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Item 7. Management’s Discussion and Analysis

2025-02-20 compared with 2024-02-22 · 113 added, 147 removed, 586 unchanged (31% of the section changed)

49 unchanged sentences

The Company compares three key performance metrics to those of an identified peer group for evaluating its results.

The peer group for 2023 consists of 22 Midwestern, publicly traded financial institutions including Bank First Corporation, Bridgewater Bancshares, Inc., ChoiceOne Financial Services, Inc., Civista Bancshares, Inc., CrossFirst Bankshares, Inc., Equity Bancshares, Inc., Farmers National Banc Corp., Farmers & Merchants Bancorp., First Business Financial Services, Inc., First Financial Corp., First Mid Bancshares, Inc., German American Bancorp, Inc., HBT Financial, Inc., Hills Bancorporation, Isabella Bank Corporation, LCNB Corp., Macatawa Bank Corporation, Mercantile Bank Corporation, MidWest One Financial Group, Inc., Nicolet Bankshares, Inc., Peoples Bancorp, Inc., and Southern Missouri Bancorp, Inc.

The peer group for 2024 consists of 21 Midwestern, publicly traded financial institutions including Bank First Corporation, Bridgewater Bancshares, Inc., ChoiceOne Financial Services, Inc., Civista Bancshares, Inc., CrossFirst Bankshares, Inc., Equity Bancshares, Inc., Farmers National Banc Corp., Farmers & Merchants Bancorp., First Business Financial Services, Inc., First Financial Corp., First Mid Bancshares, Inc., German American Bancorp, Inc., HBT Financial, Inc., Hills Bancorporation, Isabella Bank Corporation, LCNB Corp., Mercantile Bank Corporation, MidWest One Financial Group, Inc., Nicolet Bankshares, Inc., Peoples Bancorp, Inc., and Southern Missouri Bancorp, Inc.

The Company is in the middle of the group in terms of asset size.

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Results of operations for the year ended December 31, 2024 are compared to the results for the year ended December 31, 2023 and the consolidated financial condition of the Company as of December 31, 2024 is compared to December 31, 2023.

Results of operations and financial condition for the year ended December 31, 2022 compared to the year ended December 31, 2021 can be found in Item 7 - Management’s Discussion and Analysis of Financial Condition and Results of Operations of the Company’s 2022 annual report on Form 10-K filed with the SEC on February 23, 2023.

Results of operations and financial condition for the year ended December 31, 2023 compared to the year ended December 31, 2022 can be found in Item 7 - Management’s Discussion and Analysis of Financial Condition and Results of Operations of the Company’s 2023 annual report on Form 10-K/A filed with the SEC on February 23, 2024.

(dollars in thousands, except per share amounts)

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The Company’s significant accounting policies are described in the Notes to Consolidated Financial Statements.

Based on its consideration of accounting policies that involve the most complex and subjective estimates and judgments, management has identified its most critical accounting policies to be those related to the fair value of financial instruments and the allowance for credit losses.

The fair value of a financial instrument is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants in the market in which the reporting entity transacts business.

A framework has been established for measuring the fair value of financial instruments that considers the attributes specific to particular assets or liabilities and includes a three-level hierarchy for determining fair value based on the transparency of inputs to each valuation as of the measurement date.

The Company estimates the fair value of financial instruments using a variety of valuation methods.

When financial instruments are actively traded and have quoted market prices, quoted market prices are used for fair value and are classified as Level 1.

When financial instruments, such as securities and derivatives, are not actively traded, the Company determines fair value based on various sources and may apply matrix pricing with observable prices for similar instruments where a price for the identical instrument is not observable.

The fair values of these financial instruments, which are classified as Level 2, are determined by pricing models that consider observable market data such as interest rate volatilities, yield curves, credit spreads, prices from external market data providers and/or nonbinding broker-dealer quotations.

When observable inputs do not exist, the Company estimates fair value based on available market data, and these values are classified as Level 3.

Imprecision in estimating fair values can impact the carrying value of assets and the amount of revenue or loss recorded.

Expected credit losses are reflected in the allowance for credit losses (ACL) through a charge to credit loss expense.

Expected credit losses on loans are reflected in the allowance for credit losses (ACL) through a charge to credit loss expense.

When the Company deems all or a portion of a loan to be uncollectible, the appropriate amount is written off and the ACL is reduced by the same amount.

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Subsequent recoveries, if any, are credited to the ACL when received.

The Company measures expected credit losses of loans on a collective (pool) basis when the loans share similar risk characteristics and uses a cash flow based method to estimate expected credit losses for each of these pools.

The Company measures expected credit losses on loans on a collective (pool) basis when the loans share similar risk characteristics and uses a cash flow based model to estimate expected credit losses for each of these pools.

The Company’s methodology for estimating the ACL considers available relevant information about the collectability of cash flows, including information about past events, current conditions, and reasonable and supportable forecasts.

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national unemployment rate and 10-year treasury rate over 2-year treasury rate spread to establish the loss rates applied to the projected cash flows.

For all loan segments, the Company uses a forecast period of four quarters and reverts to a historical rate after four quarters.

For all loan segments, the Company uses a forecast period of four quarters and reverts to a historical loss rate after four quarters.

When estimating prepayment speed and curtailment rates, the modeling is based on historical internal data.

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The allowance for credit losses as of December 31, 2024 was $30,432, or 1.01 percent of outstanding loans, compared to $28,342, or 0.97 percent of outstanding loans as of December 31, 2023.

