ISABELLA BANK Corp - Quarter Report: 2023 June (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 June 30, 2023


☐			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 7,497,293 as of July 27, 2023.

Table of Contents

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, practices 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)


	June 30 2023		December 31 2022
ASSETS
Cash and cash equivalents
Cash and demand deposits due from banks	$	25,584	$	27,420
Fed Funds sold and interest bearing balances due from banks	4,296		11,504
Total cash and cash equivalents	29,880		38,924
AFS securities, at fair value	530,497		580,481
Mortgage loans AFS	362		379
Loans	1,334,402		1,264,173
Less allowance for credit losses	12,833		9,850
Net loans	1,321,569		1,254,323
Premises and equipment	26,383		25,553
Corporate owned life insurance policies	33,433		32,988
Equity securities without readily determinable fair values	15,746		15,746
Goodwill and other intangible assets	48,285		48,287
Accrued interest receivable and other assets	36,293		33,586
TOTAL ASSETS	$	2,042,448	$	2,030,267
LIABILITIES AND SHAREHOLDERS’ EQUITY
Deposits
Noninterest bearing	$	458,845	$	494,346
Interest bearing demand deposits	335,922		372,155
Certificates of deposit under $250 and other savings	824,272		810,642
Certificates of deposit over $250	95,909		67,132
Total deposits	1,714,948		1,744,275
Borrowed funds
Federal funds purchased and repurchase agreements	37,102		57,771
FHLB advances	55,000		—
Subordinated debt, net of unamortized issuance costs	29,290		29,245
Total borrowed funds	121,392		87,016
Accrued interest payable and other liabilities	17,677		12,766
Total liabilities	1,854,017		1,844,057
Shareholders’ equity
Common stock — no par value 15,000,000 shares authorized; issued and outstanding 7,496,826 shares (including 195,217 shares held in the Rabbi Trust) in 2023 and 7,559,421 shares (including 154,879 shares held in the Rabbi Trust) in 2022	126,278		128,651
Shares to be issued for deferred compensation obligations	5,395		5,005
Retained earnings	93,175		89,748
Accumulated other comprehensive income (loss)	(36,417)		(37,194)
Total shareholders’ equity	188,431		186,210
TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY	$	2,042,448	$	2,030,267

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

Table of Contents

INTERIM CONDENSED CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)

(Dollars in thousands except per share amounts)


	Three Months Ended June 30				Six Months Ended June 30
	2023		2022		2023		2022
Interest income
Loans, including fees	$	15,931	$	13,179	$	30,820	$	25,557
AFS securities
Taxable	2,382		2,027		4,884		3,642
Nontaxable	665		704		1,383		1,364
Federal funds sold and other	517		192		1,003		301
Total interest income	19,495		16,102		38,090		30,864
Interest expense
Deposits	4,109		854		6,938		1,790
Borrowings
Federal funds purchased and repurchase agreements	171		8		320		17
FHLB advances	270		47		270		119
Subordinated debt, net of unamortized issuance costs	266		266		532		532
Total interest expense	4,816		1,175		8,060		2,458
Net interest income	14,679		14,927		30,030		28,406
Provision for credit losses	196		485		237		522
Net interest income after provision for credit losses	14,483		14,442		29,793		27,884
Noninterest income
Service charges and fees	2,047		2,284		4,025		4,493
Wealth management fees	981		784		1,767		1,538
Earnings on corporate owned life insurance policies	226		222		452		432
Net gain on sale of mortgage loans	56		170		123		394
Other	294		135		530		285
Total noninterest income	3,604		3,595		6,897		7,142
Noninterest expenses
Compensation and benefits	6,561		6,037		13,150		12,111
Furniture and equipment	1,613		1,442		3,210		2,892
Occupancy	993		929		1,998		1,895
Other	3,372		3,253		6,379		6,083
Total noninterest expenses	12,539		11,661		24,737		22,981
Income before federal income tax expense	5,548		6,376		11,953		12,045
Federal income tax expense	918		1,081		2,002		2,016
NET INCOME	$	4,630	$	5,295	$	9,951	$	10,029
Earnings per common share
Basic	$	0.62	$	0.70	$	1.32	$	1.33
Diluted	$	0.61	$	0.69	$	1.31	$	1.31
Cash dividends per common share	$	0.28	$	0.27	$	0.56	$	0.54

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

Table of Contents

INTERIM CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (UNAUDITED)

(Dollars in thousands)


	Three Months Ended June 30				Six Months Ended June 30
	2023		2022		2023		2022
Net income	$	4,630	$	5,295	$	9,951	$	10,029
Unrealized gains (losses) on AFS securities arising during the period	(7,638)		(10,670)		972		(33,598)
Reclassification adjustment for net (gains) losses included in net income	(66)		—		(67)		—
Tax effect (1)	1,601		2,163		(128)		6,899
Unrealized gains (losses) on AFS securities, net of tax	(6,103)		(8,507)		777		(26,699)
Comprehensive income (loss)	$	(1,473)	$	(3,212)	$	10,728	$	(16,670)

(1)See “Note 9 – Accumulated Other Comprehensive Income” for tax effect reconciliation.

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

Table of Contents

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, 2022	7,532,641	$	129,052	$	4,545	$	75,592	$	1,859	$	211,048
Comprehensive income (loss)	—	—		—		10,029		(26,699)		(16,670)
Issuance of common stock	36,238	907		—		—		—		907
Common stock transferred from the Rabbi Trust to satisfy deferred compensation obligations	—	3		(3)		—		—		—
Share-based payment awards under the Directors Plan	—	—		249		—		—		249
Share-based compensation expense recognized in earnings under the RSP	—	77		—		—		—		77
Common stock purchased for deferred compensation obligations	—	(527)		—		—		—		(527)
Common stock repurchased	(15,766)	(397)		—		—		—		(397)
Cash dividends paid ($0.54 per common share)	—	—		—		(4,007)		—		(4,007)
June 30, 2022	7,553,113	$	129,115	$	4,791	$	81,614	$	(24,840)	$	190,680
January 1, 2023	7,559,421	$	128,651	$	5,005	$	89,748	$	(37,194)	$	186,210
Cumulative effect of accounting change - adoption of ASC 326	—	—		—		(2,417)		—		(2,417)
Comprehensive income (loss)	—	—		—		9,951		777		10,728
Issuance of common stock	37,983	846		—		—		—		846
Common stock transferred from the Rabbi Trust to satisfy deferred compensation obligations	—	38		(38)		—		—		—
Share-based payment awards under the Directors Plan	—	—		428		—		—		428
Share-based compensation expense recognized in earnings under the RSP	—	128		—		—		—		128
Common stock purchased for deferred compensation obligations	—	(976)		—		—		—		(976)
Common stock repurchased	(100,578)	(2,409)		—		—		—		(2,409)
Cash dividends paid ($0.56 per common share)	—	—		—		(4,107)		—		(4,107)
June 30, 2023	7,496,826	$	126,278	$	5,395	$	93,175	$	(36,417)	$	188,431

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

Table of Contents

INTERIM CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)

(Dollars in thousands)


	Six Months Ended June 30
	2023		2022
OPERATING ACTIVITIES
Net income	$	9,951	$	10,029
Reconciliation of net income to net cash provided by operating activities:
Provision for credit losses	237		522
Depreciation	994		1,077
Amortization of OMSR	77		55
Amortization of acquisition intangibles	2		8
Amortization of subordinated debt issuance costs	45		45
Net amortization of AFS securities	745		1,080
Net gains on sale of AFS securities	(67)		—
Net gain on sale of mortgage loans	(123)		(394)
Change in OMSR valuation allowance	—		(532)
Net (gains) losses on foreclosed assets	(75)		(4)
Increase in cash value of corporate owned life insurance policies, net of expenses	(445)		(411)
Gains from redemption of corporate owned life insurance policies	—		(57)
Share-based payment awards under the Directors Plan	428		249
Share-based payment awards under the RSP	128		77
Origination of loans held-for-sale	(3,719)		(12,708)
Proceeds from loan sales	3,859		13,931
Net changes in operating assets and liabilities which provided (used) cash:
Accrued interest receivable and other assets	2,696		1,848
Accrued interest payable and other liabilities	208		(35)
Net cash provided by (used in) operating activities	14,941		14,780
INVESTING ACTIVITIES
Activity in AFS securities
Sales	18,089		—
Maturities, calls, and principal payments	38,288		37,833
Purchases	(6,166)		(139,500)
Net loan principal (originations) collections	(70,397)		29,099
Proceeds from sales of foreclosed assets	279		77
Purchases of premises and equipment	(1,824)		(827)
Proceeds from redemption of corporate owned life insurance policies	—		388
Proceeds from sale of FHLB Stock	—		2,288
Funding of low income housing tax credit investments	(612)		(39)
Net cash provided by (used in) investing activities	(22,343)		(70,681)

Table of Contents

INTERIM CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (continued)

(Dollars in thousands)


	Six Months Ended June 30
	2023		2022
FINANCING ACTIVITIES
Net increase (decrease) in deposits	$	(29,327)	$	49,527
Net increase (decrease) in fed funds purchased and repurchase agreements	(20,669)		(2,915)
Net increase (decrease) in FHLB advances	55,000		(10,000)
Cash dividends paid on common stock	(4,107)		(4,007)
Proceeds from issuance of common stock	846		907
Common stock repurchased	(2,409)		(397)
Common stock purchased for deferred compensation obligations	(976)		(527)
Net cash provided by (used in) financing activities	(1,642)		32,588
Increase (decrease) in cash and cash equivalents	(9,044)		(23,313)
Cash and cash equivalents at beginning of period	38,924		105,330
Cash and cash equivalents at end of period	$	29,880	$	82,017
SUPPLEMENTAL CASH FLOWS INFORMATION:
Interest paid	$	7,715	$	2,530
Income taxes paid	$	1,400	$	1,200
SUPPLEMENTAL NONCASH INFORMATION:
Investment of low income housing tax credits	$	5,000	$	—
Transfers of loans to foreclosed assets	$	170	$	103

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

Table of Contents

NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

(Dollars in thousands except per share amounts)

Note 1 – Significant Accounting Policies

Basis of Presentation and Consolidation: The consolidated financial statements include the accounts of Isabella Bank Corporation, a financial services holding company, and its wholly owned subsidiary, Isabella Bank. All intercompany balances and accounts have been eliminated in consolidation. 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” refers 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 six-month periods ended June 30, 2023 are not necessarily indicative of the results that may be expected for the year ending December 31, 2023. For further information, refer to our Annual Report on Form 10-K for the year ended December 31, 2022.

Use of Estimates: In preparing consolidated financial statements in conformity with accounting principles generally accepted in the United States of America, we make estimates and assumptions that affect the reported amounts of assets and liabilities as of the date of the consolidated balance sheet and reported amounts of revenues and expenses during the reporting year. Actual results could differ from those estimates.

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

Accounting Changes and Reclassifications: Certain amounts reported in the interim 2022 consolidated financial statements have been reclassified to conform with the 2023 presentation.

On January 1, 2023, we adopted ASU 2016-13, “Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments,” as subsequently updated for certain clarifications, targeted relief and codification improvements. ASC 326 updated the measurement for credit losses for AFS debt securities and assets measured at amortized cost, which includes loans, trade receivables, and any other financial assets with the contractual right to receive cash and requires enhanced disclosures related to the significant estimates and judgments used in estimating credit losses.

Prior to ASU No. 2016-13, GAAP required an “incurred loss” methodology for recognizing credit losses that delayed recognition until it was probable a loss has been incurred. Under the incurred loss approach, entities were limited to a probable initial recognition threshold when credit losses were measured; an entity generally considered only past events and current conditions when measuring the incurred loss.

We adopted ASC 326 using the modified retrospective method for all financial assets measured at amortized cost and off balance sheet credit exposures. Results for reporting periods beginning January 1, 2023 are presented under ASC 326, while prior period amounts continue to be reported in accordance with previously applicable GAAP and the accounting policies described in our Annual Report on Form 10-K for the year ended December 31, 2022. We recorded a net decrease to retained earnings of $2,417 as of January 1, 2023 for the cumulative effect of adopting ASC 326.

We adopted ASC 326 using the prospective transition approach for AFS debt securities for which other-than-temporary impairment had been recognized prior to January 1, 2023. As a result, the amortized cost basis remains the same before and after the effective date of ASC 326. The effective interest rate on these debt securities was not changed. Amounts previously recognized in accumulated other comprehensive income as of January 1, 2023 relating to improvements in cash flows expected to be collected will be accreted into income over the remaining life of the asset. Recoveries of amounts previously written off relating to improvements in cash flows beginning January 1, 2023 will be recorded in earnings when received.

Table of Contents

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


	January 1, 2023
	Pre-Adoption Allowance		Impact of Adoption		Post-Adoption Allowance		Cumulative Effect on Retained Earnings
Loans:
Commercial and industrial	$	860	$	(58)	$	802	$	46
Commercial real estate	461		5,532		5,993		(4,370)
Agricultural	577		(247)		330		195
Residential real estate	617		3,535		4,152		(2,793)
Consumer	961		356		1,317		(281)
Unallocated	6,374		(6,374)		—		5,035
Total	$	9,850	$	2,744	$	12,594	$	(2,168)
Off-balance-sheet credit exposures	$	—	$	315	$	315	$	(249)

In connection with the adoption of ASC 326, we revised certain accounting policies and implemented certain accounting policy elections, which are provided below. All other accounting policies are materially the same as those discussed in Note 1 to the Consolidated Financial Statements included in our Annual Report on Form 10-K for the year ended December 31, 2022.

AFS Securities: Purchases of investment securities are generally classified as AFS. However, we may elect to classify securities as either held to maturity or trading. Securities classified as AFS debt securities are recorded at fair value, with unrealized gains and losses, net of the effect of deferred income taxes, excluded from earnings and reported in other comprehensive income (loss). Included in AFS securities are auction rate money market preferred securities. These investments, for federal income tax purposes, have no federal income tax impact given the nature of the investments. Auction rate money market preferred securities are recorded at fair value, with unrealized gains and losses excluded from earnings and reported in other comprehensive income (loss). Purchase premiums and discounts are recognized in interest income using the interest method over the term of the securities. Realized gains and losses on the sale of AFS securities are determined using the specific identification method.

