Equibles

10-Q

ISABELLA BANK CORP (ISBA)

10-Q 2023-10-27 For: 2023-09-30
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, 2023

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 7,493,698 as of October 25, 2023.

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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 40
Item 3. Quantitative and Qualitative Disclosures About Market Risk 57
Item 4. Controls and Procedures 57
PART II – OTHER INFORMATION 58
Item 1. Legal Proceedings 58
Item 1A. Risk Factors 58
Item 2. Unregistered Sales of Equity Securities, Use of Proceeds, and Issuer Purchases of Equity Securities 58
Item 3. Defaults Upon Senior Securities 58
Item 4. Mine Safety Disclosures 58
Item 5. Other Information 58
Item 6. Exhibits 59
SIGNATURES 60

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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, practices and guidelines. These risks and uncertainties should be considered in evaluating forward looking statements and undue reliance should not be placed on such statements. Further information concerning our business, including additional factors that could materially affect our consolidated financial results, is included in our filings with the SEC.

Glossary of Acronyms and Abbreviations

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

ACL: Allowance for credit losses FHLB: Federal Home Loan Bank
AFS: Available-for-sale Freddie Mac: Federal Home Loan Mortgage Corporation
ALCO: Asset-Liability Committee FTE: Fully taxable equivalent
ALLL: Allowance for loan and lease losses GAAP: U.S. generally accepted accounting principles
AOCI: Accumulated other comprehensive income IRR: Interest rate risk
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
CECL: Current expected credit losses NSF: Non-sufficient funds
CIK: Central Index Key OCI: Other comprehensive income (loss)
COVID-19: Coronavirus disease 2019 OMSR: Originated mortgage servicing rights
DIF: Deposit Insurance Fund OREO: Other real estate owned
DIFS: Department of Insurance and Financial Services OTTI: Other-than-temporary impairment
Directors Plan: Isabella Bank Corporation and Related Companies Deferred Compensation Plan for Directors Rabbi Trust: A trust established to fund our Directors Plan
Dividend Reinvestment Plan: Isabella Bank Corporation Stockholder Dividend Reinvestment Plan and Employee Stock Purchase Plan RSP: Isabella Bank Corporation Restricted Stock Plan
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 XBRL: eXtensible Business Reporting Language
FRB: Federal Reserve Bank Yield Curve: U.S. Treasury Yield Curve

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PART I – FINANCIAL INFORMATION

Item 1. Financial Statements.

INTERIM CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)

(Dollars in thousands)

September 30<br>2023 December 31<br>2022
ASSETS
Cash and cash equivalents
Cash and demand deposits due from banks $ 48,862 $ 27,420
Fed Funds sold and interest bearing balances due from banks 67,017 11,504
Total cash and cash equivalents 115,879 38,924
AFS securities, at fair value 516,897 580,481
Mortgage loans AFS 105 379
Loans 1,334,674 1,264,173
Less allowance for credit losses 12,767 9,850
Net loans 1,321,907 1,254,323
Premises and equipment 26,960 25,553
Corporate owned life insurance policies 33,654 32,988
Equity securities without readily determinable fair values 15,848 15,746
Goodwill and other intangible assets 48,285 48,287
Accrued interest receivable and other assets 38,955 33,586
TOTAL ASSETS $ 2,118,490 $ 2,030,267
LIABILITIES AND SHAREHOLDERS’ EQUITY
Deposits
Noninterest bearing $ 445,043 $ 494,346
Interest bearing demand deposits 363,558 372,155
Certificates of deposit under $250 and other savings 853,991 810,642
Certificates of deposit over $250 106,882 67,132
Total deposits 1,769,474 1,744,275
Borrowed funds
Federal funds purchased and repurchase agreements 52,330 57,771
FHLB advances 65,000 —
Subordinated debt, net of unamortized issuance costs 29,312 29,245
Total borrowed funds 146,642 87,016
Accrued interest payable and other liabilities 17,251 12,766
Total liabilities 1,933,367 1,844,057
Shareholders’ equity
Common stock — no par value 15,000,000 shares authorized; issued and outstanding 7,490,557 shares (including 136,694 shares held in the Rabbi Trust) in 2023 and 7,559,421 shares (including 154,879 shares held in the Rabbi Trust) in 2022 127,680 128,651
Shares to be issued for deferred compensation obligations 3,641 5,005
Retained earnings 95,533 89,748
Accumulated other comprehensive income (loss) (41,731) (37,194)
Total shareholders’ equity 185,123 186,210
TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY $ 2,118,490 $ 2,030,267

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
2023 2022 2023 2022
Interest income
Loans, including fees $ 17,270 $ 13,563 $ 48,090 $ 39,120
AFS securities
Taxable 2,327 2,209 7,211 5,851
Nontaxable 636 726 2,019 2,090
Federal funds sold and other 252 521 1,255 822
Total interest income 20,485 17,019 58,575 47,883
Interest expense
Deposits 5,015 908 11,953 2,698
Borrowings
Federal funds purchased and repurchase agreements 284 9 604 26
FHLB advances 617 33 887 152
Subordinated debt, net of unamortized issuance costs 267 266 799 798
Total interest expense 6,183 1,216 14,243 3,674
Net interest income 14,302 15,803 44,332 44,209
Provision for credit losses (292) 18 (55) 540
Net interest income after provision for credit losses 14,594 15,785 44,387 43,669
Noninterest income
Service charges and fees 2,060 2,122 6,085 6,615
Wealth management fees 858 679 2,625 2,217
Earnings on corporate owned life insurance policies 229 223 681 655
Net gain on sale of mortgage loans 109 174 232 568
Other 158 54 688 339
Total noninterest income 3,414 3,252 10,311 10,394
Noninterest expenses
Compensation and benefits 6,639 6,369 19,789 18,480
Furniture and equipment 1,612 1,490 4,822 4,382
Occupancy 923 918 2,921 2,813
Other 3,484 3,140 9,863 9,223
Total noninterest expenses 12,658 11,917 37,395 34,898
Income before federal income tax expense 5,350 7,120 17,303 19,165
Federal income tax expense 937 1,233 2,939 3,249
NET INCOME $ 4,413 $ 5,887 $ 14,364 $ 15,916
Earnings per common share
Basic $ 0.59 $ 0.78 $ 1.91 $ 2.11
Diluted $ 0.58 $ 0.77 $ 1.89 $ 2.08
Cash dividends per common share $ 0.28 $ 0.27 $ 0.84 $ 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
2023 2022 2023 2022
Net income $ 4,413 $ 5,887 $ 14,364 $ 15,916
Unrealized gains (losses) on AFS securities arising during the period (6,708) (22,815) (5,736) (56,413)
Reclassification adjustment for net (gains) losses included in net income — — (67) —
Tax effect (1) 1,394 4,788 1,266 11,687
Unrealized gains (losses) on AFS securities, net of tax (5,314) (18,027) (4,537) (44,726)
Comprehensive income (loss) $ (901) $ (12,140) $ 9,827 $ (28,810)

(1)See “Note 9 – 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, 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
January 1, 2023 7,559,421 $ 128,651 $ 5,005 $ 89,748 $ (37,194) $ 186,210
Cumulative effect of accounting change - adoption of ASC 326 — — — (2,417) — (2,417)
Comprehensive income (loss) — — — 14,364 (4,537) 9,827
Issuance of common stock 55,456 1,208 — — — 1,208
Common stock transferred from the Rabbi Trust to satisfy deferred compensation obligations — 1,841 (1,841) — — —
Share-based payment awards under the Directors Plan — — 477 — — 477
Share-based compensation expense recognized in earnings under the RSP — 219 — — — 219
Common stock purchased for deferred compensation obligations — (1,333) — — — (1,333)
Common stock repurchased (124,320) (2,906) — — — (2,906)
Cash dividends paid ($0.84 per common share) — — — (6,162) — (6,162)
September 30, 2023 7,490,557 $ 127,680 $ 3,641 $ 95,533 $ (41,731) $ 185,123

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
2023 2022
OPERATING ACTIVITIES
Net income $ 14,364 $ 15,916
Reconciliation of net income to net cash provided by operating activities:
Provision for credit losses (55) 540
Depreciation 1,482 1,591
Amortization of OMSR 97 55
Amortization of acquisition intangibles 2 12
Amortization of subordinated debt issuance costs 67 67
Net amortization of AFS securities 1,120 1,568
Net gains on sale of AFS securities (67) —
Net gain on sale of mortgage loans (232) (568)
Change in OMSR valuation allowance — (532)
Net (gains) losses on foreclosed assets (150) (5)
Increase in cash value of corporate owned life insurance policies, net of expenses (666) (605)
Gains from redemption of corporate owned life insurance policies — (57)
Share-based payment awards under the Directors Plan 477 346
Share-based payment awards under the RSP 219 108
Deferred income tax expense (benefit) 53 —
Origination of loans held-for-sale (6,972) (19,566)
Proceeds from loan sales 7,478 20,935
Net changes in operating assets and liabilities which provided (used) cash:
Accrued interest receivable and other assets 1,459 (2,592)
Accrued interest payable and other liabilities (218) 3,216
Net cash provided by (used in) operating activities 18,458 20,429
INVESTING ACTIVITIES
Activity in AFS securities
Sales 18,089 —
Maturities, calls, and principal payments 44,805 56,044
Purchases (6,166) (204,657)
Net loan principal (originations) collections (70,614) 64,791
Proceeds from sales of foreclosed assets 421 105
Purchases of premises and equipment (2,889) (2,279)
Proceeds from redemption of corporate owned life insurance policies — 370
Proceeds from sale of FHLB Stock — 2,288
Purchases of FRB Stock — (401)
Funding of low income housing tax credit investments (612) (39)
Purchase of equity investments (102) —
Net cash provided by (used in) investing activities (17,068) (83,778)

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INTERIM CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (continued)

(Dollars in thousands)

Nine Months Ended <br> September 30
2023 2022
FINANCING ACTIVITIES
Net increase (decrease) in deposits $ 25,199 $ 80,694
Net increase (decrease) in fed funds purchased and repurchase agreements (5,441) 2,317
Net increase (decrease) in FHLB advances 65,000 (20,000)
Cash dividends paid on common stock (6,162) (6,011)
Proceeds from issuance of common stock 1,208 1,344
Common stock repurchased (2,906) (585)
Common stock purchased for deferred compensation obligations (1,333) (828)
Net cash provided by (used in) financing activities 75,565 56,931
Increase (decrease) in cash and cash equivalents 76,955 (6,418)
Cash and cash equivalents at beginning of period 38,924 105,330
Cash and cash equivalents at end of period $ 115,879 $ 98,912
SUPPLEMENTAL CASH FLOWS INFORMATION:
Interest paid $ 13,442 $ 3,524
Income taxes paid $ 2,250 $ 2,500
SUPPLEMENTAL NONCASH INFORMATION:
Investment of low income housing tax credits $ 5,000 $ —
Transfers of loans to foreclosed assets $ 341 $ 129

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 – Significant Accounting Policies

Basis of Presentation and Consolidation: The consolidated financial statements include the accounts of Isabella Bank Corporation, a financial services holding company, and its wholly owned subsidiary, Isabella Bank. All intercompany balances and accounts have been eliminated in consolidation. References to “the Corporation”, “Isabella”, “we”, “our”, “us”, and similar terms refer to the consolidated entity consisting of Isabella Bank Corporation and its subsidiary. References to Isabella Bank or “the Bank” refers to Isabella Bank Corporation’s subsidiary, Isabella Bank.

