ISABELLA BANK Corp - Quarter Report: 2022 September (Form 10-Q)

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q


☒			Quarterly Report Pursuant to Section 13 or 15(d) of The Securities Exchange Act of 1934

For the quarterly period ended September 30, 2022


☐			Transition Report Pursuant to Section 13 or 15(d) of The Securities Exchange Act of 1934

For the transition period from to

Commission File Number: 0-18415

Isabella Bank Corporation

(Exact name of registrant as specified in its charter)

Michigan

38-2830092

(State or other jurisdiction of incorporation or organization)

(I.R.S. Employer Identification No.)

401 N. Main St

Mt. Pleasant

48858

(Address of principal executive offices)

(Zip code)

(989) 772-9471

(Registrant’s telephone number, including area code)

N/A

(Former name, former address and former fiscal year, if changed since last report)

Securities registered pursuant to Section 12(b) of the Act:


Title of each class	Trading Symbol(s)	Name of each exchange on which registered
None	N/A	N/A

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. ☒ Yes ☐ No

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). ☒ Yes ☐ No

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer

☐

Accelerated filer

☐

Non-accelerated filer

☒

Smaller reporting company

☒

Emerging growth company

☐

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). ☐ Yes ☒ No

The number of common shares outstanding of the registrant’s Common Stock (no par value) was 7,567,023 as of October 26, 2022.

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ISABELLA BANK CORPORATION

QUARTERLY REPORT ON FORM 10-Q

Table of Contents

PART I – FINANCIAL INFORMATION

Item 1.

Financial Statements

Item 2.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

Item 4.

Controls and Procedures

PART II – OTHER INFORMATION

Item 1.

Legal Proceedings

Item 1A.

Risk Factors

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

Item 3.

Defaults Upon Senior Securities

Item 4.

Mine Safety Disclosures

Item 5.

Item 6.

Forward Looking Statements

This report contains certain forward looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Rule 175 promulgated thereunder, and Section 21E of the Securities Exchange Act of 1934, as amended and Rule 3b-6 promulgated thereunder. We intend such forward looking statements to be covered by the safe harbor provisions for forward looking statements contained in the Private Securities Litigation Reform Act of 1995, and are included in this statement for purposes of these safe harbor provisions. Forward looking statements, which are based on certain assumptions and describe future plans, strategies and expectations, are generally identifiable by use of the words “believe”, “expect”, “intend”, “anticipate”, “estimate”, “project”, or similar expressions. Our ability to predict results or the actual effect of future plans or strategies is inherently uncertain. Factors which could have a material adverse effect on our operations and future prospects include, but are not limited to, changes in: interest rates, general economic conditions, federal or state tax laws, monetary and fiscal policy, a health crisis, the quality or composition of the loan or investment portfolio, demand for loan products, fluctuation in the value of collateral securing our loan portfolio, deposit flows, competition, cybersecurity risk, demand for financial services in our market area, and accounting principles, policies and guidelines. These risks and uncertainties should be considered in evaluating forward looking statements and undue reliance should not be placed on such statements. Further information concerning our business, including additional factors that could materially affect our consolidated financial results, is included in our filings with the SEC.

Glossary of Acronyms and Abbreviations

The acronyms and abbreviations identified below may be used throughout this Quarterly Report on Form 10-Q or in our other SEC filings. You may find it helpful to refer back to this page while reading this report.


ACL: Allowance for credit losses						GAAP: U.S. generally accepted accounting principles
AFS: Available-for-sale						IFRS: International Financial Reporting Standards
ALCO: Asset-Liability Committee						IRR: Interest rate risk
ALLL: Allowance for loan and lease losses						ISDA: International Swaps and Derivatives Association
AOCI: Accumulated other comprehensive income						LIBOR: London Interbank Offered Rate
ASC: FASB Accounting Standards Codification						N/A: Not applicable
ASU: FASB Accounting Standards Update						N/M: Not meaningful
ATM: Automated teller machine						NAV: Net asset value
BHC Act: Bank Holding Company Act of 1956						NSF: Non-sufficient funds
CARES Act: Coronavirus Aid, Relief, and Economic Security Act						OCI: Other comprehensive income (loss)
CECL: Current expected credit losses						OMSR: Originated mortgage servicing rights
CFPB: Consumer Financial Protection Bureau						OREO: Other real estate owned
CIK: Central Index Key						OTTI: Other-than-temporary impairment
COVID-19: Coronavirus disease 2019						PBO: Projected benefit obligation
CRA: Community Reinvestment Act						PCAOB: Public Company Accounting Oversight Board
DIF: Deposit Insurance Fund						PPP: Paycheck Protection Program
DIFS: Department of Insurance and Financial Services						Rabbi Trust: A trust established to fund our Directors Plan
Directors Plan: Isabella Bank Corporation and Related Companies Deferred Compensation Plan for Directors						RSP: Isabella Bank Corporation Restricted Stock Plan
Dividend Reinvestment Plan: Isabella Bank Corporation Stockholder Dividend Reinvestment Plan and Employee Stock Purchase Plan						SBA: Small Business Administration
Exchange Act: Securities Exchange Act of 1934						SOFR: Secured Overnight Financing Rate
FASB: Financial Accounting Standards Board						SEC: U.S. Securities and Exchange Commission
FDIC: Federal Deposit Insurance Corporation						SOX: Sarbanes-Oxley Act of 2002
FFIEC: Federal Financial Institutions Examinations Council						Tax Act: Tax Cuts and Jobs Act, enacted December 22, 2017
FRB: Federal Reserve Bank						TDR: Troubled debt restructuring
FHLB: Federal Home Loan Bank						XBRL: eXtensible Business Reporting Language
Freddie Mac: Federal Home Loan Mortgage Corporation						Yield Curve: U.S. Treasury Yield Curve
FTE: Fully taxable equivalent

Table of Contents

PART I – FINANCIAL INFORMATION

Item 1. Financial Statements.

INTERIM CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)

(Dollars in thousands)


	September 30 2022		December 31 2021
ASSETS
Cash and cash equivalents
Cash and demand deposits due from banks	$	26,763	$	25,563
Fed Funds sold and interest bearing balances due from banks	72,149		79,767
Total cash and cash equivalents	98,912		105,330
AFS securities, at fair value	581,233		490,601
Mortgage loans AFS	934		1,735
Loans
Commercial	730,504		807,439
Agricultural	96,850		93,955
Residential real estate	334,412		326,361
Consumer	74,385		73,282
Gross loans	1,236,151		1,301,037
Less allowance for loan and lease losses	9,677		9,103
Net loans	1,226,474		1,291,934
Premises and equipment	25,107		24,419
Corporate owned life insurance policies	32,764		32,472
Equity securities without readily determinable fair values	15,496		17,383
Goodwill and other intangible assets	48,290		48,302
Accrued interest receivable and other assets	34,767		19,982
TOTAL ASSETS	$	2,063,977	$	2,032,158
LIABILITIES AND SHAREHOLDERS’ EQUITY
Deposits
Noninterest bearing	$	510,127	$	448,352
Interest bearing demand deposits	368,537		364,563
Certificates of deposit under $250 and other savings	842,081		818,841
Certificates of deposit over $250	70,288		78,583
Total deposits	1,791,033		1,710,339
Borrowed funds
Federal funds purchased and repurchase agreements	52,479		50,162
FHLB advances	—		20,000
Subordinated debt, net of unamortized issuance costs	29,225		29,158
Total borrowed funds	81,704		99,320
Accrued interest payable and other liabilities	14,628		11,451
Total liabilities	1,887,365		1,821,110
Shareholders’ equity
Common stock — no par value 15,000,000 shares authorized; issued and outstanding 7,564,348 shares (including 139,084 shares held in the Rabbi Trust) in 2022 and 7,532,641 shares (including 105,654 shares held in the Rabbi Trust) in 2021	129,094		129,052
Shares to be issued for deferred compensation obligations	4,888		4,545
Retained earnings	85,497		75,592
Accumulated other comprehensive income (loss)	(42,867)		1,859
Total shareholders’ equity	176,612		211,048
TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY	$	2,063,977	$	2,032,158

See notes to interim condensed consolidated financial statements (unaudited).

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INTERIM CONDENSED CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)

(Dollars in thousands except per share amounts)


	Three Months Ended September 30				Nine Months Ended September 30
	2022		2021		2022		2021
Interest income
Loans, including fees	$	13,563	$	13,033	$	39,120	$	38,634
AFS securities
Taxable	2,209		1,224		5,851		3,529
Nontaxable	726		725		2,090		2,393
Federal funds sold and other	521		160		822		516
Total interest income	17,019		15,142		47,883		45,072
Interest expense
Deposits	908		1,251		2,698		4,363
Borrowings
Federal funds purchased and repurchase agreements	9		13		26		40
FHLB advances	33		299		152		1,093
Subordinated debt, net of unamortized issuance costs	266		266		798		349
Total interest expense	1,216		1,829		3,674		5,845
Net interest income	15,803		13,313		44,209		39,227
Provision for loan losses	18		(107)		540		(599)
Net interest income after provision for loan losses	15,785		13,420		43,669		39,826
Noninterest income
Service charges and fees	2,122		1,964		6,615		5,489
Wealth management fees	679		772		2,217		2,274
Earnings on corporate owned life insurance policies	223		201		655		577
Net gain on sale of mortgage loans	174		339		568		1,459
Other	54		91		339		415
Total noninterest income	3,252		3,367		10,394		10,214
Noninterest expenses
Compensation and benefits	6,369		6,116		18,480		17,693
Furniture and equipment	1,490		1,349		4,382		4,049
Occupancy	918		866		2,813		2,726
Other	3,140		2,854		9,223		8,029
Total noninterest expenses	11,917		11,185		34,898		32,497
Income before federal income tax expense	7,120		5,602		19,165		17,543
Federal income tax expense	1,233		916		3,249		2,838
NET INCOME	$	5,887	$	4,686	$	15,916	$	14,705
Earnings per common share
Basic	$	0.78	$	0.59	$	2.11	$	1.85
Diluted	$	0.77	$	0.58	$	2.08	$	1.82
Cash dividends per common share	$	0.27	$	0.27	$	0.81	$	0.81

See notes to interim condensed consolidated financial statements (unaudited).

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INTERIM CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (UNAUDITED)

(Dollars in thousands)


	Three Months Ended September 30				Nine Months Ended September 30
	2022		2021		2022		2021
Net income	$	5,887	$	4,686	$	15,916	$	14,705
Unrealized gains (losses) on AFS securities arising during the period	(22,815)		(1,690)		(56,413)		(4,247)
Tax effect (1)	4,788		353		11,687		894
Unrealized gains (losses) on AFS securities, net of tax	(18,027)		(1,337)		(44,726)		(3,353)
Unrealized gains (losses) on derivative instruments arising during the period	—		—		—		53
Tax effect (1)	—		—		—		(11)
Unrealized gains (losses) on derivative instruments, net of tax	—		—		—		42
Other comprehensive income (loss), net of tax	(18,027)		(1,337)		(44,726)		(3,311)
Comprehensive income (loss)	$	(12,140)	$	3,349	$	(28,810)	$	11,394

(1)See “Note 10 – Accumulated Other Comprehensive Income” for tax effect reconciliation.

See notes to interim condensed consolidated financial statements (unaudited).

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INTERIM CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY (UNAUDITED)

(Dollars in thousands except per share amounts)


	Common Stock
	Common Shares Outstanding	Amount		Common Shares to be Issued for Deferred Compensation Obligations		Retained Earnings		Accumulated Other Comprehensive Income (Loss)		Totals
January 1, 2021	7,997,247	$	142,247	$	4,183	$	64,460	$	7,698	$	218,588
Comprehensive income (loss)	—	—		—		14,705		(3,311)		11,394
Issuance of common stock	52,523	1,196		—		—		—		1,196
Common stock transferred from the Rabbi Trust to satisfy deferred compensation obligations	—	71		(71)		—		—		—
Share-based payment awards under the Directors Plan	—	—		343		—		—		343
Share-based compensation expense recognized in earnings under the RSP	—	58		—		—		—		58
Common stock purchased for deferred compensation obligations	—	(869)		—		—		—		(869)
Common stock repurchased	(123,160)	(2,699)		—		—		—		(2,699)
Cash dividends paid ($0.81 per common share)	—	—		—		(6,369)		—		(6,369)
September 30, 2021	7,926,610	$	140,004	$	4,455	$	72,796	$	4,387	$	221,642
January 1, 2022	7,532,641	$	129,052	$	4,545	$	75,592	$	1,859	$	211,048
Comprehensive income (loss)	—	—		—		15,916		(44,726)		(28,810)
Issuance of common stock	55,549	1,344		—		—		—		1,344
Common stock transferred from the Rabbi Trust to satisfy deferred compensation obligations	—	3		(3)		—		—		—
Share-based payment awards under the Directors Plan	—	—		346		—		—		346
Share-based compensation expense recognized in earnings under the RSP	—	108		—		—		—		108
Common stock purchased for deferred compensation obligations	—	(828)		—		—		—		(828)
Common stock repurchased	(23,842)	(585)		—		—		—		(585)
Cash dividends paid ($0.81 per common share)	—	—		—		(6,011)		—		(6,011)
September 30, 2022	7,564,348	$	129,094	$	4,888	$	85,497	$	(42,867)	$	176,612

See notes to interim condensed consolidated financial statements (unaudited).

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INTERIM CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)

(Dollars in thousands)


	Nine Months Ended September 30
	2022		2021
OPERATING ACTIVITIES
Net income	$	15,916	$	14,705
Reconciliation of net income to net cash provided by operating activities:
Provision for loan losses	540		(599)
Depreciation	1,591		1,761
Amortization of OMSR	55		465
Amortization of acquisition intangibles	12		22
Amortization of subordinated debt issuance costs	67		30
Net amortization of AFS securities	1,568		1,656
Net gain on sale of mortgage loans	(568)		(1,459)
Change in OMSR valuation allowance	(532)		—
Net (gains) losses on foreclosed assets	(5)		1
Increase in cash value of corporate owned life insurance policies, net of expenses	(605)		(538)
Gains from redemption of corporate owned life insurance policies	(57)		(150)
Share-based payment awards under the Directors Plan	346		343
Share-based payment awards under the RSP	108		58
Origination of loans held-for-sale	(19,566)		(40,329)
Proceeds from loan sales	20,935		43,711
Net changes in operating assets and liabilities which provided (used) cash:
Accrued interest receivable and other assets	(2,592)		1,811
Accrued interest payable and other liabilities	3,216		(325)
Net cash provided by (used in) operating activities	20,429		21,163
INVESTING ACTIVITIES
Activity in AFS securities
Maturities, calls, and principal payments	56,044		79,020
Purchases	(204,657)		(240,079)
Net loan principal (originations) collections	64,791		(10,583)
Proceeds from sales of foreclosed assets	105		462
Purchases of premises and equipment	(2,279)		(1,190)
Purchases of corporate owned life insurance policies	—		(4,272)
Proceeds from redemption of corporate owned life insurance policies	370		562
Proceeds from sale of FHLB Stock	2,288		—
Purchases of FRB Stock	(401)		—
Funding of low income housing tax credit investments	(39)		(377)
Net cash provided by (used in) investing activities	(83,778)		(176,457)

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INTERIM CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (continued)

(Dollars in thousands)


	Nine Months Ended September 30
	2022		2021
FINANCING ACTIVITIES
Net increase (decrease) in deposits	$	80,694	$	125,999
Net increase (decrease) in fed funds purchased and repurchase agreements	2,317		(1,228)
Net increase (decrease) in FHLB advances	(20,000)		(30,000)
Issuance of subordinated debt, net of unamortized issuance costs	—		29,106
Cash dividends paid on common stock	(6,011)		(6,369)
Proceeds from issuance of common stock	1,344		1,196
Common stock repurchased	(585)		(2,699)
Common stock purchased for deferred compensation obligations	(828)		(869)
Net cash provided by (used in) financing activities	56,931		115,136
Increase (decrease) in cash and cash equivalents	(6,418)		(40,158)
Cash and cash equivalents at beginning of period	105,330		246,640
Cash and cash equivalents at end of period	$	98,912	$	206,482
SUPPLEMENTAL CASH FLOWS INFORMATION:
Interest paid	$	3,524	$	5,702
Income taxes paid	2,500		2,250
SUPPLEMENTAL NONCASH INFORMATION:
Transfers of loans to foreclosed assets	$	129	$	284

See notes to interim condensed consolidated financial statements (unaudited).

