What changed in this filing

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Item 7. Management’s Discussion and Analysis

2023-03-07 compared with 2022-03-15 · 111 added, 152 removed, 692 unchanged (28% of the section changed)

6 unchanged sentences

We reported net income of $22,238 and earnings per common share of $2.95 for the year ended December 31, 2022.

Net income and earnings per common share for the year ended December 31, 2020 were $10,885 and $1.37, respectively.

While we had a reduction in total interest income of $4,059 during 2021, compared to prior year, net interest income for the period ended December 31, 2021 increased by $2,354 from the prior year.

Developments leading to the decline in gross interest income during 2021 included the lowering of interest rates, and a pause in advances to mortgage brokers.

Conversely, we benefited from lower interest rates and a reduction in higher-cost borrowings as interest expense on deposits and borrowings decreased $6,413 for the year ended December 31, 2021 when compared to the same period in 2020.

The provision for loan losses decreased by $2,183 in 2021 when compared to the previous year.

During 2020, increased economic and environmental risk factors, predominantly driven by COVID-19, drove a significant increase in the provision.

While these risk factors remain, credit quality was strong during 2021.

As of December 31, 2021, total past due and nonaccrual loans were $4,031, or 0.31% of gross loans, compared to 0.78% as of December 31, 2020.

Additionally, net loan charge-offs were relatively low at $123.

Strong credit quality, coupled with improvement in economic factors, such as unemployment rates, resulted in a reduction in the ALLL and a provision reversal of $518 during 2021.

Noninterest income of $13,822 for the year ended December 31, 2021 decreased $601 when compared to 2020.

While service charges and fees, a component of noninterest income, increased $1,070 when compared to the previous year, 2020 also included an additional $1,022 related to gain on sale of loans and $620 related to gains from redemption of corporate owned life insurance policies.

Noninterest expenses for the year ended December 31, 2021 decreased $7,539 when compared to 2020, which can be attributed to a $7,643 cost to extinguish $100,000 of FHLB advances during the fourth quarter of 2020.

The remaining marginal increase of $104 can be attributed to disciplined operating expense controls.

Net income and earnings per common share for the same period of 2021 were $19,499 and $2.48, respectively.

Net interest income increased $7,780, or 14.76%, during 2022 compared to 2021.

While PPP loan fees declined, rising interest rates and growth in core loans and AFS securities led to a $5,685 or 9.46% increase in gross interest income during 2022 compared to 2021.

We continued to benefit from the significant reduction in higher-cost borrowings as interest expense on deposits and borrowings decreased $2,095, or 28.26%, for the year ended December 31, 2022 when compared to the same period in 2021.

The provision for loan losses during the year ended December 31, 2022 was $483, compared to a net provision reversal of $518 for the same period in 2021.

During 2020, increased economic and environmental risk factors, predominantly driven by COVID-19, drove a significant increase in the ALLL and provision expense.

Strong credit quality, coupled with improvement in economic factors, such as unemployment rates, resulted in a reduction in the ALLL and a provision reversal during the first quarter of 2021.

Credit quality remained strong at December 31, 2022, as evidenced by total past due and nonaccrual loans which were $11,130, or 0.88%, of gross loans.

Despite strong credit quality, the ALLL and provision for loan losses increased during 2022 as a result of core loan growth and economic related risk factors.

Noninterest income decreased $156 during 2022 compared to the same period in 2021.

Gain on sale of mortgages decreased $1,063, as residential mortgage originations sold in the secondary market declined.

Offsetting this was an increase in service charges and fees of $1,116, with $619 of the increase attributed to OMSR income.

Noninterest expenses increased $3,126 in 2022 when compared to the same period in 2021 and was primarily a result of increased compensation, other losses, donations and community relations related expenses.

As of December 31, 2022, total assets and assets under management were $2,030,267 and $2,808,391, respectively.

1 unchanged sentence

Loans outstanding as of December 31, 2022 totaled $1,264,173.

During 2021, gross loans increased $62,726 which was largely the result of growth in the commercial and residential mortgage loan portfolios.

Our securities portfolio increased $151,373 since December 31, 2020, predominantly due to purchases of treasury securities, bringing our total securities portfolio to $490,601.

Total deposits increased $144,022 during the year and totaled $1,710,339 as of December 31, 2021.

This growth was primarily in demand and savings deposits, driven mostly from attracting new customers and funds from the SBA PPP and government stimulus.

During 2022, gross loans declined $36,864 which was largely the result of a $72,001 reduction in advances to mortgage brokers, which is included within the commercial loan portfolio;

however, is not considered a component of our core lending business.

