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Item 7. Management’s Discussion and Analysis

2022-03-04 compared with 2021-03-05 · 211 added, 339 removed, 572 unchanged (49% of the section changed)

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The following discussion by management is presented regarding the financial results for the Company for the dates and periods indicated.

The discussion should be read in conjunction with the “Selected Consolidated Five-Year Statistical Summary” and the consolidated financial statements and the accompanying notes thereto included or incorporated by reference elsewhere in this document.

The discussion should be read in conjunction with the consolidated financial statements and the accompanying notes thereto included or incorporated by reference elsewhere in this document.

For a discussion on the comparison of results of operations for the years ended December 31, 2020 and 2019, refer to Item 7.

“Management's Discussion and Analysis of Financial Condition and Results of Operation” in the Company’s Annual Form 10-K filed with the SEC on March 5, 2021.

An overview of the year 2021 is presented following the section discussing a special note regarding forward looking statements.

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• The strength of the United States economy in general and the strength of the local economies in which the Company conducts its operations which may be less favorable than expected and may result in, among other things, a deterioration in the credit quality and value of the Company’s assets.

• The effects of financial market disruptions and/or an economic recession, and monetary and other governmental actions designed to address such disruptions and recession.

• The effects of financial market disruptions and/or an economic recession, and monetary and other governmental actions designed to address such disruptions and recession, including in response to the COVID-19 pandemic.

• The financial strength of the counterparties with which the Company or the Company’s customers do business and as to which the Company has investment or financial exposure.

• The credit quality and credit agency ratings of the securities in the Company’s investment securities portfolio, a deterioration or downgrade of which could lead to other-than-temporary impairment of the affected securities and the recognition of an impairment loss.

• The credit quality and credit agency ratings of the securities in the Company’s investment securities portfolio, a deterioration or downgrade of which could lead to recognition of an allowance for credit losses on the affected securities and the recognition of a credit loss.

• The effects of, and changes in, laws, regulations and policies affecting banking, securities, insurance and monetary and financial matters as well as any laws otherwise affecting the Company.

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• Consumer spending and saving habits which may change in a manner that affects the Company’s business adversely.

• The economic impact of natural disasters, diseases and/or pandemics, such as the COVID-19 pandemic, terrorist attacks and military actions.

• The economic impact of natural disasters, diseases and/or pandemics, including any extended impact from the COVID-19 pandemic, and terrorist attacks and military actions.

• Business combinations and the integration of acquired businesses and assets which may be more difficult or expensive than expected.

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Additional information concerning the Company and its business, including other factors that could materially affect the Company’s financial results, is included in the Company’s filings with the Securities and Exchange Commission.

What the Company knows and what steps we have taken.

The outbreak of Coronavirus Disease 2019 (“COVID-19”) has and will continue to adversely impact a broad range of industries in which the Company’s customers operate and impair their ability to fulfill their financial obligations to the Company.

The World Health Organization has 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 is highly likely to disrupt banking and other financial activity in the areas in which the Company operates and could also potentially create widespread business continuity issues for the Company.

The Company’s business is dependent upon the willingness and ability of its employees and customers to conduct banking and other financial transactions.

If the global response to contain COVID-19 escalates or is unsuccessful, the Company could experience a material adverse effect on its business, financial condition, results of operations and cash flows.

With the health of our employees and customers being our top concern, as of March 17, 2020, the Bank temporarily suspended branch lobby hours to the public for walk-in transactions while allowing limited scheduled appointments.

The Bank reopened branch lobbies in the third quarter of 2020, but in November 2020 again temporarily suspended branch lobby hours to the public for walk-in transactions.

In late January 2021, the Bank has since started the process of reopening branch lobbies.

The Bank implemented the following changes in response to the pandemic:

• Plexiglass windows on our teller stations and reception areas

• A limit on the number of people who can be in the lobbies at one time

• Transaction areas and reusable items will be frequently cleaned

• Hand sanitizing stations located at each entrance

• Floor stickers to guide social distancing while waiting in line

• Require both customers and employees to wear protective face coverings, among other social distancing requirements for both customers and employees.

Update on Company Action and Ongoing Risks

Our response to COVID-19 continues to be focused on how we can best serve our employees, customers, and communities.

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.

Drive-thru services remain available as well as all ATM’s to complete needed transactions.

Customers are also able to directly contact our bankers through calling the customer contact center, engaging with a digital banker via the HERE by Hills Bank app, or through Hills Bank Online which is available 24/7.

The Bank continues to promote social distancing by encouraging employees who can work remotely to do so and in other cases, departments have been dispersed to keep the team separated.

We do not anticipate significant challenges to our ability to maintain our systems and controls in light of the measures we have taken to prevent the spread of COVID-19.

No material operational or internal control challenges or risks have been identified to date.

With the Federal Reserve rate drops of 150 basis points in March (100 basis points of which was directly related to the effects of the virus on the economy), a surge in home loan activity has occurred, a significant portion of which is refinance related.

The Bank sells most of its home loans into the secondary market and has seen a significant increase in the net gain on the sale of these loans.

The Bank is working with customers who request forbearance agreements and has also provided short-term modifications for customers primarily through deferrals of principal only payments for three to six months.

Lending Assistance

The Bank continues to work with customers to determine how best to serve them, including providing short-term modifications for customers primarily through deferrals of principal only payments for three to six months.

Throughout 2020, COVID-19 related payment deferrals provided for customers totaled approximately 14.82% of total loans.

As of December 31, 2020, COVID-19 related payment deferrals were approximately 1.20% of total loans.

As of December 31, 2021 and December 31, 2020, COVID-19 related payment deferrals were approximately 0.12% and 1.20% of total loans, respectively.

The Bank continues to assist customers through this difficult time in the best manner possible by providing $127.10 million of Paycheck Protection Program (PPP) loans through December 31, 2020.

With the passage of the Coronavirus Response and Relief Supplemental Appropriations Act 2021 in late December 2020, the Bank provided additional PPP loans in 2021 totaling $58.34 million through December 31, 2021 to further assist our customers.

The PPP loans have a two or five year term and earn interest at 1%.

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The Bank believes that the majority of these loans will ultimately be forgiven by the SBA in accordance with the terms of the program.

As of December 31, 2020, the Bank has outstanding PPP loan balances of $86.5 million and has received forgiveness payments totaling $40.4 million from the SBA.

With the passage of the Coronavirus Response and Relief Supplemental Appropriations Act 2021 in late December 2020 , the Bank is planning to provide additional PPP loans beginning in late January 2021 to further assist our customers.

As of December 31, 2021, the Bank has outstanding PPP loan balances of $5.34 million and for the year ended December 31, 2021 has received total forgiveness payments of $140.1 million from the SBA.

Financial Exposures

As discussed above, throughout 2020 the Company provided a significant number of PPP loans to customers as well as short-term loan modifications deferring principal and interest or principal only for three to six months.

During late summer and fall, a significant number of the COVID-19 related short-term loan modifications expired with the majority of customers able to return to scheduled payments.

A small percentage of customers have requested additional pandemic-related modifications described above.

Section 4013 of the CARES Act, “Temporary Relief From Troubled Debt Restructurings,” allows 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.

In March 2020, various regulatory agencies, including the FRB and the FDIC, issued an interagency statement, effective immediately, on loan modifications and reporting for financial institutions working with customers affected by COVID-19.

The agencies confirmed with the staff of the FASB 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.

As of December 31, 2020, the total amount of the eligible loans in deferral (deferral of principal and/or interest) that met the requirements set forth under the interagency statement and therefore were not considered TDRs was 13 loans, totaling $9.4 million.

The Bank anticipates that the current and future economic conditions will continue to have an impact on the initial modifications that were made that qualified under such criteria.

The COVID-19 pandemic represents an unprecedented challenge to the global economy in general and the financial services sector in particular.

However, there is still significant uncertainty regarding the overall length of the pandemic and the aggregate impact that it will have on global and regional economies, including uncertainties regarding the potential positive effects of governmental actions taken in response to the pandemic during 2020.

With so much uncertainty, it is impossible for the Bank to accurately predict the impact that the pandemic will have on the Bank’s primary markets and the overall extent to which it will affect the Bank’s financial condition and results of operations into 2021.

Nonetheless, management believes that the Bank’s current regulatory capital position is adequate to face the coming challenges.

To account for potential exposures resulting from the pandemic, the Bank has increased its allowance for loan losses for the year ended December 31, 2020 by approximately $3.3 million since December 31, 2019.

The Bank is fully prepared to make additional provisions as warranted by the COVID-19 situation.

The Bank anticipates that a significant portion of the Bank’s borrowers in the hospitality industry, which represents approximately 0.2% of our loan portfolio, will endure significant economic distress which will adversely affect their ability to repay existing indebtedness.

These developments, together with economic conditions generally, are also expected to impact the value of certain collateral securing our loans.

Our credit administration is closely monitoring and analyzing the higher risk segments within the loan portfolio, tracking loan payment deferrals, customer liquidity and providing timely reports to senior management and the board of directors.

Based on the Company’s capital levels, prudent underwriting policies, loan concentration diversification and our geographic footprint, we currently expect to be able to manage the economic risks and uncertainties associated with the pandemic and remain adequately capitalized.

The Company continued to maintain the payment of its annual dividend consistent with its past practices.

Government Response

Congress, the FRB and the other U.S.

state and federal financial regulatory agencies have taken actions to mitigate disruptions to economic activity and financial stability resulting from the COVID-19 pandemic.

