hedge against the risk of rising interest rates by providing fixed rate loans. To economically hedge against the interest rate risks in the products offered to its customers, the Company enters into mirrored interest rate contracts with institutional counterparties, with one designated as a central counterparty. The following table represents the notional amounts and the gross fair values of interest rate derivative contracts outstanding as of ~~September 30, 2018 and December 31, 2017 respectively.~~the dates indicated.

September 30, 2018
Customer Counterparties Financial Counterparties
Fair Value Fair Value
(in thousands) Notional Amount Assets Liabilities Notional Amount Assets Liabilities
Swaps $ 6,920
$ 105
$ —
$ 6,920
$ —
$ 125

December 31, 2017
Customer Counterparties Financial Counterparties
Fair Value Fair Value
(in thousands) Notional Amount Assets Liabilities Notional Amount Assets Liabilities
Swaps $ —
$ —
$ —
$ —
$ —
$ —



	September 30, 2019
	Customer Counterparties						Financial Counterparties
			Fair Value						Fair Value
(in thousands)	Notional Amount		Assets		Liabilities		Notional Amount		Assets		Liabilities
Swaps	$	33,432	$	2,403	$	—	$	33,432	$	—	$	2,667

	December 31, 2018
	Customer Counterparties						Financial Counterparties
			Fair Value						Fair Value
(in thousands)	Notional Amount		Assets		Liabilities		Notional Amount		Assets		Liabilities
Swaps	$	6,915	$	321	$	—	$	6,915	$	—	$	359

Credit Risk Participation Agreements -The Company ~~may periodically enter~~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 Company manages its credit risk on RPAs by monitoring the creditworthiness of the borrowers and institutional counterparties, which is based on the normal credit review process. The notional amount of the RPAs reflects the Company’s pro-rata share of the derivative instrument. The following table represents the notional amounts and the gross fair values of RPAs purchased and sold outstanding as of ~~September 30, 2018 and December 31, 2017 respectively.~~the dates indicated.

September 30, 2018 December 31, 2017
Fair Value Fair Value
(in thousands) Notional Amount Assets Liabilities Notional Amount Assets Liabilities
RPAs - protection purchased $ 10,112
$ —
$ 53
$ —
$ —
$ —



	September 30, 2019						December 31, 2018
			Fair Value						Fair Value
(in thousands)	Notional Amount		Assets		Liabilities		Notional Amount		Assets		Liabilities
RPAs - protection sold	$	4,758	$	38	$	—	$	—	$	—	$	—
RPAs - protection purchased	10,053		—		175		10,112		—		85
Total RPAs	$	14,811	$	38	$	175	$	10,112	$	—	$	85

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 ~~three and nine months ended September 30, 2018 and September 30, 2017:~~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) 2018 2017 2018 2017
Interest rate swaps Other gain (loss) $ —
$ —
$ (20 ) $ —
RPAs Other gain (loss) 147
—
147
—
Total $ 147
$ —
$ 127
$ —



	Location in the Consolidated Statements of Income	For the Three Months Ended September 30,					For the Nine Months Ended September 30,
(in thousands)	Location in the Consolidated Statements of Income	2019			2018		2019			2018
Interest rate swaps	Other income	$	(96	)	$	—	$	(226	)	$	(20	)
RPAs	Other income	(24		)	147		(148		)	147
Total		$	(120	)	$	147	$	(374	)	$	127

Offsetting of Derivatives

The table below presents a gross presentation, the effects of offsetting, and a net presentation of the Company’s derivatives as of September 30, ~~2018~~2019 and December 31, ~~2017.~~2018. The net amounts of derivative assets or liabilities can be reconciled to the tabular disclosure of fair value. The tabular disclosure of fair value provides the location that derivative assets and liabilities are presented on the consolidated balance sheets.

Gross Amounts Not Offset in the Balance Sheet
(in thousands) Gross Amounts of Recognized Assets (Liabilities) Gross Amounts Offset in the Balance Sheet Net Amounts of Assets (Liabilities) presented in the Balance Sheet Financial Instruments Cash Collateral Received (Paid) Net Assets (Liabilities)
As of September 30, 2018
Asset Derivatives $ 205
$ —
$ 205
$ 100
$ —
$ 105

Liability Derivatives (178 ) —
(178 ) 100
—
(78 )

As of December 31, 2017
Derivatives $ —
$ —
$ —
$ —
$ —
$ —

Liability Derivatives —
—
—
—
—
—



									Gross Amounts Not Offset in the Balance Sheet
(in thousands)	Gross Amounts of Recognized Assets (Liabilities)			Gross Amounts Offset in the Balance Sheet		Net Amounts of Assets (Liabilities) presented in the Balance Sheet			Financial Instruments		Cash Collateral Pledged			Net Assets (Liabilities)
As of September 30, 2019
Asset Derivatives	$	2,442		$	—	$	2,442		$	—	$	—		$	2,442

Liability Derivatives	(4,479		)	—		(4,479		)	—		(4,620		)	141


As of December 31, 2018
Asset Derivatives	$	321		$	—	$	321		$	—	$	—		$	321

Liability Derivatives	(667		)	—		(667		)	—		(530		)	(137		)

Credit-risk-related Contingent Features

The Company has an unsecured federal funds line with its institutional derivative ~~counterparty.The~~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~~Company’s default on the indebtedness.

As of September 30, ~~2018,~~2019, the fair value of derivatives in a net liability position, which includes accrued interest but excludes any adjustment for nonperformance risk, related to these agreements was ~~$179,000.~~$4.5 million. As of September 30, ~~2018,~~2019, the Company ~~has~~had minimum collateral posting thresholds with certain of its derivative counterparties, and has ~~not~~ posted ~~any~~$4.6 million of collateral related to these agreements. If the Company had breached any of these provisions at September 30, ~~2018,~~2019, it could have been required to settle its obligations under the agreements at their termination value of ~~$179,000.~~$4.5 million.

The following table presents the class of collateral pledged for repurchase agreements as well as the remaining contractual maturity of the repurchase agreements:



	Remaining Contractual Maturity of the Agreements
September 30, 2019	Overnight and Continuous		Up to 30 Days		30 - 90 Days		Greater than 90 Days		Total
	(in thousands)
Class of collateral pledged for repurchase agreements:
U.S. government agency and government-sponsored enterprise MBS and CMO	$	129,401	$	—	$	—	$	—	$	129,401

Gross amount of recognized liabilities for repurchase agreements									$	129,401
Amounts related to agreements not included in offsetting disclosure									$	—

The collateral utilized for the Company’s repurchase agreements is subject to market fluctuations as well as prepayment of principal. The Company monitors the risk of the fair value of its pledged collateral falling below acceptable amounts based on the type of the underlying repurchase agreement. The pledged collateral related to the Company’s $129.4 million sweep repurchase agreements, which mature on an overnight basis, is monitored on a daily basis as the underlying sweep accounts can have frequent transaction activity and the amount of pledged collateral is adjusted as necessary.

6.7. Goodwill and Intangible Assets

~~The excess~~In accordance with the Intangibles - Goodwill and Other topic of the ~~cost of an acquisition over the fair value of the net assets acquired, including core deposit, trade name, and client relationship intangibles, consists of goodwill. Under~~FASB ASC, ~~Topic 350,~~ goodwill and ~~the non-amortizing portion of the trade name~~indefinite-lived intangible assets are ~~subject to at least annual assessments~~not amortized but are reviewed for potential impairment ~~by applying a fair value based test. The Company reviews goodwill and the non-amortizing portion of the trade name intangible~~ at the reporting unit ~~level to determine potential~~level. Management analyzes its goodwill for impairment ~~annually~~on an annual basis on October 1 ~~or more frequently if events or~~and between annual tests in certain circumstances such as material adverse changes in ~~circumstances indicate~~legal, business, regulatory and economic factors. An impairment loss is recognized to the extent that the carrying ~~value may not be recoverable, by comparing the carrying value~~amount of ~~the reporting unit with the~~goodwill exceeds its implied fair ~~value of the reporting unit. No~~value. NaN impairment loss was ~~recorded on either the goodwill or the trade name intangible assets~~recognized during the nine months ended September 30, ~~2018.~~2019. The carrying amount of goodwill was ~~$64.7~~$93.3 million at September 30, ~~2018, the same as~~2019 and $64.7 million at December 31, ~~2017.~~

~~During the second quarter~~2018. The increase of ~~2018, the Company recognized a $125,000 customer list intangible~~$28.6 million in goodwill was due to the ~~purchase~~ATBancorp merger.

Finite-lived intangible assets are amortized on an accelerated basis over the estimated life of the assets. Such assets are evaluated for impairment if events and circumstances indicate a ~~registered investment adviser in~~possible impairment. As part of the ~~Denver, Colorado area.~~

ATBancorp acquisition, the Company acquired a core deposit intangible with an assigned amount of $23.5 million and an 8-year life as well as a trust customer relationship intangible with an assigned amount of $4.3 million and a 6-year life.

The following table presents the ~~changes in the carrying amount of intangibles (excluding goodwill),~~ gross carrying amount, accumulated amortization, and net ~~book value~~carrying amount as of ~~and for~~ the ~~nine months ended September 30, 2018:~~dates indicated:

(in thousands) Insurance Agency Intangible Core Deposit Intangible Indefinite-Lived Trade Name Intangible Finite-Lived Trade Name Intangible Customer List Intangible Total
September 30, 2018
Balance, beginning of period $ 148
$ 4,011
$ 7,040
$ 744
$ 103
$ 12,046
Finite-lived intangible assets acquired —
—
—
—
125
125
Amortization expense (28 ) (1,600 ) —
(143 ) (22 ) (1,793 )
Balance at end of period $ 120
$ 2,411
$ 7,040
$ 601
$ 206
$ 10,378

Gross carrying amount $ 1,320
$ 18,206
$ 7,040
$ 1,380
$ 455
$ 28,401
Accumulated amortization (1,200 ) (15,795 ) —
(779 ) (249 ) (18,023 )
Net book value $ 120
$ 2,411
$ 7,040
$ 601
$ 206
$ 10,378



(in thousands)	Insurance Agency Intangible			Core Deposit Intangible			Indefinite-Lived Trade Name Intangible		Finite-Lived Trade Name Intangible			Customer List Intangible			Total
September 30, 2019
Gross carrying amount	$	1,320		$	46,436		$	7,040	$	1,380		$	4,740		$	60,916
Accumulated amortization	(1,320		)	(24,153		)	—		(947		)	(861		)	(27,281		)
Net carrying amount	$	—		$	22,283		$	7,040	$	433		$	3,879		$	33,635

December 31, 2018
Gross carrying amount	$	1,320		$	18,206		$	7,040	$	1,380		$	455		$	28,401
Accumulated amortization	(1,210		)	(16,233		)	—		(824		)	(259		)	(18,526		)
Net carrying amount	$	110		$	1,973		$	7,040	$	556		$	196		$	9,875

The following table provides the aggregate and estimated aggregate amortization expense of amortized intangible assets for the periods indicated:



(in thousands)	Amount
Aggregate Amortization Expense
For the year ended December 31, 2018	$	2,296
For the nine months ended September 30, 2019	$	3,965
Estimated Amortization Expense
For the year ending December 31,
2020	$	6,727
2021	$	5,246
2022	$	4,280
2023	$	3,349
2024	$	2,423

7.8. Other Assets

The ~~components~~following table presents the detail of our other assets as of the ~~Company’s other assets were as follows:~~dates indicated:

(in thousands) September 30, 2018 December 31, 2017
Federal Home Loan Bank Stock $ 13,260
$ 11,324
Prepaid expenses 2,286
2,992
Mortgage servicing rights 2,711
2,316
Assets held for sale 895
—
Federal & state income taxes receivable, current 322
3,120
Accounts receivable & other miscellaneous assets 7,841
3,009
$ 27,315
$ 22,761



(in thousands)	September 30, 2019		December 31, 2018
Cash surrender value of BOLI	$	81,124	$	60,989
FHLB stock	15,838		14,678
Mortgage servicing rights	6,754		2,803
Deferred tax asset, net	4,104		8,273
Operating lease ROU assets, net	3,824		—
Equity securities	2,836		2,737
Assets held for sale	539		—
Taxes receivable	840		2,361
Other receivables/assets	28,623		23,261
	$	144,482	$	115,102

The increase in mortgage servicing rights and the cash surrender value of BOLI in 2019 was due to the acquisition of ATBancorp by the Company. See Note 3. “Business Combinations” for further details.

The Bank is a member of the FHLB of Des Moines as well as the FHLB of Chicago, and ownership of FHLB stock is a requirement for such membership. The amount of FHLB stock the Bank is required to hold is directly related to the amount of FHLB advances borrowed. Because this security is not readily marketable and there are no available market values, this security is carried at cost and evaluated for potential impairment each quarter. Redemption of this investment is at the option of the FHLB.

~~Mortgage servicing rights are recorded at fair value based on assumptions provided by a third-party valuation service.~~ The ~~valuation model incorporates assumptions that market participants would use~~increase in ~~estimating future net servicing income, such as~~ the ~~servicing cost per loan,~~operating lease ROU assets in 2019 was due to the ~~discount rate, the escrow float rate, an inflation rate, ancillary income, prepayment speeds and default rates and losses.~~adoption of ASU 2016-01 effective January 1, 2019. See Note 18. “Leases” for further details.

~~In the third quarter of 2018,~~At September 30, 2019, the Company ~~listed~~transferred a former Minnesota bank branch facility for sale as well as a former building used in the past for overflow office capacity. As such, these assets were marked down to fair value after selling costs and moved on the balance sheet from premises and equipment to assets held for sale. The value shown above reflects the building’s fair value less estimated selling costs.

As of September 30, 2019, the Company owned $0.4 million of equity investments in banks and financial service-related companies, and $2.5 million of mutual funds invested in debt securities and other debt instruments that will cause units of the fund to be deemed to be qualified under the CRA. Both realized and unrealized net gains and losses on equity investments are required to be recognized in the consolidated statements of income. A breakdown between net realized and unrealized gains and losses is provided below. These net changes are included in the other line item in the noninterest income section of the consolidated statements of income.

The following table presents the net gains and losses on equity investments during the three and nine months ended September 30, 2019 and 2018, disaggregated into realized and unrealized gains and losses:



	Three Months Ended September 30,					Nine Months Ended September 30,
(in thousands)	2019		2018			2019		2018
Net gains (losses) recognized	$	20	$	(10	)	$	101	$	(34	)
Less: Net gains (losses) recognized due to sales	—		—			—		—
Unrealized gains (losses) on securities still held at the reporting date	$	20	$	(10	)	$	101	$	(34	)

9. Deposits

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



	September 30, 2019		December 31, 2018
(in thousands)
Noninterest-bearing deposits	$	673,777	$	439,133
Interest checking deposits	924,861		683,894
Money market deposits	763,661		555,839
Savings deposits	389,606		210,416
Time deposits under $250,000	685,409		532,395
Time deposits of $250,000 or more	272,398		191,252
Total deposits	$	3,709,712	$	2,612,929

The Company had $6.6 million and $8.6 million in brokered time deposits through the CDARS program as of September 30, 2019 and December 31, 2018, respectively. Included in money market deposits at September 30, 2019 and December 31, 2018 were $15.0 million and $23.7 million, respectively, of brokered deposits in the ICS program. The CDARS and ICS programs coordinate, on a reciprocal basis, a network of banks to spread deposits exceeding the FDIC insurance coverage limits out to numerous institutions in order to provide insurance coverage for all participating deposits.

8.10. Short-Term Borrowings

~~Short-term~~The following table summarizes our short-term borrowings ~~were as follows~~ as of ~~September 30, 2018 and December 31, 2017:~~the dates indicated:

September 30, 2018 December 31, 2017
(in thousands) Weighted Average Cost Balance Weighted Average Cost Balance
Federal funds purchased 2.39 % $ 19,056
1.77 % $ 1,000
Securities sold under agreements to repurchase 0.97
68,922
0.71
96,229
Total 1.28 % $ 87,978
0.73 % $ 97,229



	September 30, 2019				December 31, 2018
(in thousands)	Weighted Average Rate		Balance		Weighted Average Rate		Balance
Securities sold under agreements to repurchase	1.20	%	$	129,401	1.00	%	$	74,522
Federal Home Loan Bank advances	2.09		25,700		2.60		56,900
Total	1.35	%	$	155,101	1.69	%	$	131,422

At September 30, 2018 and December 31, 2017, the Company had no borrowings through the Federal Reserve Discount Window, while the borrowing capacity was $11.4 million as of September 30, 2018 and December 31, 2017. As of September 30, 2018 and December 31, 2017, the Bank had municipal securities pledged with a market value of $12.6 million and $12.8 million, respectively, to the Federal Reserve to secure potential borrowings. The Company also has various other unsecured federal funds agreements with correspondent banks as well as the FHLB. As of September 30,

~~2018 and December 31, 2017, there were $19.1 million and $1.0 million of borrowings through these correspondent bank federal funds agreements, respectively.~~

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.

The Bank has a secured line of credit with the FHLB. 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 5. “Loans Receivable and the Allowance for Loan Losses” of the notes to the consolidated financial statements.

The Bank has unsecured federal funds lines totaling $170.0 million from multiple correspondent banking relationships. There were 0 borrowings from such lines at either September 30, 2019 or December 31, 2018.

At September 30, 2019 and December 31, 2018, the Company had 0 borrowings through the Federal Reserve Discount Window, while the financing capacity was $11.7 million as of September 30, 2019 and $11.4 million as of December 31, 2018. As of September 30, 2019 and December 31, 2018, the Bank had municipal securities pledged with a market value of $13.0 million and $12.7 million, respectively, as collateral for the Federal Reserve financing arrangement.

On April 30, 2015,, the Company entered into a ~~$5.0 million unsecured line of~~ credit agreement with a correspondent ~~bank.~~bank under which the Company could borrow up to $5.0 million from an unsecured revolving loan. Interest iswas payable at a rate of one-month LIBOR plus 2.00%. The ~~line~~credit agreement was ~~renewed in May 2018, and~~amended on April 29, 2019 such that, commencing April 30, 2019, the revolving

commitment amount was increased to $10.0 million with interest payable at a rate of one-month LIBOR plus 1.75%. The revolving loan matures on April 30, ~~2019~~2020. The Company had no balance outstanding under this ~~agreement~~revolving loan as of September 30, ~~2018.~~2019.

9. 11. Long-Term Debt

Junior Subordinated Notes Issued to Capital Trusts

~~The~~On May 1, 2019, with the acquisition of ATBancorp, the Company ~~has established three statutory business trusts under~~assumed the ~~laws of the state of Delaware: Central Bancshares Capital Trust II, Barron Investment Capital~~junior subordinated notes issued to ATBancorp Statutory Trust I and ~~MidWestOne~~ATBancorp Statutory Trust II. The trusts exist for the exclusive purposes of (i) issuing trust securities representing undivided beneficial interests in the assets of the respective trust; (ii) investing the gross proceeds of the trust securities in junior subordinated deferrable interest debentures (junior subordinated notes issued by the Company); and (iii) engaging in only those activities necessary or incidental thereto. For regulatory capital purposes, these trust securities qualify as a component of Tier 1 capital.

The table below summarizes the ~~outstanding~~terms of each issuance of junior subordinated notes ~~and the related trust preferred securities issued by each trust~~outstanding as of ~~September 30, 2018 and December 31, 2017:~~the dates indicated:

Face Value Book Value Interest Rate Interest Rate at Maturity Date Callable Date
(in thousands) 9/30/2018
September 30, 2018

Central Bancshares Capital Trust II^{(1) (2)}
$ 7,217
$ 6,716
Three-month LIBOR + 3.50% 5.83 % 03/15/2038 03/15/2013

Barron Investment Capital Trust I^{(1) (2)}
2,062
1,685
Three-month LIBOR + 2.15% 4.52 % 09/23/2036 09/23/2011

MidWestOne Statutory Trust II⁽¹⁾
15,464
15,464
Three-month LIBOR + 1.59% 3.92 % 12/15/2037 12/15/2012
Total $ 24,743
$ 23,865



	Face Value		Book Value		Rate Index	Rate		Maturity Date	Callable Date
(in thousands)	Face Value		Book Value		Rate Index	Rate		Maturity Date	Callable Date
September 30, 2019
ATBancorp Statutory Trust I	$	7,732	$	6,805	Three-month LIBOR + 1.68%	3.80	%	06/15/2036	06/15/2011
ATBancorp Statutory Trust II	12,372		10,781		Three-month LIBOR + 1.65%	3.77	%	06/15/2037	06/15/2012
Central Bancshares Capital Trust II	7,217		6,770		Three-month LIBOR + 3.50%	5.62	%	03/15/2038	03/15/2013
Barron Investment Capital Trust I	2,062		1,723		Three-month LIBOR + 2.15%	4.31	%	09/23/2036	09/23/2011
MidWestOne Statutory Trust II	15,464		15,464		Three-month LIBOR + 1.59%	3.71	%	12/15/2037	12/15/2012
Total	$	44,847	$	41,543

Face Value Book Value Interest Rate Interest Rate at Maturity Date Callable Date
(in thousands) 12/31/2017
December 31, 2017

Central Bancshares Capital Trust II^{(1) (2)}
$ 7,217
$ 6,674
Three-month LIBOR + 3.50% 5.09 % 03/15/2038 03/15/2013

Barron Investment Capital Trust I^{(1) (2)}
2,062
1,655
Three-month LIBOR + 2.15% 3.82 % 09/23/2036 09/23/2011

MidWestOne Statutory Trust II⁽¹⁾
15,464
15,464
Three-month LIBOR + 1.59% 3.18 % 12/15/2037 12/15/2012
Total $ 24,743
$ 23,793



	Face Value		Book Value		Rate Index	Rate		Maturity Date	Callable Date
(in thousands)	Face Value		Book Value		Rate Index	Rate		Maturity Date	Callable Date
December 31, 2018
Central Bancshares Capital Trust II	$	7,217	$	6,730	Three-month LIBOR + 3.50%	6.29	%	03/15/2038	03/15/2013
Barron Investment Capital Trust I	2,062		1,694		Three-month LIBOR + 2.15%	4.97	%	09/23/2036	09/23/2011
MidWestOne Statutory Trust II	15,464		15,464		Three-month LIBOR + 1.59%	4.38	%	12/15/2037	12/15/2012
Total	$	24,743	$	23,888

~~(1) All distributions are cumulative and paid in cash quarterly.~~

~~(2) Central Bancshares Capital Trust II and Barron Investment Capital Trust I were established by Central prior to~~Subordinated Debentures

On May 1, 2019, with the ~~Company’s merger with Central, and~~acquisition of ATBancorp, the ~~junior~~Company assumed $10.8 million of subordinated ~~notes issued by Central were assumed by the Company.~~

~~The trust preferred securities are subject to mandatory redemption, in whole or in part, upon repayment of the junior subordinated notes at the~~debentures. These debentures have a stated maturity ~~date or upon redemption~~ of ~~the junior subordinated notes. Each trust’s ability to pay amounts due~~May 31, 2023, and bear interest at a fixed annual rate of 6.50%, with interest payable semi-annually 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~~May 15th 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.~~September 15th. The Company has the ~~right~~option to ~~defer payment~~redeem the debentures, in whole or part, at any time on or after May 31, 2021. The debentures constitute Tier 2 capital under the rules and regulations of ~~interest~~the Federal Reserve applicable to the capital status of the subordinated debt of bank holding companies. Beginning on the ~~junior subordinated notes and, therefore, distributions on~~fifth anniversary preceding the ~~trust preferred securities,~~maturity date of each debenture, we were required to begin amortizing the amount of the debentures that may be treated as Tier 2 capital. Specifically, we will lose Tier 2 treatment for ~~up to~~20% of the amount of the debentures in each of the final five years ~~but~~preceding maturity, such that during the final year, we will not ~~beyond~~be permitted to treat any portion of the ~~stated maturity date in~~debentures as Tier 2 capital. At September 30, 2019, we were permitted to treat 60% of 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.~~debentures as Tier 2 capital.

~~10. Federal Home Loan Bank Borrowings and~~Other Long-Term Debt

~~Federal Home Loan Bank borrowings and long-term debt were as follows as of September 30, 2018 and December 31, 2017:~~

September 30, 2018 December 31, 2017
(in thousands) Weighted Average Cost Balance Weighted Average Cost Balance
FHLB Borrowings 2.20 % $ 143,000
1.72 % $ 115,000
Note payable to unaffiliated bank 3.85
8,750
3.32
12,500
Total 2.30 % $ 151,750
1.88 % $ 127,500



	September 30, 2019				December 31, 2018
(in thousands)	Weighted Average Rate		Balance		Weighted Average Rate		Balance
Finance lease payable	8.89	%	$	1,254	8.89	%	$	1,338
FHLB term borrowings	2.35		155,727		2.45		136,000
Other long-term debt	3.84		35,250		4.13		7,500
Total	2.67	%	$	192,231	2.60	%	$	144,838

The Company utilizes FHLB borrowings as a funding source to supplement to customer deposits ~~to fund interest-earning assets~~ and to assist in managing interest rate risk. As a member of the ~~Federal Home Loan Bank~~FHLB of Des Moines, the Bank may borrow funds from the FHLB in amounts up to ~~35%~~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 45. “Loans Receivable and the Allowance for Loan Losses” of the notes to the consolidated financial statements.

On April 30, ~~2015~~2019, the Company entered into a $35.0 million unsecured note payable with a correspondent bank with a maturity date of ~~June~~April 30, ~~2020~~2024. ~~The Company drew $25.0 million on the note prior to June 30, 2015, at which time the ability to obtain additional advances ceased. Payments of~~Quarterly principal and interest ~~are payable quarterly, which~~payments began on ~~September~~June 30, ~~2015~~2019~~. As~~ and, as of September 30, ~~2018, $8.8~~2019, $31.5 million of that note was outstanding.

See Note 18. “Leases” to our consolidated financial statements for additional information related to our finance lease obligation.

