Loans

12 Months Ended

Dec. 31, 2023

NOTE 4 – LOANS

Loan balances at year end were as follows:


	2023			2022
(In Thousands of Dollars)
Commercial real estate
Owner occupied	$	399,273		$	330,768
Non-owner occupied		712,315			563,652
Farmland		202,950			188,850
Other		224,218			133,630
Commercial
Commercial and industrial		346,354			293,643
Agricultural		58,338			58,087
Residential real estate
1-4 family residential		843,697			475,791
Home equity lines of credit		142,441			132,179
Consumer
Indirect		226,815			197,125
Direct		23,805			16,421
Other		9,164			7,714
Total originated loans	$	3,189,370		$	2,397,860
Net deferred loan costs		8,757			6,890
Allowance for credit losses		(34,440	)		(26,978	)
Net loans	$	3,163,687		$	2,377,772

Allowance for credit loss activity

The following tables present the activity in the allowance for credit losses by portfolio segment for years ended December 31, 2023, 2022 and 2021:


December 31, 2023	Commercial Real Estate			Commercial			Residential Real Estate			Consumer			Total
(In Thousands of Dollars)
Allowance for credit losses
Beginning balance	$	14,840		$	4,186		$	4,374		$	3,578		$	26,978
PCD ACL on loans acquired		850			138			11			0			999
Provision for credit losses		2,808			1,931			2,834			1,145			8,718
Loans charged off		(349	)		(1,272	)		(384	)		(932	)		(2,937	)
Recoveries		1			104			81			496			682
Total ending allowance balance	$	18,150		$	5,087		$	6,916		$	4,287		$	34,440


December 31, 2022	Commercial Real Estate			Commercial			Residential Real Estate			Consumer			Total
(In Thousands of Dollars)
Allowance for credit losses
Beginning balance	$	15,879		$	4,949		$	4,870		$	3,688		$	29,386
Provision for credit losses		(742	)		1,204			(493	)		281			250
Loans charged off		(300	)		(2,042	)		(92	)		(870	)		(3,304	)
Recoveries		3			75			89			479			646
Total ending allowance balance	$	14,840		$	4,186		$	4,374		$	3,578		$	26,978


December 31, 2021	Commercial Real Estate			Commercial			Residential Real Estate			Consumer			Total
Allowance for credit losses
Beginning balance	$	10,746		$	5,018		$	3,687		$	2,693		$	22,144
Impact of CECL adoption		(2,137	)		259			193			3,845			2,160
Provision for credit losses		6,226			(349	)		1,121			(2,349	)		4,649
PCD ACL on loans acquired		1,081			210			4			0			1,295
Loans charged off		(70	)		(388	)		(297	)		(912	)		(1,667	)
Recoveries		33			199			162			411			805
Total ending allowance balance	$	15,879		$	4,949		$	4,870		$	3,688		$	29,386

The cumulative loss rate used as the basis for the estimate of credit losses is comprised of the Company's historical loss experience from December 31, 2011 to December 31, 2023. As of December 31, 2023, the Company expects that the markets in which it operates will experience minimal changes to economic conditions, with a stable trend in unemployment, and a level trend of delinquencies. Management adjusted historical loss experience for these expectations. No reversion adjustments were necessary, as the starting point for the Company's estimate was a cumulative loss rate covering the expected contractual term of the portfolio. While there are many factors that go into the calculation of the allowance for credit losses, the change in the balances from December 31, 2022 to December 31, 2023 is largely attributed to the Emclaire merger.

The following table presents the amortized cost basis of loans on nonaccrual status and loans past due over 89 days still accruing as of December 31, 2023:


(In Thousands of Dollars)	Nonaccrual with no allowance for credit loss		Nonaccrual with an allowance for credit loss		Loans past due over 89 days still accruing
December 31, 2023
Commercial real estate
Owner occupied	$	1,804	$	830	$	0
Non-owner occupied		19		1,491		0
Farmland		1,957		9		0
Other		0		80		0
Commercial
Commercial and industrial		394		1,408		0
Agricultural		203		317		0
Residential real estate
1-4 family residential		348		3,009		460
Home equity lines of credit		240		210		69
Consumer
Indirect		22		300		125
Direct		65		69		1
Other		0		5		0
Total loans	$	5,052	$	7,728	$	655

The above table for the period ending December 31, 2023 does not include a $1.63 million non-owner occupied commercial real estate loan that is held-for-sale and in nonaccrual status. There were no nonaccrual or past due loans related to loans held-for-sale at December 31, 2022.

