What changed in this filing

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Item 7. Management’s Discussion and Analysis

2024-03-05 compared with 2023-03-03 · 123 added, 136 removed, 656 unchanged (28% of the section changed)

13 unchanged sentences

• 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.

This includes current concerns related to higher inflation, rising energy prices, the Russia-Ukraine war and supply chain imbalances.

• 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.

This includes current concerns related to higher inflation, rising energy prices, the Russia-Ukraine war, Israeli-Palestinian conflict, and supply chain imbalances.

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

• 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.

10 unchanged sentences

• 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, including any extended impact from the COVID-19 pandemic, and terrorist attacks and military actions.

• The economic impact of natural disasters, diseases and/or pandemics, 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.

5 unchanged sentences

Economic Environment

economic activity slowed in the first half of 2022 reflecting the impacts of significantly higher inflation and rising interest rates as well as repercussions from the Russia-Ukraine war alongside continued economic impacts from the COVID-19 pandemic which have resulted in supply chain disruptions and increased energy prices.

After contracting during the first two quarters of the year, U.S.

Gross Domestic Product ("GDP") grew 2.9% for 2022, while the personal consumption expenditures price index declined to an annual rate of 5.0 percent in December 2022, though still well above the FRB's target inflation rate.

The FRB increased short-term interest rates by a total of 425 basis points during 2022 and has indicated that it will increase short-term interest rates further during the first quarter of 2023 in order to fight inflation.

These conditions have created significant uncertainty about the future economic environment which will continue to evolve and potentially impact our business in future periods.

Concerns over interest rate levels, energy prices, domestic and global policy issues, trade policy in the U.S.

and geopolitical events, as well as the implications of those events on the markets in general, further add to the global uncertainty.

There is also a risk that interest rate increases to fight inflation could lead to a recession.

Interest rate levels and energy prices, in combination with global economic conditions, fiscal and monetary policy and the level of regulatory and government scrutiny of financial institutions will likely continue to impact our results into 2023.

The global economy continues to shrug off elevated inflation and rising interest rates, though economic growth is likely to moderate into 2024.

Global inflation may also continue to moderate slowly, with some supply constraints a key risk.

After a strong first half, higher interest rates are likely to begin dampening U.S.

consumer spending going in 2024 and temper inflation somewhat in the process.

Many economists continue to expect U.S.

economic conditions consistent with a soft-landing as the economy decelerates into early next year.

However, persistent inflation may force additional Fed rate hikes, raising the odds of a mild recession in 2024.

The tight labor market is likely to ease in coming months, and the restart of student loan payments and tougher lending standards should further decelerate economic activity.

Higher borrowing costs continue to present a risk to the economy, with consumer and business budgets accounting for higher interest costs.

In addition, federal debt service costs totaled 17% of federal spending as of January 2024.

Nonetheless, interest rate levels and energy prices, in combination with global economic conditions, fiscal and monetary policy and the level of regulatory and government scrutiny of financial institutions will likely continue to impact our results into 2024.

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.

10 unchanged sentences

For the years ended December 31, 2023 and 2022, the Bank achieved a net interest margin of 2.86% and 3.00%, respectively.

year ended December 31, 2022, net interest income on a tax equivalent basis increased by $10.60 million.

In 2022, net interest income increased $9.30 million due to growth of $38.05 million in the Bank's average earning assets, increased $3.98 million due to decreases in certificates of deposit and FHLB borrowings and was offset by decreases of $2.67 million due to interest rate changes.

For the year ended December 31, 2023, net interest income on a tax equivalent basis decreased by $0.86 million.

In 2023, interest income increased $16.00 million due to growth of $151.91 million in the Bank's average earning assets and increased $24.09

million due to increased interest rates.

This was offset by increased interest expense of $24.22 million due to interest rate increases and $16.73 million due to increased volume of certificates of deposit and borrowings.

Highlights with respect to items on the Company’s balance sheet as of December 31, 2023 included the following:

• Total assets were $3.980 billion, a decrease of $64.08 million since December 31, 2021.

• Cash and cash equivalents were $36.64 million, a decrease of $745.28 million since December 31, 2021.

A substantial portion of the decrease can be attributed to increased investments of approximately $280.92 million since December 31, 2021, primarily in U.S.

Treasury and mortgage-backed securities as well as loan growth of approximately $447.88 million since December 31, 2021.

• Total assets were $4.342 billion, an increase of $361.19 million since December 31, 2022, primarily due to loan growth as described further below.

• Cash and cash equivalents were $59.48 million, an increase of $22.84 million since December 31, 2022.