The federal banking agencies have encouraged financial institutions to prudently work with affected borrowers and passed measures to provide relief from reporting loan classifications due to modifications related to the COVID-19 outbreak.

The descriptions below summarize additional significant government actions taken in response to the COVID-19 pandemic.

The descriptions are qualified in their entirety by reference to the particular statutory or regulatory provisions or government programs summarized.

The CARES Act

The Coronavirus Aid, Relief and Economic Security (CARES) Act was signed into law on March 27, 2020.

Among other provisions, the CARES Act includes funding for the SBA to expand lending, relief from certain U.S.

GAAP requirements to allow COVID-19-related loan modifications to not be categorized as troubled debt restructurings and a range of incentives to encourage deferment, forbearance or modification of consumer credit and mortgage contracts.

One of the key CARES Act programs is the Paycheck Protection Program, which temporarily expanded the SBA’s business loan guarantee program to include forgivable loans used for permissible purposes, which were issued under the program through August 8, 2020.

Paycheck Protection Program loans are available to a broader range of entities than ordinary SBA loans, and the loan may be forgiven in an amount equal to payroll costs and certain other expenses during either an eight-week or twenty-four week “covered period.” The Bank is participating in this program as described above.

The CARES Act contains additional protections for homeowners and renters of properties with federally-backed mortgages, including a 60-day moratorium on the initiation of foreclosure proceedings beginning on March 18, 2020 and a 120-day moratorium on initiating eviction proceedings effective March 27, 2020.

These foreclosure and eviction moratoriums have been extended through year-end by the Federal Housing Administration.

Borrowers of federally-backed mortgages have the right under the CARES Act to request up to 360 days of forbearance on their mortgage payments if they experience financial hardship directly or indirectly due to the coronavirus-related public health emergency.

Also pursuant to the CARES Act, the U.S.

Treasury has the authority to provide loans, guarantees and other investments in support of eligible businesses, states and municipalities affected by the economic effects of COVID-19.

Some of these funds have been used to support several FRB programs and facilities described below or additional programs or facilities that are established by its authority under Section 13(3) of the Federal Reserve Act and meeting certain criteria.

Coronavirus Response and Relief Supplemental Appropriations Act 2021

On December 21, 2020, the House and Senate passed legislation to supply the latest round of COVID-19 relief, authorizing more than $900 billion in economic aid to small businesses and consumers—the second largest stimulus in history, behind only the CARES (Coronavirus Aid Relief and Economic Security) Act that Congress enacted in March.

The bill also includes appropriations provisions to keep the government funded through September 30, 2021, as well as a host of miscellaneous items.

The summary below focuses on key banking provisions while omitting significant provisions on many other important topics, including an extension of enhanced unemployment insurance and funding for vaccine distribution, school reopening, and the airline industry.

In particular, the banking aspects of the package include the following:

An additional $284.6 billion in Paycheck Protection Program (PPP) funding for loans to small businesses, including for borrowers who have previously received a PPP loan.

A one-page simplified forgiveness process for PPP loans under $150,000.

Clarification to various CARES Act provisions, the tax treatment of PPP expenses, lender responsibilities for agent fees, and lender “hold harmless” protections under the PPP and other laws.

A further delay in Troubled Debt Restructuring (TDR) accounting until 60 days after the termination of the national emergency, or January 1, 2022.

A further optional delay in Current Expected Credit Loss (CECL) accounting until January 1, 2022.

A new round of Economic Impact Payments (EIPs) for consumers, with aggressive distribution timelines and new exemptions from garnishments.

Significant added support for Community Development Financial Institutions (CDFIs) and Minority Depository Institutions (MDIs).

Funding for agricultural support programs and for renter assistance programs.

Termination of existing Federal Reserve emergency lending authority under the CARES Act, while preserving the Fed’s general 13(3) emergency authority existing prior to that Act.

The FRB has taken a range of actions to support the flow of credit to households and businesses.

For example, on March 15, 2020, the FRB reduced the target range for the federal funds rate to 0 to 0.25% and announced that it would increase its holdings of U.S.

Treasury securities and agency mortgage-backed securities and begin purchasing agency commercial mortgage-backed securities.

The FRB has also encouraged depository institutions to borrow from the discount window and has lowered the primary credit rate for such borrowing by 150 basis points while extending the term of such loans up to 90 days.

Reserve requirements have been reduced to zero as of March 26, 2020.

In addition, the FRB has established, or has taken steps to establish, a range of facilities and programs to support the U.S.

economy and U.S.

marketplace participants in response to economic disruptions associated with COVID-19.

Through these facilities and programs, the FRB, relying on its authority under Section 13(3) of the Federal Reserve Act, has taken steps to directly or indirectly purchase assets from, or make loans to, U.S.

companies, financial institutions, municipalities and other market participants.

Non-GAAP Financial Measures

This report contains references to financial measures that are not defined in GAAP.

Such non-GAAP financial measures include the Company's presentation of net income without the effect of the Tax Cut and Jobs Act enacted on December 22, 2017 (the "Tax Act"), and the presentation of earnings per share, return on assets and return on equity with the adjusted net income figure.

Management believes these Non-GAAP financial measures provide useful information to both management and investors to analyze and evaluate the Company's financial performance.

Limitations associated with non-GAAP financial measures include the risks that persons might disagree as to the appropriateness of items included in these measures.

These non-GAAP disclosures should not be considered an alternative to the Company's GAAP results.

The following table reconciles the non-GAAP financial measures to GAAP.

Year Ended December 31, 2017

Reconciliation of net income before effect of Tax Act to net income (GAAP):

Net Income (GAAP) $ 28,061

Tax Act related tax expense 4,709

Net Income before Tax Act related expense $ 32,770

Reconciliation of earnings per share before effect of Tax Act to earnings per share (GAAP):

Non-GAAP net income reconciled above $ 32,770

Weighted average shares outstanding (basic) 9,330,003

Earnings Per Share (basic) before effect of Tax Act $ 3.51

Weighted average shares outstanding (diluted) 9,334,635

Earnings Per Share (diluted) before effect of Tax Act $ 3.51

Reconciliation of return on average assets before effect of Tax Act to return on average assets (GAAP):

Non-GAAP net income reconciled above $ 32,770

Average assets 2,756,360

Return on average assets before effect of Tax Act 1.19 %

Reconciliation of return on average equity after effect of Tax Act to return on average equity (GAAP):

Non-GAAP net income reconciled above $ 32,770

Average equity 303,768

Return on average equity before effect of Tax Act 10.79 %

The COVID-19 pandemic continues to represent an unprecedented challenge to the global economy in general and the financial services sector in particular.

However, given the emergence of multiple new and more infectious variants of COVID-19 along with the hesitancy of a significant portion of the U.S.

population to become vaccinated, there is still significant uncertainty regarding the overall length of the pandemic and the aggregate impact that it will have on global and regional economies, including uncertainties regarding the potential positive effects of governmental actions taken in response to the pandemic.

Our credit administration continues to closely monitor and analyze the higher risk segments within the loan portfolio, tracking loan payment deferrals, customer liquidity and providing timely reports to senior management and the board of directors.

Based on the Company’s capital levels, prudent underwriting policies, loan concentration diversification and our geographic footprint, we currently expect to be able to continue to manage the economic risks and uncertainties associated with the pandemic and remain adequately capitalized.

However, the Company may be required to make additional loan loss provisions as warranted by the fluid COVID-19 situation.

The Company is a bank holding company engaged, through its wholly-owned subsidiary bank, in the business of commercial banking.

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The Bank was formed in Hills, Iowa in 1904.

The Bank is a full-service commercial bank extending its services to individuals, businesses, governmental units and institutional customers primarily in the communities of Hills, Iowa City, Coralville, North Liberty, Lisbon, Mount Vernon, Kalona, Wellman, Cedar Rapids, Marion and Washington, Iowa.

The Bank is a full-service commercial bank extending its services to individuals, businesses, governmental units and

institutional customers primarily in the communities of Hills, Iowa City, Coralville, North Liberty, Lisbon, Mount Vernon, Kalona, Wellman, Cedar Rapids, Marion and Washington, Iowa.

The Company’s net income for 2021 was $48.09 million compared to $38.65 million in 2020 and $45.32 million in 2019.

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For the year ended December 31, 2021, net interest income on a tax equivalent basis increased by $2.82 million.

In 2020, net interest income increased $10.57 million due to growth of $309.59 million in the Bank's average earning assets and decreased $6.43 million due to interest rate changes.

In 2021, net interest income increased $1.77 million due to growth of $424.15 million in the Bank's average earning assets and decreases in certficates of deposit and FHLB borrowings as well as increased $1.05 million due to interest rate changes.

Highlights with respect to items on the Company’s balance sheet as of December 31, 2021 included the following:

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A substantial portion of the increase can be attributed to increased savings with the current negative economic environment due to the pandemic and equity investors fleeing volatile capital markets in an effort to preserve principal.

• Loans, net of allowance for loan losses and unamortized fees and costs, totaling $2.718 billion.

• Net loan growth in 2020 of $67.74 million.

The increase was primarily due to PPP loans provided to customers totaling $127.10 million.

Loans held for sale increased $35.55 million since December 31, 2019 due to the significant reduction in interest rates during 2020, resulting in a significant amount of mortgage loan refinance activity.

• Loans, net of allowance for credit losses and unamortized fees and costs, totaling $2.631 billion, a decrease of $87.18 million since December 31, 2020.

