# Ames National Corp: Form 10-Q for the period ended Sep 30, 2024

- Company: [Ames National Corp](/companies/atlo.md) (CIK 1132651)
- Form: 10-Q
- Filed: 2024-11-08
- Accepted by EDGAR: Nov 8, 2024, 18:00 ET
- Period: 2024-09-30
- Accession: 0001437749-24-034149
- Inline XBRL: yes
- Main document: https://www.sec.gov/Archives/edgar/data/1132651/000143774924034149/atlo20240930_10q.htm
- All documents and exhibits: https://www.sec.gov/Archives/edgar/data/1132651/000143774924034149/

## Figures reported in this filing

Standardized XBRL line items for the period ended 2024-09-30.

| Line item | Period | Value | XBRL concept |
| --- | --- | ---: | --- |
| Income tax | 3 months, 2024-07-01 to 2024-09-30 | $397.0k | us-gaap:IncomeTaxExpenseBenefit |
| Income tax | 9 months, 2024-01-01 to 2024-09-30 | $1.2m | us-gaap:IncomeTaxExpenseBenefit |
| Net income | 3 months, 2024-07-01 to 2024-09-30 | $2.2m | us-gaap:NetIncomeLoss |
| Net income | 9 months, 2024-01-01 to 2024-09-30 | $6.7m | us-gaap:NetIncomeLoss |
| Basic EPS | 3 months, 2024-07-01 to 2024-09-30 | $0.25 | us-gaap:EarningsPerShareBasic |
| Basic EPS | 9 months, 2024-01-01 to 2024-09-30 | $0.75 | us-gaap:EarningsPerShareBasic |
| Operating cash flow | 9 months, 2024-01-01 to 2024-09-30 | $8.4m | us-gaap:NetCashProvidedByUsedInOperatingActivities |
| Capital expenditure | 9 months, 2024-01-01 to 2024-09-30 | $231.0k | us-gaap:PaymentsToAcquirePropertyPlantAndEquipment |
| Dividends paid | 9 months, 2024-01-01 to 2024-09-30 | $7.3m | us-gaap:PaymentsOfDividends |
| Cash and equivalents | at 2024-09-30 | $59.0m | us-gaap:CashAndCashEquivalentsAtCarryingValue |
| Total assets | at 2024-09-30 | $2.12bn | us-gaap:Assets |
| Total liabilities | at 2024-09-30 | $1.94bn | us-gaap:Liabilities |
| Shareholders' equity | at 2024-09-30 | $183.4m | us-gaap:StockholdersEquity |

## Management's discussion and analysis

As filed, 45,852 characters.

### Overview

Ames National Corporation (the “Company”) is a bank holding company established in 1975 that owns and operates six bank subsidiaries in central, north-central and south-central Iowa (the “Banks”). The following discussion is provided for the consolidated operations of the Company and its Banks, First National Bank, Ames, Iowa (First National), State Bank & Trust Co. (State Bank), Boone Bank & Trust Co. (Boone Bank), Reliance State Bank (Reliance Bank), United Bank & Trust Co. (United Bank) and Iowa State Savings Bank (Iowa State Bank). The purpose of this discussion is to focus on significant factors affecting the Company's financial condition and results of operations.

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. Wealth management services includes financial planning and managing trust, agencies, estates and investment brokerage accounts. The Company employs twenty-three individuals to assist the Banks with its financial reporting, human resources, audit, compliance, marketing, technology systems, training, real estate valuation services and the coordination of management activities, in addition to 240 full-time equivalent individuals employed by the Banks.

The Company’s primary competitive strategy is to utilize seasoned and competent Bank management and local decision making authority to provide customers with faster response times and more flexibility in the products and services offered. This strategy is viewed as providing an opportunity to increase revenues through creating a competitive advantage over other financial institutions. The Company also strives to remain operationally efficient to provide better profitability while enabling the Company to offer more competitive loan and deposit rates.

The principal sources of Company revenues and cash flow are: (i) interest and fees earned on loans made by the Company and Banks; (ii) interest on fixed income investments held by the Banks; (iii) fees on wealth management services provided by those Banks exercising trust powers; (iv) service fees on deposit accounts maintained at the Banks; (v) gain on sale of loans; and (vi) merchant and card fees. The Company’s principal expenses are: (i) interest expense on deposit accounts and other borrowings; (ii) credit loss expense; (iii) salaries and employee benefits; (iv) data processing costs associated with maintaining the Banks’ loan and deposit functions; (v) occupancy expenses for maintaining the Banks’ facilities; and (vi) professional fees. The largest component contributing to the Company’s net income is net interest income, which is the difference between interest earned on earning assets (primarily loans and investments) and interest paid on interest-bearing liabilities (primarily deposits and other borrowings). One of management’s principal functions is to manage the spread between interest earned on earning assets and interest paid on interest bearing liabilities in an effort to maximize net interest income while maintaining an appropriate level of interest rate risk.

The Company had net income of $2.2 million, or $0.25 per share, for the three months ended September 30, 2024, compared to net income of $2.9 million, or $0.33 per share, for the three months ended September 30, 2023. The decrease in earnings is primarily due to an increase in credit loss expense and consultant fees related to negotiating long-term vendor contracts. The increase in credit loss expense is primarily due to loan growth and a specific reserve placed on a commercial loan relationship. The consultant fees were paid as a percentage of the negotiated benefit to the Company. The consultant fees are recognized into expense during the contract negotiations while the benefits will be recognized throughout the related contractual agreements.