During 2022, core loan growth totaled $35,137 and was driven by growth in all loan categories.

Total deposits were $1,744,275 as of December 31, 2022, which was an increase of $33,936 since December 31, 2021.

A majority of this growth was in the form of demand deposits.

All regulatory capital ratios for the Bank exceeded the minimum thresholds to be considered a "well capitalized" institution.

Our net yield on interest earning assets (FTE) was 2.87% for 2021 which declined from 2.96% in 2020.

Management implemented strategic programs focused on improving our net yield as rates declined in 2020, which included enhanced pricing related to loans and a reduced reliance on higher-cost borrowed funds and brokered deposits as funding sources.

While these efforts have helped, the current interest rate environment plus the elevated cash position has had a negative impact on the yield of interest earning assets.

Our securities portfolio increased $89,880 since December 31, 2021, predominantly due to $210,869 in purchases, although offset by maturities and an increase in net unrealized losses.

The unrealized loss on our AFS securities portfolio resulted from the recent increases in short-term and intermediate-term benchmark interest rates.

As a result, this change in unrealized losses has reduced our balance of shareholders' equity and negatively impacted our tangible book value.

Management does not anticipate the need to sell securities and incur a loss as a result of the sale.

Our net yield on interest earning assets (FTE) was 3.18% for 2022 which increased from 2.87% in 2021.

The marked improvement is a result of strategies management began implementing in 2019 and 2020, focused on positioning the Bank to benefit in a rising interest rate environment, including a reduced reliance on higher-cost borrowed funds and brokered deposits.

Recent Events and Legislation

Impact of COVID-19:

Unexpected and unprecedented changes have occurred during 2020 and 2021 as the result of COVID-19.

The World Health Organization has declared the situation a global pandemic.

The pandemic created significant market volatility, economic uncertainty, and disruption to normal business operations around the world, with slowdowns and shutdowns affecting entire industries.

The CARES Act, an unprecedented federal government support program, was enacted on March 27, 2020 in response to the COVID-19 pandemic.

It is a $2 trillion stimulus package intended to provide financial relief across the country.

The CARES Act included the PPP, which enabled businesses to obtain a forgivable SBA loan to meet payroll, rent, utility, and mortgage interest obligations for the 24-week period following the loan origination, and re-open quickly once the public health crisis ends.

The first applications for PPP funds, with a term of two years, were accepted beginning on April 3, 2020.

During 2020, we facilitated more than 950 SBA PPP loans for a total of $99,459 and had the opportunity to continue providing funding in 2021 under an additional government stimulus program.

During 2021, we funded 845 SBA PPP loans for a total of $54,551 under this additional government stimulus program.

Bank regulators issued an interim rule that neutralizes the regulatory capital effects by allowing a zero percent risk weight, for capital purposes, to loans originated under the PPP.

The capital rule was issued April 9, 2020, with an immediate effective date.

Since 2020, many customers have expressed their general concern about the uncertain economic conditions, but it is still premature to reasonably predict the magnitude of the impact.

One measure we deployed to assist our customers included changes to service charges and fees on deposit accounts.

Since the COVID-19 pandemic led to an increase in the need for electronic services and products, we elected to remove select deposit account charges and fees and temporarily waive others to ease the financial stress on our customers.

Other measures we have taken to assist our customers include loan programs that provide short-term payment relief.

Under these programs, borrowers whose loans were in good standing as of March 1, 2020 could elect to defer full or partial payments for a period not to exceed 180 days.

Loan payment deferrals totaled $306,103, or 23.8% of gross loans, as of June 30, 2020.

As of September 30, 2020, active loan payment deferrals declined to $103,858, or 8.0% of gross loans, as the majority of borrowers granted loan payment deferrals had reverted back to contractual payments.

As of December 31, 2020, active loan payment deferrals declined even further and totaled $6,048, or 0.5% of gross loans.

As of December 31, 2021, we had active loan payment deferrals totaling $159.

Bank regulators issued a statement on March 22, 2020, and a revised statement on April 7, 2020, which provided confirmation that short-term loan modifications made on a good faith basis in response to COVID-19 to borrowers with a current payment status are not categorized as TDRs.

Pursuant to this guidance, short-term loan modifications meeting this criteria were not categorized as TDR as of December 31, 2021.

In response to the COVID-19 pandemic, we temporarily closed branch lobbies, modified staffing levels, and enabled employees to work remotely during most of 2020 and into 2021.

While branch operations and staffing levels have generally resumed to normal, the extent to which COVID-19 impacts our business will depend on future developments, which remain highly uncertain and cannot be predicted with any accuracy.