The accompanying unaudited interim condensed consolidated financial statements have been prepared in accordance with GAAP for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by GAAP for complete financial statements. In our opinion, all adjustments considered necessary for a fair presentation have been included. Operating results for the three and nine-month periods ended September 30, 2023 are not necessarily indicative of the results that may be expected for the year ending December 31, 2023. For further information, refer to our Annual Report on Form 10-K for the year ended December 31, 2022.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Loans: Loans that we have the intent and ability to hold for the foreseeable future or until maturity or payoff are reported at their outstanding principal balance adjusted for any charge-offs, the ACL, and any deferred fees or costs. Interest income on loans is accrued over the term of the loan based on the principal amount outstanding. Loan origination fees and certain direct loan origination costs are capitalized and recognized as a component of interest income over the term of the loan using the appropriate yield methods.

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

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

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

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

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

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

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

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Note 2 – AFS Securities

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

September 30, 2023
Amortized<br>Cost Gross<br>Unrealized<br>Gains Gross<br>Unrealized<br>Losses Fair<br>Value
U.S. Treasury $ 231,318 $ — $ 22,136 $ 209,182
States and political subdivisions 97,042 350 7,619 89,773
Auction rate money market preferred 3,200 — 630 2,570
Mortgage-backed securities 36,927 — 4,004 32,923
Collateralized mortgage obligations 191,187 — 15,557 175,630
Corporate 8,150 — 1,331 6,819
Total $ 567,824 $ 350 $ 51,277 $ 516,897
December 31, 2022
--- --- --- --- --- --- --- --- ---
Amortized<br>Cost Gross<br>Unrealized<br>Gains Gross<br>Unrealized<br>Losses Fair<br>Value
U.S. Treasury $ 231,622 $ — $ 22,921 $ 208,701
States and political subdivisions 122,023 392 4,903 117,512
Auction rate money market preferred 3,200 — 858 2,342
Mortgage-backed securities 42,309 — 3,239 39,070
Collateralized mortgage obligations 218,301 — 12,573 205,728
Corporate 8,150 — 1,022 7,128
Total $ 625,605 $ 392 $ 45,516 $ 580,481

The amortized cost and fair value of AFS securities by contractual maturity at September 30, 2023 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 $ — $ 231,318 $ — $ — $ — $ 231,318
States and political subdivisions 11,998 31,826 20,807 32,411 — 97,042
Auction rate money market preferred — — — — 3,200 3,200
Mortgage-backed securities — — — — 36,927 36,927
Collateralized mortgage obligations — — — — 191,187 191,187
Corporate — — 8,150 — — 8,150
Total amortized cost $ 11,998 $ 263,144 $ 28,957 $ 32,411 $ 231,314 $ 567,824
Fair value $ 11,945 $ 240,395 $ 25,832 $ 27,602 $ 211,123 $ 516,897

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

As the auction rate money market preferred investments have continual call dates, they are not reported by a specific maturity group. Because of their variable monthly payments, mortgage-backed securities and collateralized mortgage obligations are not reported by a specific maturity group. Approximately $148,000 of the amortized cost of the collateralized mortgage portfolio consist of agency commercial mortgage-backed securities with defined maturity dates of less than ten years.

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

Three Months Ended <br> September 30 Nine Months Ended <br> September 30
2023 2022 2023 2022
Proceeds from sales of AFS securities $ — $ — $ 18,089 $ —
Realized gains (losses) $ — $ — $ 67 $ —
Applicable income tax expense (benefit) $ — $ — $ 14 $ —

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

September 30, 2023
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 $ — $ — $ 22,136 $ 209,182 $ 22,136
States and political subdivisions 962 24,474 6,657 53,180 7,619
Auction rate money market preferred — — 630 2,570 630
Mortgage-backed securities 1 38 4,003 32,885 4,004
Collateralized mortgage obligations 294 4,362 15,263 171,268 15,557
Corporate — — 1,331 6,819 1,331
Total $ 1,257 $ 28,874 $ 50,020 $ 475,904 $ 51,277
Number of securities in an unrealized loss position: 67 400 467
December 31, 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 $ 1,388 $ 18,331 $ 21,533 $ 190,370 $ 22,921
States and political subdivisions 2,389 48,083 2,514 40,667 4,903
Auction rate money market preferred — — 858 2,342 858
Mortgage-backed securities 3,239 39,070 — — 3,239
Collateralized mortgage obligations 12,408 201,315 165 4,411 12,573
Corporate — — 1,022 7,128 1,022
Total $ 19,424 $ 306,799 $ 26,092 $ 244,918 $ 45,516
Number of securities in an unrealized loss position: 178 266 444

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

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Note 3 – Loans and ACL

Loan Composition

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

September 30<br>2023 Percent of Total December 31<br>2022 Percent of Total
Commercial and industrial
Secured $ 176,887 13.24 % $ 161,895 12.80 %
Unsecured 18,927 1.42 % 16,533 1.31 %
Total commercial and industrial 195,814 14.66 % 178,428 14.11 %
Commercial real estate
Commercial mortgage owner occupied 183,497 13.75 % 192,117 15.20 %
Commercial mortgage non-owner occupied 216,675 16.23 % 204,091 16.14 %
Commercial mortgage 1-4 family investor 88,150 6.60 % 85,278 6.75 %
Commercial mortgage multifamily 78,317 5.87 % 84,526 6.69 %
Total commercial real estate 566,639 42.45 % 566,012 44.78 %
Advances to mortgage brokers 24,807 1.86 % — — %
Agricultural
Agricultural mortgage 69,930 5.24 % 73,002 5.77 %
Agricultural 29,303 2.20 % 31,983 2.53 %
Total agricultural 99,233 7.44 % 104,985 8.30 %
Residential real estate
Senior lien 306,054 22.93 % 300,225 23.75 %
Junior lien 5,501 0.41 % 3,282 0.26 %
Home equity lines of credit 36,641 2.75 % 33,187 2.63 %
Total residential real estate 348,196 26.09 % 336,694 26.64 %
Consumer
Secured - direct 38,029 2.85 % 37,127 2.94 %
Secured - indirect 58,660 4.40 % 37,814 2.98 %
Unsecured 3,296 0.25 % 3,113 0.25 %
Total consumer 99,985 7.50 % 78,054 6.17 %
Total $ 1,334,674 100.00 % $ 1,264,173 100.00 %

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

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

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

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

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

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

Underwriting criteria for originated residential real estate loans generally include:

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

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

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

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

•Verification of acceptable credit reports.

•Verification of employment, income, and financial information.

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

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

Nonaccrual and Past Due Loans

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

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

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

September 30, 2023 December 31, 2022
Total Nonaccrual Loans Nonaccrual Loans with No ACL Total Nonaccrual Loans Nonaccrual Loans with No ACL
Commercial and industrial:
Secured $ 17 $ 17 $ 22 $ 22
Commercial real estate:
Commercial mortgage 1-4 family investor — — 74 74
Agricultural:
Agricultural mortgage 41 41 67 67
Agricultural other 167 167 167 167
Residential real estate:
Senior lien 295 295 127 107
Total $ 520 $ 520 $ 457 $ 437

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

September 30, 2023
Past Due: Accruing Loans 90 or More Days Past Due
30-59<br>Days 60-89<br>Days 90 Days<br>or More Current Total
Commercial and industrial
Secured $ 180 $ — $ 17 $ 176,690 $ 176,887 $ —
Unsecured 10 — — 18,917 18,927 —
Total commercial and industrial 190 — 17 195,607 195,814 —
Commercial real estate
Commercial mortgage owner occupied — — — 183,497 183,497 —
Commercial mortgage non-owner occupied — — — 216,675 216,675 —
Commercial mortgage 1-4 family investor — — — 88,150 88,150 —
Commercial mortgage multifamily — — — 78,317 78,317 —
Total commercial real estate — — — 566,639 566,639 —
Advances to mortgage brokers — — — 24,807 24,807 —
Agricultural
Agricultural mortgage — — — 69,930 69,930 —
Agricultural 10 — — 29,293 29,303 —
Total agricultural 10 — — 99,223 99,233 —
Residential real estate
Senior lien 185 405 131 305,333 306,054 —
Junior lien — — — 5,501 5,501 —
Home equity lines of credit — — — 36,641 36,641 —
Total residential real estate 185 405 131 347,475 348,196 —
Consumer
Secured - direct 7 12 — 38,010 38,029 —
Secured - indirect 17 8 — 58,635 58,660 —
Unsecured 9 — — 3,287 3,296 —
Total consumer 33 20 — 99,932 99,985 —
Total $ 418 $ 425 $ 148 $ 1,333,683 $ 1,334,674 $ —

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

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Credit Quality Indicators

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

September 30, 2023
2023 2022 2021 2020 2019 Prior Revolving<br>Loans Revolving Loans Converted to Term Total
Commercial and industrial: Secured
Risk ratings 1-3 $ 5,410 $ 4,336 $ 5,991 $ 7,221 $ 533 $ 972 $ 13,179 $ — $ 37,642
Risk rating 4 26,976 37,506 23,971 5,991 2,831 1,788 30,522 — 129,585
Risk rating 5 411 2,849 252 338 141 114 1,965 — 6,070
Risk rating 6 665 — 8 233 13 150 2,504 — 3,573
Risk rating 7 — — — 17 — — — — 17
Risk rating 8 — — — — — — — — —
Risk rating 9 — — — — — — — — —
Total $ 33,462 $ 44,691 $ 30,222 $ 13,800 $ 3,518 $ 3,024 $ 48,170 $ — $ 176,887
Current year-to-date gross charge-offs $ — $ — $ — $ — $ — $ — $ — $ — $ —
Commercial and industrial: Unsecured
Risk ratings 1-3 $ 538 $ 259 $ 144 $ 71 $ 107 $ 910 $ 4,435 $ — $ 6,464
Risk rating 4 955 3,200 636 596 — — 7,012 — 12,399
Risk rating 5 — 33 — — — — 31 — 64
Risk rating 6 — — — — — — — — —
Risk rating 7 — — — — — — — — —
Risk rating 8 — — — — — — — — —
Risk rating 9 — — — — — — — — —
Total $ 1,493 $ 3,492 $ 780 $ 667 $ 107 $ 910 $ 11,478 $ — $ 18,927
Current year-to-date gross charge-offs $ 8 $ — $ — $ — $ — $ — $ 21 $ — $ 29
Commercial real estate: Owner occupied
Risk ratings 1-3 $ 3,403 $ 1,746 $ 12,878 $ 14,429 $ 926 $ 3,376 $ 73 $ — $ 36,831
Risk rating 4 10,764 34,268 39,950 14,627 13,741 20,944 1,806 — 136,100
Risk rating 5 1,489 736 197 225 3,881 1,975 397 — 8,900
Risk rating 6 — — 882 236 — 548 — — 1,666
Risk rating 7 — — — — — — — — —
Risk rating 8 — — — — — — — — —
Risk rating 9 — — — — — — — — —
Total $ 15,656 $ 36,750 $ 53,907 $ 29,517 $ 18,548 $ 26,843 $ 2,276 $ — $ 183,497
Current year-to-date gross charge-offs $ — $ — $ — $ — $ — $ — $ — $ — $ —
Commercial real estate: Non-owner occupied
Risk ratings 1-3 $ 71 $ 4,425 $ 6,554 $ 877 $ 178 $ 1,797 $ — $ — $ 13,902
Risk rating 4 27,875 62,364 37,957 12,309 7,706 43,478 567 — 192,256
Risk rating 5 — — 5,897 — — 3,530 — — 9,427
Risk rating 6 1,034 — — 56 — — — — 1,090
Risk rating 7 — — — — — — — — —
Risk rating 8 — — — — — — — — —
Risk rating 9 — — — — — — — — —
Total $ 28,980 $ 66,789 $ 50,408 $ 13,242 $ 7,884 $ 48,805 $ 567 $ — $ 216,675
Current year-to-date gross charge-offs $ — $ — $ — $ — $ — $ — $ — $ — $ —