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NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

(Dollars in thousands except per share amounts)

Note 1 – Basis of Presentation

As used in these notes, as well as in Management's Discussion and Analysis of Financial Condition and Results of Operations, references to the “Corporation”, “Isabella”, “we”, “our”, “us”, and similar terms refer to the consolidated entity consisting of Isabella Bank Corporation and its subsidiary. References to Isabella Bank or the “Bank” refer to Isabella Bank Corporation’s subsidiary, Isabella Bank.

The accompanying unaudited interim condensed consolidated financial statements have been prepared in accordance with GAAP for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by GAAP for complete financial statements. In our opinion, all adjustments considered necessary for a fair presentation have been included. Operating results for the three and nine-month periods ended September 30, 2022 are not necessarily indicative of the results that may be expected for the year ending December 31, 2022. For further information, refer to our Annual Report on Form 10-K for the year ended December 31, 2021.

Our 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, 2021.

Reclassifications: Certain amounts reported in the interim 2021 consolidated financial statements have been reclassified to conform with the 2022 presentation.

Note 2 – Accounting Standards Updates

Pending

ASU No. 2016-13: “Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments”, as amended

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.

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Since 2016, we have invested a considerable amount of effort toward this guidance. An internal committee was formed and is 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 a software solution exclusively related to the ACL. We run parallel processes to ensure we are ready to calculate, review, and report the ACL by the required implementation date.

Our CECL implementation efforts continue to focus on model validation, developing new disclosures, establishing formal policies and procedures and control documentation. Based on our loan balances and forecasted economic conditions as of September 30, 2022, management believes the adoption of CECL could result in an increase in the current reserves of approximately 20% to 40%, as compared to our current reserve levels as of September 30, 2022. The estimated increase in reserves is driven by the guidance changes, which requires us to reserve based on expected credit losses over the expected life of the loan and also considers reasonable and supportable forecasts of expected future economic conditions.

This preliminary estimate is contingent upon continued testing and refinement of the model. The actual impact of the adoption will be dependent upon the loan portfolio size and composition, credit quality, and economic conditions and forecasts at the time of adoption. We will continue to evaluate and refine the results of our loss estimates through the end of 2022. Additionally, we will continue to run parallel calculations during the remainder of 2022.

Upon adoption on January 1, 2023, we will record a cumulative-effect adjustment to retained earnings for the change in ACL. While not expected to be material, the impact of the adoption of CECL will also affect our regulatory capital and other asset quality ratios.

Note 3 – AFS Securities

The amortized cost and fair value of AFS securities, with gross unrealized gains and losses, are as follows at:


	September 30, 2022
	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses		Fair Value
U.S. Treasury	$	231,723	$	—	$	24,932	$	206,791
States and political subdivisions	121,414		111		7,525		114,000
Auction rate money market preferred	3,200		—		721		2,479
Mortgage-backed securities	45,087		—		4,045		41,042
Collateralized mortgage obligations	223,181		—		13,461		209,720
Corporate	8,150		—		949		7,201
Total	$	632,755	$	111	$	51,633	$	581,233


	December 31, 2021
	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses		Fair Value
U.S. Treasury	$	212,379	$	—	$	2,676	$	209,703
States and political subdivisions	116,836		4,457		88		121,205
Auction rate money market preferred	3,200		42		—		3,242
Mortgage-backed securities	54,710		1,438		—		56,148
Collateralized mortgage obligations	90,435		1,876		10		92,301
Corporate	8,150		19		167		8,002
Total	$	485,710	$	7,832	$	2,941	$	490,601

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The amortized cost and fair value of AFS securities by contractual maturity at September 30, 2022 are as follows:


	Maturing								Securities with Variable Monthly Payments or Noncontractual Maturities
	Due in One Year or Less		After One Year But Within Five Years		After Five Years But Within Ten Years		After Ten Years				Total
U.S. Treasury	$	—	$	231,723	$	—	$	—	$	—	$	231,723
States and political subdivisions	15,459		45,580		21,500		38,875		—		121,414
Auction rate money market preferred	—		—		—		—		3,200		3,200
Mortgage-backed securities	—		—		—		—		45,087		45,087
Collateralized mortgage obligations	—		—		—		—		223,181		223,181
Corporate	—		—		8,150		—		—		8,150
Total amortized cost	$	15,459	$	277,303	$	29,650	$	38,875	$	271,468	$	632,755
Fair value	$	15,394	$	251,517	$	27,523	$	33,558	$	253,241	$	581,233

Expected maturities for government sponsored enterprises and states and political subdivisions may differ from contractual maturities because issuers may have the right to call or prepay obligations.

As the auction rate money market preferred investments have continual call dates, they are not reported by a specific maturity group. Because of their variable monthly payments, mortgage-backed securities and collateralized mortgage obligations are not reported by a specific maturity group. $170,400 of the collateralized mortgage portfolio consist of agency commercial mortgage-backed securities with defined maturity dates of less than ten years.

The following information pertains to AFS securities with gross unrealized losses at September 30, 2022 and December 31, 2021, aggregated by investment category and length of time that individual securities have been in a continuous loss position.


	September 30, 2022
	Less Than Twelve Months				Twelve Months or More
	Gross Unrealized Losses		Fair Value		Gross Unrealized Losses		Fair Value		Total Unrealized Losses
U.S. Treasury	$	6,996	$	62,985	$	17,936	$	143,806	$	24,932
States and political subdivisions	4,192		57,140		3,333		42,925		7,525
Auction rate money market preferred	—		—		721		2,479		721
Mortgage-backed securities	4,045		41,042		—		—		4,045
Collateralized mortgage obligations	13,461		209,720		—		—		13,461
Corporate	232		1,768		717		5,433		949
Total	$	28,926	$	372,655	$	22,707	$	194,643	$	51,633
Number of securities in an unrealized loss position:			249				305		554


	December 31, 2021
	Less Than Twelve Months				Twelve Months or More
	Gross Unrealized Losses		Fair Value		Gross Unrealized Losses		Fair Value		Total Unrealized Losses
U.S. Treasury	$	2,676	$	209,703	$	—	$	—	$	2,676
States and political subdivisions	88		9,674		—		—		88
Collateralized mortgage obligations	10		11,165		—		—		10
Corporate	167		6,283		—		—		167
Total	$	2,941	$	236,825	$	—	$	—	$	2,941
Number of securities in an unrealized loss position:			40				—		40

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

As of September 30, 2022 and December 31, 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 September 30, 2022 or December 31, 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 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. 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. Repayment of these loans is dependent upon the successful operation and management of a business. We minimize our risk by limiting the amount of direct credit exposure to any one borrower to $18,000. Borrowers with direct credit needs of more than $18,000 may be serviced through the use of loan participations with other commercial banks. Commercial and agricultural real estate loans commonly require loan-to-value limits of 80% or less. Depending upon the type of loan, past credit history, and current operating results, we may require the borrower to pledge accounts receivable, inventory, property, or equipment. 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. 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 (“advances”). 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

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advances as commercial loans and include the outstanding balance in commercial loans on our consolidated balance sheets. Under the participation agreement, we committed to a maximum outstanding aggregate amount of $40,000. The difference between our outstanding balance and the maximum outstanding aggregate amount is classified as an unfunded commitment.

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. We consider the anticipated direction of interest rates, balance sheet duration, the sensitivity of our balance sheet to changes in interest rates, our liquidity needs, and overall loan demand to determine whether or not to sell fixed rate loans to Freddie Mac.

Our lending policies generally limit the maximum loan-to-value ratio on residential real estate loans to 100% of the lower of the appraised value of the property or the purchase price. Private mortgage insurance is typically required on loans with loan-to-value ratios in excess of 80% unless the loan qualifies for government guarantees.

Underwriting criteria for originated residential real estate loans generally include:

•Evaluation of the borrower’s ability to make monthly payments.

•Evaluation of the value of the property securing the loan.

•Ensuring the payment of principal, interest, taxes, and hazard insurance does not exceed 28% of a borrower’s gross income.

•Ensuring all debt servicing does not exceed 40% of income.

•Verification of acceptable credit reports.

•Verification of employment, income, and financial information.

Appraisals are performed by independent appraisers and are reviewed for appropriateness. 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.

Consumer loans include secured and unsecured personal loans. Loans are amortized for a period of up to 15 years based on the age and value of the underlying collateral. The underwriting emphasis is on a borrower’s perceived intent and ability to pay rather than collateral value. 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. 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.

While we have experienced fluctuations in credit quality indicators in recent periods, credit quality remained strong at September 30, 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 has remained strong during 2022.

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Summaries of the ALLL and the recorded investment in loans by segments follows:



	Allowance for Loan Losses
	Three Months Ended September 30, 2022
	Commercial		Agricultural		Residential Real Estate		Consumer		Unallocated		Total
July 1, 2022	$	1,758	$	451	$	639	$	1,323	$	5,529	$	9,700
Charge-offs	—		—		—		(173)		—		(173)
Recoveries	14		1		53		64		—		132
Provision for loan losses	(436)		35		(70)		(168)		657		18
September 30, 2022	$	1,336	$	487	$	622	$	1,046	$	6,186	$	9,677


	Allowance for Loan Losses
	Nine Months Ended September 30, 2022
	Commercial		Agricultural		Residential Real Estate		Consumer		Unallocated		Total
January 1, 2022	$	1,740	$	289	$	747	$	908	$	5,419	$	9,103
Charge-offs	(3)		—		—		(367)		—		(370)
Recoveries	54		4		123		223		—		404
Provision for loan losses	(455)		194		(248)		282		767		540
September 30, 2022	$	1,336	$	487	$	622	$	1,046	$	6,186	$	9,677


	Allowance for Loan Losses and Recorded Investment in Loans
	September 30, 2022
	Commercial		Agricultural		Residential Real Estate		Consumer		Unallocated		Total
ALLL
Individually evaluated for impairment	$	14	$	—	$	460	$	—	$	—	$	474
Collectively evaluated for impairment	1,322		487		162		1,046		6,186		9,203
Total	$	1,336	$	487	$	622	$	1,046	$	6,186	$	9,677
Loans
Individually evaluated for impairment	$	5,703	$	11,188	$	2,860	$	—			$	19,751
Collectively evaluated for impairment	724,801		85,662		331,552		74,385				1,216,400
Total	$	730,504	$	96,850	$	334,412	$	74,385			$	1,236,151

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	Allowance for Loan Losses
	Three Months Ended September 30, 2021
	Commercial		Agricultural		Residential Real Estate		Consumer		Unallocated		Total
July 1, 2021	$	2,311	$	248	$	954	$	938	$	4,909	$	9,360
Charge-offs	(1)		(77)		—		(168)		—		(246)
Recoveries	22		1		29		34		—		86
Provision for loan losses	(801)		294		(226)		45		581		(107)
September 30, 2021	$	1,531	$	466	$	757	$	849	$	5,490	$	9,093


	Allowance for Loan Losses
	Nine Months Ended September 30, 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)		—		(349)		—		(458)
Recoveries	121		6		132		147		—		406
Provision for loan losses	(720)		226		(738)		253		380		(599)
September 30, 2021	$	1,531	$	466	$	757	$	849	$	5,490	$	9,093


	Allowance for Loan Losses and Recorded Investment in Loans
	December 31, 2021
	Commercial		Agricultural		Residential Real Estate		Consumer		Unallocated		Total
ALLL
Individually evaluated for impairment	$	13	$	—	$	565	$	—	$	—	$	578
Collectively evaluated for impairment	1,727		289		182		908		5,419		8,525
Total	$	1,740	$	289	$	747	$	908	$	5,419	$	9,103
Loans
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
Total	$	807,439	$	93,955	$	326,361	$	73,282			$	1,301,037

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The following tables display the internally assigned credit risk ratings for commercial and agricultural credit exposures as of:


	September 30, 2022
	Commercial								Agricultural
	Real Estate		Other		Advances to Mortgage Brokers		Total		Real Estate		Other		Total		Total
Rating
1 - Excellent	$	—	$	300	$	—	$	300	$	—	$	—	$	—	$	300
2 - High quality	9,331		5,044		—		14,375		383		60		443		14,818
3 - High satisfactory	70,779		37,313		1,484		109,576		9,833		3,944		13,777		123,353
4 - Low satisfactory	457,821		113,632		—		571,453		38,935		20,793		59,728		631,181
5 - Special mention	18,255		7,168		—		25,423		10,540		4,410		14,950		40,373
6 - Substandard	5,695		3,504		—		9,199		6,373		1,313		7,686		16,885
7 - Vulnerable	78		100		—		178		98		168		266		444
8 - Doubtful	—		—		—		—		—		—		—		—
9 - Loss	—		—		—		—		—		—		—		—
Total	$	561,959	$	167,061	$	1,484	$	730,504	$	66,162	$	30,688	$	96,850	$	827,354


	December 31, 2021
	Commercial								Agricultural
	Real Estate		Other		Advances to Mortgage Brokers		Total		Real Estate		Other		Total		Total
Rating
1 - Excellent	$	—	$	300	$	—	$	300	$	—	$	—	$	—	$	300
2 - High quality	9,010		6,881		—		15,891		453		—		453		16,344
3 - High satisfactory	86,135		46,087		72,001		204,223		9,361		4,295		13,656		217,879
4 - Low satisfactory	448,489		104,375		—		552,864		36,483		15,986		52,469		605,333
5 - Special mention	13,212		1,351		—		14,563		13,096		3,452		16,548		31,111
6 - Substandard	13,519		5,738		—		19,257		6,252		3,803		10,055		29,312
7 - Vulnerable	222		119		—		341		499		275		774		1,115
8 - Doubtful	—		—		—		—		—		—		—		—
9 - Loss	—		—		—		—		—		—		—		—
Total	$	570,587	$	164,851	$	72,001	$	807,439	$	66,144	$	27,811	$	93,955	$	901,394

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. Descriptions of the internally assigned credit risk ratings for commercial and agricultural loans are as follows:

1. EXCELLENT – Substantially Risk Free

Credit has strong financial condition and solid earnings history, characterized by:

•High liquidity, strong cash flow, low leverage.

•Unquestioned ability to meet all obligations when due.

•Experienced management, with management succession in place.

•Secured by cash.

2. HIGH QUALITY – Limited Risk

Credit with sound financial condition and a positive trend in earnings supplemented by:

•Favorable liquidity and leverage ratios.

•Ability to meet all obligations when due.

•Management with successful track record.

•Steady and satisfactory earnings history.

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•If loan is secured, collateral is of high quality and readily marketable.

•Access to alternative financing.

•Well defined primary and secondary source of repayment.

•If supported by guaranty, the financial strength and liquidity of the guarantor(s) are clearly evident.

3. HIGH SATISFACTORY – Reasonable Risk

Credit with satisfactory financial condition and further characterized by:

•Working capital adequate to support operations.

•Cash flow sufficient to pay debts as scheduled.

•Management experience and depth appear favorable.

•Loan performing according to terms.

•If loan is secured, collateral is acceptable and loan is fully protected.

