AMES NATIONAL CORP

Previous wording

The Company does not engage in any material business activities apart from its ownership of the Banks. Products and services offered by the Banks are for commercial and consumer purposes, including loans, deposits and wealth management services. Some Banks also offer investment services through a third-party broker-dealer. The Company employs 24 individuals to assist the Banks with financial reporting, human resources, marketing, audit, compliance, technology systems, property appraisals, training and the coordination of management activities, in addition to 243 full-time equivalent individuals employed by the Banks.

Current wording

The Company does not engage in any material business activities apart from its ownership of the Banks. Products and services offered by the Banks are for commercial and consumer purposes, including loans, deposits and wealth management services. Some Banks also offer investment services through a third-party broker-dealer. The Company employs 26 individuals to assist the Banks with financial reporting, human resources, marketing, audit, compliance, technology systems, property appraisals, training and the coordination of management activities, in addition to 240 full-time equivalent individuals employed by the Banks.

Previous wording

The Company reported net income of $10.8 million for the year ended December 31, 2023 compared to $19.3 million for the year ended December 31, 2022. This represents a decrease in net income of 44% when comparing 2023 with 2022. The decrease in earnings in 2023 from 2022 is primarily the result of higher interest expense on deposits and other borrowed funds and an increase in credit loss expense, offset in part by an increase in interest income on loans. Earnings per share for 2023 were $1.20 compared to $2.14 in 2022. All six Banks demonstrated profitable operations during 2023 and 2022.

Current wording

The Company reported net income of $10.2 million for the year ended December 31, 2024 compared to $10.8 million for the year ended December 31, 2023. This represents a decrease in net income of 5.5% when comparing 2024 with 2023. The decrease in earnings in 2024 from 2023 is primarily the result of normal increases in salaries and benefits and one-time consultant fees related to negotiating long-term vendor contracts, offset in part by an increase in wealth management income. Earnings per share for 2024 were $1.14 compared to $1.20 in 2023. All six Banks demonstrated profitable operations during 2024 and 2023.

Previous wording

The Company’s return on average equity for 2023 was 7.05% compared to 11.43% in 2022. The return on average assets for 2023 was 0.51% compared to 0.90% in 2022. The decrease in return on average equity and return on average assets when comparing 2023 to 2022 was primarily a result of a reduction in earnings.

Current wording

The Company’s return on average equity for 2024 was 6.02% compared to 7.05% in 2023. The return on average assets for 2024 was 0.48% compared to 0.51% in 2023. The decrease in return on average equity and return on average assets when comparing 2024 to 2023 was primarily a result of a reduction in earnings.

Previous wording

The Company’s significant accounting policies are described in the “Notes to Consolidated Financial Statements” accompanying the Company’s audited financial statements. Based on its consideration of accounting policies that involve the most complex and subjective estimates and judgments, management has identified the allowance for credit losses, the fair value determination of investment securities and the assessment of goodwill to be the Company’s most critical accounting policies.

Current wording

The Company’s significant accounting policies are described in the “Notes to Consolidated Financial Statements” accompanying the Company’s audited consolidated financial statements. Based on its consideration of accounting policies that involve the most complex and subjective estimates and judgments, management has identified the allowance for credit losses, the fair value determination of investment securities and the assessment of goodwill to be the Company’s most critical accounting policies.

Previous wording

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 using historical loss rate analysis for all loan pools.

Current wording

In estimating the component of the allowance for credit losses for loans that share common risk characteristics, loans are segregated into loan segments. Loans are designated into loan segments 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 using historical loss rate analysis for all loan pools.

Previous wording

Such factors are used to adjust the historical loss rates so that they reflect management’s expectation of future conditions based on a reasonable and supportable forecast. To the extent the lives of the loans in the portfolio extend beyond the period for which a reasonable and supportable forecast can be made, we reduce, on a straight-line basis over one year, the adjustments so that the model reverts back to the historical loss rates.

Current wording

Factors are used to adjust the historical loss rates so that they reflect management’s expectation of future conditions based on a reasonable and supportable forecast. To the extent the lives of the loans in the portfolio extend beyond the period for which a reasonable and supportable forecast can be made, we reduce, on a straight-line basis over one year, the adjustments so that the model reverts back to the historical loss rates.

Previous wording

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 loss rates and expected conditions over the remaining lives of the loans in the portfolio related to:

Current wording

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

Previous wording

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 4 - Loans Receivable and Credit Disclosures in the notes to the financial statements of this Annual Report.

