Equibles

10-Q

ISABELLA BANK CORP (ISBA)

10-Q 2022-10-28 For: 2022-09-30
View Original
Added on April 07, 2026

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

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

For the quarterly period ended September 30, 2022

or

☐ 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 MI 48858
(Address of principal executive offices) (Zip code)

(989) 772-9471

(Registrant’s telephone number, including area code)

N/A

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

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

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

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

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

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

Large accelerated filer ☐ Accelerated filer ☐
Non-accelerated filer ☒ Smaller reporting company ☒
Emerging growth company ☐

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

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

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

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ISABELLA BANK CORPORATION

QUARTERLY REPORT ON FORM 10-Q

Table of Contents

PART I – FINANCIAL INFORMATION 4
Item 1. Financial Statements 4
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations 36
Item 3. Quantitative and Qualitative Disclosures About Market Risk 56
Item 4. Controls and Procedures 56
PART II – OTHER INFORMATION 56
Item 1. Legal Proceedings 57
Item 1A. Risk Factors 57
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds 57
Item 3. Defaults Upon Senior Securities 57
Item 4. Mine Safety Disclosures 57
Item 5. Other Information 57
Item 6. Exhibits 57
SIGNATURES 59

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Forward Looking Statements

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

Glossary of Acronyms and Abbreviations

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

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

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PART I – FINANCIAL INFORMATION

Item 1. Financial Statements.

INTERIM CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)

(Dollars in thousands)

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

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

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INTERIM CONDENSED CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)

(Dollars in thousands except per share amounts)

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

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

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INTERIM CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (UNAUDITED)

(Dollars in thousands)

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

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

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

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

(Dollars in thousands except per share amounts)

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

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

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INTERIM CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)

(Dollars in thousands)

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

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INTERIM CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (continued)

(Dollars in thousands)

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

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

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NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

(Dollars in thousands except per share amounts)

Note 1 – Basis of Presentation

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

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

Our accounting policies are materially the same as those discussed in Note 1 to the Consolidated Financial Statements included in our Annual Report on Form 10-K for the year ended December 31, 2021.

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

Note 2 – Accounting Standards Updates

Pending

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

In June 2016, ASU No. 2016-13 was issued and updated the measurement for credit losses for AFS debt securities and assets measured at amortized cost which include loans, trade receivables, and any other financial assets with the contractual right to receive cash. Current GAAP requires an “incurred loss” methodology for recognizing credit losses that delays recognition until it is probable a loss has been incurred. Under the incurred loss approach, entities are limited to a probable initial recognition threshold when credit losses are measured; an entity generally only considers past events and current conditions in measuring the incurred loss.

Under the new guidance, the incurred loss impairment methodology is replaced with a methodology that reflects current expected credit losses (CECL). This methodology requires consideration of a broader range of reasonable and supportable information to calculate credit loss estimates. The measurement of expected credit losses is based on relevant information about past events, including historical experience, current conditions, and reasonable and supportable forecasts that affect the collectability of the reported amount. An entity must use judgment in determining the relevant information and estimation methods that are appropriate in its circumstances which applies to assets measured either collectively or individually.

The update allows an entity to revert to historical loss information that is reflective of the contractual term (considering the effect of prepayments) for periods that are beyond the time frame for which the entity is able to develop reasonable and supportable forecasts. In addition, the disclosures of credit quality indicators in relation to the amortized cost of financing receivables, a current disclosure requirement, are further disaggregated by year of origination (or vintage). The vintage information will be useful for financial statement users to better assess changes in underwriting standards and credit quality trends in asset portfolios over time and the effect of those changes on credit losses.

Overall, the update will allow entities the ability to measure expected credit losses without the restriction of incurred or probable losses that exist under current GAAP. For users of the financial statements, the update requires disclosure of decision-useful information about the expected credit losses on financial instruments and other commitments to extend credit held by a reporting entity at each reporting date. The new authoritative guidance was originally effective for interim and annual periods beginning after December 15, 2019. Effective October 16, 2019, the FASB approved and issued changes to the implementation date of this guidance for some filers. As a smaller reporting company, as defined by the SEC, our implementation date was delayed from January 1, 2020 to January 1, 2023. Early adoption continues to be permissible under the revised implementation date.

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Since 2016, we have invested a considerable amount of effort toward this guidance. An internal committee was formed and is accountable for timely and accurate adoption of the guidance. A service provider that has focused on the ALLL for more than 10 years and serves hundreds of financial institutions was engaged to provide us with education, advisory, and a software solution exclusively related to the ACL. We run parallel processes to ensure we are ready to calculate, review, and report the ACL by the required implementation date.

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

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

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

Note 3 – AFS Securities

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

September 30, 2022
Amortized<br>Cost Gross<br>Unrealized<br>Gains Gross<br>Unrealized<br>Losses Fair<br>Value
U.S. Treasury $ 231,723 $ — $ 24,932 $ 206,791
States and political subdivisions 121,414 111 7,525 114,000
Auction rate money market preferred 3,200 — 721 2,479
Mortgage-backed securities 45,087 — 4,045 41,042
Collateralized mortgage obligations 223,181 — 13,461 209,720
Corporate 8,150 — 949 7,201
Total $ 632,755 $ 111 $ 51,633 $ 581,233
December 31, 2021
--- --- --- --- --- --- --- --- ---
Amortized<br>Cost Gross<br>Unrealized<br>Gains Gross<br>Unrealized<br>Losses Fair<br>Value
U.S. Treasury $ 212,379 $ — $ 2,676 $ 209,703
States and political subdivisions 116,836 4,457 88 121,205
Auction rate money market preferred 3,200 42 — 3,242
Mortgage-backed securities 54,710 1,438 — 56,148
Collateralized mortgage obligations 90,435 1,876 10 92,301
Corporate 8,150 19 167 8,002
Total $ 485,710 $ 7,832 $ 2,941 $ 490,601

