Companies: 10,793     total market cap: $134.654 T
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MidWestOne Financial Group
MOFG
#5964
Rank
$1.01 B
Marketcap
๐Ÿ‡บ๐Ÿ‡ธ United States
Country
$49.31
Share price
2.35%
Change (1 day)
89.87%
Change (1 year)
๐Ÿฆ Banks๐Ÿ’ณ Financial services
Categories
  1. MidWestOne Financial Group
  2. Quarterly Reports (10-Q)
  3. Financial Year FY2021 Q2

MidWestOne Financial Group - 10-Q quarterly report FY2021 Q2


Text size:
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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
☒
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2021
OR
☐
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)
 
Iowa42-1206172
(State or other jurisdiction of incorporation or organization)(I.R.S. Employer Identification No.)
102 South Clinton Street, Iowa City, IA 52240
(319) 356-5800
(Address of principal executive offices, including zip code) (Registrant’s telephone number, including area code)

Securities registered pursuant to Section 12(b) of the Act:
Title of each classTrading Symbol(s)Name of each exchange on which registered
Common stock, $1.00 par valueMOFGThe Nasdaq Stock Market LLC
 
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    x  Yes    ☐  No
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).    x  Yes    ☐  No
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer☐Accelerated filer
x
Non-accelerated filer☐Smaller reporting company
☐
Emerging growth company
☐
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).     ☐  Yes    x  No

As of August 3, 2021, there were 15,875,091 shares of common stock, $1.00 par value per share, outstanding.


Table of Contents
MIDWESTONE FINANCIAL GROUP, INC.
Form 10-Q Quarterly Report
Table of Contents
Page No.
PART I
Item 1.
1
1
2
3
4
5
7
Item 2.
34
Item 3.
54
Item 4.
57
Part II
Item 1.
58
Item 1A.
58
Item 2.
58
Item 3.
58
Item 4.
58
Item 5.
58
Item 6.
59
60


Table of Contents
PART I – FINANCIAL INFORMATION

Glossary of Acronyms, Abbreviations, and Terms
As used in this report, references to "MidWestOne", "we", "our", "us", the "Company", and similar terms refer to the consolidated entity consisting of MidWestOne Financial Group, Inc. and its wholly-owned subsidiaries. MidWestOne Bank or the "Bank" refers to MidWestOne's bank subsidiary, MidWestOne Bank.
The acronyms, abbreviations, and terms listed below are used in various sections of this Form 10-Q, including "Item 1. Financial Statements" and "Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations."
ACLAllowance for Credit LossesFHLBFederal Home Loan Bank
AFSAvailable for SaleFHLBCFederal Home Loan Bank of Chicago
AOCIAccumulated Other Comprehensive IncomeFHLBDMFederal Home Loan Bank of Des Moines
ASCAccounting Standards CodificationFHLMCFederal Home Loan Mortgage Corporation
ASUAccounting Standards UpdateFNMAFederal National Mortgage Association
ATMAutomated Teller MachineFRBBoard of Governors of the Federal Reserve System
Basel III RulesA comprehensive capital framework and rules for U.S. banking organizations approved by the FRB and the FDIC in 2013GAAPU.S. Generally Accepted Accounting Principles
BHCABank Holding Company Act of 1956, as amendedGLBAGramm-Leach-Bliley Act of 1999
BOLIBank Owned Life InsuranceGNMAGovernment National Mortgage Association
CAAConsolidated Appropriations Act, 2021HTMHeld to Maturity
CARES ActCoronavirus Aid, Relief and Economic Security ActICSInsured Cash Sweep
CDARSCertificate of Deposit Account Registry ServiceLIBORThe London Inter-bank Offered Rate
CECLCurrent Expected Credit LossMBSMortgage-Backed Securities
CMOCollateralized Mortgage ObligationsOTTIOther-Than-Temporary Impairment
COVID-19Coronavirus Disease 2019PCDPurchased Financial Assets with Credit Deterioration
CRACommunity Reinvestment ActPCIPurchased Credit Impaired
CRECommercial Real EstatePPPPaycheck Protection Program
DCFDiscounted Cash FlowsROURight-of-Use
Dodd-Frank ActDodd-Frank Wall Street Reform and Consumer Protection ActRREResidential Real Estate
ECLExpected Credit LossesRPACredit Risk Participation Agreement
EVEEconomic Value of EquitySBAU.S. Small Business Administration
FASBFinancial Accounting Standards BoardSECU.S. Securities and Exchange Commission
FDICFederal Deposit Insurance CorporationTDRTroubled Debt Restructuring


Table of Contents
Item 1.   Financial Statements (unaudited).

MIDWESTONE FINANCIAL GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
 June 30, 2021 December 31, 2020
(unaudited) (dollars in thousands, except per share amounts) 
ASSETS
Cash and due from banks$52,297 $65,078 
Interest earning deposits in banks11,124 17,409 
Federal funds sold13 172 
Total cash and cash equivalents63,434 82,659 
Debt securities available for sale at fair value2,072,452 1,657,381 
Loans held for sale6,149 59,956 
Gross loans held for investment3,344,156 3,496,790 
Unearned income, net(14,000)(14,567)
Loans held for investment, net of unearned income3,330,156 3,482,223 
Allowance for credit losses(48,000)(55,500)
Total loans held for investment, net3,282,156 3,426,723 
Premises and equipment, net84,667 86,401 
Goodwill62,477 62,477 
Other intangible assets, net22,394 25,242 
Foreclosed assets, net755 2,316 
Other assets154,731 153,493 
Total assets$5,749,215 $5,556,648 
LIABILITIES AND SHAREHOLDERS' EQUITY
Noninterest bearing deposits$952,764 $910,655 
Interest bearing deposits3,839,902 3,636,394 
Total deposits4,792,666 4,547,049 
Short-term borrowings212,261 230,789 
Long-term debt169,839 208,691 
Other liabilities44,156 54,869 
Total liabilities5,218,922 5,041,398 
Shareholders' equity
Preferred stock, no par value; authorized 500,000 shares; no shares issued and outstanding
— — 
Common stock, $1.00 par value; authorized 30,000,000 shares; issued shares of 16,581,017 and 16,581,017; outstanding shares of 15,963,468 and 16,016,780
16,581 16,581 
Additional paid-in capital299,888 300,137 
Retained earnings219,884 188,191 
Treasury stock at cost, 617,549 and 564,237 shares
(15,888)(14,251)
Accumulated other comprehensive income9,828 24,592 
Total shareholders' equity530,293 515,250 
Total liabilities and shareholders' equity$5,749,215 $5,556,648 
See accompanying notes to consolidated financial statements.  
1
Table of Contents
MIDWESTONE FINANCIAL GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
 
Three Months EndedSix Months Ended
June 30,June 30,
(unaudited) (dollars in thousands, except per share amounts)2021 202020212020
Interest income 
Loans, including fees$34,736  $40,214 $71,278 $82,226 
Taxable investment securities6,483  4,646 11,576 8,363 
Tax-exempt investment securities2,549  1,858 5,104 3,370 
Other19 40 33 204 
Total interest income43,787  46,758 87,991 94,163 
Interest expense 
Deposits3,409  6,409 7,017 14,358 
Short-term borrowings161  263 289 597 
Long-term debt1,712  1,374 3,563 3,090 
Total interest expense5,282  8,046 10,869  18,045 
Net interest income38,505  38,712 77,122 76,118 
Credit loss (benefit) expense(2,144) 4,685 (6,878)26,418 
Net interest income after credit loss (benefit) expense40,649  34,027 84,000 49,700 
Noninterest income 
Investment services and trust activities2,809  2,217 5,645 4,753 
Service charges and fees1,475  1,290 2,962 3,116 
Card revenue1,913  1,237 3,449 2,602 
Loan revenue3,151  1,910 7,881 3,033 
Bank-owned life insurance538  635 1,080 1,155 
Investment securities gains, net42  6 69 48 
Other290 974 956 3,717 
Total noninterest income10,218  8,269 22,042 18,424 
Noninterest expense 
Compensation and employee benefits17,404  15,682 34,321 32,299 
Occupancy expense of premises, net2,198  2,253 4,516 4,594 
Equipment1,861 2,010 3,654 3,890 
Legal and professional1,375 1,382 2,158 2,917 
Data processing1,347 1,240 2,599 2,594 
Marketing873 910 1,879 1,972 
Amortization of intangibles1,341  1,748 2,848 3,776 
FDIC insurance245  445 757 893 
Communications371  449 780 906 
Foreclosed assets, net136 34 183 172 
Other1,519  1,885 2,675 4,026 
Total noninterest expense28,670  28,038 56,370 58,039 
Income before income tax expense22,197  14,258 49,672 10,085 
Income tax expense 4,926  2,546 10,753 348 
Net income$17,271  $11,712 $38,919 $9,737 
Per common share information 
Earnings - basic$1.08  $0.73 $2.43 $0.60 
Earnings - diluted$1.08  $0.73 $2.43 $0.60 
Dividends paid$0.2250  $0.2200 $0.4500 $0.4400 
See accompanying notes to consolidated financial statements.
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MIDWESTONE FINANCIAL GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
 
Three Months EndedSix Months Ended
June 30,June 30,
(unaudited) (dollars in thousands)2021202020212020
Net income$17,271 $11,712 $38,919 $9,737 
Other comprehensive income (loss), net of tax:
Unrealized (loss) gain from debt securities available for sale:
Unrealized net holding (loss) gain on debt securities available for sale arising during the period
7,874 15,866 (19,910)20,191 
Reclassification adjustment for gains included in net income
(42)(6)(69)(48)
Income tax benefit (expense)
(2,044)(4,139)5,215 (5,257)
Unrealized net (loss) gain on debt securities available for sale, net of reclassification adjustment
5,788 11,721 (14,764)14,886 
Unrealized loss from cash flow hedging instruments:
Unrealized net holding loss in cash flow hedging instruments arising during the period
— (129)— (1,017)
Reclassification adjustment for net loss in cash flow hedging instruments included in income
— 62 — 57 
Income tax benefit
— 17 — 250 
Unrealized net losses on cash flow hedge instruments, net of reclassification adjustment
— (50)— (710)
Other comprehensive income (loss), net of tax5,788 11,671 (14,764)14,176 
Comprehensive income$23,059 $23,383 $24,155 $23,913 
See accompanying notes to consolidated financial statements.

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MIDWESTONE FINANCIAL GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY

Three Months Ended June 30,
Common Stock
(unaudited)
(dollars in thousands, except per share amounts)
Par Value
Additional
Paid-in
Capital
Retained Earnings Treasury Stock
Accumulated
Other
Comprehensive
Income (Loss)
Total
Balance at March 31, 2020$16,581 $299,412 $190,212 $(12,518)$6,877 $500,564 
Net income— — 11,712 — — 11,712 
Other comprehensive income— — — — 11,671 11,671 
Release/lapse of restriction on RSUs (9,542 shares, net)
— (258)— 246 — (12)
Share-based compensation— 388 — — — 388 
Dividends paid on common stock ($0.2200 per share)
— — (3,542)— — (3,542)
Balance at June 30, 2020$16,581 $299,542 $198,382 $(12,272)$18,548 $520,781 
Balance at March 31, 2021$16,581 $299,747 $206,230 $(15,278)$4,040 511,320 
Net income — — 17,271 — — 17,271 
Other comprehensive income— — — — 5,788 5,788 
Release/lapse of restriction on RSUs (21,155 shares, net)
— (526)(17)538 — (5)
Repurchase of common stock (38,775 shares)
— — — (1,148)— (1,148)
Share-based compensation— 667 — — — 667 
Dividends paid on common stock ($0.2250 per share)
— — (3,600)— — (3,600)
Balance at June 30, 2021$16,581 $299,888 $219,884 $(15,888)$9,828 $530,293 
Six Months Ended June 30,
Common Stock
(unaudited)
(dollars in thousands, except per share amounts)
Par Value
Additional
Paid-in
Capital
Retained EarningsTreasury Stock
Accumulated
Other
Comprehensive
Income (Loss)
Total
Balance at December 31, 2019$16,581 $297,390 $201,105 $(10,466)$4,372 508,982 
Cumulative effect of change in accounting principle(1)
— — (5,362)— — (5,362)
Net Income— — 9,737 — — 9,737 
Other comprehensive income— — — — 14,176 14,176 
Acquisition fair value finalization(2)
— 2,355 — — — 2,355 
Release/lapse of restriction on RSUs (32,488 shares, net)
— (937)— 798 — (139)
Repurchase of common stock (95,340 shares)
— — — (2,604)— (2,604)
Share-based compensation— 734 — — — 734 
Dividends paid on common stock ($0.4400 per share)
— — (7,098)— — (7,098)
Balance at June 30, 2020$16,581 $299,542 $198,382 $(12,272)$18,548 $520,781 
Balance at December 31, 2020$16,581 $300,137 $188,191 $(14,251)$24,592 515,250 
Net income— — 38,919 — — 38,919 
Other comprehensive loss— — — — (14,764)(14,764)
Release/lapse of restriction on RSUs (48,051 shares, net)
— (1,300)(28)1,210 — (118)
Repurchase of common stock (101,363 shares)
— — — (2,847)— (2,847)
Share-based compensation— 1,051 — — — 1,051 
Dividends paid on common stock ($0.4500 per share)
— — (7,198)— — (7,198)
Balance at June 30, 2021$16,581 $299,888 $219,884 $(15,888)$9,828 $530,293 
(1) Reclassification pursuant to adoption of ASU 2016-13, Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments.
(2) Relates to the finalization of the purchase accounting adjustments for the ATBancorp acquisition. This purchase accounting adjustment had a $2.06 million impact on goodwill, $296 thousand impact on deferred income taxes, with the offsetting impact being to additional paid-in capital.
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MIDWESTONE FINANCIAL GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
 
Six Months Ended June 30,
(unaudited) (dollars in thousands)2021 2020
Cash flows from operating activities:
Net income
$38,919  $9,737 
Adjustments to reconcile net income to net cash provided by operating activities:
 
Credit loss (benefit) expense
(6,878) 26,418 
Depreciation, amortization, and accretion
632  2,342 
Net loss on sale of premises and equipment
5  61 
Share-based compensation
1,051  734 
Net gain on sale or call of debt securities available for sale
(69) (48)
Net change in foreclosed assets due to writedown or sale133 119 
Net gain on sale of loans held for sale(5,402)(2,696)
Origination of loans held for sale
(168,027) (179,415)
Proceeds from sales of loans held for sale
227,236 175,463 
Increase in cash surrender value of bank-owned life insurance(807)(786)
Decrease (increase) in deferred income taxes, net1,554 (6,680)
Change in:
Other assets
3,055  (9,761)
Other liabilities
(12,113)13,226 
Net cash provided by operating activities
$79,289  $28,714 
Cash flows from investing activities: 
Proceeds from sales of debt securities available for sale
$41,411  $22,146 
Proceeds from maturities and calls of debt securities available for sale
210,574  78,311 
Purchases of debt securities available for sale
(688,292) (452,716)
Net decrease (increase) in loans held for investment
158,800  (142,475)
Purchases of premises and equipment
(644) (803)
Proceeds from sale of foreclosed assets
1,712 2,637 
Proceeds from sale of premises and equipment
3  2 
Net cash (used in) investing activities
$(276,436) $(492,898)
Cash flows from financing activities: 
Net increase (decrease) in:
Deposits
$245,527  $536,589 
Short-term borrowings
(18,528)22,875 
         Payments of subordinated debt issuance costs(9)— 
         Redemption of subordinated debentures(10,835)— 
         Payments on finance lease liability(70)(62)
Payments of Federal Home Loan Bank borrowings
(28,000)(37,400)
Payments of other long-term debt— (4,251)
Taxes paid relating to the release/lapse of restriction on RSUs
(118)(139)
Dividends paid
(7,198) (7,098)
Repurchase of common stock
(2,847)(2,604)
Net cash provided by financing activities
$177,922  $507,910 
Net (decrease) increase in cash and cash equivalents
$(19,225) $43,726 
Cash and cash equivalents:
        Beginning of Period82,659  73,484 
        Ending balance$63,434  $117,210 

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(unaudited) (dollars in thousands)Six Months Ended June 30,
 2021 2020
Supplemental disclosures of cash flow information: 
Cash paid during the period for interest
$11,643  $18,039 
Cash paid during the period for income taxes
11,185  3,505 
Supplemental schedule of non-cash investing and financing activities:
Transfer of loans to foreclosed assets, net
$284  $15 
Investment securities purchased but not settled 1,500 30,192 
See accompanying notes to consolidated financial statements.
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MidWestOne Financial Group, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(Unaudited)

1.    Nature of Business and Significant Accounting Policies
Nature of Business
MidWestOne Financial Group, Inc., an Iowa corporation formed in 1983, is a bank holding company under the BHCA and a financial holding company under the GLBA. Our principal executive offices are located at 102 South Clinton Street, Iowa City, Iowa 52240.
The Company owns all of the outstanding common stock of MidWestOne Bank, an Iowa state non-member bank chartered in 1934 with its main office in Iowa City, Iowa. We operate primarily through MidWestOne Bank, our bank subsidiary.
Basis of Presentation
The accompanying interim condensed consolidated financial statements are prepared in accordance with GAAP for interim financial information and pursuant to the requirements for reporting on Form 10-Q and Article 10 of Regulation S-X of the Securities Exchange Act of 1934. Accordingly, certain disclosures accompanying annual consolidated financial statements are omitted. In the opinion of management, all significant intercompany accounts and transactions have been eliminated and adjustments, consisting solely of normal recurring accruals and considered necessary for the fair presentation of financial statements for the interim periods, have been included. The current period's results of operations are not necessarily indicative of the results that ultimately may be achieved for the year. The interim condensed consolidated financial statements and notes thereto should be read in conjunction with the audited consolidated financial statements and notes thereto included in our Form 10-K for the year ended December 31, 2020, filed with the SEC on March 11, 2021.
Risks and Uncertainties

The outbreak of COVID-19 has adversely impacted a broad range of industries in which the Company’s customers operate and could impair their ability to fulfill their financial obligations to the Company. The World Health Organization declared COVID-19 to be a global pandemic, indicating that almost all public commerce and related business activities must be, to varying degrees, curtailed with the goal of decreasing the rate of new infections. The spread of the outbreak has caused significant disruptions in the U.S. economy and has disrupted banking and other financial activity in the areas in which the Company operates. While there has been no material impact to the Company’s employees to date, COVID-19 could also potentially create widespread business continuity issues for the Company.

Congress, the President, and the FRB have taken several actions designed to mitigate the economic impact of the pandemic. The CARES Act was signed into law in March 2020 as a $2 trillion legislative package. In addition to the general impact of COVID-19, certain provisions of the CARES Act as well as other recent legislative and regulatory relief efforts are expected to have a material impact on the Company’s operations. On December 27, 2020, a new COVID-19 relief bill was signed into law by President Trump, which included as part of the bill up to $284.5 billion of a second wave of PPP funding. The American Rescue Plan Act of 2021 was signed into law on March 11, 2021 by President Biden as a $1.9 trillion legislative package, which included as part of the bill a variety of economic assistance programs for Americans. In addition, on March 30, 2021, President Biden signed into law the PPP Extension Act of 2021, which set a deadline of May 31, 2021 for qualifying businesses to apply for a PPP loan, and provided an additional 30 days for the SBA to process pending PPP loan applications.

The Company’s business is dependent upon the willingness and ability of its employees and customers to conduct banking and other financial transactions. While it appears that economic conditions are trending in a positive direction as of June 30, 2021, should the global or national response to contain COVID-19 escalate further or prove unsuccessful, the Company could experience a material adverse effect on its business, financial condition, results of operations and cash flows. While it is not possible to know the full universe or extent that the impact of COVID-19, and related measures to curtail its spread or to provide economic assistance to entities and individuals or otherwise stimulate the economy, will have on the Company’s operations, the Company discloses in this report potentially material items of which it is aware at the time this report is filed with the SEC.

Financial position and results of operations
The Company’s interest income could be reduced due to COVID-19. In accordance with CARES Act provisions and regulatory guidance, the Company is working with COVID-19 affected borrowers to defer their payments, interest, and fees. While interest and fees will still accrue to income, through normal GAAP accounting, should eventual credit losses on these
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deferred payments emerge, interest income and fees accrued would need to be reversed. In such a scenario, interest income in future periods could be negatively impacted. At this time, the Company is unable to project the materiality of such an impact, but recognizes that the breadth of the economic impact of COVID-19 may affect its borrowers’ ability to repay in future periods.

Capital and liquidity
While the Company believes that it has sufficient capital to withstand the negative economic impact of COVID-19, its reported and regulatory capital ratios could be adversely impacted by further credit losses. The Company relies on cash on hand as well as dividends from its subsidiary bank to service its debt. If the Company’s capital deteriorates such that its subsidiary bank is unable to pay dividends to it for an extended period of time, the Company may not be able to service its debt. If large numbers of the Company’s deposit customers withdraw their funds, the Company might become more reliant on volatile or more expensive sources of funding.

Asset valuation
Currently, the Company does not expect COVID-19 to affect its ability to account timely for the assets on its balance sheet; however, this could change in future periods. While certain valuation assumptions and judgments will change to account for pandemic-related circumstances such as widening credit spreads, the Company does not anticipate significant changes in methodology used to determine the fair value of assets measured in accordance with GAAP.