Current wording

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 4 - Loans Receivable and Credit Disclosures in the notes to the consolidated financial statements of this Annual Report.

Previous wording

The rate and volume analysis is used to determine how much of the change in interest income or expense is the result of a change in volume or a change in interest rate. For example, real estate loan interest income increased $7.4 million in 2023 compared to 2022. Increased volume of real estate loans increased interest income in 2023 by $2.4 million and higher interest rates increased interest income in 2023 by $5.0 million.

Current wording

The rate and volume analysis is used to determine how much of the change in interest income or expense is the result of a change in volume or a change in interest rate. For example, real estate loan interest income increased $5.6 million in 2024 compared to 2023. Increased volume of real estate loans increased interest income in 2024 by $1.1 million and higher interest rates increased interest income in 2024 by $4.5 million.

Previous wording

The Company’s largest contributing component to net income is net interest income, which is the difference between interest earned on earning assets and interest paid on interest-bearing liabilities. The volume of and yields earned on earning assets and the volume of and the rates paid on interest-bearing liabilities determine net interest income. Refer to the tables preceding this paragraph for additional detail. Interest earned and interest paid is also affected by general economic conditions, particularly changes in market interest rates, by government policies and the action of regulatory authorities. Net interest income divided by average earning assets is referred to as net interest margin. For the years December 31, 2023 and 2022, the Company's non-GAAP net interest margin was 2.20% and 2.62%, respectively, computed on an FTE basis. For further information, refer to the Non-GAAP Financial Measures section of this report.

Current wording

The Company’s largest contributing component to net income is net interest income, which is the difference between interest earned on earning assets and interest paid on interest-bearing liabilities. The volume of and yields earned on earning assets and the volume of and the rates paid on interest-bearing liabilities determine net interest income. Refer to the tables preceding this paragraph for additional detail. Interest earned and interest paid is also affected by general economic conditions, particularly changes in market interest rates, by government policies and the action of regulatory authorities. Net interest income divided by average earning assets is referred to as net interest margin. For the years December 31, 2024 and 2023, the Company's non-GAAP net interest margin was 2.22% and 2.20%, respectively, computed on an FTE basis. For further information, refer to the Non-GAAP Financial Measures section of this report.

Previous wording

The high level of competition in the local markets may continue to put downward pressure on the net interest margin of the Company. Currently, the Company’s primary market in Ames, Iowa, has fifteen banks, four credit unions and several other financial investment companies. Multiple banks are also located in the Company’s other market areas in central, north-central and south-central Iowa creating similarly competitive environments.

Current wording

The high level of competition in the local markets may continue to put downward pressure on the net interest margin of the Company. Currently, the Company’s primary market in Ames, Iowa, has fifteen banks, five credit unions and several other financial investment companies. Multiple banks are also located in the Company’s other market areas in central, north-central and south-central Iowa creating similarly competitive environments.

Previous wording

The credit loss expense reflects management's judgment of the expense to be recognized in order to maintain an adequate allowance for credit losses. The Company’s credit loss expense for the year ended December 31, 2023 was $789 thousand compared to a credit loss benefit of ($874) thousand for the previous year. Net loan charge-offs totaled $213 thousand for the year ended December 31, 2023 compared to net loan charge-offs of $50 thousand for the previous year. The credit loss expense in 2023 was primarily due to growth in the loan portfolio and charge-offs in the agriculture loan portfolio. The credit loss benefit in 2022 was primarily due to a reduction in specific reserves and offset in part by growth in the loan portfolio. Loans classified as substandard and substandard-impaired, excluding 1-4 family and consumer loans, decreased $7.5 million to $29.0 million in 2023 primarily due to improving credit quality. Refer to the “Asset Quality Review and Credit Risk Management” discussion for additional details with regard to credit loss expense.

Current wording

The credit loss expense reflects management's judgment of the expense to be recognized in order to maintain an adequate allowance for credit losses. The Company’s credit loss expense for the year ended December 31, 2024 was $592 thousand compared to a credit loss expense of $789 thousand for the previous year. Net loan charge-offs totaled $453 thousand for the year ended December 31, 2024 compared to net loan charge-offs of $213 thousand for the previous year. The credit loss expense in 2024 was primarily due to growth in the loan portfolio and charge-offs in the commercial loan portfolio. The credit loss benefit in 2023 was primarily due to growth in the loan portfolio and charge-offs in the agriculture loan portfolio. Loans classified as substandard and substandard-impaired increased $18.0 million to $49.7 million in 2024 primarily due to downgrades in the commercial real estate and commercial operating loan portfolios. Some commercial real estate loans are experiencing a decline in occupancy rate and collateral valuation. Refer to the “Asset Quality Review and Credit Risk Management” discussion for additional details with regard to credit loss expense.