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

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

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

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

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

September 30, 2022
Less Than Twelve Months Twelve Months or More
Gross<br>Unrealized<br>Losses Fair<br>Value Gross<br>Unrealized<br>Losses Fair<br>Value Total<br>Unrealized<br>Losses
U.S. Treasury $ 6,996 $ 62,985 $ 17,936 $ 143,806 $ 24,932
States and political subdivisions 4,192 57,140 3,333 42,925 7,525
Auction rate money market preferred — — 721 2,479 721
Mortgage-backed securities 4,045 41,042 — — 4,045
Collateralized mortgage obligations 13,461 209,720 — — 13,461
Corporate 232 1,768 717 5,433 949
Total $ 28,926 $ 372,655 $ 22,707 $ 194,643 $ 51,633
Number of securities in an unrealized loss position: 249 305 554
December 31, 2021
--- --- --- --- --- --- --- --- --- --- ---
Less Than Twelve Months Twelve Months or More
Gross<br>Unrealized<br>Losses Fair<br>Value Gross<br>Unrealized<br>Losses Fair<br>Value Total<br>Unrealized<br>Losses
U.S. Treasury $ 2,676 $ 209,703 $ — $ — $ 2,676
States and political subdivisions 88 9,674 — — 88
Collateralized mortgage obligations 10 11,165 — — 10
Corporate 167 6,283 — — 167
Total $ 2,941 $ 236,825 $ — $ — $ 2,941
Number of securities in an unrealized loss position: 40 — 40

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

As of September 30, 2022 and December 31, 2021, we conducted an analysis to determine whether any AFS securities currently in an unrealized loss position should be identified as other-than-temporarily impaired. Such analyses considered, among other factors, the following criteria:

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

•Is the investment credit rating below investment grade?

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

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

•Has the duration of the investment been extended?

Based on our analysis, which included the criteria outlined above and the fact that we have asserted that we do not have to sell any AFS securities in an unrealized loss position, we do not believe that the values of any AFS securities are other-than-temporarily impaired as of September 30, 2022 or December 31, 2021, with the exception of one municipal bond previously identified in 2016 which had no activity during the period.

Note 4 – Loans and ALLL

We grant commercial, agricultural, residential real estate, and consumer loans to customers situated primarily in Clare, Gratiot, Isabella, Mecosta, Midland, Montcalm, and Saginaw counties in Michigan. The ability of the borrowers to honor their repayment obligations is often dependent upon the real estate, agricultural, manufacturing, retail, gaming, tourism, health care, higher education, and general economic conditions of this region. Substantially all of our consumer and residential real estate loans are secured by various items of property, while commercial loans are secured primarily by real estate, business assets, and personal guarantees. A portion of loans are unsecured.

Loans that we have the intent and ability to hold in our portfolio are reported at their outstanding principal balance adjusted for any charge-offs, the ALLL, and deferred fees or costs. Unless a loan has a nonaccrual status, interest income is accrued over the term of the loan based on the principal amount outstanding. Loan origination fees and certain direct loan origination costs are capitalized and recognized as a component of interest income over the term of the loan using the appropriate amortization method.

The accrual of interest on commercial and agricultural loans, as well as residential real estate loans, is discontinued at the time a loan is 90 days or more past due unless the credit is well-secured and in the process of short-term collection. Upon transferring a loan to nonaccrual status, we perform an evaluation to determine the net realizable value of the underlying collateral. This evaluation is used to help determine if a charge-off is necessary. Consumer loans are typically charged-off no later than 180 days past due. Past due status is based on the contractual term of the loan. In all cases, a loan is placed in nonaccrual status at an earlier date if collection of principal or interest is considered doubtful.

When a loan is placed in nonaccrual status, all interest accrued in the current calendar year, but not collected, is reversed against interest income while interest accrued in prior calendar years, but not collected, is charged against the ALLL. Loans may be returned to accrual status after six months of continuous performance and achievement of current payment status.

Commercial and agricultural loans include loans for commercial real estate, commercial operating loans, advances to mortgage brokers, farmland and agricultural production, and loans to states and political subdivisions. Repayment of these loans is dependent upon the successful operation and management of a business. We minimize our risk by limiting the amount of direct credit exposure to any one borrower to $18,000. Borrowers with direct credit needs of more than $18,000 may be serviced through the use of loan participations with other commercial banks. Commercial and agricultural real estate loans commonly require loan-to-value limits of 80% or less. Depending upon the type of loan, past credit history, and current operating results, we may require the borrower to pledge accounts receivable, inventory, property, or equipment. Government agency guarantee may be required. Personal guarantees and/or life insurance beneficiary assignments are generally required from the owners of closely held corporations, partnerships, and sole proprietorships. In addition, we may require annual financial statements, prepare cash flow analyses, and review credit reports.

We entered into a mortgage purchase program in 2016 with a financial institution where we participate in advances to mortgage brokers (“advances”). The mortgage brokers originate residential mortgage loans with the intent to sell them on the secondary market. We participate in the advance to the mortgage broker, which is secured by the underlying mortgage loan, until it is ultimately sold on the secondary market. As such, the average life of each participated advance is approximately 20-30 days. Funds from the sale of the loan are used to pay off our participation in the advance to the mortgage broker. We classify these

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

We offer adjustable rate mortgages, construction loans, and fixed rate residential real estate loans which have amortization periods up to a maximum of 30 years. We consider the anticipated direction of interest rates, balance sheet duration, the sensitivity of our balance sheet to changes in interest rates, our liquidity needs, and overall loan demand to determine whether or not to sell fixed rate loans to Freddie Mac.

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

Underwriting criteria for originated residential real estate loans generally include:

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

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

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

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

•Verification of acceptable credit reports.

•Verification of employment, income, and financial information.

Appraisals are performed by independent appraisers and are reviewed for appropriateness. Generally, mortgage loan requests are reviewed by our mortgage loan committee or through a secondary market underwriting system; loans in excess of $1,000 require the approval of our Internal Loan Committee, the Executive Loan Committee, the Board of Directors’ Loan Committee, or the Board of Directors.

Consumer loans include secured and unsecured personal loans. Loans are amortized for a period of up to 15 years based on the age and value of the underlying collateral. The underwriting emphasis is on a borrower’s perceived intent and ability to pay rather than collateral value. No consumer loans are sold to the secondary market.

