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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, 2023
or

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

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

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

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

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

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

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

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

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

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). ☐ Yes ☒ No
The number of common shares outstanding of the registrant’s Common Stock (no par value) was 7,493,698 as of October 25, 2023.

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

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, practices and guidelines. These risks and uncertainties should be considered in evaluating forward looking statements and undue reliance should not be placed on such statements. Further information concerning our business, including additional factors that could materially affect our consolidated financial results, is included in our filings with the SEC.
Glossary of Acronyms and Abbreviations
The acronyms and abbreviations identified below may be used throughout this Quarterly Report on Form 10-Q or in our other SEC filings. You may find it helpful to refer back to this page while reading this report.

ACL: Allowance for credit losses |  | FHLB: Federal Home Loan Bank
AFS: Available-for-sale |  | Freddie Mac: Federal Home Loan Mortgage Corporation
ALCO: Asset-Liability Committee |  | FTE: Fully taxable equivalent
ALLL: Allowance for loan and lease losses |  | GAAP: U.S. generally accepted accounting principles
AOCI: Accumulated other comprehensive income |  | IRR: Interest rate risk
ASC: FASB Accounting Standards Codification |  | N/A: Not applicable
ASU: FASB Accounting Standards Update |  | N/M: Not meaningful
ATM: Automated teller machine |  | NAV: Net asset value
CECL: Current expected credit losses |  | NSF: Non-sufficient funds
CIK: Central Index Key |  | OCI: Other comprehensive income (loss)
COVID-19: Coronavirus disease 2019 |  | OMSR: Originated mortgage servicing rights
DIF: Deposit Insurance Fund |  | OREO: Other real estate owned
DIFS: Department of Insurance and Financial Services |  | OTTI: Other-than-temporary impairment
Directors Plan: Isabella Bank Corporation and Related Companies Deferred Compensation Plan for Directors |  | Rabbi Trust: A trust established to fund our Directors Plan
Dividend Reinvestment Plan: Isabella Bank Corporation Stockholder Dividend Reinvestment Plan and Employee Stock Purchase Plan |  | RSP: Isabella Bank Corporation Restricted Stock Plan
Exchange Act: Securities Exchange Act of 1934 |  | SOFR: Secured Overnight Financing Rate
FASB: Financial Accounting Standards Board |  | SEC: U.S. Securities and Exchange Commission
FDIC: Federal Deposit Insurance Corporation |  | SOX: Sarbanes-Oxley Act of 2002
FFIEC: Federal Financial Institutions Examinations Council |  | XBRL: eXtensible Business Reporting Language
FRB: Federal Reserve Bank |  | Yield Curve: U.S. Treasury Yield Curve

3

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

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

See notes to interim condensed consolidated financial statements (unaudited).
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
| 2023 |  | 2022 |  | 2023 |  | 2022
Interest income |  |  |  |  |  |  |
Loans, including fees | $ | 17,270 |  |  | $ | 13,563 |  |  | $ | 48,090 |  |  | $ | 39,120 |
AFS securities |  |  |  |  |  |  |
Taxable | 2,327 |  |  | 2,209 |  |  | 7,211 |  |  | 5,851 |
Nontaxable | 636 |  |  | 726 |  |  | 2,019 |  |  | 2,090 |
Federal funds sold and other | 252 |  |  | 521 |  |  | 1,255 |  |  | 822 |
Total interest income | 20,485 |  |  | 17,019 |  |  | 58,575 |  |  | 47,883 |
Interest expense |  |  |  |  |  |  |
Deposits | 5,015 |  |  | 908 |  |  | 11,953 |  |  | 2,698 |
Borrowings |  |  |  |  |  |  |
Federal funds purchased and repurchase agreements | 284 |  |  | 9 |  |  | 604 |  |  | 26 |
FHLB advances | 617 |  |  | 33 |  |  | 887 |  |  | 152 |
Subordinated debt, net of unamortized issuance costs | 267 |  |  | 266 |  |  | 799 |  |  | 798 |
Total interest expense | 6,183 |  |  | 1,216 |  |  | 14,243 |  |  | 3,674 |
Net interest income | 14,302 |  |  | 15,803 |  |  | 44,332 |  |  | 44,209 |
Provision for credit losses | (292) |  |  | 18 |  |  | (55) |  |  | 540 |
Net interest income after provision for credit losses | 14,594 |  |  | 15,785 |  |  | 44,387 |  |  | 43,669 |
Noninterest income |  |  |  |  |  |  |
Service charges and fees | 2,060 |  |  | 2,122 |  |  | 6,085 |  |  | 6,615 |
Wealth management fees | 858 |  |  | 679 |  |  | 2,625 |  |  | 2,217 |
Earnings on corporate owned life insurance policies | 229 |  |  | 223 |  |  | 681 |  |  | 655 |
Net gain on sale of mortgage loans | 109 |  |  | 174 |  |  | 232 |  |  | 568 |
Other | 158 |  |  | 54 |  |  | 688 |  |  | 339 |
Total noninterest income | 3,414 |  |  | 3,252 |  |  | 10,311 |  |  | 10,394 |
Noninterest expenses |  |  |  |  |  |  |
Compensation and benefits | 6,639 |  |  | 6,369 |  |  | 19,789 |  |  | 18,480 |
Furniture and equipment | 1,612 |  |  | 1,490 |  |  | 4,822 |  |  | 4,382 |
Occupancy | 923 |  |  | 918 |  |  | 2,921 |  |  | 2,813 |
Other | 3,484 |  |  | 3,140 |  |  | 9,863 |  |  | 9,223 |
Total noninterest expenses | 12,658 |  |  | 11,917 |  |  | 37,395 |  |  | 34,898 |
Income before federal income tax expense | 5,350 |  |  | 7,120 |  |  | 17,303 |  |  | 19,165 |
Federal income tax expense | 937 |  |  | 1,233 |  |  | 2,939 |  |  | 3,249 |
NET INCOME | $ | 4,413 |  |  | $ | 5,887 |  |  | $ | 14,364 |  |  | $ | 15,916 |
Earnings per common share |  |  |  |  |  |  |
Basic | $ | 0.59 |  |  | $ | 0.78 |  |  | $ | 1.91 |  |  | $ | 2.11 |
Diluted | $ | 0.58 |  |  | $ | 0.77 |  |  | $ | 1.89 |  |  | $ | 2.08 |
Cash dividends per common share | $ | 0.28 |  |  | $ | 0.27 |  |  | $ | 0.84 |  |  | $ | 0.81 |

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

| Three Months Ended September 30 |  | Nine Months Ended September 30
| 2023 |  | 2022 |  | 2023 |  | 2022
Net income | $ | 4,413 |  |  | $ | 5,887 |  |  | $ | 14,364 |  |  | $ | 15,916 |
Unrealized gains (losses) on AFS securities arising during the period | (6,708) |  |  | (22,815) |  |  | (5,736) |  |  | (56,413) |
Reclassification adjustment for net (gains) losses included in net income | — |  |  | — |  |  | (67) |  |  | — |
Tax effect (1) | 1,394 |  |  | 4,788 |  |  | 1,266 |  |  | 11,687 |
Unrealized gains (losses) on AFS securities, net of tax | (5,314) |  |  | (18,027) |  |  | (4,537) |  |  | (44,726) |
Comprehensive income (loss) | $ | (901) |  |  | $ | (12,140) |  |  | $ | 9,827 |  |  | $ | (28,810) |