ACL - AFS Securities: AFS securities are reviewed quarterly for possible credit impairment. In determining whether a credit-related impairment exists for debt securities, we assess whether: (a) we do not have the intent to sell the security; and (b) it is more likely than not we will not have to sell the security before recovery of its cost basis. If either of these conditions are met, any previously recognized allowances are charged-off and the security's amortized cost is written down to fair value through income. If these conditions are not met, the security is evaluated to determine whether the decline in fair value has resulted from credit losses or other factors.

In order to determine the amount of the credit loss for a debt security, we calculate the recovery value by performing a discounted cash flow analysis based on the current cash flows and future cash flows we expect to recover. If the present value of cash flows expected to be collected is less than the amortized cost basis, a credit loss exists and an allowance for credit losses is recorded for the credit loss, limited by the amount that the fair value is less than the amortized cost basis. The amount of the impairment related to other risk factors is recognized as a component of other comprehensive income. Adjustments to the allowance are reported in the income statement as a provision for credit losses.

We made an accounting policy election to exclude accrued interest receivable on AFS securities from the estimate of credit losses. AFS securities are charged-off against the allowance or, in the absence of any allowance, written down through income when deemed uncollectible by management, or when criteria regarding intent or requirement to sell is met.

Loans: Loans that we have the intent and ability to hold for the foreseeable future or until maturity or payoff are reported at their outstanding principal balance adjusted for any charge-offs, the ACL, and any deferred fees or costs. Interest income on loans 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 yield methods.

The accrual of interest on agricultural, commercial and mortgage loans is discontinued at the time the loan is 90 days or more past due unless the credit is well secured and in the process of collection. Consumer loans are typically charged-off no later than 180 days past due. Past due status is based on contractual terms of the loan. In all cases, loans are placed in nonaccrual status or charged-off at an earlier date if collection of principal or interest is considered doubtful. For loans that are placed on nonaccrual status or charged-off, all interest accrued in the current calendar year, but not collected, is reversed against interest income while interest accrued in prior calendar years, but not collected is charged against the ACL. Interest income on loans in

Table of Contents

nonaccrual status is not recognized until qualifying for return to accrual status. Loans are returned to accrual status when all principal and interest amounts contractually due are brought current and future payments are reasonably assured. For loans not classified as nonaccrual, interest income continues to be accrued over the term of the loan based on the principal amount outstanding.

ACL - Loans: The ACL on loans is calculated in accordance with ASC 326 and is deducted from the amortized cost basis of loans to present our best estimate of the net amount expected to be collected. The ACL is established through a provision for credit losses charged to earnings. Loan losses are charged against the allowance when we believe the uncollectability of the loan balance is confirmed. Subsequent recoveries, if any, are credited to the allowance. We made an accounting policy election to exclude accrued interest receivable on loans from the estimate of credit losses.

We evaluate the ACL on a regular basis. Our periodic review of the collectability of loans considers historical experience, the nature and volume of the loan portfolio, adverse situations that may affect the borrower’s ability to repay, estimated value of any underlying collateral, prevailing economic conditions, and reasonable and supportable forecasts. This evaluation is inherently subjective as it requires estimates that are susceptible to significant revision as more information becomes available.

The ACL consists of a general component and loans individually analyzed. The general component covers loans not specifically analyzed and is based on historical loss experience, current conditions, and reasonable and supportable forecasts. The general component also includes uncertainties that we believe could affect our estimate of probable losses based on qualitative factors.

Loans in nonaccrual status are individually analyzed on a loan-by-loan basis. Loans evaluated individually are not included in the general, or pooled, component of the ACL. For collateralized loans, the loan's specific allowance is measured by the fair value of the collateral approach. The specific reserve is based on the fair value of the collateral, less costs to sell if foreclosure is probable, and an allowance is established when the collateral value is lower than the carrying value of the loan. When the discounted cash flow method is used to measure the loan's specific allowance, the effective interest rate is used to discount expected cash flows to incorporate expected prepayments. An allowance is established when the discounted cash flows are lower than the carrying value of the loan. Large groups of smaller-balance, homogeneous loans are collectively evaluated for measurement of an allowance.

Off Balance Sheet Credit Related Financial Instruments: In the ordinary course of business, we have entered into commitments to extend credit, including commitments under credit card arrangements, commercial lines of credit, home equity lines of credit, commercial letters of credit, and standby letters of credit. Such financial instruments are recorded only when funded. In connection with these commitments, we established an allowance for credit losses related to off-balance-sheet credit exposures. The allowance, recorded in a liability account, is calculated in accordance with ASC 326 and represents expected credit losses over the contractual period for which we are exposed to credit risk resulting from a contractual obligation to extend credit. The estimate of expected credit losses considers both the likelihood that funding will occur and the amount expected to be funded over the estimated remaining life of the commitment. The likelihood and expected amount of funding are based on historical utilization rates. No allowance is recognized if we have the unconditional right to cancel the obligation. The allowance is reported as a component of accrued interest payable and other liabilities in our consolidated balance sheets. Adjustments to the allowance are reported in our income statement as a component of provision for credit losses.

Table of Contents

Note 2 – AFS Securities

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


	June 30, 2023
	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses		Fair Value
U.S. Treasury	$	231,421	$	—	$	22,068	$	209,353
States and political subdivisions	99,231		757		4,746		95,242
Auction rate money market preferred	3,200		—		563		2,637
Mortgage-backed securities	38,731		—		3,199		35,532
Collateralized mortgage obligations	193,983		—		12,987		180,996
Corporate	8,150		—		1,413		6,737
Total	$	574,716	$	757	$	44,976	$	530,497


	December 31, 2022
	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses		Fair Value
U.S. Treasury	$	231,622	$	—	$	22,921	$	208,701
States and political subdivisions	122,023		392		4,903		117,512
Auction rate money market preferred	3,200		—		858		2,342
Mortgage-backed securities	42,309		—		3,239		39,070
Collateralized mortgage obligations	218,301		—		12,573		205,728
Corporate	8,150		—		1,022		7,128
Total	$	625,605	$	392	$	45,516	$	580,481

The amortized cost and fair value of AFS securities by contractual maturity at June 30, 2023 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	$	—	$	231,421	$	—	$	—	$	—	$	231,421
States and political subdivisions	13,548		32,194		20,956		32,533		—		99,231
Auction rate money market preferred	—		—		—		—		3,200		3,200
Mortgage-backed securities	—		—		—		—		38,731		38,731
Collateralized mortgage obligations	—		—		—		—		193,983		193,983
Corporate	—		—		8,150		—		—		8,150
Total amortized cost	$	13,548	$	263,615	$	29,106	$	32,533	$	235,914	$	574,716
Fair value	$	13,513	$	241,669	$	26,959	$	29,191	$	219,165	$	530,497

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. Approximately $146,000 of the amortized cost of the collateralized mortgage portfolio consist of agency commercial mortgage-backed securities with defined maturity dates of less than ten years.

Table of Contents

A summary of the sales activity of AFS securities is as follows for the:


	Three Months Ended June 30				Six Months Ended June 30
	2023		2022		2023		2022
Proceeds from sales of AFS securities	$	13,944	$	—	$	18,089	$	—
Realized gains (losses)	$	66	$	—	$	67	$	—
Applicable income tax expense (benefit)	$	14	$	—	$	14	$	—

The following information pertains to AFS securities with gross unrealized losses at June 30, 2023 and December 31, 2022, aggregated by investment category and length of time that individual securities have been in a continuous loss position.


	June 30, 2023
	Less Than Twelve Months				Twelve Months or More
	Gross Unrealized Losses		Fair Value		Gross Unrealized Losses		Fair Value		Total Unrealized Losses
U.S. Treasury	$	—	$	—	$	22,068	$	209,353	$	22,068
States and political subdivisions	242		16,972		4,504		38,371		4,746
Auction rate money market preferred	—		—		563		2,637		563
Mortgage-backed securities	68		1,358		3,131		34,174		3,199
Collateralized mortgage obligations	3,597		67,725		9,390		113,271		12,987
Corporate	—		—		1,413		6,737		1,413
Total	$	3,907	$	86,055	$	41,069	$	404,543	$	44,976
Number of securities in an unrealized loss position:			62				225		287


	December 31, 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	$	1,388	$	18,331	$	21,533	$	190,370	$	22,921
States and political subdivisions	2,389		48,083		2,514		40,667		4,903
Auction rate money market preferred	—		—		858		2,342		858
Mortgage-backed securities	3,239		39,070		—		—		3,239
Collateralized mortgage obligations	12,408		201,315		165		4,411		12,573
Corporate	—		—		1,022		7,128		1,022
Total	$	19,424	$	306,799	$	26,092	$	244,918	$	45,516
Number of securities in an unrealized loss position:			178				266		444

As of June 30, 2023, no allowance for credit losses has been recognized on AFS securities in an unrealized loss position, as management does not believe any of the securities are impaired due to reasons of credit quality. This is based on our analysis of the underlying risk characteristics, including credit ratings, and other qualitative factors related to our AFS securities and consideration of our historical credit loss experience and internal forecasts. The issuers of these securities continue to make timely principal and interest payments under the contractual terms of the securities. Furthermore, management does not have the intent to sell any of the securities classified as AFS in the table above, and believes it is more likely than not that we will not have to sell any such securities before a recovery of cost. The unrealized losses are due to increases in market interest rates over the yields available at the time the underlying securities were purchased. The fair value is expected to recover as the securities approach their respective maturity date or repricing date, or if the market yields for such investments decline.

Table of Contents

Note 3 – Loans and ACL

Loan Composition

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


	June 30 2023		Percent of Total		December 31 2022		Percent of Total
Commercial and industrial
Secured	$	173,900	13.04	%	$	161,895	12.80	%
Unsecured	21,014		1.57	%	16,533		1.31	%
Total commercial and industrial	194,914		14.61	%	178,428		14.11	%
Commercial real estate
Commercial mortgage owner occupied	183,460		13.75	%	192,117		15.20	%
Commercial mortgage non-owner occupied	215,402		16.14	%	204,091		16.14	%
Commercial mortgage 1-4 family investor	86,260		6.46	%	85,278		6.75	%
Commercial mortgage multifamily	79,132		5.93	%	84,526		6.69	%
Total commercial real estate	564,254		42.28	%	566,012		44.78	%
Advances to mortgage brokers	39,099		2.93	%	—		—	%
Agricultural
Agricultural mortgage	69,751		5.23	%	73,002		5.77	%
Agricultural	26,938		2.02	%	31,983		2.53	%
Total agricultural	96,689		7.25	%	104,985		8.30	%
Residential real estate
Senior lien	303,643		22.75	%	300,225		23.75	%
Junior lien	4,534		0.34	%	3,282		0.26	%
Home equity lines of credit	35,297		2.65	%	33,187		2.63	%
Total residential real estate	343,474		25.74	%	336,694		26.64	%
Consumer
Secured - direct	38,458		2.88	%	37,127		2.94	%
Secured - indirect	54,131		4.06	%	37,814		2.98	%
Unsecured	3,383		0.25	%	3,113		0.25	%
Total consumer	95,972		7.19	%	78,054		6.17	%
Total	$	1,334,402	100.00	%	$	1,264,173	100.00	%

For a summary of the accounting policies related to loans, interest recognition, and the ACL for loans, including updates to such policies, refer to “Note 1 – Significant Accounting Policies” and our Annual Report on Form 10-K for the year ended December 31, 2022.

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 ACL, and deferred fees or costs. Unless a loan has a nonaccrual status, interest income is accrued over the term of the loan based on the principal amount outstanding. Loan origination fees and certain direct loan origination costs are capitalized and recognized as a component of interest income over the term of the loan using the appropriate amortization method.

Table of Contents

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 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 one or more of the following committees: Internal Loan Committee, the Executive Loan Committee, or the Board of Directors.

Consumer loans include secured and unsecured personal loans. 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.