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September 30, 2023
2023 2022 2021 2020 2019 Prior Revolving<br>Loans Revolving Loans Converted to Term Total
Commercial real estate: 1-4 family investor
Risk ratings 1-3 $ 139 $ 1,558 $ 881 $ 916 $ 675 $ 1,020 $ 1,205 $ — $ 6,394
Risk rating 4 8,844 12,417 31,029 15,404 3,157 4,215 5,413 — 80,479
Risk rating 5 154 358 77 — 56 — — — 645
Risk rating 6 559 — — — 61 12 — — 632
Risk rating 7 — — — — — — — — —
Risk rating 8 — — — — — — — — —
Risk rating 9 — — — — — — — — —
Total $ 9,696 $ 14,333 $ 31,987 $ 16,320 $ 3,949 $ 5,247 $ 6,618 $ — $ 88,150
Current year-to-date gross charge-offs $ — $ — $ — $ — $ — $ — $ — $ — $ —
Commercial real estate: Multifamily
Risk ratings 1-3 $ 4,775 $ 4,774 $ 2,088 $ 573 $ — $ 1,853 $ — $ — $ 14,063
Risk rating 4 1,375 19,448 16,146 824 555 21,994 526 — 60,868
Risk rating 5 — — — 16 — — — — 16
Risk rating 6 — — 35 — — 3,335 — — 3,370
Risk rating 7 — — — — — — — — —
Risk rating 8 — — — — — — — — —
Risk rating 9 — — — — — — — — —
Total $ 6,150 $ 24,222 $ 18,269 $ 1,413 $ 555 $ 27,182 $ 526 $ — $ 78,317
Current year-to-date gross charge-offs $ — $ — $ — $ — $ — $ — $ — $ — $ —
Advances to mortgage brokers
Risk ratings 1-3 $ 24,807 $ — $ — $ — $ — $ — $ — $ — $ 24,807
Current year-to-date gross charge-offs $ — $ — $ — $ — $ — $ — $ — $ — $ —
Agricultural mortgage
Risk ratings 1-3 $ 292 $ 2,859 $ 1,171 $ 2,816 $ 611 $ 1,250 $ 85 $ — $ 9,084
Risk rating 4 5,391 13,054 9,236 6,038 3,995 8,042 833 — 46,589
Risk rating 5 126 4,377 5,903 702 185 60 236 — 11,589
Risk rating 6 851 — — — — 1,776 — — 2,627
Risk rating 7 — — — — — 41 — — 41
Risk rating 8 — — — — — — — — —
Risk rating 9 — — — — — — — — —
Total $ 6,660 $ 20,290 $ 16,310 $ 9,556 $ 4,791 $ 11,169 $ 1,154 $ — $ 69,930
Current year-to-date gross charge-offs $ — $ — $ — $ — $ — $ 4 $ — $ — $ 4
Agricultural other
Risk ratings 1-3 $ 617 $ 81 $ 121 $ 40 $ 268 $ 151 $ 739 $ — $ 2,017
Risk rating 4 1,380 2,711 2,415 684 158 77 14,958 — 22,383
Risk rating 5 724 9 168 507 — 623 2,422 — 4,453
Risk rating 6 — — 34 — — — 249 — 283
Risk rating 7 — — — — — — 167 — 167
Risk rating 8 — — — — — — — — —
Risk rating 9 — — — — — — — — —
Total $ 2,721 $ 2,801 $ 2,738 $ 1,231 $ 426 $ 851 $ 18,535 $ — $ 29,303
Current year-to-date gross charge-offs $ — $ — $ — $ — $ — $ — $ — $ — $ —

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

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

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

  1. EXCELLENT – Substantially Risk Free

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

•High liquidity, strong cash flow, low leverage.

•Unquestioned ability to meet all obligations when due.

•Experienced management, with management succession in place.

•Secured by cash.

  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.

•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.

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  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.

•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.

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

September 30, 2023
2023 2022 2021 2020 2019 Prior Revolving<br>Loans Revolving Loans Converted to Term Total
Residential real estate: Senior lien
Current $ 32,147 $ 54,084 $ 82,460 $ 53,888 $ 24,279 $ 58,440 $ — $ — $ 305,298
Past due 30-89 days — — — — 189 272 — — 461
Past due 90 or more days — — — — — — — — —
Nonaccrual 51 — — 31 — 213 — — 295
Total $ 32,198 $ 54,084 $ 82,460 $ 53,919 $ 24,468 $ 58,925 $ — $ — $ 306,054
Current year-to-date gross charge-offs $ — $ — $ — $ — $ — $ 2 $ — $ — $ 2
Residential real estate: Junior lien
Current $ 3,097 $ 1,406 $ 190 $ 141 $ 176 $ 491 $ — $ — $ 5,501
Past due 30-89 days — — — — — — — — —
Past due 90 or more days — — — — — — — — —
Nonaccrual — — — — — — — — —
Total $ 3,097 $ 1,406 $ 190 $ 141 $ 176 $ 491 $ — $ — $ 5,501
Current year-to-date gross charge-offs $ — $ — $ — $ — $ — $ — $ — $ — $ —
Residential real estate: Home equity lines of credit
Current $ — $ — $ — $ — $ — $ — $ 36,641 $ — $ 36,641
Past due 30-89 days — — — — — — — — —
Past due 90 or more days — — — — — — — — —
Nonaccrual — — — — — — — — —
Total $ — $ — $ — $ — $ — $ — $ 36,641 $ — $ 36,641
Current year-to-date gross charge-offs $ — $ — $ — $ — $ — $ — $ — $ — $ —
Consumer : Secured - direct
Current $ 12,632 $ 10,739 $ 7,116 $ 3,926 $ 1,966 $ 1,631 $ — $ — $ 38,010
Past due 30-89 days 12 — 7 — — — — — 19
Past due 90 or more days — — — — — — — — —
Nonaccrual — — — — — — — — —
Total $ 12,644 $ 10,739 $ 7,123 $ 3,926 $ 1,966 $ 1,631 $ — $ — $ 38,029
Current year-to-date gross charge-offs $ 31 $ 12 $ 5 $ — $ — $ — $ — $ — $ 48
Consumer : Secured - indirect
Current $ 27,842 $ 12,031 $ 7,457 $ 5,692 $ 2,210 $ 3,403 $ — $ — $ 58,635
Past due 30-89 days — — 1 12 7 5 — — 25
Past due 90 or more days — — — — — — — — —
Nonaccrual — — — — — — — — —
Total $ 27,842 $ 12,031 $ 7,458 $ 5,704 $ 2,217 $ 3,408 $ — $ — $ 58,660
Current year-to-date gross charge-offs $ — $ — $ — $ — $ — $ — $ — $ — $ —

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September 30, 2023
2023 2022 2021 2020 2019 Prior Revolving<br>Loans Revolving Loans Converted to Term Total
Consumer: Unsecured
Current $ 1,385 $ 906 $ 190 $ 116 $ 12 $ 1 $ 677 $ — $ 3,287
Past due 30-89 days — 3 6 — — — — — 9
Past due 90 or more days — — — — — — — — —
Nonaccrual — — — — — — — — —
Total $ 1,385 $ 909 $ 196 $ 116 $ 12 $ 1 $ 677 $ — $ 3,296
Current year-to-date gross charge-offs $ 256 $ 18 $ 11 $ 2 $ — $ 1 $ 1 $ — $ 289

Loan Modifications

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

Typical modifications granted include, but are not limited to:

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

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

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

•Forgiving principal.

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

•The borrower is currently in default on any debt.

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

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

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

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

The following is a summary of the amortized cost basis of loan modifications granted to borrowers experiencing financial difficulty for the nine-month period ended September 30, 2023. There were no loan modifications granted to borrowers experiencing financial difficulty for the three-month period ended September 30, 2023.

Term Extension Interest Rate Reduction<br>and Term Extension
Amortized Cost Basis % of Total Class of Financial Receivable Amortized Cost Basis % of Total Class of Financial Receivable
Commercial real estate
Commercial mortgage non-owner occupied $ 1,034 0.48 % $ — — %
Agricultural
Agricultural mortgage 232 0.33 % 28 0.04 %
Agricultural 34 0.12 % — — %
Residential real estate
Senior lien 5 — % — — %
Total $ 1,305 $ 28

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

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The following table summarizes the financial effect of the modifications granted to borrowers experiencing financial difficulty for the nine-month period ended September 30, 2023:

Weighted-Average Interest Rate Reduction Weighted-Average Term Extension (Years)
Commercial real estate
Commercial mortgage non-owner occupied N/A 3.00
Agricultural
Agricultural mortgage 4.50% 1.08
Agricultural N/A 1.00
Residential real estate
Senior lien N/A 2.60

During the three-month period ended September 30, 2022, there was one loan restructured with a below market interest rate in the amount of $55. During the nine months ended September 30, 2022, there were two loans restructured, one with a below market interest rate of $55, and one with both a below market interest rate and extension of amortization period in the amount of $98. Total restructured loans at September 30, 2022 was $153.

We closely monitor the performance of loans that are modified to borrowers experiencing financial difficulty to understand the effectiveness of our modification efforts. Loans modified during the nine-month period ended September 30, 2023 were all current at September 30, 2023, with no loans in past due status.

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

ACL - Loans

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

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

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

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

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

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

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

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

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

•Changes in interest rates;

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

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

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

•Lack of current financial information;

•Competition, Legal, and Regulatory; and

•Changes in the value of underlying collateral.

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

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

Allowance for Credit Losses
Three Months Ended September 30, 2023
Commercial and Industrial Commercial Real Estate Agricultural Residential Real Estate Consumer Unallocated Total
July 1, 2023 $ 822 $ 5,968 $ 264 $ 4,173 $ 1,606 $ — $ 12,833
Charge-offs (29) — — — (150) — (179)
Recoveries 70 3 — 266 94 — 433
Credit loss expense (34) (101) 5 (281) 91 — (320)
September 30, 2023 $ 829 $ 5,870 $ 269 $ 4,158 $ 1,641 $ — $ 12,767
Allowance for Credit Losses
--- --- --- --- --- --- --- --- --- --- --- --- --- --- ---
Nine Months Ended September 30, 2023
Commercial and Industrial Commercial Real Estate Agricultural Residential Real Estate Consumer Unallocated Total
January 1, 2023 $ 860 $ 461 $ 577 $ 617 $ 961 $ 6,374 $ 9,850
Impact of the adoption of ASC 326 (58) 5,532 (247) 3,535 356 (6,374) 2,744
Charge-offs (29) — (4) (2) (337) — (372)
Recoveries 74 23 6 315 220 — 638
Credit loss expense (18) (146) (63) (307) 441 — (93)
September 30, 2023 $ 829 $ 5,870 $ 269 $ 4,158 $ 1,641 $ — $ 12,767

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

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

September 30, 2023 December 31, 2022
Loan Balance Specific Allocation Loan Balance Specific Allocation
Commercial and industrial $ — $ — $ — $ —
Commercial real estate — — 8,342 12
Agricultural 182 — 10,935 —
Residential real estate 209 — 2,741 439
Consumer — — — —
Total $ 391 $ — $ 22,018 $ 451

We have designated loans classified as collateral dependent for which we apply the practical expedient to measure the ACL based on the fair value of the collateral less cost to sell, when the repayment is expected to be provided substantially by the sale or operation of the collateral and the borrower is experiencing financial difficulty. The fair value of the collateral is based on appraisals, which may be adjusted due to their age, and the type, location, and condition of the property or area or general market conditions to reflect the expected change in value between the effective date of the appraisal and the measurement date.

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Appraisals are updated every one to two years depending on the type of loan and the total exposure of the borrower. Loans evaluated for expected credit losses on an individual basis with no allowance include $391 in collateral dependent loans.