(1)See “Note 9 – Accumulated Other Comprehensive Income” for tax effect reconciliation.
See notes to interim condensed consolidated financial statements (unaudited).
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INTERIM CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY (UNAUDITED)
(Dollars in thousands except per share amounts)

| Common Stock |  |  |  |  |  |  |  |
| Common Shares Outstanding |  | Amount |  | Common Shares to be Issued for Deferred Compensation Obligations |  | Retained Earnings |  | Accumulated Other Comprehensive Income (Loss) |  | Totals
January 1, 2022 | 7,532,641 |  |  | $ | 129,052 |  |  | $ | 4,545 |  |  | $ | 75,592 |  |  | $ | 1,859 |  |  | $ | 211,048 |
Comprehensive income (loss) | — |  |  | — |  |  | — |  |  | 15,916 |  |  | (44,726) |  |  | (28,810) |
Issuance of common stock | 55,549 |  |  | 1,344 |  |  | — |  |  | — |  |  | — |  |  | 1,344 |
Common stock transferred from the Rabbi Trust to satisfy deferred compensation obligations | — |  |  | 3 |  |  | (3) |  |  | — |  |  | — |  |  | — |
Share-based payment awards under the Directors Plan | — |  |  | — |  |  | 346 |  |  | — |  |  | — |  |  | 346 |
Share-based compensation expense recognized in earnings under the RSP | — |  |  | 108 |  |  | — |  |  | — |  |  | — |  |  | 108 |
Common stock purchased for deferred compensation obligations | — |  |  | (828) |  |  | — |  |  | — |  |  | — |  |  | (828) |
Common stock repurchased | (23,842) |  |  | (585) |  |  | — |  |  | — |  |  | — |  |  | (585) |
Cash dividends paid ($0.81 per common share) | — |  |  | — |  |  | — |  |  | (6,011) |  |  | — |  |  | (6,011) |
September 30, 2022 | 7,564,348 |  |  | $ | 129,094 |  |  | $ | 4,888 |  |  | $ | 85,497 |  |  | $ | (42,867) |  |  | $ | 176,612 |
January 1, 2023 | 7,559,421 |  |  | $ | 128,651 |  |  | $ | 5,005 |  |  | $ | 89,748 |  |  | $ | (37,194) |  |  | $ | 186,210 |
Cumulative effect of accounting change - adoption of ASC 326 | — |  |  | — |  |  | — |  |  | (2,417) |  |  | — |  |  | (2,417) |
Comprehensive income (loss) | — |  |  | — |  |  | — |  |  | 14,364 |  |  | (4,537) |  |  | 9,827 |
Issuance of common stock | 55,456 |  |  | 1,208 |  |  | — |  |  | — |  |  | — |  |  | 1,208 |
Common stock transferred from the Rabbi Trust to satisfy deferred compensation obligations | — |  |  | 1,841 |  |  | (1,841) |  |  | — |  |  | — |  |  | — |
Share-based payment awards under the Directors Plan | — |  |  | — |  |  | 477 |  |  | — |  |  | — |  |  | 477 |
Share-based compensation expense recognized in earnings under the RSP | — |  |  | 219 |  |  | — |  |  | — |  |  | — |  |  | 219 |
Common stock purchased for deferred compensation obligations | — |  |  | (1,333) |  |  | — |  |  | — |  |  | — |  |  | (1,333) |
Common stock repurchased | (124,320) |  |  | (2,906) |  |  | — |  |  | — |  |  | — |  |  | (2,906) |
Cash dividends paid ($0.84 per common share) | — |  |  | — |  |  | — |  |  | (6,162) |  |  | — |  |  | (6,162) |
September 30, 2023 | 7,490,557 |  |  | $ | 127,680 |  |  | $ | 3,641 |  |  | $ | 95,533 |  |  | $ | (41,731) |  |  | $ | 185,123 |

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

| Nine Months Ended September 30
| 2023 |  | 2022
OPERATING ACTIVITIES |  |  |
Net income | $ | 14,364 |  |  | $ | 15,916 |
Reconciliation of net income to net cash provided by operating activities: |  |  |
Provision for credit losses | (55) |  |  | 540 |
Depreciation | 1,482 |  |  | 1,591 |
Amortization of OMSR | 97 |  |  | 55 |
Amortization of acquisition intangibles | 2 |  |  | 12 |
Amortization of subordinated debt issuance costs | 67 |  |  | 67 |
Net amortization of AFS securities | 1,120 |  |  | 1,568 |
Net gains on sale of AFS securities | (67) |  |  | — |
Net gain on sale of mortgage loans | (232) |  |  | (568) |
Change in OMSR valuation allowance | — |  |  | (532) |
Net (gains) losses on foreclosed assets | (150) |  |  | (5) |
Increase in cash value of corporate owned life insurance policies, net of expenses | (666) |  |  | (605) |
Gains from redemption of corporate owned life insurance policies | — |  |  | (57) |
Share-based payment awards under the Directors Plan | 477 |  |  | 346 |
Share-based payment awards under the RSP | 219 |  |  | 108 |
Deferred income tax expense (benefit) | 53 |  |  | — |
Origination of loans held-for-sale | (6,972) |  |  | (19,566) |
Proceeds from loan sales | 7,478 |  |  | 20,935 |
Net changes in operating assets and liabilities which provided (used) cash: |  |  |
Accrued interest receivable and other assets | 1,459 |  |  | (2,592) |
Accrued interest payable and other liabilities | (218) |  |  | 3,216 |
Net cash provided by (used in) operating activities | 18,458 |  |  | 20,429 |
INVESTING ACTIVITIES |  |  |
Activity in AFS securities |  |  |
Sales | 18,089 |  |  | — |
Maturities, calls, and principal payments | 44,805 |  |  | 56,044 |
Purchases | (6,166) |  |  | (204,657) |
Net loan principal (originations) collections | (70,614) |  |  | 64,791 |
Proceeds from sales of foreclosed assets | 421 |  |  | 105 |
Purchases of premises and equipment | (2,889) |  |  | (2,279) |
Proceeds from redemption of corporate owned life insurance policies | — |  |  | 370 |
Proceeds from sale of FHLB Stock | — |  |  | 2,288 |
Purchases of FRB Stock | — |  |  | (401) |
Funding of low income housing tax credit investments | (612) |  |  | (39) |
Purchase of equity investments | (102) |  |  | — |
Net cash provided by (used in) investing activities | (17,068) |  |  | (83,778) |

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

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

See notes to interim condensed consolidated financial statements (unaudited).
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NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(Dollars in thousands except per share amounts)
Note 1 – Significant Accounting Policies
Basis of Presentation and Consolidation: The consolidated financial statements include the accounts of Isabella Bank Corporation, a financial services holding company, and its wholly owned subsidiary, Isabella Bank. All intercompany balances and accounts have been eliminated in consolidation. References to “the Corporation”, “Isabella”, “we”, “our”, “us”, and similar terms refer to the consolidated entity consisting of Isabella Bank Corporation and its subsidiary. References to Isabella Bank or “the Bank” refers to Isabella Bank Corporation’s subsidiary, Isabella Bank.
The accompanying unaudited interim condensed consolidated financial statements have been prepared in accordance with GAAP for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by GAAP for complete financial statements. In our opinion, all adjustments considered necessary for a fair presentation have been included. Operating results for the three and nine-month periods ended September 30, 2023 are not necessarily indicative of the results that may be expected for the year ending December 31, 2023. For further information, refer to our Annual Report on Form 10-K for the year ended December 31, 2022.
Use of Estimates: In preparing consolidated financial statements in conformity with accounting principles generally accepted in the United States of America, we make estimates and assumptions that affect the reported amounts of assets and liabilities as of the date of the consolidated balance sheet and reported amounts of revenues and expenses during the reporting year. Actual results could differ from those estimates.
Material estimates that are particularly susceptible to significant change in the near term relate to the determination of the ACL, the fair value of AFS investment securities, and the valuation of goodwill and other intangible assets.
Accounting Changes and Reclassifications: Certain amounts reported in the interim 2022 consolidated financial statements have been reclassified to conform with the 2023 presentation.
On January 1, 2023, we adopted ASU 2016-13, “Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments,” as subsequently updated for certain clarifications, targeted relief and codification improvements. ASC 326 updated the measurement for credit losses for AFS debt securities and assets measured at amortized cost, which includes loans, trade receivables, and any other financial assets with the contractual right to receive cash and requires enhanced disclosures related to the significant estimates and judgments used in estimating credit losses.
Prior to ASU No. 2016-13, GAAP required an “incurred loss” methodology for recognizing credit losses that delayed recognition until it was probable a loss has been incurred. Under the incurred loss approach, entities were limited to a probable initial recognition threshold when credit losses were measured; an entity generally considered only past events and current conditions when measuring the incurred loss.
We adopted ASC 326 using the modified retrospective method for all financial assets measured at amortized cost and off balance sheet credit exposures. Results for reporting periods beginning January 1, 2023 are presented under ASC 326, while prior period amounts continue to be reported in accordance with previously applicable GAAP and the accounting policies described in our Annual Report on Form 10-K for the year ended December 31, 2022. We recorded a net decrease to retained earnings of $2,417 as of January 1, 2023 for the cumulative effect of adopting ASC 326.
We adopted ASC 326 using the prospective transition approach for AFS debt securities for which other-than-temporary impairment had been recognized prior to January 1, 2023. As a result, the amortized cost basis remains the same before and after the effective date of ASC 326. The effective interest rate on these debt securities was not changed. Amounts previously recognized in accumulated other comprehensive income as of January 1, 2023 relating to improvements in cash flows expected to be collected will be accreted into income over the remaining life of the asset. Recoveries of amounts previously written off relating to improvements in cash flows beginning January 1, 2023 will be recorded in earnings when received.
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The following table details the impact of the adoption of ASC 326:

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

In connection with the adoption of ASC 326, we revised certain accounting policies and implemented certain accounting policy elections, which are provided below. All other accounting policies are materially the same as those discussed in Note 1 to the Consolidated Financial Statements included in our Annual Report on Form 10-K for the year ended December 31, 2022.
AFS Securities: Purchases of investment securities are generally classified as AFS. However, we may elect to classify securities as either held to maturity or trading. Securities classified as AFS debt securities are recorded at fair value, with unrealized gains and losses, net of the effect of deferred income taxes, excluded from earnings and reported in other comprehensive income (loss). Included in AFS securities are auction rate money market preferred securities. These investments, for federal income tax purposes, have no federal income tax impact given the nature of the investments. Auction rate money market preferred securities are recorded at fair value, with unrealized gains and losses excluded from earnings and reported in other comprehensive income (loss). Purchase premiums and discounts are recognized in interest income using the interest method over the term of the securities. Realized gains and losses on the sale of AFS securities are determined using the specific identification method.
ACL - AFS Securities: AFS securities are reviewed quarterly for possible credit impairment. In determining whether a credit-related impairment exists for debt securities, we assess whether: (a) we do not have the intent to sell the security; and (b) it is more likely than not we will not have to sell the security before recovery of its cost basis. If either of these conditions are met, any previously recognized allowances are charged-off and the security's amortized cost is written down to fair value through income. If these conditions are not met, the security is evaluated to determine whether the decline in fair value has resulted from credit losses or other factors.
In order to determine the amount of the credit loss for a debt security, we calculate the recovery value by performing a discounted cash flow analysis based on the current cash flows and future cash flows we expect to recover. If the present value of cash flows expected to be collected is less than the amortized cost basis, a credit loss exists and an allowance for credit losses is recorded for the credit loss, limited by the amount that the fair value is less than the amortized cost basis. The amount of the impairment related to other risk factors is recognized as a component of other comprehensive income. Adjustments to the allowance are reported in the income statement as a provision for credit losses.
We made an accounting policy election to exclude accrued interest receivable on AFS securities from the estimate of credit losses. AFS securities are charged-off against the allowance or, in the absence of any allowance, written down through income when deemed uncollectible by management, or when criteria regarding intent or requirement to sell is met.
Loans: Loans that we have the intent and ability to hold for the foreseeable future or until maturity or payoff are reported at their outstanding principal balance adjusted for any charge-offs, the ACL, and any deferred fees or costs. Interest income on loans is accrued over the term of the loan based on the principal amount outstanding. Loan origination fees and certain direct loan origination costs are capitalized and recognized as a component of interest income over the term of the loan using the appropriate yield methods.
The accrual of interest on agricultural, commercial and mortgage loans is discontinued at the time the loan is 90 days or more past due unless the credit is well secured and in the process of collection. Consumer loans are typically charged-off no later than 180 days past due. Past due status is based on contractual terms of the loan. In all cases, loans are placed in nonaccrual status or charged-off at an earlier date if collection of principal or interest is considered doubtful. For loans that are placed on nonaccrual status or charged-off, all interest accrued in the current calendar year, but not collected, is reversed against interest income while interest accrued in prior calendar years, but not collected is charged against the ACL. Interest income on loans in
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nonaccrual status is not recognized until qualifying for return to accrual status. Loans are returned to accrual status when all principal and interest amounts contractually due are brought current and future payments are reasonably assured. For loans not classified as nonaccrual, interest income continues to be accrued over the term of the loan based on the principal amount outstanding.
ACL - Loans: The ACL on loans is calculated in accordance with ASC 326 and is deducted from the amortized cost basis of loans to present our best estimate of the net amount expected to be collected. The ACL is established through a provision for credit losses charged to earnings. Loan losses are charged against the allowance when we believe the uncollectability of the loan balance is confirmed. Subsequent recoveries, if any, are credited to the allowance. We made an accounting policy election to exclude accrued interest receivable on loans from the estimate of credit losses.
We evaluate the ACL on a regular basis. Our periodic review of the collectability of loans considers historical experience, the nature and volume of the loan portfolio, adverse situations that may affect the borrower’s ability to repay, estimated value of any underlying collateral, prevailing economic conditions, and reasonable and supportable forecasts. This evaluation is inherently subjective as it requires estimates that are susceptible to significant revision as more information becomes available.
The ACL consists of a general component and loans individually analyzed. The general component covers loans not specifically analyzed and is based on historical loss experience, current conditions, and reasonable and supportable forecasts. The general component also includes uncertainties that we believe could affect our estimate of probable losses based on qualitative factors.
Loans in nonaccrual status are individually analyzed on a loan-by-loan basis. Loans evaluated individually are not included in the general, or pooled, component of the ACL. For collateralized loans, the loan's specific allowance is measured by the fair value of the collateral approach. The specific reserve is based on the fair value of the collateral, less costs to sell if foreclosure is probable, and an allowance is established when the collateral value is lower than the carrying value of the loan. When the discounted cash flow method is used to measure the loan's specific allowance, the effective interest rate is used to discount expected cash flows to incorporate expected prepayments. An allowance is established when the discounted cash flows are lower than the carrying value of the loan. For large groups of smaller-balance, homogeneous loans, we may collectively evaluate these loans for measurement of an allowance.
Off Balance Sheet Credit Related Financial Instruments: In the ordinary course of business, we enter into commitments to extend credit, including commitments under credit card arrangements, commercial lines of credit, home equity lines of credit, commercial letters of credit, and standby letters of credit. Such financial instruments are recorded only when funded. In connection with these commitments, we established an allowance for credit losses related to off-balance-sheet credit exposures. The allowance, recorded in a liability account, is calculated in accordance with ASC 326 and represents expected credit losses over the contractual period for which we are exposed to credit risk resulting from a contractual obligation to extend credit. The estimate of expected credit losses considers both the likelihood that funding will occur and the amount expected to be funded over the estimated remaining life of the commitment. The likelihood and expected amount of funding are based on historical utilization rates. No allowance is recognized if we have the unconditional right to cancel the obligation. The allowance is reported as a component of accrued interest payable and other liabilities in our consolidated balance sheets. Adjustments to the allowance are reported in our income statement as a component of provision for credit losses.
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Note 2 – AFS Securities
The amortized cost and fair value of AFS securities, with gross unrealized gains and losses, are as follows at:

| September 30, 2023
| Amortized Cost |  | Gross Unrealized Gains |  | Gross Unrealized Losses |  | Fair Value
U.S. Treasury | $ | 231,318 |  |  | $ | — |  |  | $ | 22,136 |  |  | $ | 209,182 |
States and political subdivisions | 97,042 |  |  | 350 |  |  | 7,619 |  |  | 89,773 |
Auction rate money market preferred | 3,200 |  |  | — |  |  | 630 |  |  | 2,570 |
Mortgage-backed securities | 36,927 |  |  | — |  |  | 4,004 |  |  | 32,923 |
Collateralized mortgage obligations | 191,187 |  |  | — |  |  | 15,557 |  |  | 175,630 |
Corporate | 8,150 |  |  | — |  |  | 1,331 |  |  | 6,819 |
Total | $ | 567,824 |  |  | $ | 350 |  |  | $ | 51,277 |  |  | $ | 516,897 |

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

The amortized cost and fair value of AFS securities by contractual maturity at September 30, 2023 are as follows:

| Maturing |  | Securities with Variable Monthly Payments or Noncontractual Maturities |  |
| Due in One Year or Less |  | After One Year But Within Five Years |  | After Five Years But Within Ten Years |  | After Ten Years |  |  | Total
U.S. Treasury | $ | — |  |  | $ | 231,318 |  |  | $ | — |  |  | $ | — |  |  | $ | — |  |  | $ | 231,318 |
States and political subdivisions | 11,998 |  |  | 31,826 |  |  | 20,807 |  |  | 32,411 |  |  | — |  |  | 97,042 |
Auction rate money market preferred | — |  |  | — |  |  | — |  |  | — |  |  | 3,200 |  |  | 3,200 |
Mortgage-backed securities | — |  |  | — |  |  | — |  |  | — |  |  | 36,927 |  |  | 36,927 |
Collateralized mortgage obligations | — |  |  | — |  |  | — |  |  | — |  |  | 191,187 |  |  | 191,187 |
Corporate | — |  |  | — |  |  | 8,150 |  |  | — |  |  | — |  |  | 8,150 |
Total amortized cost | $ | 11,998 |  |  | $ | 263,144 |  |  | $ | 28,957 |  |  | $ | 32,411 |  |  | $ | 231,314 |  |  | $ | 567,824 |
Fair value | $ | 11,945 |  |  | $ | 240,395 |  |  | $ | 25,832 |  |  | $ | 27,602 |  |  | $ | 211,123 |  |  | $ | 516,897 |