Nonaccrual and Past Due Loans

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

Table of Contents

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


	June 30, 2023				December 31, 2022
	Total Nonaccrual Loans		Nonaccrual Loans with No ACL		Total Nonaccrual Loans		Nonaccrual Loans with No ACL
Commercial and industrial:
Secured	$	17	$	17	$	22	$	22
Commercial real estate:
Commercial mortgage 1-4 family investor	—		—		74		74
Agricultural:
Agricultural mortgage	51		51		67		67
Agricultural other	167		167		167		167
Residential real estate:
Senior lien	179		179		127		107
Total	$	414	$	414	$	457	$	437

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


	June 30, 2023
	Past Due:										Accruing Loans 90 or More Days Past Due
	30-59 Days		60-89 Days		90 Days or More		Current		Total
Commercial and industrial
Secured	$	—	$	—	$	—	$	173,900	$	173,900	$	—
Unsecured	—		8		—		21,006		21,014		—
Total commercial and industrial	—		8		—		194,906		194,914		—
Commercial real estate
Commercial mortgage owner occupied	—		—		—		183,460		183,460		—
Commercial mortgage non-owner occupied	2,494		—		—		212,908		215,402		—
Commercial mortgage 1-4 family investor	—		—		—		86,260		86,260		—
Commercial mortgage multifamily	—				—		79,132		79,132		—
Total commercial real estate	2,494		—		—		561,760		564,254		—
Advances to mortgage brokers	—		—		—		39,099		39,099		—
Agricultural
Agricultural mortgage	—		—		—		69,751		69,751		—
Agricultural	—		—		—		26,938		26,938		—
Total agricultural	—		—		—		96,689		96,689		—
Residential real estate
Senior lien	190		421		133		302,899		303,643		133
Junior lien	—		—		—		4,534		4,534		—
Home equity lines of credit	—		—		—		35,297		35,297		—
Total residential real estate	190		421		133		342,730		343,474		133
Consumer
Secured - direct	4		—		—		38,454		38,458		—
Secured - indirect	88		—		—		54,043		54,131		—
Unsecured	11		—		—		3,372		3,383		—
Total consumer	103		—		—		95,869		95,972		—
Total	$	2,787	$	429	$	133	$	1,331,053	$	1,334,402	$	133

Table of Contents


	December 31, 2022
	Past Due:										Accruing Loans 90 or More Days Past Due
	30-59 Days		60-89 Days		90 Days or More		Current		Total
Commercial and industrial
Secured	$	536	$	—	$	—	$	161,359	$	161,895	$	—
Unsecured	—		—		—		16,533		16,533		—
Total commercial and industrial	536		—		—		177,892		178,428		—
Commercial real estate
Commercial mortgage owner occupied	94		—		—		192,023		192,117		—
Commercial mortgage non-owner occupied	4,208		2,570		—		197,313		204,091		—
Commercial mortgage 1-4 family investor	—		—		14		85,264		85,278		—
Commercial mortgage multifamily	—		—		—		84,526		84,526		—
Total commercial real estate	4,302		2,570		14		559,126		566,012		—
Advances to mortgage brokers	—		—		—		—		—		—
Agricultural
Agricultural mortgage	—		—		—		73,002		73,002		—
Agricultural	—		—		—		31,983		31,983		—
Total agricultural	—		—		—		104,985		104,985		—
Residential real estate
Senior lien	3,025		225		—		296,975		300,225		—
Junior lien	—		—		—		3,282		3,282		—
Home equity lines of credit	38		—		—		33,149		33,187		—
Total residential real estate	3,063		225		—		333,406		336,694		—
Consumer
Secured - direct	1		—		—		37,126		37,127		—
Secured - indirect	45		8		—		37,761		37,814		—
Unsecured	4		—		—		3,109		3,113		—
Total consumer	50		8		—		77,996		78,054		—
Total	$	7,951	$	2,803	$	14	$	1,253,405	$	1,264,173	$	—

Table of Contents

Credit Quality Indicators

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


	June 30, 2023
	2023		2022		2021		2020		2019		Prior		Revolving Loans		Revolving Loans Converted to Term		Total
Commercial and industrial: Secured
Risk ratings 1-3	$	3,386	$	5,809	$	7,251	$	8,535	$	1,200	$	1,611	$	13,124	$	—	$	40,916
Risk rating 4	16,076		36,547		24,460		6,124		2,849		1,654		34,619		—		122,329
Risk rating 5	427		3,063		286		372		172		643		2,058		—		7,021
Risk rating 6	178		—		13		258		20		171		2,977		—		3,617
Risk rating 7	—		—		—		17		—		—		—		—		17
Risk rating 8	—		—		—		—		—		—		—		—		—
Risk rating 9	—		—		—		—		—		—		—		—		—
Total	$	20,067	$	45,419	$	32,010	$	15,306	$	4,241	$	4,079	$	52,778	$	—	$	173,900
Current year-to-date gross charge-offs	$	—	$	—	$	—	$	—	$	—	$	—	$	—	$	—	$	—
Commercial and industrial: Unsecured
Risk ratings 1-3	$	—	$	259	$	158	$	71	$	115	$	1,005	$	7,266	$	—	$	8,874
Risk rating 4	630		2,862		743		624		—		—		7,192		—		12,051
Risk rating 5	8		36		—		—		2		—		43		—		89
Risk rating 6	—		—		—		—		—		—		—		—		—
Risk rating 7	—		—		—		—		—		—		—		—		—
Risk rating 8	—		—		—		—		—		—		—		—		—
Risk rating 9	—		—		—		—		—		—		—		—		—
Total	$	638	$	3,157	$	901	$	695	$	117	$	1,005	$	14,501	$	—	$	21,014
Current year-to-date gross charge-offs	$	—	$	—	$	—	$	—	$	—	$	—	$	—	$	—	$	—
Commercial real estate: Owner occupied
Risk ratings 1-3	$	1,585	$	1,760	$	13,033	$	14,625	$	985	$	3,773	$	970	$	—	$	36,731
Risk rating 4	7,372		31,816		40,924		13,966		14,066		21,960		6,311		—		136,415
Risk rating 5	1,014		888		268		227		3,931		2,297		—		—		8,625
Risk rating 6	—		—		893		239		—		557		—		—		1,689
Risk rating 7	—		—		—		—		—		—		—		—		—
Risk rating 8	—		—		—		—		—		—		—		—		—
Risk rating 9	—		—		—		—		—		—		—		—		—
Total	$	9,971	$	34,464	$	55,118	$	29,057	$	18,982	$	28,587	$	7,281	$	—	$	183,460
Current year-to-date gross charge-offs	$	—	$	—	$	—	$	—	$	—	$	—	$	—	$	—	$	—
Commercial real estate: Non-owner occupied
Risk ratings 1-3	$	74	$	4,467	$	6,682	$	969	$	80	$	1,825	$	105	$	—	$	14,202
Risk rating 4	25,531		48,951		38,433		12,150		7,809		43,754		13,984		—		190,612
Risk rating 5	—		—		—		—		—		3,576		5,921		—		9,497
Risk rating 6	1,034		—		—		57		—		—		—		—		1,091
Risk rating 7	—		—		—		—		—		—		—		—		—
Risk rating 8	—		—		—		—		—		—		—		—		—
Risk rating 9	—		—		—		—		—		—		—		—		—
Total	$	26,639	$	53,418	$	45,115	$	13,176	$	7,889	$	49,155	$	20,010	$	—	$	215,402
Current year-to-date gross charge-offs	$	—	$	—	$	—	$	—	$	—	$	—	$	—	$	—	$	—

Table of Contents


	June 30, 2023
	2023		2022		2021		2020		2019		Prior		Revolving Loans		Revolving Loans Converted to Term		Total
Commercial real estate: 1-4 family investor
Risk ratings 1-3	$	—	$	992	$	987	$	930	$	683	$	1,088	$	1,871	$	—	$	6,551
Risk rating 4	4,169		12,619		31,378		15,905		2,820		4,741		6,777		—		78,409
Risk rating 5	156		362		79		—		57		—		—		—		654
Risk rating 6	386		—		—		—		64		196		—		—		646
Risk rating 7	—		—		—		—		—		—		—		—		—
Risk rating 8	—		—		—		—		—		—		—		—		—
Risk rating 9	—		—		—		—		—		—		—		—		—
Total	$	4,711	$	13,973	$	32,444	$	16,835	$	3,624	$	6,025	$	8,648	$	—	$	86,260
Current year-to-date gross charge-offs	$	—	$	—	$	—	$	—	$	—	$	—	$	—	$	—	$	—
Commercial real estate: Multifamily
Risk ratings 1-3	$	—	$	4,861	$	2,122	$	579	$	—	$	1,951	$	5,050	$	—	$	14,563
Risk rating 4	1,377		17,208		16,312		834		601		22,201		2,601		—		61,134
Risk rating 5	—		—		—		27		—		—		—		—		27
Risk rating 6	—		—		38		—		—		3,003		367		—		3,408
Risk rating 7	—		—		—		—		—		—		—		—		—
Risk rating 8	—		—		—		—		—		—		—		—		—
Risk rating 9	—		—		—		—		—		—		—		—		—
Total	$	1,377	$	22,069	$	18,472	$	1,440	$	601	$	27,155	$	8,018	$	—	$	79,132
Current year-to-date gross charge-offs	$	—	$	—	$	—	$	—	$	—	$	—	$	—	$	—	$	—
Advances to mortgage brokers
Risk ratings 1-3	$	39,099	$	—	$	—	$	—	$	—	$	—	$	—	$	—	$	39,099
Current year-to-date gross charge-offs	—		—		—		—		—		—		—		—		$	—
Agricultural mortgage
Risk ratings 1-3	$	318	$	3,011	$	1,179	$	2,819	$	835	$	1,446	$	75	$	—	$	9,683
Risk rating 4	3,369		13,225		9,325		6,222		4,119		6,305		2,926		—		45,491
Risk rating 5	126		4,391		5,916		714		188		60		90		—		11,485
Risk rating 6	856		—		—		—		—		2,185		—		—		3,041
Risk rating 7	—		—		—		—		—		51		—		—		51
Risk rating 8	—		—		—		—		—		—		—		—		—
Risk rating 9	—		—		—		—		—		—		—		—		—
Total	$	4,669	$	20,627	$	16,420	$	9,755	$	5,142	$	10,047	$	3,091	$	—	$	69,751
Current year-to-date gross charge-offs	$	—	$	—	$	—	$	—	$	—	$	4	$	—	$	—	$	4
Agricultural other
Risk ratings 1-3	$	191	$	81	$	129	$	41	$	268	$	151	$	1,412	$	—	$	2,273
Risk rating 4	726		2,820		2,475		705		170		89		12,701		—		19,686
Risk rating 5	325		9		173		507		—		696		2,761		—		4,471
Risk rating 6	—		—		34		—		—		58		249		—		341
Risk rating 7	—		—		—		—		—		167		—		—		167
Risk rating 8	—		—		—		—		—		—		—		—		—
Risk rating 9	—		—		—		—		—		—		—		—		—
Total	$	1,242	$	2,910	$	2,811	$	1,253	$	438	$	1,161	$	17,123	$	—	$	26,938
Current year-to-date gross charge-offs	$	—	$	—	$	—	$	—	$	—	$	—	$	—	$	—	$	—

Table of Contents

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


	December 31, 2022
	Commercial						Agricultural
	Real Estate		Other		Total		Real Estate		Other		Total		Total
Rating
1 - Excellent	$	—	$	—	$	—	$	—	$	—	$	—	$	—
2 - High quality	9,045		4,533		13,578		342		100		442		14,020
3 - High satisfactory	68,133		36,608		104,741		9,757		4,608		14,365		119,106
4 - Low satisfactory	462,361		126,733		589,094		44,258		21,214		65,472		654,566
5 - Special mention	20,770		7,447		28,217		12,262		4,634		16,896		45,113
6 - Substandard	5,629		3,085		8,714		6,316		1,260		7,576		16,290
7 - Vulnerable	74		22		96		67		167		234		330
8 - Doubtful	—		—		—		—		—		—		—
9 - Loss	—		—		—		—		—		—		—
Total	$	566,012	$	178,428	$	744,440	$	73,002	$	31,983	$	104,985	$	849,425

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.

•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.

Table of Contents

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.

•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.

Table of Contents

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.

Table of Contents

Our primary credit quality indicator for residential real estate and consumer loans is the individual loan’s past due status. The following table displays residential real estate and consumer loans by payment status and year of origination as of:


	June 30, 2023
	2023		2022		2021		2020		2019		Prior		Revolving Loans		Revolving Loans Converted to Term		Total
Residential real estate: Senior lien
Current	$	18,810	$	43,814	$	83,552	$	56,147	$	25,005	$	62,437	$	7,478	$	5,561	$	302,804
Past due 30-89 days	—		294		—		48		—		185		—		—		527
Past due 90 or more days	—		—		—		—		—		133		—		—		133
Nonaccrual	51		—		—		—		43		85		—		—		179
Total	$	18,861	$	44,108	$	83,552	$	56,195	$	25,048	$	62,840	$	7,478	$	5,561	$	303,643
Current year-to-date gross charge-offs	$	—	$	—	$	—	$	—	$	—	$	2	$	—	$	—	$	2
Residential real estate: Junior lien
Current	$	1,920	$	1,450	$	199	$	150	$	227	$	588	$	—	$	—	$	4,534
Past due 30-89 days	—		—		—		—		—		—		—		—		—
Past due 90 or more days	—		—		—		—		—		—		—		—		—
Nonaccrual	—		—		—		—		—		—		—		—		—
Total	$	1,920	$	1,450	$	199	$	150	$	227	$	588	$	—	$	—	$	4,534
Current year-to-date gross charge-offs	$	—	$	—	$	—	$	—	$	—	$	—	$	—	$	—	$	—
Residential real estate: Home equity lines of credit
Current	$	222	$	—	$	—	$	—	$	—	$	—	$	35,075	$	—	$	35,297
Past due 30-89 days	—		—		—		—		—		—		—		—		—
Past due 90 or more days	—		—		—		—		—		—		—		—		—
Nonaccrual	—		—		—		—		—		—		—		—		—
Total	$	222	$	—	$	—	$	—	$	—	$	—	$	35,075	$	—	$	35,297
Current year-to-date gross charge-offs	$	—	$	—	$	—	$	—	$	—	$	—	$	—	$	—	$	—
Consumer : Secured - direct
Current	$	9,843	$	11,791	$	7,983	$	4,614	$	2,208	$	2,015	$	—	$	—	$	38,454
Past due 30-89 days	—		—		—		4		—		—		—		—		4
Past due 90 or more days	—		—		—		—		—		—		—		—		—
Nonaccrual	—		—		—		—		—		—		—		—		—
Total	$	9,843	$	11,791	$	7,983	$	4,618	$	2,208	$	2,015	$	—	$	—	$	38,458
Current year-to-date gross charge-offs	$	—	$	—	$	5	$	—	$	—	$	—	$	—	$	—	$	5
Consumer : Secured - indirect
Current	$	20,940	$	12,860	$	7,852	$	6,239	$	2,447	$	3,706	$	—	$	—	$	54,044
Past due 30-89 days	—		—		30		—		39		18		—		—		87
Past due 90 or more days	—		—		—		—		—		—		—		—		—
Nonaccrual	—		—		—		—		—		—		—		—		—
Total	$	20,940	$	12,860	$	7,882	$	6,239	$	2,486	$	3,724	$	—	$	—	$	54,131
Current year-to-date gross charge-offs	$	—	$	—	$	—	$	—	$	—	$	—	$	—	$	—	$	—

Table of Contents


	June 30, 2023
	2023		2022		2021		2020		2019		Prior		Revolving Loans		Revolving Loans Converted to Term		Total
Consumer: Unsecured
Current	$	1,053	$	1,141	$	267	$	162	$	31	$	4	$	713	$	—	$	3,371
Past due 30-89 days	—		6		3		2		—		—		1		—		12
Past due 90 or more days	—		—		—		—		—		—		—		—		—
Nonaccrual	—		—		—		—		—		—		—		—		—
Total	$	1,053	$	1,147	$	270	$	164	$	31	$	4	$	714	$	—	$	3,383
Current year-to-date gross charge-offs	$	172	$	—	$	6	$	—	$	—	$	4	$	—	$	—	$	182

Loan Modifications

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

Typical modifications granted include, but are not limited to:

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

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

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

•Forgiving principal.