Previous wording

Noninterest income during the years ended 2023 and 2022 totaled $9.2 million and $9.7 million, respectively. The decrease in noninterest income in 2023 compared to 2022 is primarily due to fewer gains on sale of residential loans held for sale as refinancing volume has slowed and a decrease in wealth management income primarily due to a decline in estate fees.

Current wording

Noninterest income during the years ended 2024 and 2023 totaled $9.8 million and $9.2 million, respectively. The increase in noninterest income in 2024 compared to 2023 is primarily due to an increase in wealth management income due to growth in assets under management and new account relationships.

Previous wording

Noninterest expense for the Company consists of all operating expenses other than interest expense on deposits and other borrowed funds. Salaries and employee benefits are the largest component of the Company’s operating expenses and comprise 59% of noninterest expense in 2023 and 2022.

Current wording

Noninterest expense for the Company consists of all operating expenses other than interest expense on deposits and other borrowed funds. Salaries and employee benefits are the largest component of the Company’s operating expenses and comprise 60% and 59% of noninterest expense in 2024 and 2023, respectively.

Previous wording

Noninterest expense during the years ended 2023 and 2022 totaled $40.2 million and $38.6 million, respectively. The increase in noninterest expense is primarily due to a wire fraud loss of $523 thousand in 2023, higher FDIC assessments and normal increases in salaries and benefits. The percentage of noninterest expense to average assets was 1.88% in 2023, compared to 1.81% during 2022.

Current wording

Noninterest expense during the years ended 2024 and 2023 totaled $42.0 million and $40.2 million, respectively. The increase in noninterest expense is primarily due to normal increases in salaries and benefits and $799 thousand of consultant fees for certain contract negotiations included in professional fees in 2024. The percentage of noninterest expense to average assets was 1.97% in 2024, compared to 1.88% during 2023.

Previous wording

The provision for income taxes for 2023 and 2022 was $2.1 million and $5.9 million, respectively. This amount represents an effective tax rate of 16.1% and 23.3%, respectively. The Company's federal income tax rate was 21% for the years ended December 31, 2023 and 2022. The decrease in income tax expense and higher than expected tax rate in 2022 was due to a $780 thousand adjustment to deferred taxes for the reduction in future Iowa bank franchise tax rates enacted in the second quarter of 2022. The lower than expected tax rate in 2023 was primarily due to a higher proportion of tax-exempt interest income and New Markets Tax Credits to pretax income as compared to 2022.

Current wording

The provision for income taxes for 2024 and 2023 was $2.0 million and $2.1 million, respectively. This amount represents an effective tax rate of 17% and 16%, respectively. The Company's federal income tax rate was 21% for the years ended December 31, 2024 and 2023. The decrease in income tax expense and lower than expected tax rate in 2024 and 2023 was primarily due to a higher proportion of tax-exempt interest income and New Markets Tax Credits to pretax income.

Previous wording

Total assets increased to $2.16 billion in 2023 compared to $2.13 billion in 2022, or 1.0%. The increase was primarily due to interest-bearing deposit and loan growth funded by other borrowings. The increase was offset in part by a decrease in securities available-for-sale due primarily to maturities in the investment portfolio.

Current wording

Total assets decreased to $2.13 billion in 2024 compared to $2.16 billion in 2023, or 1.0%. The decrease was primarily due to a decrease in securities available-for-sale and partially offset by an increase in loans and interest-bearing deposits in financial institutions.

Previous wording

Net loans as of December 31, 2023 totaled $1.28 billion, an increase of 4.2% from the $1.23 billion as of December 31, 2022. Loans increased primarily due to increases in the commercial operating, construction and multi-family loan portfolios. Loans are the primary contributor to the Company’s revenues and cash flows. The average yield on loans was 254 and 206 basis points higher in 2023 and 2022, respectively, in comparison to the average tax-equivalent investment portfolio yields.

Current wording

Net loans as of December 31, 2024 totaled $1.30 billion, an increase of 2.0% from the $1.28 billion as of December 31, 2023. Loans increased primarily due to increases in the 1 to 4 family residential real estate and agricultural operating loan portfolios. Loans are the primary contributor to the Company’s revenues and cash flows. The average yield on loans was 299 and 254 basis points higher in 2024 and 2023, respectively, in comparison to the average tax-equivalent investment portfolio yields.

