MidWestOne Financial Group, Inc. - Annual Report: 2019 (Form 10-K)

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-K



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

For the fiscal year ended December 31, 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	(I.R.S. Employer
Incorporation or Organization)	Identification Number)

102 South Clinton Street, Iowa City, IA 52240

(Address of principal executive offices, including zip code)

(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

Securities registered pursuant to Section 12(g) of the Act: None

Indicate by check mark if registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. ☐ Yes ☒ No

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. ☐ Yes ☒ No

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. ☒ 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). ☒ 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 definition of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.



Large accelerated filer	☐	Accelerated filer	☒
Non-accelerated filer	☐	Smaller reporting company	☐
		Emerging growth company	☐

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). ☐ Yes ☒ No

The aggregate market value of the voting and non-voting common equity held by non-affiliates of the registrant, based on the last sales price quoted on the Nasdaq Global Select Market on the last business day of the registrant’s most recently completed second fiscal quarter, was approximately $453.5 million.

The number of shares outstanding of the registrant’s common stock, par value $1.00 per share, as of March 4, 2020, was 16,146,376.

DOCUMENTS INCORPORATED BY REFERENCE

Portions of the registrant’s Proxy Statement for the 2020 Annual Meeting of Shareholders of MidWestOne Financial Group, Inc. to be held on April 16, 2020, to be filed within 120 days after December 31, 2019, are incorporated by reference into Part III of this Annual Report on Form 10-K to the extent indicated in such part.

MIDWESTONE FINANCIAL GROUP, INC.

Annual Report on Form 10-K

Table of Contents




		Page No.
PART I

Item 1.	Business	1

Item 1A.	Risk Factors	12

Item 1B.	Unresolved Staff Comments	25

Item 2.	Properties	25

Item 3.	Legal Proceedings	25

Item 4.	Mine Safety Disclosures	25

PART II

Item 5.	Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities	26

Item 6.	Selected Financial Data	28

Item 7.	Management's Discussion and Analysis of Financial Condition and Results of Operations	30

Item 7A.	Quantitative and Qualitative Disclosures About Market Risk	52

Item 8.	Financial Statements and Supplementary Data	55

Item 9.	Changes in and Disagreements with Accountants on Accounting and Financial Disclosure	107

Item 9A.	Controls and Procedures	108

Item 9B.	Other Information	110

PART III

Item 10.	Directors, Executive Officers and Corporate Governance	110

Item 11.	Executive Compensation	110

Item 12.	Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters	110

Item 13.	Certain Relationships and Related Transactions, and Director Independence	110

Item 14.	Principal Accountant Fees and Services	110

PART IV

Item 15.	Exhibits and Financial Statement Schedules	110
Item 16.	Form 10-K Summary	113

Glossary of Acronyms, Abbreviations, and Terms

The acronyms, abbreviations, and terms listed below are used in various sections of this Form 10-K, including "Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations." and “Item 8. Financial Statements and Supplemental Data.”



AFS	Available for Sale	FHLBDM	Federal Home Loan Bank of Des Moines
ALLL	Allowance for Loan and Lease Losses	FHLBC	Federal Home Loan Bank of Chicago
ASU	Accounting Standards Update	FHLMC	Federal Home Loan Mortgage Corporation
ABTW	American Bank and Trust-Wisconsin of Cuba City, Wisconsin	FRB	Federal Reserve Bank
ATM	Automated Teller Machine	FNMA	Federal National Mortgage Association
ATSB	American Trust & Savings Bank of Dubuque, Iowa	GAAP	U.S. Generally Accepted Accounting Principles
Basel III Rules	A comprehensive capital framework and rules for U.S. banking organizations approved by the FRB and the FDIC in 2013	GNMA	Government National Mortgage Association
BHCA	Bank Holding Company Act of 1956, as amended	GLBA	Gramm-Leach-Bliley Act of 1999
BOLI	Bank-Owned Life Insurance	HTM	Held to Maturity
CDARS	Certificate of Deposit Account Registry Service	ICS	Insured Cash Sweep
CECL	Current Expected Credit Loss	LIBOR	The London Inter-bank Offered Rate, an interest-rate average calculated from estimates submitted by the leading banks in London
CMO	Collateralized Mortgage Obligations	MBS	Mortgage-Backed Securities
CRA	Community Reinvestment Act	OTTI	Other-Than-Temporary Impairment
Dodd-Frank Act	Dodd-Frank Wall Street Reform and Consumer Protection Act	PCD	Purchased Financial Assets With Credit Deterioration
ECL	Expected Credit Losses	PCI	Purchased Credit Impaired
ESOP	Employee Stock Ownership Plan	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
FHLB	Federal Home Loan Bank

CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS

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

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


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


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


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


•	fluctuations in the value of our investment securities;


•	governmental monetary and fiscal policies;


•	changes in benchmark interest rates used to price our loans and deposits, including the expected elimination of LIBOR;


•	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 to absorb the amount of actual losses inherent in our existing loan portfolio;


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


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


•	the effects of competition from other commercial banks, thrifts, mortgage banking firms, consumer finance companies, credit unions, securities brokerage firms, insurance companies, money market and other mutual funds, financial technology companies, and other financial institutions operating in our markets or elsewhere or providing similar services;


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


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


•	volatility of rate-sensitive deposits;


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


•	asset/liability matching risks and liquidity risks;


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


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


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


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


•	the effects of cyber-attacks;


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


•	other factors and risks described under “Risk Factors” herein.

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

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PART I


ITEM 1.	BUSINESS.

General

MidWestOne Financial Group, Inc., an Iowa corporation formed in 1983, is a bank holding company registered under the BHCA with our corporate headquarters in Iowa City, Iowa. Our principal business is to serve as the holding company for our wholly-owned subsidiary, MidWestOne Bank. References to the “Bank” refer to MidWestOne Bank. References to “MidWestOne,” “we,” “us,” or the “Company,” refer to MidWestOne Financial Group, Inc. together with its subsidiaries on a consolidated basis.

The Bank is focused on delivering relationship-based business and personal banking products and services. The Bank provides commercial loans, real estate loans, agricultural loans, credit card loans, and consumer loans. The Bank also provides deposit products including demand and interest checking accounts, savings accounts, money market accounts, and time deposits. Complementary to our loan and deposit products, the Bank also provides products and services including treasury management, Zelle, online and mobile banking, debit cards, ATMs, and safe deposit boxes. The Bank offers its products and services primarily through its full-service branch network, including 34 branches located throughout central and eastern Iowa, 13 branches located principally in the Minneapolis-St. Paul metropolitan area of Minnesota, seven branches in western Wisconsin, one branch in each of Naples and Fort Myers, Florida, and one branch in Denver, Colorado. The Bank also has a trust department through which it offers services including the administration of estates, personal trusts, and conservatorships and the management of real property. Finally, the Bank’s investments services department offers financial planning, investment advisory, and retail securities brokerage services (the latter of which is provided through an agreement with a third-party registered broker-dealer).

As of December 31, 2019, we had total assets of $4.65 billion, total loans, net of unearned income, of $3.45 billion, total deposits of $3.73 billion, and shareholders’ equity of $509.0 million.

Recent Developments

On May 1, 2019, the Company acquired ATBancorp, a bank holding company whose wholly-owned banking subsidiaries were ATSB and ABTW. 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 $113.7 million and paid cash in the amount of $34.8 million.

On June 30, 2019, the Company sold substantially all of the assets used by its wholly owned insurance subsidiary, MidWestOne Insurance Services, Inc., to sell insurance products. The Company recognized a pre-tax gain of $1.1 million from the sale, which was reported in “Other” noninterest income on the Company’s consolidated statements of income. Effective December 31, 2019, MidWestOne Insurance Services, Inc. was legally dissolved.

Operating Strategy

Our operating strategy is based upon a community banking model of delivering a comprehensive suite of financial products and services while following five operating principles: (1) take care of our customers; (2) hire and retain excellent employees; (3) conduct business with the utmost integrity; (4) work as one team; and (5) learn constantly so we can continually improve. Management believes the depth and breadth of the Company’s products and services coupled with the personal and professional delivery of the same provides an appealing alternative to competitors.

Lending Activities

General

We provide a range of commercial and retail lending services to businesses, individuals and government agencies. These credit activities include commercial and residential real estate loans, commercial and industrial loans, agricultural loans, and consumer loans.

We market our services to qualified lending customers. Lending officers actively solicit the business of new companies entering their market areas as well as long-standing members of the business communities in which we operate. Through professional service, competitive pricing, and innovative structure, we have been successful in attracting new lending customers. We also actively pursue consumer lending opportunities. With convenient locations, advertising, customer communications, and competitive technology, we believe that we have been successful in capitalizing on the credit needs of our market areas.

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Our management emphasizes credit quality and seeks to avoid undue concentrations of loans to a single industry or based on a single class of collateral. We have established lending policies that include a number of underwriting factors to be considered in making a loan, including: location, loan-to-value ratio, cash flow, interest rate, and credit history of the borrower.

Agricultural Loans

Due to the number of rural market areas in which we operate, agricultural loans are an important part of our business. Agricultural loans include loans made to finance agricultural production and other loans to farmers and farming operations. Agricultural loans comprised approximately 4.1% of our total loan portfolio at December 31, 2019.

Agricultural loans, most of which are secured by crops, livestock and machinery, are generally 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.

Our agricultural lenders work closely with our customers, including companies and individual farmers, and review the preparation of budgets and cash flow projections for the ensuing crop year. These budgets and cash flow projections are monitored closely during the year and reviewed with the customers at least once annually. We also work closely with governmental agencies to help agricultural customers obtain credit enhancement products such as loan guarantees or interest rate assistance.

Commercial and Industrial Loans

We have a strong commercial loan base. We focus on, and tailor our commercial loan programs to, small- to mid-sized businesses in our market areas. Our loan portfolio includes loans to wholesalers, manufacturers, contractors, business services companies and retailers. We provide a wide range of business loans, including lines of credit for working capital and operational purposes and term loans for the acquisition of equipment. Although most loans are made on a secured basis, loans may be made on an unsecured basis where warranted by the overall financial condition of the borrower. Terms of commercial business loans generally range from one to five years.

Our 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 is based on the liquidation of the pledged collateral and enforcement of a personal guarantee, if any exists. The primary repayment risks of commercial loans are that the cash flows of the borrower may be unpredictable, and the collateral securing these loans may fluctuate in value. As of December 31, 2019, commercial and industrial loans comprised approximately 24.2% of our total loan portfolio.

Commercial Real Estate Loans

We also offer mortgage loans to our commercial and agricultural customers for the acquisition of real estate used in their businesses, such as offices, farmland, warehouses and production facilities, and to real estate investors for the acquisition of apartment buildings, retail centers, office buildings and other commercial buildings. In deciding whether to make a commercial real estate loan, we consider, among other things, the experience and qualifications of the borrower as well as the value and cash flow of the underlying property. Some factors considered are net operating income of the property before debt service and depreciation, the debt service coverage ratio (the ratio of the property’s net cash flow to debt service requirements), the cash flows of the borrower, the ratio of the loan amount to the property value and the overall creditworthiness of the prospective borrower. As of December 31, 2019, commercial real estate loans constituted approximately 52.6% of our total loan portfolio.

Construction and Development Loans. We offer loans both to individuals who are constructing personal residences and to real estate developers and building contractors for the acquisition of land for development and the construction of homes and commercial properties. These loans are generally in-market to known and established borrowers. Construction and development loans generally have a short term, such as one to two years. As of December 31, 2019, construction and development loans constituted approximately 8.6% of our total loan portfolio.

Farmland. We offer agricultural mortgage loans to our agricultural customers for the acquisition of real estate used in their business, generally farmland. As of December 31, 2019, we had $181.9 million in agricultural commercial real estate loans outstanding, which represented approximately 5.3% of our total loan portfolio.

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Multifamily. We offer mortgage loans to real estate investors for the acquisition of multifamily (apartment) buildings. As of December 31, 2019, we had $227.4 million in multifamily commercial real estate loans, which represented approximately 6.6% of our total loan portfolio.

Commercial real estate-other. We offer commercial mortgage loans for the acquisition of real estate used in the customer’s business, such as offices, warehouses, and production facilities. As of December 31, 2019, we had $1.11 billion in commercial real estate-other loans, which represented approximately 32.1% of our total loan portfolio.

Residential Real Estate Loans

Residential mortgage lending is a focal point for us, as residential real estate loans constituted approximately 16.7% of our total loan portfolio at December 31, 2019. Included in this category are home equity loans made to individuals. As long-term interest rates have remained at relatively low levels since 2008, many customers opted for mortgage loans that have a fixed rate with 15- or 30-year maturities. We generally retain short-term residential mortgage loans that we originate for our own portfolio and sell most long-term residential mortgage loans to other parties while retaining servicing rights on the majority of such loans. We also perform loan servicing activity for third parties on participations sold. At December 31, 2019, we serviced approximately $857.7 million in mortgage loans for others. We do not offer subprime mortgage loans and do not operate a wholesale mortgage business.

Consumer Lending

Our consumer lending department provides many types of consumer loans, including personal loans (secured or unsecured) and automobile loans. Consumer loans typically have shorter terms, lower balances, higher yields and higher risks of default than one- to four-family residential real estate mortgage 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. As of December 31, 2019, consumer loans comprised only 2.4% of our total loan portfolio.

Other Products and Services

Deposit Products

We believe that we offer competitive deposit products and programs that address the needs of customers in each of the local markets that we serve. The deposit products are offered to individuals, nonprofit organizations, partnerships, small businesses, corporations and public entities. These products include non-interest-bearing and interest-bearing demand deposits, savings accounts, money market accounts and certificates of deposit.

Trust and Investment Services

We offer trust and investment services, primarily in our Iowa market, to help our business and individual clients in meeting their financial goals and preserving wealth. Our services include administering estates, personal trusts, and conservatorships, and providing property management, farm management, investment advisory, retail securities brokerage, financial planning and custodial services. Licensed brokers (who are registered representatives of a third-party registered broker-dealer) serve selected branches and provide investment-related services including securities trading, financial planning, mutual funds sales, fixed and variable annuities and tax-exempt and conventional unit trusts.

Liquidity and Funding

We depend on deposits and external financing sources to fund our operations. We employ a variety of financing arrangements, including term debt, subordinated debt, and equity. A discussion of our liquidity and funding programs has been included in Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations under “Liquidity,” and Item 7A. Quantitative and Qualitative Disclosures About Market Risk under “Liquidity Risk.”

Competition

The banking business and related financial service providers operate in a highly competitive market. The Company competes with other commercial banks, thrifts, credit unions, stockbrokers, finance divisions of auto and farm equipment companies, agricultural suppliers, and other agriculture-related lenders. Some of these competitors are local, while others are statewide, regional or nationwide. In addition, financial technology, or fintech, companies are emerging in key areas of banking. We compete for deposits, loans, and other financial services through the range and quality of services we provide, with an emphasis on building long-lasting relationships.

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Employees

As of December 31, 2019, we had 771 full-time equivalent employees. We value our employees and operate under the principle of hiring and retaining excellent employees. We provide our employees with a comprehensive program of benefits, including comprehensive medical and dental plans, life insurance, long-term and short-term disability coverage, a 401(k) plan, and an employee stock ownership plan. Our continued commitment to employees was demonstrated by MidWestOne Bank being honored in 2019 as one of the Des Moines Register’s “Top Workplaces” for the 7th consecutive year.

Available Information

We file Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K, proxy statements and other information with the SEC. The public may obtain copies of these reports and any amendments at the SEC’s Internet site, www.sec.gov.

Additionally, reports filed with the SEC can be obtained free of charge through our website at www.midwestone.com under “Investor Relations”. These reports are made available through our website as soon as reasonably practicable after they are filed electronically with, or furnished to, the SEC. Information on, or accessible through, our website is not part of, or incorporated by reference in, this Annual Report on Form 10-K.

Supervision and Regulation

General

FDIC-insured institutions, like the Bank, their holding companies and their affiliates are extensively regulated under federal and state law. As a result, our growth and earnings performance may be affected not only by management decisions and general economic conditions, but also by the requirements of federal and state statutes and by the regulations and policies of various bank regulatory agencies, including the Iowa Division of Banking (the “Iowa Division”), the Board of Governors of the Federal Reserve System (the “Federal Reserve”), the FDIC and the Consumer Financial Protection Bureau (the “CFPB”). Furthermore, taxation laws administered by the Internal Revenue Service and state taxing authorities, accounting rules developed by the FASB, securities laws administered by the SEC and state securities authorities, and anti-money laundering laws enforced by the U.S. Department of the Treasury (“Treasury”) have an impact on our business. The effect of these statutes, regulations, regulatory policies and accounting rules are significant to our operations and results.

Federal and state banking laws impose a comprehensive system of supervision, regulation and enforcement on the operations of FDIC-insured institutions, their holding companies and affiliates that is intended primarily for the protection of the FDIC-insured deposits and depositors of banks, rather than shareholders. These laws, and the regulations of the bank regulatory agencies issued under them, affect, among other things, the scope of our business, the kinds and amounts of investments the Company and the Bank may make, reserve requirements, required capital levels relative to assets, the nature and amount of collateral for loans, the establishment of branches, the ability to merge, consolidate and acquire, dealings with our insiders and affiliates and the payment of dividends. In reaction to the global financial crisis and particularly following the passage of the Dodd Frank Act, we experienced heightened regulatory requirements and scrutiny. Although the reforms primarily targeted systemically important financial service providers, their influence filtered down in varying degrees to community banks over time and caused our compliance and risk management processes, and the costs thereof, to increase. However, in May 2018, the Economic Growth, Regulatory Relief and Consumer Protection Act (“Regulatory Relief Act”) was enacted by Congress in part to provide regulatory relief for community banks and their holding companies. To that end, the law eliminated questions about the applicability of certain Dodd-Frank Act reforms to community bank systems, including relieving us of any requirement to engage in mandatory stress tests, maintain a risk committee or comply with the Volcker Rule’s complicated prohibitions on proprietary trading and ownership of private funds. We believe these reforms are favorable to our operations.

The supervisory framework for U.S. banking organizations subjects banks and bank holding companies to regular examination by their respective regulatory agencies, which results in examination reports and ratings that are not publicly available and that can impact the conduct and growth of their business. These examinations consider not only compliance with applicable laws and regulations, but also capital levels, asset quality and risk, management ability and performance, earnings, liquidity, and various other factors. The regulatory agencies generally have broad discretion to impose restrictions and limitations on the operations of a regulated entity where the agencies determine, among other things, that such operations are unsafe or unsound, fail to comply with applicable law or are otherwise inconsistent with laws and regulations.

The following is a summary of the material elements of the supervisory and regulatory framework applicable to the Company and the Bank, beginning with a discussion of the continuing regulatory emphasis on our capital levels. It does not describe all of the

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statutes, regulations and regulatory policies that apply, nor does it restate all of the requirements of those that are described. The descriptions are qualified in their entirety by reference to the particular statutory and regulatory provision.

The Role of Capital

Regulatory capital represents the net assets of a banking organization available to absorb losses. Because of the risks attendant to their business, FDIC-insured institutions are generally required to hold more capital than other businesses, which directly affects their earnings capabilities. While capital has historically been one of the key measures of the financial health of both bank holding companies and banks, its role became fundamentally more important in the wake of the global financial crisis, as the banking regulators recognized that the amount and quality of capital held by banks prior to the crisis was insufficient to absorb losses during periods of severe stress. Certain provisions of the Dodd-Frank Act and Basel III, discussed below, establish capital standards that are meaningfully more stringent than those in place previously.

Minimum Required Capital Levels. Banks have been required to hold minimum levels of capital based on guidelines established by the bank regulatory agencies since 1983. The minimums have been expressed in terms of ratios of “capital” divided by “total assets.” As discussed below, bank capital measures have become more sophisticated over the years and have focused more on the quality of capital and the risk of assets. Bank holding companies have historically had to comply with less stringent capital standards than their bank subsidiaries and have been able to raise capital with hybrid instruments such as trust preferred securities. The Dodd-Frank Act mandated the Federal Reserve to establish minimum capital levels for holding companies on a consolidated basis as stringent as those required for FDIC-insured institutions. A result of this change is that the proceeds of hybrid instruments, such as trust preferred securities, were excluded from capital over a phase-out period. However, if such securities were issued prior to May 19, 2010 by bank holding companies with less than $15 billion of assets, they may be retained, subject to certain restrictions. Because we have assets of less than $15 billion, we are able to maintain our trust preferred proceeds as capital but we have to comply with new capital mandates in other respects and will not be able to raise capital in the future through the issuance of trust preferred securities.

The Basel International Capital Accords. The risk-based capital guidelines for U.S. banks since 1989 were based upon the 1988 capital accord known as “Basel I” adopted by the international Basel Committee on Banking Supervision, a committee of central banks and bank supervisors that acts as the primary global standard-setter for prudential regulation, as implemented by the U.S. bank regulatory agencies on an interagency basis. The accord recognized that bank assets for the purpose of the capital ratio calculations needed to be assigned risk weights (the theory being that riskier assets should require more capital) and that off-balance sheet exposures needed to be factored in the calculations. Basel I had a very simple formula for assigning risk weights to bank assets from 0% to 100% based on four categories. In 2008, the banking agencies collaboratively began to phase-in capital standards based on a second capital accord, referred to as “Basel II,” for large or “core” international banks (generally defined for U.S. purposes as having total assets of $250 billion or more, or consolidated foreign exposures of $10 billion or more) known as “advanced approaches” banks. The primary focus of Basel II was on the calculation of risk weights based on complex models developed by each advanced approaches bank. Because most banks were not subject to Basel II, the U.S. bank regulators worked to improve the risk sensitivity of Basel I standards without imposing the complexities of Basel II. This “standardized approach” increased the number of risk-weight categories and recognized risks well above the original 100% risk weight. It is institutionalized by the Dodd-Frank Act for all banking organizations, even for the advanced approaches banks, as a floor.

On September 12, 2010, the Group of Governors and Heads of Supervision, the oversight body of the Basel Committee on Banking Supervision, announced agreement on a strengthened set of capital requirements for banking organizations around the world, known as Basel III, to address deficiencies recognized in connection with the global financial crisis.

The Basel III Rules. In July 2013, the U.S. federal banking agencies approved the implementation of the Basel III regulatory capital reforms in pertinent part, and, at the same time, promulgated rules effecting certain changes required by the Dodd-Frank Act. In contrast to capital requirements historically, which were in the form of guidelines, Basel III was released in the form of enforceable regulations by each of the regulatory agencies. 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 holding companies with consolidated assets of less than $3 billion) and certain qualifying banking organizations that may elect a simplified framework (which we have not done). Thus, the Company and the Bank are each currently subject to the Basel III Rules as described below.

The Basel III Rules increased the required quantity and quality of capital and, for nearly every class of assets, they require more complex, detailed and calibrated assessment of risk and calculation of risk-weight amounts.

Not only did the Basel III Rules increase most of the required minimum capital ratios in effect prior to January 1, 2015, but they introduced the concept of Common Equity Tier 1 Capital, which consists primarily of common stock, related surplus (net of Treasury stock), retained earnings, and Common Equity Tier 1 minority interests subject to certain regulatory adjustments. The

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Basel III Rules also changed the definition of capital by establishing more stringent criteria that instruments must meet to be considered Additional Tier 1 Capital (primarily non-cumulative perpetual preferred stock that meets certain requirements) and Tier 2 Capital (primarily other types of preferred stock and subordinated debt, subject to limitations). A number of instruments that qualified as Tier 1 Capital under Basel I do not qualify, or their qualifications changed. For example, noncumulative perpetual preferred stock, which qualified as simple Tier 1 Capital under Basel I, does not qualify as Common Equity Tier 1 Capital, but qualifies as Additional Tier 1 Capital. The Basel III Rules also constrained the inclusion of minority interests, mortgage-servicing assets, and deferred tax assets in capital and requires deductions from Common Equity Tier 1 Capital in the event that such assets exceed a certain percentage of a banking institution’s Common Equity Tier 1 Capital.

The Basel III Rules require minimum capital ratios as follows:


•	A ratio of minimum Common Equity Tier 1 Capital equal to 4.5% of risk-weighted assets;


•	An increase in the minimum required amount of Tier 1 Capital from 4% to 6% of risk-weighted assets;


•	A continuation of the minimum required amount of Total Capital (Tier 1 plus Tier 2) at 8% of risk-weighted assets; and


•	A minimum leverage ratio of Tier 1 Capital to total quarterly average assets equal to 4% in all circumstances.

In addition, institutions that seek the freedom to make capital distributions (including for dividends and repurchases of stock) and pay discretionary bonuses to executive officers without restriction must also maintain greater than 2.5% in Common Equity Tier 1 Capital attributable to a capital conservation buffer. The purpose of the conservation buffer is to ensure that banking institutions maintain a buffer of capital that can be used to absorb losses during periods of financial and economic stress. Factoring in the conservation buffer increases the minimum ratios depicted above to 7% for Common Equity Tier 1 Capital, 8.5% for Tier 1 Capital and 10.5% for Total Capital.

The failure to maintain a capital conservation buffer greater than 2.5% will result in restrictions on capital distributions (including dividends and repurchases of stock) and discretionary bonus payments to executive officers, unless prior regulatory approval is obtained. If a banking institution’s conservation buffer is less than or equal to 0.625%, the banking institution may not make any capital distributions or discretionary bonus payments to executive officers. If the conservation buffer is greater than 0.625% but less than or equal to 1.25%, capital distributions and discretionary bonus payments are limited to 20% of net income for the four calendar quarters preceding the current calendar quarter (net of any capital distributions made during those four quarters), or “eligible retained income.” If the conservation buffer is greater than 1.25% but less than or equal to 1.875%, the limit is 40% of eligible retained income, and if the conservation buffer is greater than 1.875% but less than or equal to 2.5%, the limit is 60% of eligible retained income.

Well-Capitalized Requirements. The ratios described above are minimum standards in order for banking organizations to be considered “adequately capitalized.” Bank regulatory agencies uniformly encourage banks to hold more capital and be “well-capitalized” and, to that end, federal law and regulations provide various incentives for banking organizations to maintain regulatory capital at levels in excess of minimum regulatory requirements. For example, a banking organization that is well-capitalized may: (i) qualify for exemptions from prior notice or application requirements otherwise applicable to certain types of activities; (ii) qualify for expedited processing of other required notices or applications; and (iii) accept, roll-over or renew brokered deposits. Higher capital levels could also be required if warranted by the particular circumstances or risk profiles of individual banking organizations. For example, the Federal Reserve’s capital guidelines contemplate that additional capital may be required to take adequate account of, among other things, interest rate risk, or the risks posed by concentrations of credit, nontraditional activities or securities trading activities. Further, any banking organization experiencing or anticipating significant growth would be expected to maintain capital ratios, including tangible capital positions (i.e., Tier 1 Capital less all intangible assets), well above the minimum levels.

Under the capital regulations of the FDIC and Federal Reserve, in order to be well‑capitalized, a banking organization must maintain:


•	A Common Equity Tier 1 Capital ratio to risk-weighted assets of 6.5% or more;


•	A ratio of Tier 1 Capital to total risk-weighted assets of 8% or more (6% under Basel I);


•	A ratio of Total Capital to total risk-weighted assets of 10% or more (the same as Basel I); and


•	A leverage ratio of Tier 1 Capital to total adjusted average quarterly assets of 5% or greater.

It is possible under the Basel III Rules to be well-capitalized while remaining out of compliance with the capital conservation buffer discussed above.

As of December 31, 2019: (i) the Bank was not subject to a directive from the FDIC to increase its capital and (ii) the Bank was well-capitalized, as defined by FDIC regulations. As of December 31, 2019, the Company had regulatory capital in excess of the

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Federal Reserve’s requirements and met the Basel III Rules requirements to be well-capitalized. We are also in compliance with the capital conservation buffer.

Prompt Corrective Action. The concept of an institution being “well-capitalized” is part of a regulatory enforcement regime that provides the federal banking regulators with broad power to take “prompt corrective action” to resolve the problems of institutions based on the capital level of each particular institution. The extent of the regulators’ powers depends on whether the institution in question is “adequately capitalized,” “undercapitalized,” “significantly undercapitalized” or “critically undercapitalized,” in each case as defined by regulation. Depending upon the capital category to which an institution is assigned, the regulators’ corrective powers include: (i) requiring the institution to submit a capital restoration plan; (ii) limiting the institution’s asset growth and restricting its activities; (iii) requiring the institution to issue additional capital stock (including additional voting stock) or to sell itself; (iv) restricting transactions between the institution and its affiliates; (v) restricting the interest rate that the institution may pay on deposits; (vi) ordering a new election of directors of the institution; (vii) requiring that senior executive officers or directors be dismissed; (viii) prohibiting the institution from accepting deposits from correspondent banks; (ix) requiring the institution to divest certain subsidiaries; (x) prohibiting the payment of principal or interest on subordinated debt; and (xi) ultimately, appointing a receiver for the institution.

Community Bank Capital Simplification. Community banks have long raised concerns with bank regulators about the regulatory burden, complexity, and costs associated with certain provisions of the Basel III Rules. In response, Congress provided an “off-ramp” for institutions, like us, with total consolidated assets of less than $10 billion. Section 201 of the Regulatory Relief Act instructed the federal banking regulators to establish a single “Community Bank Leverage Ratio” (“CBLR”) of between 8 and 10%. Under the final rule, a community banking organization is eligible to elect the new framework if it has: less than $10 billion in total consolidated assets, limited amounts of certain assets and off-balance sheet exposures, and a CBLR greater than 9%. We may elect the CBLR framework at any time but have not currently determined to do so.

Regulation and Supervision of the Company

General. The Company, as the sole shareholder of the Bank, is a bank holding company that has elected financial holding company status. As a bank holding company, we are registered with, and subject to regulation by, the Federal Reserve under the BHCA. We are legally obligated to act as a source of financial and managerial strength to the Bank and to commit resources to support the Bank in circumstances where we might not otherwise do so. Under the BHCA, we are subject to periodic examination by the Federal Reserve and are required to file with the Federal Reserve periodic reports of our operations and such additional information regarding us and the Bank as the Federal Reserve may require.

Acquisitions, Activities and Financial Holding Company Election. The primary purpose of a bank holding company is to control and manage banks. The BHCA generally requires the prior approval of the Federal Reserve for any merger involving a bank holding company or any acquisition by a bank holding company of another bank or bank holding company. Subject to certain conditions (including deposit concentration limits established by the BHCA), the Federal Reserve may allow a bank holding company to acquire banks located in any state of the United States. In approving interstate acquisitions, the Federal Reserve is required to give effect to applicable state law limitations on the aggregate amount of deposits that may be held by the acquiring bank holding company and its FDIC-insured institution affiliates in the state in which the target bank is located (provided that those limits do not discriminate against out-of-state institutions or their holding companies) and state laws that require that the target bank have been in existence for a minimum period of time (not to exceed five years) before being acquired by an out-of-state bank holding company. Furthermore, in accordance with the Dodd-Frank Act, bank holding companies must be well-capitalized and well-managed in order to effect interstate mergers or acquisitions. For a discussion of the capital requirements, see “The Role of Capital” above.

The BHCA generally prohibits us from acquiring direct or indirect ownership or control of more than 5% of the voting shares of any company that is not a bank and from engaging in any business other than that of banking, managing and controlling banks or furnishing services to banks and their subsidiaries. This general prohibition is subject to a number of exceptions. The principal exception allows bank holding companies to engage in, and to own shares of companies engaged in, certain businesses found by the Federal Reserve prior to November 11, 1999 to be “so closely related to banking ... as to be a proper incident thereto.” This authority permits us to engage in a variety of banking-related businesses, including the ownership and operation of a savings association, or any entity engaged in consumer finance, equipment leasing, the operation of a computer service bureau (including software development) and mortgage banking and brokerage services. The BHCA does not place territorial restrictions on the domestic activities of nonbank subsidiaries of bank holding companies.

Additionally, bank holding companies that meet certain eligibility requirements prescribed by the BHCA and elect to operate as financial holding companies may engage in, or own shares in companies engaged in, a wider range of nonbanking activities, including securities and insurance underwriting and sales, merchant banking and any other activity that the Federal Reserve, in

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consultation with the Secretary of the Treasury, determines by regulation or order is financial in nature or incidental to any such financial activity or that the Federal Reserve determines by order to be complementary to any such financial activity and does not pose a substantial risk to the safety or soundness of FDIC-insured institutions or the financial system generally. We have elected to operate as a financial holding company. In order to maintain our status as a financial holding company, the Company and the Bank must be well-capitalized, well-managed, and the Bank must have at least a satisfactory Community Reinvestment Act (“CRA”) rating. If the Federal Reserve determines that a financial holding company is not well-capitalized or well-managed, we have a period of time in which to achieve compliance, but during the period of noncompliance, the Federal Reserve may place any limitations on us it believes to be appropriate. Furthermore, if the Federal Reserve determines that a financial holding company’s subsidiary bank has not received a satisfactory CRA rating, that company will not be able to commence any new financial activities or acquire a company that engages in such activities.

Change in Control. Federal law also prohibits any person or company from acquiring “control” of an FDIC-insured depository institution or its holding company without prior notice to the appropriate federal bank regulator. “Control” is conclusively presumed to exist upon the acquisition of 25% or more of the outstanding voting securities of a bank or bank holding company, but may arise under certain circumstances between 10% and 24.99% ownership.

Capital Requirements. We are required to maintain consolidated capital in accordance with Federal Reserve capital adequacy requirements. For a discussion of capital requirements, see “The Role of Capital” above.

Dividend Payments. Our ability to pay dividends to our shareholders may be affected by both general corporate law considerations and policies of the Federal Reserve applicable to bank holding companies. As an Iowa corporation, we are subject to the limitations of Iowa law, which allows us to pay dividends unless, after such dividend, (i) we would not be able to pay our debts as they become due in the usual course of business or (ii) our total assets would be less than the sum of our total liabilities plus any amount that would be needed if we were to be dissolved at the time of the dividend payment, to satisfy the preferential rights upon dissolution of shareholders whose rights are superior to the rights of the shareholders receiving the distribution.

As a general matter, the Federal Reserve has indicated that the board of directors of a bank holding company should eliminate, defer or significantly reduce dividends to shareholders if: (i) the company’s net income available to shareholders for the past four quarters, net of dividends previously paid during that period, is not sufficient to fully fund the dividends; (ii) the prospective rate of earnings retention is inconsistent with the company’s capital needs and overall current and prospective financial condition; or (iii) the company will not meet, or is in danger of not meeting, its minimum regulatory capital adequacy ratios. The Federal Reserve also possesses enforcement powers over bank holding companies and their nonbank subsidiaries to prevent or remedy actions that represent unsafe or unsound practices or violations of applicable statutes and regulations. Among these powers is the ability to proscribe the payment of dividends by banks and bank holding companies. In addition, under the Basel III Rules, institutions that seek the freedom to pay dividends have to maintain greater than 2.5% in Common Equity Tier 1 Capital attributable to the capital conservation buffer. See “The Role of Capital” above.

Incentive Compensation. There have been a number of developments in recent years focused on incentive compensation plans sponsored by bank holding companies and banks, reflecting recognition by the bank regulatory agencies and Congress that flawed incentive compensation practices in the financial industry were one of many factors contributing to the global financial crisis. Layered on top of that are the abuses in the headlines dealing with product cross-selling incentive plans. The result is interagency guidance on sound incentive compensation practices.

The interagency guidance recognized three core principles. Effective incentive plans should: (i) provide employees incentives that appropriately balance risk and reward; (ii) be compatible with effective controls and risk-management; and (iii) be supported by strong corporate governance, including active and effective oversight by the organization’s board of directors. Much of the guidance addresses large banking organizations and, because of the size and complexity of their operations, the regulators expect those organizations to maintain systematic and formalized policies, procedures, and systems for ensuring that the incentive compensation arrangements for all executive and non-executive employees covered by this guidance are identified and reviewed, and appropriately balance risks and rewards. Smaller banking organizations like us that use incentive compensation arrangements are expected to be less extensive, formalized, and detailed than those of the larger banks.

Monetary Policy. The monetary policy of the Federal Reserve has a significant effect on the operating results of financial or bank holding companies and their subsidiaries. Among the tools available to the Federal Reserve to affect the money supply are open market transactions in U.S. government securities, changes in the discount rate on bank borrowings and changes in reserve requirements against bank deposits. These means are used in varying combinations to influence overall growth and distribution of bank loans, investments and deposits, and their use may affect interest rates charged on loans or paid on deposits.

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Federal Securities Regulation. Our common stock is registered with the SEC under the Securities Act of 1933, as amended, and the Securities Exchange Act of 1934, as amended (the “Exchange Act”). Consequently, we are subject to the information, proxy solicitation, insider trading and other restrictions and requirements of the SEC under the Exchange Act.

Corporate Governance. The Dodd-Frank Act addressed many investor protection, corporate governance and executive compensation matters that will affect most U.S. publicly traded companies. The Dodd Frank Act increased shareholder influence over boards of directors by requiring companies to give shareholders a nonbinding vote on executive compensation and so-called “golden parachute” payments, and authorizing the SEC to promulgate rules that would allow shareholders to nominate and solicit voters for their own candidates using a company’s proxy materials. The legislation also directed the Federal Reserve to promulgate rules prohibiting excessive compensation paid to executives of bank holding companies, regardless of whether such companies are publicly traded.

Supervision and Regulation of the Bank

General. The Bank is an Iowa-chartered bank. The deposit accounts of the Bank are insured by the FDIC’s Deposit Insurance Fund (“DIF”) to the maximum extent provided under federal law and FDIC regulations, currently $250,000 per insured depositor category. As an Iowa-chartered FDIC-insured bank, the Bank is subject to the examination, supervision, reporting and enforcement requirements of the Iowa Division of Banking, the chartering authority for Iowa banks, and the FDIC, designated by federal law as the primary federal regulator of insured state banks that, like the Bank, are not members of the Federal Reserve System (nonmember banks).

Deposit Insurance. As an FDIC-insured institution, the Bank is required to pay deposit insurance premium assessments to the FDIC. The FDIC has adopted a risk-based assessment system whereby FDIC-insured institutions pay insurance premiums at rates based on their risk classification. For institutions like the Bank that are not considered large and highly complex banking organizations, assessments are now based on examination ratings and financial ratios. The total base assessment rates currently range from 1.5 basis points to 30 basis points. At least semi-annually, the FDIC updates its loss and income projections for the DIF and, if needed, increases or decreases the assessment rates, following notice and comment on proposed rulemaking. The assessment base against which an FDIC-insured institution’s deposit insurance premiums paid to the DIF has been calculated since effectiveness of the Dodd-Frank Act based on its average consolidated total assets less its average tangible equity. This method shifted the burden of deposit insurance premiums toward those large depository institutions that rely on funding sources other than U.S. deposits.

