HILLS BANCORPORATION 10-K

Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operation 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 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, 2023 and 2022, 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, 2024. An overview of the year 2024 is presented following the section discussing a special note regarding forward looking statements. Special Note Regarding Forward Looking Statements This report contains, and future oral and written statements of the Company and its management may contain, forward-looking statements within the meaning of such term in the Private Securities Litigation Reform Act of 1995 with respect to the financial condition, results of operations, plans, objectives, future performance and business of the Company. Actual results may differ materially from those included in the forward-looking statements. Forward-looking statements, which may be based upon beliefs, expectations and assumptions of the Company’s management and on information currently available to management, are generally identifiable by the use of words such as “believe,” “expect,” “anticipate,” “plan,” “intend,” “estimate,” “may,” “will,” “would,” “could,” “should” or other similar expressions. Additionally, all statements in this document, including forward-looking statements, speak only as of the date they are made, and the Company undertakes no obligation to update any statement in light of new information or future events. The Company’s ability to predict results or the actual effect of future plans or strategies is inherently uncertain. Factors which could have a material adverse effect on the operations and future prospects of the Company include, but are not limited to, the following: • 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, 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. • 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, including, but not limited to, changes in U.S. tax laws and regulations. • The effects of changes in interest rates (including the effects of changes in the rate of prepayments of the Company’s assets) and the policies of the Board of Governors of the Federal Reserve System. • The ability of the Company to compete with other financial institutions as effectively as the Company currently intends due to increases in competitive pressures in the financial services sector. • The ability of the Company to obtain new customers and to retain existing customers. • The timely development and acceptance of products and services, including products and services offered through alternative electronic delivery channels. • Technological changes implemented by the Company and by other parties, including third-party vendors, which may be more difficult or more expensive than anticipated or which may have unforeseen consequences to the Company and its customers. • The ability of the Company to develop and maintain secure and reliable technology systems, including to detect and prevent the occurrence of fraudulent activity, breaches, or failures of our information security controls or cyber-security related incidents, including as a result of sophisticated attacks using artificial intelligence and similar tools. Page 30 Table of Contents • The ability of the Company to retain key executives and employees and the difficulty that the Company may experience in replacing key executives and employees in an effective manner. • 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, 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. • The costs, effects and outcomes of existing or future litigation. • Changes in accounting policies and practices that may be adopted by state and federal regulatory agencies and the Financial Accounting Standards Board. • The ability of the Company to manage the risks associated with the foregoing as well as anticipated. These risks and uncertainties should be considered in evaluating forward-looking statements, and undue reliance should not be placed on such statements. 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. Economic Environment Through the end of 2024, incoming economic data per the Beige Book for the Company's region continue to show slight growth in the labor market and consumer spending while construction and real estate activity was flat. Also, prices were up modestly and wages rose moderately. Farm incomes in 2024 were below those of 2023. GDP growth for the fourth quarter of 2.3% was slower than expected with underlying demand from consumers increasing slightly and businesses spending decreasing slighlty, with the national unemployment rate continuing to remain low. Inflation, however, has been slower to come down than expected after the rapid decline observed in 2023, and the cumulative effect of elevated prices compared with the pre-pandemic era may be weighing on consumer sentiment. While many economists continue to expect U.S. economic conditions consistent with a soft-landing as the economy decelerated over the remainder of 2024, persistent inflation may yet force additional Fed rate hikes, further raising the odds of a mild recession. Higher borrowing costs continue to present a risk to the economy, with consumer and business budgets accounting for higher interest costs. 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 in 2024 and beyond. 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, senior management is cautiously optimistic that the Company is positioned to continue managing the impact of the varied set of risks and uncertainties currently impacting the economy and remain adequately capitalized. However, the Company may be required to make additional credit loss provisions as warranted by the extremely fluid economic conditions and continued migration in the loan portfolio towards the special mention risk rating category. Overview The Company is a bank holding company engaged, through its wholly-owned subsidiary bank, in the business of commercial banking. The Company’s subsidiary is Hills Bank and Trust Company, Hills, Iowa. 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, Washington, and Williamsburg, Iowa. The Company’s net income for 2024 was $47.60 million compared to $38.18 million in 2023 and $47.75 million in 2022. Diluted earnings per share were $5.26, $4.16, and $5.15 for the years ended December 31, 2024, 2023 and 2022, respectively. Page 31 Table of Contents The Bank’s net interest income is the largest component of the Bank’s revenue, and is a function of the average earning assets and the net interest margin percentage. Net interest margin is the ratio of net interest income to average earning assets. For the years ended December 31, 2024 and 2023, the Bank achieved a net interest margin of 2.78% and 2.86%, respectively. For the year ended December 31, 2024, net interest income on a tax equivalent basis increased by $3.08 million. In 2024, interest income increased $10.72 million due to growth of $225.10 million in the Bank's average earning assets and increased $22.94 million due to higher interest rates. This was offset by increased interest expense of $15.16 million due to higher interest rates and $15.42 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, 2024 included the following: • Total assets were $4.588 billion, an increase of $246.58 million since December 31, 2023, primarily due to increased investment securities as described further below. • Cash and cash equivalents were $123.40 million, an increase of $63.92 million since December 31, 2023. • Loans, net of allowance for credit losses and unamortized fees and costs, totaling $3.388 billion, a