Previous wording

The Company's loan portfolio consists of real estate, commercial, agricultural and consumer loans. As of December 31, 2023, gross loans totaled approximately $1.29 billion, which equals approximately 71.4% of total deposits and 60.0% of total assets. The Iowa State Average Report (consisting of 237 banks in the State of Iowa) loan to deposit ratio as of December 31, 2023 was 77%. As of December 31, 2023, the majority of the loans were originated directly by the Banks to borrowers within the Banks’ principal market areas. There are no foreign loans outstanding during the years presented.

Current wording

The Company's loan portfolio consists of real estate, commercial, agricultural and consumer loans. As of December 31, 2024, gross loans totaled approximately $1.32 billion, which equals approximately 71.5% of total deposits and 61.9% of total assets. The Iowa State Average Report (consisting of 232 banks in the State of Iowa) loan to deposit ratio as of December 31, 2024 was 78%. As of December 31, 2024, the majority of the loans were originated directly by the Banks to borrowers within the Banks’ principal market areas. There are no foreign loans outstanding during the years presented.

Previous wording

Commercial loans consist primarily of loans to businesses for various purposes, including revolving lines to finance current operations, floor-plans, inventory and accounts receivable; capital expenditure loans to finance equipment and other fixed assets; and letters of credit. These loans generally have short maturities of less than five years, have either adjustable or fixed rates and are unsecured or secured by inventory, accounts receivable, equipment and/or real estate.

Current wording

Commercial loans consist primarily of loans to businesses for various purposes, including revolving lines to finance current operations, floor-plans, inventory and accounts receivable; capital expenditure loans to finance equipment and other fixed assets; and letters of credit. These loans generally have short maturities of less than five years, have either adjustable or fixed rates and are generally secured by inventory, accounts receivable, equipment and/or real estate.

Previous wording

There was $124 thousand of mortgage origination funding awaiting delivery to the secondary market as of December 31, 2023 and $154 thousand as of December 31, 2022. Residential mortgage loans are originated by the Banks and sold to several secondary mortgage market outlets based upon customer product preferences and pricing considerations. The mortgages are sold in the secondary market to eliminate interest rate risk and to generate secondary market fee income. It is not anticipated at the present time that loans held for sale will become a significant portion of total assets.

Current wording

There was $342 thousand of mortgage origination funding awaiting delivery to the secondary market as of December 31, 2024 and $124 thousand as of December 31, 2023. Residential mortgage loans are originated by the Banks and sold to several secondary mortgage market outlets based upon customer product preferences and pricing considerations. The mortgages are sold in the secondary market to eliminate interest rate risk and to generate secondary market fee income. It is not anticipated at the present time that loans held for sale will become a significant portion of total assets.

Previous wording

Total investments as of December 31, 2023 were $736.4 million, a decrease of $50.0 million or 6.4% from the prior year end. As of December 31, 2023 and 2022, the investment portfolio comprised 34% and 37% of total assets, respectively. The decrease in investments during 2023 is primarily due to maturities in excess of purchases. The decrease is offset in part by lower unrealized losses in the investment portfolio.

Current wording

Total investments as of December 31, 2024 were $648.5 million, a decrease of $87.9 million or 11.9% from the prior year end. As of December 31, 2024 and 2023, the investment portfolio comprised 30% and 34% of total assets, respectively. The decrease in investments during 2024 is primarily due to maturities in excess of purchases. The decrease is offset in part by lower unrealized losses in the investment portfolio.

Previous wording

The Company's investment portfolio had an expected duration of 3.55 years and 4.06 years as of December 31, 2023 and 2022, respectively.

Current wording

The Company's investment portfolio had an expected duration of 3.1 years and 3.6 years as of December 31, 2024 and 2023, respectively.

Previous wording

At December 31, 2023 and 2022, the Company’s investment securities portfolio included securities issued by 272 and 289 government municipalities and agencies located within 30 states with a fair value of $269.9 million and $286.0 million, respectively. No one municipality or agency represents a concentration within this segment of the investment portfolio. Omaha, Nebraska, sewer revenue bonds with a fair value of $5.2 million (approximately 1.9% of the fair value of the government municipalities and subdivisions) represent the largest exposure to any one municipality or subdivision for the Company as of December 31, 2023.