The reserve ratio is the FDIC insurance fund balance divided by the estimated total amount of insured deposits. The Dodd-Frank Act altered the minimum reserve ratio of the DIF, increasing the minimum from 1.15% to 1.35% of the estimated amount of total insured deposits, and eliminating the requirement that the FDIC pay dividends to FDIC-insured institutions when the reserve ratio exceeds certain thresholds. The reserve ratio reached 1.36% as of September 30, 2018, exceeding the statutory required minimum reserve ratio of 1.35%. As a result, the FDIC is providing assessment credits to insured depository institutions, like the Bank, with total consolidated assets of less than $10 billion for the portion of their regular assessments that contributed to growth in the reserve ratio between 1.15% and 1.35%. The share of the aggregate small bank credits allocated to each insured institution is proportional to its credit base, defined as the average of its regular assessment base during the credit calculation period. The FDIC is currently applying the credits for quarterly assessment periods beginning July 1, 2019, and, as long as the reserve ratio is at least 1.35%, the FDIC will remit the full nominal value of any remaining credits in a lump-sum payment.

Supervisory Assessments. All Iowa banks are required to pay supervisory assessments to the Iowa Division to fund the operations of that agency. The amount of the assessment is calculated on the basis of the Bank’s total assets. During the year ended December 31, 2019, the Bank paid supervisory assessments to the Iowa Division totaling approximately $147,000.

Capital Requirements. Banks are generally required to maintain capital levels in excess of other businesses. For a discussion of capital requirements, see “The Role of Capital” above.

Liquidity Requirements. Liquidity is a measure of the ability and ease with which bank assets may be converted to cash. Liquid assets are those that can be converted to cash quickly if needed to meet financial obligations. To remain viable, FDIC-insured institutions must have enough liquid assets to meet their near-term obligations, such as withdrawals by depositors. Because the global financial crisis was in part a liquidity crisis, Basel III also includes a liquidity framework that requires FDIC-insured institutions to measure their liquidity against specific liquidity tests. One test, referred to as the liquidity coverage ratio, or LCR, is designed to ensure that the banking entity has an adequate stock of unencumbered high-quality liquid assets that can be converted easily and immediately in private markets into cash to meet liquidity needs for a 30-calendar day liquidity stress scenario. The other test, known as the net stable funding ratio, or NSFR, is designed to promote more medium- and long-term funding of the assets and activities of FDIC-insured institutions over a one-year horizon. These tests provide an incentive for banks and holding

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companies to increase their holdings in Treasury securities and other sovereign debt as a component of assets, increase the use of long-term debt as a funding source and rely on stable funding like core deposits (in lieu of brokered deposits).

In addition to liquidity guidelines already in place, the federal bank regulatory agencies implemented the Basel III LCR in September 2014, which requires large financial firms to hold levels of liquid assets sufficient to protect against constraints on their funding during times of financial turmoil, and in 2016 proposed implementation of the NSFR. While these rules do not, and will not, apply to the Bank, we continue to review our liquidity risk management policies in light of developments.

Dividend Payments. The primary source of funds for the Company is dividends from the Bank. Under the Iowa Banking Act, Iowa-chartered banks generally may pay dividends only out of undivided profits. The Iowa Division may restrict the declaration or payment of a dividend by an Iowa-chartered bank, such as the Bank. The payment of dividends by any FDIC-insured institution is affected by the requirement to maintain adequate capital pursuant to applicable capital adequacy guidelines and regulations, and a FDIC-insured institution generally is prohibited from paying any dividends if, following payment thereof, the institution would be undercapitalized. As described above, the Bank exceeded its capital requirements under applicable guidelines as of December 31, 2019. Notwithstanding the availability of funds for dividends, however, the FDIC and the Iowa Division may prohibit the payment of dividends by the Bank if either or both determine such payment would constitute an unsafe or unsound practice. In addition, under the Basel III Rules, institutions that seek the freedom to pay dividends have to maintain greater than 2.5% in Common Equity Tier 1 Capital attributable to the capital conservation buffer. See “The Role of Capital” above.

State Bank Investments and Activities. The Bank is permitted to make investments and engage in activities directly or through subsidiaries as authorized by Iowa law. However, under federal law and FDIC regulations, FDIC-insured state banks are prohibited, subject to certain exceptions, from making or retaining equity investments of a type, or in an amount, that are not permissible for a national bank. Federal law and FDIC regulations also prohibit FDIC-insured state banks and their subsidiaries, subject to certain exceptions, from engaging as principal in any activity that is not permitted for a national bank unless the bank meets, and continues to meet, its minimum regulatory capital requirements and the FDIC determines that the activity would not pose a significant risk to the DIF. These restrictions have not had, and are not currently expected to have, a material impact on the operations of the Bank.

Insider Transactions. The Bank is subject to certain restrictions imposed by federal law on “covered transactions” between the Bank and its “affiliates.” The Company is an affiliate of the Bank for purposes of these restrictions, and covered transactions subject to the restrictions include extensions of credit to the Company, investments in the stock or other securities of the Company and the acceptance of the stock or other securities of the Company as collateral for loans made by the Bank. The Dodd-Frank Act enhanced the requirements for certain transactions with affiliates, including an expansion of the definition of “covered transactions” and an increase in the amount of time for which collateral requirements regarding covered transactions must be maintained.

Certain limitations and reporting requirements are also placed on extensions of credit by the Bank to its directors and officers, to directors and officers of the Company and its subsidiaries, to principal shareholders of the Company and to “related interests” of such directors, officers and principal shareholders. In addition, federal law and regulations may affect the terms upon which any person who is a director or officer of the Company or the Bank, or a principal shareholder of the Company, may obtain credit from banks with which the Bank maintains a correspondent relationship.

Safety and Soundness Standards/Risk Management. The federal banking agencies have adopted operational and managerial standards to promote the safety and soundness of FDIC-insured institutions. The standards apply to internal controls, information systems, internal audit systems, loan documentation, credit underwriting, interest rate exposure, asset growth, compensation, fees and benefits, asset quality and earnings.

In general, the safety and soundness standards prescribe the goals to be achieved in each area, and each institution is responsible for establishing its own procedures to achieve those goals. While regulatory standards do not have the force of law, if an institution operates in an unsafe and unsound manner, the FDIC-insured institution’s primary federal regulator may require the institution to submit a plan for achieving and maintaining compliance. If an FDIC-insured institution fails to submit an acceptable compliance plan, or fails in any material respect to implement a compliance plan that has been accepted by its primary federal regulator, the regulator is required to issue an order directing the institution to cure the deficiency. Until the deficiency cited in the regulator’s order is cured, the regulator may restrict the FDIC-insured institution’s rate of growth, require the FDIC-insured institution to increase its capital, restrict the rates the institution pays on deposits or require the institution to take any action the regulator deems appropriate under the circumstances. Noncompliance with safety and soundness may also constitute grounds for other enforcement action by the federal bank regulatory agencies, including cease and desist orders and civil money penalty assessments.

During the past decade, the bank regulatory agencies have increasingly emphasized the importance of sound risk management processes and strong internal controls when evaluating the activities of the FDIC-insured institutions they supervise. Properly managing risks has been identified as critical to the conduct of safe and sound banking activities and has become even more important as new technologies, product innovation, and the size and speed of financial transactions have changed the nature of

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banking markets. The agencies have identified a spectrum of risks facing a banking institution including, but not limited to, credit, market, liquidity, operational, legal and reputational risk. The key risk themes identified for 2020 are: (i) elevated operational risk as banks adapt to an evolving technology environment and persistent cybersecurity risks; (ii) the need for banks to prepare for a cyclical change in credit risk while credit performance is strong; (iii) elevated interest rate risk due to lower rates continuing to compress net interest margins; and (iv) strategic risks from non-depository financial institutions, use of innovative and evolving technology, and progressive data analysis capabilities. The Bank is expected to have active board and senior management oversight; adequate policies, procedures and limits; adequate risk measurement, monitoring and management information systems; and comprehensive internal controls.

Privacy and Cybersecurity. The Bank is subject to many U.S. federal and state laws and regulations governing requirements for maintaining policies and procedures to protect non-public confidential information of their customers. These laws require the Bank to periodically disclose its privacy policies and practices relating to sharing such information and permit consumers to opt out of their ability to share information with unaffiliated third parties under certain circumstances. They also impact the Bank’s ability to share certain information with affiliates and non-affiliates for marketing and/or non-marketing purposes, or to contact customers with marketing offers. In addition, the Bank is required to implement a comprehensive information security program that includes administrative, technical, and physical safeguards to ensure the security and confidentiality of customer records and information. These security and privacy policies and procedures, for the protection of personal and confidential information, are in effect across all businesses and geographic locations.

Branching Authority. Iowa banks, such as the Bank, have the authority under Iowa law to establish branches anywhere in the State of Iowa, subject to receipt of all required regulatory approvals. The establishment of new interstate branches has historically been permitted only in those states the laws of which expressly authorize such expansion. The Dodd-Frank Act permits well-capitalized and well-managed banks to establish new interstate branches or the acquisition of individual branches of a bank in another state (rather than the acquisition of an out-of-state bank in its entirety) without impediments. Federal law permits state and national banks to merge with banks in other states subject to: (i) regulatory approval; (ii) federal and state deposit concentration limits; and (iii) state law limitations requiring the merging bank to have been in existence for a minimum period of time (not to exceed five years) prior to the merger.

Transaction Account Reserves. Federal Reserve regulations require FDIC-insured institutions to maintain reserves against their transaction accounts (primarily NOW and regular checking accounts). For 2020, the first $16.9 million of otherwise reservable balances are exempt from reserves and have a zero percent reserve requirement; for transaction accounts aggregating between $16.9 million to $127.5 million, the reserve requirement is 3% of those transaction account balances; and for net transaction accounts in excess of $127.5 million, the reserve requirement is 10% of the aggregate amount of total transaction account balances in excess of $127.5 million. These reserve requirements are subject to annual adjustment by the Federal Reserve.

Community Reinvestment Act Requirements. The CRA requires the Bank to have a continuing and affirmative obligation in a safe and sound manner to help meet the credit needs of the entire community, including low- and moderate-income neighborhoods. Federal regulators regularly assess the Bank’s record of meeting the credit needs of its communities. Applications for additional acquisitions would be affected by the evaluation of the Bank’s effectiveness in meeting its CRA requirements.

Anti-Money Laundering. The USA Patriot Act is designed to deny terrorists and criminals the ability to obtain access to the U.S. financial system and has significant implications for FDIC-insured institutions, brokers, dealers and other businesses involved in the transfer of money. The USA Patriot Act mandates financial services companies to have policies and procedures with respect to measures designed to address any or all of the following matters: (i) customer identification programs; (ii) money laundering; (iii) terrorist financing; (iv) identifying and reporting suspicious activities and currency transactions; (v) currency crimes; and (vi) cooperation between FDIC-insured institutions and law enforcement authorities.

Concentrations in Commercial Real Estate. Concentration risk exists when FDIC-insured institutions deploy too many assets to any one industry or segment. A concentration in commercial real estate is one example of regulatory concern. The interagency Concentrations in Commercial Real Estate Lending, Sound Risk Management Practices guidance (“CRE Guidance”) provides supervisory criteria, including the following numerical indicators, to assist bank examiners in identifying banks with potentially significant commercial real estate loan concentrations that may warrant greater supervisory scrutiny: (i) commercial real estate loans exceeding 300% of capital and increasing 50% or more in the preceding three years; or (ii) construction and land development loans exceeding 100% of capital. The CRE Guidance does not limit banks’ levels of commercial real estate lending activities, but rather guides institutions in developing risk management practices and levels of capital that are commensurate with the level and nature of their commercial real estate concentrations. On December 18, 2015, the federal banking agencies issued a statement to reinforce prudent risk-management practices related to CRE lending, having observed substantial growth in many CRE asset and lending markets, increased competitive pressures, rising CRE concentrations in banks, and an easing of CRE underwriting standards. The federal bank agencies reminded FDIC-insured institutions to maintain underwriting discipline and exercise prudent risk-management practices to identify, measure, monitor, and manage the risks arising from CRE lending. In addition, FDIC-

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insured institutions must maintain capital commensurate with the level and nature of their CRE concentration risk. As of December 31, 2019, the Bank did not exceed these guidelines.

Consumer Financial Services. The historical structure of federal consumer protection regulation applicable to all providers of consumer financial products and services changed significantly on July 21, 2011, when the CFPB commenced operations to supervise and enforce consumer protection laws. The CFPB has broad rulemaking authority for a wide range of consumer protection laws that apply to all providers of consumer products and services, including the Bank, as well as the authority to prohibit “unfair, deceptive or abusive” acts and practices. The CFPB has examination and enforcement authority over providers with more than $10 billion in assets. FDIC-insured institutions with $10 billion or less in assets, like the Bank, continue to be examined by their applicable bank regulators.

Because abuses in connection with residential mortgages were a significant factor contributing to the financial crisis, many new rules issued by the CFPB and required by the Dodd-Frank Act addressed mortgage and mortgage-related products, their underwriting, origination, servicing and sales. The Dodd-Frank Act significantly expanded underwriting requirements applicable to loans secured by 1-4 family residential real property and augmented federal law combating predatory lending practices. In addition to numerous disclosure requirements, the Dodd‑Frank Act imposed new standards for mortgage loan originations on all lenders, including banks and savings associations, in an effort to strongly encourage lenders to verify a borrower’s ability to repay, while also establishing a presumption of compliance for certain “qualified mortgages.” The Regulatory Relief Act provided relief in connection with mortgages for banks with assets of less than $10 billion, and, as a result, mortgages the Bank makes are now considered to be qualified mortgages if they are held in portfolio for the life of the loan.

The CFPB’s rules have not had a significant impact on our operations, except for higher compliance costs.


ITEM 1A.	RISK FACTORS.

An investment in our securities is subject to risks inherent in our business. Before making an investment decision, you should carefully consider the risks and uncertainties described below together with all of the other information included in this report. In addition to the risks and uncertainties described below, other risks and uncertainties not currently known to us or that we currently deem to be immaterial also may materially and adversely affect our business, financial condition and results of operations. The value or market price of our securities could decline due to any of these identified or other risks, and you could lose all or part of your investment.

Economic and Market Risks

Our business is concentrated in and largely dependent upon the continued growth and welfare of the Iowa and Minneapolis/St. Paul markets.

We operate primarily in the central and eastern Iowa and Minneapolis/St. Paul, Minnesota markets and their surrounding communities in the upper-Midwest. As a result, our financial condition, results of operations and cash flows are significantly impacted by changes in the economic conditions in those areas. Our success depends to a significant extent upon the business activity, population, income levels, deposits and real estate activity in these markets. Although our customers’ businesses and financial interests may extend well beyond these market areas, adverse economic conditions that affect these market areas could reduce our growth rate, affect the ability of our customers to repay their loans to us, affect the value of collateral underlying loans and generally affect our financial condition and results of operations. Unfavorable or uncertain economic and market conditions can be caused by declines in economic growth, business activity or investor or business confidence; limitations on the availability of increases in the cost of credit and capital; increases in inflation or interest rates; high unemployment; uncertainty in U.S. trade policies, legislation, treaties and tariffs; natural disasters; acts of war or terrorism; widespread disease or pandemics; or a combination of these or other factors. Because of our geographic concentration, we are less able than other regional or national financial institutions to diversify our credit risks across multiple markets.

Weather-related events and other natural disasters, as well as man-made disasters, could cause a disruption in our operations or other consequences that could have an adverse impact on financial results and condition.

A significant portion of our operations are located in areas that are susceptible to floods, droughts, tornadoes and other severe weather events. Any of these, or any other severe weather event, could cause disruption to our operations and could have a material adverse effect on our overall business, results of operations or financial condition. While we maintain insurance covering many of these weather-related events, including coverage for lost profits and extra expense, there is no insurance against the disruption that a severe weather event could produce to the markets that we serve and the resulting adverse impact on our borrowers to timely repay their loans and the value of any collateral held by us. The severity and impact of weather-

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related events are difficult to predict and may be exacerbated by global climate change.

We are subject to interest rate risk, which could adversely affect our financial condition and profitability.

Shifts in short-term interest rates may reduce our net interest income, which is the principal component of our earnings. Net interest income is the difference between the amounts received by us on our interest-earning assets and the interest paid by us on our interest-bearing liabilities. When interest rates rise, the rate of interest we pay on our liabilities, such as deposits, may rise more quickly than the rate of interest that we receive on our interest-earning assets, such as loans, which could cause our profits to decrease. The impact on earnings can be adverse when the slope of the yield curve flattens, that is, when short-term interest rates increase more than long-term interest rates or when long-term interest rates decrease more than short-term interest rates.

Changes in interest rates also can affect the value of loans, securities and other assets. An increase in interest rates that adversely affects the ability of borrowers to pay the principal or interest on loans may lead to an increase in nonperforming assets and a reduction of income recognized, which could have a material adverse effect on our results of operations and cash flows. Further, when we place a loan on nonaccrual status, we reverse any accrued but unpaid interest receivable, which decreases interest income. Subsequently, we continue to have a cost to fund the loan, which is reflected as interest expense, without any interest income to offset the associated funding expense. Thus, an increase in the amount of nonperforming assets would have an adverse impact on net interest income.

Rising interest rates will likely result in a decline in value of our fixed-rate debt securities. Any unrealized losses resulting from holding available for sale securities are recognized in other comprehensive income (or net income, if the decline is other-than- temporary), and reduce total shareholders’ equity. Unrealized losses do not negatively impact our regulatory capital ratios; however, tangible common equity and the associated ratios used by many investors would be reduced. If debt securities in an unrealized loss position are sold, such losses become realized and will reduce our regulatory capital ratios.

In late 2015, the Federal Reserve’s Open Market Committee began the process of raising short-term interest rates from near-zero levels, and the Federal Reserve raised the target federal funds rate by 100 basis points in 2018 and 75 basis points in 2017. In 2019, the Federal Reserve decreased the federal funds rate by 75 basis points. If the Federal Reserve increases the federal funds rate and short-term interest rates subsequently increase and long-term interest rates do not rise, or increase but at a slower rate, we could experience net interest margin compression as our rates on interest-earning assets decline measured relative to rates on our interest-bearing liabilities. Any such occurrence could have a material adverse effect on our net interest income and on our business, financial condition and results of operations.

We measure interest rate risk under various rate scenarios and using specific criteria and assumptions. A summary of this process, along with the results of our net interest income simulations, is included at Item 7A. Quantitative and Qualitative Disclosures About Market Risk under “Interest Rate Risk.” Although we believe our current level of interest rate sensitivity is reasonable and effectively managed, significant fluctuations in interest rates may have an adverse effect on our business, financial condition and results of operations.

Monetary policies and regulations of the Federal Reserve could adversely affect our business, financial condition and results of operations.

In addition to being affected by general economic conditions, our earnings and growth are affected by the policies of the Federal Reserve. An important function of the Federal Reserve is to regulate the money supply and credit conditions. Among the instruments used by the Federal Reserve to implement these objectives are open market operations in U.S. government securities, adjustments of the discount rate and changes in reserve requirements against bank deposits. These instruments are used in varying combinations to influence overall economic growth and the distribution of credit, bank loans, investments and deposits. Their use also affects interest rates charged on loans or paid on deposits.

The monetary policies and regulations of the Federal Reserve have had a significant effect on the operating results of commercial banks in the past and are expected to continue to do so in the future. The effects of such policies upon our business, financial condition and results of operations cannot be predicted.

We are subject to risk concerning the discontinuance of LIBOR.

In July 2017, the Financial Conduct Authority (the authority that regulates LIBOR) announced it intends to stop compelling banks to submit rates for the calculation of LIBOR after 2021. LIBOR makes up one of the most common interest rate indices in the world and is commonly referenced in financial instruments. We have exposure to LIBOR in various aspects through our financial contracts. Instruments that may be impacted include loans, securities, deposits, subordinated debentures and derivatives, among

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other financial contracts indexed to LIBOR and that mature after December 31, 2021. The Alternative Reference Rates Committee ("ARRC") has proposed that the Secured Overnight Financing Rate ("SOFR") is the rate that represents best practice as the alternative to LIBOR for use in derivatives and other financial contracts that are currently indexed to LIBOR. ARRC has proposed a paced market transition plan to SOFR from LIBOR, and organizations are currently working on industry wide and company specific transition plans as it relates to derivatives and cash markets exposed to LIBOR.

Given the extensive use of LIBOR across financial markets the transition to an alternative rate presents various risks that could adversely impact the value of and return on the Company’s existing instruments and contracts. In particular, any such transition could:


•	adversely affect the interest rates paid or received on, the revenue and expenses associated with, and the value of our floating-rate obligations, loans, securities, deposits, subordinated debentures, derivatives, and other financial instruments tied to LIBOR rates, or other securities or financial arrangements given LIBOR’s role in determining market interest rates globally;


•	prompt inquiries or other actions from regulators with respect to our preparation and readiness for the replacement of LIBOR with an alternative reference rate;


•	result in disputes, litigation or other actions with counterparties regarding the interpretation and enforceability of certain fallback language, or lack of fallback language, in LIBOR-based instruments; and


•	require the transition to or development of appropriate systems and analytics to effectively transition our risk management processes from LIBOR-based products to those based on the applicable alternative pricing benchmark, such as SOFR.

The manner and impact of this transition, as well as the effect of these developments on our funding costs, loan and investment and trading securities portfolios, asset-liability management, and business, is uncertain.

Credit and Lending Risks

We must manage our credit risk effectively.

There are risks inherent in making any loan, including risks inherent in dealing with individual borrowers, risks of nonpayment, risks resulting from uncertainties as to the future value of collateral and cash flows available to service debt and risks resulting from changes in economic and industry conditions. We attempt to minimize our credit risk through prudent loan application approval procedures, careful monitoring of the concentration of our loans within specific industries and periodic independent reviews of outstanding loans by our credit review department. We periodically examine our credit process and implement changes to improve our procedures and standards. However, we cannot assure you that such approval and monitoring procedures will reduce these credit risks. If the overall economic climate in the United States, generally, or our market areas, specifically, declines, or even if it does not, our borrowers may experience difficulties in repaying their loans, and the level of nonperforming loans, charge-offs and delinquencies could rise and require increases in the provision for loan losses, which would cause our net income and return on equity to decrease.

The small to mid-sized businesses that we lend to may have fewer resources to weather adverse business developments, which may impair a borrower’s ability to repay a loan.

We primarily serve the banking and financial services needs of small to mid-sized businesses. These businesses generally have fewer financial resources in terms of capital or borrowing capacity than larger entities, may be more vulnerable to economic downturns, and may experience volatility in operating results, any of which may impair a borrower’s ability to repay a loan. In addition, the success of a small and medium-sized business often depends on the management talents and efforts of one or two people or a small group of people, and the death, disability or resignation of one or more of these people could have a material adverse impact on the business and its ability to repay its loan. Should the economic conditions negatively impact the markets in which we operate, our borrowers may experience financial difficulties, and the level of nonperforming loans, charge-offs and delinquencies could rise, which could negatively impact our business.

Our loan portfolio has a significant concentration of commercial real estate loans, which involve risks specific to real estate value.

Commercial real estate lending comprises a significant portion of our lending business. Specifically, commercial real estate loans were $1.81 billion, or approximately 52.6% of our total loan portfolio, as of December 31, 2019. Of this amount, $583.6 million, or approximately 16.9% of our total loan portfolio, were loans secured by owner-occupied property, and $1.23 billion, or approximately 35.7% of our total loan portfolio, were secured by non-owner occupied property. The market value of real estate securing our commercial real estate loans can fluctuate significantly in a short period of time as a result of market conditions in

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the geographic area in which the real estate is located. Although a significant portion of such loans is secured by real estate as a secondary form of repayment, adverse developments affecting real estate values in one or more of our markets could increase the credit risk associated with our loan portfolio. Additionally, real estate lending typically involves higher loan principal amounts, 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 control of the borrower or lender could negatively impact the future cash flow and market values of the affected properties.

If problems develop in the commercial real estate sector, particularly within one or more of our markets, the value of collateral securing our commercial real estate loans could decline. In such case, we may not be able to realize the amount of security that we anticipated at the time of originating the loan, which could cause us to increase our provision for loan losses and adversely affect our operating results, financial condition and/or capital. In light of the continued general uncertainty that exists in the economy and credit markets nationally, we may experience deterioration in the performance of our commercial real estate loan customers.

Commercial, industrial and agricultural loans make up a significant portion of our loan portfolio.

Commercial, industrial and agricultural loans (including credit cards and commercially related overdrafts) were $975.7 million, or approximately 28.3% of our total loan portfolio, as of December 31, 2019. Our commercial loans are primarily made based on the identified cash flow of the borrower and secondarily on the underlying collateral provided by the borrower. Most often, this collateral is accounts receivable, inventory and equipment. Credit support provided by the borrower for most of these loans and the probability of repayment is based on the liquidation value of the pledged collateral and enforcement of a personal guarantee, if any exists. As a result, in the case of loans secured by accounts receivable, the availability of funds for the repayment of these loans may be substantially dependent on the ability of the borrower to collect amounts due from its customers. 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, if the U.S. economy declines, this could harm the businesses of our commercial and industrial customers and reduce the value of the collateral securing these loans.

Payments on agricultural loans are dependent on the successful operation or management of the farm property. The success of the farm may be affected by many factors outside the control of the borrower, including adverse weather conditions that prevent the planting of a crop or limit crop yields, such as hail, drought and floods (although borrowers may attempt to mitigate this risk by purchasing crop insurance), loss of livestock due to disease or other factors, declines in market prices for agricultural products both domestically and internationally, and the impact of government regulations, including changes in price supports, subsidies, tariffs, trade agreements, and environmental regulations. In addition, many farms are dependent on a limited number of key individuals whose injury or death may significantly affect the successful operation of the farm. If the cash flow from a farming operation is diminished, the borrower’s ability to repay the loan may be impaired. The primary crops in our market areas are corn and soybeans. Accordingly, adverse circumstances affecting these crops could have an adverse effect on our agricultural portfolio. Likewise, agricultural operating loans involve a greater degree of risk than lending on residential properties, particularly in the case of loans that are unsecured or secured by rapidly depreciating assets such as farm equipment or assets such as livestock or crops. In these cases, any repossessed collateral for a defaulted loan may not provide an adequate source of repayment of the outstanding loan balance as a result of the greater likelihood of damage, loss or depreciation.

Our allowance for loan losses may prove to be insufficient to absorb losses in our loan portfolio.

We establish our reserve or “allowance” for loan losses at a level considered appropriate by management to absorb probable loan losses based on an analysis of the portfolio, market environment and other factors we deem relevant. The allowance for loan losses represents our estimate of probable losses in the portfolio at each balance sheet date and is based upon relevant information available to us. The allowance contains an allocation for probable losses that have been identified relating to specific borrowing relationships, as well as probable losses inherent in the loan portfolio and credit undertakings that are not specifically identified. Additions to the allowance for loan losses, which are charged to earnings through the provision for loan losses, are determined based on a variety of factors, including an analysis of the loan portfolio, historical loss experience and an evaluation of current economic conditions in our market areas. In addition, as a result of the implementation of CECL, the allowance for loan losses will reflect new or updated assumptions, model, and methods for estimating the allowance for loan losses to determine expected credit losses. The determination of the appropriate level of the allowance for loan losses inherently involves a high degree of subjectivity and requires us to make significant estimates of current credit risks and future trends, all of which may undergo material changes. Although management has established an allowance for loan losses it believes is adequate to absorb probable and reasonably estimable losses in our loan portfolio, the allowance may not be adequate. We could sustain credit losses that are significantly higher than the amount of our allowance for loan losses. Higher loan losses could arise for a variety of reasons,

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including changes in economic, operating and other conditions within our markets, as well as changes in the financial condition, cash flows, and operations of our borrowers.

At December 31, 2019, our allowance for loan losses as a percentage of total gross loans was 0.84% and as a percentage of total nonperforming loans was approximately 63.23%. Although management believes that the allowance for loan losses is appropriate to absorb probable loan losses on any existing loans that may become uncollectible, we cannot predict loan losses with certainty, and we cannot assure you that our allowance for loan losses will prove sufficient to cover actual loan losses in the future. We may be required to make additional provisions for loan losses in the future to supplement the allowance for loan losses, either due to management’s decision to do so, as a result of the implementation of CECL, or because our banking regulators require us to do so. If we experience significant charge-offs in future periods or charge-offs in future periods exceed the allowance for loan losses, we may need additional provisions to replenish the allowance for loan losses. An increase in the allowance for loan losses will result in a decrease in net income and, most likely, capital, and may have a material negative impact on our financial condition and results of operations. Loan losses in excess of our reserves may adversely affect our business, financial condition and results of operations.

Nonperforming assets take significant time to resolve and adversely affect our results of operations and financial condition, and could result in further losses in the future.

As of December 31, 2019, our nonperforming loans, which includes nonaccrual loans, loans past due 90 days or more and still accruing interest, and loans modified under troubled debt restructurings, and excludes purchased credit impaired loans, totaled $46.0 million, or 1.33% of our loan portfolio, and our nonperforming assets, which include nonperforming loans plus foreclosed assets, net, totaled $49.7 million, or 1.44% of loans. In addition, we had $11.6 million in accruing loans (not included in the nonperforming loan totals) that were 31-89 days delinquent as of December 31, 2019.

Our nonperforming assets adversely affect our net income in various ways. We do not record interest income on nonaccrual loans or foreclosed assets, thereby adversely affecting our net income and returns on assets and equity, increasing our loan administration costs and adversely affecting our efficiency ratio. When we take collateral in foreclosure and similar proceedings, we are required to mark the collateral to its then-fair market value, which may result in a loss. These nonperforming loans and foreclosed assets also increase our risk profile and the capital our regulators believe is appropriate in light of such risks. The resolution of nonperforming assets requires significant time commitments from management and can be detrimental to the performance of their other responsibilities. If we experience increases in nonperforming loans and nonperforming assets, our net interest income may be negatively impacted and our loan administration costs could increase, each of which could have an adverse effect on our net income and related ratios, such as return on assets and equity.

We may encounter issues with environmental law compliance if we take possession, through foreclosure or otherwise, of the real property that secures a loan.

A significant portion of our loan portfolio is secured by real property. In the ordinary course of business, we may foreclose on and take title to properties securing certain loans. In doing so, there is a risk that hazardous or toxic substances could be found on these properties. If hazardous or toxic substances are found, we may be liable for remediation costs, as well as for personal injury and property damage. Environmental laws may require us to incur substantial expenses and may materially reduce the affected property's value or limit our ability to use or sell the affected property. In addition, future laws or more stringent interpretations or enforcement policies with respect to existing laws may increase our exposure to environmental liability. The remediation costs and any other financial liabilities associated with an environmental hazard could have a material adverse effect on our financial condition and results of operations.

Capital & Liquidity Risks

Liquidity risks could affect operations and jeopardize our business, financial condition and results of operations.

Liquidity is essential to our business. An inability to raise funds through deposits, borrowings, the sale of loans and other sources could have a substantial negative effect on our liquidity. Our most important source of funds consists of customer deposits. Deposit balances can decrease when customers perceive alternative investments, such as the stock market, provide a better risk/return trade-off. If customers move money out of bank deposits and into other investments, we could lose a relatively low cost source of funds, which would require us to seek other, potentially higher cost funding alternatives. Other primary sources of funds consist of cash from operations, investment securities maturities and sales, and funds from sales of our stock. Additional liquidity is provided by brokered deposits, bank lines of credit, repurchase agreements and the ability to borrow from the Federal Reserve Bank and the FHLB. Our access to funding sources in amounts adequate to finance or capitalize our activities or on terms that are

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acceptable to us could be impaired by factors that affect us directly or the financial services industry or economy in general, such as disruptions in the financial markets or negative views and expectations about the prospects for the financial services industry.

Any decline in available funding could adversely impact our ability to originate loans, invest in securities, pay our expenses, pay dividends to our shareholders, or fulfill obligations such as repaying our borrowings or meeting deposit withdrawal demands, any of which could have a material adverse impact on our liquidity, business, financial condition and results of operations.

We may desire or be required to raise additional capital in the future, but that capital may not be available.

We are required by federal and state regulatory authorities to maintain adequate levels of capital to support our operations. We intend to grow our business organically and to explore opportunities to grow our business by taking advantage of attractive acquisition opportunities, and such growth plans may require us to raise additional capital to ensure that we have adequate levels of capital to support such growth on top of our current operations. In order to accommodate future capital needs, we maintain a universal shelf registration statement, which allows for future sale up to $100 million of securities. Our ability to raise additional capital will depend on conditions in the capital markets, economic conditions and a number of other factors, including investor perceptions regarding the banking industry, market conditions and governmental activities, and on our financial condition and performance. Accordingly, we cannot assure you of our ability to raise additional capital, if needed or desired, on terms acceptable to us. If we cannot raise additional capital when needed or desired, our ability to further expand our operations through internal growth or acquisitions could be materially impaired.

Downgrades in the credit rating of one or more insurers that provide credit enhancement for our state and municipal securities portfolio may have an adverse impact on the market for, and valuation of, these types of securities.

We invest in tax-exempt and taxable state and local municipal securities, some of which are insured by monoline insurers. As of December 31, 2019, we had $257.2 million of municipal securities (recorded values), which represented 32.7% of our total securities portfolio. Following the onset of the financial crisis, several of these insurers came under scrutiny by rating agencies. Even though management generally purchases municipal securities on the overall credit strength of the issuer, the reduction in the credit rating of an insurer may negatively impact the market for and valuation of our investment securities. Such a downgrade could adversely affect our liquidity, financial condition and results of operations.

Our ability to pay dividends is subject to certain limitations and restrictions, and there is no guarantee that we will be able to continue paying the same level of dividends in the future that we have paid in the past or that we will be able to pay future dividends at all.

Our ability to pay dividends is limited by regulatory restrictions and the need to maintain sufficient consolidated capital. The ability of the Bank to pay dividends to us is limited by its obligations to maintain sufficient capital and liquidity and by other general restrictions on dividends that are applicable to the Bank, including the requirement under the Iowa Banking Act that the Bank may not pay dividends in excess of its undivided profits. If these regulatory requirements are not met, the Bank will not be able to pay dividends to us, and we may be unable to pay dividends on our common stock.

In addition, as a bank holding company, our ability to declare and pay dividends is subject to the guidelines of the Federal Reserve regarding capital adequacy and dividends. The Federal Reserve guidelines generally require us to review the effects of the cash payment of dividends on common stock and other Tier 1 capital instruments (i.e., perpetual preferred stock and trust preferred debt) in light of our earnings, capital adequacy and financial condition. As a general matter, the Federal Reserve indicates that the board of directors of a bank holding company (including a financial holding company) should eliminate, defer or significantly reduce the company’s dividends if:


•	the company’s net income available to shareholders for the past four quarters, net of dividends previously paid during that period, is not sufficient to fully fund the dividends;


•	the prospective rate of earnings retention is inconsistent with the company’s capital needs and overall current and prospective financial condition; or


•	the company will not meet, or is in danger of not meeting, its minimum regulatory capital adequacy ratios.

Also, banking institutions that do not maintain a capital conservation buffer, comprised of Common Equity Tier 1 Capital, greater than 2.5% above the regulatory minimum capital requirements will face constraints on the payment of dividends, stock repurchases and discretionary bonus payments to executive officers based on the amount of the shortfall, unless prior regulatory approval is obtained. Accordingly, if the Bank fails to maintain the applicable minimum capital ratios and the capital conservation buffer, distributions to the Company may be prohibited or limited, and if the Company fails to maintain the applicable minimum capital

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ratios and the capital conservation buffer, distributions to or stock repurchases from the Company’s shareholders may be prohibited or limited.

As of December 31, 2019, we had $41.6 million of junior subordinated debentures held by three statutory business trusts that we control. Interest payments on the debentures, which totaled $1.9 million for the year ended December 31, 2019, must be paid before we pay dividends on our capital stock, including our common stock. We have the right to defer interest payments on the debentures for up to 20 consecutive quarters. However, if we elect to defer interest payments, all deferred interest must be paid before we may pay dividends on our capital stock.

We have counterparty risk, and therefore, we may be adversely affected by the soundness of other financial institutions.

Our ability to engage in routine funding and other transactions could be negatively affected by the actions and the soundness of other financial institutions. Financial services institutions are generally interrelated as a result of trading, clearing, counterparty, credit or other relationships. We have exposure to many different industries and counterparties and regularly engage in transactions with counterparties in the financial services industry, including commercial banks, brokers and dealers, investment banks and other institutional customers. Many of these transactions may expose us to credit or other risks if another financial institution experiences adverse circumstances. In certain circumstances, the collateral that we hold may be insufficient to fully cover the risk that a counterparty defaults on its obligations, which may cause us to experience losses that could have a material adverse effect on our business, financial condition and results of operations.

Competitive and Strategic Risks

We face intense competition in all phases of our business from banks and other financial institutions.

The banking and financial services businesses in our markets are highly competitive. Our competitors include large regional banks, local community banks, savings and loan associations, securities and brokerage companies, mortgage companies, insurance companies, finance companies, money market mutual funds, small local credit unions as well as large aggressive and expansion-minded credit unions, fintech companies, and other non-bank financial services providers. Many of these competitors are not subject to the same regulatory restrictions as we are. Many of our unregulated competitors compete across geographic boundaries and are able to provide customers with a competitive alternative to traditional banking services.

Increased competition in our markets may result in a decrease in the amounts of our loans and deposits, reduced spreads between loan rates and deposit rates or loan terms that are more favorable to the borrower. Any of these results could have a material adverse effect on our ability to grow and remain profitable. If increased competition causes us to significantly discount the interest rates we offer on loans or increase the amount we pay on deposits, our net interest income could be adversely impacted. If increased competition causes us to modify our underwriting standards, we could be exposed to higher losses from lending activities. Additionally, many of our competitors are much larger in total assets and capitalization, have greater access to capital markets, have larger lending limits and offer a broader range of financial services than we can offer.

Consumers and businesses are increasingly using non-banks to complete their financial transactions, which could adversely affect our business and results of operations.

Technology and other changes are allowing consumers and businesses to complete financial transactions that historically have involved banks through alternative methods. For example, the wide acceptance of Internet-based commerce has resulted in a number of alternative payment processing systems and lending platforms in which banks play only minor roles. Customers can now maintain funds in prepaid debit cards or digital currencies, and pay bills and transfer funds directly without the direct assistance of banks. The diminishing role of banks as financial intermediaries has resulted and could continue to result in the loss of fee income, as well as the loss of customer deposits and the related income generated from those deposits. The loss of these revenue streams and the potential loss of lower cost deposits as a source of funds could have a material adverse effect on our business, financial condition and results of operations.

We have a continuing need for technological change, and we may not have the resources to effectively implement new technology.