decrease of $1.85 million since December 31, 2023. The decrease is primarily attributable to declines of approximately $35.09 million in construction loans, $47.21 million in 1 to 4 family first mortgages, $2.97 million in junior mortgages, $8.27 million in commercial and financial loans and $5.40 million in farmland mortgages. These decreases were offset by increases of $21.75 million in multi-family mortgages and $81.41 million in commercial mortgages. Increases in multi-family and commercial real estate were primarily due to the completion of large construction projects that were put on permanent financing during 2024. Loans held for sale increased $1.95 million since December 31, 2023. • Deferred income tax assets were $21.13 million, a decrease of $0.14 million since December 31, 2023. • Deposits increased $63.35 million in 2024 to $3.346 billion primarily due to increases in time deposits of approximately $49.58 million and increases in savings accounts of $27.35 million offset by a decrease of $19.36 million in noninterest-bearing deposits. • Short-term borrowings increased $327.64 million as of December 31, 2024, consisting of $109.00 million of borrowings from the Bank Term Funding Program and $437.64 million of federal funds purchased, compared to the Bank Term Funding Program borrowings of $219 million as of December 31, 2023. FHLB borrowings decreased $169.60 million as of December 31, 2024. • Stockholders’ equity increased $22.40 million to $492.69 million in 2024, with dividends having been paid in 2024 of $10.05 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. The return on average equity was 10.00% in 2024 compared to 8.63% in 2023. The Company remains well-capitalized as of December 31, 2024 with a CBLR of 12.69%. The minimum regulatory guideline is 9%. The Company paid a dividend per share of $1.10 in 2024, $1.05 per share in 2023 and $1.00 in 2022. A detailed discussion of the financial position and results of operations follows this overview. Page 32 Table of Contents Critical Accounting Policies The Company's consolidated financial statements are prepared in accordance with accounting principles generally accepted in the United States of America. 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 credit losses. 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. 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. 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 determining if loans share similar risk characteristics 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 Page 33 Table of Contents 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. 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 which management has determined to be four quarters, 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 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; and • 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. Management utilizes a qualitative factor framework to provide a qualitative estimate of the expected credit losses inherent in the loan portfolio in relation to potential limitations of the quantitative model. The framework provides for a level of risk approach to measure risk in each loan segment that may not be captured in the quantitative methodology, including improved risk environment, no additional risk, minimal additional risk, moderate risk and major or significant additional risk. The framework also includes a weighting component for management to consider which qualitative factors would have the highest impact on potential loan losses within each loan segment. Management uses the qualitative factor framework within the allowance for credit losses calculation to assess the risk level environment for each qualitative factor and weightings for each loan segment which is supported by various information including publicly available information, internal information specifically developed by management, or other relevant and reliable information. 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. Page 34 Table of Contents Financial Position Year End Amounts 2024 2023 2022 2021 2020 (Amounts In Thousands) Total assets $ 4,588,242 $ 4,341,667 $ 3,980,481 $ 4,044,562 $ 3,782,362 Investment securities 972,160 795,167 782,565 555,900 416,544 Loans held for sale 3,971 2,023 1,663 5,716 43,947 Loans, net 3,387,521 3,389,372 3,066,981 2,625,062 2,674,012 Deposits 3,346,133 3,282,780 3,357,367 3,533,994 3,192,568 Other short-term borrowings 546,636 219,000 82,061 249 — Federal Home Loan Bank borrowings 127,050 296,648 40,000 — 105,000 Redeemable common stock 48,257 44,853 51,011 50,013 47,329 Stockholders' equity 492,687 470,286 428,260 438,450 416,076 Total assets at December 31, 2024 increased $246.58 million, or 5.68%, from the prior year-end. The largest growth in assets in 2024 occurred in investment securities which increased $176.99 million for the year ended December 31, 2024 compared to the prior year. Loans held for sale to the secondary market increased $1.95 million for the year ended December 31, 2024. Loans held for investment represent the largest component of the Bank’s earning assets. Loans held for investment were $3.438 billion and $3.439 billion at December 31, 2024 and 2023, respectively. Loans held for investment was down slightly for 2024 compared to 2023, with significant changes as follows: declines of approximately $35.09 million in construction loans, $47.21 million in 1 to 4 family first mortgages, $2.97 million in junior mortgages, $8.27 million in commercial and financial loans and $5.40 million in farmland mortgages. These decreases were offset by increases of $21.75 million in multi-family mortgages and $81.41 million in commercial mortgages. Increases in multi-family and commercial real estate were primarily due to the completion of large construction projects that were put on permanent financing during 2024. Given the current economic environment and the potential for lower interest rates, the decrease in net loans in 2024 may not continue into 2025, and as a result, may not be indicative of future performance. On a net basis, the Company originated $3.66 million in loans to customers for the year ended December 31, 2024 compared to loans originated of $337.69 million for the year ended December 31, 2023, a significant slowdown in the local economy. The Company has not historically engaged in significant participation activity and does not purchase participations from outside its established trade area. The Company’s policy allows for the purchase or sale of participations related to existing customers or to participate in community development activity. The Company held participations purchased of $16.52, $17.04 and $16.20 million as of December 31, 2024, 2023 and 2022, respectively. The participations purchased were less than one percent of loans held for investment for each of the three years. The Company did experience minimal change in its loans held for investment in 2024 compared to 2023 though the loan composition in 2024 changed compared to 2023 as follows. Residential real estate loans, including first and junior liens, were $1,316.63 million and $1,365.82 million as of December 31, 2024 and 2023, respectively. The dollar total of residential real estate loans decreased 3.60% in 2024 and increased 8.75% in 2023. Residential real estate loans were 38.27% of the loan portfolio at December 31, 2024 and 39.72% at December 31, 2023. Agricultural loans, including production and mortgages, were $394.45 million and $396.95 million as of December 31, 2024 and 2023, respectively, a decrease of 0.63% in 2024 compared to 2023. Agricultural loans