The following table presents the recorded investment in nonaccrual and loans past due 90 days or more still on accrual by class of loans as of December 31, 2022:


	2022
	Nonaccrual		Loans Past Due 90 Days or More Still Accruing
(In Thousands of Dollars)
Commercial real estate
Owner occupied	$	993	$	0
Non-owner occupied		3,031		0
Farmland		2,183		0
Other		33
Commercial
Commercial and industrial		3,840		50
Agricultural		299		0
Residential real estate
1-4 family residential		2,703		310
Home equity lines of credit		735		58
Consumer
Indirect		313		62
Direct		179		12
Other		2		0
Total loans	$	14,311	$	492

The following table presents the amortized cost basis of collateral-dependent loans by class of loans as of December 31, 2023:


(In Thousands of Dollars)	Real Estate		Business Assets		Vehicles		Cash
December 31, 2023
Commercial real estate
Owner occupied	$	1,804	$	0	$	0	$	0
Non-owner occupied		1,335		0		0		0
Farmland		1,957		0		0		0
Other		0		0		0		0
Commercial
Commercial and industrial		94		867		0		0
Agricultural		0		203		0		0
Residential real estate
1-4 family residential		3,352		0		0		0
Home equity lines of credit		294		0		0		0
Consumer
Indirect		0		0		53		0
Direct		0		0		19		66
Other		0		0		0		0
Total loans	$	8,836	$	1,070	$	72	$	66

The following tables present the aging of the amortized cost basis in past due loans as of December 31, 2023 and 2022 by class of loans:


December 31, 2023	30-59 Days Past Due		60-89 Days Past Due		90 Days or More Past Due and Nonaccrual		Total Past Due		Loans Not Past Due		Total
(In Thousands of Dollars)
Commercial real estate
Owner occupied	$	302	$	293	$	2,634	$	3,229	$	395,799	$	399,028
Non-owner occupied		90		0		1,510		1,600		710,195		711,795
Farmland		365		0		1,966		2,331		200,395		202,726
Other		0		0		80		80		223,697		223,777
Commercial
Commercial and industrial		540		199		1,802		2,541		345,278		347,819
Agricultural		292		40		520		852		58,223		59,075
Residential real estate
1-4 family residential		6,819		4,488		3,817		15,124		828,437		843,561
Home equity lines of credit		729		34		519		1,282		141,189		142,471
Consumer
Indirect		2,045		289		447		2,781		232,105		234,886
Direct		153		23		135		311		23,514		23,825
Other		4		0		5		9		9,155		9,164
Total loans	$	11,339	$	5,366	$	13,435	$	30,140	$	3,167,987	$	3,198,127


December 31, 2022	30-59 Days Past Due		60-89 Days Past Due		90 Days or More Past Due and Nonaccrual		Total Past Due		Loans Not Past Due		Total
Commercial real estate
Owner occupied	$	159	$	0	$	993	$	1,152	$	329,305	$	330,457
Non-owner occupied		0		0		3,031		3,031		560,013		563,044
Farmland		0		0		2,183		2,183		186,399		188,582
Other		0		0		33		33		133,288		133,321
Commercial
Commercial and industrial		1,034		185		3,890		5,109		289,297		294,406
Agricultural		104		20		299		423		58,166		58,589
Residential real estate
1-4 family residential		4,247		1,775		3,013		9,035		466,313		475,348
Home equity lines of credit		115		92		793		1,000		131,209		132,209
Consumer
Indirect		1,267		298		375		1,940		202,683		204,623
Direct		234		70		191		495		15,962		16,457
Other		0		5		2		7		7,707		7,714
Total loans:	$	7,160	$	2,445	$	14,803	$	24,408	$	2,380,342	$	2,404,750