Net loan charge-offs for the three months ended September 30, 2024 totaled $10 thousand compared to net loan recoveries of $4 thousand for the three months ended September 30, 2023. A credit loss expense of $371 thousand was recognized for the three months ended September 30, 2024 as compared to a credit loss benefit of $274 thousand for the three months ended September 30, 2023.

The following management discussion and analysis will provide a review of important items relating to:

- Challenges, Risks and Uncertainties
- Critical Accounting Policies
- Non-GAAP Financial Measures
- Income Statement Review
- Balance Sheet Review
- Asset Quality Review and Credit Risk Management
- Liquidity and Capital Resources
- Forward-Looking Statements and Business Risks

### Challenges, Risks and Uncertainties

Management has identified certain events or circumstances that may negatively impact the Company’s financial condition and results of operations in the future and is attempting to position the Company to best respond to those challenges. These challenges are addressed in the Company’s most recent Annual Report on Form 10-K filed on March 8, 2024.

### Critical Accounting Policies

The discussion and analysis of the Company's financial condition and results of operations are based upon the Company's consolidated financial statements that have been prepared in accordance with GAAP. The preparation of the Company's financial statements requires management to make estimates and judgments that affect the reported amounts of assets, liabilities, income and expenses. These estimates are based upon historical experience and on various other assumptions that management believes are reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions. The estimates and judgments that management believes involve the most complex and subjective estimates and judgments and have the most effect on the Company's reported financial position and results of operations are described as critical accounting policies in the Company's Annual Report on Form 10-K for the year ended December 31, 2023, as filed with the SEC on March 8, 2024. There have been no significant changes in the critical accounting policies or the assumptions and judgments utilized in applying these policies since December 31, 2023.

### Non-GAAP Financial Measures

This report contains references to financial measures that are not defined in GAAP. Such non-GAAP financial measures include the Company’s presentation of net interest income and net interest margin on a fully taxable equivalent (FTE) basis. Management believes these non-GAAP financial measures are widely used in the financial institutions industry and provide useful information to both management and investors to analyze and evaluate the Company’s financial performance. Limitations associated with non-GAAP financial measures include the risks that persons might disagree as to the appropriateness of items included in these measures and that different companies might calculate these measures differently. These non-GAAP disclosures should not be considered an alternative to the Company’s GAAP results. The following table reconciles the non-GAAP financial measures of net interest income and net interest margin on an FTE basis to GAAP *(dollars in thousands).*

| Reconciliation of net interest income and annualized net interest margin on an FTE basis to GAAP: | Three Months Ended September 30, 2024 | 2023 | Nine Months Ended September 30, 2024 | 2023 |
| --- | ---: | ---: | ---: | ---: |
| Net interest income (GAAP) | $11,077 | $10,689 | $32,855 | $33,660 |
| Tax-equivalent adjustment (1) | 128 | 146 | 405 | 464 |
| Net interest income on an FTE basis (non-GAAP) | 11,205 | 10,835 | 33,260 | 34,124 |
| Average interest-earning assets | $2,030,102 | $2,049,289 | $2,052,438 | $2,056,912 |
| Net interest margin on an FTE basis (non-GAAP) | 2.21% | 2.11% | 2.16% | 2.21% |

(1) Computed on a tax-equivalent basis using an incremental federal income tax rate of 21 percent, adjusted to reflect the effect of the tax-exempt interest income associated with owning tax-exempt securities and loans.

### Income Statement Review for the Three Months ended September 30, 2024 and 2023

The following highlights a comparative discussion of the major components of net income and their impact for the three months ended September 30, 2024 and 2023:

AVERAGE BALANCES AND INTEREST RATES

The following two tables are used to calculate the Company’s non-GAAP net interest margin on an FTE basis. The first table includes the Company’s average assets and the related income to determine the average yield on earning assets. The second table includes the average liabilities and related expense to determine the average rate paid on interest-bearing liabilities. The net interest margin is equal to interest income less interest expense divided by average earning assets. Refer to the net interest income discussion following the tables for additional detail.

*AVERAGE BALANCE SHEETS AND INTEREST RATES*

*(dollars in thousands)*

| ASSETS Interest-earning assets Loans (1) | Three Months Ended September 30, 2024 Average balance | Revenue/ expense | Yield/ rate | 2023 Average balance | Revenue/ expense | Yield/ rate |
| --- | ---: | ---: | ---: | ---: | ---: | ---: |
| Commercial | $89,633 | $1,425 | 6.36% | $90,660 | $1,336 | 5.89% |
| Agricultural | 122,642 | 2,356 | 7.68% | 94,504 | 1,676 | 7.09% |
| Real estate | 1,073,945 | 12,750 | 4.75% | 1,049,185 | 11,384 | 4.34% |
| Consumer and other | 17,064 | 220 | 5.16% | 16,192 | 189 | 4.67% |
| Total loans (including fees) | 1,303,284 | 16,751 | 5.14% | 1,250,541 | 14,585 | 4.67% |
| Investment securities |  |  |  |  |  |  |
| Taxable | 596,141 | 2,985 | 2.00% | 652,939 | 3,152 | 1.93% |
| Tax-exempt (2) | 91,221 | 609 | 2.67% | 103,427 | 695 | 2.69% |
| Total investment securities | 687,362 | 3,594 | 2.09% | 756,366 | 3,847 | 2.03% |
| Interest-bearing deposits with banks and federal funds sold | 39,456 | 495 | 5.02% | 42,382 | 476 | 4.49% |
| Total interest-earning assets | 2,030,102 | $20,840 | 4.11% | 2,049,289 | $18,908 | 3.69% |
| Noninterest-earning assets | 72,650 |  |  | 81,230 |  |  |
| TOTAL ASSETS | $2,102,752 |  |  | $2,130,519 |  |  |

(1) Average loan balances include nonaccrual loans, if any. Interest income collected on nonaccrual loans has been included.