represented 11.47% and 11.54% of the Company's loan portfolio as of December 31, 2024 and 2023, respectively. Construction loans were $359.04 million and $394.13 million as of December 31, 2024 and 2023, respectively, an decrease of 8.90% in 2024 compared to 2023. Construction loans represented 10.44% and 11.46% of the Company's loan portfolio as of December 31, 2024 and 2023, respectively. Commercial and financial loans were $298.92 million and $307.19 million as of December 31, 2024 and 2023, respectively, a decrease of 2.69% in 2024 compared to 2023. Commercial and financial loans represented 8.69% and 8.93% of the Company's loan portfolio as of December 31, 2024 and 2023, respectively. Multi-family real estate loans were $492.76 million and $471.01 million as of December 31, 2024 and 2023, respectively, an increase of 4.62% in 2024 compared to 2023. Multi-family real estate loans represented 14.33% and 13.70% of the Company's loan portfolio as of December 31, 2024 and 2023, respectively. Commercial real estate loans totaled $498.08 million at December 31, 2024, a 19.54% increase over the December 31, 2023 total of $416.67 million. Commercial real estate loans represented 14.49% and 12.12% of the Company’s loan portfolio as of December 31, 2024 and 2023, 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. Commercial real estate loan concentration was 180.49% of capital as of December 31, 2024. Page 35 Table of Contents 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. 2024 2023 2022 2021 2020 Agricultural $ 118,678 $ 115,786 $ 112,705 $ 106,933 $ 94,842 Commercial and financial 298,917 307,190 269,568 222,002 286,242 Real estate: Construction, 1 to 4 family residential 79,451 80,255 92,408 80,486 71,117 Construction, land development and commercial 279,589 313,878 196,240 127,021 111,913 Mortgage, farmland 275,768 281,164 256,570 232,744 247,142 Mortgage, 1 to 4 family first liens 1,174,083 1,221,296 1,130,989 909,564 892,089 Mortgage, 1 to 4 family junior liens 141,550 144,524 124,951 114,342 127,833 Mortgage, multi-family 492,762 471,009 436,952 382,792 374,014 Mortgage, commercial 498,078 416,670 402,842 401,377 417,139 Loans to individuals 35,301 40,205 36,675 32,687 31,325 Obligations of state and political subdivisions 43,994 46,446 48,213 50,285 56,488 $ 3,438,171 $ 3,438,423 $ 3,108,113 $ 2,660,233 $ 2,710,144 Net unamortized fees and costs 290 359 308 299 938 $ 3,438,461 $ 3,438,782 $ 3,108,421 $ 2,660,532 $ 2,711,082 Less allowance for credit losses 50,940 49,410 41,440 35,470 37,070 $ 3,387,521 $ 3,389,372 $ 3,066,981 $ 2,625,062 $ 2,674,012 There were no foreign loans outstanding for any of the years presented. The following table shows the principal payments due on loans as of December 31, 2024: Amount Of Loans Amounts Due in One Year Or Less (1) Amounts Due in One To Five Years Amounts Due in Five To Fifteen Years Amounts Due in Over Fifteen Years (Amounts In Thousands) Commercial and Agricultural $ 2,043,243 $ 676,494 $ 1,163,457 $ 165,999 $ 37,293 Real Estate (2) 1,315,633 232,551 799,006 248,148 35,928 Other 79,295 9,001 30,314 17,633 22,347 Totals $ 3,438,171 $ 918,046 $ 1,992,777 $ 431,780 $ 95,568 The types of interest rates applicable to these principal payments are shown below: Fixed rate $ 2,307,910 $ 655,030 $ 1,354,340 $ 203,940 $ 94,600 Variable rate 1,130,261 263,016 638,437 227,840 968 $ 3,438,171 $ 918,046 $ 1,992,777 $ 431,780 $ 95,568 (1) A significant portion of the commercial loans are due in one year or less. A significant percentage of the loans will be re-evaluated prior to their maturity and are likely to be extended. (2) Commercial, multi-family, construction 1 to 4 family residential, construction land development and commercial, and agricultural real estate loans are reflected in the Commercial and Agricultural total. 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 and estimated median income information as of December 31, 2024, 2023 and 2022. Page 36 Table of Contents Unemployment Rate % Median Income 2024 2023 2022 2024 2023 2022 United States 4.1 % 3.7 % 3.5 % $ 80,610 $ 74,580 $ 70,780 State of Iowa 3.2 % 3.2 % 3.1 % 73,122 70,616 68,326 Johnson County 2.2 % 2.0 % 2.3 % 74,797 71,385 73,102 Linn County 3.2 % 3.0 % 3.5 % 72,336 68,705 68,757 Washington County 2.3 % 2.1 % 2.7 % 77,414 68,296 71,756 Iowa County 2.5 % n/a n/a 77,292 n/a n/a Competition for quality loans and deposits may continue to be a challenge. The increased competition for both loans and deposits could result in a lower interest rate margin that could result in lower net interest income if the volume of loans and deposits does not increase to offset any such reduction in the interest margin. Total deposits increased by $63.35 million in 2024. Deposits decreased by $74.59 million in 2023. As of June 30, 2024 (latest data available from the FDIC), Johnson County total deposits were $13.546 billion and the Company’s deposits were $2.196 billion, which represent a 16.21% market share. The Company had eight office locations in Johnson County as of June 30, 2024. The total banking locations in Johnson County were 47 as of June 30, 2024. At June 30, 2023, the Company’s deposits were $2.213 billion or a 15.96% market share. As of June 30, 2024, Linn County total deposits were $8.605 billion and there were 99 total banking locations in the county. The seven Linn County offices of the Company had deposits of $704 million or a 8.18% share of the market. The Company’s Linn County deposits at June 30, 2023 were $747 million and represented a 8.8% market share. As of June 30, 2024, the Company’s three Washington County offices had deposits of $335 million which was 34.25% of the County’s total deposits of $978 million. Washington County had a total of 13 banking locations as of June 30, 2024. In 2023, the Company’s Washington County deposits were $324 million or a 33.9% market share. The following tables show the amounts of the Company's average deposits and average rates paid on such deposits for the years ended December 31, 2024, 2023 and 2022 and the composition of the certificates of deposit issued in denominations in excess of $250,000 as of December 31, 2024, 2023 and 2022: December 31, 2024 Rate 2023 Rate 2022 Rate (Amounts In Thousands) Average noninterest-bearing deposits $ 564,740 — $ 607,510 — $ 647,286 — Average interest-bearing demand deposits 918,535 1.49 % 962,148 1.05 % 1,105,811 0.22 % Average savings deposits 893,062 1.08 990,168 0.78 1,163,316 0.17 Average time deposits 916,590 4.09 742,855 3.03 566,888 1.63 $ 3,292,927 $ 3,302,681 $ 3,483,301 Uninsured deposits $ 719,615 $ 693,827 $ 800,806 Time certificates issued in amounts of $250,000 or more with maturity in: 2024 Rate (Amounts In Thousands) 3 months or less $ 82,841 4.57 % 3 through 6 months 85,126 4.25 6 through 12 months 51,029 4.36 Over 12 months 5,726 3.76 $ 224,722 Portion uninsured $ 102,472 Investment securities increased $176.99 million in 2024. In 2023, investment securities increased by $12.60 million. The investment portfolio consists of $944.14 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. The Company completed a balance sheet repositioning related to its investment securities portfolio in December 2024. This consisted of the sale of lower-yielding AFS Page 37 Table of Contents debt securities with an amortized cost of $135.05 million, resulting in a pre-tax realized loss on the sale of $5.22 million, which was recorded in December of 2024. All of the proceeds from the sale of these securities were used to purchase AFS debt securities at higher yields to improve income going forward, while maintaining the liquidity provided by the investment portfolio. 