The decrease is primarily attributable to the forgiveness of PPP loans totaling a net of $81.16 million for the year ended December 31, 2021.

Loans held for sale decreased $38.23 million since December 31, 2020 due to the slowdown in mortgage loan refinance activity later in 2021.

• Tax credit real estate increased by $2.54 million for the year ended December 31, 2021, primarily attributable to a $4.18 million investment in a multi-family affordable housing rental property.

• Deposit growth of $341.43 million in 2021.

Deposits increased to $3.534 billion and included $51.59 million of brokered deposits.

A substantial portion of the increase can be attributed to the current negative economic environment.

• FHLB borrowings decreased $80.00 million.

The decrease was largely due to prepaying $55 million of FHLB borrowings.

A substantial portion of the increase can be attributed to increased savings with the current negative economic environment due to the pandemic.

• FHLB borrowings decreased $105.00 million due to prepaying all outstanding FHLB borrowings compared to December 31, 2020.

• Liabilities as of December 31, 2021 include $3.85 million of allowance for credit losses on off-balance sheet credit exposures under CECL compared to zero under the incurred loss model as of December 31, 2020.

• Stockholders’ equity increased $22.37 million to $438.45 million in 2021, with dividends having been paid in 2021 of $8.77 million.

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The return on average equity was 11.29% in 2021 compared to 9.82% in 2020.

The returns for the three previous years, 2018, 2017 and 2016, were 9.92%, 9.24% and 11.26%, respectively.

Before the effect of the Tax Act, the Company's 2017 return on average equity would have been 10.79%.

The Company remains well-capitalized as of December 31, 2021 with total risk-based capital at 20.24% and Tier 1 risk-based capital at 17.25%.

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A detailed discussion of the financial position and results of operations follows this overview.

(1) Non-GAAP financial measurement.

For further information, refer to the Non-GAAP Financial Measurement section of this report.

Critical Accounting Policies

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The financial information contained within these financial statements is, to a significant extent, financial information that is based on approximate measures of the financial effects of transactions and events that have already occurred.

Based on its consideration of accounting policies that involve the most complex and subjective decisions and assessments, management has identified its most critical accounting policies to be those which are related to the allowance for loan losses.

Allowance for Loan Losses

The Company separates its portfolio loans and leases into segments for determining the allowance for loan losses.

The Company's portfolio segments includes agricultural, commercial and financial, real estate, loans to individuals and obligations of state and political subdivisions.

The Company further separates its portfolio into classes for purposes of monitoring and assessing credit quality based on certain risk characteristics.

Classes within the real estate portfolio segment includes 1 to 4 family residential construction, land development and commercial construction, farmland, 1 to 4 family first liens, 1 to 4 family junior liens, multi-family and commercial.

For an analysis of the Company's allowance for loan losses by portfolio segment and credit risk rating information by class, see Note 3 to the Company's Consolidated Financial Statements.

Loans that exhibit probable or observed credit weaknesses, as well as loans that have been modified in a troubled debt restructuring ("TDR loans"), are subject to individual review for impairment.

When individual loans are reviewed for impairment, the Company determines allowances based on management's estimate of the borrower's ability to repay the loan given the availability of the collateral, other sources of cash flow, as well as evaluation of legal options available.

Allowances for impaired loans are measured based on the present value of expected future cash flows discounted at the loan's effective interest rate or the fair value of the underlying collateral.

Historical loss rates are applied to loans that are not individually reviewed for impairment.

A 20 quarter migration analysis performed by management uses loan level attributes to track the movement of loans through the various credit risk rating categories in order to estimate the percentage of historical loss to apply to each specific credit risk rating in each loan category.

The credit risk rating system currently utilized for allowance analysis purposes encompasses six categories.

The Company's allowance for loan loss methodology incorporates a variety of risk considerations, both quantitative and qualitative, in establishing an allowance for loan losses that management believes is appropriate at each reporting date.

Quantitative factors include the Company's historical loss experience, delinquency and charge-off trends, collateral values, changes in impaired loans, and other factors.

Quantitative factors also incorporate known information about individual loans, including borrowers' sensitivity to interest rate movements.

Qualitative factors include changes in lending policies and procedures;

changes in national and local economic and business conditions;

changes in the nature and volume of the loan portfolio;

changes in the experience, ability and depth of lending management and staff;

changes in the quality of the Bank's loan review system;

the existence and effect of concentrations of credit;

and the effect of any other identified external factors.

Determinations relating to the possible level of future loan losses are based in part on subjective judgments by management.

Future loan losses in excess of current estimates, could materially adversely affect our results of operations or financial position.

As the Company adds new products and increases the complexity of its loan portfolio, it will enhance its methodology accordingly.

Allowance for Credit Losses

On January 1, 2021, the Company adopted ASU 2016-13 Financial Instruments - Credit Losses (Topic 326):

Measurement of Credit Losses on Financial Instruments , which requires the allowance for credit losses use the current expected credit loss (CECL) methodology.

The following is a discussion of the methodologies used by the Company with the adoption of ASC 326.

ASC 326 CECL Adoption:

The preparation of financial statements in accordance with the accounting principles generally accepted in the United States ("U.S.

GAAP") requires management to make a number of judgments, estimates and assumptions that affect the reported amounts of assets, liabilities, income and expense in the financial statements.

Various elements of our accounting policies, by their nature, involve the application of highly sensitive and judgmental estimates and assumptions.

Some of these policies and estimates relate to matters that are highly complex and contain substantial inherent uncertainties.

Management has made significant estimates in several areas, including the allowance for credit losses (see Note 3 - Loans and Note 2 - Securities) and the fair value of debt securities (see Note 2 - Securities).

We have identified the following accounting policies and estimates that, due to the inherent judgments and assumptions and the potential sensitivity of the financial statements to those judgments and assumptions, are critical to an understanding of our financial statements.

We believe that the judgments, estimates and assumptions used in the preparation of the Company's financial statements are appropriate.

For a further description of our accounting policies, see Note 1 - Summary of Significant Accounting Policies in the financial statements included in this Form 10-K.

The allowance for credit losses for loans represents management's estimate of all expected credit losses over the expected contractual life of our existing loan portfolio.

Determining the appropriateness of the allowance is complex and requires judgment by management about the effect of matters that are inherently uncertain.

Subsequent evaluations of the then-existing loan portfolio, in light of the factors then prevailing, may result in significant changes in the allowance for credit losses in those future periods.

We employ a disciplined process and methodology to establish our allowance for credit losses that has two basic components:

first, an asset-specific component involving individual loans that do not share risk characteristics with other loans and the measurement of expected credit losses for such individual loans;

and second, a pooled component for estimated expected credit losses for pools of loans that share similar risk characteristics.

Based upon this methodology, management establishes an asset-specific allowance for loans that do not share risk characteristics with other loans based on the amount of expected credit losses calculated on those loans and charges off amounts determined to be uncollectible.

Factors we consider in measuring the extent of expected credit loss include payment status, collateral value, borrower financial condition, guarantor support and the probability of collecting scheduled principal and interest payments when due.

When a loan does not share risk characteristics with other loans, we measure expected credit loss as the difference between the amortized cost basis in the loan and the present value of expected future cash flows discounted at the loan's effective interest rate except that, for collateral- dependent loans, credit loss is measured as the difference between the amortized cost basis in the loan and the fair value of the underlying collateral.

The fair value of the collateral is adjusted for the estimated cost to sell if repayment or satisfaction of a loan is dependent on the sale (rather than only on the operation) of the collateral.

In accordance with our appraisal policy, the fair value of collateral-dependent loans is based upon independent third-party appraisals or on collateral valuations prepared by in-house evaluations.

Once a third-party appraisal is greater than one year old, or if its determined that market conditions, changes to the property, changes in intended use of the property or other factors indicate that an appraisal is no longer reliable, we perform an internal collateral valuation to assess whether a change in collateral value requires an additional adjustment to carrying value.

When we receive an updated appraisal or collateral valuation, management reassesses the need for adjustments to the loan's expected credit loss measurements and, where appropriate, records an adjustment.

If the calculated expected credit loss is determined to be permanent, fixed or nonrecoverable, the credit loss portion of the loan will be charged off against the allowance for credit losses.

Loans designated having significantly increased credit

risk are generally placed on nonaccrual and remain in that status until all principal and interest payments are current and the prospects for future payments in accordance with the loan agreement are reasonably assured, at which point the loan is returned to accrual status.

In estimating the component of the allowance for credit losses for loans that share common risk characteristics, loans are segregated into loan classes.

Loans are designated into loan classes based on loans pooled by product types and similar risk characteristics or areas of risk concentration.

Credit loss assumptions are estimated using a model that categorizes loan pools based on loan type and purpose.

This model calculates an expected life-of-loan loss percentage for each loan category by considering the probability of default using historical life-of-loan analysis periods for agricultural, 1 to 4 family first and junior liens, commercial and consumer segments, and the severity of loss, based on the aggregate net lifetime losses incurred per loan class.