The allowance for credit losses for 2023 was measured under the current expected credit losses, or CECL, model, while the allowance for credit losses for 2022 was measured under the previous incurred loss model.

(dollars in thousands, except per share amounts)

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Noninterest income 8,434 10,066 10,208

Adjustment for realized securities (gains) losses, net 431 — (51)

Adjustment for realized securities losses, net 1,172 431 —

Adjustment for losses on disposal of premises and

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Net income for the year ended December 31, 2024 was $24,050, compared to $24,137 for the year ended December 31, 2023.

Basic and diluted earnings per common share for 2023 were $1.44 and $1.44, respectively, and were $2.79 and $2.76, respectively for 2022.

The decrease in net income in 2023 compared to 2022 was primarily due to the decrease in net interest income.

Net interest income declined $22,709, or 24.7 percent, in 2023 compared to 2022.

The decrease in net interest income was due to an increase in interest expense on deposits and borrowings that exceeded an increase in interest income on loans and securities, primarily due to rapidly rising short-term interest rates, an inverted yield curve and changes in funding mix.

The Company recorded a credit loss expense of $700 in 2023 compared to a credit loss expense of negative $2,500 in 2022.

The credit loss expense recorded in 2023 was primarily due to loan growth.

The negative credit loss expense recorded in 2022 was due to the reversal of a specific reserve on an impaired loan and the reduction of certain qualitative factors resulting from the sustained performance of loans after the expiration of COVID-19 modifications and continued improvement in classified loans.

The credit loss expense recorded in 2023 was made under the current expected credit losses, or CECL, model, while the negative credit loss expense recorded in 2022 was made under the previous incurred loss model.

Noninterest income decreased $142, or 1.4 percent, in 2023 compared to 2022, primarily due to realized losses on the sales of securities and a decrease in loan swap fees, partially offset by a gain from bank-owned life insurance.

Noninterest expense increased $3,560, or 7.9 percent, in 2023 compared to 2022, primarily due to increases in salaries and employee benefits, occupancy and equipment expense and FDIC insurance expense.

The Company’s ratio of nonperforming assets to total assets was 0.01 percent as of both December 31, 2023 and December 31, 2022.

Basic and diluted earnings per common share for 2024 were $1.43 and $1.42, respectively, and for 2023 were $1.44 and $1.44, respectively.

The modest decrease in net income in 2024 compared to 2023 was primarily due to an increase in noninterest expense and decrease in noninterest income, partially offset by an increase in net interest income and decrease in income tax expense.

Net interest income increased $2,331, or 3.4 percent, in 2024 compared to 2023.

The increase in net interest income was primarily due to an increase in interest income on loans and interest-bearing deposits in other financial institutions, partially offset by an increase in interest expense on deposits.

The Company recorded a credit loss expense of $1,000 in 2024, compared to a credit loss expense of $700 in 2023.

The credit loss expense recorded in 2024 included a $2,000 increase in the allowance for credit losses related to loans, which was offset by a $1,000 decrease to the allowance for credit losses related to unfunded commitments.

Noninterest income decreased $1,632, or 16.2 percent, in 2024 compared to 2023, primarily due to an increase in realized losses on the sales of securities, a decrease in loan swap fees, and a nonrecurring gain from bank-owned life insurance in 2023, partially offset by an increase in trust services revenue.

Noninterest expense increased $2,742, or 5.6 percent, in 2024 compared to 2023, primarily due to increases in occupancy and equipment expense, technology and software expense and FDIC insurance, partially offset by a decrease in business development expenses.

The Company’s ratio of nonperforming assets to total assets was 0.00 percent and 0.01 percent as of December 31, 2024 and 2023, respectively.

For more discussion on loan quality, see the “Loan Portfolio” and “Summary of the Allowance for Credit Losses” sections in this Item of this Form 10-K.

Net Interest Income

Net interest income decreased to $69,031 for 2023 from $91,740 for 2022, as the impact of the increase in average rates paid on and growth in average balances of interest-bearing liabilities exceeded the benefits of the growth in average balances and increase in average yields on interest-earning assets.

Net interest income increased to $71,362 for 2024 from $69,031 for 2023, as the impact of the growth of interest-earning assets and increases in average yields on interest-earning assets exceeded the effects of an increase in average balances of interest-bearing liabilities and increase in average rate paid on interest-bearing liabilities.

The net interest margin for 2024 decreased 10 basis points to 1.91 percent, compared to 2.01 percent for 2023.

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and Interest Differential” in this Item of this Form 10-K.

Credit Loss Expense, Allowance for Credit Losses, and Loan Quality

The allowance for credit losses, which totaled $28,342 as of December 31, 2023, represented 0.97 percent of total loans, compared to 0.93 percent as of December 31, 2022.

A credit loss expense of $700 was recorded in 2023, compared to a credit loss expense of negative $2,500 in 2022.

Credit Loss Expense

A credit loss expense of $1,000 was recorded in 2024, compared to a credit loss expense of $700 in 2023.

The credit loss expense associated with loans recorded in 2024 was primarily due to changes in forecasted loss rates, driven by an increase in forecasted unemployment rate, and an adjustment to qualitative factors within the commercial real estate segment.

The negative $1,000 credit loss expense recorded in 2024 related to unfunded commitments was primarily due to a decrease in the balance of unfunded commitments, primarily from the funding of construction loans.