Note 4 – Borrowed Funds

Federal funds purchased and repurchase agreements

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

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

Three Months Ended September 30
2023 2022
Maximum Month End Balance Average Balance Weighted Average Interest Rate During the Period Maximum Month End Balance Average Balance Weighted Average Interest Rate During the Period
Securities sold under agreements to repurchase without stated maturity dates $ 54,327 $ 46,574 1.90 % $ 54,051 $ 49,267 0.07 %
Federal funds purchased $ — $ 1 6.13 % $ — $ — — %
FRB Discount Window $ — $ 135 5.30 % $ — $ — — %
Nine Months Ended September 30
--- --- --- --- --- --- --- --- --- --- --- --- ---
2023 2022
Maximum Month End Balance Average Balance Weighted Average Interest Rate During the Period Maximum Month End Balance Average Balance Weighted Average Interest Rate During the Period
Securities sold under agreements to repurchase without stated maturity dates $ 54,327 $ 40,601 1.64 % $ 54,051 $ 48,118 0.07 %
Federal funds purchased $ — $ 17 6.08 % $ — $ 1 0.79 %
FRB Discount Window $ — $ 89 5.28 % $ — $ — — %

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 $75,225 and $58,291 at September 30, 2023 and December 31, 2022, respectively. Such securities remain under our control. We may be required to provide additional collateral based on the fair value of underlying securities.

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

September 30, 2023 December 31, 2022
Amount Rate Amount Rate
Securities sold under agreements to repurchase without stated maturity dates $ 52,330 2.43 % $ 57,771 0.49 %

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

September 30<br>2023 December 31<br>2022
Pledged to secure borrowed funds $ 380,424 $ 347,331
Pledged to secure repurchase agreements 75,225 58,291
Pledged for public deposits and for other purposes necessary or required by law 72,730 48,698
Total $ 528,379 $ 454,320

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

September 30<br>2023 December 31<br>2022
U.S. Treasury $ 63,109 $ 29,351
States and political subdivisions — 11,037
Mortgage-backed securities 9,410 6,819
Collateralized mortgage obligations 2,706 11,084
Total $ 75,225 $ 58,291

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

As of September 30, 2023, we had the ability to borrow up to an additional $287,910, 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, 2023 December 31, 2022
Amount Rate Amount Rate
Fixed rate due 2023 $ 65,000 5.57 % $ — — %

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

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, 2023 December 31, 2022
Amount Rate Amount Rate
Fixed rate at 3.25% to floating, due 2031 $ 30,000 3.25 % $ 30,000 3.25 %
Unamortized issuance costs (688) (755)
Total subordinated debt, net $ 29,312 $ 29,245

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Note 5 – Computation of Earnings Per Common Share

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

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

Three Months Ended <br> September 30 Nine Months Ended <br> September 30
2023 2022 2023 2022
Average number of common shares outstanding for basic calculation 7,495,168 7,555,333 7,517,680 7,544,909
Average potential effect of common shares in the Directors Plan (1) 45,637 66,506 44,415 74,931
Average potential effect of common shares in the RSP 29,569 29,111 29,569 27,277
Average number of common shares outstanding used to calculate diluted earnings per common share 7,570,374 7,650,950 7,591,664 7,647,117
Net income $ 4,413 $ 5,887 $ 14,364 $ 15,916
Earnings per common share
Basic $ 0.59 $ 0.78 $ 1.91 $ 2.11
Diluted $ 0.58 $ 0.77 $ 1.89 $ 2.08

(1)Exclusive of shares held in the Rabbi Trust

Note 6 – Restricted Stock Plan

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

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

Three Months Ended September 30
2023 2022
Number<br>of Shares Fair<br>Value Number<br>of Shares Fair<br>Value
Balance, July 1 30,777 $ 683 30,208 $ 679
Granted (3,705) (91) (3,362) (87)
Vested — — — —
Forfeited — — — —
Balance, September 30 27,072 $ 592 26,846 $ 592
Nine Months Ended September 30
--- --- --- --- --- --- ---
2023 2022
Number<br>of Shares Fair<br>Value Number<br>of Shares Fair<br>Value
Balance, January 1 27,072 $ 592 20,123 $ 418
Granted — — 6,723 174
Vested — — — —
Forfeited — — — —
Balance, September 30 27,072 $ 592 26,846 $ 592

Fluctuations in granted shares are due to the reassessment of the projected award achievement. Expenses related to RSP awards during the three and nine month periods ended September 30, 2023 were $91 and $219, and $31 and $108 for the three and nine

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month periods ended September 30, 2022. As of September 30, 2023, there was $168 of total remaining unrecognized compensation expense related to nonvested restricted stock awards granted under the RSP. The remaining expense is expected to be recognized over a weighted-average service period of 1.27 years.

Note 7 – 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
2023 2022 2023 2022
Audit, consulting, and legal fees $ 672 $ 595 $ 1,764 $ 1,749
ATM and debit card fees 471 543 1,280 1,485
Marketing costs 398 209 883 812
Other losses 198 93 770 409
Memberships and subscriptions 259 230 729 654
Donations and community relations 252 239 692 665
FDIC insurance premiums 228 138 689 394
Loan underwriting fees 206 243 637 640
Director fees 179 210 581 598
All other 621 640 1,838 1,817
Total other noninterest expenses $ 3,484 $ 3,140 $ 9,863 $ 9,223

Note 8 – Federal Income Taxes

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

Three Months Ended <br> September 30 Nine Months Ended <br> September 30
2023 2022 2023 2022
Income taxes at statutory rate $ 1,124 $ 1,496 $ 3,634 $ 4,025
Effect of nontaxable income
Interest income on tax exempt municipal securities (131) (147) (415) (425)
Earnings on corporate owned life insurance policies (48) (47) (143) (150)
Other (6) (4) (18) (12)
Total effect of nontaxable income (185) (198) (576) (587)
Effect of nondeductible expenses 14 9 33 26
Effect of tax credits (69) (74) (205) (215)
Unrecognized deferred tax benefit 53 — 53 —
Federal income tax expense $ 937 $ 1,233 $ 2,939 $ 3,249

The unrecognized deferred tax benefit recorded in the third quarter of 2023 related to a low income housing tax credit investment. In that quarter we sold our membership interest in this investment, which resulted in a capital loss carryforward that is unlikely to be realized in the foreseeable future. As such, we did not recognize a deferred tax asset as of September 30, 2023 related to this investment.

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Note 9 – Accumulated Other Comprehensive Income

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

Three Months Ended September 30
2023 2022
Unrealized<br>Gains<br>(Losses) on<br>AFS<br>Securities Defined<br>Benefit<br>Pension Plan Total Unrealized<br>Gains<br>(Losses) on<br>AFS<br>Securities Defined<br>Benefit<br>Pension Plan Total
Balance, July 1 $ (35,051) $ (1,366) $ (36,417) $ (22,826) $ (2,014) $ (24,840)
OCI before reclassifications (6,708) — (6,708) (22,815) — (22,815)
Amounts reclassified from AOCI — — — — — —
Subtotal (6,708) — (6,708) (22,815) — (22,815)
Tax effect 1,394 — 1,394 4,788 — 4,788
OCI, net of tax (5,314) — (5,314) (18,027) — (18,027)
Balance, September 30 $ (40,365) $ (1,366) $ (41,731) $ (40,853) $ (2,014) $ (42,867)
Nine Months Ended September 30
--- --- --- --- --- --- --- --- --- --- --- --- ---
2023 2022
Unrealized<br>Gains<br>(Losses) on<br>AFS<br>Securities Defined<br>Benefit<br>Pension Plan Total Unrealized<br>Gains<br>(Losses) on<br>AFS<br>Securities Defined<br>Benefit<br>Pension Plan Total
Balance, January 1 $ (35,828) $ (1,366) $ (37,194) $ 3,873 $ (2,014) $ 1,859
OCI before reclassifications (5,736) — (5,736) (56,413) — (56,413)
Amounts reclassified from AOCI (67) — (67) — — —
Subtotal (5,803) — (5,803) (56,413) — (56,413)
Tax effect 1,266 — 1,266 11,687 — 11,687
OCI, net of tax (4,537) — (4,537) (44,726) — (44,726)
Balance, September 30 $ (40,365) $ (1,366) $ (41,731) $ (40,853) $ (2,014) $ (42,867)

Included in OCI for the three and nine-month periods ended September 30, 2023 and 2022 are changes in unrealized gains and losses related to certain 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
2023 2022
Auction Rate Money Market Preferred Stocks All Other AFS Securities Total Auction Rate Money Market Preferred Stocks All Other AFS Securities Total
Unrealized gains (losses) arising during the period $ (67) $ (6,641) $ (6,708) $ (18) $ (22,797) $ (22,815)
Reclassification adjustment for net (gains) losses included in net income — — — — — —
Net unrealized gains (losses) (67) (6,641) (6,708) (18) (22,797) (22,815)
Tax effect — 1,394 1,394 — 4,788 4,788
Unrealized gains (losses), net of tax $ (67) $ (5,247) $ (5,314) $ (18) $ (18,009) $ (18,027)
Nine Months Ended September 30
--- --- --- --- --- --- --- --- --- --- --- --- ---
2023 2022
Auction Rate Money Market Preferred Stocks All Other AFS Securities Total Auction Rate Money Market Preferred Stocks All Other AFS Securities Total
Unrealized gains (losses) arising during the period $ 228 $ (5,964) $ (5,736) $ (763) $ (55,650) $ (56,413)
Reclassification adjustment for net (gains) losses included in net income — (67) (67) — — —
Net unrealized gains (losses) 228 (6,031) (5,803) (763) (55,650) (56,413)
Tax effect — 1,266 1,266 — 11,687 11,687
Unrealized gains (losses), net of tax $ 228 $ (4,765) $ (4,537) $ (763) $ (43,963) $ (44,726)

Note 10 – Fair Value

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

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

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

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

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

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

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generally obtained from an independent third party. On a quarterly basis, we compare the values provided to alternative pricing sources.