The component of the allowance for credit losses for loans that share common risk characteristics also considers factors for each loan class to adjust for differences between the historical period used to calculate historical default and loss severity rates and expected conditions over the remaining lives of the loans in the portfolio related to:

• Lending policies and procedures;

• International, national, regional and local economic business conditions and developments that affect the collectability of the portfolio, including the condition of various markets;

• The nature of the loan portfolio, including the terms of the loans;

• The experience, ability and depth of the lending management and other relevant staff;

• The volume and severity of past due and adversely classified or graded loans and the volume of nonaccrual loans;

• The quality of our loan review and process;

• The value of underlying collateral for collateral-dependent loans;

• The existence and effect of any concentrations of credit and changes in the level of such concentrations;

• The effect of external factors such as competition and legal and regulatory requirements on the level of estimated credit losses in the existing portfolio.

Such factors are used to adjust the historical probabilities of default and severity of loss so that they reflect management expectation of future conditions based on a reasonable and supportable forecast.

To the extent the lives of the loans in the portfolio extend beyond the period for which a reasonable and supportable forecast can be made, the bank reduces, on a straight-line basis over the remaining life of the loans, the adjustments so that model reverts back to the historical rates of default and severity of loss.

The credit loss expense recorded through earnings is the amount necessary to maintain the allowance for credit losses at the amount of expected credit losses inherent within the loans held for investment portfolio.

The amount of expense and the corresponding level of allowance for credit losses for loans are based on our evaluation of the collectability of the loan portfolio based on historical loss experience, reasonable and supportable forecasts, and other significant qualitative and quantitative factors.

The allowance for credit losses for loans, as reported in our consolidated balance sheet, is adjusted by a credit loss expense, which is recognized in earnings, and reduced by the charge-off of loan amounts, net of recoveries.

For further information on the allowance for credit losses for loans, see Note 1 - Summary of Significant Accounting Policies and Note 3 - Loans in the notes to the financial statements of this Form 10-K.

This discussion of the Company’s critical accounting policies should be read in conjunction with the Company’s consolidated financial statements and the accompanying notes presented elsewhere herein, as well as other relevant portions of Management’s Discussion and Analysis of Financial Condition and Results of Operations.

Although management believes the levels of the allowance for loan losses as of December 31, 2020 and 2019 were adequate to absorb probable losses inherent in the loan portfolio, a decline in local economic conditions, or other factors, could result in increasing losses that cannot be reasonably predicted at this time.

The Company is currently finalizing the CECL model and upon adoption of ASU 2016-13 (CECL) in the first quarter of 2021 anticipates an increase to the allowance for credit losses for loans of approximately $2 to $4 million and an unfunded commitment liability of approximately $2 to $4 million.

See Note 1 to the Company's Consolidated Financial Statements for further discussion.

Financial Position

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Total assets at December 31, 2021 increased $262.20 million, or 6.93%, from the prior year-end.

Asset growth from 2018 to 2019 was $258.42 million and represented a 8.49% increase.

The largest growth in assets in 2020 occurred in Cash and Cash Equivalents, which increased $332.35 million as of December 31, 2020 compared to December 31, 2019 and increased $198.66 million as of December 31, 2019 compared to December 31, 2018.

Net Loans increased $67.74 million and $15.19 million for the years ended December 31, 2020 and 2019, respectively.

Loans held for sale to the secondary market increased $35.55 million and increased $6.42 for the years ended December 31, 2020 and 2019, respectively.

The largest growth in assets in 2021 occurred in Cash and Cash Equivalents, which increased $207.61 million as of December 31, 2021 compared to December 31, 2020.

Net Loans decreased $(48.95) million for the year ended December 31, 2021.

Loans held for sale to the secondary market decreased $(38.23) million for the year ended December 31, 2021.

Loans held for investment represent the largest component of the Bank’s earning assets.

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The local economy that generated consistent demand for loans was a significant factor in the trend of increasing net loans in past years.

The trend of increasing Net Loans did slow in 2020 and may not continue, and as a result, may not be indicative of future performance.

The primary reason for the increase in 2020 was PPP loans provided to customers in response to the COVID-19 pandemic as discussed previously.

Commercial and financial loans represent the largest increase in loan growth.

These loans increased $64.92 million in 2020 and decreased $8.18 million in 2019.

Commercial and financial loans increased due to PPP loans provided to customers, which had an outstanding balance of $86.5 million as of December 31, 2020.

On a net basis, the Company originated $72.14 million and $13.02 million in loans to customers for the years ended December 31, 2020 and 2019, respectively.

Net loan originations increased 453.89% in 2020 compared to 2019.

The increase in net loan originations in 2020 as compared to 2019 is reflective of loan demand primarily for PPP loans provided in response to the COVID-19 pandemic.

The trend of increasing Net Loans did slow in 2021 and 2020 and may not continue, and as a result, may not be indicative of future performance.

The primary reason for the decrease in 2021 was the forgiveness of PPP loans totaling a net of $81.16 million that were provided to customers in response to the COVID-19 pandemic as discussed previously.

Without the decrease due to PPP loan forgiveness, loans held for investment increased $30.61 million.

Commercial and financial loans represent a significant portion of the loan growth.

These loans increased $16.92 million in 2021 excluding the impact of PPP loans.

Construction loans, both 1 to 4 family residential and land development and commercial, had significant growth totaling $24.48 million in 2021.

Agricultural loans increased $12.09 million in 2021 though farmland mortgages decreased $14.40 million due to significant competition in the Bank's trade area.

On a net basis, the Company collected $52.02 million in loan payments from customers and the SBA for the year ended December 31, 2021 compared to loan originations of $72.14 million for the year ended December 31, 2020, primarily due to the collections from the forgiveness of PPP loans.

The Company does not engage in significant participation activity and does not purchase participations from outside its established trade area.

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The Company did not experience a material change in the composition of its loans held for investment in 2021 or 2020.

Residential real estate loans, including first and junior liens, were $1,019.92 million, $1,059.97 million and $1,064.68 million as of December 31, 2020, 2019 and 2018, respectively.

The dollar total of residential real estate loans decreased 3.78% in 2020 and decreased 0.44% in 2019.

Residential real estate loans were 37.63% of the loan portfolio at December 31, 2020, 40.16% at December 31, 2019 and 40.51% at December 31, 2018.

Commercial real estate loans totaled $417.14 million at December 31, 2020, a 3.72% increase over the December 31, 2019 total of $402.18 million.

Residential real estate loans, including first and junior liens, were $1,023.91 million and $1,019.92 million as of December 31, 2021 and 2020, respectively.

The dollar total of residential real estate loans increased 0.39% in 2021 and decreased 3.78% in 2020.

Residential real estate loans were 38.49% of the loan portfolio at December 31, 2021 and 37.63% at December 31, 2020.

Commercial real estate loans totaled $401.38 million at December 31, 2021, a 3.78% decrease over the December 31, 2020 total of $417.14 million.

Commercial real estate loans increased 3.72% in 2020.

Commercial real estate loans totaled $383.31 million at December 31, 2018.

Commercial real estate loans represented 15.09%, 15.39% and 15.24% of the Company’s loan portfolio as of December 31, 2021, 2020 and 2019, respectively.

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Commercial real estate loan concentration was 155.64% of capital as of December 31, 2021.

The following table shows the composition of loans (before deducting the allowance for loan losses) as of December 31 for each of the last five years.

The following table shows the composition of loans (before deducting the allowance for credit losses) as of December 31 for each of the last five years.

The table does not include loans held for sale to the secondary market.

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$ 2,660,532 $ 2,711,082 $ 2,640,037 $ 2,628,895 $ 2,460,565

Less allowance for loan losses 37,070 33,760 37,810 29,400 26,530

Less allowance for credit losses 35,470 37,070 33,760 37,810 29,400

$ 2,625,062 $ 2,674,012 $ 2,606,277 $ 2,591,085 $ 2,431,165

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Or Less (1) Amounts Due in One To

Five Years Amounts Due in Over Five

Five Years Amounts Due in Five To Fifteen

Years Amounts Due in Over Fifteen

(Amounts In Thousands)

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The overall economy in the Company’s trade area, Johnson, Linn and Washington Counties, remains in stable condition with levels of unemployment below national and state levels.

The following table shows unemployment as of December 31, 2020, 2019 and 2018 and median income information as of December 31, 2019, 2018 and 2017, as December 31, 2020 information is not available as of the date of this report:

The following table shows unemployment and estimated median income information as of December 31, 2021, 2020 and 2019.

Unemployment Rate % Median Income

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$ 3,378,484 $ 2,906,818 $ 2,596,581

Uninsured deposits $ 884,402 $ 687,612 $ 550,489

Time certificates issued in amounts of $250,000 or more with maturity in:

2020 Rate 2019 Rate 2018 Rate

(Amounts In Thousands)

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Over 12 months 41,150 2.07

$ 327,861 $ 292,982 $ 228,551

Portion uninsured $ 40,517

Investment securities increased $139.36 million in 2021.

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The securities portfolio is used for liquidity and pledging purposes and to provide a rate of return that is acceptable to management.

The following tables show the carrying value of the investment securities held by the Bank, including stock of the Federal Home Loan Bank, as of December 31, 2020, 2019 and 2018 and the maturities and weighted average yields of the investment securities, computed on a tax-equivalent basis using a federal tax rate of 21%, as of December 31, 2020:

The following tables show the carrying value of the investment securities held by the Bank, including stock of the Federal Home Loan Bank, as of December 31, 2021, 2020 and 2019 and the maturities and weighted average yields of the investment securities, computed using amortized cost on a tax-equivalent basis using a federal tax rate of 21%, as of December 31, 2021:

2021 2020 2019

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Stock of the Federal Home Loan Bank 4,546 8,172 11,065

Mortgage-backed securities and collateralized mortgage obligations 9,446 — —

Obligations of state and political subdivisions 263,516 224,566 211,489

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From 1 to 5 years 188,881 1.22

From 5 to 10 years $ 22,251 0.97

Other securities (FHLB, FHLMC and FNMA), maturities:

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Over 10 years 48,167 1.78

Mortgage Backed Securities

From 1 to 5 years $ 2,385 1.25 %

From 5 to 10 years 7,061 1.51

Total $ 555,900

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Total advances from the FHLB were $0.00 million at December 31, 2021 and $105.00 million in 2020.