The credit loss expense recorded in 2023 included an allocation of $500 to the allowance for credit losses related to loans and $200 to the allowance for credit losses related to unfunded commitments.

This credit loss expense was primarily due to growth in loans and unfunded loan commitments.

The credit loss expense in 2023 was primarily due to growth in loans and unfunded loan commitments.

Management believed the allowance for credit losses at December 31, 2024 was adequate to absorb expected losses in the loan portfolio as of that date.

Nonperforming loans at December 31, 2023 totaled $296, or 0.01 percent of total loans, a slight decrease from $322, or 0.01 percent of total loans, at December 31, 2022.

The decrease in nonperforming loans at December 31, 2023, compared to December 31, 2022, was due to scheduled payments made on the single loan included in the nonaccrual balance in both periods.

Nonperforming loans include loans on nonaccrual status, loans past due 90 days or more and still accruing interest, and loans that have been considered to be loan restructurings made to borrowers experiencing financial difficulty.

The Company held no other real estate owned properties as of December 31, 2023 or 2022.

(dollars in thousands, except per share amounts)

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Increase in cash value of bank-owned life insurance 1,126 1,044 82 7.9 %

Gain from bank-owned life insurance 691 — 691 N/A

Gain from bank-owned life insurance — 691 (691) (100.0) %

Loan swap fees — 431 (431) (100.0) %

Realized securities losses, net (431) — (431) N/A

Realized securities losses, net (1,172) (431) (741) (171.9) %

Other income 1,269 1,424 (155) (10.9) %

Total noninterest income $ 8,434 $ 10,066 $ (1,632) (16.2) %

The decline in service charges on deposit accounts was primarily attributable to a higher earnings credit rate on commercial accounts.

Revenue from trust services was higher in 2023 compared to 2022 primarily due to increases in one-time estate fees.

An increase in trust assets and accounts since December 31, 2022 also contributed to the increase in trust service fees.

The gain from bank-owned life insurance in 2023 was the result of a death benefit claim.

Loan swap fees in 2023 and 2022 consist of fees earned in the back-to-back swap program.

In 2023, the Company sold $11,285 of securities from the available for sale securities portfolio and realized a net loss of $431.

The proceeds from this sale were reinvested in the loan portfolio.

Revenue from trust services was higher in 2024 compared to 2023 primarily due to increases in one-time estate fees and the higher market value of trust assets.

The gain from bank-owned life insurance that occurred in 2023 was the result of a death benefit claim.

Loan swap fees in 2023 consisted of fees earned in the back-to-back swap program.

In 2024, the Company sold $11,841 of securities from the available for sale securities portfolio and realized a net loss of $1,172, compared to sales of $11,285 of securities available for sale and a realized net loss of $431 in 2023.

The proceeds from both periods were reinvested in the loan portfolio.

The estimated earn back period of the 2024 transaction is approximately two years.

Noninterest Expense

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Other expenses:

Business development 1,263 1,147 116 10.1 %

Insurance expense 821 793 28 3.5 %

Business development 803 1,263 (460) (36.4) %

Trust 663 622 41 6.6 %

Consulting fees 262 257 5 1.9 %

Charitable contributions 180 — 180 N/A

Marketing 97 163 (66) (40.5) %

Charitable contributions — 180 (180) (100.0) %

Low income housing projects amortization 571 589 (18) (3.1) %

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(dollars in thousands, except per share amounts)

Salaries and employee benefits increased in 2023 compared to 2022 primarily due to wage increases in response to market conditions and competition in retaining and recruiting talent.

Additionally, the number of full-time equivalent employees has increased with growth in our commercial banking team and information technology department.

Occupancy and equipment expense increased in 2023 compared to 2022 primarily due to an increase in depreciation expense related to the new bank buildings in St.

Cloud and Mankato, Minnesota, along with scheduled increases in rent expense on existing leases.

FDIC insurance expense increased in 2023 when compared to 2022 primarily due to the FDIC’s increase in the minimum assessment rate, which was announced in 2022 and effective as of the first quarter of 2023.

Business development expenses increased in 2023 due to an increase in the size of our commercial banking team and a general increase in sponsorships and business development activity.

Occupancy and equipment expense increased in 2024 compared to 2023 primarily due to an increase in occupancy costs related to bank buildings, including the Company’s new headquarters building.

Technology and software expense increased in 2024 compared to 2023 due to the addition of new technology, product updates and fraud management and security solutions.

FDIC insurance expense increased in 2024 compared to 2023 primarily due to increases in average assets and the assessment rate.

The Company records a provision for income tax expense currently payable, along with a provision for those taxes payable or refundable in the future (deferred taxes).

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The effective rate of income tax expense as a percent of income before income taxes was 12.3 percent and 18.9 percent, respectively, for 2024 and 2023.

In 2022, income tax expense included a one-time increase in state income tax expense related to the June 2022 enactment of changes in the Iowa bank franchise tax rates.

This legislation reduced the Iowa bank franchise tax rate applied to apportioned income for 2023 and future years.

The future reduction in the state tax rate required the Company to reduce net deferred tax assets by $671 and in turn caused the one-time increase in 2022 tax expense.

The effective income tax rates differ from the federal statutory income tax rates primarily due to tax-exempt interest income, the tax-exempt increase in cash value of bank-owned life insurance, tax-exempt gain from bank-owned life insurance, disallowed interest expense, stock compensation and state income taxes.