• Loans, net of allowance for credit losses and unamortized fees and costs, totaling $3.389 billion, an increase of $322.39 million since December 31, 2022.

The increase is primarily attributable to growth of approximately $81.14 million in construction loans, $221.43 million in 1 to 4 family first mortgages, $54.16 million in multi-family mortgages, $47.57 million in commercial and financial loans and $23.83 million in farmland mortgages.

Loans held for sale decreased $4.05 million since December 31, 2021.

• Deferred income tax assets were $24.06 million, an increase of $14.94 million since December 31, 2021.

The increase is primarily attributable to unrealized losses on available for sale investments of $54.20 million as of December 31, 2022.

• Deposits decreased $176.63 million in 2022 to $3.357 billion primarily due to decreases in brokered deposits and insured cash sweep (ICS) deposits of approximately $97 million, decrease of $32.34 million of time deposits and increased customer usage of deposits throughout 2022.

• Fed Funds purchased and FHLB borrowings increased $82.06 million and $40.00 million, respectively, as of December 31, 2022 compared to no borrowings as of December 31, 2021, primarily to fund strong loan growth and increased customer deposit usage.

• Stockholders’ equity decreased $10.19 million to $428.26 million in 2022, with dividends having been paid in 2022 of $9.30 million.

The increase is primarily attributable to growth of approximately $105.49 million in construction loans, $90.31 million in 1 to 4 family first mortgages, $19.57 million in junior mortgages, $34.06 million in multi-family mortgages, $37.62 million in commercial and financial loans and $24.59 million in farmland mortgages.

Loans held for sale increased $.36 million since December 31, 2022.

• Deferred income tax assets were $21.27 million, a decrease of $2.79 million since December 31, 2022.

The decrease is primarily attributable to lower unrealized losses on available for sale investments of $35.42 million as of December 31, 2023.

• Deposits decreased $74.59 million in 2023 to $3.283 billion primarily due to decreases in investment checking and savings accounts of approximately $324.82 million, decreases in brokered deposits and insured cash sweep (ICS) deposits of approximately $15.73 million, decrease of $47.05 million in non-interest bearing deposits, offset by an increase of $313.01 million in time deposits.

• Short-term borrowings increased $136.94 million as of December 31, 2023, consisting of $219.00 million of borrowings from the Bank Term Funding Program, compared to short-term borrowings of $82.06 million as of December 31, 2022, consisting of Federal Funds Purchased.

FHLB borrowings increased $256.65 million as of December 31, 2023, compared to $40.00 million as of December 31, 2022.

Borrowings were primarily used to fund strong loan growth and increased customer deposit usage.

• Stockholders’ equity increased $42.03 million to $470.29 million in 2023, with dividends having been paid in 2023 of $9.69 million.

Reference is made to Note 14 of the Company’s consolidated financial statements for a discussion of fair value measurements which relate to methods used by the Company in recording certain assets and liabilities on its consolidated financial statements.

2 unchanged sentences

The minimum regulatory guideline is 9%.

The Company paid a dividend per share of $1.00 in 2022, $0.94 in 2021 and $0.89 in 2020.

The Company paid a dividend per share of $1.05 in 2023, $1.00 per share in 2022 and $0.94 in 2021.

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

64 unchanged sentences

Stockholders' equity 470,286 428,260 438,450 416,076 375,211

Total assets at December 31, 2022 decreased $64.08 million, or 1.58%, from the prior year-end.

The largest decrease in assets in 2022 occurred in cash and cash equivalents, which decreased $745.28 million as of December 31, 2022 compared to December 31, 2021.

A substantial portion of the decrease can be attributed to increased investments of approximately $280.92 million since December 31, 2021, primarily in U.S.

Treasury and mortgage-backed securities as well as loan growth of approximately $447.84 million since December 31, 2021.

Total assets at December 31, 2023 increased $361.19 million, or 9.07%, from the prior year-end.

The largest growth in assets in 2023 occurred in net loans which increased $322.39 million for the year ended December 31, 2023.

Loans held for sale to the secondary market decreased $4.05 million for the year ended December 31, 2022.

Loans held for sale to the secondary market increased $0.36 million for the year ended December 31, 2023.

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

2 unchanged sentences

Significant loan growth was noted in the following areas:

approximately $81.14 million in construction loans, $221.43 million in 1 to 4 family first mortgages, $54.16 million in multi-family mortgages, $47.57 million in commercial and financial loans and $23.83 million in farmland mortgages.

approximately $105.49 million in construction loans, $90.31 million in 1 to 4 family first mortgages, $34.06 million in multi-family mortgages, $37.62 million in commercial financial loans, $24.59 million in farmland mortgages, and $19.57 million in junior mortgages.