We expect the significance of the pandemic, including the extent of its effect on our financial and operational results, to be dictated by, among other factors, its duration, the success of efforts to contain the virus and variants to the virus and the impact of actions taken in response.

Uncertainty created by the pandemic is pervasive, and continues to impact our operations, customers, and various areas of risk.

Unexpected and unprecedented changes have occurred since early 2020 as the result of COVID-19.

The full impact of the pandemic, including the uncertainties surrounding the pandemic, remain in 2022.

However, significant progress has been made with vaccinations and medical treatments.

Additionally, improved safety guidelines and the easing of restrictions have occurred since the onset of the pandemic.

We expect the significance of the pandemic, including the extent of its effect on our financial and operational results, to be dictated by continued developments related to the COVID-19 pandemic.

We continue to closely monitor external events and are in continual discussion with our customers to assess, prepare, and respond to conditions as they evolve.

Subordinated Debt Issuance:

On June 2, 2021, we completed a private placement of $30,000 in aggregate principal amount of 3.25% Fixed-to-Floating Rate Subordinated Notes due 2031 (the “Notes”) to various institutional investors (the “Offering”).

The price for the Notes was 100% of the principal amount of the Notes.

The Notes are intended to qualify as Tier 2 capital for regulatory purposes.

We intend to utilize the net proceeds from the Offering for general corporate purposes, including potential repurchases of common stock and/or merger and acquisition activity.

The Notes will initially bear a fixed interest rate of 3.25% until June 15, 2026, after which time until maturity on June 15, 2031, the interest rate will reset quarterly to an annual floating rate equal to the then-current 3-month SOFR plus 256 basis points.

The Notes are redeemable by us at our option, in whole or in part, on or after June 15, 2026.

Any such redemption will be at a redemption price equal to 100% of the principal amount of the Notes being redeemed, plus accrued and unpaid interest.

The Notes are not subject to redemption at the option of the holders.

Tender Offer :

On September 1, 2021, we announced the commencement of a “modified Dutch Auction” tender offer to purchase up to $20,000 in value of our common stock, or such lesser number of shares of our common stock as were properly tendered and not properly withdrawn, at a price not less than $23.00 nor greater than $27.00 per share.

The tender offer expired on October 13, 2021 and resulted in the purchase of 396,576.78534 shares at a price of $27.00 per share for a total amount of

approximately $10,708.

The remainder of the $20,000 not used in the tender offer may be deployed for general corporate purposes, including potential repurchases of our common stock.

Reclassifications

1 unchanged sentence

Subsequent Events

We evaluated subsequent events after December 31, 2021 through the date our consolidated financial statements were issued for potential recognition and disclosure.

No subsequent events require financial statement recognition or disclosure between December 31, 2021 and the date our consolidated financial statements were issued.

In June 2016, the FASB issued ASU 2016-13 and updated the measurement for credit losses for AFS debt securities and assets measured at amortized cost, which include loans and any other financial assets with the contractual right to receive cash.

The new approach requires the use of an expected credit loss model.

The new CECL guidance was effective January 1, 2023 and we have fully adopted the new guidance as of that date.

Based on portfolio characteristics and economic conditions and expectations as of January 1, 2023, we recorded a combined increase to the ACL and reserve for unfunded commitments on January 1, 2023 of approximately $3,000 upon the adoption of ASU 2016-13.

We evaluated subsequent events after December 31, 2022 through the date our condensed consolidated financial statements were issued for potential recognition and disclosure.

Outside of the adoption of CECL, no other subsequent events require financial statement recognition or disclosure between December 31, 2022 and the date our condensed consolidated financial statements were issued.

We have not received, nor are aware of, any notices of regulatory actions as of March 6, 2023.

