What changed in this filing

/stocks — the workspaceLOADING

Item 8. Financial Statements and Supplementary Data

2024-03-07 compared with 2023-03-07 · 550 added, 353 removed, 1261 unchanged (42% of the section changed)

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Shareholders and Board of Directors

Isabella Bank Corporation

Isabella Bank Corporation (the "Corporation")

Mount Pleasant, Michigan

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Also, in our opinion Isabella Bank Corporation maintained, in all material respects, effective internal control over financial reporting as of December 31, 2023, based on the COSO criteria.

Adoption of New Accounting Standard

As discussed in Notes 1 and 4 to the consolidated financial statements, Isabella Bank Corporation changed its method for accounting for credit losses on loans in 2023.

As explained below, auditing the Corporation's allowance for credit losses on loans, including adoption of the new accounting guidance related to the estimate of allowance for credit losses on loans, was a critical audit matter.

Basis for Opinions

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A corporation’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the corporation;

(2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of consolidated financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the corporation are being made only in accordance with authorizations of management and directors of the corporation;

(2) provide reasonable assurance that transactions are recorded as

necessary to permit preparation of consolidated financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the corporation are being made only in accordance with authorizations of management and directors of the corporation;

and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the corporation’s assets that could have a material effect on the consolidated financial statements.

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The communication of the critical audit matter does not alter in any way our opinion on the consolidated financial statements, taken as a whole, nor our opinion on internal control over financial reporting, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates.

Allowance for Loan Losses

Allowance for Credit Losses

Description of the Matter

The Corporation’s loan portfolio totaled $1.264 billion as of December 31, 2022 and the associated allowance for loan and lease losses (ALLL) was $9.850 million.

As described in Notes 1 and 4 to the consolidated financial statements, the ALLL is established to absorb inherent losses that have been incurred or are probable within the existing portfolio of loans.

Management’s estimate of inherent losses within the loan portfolio is established using quantitative, as well as qualitative, considerations.

The Corporation’s methodology to determine the ALLL considers quantitative calculations including:

specific valuation allowances determined in accordance with ASC Topic 310 based on probable losses on specific loans, historical valuation allowances determined in accordance with ASC topic 450 based on historical loan loss experience for similar loans with similar characteristics and trends, supplemented, as necessary, by credit judgment to address observed changes in trends and conditions, and other relevant environmental and economic factors such as concentrations of credit risk, economic trends and conditions, changes in underwriting standards, experience and depth of lending staff, trends in delinquencies, and the level of net charge-offs (qualitative factor adjustments).

Auditing the Corporation’s ALLL involved a high degree of subjectivity due to the judgement involved in management’s determination of commercial and agricultural loan credit risk ratings and identification and measurement of qualitative factor adjustments included in the estimate of the ALLL.

How We Addressed the Matter in Our Audit

We obtained an understanding of the Corporation’s process for establishing the ALLL and evaluated the design and tested the operating effectiveness of controls that address the risk of material misstatement related to the measurement of the ALLL.

We tested controls over management’s review of commercial and agricultural loan credit risk ratings, the data inputs utilized in the ALLL calculation, management’s identification and review of the qualitative factor adjustments, and management’s review and approval process over the final determination of the ALLL.

To test the commercial and agricultural loan credit risk ratings included in management’s estimate of the ALLL, we evaluated the methodology used, including management’s consideration of the individual commercial and agricultural loan portfolio segments, and tested the completeness and accuracy of data from underlying systems that was used in the determination of credit risk.

We performed procedures on a sample of commercial and agricultural loans to test the Corporation’s credit risk ratings by comparing key attributes used in the determination of the credit risk rating to supporting documentation such as borrowers’ financial statements, underlying collateral, financial health of the guarantor and loan payment history.

To test the measurement of qualitative factor adjustments included in management’s estimate of the ALLL, we evaluated the methodology and metrics, including testing the completeness and accuracy of data from underlying systems and other information.

We further evaluated management’s assessment of the qualitative factor adjustments by obtaining an understanding of the basis for relevant changes in underlying qualitative factor adjustments and giving consideration to prior period qualitative factor adjustments and other information available within the Corporation and from external sources focusing on both corroborating and contrary evidence.

The Corporation’s loan portfolio totaled $1.3 billion as of December 31, 2023 and the associated allowance for credit losses on loans was $13.1 million at that date.

The Corporation’s unfunded loan commitments totaled $321.7 million, with an associated allowance for credit loss of $ 315 thousand.

Together these amounts represent the allowances for credit losses (“ACL”).

As described in Notes 1 and 4 to the consolidated financial statements, in the cases of loans, the allowance for credit losses is a contra-asset valuation account, calculated in accordance with ASC 326 that is deducted from the amortized cost basis of loans to present the net amount expected to be collected.

As described in Notes 1 and 9 to the consolidated financial statements, in the case of unfunded loan commitments, the allowance for credit losses is a liability account, calculated in accordance with ASC 326, reported as a component of accrued interest payable and other liabilities.

The Corporation adopted ASC 326 effective January 1, 2023.

The amount of each allowance account represented management’s best estimate of current expected credit losses on these financial instruments considering all available information, from internal and external sources, relevant to assessing exposure to credit loss over the contractual term of the instrument.

In calculating the allowance for credit losses, most loans were segmented into pools based upon similar characteristics and risk profiles.

For each loan pool, management measured expected credit losses over the life of each loan utilizing a model which measured probability of default (“PD”), probability of attrition (“PA”), loss given default (“LGD”), and exposure at default (“EAD”).

Expected credit losses were calculated as the product of PD (adjusted for attrition), LGD, and EAD.

PD and PA were estimated by analyzing internally sourced data related to historical performance of each loan pool over an economic cycle.

PD and PA were adjusted to reflect the current impact of certain macroeconomic variables as well as their expected changes over a reasonable and supportable forecast period.

After the reasonable and supportable forecast period, the forecasted macroeconomic variables were reverted to their historical mean utilizing a rational, systematic basis.

The LGD was based on historical recovery averages for each loan pool, adjusted to reflect the current impact of certain macroeconomic variables as well as their expected changes over the reasonable and supportable forecast period.

EAD was estimated using a linear regression model that estimates the average percentage of the loan balance that remains at the time of default.

In some cases, management determined that an individual loan exhibited unique risk characteristics which differentiated the loan from other loans with the identified loan pools.

In such cases the loans were evaluated for expected credit losses on an individual basis and excluded from the collective evaluation.

Management qualitatively adjusted model results for risk factors that were not considered within the modeling processes but were nonetheless relevant in assessing the expected credit losses within the loan pools.

These qualitative factor adjustments modified management’s estimate of expected credit losses by a calculated percentage or amount based upon the estimated level of risk.

Auditing management’s estimate of the ACL involved a high degree of subjectivity due to the nature of the qualitative factor adjustments included in the allowances for credit losses and complexity due to the implementation of the PD, PA, LGD, and EAD models (the “Models”).

Management’s identification and measurement of the qualitative factor adjustments is highly judgmental and could have a significant effect on the ACL.

How We Addressed the Matter in Our Integrated Audit

We obtained an understanding of the Corporation’s process for establishing the ACL, including the implementation of Models and the qualitative factor adjustments of the ACL.

We evaluated the design and tested the operating effectiveness of related controls over the reliability and accuracy of data used to calculate and estimate the various components of the ACL, the

accuracy of the calculation of the ACL, management’s review and approval of methodologies used to establish the ACL, validation procedures over the Models, analysis of changes in various components of the ACL relative to changes in the Corporation’s loan portfolio and economy and evaluation of the overall reasonableness and appropriateness of the ACL.

In doing so, we tested the operating effectiveness of review and approval controls in the Corporation’s governance process designed to identify and assess the qualitative factor adjustments which is meant to measure expected credit losses associated with factors not captured fully in the other components of the ACL.

To test the reasonableness of the qualitative factor adjustments, we performed audit procedures that included, among others testing the appropriateness of the methodologies used by the Corporation to estimate the ACL, testing the completeness and accuracy of data and information used by the Corporation in estimating the components of the ACL, assessing the reasonableness of the Models, evaluating the appropriateness of assumptions used in estimating the qualitative factor adjustments, analyzing the changes in assumptions and various components of the ACL relative to changes in the Corporation’s loan portfolio and the economy and evaluating the appropriateness and level of the qualitative factor adjustments.

For example, we evaluated the appropriateness of the design and operation of the model, analyzed the changes, assumptions and modifications made to the qualitative factor adjustments, and evaluated the appropriateness and completeness of risk factors used in determining the amount of the qualitative factor adjustments.

We also evaluated the data and information utilized by management to estimate the qualitative factor adjustments by independently obtaining internal and external data and information to assess the appropriateness of the data and information used by management and to consider the existence of new and potentially contradictory information used.

In addition, we evaluated the overall ACL amounts, inclusive of the adjustments for the qualitative factor adjustments, and whether the amount appropriately reflects losses expected in the loan portfolio as of the consolidated balance sheet date by comparing the overall ACL to those established by similar banking institutions with similar loan portfolios.

We also reviewed subsequent events and transactions and considered whether such information serves to corroborate or contradict the Corporation’s conclusion.

/s/ Rehmann Robson LLC

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Mortgage loans AFS — 379

Commercial 740,920 807,439

Agricultural 104,314 93,955

Residential real estate 340,885 326,361

Consumer 78,054 73,282

Gross loans 1,264,173 1,301,037

Less allowance for loan and lease losses 9,850 9,103

Loans 1,349,463 1,264,173

Less allowance for credit losses 13,108 9,850

Net loans 1,336,355 1,254,323

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Balance, December 31, 2022 7,559,421 128,651 5,005 89,748 ( 37,194 ) 186,210

Cumulative effect of accounting change - adoption of ASC 326 — — — ( 2,417 ) — ( 2,417 )

Comprehensive income (loss) — — — 18,167 11,298 29,465

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Subordinated debt, net of unamortized issuance costs

1,065 1,065 615

Total interest expense 21,687 5,317 7,412

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

Provision for loan losses 483 ( 518 ) 1,665

Net interest income after provision for loan losses 59,998 53,219 48,682

Provision for credit losses 629 483 ( 518 )

Net interest income after provision for credit losses 57,315 59,998 53,219

Noninterest income

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Net gain on sale of mortgage loans 317 631 1,694

Gains from redemption of corporate owned life insurance policies 57 271 891

Net income on joint venture investment — — 577

Other 736 416 643

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Occupancy 3,778 3,691 3,661

Loss on extinguishment of debt — — 7,643

Other 13,108 12,236 10,822

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Reconciliation of net income to net cash provided by operating activities:

Undistributed earnings of equity securities without readily determinable fair values — — ( 394 )

Provision for loan losses 483 ( 518 ) 1,665

Provision for credit losses 629 483 ( 518 )

Depreciation 1,978 2,071 2,314

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Gains from redemption of corporate owned life insurance policies — ( 57 ) ( 271 )

Loss on sale of joint venture investment — — 394

Loss on extinguishment of debt — — 7,643

Share-based payment awards under the Directors Plan 529 463 433

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Purchase of equity investments ( 102 ) ( 250 ) —

Sale of joint venture investment — — 1,000

Net loan principal (originations) collections ( 85,783 ) 36,672 ( 63,210 )

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SUPPLEMENTAL NONCASH INFORMATION:

Investment in low income housing tax credits $ 5,000 $ — $ —

Transfers of loans to foreclosed assets 378 456 361

Note receivable arising from sale of joint venture investment — — 3,227

The accompanying notes are an integral part of these consolidated financial statements.