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

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

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

September 30, 2023
Valuation Technique Fair Value Unobservable Input Actual Range Weighted Average
Collateral Dependent Loans - Discount applied to collateral:
Discounted value $391 Real Estate 20% 20%
Equipment 25% 25%
December 31, 2022
--- --- --- --- ---
Valuation Technique Fair Value Unobservable Input Actual Range Weighted Average
Discount applied to collateral:
Real Estate 20% - 30% 24%
Impaired Loans - Equipment 25% - 35% 31%
Discounted value $17,143 Cash crop inventory 40% 40%
Livestock 30% 30%
Accounts receivable 25% 27%
Furniture, fixtures & equipment 45% 45%

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

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

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

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

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

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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, 2023
Carrying<br>Value Estimated<br>Fair Value Level 1 Level 2 Level 3
ASSETS
Cash and cash equivalents $ 115,879 $ 115,879 $ 115,879 $ — $ —
Mortgage loans AFS 105 105 — 105 —
Gross loans 1,334,674 1,279,671 — — 1,279,671
Less allowance for credit losses 12,767 12,767 — — 12,767
Net loans 1,321,907 1,266,904 — — 1,266,904
Accrued interest receivable 7,346 7,346 7,346 — —
Equity securities without readily determinable fair values (1) 15,848 N/A — — —
OMSR 2,463 3,223 — 3,223 —
LIABILITIES
Deposits without stated maturities 1,437,396 1,437,396 1,437,396 — —
Deposits with stated maturities 332,078 324,936 — 324,936 —
Federal funds purchased and repurchase agreements 52,330 52,197 — 52,197 —
FHLB advances 65,000 65,003 — 65,003 —
Subordinated debt, net of unamortized issuance costs 29,312 24,184 — 24,184 —
Accrued interest payable 813 813 813 — —
December 31, 2022
--- --- --- --- --- --- --- --- --- --- ---
Carrying<br>Value Estimated<br>Fair Value Level 1 Level 2 Level 3
ASSETS
Cash and cash equivalents $ 38,924 $ 38,924 $ 38,924 $ — $ —
Mortgage loans AFS 379 395 — 395 —
Gross loans 1,264,173 1,225,669 — — 1,225,669
Less allowance for credit losses 9,850 9,850 — — 9,850
Net loans 1,254,323 1,215,819 — — 1,215,819
Accrued interest receivable 7,472 7,472 7,472 — —
Equity securities without readily determinable fair values (1) 15,746 N/A — — —
OMSR 2,559 3,174 — 3,174 —
LIABILITIES
Deposits without stated maturities 1,492,235 1,492,235 1,492,235 — —
Deposits with stated maturities 252,040 240,964 — 240,964 —
Federal funds purchased and repurchase agreements 57,771 57,581 — 57,581 —
Subordinated debt, net of unamortized issuance costs 29,245 26,365 — 26,365 —
Accrued interest payable 255 255 255 — —

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

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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, 2023 December 31, 2022
Total Level 1 Level 2 Level 3 Total Level 1 Level 2 Level 3
Recurring items
AFS securities
U.S. Treasury $ 209,182 $ — $ 209,182 $ — $ 208,701 $ — $ 208,701 $ —
States and political subdivisions 89,773 — 89,773 — 117,512 — 117,512 —
Auction rate money market preferred 2,570 — 2,570 — 2,342 — 2,342 —
Mortgage-backed securities 32,923 — 32,923 — 39,070 — 39,070 —
Collateralized mortgage obligations 175,630 — 175,630 — 205,728 — 205,728 —
Corporate 6,819 — 6,819 — 7,128 — 7,128 —
Total AFS securities 516,897 — 516,897 — 580,481 — 580,481 —
Nonrecurring items
Collateral dependent (net of ACL) in 2023<br>Impaired loans (net of the ALLL) in 2022 391 — — 391 17,143 — — 17,143
Foreclosed assets 509 — — 509 439 — — 439
Total $ 517,797 $ — $ 516,897 $ 900 $ 598,063 $ — $ 580,481 $ 17,582
Percent of assets and liabilities measured at fair value — % 99.83 % 0.17 % — % 97.06 % 2.94 %

We recognized an impairment related to foreclosed assets for the three and nine month period ended September 30, 2023 of $27 and $36, respectively, and $6 for both the three and nine month periods ended September 30, 2022. We had no other assets or liabilities recorded at fair value with changes fair value recognized through earnings, on a recurring basis or nonrecurring basis, as of September 30, 2023. Further, we had no unrealized gains and losses included in OCI for recurring Level 3 fair value measurements held at the end of the reporting period.

Note 11 – Operating Segments

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

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Note 12 – Parent Company Only Financial Information

Interim Condensed Balance Sheets

September 30<br>2023 December 31<br>2022
ASSETS
Cash on deposit at the Bank $ 19,984 $ 8,525
Investments in subsidiaries 145,777 158,125
Premises and equipment 1,169 1,171
Other assets 47,819 47,922
TOTAL ASSETS $ 214,749 $ 215,743
LIABILITIES AND SHAREHOLDERS’ EQUITY
Subordinated debt, net of unamortized issuance costs $ 29,312 $ 29,245
Other liabilities 314 288
Shareholders' equity 185,123 186,210
TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY $ 214,749 $ 215,743

Interim Condensed Statements of Income

Three Months Ended <br> September 30 Nine Months Ended <br> September 30
2023 2022 2023 2022
Income
Dividends from subsidiaries $ 8,333 $ 1,200 $ 21,666 $ 3,000
Interest income 56 3 103 8
Other income 4 3 10 10
Total income 8,393 1,206 21,779 3,018
Expenses
Interest expense 267 266 799 798
Management fee 238 225 714 675
Audit, consulting, and legal fees 138 135 426 411
Director fees 92 108 315 313
Other 87 67 267 240
Total expenses 822 801 2,521 2,437
Income before income tax benefit and equity in undistributed earnings of subsidiaries 7,571 405 19,258 581
Federal income tax benefit 157 167 500 507
Income before equity in undistributed earnings of subsidiaries 7,728 572 19,758 1,088
Undistributed earnings of subsidiaries (3,315) 5,315 (5,394) 14,828
Net income $ 4,413 $ 5,887 $ 14,364 $ 15,916

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Interim Condensed Statements of Cash Flows

Nine Months Ended <br> September 30
2023 2022
Operating activities
Net income $ 14,364 $ 15,916
Adjustments to reconcile net income to cash provided by operations
Undistributed earnings of subsidiaries 5,394 (14,828)
Share-based payment awards under the Directors Plan 477 346
Share-based payment awards under the RSP 219 108
Amortization of subordinated debt issuance costs 67 67
Depreciation 38 38
Changes in operating assets and liabilities which provided (used) cash
Other assets 103 1,461
Other liabilities 26 249
Net cash provided by (used in) operating activities 20,688 3,357
Investing activities
Net sales (purchases) of premises and equipment (36) —
Net cash provided by (used in) investing activities (36) —
Financing activities
Cash dividends paid on common stock (6,162) (6,011)
Proceeds from the issuance of common stock 1,208 1,344
Common stock repurchased (2,906) (585)
Common stock purchased for deferred compensation obligations (1,333) (828)
Net cash provided by (used in) financing activities (9,193) (6,080)
Increase (decrease) in cash and cash equivalents 11,459 (2,723)
Cash and cash equivalents at beginning of period 8,525 11,535
Cash and cash equivalents at end of period $ 19,984 $ 8,812

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

Executive Summary

During the three and nine months ended September 30, 2023, we reported net income of $4,413 and $14,364 and earnings per common share of $0.59 and $1.91, respectively. Net income and earnings per common share for the same period of 2022 were $5,887 and $15,916 and $0.78 and $2.11, respectively. Net interest income increased $123 for the nine-month period ended September 30, 2023 in comparison to the same period in 2022. Rising interest rates and growth in loans led to a $10,692 increase in gross interest income during the nine-month period ended September 30, 2023 compared to the same period in 2022. Conversely, rising interest rates on deposits and an increase in borrowings led to a $10,569 increase in interest expense for the nine-month period ended September 30, 2023 when compared to the same period in 2022.

Noninterest income decreased $83 during the first nine months of 2023 compared to the same period in 2022. This decline was driven by a $574 reduction in OMSR income and gain on the sale of loans of $336, offset by a $408 increase in wealth management fees. Noninterest expenses for the first nine months of 2023 increased $2,497, in comparison to the same period in 2022, and was primarily a result of increased compensation, equipment expense, and FDIC insurance premiums.

As of September 30, 2023, total assets and assets under management were $2,118,490 and $2,961,332, respectively. Assets under management include loans sold and serviced of $252,176 and investment and trust assets managed by Isabella Wealth of $590,666, in addition to assets on our consolidated balance sheet. Loans outstanding as of September 30, 2023 totaled $1,334,674. Since December 31, 2022, gross loans have increased $70,501 as a result of growth in advances to mortgage brokers and the commercial and consumer portfolios. Although competition for deposits continued through September 30, 2023, we experienced an increase in deposits. Total deposits were $1,769,474 as of September 30, 2023, increasing $25,199 since December 31, 2022. All regulatory capital ratios for the Bank exceeded the minimum thresholds to be considered a “well capitalized” institution.

Our securities portfolio totaled $516,897 at September 30, 2023 and included net unrealized losses of $50,927, or 8.97%, of the portfolio. The unrealized loss position on our AFS securities portfolio resulted from increases in short-term and intermediate-term benchmark interest rates. As a result, this change in unrealized losses has reduced our balance of shareholders' equity and negatively impacted our tangible book value. Management does not anticipate the need to sell securities and incur a loss as a result of such sale.

Our net yield on interest earning assets (FTE) was 3.02% and 3.12% for the three and nine months ended September 30, 2023, as compared to 3.28% and 3.10% for the three and nine months ended September 30, 2022. Management began implementing strategies in 2019, focused on positioning the Bank to benefit in a rising interest rate environment, including a reduced reliance on higher-cost borrowed funds and brokered deposits. To maintain a competitive edge in a rising interest rate environment, we increased most of our deposit rates beginning in the fourth quarter of 2022 and in recent periods, increased our level of borrowings to fund loan growth. As a result, this has negatively impacted our net yield on interest earning assets and further increases could slow the rate of growth in our net yield on interest earning assets during the remainder of the year.

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Recent Events and Legislation

Recent Bank Failures and the Condition of the Banking Industry: In March 2023, disruptions in the industry resulted in FDIC seizures of three banking institutions. Each bank had its own unique balance sheet issues, none of which exist at Isabella Bank. Shortly after the FDIC takeovers, the Federal Reserve Bank and the Department of Treasury announced enhanced insurance coverage and a borrowing program to help banks in need of funding. Isabella Bank continues to monitor such events, as well as industry and regulatory responses, to assure we are prepared for any changes that might affect the bank, including the ability to timely address economic uncertainty.

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

Impact of COVID-19: Unexpected and unprecedented changes have occurred since early 2020 as the result of COVID-19. The full impact of the pandemic, including the economic uncertainties surrounding the pandemic, remain in 2023. However, significant progress has been made with vaccinations and medical treatments. Additionally, improved safety guidelines and the easing of restrictions have occurred since the onset of the pandemic. We expect the significance of the pandemic, including the extent of its effect on our financial and operational results, to be dictated by continued developments related to the COVID-19 pandemic. We continue to closely monitor external events and are in continual discussion with our customers to assess, prepare, and respond to conditions as they evolve.