10 unchanged sentences

Noninterest expenses 46,820 43,694 51,233

Federal income tax expense (benefit) 3,848 987 1,380

Net income (loss) $ 19,499 $ 10,885 $ 13,024

Basic earnings (loss) $ 2.48 $ 1.37 $ 1.65

Diluted earnings (loss) $ 2.45 $ 1.34 $ 1.61

Federal income tax expense 4,606 3,848 987

Net income $ 22,238 $ 19,499 $ 10,885

Basic earnings $ 2.95 $ 2.48 $ 1.37

Diluted earnings $ 2.91 $ 2.45 $ 1.34

Dividends $ 1.09 $ 1.08 $ 1.08

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2022 March 31

INCOME STATEMENT DATA

Total interest income $ 17,915 $ 17,019 $ 16,102 $ 14,762

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2021 March 31

INCOME STATEMENT DATA

Total interest income $ 15,041 $ 15,142 $ 14,640 $ 15,290

4 unchanged sentences

Noninterest expenses 11,197 11,185 10,495 10,817

Federal income tax expense (benefit) (508) 734 558 203

Net income (loss) $ (723) $ 4,357 $ 4,187 $ 3,064

Basic earnings (loss) $ (0.10) $ 0.55 $ 0.53 $ 0.39

Diluted earnings (loss) (0.10) 0.54 0.52 0.38

Federal income tax expense 1,010 916 881 1,041

Net income $ 4,794 $ 4,686 $ 4,621 $ 5,398

Basic earnings $ 0.63 $ 0.59 $ 0.58 $ 0.68

Diluted earnings $ 0.63 $ 0.58 $ 0.57 $ 0.67

Dividends $ 0.27 $ 0.27 $ 0.27 $ 0.27

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Acquisition intangibles and goodwill are qualitatively evaluated to determine if it is more likely than not that the carrying balance is impaired on at least an annual basis.

During the fourth quarter of 2020, we engaged a third-party valuation firm to perform a quantitative analysis of goodwill as of December 31, 2020.

In determining the fair value of the Bank and Isabella Bank Corporation, the third-party firm assessed general economic conditions, industry and market considerations, the impact of recent events to financial performance, the market price of our common stock, and other relevant events.

Based on the valuation prepared, it was determined that our estimated fair value of the Bank and Isabella Bank Corporation at December 31, 2020 were greater than our recorded book value and no impairment of goodwill was identified.

The carrying amount of goodwill as of December 31, 2020 relied on assumptions and use of estimates pursuant to the valuation obtained.

We did not observe any indications of a potential impairment to the carrying balance of goodwill during 2021.

As such, a valuation was not necessary to be performed as of December 31, 2021.

AFS securities are carried at fair value with changes in the fair value included as a component of other comprehensive income.

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INTEREST EARNING ASSETS

Loans $ 1,208,141 $ 51,410 4.26 % $ 1,236,169 $ 54,102 4.38 % $ 1,162,210 $ 54,192 4.66 %

$ 1,249,634 $ 53,283 4.26 % $ 1,208,141 $ 51,410 4.26 % $ 1,236,169 $ 54,102 4.38 %

Taxable investment securities 477,159 8,294 1.74 % 297,357 4,920 1.65 % 229,468 5,214 2.27 %

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Net yield on interest earning assets (FTE) 3.18 % 2.87 % 2.96 %

(1) Includes taxable AFS securities and equity securities

(1) Includes loans and mortgage loans AFS

Net interest income is the amount by which interest income on earning assets exceeds the interest expense on interest bearing liabilities.

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Net change in interest margin (FTE) $ 5,265 $ 2,413 $ 7,678 $ 2,555 $ (402) $ 2,153

The current low interest rate environment continues to place pressure on our net interest margin.

SBA PPP fee income has supported our yield on total earning assets.

Given the uncertainty in rates and the economic environment as a result of COVID-19, improvement in our net yield on interest earning assets could be gradual.

The interest rate increases during 2022 alleviated much of the pressure placed on our net interest margin.

Additionally, SBA PPP fee income has supported our yield on total earning assets over the past two years.

The recent rate increases, and future rate increases expected during 2023, should lead to continued improvement in our net yield on interest earning assets.

Average Yield / Rate for the Three-Month Periods Ended:

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ALLL as a % of nonaccrual loans 2155.36 % 731.16 % 183.40 % 121.48 % 115.36 %

While we have experienced fluctuations in credit quality indicators in recent periods, credit quality remained strong at December 31, 2021.

The COVID-19 pandemic led to the temporary and some permanent closures of businesses throughout the communities in which we serve, which also led to increased unemployment.

We increased the ALLL during 2020 as a result of increased economic and environmental related risk factors, primarily driven by COVID-19.

During 2020, we increased the ALLL as a result of increased economic and environmental related risk factors, primarily driven by COVID-19.

While these risk factors remain, improvement in credit quality indicators resulted in a reduction to the ALLL during 2021.

The economic impact from the COVID-19 pandemic could pose significant credit risk due to the potential inability of consumer and commercial borrowers to make contractual payments.

In late March 2020, we implemented payment programs for borrowers to alleviate the financial setback due to the temporary closure of businesses and lost wages.

We continue to monitor the economic impact from COVID-19 as it relates to credit risk to ensure the ALLL is appropriate.

Despite strong credit quality, the ALLL increased during 2022 as a result of core loan growth during the year and increased economic related risk factors.

The following table illustrates the two main components of the ALLL as of:

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Total past due and nonaccrual loans to gross loans 0.88 % 0.31 % 0.78 % 0.96 % 1.01 %

Past due and nonaccrual status loans, as a percentage of gross loans, improved throughout 2021 and continue to be at low levels as a result of strong repayment performance.