~~11.~~12. Income Taxes

Income tax expense for the three and nine months ended September 30, ~~2018~~2019 and ~~2017~~2018 ~~was equal to or less than~~varied from the amount computed by applying the maximum effective federal income tax rate of 21% ~~and 35%~~, ~~respectively,~~ to the income before income taxes, because of the following items:

For the Three Months Ended September 30, For the Nine Months Ended September 30,
2018 2017 2018 2017
(in thousands) Amount % of Pretax Income Amount % of Pretax Income Amount % of Pretax Income Amount % of Pretax Income
Income tax based on statutory rate $ 1,803
21.0 % $ 2,898
35.0 % $ 6,016
21.0 % $ 9,762
35.0 %
Tax-exempt interest (468 ) (5.4 ) (808 ) (9.7 ) (1,459 ) (5.0 ) (2,389 ) (8.6 )
Bank-owned life insurance (84 ) (1.0 ) (121 ) (1.5 ) (257 ) (0.9 ) (346 ) (1.2 )
State income taxes, net of federal income tax benefit 445
5.2
366
4.4
1,540
5.4
1,214
4.4
Non-deductible acquisition expenses 124
1.4
—
—
124
0.4
—
—
General business credits (22 ) (0.2 ) (405 ) (4.9 ) (62 ) (0.2 ) (445 ) (1.6 )
Other 8
—
8
0.1
19
—
(193 ) (0.7 )
Total income tax expense $ 1,806
21.0 % $ 1,938
23.4 % $ 5,921
20.7 % $ 7,603
27.3 %



	For the Three Months Ended September 30,										For the Nine Months Ended September 30,
	2019					2018					2019					2018
(in thousands)	Amount			% of Pretax Income		Amount			% of Pretax Income		Amount			% of Pretax Income		Amount			% of Pretax Income
Income tax based on statutory rate	$	3,267		21.0	%	$	1,803		21.0	%	$	8,111		21.0	%	$	6,016		21.0	%
Tax-exempt interest	(791		)	(5.1	)	(468		)	(5.4	)	(1,732		)	(4.5	)	(1,459		)	(5.0	)
Bank-owned life insurance	(108		)	(0.7	)	(84		)	(1.0	)	(289		)	(0.7	)	(257		)	(0.9	)
State income taxes, net of federal income tax benefit	833			5.4		445			5.2		2,063			5.3		1,540			5.4
Non-deductible acquisition expenses	5			—		124			1.4		167			0.5		124			0.4
General business credits	41			0.3		(22		)	(0.2	)	13			—		(62		)	(0.2	)
Other	9			—		8			—		31			0.1		19			—
Total income tax expense	$	3,256		20.9	%	$	1,806		21.0	%	$	8,364		21.7	%	$	5,921		20.7	%

In December 2017, the SEC staff issued Staff Accounting Bulletin No. 118 (SAB 118), which provides guidance regarding how a company is to reflect provisional amounts when necessary information is not yet available, prepared or analyzed sufficiently to complete its accounting for the effect of the changes in Public Law 115-97, commonly referred to as the Tax Cuts and Jobs Act (the “Tax Act”). During the first quarter of 2018, the income tax expense recorded during the fourth quarter of 2017 was determined to be final.

~~12.~~13. Earnings per Share

Basic ~~per-share~~per share amounts are computed by dividing net income (the numerator) by the weighted-average number of common shares outstanding (the denominator). Diluted ~~per-share~~per share amounts assume issuance of all common stock issuable upon conversion or exercise of other securities, unless the effect is to reduce the loss or increase the income per common share from continuing operations.

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

Three Months Ended September 30, Nine Months Ended September 30,
(dollars in thousands, except per share amounts) 2018 2017 2018 2017
Basic earnings per common share computation
Numerator:
Net income $ 6,778
$ 6,342
$ 22,727
$ 20,289
Denominator:
Weighted average shares outstanding 12,221,107
12,218,528
12,220,673
11,977,579
Basic earnings per common share $ 0.55
$ 0.52
$ 1.86
$ 1.69

Diluted earnings per common share computation
Numerator:
Net income $ 6,778
$ 6,342
$ 22,727
$ 20,289
Denominator:
Weighted average shares outstanding, including all dilutive potential shares 12,239,864
12,238,991
12,237,462
11,999,608
Diluted earnings per common share $ 0.55
$ 0.52
$ 1.86
$ 1.69



	Three Months Ended September 30,				Nine Months Ended September 30,
(dollars in thousands, except per share amounts)	2019		2018		2019		2018
Basic earnings per common share computation
Numerator:
Net income	$	12,300	$	6,778	$	30,259	$	22,727
Denominator:
Weighted average shares outstanding	16,200,667		12,221,107		14,434,411		12,220,673
Basic earnings per common share	$	0.76	$	0.55	$	2.10	$	1.86

Diluted earnings per common share computation
Numerator:
Net income	$	12,300	$	6,778	$	30,259	$	22,727
Denominator:
Weighted average shares outstanding, including all dilutive potential shares	16,214,562		12,239,864		14,444,732		12,237,462
Diluted earnings per common share	$	0.76	$	0.55	$	2.09	$	1.86

~~13. Estimated~~14. Regulatory Capital Requirements and Restrictions on Subsidiary Cash

The Company (on a consolidated basis) and the Bank are subject to the Basel III Rules and the Dodd-Frank Act. The Basel III Rules are applicable to all banking organizations that are subject to minimum capital requirements, including federal and state banks and savings and loan associations, as well as to bank and savings and loan holding companies, other than “small bank holding companies” (generally bank holding companies with consolidated assets of less than $3 billion which are not publicly traded companies). As of September 30, 2019, the Bank was “well capitalized” under the regulatory framework for prompt corrective action then in effect. There are no conditions or events since this date that management believes have changed the Bank’s category. In order to be a “well-capitalized” depository institution, a bank must maintain a Common Equity Tier 1 capital ratio of 6.5% or more; a Tier 1 capital ratio of 8% or more; a Total capital ratio of 10% or more; and a leverage ratio of 5% or more. A capital conservation buffer, comprised of Common Equity Tier 1 capital, is also established above the regulatory minimum capital requirements. This capital conservation buffer was fully phased in at 2.5% on January 1, 2019. At September 30, 2019, the Company’s institution-specific capital conservation buffer necessary to avoid limitations on distributions and discretionary bonus payments was 2.65%, while the Bank’s was 3.00%.



	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, 2019
Consolidated:
Total capital/risk based assets	$	454,424	10.65	%	$	447,979	10.50	%	N/A		N/A
Tier 1 capital/risk based assets	416,391		9.76		362,649		8.50		N/A		N/A
Common equity tier 1 capital/risk based assets	374,848		8.79		298,652		7.00		N/A		N/A
Tier 1 capital/adjusted average assets	416,391		9.26		179,927		4.00		N/A		N/A
MidWestOne Bank:
Total capital/risk based assets	$	468,271	11.00	%	$	447,023	10.50	%	$	425,736	10.00	%
Tier 1 capital/risk based assets	436,739		10.26		361,876		8.50		340,589		8.00
Common equity tier 1 capital/risk based assets	436,739		10.26		298,015		7.00		276,728		6.50
Tier 1 capital/adjusted average assets	436,739		9.72		179,680		4.00		224,600		5.00
At December 31, 2018
Consolidated:
Total capital/risk based assets	$	342,054	12.23	%	$	276,283	9.875	%	N/A		N/A
Tier 1 capital/risk based assets	312,747		11.18		220,327		7.875		N/A		N/A
Common equity tier 1 capital/risk based assets	288,859		10.32		178,360		6.375		N/A		N/A
Tier 1 capital/adjusted average assets	312,747		9.73		128,531		4.000		N/A		N/A
MidWestOne Bank:
Total capital/risk based assets	$	333,074	11.94	%	$	275,468	9.875	%	$	278,955	10.00	%
Tier 1 capital/risk based assets	303,767		10.89		219,677		7.875		223,164		8.00
Common equity tier 1 capital/risk based assets	303,767		10.89		177,833		6.375		181,320		6.50
Tier 1 capital/adjusted average assets	303,767		9.47		128,259		4.000		160,324		5.00

(1) Includes a capital conservation buffer of 1.875%, at December 31, 2018 and 2.50% at September 30, 2019.

The ability of the Company to pay dividends to its shareholders is dependent upon dividends paid by the Bank to the Company. The Bank is subject to certain statutory and regulatory restrictions on the amount of dividends it may pay. In addition, the Bank’s board of directors has adopted a capital policy requiring it to maintain a ratio of Tier 1 capital to total assets of at least 8% and a ratio of total capital to risk-based capital of at least 10%. Failure to maintain these ratios also could limit the ability of the Bank to pay dividends to the Company.

The Bank is required to maintain reserve balances in cash on hand or on deposit with Federal Reserve Banks. Reserve balances totaled $17.1 million and $14.9 million as of September 30, 2019 and December 31, 2018, respectively.

15. Commitments and Contingencies

Financial instruments with off-balance-sheet risk: 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, 2019		December 31, 2018
(in thousands)
Commitments to extend credit	$	924,227	$	521,270
Commitments to sell loans	7,906		666
Standby letters of credit	37,859		16,709
Total	$	969,992	$	538,645

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.

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.

Contingencies: In the normal course of business, the Bank is involved in various legal proceedings. In the opinion of management, any liability resulting from such proceedings would not have a material adverse effect on the accompanying consolidated financial statements.

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 69% of the loans are real estate loans and approximately 10% are agriculturally related. The concentrations of credit by type of loan are set forth in Note 5. “Loans Receivable and the Allowance for Loan 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 $125.9 million and $49.9 million, respectively, as of September 30, 2019. The amount of investment securities issued by any one individual municipality did not exceed $5.0 million.

16. 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. Market participants are defined as buyers and sellers in the principal (or most advantageous) market for the asset or liability that have all of the following characteristics: 1) an unrelated party; 2) knowledgeable (having a reasonable understanding about the asset or liability and the transaction based on all available information; including information that might be obtained through due diligence efforts that are usual or customary); 3) able to transact; and 4) willing to transact (motivated but not forced or otherwise compelled to do so).

The FASB states “valuation techniques that are appropriate in the circumstances and for which sufficient data are available shall be used to measure fair value.” The valuation techniques for measuring fair value are consistent with the three traditional approaches to value: the market approach, the income approach, and the cost or asset approach.

In applying valuation techniques, the use of relevant inputs (both observable and unobservable) based on the facts and circumstances must be used. The FASB has defined a fair value hierarchy for these inputs which prioritizes the inputs into three broad levels:


•	Level 1 Inputs – Quoted prices (unadjusted) for identical assets or liabilities in active markets. A quoted price in an active market provides the most reliable evidence of fair value and is used to measure fair value whenever available. A contractually binding sales price also provides reliable evidence of fair value.

•

Level 2 Inputs – Inputs to the valuation methodology include quoted prices for similar assets or liabilities in active ~~markets; inputs to the valuation methodology include~~markets, quoted prices for identical or similar assets or liabilities in markets that are not ~~active;~~active, or ~~inputs to the valuation methodology that~~ utilize model-based techniques for which all significant assumptions are observable in the market.

•

Level 3 Inputs – Inputs to the valuation methodology are unobservable and significant to the fair value ~~measurement; inputs to the valuation methodology that~~measurement, utilize model-based techniques for which significant assumptions are not observable in the ~~market;~~market, or ~~inputs to the valuation methodology that~~ require significant management judgment or estimation, some of which may be internally developed.

~~Unobservable inputs should be~~

For information regarding the valuation methodologies used ~~only~~ to ~~the extent that relevant observable inputs are not available; this allows for situations where there is little, if any, market activity for the asset or liability~~measure our assets recorded at the measurement date. Unobservable inputs should reflect the reporting entity’s own assumptions about the assumptions that market participants would use in pricing the asset or liability, including assumptions about risk.

~~It is the Company’s policy to maximize the use of observable inputs and minimize the use of unobservable inputs when developing~~ fair value measurements. The Company is required to use observable inputs, to the extent available, in the fair value estimation process unless that data results from forced liquidations or distressed sales. The Company used the following methods(under ASC Topic 820), and ~~significant assumptions to estimate fair value:~~

~~Investment Securities~~ ~~- The~~for estimating fair value for ~~investment securities are determined~~financial instruments not recorded at fair value (under ASC Topic 825, as amended by ~~quoted market prices, if available (Level 1)~~ASU 2016-01 and ASU 2018-03), 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 2018 Annual Report on Form 10-K.

The Company ~~utilizes an independent pricing service to obtain the~~uses fair value ~~of debt securities. On~~to measure certain assets and liabilities on a ~~quarterly~~recurring basis, ~~the Company selects a sample of 30~~primarily securities from its primary pricing service and compares them to a secondary independent pricing service to validate value. In addition, the Company periodically reviews the pricing methodology utilized by the primary independent service for reasonableness. Debt securities issued by the U.S. Treasury and other U.S. Government agencies and corporations, mortgage-backed securities, and collateralized mortgage obligations are priced utilizing industry-standard models that consider various assumptions, including time value, yield curves, volatility factors, prepayment speeds, default rates, loss severity, current market and contractual prices for the underlying financial instruments, as well as other relevant economic measures. Substantially all of these assumptions are observable in the marketplace, can be derived from observable data, or are supported by observable levels at which transactions are executed in the marketplace (Level 2). Municipal securities are valued using a type of matrix, or grid, pricing in which securities are benchmarked against the treasury rate based on credit rating (Level 2). On an annual basis, a group of selected municipal securities have their credit rating evaluated by a securities dealer and that information is used to verify the primary independent service’s rating and pricing.

~~Loans Held for Sale~~ ~~- Loans held~~available for sale ~~are carried~~and derivatives. For assets measured at the lower of cost or fair value, ~~with fair value being based on binding contracts from third party investors (Level 2). The portfolio has historically consisted primarily of residential real estate loans.~~

~~Loans, Net~~ - The estimated fair value of loans, net, was performed using the income approach, with the market approach used for certain nonperforming loans, resulting in a Level 3 fair value classification. The application of the income approach establishes value by methods that discount or capitalize earnings and/or cash flow, by a discount or capitalization rate that reflects market rate of return expectations, market conditions, and the relative risk of the investment. Generally, this can be accomplished by the discounted cash flow method. For loans that exhibited some characteristics of performance and where it appears that the borrower may have adequate cash flows to service the loan, a discounted cash flow analysis was used. The discounted cash flow analysis was based on the contractual maturity of the loan and market indications of rates, prepayment speeds, defaults and credit risk. For loans with balloon or interest only payment structures, the repayment was extended by assuming a renewal period beyond the current contractual maturity date. For loans analyzed using the asset approach, the fair value ~~was determined based on the estimated values~~measurement criteria may or may not be met during a reporting period and such measurements are therefore considered “nonrecurring” for purposes of ~~the underlying collateral. For impaired loans, the estimated net sales proceeds was used to determine the~~disclosing our fair value of the loans when deemed appropriate. The implied sales proceeds value provides a better indication of value than the income stream as these loans are not performing or exhibit strong signs indicative of nonperformance.

~~Collateral Dependent Impaired Loans~~ - From time to time, a loan is considered impaired and an allowance for credit losses is established. The specific reserves for collateral dependent impaired loans are based on the fair value of the collateral less estimated costs to sell, based on appraisals. These appraisals may utilize a single valuation approach or a combination of approaches including comparable sales and the income approach. Adjustments are routinely made in the appraisal process by the independent appraisers to adjust for differences between the comparable sales and income data available for similar loans and collateral underlying such loans, and resulted in a Level 3 classification for inputs for determining fair value. Non-real estate collateral may be valued using an appraisal, net book value per the borrower’s financial statements, or aging reports, adjusted or discounted based on management’s historical knowledge, changes in market conditions from the time of valuation, and management’s expertise and knowledge of the client and the client’s business, resulting in a Level 3 fair value classification. Impaired loans are evaluated on a quarterly basis for additional impairment and adjusted in accordance with the allowance policy.

~~Other Real Estate Owned (“OREO”)~~ - OREO represents property acquired through foreclosures and settlements of loans. Property acquired through or in lieu of foreclosure are initially recorded at fair value less estimated selling cost at the date of foreclosure, establishing a new cost basis. These assets are subsequently accounted for at the lower of cost or fair value less estimated costs to sell.measurements. Fair value is ~~commonly based~~used on ~~recent real estate appraisals which are updated no less frequently than every 18 months. These appraisals may utilize~~ a ~~single valuation approach or a combination of approaches, including comparable sales and the income approach. Adjustments are routinely made in the appraisal process by the independent appraisers~~nonrecurring basis to adjust carrying values for differences between the comparable sales and income data available for similar loans and the collateral underlying such loans, resulting in a Level 3 classification for inputs for determining fair value. Real estate owned properties are evaluated on a quarterly basis for additional impairment and adjusted accordingly.

~~Appraisals for both collateral dependent~~ impaired loans and OREO are performed by certified general appraisers (for commercial properties) or certified residential appraisers (for residential properties) whose qualifications and licenses have been reviewed and verified by the Company. Once received, a member of the Special Assets Department reviews the assumptions and approaches utilized in the appraisal as well as the overall resulting fair value in comparison with independent data sources such as recent market data or industry-wide statistics.

~~Interest Rate Swaps~~ - Interest rate swaps are valued by the Company's swap dealers using cash flow valuation techniques with observable market data inputs. The fair values estimated by the Company's swap dealers use interest rates that are observable or that can be corroborated by observable market data and, therefore, are classified within Level 2 of the valuation hierarchy. The Company has entered into collateral agreements with its swap dealers which entitle it to receive collateral to cover market values on derivatives which are in asset position, thus a credit risk adjustment on interest rate swaps is not warranted.

~~Credit Risk Participation Agreements~~ — The Company enters into credit risk participation agreements (“RPAs”) with institutional counterparties, under which the Company assumes its pro-rata share of the credit exposure associated with a borrower’s performance related to interest rate derivative contracts. The fair value of RPAs is calculated by determining the total expected asset or liability exposure of the derivatives to the borrowers and applying the borrowers’ credit spread to that exposure. Total expected exposure incorporates both the current and potential future exposure of the derivatives, derived from using observable inputs, such as yield curves and volatilities. Accordingly, RPAs fall within Level 2.other real estate owned.

The following ~~table summarizes~~tables present information on the assets and liabilities measured at fair value on a recurring basis as of ~~September 30, 2018 and December 31, 2017. The assets and liabilities are segregated by~~ the ~~level of valuation inputs within the fair value hierarchy utilized to measure fair value:~~dates indicated:

Fair Value Measurement at September 30, 2018 Using
(in thousands) Fair Value
Quoted Prices in
Active Markets for
Identical Assets
(Level 1)

Significant Other
Observable
Inputs
(Level 2)

Significant
Unobservable
Inputs
(Level 3)
Assets:
Available for sale debt securities:
U.S. Government agencies and corporations $ 5,519
$ —
$ 5,519
$ —
State and political subdivisions 115,136
—
115,136
—
Mortgage-backed securities 51,896
—
51,896
—
Collateralized mortgage obligations 170,877
—
170,877
—
Corporate debt securities 64,338
—
64,338
—
Total available for sale debt securities $ 407,766
$ —
$ 407,766
$ —
Derivatives:
Interest rate swaps $ 205
$ —
$ 205
$ —
RPAs —
—
—
—
Total derivative assets $ 205
$ —
$ 205
$ —

Liabilities:
Derivatives:
Interest rate swaps $ 125
$ —
$ 125
$ —
RPAs 53
—
53
—
Total derivative liabilities $ 178
$ —
$ 178
$ —



	Fair Value Measurements as of September 30, 2019
(in thousands)	Total		Level 1		Level 2		Level 3
Assets:
Available for sale debt securities:
U.S. Government agencies and corporations	$	456	$	—	$	456	$	—
State and political subdivisions	112,209		—		112,209		—
Mortgage-backed securities	24,296		—		24,296		—
Collateralized mortgage obligations	213,044		—		213,044		—
Corporate debt securities	153,273		—		153,273		—
Total available for sale debt securities	$	503,278	$	—	$	503,278	$	—
Equity securities	2,836		2,836		—		—
Derivatives:
Interest rate swaps	2,403		—		2,403		—
RPAs	38		—		38		—
Total derivative assets	$	2,441	$	—	$	2,441	$	—

Liabilities:
Derivatives:
Interest rate swaps	$	4,304	$	—	$	4,304	$	—
RPAs	175		—		175		—
Total derivative liabilities	$	4,479	$	—	$	4,479	$	—

Fair Value Measurement at December 31, 2017 Using
(in thousands) Fair Value
Quoted Prices in
Active Markets for
Identical Assets
(Level 1)

Significant Other
Observable
Inputs
(Level 2)

Significant
Unobservable
Inputs
(Level 3)
Assets:
Available for sale debt securities:
U.S. Government agencies and corporations $ 15,626
$ —
$ 15,626
$ —
State and political subdivisions 141,839
—
141,839
—
Mortgage-backed securities 48,497
—
48,497
—
Collateralized mortgage obligations 168,196
—
168,196
—
Corporate debt securities 71,166
—
71,166
—
Total available for sale debt securities $ 445,324
$ —
$ 445,324
$ —



	Fair Value Measurements as of December 31, 2018
(in thousands)	Total		Level 1		Level 2		Level 3
Assets:
Debt securities available for sale:
U.S. Government agencies and corporations	$	5,495	$	—	$	5,495	$	—
State and political subdivisions	121,901		—		121,901		—
Mortgage-backed securities	50,653		—		50,653		—
Collateralized mortgage obligations	169,928		—		169,928		—
Corporate debt securities	66,124		—		66,124		—
Total debt securities available for sale	$	414,101	$	—	$	414,101	$	—
Equity securities	2,737		2,737		—		—
Derivatives:
Interest rate swaps	321		—		321		—

Liabilities:
Derivatives:
Interest rate swaps	$	582	$	—	$	582	$	—
RPAs	85		—		85		—
Total derivative liabilities	$	667	$	—	$	667	$	—

There were no0 transfers of assets between Level 3 and other levels of the fair value hierarchy during the three and nine months ended September 30, ~~2018~~2019 or the year ended December 31, ~~2017.~~2018.

Changes in the fair value of ~~available for sale~~AFS debt securities are included in other comprehensive income, and changes in the fair value of equity securities are included in noninterest income.

The following ~~table discloses the Company’s estimated fair value amounts of its~~tables present assets ~~recorded~~measured at fair value on a nonrecurring ~~basis. It is management’s belief that the fair values presented below are reasonable based on the valuation techniques and data available to the Company~~basis as of ~~September 30, 2018~~ ~~and~~ ~~December 31, 2017, as more fully described above.~~ the dates indicated:

Fair Value Measurement at September 30, 2018 Using
(in thousands) Fair Value
Quoted Prices in
Active Markets for
Identical Assets
(Level 1)

Significant Other
Observable
Inputs
(Level 2)

Significant
Unobservable
Inputs
(Level 3)
Assets:
Collateral dependent impaired loans $ 8,362
$ —
$ —
$ 8,362
Other real estate owned $ 549
$ —
$ —
$ 549



	Fair Value Measurements as of September 30, 2019
(in thousands)	Total		Level 1		Level 2		Level 3
Impaired loans, net of related allowance	$	7,458	$	—	$	—	$	7,458
Foreclosed assets, net	$	4,366	$	—	$	—	$	4,366

Fair Value Measurement at December 31, 2017 Using
(in thousands) Fair Value
Quoted Prices in
Active Markets for
Identical Assets
(Level 1)

Significant Other
Observable
Inputs
(Level 2)

Significant
Unobservable
Inputs
(Level 3)
Assets:
Collateral dependent impaired loans $ 3,927
$ —
$ —
$ 3,927
Other real estate owned $ 2,010
$ —
$ —
$ 2,010



	Fair Value Measurements as of December 31, 2018
(in thousands)	Total		Level 1		Level 2		Level 3
Impaired loans, net of related allowance	$	10,084	$	—	$	—	$	10,084
Foreclosed assets, net	$	535	$	—	$	—	$	535

The following table presents the valuation ~~technique(s),~~technique and unobservable inputs ~~and quantitative information about the unobservable inputs used~~ for Level 3 assets measured at fair value ~~measurements~~as of the ~~financial instruments held by the Company at September 30, 2018, categorized within Level 3 of the fair value hierarchy:~~date indicated:

Quantitative Information About Level 3 Fair Value Measurements
(dollars in thousands) Fair Value at September 30, 2018 Valuation Techniques(s) Unobservable Input Range of Inputs Weighted Average
Collateral dependent impaired loans $ 8,362
Modified appraised value Third party appraisal NM * - NM * NM *
Appraisal discount NM * - NM * NM *
Other real estate owned $ 549
Modified appraised value Third party appraisal NM * - NM * NM *
Appraisal discount NM * - NM * NM *

September 30, 2019

(dollars in thousands)

Fair Value

Valuation Techniques(s)

Unobservable Input

Range of Inputs

Weighted Average

Impaired loans, net of related allowance

7,458

Third party appraisal

Appraisal discount

NM *

Foreclosed assets, net

4,366

Third party appraisal

Appraisal discount

NM *

* Not Meaningful. Third party appraisals are obtained as to the value of the underlying asset, but disclosure of this information would not provide meaningful information, as the range will vary widely from loan to loan. Types of discounts considered include age of the appraisal, local market conditions, current condition of the property, and estimated sales costs. These discounts will also vary from loan to loan, thus providing a range would not be meaningful.