Current wording

At December 31, 2024 and 2023, the Company’s investment securities portfolio included securities issued by 258 and 272 government municipalities and agencies located within 30 states with a fair value of $245.6 million and $269.9 million, respectively. No one municipality or agency represents a concentration within this segment of the investment portfolio. Omaha, Nebraska, sewer revenue bonds with a fair value of $5.3 million (approximately 2.1% of the fair value of the government municipalities and subdivisions) represent the largest exposure to any one municipality or subdivision for the Company as of December 31, 2024.

Previous wording

As of December 31, 2023 and 2022, the revenue bonds in the Company’s investment securities portfolios were issued by government municipalities and agencies to fund public services such as community school facilities, college and university dormitory facilities and water utilities. The revenue bonds are to be paid from 16 revenue sources in 2023 and 2022. The revenue sources that represent 5% or more, individually, as a percent of the total revenue bonds are summarized in the following table*(in thousands)*:

Current wording

As of December 31, 2024 and 2023, the revenue bonds in the Company’s investment securities portfolios were issued by government municipalities and agencies to fund public services such as community school facilities, college and university dormitory facilities and water utilities. The revenue bonds are to be paid from 15 and 16 revenue sources in 2024 and 2023, respectively. The revenue sources that represent 5% or more, individually, as a percent of the total revenue bonds are summarized in the following table*(in thousands)*:

Previous wording

Total deposits were $1.81 billion and $1.90 billion as of December 31, 2023 and 2022, respectively. The decrease of $86.1 million between the periods can be primarily attributed to decreases in savings and money market accounts as customers seek higher interest rates. A portion of the decline in savings and money market accounts was offset by an increase in time deposits. Balances fluctuate as customer liquidity needs vary and could be impacted by prevailing market interest rates, competition, and economic conditions. Approximately 12% of deposits are tied to external indexes as of December 31, 2023. Deposit interest expense related to these deposits increase more quickly than our other deposit products in a rising interest rate environment.

Current wording

Total deposits were $1.85 billion and $1.81 billion as of December 31, 2024 and 2023, respectively. The increase of $34.9 million between the periods can be primarily attributed to increases in time deposits and public funds. A portion of the increase in time deposits and public funds was offset by a decline in noninterest-bearing checking, savings and money market accounts. Balances fluctuate as customer liquidity needs vary and could be impacted by prevailing market interest rates, competition, and economic conditions. Approximately 14% of deposits are tied to external indexes as of December 31, 2024. Deposit interest expense related to these deposits can be more volatile than our other deposit products in a changing interest rate environment.

Previous wording

The Company’s primary source of funds is customer deposits. The Banks attempt to attract noninterest-bearing deposits, which are a low-cost funding source. In addition, the Banks offer a variety of interest-bearing accounts designed to attract both short-term and longer-term deposits from customers. Interest-bearing accounts earn interest at rates established by Bank management based on competitive market factors and the Company’s need for funds. While 87.0% of the Banks’ certificates of deposit mature in the next year, it is anticipated that many of these certificates will be renewed. Rate sensitive certificates of deposits in excess of $250,000 are subject to somewhat higher volatility with regard to renewal volume as the Banks adjust rates based upon funding needs. In the event a substantial volume of certificates is not renewed, the Company believes it has sufficient liquid assets and borrowing lines to fund significant runoff. A sustained reduction in deposit volume would have a significant negative impact on the Company’s operations and liquidity. The Company had $6.9 million and $11.4 million of brokered deposits as of December 31, 2023 and 2022, respectively. The Company has approximately $590 million of estimated uninsured deposits as of December 31, 2023. Approximately $173 million of estimated uninsured deposits were collateralized by pledged assets.

Current wording

The Company’s primary source of funds is customer deposits. The Banks attempt to attract noninterest-bearing deposits, which are a low-cost funding source. In addition, the Banks offer a variety of interest-bearing accounts designed to attract both short-term and longer-term deposits from customers. Interest-bearing accounts earn interest at rates established by Bank management based on competitive market factors and the Company’s need for funds. While 91.9% of the Banks’ certificates of deposit mature in the next year, it is anticipated that many of these certificates will be renewed. Rate sensitive certificates of deposits in excess of $250,000 are subject to somewhat higher volatility with regard to renewal volume as the Banks adjust rates based upon funding needs. In the event a substantial volume of certificates is not renewed, the Company believes it has sufficient liquid assets and borrowing lines to fund significant runoff. A sustained reduction in deposit volume would have a significant negative impact on the Company’s operations and liquidity. The Company had $14.2 million and $6.9 million of brokered deposits as of December 31, 2024 and 2023, respectively. The Company has approximately $643 million of estimated uninsured deposits as of December 31, 2024. Approximately $168 million of estimated uninsured deposits were collateralized by pledged assets.