It is possible that the lingering effects of COVID-19 could cause the occurrence of what management would deem to be subsequent triggering events that could, under certain circumstances, cause us to perform a goodwill or intangible asset impairment test and result in an impairment charge being recorded for that period. In the event that the Company concludes that all or a portion of its goodwill or intangible assets is impaired, a non-cash charge for the amount of such impairment would be recorded to earnings. Such a charge would have no impact on tangible capital or regulatory capital, cash flows or liquidity position.

Credit
The Company is working with customers directly affected by COVID-19. The Company has offered and continues to offer short-term assistance in accordance with regulatory guidelines. As a result of the current economic environment caused by the COVID-19 pandemic, the Company is engaging in more frequent communication with borrowers to better understand their situations and the challenges faced, allowing it to respond proactively as needs and issues arise. We acknowledge there are indicators that economic conditions are improving. However, should economic conditions worsen, the Company could experience further increases in its required ACL and record additional credit loss expense. It is possible that the Company’s asset quality measures could worsen in future periods if the effects of COVID-19 are prolonged.

Use of Estimates

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

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

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

Accounting Guidance Pending Adoption at June 30, 2021

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

2.    Debt Securities
The amortized cost and fair value of investment debt securities AFS, with gross unrealized gains and losses, were as follows:
 As of June 30, 2021
(in thousands)Amortized
Cost		Gross
Unrealized
Gains		Gross
Unrealized
Losses		Allowance for Credit Loss related to Debt SecuritiesFair Value
U.S. Government agencies and corporations$313 $3 $— $— $316 
State and political subdivisions685,287 12,562 2,975 — 694,874 
Mortgage-backed securities
115,636 1,673 355 — 116,954 
Collateralized mortgage obligations813,004 3,561 8,491 — 808,074 
Corporate debt securities444,913 9,288 1,967 — 452,234 
Total debt securities
$2,059,153 $27,087 $13,788 $— $2,072,452 
 
 As of December 31, 2020
(in thousands)
Amortized
Cost
Gross
Unrealized
Gains
Gross
Unrealized
Losses
Allowance for Credit Loss related to Debt Securities
Fair Value
U.S. Government agencies and corporations$355 $6 $— $— $361 
State and political subdivisions611,666 17,163 483 — 628,346 
Mortgage-backed securities
92,261 1,758 1 — 94,018 
Collateralized mortgage obligations559,718 6,332 214 — 565,836 
Corporate debt securities360,103 9,333 616 — 368,820 
Total debt securities
$1,624,103 $34,592 $1,314 $— $1,657,381 
 
Investment securities with a fair value of $509.6 million and $434.7 million at June 30, 2021 and December 31, 2020, respectively, were pledged on public deposits, securities sold under agreements to repurchase and for other purposes, as required or permitted by law.
The following table presents debt securities AFS in an unrealized loss position for which an allowance for credit losses has not been recorded at June 30, 2021, aggregated by investment category and length of time in a continuous loss position:  
  As of June 30, 2021
Number
of
Securities
Less than 12 Months12 Months or MoreTotal
Available for Sale
Fair
Value
Unrealized
Losses
Fair
Value
Unrealized
Losses
Fair
Value
Unrealized
Losses
(in thousands, except number of securities) 
State and political subdivisions96 $201,496 $2,845 $7,485 $130 $208,981 $2,975 
Mortgage-backed securities
6 18,643 355 — — 18,643 355 
Collateralized mortgage obligations
32 600,050 8,491 — — 600,050 8,491 
Corporate debt securities17 118,649 1,810 750 157 119,399 1,967 
Total
151 $938,838 $13,501 $8,235 $287 $947,073 $13,788 
As of June 30, 2021, 96 state and political subdivisions securities with total unrealized losses of $3.0 million were held by the Company. Management evaluated these securities through a process that included consideration of credit agency ratings and payment history. In addition, management may evaluate securities by considering the yield spread to treasury securities and the most recent financial information available. Based on this evaluation, management concluded that the decline in fair value was not attributable to credit losses.
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As of June 30, 2021, 6 mortgage-backed securities and 32 collateralized mortgage obligations with unrealized losses totaling $8.8 million were held by the Company. Management evaluated the payment history of these securities. In addition, management considered the implied U.S. government guarantee of these agency securities and the level of credit enhancement for non-agency securities. Based on this evaluation, management concluded that the decline in fair value was not attributable to credit losses.
As of June 30, 2021, 17 corporate debt securities with total unrealized losses of $2.0 million were held by the Company. Management evaluated these securities by considering credit agency ratings and payment history. In addition, management may evaluate securities by considering the yield spread to treasury securities and the most recent financial information available. Based on this evaluation, management concluded that the decline in fair value was not attributable to credit losses.
Accrued interest receivable on available for sale debt securities, which is recorded within 'Other Assets,' totaled $8.4 million at June 30, 2021 and $7.3 million at December 31, 2020 and is excluded from the estimate of credit losses.
The following table presents debt securities AFS in an unrealized loss position for which an allowance for credit losses has not been recorded at December 31, 2020, aggregated by investment category and length of time in a continuous loss position:
  As of December 31, 2020
Available for Sale
Number
of
Securities
Less than 12 Months12 Months or MoreTotal
Fair
Value
Unrealized
Losses
Fair
Value
Unrealized
Losses
Fair
Value
Unrealized
Losses
(in thousands, except number of securities) 
State and political subdivisions27 $31,489 $157 $4,065 $326 $35,554 $483 
Mortgage-backed securities
7 315 1 — — 315 1 
Collateralized mortgage obligations8 133,032 214 — — 133,032 214 
Corporate debt securities15 35,995 523 3,311 93 39,306 616 
Total
57 $200,831 $895 $7,376 $419 $208,207 $1,314 
Proceeds and gross realized gains and losses on debt securities available for sale for the three and six months ended June 30, 2021 and 2020 were as follows:
Three Months EndedSix Months Ended
(in thousands)June 30, 2021June 30, 2020June 30, 2021June 30, 2020
Proceeds from sales of debt securities available for sale$41,411 $— $41,411 $22,140 
Gross realized gains from sales of debt securities available for sale824 — 824 155 
Gross realized losses from sales of debt securities available for sale(791)— (791)(113)
Net realized gain from sales of debt securities available for sale(1)
$33 $— $33 $42 
(1) The difference in investment security gains, net reported herein as compared to the Consolidated Statements of Income is associated with the net realized gain from the call or maturity of debt securities of $9.0 thousand and $36.0 thousand for the three and six months ended ended June 30, 2021, respectively, and $6.0 thousand for each of the three and six months ended June 30, 2020.
The contractual maturity distribution of investment debt securities at June 30, 2021, is shown below. Expected maturities of MBS and CMO may differ from contractual maturities because the mortgages underlying the securities may be called or prepaid without any penalties. Therefore, these securities are not included in the maturity categories in the following summary.
 Available For Sale
(in thousands)Amortized CostFair Value
Due in one year or less$44,542 $45,142 
Due after one year through five years289,759 296,104 
Due after five years through ten years461,564 465,685 
Due after ten years334,648 340,493 
$1,130,513 $1,147,424 
Mortgage-backed securities115,636 116,954 
Collateralized mortgage obligations813,004 808,074 
Total$2,059,153 $2,072,452 

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3.    Loans Receivable and the Allowance for Credit Losses
The composition of loans by class of receivable was as follows:
As of
(in thousands)June 30, 2021December 31, 2020
Agricultural$107,834 $116,392 
Commercial and industrial982,092 1,055,488
Commercial real estate:
Construction & development168,070 181,291
Farmland134,877 144,970
Multifamily255,826 256,525
Commercial real estate-other1,147,016 1,149,575
Total commercial real estate1,705,789 1,732,361
Residential real estate:
One- to four- family first liens332,117 355,684
One- to four- family junior liens136,464 143,422
Total residential real estate468,581 499,106
Consumer65,860 78,876
Loans held for investment, net of unearned income3,330,156 3,482,223
Allowance for credit losses(48,000)(55,500)
Total loans held for investment, net$3,282,156 $3,426,723 

Loans with unpaid principal in the amount of $822.0 million and $830.2 million at June 30, 2021 and December 31, 2020, respectively, were pledged to the FHLB as collateral for borrowings.

Non-accrual and Delinquent Status
Loans are placed on non-accrual when (1) payment in full of principal and interest is no longer expected or (2) principal or interest has been in default for 90 days or more unless the loan is both well secured with marketable collateral and in the process of collection. All loans rated doubtful or worse, and certain loans rated substandard, are placed on non-accrual.
A non-accrual loan may be restored to an accrual status when (1) all past due principal and interest has been paid (excluding renewals and modifications that involve the capitalizing of interest) or (2) the loan becomes well secured with marketable collateral and is in the process of collection. An established track record of performance is also considered when determining accrual status.

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

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The following table presents the amortized cost basis of loans based on delinquency status:
Age Analysis of Past-Due Financial Assets90 Days or More Past Due And Accruing
(in thousands)Current30 - 59 Days Past Due60 - 89 Days Past Due90 Days or More Past DueTotal
June 30, 2021
Agricultural
$106,390 $417 $69 $958 $107,834 $— 
Commercial and industrial
978,508 732 63 2,789 982,092 — 
Commercial real estate:
Construction and development
167,474 — — 596 168,070 — 
Farmland
130,835 649 27 3,366 134,877 — 
Multifamily
254,440 1,386 — — 255,826 — 
Commercial real estate-other
1,141,031 352 46 5,587 1,147,016 — 
Total commercial real estate
1,693,780 2,387 73 9,549 1,705,789 — 
Residential real estate:
One- to four- family first liens
328,847 1,929 511 830 332,117 664 
One- to four- family junior liens
136,113 237 9 105 136,464 — 
Total residential real estate
464,960 2,166 520 935 468,581 664 
Consumer
65,724 76 48 12 65,860 1 
Total
$3,309,362 $5,778 $773 $14,243 $3,330,156 $665 
December 31, 2020
Agricultural
$115,284 $8 $45 $1,055 $116,392 $— 
Commercial and industrial
1,051,727 477 333 2,951 1,055,488 106 
Commercial real estate:
Construction and development
180,059 586 42 604 181,291 — 
Farmland
138,798 226 324 5,622 144,970 — 
Multifamily
256,525 — — — 256,525 — 
Commercial real estate-other
1,132,015 11,514 318 5,728 1,149,575 — 
Total commercial real estate
1,707,397 12,326 684 11,954 1,732,361 — 
Residential real estate:
One- to four- family first liens
351,370 2,062 566 1,686 355,684 625 
One- to four- family junior liens
142,663 377 234 148 143,422 — 
Total residential real estate
494,033 2,439 800 1,834 499,106 625 
Consumer
78,747 43 39 47 78,876 8 
Total
$3,447,188 $15,293 $1,901 $17,841 $3,482,223 $739 

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The following table presents the amortized cost basis of loans on non-accrual status, amortized cost basis of loans on non-accrual status with no allowance for credit losses recorded, and loans past due 90 days or more and still accruing by class of loan as of June 30, 2021 and December 31, 2020:
NonaccrualNonaccrual with no Allowance for Credit Losses90 Days or More Past Due And Accruing
(in thousands)June 30, 2021December 31, 2020June 30, 2021December 31, 2020June 30, 2021December 31, 2020
Agricultural
$2,086 $2,584 $1,381 $1,599 $— $— 
Commercial and industrial
6,395 7,326 3,858 4,349 — 106 
Commercial real estate:
Construction and development
609 1,145 596 900 — — 
Farmland
10,280 8,319 9,616 7,266 — — 
Multifamily
1,073 746 377 39 — — 
Commercial real estate-other
17,802 19,134 1,732 2,497 — — 
Total commercial real estate
29,764 29,344 12,321 10,702 — — 
Residential real estate:
One- to four- family first liens
1,762 1,895 344 75 664 625 
One- to four- family junior liens
695 722 — 1 — — 
Total residential real estate
2,457 2,617 344 76 664 625 
Consumer
62 79 8 13 1 8 
Total
$40,764 $41,950 $17,912 $16,739 $665 $739 
The interest income recognized on loans that were on nonaccrual for the three months ended June 30, 2021 and June 30, 2020 was $367 thousand and $124 thousand, respectively. The interest income recognized on loans that were on nonaccrual for the six months ended June 30, 2021 and June 30, 2020 was $603 thousand and $396 thousand, respectively.

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

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

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

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

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

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

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The following table sets forth the amortized cost basis of loans by class of receivable by credit quality indicator and vintage based on the most recent analysis performed, as of June 30, 2021. As of June 30, 2021, there were no 'loss' rated credits.
Term Loans by Origination YearRevolving Loans
June 30, 2021
(in thousands)
20212020201920182017PriorTotal
Agricultural
Pass$23,338 $11,915 $5,413 $1,782 $1,353 $2,109 $48,404 $94,314 
Special mention / watch1,730 1,612 874 — 76 1,034 4,264 9,590 
Substandard265 1,313 140 229 164 299 1,520 3,930 
Doubtful— — — — — — — — 
Total$25,333 $14,840 $6,427 $2,011 $1,593 $3,442 $54,188 $107,834 
Commercial and industrial
Pass$227,143 $298,502 $87,470 $44,810 $59,602 $110,679 $127,986 $956,192 
Special mention / watch6,649 2,285 493 163 475 223 2,731 13,019 
Substandard2,487 2,186 1,093 833 367 3,534 2,380 12,880 
Doubtful— — — — 1 — — 1 
Total$236,279 $302,973 $89,056 $45,806 $60,445 $114,436 $133,097 $982,092 
CRE - Construction and development
Pass$32,005 $80,144 $23,982 $3,905 $1,896 $2,863 $20,016 $164,811 
Special mention / watch565 — 174 532 — 1 — 1,272 
Substandard— 910 1,060 — — 17 — 1,987 
Doubtful— — — — — — — — 
Total$32,570 $81,054 $25,216 $4,437 $1,896 $2,881 $20,016 $168,070 
CRE - Farmland
Pass$20,944 $38,762 $20,864 $5,297 $6,516 $13,695 $1,161 $107,239 
Special mention / watch1,826 4,617 3,963 1,428 297 234 147 12,512 
Substandard4,476 2,500 1,783 2,336 1,668 2,333 30 15,126 
Doubtful— — — — — — — — 
Total$27,246 $45,879 $26,610 $9,061 $8,481 $16,262 $1,338 $134,877 
CRE - Multifamily
Pass$68,924 $135,555 $16,456 $2,833 $7,305 $5,861 $8,771 $245,705 
Special mention / watch— 342 — 5,940 — 43 — 6,325 
Substandard— 2,459 — — — 1,337 — 3,796 
Doubtful— — — — — — — — 
Total$68,924 $138,356 $16,456 $8,773 $7,305 $7,241 $8,771 $255,826 
CRE - other
Pass$181,839 $458,518 $114,186 $42,458 $69,239 $93,469 $43,461 $1,003,170 
Special mention / watch4,731 47,407 2,554 11,702 1,869 4,152 281 72,696 
Substandard3,383 40,572 12,659 6,245 983 7,308 — 71,150 
Doubtful— — — — — — — — 
Total$189,953 $546,497 $129,399 $60,405 $72,091 $104,929 $43,742 $1,147,016 
RRE - One- to four- family first liens
Performing$57,206 $91,648 $34,651 $30,668 $21,425 $89,014 $5,079 $329,691 
Nonperforming489 394 — 675 166 702 — 2,426 
Total$57,695 $92,042 $34,651 $31,343 $21,591 $89,716 $5,079 $332,117 
RRE - One- to four- family junior liens
Performing$23,372 $15,553 $5,696 $7,761 $4,787 $6,289 $72,311 $135,769 
Nonperforming— — 143 181 15 206 150 695 
Total$23,372 $15,553 $5,839 $7,942 $4,802 $6,495 $72,461 $136,464 
Consumer
Performing$18,089 $21,267 $9,114 $6,284 $2,665 $6,083 $2,295 $65,797 
Nonperforming— 3 19 9 16 16 — 63 
Total$18,089 $21,270 $9,133 $6,293 $2,681 $6,099 $2,295 $65,860 


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Term Loans by Origination YearRevolving Loans
20212020201920182017PriorTotal
Total by Credit Quality Indicator Category
Pass$554,193 $1,023,396 $268,371 $101,085 $145,911 $228,676 $249,799 $2,571,431 
Special mention / watch15,501 56,263 8,058 19,765 2,717 5,687 7,423 115,414 
Substandard10,611 49,940 16,735 9,643 3,182 14,828 3,930 108,869 
Doubtful— — — — 1 — — 1 
Performing98,667 128,468 49,461 44,713 28,877 101,386 79,685 531,257 
Nonperforming489 397 162 865 197 924 150 3,184 
Total$679,461 $1,258,464 $342,787 $176,071 $180,885 $351,501 $340,987 $3,330,156 

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The following table sets forth the amortized cost basis of loans by class of receivable by credit quality indicator and vintage based on the most recent analysis performed, as of December 31, 2020. As of December 31, 2020, there were no 'loss' rated credits.
Term Loans by Origination YearRevolving Loans
December 31, 2020
(in thousands)
20202019201820172016PriorTotal
Agricultural
Pass$17,836 $6,959 $2,764 $2,145 $1,386 $1,833 $60,802 $93,725 
Special mention / watch4,892 1,083 117 108 553 1,103 7,210 15,066 
Substandard4,075 650 258 183 121 226 2,086 7,599 
Doubtful1 — — — — 1 — 2 
Total$26,804 $8,692 $3,139 $2,436 $2,060 $3,163 $70,098 $116,392 
Commercial and industrial
Pass$546,171 $105,523 $57,055 $61,753 $38,695 $92,526 $120,498 $1,022,221 
Special mention / watch3,410 572 497 2,261 611 112 4,796 12,259 
Substandard5,014 1,539 928 656 461 3,261 9,144 21,003 
Doubtful— — — 1 — 3 1 5 
Total$554,595 $107,634 $58,480 $64,671 $39,767 $95,902 $134,439 $1,055,488 
CRE - Construction and development
Pass$109,885 $25,972 $14,994 $2,696 $679 $876 $22,519 $177,621 
Special mention / watch843 298 542 — 9 3 — 1,695 
Substandard597 1,132 220 — — 26 — 1,975 
Doubtful— — — — — — — — 
Total$111,325 $27,402 $15,756 $2,696 $688 $905 $22,519 $181,291 
CRE - Farmland
Pass$48,378 $25,022 $9,577 $10,490 $8,378 $13,003 $1,263 $116,111 
Special mention / watch8,088 4,583 935 660 361 237 — 14,864 
Substandard3,924 2,627 4,386 1,728 166 1,128 36 13,995 
Doubtful— — — — — — — — 
Total$60,390 $32,232 $14,898 $12,878 $8,905 $14,368 $1,299 $144,970 
CRE - Multifamily
Pass$164,817 $18,992 $17,805 $10,706 $10,201 $19,581 $11,558 $253,660 
Special mention / watch345 — — — 59 — — 404 
Substandard1,099 — — — 1,362 — — 2,461 
Doubtful— — — — — — — — 
Total$166,261 $18,992 $17,805 $10,706 $11,622 $19,581 $11,558 $256,525 
CRE - other
Pass$487,771 $129,388 $60,957 $83,393 $66,369 $91,698 $45,129 $964,705 
Special mention / watch71,141 14,870 12,415 5,953 3,756 4,335 455 112,925 
Substandard48,690 7,162 6,370 1,222 579 6,997 925 71,945 
Doubtful— — — — — — — — 
Total$607,602 $151,420 $79,742 $90,568 $70,704 $103,030 $46,509 $1,149,575 
RRE - One- to four- family first liens
Performing$117,923 $46,581 $42,875 $30,628 $37,407 $68,501 $9,249 $353,164 
Nonperforming239 1 596 303 148 1,233 — 2,520 
Total$118,162 $46,582 $43,471 $30,931 $37,555 $69,734 $9,249 $355,684 
RRE - One- to four- family junior liens
Performing$19,818 $7,973 $12,140 $6,152 $3,467 $5,354 $87,795 $142,699 
Nonperforming7 — 223 17 116 190 170 723 
Total$19,825 $7,973 $12,363 $6,169 $3,583 $5,544 $87,965 $143,422 
Consumer
Performing$30,755 $13,662 $10,341 $4,960 $2,656 $6,306 $10,118 $78,798 
Nonperforming2 21 13 5 13 24 — 78 
Total$30,757 $13,683 $10,354 $4,965 $2,669 $6,330 $10,118 $78,876 


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Term Loans by Origination YearRevolving Loans
20202019201820172016PriorTotal
Total by Credit Quality Indicator Category
Pass$1,374,858 $311,856 $163,152 $171,183 $125,708 $219,517 $261,769 $2,628,043 
Special mention / watch88,719 21,406 14,506 8,982 5,349 5,790 12,461 157,213 
Substandard63,399 13,110 12,162 3,789 2,689 11,638 12,191 118,978 
Doubtful1 — — 1 — 4 1 7 
Performing168,496 68,216 65,356 41,740 43,530 80,161 107,162 574,661 
Nonperforming248 22 832 325 277 1,447 170 3,321 
Total$1,695,721 $414,610 $256,008 $226,020 $177,553 $318,557 $393,754 $3,482,223 

Allowance for Credit Losses
At June 30, 2021, the economic forecast used by the Company showed the following: (1) Midwest unemployment – decreases over the next four forecasted quarters; (2) Year-to-year change in national retail sales - increases over the next four forecasted quarters; (3) Year-to-year change in CRE Index - decreases over the next four forecasted quarters; (4) Year-to-year change in U.S. GDP - increases over the next four forecasted quarters; (5) Year-to-year change in National Home Price Index – increases over the next four forecasted quarters; and (6) Rental Vacancy - an increase over the next two forecasted quarters, followed by a decline in the third and fourth forecasted quarters. Overall, economic forecast loss driver data improved when compared to the previously disclosed first quarter of 2021 results.

