What changed in this filing

/stocks — the workspaceLOADING

Item 7. Management’s Discussion and Analysis

2024-03-07 compared with 2023-03-07 · 198 added, 268 removed, 535 unchanged (47% of the section changed)

7 unchanged sentences

Net income and earnings per common share for the same period of 2022 were $22,238 and $2.95, 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.

Net interest income decreased $2,537, or 4.19%, during 2023 compared to 2022.

Rising interest rates and growth in core loans led to a $13,833, or 21.02%, increase in gross interest income during 2023 compared to 2022.

Conversely, rising interest rates on deposits and an increase in borrowings led to a $16,370 increase in interest expense for the year ended December 31, 2023 when compared to the same period in 2022.

The provision for credit losses during the year ended December 31, 2023 was $629, compared to $483 for the same period in 2022.

Credit quality remained strong at December 31, 2023, as evidenced by total past due and nonaccrual loans which were $4,964, or 0.37%, 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.

While maintaining strong credit quality, the ACL and provision for loan losses increased during 2023 as a result of core loan growth and economic related risk factors.

Noninterest income increased $161 during 2023 compared to the same period in 2022.

This increase was driven by wealth management fees and ATM and debit card fee income, offset by a decrease in OMSR income and gain on sale of loans, as residential mortgages sold to the secondary market declined.

Noninterest expenses increased $2,490 in 2023, when compared to the same period in 2022, and was primarily a result of increased compensation, equipment expense, other losses, and FDIC insurance premiums.

As of December 31, 2023, total assets and assets under management were $2,058,968 and $2,948,751, respectively.

1 unchanged sentence

Loans outstanding as of December 31, 2023 totaled $1,349,463.

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.

During 2023, gross loans grew $85,290 driven by growth in nearly all loan categories.

Total deposits were $1,723,695 as of December 31, 2023, declining $20,580, or 1.2%, during the year as competition for deposits remained strong throughout 2023.

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

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.

Our securities portfolio decreased $52,333 during 2023, predominantly due to maturities and principal paydowns.

Unrealized losses on our AFS securities portfolio were $31,826 at December 31, 2023, improving $13,298 since December 31, 2022.

Unrealized losses on our AFS securities portfolio resulted from increased short-term and intermediate-term benchmark interest rates throughout 2023.

As a result, the higher level of 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.

Our net yield on interest earning assets (FTE) was 3.05% for 2023, which decreased from 3.18% in 2022.

To maintain a competitive edge in a rising interest rate environment, we increased most of our deposit rates beginning in the fourth quarter of 2022 and in recent periods, increased our level of borrowings to fund loan growth.

As a result, this has negatively impacted our net yield on interest earning assets and further increases may slow improvement in our net yield on interest earning assets.

Recent Events and Legislation

Impact of COVID-19:

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.

2023 Bank Failures and the Condition of the Banking Industry:

In March 2023, disruptions in the industry resulted in FDIC seizures of three banking institutions.

Each bank had its own unique balance sheet issues, none of which exist at Isabella Bank.

Shortly after the FDIC takeovers, the Federal Reserve Bank and the Department of Treasury announced enhanced insurance coverage and a borrowing program to help banks in need of funding.

Isabella Bank continues to monitor such events, as well as industry and regulatory responses, to assure we are prepared for any changes that might affect the bank, including the ability to timely address economic uncertainty.

Impact of the Adoption of ASC 326 (CECL):

We adopted ASU No.

2016-13, as subsequently updated for certain clarifications, targeted relief and codification improvements, as of January 1, 2023.

Based on portfolio characteristics and economic conditions and expectations as of January 1, 2023, we recorded a combined pre-tax increase of $3,059 to the ACL and reserve for unfunded commitments on January 1, 2023 upon the adoption of ASU 2016-13;

this implementation resulted in a reduction to retained earnings of $2,417, net of tax, as of January 1, 2023.

In connection with the adoption of ASC 326, we revised certain accounting policies and implemented certain accounting policy elections, which are included in “Note 1 – Significant Accounting Policies” of our interim condensed consolidated financial statements.

Reclassifications

Certain amounts reported in management's discussion and analysis of financial condition and results of operations for 2022 and 2021 have been reclassified to conform with the 2023 presentation.

Operating results for periods after January 1, 2023 are presented in accordance with ASC 326 while prior period amounts continue to be reported in accordance with previously applicable standards and the accounting policies described in our Annual Report on Form 10-K for the year ended December 31, 2022.

In addition, the adoption of ASC 326 requires enhanced disclosures related to the significant estimates and judgments used in estimating credit losses.

Subsequent Events

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, 2023 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.

No subsequent events require financial statement recognition or disclosure between December 31, 2023 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, 2024.