The ALLL is established as losses are estimated to have occurred through a provision for loan losses charged to earnings. Full or partial loan balances are charged against the ALLL when we believe uncollectability is probable. Subsequent recoveries, if any, are credited to the ALLL.

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

The primary factors behind the determination of the level of the ALLL are specific allocations for impaired loans, historical loss percentages, as well as unallocated components. Specific allocations for impaired loans are primarily determined based on the difference between the loan’s outstanding balance and the present value of expected future cash flows discounted at the loan’s effective interest rate, or the fair value of the collateral, less costs to sell, if the loan is collateral dependent. Historical loss allocations are calculated at the loan class and segment levels based on a migration analysis of the loan portfolio, with the exception of advances to mortgage brokers, over the preceding five years. With no historical losses on advances to mortgage brokers, there is no allocation related to this portfolio. The unallocated component of the allowance reflects the margin of imprecision inherent in the underlying assumptions used in the methodologies for estimating specific and general losses in the portfolio.

While we have experienced fluctuations in credit quality indicators in recent periods, credit quality remained strong at September 30, 2022. The COVID-19 pandemic led to the temporary and some permanent closures of businesses throughout the communities in which we serve, which also led to increased unemployment. We increased the ALLL during 2020 as a result of increased economic and environmental related risk factors, primarily driven by COVID-19. While these risk factors remain, improvement in credit quality indicators resulted in a reduction to the ALLL during 2021. There have been no material changes to the ALLL and credit quality has remained strong during 2022.

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

Allowance for Loan Losses
Three Months Ended September 30, 2022
Commercial Agricultural Residential Real Estate Consumer Unallocated Total
July 1, 2022 $ 1,758 $ 451 $ 639 $ 1,323 $ 5,529 $ 9,700
Charge-offs — — — (173) — (173)
Recoveries 14 1 53 64 — 132
Provision for loan losses (436) 35 (70) (168) 657 18
September 30, 2022 $ 1,336 $ 487 $ 622 $ 1,046 $ 6,186 $ 9,677
Allowance for Loan Losses
--- --- --- --- --- --- --- --- --- --- --- --- ---
Nine Months Ended September 30, 2022
Commercial Agricultural Residential Real Estate Consumer Unallocated Total
January 1, 2022 $ 1,740 $ 289 $ 747 $ 908 $ 5,419 $ 9,103
Charge-offs (3) — — (367) — (370)
Recoveries 54 4 123 223 — 404
Provision for loan losses (455) 194 (248) 282 767 540
September 30, 2022 $ 1,336 $ 487 $ 622 $ 1,046 $ 6,186 $ 9,677
Allowance for Loan Losses and Recorded Investment in Loans
--- --- --- --- --- --- --- --- --- --- --- --- ---
September 30, 2022
Commercial Agricultural Residential Real Estate Consumer Unallocated Total
ALLL
Individually evaluated for impairment $ 14 $ — $ 460 $ — $ — $ 474
Collectively evaluated for impairment 1,322 487 162 1,046 6,186 9,203
Total $ 1,336 $ 487 $ 622 $ 1,046 $ 6,186 $ 9,677
Loans
Individually evaluated for impairment $ 5,703 $ 11,188 $ 2,860 $ — $ 19,751
Collectively evaluated for impairment 724,801 85,662 331,552 74,385 1,216,400
Total $ 730,504 $ 96,850 $ 334,412 $ 74,385 $ 1,236,151

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Allowance for Loan Losses
Three Months Ended September 30, 2021
Commercial Agricultural Residential Real Estate Consumer Unallocated Total
July 1, 2021 $ 2,311 $ 248 $ 954 $ 938 $ 4,909 $ 9,360
Charge-offs (1) (77) — (168) — (246)
Recoveries 22 1 29 34 — 86
Provision for loan losses (801) 294 (226) 45 581 (107)
September 30, 2021 $ 1,531 $ 466 $ 757 $ 849 $ 5,490 $ 9,093
Allowance for Loan Losses
--- --- --- --- --- --- --- --- --- --- --- --- ---
Nine Months Ended September 30, 2021
Commercial Agricultural Residential Real Estate Consumer Unallocated Total
January 1, 2021 $ 2,162 $ 311 $ 1,363 $ 798 $ 5,110 $ 9,744
Charge-offs (32) (77) — (349) — (458)
Recoveries 121 6 132 147 — 406
Provision for loan losses (720) 226 (738) 253 380 (599)
September 30, 2021 $ 1,531 $ 466 $ 757 $ 849 $ 5,490 $ 9,093
Allowance for Loan Losses and Recorded Investment in Loans
--- --- --- --- --- --- --- --- --- --- --- --- ---
December 31, 2021
Commercial Agricultural Residential Real Estate Consumer Unallocated Total
ALLL
Individually evaluated for impairment $ 13 $ — $ 565 $ — $ — $ 578
Collectively evaluated for impairment 1,727 289 182 908 5,419 8,525
Total $ 1,740 $ 289 $ 747 $ 908 $ 5,419 $ 9,103
Loans
Individually evaluated for impairment $ 9,267 $ 14,189 $ 3,454 $ — $ 26,910
Collectively evaluated for impairment 798,172 79,766 322,907 73,282 1,274,127
Total $ 807,439 $ 93,955 $ 326,361 $ 73,282 $ 1,301,037