We have made a policy election to report interest receivable as a separate line on the balance sheet. Accrued interest receivable, which is recorded within 'Other Assets', totaled $11.1 million at June 30, 2021 and $14.2 million at December 31, 2020 and is excluded from the estimate of credit losses. The changes in the allowance for credit losses by portfolio segment were as follows:

For the Three Months Ended June 30, 2021 and 2020
(in thousands)AgriculturalCommercial and IndustrialCommercial Real EstateResidential Real EstateConsumerTotal
For the Three Months Ended June 30, 2021
Beginning balance$1,110 $13,644 $30,425 $4,655 $816 $50,650 
Charge-offs
(113)(195)(350)(71)(111)(840)
Recoveries
21 314 9 47 43 434 
Credit loss (benefit) expense(1)
(5)24 (1,568)(555)(140)(2,244)
Ending balance$1,013 $13,787 $28,516 $4,076 $608 $48,000 
For the Three Months Ended June 30, 2020
Beginning balance$1,146 $19,309 $23,138 $6,425 $1,169 $51,187 
Charge-offs
(109)(902)(792)(103)(197)(2,103)
Recoveries
1 166 11 8 50 236 
Credit loss expense(1)
370 136 5,864 (256)210 6,324 
Ending balance$1,408 $18,709 $28,221 $6,074 $1,232 $55,644 
(1) The difference in the credit loss expense reported herein as compared to the Consolidated Statements of Income is associated with the credit loss (benefit) expense of $0.1 million and $(1.6) million related to off-balance sheet credit exposures for the three months ended June 30, 2021 and June 30, 2020, respectively.
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For the Six Months Ended June 30, 2021 and 2020
(in thousands)AgriculturalCommercial and IndustrialCommercial Real EstateResidential Real EstateConsumerTotal
For the Six Months Ended June 30, 2021
Beginning balance$1,346 $15,689 $32,640 $4,882 $943 $55,500 
Charge-offs(154)(861)(416)(106)(306)(1,843)
Recoveries48 606 315 56 96 1,121 
Credit loss expense(1)
(227)(1,647)(4,023)(756)(125)(6,778)
Ending balance$1,013 $13,787 $28,516 $4,076 $608 $48,000 
For the Six Months Ended June 30, 2020
Beginning balance$3,748 $8,394 $13,804 $2,685 $448 $29,079 
Day 1 transition adjustment from adoption of ASC 326(2,557)2,728 1,300 2,050 463 3,984 
Charge-offs(193)(1,373)(1,512)(103)(419)(3,600)
Recoveries26 379 19 15 96 535 
Credit loss expense384 8,581 14,610 1,427 644 25,646 
Ending balance$1,408 $18,709 $28,221 $6,074 $1,232 $55,644 
(1) The difference in the credit loss expense reported herein as compared to the Consolidated Statements of Income is associated with the credit loss (benefit) expense of $(0.1) million and $0.8 million related to off-balance sheet credit exposures for the six months ended June 30, 2021 and June 30, 2020, respectively.
The composition of allowance for credit losses by portfolio segment based on evaluation method were as follows:
As of June 30, 2021
(in thousands)AgriculturalCommercial and IndustrialCommercial Real EstateResidential Real EstateConsumerTotal
Loans held for investment, net of unearned income
Individually evaluated for impairment
$1,537 $5,753 $28,889 $591 $8 $36,778 
Collectively evaluated for impairment
106,297 976,339 1,676,900 467,990 65,852 3,293,378 
Total
$107,834 $982,092 $1,705,789 $468,581 $65,860 $3,330,156 
Allowance for credit losses:
Individually evaluated for impairment
$8 $641 $2,060 $151 $— $2,860 
Collectively evaluated for impairment
1,005 13,146 26,456 3,925 608 45,140 
Total
$1,013 $13,787 $28,516 $4,076 $608 $48,000 
As of December 31, 2020
(in thousands)AgriculturalCommercial and IndustrialCommercial Real EstateResidential Real EstateConsumerTotal
Loans held for investment, net of unearned income
Individually evaluated for impairment
$2,088 $6,582 $28,235 $427 $8 $37,340 
Collectively evaluated for impairment
114,304 1,048,906 1,704,126 498,679 78,868 3,444,883 
Total
$116,392 $1,055,488 $1,732,361 $499,106 $78,876 $3,482,223 
Allowance for credit losses:
Individually evaluated for impairment
$66 $799 $2,031 $179 $— $3,075 
Collectively evaluated for impairment
1,280 14,890 30,609 4,703 943 52,425 
Total
$1,346 $15,689 $32,640 $4,882 $943 $55,500 







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The following table presents the amortized cost basis of collateral dependent loans, by the primary collateral type, which are individually evaluated to determine expected credit losses, and the related ACL allocated to these loans:
As of June 30, 2021

(in thousands)		Primary Type of Collateral
Real EstateEquipmentOtherTotalACL Allocation
Agricultural$946 $591 $— $1,537 $8 
Commercial and industrial629 2,590 2,534 5,753 641 
Commercial real estate:
     Construction and development595 — — 595 — 
      Farmland9,961 — — 9,961 6 
      Multifamily1,073 — — 1,073 390 
      Commercial real estate-other17,260 — — 17,260 1,664 
Residential real estate:
     One- to four- family first liens410 — — 410 64 
     One- to four- family junior liens181 181 87 
Consumer— 8 — 8 — 
        Total$31,055 $3,189 $2,534 $36,778 $2,860 
As of December 31, 2020

(in thousands)		Primary Type of Collateral
Real EstateEquipmentOtherTotalACL Allocation
Agricultural$516 $824 $748 $2,088 $66 
Commercial and industrial667 3,037 2,878 6,582 799 
Commercial real estate:
     Construction and development899 — — 899 — 
      Farmland7,850 — — 7,850 88 
      Multifamily746 — — 746 202 
      Commercial real estate-other18,740 — — 18,740 1,741 
Residential real estate:
     One- to four- family first liens204 — — 204 132 
     One- to four- family junior liens223 — — 223 47 
Consumer— 8 — 8 — 
        Total$29,845 $3,869 $3,626 $37,340 $3,075 

Troubled Debt Restructurings
TDRs totaled $11.6 million and $11.0 million as of June 30, 2021 and December 31, 2020, respectively. As of June 30, 2021, the Company had $7 thousand of commitments to lend additional funds to borrowers with loans classified as TDR.
The following table sets forth information on the Company's TDRs by class of financing receivable occurring during the stated periods. TDRs include multiple concessions, and the disclosure classifications in the table are based on the primary concession provided to the borrower.
Three Months Ended June 30,
20212020
Number of ContractsPre-Modification Outstanding Recorded InvestmentPost-Modification Outstanding Recorded InvestmentNumber of ContractsPre-Modification Outstanding Recorded InvestmentPost-Modification Outstanding Recorded Investment
(dollars in thousands)
CONCESSION - Interest rate reduction
Farmland2 $1,982 $1,982 — $— $— 
One- to four- family first liens1 171 171 — — — 
CONCESSION - Extended maturity date
One- to four- family first liens1 85 85 2 145 145 
CONCESSION - Other
Agricultural— — — 1 208 208 
Farmland— — — 2 354 354 
Total4$2,238 $2,238 5 $707 $707 
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Six Months Ended June 30,
20212020
Number of ContractsPre-Modification Outstanding Recorded InvestmentPost-Modification Outstanding Recorded InvestmentNumber of ContractsPre-Modification Outstanding Recorded InvestmentPost-Modification Outstanding Recorded Investment
(dollars in thousands)
CONCESSION - Interest rate reduction
Farmland2$1,982 $1,982 —$— $— 
One- to four- family first liens1171 171 —— — 
CONCESSION - Extended maturity date
Commercial real estate-other—— — 3759 808 
One- to four- family first liens2178 178 2145 145 
CONCESSION - Other
Agricultural—— — 1208 208 
Farmland—— — 2354 354 
Commercial real estate-other144 44 —— — 
One- to four- family first liens1150 150 —— — 
Total7$2,525 $2,525 8$1,466 $1,515 

For the three and six months ended June 30, 2021 and June 30, 2020, the Company had no TDRs that redefaulted within 12 months subsequent to restructure.

Modifications in response to COVID-19:

The Company began offering short-term loan modifications to assist borrowers during the COVID-19 pandemic. The CARES Act, as extended by the CAA, along with a joint interagency statement issued by the federal banking agencies, provide that short-term modifications made in response to COVID-19 do not need to be accounted for as a TDR. Accordingly, the Company does not account for such loan modifications as TDRs. The Company's loan modifications allow for the initial deferral of three months of principal and/or interest. The deferred interest is due and payable at the end of the deferral period, and the deferred principal is due and payable on the maturity date. At June 30, 2021, the outstanding balance of loans modified as a result of the COVID-19 pandemic totaled $21.0 million. The program is ongoing and additional loans continue to be granted deferrals.


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

The fair values of the Company's derivative instrument assets and liabilities are summarized as follows:
As of June 30, 2021As of December 31, 2020
Notional
Amount
Fair Value
Notional
Amount
Fair Value
(in thousands)AssetsLiabilitiesAssetsLiabilities
Designated as hedging instruments:
Fair value hedges:
Interest rate swaps
$25,184 $339 $1,699 $25,559 $34 $2,452 
Total$25,184 $339 $1,699 $25,559 $34 $2,452 
Not designated as hedging instruments:
Interest rate swaps
$343,761 $6,267 $6,280 $347,380 $10,758 $10,807 
RPAs - protection sold4,353 1 — 4,471 4 — 
RPAs - protection purchased
9,730 — 3 9,825 — 8 
Total$357,844 $6,268 $6,283 $361,676 $10,762 $10,815 

Derivatives Designated as Hedging Instruments
The Company uses derivative instruments to hedge its exposure to economic risks, including interest rate, liquidity, and credit risk. Certain hedging relationships are formally designated and qualify for hedge accounting under GAAP as fair value or cash flow hedges.
Fair Value Hedges - Derivatives are designated as fair value hedges to limit the Company's exposure to changes in the fair value of assets or liabilities due to movements in interest rates. The Company entered into pay-fixed receive-floating interest rate swaps to manage its exposure to changes in fair value in certain fixed-rate assets. The gain or loss on the derivative as well as the offsetting loss or gain on the hedged item attributable to the hedged risk are recognized in interest income.
Cash Flow Hedges - Derivatives are designated as cash flow hedges in order to minimize the variability in cash flows of earning assets or forecasted transactions caused by movement in interest rates. In February 2020, the Company entered into a pay-fixed receive-variable interest rate swap with a notional amount of $30.0 million to hedge against adverse fluctuations in interest rates by reducing exposure to variability in cash flows relating to interest payments on the Company's variable rate debt. The interest rate swap was designated as a cash flow hedge. The gain or loss on the derivative was recorded in accumulated other comprehensive income and subsequently reclassified into interest expense in the same period(s) during which the hedged transaction affects earnings. The Company terminated its cash flow hedge in the fourth quarter of 2020.

The table below presents the effect of cash flow hedge accounting on AOCI for three and six months ended June 30, 2021 and 2020.
Amount of Gain (Loss) Recognized in AOCI on DerivativeLocation of Gain (Loss) Reclassified from AOCI into Income Amount of Gain (Loss) Reclassified from AOCI into Income
Three Months Ended June 30,Three Months Ended June 30,
(in thousands)2021202020212020
Interest rate swaps$— $(129)Interest Expense$— $(62)
Amount of Gain (Loss) Recognized in AOCI on DerivativeLocation of Gain (Loss) Reclassified from AOCI into Income Amount of Gain (Loss) Reclassified from AOCI into Income
Six Months Ended June 30,Six Months Ended June 30,
(in thousands)2021202020212020
Interest rate swaps$— $(1,017)Interest Expense$— $(57)
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The table below presents the effect of the Company’s derivative financial instruments designated as hedging instruments on the consolidated statements of income for the periods indicated:
Location and Amount of Gain or Loss Recognized in Income on Fair Value and Cash Flow Hedging Relationships
For the Three Months Ended June 30,For the Six Months Ended June 30,
2021202020212020
(in thousands)Interest IncomeOther IncomeInterest IncomeOther IncomeInterest IncomeOther IncomeInterest IncomeOther Income
Total amounts of income and expense line items presented in the consolidated statements of income in which the effects of fair value or cash flow hedges are recorded
$(111)$— $(80)$— $(219)$— $(127)$— 
The effects of fair value and cash flow hedging:
Gain (loss) on fair value hedging relationships in subtopic 815-20:
Interest contracts:
Hedged items578 — 237 — (1,055)— 1,988 — 
Derivative designated as hedging instruments
(370)— (232)— 753 — (1,993)— 
Income statement effect of cash flow hedging relationships in subtopic 815-20:
Interest contracts:
Amount reclassified from AOCI into income
— — (62)— — — (57)— 

As of June 30, 2021, the following amounts were recorded on the balance sheet related to cumulative basis adjustment for fair value hedges:
Line Item in the Balance
Sheet in Which the
Hedged Item is Included
Carrying Amount of the
Hedged Assets
Cumulative Amount of Fair Value
Hedging Adjustment Included in the Carrying Amount of the Hedged Asset
(in thousands)
Loans$26,565 $1,364 

Derivatives Not Designated as Hedging Instruments
Interest Rate Swaps - The Company has also entered into interest rate swap contracts. The derivative contracts related to transactions in which the Company enters into an interest rate swap with a customer, while simultaneously entering into an offsetting interest rate swap with an institutional counterparty.

Credit Risk Participation Agreements - The Company enters into RPAs to manage the credit exposure on interest rate contracts associated with a syndicated loan. The Company may enter into protection purchased RPAs with institutional counterparties to decrease or increase its exposure to a borrower. Under the RPA, the Company will receive or make payment if a borrower defaults on the related interest rate contract. The 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.
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The following table presents the net gains (losses) recognized on the consolidated statements of income related to the derivatives not designated as hedging instruments for the periods indicated:
Location in the Consolidated Statements of IncomeFor the Three Months Ended June 30,For the Six Months Ended June 30,
(in thousands)2021202020212020
Interest rate swapsOther income$1 $(18)$35 $123 
RPAsOther income1 (6)1 97 
                Total$2 $(24)$36 $220 

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

The table below presents gross derivatives and the respective collateral received or pledged in the form of other financial instruments as of June 30, 2021 and December 31, 2020, which are generally marketable securities and/or cash. The collateral amounts in the table below are limited to the outstanding balances of the related asset or liability (after netting is applied); thus instances of over-collateralization are not shown. Further, the net amounts of derivative assets or liabilities can be reconciled to the tabular disclosure of fair value. The tabular disclosure of fair value provides the location that derivative assets and liabilities are presented on the consolidated balance sheets.
Gross Amounts Not Offset in the Balance Sheet
(in thousands)Gross Amounts of Recognized Assets (Liabilities)Gross Amounts Offset in the Balance SheetNet Amounts of Assets (Liabilities) presented in the Balance SheetFinancial InstrumentsCash Collateral Received (Paid)Net Assets (Liabilities)
As of June 30, 2021
Asset Derivatives$6,607 $— $6,607 $— $— $6,607 
Liability Derivatives(7,982)(7,982)(5,920)(2,062)
As of December 31, 2020
Asset Derivatives$10,796 $— $10,796 $— $— $10,796 
Liability Derivatives(13,267)— (13,267)— (13,267)— 

Credit-risk-related Contingent Features
The Company has an unsecured federal funds line with its institutional derivative counterparty. The Company has an agreement with its institutional derivative counterparty that contains a provision under which if the Company defaults on any of its indebtedness, including default where repayment of the indebtedness has not been accelerated by the lender, then the Company could also be declared in default on its derivative obligations. The Company also has an agreement with its derivative counterparty that contains a provision under which the Company could be declared in default on its derivative obligations if repayment of the underlying indebtedness is accelerated by the lender due to the Company’s default on the indebtedness.
As of June 30, 2021, the fair value of derivatives in a net liability position, which includes accrued interest but excludes any adjustment for nonperformance risk, related to these agreements was $7.1 million. As of June 30, 2021, the Company had minimum collateral posting thresholds with certain of its derivative counterparties and had posted $5.9 million of collateral related to these agreements. If the Company had breached any of these provisions at June 30, 2021, it could have been required to settle its obligations under the agreements at their termination value of $7.1 million.

5.    Goodwill and Intangible Assets
The carrying amount of goodwill was $62.5 million at June 30, 2021 and December 31, 2020.
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The following table presents the gross carrying amount, accumulated amortization, and net carrying amount of other intangible assets at the dates indicated:
As of June 30, 2021As of December 31, 2020
(in thousands)Gross Carrying AmountAccumulated AmortizationNet Carrying AmountGross Carrying AmountAccumulated AmortizationNet Carrying Amount
Core deposit intangible$41,745 $(28,668)$13,077 $41,745 $(26,440)$15,305 
Customer relationship intangible5,265 (3,193)2,072 5,265 (2,630)2,635 
Other
2,700 (2,495)205 2,700 (2,438)262 
$49,710 $(34,356)$15,354 $49,710 $(31,508)$18,202 
Indefinite-lived trade name intangible$7,040 $7,040 
The following table provides the estimated future amortization expense for the remaining six months ending December 31, 2021 and the succeeding annual periods:
(in thousands)Core Deposit IntangibleCustomer Relationship IntangibleOtherTotal
Estimated Remaining Amortization Expense for the Year Ending December 31,
2021$1,962 $499 $49 $2,510 
20223,487 797 79 4,363 
20232,833 518 51 3,402 
20242,180 239 24 2,443 
20251,526 19 2 1,547 
Thereafter1,089 — — 1,089 
Total$13,077 $2,072 $205 $15,354 
6.    Other Assets
The components of the Company's other assets as of June 30, 2021 and December 31, 2020 were as follows:
(in thousands)June 30, 2021December 31, 2020
Bank-owned life insurance$84,290 $83,483 
Interest receivable19,758 21,706 
FHLB stock12,687 13,784 
Mortgage servicing rights5,997 5,137 
Operating lease right-of-use assets, net3,232 3,613 
Federal and state income taxes, current2,340 — 
Federal and state income taxes, deferred7,506 3,845 
Derivative assets6,607 10,796 
Other receivables/assets12,314 11,129 
$154,731 $153,493 


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7.    Deposits
The following table presents the composition of our deposits as of the dates indicated:
(in thousands)June 30, 2021December 31, 2020
Noninterest bearing deposits$952,764 $910,655 
Interest checking deposits1,414,942 1,351,641 
Money market deposits936,683 918,654 
Savings deposits596,199 529,751 
Time deposits under $250538,331 581,471 
Time deposits of $250 or more353,747 254,877 
Total deposits
$4,792,666 $4,547,049 

The Company had $5.9 million and $7.8 million in reciprocal time deposits through the CDARS program as of June 30, 2021 and December 31, 2020, respectively. Included in interest-bearing checking and money market deposits at June 30, 2021 and December 31, 2020 were $35.2 million and $14.8 million, respectively, of reciprocal deposits in the ICS program. The CDARS and ICS programs coordinate, on a reciprocal basis, a network of banks to spread deposits exceeding the FDIC insurance coverage limits out to numerous institutions in order to provide insurance coverage for all participating deposits.

As of June 30, 2021 and December 31, 2020, the Company had public entity deposits that were collateralized by investment securities of $233.3 million and $156.7 million, respectively.

8.    Short-Term Borrowings
The following table summarizes our short-term borrowings as of the dates indicated:
June 30, 2021December 31, 2020
(in thousands)Weighted Average RateBalanceWeighted Average RateBalance
Securities sold under agreements to repurchase0.26 %$172,961 0.28 %$174,289 
Federal Home Loan Bank advances0.26 39,300 0.29 56,500 
Total
0.26 %$212,261 0.28 %$230,789 

Securities Sold Under an Agreement to Repurchase - Securities sold under agreements to repurchase are agreements in which the Company acquires funds by selling assets to another party under a simultaneous agreement to repurchase the same assets at a specified price and date. The Company enters into repurchase agreements and also offers a demand deposit account product to customers that sweeps their balances in excess of an agreed upon target amount into overnight repurchase agreements. All securities sold under agreements to repurchase are recorded on the face of the balance sheet.
Federal Home Loan Bank Advances - The Bank has a secured line of credit with the FHLBDM. Advances from the FHLBDM are collateralized primarily by one- to four-family residential, commercial and agricultural real estate first mortgages equal to various percentages of the total outstanding notes. See Note 3. Loans Receivable and the Allowance for Credit Losses of the notes to the consolidated financial statements.
Unsecured Line of Credit - The Bank has unsecured federal funds lines totaling $145.0 million from multiple correspondent banking relationships. There were no borrowings from such lines at either June 30, 2021 or December 31, 2020.
Other - At June 30, 2021 and December 31, 2020, the Company had no Federal Reserve Discount Window borrowings, while the financing capacity was $62.9 million as of June 30, 2021 and $67.7 million as of December 31, 2020. As of June 30, 2021 and December 31, 2020, the Bank had municipal securities with a market value of $68.1 million and $72.0 million, respectively, pledged to the Federal Reserve Bank of Chicago to secure potential borrowings.
The Company has a credit agreement with a correspondent bank with a revolving commitment of $25.0 million with interest payable at a rate of one-month LIBOR plus 1.75%. Fees are paid on the average daily unused revolving commitment in the amount of 0.30% per annum. The credit agreement matures on September 30, 2021. The Company had no balance outstanding under this revolving credit facility as of both June 30, 2021 and December 31, 2020.