7 unchanged sentences

Net interest income 57,944 60,481 52,701

Provision for loan losses 483 ( 518 ) 1,665

Provision for credit losses 629 483 (518)

Noninterest income 13,827 13,666 13,822

6 unchanged sentences

Tangible book value (1)

$ 20.59 $ 18.25 $ 21.61

Quoted market value

24 unchanged sentences

Nonperforming assets to total assets 0.07 % 0.05 % 0.08 %

ALLL to gross loans 0.78 % 0.70 % 0.79 %

ACL to gross loans 0.97 % 0.78 % 0.70 %

CAPITAL RATIOS (1)

24 unchanged sentences

Tangible book value (1)

$ 20.59 $ 18.27 $ 18.69 $ 19.24

Quarter to Date

16 unchanged sentences

Tangible book value (1)

$ 18.25 $ 16.96 $ 18.85 $ 19.56

(1) At end of period

CRITICAL ACCOUNTING POLICIES

Our significant accounting policies are set forth in “Note 1 – Nature of Operations and Summary of Significant Accounting Policies” of “Notes to Consolidated Financial Statements” in Item 8.

Our significant accounting policies are set forth in “Note 1 – Significant Accounting Policies” of “Notes to Consolidated Financial Statements” in Item 8.

Financial Statements and Supplementary Data.

Of these significant accounting policies, we consider our policies regarding the ALLL, acquisition intangibles and goodwill, and the determination of the fair value and assessment of OTTI of investment securities to be our most critical accounting policies.

The ALLL requires our most subjective and complex judgment.

Changes in economic conditions and other external factors can have a significant impact on the ALLL and, therefore, the provision for loan losses and results of operations.

We have developed policies and procedures for assessing the appropriateness of the ALLL, recognizing that this process requires a number of assumptions and estimates with respect to our loan portfolio.

Of these significant accounting policies, we consider our policies regarding the ACL, acquisition intangibles and goodwill, and the determination of the fair value and assessment of credit related impairments of investment securities to be our most critical accounting policies.

The ACL requires our most subjective and complex judgment.

Changes in economic conditions and other external factors can have a significant impact on the ACL and, therefore, the allowance for credit losses and results of operations.

We have developed policies and procedures for assessing the appropriateness of the ACL, recognizing that this process requires a number of assumptions and estimates with respect to our loan portfolio.

Our assessments may be impacted in future periods by changes in economic conditions, and the discovery of information with respect to borrowers which is not known to us at the time of the issuance of the consolidated financial statements.

For additional discussion concerning our ALLL and related matters, see “Allowance for Loan and Lease Losses” and “Note 4 – Loans and ALLL” of “Notes to Consolidated Financial Statements” in Item 8.

For additional discussion concerning our ACL and related matters, see “ACL - Loans” and “Note 4 – Loans and ACL” of “Notes to Consolidated Financial Statements” in Item 8.

Financial Statements and Supplementary Data.

7 unchanged sentences

Declines in the fair value of AFS securities below their cost that are other-than-temporary are reflected as realized losses in the consolidated statements of income.

We evaluate AFS securities for indications of losses that are considered other-than-temporary, if any, on a regular basis.

The market values for most AFS investment securities are typically obtained from outside sources and applied to individual securities within the portfolio.

Municipal securities for which no readily determinable market values are available are priced using fair value curves which most closely match the securities' characteristics.

AFS securities are reviewed quarterly for possible credit impairment.

In determining whether a credit-related impairment exists for debt securities, we assess whether:

(a) we do not have the intent to sell the security;

and (b) it is more likely than not we will not have to sell the security before recovery of its cost basis.

If either of these conditions are met, any previously recognized allowances are charged-off and the security's amortized cost is written down to fair value through income.

If these conditions are not met, the security is evaluated to determine whether the decline in fair value has resulted from credit losses or other factors.

Average Balances, Interest Rates, and Net Interest Income

17 unchanged sentences

NONEARNING ASSETS

Allowance for loan losses (9,477) (9,396) (8,837)

Allowance for credit losses (12,784) (9,477) (9,396)

Cash and demand deposits due from banks 24,592 24,708 29,139

53 unchanged sentences

Net change in interest margin (FTE) $ 266 $ (2,836) $ (2,570) $ 5,265 $ 2,413 $ 7,678

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.

Over the past several quarters, rising rates on deposit accounts and an increase in borrowed funds have reversed the improvement in our net interest margin.

The higher interest rate environment is expected to continue to place pressure and slow improvement on our net yield on interest earning assets.

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

12 unchanged sentences

Net interest income (FTE) $ 13,858 $ 14,552 $ 14,934 $ 15,623 $ 16,540

Allowance for Loan and Lease Losses

The viability of any financial institution is ultimately determined by its management of credit risk.

Past Due and Nonaccrual Loans

Fluctuations in past due and nonaccrual loans can have a significant impact on the ACL.

To determine the potential impact, and corresponding estimated losses, we analyze our historical loss trends on loans past due greater than 30 days and nonaccrual loans for indications of additional deterioration.

Total Past Due and Nonaccrual Loans as of December 31

2023 2022 2021 2020 2019

Commercial and industrial $ 656 $ 617 $ 203 $ 1,790 $ 1,936

Commercial real estate — 6,887 358 358 559

Agricultural 205 234 987 3,786 4,285

Residential real estate 3,910 3,333 2,287 3,580 4,554

Consumer 193 59 196 96 71

Total $ 4,964 $ 11,130 $ 4,031 $ 9,610 $ 11,405

Total past due and nonaccrual loans to gross loans 0.37 % 0.88 % 0.31 % 0.78 % 0.96 %

The increase in past due and nonaccrual loans within the commercial real estate and residential loan portfolios at the end of 2022 was the result of one past due relationship, which has since improved.