(2) Tax-exempt income has been adjusted to a tax-equivalent basis using an incremental tax rate of 21%.

*AVERAGE BALANCE SHEETS AND INTEREST RATES*

*(dollars in thousands)*

| LIABILITIES AND STOCKHOLDERS' EQUITY Interest-bearing liabilities Deposits | Three Months Ended September 30, 2024 Average balance | Revenue/ expense | Yield/ rate | 2023 Average balance | Revenue/ expense | Yield/ rate |
| --- | ---: | ---: | ---: | ---: | ---: | ---: |
| Interest-bearing checking, savings accounts and money markets | $1,146,461 | $4,982 | 1.74% | $1,175,939 | $4,301 | 1.46% |
| Time deposits | 312,034 | 3,296 | 4.23% | 266,066 | 2,217 | 3.33% |
| Total deposits | 1,458,495 | 8,278 | 2.27% | 1,442,005 | 6,518 | 1.81% |
| Other borrowed funds | 120,234 | 1,357 | 4.51% | 155,249 | 1,555 | 4.01% |
| Total interest-bearing liabilities | 1,578,729 | 9,635 | 2.44% | 1,597,254 | 8,073 | 2.02% |
| Noninterest-bearing liabilities |  |  |  |  |  |  |
| Noninterest-bearing checking | 337,604 |  |  | 367,139 |  |  |
| Other liabilities | 13,244 |  |  | 12,189 |  |  |
| Stockholders' equity | 173,175 |  |  | 153,937 |  |  |
| TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY | $2,102,752 |  |  | $2,130,519 |  |  |
| Net interest income (FTE)(3) |  | $11,205 |  |  | $10,835 |  |
| Net interest spread (FTE) |  |  | 1.67% |  |  | 1.67% |
| Net interest margin (FTE)(3) |  |  | 2.21% |  |  | 2.11% |

(3) Net interest income (FTE) is a non-GAAP financial measure. For further information, refer to the Non-GAAP Financial Measures section of this report.

Net Interest Income

For the three months ended September 30, 2024 and 2023, the Company's net interest margin adjusted for tax exempt income was 2.21% and 2.11%, respectively. Net interest income, prior to the adjustment for tax-exempt income, for the three months ended September 30, 2024 totaled $11.1 million compared to $10.7 million for the three months ended September 30, 2023.

For the three months ended September 30, 2024, interest income increased $2.0 million, or 10.4%, when compared to the same period in 2023. The increase is primarily due to higher average rates and growth in the loan portfolio.

Interest expense increased $1.6 million, or 19.3%, for the three months ended September 30, 2024 when compared to the same period in 2023. The higher interest expense for the period is primarily due to customers shifting to higher rate deposit products.

Credit Loss Expense

A credit loss expense of $371 thousand was recognized for the three months ended September 30, 2024 as compared to a credit loss benefit of $274 thousand for the three months ended September 30, 2023. Net loan charge-offs for the three months ended September 30, 2024 totaled $10 thousand compared to net loan recoveries of $4 thousand for the three months ended September 30, 2023. The credit loss expense in 2024 was primarily due to an increase in specific reserves in the commercial loan portfolio.

Noninterest Income and Expense

Noninterest income for the three months ended September 30, 2024 totaled $2.41 million compared to $2.36 million for the three months ended September 30, 2023, an increase of 2.2%.

Noninterest expense for the three months ended September 30, 2024 totaled $10.5 million compared to $9.8 million recorded for the three months ended September 30, 2023, an increase of 7.2%. The increase is primarily due to increases in salaries and benefits and $449 thousand of consultant fees for certain contract negotiations included in professional fees in 2024. These types of consultant fees are infrequent as they normally relate to longer term contracts and no additional fees are anticipated for contracts for the remainder of the year. The efficiency ratio was 77.87% for the third quarter of 2024 as compared to 75.12% in the third quarter of 2023.

Income Taxes

Income tax expense for the three months ended September 30, 2024 totaled $397 thousand compared to $597 thousand recorded for the three months ended September 30, 2023. The effective tax rate was 15% and 17% for the three months ended September 30, 2024 and 2023. The lower than expected tax rate in 2024 and 2023 was due primarily to tax-exempt interest income and New Markets Tax Credits.

### Income Statement Review for the Nine Months Ended September 30, 2024 and 2023

The following highlights a comparative discussion of the major components of net income and their impact for the nine months ended September 30, 2024 and 2023:

AVERAGE BALANCES AND INTEREST RATES

The following two tables are used to calculate the Company’s non-GAAP net interest margin on an FTE basis. The first table includes the Company’s average assets and the related income to determine the average yield on earning assets. The second table includes the average liabilities and related expense to determine the average rate paid on interest-bearing liabilities. The net interest margin is equal to interest income less interest expense divided by average earning assets. Refer to the net interest income discussion following the tables for additional detail.