In 2024, income tax expense included a $1,842 tax benefit for an energy-related investment tax credit associated with the construction of the Company’s new headquarters building.

The effective tax rate for both 2024 and 2023 was also impacted by federal income tax credits, including low income housing tax credits and a new markets tax credit from West Bank’s investment in a qualified community development entity, of approximately $1,508 and $1,498, respectively.

The Company continues to maintain a valuation allowance against the tax effect of state net operating losses carryforwards as management believes it is likely that such carryforwards will expire without being utilized.

The Company continues to maintain a valuation allowance against the tax effect of state net operating losses carryforwards as management believes it is likely that a portion of such carryforwards will expire without being utilized.

(dollars in thousands, except per share amounts)

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The Federal Reserve increased the target federal funds interest rate by a total of 425 basis points in 2022 and an additional 100 basis points in 2023.

The potential for additional target federal funds interest rate changes in 2024 is unknown at this time.

The increases that occurred throughout 2022 and 2023 have had a significant impact on the comparability of net interest income between 2023, 2022 and 2021.

In 2024, the Federal Reserve decreased the target federal funds rate by a total of 100 basis points.

The timing and extent of additional interest rate changes by the Federal Reserve is not known at this time.

Net interest margin on an FTE basis, a non-GAAP financial measure, is a measure of the net return on interest-earning assets and is computed by dividing annualized tax-equivalent net interest income by total average interest-earning assets for the period.

For the years ended December 31, 2024, 2023 and 2022, the Company’s net interest margin on a tax-equivalent basis was 1.91, 2.01 and 2.76 percent, respectively.

Tax-equivalent net interest income decreased $23,340 in 2023 compared to 2022.

Tax-equivalent net interest income increased $2,022 in 2024 compared to 2023.

Rate and Volume Analysis

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Tax-equivalent interest income and fees on loans increased $23,154 for the year ended December 31, 2024, compared to 2023.

The improvement was primarily due to an increase in the average yield on loans of 90 basis points in 2023 compared to 2022.

Rising market interest rates have resulted in increasing rates on variable-rate loans and higher interest rates on loan renewals and new originations compared to existing portfolio rates.

Additionally, the average balance of loans increased $245,580 in 2023 compared to 2022.

The Company continues to focus on expanding existing and entering into new customer relationships while maintaining strong credit quality.

The improvement was driven by a combination of an increase in the average balance of loans and an increase in loan yields in 2024 compared to 2023.

The average balance of loans increased $185,567 in 2024 compared to 2023, while loan yields increased by 46 basis points in 2024 compared to 2023.

Loan originations and renewals in 2024 continued to reprice at prevailing market rates which exceeded the current weighted average portfolio rate.

The yield on the Company’s loan portfolio is affected by the portfolio’s loan mix, the interest rate environment, the effects of competition, the level of nonaccrual loans and reversals of previously accrued interest on charged-off loans.

The yield on the loan portfolio is expected to increase in a rising rate environment as variable-rate loans reprice at higher rates and fixed rate loan renewals and new originations are priced at prevailing market rates, which exceed the average rate on existing fixed rate loans.

The yield on the loan portfolio is expected to increase in flat and rising rate environments as variable-rate loans reprice at higher rates and renewals and new originations are priced at prevailing market rates, which exceed the roll-off rate of principal repayments and maturities of existing loans.

In a declining rate environment, the yield on variable-rate loans will decline;

however, as long as market rates remain higher than the yield on the fixed-rate portfolio, renewals and originations will continue to increase the yield on the fixed-rate portfolio.

The political and economic environments can also influence the volume of new loan originations and the mix of variable-rate versus fixed-rate loans.

Tax-equivalent interest income on securities increased $743 for the year ended December 31, 2023, compared to 2022.

Tax-equivalent interest income on securities decreased $1,128 for the year ended December 31, 2024, compared to 2023.

The average balance of securities available for sale in 2024 was $49,468 lower than in 2023, primarily due to principal paydowns on securities, sales of securities, and the decline in fair value of available for sale securities during 2024 resulting from the increase in market interest rates during 2024.

The yield on available for sale securities increased by 3 basis points in 2024 compared to 2023.

Interest income on interest-bearing deposits in other financial institutions increased $7,426 in 2024 compared to 2023.

This was primarily due to the increase in the average balance of interest-bearing deposits in other financial institutions, which was driven by the impact that the increase in average customer deposit balances had on the Company’s cash liquidity.

Interest expense on deposits increased $30,488 for the year ended December 31, 2024, compared to 2023.

The average balance of interest bearing deposits decreased $486 in 2023 compared to 2022.

The rates paid on deposits increased 196 basis points in 2023 compared to 2022.

The increase in the cost of deposits was primarily due to increases in deposit rates in response to increases in the target federal funds rate and market interest rates, increased competition for deposit balances, and changes in deposit mix.

The Federal Reserve increased the target federal funds rate by a total of 425 basis points in 2022 and an additional 100 basis points in 2023.

These increases have had an adverse impact on the cost of deposits and have increased market competition.

Interest expense on borrowed funds increased $15,498 for the year ended December 31, 2023, compared to 2022.

The average balance of borrowed funds increased $293,759 in 2023 compared to 2022.

The Company issued $60,000 of subordinated debt in June 2022.