Given the current economic environment and the potential for a recession in 2024, the increase in net loans in 2023 may not continue into 2024, and as a result, may not be indicative of future performance.

On a net basis, the Company originated $447.84 million in loans to customers for the year ended December 31, 2022 compared to loan collections of $52.02 million for the year ended December 31, 2021, primarily due to the collections from the forgiveness of PPP loans.

On a net basis, the Company originated $337.69 million in loans to customers for the year ended December 31, 2023 compared to loans originated of $447.84 million for the year ended December 31, 2022.

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

15 unchanged sentences

Commercial real estate loans totaled $416.67 million at December 31, 2023, a 3.43% increase over the December 31, 2022 total of $402.84 million.

Commercial real estate loans decreased 3.78% in 2021.

Commercial real estate loans increased 0.36% in 2022.

Commercial real estate loans represented 12.12% and 12.96% of the Company’s loan portfolio as of December 31, 2023 and 2022, respectively.

The Company monitors its commercial real estate level so that

it does not have a concentration in that category that exceeds 300% of its capital.

The Company monitors its commercial real estate level so that it does not have a concentration in that category that exceeds 300% of its capital.

Commercial real estate loan concentration was 186.24% of capital as of December 31, 2023.

48 unchanged sentences

Total deposits decreased by $74.59 million in 2023.

Deposits increased by $341.43 million in 2021.

Deposits decreased by $176.63 million in 2022.

As of June 30, 2023 (latest data available from the FDIC), Johnson County total deposits were $13.862 billion and the Company’s deposits were $2.213 billion, which represent a 15.96% market share.

The Company had nine office locations in Johnson County as of June 30, 2022.

The Company had eight office locations in Johnson County as of June 30, 2023.

The total banking locations in Johnson County were 48 as of June 30, 2023.

24 unchanged sentences

In 2022, investment securities increased by $226.67 million.

The investment portfolio consists of $776.10 million of securities that are stated at fair value, with any unrealized gain or loss, net of income taxes, reported as a separate component of stockholders’ equity.

The investment portfolio consists of $779.42 million of securities that are stated at fair value, with any unrealized gain or loss, net of

income taxes, reported as a separate component of stockholders’ equity.

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

28 unchanged sentences

From 5 to 10 years 9,035 5.35

Over 10 years 51,894 2.69

Total $ 795,167

3 unchanged sentences

See Note 2 to the Company’s Consolidated Financial Statements.

During 2022, the major funding source for the growth in loans and other assets was cash and cash equivalents in addition to federal funds purchased and FHLB borrowings.

In 2021, the major source of funding for the growth in loans was deposit growth of $341.43 million.

During 2023, the major funding source for the growth in loans and other assets was from short-term borrowings in addition to FHLB borrowings.

In 2022, the major source of funding for the growth in loans was cash and cash equivalents in addition to federal funds purchased and FHLB borrowings.

Brokered deposits totaled $24.22 million and $31.74 million as of December 31, 2023 and 2022, respectively.

Total advances from the FHLB were $40.00 million at December 31, 2022 and none in 2021.

Total federal funds purchased were $82.06 million and $0.25 million as of December 31, 2022 and 2021, respectively.

The federal funds purchased and FHLB funding sources are 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.

Total advances from the FHLB were $296.65 million at December 31, 2023 and $40 million in 2022.

Total federal funds purchased were none as of December 31, 2023 and $82.06 million as of December 31, 2022.

Total funds purchased from the Bank Term Funding program was $219.00 million as December 31, 2023, and none in 2022.

The federal funds purchased, Bank Term Funding Program, and FHLB funding sources are considered when loan growth exceeds core deposit increases and the interest rates on funds borrowed from the FHLB or other sources are favorable compared to other funding alternatives.

Stockholders’ equity was $470.29 million at December 31, 2023 compared to $428.26 million at December 31, 2022.

16 unchanged sentences

Net income for 2023 decreased by $9.58 million or 20.06% and diluted earnings per share decreased by 19.22%.

In 2022, net interest income, before credit loss expense, increased by $10.54 million due to the following reasons:

1) increase in interest income of $9.00 million primarily due to higher loan growth, increased volume in U.S.