*AVERAGE BALANCE SHEETS AND INTEREST RATES*

*(dollars in thousands)*

| ASSETS Interest-earning assets Loans (1) | Nine Months Ended September 30, 2024 Average balance | Revenue/ expense | Yield/ rate | 2023 Average balance | Revenue/ expense | Yield/ rate |
| --- | ---: | ---: | ---: | ---: | ---: | ---: |
| Commercial | $88,236 | $4,132 | 6.24% | $84,654 | $3,508 | 5.53% |
| Agricultural | 118,875 | 6,734 | 7.55% | 92,289 | 4,636 | 6.70% |
| Real estate | 1,069,681 | 37,302 | 4.65% | 1,044,394 | 32,978 | 4.21% |
| Consumer and other | 16,676 | 625 | 5.00% | 16,322 | 535 | 4.37% |
| Total loans (including fees) | 1,293,468 | 48,793 | 5.03% | 1,237,659 | 41,657 | 4.49% |
| Investment securities |  |  |  |  |  |  |
| Taxable | 611,032 | 9,104 | 1.99% | 664,661 | 9,556 | 1.92% |
| Tax-exempt (2) | 96,314 | 1,929 | 2.67% | 111,872 | 2,212 | 2.64% |
| Total investment securities | 707,346 | 11,033 | 2.08% | 776,533 | 11,768 | 2.02% |
| Interest-bearing deposits with banks and federal funds sold | 51,624 | 1,937 | 5.00% | 42,720 | 1,484 | 4.63% |
| Total interest-earning assets | 2,052,438 | $61,763 | 4.01% | 2,056,912 | $54,909 | 3.56% |
| Noninterest-earning assets | 74,608 |  |  | 78,761 |  |  |
| TOTAL ASSETS | $2,127,046 |  |  | $2,135,673 |  |  |

(1) Average loan balances include nonaccrual loans, if any. Interest income collected on nonaccrual loans has been included.

(2) Tax-exempt income has been adjusted to a tax-equivalent basis using an incremental tax rate of 21%.

*AVERAGE BALANCE SHEETS AND INTEREST RATES*

*(dollars in thousands)*

| LIABILITIES AND STOCKHOLDERS' EQUITY Interest-bearing liabilities Deposits | Nine Months Ended September 30, 2024 Average balance | Revenue/ expense | Yield/ rate | 2023 Average balance | Revenue/ expense | Yield/ rate |
| --- | ---: | ---: | ---: | ---: | ---: | ---: |
| Interest-bearing checking, savings accounts and money markets | $1,169,167 | $14,768 | 1.68% | $1,224,172 | $12,043 | 1.31% |
| Time deposits | 302,650 | 9,269 | 4.08% | 248,775 | 5,171 | 2.77% |
| Total deposits | 1,471,817 | 24,037 | 2.18% | 1,472,947 | 17,214 | 1.56% |
| Other borrowed funds | 135,331 | 4,466 | 4.40% | 123,142 | 3,571 | 3.87% |
| Total interest-bearing liabilities | 1,607,148 | 28,503 | 2.36% | 1,596,089 | 20,785 | 1.74% |
| Noninterest-bearing liabilities |  |  |  |  |  |  |
| Noninterest-bearing checking | 340,466 |  |  | 373,412 |  |  |
| Other liabilities | 12,919 |  |  | 11,187 |  |  |
| Stockholders' equity | 166,513 |  |  | 154,985 |  |  |
| TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY | $2,127,046 |  |  | $2,135,673 |  |  |
| Net interest income (FTE)(3) |  | $33,260 |  |  | $34,124 |  |
| Net interest spread (FTE) |  |  | 1.65% |  |  | 1.82% |
| Net interest margin (FTE)(3) |  |  | 2.16% |  |  | 2.21% |

(3) Net interest income (FTE) is a non-GAAP financial measure. For further information, refer to the Non-GAAP Financial Measures section of this report.

Net Interest Income

For the nine months ended September 30, 2024 and 2023, the Company's net interest margin adjusted for tax exempt income was 2.16% and 2.21%, respectively. Net interest income, prior to the adjustment for tax-exempt income, for the nine months ended September 30, 2024 totaled $32.9 million compared to $33.7 million for the nine months ended September 30, 2023.

For the nine months ended September 30, 2024, interest income increased $6.9 million, or 12.7%, when compared to the same period in 2023. The increase is primarily due to higher average rates and growth in the loan portfolio.

Interest expense increased $7.7 million, or 37.1%, for the nine months ended September 30, 2024 when compared to the same period in 2023. The higher interest expense for the period is primarily due to an increase in market interest rates, customers shifting to higher rate deposit products and an increase in other borrowings.

Credit Loss Expense

A credit loss expense of $722 thousand was recognized for the nine months ended September 30, 2024 as compared to a credit loss expense of $34 thousand for the nine months ended September 30, 2023. Net loan charge-offs totaled $6 thousand for the nine months ended September 30, 2024 compared to net loan charge-offs of $177 thousand for the nine months ended September 30, 2023. The credit loss expense in 2024 was primarily due to loan growth and an increase in specific reserves. The credit loss expense in 2023 was primarily due to charge-offs in the agriculture and commercial loan portfolios.

Noninterest Income and Expense

Noninterest income for the nine months ended September 30, 2024 totaled $7.2 million compared to $6.9 million for the nine months ended September 30, 2023, an increase of 4.0%. The increase is primarily due to an increase in wealth management income and partially offset by losses on the sale of securities in 2024.

