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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-Q

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

For the quarterly period ended September 30, 2022
or

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

For the transition period from to
Commission File Number: 0-18415

Isabella Bank Corporation
(Exact name of registrant as specified in its charter)

Michigan |  | 38-2830092
(State or other jurisdiction of incorporation or organization) |  | (I.R.S. Employer Identification No.)
401 N. Main St | Mt. Pleasant | MI |  | 48858
(Address of principal executive offices) |  | (Zip code)

(989) 772-9471
(Registrant’s telephone number, including area code)
N/A
(Former name, former address and former fiscal year, if changed since last report)

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

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

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. ☒ Yes ☐ No
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). ☒ Yes ☐ No
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

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

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). ☐ Yes ☒ No
The number of common shares outstanding of the registrant’s Common Stock (no par value) was 7,567,023 as of October 26, 2022.

Table of Contents
ISABELLA BANK CORPORATION
QUARTERLY REPORT ON FORM 10-Q
Table of Contents

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

2

Table of Contents
Forward Looking Statements
This report contains certain forward looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Rule 175 promulgated thereunder, and Section 21E of the Securities Exchange Act of 1934, as amended and Rule 3b-6 promulgated thereunder. We intend such forward looking statements to be covered by the safe harbor provisions for forward looking statements contained in the Private Securities Litigation Reform Act of 1995, and are included in this statement for purposes of these safe harbor provisions. Forward looking statements, which are based on certain assumptions and describe future plans, strategies and expectations, are generally identifiable by use of the words “believe”, “expect”, “intend”, “anticipate”, “estimate”, “project”, or similar expressions. Our ability to predict results or the actual effect of future plans or strategies is inherently uncertain. Factors which could have a material adverse effect on our operations and future prospects include, but are not limited to, changes in: interest rates, general economic conditions, federal or state tax laws, monetary and fiscal policy, a health crisis, the quality or composition of the loan or investment portfolio, demand for loan products, fluctuation in the value of collateral securing our loan portfolio, deposit flows, competition, cybersecurity risk, demand for financial services in our market area, and accounting principles, policies and guidelines. These risks and uncertainties should be considered in evaluating forward looking statements and undue reliance should not be placed on such statements. Further information concerning our business, including additional factors that could materially affect our consolidated financial results, is included in our filings with the SEC.
Glossary of Acronyms and Abbreviations
The acronyms and abbreviations identified below may be used throughout this Quarterly Report on Form 10-Q or in our other SEC filings. You may find it helpful to refer back to this page while reading this report.

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

3

Table of Contents
PART I – FINANCIAL INFORMATION
Item 1. Financial Statements.
INTERIM CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)
(Dollars in thousands)

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

See notes to interim condensed consolidated financial statements (unaudited).
4

Table of Contents
INTERIM CONDENSED CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
(Dollars in thousands except per share amounts)

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

See notes to interim condensed consolidated financial statements (unaudited).
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INTERIM CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (UNAUDITED)
(Dollars in thousands)

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

(1)See “Note 10 – Accumulated Other Comprehensive Income” for tax effect reconciliation.
See notes to interim condensed consolidated financial statements (unaudited).
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INTERIM CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY (UNAUDITED)
(Dollars in thousands except per share amounts)

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

See notes to interim condensed consolidated financial statements (unaudited).
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INTERIM CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(Dollars in thousands)

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

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INTERIM CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (continued)
(Dollars in thousands)

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

See notes to interim condensed consolidated financial statements (unaudited).
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NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(Dollars in thousands except per share amounts)
Note 1 – Basis of Presentation
As used in these notes, as well as in Management's Discussion and Analysis of Financial Condition and Results of Operations, references to the “Corporation”, “Isabella”, “we”, “our”, “us”, and similar terms refer to the consolidated entity consisting of Isabella Bank Corporation and its subsidiary. References to Isabella Bank or the “Bank” refer to Isabella Bank Corporation’s subsidiary, Isabella Bank.
The accompanying unaudited interim condensed consolidated financial statements have been prepared in accordance with GAAP for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by GAAP for complete financial statements. In our opinion, all adjustments considered necessary for a fair presentation have been included. Operating results for the three and nine-month periods ended September 30, 2022 are not necessarily indicative of the results that may be expected for the year ending December 31, 2022. For further information, refer to our Annual Report on Form 10-K for the year ended December 31, 2021.
Our accounting policies are materially the same as those discussed in Note 1 to the Consolidated Financial Statements included in our Annual Report on Form 10-K for the year ended December 31, 2021.
Reclassifications: Certain amounts reported in the interim 2021 consolidated financial statements have been reclassified to conform with the 2022 presentation.
Note 2 – Accounting Standards Updates
Pending
ASU No. 2016-13: “Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments”, as amended
In June 2016, ASU No. 2016-13 was issued and updated the measurement for credit losses for AFS debt securities and assets measured at amortized cost which include loans, trade receivables, and any other financial assets with the contractual right to receive cash. Current GAAP requires an “incurred loss” methodology for recognizing credit losses that delays recognition until it is probable a loss has been incurred. Under the incurred loss approach, entities are limited to a probable initial recognition threshold when credit losses are measured; an entity generally only considers past events and current conditions in measuring the incurred loss.
Under the new guidance, the incurred loss impairment methodology is replaced with a methodology that reflects current expected credit losses (CECL). This methodology requires consideration of a broader range of reasonable and supportable information to calculate credit loss estimates. The measurement of expected credit losses is based on relevant information about past events, including historical experience, current conditions, and reasonable and supportable forecasts that affect the collectability of the reported amount. An entity must use judgment in determining the relevant information and estimation methods that are appropriate in its circumstances which applies to assets measured either collectively or individually.
The update allows an entity to revert to historical loss information that is reflective of the contractual term (considering the effect of prepayments) for periods that are beyond the time frame for which the entity is able to develop reasonable and supportable forecasts. In addition, the disclosures of credit quality indicators in relation to the amortized cost of financing receivables, a current disclosure requirement, are further disaggregated by year of origination (or vintage). The vintage information will be useful for financial statement users to better assess changes in underwriting standards and credit quality trends in asset portfolios over time and the effect of those changes on credit losses.
Overall, the update will allow entities the ability to measure expected credit losses without the restriction of incurred or probable losses that exist under current GAAP. For users of the financial statements, the update requires disclosure of decision-useful information about the expected credit losses on financial instruments and other commitments to extend credit held by a reporting entity at each reporting date. The new authoritative guidance was originally effective for interim and annual periods beginning after December 15, 2019. Effective October 16, 2019, the FASB approved and issued changes to the implementation date of this guidance for some filers. As a smaller reporting company, as defined by the SEC, our implementation date was delayed from January 1, 2020 to January 1, 2023. Early adoption continues to be permissible under the revised implementation date.
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Since 2016, we have invested a considerable amount of effort toward this guidance. An internal committee was formed and is accountable for timely and accurate adoption of the guidance. A service provider that has focused on the ALLL for more than 10 years and serves hundreds of financial institutions was engaged to provide us with education, advisory, and a software solution exclusively related to the ACL. We run parallel processes to ensure we are ready to calculate, review, and report the ACL by the required implementation date.
Our CECL implementation efforts continue to focus on model validation, developing new disclosures, establishing formal policies and procedures and control documentation. Based on our loan balances and forecasted economic conditions as of September 30, 2022, management believes the adoption of CECL could result in an increase in the current reserves of approximately 20% to 40%, as compared to our current reserve levels as of September 30, 2022. The estimated increase in reserves is driven by the guidance changes, which requires us to reserve based on expected credit losses over the expected life of the loan and also considers reasonable and supportable forecasts of expected future economic conditions.
This preliminary estimate is contingent upon continued testing and refinement of the model. The actual impact of the adoption will be dependent upon the loan portfolio size and composition, credit quality, and economic conditions and forecasts at the time of adoption. We will continue to evaluate and refine the results of our loss estimates through the end of 2022. Additionally, we will continue to run parallel calculations during the remainder of 2022.
Upon adoption on January 1, 2023, we will record a cumulative-effect adjustment to retained earnings for the change in ACL. While not expected to be material, the impact of the adoption of CECL will also affect our regulatory capital and other asset quality ratios.
Note 3 – AFS Securities
The amortized cost and fair value of AFS securities, with gross unrealized gains and losses, are as follows at:

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

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

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

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

Expected maturities for government sponsored enterprises and states and political subdivisions may differ from contractual maturities because issuers may have the right to call or prepay obligations.
As the auction rate money market preferred investments have continual call dates, they are not reported by a specific maturity group. Because of their variable monthly payments, mortgage-backed securities and collateralized mortgage obligations are not reported by a specific maturity group. $170,400 of the collateralized mortgage portfolio consist of agency commercial mortgage-backed securities with defined maturity dates of less than ten years.
The following information pertains to AFS securities with gross unrealized losses at September 30, 2022 and December 31, 2021, aggregated by investment category and length of time that individual securities have been in a continuous loss position.