It is expected that the FHLB funding source and brokered deposits funding will be considered in the future if loan growth continues to exceed core deposit increases and the interest rates on funds borrowed from the FHLB and interest rates on brokered deposits are favorable compared to other funding alternatives.

The FHLB funding source is considered when loan growth exceeds core deposit increases and the interest rates on funds borrowed from the FHLB are favorable compared to other funding alternatives.

Stockholders’ equity was $438.45 million at December 31, 2021 compared to $416.08 million at December 31, 2020.

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Net Income Overview

Net income and diluted earnings per share for the last five years are as presented below:

Net income and diluted earnings per share for the last three years are as presented below:

Year Net Income % (Decrease) Increase Earnings Per

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2019 45,318 23.26 4.85

2017 28,061 (11.07) 3.01

2017 (1) 32,770 3.85 3.51

2016 31,555 11.04 3.40

(1) Non-GAAP financial measurement.

For further information, refer to the Non-GAAP Financial Measurement section of this report.

Net income for 2020 decreased by $(6.67) million or (14.72)% and diluted earnings per share decreased by (15.05)%.

In 2020, net interest income increased $10.57 million due to growth of $309.59 million in the Bank's average earning assets and decreased $6.43 million due to interest rate changes.

Noninterest income increased by $3.54 million, the provision for loan losses increased by $7.24 million and total noninterest expenses increased by $8.37 million.

Annual fluctuations in the Company's net income are driven primarily by four important factors.

Net income for 2021 increased by $9.44 million or 24.42% and diluted earnings per share increased by 25.24%.

In 2021, net interest income, before credit loss expense, increased by $2.89 million due to the following reasons:

1) decrease in interest income of $6.44 million primarily due to decreases in interest rates and 2) decrease in interest expense of $9.33 million due to interest rate decreases and decreases in the volume of certificates of deposit and FHLB borrowings.

Noninterest income increased by $5.13 million, the credit loss expense decreased by $9.87 million and total noninterest expenses increased by $5.71 million.

Annual fluctuations in the Company's net income are driven primarily by three important factors.

The first important factor is net interest margin.

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The importance of net interest margin is illustrated by the fact that a decrease or an increase in the net interest margin of 10 basis points would result in a $3.87 million decrease or increase in income before taxes.

Net interest margin in 2018 was 3.25%.

Net interest income for the Company increased primarily as a result of growth in the volume of earning assets (offsetting reductions in interest income caused by declines in interest rates) and the continued low interest rates on interest bearing deposits resulting in decreased interest expense.

Net interest income for the Company increased primarily due to the continued low interest rates on interest bearing deposits resulting in decreased interest expense of $9.33 million compared to 2020.

$7.34 million of the decrease in interest expense was due to interest rate decreases and $1.99 million was primarily due to volume decreases in certificates of deposit and FHLB borrowings.

The Company expects net interest compression to impact earnings for the foreseeable future due to competition for loans and deposits combined with the interest rate decreases by the Federal Reserve Board.

The Company believes growth in net interest income will be contingent on the growth of the Company’s earnings assets and maintaining yield on loans.

Net interest income was also impacted by the decrease in interest expense of $7.92 million compared to 2019, primarily driven by interest rate decreases which accounted for $8.54 million of the change.

A significant portion of the increase in the loan portfolio is attributable to PPP loans.

The Company anticipates most PPP loans will be forgiven in accordance with the SBA's requirements.

The second significant factor affecting the Company's net income is the provision for loan losses.

The Company believes growth in net interest income will be contingent on the growth of the Company’s earning assets and maintaining yield on loans.

The second significant factor affecting the Company's net income is the credit loss expense recorded under CECL.

The majority of the Company's interest-earning assets are in loans outstanding, which amounted to $2.666 billion at the end of 2021.

The Company’s allowance for loan losses was $37.07 million at December 31, 2020.

The allowance in 2020 increased in comparison to 2019 due to a increased provision for loan losses of $7.24 million resulting from a combination of the composition of loan growth, historical loss rates, changes in the composition of loans among the credit risk ratings in 2020 and management's evaluation of qualitative factors given the current and expected national and local economic conditions primarily given the impact of the COVID-19 pandemic.

The loan loss provision, which is the amount necessary to adjust the allowance to the level considered appropriate by management, totaled an expense of $4.36 million for 2020, a reduction of expense of $2.88 million for 2019 and an expense of $8.50 million for 2018.

Provision expense is expected to be dependent on the Company’s loan growth, local economic conditions, including, but not limited to, conditions associated with the COVID-19 pandemic and the attendant risks and uncertainties related thereto, asset quality and the adoption of ASU 2016-13, or CECL, through the end of 2021.

See Note 3 to the Company's Consolidated Financial Statements.

A detailed discussion is included in the Provision for Loan Losses section below.

The third significant factor affecting the Company’s net income is net gain on the sale of loans.

The Company’s allowance for credit losses was $35.47 million at December 31, 2021.

Expected credit loss expense is computed on a quarterly basis and is the amount necessary to adjust the allowance for credit losses to the level considered by management to appropriately account for the estimated current expected credit losses within the Bank's loan portfolio.

The expense reflects a number of factors, including the size of the loan portfolio, the overall composition of the loan portfolio and loan concentrations, the borrowers’ ability to repay, past loss experience, loan collateral values, current economic conditions, reasonable and supportable economic forecasts, adjustments for prepayments and curtailments, the level of collateral-dependent loans and loans past due ninety days or more.

In addition, management considers the credit quality of the loans based on management’s review of problem and watch loans, including loans with historically higher credit risk.

Credit loss expense was a reduction of expense of $5.51 million in 2021 under CECL compared to an expense of $4.36 million in 2020 and a reduction of expense of $2.88 million in 2019 under the incurred loss model.

The decrease is attributable to improvements in the economic factor forecasts, primarily Iowa unemployment in the first quarter 2021, and continued improvement in asset quality, relative to the sizable expense taken for the first half of 2020 from management increases to qualitative factors as a result of the significant economic uncertainties surrounding the pandemic.

The Company believes that credit loss expense is expected to be dependent on the Company’s loan growth, local economic conditions, including, but not limited to, conditions associated with the COVID-19 pandemic and the attendant risks and uncertainties related thereto, asset quality and will continue to have potential volatility for the foreseeable future resulting from the uncertainties due to the COVID-19 pandemic.

The third significant factor affecting the Company’s net income is noninterest income, primarily net gain on the sale of loans, services charges and trust fees.

The net gain on the sale of loans was $7.59 million and $6.68 million for the years ended December 31, 2021 and 2020, respectively, an increase of 13.63% for the year ended December 31, 2021 compared to the same period in 2020.

Loans originated for sale in 2020 totaled $475.19 million compared to $299.22 million in the same period in 2019, an increase of 58.81%.

The amount of the net gain on sale of secondary market mortgage loans in each year can vary significantly.

The volume of activity in these types of loans is directly related to the level of interest rates and has been significantly impacted by the Federal Reserve Board's reduction of the federal funds rate to 0.25%, resulting in a significant amount of mortgage loan refinance activity.

The fourth significant factor affecting the Company's net income is noninterest expenses.

Noninterest expenses were $75.63 million and 67.26 million for the years ended December 31, 2020 and 2019, respectively.

Salaries and employee benefits increased $3.91 million in 2020.

The increase is primarily the result of annual salary adjustments, hiring of additional employees to staff growth, increased variable compensation due to the increase in loans originated for sale described above and increased overtime due to the increase in loans originated for sale and processing of PPP loans.

Other noninterest expenses increased $3.07 million in 2020 primarily due to $2.53 million in fees incurred from the prepayment of FHLB borrowings and $2.68 million paid for the early termination of the interest rate swap.

Net income for 2019 was $45.32 million, or diluted earnings per share of $4.85.

For 2019, diluted earnings per share increased by $0.93 per share compared to 2018.

Net interest income increased $5.55 million for the year ended December 31, 2019 compared to 2018.

This increase in net interest income was due to an increase in average earning assets of $229.77 million in 2019.

Noninterest income increased 4.09% in 2019 to $24.79 million.

Noninterest expense increased from $62.12 million in 2018 to $67.26 million in 2019, or 8.28%.

Services charges and fees were $11.77 million and $10.19 million for the years ended December 31, 2021 and 2020, respectively, an increase of 15.59% for the year ended December 31, 2021 compared to the same period in 2020.

This is primarily due to an increase in debit and credit card interchange fees of $1.52 million compared to 2020 with increased usage activity.

Trust fees were $13.52 million and $10.28 million for the years ended December 31, 2021 and 2020, respectively, an increase of 31.59% for the year ended December 31, 2021 compared to the same period in 2020.

This is primarily driven by the increase in assets under management of $0.37 billion from $2.18 billion as of December 31, 2020 to $2.55 billion as of December 31, 2021 and increased investment transaction activity.