Noninterest expense for the nine months ended September 30, 2024 totaled $31.4 million compared to $30.1 million recorded for the nine months ended September 30, 2023, an increase of 4.3%. The increase is primarily due to an increase in number of employees, normal increases in salaries and benefits and $799 thousand of consultant fees for certain contract negotiations included in professional fees. The efficiency ratio was 78.47% for the third quarter of 2024 as compared to 74.27% in the third quarter of 2023.

Income Taxes

Income tax expense for the nine months ended September 30, 2024 totaled $1.2 million compared to $1.7 million recorded for the nine months ended September 30, 2023. The effective tax rate was 15% and 17% for the nine months ended September 30, 2024 and 2023, respectively. The lower than expected tax rate in 2024 and 2023 was due primarily to tax-exempt interest income and New Markets Tax Credits.

### Balance Sheet Review

As of September 30, 2024, total assets were $2.1 billion, a $32.3 million decrease compared to December 31, 2023. This decrease in assets is primarily due to a decrease in securities available-for-sale and partially offset by an increase in loans.

Investment Portfolio

The investment portfolio totaled $688.6 million as of September 30, 2024, a decrease of $47.8 million from the December 31, 2023 balance of $736.4 million. The decrease in securities available-for-sale is primarily due to maturities in excess of purchases and partially offset by a decrease in unrealized losses.

On a quarterly basis, the investment portfolio is reviewed for credit losses. As of September 30, 2024, gross unrealized losses of $39.8 million, are due to the interest rate environment and are not considered credit-related. Certain bonds in the investment portfolio may incur credit losses and could negatively affect the Company’s net income. As a result of the Company’s favorable liquidity position, the Company does not have the intent to sell securities with an unrealized loss at the present time. In addition, management believes it is more likely than not that the Company will hold these securities until recovery of their fair value to cost basis and expects full principal and interest to be collected. Therefore, the Company does not have an allowance for credit losses on these investments as of September 30, 2024.

At September 30, 2024, the Company’s investment securities portfolio included securities issued by 261 government municipalities and agencies located within 30 states with a fair value of $256.4 million. At December 31, 2023, the Company’s investment securities portfolio included securities issued by 272 government municipalities and agencies located within 30 states with a fair value of $269.9 million. 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 $5.4 million (approximately 2.1% of the fair value of the government municipalities and agencies) represent the largest exposure to any one municipality or agency for the Company as of September 30, 2024.

The Company’s procedures for evaluating investments in states, municipalities and political subdivisions include but are not limited to reviewing the offering statement and the most current available financial information, comparing yields to yields of bonds of similar credit quality, confirming capacity to repay, assessing operating and financial performance, evaluating the stability of tax revenues, considering debt profiles and local demographics, and for revenue bonds, assessing the source and strength of revenue structures for municipal authorities. These procedures, as applicable, are utilized for all municipal purchases and are utilized in whole or in part for monitoring the portfolio of municipal holdings. The Company does not utilize third party credit rating agencies as a primary component of determining if the municipal issuer has an adequate capacity to meet the financial commitments under the security for the projected life of the investment, and, therefore, does not compare internal assessments to those of the credit rating agencies. Credit rating downgrades are utilized as an additional indicator of credit weakness and as a reference point for historical default rates.

The following table summarizes the total general obligation and revenue bonds in the Company’s investment securities portfolios as of September 30, 2024 and December 31, 2023 identifying the state in which the issuing government municipality or agency operates *(in thousands):*

| Obligations of states and political subdivisions: General Obligation bonds: | 2024 Amortized Cost | Estimated Fair Value | 2023 Amortized Cost | Estimated Fair Value |
| --- | ---: | ---: | ---: | ---: |
| Iowa | $51,606 | $49,261 | $59,721 | $55,827 |
| Texas | 25,879 | 24,413 | 29,199 | 26,721 |
| Nebraska | 19,656 | 17,912 | 19,660 | 17,202 |
| Washington | 9,380 | 8,858 | 9,632 | 8,860 |
| Oregon | 9,183 | 8,860 | 9,885 | 9,299 |
| Connecticut | 8,699 | 8,367 | 8,700 | 8,183 |
| Other (2024: 15 states; 2023: 15 states) | 28,367 | 26,827 | 32,698 | 30,257 |
| Total general obligation bonds | $152,770 | $144,498 | $169,495 | $156,349 |
| Revenue bonds: |  |  |  |  |
| Iowa | $44,931 | $43,343 | $48,645 | $45,953 |
| Texas | 14,771 | 13,727 | 14,794 | 13,193 |
| Nebraska | 9,217 | 8,408 | 9,397 | 8,238 |
| Other (2024: 24 states; 2023: 23 states) | 49,028 | 46,406 | 50,144 | 46,158 |
| Total revenue bonds | $117,947 | $111,884 | $122,980 | $113,542 |
| Total obligations of states and political subdivisions | $270,717 | $256,382 | $292,475 | $269,891 |