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(Dollars in thousands except per share amounts)

Note 1 – Nature of Operations and Summary of Significant Accounting Policies

Note 1 – Significant Accounting Policies

BASIS OF PRESENTATION AND CONSOLIDATION:

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Isabella Bank Corporation is a financial services holding company offering a wide array of financial products and services in several mid-Michigan counties.

Our banking subsidiary, Isabella Bank, offers banking services throughout 29 locations, 24 hour banking services locally and nationally through shared automatic teller machines, 24 hour online banking, mobile banking, and direct deposits to businesses, institutions, individuals and their families.

Our banking subsidiary, Isabella Bank, offers banking services throughout 31 locations, 24 hour banking services locally and nationally through shared ATMs, online banking, mobile banking, and direct deposits to businesses, institutions, individuals and their families.

Lending services offered include commercial loans, agricultural loans, residential real estate loans, and consumer loans.

Deposit services include interest and noninterest bearing checking accounts, savings accounts, money market accounts, certificates of deposit, direct deposits, cash management services, mobile and internet banking, electronic bill pay services, and automated teller machines.

Other related financial products include trust and investment services, safe deposit box rentals, and various insurance related products.

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Actual results could differ from those estimates.

Material estimates that are particularly susceptible to significant change in the near term relate to the determination of the ALLL, the fair value of AFS investment securities, and the valuation of goodwill and other intangible assets.

Material estimates that are particularly susceptible to significant change in the near term relate to the determination of the ACL, the fair value of AFS investment securities, and the valuation of goodwill and other intangible assets.

ACCOUNTING CHANGES AND RECLASSIFICATIONS:

Certain amounts reported in the 2022 and 2021 consolidated financial statements have been reclassified to conform with the 2023 presentation.

On January 1, 2023, we adopted ASU 2016-13, “Financial Instruments - Credit Losses (Topic 326):

Measurement of Credit Losses on Financial Instruments,” as subsequently updated for certain clarifications, targeted relief and codification improvements.

ASC 326 updated the measurement for credit losses for AFS debt securities and assets measured at amortized cost, which includes loans, trade receivables, and any other financial assets with the contractual right to receive cash and requires enhanced disclosures related to the significant estimates and judgments used in estimating credit losses.

Prior to ASU No.

2016-13, GAAP required an “incurred loss” methodology for recognizing credit losses that delayed recognition until it was probable a loss has been incurred.

Under the incurred loss approach, entities were limited to a probable initial recognition threshold when credit losses were measured;

an entity generally considered only past events and current conditions when measuring the incurred loss.

We adopted ASC 326 using the modified retrospective method for all financial assets measured at amortized cost and off balance sheet credit exposures.

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

We recorded a net decrease to retained earnings of $ 2,417 as of January 1, 2023 for the cumulative effect of adopting ASC 326.

We adopted ASC 326 using the prospective transition approach for AFS debt securities for which other-than-temporary impairment had been recognized prior to January 1, 2023.

As a result, the amortized cost basis remains the same before and after the effective date of ASC 326.

The effective interest rate on these debt securities was not changed.

Amounts previously recognized in accumulated other comprehensive income as of January 1, 2023 relating to improvements in cash flows expected to be collected will be accreted into income over the remaining life of the asset.

Recoveries of amounts previously written off relating to improvements in cash flows beginning January 1, 2023 will be recorded in earnings when received.

The following table details the impact of the adoption of ASC 326:

January 1, 2023

Allowance Impact of

Adoption Post-Adoption

Allowance Cumulative

Retained Earnings

Commercial and industrial $ 860 $ ( 58 ) $ 802 $ 46

Commercial real estate 461 5,532 5,993 ( 4,370 )

Agricultural 577 ( 247 ) 330 195

Residential real estate 617 3,535 4,152 ( 2,793 )

Consumer 961 356 1,317 ( 281 )

Unallocated 6,374 ( 6,374 ) — 5,035

Total $ 9,850 $ 2,744 $ 12,594 $ ( 2,168 )

Off-balance-sheet credit exposures $ — $ 315 $ 315 $ ( 249 )

In connection with the adoption of ASC 326, we revised certain accounting policies and implemented certain accounting policy elections, which are provided below.

All other accounting policies are materially the same as those discussed in Note 1 to the Consolidated Financial Statements included in our Annual Report on Form 10-K for the year ended December 31, 2022.

FAIR VALUE MEASUREMENTS:

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Investment securities AFS and derivative instruments are recorded at fair value on a recurring basis.

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

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

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However, we may elect to classify securities as either held to maturity or trading.

Securities classified as AFS debt securities are recorded at fair value, with unrealized gains and losses, net of the effect of deferred income taxes, excluded from earnings and reported in other comprehensive income.

Included in AFS securities are auction rate money market preferred securities.

These investments, for federal income tax purposes, have no federal income tax impact given the nature of the investments.

Auction rate money market preferred securities are recorded at fair value, with unrealized gains and losses excluded from earnings and reported in other comprehensive income.

Auction rate money market preferred securities are recorded at fair value, with unrealized gains and losses excluded from earnings and reported in other comprehensive income (loss).

Purchase premiums and discounts are recognized in interest income using the interest method over the term of the securities.

Realized gains and losses on the sale of AFS securities are determined using the specific identification method.

AFS securities are reviewed quarterly for possible OTTI.

In determining whether an OTTI exists for debt securities, we assert that:

ACL - AFS SECURITIES:

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 these conditions are not met, we recognize an OTTI charge through earnings for the difference between the debt security’s amortized cost basis and its fair value, and such amount is included in noninterest income.

For debt securities that do not meet the above criteria, and we do not expect to recover the security’s amortized cost basis, the security is considered other-than-temporarily impaired.

For these debt securities, we separate the total impairment into the credit risk loss component and the amount of the loss related to market and other risk factors.

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.

In order to determine the amount of the credit loss for a debt security, we calculate the recovery value by performing a discounted cash flow analysis based on the current cash flows and future cash flows we expect to recover.

The amount of the total OTTI related to the credit risk is recognized in earnings and is included in noninterest income.

The amount of the total OTTI related to other risk factors is recognized as a component of other comprehensive income.

For debt securities that have recognized OTTI through earnings, if through subsequent evaluation there is a significant increase in the cash flow expected, the difference between the amortized cost basis and the cash flows expected to be collected is accreted as interest income.

Loans that we have the intent and ability to hold for the foreseeable future or until maturity or payoff are reported at their outstanding principal balance adjusted for any charge-offs, the ALLL, and any deferred fees or costs.

If the present value of cash flows expected to be collected is less than the amortized cost basis, a credit loss exists and an allowance for credit losses is recorded for the credit loss, limited by the amount that the fair value is less than the amortized cost basis.

The amount of the impairment related to other risk factors is recognized as a component of other comprehensive income.

Adjustments to the allowance are reported in the income statement as a provision for credit losses.

We made an accounting policy election to exclude accrued interest receivable on AFS securities from the estimate of credit losses.

Accrued interest receivable on AFS securities was $ 2,247 at December 31, 2023.

AFS securities are charged-off against the allowance or, in the absence of any allowance, written down through income when deemed uncollectible by management, or when criteria regarding intent or requirement to sell is met.

Interest income on loans is accrued over the term of the loan based on the principal amount outstanding.

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Past due status is based on contractual terms of the loan.

In all cases, loans are placed in nonaccrual or charged-off at an earlier date if collection of principal or interest is considered doubtful.

For loans that are placed on nonaccrual status or charged-off, all interest accrued in the current calendar year, but not collected, is reversed against interest income while interest accrued in prior calendar years, but not collected is charged against the ALLL.

In all cases, loans are placed in nonaccrual status or charged-off at an earlier date if collection of principal or interest is considered doubtful.

Interest income on loans in nonaccrual status is not recognized until qualifying for return to accrual status.

Loans are returned to accrual status when all principal and interest amounts contractually due are brought current and future payments are reasonably assured.

For impaired loans not classified as nonaccrual, interest income continues to be accrued over the term of the loan based on the principal amount outstanding.

ALLOWANCE FOR LOAN AND LEASE LOSSES:

The ALLL is established as losses are estimated to have occurred through a provision for loan losses charged to earnings.

For loans not classified as nonaccrual, interest income continues to be accrued over the term of the loan based on the principal amount outstanding.

The ACL on loans is calculated in accordance with ASC 326 and is deducted from the amortized cost basis of loans to present our best estimate of the net amount expected to be collected.

The ACL is established through a provision for credit losses charged to earnings.

Loan losses are charged against the allowance when we believe the uncollectability of the loan balance is confirmed.

Subsequent recoveries, if any, are credited to the allowance.

We evaluate the ALLL on a regular basis.

Our periodic review of the collectability of loans considers historical experience, the nature and volume of the loan portfolio, adverse situations that may affect the borrower’s ability to repay, estimated value of any underlying collateral and prevailing economic conditions.

We made an accounting policy election to exclude accrued interest receivable on loans from the estimate of credit losses.

Accrued interest receivable on loans was $ 5,920 at December 31, 2023.

We evaluate the ACL on a regular basis.

This evaluation is inherently subjective as it requires estimates that are susceptible to significant revision as more information becomes available.

The ALLL consists of specific, general, and unallocated components.

The specific component relates to loans that are deemed to be impaired.

For such loans that are analyzed for specific allowance allocations, an allowance is established when the discounted cash flows or collateral value, less costs to sell, of the impaired loan is lower than the carrying value of that loan.

The general component covers non-impaired loans and is based on historical loss experience adjusted for current conditions.

An unallocated component is maintained to cover uncertainties that we believe affect our estimate of probable losses based on qualitative factors.

The unallocated component of the allowance reflects the margin of imprecision inherent in the underlying assumptions used in the methodologies for estimating specific and general losses in the portfolio.

Loans may be classified as impaired if they meet one or more of the following criteria:

There has been a charge-off of its principal balance;

The loan has been classified as a TDR;

The loan is in nonaccrual status.

Impairment is measured on a loan-by-loan basis by either the present value of expected future cash flows discounted at the loan’s effective interest rate, or the fair value of the collateral, less costs to sell, if the loan is collateral dependent.