The financial services industry continues to undergo rapid technological changes with frequent introductions of new technology-driven products and services. In addition to enabling us to better serve our customers, the effective use of technology increases efficiency and the potential for cost reduction. Our future success will depend in part upon our ability, both internally and through our core processor, to address the needs of our customers by using technology to provide products and services that will satisfy customer demands for convenience as well as to create additional efficiencies in our operations as we continue to grow our market share. Many of our larger competitors have substantially greater resources to invest in technological improvements. As a result,

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they may be able to offer additional or superior products to those that we will be able to offer, which could put us at a competitive disadvantage. Accordingly, we cannot provide you with assurance that we will be able to effectively implement new technology-driven products and services or be successful in marketing such products and services to our customers.

We may be adversely affected by risks associated with completed and potential acquisitions, including execution risks, failure to realize anticipated transaction benefits, and failure to overcome integration risks, which could adversely affect our growth and profitability.

We plan to continue to grow our businesses organically but remain open to considering potential bank or other acquisition opportunities that make financial and strategic sense. In the event that we do pursue acquisitions, we may have difficulty executing on acquisitions and may not realize the anticipated benefits of any transaction we complete. Any of the foregoing matters could materially and adversely affect us.

In any acquisition that we complete, such as the acquisition of ATBancorp, we may fail to realize some or all of the anticipated transaction benefits if the integration process takes longer or is more costly than expected or otherwise fails to meet our expectations. Acquisition activities could be material to our business and involve a number of risks, including the following:


•	We may incur time and expense associated with identifying and evaluating potential acquisitions and negotiating potential transactions, resulting in our attention being diverted from the operation of our existing business.


•	We are exposed to potential asset and credit quality risks and unknown or contingent liabilities of the banks or businesses we acquire. If these issues or liabilities exceed our estimates, our earnings, capital and financial condition may be materially and adversely affected.

•

The acquisition of other entities generally requires integration of systems, procedures and personnel of the acquired entity. This integration process is complicated and time consuming and can also be disruptive to the customers and employees of the acquired business and our business. If the integration process is not conducted successfully, we may not realize the anticipated economic benefits of acquisitions within the expected time frame, or ever, and we may lose customers or employees of the acquired business. We may also experience greater than anticipated customer losses even if the integration process is successful.


•	To finance an acquisition, we may borrow funds or pursue other forms of financing, such as issuing convertible preferred stock, which may have high dividend rates or may be highly dilutive to holders of our common stock, thereby increasing our leverage and diminishing our liquidity, or issuing capital stock, which could dilute the interests of our existing shareholders.


•	We may be unsuccessful in realizing the anticipated benefits from acquisitions. For example, we may not be successful in realizing anticipated cost savings. We also may not be successful in preventing disruptions in service to existing customer relationships of the acquired institution, which could lead to a loss in revenues.

In addition to the foregoing, we may face additional risks in acquisitions to the extent we acquire new lines of business or new products, or enter new geographic areas, in which we have little or no current experience, especially if we lose key employees of the acquired operations. We cannot assure you that we will be successful in overcoming these risks or any other problems encountered in connection with acquisitions. Our inability to overcome risks associated with acquisitions could have an adverse effect on our ability to successfully implement our acquisition growth strategy and grow our business and profitability.

Accounting and Tax Risks

We are subject to changes in accounting principles, policies or guidelines.

Our financial performance is impacted by accounting principles, policies and guidelines. Some of these policies require the use of estimates and assumptions that may affect the value of our assets or liabilities and financial results. Some of our accounting policies are critical because they require management to make difficult, subjective and complex judgments about matters that are inherently uncertain and because it is likely that materially different amounts would be reported under different conditions or using different assumptions. If such estimates or assumptions underlying our financial statements are incorrect, we may experience material losses.

From time to time, the FASB and the SEC change the financial accounting and reporting standards, such as the implementation of CECL, or the interpretation of those standards that govern the preparation of our financial statements. These changes are beyond our control, can be difficult to predict and could materially impact how we report our financial condition and results of operations. Changes in these standards are continuously occurring, and given recent economic conditions, more drastic changes may occur. The implementation of such changes, such as CECL, could have a material adverse effect on our financial condition and results of operations.

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A new accounting standard may require us to increase our allowance for loan losses and may have a material adverse effect on our financial condition and results of operations.

The FASB adopted a new accounting standard that will be effective for the Company and the Bank for our first fiscal year after December 15, 2019. This standard, referred to as Current Expected Credit Loss, or CECL, requires financial institutions to determine periodic estimates of lifetime expected credit losses on loans, and recognize the expected credit losses as allowances for loan losses. This changes the prior method of providing allowances for loan losses that are probable, which may require us to increase our allowance for loan losses and has required us to greatly increase the types of data we need to collect and review to determine the appropriate level of the allowance for loan losses. The actual impact of CECL depends on the characteristics of our financial instruments, economic conditions, and our economic and loss forecasts at the adoption date. The use of economic forecasting may increase the volatility of our allowance for loan losses and our earnings. Any increase in our allowance for loan losses or expenses incurred to determine the appropriate level of the allowance for loan losses may have a material adverse effect on our financial condition and results of operations.

The Company is subject to changes in tax law and may not realize tax benefits which could adversely affect our results of operations.

Changes in tax laws at national or state levels could have an effect on the Company’s short-term and long-term earnings. Tax law changes are both difficult to predict and are beyond the Company’s control. Changes in tax laws could affect the Company’s earnings as well as its customers’ financial positions, or both. Changes in tax laws could also require the revaluation of the Company’s net deferred tax position, which could have a material adverse effect on our results of operations and financial condition. In addition, current portions of the Company’s net deferred tax assets relate to tax-effected state net operating loss carry-forwards, the utilization of which may be further limited in the event of certain material changes in the Company’s ownership.

In addition, changes in ownership could further limit the Company’s realization of deferred tax assets. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during the periods prior to the expiration of the related net operating losses and the limitation of Section 382 of the Internal Revenue Code (the “Code”). Section 382 of the Code contains rules that limit the ability of a company that undergoes an ownership change to utilize its net operating loss carry-forwards and certain built-in losses recognized in years after the ownership change. The Company issued a significant amount of common stock in connection with the acquisition of Central Bancshares, Inc. (“Central”) in 2015 and the acquisition of ATBancorp in 2019. While the issuance of stock does not affect an ownership change under Section 382, it may make it more likely that an ownership change under Section 382 will occur in the future. If the Company undergoes an ownership change for purposes of Section 382 as a result of future transactions involving our common stock, our ability to use net operating loss carry-forwards, tax credit carry-forwards or net unrealized built-in losses at the time of ownership change would be subject to the limitations of Section 382. The limitation may affect the amount of the Company’s deferred income tax asset and, depending on the limitation, a portion of its built-in losses. Net operating loss carry-forwards or tax credit carry-forwards could expire before the Company would be able to use them. This could adversely affect the Company’s financial position, results of operations and cash flow.

Operational Risks

We face the risk of possible future goodwill impairment.

We performed a valuation analysis of our goodwill, which increased to $91.9 million as a result of our acquisition of ATBancorp, as of October 1, 2019, which indicated no impairment existed. We will be required to perform additional goodwill impairment assessments on at least an annual basis, and perhaps more frequently, which could result in goodwill impairment charges. Any future goodwill impairment charge on the current goodwill balance, or future goodwill arising out of acquisitions that we are required to take, could have a material adverse effect on our results of operations by reducing our net income or increasing our net losses.

We could recognize losses on securities held in our securities portfolio, particularly if interest rates increase or economic and market conditions deteriorate.

As of December 31, 2019, the fair value of our securities portfolio was approximately $786.0 million. Factors beyond our control can significantly influence the fair value of securities in our portfolio and can cause potential adverse changes to the fair value of these securities. For example, fixed-rate securities acquired by us are generally subject to decreases in market value when interest rates rise. Additional factors include, but are not limited to, rating agency downgrades of the securities, defaults by the issuer or individual mortgagors with respect to the underlying securities, and instability in the credit markets. Any of the foregoing factors could cause an other-than-temporary impairment in future periods and result in realized losses. The process for determining whether impairment is other-than-temporary usually requires subjective judgments about the future financial performance of the issuer

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and any collateral underlying the security in order to assess the probability of receiving all contractual principal and interest payments on the security. Because of changing economic and market conditions affecting interest rates, the financial condition of issuers of the securities and the performance of the underlying collateral, we may recognize realized and/or unrealized losses in future periods, which could have an adverse effect on our financial condition and results of operations.

Our ability to attract and retain management and key personnel may affect future growth and earnings.

Much of our success and growth has been influenced by our ability to attract and retain management experienced in banking and financial services and familiar with the communities in our market areas. Our ability to retain our executive officers, current management teams, branch managers and loan officers will continue to be important to the successful implementation of our strategy. It is also critical, as we grow, to be able to attract and retain qualified additional management and loan officers with the appropriate level of experience and knowledge about our market areas to implement our operating strategy. The Dodd-Frank Act also directs the Federal Reserve to promulgate rules prohibiting excessive compensation paid to bank holding company executives. These rules, when adopted, may make it more difficult to attract and retain the people we need to operate our businesses and limit our ability to promote our objectives through our compensation and incentive programs. The unexpected loss of services of any key management personnel, or the inability to recruit and retain qualified personnel in the future, could have an adverse effect on our business, results of operations and financial condition.

The occurrence of fraudulent activity, breaches or failures of our information security controls or cybersecurity-related incidents could have a material adverse effect on our business, financial condition, results of operations and growth prospects.

As a bank, we are susceptible to fraudulent activity, information security breaches and cybersecurity-related incidents that may be committed against us or our clients, which may result in financial losses or increased costs to us or our clients, disclosure or misuse of our information or our client information, misappropriation of assets, privacy breaches against our clients, litigation or damage to our reputation. Such fraudulent activity may take many forms, including check fraud, electronic fraud, wire fraud, phishing, social engineering and other dishonest acts. Information security breaches and cybersecurity-related incidents may include fraudulent or unauthorized access to systems used by us or our clients, denial or degradation of service attacks and malware or other cyber-attacks.

There continues to be a rise in electronic fraudulent activity, security breaches and cyber-attacks within the financial services industry, especially in the commercial banking sector due to cyber criminals targeting commercial bank accounts. Several large corporations, including financial institutions and retail companies, have suffered major data breaches, in some cases exposing not only confidential and proprietary corporate information, but also sensitive financial and other personal information of their customers and employees and subjecting them to potential fraudulent activity. Some of our clients may have been affected by these breaches, which could increase their risks of identity theft and other fraudulent activity that could involve their accounts with us.

Information pertaining to us and our clients is maintained, and transactions are executed, on networks and systems maintained by us and certain third party partners, such as our online banking, mobile banking or accounting systems. The secure maintenance and transmission of confidential information, as well as execution of transactions over these systems, are essential to protect us and our clients against fraud and security breaches and to maintain the confidence of our clients. Breaches of information security also may occur through intentional or unintentional acts by those having access to our systems or the confidential information of our clients, including employees. In addition, increases in criminal activity levels and sophistication, advances in computer capabilities, new discoveries, vulnerabilities in third party technologies (including browsers and operating systems) or other developments could result in a compromise or breach of the technology, processes and controls that we use to prevent fraudulent transactions and to protect data about us, our clients and underlying transactions, as well as the technology used by our clients to access our systems. Our third party partners’ inability to anticipate, or failure to adequately mitigate, breaches of security could result in a number of negative events, including losses to us or our clients, loss of business or clients, damage to our reputation, the incurrence of additional expenses, disruption to our business, additional regulatory scrutiny or penalties or our exposure to civil litigation and possible financial liability, any of which could have a material adverse effect on our business, financial condition, results of operations and growth prospects. While we maintain insurance coverage that may, subject to policy terms and conditions, cover certain aspects of cyber risks, such insurance coverage may be insufficient to cover all losses.

We depend on information technology and telecommunications systems of third parties, and any systems failures, interruptions or data breaches involving these systems could adversely affect our operations and financial condition.

Our business is highly dependent on the successful and uninterrupted functioning of our information technology and telecommunications systems, third party servicers, accounting systems, mobile and online banking platforms and financial intermediaries. We outsource to third parties many of our major systems, such as data processing and mobile and online banking.

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The failure of these systems, or the termination of a third party software license or service agreement on which any of these systems is based, could interrupt our operations. Because our information technology and telecommunications systems interface with and depend on third party systems, we could experience service denials if demand for such services exceeds capacity or such third party systems fail or experience interruptions. A system failure or service denial could result in a deterioration of our ability to process loans or gather deposits and provide customer service, compromise our ability to operate effectively, result in potential noncompliance with applicable laws or regulations, damage our reputation, result in a loss of customer business or subject us to additional regulatory scrutiny and possible financial liability, any of which could have a material adverse effect on business, financial condition, results of operations and growth prospects. In addition, failures of third parties to comply with applicable laws and regulations, or fraud or misconduct on the part of employees of any of these third parties, could disrupt our operations or adversely affect our reputation.

It may be difficult for us to replace some of our third party vendors, particularly vendors providing our core banking and information services, in a timely manner if they are unwilling or unable to provide us with these services in the future for any reason, and even if we are able to replace them, it may be at higher cost or result in the loss of customers. Any such events could have a material adverse effect on our business, financial condition, results of operations and growth prospects.

Our operations rely heavily on the secure processing, storage and transmission of information and the monitoring of a large number of transactions on a minute-by-minute basis, and even a short interruption in service could have significant consequences. We also interact with and rely on retailers, for whom we process transactions, as well as financial counterparties and regulators. Each of these third parties may be targets of the same types of fraudulent activity, computer break-ins and other cybersecurity breaches described above, and the cybersecurity measures that they maintain to mitigate the risk of such activity may be different than our own and may be inadequate.

As a result of financial entities and technology systems becoming more interdependent and complex, a cyber incident, information breach or loss, or technology failure that compromises the systems or data of one or more financial entities could have a material impact on counterparties or other market participants, including ourselves. As a result of the foregoing, our ability to conduct business may be adversely affected by any significant disruptions to us or to third parties with whom we interact.

We are subject to certain operational risks, including, but not limited to, customer or employee fraud and data processing system failures and errors.

Employee errors and employee and customer misconduct could subject us to financial losses or regulatory sanctions and seriously harm our reputation. Misconduct by our employees could include hiding unauthorized activities from us, improper or unauthorized activities on behalf of our customers or improper use of confidential information. It is not always possible to prevent employee errors and misconduct, and the precautions we take to prevent and detect this activity may not be effective in all cases. Employee errors could also subject us to financial claims for negligence.

We maintain a system of internal controls and insurance coverage to mitigate against operational risks, including data processing system failures and errors and customer or employee fraud. Should our internal controls fail to prevent or detect an occurrence, and if any resulting loss is not insured or exceeds applicable insurance limits, such failure could have a material adverse effect on our business, financial condition and results of operations.

Our framework for managing risks may not be effective in mitigating risk and loss to us.

Our risk management framework seeks to mitigate risk and loss to us. We have established processes and procedures intended to identify, measure, monitor, report and analyze the types of risk to which we are subject, including liquidity risk, credit risk, market risk, interest rate risk, operational risk, compensation risk, legal and compliance risk, and reputational risk, among others. However, as with any risk management framework, there are inherent limitations to our risk management strategies as there may exist, or develop in the future, risks that we have not appropriately anticipated or identified. Our ability to successfully identify and manage risks facing us is an important factor that can significantly impact our results. If our risk management framework proves ineffective, we could suffer unexpected losses and could be materially adversely affected.

Our internal controls may be ineffective.

Management regularly reviews and updates our internal controls, disclosure controls and procedures and corporate governance policies and procedures. Any system of controls, however well designed and operated, is based in part on certain assumptions and can provide only reasonable, not absolute, assurances that the objectives of the system are met. Any failure or circumvention of our controls and procedures or failure to comply with regulations related to controls and procedures could have a material adverse effect on our financial condition and results of operations.

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We depend on the accuracy and completeness of information provided by customers and counterparties.

In deciding whether to extend credit or enter into other transactions with customers and counterparties, we may rely on information furnished to us by or on behalf of customers and counterparties, including financial statements and other financial information. We also may rely on representations of customers and counterparties as to the accuracy and completeness of that information. In deciding whether to extend credit, we may rely upon our customers' representations that their financial statements conform to U.S. Generally Accepted Accounting Principles (“GAAP”) and present fairly, in all material respects, the financial condition, results of operations and cash flows of the customer. We also may rely on customer representations and certifications, or other audit or accountants' reports, with respect to the business and financial condition of our clients. Our financial condition, results of operations, financial reporting and reputation could be negatively affected if we rely on materially misleading, false, inaccurate or fraudulent information.

Our reputation could be damaged by negative publicity.

Reputational risk, or the risk to our business, financial condition or results of operations from negative publicity, is inherent in our business. Negative publicity can result from actual or alleged conduct in a number of areas, including legal and regulatory compliance, lending practices, corporate governance, litigation, inadequate protection of customer data, or ethical behavior of our employees, and from actions taken by regulators, ratings agencies and others as a result of that conduct. Damage to our reputation could impact our ability to attract new or maintain existing loan and deposit customers, employees and business relationships.

Regulatory Risks

We operate in a highly regulated industry, and the laws and regulations to which we are subject, or changes in them, or our failure to comply with them, may adversely affect us.

The Company and the Bank are subject to extensive regulation by multiple regulatory agencies. These regulations may affect the manner and terms of delivery of our services. If we do not comply with governmental regulations, we may be subject to fines, penalties, lawsuits or material restrictions on our businesses in the jurisdiction where the violation occurred, which may adversely affect our business operations. Changes in these regulations can significantly affect the services that we provide, as well as our costs of compliance with such regulations. These regulations may be impacted by the political ideologies of the executive and legislative branches of the U.S. government as well as the heads of regulatory and administrative agencies, which may change as a result of elections. In addition, adverse publicity and damage to our reputation arising from the failure or perceived failure to comply with legal, regulatory or contractual requirements could affect our ability to attract and retain customers.

The Company and the Bank are subject to stringent capital and liquidity requirements.

As a result of the implementation of the Basel III Rules, we were required to meet new and increased capital requirements beginning on January 1, 2015. In addition, beginning in 2016, banking institutions that do not maintain a capital conservation buffer, comprised of Common Equity Tier 1 Capital, greater than 2.5% above the regulatory minimum capital requirements face constraints on the payment of dividends, stock repurchases and discretionary bonus payments to executive officers based on the amount of the shortfall, unless prior regulatory approval is obtained. Accordingly, if the Bank or the Company fails to maintain the applicable minimum capital ratios and the capital conservation buffer, distributions by the Bank to the Company, or dividends or stock repurchases by the Company, may be prohibited or limited.

Future increases in minimum capital requirements could adversely affect our net income. Furthermore, if we fail to comply with the minimum capital requirements, our failure could result in our regulators taking formal or informal actions against us which could restrict our future growth or operations.

Federal and state regulators periodically examine our business, and we may be required to remediate adverse examination findings.

The Federal Reserve, the FDIC, and the Iowa Division periodically examine our business, including our compliance with laws and regulations. If, as a result of an examination, a banking agency were to determine that our financial condition, capital resources, asset quality, earnings prospects, management, liquidity or other aspects of any of our operations had become unsatisfactory, or that we were in violation of any law or regulation, they may take a number of different remedial actions as they deem appropriate. These actions include the power to enjoin “unsafe or unsound” practices, to require affirmative action to correct any conditions resulting from any violation or practice, to issue an administrative order that can be judicially enforced, to direct an increase in our capital, to restrict our growth, to assess civil money penalties, to fine or remove officers and directors and, if it is concluded that such conditions cannot be corrected or there is an imminent risk of loss to depositors, to terminate our deposit insurance and

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place our bank into receivership or conservatorship. Any regulatory action against us could have an adverse effect on our business, financial condition and results of operations.

We are subject to numerous laws designed to protect consumers, including the CRA and fair lending laws, and failure to comply with these laws could lead to a wide variety of sanctions.

The CRA requires our bank, consistent with safe and sound operations, to ascertain and meet the credit needs of its entire community, including low and moderate income areas. Our bank’s failure to comply with the CRA could, among other things, result in the denial or delay of certain corporate applications filed by us or our bank, including applications for branch openings or relocations and applications to acquire, merge or consolidate with another banking institution or holding company. In addition, the Equal Credit Opportunity Act, the Fair Housing Act and other fair lending laws and regulations prohibit discriminatory lending practices by financial institutions. The U.S. Department of Justice, federal banking agencies, and other federal agencies are responsible for enforcing these laws and regulations. A challenge to an institution’s compliance with fair lending laws and regulations could result in a wide variety of sanctions, including damages and civil money penalties, injunctive relief, restrictions on mergers and acquisitions activity, restrictions on expansion, and restrictions on entering new business lines. Private parties may also challenge an institution’s performance under fair lending laws in private class action litigation. Such actions could have a material adverse effect on our business, financial condition, results of operations and growth prospects.

Non-compliance with the USA Patriot Act, the Bank Secrecy Act or other laws and regulations could result in fines or sanctions against us.

The USA Patriot Act and the Bank Secrecy Act require financial institutions to design and implement programs to prevent financial institutions from being used for money laundering and terrorist activities. If such activities are detected, financial institutions are obligated to file suspicious activity reports with the Financial Crimes Enforcement Network of the Treasury. These rules require financial institutions to establish procedures for identifying and verifying the identity of customers seeking to open new financial accounts. Federal and state bank regulators also have focused on compliance with Bank Secrecy Act and anti-money laundering regulations. Failure to comply with these regulations could result in fines or sanctions, including restrictions on conducting acquisitions or establishing new branches. In recent years, several banking institutions have received large fines for non-compliance with these laws and regulations. While we have developed policies and procedures designed to assist in compliance with these laws and regulations, these policies and procedures may not be effective in preventing violations of these laws and regulations. Failure to maintain and implement adequate programs to combat money laundering and terrorist financing could also have serious reputational consequences for us, which could have a material adverse effect on our business, financial condition or results of operations.

Common Stock Risks

There is a limited trading market for our common shares, and you may not be able to resell your shares at or above the price you paid for them.

Although our common shares are listed for quotation on the Nasdaq Global Select Market, the trading in our common shares has substantially less liquidity than many other companies listed on Nasdaq. A public trading market having the desired characteristics of depth, liquidity and orderliness depends on the presence in the market of willing buyers and sellers of our common shares at any given time. This presence depends on the individual decisions of investors and general economic and market conditions over which we have no control. We cannot assure you that the volume of trading in our common shares will increase in the future.

The stock market can be volatile, and fluctuations in our operating results and other factors could cause our stock price to decline.

The stock market has experienced, and may continue to experience, fluctuations that significantly impact the market prices of securities issued by many companies. Market fluctuations could adversely affect our stock price. These fluctuations have often been unrelated or disproportionate to the operating performance of particular companies. These broad market fluctuations, as well as general economic, systemic, political and market conditions, such as recessions, loss of investor confidence, interest rate changes, government shutdowns, trade wars, or international currency fluctuations, may negatively affect the market price of our common stock. Moreover, our operating results may fluctuate and vary from period to period due to the risk factors set forth herein. As a result, period-to-period comparisons should not be relied upon as an indication of future performance. Our stock price could fluctuate significantly in response to our quarterly or annual results, annual projections and the impact of these risk factors on our operating results or financial position.

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Certain shareholders own a significant interest in the company and may exercise their control in a manner detrimental to your interests.

Certain MidWestOne shareholders who are descendants of our founder collectively control approximately 17.4% of our outstanding common stock. In addition, certain MidWestOne shareholders that previously owned ATBancorp collectively control approximately 23.9% of our outstanding common stock. These shareholders may have the opportunity to exert influence on the outcome of matters required to be submitted to shareholders for approval. In addition, the significant level of ownership by these shareholders may contribute to the rather limited liquidity of our common stock on the Nasdaq Global Select Market.


ITEM 1B.	UNRESOLVED STAFF COMMENTS.

None.


ITEM 2.	PROPERTIES.

The Company’s principal location is our corporate headquarters located at 102 South Clinton Street, Iowa City, Iowa. We own or lease other branch offices and operating facilities located throughout Iowa, Minnesota, Wisconsin, Florida, and Colorado. The number of branches per state at December 31, 2019 is detailed in the following table:



	Number of Branches
Iowa branches	34
Minnesota branches	13
Wisconsin branches	7
Florida branches	2
Colorado branches	1
	57

Additional information with respect to premises and equipment is presented in Note 6. Premises and Equipment and Note 22. Leases to the consolidated financial statements.


ITEM 3.	LEGAL PROCEEDINGS.

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


ITEM 4.	MINE SAFETY DISCLOSURES.

Not applicable.

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PART II


ITEM 5.	MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES.

Marketplace Designation and Holders

Our common stock is listed on the Nasdaq Global Select Market under the symbol “MOFG.” As of March 4, 2020, there were 16,146,376 shares of common stock outstanding held by approximately 424 holders of record. Additionally, there are an estimated 2,914 beneficial holders whose stock was held in street name by brokerage houses and other nominees as of that date.

Issuer Purchases of Equity Securities

The following table sets forth information about the Company’s purchases of its common stock during the fourth quarter of 2019:



	Total Number of Shares Purchased (1)	Average Price Paid per Share		Total Number of Shares Purchased as Part of Publicly Announced Programs (2)	Approximate Dollar Value of Shares That May Yet Be Purchased Under the Program (2)
October 1 - 31, 2019	19,102	$	29.65	19,102	$	8,995,688
November 1 - 30, 2019	—	—		—	—
December 1 - 31, 2019	—	—		—	—
Total	19,102	$	29.65	19,102	$	8,995,688

(1) Common shares repurchased by the Company during the quarter related to shares repurchased under the 2019 program announced on August 22, 2019.

(2) On August 22, 2019, the Company announced that on August 20, 2019, the board of directors of the Company approved a new share repurchase program, allowing for the repurchase of up to $10.0 million of the Company’s common stock through December 31, 2021. The new repurchase program replaced the Company’s prior repurchase program, pursuant to which the Company had repurchased 174,702 shares of common stock for approximately $4.7 million since the plan was announced in October 2018. The prior program had authorized the repurchase of $5.0 million of stock and was due to expire on December 31, 2020.

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Performance Graph

The following table compares MidWestOne’s performance, as measured by the change in price of its common stock plus reinvested dividends, with the Nasdaq Composite Index and the SNL-Midwestern Banks Index for the five years ended December 31, 2019.

MidWestOne Financial Group, Inc.



	At
Index	12/31/2014		12/31/2015		12/31/2016		12/31/2017		12/31/2018		12/31/2019
MidWestOne Financial Group, Inc.	$	100.00	$	107.69	$	136.07	$	123.69	$	93.86	$	140.64
Nasdaq Composite Index	100.00		106.96		116.45		150.96		146.67		200.49
SNL-Midwestern Banks Index	100.00		101.52		135.64		145.76		124.47		161.94

The banks in the custom peer group - SNL-Midwestern Banks Index - represent all publicly traded banks, thrifts or financial service companies located in Iowa, Illinois, Indiana, Kansas, Kentucky, Michigan, Minnesota, Missouri, Nebraska, North Dakota, Ohio, South Dakota and Wisconsin.

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ITEM 6.	SELECTED FINANCIAL DATA.

The following selected financial data for each of the five years in the period ended December 31, 2019, has been derived from our audited consolidated financial statements and the results of operations for each of the five years in the period ended December 31, 2019. This financial data should be read in conjunction with the financial statements and the related notes thereto.



	As of or For the Year Ended December 31,
	2019			2018			2017			2016			2015
Results of Operations	(Dollars in thousands, except per share data)
Interest income	$	182,441		$	128,109		$	118,926		$	112,328		$	100,700
Interest expense	38,791			22,841			15,145			12,722			10,648
Net interest income	143,650			105,268			103,781			99,606			90,052
Provision for loan losses	7,158			7,300			17,334			7,983			5,132
Noninterest income	31,246			23,215			22,751			23,434			21,193
Noninterest expense	117,535			83,215			80,123			87,806			73,176
Income before income tax	50,203			37,968			29,075			27,251			32,937
Income tax expense	6,573			7,617			10,376			6,860			7,819
Net income	$	43,630		$	30,351		$	18,699		$	20,391		$	25,118

Per Common Share Data
Earnings - basic	$	2.93		$	2.48		$	1.55		$	1.78		$	2.42
Earnings - diluted	2.93			2.48			1.55			1.78			2.42
Cash dividends declared	0.81			0.78			0.67			0.64			0.60
Book value	31.49			29.32			27.85			26.71			25.96
Tangible book value⁽¹⁾	23.77			23.20			21.57			19.73			18.63

Balance Sheet Data
Total assets	$	4,653,573		$	3,291,480		$	3,212,271		$	3,079,575		$	2,979,975
Loans held for investment, net of unearned income	3,451,266			2,398,779			2,286,695			2,165,143			2,151,942
Total deposits	3,728,655			2,612,929			2,605,319			2,480,448			2,463,521
Short-term borrowings	139,349			131,422			97,229			117,871			68,963
Long-term debt	231,660			168,726			151,293			156,192			133,087
Total equity	508,982			357,067			340,304			305,456			296,178

Performance Ratios
Return on average assets	1.04		%	0.93		%	0.60		%	0.68		%	0.91		%
Return on average equity	9.65			8.78			5.58			6.69			9.84
Return on average tangible equity⁽¹⁾	13.98			11.87			8.07			10.30			14.70
Dividend payout ratio	27.65			31.45			43.23			35.96			24.79
Equity to assets ratio	10.94			10.85			10.59			9.92			9.94
Tangible common equity ratio⁽¹⁾	8.50			8.78			8.41			7.52			7.34
Net interest margin, tax equivalent⁽¹⁾	3.82			3.60			3.81			3.80			3.71
Efficiency ratio⁽¹⁾	57.56			61.23			58.63			62.27			58.02

Asset Quality
Allowance for loan losses to loans held for investment, net of unearned income	0.84		%	1.22		%	1.23		%	1.01		%	0.90		%
Non-performing loans to loans held for investment, net of unearned income⁽²⁾	1.33			1.07			1.08			1.32			0.55
Net charge-offs to average loans held for investment	0.23			0.26			0.51			0.26			0.11
(1) Non-GAAP measure. See pages 29 - 30 for a reconciliation to the most directly comparable GAAP measure.
(2) The “Non-performing loans to loans held for investment, net of unearned income” line for 2017, 2016, and 2015 has been adjusted to include troubled debt restructure loans that were previously considered “non-disclosed” of $945,000, $65,000, and $315,000, respectively. Thus, the ratios reported in the table above have changed for those periods from what was previously reported.

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Non-GAAP Presentations:

Certain ratios and amounts not in conformity with GAAP are provided to evaluate and measure the Company’s operating performance and financial condition, including return on average tangible equity, tangible book value per share, tangible common equity ratio, efficiency ratio, and net interest margin, tax equivalent, as further discussed under Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations. Management believes these ratios and amounts provide investors with information regarding the Company’s balance sheet, profitability, financial condition and capital adequacy and how management evaluates such metrics internally, and that providing certain metrics exclusive on merger-related expenses and the deferred tax adjustment, which were either one-time or non-recurring items, enhances comparability between periods. The following tables provide a reconciliation of each non-GAAP measure to the most comparable GAAP equivalent.



	For the Year Ended December 31,
Return on Average Tangible Equity	2019			2018			2017			2016			2015
	(Dollars in thousands)
Net income	$	43,630		$	30,351		$	18,699		$	20,391		$	25,118
Intangible amortization, net of tax⁽¹⁾	4,430			1,722			2,031			2,581			2,126
Tangible net income	$	48,060		$	32,073		$	20,730		$	22,972		$	27,244

Average shareholders’ equity	$	452,018		$	345,734		$	334,966		$	304,670		$	255,307
Average intangible assets, net	(108,242		)	(75,531		)	(78,159		)	(81,727		)	(69,975		)
Average tangible equity	$	343,776		$	270,203		$	256,807		$	222,943		$	185,332

Return on average equity	9.65		%	8.78		%	5.58		%	6.69		%	9.84		%
Return on average tangible equity⁽²⁾	13.98		%	11.87		%	8.07		%	10.30		%	14.70		%

(1) Computed on a tax-equivalent basis, assuming an income tax rate of 25% for 2019 and 2018 and 35% for 2017, 2016, and 2015.
(2) Tangible net income divided by average tangible equity

Tangible Book Value Per Share/ Tangible Common Equity Ratio	As of December 31,
Tangible Book Value Per Share/ Tangible Common Equity Ratio	2019			2018			2017			2016			2015
	(Dollars in thousands, except per share data)
Total shareholders’ equity	$	508,982		$	357,067		$	340,304		$	305,456		$	296,178
Intangible assets, net	(124,136		)	(74,529		)	(76,700		)	(79,825		)	(83,689		)
Tangible equity	$	384,846		$	282,538		$	263,604		$	225,631		$	212,489

Total assets	$	4,653,573		$	3,291,480		$	3,212,271		$	3,079,575		$	2,979,975
Intangible assets, net	(124,136		)	(74,529		)	(76,700		)	(79,825		)	(83,689		)
Tangible assets	$	4,529,437		$	3,216,951		$	3,135,571		$	2,999,750		$	2,896,286

Book value per share	$	31.49		$	29.32		$	27.85		$	26.71		$	25.96
Tangible book value per share	$	23.81		$	23.20		$	21.57		$	19.73		$	18.63
Common shares outstanding	16,162,176			12,180,015			12,219,611			11,436,360			11,408,773

Equity to assets ratio	10.94		%	10.85		%	10.59		%	9.92		%	9.94		%
Tangible common equity ratio	8.50		%	8.78		%	8.41		%	7.52		%	7.34		%

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		For the Year Ended December 31,
Efficiency Ratio		2019			2018			2017			2016			2015
		(Dollars in thousands)
Total noninterest expense		$	117,535		$	83,215		$	80,123		$	87,806		$	73,176
Amortization of intangibles		(5,906		)	(2,296		)	(3,125		)	(3,970		)	(3,271		)
Merger-related expenses		(9,130		)	(797		)	—			(4,568		)	(3,512		)
Noninterest expense used for efficiency ratio		$	102,499		$	80,122		$	76,998		$	79,268		$	66,393

Net interest income, tax equivalent ⁽¹⁾		$	146,916		$	107,823		$	108,808		$	104,321		$	94,243
Noninterest income		31,246			23,215			22,751			23,434			21,193
Investment securities gains, net		90			193			241			464			1,011
Net revenues used for efficiency ratio		$	178,072		$	130,845		$	131,318		$	127,291		$	114,425

Efficiency ratio		57.56		%	61.23		%	58.63		%	62.27		%	58.02		%

Net Interest Margin, Tax Equivalent
Net interest income		$	143,650		$	105,268		$	103,781		$	99,606		$	90,052
Tax equivalent adjustments:
	Loans ⁽¹⁾	1,785			1,040			1,730			1,692			1,293
	Securities ⁽¹⁾	1,481			1,515			3,297			3,023			2,898
Net interest income, tax equivalent		$	146,916		$	107,823		$	108,808		$	104,321		$	94,243

Net interest margin		3.73		%	3.52		%	3.64		%	3.63		%	3.54		%
Net interest margin, tax equivalent		3.82		%	3.60		%	3.81		%	3.80		%	3.71		%
Average interest-earning assets		$	3,848,275		$	2,994,088		$	2,853,830		$	2,747,493		$	2,541,681

(1) Computed on a tax-equivalent basis, assuming a federal income tax rate of 21% for 2019 and 2018 and 35% for 2017, 2016, and 2015.


ITEM 7.	MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.

This section should be read in conjunction with the following parts of this Form 10-K: Part II, Item 8 “Financial Statements and Supplementary Data,” Part II, Item 7A, “Quantitative and Qualitative Disclosures About Market Risk,” and Part I, Item 1 “Business.”

Overview

We are the holding company for MidWestOne Bank, an Iowa state non-member bank with its main office in Iowa City, Iowa. We are headquartered in Iowa City, Iowa, and are a bank holding company under the Bank Holding Company Act of 1956, as amended, that has elected to be a financial holding company. We also were the holding company for MidWestOne Insurance Services, Inc., until its dissolution in 2019.

The Bank operates a total of 57 banking offices in Iowa, Minnesota, Wisconsin, Florida, and Colorado. It provides full service retail banking in the communities in which its branch offices are located and also offers trust and investment management services.

On June 30, 2019, the Company sold substantially all of the assets used by its wholly-owned insurance subsidiary, MidWestOne Insurance Services, Inc., to sell insurance products. The Company recognized a pre-tax gain of $1.1 million from the sale, which was reported in “Other” noninterest income on the Company’s consolidated statements of income. Effective December 31, 2019, MidWestOne Insurance Services, Inc. was legally dissolved.

Total assets increased to $4.65 billion at December 31, 2019 from $3.29 billion at December 31, 2018. Total deposits at December 31, 2019, were $3.73 billion, an increase of $1.12 billion, or 42.7%, from December 31, 2018. Gross loans held for investment increased $1.06 billion, or 44.3%, from $2.41 billion at December 31, 2018, to $3.47 billion at December 31, 2019. The increase in loan and deposit balances was primarily driven by the ATBancorp acquisition.

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Net income for the year ended December 31, 2019 was $43.6 million, an increase of $13.3 million, or 43.8%, compared to $30.4 million of net income for 2018, with diluted earnings per share of $2.93 and $2.48 for the comparative annual periods, respectively. The increase in net income was due primarily to higher average loan and securities balances acquired in the ATBancorp acquisition. Net interest income increased $38.4 million, or 36.5%, and noninterest income increased $8.0 million, or 34.6%, between 2018 and 2019. These increases were partially offset by a $34.3 million, or 41.2%, increase in noninterest expense with all expense line items except FDIC insurance showing an increase between 2018 and 2019.

Net interest income for the year ended December 31, 2019, was $143.7 million, as compared to $105.3 million for the year ended December 31, 2018, primarily due to an increase of $54.3 million, or 42.4%, in interest income. Loan interest income increased $52.0 million, or 46.7%, to $163.2 million for the year 2019 compared to the year 2018, primarily due to an increase in average loan balances of $802.8 million, or 34.1%, between the two periods. Loan interest income was also impacted by an increase in the loan purchase discount accretion to $14.0 million for the year ended December 31, 2019, compared to $2.7 million for the year ended December 31, 2018.

Interest expense was $38.8 million for the year ended December 31, 2019, an increase of $16.0 million, or 69.8%, compared to the year 2018. Interest expense on deposits increased $12.6 million, or 72.7%, to $29.9 million for the year ended December 31, 2019, compared to $17.3 million for the year ended December 31, 2018. We posted a net interest margin of 3.82% for the year 2019, up 22 basis points from the net interest margin of 3.60% for the same period in 2018.

For the year ended December 31, 2019, noninterest income increased to $31.2 million, an increase of $8.0 million, or 34.6%, from $23.2 million during 2018. The largest driver of the increase was an increase of $3.1 million in investment services and trust activities, as well as general improvement in all areas of noninterest income as a result of the merger with ATBancorp, with the exception of investment securities gains, net, and insurance commissions, which declined as a result of our sale of the assets of MidWestOne Insurance Services, Inc. in June 2019.