As of September 30, 2024 and December 31, 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, water utilities and electrical utilities. The revenue bonds are to be paid from 5 primary revenue sources. 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):*

| Revenue bonds by revenue source | 2024 Amortized Cost | Estimated Fair Value | 2023 Amortized Cost | Estimated Fair Value |
| --- | ---: | ---: | ---: | ---: |
| Sales tax | $27,678 | $26,414 | $29,409 | $27,284 |
| Water | 19,783 | 18,763 | 20,394 | 18,968 |
| College and universities, primarily dormitory revenues | 16,766 | 15,686 | 16,944 | 15,340 |
| Sewer | 12,212 | 11,363 | 12,771 | 11,465 |
| Leases | 7,922 | 7,523 | 8,060 | 7,421 |
| Other | 33,586 | 32,135 | 35,402 | 33,064 |
| Total revenue bonds by revenue source | $117,947 | $111,884 | $122,980 | $113,542 |

46

Loan Portfolio

The loan portfolio, net of the allowance for credit losses, totaled $1.296 billion and $1.278 billion as of September 30, 2024 and December 31, 2023, respectively. The increase was primarily due to an increase in the 1 to 4 family residential real estate, multi-family real estate and agricultural operating loan portfolios.

Deposits

Deposits totaled $1.80 billion and $1.81 billion as of September 30, 2024 and December 31, 2023, respectively. The decrease is primarily due to lower balances in retail and commercial noninterest-bearing checking, savings and money market accounts as customers seek higher interest rates. A portion of the decrease in retail and commercial noninterest-bearing checking, savings and money market accounts was offset by an increase in time deposits and public funds. Securities sold under agreements to repurchase decreased to $42.8 million as of September 30, 2024 compared to $54.0 million as of December 31, 2023. Securities sold under agreements to repurchase and deposit balances fluctuate as customers’ liquidity needs vary and could be impacted by prevailing market interest rates, competition, and economic conditions. Approximately 15% of deposits are tied to external indexes as of September 30, 2024. Deposit interest expense related to these deposits can be more volatile than other deposit products in a changing interest rate environment.

Other Borrowings

Other borrowings decreased to $83.1 million as of September 30, 2024 compared to $110.6 million as of December 31, 2023. The Company has reduced borrowings throughout 2024 as investments have matured.

Off-Balance Sheet Arrangements

The Company is party to financial instruments with off-balance-sheet risk in the normal course of business. These financial instruments include commitments to extend credit and standby letters of credit. These instruments involve, to varying degrees, elements of credit risk in excess of the amount recognized in the balance sheet. No material changes in the Company’s off-balance sheet arrangements have occurred since December 31, 2023.

### Asset Quality Review and Credit Risk Management

The Company’s credit risk is historically centered in the loan portfolio, which totaled $1.296 billion and $1.278 billion as of September 30, 2024 and December 31, 2023, respectively. Net loans comprise 61% of total assets as of September 30, 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 an agreement and to quantify and manage credit risk on a portfolio basis. The Company’s level of problem loans (consisting of nonaccrual loans and loans past due 90 days or more) as a percentage of total loans was 1.33% at September 30, 2024, as compared to 1.08% at December 31, 2023. The Company’s level of problem loans as a percentage of total loans at September 30, 2024 of 1.33% is higher as compared to the Iowa State Average peer group of FDIC insured institutions as of June 30, 2024, of 0.49%, most recent available.

Substandard-Impaired loans totaled $16.9 million as of September 30, 2024 and have increased $3.7 million as compared to the substandard-impaired loans of $13.2 million as of December 31, 2023. The increase is primarily due to downgrades in the commercial real estate and commercial operating loan portfolios.

A loan is considered Substandard-Impaired when, based on current information and events, it is probable that the Company will be unable to collect the scheduled payment of principal and interest when due according to the contractual terms of the loan agreement. Factors considered by management in determining impairment include payment status, collateral value, and the probability of collecting scheduled principal and interest payments when due. The Company applies its normal loan review procedures to identify loans that should be evaluated for impairment.

Loans past due 90 days or more that are still accruing interest are reviewed no less frequently than quarterly to determine if there continues to be a strong reason that the credit should not be placed on nonaccrual. As of September 30, 2024, nonaccrual loans totaled $17.5 million and there were no loans past due 90 days and still accruing. This compares to nonaccrual loans of $13.8 million and $109 thousand of loans past due 90 days and still accruing as of December 31, 2023. There was no other real estate owned as of September 30, 2024 and December 31, 2023.

Loans past due 30 days or more totaled $9.8 million as of September 30, 2024, compared to $4.3 million as of December 31, 2023. The increase is primarily related to the commercial real estate portfolio.

The watch and special mention loans classified as agricultural real estate and operating totaled $27.5 million as of September 30, 2024 as compared to $19.9 million as of December 31, 2023. The increase is primarily due to agricultural operating loans that were moved to watch as the customers refinance and restructure assets. The substandard and substandard-impaired loans in these categories totaled $6.1 million and $6.2 million as of September 30, 2024 and December 31, 2023, respectively.

The watch and special mention loans classified as commercial real estate totaled $41.0 million as of September 30, 2024 as compared to $73.3 million as of December 31, 2023. The substandard and substandard-impaired commercial real estate loans totaled $29.3 million and $15.4 million as of September 30, 2024 and December 31, 2023, respectively. The changes between periods are primarily due to weaking in the commercial real estate loan portfolio as some commercial real estate loans are experiencing a decline in occupancy rate and collateral valuation.

The allowance for credit losses as a percentage of outstanding loans as of September 30, 2024 was 1.34%, as compared to 1.30% at December 31, 2023. The allowance for credit losses totaled $17.6 million and $16.8 million as of September 30, 2024 and December 31, 2023, respectively. The increase in the allowance for credit losses is mainly due to loan growth and an increase in specific reserves.