Net Interest Income

Net interest income is the excess of the interest and fees received on interest-earning assets over the interest paid on the interest-bearing liabilities.

The factors that have the greatest impact on net interest income are the volume of average earning assets and the net interest margin.

The volume of average earning assets has continued to grow each year, primarily due to net loan growth.

The net interest margin was 3.00% in 2020, 3.18% in 2019, 3.25% in 2018, 3.43% in 2017, and 3.43% in 2016.

The factors that have the greatest impact on net interest income are the volume of average earning assets and interest-bearing liabilities and the net interest margin.

The volume of average earning assets has continued to grow each year, primarily due to excess cash for 2021.

The volume of interest-bearing liabilities also grew in 2021 due to growth of interest-bearing demand and savings deposits.

The net interest margin was 2.75% in 2021, 3.00% in 2020 and 3.18% in 2019.

The measure is shown on a tax-equivalent basis using a rate of 21% for 2021, 2020 and 2019 to make the interest earned on taxable and nontaxable assets more comparable.

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(1) Presented on a tax equivalent basis using a rate of 21% for 2021, 2020 and 2019.

Interest income includes certain loan origination and document preparation fees, which comprise approximately 2.0% of the amounts indicated.

Net interest income on a tax-equivalent basis changed in 2021 as follows:

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As of December 31, 2021, the average rate indexes for the one, three and five year indexes were 0.39%, 0.97% and 1.26%, respectively.

The one year index decreased 93.71% from December 31, 2019, the three year index decreased 89.51% and the five year index decreased 78.70%.

Provision for Loan Losses

Management has determined that the allowance for loan losses was appropriate at December 31, 2020, and that the loan portfolio is diversified and secured, without undue concentration in any specific risk area.

The one year index increased 290.00% from December 31, 2020, the three year index increased 470.59% and the five year index increased 250.00%.

CECL Adoption and Allowance for Credit Losses (ACL)

The framework requires that management's estimate reflects credit losses over the full remaining expected life of each credit and considers expected future changes in macroeconomic conditions.

The adoption resulted in the recognition on January 1, 2021 of cumulative effect adjustments of $2.75 million related to the ACL for loans and $3.58 million related to the ACL on off-balance sheet credit exposures.

Credit loss expense was a reduction of expense of $5.51 million for the year ended December 31, 2021 compared to an expense of $4.36 million in 2020 under the incurred loss model, a decrease of expense of $9.87 million.

The credit loss expense includes expense of $0.27 million related to the ACL on off-balance sheet credit exposures.

Credit loss expense is the amount necessary to adjust the allowance for credit losses to the level considered by management to appropriately account for the estimated current expected credit losses within the Bank's loan portfolio.

The credit loss expense taken to fund the allowance for credit losses is computed on a quarterly basis and is a result of management’s determination of the quality of the loan portfolio.

The expense reflects a number of factors, including the size of the loan portfolio, the overall composition of the loan portfolio and loan concentrations, the impact on the borrowers’ ability to repay, past loss experience, loan collateral values, the level of collateral-dependent loans and loans past due ninety days or more.

In addition, management considers the credit quality of the

loans based on management’s review of special mention and substandard loans, including loans with historical higher credit risks.

Also, under CECL, a significant component in estimating expected credit losses are economic forecasts such as Iowa unemployment, all-transactions house price index for Iowa and Iowa real GDP.

The percentage of the allowance to outstanding loans was 1.33% and 1.37% at December 31, 2021 and 2020, respectively.

The credit loss expense totaled a reduction of expense of $5.51 million in 2021, an expense of $4.36 million in 2020 and a reduction of expense of $2.88 million in 2019.

Loan recoveries net of charge-offs were $1.43 million in 2021, loan charge-offs net of recoveries were $1.05 million in 2020 and loan charge-offs net of recoveries were $1.17 million in 2019.

Management has determined that the allowance for credit losses was appropriate at December 31, 2021, and that the loan portfolio is diversified and secured, without undue concentration in any specific risk area.

This process involves a high degree of management judgment;

however, the allowance for loan losses is based on a comprehensive and well-documented applied analysis of the Company’s loan portfolio.

however, the allowance for credit losses is based on a comprehensive and well-documented applied analysis of the Company’s loan portfolio.

This analysis takes into consideration all available information existing as of the financial statement date, including environmental factors such as economic, industry, geographical and political factors.

The relative level of allowance for loan losses is reviewed and compared to industry peers.

This review encompasses levels of total impaired loans, portfolio mix, portfolio concentrations, current geographic risks and overall levels of net charge-offs.

The allowance for loan losses totaled $37.07 million at December 31, 2020 compared to $33.76 million at December 31, 2019.

The increase in 2020 is the result of an increase of $3.39 million due to changes in average balances, composition of loans outstanding and significant uncertainties with respect to qualitative factors considered by management due to the COVID-19 pandemic's economic impact.

There was a decrease of $0.08 million in the amount allocated to the allowance due to improvements in credit quality.

The percentage of the allowance to outstanding loans was 1.37% and 1.28% at December 31, 2020 and 2019, respectively.

The provision for loan losses totaled an expense of $4.36 million in 2020, a reduction of expense of $2.88 million in 2019 and an expense of $8.50 million for 2018.

Loan charge-offs net of recoveries were $1.05 million in 2019.

Loan charge-offs net of recoveries were $1.17 million in 2019 and loan recoveries net of charge-offs were $0.09 million in 2018.

The provision for loan losses is the amount necessary to adjust the allowance for loan losses to the level considered appropriate by management.

The adequacy of the allowance for loans and any related provision is computed on a quarterly basis and is a result of management’s determination of the quality of the loan portfolio.

The provision reflects a number of significant factors, including the size and growth of the loan portfolio, the overall composition of the loan portfolio and loan concentrations, the impact of the borrowers’ ability to repay, past loss experience, loan collateral values, the level of impaired loans and loans past due ninety days or more and the trends in problem and watch loans.

In addition, management considers the credit quality of the loans based on management’s review of special mention and substandard loans, including loans with historical higher credit risks.

Quantitative factors include the Company’s historical loss experience, which is then adjusted for levels and trends in past due loans, levels and trends in charged-off and recovered loans, trends in volume growth, trends in problem and watch loans, trends in TDR loans, local economic trends and conditions, industry and other conditions, and effects of changing interest rates.

In accordance with Staff Accounting Bulletin No.

102, Selected Loan Loss Allowance Methodology and Documentation Issues, the Company determines and assigns ratings to loans using factors that include the following:

an assessment of the financial condition of the borrower;

a realistic determination of the value and adequacy of underlying collateral;

the condition of the local economy and the condition of the specific industry of the borrower;

an analysis of the levels and trends of loan categories;

and a review of delinquent and classified loans.

The relative level of allowance for credit losses is reviewed and compared to industry peers.

This review encompasses levels of total nonperforming loans, portfolio mix, portfolio concentrations, current geographic risks and overall levels of net charge-offs.

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.

Through the credit risk rating process, loans are reviewed to determine if they are performing in accordance with the original contractual terms.

If the borrower has failed to comply with the original contractual terms, further action may be required by the Company, including a downgrade in the credit risk rating, movement to nonaccrual status, a charge-off or the establishment of a specific impairment reserve.

In the event a collateral shortfall is identified during the credit review process, the Company will work with the borrower for a principal reduction payment and/or a pledge of additional collateral and/or additional guarantees.

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If we determine that a loan amount, or portion thereof, is uncollectible, the loan’s credit risk rating is immediately downgraded and the uncollectible amount is charged-off.

The Bank’s credit and legal departments undertake a thorough and ongoing analysis to determine if additional impairment and/or charge-offs are appropriate and to begin a workout plan for the loan to minimize realized loss.

The Bank’s credit and legal departments undertake a thorough and ongoing analysis to determine if an additional specific reserve and/or charge-offs are appropriate and to begin a workout plan for the loan to minimize realized loss.

In certain circumstances, the Bank may modify the terms of a loan to maximize the collection of amounts due.

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The Bank’s TDR loans occur on a case-by-case basis in connection with ongoing loan collection processes.

For loans that are collateral dependent, losses are evaluated based on the portion of a loan that exceeds the fair market value of the collateral that can be identified as uncollectible.

In general, this is the amount that the carrying value of the loan exceeds the related appraised value less estimated selling costs.

Generally, it is the Company’s policy not to rely on appraisals that are older than one year prior to the date the impairment is being measured.

The most recent appraisal values may be adjusted if, in the Company’s judgment, experience and other market data indicate that the property’s value, use, condition, exit market or other variable affecting its value may have changed since the appraisal was performed, consistent with the December 2006 joint interagency guidance on the allowance for loan losses.

The charge-off or loss adjustment supported by an appraisal is considered the minimum charge-off.

Any adjustments made to the appraised value are to provide additional charge-off or loss allocations based on the applicable facts and circumstances.

In instances where there is an estimated decline in value, a loss allocation may be provided or a charge-off taken pending confirmation of the amount of the loss from an updated appraisal.

Upon receipt of the new appraisals, an additional loss allocation may be provided or charge-off taken based on the appraised value of the collateral.

On average, appraisals are obtained within one month of order.

The Company has not experienced any significant time lapses in recognizing the required provisions for collateral dependent loans, nor has the Company delayed appropriate charge-offs.

When an updated appraisal value has been obtained, the Company has used the appraisal amount in determining the appropriate charge-off or required reserve.