Past due and nonaccrual status loans, as a percentage of gross loans, has improved in recent years with the exception of 2022.

During the fourth quarter, past due loans increased as a result of one commercial relationship.

Therefore, we do not believe the recent increase is an indicator of credit deterioration.

A summary of loans past due and in nonaccrual status, including the composition of the ending balance of nonaccrual status loans by type, is included in “Note 4 – Loans and ALLL” of “Notes to Consolidated Financial Statements” in Item 8.

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Loans paid off (22) (5,739) — — (22) (5,739)

Transfers to OREO — — (2) (356) (2) (356)

Transfers to accrual status 3 2,127 (3) (2,127) — —

Transfers to nonaccrual status (2) (88) 2 88 — —

December 31, 2021 98 25,276 6 449 104 25,725

2 unchanged sentences

Loans paid off (24) (4,988) — — (24) (4,988)

Transfers to accrual status 3 2,127 (3) (2,127) — —

Transfers to nonaccrual status (2) (88) 2 88 — —

Balances charged-off — — (1) (74) (1) (74)

December 31, 2022 78 $ 21,069 5 $ 270 83 $ 21,339

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Commercial real estate 161 223 — 314 377 —

Commercial other — — — 1,200 1,200 —

Agricultural real estate — — — 356 357 —

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Loans may be placed back on accrual status after six months of continued performance and achievement of current payment status.

While the level of nonperforming loans has fluctuated in recent periods, it remains low in comparison to peer banks.

The level of nonperforming loans continued to improve and remains low in comparison to peer banks.

The following table summarizes nonaccrual loans as of December 31:

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Freddie Mac servicing fee 669 747 (78) (10.44) % 625 122 19.52 %

Net OMSR income (loss) (184) 44 (228) (518.18) % (170) 214 N/M

Net OMSR income (loss) 435 (184) 619 336.41 % 44 (228) (518.18) %

Other fees for customer services 286 312 (26) (8.33) % 305 7 2.30 %

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Wealth management fees 3,005 3,071 (66) (2.15) % 2,578 493 19.12 %

Net gain on sale of mortgage loans 1,694 2,716 (1,022) (37.63) % 650 2,066 317.85 %

Earnings on corporate owned life insurance policies 884 800 84 10.50 % 755 45 5.96 %

Gains from redemption of corporate owned life insurance policies 271 891 (620) (69.58) % — 891 N/M

Net income (loss) on joint venture investment — 577 (577) (100.00) (3,108) 3,685 N/M

Net gain on sale of mortgage loans 631 1,694 (1,063) (62.75) % 2,716 (1,022) (37.63) %

Gains from redemption of corporate owned life insurance policies 57 271 (214) (78.97) % 891 (620) (69.58) %

Net income (loss) on joint venture investment — — — 0.00 % 577 (577) (100.00) %

Other 359 372 (13) (3.49) % 362 10 2.76 %

Total noninterest income $ 13,666 $ 13,822 $ (156) (1.13) % $ 14,423 $ (601) (4.17) %

ATM and debit card fees fluctuate from period to period based primarily on their usage.

While we do not anticipate significant changes to our ATM and debit card fee structure, we do expect that fee income will continue to increase in 2022 as the usage of ATM and debit cards continues to increase.

Service charges and fees on deposit accounts declined in 2020 as a result of waived fees.

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Despite some fees being removed or waived, fee income increased during 2021, but did not reach pre-pandemic levels.

As such, we expect service charges and fees in 2022 to approximate pre-pandemic levels.

During 2022, we experienced an increase in fees mainly due to an increase in the number of deposit accounts.

Although we expect a continuation in deposit account growth in 2023, fee levels may not exceed 2022 due to continued regulatory discussions around the practice of service charges and fees.

OMSR income results are driven, in part, by changes in offering rates on residential mortgage loans, anticipated prepayments in the servicing-retained portfolio, and the volume of loans within the servicing-retained portfolio.

Increased prepayment speeds, as a result of a decline in interest rates during the first quarter of 2020, were the primary driver of the losses recognized during most of 2020.

During 2021, the volume of loans serviced decreased, which decreases the value of the servicing rights, and the increased prepayment speeds continued.

Both of these factors have contributed to the recognition of a loss during 2021.

OMSR income during 2022 may continue to experience fluctuations and could vary from 2021 levels.

The increase in wealth management fees in 2021 was driven by a combination of the growth in the stock market and increased new business activity.

During the first quarter of 2020, a decline in the stock market resulted in a decrease in the value of investment assets under management.