Additionally, average balances of federal funds purchased and other short-term borrowings increased $131,901 in 2023 compared to 2022.

The average rate paid on federal funds purchased and other short-term borrowings increased 209 basis points in 2023 compared to 2022.

This increase in average rates paid on federal funds purchased and other short-term borrowings was driven by the increases in the target federal funds rate by the Federal Reserve.

The average balances of FHLB advances increased by $136,781 in 2023 compared to 2022.

This increase in average balances was primarily due to increases in our rolling funding program whereby rolling one-month FHLB advances are hedged with long-term interest rate swap agreements to provide long-term fixed cost wholesale funding.

The average balance of interest bearing deposits increased $416,483 in 2024 compared to 2023, while the rates paid on deposits increased 68 basis points in 2024 compared to 2023.

The increase in interest expense on deposits was primarily due to the increase in deposit balances, higher deposit rates resulting from higher market rates and increased competition for deposit balances, and changes in deposit mix.

Interest expense on borrowed funds decreased $3,058 for the year ended December 31, 2024, compared to 2023.

The average balance of borrowed funds decreased $76,971 in 2024 compared to 2023.

The average balance of federal funds purchased and other short-term borrowings decreased $119,066 in 2024 compared to 2023 primarily due to increases in deposits.

The average balance of FHLB advances increased by $46,719 in 2024 compared to 2023.

This increase in average balances was primarily due to an increase in rolling one-month FHLB advances that are hedged with long-term interest rate swap agreements to provide fixed-cost wholesale funding.

The average rate paid on FHLB advances increased 40 basis points in 2024 compared to 2023.

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The balance of securities available for sale decreased by $79,354 as of December 31, 2024, compared to December 31, 2023.

This decrease was primarily due to principal paydowns on securities and a sale of $11,285 of securities in the fourth quarter of 2023.

This decrease was primarily due to principal paydowns on securities, a decline in fair value of securities during 2024 resulting from the increase in market interest rates and the sale of $11,841 of securities in the fourth quarter of 2024.

The proceeds from this sale were reinvested into the loan portfolio.

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The securities issued by state and political subdivisions are diversified among municipalities in 26 states.

(dollars in thousands, except per share amounts)

The following table sets forth the weighted average yield by contractual maturity by security type as of December 31, 2024.

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The collateralized mortgage obligations and mortgage-backed securities have monthly paydowns that are not reflected in the table.

(dollars in thousands, except per share amounts)

year After one year

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Loans outstanding at the end of 2024 increased 2.6 percent compared to the end of 2023.

Changes in the loan portfolio during 2023 included increases of $82,570 in commercial real estate loans, $50,463 in construction, land and land development loans and $31,477 in 1-4 family residential first mortgage loans.

Changes in the loan portfolio during 2024 included an increase of $94,670 in construction, land and land development loans and decreases of $18,830 in 1-4 family residential first mortgage loans and $17,362 in commercial and industrial loans.

The Company continues to focus on business development efforts in all of its markets.

We believe that loan growth could slow down in 2024 as a result of uncertainty and diversity in economic outlooks, labor and wage challenges and the impact of higher interest rates on overall cash flows and debt service capabilities.

For a description of the loan segments, see Note 4 to the consolidated financial statements included in Item 8 of this Form 10-K.

The political and economic environments could influence the volume of future loan originations and the mix of variable-rate versus fixed-rate loans.

For a description of the loan segments, see Note 4 of the Notes to the Consolidated Financial Statements included in Item 8 of this Form 10-K.

The interest rates charged on loans vary with the degree of risk and the amount and terms of the loan.

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As of December 31, 2024 and 2023, there were no loans that were past due 30 days or more.

Nonperforming loans declined slightly to $296 at December 31, 2023, compared to $322 at December 31, 2022.

The decrease was due to scheduled payments made on the one loan that was included in nonaccrual loans in both periods.

(dollars in thousands, except per share amounts)

The watch classification of loans decreased to $144 as of December 31, 2023 from $54,231 as of December 31, 2022.

Commercial real estate loans of approximately $52,600 were upgraded and removed from the watch list during the second quarter of 2023.

These loans related to one borrowing relationship that had been downgraded during the COVID-19 pandemic.

The upgrade resulted from the borrowers’ ability to return to normal operations and financial performance for an extended period of time.

Nonperforming loans declined to $133 at December 31, 2024, compared to $296 at December 31, 2023.

The decrease was due to a payoff on the single loan included in nonperforming loans as of December 31, 2023, partially offset by the addition of one loan as of December 31, 2024.

The watch classification of loans increased to $8,349 as of December 31, 2024 from $144 as of December 31, 2023.

Commercial loans for three borrowers with a total balance of $7,768 were added to the watchlist in 2024 due to a decline in financial performance at the companies.

These loans are considered well collateralized and no required payments are past due.

Loans Secured by Real Estate

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$ 1,905,192 100.0 % $ 1,873,144 100.0 %

The following table summarizes non-owner occupied commercial real estate loans by property type by risk rating as of December 31, 2023.

Risk ratings are defined in Note 4 to the consolidated financial statements included in Item 8 of this Form 10-K.

The following table summarizes non-owner occupied commercial real estate loans by property type and risk rating as of December 31, 2024.

Risk ratings are defined in Note 4 of the Notes to the Consolidated Financial Statements included in Item 8 of this Form 10-K.