Noninterest expense increased to $117.5 million for the year ended December 31, 2019 compared with $83.2 million for the year ended December 31, 2018, an increase of $34.3 million, or 41.2%. The largest driver of the increase was due to an increase in compensation and employee benefits of $15.9 million, which was primarily due to increased full-time equivalent employees related to the acquisition of ATBancorp and merger-related expenses of $5.4 million.

Nonperforming loans increased from $25.6 million, or 1.1% of total loans, at December 31, 2018, to $46.0 million, or 1.3% of total loans, at December 31, 2019. The increase was due primarily to a higher level of nonaccrual loans. As of December 31, 2019, the allowance for loan losses was $29.1 million, or 0.84% of total loans, compared with $29.3 million, or 1.22% of total loans, at December 31, 2018. The Company had net loan charge-offs of $7.4 million in the year ended December 31, 2019, equal to 0.23% of average loans outstanding, compared to net charge-offs of $6.1 million, equal to 0.26% of average loans outstanding for the year ended 2018.

The Company’s capital position remains strong with an increase in our equity to assets ratio to 10.94% at December 31, 2019 compared to 10.85% at December 31, 2018. The Company’s tangible common equity ratio declined to 8.50% at December 31, 2019 compared to 8.78% at December 31, 2018. Our regulatory capital levels remain well above the minimums established to be considered well-capitalized.

Critical Accounting Policies

We have identified the following critical accounting policies and practices relative to the reporting of our results of operations and financial condition. These accounting policies relate to the allowance for loan losses, application of purchase accounting, and goodwill and intangible assets.

Allowance for Loan Losses

The allowance for loan losses is an accounting estimate of incurred credit losses in our loan portfolio at the balance sheet date. The allowance for loan losses is established through a provision for loan losses charged to earnings. On a quarterly basis, management reviews the adequacy of the allowance for loan losses. That review incorporates a variety of credit risk considerations, both quantitative and qualitative. Quantitative factors include the loss experience over a historical base period. Management then considers the effects of the following qualitative factors to ensure our allowance for loan losses reflects the inherent losses in the loan portfolio:


•	Economic and business conditions;


•	Concentration of credit;

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•	Lending management and staff;


•	Lending policies and procedures;


•	Collateral type and trends in value;


•	Nature and volume of the portfolio;


•	Trends in problem loans, loan delinquencies and nonaccrual loans;


•	Quality of internal loan review; and


•	External factors

These qualitative factors have a high degree of subjectivity and changes in any of the factors could have a significant impact on our calculation of the allowance for loan losses. In the event that our evaluation of the level of the allowance for loan losses indicates that it is inadequate, we would need to increase our provision for loan losses. We believed the allowance for loan losses as of December 31, 2019, was adequate to absorb probable credit losses on existing loans held for investment.

Accounting for Business Combinations

In May 2019, we completed the acquisition of ATBancorp, which generated significant amounts of fair value adjustments to assets and liabilities. The fair value adjustments assigned to assets and liabilities, as well as their related useful lives, are subject to judgment and estimation by our management. Valuation of intangible assets is generally based on the estimated cash flows related to those assets, while the initial value assigned to goodwill is the residual of the purchase price over the fair value of all identifiable assets acquired and liabilities assumed. Useful lives are determined based on the expected future period of the benefit of the asset or liability, the assessment of which considers various characteristics of the asset or liability, including the historical cash flows. Due to the number of estimates involved, we have identified accounting for business combinations as a critical accounting policy.

Goodwill and Other Intangible Assets

Goodwill and intangible assets arise from business combinations. Goodwill represented $91.9 million of our $4.65 billion total assets at December 31, 2019. The goodwill was assigned to the Bank. Under the Intangibles - Goodwill and Other topic of the FASB ASC, goodwill is tested at least annually for impairment at the reporting unit level; the Company consists of a single reporting unit. We review goodwill for impairment annually during the fourth quarter and also test for impairment between annual tests if an event occurs or circumstances change that would more likely than not reduce the fair value of our reporting unit below its carrying amount. Such events and circumstances may include among others: a significant adverse change in legal factors or in the general business climate; significant decline in our stock price and market capitalization; unanticipated competition; the testing for recoverability of a significant asset group within the reporting unit; and an adverse action or assessment by a regulator. Any adverse change in these factors could have a significant impact on the recoverability of goodwill and could have a material impact on our consolidated financial statements.

The Company conducted an internal assessment of goodwill in both 2019 and 2018 and determined no goodwill impairment charges were required.

Other intangible assets represented $32.2 million of our $4.65 billion total assets at December 31, 2019. The accounting for a recognized intangible asset is based on its useful life to the Company. An intangible asset with a finite useful life is amortized over its estimated useful life to the Company; an intangible asset with an indefinite useful life is not amortized but rather is tested at least annually for impairment. The intangible assets with finite lives reflected on our financial statements relate to core deposit relationships, trade name, and customer lists. The initial and subsequent measurements of intangible assets involve the use of significant estimates and assumptions. These estimates and assumptions include, among other things, the estimated cost to service deposits acquired, discount rates, estimated attrition rates and useful lives, future economic and market conditions, comparison of our market value to book value and determination of appropriate market comparables. Actual future results may differ from those estimates. Periodically we evaluate the estimated useful lives of intangible assets and whether events or changes in circumstances warrant a revision to the remaining periods of amortization. We also assess these intangible assets for impairment annually or more often if conditions indicate a possible impairment. If the asset is considered to be impaired, the amount of any impairment is measured as the difference between the carrying value and the fair value of the impaired asset. See Note 7. Goodwill and Other Intangible Assets to our consolidated financial statements for additional information related to our intangible assets.

Results of Operations

Summary

Our consolidated net income for the year ended December 31, 2019 was $43.6 million, an increase of $13.3 million, or 43.8%, compared to $30.4 million for 2018, with diluted earnings per share of $2.93 and $2.48 for the years ended December 31, 2019

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and 2018, respectively. The increase in net income was due primarily to an increase in net interest income of $38.4 million, which was primarily attributable to increased volume of interest-earning assets as a consequence of the ATBancorp merger. Interest income increased $54.3 million, or 42.4%, to $182.4 million. These increases were partially offset by an increase in interest expense of $16.0 million, or 69.8%, to $38.8 million for the year ended December 31, 2019, compared to $22.8 million for the year of 2018. Noninterest income increased $8.0 million, or 34.6% between 2018 and 2019, primarily due to general improvement in all areas of noninterest income as a result of the merger with ATBancorp, with the exception of investment securities gain, net, and insurance commissions, which declined as a result of our sale of the assets of MidWestOne Insurance Services, Inc. Also, the Company realized a $1.0 million decrease in income tax expense in 2019 compared to 2018 due primarily to the recognition of tax credits. These improvements were partially offset by a $34.3 million, or 41.2%, increase in noninterest expense driven by a $15.9 million increase in salaries and employee benefits.

Our consolidated net income for the year ended December 31, 2018 was $30.4 million, an increase of $11.7 million, or 62.3%, compared to $18.7 million for 2017, with diluted earnings per share of $2.48 and $1.55 for the comparative twelve month periods, respectively. The increase in net income was due primarily to the provision for loans losses decreasing $10.0 million in 2018 compared to 2017, due primarily to a large credit impairment in 2017 related to a loan made to one commercial borrower, which did not recur in 2018. Net interest income increased $1.5 million, or 1.4%, primarily due to an increase of $9.2 million, or 7.7%, in interest income, partially offset by an increase of $7.7 million, or 50.8%, in interest expense, to $22.8 million for the year ended December 31, 2018, compared to $15.1 million for the year of 2017. Noninterest income increased $0.5 million, or 2.0% between 2017 and 2018, primarily due to general improvement in all areas of noninterest income with the exception of service charges and fees on deposit accounts, which decreased $0.5 million for the year ended December 31, 2018, compared to the same period in 2017, and investment securities gains, net, which also decreased. Also, the Company realized a $2.8 million decrease in income tax expense in 2018 compared to 2017 due primarily to a decrease in the federal corporate statutory rate from 35% in 2017 to 21% in 2018. These improvements were partially offset by a $3.1 million, or 3.9%, increase in noninterest expense driven by a $1.9 million increase in salaries and employee benefits.

We ended 2019 with an allowance for loan losses of $29.1 million, which represented 63.2% coverage of our nonperforming loans at December 31, 2019 as compared to 114.6% and 113.1% at December 31, 2018 and 2017, respectively. Nonperforming loans totaled $46.0 million as of December 31, 2019 compared with $25.6 million and $24.8 million at December 31, 2018 and December 31, 2017, respectively. For the year ended December 31, 2019, the provision for loan losses decreased to $7.2 million from $7.3 million for 2018, which had decreased from $17.3 million for 2017.

Various operating and equity ratios for the Company are presented in the table below for the years indicated. The dividend payout ratio represents the percentage of our prior year’s net income that is paid to shareholders in the form of cash dividends. Average equity to average assets is a measure of capital adequacy that presents the percentage of average total shareholders’ equity compared to our average assets. The equity to assets ratio is expressed using the period-end amounts instead of average amounts. As of December 31, 2019, under regulatory standards, the Bank had capital levels in excess of the minimums necessary to be considered “well capitalized,” which is the highest regulatory designation.



	As of and For the Years Ended December 31,
	2019		2018		2017
Return on average assets	1.04	%	0.93	%	0.60	%
Return on average shareholders' total equity	9.65		8.78		5.58
Return on average tangible equity⁽¹⁾	13.98		11.87		8.07
Dividend payout ratio	27.65		31.45		43.23
Average equity to average assets	10.76		10.64		10.81
Equity to assets ratio (at period end)	10.94		10.85		10.59

(1) Non-GAAP measure. See pages 29 - 30 for a reconciliation to the most directly comparable GAAP measure.

Net Interest Income

Net interest income is the difference between interest income and fees earned on interest-earning assets, less 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 the tax-equivalent basis net interest income as a percent of average interest-earning assets.

Certain assets with tax favorable treatment are evaluated on a tax-equivalent basis. Tax-equivalent basis assumes a federal income tax rate of 21% for 2019 and 2018 and 35% for 2017. Tax favorable assets generally have lower contractual pre-tax yields than fully taxable assets. A tax-equivalent analysis is performed by adding the tax savings to the earnings on tax favorable assets. After

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factoring in the tax favorable effects of these assets, the yields may be more appropriately evaluated against alternative interest-earning assets. In addition to yield, various other risks are factored into the evaluation process.

The following table shows the consolidated average balance sheets, detailing the major categories of assets and liabilities, the interest income earned on interest-earning assets, the interest expense paid for interest-bearing liabilities, and the related interest rates/yields for the periods shown. Average information is provided on a daily average basis.



	Year ended December 31,
	2019						2018						2017
	Average Balance		Interest Income/ Expense		Average Yield/Cost		Average Balance ⁽³⁾		Interest Income/Expense⁽³⁾		Average Yield/Cost		Average Balance⁽³⁾		Interest Income/Expense⁽³⁾		Average Yield/Cost
	(dollars in thousands)
ASSETS
Loans, including fees ⁽¹⁾⁽²⁾	$	3,157,127	$	164,948	5.22	%	$	2,354,354	$	112,233	4.77	%	$	2,201,364	$	104,096	4.73	%
Taxable investment securities	465,484		13,132		2.82		428,757		11,027		2.57		423,678		10,179		2.40
Tax-exempt investment securities ⁽²⁾	204,375		7,177		3.51		207,605		7,342		3.54		217,650		9,536		4.38
Total securities held for investment ⁽²⁾	669,859		20,309		3.03		636,362		18,369		2.89		641,328		19,715		3.07
Other	21,289		450		2.11		3,372		62		1.84		11,138		142		1.27
Total interest earning assets ⁽²⁾	$	3,848,275	$	185,707	4.83	%	$	2,994,088	$	130,664	4.36	%	$	2,853,830	$	123,953	4.34	%
Other assets	352,765						255,630						243,666
Total assets	$	4,201,040					$	3,249,718					$	3,097,496
LIABILITIES AND SHAREHOLDERS’ EQUITY
Interest checking deposits	$	806,624	$	4,723	0.59	%	$	672,069	$	2,907	0.43	%	$	641,636	$	2,188	0.34	%
Money market deposits	766,812		7,549		0.98		543,359		3,020		0.56		510,714		1,460		0.29
Savings deposits	329,199		1,092		0.33		214,244		254		0.12		205,204		215		0.10
Time deposits	873,978		16,563		1.90		723,830		11,150		1.54		674,757		7,626		1.13
Total interest bearing deposits	2,776,613		29,927		1.08		2,153,502		17,331		0.80		2,032,311		11,489		0.57
Short-term borrowings	124,956		1,847		1.48		105,094		1,315		1.25		87,763		424		0.48
Long-term debt	224,149		7,017		3.13		169,540		4,195		2.47		150,679		3,232		2.14
Total borrowed funds	349,105		8,864		2.54		274,634		5,510		2.01		238,442		3,656		1.53
Total interest-bearing liabilities	$	3,125,718	$	38,791	1.24	%	$	2,428,136	$	22,841	0.94	%	$	2,270,753	$	15,145	0.67	%
Demand deposits	586,100						455,223						471,170
Other liabilities	37,204						20,625						20,607
Shareholders’ equity	452,018						345,734						334,966
Total liabilities and shareholders’ equity	$	4,201,040					$	3,249,718					$	3,097,496
Net interest spread ⁽²⁾					3.59	%					3.42	%					3.67	%
Interest income/earning assets ⁽²⁾	$	3,848,275	$	185,707	4.83	%	$	2,994,088	$	130,664	4.36	%	$	2,853,830	$	123,953	4.34	%
Interest expense/earning assets ⁽²⁾	$	3,848,275	$	38,791	1.01	%	$	2,994,088	$	22,841	0.76	%	$	2,853,830	$	15,145	0.53	%
Net interest income/margin ⁽²⁾			$	146,916	3.82	%			$	107,823	3.60	%			$	108,808	3.81	%
Non-GAAP to GAAP Reconciliation:
Tax Equivalent Adjustment:
Loans			$	1,785					$	1,040					$	1,730
Securities			1,481						1,515						3,297
Total tax equivalent adjustment			3,266						2,555						5,027
Net Interest Income			$	143,650					$	105,268					$	103,781



(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 loans fees was $(316) thousand, $(407) thousand, and $(543) thousand for the years ended December 31, 2019, 2018, and 2017, respectively. Loan purchase discount accretion was $14.0 million, $2.7 million, and $4.8 million for the years ended December 31, 2019, 2018, and 2017, respectively.
(2)	Tax equivalent.
(3)	Reclassified to conform to the current period’s presentation.

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The following table presents the dollar amount of changes in interest income and interest expense for major components of interest-earning assets and interest-bearing liabilities. It distinguishes between the difference related to changes in average outstanding balances and the increase or decrease due to the levels and volatility of interest rates. For each category of interest-earning assets and interest-bearing liabilities information is provided on changes attributable to (i) changes in volume (i.e. changes in volume multiplied by old rate) and (ii) changes in rate (i.e. changes in rate multiplied by old volume). For purposes of this table, changes attributable to both rate and volume that cannot be segregated have been allocated proportionately to the change due to volume and the change due to rate.



	Years Ended December 31, 2019, 2018, and 2017
	Year 2019 to 2018 Change due to									Year 2018 to 2017 Change due to
	Volume			Rate/Yield			Net			Volume			Rate/Yield			Net
	(dollars in thousands)
Increase (decrease) in interest income
Loans, including fees⁽¹⁾	$	41,135		$	11,580		$	52,715		$	7,287		$	850		$	8,137
Taxable investment securities	988			1,117			2,105			123			725			848
Tax-exempt investment securities ⁽¹⁾	(113		)	(52		)	(165		)	(424		)	(1,770		)	(2,194		)
Total securities held for investment ⁽¹⁾	875			1,065			1,940			(301		)	(1,045		)	(1,346		)
Other	378			10			388			(126		)	46			(80		)
Change in interest income ⁽¹⁾	42,388			12,655			55,043			6,860			(149		)	6,711
Increase (decrease) in interest expense
Interest checking deposits	654			1,162			1,816			107			612			719
Money market deposits	1,596			2,933			4,529			99			1,461			1,560
Savings deposits	197			641			838			7			32			39
Time deposits	2,565			2,848			5,413			589			2,935			3,524
Total interest bearing deposits	5,012			7,584			12,596			802			5,040			5,842
Short-term borrowings	271			261			532			98			793			891
Long-term debt	1,547			1,275			2,822			432			531			963
Total borrowed funds	1,818			1,536			3,354			530			1,324			1,854
Change in interest expense	6,830			9,120			15,950			1,332			6,364			7,696
Change in net interest income ⁽¹⁾	$	35,558		$	3,535		$	39,093		$	5,528		$	(6,513	)	$	(985	)
Percentage increase (decrease) in net interest income over prior period							36.3		%							(0.9		)%



	(1)	Tax equivalent.

Earning Assets, Sources of Funds, and Net Interest Margin

Average earning assets were $3.85 billion in 2019, an increase of $854.2 million, or 28.5%, from $2.99 billion in 2018. The growth in the average balance of earning assets between 2019 and 2018 was due primarily to the acquisition of ATBancorp.

Average earning assets were $2.99 billion in 2018, an increase of $140.3 million, or 4.9%, from $2.85 billion in 2017.The growth in the average balance of earning assets in 2018 compared to 2017 was due primarily to an increase in average loans outstanding of $153.0 million, or 6.9%.

Interest-bearing liabilities averaged $3.13 billion for the year ended December 31, 2019, an increase of $697.6 million, or 28.7%, from the average balance for the year ended December 31, 2018. Average deposits increased $754.0 million during 2019 compared to 2018, primarily due to the acquisition of ATBancorp and strong deposit generation in other MidWestOne markets. Average borrowed funds increased $74.5 million during 2019 compared to 2018, primarily due to a $19.9 million, or 18.9%, increase in the average balance of short-term borrowings, and a $54.6 million, or 32.2%, increase in the average balance of long-term debt for 2019 compared to 2018.

Interest-bearing liabilities averaged $2.43 billion for the year ended December 31, 2018, an increase of $157.4 million, or 6.9%, from the average balance for the year ended December 31, 2017. An increase in average deposits of $105.2 million during 2018 compared to 2017, mainly due to an increased focus on deposit gathering, accounted for the majority of the increase in average interest-bearing liabilities. Average borrowed funds increased $36.2 million during 2018 compared to 2017, primarily due to a $17.3 million, or 19.7%, increase in the average balance of federal funds purchased and repurchase agreements, and an $18.9 million, or 12.5%, increase in the average balance of long-term debt.

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Interest income, on a tax-equivalent basis, increased $55.0 million, or 42.1%, to $185.7 million in 2019 from $130.7 million in 2018. The increase in interest income was primarily attributable to the increased loan volume and an increase in loan purchase discount accretion to $14.0 million in 2019. Interest income related to securities held for investment increased $1.9 million, due to increased investment securities volume and a 14 basis point increase in the average yield earned. Our yield on average earning assets was 4.83% in 2019 compared to 4.36% in 2018.

Interest income, on a tax-equivalent basis, increased $6.7 million, or 5.4%, to $130.7 million in 2018 from $124.0 million in 2017. The higher interest income in 2018 compared to 2017 was due primarily to the increase in the volume of loans due to new originations, the increased interest rate on loans, and the inclusion of $2.7 million of merger-related loan discount accretion in 2018. This increase was partially offset by a $1.3 million decrease in interest income on investment securities, due primarily to a 18 basis point decrease in the average rate earned. Our yield on average earning assets was 4.36% in 2018 compared to 4.34% in 2017.

Interest expense increased during 2019 by $16.0 million, or 69.8%, to $38.8 million from $22.8 million in 2018. The increase in interest expense during 2019 compared to 2018 was due to increased volume of interest bearing liabilities primarily related to the ATBancorp merger and a 28 basis point increase in the cost of deposits, mainly due to increased market interest rates. The average rate paid on interest-bearing liabilities was 1.24% in 2019 compared to 0.94% in 2018.

Interest expense in 2018 increased by $7.7 million, or 50.8%, from 2017. The increase in interest expense during 2018 compared to 2017 was primarily driven by a 23 basis point increase in the cost of deposits. The average rate paid on interest-bearing liabilities was 0.94% in 2018 compared to 0.67% in 2017.

Net interest income, on a tax-equivalent basis, increased 36.3% in 2019 to $146.9 million from $107.8 million in 2018. Tax-equivalent net interest income in 2018 decreased by $1.0 million, or 0.9%, from 2017. The net interest margin, which is our net interest income expressed as a percentage of average interest-earning assets stated on a tax-equivalent basis, was higher at 3.82% for 2019 compared to 3.60% in 2018 and 3.81% in 2017. The increase in net interest margin was driven primarily by an increase in loan purchase discount accretion to $14.0 million in 2019 from $2.7 million in 2018. The net interest spread, also on a tax-equivalent basis, was 3.59% in 2019 compared to 3.42% in 2018 and 3.67% in 2017.

Provision for Loan Losses

Our provision for loan losses was $7.2 million during 2019 compared to $7.3 million in 2018 and $17.3 million in 2017. Net charge-offs totaled $7.4 million in 2019, compared to net charge-offs of $6.1 million in 2018. The decreased provision from 2018 to 2019 was primarily the result of a decrease in specific reserves on loans individually evaluated for impairment, partially offset by an increase in reserves on loans collectively evaluated for impairment. The decreased provision from 2017 to 2018 reflects a $7.3 million credit impairment in 2017 related to a loan made to one of the Company’s commercial borrowers. Loan growth in future periods, a decline in our current level of recoveries, or an increase in charge-offs could result in an increase in provision expense. Additionally, with the adoption of CECL effective January 1, 2020, provision expense may become more volatile due to changes in CECL model assumptions of credit quality, macroeconomic factors and conditions, and loan composition, which drive the allowance for credit losses balance. The provision for loan losses is established based on a number of factors as described in more detail in the “Critical Accounting Policies” section.

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Noninterest Income

The following table sets forth the various categories of noninterest income for the years ended December 31, 2019, 2018, and 2017.



	For the Year Ended December 31,
	2019		2018		$ Change			% Change		2018		2017		$ Change			% Change
	(dollars in thousands)
Investment services and trust activities	$	8,040	$	4,953	$	3,087		62.3	%	$	4,953	$	4,919	$	34		0.7	%
Service charges and fees	7,452		6,157		1,295			21.0		6,157		6,533		(376		)	(5.8	)
Card revenue	5,594		4,223		1,371			32.5		4,223		3,906		317			8.1
Loan revenue	3,789		3,622		167			4.6		3,622		3,421		201			5.9
Bank-owned life insurance	1,877		1,610		267			16.6		1,610		1,388		222			16.0
Insurance commissions	734		1,284		(550		)	(42.8	)	1,284		1,270		14			1.1
Investment securities gains, net	90		193		(103		)	(53.4	)	193		241		(48		)	(19.9	)
Other	3,670		1,173		2,497			212.9		1,173		1,073		100			9.3
Total noninterest income	$	31,246	$	23,215	$	8,031		34.6	%	$	23,215	$	22,751	$	464		2.0	%

Total noninterest income for the year ended December 31, 2019 was $31.2 million, an increase of $8.0 million, or 34.6%, from $23.2 million during the same period of 2018. This increase was primarily due to general improvement in all areas of noninterest income as a result of the ATBancorp merger with the exception of insurance commissions, which decreased due to the sale of substantially all of the assets used by MidWestOne Insurance Services, Inc. in June 2019, and investment securities gains, net, which also decreased.

Total noninterest income for the year ended December 31, 2018 was $23.2 million, an increase of $0.5 million, or 2.0%, from $22.8 million during the same period of 2017. This increase was primarily due to general improvement in all areas of noninterest income with the exception of service charges and fees on deposit accounts, which decreased due to generally lower account and non-sufficient funds fees, as well as investment securities gains, net, which also decreased.

Noninterest Expense

The following table sets forth the various categories of noninterest expense for the years ended December 31, 2019, 2018, and 2017.



	For the Year Ended December 31,
	2019		2018		$ Change			% Change		2018		2017		$ Change			% Change
	(dollars in thousands)
Compensation and employee benefits	$	65,660	$	49,758	$	15,902		32.0	%	$	49,758	$	47,864	$	1,894		4.0	%
Occupancy expense of premises, net	8,647		7,597		1,050			13.8		7,597		7,382		215			2.9
Equipment	7,717		5,565		2,152			38.7		5,565		5,060		505			10.0
Legal and professional	8,049		4,641		3,408			73.4		4,641		3,962		679			17.1
Data processing	4,579		2,951		1,628			55.2		2,951		2,674		277			10.4
Marketing	3,789		2,660		1,129			42.4		2,660		2,449		211			8.6
Amortization of intangibles	5,906		2,296		3,610			157.2		2,296		3,125		(829		)	(26.5	)
FDIC insurance	690		1,533		(843		)	(55.0	)	1,533		1,265		268			21.2
Communications	1,701		1,353		348			25.7		1,353		1,333		20			1.5
Foreclosed assets, net	580		21		559			2,661.9		21		184		(163		)	(88.6	)
Other	10,217		4,840		5,377			111.1		4,840		4,825		15			0.3
Total noninterest expense	$	117,535	$	83,215	$	34,320		41.2	%	$	83,215	$	80,123	$	3,092		3.9	%

Noninterest expense increased to $117.5 million for the year ended December 31, 2019, compared with $83.2 million for the year ended December 31, 2018, an increase of $34.3 million, or 41.2%, with all expense line items except FDIC insurance showing increases from 2018 to 2019. The increase in compensation and employee benefits of $15.9 million was primarily due to increased FTE employees due to the acquisition of ATBancorp and merger-related expenses of $5.4 million. The increase in other noninterest expense of $5.4 million was primarily related to $4.0 million of amortization of tax credit investments in 2019. Net occupancy expense increased primarily due to additional locations related to the ATBancorp acquisition, as well as merger-related expenses of $0.5 million. Legal and professional fees increased in 2019 as well, reflecting $2.8 million of expenses related to the merger

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with ATBancorp. Data processing expense rose $1.6 million primarily due to increased core data processing expenses. Amortization of intangibles increased $3.6 million due primarily to increased intangible asset balances related to the ATBancorp acquisition. Equipment expense increased $2.2 million primarily due to an increase in software-related expenses. FDIC insurance expense decreased $0.8 million primarily due to one-time FDIC premium credits received in 2019.

Noninterest expense increased to $83.2 million for the year ended December 31, 2018, compared with $80.1 million for the year ended December 31, 2017, an increase of $3.1 million, or 3.9%, with all expense line items except amortization of intangible assets and foreclosed assets, net, showing increases between 2017 and 2018. The increase was primarily due to salaries and employee benefits, which increased mainly due to normal salary and benefit cost adjustments. Equipment expense increased primarily due to increased software licensing expenses. Professional fees increased in 2018 as well, reflecting $0.7 million of expenses related to the merger with ATBancorp. Data processing expense rose primarily due to increased core data processing expenses.

Full-time equivalent employee levels were 771, 597, and 610 at December 31, 2019, 2018 and 2017, respectively.

Income Tax Expense

Our effective tax rate, or income taxes divided by income before taxes, was 13.1% for 2019 compared with 20.1% for 2018. Income tax expense decreased by $1.0 million to $6.6 million in 2019 compared to tax expense of $7.6 million for 2018. The lower effective tax rate in 2019 was driven by recognition of tax credits.

Our effective tax rate was 20.1% for 2018 compared with 35.7% for 2017. Income tax expense decreased by $2.8 million to $7.6 million in 2018 compared to tax expense of $10.4 million for 2017. The lower effective tax rate in 2018 was due primarily to the $3.2 million impact of the Tax Act in 2017.

Financial Condition

Summary

Our total assets increased $1.36 billion, or 41.4%, to $4.65 billion as of December 31, 2019 from $3.29 billion as of December 31, 2018. This growth resulted primarily from increases in total loans, excluding loans held for sale, of $1.06 billion, or 44.3%, which was principally driven by the ATBancorp acquisition. Securities held for investment increased $176.1 million, or 28.9%, driven by the ATBancorp acquisition, as well as strong deposit generation. Our loan-to-deposit ratio rose to 93.0% at year-end 2019 compared to 92.0% at year-end 2018, with our target range being between 80% and 90%.

Total liabilities increased by $1.21 billion from December 31, 2018 to December 31, 2019. Our deposits increased $1.12 billion, or 42.7%, to $3.73 billion as of December 31, 2019 from $2.61 billion at December 31, 2018. Long-term debt was $231.7 million at December 31, 2019, an increase of $62.9 million, or 37.3%, from December 31, 2018. Short-term borrowings rose $7.9 million between December 31, 2018 and December 31, 2019.

Shareholders’ equity increased $151.9 million, or 42.5%, from December 31, 2018 to December 31, 2019. The increase was primarily driven by the issuance of common stock related to the ATBancorp merger, as well as net income of $43.6 million in 2019. These increases were primarily offset by dividends paid of $11.5 million.

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Following is a table that represents the major categories of the Company’s balance sheet:



	December 31,		December 31,
	2019		2018		$ Change		% Change
	(dollars in thousands)
Assets
Cash and cash equivalents	$	73,484	45,480		$	28,004	61.6	%
Securities held for investment	785,977		609,923		176,054		28.9
Total loans, net	3,427,587		2,370,138		1,057,449		44.6
Other assets	366,525		265,939		100,586		37.8
Total assets	$	4,653,573	$	3,291,480	$	1,362,093	41.4	%
Liabilities and Shareholders’ Equity
Total deposits	$	3,728,655	$	2,612,929	$	1,115,726	42.7	%
Total borrowings	371,009		300,148		70,861		23.6
Other liabilities	44,927		21,336		23,591		110.6
Total shareholders’ equity	508,982		357,067		151,915		42.5
Total liabilities and shareholders’ equity	$	4,653,573	$	3,291,480	$	1,362,093	41.4	%

Investment Securities

Our investment securities portfolio is managed to provide both a source of liquidity and earnings. The size of the portfolio varies along with fluctuations in levels of deposits and loans. We consider many factors in determining the composition of our investment portfolio including tax-equivalent yield, credit quality, duration, expected cash flows and prepayment risk, as well as the liquidity position and the interest rate risk profile of the Company.

Debt securities available for sale are carried at fair value. As of December 31, 2019, the fair value of our debt securities available for sale was $786.0 million and the amortized cost was $780.1 million. There were $8.4 million of gross unrealized gains and $2.4 million of gross unrealized losses in our debt securities available for sale portfolio for a net unrealized gain of $5.9 million. The after-tax effect of this unrealized gain has been included in the accumulated other comprehensive income component of shareholders’ equity. The ratio of the fair value as a percentage of amortized cost increased at December 31, 2019 compared to December 31, 2018, due to a decrease in interest rates during 2019.

U.S. government agency securities as a percentage of total debt securities decreased to 0.1% at December 31, 2019, from 0.9% at December 31, 2018, and obligations of state and political subdivisions (primarily tax-exempt obligations) as a percentage of total securities also decreased to 32.7% at December 31, 2019, from 41.5% at December 31, 2018. Investments in mortgage-backed securities and collateralized mortgage obligations increased to 42.8% of total securities at December 31, 2019, as compared to 41.0% of total securities at December 31, 2018, and corporate debt securities increased to 24.4% of total securities at December 31, 2019, as compared to 16.6% at December 31, 2018.

As of December 31, 2019 and 2018, the Company’s mortgage-backed 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: FHLMC, the FNMA, and the GNMA. The receipt of principal, at par, and interest on these 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 significant credit-related losses.

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



	December 31,
	2019				2018				2017
Debt securities available for sale	(dollars in thousands)
U.S. Government agencies and corporations	$	441	0.1	%	$	5,495	1.3	%	$	15,626	3.5	%
States and political subdivisions	257,205		32.7		121,901		29.4		141,839		31.9
Mortgage-backed securities	43,530		5.5		50,653		12.2		48,497		10.9
Collateralized mortgage obligations	292,946		37.3		169,928		41.1		168,196		37.7
Corporate debt securities	191,855		24.4		66,124		16.0		71,166		16.0
Fair value of debt securities available for sale	$	785,977	100.0	%	$	414,101	100.0	%	$	445,324	100.0	%

The composition of held to maturity securities was as follows:



	December 31,
	2019			2018				2017
Debt securities held to maturity	(dollars in thousands)
U.S. Government agencies and corporations	$	—	N/A	$	—	—	%	$	10,049	5.1	%
States and political subdivisions	—		N/A	131,177		67.0		126,413		64.6
Mortgage-backed securities	—		N/A	11,016		5.6		1,906		1.0
Collateralized mortgage obligations	—		N/A	18,527		9.5		22,115		11.3
Corporate debt securities	—		N/A	35,102		17.9		35,136		18.0
Amortized cost	$	—	N/A	$	195,822	100.0	%	$	195,619	100.0	%

See Note 3. Debt Securities, and Note 20. Estimated Fair Value of Financial Instruments and Fair Value Measurements to our consolidated financial statements for additional information related to the investment portfolio.

The maturities, carrying values and weighted average yields of debt securities as of December 31, 2019 were as follows:



	Maturity
					After One but				After Five but
	Within One Year				Within Five Years				Within Ten Years				After Ten Years
	Amount		Yield		Amount		Yield		Amount		Yield		Amount		Yield
	(dollars in thousands)
Debt securities available for sale:
U.S. Government agencies and corporations	$	—	—	%	$	441	2.05	%	$	—	—	%	$	—	—	%
States and political subdivisions ⁽¹⁾	6,069		3.85		64,803		3.51		132,394		3.39		53,939		3.35
Mortgage-backed securities ⁽²⁾	12		4.69		9,466		2.24		8,273		2.63		25,779		2.83
Collateralized mortgage obligations ⁽²⁾	—		—		7,107		3.78		5,422		1.53		280,417		2.46
Corporate debt securities	16,575		2.00		107,928		2.80		66,532		4.62		820		4.20
Total debt securities available for sale	$	22,656	2.50	%	$	189,745	3.05	%	$	212,621	3.70	%	$	360,955	2.62	%
⁽¹⁾ Yield is on a tax-equivalent basis, assuming a federal income tax rate of 21%.
⁽²⁾ These securities are presented based upon contractual maturities.

As of December 31, 2019, no non-agency issuer’s securities exceeded 10% of the Company’s total shareholders’ equity.

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Loans

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



	As of December 31,
	2019				2018				2017				2016				2015
			% of				% of				% of				% of				% of
	Amount		Total		Amount		Total		Amount		Total		Amount		Total		Amount		Total
	(dollars in thousands)
Agricultural	$	140,446	4.1	%	$	96,956	4.1	%	$	105,512	4.6	%	$	113,343	5.2	%	$	121,714	5.7	%
Commercial and industrial	835,236		24.2		533,188		22.2		503,624		22.0		460,970		21.3		470,272		21.9
Commercial real estate:
Construction & development	298,077		8.6		217,617		9.1		165,276		7.3		126,685		5.9		120,753		5.6
Farmland	181,885		5.3		88,807		3.7		87,868		3.8		94,979		4.4		89,084		4.1
Multifamily	227,407		6.6		134,741		5.6		134,506		5.9		136,003		6.3		121,763		5.7
Commercial real estate-other	1,107,490		32.1		826,163		34.4		784,321		34.3		706,576		32.6		660,341		30.7
Total commercial real estate	1,814,859		52.6		1,267,328		52.8		1,171,971		51.3		1,064,243		49.2		991,941		46.1
Residential real estate:
One- to four-family first liens	407,418		11.8		341,830		14.3		352,226		15.4		372,233		17.2		428,233		19.9
One- to four-family junior liens	170,381		4.9		120,049		5.0		117,204		5.1		117,763		5.4		102,273		4.7
Total residential real estate	577,799		16.7		461,879		19.3		469,430		20.5		489,996		22.6		530,506		24.6
Consumer	82,926		2.4		39,428		1.6		36,158		1.6		36,591		1.7		37,509		1.7
Total loans	$	3,451,266	100.0	%	$	2,398,779	100.0	%	$	2,286,695	100.0	%	$	2,165,143	100.0	%	$	2,151,942	100.0	%
Total assets	$	4,653,573			$	3,291,480			$	3,212,271			$	3,079,575			$	2,979,975
Loans to total assets			74.2	%			72.9	%			71.2	%			70.3	%			72.2	%

Our loan portfolio, before allowance for loan losses, increased 43.9% to $3.45 billion as of December 31, 2019 from $2.40 billion at December 31, 2018. The increases in the loan portfolio were primarily driven by the ATBancorp merger, which resulted in the recognition of $1.14 billion in loan balances as of the acquisition date.

The largest increase occurred in commercial real estate loans, which increased $547.5 million, or 43.2%, to $1.81 billion as of December 31, 2019, from $1.27 billion as of December 31, 2018. Within commercial real estate, other commercial real estate increased $281.3 million, or 34.1%, construction and development increased $80.5 million, or 37.0%, farmland loans increased $93.1 million, or 104.8%, and multifamily increased $92.7 million, or 68.8%, between December 31, 2019 and December 31, 2018. Commercial and industrial loans increased $302.0 million, or 56.6%, to $835.2 million between December 31, 2019 and December 31, 2018. Additionally, agricultural loans increased $43.5 million, or 44.9%, between December 31, 2019 and December 31, 2018, to $140.4 million at December 31, 2019, and residential real estate loans increased $115.9 million, or 25.1%, between December 31, 2019 and December 31, 2018. Consumer loans also increased $43.5 million, or 110.3%, between the two dates. Commitments under standby letters of credit, unused lines of credit and other conditionally approved credit lines totaled approximately $900.8 million and $538.6 million as of December 31, 2019 and 2018, respectively.

Our loan to deposit ratio increased to 93.0% at year end 2019 from 92.0% at the end of 2018, with our target range for this ratio being between 80% and 90%. The increase in this ratio is reflective of the ATBancorp merger, which included the acquisition of loan balances of $1.14 billion and deposit balances of $1.09 billion as of the acquisition date, or a loan to deposit ratio of 105% as of the acquisition date. We expect to reduce this ratio to be within the target range through a greater focus on deposit gathering within our markets.