Expected maturities for government sponsored enterprises and states and political subdivisions may differ from contractual maturities because issuers may have the right to call or prepay obligations.
As the auction rate money market preferred investments have continual call dates, they are not reported by a specific maturity group. Because of their variable monthly payments, mortgage-backed securities and collateralized mortgage obligations are not reported by a specific maturity group. Approximately $148,000 of the amortized cost of the collateralized mortgage portfolio consist of agency commercial mortgage-backed securities with defined maturity dates of less than ten years.
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A summary of the sales activity of AFS securities is as follows for the:

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

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

| September 30, 2023
| Less Than Twelve Months |  | Twelve Months or More |  |
| Gross Unrealized Losses |  | Fair Value |  | Gross Unrealized Losses |  | Fair Value |  | Total Unrealized Losses
U.S. Treasury | $ | — |  |  | $ | — |  |  | $ | 22,136 |  |  | $ | 209,182 |  |  | $ | 22,136 |
States and political subdivisions | 962 |  |  | 24,474 |  |  | 6,657 |  |  | 53,180 |  |  | 7,619 |
Auction rate money market preferred | — |  |  | — |  |  | 630 |  |  | 2,570 |  |  | 630 |
Mortgage-backed securities | 1 |  |  | 38 |  |  | 4,003 |  |  | 32,885 |  |  | 4,004 |
Collateralized mortgage obligations | 294 |  |  | 4,362 |  |  | 15,263 |  |  | 171,268 |  |  | 15,557 |
Corporate | — |  |  | — |  |  | 1,331 |  |  | 6,819 |  |  | 1,331 |
Total | $ | 1,257 |  |  | $ | 28,874 |  |  | $ | 50,020 |  |  | $ | 475,904 |  |  | $ | 51,277 |
Number of securities in an unrealized loss position: |  |  | 67 |  |  |  |  | 400 |  |  | 467 |

| December 31, 2022
| Less Than Twelve Months |  | Twelve Months or More |  |
| Gross Unrealized Losses |  | Fair Value |  | Gross Unrealized Losses |  | Fair Value |  | Total Unrealized Losses
U.S. Treasury | $ | 1,388 |  |  | $ | 18,331 |  |  | $ | 21,533 |  |  | $ | 190,370 |  |  | $ | 22,921 |
States and political subdivisions | 2,389 |  |  | 48,083 |  |  | 2,514 |  |  | 40,667 |  |  | 4,903 |
Auction rate money market preferred | — |  |  | — |  |  | 858 |  |  | 2,342 |  |  | 858 |
Mortgage-backed securities | 3,239 |  |  | 39,070 |  |  | — |  |  | — |  |  | 3,239 |
Collateralized mortgage obligations | 12,408 |  |  | 201,315 |  |  | 165 |  |  | 4,411 |  |  | 12,573 |
Corporate | — |  |  | — |  |  | 1,022 |  |  | 7,128 |  |  | 1,022 |
Total | $ | 19,424 |  |  | $ | 306,799 |  |  | $ | 26,092 |  |  | $ | 244,918 |  |  | $ | 45,516 |
Number of securities in an unrealized loss position: |  |  | 178 |  |  |  |  | 266 |  |  | 444 |

As of September 30, 2023, no allowance for credit losses has been recognized on AFS securities in an unrealized loss position, as management does not believe any of the securities are impaired due to reasons of credit quality. This is based on our analysis of the underlying risk characteristics, including credit ratings, and other qualitative factors related to our AFS securities and consideration of our historical credit loss experience and internal forecasts. The issuers of these securities continue to make timely principal and interest payments under the contractual terms of the securities. Furthermore, management does not have the intent to sell any of the securities classified as AFS in the table above, and believes it is more likely than not that we will not have to sell any such securities before a recovery of cost. The unrealized losses are due to increases in market interest rates over the yields available at the time the underlying securities were purchased. The fair value is expected to recover as the securities approach their respective maturity date or repricing date, or if the market yields for such investments decline.
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Note 3 – Loans and ACL
Loan Composition
The following table provides a detailed listing of our loan portfolio at:

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

For a summary of the accounting policies related to loans, interest recognition, and the ACL for loans, including updates to such policies, refer to “Note 1 – Significant Accounting Policies” and our Annual Report on Form 10-K for the year ended December 31, 2022.
We grant commercial, agricultural, residential real estate, and consumer loans to customers situated primarily in Bay, Clare, Gratiot, Isabella, Mecosta, Midland, Montcalm, and Saginaw counties in mid-Michigan. The ability of the borrowers to honor their repayment obligations is often dependent upon the real estate, agricultural, manufacturing, retail, gaming, tourism, health care, higher education, and general economic conditions of this region. Substantially all of our consumer and residential real estate loans are secured by various items of property, while commercial loans are secured primarily by real estate, business assets, and personal guarantees. A portion of loans are unsecured.
Loans that we have the intent and ability to hold in our portfolio are reported at their outstanding principal balance adjusted for any charge-offs, the ACL, and deferred fees or costs. Unless a loan has a nonaccrual status, interest income is accrued over the term of the loan based on the principal amount outstanding. Loan origination fees and certain direct loan origination costs are capitalized and recognized as a component of interest income over the term of the loan using the appropriate amortization method.
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Commercial and agricultural loans include loans for commercial real estate, commercial operating loans, advances to mortgage brokers, farmland and agricultural production, and loans to states and political subdivisions. Repayment of these loans is dependent upon the successful operation and management of a business. We minimize our risk by limiting the amount of direct credit exposure to any one borrower to $18,000. Borrowers with direct credit needs of more than $18,000 may be serviced through the use of loan participations with other commercial banks. Commercial and agricultural real estate loans commonly require loan-to-value limits of 80% or less. Depending upon the type of loan, past credit history, and current operating results, we may require the borrower to pledge accounts receivable, inventory, property, or equipment. Government agency guarantee may be required. Personal guarantees and/or life insurance beneficiary assignments are generally required from the owners of closely held corporations, partnerships, and sole proprietorships. In addition, we may require annual financial statements, prepare cash flow analyses, and review credit reports.
We offer adjustable rate mortgages, construction loans, and fixed rate residential real estate loans which have amortization periods up to a maximum of 30 years. We consider the anticipated direction of interest rates, balance sheet duration, the sensitivity of our balance sheet to changes in interest rates, our liquidity needs, and overall loan demand to determine whether or not to sell fixed rate loans to Freddie Mac.
Our lending policies generally limit the maximum loan-to-value ratio on residential real estate loans to 100% of the lower of the appraised value of the property or the purchase price. Private mortgage insurance is typically required on loans with loan-to-value ratios in excess of 80% unless the loan qualifies for government guarantees.
Underwriting criteria for originated residential real estate loans generally include:
•Evaluation of the borrower’s ability to make monthly payments.
•Evaluation of the value of the property securing the loan.
•Ensuring the payment of principal, interest, taxes, and hazard insurance generally does not exceed 28% of a borrower’s gross income.
•Ensuring all debt servicing does not exceed 40% of income.
•Verification of acceptable credit reports.
•Verification of employment, income, and financial information.
Appraisals are performed by independent appraisers and are reviewed for appropriateness. Generally, mortgage loan requests are reviewed by our mortgage loan committee or through a secondary market underwriting system; loans in excess of $1,000 require the approval of one or more of the following committees: Internal Loan Committee, the Executive Loan Committee, or the Board of Directors.
Consumer loans include secured and unsecured personal loans. Loans are amortized for a period of up to 15 years based on the age and value of the underlying collateral. The underwriting emphasis is on a borrower’s perceived intent and ability to pay rather than collateral value. No consumer loans are sold to the secondary market.
Nonaccrual and Past Due Loans
The accrual of interest on commercial and agricultural loans, as well as residential real estate loans, is discontinued at the time a loan is 90 days or more past due unless the credit is well-secured and in the process of short-term collection. Upon transferring a loan to nonaccrual status, we perform an evaluation to determine the net realizable value of the underlying collateral. This evaluation is used to help determine if a charge-off is necessary. Consumer loans are typically charged-off no later than 180 days past due. Past due status is based on the contractual term of the loan. In all cases, a loan is placed in nonaccrual status at an earlier date if collection of principal or interest is considered doubtful.
When a loan is placed in nonaccrual status, all interest accrued in the current calendar year, but not collected, is reversed against interest income while interest accrued in prior calendar years, but not collected, is charged against the ACL. Loans may be returned to accrual status after six months of continuous performance and achievement of current payment status.
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The following table summarizes nonaccrual loan data by class of loans as of:

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

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

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

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

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

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

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

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

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

Internally assigned credit risk ratings are reviewed, at a minimum, when loans are renewed or when management has knowledge of improvements or deterioration of the credit quality of individual credits. Descriptions of the internally assigned credit risk ratings for commercial and agricultural loans are as follows:
1. EXCELLENT – Substantially Risk Free
Credit has strong financial condition and solid earnings history, characterized by:
•High liquidity, strong cash flow, low leverage.
•Unquestioned ability to meet all obligations when due.
•Experienced management, with management succession in place.
•Secured by cash.
2. HIGH QUALITY – Limited Risk
Credit with sound financial condition and a positive trend in earnings supplemented by:
•Favorable liquidity and leverage ratios.
•Ability to meet all obligations when due.
•Management with successful track record.
•Steady and satisfactory earnings history.
•If loan is secured, collateral is of high quality and readily marketable.
•Access to alternative financing.
•Well defined primary and secondary source of repayment.
•If supported by guaranty, the financial strength and liquidity of the guarantor(s) are clearly evident.
3. HIGH SATISFACTORY – Reasonable Risk
Credit with satisfactory financial condition and further characterized by:
•Working capital adequate to support operations.
•Cash flow sufficient to pay debts as scheduled.
•Management experience and depth appear favorable.
•Loan performing according to terms.
•If loan is secured, collateral is acceptable and loan is fully protected.
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4. LOW SATISFACTORY – Acceptable Risk
Credit with bankable risks, although some signs of weaknesses are shown:
•Would include most start-up businesses.
•Occasional instances of trade slowness or repayment delinquency – may have been 10-30 days slow within the past year.
•Management’s abilities are apparent yet unproven.
•Weakness in primary source of repayment with adequate secondary source of repayment.
•Loan structure generally in accordance with policy.
•If secured, loan collateral coverage is marginal.
To be classified as less than satisfactory, only one of the following criteria must be met.
5. SPECIAL MENTION – Criticized
Credit constitutes an undue and unwarranted credit risk but not to the point of justifying a classification of substandard. The credit risk may be relatively minor yet constitutes an unwarranted risk in light of the circumstances surrounding a specific loan:
•Downward trend in sales, profit levels, and margins.
•Impaired working capital position.
•Cash flow is strained in order to meet debt repayment.
•Loan delinquency (30-60 days) and overdrafts may occur.
•Shrinking equity cushion.
•Diminishing primary source of repayment and questionable secondary source.
•Management abilities are questionable.
•Weak industry conditions.
•Litigation pending against the borrower.
•Loan may need to be restructured to improve collateral position or reduce payments.
•Collateral or guaranty offers limited protection.
•Negative debt service coverage, however the credit is well collateralized and payments are current.
6. SUBSTANDARD – Classified
Credit is inadequately protected by the current net worth and paying capacity of the borrower or of the collateral pledged. There is a distinct possibility we will implement collection procedures if the loan deficiencies are not corrected. Any commercial loan placed in nonaccrual status will be rated “7” or worse. In addition, the following characteristics may apply:
•Sustained losses have severely eroded the equity and cash flow.
•Deteriorating liquidity.
•Serious management problems or internal fraud.
•Original repayment terms liberalized.
•Likelihood of bankruptcy.
•Inability to access other funding sources.
•Reliance on secondary source of repayment.
•Litigation filed against borrower.
•Interest non-accrual may be warranted.
•Collateral provides little or no value.
•Requires excessive attention of the loan officer.
•Borrower is uncooperative with loan officer.
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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 status. The following table displays residential real estate and consumer loans by payment status and year of origination as of:

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

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

Loan Modifications
A loan modification includes terms outside of normal lending practices to a borrower experiencing financial difficulty.
Typical modifications granted include, but are not limited to:
•Agreeing to interest rates below prevailing market rates for debt with similar risk characteristics.
•Extending the maturity date or amortization period beyond typical lending guidelines for loans with similar risk characteristics.
•Agreeing to an interest-only payment structure, delaying principal payments, or delaying payments.
•Forgiving principal.
To determine if a borrower is experiencing financial difficulty, factors we consider include:
•The borrower is currently in default on any debt.
•The borrower would likely default on any debt if the concession is not granted.
•The borrower’s cash flow is insufficient to service all debt if the concession is not granted.
•The borrower has declared, or is in the process of declaring, bankruptcy.
•The borrower is unlikely to continue as a going concern (if the entity is a business).
The following is a summary of the amortized cost basis of loan modifications granted to borrowers experiencing financial difficulty for the nine-month period ended September 30, 2023. There were no loan modifications granted to borrowers experiencing financial difficulty for the three-month period ended September 30, 2023.

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

We do not modify any loans by forgiving principal or accrued interest. We had committed to advance $0 in additional funds to be disbursed in connection with modified loans at September 30, 2023, as displayed in the table above, at September 30, 2023.
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The following table summarizes the financial effect of the modifications granted to borrowers experiencing financial difficulty for the nine-month period ended September 30, 2023:

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

During the three-month period ended September 30, 2022, there was one loan restructured with a below market interest rate in the amount of $55. During the nine months ended September 30, 2022, there were two loans restructured, one with a below market interest rate of $55, and one with both a below market interest rate and extension of amortization period in the amount of $98. Total restructured loans at September 30, 2022 was $153.
We closely monitor the performance of loans that are modified to borrowers experiencing financial difficulty to understand the effectiveness of our modification efforts. Loans modified during the nine-month period ended September 30, 2023 were all current at September 30, 2023, with no loans in past due status.
We had no loans that defaulted in the three and nine-month periods ended September 30, 2023 and 2022 which were modified within 12 months prior to the default date.