Wealth management fees in 2022 are expected to continue to increase as a result of new business activity.

Net gain on sale of mortgage loans fluctuates as the result of changes in the amount of loans sold, loan pricing and interest rates.

During 2021, the volume of loans serviced decreased, while prepayment speeds continued to increase.

Both of these factors contributed to the recognition of a loss during 2021.

During 2022, prepayment speeds declined as a result of an increase in interest rates, resulting in income recognized during 2022.

OMSR income during 2023 is not expected to exceed 2022 levels as a result of an anticipated decline in the volume of loans serviced.

In 2020 wealth management fees decreased mainly due to the decline in market values of assets under management.

During 2021, we experienced an increase in wealth management fees driven by a combination of the growth in the stock market and increased new business activity.

During 2022, there was strong growth in the portfolio, however the decline in the market offset the increase in fees related to growth.

We expect wealth management fees to exceed 2022 levels in 2023, as a result of new business activity.

The amount of loans sold is driven by customer demand and balance sheet management strategies.

We experienced a significant increase in loan demand during most of 2020 and into 2021 which led to an increase in the number and dollar amount of loans sold.

We experienced a significant increase in loan demand in early 2021 which led to an increase in the number and dollar amount of loans sold;

as such, net gain on sale of mortgage loans increased significantly.

In mid-2021, we decided to retain more loan originations on the balance sheet, thereby decreasing the number of mortgage loans sold, which had an impact on the net gain on loans sold in 2021.

As demand is expected to decline slightly in 2022, net gain on sale of mortgage loans is not expected to exceed 2021 levels.

We recognized income during 2021 and 2020 due to the redemption of corporate owned life insurance policies in connection with the passing of retired bank employees.

We sold our membership interest in our joint venture investment in Corporate Settlement Solutions, LLC (“CSS”) during the fourth quarter of 2020, which resulted in a $394 reduction in income.

As a result of a valuation during the fourth quarter of 2019, CSS recognized a $7,133 impairment related to intangible assets as of December 31, 2019.

Since we accounted for our investment in CSS under the equity method of accounting, and were a 50% owner of CSS, we reduced our investment in CSS by $3,566 during the fourth quarter of 2019.

In mid-2021, we decided to retain more loan originations on the balance sheet, due to our liquidity position, thereby decreasing the number of mortgage loans sold, which had an impact on the net gain on loans sold.

As a result of this change in strategy, coupled with a decline in loan demand, net gain on sale of mortgage loans declined in the second half of 2021 and during 2022.

As demand is expected to remain at reduced levels in 2023, due to the rise in interest rates, net gain on sale of mortgage loans is not expected to exceed 2022 levels during 2023.

We recognized gains from the redemption of corporate owned life insurance policies in connection with the passing of retired bank employees.

We sold our membership interest in our joint venture investment in Corporate Settlement Solutions, LLC during the fourth quarter of 2020.

The fluctuations in all other income are spread throughout various categories, none of which are individually significant.

5 unchanged sentences

Occupancy 3,691 3,661 30 0.82 % 3,557 104 2.92 %

Losses on extinguishment of debt — 7,643 (7,643) (100.00) % — 7,643 N/M

Losses on extinguishment of debt — — — 0.00 % 7,643 (7,643) (100.00) %

Audit, consulting, and legal fees 2,358 2,066 292 14.13 % 1,836 230 12.53 %

1 unchanged sentence

Marketing costs 1,056 939 117 12.46 % 877 62 7.07 %

Memberships and subscriptions 877 740 137 18.51 % 700 40 5.71 %

Loan underwriting fees 1,004 849 155 18.26 % 825 24 2.91 %

Donations and community relations 923 705 218 30.92 % 723 (18) (2.49) %

Memberships and subscriptions 876 877 (1) (0.11) % 740 137 18.51 %

Director fees 790 703 87 12.38 % 695 8 1.15 %

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During the fourth quarter of 2020, we incurred expense of $7,643 as a result of the extinguishment of $100,000 of FHLB advances.

We have experienced an increase in the usage of ATM and debit cards which has resulted in increased income and also increased ATM and debit card expenses.

Based on the anticipated continuation of increased ATM and debit card usage, we expect expenses to continue to increase in 2022.

As a result of an assessment credit of $440 received during the third quarter of 2019, FDIC insurance premiums declined in 2019 as compared to 2020 and 2021 expenses.

Donations and community relations increased during 2022 as a result of initiatives designed to deepen and strengthen our relationship with the communities in which we operate and serve, which includes an expanded footprint.

While government restrictions and temporary business closures related to COVID-19 impacted our ability to maintain the level of support in early 2021, we have since increased the level of community support.