4. LOW SATISFACTORY – Acceptable Risk

Credit with bankable risks, although some signs of weaknesses are shown:

•Would include most start-up businesses.

•Occasional instances of trade slowness or repayment delinquency – may have been 10-30 days slow within the past year.

•Management’s abilities are apparent yet unproven.

•Weakness in primary source of repayment with adequate secondary source of repayment.

•Loan structure generally in accordance with policy.

•If secured, loan collateral coverage is marginal.

To be classified as less than satisfactory, only one of the following criteria must be met.

5. SPECIAL MENTION – Criticized

Credit constitutes an undue and unwarranted credit risk but not to the point of justifying a classification of substandard. The credit risk may be relatively minor yet constitutes an unwarranted risk in light of the circumstances surrounding a specific loan:

•Downward trend in sales, profit levels, and margins.

•Impaired working capital position.

•Cash flow is strained in order to meet debt repayment.

•Loan delinquency (30-60 days) and overdrafts may occur.

•Shrinking equity cushion.

•Diminishing primary source of repayment and questionable secondary source.

•Management abilities are questionable.

•Weak industry conditions.

•Litigation pending against the borrower.

•Loan may need to be restructured to improve collateral position or reduce payments.

•Collateral or guaranty offers limited protection.

•Negative debt service coverage, however the credit is well collateralized and payments are current.

6. SUBSTANDARD – Classified

Credit is inadequately protected by the current net worth and paying capacity of the borrower or of the collateral pledged. There is a distinct possibility we will implement collection procedures if the loan deficiencies are not corrected. Any commercial loan placed in nonaccrual status will be rated “7” or worse. In addition, the following characteristics may apply:

•Sustained losses have severely eroded the equity and cash flow.

•Deteriorating liquidity.

•Serious management problems or internal fraud.

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•Original repayment terms liberalized.

•Likelihood of bankruptcy.

•Inability to access other funding sources.

•Reliance on secondary source of repayment.

•Litigation filed against borrower.

•Interest non-accrual may be warranted.

•Collateral provides little or no value.

•Requires excessive attention of the loan officer.

•Borrower is uncooperative with loan officer.

7. VULNERABLE – Classified

Credit is considered “Substandard” and warrants placing in nonaccrual status. Risk of loss is being evaluated and exit strategy options are under review. Other characteristics that may apply:

•Insufficient cash flow to service debt.

•Minimal or no payments being received.

•Limited options available to avoid the collection process.

•Transition status, expect action will take place to collect loan without immediate progress being made.

8. DOUBTFUL – Workout

Credit has all the weaknesses inherent in a “Substandard” loan with the added characteristic that collection and/or liquidation is pending. The possibility of a loss is extremely high, but its classification as a loss is deferred until liquidation procedures are completed, or reasonably estimable. Other characteristics that may apply:

•Normal operations are severely diminished or have ceased.

•Seriously impaired cash flow.

•Original repayment terms materially altered.

•Secondary source of repayment is inadequate.

•Survivability as a “going concern” is impossible.

•Collection process has begun.

•Bankruptcy petition has been filed.

•Judgments have been filed.

•Portion of the loan balance has been charged-off.

9. LOSS – Charge-off

Credit is considered uncollectible and of such little value that their continuance as bankable assets is not warranted. This classification is for charged-off loans but does not mean that the asset has absolutely no recovery or salvage value. These loans are further characterized by:

•Liquidation or reorganization under Bankruptcy, with poor prospects of collection.

•Fraudulently overstated assets and/or earnings.

•Collateral has marginal or no value.

•Debtor cannot be located.

•Over 120 days delinquent.

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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:


	September 30, 2022
	Accruing Interest and Past Due:								Total Past Due and Nonaccrual
	30-59 Days		60-89 Days		90 Days or More		Nonaccrual				Current		Total
Commercial
Commercial real estate	$	2,321	$	—	$	—	$	78	$	2,399	$	559,560	$	561,959
Commercial other	248		—		—		100		348		166,713		167,061
Advances to mortgage brokers	—		—		—		—		—		1,484		1,484
Total commercial	2,569		—		—		178		2,747		727,757		730,504
Agricultural
Agricultural real estate	—		258		—		98		356		65,806		66,162
Agricultural other	—		50		—		168		218		30,470		30,688
Total agricultural	—		308		—		266		574		96,276		96,850
Residential real estate
Senior liens	213		137		21		136		507		299,097		299,604
Junior liens	—		—		—		—		—		2,807		2,807
Home equity lines of credit	—		—		—		—		—		32,001		32,001
Total residential real estate	213		137		21		136		507		333,905		334,412
Consumer
Secured	176		—		—		—		176		71,258		71,434
Unsecured	2		2		—		—		4		2,947		2,951
Total consumer	178		2		—		—		180		74,205		74,385
Total	$	2,960	$	447	$	21	$	580	$	4,008	$	1,232,143	$	1,236,151

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	December 31, 2021
	Accruing Interest and Past Due:								Total Past Due and Nonaccrual
	30-59 Days		60-89 Days		90 Days or More		Nonaccrual				Current		Total
Commercial
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
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
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
Consumer
Secured	186		—		—		—		186		70,259		70,445
Unsecured	10		—		—		—		10		2,827		2,837
Total consumer	196		—		—		—		196		73,086		73,282
Total	$	2,652	$	37	$	97	$	1,245	$	4,031	$	1,297,006	$	1,301,037

Impaired Loans

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

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

2.The loan has been classified as a TDR; or

3.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.

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The following is a summary of impaired loans as of:


	September 30, 2022						December 31, 2021
	Recorded Balance		Unpaid Principal Balance		Valuation Allowance		Recorded Balance		Unpaid Principal Balance		Valuation Allowance
Impaired loans with a valuation allowance
Commercial real estate	$	185	$	185	$	14	$	192	$	193	$	9
Commercial other	—		—		—		2,802		2,802		4
Residential real estate senior liens	2,860		3,104		460		3,417		3,688		565
Total impaired loans with a valuation allowance	3,045		3,289		474		6,411		6,683		578
Impaired loans without a valuation allowance
Commercial real estate	5,319		5,635				5,829		6,145
Commercial other	199		199				444		444
Agricultural real estate	8,611		8,611				9,538		9,538
Agricultural other	2,577		2,577				4,651		4,651
Home equity lines of credit	—		—				37		37
Total impaired loans without a valuation allowance	16,706		17,022				20,499		20,815
Impaired loans
Commercial	5,703		6,019		14		9,267		9,584		13
Agricultural	11,188		11,188		—		14,189		14,189		—
Residential real estate	2,860		3,104		460		3,454		3,725		565
Total impaired loans	$	19,751	$	20,311	$	474	$	26,910	$	27,498	$	578

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The following is a summary of impaired loans for the:



	Three Months Ended September 30
	2022				2021
	Average Recorded Balance		Interest Income Recognized		Average Recorded Balance		Interest Income Recognized
Impaired loans with a valuation allowance
Commercial real estate	$	188	$	3	$	1,377	$	3
Commercial other	1,413		—		3,090		35
Agricultural real estate	—		—		94		—
Residential real estate senior liens	2,927		31		3,585		37
Total impaired loans with a valuation allowance	4,528		34		8,146		75
Impaired loans without a valuation allowance
Commercial real estate	5,359		82		7,013		121
Commercial other	208		3		305		9
Agricultural real estate	8,638		116		9,845		113
Agricultural other	2,635		43		4,794		58
Total impaired loans without a valuation allowance	16,840		244		21,957		301
Impaired loans
Commercial	7,168		88		11,785		168
Agricultural	11,273		159		14,733		171
Residential real estate	2,927		31		3,585		37
Total impaired loans	$	21,368	$	278	$	30,103	$	376


	Nine Months Ended September 30
	2022				2021
	Average Recorded Balance		Interest Income Recognized		Average Recorded Balance		Interest Income Recognized
Impaired loans with a valuation allowance
Commercial real estate	$	190	$	9	$	2,161	$	66
Commercial other	2,299		62		1,569		71
Agricultural real estate	—		—		737		11
Agricultural other	—		—		226		—
Residential real estate senior liens	3,141		97		3,908		115
Total impaired loans with a valuation allowance	5,630		168		8,601		263
Impaired loans without a valuation allowance
Commercial real estate	5,571		256		6,109		315
Commercial other	336		18		2,494		59
Agricultural real estate	8,569		341		9,760		378
Agricultural other	3,147		114		4,115		174
Home equity lines of credit	6		—		—		—
Total impaired loans without a valuation allowance	17,629		729		22,478		926
Impaired loans
Commercial	8,396		345		12,333		511
Agricultural	11,716		455		14,838		563
Residential real estate	3,147		97		3,908		115
Total impaired loans	$	23,259	$	897	$	31,079	$	1,189

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We had committed to advance $678 and $266 in additional funds to be disbursed in connection with impaired loans, which includes TDRs, of September 30, 2022 and December 31, 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:

•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.

•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 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 TDRs granted for the:



	Three Months Ended September 30
	2022					2021
	Number of Loans	Pre-Modification Recorded Investment		Post-Modification Recorded Investment		Number of Loans	Pre-Modification Recorded Investment		Post-Modification Recorded Investment
Commercial other	1	$	55	$	55	—	$	—	$	—


	Nine Months Ended September 30
	2022					2021
	Number of Loans	Pre-Modification Recorded Investment		Post-Modification Recorded Investment		Number of Loans	Pre-Modification Recorded Investment		Post-Modification Recorded Investment
Commercial other	1	$	55	$	55	5	$	4,761	$	4,761
Agricultural other	—	—		—		6	3,712		3,712
Residential real estate	1	98		98		—	—		—
Total	2	$	153	$	153	11	$	8,473	$	8,473

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The following is a summary of concessions we granted to borrowers experiencing financial difficulty for the:



	Three Months Ended September 30
	2022						2021
	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	1	$	55	—	$	—	—	$	—	—	$	—


	Nine Months Ended September 30
	2022						2021
	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	1	$	55	—	$	—	1	$	3,189	4	$	1,572
Agricultural other	—	—		—	—		6	3,712		—	—
Residential real estate	—	—		1	98		—	—		—	—
Total	1	$	55	1	$	98	7	$	6,901	4	$	1,572

We did not restructure any loans by forgiving principal or accrued interest in the three and nine-month periods ended September 30, 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 three and nine-month periods ended September 30, 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:


	September 30 2022		December 31 2021
TDRs	$	19,083	$	25,725

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Note 5 – Borrowed Funds

Federal funds purchased and repurchase agreements

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 during the three and nine-month periods ended September 30, 2022 and 2021.

A summary of securities sold under repurchase agreements without stated maturity dates was as follows for the:



	Three Months Ended September 30
	2022						2021
	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
Securities sold under agreements to repurchase without stated maturity dates	$	54,051	$	49,267	0.07	%	$	67,519	$	62,790	0.10	%
Federal funds purchased	$	—	$	—	—	%	$	—	$	—	0.52	%


	Nine Months Ended September 30
	2022						2021
	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
Securities sold under agreements to repurchase without stated maturity dates	$	54,051	$	48,118	0.07	%	$	67,519	$	56,422	0.11	%
Federal funds purchased	$	—	$	1	0.79	%	$	80	$	2	0.40	%

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. The securities underlying the agreements have a carrying value and a fair value of $55,591 and $50,173 at September 30, 2022 and December 31, 2021, respectively. Such securities remain under our control. We may be required to provide additional collateral based on the fair value of underlying securities.

Securities sold under repurchase agreements without stated maturity dates were as follows as of:


	September 30, 2022				December 31, 2021
	Amount		Rate		Amount		Rate
Securities sold under agreements to repurchase without stated maturity dates	$	52,479	0.07	%	$	50,162	0.07	%

We had pledged AFS securities and 1-4 family residential real estate loans in the following amounts at:


	September 30 2022		December 31 2021
Pledged to secure borrowed funds	$	341,457	$	334,415
Pledged to secure repurchase agreements	55,591		50,173
Pledged for public deposits and for other purposes necessary or required by law	30,374		28,154
Total	$	427,422	$	412,742

AFS securities pledged to repurchase agreements without stated maturity dates consisted of the following at:


	September 30 2022		December 31 2021
U.S. Treasury	$	19,542	$	9,711
States and political subdivisions	18,315		13,491
Mortgage-backed securities	7,370		13,174
Collateralized mortgage obligations	10,364		13,797
Total	$	55,591	$	50,173

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AFS securities pledged to repurchase agreements are monitored to ensure the appropriate level is collateralized. In the event of maturities, calls, significant principal repayments, or significant decline in market values, we have an adequate level of AFS securities to pledge to satisfy collateral requirements.

As of September 30, 2022, we had the ability to borrow up to an additional $343,437, without pledging additional collateral.

FHLB advances

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:


	September 30, 2022				December 31, 2021
	Amount		Rate		Amount		Rate
Fixed rate due 2022	$	—	—	%	$	20,000	1.97	%

Subordinated Notes

On June 2, 2021, we completed a private placement of $30,000 in aggregate principal amount of 3.25% Fixed-to-Floating Rate Subordinated Notes due 2031 (the "Notes"). The Notes will initially bear a fixed interest rate of 3.25% until June 15, 2026, after which time until maturity on June 15, 2031, the interest rate will reset quarterly to an annual floating rate equal to the then-current 3-month SOFR plus 256 basis points. The Notes are redeemable by us at our option, in whole or in part, on or after June 15, 2026. The Notes are not subject to redemption at the option of the holders.

The following table summarizes our outstanding notes as of:


	September 30, 2022				December 31, 2021
	Amount		Rate		Amount		Rate
Fixed rate at 3.25% to floating, due 2031	$	30,000	3.25	%	$	30,000	3.25	%
Unamortized issuance costs	(775)				(842)
Total subordinated debt, net	$	29,225			$	29,158

Note 6 – Computation of Earnings Per Common Share

Basic earnings per common share represents income available to common shareholders divided by the weighted average number of common shares outstanding during the period. Diluted earnings per common share includes additional common shares that would have been outstanding if dilutive potential common shares had been issued. Potential common shares that may be issued relate solely to outstanding shares in the Directors Plan and grant awards under the RSP.

Earnings per common share have been computed based on the following for the:


	Three Months Ended September 30				Nine Months Ended September 30
	2022		2021		2022		2021
Average number of common shares outstanding for basic calculation	7,555,333		7,932,227		7,544,909		7,948,578
Average potential effect of common shares in the Directors Plan (1)	66,506		94,828		74,931		103,816
Average potential effect of common shares in the RSP	29,111		17,517		27,277		12,858
Average number of common shares outstanding used to calculate diluted earnings per common share	7,650,950		8,044,572		7,647,117		8,065,252
Net income	$	5,887	$	4,686	$	15,916	$	14,705
Earnings per common share
Basic	$	0.78	$	0.59	$	2.11	$	1.85
Diluted	$	0.77	$	0.58	$	2.08	$	1.82

(1)Exclusive of shares held in the Rabbi Trust

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Note 7 – Restricted Stock Plan

We adopted the RSP, an equity-based bonus plan, in 2020. Under the RSP, we may award restricted stock bonuses to eligible employees on an annual basis that are not fully transferable or vested until certain conditions are met. Currently, the eligible employees are the Bank's CEO, President, and CFO. The RSP authorizes the issuance of unvested restricted stock to an eligible employee with a maximum award ranging from 25% to 40% of the employee’s annual salary, on a calendar year basis. The employee must also satisfy the annual performance targets and measures established by the Board of Directors. 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.