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9.    Long-Term Debt
Junior Subordinated Notes Issued to Capital Trusts
The table below summarizes the terms of each issuance of junior subordinated notes outstanding as of the dates indicated:
(in thousands)Face ValueBook ValueInterest RateRateMaturity DateCallable Date
June 30, 2021
ATBancorp Statutory Trust I$7,732 $6,869 
Three-month LIBOR + 1.68%
1.80 %06/15/203606/15/2011
ATBancorp Statutory Trust II12,372 10,879 
Three-month LIBOR + 1.65%
1.77 %09/15/203706/15/2012
Barron Investment Capital Trust I2,062 1,784 
Three-month LIBOR + 2.15%
2.29 %09/23/203609/23/2011
Central Bancshares Capital Trust II7,217 6,856 
Three-month LIBOR + 3.50%
3.62 %03/15/203803/15/2013
MidWestOne Statutory Trust II15,464 15,464 
Three-month LIBOR + 1.59%
1.71 %12/15/203712/15/2012
Total
$44,847 $41,852 
December 31, 2020
ATBancorp Statutory Trust I$7,732 $6,850 
Three-month LIBOR + 1.68%
1.90 %06/15/203606/15/2011
ATBancorp Statutory Trust II12,37210,850
Three-month LIBOR + 1.65%
1.87 %09/15/203706/15/2012
Barron Investment Capital Trust I2,062 1,767 
Three-month LIBOR + 2.15%
2.39 %09/23/203609/23/2011
Central Bancshares Capital Trust II7,217 6,832 
Three-month LIBOR + 3.50%
3.72 %03/15/203803/15/2013
MidWestOne Statutory Trust II15,464 15,464 
Three-month LIBOR + 1.59%
1.81 %12/15/203712/15/2012
    Total$44,847 $41,763 
The trust preferred securities are subject to mandatory redemption, in whole or in part, upon repayment of the junior subordinated notes at the stated maturity date or upon redemption of the junior subordinated notes. Each trust’s ability to pay amounts due on the trust preferred securities is solely dependent upon the Company making payment on the related junior subordinated notes. The Company’s obligation under the junior subordinated notes and other relevant trust agreements, in aggregate, constitutes a full and unconditional guarantee by the Company of each trust’s obligations under the trust preferred securities issued by each trust. The Company has the right to defer payment of interest on the junior subordinated notes and, therefore, distributions on the trust preferred securities, for up to five years, but not beyond the stated maturity date in the table above. During any such deferral period the Company may not pay cash dividends on its stock and generally may not repurchase its stock.

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

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

Other Long-Term Debt
Long-term borrowings were as follows as of June 30, 2021 and December 31, 2020:
June 30, 2021December 31, 2020
(in thousands)Weighted Average RateBalanceWeighted Average RateBalance
Finance lease payable8.89 %$1,026 8.89 %$1,096 
FHLB borrowings2.18 63,151 1.92 91,198 
Total
2.29 %$64,177 2.00 %$92,294 

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As a member of the FHLBDM, the Bank may borrow funds from the FHLB in amounts up to 45% of the Bank’s total assets, provided the Bank is able to pledge an adequate amount of qualified assets to secure the borrowings. Advances from the FHLB are collateralized primarily by one- to four-family residential, commercial and agricultural real estate first mortgages equal to various percentages of the total outstanding notes. See Note 3. Loans Receivable and the Allowance for Credit Losses of the notes to the consolidated financial statements. At June 30, 2021, FHLB long-term borrowings included advances from the FHLBC, which were collateralized by investment securities. See Note 2. Debt Securities of the notes to the consolidated financial statements.
As of June 30, 2021, FHLB borrowings were as follows:
(in thousands)Weighted Average RateAmount
Due in 20210.31 %$15,000 
Due in 20222.68 %31,000 
Due in 20232.79 %11,000 
Due in 20243.15 %6,000 
Total63,000 
Valuation adjustment from acquisition accounting151 
Total$63,151 

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

Three Months Ended June 30,Six Months Ended June 30,
(dollars in thousands, except per share amounts)2021202020212020
Basic Earnings Per Share:
Net income$17,271 $11,712 $38,919 $9,737 
Weighted average shares outstanding15,986,822 16,094,084 15,988,762 16,117,792 
Basic earnings per common share$1.08 $0.73 $2.43 $0.60 
Diluted Earnings Per Share:
Net income $17,271 $11,712 $38,919 $9,737 
Weighted average shares outstanding, including all dilutive potential shares
16,011,766 16,099,682 16,016,037 16,125,375 
Diluted earnings per common share$1.08 $0.73 $2.43 $0.60 

11.    Regulatory Capital Requirements and Restrictions on Subsidiary Cash
Regulatory Capital and Reserve Requirement - The Company (on a consolidated basis) and the Bank are subject to various regulatory capital requirements administered by the federal banking agencies. Failure to meet minimum capital requirements can initiate certain mandatory and possibly additional discretionary actions by regulators that, if undertaken, could have a direct material effect on the Company's consolidated financial statements. The capital amounts and classification are also subject to qualitative judgments by the regulators about components, risk weightings and other factors.
As of June 30, 2021 and December 31, 2020, the Bank was not required to maintain reserve balances in cash on hand or on deposit with Federal Reserve Banks, and therefore the total amount held in reserve for each of these periods was zero dollars.
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A comparison of the Company's and the Bank's capital with the corresponding minimum regulatory requirements in effect as of June 30, 2021 and December 31, 2020, is presented below:
Actual
For Capital Adequacy Purposes With Capital Conservation Buffer(1)
To Be Well Capitalized Under Prompt Corrective Action Provisions
(dollars in thousands)AmountRatioAmountRatioAmountRatio
At June 30, 2021
Consolidated:
Total capital/risk weighted assets$596,54313.63%$459,54610.50%N/AN/A
Tier 1 capital/risk weighted assets490,67811.21372,0138.50N/AN/A
Common equity tier 1 capital/risk weighted assets
448,82610.26306,3647.00N/AN/A
Tier 1 leverage capital/average assets490,6788.50230,9214.00N/AN/A
MidWestOne Bank:
Total capital/risk weighted assets$568,22813.02%$458,07910.50%$436,26610.00%
Tier 1 capital/risk weighted assets527,36312.09370,8268.50349,0128.00
Common equity tier 1 capital/risk weighted assets
527,36312.09305,3867.00283,5736.50
Tier 1 leverage capital/average assets527,3639.15230,5324.00288,1655.00
At December 31, 2020
Consolidated:
Total capital/risk weighted assets$572,43713.41%$448,06810.50%N/AN/A
Tier 1 capital/risk weighted assets456,52610.70362,7228.50N/AN/A
Common equity tier 1 capital/risk weighted assets
414,7639.72298,7127.00N/AN/A
Tier 1 leverage capital/average assets456,5268.50214,7954.00N/AN/A
MidWestOne Bank:
Total capital/risk weighted assets$547,55812.89%$446,11310.50%$424,87010.00%
Tier 1 capital/risk weighted assets500,98111.79361,1398.50339,8968.00
Common equity tier 1 capital/risk weighted assets
500,98111.79297,4097.00276,1656.50
Tier 1 leverage capital/average assets500,9819.35214,2514.00271,9925.00
(1) Includes a capital conservation buffer of 2.50%.
Subordinated Notes - The Company completed a private placement of $65.0 million aggregate principal amount of 5.75% fixed-to-floating rate subordinated notes on July 28, 2020. The subordinated notes are intended to qualify as Tier 2 capital for regulatory purposes, and the Company is using the net proceeds from the offering for general corporate purposes and to support its organic growth plans, including maintaining its regulatory capital ratios.
ATBancorp Subordinated Debenture Redemption: On May 31, 2021, the Company redeemed, in whole, $10.8 million of ATB Debentures. The amount of ATB Debentures qualifying as Tier 2 regulatory capital would have been phased-out completely starting in the second quarter of 2022. See Note 9. Long-Term Debt of the notes to the consolidated financial statements.

12.    Commitments and Contingencies
Credit-related financial instruments - The Bank is a party to financial instruments with off-balance-sheet risk in the normal course of business to meet the financing needs of its customers. These financial instruments include commitments to extend credit, commitments to sell loans, and standby letters of credit. These instruments involve, to varying degrees, elements of credit risk in excess of the amount recognized in the balance sheets.
The Bank uses the same credit policies in making commitments and conditional obligations as it does for on-balance-sheet instruments. The following table summarizes the Bank's commitments as of the dates indicated:
June 30, 2021December 31, 2020
(in thousands)
Commitments to extend credit$959,696 $897,274 
Commitments to sell loans6,149 59,956 
Standby letters of credit13,424 34,212 
Total$979,269 $991,442 
The Bank’s exposure to credit loss in the event of nonperformance by the counterparty to the financial instrument for commitments to extend credit is represented by the contractual amount of those instruments. Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract. Since many of the
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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.

Liability for Off-Balance Sheet Credit Losses - The Company records a liability for off-balance sheet credit losses through a charge to credit loss expense (or a reversal of credit loss expense) on the Company's consolidated statements of income and other liabilities on the Company's consolidated balance sheets. At June 30, 2021, the liability for off-balance-sheet credit losses totaled $4.0 million, whereas the total amount of the liability as of December 31, 2020 was $4.1 million. The total amount recorded in credit loss (benefit) expense for the six months ended June 30, 2021 was a benefit of $0.1 million, while credit loss expense of $0.8 million was recorded for the six months ended June 30, 2020.
Litigation - In the normal course of business, the Company and its subsidiaries have been named, from time to time, as defendants in various legal actions.  Certain of the actual or threatened legal actions may include claims for substantial compensatory and/or punitive damages or claims for indeterminate amounts of damages. Management, after consulting with legal counsel, is of the opinion that the ultimate liability, if any, resulting from these pending or threatened actions and proceedings will not have a material effect on the financial statements of the Company.

Concentrations of credit risk - Substantially all of the Bank’s loans, commitments to extend credit and standby letters of credit have been granted to customers in the Bank’s market areas. Although the loan portfolio of the Bank is diversified, approximately 61% of the loans are real estate loans, excluding farmland, and approximately 7% are agriculturally related. The concentrations of credit by type of loan are set forth in Note 3. Loans Receivable and the Allowance for Credit Losses. Commitments to extend credit are primarily related to commercial loans and home equity loans. Standby letters of credit were granted primarily to commercial borrowers. Investments in securities issued by state and political subdivisions involve certain governmental entities within Iowa and Minnesota. The carrying value of investment securities of Iowa and Minnesota political subdivisions totaled 19% and 14%, respectively, as of June 30, 2021.

13.    Fair Value of Financial Instruments and Fair Value Measurements
Fair value is the exchange price that would be received for an asset or paid to transfer a liability (exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date.  There are three levels of inputs that may be used to measure fair values:
•Level 1 – Quoted prices (unadjusted) for identical assets or liabilities in active markets that the entity has the ability to access as of the measurement date.
•Level 2 – Significant other observable inputs other than Level 1 prices, such as quoted prices for similar assets or liabilities, quoted prices in markets that are not active, or other inputs that are observable or can be corroborated by observable market data.
•Level 3 – Significant unobservable inputs that reflect a company’s own assumptions about the assumptions that market participants would use in pricing an asset or liability.

For information regarding the valuation methodologies used to measure the Company's assets recorded at fair value (under ASC Topic 820), and for estimating fair value for financial instruments not recorded at fair value (under ASC Topic 825, as amended by ASU 2016-01 and ASU 2018-03), see Note 1. Nature of Business and Significant Accounting Policies and Note 20. Estimated Fair Value of Financial Instruments and Fair Value Measurements to the consolidated financial statements in the Company's 2020 Annual Report on Form 10-K, filed with the SEC on March 11, 2021.
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The Company uses fair value to measure certain assets and liabilities on a recurring basis, primarily available for sale debt securities, derivatives and mortgage servicing rights. For assets measured at the lower of cost or fair value, the fair value measurement criteria may or may not be met during a reporting period and such measurements are therefore considered "nonrecurring" for purposes of disclosing the Company's fair value measurements. Fair value is used on a nonrecurring basis to adjust carrying values for collateral dependent individually analyzed loans and other real estate owned.
Recurring Basis
The following table summarizes assets and liabilities measured at fair value on a recurring basis as of the dates indicated, by level within the fair value hierarchy:
 
Fair Value Measurement at June 30, 2021 Using
(in thousands)Total Level 1 Level 2 Level 3
Assets:   
Available for sale debt securities:
   
U.S. Government agencies and corporations
$316  $—  $316  $— 
State and political subdivisions
694,874  —  694,874  — 
Mortgage-backed securities
116,954  —  116,954  — 
Collateralized mortgage obligations
808,074 — 808,074 — 
Corporate debt securities
452,234  —  452,234  — 
Derivative assets6,607 — 6,607 — 
     Mortgage servicing rights5,997 — 5,997 — 
Liabilities:
Derivative liabilities
$7,982 $— $7,982 $— 
 
Fair Value Measurement at December 31, 2020 Using
(in thousands)Total Level 1 Level 2 Level 3
Assets:   
Debt securities available for sale:
   
U.S. Government agencies and corporations
$361  $—  $361  $— 
State and political subdivisions
628,346  —  628,346  — 
Mortgage-backed securities
94,018  —  94,018  — 
Collateralized mortgage obligations
565,836 — 565,836 — 
Corporate debt securities
368,820  —  368,820  — 
Derivative assets10,796 — 10,796 — 
Mortgage servicing rights5,137 — 5,137 — 
Liabilities:
Derivative liabilities$13,267 $— $13,267 $— 

There were no transfers of assets between Level 3 and other levels of the fair value hierarchy during the three and six months ended June 30, 2021 or the year ended December 31, 2020.
Changes in the fair value of available for sale debt securities are included in other comprehensive income.
Nonrecurring Basis
The following table presents assets measured at fair value on a nonrecurring basis as of the dates indicated:
 
Fair Value Measurement at June 30, 2021 Using
(in thousands)TotalLevel 1Level 2Level 3
Collateral dependent individually analyzed loans$33,918 $— $— $33,918 
Foreclosed assets, net
755 — — 755 
 
Fair Value Measurement at December 31, 2020 Using
(in thousands)TotalLevel 1Level 2Level 3
Collateral dependent individually analyzed loans$34,265 $— $— $34,265 
Foreclosed assets, net
2,316 — — 2,316 
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The following table presents the valuation technique(s), unobservable inputs, and quantitative information about the unobservable inputs used for fair value measurements of the financial instruments held by the Company and categorized within Level 3 of the fair value hierarchy as of the dates indicated:
Fair Value at
(dollars in thousands)June 30, 2021December 31, 2020Valuation Techniques(s)Unobservable InputRange of InputsWeighted Average
Collateral dependent individually analyzed loans$33,918 $34,265 Fair value of collateralValuation adjustments— %-55 %25 %
Foreclosed assets, net$755 $2,316 Fair value of collateralValuation adjustments8 %-66 %24 %
Changes in assumptions or estimation methodologies may have a material effect on these estimated fair values.
The carrying amount and estimated fair value of financial instruments at June 30, 2021 and December 31, 2020 were as follows:

 June 30, 2021
(in thousands)Carrying
Amount		Estimated
Fair Value		Level 1Level 2Level 3
Financial assets:
Cash and cash equivalents$63,434 $63,434 $63,434 $— $— 
Debt securities available for sale2,072,452 2,072,452 — 2,072,452 — 
Loans held for sale6,149 6,303 — 6,303 — 
Loans held for investment, net3,282,156 3,302,688 — — 3,302,688 
Interest receivable19,758 19,758 — 19,758 — 
FHLB stock12,687 12,687 — 12,687 — 
Derivative assets6,607 6,607 — 6,607 — 
Financial liabilities:
Noninterest bearing deposits952,764 952,764 952,764 — — 
Interest bearing deposits3,839,902 3,839,869 2,947,824 892,045 — 
Short-term borrowings212,261 212,261 212,261 — — 
Finance leases payable1,026 1,026 — 1,026 — 
FHLB borrowings63,151 64,653 — 64,653 — 
Junior subordinated notes issued to capital trusts41,852 34,131 — 34,131 — 
Subordinated debentures63,810 67,384 — 67,384 — 
Derivative liabilities7,982 7,982 — 7,982 — 
 December 31, 2020
(in thousands)
Carrying
Amount
Estimated
Fair Value
Level 1Level 2Level 3
Financial assets:
Cash and cash equivalents$82,659 $82,659 $82,659 $— $— 
Debt securities available for sale1,657,381 1,657,381 — 1,657,381 — 
Loans held for sale59,956 60,039 — 60,039 — 
Loans held for investment, net3,426,723 3,469,515 — — 3,469,515 
Interest receivable21,706 21,706 — 21,706 — 
FHLB stock13,784 13,784 — 13,784 — 
Derivative assets10,796 10,796 — 10,796 — 
Financial liabilities:
Noninterest bearing deposits910,655 910,655 910,655 — — 
Interest bearing deposits3,636,394 3,640,365 2,800,046 840,319 
Short-term borrowings230,789 230,789 230,789 — — 
Finance leases payable1,096 1,096 — 1,096 — 
FHLB borrowings91,198 93,380 — 93,380 
Junior subordinated notes issued to capital trusts41,763 33,986 — 33,986 
Subordinated debentures74,634 77,228 — 77,228 
Derivative liabilities13,267 13,267 — 13,267 — 

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14.    Leases
Substantially all of the leases in which the Company is the lessee are comprised of real estate property for banking offices and office space with terms extending through 2025. We do not have any subleased properties. Substantially all of our leases are classified as operating leases, with the Company only holding one existing finance lease for a banking office location with a lease term through 2025.
Supplemental balance sheet information related to leases was as follows:
(in thousands)ClassificationJune 30, 2021December 31, 2020
Lease Right-of-Use Assets
Operating lease right-of-use assets
Other assets
$3,232 $3,613 
Finance lease right-of-use asset
Premises and equipment, net
494 542 
Total right-of-use assets
$3,726 $4,155 
Lease Liabilities
Operating lease liability
Other liabilities
$4,184 $4,583 
Finance lease liability
Long-term debt
1,026 1,096 
Total lease liabilities
$5,210 $5,679 
Weighted-average remaining lease term
Operating leases
9.03 years8.82 years
Finance lease
5.17 years5.67 years
Weighted-average discount rate
Operating leases
4.01 %3.92 %
Finance lease
8.89 %8.89 %

The following table represents lease costs and other lease information. As the Company elected, for all classes of underlying assets, not to separate lease and non-lease components and instead to account for them as a single lease component, the variable lease cost primarily represents variable payments such as common area maintenance and utilities.
Three Months EndedSix Months Ended
June 30,June 30,
(in thousands)2021 202020212020
Lease Costs
Operating lease cost
$294 $409 $593 $728 
Variable lease cost
20 109 93 147 
Interest on lease liabilities(1)
23 26 46 52 
Amortization of right-of-use assets
24 24 48 48 
Net lease cost
$361 $568 $780 $975 
Other Information
Cash paid for amounts included in the measurement of lease liabilities:
Operating cash flows from operating leases
$530 $651 $1,102 $1,154 
Operating cash flows from finance lease
23 26 46 52 
Finance cash flows from finance lease
35 31 70 62 
     Supplemental non-cash information on lease liabilities:
           Right-of-use assets obtained in exchange for new operating lease liabilities119 94 119 94 
(1)Included in long-term debt interest expense in the Company’s consolidated statements of income. All other lease costs in this table are included in occupancy expense of premises, net.
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Future minimum payments for finance leases and operating leases with initial or remaining terms of one year or more as of June 30, 2021 were as follows:
(in thousands)Finance LeasesOperating Leases
Twelve Months Ended:
December 31, 2021$118 $528 
December 31, 2022240 1,008 
December 31, 2023245 947 
December 31, 2024250 717 
December 31, 2025255 247 
Thereafter171 1,973 
Total undiscounted lease payment$1,279 $5,420 
Amounts representing interest(253)(1,236)
Lease liability$1,026 $4,184 

15.    Subsequent Events
The Company has evaluated events that have occurred subsequent to June 30, 2021 and has concluded there are no other subsequent events that would require recognition in the accompanying consolidated financial statements.
On July 20, 2021, the board of directors of the Company declared a cash dividend of $0.2250 per share payable on September 15, 2021 to shareholders of record as of the close of business on September 1, 2021.
Pursuant to the Company’s new share repurchase program approved on June 22, 2021, the Company has purchased 88,377 shares of common stock subsequent to June 30, 2021 and through August 3, 2021 for a total cost of $2.5 million inclusive of transaction costs, leaving $11.9 million remaining available under the program.
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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.

CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS

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

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

•the effects of the COVID-19 pandemic, including its effects on the economic environment, our customers and our operations, as well as any changes to federal, state, or local government laws, regulations, or orders in connection with the pandemic;
•government intervention in the U.S. financial system in response to the COVID-19 pandemic, including the effects of recent legislative, tax, accounting and regulatory actions and reforms, including the CARES Act, the CAA and the American Rescue Plan Act;
•the impact of the COVID-19 pandemic on our financial results, including possible lost revenue and increased expenses (including the cost of capital), as well as possible goodwill impairment charges;
•credit quality deterioration or pronounced and sustained reduction in real estate market values causing an increase in the allowance for credit losses, an increase in the credit loss expense, and a reduction in net earnings;
•the effects of interest rates, including on our net income and the value of our securities portfolio;
•changes in the economic environment, competition, or other factors that may affect our ability to acquire loans or influence the anticipated growth rate of loans and deposits and the quality of the loan portfolio and loan and deposit pricing;
•fluctuations in the value of our investment securities;
•governmental monetary and fiscal policies;
•changes in and uncertainty related to benchmark interest rates used to price loans and deposits, including the expected elimination of LIBOR, and the adoption of a substitute;
•legislative and regulatory changes, including changes in banking, securities, trade, and tax laws and regulations and their application by our regulators;
•the ability to attract and retain key executives and employees experienced in banking and financial services;
•the sufficiency of the allowance for credit losses to absorb the amount of actual losses inherent in our existing loan portfolio;
•our ability to adapt successfully to technological changes to compete effectively in the marketplace;
•credit risks and risks from concentrations (by geographic area and by industry) within our loan portfolio;
•the effects of competition from other commercial banks and other financial institutions operating in our markets or elsewhere or providing similar services;
•the failure of assumptions underlying the establishment of allowances for credit losses and estimation of values of collateral and various financial assets and liabilities;
•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;
•war or terrorist activities, widespread disease or pandemic, or other adverse external events, which may cause deterioration in the economy or cause instability in credit markets;
•the effects of cyber-attacks;
•the imposition of tariffs or other domestic or international governmental policies impacting the value of the agricultural or other products of our borrowers; and
•other factors and risks described under “Risk Factors” in this Form 10-Q and in other reports we file with the SEC.

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

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OVERVIEW
The Company provides financial services to individuals, businesses, governmental units and institutional customers located primarily in the upper Midwest through its bank subsidiary, MidWestOne Bank. The Bank has locations throughout central and eastern Iowa, the Minneapolis/St. Paul metropolitan area of Minnesota, southwestern Wisconsin, southwestern Florida, and Denver, Colorado.
The Bank is focused on delivering relationship-based business and personal banking products and services. The Bank provides commercial loans, real estate loans, agricultural loans, credit card loans, and consumer loans. The Bank also provides deposit products including demand and interest checking accounts, savings accounts, money market accounts, and time deposits. Complementary to our loan and deposit products, the Bank also provides products and services including treasury management, Zelle, online and mobile banking, credit and debit cards, ATMs, and safe deposit boxes. The Bank also has a trust department through which it offers services including the administration of estates, personal trusts, and conservatorships and the management of real property. Finally, the Bank’s investment services department offers financial planning, investment advisory, and retail securities brokerage services (the latter of which is provided through an agreement with a third-party registered broker-dealer).
Our results of operations are significantly affected by our net interest income. Results of operations are also affected by noninterest income and expense, credit loss expense and income tax expense. Significant external factors that impact our results of operations include general economic and competitive conditions, as well as changes in market interest rates, government policies, and actions of regulatory authorities.

The following discussion and analysis should be read in conjunction with the consolidated financial statements and related notes and the statistical information and financial data appearing in this report as well as our Annual Report on Form 10-K for the year ended December 31, 2020, filed with the SEC on March 11, 2021. Results of operations for the three and six months ended June 30, 2021 are not necessarily indicative of results to be attained for any other period.
COVID-19 Update
The outbreak of the COVID-19 pandemic in the United States has had an adverse impact on our financial condition and results of operations as of and for the three and six months ended June 30, 2021, and is expected to have a complex and significant adverse impact on the economy, the banking industry and the Company in future fiscal periods, all subject to a high degree of uncertainty.
Effects on Our Market Areas
Our commercial and consumer banking products and services are offered primarily in Iowa, Minnesota, Wisconsin, Florida and Colorado, where individual and governmental responses to the COVID-19 pandemic led to a broad curtailment of economic activity beginning in March 2020. Since the outbreak of the COVID-19 pandemic, we've seen in our markets a variety of responses to the pandemic, which have included social distancing protocols, limitations on the numbers of customers at restaurants and retail stores, limitations of social gathering sizes, safety practices for the at-risk and elderly, as well as other safeguarding practices. Each of our market areas have also had varying responses to the COVID-19 pandemic due to the availability of the COVID-19 vaccine. The Bank's banking offices have remained open during these orders because the Bank is deemed to be an essential business. While it appears that economic conditions are trending in a positive direction as of June 30, 2021, it is unclear how the states in our market areas will continue to change policies in response to the COVID-19 pandemic and the impact of these policies on our customers and regional economies.
The U.S. experienced a substantial decline nationally in economic condition in 2020. The national unemployment rate has fluctuated since the outbreak of the COVID-19 pandemic and has declined from 6.7% in December 2020 to 5.9% in June 2021, but remains elevated when compared to the pre-pandemic levels in February 2020 of 3.5% per the U.S. Department of Labor.
Policy and Regulatory Developments
Federal, state, and local governments and regulatory authorities throughout 2020 and into the first half of 2021 have enacted and issued a range of policy responses to the COVID-19 pandemic. More recently, these have included policies such as the following:
•President Biden on March 11, 2021 signed into law the American Rescue Plan Act of 2021, a new $1.9 trillion COVID-19 relief bill. The bill includes a variety of economic assistance programs for Americans, such as the payment of an additional stimulus check, extension of job benefits, additional funding for coronavirus testing and vaccine
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distribution, an infusion of cash in state and local governments, an array of tax benefits, and expansion and modification of the PPP, among other economic incentives.
•President Biden on March 30, 2021 signed into law the PPP Extension Act of 2021, which set a deadline for qualifying businesses to apply for a PPP loan of May 31, 2021, and provided an additional 30 days for the SBA to process pending PPP loan applications.
Our Response
Our response to COVID-19 continues to be focused on how we can best serve our employees, customers, and communities. The Bank has utilized a combination of digital banking, voice, branch drive-thru and other channels in order to meet the needs of our customers. We implemented additional safety measures to achieve appropriate social distancing for both customers and employees throughout our locations. We have continued to adjust procedures and restrictions based on local conditions and generally in alignment with guidance from the Centers for Disease Control.
We continue to work with our customers to understand the level of impact the pandemic has had on their business operations as the pandemic continues to determine how best to serve them in these unprecedented times. Additionally, we implemented a loan payment deferral program and assisted our clients through the PPP. We continue to lend to qualified businesses for working capital and general business purposes, while also meeting the needs of our individual customers.
Financial Condition & Results of Operations
Net Interest Income. The Company's net interest income continues to be impacted by the monetary policy tools that were implemented by the FRB in March 2020 to stimulate the economy and influence overall growth and distribution of credit, bank loans, investments and deposits, and also to affect interest rates charged on loans or paid on deposits. These actions reduced both short-term and long-term interest rates and added significantly to the country’s money supply. Thus, the interest rates at which we originated new loans and repriced existing loans were generally lower than pre-pandemic existing loan portfolio rates, reducing loan interest income. In addition, while we've generally seen a decline in the number of COVID-19 affected borrowers who have requested a deferral of loan principal and/or interest payments since March 31, 2021, we recognize that the economic impact from COVID-19 may affect our borrowers' ability to repay the deferred principal and interest in future periods, which would reduce interest income. We are unable to project the materiality that such actions may have on the Company's results of operations.
Further, the aforementioned increase in the country’s money supply, in combination with the fiscal stimulus and general economic uncertainty amid the COVID-19 pandemic, weakened customer loan demand and line utilization, but increased customer deposit balances. As a result, the Company invested the net deposit inflows into debt securities, which generally carry a lower yield than loans. In addition, a severe and sustained economic downturn could impact the debt securities issuers' ability to make payments on debt or to raise additional funds to continue operations, which could result in a reduction in interest income from debt securities and increased credit loss expense. With respect to interest expense, the reduction in short-term interest rates led to a corresponding reduction in the rates we pay for customer deposit accounts and short-term borrowings. Finally, the Company’s funding mix changed favorably toward lower cost deposit products. However, an extended recession could cause large numbers of our deposit customers to withdraw their funds, which could increase our reliance on more volatile or expensive funding sources.
Credit Loss Expense. The Company's credit loss expense was impacted by COVID-19. In 2020, the overall increase in the ACL reflected the impact that the COVID-19 pandemic had on current and forecasted economic conditions that were utilized in our ACL model. As it pertains to our June 30, 2021 financial condition and results of operations, our ACL declined compared to December 31, 2020 due to overall improvements in forecasted economic conditions and an improved outlook on the credit risk profile. However, as our ACL calculation and credit loss expense are significantly impacted by changes in forecasted economic conditions, significant worsening of forecasted conditions is possible and would result in further increases in the ACL and credit loss expense in future periods.
Noninterest Income. The Company's fee income has been impacted by COVID-19. For example, in keeping with guidance from regulators, during the second and third quarters of 2020, the Company worked with COVID-19 affected customers and temporarily waived fees from a variety of sources, such as, but not limited to, insufficient funds and overdraft fees, ATM fees, and account maintenance fees. At this time, the Company is unable to project whether such fee waivers will be implemented again in the future and the materiality of such actions on the Company's noninterest income, but recognizes the breadth of the long-term economic impact from COVID-19 can impact its fee income in future periods.
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Noninterest Expense. The PPP has impacted the timing of compensation and benefit expense as PPP loan origination costs are deferred and amortized over the life of the loan to which they relate. In addition, the PPP led to increased information service expenses as a result of the Company's adoption of a PPP loan origination platform in the second quarter of 2020.
Credit Administration. The federal government has taken several actions designed to cushion the economic impact as a result of COVID-19 and related restrictions. Section 4013 of the CARES Act, “Temporary Relief From Troubled Debt Restructurings,” and guidance from the FRB and the FDIC allow financial institutions the option to temporarily suspend certain requirements under GAAP related to TDRs for a limited period of time during the COVID-19 pandemic and that short-term modifications made on a good faith basis in response to COVID-19 to borrowers who were current prior to any relief are not to be considered TDRs. This includes short-term (e.g., six months) modifications, such as payment deferrals, fee waivers, extensions of repayment terms, or other delays in payment that are insignificant. Borrowers considered current are those that are less than 30 days past due on their contractual payments at the time a modification program is implemented. As of June 30, 2021, the outstanding balance of loans modified as a result of the COVID-19 pandemic was $21.0 million, as compared to $44.1 million as of December 31, 2020. The Company is unable to project the overall impact that such loan modifications and future loan modifications will have on our financial statements.
The Bank was a participating lender in the PPP. The PPP loans have a two-year or five-year term and earn interest at 1%. Loans funded through the PPP are fully guaranteed by the U.S. government if certain criteria are met. The Company believes that the majority of these loans will be forgiven by the SBA in accordance with the terms of the program. Should those circumstances change, the Company could be required to establish additional allowance for credit loss through additional credit loss expense charged to earnings. As of June 30, 2021, the Company had $184.4 million in outstanding PPP loans, with $6.5 million of unamortized net loan origination fees. We expect PPP loans outstanding will continue to decline after June 30, 2021 as a result of PPP loan forgiveness.
Loan Portfolio. COVID-19 has impacted the Company's loan growth, and we anticipate that loan growth will continue to be impacted in the future. While all industries have and will continue to experience adverse impacts as a result of the COVID-19 pandemic, we had exposures in the following industries that we believe to be uniquely vulnerable to credit deterioration stemming from the COVID-19 pandemic as of June 30, 2021.
Balance% of Total Loans
(dollars in thousands)
Non-essential retail$78,414 2.4 %
Restaurants51,319 1.5 
Hotels108,209 3.2 
CRE - Retail202,582 6.1 
Arts, entertainment, and gaming23,032 0.7 
$463,556 13.9 %
Capital and liquidity
As of June 30, 2021, all of our capital ratios, and the Bank’s capital ratios, were in excess of all regulatory requirements. While we believe that we have sufficient capital to withstand an extended economic recession brought about by COVID-19, our reported and regulatory capital ratios could be adversely impacted by further credit losses. We rely on cash on hand as well as dividends from the Bank to service our debt. If our capital deteriorates such that our Bank is unable to pay dividends to us for an extended period of time, we may not be able to service our debt. If large numbers of our deposit customers withdraw their funds, we might become more reliant on volatile or more expensive sources of funding.
As stated above, liquidity was also impacted by the actions of the federal, state, and local governments and other regulatory authorities in response to COVID-19. Specifically, the FRB’s use of a variety of monetary policy tools to stimulate the economy and influence overall growth and distribution of credit, bank loans, investments and deposits, and also to affect interest rates charged on loans or paid on deposits, included tactics such as the reduction in the reserve requirement ratio to zero, reduction in the target federal funds rate, and also commencing quantitative easing by purchasing longer-term Treasury and mortgage-backed securities. These aforementioned monetary policy tools utilized by the FRB significantly added to the country’s money supply.
Critical Accounting Estimates
Management has identified the accounting policies related to the ACL, fair value of assets acquired and liabilities assumed in a business combination, and the annual impairment testing of goodwill and other intangible assets to be critical accounting policies. Information about our critical accounting estimates is included under Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in our Annual Report on Form 10-K for the year ended December 31, 2020, filed with the SEC on March 11, 2021, and there have been no material changes in these critical accounting policies since December 31, 2020.
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RESULTS OF OPERATIONS
Comparison of Operating Results for the Three Months Ended June 30, 2021 and June 30, 2020
Summary
Overall: Our consolidated net income for the three months ended June 30, 2021 was $17.3 million, an increase of $5.6 million, from net income of $11.7 million for the three months ended June 30, 2020. The increase in net income was due primarily to a decline in credit loss expense of $6.8 million, or 145.8%, coupled with an increase of $1.9 million, or 23.6%, in noninterest income. Partially offsetting the identified increases to net income was an increase of $0.6 million, or 2.3%, in noninterest expense, a $2.4 million increase in income tax expense, and a $0.2 million, or 0.5%, decrease in net interest income.
Credit Loss (Benefit) Expense: The credit loss benefit recorded in the second quarter of 2021 reflected overall improvements in the economic forecast and an improved outlook on the credit risk profile. In the second quarter of 2020, the Company recorded a credit loss expense primarily due to the impact of economic uncertainty stemming from the COVID-19 pandemic on forecasted economic conditions.
Noninterest Income: Noninterest income increased primarily due to increases in loan revenue, card revenue, and investment services and trust activities of $1.2 million, $0.7 million, and $0.6 million, respectively. The increase in loan revenue was reflective of a $0.8 million increase stemming from the fair value of our mortgage servicing rights, coupled with a $0.4 million increase in mortgage origination fee income. The increase in card revenue reflects an increase in transaction volumes in the second quarter of 2021 when compared to the second quarter of 2020, while investment services and trust activities revenue was positively impacted by improvements in the financial markets and increased assets under administration. Partially offsetting the identified increases in noninterest income was a decrease in 'Other' noninterest income of $0.7 million that stemmed from a decline in income from our commercial loan back-to-back swap program.
Noninterest Expense: The increase in noninterest expense was primarily due to an increase of $1.7 million in compensation and employee benefits expense, and partially offset by a decline of $0.4 million in the amortization of intangibles and a decline of $0.4 million in 'Other' noninterest expense. The increase in compensation and employee benefits was primarily due to a smaller benefit from deferred loan origination costs recognized in connection with SBA PPP loans during the second quarter of 2021, as compared to the second quarter of 2020, coupled with increased incentive and commission expense, normal annual increases in compensation, as well as increased share-based compensation expense.
Financial Performance: Both basic and diluted earnings per common share for the three months ended June 30, 2021 were $1.08 as compared with both basic and diluted earnings per common share of $0.73 for the three months ended June 30, 2020. Our annualized return on average shareholders' equity was 13.24% for the three months ended June 30, 2021 compared with 9.21% for the three months ended June 30, 2020.
Selected financial performance and capital ratios for the Company are presented in the table below as of or for the quarters ended June 30, 2021 and 2020.
As of or for the Three Months Ended June 30,
(dollars in thousands, except per share amounts)2021 2020
Net Income $17,271  $11,712 
Return on Average Assets1.18 % 0.92 %
Return on Average Equity13.24  9.21 
Return on Average Tangible Equity(1)
16.75  13.50 
Efficiency Ratio(1)
54.83 54.80 
Dividend Payout Ratio20.83 30.14 
Common Equity Ratio9.22  9.96 
Tangible Common Equity Ratio(1)
7.86  7.80 
Book Value per Share$33.22 $32.35 
Tangible Book Value per Share(1)
27.90 24.74 
(1) A non-GAAP financial measure. See "Non-GAAP Financial Measures" for a reconciliation to the most comparable GAAP equivalents.
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Net Interest Income
The following table shows consolidated average balance sheets, detailing the major categories of assets and liabilities, the interest income earned on interest-earning assets, the interest expense paid for interest-bearing liabilities, and the related yields and costs for the periods indicated.
 Three Months Ended June 30,
 2021 2020
 Average
Balance		Interest
Income/
Expense		 Average
Yield/
Cost		 Average
Balance		Interest
Income/
Expense		 Average
Yield/
Cost
(dollars in thousands)     
ASSETS   
Loans, including fees (1)(2)(3)
$3,396,575 $35,255  4.16 % $3,633,695 $40,721  4.51 %
Taxable investment securities
1,604,463 6,483  1.62  731,699 4,646  2.55 
Tax-exempt investment securities (2)(4)
473,181 3,196  2.71  285,758 2,340  3.29 
Total securities held for investment (2)
2,077,644 9,679  1.87  1,017,457 6,986  2.76 
Other
48,208 19  0.16  67,429 40  0.24 
Total interest earning assets (2)
$5,522,427 $44,953  3.26 % $4,718,581 $47,747  4.07 %
Other assets
329,309   380,266  
Total assets
$5,851,736   $5,098,847  
     
LIABILITIES AND SHAREHOLDERS' EQUITY   
Interest checking deposits
$1,469,853 $1,095 0.30 %$1,091,565 $1,113 0.41 %
Money market deposits
942,072 502 0.21 829,826 885 0.43 
Savings deposits
595,150 324  0.22  439,592 365  0.33 
Time deposits
896,169 1,488  0.67  990,797 4,046  1.64 
Total interest bearing deposits
3,903,244 3,409  0.35  3,351,780 6,409  0.77 
Short-term borrowings
218,491 161  0.30  159,157 263  0.66 
Long-term debt189,644 1,712  3.62  201,240 1,374  2.75 
Total borrowed funds
408,135 1,873 1.84 360,397 1,637 1.83 
Total interest bearing liabilities
$4,311,379 $5,282  0.49 % $3,712,177 $8,046  0.87 %
         
Noninterest bearing deposits
972,080   813,794  
Other liabilities
45,035   61,637  
Shareholders’ equity
523,242 511,239 
Total liabilities and shareholders’ equity
$5,851,736   $5,098,847  
Net interest income (2)
 $39,671    $39,701  
Net interest spread(2)
2.77 %3.20 %
Net interest margin(2)
2.88 %3.38 %
Total deposits(5)
$4,875,324 $3,409 0.28 %$4,165,574 $6,409 0.62 %
Cost of funds(6)
0.40 %0.72 %
(1)Average balance includes nonaccrual loans.
(2)Tax equivalent. The federal statutory tax rate utilized was 21%.
(3)
Interest income includes net loan fees, loan purchase discount accretion and tax equivalent adjustments. Net loan fees were $2.3 million and $748 thousand for the three months ended June 30, 2021 and June 30, 2020, respectively. Loan purchase discount accretion was $873 thousand and $2.6 million for the three months ended June 30, 2021 and June 30, 2020, respectively. Tax equivalent adjustments were $519 thousand and $507 thousand for the three months ended June 30, 2021 and June 30, 2020, respectively. The federal statutory tax rate utilized was 21%.
(4)
Interest income includes tax equivalent adjustments of $647 thousand and $482 thousand for the three months ended June 30, 2021 and June 30, 2020, respectively. The federal statutory tax rate utilized was 21%.
(5)Total deposits is the sum of total interest-bearing deposits and noninterest bearing deposits. The cost of total deposits is calculated as annualized interest expense on deposits divided by average total deposits.
(6)Cost of funds is calculated as annualized total interest expense divided by the sum of average total deposits and borrowed funds.