The accrual of interest on commercial and agricultural loans, as well as residential real estate loans, is discontinued at the time a loan is 90 days or more past due unless the credit is well-secured and in the process of short-term collection.

Upon transferring a loan to nonaccrual status, we perform an evaluation to determine the net realizable value of the underlying collateral.

This evaluation is used to help determine if a charge-off is necessary.

Consumer loans are typically charged-off no later than 180 days past due.

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

The following table summarizes nonaccrual loans as of:

2023 September 30

2023 March 31

2023 December 31

Commercial and industrial $ 491 $ 17 $ 17 $ 20 $ 82

Commercial real estate — — — 57 14

Agricultural 205 208 218 232 234

Residential real estate 286 295 179 179 127

Total $ 982 $ 520 $ 414 $ 488 $ 457

Nonaccrual loans as a % of loans at end of period 0.07 % 0.04 % 0.03 % 0.04 % 0.04 %

A summary of loans past due by type and information related to nonaccrual status loans are included in “Note 4 – Loans and ACL” of “Notes to Consolidated Financial Statements” in Item 8.

Financial Statements and Supplementary Data.

Nonperforming Assets

The following table summarizes our nonperforming assets as of December 31:

2023 2022 2021 2020 2019

Nonaccrual loans $ 982 $ 457 $ 1,245 $ 5,313 $ 6,535

Accruing loans past due 90 days or more 87 — 97 — —

Total nonperforming loans 1,069 457 1,342 5,313 6,535

Foreclosed assets 406 439 211 527 456

Debt securities 12 77 131 230 230

Total nonperforming assets $ 1,487 $ 973 $ 1,684 $ 6,070 $ 7,221

Nonperforming loans as a % of total loans 0.08 % 0.04 % 0.10 % 0.43 % 0.55 %

Nonperforming assets as a % of total assets 0.07 % 0.05 % 0.08 % 0.31 % 0.40 %

The viability of any financial institution is ultimately determined by its management of risk.

Loans represent our single largest concentration of risk.

The ALLL is our estimation of incurred losses within the existing loan portfolio.

We allocate the ALLL throughout the loan portfolio based on our assessment of the underlying risks associated within each loan segment.

Our assessments include allocations based on specific impairment valuation allowances, historical charge-offs, internally assigned credit risk ratings, and past due and nonaccrual balances.

A portion of the ALLL is not allocated to any one loan segment, but is instead a representation of other qualitative risks that reflect the margin of imprecision inherent in the underlying assumptions used in the methodologies for estimating specific and general losses in the portfolio.

The following table summarizes our charge-offs, recoveries, provision for loan losses, and ALLL balances as of, and for the unaudited three month periods ended:

The ACL is our estimation of expected credit losses within the existing loan portfolio.

We allocate the ACL throughout the loan portfolio based on our assessment of the underlying risks associated within each loan segment.

Our assessments include allocations based on specific valuation allowances, historical charge-offs, internally assigned credit risk ratings, past due and nonaccrual balances, historical loss percentages, and other credit trends and risk characteristics, including current conditions and reasonable and supportable forecasts about the future.

Upon the adoption of ASC 326 on January 1, 2023, the total amount of the allowance for credit losses on loans estimated using the CECL methodology increased $2,744 compared to the total amount of the allowance for credit losses on loans estimated as of December 31, 2022 using the prior incurred loss methodology.

The manner in which credit loss allowances are allocated to the individual portfolio segments was partly impacted by a change in the way the underlying loans within each segment are pooled for modeling purposes.

The impact of varying economic conditions and portfolio risk factors are now a component of the credit loss models applied to each modeling pool.

In that regard, the amounts allocated to the underlying pools of loans within each portfolio segment more directly reflect the economic variables and portfolio stress factors that correlate with credit losses within each portfolio.

Under the prior methodology, allocations in excess of those derived from historical loss rates were recognized as unallocated.

Nonetheless, despite fluctuations in the allocation of portions of the overall allowance to the various portfolio segments, the entire allowance is available to absorb any credit losses within the entire loan portfolio.

The following table summarizes our charge-offs, recoveries, provision for credit losses, and ACL balances as of, and for the unaudited three month periods ended:

2023 September 30

5 unchanged sentences

Net loan charge-offs (recoveries) to average loans outstanding 0.03 % (0.02) % 0.00 % 0.00 % (0.02) %

Provision for loan losses $ (57) $ 18 $ 485 $ 37 $ 81

Provision for loan losses to average loans outstanding 0.00 % 0.00 % 0.04 % 0.00 % 0.01 %

ALLL $ 9,850 $ 9,677 $ 9,700 $ 9,204 $ 9,103

ALLL as a % of loans at end of period 0.78 % 0.78 % 0.76 % 0.76 % 0.70 %

Provision for credit losses - loans $ 684 $ (320) $ 190 $ 37 $ (57)

Provision for credit losses to average loans outstanding 0.05 % (0.02) % 0.01 % 0.00 % 0.00 %

ACL $ 13,108 $ 12,767 $ 12,833 $ 12,640 $ 9,850

ACL as a % of loans at end of period 0.97 % 0.96 % 0.96 % 0.99 % 0.78 %

The following table summarizes charge-off and recovery activity by loan segment for the year ended December 31, 2023:

Commercial Agricultural Residential Real Estate Consumer Total

Commercial and Industrial Commercial Real Estate Agricultural Residential Real Estate Consumer Total

Charge-offs $ 276 $ — $ 4 $ 2 $ 542 $ 824

3 unchanged sentences

Net loan charge-offs (recoveries) to average loans outstanding 0.10 % — % (0.01) % (0.09) % 0.29 % 0.01 %

The following table summarizes charge-offs, recoveries, and provision for loan loss activity for the years ended December 31:

The following table summarizes charge-offs, recoveries, and provision for credit loss activity for the years ended December 31:

2023 2022 2021 2020 2019

ALLL at beginning of period $ 9,103 $ 9,744 $ 7,939 $ 8,375 $ 7,700

Allowance at beginning of period $ 9,850 $ 9,103 $ 9,744 $ 7,939 $ 8,375

Adoption of ASC 326 2,744 — — — —

Charge-offs 824 619 607 381 948

Recoveries 709 883 484 521 482

Provision for loan losses 483 (518) 1,665 30 978

ALLL at end of period $ 9,850 $ 9,103 $ 9,744 $ 7,939 $ 8,375

Provision for credit losses - loans 629 483 (518) 1,665 30

Allowance at end of period $ 13,108 $ 9,850 $ 9,103 $ 9,744 $ 7,939

Net loan charge-offs (recoveries) $ 115 $ (264) $ 123 $ (140) $ 466

Net loan charge-offs (recoveries) to average loans outstanding 0.01 % (0.02) % 0.01 % (0.01) % 0.04 %

ALLL as a % of loans at end of period 0.78 % 0.70 % 0.79 % 0.67 % 0.74 %

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

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.

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:

ACL as a % of loans at end of period 0.97 % 0.78 % 0.70 % 0.79 % 0.67 %

ACL as a % of nonaccrual loans 1334.83 % 2155.36 % 731.16 % 183.40 % 121.48 %

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

2023 September 30

1 unchanged sentence

2023 December 31

Individually evaluated for impairment $ 451 $ 474 $ 515 $ 573 $ 578

Collectively evaluated for impairment 9,399 9,203 9,185 8,631 8,525

Individually evaluated $ 84 $ — $ — $ — $ 451

Collectively evaluated 13,024 12,767 12,833 12,640 9,399

Total $ 13,108 $ 12,767 $ 12,833 $ 12,640 $ 9,850

ALLL to gross loans

Individually evaluated for impairment 0.04 % 0.04 % 0.04 % 0.05 % 0.04 %

Collectively evaluated for impairment 0.74 % 0.74 % 0.72 % 0.71 % 0.66 %

ACL to gross loans

Individually evaluated 0.01 % 0.00 % 0.00 % 0.00 % 0.04 %

Collectively evaluated 0.96 % 0.96 % 0.96 % 0.99 % 0.74 %

Total 0.97 % 0.96 % 0.96 % 0.99 % 0.78 %

The following table illustrates the amounts of the ALLL allocated to each loan segment and the percentage of these loan segments to gross loans as of December 31:

The following table illustrates the amounts of the ACL and ALLL allocated to each loan segment and the percentage of these loan segments to gross loans as of December 31:

2023 2022 2021 2020 2019

ALLL Allocation % of Gross Loans ALLL Allocation % of Gross Loans ALLL Allocation % of Gross Loans ALLL Allocation % of Gross Loans ALLL Allocation % of Gross Loans

Commercial $ 1,321 58.61 $ 1,740 62.07 $ 2,162 61.10 $ 1,914 59.08 $ 2,563 58.43

ACL Allocation % of Gross Loans ALLL Allocation % of Gross Loans ALLL Allocation % of Gross Loans ALLL Allocation % of Gross Loans ALLL Allocation % of Gross Loans

Commercial and industrial $ 968 15.54 $ 860 14.11 $ 680 13.91 $ 704 17.37 $ 644 14.25

Commercial real estate 5,878 41.82 461 44.78 1,060 42.89 1,458 39.99 1,270 42.22

Advances to mortgage brokers — 1.37 — — — 5.53 — 4.06 — 2.99

Agricultural 270 7.41 577 8.30 289 7.27 311 8.12 634 9.87

4 unchanged sentences

Total $ 13,108 100.00 $ 9,850 100.00 $ 9,103 100.00 $ 9,744 100.00 $ 7,939 100.00

While we utilize our best judgment and information available, the ultimate adequacy of the ALLL is dependent upon a variety of factors beyond our control, including the performance of our borrowers, the economy, and changes in interest rates.

We closely monitor overall credit quality indicators and our policies and procedures related to the analysis of the ALLL to ensure that the ALLL remains at an appropriate level.

For further discussion of the allocation of the ALLL, see “Note 4 – Loans and ALLL” of “Notes to Consolidated Financial Statements” in Item 8.

Financial Statements and Supplementary Data.

Loans Past Due and Loans in Nonaccrual Status

Fluctuations in past due and nonaccrual status loans can have a significant impact on the ALLL.

To determine the potential impact, and corresponding estimated losses, we analyze our historical loss trends on loans past due greater than 30 days and nonaccrual status loans for indications of additional deterioration.