Reclassifications

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

Subsequent Events

We evaluated subsequent events after September 30, 2023 through the date our interim condensed consolidated financial statements were issued for potential recognition and disclosure. No subsequent events require financial statement recognition or disclosure between September 30, 2023 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>2023 June 30<br>2023 March 31<br>2023 December 31<br>2022 September 30<br>2022
INCOME STATEMENT DATA
Interest income $ 20,485 $ 19,495 $ 18,595 $ 17,915 $ 17,019
Interest expense 6,183 4,816 3,244 1,643 1,216
Net interest income 14,302 14,679 15,351 16,272 15,803
Provision for credit losses (292) 196 41 (57) 18
Noninterest income 3,414 3,604 3,293 3,272 3,252
Noninterest expenses 12,658 12,539 12,198 11,922 11,917
Federal income tax expense 937 918 1,084 1,357 1,233
Net income $ 4,413 $ 4,630 $ 5,321 $ 6,322 $ 5,887
PER SHARE
Basic earnings $ 0.59 $ 0.62 $ 0.70 $ 0.84 $ 0.78
Diluted earnings $ 0.58 $ 0.61 $ 0.70 $ 0.83 $ 0.77
Dividends $ 0.28 $ 0.28 $ 0.28 $ 0.28 $ 0.27
Tangible book value $ 18.27 $ 18.69 $ 19.24 $ 18.25 $ 16.96
Quoted market value
High $ 23.00 $ 26.00 $ 25.10 $ 24.02 $ 24.95
Low $ 19.61 $ 19.13 $ 22.08 $ 21.00 $ 21.39
Close (1) $ 21.05 $ 20.50 $ 24.80 $ 23.50 $ 21.40
Common shares outstanding (1) 7,490,557 7,496,826 7,540,015 7,559,421 7,564,348
PERFORMANCE RATIOS
Return on average total assets 0.86 % 0.91 % 1.04 % 1.24 % 1.13 %
Return on average shareholders' equity 9.24 % 9.47 % 11.35 % 14.01 % 12.13 %
Return on average tangible shareholders' equity 12.37 % 12.58 % 15.28 % 19.14 % 16.15 %
Net interest margin yield (FTE) 3.02 % 3.11 % 3.22 % 3.43 % 3.28 %
BALANCE SHEET DATA (1)
Gross loans $ 1,334,674 $ 1,334,402 $ 1,270,651 $ 1,264,173 $ 1,236,151
AFS securities $ 516,897 $ 530,497 $ 568,650 $ 580,481 $ 581,233
Total assets $ 2,118,490 $ 2,042,448 $ 2,084,624 $ 2,030,267 $ 2,063,977
Deposits $ 1,769,474 $ 1,714,948 $ 1,813,528 $ 1,744,275 $ 1,791,033
Borrowed funds $ 146,642 $ 121,392 $ 61,262 $ 87,016 $ 81,704
Shareholders' equity $ 185,123 $ 188,431 $ 193,333 $ 186,210 $ 176,612
Gross loans to deposits 75.43 % 77.81 % 70.07 % 72.48 % 69.02 %
ASSETS UNDER MANAGEMENT (1)
Loans sold with servicing retained $ 252,176 $ 254,934 $ 259,512 $ 264,206 $ 268,879
Assets managed by Isabella Wealth $ 590,666 $ 593,530 $ 571,453 $ 513,918 $ 464,136
Total assets under management $ 2,961,332 $ 2,890,912 $ 2,915,589 $ 2,808,391 $ 2,796,992
ASSET QUALITY (1)
Nonperforming loans to gross loans 0.04 % 0.04 % 0.04 % 0.04 % 0.05 %
Nonperforming assets to total assets 0.05 % 0.05 % 0.05 % 0.05 % 0.04 %
ACL to gross loans 0.96 % 0.96 % 0.99 % 0.78 % 0.78 %
CAPITAL RATIOS (1)
Shareholders' equity to assets 8.74 % 9.23 % 9.27 % 9.17 % 8.56 %
Tier 1 leverage 8.77 % 8.70 % 8.58 % 8.61 % 8.44 %
Common equity tier 1 capital 12.43 % 12.39 % 12.71 % 12.91 % 12.92 %
Tier 1 risk-based capital 12.43 % 12.39 % 12.71 % 12.91 % 12.92 %
Total risk-based capital 15.39 % 15.37 % 15.77 % 15.79 % 15.85 %

(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>2023 September 30<br>2022 September 30<br>2021
INCOME STATEMENT DATA
Interest income $ 58,575 $ 47,883 $ 45,072
Interest expense 14,243 3,674 5,845
Net interest income 44,332 44,209 39,227
Provision for credit losses (55) 540 (599)
Noninterest income 10,311 10,394 10,214
Noninterest expenses 37,395 34,898 32,497
Federal income tax expense 2,939 3,249 2,838
Net income $ 14,364 $ 15,916 $ 14,705
PER SHARE
Basic earnings $ 1.91 $ 2.11 $ 1.85
Diluted earnings $ 1.89 $ 2.08 $ 1.82
Dividends $ 0.84 $ 0.81 $ 0.81
Tangible book value $ 18.27 $ 16.96 $ 21.87
Quoted market value
High $ 26.00 $ 26.25 $ 26.74
Low $ 19.13 $ 21.39 $ 19.45
Close (1) $ 21.05 $ 21.40 $ 26.03
Common shares outstanding (1) 7,490,557 7,564,348 7,926,610
PERFORMANCE RATIOS
Return on average total assets 0.94 % 1.03 % 0.97 %
Return on average shareholders' equity 10.01 % 10.62 % 8.82 %
Return on average tangible shareholders' equity 13.39 % 14.01 % 11.28 %
Net interest margin yield (FTE) 3.12 % 3.10 % 2.87 %
BALANCE SHEET DATA (1)
Gross loans $ 1,334,674 $ 1,236,151 $ 1,248,558
AFS securities $ 516,897 $ 581,233 $ 494,384
Total assets $ 2,118,490 $ 2,063,977 $ 2,082,701
Deposits $ 1,769,474 $ 1,791,033 $ 1,692,316
Borrowed funds $ 146,642 $ 81,704 $ 156,655
Shareholders' equity $ 185,123 $ 176,612 $ 221,642
Gross loans to deposits 75.43 % 69.02 % 73.78 %
ASSETS UNDER MANAGEMENT (1)
Loans sold with servicing retained $ 252,176 $ 268,879 $ 285,392
Assets managed by Isabella Wealth $ 590,666 $ 464,136 $ 491,784
Total assets under management $ 2,961,332 $ 2,796,992 $ 2,859,877
ASSET QUALITY (1)
Nonperforming loans to gross loans 0.04 % 0.05 % 0.25 %
Nonperforming assets to total assets 0.05 % 0.04 % 0.18 %
ACL to gross loans 0.96 % 0.78 % 0.73 %
CAPITAL RATIOS (1)
Shareholders' equity to assets 8.74 % 8.56 % 10.64 %
Tier 1 leverage 8.77 % 8.44 % 8.37 %
Common equity tier 1 capital 12.43 % 12.92 % 13.07 %
Tier 1 risk-based capital 12.43 % 12.92 % 13.07 %
Total risk-based capital 15.39 % 15.85 % 16.03 %

(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, 2023 June 30, 2023 September 30, 2022
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) $ 1,325,455 $ 17,270 5.21 % $ 1,300,593 $ 15,931 4.90 % $ 1,256,723 $ 13,563 4.32 %
Taxable investment securities 478,846 2,298 1.92 % 485,897 2,356 1.94 % 490,751 2,190 1.79 %
Nontaxable investment securities 93,192 915 3.93 % 97,755 946 3.87 % 110,058 1,002 3.64 %
Fed funds sold 13 — 5.51 % 4 — 4.70 % 16 — 1.98 %
Other 30,400 252 3.32 % 37,664 517 5.49 % 101,687 521 2.05 %
Total earning assets 1,927,906 20,735 4.30 % 1,921,913 19,750 4.11 % 1,959,235 17,276 3.53 %
NONEARNING ASSETS
Allowance for credit losses (12,937) (12,759) (9,691)
Cash and demand deposits due from banks 25,287 24,807 24,875
Premises and equipment 26,629 26,401 24,475
Accrued income and other assets 74,244 80,374 78,151
Total assets $ 2,041,129 $ 2,040,736 $ 2,077,045
INTEREST BEARING LIABILITIES
Interest bearing demand deposits $ 342,175 $ 242 0.28 % $ 348,341 $ 194 0.22 % $ 381,282 $ 64 0.07 %
Savings deposits 595,372 2,156 1.45 % 628,673 1,849 1.18 % 642,916 270 0.17 %
Time deposits 324,399 2,617 3.23 % 303,117 2,066 2.73 % 262,628 574 0.87 %
Federal funds purchased and repurchase agreements 46,574 284 2.44 % 35,495 171 1.93 % 49,267 9 0.07 %
FHLB advances 44,429 617 5.55 % 20,404 270 5.29 % 6,739 33 1.96 %
Subordinated debt, net of unamortized issuance costs 29,298 267 3.65 % 29,275 266 3.63 % 29,211 266 3.64 %
Total interest bearing liabilities 1,382,247 6,183 1.79 % 1,365,305 4,816 1.41 % 1,372,043 1,216 0.35 %
NONINTEREST BEARING LIABILITIES
Demand deposits 451,123 462,953 497,215
Other 16,802 16,906 13,627
Shareholders’ equity 190,957 195,572 194,160
Total liabilities and shareholders’ equity $ 2,041,129 $ 2,040,736 $ 2,077,045
Net interest income (FTE) $ 14,552 $ 14,934 $ 16,060
Net yield on interest earning assets (FTE) 3.02 % 3.11 % 3.28 %

(1) Includes loans and mortgage loans AFS

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Nine Months Ended
September 30, 2023 September 30, 2022
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) $ 1,298,316 $ 48,090 4.94 % $ 1,251,206 $ 39,120 4.17 %
Taxable investment securities 489,782 7,125 1.94 % 462,675 5,795 1.67 %
Nontaxable investment securities 99,014 2,882 3.88 % 107,041 2,934 3.65 %
Fed funds sold 11 — 5.06 % 8 — 1.69 %
Other 42,767 1,255 3.91 % 113,847 822 0.96 %
Total earning assets 1,929,890 59,352 4.10 % 1,934,777 48,671 3.35 %
NONEARNING ASSETS
Allowance for credit losses (12,786) (9,372)
Cash and demand deposits due from banks 25,043 24,843
Premises and equipment 26,300 24,401
Accrued income and other assets 75,239 87,989
Total assets $ 2,043,686 $ 2,062,638
INTEREST BEARING LIABILITIES
Interest bearing demand deposits $ 356,608 $ 582 0.22 % $ 379,952 $ 170 0.06 %
Savings deposits 623,157 5,471 1.17 % 628,823 600 0.13 %
Time deposits 298,535 5,900 2.64 % 275,586 1,928 0.93 %
Federal funds purchased and repurchase agreements 40,707 604 1.98 % 48,119 26 0.07 %
FHLB advances 21,685 887 5.45 % 10,513 152 1.93 %
Subordinated debt, net of unamortized issuance costs 29,275 799 3.64 % 29,189 798 3.65 %
Total interest bearing liabilities 1,369,967 14,243 1.39 % 1,372,182 3,674 0.36 %
NONINTEREST BEARING LIABILITIES
Demand deposits 466,725 475,373
Other 15,619 15,242
Shareholders’ equity 191,375 199,841
Total liabilities and shareholders’ equity $ 2,043,686 $ 2,062,638
Net interest income (FTE) $ 45,109 $ 44,997
Net yield on interest earning assets (FTE) 3.12 % 3.10 %

(1) Includes loans and mortgage loans AFS

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

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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, 2023 Compared to <br> June 30, 2023 <br> Increase (Decrease) Due to Three Months Ended <br> September 30, 2023 Compared to  <br> September 30, 2022 <br>  Increase (Decrease) Due to Nine Months Ended <br> September 30, 2023 Compared to <br> September 30, 2022 <br> Increase (Decrease) Due to
Volume Rate Net Volume Rate Net Volume Rate Net
Changes in interest income
Loans $ 309 $ 1,030 $ 1,339 $ 774 $ 2,933 $ 3,707 $ 1,519 $ 7,451 $ 8,970
Taxable investment securities (34) (24) (58) (54) 162 108 354 976 1,330
Nontaxable investment securities (45) 14 (31) (162) 75 (87) (227) 175 (52)
Other (87) (178) (265) (485) 216 (269) (779) 1,212 433
Total changes in interest income 143 842 985 73 3,386 3,459 867 9,814 10,681
Changes in interest expense
Interest bearing demand deposits (3) 51 48 (7) 185 178 (11) 423 412
Savings deposits (102) 409 307 (21) 1,907 1,886 (5) 4,876 4,871
Time deposits 152 399 551 164 1,879 2,043 173 3,799 3,972
Federal funds purchased and repurchase agreements 61 52 113 (1) 276 275 (5) 583 578
FHLB advances 333 14 347 440 144 584 270 465 735
Subordinated debt, net of unamortized issuance costs — 1 1 1 — 1 2 (1) 1
Total changes in interest expense 441 926 1,367 576 4,391 4,967 424 10,145 10,569
Net change in interest margin (FTE) $ (298) $ (84) $ (382) $ (503) $ (1,005) $ (1,508) $ 443 $ (331) $ 112

The interest rate increases during 2022 and the first nine months of 2023 have alleviated much of the pressure placed on our net interest margin. Over the past several quarters, rising rates on deposit accounts and an increase in borrowed funds have reversed our recent improvement in our net interest margin. With the potential for additional rate increases during the remainder of the year, we should see improvement in net yield on interest earning assets but at a slower pace than recent periods.