ACL - Loans
The credit quality of our loan portfolio is continuously monitored and is reflected within the ACL for loans. The ACL is an estimate of expected losses inherent within our loan portfolio. The ACL is adjusted by a credit loss expense, which is reported in earnings, and reduced by the charge-off of loan amounts, net of recoveries.
The ACL is evaluated on a regular basis for appropriateness. Our periodic review of the collectability of a loan considers historical experience, the nature and volume of the loan portfolio, adverse situations that may affect the borrower’s ability to repay, estimated value of any underlying collateral, and prevailing economic conditions. This evaluation is inherently subjective as it requires estimates that are susceptible to significant revision as more information becomes available.
The primary factors behind the determination of the level of the ACL are specific allocations for loans individually evaluated, historical loss percentages, delinquency status, and other credit trends and risk characteristics, including current conditions and reasonable and supportable forecasts about the future. Determining the appropriateness of the allowance is complex and requires judgment by management about the effect of matters that are inherently uncertain. In future periods evaluations of the overall loan portfolio, in light of the factors and forecasts then prevailing, may result in significant changes in the allowance and credit loss expense in those future periods.
The methodology for estimating the amount of expected credit losses reported in the ACL has two basic components: a component of individual loans that do not share risk characteristics with other loans; and a pooled component for estimated expected credit losses for pools of loans that share similar risk characteristics.
For a loan that does not share risk characteristics with other loans, an individual analysis is performed to measure an allowance. Loans in nonaccrual status are individually evaluated for specific allocation of the allowance using the fair value of collateral, less costs to sell if foreclosure is probable, or the discounted cash flow method. We do not recognize interest income on loans in nonaccrual status. For loans not classified as nonaccrual, interest income is recognized daily, as earned, according to the terms of the loan agreement and the principal amount outstanding.
In determining the allowance for credit losses, we derive an estimated credit loss assumption from a model that categorizes loan pools based on loan type and credit risk ratings or delinquency bucket. This model calculates an expected loss percentage for each loan class by considering the probability of default, based on the migration of loans from performing to loss by credit risk ratings or delinquency buckets using life-of-loan analysis, and the historical severity of loss, based on the aggregate net lifetime losses incurred per loan class.
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The default and severity factors used to calculate the allowance for credit losses for loans that share similar risk characteristics with other loans are adjusted for differences between the historical period used to calculate historical default and loss severity rates and expected conditions over the remaining lives of the loans in the portfolio. These qualitative factors are used to adjust the historical probabilities of default and severity of loss so that they reflect management's expectation of future conditions based on a reasonable and supportable forecast. To the extent the lives of the loans in the portfolio extend beyond the period for which a reasonable and supportable forecast can be made, the model reverts back to the historical rates of default and severity of loss. Qualitative factors include:
•Changes in lending policies and procedures, including changes in underwriting standards and collection, charge-off, recovery practices not considered elsewhere in estimating credit losses;
•Changes in the experience, ability, and depth of lending management and other relevant staff;
•Changes in interest rates;
•Changes in international, national, regional, and local economic factors (international, national, regional, and local);
•Changes in the nature and volume of the portfolio and in the terms of loans;
•Changes in the volume and severity of past due loans, the volume of nonaccrual loans, and the volume and severity of adversely classified or graded loans;
•Lack of current financial information;
•Competition, Legal, and Regulatory; and
•Changes in the value of underlying collateral.
Upon the adoption of ASC 326, the estimated ACL using the CECL methodology increased $2,744 compared to the ACL as of December 31, 2022 using the prior incurred loss model. The manner in which credit loss allowances are allocated to the individual portfolio segments was partly impacted by a change in the way the underlying loans within each segment are pooled for modeling purposes. The impact of varying economic conditions and portfolio risk factors are now a component of the credit loss models applied to each modeling pool. In that regard, the amounts allocated to the underlying pools of loans within each portfolio segment more directly reflect the economic variables and portfolio stress factors that correlate with credit losses within each portfolio. Under the prior methodology, allocations in excess of those derived from historical loss rates were recognized as unallocated. Nonetheless, despite fluctuations in the allocation of portions of the overall allowance to the various portfolio segments, the entire allowance is available to absorb any credit losses within the entire loan portfolio.
A summary of activity in the ACL by portfolio segment and the recorded investment in loans by segments follows:

| Allowance for Credit Losses
| Three Months Ended September 30, 2023
| Commercial and Industrial |  | Commercial Real Estate |  | Agricultural |  | Residential Real Estate |  | Consumer |  | Unallocated |  | Total
July 1, 2023 | $ | 822 |  |  | $ | 5,968 |  |  | $ | 264 |  |  | $ | 4,173 |  |  | $ | 1,606 |  |  | $ | — |  |  | $ | 12,833 |
Charge-offs | (29) |  |  | — |  |  | — |  |  | — |  |  | (150) |  |  | — |  |  | (179) |
Recoveries | 70 |  |  | 3 |  |  | — |  |  | 266 |  |  | 94 |  |  | — |  |  | 433 |
Credit loss expense | (34) |  |  | (101) |  |  | 5 |  |  | (281) |  |  | 91 |  |  | — |  |  | (320) |
September 30, 2023 | $ | 829 |  |  | $ | 5,870 |  |  | $ | 269 |  |  | $ | 4,158 |  |  | $ | 1,641 |  |  | $ | — |  |  | $ | 12,767 |

| Allowance for Credit Losses
| Nine Months Ended September 30, 2023
| Commercial and Industrial |  | Commercial Real Estate |  | Agricultural |  | Residential Real Estate |  | Consumer |  | Unallocated |  | Total
January 1, 2023 | $ | 860 |  |  | $ | 461 |  |  | $ | 577 |  |  | $ | 617 |  |  | $ | 961 |  |  | $ | 6,374 |  |  | $ | 9,850 |
Impact of the adoption of ASC 326 | (58) |  |  | 5,532 |  |  | (247) |  |  | 3,535 |  |  | 356 |  |  | (6,374) |  |  | 2,744 |
Charge-offs | (29) |  |  | — |  |  | (4) |  |  | (2) |  |  | (337) |  |  | — |  |  | (372) |
Recoveries | 74 |  |  | 23 |  |  | 6 |  |  | 315 |  |  | 220 |  |  | — |  |  | 638 |
Credit loss expense | (18) |  |  | (146) |  |  | (63) |  |  | (307) |  |  | 441 |  |  | — |  |  | (93) |
September 30, 2023 | $ | 829 |  |  | $ | 5,870 |  |  | $ | 269 |  |  | $ | 4,158 |  |  | $ | 1,641 |  |  | $ | — |  |  | $ | 12,767 |

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

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

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

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

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

We have designated loans classified as collateral dependent for which we apply the practical expedient to measure the ACL based on the fair value of the collateral less cost to sell, when the repayment is expected to be provided substantially by the sale or operation of the collateral and the borrower is experiencing financial difficulty. The fair value of the collateral is based on appraisals, which may be adjusted due to their age, and the type, location, and condition of the property or area or general market conditions to reflect the expected change in value between the effective date of the appraisal and the measurement date.
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Appraisals are updated every one to two years depending on the type of loan and the total exposure of the borrower. Loans evaluated for expected credit losses on an individual basis with no allowance include $391 in collateral dependent loans.
Note 4 – Borrowed Funds
Federal funds purchased and repurchase agreements
Securities sold under repurchase agreements without stated maturity dates, federal funds purchased, and FRB Discount Window advances generally mature within one to four days from the transaction date.
A summary of borrowed funds without stated maturity dates was as follows for the:

| Three Months Ended September 30
| 2023 |  | 2022
| Maximum Month End Balance |  | Average Balance |  | Weighted Average Interest Rate During the Period |  | Maximum Month End Balance |  | Average Balance |  | Weighted Average Interest Rate During the Period
Securities sold under agreements to repurchase without stated maturity dates | $ | 54,327 |  |  | $ | 46,574 |  |  | 1.90 | % |  | $ | 54,051 |  |  | $ | 49,267 |  |  | 0.07 | %
Federal funds purchased | $ | — |  |  | $ | 1 |  |  | 6.13 | % |  | $ | — |  |  | $ | — |  |  | — | %
FRB Discount Window | $ | — |  |  | $ | 135 |  |  | 5.30 | % |  | $ | — |  |  | $ | — |  |  | — | %

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

Securities sold under agreements to repurchase are classified as secured borrowings and are reflected at the amount of cash received in connection with the transaction. The securities underlying the agreements have a carrying value and a fair value of $75,225 and $58,291 at September 30, 2023 and December 31, 2022, respectively. Such securities remain under our control. We may be required to provide additional collateral based on the fair value of underlying securities.
Securities sold under repurchase agreements without stated maturity dates were as follows as of:

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

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

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

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

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

AFS securities pledged to repurchase agreements are monitored to ensure the appropriate level is collateralized. In the event of maturities, calls, significant principal repayments, or significant decline in market values, we have an adequate level of AFS securities to pledge to satisfy collateral requirements.
As of September 30, 2023, we had the ability to borrow up to an additional $287,910, without pledging additional collateral.
FHLB advances
FHLB advances are collateralized by a blanket lien on all qualified 1-4 family residential real estate loans, specific AFS securities, and FHLB stock.
The following table lists the maturities and weighted average interest rates of FHLB advances as of:

| September 30, 2023 |  | December 31, 2022
| Amount |  | Rate |  | Amount |  | Rate
Fixed rate due 2023 | $ | 65,000 |  |  | 5.57 | % |  | $ | — |  |  | — | %

FHLB advances outstanding as of September 30, 2023 were short-term, with maturities within four weeks after September 30, 2023.
Subordinated notes
On June 2, 2021, we completed a private placement of $30,000 in aggregate principal amount of 3.25% Fixed-to-Floating Rate Subordinated Notes due 2031 (the "Notes"). The Notes will initially bear a fixed interest rate of 3.25% until June 15, 2026, after which time until maturity on June 15, 2031, the interest rate will reset quarterly to an annual floating rate equal to the then-current 3-month SOFR plus 256 basis points. The Notes are redeemable by us at our option, in whole or in part, on or after June 15, 2026. The Notes are not subject to redemption at the option of the holders.
The following table summarizes our outstanding notes as of:

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

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Note 5 – Computation of Earnings Per Common Share
Basic earnings per common share represents income available to common shareholders divided by the weighted average number of common shares outstanding during the period. Diluted earnings per common share includes additional common shares that would have been outstanding if dilutive potential common shares had been issued. Potential common shares that may be issued relate solely to outstanding shares in the Directors Plan and grant awards under the RSP.
Earnings per common share have been computed based on the following for the:

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

(1)Exclusive of shares held in the Rabbi Trust
Note 6 – Restricted Stock Plan
Under the RSP, an equity-based bonus plan, we award restricted stock bonuses to eligible employees on an annual basis that are not fully transferable or vested until certain conditions are met. Currently, the eligible employees are the Bank's CEO, President, and CFO. The RSP authorizes the issuance of unvested restricted stock to an eligible employee with a maximum award ranging from 25% to 40% of the employee’s annual salary, on a calendar year basis. The employee must also satisfy the annual performance targets and measures established by the Board of Directors. If these grant conditions are not satisfied, then the award of restricted shares will lapse or be adjusted appropriately, at the discretion of the Board of Directors. All such Grant Agreements contain vesting conditions and clawback provisions.
A summary of changes in nonvested restricted stock awards is as follows for the:

| Three Months Ended September 30
| 2023 |  | 2022
| Number of Shares |  | Fair Value |  | Number of Shares |  | Fair Value
Balance, July 1 | 30,777 |  |  | $ | 683 |  |  | 30,208 |  |  | $ | 679 |
Granted | (3,705) |  |  | (91) |  |  | (3,362) |  |  | (87) |
Vested | — |  |  | — |  |  | — |  |  | — |
Forfeited | — |  |  | — |  |  | — |  |  | — |
Balance, September 30 | 27,072 |  |  | $ | 592 |  |  | 26,846 |  |  | $ | 592 |

| Nine Months Ended September 30
| 2023 |  | 2022
| Number of Shares |  | Fair Value |  | Number of Shares |  | Fair Value
Balance, January 1 | 27,072 |  |  | $ | 592 |  |  | 20,123 |  |  | $ | 418 |
Granted | — |  |  | — |  |  | 6,723 |  |  | 174 |
Vested | — |  |  | — |  |  | — |  |  | — |
Forfeited | — |  |  | — |  |  | — |  |  | — |
Balance, September 30 | 27,072 |  |  | $ | 592 |  |  | 26,846 |  |  | $ | 592 |

Fluctuations in granted shares are due to the reassessment of the projected award achievement. Expenses related to RSP awards during the three and nine month periods ended September 30, 2023 were $91 and $219, and $31 and $108 for the three and nine
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month periods ended September 30, 2022. As of September 30, 2023, there was $168 of total remaining unrecognized compensation expense related to nonvested restricted stock awards granted under the RSP. The remaining expense is expected to be recognized over a weighted-average service period of 1.27 years.
Note 7 – Other Noninterest Expenses
A summary of expenses included in other noninterest expenses is as follows for the:

| Three Months Ended September 30 |  | Nine Months Ended September 30
| 2023 |  | 2022 |  | 2023 |  | 2022
Audit, consulting, and legal fees | $ | 672 |  |  | $ | 595 |  |  | $ | 1,764 |  |  | $ | 1,749 |
ATM and debit card fees | 471 |  |  | 543 |  |  | 1,280 |  |  | 1,485 |
Marketing costs | 398 |  |  | 209 |  |  | 883 |  |  | 812 |
Other losses | 198 |  |  | 93 |  |  | 770 |  |  | 409 |
Memberships and subscriptions | 259 |  |  | 230 |  |  | 729 |  |  | 654 |
Donations and community relations | 252 |  |  | 239 |  |  | 692 |  |  | 665 |
FDIC insurance premiums | 228 |  |  | 138 |  |  | 689 |  |  | 394 |
Loan underwriting fees | 206 |  |  | 243 |  |  | 637 |  |  | 640 |
Director fees | 179 |  |  | 210 |  |  | 581 |  |  | 598 |
All other | 621 |  |  | 640 |  |  | 1,838 |  |  | 1,817 |
Total other noninterest expenses | $ | 3,484 |  |  | $ | 3,140 |  |  | $ | 9,863 |  |  | $ | 9,223 |

Note 8 – Federal Income Taxes
The reconciliation of the provision for federal income taxes and the amount computed at the federal statutory tax rate of 21% of income before federal income tax expense is as follows for the:

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

The unrecognized deferred tax benefit recorded in the third quarter of 2023 related to a low income housing tax credit investment. In that quarter we sold our membership interest in this investment, which resulted in a capital loss carryforward that is unlikely to be realized in the foreseeable future. As such, we did not recognize a deferred tax asset as of September 30, 2023 related to this investment.
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Note 9 – Accumulated Other Comprehensive Income
The following table summarizes the changes in AOCI by component for the:

| Three Months Ended September 30
| 2023 |  | 2022
| Unrealized Gains (Losses) on AFS Securities |  |  |  | Defined Benefit Pension Plan |  | Total |  | Unrealized Gains (Losses) on AFS Securities |  |  |  | Defined Benefit Pension Plan |  | Total
Balance, July 1 | $ | (35,051) |  |  |  |  | $ | (1,366) |  |  | $ | (36,417) |  |  | $ | (22,826) |  |  |  |  | $ | (2,014) |  |  | $ | (24,840) |
OCI before reclassifications | (6,708) |  |  |  |  | — |  |  | (6,708) |  |  | (22,815) |  |  |  |  | — |  |  | (22,815) |
Amounts reclassified from AOCI | — |  |  |  |  | — |  |  | — |  |  | — |  |  |  |  | — |  |  | — |
Subtotal | (6,708) |  |  |  |  | — |  |  | (6,708) |  |  | (22,815) |  |  |  |  | — |  |  | (22,815) |
Tax effect | 1,394 |  |  |  |  | — |  |  | 1,394 |  |  | 4,788 |  |  |  |  | — |  |  | 4,788 |
OCI, net of tax | (5,314) |  |  |  |  | — |  |  | (5,314) |  |  | (18,027) |  |  |  |  | — |  |  | (18,027) |
Balance, September 30 | $ | (40,365) |  |  |  |  | $ | (1,366) |  |  | $ | (41,731) |  |  | $ | (40,853) |  |  |  |  | $ | (2,014) |  |  | $ | (42,867) |

| Nine Months Ended September 30
| 2023 |  | 2022
| Unrealized Gains (Losses) on AFS Securities |  | Defined Benefit Pension Plan |  | Total |  | Unrealized Gains (Losses) on AFS Securities |  | Defined Benefit Pension Plan |  | Total
Balance, January 1 | $ | (35,828) |  |  | $ | (1,366) |  |  | $ | (37,194) |  |  | $ | 3,873 |  |  | $ | (2,014) |  |  | $ | 1,859 |
OCI before reclassifications | (5,736) |  |  | — |  |  | (5,736) |  |  | (56,413) |  |  | — |  |  | (56,413) |
Amounts reclassified from AOCI | (67) |  |  | — |  |  | (67) |  |  | — |  |  | — |  |  | — |
Subtotal | (5,803) |  |  | — |  |  | (5,803) |  |  | (56,413) |  |  | — |  |  | (56,413) |
Tax effect | 1,266 |  |  | — |  |  | 1,266 |  |  | 11,687 |  |  | — |  |  | 11,687 |
OCI, net of tax | (4,537) |  |  | — |  |  | (4,537) |  |  | (44,726) |  |  | — |  |  | (44,726) |
Balance, September 30 | $ | (40,365) |  |  | $ | (1,366) |  |  | $ | (41,731) |  |  | $ | (40,853) |  |  | $ | (2,014) |  |  | $ | (42,867) |