Due to recent trends in the banking industry, commercial real estate and multi-family real estate loans are facing heightened risk due to factors such as increased susceptibility to economic pressures caused by elevated interest rates and challenging market conditions. The Company maintains a rigorous approach to risk management through regular loan reviews, stress testing and sensitivity analyses to evaluate the risk level in the loan portfolio. Loan reviews include monitoring past due rates, non-performing trends, concentrations, loan-to-value ratios, and other qualitative factors. The Company's loan policies are robust and are updated as needed to align with strategic objectives and risk management priorities.

Commercial real estate and multi-family real estate represent approximately 42% of the loan portfolio as of September 30, 2024. The following is an additional breakdown of the Company's commercial real estate and multi-family real estate portfolios *(in thousands):*

|  | September 30, 2024 Total | Percent of Total Loans |
| --- | ---: | ---: |
| Real estate - multi-family | $201,888 | 15.4% |
| Real estate - commercial |  |  |
| Owner-Occupied All Purposes | 185,281 | 14.1% |
| Non-Owner Occupied Retail or Other | 59,103 | 4.5% |
| Non-Owner Occupied Hotel | 40,264 | 3.1% |
| Non-Owner Occupied Warehouse | 35,336 | 2.7% |
| Non-Owner Occupied Office | 35,089 | 2.7% |
| Total real estate - commercial | 355,073 | 27.0% |
| Total real estate - commercial and multi-family | $556,961 | 42.4% |

### Liquidity and Capital Resources

Liquidity management is the process by which the Company, through its Banks’ Asset and Liability Committees (ALCO), ensures that adequate liquid funds are available to meet its financial commitments on a timely basis, at a reasonable cost and within acceptable risk tolerances. These commitments include funding credit obligations to borrowers, funding of mortgage originations pending delivery to the secondary market, withdrawals by depositors, maintaining adequate collateral for pledging for public funds, trust deposits and borrowings, paying dividends to shareholders, payment of operating expenses, funding capital expenditures and maintaining deposit reserve requirements.

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 securities available-for-sale; 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.

As of September 30, 2024, the level of liquidity and capital resources of the Company remain at a satisfactory level. Management believes that the Company’s liquidity sources will be sufficient to support its existing operations for the foreseeable future.

The liquidity and capital resources discussion will cover the following topics:

- Review of the Company’s Current Liquidity Sources
- Review of Statements of Cash Flows
- Company Only Cash Flows
- Review of Commitments for Capital Expenditures, Cash Flow Uncertainties and Known Trends in Liquidity and Cash Flows Needs
- Capital Resources

Review of the Company’s Current Liquidity Sources

Liquid assets of cash on hand, balances due from other banks and interest-bearing deposits in financial institutions as of September 30, 2024 and December 31, 2023 totaled $59.0 million and $55.1 million, respectively, and management believes these sources provide an adequate level of liquidity given current economic conditions.

Other sources of liquidity available to the Banks as of September 30, 2024 include outstanding lines of credit with the FHLB of Des Moines, Iowa of $201.0 million, with $72.5 million of outstanding FHLB advances. Federal funds borrowing capacity at correspondent banks was $97.5 million, with no outstanding federal fund purchase balances as of September 30, 2024. The Company had securities sold under agreements to repurchase totaling $42.8 million as of September 30, 2024.

Total investments as of September 30, 2024 were $688.6 million compared to $736.4 million as of December 31, 2023. These investments provide the Company with liquidity since all of the investments are classified as available-for-sale as of September 30, 2024. The Company has $398.9 million of unpledged securities available-for-sale and interest-bearing deposits as of September 30, 2024. The investment portfolio serves an important role in the overall context of balance sheet management in terms of balancing capital utilization and liquidity. The decision to purchase or sell securities is based upon the current assessment of economic and financial conditions, including the interest rate environment, liquidity and credit considerations. The portfolio’s scheduled maturities and payments represent a significant source of liquidity.

Review of the Consolidated Statements of Cash Flows

Net cash provided by operating activities for the nine months ended September 30, 2024 totaled $8.4 million compared to $12.8 million for the nine months ended September 30, 2023. The decrease of $4.4 million in cash provided by operating activities was primarily due to payments of accrued interest on borrowings and lower net income.

Net cash provided by investing activities for the nine months ended September 30, 2024 was $51.6 million compared to $38.8 million for the nine months ended September 30, 2023. The increase of $12.8 million in cash provided by investing activities was primarily due to maturities of securities available-for-sale.

Net cash provided by (used in) financing activities for the nine months ended September 30, 2024 totaled ($56.1) million compared to $10.5 million for the nine months ended September 30, 2023. The decrease in cash provided by financing activities of $66.6 million was primarily due to payments on other borrowings, fewer proceeds from other borrowings between periods and a decrease in securities sold under agreements to repurchase. The decrease in cash provided by financing activities was partially offset by a lower decrease in deposits. As of September 30, 2024, the Company did not have any external debt financing, off-balance sheet financing arrangements, or derivative instruments linked to its stock.