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

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

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The unrealized loss on our AFS securities portfolio resulted from the recent increases in short-term and intermediate-term benchmark interest rates.
As of September 30, 2022 and December 31, 2021, we conducted an analysis to determine whether any AFS securities currently in an unrealized loss position should be identified as other-than-temporarily impaired. Such analyses considered, among other factors, the following criteria:
•Has the value of the investment declined more than what is deemed to be reasonable based on a risk and maturity adjusted discount rate?
•Is the investment credit rating below investment grade?
•Is it probable the issuer will be unable to pay the amount when due?
•Is it more likely than not that we will have to sell the security before recovery of its cost basis?
•Has the duration of the investment been extended?
Based on our analysis, which included the criteria outlined above and the fact that we have asserted that we do not have to sell any AFS securities in an unrealized loss position, we do not believe that the values of any AFS securities are other-than-temporarily impaired as of September 30, 2022 or December 31, 2021, with the exception of one municipal bond previously identified in 2016 which had no activity during the period.
Note 4 – Loans and ALLL
We grant commercial, agricultural, residential real estate, and consumer loans to customers situated primarily in Clare, Gratiot, Isabella, Mecosta, Midland, Montcalm, and Saginaw counties in Michigan. The ability of the borrowers to honor their repayment obligations is often dependent upon the real estate, agricultural, manufacturing, retail, gaming, tourism, health care, higher education, and general economic conditions of this region. Substantially all of our consumer and residential real estate loans are secured by various items of property, while commercial loans are secured primarily by real estate, business assets, and personal guarantees. A portion of loans are unsecured.
Loans that we have the intent and ability to hold in our portfolio are reported at their outstanding principal balance adjusted for any charge-offs, the ALLL, and deferred fees or costs. Unless a loan has a nonaccrual status, interest income is accrued over the term of the loan based on the principal amount outstanding. Loan origination fees and certain direct loan origination costs are capitalized and recognized as a component of interest income over the term of the loan using the appropriate amortization method.
The accrual of interest on commercial and agricultural loans, as well as residential real estate loans, is discontinued at the time a loan is 90 days or more past due unless the credit is well-secured and in the process of short-term collection. Upon transferring a loan to nonaccrual status, we perform an evaluation to determine the net realizable value of the underlying collateral. This evaluation is used to help determine if a charge-off is necessary. Consumer loans are typically charged-off no later than 180 days past due. Past due status is based on the contractual term of the loan. In all cases, a loan is placed in nonaccrual status at an earlier date if collection of principal or interest is considered doubtful.
When a loan is placed in nonaccrual status, all interest accrued in the current calendar year, but not collected, is reversed against interest income while interest accrued in prior calendar years, but not collected, is charged against the ALLL. Loans may be returned to accrual status after six months of continuous performance and achievement of current payment status.
Commercial and agricultural loans include loans for commercial real estate, commercial operating loans, advances to mortgage brokers, farmland and agricultural production, and loans to states and political subdivisions. Repayment of these loans is dependent upon the successful operation and management of a business. We minimize our risk by limiting the amount of direct credit exposure to any one borrower to $18,000. Borrowers with direct credit needs of more than $18,000 may be serviced through the use of loan participations with other commercial banks. Commercial and agricultural real estate loans commonly require loan-to-value limits of 80% or less. Depending upon the type of loan, past credit history, and current operating results, we may require the borrower to pledge accounts receivable, inventory, property, or equipment. Government agency guarantee may be required. Personal guarantees and/or life insurance beneficiary assignments are generally required from the owners of closely held corporations, partnerships, and sole proprietorships. In addition, we may require annual financial statements, prepare cash flow analyses, and review credit reports.
We entered into a mortgage purchase program in 2016 with a financial institution where we participate in advances to mortgage brokers (“advances”). The mortgage brokers originate residential mortgage loans with the intent to sell them on the secondary market. We participate in the advance to the mortgage broker, which is secured by the underlying mortgage loan, until it is ultimately sold on the secondary market. As such, the average life of each participated advance is approximately 20-30 days. Funds from the sale of the loan are used to pay off our participation in the advance to the mortgage broker. We classify these
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advances as commercial loans and include the outstanding balance in commercial loans on our consolidated balance sheets. Under the participation agreement, we committed to a maximum outstanding aggregate amount of $40,000. The difference between our outstanding balance and the maximum outstanding aggregate amount is classified as an unfunded commitment.
We offer adjustable rate mortgages, construction loans, and fixed rate residential real estate loans which have amortization periods up to a maximum of 30 years. We consider the anticipated direction of interest rates, balance sheet duration, the sensitivity of our balance sheet to changes in interest rates, our liquidity needs, and overall loan demand to determine whether or not to sell fixed rate loans to Freddie Mac.
Our lending policies generally limit the maximum loan-to-value ratio on residential real estate loans to 100% of the lower of the appraised value of the property or the purchase price. Private mortgage insurance is typically required on loans with loan-to-value ratios in excess of 80% unless the loan qualifies for government guarantees.
Underwriting criteria for originated residential real estate loans generally include:
•Evaluation of the borrower’s ability to make monthly payments.
•Evaluation of the value of the property securing the loan.
•Ensuring the payment of principal, interest, taxes, and hazard insurance does not exceed 28% of a borrower’s gross income.
•Ensuring all debt servicing does not exceed 40% of income.
•Verification of acceptable credit reports.
•Verification of employment, income, and financial information.
Appraisals are performed by independent appraisers and are reviewed for appropriateness. Generally, mortgage loan requests are reviewed by our mortgage loan committee or through a secondary market underwriting system; loans in excess of $1,000 require the approval of our Internal Loan Committee, the Executive Loan Committee, the Board of Directors’ Loan Committee, or the Board of Directors.
Consumer loans include secured and unsecured personal loans. Loans are amortized for a period of up to 15 years based on the age and value of the underlying collateral. The underwriting emphasis is on a borrower’s perceived intent and ability to pay rather than collateral value. No consumer loans are sold to the secondary market.
The ALLL is established as losses are estimated to have occurred through a provision for loan losses charged to earnings. Full or partial loan balances are charged against the ALLL when we believe uncollectability is probable. Subsequent recoveries, if any, are credited to the ALLL.
The ALLL is evaluated on a regular basis for appropriateness. Our periodic review of the collectability of a loan considers historical experience, the nature and volume of the loan portfolio, adverse situations that may affect the borrower’s ability to repay, estimated value of any underlying collateral, and prevailing economic conditions. This evaluation is inherently subjective as it requires estimates that are susceptible to significant revision as more information becomes available.
The primary factors behind the determination of the level of the ALLL are specific allocations for impaired loans, historical loss percentages, as well as unallocated components. Specific allocations for impaired loans are primarily determined based on the difference between the loan’s outstanding balance and the present value of expected future cash flows discounted at the loan’s effective interest rate, or the fair value of the collateral, less costs to sell, if the loan is collateral dependent. Historical loss allocations are calculated at the loan class and segment levels based on a migration analysis of the loan portfolio, with the exception of advances to mortgage brokers, over the preceding five years. With no historical losses on advances to mortgage brokers, there is no allocation related to this portfolio. The unallocated component of the allowance reflects the margin of imprecision inherent in the underlying assumptions used in the methodologies for estimating specific and general losses in the portfolio.
While we have experienced fluctuations in credit quality indicators in recent periods, credit quality remained strong at September 30, 2022. The COVID-19 pandemic led to the temporary and some permanent closures of businesses throughout the communities in which we serve, which also led to increased unemployment. We increased the ALLL during 2020 as a result of increased economic and environmental related risk factors, primarily driven by COVID-19. While these risk factors remain, improvement in credit quality indicators resulted in a reduction to the ALLL during 2021. There have been no material changes to the ALLL and credit quality has remained strong during 2022.
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Summaries of the ALLL and the recorded investment in loans by segments follows:

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

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

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

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

| Allowance for Loan Losses
| Nine Months Ended September 30, 2021
| Commercial |  | Agricultural |  | Residential Real Estate |  | Consumer |  | Unallocated |  | Total
January 1, 2021 | $ | 2,162 |  |  | $ | 311 |  |  | $ | 1,363 |  |  | $ | 798 |  |  | $ | 5,110 |  |  | $ | 9,744 |
Charge-offs | (32) |  |  | (77) |  |  | — |  |  | (349) |  |  | — |  |  | (458) |
Recoveries | 121 |  |  | 6 |  |  | 132 |  |  | 147 |  |  | — |  |  | 406 |
Provision for loan losses | (720) |  |  | 226 |  |  | (738) |  |  | 253 |  |  | 380 |  |  | (599) |
September 30, 2021 | $ | 1,531 |  |  | $ | 466 |  |  | $ | 757 |  |  | $ | 849 |  |  | $ | 5,490 |  |  | $ | 9,093 |

| Allowance for Loan Losses and Recorded Investment in Loans
| December 31, 2021
| Commercial |  | Agricultural |  | Residential Real Estate |  | Consumer |  | Unallocated |  | Total
ALLL |  |  |  |  |  |  |  |  |  |  |
Individually evaluated for impairment | $ | 13 |  |  | $ | — |  |  | $ | 565 |  |  | $ | — |  |  | $ | — |  |  | $ | 578 |
Collectively evaluated for impairment | 1,727 |  |  | 289 |  |  | 182 |  |  | 908 |  |  | 5,419 |  |  | 8,525 |
Total | $ | 1,740 |  |  | $ | 289 |  |  | $ | 747 |  |  | $ | 908 |  |  | $ | 5,419 |  |  | $ | 9,103 |
Loans |  |  |  |  |  |  |  |  |  |  |
Individually evaluated for impairment | $ | 9,267 |  |  | $ | 14,189 |  |  | $ | 3,454 |  |  | $ | — |  |  |  |  | $ | 26,910 |
Collectively evaluated for impairment | 798,172 |  |  | 79,766 |  |  | 322,907 |  |  | 73,282 |  |  |  |  | 1,274,127 |
Total | $ | 807,439 |  |  | $ | 93,955 |  |  | $ | 326,361 |  |  | $ | 73,282 |  |  |  |  | $ | 1,301,037 |

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

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

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

Internally assigned credit risk ratings are reviewed, at a minimum, when loans are renewed or when management has knowledge of improvements or deterioration of the credit quality of individual credits. Descriptions of the internally assigned credit risk ratings for commercial and agricultural loans are as follows:
1. EXCELLENT – Substantially Risk Free
Credit has strong financial condition and solid earnings history, characterized by:
•High liquidity, strong cash flow, low leverage.
•Unquestioned ability to meet all obligations when due.
•Experienced management, with management succession in place.
•Secured by cash.
2. HIGH QUALITY – Limited Risk
Credit with sound financial condition and a positive trend in earnings supplemented by:
•Favorable liquidity and leverage ratios.
•Ability to meet all obligations when due.
•Management with successful track record.
•Steady and satisfactory earnings history.
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•If loan is secured, collateral is of high quality and readily marketable.
•Access to alternative financing.
•Well defined primary and secondary source of repayment.
•If supported by guaranty, the financial strength and liquidity of the guarantor(s) are clearly evident.
3. HIGH SATISFACTORY – Reasonable Risk
Credit with satisfactory financial condition and further characterized by:
•Working capital adequate to support operations.
•Cash flow sufficient to pay debts as scheduled.
•Management experience and depth appear favorable.
•Loan performing according to terms.
•If loan is secured, collateral is acceptable and loan is fully protected.
4. LOW SATISFACTORY – Acceptable Risk
Credit with bankable risks, although some signs of weaknesses are shown:
•Would include most start-up businesses.
•Occasional instances of trade slowness or repayment delinquency – may have been 10-30 days slow within the past year.
•Management’s abilities are apparent yet unproven.
•Weakness in primary source of repayment with adequate secondary source of repayment.
•Loan structure generally in accordance with policy.
•If secured, loan collateral coverage is marginal.
To be classified as less than satisfactory, only one of the following criteria must be met.
5. SPECIAL MENTION – Criticized
Credit constitutes an undue and unwarranted credit risk but not to the point of justifying a classification of substandard. The credit risk may be relatively minor yet constitutes an unwarranted risk in light of the circumstances surrounding a specific loan:
•Downward trend in sales, profit levels, and margins.
•Impaired working capital position.
•Cash flow is strained in order to meet debt repayment.
•Loan delinquency (30-60 days) and overdrafts may occur.
•Shrinking equity cushion.
•Diminishing primary source of repayment and questionable secondary source.
•Management abilities are questionable.
•Weak industry conditions.
•Litigation pending against the borrower.
•Loan may need to be restructured to improve collateral position or reduce payments.
•Collateral or guaranty offers limited protection.
•Negative debt service coverage, however the credit is well collateralized and payments are current.
6. SUBSTANDARD – Classified
Credit is inadequately protected by the current net worth and paying capacity of the borrower or of the collateral pledged. There is a distinct possibility we will implement collection procedures if the loan deficiencies are not corrected. Any commercial loan placed in nonaccrual status will be rated “7” or worse. In addition, the following characteristics may apply:
•Sustained losses have severely eroded the equity and cash flow.
•Deteriorating liquidity.
•Serious management problems or internal fraud.
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•Original repayment terms liberalized.
•Likelihood of bankruptcy.
•Inability to access other funding sources.
•Reliance on secondary source of repayment.
•Litigation filed against borrower.
•Interest non-accrual may be warranted.
•Collateral provides little or no value.
•Requires excessive attention of the loan officer.
•Borrower is uncooperative with loan officer.
7. VULNERABLE – Classified
Credit is considered “Substandard” and warrants placing in nonaccrual status. Risk of loss is being evaluated and exit strategy options are under review. Other characteristics that may apply:
•Insufficient cash flow to service debt.
•Minimal or no payments being received.
•Limited options available to avoid the collection process.
•Transition status, expect action will take place to collect loan without immediate progress being made.
8. DOUBTFUL – Workout
Credit has all the weaknesses inherent in a “Substandard” loan with the added characteristic that collection and/or liquidation is pending. The possibility of a loss is extremely high, but its classification as a loss is deferred until liquidation procedures are completed, or reasonably estimable. Other characteristics that may apply:
•Normal operations are severely diminished or have ceased.
•Seriously impaired cash flow.
•Original repayment terms materially altered.
•Secondary source of repayment is inadequate.
•Survivability as a “going concern” is impossible.
•Collection process has begun.
•Bankruptcy petition has been filed.
•Judgments have been filed.
•Portion of the loan balance has been charged-off.
9. LOSS – Charge-off
Credit is considered uncollectible and of such little value that their continuance as bankable assets is not warranted. This classification is for charged-off loans but does not mean that the asset has absolutely no recovery or salvage value. These loans are further characterized by:
•Liquidation or reorganization under Bankruptcy, with poor prospects of collection.
•Fraudulently overstated assets and/or earnings.
•Collateral has marginal or no value.
•Debtor cannot be located.
•Over 120 days delinquent.
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Our primary credit quality indicator for residential real estate and consumer loans is the individual loan’s past due aging. The following tables summarize the past due and current loans for the entire loan portfolio as of:

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

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

Impaired Loans
Loans may be classified as impaired if they meet one or more of the following criteria:
1.There has been a charge-off of its principal balance (in whole or in part);
2.The loan has been classified as a TDR; or
3.The loan is in nonaccrual status.
Impairment is measured on a loan-by-loan basis for commercial and agricultural loans by comparing the loan’s outstanding balance to the present value of expected future cash flows discounted at the loan’s effective interest rate, or the fair value of the collateral, less costs to sell, if the loan is collateral dependent. Large groups of smaller-balance, homogeneous residential real estate and consumer loans are collectively evaluated for impairment by comparing the loan’s unpaid principal balance to the present value of expected future cash flows discounted at the loan’s effective interest rate.
We do not recognize interest income on impaired loans in nonaccrual status. For impaired loans not classified as nonaccrual, interest income is recognized daily, as earned, according to the terms of the loan agreement and the principal amount outstanding.
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The following is a summary of impaired loans as of:

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

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The following is a summary of impaired loans for the:

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

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

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We had committed to advance $678 and $266 in additional funds to be disbursed in connection with impaired loans, which includes TDRs, of September 30, 2022 and December 31, 2021, respectively.
Troubled Debt Restructurings
A loan modification is considered to be a TDR when the modification includes terms outside of normal lending practices to a borrower who is experiencing financial difficulties.
Typical concessions granted include, but are not limited to:
•Agreeing to interest rates below prevailing market rates for debt with similar risk characteristics.
•Extending the amortization period beyond typical lending guidelines for loans with similar risk characteristics.
•Agreeing to an interest-only payment structure and delaying principal payments.
•Forgiving principal.
•Forgiving accrued interest.
To determine if a borrower is experiencing financial difficulties, factors we consider include:
•The borrower is currently in default on any debt.
•The borrower would likely default on any debt if the concession is not granted.
•The borrower’s cash flow is insufficient to service all debt if the concession is not granted.
•The borrower has declared, or is in the process of declaring, bankruptcy.
•The borrower is unlikely to continue as a going concern (if the entity is a business).
The following is a summary of TDRs granted for the:

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

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

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

| Three Months Ended September 30
| 2022 |  | 2021
| Below Market Interest Rate |  | Below Market Interest Rate and Extension of Amortization Period |  | Below Market Interest Rate |  | Below Market Interest Rate and Extension of Amortization Period
| Number of Loans |  | Pre-Modification Recorded Investment |  | Number of Loans |  | Pre-Modification Recorded Investment |  | Number of Loans |  | Pre-Modification Recorded Investment |  | Number of Loans |  | Pre-Modification Recorded Investment
Commercial other | 1 |  |  | $ | 55 |  |  | — |  |  | $ | — |  |  | — |  |  | $ | — |  |  | — |  |  | $ | — |

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

We did not restructure any loans by forgiving principal or accrued interest in the three and nine-month periods ended September 30, 2022 or 2021.
Based on our historical loss experience, losses associated with TDRs are not significantly different than other impaired loans within the same loan segment. As such, TDRs, including TDRs that have been modified in the past 12 months that subsequently defaulted, are analyzed in the same manner as other impaired loans within their respective loan segment.
We had no loans that defaulted in the three and nine-month periods ended September 30, 2022 and 2021 which were modified within 12 months prior to the default date.
The following is a summary of TDR loan balances as of:

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

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Note 5 – Borrowed Funds
Federal funds purchased and repurchase agreements
Securities sold under repurchase agreements without stated maturity dates, federal funds purchased, and FRB Discount Window advances generally mature within one to four days from the transaction date. We had no FRB Discount Window advances during the three and nine-month periods ended September 30, 2022 and 2021.
A summary of securities sold under repurchase agreements without stated maturity dates was as follows for the:

| Three Months Ended September 30
| 2022 |  | 2021
| Maximum Month End Balance |  | Average Balance |  | Weighted Average Interest Rate During the Period |  | Maximum Month End Balance |  | Average Balance |  | Weighted Average Interest Rate During the Period
Securities sold under agreements to repurchase without stated maturity dates | $ | 54,051 |  |  | $ | 49,267 |  |  | 0.07 | % |  | $ | 67,519 |  |  | $ | 62,790 |  |  | 0.10 | %
Federal funds purchased | $ | — |  |  | $ | — |  |  | — | % |  | $ | — |  |  | $ | — |  |  | 0.52 | %

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

Securities sold under agreements to repurchase are classified as secured borrowings and are reflected at the amount of cash received in connection with the transaction. The securities underlying the agreements have a carrying value and a fair value of $55,591 and $50,173 at September 30, 2022 and December 31, 2021, respectively. Such securities remain under our control. We may be required to provide additional collateral based on the fair value of underlying securities.
Securities sold under repurchase agreements without stated maturity dates were as follows as of:

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

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

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

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

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

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AFS securities pledged to repurchase agreements are monitored to ensure the appropriate level is collateralized. In the event of maturities, calls, significant principal repayments, or significant decline in market values, we have an adequate level of AFS securities to pledge to satisfy collateral requirements.
As of September 30, 2022, we had the ability to borrow up to an additional $343,437, without pledging additional collateral.
FHLB advances
FHLB advances are collateralized by a blanket lien on all qualified 1-4 family residential real estate loans, specific AFS securities, and FHLB stock.
The following table lists the maturities and weighted average interest rates of FHLB advances as of:

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

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

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

Note 6 – Computation of Earnings Per Common Share
Basic earnings per common share represents income available to common shareholders divided by the weighted average number of common shares outstanding during the period. Diluted earnings per common share includes additional common shares that would have been outstanding if dilutive potential common shares had been issued. Potential common shares that may be issued relate solely to outstanding shares in the Directors Plan and grant awards under the RSP.
Earnings per common share have been computed based on the following for the:

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

(1)Exclusive of shares held in the Rabbi Trust
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Note 7 – Restricted Stock Plan
We adopted the RSP, an equity-based bonus plan, in 2020. Under the RSP, we may award restricted stock bonuses to eligible employees on an annual basis that are not fully transferable or vested until certain conditions are met. Currently, the eligible employees are the Bank's CEO, President, and CFO. The RSP authorizes the issuance of unvested restricted stock to an eligible employee with a maximum award ranging from 25% to 40% of the employee’s annual salary, on a calendar year basis. The employee must also satisfy the annual performance targets and measures established by the Board of Directors. If these grant conditions are not satisfied, then the award of restricted shares will lapse or be adjusted appropriately, at the discretion of the Board of Directors. All Grant Agreements contain vesting conditions and clawback provisions.
A summary of changes in nonvested restricted stock awards is as follows for the:

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

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

Fluctuations in granted shares are due to the reassessment of the award achievement. Expense related to RSP awards were $108 and $58 for the nine-month periods ended September 30, 2022 and 2021. As of September 30, 2022, there was $369 of total remaining unrecognized compensation expense related to nonvested restricted stock awards granted under the RSP. The remaining expense is expected to be recognized over a weighted-average service period of 2.62 years.
Note 8 – Other Noninterest Expenses
A summary of expenses included in other noninterest expenses is as follows for the:

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

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Note 9 – Federal Income Taxes
The reconciliation of the provision for federal income taxes and the amount computed at the federal statutory tax rate of 21% of income before federal income tax expense is as follows for the:

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

Note 10 – Accumulated Other Comprehensive Income
The following table summarizes the changes in AOCI by component for the:

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

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

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

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

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

Note 11 – Fair Value
Under fair value measurement and disclosure authoritative guidance, we group assets and liabilities measured at fair value into three levels, based on the markets in which the assets and liabilities are traded, and the reliability of the assumptions used to determine fair value, based on the prioritization of inputs in the valuation techniques. These levels are:

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

The asset’s or liability’s fair value measurement level within the fair value hierarchy is based on the lowest level of any input that is significant to the fair value measurement. Valuation techniques maximize the use of observable inputs and minimize the use of unobservable inputs. Transfers between measurement levels are recognized at the end of reporting periods.
Fair value measurement requires the use of an exit price notion which may differ from entrance pricing. Generally we believe our assets and liabilities classified as Level 1 or Level 2 approximate an exit price notion.
Following is a description of the valuation methodologies, key inputs, and an indication of the level of the fair value hierarchy in which the assets or liabilities are classified.
AFS securities: AFS securities are recorded at fair value on a recurring basis. Level 1 fair value measurement is based upon quoted prices for identical instruments. Level 2 fair value measurement is based upon quoted prices for similar instruments. If quoted prices are not available, fair values are measured using independent pricing models or other model-based valuation techniques such as the present value of future cash flows, adjusted for the security’s credit rating, prepayment assumptions and other factors such as credit loss and liquidity assumptions. The values for Level 1 and Level 2 investment securities are generally obtained from an independent third party. On a quarterly basis, we compare the values provided to alternative pricing sources.
Loans: We do not record loans at fair value on a recurring basis. However, some loans are classified as impaired and a specific allowance for loan losses may be established. Loans for which it is probable that payment of interest and principal will be significantly different than the contractual terms of the original loan agreement are considered impaired. Once a loan is identified as impaired, we measure the estimated impairment. The fair value of impaired loans is estimated using one of several
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methods, including the present value of expected future cash flows discounted at the loan’s effective interest rate, or the fair value of the collateral, less costs to sell, if the loan is collateral dependent. Those impaired loans not requiring an allowance represent loans for which the fair value of the expected repayments or collateral exceed the recorded investments in such loans.
We review the net realizable values of the underlying collateral for collateral dependent impaired loans on at least a quarterly basis for all loan types. To determine the collateral value, we utilize independent appraisals, broker price opinions, or internal evaluations. We review these valuations to determine whether an additional discount should be applied given the age of market information that may have been considered as well as other factors such as costs to sell an asset if it is determined that the collateral will be liquidated in connection with the ultimate settlement of the loan. We use these valuations to determine if any specific reserves or charge-offs are necessary. We may obtain new valuations in certain circumstances, including when there has been significant deterioration in the condition of the collateral, if the foreclosure process has begun, or if the existing valuation is deemed to be outdated.
The following tables list the quantitative fair value information about impaired loans as of:

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

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

Collateral discount rates may have ranges to accommodate differences in the age of the independent appraisal, broker price opinion, or internal evaluation.
OMSR: OMSR (which are included in other assets) are subject to impairment testing. To test for impairment, we utilize a discounted cash flow analysis using interest rates and prepayment speed assumptions currently quoted for comparable instruments and discount rates. If the valuation model reflects a value less than the carrying value, OMSR are adjusted to fair value through a valuation allowance as determined by the model. As such, we classify OMSR subject to nonrecurring fair value adjustments as Level 2.
The preceding methods described may produce a fair value calculation that may not be indicative of net realizable value or reflective of future fair values. Although we believe our valuation methods are appropriate and consistent with other market participants, the use of different methodologies or assumptions to determine the fair value of certain financial instruments could result in a different fair value measurement.
Estimated Fair Values of Financial Instruments Not Recorded at Fair Value in their Entirety on a Recurring Basis
Disclosure of the estimated fair values of financial instruments, which differ from carrying values, often requires the use of estimates. In cases where quoted market values in an active market are not available, we use present value techniques and other valuation methods to estimate the fair values of our financial instruments. These valuation methods require considerable judgment and the resulting estimates of fair value can be significantly affected by the assumptions made and methods used.
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The carrying amount and estimated fair value of financial instruments not recorded at fair value in their entirety on a recurring basis were as follows as of:

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

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

(1)Due to the characteristics of equity securities without readily determinable fair values, they are not disclosed under a specific fair value hierarchy. When an impairment or write-down related to these securities is recorded, such amount would be classified as a nonrecurring Level 3 fair value adjustment.
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Financial Instruments Recorded at Fair Value
The table below presents the recorded amount of assets and liabilities measured at fair value on:

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

We recorded an impairment related to foreclosed assets of $6 and $0 through earnings for the nine-month period ended September 30, 2022 and 2021, respectively. We had no other assets or liabilities recorded at fair value with changes in fair value recognized through earnings, on a recurring basis or nonrecurring basis, as of September 30, 2022. Further, we had no unrealized gains and losses included in OCI for recurring Level 3 fair value measurements held at the end of the reporting period.
Note 12 – Operating Segments
Our reportable segments are based on legal entities that account for at least 10% of net operating results. The Bank as of September 30, 2022 and December 31, 2021 and for the three and nine-month periods ended September 30, 2022 and 2021, represents approximately 90% or more of our consolidated total assets and operating results. As such, no additional segment reporting is presented.
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Note 13 – Parent Company Only Financial Information
Interim Condensed Balance Sheets

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

Interim Condensed Statements of Income

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

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Interim Condensed Statements of Cash Flows

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

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Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations.
ISABELLA BANK CORPORATION FINANCIAL REVIEW
(Dollars in thousands except per share amounts)
The following is management's discussion and analysis of our financial condition and results of operations for the unaudited three and nine-month periods ended September 30, 2022 and 2021. This analysis should be read in conjunction with our Annual Report on Form 10-K for the year ended December 31, 2021 and with the unaudited interim condensed consolidated financial statements and notes, beginning on page 4 of this report.
Executive Summary
During the three and nine months ended September 30, 2022, we reported net income of $5,887 and $15,916 and earnings per common share of $0.78 and $2.11, respectively. Net income and earnings per common share for the same periods of 2021 were $4,686 and $14,705 and $0.59 and $1.85, respectively. Net interest income increased $4,982, or 12.70%, for the nine-month period ended September 30, 2022 in comparison to the same period in 2021. While PPP loan fees declined, rising interest rates and growth in AFS securities led to a $2,811 increase in gross interest income during the nine-month period ended September 30, 2022 compared to the same period in 2021. We continued to benefit from a reduction in higher-cost borrowings as interest expense on deposits and borrowings decreased $2,171, or 37.14%, for the nine-month period ended September 30, 2022 when compared to the same period in 2021.
The provision for loan losses during the nine months ended September 30, 2022 was $540, compared to a net provision reversal of $599 for the same period in 2021. During 2020, increased economic and environmental risk factors, predominantly driven by COVID-19, drove a significant increase in the ALLL and provision expense. Strong credit quality, coupled with improvement in economic factors, such as unemployment rates, resulted in a reduction in the ALLL and a provision reversal during the first quarter of 2021. Credit quality remained strong at September 30, 2022, as evidenced by total past due and nonaccrual loans which were $4,008, or 0.32% of gross loans. Despite strong credit quality, the ALLL and provision for loan losses increased during 2022 as a result of increased economic and environmental related risk factors.
Noninterest income increased $180 during the first nine months of 2022 compared to the same period in 2021. Service charges and fees increased $1,126, with $605 of the increase attributed to OMSR income. Offsetting this income was an $891 reduction in gain on sale of mortgage loans, as residential mortgage originations sold in the secondary market declined. Noninterest expenses for the first nine months of 2022 increased $2,401 in comparison to the same period in 2021 and was primarily a result of increased compensation, other losses, consulting, marketing, and donations and community relations related expenses.
As of September 30, 2022, total assets and assets under management were $2,063,977 and $2,796,992, respectively. Assets under management include loans sold and serviced of $268,879 and investment and trust assets managed by Isabella Wealth of $464,136, in addition to assets on our consolidated balance sheet. Loans outstanding as of September 30, 2022 totaled $1,236,151. Since December 31, 2021, gross loans declined $64,886 as a result of a $70,517 reduction in advances to mortgage brokers, which is included within the commercial loan portfolio, however is not considered a component of our core lending business. Total deposits were $1,791,033 as of September 30, 2022, which was an increase of $80,694 since December 31, 2021. All regulatory capital ratios for the Bank exceeded the minimum thresholds to be considered a “well capitalized” institution.
Our securities portfolio increased $90,632 from December 31, 2021, predominantly due to $204,657 in purchases, although offset by maturities and an increase in net unrealized losses. The unrealized loss on our AFS securities portfolio resulted from the recent increases in short-term and intermediate-term benchmark interest rates. As a result, this change in unrealized losses has reduced our balance of shareholders' equity and negatively impacted our tangible book value.
Our net yield on interest earning assets (FTE) was 3.28% and 3.10% for the three and nine months ended September 30, 2022, as compared to 2.85% and 2.87% for the three and nine months ended September 30, 2021. The marked improvement is a result of strategies management began implementing in 2019 and 2020, focused on improving our net yield as rates declined, including enhanced pricing related to loans and a reduced reliance on higher-cost borrowed funds and brokered deposits. With rate increases during the first three quarters of 2022, and anticipated future rate increases during the remainder of the year, we expect continued improvement in net yield on interest earning assets.
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Recent Events and Legislation
Impact of COVID-19: Unexpected and unprecedented changes have occurred since early 2020 as the result of COVID-19. The full impact of the pandemic, including the uncertainties surrounding the pandemic, remain in 2022. However, significant progress has been made with vaccinations and medical treatments. Additionally, improved safety guidelines and the easing of restrictions have occurred since the onset of the pandemic. We expect the significance of the pandemic, including the extent of its effect on our financial and operational results, to be dictated by continued developments related to the COVID-19 pandemic. We continue to closely monitor external events and are in continual discussion with our customers to assess, prepare and respond to conditions as they evolve.
Reclassifications
Certain amounts reported in the interim 2021 consolidated financial statements have been reclassified to conform to the 2022 presentation.
Subsequent Events
We evaluated subsequent events after September 30, 2022 through the date our interim condensed consolidated financial statements were issued for potential recognition and disclosure. No subsequent events require financial statement recognition or disclosure between September 30, 2022 and the date our interim condensed consolidated financial statements were issued.
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Results of Operations (Unaudited)
The following table outlines our quarter-to-date results of operations and provides certain performance measures as of, and for the three-month periods ended:

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

(1) At end of period
38

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

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

(1) At end of period
39

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

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

40

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

Net interest income is the amount by which interest income on earning assets exceeds the interest expense on interest bearing liabilities. Net interest income is influenced by changes in the balance and mix of assets and liabilities, as well as market interest rates. While we exert some control over these factors, FRB monetary policy and competition have a significant impact. For analytical purposes, net interest income is adjusted to an FTE basis by including the income tax savings from interest on tax exempt loans and nontaxable investment securities, thus making year to year comparisons more meaningful.
41

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Volume and Rate Variance Analysis
The following table sets forth the effect of volume and rate changes on interest income and expense for the periods indicated. Changes in interest due to volume and rate were determined as follows:
Volume—change in volume multiplied by the previous period's rate.
Rate—change in the FTE rate multiplied by the previous period's volume.
The change in interest due to both volume and rate has been allocated to volume and rate changes in proportion to the relationship of the absolute dollar amounts of the change in each.

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

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

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

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

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

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

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

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

During 2020, we increased the ALLL as a result of increased economic and environmental related risk factors, primarily driven by COVID-19. While these risk factors remain, improvement in credit quality indicators resulted in a reduction to the ALLL during the first quarter of 2021. While we have experienced fluctuations in credit quality indicators in recent periods, credit quality remained strong at September 30, 2022. Despite strong credit quality, the ALLL increased during the second quarter of 2022 as a result of loan growth during the quarter and increased economic and environmental related risk factors. Although
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loans declined during the third quarter, increased economic and environmental related risk factors remained. As such, no reduction in the ALLL was recorded.
The following table illustrates the two main components of the ALLL as of:

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

While we utilize our best judgment and information available, the ultimate adequacy of the ALLL is dependent upon a variety of factors beyond our control, including the performance of our borrowers, the economy, and changes in interest rates. We closely monitor overall credit quality indicators and our policies and procedures related to the analysis of the ALLL to ensure that the ALLL remains at an appropriate level.
For further discussion of the allocation of the ALLL, see “Note 4 – Loans and ALLL” of our interim condensed consolidated financial statements.
Loans Past Due and Loans in Nonaccrual Status
Fluctuations in past due and nonaccrual status loans can have a significant impact on the ALLL. To determine the potential impact, and corresponding estimated losses, we analyze our historical loss trends on loans past due greater than 30 days and nonaccrual status loans for indications of additional deterioration.

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

The increase in past due and nonaccrual commercial loans as of September 30, 2022 was the result of one past due relationship. A summary of loans past due and in nonaccrual status, including the composition of the ending balance of nonaccrual status loans by type, is included in “Note 4 – Loans and ALLL” of our interim condensed consolidated financial statements.
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Troubled Debt Restructurings
We have taken a proactive approach modifying loans to assist borrowers who are willing to work with us, thus making them less likely to default, and to avoid foreclosure. This approach has permitted certain borrowers to develop a payment structure that will allow them to continue making payments in lieu of foreclosure. Modifications have been successful for us and our customers as very few of the modified loans have resulted in foreclosures. The majority of modifications result in terms that satisfy our criteria for continued interest accrual. TDRs that have been placed in nonaccrual status may be placed back on accrual status after six months of continued performance and achievement of current payment status.
We restructure debt with borrowers who, due to financial difficulties, are unable to service their debt under the original terms. We may extend the amortization period, reduce interest rates, allow temporary interest-only payment structures, forgive principal, forgive interest, or grant a combination of these modifications. Typically, the modifications are for a period of three years or less.
Losses associated with TDRs, if any, are included in the estimation of the ALLL during the quarter in which a loan is identified as a TDR, and we review the analysis of the ALLL estimation each reporting period thereafter to ensure its continued appropriateness.
The following tables provide roll-forwards of TDRs for the:

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

| Nine Months Ended September 30, 2022
| Accruing Interest |  | Nonaccrual |  | Total
| Number of Loans |  | Balance |  | Number of Loans |  | Balance |  | Number of Loans |  | Balance
January 1, 2022 | 98 |  |  | $ | 25,276 |  |  | 6 |  |  | $ | 449 |  |  | 104 |  |  | $ | 25,725 |
New modifications | 2 |  |  | 153 |  |  | — |  |  | — |  |  | 2 |  |  | 153 |
Principal advances (payments) | — |  |  | (1,971) |  |  | — |  |  | (68) |  |  | — |  |  | (2,039) |
Loans paid off | (19) |  |  | (4,756) |  |  | — |  |  | — |  |  | (19) |  |  | (4,756) |
September 30, 2022 | 81 |  |  | $ | 18,702 |  |  | 6 |  |  | $ | 381 |  |  | 87 |  |  | $ | 19,083 |

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

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

The following table summarizes our TDRs as of:

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

Additional disclosures about TDRs are included in “Note 4 – Loans and ALLL” of our interim condensed consolidated financial statements.
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Impaired Loans
The following is a summary of information pertaining to impaired loans as of:

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

We continue to devote considerable attention to identifying impaired loans and adjusting the net carrying value of these loans to their current net realizable values through the establishment of a specific reserve or the recognition of a charge-off.
Additional disclosures related to impaired loans are included in “Note 4 – Loans and ALLL” of our interim condensed consolidated financial statements.
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Nonperforming Assets
The following table summarizes our nonperforming assets as of:

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

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

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

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

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

Additional disclosures about nonaccrual status loans are included in “Note 4 – Loans and ALLL” of our interim condensed consolidated financial statements.
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Noninterest Income and Noninterest Expenses
Significant noninterest income balances are highlighted in the following tables for the:

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

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

Service charges and fees on deposit accounts increased during the first nine months of 2022, mainly due to an increase in the number of deposit accounts. Service charges and fees during the remainder of 2022 are expected to exceed 2021 levels.
OMSR income results are driven, in part, by changes in offering rates on residential mortgage loans, anticipated prepayments in the servicing-retained portfolio, and the volume of loans within the servicing-retained portfolio. Decreased prepayment speeds, as a result of an increase in interest rates, was the primary driver of the income recognized during the first nine months of 2022. Income during the remainder of 2022 will be driven by the volume of loans originated within the servicing-retained portfolio, along with any further future increases in interest rates.
The amount of loans sold is driven by customer demand and balance sheet management strategies. We experienced a significant increase in loan demand in early 2021 which led to an increase in the number and dollar amount of loans sold; as such, net gain on sale of mortgage loans increased significantly. In mid-2021, we decided to retain more loan originations on the balance sheet, due to our liquidity position, thereby decreasing the number of mortgage loans sold, which had an impact on the net gain on loans sold. As a result of this change in strategy, coupled with a decline in loan demand, net gain on sale of mortgage loans has declined in comparison to the prior year. As demand is expected to slow during the remainder of 2022 due to the rise in interest rates, net gain on sale of mortgage loans is not expected to exceed 2021 levels.
The fluctuations in all other noninterest income are spread throughout various categories, none of which are individually significant.
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Significant noninterest expense balances are highlighted in the following tables for the:

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

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

Donations and community relations increased during 2022 as a result of initiatives designed to deepen and strengthen our relationship with the communities in which we operate and serve, which includes an expanded footprint. While government restrictions and temporary business closures related to COVID-19 impacted our ability to maintain the level of support in early 2021, we have since increased the level of community support.
The fluctuations in all other noninterest expenses are spread throughout various categories, none of which are individually significant.
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Analysis of Changes in Financial Condition

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

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

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

The following table displays loan balances as of:

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

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

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

The following table displays deposit balances as of:

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

Total deposits have increased over the past 12 months with significant growth in non-contractual deposits, such as demand and savings deposits. We experienced a decline in certificates of deposit over the past year as a result of the low interest rate environment with customers moving their funds into demand and savings accounts. Over the last few years, we used excess funds to reduce higher-cost deposits, such as brokered certificates of deposit.
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The primary objective of our investing activities is to manage our overall exposure to changes in interest rates. Secondary considerations include ensuring ample access to liquidity, generating returns, and providing current income. Over the last two years, the flat yield curve encouraged the use of excess funds to reduce higher-cost borrowings as opposed to investing in AFS securities. However, based on balance sheet strategies, excess funds above what is required to retire future maturities of higher-cost funding sources was prudently deployed to purchase AFS securities in future periods.
The following table displays fair values of AFS securities as of:

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

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

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

Over the last few years, we used excess funds to reduce FHLB advances. On June 2, 2021, we completed a private placement of $30,000 in aggregate principal amount of 3.25% Fixed-to-Floating Rate Subordinated Notes due 2031 (the "Notes"). The Notes will initially bear a fixed interest rate of 3.25% until June 15, 2026, after which time until maturity on June 15, 2031, the interest rate will reset quarterly to an annual floating rate equal to the then-current 3-month SOFR plus 256 basis points. The Notes are redeemable by us at our option, in whole or in part, on or after June 15, 2026. The Notes are not subject to redemption at the option of the holders.
Contractual Obligations and Loan Commitments
We have various financial obligations, including contractual obligations and commitments related to deposits and borrowings, which may require future cash payments. We also have loan related commitments that may impact liquidity. The commitments include unused lines of credit, commercial and standby letters of credit, and commitments to grant loans. These commitments to grant loans include residential mortgage loans with the majority committed to be sold to the secondary market. Many of these commitments historically have expired without being drawn upon and do not necessarily represent our future cash requirements.
We are party to credit related financial instruments with off-balance-sheet risk. These financial instruments are entered into in the normal course of business to meet the financing needs of our customers. These financial instruments involve, to varying degrees, elements of credit and interest rate risk in excess of the amounts recognized in the consolidated balance sheets. The contractual or notional amounts of these instruments reflect the extent of involvement we have in a particular class of financial instrument.
Our exposure to credit-related loss in the event of nonperformance by the counterparties to the financial instruments for commitments to extend credit and standby letters of credit could be up to the contractual notional amount of those instruments. We use the same credit policies when analyzing the creditworthiness of counterparties as we do for extending loans to customers. No significant losses are anticipated as a result of these commitments.
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Capital
Capital consists solely of common stock, retained earnings, and accumulated other comprehensive income (loss). We are authorized to raise capital through dividend reinvestment, employee and director stock purchases, and shareholder stock purchases. Pursuant to these authorizations, we issued 55,549 shares or $1,344 of common stock during the first nine months of 2022, as compared to 52,523 shares or $1,196 of common stock during the same period in 2021. We also offer the Directors Plan in which participants purchase stock units through deferred fees, in lieu of cash payments. Pursuant to this plan, we increased shareholders’ equity by $346 and $343 during the nine-month periods ended September 30, 2022 and 2021, respectively. We also grant restricted stock awards pursuant to the RSP. Pursuant to this plan, we increased shareholders’ equity by $108 during the first nine months of 2022, as compared to $58 during the same period in 2021.
We have publicly announced a common stock repurchase plan. Pursuant to this plan, we repurchased 23,842 shares or $585 of common stock during the first nine months of 2022 and 123,160 shares or $2,699 during the first nine months of 2021. As of September 30, 2022, we were authorized to repurchase up to an additional 443,649 shares of common stock.
The FRB has established minimum risk-based capital guidelines. Pursuant to these guidelines, a framework has been established that assigns risk weights to each category of on and off-balance-sheet items to arrive at risk adjusted total assets. Regulatory capital is divided by the risk adjusted assets with the resulting ratio compared to the minimum standard to determine whether a corporation has adequate capital.
The common equity tier 1 capital ratio has a minimum requirement of 4.50%. The minimum standard for primary, or Tier 1 capital is 6.00% and the minimum standard for total capital is 8.00%. The minimum requirements presented below include the minimum required capital levels based on the Basel III Capital Rules. Capital requirements to be considered well capitalized are based upon prompt corrective action regulations, as amended to reflect the changes under the Basel III Capital Rules. The following table sets forth these requirements and our ratios as of:

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

Total capital includes Tier 1 capital and Tier 2 capital. Tier 2 capital includes a permissible portion of the allowances for loan and lease losses and subordinated debt, net of unamortized issuance costs. There are no significant regulatory constraints placed on our capital. At September 30, 2022, the Bank also exceeded minimum capital requirements.
Liquidity
Liquidity is monitored regularly by our ALCO, which consists of members of senior management. The committee reviews projected cash flows, key ratios, and liquidity available from both primary and secondary sources.
Our primary sources of liquidity are cash and cash equivalents and unencumbered AFS securities. These categories totaled $577,137 or 27.96% of assets as of September 30, 2022, compared to $495,169 or 24.37% as of December 31, 2021. The increase in the amount and percentage of primary liquidity is a direct result of an increase in market deposits, an increase in unencumbered AFS securities from purchases during 2022, and a deliberate reduction in non-market funding which required collateralization. Liquidity is important for financial institutions because of their need to meet loan funding commitments, depositor withdrawal requests, and various other commitments including expansion of operations, investment opportunities, and payment of cash dividends. Based on these same factors, daily liquidity could vary significantly.
Deposit accounts are our primary source of funds. Our secondary sources include the ability to borrow from the FHLB, from the FRB, and through various correspondent banks in the form of federal funds purchased and a line of credit. These funding methods typically carry a higher interest rate than traditional market deposit accounts. In recent periods, we have elected to use excess funds to reduce borrowings and other higher-cost funding sources. Some borrowed funds, including FHLB advances, FRB Discount Window advances, and repurchase agreements, require us to pledge assets, typically in the form of AFS securities or loans, as collateral. As of September 30, 2022, we had available lines of credit of $343,437.
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Our stress testing of liquidity increased since early 2020 and continues to evolve due to economic uncertainly as a result of COVID-19. Our liquidity position remained strong at September 30, 2022, which is illustrated in the following table:

| September 30 2022
Total cash and cash equivalents | $ | 98,912 |
Available lines of credit |
Fed funds lines with correspondent banks | 93,000 |
FHLB borrowings | 236,510 |
FRB Discount Window | 8,927 |
Other lines of credit | 5,000 |
Total available lines of credit | 343,437 |
Unencumbered lendable value of FRB collateral, estimated 1 | 440,000 |
Total cash and liquidity | $ | 882,349 |