Previous wording

The following table shows the amounts and remaining maturities of estimated uninsured time certificates of deposit as of December 31, 2023 and 2022 (in thousands).

Current wording

The following table shows the amounts and remaining maturities of the portion of estimated time deposits in excess of FIDC Insurance Limits as of December 31, 2024 and 2023 (in thousands).

Previous wording

Borrowed funds that may be utilized by the Company are comprised of the Federal Reserve Bank Term Funding Program (BTFP), FHLB advances, federal funds purchased and securities sold under agreements to repurchase (repurchase agreements). Borrowed funds are an alternative funding source to deposits and can be used to fund the Company’s assets and unforeseen liquidity needs. The BTFP offers loans of up to one year in length to banks pledging U.S. Treasuries, agency debt and mortgage-backed securities, and other qualifying assets as collateral. The BTFP allows for borrowing from the Federal Reserve Bank up to the par value of the pledged collateral. FHLB advances are loans from the FHLB that can mature daily or have longer maturities for fixed or floating rates of interest. Federal funds purchased are borrowings from other banks that mature daily. Repurchase agreements are similar to deposits as they are funds lent by various Bank customers; however, investment securities are pledged to secure such borrowings. The Company’s repurchase agreements reprice daily.

Current wording

Borrowed funds that may be utilized by the Company are comprised of the Federal Reserve Bank Term Funding Program (BTFP), FHLB advances, federal funds purchased and securities sold under agreements to repurchase (repurchase agreements). Borrowed funds are an alternative funding source to deposits and can be used to fund the Company’s assets and unforeseen liquidity needs. The BTFP offers loans of up to one year in length to banks pledging U.S. Treasuries, agency debt and mortgage-backed securities, and other qualifying assets as collateral. The BTFP allows for borrowing from the Federal Reserve Bank up to the par value of the pledged collateral. FHLB advances are loans that can mature daily or have longer maturities for fixed or floating rates of interest. Federal funds purchased are borrowings from other banks that mature daily. Repurchase agreements are similar to deposits as they are funds lent by various Bank customers; however, investment securities are pledged to secure such borrowings. The Company’s repurchase agreements reprice daily.

Previous wording

The Company’s credit risk is centered in the loan portfolio, which on December 31, 2023, totaled $1.28 billion as compared to $1.23 billion as of December 31, 2022, an increase of 4.2%. Net loans comprise approximately 59% of total assets as of the end of 2023. The objective in managing loan portfolio risk is to reduce the risk of loss resulting from a customer’s failure to perform according to the terms of a transaction and to quantify and manage credit risk on a portfolio basis. As the following chart indicates, the Company’s non-performing assets have decreased by 5% from December 31, 2022 and total $13.9 million as of December 31, 2023. The Company’s level of non-performing loans as a percentage of loans of 1.08% as of December 31, 2023, is higher than the Iowa State Average peer group of FDIC insured institutions as of December 31, 2023, of 0.39%. Management believes that the allowance for credit losses as of December 31, 2023 remains adequate based on its analysis of the non-performing assets and the portfolio as a whole.

Current wording

The Company’s credit risk is centered in the loan portfolio, which on December 31, 2024, totaled $1.30 billion as compared to $1.28 billion as of December 31, 2023, an increase of 2.0%. Net loans comprise approximately 61% of total assets as of the end of 2024. The objective in managing loan portfolio risk is to reduce the risk of loss resulting from a customer’s failure to perform according to the terms of a transaction and to quantify and manage credit risk on a portfolio basis. As the following chart indicates, the Company’s non-performing assets have increased by 11.4% from December 31, 2023 and total $15.5 million as of December 31, 2024. The Company’s level of non-performing loans as a percentage of loans of 1.17% as of December 31, 2024, is higher than the Iowa State Average peer group of FDIC insured institutions as of December 31, 2024, of 0.47%. Management believes that the allowance for credit losses as of December 31, 2024 remains adequate based on its analysis of the non-performing assets and the portfolio as a whole.