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

September 30, 2022
Commercial Agricultural
Real Estate Other Advances to Mortgage Brokers Total Real Estate Other Total Total
Rating
1 - Excellent $ — $ 300 $ — $ 300 $ — $ — $ — $ 300
2 - High quality 9,331 5,044 — 14,375 383 60 443 14,818
3 - High satisfactory 70,779 37,313 1,484 109,576 9,833 3,944 13,777 123,353
4 - Low satisfactory 457,821 113,632 — 571,453 38,935 20,793 59,728 631,181
5 - Special mention 18,255 7,168 — 25,423 10,540 4,410 14,950 40,373
6 - Substandard 5,695 3,504 — 9,199 6,373 1,313 7,686 16,885
7 - Vulnerable 78 100 — 178 98 168 266 444
8 - Doubtful — — — — — — — —
9 - Loss — — — — — — — —
Total $ 561,959 $ 167,061 $ 1,484 $ 730,504 $ 66,162 $ 30,688 $ 96,850 $ 827,354
December 31, 2021
--- --- --- --- --- --- --- --- --- --- --- --- --- --- --- --- ---
Commercial Agricultural
Real Estate Other Advances to Mortgage Brokers Total Real Estate Other Total Total
Rating
1 - Excellent $ — $ 300 $ — $ 300 $ — $ — $ — $ 300
2 - High quality 9,010 6,881 — 15,891 453 — 453 16,344
3 - High satisfactory 86,135 46,087 72,001 204,223 9,361 4,295 13,656 217,879
4 - Low satisfactory 448,489 104,375 — 552,864 36,483 15,986 52,469 605,333
5 - Special mention 13,212 1,351 — 14,563 13,096 3,452 16,548 31,111
6 - Substandard 13,519 5,738 — 19,257 6,252 3,803 10,055 29,312
7 - Vulnerable 222 119 — 341 499 275 774 1,115
8 - Doubtful — — — — — — — —
9 - Loss — — — — — — — —
Total $ 570,587 $ 164,851 $ 72,001 $ 807,439 $ 66,144 $ 27,811 $ 93,955 $ 901,394

Internally assigned credit risk ratings are reviewed, at a minimum, when loans are renewed or when management has knowledge of improvements or deterioration of the credit quality of individual credits. Descriptions of the internally assigned credit risk ratings for commercial and agricultural loans are as follows:

  1. EXCELLENT – Substantially Risk Free

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

•High liquidity, strong cash flow, low leverage.

•Unquestioned ability to meet all obligations when due.

•Experienced management, with management succession in place.

•Secured by cash.

  1. HIGH QUALITY – Limited Risk

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

•Favorable liquidity and leverage ratios.

•Ability to meet all obligations when due.

•Management with successful track record.

•Steady and satisfactory earnings history.

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

•Access to alternative financing.

•Well defined primary and secondary source of repayment.

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

  1. 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.

  1. 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.

  1. 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.

  1. SUBSTANDARD – Classified

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

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

•Deteriorating liquidity.

•Serious management problems or internal fraud.

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•Original repayment terms liberalized.

•Likelihood of bankruptcy.

•Inability to access other funding sources.

•Reliance on secondary source of repayment.

•Litigation filed against borrower.

•Interest non-accrual may be warranted.

•Collateral provides little or no value.

•Requires excessive attention of the loan officer.

•Borrower is uncooperative with loan officer.

  1. 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.

  1. 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.

  1. LOSS – Charge-off

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

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

•Fraudulently overstated assets and/or earnings.

•Collateral has marginal or no value.

•Debtor cannot be located.

•Over 120 days delinquent.

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Our primary credit quality indicator for residential real estate and consumer loans is the individual loan’s past due aging. The following tables summarize the past due and current loans for the entire loan portfolio as of:

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

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December 31, 2021
Accruing Interest<br>and Past Due: Total Past Due and Nonaccrual
30-59<br>Days 60-89<br>Days 90 Days<br>or More Nonaccrual Current Total
Commercial
Commercial real estate $ 135 $ — $ — $ 222 $ 357 $ 570,230 $ 570,587
Commercial other 85 — — 119 204 164,647 164,851
Advances to mortgage brokers — — — — — 72,001 72,001
Total commercial 220 — — 341 561 806,878 807,439
Agricultural
Agricultural real estate 213 — — 499 712 65,432 66,144
Agricultural other — — — 275 275 27,536 27,811
Total agricultural 213 — — 774 987 92,968 93,955
Residential real estate
Senior liens 2,016 37 97 93 2,243 290,900 293,143
Junior liens — — — — — 2,439 2,439
Home equity lines of credit 7 — — 37 44 30,735 30,779
Total residential real estate 2,023 37 97 130 2,287 324,074 326,361
Consumer
Secured 186 — — — 186 70,259 70,445
Unsecured 10 — — — 10 2,827 2,837
Total consumer 196 — — — 196 73,086 73,282
Total $ 2,652 $ 37 $ 97 $ 1,245 $ 4,031 $ 1,297,006 $ 1,301,037

Impaired Loans

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

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

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

3.The loan is in nonaccrual status.

Impairment is measured on a loan-by-loan basis for commercial and agricultural loans by comparing the loan’s outstanding balance to the present value of expected future cash flows discounted at the loan’s effective interest rate, or the fair value of the collateral, less costs to sell, if the loan is collateral dependent. Large groups of smaller-balance, homogeneous residential real estate and consumer loans are collectively evaluated for impairment by comparing the loan’s unpaid principal balance to the present value of expected future cash flows discounted at the loan’s effective interest rate.

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

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The following is a summary of impaired loans as of:

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

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The following is a summary of impaired loans for the:

Three Months Ended September 30
2022 2021
Average Recorded Balance Interest Income Recognized Average Recorded Balance Interest Income Recognized
Impaired loans with a valuation allowance
Commercial real estate $ 188 $ 3 $ 1,377 $ 3
Commercial other 1,413 — 3,090 35
Agricultural real estate — — 94 —
Residential real estate senior liens 2,927 31 3,585 37
Total impaired loans with a valuation allowance 4,528 34 8,146 75
Impaired loans without a valuation allowance
Commercial real estate 5,359 82 7,013 121
Commercial other 208 3 305 9
Agricultural real estate 8,638 116 9,845 113
Agricultural other 2,635 43 4,794 58
Total impaired loans without a valuation allowance 16,840 244 21,957 301
Impaired loans
Commercial 7,168 88 11,785 168
Agricultural 11,273 159 14,733 171
Residential real estate 2,927 31 3,585 37
Total impaired loans $ 21,368 $ 278 $ 30,103 $ 376
Nine Months Ended September 30
--- --- --- --- --- --- --- --- ---
2022 2021
Average Recorded Balance Interest Income Recognized Average Recorded Balance Interest Income Recognized
Impaired loans with a valuation allowance
Commercial real estate $ 190 $ 9 $ 2,161 $ 66
Commercial other 2,299 62 1,569 71
Agricultural real estate — — 737 11
Agricultural other — — 226 —
Residential real estate senior liens 3,141 97 3,908 115
Total impaired loans with a valuation allowance 5,630 168 8,601 263
Impaired loans without a valuation allowance
Commercial real estate 5,571 256 6,109 315
Commercial other 336 18 2,494 59
Agricultural real estate 8,569 341 9,760 378
Agricultural other 3,147 114 4,115 174
Home equity lines of credit 6 — — —
Total impaired loans without a valuation allowance 17,629 729 22,478 926
Impaired loans
Commercial 8,396 345 12,333 511
Agricultural 11,716 455 14,838 563
Residential real estate 3,147 97 3,908 115
Total impaired loans $ 23,259 $ 897 $ 31,079 $ 1,189

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We had committed to advance $678 and $266 in additional funds to be disbursed in connection with impaired loans, which includes TDRs, of September 30, 2022 and December 31, 2021, respectively.