A summary of changes in nonvested restricted stock awards is as follows for the:



	Three Months Ended September 30, 2022			Three Months Ended September 30, 2021
	Number of Shares	Fair Value		Number of Shares	Fair Value
Balance, July 1	30,208	$	679	16,257	$	334
Granted	(3,362)	(87)		3,866	84
Vested	—	—		—	—
Forfeited	—	—		—	—
Balance, September 30	26,846	$	592	20,123	$	418


	Nine Months Ended September 30, 2022			Nine Months Ended September 30, 2021
	Number of Shares	Fair Value		Number of Shares	Fair Value
Balance, January 1	20,123	$	418	4,658	$	82
Granted	6,723	174		15,465	336
Vested	—	—		—	—
Forfeited	—	—		—	—
Balance, September 30	26,846	$	592	20,123	$	418

Fluctuations in granted shares are due to the reassessment of the award achievement. Expense related to RSP awards were $108 and $58 for the nine-month periods ended September 30, 2022 and 2021. As of September 30, 2022, there was $369 of total remaining unrecognized compensation expense related to nonvested restricted stock awards granted under the RSP. The remaining expense is expected to be recognized over a weighted-average service period of 2.62 years.

Note 8 – Other Noninterest Expenses

A summary of expenses included in other noninterest expenses is as follows for the:


	Three Months Ended September 30				Nine Months Ended September 30
	2022		2021		2022		2021
Audit, consulting, and legal fees	$	595	$	665	$	1,749	$	1,553
ATM and debit card fees	543		473		1,485		1,352
Marketing costs	209		236		812		683
Donations and community relations	239		198		665		452
Memberships and subscriptions	230		234		654		662
Loan underwriting fees	243		238		640		628
Director fees	210		166		598		505
All other	871		644		2,620		2,194
Total other noninterest expenses	$	3,140	$	2,854	$	9,223	$	8,029

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Note 9 – Federal Income Taxes

The reconciliation of the provision for federal income taxes and the amount computed at the federal statutory tax rate of 21% of income before federal income tax expense is as follows for the:


	Three Months Ended September 30				Nine Months Ended September 30
	2022		2021		2022		2021
Income taxes at statutory rate	$	1,496	$	1,176	$	4,025	$	3,684
Effect of nontaxable income
Interest income on tax exempt municipal securities	(147)		(143)		(425)		(474)
Earnings on corporate owned life insurance policies	(47)		(43)		(150)		(153)
Other	(4)		(9)		(12)		(22)
Total effect of nontaxable income	(198)		(195)		(587)		(649)
Effect of nondeductible expenses	9		11		26		23
Effect of tax credits	(74)		(76)		(215)		(220)
Federal income tax expense	$	1,233	$	916	$	3,249	$	2,838

Note 10 – Accumulated Other Comprehensive Income

The following table summarizes the changes in AOCI by component for the:



	Three Months Ended September 30
	2022								2021
	Unrealized Gains (Losses) on AFS Securities		Unrealized Gains (Losses) on Derivative Instruments		Defined Benefit Pension Plan		Total		Unrealized Gains (Losses) on AFS Securities		Unrealized Gains (Losses) on Derivative Instruments		Defined Benefit Pension Plan		Total
Balance, July 1	$	(22,826)	$	—	$	(2,014)	$	(24,840)	$	8,469	$	—	$	(2,745)	$	5,724
OCI before reclassifications	(22,815)		—		—		(22,815)		(1,690)		—		—		(1,690)
Tax effect	4,788		—		—		4,788		353		—		—		353
OCI, net of tax	(18,027)		—		—		(18,027)		(1,337)		—		—		(1,337)
Balance, September 30	$	(40,853)	$	—	$	(2,014)	$	(42,867)	$	7,132	$	—	$	(2,745)	$	4,387


	Nine Months Ended September 30
	2022								2021
	Unrealized Gains (Losses) on AFS Securities		Unrealized Gains (Losses) on Derivative Instruments		Defined Benefit Pension Plan		Total		Unrealized Gains (Losses) on AFS Securities		Unrealized Gains (Losses) on Derivative Instruments		Defined Benefit Pension Plan		Total
Balance, January 1	$	3,873	$	—	$	(2,014)	$	1,859	$	10,485	$	(42)	$	(2,745)	$	7,698
OCI before reclassifications	(56,413)		—		—		(56,413)		(4,247)		53		—		(4,194)
Tax effect	11,687		—		—		11,687		894		(11)		—		883
OCI, net of tax	(44,726)		—		—		(44,726)		(3,353)		42		—		(3,311)
Balance, September 30	$	(40,853)	$	—	$	(2,014)	$	(42,867)	$	7,132	$	—	$	(2,745)	$	4,387

Included in OCI for the three and nine-month periods ended September 30, 2022 and 2021 are changes in unrealized gains and losses related to auction rate money market preferred stocks. These investments, for federal income tax purposes, have no deferred federal income taxes related to unrealized gains or losses given the nature of the investments.

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A summary of the components of unrealized gains on AFS securities included in OCI follows for the:



	Three Months Ended September 30
	2022						2021
	Auction Rate Money Market Preferred Stocks		All Other AFS Securities		Total		Auction Rate Money Market Preferred Stocks		All Other AFS Securities		Total
Unrealized gains (losses) arising during the period	$	(18)	$	(22,797)	$	(22,815)	$	(14)	$	(1,676)	$	(1,690)
Tax effect	—		4,788		4,788		—		353		353
Unrealized gains (losses), net of tax	$	(18)	$	(18,009)	$	(18,027)	$	(14)	$	(1,323)	$	(1,337)


	Nine Months Ended September 30
	2022						2021
	Auction Rate Money Market Preferred Stocks		All Other AFS Securities		Total		Auction Rate Money Market Preferred Stocks		All Other AFS Securities		Total
Unrealized gains (losses) arising during the period	$	(763)	$	(55,650)	$	(56,413)	$	9	$	(4,256)	$	(4,247)
Tax effect	—		11,687		11,687		—		894		894
Unrealized gains (losses), net of tax	$	(763)	$	(43,963)	$	(44,726)	$	9	$	(3,362)	$	(3,353)

Note 11 – Fair Value

Under fair value measurement and disclosure authoritative guidance, we group assets and liabilities measured at fair value into three levels, based on the markets in which the assets and liabilities are traded, and the reliability of the assumptions used to determine fair value, based on the prioritization of inputs in the valuation techniques. These levels are:


Level 1:			Valuation is based upon quoted prices for identical instruments traded in active markets.
Level 2:			Valuation is based upon quoted prices for similar instruments in active markets, quoted prices for identical or similar instruments in markets that are not active and model-based valuation techniques for which all significant assumptions are observable in the market.
Level 3:			Valuation is generated from model-based techniques that use at least one significant assumption not observable in the market. These unobservable assumptions reflect estimates of assumptions that market participants would use in pricing the asset or liability.

The asset’s or liability’s fair value measurement level within the fair value hierarchy is based on the lowest level of any input that is significant to the fair value measurement. Valuation techniques maximize the use of observable inputs and minimize the use of unobservable inputs. Transfers between measurement levels are recognized at the end of reporting periods.

Fair value measurement requires the use of an exit price notion which may differ from entrance pricing. Generally we believe our assets and liabilities classified as Level 1 or Level 2 approximate an exit price notion.

Following is a description of the valuation methodologies, key inputs, and an indication of the level of the fair value hierarchy in which the assets or liabilities are classified.

AFS securities: AFS securities are recorded at fair value on a recurring basis. Level 1 fair value measurement is based upon quoted prices for identical instruments. Level 2 fair value measurement is based upon quoted prices for similar instruments. If quoted prices are not available, fair values are measured using independent pricing models or other model-based valuation techniques such as the present value of future cash flows, adjusted for the security’s credit rating, prepayment assumptions and other factors such as credit loss and liquidity assumptions. The values for Level 1 and Level 2 investment securities are generally obtained from an independent third party. On a quarterly basis, we compare the values provided to alternative pricing sources.

Loans: 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

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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. 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 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:


	September 30, 2022
Valuation Technique	Fair Value	Unobservable Input	Actual Range	Weighted Average
		Discount applied to collateral:
		Real Estate	20% - 30%	23%
		Equipment	20% - 35%	30%
Discounted value	$14,724	Cash crop inventory	40%	40%
		Livestock	30%	30%
		Accounts receivable	50%	50%
		Furniture, fixtures & equipment	45%	45%


	December 31, 2021
Valuation Technique	Fair Value	Unobservable Input	Actual Range	Weighted Average
		Discount applied to collateral:
		Real Estate	20% - 30%	23%
		Equipment	20% - 35%	28%
Discounted value	$18,812	Cash crop inventory	40%	40%
		Livestock	30%	30%
		Accounts receivable	50%	50%
		Liquor license	75%	75%

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

OMSR: OMSR (which are included in other assets) are subject to impairment testing. To test for impairment, we utilize a discounted cash flow analysis using interest rates and prepayment speed assumptions currently quoted for comparable instruments and discount rates. If the valuation model reflects a value less than the carrying value, OMSR are adjusted to fair value through a valuation allowance as determined by the model. As such, we classify OMSR subject to nonrecurring fair value adjustments as Level 2.

The preceding methods described may produce a fair value calculation that may not be indicative of net realizable value or reflective of future fair values. Although we believe our valuation methods are appropriate and consistent with other market participants, the use of different methodologies or assumptions to determine the fair value of certain financial instruments could result in a different fair value measurement.

Estimated Fair Values of Financial Instruments Not Recorded at Fair Value in their Entirety on a Recurring Basis

Disclosure of the estimated fair values of financial instruments, which differ from carrying values, often requires the use of estimates. In cases where quoted market values in an active market are not available, we use present value techniques and other valuation methods to estimate the fair values of our financial instruments. These valuation methods require considerable judgment and the resulting estimates of fair value can be significantly affected by the assumptions made and methods used.

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The carrying amount and estimated fair value of financial instruments not recorded at fair value in their entirety on a recurring basis were as follows as of:


	September 30, 2022
	Carrying Value		Estimated Fair Value		Level 1		Level 2		Level 3
ASSETS
Cash and cash equivalents	$	98,912	$	98,912	$	98,912	$	—	$	—
Mortgage loans AFS	934		942		—		942		—
Gross loans	1,236,151		1,194,804		—		—		1,194,804
Less allowance for loan and lease losses	9,677		9,677		—		—		9,677
Net loans	1,226,474		1,185,127		—		—		1,185,127
Accrued interest receivable	6,406		6,406		6,406		—		—
Equity securities without readily determinable fair values (1)	15,496		N/A		—		—		—
OMSR	2,601		3,179		—		3,179		—
LIABILITIES
Deposits without stated maturities	1,529,793		1,529,793		1,529,793		—		—
Deposits with stated maturities	261,240		248,892		—		248,892		—
Federal funds purchased and repurchase agreements	52,479		52,349		—		52,349		—
Subordinated debt, net of unamortized issuance costs	29,225		26,548		—		26,548		—
Accrued interest payable	158		158		158		—		—


	December 31, 2021
	Carrying Value		Estimated Fair Value		Level 1		Level 2		Level 3
ASSETS
Cash and cash equivalents	$	105,330	$	105,330	$	105,330	$	—	$	—
Mortgage loans AFS	1,735		1,797		—		1,797		—
Gross loans	1,301,037		1,296,841		—		—		1,296,841
Less allowance for loan and lease losses	9,103		9,103		—		—		9,103
Net loans	1,291,934		1,287,738		—		—		1,287,738
Accrued interest receivable	5,804		5,804		5,804		—		—
Equity securities without readily determinable fair values (1)	17,383		N/A		—		—		—
OMSR	2,124		2,753		—		2,753		—
LIABILITIES
Deposits without stated maturities	1,409,577		1,409,577		1,409,577		—		—
Deposits with stated maturities	300,762		301,216		—		301,216		—
Federal funds purchased and repurchase agreements	50,162		50,153		—		50,153		—
FHLB advances	20,000		20,120		—		20,120		—
Subordinated debt, net of unamortized issuance costs	29,158		27,435		—		27,435		—
Accrued interest payable	251		251		251		—		—

(1)Due to the characteristics of equity securities without readily determinable fair values, they are not disclosed under a specific fair value hierarchy. When an impairment or write-down related to these securities is recorded, such amount would be classified as a nonrecurring Level 3 fair value adjustment.

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Financial Instruments Recorded at Fair Value

The table below presents the recorded amount of assets and liabilities measured at fair value on:


	September 30, 2022											December 31, 2021
	Total		Level 1			Level 2			Level 3			Total		Level 1			Level 2			Level 3
Recurring items
AFS securities
U.S. Treasury	$	206,791	$	—		$	206,791		$	—		$	209,703	$	—		$	209,703		$	—
States and political subdivisions	114,000		—			114,000			—			121,205		—			121,205			—
Auction rate money market preferred	2,479		—			2,479			—			3,242		—			3,242			—
Mortgage-backed securities	41,042		—			41,042			—			56,148		—			56,148			—
Collateralized mortgage obligations	209,720		—			209,720			—			92,301		—			92,301			—
Corporate	7,201		—			7,201			—			8,002		—			8,002			—
Total AFS securities	581,233		—			581,233			—			490,601		—			490,601			—
Nonrecurring items
Impaired loans (net of the ALLL)	14,724		—			—			14,724			18,812		—			—			18,812
Foreclosed assets	240		—			—			240			211		—			—			211
Total	$	596,197	$	—		$	581,233		$	14,964		$	509,624	$	—		$	490,601		$	19,023
Percent of assets and liabilities measured at fair value			—		%	97.49		%	2.51		%			—		%	96.27		%	3.73		%

We recorded an impairment related to foreclosed assets of $6 and $0 through earnings for the nine-month period ended September 30, 2022 and 2021, respectively. We had no other assets or liabilities recorded at fair value with changes in fair value recognized through earnings, on a recurring basis or nonrecurring basis, as of September 30, 2022. Further, we had no unrealized gains and losses included in OCI for recurring Level 3 fair value measurements held at the end of the reporting period.

Note 12 – Operating Segments

Our reportable segments are based on legal entities that account for at least 10% of net operating results. The Bank as of September 30, 2022 and December 31, 2021 and for the three and nine-month periods ended September 30, 2022 and 2021, represents approximately 90% or more of our consolidated total assets and operating results. As such, no additional segment reporting is presented.

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Note 13 – Parent Company Only Financial Information

Interim Condensed Balance Sheets


	September 30 2022		December 31 2021
ASSETS
Cash on deposit at the Bank	$	8,812	$	11,535
Investments in subsidiaries	148,497		178,395
Premises and equipment	1,444		1,482
Other assets	47,462		48,923
TOTAL ASSETS	$	206,215	$	240,335
LIABILITIES AND SHAREHOLDERS’ EQUITY
Subordinated debt, net of unamortized issuance costs	$	29,225	$	29,158
Other liabilities	378		129
Shareholders' equity	176,612		211,048
TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY	$	206,215	$	240,335

Interim Condensed Statements of Income


	Three Months Ended September 30				Nine Months Ended September 30
	2022		2021		2022		2021
Income
Dividends from subsidiaries	$	1,200	$	800	$	3,000	$	2,800
Interest income	3		7		8		8
Other income	3		4		10		14
Total income	1,206		811		3,018		2,822
Expenses
Interest expense	266		266		798		349
Occupancy and equipment	17		16		50		49
Audit, consulting, and legal fees	135		187		411		440
Director fees	108		87		313		258
Other	275		277		865		852
Total expenses	801		833		2,437		1,948
Income before income tax benefit and equity in undistributed earnings of subsidiaries	405		(22)		581		874
Federal income tax benefit	167		172		507		403
Income before equity in undistributed earnings of subsidiaries	572		150		1,088		1,277
Undistributed earnings of subsidiaries	5,315		4,536		14,828		13,428
Net income	$	5,887	$	4,686	$	15,916	$	14,705

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Interim Condensed Statements of Cash Flows


	Nine Months Ended September 30
	2022		2021
Operating activities
Net income	$	15,916	$	14,705
Adjustments to reconcile net income to cash provided by operations
Undistributed earnings of subsidiaries	(14,828)		(13,428)
Share-based payment awards under the Directors Plan	346		343
Share-based payment awards under the RSP	108		58
Amortization of subordinated debt issuance costs	67		30
Depreciation	38		38
Changes in operating assets and liabilities which provided (used) cash
Other assets	1,461		673
Other liabilities	249		390
Net cash provided by (used in) operating activities	3,357		2,809
Investing activities
Financing activities
Issuance of subordinated debt, net of unamortized issuance costs	—		29,106
Cash dividends paid on common stock	(6,011)		(6,369)
Proceeds from the issuance of common stock	1,344		1,196
Common stock repurchased	(585)		(2,699)
Common stock purchased for deferred compensation obligations	(828)		(869)
Net cash provided by (used in) financing activities	(6,080)		20,365
Increase (decrease) in cash and cash equivalents	(2,723)		23,174
Cash and cash equivalents at beginning of period	11,535		2,670
Cash and cash equivalents at end of period	$	8,812	$	25,844

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Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations.