Treasuries, mortgage-backed and municipal securities and higher interest rates offset by no PPP fee income in 2022 compared to $6.27 million in 2021;

and 2) decrease in interest expense of $1.54 million primarily due to decreases in the volume of certificates of deposit and FHLB borrowings.

Noninterest income decreased by $5.68 million primarily due to the decrease in net gain on the sale of loans, the credit loss expense increased by $11.85 million and total noninterest expenses decreased by $5.77 million primarily due to $7.69 million in fees incurred from the prepayment of FHLB borrowings in 2021.

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

The first important factor is net interest margin.

Net interest income of $115.00 million in 2022 was derived from the Company's $3.904 billion of average earning assets and its net interest margin of 3.00%, compared to $3.866 billion of average earning assets and a 2.75% net interest margin in 2021.

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 $3.90 million decrease or increase in income before taxes.

Net interest income for the Company increased primarily due to higher loan growth resulting in an increase of $5.34 million, increased volume in U.S.

Treasuries, mortgage-backed and municipal securities resulting in an increase of $4.66 million and higher interest rates resulting in an increase of $6.04 million offset by no PPP fee income in 2022 compared to $6.27 million in 2021.

In addition, the decrease in interest expense was due to volume decreases in certificates of deposit and FHLB borrowings resulting in a decrease of $4.17 million offset by increased cost of funds resulting in higher interest expense of approximately $3.12 million.

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 increases by the Federal Reserve Board.

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 (benefit).

The majority of the Company's interest-earning assets are in loans outstanding, which amounted to $3.110 billion at the end of 2022.

The Company’s allowance for credit losses was $41.44 million at December 31, 2022.

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 $6.34 million in 2022 compared to credit loss (benefit) of $5.51 million in 2021 and a loan loss expense of $4.36 million in 2020 under the incurred loss model.

The increase in credit loss expense is attributable to increases in loan volume which resulted in an increase of $4.72 million;

changes in prepayment and curtailment rates resulting in an increase of $1.00 million;

decreases in the individually analyzed loans reserve of $0.18 million;

and increases in qualitative factors determined necessary by management which resulted in an increase of $1.52 million offset by slight improvements in the economic factor forecasts, primarily Iowa unemployment, used in the ACL calculation which resulted in a decrease of $1.09 million.

The reduction in expense in 2021 was primarily due to the increases to the allowance taken in 2020 in response to the COVID-19 pandemic that were released in 2021.

In 2023, net interest income, before credit loss expense, decreased by $1.12 million due to the following reasons:

1) increase in interest income of $39.83 million primarily due to higher loan growth and higher interest rates;

and 2) increase in interest expense of $40.95 million primarily due to increased interest rates on deposits, an increase in short term borrowings of $136.94 million, and an increase in Federal Home Loan Bank borrowings of $256.65 million.

Noninterest income increased by $0.83 million primarily due to an increase in trust fees, the credit loss expense increased by $9.28 million and total noninterest expenses increased by $2.82 million primarily due to an increase in salaries and employee benefits and an increase in FDIC assessments.

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

The first factor is credit loss expense.

The majority of the Company's interest earning assets are in loans outstanding, which amounted to more than $3.438 billion at December 31, 2023.

Credit loss expense was $15.62 million in 2023 compared to $6.34 million in 2022.

The increase in expense when compared to 2022 is primarily attributable to the decreased credit quality in specific relationships leading to an increased allowance for credit losses for individually analyzed loans, increases in loan volume during 2023, and an increase in loss rates resulting from increased charge-off activity.

The Company believes that credit loss expense is expected to be dependent on the Company's loan growth, local economic conditions, and asset quality.

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

The net gain on the sale of loans was $1.52 million and $7.59 million for the years ended December 31, 2022 and 2021, respectively, a decrease of 80.01% for the year ended December 31, 2022 compared to the same period in 2021.

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 as well as the current origination and refinancing activity.

The volume was significantly impacted by the Federal Reserve Board's increases to the federal funds rate in 2022, resulting in a significant decline in the amount of mortgage loan origination and refinance activity.

The second factor affecting the Company’s net income is the interaction between changes in net interest margin and changes in average volumes of the Company's earnings assets.

Net interest income of $113.89 million for 2023 was derived from the Company’s $4.056 billion of average earning assets and its tax-equivalent net interest margin of 2.86%.

Average earning assets in 2022 were $3.904 billion and the tax-equivalent net interest margin was 3.00%.

Net interest income for the Company decreased primarily as a result of interest income on increased loan volume and rates offset by increased interest expense from increased interest rates, including on borrowings, certificates of deposit, and interest-bearing deposits.