The Company also evaluates any changes in the financial condition of the borrower and guarantors (if applicable), economic conditions, and the Company’s loss experience with the type of property in question.

Any information utilized in addition to the appraisal is intended to identify additional charge-offs or provisions, not to override the appraised value.

The Bank regularly reviews loans in the portfolio and assesses whether the loans are impaired in accordance with ASC 310-10-35 , Accounting by Creditors for Impairment of a Loan .

If the loans are impaired, the Bank determines if a specific allowance is appropriate.

The Bank regularly reviews loans in the portfolio and assesses whether the loans are nonperforming.

If the loans are nonperforming, the Bank determines if a specific reserve is appropriate.

In addition, the Bank's management also reviews and, where determined necessary, provides allowances for particular loans based upon (1) reviews of specific borrowers and (2) management’s assessment of areas that management considers are of higher credit risk, including loans that have been restructured.

Loans that are determined not to be impaired and for which there are no specific allowances are classified into one or more risk categories.

Based upon the risk category assigned, the Bank allocates a percentage, as determined by management, for a required allowance needed.

The determination concerning the appropriate percentage begins with historical loss experience factors, which are then adjusted for levels and trends in past due loans, levels and trends in charged-off and recovered loans, trends in volume growth, trends in problem and watch loans, trends in TDR loans, local economic trends and conditions, industry and other conditions, and effects of changing interest rates.

Specific allowances for losses on impaired loans are established if the loan balances exceed the net present value of the relevant future cash flows or the fair value of the collateral based on updated appraisals and/or updated collateral analysis for the properties if the loan is collateral dependent.

The Company may recognize a charge-off related to an impaired loan when loan balances exceed net present value of cash flows or collateral.

Impaired loans decreased by $0.20 million from December 31, 2019 to December 31, 2020.

Impaired loans include any loan that has been placed on nonaccrual status, accruing loans past due 90 days or more and TDR loans.

Impaired loans also include loans that, based on management’s evaluation of current information and events, the Bank expects to be unable to collect in full according to the contractual terms of the original loan agreement.

The decrease in impaired loans is primarily due to a decrease in nonaccrual loans of $1.92 million and offset by an increase of accruing loans past due 90 days or more of $0.45 million, an increase of $0.43 million in specific reserve loans and an increase in TDR loans of $0.94 million from December 31, 2019 to December 31, 2020.

Special mention loan balances were $78.05 million at December 31, 2020 and $66.81 million at December 31, 2019.

These asset quality changes increased the provision by $0.13 million based upon the relative mix of special mention loans by category.

The $11.24 million increase in special mention loans is related to management’s evaluation of its loan portfolio.

The total increase of $11.24 million is comprised of approximately $2.03 million in agricultural operating loans, $3.10 million in commercial loans, $3.04 million in real estate farmland, $1.72 million in 1 to 4 family residential mortgages and $14.94 million for commercial real estate mortgages.

The increase is offset by a decrease in the special mention classification of $0.63 million in construction 1 to 4 family residential, $0.29 million in construction land development and commercial, $0.16 million in 1 to 4 family junior mortgages, $12.18 million for multi-family real estate mortgages, $0.09 million in individual loans and $0.24 million for obligations of state and political subdivisions.

Substandard loan balances were $51.03 million at December 31, 2020 and $43.34 million at December 31, 2019.

These asset quality changes increased the provision by $0.21 million at December 31, 2020 due to the mix of the reserve required for certain substandard loans.

The increase of $7.69 million in substandard loans at December 31, 2020 includes an increase of $2.01 million in commercial loans, $0.32 million in construction 1 to 4 family residential, $1.11 million in construction land development, $0.02 million in 1 to 4 family junior mortgages, $12.31 million in multi-family real estate mortgages, $1.02 million in commercial real estate mortgages and $0.03 million in loans to individuals.

The increase is offset by a decrease in the substandard classification of $1.90 million in agricultural operating loans, $5.09 million in real estate farmland and $2.14 million of 1 to 4 family residential mortgages.

The extent to which collateral secures collateral-dependent loans and changes in the extent to which collateral secures its collateral-dependent loans are described below.

Collateral-dependent loans decreased $4.10 million from December 31, 2020 to December 31, 2021.

Collateral-dependent loans include any loan that has been placed on nonaccrual status, accruing loans past due 90 days or more and TDR loans.

Collateral-dependent loans also include loans that, based on management’s evaluation of current information and events, the Company expects to be unable to collect in full according to the contractual terms of the original loan agreement.

Collateral-dependent loans were 0.63% of loans held for investment as of December 31, 2021 and 0.76% as of December 31, 2020.

The decrease in collateral-dependent loans is due to a decrease of $0.55 million in loans with a specific reserve, a decrease in nonaccrual loans of $0.36 million, a decrease in 90 days or more accruing loans of $0.86 million and a decrease in TDR loans of $2.33 million from December 31, 2020 to December 30, 2021.

There were no significant changes noted in the extent to which collateral secures collateral-dependent loans.

See Note 1 Adoption of New Financial Accounting Standard for further discussion of the allowance for credit losses for loans held for investment.

A description of the Bank's credit quality indicators are discussed in Note 3 to the Company's Consolidated Financial Statements.

The Company evaluates the following loans to determine impairment:

1) all nonaccrual and TDR loans, 2) all non-consumer and non 1 to 4 family residential loans with prior charge-offs, 3) all non-consumer and non 1 to 4 family loan relationships classified as substandard and 4) loans with indications of or suspected deteriorating credit quality.

The following table summarizes the Company's impaired loans and non-performing assets as of December 31 for each of the years presented:

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Troubled debt restructurings ("TDR loans")(1) (3) 7,921 10,251 9,308 8,539 8,470

Total impaired loans $ 20,729 $ 20,925 $ 27,985 $ 31,487 $ 33,664

Total non-performing loans $ 16,633 $ 20,729 $ 20,925 $ 27,985 $ 31,487

Other real estate — — — — —

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Loans held for investment $2,660,233 $2,710.144 $2,639.104 $2,627,943 $2,459,671

Ratio of allowance for loan losses to loans held for investment 1.37 % 1.28 % 1.44 % 1.20 % 1.17 %

Ratio of allowance for loan losses to impaired loans 178.83 161.34 135.11 93.37 78.81

Ratio of impaired loans to total loans held for investment 0.76 0.79 1.06 1.28 1.48

Ratio of allowance for credit losses to loans held for investment 1.33 % 1.37 % 1.28 % 1.44 % 1.20 %

Ratio of allowance for credit losses to non-performing loans 213.25 178.83 161.34 135.11 93.37

Ratio of non-performing loans to total loans held for investment 0.63 0.76 0.79 1.06 1.28

Ratio of non-performing assets to total assets 0.41 0.55 0.63 0.92 1.06

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Included in the total nonaccrual loans were $2.28, $2.97, $4.34, $4.84 and $3.62 million of TDR loans as of December 31, 2021, 2020, 2019, 2018 and 2017, respectively.

The ratio of allowance for loan losses to impaired loans increased to 178.83% as of December 31, 2020 compared to 161.34% as of December 31, 2019.

The increase in 2020 is the result of an increase in the allowance for loan losses primarily due to management's evaluation of qualitative factors in response to the COVID-19 pandemic and related uncertainties.

The ratio of impaired loans to total gross loans was 0.76% and 0.79% at December 31, 2020 and 2019, respectively.

The decrease in the 2020 ratio is primarily due to the decrease in nonaccrual loans.

The ratio of allowance for credit losses to non-performing loans increased to 213.25% as of December 31, 2021 compared to 178.83% as of December 31, 2020.

The increase in 2021 is primarily due to the reduction in non-performing loans compared to 2020.

The ratio of non-performing loans to total gross loans was 0.63% and 0.76% at December 31, 2021 and 2020, respectively.

The decrease in the 2021 ratio is primarily due to the decrease in TDR loans and accruing loans past due 90 days or more.

Other factors that are considered in determining the credit quality of the Company’s loan portfolio are the vacancy rates for both residential and commercial space, current equity the borrower has in the property and overall financial strength of the customer including cash flow to continue to fund loan payments.

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SUMMARY OF LOAN LOSS EXPERIENCE

The allowance for loan losses balance is also affected by the charge-offs and recoveries for the periods presented.

The allowance for credit losses balance is also affected by the charge-offs and recoveries for the periods presented.

For the years ended December 31, 2021, 2020 and 2019, recoveries were $2.74 million, $1.87 million and $1.80 million, respectively;

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Overall credit quality may deteriorate in 2022.

Such deterioration could cause increases in impaired loans, allowance for loan losses provision expense and net charge-offs.

Management will monitor changing market conditions as a part of its allowance for loan loss methodology.

Such deterioration could cause increases in non-performing loans, allowance for credit losses, credit loss expense and net charge-offs.

Management will monitor changing market conditions as a part of its allowance for credit loss methodology.