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The following table shows changes to tax equivalent net interest income attributable to (i) changes in volume and (ii) changes in rate. Changes attributable to both rate and volume have been allocated proportionately to the change due to volume and the change due to rate.
 Three Months Ended June 30,
 2021 Compared to 2020 Change due to
(in thousands)Volume Yield/Cost Net
Increase (decrease) in interest income:  
Loans, including fees (1)
$(2,497) $(2,969) $(5,466)
Taxable investment securities
4,006  (2,169) 1,837 
Tax-exempt investment securities (1)
1,326  (470) 856 
Total securities held for investment (1)
5,332  (2,639) 2,693 
Other
(10) (11) (21)
Change in interest income (1)
2,825  (5,619) (2,794)
Increase (decrease) in interest expense:  
Interest checking deposits
327 (345)(18)
Money market deposits
110 (493)(383)
Savings deposits
103  (144) (41)
Time deposits
(356) (2,202) (2,558)
Total interest-bearing deposits
184  (3,184) (3,000)
Short-term borrowings
75  (177) (102)
Long-term debt
(83) 421  338 
Total borrowed funds
(8) 244  236 
Change in interest expense
176  (2,940) (2,764)
Change in net interest income$2,649  $(2,679) $(30)
Percentage (decrease) in net interest income over prior period  (0.1)%
(1) Tax equivalent, using a federal statutory tax rate of 21%.
Our tax equivalent net interest income for the second quarter of 2021 was relatively flat compared to the second quarter of 2020 at $39.7 million. Loan interest income declined $5.5 million, which was partially offset by an increase of $2.7 million in interest income earned from investment securities, which was $9.7 million for the second quarter of 2021. The increase reflected the larger volume of securities held for investment from the Company's investment of net deposit inflows, partially offset by a decrease in yield. Loan purchase discount accretion added $0.9 million to net interest income in the second quarter of 2021 compared to $2.6 million in the second quarter of 2020. Offsetting the decline in interest income of $2.8 million, or 5.9%, for the second quarter of 2021 was a decline in interest expense of $2.8 million, or 34.4%. The decline in interest expense was primarily due to a decline in interest expense on interest-bearing deposits of $3.0 million, or 46.8%, to $3.4 million as a result of lower rates paid on such deposits that more than offset the increase in the volume of deposits. Net fee accretion for PPP loans for the second quarter of 2021 was $2.5 million, compared to $1.1 million in the second quarter of 2020.
The tax equivalent net interest margin for the second quarter of 2021 was 2.88%, or 50 basis points lower than the tax equivalent net interest margin of 3.38% for the second quarter of 2020. The yield on loans decreased 35 basis points. The tax equivalent yield on investment securities decreased by 89 basis points. Combined, the resulting yield on interest-earning assets for the second quarter of 2021 was 81 basis points lower than the second quarter of 2020, which primarily reflected the shift in earning asset mix to a greater proportion of investment securities, which generally have lower yields than loans, in addition to the continued origination and re-pricing of loans at generally lower coupon rates when compared to existing portfolio coupon rates. The cost of interest-bearing deposits decreased 42 basis points, while the average cost of borrowings was 1 basis point higher for the second quarter of 2021, compared to the second quarter of 2020.
Credit Loss (Benefit) Expense
We recorded a credit loss benefit during the second quarter of 2021 of $2.1 million, as compared to credit loss expense of $4.7 million for the second quarter of 2020, a decrease of $6.8 million, or 145.8%. In the second quarter of 2020, the Company recorded a credit loss expense primarily due to the impact of economic uncertainty stemming from the COVID-19 pandemic on forecasted economic conditions. The decline in credit loss expense in the second quarter of 2021 reflected overall improvements in forecasted economic conditions and an improved outlook on the credit risk profile. Specifically, the economic forecast utilized by the Company is sensitive to changes in the following loss drivers: (1) Midwest unemployment, (2) year-to-year change in national retail sales, (3) year-to-year change in the CRE Index, (4) year-to-year change in U.S. GDP, (5) year-to-year change in the National Home Price Index, and (6) Rental Vacancy. The total amount of net loans charged off in the second quarter of 2021 was $0.4 million as compared to $1.9 million in the second quarter of 2020.
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Noninterest Income
The following table sets forth the various categories of noninterest income for the three months ended June 30, 2021 and June 30, 2020:
 Three Months Ended June 30,
(dollars in thousands)2021 2020$ Change% Change
Investment services and trust activities$2,809  $2,217 $592 26.7 %
Service charges and fees1,475  1,290 185 14.3 
Card revenue1,913  1,237 676 54.6 
Loan revenue3,151 1,910 1,241 65.0 
Bank-owned life insurance538  635 (97)(15.3)
Investment securities gains, net42  6 36 600.0 
Other290 974 (684)(70.2)
Total noninterest income
$10,218  $8,269 $1,949 23.6 %
Total noninterest income for the second quarter of 2021 increased $1.9 million, or 23.6%, to $10.2 million from $8.3 million in the second quarter of 2020. The increase in noninterest income was primarily due to increases in loan revenue, card revenue and investment services and trust activities of $1.2 million, $0.7 million, and $0.6 million, respectively. The increase in loan revenue was reflective of a $0.8 million increase stemming from the fair value of our mortgage servicing rights, coupled with a $0.4 million increase in mortgage origination fee income. The increase in card revenue reflects an increase in transaction volumes in the second quarter of 2021 when compared to the second quarter of 2020, while investment services and trust activities revenue was positively impacted by improvements in the financial markets and increased assets under administration. Partially offsetting the identified increases in noninterest income was a decrease in 'Other' noninterest income of $0.7 million that stemmed from a decline in income from our commercial loan back-to-back swap program.
Noninterest Expense
The following table presents significant components of noninterest expense and the related dollar and percentage change from period to period:
 Three Months Ended June 30,
(dollars in thousands)20212020$ Change% Change
Compensation and employee benefits$17,404 $15,682 $1,722 11.0 %
Occupancy expense of premises, net2,198 2,253 (55)(2.4)
Equipment1,861 2,010 (149)(7.4)
Legal and professional1,375 1,382 (7)(0.5)
Data processing1,347 1,240 107 8.6 
Marketing873 910 (37)(4.1)
Amortization of intangibles1,341 1,748 (407)(23.3)
FDIC insurance245 445 (200)(44.9)
Communications371 449 (78)(17.4)
Foreclosed assets, net136 34 102 300.0 
Other1,519 1,885 (366)(19.4)
Total noninterest expense
$28,670 $28,038 $632 2.3 %
Noninterest expense for the second quarter of 2021 was $28.7 million, an increase of $0.6 million, or 2.3%, from $28.0 million for the second quarter of 2020. The increase in noninterest expense was primarily due to an increase of $1.7 million in compensation and employee benefits expense, and partially offset by a decline of $0.4 million in the amortization of intangibles and a decline of $0.4 million in other noninterest expense. The increase in compensation and employee benefits was primarily due to a $1.0 million decline in the benefit received from deferred loan origination costs recognized in connection with SBA PPP loans during the second quarter of 2021, as compared to the second quarter of 2020. In addition, compensation and employee benefits expense also increased by $0.5 million in the second quarter of 2021 as compared to the second quarter of 2020 due to increased incentive and commission expense, normal annual increases in compensation, as well as increased share-based compensation expense. The decrease in the amortization of intangibles reflected the accelerated amortization methodology utilized for certain finite-lived intangible assets, while the decrease in other noninterest expense was primarily due to a reduction in tax credit partnership investment amortization.
Income Tax Expense
Our effective income tax rate, or income taxes divided by income before taxes, was 22.2% for the three months ended June 30, 2021, as compared to an effective tax rate of 17.9% for the three months ended June 30, 2020. The effective tax rate for the full year 2021 is expected to be in the range of 20-22%.
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Comparison of Operating Results for the Six Months Ended June 30, 2021 and June 30, 2020
Summary
Overall: Our consolidated net income for the six months ended June 30, 2021 was $38.9 million, an increase of $29.2 million from net income of $9.7 million for the six months ended June 30, 2020. The increase in net income was due primarily to a decrease of $33.3 million in credit loss expense, coupled with a $3.6 million, or 19.6%, increase in noninterest income, a decrease of $1.7 million, or 2.9%, in noninterest expense, and a $1.0 million, or 1.3%, increase in net interest income. Partially offsetting the identified increases to net income was an increase in income tax expense of $10.4 million.
Credit Loss (Benefit) Expense: The credit loss benefit recorded in the first six months of 2021 reflected overall improvements in forecasted economic conditions and an improved outlook in the credit risk profile. The Company recorded credit loss expense in the first six months of 2020 primarily due to the impact of economic uncertainty stemming from the COVID-19 pandemic on forecasted economic conditions.
Noninterest Income: The increase in noninterest income was primarily due to increased loan revenue of $4.8 million, which reflected a $2.6 million increase in mortgage origination fees, as well as an increase of $2.1 million stemming from the fair value of our mortgage servicing rights. Also contributing to the increases in noninterest income were increases of $0.9 million and $0.8 million of revenue from investment services and trust activities and card revenue, respectively. Partially offsetting the identified increases in noninterest income was a decrease in other noninterest income of $2.8 million, which was primarily due to a decline in income from our commercial loan back-to-back swap program.
Noninterest Expense: The decline in noninterest expense was due to decreases in other noninterest expense, amortization of intangibles, and legal and professional expenses of $1.4 million, $0.9 million, and $0.8 million, respectively. The largest driver in the decrease in other noninterest expense was a reduction in tax credit partnership investment amortization of $0.7 million. The decrease in the amortization of intangibles reflected the accelerated amortization methodology utilized for certain finite-lived intangible assets, while the decline in legal and professional expenses primarily reflected a decline in loan legal expenses. Partially offsetting the identified decreases in noninterest expense was an increase of $2.0 million in compensation and employee benefits expense that stemmed primarily from increased incentive and commission expense, normal annual increases in compensation, as well as increased share-based compensation expense.
Financial Performance: Both basic and diluted earnings per common share for the six months ended June 30, 2021 were $2.43 as compared with basic and diluted earnings per common share of $0.60 for the six months ended June 30, 2020. Our annualized return on average shareholders' equity was 15.10% for the six months ended June 30, 2021 compared with 3.82% for the six months ended June 30, 2020.
Selected financial performance and capital ratios for the Company are presented in the table below as of or for the six months ended June 30, 2021 and 2020.
 As of and for the Six Months Ended June 30,
(dollars in thousands, except per share amounts)2021 2020
Net Income$38,919  $9,737 
Return on Average Assets1.38 % 0.40 %
Return on Average Equity15.10  3.82 
Return on Average Tangible Equity(1)
19.10  6.48 
Efficiency Ratio (1)
52.76 56.24 
Dividend Payout Ratio18.52 73.33 
Common Equity Ratio9.22  9.96 
Tangible Common Equity Ratio(1)
7.86  7.80 
Book Value per Share$33.22 $32.35 
Tangible Book Value per Share(1)
27.90 24.74 
(1) A non-GAAP financial measure. See "Non-GAAP Financial Measures" for a reconciliation to the most comparable GAAP equivalents.
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Net Interest Income
The following table shows consolidated average balance sheets, detailing the major categories of assets and liabilities, the interest income earned on interest-earning assets, the interest expense paid for interest-bearing liabilities, and the related yields and costs for the periods indicated.
 Six Months Ended June 30,
 2021 2020
(dollars in thousands)
Average
Balance
Interest
Income/
Expense
 
Average
Yield/
Cost
 
Average
Balance
Interest
Income/
Expense
 
Average
Yield/
Cost
ASSETS   
Loans, including fees (1)(2)(3)
$3,413,069 $72,328  4.27 % $3,534,979 $83,230  4.73 %
Taxable investment securities
1,436,522 11,576  1.63  648,678 8,363  2.59 
Tax-exempt investment securities (2)(4)
469,507 6,399  2.75  254,963 4,247  3.35 
Total securities held for investment (2)
1,906,029 17,975  1.90  903,641 12,610  2.81 
Other
42,404 33  0.16  62,304 204  0.66 
Total interest-earning assets (2)
$5,361,502 $90,336  3.40 % $4,500,924 $96,044  4.29 %
Other assets
325,434   383,361  
Total assets
$5,686,936   $4,884,285  
     
LIABILITIES AND SHAREHOLDERS' EQUITY   
Interest checking deposits
$1,410,094 $2,086 0.30 %$1,028,321 $2,428 0.47 %
Money market deposits
927,660 980 0.21 798,296 2,530 0.64 
Savings deposits
574,602 610  0.21  416,713 756  0.36 
Time deposits
866,976 3,341  0.78  993,966 8,644  1.75 
Total interest-bearing deposits
3,779,332 7,017  0.37  3,237,296 14,358  0.89 
Short-term borrowings
196,962 289  0.30  140,550 597  0.85 
Long-term debt
197,762 3,563  3.63  213,413 3,090  2.91 
Total borrowed funds
394,724 3,852 1.97 353,963 3,687 2.09 
Total interest-bearing liabilities
$4,174,056 $10,869  0.53 % $3,591,259 $18,045  1.01 %
Noninterest bearing deposits946,112 725,499 
Other liabilities47,008 54,323 
Shareholders' equity519,760 513,204 
Total liabilities and shareholders' equity$5,686,936     $4,884,285    
Net interest income (2)
$79,467 $77,999 
Net interest spread(2)
 2.87 %  3.28 %
Net interest margin (2)
 2.99 %  3.48 %
Total deposits(5)
$4,725,444 $7,017 0.30 %$3,962,795 $14,358 0.73 %
Cost of funds(6)
0.43 %0.84 %
 
(1)Average balance includes nonaccrual loans.
(2)Tax equivalent. The federal statutory tax rate utilized was 21%.
(3)
Interest income includes net loan fees, loan purchase discount accretion and tax equivalent adjustments. Net loan fees were $5.8 million and $0.6 million for the six months ended June 30, 2021 and June 30, 2020, respectively. Loan purchase discount accretion was $2.0 million and $5.6 million for the six months ended June 30, 2021 and June 30, 2020, respectively. Tax equivalent adjustments were $1.0 million and $1.0 million for the six months ended June 30, 2021 and June 30, 2020, respectively. The federal statutory tax rate utilized was 21%.
(4)
Interest income includes tax equivalent adjustments of $1.3 million and $0.9 million for the six months ended June 30, 2021 and June 30, 2020, respectively. The federal statutory tax rate utilized was 21%.
(5)Total deposits is the sum of total interest-bearing deposits and noninterest bearing deposits. The cost of total deposits is calculated as annualized interest expense on deposits divided by average total deposits.
(6)Cost of funds is calculated as annualized total interest expense divided by the sum of average total deposits and borrowed funds.
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The following table shows changes to tax equivalent net interest income attributable to (i) changes in volume and (ii) changes in rate. Changes attributable to both rate and volume have been allocated proportionately to the change due to volume and the change due to rate.
 Six Months Ended June 30,
 2021 Compared to 2020 Change due to
(in thousands)Volume Yield/Cost Net
Increase (decrease) in interest income:  
Loans, including fees (1)
$(2,854) $(8,048) $(10,902)
Taxable investment securities
7,194  (3,981) 3,213 
Tax-exempt investment securities(1)
3,026  (874) 2,152 
Total securities held for investment(1)
10,220  (4,855) 5,365 
Other
(51) (120) (171)
Change in interest income (1)
7,315  (13,023) (5,708)
Increase (decrease) in interest expense:  
Interest checking deposits
705 (1,047)(342)
Money market deposits
361 (1,911)(1,550)
Savings deposits
226  (372) (146)
Time deposits
(993) (4,310) (5,303)
Total interest-bearing deposits
299  (7,640) (7,341)
Short-term borrowings
176  (484) (308)
Long-term debt
(240) 713  473 
Total borrowed funds
(64) 229  165 
Change in interest expense
235  (7,411) (7,176)
Change in net interest income$7,080  $(5,612) $1,468 
Percentage (decrease) increase in net interest income over prior period  1.9 %
(1) Tax equivalent, using a federal statutory tax rate of 21%.

Our tax equivalent net interest income for the six months ended June 30, 2021 was $79.5 million, an increase of $1.5 million, or 1.9%, as compared to $78.0 million for the six months ended June 30, 2020. Interest expense declined $7.2 million, or 39.8%, primarily due to a decline in interest expense on interest-bearing deposits of $7.3 million, or 51.1%, to $7.0 million as a result of lower rates paid on such deposits that more than offset the increase in the volume of deposits. Partially offsetting the decrease in interest expense was a decline of $10.9 million in interest income from loans due to lower loan purchase discount accretion, which decreased $3.6 million, reduced loan demand and line utilization, coupled with the origination of new loans and repricing of variable rate loans at lower rates. The identified decline in interest income from loans was partially offset by a net increase in loan fees of $5.2 million, which was primarily due to PPP fee accretion. Partially offsetting the decline in interest income from loans was an increase in interest income earned from investment securities, which was $18.0 million for the six months ended June 30, 2021, up $5.4 million from the six months ended June 30, 2020. The increase in interest income earned from investment securities reflected the larger volume of securities held for investment from the Company's investment of net deposit inflows, partially offset by a decrease in yield.

The tax equivalent net interest margin for the six months ended June 30, 2021 was 2.99%, or 49 basis points lower than the tax equivalent net interest margin of 3.48% for the six months ended June 30, 2020. The yield on loans decreased 46 basis points. The tax equivalent yield on investment securities decreased by 91 basis points. Combined, the resulting yield on interest-earning assets for the six months ended June 30, 2021 was 89 basis points lower than the six months ended June 30, 2020, and reflected the origination and re-pricing of loans at generally lower coupon rates compared to existing portfolio coupon rates, as well as a shift in earning asset mix to a greater proportion of investment securities, which generally have lower yields than loans. The cost of interest-bearing deposits decreased 52 basis points, while the average cost of borrowings was lower by 12 basis points for the six months ended June 30, 2021, compared to the six months ended June 30, 2020. Our lower deposit costs in the six months ended June 30, 2021 as compared to the six months ended June 30, 2020 were a result of lower market interest rates following the FRB's reduction of the target federal funds interest rate by 150 basis points in March 2020 in response to the COVID-19 pandemic.
Credit Loss (Benefit) Expense
We recorded a credit loss benefit of $6.9 million in the first six months of 2021, as compared to credit loss expense of $26.4 million for the first six months of 2020, a decrease of $33.3 million, or 126.1%. The Company recorded credit loss expense in the first and second quarters of 2020 primarily due to the impact of economic uncertainty stemming from the COVID-19 pandemic on forecasted economic conditions. The credit loss benefit recorded in the first six months of 2021 reflected overall improvements in forecasted economic conditions and an improved outlook on the credit risk profile. Specifically, the economic
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forecast utilized by the Company is sensitive to changes in the following loss drivers: (1) Midwest unemployment, (2) year-to-year change in national retail sales, (3) year-to-year change in the CRE Index, (4) year-to-year change in U.S. GDP, (5) year-to-year change in the National Home Price Index, and (6) Rental Vacancy. The total amount of net loans charged off in the first six months of 2021 was $0.7 million as compared to $3.1 million in the first six months of 2020.
Noninterest Income
The following table presents the significant components of noninterest income and the related dollar and percentage change from period to period:
 Six Months Ended June 30,
(dollars in thousands)2021 2020$ Change% Change
Investment services and trust activities$5,645  $4,753 $892 18.8 %
Service charges and fees2,962  3,116 (154)(4.9)
Card revenue3,449  2,602 847 32.6 
Loan revenue7,881  3,033 4,848 159.8 
Bank-owned life insurance1,080 1,155 (75)(6.5)
Investment securities gains, net69  48 21 43.8 
Other956 3,717 (2,761)(74.3)
Total noninterest income
$22,042  $18,424 $3,618 19.6 %
Total noninterest income for the first six months of 2021 increased $3.6 million, or 19.6%, to $22.0 million from $18.4 million during the same period of 2020. This increase was due to increases in loan revenue, investment services and trust activities, and card revenue of $4.8 million, $0.9 million, and $0.8 million, respectively. The increase in loan revenue was primarily due to an increase of $2.6 million in mortgage origination fee income, as well as an increase of $2.1 million stemming from the fair value of our mortgage servicing rights. Investment services and trust activities revenue was positively impacted by improvements in the financial markets and increased assets under administration, while the increase in card revenue reflects an increase in transaction volumes in the first six months of 2021, as compared to first six months of 2020. Partially offsetting the identified increases in noninterest income was a decrease in other noninterest income of $2.8 million, which was primarily due to a decline in income from our commercial loan back-to-back swap program.
Noninterest Expense
The following table presents the significant components of noninterest expense and the related dollar and percentage change from period to period:
 Six Months Ended June 30,
(dollars in thousands)20212020$ Change% Change
Compensation and employee benefits$34,321 $32,299 $2,022 6.3 %
Occupancy expense of premises, net4,516 4,594 (78)(1.7)
Equipment3,654 3,890 (236)(6.1)
Legal and professional2,158 2,917 (759)(26.0)
Data processing2,599 2,594 5 0.2 
Marketing1,879 1,972 (93)(4.7)
Amortization of intangibles2,848 3,776 (928)(24.6)
FDIC insurance757 893 (136)(15.2)
Communications780 906 (126)(13.9)
Foreclosed assets, net183 172 11 6.4 
Other2,675 4,026 (1,351)(33.6)
Total noninterest expense
$56,370 $58,039 $(1,669)(2.9)%

Noninterest expense for the six months ended June 30, 2021 was $56.4 million, a decrease of $1.7 million, or 2.9%, from $58.0 million for the six months ended June 30, 2020. The decline in noninterest expense was primarily due to decreases in other noninterest expense, amortization of intangibles, and legal and professional expenses of $1.4 million, $0.9 million, and $0.8 million, respectively. The decrease in other noninterest expense was principally due to a reduction in tax credit partnership investment amortization of $0.7 million. The decrease in the amortization of intangibles reflected the accelerated amortization methodology utilized for certain finite-lived intangible assets, while the decline in legal and professional expenses reflected a decline in loan legal expenses, as well as a decline in non-recurring audit fees. Partially offsetting the identified decreases in noninterest expense was an increase of $2.0 million in compensation and employee benefits expense that stemmed primarily
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from increased incentive and commission expense, normal annual increases in compensation, as well as increased share-based compensation expense.
Income Tax Expense
Our effective income tax rate, or income taxes divided by income before taxes, was 21.6% for the first six months of 2021, as compared to an effective tax rate of 3.5% for the first six months of 2020. The effective tax rate for the full year 2021 is currently expected to be in the range of 20-22%.