ISABELLA BANK CORPORATION FINANCIAL REVIEW

(Dollars in thousands except per share amounts)

The following is management's discussion and analysis of our financial condition and results of operations for the unaudited three and nine-month periods ended September 30, 2022 and 2021. This analysis should be read in conjunction with our Annual Report on Form 10-K for the year ended December 31, 2021 and with the unaudited interim condensed consolidated financial statements and notes, beginning on page 4 of this report.

Executive Summary

During the three and nine months ended September 30, 2022, we reported net income of $5,887 and $15,916 and earnings per common share of $0.78 and $2.11, respectively. Net income and earnings per common share for the same periods of 2021 were $4,686 and $14,705 and $0.59 and $1.85, respectively. Net interest income increased $4,982, or 12.70%, for the nine-month period ended September 30, 2022 in comparison to the same period in 2021. While PPP loan fees declined, rising interest rates and growth in AFS securities led to a $2,811 increase in gross interest income during the nine-month period ended September 30, 2022 compared to the same period in 2021. We continued to benefit from a reduction in higher-cost borrowings as interest expense on deposits and borrowings decreased $2,171, or 37.14%, for the nine-month period ended September 30, 2022 when compared to the same period in 2021.

The provision for loan losses during the nine months ended September 30, 2022 was $540, compared to a net provision reversal of $599 for the same period in 2021. During 2020, increased economic and environmental risk factors, predominantly driven by COVID-19, drove a significant increase in the ALLL and provision expense. Strong credit quality, coupled with improvement in economic factors, such as unemployment rates, resulted in a reduction in the ALLL and a provision reversal during the first quarter of 2021. Credit quality remained strong at September 30, 2022, as evidenced by total past due and nonaccrual loans which were $4,008, or 0.32% of gross loans. Despite strong credit quality, the ALLL and provision for loan losses increased during 2022 as a result of increased economic and environmental related risk factors.

Noninterest income increased $180 during the first nine months of 2022 compared to the same period in 2021. Service charges and fees increased $1,126, with $605 of the increase attributed to OMSR income. Offsetting this income was an $891 reduction in gain on sale of mortgage loans, as residential mortgage originations sold in the secondary market declined. Noninterest expenses for the first nine months of 2022 increased $2,401 in comparison to the same period in 2021 and was primarily a result of increased compensation, other losses, consulting, marketing, and donations and community relations related expenses.

As of September 30, 2022, total assets and assets under management were $2,063,977 and $2,796,992, respectively. Assets under management include loans sold and serviced of $268,879 and investment and trust assets managed by Isabella Wealth of $464,136, in addition to assets on our consolidated balance sheet. Loans outstanding as of September 30, 2022 totaled $1,236,151. Since December 31, 2021, gross loans declined $64,886 as a result of a $70,517 reduction in advances to mortgage brokers, which is included within the commercial loan portfolio, however is not considered a component of our core lending business. Total deposits were $1,791,033 as of September 30, 2022, which was an increase of $80,694 since December 31, 2021. All regulatory capital ratios for the Bank exceeded the minimum thresholds to be considered a “well capitalized” institution.

Our securities portfolio increased $90,632 from December 31, 2021, predominantly due to $204,657 in purchases, although offset by maturities and an increase in net unrealized losses. The unrealized loss on our AFS securities portfolio resulted from the recent increases in short-term and intermediate-term benchmark interest rates. As a result, this change in unrealized losses has reduced our balance of shareholders' equity and negatively impacted our tangible book value.

Our net yield on interest earning assets (FTE) was 3.28% and 3.10% for the three and nine months ended September 30, 2022, as compared to 2.85% and 2.87% for the three and nine months ended September 30, 2021. The marked improvement is a result of strategies management began implementing in 2019 and 2020, focused on improving our net yield as rates declined, including enhanced pricing related to loans and a reduced reliance on higher-cost borrowed funds and brokered deposits. With rate increases during the first three quarters of 2022, and anticipated future rate increases during the remainder of the year, we expect continued improvement in net yield on interest earning assets.

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Recent Events and Legislation

Impact of COVID-19: Unexpected and unprecedented changes have occurred since early 2020 as the result of COVID-19. The full impact of the pandemic, including the uncertainties surrounding the pandemic, remain in 2022. However, significant progress has been made with vaccinations and medical treatments. Additionally, improved safety guidelines and the easing of restrictions have occurred since the onset of the pandemic. We expect the significance of the pandemic, including the extent of its effect on our financial and operational results, to be dictated by continued developments related to the COVID-19 pandemic. We continue to closely monitor external events and are in continual discussion with our customers to assess, prepare and respond to conditions as they evolve.

Reclassifications

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

Subsequent Events

We evaluated subsequent events after September 30, 2022 through the date our interim condensed consolidated financial statements were issued for potential recognition and disclosure. No subsequent events require financial statement recognition or disclosure between September 30, 2022 and the date our interim condensed consolidated financial statements were issued.

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Results of Operations (Unaudited)

The following table outlines our quarter-to-date results of operations and provides certain performance measures as of, and for the three-month periods ended:


	September 30 2022			June 30 2022			March 31 2022			December 31 2021			September 30 2021
INCOME STATEMENT DATA
Interest income	$	17,019		$	16,102		$	14,762		$	15,041		$	15,142
Interest expense	1,216			1,175			1,283			1,567			1,829
Net interest income	15,803			14,927			13,479			13,474			13,313
Provision for loan losses	18			485			37			81			(107)
Noninterest income	3,252			3,595			3,547			3,608			3,367
Noninterest expenses	11,917			11,661			11,320			11,197			11,185
Federal income tax expense (benefit)	1,233			1,081			935			1,010			916
Net income (loss)	$	5,887		$	5,295		$	4,734		$	4,794		$	4,686
PER SHARE
Basic earnings	$	0.78		$	0.70		$	0.63		$	0.63		$	0.59
Diluted earnings	$	0.77		$	0.69		$	0.62		$	0.63		$	0.58
Dividends	$	0.27		$	0.27		$	0.27		$	0.27		$	0.27
Tangible book value	$	16.96		$	18.85		$	19.56		$	21.61		$	21.87
Quoted market value
High	$	24.95		$	26.25		$	26.00		$	29.00		$	26.74
Low	$	21.39		$	23.00		$	24.50		$	24.75		$	22.55
Close (1)	$	21.40		$	24.80		$	25.85		$	25.50		$	26.03
Common shares outstanding (1)	7,564,348			7,553,113			7,542,758			7,532,641			7,926,610
PERFORMANCE RATIOS
Return on average total assets	1.13		%	1.04		%	0.92		%	0.96		%	0.91		%
Return on average shareholders' equity	12.13		%	10.83		%	9.02		%	8.83		%	8.35		%
Return on average tangible shareholders' equity	16.15		%	14.38		%	11.72		%	11.31		%	10.65		%
Net interest margin yield (FTE)	3.28		%	3.16		%	2.86		%	2.86		%	2.85		%
BALANCE SHEET DATA (1)
Gross loans	$	1,236,151		$	1,271,910		$	1,218,371		$	1,301,037		$	1,248,558
AFS securities	$	581,233		$	557,590		$	544,919		$	490,601		$	494,384
Total assets	$	2,063,977		$	2,048,373		$	2,060,933		$	2,032,158		$	2,082,701
Deposits	$	1,791,033		$	1,759,866		$	1,764,161		$	1,710,339		$	1,692,316
Borrowed funds	$	81,704		$	86,450		$	90,534		$	99,320		$	156,655
Shareholders' equity	$	176,612		$	190,680		$	195,842		$	211,048		$	221,642
Gross loans to deposits	69.02		%	72.27		%	69.06		%	76.07		%	73.78		%
ASSETS UNDER MANAGEMENT (1)
Loans sold with servicing retained	$	268,879		$	273,294		$	275,556		$	278,844		$	285,392
Assets managed by Isabella Wealth	$	464,136		$	454,535		$	501,829		$	516,243		$	491,784
Total assets under management	$	2,796,992		$	2,776,202		$	2,838,318		$	2,827,245		$	2,859,877
ASSET QUALITY (1)
Nonperforming loans to gross loans	0.05		%	0.05		%	0.06		%	0.10		%	0.25		%
Nonperforming assets to total assets	0.04		%	0.05		%	0.05		%	0.08		%	0.18		%
ALLL to gross loans	0.78		%	0.76		%	0.76		%	0.70		%	0.73		%
CAPITAL RATIOS (1)
Shareholders' equity to assets	8.56		%	9.31		%	9.50		%	10.39		%	10.64		%
Tier 1 leverage	8.44		%	8.38		%	8.12		%	7.97		%	8.37		%
Common equity tier 1 capital	12.92		%	12.44		%	12.83		%	12.07		%	13.07		%
Tier 1 risk-based capital	12.92		%	12.44		%	12.83		%	12.07		%	13.07		%
Total risk-based capital	15.85		%	15.33		%	15.84		%	14.94		%	16.03		%

(1) At end of period

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The following table outlines our year-to-date results of operations and provides certain performance measures as of, and for the nine-month periods ended:


	September 30 2022			September 30 2021			September 30 2020
INCOME STATEMENT DATA
Interest income	$	47,883		$	45,072		$	47,770
Interest expense	3,674			5,845			10,967
Net interest income	44,209			39,227			36,803
Provision for loan losses	540			(599)			1,409
Noninterest income	10,394			10,214			10,304
Noninterest expenses	34,898			32,497			32,595
Federal income tax expense	3,249			2,838			1,495
Net income	$	15,916		$	14,705		$	11,608
PER SHARE
Basic earnings	$	2.11		$	1.85		$	1.46
Diluted earnings	$	2.08		$	1.82		$	1.43
Dividends	$	0.81		$	0.81		$	0.81
Tangible book value	$	16.96		$	21.87		$	21.75
Quoted market value
High	$	26.25		$	26.74		$	24.50
Low	$	21.39		$	19.45		$	15.60
Close (1)	$	21.40		$	26.03		$	16.74
Common shares outstanding (1)	7,564,348			7,926,610			8,007,901
PERFORMANCE RATIOS
Return on average total assets	1.03		%	0.97		%	0.82		%
Return on average shareholders' equity	10.62		%	8.82		%	7.04		%
Return on average tangible shareholders' equity	14.01		%	11.28		%	9.05		%
Net interest margin yield (FTE)	3.10		%	2.87		%	2.93		%
BALANCE SHEET DATA (1)
Gross loans	$	1,236,151		$	1,248,558		$	1,303,308
AFS securities	$	581,233		$	494,384		$	363,054
Total assets	$	2,063,977		$	2,082,701		$	1,971,697
Deposits	$	1,791,033		$	1,692,316		$	1,495,095
Borrowed funds	$	81,704		$	156,655		$	238,349
Shareholders' equity	$	176,612		$	221,642		$	222,545
Gross loans to deposits	69.02		%	73.78		%	87.17		%
ASSETS UNDER MANAGEMENT (1)
Loans sold with servicing retained	$	268,879		$	285,392		$	289,524
Assets managed by Isabella Wealth	$	464,136		$	491,784		$	403,730
Total assets under management	$	2,796,992		$	2,859,877		$	2,664,951
ASSET QUALITY (1)
Nonperforming loans to gross loans	0.05		%	0.25		%	0.38		%
Nonperforming assets to total assets	0.04		%	0.18		%	0.30		%
ALLL to gross loans	0.78		%	0.73		%	0.73		%
CAPITAL RATIOS (1)
Shareholders' equity to assets	8.56		%	10.64		%	11.29		%
Tier 1 leverage	8.44		%	8.37		%	8.76		%
Common equity tier 1 capital	12.92		%	13.07		%	12.90		%
Tier 1 risk-based capital	12.92		%	13.07		%	12.90		%
Total risk-based capital	15.85		%	16.03		%	13.64		%

(1) At end of period

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Average Balances, Interest Rates, and Net Interest Income

The following schedules present the daily average amount outstanding for each major category of interest earning assets, non-earning assets, interest bearing liabilities, and noninterest bearing liabilities. These schedules also present an analysis of interest income and interest expense for the periods indicated. All interest income is reported on a FTE basis using a federal income tax rate of 21%. Loans in nonaccrual status, for the purpose of the following computations, are included in the average loan balances. FRB and FHLB restricted equity holdings are included in other interest earning assets.


	Three Months Ended
	September 30, 2022						June 30, 2022						September 30, 2021
	Average Balance		Tax Equivalent Interest		Average Yield / Rate		Average Balance		Tax Equivalent Interest		Average Yield / Rate		Average Balance		Tax Equivalent Interest		Average Yield / Rate
INTEREST EARNING ASSETS
Loans	$	1,256,723	$	13,563	4.32	%	$	1,259,573	$	13,179	4.19	%	$	1,203,468	$	13,033	4.33	%
Taxable investment securities	490,751		2,190		1.79	%	475,010		2,027		1.71	%	332,056		1,224		1.47	%
Nontaxable investment securities	110,058		1,002		3.64	%	109,367		975		3.57	%	113,857		1,035		3.64	%
Fed funds sold	16		—		1.98	%	6		—		1.47	%	4		—		0.02	%
Other	101,687		521		2.05	%	77,176		192		1.00	%	262,023		160		0.24	%
Total earning assets	1,959,235		17,276		3.53	%	1,921,132		16,373		3.41	%	1,911,408		15,452		3.23	%
NONEARNING ASSETS
Allowance for loan losses	(9,691)						(9,288)						(9,361)
Cash and demand deposits due from banks	24,875						22,838						30,120
Premises and equipment	24,475						24,269						24,540
Accrued income and other assets	78,151						84,590						109,750
Total assets	$	2,077,045					$	2,043,541					$	2,066,457
INTEREST BEARING LIABILITIES
Interest bearing demand deposits	$	381,282	$	64	0.07	%	$	375,123	$	56	0.06	%	$	366,345	$	46	0.05	%
Savings deposits	642,916		270		0.17	%	627,916		171		0.11	%	565,814		161		0.11	%
Time deposits	262,628		574		0.87	%	274,284		627		0.91	%	323,322		1,044		1.29	%
Federal funds purchased and repurchase agreements	49,267		9		0.07	%	46,029		8		0.07	%	62,790		13		0.08	%
FHLB advances	6,739		33		1.96	%	10,000		47		1.88	%	62,718		299		1.91	%
Subordinated debt, net of unamortized issuance costs	29,211		266		3.64	%	29,188		266		3.65	%	29,124		266		3.65	%
Total interest bearing liabilities	1,372,043		1,216		0.35	%	1,362,540		1,175		0.34	%	1,410,113		1,829		0.52	%
NONINTEREST BEARING LIABILITIES
Demand deposits	497,215						470,139						419,017
Other	13,627						15,237						12,826
Shareholders’ equity	194,160						195,625						224,501
Total liabilities and shareholders’ equity	$	2,077,045					$	2,043,541					$	2,066,457
Net interest income (FTE)			$	16,060					$	15,198					$	13,623
Net yield on interest earning assets (FTE)					3.28	%					3.16	%					2.85	%