The Company expects net interest compression to impact earnings for the foreseeable future due to competition for loans and deposits.

The Company believes growth in net interest income will be contingent on the growth of the Company’s earning assets, increasing yield on loans and the ongoing interest rate stance of the Federal Reserve Board.

The third factor affecting the Company’s net income is noninterest income, primarily the increase in trust fees and service charges and fees income.

Trust fees were $13.58 million and $12.28 million for the twelve months ended December 31, 2023 and 2022, respectively, an increase of 10.53%.

This is primarily driven by the increase in assets under management of $0.383 billion from $2.262 billion as of December 31, 2022 to $2.645 billion as of December 31, 2023.

The fourth factor affecting the Company’s net income is noninterest expenses, primarily the increase in salaries and related employee benefits due to annual compensation increases and increased FDIC insurance assessment expense from rate increases.

Net Interest Income

1 unchanged sentence

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 increased investments and loan growth in 2022.

The volume of interest-bearing liabilities decreased in 2022 due to decreased volume in certificates of deposit and FHLB borrowings being prepaid in December 2021.

The volume of average earning assets has continued to grow each year, primarily due to increased loan growth in 2023.

The volume of interest-bearing liabilities increased in 2023 primarily due to increased volume in certificates of deposit and borrowings.

Increased interest rates led to increases in interest income as well as interest expense on interest-bearing deposits, certificates of deposit and borrowings.

The net interest margin was 2.86% in 2023, 3.00% in 2022 and 2.75% in 2021.

12 unchanged sentences

Time deposits 22,539 8,561 10,500

Federal funds purchased 267 — —

Other short-term borrowings, including Bank Term Funding Program and federal funds purchased 11,330 267 —

FHLB borrowings 5,309 — 2,915

12 unchanged sentences

Interest-bearing cash and cash equivalents (337,285) 4.47 (2,761) 701 (2,060)

Federal funds sold 75 0.29 — — —

$ 151,908 $ 15,998 $ 24,089 $ 40,087

3 unchanged sentences

Time deposits 175,967 1.52 (2,657) (11,322) (13,979)

Federal funds purchased 5,685 4.22 (27) (240) (267)

Other short-term borrowings, including Bank Term Funding Program and federal funds purchased 210,608 0.60 (9,870) (1,287) (11,157)

FHLB borrowings 92,330 5.50 (5,215) — (5,215)

Interest-bearing other liabilities — — — — —

$ 162,094 $ (16,731) $ (24,217) $ (40,948)

45 unchanged sentences

(2) Net interest spread is the difference between the yield on average interest-earning assets and the yield on average interest-paying liabilities stated on a tax equivalent basis using a federal rate of 21% for 2023, 2022 and 2021.

The net interest spread increased 25 basis points in 2022 compared to 2021 and the net interest spread decreased 17 basis points compared to 2020.

The net interest spread decreased 47 basis points in 2023 compared to 2022 and the net interest spread increased 25 basis points compared to 2021.

(3) Net interest margin is net interest income, on a tax equivalent basis, divided by average interest-earning assets.

The net interest margin increased 25 basis points in 2022.

The net interest margin decreased 25 basis points in 2021 compared to 2020.

The net interest margin decreased 14 basis points in 2023.

The net interest margin increased 25 basis points in 2022 compared to 2021.

The Federal Open Market Committee met eight times during 2023.

5 unchanged sentences

As of December 31, 2023, the average rate indexes for the one, three and five year indexes were 4.79%, 4.01% and 3.84%, respectively.

The one year index increased 1,112.82% from December 31, 2021, the three year index increased 335.05% and the five year index increased 216.67%.

The one year index increased 1.27% from December 31, 2022, the three year index decreased 4.98% and the five year index decreased 3.76%.

Current Expected Credit Losses and Allowance for Credit Losses (ACL)

1 unchanged sentence

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 $6.34 million for the year ended December 31, 2022 compared to a reduction of expense of $5.51 million in 2021, an increase of expense of $11.85 million.

Credit loss expense was $15.62 million for the year ended December 31, 2023 compared to expense of $6.34 million in 2022, an increase of expense of $9.28 million.

The credit loss expense includes expense of $0.68 million related to the ACL on off-balance sheet credit exposures for the year ended December 31, 2023 compared to $0.58 million expense for 2022.

2 unchanged sentences

The Company believes that credit loss expense is expected to be dependent on the Company’s loan growth, local economic conditions and asset quality.

percentage of the allowance to outstanding loans was 1.33% and 1.33% at December 31, 2022 and 2021, respectively.