Large groups of smaller-balance, homogeneous loans are collectively evaluated for impairment.

The ACL consists of a general component and loans individually analyzed.

The general component covers loans not specifically analyzed and is based on historical loss experience, current conditions, and reasonable and supportable forecasts.

The general component also includes uncertainties that we believe could affect our estimate of probable losses based on qualitative factors.

Loans in nonaccrual status are individually analyzed on a loan-by-loan basis.

Loans evaluated individually are not included in the general, or pooled, component of the ACL.

For collateralized loans, the loan's specific allowance is measured by the fair value of the collateral approach.

The specific reserve is based on the fair value of the collateral, less costs to sell if foreclosure is probable, and an allowance is established when the collateral value is lower than the carrying value of the loan.

When the discounted cash flow method is used to measure the loan's specific allowance, the effective interest rate is used to discount expected cash flows to incorporate expected prepayments.

An allowance is established when the discounted cash flows are lower than the carrying value of the loan.

For large groups of smaller-balance, homogeneous loans, we may collectively evaluate these loans for measurement of an allowance.

LOANS HELD FOR SALE:

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Assets acquired through, or in lieu of, loan foreclosure are held for sale and are initially recorded at the lower of our carrying amount or fair value less estimated selling costs at the date of transfer, establishing a new cost basis.

Any write downs based on the asset’s fair value at the date of acquisition are charged to the ALLL.

Any write downs based on the asset’s fair value at the date of acquisition are charged to the ACL.

After foreclosure, property held for sale is carried at the lower of the new cost basis or fair value less costs to sell.

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Such financial instruments are recorded only when funded.

In connection with these commitments, we established an allowance for credit losses related to off-balance-sheet credit exposures.

The allowance, recorded in a liability account, is calculated in accordance with ASC 326 and represents expected credit losses over the contractual period for which we are exposed to credit risk resulting from a contractual obligation to extend credit.

The estimate of expected credit losses considers both the likelihood that funding will occur and the amount expected to be funded over the estimated remaining life of the commitment.

The likelihood and expected amount of funding are based on historical utilization rates.

No allowance is recognized if we have the unconditional right to cancel the obligation.

The allowance is reported as a component of accrued interest payable and other liabilities in our consolidated balance sheets.

Adjustments to the allowance are reported in our income statement as a component of provision for credit losses.

REVENUE RECOGNITION:

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Inherent in the determination of defined benefit pension costs are assumptions concerning future events that will affect the amount and timing of required benefit payments under the plan.

These assumptions include demographic assumptions such as mortality, a discount rate used to determine the current benefit obligation and a long-term expected rate of return on plan assets.

These assumptions include demographic assumptions such as mortality, a discount rate used to determine the current benefit obligation and a long-term

expected rate of return on plan assets.

Net periodic benefit cost includes the interest cost based on the assumed discount rate, an expected return on plan assets based on an actuarially derived market-related value of assets, and amortization of unrecognized net actuarial gains or losses.

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Marketing costs are expensed as incurred (see “Note 14 – Other Noninterest Expenses”).

RECLASSIFICATIONS:

Certain amounts reported in the 2021 and 2020 consolidated financial statements have been reclassified to conform with the 2022 presentation.

Note 2 – Accounting Standards Updates

Pending Accounting Standards Updates

“Financial Instruments - Credit Losses (Topic 326):

Measurement of Credit Losses on Financial Instruments”

In June 2016, ASU No.

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

Current GAAP requires an “incurred loss” methodology for recognizing credit losses that delays recognition until it is probable a loss has been incurred.

Under the incurred loss approach, entities are limited to a probable initial recognition threshold when credit losses are measured;

an entity generally only considers past events and current conditions in measuring the incurred loss.

Under the new guidance, the incurred loss impairment methodology is replaced with a methodology that reflects current expected credit losses (CECL).

This methodology requires consideration of a broader range of reasonable and supportable information to calculate credit loss estimates.

The measurement of expected credit losses is based on relevant information about past events, including historical experience, current conditions, and reasonable and supportable forecasts that affect the collectability of the reported amount.

An entity must use judgment in determining the relevant information and estimation methods that are appropriate in its circumstances which applies to assets measured either collectively or individually.

The update allows an entity to revert to historical loss information that is reflective of the contractual term (considering the effect of prepayments) for periods that are beyond the time frame for which the entity is able to develop reasonable and supportable forecasts.

In addition, the disclosures of credit quality indicators in relation to the amortized cost of financing receivables, a current disclosure requirement, are further disaggregated by year of origination (or vintage).

The vintage information will be useful for financial statement users to better assess changes in underwriting standards and credit quality trends in asset portfolios over time and the effect of those changes on credit losses.

Overall, the update will allow entities the ability to measure expected credit losses without the restriction of incurred or probable losses that exist under current GAAP.

For users of the financial statements, the update requires disclosure of decision-useful information about the expected credit losses on financial instruments and other commitments to extend credit held by a reporting entity at each reporting date.

The new authoritative guidance was originally effective for interim and annual periods beginning after December 15, 2019.

Effective October 16, 2019, the FASB approved and issued changes to the implementation date of this guidance for some filers.

As a smaller reporting company, as defined by the SEC, our implementation date was delayed from January 1, 2020 to January 1, 2023.

Early adoption continues to be permissible under the revised implementation date.

This guidance may have a significant impact on the results of our operations and financial statement disclosures as well as that of the banking industry as a whole.

We invested a considerable amount of effort toward this guidance to be prepared for adoption on January 1, 2023.

An internal committee was formed and was accountable for timely and accurate adoption of the guidance.

A service provider that has focused on the ALLL for more than 10 years and serves hundreds of financial institutions was engaged to provide us with education, advisory, and software solutions exclusively related to the ACL.

We ran parallel processes for over a year to ensure our calculation and analysis was complete by the required implementation date.

We fully adopted the new guidance as of January1, 2023.

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.

“Income Tax (Topic 740):

Improvement to Income tax Disclosures

In December 2023, ASU No.

2023-09 was issued to enhance the transparency and decision usefulness of income tax disclosures.

The existing disclosure is being enhanced to provide information to help investors, lenders, creditors and all other allocators of capital asses how an entity's operations and related tax risks and tax planning and operational opportunities affect its tax rate and prospects for future cash flows.

The new authoritative guidance is effective for interim and annual periods beginning after December 15, 2024 and is not expected to have a significant impact on our operations or financial statement disclosures.

Note 3 – AFS Securities

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Because of their variable monthly payments, mortgage-backed securities and collateralized mortgage obligations are not reported by a specific maturity group.

Approximately $143,000 of the amortized cost of the collateralized mortgage portfolio consist of agency commercial mortgage-backed securities with defined maturity dates of less than ten years.

A summary of the sales activity of AFS securities during the years ended December 31 is displayed in the following table.

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States and political subdivisions 2,389 48,083 2,514 40,667 4,903

Auction rate money market preferred — — 858 2,342 858

Mortgage-backed securities 3,239 39,070 — — 3,239

Collateralized mortgage obligations 12,408 201,317 165 4,411 12,573

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Number of securities in an unrealized loss position:

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

As of December 31, 2022 and 2021, we conducted an analysis to determine whether any AFS securities currently in an unrealized loss position should be identified as other-than-temporarily impaired.

Such analyses considered, among other factors, the following criteria:

• Has the value of the investment declined more than what is deemed to be reasonable based on a risk and maturity adjusted discount rate?

• Is the investment credit rating below investment grade?

• Is it probable the issuer will be unable to pay the amount when due?

• Is it more likely than not that we will have to sell the security before recovery of its cost basis?

• Has the duration of the investment been extended?

Based on our analysis, which included the criteria outlined above and the fact that we have asserted that we do not have to sell any AFS securities in an unrealized loss position, we do not believe that the values of any AFS securities are other-than-temporarily impaired as of December 31, 2022 and 2021, with the exception of one municipal bond previously identified in 2016 which had no activity during the period.

Note 4 – Loans and ALLL

We grant commercial, agricultural, residential real estate, and consumer loans to customers situated primarily in Clare, Gratiot, Isabella, Mecosta, Midland, Montcalm, and Saginaw counties in Michigan.

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

As of December 31, 2023, no allowance for credit losses has been recognized on AFS securities in an unrealized loss position, as management does not believe any of the securities are impaired due to reasons of credit quality.

This is based on our analysis of the underlying risk characteristics, including credit ratings, and other qualitative factors related to our AFS securities and consideration of our historical credit loss experience and internal forecasts.

The issuers of these securities continue to make timely principal and interest payments under the contractual terms of the securities.

Furthermore, management does not have the intent to sell any of the securities classified as AFS in the table above, and believes it is more likely than not that we will not have to sell any such securities before a recovery of cost.

The unrealized losses are due to increases in market interest rates over the yields available at the time the underlying securities were purchased.

The fair value is expected to recover as the securities approach their respective maturity date or repricing date, or if the market yields for such investments decline.

Note 4 – Loans and ACL

Loan Composition

The following table provides a detailed listing of our loan portfolio at December 31:

Balance Percent of Total Balance Percent of Total

Commercial and industrial

Secured $ 189,186 14.02 % $ 161,895 12.80 %

Unsecured 20,552 1.52 % 16,533 1.31 %

Total commercial and industrial 209,738 15.54 % 178,428 14.11 %

Commercial real estate

Commercial mortgage owner occupied 180,636 13.39 % 192,117 15.20 %

Commercial mortgage non-owner occupied 216,292 16.03 % 204,091 16.14 %

Commercial mortgage 1-4 family investor 89,208 6.61 % 85,278 6.75 %

Commercial mortgage multifamily 78,108 5.79 % 84,526 6.69 %

Total commercial real estate 564,244 41.82 % 566,012 44.78 %

Advances to mortgage brokers 18,541 1.37 % — — %

Agricultural mortgage 69,044 5.12 % 73,002 5.77 %

Agricultural 30,950 2.29 % 31,983 2.53 %

Total agricultural 99,994 7.41 % 104,985 8.30 %

Residential real estate

Senior lien 313,459 23.23 % 300,225 23.75 %

Junior lien 5,945 0.44 % 3,282 0.26 %

Home equity lines of credit 37,014 2.74 % 33,187 2.63 %

Total residential real estate 356,418 26.41 % 336,694 26.64 %

Secured - direct 37,948 2.81 % 37,127 2.94 %

Secured - indirect 59,324 4.40 % 37,814 2.98 %

Unsecured 3,256 0.24 % 3,113 0.25 %

Total consumer 100,528 7.45 % 78,054 6.17 %

Total $ 1,349,463 100.00 % $ 1,264,173 100.00 %

We grant commercial, agricultural, residential real estate, and consumer loans to customers situated primarily in Bay, Clare, Gratiot, Isabella, Mecosta, Midland, Montcalm, and Saginaw counties in Michigan.