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

•The borrower is currently in default on any debt.

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

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

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

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

Table of Contents

The following is a summary of the amortized cost basis of loan modifications granted to borrowers experiencing financial difficulty for the:



	Three Months Ended June 30
	Term Extension				Interest Rate Reduction and Term Extension
	Amortized Cost Basis		% of Total Class of Financial Receivable		Amortized Cost Basis		% of Total Class of Financial Receivable
Commercial real estate
Commercial mortgage non-owner occupied	$	1,034	0.48	%	$	—	—	%
Agricultural
Agricultural mortgage	—		—	%	28		0.04	%
Total	$	1,034			$	28


	Six Months Ended June 30
	Term Extension				Interest Rate Reduction and Term Extension
	Amortized Cost Basis		% of Total Class of Financial Receivable		Amortized Cost Basis		% of Total Class of Financial Receivable
Commercial real estate
Commercial mortgage non-owner occupied	$	1,034	0.48	%	$	—	—	%
Agricultural
Agricultural mortgage	232		0.33	%	28		0.04	%
Agricultural	34		0.13	%	—		—	%
Residential real estate
Senior lien	5		—	%	—		—	%
Total	$	1,305			$	28

We do not modify any loans by forgiving principal or accrued interest. We had committed to advance $0 in additional funds to be disbursed in connection with modified loans at June 30, 2023, as displayed in the table above, at June 30, 2023.

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

Three Months Ended June 30

Six Months Ended June 30

Weighted-Average Interest Rate Reduction

Weighted-Average Term Extension (Years)

Weighted-Average Interest Rate Reduction

Weighted-Average Term Extension (Years)

Commercial real estate

Commercial mortgage non-owner occupied

N/A

3.00

N/A

3.00

Agricultural

Agricultural mortgage

4.50%

1.75

4.50%

1.08

Agricultural

N/A

1.00

Residential real estate

Senior lien

N/A

2.60

There were no loans restructured during the three-month period ended June 30, 2022. During the six months ended June 30, 2022, there was one loan restructured, with a below market interest rate and extension of amortization period, in the amount of $98.

Table of Contents

We closely monitor the performance of loans that are modified to borrowers experiencing financial difficulty to understand the effectiveness of our modification efforts. The following tables summarize the performance of such loans that were modified during the three and six-month periods ended June 30, 2023.

June 30, 2023

Past Due:

30-59 Days

60-89 Days

90 Days or More

Total Past Due

Commercial real estate

Commercial mortgage non-owner occupied

—

Agricultural

Agricultural mortgage

—

Total

—


	June 30, 2023
	Past Due:
	30-59 Days		60-89 Days		90 Days or More		Total Past Due
Commercial real estate
Commercial mortgage non-owner occupied	$	—	$	—	$	—	$	—
Agricultural
Agricultural mortgage	—		—		—		—
Agricultural	—		—		—		—
Residential real estate
Senior lien	5		—		—		5
Total	$	5	$	—	$	—	$	5

We had no loans that defaulted in the three and six-month periods ended June 30, 2023 and 2022 which were modified within 12 months prior to the default date.

ACL - Loans

The credit quality of our loan portfolio is continuously monitored and is reflected within the ACL for loans. The ACL is an estimate of expected losses inherent within our loan portfolio. The ACL is adjusted by a credit loss expense, which is reported in earnings, and reduced by the charge-off of loan amounts, net of recoveries.

The ACL is evaluated on a regular basis for appropriateness. 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 ACL are specific allocations for loans individually evaluated, historical loss percentages, delinquency status, and other credit trends and risk characteristics, including current conditions and reasonable and supportable forecasts about the future. Determining the appropriateness of the allowance is complex and requires judgment by management about the effect of matters that are inherently uncertain. In future periods evaluations of the overall loan portfolio, in light of the factors and forecasts then prevailing, may result in significant changes in the allowance and credit loss expense in those future periods.

The methodology for estimating the amount of expected credit losses reported in the ACL has two basic components: a component of individual loans that do not share risk characteristics with other loans; and a pooled component for estimated expected credit losses for pools of loans that share similar risk characteristics.

For a loan that does not share risk characteristics with other loans, an individual analysis is performed to measure an allowance. Loans in nonaccrual status are individually evaluated for specific allocation of the allowance using the fair value of collateral, less costs to sell if foreclosure is probable, or the discounted cash flow method. We do not recognize interest income on loans in nonaccrual status. For loans not classified as nonaccrual, interest income is recognized daily, as earned, according to the terms of the loan agreement and the principal amount outstanding.

Table of Contents

In determining the allowance for credit losses, we derive an estimated credit loss assumption from a model that categorizes loan pools based on loan type and credit risk ratings or delinquency bucket. This model calculates an expected loss percentage for each loan class by considering the probability of default, based on the migration of loans from performing to loss by credit risk ratings or delinquency buckets using life-of-loan analysis, and the historical severity of loss, based on the aggregate net lifetime losses incurred per loan class.

The default and severity factors used to calculate the allowance for credit losses for loans that share similar risk characteristics with other loans are adjusted for differences between the historical period used to calculate historical default and loss severity rates and expected conditions over the remaining lives of the loans in the portfolio. These qualitative factors are used to adjust the historical probabilities of default and severity of loss so that they reflect management's expectation of future conditions based on a reasonable and supportable forecast. To the extent the lives of the loans in the portfolio extend beyond the period for which a reasonable and supportable forecast can be made, the model reverts back to the historical rates of default and severity of loss. Qualitative factors include:

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

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

•Changes in interest rates;

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

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

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

•Lack of current financial information;

•Competition, Legal, and Regulatory; and

•Changes in the value of underlying collateral.

Upon the adoption of ASC 326, the estimated ACL using the CECL methodology increased $2,744 compared to the ACL as of December 31, 2022 using the prior incurred loss model. The manner in which credit loss allowances are allocated to the individual portfolio segments was partly impacted by a change in the way the underlying loans within each segment are pooled for modeling purposes. The impact of varying economic conditions and portfolio risk factors are now a component of the credit loss models applied to each modeling pool. In that regard, the amounts allocated to the underlying pools of loans within each portfolio segment more directly reflect the economic variables and portfolio stress factors that correlate with credit losses within each portfolio. Under the prior methodology, allocations in excess of those derived from historical loss rates were recognized as unallocated. Nonetheless, despite fluctuations in the allocation of portions of the overall allowance to the various portfolio segments, the entire allowance is available to absorb any credit losses within the entire loan portfolio.

A summary of activity in the ACL by portfolio segment and the recorded investment in loans by segments follows:



	Allowance for Credit Losses
	Three Months Ended June 30, 2023
	Commercial and Industrial		Commercial Real Estate		Agricultural		Residential Real Estate		Consumer		Unallocated		Total
April 1, 2023	$	817	$	6,036	$	265	$	4,113	$	1,409	$	—	$	12,640
Charge-offs	—		0		(4)		—		(88)		—		(92)
Recoveries	4		10		2		25		54		—		95
Credit loss expense	1		(78)		1		35		231		—		190
June 30, 2023	$	822	$	5,968	$	264	$	4,173	$	1,606	$	—	$	12,833

Table of Contents


	Allowance for Credit Losses
	Six Months Ended June 30, 2023
	Commercial and Industrial		Commercial Real Estate		Agricultural		Residential Real Estate		Consumer		Unallocated		Total
January 1, 2023	$	860	$	461	$	577	$	617	$	961	$	6,374	$	9,850
Impact of the adoption of ASC 326	(58)		5,532		(247)		3,535		356		(6,374)		2,744
Charge-offs	—		—		(4)		(2)		(187)		—		(193)
Recoveries	4		20		6		49		126		—		205
Credit loss expense	16		(45)		(68)		(26)		350		—		227
June 30, 2023	$	822	$	5,968	$	264	$	4,173	$	1,606	$	—	$	12,833



	Allowance for Loan Losses
	Three Months Ended June 30, 2022
	Commercial		Agricultural		Residential Real Estate		Consumer		Unallocated		Total
April 1, 2022	$	1,245	$	383	$	725	$	708	$	6,143	$	9,204
Charge-offs	(3)		—		—		(103)		—		(106)
Recoveries	26		1		42		48		—		117
Credit loss expense	490		67		(128)		670		(614)		485
June 30, 2022	$	1,758	$	451	$	639	$	1,323	$	5,529	$	9,700


	Allowance for Loan Losses
	Six Months Ended June 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)		—		—		(194)		—		(197)
Recoveries	40		3		70		159		—		272
Credit loss expense	(19)		159		(178)		450		110		522
June 30, 2022	$	1,758	$	451	$	639	$	1,323	$	5,529	$	9,700


	Allowance for Loan Losses and Recorded Investment in Loans
	As of December 31, 2022
	Commercial		Agricultural		Residential Real Estate		Consumer		Unallocated		Total
Allowance
Individually evaluated for impairment	$	12	$	—	$	439	$	—	$	—	$	451
Collectively evaluated for impairment	1,309		577		178		961		6,374		9,399
Total	$	1,321	$	577	$	617	$	961	$	6,374	$	9,850
Loans
Individually evaluated for impairment	$	8,342	$	10,935	$	2,741	$	—			$	22,018
Collectively evaluated for impairment	736,098		94,050		333,953		78,054				1,242,155
Total	$	744,440	$	104,985	$	336,694	$	78,054			$	1,264,173

Table of Contents

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


	June 30, 2023				December 31, 2022
	Loan Balance		Specific Allocation		Loan Balance		Specific Allocation
Commercial and industrial	$	—	$	—	$	—	$	—
Commercial real estate	—		—		8,342		12
Agricultural	190		—		10,935		—
Residential real estate	80		—		2,741		439
Consumer	—		—		—		—
Total	$	270	$	—	$	22,018	$	451

We have designated loans classified as collateral dependent for which we apply the practical expedient to measure the ACL based on the fair value of the collateral less cost to sell, when the repayment is expected to be provided substantially by the sale or operation of the collateral and the borrower is experiencing financial difficulty. The fair value of the collateral is based on appraisals, which may be adjusted due to their age, and the type, location, and condition of the property or area or general market conditions to reflect the expected change in value between the effective date of the appraisal and the measurement date. Appraisals are updated every one to two years depending on the type of loan and the total exposure of the borrower. Loans evaluated for expected credit losses on an individual basis with no allowance include $270 in collateral dependent loans.

Note 4 – 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.

A summary of borrowed funds without stated maturity dates was as follows for the:



	Three Months Ended June 30
	2023						2022
	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	$	39,801	$	35,447	1.64	%	$	50,243	$	46,028	0.07	%
Federal funds purchased	$	—	$	48	6.13	%	$	—	$	1	0.91	%
FRB Discount Window	$	—	$	129	5.25	%	$	—	$	—	—	%


	Six Months Ended June 30
	2023						2022
	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	$	54,236	$	37,565	1.48	%	$	53,970	$	47,534	0.07	%
Federal funds purchased	$	—	$	26	6.08	%	$	—	$	1	0.79	%
FRB Discount Window	$	—	$	65	5.25	%	$	—	$	—	—	%

Table of Contents

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 $40,723 and $58,291 at June 30, 2023 and December 31, 2022, 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:


	June 30, 2023				December 31, 2022
	Amount		Rate		Amount		Rate
Securities sold under agreements to repurchase without stated maturity dates	$	37,102	2.30	%	$	57,771	0.49	%

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


	June 30 2023		December 31 2022
Pledged to secure borrowed funds	$	373,910	$	347,331
Pledged to secure repurchase agreements	40,723		58,291
Pledged for public deposits and for other purposes necessary or required by law	72,986		48,698
Total	$	487,619	$	454,320

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


	June 30 2023		December 31 2022
U.S. Treasury	$	35,988	$	29,351
States and political subdivisions	—		11,037
Mortgage-backed securities	3,931		6,819
Collateralized mortgage obligations	804		11,084
Total	$	40,723	$	58,291

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 June 30, 2023, we had the ability to borrow up to an additional $312,211, 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:


	June 30, 2023				December 31, 2022
	Amount		Rate		Amount		Rate
Fixed rate due 2023	$	55,000	5.26	%	$	—	—	%

FHLB advances outstanding as of June 30, 2023 were short-term, with maturities within three weeks after June 30, 2023.

Table of Contents

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:


	June 30, 2023				December 31, 2022
	Amount		Rate		Amount		Rate
Fixed rate at 3.25% to floating, due 2031	$	30,000	3.25	%	$	30,000	3.25	%
Unamortized issuance costs	(710)				(755)
Total subordinated debt, net	$	29,290			$	29,245

Note 5 – 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 June 30				Six Months Ended June 30
	2023		2022		2023		2022
Average number of common shares outstanding for basic calculation	7,498,584		7,545,001		7,528,251		7,539,799
Average potential effect of common shares in the Directors Plan (1)	38,166		74,936		43,793		79,213
Average potential effect of common shares in the RSP	30,777		30,208		29,569		26,345
Average number of common shares outstanding used to calculate diluted earnings per common share	7,567,527		7,650,145		7,601,613		7,645,357
Net income	$	4,630	$	5,295	$	9,951	$	10,029
Earnings per common share
Basic	$	0.62	$	0.70	$	1.32	$	1.33
Diluted	$	0.61	$	0.69	$	1.31	$	1.31

(1)Exclusive of shares held in the Rabbi Trust

Table of Contents

Note 6 – Restricted Stock Plan

Under the RSP, an equity-based bonus plan, we 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 June 30
	2023			2022
	Number of Shares	Fair Value		Number of Shares	Fair Value
Balance, April 1	30,777	$	683	26,846	$	592
Granted	—	—		3,362	87
Vested	—	—		—	—
Forfeited	—	—		—	—
Balance, June 30	30,777	$	683	30,208	$	679


	Six Months Ended June 30
	2023			2022
	Number of Shares	Fair Value		Number of Shares	Fair Value
Balance, January 1	27,072	$	592	20,123	$	418
Granted	3,705	91		10,085	261
Vested	—	—		—	—
Forfeited	—	—		—	—
Balance, June 30	30,777	$	683	30,208	$	679

Expenses related to RSP awards during the three and six month periods ended June 30, 2023 were $86 and $128, and $46 and $77 for the three and six month periods ended June 30, 2022. As of June 30, 2023, there was $309 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 1.91 years.