Total Past Due and Nonaccrual Loans as of December 31

2022 2021 2020 2019 2018

Commercial $ 7,504 $ 561 $ 2,148 $ 2,477 $ 2,722

Agricultural 234 987 3,786 4,285 5,377

Residential real estate 3,333 2,287 3,580 4,572 3,208

Consumer 59 196 96 71 105

Total $ 11,130 $ 4,031 $ 9,610 $ 11,405 $ 11,412

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, 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.

Financial Statements and Supplementary Data.

Troubled Debt Restructurings

We have taken a proactive approach to modifying loans to assist borrowers who are willing to work with us, thus making them less likely to default, and to avoid foreclosure.

This approach has permitted certain borrowers to develop a payment structure that will allow them to continue making payments in lieu of foreclosure.

Modifications have been successful for us and our customers as very few of the modified loans have resulted in foreclosures.

The majority of new modifications result in terms that satisfy our criteria for continued interest accrual.

TDRs that have been placed in nonaccrual status may be placed back on accrual status after six months of continued performance and achievement of current payment status.

We restructure debt with borrowers who due to financial difficulties are unable to service their debt under the original terms.

We may extend the amortization period, reduce interest rates, allow temporary interest-only payment structures, forgive principal, forgive interest, or grant a combination of these modifications.

Typically, the modifications are for a period of three years or less.

There were no TDRs that were government sponsored as of December 31, 2022 or December 31, 2021.

Losses associated with TDRs, if any, are included in the estimation of the ALLL during the quarter in which a loan is identified as a TDR, and we review the analysis of the ALLL estimation each reporting period thereafter to ensure its continued appropriateness.

The following table provides a roll-forward of TDRs for the years ended December 31, 2021 and 2022:

Accruing Interest Nonaccrual Total

Loans Balance Number

Loans Balance

January 1, 2021 108 $ 22,200 7 $ 2,730 115 $ 24,930

New modifications 11 8,473 — — 11 8,473

Principal advances (payments) — (1,697) — (242) — (1,939)

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

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

New modifications 4 2,969 — — 4 2,969

Principal advances (payments) — (2,188) — (105) — (2,293)

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

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

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

The following table summarizes our TDRs as of December 31:

2022 2021 2020

Interest Nonaccrual Total Accruing

Interest Nonaccrual Total

Current $ 20,844 $ 256 $ 21,100 $ 25,236 $ 294 $ 25,530 $ 22,017 $ 2,421 $ 24,438

Past due 30-59 days 225 — 225 40 85 125 183 — 183

Past due 60-89 days — — — — — — — — —

Past due 90 days or more — 14 14 — 70 70 — 309 309

Total $ 21,069 $ 270 $ 21,339 $ 25,276 $ 449 $ 25,725 $ 22,200 $ 2,730 $ 24,930

Interest Nonaccrual Total Accruing

Interest Nonaccrual Total

Current $ 20,847 $ 507 $ 21,354 $ 21,794 $ 2,673 $ 24,467

Past due 30-59 days 346 — 346 899 — 899

Past due 60-89 days 1 — 1 707 — 707

Past due 90 days or more — 3,036 3,036 — 878 878

Total $ 21,194 $ 3,543 $ 24,737 $ 23,400 $ 3,551 $ 26,951

Additional disclosures about TDRs are included in “Note 4 – Loans and ALLL” of “Notes to Consolidated Financial Statements” in Item 8.

Financial Statements and Supplementary Data.

Impaired Loans

The following is a summary of information pertaining to impaired loans as of December 31:

Balance Unpaid

Balance Valuation

Allowance Recorded

Balance Unpaid

Balance Valuation

Commercial real estate $ 5,388 $ 5,643 $ 12 $ 5,707 $ 5,961 $ 9

Commercial other 2,793 2,793 — 3,246 3,246 4

Agricultural real estate 8,522 8,522 — 9,182 9,181 —

Agricultural other 2,413 2,413 — 4,543 4,543 —

Residential real estate senior liens 2,223 2,293 356 3,047 3,203 504

Total TDRs 21,339 21,664 368 25,725 26,134 517

Other impaired loans

Commercial real estate 161 223 — 314 377 —

Agricultural real estate — — — 356 357 —

Agricultural other — — — 108 108 —

Residential real estate senior liens 518 708 83 370 485 61

Home equity lines of credit — — — 37 37 —

Total other impaired loans 679 931 83 1,185 1,364 61

Total impaired loans $ 22,018 $ 22,595 $ 451 $ 26,910 $ 27,498 $ 578

We continue to devote considerable attention to identifying impaired loans and adjusting the net carrying value of these loans to their current net realizable values through the establishment of a specific reserve or the recording of a charge-off.

Additional disclosures related to impaired loans are included in “Note 4 – Loans and ALLL” of “Notes to Consolidated Financial Statements” in Item 8.

Financial Statements and Supplementary Data.