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The following table sets forth remaining maturities and rate types of loans at December 31, 2019:



									Maturities Within				Maturities After
			Due In						One Year				One Year
	Due Within		One to		Due After				Fixed		Variable		Fixed		Variable
	One Year		Five Years		Five Years		Total		Rates		Rates		Rates		Rates
	(in thousands)
Agricultural	$	91,376	$	39,908	$	9,162	$	140,446	$	25,231	$	66,145	$	36,986	$	12,084
Commercial and industrial	226,663		310,367		298,206		835,236		62,831		163,832		324,257		284,316
Commercial real estate:
Construction & development	87,714		152,790		57,573		298,077		49,526		38,188		108,280		102,083
Farmland	29,124		97,396		55,365		181,885		26,267		2,857		111,840		40,921
Multifamily	22,371		138,549		66,487		227,407		11,929		10,442		133,771		71,265
Commercial real estate-other	87,936		620,264		399,290		1,107,490		78,080		9,856		599,931		419,623
Total commercial real estate	227,145		1,008,999		578,715		1,814,859		165,802		61,343		953,822		633,892
Residential real estate:
One- to four- family first liens	18,905		99,103		289,410		407,418		12,306		6,599		160,014		228,499
One- to four- family junior liens	13,935		36,404		120,042		170,381		3,116		10,819		57,759		98,687
Total residential real estate	32,840		135,507		409,452		577,799		15,422		17,418		217,773		327,186
Consumer	11,500		62,180		9,246		82,926		5,416		6,084		69,731		1,695
Total loans	$	589,524	$	1,556,961	$	1,304,781	$	3,451,266	$	274,702	$	314,822	$	1,602,569	$	1,259,173

Of the $1.57 billion of variable rate loans, approximately $825.3 million, or 52.4%, are subject to interest rate floors, with a weighted average floor rate of 4.45%.

Nonperforming Assets

The following table sets forth information concerning nonperforming assets at December 31 for each of the years indicated:



	December 31,
	2019			2018			2017			2016			2015
	(dollars in thousands)
90 days or more past due and still accruing interest	$	136		$	365		$	207		$	485		$	284
Performing troubled debt restructured	4,372			5,284			9,815			7,377			7,547
Nonaccrual	41,481			19,924			14,784			20,668			4,012
Total nonperforming loans	45,989			25,573			24,806			28,530			11,843
Foreclosed assets, net	3,706			535			2,010			2,097			8,834
Total nonperforming assets	$	49,695		$	26,108		$	26,816		$	30,627		$	20,677
Nonperforming loans to loans held for investment, net of unearned income	1.33		%	1.07		%	1.08		%	1.32		%	0.55		%
Nonperforming assets to loans held for investment, net of unearned income	1.44		%	1.09		%	1.17		%	1.41		%	1.43		%

Management’s policy is to place loans on nonaccrual status when interest or principal is 90 days or more past due. Such loans may continue on accrual status only if they are both well-secured with marketable collateral and in the process of collection.

Total nonperforming assets were $49.7 million at December 31, 2019, compared to $26.1 million at December 31, 2018, a $23.6 million, or 90.3%, increase. Nonperforming loans increased $20.4 million during 2019, and foreclosed assets, net, increased $3.2 million during 2019. The increase in foreclosed assets, net, from $0.5 million at December 31, 2018 to $3.7 million at December 31, 2019, was primarily attributable to the ATBancorp merger, which resulted in the acquisition of $3.1 million in foreclosed assets at the date of acquisition. Foreclosed assets, net, are carried at the lower of cost or fair value less estimated costs of disposal. Additional discounts could be required to market and sell the properties, resulting in a write down through expense.

Nonperforming loans increased from $25.6 million, or 1.07% of total loans, at December 31, 2018, to $46.0 million, or 1.33% of total loans, at December 31, 2019. At December 31, 2019, nonperforming loans consisted of $41.5 million in nonaccrual loans, $4.4 million in performing TDRs and $0.1 million in loans past due 90 days or more and still accruing interest. This compares to nonaccrual loans of $19.9 million, TDRs of $5.3 million, and loans past due 90 days or more and still accruing interest of $0.4 million at December 31, 2018. The $21.6 million increase in nonaccrual loans was primarily driven by loans placed on nonaccrual

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status during the year of $30.0 million, as well as nonaccrual loans of $12.1 million obtained through the ATBancorp acquisition. These increases were partially offset by repayments of $10.0 million, loans returned to accrual status of $1.8 million, charge-offs of $7.0 million and transfers to foreclosed assets of $1.8 million. Loans 90 days or more past due and still accruing interest decreased $0.2 million between December 31, 2018, and December 31, 2019.

As of December 31, 2019, the allowance for loan losses was $29.1 million compared with $29.3 million at December 31, 2018. The Company had an allowance of 0.84% of total gross loans at December 31, 2019, compared to 1.22% and 1.22% at December 31, 2018 and 2017, respectively. Management evaluates the allowance needed on acquired loans factoring in the remaining discount, which was $18.3 million, $5.8 million, and $8.5 million at December 31, 2019, 2018, and 2017, respectively. The allowance for loan losses represented 63.2% of nonperforming loans at December 31, 2019, compared with 114.6% of nonperforming loans at December 31, 2018.

The following table sets forth information concerning nonperforming loans by class of receivable at December 31, 2019 and December 31, 2018:



	90 Days or More Past Due and Still Accruing Interest		Troubled Debt Restructure		Nonaccrual		Total
	(in thousands)
December 31, 2019
Agricultural	$	—	$	2,361	$	2,893	$	5,254
Commercial and industrial	—		—		13,276		13,276
Commercial real estate:
Construction & development	—		—		1,494		1,494
Farmland	—		—		10,402		10,402
Multifamily	—		—		—		—
Commercial real estate-other	—		1,017		10,141		11,158
Total commercial real estate	—		1,017		22,037		23,054
Residential real estate:
One- to four- family first liens	99		856		2,556		3,511
One- to four- family junior liens	25		138		513		676
Total residential real estate	124		994		3,069		4,187
Consumer	12		—		206		218
Total	$	136	$	4,372	$	41,481	$	45,989
December 31, 2018
Agricultural	$	—	$	2,502	$	1,622	$	4,124
Commercial and industrial	—		492		9,218		9,710
Commercial real estate:
Construction & development	—		—		99		99
Farmland	—		—		2,751		2,751
Multifamily	—		—		—		—
Commercial real estate-other	—		1,227		4,558		5,785
Total commercial real estate	—		1,227		7,408		8,635
Residential real estate:
One- to four- family first liens	341		1,063		1,049		2,453
One- to four- family junior liens	24		—		465		489
Total residential real estate	365		1,063		1,514		2,942
Consumer	—		—		162		162
Total	$	365	$	5,284	$	19,924	$	25,573

The largest categories of nonperforming loans were commercial and industrial loans, with a balance of $13.3 million, and commercial real estate loans, with a balance of $23.1 million at December 31, 2019. The remaining nonperforming loans consisted of $5.3 million in agricultural, $4.2 million in residential real estate, and $0.2 million of consumer loans.

A loan is considered to be impaired when, based on current information and events, it is probable that we will not be able to collect all amounts due. The accrual of interest income on impaired loans is discontinued when there is reasonable doubt as to the borrower’s

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ability to meet contractual payments of interest or principal. Interest income on these loans is recognized to the extent interest payments are received and the principal is considered fully collectible.

The gross interest income that would have been recorded in the years ended December 31, 2019, 2018 and 2017 if the nonaccrual and TDRs had been current in accordance with their original terms was $5.8 million, $2.4 million, and $2.5 million, respectively. The amount of interest collected on those loans that was included in interest income was $2.4 million, $0.9 million, and $1.4 million for the years ended December 31, 2019, 2018 and 2017, respectively.

Loan Review and Classification Process for Agricultural Loans, Commercial and Industrial Loans, 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 foreclosed assets, net.

The review process also provides for the upgrade of loans that show improvement since the last review. All requests for an upgrade of a credit are approved by the 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. See Note 1. Nature of Business and Significant Accounting Policies for additional information on factors considered related to concessions.

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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 year ended December 31, 2019, the Company restructured 21 loans by granting concessions to borrowers experiencing financial difficulties.

Allowance for Loan Losses

The following table shows activity affecting the allowance for loan losses:



	Year ended December 31,
	2019			2018			2017			2016			2015
	(dollars in thousands)
Loans held for investment, net of unearned income	$	3,451,266		$	2,398,779		$	2,286,695		$	2,165,143		$	2,151,942
Average loans held for investment, net of unearned income	$	3,157,127		$	2,354,354		$	2,201,364		$	2,161,376		$	1,962,846
Allowance for loan losses at beginning of period	$	29,307		$	28,059		$	21,850		$	19,427		$	16,363
Charge-offs:
Agricultural	$	1,130		$	656		$	1,202		$	1,204		$	245
Commercial and industrial	4,774			2,752			2,338			3,066			736
Commercial real estate:
Construction & development	—			—			257			734			193
Farmland	650			—			—			—			—
Multifamily	—			—			—			—			—
Commercial real estate-other	887			2,901			7,674			197			660
Total commercial real estate	1,537			2,901			7,931			931			853
Residential real estate:
One- to four- family first liens	61			83			250			462			653
One- to four- family junior liens	168			30			55			320			87
Total residential real estate	229			113			305			782			740
Consumer	720			618			257			98			48
Total charge-offs	$	8,390		$	7,040		$	12,033		$	6,081		$	2,622
Recoveries:
Agricultural	$	32		$	67		$	187		$	33		$	1
Commercial and industrial	195			291			232			124			383
Commercial real estate:
Construction & development	6			60			167			54			—
Farmland	202			—			24			1			4
Multifamily	—			—			—			—			—
Commercial real estate-other	103			230			100			137			3
Total commercial real estate	311			290			291			192			7
Residential real estate:
One- to four- family first liens	47			139			24			82			131
One- to four- family junior liens	58			149			156			75			12
Total residential real estate	105			288			180			157			143
Consumer	361			52			18			15			20
Total recoveries	$	1,004		$	988		$	908		$	521		$	554
Net loans charged off	$	7,386		$	6,052		$	11,125		$	5,560		$	2,068
Provision for loan losses	7,158			7,300			17,334			7,983			5,132
Allowance for loan losses at end of period	$	29,079		$	29,307		$	28,059		$	21,850		$	19,427

Net loans charged off to average loans	0.23		%	0.26		%	0.51		%	0.26		%	0.11		%
Allowance for loan losses to total loans at end of period	0.84		%	1.22		%	1.23		%	1.01		%	0.90		%

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The following table sets forth the allowance for loan losses by loan portfolio segments compared to the percentage of loans to total loans by loan portfolio segment as of December 31 for each of the years indicated:



	December 31,
	2019				2018				2017				2016				2015
	Allowance Amount		Percent of Loans to Total Loans		Allowance Amount		Percent of Loans to Total Loans		Allowance Amount		Percent of Loans to Total Loans		Allowance Amount		Percent of Loans to Total Loans		Allowance Amount		Percent of Loans to Total Loans
	(dollars in thousands)
Agricultural	$	3,748	4.1	%	$	3,637	4.1	%	$	2,790	4.6	%	$	2,003	5.2	%	$	1,396	5.7	%
Commercial and industrial	8,394		24.2		7,478		22.2		8,518		22.0		6,274		21.3		5,369		21.9
Commercial real estate	13,804		52.6		15,635		52.8		13,637		51.3		9,860		49.2		8,384		46.1
Residential real estate	2,685		16.7		2,349		19.3		2,870		20.5		3,458		22.6		3,876		24.6
Consumer	448		2.4		208		1.6		244		1.6		255		1.7		402		1.7
Total	$	29,079	100.0	%	$	29,307	100.0	%	$	28,059	100.0	%	$	21,850	100.0	%	$	19,427	100.0	%

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.

At December 31, 2018, the Bank adjusted its measure of certain qualitative factors for watch and substandard risk-rated loans. Specifically, prior to year-end 2018, a certain qualitative adjustment applied to each watch and substandard risk-rated segment was measured as the greater of: 1) the actual historical loss rate for that segment as measured over a 20-quarter loss accumulation period or 2) the average loss rate observed across all such risk-rated loan segments over that same period. At year-end 2018, to better align the Bank’s loan credit loss estimate with its actual loss experience, management changed the application of that certain watch and substandard qualitative factor to be the actual historical loss rate for each segment. That adjustment reduced the Bank’s estimate of loan credit losses by $1.2 million at December 31, 2018.

In June 2016, the FASB issued ASU No. 2016-13, Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments. The main objective of this amendment is to provide financial statement users with more decision-useful information about the expected credit losses on financial instruments and other commitments to extend credit held by a reporting entity at each reporting date. The amendment requires the measurement of all expected credit losses for financial assets held at the reporting date based on historical experience, current conditions, and reasonable and supportable forecasts. Financial institutions and other organizations will now use forward-looking information to enhance their credit loss estimates. The amendment requires enhanced disclosures to help investors and other financial statement users better understand significant estimates and judgments used in estimating credit losses, as well as the credit quality and underwriting standards of an organization’s portfolio. In addition, the ASU amends the accounting for credit losses on available-for-sale debt securities and purchased financial assets with credit deterioration. The current expected credit loss measurement will be used to estimate the allowance for credit losses (“ACL”) over the life of the financial assets. The amendments in this update become effective for annual periods and interim periods within those annual periods beginning after December 15, 2019.

The Company formed a cross functional committee to oversee the adoption of the ASU. The committee identified eleven distinct loan segments for which models have been developed. Management monitors and assesses credit risk based on these loan segments.

The CECL modeling measurements for estimating the current expected lifetime credit losses for loans includes the following major items:


•	Initial forecast - using a period of one year using forward-looking economic scenarios of expected losses.


•	Historical loss forecast - for a period incorporating the remaining contractual life, adjusted for prepayments, and the changes in various economic variables during representative historical and recessionary periods.


•	Reversion period - using one and a half years, which links the initial loss forecast to the historical loss forecast based on economic conditions at the measurement date.


•	Discounted cash flows (DCF) calculation - using the items above to estimate the lifetime credit losses for each portfolio and losses for loans modified as a TDR.

The Company will adopt CECL effective January 1, 2020. During the first quarter of 2020, the Company will finalize all internal processes related to the adoption of CECL. At that time, the cross functional committee will be disbanded, along with the current Allowance for Loan Losses Committee, and will be replaced with an Allowance for Credit Losses Committee that will provide oversight for the entire CECL model and allowance process.

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Upon finalization of internal processes, the Company will recognize a one-time cumulative effect adjustment increasing the allowance for credit losses. We expect an initial increase to the allowance for credit losses, including the allowance for unfunded commitments, in the range of 20-30% above existing levels. The initial increase to the allowance for credit losses is expected to be substantially attributable to the acquired loan portfolio and the allowance for unfunded commitments. The ultimate impact to the Company’s financial condition and results of operations of the ASU, at both adoption and each subsequent reporting period, is highly dependent on credit quality, macroeconomic forecasts and conditions, the composition of our loans and available-for-sale securities portfolio, along with other management judgments.

The Company does not expect a material allowance for credit losses to be recorded on its available-for-sale debt securities under the newly codified available-for-sale debt security impairment model, as a large portion of these securities are government agency-backed securities for which the risk of loss is minimal. Utilizing a risk-based approach that incorporates credit ratings, observed credit spreads and in certain cases issuer-specific financial analysis, the Bank performs a quarterly assessment of non-agency backed securities. Our assessment based on this analysis is that the risk of loss on non-agency backed securities is also minimal.

In December 2018, the OCC, the Federal Reserve, and the FDIC approved a final rule to address changes to credit loss accounting under GAAP, including banking organizations’ implementation of CECL. The final rule provides banking organizations the option to phase in over a three-year period the day-one adverse effects on regulatory capital that may result from the adoption of the new accounting standard. The Company is planning on adopting the capital transition relief over the permissible three-year period.

See Note 1 to the consolidated financial statements for additional information on the Company’s adoption of CECL.

Premises and Equipment

As of December 31, 2019, premises and equipment totaled $90.7 million, an increase of $15.0 million, or 19.7%, from $75.8 million at December 31, 2018. This increase was primarily due to the ATBancorp acquisition.

Goodwill and Other Intangible Assets

Goodwill increased to $91.9 million as of December 31, 2019 compared to $64.7 million at December 31, 2018. Other intangible assets increased $22.3 million, or 226.3%, to $32.2 million at December 31, 2019 compared to December 31, 2018. Increases in goodwill and other intangible assets were due to the ATBancorp acquisition.

Deposits

Deposits increased $1.12 billion, or 42.7%, during the year ended December 31, 2019, due to the ATBancorp acquisition, which resulted in an increase of $1.09 billion in deposits on the date of the acquisition, and strong deposit generation. The mix of deposits saw increases between December 31, 2018 and December 31, 2019 of $223.1 million, or 50.8% in non-interest bearing deposits, $278.9 million, or 40.8%, in interest-bearing checking accounts, $207.2 million, or 37.3%, in money market deposits, $229.8 million, or 31.8%, in certificates of deposit, and $176.7 million, or 84.0%, in savings deposits.

The average balance of non-interest-bearing accounts increased $130.9 million, or 28.8%, from 2018 to 2019. The average balance of interest-bearing demand deposits increased $358.0 million, or 29.5%, and the average balance of savings accounts increased by $115.0 million, or 53.7%, between 2018 and 2019. The aggregate average balance of time deposits increased by $150.1 million, or 20.7%, from 2018 to 2019.



	Year Ended December 31,
	2019						2018						2017						2016						2015
	Average		%		Average		Average		%		Average		Average		%		Average		Average		%		Average		Average		%		Average
	Balance		Total		Rate		Balance		Total		Rate		Balance		Total		Rate		Balance		Total		Rate		Balance		Total		Rate
	(dollars in thousands)
Non-interest-bearing demand deposits	$	586,100	17.4	%	NA		$	455,223	17.5	%	NA		$	471,170	18.8	%	NA		$	512,383	21.0	%	NA		$	488,312	21.4	%	NA
Interest-bearing checking and money market	1,573,436		46.8		0.78	%	1,215,428		46.6		0.49	%	1,152,350		46.0		0.32	%	1,087,757		44.5		0.29	%	859,945		37.8		0.31	%
Savings	329,199		9.8		0.33		214,244		8.2		0.12		205,204		8.2		0.10		195,237		8.0		0.14		279,230		12.3		0.13
Certificates of deposit	873,978		26.0		1.90		723,830		27.7		1.54		674,757		27.0		1.13		649,986		26.5		0.92		648,516		28.5		0.75
Total deposits	$	3,362,713	100.0	%	0.89	%	$	2,608,725	100.0	%	0.66	%	$	2,503,481	100.0	%	0.46	%	$	2,445,363	100.0	%	0.38	%	$	2,276,003	100.0	%	0.35	%

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Certificates of deposit of $100,000 and over at December 31, 2019 had the following maturities:



	(in thousands)
Three months or less	$	116,914
Over three through six months	98,107
Over six months through one year	165,040
Over one year	121,915
Total	$	501,976

Short-Term Borrowings

The Bank purchases federal funds for short-term funding needs from correspondent and regional banks. As of December 31, 2019 and 2018, the Bank had no balance of federal funds purchased.

Securities sold under agreement to repurchase were $117.2 million as of December 31, 2019, an increase of $42.7 million, or 57.3%, from $74.5 million at December 31, 2018. 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. Changes in the balance of securities sold under agreement to repurchase are due to variances in the cash needs of these customers. See Note 11. Short-Term Borrowings to our consolidated financial statements for additional information related to our federal funds purchased and securities sold under agreement to repurchase.

The Bank utilizes FHLB short-term advances for short-term funding needs. As of December 31, 2019 and 2018, FHLB advances were $22.1 million and $56.9 million, respectively.

Long-Term Debt

Junior subordinated notes that have been issued to capital trusts that issued trust preferred securities were $41.6 million as of December 31, 2019, an increase of $17.7 million, or 74.1%, from $23.9 million at December 31, 2018. The increase was due to the assumption of junior subordinated notes as part of the ATBancorp acquisition.

Subordinated debentures increased to a balance of $10.9 million at December 31, 2019 due to the assumption of subordinated debentures as a result of to the ATBancorp acquisition.

FHLB borrowings totaled $145.7 million as of December 31, 2019, compared to $136.0 million as of December 31, 2018, an increase of $9.7 million, or 7.1%. We utilize FHLB borrowings as a supplement to customer deposits to fund earning assets and to assist in managing interest rate risk.

Other long-term debt in the form of a $35.0 million unsecured note 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. In addition, on April 30, 2019, in connection with the ATBancorp merger, the Company entered into a $35.0 million unsecured note payable with a correspondent bank with a maturity date of April 30, 2024. As of December 31, 2019, the remaining outstanding balance of both notes totaled $32.3 million. See Note 12. Long-Term Debt to our consolidated financial statements for additional information related to long-term debt.

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The following table sets forth the distribution of borrowed funds and weighted average interest rates.



	December 31,
	2019				2018				2017
			Weighted				Weighted				Weighted
	Balance		Average Rate		Balance		Average Rate		Balance		Average Rate
	(dollars in thousands)
Federal funds purchased, repurchase agreements, and FHLB overnight advances	$	139,349	1.17	%	$	131,422	1.70	%	$	97,229	0.47	%
Junior subordinated notes issued to capital trusts	41,587		3.85		23,888		4.97		23,793		4.00
Subordinated debentures	10,899		6.50		—		—		—		—
FHLB borrowings	145,700		2.25		136,000		2.45		115,000		1.67
Other long-term debt	32,250		3.44		7,500		3.78		12,500		2.85
Total	$	369,785	2.25	%	$	298,810	2.35	%	$	248,522	1.48	%

The following table sets forth the maximum amount of borrowed funds outstanding at any month-end for the periods presented.



	Year Ended December 31,
	2019		2018		2017
	(in thousands)
Federal funds purchased, repurchase agreements, and FHLB overnight advances	$	159,236	$	131,420	$	124,952
FHLB borrowings	160,755		148,000		145,000
Junior subordinated notes issued to capital trusts	44,030		23,888		23,793
Subordinated note	10,903		—		—
Other long-term debt	41,250		12,500		17,500
Total	$	416,174	$	315,808	$	311,245

The following table sets forth the average amount of and the average rate paid on borrowed funds.



	Year Ended December 31,
	2019				2018				2017
	Average		Average		Average		Average		Average		Average
	Balance		Rate		Balance		Rate		Balance		Rate
	(dollars in thousands)
Federal funds purchased, repurchase agreements, and FHLB overnight advances	$	124,956	1.46	%	$	105,094	1.24	%	$	87,763	0.47	%
FHLB borrowings	151,764		2.30		133,814		1.95		110,000		1.67
Junior subordinated notes issued to capital trusts	35,956		5.15		23,841		4.97		23,743		4.00
Subordinated note	7,304		6.31		—		—		—		—
Other long-term debt	27,844		3.97		10,596		3.77		15,596		2.75
Total	$	347,824	2.51	%	$	273,345	2.01	%	$	237,102	1.53	%

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Contractual Obligations

The following table summarizes contractual obligations payments due by period, as of December 31, 2019:



			Less than		1 to 3		3 to 5		More than
Contractual Obligations	Total		1 year		years		years		5 years
	(in thousands)
Time certificates of deposit	$	953,446	$	678,107	$	242,832	$	31,670	$	837
Federal funds purchased, repurchase agreements, and FHLB overnight advances	139,349		139,349		—		—		—
FHLB borrowings	145,400		54,400		74,000		17,000		—
Junior subordinated notes issued to capital trusts	41,587		—		—		—		41,587
Subordinated debentures	10,899		—		—		10,899		—
Other long-term debt	32,250		9,500		14,000		8,750		—
Noncancellable operating leases and capital lease obligations	8,512		1,345		2,522		2,088		2,557
Total	$	1,331,443	$	882,701	$	333,354	$	70,407	$	44,981

Off-Balance-Sheet Transactions

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

Our exposure to credit losses in the event of nonperformance is represented by the contractual amount of the commitments. Management does not expect any significant losses as a result of these commitments, and also expects to have sufficient liquidity available to cover these off-balance-sheet instruments. Off-balance-sheet transactions are more fully discussed in Note 18. Commitments and Contingencies to our consolidated financial statements.

The following table summarizes our off-balance-sheet commitments by expiration period, as of December 31, 2019:



			Less than		1 to 3		3 to 5		More than
Contractual obligations	Total		1 year		years		years		5 years
	(in thousands)
Commitments to extend credit	$	859,212	$	450,341	$	121,393	$	77,787	$	209,691
Commitments to sell loans	5,400		5,400		—		—		—
Standby letters of credit	36,192		32,956		3,011		179		46
Total	$	900,804	$	488,697	$	124,404	$	77,966	$	209,737

Capital Resources

The Federal Reserve uses capital adequacy guidelines in its examination and regulation of bank holding companies and their subsidiary banks. Risk-based capital ratios are established by allocating assets and certain off-balance-sheet commitments into four risk-weighted categories. These balances are then multiplied by the factor appropriate for that risk-weighted category. Pursuant to the Basel III Rules, the Company and the Bank, respectively, are subject to regulatory capital adequacy requirements promulgated by the Federal Reserve and the FDIC. Failure by the Company or the Bank to meet minimum capital requirements could result in certain mandatory and discretionary actions by our regulators that could have a material adverse effect on our consolidated financial statements. Under the capital requirements and the regulatory framework for prompt corrective action, the Company and the Bank must meet specific capital guidelines that involve quantitative measures of the Company’s and the Bank’s assets, liabilities and certain off-balance-sheet items as calculated under regulatory accounting practices. The Company’s and the Bank’s capital amounts and classifications are also subject to qualitative judgments by regulators about components, risk weightings and other factors. Quantitative measures established by regulation to ensure capital adequacy require the Company and the Bank to maintain minimum amounts and ratios of total risk-based capital, Tier 1 capital (as defined in the regulations) and Common Equity Tier 1 Capital (as defined in the regulations) to risk-weighted assets (as defined in the regulations), and a leverage ratio consisting of Tier 1 capital (as defined in the regulations) to average assets (as defined in the regulations). As of December 31, 2019, the Bank exceeded federal regulatory minimum capital requirements to be classified as well-capitalized under the prompt corrective action requirements (including the capital conservation buffer), and the Company exceeded federal regulatory minimum requirements

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for capital adequacy purposes (including the capital conservation buffer). See Note 17. Regulatory Capital Requirements and Restrictions on Subsidiary Cash to our consolidated financial statements for additional information related to our regulatory capital ratios.

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.

On March 17, 2017, the Company entered into an underwriting agreement to offer and sell, through an underwriter, up to 750,000 newly issued shares of the Company’s common stock at a public purchase price of $34.25 per share. This included 250,000 shares of the Company’s common stock granted as a 30-day option to purchase to cover over-allotments, if any. On April 6, 2017, the underwriter purchased the full amount of its over-allotment option of 250,000 shares.

On April 20, 2017, the Company’s shareholders approved the MidWestOne Financial Group, Inc. 2017 Equity Incentive Plan (the “2017 Plan”). The 2017 Plan is the successor to the MidWestOne Financial Group, Inc. 2008 Equity Incentive Plan (the “2008 Plan”), which expired on November 20, 2017.

On February 15, 2019, 39,100 restricted stock units were granted to certain officers of the Company under the 2017 Plan. Additionally, during the year of 2019, 34,810 shares of common stock were issued in connection with the vesting of previously awarded grants of restricted stock units, of which 3,456 shares were surrendered by grantees to satisfy tax requirements, and 8,190 nonvested restricted stock units were forfeited. During 2019, no shares of common stock were issued in connection with the exercise of previously issued stock options, and no options expired.

On May 15, 2019, 9,940 restricted stock units were granted to the directors of the Company under the 2017 Plan. See Note 15. Stock Compensation Plans to our consolidated financial statements for additional information related to our stock compensation program.

Liquidity

Liquidity management involves the ability to meet the cash flow requirements of depositors and borrowers. We conduct liquidity management on both a daily and long-term basis. We adjust our investments in liquid assets based upon management’s assessment of expected loan demand, projected loan sales, expected deposit flows, yields available on interest-bearing deposits, and the objectives of our asset/liability management program. Excess liquidity is invested generally in short-term U.S. government and agency securities, short- and medium-term state and political subdivision securities, and other investment securities. Our most liquid assets are cash and due from banks, interest-bearing bank deposits, and federal funds sold. The balances of these assets are dependent on our operating, investing, lending, and financing activities during any given period.

Cash and cash equivalents are summarized in the table below:



	Year Ended December 31,
	2019			2018			2017
(dollars in thousands)
Cash and due from banks	$	67,174		$	43,787		$	44,818
Interest-bearing deposits	6,112			1,693			5,474
Federal funds sold	198			—			680
Total	$	73,484		$	45,480		$	50,972
Percentage of average total assets	1.7		%	1.4		%	1.6		%

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

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Net cash provided by operations was another major source of liquidity. The net cash provided by operating activities was $47.3 million for the year ended December 31, 2019 and $42.8 million for the year ended December 31, 2018.

As of December 31, 2019, we had outstanding commitments to extend credit to borrowers of $859.2 million, standby letters of credit of $36.2 million, and commitments to sell loans of $5.4 million. Certificates of deposit maturing in one year or less totaled $678.1 million as of December 31, 2019. We believe that a significant portion of these deposits will remain with us upon maturity.

Inflation

The effects of price changes and inflation can vary substantially for most financial institutions. While management believes that inflation affects the growth of total assets, it is difficult to assess the overall impact. The price of one or more of the components of the Consumer Price Index may fluctuate considerably and thereby influence the overall Consumer Price Index without having a corresponding effect on interest rates or upon the cost of those goods and services normally purchased by us. In years of high inflation and high interest rates, intermediate and long-term interest rates tend to increase, thereby adversely impacting the market values of investment securities, mortgage loans and other long-term fixed rate loans held by financial institutions. In addition, higher short-term interest rates caused by inflation tend to increase financial institutions’ cost of funds. In other years, the reverse situation may occur.


ITEM 7A.	QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.

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

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

Liquidity Risk

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

Net cash provided by operating activities was $47.3 million during 2019, compared with $42.8 million in 2018 and $41.1 million in 2017. Proceeds from loans held for sale, net of funds used to originate loans held for sale, represented a $3.4 million outflow for 2019, compared to an inflow of $0.2 million for 2018 and a $3.4 million net inflow for 2017.

Net cash provided by investing activities was $72.7 million during 2019, compared with net cash used in investing activities of $94.4 million in 2018 and net cash used in investing activities of $148.8 million in 2017. During 2019, securities transactions resulted in net cash outflows of $64.6 million, net cash inflows of $25.7 million for 2018, and were relatively cash neutral for 2017. Net origination of loans resulted in $89.0 million in cash inflows for 2019, compared to $118.7 million in cash outflows for 2018 and $133.8 million in cash outflows in 2017.

Net cash used in financing activities was $92.1 million during 2019, compared with net cash provided by financing activities of $46.2 million in 2018, and net cash provided by financing activities of $115.4 million in 2017. Sources of cash from financing activities for 2019 included a net increase of $25.7 million in deposits. This increase in cash was offset by $11.5 million of cash dividends paid, a net decrease of $92.8 million in short-term borrowings, and a net decrease of $8.4 million in long-term debt.

Sources of cash from financing activities for 2018 primarily included net increases of $7.6 million in deposits, $34.2 million in short-term borrowings, and $16.0 million in long-term debt. These increases in cash were partially offset by $9.5 million of cash dividends paid and $2.1 million of repurchases of common stock.

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:


•	Federal funds lines;


•	FHLB borrowings;

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•	Brokered deposits;


•	Brokered repurchase agreements; and


•	Federal Reserve Bank Discount Window.

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

FHLB Borrowings: FHLB borrowings provide both a source of liquidity and long-term funding for the Bank. Use of this type of funding is coordinated with both the strategic balance sheet growth projections and interest rate risk profile of the Bank. Factors that are taken into account when contemplating use of FHLB borrowings are the effective interest rate, the collateral requirements, community investment program credits, and the implications and cost of having to purchase incremental FHLB stock. The current FHLB borrowing limit is 45% of total assets. As of December 31, 2019, the Bank had $145.7 million in outstanding FHLB borrowings, leaving $445.5 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/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 retail market, deposit gathering which does not cannibalize the existing deposit base, the unsecured nature of these liabilities, and the ability to quickly generate funds. 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. The Company had $6.6 million in brokered time deposits through the CDARS program as of December 31, 2019. Included in interest-bearing checking and money market deposits at December 31, 2019 were $10.1 million of brokered deposits in the ICS program.

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 December 31, 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 December 31, 2019, the Bank had municipal securities with an approximate market value of $13.0 million pledged for liquidity purposes. There were no outstanding borrowings through the FRB Discount Window at December 31, 2019.

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 interest rate risk are timing differences in the maturity and re-pricing characteristics of assets and liabilities, changes in the shape of the yield curve, changes in customer behavior and changes in relationships between rate indices (basis risk). Management measures these risks and their impact in various ways, including through the use of income simulation and valuation analyses. Multiple interest rate scenarios are evaluated which 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). The change in the Company’s interest rate profile between December 31, 2018 and December 31, 2019 is largely attributable to the ATBancorp merger. ATBancorp’s loan portfolio was more heavily weighted toward Prime-based and other floating rate lending than the Bank’s legacy loan portfolio. As a result, the Bank’s interest rate risk profile became less liability sensitive upon completion of the merger.

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 possible rate scenarios by structuring our balance sheet and off-balance-sheet positions in such a way that changes in interest rates do not have a large negative impact. The risk is monitored and managed within approved policy limits.

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

Net Interest Income Simulation: Management utilizes net interest income simulation models to estimate the near-term effects of changing interest rates on its net interest income. Net interest income simulation involves forecasting net interest income under a variety of scenarios, including 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 control, such as customer behavior on loan and deposit activity and the effect that competition has on both loan and deposit pricing. These assumptions are subjective, and, as a result, net interest income simulation results will differ from actual results due to the timing, magnitude and frequency of interest rate changes, changes in market conditions, customer behavior and management strategies, among other factors. We perform various sensitivity analyses on assumptions of deposit attrition and deposit re-pricing.

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



	Immediate Change in Rates
	-200			-100			+100			+200
(dollars in thousands)
December 31, 2019
Dollar change	$	1,302		$	101		$	(638	)	$	(2,354	)
Percent change	0.9		%	0.1		%	(0.5		)%	(1.7		)%

December 31, 2018
Dollar change	$	(529	)	$	(568	)	$	(1,840	)	$	(4,006	)
Percent change	(0.5		)%	(0.5		)%	(1.7		)%	(3.8		)%

As of December 31, 2019, 42.4% of the Company’s interest-earning asset balances will reprice or are expected to pay down in the next 12 months, and 43.6% 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. 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.

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ITEM 8.	FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.

Report of Independent Registered Public Accounting Firm

To the Shareholders and Board of Directors of MidWestOne Financial Group, Inc.

Opinion on the Financial Statements

We have audited the accompanying consolidated balance sheets of MidWestOne Financial Group, Inc. and its subsidiaries (the Company) as of December 31, 2019 and 2018, the related consolidated statements of income, comprehensive income, shareholders’ equity and cash flows for each of the three years in the period ended December 31, 2019, and the related notes to the consolidated financial statements (collectively, the financial statements). In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2019 and 2018, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2019, in conformity with accounting principles generally accepted in the United States of America.

We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the Company’s internal control over financial reporting as of December 31, 2019, based on criteria established in Internal Control - Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission in 2013, and our report dated March 6, 2020 expressed an unqualified opinion on the effectiveness of the Company’s internal control over financial reporting.

Basis for Opinion

These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with U.S. federal securities laws and applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. Our audits includes performing procedures to assess the risk of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.

/s/ RSM US LLP

We have served as the Company’s auditor since 2013.

Cedar Rapids, Iowa

March 6, 2020

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MIDWESTONE FINANCIAL GROUP, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS



	December 31,
	2019			2018
ASSETS	(dollars in thousands)
Cash and due from banks	$	67,174		$	43,787
Interest earning deposits in banks	6,112			1,693
Federal funds sold	198			—
Total cash and cash equivalents	73,484			45,480
Debt securities available for sale at fair value	785,977			414,101
Held to maturity securities at amortized cost (fair value of $0 and $192,564)	—			195,822
Total securities held for investment	785,977			609,923
Loans held for sale	5,400			666
Gross loans held for investment	3,469,236			2,405,001
Unearned income, net	(17,970		)	(6,222		)
Loans held for investment, net of unearned income	3,451,266			2,398,779
Allowance for loan losses	(29,079		)	(29,307		)
Total loans held for investment, net	3,422,187			2,369,472
Premises and equipment, net	90,723			75,773
Goodwill	91,918			64,654
Other intangible assets, net	32,218			9,875
Foreclosed assets, net	3,706			535
Other assets	147,960			115,102
Total assets	$	4,653,573		$	3,291,480

LIABILITIES AND SHAREHOLDERS' EQUITY
Noninterest bearing deposits	$	662,209		$	439,133
Interest bearing deposits	3,066,446			2,173,796
Total deposits	3,728,655			2,612,929
Short-term borrowings	139,349			131,422
Long-term debt	231,660			168,726
Other liabilities	44,927			21,336
Total liabilities	4,144,591			2,934,413

Commitments and contingencies (Note 18)

Shareholders' equity
Preferred stock, no par value; authorized 500,000 shares; no shares issued and outstanding	—			—
Common stock, $1.00 par value; authorized 30,000,000 shares; issued shares of 16,581,017 and 12,463,481; outstanding shares of 16,162,176 and 12,180,015	16,581			12,463
Additional paid-in capital	297,390			187,813
Retained earnings	201,105			168,951
Treasury stock at cost, 418,841 and 283,466	(10,466		)	(6,499		)
Accumulated other comprehensive income (loss)	4,372			(5,661		)
Total shareholders' equity	508,982			357,067
Total liabilities and shareholders' equity	$	4,653,573		$	3,291,480

See accompanying notes to consolidated financial statements.

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MIDWESTONE FINANCIAL GROUP, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF INCOME



	Years ended December 31,
	2019		2018		2017
	(in thousands, except per share amounts)
Interest income
Loans, including fees	$	163,163	$	111,193	$	102,366
Taxable investment securities	13,132		11,027		10,179
Tax-exempt investment securities	5,696		5,827		6,239
Other	450		62		142
Total interest income	182,441		128,109		118,926
Interest expense
Deposits	29,927		17,331		11,489
Short-term borrowings	1,847		1,315		424
Long-term debt	7,017		4,195		3,232
Total interest expense	38,791		22,841		15,145
Net interest income	143,650		105,268		103,781
Provision for loan losses	7,158		7,300		17,334
Net interest income after provision for loan losses	136,492		97,968		86,447
Noninterest income
Investment services and trust activities	8,040		4,953		4,919
Service charges and fees	7,452		6,157		6,533
Card revenue	5,594		4,223		3,906
Loan revenue	3,789		3,622		3,421
Bank-owned life insurance	1,877		1,610		1,388
Insurance commissions	734		1,284		1,270
Investment securities gains, net	90		193		241
Other	3,670		1,173		1,073
Total noninterest income	31,246		23,215		22,751
Noninterest expense
Compensation and employee benefits	65,660		49,758		47,864
Occupancy expense of premises, net	8,647		7,597		7,382
Equipment	7,717		5,565		5,060
Legal and professional	8,049		4,641		3,962
Data processing	4,579		2,951		2,674
Marketing	3,789		2,660		2,449
Amortization of intangibles	5,906		2,296		3,125
FDIC insurance	690		1,533		1,265
Communications	1,701		1,353		1,333
Foreclosed assets, net	580		21		184
Other	10,217		4,840		4,825
Total noninterest expense	117,535		83,215		80,123
Income before income tax expense	50,203		37,968		29,075
Income tax expense	6,573		7,617		10,376
Net income	$	43,630	$	30,351	$	18,699
Earnings per share:
Basic	$	2.93	$	2.48	$	1.55
Diluted	$	2.93	$	2.48	$	1.55

See accompanying notes to consolidated financial statements.