Troubled Debt Restructurings

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

Typical concessions granted include, but are not limited to:

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

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

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

•Forgiving principal.

•Forgiving accrued interest.

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

•The borrower is currently in default on any debt.

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

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

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

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

The following is a summary of TDRs granted for the:

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

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

Three Months Ended September 30
2022 2021
Below Market Interest Rate Below Market Interest Rate and Extension of Amortization Period Below Market Interest Rate Below Market Interest Rate and Extension of Amortization Period
Number of Loans Pre-Modification Recorded Investment Number of Loans Pre-Modification Recorded Investment Number of Loans Pre-Modification Recorded Investment Number of Loans Pre-Modification Recorded Investment
Commercial other 1 $ 55 — $ — — $ — — $ —
Nine Months Ended September 30
--- --- --- --- --- --- --- --- --- --- --- --- ---
2022 2021
Below Market Interest Rate Below Market Interest Rate and Extension of Amortization Period Below Market Interest Rate Below Market Interest Rate and Extension of Amortization Period
Number of Loans Pre-Modification Recorded Investment Number of Loans Pre-Modification Recorded Investment Number of Loans Pre-Modification Recorded Investment Number of Loans Pre-Modification Recorded Investment
Commercial other 1 $ 55 — $ — 1 $ 3,189 4 $ 1,572
Agricultural other — — — — 6 3,712 — —
Residential real estate — — 1 98 — — — —
Total 1 $ 55 1 $ 98 7 $ 6,901 4 $ 1,572

We did not restructure any loans by forgiving principal or accrued interest in the three and nine-month periods ended September 30, 2022 or 2021.

Based on our historical loss experience, losses associated with TDRs are not significantly different than other impaired loans within the same loan segment. As such, TDRs, including TDRs that have been modified in the past 12 months that subsequently defaulted, are analyzed in the same manner as other impaired loans within their respective loan segment.

We had no loans that defaulted in the three and nine-month periods ended September 30, 2022 and 2021 which were modified within 12 months prior to the default date.

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

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

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Note 5 – Borrowed Funds

Federal funds purchased and repurchase agreements

Securities sold under repurchase agreements without stated maturity dates, federal funds purchased, and FRB Discount Window advances generally mature within one to four days from the transaction date. We had no FRB Discount Window advances during the three and nine-month periods ended September 30, 2022 and 2021.

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

Three Months Ended September 30
2022 2021
Maximum Month End Balance Average Balance Weighted Average Interest Rate During the Period Maximum Month End Balance Average Balance Weighted Average Interest Rate During the Period
Securities sold under agreements to repurchase without stated maturity dates $ 54,051 $ 49,267 0.07 % $ 67,519 $ 62,790 0.10 %
Federal funds purchased $ — $ — — % $ — $ — 0.52 %
Nine Months Ended September 30
--- --- --- --- --- --- --- --- --- --- --- --- ---
2022 2021
Maximum Month End Balance Average Balance Weighted Average Interest Rate During the Period Maximum Month End Balance Average Balance Weighted Average Interest Rate During the Period
Securities sold under agreements to repurchase without stated maturity dates $ 54,051 $ 48,118 0.07 % $ 67,519 $ 56,422 0.11 %
Federal funds purchased $ — $ 1 0.79 % $ 80 $ 2 0.40 %

Securities sold under agreements to repurchase are classified as secured borrowings and are reflected at the amount of cash received in connection with the transaction. The securities underlying the agreements have a carrying value and a fair value of $55,591 and $50,173 at September 30, 2022 and December 31, 2021, respectively. Such securities remain under our control. We may be required to provide additional collateral based on the fair value of underlying securities.

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

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

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

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

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

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

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

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

FHLB advances

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

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

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

Subordinated Notes

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

The following table summarizes our outstanding notes as of:

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

Note 6 – Computation of Earnings Per Common Share

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

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

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

(1)Exclusive of shares held in the Rabbi Trust

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Note 7 – Restricted Stock Plan

We adopted the RSP, an equity-based bonus plan, in 2020. Under the RSP, we may award restricted stock bonuses to eligible employees on an annual basis that are not fully transferable or vested until certain conditions are met. Currently, the eligible employees are the Bank's CEO, President, and CFO. The RSP authorizes the issuance of unvested restricted stock to an eligible employee with a maximum award ranging from 25% to 40% of the employee’s annual salary, on a calendar year basis. The employee must also satisfy the annual performance targets and measures established by the Board of Directors. If these grant conditions are not satisfied, then the award of restricted shares will lapse or be adjusted appropriately, at the discretion of the Board of Directors. All Grant Agreements contain vesting conditions and clawback provisions.