Note 7 – Other Noninterest Expenses

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


	Three Months Ended June 30				Six Months Ended June 30
	2023		2022		2023		2022
Audit, consulting, and legal fees	$	557	$	605	$	1,092	$	1,154
ATM and debit card fees	409		508		809		942
Other losses	425		233		572		316
Marketing costs	240		364		485		603
Memberships and subscriptions	230		207		470		424
FDIC insurance premiums	233		131		461		256
Donations and community relations	256		139		440		426
Loan underwriting fees	216		215		431		397
Director fees	198		187		402		388
All other	608		664		1,217		1,177
Total other noninterest expenses	$	3,372	$	3,253	$	6,379	$	6,083

Table of Contents

Note 8 – 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 June 30				Six Months Ended June 30
	2023		2022		2023		2022
Income taxes at statutory rate	$	1,165	$	1,339	$	2,510	$	2,529
Effect of nontaxable income
Interest income on tax exempt municipal securities	(136)		(144)		(284)		(278)
Earnings on corporate owned life insurance policies	(48)		(48)		(95)		(103)
Other	(5)		(4)		(12)		(8)
Total effect of nontaxable income	(189)		(196)		(391)		(389)
Effect of nondeductible expenses	10		6		19		17
Effect of tax credits	(68)		(68)		(136)		(141)
Federal income tax expense	$	918	$	1,081	$	2,002	$	2,016

Note 9 – Accumulated Other Comprehensive Income

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



	Three Months Ended June 30
	2023				2022
	Unrealized Gains (Losses) on AFS Securities		Defined Benefit Pension Plan		Total		Unrealized Gains (Losses) on AFS Securities		Defined Benefit Pension Plan		Total
Balance, April 1	$	(28,948)	$	(1,366)	$	(30,314)	$	(14,319)	$	(2,014)	$	(16,333)
OCI before reclassifications	(7,638)		—		(7,638)		(10,670)		—		(10,670)
Amounts reclassified from AOCI	(66)		—		(66)		—		—		—
Subtotal	(7,704)		—		(7,704)		(10,670)		—		(10,670)
Tax effect	1,601		—		1,601		2,163		—		2,163
OCI, net of tax	(6,103)		—		(6,103)		(8,507)		—		(8,507)
Balance, June 30	$	(35,051)	$	(1,366)	$	(36,417)	$	(22,826)	$	(2,014)	$	(24,840)


	Six Months Ended June 30
	2023						2022
	Unrealized Gains (Losses) on AFS Securities		Defined Benefit Pension Plan		Total		Unrealized Gains (Losses) on AFS Securities		Defined Benefit Pension Plan		Total
Balance, January 1	$	(35,828)	$	(1,366)	$	(37,194)	$	3,873	$	(2,014)	$	1,859
OCI before reclassifications	972		—		972		(33,598)		—		(33,598)
Amounts reclassified from AOCI	(67)		—		(67)		—		—		—
Subtotal	905		—		905		(33,598)		—		(33,598)
Tax effect	(128)		—		(128)		6,899		—		6,899
OCI, net of tax	777		—		777		(26,699)		—		(26,699)
Balance, June 30	$	(35,051)	$	(1,366)	$	(36,417)	$	(22,826)	$	(2,014)	$	(24,840)

Included in OCI for the three and six-month periods ended June 30, 2023 and 2022 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.

Table of Contents

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



	Three Months Ended June 30
	2023						2022
	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	$	(79)	$	(7,559)	$	(7,638)	$	(370)	$	(10,300)	$	(10,670)
Reclassification adjustment for net (gains) losses included in net income	—		(66)		(66)		—		—		—
Net unrealized gains (losses)	(79)		(7,625)		(7,704)		(370)		(10,300)		(10,670)
Tax effect	—		1,601		1,601		—		2,163		2,163
Unrealized gains (losses), net of tax	$	(79)	$	(6,024)	$	(6,103)	$	(370)	$	(8,137)	$	(8,507)


	Six Months Ended June 30
	2023						2022
	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	$	295	$	677	$	972	$	(745)	$	(32,853)	$	(33,598)
Reclassification adjustment for net (gains) losses included in net income	—		(67)		(67)		—		—		—
Net unrealized gains (losses)	295		610		905		(745)		(32,853)		(33,598)
Tax effect	—		(128)		(128)		—		6,899		6,899
Unrealized gains (losses), net of tax	$	295	$	482	$	777	$	(745)	$	(25,954)	$	(26,699)

Note 10 – 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

Table of Contents

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 individually evaluated for ACL purposes, and a specific ACL may be established. To measure reserve, the fair value of the loan is estimated using the fair value of the collateral, less costs to sell if foreclosure is probable, or the present value of expected future cash flows discounted at the loan’s effective interest rate. Loans not requiring an allowance represent loans for which the fair value of the expected repayments or collateral exceed the recorded investments in such loans.

We review the net realizable values of the underlying collateral for collateral dependent loans on at least a quarterly basis for all loan types. To determine the collateral value, we utilize independent appraisals, broker price opinions, or internal evaluations. We review these valuations to determine whether an additional discount should be applied given the age of market information that may have been considered as well as other factors such as costs to sell an asset if it is determined that the collateral will be liquidated in connection with the ultimate settlement of the loan. We 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 information about loans measured at fair value on a nonrecurring basis as of:

June 30, 2023

Valuation Technique

Fair Value

Unobservable Input

Actual Range

Weighted Average

Collateral Dependent Loans -

Discount applied to collateral:

Discounted value

$270

Real Estate

20%

Equipment

25%


	December 31, 2022
Valuation Technique	Fair Value	Unobservable Input	Actual Range	Weighted Average
		Discount applied to collateral:
		Real Estate	20% - 30%	24%
Impaired Loans -		Equipment	25% - 35%	31%
Discounted value	$17,143	Cash crop inventory	40%	40%
		Livestock	30%	30%
		Accounts receivable	25%	27%
		Furniture, fixtures & equipment	45%	45%

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

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.

Table of Contents

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:


	June 30, 2023
	Carrying Value		Estimated Fair Value		Level 1		Level 2		Level 3
ASSETS
Cash and cash equivalents	$	29,880	$	29,880	$	29,880	$	—	$	—
Mortgage loans AFS	362		365		—		365		—
Gross loans	1,334,402		1,288,352		—		—		1,288,352
Less allowance for credit losses	12,833		12,833		—		—		12,833
Net loans	1,321,569		1,275,519		—		—		1,275,519
Accrued interest receivable	5,763		5,763		5,763		—		—
Equity securities without readily determinable fair values (1)	15,746		N/A		—		—		—
OMSR	2,483		3,195		—		3,195		—
LIABILITIES
Deposits without stated maturities	1,401,411		1,401,411		1,401,411		—		—
Deposits with stated maturities	313,537		305,375		—		305,375		—
Federal funds purchased and repurchase agreements	37,102		37,011		—		37,011		—
FHLB advances	55,000		55,001		—		55,001		—
Subordinated debt, net of unamortized issuance costs	29,290		23,576		—		23,576		—
Accrued interest payable	600		600		600		—		—


	December 31, 2022
	Carrying Value		Estimated Fair Value		Level 1		Level 2		Level 3
ASSETS
Cash and cash equivalents	$	38,924	$	38,924	$	38,924	$	—	$	—
Mortgage loans AFS	379		395		—		395		—
Gross loans	1,264,173		1,225,669		—		—		1,225,669
Less allowance for credit losses	9,850		9,850		—		—		9,850
Net loans	1,254,323		1,215,819		—		—		1,215,819
Accrued interest receivable	7,472		7,472		7,472		—		—
Equity securities without readily determinable fair values (1)	15,746		N/A		—		—		—
OMSR	2,559		3,174		—		3,174		—
LIABILITIES
Deposits without stated maturities	1,492,235		1,492,235		1,492,235		—		—
Deposits with stated maturities	252,040		240,964		—		240,964		—
Federal funds purchased and repurchase agreements	57,771		57,581		—		57,581		—
Subordinated debt, net of unamortized issuance costs	29,245		26,365		—		26,365		—
Accrued interest payable	255		255		255		—		—

(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.

Table of Contents

Financial Instruments Recorded at Fair Value

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


	June 30, 2023											December 31, 2022
	Total		Level 1			Level 2			Level 3			Total		Level 1			Level 2			Level 3
Recurring items
AFS securities
U.S. Treasury	$	209,353	$	—		$	209,353		$	—		$	208,701	$	—		$	208,701		$	—
States and political subdivisions	95,242		—			95,242			—			117,512		—			117,512			—
Auction rate money market preferred	2,637		—			2,637			—			2,342		—			2,342			—
Mortgage-backed securities	35,532		—			35,532			—			39,070		—			39,070			—
Collateralized mortgage obligations	180,996		—			180,996			—			205,728		—			205,728			—
Corporate	6,737		—			6,737			—			7,128		—			7,128			—
Total AFS securities	530,497		—			530,497			—			580,481		—			580,481			—
Nonrecurring items
Collateral dependent (net of ACL) in 2023 Impaired loans (net of the ALLL) in 2022	270		—			—			270			17,143		—			—			17,143
Foreclosed assets	405		—			—			405			439		—			—			439
Total	$	531,172	$	—		$	530,497		$	675		$	598,063	$	—		$	580,481		$	17,582
Percent of assets and liabilities measured at fair value			—		%	99.87		%	0.13		%			—		%	97.06		%	2.94		%

We recorded an impairment related to foreclosed assets of $9 through earnings for the three and six month periods ended June 30, 2023, and $0 for the three and six month periods ended June 30, 2022. We had no other assets or liabilities recorded at fair value with changes fair value recognized through earnings, on a recurring basis or nonrecurring basis, as of June 30, 2023. 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 11 – Operating Segments

Our reportable segments are based on legal entities that account for at least 10% of net operating results. The Bank as of June 30, 2023 and December 31, 2022 and for the three and six-month periods ended June 30, 2023 and 2022, represents approximately 90% or more of our consolidated total assets and operating results. As such, no additional segment reporting is presented.

Table of Contents

Note 12 – Parent Company Only Financial Information

Interim Condensed Balance Sheets


	June 30 2023		December 31 2022
ASSETS
Cash on deposit at the Bank	$	14,158	$	8,525
Investments in subsidiaries	154,405		158,125
Premises and equipment	1,164		1,171
Other assets	48,059		47,922
TOTAL ASSETS	$	217,786	$	215,743
LIABILITIES AND SHAREHOLDERS’ EQUITY
Subordinated debt, net of unamortized issuance costs	$	29,290	$	29,245
Other liabilities	65		288
Shareholders' equity	188,431		186,210
TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY	$	217,786	$	215,743

Interim Condensed Statements of Income


	Three Months Ended June 30				Six Months Ended June 30
	2023		2022		2023		2022
Income
Dividends from subsidiaries	$	8,333	$	1,000	$	13,333	$	1,800
Interest income	25		2		47		5
Other income	3		3		6		7
Total income	8,361		1,005		13,386		1,812
Expenses
Interest expense	266		266		532		532
Management fee	238		225		476		450
Audit, consulting, and legal fees	169		156		288		276
Director fees	112		99		223		205
Other	89		101		180		173
Total expenses	874		847		1,699		1,636
Income before income tax benefit and equity in undistributed earnings of subsidiaries	7,487		158		11,687		176
Federal income tax benefit	175		177		343		340
Income before equity in undistributed earnings of subsidiaries	7,662		335		12,030		516
Undistributed earnings of subsidiaries	(3,032)		4,960		(2,079)		9,513
Net income	$	4,630	$	5,295	$	9,951	$	10,029

Table of Contents

Interim Condensed Statements of Cash Flows


	Six Months Ended June 30
	2023		2022
Operating activities
Net income	$	9,951	$	10,029
Adjustments to reconcile net income to cash provided by operations
Undistributed earnings of subsidiaries	2,079		(9,513)
Share-based payment awards under the Directors Plan	428		249
Share-based payment awards under the RSP	128		77
Amortization of subordinated debt issuance costs	45		45
Depreciation	25		26
Changes in operating assets and liabilities which provided (used) cash
Other assets	(137)		1,275
Other liabilities	(223)		(51)
Net cash provided by (used in) operating activities	12,296		2,137
Investing activities
Net sales (purchases) of premises and equipment	(17)		—
Net cash provided by (used in) investing activities	(17)		—
Financing activities
Cash dividends paid on common stock	(4,107)		(4,007)
Proceeds from the issuance of common stock	846		907
Common stock repurchased	(2,409)		(397)
Common stock purchased for deferred compensation obligations	(976)		(527)
Net cash provided by (used in) financing activities	(6,646)		(4,024)
Increase (decrease) in cash and cash equivalents	5,633		(1,887)
Cash and cash equivalents at beginning of period	8,525		11,535
Cash and cash equivalents at end of period	$	14,158	$	9,648

Table of Contents

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 six-month periods ended June 30, 2023 and 2022. This analysis should be read in conjunction with our Annual Report on Form 10-K for the year ended December 31, 2022 and with the unaudited interim condensed consolidated financial statements and notes, beginning on page 4 of this report.

Executive Summary

During the three and six months ended June 30, 2023, we reported net income of $4,630 and $9,951 and earnings per common share of $0.62 and $1.32, respectively. Net income and earnings per common share for the same period of 2022 were $5,295 and $10,029 and $0.70 and $1.33, respectively. Net interest income increased $1,624, or 5.72%, for the six-month period ended June 30, 2023 in comparison to the same period in 2022. Rising interest rates and growth in loans led to a $7,226 increase in gross interest income during the six-month period ended June 30, 2023 compared to the same period in 2022. Conversely, rising interest rates on deposits led to a $5,602 increase in interest expense for the six-month period ended June 30, 2023 when compared to the same period in 2022.