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, 2024, 2023 and 2022 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, 2024: December 31, 2024 2023 2022 (Amounts In Thousands) Carrying value: U.S. Treasury $ 288,462 $ 422,490 $ 445,392 Other securities (FHLB, FHLMC and FNMA) 14,848 33,049 31,934 Stock of the Federal Home Loan Bank 28,024 15,746 6,461 Mortgage-backed securities and collateralized mortgage obligations 278,090 60,929 50,196 State and political subdivisions 362,736 262,953 248,582 $ 972,160 $ 795,167 $ 782,565 December 31, 2024 Carrying Value Weighted Average Yield (Amounts In Thousands) U.S. Treasury Within 1 year $ 67,134 2.26 % From 1 to 5 years 212,191 3.23 From 5 to 10 years $ 9,137 3.84 $ 288,462 Other securities (FHLB, FHLMC and FNMA), maturities: Within 1 year $ 14,848 0.39 % Stock of the Federal Home Loan Bank $ 28,024 9.07 % State and political subdivisions, maturities: Within 1 year $ 34,756 3.81 % From 1 to 5 years 76,319 3.19 From 5 to 10 years 106,856 2.57 Over 10 years 144,805 4.99 $ 362,736 Mortgage Backed Securities From 1 to 5 years $ 76,537 4.90 % From 5 to 10 years 158,777 4.14 Over 10 years 42,776 5.01 $ 278,090 Total $ 972,160 Page 38 Table of Contents As of December 31, 2024, the Company held no investment securities exceeding 10% of stockholders’ equity, other than securities of the U.S. Government agencies and corporations. The Company does not hold any investments in FNMA preferred stock, any pooled trust preferred stocks or other preferred stock type investments. See Note 2 to the Company’s Consolidated Financial Statements. During 2024, the major funding source for loans and other assets was from short-term borrowings, primarily federal funds purchased, in addition to FHLB borrowings. In 2023, the major funding source of the growth in loans and other assets was from short-term borrowings in addition to FHLB borrowings. Brokered deposits totaled $34.75 million and $24.22 million as of December 31, 2024 and 2023, respectively. Total advances from the FHLB were $127.05 million at December 31, 2024 and $296,648 million in 2023. Total federal funds purchased were $437.64 million as of December 31, 2024 and none as of December 31, 2023. Total funds purchased from the Bank Term Funding program was $109.00 million as of December 31, 2024 and $219.00 million as December 31, 2023. 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 or other sources are favorable compared to other funding alternatives. Stockholders’ equity was $492.69 million at December 31, 2024 compared to $470.29 million at December 31, 2023. The Company’s capital resources are discussed in detail in the Liquidity and Capital Resources section. Over the last five years, the Company has realized cumulative earnings of $220.27 million and paid shareholders dividends of $46.14 million, or 20.95% of earnings, while maintaining capital ratios in excess of regulatory requirements. The following table presents the return on average assets, return on average stockholders' equity, the dividend payout ratio and average stockholders’ equity to average assets ratio for the years ended December 31, 2024, 2023 and 2022: 2024 2023 2022 Return on average assets 1.09 % 0.92 % 1.20 % Return on average stockholders' equity 10.00 8.63 11.32 Dividend payout ratio 21.11 25.38 19.48 Average stockholders' equity to average assets ratio 10.88 10.72 10.58 Net Income Overview Net income and diluted earnings per share for the last three years are as presented below: Year Net Income % (Decrease) Increase Earnings Per Share - Diluted (In Thousands) 2024 $ 47,604 24.70 % $ 5.26 2023 $ 38,176 (20.06) % $ 4.16 2022 47,753 (0.69) % 5.15 Net income for 2024 increased by $9.43 million or 24.70% and diluted earnings per share increased by 26.44%. In 2024, net interest income, before credit loss expense, increased by $1.94 million due to the following reasons: 1) increase in interest income of $32.52 million primarily due to higher loan and investment balances and higher interest rates; and 2) increase in interest expense of $30.58 million primarily due to increased interest rates on deposits and higher borrowings balances throughout 2024 compared to 2023. Noninterest income, excluding loss on sale of investment securities, increased by $3.43 million primarily due to increased trust fees and net gain on sale of loans. The credit loss expense decreased by $13.41 million and total noninterest expenses increased by $1.84 million primarily due to an increase in other noninterest expenses. 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, 2024. Credit loss expense was $2.21 million in 2024 compared to $15.62 million in 2023. The decrease in expense when compared to 2023 is primarily attributable to not having significant specific relationships with decreasing credit quality resulting in chargeoffs in 2024 when compared to 2023. Another factor leading to lower credit loss expense was decreased outstanding commitments which resulted in a lower allowance for credit losses on off-balance sheet credit exposures. The Company believes that credit loss expense is expected to be dependent on the Company's loan growth, local economic conditions, and asset quality. Page 39 Table of Contents 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 $115.82 million for 2024 was derived from the Company’s $4.281 billion of average earning assets and its tax-equivalent net interest margin of 2.78%. Average earning assets in 2023 were $4.056 billion and the tax-equivalent net interest margin was 2.86%. Net interest income for the Company increased primarily as a result of interest income on higher loan and investment balances and rates offset by increased interest expense from increased interest rates, including on borrowings, certificates of deposit, and interest-bearing deposits as well as higher balances of certificates of deposit and borrowings. 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. Trust fees were $15.26 million and $13.58 million for the years ended December 31, 2024 and 2023, respectively, an increase of 12.40%. This is primarily driven by the increase in assets under management of $0.267 billion from $2.645 billion as of December 31, 2023 to $2.912 billion as of December 31, 2024, an increase of 10.09%. See the Noninterest Income section later in Item 7. The fourth factor affecting the Company’s net income is noninterest expenses, primarily the increase in other noninterest expenses. See the Noninterest Expenses section later in Item 7. For the overview discussion of the comparison of the Company’s results of operations for the fiscal year ended December 31, 2023 to the year ended December 31, 2022, please refer to Part II, Item 7, "Management’s Discussion and Analysis of Financial Condition and Results of Operations" in our Annual Report on Form 10-K for the fiscal year ended December 31, 2023, filed with the SEC on March 5, 2024. Page 40 Table of Contents 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 interest-bearing liabilities and the net interest margin. The volume of average earning assets has continued to grow each year, primarily due to higher loan and investment balances in 2024. The volume of interest-bearing liabilities increased in 2024 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 2.78% in 2024, 2.86% in 2023 and 3.00% in 2022. The measure is shown on a tax-equivalent basis using a rate of 21% for 2024, 2023 and 2022 to make the interest earned on taxable and nontaxable assets more comparable. Interest income and expense for 2024, 2023 and 2022 are indicated on the following table: Years Ended