~~Due to~~The following tables summarize the adoption of ASU 2016-01 as of January 1, 2018, the estimated fair value amounts shown for December 31, 2017 are not comparable to those for September 30, 2018, due to a change in the required methodology (“exit price” only) for determining current estimated fair value. The carrying amount and estimated fair value of selected financial instruments ~~not carried at fair value, at~~ ~~September 30, 2018~~ ~~and~~ ~~December 31, 2017~~ ~~are~~ as ~~follows:~~of the dates indicated:

September 30, 2018
(in thousands)
Carrying
Amount

Estimated
Fair Value
Quoted
Prices in
Active
Markets for
Identical Assets
(Level 1) Significant Other
Observable
Inputs
(Level 2) Significant
Unobservable
Inputs
(Level 3)
Financial assets:
Cash and cash equivalents $ 53,379
$ 53,379
$ 53,379
$ —
$ —
Investment securities:
Equity securities 2,797
2,797
2,797
—
—
Debt securities available for sale 407,766
407,766
—
407,766
—
Debt securities held to maturity 191,733
186,057
—
186,057
—
Total investment securities 602,296
596,620
2,797
593,823
—
Loans held for sale 1,124
1,145
—
1,145
—
Loans held for investment, net 2,346,371
2,283,363
—
—
2,283,363
Interest receivable 14,800
14,800
14,800
—
—
Federal Home Loan Bank stock 13,260
13,260
—
13,260
—
Derivative assets 205
205
—
205
—
Financial liabilities:
Deposits:
Non-interest bearing demand 458,576
458,576
458,576
—
—
Interest-bearing checking 1,236,922
1,236,922
1,236,922
—
—
Savings 211,591
211,591
211,591
—
—
Certificates of deposit under $100,000 348,099
342,998
—
342,998
—
Certificates of deposit $100,000 and over 377,071
373,313
—
373,313
—
Total deposits 2,632,259
2,623,400
1,907,089
716,311
—
Federal funds purchased and securities sold under agreements to repurchase 87,978
87,978
87,978
—
—
Federal Home Loan Bank borrowings 143,000
141,110
—
141,110
—
Junior subordinated notes issued to capital trusts 23,865
21,058
—
21,058
—
Long-term debt 8,750
8,750
—
8,750
—
Derivative liabilities 178
178
—
178
—



	September 30, 2019
(in thousands)	Carrying Amount		Estimated Fair Value		Level 1		Level 2		Level 3
Financial assets:
Cash and cash equivalents	$	86,667	$	86,667	$	86,667	$	—	$	—
Equity securities	2,836		2,836		2,836		—		—
Debt securities available for sale	503,278		503,278		—		503,278		—
Debt securities held to maturity	190,309		193,337		—		193,337		—
Loans held for sale	7,906		8,028		—		8,028		—
Loans held for investment, net	3,493,196		3,462,456		—		—		3,462,456
Interest and dividends receivable	18,544		18,544		18,544		—		—
Federal Home Loan Bank stock	15,838		15,838		—		15,838		—
Derivative assets	2,441		2,441		—		2,441		—
Financial liabilities:
Noninterest bearing deposits	673,777		673,777		673,777		—		—
Interest bearing deposits	3,035,935		3,035,745		2,078,128		957,617		—
Short-term borrowings	155,101		155,101		155,101		—		—
Finance lease liability	1,254		1,254		—		1,254		—
Federal Home Loan Bank borrowings	155,727		157,081		—		157,081		—
Junior subordinated notes issued to capital trusts	41,543		39,620		—		39,620		—
Subordinated debentures	10,903		11,099		—		11,099		—
Other long-term debt	35,250		35,250		—		35,250		—
Derivative liabilities	4,479		4,479		—		4,479		—

December 31, 2017
(in thousands)
Carrying
Amount

Estimated
Fair Value

Quoted
Prices in
Active
Markets for
Identical Assets
(Level 1)
Significant Other
Observable
Inputs
(Level 2) Significant
Unobservable
Inputs
(Level 3)
Financial assets:
Cash and cash equivalents $ 50,972
$ 50,972
$ 50,972
$ —
$ —
Investment securities:
Equity securities 2,336
2,336
2,336
—
—
Debt securities available for sale 445,324
445,324
—
445,324
—
Debt securities held to maturity 195,619
194,343
—
194,343
—
Total investment securities 643,279
642,003
2,336
639,667
—
Loans held for sale 856
871
—
—
871
Loans held for investment, net 2,258,636
2,256,726
—
2,256,726
—
Interest receivable 14,732
14,732
14,732
—
—
Federal Home Loan Bank stock 11,324
11,324
—
11,324
—
Financial liabilities:
Deposits:
Non-interest bearing demand 461,969
461,969
461,969
—
—
Interest-bearing checking 1,228,112
1,228,112
1,228,112
—
—
Savings 213,430
213,430
213,430
—
—
Certificates of deposit under $100,000 324,681
321,197
—
321,197
—
Certificates of deposit $100,000 and over 377,127
374,685
—
374,685
—
Total deposits 2,605,319
2,599,393
1,903,511
695,882
—
Federal funds purchased and securities sold under agreements to repurchase 97,229
97,229
97,229
—
—
Federal Home Loan Bank borrowings 115,000
114,945
—
114,945
—
Junior subordinated notes issued to capital trusts 23,793
19,702
—
19,702
—
Long-term debt 12,500
12,500
—
12,500
—



	December 31, 2018
(in thousands)	Carrying Amount		Estimated Fair Value		Level 1		Level 2		Level 3
Financial assets:
Cash and cash equivalents	$	45,480	$	45,480	$	45,480	$	—	$	—
Equity securities	2,737		2,737		2,737		—		—
Debt securities available for sale	414,101		414,101		—		414,101		—
Debt securities held to maturity	195,822		192,564		—		192,564		—
Loans held for sale	666		678		—		678		—
Loans held for investment, net	2,369,472		2,343,654		—		—		2,343,654
Interest and dividends receivable	14,736		14,736		14,736		—		—
Federal Home Loan Bank stock	14,678		14,678		—		14,678		—
Derivative assets	321		321		—		321		—
Financial liabilities:
Noninterest bearing deposits	439,133		439,133		439,133		—		—
Interest bearing deposits	2,173,796		2,166,518		1,450,149		716,369		—
Short-term borrowings	131,422		131,422		131,422		—		—
Capital lease liability	1,338		1,338		—		1,338		—
Federal Home Loan Bank borrowings	136,000		134,995		—		134,995		—
Junior subordinated notes issued to capital trusts	23,888		21,215		—		21,215		—
Other long-term debt	7,500		7,500		—		7,500		—
Derivative liabilities	667		667		—		667		—

~~14.~~17. Revenue Recognition

~~On January 1, 2018, the Company adopted ASU No. 2014-09 “Revenue from Contracts with Customers” (Topic 606) and all subsequent ASUs that modified Topic 606. As stated in~~ ~~Note 2. “Effect of New Financial Accounting Standards,”~~ the implementation of the new standard did not have a material impact on the measurement or recognition of revenue; as such, a cumulative effect adjustment to opening retained earnings was not deemed necessary. Results for reporting periods beginning after January 1, 2018 are presented under Topic 606, while prior period amounts were not adjusted and continue to be reported in accordance with our historic accounting under Topic 605.

Topic 606 does not apply to revenue associated with financial instruments, including revenue from loans and securities. In addition, certain noninterest income streams such as fees associated with mortgage servicing rights, financial guarantees, derivatives, and certain credit card fees are also not in scope of the new guidance. Topic 606 is applicable to noninterest revenue streams such as trust and asset management fees, service charges on deposit accounts, sales of other real estate, and debit card interchange fees. However, the recognition of these revenue streams did not change significantly upon adoption of Topic 606. Substantially all of the Company’s revenue is generated from contracts with customers. Noninterest revenue streams in-scope of Topic 606 are discussed below.

Trust and Asset Management

Trust and asset management income is primarily comprised of fees earned from the management and administration of trusts and other customer assets. The Company’s performance obligation is generally satisfied over time, and the resulting fees are recognized monthly, based upon the month-end market value of the assets under management and the applicable fee rate. Payment is generally received a few days after month end through a direct charge to customers’ accounts. The Company does not earn performance-based incentives. Optional services such as real estate sales and tax return preparation services are also available to existing trust and asset management customers. The Company’s performance obligation for these transactional-based services is generally satisfied, and related revenue recognized, at a point in time (i.e., as incurred). Payment is received shortly after services are rendered.

Service Charges on Deposit Accounts

Service charges on deposit accounts consist of account analysis fees (i.e., net fees earned on analyzed business and public checking accounts), monthly service fees, check orders, and other deposit account related fees. The Company’s performance obligation for account analysis fees and monthly service fees is generally satisfied, and the related revenue recognized, over the period in which the service is provided. Check orders and other deposit account related fees are largely transactional based, and therefore, the Company’s performance obligation is satisfied, and related revenue recognized, at a point in time. Payment for service charges on deposit accounts is primarily received immediately or in the following month through a direct charge to customers’ accounts.

Fees, Exchange, and Other Service Charges

Fees, exchange, and other service charges are primarily comprised of debit and credit card income, ATM fees, merchant services income, and other service charges. Debit and credit card income is primarily comprised of interchange fees earned whenever the Company’s debit and credit cards are processed through card payment networks such as Visa. ATM fees are primarily generated when a Company cardholder uses a non-Company ATM or a non-Company cardholder uses a Company ATM. Merchant services income mainly represents fees charged to merchants to process their debit and credit card transactions, in addition to account management fees. Other service charges include revenue from processing wire transfers, bill pay service, cashier’s checks, and other services. The Company’s performance obligation for fees, exchange, and other service charges are largely satisfied, and related revenue recognized, when the services are rendered or upon completion. Payment is typically received immediately or in the following month.

Gains/Losses on Sales of ~~OREO~~Foreclosed Assets

Gain or loss from the sale of ~~OREO~~foreclosed assets occurs when control of the property transfers to the buyer, which generally occurs at the time of an executed deed. When the Company finances the sale of ~~OREO~~foreclosed assets to the buyer, the Company assesses whether the buyer is committed to perform their obligations under the contract and whether collectability of the transaction price is probable. Once these criteria are met, the ~~OREO asset is~~foreclosed assets are derecognized and the gain or loss on

sale is recorded upon the transfer of control of the property to the buyer. In determining the gain or loss on the sale, the Company adjusts the transaction price and related gain (loss) on sale if a significant financing component is present. ~~OREO~~Foreclosed asset sales for the nine months ended September 30, ~~2018~~2019 and September 30, ~~2017~~2018 were not financed by the Bank.

Other

Other noninterest income consists of other recurring revenue streams such as safe deposit box rental fees, and other miscellaneous revenue streams. Safe deposit box rental fees are charged to the customer on an annual basis and recognized upon receipt of payment. The Company determined that since rentals and renewals occur fairly consistently over time, revenue is recognized on a basis consistent with the duration of the performance obligation.

Contract Balances

A contract asset balance occurs when an entity performs a service for a customer before the customer pays consideration (resulting in a contract receivable) or before payment is due (resulting in a contract asset). A contract liability balance is an entity’s obligation to transfer a service to a customer for which the entity has already received payment (or payment is due) from the customer. The Company’s noninterest revenue streams are largely based on transactional activity, or standard month-end revenue accruals such as asset management fees based on month-end market values. Consideration is often received immediately or shortly after the Company satisfies its performance obligation and revenue is recognized. The Company does not typically enter into long-term revenue contracts with customers, and therefore, does not experience significant contract balances. As of September 30, ~~2018~~2019 and December 31, ~~2017,~~2018, the Company did not have any significant contract balances.

Contract Acquisition Costs

In connection with the adoption of Topic 606, an entity is required to capitalize, and subsequently amortize into expense, certain incremental costs of obtaining a contract with a customer if these costs are expected to be recovered. The incremental costs of obtaining a contract are those costs that an entity incurs to obtain a contract with a customer that it would not have incurred if the contract had not been obtained (for example, sales commission). The Company utilizes the practical expedient which allows entities to immediately expense contract acquisition costs when the asset that would have resulted from capitalizing these costs would have been amortized in one year or less. Upon adoption of Topic 606, the Company did not capitalize any contract acquisition cost.

~~15.~~18. Leases

A lease is defined as a contract, or part of a contract, that conveys the right to control the use of identified property, plant or equipment for a period of time in exchange for consideration. On January 1, 2019, the Company adopted ASU No. 2016-02 “Leases” (Topic 842) and all subsequent ASUs that modified Topic 842. For the Company, Topic 842 primarily affected the accounting treatment for operating lease agreements in which the Company is the lessee. As stated in Note 2. “Effect of New Financial Accounting Standards,” the implementation of the new standard did not have a material effect on the Company’s consolidated financial statements. The Company adopted the new standard utilizing the cumulative effect approach, and also elected certain relief options offered in ASU 2016-02 including the package of practical expedients, the option not to separate lease and non-lease components and instead to account for them as a single lease component, and the option not to recognize ROU assets and lease liabilities that arise from short-term leases (i.e., leases with terms of twelve months or less). The Company elected the hindsight practical expedient, which allows entities to use hindsight when determining lease term and impairment of ROU assets. The Company has several lease agreements for branch locations, which are considered operating leases, and are now recognized on the Company’s consolidated balance sheets.

Lessee Accounting

Substantially all of the leases in which the Company is the lessee are comprised of real estate property for branches and office space with terms extending through 2025. We do not have any subleased properties. Substantially all of our leases are classified as operating leases, and therefore, were previously not recognized on the Company’s consolidated balance sheets. With the adoption of Topic 842, operating lease agreements are required to be recognized on the consolidated statements of condition as a ROU asset and a corresponding lease liability. Upon adoption of ASU 2016-02, the Company recognized a ROU asset on its balance sheet in the amount of $2.9 million, and a corresponding operating lease liability of $2.9 million. The Company has one existing finance lease (previously referred to as a capital lease) for a branch location with a lease term through 2025. As this lease was previously required to be recorded on the Company’s consolidated statements of condition, Topic 842 did not materially impact the accounting for this lease.

On May 1, 2019 the Company completed its merger with ATBancorp. In connection with the transaction, the Company obtained lease right-of-use assets totaling $1.6 million, which are included in the following disclosures.

The following table represents the consolidated balance sheet classification of the Company’s ROU assets and lease liabilities. The Company elected not to include short-term leases (i.e., leases with initial terms of twelve months or less) on the consolidated balance sheet.



(in thousands)		September 30, 2019
Lease Right-of-Use Assets	Classification
Operating lease right-of-use assets	Other assets	$	3,824
Finance lease right-of-use asset	Premises and equipment, net	661
Total right-of-use assets		$	4,485

Lease Liabilities
Operating lease liability	Other liabilities	$	4,717
Finance lease liability	Long-term debt	1,254
Total lease liabilities		$	5,971

The calculated amount of the ROU assets and lease liabilities in the table above are impacted by the length of the lease term and the discount rate used to present value the minimum lease payments. The Company’s lease agreements often include one or more options to renew at the Company’s discretion. If at lease inception, the Company considers the exercising of a renewal option to be reasonably certain, the Company will include the extended term in the calculation of the ROU asset and lease liability. Regarding the discount rate, Topic 842 requires the use of the rate implicit in the lease whenever this rate is readily determinable. As this rate is rarely determinable, the Company utilizes its incremental borrowing rate at lease inception, on a collateralized basis, over a similar term. For operating leases existing prior to January 1, 2019, the rate for the remaining lease term as of January 1, 2019 was used. For the Company’s only finance lease, the Company utilized the rate implicit in the lease.

The following table presents the weighted-average remaining term and weighted-average discount rate for both operating and finance leases as of September 30, 2019:



	September 30, 2019
Weighted-average remaining lease term
Operating leases	9.61 years
Finance lease	6.92 years
Weighted-average discount rate
Operating leases	4.06	%
Finance lease	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)	2019		2019
Lease Costs
Operating lease cost	$	303	$	755
Variable lease cost	52		118
Interest on lease liabilities ⁽¹⁾	28		85
Amortization of right-of-use assets	24		72
Net lease cost	$	407	$	1,030

Other Information
Cash paid for amounts included in the measurement of lease liabilities:
Operating cash flows from operating leases	$	524	$	1,354
Operating cash flows from finance lease	41		124
Finance cash flows from finance lease	28		83

Right-of-use assets obtained in exchange for new operating lease liabilities	49		5,319
Right-of-use assets obtained in exchange for new finance lease liabilities	—		—

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

Future minimum payments for finance leases and operating leases with initial or remaining terms of one year or more as of September 30, 2019 were as follows:



(in thousands)	Finance Leases		Operating Leases
Twelve Months Ended:
December 31, 2019	$	57	$	264
December 31, 2020	231		974
December 31, 2021	235		883
December 31, 2022	240		778
December 31, 2023	245		712
Thereafter	676		2,557
Total future minimum lease payments	$	1,684	$	6,168

Lease liability	1,254		4,717
Amounts representing interest	$	430	$	1,451

19. Operating Segments

The Company’s activities are considered to be ~~a single industry segment for financial reporting purposes.~~one reportable segment. The Company is engaged in the business of commercial and retail banking, and investment management ~~and insurance services~~ with operations throughout central and eastern Iowa, the Twin Cities area of Minnesota, ~~and~~ Wisconsin, Florida, and Denver,

Colorado. Substantially all income is derived from a diverse base of commercial, mortgage and retail lending activities, and investments.

~~16. Proposed Merger~~

~~For further information, please refer to the~~ ~~Current Report on Form 8-K~~ ~~filed by the Company with the SEC on August 22, 2018.~~

~~17.~~20. Subsequent Events

~~Management evaluated subsequent events through the date the consolidated financial statements were issued. Events or transactions occurring after~~ ~~September 30, 2018, but prior to the date the consolidated financial statements were issued, that provided additional evidence about conditions that existed at~~ ~~September 30, 2018~~ ~~have been recognized in the consolidated financial statements for the three and nine months ended~~ ~~September 30, 2018. Events or transactions that provided evidence about conditions that did not exist at~~ ~~September 30, 2018, but arose before the consolidated financial statements were issued, have not been recognized in the consolidated financial statements for the three and nine months ended~~ ~~September 30, 2018~~.

On October 16, 2018, the Board of Directors of the Company approved a new share repurchase program, allowing for the repurchase of up to $5.0 million of common stock through December 31, 2020. The new repurchase program replaces the Company's prior repurchase program, pursuant to which the Company had repurchased 33,998 shares of common stock for approximately $1.1 million since the plan was announced in July 2016. The prior program had authorized the repurchase of $5.0 million of stock and was due to expire on December 31, 2018.

On October ~~16, 2018~~22, 2019, the board of directors of the Company declared a cash dividend of $~~0.195~~0.2025 per share payable on December ~~15, 2018~~16, 2019 to shareholders of record as of the close of business on December ~~1, 2018~~2, 2019.

Pursuant to the Company’s share repurchase program approved on August 20, 2019, the Company purchased 19,102 shares of common stock subsequent to September 30, 2019 and through November 5, 2019 for a total cost of $0.6 million inclusive of transaction costs, leaving $4.0 million remaining available under the program.

The Company has evaluated events that have occurred subsequent to September 30, 2019 and has concluded there are no other subsequent events that would require recognition in the accompanying consolidated financial statements.

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

OVERVIEW

The Company provides financial services to individuals, businesses, governmental units and institutional customers located primarily in the upper Midwest through its bank subsidiary, MidWestOne Bank (the “Bank”). The Bank has locations in central and ~~east-central~~eastern Iowa, the Twin Cities area of Minnesota, Wisconsin, Florida, and Denver, Colorado. The Bank is actively engaged in many areas of commercial banking, including: acceptance of demand, savings and time deposits; making commercial, real estate, agricultural and consumer loans; and other banking services tailored for its ~~individual~~commercial and retail customers. The ~~Wealth Management Division~~Trust and Investment Service departments of theBank ~~administers~~administer estates, personal trusts, conservatorships, and pension and profit-sharing accounts along with providing brokerage and other investment management services to customers. ~~MidWestOne~~ ~~Insurance Services, Inc.,~~

On May 1, 2019, the Company acquired ATBancorp, a ~~wholly-owned subsidiary~~bank holding company and the parent company of ATSB, a commercial bank headquartered in Dubuque, Iowa, and ABTW, a commercial bank headquartered in Cuba City, Wisconsin, through the merger of ATBancorp with and into the Company. The primary reasons for the acquisition were to expand the Company’s operations into new markets and grow the size of the Company, provides personal and business insurance services in Iowa. During the second quarter of 2018, the Company purchased a registered investment adviser in Denver, Colorado, which operates through the Bank.Company’s business.

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

Our results of operations depend primarily on our net interest income, which is the difference between the interest income on our interest-earning assets, such as loans and securities held for investment, and the interest expense paid on our deposits and borrowings. Results of operations are also affected by ~~non-interest~~noninterest income and expense, the provision for loan losses and income

tax expense. Significant

external factors that impact our results of operations include general economic and competitive conditions, as well as changes in market interest rates, government policies, and actions of regulatory authorities.

The following discussion and analysis should be read in conjunction with the consolidated financial statements and related notes and 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, ~~2017.~~2018. Results of operations for the three and nine months ended September 30, ~~2018~~2019 are not necessarily indicative of results to be attained for any other period.

On August 21, 2018, the Company entered into a merger agreement with ATBancorp, an Iowa corporation, pursuant to which ATBancorp will merge with and into the Company. In connection with the merger, American Trust & Savings Bank, an Iowa state chartered bank and wholly owned subsidiary of ATBancorp, and American Bank & Trust Wisconsin, a Wisconsin state chartered bank and wholly owned subsidiary of ATBancorp, will merge with and into MidWest~~One~~ Bank, which will continue as the surviving bank. The merger agreement also provides that each of the outstanding shares of ATBancorp common stock will be converted into the right to receive 117.5500 shares of Company common stock and $992.51 in cash. The corporate headquarters of the combined company will be in Iowa City, Iowa. The merger is anticipated to be completed in the first quarter of 2019. For further information, please refer to the ~~Current Report on Form 8-K~~ ~~filed by the Company with the SEC on August 22, 2018.~~

Critical Accounting Estimates

Critical accounting estimates are those which are both most important to the portrayal of our financial condition and results of operations, and require our ~~management's~~management’s most difficult, subjective or complex judgments, often as a result of the need to make estimates about the effect of matters that are inherently uncertain. Our critical accounting estimates relate to the ~~allowance~~ALLL, accounting for ~~loan losses, application of purchase accounting,~~business combinations, goodwill and other intangible assets, and fair value of ~~available for sale~~AFS investment securities, all of which involve significant judgment by our management. Information about our critical accounting estimates is included under Item 7, "“~~Management's~~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, ~~2017.~~2018.

RESULTS OF OPERATIONS

Comparison of Operating Results for the Three Months Ended September 30, ~~2018~~2019 and September 30, ~~2017~~2018

Summary

On May 1, 2019, we completed the acquisition of ATBancorp. The effects of this acquisition are one of the primary causes of the changes in our operating results for the three months ended September 30, 2019 compared to the three months ended September 30, 2018, unless otherwise noted. See Note 3. “Business Combinations” for more details regarding assets acquired and liabilities assumed.

For the quarter ended September 30, ~~2018,~~2019, we earned net income of ~~$6.8~~$12.3 million, which was an increase of ~~$0.5~~$5.5 million from ~~$6.3~~$6.8 million for the quarter ended September 30, ~~2017.~~2018. The increase in net income was due primarily to a ~~$3.4~~$17.1 million, or ~~78.3%~~65.7%, ~~decrease~~increase in ~~the allowance for loan losses~~net interest income, combined with a $2.0 million, or 32.4%, increase in noninterest income, partially offset by an $8.8 million, or 39.0%, increase in noninterest expense between the two comparable periods, an increase of $0.1 million, or 1.1%, in noninterest income, and a $0.1 million, or 6.8%, decrease in income tax expense, stemming from the reduction in the maximum corporate federal income tax rate to 21% for 2018 compared to 35% for 2017. These increases were partially offset by an increase of $3.1 million, or 15.5%, in noninterest expense, due primarily to increased salaries and employee benefits of $1.0 million, or 8.4%, and a $0.1 million, or 0.5%, decrease in net interest income, due primarily to an increase of $2.2 million in interest expense partially offset by an increase of $2.1 million in interest income.periods. Both basic and diluted earnings per common share for the third quarter of ~~2018~~2019 were ~~$0.55,~~$0.76, versus ~~$0.52~~$0.55 for the third quarter of ~~2017.~~2018. Our annualized return on average assets for the third quarter of ~~2018~~2019 was ~~0.83%~~1.06% compared with ~~0.81% for~~0.83% in the ~~same period in 2017.~~third quarter of 2018. Our annualized return on average shareholders’ equity was 9.92% for the three months ended September 30, 2019 compared with 7.72% for the three months ended September 30, ~~2018 compared with 7.29% for the three months ended September 30, 2017.~~2018. The annualized return on average tangible equity was ~~10.45%~~15.57% for the third quarter of ~~2018~~2019 compared with ~~10.06%~~10.42% for the same period in ~~2017.~~

2018.

The following table presents selected financial results and measures as of and for the quarters ended September 30, ~~2018~~2019 and ~~2017.~~2018.


	As of and for the Three Months Ended September 30,						As of and for the Three Months Ended September 30,
(dollars in thousands, except per share amounts)	2018			2017			2019			2018
Net Income	$	6,778		$	6,342		$	12,300		$	6,778
Average Assets	3,258,283			3,102,348			4,620,531			3,258,283
Average Shareholders’ Equity	348,131			344,961			491,750			348,131
Return on Average Assets*	0.83		%	0.81		%	1.06		%	0.83		%
Return on Average Shareholders’ Equity*	7.72			7.29			9.92			7.72
Return on Average Tangible Equity*⁽¹⁾	10.45			10.06			15.57			10.42
Total Equity to Assets (end of period)	10.69			11.02			10.71			10.69
Tangible Equity to Tangible Assets (end of period)⁽¹⁾	8.61			8.84			8.21			8.59
Book Value per Share	$	28.57		$	28.36		$	30.77		$	28.57
Tangible Book Value per Share⁽¹⁾	22.50			22.20			22.93			22.43
* Annualized
(1) A non-GAAP financial measure. See below for a reconciliation to the most comparable GAAP equivalents.

We ~~have traditionally disclosed~~disclose certain non-GAAP ratios, including ~~our~~ return on average tangible equity, ~~and~~ the ratio of ~~our~~ tangible equity to tangible assets, ~~as well as adjusted noninterest income as a percentage of total revenue~~ and tangible book value per ~~share. We~~share, as we believe these ~~financial~~ measures provide investors with information regarding our financial condition and results of operations and how we evaluate them ~~internally, such as presenting how management tracks adjusted noninterest income as a percentage~~internally. These metrics focus on the core business of ~~total revenue against its goal~~the Company by removing the effects of ~~25%.~~goodwill and other intangibles.

The following tables provide a reconciliation of the non-GAAP measures to the most comparable GAAP ~~equivalents.~~equivalents for the periods indicated:

For the Three Months Ended September 30,
(dollars in thousands) 2018 2017
Net Income:
Net income $ 6,778
$ 6,342
Plus: Intangible amortization, net of tax ⁽¹⁾
432
493
Adjusted net income $ 7,210
$ 6,835
Average Tangible Equity:
Average total shareholders’ equity $ 348,131
$ 344,961
Plus: Average deferred tax liability associated with intangibles 852
2,282
Less: Average intangibles, net of amortization (75,292 ) (77,775 )
Average tangible equity $ 273,691
$ 269,468
Return on Average Tangible Equity (annualized) 10.45 % 10.06 %
(1) Computed on a tax-equivalent basis, assuming a federal income tax rate of 21% for 2018 and 35% for 2017.