The credit loss expense was $6.34 million in 2022, a reduction of expense of $5.51 million in 2021 and an expense of $4.36 million in 2020.

Loan recoveries net of charge-offs were $0.21 million in 2022, loan recoveries net of charge-offs were $1.43 million in 2021 and loan charge-offs net of recoveries were $1.05 million in 2020.

The percentage of the allowance to

outstanding loans was 1.44% and 1.33% at December 31, 2023 and 2022, respectively.

The credit loss expense was $15.62 million in 2023, $6.34 million in 2022 and a reduction to expense of $5.51 million in 2021.

Loan charge-offs net of recoveries were $6.97 million in 2023, loan recoveries net of charge-offs were $0.21 million in 2022 and loan charge-offs net of recoveries were $1.43 million in 2021.

Management has determined that the allowance for credit losses was appropriate at December 31, 2023, and that the loan portfolio is diversified and secured, without undue concentration in any specific risk area.

13 unchanged sentences

In most cases, the modification is either a reduction in interest rate, conversion to interest only payments, deferral of payments or extension of the maturity date.

Generally, the borrower is experiencing financial difficulties or is expected to experience difficulties in the near-term, so concessionary modification is granted to the borrower that otherwise would not be considered.

Troubled debt restructure ("TDR") loans accrue interest as long as the borrower complies with the revised terms and conditions and has demonstrated repayment performance at a level commensurate with the modified terms over several payment cycles.

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

Generally, the borrower is experiencing financial difficulties, so concessionary modification is granted to the borrower that otherwise would not be considered.

Prior to January 1, 2023, these loans were accounted for as troubled debt restructure ("TDR") loans.

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

2 unchanged sentences

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 $3.05 million from December 31, 2021 to December 31, 2022.

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 increased $26.77 million from December 31, 2022 to December 31, 2023.

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

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 1.17% of loans held for investment as of December 31, 2023 and 0.44% as of December 31, 2022.

The decrease in collateral-dependent loans is due to a decrease in nonaccrual loans of $1.68 million, a decrease in TDR loans of $2.02 million and is offset by an increase of $0.29 million in loans with a specific reserve and an increase in 90 days or more accruing loans of $0.35 million from December 31, 2021 to December 30, 2022.

The increase in collateral-dependent loans is due to an increase in loans modified due to financial difficulties of $4.09 million, an increase in nonaccrual loans of $24.07 million, an increase of $1.36 million in loans with a specific reserve and is offset by a decrease in 90 days or more accruing loans of $0.01 million and former individually analyzed loans totaling $2.44 million being classified as pooled loans as of December 31, 2023 for purposes of the ACL calculation due to having similar risk characteristics as pooled loans.

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

6 unchanged sentences

Accruing loans past due 90 days or more (1) 545 553 201 1,056 606

Specific reserve loans 307 20 573 243 8,247

Troubled debt restructurings ("TDR loans")(1) (3) 5,905 7,921 10,251 9,308 8,539

Individually evaluated loans 1,665 307 20 573 243

Loan modifications to borrowers experiencing financial difficulties 4,087 — — — —

2023 Other non-performing loans;

2022 and prior Former troubled debt restructurings ("TDR loans")(2) 3,159 5,905 7,921 10,251 9,308

Total non-performing loans $ 40,344 $ 13,580 $ 16,633 $ 20,729 $ 20,925

6 unchanged sentences

Ratio of non-performing assets to total assets 0.93 0.34 0.41 0.55 0.63

(1) The gross interest income that would have been recorded if the loans had been current in accordance with their original terms and had been outstanding throughout the period or since origination if held for part of the period was $0.37 million in 2022 and $0.46 million in 2021.

The amount of interest income on the loans that was included in income was $0.33 million in 2022 and $0.44 million in 2021.

(1) The accruing loans past due 90 days or more are still believed to be adequately collateralized.

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Included in the total nonaccrual loans were $1.75, $2.28, $2.97, and $4.34 million of TDR loans as of December 31, 2022, 2021, 2020, and 2019, respectively.

The ratio of allowance for credit losses to non-performing loans increased to 305.15% as of December 31, 2022 compared to 213.25% as of December 31, 2021.

The increase in 2022 is primarily due to the reduction in nonaccrual and TDR loans compared to 2021.

The ratio of allowance for credit losses to non-performing loans decreased to 122.47% as of December 31, 2023 compared to 305.15% as of December 31, 2022.

The decrease in 2023 is primarily due to the large increase in nonaccrual loans and loan modifications to borrowers experiencing financial difficulties compared to 2022.