Loan Restructurings:

The Company adopted the accounting guidance in ASU No. 2022-02, effective as of January 1, 2023, which eliminates the recognition and measurement of troubled debt restructurings ("TDRs"). Due to the removal of the TDR designation, the Company evaluates all loan restructurings according to the accounting guidance for loan modifications to determine if the restructuring results in a new loan or a continuation of the existing loan. Loan modifications to borrowers experiencing financial difficulty that result in a direct change in the timing or amount of contractual cash flows include situations where there is principal forgiveness, interest rate reductions, other-than-insignificant payment delays, term extensions, and combinations of the listed modifications. Therefore, the disclosures related to loan restructurings are only for modifications that directly affect cash flows.

Any restructuring of a loan in which the borrower has experienced financial difficulty and the terms of the loan are more favorable than would generally be considered for borrowers with the same credit characteristics would be individually evaluated. Otherwise, the restructured loan remains in the appropriate segment in the ACL model.

The following table presents the amortized cost basis of loans that were both experiencing financial difficulty and modified during the twelve months ended December 31, 2023, by class and type of modification. The percentage of the amortized cost basis of loans that were modified to borrowers in financial distress as compared to the amortized cost basis of each class of financing receivable is also presented below:


December 31, 2023	Amortized Cost
(In Thousands of Dollars)	Term Extension		Interest Rate Reduction		Combination Term Extension and Interest Rate Reduction		Total		% of Total Class of Financing Receivable
Residential real estate
1-4 family residential	$	48	$	30	$	132	$	210		0.03	%
Total modifications to borrowers experiencing financial difficulty	$	48	$	30	$	132	$	210		0.01	%

As of December 31, 2023, the Company had no commitments to lend any additional funds to the borrowers included in the previous table.

The Company closely monitors the performance of the loans that are modified to borrowers experiencing financial difficulty to understand the effectiveness of its modification efforts. The following table presents the performance of such loans that have been modified in the twelve months ended December 31, 2023:


December 31, 2023	Payment status (Amortized cost Basis)
(In Thousands of Dollars)	Current		30-89 Days past due		90+ Days past due
Accrual restructured loans
Residential real estate
1-4 family residential	$	132	$	30	$	0
Total accruing restructured loans	$	132	$	30	$	0

Nonaccrual restructured loans
Residential real estate
1-4 family residential	$	48	$	0	$	0
Total nonaccrual restructured loans	$	48	$	0	$	0
Total restructured loans	$	180	$	30	$	0

The following table presents the financial effect of the loan modifications presented above to borrowers experiencing financial difficulty during the twelve months ended December 31, 2023:

       
      Payment Deferral

      Interest Rate Reduction

      Term Extension

       
      Weighted-Average Years Added to the Life

      Weighted-Average Contractual Interest Rate

      Weighted-Average Years Added to the Life

      December 31, 2023

      From

      To

      Residential real estate

1-4 family residential

4.77

3.38

6.3

The following table presents the amortized cost basis of loans that had a payment default during the year ended December 31, 2023 and were modified in the twelve months prior to that default to borrowers experiencing financial difficulty. For purposes of this disclosure a default occurs when within 12 months of the original modification, a loan is 30 days contractually past due under the modified terms:


December 31, 2023	Amortized Cost
(In Thousands of Dollars)	Term Extension		Interest Rate Reduction		Combination Term Extension and Interest Rate Reduction
Residential real estate
1-4 family residential	$	0	$	30	$	0
Total modifications to borrowers experiencing financial difficulty	$	0	$	30	$	0

Upon the Company's determination that a modified loan (or portion of a loan) has subsequently been deemed uncollectible, the loan (or portion of the loan) is written off. Therefore, the amortized cost basis of the loan is reduced by the uncollectible amount and the allowance of credit losses is adjusted by the same amount.