The ability of the borrowers to honor their repayment obligations is often dependent upon the real estate, agricultural, manufacturing, retail, gaming, tourism, health care, higher education, and general economic conditions of this region.

Substantially all of our consumer and residential real estate loans are secured by various items of property, while commercial loans are secured primarily by real estate, business assets, and personal guarantees.

A portion of loans are unsecured.

Loans that we have the intent and ability to hold in our portfolio are reported at their outstanding principal balance adjusted for any charge-offs, the ALLL, and deferred fees or costs.

A portion of loans is unsecured.

Loans that we have the intent and ability to hold in our portfolio are reported at their outstanding principal balance adjusted for any charge-offs, the ACL, and deferred fees or costs.

Unless a loan has a nonaccrual status, interest income is accrued over the term of the loan based on the principal amount outstanding.

Loan origination fees and certain direct loan origination costs are capitalized and recognized as a component of interest income over the term of the loan using the appropriate amortization method.

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.

Past due status is based on the contractual term of the loan.

In all cases, a loan is placed in nonaccrual status at an earlier date if collection of principal or interest is considered doubtful.

When a loan is placed in nonaccrual status, all interest accrued in the current calendar year, but not collected, is reversed against interest income while interest accrued in prior calendar years, but not collected, is charged against the ALLL.

Loans may be returned to accrual status after six months of continuous performance and achievement of current payment status.

Commercial and agricultural loans include loans for commercial real estate, commercial operating loans, advances to mortgage brokers, farmland and agricultural production, and loans to states and political subdivisions.

5 unchanged sentences

Government agency guarantee may be required.

Personal guarantees and/or life insurance beneficiary assignments are generally required from the owners of closely held corporations, partnerships, and sole proprietorships.

Personal guarantees and/or life insurance beneficiary assignments are generally required from the owners of

closely held corporations, partnerships, and sole proprietorships.

In addition, we may require annual financial statements, prepare cash flow analyses, and review credit reports.

We entered into a mortgage purchase program in 2016 with a financial institution where we participate in advances to mortgage brokers.

The mortgage brokers originate residential mortgage loans with the intent to sell them on the secondary market.

We participate in the advance to the mortgage broker, which is secured by the underlying mortgage loan, until it is ultimately sold on the secondary market.

As such, the average life of each participated advance is approximately 20-30 days.

Funds from the sale of the loan are used to pay off our participation in the advance to the mortgage broker.

We classify these advances as commercial loans and include the outstanding balance in commercial loans on our consolidated balance sheets.

Under the participation agreement, we currently are not committed to participate.

We offer adjustable rate mortgages, construction loans, and fixed rate residential real estate loans which have amortization periods up to a maximum of 30 years.

11 unchanged sentences

Generally, mortgage loan requests are reviewed by our mortgage loan committee or through a secondary market underwriting system;

loans in excess of $ 1,000 require the approval of our Internal Loan Committee, the Executive Loan Committee, the Board of Directors’ Loan Committee, or the Board of Directors.

loans in excess of $ 1,000 require the approval of one or more of the following committees:

Internal Loan Committee, the Executive Loan Committee, or the Board of Directors.

Consumer loans include secured and unsecured personal loans.

2 unchanged sentences

No consumer loans are sold to the secondary market.

The ALLL is established as losses are estimated to have occurred through a provision for loan losses charged to earnings.

Full or partial loan balances are charged against the ALLL when we believe uncollectability is probable.

Subsequent recoveries, if any, are credited to the ALLL

The ALLL is evaluated on a regular basis for appropriateness.

Our periodic review of the collectability of a loan considers historical experience, the nature and volume of the loan portfolio, adverse situations that may affect the borrower’s ability to repay, estimated value of any underlying collateral, and prevailing economic conditions.

This evaluation is inherently subjective as it requires estimates that are susceptible to significant revision as more information becomes available.

The primary factors behind the determination of the level of the ALLL are specific allocations for impaired loans, historical loss percentages, as well as unallocated components.

Specific allocations for impaired loans are primarily determined based on the difference between the loan’s outstanding balance and the present value of expected future cash flows discounted at the loan’s effective interest rate, or the fair value of the collateral, less costs to sell, if the loan is collateral dependent.

Historical loss allocations are calculated at the loan class and segment levels based on a migration analysis of the loan portfolio, with the exception of advances to mortgage brokers, over the preceding five years .

With no historical losses on advances to mortgage brokers, there is no allocation related to this portfolio.

While we have experienced fluctuations in credit quality indicators in recent periods, credit quality remained strong at December 31, 2022.

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.

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

There have been no material changes to the ALLL and credit quality remained strong throughout 2022.

A summary of changes in the ALLL and the recorded investment in loans by segments follows:

Allowance for Loan Losses

Year Ended December 31, 2022

Commercial Agricultural Residential Real Estate Consumer Unallocated Total

January 1, 2022 $ 1,740 $ 289 $ 747 $ 908 $ 5,419 $ 9,103

Charge-offs ( 77 ) — — ( 542 ) — ( 619 )

Recoveries 442 9 150 282 — 883

Provision for loan losses ( 784 ) 279 ( 280 ) 313 955 483

December 31, 2022 $ 1,321 $ 577 $ 617 $ 961 $ 6,374 $ 9,850

Allowance for Loan Losses

Year Ended December 31, 2021

Commercial Agricultural Residential Real Estate Consumer Unallocated Total

January 1, 2021 $ 2,162 $ 311 $ 1,363 $ 798 $ 5,110 $ 9,744

Charge-offs ( 32 ) ( 77 ) ( 12 ) ( 486 ) — ( 607 )

Recoveries 133 12 162 177 — 484

Provision for loan losses ( 523 ) 43 ( 766 ) 419 309 ( 518 )

December 31, 2021 $ 1,740 $ 289 $ 747 $ 908 $ 5,419 $ 9,103

Allowance for Loan Losses and Recorded Investment in Loans

As of December 31, 2022

Commercial Agricultural Residential Real Estate Consumer Unallocated Total

Individually evaluated for impairment $ 12 $ — $ 439 $ — $ — $ 451

Collectively evaluated for impairment 1,309 577 178 961 6,374 9,399

Nonaccrual and Past Due Loans

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.

Past due status is based on the contractual term of the loan.

In all cases, a loan is placed in nonaccrual status at an earlier date if collection of principal or interest is considered doubtful.

Loans may be returned to accrual status after six months of continuous performance and achievement of current payment status.

The following table summarizes nonaccrual loan data by class of loans as of December 31:

Total Nonaccrual Loans Nonaccrual Loans with No ACL Total Nonaccrual Loans Nonaccrual Loans with No ACL

Commercial and industrial:

Secured $ 491 $ 435 $ 82 $ 82

Commercial real estate:

Commercial mortgage 1-4 family investor — — 14 14

Agricultural:

Agricultural mortgage 38 38 67 67

Agricultural other 167 167 167 167

Residential real estate:

Senior lien 286 286 127 107

Total $ 982 $ 926 $ 457 $ 437

Individually evaluated for impairment $ 8,342 $ 10,935 $ 2,741 $ — $ 22,018

Collectively evaluated for impairment 732,578 93,379 338,144 78,054 1,242,155

The following tables summarize the past due and current loans for the entire loan portfolio as of December 31:

or More Current Total Accruing Loans 90 or More Days Past Due

Commercial and industrial

Secured $ 165 $ 290 $ 201 $ 188,530 $ 189,186 $ —

Unsecured — — — 20,552 20,552 —

Total commercial and industrial 165 290 201 209,082 209,738 —

Commercial real estate

Commercial mortgage owner occupied — — — 180,636 180,636 —

Commercial mortgage non-owner occupied — — — 216,292 216,292 —

Commercial mortgage 1-4 family investor — — — 89,208 89,208 —

Commercial mortgage multifamily — — — 78,108 78,108 —

Total commercial real estate — — — 564,244 564,244 —

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

Agricultural mortgage — — — 69,044 69,044 —

Agricultural — — — 30,950 30,950 —

Total agricultural — — — 99,994 99,994 —

Residential real estate

Senior lien 3,188 349 201 309,721 313,459 87

Junior lien — — — 5,945 5,945 —

Home equity lines of credit — — — 37,014 37,014 —

Total residential real estate 3,188 349 201 352,680 356,418 87

Secured - direct 3 — — 37,945 37,948 —

Secured - indirect 181 — — 59,143 59,324 —

Unsecured 9 — — 3,247 3,256 —

Total consumer 193 — — 100,335 100,528 —

Total $ 3,546 $ 639 $ 402 $ 1,344,876 $ 1,349,463 $ 87

Allowance for Loan Losses and Recorded Investment in Loans

As of December 31, 2021

Commercial Agricultural Residential Real Estate Consumer Unallocated Total

Individually evaluated for impairment $ 13 $ — $ 565 $ — $ — $ 578

Collectively evaluated for impairment 1,727 289 182 908 5,419 8,525

or More Current Total Accruing Loans 90 or More Days Past Due

Commercial and industrial

Secured $ 536 $ — $ — $ 161,359 $ 161,895 $ —

Unsecured — — — 16,533 16,533 —

Total commercial and industrial 536 — — 177,892 178,428 —

Commercial real estate

Commercial mortgage owner occupied 94 — — 192,023 192,117 —

Commercial mortgage non-owner occupied 4,208 2,570 — 197,313 204,091 —

Commercial mortgage 1-4 family investor — — 14 85,264 85,278 —

Commercial mortgage multifamily — — — 84,526 84,526 —

Total commercial real estate 4,302 2,570 14 559,126 566,012 —

Advances to mortgage brokers — — — — — —

Agricultural mortgage — — — 73,002 73,002 —

Agricultural — — — 31,983 31,983 —

Total agricultural — — — 104,985 104,985 —

Residential real estate

Senior lien 3,025 225 — 296,975 300,225 —

Junior lien — — — 3,282 3,282 —

Home equity lines of credit 38 — — 33,149 33,187 —

Total residential real estate 3,063 225 — 333,406 336,694 —

Secured - direct 1 — — 37,126 37,127 —

Secured - indirect 45 8 — 37,761 37,814 —

Unsecured 4 — — 3,109 3,113 —

Total consumer 50 8 — 77,996 78,054 —

Total $ 7,951 $ 2,803 $ 14 $ 1,253,405 $ 1,264,173 $ —

Individually evaluated for impairment $ 9,267 $ 14,189 $ 3,454 $ — $ 26,910

Collectively evaluated for impairment 798,172 79,766 322,907 73,282 1,274,127

Credit Quality Indicators

The following table displays commercial and agricultural loans by credit risk ratings and year of origination as of December 31:

2023 2022 2021 2020 2019 Prior Revolving

Loans Revolving Loans Converted to Term Total

Commercial and industrial:

Risk ratings 1-3 $ 15,061 $ 4,324 $ 6,188 $ 6,666 $ 422 $ 449 $ 12,305 $ — $ 45,415

Risk rating 4 38,680 35,245 22,065 4,523 2,469 1,762 29,826 — 134,570

Risk rating 5 391 2,634 233 305 111 101 1,994 — 5,769

Risk rating 6 — — 4 207 6 128 2,596 — 2,941

Risk rating 7 465 — — 24 2 — — — 491

Risk rating 8 — — — — — — — — —

Risk rating 9 — — — — — — — — —

Total $ 54,597 $ 42,203 $ 28,490 $ 11,725 $ 3,010 $ 2,440 $ 46,721 $ — $ 189,186

The following tables display the credit quality indicators for commercial and agricultural credit exposures based on internally assigned credit risk ratings as of December 31:

Commercial Agricultural

Real Estate Other Advances to Mortgage Brokers Total Real Estate Other Total Total

1 - Excellent $ — $ — $ — $ — $ — $ — $ — $ —

2 - High quality 9,045 4,533 — 13,578 342 100 442 14,020

3 - High satisfactory 68,133 36,608 — 104,741 9,757 4,608 14,365 119,106

4 - Low satisfactory 471,009 114,565 — 585,574 43,587 21,214 64,801 650,375

5 - Special mention 20,770 7,447 — 28,217 12,262 4,634 16,896 45,113

6 - Substandard 5,629 3,085 — 8,714 6,316 1,260 7,576 16,290

7 - Vulnerable 74 22 — 96 67 167 234 330

8 - Doubtful — — — — — — — —

9 - Loss — — — — — — — —

Current year-to-date gross charge-offs $ 200 $ — $ — $ — $ — $ — $ — $ — $ 200

Commercial and industrial:

Risk ratings 1-3 $ 2,200 $ 259 $ 129 $ 71 $ 96 $ 707 $ 1,663 $ — $ 5,125

Risk rating 4 3,988 3,117 517 470 — — 7,274 — 15,366

Risk rating 5 — 31 — — — — 30 — 61

Risk rating 6 — — — — — — — — —

Risk rating 7 — — — — — — — — —

Risk rating 8 — — — — — — — — —

Risk rating 9 — — — — — — — — —

Total $ 6,188 $ 3,407 $ 646 $ 541 $ 96 $ 707 $ 8,967 $ — $ 20,552

Current year-to-date gross charge-offs $ 8 $ — $ — $ — $ — $ — $ 68 $ — $ 76

Commercial real estate:

Owner occupied

Risk ratings 1-3 $ 3,592 $ 1,712 $ 12,655 $ 14,228 $ 761 $ 3,313 $ 211 $ — $ 36,472

Risk rating 4 12,148 33,392 39,406 14,086 13,384 19,942 1,506 — 133,864

Risk rating 5 1,460 727 195 220 3,829 1,761 464 — 8,656

Risk rating 6 — — 870 234 — 540 — — 1,644

Risk rating 7 — — — — — — — — —

Risk rating 8 — — — — — — — — —

Risk rating 9 — — — — — — — — —

Total $ 17,200 $ 35,831 $ 53,126 $ 28,768 $ 17,974 $ 25,556 $ 2,181 $ — $ 180,636

Current year-to-date gross charge-offs $ — $ — $ — $ — $ — $ — $ — $ — $ —

Commercial real estate:

Non-owner occupied

Risk ratings 1-3 $ 67 $ 4,383 $ 6,496 $ 827 $ 172 $ 1,766 $ — $ — $ 13,711

Risk rating 4 37,906 62,979 37,583 11,534 7,589 32,941 1,650 — 192,182

Risk rating 5 — — 5,838 — — 3,478 — — 9,316

Risk rating 6 1,029 — — 54 — — — — 1,083

Risk rating 7 — — — — — — — — —

Risk rating 8 — — — — — — — — —

Risk rating 9 — — — — — — — — —

Total $ 39,002 $ 67,362 $ 49,917 $ 12,415 $ 7,761 $ 38,185 $ 1,650 $ — $ 216,292

Current year-to-date gross charge-offs $ — $ — $ — $ — $ — $ — $ — $ — $ —

2023 2022 2021 2020 2019 Prior Revolving

Loans Revolving Loans Converted to Term Total

Commercial real estate:

1-4 family investor

Risk ratings 1-3 $ 286 $ 1,445 $ 864 $ 905 $ 666 $ 887 $ 1,352 $ — $ 6,405

Risk rating 4 13,492 11,641 30,604 15,124 3,036 3,111 4,538 — 81,546

Risk rating 5 152 354 77 — 55 — — — 638

Risk rating 6 555 — — — 59 5 — — 619

Risk rating 7 — — — — — — — — —

Risk rating 8 — — — — — — — — —

Risk rating 9 — — — — — — — — —

Total $ 14,485 $ 13,440 $ 31,545 $ 16,029 $ 3,816 $ 4,003 $ 5,890 $ — $ 89,208

Current year-to-date gross charge-offs $ — $ — $ — $ — $ — $ — $ — $ — $ —

Commercial real estate:

Risk ratings 1-3 $ 4,509 $ 4,682 $ 2,053 $ 568 $ — $ 1,515 $ — $ — $ 13,327

Risk rating 4 2,792 19,465 15,981 813 549 21,263 554 — 61,417

Risk rating 5 — — — 4 — — — — 4

Risk rating 6 — — 32 — — 3,328 — — 3,360

Risk rating 7 — — — — — — — — —

Risk rating 8 — — — — — — — — —

Risk rating 9 — — — — — — — — —

Total $ 7,301 $ 24,147 $ 18,066 $ 1,385 $ 549 $ 26,106 $ 554 $ — $ 78,108

Current year-to-date gross charge-offs $ — $ — $ — $ — $ — $ — $ — $ — $ —

Advances to mortgage brokers

Risk ratings 1-3 $ 18,541 $ — $ — $ — $ — $ — $ — $ — $ 18,541

Current year-to-date gross charge-offs $ — $ — $ — $ — $ — $ — $ — $ — $ —

Agricultural mortgage

Risk ratings 1-3 $ 292 $ 2,834 $ 1,241 $ 2,786 $ 604 $ 964 $ 94 $ — $ 8,815

Risk rating 4 5,622 12,903 8,970 5,940 3,926 7,883 566 — 45,810

Risk rating 5 126 4,098 5,886 689 175 60 756 — 11,790

Risk rating 6 842 — — — — 1,749 — — 2,591

Risk rating 7 — — — — — 38 — — 38

Risk rating 8 — — — — — — — — —

Risk rating 9 — — — — — — — — —

Total $ 6,882 $ 19,835 $ 16,097 $ 9,415 $ 4,705 $ 10,694 $ 1,416 $ — $ 69,044

Current year-to-date gross charge-offs $ — $ — $ — $ — $ — $ 4 $ — $ — $ 4

Agricultural other

Risk ratings 1-3 $ 801 $ 81 $ 121 $ 38 $ 183 $ 141 $ 2,659 $ — $ 4,024

Risk rating 4 1,830 2,481 2,280 619 146 75 14,405 — 21,836

Risk rating 5 753 8 163 507 — 480 2,731 — 4,642

Risk rating 6 — — 32 — — — 249 — 281

Risk rating 7 — — — — — — 167 — 167

Risk rating 8 — — — — — — — — —

Risk rating 9 — — — — — — — — —

Total $ 3,384 $ 2,570 $ 2,596 $ 1,164 $ 329 $ 696 $ 20,211 $ — $ 30,950

Current year-to-date gross charge-offs $ — $ — $ — $ — $ — $ — $ — $ — $ —

The following table displays the credit quality indicators for commercial and agricultural credit exposures based on internally assigned credit risk ratings as of December 31:

Commercial Agricultural

106 unchanged sentences

• Over 120 days delinquent.

Our primary credit quality indicator for residential real estate and consumer loans is the individual loan’s past due aging.

The following tables summarize the past due and current loans for the entire loan portfolio as of December 31:

Accruing Interest

and Past Due:

Total Past Due and Nonaccrual

or More Nonaccrual Current Total

Commercial real estate $ 4,553 $ 2,570 $ — $ 74 $ 7,197 $ 567,463 $ 574,660

Commercial other 285 — — 22 307 165,953 166,260

Advances to mortgage brokers — — — — — — —

Total commercial 4,838 2,570 — 96 7,504 733,416 740,920

Agricultural real estate — — — 67 67 72,264 72,331

Agricultural other — — — 167 167 31,816 31,983

Total agricultural — — — 234 234 104,080 104,314

Internally assigned credit risk ratings are reviewed, at a minimum, when loans are renewed or when management has knowledge of improvements or deterioration of the credit quality of individual credits.

Our primary credit quality indicator for residential real estate and consumer loans is the individual loan’s past due status.

The following table displays residential real estate and consumer loans by payment status and year of origination as of December 31:

2023 2022 2021 2020 2019 Prior Revolving

Loans Revolving Loans Converted to Term Total

Residential real estate:

Senior liens 2,943 225 — 127 3,295 301,606 304,901

Junior liens — — — — — 3,282 3,282

Home equity lines of credit 38 — — — 38 32,664 32,702

Total residential real estate 2,981 225 — 127 3,333 337,552 340,885

Secured 47 8 — — 55 74,886 74,941

Unsecured 4 — — — 4 3,109 3,113

Total consumer 51 8 — — 59 77,995 78,054

Current $ 45,878 $ 52,989 $ 80,122 $ 52,648 $ 23,356 $ 54,556 $ — $ — $ 309,549

Past due 30-89 days — 784 714 123 478 1,438 — — 3,537

Past due 90 or more days — — — — — 87 — — 87

Nonaccrual 48 — — 31 — 207 — — 286

Total $ 45,926 $ 53,773 $ 80,836 $ 52,802 $ 23,834 $ 56,288 $ — $ — $ 313,459

Accruing Interest

and Past Due:

Total Past Due and Nonaccrual

or More Nonaccrual Current Total

Commercial real estate $ 135 $ — $ — $ 222 $ 357 $ 570,230 $ 570,587

Commercial other 85 — — 119 204 164,647 164,851

Advances to mortgage brokers — — — — — 72,001 72,001

Total commercial 220 — — 341 561 806,878 807,439

Agricultural real estate 213 — — 499 712 65,432 66,144

Agricultural other — — — 275 275 27,536 27,811

Total agricultural 213 — — 774 987 92,968 93,955

Current year-to-date gross charge-offs $ — $ — $ — $ — $ — $ 2 $ — $ — $ 2

Residential real estate:

Senior liens 2,016 37 97 93 2,243 290,900 293,143

Junior liens — — — — — 2,439 2,439

Home equity lines of credit 7 — — 37 44 30,735 30,779

Total residential real estate 2,023 37 97 130 2,287 324,074 326,361

Secured 186 — — — 186 70,259 70,445

Unsecured 10 — — — 10 2,827 2,837

Total consumer 196 — — — 196 73,086 73,282

Current $ 3,706 $ 1,325 $ 168 $ 134 $ 167 $ 445 $ — $ — $ 5,945

Past due 30-89 days — — — — — — — — —

Past due 90 or more days — — — — — — — — —

Nonaccrual — — — — — — — — —

Total $ 3,706 $ 1,325 $ 168 $ 134 $ 167 $ 445 $ — $ — $ 5,945

Impaired Loans

Loans may be classified as impaired if they meet one or more of the following criteria:

There has been a charge-off of its principal balance (in whole or in part);

The loan has been classified as a TDR;

The loan is in nonaccrual status.