As of December 31, 2024

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SUMMARY OF THE ALLOWANCE FOR CREDIT LOSSES

The Company adopted FASB Accounting Standards Update (ASU) No.

2016-13 effective January 1, 2023 using the modified retrospective method for financial assets measured at amortized cost and off-balance sheet credit exposures.

See Notes 1 and 4 to the Financial Statements included in Item 8 of this Form 10-K for additional information.

The credit loss expense recorded on the income statement includes charges made to earnings to maintain an adequate allowance for credit losses.

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loans at end of period 0.00 % 0.00 % (0.01) %

(1) As presented, this is a non-GAAP financial measure.

For further information, refer to the section “Non-GAAP Financial Measures” of this item.

(dollars in thousands, except per share amounts)

Nonperforming loans at December 31, 2024 totaled $133, or 0.00 percent of total loans, a slight decrease from $296, or 0.01 percent of total loans, at December 31, 2023.

The decrease in nonperforming loans at December 31, 2024, compared to December 31, 2023, was due a payoff on the single loan included in the nonaccrual balance on December 31, 2023, partially offset by the addition of one loan as of December 31, 2024.

The Company held no other real estate owned properties as of December 31, 2024 or 2023.

The following table sets forth information concerning the Company’s allocation of the allowance for credit losses by loan segment as of the dates indicated.

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* Percent of loans in each category to total loans.

As of December 31, 2023 there was no allowance for credit losses related to loans individually evaluated for credit losses.

As of December 31, 2022, there were no specific reserves related to loans individually evaluated for impairment.

As of December 31, 2024 and 2023 there was no allowance for credit losses related to loans individually evaluated for credit losses.

The portion of the allowance for credit losses related to loans collectively evaluated for credit losses increased to $30,432, or 1.01 percent of outstanding loans as of December 31, 2024, compared to $28,342, or 0.97 percent of outstanding loans as of December 31, 2023.

The increase was primarily due to the $2,458 adjustment to the allowance on January 1, 2023 related to the adoption of ASU No.

2016-13, also known as the current expected credit loss, or CECL, standard.

Additionally, there was a credit loss expense of $500 related to loans for the year ended December 31, 2023, which was due primarily to loan growth.

The provision for loan losses recorded in 2022 was negative $2,500.

This negative provision in 2022 was due to the reversal of a specific reserve on an impaired loan and the reduction of certain qualitative factors resulting from the sustained performance of loans after the expiration of COVID-19 modifications and continued improvement in classified loans.

The increase was primarily due to the credit loss expense of $2,000 for the year ended December 31, 2024.

The credit loss expense for loans in 2024 was primarily due to changes in forecasted loss rates, driven by an increase in forecasted unemployment rate, and an adjustment to qualitative factors within the commercial real estate segment.

The Company recorded a credit loss expense related to loans of $500 in 2023.

The credit loss expense in 2023 was primarily due to growth in loans.

Management believed the allowance for credit losses as of December 31, 2024 was adequate to absorb the expected losses in the portfolio as of that date.

Deposits totaled $3,357,596 as of December 31, 2024, which was an increase of 12.9 percent compared to December 31, 2023.

Deposit inflows and outflows are influenced by prevailing market interest rates, competition, local and national economic conditions, fluctuations in our business customers’ own liquidity needs and recent developments in the financial services industry.

In particular, significant competition for deposits driven by high interest rate alternatives for depositors is currently impacting deposit fluctuations and increasing our cost of deposits.

Deposit growth in 2024 included a mix of public funds and commercial and consumer deposits.

Deposit inflows and outflows are influenced by prevailing market interest rates, competition, local and national economic conditions, and fluctuations in our business customers’ own liquidity needs.

At December 31, 2024, the Company had $266,418 in brokered deposits, compared to $305,411 at December 31, 2023.

Brokered deposits included fixed-rate time deposits with maturities through December 2025 and variable-rate deposits with terms through February 2025.

Brokered deposits are utilized, along with other wholesale funding sources, to fund loan growth and offset core deposit outflows.

Brokered deposits included fixed-rate time deposits with maturities through September 2025 and variable-rate deposits with terms through February 2026.

The decrease in brokered deposits during 2024 was primarily due to core deposit growth.

When necessary, brokered deposits are utilized, along with other wholesale funding sources, to fund loan growth and offset core deposit outflows.

(dollars in thousands, except per share amounts)

14 unchanged sentences

$ 3,194,043 $ 2,836,072 $ 2,958,322

Management believes interest rates on deposits could continue to increase in 2024 in response to ongoing competition for deposit balances and high short-term market rates.

Management reduced interest rates on deposits in the fourth quarter of 2024 as a result of the reductions in the target federal funds rate by the Federal Reserve.

Any deposit rate changes in 2025 will be dependent on market rates, liquidity needs and competition for deposit balances.

To limit the Company’s exposure to market interest rate changes, interest rate swaps are in place on $110,000 of deposit balances that effectively convert certain customer deposits with variable rates to fixed-rate instruments.

12 unchanged sentences

Total estimated uninsured deposits were $1,562,981, $1,435,406 and $1,412,955 as of December 31, 2024, 2023 and 2022, respectively.

The uninsured deposit amounts are estimated based on the methodologies and assumptions used for regulatory reporting requirements and include brokered funds and collateralized public unit deposits.

The uninsured deposit amounts are estimated based on the methodologies and assumptions used for regulatory reporting requirements and include collateralized public unit deposits.