Noninterest income decreased $245 during the first six months of 2023 compared to the same period in 2022. This decline was driven by a $554 reduction in OMSR income. Noninterest expenses for the first six months of 2023 increased $1,756, in comparison to the same period in 2022, and was primarily a result of increased compensation, equipment expense, and FDIC insurance premiums.

As of June 30, 2023, total assets and assets under management were $2,042,448 and $2,890,912, respectively. Assets under management include loans sold and serviced of $254,934 and investment and trust assets managed by Isabella Wealth of $593,530, in addition to assets on our consolidated balance sheet. Loans outstanding as of June 30, 2023 totaled $1,334,402. Since December 31, 2022, gross loans increased $70,229 as a result of growth in advances to mortgage brokers and commercial and consumer portfolios. Consistent with industry trends, we've experienced a decline in deposits during the year as competition for deposits remains high. Total deposits were $1,714,948 as of June 30, 2023, decreasing $29,327 since December 31, 2022. All regulatory capital ratios for the Bank exceeded the minimum thresholds to be considered a “well capitalized” institution.

Our securities portfolio totaled $530,497 at June 30, 2023 and included net unrealized losses of $44,219, or 7.69%, of the portfolio. Market conditions led to a $905 improvement in unrealized losses at June 30, 2023 when compared to December 31, 2022. The unrealized loss position on our AFS securities portfolio resulted from increases in short-term and intermediate-term benchmark interest rates. As a result, this change in unrealized losses has reduced our balance of shareholders' equity and negatively impacted our tangible book value. Management does not anticipate the need to sell securities and incur a loss as a result of such sale.

Our net yield on interest earning assets (FTE) was 3.11% and 3.17% for the three and six months ended June 30, 2023, as compared to 3.16% and 3.01% for the three and six months ended June 30, 2022. Improvement in our yield on interest earning assets is a result of strategies management began implementing in 2019, focused on positioning the Bank to benefit in a rising interest rate environment, including a reduced reliance on higher-cost borrowed funds and brokered deposits. To maintain a competitive edge in a rising interest rate environment, we increased most of our deposit rates beginning in the fourth quarter of 2022. As a result, this has negatively impacted our net yield on interest earning assets and further improvement could slow the rate of growth in our net yield on interest earning assets during the remainder of the year.

Table of Contents

Recent Events and Legislation

Recent Bank Failures and the Condition of the Banking Industry: In March 2023, disruptions in the industry resulted in FDIC seizures of three banking institutions. Each bank had its own unique balance sheet issues, neither of which exist at Isabella Bank. Shortly after the FDIC takeovers, the Federal Reserve Bank and the Department of Treasury announced enhanced insurance coverage and a borrowing program to help banks in need of funding. Isabella Bank continues to monitor such events, as well as industry and regulatory responses, to assure we are prepared for any changes that might affect the bank, including the ability to timely address economic uncertainty.

Impact of the Adoption of ASC 326 (CECL): We adopted ASU No. 2016-13, as subsequently updated for certain clarifications, targeted relief and codification improvements, as of January 1, 2023. Based on portfolio characteristics and economic conditions and expectations as of January 1, 2023, we recorded a combined pre-tax increase of $3,059 to the ACL and reserve for unfunded commitments on January 1, 2023 upon the adoption of ASU 2016-13; this implementation resulted in a reduction to retained earnings of $2,417, net of tax, as of January 1, 2023. In connection with the adoption of ASC 326, we revised certain accounting policies and implemented certain accounting policy elections, which are included in “Note 1 – Significant Accounting Policies” of our interim condensed consolidated financial statements.

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 2023. 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 2022 consolidated financial statements have been reclassified to conform to the 2023 presentation. Operating results for periods after January 1, 2023 are presented in accordance with ASC 326 while prior period amounts continue to be reported in accordance with previously applicable standards and the accounting policies described in our Annual Report on Form 10-K for the year ended December 31, 2022. In addition, the adoption of ASC 326 requires enhanced disclosures related to the significant estimates and judgments used in estimating credit losses.

Subsequent Events

We evaluated subsequent events after June 30, 2023 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 June 30, 2023 and the date our interim condensed consolidated financial statements were issued.

Table of Contents

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:


	June 30 2023			March 31 2023			December 31 2022			September 30 2022			June 30 2022
INCOME STATEMENT DATA
Interest income	$	19,495		$	18,595		$	17,915		$	17,019		$	16,102
Interest expense	4,816			3,244			1,643			1,216			1,175
Net interest income	14,679			15,351			16,272			15,803			14,927
Provision for credit losses	196			41			(57)			18			485
Noninterest income	3,604			3,293			3,272			3,252			3,595
Noninterest expenses	12,539			12,198			11,922			11,917			11,661
Federal income tax expense	918			1,084			1,357			1,233			1,081
Net income	$	4,630		$	5,321		$	6,322		$	5,887		$	5,295
PER SHARE
Basic earnings	$	0.62		$	0.70		$	0.84		$	0.78		$	0.70
Diluted earnings	$	0.61		$	0.70		$	0.83		$	0.77		$	0.69
Dividends	$	0.28		$	0.28		$	0.28		$	0.27		$	0.27
Tangible book value	$	18.69		$	19.24		$	18.25		$	16.96		$	18.85
Quoted market value
High	$	26.00		$	25.10		$	24.02		$	24.95		$	26.25
Low	$	19.13		$	22.08		$	21.00		$	21.39		$	23.00
Close (1)	$	20.50		$	24.80		$	23.50		$	21.40		$	24.80
Common shares outstanding (1)	7,496,826			7,540,015			7,559,421			7,564,348			7,553,113
PERFORMANCE RATIOS
Return on average total assets	0.91		%	1.04		%	1.24		%	1.13		%	1.04		%
Return on average shareholders' equity	9.47		%	11.35		%	14.01		%	12.13		%	10.83		%
Return on average tangible shareholders' equity	12.58		%	15.28		%	19.14		%	16.15		%	14.38		%
Net interest margin yield (FTE)	3.11		%	3.22		%	3.43		%	3.28		%	3.16		%
BALANCE SHEET DATA (1)
Gross loans	$	1,334,402		$	1,270,651		$	1,264,173		$	1,236,151		$	1,271,910
AFS securities	$	530,497		$	568,650		$	580,481		$	581,233		$	557,590
Total assets	$	2,042,448		$	2,084,624		$	2,030,267		$	2,063,977		$	2,048,373
Deposits	$	1,714,948		$	1,813,528		$	1,744,275		$	1,791,033		$	1,759,866
Borrowed funds	$	121,392		$	61,262		$	87,016		$	81,704		$	86,450
Shareholders' equity	$	188,431		$	193,333		$	186,210		$	176,612		$	190,680
Gross loans to deposits	77.81		%	70.07		%	72.48		%	69.02		%	72.27		%
ASSETS UNDER MANAGEMENT (1)
Loans sold with servicing retained	$	254,934		$	259,512		$	264,206		$	268,879		$	273,294
Assets managed by Isabella Wealth	$	593,530		$	571,453		$	513,918		$	464,136		$	454,535
Total assets under management	$	2,890,912		$	2,915,589		$	2,808,391		$	2,796,992		$	2,776,202
ASSET QUALITY (1)
Nonperforming loans to gross loans	0.04		%	0.04		%	0.04		%	0.05		%	0.05		%
Nonperforming assets to total assets	0.05		%	0.05		%	0.05		%	0.04		%	0.05		%
ACL to gross loans	0.96		%	0.99		%	0.78		%	0.78		%	0.76		%
CAPITAL RATIOS (1)
Shareholders' equity to assets	9.23		%	9.27		%	9.17		%	8.56		%	9.31		%
Tier 1 leverage	8.70		%	8.58		%	8.61		%	8.44		%	8.38		%
Common equity tier 1 capital	12.39		%	12.71		%	12.91		%	12.92		%	12.44		%
Tier 1 risk-based capital	12.39		%	12.71		%	12.91		%	12.92		%	12.44		%
Total risk-based capital	15.37		%	15.77		%	15.79		%	15.85		%	15.33		%

(1) At end of period

Table of Contents

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


	June 30 2023			June 30 2022			June 30 2021
INCOME STATEMENT DATA
Interest income	$	38,090		$	30,864		$	29,930
Interest expense	8,060			2,458			4,016
Net interest income	30,030			28,406			25,914
Provision for credit losses	237			522			(492)
Noninterest income	6,897			7,142			6,847
Noninterest expenses	24,737			22,981			21,312
Federal income tax expense	2,002			2,016			1,922
Net income	$	9,951		$	10,029		$	10,019
PER SHARE
Basic earnings	$	1.32		$	1.33		$	1.26
Diluted earnings	$	1.31		$	1.31		$	1.24
Dividends	$	0.56		$	0.54		$	0.54
Tangible book value	$	18.69		$	18.85		$	21.73
Quoted market value
High	$	26.00		$	26.25		$	23.90
Low	$	19.13		$	23.00		$	19.45
Close (1)	$	20.50		$	24.80		$	23.00
Common shares outstanding (1)	7,496,826			7,553,113			7,946,658
PERFORMANCE RATIOS
Return on average total assets	0.97		%	0.98		%	1.00		%
Return on average shareholders' equity	10.39		%	9.89		%	9.06		%
Return on average tangible shareholders' equity	13.89		%	13.00		%	11.61		%
Net interest margin yield (FTE)	3.17		%	3.01		%	2.88		%
BALANCE SHEET DATA (1)
Gross loans	$	1,334,402		$	1,271,910		$	1,206,663
AFS securities	$	530,497		$	557,590		$	448,454
Total assets	$	2,042,448		$	2,048,373		$	2,031,407
Deposits	$	1,714,948		$	1,759,866		$	1,636,506
Borrowed funds	$	121,392		$	86,450		$	161,395
Shareholders' equity	$	188,431		$	190,680		$	220,990
Gross loans to deposits	77.81		%	72.27		%	73.73		%
ASSETS UNDER MANAGEMENT (1)
Loans sold with servicing retained	$	254,934		$	273,294		$	290,033
Assets managed by Isabella Wealth	$	593,530		$	454,535		$	493,287
Total assets under management	$	2,890,912		$	2,776,202		$	2,814,727
ASSET QUALITY (1)
Nonperforming loans to gross loans	0.04		%	0.05		%	0.28		%
Nonperforming assets to total assets	0.05		%	0.05		%	0.19		%
ACL to gross loans	0.96		%	0.76		%	0.78		%
CAPITAL RATIOS (1)
Shareholders' equity to assets	9.23		%	9.31		%	10.88		%
Tier 1 leverage	8.70		%	8.38		%	8.46		%
Common equity tier 1 capital	12.39		%	12.44		%	13.81		%
Tier 1 risk-based capital	12.39		%	12.44		%	13.81		%
Total risk-based capital	15.37		%	15.33		%	17.00		%

(1) At end of period

Table of Contents

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
	June 30, 2023						March 31, 2023						June 30, 2022
	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)	$	1,300,593	$	15,931	4.90	%	$	1,268,269	$	14,889	4.70	%	$	1,259,573	$	13,179	4.19	%
Taxable investment securities	485,897		2,356		1.94	%	504,889		2,471		1.96	%	475,010		2,027		1.71	%
Nontaxable investment securities	97,755		946		3.87	%	106,240		1,021		3.84	%	109,367		975		3.57	%
Fed funds sold	4		—		4.70	%	17		—		4.50	%	6		—		1.47	%
Other	37,664		517		5.49	%	60,583		486		3.21	%	77,176		192		1.00	%
Total earning assets	1,921,913		19,750		4.11	%	1,939,998		18,867		3.89	%	1,921,132		16,373		3.41	%
NONEARNING ASSETS
Allowance for credit losses	(12,759)						(12,660)						(9,288)
Cash and demand deposits due from banks	24,807						25,039						22,838
Premises and equipment	26,401						25,864						24,269
Accrued income and other assets	80,374						71,063						84,590
Total assets	$	2,040,736					$	2,049,304					$	2,043,541
INTEREST BEARING LIABILITIES
Interest bearing demand deposits	$	348,341	$	194	0.22	%	$	379,717	$	146	0.15	%	$	375,123	$	56	0.06	%
Savings deposits	628,673		1,849		1.18	%	645,987		1,466		0.91	%	627,916		171		0.11	%
Time deposits	303,117		2,066		2.73	%	267,463		1,217		1.82	%	274,284		627		0.91	%
Federal funds purchased and repurchase agreements	35,495		171		1.93	%	39,709		149		1.50	%	46,029		8		0.07	%
FHLB advances	20,404		270		5.29	%	—		—		—	%	10,000		47		1.88	%
Subordinated debt, net of unamortized issuance costs	29,275		266		3.63	%	29,253		266		3.64	%	29,188		266		3.65	%
Total interest bearing liabilities	1,365,305		4,816		1.41	%	1,362,129		3,244		0.95	%	1,362,540		1,175		0.34	%
NONINTEREST BEARING LIABILITIES
Demand deposits	462,953						486,491						470,139
Other	16,906						13,094						15,237
Shareholders’ equity	195,572						187,590						195,625
Total liabilities and shareholders’ equity	$	2,040,736					$	2,049,304					$	2,043,541
Net interest income (FTE)			$	14,934					$	15,623					$	15,198
Net yield on interest earning assets (FTE)					3.11	%					3.22	%					3.16	%