December 31, 2024 2023 2022 (Amounts In Thousands) Income: Loans (1) $ 179,600 $ 155,076 $ 115,919 Taxable securities 14,780 10,674 8,662 Nontaxable securities (1) 11,039 6,534 5,558 Interest-bearing cash and cash equivalents 1,355 829 2,889 Total interest income $ 206,774 $ 173,113 $ 133,028 Expense: Interest-bearing demand deposits 13,692 10,134 4,084 Savings deposits 9,614 7,721 3,173 Time deposits 37,598 22,539 8,561 Other short-term borrowings, including Bank Term Funding Program and federal funds purchased 16,556 11,330 267 FHLB borrowings 10,157 5,309 — Total interest expense $ 87,617 $ 57,033 $ 16,085 Net interest income $ 119,157 $ 116,080 $ 116,943 (1) Presented on a tax equivalent basis using a rate of 21% for 2024, 2023 and 2022. Interest income includes certain loan origination and document preparation fees, which comprise approximately 1.4% of the amounts indicated. Page 41 Table of Contents Net interest income on a tax-equivalent basis changed in 2024 as follows: Change In Change In Increase (Decrease) Average Balance Average Rate Volume Changes Rate Changes Net Change (Amounts In Thousands) Interest income: Loans, net $ 148,989 0.51 % $ 8,124 $ 16,784 $ 24,908 Taxable securities (2,011) 0.68 337 3,769 4,106 Nontaxable securities 70,496 0.83 1,863 2,258 4,121 Interest-bearing cash and cash equivalents 7,625 0.53 399 127 526 $ 225,099 $ 10,723 $ 22,938 $ 33,661 Interest expense: Interest-bearing demand deposits $ (43,613) 0.43 % $ 433 $ (3,990) $ (3,557) Savings deposits (97,106) 0.30 23 (1,917) (1,894) Time deposits 173,735 1.06 (5,347) (9,712) (15,059) Other short-term borrowings, including Bank Term Funding Program and federal funds purchased 118,583 (0.31) (5,048) (178) (5,226) FHLB borrowings 96,973 (0.33) (5,485) 637 (4,848) $ 248,572 $ (15,424) $ (15,160) $ (30,584) Change in net interest income $ (4,701) $ 7,778 $ 3,077 Rate/volume variances are allocated on a consistent basis using the absolute values of changes in volume compared to the absolute values of the changes in rates. Loan fees included in interest income are not material. Interest on nontaxable securities and loans is shown at tax equivalent amounts. Net interest income on a tax equivalent basis changed in 2023 as follows: Change In Average Balance Change In Average Rate Increase (Decrease) Volume Changes Rate Changes Net Change (Amounts In Thousands) Interest income: Loans, net $ 449,881 0.64 % $ 17,884 $ 21,404 $ 39,288 Taxable securities 38,655 0.22 860 1,152 2,012 Nontaxable securities 657 0.39 15 832 847 Interest-bearing cash and cash equivalents (337,285) 4.47 (2,761) 701 (2,060) $ 151,908 $ 15,998 $ 24,089 $ 40,087 Interest expense: Interest-bearing demand deposits $ (143,663) 0.68 % $ 530 $ (6,580) $ (6,050) Savings deposits (173,148) 0.51 481 (5,028) (4,547) Time deposits 175,967 1.52 (2,657) (11,322) (13,979) 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) $ 162,094 $ (16,731) $ (24,217) $ (40,948) Change in net interest income $ (733) $ (128) $ (861) Page 42 Table of Contents A summary of the average yields, average rates paid, net interest spread and margin is as follows: Years Ended December 31, 2024 2023 2022 Average yields: Loans (1) 5.30 % 4.78 % 4.14 % Loans (tax equivalent basis) (1) 5.31 4.80 4.16 Taxable securities 2.57 1.89 1.67 Nontaxable securities 2.65 2.01 1.71 Nontaxable securities (tax equivalent basis) 3.47 2.64 2.25 Interest-bearing cash and cash equivalents 5.82 5.32 0.82 Federal funds sold 4.24 1.51 0.31 Average rates paid: Interest-bearing demand deposits 1.49 1.05 0.37 Savings deposits 1.08 0.78 0.27 Time deposits 4.09 3.03 1.51 Short-term borrowings 4.97 5.29 4.69 FHLB borrowings 5.22 5.55 — Yield on average interest-earning assets 4.82 4.27 3.41 Rate on average interest-bearing liabilities 2.68 1.90 0.57 Net interest spread (2) 2.14 2.37 2.84 Net interest margin (3) 2.78 2.86 3.00 (1) Non-accruing loans have been included in the average loan balances for purposes of this computation. (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 2024, 2023 and 2022. The net interest spread decreased 23 basis points in 2024 compared to 2023 and the net interest spread decreased 47 basis points compared to 2022. (3) Net interest margin is net interest income, on a tax equivalent basis, divided by average interest-earning assets. The net interest margin decreased 8 basis points in 2024. The net interest margin decreased 14 basis points in 2023 compared to 2022. The Federal Open Market Committee met eight times during 2024. The federal funds target rate decreased to 4.50% as of December 31, 2024 from 5.50% as of December 31, 2023. Interest rates on loans are generally affected by the target rate since interest rates for the U.S. Treasury market normally correlate to the Federal Reserve Board federal funds rate. In pricing of loans and deposits, the Bank considers the U.S. Treasury indexes as benchmarks in determining interest rates. As of December 31, 2024, the average rate indexes for the one, three and five year indexes were 4.16%, 4.27% and 4.38%, respectively. The one year index decreased 13.15% from December 31, 2023, the three year index increased 6.48% and the five year index increased 14.06%. Current Expected Credit Losses and Allowance for Credit Losses (ACL) Credit loss expense was $2.21 million for the year ended December 31, 2024 compared to expense of $15.62 million in 2023, a decrease of expense of $13.41 million. The credit loss expense includes a reduction of expense of $2.21 million related to the ACL on off-balance sheet credit exposures for the year ended December 31, 2024 compared to $0.68 million expense for 2023. 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. Also, under CECL, a significant component in estimating expected credit losses are economic forecasts such as Iowa unemployment and National real gross domestic product (GDP). 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 percentage of the allowance to outstanding loans was 1.48% and 1.44% at December 31, 2024 and 2023, respectively. The credit loss expense was $2.21 million in 2024, $15.62 million in 2023 and $6.34 million in 2022. Loan charge-offs net of recoveries were $2.89 million in 2024, loan charge-offs net of recoveries were $6.97 million in 2023 and loan recoveries net of charge-offs were $0.21 million in 2022. Management has determined that the allowance for credit losses was appropriate at December 31, 2024, and that the loan portfolio is diversified and secured, without undue concentration in any specific risk area. This process involves a high degree Page 43 Table of Contents of management judgment; 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 credit losses is reviewed and compared to industry peers. This review encompasses levels of total nonperforming loans 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 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. In the event that these options are not available, the loan may be subject to a downgrade of the credit risk rating. 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 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. 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, so concessionary modification is granted to the borrower that otherwise would not be considered. 