	For the Three Months Ended September 30,
(dollars in thousands)	2019			2018
Net Income:
Net income	$	12,300		$	6,778
Plus: Intangible amortization, net of tax ⁽¹⁾	1,937			410
Adjusted net income	$	14,237		$	7,188
Average Tangible Equity:
Average total shareholders’ equity	$	491,750		$	348,131
Less: Average intangibles, net	(128,963		)	(75,292		)
Average tangible equity	$	362,787		$	272,839
Return on Average Tangible Equity (annualized)	15.57		%	10.42		%
(1) Computed assuming a combined marginal income tax rate of 25%.

For the Three Months Ended September 30,
(dollars in thousands) 2018 2017
Adjusted Noninterest Income:
Noninterest income $ 5,984
$ 5,916
Less: Gain on sale of debt securities (192 ) (176 )
Other gain (326 ) (10 )
Adjusted noninterest income $ 5,466
$ 5,730
Total Revenue:
Net interest income $ 26,361
$ 26,492
Plus: Noninterest income 5,984
5,916
Less: Gain on sale of debt securities (192 ) (176 )
Other gain (326 ) (10 )
Total Revenue $ 31,827
$ 32,222
Adjusted Noninterest Income as a Percentage of Total Revenue⁽¹⁾
17.2 % 17.8 %
(1) This measure tracks management’s strategic goal for this measure to be at 25%.


	As of September 30,						As of September 30,
(dollars in thousands, except per share amounts)	2018			2017			2019			2018
Tangible Equity:
Total shareholders’ equity	$	349,189		$	346,563		$	497,885		$	349,189
Plus: Deferred tax liability associated with intangibles	786			2,141
Less: Intangible assets, net	(75,032		)	(77,413		)	(126,893		)	(75,032		)
Tangible equity	$	274,943		$	271,291		$	370,992		$	274,157
Tangible Assets:
Total assets	$	3,267,965		$	3,144,199		$	4,648,287		$	3,267,965
Plus: Deferred tax liability associated with intangibles	786			2,141
Less: Intangible assets, net	(75,032		)	(77,413		)	(126,893		)	(75,032		)
Tangible assets	$	3,193,719		$	3,068,927		$	4,521,394		$	3,192,933
Common shares outstanding	12,221,107			12,218,528			16,179,734			12,221,107
Tangible Book Value Per Share	$	22.50		$	22.20		$	22.93		$	22.43
Tangible Equity/Tangible Assets	8.61		%	8.84		%	8.21		%	8.59		%

Net Interest Income

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

Certain assets with tax favorable ~~treatment~~attributes are evaluated on a tax-equivalent basis. Tax-equivalent basis assumes a federal income tax rate of 21% ~~for 2018 and 35% for 2017.~~. Tax-favorable assets generally have lower contractual yields than fully taxable assets. A tax-equivalent analysis is performed by adding the tax savings to the earnings on tax-favorable assets. After factoring in the tax-favorable effects of these assets, the yields may be more appropriately evaluated against alternative earning assets. In addition to yield, various other risks are factored into the evaluation process.

Net interest income of ~~$26.4~~$43.3 million for the third quarter of ~~2018~~2019 was ~~down $0.1~~up $17.1 million, or ~~0.5%~~65.7%, from ~~$26.5~~$26.1 million for the third quarter of ~~2017.~~2018. An increase in interest income of ~~$2.1~~$21.9 million, or ~~6.9%~~67.9%, was ~~more than~~partially offset by increased interest expense of ~~$2.2~~$4.7 million, or ~~57.6%~~77.4%. Loan interest income increased ~~$1.9~~$21.1 million, or ~~7.2%~~75.1%, to ~~$28.1~~$49.2 million for the third quarter of ~~2018~~2019 compared to the third quarter of ~~2017,~~2018, as a ~~2 basis point decrease in loan yield was more than offset by a $155.7 million,~~$1.2 billion, or ~~7.0%~~48.5%, increase in average loan balances between the two ~~periods.~~periods was augmented by a 85 basis point increase in loan yield. Merger-related loan purchase discount accretion saw ~~a decrease~~an increase of ~~$0.7~~$6.6 million to ~~$0.6~~$7.2 million for the third quarter of ~~2018.~~2019 and drove 71 basis points of the increased loan yield. Interest income from investment securities was ~~$4.4~~$4.8 million for the third quarter of ~~2018,~~2019, up $0.7 million from ~~$4.1~~the third quarter of 2018.

Interest expense increased $4.7 million, or 77.4%, to $10.8 million for the third quarter of ~~2017.~~

~~Interest expense increased $2.2 million, or 57.6%,~~2019, compared to $6.1 ~~million for the third quarter of 2018, compared to $3.9~~ million for the same period in ~~2017,~~2018, primarily due to an increase in the cost of interest-bearing deposits of 2823 basis points and an increase in the average balance of ~~$133.9~~$862.9 million between the two periods. Interest expense on borrowed funds was $2.6 million for the third quarter of 2019, up from $1.5 million for the third quarter of 2018, ~~up from $1.0 million for the third quarter of 2017,~~ an increase of ~~$0.5~~$1.1 million, or ~~52.1%~~75.0%. This increase resulted from an increase of 5552 basis points in ~~cost,~~rate, combined with ~~a higher~~an increase in the average balance of borrowed funds ~~of $277.7~~ to $388.7

million for the third quarter of ~~2018~~2019 compared to ~~$247.0~~$277.7 million for the same period last year, an increase of ~~$30.7~~$111.0 million, or ~~12.4%~~40.0%, between the comparative periods.

Our net interest margin for the third quarter of ~~2018,~~2019, calculated on a fully tax-equivalent basis, was ~~3.56%~~4.15%, or 2960 basis points ~~lower~~higher than the net interest margin of ~~3.85%~~3.55% for the third quarter of ~~2017.~~2018. The yield on loans ~~decreased 2~~increased 85 basis points ~~and~~due primarily to the benefit from loan purchase discount accretion. The tax equivalent yield on investment securities ~~decreased~~increased by 1013 basis ~~points, primarily due to~~points. Combined, the ~~reduction in the federal income tax rate,~~ resulting ~~in the~~ yield on interest-earning assets for the third quarter of ~~2018 being 2~~2019 was 81 basis points ~~lower compared to~~higher than the third quarter of ~~2017.~~2018. The cost of deposits increased 2823 basis points, reflecting competitive market pressures, while the average cost of borrowings was higher by 5552 basis points for the third quarter of ~~2018,~~2019, compared to the third quarter of ~~2017,~~2018, reflecting ~~the increasing interest rate environment. We expect further net interest margin compression pressure~~higher costs from certain short-term borrowing as well as certain higher cost long-term debt assumed in the ~~future as rates on deposits are expected to increase more rapidly than yields on loans.~~ATBancorp acquisition.

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 ~~interest rates~~costs for the quarters ended September 30, 2018 and 2017, reported on a fully tax-equivalent basis assuming a 21% tax rate for 2018 and a 35% tax rate for 2017. Dividing annualized income or expense by the average balances of assets or liabilities results in average yields or costs. Average information is provided on a daily average basis.periods indicated.

Three Months Ended September 30,
2018 2017

Average
Balance

Interest
Income/
Expense

Average
Rate/
Yield

Average
Balance

Interest
Income/
Expense

Average
Rate/
Yield
(dollars in thousands)
Average Interest-Earning Assets:
Loans ⁽¹⁾⁽²⁾
$ 2,375,100
$ 28,358
4.74 % $ 2,219,355
$ 26,652
4.76 %
Investment securities:
Taxable investments 426,674
2,965
2.76
417,896
2,589
2.46
Tax exempt investments ⁽²⁾
200,577
1,760
3.48
217,535
2,367
4.32
Total investment securities 627,251
4,725
2.99
635,431
4,956
3.09
Federal funds sold and interest-bearing balances 2,541
12
1.87
3,929
19
1.92
Total interest-earning assets $ 3,004,892
$ 33,095
4.37 % $ 2,858,715
$ 31,627
4.39 %

Cash and due from banks 36,759
35,774

Premises and equipment 77,476
74,962

Allowance for loan losses (31,441 ) (23,054 )
Other assets 170,597
155,951

Total assets $ 3,258,283
$ 3,102,348

Average Interest-Bearing Liabilities:
Savings and interest-bearing demand deposits $ 1,425,768
$ 1,685
0.47 % $ 1,345,525
$ 966
0.28 %
Certificates of deposit 729,795
2,940
1.60
676,143
1,934
1.13
Total deposits 2,155,563
4,625
0.85
2,021,668
2,900
0.57
Federal funds purchased and repurchase agreements 99,254
317
1.27
95,387
134
0.56
Federal Home Loan Bank borrowings 143,326
741
2.05
111,576
474
1.69
Long-term debt and other 35,109
416
4.70
40,057
361
3.58
Total borrowed funds 277,689
1,474
2.11
247,020
969
1.56
Total interest-bearing liabilities $ 2,433,252
$ 6,099
0.99 % $ 2,268,688
$ 3,869
0.68 %

Net interest spread⁽²⁾
3.38 % 3.71 %

Demand deposits 453,124
466,485

Other liabilities 23,776
22,214

Shareholders’ equity 348,131
344,961

Total liabilities and shareholders’ equity $ 3,258,283
$ 3,102,348

Interest income/earning assets ⁽²⁾
$ 3,004,892
$ 33,095
4.37 % $ 2,858,715
$ 31,627
4.39 %
Interest expense/earning assets $ 3,004,892
$ 6,099
0.81 % $ 2,858,715
$ 3,869
0.54 %
Net interest margin ⁽²⁾⁽³⁾
$ 26,996
3.56 % $ 27,758
3.85 %

Non-GAAP to GAAP Reconciliation:
Tax Equivalent Adjustment:
Loans $ 270
$ 446

Securities 365
820

Total tax equivalent adjustment 635
1,266

Net Interest Income $ 26,361
$ 26,492



	Three Months Ended September 30,
	2019						2018
	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⁾	$	3,526,149	$	49,712	5.59	%	$	2,375,100	$	28,358	4.74	%
Taxable investment securities	471,180		3,376		2.84		409,816		2,715		2.63
Tax-exempt investment securities ⁽²⁾	200,533		1,765		3.49		200,577		1,760		3.48
Total securities held for investment	671,713		5,141		3.04		610,393		4,475		2.91
Other	17,609		130		2.93		2,541		12		1.87
Total interest-earning assets	$	4,215,471	$	54,983	5.17	%	$	2,988,034	$	32,845	4.36	%

Other assets	405,060						270,249
Total assets	$	4,620,531					$	3,258,283

Liabilities and Shareholders’ Equity:
Interest checking deposits	$	877,470	$	1,398	0.63	%	$	672,502	$	798	0.47	%
Money market deposits	809,264		1,904		0.93		539,142		824		0.61
Savings deposits	392,298		463		0.47		214,124		63		0.12
Time deposits	939,480		4,473		1.89		729,795		2,940		1.60
Total interest-bearing deposits	3,018,512		8,238		1.08		2,155,563		4,625		0.85
Short-term borrowings	139,458		522		1.49		99,254		321		1.28
Long-term debt	249,226		2,058		3.28		178,435		1,153		2.56
Total borrowed funds	388,684		2,580		2.63		277,689		1,474		2.11
Total interest-bearing liabilities	$	3,407,196	$	10,818	1.26	%	$	2,433,252	$	6,099	0.99	%

Net interest spread⁽³⁾					3.91	%					3.37	%

Noninterest-bearing deposits	674,003						453,124
Other liabilities	47,582						23,776
Shareholders’ equity	491,750						348,131
Total liabilities and shareholders’ equity	$	4,620,531					$	3,258,283

Interest income/earning assets ⁽²⁾	$	4,215,471	$	54,983	5.17	%	$	2,988,034	$	32,845	4.36	%
Interest expense/earning assets	$	4,215,471	$	10,818	1.02	%	$	2,988,034	$	6,099	0.81	%
Net interest margin ⁽³⁾			$	44,165	4.15	%			$	26,746	3.55	%

Non-GAAP to GAAP Reconciliation:
Tax Equivalent Adjustment:
Loans			$	543					$	270
Securities			364						365
Total tax equivalent adjustment			907						635
Net Interest Income			$	43,258					$	26,111



	(1)	Non-accrual loans have been included in average loans, net of unearned income. Amortized net deferred loans and net unearned discounts on acquired loans were included in the interest income calculations. The amortization of net deferred loans fees was ~~$(128)~~$(318) thousand and ~~$(99)~~$(186) thousand for the three months ended September 30, ~~2018,~~2019, and September 30, ~~2017,~~2018, respectively. Accretion of unearned purchase discounts was $7.2 million and $605 thousand ~~and $1.3 million~~ for the three months ended September 30, ~~2018,~~2019 and September 30, ~~2017,~~2018, respectively.
	(2)	Computed on a tax-equivalent basis, assuming a federal income tax rate of 21% ~~for 2018 and 35% for 2017.~~.
	(3)	~~Net interest margin is tax-equivalent net interest income as a percentage of average interest-earning assets.~~Tax equivalent.

The following table sets forth an analysis of volume and rate changes in tax-equivalent interest income and interest expense on our average interest-earning assets and average interest-bearing liabilities ~~during~~for the ~~three months ended September 30, 2018, compared to the same period in 2017, reported on a fully tax-equivalent basis assuming a 21% federal tax rate for 2018 and a 35% federal tax rate for 2017.~~periods indicated. The table distinguishes between the changes related to average outstanding balances (changes in volume holding the initial interest rate constant) and the changes related to average interest rates (changes in average rate holding the initial outstanding balance constant). The change in interest due to both volume and rate has been allocated to volume and rate changes in proportion to the relationship of the absolute dollar amounts of the change in each.

Three Months Ended September 30,
2018 Compared to 2017 Change due to
Volume Rate/Yield Net
(in thousands)
Increase (decrease) in interest income:
Loans, tax equivalent $ 2,447
$ (741 ) $ 1,706
Investment securities:
Taxable investments 55
321
376
Tax exempt investments (174 ) (433 ) (607 )
Total investment securities (119 ) (112 ) (231 )
Federal funds sold and interest-bearing balances (7 ) —
(7 )
Change in interest income 2,321
(853 ) 1,468
Increase (decrease) in interest expense:
Savings and interest-bearing demand deposits 58
661
719
Certificates of deposit 161
845
1,006
Total deposits 219
1,506
1,725
Federal funds purchased and repurchase agreements 6
177
183
Federal Home Loan Bank borrowings 153
114
267
Other long-term debt (238 ) 293
55
Total borrowed funds (79 ) 584
505
Change in interest expense 140
2,090
2,230
Increase in net interest income $ 2,181
$ (2,943 ) $ (762 )
Percentage change in net interest income over prior period (2.8 )%



	Three Months Ended September 30,
	2019 Compared to 2018 Change due to
	Volume			Yield/Cost		Net
(in thousands)
Interest income:
Loans, including fees	$	15,587		$	5,767	$	21,354
Taxable investment securities	431			230		661
Tax-exempt investment securities	(3		)	8		5
Total securities held for investment	428			238		666
Other	108			10		118
Interest income	16,123			6,015		22,138
Interest expense:
Interest checking deposits	283			317		600
Money market deposits	528			552		1,080
Savings deposits	89			311		400
Time deposits	940			593		1,533
Total interest-bearing deposits	1,840			1,773		3,613
Short-term borrowings	143			58		201
Long-term debt	529			376		905
Total borrowed funds	672			434		1,106
Interest expense	2,512			2,207		4,719
Change in net interest income	$	13,611		$	3,808	$	17,419
Percentage change in net interest income over prior period						65.1		%

Interest income ~~and fees~~ on loans on a tax-equivalent basis in the third quarter of ~~2018~~2019 increased ~~$1.7~~$21.4 million, or ~~6.4%~~75.3%, compared with the same period in ~~2017.~~2018. This increase includes the effect of the merger-related discount accretion of ~~$0.6~~$7.2 million on loans for the third quarter of ~~2018~~2019 compared to ~~$1.3~~$0.6 million of merger-related discount accretion for the third quarter of ~~2017.~~2018. Average loans were ~~$155.7 million,~~$1.15 billion, or ~~7.0%~~48.5%, higher in the third quarter of ~~2018~~2019 compared with the third quarter of ~~2017,~~2018, primarily resulting from ~~new loan originations exceeding loan payments and payoffs.~~the acquisition of ATBancorp. In addition to purchase accounting adjustments, the yield on our loan portfolio is affected by the amount of nonaccrual loans (which do not earn interest income), the mix of the portfolio (real estate loans generally have a lower overall yield than commercial and agricultural loans), the effects of competition and the interest rate environment on the amounts and volumes of new loan originations, and the mix of variable-rate versus fixed-rate loans in our portfolio. The increase in interest income on loans was due primarily ~~the result of~~to the increase in average balance of loans between the third quarter of ~~2018~~2019 and the comparative period in ~~2017. The effects of this~~2018, augmented by an increase ~~were partially offset by a decrease~~ in the average yield on loans from ~~4.76% in the third quarter of 2017 to~~ 4.74% in the third quarter of 2018 ~~which was primarily attributable~~ to ~~a decrease in purchase accounting adjustments and the reduction~~5.59% in the ~~federal income tax rate. Despite the increase in overall interest rates, we~~third quarter of 2019. We expect the yield on new and renewing loans to remain relatively flat for the remainder of 2019 in the markets we serve due to a downward trend in overall interest rates and competitive pressures for quality credits.

Interest income on investment securities on a tax-equivalent basis totaled ~~$4.7~~$5.1 million in the third quarter of ~~2018~~2019 compared with ~~$5.0~~$4.5 million for the same period of ~~2017.~~2018. The tax-equivalent yield on our investment portfolio in the third quarter of ~~2018 decreased~~2019 increased to ~~2.99%~~3.04% from ~~3.09%~~2.91% in the comparable period of ~~2017, primarily due to the impact of the reduction in the federal corporate income tax rate from 35% in 2017 to 21% in~~ 2018. The average balance of ~~investments~~investment securities in the third quarter of 2019 was $671.7 million compared with $610.4 million in the third quarter of 2018, ~~was $627.3 million compared with $635.4 million in the third quarter~~an increase of ~~2017, a decrease of $8.2~~$61.3 million, or ~~1.3%~~10.0%.

Interest expense on deposits increased ~~$1.7~~$3.6 million, or ~~59.5%~~78.1%, to ~~$4.6~~$8.2 million in the third quarter of ~~2018~~2019 compared ~~with$2.9~~with $4.6 million in the same period of ~~2017.~~2018. The increased interest expense on deposits was ~~primarily~~ due to an increase in average balances of 28interest-bearing deposits for the third quarter of 2019 of $862.9 million compared with the same period in 2018 , mainly attributable to the acquisition of ATBancorp. There was an increase of 23 basis points in the weighted average rate paid on interest-bearing deposits to 1.08% in the third quarter of 2019, compared with 0.85% in the third quarter of 2018, ~~compared with 0.57% in the third quarter of 2017. An increase in average balances of interest-bearing deposits for the third quarter of 2018 of $133.9 million compared with the same period in 2017,~~which also contributed to increased expense on deposits. ~~We expect to see some upward~~

~~movement in deposit rates in future periods, as overall interest rate increases continue in our market footprint due to competition for deposits.~~

Interest expense on borrowed funds of ~~$1.5~~$2.6 million in the third quarter of ~~2018~~2019 was an increase of ~~$0.5~~$1.1 million, or ~~52.1%~~75.0%, from ~~$1.0~~$1.5 million in same period of ~~2017.~~2018. Average borrowed funds for the third quarter of ~~2018 were $30.7~~2019 saw a $111.0 million ~~higher~~increase compared with the same period in ~~2017. A higher~~2018. An increase in the level of borrowed funds, primarily due to the ~~$31.8~~$70.8 million increase in the average ~~level~~volume of ~~FHLB borrowings~~long-term debt combined with a ~~$3.9~~$40.2 million increase in the average ~~level~~volume of ~~federal funds purchased and repurchase agreements~~short-term borrowings for the third quarter of ~~2018,~~2019, compared to the same period in ~~2017,~~2018, was enhanced by an increase in the weighted average rate on borrowed funds to 2.63% for the third quarter of 2019 compared with 2.11% for the third quarter of ~~2018 compared with 1.56% for the third quarter of 2017.~~2018. The increase in the weighted average rate was primarily due to the ~~interest rate on a portion~~higher cost of debt assumed in the ~~Company’s borrowings being tied to short-term interest rate indexes, which allows them to reprice upward rapidly in an increasing interest rate environment.~~merger transaction.

~~Provision for Loan Losses~~

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

We recorded a provision for loan losses of $1.0 million in the third quarter of 2018, a decrease of $3.4 million, or 78.3%, from $4.4 million for the third quarter of 2017. The decrease was primarily due to the presence of specific provisions on large credits that occurred in 2017 that did not occur in 2018. Net loans charged off in the third quarter of 2018 totaled $0.5 million, compared to $0.4 million net loans charged off in the third quarter of 2017. We determined an appropriate provision based on our evaluation of the adequacy of the allowance for loan losses in relationship to a continuing review of problem loans, current economic conditions, actual loss experience and industry trends. We believed that the allowance for loan losses was adequate based on the inherent risk in the portfolio as of September 30, 2018; however, there is no assurance losses will not exceed the allowance, and any growth in the loan portfolio and the uncertainty of the general economy may require additional provisions in future periods.

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

~~Noninterest Income~~

Three Months Ended September 30,
2018 2017 $ Change % Change
(dollars in thousands)
Trust, investment, and insurance fees $ 1,526
$ 1,454
$ 72
5.0 %
Service charges and fees on deposit accounts 1,148
1,295
(147 ) (11.4 )
Loan origination and servicing fees 891
1,012
(121 ) (12.0 )
Other service charges and fees 1,502
1,625
(123 ) (7.6 )
Bank-owned life insurance income 399
344
55
16.0
Gain on sale or call of debt securities 192
176
16
9.1
Other gain 326
10
316
NM
Total noninterest income $ 5,984
$ 5,916
$ 68
1.1 %
Noninterest income as a % of total revenue* 17.2 % 17.8 %
NM - Percentage change not considered meaningful.
* See the non-GAAP reconciliation at the beginning of this section for the reconciliation of this non-GAAP measure to its most directly comparable GAAP financial measures.

Total noninterest income for the third quarter of 2018 increased $0.1 million, or 1.1%, to $6.0 million from $5.9 million in the third quarter of 2017. The greatest increase was in other gain of $0.3 million between the third quarter of 2018 and the third quarter of 2017, due primarily to increased gains on the sale of other real estate owned and derivative income. Other gain (loss) represents gains and losses on the sale other real estate owned, derivatives, premises and equipment, other assets, and the mark-to-market of equity securities. Trust, investment and insurance fees increased $0.1 million, or 5.0%, to $1.5 million for the third quarter of 2018, due to increased trust services activity. These increase were partially offset by a decrease of $0.2 million, or 11.4%, in service charges and fees on deposit accounts to $1.1 million for the third quarter of 2018, compared to $1.3 million for the third

quarter of 2017, primarily due to decreased non-sufficient funds charges on deposit accounts. Other service charges and fees decreased $0.1 million, or 7.6%, to $1.5 million in the third quarter of 2018 from $1.6 million in the third quarter of 2017, primarily due to a cumulative adjustment change in how electronic transaction expenses are classified that was made in the third quarter of 2017. Loan origination and servicing fees decreased $0.1 million, or 12.0%, from $1.0 million for the third quarter of 2017 to $0.9 million for the third quarter of 2018. This decrease was primarily due to a lower level of loans originated and sold on the secondary market in the third quarter of 2018 compared to the third quarter of 2017, which was a result of the general decrease in mortgage activity in the Company’s markets.

Management’s strategic goal is for noninterest income to constitute 25% of total revenues (net interest income plus noninterest income excluding gain/loss on securities and premises and equipment and impairment of investment securities) over time. For the three months ended September 30, 2018, noninterest income comprised 17.2% of total revenues, compared with 17.8% for the same period in 2017. Despite recent downward trends in this ratio, management expects to see gradual improvement in future periods due to the implementation of new management strategies in the origination of residential real estate loans, and continued growth in trust, investment and insurance fees. We expect this ratio to be positively impacted by the proposed acquisition of ATBancorp.

~~Noninterest Expense~~

Three Months Ended September 30,
2018 2017 $ Change % Change
(dollars in thousands)
Salaries and employee benefits $ 13,051
$ 12,039
$ 1,012
8.4 %
Net occupancy and equipment expense 3,951
2,986
965
32.3
Professional fees 1,861
933
928
99.5
Data processing expense 697
723
(26 ) (3.6 )
FDIC insurance expense 393
238
155
65.1
Amortization of intangible assets 547
759
(212 ) (27.9 )
Other operating expense 2,311
2,066
245
11.9
Total noninterest expense $ 22,811
$ 19,744
$ 3,067
15.5 %

Noninterest expense for the third quarter of 2018 was $22.8 million, an increase of $3.1 million, or 15.5%, from $19.7 million for the third quarter of 2017. Salaries and employee benefits increased $1.0 million, or 8.4%, from $12.0 million for the third quarter of 2017 to $13.1 million for the third quarter of 2018, primarily due to normal annual salary and personnel adjustments. The Company also realized an expense of $0.3 million related to the retirement of the Company’s Chief Credit Officer, which was effective August 31, 2018, which expense is included in salaries and employee benefits. Occupancy and equipment expense, net, increased $1.0 million, or 32.3%, to $4.0 million for the third quarter of 2018 compared to $3.0 million for the third quarter of 2017, due primarily to a $0.6 million writedown of the value of a former branch facility that is currently listed for sale. Professional fees increased $0.9 million, or 99.5%, for the quarter ended September 30, 2018 compared to the quarter ended September 30, 2017, mainly due to expenses paid of $0.6 million related to the previously announced merger agreement with ATBancorp. Partially offsetting these increases, amortization of intangible asset expense decreased $0.2 million, or 27.9%, between the two periods.

~~Income Tax Expense~~

Our effective income tax rate, or income taxes divided by income before taxes, was 21.0% for the third quarter of 2018, which was lower than the effective tax rate of 23.4% for the third quarter of 2017. Income tax expense was $1.8 million in the third quarter of 2018 compared to $1.9 million for the same period of 2017. The primary reason for the decrease in income tax expense was the reduction in the maximum corporate federal income tax rate to 21% for 2018 compared to 35% for 2017 as a result of the Tax Act enacted by the U.S. government on December 22, 2017. We also realized $0.4 million of historic tax credits in the third quarter of 2017 related to the remodel and restoration of the Company’s headquarters building. We expect the reduction in the federal corporate income tax rate to contribute to higher net income levels in future periods.