Previous wording

The accrual of interest on nonaccrual and other impaired loans is generally discontinued at 90 days or when, in the opinion of management, the borrower may be unable to meet payments as they become due. When interest accrual is discontinued, all unpaid accrued interest is reversed. Interest income is subsequently recognized only to the extent cash payments are received and when principal obligations are expected to be recoverable. Interest income on restructured loans is recognized pursuant to the terms of the new loan agreement. Interest income on other impaired loans remaining on accrual is monitored and income is recognized based upon the terms of the underlying loan agreement. However, the recorded net investment in impaired loans, including accrued interest, is limited to the present value of the expected cash flows of the impaired loan or the observable fair value of the loan’s collateral.

Current wording

The accrual of interest on nonaccrual and other non-performing loans is generally discontinued at 90 days or when, in the opinion of management, the borrower may be unable to meet payments as they become due. When interest accrual is discontinued, all unpaid accrued interest is reversed. Interest income is subsequently recognized only to the extent cash payments are received and when principal obligations are expected to be recoverable. Interest income on restructured loans is recognized pursuant to the terms of the new loan agreement. Interest income on other non-performing loans remaining on accrual is monitored and income is recognized based upon the terms of the underlying loan agreement. However, the recorded net investment in non-performing loans, including accrued interest, is limited to the present value of the expected cash flows of the substandard-impaired loan or the observable fair value of the loan’s collateral.

Previous wording

Non-performing loans totaled $13.9 million as of December 31, 2023 and were $803 thousand lower than the non-performing loans as of December 31, 2022. The decrease in non-performing loans was due primarily to payments on nonaccrual loans. The Company considers non-performing loans to generally include nonaccrual loans, loans past due 90 days or more and still accruing and other loans that may or may not meet the former nonperforming criteria but are considered to meet the definition of impaired.

Current wording

Non-performing loans totaled $15.5 million as of December 31, 2024 and were $1.6 million higher than the non-performing loans as of December 31, 2023. The increase in non-performing loans was due primarily to one loan relationship in the commercial real estate and commercial operating portfolios. The Company considers non-performing loans to generally include nonaccrual loans, loans past due 90 days or more and still accruing and other loans that may or may not meet the former non-performing criteria.

Previous wording

The allowance for credit losses related to these impaired loans was approximately $118 thousand and $95 thousand at December 31, 2023 and 2022, respectively. The average balances of impaired loans for the years ended December 31, 2023 and 2022 were $12.7 million and $13.0 million, respectively. For the years ended December 31, 2023 and 2022, interest income, which would have been recorded under the original terms of nonaccrual loans, was approximately $768 thousand and $733 thousand, respectively. There were $109 thousand and no loans greater than 90 days past due and still accruing interest as of December 31, 2023 and 2022, respectively.

Current wording

The allowance for credit losses related to these non-performing loans was approximately $98 thousand and $118 thousand at December 31, 2024 and 2023, respectively. The average balances of non-performing loans for the years ended December 31, 2024 and 2023 were $14.4 million and $13.2 million, respectively. For the years ended December 31, 2024 and 2023, interest income, which would have been recorded under the original terms of nonaccrual loans, was approximately $963 thousand and $768 thousand, respectively. There were $736 thousand and $109 thousand of loans greater than 90 days past due and still accruing interest as of December 31, 2024 and 2023, respectively.

Previous wording

Pooled reserves for loan categories range from 0.64% to 2.69% of the outstanding loan balances as of December 31, 2023. In general, as loan volume increases, the pooled reserve levels increase with that growth and as loan volume decreases, the pooled reserve levels decrease with that decline. The allowance relating to commercial real estate is the largest reserve component. As of December 31, 2023, commercial real estate loans have a pooled reserve of 1.50%.

Current wording

Pooled reserves for loan categories range from 0.81% to 2.41% of the outstanding loan balances as of December 31, 2024. In general, as loan volume increases, the pooled reserve levels increase with that growth and as loan volume decreases, the pooled reserve levels decrease with that decline. The allowance relating to commercial real estate is the largest reserve component. As of December 31, 2024, commercial real estate loans have a pooled reserve of 1.45%.

Previous wording

Other factors considered when determining the adequacy of the pooled reserve include historical losses; watch, substandard and impaired loan volume; the ability to collect past due loans; loan growth; loan-to-value ratios; loan administration; collateral values; and economic factors. The Company’s concentration risks include geographic concentration in Iowa; the local economy’s dependence upon several large governmental entity employers, including Iowa State University; and the health of Iowa’s agricultural sector that, in turn, is dependent on crop and livestock prices, weather conditions, trade policies and government programs. No assurances can be made that losses will remain at the relatively favorable levels experienced over the past five years.