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 modified. The extent to which collateral secures collateral-dependent loans is provided in the previous individually analyzed loans table and changes in the extent to which collateral secures its collateral-dependent loans are described below. Collateral-dependent loans decreased $6.85 million from December 31, 2023 to December 31, 2024. Collateral-dependent loans include any loan that has been placed on nonaccrual status, accruing loans past due 90 days or more and loans made 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 0.97% of loans held for investment as of December 31, 2024 and 1.17% as of December 31, 2023. The decrease in collateral-dependent loans is primarily due to a decrease in nonaccrual loans of $6.96 million. There were no significant changes noted in the extent to which collateral secures collateral-dependent loans. A description of the Bank's credit quality indicators are discussed in Note 3 to the Company's Consolidated Financial Statements. Page 44 Table of Contents The following table summarizes the Company's collateral dependent loans and non-performing assets as of December 31 for each of the years presented: 2024 2023 2022 2021 2020 (Amounts In Thousands) Nonaccrual loans $ 23,926 $ 30,888 $ 6,815 $ 8,491 $ 8,849 Accruing loans past due 90 days or more (1) 866 545 553 201 1,056 Loans with specific reserves, credit cards for 2024 192 1,665 307 20 573 Loan modifications to borrowers experiencing financial difficulties 6,741 4,087 — — — 2024-2023 Other non-performing loans; 2022 and prior former troubled debt restructurings ("TDR loans")(2) 1,770 3,159 5,905 7,921 10,251 Total non-performing loans $ 33,495 $ 40,344 $ 13,580 $ 16,633 $ 20,729 Other real estate 1,035 — — — — Non-performing assets (includes collateral dependent loans and other real estate) $ 34,530 $ 40,344 $ 13,580 $ 16,633 $ 20,729 Loans held for investment $3,438,171 $3,438,423 $3,108,113 $2,660,233 $2,710,144 Ratio of allowance for credit losses to loans held for investment 1.48 % 1.44 % 1.33 % 1.33 % 1.37 % Ratio of allowance for credit losses to non-performing loans 152.08 122.47 305.15 213.25 178.83 Ratio of non-performing loans to total loans held for investment 0.97 1.17 0.44 0.63 0.76 Ratio of non-performing assets to total assets 0.75 0.93 0.34 0.41 0.55 (1) The accruing loans past due 90 days or more are still believed to be adequately collateralized. Loans are placed on nonaccrual status when management believes the collection of future principal and interest is not reasonably assured. (2) Total TDR loans were $7.66, $10.20, and $13.22 million as of December 31, 2022, 2021, and 2020, respectively. Included in the total nonaccrual loans were $1.75, $2.28, and $2.97 million of TDR loans as of December 31, 2022, 2021, and 2020, respectively. The ratio of allowance for credit losses to non-performing loans increased to 152.08% as of December 31, 2024 compared to 122.47% as of December 31, 2023. The increase in 2024 is primarily due to the slight increase in the allowance for credit losses and the decrease in nonaccrual loans compared to 2023. The ratio of non-performing loans to total gross loans was 0.97% and 1.17% at December 31, 2024 and 2023, respectively. The decrease in the 2024 ratio is primarily due to the decrease in nonaccrual loans. 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. The Company also considers the state of the total economy including unemployment levels. In most instances, the borrowers have used in their rental projections of income at least a 10% vacancy rate. As of December 31, 2024, the unemployment levels in Johnson County and Linn County were 2.2% and 3.2%, respectively, compared to 2.0% and 3.0% in December of 2023. These levels compare favorably to the State of Iowa at 3.2% and the national unemployment level at 4.1% in December 2024 compared to 3.2% and 3.7%, respectively in December 2023. The residential rental vacancy rates in 2023 and 2024 in Johnson and Linn County were estimated between 6.0% and 8.0%. The State of Iowa vacancy rate is 8.4% and the national rate is 6.9% with the Midwest rate at 7.2%. These vacancy rates one year ago were 7.9%, 6.6% and 6.8%, respectively, so are slightly elevated compared to the prior year. The Company continues to consider those vacancy rates among other factors in its current evaluation of the real estate portion of its loan portfolio. Vacancy rates may continue to rise in 2025 and affect the overall quality of the loan portfolio. See Note 3 to the Company's Consolidated Financial Statements for additional disclosures on loans. Page 45 Table of Contents 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. For the years ended December 31, 2024, 2023 and 2022, recoveries were $3.99 million, $1.67 million, and $2.42 million, respectively; charge-offs were $6.88 million, $8.64 million, and $2.21 million in 2024, 2023 and 2022, respectively. Overall credit quality may deteriorate in 2025. 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 credit loss experience on loans for the years ended December 31 for each of the years presented: Agricultural Commercial and Financial Real Estate: Construction and land development Real Estate: Mortgage, farmland Real Estate: Mortgage, 1 to 4 family Real Estate: Mortgage, multi-family and commercial Other Total (Amounts In Thousands) 2024 Allowance for credit losses: Beginning balance $ 2,516 $ 8,750 $ 6,482 $ 3,429 $ 18,552 $ 8,156 $ 1,525 $ 49,410 Charge-offs (669) (2,568) (739) (39) (1,151) (224) (1,490) (6,880) Recoveries 100 1,197 886 37 964 430 378 3,992 Credit loss (benefit) expense (1,273) 2,838 (4,236) (175) 4,564 1,991 709 4,418 Ending balance $ 674 $ 10,217 $ 2,393 $ 3,252 $ 22,929 $ 10,353 $ 1,122 $ 50,940 Net charge-offs/(net recoveries) to average net loans outstanding 0.49 % 0.45 % (0.04) % — % 0.01 % (0.02) % 1.34 % 0.08 % Agricultural Commercial and Financial Real Estate: Construction and land development Real Estate: Mortgage, farmland Real Estate: Mortgage, 1 to 4 family Real Estate: Mortgage, multi-family and commercial Other Total (Amounts In Thousands) 2023 Allowance for credit losses: Beginning balance $ 2,542 $ 6,259 $ 4,189 $ 2,989 $ 14,208 $ 9,416 $ 1,837 $ 41,440 Charge-offs (781) (3,214) (2,066) (21) (467) (869) (1,219) (8,637) Recoveries 72 556 13 56 446 256 267 1,666 Credit loss (benefit) expense 683 5,149 4,346 405 4,365 (647) 640 14,941 Ending balance $ 2,516 $ 8,750 $ 6,482 $ 3,429 $ 18,552 $ 8,156 $ 1,525 $ 49,410 Net charge-offs/(net recoveries) to average net loans outstanding 0.62 % 0.92 % 0.60 % (0.01) % — % 0.07 % 1.11 % 0.21 % Page 46 Table of Contents Agricultural Commercial and Financial Real Estate: Construction and land development Real Estate: Mortgage, farmland Real Estate: Mortgage, 1 to 4 family Real Estate: Mortgage, multi-family and commercial Other Total (Amounts In Thousands) 2022 Allowance for credit losses: Beginning balance $ 2,261 $ 4,269 $ 2,300 $ 3,433 $ 11,498 $ 10,498 $ 1,211 $ 35,470 Charge-offs (357) (447) — (40) (729) (51) (589) (2,213) Recoveries 83 584 48 296 898 361 153 2,423 Credit loss (benefit) expense 555 1,853 1,841 (700) 2,541 (1,392) 1,062 5,760 Ending balance $ 2,542 $ 6,259 $ 4,189 $ 2,989 $ 14,208 $ 9,416 $ 1,837 $ 41,440 Net charge-offs/(net recoveries) to average net loans outstanding 0.25 % (0.06) % (0.02) % (0.10) % (0.01) % (0.04) % 0.52 % (0.01) % Agricultural Commercial and Financial Real Estate: Construction and land development Real Estate: Mortgage, farmland Real Estate: Mortgage, 1 to 4 family Real Estate: Mortgage, multi-family and commercial Other Total (Amounts In Thousands) 2021 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 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: Construction and land development Real Estate: Mortgage, farmland Real Estate: Mortgage, 1 to 4 family Real Estate: Mortgage, multi-family and commercial Other Total (Amounts In Thousands) 2020 Allowance for loan losses: Beginning balance $ 2,400 $ 4,988 $ 2,599 $ 