Review of Company Only Cash Flows

The Company’s liquidity on an unconsolidated basis is heavily dependent upon dividends paid to the Company by the Banks. The Banks provide adequate liquidity to pay the Company’s expenses and stockholder dividends. Dividends paid by the Banks to the Company amounted to $7.9 million and $7.2 million for the nine months ended September 30, 2024 and 2023, respectively. Various federal and state statutory provisions limit the amounts of dividends banking subsidiaries are permitted to pay to their holding companies without regulatory approval. Federal Reserve policy further limits the circumstances under which bank holding companies may declare dividends. For example, a bank holding company should not continue its existing rate of cash dividends on its common stock unless its net income is sufficient to fully fund each dividend and its prospective rate of earnings retention appears consistent with its capital needs, asset quality and overall financial condition. In addition, the Federal Reserve and the FDIC have issued policy statements, which provide that insured banks and bank holding companies should generally pay dividends only out of current operating earnings. Federal and state banking regulators may also restrict the payment of dividends by order.

The Company, on an unconsolidated basis, has interest-bearing deposits totaling $1.0 million as of September 30, 2024.

Review of Commitments for Capital Expenditures, Cash Flow Uncertainties and Known Trends in Liquidity and Cash Flows Needs

No other material capital expenditures or material changes in the capital resource mix are anticipated at this time. The primary cash flow uncertainty would be a sudden decline in deposits causing the Banks to liquidate securities. Historically, the Banks have maintained an adequate level of short-term marketable investments to fund the temporary declines in deposit balances. There are no known trends in liquidity and cash flow needs as of September 30, 2024 that are of concern to management.

Capital Resources

The Company’s total stockholders’ equity as of September 30, 2024 totaled $183.4 million and was $17.6 million higher than the $165.8 million recorded as of December 31, 2023. The increase in stockholders’ equity was primarily the result of a decrease in unrealized losses on the investment portfolio. At September 30, 2024 and December 31, 2023, stockholders’ equity as a percentage of total assets was 8.6% and 7.7%, respectively. The capital levels of the Company currently exceed applicable regulatory guidelines to be considered “well capitalized” as of September 30, 2024. Unrealized losses on the investment portfolio are excluded from regulatory capital.

### Forward-Looking Statements and Business Risks

Th**e** Private Securities Litigation Reform Act of 1995 provides the Company with the opportunity to make cautionary statements regarding forward-looking statements contained in this Quarterly Report, including forward-looking statements concerning the Company’s financial performance and asset quality. Forward-looking statements contained in this Quarterly Report are not historical facts and are based on management’s current beliefs, assumptions, predictions and expectations of future events, including the Company’s future performance, taking into account all information currently available to management. These beliefs, assumptions, predictions and expectations are subject to numerous risks and uncertainties and can change as a result of many possible events or factors, not all of which are known to management and many of which are beyond management’s control. If a change occurs, the Company’s business, financial condition, liquidity, results of operations, asset quality, plans and objectives may vary materially from those expressed in the forward-looking statements. Accordingly, investors are cautioned not to place undue reliance on such forward-looking statements. These statements are often, but not always, made through the use of words or phrases such as “anticipates,” “believes,” “can,” “could,” “may,” “predicts,” “potential,” “should,” “will,” “estimate,” “plans,” “projects,” “forecasts”, “continuing,” “ongoing,” “expects,” “views,” “intends” and similar words or phrases. The risks and uncertainties that may affect the Company’s future performance and asset quality include, but are not limited to, the following: the impact of inflation and changing interest rates on national, regional and local economies in general and on the Company’s customers in particular; competitive products and pricing available in the marketplace; changes in credit and other risks posed by the Company’s loan and investment portfolios, including declines in commercial or residential real estate values or changes in the allowance for credit losses resulting from new market conditions or regulatory requirements; fiscal and monetary policies of the U.S. government; changes in governmental regulations affecting financial institutions (including regulatory fees and capital requirements); changes in prevailing interest rates; credit risk management and asset/liability management; the financial and securities markets; the availability of and cost associated with sources of liquidity; and other risks and uncertainties inherent in the Company’s business, including those discussed under the headings Forward-Looking Statements and Business Risks” and “Risk Factors” in the Company’s Annual Report on Form 10-K for the year-ended December 31, 2023. Any forward-looking statements are qualified in their entirety by the foregoing risks and uncertainties and speak only as of the date on which such statements are made. The Company undertakes no obligation to revise or update such forward-looking statements to reflect events or circumstances after the date on which the statements are made or to reflect the occurrence of unanticipated events.

## Controls and procedures

As filed, 1,197 characters.

As of the end of the period covered by this report, an evaluation was performed under the supervision and with the participation of the Company’s management, including the Principal Executive Officer and Principal Financial Officer, of the effectiveness of the design and operation of the Company’s disclosure controls and procedures (as defined in Rule 13a-15(e) promulgated under the Securities and Exchange Act of 1934, as amended). Based on that evaluation, the Company’s management, including the Principal Executive Officer and Principal Financial Officer, concluded that the Company’s disclosure controls and procedures are effective to ensure that information required to be disclosed by the Company in the reports that it files or submits under Securities Exchange Act of 1934 is recorded, processed, summarized and reported, within the time periods specified in the Securities and Exchange Commission’s rules and forms.

There was no change in the Company's internal control over financial reporting that occurred during the Company's last fiscal quarter that has materially affected, or is reasonably likely to materially affect, the Company's internal control over financial reporting.

Filed Nov 8, 2024.
Source: SEC EDGAR, the filing index for accession 0001437749-24-034149. Last ingested by Listed: Oct 24, 2026, 15:05 ET. No prices; not investment advice.