(1)Includes estimated unencumbered lendable value of FHLB collateral of $380,000
The following table summarizes our sources and uses of cash for the nine-month period ended September 30:

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

Fair Value
We utilize fair value measurements to record fair value adjustments to certain assets and liabilities and to determine fair value disclosures. AFS securities, cash flow hedge derivative instruments and certain liabilities are recorded at fair value on a recurring basis. Additionally, from time to time, we may be required to record at fair value other assets on a nonrecurring basis, such as mortgage loans AFS, impaired loans, goodwill, foreclosed assets, OMSR, and certain other assets and liabilities. These nonrecurring fair value adjustments typically involve the application of lower of cost or market accounting or write downs of individual assets.
For further information regarding fair value measurements see “Note 11 – Fair Value” of our interim condensed consolidated financial statements.
Market Risk
Our primary market risks are interest rate risk and liquidity risk. IRR is the exposure of our net interest income to changes in interest rates. IRR results from the difference in the maturity or repricing frequency of a financial institution's interest earning assets and its interest bearing liabilities. Managing IRR is the fundamental method by which financial institutions earn income and create shareholder value. Excessive exposure to IRR could pose a significant risk to our earnings and capital.
The FRB has adopted a policy requiring banks to effectively manage the various risks that can have a material impact on safety and soundness. The risks include credit, interest rate, liquidity, operational, and reputational. We have policies, procedures, and internal controls for measuring and managing these risks. Specifically, our ALCO policy and procedures include defining acceptable types and terms of investments and funding sources, liquidity requirements, limits on investments in long-term assets, limiting the mismatch in repricing opportunities of assets and liabilities, and the frequency of measuring and reporting to our Board of Directors.
The primary technique to measure IRR is simulation analysis. Simulation analysis forecasts the effects on the balance sheet structure and net interest income under a variety of scenarios that incorporate changes in interest rates, the shape of yield curves, interest rate relationships, loan prepayments, and funding sources. These forecasts are compared against net interest income projected in a stable interest rate environment. While many assets and liabilities reprice either at maturity or in accordance with their contractual terms, several balance sheet components demonstrate characteristics that require an evaluation to more accurately reflect their repricing behavior. Key assumptions in the simulation analysis include prepayments on loans,
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probable calls of investment securities, changes in market conditions, loan volumes and loan pricing, deposit sensitivity, and customer preferences. These assumptions are inherently uncertain as they are subject to fluctuation and revision in a dynamic rate environment. As a result, the simulation analysis cannot precisely forecast the impact of rising and falling interest rates on net interest income. Actual results will differ from simulated results due to many other factors, including changes in balance sheet components, interest rate changes, changes in market conditions, and management strategies. We regularly monitor our projected net interest income sensitivity to ensure that it remains within established limits.
Gap analysis, the secondary method to measure IRR, measures the cash flows and/or the earliest repricing of our interest bearing assets and liabilities. This analysis is useful for measuring trends in the repricing characteristics of the balance sheet. Significant assumptions are required in this process because of the embedded repricing options contained in assets and liabilities. Residential real estate and consumer loans allow the borrower to repay the balance prior to maturity without penalty, while commercial and agricultural loans may have prepayment penalties. The amount of prepayments is dependent upon many factors, including the interest rate of a given loan in comparison to the current offering rates, the level of home sales, and the overall availability of credit in the market place. Generally, a decrease in interest rates will result in an increase in cash flows from these assets. A significant portion of our securities are callable or have prepayment options. The call and prepayment options are more likely to be exercised in a period of decreasing interest rates. Savings and demand accounts may generally be withdrawn on request without prior notice. The timing of cash flows from these deposits is estimated based on historical experience. Certificates of deposit have penalties that discourage early withdrawals.
We do not believe there has been a material change in the nature or categories of our primary market risk exposure, or the particular markets that present the primary risk of loss. We do not know of or expect there to be any material change in the general nature of our primary market risk exposure in the near term, and we do not expect to make material changes to our market risk methods in the near term. We may change those methods in the future to adapt to changes in circumstances or to implement new techniques.
Our primary market risk exposures related to the COVID-19 pandemic remain uncertain. A review of our market risk methods are ongoing and modeling is incorporating additional assumptions to account for this uncertainty related to this crisis. Repricing, cash flows, and prepayment projections for loans and mortgage-backed securities are not expected to behave as they would be expected to in a more stable interest rate environment. Customer deposit levels may experience unusual fluctuations due to COVID-related government support programs ending, customer and business needs, and a potential decline in money supply as the Federal Reserve shrinks its balance sheet. We continue to closely monitor customer and economic indicators to develop more precise market risk assumptions as the economic impact of the crisis continues to reveal itself.
Item 3. Quantitative and Qualitative Disclosures about Market Risk.
The information presented in the section captioned “Market Risk” in Management's Discussion and Analysis of Financial Condition and Results of Operations is incorporated herein by reference.
Item 4. Controls and Procedures.
DISCLOSURE CONTROLS AND PROCEDURES
We carried out an evaluation, under the supervision and with the participation of the Principal Executive Officer and Principal Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures (as such term is defined in Rules 13a-15(e) and 15(d)-15(e) under the Exchange Act) as of September 30, 2022, pursuant to Exchange Act Rule 13a-15. Based upon that evaluation, the Principal Executive Officer and Principal Financial Officer concluded that our disclosure controls and procedures as of September 30, 2022, were effective to ensure that information required to be disclosed in reports that we file or submit under the Exchange Act are recorded, processed, summarized and reported within the time periods specified in SEC rules and forms.
CHANGES IN INTERNAL CONTROL OVER FINANCIAL REPORTING
During the most recent fiscal quarter, no change occurred in our internal control over financial reporting that materially affected, or is likely to materially affect, our internal control over financial reporting.
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PART II – OTHER INFORMATION
Item 1. Legal Proceedings.
We are not involved in any material legal proceedings. We are involved in ordinary, routine litigation incidental to our business; however, no such routine proceedings are expected to result in any material adverse effect on operations, earnings, financial condition, or cash flows.
Item 1A. Risk Factors.
There have been no material changes to the risk factors disclosed in Item 1A in our Annual Report on Form 10-K for the year ended December 31, 2021.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.
(A)None
(B)None
(C)Repurchases of Common Stock
We have adopted and publicly announced a common stock repurchase plan. The plan was last amended on April 28, 2021, to allow for the repurchase of an additional 500,000 shares of common stock after that date. These authorizations do not have expiration dates. As common shares are repurchased under this plan, they are retired with the status of authorized, but unissued, shares.
The following table provides information for the three-month period ended September 30, 2022, with respect to this plan:

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

Item 3. Defaults Upon Senior Securities.
Not applicable.
Item 4. Mine Safety Disclosures.
Not applicable.
Item 5. Other Information.
Not applicable.
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Item 6. Exhibits.
(a) Exhibits

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

* In accordance with Rule 406T of Regulations S-T, the XBRL related information shall not be deemed to be “filed” for purposes of Section 18 of the Exchange Act, or otherwise subject to the liability of that section, and shall not be part of any registration statement or other document filed under the Securities Act or the Exchange Act, except as shall be expressly set forth by specific reference in such filing.
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Table of Contents
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

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

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