~~Comparison of Operating Results for the~~ ~~Nine~~ ~~Months Ended September 30, 2018 and September 30, 2017~~

~~Summary~~

~~For the~~ ~~nine months~~ ~~ended September 30, 2018, we earned net income of~~ ~~$22.7 million,~~ ~~compared with~~ ~~$20.3 million~~ ~~for the~~ ~~nine months~~ ended September 30, 2017, an increase of 12.0%. The increase in net income was primarily due to a decrease in the provision for loan losses by $2.6 million, or 39.2%, to $4.1 million, compared to $6.7 million for the first nine months of 2017. This decrease was primarily due to the recognition of individual impairments against certain large credits last year with no similarly large impairments in the nine months ended September 30, 2018. In addition, net interest income increased $1.5 million, or 1.9%, for the first nine months of 2018 compared with the same period of 2017. The Company also realized a $1.7 million decrease in

income tax expense between the nine months ended September 30, 2018 and the same period in 2017, primarily due to the reduction in the maximum corporate federal income tax rate to 21% for 2018 compared to 35% for 2017. Noninterest income increased by $0.3 million, or 1.8%, between the first nine months of 2017 and 2018. These changes were partially offset by a $3.7 million, or 6.1%, increase in noninterest expense between the comparative nine month periods, primarily due to an increase of $1.9 million, or 5.4%, in salaries and employee benefits, primarily due to normal annual salary and personnel adjustments. Our annualized return on average assets for the ~~first nine months~~ of ~~2018~~ ~~was 0.94% compared with 0.88% for the same period in~~ ~~2017. Our annualized return on average shareholders’ equity was 8.84% for the~~ ~~nine months~~ ~~ended September 30, 2018 versus 8.20% for the~~ ~~nine months~~ ~~ended September 30, 2017. The annualized return on average tangible equity was 12.00% for the~~ ~~first nine months~~ of ~~2018~~ ~~compared with 11.47% for the same period in~~ ~~2017~~.

~~The following table presents selected financial results and measures as of and for the nine months ended September 30, 2018 and 2017.~~

As of and for the Nine Months Ended September 30,
(dollars in thousands, except per share amounts) 2018 2017
Net Income $ 22,727
$ 20,289
Average Assets 3,240,123
3,072,998
Average Shareholders’ Equity 343,825
330,682
Return on Average Assets* 0.94 % 0.88 %
Return on Average Shareholders’ Equity* 8.84
8.20
Return on Average Tangible Equity*⁽¹⁾
12.00
11.47
Total Equity to Assets (end of period) 10.69
11.02
Tangible Equity to Tangible Assets (end of period)⁽¹⁾
8.61
8.84
Book Value per Share $ 28.57
$ 28.36
Tangible Book Value per Share⁽¹⁾
22.50
22.20
* Annualized
(1) A non-GAAP financial measure. See below for a reconciliation to the most comparable GAAP equivalents.

We have traditionally disclosed certain non-GAAP ratios, including our return on average tangible equity and the ratio of our tangible equity to tangible assets, as well as adjusted noninterest income as a percentage of total revenue and tangible book value per share. We believe these financial measures provide investors with information regarding our financial condition and results of operations and how we evaluate them internally, such as presenting how management tracks adjusted noninterest income as a percentage of total revenue against its goal of 25%.

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

For the Nine Months Ended September 30,
(dollars in thousands) 2018 2017
Net Income:
Net income $ 22,727
$ 20,289
Plus: Intangible amortization, net of tax ⁽¹⁾
1,416
1,568
Adjusted net income $ 24,143
$ 21,857
Average Tangible Equity:
Average total shareholders’ equity $ 343,825
$ 330,682
Less: Average intangibles, net of amortization (75,799 ) (78,550 )
Plus: Average deferred tax liability associated with intangibles 1,000
2,585
Average tangible equity $ 269,026
$ 254,717
Return on Average Tangible Equity (annualized) 12.00 % 11.47 %
(1) Computed on a tax-equivalent basis, assuming a federal income tax rate of 21% for 2018 and 35% for 2017.

For the Nine Months Ended September 30,
(dollars in thousands) 2018 2017
Adjusted Noninterest Income:
Noninterest income $ 17,143
$ 16,836
Less: Gain on sale or call of debt securities (197 ) (239 )
Other gain (338 ) (66 )
Adjusted noninterest income $ 16,608
$ 16,531
Total Revenue:
Net interest income $ 79,255
$ 77,764
Plus: Noninterest income 17,143
16,836
Less: Gain on sale or call of debt securities (197 ) (239 )
Other gain (338 ) (66 )
Total Revenue $ 95,863
$ 94,295
Adjusted Noninterest Income as a Percentage of Total Revenue⁽¹⁾
17.3 % 17.5 %
(1) This measure tracks management’s strategic goal for this measure to be at 25%.

As of September 30,
(dollars in thousands, except per share amounts) 2018 2017
Tangible Equity:
Total shareholders’ equity $ 349,189
$ 346,563
Plus: Deferred tax liability associated with intangibles 786
2,141
Less: Intangible assets, net (75,032 ) (77,413 )
Tangible equity $ 274,943
$ 271,291
Tangible Assets:
Total assets $ 3,267,965
$ 3,144,199
Plus: Deferred tax liability associated with intangibles 786
2,141
Less: Intangible assets, net (75,032 ) (77,413 )
Tangible assets $ 3,193,719
$ 3,068,927
Common shares outstanding 12,221,107
12,218,528
Tangible Book Value Per Share $ 22.50
$ 22.20
Tangible Equity/Tangible Assets 8.61 % 8.84 %

~~Net Interest Income~~

Our net interest income for the nine months ended September 30, 2018, was $79.3 million, up $1.5 million, or 1.9%, from $77.8 million for the nine months ended September 30, 2017, primarily due to an increase of $6.6 million, or 7.5%, in interest income. Loan interest income increased $6.0 million, or 7.9%, to $82.1 million for the first nine months of 2018 compared to the first nine months of 2017, primarily due to a $157.1 million, or 7.2%, increase in the average balance of loans between the two periods. Loan interest income in 2018 also included the effect of a decrease in the discount accretion related to the merger in 2015 of the Company with Central Bancshares, Inc. (“Central”), to $2.3 million for the nine months ended September 30, 2018, compared to $3.8 million for the nine months ended September 30, 2017. Interest income on investment securities rose $0.6 million, or 5.2%, to $13.2 million for the first nine months of 2018 compared to the first nine months of 2017 primarily due to an increase of $1.8 million in the average balance between the comparative periods. These income increases were partially offset by an increase of $5.2 million, or 46.8%, in interest expense, to $16.2 million for the nine months ended September 30, 2018, compared to $11.0 million for the first nine months of 2017. Interest expense on deposits increased $3.8 million, or 45.4%, to $12.2 million for the nine months ended September 30, 2018 compared to $8.4 million for the nine months ended September 30, 2017, as the average rate for deposits increased 21 basis points, and the average balance of interest-bearing deposits increased $128.3 million, or 6.4%, between the two periods. Interest expense related to borrowings rose $1.4 million, or 51.0% between the two periods, primarily due to a 42 basis point increase in average rate for the first nine months of 2018 compared to the same period of 2017.

The Company posted a net interest margin, calculated on a fully tax-equivalent basis, of 3.64% for the first nine months of 2018, down 21 basis points from the net interest margin of 3.85% for the same period in 2017. For the first nine months of 2018 compared with 2017, the tax equivalent loan yield was unchanged between the two period, on a higher volume of average loans, coupled with a 15 basis point tax equivalent yield decrease on a higher average balance of investment securities, resulted in an overall 1 basis point decrease in the yield on earning assets. On the liability side of the balance sheet, a 21 basis point increase in

the cost of deposit was due primarily to the increasing interest rate environment. This, combined with an increase in the cost of borrowed funds of 42 basis points, were the primary factors in a 23 basis point increase in the cost of interest-bearing liabilities for the first nine months of 2018 compared to the same period of 2017.

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 interest rates for the ~~nine months~~ ~~ended September 30, 2018 and~~ ~~2017~~, reported on a fully tax-equivalent basis assuming a 21% tax rate for 2018 and a 35% tax rate for 2017. Dividing annualized income or expense by the average balances of assets or liabilities results in average yields or costs. Average information is provided on a daily average basis.

Nine Months Ended September 30,
2018 2017
(dollars in thousands)
Average
Balance

Interest
Income/
Expense

Average
Rate/
Yield

Average
Balance

Interest
Income/
Expense

Average
Rate/
Yield
Average Interest-Earning Assets:
Loans ⁽¹⁾⁽²⁾
$ 2,339,357
$ 82,910
4.74 % $ 2,182,275
$ 77,386
4.74 %
Investment securities:
Taxable investments 434,941
8,793
2.70
426,429
7,897
2.48
Tax exempt investments ⁽²⁾
210,817
5,619
3.56
217,524
7,190
4.42
Total investment securities 645,758
14,412
2.98
643,953
15,087
3.13
Federal funds sold and interest-bearing balances 3,078
39
1.69
5,636
51
1.21
Total interest-earning assets $ 2,988,193
$ 97,361
4.36 % $ 2,831,864
$ 92,524
4.37 %

Cash and due from banks 35,975
35,281

Premises and equipment 77,483
74,960

Allowance for loan losses (30,135 ) (22,625 )
Other assets 168,607
153,518

Total assets $ 3,240,123
$ 3,072,998

Average Interest-Bearing Liabilities:
Savings and interest-bearing demand deposits $ 1,423,431
$ 4,187
0.39 % $ 1,340,521
$ 2,778
0.28 %
Certificates of deposit 722,645
7,983
1.48
677,249
5,591
1.10
Total deposits 2,146,076
12,170
0.76
2,017,770
8,369
0.55
Federal funds purchased and repurchase agreements 105,223
931
1.18
85,197
277
0.43
Federal Home Loan Bank borrowings 132,718
1,873
1.89
104,579
1,321
1.69
Long-term debt and other 36,320
1,196
4.40
41,304
1,051
3.40
Total borrowed funds 274,261
4,000
1.95
231,080
2,649
1.53
Total interest-bearing liabilities $ 2,420,337
$ 16,170
0.89 % $ 2,248,850
$ 11,018
0.66 %

Net interest spread⁽²⁾
3.47 % 3.71 %

Demand deposits 455,521
472,482

Other liabilities 20,440
20,984

Shareholders’ equity 343,825
330,682

Total liabilities and shareholders’ equity $ 3,240,123
$ 3,072,998

Interest income/earning assets ⁽²⁾
$ 2,988,193
$ 97,361
4.36 % $ 2,831,864
$ 92,524
4.37 %
Interest expense/earning assets $ 2,988,193
$ 16,170
0.72 % $ 2,831,864
$ 11,018
0.52 %
Net interest margin ⁽²⁾⁽³⁾
$ 81,191
3.64 % $ 81,506
3.85 %

Non-GAAP to GAAP Reconciliation:
Tax Equivalent Adjustment:
Loans $ 769
$ 1,251

Securities 1,167
2,491

Total tax equivalent adjustment 1,936
3,742

Net Interest Income $ 79,255
$ 77,764



	~~(1)~~	Non-accrual loans have been included in average loans, net of unearned income. Amortized net deferred loans and net unearned discounts on acquired loans were included in the interest income calculations. The amortization of net deferred loans fees was $(339) thousand, and $(411) thousand for the nine months ended September 30, 2018, and September 30, 2017, respectively. Accretion of unearned purchase discounts was $2.3 million and $3.8 million for the nine months ended September 30, 2018, and September 30, 2017, respectively.
	~~(2)~~	~~Computed on a tax-equivalent basis, assuming a federal income tax rate of 21% for 2018 and 35% for 2017.~~
	~~(3)~~	~~Net interest margin is tax-equivalent net interest income as a percentage of average interest-earning assets.~~

~~The following table sets forth an analysis of volume and rate changes in interest income and interest expense on our average interest-earning assets and average interest-bearing liabilities during the~~ ~~nine~~ ~~months ended September 30, 2018, compared to the same period in~~ ~~2017~~, reported on a fully tax-equivalent basis assuming a 21% tax rate for 2018 and a 35% tax rate for 2017. The table distinguishes between the changes related to average outstanding balances (changes in volume holding the initial interest rate constant) and the changes related to average interest rates (changes in average rate holding the initial outstanding balance constant). The change in interest due to both volume and rate has been allocated to volume and rate changes in proportion to the relationship of the absolute dollar amounts of the change in each.

Nine Months Ended September 30,
2018 Compared to 2017 Change due to
(in thousands) Volume Rate/Yield Net
Increase (decrease) in interest income:
Loans, tax equivalent $ 5,524
$ —
$ 5,524
Investment securities:
Taxable investments 165
731
896
Tax exempt investments (215 ) (1,356 ) (1,571 )
Total investment securities (50 ) (625 ) (675 )
Federal funds sold and interest-bearing balances (35 ) 23
(12 )
Change in interest income 5,439
(602 ) 4,837
Increase (decrease) in interest expense:
Savings and interest-bearing demand deposits 192
1,217
1,409
Certificates of deposit 389
2,003
2,392
Total deposits 581
3,220
3,801
Federal funds purchased and repurchase agreements 78
576
654
Federal Home Loan Bank borrowings 383
169
552
Other long-term debt (198 ) 343
145
Total borrowed funds 263
1,088
1,351
Change in interest expense 844
4,308
5,152
Change in net interest income $ 4,595
$ (4,910 ) $ (315 )
Percentage change in net interest income over prior period (0.4 )%

~~Interest income and fees on loans~~ on a tax-equivalent basis increased $5.5 million, or 7.1%, in the first nine months of 2018 compared to the same period in 2017. This increase reflects the effect of the merger-related discount accretion for loans of $2.3 million in the first nine months of 2018, compared to $3.8 million of discount accretion in the first nine months of 2017. The increased income is due to average loan balances increasing $157.1 million, or 7.2%, for the first nine months of 2018 compared to the same period in 2017, primarily resulting from loan originations exceeding loan payments and payoffs. The yield on loans in the first nine months of 2017 was 4.74%, the same as in the first nine months of 2018. The yield on our loan portfolio is affected by the amount of nonaccrual loans (which do not earn interest income), the mix of the portfolio (real estate loans generally have a lower overall yield than commercial and agricultural loans), the effects of competition and the interest rate environment on the amounts and volumes of new loan originations, and the mix of variable-rate versus fixed-rate loans in our portfolio. Despite the increase in overall interest rates, we expect the yield on new and renewing loans to remain relatively flat in the markets we serve due to competitive pressures for quality credits.

~~Interest income on investment securities~~ on a tax-equivalent basis totaled $14.4 million in the first nine months of 2018 compared with $15.1 million for the same period of 2017. The tax-equivalent yield on our investment portfolio for the first nine months of 2018 decreased to 2.98% from 3.13% in the comparable period of 2017, primarily due to the impact of the reduction in the federal corporate income tax rate from 35% in 2017 to 21% in 2018. The average balance of investments in the first nine months of 2018 was $645.8 million compared with $644.0 million in the first nine months of 2017, an increase of $1.8 million, or 0.3%.

~~Interest expense on deposits~~ was $12.2 million for the first nine months of 2018 compared with $8.4 million for the same period in 2017. This increase was primarily due to the increase in general interest rates. Additionally, average interest-bearing deposits for the first nine months of 2018 increased $128.3 million, or 6.4%, compared with the same period in 2017, due primarily to an increased focus by the Company on gathering new deposits. The weighted average rate paid on interest-bearing deposits was 0.76% for the first nine months of 2018 compared with 0.55% for the first nine months of 2017. We expect to see some upward movement in deposit rates in future periods, as overall interest rate increases continue in our market footprint due to competition for deposits.

~~Interest expense on borrowed funds~~ in the first nine months of 2018 was $4.0 million, compared with $2.6 million for the same period in 2017, an increase of $1.4 million, or 51.0%. Average borrowed funds for the first nine months of 2018 were $43.2 million higher compared with the same period in 2017. The increase in the average level of FHLB borrowings of $28.1 million, or 26.9%, coupled with an increase in the average balance of federal funds purchased and repurchase agreements of $20.0 million, or 23.5%, was partially offset by a $5.0 million, or 12.1%, decrease in long-term debt and junior subordinated notes, all for the first nine months of 2018 compared to the first nine months of 2017. The weighted average rate on borrowed funds for the first nine months of 2018 was 1.95%, an increase of 42 basis points from 1.53% for the first nine months of 2017. The increase in the weighted average rate was due to the interest rate on a portion of the Company’s borrowings being tied to short-term interest rate indexes, which allows them to reprice upward rapidly in an increasing interest rate environment.

Provision for Loan Losses

The provision for loan losses is based upon our allowance methodology and is a charge to income that, in our judgment, is required to maintain an adequate allowance for incurred loan losses at each period-end. In assessing the adequacy of the allowance, management considers the size and quality of the loan portfolio measured against prevailing economic conditions, regulatory guidelines, and historical loan loss experience. However, there is no assurance that loan credit losses will not exceed the allowance, and any growth in the loan portfolio and the uncertainty of the general economy may require additional provisions in future periods.

We recorded a provision for loan losses of $4.3 million in the third quarter of 2019, an increase of $3.3 million, or 348.8%, from $1.0 million for the third quarter of 2018. The increase was primarily due to transitioning from the initial measurement of the ATBancorp acquired loans to our standard allowance methodology as well as renewal of acquired loans. Net loans charged off in the third quarter of 2019 totaled $1.4 million, compared to $0.5 million of net loans charged off in the third quarter of 2018.

Noninterest Income

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



	Three Months Ended September 30,
	2019		2018		$ Change			% Change
(dollars in thousands)
Investment services and trust activities	$	2,339	$	1,222	$	1,117		91.4	%
Service charges and fees	2,068		1,512		556			36.8
Card revenue	1,655		1,069		586			54.8
Loan revenue	991		891		100			11.2
Bank-owned life insurance	514		399		115			28.8
Insurance commissions	—		304		(304		)	NM
Investment securities gains, net	23		192		(169		)	(88.0	)
Other	414		456		(42		)	(9.2	)
Total noninterest income	$	8,004	$	6,045	$	1,959		32.4	%
NM - Percentage change not considered meaningful.

Total noninterest income for the third quarter of 2019 increased $2.0 million, or 32.4%, to $8.0 million from $6.0 million in the third quarter of 2018. The increase was due primarily to additional fee income (investment services and trust activities, service charges and fees, and card revenue) earned as a result of the acquisition. Partially offsetting these increases, loan revenue included a $0.7 million negative valuation adjustment to the Company’s mortgage servicing rights. The decrease in insurance commissions was due to the sale of the assets of the Company’s MidWestOne Insurance subsidiary in the second quarter of 2019.

Noninterest Expense

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



	Three Months Ended September 30,
	2019			2018			$ Change			% Change
(dollars in thousands)
Compensation and employee benefits	$	17,426		$	13,051		$	4,375		33.5	%
Occupancy expense of premises, net	2,294			2,643			(349		)	(13.2	)
Equipment	2,181			1,341			840			62.6
Legal and professional	1,996			1,861			135			7.3
Data processing	1,234			697			537			77.0
Marketing	1,167			672			495			73.7
Amortization of intangibles	2,583			547			2,036			372.2
FDIC insurance	(42		)	393			(435		)	(110.7	)
Communications	489			341			148			43.4
Foreclosed assets, net	265			(131		)	396			(302.3	)
Other	1,849			1,207			642			53.2
Total noninterest expense	$	31,442		$	22,622		$	8,820		39.0	%

The following table shows the impact of merger-related expenses to the various components of noninterest expense for the periods indicated:



	Three Months Ended September 30,
	2019		2018
(dollars in thousands)
Merger-related expenses:
Compensation and employee benefits	$	1,584	$	—
Legal and professional	163		571
Data processing	567		17
Other	233		16
Total impact of merger-related expenses to noninterest expense	2,547		$	604

Noninterest expense for the third quarter of 2019 was $31.4 million, an increase of $8.8 million, or 39.0%, from $22.6 million for the third quarter of 2018. Compensation and employee benefits increased for the third quarter of 2019 compared to the third quarter of 2018, primarily due to the merger, with the increase including $1.6 million of merger-related expenses. Amortization of intangibles for the third quarter of 2019 was $2.6 million, an increase of $2.0 million, or 372.2%, from $0.6 million for the third quarter of 2018, due primarily to additions from the merger. Data processing fees also rose primarily due to $0.6 million of merger-related expenses.

Income Tax Expense

Our effective income tax rate, or income taxes divided by income before taxes, was 20.9% for the third quarter of 2019, which was lower than the effective tax rate of 21.0% for the third quarter of 2018. Income tax expense was $3.3 million in the third quarter of 2019 compared to $1.8 million for the same period of 2018. The primary reason for the increase in income tax expense was a higher level of taxable income being realized in the third quarter of 2019 compared to the same period in 2018.

Comparison of Operating Results for the Nine Months Ended September 30, 2019 and September 30, 2018

Summary

On May 1, 2019, we completed the acquisition of ATBancorp. The effects of this acquisition are one of the primary causes of the stated changes in our operating results for the nine months ended September 30, 2019 compared to the nine months ended September 30, 2018, unless otherwise noted. See Note 3. “Business Combinations” for more details regarding assets acquired and liabilities assumed.

For the nine months ended September 30, 2019, we earned net income of $30.3 million, compared with $22.7 million for the nine months ended September 30, 2018, an increase of 33.1%. The increase in net income was due primarily to a $25.4 million, or 32.2%, increase in net interest income, combined with a $4.8 million, or 27.5%, increase in noninterest income, partially offset by a $17.7 million, or 27.8%, increase in noninterest expense between the two comparable periods. Basic and diluted earnings per common share for the nine months ended September 30, 2019 were $2.10 and $2.09, respectively, versus $1.86 for both for the nine months ended September 30, 2018. Our annualized return on average assets for the first nine months of 2019 was 1.00% compared with 0.94% for the same period in 2018. Our annualized return on average shareholders’ equity was 9.37% for the nine months ended September 30, 2019 versus 8.84% for the nine months ended September 30, 2018. The annualized return on average tangible equity was 13.48% for the first nine months of 2019 compared with 11.96% for the same period in 2018.

The following table presents selected financial results and measures as of and for the nine months ended September 30, 2019 and 2018.



	As of and for the Nine Months Ended September 30,
(dollars in thousands, except per share amounts)	2019			2018
Net Income	$	30,259		$	22,727
Average Assets	4,054,731			3,240,123
Average Shareholders’ Equity	431,907			343,825
Return on Average Assets*	1.00		%	0.94		%
Return on Average Shareholders’ Equity*	9.37			8.84
Return on Average Tangible Equity*⁽¹⁾	13.48			11.96
Total Equity to Assets (end of period)	10.71			10.69
Tangible Equity to Tangible Assets (end of period)⁽¹⁾	8.21			8.59
Book Value per Share	$	30.77		$	28.57
Tangible Book Value per Share⁽¹⁾	22.93			22.43
* Annualized
(1) A non-GAAP financial measure. See below for a reconciliation to the most comparable GAAP equivalents.

We disclose certain non-GAAP ratios, including return on average tangible equity, the ratio of tangible equity to tangible assets, and tangible book value per share, as we believe these measures provide investors with information regarding our financial condition and results of operations and how we evaluate them internally. These metrics focus on the core business of the Company by removing the effects of goodwill and other intangibles.

The following tables provide a reconciliation of the non-GAAP measures to the most comparable GAAP equivalents for the periods indicated:



	For the Nine Months Ended September 30,
(dollars in thousands)	2019			2018
Net Income:
Net income	$	30,259		$	22,727
Plus: Intangible amortization, net of tax ⁽¹⁾	2,974			1,345
Adjusted net income	$	33,233		$	24,072
Average Tangible Equity:
Average total shareholders’ equity	$	431,907		$	343,825
Less: Average intangibles, net	(102,224		)	(75,799		)
Average tangible equity	$	329,683		$	268,026
Return on Average Tangible Equity (annualized)	13.48		%	11.96		%
(1) Computed assuming a combined marginal income tax rate of 25%.



	As of September 30,
(dollars in thousands, except per share amounts)	2019			2018
Tangible Equity:
Total shareholders’ equity	$	497,885		$	349,189
Less: Intangible assets, net	(126,893		)	(75,032		)
Tangible equity	$	370,992		$	274,157
Tangible Assets:
Total assets	$	4,648,287		$	3,267,965
Less: Intangible assets, net	(126,893		)	(75,032		)
Tangible assets	$	4,521,394		$	3,192,933
Common shares outstanding	16,179,734			12,221,107
Tangible Book Value Per Share	$	22.93		$	22.43
Tangible Equity/Tangible Assets	8.21		%	8.59		%

Net Interest Income

Our net interest income for the nine months ended September 30, 2019, was $104.1 million, up $25.4 million, or 32.2%, from $78.7 million for the nine months ended September 30, 2018. Interest income saw an increase of $37.5 million, or 39.6% between the two periods. Loan interest income increased $36.1 million, or 44.0%, to $118.3 million for the first nine months of 2019 compared to the first nine months of 2018, primarily due to a $704.4 million, or 30.1%, increase in the average balance of loans between the two periods. Loan interest income also included the effect of an increase in the discount accretion related to the merger to $10.0 million for the nine months ended September 30, 2019, compared to $2.3 million for the nine months ended September 30, 2018. Interest income on investment securities rose $1.1 million, or 8.8%, to $13.8 million for the first nine months of 2019 compared to the first nine months of 2018 primarily due to a 20 basis point increase in the average yield between the comparative periods. These income increases were partially offset by an increase of $12.2 million, or 75.3%, in interest expense, to $28.3 million for the nine months ended September 30, 2019, compared to $16.2 million for the first nine months of 2018. Interest expense on deposits increased $9.5 million, or 78.1%, to $21.7 million for the nine months ended September 30, 2019 compared to $12.2 million for the nine months ended September 30, 2018, as the average rate for deposits increased 32 basis points, and the average balance of interest-bearing deposits increased $536.7 million, or 25.0%, between the two periods. Interest expense related to borrowings rose $2.7 million, or 66.8%, between the two periods, primarily due to a 64 basis point increase in the average cost for the first nine months of 2019 compared to the same period of 2018.