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	Nine Months Ended
	September 30, 2022						September 30, 2021
	Average Balance		Tax Equivalent Interest		Average Yield / Rate		Average Balance		Tax Equivalent Interest		Average Yield / Rate
INTEREST EARNING ASSETS
Loans	$	1,251,206	$	39,120	4.17	%	$	1,202,060	$	38,634	4.29	%
Taxable investment securities	462,675		5,795		1.67	%	268,435		3,529		1.75	%
Nontaxable investment securities	107,041		2,934		3.65	%	122,675		3,346		3.64	%
Fed funds sold	8		—		1.69	%	3		—		0.01	%
Other	113,847		822		0.96	%	273,997		516		0.25	%
Total earning assets	1,934,777		48,671		3.35	%	1,867,170		46,025		3.29	%
NONEARNING ASSETS
Allowance for loan losses	(9,372)						(9,502)
Cash and demand deposits due from banks	24,843						29,236
Premises and equipment	24,401						24,836
Accrued income and other assets	87,989						109,835
Total assets	$	2,062,638					$	2,021,575
INTEREST BEARING LIABILITIES
Interest bearing demand deposits	$	379,952	$	170	0.06	%	$	337,561	$	168	0.07	%
Savings deposits	628,823		600		0.13	%	549,213		459		0.11	%
Time deposits	275,586		1,928		0.93	%	345,960		3,736		1.44	%
Federal funds purchased and repurchase agreements	48,119		26		0.07	%	56,424		40		0.09	%
FHLB advances	10,513		152		1.93	%	79,048		1,093		1.84	%
Subordinated debt, net of unamortized issuance costs	29,189		798		3.65	%	12,907		349		3.61	%
Total interest bearing liabilities	1,372,182		3,674		0.36	%	1,381,113		5,845		0.56	%
NONINTEREST BEARING LIABILITIES
Demand deposits	475,373						405,046
Other	15,242						13,144
Shareholders’ equity	199,841						222,272
Total liabilities and shareholders’ equity	$	2,062,638					$	2,021,575
Net interest income (FTE)			$	44,997					$	40,180
Net yield on interest earning assets (FTE)					3.10	%					2.87	%

Net interest income is the amount by which interest income on earning assets exceeds the interest expense on interest bearing liabilities. Net interest income is influenced by changes in the balance and mix of assets and liabilities, as well as market interest rates. While we exert some control over these factors, FRB monetary policy and competition have a significant impact. For analytical purposes, net interest income is adjusted to an FTE basis by including the income tax savings from interest on tax exempt loans and nontaxable investment securities, thus making year to year comparisons more meaningful.

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Volume and Rate Variance Analysis

The following table sets forth the effect of volume and rate changes on interest income and expense for the periods indicated. Changes in interest due to volume and rate were determined as follows:

Volume—change in volume multiplied by the previous period's rate.

Rate—change in the FTE rate multiplied by the previous period's volume.

The change in interest due to both volume and rate has been allocated to volume and rate changes in proportion to the relationship of the absolute dollar amounts of the change in each.


	Three Months Ended September 30, 2022 Compared to June 30, 2022 Increase (Decrease) Due to						Three Months Ended September 30, 2022 Compared to September 30, 2021 Increase (Decrease) Due to						Nine Months Ended September 30, 2022 Compared to September 30, 2021 Increase (Decrease) Due to
	Volume		Rate		Net		Volume		Rate		Net		Volume		Rate		Net
Changes in interest income
Loans	$	(30)	$	414	$	384	$	575	$	(45)	$	530	$	1,554	$	(1,068)	$	486
Taxable investment securities	68		95		163		670		296		966		2,440		(174)		2,266
Nontaxable investment securities	6		21		27		(35)		2		(33)		(428)		16		(412)
Other	76		253		329		(153)		514		361		(448)		754		306
Total changes in interest income	120		783		903		1,057		767		1,824		3,118		(472)		2,646
Changes in interest expense
Interest bearing demand deposits	1		7		8		2		16		18		20		(18)		2
Savings deposits	4		95		99		24		85		109		71		70		141
Time deposits	(26)		(27)		(53)		(173)		(297)		(470)		(662)		(1,146)		(1,808)
Federal funds purchased and repurchase agreements	1		—		1		(3)		(1)		(4)		(5)		(9)		(14)
FHLB advances	(16)		2		(14)		(274)		8		(266)		(989)		48		(941)
Subordinated debt, net of unamortized issuance costs	—		—		—		1		(1)		—		445		4		449
Total changes in interest expense	(36)		77		41		(423)		(190)		(613)		(1,120)		(1,051)		(2,171)
Net change in interest margin (FTE)	$	156	$	706	$	862	$	1,480	$	957	$	2,437	$	4,238	$	579	$	4,817

The interest rate increases during 2022 have alleviated much of the pressure placed on our net interest margin. Additionally, SBA PPP fee income has supported our yield on total earning assets over the past two years. The recent rate increases, and future rate increases expected during the remainder of the year and into 2023, should lead to continued improvement in our net yield on interest earning assets.


	Average Yield / Rate for the Three-Month Periods Ended:
	September 30 2022		June 30 2022		March 31 2022		December 31 2021		September 30 2021
Total earning assets	3.53	%	3.41	%	3.13	%	3.19	%	3.23	%
Total interest bearing liabilities	0.35	%	0.34	%	0.37	%	0.45	%	0.52	%
Net yield on interest earning assets (FTE)	3.28	%	3.16	%	2.86	%	2.86	%	2.85	%


	Quarter to Date Net Interest Income (FTE)
	September 30 2022		June 30 2022		March 31 2022		December 31 2021		September 30 2021
Total interest income (FTE)	$	17,276	$	16,373	$	15,022	$	15,246	$	15,452
Total interest expense	1,216		1,175		1,283		1,567		1,829
Net interest income (FTE)	$	16,060	$	15,198	$	13,739	$	13,679	$	13,623

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Allowance for Loan and Lease Losses

The viability of any financial institution is ultimately determined by its management of credit risk. Loans represent our single largest concentration of risk. The ALLL is our estimation of incurred losses within the existing loan portfolio. We allocate the ALLL throughout the loan portfolio based on our assessment of the underlying risks associated within each loan segment. Our assessments include allocations based on specific impairment valuation allowances, historical charge-offs, internally assigned credit risk ratings, and past due and nonaccrual balances. A portion of the ALLL is not allocated to any one loan segment, but is instead a representation of other qualitative risks that reflect the margin of imprecision inherent in the underlying assumptions used in the methodologies for estimating specific and general losses in the portfolio.

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


	Three Months Ended September 30						Nine Months Ended September 30
	2022			2021			2022			2021
ALLL at beginning of period	$	9,700		$	9,360		$	9,103		$	9,744
Charge-offs
Commercial	—			1			3			32
Agricultural	—			77			—			77
Residential real estate	—			—			—			—
Consumer	173			168			367			349
Total charge-offs	173			246			370			458
Recoveries
Commercial	14			22			54			121
Agricultural	1			1			4			6
Residential real estate	53			29			123			132
Consumer	64			34			223			147
Total recoveries	132			86			404			406
Net loan charge-offs (recoveries)	41			160			(34)			52
Provision for loan losses	18			(107)			540			(599)
ALLL at end of period	$	9,677		$	9,093		$	9,677		$	9,093
Net loan charge-offs (recoveries) to average loans outstanding	0.00		%	0.01		%	0.00		%	0.00		%

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


	September 30 2022			June 30 2022			March 31 2022			December 31 2021			September 30 2021
Total charge-offs	$	173		$	106		$	91		$	149		$	246
Total recoveries	132			117			155			78			86
Net loan charge-offs (recoveries)	41			(11)			(64)			71			160
Net loan charge-offs (recoveries) to average loans outstanding	0.00		%	0.00		%	(0.01)		%	0.01		%	0.01		%
Provision for loan losses	$	18		$	485		$	37		$	81		$	(107)
Provision for loan losses to average loans outstanding	0.00		%	0.04		%	0.00		%	0.01		%	(0.01)		%
ALLL	$	9,677		$	9,700		$	9,204		$	9,103		$	9,093
ALLL as a % of loans at end of period	0.78		%	0.76		%	0.76		%	0.70		%	0.73		%
ALLL as a % of nonaccrual loans	1,668.45		%	1,796.30		%	1,232.13		%	731.16		%	295.52		%

During 2020, we increased the ALLL as a result of increased economic and environmental related risk factors, primarily driven by COVID-19. While these risk factors remain, improvement in credit quality indicators resulted in a reduction to the ALLL during the first quarter of 2021. While we have experienced fluctuations in credit quality indicators in recent periods, credit quality remained strong at September 30, 2022. Despite strong credit quality, the ALLL increased during the second quarter of 2022 as a result of loan growth during the quarter and increased economic and environmental related risk factors. Although

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loans declined during the third quarter, increased economic and environmental related risk factors remained. As such, no reduction in the ALLL was recorded.

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


	September 30 2022			June 30 2022			March 31 2022			December 31 2021			September 30 2021
ALLL
Individually evaluated for impairment	$	474		$	515		$	573		$	578		$	583
Collectively evaluated for impairment	9,203			9,185			8,631			8,525			8,510
Total	$	9,677		$	9,700		$	9,204		$	9,103		$	9,093
ALLL to gross loans
Individually evaluated for impairment	0.04		%	0.04		%	0.05		%	0.04		%	0.05		%
Collectively evaluated for impairment	0.74		%	0.72		%	0.71		%	0.66		%	0.68		%
Total	0.78		%	0.76		%	0.76		%	0.70		%	0.73		%

While we utilize our best judgment and information available, the ultimate adequacy of the ALLL is dependent upon a variety of factors beyond our control, including the performance of our borrowers, the economy, and changes in interest rates. We closely monitor overall credit quality indicators and our policies and procedures related to the analysis of the ALLL to ensure that the ALLL remains at an appropriate level.

For further discussion of the allocation of the ALLL, see “Note 4 – Loans and ALLL” of our interim condensed consolidated financial statements.

Loans Past Due and Loans in Nonaccrual Status

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


	Total Past Due and Nonaccrual Loans
	September 30 2022			June 30 2022			March 31 2022			December 31 2021			September 30 2021
Commercial	$	2,747		$	432		$	412		$	561		$	345
Agricultural	574			271			283			987			2,860
Residential real estate	507			345			1,560			2,287			268
Consumer	180			457			109			196			25
Total	$	4,008		$	1,505		$	2,364		$	4,031		$	3,498
Total past due and nonaccrual loans to gross loans	0.32		%	0.12		%	0.19		%	0.31		%	0.28		%

The increase in past due and nonaccrual commercial loans as of September 30, 2022 was the result of one past due relationship. A summary of loans past due and in nonaccrual status, including the composition of the ending balance of nonaccrual status loans by type, is included in “Note 4 – Loans and ALLL” of our interim condensed consolidated financial statements.

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Troubled Debt Restructurings

We have taken a proactive approach modifying loans to assist borrowers who are willing to work with us, thus making them less likely to default, and to avoid foreclosure. This approach has permitted certain borrowers to develop a payment structure that will allow them to continue making payments in lieu of foreclosure. Modifications have been successful for us and our customers as very few of the modified loans have resulted in foreclosures. The majority of modifications result in terms that satisfy our criteria for continued interest accrual. TDRs that have been placed in nonaccrual status may be placed back on accrual status after six months of continued performance and achievement of current payment status.

We restructure debt with borrowers who, due to financial difficulties, are unable to service their debt under the original terms. We may extend the amortization period, reduce interest rates, allow temporary interest-only payment structures, forgive principal, forgive interest, or grant a combination of these modifications. Typically, the modifications are for a period of three years or less.

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

The following tables provide roll-forwards of TDRs for the:



	Three Months Ended September 30, 2022
	Accruing Interest			Nonaccrual			Total
	Number of Loans	Balance		Number of Loans	Balance		Number of Loans	Balance
July 1, 2022	89	$	22,003	6	$	391	95	$	22,394
New modifications	1	55		—	—		1	55
Principal advances (payments)	—	(296)		—	(10)		—	(306)
Loans paid off	(9)	(3,060)		—	—		(9)	(3,060)
September 30, 2022	81	$	18,702	6	$	381	87	$	19,083


	Nine Months Ended September 30, 2022
	Accruing Interest			Nonaccrual			Total
	Number of Loans	Balance		Number of Loans	Balance		Number of Loans	Balance
January 1, 2022	98	$	25,276	6	$	449	104	$	25,725
New modifications	2	153		—	—		2	153
Principal advances (payments)	—	(1,971)		—	(68)		—	(2,039)
Loans paid off	(19)	(4,756)		—	—		(19)	(4,756)


September 30, 2022	81	$	18,702	6	$	381	87	$	19,083

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	Three Months Ended September 30, 2021
	Accruing Interest			Nonaccrual			Total
	Number of Loans	Balance		Number of Loans	Balance		Number of Loans	Balance
July 1, 2021	101	$	26,785	8	$	2,562	109	$	29,347
New modifications	—	—		—	—		—	—
Principal advances (payments)	—	(235)		—	(28)		—	(263)
Loans paid off	(3)	(402)		—	—		(3)	(402)
Transfers to accrual status	1	41		(1)	(41)		—	—
September 30, 2021	99	26,189		7	$	2,493	106	$	28,682


	Nine Months Ended September 30, 2021
	Accruing Interest			Nonaccrual			Total
	Number of Loans	Balance		Number of Loans	Balance		Number of Loans	Balance
January 1, 2021	108	$	22,200	7	$	2,730	115	$	24,930
New modifications	11	8,473		—	—		11	8,473
Principal advances (payments)	—	(1,073)		—	(235)		—	(1,308)
Loans paid off	(20)	(3,413)		—	—		(20)	(3,413)
Transfers to nonaccrual status	(1)	(39)		1	39		—	—

Transfers to accrual status	1	41		(1)	(41)		—	—
September 30, 2021	99	$	26,189	7	$	2,493	106	$	28,682

The following table summarizes our TDRs as of:


	September 30, 2022						December 31, 2021
	Accruing Interest		Nonaccrual		Total		Accruing Interest		Nonaccrual		Total		Total Change
Current	$	18,605	$	251	$	18,856	$	25,236	$	294	$	25,530	$	(6,674)
Past due 30-59 days	—		—		—		40		85		125		(125)
Past due 60-89 days	97		—		97		—		—		—		97
Past due 90 days or more	—		130		130		—		70		70		60
Total	$	18,702	$	381	$	19,083	$	25,276	$	449	$	25,725	$	(6,642)

Additional disclosures about TDRs are included in “Note 4 – Loans and ALLL” of our interim condensed consolidated financial statements.

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Impaired Loans

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


	September 30, 2022						December 31, 2021
	Recorded Balance		Unpaid Principal Balance		Valuation Allowance		Recorded Balance		Unpaid Principal Balance		Valuation Allowance
TDRs
Commercial real estate	$	5,339	$	5,593	$	14	$	5,707	$	5,961	$	9
Commercial other	199		199		—		3,246		3,246		4
Agricultural real estate	8,611		8,611		—		9,182		9,181		—
Agricultural other	2,577		2,577		—		4,543		4,543		—
Residential real estate senior liens	2,357		2,427		378		3,047		3,203		504
Total TDRs	19,083		19,407		392		25,725		26,134		517
Other impaired loans
Commercial real estate	165		227		—		314		377		—
Agricultural real estate	—		—		—		356		357		—
Agricultural other	—		—		—		108		108		—
Residential real estate senior liens	503		677		82		370		485		61
Home equity lines of credit	—		—		—		37		37		—
Total other impaired loans	668		904		82		1,185		1,364		61
Total impaired loans	$	19,751	$	20,311	$	474	$	26,910	$	27,498	$	578

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

Additional disclosures related to impaired loans are included in “Note 4 – Loans and ALLL” of our interim condensed consolidated financial statements.