The following table shows the amount of time deposits in excess of the insurance limit by maturity.

7 unchanged sentences

Federal funds purchased and other short-term borrowings decreased from $150,270 as of December 31, 2023 to $0 as of December 31, 2024.

This decrease was primarily due to the increase in customer deposits.

The Company had $270,000 of FHLB advances outstanding at December 31, 2024, compared to $315,000 at December 31, 2023.

During 2023, the Company increased its rolling funding program by entering into seven long-term interest rate swap agreements hedging interest payments of one-month rolling funding with a total notional amount of $140,000.

As of December 31, 2023, the Company’s rolling funding program, funded with short-term FHLB advances and hedged with long-term interest rate swaps, totaled $295,000.

These interest rate swaps have maturity dates ranging from August 2024 through June 2029 and fixed rates ranging from 1.69 percent to 4.65 percent.

This decrease was due to two FHLB advances that matured in 2024 and were not renewed.

One advance, with a balance of $20,000, was a term advance and the other advance, with a balance of $25,000, was part of the Company’s rolling funding program and associated with a corresponding interest rate swap agreement that also matured.

As of December 31, 2024, all FHLB advances were hedged with long-term interest rate swaps as part of the Company’s rolling funding program.

These interest rate swaps have maturity dates ranging from July 2026 through June 2029 and fixed rates ranging from 1.86 percent to 4.32 percent.

This strategy of hedging short-term rolling funding effectively provides fixed cost wholesale funding through the maturity dates of the various interest rate swaps.

In December 2021, the Company entered into a credit agreement with an unaffiliated commercial bank and borrowed $40,000.

This credit agreement replaced a prior credit agreement with the same commercial bank that had a remaining balance of $5,500.

The additional borrowing was used to make a capital injection into the Company’s subsidiary, West Bank.

The Company has a credit agreement with an unaffiliated commercial bank.

As of December 31, 2024, this borrowing had a balance of $31,250.

Interest is payable quarterly.

Required quarterly principal payments began in May 2023.

Required quarterly principal payments are $1,250, with the remaining balance due February 2027.

The Company may make additional principal payments without penalty.

The interest rate is variable at the Wall Street Journal Prime Rate minus 1.00 percent, which was 6.50 percent as of December 31, 2024.

During 2023, the Company entered into an interest rate swap contract that effectively converts $20,000 of this borrowing to a fixed rate of 6.40 percent through its maturity date.

As of December 31, 2023, this borrowing had a balance of $36,250.

The Company has an interest rate swap contract that effectively converts $20,000 of this borrowing to a fixed rate of 6.40 percent through its maturity date.

In June 2022, the Company issued $60,000 of subordinated notes (Notes).

The Notes initially bear interest at 5.25 percent per annum, with interest payable semi-annually for the first five years of the Notes.

Beginning June 15, 2027, the interest rate will reset quarterly to a floating rate per annum that is expected to be three-month term Secured Overnight Financing Rate (SOFR) plus 2.41 percent, with payments due quarterly.

Beginning June 15, 2027, the interest rate will reset quarterly to a floating rate per annum that will be three-month term Secured Overnight Financing Rate (SOFR) plus 2.41 percent, with payments due quarterly.

The Company may redeem the Notes, in whole or in part, on and after June 15, 2027 at a price equal to 100 percent of the principal amount of the Notes being redeemed plus accrued and unpaid interest.

The Notes will mature on June 15, 2032 if they are not earlier redeemed.

Proceeds from this debt issuance were used to make a $58,650 capital injection into West Bank, the Company’s subsidiary.

Proceeds from this debt issuance were used to make a $58,650 capital injection into West Bank, the Company’s subsidiary to fund organic growth.

The Company has an interest rate swap with a notional amount of $20,000 which converts variable-rate subordinated debentures to fixed-rate debt.

1 unchanged sentence

This interest rate swap has a fixed rate of 4.81 percent and matures in September 2026.

West Bank’s new markets tax credit special purpose subsidiary has a credit agreement for $11,486.

West Bank’s new markets tax credit special purpose subsidiary has a credit agreement for $11,486 as of December 31, 2024.

Interest is payable monthly over the term of the agreement with an interest rate of 1.00 percent.

6 unchanged sentences

Commitments to lend are subject to borrowers’ continuing compliance with existing credit agreements.

Off-balance sheet commitments are more fully discussed in Note 17 to the consolidated financial statements included in Item 8 of this Form 10-K.

Off-balance sheet commitments are more fully discussed in Note 17 of the Notes to the Consolidated Financial Statements included in Item 8 of this Form 10-K.

(dollars in thousands, except per share amounts)

As of December 31, 2023, the allowance for credit losses related to off-balance sheet unfunded commitments was $2,544.

Upon the adoption of ASU No.

2016-13, the Company recorded an allowance for credit losses associated with unfunded commitments of $2,344.

In 2023, the Company recorded a credit loss expense of $200 for unfunded commitments.

As of December 31, 2024, the allowance for credit losses related to off-balance sheet commitments was $1,544.

In 2024, the Company recorded a credit loss expense of negative $1,000 for unfunded commitments.

The negative credit loss expense was primarily due to the decrease in the balance of unfunded commitments resulting from the funding of construction loans.

The allowance for credit losses for off-balance-sheet credit exposures is presented in the “Accrued expenses and other liabilities” line of the Consolidated Balance Sheets.