Current wording

Other factors considered when determining the adequacy of the pooled reserve include historical losses; watch, substandard and substandard-impaired loan volume; the ability to collect past due loans; loan growth; loan-to-value ratios; loan administration; collateral values; and economic factors. The Company’s concentration risks include geographic concentration in Iowa; the local economy’s dependence upon several large governmental entity employers, including Iowa State University; and the health of Iowa’s agricultural sector that, in turn, is dependent on crop and livestock prices, weather conditions, trade policies and government programs. No assurances can be made that losses will remain at the relatively favorable levels experienced over the past five years.

Previous wording

Loans that the Banks have identified as having higher risk levels are reviewed individually in an effort to establish adequate loss reserves. These reserves are considered specific reserves and are directly impacted by the credit quality of the underlying loans. The specific reserves are dependent upon assumptions regarding the liquidation value of collateral and the cost of recovering collateral including legal fees. Changing the amount of specific reserves on individual loans has historically had a significant impact on the reallocation of the allowance among different parts of the portfolio. The following table sets forth information regarding changes in the Company's specific reserve on loans individually evaluated for impairment and loans individually evaluated for impairment for the most recent three years*(dollars in thousands)*:

Current wording

Loans that the Banks have identified as having higher risk levels are reviewed individually in an effort to establish adequate loss reserves. These reserves are considered specific reserves and are directly impacted by the credit quality of the underlying loans. The specific reserves are dependent upon assumptions regarding the liquidation value of collateral and the cost of recovering collateral including legal fees. Changing the amount of specific reserves on individual loans has historically had a significant impact on the reallocation of the allowance among different parts of the portfolio. The following table sets forth information regarding changes in the Company's specific reserve on loans individually evaluated for credit losses and loans individually evaluated for credit losses for the most recent three years*(dollars in thousands)*:

Previous wording

Liquidity is derived primarily from core deposit growth and retention; principal and interest payments on loans; principal and interest payments, sale, maturity, and prepayment of investment securities; net cash provided from operations; and access to other funding sources. Other funding sources include federal funds purchased lines, Federal Reserve BTFP, FHLB advances and other capital market sources.

Current wording

Liquidity is derived primarily from core deposit growth and retention; principal and interest payments on loans; principal and interest payments, sale, maturity, and prepayment of investment securities; net cash provided from operations; and access to other funding sources. Other funding sources include federal funds purchased lines, FHLB advances and other capital market sources.

Previous wording

Liquid assets of cash on hand, balances due from other banks and interest-bearing deposits in financial institutions for December 31, 2023 and 2022 totaled $55.1 million and $27.9 million, respectively. The higher balance of liquid assets as of December 31, 2023 primarily relates to increased deposits at the Federal Reserve Bank.

Current wording

Liquid assets of cash on hand, balances due from other banks, interest-bearing deposits in financial institutions and federal funds sold for December 31, 2024 and 2023 totaled $101.2 million and $55.1 million, respectively. The higher balance of liquid assets as of December 31, 2024 primarily relates to increased deposits at the Federal Reserve Bank.

Previous wording

Other sources of liquidity available to the Banks as of December 31, 2023 include available borrowing capacity with the FHLB of $280.9 million and federal funds borrowing capacity at correspondent banks of $101.5 million. As of December 31, 2023, the Company had outstanding FHLB advances and other borrowings of $110.6 million, no federal funds purchased, and securities sold under agreements to repurchase of $54.0 million.

Current wording

Other sources of liquidity available to the Banks as of December 31, 2024 include available borrowing capacity with the FHLB of $245.3 million and federal funds borrowing capacity at correspondent banks of $97.0 million. As of December 31, 2024, the Company had outstanding FHLB advances and other borrowings of $47.0 million, no federal funds purchased, and securities sold under agreements to repurchase of $52.4 million.

Previous wording

Total investments as of December 31, 2023, were $736.4 million compared to $786.4 million as of year-end 2022. The investment portfolio provides the Company with a significant amount of liquidity since all investments are classified as available-for-sale as of December 31, 2023 and 2022. The investments have pretax net unrealized losses of $62.3 million and $83.6 million as of December 31, 2023 and 2022, respectively.

Current wording

Total investments as of December 31, 2024, were $648.5 million compared to $736.4 million as of year-end 2023. The investment portfolio provides the Company with a significant amount of liquidity since all investments are classified as available-for-sale as of December 31, 2024 and 2023. The investments have pretax net unrealized losses of $52.0 million and $62.3 million as of December 31, 2024 and 2023, respectively.