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MIDWESTONE FINANCIAL GROUP, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME



	Years Ended December 31,
	2019			2018			2017
	(in thousands)
Net income	$	43,630		$	30,351		$	18,699

Other comprehensive income (loss), net of tax:
Unrealized net holding gains (losses) on debt securities available for sale arising during the period	13,663			(3,865		)	(1,470		)
Reclassification adjustment for net gains included in net income	(87		)	(197		)	(188		)
Income tax (expense) benefit	(3,543		)	1,060			654
Unrealized net gains (losses) on debt securities available for sale, net of reclassification adjustment	10,033			(3,002		)	(1,004		)
Other comprehensive income (loss), net of tax	$	10,033		$	(3,002	)	$	(1,004	)
Comprehensive income	$	53,663		$	27,349		$	17,695

See accompanying notes to consolidated financial statements.

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MIDWESTONE FINANCIAL GROUP, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY



	Common Stock											Accumulated
	Par Value		Additional Paid-in Capital			Retained Earnings			Treasury Stock			Other Comprehensive Income (Loss)			Total
	(in thousands)
Balance at December 31, 2016	$	11,713	$	163,667		$	136,975		$	(5,766	)	$	(1,133	)	$	305,456
Cumulative effect of change in accounting principle⁽¹⁾	—		—			465			—			(465		)	—
Net income	—		—			18,699			—			—			18,699
Other comprehensive loss	—		—			—			—			(1,004		)	(1,004		)
Issuance of common stock (750,000 shares), net of expenses of $1,328	750		23,610			—			—			—			24,360
Stock options exercised (8,750 shares)	—		(83		)	—			183			—			100
Release/lapse of restriction on RSUs (27,625 shares, net)	—		(576		)	—			462			—			(114		)
Share-based compensation	—		868			—			—			—			868
Dividends paid on common stock ($0.67 per share)	—		—			(8,061		)	—			—			(8,061		)
Balance at December 31, 2017	$	12,463	$	187,486		$	148,078		$	(5,121	)	$	(2,602	)	$	340,304
Cumulative effect of change in accounting principle⁽²⁾	—		—			57			—			(57		)	—
Net income	—		—			30,351			—			—			30,351
Other comprehensive loss	—		—			—			—			(3,002		)	(3,002		)
Stock options exercised (9,700 shares)	—		(68		)	—			204			—			136
Release/lapse of restriction on RSUs (29,715 shares, net)	—		(635		)	—			547			—			(88		)
Repurchase of common stock (76,128 shares)	—		—			—			(2,129		)	—			(2,129		)
Share-based compensation	—		1,030			—			—			—			1,030
Dividends paid on common stock ($0.78 per share)	—		—			(9,535		)	—			—			(9,535		)
Balance at December 31, 2018	$	12,463	$	187,813		$	168,951		$	(6,499	)	$	(5,661	)	$	357,067
Net income	—		—			43,630			—			—			43,630
Other comprehensive income	—		—			—			—			10,033			10,033
Issuance of common stock for acquisition of ATBancorp (4,117,536 shares), net of offering expenses of $323 and liquidity discount of $2,355	4,118		109,236			—			—			—			113,354
Release/lapse of restriction on RSUs (31,354 shares, net)	—		(815		)	—			712			—			(103		)
Repurchase of common stock (166,729 shares)	—		—			—			(4,679		)	—			(4,679		)
Share-based compensation	—		1,156			—			—			—			1,156
Dividends paid on common stock ($0.81 per share)	—		—			(11,476		)	—			—			(11,476		)
Balance at December 31, 2019	$	16,581	$	297,390		$	201,105		$	(10,466	)	$	4,372		$	508,982

(1) Reclassification pursuant to adoption of ASU 2018-02, Income Statement - Reporting Comprehensive Income (Topic 220): Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income. See Note 1. Nature of Business and Significant Accounting Policies - Effect of New Financial Accounting Standards and Note 13. Income Taxes for additional information

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

See accompanying notes to consolidated financial statements.

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MIDWESTONE FINANCIAL GROUP, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS



	Years Ended December 31,
	2019			2018			2017
	(in thousands)
Cash flows from operating activities:
Net income	$	43,630		$	30,351		$	18,699
Adjustments to reconcile net income to net cash provided by operating activities:
Provision for loan losses	7,158			7,300			17,334
Depreciation, amortization, and accretion	2,751			9,045			8,434
Net loss (gain) on sale of premises and equipment	119			(20		)	(2		)
Stock-based compensation	1,156			1,030			868
Net (gain) on sale or call of debt securities available for sale	(87		)	(197		)	(188		)
Net (gain) loss on call of debt securities held to maturity	(3		)	4			(53		)
Net loss (gain) on sale of foreclosed assets, net	87			(241		)	(28		)
Writedown of foreclosed assets	170			22			58
Net gain on sale of loans held for sale	(2,297		)	(1,725		)	(1,794		)
Origination of loans held for sale	(115,694		)	(66,180		)	(87,579		)
Proceeds from sales of loans held for sale	114,605			68,108			92,758
Gain on sale of assets of MidWestOne Insurance Services, Inc.	(1,076		)	—			—
Increase in cash surrender value of bank-owned life insurance	(1,877		)	(1,610		)	(1,388		)
Increase (decrease) in deferred income taxes, net	2,708			(676		)	744
Change in:
Other assets	1,917			(6,996		)	(5,309		)
Oher liabilities	(5,953		)	4,548			(1,482		)
Net cash provided by operating activities	$	47,314		$	42,763		$	41,072
Cash flows from investing activities:
Purchases of equity securities	$	(10	)	$	(509	)	$	—
Proceeds from sales of debt securities available for sale	125,452			14,490			22,538
Proceeds from maturities and calls of debt securities available for sale	91,256			73,719			67,743
Purchases of debt securities available for sale	(289,733		)	(61,512		)	(62,849		)
Proceeds from sales of debt securities held to maturity	1,381			—			1,153
Proceeds from maturities and calls of debt securities held to maturity	7,008			5,509			15,477
Purchase of debt securities held to maturity	—			(6,008		)	(44,024		)
Net decrease (increase) in loans, net of unearned income	88,960			(118,710		)	(133,836		)
Purchases of premises and equipment	(2,186		)	(5,568		)	(4,988		)
Proceeds from sale of foreclosed assets	2,071			2,268			1,216
Proceeds from sale of premises and equipment	56			657			32
Proceeds from sale of assets held for sale	—			895			—
Proceeds of principal and earnings from bank-owned life insurance	—			452			—
Purchases of bank owned life insurance	—			—			(11,212		)
Proceeds from sale of assets of MidWestOne Insurance Services, Inc.	1,175			—			—
Payments to acquire intangible assets	—			(125		)	—
Net cash acquired in business acquisition	47,315			—			—
Net cash provided by (used in) investing activities	$	72,745		$	(94,442	)	$	(148,750	)
Cash flows from financing activities:
Net increase (decrease) in:
Deposits	$	25,723		$	7,610		$	124,871
Short-term borrowings	(92,834		)	34,193			(20,642		)
Long-term debt	(8,363		)	16,000			(5,000		)
Proceeds from share-based award activity	—			137			8
Taxes paid relating to net share settlement of equity awards	(103		)	(89		)	(114		)
Dividends paid	(11,476		)	(9,535		)	(8,061		)
Issuance of common stock	—			—			25,688
Payment of stock issuance costs	(323		)	—			(1,328		)
Repurchase of common stock	(4,679		)	(2,129		)	—
Net cash provided by (used in) financing activities	$	(92,055	)	$	46,187		$	115,422
Net increase (decrease) in cash and cash equivalents	$	28,004		$	(5,492	)	$	7,744
Cash and cash equivalents:
Beginning of period	45,480			$	50,972		$	43,228
Ending balance	$	73,484		$	45,480		$	50,972

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MIDWESTONE FINANCIAL GROUP, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)



	Years Ended December 31,
	2019		2018		2017
	(in thousands)
Supplemental disclosures of cash flow information:
Cash paid during the period for interest	$	34,089	$	22,441	$	15,189
Cash paid during the period for income taxes	7,269		6,245		13,199
Supplemental schedule of non-cash investing and financing activities:
Transfer of loans to foreclosed assets	$	2,408	$	574	$	1,159
Transfer of premises and equipment to assets held for sale	580		895		—
Transfer from debt securities held to maturity to available for sale	186,447		—		—
Initial recognition of operating lease right of use assets	2,892		—		—
Initial recognition of operation lease liabilities	2,892		—		—
Transfer due to Tax Cuts and Jobs Act of 2017, reclassified from AOCI to Retained Earnings, tax effect	—		—		465
Transfer due to adoption of ASU 2016-01, reclassified from AOCI to Retained Earnings.	—		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	18,327		—		—
Goodwill	27,264		—		—
Core deposit intangible	23,539		—		—
Trust customer intangible	4,810		—		—
Bank-owned life insurance	18,759		—		—
Foreclosed assets	3,091		—		—
Other assets	23,889		—		—
Total noncash assets acquired	1,357,663		—		—

Liabilities assumed:
Deposits	1,089,355		—		—
Short-term borrowings	100,761		—		—
FHLB borrowings	42,770		—		—
Junior subordinated notes issued to capital trusts	17,555
Subordinated debentures	10,909		—		—
Other liabilities	29,951		—		—
Total liabilities assumed	$	1,291,301	$	—	$	—

See accompanying notes to consolidated financial statements.

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MIDWESTONE FINANCIAL GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Note 1.Nature of Business and Significant Accounting Policies

Nature of business: MidWestOne Financial Group, Inc. (the “Company”), is a bank holding company registered under the Bank Holding Company Act of 1956, as amended, that has elected to be a financial holding company. It is headquartered in Iowa City, Iowa and owns all of the outstanding common stock of MidWestOne Bank (the “Bank”), Iowa City, Iowa, and, until its dissolution in December 2019, all of the common stock of MidWestOne Insurance Services, Inc., Oskaloosa, Iowa. The Bank is also headquartered in Iowa City, Iowa, and provides services to individuals, businesses, governmental units and institutional customers through a total of 57 banking offices in central and east-central Iowa, the Minneapolis/St. Paul metropolitan area in Minnesota, western Wisconsin, Naples and Fort Myers, Florida, and Denver, Colorado. Prior to the sale of its assets in June 2019, MidWestOne Insurance Services, Inc. provided personal and business insurance services in Cedar Falls, Conrad, Melbourne, Oskaloosa, Parkersburg, and Pella, Iowa. The Bank is actively engaged in many areas of commercial banking, including: acceptance of demand, savings and time deposits; making commercial, real estate, agricultural and consumer loans, and other banking services tailored for its individual customers. The wealth management area of the Bank administers estates, personal trusts, and conservatorship accounts along with providing other management services to customers.

Accounting estimates: The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amount of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.

Certain significant estimates: The allowance for loan losses, fair value of assets acquired and liabilities assumed in a business combination, and the annual impairment testing of goodwill involve certain significant estimates made by management. These estimates are reviewed by management routinely, and it is reasonably possible that circumstances that exist may change in the near-term future and that the effect could be material to the consolidated financial statements.

Principles of consolidation: The consolidated financial statements include the accounts of MidWestOne Financial Group, Inc., a bank holding company, and its wholly-owned subsidiary MidWestOne Bank, which is a state chartered bank whose primary federal regulator is the FDIC, and MidWestOne Insurance Services, Inc. All significant inter-company accounts and transactions have been eliminated in consolidation.

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.

Trust assets, other than cash deposits held by the Bank in a fiduciary or agency capacity for its customers, are not included in the accompanying consolidated financial statements because such accounts are not assets of the Bank.

Presentation of cash flows: For purposes of reporting cash flows, cash and due from banks includes cash on hand, amounts due from banks, and federal funds sold. Cash flows from loans, deposits, short-term borrowings, and long-term debt are reported net.

Cash receipts and cash payments resulting from originations and sales of loans held for sale are classified as operating cash flows on a gross basis in the consolidated statements of cash flows.

The nature of the Company’s business requires that it maintain amounts due from banks that, at times, may exceed federally insured limits. In the opinion of management, no material risk of loss exists due to the various correspondent banks’ financial condition and the fact that they are well capitalized.

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MIDWESTONE FINANCIAL GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Investment securities: Debt securities that the Company has the positive intent and ability to hold to maturity are classified as held to maturity and recorded at amortized cost. As of December 31, 2019, the Company held no debt securities classified as held to maturity. Debt securities not classified as held to maturity are classified as available for sale and recorded at fair value, with unrealized gains and losses excluded from earnings and reported in other comprehensive income.

The Company employs valuation techniques which utilize observable inputs when those inputs are available. These observable inputs reflect assumptions market participants would use in pricing the security, developed based on market data obtained from sources independent of the Company. When such information is not available, the Company employs valuation techniques which utilize unobservable inputs, or those which reflect the Company’s own assumptions about assumptions that market participants would use, based on the best information available in the circumstances. These valuation methods typically involve cash flow and other financial modeling techniques. Changes in underlying factors, assumptions, estimates, or other inputs to the valuation techniques could have a material impact on the Company’s future financial condition and results of operations. Fair value measurements are required to be classified as Level 1 (quoted prices), Level 2 (based on observable inputs) or Level 3 (based on unobservable inputs) discussed in more detail in Note 20 to the consolidated financial statements. Available for sale debt securities are recorded at fair value with unrealized gains and losses excluded from earnings and reported as a separate component of shareholders’ equity until realized.

Purchase premiums and discounts are recognized in interest income using the interest method between the date of purchase and the first call date, or the maturity date of the security when there is no call date. Declines in the fair value of held to maturity and available for sale securities below their cost that are deemed to be other than temporary are reflected in earnings as realized losses. In determining whether other than temporary impairment exists, management considers whether: (1) we have the intent to sell the security; (2) it is more likely than not that we will be required to sell the security before recovery of the amortized cost basis; and (3) we do not expect to recover the entire amortized cost basis of the security. Gains and losses on the sale of securities are recorded on the trade date and are determined using the specific identification method.

During the quarter ended December 31, 2019, the Company transferred all of its investment securities classified as held to maturity to available for sale. See Note 3. Debt Securities for additional information.

Loans: Loans are stated at the principal amount outstanding, net of purchase premiums, purchase discounts and net deferred loan fees. Net deferred loan fees include nonrefundable loan origination fees less direct loan origination costs. Net deferred loan fees, purchase premiums and purchase discounts are amortized into interest income using either the interest method or straight-line method over the terms of the loans, adjusted for actual prepayments. The interest method is used for all loans except revolving loans, for which the straight-line method is used. Interest on loans is credited to income as earned based on the principal amount outstanding.

The accrual of interest on agricultural, commercial, commercial real estate, and consumer loan segments is discontinued at the time the loan is 90 days past due, and residential real estate loan segments at 120 days past due, unless the credit is well secured and in process of collection. Credit card loans and other personal loans are typically charged off no later than 180 days past due. Past due status is based on contractual terms of the loan. In all cases, loans are placed on nonaccrual or charged off at an earlier date, if collection of principal or interest is considered doubtful.

All interest accrued but not collected for loans that are placed on nonaccrual or charged off is reversed against interest income. The interest on these loans is accounted for on the cash-basis or cost-recovery method, until qualifying for return to accrual. Loans are returned to accrual status when all the principal and interest amounts contractually due are brought current and future payments are reasonably assured.

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.

The risk characteristics of each loan portfolio segment are as follows:

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

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MIDWESTONE FINANCIAL GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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: 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 ALLL is not carried over. These purchased loans are segregated into two types: 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.

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MIDWESTONE FINANCIAL GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


•	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 renew and the discount is accreted.

For 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.

TDR: TDRs exist when the Company, for economic or legal reasons related to the borrower’s financial difficulties, grants a concession (either imposed by court order, law, or agreement between the borrower and the Company) to the borrower that it would not otherwise consider. The Company attempts to maximize its recovery of the balances of the loans through these various concessionary restructurings. All loans deemed TDR are considered impaired.

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.

Loans held for sale: Loans originated and intended for sale in the secondary market are carried at the lower of aggregate cost or estimated fair value, as determined by aggregate outstanding commitments from investors or current investor yield requirements. Net unrealized losses, if any, are recognized through a valuation allowance by charges to income.

Mortgage loans held for sale are generally sold with the mortgage servicing rights retained. Gains or losses on sales of mortgage loans are recognized based on the difference between the selling price plus the value of servicing rights, less the carrying value of the related mortgage loans sold.

Allowance for loan losses: The allowance for loan losses is established through a provision for loan losses charged to earnings. Loan losses are charged against the allowance when management believes the uncollectibility of a loan balance is confirmed. Subsequent recoveries, if any, are credited to the allowance. The allowance for loan losses is evaluated on a quarterly basis by management and consists of collective evaluation and specific evaluation components.

Loans Reviewed Collectively for Impairment - All loans not evaluated individually for impairment will be separated into homogeneous pools to be collectively evaluated. Loans are segmented by loan types (i.e. commercial, agricultural, consumer, etc.). 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 loan type is calculated using the fiscal quarter-end data for the most recent 20 quarters. Management then considers the effects of qualitative factors to ensure our allowance reflects the inherent losses in the loan portfolio. Qualitative factors include, but are not limited to:


•	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.

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MIDWESTONE FINANCIAL GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


•	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.


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

The Company may also consider other qualitative factors for additional ALLL allocations, including changes in the Company’s loan review process. In addition to the qualitative factors identified above, the Bank applies a qualitative adjustment to each watch and substandard risk-rated portfolio segment.

Loans Individually Evaluated for Impairment—This measure of estimated credit losses begins if, based upon current information and events, we believe it is probable that we will be unable to collect all amounts due according to the contractual terms of the loan agreement or when a loan has been modified in a troubled debt restructuring. When a loan has been identified as impaired, the amount of impairment will be measured using discounted cash flows, except when it is determined that the remaining source of repayment for the loan is the operation or liquidation of the underlying collateral. In these cases, the current fair value of the collateral, reduced by costs to sell, will be used in place of discounted cash flows. Predominantly, the Company uses the fair value of collateral approach based upon a reliable valuation. When the measurement of the impaired loan is less than the recorded amount of the loan, an impairment is recognized by recording a charge-off to the allowance or by designating a specific reserve.

Large groups of smaller-balance loans (with individual balances less than $100,000) are not individually evaluated for impairment, but are collectively evaluated under ASC 450.

Transfers of financial assets: Revenue from the origination and sale of loans in the secondary market is recognized upon the transfer of financial assets and accounted for as sales when control over the assets has been surrendered. The Company also sells participation interests in some large loans originated to non-affiliated entities. Control over transferred assets is deemed to be surrendered when: (1) the assets have been isolated from the Company; (2) the transferee has the right to pledge or exchange the assets it received and no condition both constrains the transferee from taking advantage of its right to pledge or exchange and provides more than a trivial benefit to the transferor; and (3) the Company does not maintain effective control over the transferred assets through an agreement to repurchase them before their maturity or the ability to unilaterally cause the holder to return specific assets.

Credit-related financial instruments: In the ordinary course of business, the Company has entered into commitments to extend credit, including commitments under credit card arrangements, commitments to sell loans, commercial letters of credit and standby letters of credit. Such financial instruments are recorded when they are funded.

Derivatives and hedging instruments: As part of its asset and liability management strategy, the Company uses derivative financial instruments to mitigate exposure to interest rate risks. 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.

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.

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MIDWESTONE FINANCIAL GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Premises and equipment: Land is carried at cost. Premises and equipment are stated at cost less accumulated depreciation. The estimated useful lives and primary method of depreciation for the principal items are as follows:



	Years
Type of Assets	Minimum		Maximum	Depreciation Method

Buildings and leasehold improvements	10	-	39	Straight-line
Furniture and equipment	3	-	10	Straight-line

Charges for maintenance and repairs are expensed as incurred. When assets are retired or disposed of, the related cost and accumulated depreciation are removed from the respective accounts and the resulting gain or loss is recorded.

Foreclosed assets, net: Real estate properties and other assets 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. Fair value is determined by management by obtaining appraisals or other market value information at least annually. Any write-downs in value at the date of acquisition are charged to the allowance for loan losses. After foreclosure, valuations are periodically performed by management by obtaining updated appraisals or other market value information. Any subsequent write-downs are recorded as a charge to operations, if necessary, to reduce the carrying value of a property to the updated fair value less estimated selling cost. Net costs related to the holding of properties are included in noninterest expense.

Goodwill and other intangibles: Goodwill is the excess of the purchase price over the fair value of identifiable net assets acquired in business combinations accounted for as acquisitions. Under ASC Topic 350, goodwill of a reporting unit is tested for impairment on an annual basis, or between annual tests if an event occurs or circumstances change that would reduce the fair value of a reporting unit below its carrying amount. The Company's annual assessment is done at the reporting unit level. The Company did not recognize impairment losses during the year ended December 31, 2019. Any future impairment will be recorded as noninterest expense in the period of assessment. Certain other intangible assets that have finite lives 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 possible impairment.

Federal Home Loan Bank Stock: 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. 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: Mortgage servicing rights are recorded at fair value based on assumptions through a third-party valuation service. The valuation model incorporates assumptions that market participants would use in estimating future net servicing income, such as the servicing cost per loan, the discount rate, the escrow float rate, an inflation rate, ancillary income, prepayment speeds and default rates and losses.

Bank-owned life insurance: BOLI represents life insurance policies on the lives of certain Company officers and directors or former officers and directors for which the Company is the beneficiary. Bank-owned life insurance is carried at cash surrender value, net of surrender and other charges, with increases/decreases reflected as noninterest income/expense in the consolidated statements of income.

Employee benefit plans: Deferred benefits under a salary continuation plan are charged to expense during the period in which the participating employees attain full eligibility.

Stock-based compensation: Compensation expense for share based awards is recorded over the vesting period at the fair value of the award at the time of grant. The exercise price of options or fair value of nonvested shares granted under the Company’s incentive plans is equal to the fair market value of the underlying stock at the grant date. The Company assumes no projected forfeitures on its stock based compensation, since actual historical forfeiture rates on its stock-based incentive awards have been negligible.

Income taxes: The Company and/or its subsidiaries file tax returns in all states and local taxing jurisdictions which impose corporate income, franchise or other taxes where it operates. The methods of filing and the methods for calculating taxable and apportionable income vary depending upon the laws of the taxing jurisdiction. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to temporary differences between the financial statement carrying amount of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply

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MIDWESTONE FINANCIAL GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect of a change in tax rates on deferred tax assets and liabilities is recognized as income or expense in the period that includes the enactment date of such change. Deferred tax assets are reduced by a valuation allowance when, in the opinion of management, it is more likely than not that some portion or all of the deferred tax assets will not be realized.

In accordance with ASC 740, Income Taxes, the Company recognizes a tax position as a benefit only if it is more likely than not that the tax position would be sustained in a tax examination, with a tax examination being presumed to occur. The amount recognized is the largest amount of tax benefit that is greater than 50% likely of being realized upon examination. For tax positions not meeting the more likely than not test, no tax benefit is recorded. The Company recognizes interest and/or penalties related to income tax matters in income tax expense.

On December 22, 2017, the U.S. government enacted comprehensive tax legislation commonly referred to as the Tax Cuts and Jobs Act (the “Tax Act”). The Tax Act introduced tax reform that reduced the corporate federal income tax rate from 35% to 21%, among other changes. While the corporate tax rate reduction was effective January 1, 2018, GAAP required a revaluation of the Company’s net deferred tax asset. Deferred tax assets and liabilities are measured using enacted rates expected to apply to taxable income in years in which those temporary differences are expected to be recovered or settled. Deferred tax assets and liabilities are adjusted through income tax expense as changes in tax laws are enacted. On February 14, 2018, the FASB issued Accounting Standards Update No. 2018-02, Income Statement-Reporting Comprehensive Income (Topic 220) - Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income. The amendments of this ASU allowed a reclassification from accumulated other comprehensive income to retained earnings for stranded tax effects resulting from the Tax Act. See Note 13. Income Taxes for more information.

There were no material unrecognized tax benefits or any interest or penalties on any unrecognized tax benefits as of December 31, 2019 and 2018.

Common stock: On July 21, 2016, the board of directors of the Company approved a share repurchase program, which allowed for the repurchase of up to $5.0 million of stock through December 31, 2018. Pursuant to the program, the Company could continue to repurchase shares from time to time in the open market, and the method, timing and amounts of repurchase were solely in the discretion of the Company's management. The repurchase program did not require the Company to acquire a specific number of shares. Therefore, the amount of shares repurchased pursuant to the program depended on several factors, including market conditions, capital and liquidity requirements, and alternative uses for cash available. The Company repurchased no common stock under this plan in 2017. In 2018, 33,998 shares of common stock for approximately $1.1 million were purchased under this plan.

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 replaced the Company's prior repurchase program. The Company repurchased 42,130 shares of common stock under this plan in 2018, at a cost of $1.0 million. During 2019, the Company repurchased 166,729 shares of common stock under this plan at a cost of $4.7 million.

On August 20, 2019, the Board of Directors of the Company approved a new share repurchase program, allowing for the repurchase of up to $10.0 million of common stock through December 31, 2021. The new repurchase program replaced the Company’s prior repurchase program. During 2019, the Company repurchased 34,157 shares of common stock under this plan at a cost of $1.0 million, leaving $9.0 million of common stock available for possible future repurchases as of December 31, 2019.

Comprehensive income: Accounting principles generally require that recognized revenue, expenses, gains and losses be included in net income. Certain changes in assets and liabilities, such as unrealized gains and losses on available-for-sale securities, are reported as a separate component of shareholders’ equity on the consolidated balance sheets, and are disclosed in the consolidated statements of comprehensive income.

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MIDWESTONE FINANCIAL GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

The components of accumulated other comprehensive loss included in shareholders’ equity were as follows:



	Year Ended December 31,
	2019		2018			2017
	(in thousands)
Unrealized gains (losses) on securities available for sale	$	5,916	$	(7,660	)	$	(3,530	)
Less: Tax effect	1,544		(1,999		)	(928		)
Accumulated other comprehensive gain (loss), net of tax	$	4,372	$	(5,661	)	$	(2,602	)

Effect of New Financial Accounting Standards

Accounting Guidance Adopted in 2019

In February 2016, the FASB issued ASU No. 2016-02, Leases (Topic 842). The guidance in this update is meant to increase transparency and comparability among organizations by recognizing 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 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 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, such as branch locations, which are considered operating leases, and are now recognized on the Company’s consolidated balance sheets. The new guidance requires these lease agreements to be recognized on the consolidated balance sheets as a ROU asset and a corresponding lease liability. See Note 22. Leases for more information. The adoption of this standard did not have a material effect on the Company’s consolidated financial statements.

Accounting Guidance Pending Adoption at December 31, 2019

The CECL modeling measurements for estimating the current expected lifetime credit losses for loans includes the following major items:


•	Initial forecast - using a period of one year using forward-looking economic scenarios of expected losses.


•	Historical loss forecast - for a period incorporating the remaining contractual life, adjusted for prepayments, and the changes in various economic variables during representative historical and recessionary periods.


•	Reversion period - using one and a half years, which links the initial loss forecast to the historical loss forecast based on economic conditions at the measurement date.


•	Discounted cash flows (DCF) calculation - using the items above to estimate the lifetime credit losses for each portfolio and losses for loans modified as a TDR.

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MIDWESTONE FINANCIAL GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

In December 2018, the OCC, the Board of Governors of the Federal Reserve System, and the FDIC approved a final rule to address changes to credit loss accounting under GAAP, including banking organizations’ implementation of CECL. The final rule provides banking organizations the option to phase in over a three-year period the day-one adverse effects on regulatory capital that may result from the adoption of the new accounting standard. The Company is planning on adopting the capital transition relief over the permissible three-year period.

In August 2018, the FASB issued 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 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 for the Company). 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.

Note 2.Business Combinations

On May 1, 2019, the Company acquired 100% of the equity of ATBancorp through a merger and acquired 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. On April 30, 2019, the last trading date before the closing, the Company’s common stock closed at $28.18, which resulted in stock consideration valued at $113.7 million net of a liquidity discount of $2.4 million, and total consideration paid by the Company of $148.4 million.

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MIDWESTONE FINANCIAL GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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 net of any applicable tax effects. The Company considers all purchase accounting estimates provisional and fair values are subject to refinement for up to one year after the close date.

The excess of the consideration paid over the fair value of the net assets acquired is recorded as goodwill. This goodwill is not deductible for tax purposes.

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



	May 1, 2019
Merger consideration	(in thousands)
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	$	82,081
Debt securities available for sale	99,056
Loans	1,138,928
Premises and equipment	18,327
Other intangible assets	28,349
Foreclosed assets	3,091
Other assets	42,648
Total assets acquired			1,412,480
Liabilities assumed
Deposits	$	1,089,355
Short-term borrowings	100,761
Long-term debt	71,234
Other liabilities	29,951
Total liabilities assumed			1,291,301
Fair value of net assets acquired			121,179
Goodwill			$	27,264

Premises and equipment acquired with a fair value of $18.3 million included 17 branch locations. The fair value was determined with the assistance of a third party valuation consultant. The fair value write-ups will be recognized in depreciation expense over the estimated useful lives of the assets.

The Company recorded a core deposit intangible totaling $23.5 million, which is the portion of the merger purchase price that represents the value assigned to the existing deposit base. The core deposit intangible has a finite life and is amortized using an accelerated method over the estimated useful life of the deposits (estimated to be 8 years). In addition, the Company recorded a trust customer intangible totaling $4.8 million, which is the portion of the merger purchase price that represents the value assigned to the existing trust customer list. The trust customer intangible has a finite life and is amortized using an accelerated method over the estimated useful life of the intangible (estimated to be 6 years). See Note 7. Goodwill and Other Intangible Assets for further discussion of the accounting for goodwill and other intangible assets.

Short-term borrowings assumed with a fair value of $100.8 million included federal funds purchased of $9.4 million, securities sold under agreement to repurchase of $51.4 million, and $40.0 million of FHLB overnight advances. Long-term debt assumed

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MIDWESTONE FINANCIAL GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

with a fair value of $71.2 million included $42.7 million of FHLB term advances, $17.6 million of junior subordinated notes issued to capital trusts, and $10.9 million of subordinated debentures. See Note 12. Long-Term Debt for further discussion.

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 December 31, 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.



	Years Ended
	December 31,
	2019		2018
	(in thousands, except per share)
Total revenues (net interest income plus noninterest income)	$	185,102	$	190,895
Net income	$	45,871	$	42,751
Earnings per share - basic	$	2.84	$	2.62
Earnings per share - diluted	$	2.84	$	2.61

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



	Years Ended
	December 31,
	2019		2018
Noninterest Expense	(in thousands)
Compensation and employee benefits	$	5,435	$	—
Occupancy expense of premises, net	483		2
Legal and professional	2,762		680
Data processing	90		100
Other	360		15
Total ATBancorp acquisition-related expenses	$	9,130	$	797

Included in legal and professional above were transaction costs of $1.9 million and $0.6 million for the years ended December 31, 2019 and 2018, respectively.

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MIDWESTONE FINANCIAL GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Note 3.Debt Securities

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



			Gross		Gross
	Amortized		Unrealized		Unrealized
	Cost		Gains		Losses		Fair Value
	(in thousands)
December 31, 2019
U.S. Government agencies and corporations	$	439	$	2	$	—	$	441
State and political subdivisions	253,750		3,803		348		257,205
Mortgage-backed securities	43,009		536		15		43,530
Collateralized mortgage obligations	293,911		1,000		1,965		292,946
Corporate debt securities	188,952		3,018		115		191,855
Total debt securities	$	780,061	$	8,359	$	2,443	$	785,977

December 31, 2018
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 investment debt securities HTM, with gross unrealized gains and losses, were as follows:



			Gross		Gross
	Amortized		Unrealized		Unrealized
	Cost		Gains		Losses		Fair Value
	(in thousands)
December 31, 2018
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

During the quarter ended December 31, 2019, the Company transferred all of its investment securities classified as held to maturity to available for sale. Based on the changes in the current rate environment, management made this change in an effort to manage more effectively the investment portfolio, including the potential sale in the future of securities that were formerly classified as held to maturity. The amortized cost of the securities that were transferred totaled $186.4 million, and the pre-tax net unrealized gain related to these securities totaled $2.8 million on the date of the transfer. As a result of the transfer, the Company believes its held to maturity classification process has been compromised, and careful evaluation and analysis will be required going forward in determining when circumstances are suitable for management to assert with a great degree of credibility that it has the intent and ability to hold investments to maturity.

Investment securities with a carrying value of $264.8 million and $197.2 million at December 31, 2019 and 2018, respectively, were pledged on public deposits, securities sold under agreements to repurchase and for other purposes, as required or permitted by law.

Certain debt securities AFS and HTM were temporarily impaired as of December 31, 2019 and December 31, 2018. This temporary impairment represents the estimated amount of loss that would be realized if the securities were sold on the valuation date.

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MIDWESTONE FINANCIAL GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

The following tables present information pertaining to debt securities with gross unrealized losses as of December 31, 2019 and 2018, aggregated by investment category and length of time that individual securities have been in a continuous loss position. There were no held to maturity securities as of December 31, 2019.



		As of December 31, 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)
U.S. Government agencies and corporations	—	$	—	$	—	$	—	$	—	$	—	$	—
State and political subdivisions	47	27,161		322		2,112		26		29,273		348
Mortgage-backed securities	7	963		12		1,365		3		2,328		15
Collateralized mortgage obligations	33	103,395		719		65,604		1,246		168,999		1,965
Corporate debt securities	7	7,012		14		8,788		101		15,800		115
Total	94	$	138,531	$	1,067	$	77,869	$	1,376	$	216,400	$	2,443

		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 December 31, 2018
	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	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 assessment of OTTI is based on its reasonable judgment of the specific facts and circumstances impacting each individual security at the time such assessments are made. The Company reviews and considers factual information, including expected cash flows, the structure of the security, the creditworthiness of the issuer, the type of underlying assets and the current and anticipated market conditions.

At December 31, 2019, the investment portfolio included 807 securities. Of this number, 94 securities were in an unrealized loss position. The aggregate unrealized losses of these securities totaled approximately 0.31% of the total aggregate amortized cost. Of these 94 securities, 31 securities had an unrealized loss for 12 months or more. All of the debt securities in unrealized loss positions are considered acceptable credit risks. Based upon an evaluation of the available evidence, including the recent changes in market rates, credit rating information and information obtained from regulatory filings, management believes the declines in fair value for these debt securities are temporary. In addition, the Company lacks the intent to sell these securities and it is more likely than not that the Company will not be required to sell these debt securities before their anticipated recovery.

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MIDWESTONE FINANCIAL GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Proceeds and gross realized gains and losses on debt securities available for sale for the years ended December 31, 2019, 2018 and 2017, were as follows:



	Year Ended December 31,
	2019			2018			2017
	(in thousands)
Proceeds from sales of debt securities available for sale	$	125,452		$	14,490		$	22,538

Gross realized gains from sales of debt securities available for sale	$	143		$	203		$	199
Gross realized losses from sales of debt securities available for sale	(56		)	(6		)	(11		)
Net realized gain from sales of debt securities available for sale	$	87		$	197		$	188

The contractual maturity distribution of investment debt securities at December 31, 2019, is shown below. Expected maturities of MBS and CMO may differ from contractual maturities because the mortgages underlying the securities may be called or prepaid without any penalties. Therefore, these securities are not included in the maturity categories in the following summary.



	Available For Sale
	Amortized Cost		Fair Value
	(in thousands)
Due in one year or less	$	22,635	$	22,644
Due after one year through five years	170,933		173,172
Due after five years through ten years	194,803		198,926
Due after ten years	54,770		54,759
	$	443,141	$	449,501
Mortgage-backed securities	43,009		43,530
Collateralized mortgage obligations	293,911		292,946
Total	$	780,061	$	785,977

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MIDWESTONE FINANCIAL GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Note 4.Loans Receivable and the Allowance for Loan Losses

The composition of loans by lending classification was as follows:



	As of December 31,
	2019			2018
	(in thousands)
Agricultural	$	140,446		$	96,956
Commercial and industrial	835,236			533,188
Commercial real estate:
Construction & development	298,077			217,617
Farmland	181,885			88,807
Multifamily	227,407			134,741
Commercial real estate-other	1,107,490			826,163
Total commercial real estate	1,814,859			1,267,328
Residential real estate:
One- to four- family first liens	407,418			341,830
One- to four- family junior liens	170,381			120,049
Total residential real estate	577,799			461,879
Consumer	82,926			39,428
Loans held for investment, net of unearned income	$	3,451,266		$	2,398,779
Allowance for loan losses	$	(29,079	)	$	(29,307	)
Total loans held for investment, net	$	3,422,187		$	2,369,472

Loans with unpaid principal in the amount of $945.9 million and $444.6 million at December 31, 2019 and December 31, 2018, respectively, were pledged to the FHLB as collateral for borrowings.

The composition of allowance for loan losses and loans by portfolio segment and based on impairment method were as follows:



	As of December 31, 2019
	Agricultural		Commercial and Industrial		Commercial Real Estate		Residential Real Estate		Consumer		Total
	(in thousands)
Loans receivable
Individually evaluated for impairment	$	4,312	$	12,242	$	16,082	$	838	$	21	$	33,495
Collectively evaluated for impairment	135,246		822,939		1,781,306		572,865		82,864		3,395,220
Purchased credit impaired loans	888		55		17,471		4,096		41		22,551
Total	$	140,446	$	835,236	$	1,814,859	$	577,799	$	82,926	$	3,451,266
Allowance for loan losses:
Individually evaluated for impairment	$	212	$	2,198	$	1,180	$	73	$	—	$	3,663
Collectively evaluated for impairment	3,536		6,194		11,836		2,152		448		24,166
Purchased credit impaired loans	—		2		788		460		—		1,250
Total	$	3,748	$	8,394	$	13,804	$	2,685	$	448	$	29,079

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MIDWESTONE FINANCIAL GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



	As of December 31, 2018
	Agricultural		Commercial and Industrial		Commercial Real Estate		Residential Real Estate		Consumer		Total
	(in thousands)
Loans receivable
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

The changes in the ALLL by portfolio segment were as follows:



	Allowance for Loan Loss Activity
	For the Years Ended December 31, 2019, 2018, and 2017
	Agricultural			Commercial and Industrial			Commercial Real Estate			Residential Real Estate			Consumer			Total
	(in thousands)
2019
Beginning balance	$	3,637		$	7,478		$	15,635		$	2,349		$	208		$	29,307
Charge-offs	(1,130		)	(4,774		)	(1,537		)	(229		)	(720		)	(8,390		)
Recoveries	32			195			311			105			361			1,004
Provision (negative provision)	1,209			5,495			(605		)	460			599			7,158
Ending balance	$	3,748		$	8,394		$	13,804		$	2,685		$	448		$	29,079
2018
Beginning balance	$	2,790		$	8,518		$	13,637		$	2,870		$	244		$	28,059
Charge-offs	(656		)	(2,752		)	(2,901		)	(113		)	(618		)	(7,040		)
Recoveries	67			291			290			288			52			988
Provision (negative provision)	1,436			1,421			4,609			(696		)	530			7,300
Ending balance	$	3,637		$	7,478		$	15,635		$	2,349		$	208		$	29,307
2017
Beginning balance	$	2,003		$	6,274		$	9,860		$	3,458		$	255		$	21,850
Charge-offs	(1,202		)	(2,338		)	(7,931		)	(305		)	(257		)	(12,033		)
Recoveries	187			232			291			180			18			908
Provision (negative provision)	1,802			4,350			11,417			(463		)	228			17,334
Ending balance	$	2,790		$	8,518		$	13,637		$	2,870		$	244		$	28,059

Table of Contents

MIDWESTONE FINANCIAL GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

TDRs totaled $11.0 million and $5.3 million as of December 31, 2019 and 2018, respectively. The following table sets forth information on the Company's TDRs by class of financing receivable occurring during the stated periods. TDRs may include multiple concessions, and the disclosure classifications in the table are based on the primary concession provided to the borrower.