2 unchanged sentences

The Company’s principal source of funds is deposits.

Other sources include loan principal repayments, proceeds from the maturity and sale of securities, principal payments on amortizing securities, federal funds purchased, advances from the FHLB, other wholesale funding and funds provided by operations.

Other sources include loan principal repayments, proceeds from the maturity and sale of securities, principal payments on amortizing securities, federal funds purchased, advances from the FHLB and Federal Reserve Bank, other wholesale funding and funds provided by operations.

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

2 unchanged sentences

Our deposit growth strategy emphasizes core deposit growth.

Deposit inflows and outflows can vary widely and are influenced by prevailing market interest rates, competition, local and national economic conditions, fluctuations in our corporate customers’ and municipal customers’ own liquidity needs and recent developments in the financial services industry.

Deposit inflows and outflows can vary widely and are influenced by prevailing market interest rates, competition, local and national economic conditions, and fluctuations in our business customers’ and municipal customers’ own liquidity needs.

The Company utilizes brokered deposits and other wholesale funding to supplement core deposit fluctuations and loan growth.

Brokered deposits are obtained through various programs administered by IntraFi® and through other third party brokers.

At December 31, 2023, the Company had $305,411 in brokered deposits, which included fixed-rate time deposits with maturities through December 2025 and variable-rate deposits with terms through February 2025.

As of December 31, 2023, West Bank had additional borrowing capacity available from the FHLB of approximately $528,000, as well as approximately $2,282 through the Federal Reserve discount window, $35,000 through unsecured federal funds lines of credit with correspondent banks and $89,000 through the BTFP.

The BTFP was established by the Federal Reserve in March 2023 to provide an additional source of liquidity against high-quality securities.

As of December 31, 2023, West Bank had pledged approximately $89,000 in eligible securities to facilitate participation in the program.

No funds were borrowed from the Federal Reserve discount window or BTFP as of December 31, 2023.

The Federal Reserve has announced that it is ending the BTFP and will cease making new loans under this program on March 11, 2024.

At December 31, 2024, the Company had $266,418 in brokered deposits, which included fixed-rate time deposits with maturities through September 2025 and variable-rate deposits with terms through February 2026.

As of December 31, 2024, West Bank had additional borrowing capacity available from the FHLB of approximately $610,000, as well as approximately $116,840 through the Federal Reserve discount window and $75,000 through unsecured federal funds lines of credit.

Net cash from continuing operating activities contributed $39,808, $25,249 and $59,439 to liquidity for the years ended December 31, 2024, 2023 and 2022, respectively.

Management believed that the combination of high levels of potentially liquid assets, unencumbered securities, cash flows from operations and additional borrowing capacity provided the Company with sufficient liquidity as of December 31, 2024.

West Bank has entered into a construction contract for the construction of a new headquarters building in West Des Moines, Iowa.

West Bank will pay the contractor a contract price consisting of the cost of work plus a fee, with anticipated construction completed in 2024.

As of December 31, 2023, the Company had a remaining commitment of $13,019 under this contract.

The Company’s total stockholders’ equity increased to $227,875 as of December 31, 2024 from $225,043 as of December 31, 2023.

The increase was primarily due to net income less dividends paid and the decrease in accumulated other comprehensive loss.

The increase was primarily due to retained income, partially offset by an increase in accumulated other comprehensive loss.

At December 31, 2024, tangible common equity as a percent of tangible assets was 5.68 percent compared to 5.88 percent as of December 31, 2023.

The decrease in accumulated other comprehensive loss was driven by the decrease in the net unrealized losses on available for sale securities between December 31, 2022 and December 31, 2023.

The increase in accumulated other comprehensive loss was driven by the increase in net unrealized losses on available for sale securities between December 31, 2023 and December 31, 2024, due to the increase in market interest rates.

While accumulated other comprehensive losses reduce tangible common equity, they have no impact on regulatory capital.

1 unchanged sentence

The Company and West Bank are subject to various regulatory capital requirements administered by federal and state banking agencies.

Capital requirements are more fully discussed under the heading “Supervision and Regulation” included in Item 1 and in Note 16 to the consolidated financial statements included in Item 8 of this Form 10-K.

As of December 31, 2023, the Company and West Bank met all capital adequacy requirements to which they were subject, and the Company’s and West Bank’s capital ratios were in excess of the requirements to be well-capitalized under capital regulations.

Capital requirements are more fully discussed under the heading “Supervision and Regulation” included in Item 1 and in Note 16 of the Notes to the Consolidated Financial Statements included in Item 8 of this Form 10-K.

As of December 31, 2024, the Company and West Bank met all capital adequacy requirements to which they were subject, and the Company’s and West Bank’s capital ratios were in excess of the requirements to be considered well-capitalized under capital regulations.

Also, as of December 31, 2024, the ratios for the Company and West Bank were sufficient to meet the capital conservation buffer.

(dollars in thousands, except per share amounts)

EFFECTS OF NEW STATEMENTS OF FINANCIAL ACCOUNTING STANDARDS

A discussion of the effects of new financial accounting standards and developments as they relate to the Company is located in Note 1 to the consolidated financial statements included in Item 8 of this Form 10-K.

A discussion of the effects of new financial accounting standards and developments as they relate to the Company is located in Note 1 of the Notes to the Consolidated Financial Statements included in Item 8 of this Form 10-K.

(dollars in thousands, except per share amounts)

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