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

Three Months Ended <br> September 30, 2022 Three Months Ended <br> September 30, 2021
Number<br>of Shares Fair<br>Value Number<br>of Shares Fair<br>Value
Balance, July 1 30,208 $ 679 16,257 $ 334
Granted (3,362) (87) 3,866 84
Vested — — — —
Forfeited — — — —
Balance, September 30 26,846 $ 592 20,123 $ 418
Nine Months Ended <br> September 30, 2022 Nine Months Ended <br> September 30, 2021
--- --- --- --- --- --- ---
Number<br>of Shares Fair<br>Value Number<br>of Shares Fair<br>Value
Balance, January 1 20,123 $ 418 4,658 $ 82
Granted 6,723 174 15,465 336
Vested — — — —
Forfeited — — — —
Balance, September 30 26,846 $ 592 20,123 $ 418

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

Note 8 – Other Noninterest Expenses

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

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

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Note 9 – Federal Income Taxes

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

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

Note 10 – Accumulated Other Comprehensive Income

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

Three Months Ended September 30
2022 2021
Unrealized<br>Gains<br>(Losses) on<br>AFS<br>Securities Unrealized<br>Gains<br>(Losses) on Derivative Instruments Defined<br>Benefit<br>Pension Plan Total Unrealized<br>Gains<br>(Losses) on<br>AFS<br>Securities Unrealized<br>Gains<br>(Losses) on Derivative Instruments Defined<br>Benefit<br>Pension Plan Total
Balance, July 1 $ (22,826) $ — $ (2,014) $ (24,840) $ 8,469 $ — $ (2,745) $ 5,724
OCI before reclassifications (22,815) — — (22,815) (1,690) — — (1,690)
Tax effect 4,788 — — 4,788 353 — — 353
OCI, net of tax (18,027) — — (18,027) (1,337) — — (1,337)
Balance, September 30 $ (40,853) $ — $ (2,014) $ (42,867) $ 7,132 $ — $ (2,745) $ 4,387
Nine Months Ended September 30
--- --- --- --- --- --- --- --- --- --- --- --- --- --- --- --- ---
2022 2021
Unrealized<br>Gains<br>(Losses) on<br>AFS<br>Securities Unrealized<br>Gains<br>(Losses) on Derivative Instruments Defined<br>Benefit<br>Pension Plan Total Unrealized<br>Gains<br>(Losses) on<br>AFS<br>Securities Unrealized<br>Gains<br>(Losses) on Derivative Instruments Defined<br>Benefit<br>Pension Plan Total
Balance, January 1 $ 3,873 $ — $ (2,014) $ 1,859 $ 10,485 $ (42) $ (2,745) $ 7,698
OCI before reclassifications (56,413) — — (56,413) (4,247) 53 — (4,194)
Tax effect 11,687 — — 11,687 894 (11) — 883
OCI, net of tax (44,726) — — (44,726) (3,353) 42 — (3,311)
Balance, September 30 $ (40,853) $ — $ (2,014) $ (42,867) $ 7,132 $ — $ (2,745) $ 4,387

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

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

Three Months Ended September 30
2022 2021
Auction Rate Money Market Preferred Stocks All Other AFS Securities Total Auction Rate Money Market Preferred Stocks All Other AFS Securities Total
Unrealized gains (losses) arising during the period $ (18) $ (22,797) $ (22,815) $ (14) $ (1,676) $ (1,690)
Tax effect — 4,788 4,788 — 353 353
Unrealized gains (losses), net of tax $ (18) $ (18,009) $ (18,027) $ (14) $ (1,323) $ (1,337)
Nine Months Ended September 30
--- --- --- --- --- --- --- --- --- --- --- --- ---
2022 2021
Auction Rate Money Market Preferred Stocks All Other AFS Securities Total Auction Rate Money Market Preferred Stocks All Other AFS Securities Total
Unrealized gains (losses) arising during the period $ (763) $ (55,650) $ (56,413) $ 9 $ (4,256) $ (4,247)
Tax effect — 11,687 11,687 — 894 894
Unrealized gains (losses), net of tax $ (763) $ (43,963) $ (44,726) $ 9 $ (3,362) $ (3,353)

Note 11 – Fair Value

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

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

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

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

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

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

Loans: We do not record loans at fair value on a recurring basis. However, some loans are classified as impaired and a specific allowance for loan losses may be established. Loans for which it is probable that payment of interest and principal will be significantly different than the contractual terms of the original loan agreement are considered impaired. Once a loan is identified as impaired, we measure the estimated impairment. The fair value of impaired loans is estimated using one of several

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methods, including the present value of expected future cash flows discounted at the loan’s effective interest rate, or the fair value of the collateral, less costs to sell, if the loan is collateral dependent. Those impaired loans not requiring an allowance represent loans for which the fair value of the expected repayments or collateral exceed the recorded investments in such loans.

We review the net realizable values of the underlying collateral for collateral dependent impaired loans on at least a quarterly basis for all loan types. To determine the collateral value, we utilize independent appraisals, broker price opinions, or internal evaluations. We review these valuations to determine whether an additional discount should be applied given the age of market information that may have been considered as well as other factors such as costs to sell an asset if it is determined that the collateral will be liquidated in connection with the ultimate settlement of the loan. We use these valuations to determine if any specific reserves or charge-offs are necessary. We may obtain new valuations in certain circumstances, including when there has been significant deterioration in the condition of the collateral, if the foreclosure process has begun, or if the existing valuation is deemed to be outdated.

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

September 30, 2022
Valuation Technique Fair Value Unobservable Input Actual Range Weighted Average
Discount applied to collateral:
Real Estate 20% - 30% 23%
Equipment 20% - 35% 30%
Discounted value $14,724 Cash crop inventory 40% 40%
Livestock 30% 30%
Accounts receivable 50% 50%
Furniture, fixtures & equipment 45% 45%
December 31, 2021
--- --- --- --- ---
Valuation Technique Fair Value Unobservable Input Actual Range Weighted Average
Discount applied to collateral:
Real Estate 20% - 30% 23%
Equipment 20% - 35% 28%
Discounted value $18,812 Cash crop inventory 40% 40%
Livestock 30% 30%
Accounts receivable 50% 50%
Liquor license 75% 75%