We intend to increase our community support in 2023, as a result expenses in 2023 are expected to exceed 2022 levels.

FDIC insurance premiums decreased in 2022 as a result of increased earnings and improved credit quality metrics.

While we anticipate these trends to continue, FDIC insurance premiums are expected to increase in 2023 as a result of the recently approved increase in the base deposit insurance rate.

The fluctuations in all other noninterest expenses are spread throughout various categories, none of which are individually significant.

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Amortized cost of AFS securities 625,605 485,710 139,895 28.80 %

Unrealized gains (losses) on AFS securities 4,891 13,262 (8,371) (63.12) %

Unrealized gains (losses) on AFS securities (45,124) 4,891 (50,015) N/M

AFS securities 580,481 490,601 89,880 18.32 %

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Included in cash and cash equivalents are funds held with the FRB which fluctuate from period to period.

Cash levels decreased significantly during 2021 as a result of loan growth and payments for maturing long-term borrowings and other short-term liabilities.

During 2021, excess funds from deposit growth were used to purchase AFS securities.

Cash levels decreased significantly during 2022 as a result of the purchase of AFS securities.

These purchases were funded through deposit growth and a decline in loans during 2022.

AFS securities

The primary objective of our investing activities is to provide for safety of the principal invested.

Secondary considerations include providing earnings and liquidity while managing our overall exposure to changes in interest rates.

The primary objective of our investing activities is to manage our overall exposure to changes in interest rates.

Secondary considerations include ensuring ample access to liquidity, generating returns, and providing current income.

Over the last two years, the flat yield curve encouraged the use of excess funds to reduce higher-cost borrowings as opposed to investing in AFS securities.

However, based on balance sheet strategies, excess funds above what is required to retire higher-cost funding sources may prudently be deployed to purchase of AFS securities in future periods.

However, based on balance sheet strategies, excess funds above what is required to retire future maturities of higher-cost funding sources was prudently deployed to purchase AFS securities in future periods.

The following is a schedule of the carrying value of AFS securities as of December 31:

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Total $ (36,864) (2.83) % $ 62,726 5.07 % $ 51,741 4.36 %

Loan demand has been negatively impacted by competition for new commercial loan opportunities while some customers hesitated to borrow due to the pandemic.

While we've recently experienced an increase in commercial loan demand, advances to mortgage brokers, within the commercial loan portfolio, was the primary driver behind the growth during 2021.

While we anticipate a decline in advances to mortgage brokers in 2022, we expect the commercial loan portfolio to increase with increased demand.

Agricultural loans have declined over the last year due to the competitive lending environment.

We expect the competitive environment for agricultural loans to remain strong.

Residential mortgage lending activities have increased since mid-2020 as interest rates declined.

Growth is expected to continue in both the residential mortgage and consumer loan portfolios during 2022.

Advances to mortgage brokers, within the commercial loan portfolio, which is not considered a component of our core lending business, was the primary driver behind the fluctuations experienced since December 31, 2021, as participation in this mortgage purchase program paused during most of 2021 and again in 2022.

We've recently experienced an increase in commercial loan demand, despite changes in advances to mortgage brokers and continued forgiveness of the remaining SBA PPP loans.

As demand is expected to continue, we anticipate growth in the commercial loan portfolio in 2023.

While Agricultural loans have increased in 2022 and are expected to continue in 2023, we do not anticipate the same level of growth experienced in 2022 as the result of the competitive lending environment.

Residential mortgage lending activities have slowed during the year as a result of rising interest rates.

As interest rates are expected to continue to increase in 2023, growth in residential and consumer loans is anticipated to continue but at a slower pace.

Accrued interest receivable and other assets

Other assets consist primarily of prepaid expenses, OMSR, and net deferred tax assets.

The increase in accrued interest receivable and other assets during 2022 was due primarily to the change in the net deferred tax assets related to AFS securities.

For more information related to estimates and deferred taxes, refer to “Note 1 – Nature of Operations and Summary of Significant Accounting Policies” and “Note 15 – Federal Income Taxes” of “Notes to Consolidated Financial Statements” in Item 8.

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Total deposits have increased over the past 12 months with significant growth in non-contractual deposits, such as demand and savings deposits.

This trend is anticipated to continue into 2022 as the financial markets continue to exhibit signs of instability.

We experienced a decline in certificates of deposit over the past year as a result of the low interest rate environment with customers moving their funds into demand and savings accounts.

During 2020, we used excess funds to reduce higher-cost deposits, such as brokered certificates of deposit.

This trend continued in 2021 as we paid off the remaining balance of brokered deposits as they matured.