Impairment is measured on a loan-by-loan basis for commercial and agricultural loans by comparing the loan’s outstanding balance to the present value of expected future cash flows discounted at the loan’s effective interest rate, or the fair value of the collateral, less costs to sell, if the loan is collateral dependent.

Large groups of smaller-balance, homogeneous residential real estate and consumer loans are collectively evaluated for impairment by comparing the loan’s unpaid principal balance to the present value of expected future cash flows discounted at the loan’s effective interest rate.

We do not recognize interest income on impaired loans in nonaccrual status.

For impaired loans not classified as nonaccrual, interest income is recognized daily, as earned, according to the terms of the loan agreement and the principal amount outstanding.

The following summarizes information pertaining to impaired loans as of, and for the years ended, December 31:

Recorded Balance Unpaid Principal Balance Valuation Allowance Average Recorded Balance Interest Income Recognized

Impaired loans with a valuation allowance

Commercial real estate $ 183 $ 184 $ 12 $ 189 $ 12

Commercial other — — — 1,724 62

Residential real estate senior liens 2,741 3,001 439 3,056 126

Total impaired loans with a valuation allowance 2,924 3,185 451 4,969 200

Impaired loans without a valuation allowance

Commercial real estate 5,366 5,682 5,514 338

Commercial other 2,793 2,793 626 58

Agricultural real estate 8,522 8,522 8,568 468

Agricultural other 2,413 2,413 2,984 157

Home equity lines of credit — — 5 —

Total impaired loans without a valuation allowance 19,094 19,410 17,697 1,021

Impaired loans

Commercial 8,342 8,659 12 8,053 470

Agricultural 10,935 10,935 — 11,552 625

Current year-to-date gross charge-offs $ — $ — $ — $ — $ — $ — $ — $ — $ —

Residential real estate:

Total impaired loans $ 22,018 $ 22,595 $ 451 $ 22,666 $ 1,221

Recorded Balance Unpaid Principal Balance Valuation Allowance Average Recorded Balance Interest Income Recognized

Impaired loans with a valuation allowance

Commercial real estate $ 192 $ 193 $ 9 $ 1,668 $ 69

Commercial other 2,802 2,802 4 1,909 103

Agricultural real estate — — — 553 11

Agricultural other — — — 169 —

Residential real estate senior liens 3,417 3,688 565 3,794 151

Total impaired loans with a valuation allowance 6,411 6,683 578 8,093 334

Impaired loans without a valuation allowance

Commercial real estate 5,829 6,145 6,313 398

Commercial other 444 444 1,963 68

Agricultural real estate 9,538 9,538 9,739 699

Agricultural other 4,651 4,651 4,269 235

Home equity lines of credit

Total impaired loans without a valuation allowance 20,499 20,815 22,289 1,400

Impaired loans

Commercial 9,267 9,584 13 11,853 638

Agricultural 14,189 14,189 — 14,730 945

Residential real estate 3,454 3,725 565 3,799 151

Total impaired loans $ 26,910 $ 27,498 $ 578 $ 30,382 $ 1,734

We had committed to advance $ 0 and $ 266 in additional funds to be disbursed in connection with impaired loans, which includes TDRs, as of December 31, 2022 and 2021, respectively.

Troubled Debt Restructurings

A loan modification is considered to be a TDR when the modification includes terms outside of normal lending practices to a borrower who is experiencing financial difficulties.

Typical concessions granted include, but are not limited to:

Current $ — $ — $ — $ — $ — $ — $ 37,014 $ — $ 37,014

Past due 30-89 days — — — — — — — — —

Past due 90 or more days — — — — — — — — —

Nonaccrual — — — — — — — — —

Total $ — $ — $ — $ — $ — $ — $ 37,014 $ — $ 37,014

Current year-to-date gross charge-offs $ — $ — $ — $ — $ — $ — $ — $ — $ —

Secured - direct

Current $ 14,813 $ 10,037 $ 6,468 $ 3,473 $ 1,682 $ 1,472 $ — $ — $ 37,945

Past due 30-89 days — — — 3 — — — — 3

Past due 90 or more days — — — — — — — — —

Nonaccrual — — — — — — — — —

Total $ 14,813 $ 10,037 $ 6,468 $ 3,476 $ 1,682 $ 1,472 $ — $ — $ 37,948

Current year-to-date gross charge-offs $ 139 $ 12 $ 6 $ — $ 3 $ — $ — $ — $ 160

Secured - indirect

Current $ 30,900 $ 10,977 $ 6,887 $ 5,376 $ 2,030 $ 2,973 $ — $ — $ 59,143

Past due 30-89 days 123 — — 30 3 25 — — 181

Past due 90 or more days — — — — — — — — —

Nonaccrual — — — — — — — — —

Total $ 31,023 $ 10,977 $ 6,887 $ 5,406 $ 2,033 $ 2,998 $ — $ — $ 59,324

Current year-to-date gross charge-offs $ — $ — $ — $ — $ — $ — $ — $ — $ —

2023 2022 2021 2020 2019 Prior Revolving

Loans Revolving Loans Converted to Term Total

Current $ 1,576 $ 740 $ 144 $ 86 $ 7 $ — $ 694 $ — $ 3,247

Past due 30-89 days — 9 — — — — — — 9

Past due 90 or more days — — — — — — — — —

Nonaccrual — — — — — — — — —

Total $ 1,576 $ 749 $ 144 $ 86 $ 7 $ — $ 694 $ — $ 3,256

Current year-to-date gross charge-offs $ 344 $ 21 $ 13 $ 2 $ — $ 1 $ 1 $ — $ 382

Loan Modifications

A loan modification includes terms outside of normal lending practices to a borrower experiencing financial difficulty.

Typical modifications granted include, but are not limited to:

• Agreeing to interest rates below prevailing market rates for debt with similar risk characteristics.

Extending the amortization period beyond typical lending guidelines for loans with similar risk characteristics.

Agreeing to an interest only payment structure and delaying principal payments.

• Extending the maturity date or amortization period beyond typical lending guidelines for loans with similar risk characteristics.

• Agreeing to an interest-only payment structure, delaying principal payments, or delaying payments.

• Forgiving principal.

Forgiving accrued interest.

To determine if a borrower is experiencing financial difficulties, factors we consider include:

The borrower is currently in default on any of their debt.

The borrower would likely default on any of their debt if the concession is not granted.

The borrower’s cash flow is insufficient to service all of their debt if the concession is not granted.

To determine if a borrower is experiencing financial difficulty, factors we consider include:

• The borrower is currently in default on any debt.

• The borrower would likely default on any debt if the concession is not granted.

• The borrower’s cash flow is insufficient to service all debt if the concession is not granted.

• The borrower has declared, or is in the process of declaring, bankruptcy.

• The borrower is unlikely to continue as a going concern (if the entity is a business).

The following is a summary of information pertaining to TDRs granted in the years ended December 31:

Number of Loans Pre-Modification Recorded Investment Post-Modification Recorded Investment Number of Loans Pre-Modification Recorded Investment Post-Modification Recorded Investment

Commercial other 3 $ 2,871 $ 2,871 5 $ 4,761 $ 4,761

Agricultural other — — — 6 3,712 3,712

The following is a summary of the amortized cost basis of loan modifications granted to borrowers experiencing financial difficulty for the year ended December 31, 2023.

Other-Than-Insignificant Payment Delay Term Extension Interest Rate Reduction

and Term Extension

Amortized Cost Basis % of Total Class of Financial Receivable Amortized Cost Basis % of Total Class of Financial Receivable Amortized Cost Basis % of Total Class of Financial Receivable

Commercial real estate

Commercial mortgage owner occupied $ 118 0.07 % $ — — % $ — — %

Commercial mortgage non-owner occupied — — % 1,030 0.48 % — — %

Commercial mortgage multifamily 2,977 3.81 % — — % — — %

Agricultural mortgage — — % 227 0.33 % 24 0.03 %

Agricultural — — % 32 0.10 % — — %

Residential real estate

Senior lien — — % 5 — % — — %

Total $ 3,095 $ 1,294 $ 24

The following table summarizes the nature of the concessions we granted to borrowers in financial difficulty in the years ended December 31:

Below Market Interest Rate Below Market Interest Rate and Extension of Amortization Period Below Market Interest Rate Below Market Interest Rate and Extension of Amortization Period

Number of Loans Pre-Modification Recorded Investment Number of Loans Pre-Modification Recorded Investment Number of Loans Pre-Modification Recorded Investment Number of Loans Pre-Modification Recorded Investment

Commercial other 3 $ 2,871 — $ — 1 $ 3,189 4 $ 1,572

Agricultural other — — — — 6 3,712 — —

We do not modify any loans by forgiving principal or accrued interest.

We had committed to advance $ 0 in additional funds in connection with modified loans at December 31, 2023, as displayed in the table above.

The following table summarizes the financial effect of the modifications granted to borrowers experiencing financial difficulty for the year ended December 31:

Payment Delay Term Weighted-Average Interest Rate Reduction Weighted-Average Term Extension (Years)

Commercial real estate

Commercial mortgage owner occupied 6 months N/A N/A

Commercial mortgage non-owner occupied N/A N/A 3.00

Commercial mortgage multifamily 6 months N/A N/A

Agricultural mortgage N/A 4.50 % 1.08

Agricultural N/A N/A 1.00

Residential real estate

Senior lien N/A N/A 2.60

For the year ended December 31, 2022, there were four loans restructured, three with a below market interest rate in the amount of $ 2,871 , and one with both a below market interest rate and extension of amortization period in the amount of $ 98 .

Total restructured loans for the year ended December 31, 2022 was $ 2,969 .

We closely monitor the performance of loans that are modified to borrowers experiencing financial difficulty to understand the effectiveness of our modification efforts.

The following table summarizes the performance of such loans that were modified during the year ended December 31, 2023.

December 31, 2023

30-59 Days 60-89 Days 90 Days or More Total Past Due

Residential real estate

Senior lien $ — $ — $ 5 $ 5

Total $ — $ — $ 5 $ 5

We did not restructure any loans by forgiving principal or accrued interest during 2022 or 2021.