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Nonperforming Assets

The following table summarizes our nonperforming assets as of:


	September 30 2022			June 30 2022			March 31 2022			December 31 2021			September 30 2021
Nonaccrual status loans	$	580		$	540		$	747		$	1,245		$	3,077
Accruing loans past due 90 days or more	21			119			—			97			—
Total nonperforming loans	601			659			747			1,342			3,077
Foreclosed assets	240			241			187			211			348
Debt securities	77			131			131			131			230
Total nonperforming assets	$	918		$	1,031		$	1,065		$	1,684		$	3,655
Nonperforming loans as a % of total loans	0.05		%	0.05		%	0.06		%	0.10		%	0.25		%
Nonperforming assets as a % of total assets	0.04		%	0.05		%	0.05		%	0.08		%	0.18		%

The accrual of interest on commercial and agricultural loans, as well as residential real estate loans, is discontinued at the time a loan is 90 days or more past due unless the credit is well-secured and in the process of short-term collection. Upon transferring a loan to nonaccrual status, we perform an evaluation to determine the net realizable value of the underlying collateral. This evaluation is used to help determine if a charge-off is necessary. Consumer loans are typically charged-off no later than 180 days past due. Loans may be placed back on accrual status after six months of continued performance and achievement of current payment status. The level of nonperforming loans continued to decline and remains low in comparison to peer banks.

The following table summarizes nonaccrual loans as of:


	September 30 2022			June 30 2022			March 31 2022			December 31 2021			September 30 2021
Commercial	$	178		$	184		$	319		$	341		$	161
Agricultural	266			271			283			774			2,811
Residential real estate	136			85			145			130			105
Total	$	580		$	540		$	747		$	1,245		$	3,077
Nonaccrual loans as a % of loans at end of period	0.05		%	0.04		%	0.06		%	0.10		%	0.25		%

Included in the nonaccrual loan balances above were loans currently classified as TDR as of:


	September 30 2022		June 30 2022		March 31 2022		December 31 2021		September 30 2021
Commercial	$	115	$	120	$	127	$	139	$	146
Agricultural	266		271		283		310		2,347
Residential real estate	—		—		—		—		—
Total	$	381	$	391	$	410	$	449	$	2,493

Additional disclosures about nonaccrual status loans are included in “Note 4 – Loans and ALLL” of our interim condensed consolidated financial statements.

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Noninterest Income and Noninterest Expenses

Significant noninterest income balances are highlighted in the following tables for the:



	Three Months Ended September 30
					Change
	2022		2021		$		%
Service charges and fees
ATM and debit card fees	$	1,212	$	1,156	$	56	4.84	%
Service charges and fees on deposit accounts	673		601		72		11.98	%
Freddie Mac servicing fee	168		177		(9)		(5.08)	%
Net OMSR income (loss)	—		(28)		28		N/M
Other fees for customer services	69		58		11		18.97	%
Total service charges and fees	2,122		1,964		158		8.04	%
Wealth management fees	679		772		(93)		(12.05)	%
Earnings on corporate owned life insurance policies	223		201		22		10.95	%
Net gain on sale of mortgage loans	174		339		(165)		(48.67)	%
All other	54		91		(37)		(40.66)	%
Total noninterest income	$	3,252	$	3,367	$	(115)	(3.42)	%


	Nine Months Ended September 30
					Change
	2022		2021		$		%
Service charges and fees
ATM and debit card fees	$	3,507	$	3,282	$	225	6.86	%
Service charges and fees on deposit accounts	1,913		1,518		395		26.02	%
Freddie Mac servicing fee	506		572		(66)		(11.54)	%
Net OMSR income (loss)	477		(128)		605		N/M
Other fees for customer services	212		245		(33)		(13.47)	%
Total service charges and fees	6,615		5,489		1,126		20.51	%
Wealth management fees	2,217		2,274		(57)		(2.51)	%
Earnings on corporate owned life insurance policies	655		577		78		13.52	%
Net gain on sale of mortgage loans	568		1,459		(891)		(61.07)	%
All other	339		415		(76)		(18.31)	%
Total noninterest income	$	10,394	$	10,214	$	180	1.76	%

Service charges and fees on deposit accounts increased during the first nine months of 2022, mainly due to an increase in the number of deposit accounts. Service charges and fees during the remainder of 2022 are expected to exceed 2021 levels.

OMSR income results are driven, in part, by changes in offering rates on residential mortgage loans, anticipated prepayments in the servicing-retained portfolio, and the volume of loans within the servicing-retained portfolio. Decreased prepayment speeds, as a result of an increase in interest rates, was the primary driver of the income recognized during the first nine months of 2022. Income during the remainder of 2022 will be driven by the volume of loans originated within the servicing-retained portfolio, along with any further future increases in interest rates.

The amount of loans sold is driven by customer demand and balance sheet management strategies. We experienced a significant increase in loan demand in early 2021 which led to an increase in the number and dollar amount of loans sold; as such, net gain on sale of mortgage loans increased significantly. In mid-2021, we decided to retain more loan originations on the balance sheet, due to our liquidity position, thereby decreasing the number of mortgage loans sold, which had an impact on the net gain on loans sold. As a result of this change in strategy, coupled with a decline in loan demand, net gain on sale of mortgage loans has declined in comparison to the prior year. As demand is expected to slow during the remainder of 2022 due to the rise in interest rates, net gain on sale of mortgage loans is not expected to exceed 2021 levels.

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

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Significant noninterest expense balances are highlighted in the following tables for the:



	Three Months Ended September 30
					Change
	2022		2021		$		%
Compensation and benefits	$	6,369	$	6,116	$	253	4.14	%
Furniture and equipment	1,490		1,349		141		10.45	%
Occupancy	918		866		52		6.00	%
Other
Audit, consulting, and legal fees	595		665		(70)		(10.53)	%
ATM and debit card fees	543		473		70		14.80	%
Marketing costs	209		236		(27)		(11.44)	%
Donations and community relations	239		198		41		20.71	%
Memberships and subscriptions	230		234		(4)		(1.71)	%
Loan underwriting fees	243		238		5		2.10	%
Director fees	210		166		44		26.51	%
All other	871		644		227		35.25	%
Total other noninterest expenses	3,140		2,854		286		10.02	%
Total noninterest expenses	$	11,917	$	11,185	$	732	6.54	%


	Nine Months Ended September 30
					Change
	2022		2021		$		%
Compensation and benefits	$	18,480	$	17,693	$	787	4.45	%
Furniture and equipment	4,382		4,049		333		8.22	%
Occupancy	2,813		2,726		87		3.19	%
Other
Audit, consulting, and legal fees	1,749		1,553		196		12.62	%
ATM and debit card fees	1,485		1,352		133		9.84	%
Marketing costs	812		683		129		18.89	%
Donations and community relations	665		452		213		47.12	%
Memberships and subscriptions	654		662		(8)		(1.21)	%
Loan underwriting fees	640		628		12		1.91	%
Director fees	598		505		93		18.42	%
All other	2,620		2,194		426		19.42	%
Total other noninterest expenses	9,223		8,029		1,194		14.87	%
Total noninterest expenses	$	34,898	$	32,497	$	2,401	7.39	%

Donations and community relations increased during 2022 as a result of initiatives designed to deepen and strengthen our relationship with the communities in which we operate and serve, which includes an expanded footprint. While government restrictions and temporary business closures related to COVID-19 impacted our ability to maintain the level of support in early 2021, we have since increased the level of community support.

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

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Analysis of Changes in Financial Condition


	September 30 2022		December 31 2021		$ Change		% Change (unannualized)
ASSETS
Cash and cash equivalents	$	98,912	$	105,330	$	(6,418)	(6.09)	%
AFS securities
Amortized cost of AFS securities	632,755		485,710		147,045		30.27	%
Unrealized gains (losses) on AFS securities	(51,522)		4,891		(56,413)		N/M
AFS securities	581,233		490,601		90,632		18.47	%
Mortgage loans AFS	934		1,735		(801)		(46.17)	%
Loans
Gross loans	1,236,151		1,301,037		(64,886)		(4.99)	%
Less allowance for loan and lease losses	9,677		9,103		574		6.31	%
Net loans	1,226,474		1,291,934		(65,460)		(5.07)	%
Premises and equipment	25,107		24,419		688		2.82	%
Corporate owned life insurance policies	32,764		32,472		292		0.90	%
Equity securities without readily determinable fair values	15,496		17,383		(1,887)		(10.86)	%
Goodwill and other intangible assets	48,290		48,302		(12)		(0.02)	%
Accrued interest receivable and other assets	34,767		19,982		14,785		73.99	%
TOTAL ASSETS	$	2,063,977	$	2,032,158	$	31,819	1.57	%
LIABILITIES AND SHAREHOLDERS’ EQUITY
Liabilities
Deposits	$	1,791,033	$	1,710,339	$	80,694	4.72	%
Borrowed funds	81,704		99,320		(17,616)		(17.74)	%
Accrued interest payable and other liabilities	14,628		11,451		3,177		27.74	%
Total liabilities	1,887,365		1,821,110		66,255		3.64	%
Shareholders’ equity	176,612		211,048		(34,436)		(16.32)	%
TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY	$	2,063,977	$	2,032,158	$	31,819	1.57	%

As shown above, total assets increased $31,819 from December 31, 2021, driven primarily by an increase in AFS securities. Purchases of AFS securities were partially funded by a $80,694 increase in deposits. We experienced a $64,886 decrease in loans during the first nine months of 2022 which was largely driven by a $70,517 decrease in advances to mortgage brokers, which are included within the commercial loan portfolio, however, is not considered a component of our core lending business .

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The following table outlines the changes in loan balances:


	September 30 2022		December 31 2021		$ Change		% Change (unannualized)
Commercial	$	730,504	$	807,439	$	(76,935)	(9.53)	%
Agricultural	96,850		93,955		2,895		3.08	%
Residential real estate	334,412		326,361		8,051		2.47	%
Consumer	74,385		73,282		1,103		1.51	%
Total	$	1,236,151	$	1,301,037	$	(64,886)	(4.99)	%

The following table displays loan balances as of:


	September 30 2022		June 30 2022		March 31 2022		December 31 2021		September 30 2021
Commercial	$	730,504	$	772,567	$	727,614	$	807,439	$	757,993
Agricultural	96,850		94,726		88,169		93,955		93,782
Residential real estate	334,412		329,795		328,559		326,361		321,620
Consumer	74,385		74,822		74,029		73,282		75,163
Total	$	1,236,151	$	1,271,910	$	1,218,371	$	1,301,037	$	1,248,558

Loan demand has been negatively impacted by the strong competition for new commercial loan opportunities. Advances to mortgage brokers, within the commercial loan portfolio, however, is not considered a component of our core lending business, was the primary driver behind the fluctuations experienced since December 31, 2021, as participation in this mortgage purchase program paused during most of 2021 and again in 2022. We've recently experienced an increase in commercial loan demand, despite changes in advances to mortgage brokers and continued forgiveness of the remaining SBA PPP loans. As demand is expected to continue, we anticipate growth in the commercial loan portfolio during the remainder of 2022. While Agricultural loans have increased, we may continue to experience fluctuations due to the competitive lending environment. Residential mortgage lending activities have slowed during the year as a result of rising interest rates. As interest rates are expected to continue to increase during the remainder in 2022, growth in residential and consumer loans is anticipated to continue but at a slower pace.

The following table outlines the changes in deposit balances:


	September 30 2022		December 31 2021		$ Change		% Change (unannualized)
Noninterest bearing demand deposits	$	510,127	$	448,352	$	61,775	13.78	%
Interest bearing demand deposits	368,537		364,563		3,974		1.09	%
Savings deposits	651,129		596,662		54,467		9.13	%
Certificates of deposit	260,741		297,696		(36,955)		(12.41)	%
Internet certificates of deposit	499		3,066		(2,567)		(83.72)	%
Total	$	1,791,033	$	1,710,339	$	80,694	4.72	%

The following table displays deposit balances as of:


	September 30 2022		June 30 2022		March 31 2022		December 31 2021		September 30 2021
Noninterest bearing demand deposits	$	510,127	$	488,110	$	461,473	$	448,352	$	430,950
Interest bearing demand deposits	368,537		370,284		387,187		364,563		374,137
Savings deposits	651,129		635,397		635,195		596,662		572,136
Certificates of deposit	260,741		265,477		279,708		297,696		312,027
Internet certificates of deposit	499		598		598		3,066		3,066
Total	$	1,791,033	$	1,759,866	$	1,764,161	$	1,710,339	$	1,692,316

Total deposits have increased over the past 12 months with significant growth in non-contractual deposits, such as demand and savings deposits. We experienced a decline in certificates of deposit over the past year as a result of the low interest rate environment with customers moving their funds into demand and savings accounts. Over the last few years, we used excess funds to reduce higher-cost deposits, such as brokered certificates of deposit.

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The primary objective of our investing activities is to manage our overall exposure to changes in interest rates. Secondary considerations include ensuring ample access to liquidity, generating returns, and providing current income. Over the last two years, the flat yield curve encouraged the use of excess funds to reduce higher-cost borrowings as opposed to investing in AFS securities. However, based on balance sheet strategies, excess funds above what is required to retire future maturities of higher-cost funding sources was prudently deployed to purchase AFS securities in future periods.

The following table displays fair values of AFS securities as of:


	September 30 2022		June 30 2022		March 31 2022		December 31 2021		September 30 2021
U.S. Treasury	$	206,791	$	214,474	$	218,268	$	209,703	$	192,069
States and political subdivisions	114,000		119,649		114,015		121,205		128,689
Auction rate money market preferred	2,479		2,497		2,867		3,242		3,246
Mortgage-backed securities	41,042		45,796		49,578		56,148		62,030
Collateralized mortgage obligations	209,720		167,572		152,441		92,301		100,767
Corporate	7,201		7,602		7,750		8,002		7,583
Total	$	581,233	$	557,590	$	544,919	$	490,601	$	494,384

Borrowed funds include FHLB advances, securities sold under agreements to repurchase, subordinated debt, and federal funds purchased. The balance of borrowed funds fluctuates from period to period based on our funding needs that arise from changes in loans, investments, and deposits. To provide balance sheet growth, we may utilize borrowings and brokered deposits to fund earning assets. The following table displays borrowed funds balances as of:


	September 30 2022		June 30 2022		March 31 2022		December 31 2021		September 30 2021
Securities sold under agreements to repurchase without stated maturity dates	$	52,479	$	47,247	$	51,353	$	50,162	$	67,519
FHLB advances	—		10,000		10,000		20,000		60,000
Fixed rate at 3.25% to floating, due 2031	29,225		29,203		29,181		29,158		29,136
Total	$	81,704	$	86,450	$	90,534	$	99,320	$	156,655

Over the last few years, we used excess funds to reduce FHLB advances. On June 2, 2021, we completed a private placement of $30,000 in aggregate principal amount of 3.25% Fixed-to-Floating Rate Subordinated Notes due 2031 (the "Notes"). The Notes will initially bear a fixed interest rate of 3.25% until June 15, 2026, after which time until maturity on June 15, 2031, the interest rate will reset quarterly to an annual floating rate equal to the then-current 3-month SOFR plus 256 basis points. The Notes are redeemable by us at our option, in whole or in part, on or after June 15, 2026. The Notes are not subject to redemption at the option of the holders.