The following table summarizes the Bank's loan loss experience for the years ended December 31 for each of the years presented:

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(Amounts In Thousands)

Allowance for loan losses:

Allowance for credit losses:

Beginning balance $ 2,508 $ 4,885 $ 2,319 $ 4,173 $ 12,368 $ 9,415 $ 1,402 $ 37,070

Impact of adopting ASC 326 (328) 298 327 763 522 1,396 (232) 2,746

Charge-offs (106) (136) (3) (1) (482) (265) (323) (1,316)

Recoveries 142 1,103 94 25 964 263 152 2,743

Provision 88 652 (355) 214 1,684 1,798 277 4,358

Credit loss (benefit) expense 45 (1,881) (437) (1,527) (1,874) (311) 212 (5,773)

Ending balance $ 2,261 $ 4,269 $ 2,300 $ 3,433 $ 11,498 $ 10,498 $ 1,211 $ 35,470

Net charge-offs/(net recoveries) to average net loans outstanding (0.04) % (0.38) % (0.05) % (0.01) % (0.05) % — % 0.20 % (0.05) %

Agricultural Commercial and Financial Real Estate:

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Ending balance $ 2,508 $ 4,885 $ 2,319 $ 4,173 $ 12,368 $ 9,415 $ 1,402 $ 37,070

Net charge-offs/(net recoveries) to average net loans outstanding (0.02) % 0.30 % (0.04) % — % — % 0.03 % 0.24 % 0.04 %

Agricultural Commercial and Financial Real Estate:

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Ending balance $ 2,400 $ 4,988 $ 2,599 $ 3,950 $ 10,638 $ 7,859 $ 1,326 $ 33,760

Net charge-offs/(net recoveries) to average net loans outstanding 0.19 % 0.15 % 0.02 % — % 0.02 % 0.02 % 0.33 % 0.04 %

Agricultural Commercial and Financial Real Estate:

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Ending balance $ 2,789 $ 5,826 $ 3,292 $ 3,972 $ 12,516 $ 8,165 $ 1,250 $ 37,810

Net charge-offs/(net recoveries) to average net loans outstanding (0.03) % (0.21) % (0.08) % (0.01) % 0.02 % 0.02 % 0.48 % — %

Agricultural Commercial and Financial Real Estate:

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Ending balance $ 2,294 $ 4,837 $ 2,989 $ 3,669 $ 8,668 $ 5,700 $ 1,243 $ 29,400

The ratio of net charge-offs to average net loans outstanding during the years ended December 31, 2020, 2019, 2018, 2017 and 2016 was 0.04%, 0.04%, 0.00%, (0.05)% and (0.05)%, respectively.

ALLOCATION OF THE ALLOWANCE FOR LOAN LOSSES

The following table presents the allowance for loan losses by type of loans, the percentage of the allocation for each category to the total allowance and the percentage of all loans in each category to total loans as of December 31, 2020, 2019, 2018, 2017 and 2016:

Net charge-offs/(net recoveries) to average net loans outstanding 0.02 % (0.29) % (0.31) % — % (0.01) % (0.04) % 0.36 % (0.05) %

ALLOCATION OF THE ALLOWANCE FOR CREDIT LOSSES

The following table presents the allowance for credit losses by type of loans, the percentage of the allocation for each category to the total allowance and the percentage of all loans in each category to total loans as of December 31, 2021, 2020, 2019, 2018 and 2017:

Amount % of Total Allowance % of Loans

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$ 29,400 100.00 % 100.00 %

The Company believes that the allowance for loan losses is at a level commensurate with the overall risk exposure of the loan portfolio.

However, if economic conditions deteriorate, certain borrowers may experience difficulty and the level of impaired loans, charge-offs and delinquencies could rise and require increases in the provision for loan losses.

The Company believes that the allowance for credit losses is at a level commensurate with the overall risk exposure of the loan portfolio.

However, if economic conditions deteriorate, certain borrowers may experience difficulty and the level of non-performing loans, charge-offs and delinquencies could rise and require increases in the allowance for credit losses.

The Company will continue to monitor the adequacy of the allowance on a quarterly basis and will consider the impact of economic conditions on the borrowers’ ability to repay, loan collateral values, past collection experience, the risk characteristics of the loan portfolio and such other factors that deserve current recognition.

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The increase of $5.13 million in 2021 was the result of a combination of factors discussed below.

In 2019, the total noninterest income increased $0.97 million from 2018.

Loans originated for sale in 2020, which consist primarily of fixed rate residential mortgage loans, totaled $475.19 million compared to $299.22 million in 2019, an increase of 58.81%.

In the year ended December 31, 2020 and 2019, the net gain on sale of loans was $6.68 million and $3.54 million, respectively.

The amount of the net gain on sale of secondary market mortgage loans in each year can vary significantly.

The volume of activity in these types of loans is directly related to the level

of interest rates and has been significantly impacted by the Federal Reserve Board's reduction of the federal funds rate to 0.25% in 2020, resulting in a significant amount of mortgage loan refinance activity.

The servicing of the loans sold into the secondary market is not retained by the Company so these loans do not provide an ongoing stream of income.

Trust fees increased $0.70 million to $10.28 million in 2020.

Trust fees decreased $(0.43) million in 2019.

As of December 31, 2020, the Bank’s Trust Department had $2.176 billion in assets under management compared to $1.919 billion and $1.618 billion at December 31, 2019 and 2018, respectively.

The servicing

of the loans sold into the secondary market is not retained by the Company so these loans do not provide an ongoing stream of income.

The trust assets that are the most volatile are those that are held in common stocks, which amount to approximately 71% of assets under management.

In 2021, the Dow Jones Industrial Average increased 18.73%.

The market value of the Dow Jones Industrial Average increased 22.34% in 2019 and decreased 5.63% in 2018.

Other noninterest income decreased $1.25 million in 2019 primarily due to the sale of the insurance department in August 2018 for a gain of $885,000.

This is primarily due to an increase in debit and credit card interchange fees of $1.52 million compared to 2020 with increased usage activity.

Other noninterest income decreased $0.61 million in 2021 primarily due to the net loss recognized on the tax credit real estate.

Noninterest Expenses

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Salaries and employee benefits increased $1.84 million in 2021.

Furniture and equipment increased $0.56 million in 2020 primarily due to planned increases in software maintenance contract costs.

Advertising and business development decreased $0.51 million in 2020 due to lower spending in response to the pandemic.

FDIC insurance assessment increased $0.66 million in 2020 primarily due to the use of the credit carryover in 2019.

Total noninterest expenses were $62.12 million for the year ended December 31, 2018.

The increase in expenses in 2019 was $5.14 million.

This included an increase of $1.73 million in salaries and benefits, which was the direct result of salary adjustments and hiring additional employees.

Furniture and equipment increased $1.05 million in 2019 primarily due to

increases in software maintenance contract costs.

Other noninterest expenses increased $2.63 million in 2019 primarily due to $2.09 million in fees incurred from the prepayment of FHLB borrowings.

The increase is primarily the result of annual salary adjustments.

Outside services increased $1.52 million in 2021 compared to 2020 primarily due to increased debit and credit card processing charges with increase usage activity.

Other noninterest expenses increased $2.44 million in 2021 primarily due to $7.69 million in fees incurred from the prepayment of FHLB borrowings compared to $2.53 million of FHLB prepayment fees and $2.68 million of interest rate swap termination fees paid in 2020.

Income tax expense was $14.01, $11.28 and $12.55 million for the years ended December 31, 2021, 2020 and 2019, respectively.

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In addition, the Company had $554.18 million in borrowing capacity available through secured and unsecured lines of credit with correspondent banks.

The Company had no amounts outstanding under those federal funds lines as of December 31, 2020.

The Company had $0.25 million outstanding under those federal funds lines as of December 31, 2021.

On an unconsolidated basis, the Company had cash balances of $2.18 million as of December 31, 2021.

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For more information regarding regulatory capital requirements, see the section under Part I, Item 1 to this 10-K captioned “Supervision and Regulation.”

On a consolidated basis, 2020 cash flows from operations provided $8.15 million and net increases in deposits provided $531.20 million.

These cash flows were invested in Net Loans of $72.14 million and $129.36 million in purchases of investment securities.

In addition, $1.86 million was used to purchase property and equipment and leasehold improvements.

On a consolidated basis, 2021 cash flows from operations provided $85.07 million, net increases in deposits provided $341.43 million and net collections on loans to customers provided $52.02 million.

These cash flows were invested $245.38 million in purchases of investment securities.

In addition, $1.46 million was used to purchase property and equipment and leasehold improvements and $4.18 million was used to invest in a tax credit real estate property.

The Bank has a contingency funding plan to address liquidity issues in times of crisis.

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Other liquidity sources include a $10.00 million line of credit with the Federal Reserve Bank of Chicago and various sources of brokered deposits.

The following table shows outstanding balances, weighted average interest rates at year end, maximum month-end balances, average month-end balances and weighted average interest rates of federal funds purchased and securities sold under agreements to repurchase during 2020, 2019 and 2018:

2020 2019 2018

(Amounts In Thousands)

Outstanding balance as of December 31 $ — $ — $ —

Weighted average interest rate at year end — % — % — %

Maximum month-end balance — — —

Average month-end balance — — —

Weighted average interest rate for the year 0.93 % 2.64 % 2.71 %

The following table shows outstanding balances, weighted average interest rates at year end, maximum month-end balances, average month-end balances and weighted average interest rates of Federal Home Loan Bank borrowings during 2021, 2020 and 2019:

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Weighted average interest rate for the year 2.82 % 2.93 % 2.93 %

The Bank has off-balance sheet commitments to fund additional borrowings of customers as well as derivative financial instruments, consisting of interest rate swaps as disclosed in Note 17 to the Company's Consolidated Financial Statements.

The Bank has off-balance sheet commitments to fund additional borrowings of customers.

Contractual commitments to fund loans are met from the proceeds of federal funds sold or investment securities and additional borrowings.

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Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-K

Item 7. Management’s Discussion and Analysis