3,950 $ 10,638 $ 7,859 $ 1,326 $ 33,760 Charge-offs (43) (1,425) (43) (1) (738) (291) (381) (2,922) Recoveries 63 670 118 10 784 49 180 1,874 Provision 88 652 (355) 214 1,684 1,798 277 4,358 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 % Page 47 Table of Contents 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, 2024, 2023, 2022, 2021 and 2020: 2024 2023 Amount % of Total Allowance % of Loans to Total Loans Amount % of Total Allowance % of Loans to Total Loans (In Thousands) (In Thousands) Agricultural $ 674 1.32 % 3.45 % $ 2,516 5.09 % 3.37 % Commercial and financial 10,217 20.06 8.69 8,750 17.71 8.93 Real estate: Construction, 1 to 4 family residential 280 0.55 2.31 1,113 2.25 2.33 Construction, land development and commercial 2,113 4.15 8.13 5,369 10.87 9.13 Mortgage, farmland 3,252 6.38 8.02 3,429 6.94 8.18 Mortgage, 1 to 4 family first liens 18,210 35.75 34.15 14,664 29.68 35.52 Mortgage, 1 to 4 family junior liens 4,719 9.26 4.12 3,888 7.87 4.20 Mortgage, multi-family 2,828 5.55 14.33 4,255 8.61 13.70 Mortgage, commercial 7,525 14.77 14.49 3,901 7.90 12.12 Loans to individuals 1,109 2.18 1.03 1,247 2.52 1.17 Obligations of state and political subdivisions 13 0.03 1.28 278 0.56 1.35 $ 50,940 100.00 % 100.00 % $ 49,410 100.00 % 100.00 % 2022 2021 Agricultural $ 2,542 6.13 % 3.63 % $ 2,261 6.37 % 4.02 % Commercial and financial 6,259 15.10 8.67 4,269 12.04 8.35 Real estate: Construction, 1 to 4 family residential 1,111 2.68 2.97 818 2.31 3.03 Construction, land development and commercial 3,078 7.43 6.31 1,482 4.18 4.77 Mortgage, farmland 2,989 7.21 8.25 3,433 9.68 8.75 Mortgage, 1 to 4 family first liens 11,147 26.91 36.40 8,340 23.52 34.19 Mortgage, 1 to 4 family junior liens 3,061 7.39 4.02 3,158 8.90 4.30 Mortgage, multi-family 4,435 10.70 14.06 3,715 10.47 14.39 Mortgage, commercial 4,981 12.02 12.96 6,783 19.12 15.09 Loans to individuals 1,397 3.37 1.18 771 2.17 1.23 Obligations of state and political subdivisions 440 1.06 1.55 440 1.24 1.88 $ 41,440 100.00 % 100.00 % $ 35,470 100.00 % 100.00 % Page 48 Table of Contents 2020 Amount % of Total Allowance % of Loans to Total Loans (In Thousands) Agricultural $ 2,508 6.77 % 3.50 % Commercial and financial 4,885 13.18 10.56 Real estate: Construction, 1 to 4 family residential 907 2.45 2.62 Construction, land development and commercial 1,412 3.81 4.13 Mortgage, farmland 4,173 11.26 9.12 Mortgage, 1 to 4 family first liens 10,871 29.32 32.92 Mortgage, 1 to 4 family junior liens 1,497 4.04 4.72 Mortgage, multi-family 4,462 12.04 13.80 Mortgage, commercial 4,953 13.36 15.39 Loans to individuals 752 2.03 1.16 Obligations of state and political subdivisions 650 1.74 2.08 $ 37,070 100.00 % 100.00 % 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. Noninterest Income The following table sets forth the various categories of noninterest income for the years ended December 31, 2024, 2023 and 2022. Year Ended December 31, $ Change % Change 2024 2023 2022 2024/2023 2023/2022 2024/2023 2023/2022 (Amounts in thousands) Net gain on sale of loans $ 2,342 $ 1,541 $ 1,517 $ 801 $ 24 51.98 % 1.58 % Trust fees 15,261 13,578 12,284 1,683 1,294 12.40 10.53 Service charges and fees 12,923 12,946 12,646 (23) 300 (0.18) 2.37 Other noninterest income 1,512 541 1,333 971 (792) 179.48 (59.41) Loss on sale of investment securities (5,217) $ — $ — (5,217) — — — $ 26,821 $ 28,606 $ 27,780 $ (1,785) $ 826 (6.24) % 2.97 % The noninterest income of the Company was $26.82 million in 2024 compared to $28.61 million in 2023. The decrease of $1.79 million in 2024 was the result of a combination of factors discussed below. The net gain on the sale of loans was $2.34 million and $1.54 million for the years ended December 31, 2024 and 2023, respectively, an increase of 51.98% for the year ended December 31, 2024 compared to the same period in 2023. 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 Page 49 Table of Contents 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 $15.26 million and $13.58 million for the years ended December 31, 2024 and 2023, respectively, an increase of 12.40% for the year ended December 31, 2024 compared to the same period in 2023. This is primarily driven by the increase in assets under management of $0.267 billion from $2.645 billion as of December 31, 2023 to $2.912 billion as of December 31, 2024 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 2024, the Dow Jones Industrial Average increased 12.88%. Other noninterest income increased $0.97 million in 2024 primarily due to the recognition of approximately $1.1 million of incentive and marketing bonuses from the VISA payment network growth agreement. The Company completed a balance sheet repositioning related to its investment securities portfolio in December 2024. This consisted of the sale of lower-yielding AFS debt securities with an amortized cost of $135.05 million, resulting in a pre-tax realized loss on the sale of $5.22 million, which was recorded in December of 2024. All of the proceeds from the sale of these securities were used to purchase AFS debt securities at higher yields to improve income going forward, while maintaining the liquidity provided by the investment portfolio. Other noninterest income categories experienced marginal period-to-period fluctuations for the year ended December 31, 2024. Noninterest Expenses The following table sets forth the various categories of noninterest expenses for the year ended December 31, 2024, 2023 and 2022. Year Ended December 31, $ Change % Change 2024 2023 2022 2024/2023 2023/2022 2024/2023 2023/2022 (Amounts in thousands) Salaries and employee benefits $ 44,548 $ 44,897 $ 43,468 $ (349) $ 1,429 (0.78) % 3.29 % Occupancy 4,266 4,408 4,549 (142) (141) (3.22) (3.10) Furniture and equipment 6,757 6,835 6,937 (78) (102) (1.14) (1.47) Office supplies and postage 2,043 1,879 1,837 164 42 8.73 2.29 Advertising and business development 2,970 2,851 2,576 119 275 4.17 10.68 Outside services 14,021 13,791 12,766 230 1,025 1.67 8.03 FDIC insurance assessment 1,922 1,807 1,079 115 728 6.36 67.47 Other noninterest expense 3,706 1,929 2,363 1,777 (434) 92.12 (18.37) $ 80,233 $ 78,397 $ 75,575 $ 1,836 $ 2,822 2.34 % 3.73 % Total noninterest expenses were $80.23 million and $78.40 million for the years ended December 31, 2024 and 2023, respectively. The increase is $1.84 million or 2.34% in 2024 and an increase of $2.82 million or 3.73% in 2023. Other noninterest expenses increased $1.78 million or 92.12% in 2024. The primary reasons for the increase are increased deferred compensation expense of $0.62 million from the increased stock price valuation, increased operating losses from fraudulent ATM and debit card activities of $0.41 million, and the loss on disposal of property of $0.62 million. Other noninterest expense categories experienced marginal period-to-period fluctuations for the year ended December 31, 2024. Page 50 Table of Contents Income Taxes Income tax expense was $12.60 million, $10.30 million, and $13.11 million for the years ended December 31, 2024, 2023 and 2022, respectively. 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 20.93% in 2024, 21.24% in 2023 and 21.55% in 2022. The amount of tax credits were $0.48 million for 2024, 2023, and 2022. Effects of Inflation The consolidated financial statements and the accompanying notes have been prepared in accordance with accounting principles generally accepted in the United States of America. These principles require the measurement of financial position and operating results in terms of historical dollar amounts without considering the changes in the relative purchasing power of money over time due to inflation. The impact of inflation is reflected in the increased cost of the Company’s operations. Nearly all of the assets and liabilities of the Company are monetary in nature. As a result, interest rates have a more significant impact in the Company’s performance than do the effects of general levels of inflation. 