Credit Quality Indicators:

The Company categorizes loans into risk categories based on relevant information about the ability of borrowers to service their debt such as: current financial information, historical payment experience, credit documentation, public information and current economic trends, among other factors. The Company establishes a risk rating at origination for all commercial loan and commercial real estate relationships. For relationships over $1 million management monitors the loans on an ongoing basis for any changes in the borrower’s ability to service their debt. Management also affirms the risk ratings for the loans and leases in their respective portfolios on an annual basis. The Company uses the following definitions for risk ratings:

Special Mention. Loans classified as special mention have a potential weakness that deserves management’s close attention. If left uncorrected, these potential weaknesses may result in deterioration of the repayment prospects for the loan or of the institution’s credit position at some future date. Special mention assets are not adversely classified and do not expose an institution to sufficient risk to warrant adverse classification.

Substandard. Loans classified as substandard are inadequately protected by the current net worth and paying capacity of the obligor or of the collateral pledged, if any. Loans so classified have a well-defined weakness or weaknesses that jeopardize the liquidation of the debt. They are characterized by the distinct possibility that the institution will sustain some loss if the deficiencies are not corrected.

Doubtful. Loans classified as doubtful have all the weaknesses inherent in those classified as substandard, with the added characteristic that the weaknesses make collection or liquidation in full, on the basis of currently existing facts, conditions and values, highly questionable and improbable.

Loans not meeting the criteria above that are analyzed individually as part of the above described process are considered to be pass rated loans.

Based on the most recent analysis performed, the risk category of loans by class of loans is as follows:


December 31, 2023	Pass		Special Mention		Sub standard		Total
(In Thousands of Dollars)
Commercial real estate
Owner occupied	$	386,015	$	9,628	$	3,385	$	399,028
Non-owner occupied		648,063		27,938		35,794		711,795
Farmland		200,240		0		2,486		202,726
Other		215,459		0		8,318		223,777
Commercial
Commercial and industrial		334,764		646		12,409		347,819
Agricultural		58,506		17		552		59,075
Total loans	$	1,843,047	$	38,229	$	62,944	$	1,944,220


December 31, 2022	Pass		Special Mention		Sub standard		Total

Commercial real estate
Owner occupied	$	324,979	$	1,193	$	4,285	$	330,457
Non-owner occupied		527,267		25,541		10,236		563,044
Farmland		186,057		0		2,525		188,582
Other		133,218		0		103		133,321
Commercial
Commercial and industrial		282,412		777		11,217		294,406
Agricultural		58,002		250		337		58,589
Total loans	$	1,511,935	$	27,761	$	28,703	$	1,568,399

The Company considers the performance of the loan portfolio and its impact on the allowance for credit losses. For residential, consumer and indirect loan classes, the Company evaluates credit quality based on the aging status of the loan, which was previously presented, and by payment activity. The above table for the period ending December 31, 2023 does not include a $1.63 million non-owner occupied commercial real estate loan that is held-for-sale and risk-rated substandard. There were no special mention or substandard loans related to loans held-for-sale at December 31, 2022. In the 1-4 family residential real estate portfolio at December 31, 2023, other real estate owned and foreclosure properties were $92 thousand and $207 thousand, respectively. At December 31, 2022, other real estate owned and foreclosure properties were $0 and $129 thousand, respectively.

The following table presents the amortized cost in residential, consumer and indirect auto loans based on payment activity. Nonperforming loans are loans past due 90 days and still accruing interest and nonaccrual loans.


	Residential Real Estate				Consumer
December 31, 2023	1-4 Family Residential		Home Equity Lines of Credit		Indirect		Direct		Other
(In Thousands of Dollars)
Performing	$	839,744	$	141,952	$	234,439	$	23,690	$	9,159
Nonperforming		3,817		519		447		135		5
Total loans	$	843,561	$	142,471	$	234,886	$	23,825	$	9,164


	Residential Real Estate				Consumer
December 31, 2022	1-4 Family Residential		Home Equity Lines of Credit		Indirect		Direct		Other

Performing	$	472,335	$	131,416	$	204,248	$	16,266	$	7,712
Nonperforming		3,013		793		375		191		2
Total loans	$	475,348	$	132,209	$	204,623	$	16,457	$	7,714

The following table presents total loans by risk categories and year of origination.