The ratio of non-performing loans to total gross loans was 1.17% and 0.44% at December 31, 2023 and 2022, respectively.

The decrease in the 2022 ratio is primarily due to the decrease in TDR and nonaccrual loans.

The increase in the 2023 ratio is primarily due to the increase in nonaccrual loans and loan modifications to borrowers experiencing financial difficulties.

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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See Note 3 to the Company's Consolidated Financial Statements for additional disclosures on loans.

SUMMARY OF LOAN LOSS EXPERIENCE

SUMMARY OF CREDIT LOSS EXPERIENCE ON LOANS

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

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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:

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

Agricultural Commercial and Financial Real Estate:

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

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

Charge-offs (357) (447) — (40) (729) (51) (589) (2,213)

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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

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Other noninterest income 541 1,333 581 (792) 752 (59.41) 129.43

Gain on sale of investment securities $ — $ — $ 10 — (10) — (100.00)

$ 28,606 $ 27,780 $ 33,464 $ 826 $ (5,684) 2.97 % (16.99) %

The noninterest income of the Company was $28.61 million in 2023 compared to $27.78 million in 2022.

The decrease of $5.68 million in 2022 was the result of a combination of factors discussed below.

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 as well as the current origination and refinancing activity.

The volume was significantly impacted by the Federal Reserve Board's increases to the federal funds rate in 2022, resulting in a

significant decline in the amount of mortgage loan origination and 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 were $12.28 million and $13.52 million for the years ended December 31, 2022 and 2021, respectively, a decrease of 9.15% for the year ended December 31, 2022 compared to the same period in 2021.

This is primarily driven by the decrease in assets under management of $0.291 billion from $2.553 billion as of December 31, 2021 to $2.262 billion as of December 31, 2022 and decreased investment transaction activity.

The increase of $0.83 million in 2023 was the result of a combination of factors discussed below.

Trust fees were $13.58 million and $12.28 million for the years ended December 31, 2023 and 2022, respectively, an increase of 10.53% for the year ended December 31, 2023 compared to the same period in 2022.

This is primarily driven by the increase in assets under management of $0.383 billion from $2.262 billion as of December 31, 2022 to $2.645 billion as of December 31, 2023 and increased investment transaction activity.

The trust assets that are the most volatile are those that are held in common stocks, which amount to approximately 68% of assets under management.

In 2022, the Dow Jones Industrial Average decreased 8.78%.

Services charges and fees were $12.64 million and $11.77 million for the years ended December 31, 2022 and 2021, respectively, an increase of 7.41% for the year ended December 31, 2022 compared to the same period in 2021.

This is primarily due to an increase in debit and credit card interchange fees of $0.39 million compared to 2021 with increased usage activity and an increase in overdraft and non-sufficient funds fees of $0.47 million compared to 2021.

Other noninterest income increased $0.75 million in 2022 primarily due to a lower net loss recognized on the tax credit real estate compared to 2021.

In 2023, the Dow Jones Industrial Average increased 13.70%.

Other noninterest income decreased $0.79 million in 2023 primarily due to the decrease in tax credit real estate investments based on the investments year-end audited financial statements.

Noninterest Expenses

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Total noninterest expenses were $78.40 and $75.58 million for the years ended December 31, 2023 and 2022, respectively.

The decrease is $5.77 million or 7.09% in 2022 and an increase of $5.71 million or 7.55% in 2021.

Salaries and employee benefits increased $1.01 million in 2022.

The increase is primarily the result of annual salary adjustments.

Other noninterest expenses decreased $7.59 million in 2022 primarily due to $7.69 million in fees incurred from the prepayment of FHLB borrowings in 2021.

The increase is $2.82 million or 3.73% in 2023 and a decrease of $5.77 million or 7.09% in 2022.

Salaries and employee benefits increased $1.43 million in 2023 primarily due to annual salary adjustments.

The FDIC insurance assessment expense increased $0.72 million compared to 2022 due to rate increases enacted for 2023.

Other noninterest expense categories experienced marginal period-to-period fluctuations for the year ended December 31, 2023.

Income tax expense was $10.30, $13.11, and $14.01 million for the years ended December 31, 2023, 2022 and 2021, respectively.

The Company's income tax expense included a one-time increase in state income tax expense related to the 2022 enactment of changes in the Iowa bank franchise tax rates.

The Company's income tax expense in 2022 included a one-time increase in state income tax expense related to the 2022 enactment of changes in the Iowa bank franchise tax rates.