Nonperforming Assets

The following table summarizes our nonperforming assets as of December 31:

2022 2021 2020 2019 2018

Nonaccrual status loans $ 457 $ 1,245 $ 5,313 $ 6,535 $ 7,260

Accruing loans past due 90 days or more — 97 — — 113

Total nonperforming loans 457 1,342 5,313 6,535 7,373

Foreclosed assets 439 211 527 456 355

Debt securities 77 131 230 230 230

Total nonperforming assets $ 973 $ 1,684 $ 6,070 $ 7,221 $ 7,958

Nonperforming loans as a % of total loans 0.04 % 0.10 % 0.43 % 0.55 % 0.65 %

Nonperforming assets as a % of total assets 0.05 % 0.08 % 0.31 % 0.40 % 0.42 %

Upon transferring a loan to nonaccrual status, we perform an evaluation to determine the net realizable value of the underlying collateral.

This evaluation is used to help determine if a charge-off is necessary.

Consumer loans are typically charged-off no later than 180 days past due.

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

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:

2022 2021 2020 2019 2018

Commercial $ 96 $ 341 $ 1,329 $ 1,621 $ 1,757

Agricultural 234 774 3,785 4,285 4,949

Residential real estate 127 130 199 629 554

Total $ 457 $ 1,245 $ 5,313 $ 6,535 $ 7,260

Nonaccrual loans as a % of loans at end of period 0.04 % 0.10 % 0.43 % 0.55 % 0.64 %

Included in the nonaccrual loan balances above were loans also classified as TDR as of December 31:

2022 2021 2020 2019 2018

Commercial $ 36 $ 139 $ 129 $ 390 $ 160

Agricultural 234 310 2,559 3,048 3,391

Residential real estate — — 42 105 —

Total $ 270 $ 449 $ 2,730 $ 3,543 $ 3,551

Additional disclosures about nonaccrual status loans are included in “Note 4 – Loans and ALLL”of “Notes to Consolidated Financial Statements” in Item 8.

While we utilize our best judgment and information available, the ultimate adequacy of the ACL is dependent upon a variety of factors beyond our control, including the performance of our borrowers, the economy, and changes in interest rates.

We closely monitor overall credit quality indicators and our policies and procedures related to the analysis of the ACL to ensure that the ACL remains at an appropriate level.

For further discussion of the allocation of the ACL, see “Note 4 – Loans and ACL” of “Notes to Consolidated Financial Statements” in Item 8.

Financial Statements and Supplementary Data.

13 unchanged sentences

Net gain on sale of mortgage loans 317 631 (314) (49.76) % 1,694 (1,063) (62.75) %

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 736 416 320 76.92 % 643 (227) (35.30) %

Total noninterest income $ 13,827 $ 13,666 $ 161 1.18 % $ 13,822 $ (156) (1.13) %

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

In response to the COVID-19 pandemic, which led to an increase in the need for electronic services and products, we elected to remove select deposit account related charges and fees and temporarily waived some charges and fees to ease the financial stress of our customers.

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

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

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

Although deposit accounts continued to grow in 2023, we experienced a decline in fees due to the discontinuation of NSF fees.

Although we expect a continuation in deposit account growth in 2024, fee levels may not exceed 2023 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.

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 2023 the volume of loans serviced decreased, resulting in the recognition of losses.

OMSR income during 2024 may continue to experience fluctuations and could vary from 2023 levels.

During 2023, 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.

During 2022, there was strong growth in assets managed by Isabella Wealth, however the decline in the market offset the increase in fees related to growth in new business.

We expect wealth management fees to exceed 2023 levels in 2024 as a result of new business activity.

3 unchanged sentences

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.

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

During 2023, we experienced a decrease in gain on sale of mortgage loans as loan demand continued to decline.

As demand is expected to remain at reduced levels in 2024, gain on sale of mortgage loans is not expected to exceed 2023 levels during 2024.

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

Significant noninterest expense balances are highlighted in the following table for the years ended December 31:

4 unchanged sentences

Occupancy 3,778 3,691 87 2.36 % 3,661 30 0.82 %

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

Audit, consulting, and legal fees 2,340 2,358 (18) (0.76) % 2,066 292 14.13 %

1 unchanged sentence

Marketing costs 1,159 1,056 103 9.75 % 939 117 12.46 %

Memberships and subscriptions 1,042 876 166 18.95 % 877 (1) (0.11) %

Loan underwriting fees 927 1,004 (77) (7.67) % 849 155 18.26 %

FDIC insurance premiums 922 537 385 71.69 % 690 (153) (22.17) %

Donations and community relations 915 923 (8) (0.87) % 705 218 30.92 %

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

Other losses 871 546 325 59.52 % 194 352 181.44 %

Director fees 764 790 (26) (3.29) % 703 87 12.38 %

FDIC insurance premiums 537 690 (153) (22.17) % 612 78 12.75 %

All other 2,401 2,237 164 7.33 % 1,989 248 12.47 %

Total other 12,236 10,822 1,414 13.07 % 10,474 348 3.32 %

Total other noninterest expenses 13,108 12,236 872 7.13 % 10,822 1,414 13.07 %

Total noninterest expenses $ 49,310 $ 46,820 $ 2,490 5.32 % $ 43,694 $ 3,126 7.15 %

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

The increase in compensation and benefits has been driven by merit increases and our employee incentive plans.

We closely monitor compensation levels to ensure we attract and retain talent in a competitive labor market.

While expenses related to our employee incentive plans fluctuate based on financial performance, compensation and benefits expense in 2024 is expected to continue to increase as a result of anticipated merit increases and insurance related benefits.