	2019					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		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	0	$	—	$	—	0	$	—	$	—
Commercial and industrial
Extended maturity date	3	6,309		6,309		0	—		—		6	2,037		2,083
Commercial real estate:
Farmland
Extended maturity date	1	158		158		1	86		86		2	176		176
Commercial real estate-other
Extended maturity date	0	—		—		0	—		—		2	4,276		4,276
Other	0	—		—		0	—		—		1	10,546		10,923
Residential real estate:
One- to four- family first liens
Extended maturity date	4	294		293		1	39		46		0	—		—
One- to four- family junior liens
Extended maturity date	6	168		168		0	—		—		0	—		—
Total	21	$	7,270	$	7,269	2	$	125	$	132	11	$	17,035	$	17,458

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

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



	2019			2018			2017
	Number of Contracts	Recorded Investment		Number of Contracts	Recorded Investment		Number of Contracts	Recorded Investment
(dollars in thousands)
TDRs⁽¹⁾ That Subsequently Defaulted:
Agricultural
Extended maturity date	6	$	315	0	$	—	0	$	—
Commercial and industrial
Extended maturity date	0	—		0	—		4	1,504
Commercial real estate:
Farmland
Extended maturity date	1	158		0	—		0	—
Commercial real estate-other
Extended maturity date	0	—		1	46		1	968
Residential real estate:
One- to four- family first liens
Extended maturity date	3	239		0	—		0	—
One- to four- family junior liens
Extended maturity date	2	30		0	—		0	—
Total	12	$	742	1	$	46	5	$	2,472

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

Table of Contents

MIDWESTONE FINANCIAL GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

The following table sets forth the risk category of loans by class of loans and credit quality indicator based on the most recent analysis performed, as of December 31, 2019 and 2018:



	Pass		Special Mention/Watch		Substandard		Doubtful		Loss		Total
	(in thousands)
2019
Agricultural	$	117,374	$	13,292	$	9,780	$	—	$	—	$	140,446
Commercial and industrial	794,526		19,038		21,635		1		36		835,236
Commercial real estate:
Construction & development	283,921		11,423		2,733		—		—		298,077
Farmland	141,107		21,307		19,471		—		—		181,885
Multifamily	226,124		90		1,193		—		—		227,407
Commercial real estate-other	1,036,418		50,691		20,381		—		—		1,107,490
Total commercial real estate	1,687,570		83,511		43,778		—		—		1,814,859
Residential real estate:
One- to four- family first liens	396,175		4,547		6,532		164		—		407,418
One- to four- family junior liens	168,229		1,282		870		—		—		170,381
Total residential real estate	564,404		5,829		7,402		164		—		577,799
Consumer	82,650		39		218		19		—		82,926
Total	$	3,246,524	$	121,709	$	82,813	$	184	$	36	$	3,451,266
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 & 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, substandard, and doubtful categories at December 31, 2019 and 2018 were purchased credit impaired loans totaling $12.1 million and $8.9 million, respectively.

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.

Table of Contents

MIDWESTONE FINANCIAL GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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, as of December 31, 2019 and 2018:



	As of December 31,
	2019						2018
	Recorded Investment		Unpaid Principal Balance		Related Allowance		Recorded Investment		Unpaid Principal Balance		Related Allowance
	(in thousands)
With no related allowance recorded:
Agricultural	$	2,383	$	2,913	$	—	$	1,999	$	2,511	$	—
Commercial and industrial	7,391		10,875		—		2,761		2,977		—
Commercial real estate:
Construction & development	1,181		1,218		—		84		84		—
Farmland	4,306		4,331		—		110		110		—
Multifamily	—		—		—		—		—		—
Commercial real estate-other	5,709		5,854		—		1,533		2,046		—
Total commercial real estate	11,196		11,403		—		1,727		2,240		—
Residential real estate:
One- to four- family first liens	577		578		—		617		644		—
One- to four- family junior liens	—		—		—		292		293		—
Total residential real estate	577		578		—		909		937		—
Consumer	21		21		—		24		24		—
Total	$	21,568	$	25,790	$	—	$	7,420	$	8,689	$	—
With an allowance recorded:
Agricultural	$	1,929	$	1,930	$	212	$	2,091	$	2,097	$	322
Commercial and industrial	4,851		5,417		2,198		6,196		8,550		2,159
Commercial real estate:
Construction & development	135		135		135		—		—		—
Farmland	1,109		1,148		347		2,123		2,123		662
Multifamily	—		—		—		—		—		—
Commercial real estate-other	3,642		4,229		698		4,107		4,365		2,021
Total commercial real estate	4,886		5,512		1,180		6,230		6,488		2,683
Residential real estate:
One- to four- family first liens	261		262		73		851		851		120
One- to four- family junior liens	—		—		—		—		—		—
Total residential real estate	261		262		73		851		851		120
Consumer	—		—		—		—		—		—
Total	$	11,927	$	13,121	$	3,663	$	15,368	$	17,986	$	5,284
Total:
Agricultural	$	4,312	$	4,843	$	212	$	4,090	$	4,608	$	322
Commercial and industrial	12,242		16,292		2,198		8,957		11,527		2,159
Commercial real estate:
Construction & development	1,316		1,353		135		84		84		—
Farmland	5,415		5,479		347		2,233		2,233		662
Multifamily	—		—		—		—		—		—
Commercial real estate-other	9,351		10,083		698		5,640		6,411		2,021
Total commercial real estate	16,082		16,915		1,180		7,957		8,728		2,683
Residential real estate:
One- to four- family first liens	838		840		73		1,468		1,495		120
One- to four- family junior liens	—		—		—		292		293		—
Total residential real estate	838		840		73		1,760		1,788		120
Consumer	21		21		—		24		24		—
Total	$	33,495	$	38,911	$	3,663	$	22,788	$	26,675	$	5,284

Table of Contents

MIDWESTONE FINANCIAL GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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, during the stated periods:



	For the Year Ended December 31,
	2019				2018				2017
	Average Recorded Investment		Interest Income Recognized		Average Recorded Investment		Interest Income Recognized		Average Recorded Investment		Interest Income Recognized
	(in thousands)
With no related allowance recorded:
Agricultural	$	2,388	$	43	$	1,608	$	53	$	1,585	$	66
Commercial and industrial	5,323		—		2,607		94		7,588		230
Commercial real estate:
Construction & development	244		37		84		—		364		2
Farmland	2,243		—		66		—		1,012		58
Multifamily	—		—		—		—		—		—
Commercial real estate-other	2,161		224		1,328		41		5,682		233
Total commercial real estate	4,648		261		1,478		41		7,058		293
Residential real estate:
One- to four- family first liens	323		2		404		—		2,406		84
One- to four- family junior liens	—		—		287		—		27		2
Total residential real estate	323		2		691		—		2,433		86
Consumer	17		—		5		1		—		—
Total	$	12,699	$	306	$	6,389	$	189	$	18,664	$	675
With an allowance recorded:
Agricultural	$	1,500	$	34	$	1,876	$	56	$	1,457	$	44
Commercial and industrial	2,186		136		4,991		59		2,189		103
Commercial real estate:
Construction & development	26		7		—		—		—		—
Farmland	684		5		1,692		—		—		—
Multifamily	—		—		—		—		—		—
Commercial real estate-other	1,558		100		2,146		190		4,275		34
Total commercial real estate	2,268		112		3,838		190		4,275		34
Residential real estate:
One- to four- family first liens	265		9		861		32		1,030		35
One- to four- family junior liens	—		—		—		—		267		5
Total residential real estate	265		9		861		32		1,297		40
Consumer	—		—		—		—		—		—
Total	$	6,219	$	291	$	11,566	$	337	$	9,218	$	221
Total:
Agricultural	$	3,888	$	77	$	3,484	$	109	$	3,042	$	110
Commercial and industrial	7,509		136		7,598		153		9,777		333
Commercial real estate:
Construction & development	270		44		84		—		364		2
Farmland	2,927		5		1,758		—		1,012		58
Multifamily	—		—		—		—		—		—
Commercial real estate-other	3,719		324		3,474		231		9,957		267
Total commercial real estate	6,916		373		5,316		231		11,333		327
Residential real estate:
One- to four- family first liens	588		11		1,265		32		3,436		119
One- to four- family junior liens	—		—		287		—		294		7
Total residential real estate	588		11		1,552		32		3,730		126
Consumer	17		—		5		1		—		—
Total	$	18,918	$	597	$	17,955	$	526	$	27,882	$	896

Table of Contents

MIDWESTONE FINANCIAL GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

The following table presents the contractual aging of the loan portfolio:



	Current		30 - 59 Days Past Due		60 - 89 Days Past Due		90 Days or More Past Due & Accruing		Non-Accrual		Total Loans Receivable
	(in thousands)
December 31, 2019
Agricultural	$	136,578	$	975	$	—	$	—	$	2,893	$	140,446
Commercial and industrial	820,923		782		255		—		13,276		835,236
Commercial real estate:
Construction & development	293,718		2,256		609		—		1,494		298,077
Farmland	171,121		362		—		—		10,402		181,885
Multifamily	227,013		394		—		—		—		227,407
Commercial real estate-other	1,095,271		1,731		347		—		10,141		1,107,490
Total commercial real estate	1,787,123		4,743		956		—		22,037		1,814,859
Residential real estate:
One- to four- family first liens	401,553		2,492		718		99		2,556		407,418
One- to four- family junior liens	169,344		419		80		25		513		170,381
Total residential real estate	570,897		2,911		798		124		3,069		577,799
Consumer	82,499		130		79		12		206		82,926
Total	$	3,398,020	$	9,541	$	2,088	$	136	$	41,481	$	3,451,266

Included in the totals above are the following purchased credit impaired loans	$	15,304	$	—	$	—	$	—	$	7,247	$	22,551

December 31, 2018
Agricultural	$	95,227	$	57	$	50	$	—	$	1,622	$	96,956
Commercial and industrial	522,463		1,507		—		—		9,218		533,188
Commercial real estate:
Construction & development	217,476		42		—		—		99		217,617
Farmland	86,056		—		—		—		2,751		88,807
Multifamily	134,741		—		—		—		—		134,741
Commercial real estate-other	821,214		391		—		—		4,558		826,163
Total commercial real estate	1,259,487		433		—		—		7,408		1,267,328
Residential real estate:
One- to four- family first liens	337,405		1,851		1,184		341		1,049		341,830
One- to four- family junior liens	119,040		406		114		24		465		120,049
Total residential real estate	456,445		2,257		1,298		365		1,514		461,879
Consumer	39,225		32		9		—		162		39,428
Total	$	2,372,847	$	4,286	$	1,357	$	365	$	19,924	$	2,398,779

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

As of December 31, 2019, the Company had $0.3 million of commitments to lend additional funds to borrowers who have a nonperforming loan.

Table of Contents

MIDWESTONE FINANCIAL GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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



	December 31, 2019		December 31, 2018
	(in thousands)
Agricultural	$	904	$	—
Commercial and industrial	147		165
Commercial real estate	17,803		13,600
Residential real estate	4,136		4,172
Consumer	57		—
Outstanding balance	23,047		17,937
Carrying amount	22,551		17,009
Allowance for loan losses	1,250		1,197
Carrying amount, net of allowance for loan losses	$	21,301	$	15,812

The following table summarizes PCI loans acquired by the Company during the current period as of the merger date and at the end of the period:



	For the Year Ended
	December 31, 2019
	(in thousands)
Contractually required principal payments	$	15,074
Nonaccretable discount	(2,957		)
Fair value of acquired loans	$	12,116

Loans at end of period	$	7,666

Changes in the accretable yield for loans acquired and accounted for under ASC 310-30 were as follows for the year ended December 31, 2019 and 2018:



	For the Year Ended December 31,
	2019			2018
	(in thousands)
Balance at beginning of period	$	3,840		$	4,304
Purchases	—			—
Accretion	(626		)	(802		)
Reclassification from nonaccretable difference	68			338
Balance at end of period	$	3,282		$	3,840

Table of Contents

MIDWESTONE FINANCIAL GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Note 5.Derivatives, Hedging Activities and Balance Sheet Offsetting

The following table presents the total notional amounts and gross fair values of the Company’s derivatives. 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 December 31, 2019						As of December 31, 2018
			Fair Value						Fair Value
	Notional Amount		Derivative Assets		Derivative Liabilities		Notional Amount		Derivative Assets		Derivative Liabilities
	(in thousands)
Derivatives designated as hedging instruments:
Fair value hedges:
Interest rate swaps	$	16,734	$	—	$	1,113	$	8,927	$	—	$	223
Total derivatives designated as hedging instruments	$	16,734	$	—	$	1,113	$	8,927	$	—	$	223

Derivatives not designated as hedging instruments:
Interest rate swaps	$	113,632	$	1,824	$	1,999	$	13,830	$	321	$	359
RPAs	14,711		24		130		10,112		—		85
Total derivatives not designated as hedging instruments	$	128,343	$	1,848	$	2,129	$	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 years ended December 31, 2019, 2018, and 2017:



	Location and Amount of Gain (Loss) Recognized in Income on Fair Value Hedging Relationships
	For the Years Ended December 31,
	2019					2018					2017
	Interest Income			Other Income		Interest Income			Other Income		Interest Income		Other Income
	(in thousands)
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	)	$	—	$	—	$	—

The effects of fair value hedging:
Gain (Loss) on fair value hedging relationships in subtopic 815-20:
Interest contracts:
Hedged items	891			—		221			—		—		—
Derivative designated as hedging instruments	(890		)	—		(223		)	—		—		—

Table of Contents

MIDWESTONE FINANCIAL GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

As of December 31, 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	$	17,849	$	1,111

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. The following table represents the notional amounts and the gross fair values of interest rate derivative contracts outstanding as of December 31, 2019 and December 31, 2018.



	December 31, 2019
	Customer Counterparties						Financial Counterparties
			Fair Value						Fair Value
(in thousands)	Notional Amount		Assets		Liabilities		Notional Amount		Assets		Liabilities
Swaps	$	56,816	$	1,824	$	—	$	56,816	$	—	$	1,999

	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 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 December 31, 2019 and December 31, 2018.



	December 31, 2019						December 31, 2018
			Fair Value						Fair Value
(in thousands)	Notional Amount		Assets		Liabilities		Notional Amount		Assets		Liabilities
RPAs - protection sold	$	4,702	$	24	$	—	$	—	$	—	$	—
RPAs - protection purchased	10,009		—		130		10,112		—		85
Total RPAs	$	14,711	$	24	$	130	$	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 years ended December 31, 2019, 2018, and 2017:



	Location in the Consolidated Statements of Income	For the Years Ended December 31,
(in thousands)	Location in the Consolidated Statements of Income	2019			2018			2017
Interest rate swaps	Other income	$	(138	)	$	(38	)	$	—
RPAs	Other income	(117		)	115			—
Total		$	(255	)	$	77		$	—

Table of Contents

MIDWESTONE FINANCIAL GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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 December 31, 2019 and December 31, 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 December 31, 2019
Asset Derivatives	$	1,848		$	—	$	1,848		$	—	$	—		$	1,848
Liability Derivatives	(3,242		)	—		(3,242		)	—		(3,280		)	38

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

As of December 31, 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 $3,265,000. As of December 31, 2019, the Company has minimum collateral posting thresholds with certain of its derivative counterparties, and has posted $3,280,000 of collateral related to these agreements. If the Company had breached any of these provisions at December 31, 2019, it could have been required to settle its obligations under the agreements at their termination value of $3,265,000.

Note 6.Premises and Equipment

Premises and equipment as of December 31, 2019 and 2018 were as follows:



	As of December 31,
	2019		2018
	(in thousands)
Land	$	14,530	$	12,464
Buildings and leasehold improvements	89,605		75,775
Furniture and equipment	20,769		17,752
Construction in process	359		95
Premises and equipment	125,263		106,086
Accumulated depreciation and amortization	34,540		30,313
Premises and equipment, net	$	90,723	$	75,773

Premises and equipment depreciation and amortization expense for the years ended December 31, 2019, 2018 and 2017 was $4.8 million, $4.2 million and $4.0 million, respectively.

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MIDWESTONE FINANCIAL GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Note 7.Goodwill and Other Intangible Assets

The following table presents the changes in the carrying amount of goodwill for the periods indicated:



	For the Years Ended December 31,
	2019		2018
	(in thousands)
Goodwill, beginning of period	$	64,654	$	64,654
Goodwill from acquisition of ATBancorp	27,264		—
Total goodwill, end of period	$	91,918	$	64,654

As part of the ATBancorp acquisition, the Company acquired a core deposit intangible with an assigned amount of $23.5 million and a trust customer relationship intangible with an assigned amount of $4.8 million. The following table presents the gross carrying amount, accumulated amortization, and net carrying amount of other intangible assets for the periods indicated:



	As of December 31, 2019							As of December 31, 2018
	Gross Carrying Amount		Accumulated Amortization			Net Carrying Amount		Gross Carrying Amount		Accumulated Amortization			Net Carrying Amount
	(in thousands)
Core deposit intangible	$	41,745	$	(21,032	)	$	20,713	$	18,206	$	(16,233	)	$	1,973
Customer relationship intangible	5,265		(1,195		)	4,070		455		(259		)	196
Other	2,700		(2,305		)	395		2,700		(2,034		)	666
	$	49,710	$	(24,532	)	$	25,178	$	21,361	$	(18,526	)	$	2,835

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

The following table summarizes future amortization expense of intangible assets:



	Core		Customer
	Deposit		Relationship
	Intangible		Intangible		Other		Totals
Year ending December 31,	(in thousands)
2020	$	5,407	$	1,435	$	133	$	6,975
2021	4,190		1,062		106		5,358
2022	3,487		797		79		4,363
2023	2,833		518		51		3,402
2024	2,180		239		24		2,443
Thereafter	2,616		19		2		2,637
Total	$	20,713	$	4,070	$	395	$	25,178

Table of Contents

MIDWESTONE FINANCIAL GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Note 8.Other Assets

The components of the Company’s other assets as of December 31, 2019 and 2018 were as follows:



	As of December 31,
	2019		2018
	(in thousands)
Assets held for sale	$	580	$	—
Bank-owned life insurance	81,625		60,989
Interest receivable	18,525		14,736
FHLB stock	15,381		14,678
Mortgage servicing rights	7,026		2,803
Operating leases right-of-use asset	4,499		—
Federal & state taxes, current	2,318		2,361
Federal & state taxes, deferred	3,530		8,273
Other receivables/assets	14,476		11,262
	$	147,960	$	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 2. Business Combinations for further details.

The increase in the operating lease ROU assets in 2019 was due to the adoption of ASU 2016-01 effective January 1, 2019. See Note 22. Leases for further details.

Note 9.Loans Serviced for Others

Loans serviced for others are not included in the accompanying consolidated balance sheets. The unpaid principal balances of mortgage and other loans serviced for others were $1.1 billion and $447.8 million at December 31, 2019 and 2018, respectively. Servicing loans for others generally consists of collecting mortgage payments, maintaining escrow accounts, disbursing payments to investors and collection and foreclosure processing. Loan servicing income is recorded on the accrual basis and includes servicing fees from investors and certain charges collected from borrowers, such as late payment fees, and is net of fair value adjustments to capitalized mortgage servicing rights.

Note 10.Deposits

The composition of the Company’s deposits as of December 31, 2019 and 2018 were as follows:



	As of December 31,
	2019		2018
	(in thousands)
Non-interest-bearing demand	$	662,209	$	439,133
Interest-bearing checking	962,830		683,894
Money market	763,028		555,839
Savings	387,142		210,416
Certificates of deposit under $250,000	682,232		532,395
Certificates of deposit of $250,000 or more	271,214		191,252
Total deposits	$	3,728,655	$	2,612,929

Table of Contents

MIDWESTONE FINANCIAL GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

At December 31, 2019, the scheduled maturities of certificates of deposits were as follows:



(in thousands)
2020	$	678,107
2021	183,458
2022	59,374
2023	19,000
2024	12,670
Thereafter	837
Total	$	953,446

The Company had $6.6 million and $8.6 million in brokered time deposits through the CDARS program as of December 31, 2019 and December 31, 2018, respectively. Included in interest-bearing checking and money market deposits at December 31, 2019 and December 31, 2018 were $10.1 million and $23.7 million, respectively, of brokered deposits in the Insured Cash Sweep (ICS) program. The CDARS and ICS programs coordinate, on a reciprocal basis, a network of banks to spread deposits exceeding the FDIC insurance coverage limits out to numerous institutions in order to provide insurance coverage for all participating deposits.

As of December 31, 2019 and December 31, 2018, the Company had public entity deposits that were collateralized by investment securities of $96.6 million and $90.4 million, respectively.

Note 11.Short-Term Borrowings

Short-term borrowings were as follows as of December 31, 2019 and December 31, 2018:



	December 31, 2019				December 31, 2018
	Weighted Average Cost		Balance		Weighted Average Cost		Balance
	(dollars in thousands)
Securities sold under agreements to repurchase	1.06	%	$	117,249	1.00	%	$	74,522
Federal Home Loan Bank overnight advances	1.73		22,100		2.60		56,900
Total	1.17	%	$	139,349	1.69	%	$	131,422

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 FHLBDM. Advances from the FHLBDM are collateralized primarily by one- to four-family residential, commercial and agricultural real estate first mortgages equal to various percentages of the total outstanding notes. See Note 4. Loans Receivable and the Allowance for 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 no borrowings from such lines at December 31, 2019 and December 31, 2018.

At December 31, 2019 and 2018, the Company had no Federal Reserve Discount Window borrowings, while the borrowing capacity at December 31, 2019 and 2018 was $12.7 million, and $11.4 million, respectively. As of December 31, 2019 and 2018, the Bank had municipal securities with a market value of $13.0 million and $12.7 million, respectively, pledged to the Federal Reserve Bank of Chicago to secure potential borrowings.

On April 30, 2015, the Company entered into a credit agreement with a correspondent bank under which the Company could borrow up to $5.0 million from an unsecured revolving loan. Interest was payable at a rate of one-month LIBOR plus 2.00%. The credit agreement was 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, 2020. The Company had no balance outstanding under this revolving loan as of December 31, 2019 and 2018.

Table of Contents

MIDWESTONE FINANCIAL GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Note 12.Long-Term Debt

Junior Subordinated Notes Issued to Capital Trusts

On May 1, 2019, through the acquisition of ATBancorp, the Company assumed the junior subordinated notes issued to ATBancorp Statutory Trust I and ATBancorp Statutory Trust II. The table below summarizes the terms of each issuance of junior subordinated notes outstanding as of December 31, 2019 and December 31, 2018:



	Face Value		Book Value		Interest Rate	Year-end Interest Rate		Maturity Date	Callable Date
December 31, 2019	Face Value		Book Value		Interest Rate	Year-end Interest Rate		Maturity Date	Callable Date
	(in thousands)
ATBancorp Statutory Trust I	$	7,732	$	6,814	Three-month LIBOR + 1.68%	3.57	%	06/15/2036	06/15/2011
ATBancorp Statutory Trust II	12,372		10,794		Three-month LIBOR + 1.65%	3.54	%	09/15/2037	06/15/2012
Central Bancshares Capital Trust II	7,217		6,783		Three-month LIBOR + 3.50%	5.39	%	03/15/2038	03/15/2013
Barron Investment Capital Trust I	2,062		1,732		Three-month LIBOR + 2.15%	4.08	%	09/23/2036	09/23/2011
MidWestOne Statutory Trust II	15,464		15,464		Three-month LIBOR + 1.59%	3.48	%	12/15/2037	12/15/2012
Total	$	44,847	$	41,587

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

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

Subordinated Debentures

On May 1, 2019, with the acquisition of ATBancorp, the Company assumed $10.9 million of subordinated debentures. These debentures have a stated maturity of May 31, 2023, and bear interest at a fixed annual rate of 6.50%, with interest payable semi-annually on March 15th and September 15th. The Company has the option to 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 the Federal Reserve applicable to the capital status of the subordinated debt of bank holding companies. Beginning on the fifth anniversary preceding the 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 20% of the amount of the debentures in each of the final five years preceding maturity, such that during the final year, we will not be permitted to treat any portion of the debentures as Tier 2 capital. At December 31, 2019, we were permitted to treat 60% of the debentures as Tier 2 capital.

Other Long-Term Debt

Long-term borrowings were as follows as of December 31, 2019 and December 31, 2018:



	December 31, 2019				December 31, 2018
	Weighted Average Cost		Balance (in thousands)		Weighted Average Cost		Balance (in thousands)
Finance lease payable	8.89	%	$	1,224	8.89	%	$	1,338
FHLB borrowings	2.25		145,700		2.45		136,000
Notes payable to unaffiliated bank	3.44		32,250		4.13		7,500
Total	2.51	%	$	179,174	2.60	%	$	144,838

The Company utilizes FHLB borrowings as a funding source to supplement customer deposits and to assist in managing interest rate risk. As a member of the FHLBDM, the Bank may borrow funds from the FHLB in amounts up to 45% of the Bank’s total

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MIDWESTONE FINANCIAL GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

assets, provided the Bank is able to pledge an adequate amount of qualified assets to secure the borrowings. Advances from the FHLB are collateralized primarily by one- to four-family residential, commercial and agricultural real estate first mortgages equal to various percentages of the total outstanding notes. See Note 4. Loans Receivable and the Allowance for Loan Losses of the notes to the consolidated financial statements. At December 31, 2019, FHLB long-term borrowings included $6.4 million in advances from the FHLBC assumed in the merger with ATBancorp. The advances from the FHLBC are collateralized by investment securities. See Note 3. Debt Securities of the notes to the consolidated financial statements.

As of December 31, 2019, FHLB borrowings were as follows:



	Weighted Average Rate		Amount
			(in thousands)
Due in 2020	1.93	%	$	54,400
Due in 2021	2.07	%	43,000
Due in 2022	2.68	%	31,000
Due in 2023	2.79	%	11,000
Due in 2024	3.15	%	6,000
Thereafter	—	%	—
Total			145,400
Valuation adjustment from acquisition accounting			300
Total			$	145,700

On April 30, 2015, the Company entered into a $35.0 million unsecured note payable with a correspondent bank with a maturity date of June 30, 2020. 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 principal and interest were payable quarterly beginning September 30, 2015. As of December 31, 2019, $2.5 million of that note was outstanding. The note contains certain requirements, covenants and restrictions that we view to be customary for such a transaction, including those that place restrictions on additional debt and stipulate minimum capital and various operating ratios.

On April 30, 2019, the Company entered into a $35.0 million unsecured note payable with a correspondent bank with a maturity date of April 30, 2024. Quarterly principal and interest payments began June 30, 2019 and, as of December 31, 2019, $29.8 million of that note was outstanding.

Note 13.Income Taxes

Income taxes for the years ended December 31, 2019, 2018 and 2017 are summarized as follows:



	December 31,
	2019		2018			2017
	(in thousands)
Current:
Federal tax expense	$	1,217	$	5,293		$	7,289
State tax expense	2,353		3,004			2,435
Deferred:
Deferred income tax expense	3,003		(680		)	652
Total income tax provision	$	6,573	$	7,617		$	10,376

Table of Contents

MIDWESTONE FINANCIAL GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

A reconciliation of the expected federal income tax expense to the income tax expense included in the consolidated statements of income was as follows:



	Year ended December 31,
	2019					2018					2017
	Amount			% of Pretax Income		Amount			% of Pretax Income		Amount			% of Pretax Income
	(dollars in thousands)
Computed “expected” tax expense	$	10,543		21.0	%	$	7,973		21.0	%	$	10,176		35.0	%
Tax-exempt interest	(2,392		)	(4.8	)	(1,876		)	(4.9	)	(3,182		)	(10.9	)
Bank-owned life insurance	(394		)	(0.8	)	(337		)	(0.9	)	(485		)	(1.7	)
State income taxes, net of federal income tax benefit	2,688			5.3		2,040			5.4		1,307			4.5
Non-deductible acquisition expenses	177			0.4		122			0.3		—			—
General business credits	(4,090		)	(8.1	)	(343		)	(0.9	)	(466		)	(1.6	)
Federal income tax rate change	—			—		—			—		3,212			11.1
Other	41			0.1		38			0.1		(186		)	(0.7	)
Total income tax provision	$	6,573		13.1	%	$	7,617		20.1	%	$	10,376		35.7	%

Net deferred tax assets as of December 31, 2019 and 2018 consisted of the following components:



	December 31,
	2019		2018
	(in thousands)
Deferred income tax assets:
Allowance for loan losses	$	7,577	$	7,636
Deferred compensation	4,100		1,361
Net operating losses (state net operating loss carryforwards)	4,477		4,283
Unrealized losses on investment securities	—		1,999
Accrued compensation	1,496		816
ROU liabilities	1,388		—
Tax credit carryforward	611		—
Other	1,541		1,415
Gross deferred tax assets	21,190		17,510

Deferred income tax liabilities:
Premises and equipment depreciation and amortization	4,759		2,947
Purchase accounting adjustments	3,171		769
Mortgage servicing rights	1,831		730
Unrealized gains on investment securities	1,544		—
ROU assets	1,388		—
Other	490		508
Gross deferred tax liabilities	13,183		4,954
Net deferred income tax asset	8,007		12,556
Valuation allowance	4,477		4,283
Net deferred tax asset	$	3,530	$	8,273

The Company has recorded a deferred tax asset for the future tax benefits of Iowa net operating loss carryforwards. The Iowa net operating loss carryforwards amounting to approximately $58.0 million will expire in various amounts from 2020 to 2040. As of December 31, 2019 and 2018, the Company believed it was more likely than not that all temporary differences associated with the Iowa corporate tax return would not be fully realized. Accordingly, the Company has recorded a valuation allowance to reduce the net operating loss carryforward. A valuation allowance related to the remaining deferred tax assets has not been provided because management believes it is more likely than not that the results of future operations will generate sufficient taxable income to realize the deferred tax assets.

Table of Contents

MIDWESTONE FINANCIAL GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

The Company had no material unrecognized tax benefits as of December 31, 2019 and 2018.

Note 14.Employee Benefit Plans

The Company has a salary reduction profit-sharing 401(k) plan covering all employees fulfilling minimum age and service requirements. Employee contributions to the plan are optional. Employer contributions are discretionary and may be made to the plan in an amount equal to a percentage of each participating employee’s salary. The Company matches 100% of the first 3% of employee contributions, and 50% of the next 2% of employee contributions, up to a maximum amount of 4% of an employee’s compensation. Company matching contributions for the years ended December 31, 2019, 2018 and 2017 were as follows:



	2019		2018		2017
	(in thousands)
Company contributions	$	1,617	$	1,361	$	1,306

The Company has an ESOP covering all employees fulfilling minimum age and service requirements. Employer contributions are discretionary and may be made to the plan in an amount equal to a percentage of each participating employee’s salary. The ESOP contribution expense for the years ended December 31, 2019, 2018 and 2017 were as follows:



	2019		2018		2017
	(in thousands)
Company contributions	$	1,514	$	690	$	1,081

The Company provides Health Savings Account contributions to its employees enrolled in high deductible plans. Company contributions for the years ended December 31, 2019, 2018 and 2017 were as follows:



	2019		2018		2017
	(in thousands)
Company contributions	$	315	$	215	$	195

The Company has several nonqualified plans for which liabilities are recorded on its books under a broad label of deferred compensation liabilities. These plans include supplemental executive retirement plans, salary continuation plans, deferred compensation plans, and an insurance plan that provides one times final salary as a post-retirement death benefit. These plans are outlined in the paragraphs and tables that follow.

The Company has entered into nonqualified supplemental executive retirement plans (SERPs) with certain executive officers. The SERPs allow certain executives to accumulate retirement benefits beyond those provided by the qualified plans. Changes in the liability related to the SERPs, included in other liabilities, were as follows for the years ended December 31, 2019, 2018 and 2017:



	2019			2018			2017
	(in thousands)
Balance, beginning	$	1,867		$	2,061		$	2,278
Company contributions and interest	117			156			146
Cash payments made	(352		)	(350		)	(363		)
Balance, ending	$	1,632		$	1,867		$	2,061

The Company has salary continuation plans for several officers and directors. These plans provide payments of various amounts upon retirement or death. There are no employee compensation deferrals to these plans. The Company accrues the expense for these benefits by charges to operating expense during the period the respective officer or director attains full eligibility.

Table of Contents

MIDWESTONE FINANCIAL GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Changes in the salary continuation agreements, included in other liabilities, were as follows for the years ended December 31, 2019, 2018 and 2017:



	2019			2018			2017
	(in thousands)
Balance, beginning	$	1,104		$	1,251		$	1,389
Plans acquired in ATBancorp merger	11,058			—			—
Company paid interest	145			75			84
Cash payments made	(6,855		)	(222		)	(222		)
Balance, ending	$	5,452		$	1,104		$	1,251

The Company has entered into deferred compensation agreements with certain executive officers. Under the provisions of the agreements, the officers may defer compensation. Interest on the deferred amounts is earned at The Wall Street Journal’s prime rate plus one percent. The Company also maintains deferred compensation agreements with certain other officers and directors under whose terms deferrals are no longer permitted, and the interest rate is fixed at 4%. In 2019 the Company also acquired deferred compensations plans as a result of the merger with ATBancorp. Under the provisions of the agreements, interest on the deferred amounts is earned at an annual interest rate equal to the Bank’s return on equity and deferrals are no longer permitted. Upon retirement, the officers and directors will generally receive the deferral balance in equal monthly installments over periods no longer that 180 months.

Changes in the deferred compensation agreements, included in other liabilities, were as follows for the years ended December 31, 2019, 2018 and 2017:



	2019			2018			2017
	(in thousands)
Balance, beginning	$	855		$	715		$	529
Plans acquired in ATBancorp merger	5,958			—			—
Employee deferrals	157			179			193
Company paid interest	395			35			24
Cash payments made	(344		)	(74		)	(31		)
Balance, ending	$	7,021		$	855		$	715

The Company has an insurance benefit plan for several officers for which it is required under accounting standards to maintain an accrued liability balance for the commitment to provide an insurance benefit of one times last annual salary after retirement. Changes in the accrued balance, included in other liabilities, were as follows for the years ended December 31, 2019, 2018 and 2017:



	2019		2018		2017
	(in thousands)
Balance, beginning	$	1,442	$	1,172	$	983
Company deferral expense	228		270		189
Balance, ending	$	1,670	$	1,442	$	1,172

To provide the retirement benefits for the aforementioned various deferred compensation plans, the Company carries life insurance policies which had cash values totaling $74.9 million, $55.1 million and $54.1 million at December 31, 2019, 2018 and 2017, respectively.

Note 15.Stock Compensation Plans

On April 20, 2017, the Company’s shareholders approved the MidWestOne Financial Group, Inc. 2017 Equity Incentive Plan (the “2017 Plan”). The 2017 Plan is the successor to the 2008 Equity Incentive Plan, which expired on November 20, 2017. Under the terms of the 2017 Plan, the Company may grant a total of 500,000 total shares of the Company’s common stock as stock options, stock appreciation rights or stock awards (including restricted stock and restricted stock units) and may also grant cash incentive awards to eligible individuals. As of December 31, 2019, 402,310 shares of the Company’s common stock remained available for future awards under the 2017 Plan.

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During 2019, the Company recognized $1.2 million of stock based compensation expense related to restricted stock unit grants. In comparison, during 2018 and 2017, the Company recognized $1.0 million and $0.9 million, respectively, related to restricted stock unit grants.

Incentive Stock Options:

The Company is required to estimate the fair value of share-based payment awards on the date of grant using an option-pricing model. The value of the portion of the award that is ultimately expected to vest is recognized as compensation expense in the Company’s consolidated statements of operations over the requisite service periods using a straight-line method. The Company assumes no projected forfeitures on its stock-based compensation, since actual historical forfeiture rates on its stock-based incentive awards have been negligible.

The stock options were granted with a maximum term of ten years, an exercise price equal to the fair market value of a share of stock on the date of grant and vesting at a rate of 25% per year over four years, with the first vesting date being the one-year anniversary of the grant date. There were no stock options outstanding as of December 31, 2019 and 2018. Plan participants realized an intrinsic value of $179,000 and $219,000 from the exercise of stock options during 2018 and 2017, respectively. As of December 31, 2019, there were no remaining compensation costs related to nonvested stock options that have not yet been recognized. There were no stock option awards granted in 2019, 2018, or 2017.

Restricted Stock Units:

Under the 2017 Plan, the Company may grant restricted stock unit awards that vest upon the completion of future service requirements or specified performance criteria. The fair value of these awards is equal to the market price of the common stock at the date of grant. The Company recognizes stock-based compensation expense for these awards over the vesting period, using the straight-line method, based upon the number of awards ultimately expected to vest. Each restricted stock unit entitles the recipient to receive one share of stock on the vesting date. Generally, for employee awards, the restricted stock units vest 25% per year over four years, with the first vesting date being the one-year anniversary of the grant date, or 100% upon the death or disability of the recipient, or, in certain circumstances, in connection with a change of control (as defined in the 2017 Plan) of the Company. The Compensation Committee retains discretion to fully vest an unvested award where a participant retires before the end of the vesting period. Awards granted to directors vest 100% one year from the grant date. Except as otherwise provided in the 2017 Plan, if a participant terminates employment or service prior to the end of the vesting period, the unearned portion of the stock unit award will be forfeited. The Company may also issue awards that vest upon satisfaction of specified performance criteria. For these types of awards, the final measure of compensation cost is based upon the number of shares that ultimately vest considering the performance criteria.