(1) Includes loans and mortgage loans AFS

Table of Contents


	Six Months Ended
	June 30, 2023						June 30, 2022
	Average Balance		Tax Equivalent Interest		Average Yield / Rate		Average Balance		Tax Equivalent Interest		Average Yield / Rate
INTEREST EARNING ASSETS
Loans (1)	$	1,284,520	$	30,820	4.80	%	$	1,247,746	$	25,557	4.10	%
Taxable investment securities	495,340		4,827		1.95	%	448,405		3,642		1.62	%
Nontaxable investment securities	101,973		1,967		3.86	%	105,507		1,895		3.59	%
Fed funds sold	10		—		4.77	%	4		—		1.12	%
Other	49,059		1,003		4.09	%	120,027		301		0.50	%
Total earning assets	1,930,902		38,617		4.00	%	1,921,689		31,395		3.27	%
NONEARNING ASSETS
Allowance for credit losses	(12,709)						(9,209)
Cash and demand deposits due from banks	24,918						24,827
Premises and equipment	26,132						24,364
Accrued income and other assets	75,746						93,648
Total assets	$	2,044,989					$	2,055,319
INTEREST BEARING LIABILITIES
Interest bearing demand deposits	$	363,942	$	340	0.19	%	$	379,275	$	106	0.06	%
Savings deposits	637,281		3,315		1.04	%	621,661		330		0.11	%
Time deposits	285,389		3,283		2.30	%	282,172		1,354		0.96	%
Federal funds purchased and repurchase agreements	37,656		320		1.70	%	47,535		17		0.07	%
FHLB advances	10,193		270		5.30	%	12,431		119		1.91	%
Subordinated debt, net of unamortized issuance costs	29,264		532		3.64	%	29,177		532		3.65	%
Total interest bearing liabilities	1,363,725		8,060		1.18	%	1,372,251		2,458		0.36	%
NONINTEREST BEARING LIABILITIES
Demand deposits	474,656						464,271
Other	15,005						16,061
Shareholders’ equity	191,603						202,736
Total liabilities and shareholders’ equity	$	2,044,989					$	2,055,319
Net interest income (FTE)			$	30,557					$	28,937
Net yield on interest earning assets (FTE)					3.17	%					3.01	%

(1) Includes loans and mortgage loans AFS

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

Table of Contents

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 June 30, 2023 Compared to March 31, 2023 Increase (Decrease) Due to						Three Months Ended June 30, 2023 Compared to June 30, 2022 Increase (Decrease) Due to						Six Months Ended June 30, 2023 Compared to June 30, 2022 Increase (Decrease) Due to
	Volume		Rate		Net		Volume		Rate		Net		Volume		Rate		Net
Changes in interest income
Loans	$	386	$	656	$	1,042	$	441	$	2,311	$	2,752	$	772	$	4,491	$	5,263
Taxable investment securities	(92)		(23)		(115)		47		282		329		408		777		1,185
Nontaxable investment securities	(82)		7		(75)		(108)		79		(29)		(65)		137		72
Other	(229)		260		31		(144)		469		325		(275)		977		702
Total changes in interest income	(17)		900		883		236		3,141		3,377		840		6,382		7,222
Changes in interest expense
Interest bearing demand deposits	(13)		61		48		(4)		142		138		(4)		238		234
Savings deposits	(40)		423		383		—		1,678		1,678		8		2,977		2,985
Time deposits	179		670		849		72		1,367		1,439		16		1,913		1,929
Federal funds purchased and repurchase agreements	(17)		39		22		(2)		165		163		(4)		307		303
FHLB advances	270		—		270		81		142		223		(25)		176		151
Subordinated debt, net of unamortized issuance costs	—		—		—		1		(1)		—		2		(2)		—
Total changes in interest expense	379		1,193		1,572		148		3,493		3,641		(7)		5,609		5,602
Net change in interest margin (FTE)	$	(396)	$	(293)	$	(689)	$	88	$	(352)	$	(264)	$	847	$	773	$	1,620

The interest rate increases during 2022 and the first half of 2023 have alleviated much of the pressure placed on our net interest margin. Over the past several quarters, rising rates on deposit accounts has slowed growth in our net interest margin. With the potential for additional rate increases during the remainder of the year, we should see improvement in net yield on interest earning assets but at slower rates than recent periods.


	Average Yield / Rate for the Three-Month Periods Ended:
	June 30 2023		March 31 2023		December 31 2022		September 30 2022		June 30 2022
Total earning assets	4.11	%	3.89	%	3.77	%	3.53	%	3.41	%
Total interest bearing liabilities	1.41	%	0.95	%	0.49	%	0.35	%	0.34	%
Net yield on interest earning assets (FTE)	3.11	%	3.22	%	3.43	%	3.28	%	3.16	%


	Quarter to Date Net Interest Income (FTE)
	June 30 2023		March 31 2023		December 31 2022		September 30 2022		June 30 2022
Total interest income (FTE)	$	19,750	$	18,867	$	18,183	$	17,276	$	16,373
Total interest expense	4,816		3,244		1,643		1,216		1,175
Net interest income (FTE)	$	14,934	$	15,623	$	16,540	$	16,060	$	15,198

Table of Contents

Past Due and Nonaccrual Loans

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


	Total Past Due and Nonaccrual Loans
	June 30 2023			March 31 2023			December 31 2022			September 30 2022			June 30 2022
Commercial and industrial	$	25		$	291		$	307		$	348		$	350
Commercial real estate	2,495			2,844			7,197			2,399			82
Agricultural	218			588			234			574			271
Residential real estate	838			2,365			3,333			507			345
Consumer	103			43			59			180			457
Total	$	3,679		$	6,131		$	11,130		$	4,008		$	1,505
Total past due and nonaccrual loans to gross loans	0.28		%	0.48		%	0.88		%	0.32		%	0.12		%

The increase in past due and nonaccrual loans within the commercial and residential loan portfolios was the result of one past due relationship, which has since improved. Therefore, we do not believe the recent increase is an indicator of credit deterioration.

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:


	June 30 2023			March 31 2023			December 31 2022			September 30 2022			June 30 2022
Commercial and industrial	$	17		$	20		$	22		$	100		$	102
Commercial real estate	—			57			74			78			82
Agricultural	218			232			234			266			271
Residential real estate	179			179			127			136			85
Total	$	414		$	488		$	457		$	580		$	540
Nonaccrual loans as a % of loans at end of period	0.03		%	0.04		%	0.04		%	0.05		%	0.04		%

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 3 – Loans and ACL” of our interim condensed consolidated financial statements.

Nonperforming Assets

The following table summarizes our nonperforming assets as of:


	June 30 2023			March 31 2023			December 31 2022			September 30 2022			June 30 2022
Nonaccrual loans	$	414		$	488		$	457		$	580		$	540
Accruing loans past due 90 days or more	133			—			—			21			119
Total nonperforming loans	547			488			457			601			659
Foreclosed assets	405			414			439			240			241
Debt securities	77			77			77			77			131
Total nonperforming assets	$	1,029		$	979		$	973		$	918		$	1,031
Nonperforming loans as a % of total loans	0.04		%	0.04		%	0.04		%	0.05		%	0.05		%
Nonperforming assets as a % of total assets	0.05		%	0.05		%	0.05		%	0.04		%	0.05		%

Table of Contents

ACL - Loans

The viability of any financial institution is ultimately determined by its management of credit risk. Loans represent our single largest concentration of risk. The ACL is our estimation of expected losses within the existing loan portfolio. We allocate the ACL throughout the loan portfolio based on our assessment of the underlying risks associated within each loan segment. Our assessments include allocations based on specific valuation allowances, historical charge-offs, internally assigned credit risk ratings, past due and nonaccrual balances, historical loss percentages, and other credit trends and risk characteristics, including current conditions and reasonable and supportable forecasts about the future.

Upon the adoption of ASC 326 on January 1, 2023, the total amount of the allowance for credit losses on loans estimated using the CECL methodology increased $2,744 compared to the total amount of the allowance for credit losses on loans estimated as of December 31, 2022 using the prior incurred loss methodology. The manner in which credit loss allowances are allocated to the individual portfolio segments was partly impacted by a change in the way the underlying loans within each segment are pooled for modeling purposes. The impact of varying economic conditions and portfolio risk factors are now a component of the credit loss models applied to each modeling pool. In that regard, the amounts allocated to the underlying pools of loans within each portfolio segment more directly reflect the economic variables and portfolio stress factors that correlate with credit losses within each portfolio. Under the prior methodology, allocations in excess of those derived from historical loss rates were recognized as unallocated. Nonetheless, despite fluctuations in the allocation of portions of the overall allowance to the various portfolio segments, the entire allowance is available to absorb any credit losses within the entire loan portfolio.

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


	Three Months Ended June 30						Six Months Ended June 30
	2023			2022			2023			2022
Allowance at beginning of period	$	12,640		$	9,204		$	9,850		$	9,103
Adoption of ASC 326	—			—			2,744			—
Charge-offs
Commercial and industrial	—			3			—			3
Commercial real estate	—			—			—			—
Agricultural	4			—			4			—
Residential real estate	—			—			2			—
Consumer	88			103			187			194
Total charge-offs	92			106			193			197
Recoveries
Commercial and industrial	4			26			4			40
Commercial real estate	10			—			20			—
Agricultural	2			1			6			3
Residential real estate	25			42			49			70
Consumer	54			48			126			159
Total recoveries	95			117			205			272
Net loan charge-offs (recoveries)	(3)			(11)			(12)			(75)
Provision for credit losses	190			485			227			522
Allowance at end of period	$	12,833		$	9,700		$	12,833		$	9,700
Net loan charge-offs (recoveries) to average loans outstanding	0.00		%	0.00		%	0.00		%	(0.01)		%

Table of Contents

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


	June 30 2023			March 31 2023			December 31 2022			September 30 2022			June 30 2022
Total charge-offs	$	92		$	101		$	249		$	173		$	106
Total recoveries	95			110			479			132			117
Net loan charge-offs (recoveries)	(3)			(9)			(230)			41			(11)
Net loan charge-offs (recoveries) to average loans outstanding	0.00		%	0.00		%	(0.02)		%	0.00		%	0.00		%
Provision for credit losses	$	190		$	37		$	(57)		$	18		$	485
Provision for credit losses to average loans outstanding	0.01		%	0.00		%	0.00		%	—		%	0.04		%
ACL	$	12,833		$	12,640		$	9,850		$	9,677		$	9,700
ACL as a % of loans at end of period	0.96		%	0.99		%	0.78		%	0.78		%	0.76		%
ACL as a % of nonaccrual loans	3,099.76		%	2,590.16		%	2,155.36		%	1,668.45		%	1,796.30		%

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


	June 30 2023			March 31 2023			December 31 2022			September 30 2022			June 30 2022
ACL
Individually evaluated	$	—		$	—		$	451		$	474		$	515
Collectively evaluated	12,833			12,640			9,399			9,203			9,185
Total	$	12,833		$	12,640		$	9,850		$	9,677		$	9,700
ACL to gross loans
Individually evaluated	0.00		%	0.00		%	0.04		%	0.04		%	0.04		%
Collectively evaluated	0.96		%	0.99		%	0.74		%	0.74		%	0.72		%
Total	0.96		%	0.99		%	0.78		%	0.78		%	0.76		%

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

For further discussion of the allocation of the ACL, see “Note 3 – Loans and ACL” of our interim condensed consolidated financial statements.

Table of Contents

Noninterest Income and Noninterest Expenses

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



	Three Months Ended June 30
					Change
	2023		2022		$		%
Service charges and fees
ATM and debit card fees	$	1,244	$	1,202	$	42	3.49	%
Service charges and fees on deposit accounts	588		631		(43)		(6.81)	%
Freddie Mac servicing fee	162		167		(5)		(2.99)	%
Net OMSR income (loss)	(41)		213		(254)		(119.25)	%
Other fees for customer services	94		71		23		32.39	%
Total service charges and fees	2,047		2,284		(237)		(10.38)	%
Wealth management fees	981		784		197		25.13	%
Earnings on corporate owned life insurance policies	226		222		4		1.80	%
Net gain on sale of mortgage loans	56		170		(114)		(67.06)	%
All other	294		135		159		117.78	%
Total noninterest income	$	3,604	$	3,595	$	9	0.25	%


	Six Months Ended June 30
					Change
	2023		2022		$		%
Service charges and fees
ATM and debit card fees	$	2,404	$	2,295	$	109	4.75	%
Service charges and fees on deposit accounts	1,199		1,240		(41)		(3.31)	%
Freddie Mac servicing fee	321		338		(17)		(5.03)	%
Net OMSR income (loss)	(77)		477		(554)		(116.14)	%
Other fees for customer services	178		143		35		24.48	%
Total service charges and fees	4,025		4,493		(468)		(10.42)	%
Wealth management fees	1,767		1,538		229		14.89	%
Earnings on corporate owned life insurance policies	452		432		20		4.63	%
Net gain on sale of mortgage loans	123		394		(271)		(68.78)	%
All other	530		285		245		85.96	%
Total noninterest income	$	6,897	$	7,142	$	(245)	(3.43)	%

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 2022. A decline in volume of originated loans and the balance of loans serviced led to OMSR losses during the first half of 2023. Income during 2023 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. Loan demand declined in the first half of 2023 compared to the prior year. With fewer mortgage loans being originated and sold, we've experienced a decline in net gain on sale of mortgage loans. Demand is expected to continue to be slow during the remainder of 2023 due to the continual rise in interest rates and as a result, net gain on sale of mortgage loans is not expected to exceed 2022 levels.