Average Yield / Rate for the Three-Month Periods Ended:
September 30<br>2023 June 30<br>2023 March 31<br>2023 December 31<br>2022 September 30<br>2022
Total earning assets 4.30 % 4.11 % 3.89 % 3.77 % 3.53 %
Total interest bearing liabilities 1.79 % 1.41 % 0.95 % 0.49 % 0.35 %
Net yield on interest earning assets (FTE) 3.02 % 3.11 % 3.22 % 3.43 % 3.28 %
Quarter to Date Net Interest Income (FTE)
--- --- --- --- --- --- --- --- --- --- ---
September 30<br>2023 June 30<br>2023 March 31<br>2023 December 31<br>2022 September 30<br>2022
Total interest income (FTE) $ 20,735 $ 19,750 $ 18,867 $ 18,183 $ 17,276
Total interest expense 6,183 4,816 3,244 1,643 1,216
Net interest income (FTE) $ 14,552 $ 14,934 $ 15,623 $ 16,540 $ 16,060

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Past Due and Nonaccrual Loans

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

Total Past Due and Nonaccrual Loans
September 30<br>2023 June 30<br>2023 March 31<br>2023 December 31<br>2022 September 30<br>2022
Commercial and industrial $ 207 $ 25 $ 291 $ 307 $ 348
Commercial real estate — 2,495 2,844 7,197 2,399
Agricultural 219 218 588 234 574
Residential real estate 756 838 2,365 3,333 507
Consumer 53 103 43 59 180
Total $ 1,235 $ 3,679 $ 6,131 $ 11,130 $ 4,008
Total past due and nonaccrual loans to gross loans 0.09 % 0.28 % 0.48 % 0.88 % 0.32 %

The increase in past due and nonaccrual loans within the commercial and residential loan portfolios at the end of 2022 was the result of one past due relationship, which has since improved. 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 following table summarizes nonaccrual loans as of:

September 30<br>2023 June 30<br>2023 March 31<br>2023 December 31<br>2022 September 30<br>2022
Commercial and industrial $ 17 $ 17 $ 20 $ 22 $ 100
Commercial real estate — — 57 74 78
Agricultural 208 218 232 234 266
Residential real estate 295 179 179 127 136
Total $ 520 $ 414 $ 488 $ 457 $ 580
Nonaccrual loans as a % of loans at end of period 0.04 % 0.03 % 0.04 % 0.04 % 0.05 %

A summary of loans past due and in nonaccrual status, including the composition of the ending balance of nonaccrual status loans by type, is included in “Note 3 – Loans and ACL” of our interim condensed consolidated financial statements.

Nonperforming Assets

The following table summarizes our nonperforming assets as of:

September 30<br>2023 June 30<br>2023 March 31<br>2023 December 31<br>2022 September 30<br>2022
Nonaccrual loans $ 520 $ 414 $ 488 $ 457 $ 580
Accruing loans past due 90 days or more — 133 — — 21
Total nonperforming loans 520 547 488 457 601
Foreclosed assets 509 405 414 439 240
Debt securities 77 77 77 77 77
Total nonperforming assets $ 1,106 $ 1,029 $ 979 $ 973 $ 918
Nonperforming loans as a % of total loans 0.04 % 0.04 % 0.04 % 0.04 % 0.05 %
Nonperforming assets as a % of total assets 0.05 % 0.05 % 0.05 % 0.05 % 0.04 %

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ACL - Loans

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

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

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

Three Months Ended <br> September 30 Nine Months Ended <br> September 30
2023 2022 2023 2022
Allowance at beginning of period $ 12,833 $ 9,700 $ 9,850 $ 9,103
Adoption of ASC 326 — — 2,744 —
Charge-offs
Commercial and industrial 29 — 29 3
Commercial real estate — — — —
Agricultural — — 4 —
Residential real estate — — 2 —
Consumer 150 173 337 367
Total charge-offs 179 173 372 370
Recoveries
Commercial and industrial 70 5 74 16
Commercial real estate 3 9 23 38
Agricultural — 1 6 4
Residential real estate 266 53 315 123
Consumer 94 64 220 223
Total recoveries 433 132 638 404
Net loan charge-offs (recoveries) (254) 41 (266) (34)
Provision for credit losses (320) 18 (93) 540
Allowance at end of period $ 12,767 $ 9,677 $ 12,767 $ 9,677
Net loan charge-offs (recoveries) to average loans outstanding (0.02) % 0.00 % (0.02) % 0.00 %

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

September 30<br>2023 June 30<br>2023 March 31<br>2023 December 31<br>2022 September 30<br>2022
Total charge-offs $ 179 $ 92 $ 101 $ 249 $ 173
Total recoveries 433 95 110 479 132
Net loan charge-offs (recoveries) (254) (3) (9) (230) 41
Net loan charge-offs (recoveries) to average loans outstanding (0.02) % 0.00 % 0.00 % (0.02) % 0.00 %
Provision for credit losses $ (320) $ 190 $ 37 $ (57) $ 18
Provision for credit losses to average loans outstanding (0.02) % 0.01 % 0.00 % 0.00 % 0.00 %
ACL $ 12,767 $ 12,833 $ 12,640 $ 9,850 $ 9,677
ACL as a % of loans at end of period 0.96 % 0.96 % 0.99 % 0.78 % 0.78 %
ACL as a % of nonaccrual loans 2,455.19 % 3,099.76 % 2,590.16 % 2,155.36 % 1,668.45 %

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

September 30<br>2023 June 30<br>2023 March 31<br>2023 December 31<br>2022 September 30<br>2022
ACL
Individually evaluated $ — $ — $ — $ 451 $ 474
Collectively evaluated 12,767 12,833 12,640 9,399 9,203
Total $ 12,767 $ 12,833 $ 12,640 $ 9,850 $ 9,677
ACL to gross loans
Individually evaluated 0.00 % 0.00 % 0.00 % 0.04 % 0.04 %
Collectively evaluated 0.96 % 0.96 % 0.99 % 0.74 % 0.74 %
Total 0.96 % 0.96 % 0.99 % 0.78 % 0.78 %

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

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

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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
2023 2022 %
Service charges and fees
ATM and debit card fees $ 1,250 $ 1,212 3.14 %
Service charges and fees on deposit accounts 598 673 (75) (11.14) %
Freddie Mac servicing fee 154 168 (14) (8.33) %
Net OMSR income (loss) (20) — (20) — %
Other fees for customer services 78 69 9 13.04 %
Total service charges and fees 2,060 2,122 (62) (2.92) %
Wealth management fees 858 679 179 26.36 %
Earnings on corporate owned life insurance policies 229 223 6 2.69 %
Net gain on sale of mortgage loans 109 174 (65) (37.36) %
All other 158 54 104 192.59 %
Total noninterest income $ 3,414 $ 3,252 4.98 %

All values are in US Dollars.

Nine Months Ended September 30
Change
2023 2022 %
Service charges and fees
ATM and debit card fees $ 3,654 $ 3,507 4.19 %
Service charges and fees on deposit accounts 1,797 1,913 (116) (6.06) %
Freddie Mac servicing fee 475 506 (31) (6.13) %
Net OMSR income (loss) (97) 477 (574) (120.34) %
Other fees for customer services 256 212 44 20.75 %
Total service charges and fees 6,085 6,615 (530) (8.01) %
Wealth management fees 2,625 2,217 408 18.40 %
Earnings on corporate owned life insurance policies 681 655 26 3.97 %
Net gain on sale of mortgage loans 232 568 (336) (59.15) %
All other 688 339 349 102.95 %
Total noninterest income $ 10,311 $ 10,394 (0.80) %

All values are in US Dollars.

The decline in service charges and fees on deposit accounts is the result of the removal of NSF fees, effective May 1, 2023. As such, we do not anticipate service charges and fees on deposit accounts for 2023 to exceed 2022 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 2022. A decline in volume of originated loans and the balance of loans serviced led to OMSR losses during the first nine months of 2023. Income during the remainder of 2023 will be driven by the volume of loans originated within the servicing-retained portfolio, along with any further future increases in interest rates.

The increase in wealth management fees is due to an increase in new accounts and market growth. Wealth management fees for 2023 are expected to continue to exceed 2022 levels for the remainder of the year.

The amount of loans sold is driven by customer demand and balance sheet management strategies. Loan demand declined during the first nine months of 2023 compared to the prior year. With fewer mortgage loans being originated and sold, we experienced a decline in net gain on sale of mortgage loans. Demand is not expected to change during the remainder of 2023 due to the continual rise in interest rates and as a result, net gain on sale of mortgage loans is not expected to exceed 2022 levels.

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

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

Three Months Ended September 30
Change
2023 2022 %
Compensation and benefits $ 6,639 $ 6,369 4.24 %
Furniture and equipment 1,612 1,490 122 8.19 %
Occupancy 923 918 5 0.54 %
Other
Audit, consulting, and legal fees 672 595 77 12.94 %
ATM and debit card fees 471 543 (72) (13.26) %
Marketing costs 398 209 189 90.43 %
Other losses 198 93 105 112.90 %
Memberships and subscriptions 259 230 29 12.61 %
Donations and community relations 252 239 13 5.44 %
FDIC insurance premiums 228 138 90 65.22 %
Loan underwriting fees 206 243 (37) (15.23) %
Director fees 179 210 (31) (14.76) %
All other 621 640 (19) (2.97) %
Total other noninterest expenses 3,484 3,140 344 10.96 %
Total noninterest expenses $ 12,658 $ 11,917 6.22 %

All values are in US Dollars.

Nine Months Ended September 30
Change
2023 2022 %
Compensation and benefits $ 19,789 $ 18,480 7.08 %
Furniture and equipment 4,822 4,382 440 10.04 %
Occupancy 2,921 2,813 108 3.84 %
Other
Audit, consulting, and legal fees 1,764 1,749 15 0.86 %
ATM and debit card fees 1,280 1,485 (205) (13.80) %
Marketing costs 883 812 71 8.74 %
Other losses 770 409 361 88.26 %
Memberships and subscriptions 729 654 75 11.47 %
Donations and community relations 692 665 27 4.06 %
FDIC insurance premiums 689 394 295 74.87 %
Loan underwriting fees 637 640 (3) (0.47) %
Director fees 581 598 (17) (2.84) %
All other 1,838 1,817 21 1.16 %
Total other noninterest expenses 9,863 9,223 640 6.94 %
Total noninterest expenses $ 37,395 $ 34,898 7.16 %

All values are in US Dollars.

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

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

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

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

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

Analysis of Changes in Financial Condition

September 30<br>2023 December 31<br>2022 Change % Change<br>(unannualized)
ASSETS
Cash and cash equivalents $ 115,879 $ 38,924 197.71 %
AFS securities
Amortized cost of AFS securities 567,824 625,605 (57,781) (9.24) %
Unrealized gains (losses) on AFS securities (50,927) (45,124) (5,803) 12.86 %
AFS securities 516,897 580,481 (63,584) (10.95) %
Mortgage loans AFS 105 379 (274) (72.30) %
Loans
Loans 1,334,674 1,264,173 70,501 5.58 %
Less allowance for credit losses 12,767 9,850 2,917 29.61 %
Net loans 1,321,907 1,254,323 67,584 5.39 %
Premises and equipment 26,960 25,553 1,407 5.51 %
Corporate owned life insurance policies 33,654 32,988 666 2.02 %
Equity securities without readily determinable fair values 15,848 15,746 102 0.65 %
Goodwill and other intangible assets 48,285 48,287 (2) — %
Accrued interest receivable and other assets 38,955 33,586 5,369 15.99 %
TOTAL ASSETS $ 2,118,490 $ 2,030,267 4.35 %
LIABILITIES AND SHAREHOLDERS’ EQUITY
Liabilities
Deposits $ 1,769,474 $ 1,744,275 1.44 %
Borrowed funds 146,642 87,016 59,626 68.52 %
Accrued interest payable and other liabilities 17,251 12,766 4,485 35.13 %
Total liabilities 1,933,367 1,844,057 89,310 4.84 %
Shareholders’ equity 185,123 186,210 (1,087) (0.58) %
TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY $ 2,118,490 $ 2,030,267 4.35 %

All values are in US Dollars.