FINANCIAL CONDITION
Following is a table that represents the major categories of the Company's balance sheet as of the dates indicated:
(dollars in thousands)June 30, 2021December 31, 2020$ Change% Change
ASSETS
Cash and cash equivalents$63,434 $82,659 $(19,225)(23.3)%
Loans held for sale6,149 59,956 (53,807)(89.7)
Debt securities available for sale at fair value2,072,452 1,657,381 415,071 25.0 
Loans held for investment, net of unearned income3,330,156 3,482,223 (152,067)(4.4)
Allowance for credit losses(48,000)(55,500)7,500 (13.5)
Total loans held for investment, net3,282,156 3,426,723 (144,567)(4.2)
Other assets325,024 329,929 (4,905)(1.5)
Total assets$5,749,215 $5,556,648 $192,567 3.5 %
LIABILITIES AND SHAREHOLDERS' EQUITY
Total deposits$4,792,666 $4,547,049 $245,617 5.4 %
Total borrowings382,100 439,480 (57,380)(13.1)
Other liabilities44,156 54,869 (10,713)(19.5)
Total shareholders' equity530,293 515,250 15,043 2.9 
Total liabilities and shareholders' equity$5,749,215 $5,556,648 $192,567 3.5 %
Debt Securities Available for Sale
The composition of debt securities available for sale as of the dates indicated was as follows:
 June 30, 2021 December 31, 2020
(dollars in thousands)Balance% of Total Balance% of Total
U.S. Government agencies and corporations$316 — %$361 — %
States and political subdivisions
694,874 33.5 628,346 37.9 
Mortgage-backed securities
116,954 5.6  94,018 5.7 
Collateralized mortgage obligations
808,074 39.0  565,836 34.1 
Corporate debt securities
452,234 21.8 368,820 22.3 
Fair value of debt securities available for sale
$2,072,452 100 % $1,657,381 100 %
As of June 30, 2021, the fair value of debt securities available for sale was $2.1 billion, an increase of $415.1 million from $1.7 billion as of December 31, 2020. The increase was primarily driven by the excess liquidity generated by the increased levels of deposit balances that were deployed into investment security purchases. There were $27.1 million of gross unrealized gains and $13.8 million of gross unrealized losses in our debt securities available for sale portfolio for a net unrealized gain of $13.3 million at June 30, 2021.



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Loans
The composition of our loan portfolio by type of loan was as follows:
 June 30, 2021 December 31, 2020
(dollars in thousands)Balance% of Total Balance% of Total
Agricultural$107,834 3.2 %$116,392 3.3 %
Commercial and industrial
982,092 29.5 1,055,488 30.3 
Commercial real estate:
 
Construction and development
168,070 5.0  181,291 5.2 
Farmland
134,877 4.1 144,970 4.2 
Multifamily
255,826 7.7 256,525 7.4 
Commercial real estate-other
1,147,016 34.4 1,149,575 33.0 
Total commercial real estate
1,705,789 51.2  1,732,361 49.8 
Residential real estate:
 
One- to four-family first liens
332,117 10.0  355,684 10.2 
One- to four-family junior liens
136,464 4.1  143,422 4.1 
Total residential real estate
468,581 14.1  499,106 14.3 
Consumer
65,860 2.0  78,876 2.3 
Loans held for investment, net of unearned income
$3,330,156 100.0 %$3,482,223 100.0 %
Loans held for sale$6,149 $59,956 
Loans held for investment, net of unearned income, decreased $152.1 million, or 4.4%, from a balance of $3.48 billion at December 31, 2020, to $3.33 billion at June 30, 2021, primarily as a result of net loan pay-downs, PPP loan forgiveness, and lower line utilization. As of June 30, 2021, the amortized cost basis of PPP loans was $184.4 million, or 5.5% of loans held for investment, as compared to $259.3 million, or 7.4% of loans held for investment, at December 31, 2020, which are included in the agricultural and commercial and industrial loan portfolios. See Note 3. Loans Receivable and the Allowance for Credit Losses to our consolidated financial statements for additional information related to our loan portfolio.
Commitments under standby letters of credit, unused lines of credit and other conditionally approved credit lines totaled approximately $979.3 million and $991.4 million as of June 30, 2021 and December 31, 2020, respectively.
Our loan to deposit ratio decreased to 69.48% as of June 30, 2021 as compared to 76.58% as of December 31, 2020. The loan to deposit ratio fell when compared to the prior year-end due to net loan pay-downs, PPP loan forgiveness and lower line utilization. In addition, deposit growth fueled by the government stimulus and PPP loan proceeds, which were generally deposited into customer accounts at the Bank, were principally utilized to purchase debt securities.
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Nonperforming Assets
The following table sets forth information concerning nonperforming loans by class of receivable and our nonperforming assets at June 30, 2021 and December 31, 2020:
June 30, 2021December 31, 2020
(in thousands)Nonaccrual90+ Days Past Due and Still Accruing InterestTotalNonaccrual90+ Days Past Due and Still Accruing InterestTotal
Agricultural
$2,086 $— $2,086 $2,584 $— $2,584 
Commercial and industrial
6,395 — 6,395 7,326 106 7,432 
Commercial real estate:
Construction and development
609 — 609 1,145 — 1,145 
Farmland
10,280 — 10,280 8,319 — 8,319 
Multifamily
1,073 — 1,073 746 — 746 
Commercial real estate-other
17,802 — 17,802 19,134 — 19,134 
Total commercial real estate
29,764 — 29,764 29,344 — 29,344 
Residential real estate:
One- to four- family first liens
1,762 664 2,426 1,895 625 2,520 
One- to four- family junior liens
695 — 695 722 — 722 
Total residential real estate
2,457 664 3,121 2,617 625 3,242 
Consumer
62 1 63 79 8 87 
Total nonperforming loans
$40,764 $665 $41,429 $41,950 $739 $42,689 
     Foreclosed assets, net755 2,316 
      Total nonperforming assets$42,184 $45,005 
Nonperforming loans ratio (1)
1.24 %1.23 %
Nonperforming assets ratio (2)
0.73 %0.81 %
(1) Nonperforming loans ratio is calculated as total nonperforming loans divided by loans held for investment, net of unearned income, at the end of the period.
(2) Nonperforming assets ratio is calculated as total nonperforming assets divided by total assets at the end of the period.
Loan Review and Classification Process for Agricultural, Commercial and Industrial, and Commercial Real Estate Loans:
The Bank maintains a loan review and classification process which involves multiple officers of the Bank and is designed to assess the general quality of credit underwriting and to promote early identification of potential problem loans. All commercial and agricultural loan officers are charged with the responsibility of risk rating all loans in their portfolios and updating the ratings, positively or negatively, on an ongoing basis as conditions warrant. Risk ratings are selected from an 8-point scale with ratings as follows: ratings 1- 4 Satisfactory (pass), rating 5 Watch (potential weakness), rating 6 Substandard (well-defined weakness), rating 7 Doubtful, and rating 8 Loss.
When a loan officer originates a new loan, based upon proper loan authorization, they document the credit file with an offering sheet summary, supplemental underwriting analysis, relevant financial information and collateral evaluations. All of this information is used in the determination of the initial loan risk rating. The Bank’s loan review department undertakes independent credit reviews of relationships based on either criteria established by loan policy, risk-focused sampling, or random sampling. Credit relationships with larger exposure may pose incrementally higher risks. As a result, the Bank's loan review department is required to review all credit relationships with total exposure of $5.0 million or more, as determined semi-annually as of month-end in December and June, no less than annually. In addition, the individual loan reviews consider such items as: loan type; nature, type and estimated value of collateral; borrower and/or guarantor estimated financial strength; most recently available financial information; related loans and total borrower exposure; and current and anticipated performance of the loan. The results of such reviews are presented to both executive management and the audit committee of the Company's board of directors.
Through the review of delinquency reports, updated financial statements or other relevant information, the lending officer and/or loan review personnel may determine that a loan relationship has weakened to the point that a watch (loan grade 5) or classified (loan grades 6 through 8) status is warranted. At least quarterly, the loan strategy committee will meet to discuss loan relationships with total related exposure of $1.0 million or above that are Watch rated credits, loan relationships with total related exposure of $500 thousand and above that are Substandard or worse rated credits, as well as loan relationships with total related exposure of $250 thousand and above that are on non-accrual. Credits below these designated thresholds are reviewed upon request. The lending officer is charged with preparing a loan strategy summary worksheet that outlines the background of the credit problem, current repayment status of the loans, current collateral evaluation and a workout plan of action. This plan may include goals to improve the credit rating, assist the borrower in moving the loans to another institution and/or collateral
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liquidation. All such reports are presented to the loan strategy committee. Copies of the minutes of these committee meetings are presented to the board of directors of the Bank.
Depending upon the individual facts and circumstances and the result of the classified/watch review process, loan officers and/or loan review personnel may categorize a loan relationship as requiring an individual analysis. Once that determination has occurred, the credit analyst will complete an individually analyzed worksheet that contains an evaluation of the collateral (for collateral-dependent loans) based upon the estimated collateral value, adjusting for current market conditions and other local factors that may affect collateral value. Loan review personnel may also complete an independent individual analysis when deemed necessary. These judgmental evaluations may produce an initial specific allowance for placement in the Company’s allowance for credit losses calculation. An analysis for the underlying collateral value of each individually analyzed loan relationship is completed in the last month of the quarter. The individually analyzed worksheets are reviewed by the Credit Administration department prior to quarter-end. The board of directors of the Bank on a quarterly basis reviews the classified/watch reports including changes in credit grades of 5 or higher as well as all individually analyzed loans, the related allowances and foreclosed assets, net.

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

Loan Modifications

We restructure loans for our customers who appear to be able to meet the terms of their loan over the long term, but who may be unable to meet the terms of the loan in the near term due to individual circumstances. We consider the customer’s past performance, previous and current credit history, the individual circumstances surrounding the current difficulties and their plan to meet the terms of the loan in the future prior to restructuring the terms of the loan. The following factors are indicators that a concession has been granted (one or multiple items may be present):

•The borrower receives a reduction of the stated interest rate for the remaining original life of the debt.
•The borrower receives an extension of the maturity date or dates at a stated interest rate lower than the current market interest rate for new debt with similar risk characteristics.
•The borrower receives a reduction of the face amount or maturity amount of the debt as stated in the instrument or other agreement.
•The borrower receives a deferral of required payments (principal and/or interest).
•The borrower receives a reduction of the accrued interest.
Generally, short-term deferral of required payments would not be considered a concession. During the three and six months ended June 30, 2021, the Company classified four loans and seven loans as TDRs, respectively, due to the Company granting a concession to a borrower experiencing financial difficulty. The aggregate post-modification outstanding recorded investment of the loans classified as TDRs during three and six months ended June 30, 2021 was $2.2 million and $2.5 million, respectively.
Refer above to the "COVID-19 Update" section for details pertaining to the modifications that were a result of COVID-19 that were not deemed to be TDRs.
Allowance for Credit Losses
Our ACL as of June 30, 2021 was $48.0 million, which was 1.44% of loans held for investment, net of unearned income. This compares with an ACL of $55.5 million as of December 31, 2020, which was 1.59% of loans held for investment, net of unearned income. The ACL at June 30, 2021 does not include an allowance amount for PPP loans as they are fully guaranteed by the SBA. When adjusted for the impact of PPP loans, the ratio of the ACL as a percentage of loans held for investment, net of unearned income as of June 30, 2021 was 1.53% and as of December 31, 2020 was 1.72% (a non-GAAP financial measure - see "Non-GAAP Financial Measures"). The decrease in the ACL reflects overall improvements in forecasted economic conditions and an improved credit profile outlook. The liability for off-balance sheet credit exposures totaled $4.0 million as of June 30, 2021 as compared to $4.1 million at December 31, 2020 and is included in 'Other liabilities' on the balance sheet.
The Company recorded a credit loss benefit related to loans of $6.8 million for the six months ended June 30, 2021 as compared to a credit loss expense related to loans of $25.6 million for the six months ended June 30, 2020. Gross charge-offs for the first six months of 2021 totaled $1.8 million, while there were $1.1 million in gross recoveries of previously charged-off loans. The ratio of annualized net loan charge offs to average loans for the first six months of 2021 was 0.04% compared to 0.17% for the six months ended June 30, 2020.
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Economic Forecast: At June 30, 2021, the economic forecast used by the Company showed the following: (1) Midwest unemployment – decreases over the next four forecasted quarters; (2) Year-to-year change in national retail sales - increases over the next four forecasted quarters; (3) Year-to-year change in CRE Index - decreases over the next four forecasted quarters; (4) Year-to-year change in U.S. GDP - increases over the next four forecasted quarters; (5) Year-to-year change in National Home Price Index – increases over the next four forecasted quarters; and (6) Rental Vacancy - an increase over the next two forecasted quarters, followed by a decline in the third and fourth forecasted quarters. Overall, economic forecast loss driver data improved when compared to the previously disclosed first quarter of 2021 results.
Loan Policy: We review all nonaccrual loans greater than $250,000 individually on a quarterly basis to estimate the appropriate allowance due to collateral deficiency or insufficient cash-flow based on a discounted cash-flow analysis. At June 30, 2021, TDRs were not a material portion of the loan portfolio. We review loans 90 days or more past due that are still accruing interest no less than quarterly to determine if the asset is both well secured and in the process of collection. If not, such loans are placed on non-accrual status.
Based on the inherent risk in the loan portfolio, management believed that as of June 30, 2021, the ACL was adequate; however, there is no assurance losses will not exceed the allowance, and any growth in the loan portfolio or uncertainty in the general economy will require that management continue to evaluate the adequacy of the ACL and make additional provisions in future periods as deemed necessary. See Note 3. Loans Receivable and the Allowance for Credit Losses to our unaudited consolidated financial statements for additional information related to the allowance for credit losses.
Deposits

The composition of deposits was as follows:
As of June 30, 2021As of December 31, 2020
(in thousands)Balance% of TotalBalance% of Total
Noninterest bearing deposits$952,764 19.9 %$910,655 20.0 %
Interest checking deposits1,414,942 29.6 1,351,641 29.7 
Money market deposits936,683 19.5 918,654 20.2 
Savings deposits596,199 12.4 529,751 11.7 
Time deposits under $250538,331 11.2 581,471 12.8 
Time deposits of $250 or more353,747 7.4 254,877 5.6 
Total deposits
$4,792,666 100.0 %$4,547,049 100.0 %
Deposits increased $245.6 million from December 31, 2020, or 5.4%, reflecting the combination of fiscal stimulus and the deposit of PPP loan proceeds, which were generally deposited into customer accounts at the Bank. Approximately 81.4% of our total deposits were considered “core” deposits as of June 30, 2021, compared to 81.6% at December 31, 2020. We consider core deposits to be the total of all deposits other than time deposits and non-reciprocal brokered money market deposits. See Note 7. Deposits to our consolidated financial statements for additional information related to our deposits.

Short-Term Borrowings
Federal funds purchased - The Bank purchases federal funds for short-term funding needs from correspondent and regional banks. As of June 30, 2021 and December 31, 2020, the Bank had no federal funds purchased.
Securities Sold Under Agreements to Repurchase - Securities sold under agreements to repurchase declined $1.3 million, or 0.8%, to $173.0 million as of June 30, 2021, compared with $174.3 million as of December 31, 2020. Securities sold under agreements to repurchase are agreements in which the Company acquires funds by selling investment securities to another party under a simultaneous agreement to repurchase the same investment securities at a specified price and date. The Company enters into repurchase agreements and also offers a demand deposit account product to customers that sweeps their balances in excess of an agreed upon target amount into overnight repurchase agreements. As such, the balance of these borrowings vary according to the liquidity needs of the customers participating in these sweep accounts.
Federal Home Loan Bank Advances - The Bank utilizes FHLB short-term advances for short-term funding needs. The Company had $39.3 million of short-term advances as of June 30, 2021, compared with $56.5 million as of December 31, 2020.
Other - At June 30, 2021 and December 31, 2020, the Company had no Federal Reserve Discount Window borrowings, while the financing capacity was $62.9 million as of June 30, 2021 and $67.7 million as of December 31, 2020.
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The Bank maintains a credit agreement with a correspondent bank under which the Company is able to borrow up to $25.0 million from an unsecured revolving credit facility. The Company had no balance outstanding under this revolving credit facility as of both June 30, 2021 and December 31, 2020.
See Note 8. Short-Term Borrowings to our unaudited consolidated financial statements for additional information related to short-term borrowings.
Long-Term Debt
Finance Lease Payable - The Company has one existing finance lease for a branch location, with a present value liability balance of $1.0 million as of June 30, 2021 and $1.1 million as of December 31, 2020.
Junior Subordinated Notes Issued to Capital Trusts - Junior subordinated notes that have been issued to capital trusts that issued trust preferred securities were $41.9 million as of June 30, 2021 and $41.8 million as of December 31, 2020.
Subordinated Debentures - On May 1, 2019, the Company assumed $10.9 million in aggregate principal amount of subordinated debentures as a result of the merger with ATBancorp. The Company redeemed the ATB Debentures, in whole, on May 31, 2021. In addition, on July 28, 2020, the Company completed the private placement offering of $65.0 million aggregate principal amount of 5.75% fixed-to-floating rate subordinated notes, of which $63.75 million have been exchanged for subordinated notes registered under the Securities Act of 1933. The balance of the subordinated debt was $63.8 million as of June 30, 2021, as compared to $74.6 million at December 31, 2020.
Federal Home Loan Bank Borrowings - FHLB borrowings totaled $63.2 million as of June 30, 2021, compared with $91.2 million as of December 31, 2020, a decrease of $28.0 million, or 30.8%, due to maturities of FHLB advances. We utilize FHLB borrowings as a supplement to customer deposits to fund interest-earning assets and to assist in managing interest rate risk.
See Note 9. Long-Term Debt to our unaudited consolidated financial statements for additional information related to long-term debt.
Capital Resources
Shareholder's Equity
Total shareholders’ equity was $530.3 million as of June 30, 2021, compared to $515.3 million as of December 31, 2020, an increase of $15.0 million, or 2.9%, primarily as a result of an increase in retained earnings, partially offset by decreased AOCI. The total shareholders’ equity to total assets ratio was 9.22% at June 30, 2021, down from 9.27% at December 31, 2020. The tangible common equity ratio (a non-GAAP financial measure -see "Non-GAAP Financial Measures") was 7.86% at June 30, 2021, compared with 7.82% at December 31, 2020. Book value was $33.22 per share at June 30, 2021, an increase from $32.17 per share at December 31, 2020. Tangible book value per share (a non-GAAP financial measure - see "Non-GAAP Financial Measures") was $27.90 at June 30, 2021, an increase from $26.69 per share at December 31, 2020.
Capital Adequacy
Our Tier 1 capital to risk-weighted assets ratio was 11.21% as of June 30, 2021 and was 10.70% as of December 31, 2020. Risk-based capital guidelines require the classification of assets and some off-balance-sheet items in terms of credit-risk exposure and the measuring of capital as a percentage of the risk-adjusted asset totals. Management believed that, as of June 30, 2021, the Company and the Bank met all capital adequacy requirements to which we were subject. As of that date, the Bank was “well capitalized” under regulatory prompt corrective action provisions. See Note 11. Regulatory Capital Requirements and Restrictions on Subsidiary Cash to our unaudited consolidated financial statements for additional information related to our capital.
Stock Compensation
Restricted stock units were granted to certain officers and directors of the Company on February 15, 2021 and May 15, 2021, in the aggregate amounts of 65,168 and 11,231, respectively. Additionally, during the first six months of 2021, 52,323 shares of common stock were issued in connection with the vesting of previously awarded grants of restricted stock units, of which 4,272 shares were surrendered by grantees to satisfy tax requirements, and 9,533 unvested restricted stock units were forfeited.
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Liquidity
Liquidity Management
Liquidity management involves meeting the cash flow requirements of depositors and borrowers. We conduct liquidity management on both a daily and long-term basis, and adjust our investments in liquid assets based on expected loan demand, projected loan maturities and payments, expected deposit flows, yields available on interest-bearing deposits, and the objectives of our asset/liability management program. Excess liquidity is invested generally in short-term U.S. government and agency securities, short- and medium-term state and political subdivision securities, and other investment securities. Our most liquid assets are cash and due from banks, interest-bearing bank deposits, and federal funds sold. The balances of these assets are dependent on our operating, investing, and financing activities during any given period.
Generally, the government’s response to the COVID-19 pandemic in the form of fiscal stimulus payments to individuals, coupled with economic uncertainty stemming from the pandemic, has resulted in increased liquidity throughout 2020 and into 2021.
Cash and cash equivalents are summarized in the table below:
(dollars in thousands)As of June 30, 2021As of December 31, 2020
Cash and due from banks$52,297 $65,078 
Interest-bearing deposits11,124 17,409 
Federal funds sold13 172 
      Total$63,434 $82,659 
Generally, our principal sources of funds are deposits, advances from the FHLB, principal repayments on loans, proceeds from the sale of loans, proceeds from the maturity and sale of investment securities, our federal funds lines, and funds provided by operations. While scheduled loan amortization and maturing interest-bearing deposits are relatively predictable sources of funds, deposit flows and loan prepayments are greatly influenced by economic conditions, the general level of interest rates, and competition. We utilized particular sources of funds based on comparative costs and availability. The Bank maintains unsecured lines of credit with several correspondent banks and secured lines with the Federal Reserve Bank of Chicago and the FHLB that would allow us to borrow funds on a short-term basis, if necessary. We also hold debt securities classified as available for sale that could be sold to meet liquidity needs if necessary.
Net cash provided by operations was another major source of liquidity. The net cash provided by operating activities was $79.3 million for the six months ended June 30, 2021 and $28.7 million for the six months ended June 30, 2020.
Inflation
The effects of price changes and inflation can vary substantially for most financial institutions. While management believes that inflation affects the growth of total assets, it is difficult to assess its overall impact on the Company. The price of one or more of the components of the Consumer Price Index may fluctuate considerably and thereby influence the overall Consumer Price Index without having a corresponding effect on interest rates or upon the cost of those goods and services normally purchased by us. In years of high inflation and high interest rates, intermediate and long-term interest rates tend to increase, thereby adversely impacting the market values of investment securities, mortgage loans and other long-term fixed rate loans held by financial institutions. In addition, higher short-term interest rates caused by inflation tend to increase financial institutions’ cost of funds. In other years, the reverse situation may occur.
Off-Balance-Sheet Arrangements
During the normal course of business, we are a party to financial instruments with off-balance-sheet risk in order to meet the financing needs of our customers. These financial instruments include commitments to extend credit, commitments to sell loans, and standby letters of credit. We follow the same credit policy (including requiring collateral, if deemed appropriate) to make such commitments as is followed for those loans that are recorded in our financial statements.
Our exposure to credit losses in the event of nonperformance is represented by the contractual amount of the commitments. Management does not expect any significant losses as a result of these commitments, and also expects to have sufficient liquidity available to cover these off-balance-sheet instruments. Off-balance-sheet transactions are more fully discussed in Note 12. Commitments and Contingencies to our unaudited consolidated financial statements.
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Contractual Obligations
Outside the redemption on May 31, 2021 of the ATB Debentures that were assumed upon the acquisition of ATBancorp, there have been no material changes to the contractual obligations existing at December 31, 2020, as disclosed in the Annual Report on Form 10-K, filed with the SEC on March 11, 2021.