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

Table of Contents

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



	Three Months Ended June 30
					Change
	2023		2022		$		%
Compensation and benefits	$	6,561	$	6,037	$	524	8.68	%
Furniture and equipment	1,613		1,442		171		11.86	%
Occupancy	993		929		64		6.89	%
Other
Audit, consulting, and legal fees	557		605		(48)		(7.93)	%
ATM and debit card fees	409		508		(99)		(19.49)	%
Other losses	425		233		192		82.40	%
Marketing costs	240		364		(124)		(34.07)	%
Memberships and subscriptions	230		207		23		11.11	%
FDIC insurance premiums	233		131		102		77.86	%
Donations and community relations	256		139		117		84.17	%
Loan underwriting fees	216		215		1		0.47	%
Director fees	198		187		11		5.88	%
All other	608		664		(56)		(8.43)	%
Total other noninterest expenses	3,372		3,253		119		3.66	%
Total noninterest expenses	$	12,539	$	11,661	$	878	7.53	%


	Six Months Ended June 30
					Change
	2023		2022		$		%
Compensation and benefits	$	13,150	$	12,111	$	1,039	8.58	%
Furniture and equipment	3,210		2,892		318		11.00	%
Occupancy	1,998		1,895		103		5.44	%
Other
Audit, consulting, and legal fees	1,092		1,154		(62)		(5.37)	%
ATM and debit card fees	809		942		(133)		(14.12)	%
Other losses	572		316		256		81.01	%
Marketing costs	485		603		(118)		(19.57)	%
Memberships and subscriptions	470		424		46		10.85	%
FDIC insurance premiums	461		256		205		80.08	%
Donations and community relations	440		426		14		3.29	%
Loan underwriting fees	431		397		34		8.56	%
Director fees	402		388		14		3.61	%
All other	1,217		1,177		40		3.40	%
Total other noninterest expenses	6,379		6,083		296		4.87	%
Total noninterest expenses	$	24,737	$	22,981	$	1,756	7.64	%

The increase in compensation and benefits was the result of employee merit increases and staff additions for a new branch, opened March of 2023. Compensation and benefits expense for the remainder of 2023 is expected to exceed 2022 levels.

Furniture and equipment expense has increased due to an initiative towards leased ATMs, implemented during the second half of 2022, leading to increased equipment expense. As a result of this initiative, overall expense for 2023 is expected to exceed expense from 2022.

During the second quarter of 2023, we recognized a loss related to the settlement of a business matter. No further losses are anticipated related to this matter. As such, other losses for the remainder of 2023 are expected to approximate 2022 levels.

Table of Contents

The decline in Marketing cost is due to an implementation of a new and enhanced online banking platform that took place in the second quarter of 2022.

The FDIC adopted a final rule, applicable to all insured depository institutions, to increase initial base deposit insurance assessment rate schedules uniformly by 2 basis point, beginning in the first quarterly assessment period of 2023. The increase in assessment rate schedules is intended to increase the likelihood that the reserve ratio of the Deposit Insurance fund reaches the statutory minimum of 1.35 percent by the statutory deadline of September 30, 2028. FDIC expense for the remainder of 2023 will continue to exceed 2022 levels.

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

Analysis of Changes in Financial Condition


	June 30 2023		December 31 2022		$ Change		% Change (unannualized)
ASSETS
Cash and cash equivalents	$	29,880	$	38,924	$	(9,044)	(23.24)	%
AFS securities
Amortized cost of AFS securities	574,716		625,605		(50,889)		(8.13)	%
Unrealized gains (losses) on AFS securities	(44,219)		(45,124)		905		N/M
AFS securities	530,497		580,481		(49,984)		(8.61)	%
Mortgage loans AFS	362		379		(17)		(4.49)	%
Loans
Loans	1,334,402		1,264,173		70,229		5.56	%
Less allowance for credit losses	12,833		9,850		2,983		30.28	%
Net loans	1,321,569		1,254,323		67,246		5.36	%
Premises and equipment	26,383		25,553		830		3.25	%
Corporate owned life insurance policies	33,433		32,988		445		1.35	%
Equity securities without readily determinable fair values	15,746		15,746		—		—	%
Goodwill and other intangible assets	48,285		48,287		(2)		—	%
Accrued interest receivable and other assets	36,293		33,586		2,707		8.06	%
TOTAL ASSETS	$	2,042,448	$	2,030,267	$	12,181	0.60	%
LIABILITIES AND SHAREHOLDERS’ EQUITY
Liabilities
Deposits	$	1,714,948	$	1,744,275	$	(29,327)	(1.68)	%
Borrowed funds	121,392		87,016		34,376		39.51	%
Accrued interest payable and other liabilities	17,677		12,766		4,911		38.47	%
Total liabilities	1,854,017		1,844,057		9,960		0.54	%
Shareholders’ equity	188,431		186,210		2,221		1.19	%
TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY	$	2,042,448	$	2,030,267	$	12,181	0.60	%

As shown above, total assets increased $12,181 from December 31, 2022, driven primarily by an increase in loans, partially offset by a decline in AFS securities. Total loans grew $70,229, largely driven by an increase in advance to mortgage brokers and the commercial and consumer portfolios, offset by a decline in the agricultural portfolio. With the decline in deposits, loan growth was funded by maturities and principal paydowns within the AFS securities portfolio, as well as short-term borrowed funds.

Table of Contents

The following table outlines the changes in loan balances:


	June 30 2023		December 31 2022		$ Change		% Change (unannualized)
Commercial and industrial	$	194,914	$	178,428	$	16,486	9.24	%
Commercial real estate	564,254		566,012		(1,758)		(0.31)	%
Advances to mortgage brokers	39,099		—		39,099		N/M
Agricultural	96,689		104,985		(8,296)		(7.90)	%
Residential real estate	343,474		336,694		6,780		2.01	%
Consumer	95,972		78,054		17,918		22.96	%
Total	$	1,334,402	$	1,264,173	$	70,229	5.56	%

The following table displays loan balances as of:


	June 30 2023		March 31 2023		December 31 2022		September 30 2022		June 30 2022
Commercial and industrial	$	194,914	$	189,185	$	178,428	$	180,124	$	175,674
Commercial real estate	564,254		566,410		566,012		552,399		559,602
Advances to mortgage brokers	39,099		—		—		1,484		37,291
Agricultural	96,689		94,760		104,985		97,527		94,726
Residential real estate	343,474		336,186		336,694		330,232		329,795
Consumer	95,972		84,110		78,054		74,385		74,822
Total	$	1,334,402	$	1,270,651	$	1,264,173	$	1,236,151	$	1,271,910

We've experienced an increase in commercial loan demand in recent periods, with demand expected to continue during the remainder of the year. During the second quarter of 2023, we resumed participation in advances to mortgage brokers. Our participation in this mortgage purchase program paused during most of 2022 and the first quarter of 2023 due to low mortgage volume. Continued growth in the agricultural portfolio is expected during the remainder of 2023, but not at the same level of growth experienced in 2022 as the result of the competitive lending environment. Residential mortgage lending activities have slowed over the last year as a result of rising interest rates. As interest rates are expected to remain high throughout 2023, growth in residential loans is anticipated to continue but at a slower pace. We've experienced steady growth in the consumer portfolio and expect this trend to continue during the remainder of 2023.

The following table outlines the changes in deposit balances:


	June 30 2023		December 31 2022		$ Change		% Change (unannualized)
Noninterest bearing demand deposits	$	458,845	$	494,346	$	(35,501)	(7.18)	%
Interest bearing demand deposits	335,922		372,155		(36,233)		(9.74)	%
Savings deposits	606,644		625,734		(19,090)		(3.05)	%
Certificates of deposit	313,288		251,541		61,747		24.55	%
Internet certificates of deposit	249		499		(250)		(50.10)	%
Total	$	1,714,948	$	1,744,275	$	(29,327)	(1.68)	%

The following table displays deposit balances as of:


	June 30 2023		March 31 2023		December 31 2022		September 30 2022		June 30 2022
Noninterest bearing demand deposits	$	458,845	$	478,829	$	494,346	$	510,127	$	488,110
Interest bearing demand deposits	335,922		383,602		372,155		368,537		370,284
Savings deposits	606,644		662,495		625,734		651,129		635,397
Certificates of deposit	313,288		288,103		251,541		260,741		265,477
Internet certificates of deposit	249		499		499		499		598
Total	$	1,714,948	$	1,813,528	$	1,744,275	$	1,791,033	$	1,759,866

Total deposits have fluctuated significantly over the past 12 months with an overall decline in non-contractual deposits, such as demand and savings deposits. We have experienced significant growth in certificates of deposit during the first half of 2023

Table of Contents

as a result of the recent increase in the interest rate environment. We expect interest rates to continue to rise in 2023 and anticipate a continuation in the shift of customers moving to higher interest earning products.

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


	June 30 2023		March 31 2023		December 31 2022		September 30 2022		June 30 2022
U.S. Treasury	$	209,353	$	212,086	$	208,701	$	206,791	$	214,474
States and political subdivisions	95,242		108,719		117,512		114,000		119,649
Auction rate money market preferred	2,637		2,716		2,342		2,479		2,497
Mortgage-backed securities	35,532		37,797		39,070		41,042		45,796
Collateralized mortgage obligations	180,996		200,252		205,728		209,720		167,572
Corporate	6,737		7,080		7,128		7,201		7,602
Total	$	530,497	$	568,650	$	580,481	$	581,233	$	557,590

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, which occurred during the second quarter of 2023. The increase in borrowings during the second quarter was the result of short-term FHLB advances, with maturities within three weeks after June 30, 2023.

The following table displays borrowed funds balances as of:


	June 30 2023		March 31 2023		December 31 2022		September 30 2022		June 30 2022
Securities sold under agreements to repurchase without stated maturity dates	$	37,102	$	31,995	$	57,771	$	52,479	$	47,247
FHLB advances	55,000		—		—		—		10,000
Fixed rate at 3.25% to floating, due 2031	29,290		29,267		29,245		29,225		29,203
Total	$	121,392	$	61,262	$	87,016	$	81,704	$	86,450

In 2021, we completed a private placement of $30,000 in aggregate principal amount of 3.25% Fixed-to-Floating Rate Subordinated Notes due 2031 (the "Notes"). The Notes will initially bear a fixed interest rate of 3.25% until June 15, 2026, after which time until maturity on June 15, 2031, the interest rate will reset quarterly to an annual floating rate equal to the then-current 3-month SOFR plus 256 basis points. 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.

Table of Contents

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 37,983 shares or $846 of common stock during the first six months of 2023, as compared to 36,238 shares or $907 of common stock during the same period in 2022. 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 $428 and $249 during the six-month periods ended June 30, 2023 and 2022, respectively. We also grant restricted stock awards pursuant to the RSP. Pursuant to this plan, we increased shareholders’ equity by $128 during the first six months of 2023, as compared to $77 during the same period in 2022.

We have publicly announced a common stock repurchase plan. Pursuant to this plan, we repurchased 100,578 shares or $2,409 of common stock during the first six months of 2023 and 15,766 shares or $397 during the first six months of 2022. As of June 30, 2023, we were authorized to repurchase up to an additional 319,248 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:


	June 30, 2023						December 31, 2022
	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	12.39	%	7.00	%	6.50	%	12.91	%	7.00	%	6.50	%
Tier 1 capital	12.39	%	8.50	%	8.00	%	12.91	%	8.50	%	8.00	%
Total capital	15.37	%	10.50	%	10.00	%	15.79	%	10.50	%	10.00	%
Tier 1 leverage	8.70	%	4.00	%	5.00	%	8.61	%	4.00	%	5.00	%

Total capital includes Tier 1 capital and Tier 2 capital. Tier 2 capital includes a permissible portion of the allowances for loan and lease losses and subordinated debt, net of unamortized issuance costs. There are no significant regulatory constraints placed on our capital. At June 30, 2023, 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 $410,714 or 20.11% of assets as of June 30, 2023, compared to $488,981 or 24.08% as of December 31, 2022. The decrease in the amount and percentage of primary liquidity is a direct result of an increase in loans, decrease in market deposits, and a decrease in unencumbered AFS securities, collateralizing non-market funding. Liquidity is important for financial institutions because of their need to meet loan funding commitments, depositor withdrawal requests, and various other commitments including expansion of operations, investment opportunities, and payment of cash dividends. 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. 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 June 30, 2023, we had available lines of credit of $312,211.

Table of Contents

The frequency and complexity of our liquidity stress testing has increased since early 2020 and continues to evolve due to economic uncertainly as a result of COVID-19 and changes within the interest rate and economic environment. Our liquidity position remained strong at June 30, 2023, which is illustrated in the following table:


	June 30 2023
Total cash and cash equivalents	$	29,880
Available lines of credit
Fed funds lines with correspondent banks	93,000
FHLB borrowings	186,284
FRB Discount Window	27,927
Other lines of credit	5,000
Total available lines of credit	312,211
Unencumbered lendable value of FRB collateral, estimated1	360,000
Total cash and liquidity	$	702,091

(1)Includes estimated unencumbered lendable value of FHLB collateral of $260,000

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


	2023		2022		$ Variance
Net cash provided by (used in) operating activities	$	14,941	$	14,780	$	161
Net cash provided by (used in) investing activities	(22,343)		(70,681)		48,338
Net cash provided by (used in) financing activities	(1,642)		32,588		(34,230)
Increase (decrease) in cash and cash equivalents	(9,044)		(23,313)		14,269
Cash and cash equivalents January 1	38,924		105,330		(66,406)
Cash and cash equivalents June 30	$	29,880	$	82,017	$	(52,137)

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, collateral dependent 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 10 – 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

Table of Contents

to more accurately reflect their repricing behavior. Key assumptions in the simulation analysis include prepayments on loans, 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.

Gap analysis is also utilized as a method to measure interest rate sensitivity. Interest rate sensitivity is determined by the amount of earning assets and interest bearing liabilities repricing within a specific time period, and their relative sensitivity to a change in interest rates. We strive to achieve reasonable stability in the net interest margin through periods of changing interest rates. One specific focus of interest rate sensitivity is the loan portfolio, primarily with commercial and agricultural loans..

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 June 30, 2023, 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 June 30, 2023, 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.

Table of Contents

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, 2022.

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 June 30, 2023, 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
March 31, 2023					380,547
April 1 - 30	47,490	$	24.87	47,490	333,057
May 1 - 31	7,727	20.32		7,727	325,330
June 1 - 30	6,082	21.70		6,082	319,248
June 30, 2023	61,299	$	23.98	61,299	319,248

Item 3. Defaults Upon Senior Securities.

Not applicable.

Item 4. Mine Safety Disclosures.

Not applicable.

Item 5. Other Information.

Not applicable.

Table of Contents

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.

Table of Contents

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:

July 28, 2023

/s/ Jae A. Evans

Jae A. Evans

President and Chief Executive Officer

(Principal Executive Officer)

Date:

July 28, 2023

/s/ Neil M. McDonnell

Neil M. McDonnell

Chief Financial Officer

(Principal Financial Officer)