As shown above, total assets increased $88,223 from December 31, 2022, driven primarily by an increase in loans and excess cash, partially offset by a decline in AFS securities. Total loans grew $70,501, largely driven by an increase in advances to mortgage brokers and growth in the commercial and consumer portfolios, offset by a decline in the agricultural portfolio. Loan growth was funded by maturities and principal paydowns within the AFS securities portfolio, as well as short-term borrowed funds.

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The following table outlines the changes in loan balances:

September 30<br>2023 December 31<br>2022 Change % Change<br>(unannualized)
Commercial and industrial $ 195,814 $ 178,428 9.74 %
Commercial real estate 566,639 566,012 627 0.11 %
Advances to mortgage brokers 24,807 — 24,807 N/M
Agricultural 99,233 104,985 (5,752) (5.48) %
Residential real estate 348,196 336,694 11,502 3.42 %
Consumer 99,985 78,054 21,931 28.10 %
Total $ 1,334,674 $ 1,264,173 5.58 %

All values are in US Dollars.

The following table displays loan balances as of:

September 30<br>2023 June 30<br>2023 March 31<br>2023 December 31<br>2022 September 30<br>2022
Commercial and industrial $ 195,814 $ 194,914 $ 189,185 $ 178,428 $ 180,124
Commercial real estate 566,639 564,254 566,410 566,012 552,399
Advances to mortgage brokers 24,807 39,099 — — 1,484
Agricultural 99,233 96,689 94,760 104,985 97,527
Residential real estate 348,196 343,474 336,186 336,694 330,232
Consumer 99,985 95,972 84,110 78,054 74,385
Total $ 1,334,674 $ 1,334,402 $ 1,270,651 $ 1,264,173 $ 1,236,151

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

The following table outlines the changes in deposit balances:

September 30<br>2023 December 31<br>2022 Change % Change<br>(unannualized)
Noninterest bearing demand deposits $ 445,043 $ 494,346 (9.97) %
Interest bearing demand deposits 363,558 372,155 (8,597) (2.31) %
Savings deposits 628,795 625,734 3,061 0.49 %
Certificates of deposit 331,829 251,541 80,288 31.92 %
Internet certificates of deposit 249 499 (250) (50.10) %
Total $ 1,769,474 $ 1,744,275 1.44 %

All values are in US Dollars.

The following table displays deposit balances as of:

September 30<br>2023 June 30<br>2023 March 31<br>2023 December 31<br>2022 September 30<br>2022
Noninterest bearing demand deposits $ 445,043 $ 458,845 $ 478,829 $ 494,346 $ 510,127
Interest bearing demand deposits 363,558 335,922 383,602 372,155 368,537
Savings deposits 628,795 606,644 662,495 625,734 651,129
Certificates of deposit 331,829 313,288 288,103 251,541 260,741
Internet certificates of deposit 249 249 499 499 499
Total $ 1,769,474 $ 1,714,948 $ 1,813,528 $ 1,744,275 $ 1,791,033

Total deposits have fluctuated significantly over the past 12 months with an overall decline in non-contractual deposits, such as demand and savings deposits. At the end of the third quarter, we experienced significant deposit growth related primarily to

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interest bearing demand and certificates of deposit accounts. We have experienced significant growth in certificates of deposit during the first nine months of 2023 as a result of the recent increase in the interest rate environment. We expect interest rates to continue to rise through the fourth quarter of 2023 due to competitive pressures, and anticipate a continuation in the shift of customers moving to higher interest earning products.

The primary objective of our investing activities is to manage our overall exposure to changes in interest rates. Secondary considerations include ensuring ample access to liquidity, generating returns, and providing current income. The following table displays fair values of AFS securities as of:

September 30<br>2023 June 30<br>2023 March 31<br>2023 December 31<br>2022 September 30<br>2022
U.S. Treasury $ 209,182 $ 209,353 $ 212,086 $ 208,701 $ 206,791
States and political subdivisions 89,773 95,242 108,719 117,512 114,000
Auction rate money market preferred 2,570 2,637 2,716 2,342 2,479
Mortgage-backed securities 32,923 35,532 37,797 39,070 41,042
Collateralized mortgage obligations 175,630 180,996 200,252 205,728 209,720
Corporate 6,819 6,737 7,080 7,128 7,201
Total $ 516,897 $ 530,497 $ 568,650 $ 580,481 $ 581,233

Borrowed funds include FHLB advances, securities sold under agreements to repurchase, subordinated debt, and federal funds purchased. The balance of borrowed funds fluctuates from period to period based on our funding needs that arise from changes in loans, investments, and deposits. To provide balance sheet growth, we may utilize borrowings and brokered deposits to fund earning assets, which occurred during the second and third quarter of 2023. The increase in borrowings during the last two quarters was the result of short-term FHLB advances.

The following table displays borrowed funds balances as of:

September 30<br>2023 June 30<br>2023 March 31<br>2023 December 31<br>2022 September 30<br>2022
Securities sold under agreements to repurchase without stated maturity dates $ 52,330 $ 37,102 $ 31,995 $ 57,771 $ 52,479
FHLB advances 65,000 55,000 — — —
Fixed rate at 3.25% to floating, due 2031 29,312 29,290 29,267 29,245 29,225
Total $ 146,642 $ 121,392 $ 61,262 $ 87,016 $ 81,704

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

Contractual Obligations and Loan Commitments

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

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

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

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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 55,456 shares or $1,208 of common stock during the first nine months of 2023, as compared to 55,549 shares or $1,344 of common stock during the same period in 2022. We also offer the Directors Plan in which participants purchase stock units through deferred fees, in lieu of cash payments. Pursuant to this plan, we increased shareholders’ equity by $477 and $346 during the nine-month periods ended September 30, 2023 and 2022, respectively. We also grant restricted stock awards pursuant to the RSP. Pursuant to this plan, we increased shareholders’ equity by $219 during the first nine months of 2023, as compared to $108 during the same period in 2022.

We have publicly announced a common stock repurchase plan. Pursuant to this plan, we repurchased 124,320 shares or $2,906 of common stock during the first nine months of 2023 and 23,842 shares or $585 during the first nine months of 2022. As of September 30, 2023, we were authorized to repurchase up to an additional 295,505 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, 2023 December 31, 2022
Actual Minimum Required - BASEL III Required to be Considered Well Capitalized Actual Minimum Required - BASEL III Required to be Considered Well Capitalized
Common equity tier 1 capital 12.43 % 7.00 % 6.50 % 12.91 % 7.00 % 6.50 %
Tier 1 capital 12.43 % 8.50 % 8.00 % 12.91 % 8.50 % 8.00 %
Total capital 15.39 % 10.50 % 10.00 % 15.79 % 10.50 % 10.00 %
Tier 1 leverage 8.77 % 4.00 % 5.00 % 8.61 % 4.00 % 5.00 %

Total capital includes Tier 1 capital and Tier 2 capital. Tier 2 capital includes a permissible portion of the allowances for credit losses and subordinated debt, net of unamortized issuance costs. There are no significant regulatory constraints placed on our capital. At September 30, 2023, the Bank exceeded all 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 $457,002 or 21.57% of assets as of September 30, 2023, compared to $488,981 or 24.08% as of December 31, 2022. The decrease in the amount and percentage of primary liquidity is a direct result of an increase in loans and a decrease in unencumbered AFS securities, collateralizing non-market funding. Liquidity is important for financial institutions because of their need to meet loan funding commitments, depositor withdrawal requests, and various other commitments including expansion of operations, investment opportunities, and payment of cash dividends. Based on these same factors, daily liquidity could vary significantly.

Deposit accounts are our primary source of funds. Our secondary sources include the ability to borrow from the FHLB, from the FRB, and through various correspondent banks in the form of federal funds purchased and a line of credit. These funding methods typically carry a higher interest rate than traditional market deposit accounts. Some borrowed funds, including FHLB advances, FRB Discount Window advances, and repurchase agreements, require us to pledge assets, typically in the form of AFS securities or loans, as collateral. As of September 30, 2023, we had available lines of credit of $287,910.

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

September 30<br>2023
Total cash and cash equivalents $ 115,879
Available lines of credit
Fed funds lines with correspondent banks 73,000
FHLB borrowings 182,125
FRB Discount Window 27,785
Other lines of credit 5,000
Total available lines of credit 287,910
Unencumbered lendable value of FRB collateral, estimated1 320,000
Total cash and liquidity $ 723,789

(1)Includes estimated unencumbered lendable value of FHLB collateral of $230,000

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

2023 2022 Variance
Net cash provided by (used in) operating activities $ 18,458 $ 20,429
Net cash provided by (used in) investing activities (17,068) (83,778) 66,710
Net cash provided by (used in) financing activities 75,565 56,931 18,634
Increase (decrease) in cash and cash equivalents 76,955 (6,418) 83,373
Cash and cash equivalents January 1 38,924 105,330 (66,406)
Cash and cash equivalents September 30 $ 115,879 $ 98,912

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, collateral dependent loans, goodwill, foreclosed assets, OMSR, and certain other assets and liabilities. These nonrecurring fair value adjustments typically involve the application of lower of cost or market accounting or write downs of individual assets.

For further information regarding fair value measurements see “Note 10 – Fair Value” of our interim condensed consolidated financial statements.

Market Risk

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

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

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

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

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

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

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

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, 2023, pursuant to Exchange Act Rule 13a-15. Based upon that evaluation, the Principal Executive Officer and Principal Financial Officer concluded that our disclosure controls and procedures as of September 30, 2023, were effective to ensure that information required to be disclosed in reports that we file or submit under the Exchange Act are recorded, processed, summarized and reported within the time periods specified in SEC rules and forms.

CHANGES IN INTERNAL CONTROL OVER FINANCIAL REPORTING

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

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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, 2022.

Item 2. Unregistered Sales of Equity Securities, Use of Proceeds, and Issuer Purchases of Equity Securities.

(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, 2023, with respect to this plan:

Common Shares Repurchased Total Number of Common Shares Purchased as Part of Publicly Announced Plan or Program Maximum Number of Common Shares That May Yet Be Purchased Under the Plans or Programs
Number Average Price<br>Per Common Share
June 30, 2023 319,248
July 1 - 31 10,252 $ 21.36 10,252 308,996
August 1 - 31 6,970 20.80 6,970 302,026
September 1 - 30 6,521 20.55 6,521 295,505
September 30, 2023 23,743 $ 20.97 23,743 295,505

Item 3. Defaults Upon Senior Securities.

Not applicable.

Item 4. Mine Safety Disclosures.

Not applicable.

Item 5. Other Information.

Not applicable.

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Item 6. Exhibits.

(a) Exhibits

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

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

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SIGNATURES

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

Isabella Bank Corporation
Date: October 27, 2023 /s/ Jae A. Evans
Jae A. Evans
President and Chief Executive Officer
(Principal Executive Officer)
Date: October 27, 2023 /s/ Neil M. McDonnell
Neil M. McDonnell
Chief Financial Officer
(Principal Financial Officer)

60

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 27, 2023 /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 27, 2023 /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, 2023 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 27, 2023
/s/ Neil M. McDonnell
Chief Financial Officer
(Principal Financial Officer)
October 27, 2023

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