Based on our historical loss experience, losses associated with TDRs are not significantly different than other impaired loans within the same loan segment.

As such, TDRs, including TDRs that have been modified in the past 12 months that subsequently defaulted, are analyzed in the same manner as other impaired loans within their respective loan segment.

We had no loans that defaulted in the years ended December 31, 2022 and 2021, which were modified within 12 months prior to the default date.

The following is a summary of TDR loan balances as of December 31:

TDRs $ 21,339 $ 25,725

We had no loans that defaulted for the years ended December 31, 2023 and 2022 which were modified within 12 months prior to the default date.

The credit quality of our loan portfolio is continuously monitored and is reflected within the ACL for loans.

The ACL is an estimate of expected losses inherent within our loan portfolio.

The ACL is adjusted by a credit loss expense, which is reported in earnings, and reduced by the charge-off of loan amounts, net of recoveries.

The ACL is evaluated on a regular basis for appropriateness.

This evaluation is inherently subjective as it requires estimates that are susceptible to significant revision as more information becomes available.

The primary factors behind the determination of the level of the ACL are specific allocations for loans individually evaluated, historical loss percentages, delinquency status, and other credit trends and risk characteristics, including current conditions and reasonable and supportable forecasts about the future.

Determining the appropriateness of the allowance is complex and requires judgment by management about the effect of matters that are inherently uncertain.

In future periods evaluations of the overall loan portfolio, in light of the factors and forecasts then prevailing, may result in significant changes in the allowance and credit loss expense in those future periods.

The methodology for estimating the amount of expected credit losses reported in the ACL has two basic components:

a component of individual loans that do not share risk characteristics with other loans;

and a pooled component for estimated expected credit losses for pools of loans that share similar risk characteristics.

For a loan that does not share risk characteristics with other loans, an individual analysis is performed to measure an allowance.

Loans in nonaccrual status are individually evaluated for specific allocation of the allowance using the fair value of collateral, less costs to sell if foreclosure is probable, or the discounted cash flow method.

We do not recognize interest income on loans in nonaccrual status.

For loans not classified as nonaccrual, interest income is recognized daily, as earned, according to the terms of the loan agreement and the principal amount outstanding.

In determining the allowance for credit losses, we derive an estimated credit loss assumption from a model that categorizes loan pools based on loan type and credit risk ratings or delinquency bucket.

This model calculates an expected loss percentage for each loan class by considering the probability of default, based on the migration of loans from performing to loss by credit risk ratings or delinquency buckets using life-of-loan analysis, and the historical severity of loss, based on the aggregate net lifetime losses incurred per loan class.

The default and severity factors used to calculate the allowance for credit losses for loans that share similar risk characteristics with other loans are adjusted for differences between the historical period used to calculate historical default and loss severity rates and expected conditions over the remaining lives of the loans in the portfolio.

These qualitative factors are used to adjust the historical probabilities of default and severity of loss so that they reflect management's expectation of future conditions based on a reasonable and supportable forecast.

To the extent the lives of the loans in the portfolio extend beyond the period for which a reasonable and supportable forecast can be made, the model reverts back to the historical rates of default and severity of loss.

Qualitative factors include:

• Changes in lending policies and procedures, including changes in underwriting standards and collection, charge-off, recovery practices not considered elsewhere in estimating credit losses;

• Changes in the experience, ability, and depth of lending management and other relevant staff;

• Changes in interest rates;

• Changes in international, national, regional, and local economic factors (international, national, regional, and local);

• Changes in the nature and volume of the portfolio and in the terms of loans;

• Changes in the volume and severity of past due loans, the volume of nonaccrual loans, and the volume and severity of adversely classified or graded loans;

• Lack of current financial information;

• Competition, legal, and regulatory;

• Changes in the value of underlying collateral.

Upon the adoption of ASC 326, the estimated ACL using the CECL methodology increased $2,744 compared to the ACL as of December 31, 2022 using the prior incurred loss model.

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.

A summary of changes in the ACL and the recorded investment in loans by segments follows:

Allowance for Credit Losses

Year Ended December 31, 2023

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

January 1, 2023 $ 860 $ 461 $ 577 $ 617 $ 961 $ 6,374 $ 9,850

Impact of the adoption of ASC 326 ( 58 ) 5,532 ( 247 ) 3,535 356 ( 6,374 ) 2,744

Charge-offs ( 276 ) — ( 4 ) ( 2 ) ( 542 ) — ( 824 )

Recoveries 79 26 12 329 263 — 709

Credit loss expense 363 ( 141 ) ( 68 ) ( 143 ) 618 — 629

December 31, 2023 $ 968 $ 5,878 $ 270 $ 4,336 $ 1,656 $ — $ 13,108

Allowance for Loan Losses

Year Ended December 31, 2022

Commercial Agricultural Residential Real Estate Consumer Unallocated Total

January 1, 2022 $ 1,740 $ 289 $ 747 $ 908 $ 5,419 $ 9,103

Charge-offs ( 77 ) — — ( 542 ) — ( 619 )

Recoveries 442 9 150 282 — 883

Credit loss expense ( 784 ) 279 ( 280 ) 313 955 483

December 31, 2022 $ 1,321 $ 577 $ 617 $ 961 $ 6,374 $ 9,850

Allowance for Loan Losses and Recorded Investment in Loans

As of December 31, 2022

Commercial Agricultural Residential Real Estate Consumer Unallocated Total

Individually evaluated for impairment $ 12 $ — $ 439 $ — $ — $ 451

Collectively evaluated for impairment 1,309 577 178 961 6,374 9,399

Total $ 1,321 $ 577 $ 617 $ 961 $ 6,374 $ 9,850

Individually evaluated for impairment $ 8,342 $ 10,935 $ 2,741 $ — $ 22,018

Collectively evaluated for impairment 736,098 94,050 333,953 78,054 1,242,155

Total $ 744,440 $ 104,985 $ 336,694 $ 78,054 $ 1,264,173

The following table presents loans that were evaluated for expected credit losses on an individual basis and the related specific allocations, by loan segment as of December 31:

Loan Balance Specific Allocation Loan Balance Specific Allocation

Commercial and industrial $ 465 $ 56 $ — $ —

Commercial real estate 234 28 8,342 12

Agricultural 181 — 10,935 —

Residential real estate 203 — 2,741 439

Consumer — — — —

Total $ 1,083 $ 84 $ 22,018 $ 451

We have designated loans classified as collateral dependent for which we apply the practical expedient to measure the ACL based on the fair value of the collateral less cost to sell, when the repayment is expected to be provided substantially by the sale or operation of the collateral and the borrower is experiencing financial difficulty.

The fair value of the collateral is based on appraisals, which may be adjusted due to their age, and the type, location, and condition of the property or area or general market conditions to reflect the expected change in value between the effective date of the appraisal and the measurement date.

Appraisals are updated every one to two years depending on the type of loan and the total exposure of the borrower.

Loans evaluated for expected credit losses on an individual basis include $1,083 in collateral dependent loans.

Note 5 – Premises and Equipment

17 unchanged sentences

Amortization expense associated with identifiable intangible assets was $ 3 , $ 15 , and $ 29 in 2023, 2022, and 2021, respectively.

Estimated amortization expense associated with identifiable intangibles for each of the next three years succeeding December 31, 2022, and thereafter is as follows:

Estimated amortization expense associated with identifiable intangibles for each of the next two years succeeding December 31, 2023, and thereafter is as follows:

Estimated Amortization Expense

9 unchanged sentences

Securities sold under repurchase agreements without stated maturity dates, federal funds purchased, and FRB Discount Window advances generally mature within one to four days from the transaction date.

We had no FRB Discount Window advances for the years ended December 31, 2022 and 2021.

The following table provides a summary of securities sold under repurchase agreements without stated maturity dates and federal funds purchased for the years ended December 31:

A summary of borrowed funds without stated maturity dates was as follows for the years ended December 31:

Maximum Month End Balance Average Balance Weighted Average Interest Rate During the Period Maximum Month End Balance Average Balance Weighted Average Interest Rate During the Period

1 unchanged sentence

Federal funds purchased — 13 6.13 % — 1 3.02 %

FRB Discount Window — 66 5.34 % — — — %

Securities sold under agreements to repurchase are classified as secured borrowings and are reflected at the amount of cash received in connection with the transaction.

21 unchanged sentences

FHLB advances are collateralized by a blanket lien on all qualified 1-4 family residential real estate loans, specific AFS securities, and FHLB stock.

The following table lists the maturities and weighted average interest rates of FHLB advances as of:

The following table lists the maturity and weighted average interest rate of FHLB advances as of:

Amount Rate Amount Rate

Fixed rate due 2024 $ 40,000 5.55 % $ — — %

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

Subordinated Notes

33 unchanged sentences

The amount of collateral obtained, if deemed necessary upon the extension of credit, is based on our credit evaluation of the borrower.

While we consider standby letters of credit to be

guarantees, the amount of the liability related to such guarantees on the commitment date is not significant and a liability related to such guarantees is not recorded on the consolidated balance sheets.

While we consider standby letters of credit to be guarantees, the amount of the liability related to such guarantees on the commitment date is not significant and a liability related to such guarantees is not recorded on the consolidated balance sheets.

Our exposure to credit-related loss in the event of nonperformance by the counter parties to the financial instruments for commitments to extend credit and standby letters of credit could be up to the contractual notional amount of those instruments.

1 unchanged sentence

No significant losses are anticipated as a result of these commitments.

ACL - Off-Balance-Sheet Credit Commitments

In connection with the commitments for credit-related financial instruments discussed above, we established an allowance for credit losses related to this off-balance-sheet credit exposure.

The estimate of expected credit losses considers both the likelihood that funding will occur and the amount expected to be funded over the estimated remaining life of the commitment.

The likelihood and expected amount of funding are based on historical utilization rates.

No allowance is recognized if we have the unconditional right to cancel the obligation.

The allowance was $ 315 at December 31, 2023 and is reported as a component of accrued interest payable and other liabilities in our consolidated balance sheets.

Adjustments to the allowance are reported in our income statement as a component of provision for credit losses.

Derivative Loan Commitments

5 unchanged sentences

Conversely, if interest rates decrease, the value of these loan commitments increase.

The notional amount of undesignated interest rate lock commitments was $ 0 and $ 788 at December 31, 2022 and 2021, respectively.

There were no undesignated interest rate lock commitments at December 31, 2023 and 2022.

Forward Loan Sale Commitments

6 unchanged sentences

We expect that these forward loan sale commitments will experience changes in fair value opposite to the change in fair value of derivative loan commitments.

The notional amount of undesignated forward loan sale commitments was $ 379 and $ 2,255 at December 31, 2022 and 2021, respectively.