This legislation reduces the Iowa bank franchise tax rate applied to apportioned income for 2023 and future years and required the Company to reduce net deferred tax assets and increase income tax expense.

Income taxes as a percentage of income before income taxes were 21.24% in 2023, 21.55% in 2022 and 22.56% in 2021.

The amount of tax credits were $0.48, $0.48 and $0.05 million for 2022, 2021, and 2020, respectively.

The amount of tax credits were $0.48 million for 2023, 2022, and 2021.

Effects of Inflation

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Interest rates do not necessarily move in the same direction or to the same extent as the price of goods and services.

Liquidity and interest rate adjustments are features of the Company’s asset/liability management, which are important to the maintenance of acceptable performance levels.

Liquidity and interest rate adjustments are

features of the Company’s asset/liability management, which are important to the maintenance of acceptable performance levels.

Item 7A of this Form 10-K contains a more thorough discussion of interest rate risk.

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The Company's principal source of funds is deposits.

Other sources include loan principal repayments, proceeds from the maturity and sale of investment securities, federal funds purchased, advances from the FHLB, advances on bank lines of credit, brokered deposit relationships and funds provided by operations.

Other sources include loan principal repayments, proceeds from the maturity and sale of investment securities, federal funds purchased, advances from the FHLB, Bank Term Funding Program borrowings, advances on bank lines of credit, brokered deposit relationships and funds provided by operations.

Liquidity management is conducted on both a daily and a long-term basis.

Investments in liquid assets are adjusted based on expected loan demand, projected loan and investment securities maturities and payments, expected deposit flows and the objectives set by the Company's asset-liability management, liquidity and contingency funding policies.

The Company has historically maintained a stable deposit base and a relatively low level of large deposits, which has mitigated the volatility in the Company’s liquidity position.

Deposit inflows and outflows can vary widely based on prevailing market interest rates, competition, economic conditions, our business customers' liquidity needs and by recent developments in the financial services industry.

Uninsured deposits as of December 31, 2023 and 2022 were approximately $693.83 million and $800.81 million, respectively, which comprised 21.14% and 23.85% of total deposits.

As of December 31, 2023, the Company had additional borrowing capacity available from the FHLB of $782.27 million.

The Company had $40.00 million outstanding in FHLB overnight borrowings as of December 31, 2022.

In addition, the Company had $87.94 million in borrowing capacity available through secured and unsecured lines of credit with correspondent banks.

The Company had $82.06 million outstanding under those federal funds lines as of December 31, 2022.

The Company had $296.65 million outstanding in FHLB borrowings as of December 31, 2023 with maturities all within one year.

In addition, the Company had $175.00 million in borrowing capacity available through secured and unsecured lines of credit with correspondent banks with no borrowings under those federal funds lines as of December 31, 2023.

The Company also has additional borrowing capacity available from the Federal Reserve's Bank Term Funding Program of $77.46 million.

The Company had $219.00 million outstanding in Bank Term Funding Program borrowings as of December 31, 2023.

Finally, the Company had $103.87 million in borrowing capacity available through the Federal Reserve Discount Window with no borrowings as of December 31, 2023.

On an unconsolidated basis, the Company had cash balances of $0.65 million as of December 31, 2023.

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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, 2022 cash flows from operations provided $56.46 million, proceeds from maturities of investments available for sale provided $78.04 million and proceeds from FHLB borrowings and federal funds purchased provided $121.81 million.

These cash flows and cash and cash equivalents of $781.92 million as of December 31, 2021 were invested $358.98 million in purchases of investment securities and $447.84 million of loans made to customers.

On a consolidated basis, 2023 cash flows from operations provided $52.84 million, proceeds from maturities of investments available for sale provided $116.08 million and proceeds from FHLB borrowings, federal funds purchased and Bank Term Funding Program borrowings provided $393.59 million.

These cash flows were invested $100.65 million in purchases of investment securities and $337.69 million of loans made to customers.

In addition, $3.03 million was used to purchase property and equipment.

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The borrowings under these credit lines would be secured by the Bank’s investment securities.

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

Other liquidity sources include a $103.87 million line of credit with the Federal Reserve Bank of Chicago, an additional $77.46 million from the Federal Reserve's Bank Term Funding Program, 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 Home Loan Bank borrowings during 2023, 2022 and 2021:

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Weighted average interest rate for the year 5.55 % 4.62 % 2.82 %

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 2022, 2021 and 2020:

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 bank term funding program borrowings during 2023, 2022 and 2021:

2023 2022 2021

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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