The following is a summary of nonvested restricted stock unit activity for the year ended December 31, 2019:



			Weighted-Average
	Shares		Grant-Date Fair Value
Nonvested at December 31, 2018	83,750		$	31.63
Granted	49,040		29.53
Vested	(34,810	)	31.21
Forfeited	(8,190	)	31.83
Nonvested at December 31, 2019	89,790		$	30.63

The fair value of restricted stock unit awards that vested during 2019 was $1.0 million, compared to $0.9 million and $0.9 million during the years ended December 31, 2018 and 2017, respectively. As of December 31, 2019, the total compensation costs related to nonvested restricted stock units that have not yet been recognized totaled $1.8 million, and the weighted average period over which these costs are expected to be recognized is approximately 2.4 years.

Note 16.Earnings per Share

Basic per-share amounts are computed by dividing net income by the weighted average number of common shares outstanding. Diluted 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.

Following are the calculations for basic and diluted earnings per common share:



	Year Ended December 31,
	2019		2018		2017
	(dollars in thousands, except per share amounts)
Basic Earnings Per Share:
Net income	$	43,630	$	30,351	$	18,699
Weighted average shares outstanding	14,869,952		12,219,725		12,038,499
Basic earnings per common share	$	2.93	$	2.48	$	1.55

Diluted Earnings Per Share:
Net income	$	43,630	$	30,351	$	18,699
Weighted average shares outstanding, included all dilutive potential shares	14,884,933		12,237,153		12,062,577
Diluted earnings per common share	$	2.93	$	2.48	$	1.55

Note 17.Regulatory Capital Requirements and Restrictions on Subsidiary Cash

The Company (on a consolidated basis) and the Bank are subject to various regulatory capital requirements administered by the federal banking agencies. Failure to meet minimum capital requirements can initiate certain mandatory and possibly additional

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

discretionary actions by regulators that, if undertaken, could have a direct material effect on the Company and Bank financial statements.

As of December 31, 2019, the most recent notification from the FDIC categorized the Bank as “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.

A comparison of the Company’s and the Bank’s capital with the corresponding minimum regulatory requirements in effect as of December 31, 2019 and December 31, 2018, is presented below:



	Actual				For Capital Adequacy Purposes With Capital Conservation Buffer(1)				To Be Well Capitalized Under Prompt Corrective Action Provisions
	Amount		Ratio		Amount		Ratio⁽¹⁾		Amount		Ratio
	(dollars in thousands)
At December 31, 2019:
Consolidated:
Total capital/risk weighted assets	$	463,601	11.34	%	$	429,077	10.50	%	N/A		N/A
Tier 1 capital/risk weighted assets	428,021		10.47		347,348		8.50		N/A		N/A
Common equity tier 1 capital/risk weighted assets	386,434		9.46		286,051		7.00		N/A		N/A
Tier 1 leverage capital/average assets	428,021		9.48		180,529		4.00		N/A		N/A
MidWestOne Bank:
Total capital/risk weighted assets	$	482,106	11.83	%	$	427,877	10.50	%	$	407,502	10.00	%
Tier 1 capital/risk weighted assets	453,027		11.12		346,377		8.50		326,002		8.00
Common equity tier 1 capital/risk weighted assets	453,027		11.12		285,251		7.00		264,876		6.50
Tier 1 leverage capital/average assets	453,027		10.06		180,209		4.00		231,166		5.00
At December 31, 2018:
Consolidated:
Total capital/risk weighted assets	$	342,054	12.23	%	$	276,283	9.875	%	N/A		N/A
Tier 1 capital/risk weighted assets	312,747		11.18		220,327		7.875		N/A		N/A
Common equity tier 1 capital/risk weighted assets	288,859		10.32		178,360		6.375		N/A		N/A
Tier 1 leverage capital/average assets	312,747		9.73		128,531		4.000		N/A		N/A
MidWestOne Bank:
Total capital/risk weighted assets	$	333,074	11.94	%	$	275,468	9.875	%	$	278,955	10.00	%
Tier 1 capital/risk weighted assets	303,767		10.89		219,677		7.875		223,164		8.00
Common equity tier 1 capital/risk weighted assets	303,767		10.89		177,833		6.375		181,320		6.50
Tier 1 leverage capital/average assets	303,767		9.47		128,259		4.000		160,324		5.00

(1) Includes the capital conservation buffer of 1.875% at December 31, 2018 and 2.50% at December 31, 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, as previously disclosed, subsequent to December 31, 2008, the Bank’s board of directors 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 $24.1 million and $14.9 million as of December 31, 2019 and 2018, respectively.

Note 18.Commitments and Contingencies

Credit-related financial instruments: In the normal course of business, the Bank makes various commitments and incurs certain contingent liabilities that are not presented in the accompanying consolidated financial statements. The commitments and contingent liabilities include commitments to extend credit, commitments to sell loans, and standby letters of credit.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

The Bank uses the same credit policies in making commitments and conditional obligations as it does for on-balance-sheet instruments. A summary of the Bank’s commitments at December 31, 2019 and 2018, is as follows:



	December 31,
	2019		2018
	(in thousands)
Commitments to extend credit	$	859,212	$	521,270
Commitments to sell loans	5,400		666
Standby letters of credit	36,192		16,709
Total	$	900,804	$	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.

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

Concentrations of credit risk: Substantially all of the Bank’s loans, commitments to extend credit and standby letters of credit have been granted to customers in the Bank’s market areas. Although the loan portfolio of the Bank is diversified, approximately 69% of the loans are real estate loans and approximately 9% are agriculturally related. The concentrations of credit by type of loan are set forth in Note 4. 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 49% and 20%, respectively, as of December 31, 2019.

Note 19.Related Party Transactions

Certain directors of the Company and certain principal officers are customers of, and have banking transactions with, the Bank in the ordinary course of business. Such indebtedness has been incurred on substantially the same terms, including interest rates and collateral, as those prevailing at the time for comparable transactions with unrelated persons.

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MIDWESTONE FINANCIAL GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

The following is an analysis of the changes in the loans to related parties during the years ended December 31, 2019 and 2018:



	Year Ended December 31,
	2019			2018
	(in thousands)
Balance, beginning	$	12,655		$	14,131
Net increase (decrease) due to change in related parties	12,163			(2,518		)
Advances	4,057			2,059
Collections	(1,240		)	(1,017		)
Balance, ending	$	27,635		$	12,655

None of these loans are past due, nonaccrual or restructured to provide a reduction or deferral of interest or principal because of deterioration in the financial position of the borrower. Deposits from these related parties totaled $7.1 million and $4.4 million as of December 31, 2019 and 2018, respectively. Deposits from related parties are accepted subject to the same interest rates and terms as those from nonrelated parties.

In December 2018, Kevin W. Monson, Chairman of the Board of the Company and of the Bank, as manager and member of a limited liability company, purchased from the Company a former office building in Iowa City, Iowa, which had been used for overflow office space by the Company, for the amount of $1.4 million. In accordance with Company policy requirements, the transaction and supporting valuation documentation was reviewed and received pre-approval from the Audit Committee at its meeting on November 13, 2018.

Note 20.Estimated Fair Value of Financial Instruments and Fair Value Measurements

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


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


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


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

Recurring Basis

The Company used the following methods and significant assumptions to estimate the fair value of each type of financial instrument:

Investment Securities - The fair value for investment securities are determined by quoted market prices, if available (Level 1). The Company utilizes an independent pricing service to obtain the fair value of debt securities. 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).

Derivatives - Interest rate swaps are valued by using cash flow valuation techniques with observable market data inputs (Level 2). 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 (RPAs) are entered into by the Company 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

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

contracts. The fair value of RPAs is calculated by determining the total expected asset or liability exposure using observable inputs, such as yield curves and volatilities, of the derivatives to the borrowers and applying the borrowers’ credit spread to that exposure (Level 2).

The following table summarizes assets measured at fair value on a recurring basis as of December 31, 2019 and 2018 by level within the fair value hierarchy:



	Fair Value Measurement at December 31, 2019 Using
	Total		Level 1		Level 2		Level 3
	(in thousands)
Assets:
Available for sale debt securities:
U.S. Government agencies and corporations	$	441	$	—	$	441	$	—
State and political subdivisions	257,205		—		257,205		—
Mortgage-backed securities	43,530		—		43,530		—
Collateralized mortgage obligations	292,946		—		292,946		—
Corporate debt securities	191,855		—		191,855		—
Derivative assets	1,848		—		1,848		—

Liabilities:
Derivative liabilities	$	3,242	$	—	$	3,242	$	—



	Fair Value Measurement at December 31, 2018 Using
	Total		Level 1		Level 2		Level 3
	(in thousands)
Assets:
Available for sale debt securities:
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		—
Derivative assets	321		—		321		—

Liabilities:
Derivative liabilities	$	667	$	—	$	667	$	—

There were no transfers of assets between Level 3 and other levels of the fair value hierarchy during the years ended December 31, 2019 or December 31, 2018.

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

Nonrecurring Basis

The Company used the following methods and significant assumptions to estimate the fair value of each type of financial instrument:

Collateral Dependent Impaired Loans - Impaired loans that are deemed collateral dependent are valued based on the fair value of the collateral less estimated costs to sell. These estimates are based on the most recently available appraisals by qualified licensed appraisers with certain adjustment made based on the type of property, age of appraisal, current status of the property, and other related factors to estimate the current value of the collateral (Level 3).

Foreclosed Assets, Net - Foreclosed assets are measured at fair value less costs to sell. These estimates are based on the most recently available appraisals by qualified licensed appraisers with certain adjustment made based on the type of property, age of appraisal, current status of the property, and other related factors to estimate the current value of the collateral (Level 3).

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MIDWESTONE FINANCIAL GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

The following table discloses the Company’s estimated fair value amounts of its assets recorded at fair value on a nonrecurring basis:



	Fair Value Measurement at December 31, 2019 Using
(in thousands)	Total		Level 1		Level 2		Level 3
Collateral dependent impaired loans	$	6,749	$	—	$	—	$	6,749
Foreclosed assets, net	3,706		—		—		3,706



	Fair Value Measurement at December 31, 2018 Using
(in thousands)	Total		Level 1		Level 2		Level 3
Collateral dependent impaired loans	$	8,328	$	—	$	—	$	8,328
Foreclosed assets, net	535		—		—		535

The following presents the valuation technique(s), unobservable inputs, and quantitative information about the unobservable inputs used for fair value measurements of the financial instruments held by the Company at December 31, 2019, categorized within Level 3 of the fair value hierarchy:



	Quantitative Information About Level 3 Fair Value Measurements
(dollars in thousands)	Fair Value at December 31, 2019		Fair Value at December 31, 2018	Valuation Techniques(s)	Unobservable Input	Range of Inputs				Weighted Average
Collateral dependent impaired loans	$	6,749	8,328	Fair value of collateral	Valuation adjustments	—	%	75	%	18	%
Foreclosed assets, net	$	3,706	535	Fair value of collateral	Valuation adjustments	5	%	46	%	10	%

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

Other Fair Value Methods

Cash and Cash Equivalents - The carrying amounts of these financial instruments approximate their fair values.

Loans Held for Sale - Loans held for sale are carried 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 Held for Investment, 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.

FHLB stock - Investments in FHLB stock are recorded at cost and measured for impairment quarterly. Ownership of FHLB stock is restricted to member banks and the securities do not have a readily determinable market value. Purchases and sales of these securities are at par value with the issuer. The fair value of investments in FHLB stock is equal to the carrying amount.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

The carrying amount and estimated fair value of financial instruments not carried at fair value, at December 31, 2019 and December 31, 2018 were as follows:



	December 31, 2019
	Carrying Amount		Estimated Fair Value		Level 1		Level 2		Level 3
	(in thousands)
Financial assets:
Cash and cash equivalents	$	73,484	$	73,484	$	73,484	$	—	$	—
Debt securities available for sale	785,977		785,977		—		785,977		—
Loans held for sale	5,400		5,476		—		5,476		—
Loans held for investment, net	3,422,187		3,427,952		—		—		3,427,952
Interest receivable	18,525		18,525		—		18,525		—
Federal Home Loan Bank stock	15,381		15,381		—		15,381		—
Derivative assets	1,848		1,848		—		1,848		—
Financial liabilities:
Non-interest bearing	662,209		662,209		662,209		—		—
Interest-bearing	3,066,446		3,066,427		2,113,000		953,427		—
Short-term borrowings	139,349		139,349		139,349		—		—
Finance leases payable	1,224		1,224		—		1,224		—
Federal Home Loan Bank borrowings	145,700		146,913		—		146,913		—
Junior subordinated notes issued to capital trusts	41,587		39,391		—		39,391		—
Subordinated debentures	10,899		11,083		—		11,083		—
Other long-term debt	32,250		32,250		—		32,250		—
Derivative liabilities	3,242		3,242		—		3,242		—



	December 31, 2018
	Carrying Amount		Estimated Fair Value		Level 1		Level 2		Level 3
	(in thousands)
Financial assets:
Cash and cash equivalents	$	45,480	$	45,480	$	45,480	$	—	$	—
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 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:
Non-interest bearing	439,133		439,133		439,133		—		—
Interest-bearing	2,173,796		2,166,518		1,450,149		716,369		—
Short-term borrowings	131,422		131,422		131,422		—		—
Finance leases payable	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		—
Subordinated debentures	—		—		—		—		—
Other long-term debt	7,500		7,500		—		7,500		—
Derivative liabilities	667		667		—		667		—

Note 21.Revenue Recognition

Substantially all of the Company’s revenue is generated from contracts with customers. Noninterest revenue streams in-scope of Topic 606 are discussed below.

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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 Foreclosed Assets

Gain or loss from the sale of 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 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 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. Foreclosed asset sales for the years ended December 31, 2019 and December 31, 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 December 31, 2019 and December 31, 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

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MIDWESTONE FINANCIAL GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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.

Note 22.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 FASB Topic 842. See Note 1 to the consolidated financial statements regarding transition guidance related to the new standard.

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. Upon adoption of FASB Topic 842, 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 balance sheet, Topic 842 did not materially impact the accounting for this lease. The Company made a policy election to exclude the recognition requirements of Topic 842 to all classes of leases with original terms of 12 months or less. Instead, the short-term lease payments are recognized in income or expense on a straight-line basis over the lease term.

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 $1.3 million, and assumed lease liabilities totaling $2.2 million which are included in the following disclosures.

Supplemental balance sheet information related to leases was as follows:



		December 31, 2019
		(dollars in thousands)
Lease Right-of-Use Assets	Classification
Operating lease right-of-use assets	Other assets	$	4,499
Finance lease right-of-use asset	Premises and equipment, net	637

Lease Liabilities
Operating lease liability	Other liabilities	$	5,430
Finance lease liability	Long-term debt	1,225

Weighted-average remaining lease term
Operating leases		8.90 years
Finance lease		6.67 years
Weighted-average discount rate
Operating leases		3.78		%
Finance lease		8.89		%

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.

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MIDWESTONE FINANCIAL GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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. Amounts for the years ended December 31, 2017 and 2018 are not included in the table below because the accounting standard was adopted as of January 1, 2019.



	Years Ended December 31,
	2019		2018		2017
Lease Costs	(in thousands)
Operating lease cost	$	1,068	$	—	$	—
Variable lease cost	148		—		—
Short-term lease cost	—		—		—
Interest on lease liabilities ⁽¹⁾	113		—		—
Amortization of right-of-use assets	96		—		—
Net lease cost	$	1,425	$	—	$	—

Other Information
Cash paid for amounts included in the measurement of lease liabilities:
Operating cash flows from operating leases	$	989	$	—	$	—
Operating cash flows from finance lease	113		—		—
Finance cash flows from finance lease	113		—		—

Right-of-use assets obtained in exchange for new operating lease liabilities	6,250		—		—
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 December 31, 2019 were as follows:



	Finance Leases			Operating Leases
	(in thousands)
Twelve Months Ended:
December 31, 2020	$	231		$	1,114
December 31, 2021	235			1,074
December 31, 2022	240			973
December 31, 2023	245			912
December 31, 2024	250			682
Thereafter	426			2,132
Total undiscounted lease payments	$	1,627		$	6,887
Amounts representing interest	(402		)	(1,457		)
Lease liability	$	1,225		$	5,430

Note 23.Operating Segments

The Company’s activities are considered to be a single industry segment for financial reporting purposes. The Company is engaged in the business of commercial and retail banking and investment management services with operations throughout central and eastern Iowa, the Minneapolis/St. Paul metropolitan area of Minnesota, Wisconsin, Florida, and Colorado. Substantially all income is derived from a diverse base of commercial, mortgage, and retail lending activities, and investments.

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MIDWESTONE FINANCIAL GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Note 24.Parent Company Only Financial Information

The following are condensed balance sheets of MidWestOne Financial Group, Inc. as of December 31, 2019 and 2018 (parent company only):



	As of December 31,
	2019			2018
Balance Sheets	(in thousands)
Assets
Cash	$	10,661		$	9,611
Investment in subsidiaries	575,508			372,595
Income tax receivable	1,182			117
Deferred income taxes	—			44
Bank-owned life insurance	5,127			4,999
Other assets	2,256			1,482
Total assets	$	594,734		$	388,848
Liabilities and Shareholders’ Equity
Liabilities:
Long-term debt	$	84,736		$	31,388
Deferred income taxes	433			—
Other liabilities	583			393
Total liabilities	85,752			31,781
Shareholders’ equity:
Capital stock, preferred	—			—
Capital stock, common	16,581			12,463
Additional paid-in capital	297,390			187,813
Retained earnings	201,105			168,951
Treasury stock	(10,466		)	(6,499		)
Accumulated other comprehensive loss	4,372			(5,661		)
Total shareholders’ equity	508,982			357,067
Total liabilities and shareholders’ equity	$	594,734		$	388,848

The following are condensed statements of income of MidWestOne Financial Group, Inc. for the years ended December 31, 2019, 2018, and 2017 (parent company only):



	Year Ended December 31,
	2019			2018			2017
Statements of Income	(in thousands)
Dividends received from subsidiaries	$	15,000		$	25,017		$	6,500
Interest income and dividends on investment securities	84			43			47
Investment securities gains	47			(48		)	—
Interest on debt	(3,439		)	(1,596		)	(1,406		)
Bank-owned life insurance income	130			127			126
Income from MidWestOne Insurance Services, Inc.	943			—			—
Operating expenses	(4,130		)	(2,940		)	(2,281		)
Income before income taxes and equity in subsidiaries’ undistributed income	8,635			20,603			2,986
Income tax benefit	(1,394		)	(823		)	(1,137		)
Income before equity in subsidiaries’ undistributed income	10,029			21,426			4,123
Equity in subsidiaries’ undistributed income	33,601			8,925			14,576
Net income	$	43,630		$	30,351		$	18,699

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MIDWESTONE FINANCIAL GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

The following are condensed statements of cash flows of MidWestOne Financial Group, Inc. for the years ended December 31, 2019, 2018, and 2017 (parent company only):



	Year Ended December 31,
	2019			2018			2017
Statements of Cash Flows	(in thousands)
Cash flows from operating activities:
Net income	$	43,630		$	30,351		$	18,699
Adjustments to reconcile net income to net cash provided by operating activities:
Undistributed income of subsidiaries, net of dividends and distributions	(33,601		)	(8,925		)	(14,576		)
Amortization	134			95			101
Increase (decrease) in deferred income taxes, net	(43		)	(42		)	(93		)
Stock-based compensation	1,156			1,030			868
Gain on sale of assets of MidWestOne Insurance Services, Inc.	(1,076		)	—			—
Increase in cash surrender value of bank-owned life insurance	(128		)	(127		)	(126		)
Change in:
Other assets	(403		)	(405		)	1,617
Other liabilities	(4		)	59			13
Net cash provided by operating activities	9,665			22,036			6,503
Cash flows from investing activities
Proceeds from sales of available for sale securities	43			1			1
Purchase of available for sale securities	(9		)	(10		)	(10		)
Proceeds from sale of assets of MidWestOne Insurance Services, Inc.	1,175			—			—
Cash and earnings transferred in dissolution of MidWestOne Insurance Services, Inc.	631			—			—
Net cash paid in business acquisition	(18,624		)	—			—
Investment in subsidiary	—			—			(16,200		)
Net cash used in investing activities	(16,784		)	(9		)	(16,209		)
Cash flows from financing activities:
Net increase (decrease) in:
Long-term debt	24,750			(5,000		)	(5,000		)
Proceeds from share-based award activity	—			137			100
Taxes paid relating to net share settlement of equity awards	(103		)	(89		)	(114		)
Dividends paid	(11,476		)	(9,535		)	(8,061		)
Issuance of common stock	—			—			25,688
Expenses incurred in stock issuance	(323		)	—			(1,328		)
Repurchase of common stock	(4,679		)	(2,129		)	—
Net cash provided by (used in) financing activities	8,169			(16,616		)	11,285
Net increase in cash	1,050			5,411			1,579
Cash Balance:
Beginning	9,611			4,200			2,621
Ending	$	10,661		$	9,611		$	4,200

Note 25.Subsequent Events

Management evaluated subsequent events through the date the consolidated financial statements were issued. Events or transactions occurring after December 31, 2019, but prior to the date the consolidated financial statements were issued, that provided additional evidence about conditions that existed at December 31, 2019 have been recognized in the consolidated financial statements for the period ended December 31, 2019. Events or transactions that provided evidence about conditions that did not exist at December 31, 2019, but arose before the consolidated financial statements were issued, have not been recognized in the consolidated financial statements for the period ended December 31, 2019.

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MIDWESTONE FINANCIAL GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

On January 22, 2020, the board of directors of the Company declared a cash dividend of $0.22 per share payable on March 16, 2020 to shareholders of record as of the close of business on March 2, 2020.

Pursuant to the Company’s share repurchase program approved on August 20, 2019, the Company has purchased 38,746 shares of common stock subsequent to December 31, 2019 and through March 4, 2020 for a total cost of $1.2 million inclusive of transaction costs, leaving $7.8 million remaining available under the program.

Note 26.Quarterly Results of Operations (unaudited)



	Three Months Ended
	December 31			September 30		June 30		March 31
(in thousands, except per share amounts)
2019
Interest income	$	50,026		$	54,076	$	44,951	$	33,388
Interest expense	10,442			10,818		10,119		7,412
Net interest income	39,584			43,258		34,832		25,976
Provision for loan losses	604			4,264		696		1,594
Noninterest income	9,036			8,004		8,796		5,410
Noninterest expense	36,436			31,442		29,040		20,617
Income before income taxes	11,580			15,556		13,892		9,175
Income tax expense	(1,791		)	3,256		3,218		1,890
Net income	$	13,371		$	12,300	$	10,674	$	7,285
Net income per common share - basic	$	0.83		$	0.76	$	0.72	$	0.60
Net income per common share - diluted	$	0.83		$	0.76	$	0.72	$	0.60
2018
Interest income	$	33,224		$	32,210	$	31,822	$	30,853
Interest expense	6,671			6,099		5,392		4,679
Net interest income	26,553			26,111		26,430		26,174
Provision for loan losses	3,250			950		1,250		1,850
Noninterest income	5,796			6,045		5,693		5,681
Noninterest expense	19,779			22,622		20,586		20,228
Income before income taxes	9,320			8,584		10,287		9,777
Income tax expense	1,696			1,806		2,131		1,984
Net income	$	7,624		$	6,778	$	8,156	$	7,793
Net income per common share - basic	$	0.62		$	0.55	$	0.67	$	0.64
Net income per common share - diluted	$	0.62		$	0.55	$	0.67	$	0.64


ITEM 9.	CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE.

None.

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ITEM 9A.	CONTROLS AND PROCEDURES.

Disclosure Controls and Procedures

The Company’s management, including the Chief Executive Officer and Chief Financial Officer, evaluated the effectiveness of the Company’s disclosure controls and procedures (as defined in Rule 13a-15(e) or Rule 15d-15(e) under the Exchange Act) that are designed to ensure that information required to be disclosed by the Company in the reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to the Company’s management, including the Company’s Chief Executive Officer and Chief Financial Officer, to allow timely decisions regarding required disclosure. Based on this evaluation, the Chief Executive Officer and Chief Financial Officer have concluded that the Company’s disclosure controls and procedures were effective as of December 31, 2019.

Changes in Internal Control over Financial Reporting

There were no changes in the Company’s internal controls over financial reporting (as defined in Rule 13a-15(f) and Rule 15d-15(f) under the Exchange Act) that occurred during the quarter ended December 31, 2019 that have materially affected or are reasonably likely to materially affect the Company’s internal control over financial reporting.

Management’s Annual Report on Internal Control over Financial Reporting

Management of the Company is responsible for establishing and maintaining adequate internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) to provide reasonable assurance to the Company’s management and board of directors regarding the preparation of reliable published financial statements. Internal control over financial reporting includes self-monitoring mechanisms and taking action to correct deficiencies as they are identified. Because of inherent limitations in any system of internal control, no matter how well designed, misstatements due to error or fraud may occur and not be detected, including the possibility of the circumvention or overriding of controls. Accordingly, even effective internal control over financial reporting can provide only reasonable assurance with respect to financial statement preparation. Further, because of changes in conditions, internal control effectiveness may vary over time.

Management excluded from its assessment the internal control over financial reporting of ATBancorp, which was acquired on May 1, 2019, until the accounting systems were converted on May 18, 2019 and July 13, 2019, and whose financial data constituted approximately 30% of total assets as of the date of acquisition.

Management assessed the Company’s internal control over financial reporting as of December 31, 2019. This assessment was based on criteria for effective internal control over financial reporting described in Internal Control-Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on this assessment, the Chief Executive Officer and Chief Financial Officer assert that the Company maintained effective internal control over financial reporting as of December 31, 2019 based on the specified criteria.

The effectiveness of the Company’s internal control over financial reporting as of December 31, 2019, has been audited by RSM US LLP, the independent registered public accounting firm who also has audited the Company’s consolidated financial statements included in this Annual Report on Form 10-K. RSM US LLP’s report on the Company’s internal control over financial reporting appears on the following page.

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Report of Independent Registered Public Accounting Firm

To the Shareholders and the

Board of Directors of MidWestOne Financial Group, Inc.

Opinion on the Internal Control Over Financial Reporting

We have audited MidWestOne Financial Group, Inc. and its subsidiaries’ (the Company) internal control over financial reporting as of December 31, 2019, based on criteria established in Internal Control - Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission in 2013. In our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2019, based on criteria established in Internal Control - Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission in 2013.

We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the consolidated balance sheets as of December 31, 2019 and 2018 and the consolidated statements of income, comprehensive income, shareholders’ equity, and cash flows for each of the three years in the period ended December 31, 2019, and the related notes to the consolidated financial statements of the Company and our report dated March 6, 2020 expressed an unqualified opinion.

As described in Management’s Annual Report on Internal Control over Financial Reporting, management has excluded ATBancorp from its assessment of internal control over financial reporting as of December 31, 2019, because it was acquired by the Company in a purchase business combination in the second quarter of 2019. We have also excluded ATBancorp from our audit of internal control over financial reporting. ATBancorp entities operated under separate accounting systems from May 1, 2019 (the date of acquisition) until the systems were converted on May 18, 2019 and July 13, 2019. ATBancorp total assets represented approximately 30% of consolidated assets as of the date of the merger.

Basis for Opinion

The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting in the accompanying Management’s Assessment of Internal Controls over Financial Reporting. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with U.S. federal securities laws and applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audit also included performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.

Definition and Limitations of Internal Control Over Financial Reporting

A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of the company’s assets that could have a material effect on the financial statements.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

/s/ RSM US LLP

Cedar Rapids, Iowa

March 6, 2020

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ITEM 9B.	OTHER INFORMATION.

None.

PART III


ITEM 10.	DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE.

The information required by this Item 10 will be included in the Company’s Definitive Proxy Statement for the 2020 Annual Meeting of Shareholders under the headings “Proposal 1: Election of Directors,” “Information About Nominees, Continuing Directors and Named Executive Officers,” “Corporate Governance and Board Matters,” “Section 16(a) Filings,” and “Shareholder Communications with the Board and Nomination and Proposal Procedures” and is incorporated herein by reference. The Definitive Proxy Statement will be filed with the SEC pursuant to Regulation 14A within 120 days of the end of the Company’s 2019 fiscal year.


ITEM 11.	EXECUTIVE COMPENSATION.

The information required by this Item 11 will be included in the Company’s Definitive Proxy Statement for the 2020 Annual Meeting of Shareholders under the headings “Compensation Discussion and Analysis,” “Compensation Committee Report,” “Executive Compensation” and “Director Compensation” and is incorporated herein by reference. The Definitive Proxy Statement will be filed with the SEC pursuant to Regulation 14A within 120 days of the end of the Company’s 2019 fiscal year.


ITEM 12.	SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS.

The information required by this Item 12 will be included in the Company’s Definitive Proxy Statement for the 2020 Annual Meeting of Shareholders under the headings “Security Ownership of Certain Beneficial Owners and Management” and “Equity Compensation Plan Information” and is incorporated herein by reference. The Definitive Proxy Statement will be filed with the SEC pursuant to Regulation 14A within 120 days of the end of the Company’s 2019 fiscal year.


ITEM 13.	CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE.

The information required by this Item 13 will be included in the Company’s Definitive Proxy Statement for the 2020 Annual Meeting of Shareholders under the headings “Corporate Governance and Board Matters” and “Certain Relationships and Related-Person Transactions” and is incorporated herein by reference. The Definitive Proxy Statement will be filed with the SEC pursuant to Regulation 14A within 120 days of the end of the Company’s 2019 fiscal year.


ITEM 14.	PRINCIPAL ACCOUNTANT FEES AND SERVICES.

The information required by this Item 14 will be included in the Company’s Definitive Proxy Statement for the 2020 Annual Meeting of Shareholders under the caption “Proposal 3: Ratification of Appointment of Independent Registered Public Accounting Firm” and is incorporated herein by reference. The Definitive Proxy Statement will be filed with the SEC pursuant to Regulation 14A within 120 days of the end of the Company’s 2019 fiscal year.

PART IV


ITEM 15.	EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.

(a) The following documents are filed as part of this report:

(1) Financial Statements: The following consolidated financial statements of the registrant and its subsidiaries are filed as part of this document under “Item 8. Financial Statements and Supplementary Data.”

Consolidated Balance Sheets - December 31, 2019 and 2018

Consolidated Statements of Income - Years Ended December 31, 2019, 2018, and 2017

Consolidated Statements of Comprehensive Income - Years Ended December 31, 2019, 2018, and 2017

Consolidated Statements of Shareholders’ Equity - Years Ended December 31, 2019, 2018, and 2017

Consolidated Statements of Cash Flows - Years Ended December 31, 2019, 2018, and 2017

Notes to Consolidated Financial Statements

(2) Financial Statement Schedules:

All schedules are omitted as such information is inapplicable or is included in the financial statements.

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(3) Exhibits:

The exhibits are filed as part of this report and exhibits incorporated herein by reference to other documents are as follows:



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

2.2	First Amendment to the Agreement and Plan of Merger,	Exhibit 2.2 to the Company’s Current Report on Form 8-K
	dated April 30, 2019, between MidWestOne Financial	filed with the SEC on May 1, 2019
	Group, Inc. and ATBancorp

3.1	Amended and Restated Articles of Incorporation of	Exhibit 3.3 to the Company’s Amendment No. 1 to
	MidWestOne Financial Group, Inc. filed with the	Registration Statement on Form S-4 (File No. 333-147628)
	Secretary of State of the State of Iowa on March 14, 2008	filed with the SEC on January 14, 2008

3.2	Articles of Amendment (First Amendment) to the	Exhibit 3.1 to the Company’s Current Report on Form 8-K
	Amended and Restated Articles of Incorporation of	filed with the SEC on January 23, 2009
	MidWestOne Financial Group, Inc. filed with the
	Secretary of State of the State of Iowa on
	January 23, 2009

3.3	Articles of Amendment (Second Amendment) to the	Exhibit 3.1 to the Company’s Current Report on Form 8-K
	Amended and Restated Articles of Incorporation of	filed with the SEC on February 6, 2009
	MidWestOne Financial Group, Inc. filed with the
	Secretary of State of the State of Iowa on
	February 4, 2009 (containing the Certificate of
	Designations for the Company’s Fixed Rate
	Cumulative Perpetual Preferred Stock, Series A)

3.4	Articles of Amendment (Third Amendment) to the	Exhibit 3.1 to the Company’s Form 10-Q for the quarter
	Amended and Restated Articles of Incorporation of	ended March 31, 2017, filed with the SEC on May 4, 2017
	MidWestOne Financial Group, Inc., filed with the Secretary
	of State of the State of Iowa on April 21, 2017

3.5	Second Amended and Restated Bylaws of MidWestOne	Exhibit 3.1 to the Company’s Current Report on Form 8-K
	Financial Group, Inc.	filed with the SEC on February 1, 2017

3.6	Amendment to Second Amended and Restated Bylaws of	Exhibit 3.1 to the Company’s Current Report on Form 8-K
	MidWestOne Financial Group, Inc.	filed with the SEC on May 1, 2019

4.1	Reference is made to Exhibits 3.1 through 3.6 hereof	N/A

4.2	Description of the Company’s Securities Registered	Filed herewith
	Pursuant to Section 12 of the Securities Exchange Act of
	1934

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Exhibit
Number	Description	Incorporated by Reference to:
10.1	MidWestOne Financial Group, Inc. Employee Stock	Filed herewith
	Ownership Plan and Trust (Restated as of January 1,
	2013)*

10.2	ISB Financial Corp. (now known as MidWestOne	Appendix F of the Joint Proxy Statement-Prospectus
	Financial Group, Inc.) 2008 Equity Incentive Plan*	constituting part of the Company’s Amendment No. 2 to
		Registration Statement on Form S-4 (File No. 333-147628)
		filed with the SEC on January 22, 2008

10.3	MidWestOne Financial Group, Inc. 2017 Equity	Appendix A of the Company’s Definitive Proxy Statement on
	Incentive Plan*	Schedule 14A filed with the SEC on March 10, 2017

10.4	Form of MidWestOne Financial Group, Inc. 2017 Equity	Exhibit 4.8 to the Company’s Registration Statement on Form
	Incentive Plan Restricted Stock Unit Award Agreement*	S-8 (File No. 333-217718) filed with the SEC on May 5, 2017

10.5	Employment Agreement between MidWestOne Financial	Exhibit 10.1 to the Company’s Current Report on
	Group, Inc. and Charles N. Funk, dated October 18, 2017*	Form 8-K filed with the SEC on October 18, 2017

10.6	Supplemental Retirement Agreement between Iowa State	Exhibit 10.13 of the Company’s Registration Statement on
	Bank & Trust Company (now known as MidWestOne	Form S-4 (File No. 333-147628) filed with the SEC on
	Bank) and Charles N. Funk, dated November 1, 2001*	November 27, 2007

10.7	Employment Agreement between MidWestOne Financial	Exhibit 10.5 to the Company’s Current Report on
	Group, Inc. and James M. Cantrell, dated October 18,	Form 8-K filed with the SEC on October 18, 2017
	2017*

10.8	Credit Agreement by and between MidWestOne	Exhibit 10.1 to the Company’s Form 10-Q for the quarter
	Financial Group, Inc. and U.S. Bank National Association	ended June 30, 2015 filed with the SEC on August 10, 2015
	dated April 30, 2015

10.9	Fourth Amendment to the Credit Agreement by and	Filed herewith
	between MidWestOne Financial Group, Inc. and U.S. Bank
	National Association dated April 29, 2019

10.10	Employment Agreement between MidWestOne Financial	Exhibit 10.1 to the Company’s Current Report on
	Group, Inc. and Barry S. Ray, effective June 4, 2018*	Form 8-K filed with the SEC on May 4, 2018

10.11	Employment Agreement between MidWestOne Financial	Exhibit 10.1 to the Company’s Current Report on
	Group, Inc. and Gary L. Sims, effective June 25, 2018*	Form 8-K filed with the SEC on June 11, 2018

10.12	Change of Control Agreement between MidWestOne	Exhibit 10.23 to the Company’s Annual Report on Form 10-K
	Financial Group, Inc. and David Lindstrom, effective	filed with the SEC on March 8, 2019
	February 21, 2018*

10.13	Change of Control Agreement between MidWestOne	Filed herewith
	Financial Group, Inc. and Greg Turner, effective
	October 13, 2017*

21.1	Subsidiaries of MidWestOne Financial Group, Inc.	Filed herewith

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Exhibit
Number	Description	Incorporated by Reference to:

23.1	Consent of RSM US LLP	Filed herewith

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

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

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

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

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	Filed herewith
	Document

101.LAB	XBRL Taxonomy Extension Label Linkbase Document	Filed herewith

101.PRE	XBRL Taxonomy Extension Presentation Linkbase	Filed herewith
	Document

101.INS	The XBRL Instance Document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document	Filed herewith

104	Cover Page Interactive Data File (formatted inline XBRL and contained in Exhibit 101)	Filed herewith


+ Schedules and/or exhibits to the Exhibit have been omitted pursuant to Item 601(b)(2) of Regulation S-K. The Company agrees to furnish
a copy of any omitted schedule or exhibit to the SEC upon request.
* Indicates management contract or compensatory plan or arrangement.


ITEM 16.	FORM 10-K SUMMARY.

None.

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SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) 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:	March 6, 2020	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)

Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated.



Signature	Title	Date

/s/ CHARLES N. FUNK	President and Chief Executive Officer;	March 6, 2020
Charles N. Funk	Director (Principal Executive Officer)

	Senior Executive Vice President
/s/ BARRY S. RAY	and Chief Financial Officer	March 6, 2020
Barry S. Ray	(Principal Financial and Accounting
	Officer)

/s/ KEVIN W. MONSON	Chairman of the Board	March 6, 2020
Kevin W. Monson

/s/ LARRY D. ALBERT	Director	March 6, 2020
Larry D. Albert

/s/ RICHARD R. DONOHUE	Director	March 6, 2020
Richard R. Donohue

/s/ JANET E. GODWIN	Director	March 6, 2020
Janet E. Godwin

/s/ DOUGLAS H. GREEFF	Director	March 6, 2020
Douglas H. Greeff

/s/ RICHARD J. HARTIG	Director	March 6, 2020
Richard J. Hartig

/s/ JENNIFER L. HAUSCHILDT	Director	March 6, 2020
Jennifer L. Hauschildt

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/s/ MATTHEW J. HAYEK	Director	March 6, 2020
Matthew J. Hayek

/s/ NATHANIEL J. KAEDING	Director	March 6, 2020
Nathaniel J. Kaeding

/s/ TRACY S. MCCORMICK	Director	March 6, 2020
Tracy S. McCormick

/s/ RUTH E. STANOCH	Director	March 6, 2020
Ruth E. Stanoch

/s/ DOUGLAS K. TRUE	Director	March 6, 2020
Douglas K. True

/s/ KURT R. WEISE	Director	March 6, 2020
Kurt R. Weise

115