The Company’s net interest margin, calculated on a fully tax-equivalent basis, was 3.83% for the first nine months of 2019, up 22 basis points from the net interest margin of 3.61% for the same period in 2018. For the first nine months of 2019 compared with 2018, the tax equivalent loan yield increased 51 basis points, with an increase in the average balance of loans of $704.4 million, or 30.1%. This was coupled with a 20 basis point increase in the tax equivalent yield on a slightly higher level of average balance of investment securities, resulting in an overall 52 basis point increase in the yield on earning assets. On the liability side of the balance sheet, a 32 basis point increase in the cost of deposits was due primarily to deposits assumed in the merger. This, combined with an increase in the cost of borrowed funds of 64 basis points, were the primary factors in a 36 basis point increase in the cost of interest-bearing liabilities for the first nine months of 2019 compared to the same period of 2018.



	Nine Months Ended September 30,
	2019						2018
(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⁾	$	3,043,772	$	119,519	5.25	%	$	2,339,357	$	82,910	4.74	%
Taxable investment securities	448,407		9,592		2.86		434,537		8,253		2.54
Tax-exempt investment securities ⁽²⁾	201,908		5,331		3.53		210,817		5,619		3.56
Total securities held for investment	650,315		14,923		3.07		645,354		13,872		2.87
Other	18,951		335		2.36		3,078		39		1.69
Total interest-earning assets	$	3,713,038	$	134,777	4.85	%	$	2,987,789	$	96,821	4.33	%

Other assets	341,693						252,334
Total assets	$	4,054,731					$	3,240,123

Liabilities and Shareholders’ Equity
Interest checking deposits	$	766,343	$	3,329	0.58	%	$	669,070	$	2,008	0.40	%
Money market deposits	760,115		5,729		1.01		538,723		1,990		0.49
Savings deposits	309,270		703		0.30		215,638		189		0.12
Time deposits	847,077		11,915		1.88		722,645		7,983		1.48
Total interest-bearing deposits	2,682,805		21,676		1.08		2,146,076		12,170		0.76
Short-term borrowings	124,433		1,479		1.59		105,223		941		1.20
Long-term debt	219,553		5,194		3.16		169,038		3,059		2.42
Total borrowed funds	343,986		6,673		2.59		274,261		4,000		1.95
Total interest-bearing liabilities	$	3,026,791	$	28,349	1.25	%	$	2,420,337	$	16,170	0.89	%

Net interest spread⁽³⁾					3.60	%					3.44	%

Demand deposits	557,708						455,521
Other liabilities	38,325						20,440
Shareholders’ equity	431,907						343,825
Total liabilities and shareholders’ equity	$	4,054,731					$	3,240,123

Interest income/earning assets ⁽²⁾	$	3,713,038	$	134,777	4.85	%	$	2,987,789	$	96,821	4.33	%
Interest expense/earning assets	$	3,713,038	$	28,349	1.02	%	$	2,987,789	$	16,170	0.72	%
Net interest margin ⁽³⁾			$	106,428	3.83	%			$	80,651	3.61	%

Non-GAAP to GAAP Reconciliation:
Tax Equivalent Adjustment:
Loans			$	1,262					$	769
Securities			1,100						1,167
Total tax equivalent adjustment			2,362						1,936
Net Interest Income			$	104,066					$	78,715



	(1)	Non-accrual loans have been included in average loans, net of unearned income. Amortized net deferred loans and net unearned discounts on acquired loans were included in the interest income calculations. The amortization of net deferred loan fees was $(670) thousand and $(526) thousand for the nine months ended September 30, 2019 and September 30, 2018, respectively. Accretion of unearned purchase discounts was $10.0 million and $2.3 million for the nine months ended September 30, 2019 and September 30, 2018, respectively.
	(2)	Computed on a tax-equivalent basis, assuming a federal income tax rate of 21%.
	(3)	Tax equivalent.

The following table sets forth an analysis of volume and rate changes in tax-equivalent interest income and interest expense on our average interest-earning assets and average interest-bearing liabilities for the periods indicated. The table distinguishes between the changes related to average outstanding balances (changes in volume holding the initial interest rate constant) and the changes related to average interest rates (changes in average rate holding the initial outstanding balance constant). The change in interest due to both volume and rate has been allocated to volume and rate changes in proportion to the relationship of the absolute dollar amounts of the change in each.



	Nine Months Ended September 30,
	2019 Compared to 2018 Change due to
(in thousands)	Volume			Yield/Cost			Net
Interest income:
Loans, including fees	$	26,971		$	9,638		$	36,609
Taxable investment securities	270			1,069			1,339
Tax-exempt investment securities	(240		)	(48		)	(288		)
Total securities held for investment	30			1,021			1,051
Other	274			22			296
Interest income	27,275			10,681			37,956
Interest expense:
Interest checking deposits	323			998			1,321
Money market deposits	1,044			2,695			3,739
Savings deposits	115			399			514
Time deposits	1,530			2,402			3,932
Total interest-bearing deposits	3,012			6,494			9,506
Short-term borrowings	194			344			538
Long-term debt	1,055			1,080			2,135
Total borrowed funds	1,249			1,424			2,673
Interest expense	4,261			7,918			12,179
Change in net interest income	$	23,014		$	2,763		$	25,777
Percentage change in net interest income over prior period							32.0		%

Interest income and fees on loans on a tax-equivalent basis increased $36.6 million, or 44.2%, in the first nine months of 2019 compared to the same period in 2018. This increase reflected purchase discount accretion for loans of $10.0 million in the first nine months of 2019, compared to $2.3 million in the first nine months of 2018. The increased income was also attributable to average loan balances increasing $704.4 million, or 30.1%, for the first nine months of 2019 compared to the same period in 2018, primarily due to loans acquired in the ATBancorp acquisition. The yield on loans in the first nine months of 2019 was 5.25%, an increase of 51 basis points over the first nine months of 2018. Loan purchase discount accounted for 31 basis points of that increase. The yield on our loan portfolio is affected by the amount of nonaccrual loans (which do not earn interest income), the mix of the portfolio (real estate loans generally have a lower overall yield than commercial and agricultural loans), the effects of competition and the interest rate environment on the amounts and volumes of new loan originations, and the mix of variable-rate versus fixed-rate loans in our portfolio.

Interest income on investment securities on a tax-equivalent basis totaled $14.9 million in the first nine months of 2019 compared with $13.9 million for the same period of 2018. The tax-equivalent yield on our investment portfolio for the first nine months of 2019 increased to 3.07% from 2.87% in the comparable period of 2018. The average balance of investment securities in the first nine months of 2019 was $650.3 million compared with $645.4 million in the first nine months of 2018, an increase of $5.0 million, or 0.8%.

Interest expense on deposits was $21.7 million for the first nine months of 2019 compared with $12.2 million for the same period in 2018. This increase was due to both increased deposit costs and volumes. Average interest-bearing deposits for the first nine months of 2019 increased $536.7 million, or 25.0%, compared with the same period in 2018. The weighted average rate on interest-bearing deposits was 1.08% for the first nine months of 2019 compared with 0.76% for the first nine months of 2018, an increase of 32 basis points, mainly attributable to the acquisition of ATBancorp.

Interest expense on borrowed funds in the first nine months of 2019 was $6.7 million, compared with $4.0 million for the same period in 2018, an increase of $2.7 million, or 66.8%. Average borrowed funds for the first nine months of 2019 were $69.7 million higher compared with the same period in 2018, primarily due to the higher average level of long-term debt of $50.5 million, or 29.9%, coupled with an increase in the average balance of short-term borrowings of $19.2 million, or 18.3%, for the first nine months of 2019 compared to the same period in 2018. The weighted average rate on borrowed funds for the first nine months of

2019 was 2.59%, an increase of 64 basis points from 1.95% for the first nine months of 2018.The increase in the weighted average rate was primarily due to the higher cost of debt assumed in the merger transaction.

Provision for Loan Losses

We recorded a provision for loan losses of ~~$4.1~~$6.6 million in the first nine months of ~~2018,~~2019, compared to ~~$6.7~~$4.1 million for the same period of ~~2017, a decrease~~2018, an increase of ~~$2.6~~$2.5 million, or ~~39.2%~~61.8%. The ~~decreased provision~~increase was primarily due to transitioning from the ~~presence~~initial measurement of ~~specific provisions on large credits that occurred in 2017 that did not occur in 2018.~~the ATBancorp acquired loans to our standard allowance methodology as well as renewal of acquired loans. Net loans charged off in the first nine months of ~~2018~~2019 totaled ~~$0.8~~$4.3 million compared with ~~$2.0~~$0.8 million in the first nine months of ~~2017.~~2018.

Noninterest Income

The following table outlines the amount of and changes to the various noninterest income line items as of the dates indicated:

Nine Months Ended September 30,
(dollars in thousands) 2018 2017 $ Change % Change
Trust, investment, and insurance fees $ 4,703
$ 4,594
$ 109
2.4 %
Service charges and fees on deposit accounts 3,474
3,835
(361 ) (9.4 )
Loan origination and servicing fees 2,738
2,532
206
8.1
Other service charges and fees 4,464
4,580
(116 ) (2.5 )
Bank-owned life insurance income 1,229
990
239
24.1
Gain on sale or call of debt securities 197
239
(42 ) (17.6 )
Other gain 338
66
272
NM
Total noninterest income $ 17,143
$ 16,836
$ 307
1.8 %
Adjusted noninterest income as a % of total revenue* 17.3 % 17.5 %
NM - Percentage change not considered meaningful.
* See the non-GAAP reconciliation at the beginning of this section for the reconciliation of this non-GAAP measure to its most directly comparable GAAP financial measures.



	Nine Months Ended September 30,
(dollars in thousands)	2019		2018		$ Change			% Change
Investment services and trust activities	$	5,619	$	3,679	$	1,940		52.7	%
Service charges and fees	5,380		4,601		779			16.9
Card revenue	4,452		3,128		1,324			42.3
Loan revenue	2,032		2,738		(706		)	(25.8	)
Bank-owned life insurance	1,376		1,229		147			12.0
Insurance commissions	734		1,024		(290		)	(28.3	)
Investment securities gains, net	72		197		(125		)	(63.5	)
Other	2,545		823		1,722			209.2
Total noninterest income	$	22,210	$	17,419	$	4,791		27.5	%

In the first nine months of ~~2018~~2019, total noninterest income increased ~~$0.3~~$4.8 million, or ~~1.8%~~27.5%, to ~~$17.1~~$22.2 million from ~~$16.8~~$17.4 million during the same period of ~~2017.~~2018. This increase was due primarily ~~due~~ to ~~an increase in~~additional fee income (investment services and trust activities, service charges and fees, and card revenue) earned as a result of the acquisition. Further, other noninterest income reflected a gain of ~~$0.3~~$1.1 million from the sale of assets of MidWestOne Insurance Services, Inc., completed in the second quarter of 2019, which caused a decrease in insurance commissions between the comparative periods. Partially offsetting these increases, loan revenue included a $1.3 million negative valuation adjustment to ~~$0.3~~the Company’s mortgage servicing rights.

Noninterest Expense

The following table outlines the amount of and changes to the various noninterest expense line items as of the dates indicated:



	Nine Months Ended September 30,
(dollars in thousands)	2019		2018			$ Change			% Change
Compensation and employee benefits	$	46,414	$	37,647		$	8,767		23.3	%
Occupancy expense of premises, net	6,300		6,431			(131		)	(2.0	)
Equipment	5,466		4,132			1,334			32.3
Legal and professional	6,252		3,614			2,638			73.0
Data processing	3,087		2,076			1,011			48.7
Marketing	2,642		1,982			660			33.3
Amortization of intangibles	3,965		1,793			2,172			121.1
FDIC insurance	762		1,104			(342		)	(31.0	)
Communications	1,208		1,011			197			19.5
Foreclosed assets, net	407		(25		)	432			(1,728.0	)
Other	4,596		3,671			925			25.2
Total noninterest expense	$	81,099	$	63,436		$	17,663		27.8	%

The following table shows the impact of merger-related expenses to the various components of noninterest expense for the periods indicated:



	Nine Months Ended September 30,
	2019		2018
(dollars in thousands)
Merger-related expenses:
Compensation and employee benefits	$	2,614	$	—
Legal and professional	2,115		574
Data processing	812		17
Other	307		16
Total impact of merger-related expenses to noninterest expense	5,848		$	607

Noninterest expense increased to $81.1 million for the nine months ended September 30, 2019, compared with $63.4 million for the nine months ended September 30, 2018, compared to $0.1 million for the same period of 2017. This increase was primarily due to increased gains on the sale of other real estate owned and derivative income. Loan origination and servicing fees increased $0.2 million, or 8.1%, between the first nine months of 2018 and the same period of 2017. This increase was primarily due to the recovery of interest and collection expenses on a charged-off loan in the amount of $0.2 million in the first quarter of 2018 and $0.1 million of income related to the mark-to-market of our loan servicing portfolio, and despite a lower level of loans originated and sold on the secondary market for the first nine months of 2018 compared to the first nine months of 2017, a result of the general decrease in mortgage activity in the Company’s markets. Bank-owned life insurance income increased $0.2 million between the comparative 2017 and 2018 periods due to the purchase of an additional $11.2 million of insurance in the fourth quarter of 2017. Trust, investment and insurance fees increased $0.1 million, or 2.4%, to $4.7 million for the first nine months of 2018, due to increased trust services activity. These increases were partially offset by a decrease in service charges and fees on deposit accounts, which decreased $0.3 million, or 9.4%, to $3.5 million for the first nine months of 2018 compared with $3.8 million for the same period in 2017, primarily due to decreased non-sufficient funds charges on deposit accounts. Other service charges and fees decreased $0.1 million, or 2.5%, in the nine months ended September 30, 2018 compared to the same period of 2017, primarily due to a cumulative adjustment change in how electronic transaction expenses are classified that was made in the third quarter of 2017.

Management’s strategic goal is for noninterest income to constitute 25% of total revenues (net interest income plus noninterest income excluding gain/loss on securities and premises and equipment and impairment of investment securities) over time. For the nine months ended September 30, 2018, noninterest income comprised 17.3% of total revenues, compared with 17.5% for the same period in 2017. Despite recent downward trends in this ratio, management expects to see continued gradual improvement in future periods due to the implementation of new management strategies in the origination of residential real estate loans, and continued growth in trust, investment and insurance fees. We expect this ratio to be positively impacted by the proposed acquisition of ATBancorp.

~~Noninterest Expense~~

Nine Months Ended September 30,
(dollars in thousands) 2018 2017 $ Change % Change
Salaries and employee benefits $ 37,647
$ 35,712
$ 1,935
5.4 %
Net occupancy and equipment expense 10,440
9,323
1,117
12.0
Professional fees 3,614
2,991
623
20.8
Data processing expense 2,076
1,982
94
4.7
FDIC insurance expense 1,104
957
147
15.4
Amortization of intangible assets 1,793
2,412
(619 ) (25.7 )
Other operating expense 7,026
6,666
360
5.4
Total noninterest expense $ 63,700
$ 60,043
$ 3,657
6.1 %

~~Noninterest expense increased to $63.7 million for the nine months ended September 30, 2018, compared with $60.0 million for the nine months ended September 30, 2017,~~ an increase of ~~$3.7~~$17.7 million, or ~~6.1%, with salaries~~27.8%. Compensation and employee benefits ~~showing~~showed the greatest increase of ~~$1.9~~$8.8 million, or ~~5.4%~~23.3%, from ~~$35.7 million for the nine months ended September 30, 2017, to~~ $37.6 million for the nine months ended September 30, 2018, ~~primarily due~~ to ~~normal annual salary and personnel adjustments. The Company also realized an expense of $0.3~~$46.4 million related to the retirement of the Company’s Chief Credit Officer, which was effective August 31, 2018, which was included in salaries and employee benefits. Occupancy and equipment expense increased $1.1 million, or 12.0%, primarily due to the previously mentioned $0.6 million writedown of the value of a former branch facility that is currently listed for sale. Professional fees increased $0.6 million, or 20.8%, for the nine months ended September 30, ~~2018~~2019, primarily due to the merger and the inclusion of $2.6 million of merger-related expenses. Legal and professional fees increased for the nine months ended September 30, 2019 compared to the nine months ended September 30, ~~2017,~~2018, mainly due to expenses ~~paid~~ of ~~$0.6~~$2.1 million related to the ~~previously announced~~ merger ~~agreement~~ with ATBancorp. Data processing ~~expense~~fees also rose ~~$0.1~~primarily due to $0.8 million ~~or 4.7%, for the nine months ended September 30, 2018, compared to the nine months ended September 30, 2017. Partially offsetting these increases, amortization~~ of ~~intangible asset expense decreased $0.6 million, or 25.7%, for the nine months ended September 30, 2018 compared to the nine months ended September 30, 2017.~~merger-related expenses.

Income Tax Expense

Our effective tax rate, or income taxes divided by income before taxes, was 21.7% for the first nine months of 2019, and 20.7% for the first nine months of ~~2018, and 27.3% for the first nine months of 2017.~~2018. Income tax expense ~~decreased~~increased to ~~$5.9~~$8.4 million in the first nine months of ~~2018~~2019 compared with ~~$7.6~~$5.9 million for the same period of ~~2017,~~2018, primarily due to ~~the reduction~~a higher level of taxable income being realized in the ~~maximum corporate federal income tax rate to 21% for 2018 compared to 35% for 2017 as a result~~first nine months of ~~the Tax Act enacted by the U.S. government on December 22, 2017. We expect the reduction~~2019 than in the ~~federal corporate income tax rate to contribute to higher net income levels in future periods.~~same period of 2018.

FINANCIAL CONDITION

~~Our~~Primarily as a result of the merger with ATBancorp, our total assets were ~~$3.27~~$4.65 billion at September 30, ~~2018,~~2019, an increase of ~~$55.7 million,~~$1.36 billion, or ~~1.7%~~41.2%, from December 31, ~~2017.~~ 2018. Loans held for investment, net of unearned income, were $3.52 billion at September 30, 2019, an increase of $1.13 billion, or 46.9%, from $2.40 billion at December 31, 2018. Between these two dates, debt securities increased $83.7 million, or 13.7%, and cash and cash equivalents increased $41.2 million, or 90.6%. Total deposits at September 30, 2019, were $3.71 billion, an increase of $1.10 billion from December 31, 2018. Between December 31, 2018 and September 30, 2019, short-term borrowings rose $23.7 million, or 18.0%, while long-term debt increased $76.0 million, or 45.0%.

Debt Securities

Debt securities totaled $693.6 million at September 30, 2019, or 14.9% of total assets, an increase of $83.7 million from $609.9 million, or 18.6% of total assets, as of December 31, 2018. A total of $503.3 million of the debt securities were classified as AFS at September 30, 2019, compared to $414.1 million at December 31, 2018. As of September 30, 2019, the portfolio consisted mainly of MBS and CMOs (38.1%), obligations of states and political subdivisions (34.6%), corporate debt securities (27.2%), and obligations of U.S. government agencies (0.1%). Debt securities HTM were $190.3 million at September 30, 2019, compared to $195.8 million at December 31, 2018.

Loans

The composition of loans held for investment, net of unearned income was as follows:



	September 30, 2019				December 31, 2018
(dollars in thousands)	Balance		% of Total		Balance		% of Total
Agricultural	$	151,984	4.3	%	$	96,956	4.1	%
Commercial and industrial	871,192		24.7		533,188		22.2
Commercial real estate:
Construction and development	296,586		8.4		217,617		9.1
Farmland	188,394		5.4		88,807		3.7
Multifamily	236,145		6.7		134,741		5.6
Commercial real estate-other	1,102,744		31.3		826,163		34.4
Total commercial real estate	1,823,869		51.8		1,267,328		52.8
Residential real estate:
One- to four-family first liens	416,194		11.8		341,830		14.3
One- to four-family junior liens	176,162		5.0		120,049		5.0
Total residential real estate	592,356		16.8		461,879		19.3
Consumer	85,327		2.4		39,428		1.6
Loans held for investment, net of unearned income	$	3,524,728	100.0	%	$	2,398,779	100.0	%

Loans held for investment, net of unearned income increased ~~$91.0 million,~~$1.13 billion, or ~~4.0%~~46.9%, from ~~$2.29~~a balance of $2.40 billion at December 31, ~~2017~~2018, to ~~$2.38~~$3.52 billion at September 30, 2018, combined with an increase in cash and cash equivalents of $2.4 million, or 4.7%. These increases were partially offset by a decrease in investment securities of $41.0 million, or 6.4%. Total deposits at September 30, 2018, were $2.63 billion, an increase of $26.9 million from December 31, 2017. The mix of deposits saw increases between December 31, 2017 and September 30, 2018 of $23.4 million, or 3.3%, in certificates of deposit, and $8.8 million, or 0.7%, in interest-bearing checking deposits. These increases were partially offset by a decrease of $3.4 million, or 0.7%, in non-interest-bearing demand deposits, and a decrease of $1.8 million, or 0.9%, in savings deposits. Between December 31, 2017 and September 30, 2018, federal funds purchased rose $18.1 million,2019. Due primarily to $19.1 million compared to $1.0 million, while securities sold under agreements to repurchase declined $27.3 million, due to normal cash need fluctuations by customers. FHLB borrowings rose $28.0 million, or 24.3%, between the two dates. The overall increase in borrowings was the result of growth in the loan portfolio exceeding deposit growth. At September 30, 2018, long-term debt had an outstanding balance of $8.8 million, a decrease of $3.8 million, or 30.0%, from December 31, 2017, due to normal scheduled repayments.

~~Investment Securities~~

Investment securities totaled $602.3 million at September 30, 2018, or 18.4% of total assets, a decrease of $41.0 million, from $643.3 million, or 20.0% of total assets, as of December 31, 2017. A total of $407.8 millioneffect of the ~~investment securities were classified as available for sale at September 30, 2018, compared to $445.3 million at December 31, 2017. As of September 30, 2018,~~ATBancorp merger, the portfolio consisted mainly of mortgage-backed securities and collateralized mortgage obligations (42.1%), obligations of states and political subdivisions (40.0%), corporate debt securities (16.5%), and obligations of U.S. government agencies (0.9%). Investment securities held to maturity were $191.7 million at September 30, 2018, compared to $195.6 million at December 31, 2017, and equity securities were $2.8 million at September 30, 2018, compared to $2.3 million at December 31, 2017.

~~Loans~~

~~The composition of loans (before deducting the allowance for loan losses) was as follows:~~

September 30, 2018 December 31, 2017
(dollars in thousands) Balance % of Total Balance % of Total
Agricultural $ 103,207
4.4 % $ 105,512
4.6 %
Commercial and industrial 523,333
22.0
503,624
22.0
Commercial real estate:
Construction and development 223,324
9.4
165,276
7.3
Farmland 85,735
3.6
87,868
3.8
Multifamily 126,663
5.3
134,506
5.9
Commercial real estate-other 818,068
34.4
784,321
34.3
Total commercial real estate 1,253,790
52.7
1,171,971
51.3
Residential real estate:
One- to four-family first liens 342,755
14.4
352,226
15.4
One- to four-family junior liens 115,768
4.9
117,204
5.1
Total residential real estate 458,523
19.3
469,430
20.5
Consumer 38,796
1.6
36,158
1.6
Total loans $ 2,377,649
100.0 % $ 2,286,695
100.0 %

Loans held for investment, net of unearned income, (excluding loans held for sale) increased $91.0 million, or 4.0%, from $2.29 billion at December 31, 2017, to $2.38 billion at September 30, 2018. The mix of loans saw increases between December 31, ~~2017~~2018 and September 30, ~~2018,~~2019 in all loan classes, with the increases primarily concentrated in ~~construction~~commercial and ~~development,~~industrial, commercial real estate-other, and ~~commercial and industrial. Decreases occurred primarily in residential real estate,~~ multifamily ~~agricultural, and farmland.~~loans. As of September 30, ~~2018,~~2019, the largest category of loans was commercial real estate loans, comprising approximately ~~53%~~52% of the portfolio, of which 9%8% of total loans were construction and development, 5%7% of total loans were multifamily residential mortgages, and 4%5% of total loans were farmland. Commercial and industrial loans was the next largest category at ~~22%~~25% of total loans, followed by residential real estate loans at ~~19%~~17%, agricultural loans at 4%, and consumer loans at 2%. Included in these totals ~~are $17.5 million, net of a discount of $0.9~~were $23.5 million, or 0.7% of the total loan portfolio, in ~~purchased credit impaired loans as a result of the merger between the Company and Central in 2015.~~PCI loans.

We have minimal direct exposure to subprime mortgages in our loan portfolio. Our loan policy provides a guideline that real estate mortgage borrowers have a Beacon score of 640 or greater. Exceptions to this guideline have been noted, but the overall exposure is deemed minimal by management. Mortgages we originate and sell on the secondary market are typically underwritten according to the guidelines of secondary market investors. These mortgages are sold on a non-recourse basis.

Premises and Equipment

As of September 30, ~~2018,~~2019, premises and equipment totaled ~~$76.5~~$91.2 million, an increase of ~~$0.5~~$15.4 million, or ~~0.7%~~20.3%, from December 31, ~~2017. Additions from capital improvement projects, notably replacement branch locations in South St. Paul, Minnesota and Naples, Florida, offset~~2018, due primarily to the ~~$3.2 million effective balance decrease due to depreciation.~~merger.

Goodwill and Other Intangible Assets

Goodwill was ~~$64.7~~$93.3 million at September 30, ~~2018 and~~2019, an increase of $28.6 million, or 44.2%, from $64.7 million at December 31, ~~2017.~~2018. Other intangible assets ~~decreased $1.7~~increased $23.8 million, or ~~13.8%~~240.6%, to ~~$10.4~~$33.6 million at September 30, ~~2018~~2019 compared to ~~$12.0~~$9.9 million at December 31, ~~2017,~~2018. Both the increase in goodwill and in other intangible assets was due ~~primarily~~ to ~~amortization.~~the merger. SeeNote 6.7. “Goodwill and Intangible Assets” to our consolidated financial statements for additional information.

Foreclosed Assets, Net

Foreclosed assets, net were $4.4 million at September 30, 2019 and $0.5 million at December 31, 2018, an increase of $3.8 million, or 716.1%, primarily due to the merger.