Non-GAAP Financial Measures
Certain ratios and amounts not in conformity with GAAP are provided to evaluate and measure the Company’s operating performance and financial condition, including return on average tangible equity, tangible common equity, tangible book value per share, tangible common equity ratio, net interest margin (tax equivalent), core net interest margin, efficiency ratio, and adjusted allowance for credit losses ratio. Management believes these ratios and amounts provide investors with useful information regarding the Company’s profitability, financial condition and capital adequacy, consistent with how management evaluates the Company’s financial performance. The following tables provide a reconciliation of each non-GAAP measure to the most comparable GAAP equivalent.
Three Months EndedSix Months Ended
Return on Average Tangible EquityJune 30, 2021June 30, 2020June 30, 2021June 30, 2020
(Dollars in thousands)
Net income $17,271 $11,712 $38,919 $9,737 
Intangible amortization, net of tax (1)
1,006 1,311 2,136 2,832 
Tangible net income$18,277  $13,023 $41,055 $12,569 
 
Average shareholders' equity$523,242  $511,239 $519,760 $513,204 
Average intangible assets, net(85,518) (123,313)(86,235)(123,130)
Average tangible equity$437,724  $387,926 $433,525 $390,074 
Return on average equity13.24 %9.21 %15.10 %3.82 %
Return on average tangible equity (2)
16.75 % 13.50 %19.10 %6.48 %
(1) Computed assuming a combined marginal income tax rate of 25%.
(2) Annualized tangible net income divided by average tangible equity.
Tangible Common Equity/Tangible Book Value per Share /
Tangible Common Equity Ratio		June 30, 2021December 31, 2020
(Dollars in thousands, except per share data)
Total shareholders’ equity$530,293 $515,250 
Intangible assets, net (84,871)(87,719)
Tangible common equity$445,422 $427,531 
Total assets$5,749,215 $5,556,648 
Intangible assets, net (84,871)(87,719)
Tangible assets$5,664,344 $5,468,929 
Book value per share$33.22 $32.17 
Tangible book value per share (1)
$27.90 $26.69 
Shares outstanding15,963,468 16,016,780 
Equity to assets ratio9.22 %9.27 %
Tangible common equity ratio (2)
7.86 %7.82 %
(1) Tangible common equity divided by shares outstanding.
(2) Tangible common equity divided by tangible assets.
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Three Months EndedSix Months Ended
Net Interest Margin, Tax Equivalent/Core Net Interest MarginJune 30, 2021June 30, 2020June 30, 2021June 30, 2020
(dollars in thousands)
Net interest income$38,505 $38,712 $77,122 $76,118 
Tax equivalent adjustments:
Loans (1)
519 507 1,050 1,004 
Securities (1)
647 482 1,295 877 
Net interest income, tax equivalent$39,671 $39,701 $79,467 $77,999 
Loan purchase discount accretion(873)(2,610)(1,971)(5,633)
  Core net interest income$38,798 $37,091 $77,496 $72,366 
Net interest margin2.80 %3.30 %2.90 %3.40 %
Net interest margin, tax equivalent (2)
2.88 %3.38 %2.99 %3.48 %
Core net interest margin (3)
2.82 %3.16 %2.91 %3.23 %
Average interest earning assets$5,522,427 $4,718,581 $5,361,502 $4,500,924 
(1) The federal statutory tax rate utilized was 21%.
(2) Annualized tax equivalent net interest income divided by average interest earning assets.
(3) Annualized core net interest income divided by average interest earning assets.
Three Months EndedSix Months Ended
Efficiency RatioJune 30, 2021June 30, 2020June 30, 2021June 30, 2020
(dollars in thousands)
Total noninterest expense$28,670 $28,038 $56,370 $58,039 
Amortization of intangibles(1,341)(1,748)(2,848)(3,776)
Merger-related expenses— (7)— (61)
Noninterest expense used for efficiency ratio$27,329 $26,283 $53,522 $54,202 
Net interest income, tax equivalent(1)
$39,671 $39,701 $79,467 $77,999 
Noninterest income10,218 8,269 22,042 18,424 
Investment security gains, net(42)(6)(69)(48)
Net revenues used for efficiency ratio$49,847 $47,964 $101,440 $96,375 
Efficiency ratio(2)
54.83 %54.80 %52.76 %56.24 %
(1) The federal statutory tax rate utilized was 21%.
(2) Noninterest expense adjusted for amortization of intangibles and merger-related expenses divided by the sum of tax equivalent net interest income, noninterest income and net investment securities gains.
Adjusted Allowance for Credit Losses Ratio
June 30, 2021December 31, 2020
(dollars in thousands)
Loans held for investment, net of unearned income$3,330,156 $3,482,223 
PPP loans(184,390)(259,260)
Core loans$3,145,766 $3,222,963 
Allowance for credit losses$48,000 $55,500 
Allowance for credit losses ratio1.44 %1.59 %
Adjusted allowance for credit losses ratio (1)
1.53 %1.72 %
(1) Allowance for credit losses divided by core loans.

Item 3. Quantitative and Qualitative Disclosures about Market Risk.
In general, market risk is the risk of change in asset values due to movements in underlying market rates and prices. Interest rate risk is the risk to earnings and capital arising from movements in interest rates. Interest rate risk is the most significant market risk affecting us as other types of market risk, such as foreign currency exchange rate risk and commodity price risk, do not arise in the normal course of our business activities.
In addition to interest rate risk, economic conditions in recent years have made liquidity risk (namely, funding liquidity risk) a more prevalent concern among financial institutions. In general, liquidity risk is the risk of being unable to fund an entity’s
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obligations to creditors (including, in the case of banks, obligations to depositors) as such obligations become due and/or fund its acquisition of assets.

Liquidity Risk
Liquidity refers to our ability to fund operations, to meet depositor withdrawals, to provide for our customers’ credit needs, and to meet maturing obligations and existing commitments. Our liquidity principally depends on cash flows from operating activities, investment in and maturity of assets, changes in balances of deposits and borrowings, and our ability to borrow funds.
Net cash inflows from operating activities were $79.3 million in the first six months of June 30, 2021, compared with $28.7 million in the first six months of 2020. Net cash outflows from investing activities were $276.4 million in the first six months of 2021, compared to net cash outflows of $492.9 million in the comparable six-month period of 2020. Net cash inflows from financing activities in the first six months of 2021 were $177.9 million, compared with net cash inflows of $507.9 million for the same period of 2020.
To manage liquidity risk, the Bank has several sources of liquidity in place to maximize funding availability and increase the diversification of funding sources. The criteria for evaluating the use of these sources include volume concentration (percentage of liabilities), cost, volatility, and the fit with the current asset/liability management plan. These acceptable sources of liquidity include:
•Federal Funds Lines
•Federal Reserve Bank Discount Window
•FHLB Borrowings
•Brokered Deposits
•Brokered Repurchase Agreements
Federal Funds Lines - Routine liquidity requirements are met by fluctuations in the federal funds position of the Bank. The principal function of these funds is to maintain short-term liquidity. Unsecured federal funds purchased lines are viewed as a volatile liability and are not used as a long-term funding solution, especially when used to fund long-term assets. The current federal funds purchased limit is 10% of total assets, or the amount of established federal funds lines, whichever is smaller. Currently, the Bank maintains several unsecured federal funds lines totaling $145.0 million, which lines are tested annually to ensure availability.
Federal Reserve Bank Discount Window - The Federal Reserve Bank Discount Window is another source of liquidity, particularly during difficult economic times. The Bank has a borrowing capacity with the Federal Reserve Bank of Chicago limited by the amount of municipal securities pledged against the line. As of June 30, 2021, the Bank had municipal securities with an approximate market value of $68.1 million pledged for liquidity purposes, and had a borrowing capacity of $62.9 million. There were no outstanding borrowings through the FRB Discount Window at June 30, 2021.
FHLB Borrowings - FHLB borrowings provide both a source of liquidity and long-term funding for the Bank. Use of this type of funding is coordinated with both the strategic balance sheet growth projections and interest rate risk profile of the Bank. Factors that are taken into account when contemplating use of FHLB borrowings are the effective interest rate, the collateral requirements, community investment program credits, and the implications and cost of having to purchase incremental FHLB stock. The current FHLB borrowing limit is 45% of total assets. As of June 30, 2021, the Bank had $63.2 million in outstanding FHLB borrowings, leaving $422.3 million available for liquidity needs, based on collateral capacity. These borrowings are secured by various real estate loans (residential, commercial and agricultural).

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

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Under a final rule that was issued by the FDIC in December 2018, financial institutions that are considered "well capitalized" qualify for the exemption of certain reciprocal deposits from being considered brokered deposits. Such exemption is limited to the lesser of 20 percent of total liabilities or $5 billion, with some exceptions for financial institutions that do not meet such criteria. At June 30, 2021, the Company had $5.9 million of reciprocal time deposits through the CDARS program and $35.2 million of reciprocal non-maturity deposits through the ICS program that qualified for the brokered deposit exemption.

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

Interest Rate Risk
Interest rate risk is defined as the exposure of net interest income and fair value of financial instruments (interest-earning assets, deposits and borrowings) to movements in interest rates. The Company’s results of operations depend to a large degree on its net interest income and its ability to manage interest rate risk. The Company considers interest rate risk to be a significant market risk. The major sources of the Company’s interest rate risk are timing differences in the maturity and re-pricing characteristics of assets and liabilities, changes in the shape of the yield curve, changes in customer behavior and changes in relationships between rate indices (basis risk). Management measures these risks and their impact in various ways, including through the use of income simulation and valuation analyses. Multiple interest rate scenarios are used in this analysis which include changes in interest rates, spread narrowing and widening, yield curve twists and changes in assumptions about customer behavior in various interest rate scenarios. A mismatch between maturities, interest rate sensitivities and prepayment characteristics of assets and liabilities results in interest-rate risk. Like most financial institutions, we have material interest-rate risk exposure to changes in both short-term and long-term interest rates, as well as variable interest rate indices (e.g., the prime rate or LIBOR).
The Bank’s asset and liability committee meets regularly and is responsible for reviewing its interest rate sensitivity position and establishing policies to monitor and limit exposure to interest rate risk. Our asset and liability committee seeks to manage interest rate risk under a variety of rate environments by structuring our balance sheet and off-balance-sheet positions in such a way that changes in interest rates do not have a large negative impact. The risk is monitored and managed within approved policy limits.
We use a third-party service to model and measure our exposure to potential interest rate changes. For various assumed hypothetical changes in market interest rates, numerous other assumptions are made, such as prepayment speeds on loans and securities backed by mortgages, the slope of the Treasury yield-curve, the rates and volumes of our deposits, and the rates and volumes of our loans. There are two primary tools used to evaluate interest rate risk: net interest income simulation and economic value of equity ("EVE"). In addition, interest rate gap is reviewed to monitor asset and liability repricing over various time periods.

Net Interest Income Simulation - Management utilizes net interest income simulation models to estimate the near-term effects of changing interest rates on its net interest income. Net interest income simulation involves projecting net interest income under a variety of scenarios, which include varying the level of interest rates and shifts in the shape of the yield curve. Management exercises its best judgment in making assumptions regarding events that management can influence, such as non-contractual deposit re-pricings, and events outside management’s control, such as customer behavior on loan and deposit activity and the effect that competition has on both loan and deposit pricing. These assumptions are subjective and, as a result, net interest income simulation results will differ from actual results due to the timing, magnitude and frequency of interest rate changes, changes in market conditions, customer behavior and management strategies, among other factors. We perform various sensitivity analyses on assumptions of deposit attrition and deposit re-pricing.
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The following table presents the anticipated effect on net interest income over a twelve month period if short- and long-term interest rates were to sustain an immediate decrease of 100 basis points or 200 basis points (the effects of which are not meaningful as of June 30, 2021 in the current low interest rate environment), or an immediate increase of 100 basis points or 200 basis points:
 Immediate Change in Rates
(dollars in thousands)-200 -100 +100 +200
June 30, 2021   
Dollar change
N/A N/A $32  $(599)
Percent change
N/A N/A — % 0.4 %
December 31, 2020   
Dollar change
N/A N/A $2,667  $4,167 
Percent change
N/A N/A 1.8 % 2.8 %
As of June 30, 2021, 28.8% of the Company’s earning asset balances will reprice or are expected to pay down in the next twelve months, and 49.4% of the Company’s deposit balances are low cost or no cost deposits.
Economic Value of Equity - Management also uses EVE to measure risk in the balance sheet that might not be taken into account in the net interest income simulation analysis. Net interest income simulation highlights exposure over a relatively short time period, while EVE analysis incorporates all cash flows over the estimated remaining life of all balance sheet positions. The valuation of the balance sheet, at a point in time, is defined as the discounted present value of asset cash flows minus the discounted present value of liability cash flows. EVE analysis addresses only the current balance sheet and does not incorporate the run-off replacement assumptions that are used in the net interest income simulation model. As with the net interest income simulation model, EVE analysis is based on key assumptions about the timing and variability of balance sheet cash flows and does not take into account any potential responses by management to anticipated changes in interest rates.
Interest Rate Gap - The interest rate gap is the difference between interest-earning assets and interest-bearing liabilities re-pricing within a given period and represents the net asset or liability sensitivity at a point in time. An interest rate gap measure could be significantly affected by external factors such as loan prepayments, early withdrawals of deposits, changes in the correlation of various interest-bearing instruments, competition, or a rise or decline in interest rates.

Item 4. Controls and Procedures.
Disclosure Controls and Procedures
The Company’s management, including the Chief Executive Officer and Senior Executive Vice President and Chief Financial Officer, evaluated the effectiveness of the Company’s disclosure controls and procedures (as defined in Rule 13a-15(e) or Rule 15d-15(e) under the Exchange Act) that are designed to ensure that information required to be disclosed by the Company in the reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to the Company’s management, including the Company’s Chief Executive Officer and Senior Executive Vice President and Chief Financial Officer, to allow timely decisions regarding required disclosure. Based on this evaluation, the Chief Executive Officer and Senior Executive Vice President and Chief Financial Officer have concluded that the Company’s disclosure controls and procedures were effective as of June 30, 2021.
The effectiveness of our or any system of disclosure controls and procedures is subject to certain limitations, including the exercise of judgment in designing, implementing, and evaluating the controls and procedures, the assumptions used in identifying the likelihood of future events, and the inability to eliminate misconduct completely. As a result, there can be no assurance that our disclosure controls and procedures will prevent all errors or fraud or ensure that all material information will be made known to appropriate management in a timely fashion. By their nature, our or any system of disclosure controls and procedures can provide only reasonable assurance regarding management’s control objectives.
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 June 30, 2021 that have materially affected or are reasonably likely to materially affect the Company's internal control over financial reporting.
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PART II – OTHER INFORMATION
Item 1. Legal Proceedings.
We and our subsidiaries are from time to time parties to various legal actions arising in the normal course of business. We believe that there is no threatened or pending proceeding, other than ordinary routine litigation incidental to the Company’s business, against us or our subsidiaries or of which our property is the subject, which, if determined adversely, would have a material adverse effect on our consolidated business or financial condition.

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

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

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

Total Number of Shares Purchased(1)
Average Price Paid per Share
Total Number of Shares Purchased as Part of Publicly Announced Programs(1)
Approximate Dollar Value of Shares That May Yet Be Purchased Under the Program
April 1 - 30, 20211,890 $29.37 1,890 $2,617,267 
May 1 - 31, 2021— — — 2,617,267 
June 1 - 30, 202136,885 29.61 36,885 14,474,621 
Total38,775 $29.60 38,775 $14,474,621 

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

On June 22, 2021, the Board of Directors of the Company approved a new share repurchase program, allowing for the repurchase of up to $15.0 million of the Company's common stock through December 31, 2023. The new repurchase program replaced the Company’s prior repurchase program, which was due to expire on December 31, 2021. For the period June 23, 2021 through June 30, 2021, the Company repurchased 17,790 shares of common stock for approximately $0.5 million, leaving $14.5 million available to be repurchased.


Item 3. Defaults Upon Senior Securities.
None.

Item 4. Mine Safety Disclosures.
Not Applicable.

Item 5. Other Information.
None.

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Item 6. Exhibits.
Exhibit
Number
DescriptionIncorporated by Reference to:
3.1
Amended and Restated Articles of Incorporation of MidWestOne Financial Group, Inc. filed with the Secretary of State of the State of Iowa on March 14, 2008
Exhibit 3.3 to the Company’s Amendment No. 1 to Registration Statement on Form S-4 (File No. 333-147628) filed with the SEC on January 14, 2008
3.2
Articles of Amendment (First Amendment) to the Amended and Restated Articles of Incorporation of MidWestOne Financial Group, Inc. filed with the Secretary of State of the State of Iowa on January 23, 2009
Exhibit 3.1 to the Company’s Current Report on Form 8-K filed with the SEC on January 23, 2009
3.3
Articles of Amendment (Second Amendment) to the Amended and Restated Articles of Incorporation of 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)
Exhibit 3.1 to the Company’s Current Report on Form 8-K filed with the SEC on February 6, 2009
3.4
Articles of Amendment (Third Amendment) to the Amended and Restated Articles of Incorporation of MidWestOne Financial Group, Inc., filed with the Secretary of State of the State of Iowa on April 21, 2017
Exhibit 3.1 to the Company’s Form 10-Q for the quarter ended March 31, 2017, filed with the SEC on May 4, 2017
3.5
Third Amended and Restated Bylaws of MidWestOne Financial Group, Inc.
Exhibit 3.1 to the Company’s Current Report on Form 8-K filed with the SEC on January 25, 2021
31.1
Certification of Principal Executive Officer pursuant to Rule 13a-14(a) and Rule 15d-14(a)Filed herewith
31.2
Certification of Principal Financial Officer pursuant to Rule 13a-14(a) and Rule 15d-14(a)Filed herewith
32.1
Certification of Principal Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002Filed herewith
32.2
Certification of Principal Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002Filed herewith
101
The following financial statements from the Company’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2021, formatted in Inline XBRL: (i) Consolidated Balance Sheets, (ii) Consolidated Statements of Income, (iii) Consolidated Statements of Comprehensive Income, (iv) Consolidated Statements of Shareholders’ Equity, (v) Consolidated Statements of Cash Flows, and (vi) Notes to Consolidated Financial Statements, tagged as blocks of text and including detailed tags.
Filed herewith
101.SCHInline XBRL Taxonomy Extension Schema DocumentFiled herewith
101.CALInline XBRL Taxonomy Extension Calculation Linkbase DocumentFiled herewith
101.DEFInline XBRL Taxonomy Extension Definition Linkbase DocumentFiled herewith
101.LABInline XBRL Taxonomy Extension Label Linkbase DocumentFiled herewith
101.PREInline XBRL Taxonomy Extension Presentation Linkbase DocumentFiled herewith
104Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101)Filed herewith

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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
 
MIDWESTONE FINANCIAL GROUP, INC.
Dated:August 5, 2021By: /s/ CHARLES N. FUNK
 Charles N. Funk
 Chief Executive Officer
(Principal Executive Officer)
By: /s/ BARRY S. RAY
 Barry S. Ray
 
Senior Executive Vice President and Chief Financial Officer
(Principal Financial and Accounting Officer)
 
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