	Term Loans Amortized Cost Basis by Origination Year
As of December 31, 2023	2023		2022		2021		2020		2019		Prior		Revolving Loans		Total
Commercial real estate
Risk Rating
Pass	$	176,071	$	250,364	$	202,288	$	128,800	$	138,444	$	338,829	$	14,741	$	1,249,537
Special mention		0		293		12,156		8,779		6,565		9,773		0		37,566
Substandard		0		0		3,972		18,232		3,982		20,627		684		47,497
Total commercial real estate loans	$	176,071	$	250,657	$	218,416	$	155,811	$	148,991	$	369,229	$	15,425	$	1,334,600

Commercial real estate current period gross write-offs	$	0	$	0	$	0	$	0	$	145	$	204	$	0	$	349

Commercial and industrial
Risk Rating
Pass	$	90,807	$	85,255	$	40,444	$	21,794	$	9,736	$	23,030	$	63,698	$	334,764
Special mention		0		141		355		21		0		0		129		646
Substandard		195		3,551		980		404		1,077		699		5,503		12,409
Total commercial loans	$	91,002	$	88,947	$	41,779	$	22,219	$	10,813	$	23,729	$	69,330	$	347,819

Commercial and industrial current period gross write-offs	$	0	$	178	$	579	$	11	$	16	$	394	$	0	$	1,178

Agricultural
Risk Rating
Pass	$	36,314	$	57,469	$	29,807	$	37,620	$	20,020	$	61,033	$	16,483	$	258,746
Special mention		0		0		0		0		0		0		17		17
Substandard		0		33		448		225		50		2,282		0		3,038
Total agricultural loans	$	36,314	$	57,502	$	30,255	$	37,845	$	20,070	$	63,315	$	16,500	$	261,801

Agricultural current period gross write-offs	$	0	$	15	$	70	$	3	$	0	$	6	$	0	$	94

Residential real estate
Risk Rating
Pass	$	63,365	$	171,587	$	164,271	$	132,022	$	49,035	$	245,980	$	3,652	$	829,912
Special mention		0		229		0		66		107		1,655		0		2,057
Substandard		37		104		510		2,546		353		8,042		0		11,592
Total residential real estate loans	$	63,402	$	171,920	$	164,781	$	134,634	$	49,495	$	255,677	$	3,652	$	843,561

Residential real estate current period gross write-offs	$	52	$	0	$	49	$	130	$	0	$	129	$	0	$	360

Home equity lines of credit
Risk Rating
Pass	$	0	$	19	$	14	$	44	$	7	$	1,911	$	138,356	$	140,351
Special mention		0		0		0		0		0		0		0		0
Substandard		0		26		13		82		44		1,856		99		2,120
Total home equity lines of credit	$	0	$	45	$	27	$	126	$	51	$	3,767	$	138,455	$	142,471

Home equity lines of credit current period gross write-offs	$	0	$	0	$	0	$	8	$	0	$	16	$	0	$	24

Consumer
Risk Rating
Pass	$	77,977	$	75,517	$	34,754	$	22,580	$	12,344	$	34,840	$	9,002	$	267,014
Substandard		54		125		175		188		133		186		0		861
Total consumer loans	$	78,031	$	75,642	$	34,929	$	22,768	$	12,477	$	35,026	$	9,002	$	267,875

Consumer current period gross write-offs	$	44	$	176	$	93	$	86	$	32	$	352	$	149	$	932


	Term Loans Amortized Cost Basis by Origination Year

As of December 31, 2022	2022		2021		2020		2019		2018		Prior		Revolving Loans		Total
Commercial real estate
Risk Rating
Pass	$	188,240	$	174,841	$	120,883	$	138,342	$	89,769	$	256,103	$	17,286	$	985,464
Special mention		0		711		1,861		5,286		624		18,252		0		26,734
Substandard		0		18		256		1,968		267		10,952		1,163		14,624
Total commercial real estate loans	$	188,240	$	175,570	$	123,000	$	145,596	$	90,660	$	285,307	$	18,449	$	1,026,822