The decrease in ATM and debit card fees is primarily the result of a cost savings related to vendor reporting services.

While the savings in the service fees will continue, ATM and debit card fees are expected to exceed 2023 levels in 2024 as a result of the continuation of increased card usage.

The increase in FDIC insurance premiums is due to the FDIC adopting a final rule, applicable to all insured depository institutions, to increase initial base deposit insurance assessment rate schedules uniformly by 2 basis points, beginning in the first quarterly assessment period of 2023.

The increase in assessment rate schedules is intended to increase the likelihood that the reserve ratio of the Deposit Insurance fund reaches the statutory minimum of 1.35 percent by the statutory deadline of September 30, 2028.

FDIC premiums are expected to maintain 2023 levels into 2024.

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.

During 2023 we maintained the same level of community support as in 2022.

In 2024 we do not expect donations and community relations to exceed 2023 levels.

During the second quarter of 2023, we recognized a loss related to the settlement of a business matter.

No further losses are anticipated related to this matter.

As such, other losses are expected to decline during 2024 when compared to 2023 levels.

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

Analysis of Changes in Financial Condition

7 unchanged sentences

Mortgage loans AFS — 379 (379) (100.00) %

Gross loans 1,264,173 1,301,037 (36,864) (2.83) %

Less allowance for loan and lease losses 9,850 9,103 747 8.21 %

Loans 1,349,463 1,264,173 85,290 6.75 %

Less allowance for credit losses 13,108 9,850 3,258 33.08 %

Net loans 1,336,355 1,254,323 82,032 6.54 %

15 unchanged sentences

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

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.

Cash levels declined slightly during 2023 driven by funding for loan growth.

AFS securities

1 unchanged sentence

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 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:

9 unchanged sentences

We have a policy prohibiting investments in securities that we deem unsuitable due to their inherent credit or market risks.

Prohibited investments include stripped mortgage-backed securities, zero coupon bonds, nongovernment agency asset-backed securities, and structured notes.

Prohibited investments include stripped mortgage-backed securities, zero coupon bonds, non-government agency asset-backed securities, and structured notes.

Our holdings in mortgage-backed securities and collateralized mortgage obligations include only government agencies and government sponsored agencies as we hold no investments in private label mortgage-backed securities or collateralized mortgage obligations.

27 unchanged sentences

2023 2022 2021 2020 2019

Commercial $ 740,920 $ 807,439 $ 756,686 $ 700,941 $ 659,529

Commercial and industrial $ 209,738 $ 178,428 $ 180,975 $ 215,101 $ 169,116

Commercial real estate 564,244 566,012 557,905 495,232 500,876

Advances to mortgage brokers 18,541 — 72,001 50,258 35,523

Agricultural 99,994 104,985 94,634 100,600 117,136

5 unchanged sentences

$ Change % Change $ Change % Change $ Change % Change

Commercial $ (66,519) (8.24) % $ 50,753 6.71 % $ 55,745 7.95 %

Commercial and industrial $ 31,310 17.55 % $ (2,547) (1.41) % $ (34,126) (15.87) %

Commercial real estate (1,768) (0.31) % 8,107 1.45 % 62,673 12.66 %

Advances to mortgage brokers 18,541 100.00 % (72,001) (100.00) % 21,743 43.26 %

Agricultural (4,991) (4.75) % 10,351 10.94 % (5,966) (5.93) %

2 unchanged sentences

Total $ 85,290 6.75 % $ (36,864) (2.83) % $ 62,726 5.07 %

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.

We've experienced an increase in the commercial loan portfolio in recent periods as demand has increased.

With the increased activity in mortgage lending in the second quarter of 2023, we elected to resume participation in a mortgage purchase program.

Our participation in this program paused during most of 2022 and the first quarter of 2023 due to low mortgage volume.

Residential mortgage lending activities continues to increase despite increased interest rates.

As interest rates are expected to remain high throughout 2024, growth in residential loans is anticipated to continue, but at a slower pace.

We've experienced growth in the consumer portfolio and expect this trend to continue in 2024.

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.

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

Financial Statements and Supplementary Data.

6 unchanged sentences

Certificates of deposit 346,125 251,541 297,696

Brokered certificates of deposit — — 14,029

Internet certificates of deposit 249 499 3,066

6 unchanged sentences

Certificates of deposit 94,584 37.60 % (46,155) (15.50) %

Brokered certificates of deposit — 0.00 % (14,029) (100.00) %

Internet certificates of deposit (250) (50.10) % (2,567) (83.72) %

Total $ (20,580) (1.18) % $ 33,936 1.98 %

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

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.

Total deposits have decreased over the past 12 months driven by a decline in demand deposits.

We have experienced significant growth in certificates of deposit accounts during 2023 as a result of increased interest rates.

We expect interest rates on deposits to continue to rise into 2024 due to competitive pressures, and anticipate a continuation in the shift of customers moving to higher interest earning products.

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

21 unchanged sentences

Total $ 116,136 $ 87,016 $ 99,320

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").

FHLB advances outstanding as of December 31, 2023 were short-term, with maturities within a week after December 31, 2023.

In 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").

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.

25 unchanged sentences

As of December 31, 2023, we were authorized to repurchase up to an additional 270,806 shares of 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.