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. Item 7A of this Form 10-K contains a more thorough discussion of interest rate risk. The Company attempts to maintain a balance between monetary assets and monetary liabilities to offset the potential effects of changing interest rates. Liquidity and Capital Resources The objective of liquidity management is to ensure the availability of sufficient cash flows to fund operations, to meet depositor withdrawals, to provide for our customers' credit needs and to meet maturing obligations and existing commitments. 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, 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, 2024 and 2023 were approximately $719.62 million and $693.83 million, respectively, which comprised 21.51% and 21.14% of total deposits. As of December 31, 2024, the Company had additional borrowing capacity available from the FHLB of $432.02 million. The Company had $127.05 million outstanding in FHLB borrowings as of December 31, 2024 with maturities through 2027. The Company also had $437.64 million outstanding in FHLB federal funds purchased as of December 31, 2024. 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, 2024. The Company had $109.00 million outstanding in Bank Term Funding Program borrowings as of December 31, 2024. Finally, the Company had $109.09 million in borrowing capacity available through the Federal Reserve Discount Window with no borrowings as of December 31, 2024. On an unconsolidated basis, the Company had cash balances of $1.90 million as of December 31, 2024. In 2024, the Company received dividends of $23.55 million from its subsidiary Bank and used those funds to pay dividends to its stockholders of $10.05 million and to fund purchases of treasury stock under the 2005 Stock Repurchase Program. The total purchase of treasury stock under the 2005 Stock Repurchase Program totaled $12.90 million and $7.71 million for the years ended December 31, 2024 and 2023, respectively. As of December 31, 2024 and 2023, stockholders' equity, before deducting for the maximum cash obligation related to the ESOP, was $540.94 million and $515.14 million, respectively. This measure of stockholders’ equity as a percent of total assets was 11.79% at December 31, 2024 and 11.87% at December 31, 2023. As of December 31, 2024, total equity, after deducting the maximum cash value related to the ESOP, was 10.74% of assets compared to 10.83% of assets at the prior year end. Page 51 Table of Contents The Company and the Bank are subject to the Federal Deposit Insurance Corporation Improvement Act of 1991, and the Bank is subject to Prompt Corrective Action Rules as determined and enforced by the Federal Reserve. These regulations establish minimum capital requirements that member banks must maintain. The Bank is classified as "well-capitalized" by FDIC capital guidelines. 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, 2024 cash flows from operations provided $55.54 million, proceeds from maturities of investments available for sale provided $243.71 million and proceeds from FHLB borrowings, federal funds purchased and Bank Term Funding Program borrowings provided $413.26 million. These cash flows were invested $542.83 million in purchases of investment securities and $3.66 million of loans made to customers. In addition, $4.50 million was used to purchase property and equipment. The Bank has a contingency funding plan to address liquidity issues in times of crisis. The primary source of funding will be the Bank’s customer deposit base. The Bank has established alternative sources of funding available to increase liquidity. The availability of the funding sources is tested on an annual basis. The Bank performs quarterly stress testing to determine if the Bank has an appropriate amount of funding sources to address potential liquidity needs. At December 31, 2024, the Bank had total outstanding loan commitments and unused portions of lines of credit totaling $600.64 million (see Note 16 to the Company's Consolidated Financial Statements). Management believes that its liquidity levels are sufficient at this time, but the Bank may increase its liquidity by limiting the growth of its assets, by selling more loans in the secondary market or selling portions of loans to other banks through participation agreements. Another liquidity source includes obtaining additional funds from the Federal Home Loan Bank (FHLB). As of December 31, 2024, the Bank can obtain an additional $432.02 million from the FHLB based on the current real estate mortgage loans held. In addition, the Bank has arranged $175.00 million of credit lines at three banks. The borrowings under these credit lines would be secured by the Bank’s investment securities. Other liquidity sources include a $109.09 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 Home Loan Bank borrowings during 2024, 2023 and 2022: 2024 2023 2022 (Amounts In Thousands) Outstanding balance as of December 31 $ 127,050 $ 296,648 $ 40,000 Weighted average interest rate at year end 5.22 % 5.55 % 4.62 % Maximum month-end balance 359,895 296,648 40,000 Average month-end balance 191,346 94,413 2,043 Weighted average interest rate for the year 5.22 % 5.55 % 4.62 % Page 52 Table of Contents The following tables show 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 2024, 2023 and 2022: 2024 2023 2022 Bank Term Funding Program (Amounts In Thousands) Outstanding balance as of December 31 $ 109,000 $ 219,000 $ — Weighted average interest rate at year end 4.77 % 5.29 % — % Maximum month-end balance 219,000 219,000 — Average month-end balance 214,726 8,900 — Weighted average interest rate for the year 4.77 % 5.29 % — % Federal Funds Purchased Outstanding balance as of December 31 $ 437,636 $ — $ 82,061 Weighted average interest rate at year end 5.31 % — % 4.73 % Maximum month-end balance 437,636 286,119 82,061 Average month-end balance 118,113 205,315 3,648 Weighted average interest rate for the year 5.31 % 5.31 % 4.73 % 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. Many of the contractual commitments to extend credit will not be funded because they represent the credit limits on credit cards and home equity lines of credits. Page 53 Table of Contents As disclosed in Note 16 to the Company's Consolidated Financial Statements, the Company has certain obligations and commitments to make future payments under contracts. The following table summarizes significant contractual obligations and other commitments as of December 31, 2024: Payments Due By Period (Amounts In Thousands) Total Less Than One Year One - Three Years Three - Five Years More Than Five Years Contractual obligations: Long-term debt obligations $ 673,686 $ 633,686 $ 40,000 $ — $ — Operating lease obligations 1,316 315 640 361 — Total contractual obligations: $ 675,002 $ 634,001 $ 40,640 $ 361 $ — Other commitments: Lines of credit $ 586,775 $ 369,430 $ 180,120 $ 35,048 $ 2,177 Standby letters of credit 13,867 6,893 2,380 594 4,000 Total other commitments $ 600,642 $ 376,323 $ 182,500 $ 35,642 $ 6,177 The Company and the Bank have no additional material commitments or plans that will materially affect liquidity or capital resources. Property and equipment may be acquired in cash purchases, or they may be financed if favorable terms are available.