There were undesignated forward loan sale commitments of $ 0 and $ 379 at December 31, 2023 and 2022, respectively.

The fair value of these forward loan sale commitments was $ 0 and $ 394 at December 31, 2023 and 2022, respectively.

2 unchanged sentences

Correspondent banks may require us to maintain minimum cash reserve balances.

The reserve balances related to correspondent banks amounted to $ 500 for the years ended December 31, 2022 and 2021.

The reserve balances related to correspondent banks amounted to $ 250 and $ 500 for the years ended December 31, 2023 and 2022.

Banking regulations limit the transfer of assets in the form of dividends, loans, or advances from the Bank to the Corporation.

22 unchanged sentences

Requirement Minimum To Be Well

Capitalized Under Prompt

Corrective Action Provisions

Capitalized Under Prompt Corrective Action Provisions

Amount Ratio Amount Ratio Amount Ratio

67 unchanged sentences

Fair value of plan assets, December 31 7,066 6,582

Deficiency in funded status at December 31, included on the consolidated balance sheets in accrued interest payable and other liabilities $ ( 314 ) $ ( 1,076 )

Surplus (deficiency) in funded status at December 31, included on the consolidated balance sheets in accrued interest payable and other liabilities $ 438 $ ( 314 )

Accumulated benefit obligation at December 31 $ 6,628 $ 6,896

4 unchanged sentences

Net change in unrecognized actuarial loss and prior service cost 847 821

Accrued pension liability at December 31 $ ( 314 ) $ ( 1,076 )

Prepaid (accrued) pension liability at December 31 $ 438 $ ( 314 )

We have recorded the funded status of the plan in our consolidated balance sheets.

We adjust the underfunded status in a liability account to reflect the current funded status of the plan.

We adjust the funded status in a prepaid account and the underfunded status in a liability account to reflect the current funded status of the plan.

Any gains or losses that arise during the year but are not recognized as components of net periodic benefit cost are recognized as a component of other comprehensive income (loss).

6 unchanged sentences

Net periodic benefit cost (credit) $ 95 $ 59 $ ( 31 )

During 2022, 2021 and 2020, settlement losses of $ 109 , $ 0 and $ 152 were recognized in connection with lump-sum benefit distributions, respectively.

Settlement losses during 2022 were recognized in connection with lump-sum benefit distributions.

Many plan participants elect to receive their retirement benefit payments in the form of lump-sum settlements.

83 unchanged sentences

If these grant conditions are not satisfied, then the award of restricted shares will lapse or be adjusted appropriately, at the discretion of the Board of Directors.

All Grant Agreements contain vesting conditions and clawback provisions.

All such Grant Agreements contain vesting conditions and clawback provisions.

A summary of changes in nonvested restricted stock awards follows for the years ended December 31:

6 unchanged sentences

Balance, December 31 27,072 $ 592 27,072 $ 592

Compensation expense related to the RSP for 2022, 2021, 2020 and was $ 147 , $ 86 , and $ 14 respectively.

Expenses related to the RSP for 2023, 2022, 2021 were $ 253 , $ 147 , and $ 86 respectively.

As of December 31, 2023, there was $ 92 of total remaining unrecognized compensation expense related to nonvested restricted stock awards granted under the RSP.

32 unchanged sentences

Marketing costs 1,159 1,056 939

Memberships and subscriptions 1,042 876 877

Loan underwriting fees 927 1,004 849

FDIC insurance premiums 922 537 690

Donations and community relations 915 923 705

Memberships and subscriptions 876 877 740

Other losses 871 546 194

Director fees 764 790 703

FDIC insurance premiums 537 690 612

All other 2,401 2,237 1,989

16 unchanged sentences

Effect of tax credits ( 602 ) ( 621 ) ( 617 )

Unrecognized deferred tax benefit on joint venture investment — 72 116

Unrecognized deferred tax benefit 49 — 72

Federal income tax expense $ 3,665 $ 4,606 $ 3,848

The losses recognized for December 31, 2021 and 2020 related to our joint venture investment in CSS, which was sold during the fourth quarter of 2020.

The sale of this investment resulted in a capital loss carryforward that is unlikely to be recognized in the foreseeable future.

As such, we did not recognize a deferred tax asset as of December 31, 2022, 2021 and 2020 related to our investment and capital loss in CSS.

The unrecognized deferred tax benefit recorded during 2023 related to a low income housing tax credit investment.

The unrecognized deferred tax benefit recorded during 2021 related to our joint venture investment in Corporate Settlement Solutions, LLC, which was sold during the fourth quarter of 2020.

The sale of each investment resulted in a capital loss carryforward that is unlikely to be recognized in the foreseeable future.

As such, we did not recognize a deferred tax asset as of December 31, 2023, 2022 and 2021 related to our low income housing tax credit investment or the investment in Corporate Settlement Solutions, LLC.

Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for federal income tax purposes.

Significant components of our deferred tax assets and liabilities, measured at the 21% statutory rate, included in other assets and other liabilities on our consolidated balance sheets, are summarized as follows as of December 31:

Significant components of our deferred tax assets and liabilities, measured at the 21% statutory rate, included in other assets on our consolidated balance sheets, are summarized as follows as of December 31:

Deferred tax assets

Allowance for loan losses $ 1,848 $ 1,635

Allowance for credit losses $ 2,658 $ 1,848

Deferred compensation 1,388 1,648

11 unchanged sentences

Core deposit premium and acquisition expenses 1,022 984

Net unrealized gains on AFS securities — 1,018

Other 1,236 1,075

79 unchanged sentences

We do not record loans at fair value on a recurring basis.

However, some loans are classified as impaired and a specific allowance for loan losses may be established.

Loans for which it is probable that payment of interest and principal will be significantly different than the contractual terms of the original loan agreement are considered impaired.

Once a loan is identified as impaired, we measure the estimated impairment.

The fair value of impaired loans is estimated using one of several methods, including the present value of expected future cash flows discounted at the loan’s effective interest rate, or the fair value of the collateral, less costs to sell, if the loan is collateral dependent.

Those impaired loans not requiring an allowance represent loans for which the fair value of the expected repayments or collateral exceed the recorded investments in such loans.

We review the net realizable values of the underlying collateral for collateral dependent impaired loans on at least a quarterly basis for all loan types.

However, some loans are individually evaluated for ACL purposes, and a specific ACL may be established.

To measure reserve, the fair value of the loan is estimated using the fair value of the collateral, less costs to sell if foreclosure is probable, or the present value of expected future cash flows discounted at the loan’s effective interest rate.

Loans not requiring an allowance represent loans for which the fair value of the expected repayments or collateral exceed the recorded investments in such loans.

We review the net realizable values of the underlying collateral for collateral dependent loans on at least a quarterly basis for all loan types.

To determine the collateral value, we utilize independent appraisals, broker price opinions, or internal evaluations.

We review these valuations to determine whether an additional discount should be applied given the age of market information that may have been considered as well as other factors such as costs to sell an asset if it is determined that the collateral will be liquidated in connection with the ultimate settlement of the loan.

We review these valuations to determine whether an additional discount should be applied given the age of market

information that may have been considered as well as other factors such as costs to sell an asset if it is determined that the collateral will be liquidated in connection with the ultimate settlement of the loan.

We use these valuations to determine if any specific reserves or charge-offs are necessary.

We may obtain new valuations in certain circumstances, including when there has been significant deterioration in the condition of the collateral, if the foreclosure process has begun, or if the existing valuation is deemed to be outdated.

The following tables list the quantitative fair value information about impaired loans as of:

The following tables list the quantitative fair value information about loans measured at fair value on a nonrecurring basis as of:

December 31, 2023

Valuation Technique Fair Value Unobservable Input Actual Range Weighted Average

Discount applied to collateral:

Real Estate 20 % - 30 %

Collateral Dependent Loans - Discount applied to collateral:

Discounted value $ 1,083 Real Estate 20 % 20 %

Equipment 25 % - 35 %

Discounted value $ 17,143 Cash crop inventory 40 % 40 %

Livestock 30 % 30 %

Accounts receivable 25 % 25 %

Furniture, fixtures & equipment 45 % 45 %

December 31, 2022

2 unchanged sentences

Real Estate 20 % - 30 %

Equipment 20 % - 35 %

Impaired Loans - Equipment 25 % - 35 %

Discounted value $ 17,143 Cash crop inventory 40 % 40 %

1 unchanged sentence

Accounts receivable 25 % 27 %

Liquor license 75 % 75 %

Furniture, fixtures & equipment 45 % 45 %

Collateral discount rates may have ranges to accommodate differences in the age of the independent appraisal, broker price opinion, or internal evaluation.

15 unchanged sentences

Gross loans 1,349,463 1,292,458 — — 1,292,458

Less allowance for loan and lease losses 9,850 9,850 — — 9,850

Less allowance for credit losses 13,108 13,108 — — 13,108

Net loans 1,336,355 1,279,350 — — 1,279,350

6 unchanged sentences

Federal funds purchased and repurchase agreements 46,801 46,704 — 46,704 —

FHLB advances 40,000 40,000 — 40,000 —

Subordinated debt, net of unamortized issuance costs

6 unchanged sentences

Gross loans 1,264,173 1,225,669 — — 1,225,669

Less allowance for loan and lease losses 9,103 9,103 — — 9,103

Less allowance for credit losses 9,850 9,850 — — 9,850

Net loans 1,254,323 1,215,819 — — 1,215,819

24 unchanged sentences

Nonrecurring items

Impaired loans (net of the ALLL) 17,143 — — 17,143 18,812 — — 18,812

Collateral dependent (net of ACL) in 2023

Impaired loans (net of the ALLL) in 2022 1,083 — — 1,083 17,143 — — 17,143

Foreclosed assets 406 — — 406 439 — — 439

43 unchanged sentences

Interest income 191 15 12

Net income on CSS joint venture — — 577

Other income 13 14 17

1 unchanged sentence

Interest expense 1,065 1,065 615

Occupancy and equipment 67 67 61

Management fee 952 900 854

Audit, consulting, and legal fees 577 522 590

14 unchanged sentences

Undistributed earnings of subsidiaries 9,335 ( 18,782 ) ( 18,139 )

Undistributed earnings of equity securities without readily determinable fair values — — ( 394 )

Loss on sale of joint venture investment — — 394

Share-based payment awards under the Directors Plan 529 463 433

9 unchanged sentences

Purchase of equity investments — ( 250 ) —

Sale of joint venture investment — — 1,000

Net sales (purchases) of premises and equipment 260 ( 2 ) ( 37 )

Net (purchases) sales of premises and equipment ( 77 ) 260 ( 2 )

Net cash provided by (used in) investing activities ( 77 ) 10 ( 2 )

10 unchanged sentences

Note 21 – 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.

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.

Changes in and Disagreements With Accountants on Accounting and Financial Disclosure.

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 8. Financial Statements and Supplementary Data