Deposits

Total deposits as of September 30, ~~2018~~2019 were ~~$2.63~~$3.71 billion, an increase of ~~$26.9 million,~~$1.10 billion from December 31, ~~2017. Interest-bearing checking deposits were~~2018, primarily due to the ~~largest category~~merger. The mix of deposits atsaw increases between December 31, 2018 and September 30, ~~2018, representing approximately 47.0%~~2019 of ~~total deposits. Total interest-bearing checking deposits were $1.24 billion at September 30, 2018, an increase of $8.8~~$241.0 million, or ~~0.7%~~35.2%, ~~from December 31, 2017. Included~~ in interest-bearing checking deposits, ~~at September 30, 2018 were $37.2 million of brokered deposits in the Insured Cash Sweep (ICS) program, a decrease of $10.7~~$234.6 million, or ~~22.4%~~53.4%, ~~from $47.9 million at December 31, 2017. Non-interest bearing~~in non-interest-bearing demand deposits, ~~were $458.6 million at September 30, 2018, a decrease of $3.4~~$234.2 million, or ~~0.7%~~32.4%, ~~from $462.0 million at December 31, 2017. Savings deposits were $211.6 million at September 30, 2018, a decrease of $1.8 million, or 0.9%, from $213.4 million at December 31, 2017. Total~~in certificates of deposit, ~~were $725.2 million at September 30, 2018, up $23.4~~$207.8 million, or ~~3.3%~~37.4%, ~~from $701.8 million at December 31, 2017. Included~~ in ~~total certificates of deposit at September 30, 2018~~

~~was $9.1 million of brokered~~money market deposits, ~~in the Certificate of Deposit Account Registry Service (CDARS) program, an increase of $3.8~~and $179.2 million, or ~~72.5%~~85.2%, from December 31, 2017. Based on recent experience, management anticipates that many of the maturing certificates of deposit will be renewed upon maturity, as the interest rate environment has begun to trend upward.in savings deposits. Approximately ~~85.7%~~74.2% of our total deposits were considered “core” deposits as of September 30, ~~2018. Approximately 85.7% of our total deposits were considered “core” deposits as of September 30, 2018.~~2019, compared to

~~Debt~~

~~Federal Funds Purchased~~

~~Federal funds purchased were $19.1 million~~ ~~as of~~ ~~September 30, 2018, compared with $1.0 million~~ ~~as of~~72.3% at December 31, ~~2017, an increase~~2018. We consider core deposits to be the total of ~~$18.1 million. The principal function~~all deposits other than certificates of ~~these funds is to maintain short-term liquidity.~~deposit. See Note ~~8. “Short-Term Borrowings”~~9. “Deposits” to our consolidated financial statements for additional information related to our ~~federal funds purchased.~~deposits.

Debt

Short-Term Borrowings

Securities Sold Under Agreements to Repurchase

- Securities sold under agreements to repurchase ~~declined $27.3~~rose $54.9 million, or ~~28.4%~~73.6%, to ~~$68.9~~$129.4 million as of September 30, ~~2018~~2019, compared with ~~$96.2~~$74.5 million as of December 31, ~~2017.~~2018, primarily due to the merger. Securities sold under agreements to repurchase are agreements in which the Company acquires funds by selling investment securities to another party under a simultaneous agreement to repurchase the same investment securities at a specified price and date. The Company enters into repurchase agreements and also offers a demand deposit account product to customers that sweeps their balances in excess of an agreed upon target amount into overnight repurchase agreements. As such, the balance of these borrowings vary according to the liquidity needs of the customers participating in these sweep accounts. See Note 8.10. “Short-Term Borrowings” to our consolidated financial statements for additional information related to our securities sold under agreements to repurchase.

Federal Home Loan Bank Advances - FHLB advances were $25.7 million as of September 30, 2019, compared with $56.9 million as of December 31, 2018, a decrease of $31.2 million. The principal function of these funds is to maintain short-term liquidity. The decline in FHLB advances was due to the receipt of cash as part of the acquisition of ATBancorp. See Note 10. “Short-Term Borrowings” to our consolidated financial statements for additional information related to our FHLB advances.

Long-term Debt

Finance Lease Payable - The Company has one existing finance lease (previously referred to as a capital lease) for a branch location, with a present value liability balance of $1.3 million as of September 30, 2019, substantially unchanged from December 31, 2018. See Note 11. “Long-Term Debt” and Note 18. “Leases” to our consolidated financial statements for additional information related to our finance lease obligation.

Junior Subordinated Notes Issued to Capital Trusts - Junior subordinated notes that have been issued to capital trusts that issued trust preferred securities were $41.5 million as of September 30, 2019, an increase of $17.7 million, or 73.9% from $23.9 million at December 31, 2018, due primarily to the merger. See Note 11. “Long-Term Debt” to our consolidated financial statements for additional information related to our junior subordinated notes.

Subordinated Debentures - On May 1, 2019, the Company assumed $10.8 million in aggregate principal amount of subordinated debentures as a result of the merger with ATBancorp. See Note 11. “Long-Term Debt” to our consolidated financial statements for additional information related to our subordinated debentures.

Federal Home Loan Bank Borrowings

- FHLB borrowings totaled ~~$143.0~~$155.7 million as of September 30, ~~2018~~2019, compared with $~~115.0~~136.0 million as of December 31, ~~2017,~~2018, an increase of ~~$28.0~~$19.7 million, or ~~24.3%~~14.5%. We utilize FHLB borrowings as a supplement to customer deposits to fund interest-earning assets and to assist in managing interest rate risk. See Note ~~10. “Federal Home Loan Bank Borrowings and Long-Term~~11. “Long-Term Debt” to our consolidated financial statements for additional information related to our FHLB borrowings.

~~Junior Subordinated Notes Issued to Capital Trusts~~

~~Junior subordinated notes that have been issued to capital trusts that issued trust preferred securities were $23.9~~Other Long-Term Debt - Other long-term debt consists of a $35.0 million unsecured note entered into on April 30, 2015, in connection with the merger with Central Bancshares, Inc., $3.8 million of which was outstanding as of September 30, ~~2018, substantially unchanged from December 31, 2017.~~2019. On April 30, 2019, the Company entered into a $35.0 million unsecured note in connection with the ATBancorp acquisition, $31.5 million of which was outstanding at September 30, 2019. See Note ~~9. “Junior Subordinated Notes Issued to Capital Trusts”~~11. “Long-Term Debt” to our consolidated financial statements for additional information related to our ~~junior subordinated notes.~~

~~Long-term Debt~~

Long-term debt in the form of a $35.0 million unsecured note, of which $25.0 million was drawn upon, payable to a correspondent bank was entered into on April 30, 2015 in connection with the payment of the merger consideration at the closing of the Central merger, of which $8.8 million was outstanding as of September 30, 2018. See ~~Note 10. “Federal Home Loan Bank Borrowings and Long-Term Debt”~~ ~~to our consolidated financial statements for additional information related to our~~other long-term debt.

Nonperforming Assets

The following tables set forth information concerning nonperforming loans by class of loans at September 30, ~~2018~~2019 and December 31, ~~2017~~2018:


(in thousands)	90 Days or More Past Due and Still Accruing Interest		Troubled Debt Restructure		Nonaccrual		Total		Nonaccrual		90+ Days Past Due and Still Accruing Interest		Performing Troubled Debt Restructured		Total
September 30, 2018
September 30, 2019
Agricultural	$	—	$	2,502	$	662	$	3,164	$	2,481	$	—	$	2,361	$	4,842
Commercial and industrial	—		492		11,208		11,700		12,020		—		—		12,020
Commercial real estate:
Construction and development	—		—		100		100		632		—		—		632
Farmland	—		—		2,367		2,367		8,081		—		—		8,081
Multifamily	—		—		—		—		—		—		—		—
Commercial real estate-other	—		3,724		4,816		8,540		5,337		—		1,144		6,481
Total commercial real estate	—		3,724		7,283		11,007		14,050		—		1,144		15,194
Residential real estate:
One- to four- family first liens	171		636		1,277		2,084		2,734		236		1,056		4,026
One- to four- family junior liens	—		—		413		413		368		—		140		508
Total residential real estate	171		636		1,690		2,497		3,102		236		1,196		4,534
Consumer	—		—		86		86		315		—		—		315
Total	$	171	$	7,354	$	20,929	$	28,454	$	31,968	$	236	$	4,701	$	36,905


(in thousands)	90 Days or More Past Due and Still Accruing Interest		Troubled Debt Restructure		Nonaccrual		Total		Nonaccrual		90+ Days Past Due and Still Accruing Interest		Performing Troubled Debt Restructured		Total
December 31, 2017
December 31, 2018
Agricultural	$	—	$	2,637	$	168	$	2,805	$	1,622	$	—	$	2,502	$	4,124
Commercial and industrial	—		1,450		7,124		8,574		9,218		—		492		9,710
Commercial real estate:
Construction and development	—		—		188		188		99		—		—		99
Farmland	—		—		386		386		2,751		—		—		2,751
Multifamily	—		—		—		—		—		—		—		—
Commercial real estate-other	—		4,028		5,279		9,307		4,558		—		1,227		5,785
Total commercial real estate	—		4,028		5,853		9,881		7,408		—		1,227		8,635
Residential real estate:
One- to four- family first liens	205		755		1,228		2,188		1,049		341		1,063		2,453
One- to four- family junior liens	2		—		346		348		465		24		—		489
Total residential real estate	207		755		1,574		2,536		1,514		365		1,063		2,942
Consumer	—		—		65		65		162		—		—		162
Total	$	207	$	8,870	$	14,784	$	23,861	$	19,924	$	365	$	5,284	$	25,573

Not included in the loans above as of September 30, 2019 and December 31, 2018, were ~~purchased credit impaired~~PCI loans with an outstanding balance of $0.4 million and $0.3 ~~million.~~million, respectively.

~~Our nonperforming assets (which include~~

The following table presents a roll forward of nonperforming loans ~~and OREO)~~as of the dates indicated:



				90+ Days Past			Performing
				Due & Still			Troubled Debt
Nonperforming Loans	Nonaccrual			Accruing			Restructured			Total
(in thousands)
Balance at December 31, 2018	$	19,924		$	365		$	5,284		$	25,573
Loans placed on nonaccrual, restructured or 90+ days past due & still accruing	14,236			1,265			215			15,716
Established through acquisition	12,116			—			—			12,116
Repayments (including interest applied to principal)	(7,420		)	(18		)	(244		)	(7,682		)
Loans returned to accrual status or no longer past due	(1,243		)	(962		)	—			(2,205		)
Charge-offs	(3,972		)	—			—			(3,972		)
Transfers to foreclosed assets	(1,673		)	—			—			(1,673		)
Transfers to 90+ days & still accruing	—			—			—			—
Transfers to nonaccrual	—			(414		)	(554		)	(968		)
Balance at September 30, 2019	$	31,968		$	236		$	4,701		$	36,905

At September 30, 2019, net foreclosed assets totaled ~~$29.0~~$4.4 million, asup from $535 thousand at December 31, 2018, primarily due to the merger. As of September 30, ~~2018, an increase of $3.1~~2019, the allowance for loan losses was $31.5 million, or 12.1%, from December 31, 2017. The balance of OREO at September 30, 2018 was $0.5 million, down $1.5 million, from $2.0 million of OREO at December 31, 2017. During the first nine months of 2018, the Company had a net decrease of 17 properties in other real estate owned. All of the OREO property was acquired either through foreclosures or through settlement agreements, and we are actively working to sell all properties held as of September 30, 2018. OREO is carried at appraised value less estimated cost of disposal at the date of acquisition. Additional discounts could be required to market and sell the properties, resulting in a write down through expense.

~~Nonperforming loans increased from $23.9 million, or 1.04%~~0.89% of loans held for investment, net of unearned income, compared with $29.3 million, or 1.22%, at December 31, ~~2017, to $28.5 million, or 1.20%, at September 30,~~ 2018. ~~At September 30, 2018, nonperforming loans consisted of $20.9 million in nonaccrual loans, $7.4 million in troubled debt restructures (“TDRs”) and $0.2 million in loans past due 90~~

days or more and still accruing interest. This compares to nonaccrual loans of $14.8 million, TDRs of $8.9 million, and loans past due 90 days or more and still accruing interest of $0.2 million at December 31, 2017. Nonaccrual loans increased $6.1 million between December 31, 2017, and September 30, 2018, primarily due to $8.7 million of loans being added to nonaccrual status, partially offset by $1.8 million of payments and net charge-offs of $0.8 million. The balance of TDRs decreased $1.5 million between these two dates, primarily due to payments of $1.2 million collected from TDR status borrowers, and two loans totaling $0.3 million moving to non-disclosed status. Loans 90 days or more past due and still accruing interest were largely unchanged between December 31, 2017, and September 30, 2018. Loans past due 30 to 89 days and still accruing interest (not included in the nonperforming loan totals) increased to $9.1 million at September 30, 2018, compared with $8.4 million at December 31, 2017. The Company had net loan charge-offs of $0.8 million in the nine months ended September 30, 2018, or an annualized 0.05% of average loans outstanding, compared to net charge-offs of $2.0 million, or an annualized 0.12% of average loans outstanding, for the same period of 2017.

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

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

When a loan officer originates a new loan, based upon proper loan authorization, he or she documents the credit file with an offering sheet summary, supplemental underwriting analysis, relevant financial information and collateral evaluations. All of this information is used in the determination of the initial loan risk rating. The 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. Loan policy requires all lending relationships with total exposure of $5.0 million or more as well as all classified (loan grades 6 through 8) and watch (loan grade 5) rated credits over $1.0 million be reviewed no less than annually. 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 executive management.

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. When a loan relationship with total related exposure of $1.0 million or greater is adversely graded (loan grade 5 or above), or is classified as a TDR (regardless of size), the lending officer is then charged with preparing a loan strategy summary worksheet that outlines the background of the credit problem, current repayment status of the loans, current collateral evaluation and a workout plan of action. This plan may include goals to improve the credit rating, assist the borrower in moving the loans to another institution and/or collateral liquidation. All such reports are first presented to regional management and then to the 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 the loan relationship as impaired. Once that determination has occurred, the credit analyst will complete 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 impairment analysis when deemed necessary. These judgmental evaluations may produce an initial specific allowance for placement in the Company’s allowance for loan and lease losses calculation. Impairment analysis for the underlying collateral value is completed in the last month of the quarter. The impairment analysis 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 impaired loans, the related allowances and ~~OREO.~~foreclosed assets, net.

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

The review process also provides for the upgrade of loans that show improvement since the last review. All requests for an upgrade of a credit are approved by the loan strategy committee before the rating can be changed.

Restructured Loans

We restructure loans for our customers who appear to be able to meet the terms of their loan over the long term, but who may be unable to meet the terms of the loan in the near term due to individual circumstances. We consider the customer’s past performance, previous and current credit history, the individual circumstances surrounding the current difficulties and their plan to meet the terms of the loan in the future prior to restructuring the terms of the loan. 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, loans are restructured through short-term interest rate relief, short-term principal payment relief or short-term principal and interest payment relief. Once a restructured loan has gone 90 days or more past due or is placed on nonaccrual status, it is included in the 90 days or more past due or nonaccrual totals.

During the nine months ended September 30, ~~2018,~~2019, the Company restructured ~~one loan~~fifteen loans by granting concessions to a borrower experiencing financial difficulties.

A loan classified as a troubled debt restructuring will no longer be included in the troubled debt restructuring disclosures in the periods after the restructuring if the loan performs in accordance with the terms specified by the restructuring agreement and the interest rate specified in the restructuring agreement represents a market rate at the time of modification. The specified interest rate is considered a market rate when the interest rate is equal to or greater than the rate the Company is willing to accept at the time of restructuring for a new loan with comparable risk. If there are concerns that the borrower will not be able to meet the modified terms of the loan, the loan will continue to be included in the troubled debt restructuring disclosures.

We consider all TDRs, regardless of whether they are performing in accordance with their modified terms, to be impaired loans when determining our allowance for loan losses. A summary of restructured loans as of September 30, 2018 and December 31, 2017 is as follows:

September 30, December 31,
(in thousands) 2018 2017
Restructured Loans (TDRs):
In compliance with modified terms $ 7,354
$ 8,870
Not in compliance with modified terms - on nonaccrual status or 90 days or more past due and still accruing interest 4,509
4,778
Total restructured loans $ 11,863
$ 13,648

Allowance for Loan Losses

The ALLL is an accounting estimate of incurred credit losses in our loan portfolio at the balance sheet date. The provision for loan losses is the expense recognized in the consolidated statements of income to adjust the allowance to the levels deemed appropriate by management, as measured by the Company’s credit loss estimation methodologies.

Our ALLL as of September 30, ~~2018~~2019 was ~~$31.3~~$31.5 million, which was ~~1.32%~~0.89% of ~~total~~ loans held for investment, net of unearned income, as of that date. This compares with an ALLL of ~~$28.1~~$29.3 million as of December 31, ~~2017,~~2018, which was ~~1.23%~~1.22% of ~~total~~ loans held for investment, net of unearned income, as of that date. Gross charge-offs for the first nine months of ~~2018~~2019 totaled ~~$1.6~~$5.2 million, while there were $0.8 million in recoveries of previously charged-off loans. The increase in the ~~allowance for loan losses~~ALLL was primarily due to ~~loan growth (excluding~~the application of the Company’s standard loss reserve factors to the agricultural portfolio loans ~~held for sale)~~and renewal of ~~$91.0 million for the nine months ended September 30, 2018, combined with some indicated weakness~~non-agricultural loans acquired in the ~~agricultural sector.~~merger. The ratio of annualized net loan charge offs to average loans for the first nine months of ~~2018~~2019 was ~~0.05%~~0.19% compared to ~~0.51%~~0.26% for the year ended December 31, ~~2017.~~2018. As of September 30, ~~2018,~~2019, the ALLL was ~~109.9%~~85.4% of nonperforming loans compared with ~~117.6%~~114.6% as of December 31, ~~2017.~~2018. Based on the inherent risk in the loan portfolio, management believed that as of September 30, ~~2018,~~2019, the ALLL was adequate; however, there is no assurance losses will not exceed the allowance, and any growth in the loan portfolio or uncertainty in the general economy will require that management continue to evaluate the adequacy of the ALLL and make additional provisions in future periods as deemed necessary.

The Bank carefully monitors the loan portfolio and continues to emphasize the importance of credit quality while continuously strengthening loan monitoring systems and controls. The Bank reviews the ALLL quantitative and qualitative methodology on a quarterly basis and makes adjustments when appropriate to maintain adequate reserves. There were no changes to our ALLL calculation methodology during the first nine months of ~~2018.~~2019. Classified and impaired loans are reviewed per the requirements of FASB ASC Topic 310.

The Bank uses a rolling 20-quarter annual average historical net charge-off component for its ALLL calculation. One qualitative factor table is used for the entire bank. Differences in regional (Iowa, Minnesota/Wisconsin, Florida and Colorado)

economic and business conditions are included in the qualitative factor narrative and the risk is spread over the entire loan portfolio. All pass rated loans, regardless of size, are allocated based on delinquency status. The Bank has streamlined the ALLL process for a number of low-balance loan types that do not have a material impact on the overall calculation, which are applied a reserve amount equal to the overall reserve calculated pursuant to applicable accounting standards to total loan calculated pursuant to applicable accounting standards. The guaranteed portion of any government guaranteed loan is included in the calculation and is reserved for according to the type of loan. Special mention/watch and substandard rated credits not individually reviewed for impairment are allocated at a higher amount due to the inherent risks associated with these types of loans. Special mention/watch risk rated loans (i.e. early stages of financial deterioration, technical exceptions, etc.) are reserved at a level that will cover losses above a pass allocation for loans that had a loss in the trailing 20-quarters in which the loan was risk-rated special mention/watch at the time of the loss. Substandard loans carry a greater risk than special mention/watch loans, and as such, this subset is reserved at a level that covers losses above a pass allocation for loans that had a loss in the trailing 20-quarters in which the loans was risk-rated substandard at the time of the loss. Classified and impaired loans are reviewed per the requirements of applicable accounting standards.

We monitor the loan to value (“LTV”) ratio of all loans in our portfolio, and those loans in excess of internal and supervisory guidelines are presented to the Bank’s board of directors on a quarterly basis. At September 30, ~~2018,~~2019, there were 2524 owner-occupied 1-4 family loans with a LTV ratio of 100% or greater. In addition, there were ~~124~~86 home equity loans without credit enhancement that had a LTV ratio of 100% or greater. We have the first lien on 63 of these equity loans, and other financial institutions have the first lien on the remaining ~~118.~~83. Additionally, there were ~~165~~170 commercial real estate loans without credit enhancement that exceeded

the supervisory LTV guidelines. No additional allocation of the ALLL is made for loans that exceed internal and supervisory guidelines.

We review all impaired and nonperforming loans individually on a quarterly basis to determine their level of impairment due to collateral deficiency or insufficient cash-flow based on a discounted cash-flow analysis. At September 30, ~~2018,~~2019, TDRs were not a material portion of the loan portfolio. We review loans 90 days or more past due that are still accruing interest no less than quarterly to determine if there is a strong reason that the credit should not be placed on non-accrual. The Bank’s board of directors has reviewed these credit relationships and determined that these loans and the risks associated with them were acceptable and did not represent any undue risk.

Capital Resources

Total shareholders’ equity was ~~$349.2~~$497.9 million as of September 30, ~~2018,~~2019, compared to ~~$340.3~~$357.1 million as of December 31, ~~2017,~~2018, an increase of ~~$8.9~~$140.8 million, or ~~2.6%~~39.4%. This increase was primarily attributable to capital acquired from the ATBancorp merger of $113.7 million, net income of ~~$22.7~~$30.3 million for the first nine months of ~~2018. This~~2019, and an $8.7 million increase ~~was partially offset by the payment of $7.2 million in common stock dividends, and a $6.5 million decrease~~ in accumulated other comprehensive income due to market value adjustments on investment securities ~~available for sale.~~AFS. This increase was partially offset by the payment of $8.2 million in dividends on our common stock. In addition, there was a ~~$0.4~~$3.4 million increase in treasury stock due to the repurchase of ~~33,998~~147,627 shares of Company common stock at a cost of ~~$1.1~~$4.1 million, partially offset by the issuance of ~~35,494~~29,916 shares of Company common stock in connection with stock compensation plans during the first nine months of ~~2018.~~2019. The total shareholders’ equity to total assets ratio was ~~10.69%~~10.71% at September 30, ~~2018, up~~2019, down from ~~10.59%~~10.85% at December 31, ~~2017.~~2018. The tangible equity to tangible assets ratio (a non-GAAP financial measure) was ~~8.61%~~8.36% at September 30, ~~2018,~~2019, compared with ~~8.44%~~8.80% at December 31, ~~2017.~~2018. Book value was ~~$28.57~~$30.77 per share at September 30, ~~2018,~~2019, an increase from ~~$27.85~~$29.32 per share at December 31, ~~2017.~~2018. Tangible book value per share (a non-GAAP financial measure) was ~~$22.50~~$23.40 at September 30, ~~2018,~~2019, an increase from ~~$21.67~~$23.25 per share at December 31, ~~2017.~~2018.

Our Tier 1 capital to risk-weighted assets ratio was ~~11.06%~~9.76% as of September 30, ~~2018~~2019 and was ~~10.96%~~11.18% as of December 31, ~~2017.~~2018. 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, ~~2018,~~2019, 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.

~~The Company~~ See Note 14. “Regulatory Capital Requirements and ~~the Bank are subject~~Restrictions on Subsidiary Cash” to ~~the Basel III regulatory capital reforms (the “Basel III Rules”) and the Dodd-Frank Wall Street Reform and Consumer Protection Act (the “Dodd-Frank Act”). The Basel III Rules are applicable~~our consolidated financial statements for additional information related to all banking organizations that are subject to minimum capital requirements, including federal and state banks and savings and loan associations, as well as to bank and savings and loan holding companies, other than “small bank holding companies” (generally bank holding companies with consolidated assets of less than $3 billion which are not publicly traded companies). In order to be a “well-capitalized” depository institution, a bank must maintain a Common Equity Tier 1 capital ratio of 6.5% or more; a Tier 1 capital ratio of 8% or more; a Total capital ratio of 10% or more; and a leverage ratio of 5% or more. A capital conservation buffer, comprised of Common Equity Tier 1 capital, is also established above the regulatory minimum capital requirements. This capital conservation buffer is being phased in, which began January 1, 2016 at 0.625% of risk-weighted assets, was 1.25% of risk-weighted assets in 2017, is 1.875% of risk-weighted assets in 2018, and further increases to the final level of 2.5% on January 1, 2019. At

September 30, 2018, the Company’s institution-specific capital conservation buffer necessary to avoid limitations on distributions and discretionary bonus payments was 4.18%, while the Bank’s was 3.97%.

~~We have traditionally disclosed certain non-GAAP ratios and amounts to evaluate and measure~~ our financial condition, including our Tier 1 capital to risk-weighted assets ratio and our Common Equity Tier 1 capital ratio to risk-weighted assets ratio. We believe these ratios provide investors with information regarding our financial condition and how we evaluate our financial condition internally. The following table provides a reconciliation of these non-GAAP measures to the most comparable GAAP equivalents.