11 unchanged sentences

Tier 1 leverage 8.76 % 4.00 % 5.00 % 8.61 % 4.00 % 5.00 %

Total capital includes Tier 1 capital and Tier 2 capital.

Tier 2 capital includes a permissible portion of the allowances for credit losses and subordinated debt, net of unamortized issuance costs.

There are no significant regulatory constraints placed on our capital.

2 unchanged sentences

Financial Statements and Supplementary Data.

We utilize fair value measurements to record fair value adjustments to certain assets and liabilities and to determine fair value disclosures.

AFS securities, cash flow hedge derivative instruments and certain liabilities are recorded at fair value on a recurring basis.

Additionally, from time to time, we may be required to record at fair value other assets on a nonrecurring basis, such as mortgage loans AFS, impaired loans, goodwill, foreclosed assets, OMSR, and certain other assets and liabilities.

These nonrecurring fair value adjustments typically involve the application of lower of cost or market accounting or write downs of individual assets.

For further information regarding fair value measurements, see “Note 1 – Nature of Operations and Summary of Significant Accounting Policies” and “Note 17 – Fair Value” of “Notes to Consolidated Financial Statements” in Item 8.

Financial Statements and Supplementary Data.

Liquidity is monitored regularly by our ALCO, which consists of members of senior management.

2 unchanged sentences

These categories totaled $381,417 or 18.52% of assets as of December 31, 2023, compared to $488,981 or 24.08% as of December 31, 2022.

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

The decline in the amount and percentage of primary liquidity is a direct result of an increase in loans and a decrease in unencumbered AFS securities collateralizing non-market funding.

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.

3 unchanged sentences

These funding methods typically carry a higher interest rate than traditional market deposit accounts.

In recent periods, we have elected to use excess funds to reduce borrowings and other higher-cost funding sources.

Some borrowed funds, including FHLB advances, FRB Discount Window advances, and repurchase agreements, require us to pledge assets, typically in the form of AFS securities or loans, as collateral.

As of December 31, 2023, we had available lines of credit of $338,080.

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.

The frequency and complexity of our liquidity stress testing has increased due to economic uncertainly and changes within the interest rate and economic environment.

Our liquidity position remained strong at the end of 2023, which is illustrated in the following table:

17 unchanged sentences

Cash and cash equivalents December 31 $ 33,672 $ 38,924 $ (5,252)

We utilize fair value measurements to record fair value adjustments to certain assets and liabilities and to determine fair value disclosures.

AFS securities, cash flow hedge derivative instruments and certain liabilities are recorded at fair value on a recurring basis.

These nonrecurring fair value adjustments typically involve the application of lower of cost or market accounting or write downs of individual assets.

For further information regarding fair value measurements, see “Note 1 – Significant Accounting Policies” and “Note 17 – Fair Value” of “Notes to Consolidated Financial Statements” in Item 8.

Financial Statements and Supplementary Data .

Our primary market risks are interest rate risk and liquidity risk.

8 unchanged sentences

The primary technique to measure IRR is simulation analysis.

Simulation analysis forecasts the effects on the balance sheet structure and net interest income under a variety of scenarios that incorporate changes in interest rates, the shape of yield curves, interest rate relationships, loan prepayments, and funding sources.

Simulation analysis forecasts the effects on the balance sheet structure and net interest income under a variety of scenarios that incorporate changes in interest rates, the shape of the yield curve, interest rate relationships, loan prepayments, and funding sources.

These forecasts are compared against net interest income projected in a stable interest rate environment.

28 unchanged sentences

Years Over 15

Commercial $ 81,025 $ 179,439 $ 180,130 $ 300,326 $ 740,920

Commercial and industrial $ 33,643 $ 94,909 $ 40,710 $ 40,476 $ 209,738

Commercial real estate 28,478 70,347 148,297 317,122 564,244

Advances to mortgage brokers 18,541 — — — 18,541

Agricultural 9,195 24,821 29,919 36,059 99,994

3 unchanged sentences

Fixed interest rates

Commercial $ 43,950 $ 132,293 $ 35,368 $ 3,356 $ 214,967

Commercial and industrial $ 5,300 $ 67,963 $ 15,781 $ 78 $ 89,122

Commercial real estate 23,068 58,228 21,030 593 102,919

Advances to mortgage brokers 18,541 — — — 18,541

Agricultural 3,126 8,710 4,514 634 16,984

3 unchanged sentences

Variable interest rates

Commercial $ 37,075 $ 47,146 $ 144,762 $ 296,970 $ 525,953

Commercial and industrial $ 28,343 $ 26,946 $ 24,929 $ 40,398 $ 120,616

Commercial real estate 5,410 12,119 127,267 316,529 461,325

Advances to mortgage brokers — — — — —

Agricultural 6,069 16,111 25,405 35,425 83,010

2 unchanged sentences

Total $ 41,828 $ 64,340 $ 214,579 $ 573,196 $ 893,943

Our primary market risk exposures related to the COVID-19 pandemic remain uncertain.

A review of our market risk methods are ongoing and modeling is incorporating additional assumptions to account for this uncertainty related to this crisis.

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.

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.

Quantitative and Qualitative Disclosures About Market Risk.

2 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