Commercial
Risk Rating
Pass	$	100,368	$	45,872	$	34,110	$	16,854	$	13,574	$	14,664	$	56,970	$	282,412
Special mention		0		197		0		0		0		0		580		777
Substandard		3,642		1,331		356		152		110		1,761		3,865		11,217
Total commercial loans	$	104,010	$	47,400	$	34,466	$	17,006	$	13,684	$	16,425	$	61,415	$	294,406

Agricultural
Risk Rating
Pass	$	51,096	$	36,376	$	44,133	$	23,661	$	24,003	$	45,490	$	19,300	$	244,059
Special mention		0		0		0		0		0		0		250		250
Substandard		0		379		235		72		0		2,146		30		2,862
Total agricultural loans	$	51,096	$	36,755	$	44,368	$	23,733	$	24,003	$	47,636	$	19,580	$	247,171

Residential real estate
Risk Rating
Pass	$	83,951	$	112,463	$	76,095	$	31,404	$	22,918	$	135,757	$	3,956	$	466,544
Special mention		0		0		70		118		76		93		0		357
Substandard		0		136		249		121		9		7,932		0		8,447
Total residential real estate loans	$	83,951	$	112,599	$	76,414	$	31,643	$	23,003	$	143,782	$	3,956	$	475,348

Home equity lines of credit
Risk Rating
Pass	$	0	$	10	$	0	$	0	$	16	$	1,394	$	128,622	$	130,042
Special mention		0		0		0		0		0		0		49		49
Substandard		0		13		137		20		0		1,848		100		2,118
Total home equity lines of credit	$	0	$	23	$	137	$	20	$	16	$	3,242	$	128,771	$	132,209

Consumer
Risk Rating
Pass	$	98,530	$	46,945	$	32,284	$	20,849	$	10,918	$	10,942	$	7,302	$	227,770
Special mention		0		0		0		0		0		0		0		0
Substandard		102		113		267		230		109		202		1		1,024
Total consumer loans	$	98,632	$	47,058	$	32,551	$	21,079	$	11,027	$	11,144	$	7,303	$	228,794

The Company follows ASU 2016-13 to calculate the allowance for credit losses which requires estimating credit losses over the lifetime of the credits. The ACL is adjusted through the provision for credit losses and reduced by net charge offs of loans. Although the Company has a diversified loan portfolio, the credit risk in the loan portfolio is largely influenced by general economic conditions and trends of the counties and markets in which the debtors operate, and the resulting impact on the operations of borrowers or on the value of any underlying collateral.

The credit loss estimation process involves procedures that consider the unique characteristics of the Company’s loan portfolio segments. These segments are disaggregated into the loan pools for monitoring. A model of risk characteristics, such as loss history and delinquency experience, trends in past due and non-performing loans, as well as existing economic conditions and supportable forecasts are used to determine credit loss assumptions.

The Company uses two methodologies to analyze loan pools. The cohort method and the PD/LGD. Cohort relies on the creation of cohorts to capture loans that qualify for a particular segment, as of a point in time. Those loans are then tracked over their remaining lives to determine their loss experience. The Company aggregates financial assets

on the basis of similar risk characteristics when evaluating loans on a collective basis. Those characteristics include, but are not limited to, internal or external credit score, risk ratings, financial asset, loan type, collateral type, size, effective interest rate, term, or geographical location. The Company uses cohort primarily for consumer loan portfolios.

The probability of default portion of PD/LGD is defined by the Company as 90 days past due, placed on non-accrual, or is partially or wholly, charged-off. Typically, a one-year time period is used to asses PD. PD can be measured and applied using various risk criteria. Risk rating is one common way to apply PDs. Loss given default is to determine the percentage of loss by facility or collateral type. LGD estimates can sometimes be driven, or influenced, by product type, industry or geography. The Company uses PD/LGD primarily for commercial loan portfolios.

The following table presents the loan pools and the associated methodology used during the calculation of the allowance for credit losses in 2023.