At September 30, At December 31,
(in thousands) 2018 2017
Tier 1 capital
Total shareholders’ equity $ 349,189
$ 340,304
Less: Net unrealized gains on securities available for sale 9,090
2,602
Disallowed Intangibles (74,164 ) (73,340 )
Common equity tier 1 capital $ 284,115
269,566
Plus: Junior subordinated notes issued to capital trusts (qualifying restricted core capital) 23,865
23,793
Tier 1 capital $ 307,980
$ 293,359
Risk-weighted assets $ 2,784,408
$ 2,677,721
Tier 1 capital to risk-weighted assets 11.06 % 10.96 %
Common Equity Tier 1 capital to risk-weighted assets 10.20 % 10.07 %

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

Actual
For Capital Adequacy Purposes^*
To Be Well Capitalized Under Prompt Corrective Action Provisions
(dollars in thousands) Amount Ratio Amount Ratio Amount Ratio
At September 30, 2018
Consolidated:
Total capital/risk based assets $ 339,258
12.18 % $ 274,960
9.875 % N/A
N/A
Tier 1 capital/risk based assets 307,980
11.06
219,272
7.875
N/A
N/A
Common equity tier 1 capital/risk based assets 284,115
10.20
177,506
6.375
N/A
N/A
Tier 1 capital/adjusted average assets 307,980
9.65
127,606
4.000
N/A
N/A
MidWestOne Bank:

Total capital/risk based assets $ 332,218
11.97 % $ 274,163
9.875 % $ 277,633
10.00 %
Tier 1 capital/risk based assets 300,940
10.84
218,636
7.875
222,107
8.00
Common equity tier 1 capital/risk based assets 300,940
10.84
176,991
6.375
180,462
6.50
Tier 1 capital/adjusted average assets 300,940
9.45
127,441
4.000
159,302
5.00
At December 31, 2017
Consolidated:
Total capital/risk based assets $ 321,459
12.00 % $ 247,689
9.250 % N/A
N/A
Tier 1 capital/risk based assets 293,359
10.96
194,135
7.250
N/A
N/A
Common equity tier 1 capital/risk based assets 269,566
10.07
153,969
5.750
N/A
N/A
Tier 1 capital/adjusted average assets 293,359
9.48
123,831
4.000
N/A
N/A
MidWestOne Bank:

Total capital/risk based assets $ 322,679
12.08 % $ 247,010
9.250 % $ 267,038
10.00 %
Tier 1 capital/risk based assets 294,620
11.03
193,603
7.250
213,631
8.00
Common equity tier 1 capital/risk based assets 294,620
11.03
153,547
5.750
173,575
6.50
Tier 1 capital/adjusted average assets 294,620
9.53
123,678
4.000
154,598
5.00
* The ratios for December 31, 2017 include a capital conservation buffer of 1.25%, and the ratios for September 30, 2018 include a capital conservation buffer of 1.875%

On February 15, ~~2018~~2019, ~~32,460~~39,100 restricted stock units were granted to certain officers of the ~~Company, and on~~Company. On May 15, ~~2018, 5,720~~2019, 9,940 restricted stock units were granted to ~~members of~~ the ~~board of~~ directors ~~of the Company. On June 15, 2018, 6,780 restricted stock units were granted to certain officers~~ of the Company. Additionally, during the first nine months of ~~2018~~2019, ~~28,525~~32,810 shares of common stock were issued in connection with the vesting of previously awarded grants of restricted stock units, of which ~~2,731~~2,894

shares were surrendered by grantees to satisfy tax requirements, and ~~960~~8,190 nonvested restricted stock units ~~were forfeited. In the first nine months of 2018,~~ ~~9,700~~ ~~shares of common stock were issued in connection with the exercise of previously issued stock options, and no options~~ 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. We had liquid assets (cash and cash equivalents) of ~~$53.4~~$86.7 million as of September 30, ~~2018,~~2019, compared with ~~$51.0~~$45.5 million as of December 31, ~~2017.~~2018. Interest-bearing deposits in banks at September 30, ~~2018,~~2019, were ~~$4.2~~$6.4 million, ~~a decrease~~an increase of ~~$1.3~~$4.7 million from ~~$5.5~~$1.7 million at December 31, ~~2017.~~2018. Debt securities classified as ~~available for sale,~~AFS, totaling ~~$407.8~~$503.3 million and ~~$445.3~~$414.1 million as of September 30, ~~2018~~2019 and December 31, ~~2017,~~2018, respectively, could be sold to meet liquidity needs if necessary. Additionally, the Bank maintains unsecured lines of credit with several correspondent banks and secured lines with the Federal Reserve Bank Discount Window and the FHLB that would allow us to borrow funds on a short-term basis, if necessary. Management believed that the Company had sufficient liquidity as of September 30, ~~2018~~2019 to meet the needs of borrowers and depositors.

Our principal sources of funds between December 31, ~~2017~~2018 and September 30, ~~2018~~2019 were ~~FHLB borrowings, deposits,~~sales and ~~federal funds purchased.~~maturities of investment securities. While scheduled loan amortization and maturing interest-bearing deposits in banks are relatively predictable sources of funds, deposit flows and loan prepayments are greatly influenced by economic conditions, the general level of interest rates, and competition. We utilize particular sources of funds based on comparative costs and availability. This includes fixed-rate FHLB borrowings that can at times be obtained at a more favorable cost than deposits of comparable maturity. We generally manage the pricing of our deposits to maintain a steady deposit base but from time to time may decide, as we have done in the past, not to pay rates on deposits as high as our competition.

As of September 30, ~~2018,~~2019, we had ~~$8.8~~$35.3 million of long-term debt outstanding to an unaffiliated banking organization. See Note ~~10. “Federal Home Loan Bank Borrowings and Long-Term~~11. “Long-Term Debt” to our consolidated financial statements for additional information related to our long-term debt. We

also have ~~$23.9~~$41.5 million of indebtedness payable under junior subordinated ~~debentures~~notes issued to subsidiary trusts that issued trust preferred securities in pooled ~~offerings.~~offerings, and $10.8 million payable under subordinated debentures. See Note ~~9. “Junior Subordinated Notes Issued to Capital Trusts”~~11. “Long-Term Debt” to our consolidated financial statements for additional information related to our junior subordinated notes.

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 (“CPI”) may fluctuate considerably and thereby influence the overall CPI without having a corresponding effect on interest rates or upon the cost of those goods and services normally purchased by us. In years of high inflation and high interest rates, intermediate and long-term interest rates tend to increase, thereby adversely impacting the market values of investment securities, mortgage loans and other long-term fixed rate loans held by financial institutions. In addition, higher short-term interest rates caused by inflation tend to increase financial institutions’ cost of funds. In other years, the reverse situation may occur.

Off-Balance-Sheet Arrangements

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

Commitments to extend credit generally have fixed expiration dates or other termination clauses and may require payment of a fee. Since many of the commitments are expected to expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements. We evaluate each customer’s creditworthiness on a case-by-case basis. As of September 30, ~~2018,~~2019, outstanding commitments to extend credit totaled approximately ~~$511.9~~$924.2 million.

Commitments under standby and performance letters of credit outstanding totaled ~~$15.5~~$37.9 million as of September 30, ~~2018.~~2019. We do not anticipate any losses as a result of these transactions, and expect to have sufficient liquidity to fulfill outstanding credit commitments and letters of credit.

Residential mortgage loans sold to others are predominantly conventional residential first lien mortgages originated under our usual underwriting procedures, and are most often sold on a nonrecourse basis. At September 30, ~~2018~~2019, there ~~were approximately~~ ~~$1.1~~was $7.9 million of mandatory commitments with investors to sell ~~not yet originated~~ residential mortgage loans. We do not anticipate any losses as a result of these transactions.

Contractual Obligations

There have been no material changes to the contractual obligations existing at December 31, 2018, as disclosed in the Annual Report on Form 10-K.

Special Cautionary Note Regarding Forward-Looking Statements

This report 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,” “goals,” “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:

credit quality deterioration or pronounced and sustained reduction in real estate market values that cause an increase in our ~~allowance for credit losses~~ALLL and a reduction in net earnings;

the risk of mergers, including with ATBancorp, including without limitation, the related time and costs of implementing such transactions, integrating operations as part of these transactions and possible failure to achieve expected gains, revenue growth and/or expense savings from such transactions;

our management’s ability to reduce and effectively manage interest rate risk and the impact of interest rates in general on the volatility of our net interest income;

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, trade and fiscal policies;

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

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

the sufficiency of the ~~allowance for loan losses~~ALLL 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, FinTech 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 loan losses~~our ALLL 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 or industry conditions, internationally, nationally 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;~~FASB, such as the implementation of CECL;

war or terrorist activities which may cause further deterioration in the economy or cause instability in credit markets;

the effects of cyber-attacks;

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

other factors and risks described under “Risk Factors” in our Annual Report on Form 10-K for the period ended December 31, ~~2017~~2018 and otherwise in our reports and filings with the Securities and Exchange Commission.

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.

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 the Company as other types of market risk, such as foreign currency exchange rate risk and commodity price risk, play a lesser role in the normal course of our business activities.

In addition to interest rate risk, economic conditions in recent years have made liquidity risk (in particular, 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 or to 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 $39.3 million in the first nine months of 2019, compared with $31.0 million in the first nine months of ~~2018, compared with $34.0 million in the first nine months of 2017.~~2018. Net income before depreciation, amortization, and accretion is generally the primary contributor for net cash inflows from operating activities.

Net cash ~~outflows~~inflows from investing activities were ~~$62.4~~$69.3 million in the first nine months of ~~2018,~~2019, compared to net cash outflows of ~~$76.5~~$62.4 million in the comparable nine-month period of ~~2017. In~~2018. Investment securities transactions resulted in net cash inflows of $27.7 million the first nine months of ~~2018, net~~2019 compared to inflows of $31.7 million during the same period of 2018. Net cash ~~outflows~~acquired from the ATBancorp merger was $37.1 million in the first nine months of 2019. Net cash inflows related to the net ~~increase~~decrease in organic loans were ~~$92.3~~$4.0 million for the first nine months of ~~2018,~~2019, compared with ~~$100.9~~$92.3 million of net cash outflows for the same period of ~~2017. Investment securities transactions resulted in net cash inflows of $31.7 million, compared to inflows of $24.2 million during the same period of 2017.~~2018.

Net cash ~~inflows~~outflows from financing activities in the first nine months of ~~2018~~2019 were ~~$33.8~~$67.4 million, compared with net cash inflows of ~~$41.4~~$33.8 million for the same period of ~~2017.~~2018. Uses of cash were highlighted by a net decrease of $35.3 million in long-term debt, a net decrease of $37.1 million in short-term borrowings, and $8.2 million to pay dividends. The largest financing cash inflows during the nine months ended September 30, ~~2018 were a net increase of $28.0 million in FHLB borrowings,~~2019 was an increase of ~~$26.9~~$17.7 million in deposits, and an increase of $18.1 million in federal funds purchased. Uses of cash were a decrease of $27.3 million in securities sold under agreements to repurchase, $7.2 million to pay dividends, and $3.8 million of payments on long-term debt.deposits.

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

•FHLB Advances and Federal Funds Lines

•Federal Reserve Bank Discount Window

•FHLB Borrowings

•Brokered Deposits

•Brokered Repurchase Agreements

•Federal ~~Reserve~~Home Loan Bank ~~Discount Window~~

Advances and Federal Funds Lines:

Routine liquidity requirements are met by fluctuations in the FHLB advances and federal funds ~~position~~positions of the Bank. The principal function of these funds is to maintain short-term liquidity. Unsecured federal funds purchased and secured FHLB advance 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. FHLB advances are subject to the same collateral requirements and borrowing limits as set term FHLB borrowing, discussed below. Multiple correspondent relationships are

preferable and federal funds sold exposure to any one customer is continuously monitored. The current federal funds purchased limit is 10% of total assets, or the amount of established federal funds lines, whichever is smaller. Currently, the Bank has unsecured federal funds lines available totaling ~~$150.0~~$170.0 million, which lines are tested annually to ensure availability.

Federal Reserve Bank Discount Window:

The Federal Reserve Bank Discount Window is another source of liquidity, particularly during difficult economic times. The Bank has a borrowing capacity with the Federal Reserve Bank of Chicago limited by the amount of municipal securities pledged against the line. As of September 30, 2019, the Bank had municipal securities with an approximate market value of $13.0 million pledged for liquidity purposes, and had a borrowing capacity of $11.7 million.

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. As of September 30, ~~2018~~2019, the Bank had $~~143.0~~155.7 million in outstanding FHLB borrowings, leaving $~~137.3~~443.7 million available for liquidity needs, based on collateral capacity. These borrowings are secured by various real estate loans (residential, commercial and agricultural).

Brokered Deposits:

The Bank has brokered certificate of deposit lines and deposit relationships available to help diversify its various funding sources. Brokered deposits offer several benefits relative to other funding sources, such as: maturity structures which cannot be duplicated in the current deposit market, deposit gathering which does not cannibalize the existing deposit base, the unsecured nature of these liabilities, and the ability to quickly generate funds. However, brokered deposits are often viewed as a volatile liability by banking regulators and market participants. This viewpoint, and the desire to not develop a large funding concentration in any one area outside of the Bank’s core market area, is reflected in an internal policy stating that the Bank limit the use of brokered deposits as a funding source to no more than 10% of total 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.

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, ~~2018.~~2019.

~~Federal Reserve Bank Discount Window:~~

The Federal Reserve Bank Discount Window is another source of liquidity, particularly during difficult economic times. The Bank has a borrowing capacity with the Federal Reserve Bank of Chicago limited by the amount of municipal securities pledged against the line. As of September 30, 2018, the Bank had municipal securities with an approximate market value of $12.6 million pledged for liquidity purposes, and had a borrowing capacity of $11.4 million.

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 one of its more significant market risks. The major sources of the ~~Company's~~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. The interest rate scenarios used in such analysis may include gradual or rapid 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 or LIBOR). There has been no material change in the Company’s interest rate profile between September 30, ~~2018~~2019 and December 31, ~~2017.~~2018. The mix of earning assets and interest-bearing liabilities has remained stable over the period.

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").~~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 forecasting net interest income under a variety of scenarios, which include varying the level of interest rates and 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~~management’s control, such as customer behavior on loan and deposit activity and the effect that competition has on both loan and deposit pricing. These assumptions are subjective and, as a result, net interest income simulation results will differ from actual results due to the timing, magnitude and frequency of interest rate changes, changes in market conditions, customer behavior and management strategies, among other factors. We perform various sensitivity analyses on assumptions of deposit attrition and deposit re-pricing.

The following table presents the anticipated effect on net interest income over a twelve month period if short- and long-term interest rates were to sustain an immediate decrease of 100 basis points or 200 basis points, or an immediate increase of 100 basis points or 200 basis points:

Immediate Change in Rates
(dollars in thousands) -200 -100 +100 +200
September 30, 2018
Dollar change $ (2,873 ) $ (729 ) $ 55
$ (361 )
Percent change (2.8 )% (0.7 )% 0.1 % (0.4 )%
December 31, 2017
Dollar change $ (2,873 ) $ (729 ) $ 55
$ (361 )
Percent change (2.8 )% (0.7 )% 0.1 % (0.4 )%



	Immediate Change in Rates
(dollars in thousands)	-200			-100			+100			+200
September 30, 2019
Dollar change	$	1,913		$	(756	)	$	(568	)	$	(1,885	)
Percent change	1.3		%	(0.5		)%	(0.4		)%	(1.3		)%
December 31, 2018
Dollar change	$	(529	)	$	(568	)	$	(1,840	)	$	(4,006	)
Percent change	(0.5		)%	(0.5		)%	(1.7		)%	(3.8		)%

As of September 30, ~~2018, 37.4%~~2019, 41.1% of the Company’s earning asset balances will reprice or are expected to pay down in the next twelve months, and ~~64.4%~~43.1% 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

Under the supervision and with the participation of certain members of our management, including our chief executive officer and chief financial officer, we completed an evaluation of the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended) as of September 30, ~~2018~~2019. Based on this evaluation, our chief executive officer and chief financial officer have concluded that the disclosure controls and procedures were effective as of the end of the period covered by this report with respect to timely

communication to them and other members of management responsible for preparing periodic reports of material information required to be disclosed in this report as it relates to the Company and our consolidated subsidiaries.

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

Changes in Internal Control over Financial Reporting

There was no change in our internal control over financial reporting during the ~~last~~ fiscal quarter ended September 30, 2019 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting. We implemented internal controls to ensure we adequately evaluated our contracts and properly assessed the impact of new accounting standards related to leases on our financial statements to facilitate its adoption on January 1, 2019. There were no significant changes to our internal control over financial reporting due to the adoption of the new standard.

PART II – OTHER INFORMATION

Item 1. Legal Proceedings.

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

Item 1A. Risk Factors.

~~The Company has made the following addition to~~There have been no material changes from the risk factors set forth in Part I, Item 1A. “Risk Factors” of our Annual Report on Form 10-K for the period ended December 31, ~~2017~~2018:

Changes in U.S. trade policies, such as the implementation of tariffs, and other factors beyond the Company’s control may adversely impact our business, financial condition and results of operations.

~~In recent months, the U.S. government implemented tariffs on certain products, and certain countries or entities, such as Mexico, Canada, China and the European Union, have issued or continue~~. Please refer to threaten retaliatory tariffs against products from the United States, including agricultural products. Additional tariffs and retaliatory tariffs may be imposed in the future by the United States and these and other countries. Tariffs, retaliatory tariffs or other trade restrictions on products and materials that ~~our customers import or export, including among others, agricultural products, could cause the prices~~section of our ~~customers’ products~~Form 10-K for disclosures regarding the risks and uncertainties related to ~~increase which could reduce demand for such products, or reduce~~ our customer margins, and adversely impact their revenues, financial results and ability to service debt, which, in turn, could adversely affect our financial condition and results of operations. In addition, to the extent changes in the political environment have a negative impact on us or on the markets in which we operate, our business, results of operations and financial condition could be materially and adversely impacted in the future.business.

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



Period	Total Number of Shares Purchased	Average Price Paid per Share		Total Number of Shares Purchased as Part of Publicly Announced Programs	Approximate Dollar Value of Shares that May Yet Be Purchased Under the Programs
July 1 - 31, 2019	631	$	30.00	18,930	$	1,038,397
August 1 - 31, 2019	36,795	29.38		1,081,068	4,678,882
September 1 - 30, 2019	4,000	29.20		116,783	9,562,099
Total	41,426	$	29.37	1,216,781	$	9,562,099

On ~~October 16, 2018,~~August 20, 2019, the Board of Directors of the Company approved a new share repurchase program, allowing for the repurchase of up to ~~$5.0~~$10.0 million of common stock through December 31, ~~2020.~~2021. The new repurchase program ~~replaces~~replaced the ~~Company's~~Company’s prior repurchase program, pursuant to which the Company had repurchased ~~33,998~~174,702 shares of common stock for approximately ~~$1.1~~$4.7 million since the plan was announced in ~~July 2016.~~October 2018. The prior program had authorized the repurchase of $5.0 million of stock and was due to expire on December 31, ~~2018.~~

~~There were no repurchases of stock in the third quarter of 2018.~~2020.

Item 3. Defaults Upon Senior Securities.

None.

Item 4. Mine Safety Disclosures.

Not Applicable.

Item 5. Other Information.

None.

Item 6. Exhibits.



Exhibit Number	Description	Incorporated by Reference to:

~~2.1~~	~~Agreement and Plan of Merger between MidWestOne~~ ~~Financial Group, Inc. and ATBancorp, dated August 21, 2018~~	~~Incorporated by reference to Exhibit 2.1 to the Company’s Current Report on Form 8-K filed with the SEC on August 22, 2018~~

~~10.1~~	~~Release and Waiver of Claims between MidWestOne~~ ~~Financial Group, Inc. and Kent L. Jehle, dated as of August 31, 2018~~	~~Incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K filed with the SEC on September 4, 2018~~

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

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

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

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

101.SCH	XBRL Taxonomy Extension Schema Document	Filed herewith

101.CAL	XBRL Taxonomy Extension Calculation Linkbase Document	Filed herewith

101.DEF	XBRL Taxonomy Extension Definition Linkbase Document	Filed herewith

101.LAB	XBRL Taxonomy Extension Label Linkbase Document	Filed herewith

101.PRE	XBRL Taxonomy Extension Presentation Linkbase Document	Filed herewith

SIGNATURES

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



		MIDWESTONE FINANCIAL GROUP, INC.

Dated:	November ~~5, 2018~~7, 2019	By:	/s/ CHARLES N. FUNK
			Charles N. Funk
			President and Chief Executive Officer
			(Principal Executive Officer)

		By:	/s/ BARRY S. RAY
			Barry S. Ray
			Senior Executive Vice President and Chief Financial Officer
			(Principal Financial and Accounting Officer)



	As of September 30, 2018
(in thousands)	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses		Estimated Fair Value
U.S. Government agencies and corporations	$	5,561	$	—	$	42	$	5,519
State and political subdivisions	115,251		716		831		115,136
Mortgage-backed securities	53,664		112		1,880		51,896
Collateralized mortgage obligations	179,748		3		8,874		170,877
Corporate debt securities	65,842		8		1,512		64,338
Total	$	420,066	$	839	$	13,139	$	407,766



	As of December 31, 2017
(in thousands)	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses		Estimated Fair Value
U.S. Government agencies and corporations	$	15,716	$	—	$	90	$	15,626
State and political subdivisions	139,561		2,475		197		141,839
Mortgage-backed securities	48,744		181		428		48,497
Collateralized mortgage obligations	173,339		29		5,172		168,196
Corporate debt securities	71,562		31		427		71,166
Total	$	448,922	$	2,716	$	6,314	$	445,324



	Allowance for Loan Losses and Recorded Investment in Loan Receivables
	As of September 30, 2018 and December 31, 2017
(in thousands)	Agricultural		Commercial and Industrial		Commercial Real Estate		Residential Real Estate		Consumer		Total
September 30, 2018
Loans receivable
Individually evaluated for impairment	$	6,711	$	12,924	$	17,375	$	3,981	$	8	$	40,999
Collectively evaluated for impairment	96,496		510,357		1,223,311		450,246		38,788		2,319,198
Purchased credit impaired loans	—		52		13,104		4,296		—		17,452
Total	$	103,207	$	523,333	$	1,253,790	$	458,523	$	38,796	$	2,377,649
Allowance for loan losses:
Individually evaluated for impairment	$	195	$	3,059	$	4,183	$	143	$	—	$	7,580
Collectively evaluated for impairment	2,532		5,183		12,563		2,356		251		22,885
Purchased credit impaired loans	—		—		343		470		—		813
Total	$	2,727	$	8,242	$	17,089	$	2,969	$	251	$	31,278



	Face Value		Book Value		Interest Rate	Interest Rate at		Maturity Date	Callable Date
(in thousands)	Face Value		Book Value		Interest Rate	9/30/2018		Maturity Date	Callable Date
September 30, 2018
Central Bancshares Capital Trust II^{(1) (2)}	$	7,217	$	6,716	Three-month LIBOR + 3.50%	5.83	%	03/15/2038	03/15/2013
Barron Investment Capital Trust I^{(1) (2)}	2,062		1,685		Three-month LIBOR + 2.15%	4.52	%	09/23/2036	09/23/2011
MidWestOne Statutory Trust II⁽¹⁾	15,464		15,464		Three-month LIBOR + 1.59%	3.92	%	12/15/2037	12/15/2012
Total	$	24,743	$	23,865



	Three Months Ended September 30,
	2018 Compared to 2017 Change due to
	Volume			Rate/Yield			Net
(in thousands)
Increase (decrease) in interest income:
Loans, tax equivalent	$	2,447		$	(741	)	$	1,706
Investment securities:
Taxable investments	55			321			376
Tax exempt investments	(174		)	(433		)	(607		)
Total investment securities	(119		)	(112		)	(231		)
Federal funds sold and interest-bearing balances	(7		)	—			(7		)
Change in interest income	2,321			(853		)	1,468
Increase (decrease) in interest expense:
Savings and interest-bearing demand deposits	58			661			719
Certificates of deposit	161			845			1,006
Total deposits	219			1,506			1,725
Federal funds purchased and repurchase agreements	6			177			183
Federal Home Loan Bank borrowings	153			114			267
Other long-term debt	(238		)	293			55
Total borrowed funds	(79		)	584			505
Change in interest expense	140			2,090			2,230
Increase in net interest income	$	2,181		$	(2,943	)	$	(762	)
Percentage change in net interest income over prior period							(2.8		)%



	September 30,		December 31,
(in thousands)	2018		2017
Restructured Loans (TDRs):
In compliance with modified terms	$	7,354	$	8,870
Not in compliance with modified terms - on nonaccrual status or 90 days or more past due and still accruing interest	4,509		4,778
Total restructured loans	$	11,863	$	13,648



	At September 30,			At December 31,
(in thousands)	2018			2017
Tier 1 capital
Total shareholders’ equity	$	349,189		$	340,304
Less: Net unrealized gains on securities available for sale	9,090			2,602
Disallowed Intangibles	(74,164		)	(73,340		)
Common equity tier 1 capital	$	284,115		269,566
Plus: Junior subordinated notes issued to capital trusts (qualifying restricted core capital)	23,865			23,793
Tier 1 capital	$	307,980		$	293,359
Risk-weighted assets	$	2,784,408		$	2,677,721
Tier 1 capital to risk-weighted assets	11.06		%	10.96		%
Common Equity Tier 1 capital to risk-weighted assets	10.20		%	10.07		%



	Actual				For Capital Adequacy Purposes^*				To Be Well Capitalized Under Prompt Corrective Action Provisions
(dollars in thousands)	Amount		Ratio		Amount		Ratio		Amount		Ratio
At September 30, 2018
Consolidated:
Total capital/risk based assets	$	339,258	12.18	%	$	274,960	9.875	%	N/A		N/A
Tier 1 capital/risk based assets	307,980		11.06		219,272		7.875		N/A		N/A
Common equity tier 1 capital/risk based assets	284,115		10.20		177,506		6.375		N/A		N/A
Tier 1 capital/adjusted average assets	307,980		9.65		127,606		4.000		N/A		N/A
MidWestOne Bank:
Total capital/risk based assets	$	332,218	11.97	%	$	274,163	9.875	%	$	277,633	10.00	%
Tier 1 capital/risk based assets	300,940		10.84		218,636		7.875		222,107		8.00
Common equity tier 1 capital/risk based assets	300,940		10.84		176,991		6.375		180,462		6.50
Tier 1 capital/adjusted average assets	300,940		9.45		127,441		4.000		159,302		5.00
At December 31, 2017
Consolidated:
Total capital/risk based assets	$	321,459	12.00	%	$	247,689	9.250	%	N/A		N/A
Tier 1 capital/risk based assets	293,359		10.96		194,135		7.250		N/A		N/A
Common equity tier 1 capital/risk based assets	269,566		10.07		153,969		5.750		N/A		N/A
Tier 1 capital/adjusted average assets	293,359		9.48		123,831		4.000		N/A		N/A
MidWestOne Bank:
Total capital/risk based assets	$	322,679	12.08	%	$	247,010	9.250	%	$	267,038	10.00	%
Tier 1 capital/risk based assets	294,620		11.03		193,603		7.250		213,631		8.00
Common equity tier 1 capital/risk based assets	294,620		11.03		153,547		5.750		173,575		6.50
Tier 1 capital/adjusted average assets	294,620		9.53		123,678		4.000		154,598		5.00
* The ratios for December 31, 2017 include a capital conservation buffer of 1.25%, and the ratios for September 30, 2018 include a capital conservation buffer of 1.875%