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

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

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

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

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

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

September 30, 2022
Carrying<br>Value Estimated<br>Fair Value Level 1 Level 2 Level 3
ASSETS
Cash and cash equivalents $ 98,912 $ 98,912 $ 98,912 $ — $ —
Mortgage loans AFS 934 942 — 942 —
Gross loans 1,236,151 1,194,804 — — 1,194,804
Less allowance for loan and lease losses 9,677 9,677 — — 9,677
Net loans 1,226,474 1,185,127 — — 1,185,127
Accrued interest receivable 6,406 6,406 6,406 — —
Equity securities without readily determinable fair values (1) 15,496 N/A — — —
OMSR 2,601 3,179 — 3,179 —
LIABILITIES
Deposits without stated maturities 1,529,793 1,529,793 1,529,793 — —
Deposits with stated maturities 261,240 248,892 — 248,892 —
Federal funds purchased and repurchase agreements 52,479 52,349 — 52,349 —
Subordinated debt, net of unamortized issuance costs 29,225 26,548 — 26,548 —
Accrued interest payable 158 158 158 — —
December 31, 2021
--- --- --- --- --- --- --- --- --- --- ---
Carrying<br>Value Estimated<br>Fair Value Level 1 Level 2 Level 3
ASSETS
Cash and cash equivalents $ 105,330 $ 105,330 $ 105,330 $ — $ —
Mortgage loans AFS 1,735 1,797 — 1,797 —
Gross loans 1,301,037 1,296,841 — — 1,296,841
Less allowance for loan and lease losses 9,103 9,103 — — 9,103
Net loans 1,291,934 1,287,738 — — 1,287,738
Accrued interest receivable 5,804 5,804 5,804 — —
Equity securities without readily determinable fair values (1) 17,383 N/A — — —
OMSR 2,124 2,753 — 2,753 —
LIABILITIES
Deposits without stated maturities 1,409,577 1,409,577 1,409,577 — —
Deposits with stated maturities 300,762 301,216 — 301,216 —
Federal funds purchased and repurchase agreements 50,162 50,153 — 50,153 —
FHLB advances 20,000 20,120 — 20,120 —
Subordinated debt, net of unamortized issuance costs 29,158 27,435 — 27,435 —
Accrued interest payable 251 251 251 — —

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

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Financial Instruments Recorded at Fair Value

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

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

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

Note 12 – Operating Segments

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

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Note 13 – Parent Company Only Financial Information

Interim Condensed Balance Sheets

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

Interim Condensed Statements of Income

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

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Interim Condensed Statements of Cash Flows

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

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

ISABELLA BANK CORPORATION FINANCIAL REVIEW

(Dollars in thousands except per share amounts)

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

Executive Summary

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

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

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

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

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

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

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Recent Events and Legislation

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

Reclassifications

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

Subsequent Events

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

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Results of Operations (Unaudited)

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

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

(1) At end of period

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

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

(1) At end of period

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Average Balances, Interest Rates, and Net Interest Income

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

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

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

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

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Volume and Rate Variance Analysis

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

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

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

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

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

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

Average Yield / Rate for the Three-Month Periods Ended:
September 30<br>2022 June 30<br>2022 March 31<br>2022 December 31<br>2021 September 30<br>2021
Total earning assets 3.53 % 3.41 % 3.13 % 3.19 % 3.23 %
Total interest bearing liabilities 0.35 % 0.34 % 0.37 % 0.45 % 0.52 %
Net yield on interest earning assets (FTE) 3.28 % 3.16 % 2.86 % 2.86 % 2.85 %
Quarter to Date Net Interest Income (FTE)
--- --- --- --- --- --- --- --- --- --- ---
September 30<br>2022 June 30<br>2022 March 31<br>2022 December 31<br>2021 September 30<br>2021
Total interest income (FTE) $ 17,276 $ 16,373 $ 15,022 $ 15,246 $ 15,452
Total interest expense 1,216 1,175 1,283 1,567 1,829
Net interest income (FTE) $ 16,060 $ 15,198 $ 13,739 $ 13,679 $ 13,623

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Allowance for Loan and Lease Losses

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

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

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

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

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

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

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

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

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

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

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

Loans Past Due and Loans in Nonaccrual Status

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

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

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

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Troubled Debt Restructurings

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

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

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

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

Three Months Ended September 30, 2022
Accruing Interest Nonaccrual Total
Number<br>of<br>Loans Balance Number<br>of<br>Loans Balance Number<br>of<br>Loans Balance
July 1, 2022 89 $ 22,003 6 $ 391 95 $ 22,394
New modifications 1 55 — — 1 55
Principal advances (payments) — (296) — (10) — (306)
Loans paid off (9) (3,060) — — (9) (3,060)
September 30, 2022 81 $ 18,702 6 $ 381 87 $ 19,083
Nine Months Ended September 30, 2022
--- --- --- --- --- --- --- --- --- ---
Accruing Interest Nonaccrual Total
Number<br>of<br>Loans Balance Number<br>of<br>Loans Balance Number<br>of<br>Loans Balance
January 1, 2022 98 $ 25,276 6 $ 449 104 $ 25,725
New modifications 2 153 — — 2 153
Principal advances (payments) — (1,971) — (68) — (2,039)
Loans paid off (19) (4,756) — — (19) (4,756)
September 30, 2022 81 $ 18,702 6 $ 381 87 $ 19,083

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Three Months Ended September 30, 2021
Accruing Interest Nonaccrual Total
Number<br>of<br>Loans Balance Number<br>of<br>Loans Balance Number<br>of<br>Loans Balance
July 1, 2021 101 $ 26,785 8 $ 2,562 109 $ 29,347
New modifications — — — — — —
Principal advances (payments) — (235) — (28) — (263)
Loans paid off (3) (402) — — (3) (402)
Transfers to accrual status 1 41 (1) (41) — —
September 30, 2021 99 26,189 7 $ 2,493 106 $ 28,682
Nine Months Ended September 30, 2021
--- --- --- --- --- --- --- --- --- ---
Accruing Interest Nonaccrual Total
Number<br>of<br>Loans Balance Number<br>of<br>Loans Balance Number<br>of<br>Loans Balance
January 1, 2021 108 $ 22,200 7 $ 2,730 115 $ 24,930
New modifications 11 8,473 — — 11 8,473
Principal advances (payments) — (1,073) — (235) — (1,308)
Loans paid off (20) (3,413) — — (20) (3,413)
Transfers to nonaccrual status (1) (39) 1 39 — —
Transfers to accrual status 1 41 (1) (41) — —
September 30, 2021 99 $ 26,189 7 $ 2,493 106 $ 28,682

The following table summarizes our TDRs as of:

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

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

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Impaired Loans

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

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

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

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

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Nonperforming Assets

The following table summarizes our nonperforming assets as of:

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

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

The following table summarizes nonaccrual loans as of:

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

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

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

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

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Noninterest Income and Noninterest Expenses

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

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

All values are in US Dollars.