Portfolio Segments	Loan Pool	Methodology	Loss Drivers
Residential real estate	1-4 Family Residential Real Estate - 1st Liens	Cohort	Credit Loss History
	1-4 Family Residential Real Estate - 2nd Liens	Cohort	Credit Loss History
Home Equity Lines of Credit	Home Equity Lines of Credit	Cohort	Credit Loss History
Consumer Finance	Cash Reserves	Cohort	Credit Loss History
	Direct	Cohort	Credit Loss History
	Indirect	Cohort	Credit Loss History
Commercial	Commercial and Industrial	PD/LGD	Credit Loss History
	Agricultural	PD/LGD	Credit Loss History
	Municipal	PD/LGD	Credit Loss History
Commercial real estate	Owner Occupied	PD/LGD	Credit Loss History
	Non-Owner Occupied	PD/LGD	Credit Loss History
	Multifamily	PD/LGD	Credit Loss History
	Farmland	PD/LGD	Credit Loss History
	Construction	PD/LGD	Credit Loss History

According to accounting standards, an entity may make an accounting policy election not to measure an allowance for credit losses for accrued interest receivable if the entity writes off the applicable accrued interest receivable balance in a timely manner. The Company has made the accounting policy election not to measure an allowance for credit losses for accrued interest receivables for all loan segments. Current policy dictates that a loan will be placed on nonaccrual status, with the current accrued interest receivable balance being written off, upon the loan being 90 days delinquent or when the loan is deemed to be collateral dependent and the collateral analysis shows insufficient collateral coverage based on a current assessment of the value of the collateral.

In addition, ASC Topic 326 requires the Company to establish a liability for anticipated credit losses for unfunded commitments. To accomplish this, the Company must first establish a loss expectation for extended (funded) commitments. This loss expectation, expressed as a ratio to the amortized cost basis, is then applied to the portion of unfunded commitments not considered unilaterally cancelable, and considered by the company’s management as likely to fund over the life of the instrument. At December 31, 2023, the Company had $753 million in unfunded commitments and set aside $1.84 million in anticipated credit losses. At December 31, 2022, the Company had $603 million in unfunded commitments and set aside $1.4 million in anticipated credit losses. The $150 million increase in unfunded commitments and $435 thousand provision for anticipated credit losses is attributed to the Emclaire merger. This reserve is recorded in other liabilities as opposed to the ACL.

The determination of ACL is complex and the Company makes decisions on the effects of factors that are inherently uncertain. Evaluations of the loan portfolio and individual credits require certain estimates, assumptions and judgments as to the facts and circumstances related to particular situations or credits. The ACL was $34.4 million at December 31, 2023 and $27.0 million at December 31, 2022. The $7.4 million increase is attributed to the Emclaire merger that was partially offset by improvements in the Company's maximum loss rates that anchor the qualitative

factors, reclassification of construction loans balances that were placed into their permanent loan pool, adjustments made to the Commercial Staffing qualitative factor and release of reserves related to loans transferred to held for sale.

Purchased Loans

As a result of the Emclaire merger, the Company acquired $740.7 million in loans.


	2023
Par value of acquired loans at acquisition	$	797,616
Net purchase discount		(55,958	)
Allowance for credit losses of PCD loans		(999	)
Purchase price of loans at acquisition	$	740,659

Under ASC Topic 326, when loans are purchased with evidence of more than insignificant deterioration of credit, they are accounted for as purchase credit deteriorated ("PCD"). PCD loans acquired in a transaction are marked to fair value and a mark on yield is recorded. In addition, an adjustment is made to the ACL for the expected loss on the acquisition date. These loans are assessed on a regular basis and subsequent adjustments to the ACL are recorded on the income statement. During 2023, the Company acquired PCD loans with a fair value of $25.9 million, credit discount of $999 thousand and a noncredit discount of $5.5 million. The remaining discounts for all acquired PCD loans as of December 31, 2023 are $4.4 million. The outstanding balance at December 31, 2023 and related allowance on PCD loans is as follows (in thousands):


	Loan Balance		ACL Balance
Commercial real estate
Owner Occupied	$	430	$	19
Non-owner Occupied		30,653		914
Farmland		9		0
Commercial
Commercial and industrial		2,229		158
Agricultural		149		9
Residential real estate
1-4 family residential		1,211		7
Home equity lines of credit		3		0
Total	$	34,684	$	1,107