The following table presents estimated balances of uninsured deposits for the years ended December 31:

While we experienced a decline in certificates of deposit over the past year, the decline has slowed as a result of the recent increase in the interest rate environment.

We expect interest rates to continue to rise in 2023 and anticipate a shift of customers moving back to certificates of deposit products.

Over the last few years, we used excess funds to reduce higher-cost deposits, such as brokered certificates of deposit.

The following table presents estimated balances of uninsured deposits as of December 31:

2022 2021 2020 2019 2018

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To provide balance sheet growth, we may utilize borrowings and brokered deposits to fund earning assets.

The following table presents borrowed funds balances for the years ended December 31:

The following table presents borrowed funds balances as of December 31:

2022 2021 2020

3 unchanged sentences

Total $ 87,016 $ 99,320 $ 158,747

During the fourth quarter of 2020, we elected to extinguish $100,000 of FHLB advances based on our level of cash reserves and strategic initiatives.

Due to a significant increase in one account during the fourth quarter of 2020, our level of securities sold under agreements to repurchase increased as of December 31, 2020.

This increase was short-term and balances declined during 2021.

Over the last few years, we used excess funds to reduce and payoff FHLB advances.

On June 2, 2021, we completed a private placement of $30,000 in aggregate principal amount of 3.25% Fixed-to-Floating Rate Subordinated Notes due 2031 (the "Notes").

26 unchanged sentences

As of December 31, 2022, we were authorized to repurchase up to an additional 419,826 shares of common stock.

The tender offer expired on October 13, 2021 and resulted in the purchase of 396,576.78534 shares at a price of $27.00 per share for a total amount of approximately $10,708.

The remainder of the $20,000 not used in the tender offer may be deployed for general corporate purposes, including potential repurchases of our common stock.

In the fourth quarter of 2021, we completed a “modified Dutch Auction” tender offer which resulted in the purchase of 396,576.78534 shares at a price of $27.00 per share for a total amount of approximately $10,708.

The FRB has established minimum risk-based capital guidelines.

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Our primary sources of liquidity are cash and cash equivalents and unencumbered AFS securities.

These categories totaled $495,259 or 24.37% of assets as of December 31, 2021 as compared to $444,051 or 22.69% as of December 31, 2020.

The increase in both the amount and percentage of primary liquidity is a direct result of an increase in market deposits and a deliberate reduction in non-market funding which required collateralization.

These categories totaled $488,981 or 24.08% of assets as of December 31, 2022, compared to $495,259 or 24.37% as of December 31, 2021.

The decline in the amount and percentage of primary liquidity is a result of investment purchases, with an offset in increased deposits.

Liquidity is important for financial institutions because of their need to meet loan funding commitments, depositor withdrawal requests, and various other commitments including expansion of operations, investment opportunities, and payment of cash dividends.

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As of December 31, 2022, we had available lines of credit of $344,393.

Our stress testing of liquidity increased during 2020 and continues to evolve due to economic uncertainly as a result of COVID-19.

The frequency and complexity of our liquidity stress testing has increased since early 2020 and continues to evolve due to economic uncertainly as a result of COVID-19 and changes within the interest rate and economic environment.

Our liquidity position remained strong at the end of 2022, which is illustrated in the following table:

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We have policies, procedures, and internal controls for measuring and managing these risks.

Specifically, our Funds Management policy and procedures include defining acceptable types and terms of investments and funding sources, liquidity requirements, limits on investments in long-term assets, limiting the mismatch in repricing opportunities of assets and liabilities, and the frequency of measuring and reporting to our Board of Directors.

Specifically, our ALCO policy and procedures include defining acceptable types and terms of investments and funding sources, liquidity requirements, limits on investments in long-term assets, limiting the mismatch in repricing opportunities of assets and liabilities, and the frequency of measuring and reporting to our Board of Directors.

The primary technique to measure IRR is simulation analysis.

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Repricing, cash flows, and prepayment projections for loans and mortgage-backed securities are not expected to behave as they would be expected to in a more stable interest rate environment.

The SBA PPP loan is a newer instrument and has payment characteristics that could create uncertainty in our assumptions.

Customer deposit levels may experience unusual fluctuations due to government support programs, customer and business needs, and general money supply.

Customer deposit levels may experience unusual fluctuations due to COVID-related government support programs ending, customer and business needs, and a potential decline in money supply as the Federal Reserve shrinks its balance sheet.

We continue to closely monitor customer and economic indicators to develop more precise market risk assumptions as the economic impact of the crisis continues to reveal itself.

3 unchanged sentences

Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-K

Item 7. Management’s Discussion and Analysis