Contractual Obligations and Loan Commitments

We have various financial obligations, including contractual obligations and commitments related to deposits and borrowings, which may require future cash payments. We also have loan related commitments that may impact liquidity. The commitments include unused lines of credit, commercial and standby letters of credit, and commitments to grant loans. These commitments to grant loans include residential mortgage loans with the majority committed to be sold to the secondary market. Many of these commitments historically have expired without being drawn upon and do not necessarily represent our future cash requirements.

We are party to credit related financial instruments with off-balance-sheet risk. These financial instruments are entered into in the normal course of business to meet the financing needs of our customers. These financial instruments involve, to varying degrees, elements of credit and interest rate risk in excess of the amounts recognized in the consolidated balance sheets. The contractual or notional amounts of these instruments reflect the extent of involvement we have in a particular class of financial instrument.

Our exposure to credit-related loss in the event of nonperformance by the counterparties 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. We use the same credit policies when analyzing the creditworthiness of counterparties as we do for extending loans to customers. No significant losses are anticipated as a result of these commitments.

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Capital

Capital consists solely of common stock, retained earnings, and accumulated other comprehensive income (loss). We are authorized to raise capital through dividend reinvestment, employee and director stock purchases, and shareholder stock purchases. Pursuant to these authorizations, we issued 55,549 shares or $1,344 of common stock during the first nine months of 2022, as compared to 52,523 shares or $1,196 of common stock during the same period in 2021. We also offer the Directors Plan in which participants purchase stock units through deferred fees, in lieu of cash payments. Pursuant to this plan, we increased shareholders’ equity by $346 and $343 during the nine-month periods ended September 30, 2022 and 2021, respectively. We also grant restricted stock awards pursuant to the RSP. Pursuant to this plan, we increased shareholders’ equity by $108 during the first nine months of 2022, as compared to $58 during the same period in 2021.

We have publicly announced a common stock repurchase plan. Pursuant to this plan, we repurchased 23,842 shares or $585 of common stock during the first nine months of 2022 and 123,160 shares or $2,699 during the first nine months of 2021. As of September 30, 2022, we were authorized to repurchase up to an additional 443,649 shares of common stock.

The FRB has established minimum risk-based capital guidelines. Pursuant to these guidelines, a framework has been established that assigns risk weights to each category of on and off-balance-sheet items to arrive at risk adjusted total assets. Regulatory capital is divided by the risk adjusted assets with the resulting ratio compared to the minimum standard to determine whether a corporation has adequate capital.

The common equity tier 1 capital ratio has a minimum requirement of 4.50%. The minimum standard for primary, or Tier 1 capital is 6.00% and the minimum standard for total capital is 8.00%. The minimum requirements presented below include the minimum required capital levels based on the Basel III Capital Rules. Capital requirements to be considered well capitalized are based upon prompt corrective action regulations, as amended to reflect the changes under the Basel III Capital Rules. The following table sets forth these requirements and our ratios as of:


	September 30, 2022						December 31, 2021
	Actual		Minimum Required - BASEL III		Required to be Considered Well Capitalized		Actual		Minimum Required - BASEL III		Required to be Considered Well Capitalized
Common equity tier 1 capital	12.92	%	7.00	%	6.50	%	12.07	%	7.00	%	6.50	%
Tier 1 capital	12.92	%	8.50	%	8.00	%	12.07	%	8.50	%	8.00	%
Total capital	15.85	%	10.50	%	10.00	%	14.94	%	10.50	%	10.00	%
Tier 1 leverage	8.44	%	4.00	%	5.00	%	7.97	%	4.00	%	5.00	%

Total capital includes Tier 1 capital and Tier 2 capital. Tier 2 capital includes a permissible portion of the allowances for loan and lease losses and subordinated debt, net of unamortized issuance costs. There are no significant regulatory constraints placed on our capital. At September 30, 2022, the Bank also exceeded minimum capital requirements.

Liquidity

Liquidity is monitored regularly by our ALCO, which consists of members of senior management. The committee reviews projected cash flows, key ratios, and liquidity available from both primary and secondary sources.

Our primary sources of liquidity are cash and cash equivalents and unencumbered AFS securities. These categories totaled $577,137 or 27.96% of assets as of September 30, 2022, compared to $495,169 or 24.37% as of December 31, 2021. The increase in the amount and percentage of primary liquidity is a direct result of an increase in market deposits, an increase in unencumbered AFS securities from purchases during 2022, and a deliberate reduction in non-market funding which required collateralization. Liquidity is important for financial institutions because of their need to meet loan funding commitments, depositor withdrawal requests, and various other commitments including expansion of operations, investment opportunities, and payment of cash dividends. Based on these same factors, daily liquidity could vary significantly.

Deposit accounts are our primary source of funds. Our secondary sources include the ability to borrow from the FHLB, from the FRB, and through various correspondent banks in the form of federal funds purchased and a line of credit. These funding methods typically carry a higher interest rate than traditional market deposit accounts. In recent periods, we have elected to use excess funds to reduce borrowings and other higher-cost funding sources. Some borrowed funds, including FHLB advances, FRB Discount Window advances, and repurchase agreements, require us to pledge assets, typically in the form of AFS securities or loans, as collateral. As of September 30, 2022, we had available lines of credit of $343,437.

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Our stress testing of liquidity increased since early 2020 and continues to evolve due to economic uncertainly as a result of COVID-19. Our liquidity position remained strong at September 30, 2022, which is illustrated in the following table:


	September 30 2022
Total cash and cash equivalents	$	98,912
Available lines of credit
Fed funds lines with correspondent banks	93,000
FHLB borrowings	236,510
FRB Discount Window	8,927
Other lines of credit	5,000
Total available lines of credit	343,437
Unencumbered lendable value of FRB collateral, estimated1	440,000
Total cash and liquidity	$	882,349

(1)Includes estimated unencumbered lendable value of FHLB collateral of $380,000

The following table summarizes our sources and uses of cash for the nine-month period ended September 30:


	2022		2021		$ Variance
Net cash provided by (used in) operating activities	$	20,429	$	21,163	$	(734)
Net cash provided by (used in) investing activities	(83,778)		(176,457)		92,679
Net cash provided by (used in) financing activities	56,931		115,136		(58,205)
Increase (decrease) in cash and cash equivalents	(6,418)		(40,158)		33,740
Cash and cash equivalents January 1	105,330		246,640		(141,310)
Cash and cash equivalents September 30	$	98,912	$	206,482	$	(107,570)

Fair Value

We utilize fair value measurements to record fair value adjustments to certain assets and liabilities and to determine fair value disclosures. AFS securities, cash flow hedge derivative instruments and certain liabilities are recorded at fair value on a recurring basis. Additionally, from time to time, we may be required to record at fair value other assets on a nonrecurring basis, such as mortgage loans AFS, impaired loans, goodwill, foreclosed assets, OMSR, and certain other assets and liabilities. These nonrecurring fair value adjustments typically involve the application of lower of cost or market accounting or write downs of individual assets.

For further information regarding fair value measurements see “Note 11 – Fair Value” of our interim condensed consolidated financial statements.

Market Risk

Our primary market risks are interest rate risk and liquidity risk. IRR is the exposure of our net interest income to changes in interest rates. IRR results from the difference in the maturity or repricing frequency of a financial institution's interest earning assets and its interest bearing liabilities. Managing IRR is the fundamental method by which financial institutions earn income and create shareholder value. Excessive exposure to IRR could pose a significant risk to our earnings and capital.

The FRB has adopted a policy requiring banks to effectively manage the various risks that can have a material impact on safety and soundness. The risks include credit, interest rate, liquidity, operational, and reputational. We have policies, procedures, and internal controls for measuring and managing these risks. Specifically, our ALCO policy and procedures include defining acceptable types and terms of investments and funding sources, liquidity requirements, limits on investments in long-term assets, limiting the mismatch in repricing opportunities of assets and liabilities, and the frequency of measuring and reporting to our Board of Directors.

The primary technique to measure IRR is simulation analysis. Simulation analysis forecasts the effects on the balance sheet structure and net interest income under a variety of scenarios that incorporate changes in interest rates, the shape of yield curves, interest rate relationships, loan prepayments, and funding sources. These forecasts are compared against net interest income projected in a stable interest rate environment. While many assets and liabilities reprice either at maturity or in accordance with their contractual terms, several balance sheet components demonstrate characteristics that require an evaluation to more accurately reflect their repricing behavior. Key assumptions in the simulation analysis include prepayments on loans,

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probable calls of investment securities, changes in market conditions, loan volumes and loan pricing, deposit sensitivity, and customer preferences. These assumptions are inherently uncertain as they are subject to fluctuation and revision in a dynamic rate environment. As a result, the simulation analysis cannot precisely forecast the impact of rising and falling interest rates on net interest income. Actual results will differ from simulated results due to many other factors, including changes in balance sheet components, interest rate changes, changes in market conditions, and management strategies. We regularly monitor our projected net interest income sensitivity to ensure that it remains within established limits.

Gap analysis, the secondary method to measure IRR, measures the cash flows and/or the earliest repricing of our interest bearing assets and liabilities. This analysis is useful for measuring trends in the repricing characteristics of the balance sheet. Significant assumptions are required in this process because of the embedded repricing options contained in assets and liabilities. Residential real estate and consumer loans allow the borrower to repay the balance prior to maturity without penalty, while commercial and agricultural loans may have prepayment penalties. The amount of prepayments is dependent upon many factors, including the interest rate of a given loan in comparison to the current offering rates, the level of home sales, and the overall availability of credit in the market place. Generally, a decrease in interest rates will result in an increase in cash flows from these assets. A significant portion of our securities are callable or have prepayment options. The call and prepayment options are more likely to be exercised in a period of decreasing interest rates. Savings and demand accounts may generally be withdrawn on request without prior notice. The timing of cash flows from these deposits is estimated based on historical experience. Certificates of deposit have penalties that discourage early withdrawals.

We do not believe there has been a material change in the nature or categories of our primary market risk exposure, or the particular markets that present the primary risk of loss. We do not know of or expect there to be any material change in the general nature of our primary market risk exposure in the near term, and we do not expect to make material changes to our market risk methods in the near term. We may change those methods in the future to adapt to changes in circumstances or to implement new techniques.

Our primary market risk exposures related to the COVID-19 pandemic remain uncertain. A review of our market risk methods are ongoing and modeling is incorporating additional assumptions to account for this uncertainty related to this crisis. Repricing, cash flows, and prepayment projections for loans and mortgage-backed securities are not expected to behave as they would be expected to in a more stable interest rate environment. Customer deposit levels may experience unusual fluctuations due to COVID-related government support programs ending, customer and business needs, and a potential decline in money supply as the Federal Reserve shrinks its balance sheet. We continue to closely monitor customer and economic indicators to develop more precise market risk assumptions as the economic impact of the crisis continues to reveal itself.

Item 3. Quantitative and Qualitative Disclosures about Market Risk.

The information presented in the section captioned “Market Risk” in Management's Discussion and Analysis of Financial Condition and Results of Operations is incorporated herein by reference.

Item 4. Controls and Procedures.

DISCLOSURE CONTROLS AND PROCEDURES

We carried out an evaluation, under the supervision and with the participation of the Principal Executive Officer and Principal Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures (as such term is defined in Rules 13a-15(e) and 15(d)-15(e) under the Exchange Act) as of September 30, 2022, pursuant to Exchange Act Rule 13a-15. Based upon that evaluation, the Principal Executive Officer and Principal Financial Officer concluded that our disclosure controls and procedures as of September 30, 2022, were effective to ensure that information required to be disclosed in reports that we file or submit under the Exchange Act are recorded, processed, summarized and reported within the time periods specified in SEC rules and forms.

CHANGES IN INTERNAL CONTROL OVER FINANCIAL REPORTING

During the most recent fiscal quarter, no change occurred in our internal control over financial reporting that materially affected, or is likely to materially affect, our internal control over financial reporting.

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PART II – OTHER INFORMATION

Item 1. Legal Proceedings.

We are not involved in any material legal proceedings. We are involved in ordinary, routine litigation incidental to our business; however, no such routine proceedings are expected to result in any material adverse effect on operations, earnings, financial condition, or cash flows.

Item 1A. Risk Factors.

There have been no material changes to the risk factors disclosed in Item 1A in our Annual Report on Form 10-K for the year ended December 31, 2021.

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.

(A)None

(B)None

(C)Repurchases of Common Stock

We have adopted and publicly announced a common stock repurchase plan. The plan was last amended on April 28, 2021, to allow for the repurchase of an additional 500,000 shares of common stock after that date. These authorizations do not have expiration dates. As common shares are repurchased under this plan, they are retired with the status of authorized, but unissued, shares.

The following table provides information for the three-month period ended September 30, 2022, with respect to this plan:


	Common Shares Repurchased			Total Number of Common Shares Purchased as Part of Publicly Announced Plan or Program	Maximum Number of Common Shares That May Yet Be Purchased Under the Plans or Programs
	Number	Average Price Per Common Share
June 30, 2022					451,725
July 1 - 31	2,073	$	24.12	2,073	449,652
August 1 - 31	2,903	23.42		2,903	446,749
September 1 - 30	3,100	22.58		3,100	443,649
September 30, 2022	8,076	$	23.28	8,076	443,649

Item 3. Defaults Upon Senior Securities.

Not applicable.

Item 4. Mine Safety Disclosures.

Not applicable.

Item 5. Other Information.

Not applicable.

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Item 6. Exhibits.

(a) Exhibits


Exhibit Number						Exhibits

4.1						Indenture, dated as of June 2, 2021, by and between Isabella Bank Corporation and UMB Bank, National Association, as trustee (incorporated by reference to Exhibit 4.1 to the Registrant’s Current Report on Form 8-K filed with the SEC on June 2, 2021)

4.2						Form of 3.25% Fixed-to-Floating Rate Subordinated Note due 2031 (included in the Indenture included as Exhibit 4.1 to this Quarterly Report on Form 10-Q)

10.1						Form of Subordinated Note Purchase Agreement, dated as of June 2, 2021, by and among the Corporation and the several Purchasers (incorporated by reference to Exhibit 10.1 to the Registrant’s Current Report on Form 8-K filed with the SEC on June 2, 2021)

10.2						Form of Registration Rights Agreement, dated as of June 2, 2021, by and among the Corporation and the several Purchasers (incorporated by reference to Exhibit 10.2 to the Registrant’s Current Report on Form 8-K filed with the SEC on June 2, 2021)

31.1						Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 by the Principal Executive Officer

31.2						Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 by the Principal Financial Officer

32						Section 1350 Certification of Principal Executive Officer and Principal Financial Officer

101.1*						101.INS (Inline XBRL Instance Document)

						101.SCH (Inline XBRL Taxonomy Extension Schema Document)

						101.CAL (Inline XBRL Calculation Linkbase Document)

						101.LAB (Inline XBRL Taxonomy Label Linkbase Document)

						101.DEF (Inline XBRL Taxonomy Linkbase Document)

						101.PRE (Inline XBRL Taxonomy Presentation Linkbase Document)

104						Cover Page Interactive Data File

* In accordance with Rule 406T of Regulations S-T, the XBRL related information shall not be deemed to be “filed” for purposes of Section 18 of the Exchange Act, or otherwise subject to the liability of that section, and shall not be part of any registration statement or other document filed under the Securities Act or the Exchange Act, except as shall be expressly set forth by specific reference in such filing.

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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

Isabella Bank Corporation

Date:

October 28, 2022

/s/ Jae A. Evans

Jae A. Evans

President and Chief Executive Officer

(Principal Executive Officer)

Date:

October 28, 2022

/s/ Neil M. McDonnell

Neil M. McDonnell

Chief Financial Officer

(Principal Financial Officer)