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

All values are in US Dollars.

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

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

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

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

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

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

All values are in US Dollars.

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

All values are in US Dollars.

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

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

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Analysis of Changes in Financial Condition

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

All values are in US Dollars.

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

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The following table outlines the changes in loan balances:

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

All values are in US Dollars.

The following table displays loan balances as of:

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

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

The following table outlines the changes in deposit balances:

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

All values are in US Dollars.

The following table displays deposit balances as of:

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

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

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

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

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

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

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

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

Contractual Obligations and Loan Commitments

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

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

Our exposure to credit-related loss in the event of nonperformance by the counterparties to the financial instruments for commitments to extend credit and standby letters of credit could be up to the contractual notional amount of those instruments. We use the same credit policies when analyzing the creditworthiness of counterparties as we do for extending loans to customers. No significant losses are anticipated as a result of these commitments.

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Capital

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

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

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

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

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

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

Liquidity

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

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

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

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

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

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

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

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

All values are in US Dollars.

Fair Value

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

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

Market Risk

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

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

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

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

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

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

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

Item 3. Quantitative and Qualitative Disclosures about Market Risk.

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

Item 4. Controls and Procedures.

DISCLOSURE CONTROLS AND PROCEDURES

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

CHANGES IN INTERNAL CONTROL OVER FINANCIAL REPORTING

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

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PART II – OTHER INFORMATION

Item 1. Legal Proceedings.

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

Item 1A. Risk Factors.

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

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

(A)None

(B)None

(C)Repurchases of Common Stock

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

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

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

Item 3. Defaults Upon Senior Securities.

Not applicable.

Item 4. Mine Safety Disclosures.

Not applicable.

Item 5. Other Information.

Not applicable.

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Item 6. Exhibits.

(a) Exhibits

Exhibit Number Exhibits
4.1 Indenture, dated as of June 2, 2021, by and between Isabella Bank Corporation and UMB Bank, National Association, as trustee (incorporated by reference to Exhibit 4.1 to the Registrant’s Current Report on Form 8-K filed with the SEC on June 2, 2021)
4.2 Form of 3.25% Fixed-to-Floating Rate Subordinated Note due 2031 (included in the Indenture included as Exhibit 4.1 to this Quarterly Report on Form 10-Q)
10.1 Form of Subordinated Note Purchase Agreement, dated as of June 2, 2021, by and among the Corporation and the several Purchasers (incorporated by reference to Exhibit 10.1 to the Registrant’s Current Report on Form 8-K filed with the SEC on June 2, 2021)
10.2 Form of Registration Rights Agreement, dated as of June 2, 2021, by and among the Corporation and the several Purchasers (incorporated by reference to Exhibit 10.2 to the Registrant’s Current Report on Form 8-K filed with the SEC on June 2, 2021)
31.1 Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 by the Principal Executive Officer
31.2 Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 by the Principal Financial Officer
32 Section 1350 Certification of Principal Executive Officer and Principal Financial Officer
101.1* 101.INS (Inline XBRL Instance Document)
101.SCH (Inline XBRL Taxonomy Extension Schema Document)
101.CAL (Inline XBRL Calculation Linkbase Document)
101.LAB (Inline XBRL Taxonomy Label Linkbase Document)
101.DEF (Inline XBRL Taxonomy Linkbase Document)
101.PRE (Inline XBRL Taxonomy Presentation Linkbase Document)
104 Cover Page Interactive Data File

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

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: October 28, 2022 /s/ Jae A. Evans
Jae A. Evans
President and Chief Executive Officer
(Principal Executive Officer)
Date: October 28, 2022 /s/ Neil M. McDonnell
Neil M. McDonnell
Chief Financial Officer
(Principal Financial Officer)

59

Document

Exhibit 31.1

I, Jae A. Evans, certify that:

1.I have reviewed this Quarterly Report on Form 10-Q of Isabella Bank Corporation (the “registrant”).

2.Based on my knowledge, this Quarterly Report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this Quarterly Report.

3.Based on my knowledge, the consolidated financial statements, and other financial information included in this Quarterly Report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this Quarterly Report.

4.The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

a)designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under my supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this Quarterly Report is being prepared;

b)designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under my supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of consolidated financial statements for external purposes in accordance with generally accepted accounting principles;

c)evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

d)disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5.The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of registrant’s board of directors:

a)all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

b)any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date: October 28, 2022 /s/ Jae A. Evans
President and Chief Executive Officer
(Principal Executive Officer)

Document

Exhibit 31.2

I, Neil M. McDonnell, certify that:

1.I have reviewed this Quarterly Report on Form 10-Q of Isabella Bank Corporation (the “registrant”).

2.Based on my knowledge, this Quarterly Report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this Quarterly Report.

3.Based on my knowledge, the consolidated financial statements, and other financial information included in this Quarterly Report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this Quarterly Report.

4.The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

a)designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under my supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this Quarterly Report is being prepared;

b)designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under my supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of consolidated financial statements for external purposes in accordance with generally accepted accounting principles;

c)evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

d)disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5.The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of registrant’s board of directors:

a)all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

b)any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date: October 28, 2022 /s/ Neil M. McDonnell
Chief Financial Officer
(Principal Financial Officer)

Document

Exhibit 32

CERTIFICATION PURSUANT TO

18 U.S.C. SECTION 1350,

AS ADOPTED PURSUANT TO

SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

In connection with the Quarterly Report of Isabella Bank Corporation (the “Corporation”) on Form 10-Q for the quarterly period ended September 30, 2022 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), Jae A. Evans, President and Chief Executive Officer and Neil M. McDonnell, Chief Financial Officer of the Corporation, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that:

(1)The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and

(2)The information contained in the Report fairly presents, in all material respects, the consolidated financial condition and results of operations of the Corporation.

/s/ Jae A. Evans
President and Chief Executive Officer
(Principal Executive Officer)
October 28, 2022
/s/ Neil M. McDonnell
Chief Financial Officer
(Principal Financial Officer)
October 28, 2022

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