Included in OCI for the three and nine-month periods ended September 30, 2023 and 2022 are changes in unrealized gains and losses related to certain auction rate money market preferred stocks. These investments, for federal income tax purposes, have no deferred federal income taxes related to unrealized gains or losses given the nature of the investments.
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A summary of the components of unrealized gains on AFS securities included in OCI follows for the:

| Three Months Ended September 30
| 2023 |  | 2022
| Auction Rate Money Market Preferred Stocks |  | All Other AFS Securities |  | Total |  | Auction Rate Money Market Preferred Stocks |  | All Other AFS Securities |  | Total
Unrealized gains (losses) arising during the period | $ | (67) |  |  | $ | (6,641) |  |  | $ | (6,708) |  |  | $ | (18) |  |  | $ | (22,797) |  |  | $ | (22,815) |
Reclassification adjustment for net (gains) losses included in net income | — |  |  | — |  |  | — |  |  | — |  |  | — |  |  | — |
Net unrealized gains (losses) | (67) |  |  | (6,641) |  |  | (6,708) |  |  | (18) |  |  | (22,797) |  |  | (22,815) |
Tax effect | — |  |  | 1,394 |  |  | 1,394 |  |  | — |  |  | 4,788 |  |  | 4,788 |
Unrealized gains (losses), net of tax | $ | (67) |  |  | $ | (5,247) |  |  | $ | (5,314) |  |  | $ | (18) |  |  | $ | (18,009) |  |  | $ | (18,027) |

| Nine Months Ended September 30
| 2023 |  | 2022
| Auction Rate Money Market Preferred Stocks |  | All Other AFS Securities |  | Total |  | Auction Rate Money Market Preferred Stocks |  | All Other AFS Securities |  | Total
Unrealized gains (losses) arising during the period | $ | 228 |  |  | $ | (5,964) |  |  | $ | (5,736) |  |  | $ | (763) |  |  | $ | (55,650) |  |  | $ | (56,413) |
Reclassification adjustment for net (gains) losses included in net income | — |  |  | (67) |  |  | (67) |  |  | — |  |  | — |  |  | — |
Net unrealized gains (losses) | 228 |  |  | (6,031) |  |  | (5,803) |  |  | (763) |  |  | (55,650) |  |  | (56,413) |
Tax effect | — |  |  | 1,266 |  |  | 1,266 |  |  | — |  |  | 11,687 |  |  | 11,687 |
Unrealized gains (losses), net of tax | $ | 228 |  |  | $ | (4,765) |  |  | $ | (4,537) |  |  | $ | (763) |  |  | $ | (43,963) |  |  | $ | (44,726) |

Note 10 – Fair Value
Under fair value measurement and disclosure authoritative guidance, we group assets and liabilities measured at fair value into three levels, based on the markets in which the assets and liabilities are traded, and the reliability of the assumptions used to determine fair value, based on the prioritization of inputs in the valuation techniques. These levels are:

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

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

| September 30, 2023
Valuation Technique | Fair Value | Unobservable Input |  | Actual Range |  | Weighted Average
Collateral Dependent Loans - |  | Discount applied to collateral: |  |  |  |
Discounted value | $391 | Real Estate |  | 20% |  | 20%
|  | Equipment |  | 25% |  | 25%

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

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

| September 30, 2023
| Carrying Value |  | Estimated Fair Value |  | Level 1 |  | Level 2 |  | Level 3
ASSETS |  |  |  |  |  |  |  |  |
Cash and cash equivalents | $ | 115,879 |  |  | $ | 115,879 |  |  | $ | 115,879 |  |  | $ | — |  |  | $ | — |
Mortgage loans AFS | 105 |  |  | 105 |  |  | — |  |  | 105 |  |  | — |
Gross loans | 1,334,674 |  |  | 1,279,671 |  |  | — |  |  | — |  |  | 1,279,671 |
Less allowance for credit losses | 12,767 |  |  | 12,767 |  |  | — |  |  | — |  |  | 12,767 |
Net loans | 1,321,907 |  |  | 1,266,904 |  |  | — |  |  | — |  |  | 1,266,904 |
Accrued interest receivable | 7,346 |  |  | 7,346 |  |  | 7,346 |  |  | — |  |  | — |
Equity securities without readily determinable fair values (1) | 15,848 |  |  | N/A |  | — |  |  | — |  |  | — |
OMSR | 2,463 |  |  | 3,223 |  |  | — |  |  | 3,223 |  |  | — |
LIABILITIES |  |  |  |  |  |  |  |  |
Deposits without stated maturities | 1,437,396 |  |  | 1,437,396 |  |  | 1,437,396 |  |  | — |  |  | — |
Deposits with stated maturities | 332,078 |  |  | 324,936 |  |  | — |  |  | 324,936 |  |  | — |
Federal funds purchased and repurchase agreements | 52,330 |  |  | 52,197 |  |  | — |  |  | 52,197 |  |  | — |
FHLB advances | 65,000 |  |  | 65,003 |  |  | — |  |  | 65,003 |  |  | — |
Subordinated debt, net of unamortized issuance costs | 29,312 |  |  | 24,184 |  |  | — |  |  | 24,184 |  |  | — |
Accrued interest payable | 813 |  |  | 813 |  |  | 813 |  |  | — |  |  | — |

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

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

| September 30, 2023 |  | December 31, 2022
| Total |  | Level 1 |  | Level 2 |  | Level 3 |  | Total |  | Level 1 |  | Level 2 |  | Level 3
Recurring items |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
AFS securities |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
U.S. Treasury | $ | 209,182 |  |  | $ | — |  |  | $ | 209,182 |  |  | $ | — |  |  | $ | 208,701 |  |  | $ | — |  |  | $ | 208,701 |  |  | $ | — |
States and political subdivisions | 89,773 |  |  | — |  |  | 89,773 |  |  | — |  |  | 117,512 |  |  | — |  |  | 117,512 |  |  | — |
Auction rate money market preferred | 2,570 |  |  | — |  |  | 2,570 |  |  | — |  |  | 2,342 |  |  | — |  |  | 2,342 |  |  | — |
Mortgage-backed securities | 32,923 |  |  | — |  |  | 32,923 |  |  | — |  |  | 39,070 |  |  | — |  |  | 39,070 |  |  | — |
Collateralized mortgage obligations | 175,630 |  |  | — |  |  | 175,630 |  |  | — |  |  | 205,728 |  |  | — |  |  | 205,728 |  |  | — |
Corporate | 6,819 |  |  | — |  |  | 6,819 |  |  | — |  |  | 7,128 |  |  | — |  |  | 7,128 |  |  | — |
Total AFS securities | 516,897 |  |  | — |  |  | 516,897 |  |  | — |  |  | 580,481 |  |  | — |  |  | 580,481 |  |  | — |
Nonrecurring items |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Collateral dependent (net of ACL) in 2023 Impaired loans (net of the ALLL) in 2022 | 391 |  |  | — |  |  | — |  |  | 391 |  |  | 17,143 |  |  | — |  |  | — |  |  | 17,143 |
Foreclosed assets | 509 |  |  | — |  |  | — |  |  | 509 |  |  | 439 |  |  | — |  |  | — |  |  | 439 |
Total | $ | 517,797 |  |  | $ | — |  |  | $ | 516,897 |  |  | $ | 900 |  |  | $ | 598,063 |  |  | $ | — |  |  | $ | 580,481 |  |  | $ | 17,582 |
Percent of assets and liabilities measured at fair value |  |  | — | % |  | 99.83 | % |  | 0.17 | % |  |  |  | — | % |  | 97.06 | % |  | 2.94 | %

We recognized an impairment related to foreclosed assets for the three and nine month period ended September 30, 2023 of $27 and $36, respectively, and $6 for both the three and nine month periods ended September 30, 2022. We had no other assets or liabilities recorded at fair value with changes fair value recognized through earnings, on a recurring basis or nonrecurring basis, as of September 30, 2023. Further, we had no unrealized gains and losses included in OCI for recurring Level 3 fair value measurements held at the end of the reporting period.
Note 11 – Operating Segments
Our reportable segments are based on legal entities that account for at least 10% of net operating results. The Bank as of September 30, 2023 and December 31, 2022 and for the three and nine-month periods ended September 30, 2023 and 2022, represents approximately 90% or more of our consolidated total assets and operating results. As such, no additional segment reporting is presented.
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Note 12 – Parent Company Only Financial Information
Interim Condensed Balance Sheets

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

Interim Condensed Statements of Income

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

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Interim Condensed Statements of Cash Flows

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

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Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations.
ISABELLA BANK CORPORATION FINANCIAL REVIEW
(Dollars in thousands except per share amounts)
The following is management's discussion and analysis of our financial condition and results of operations for the unaudited three and nine-month periods ended September 30, 2023 and 2022. This analysis should be read in conjunction with our Annual Report on Form 10-K for the year ended December 31, 2022 and with the unaudited interim condensed consolidated financial statements and notes, beginning on page 4 of this report.
Executive Summary
During the three and nine months ended September 30, 2023, we reported net income of $4,413 and $14,364 and earnings per common share of $0.59 and $1.91, respectively. Net income and earnings per common share for the same period of 2022 were $5,887 and $15,916 and $0.78 and $2.11, respectively. Net interest income increased $123 for the nine-month period ended September 30, 2023 in comparison to the same period in 2022. Rising interest rates and growth in loans led to a $10,692 increase in gross interest income during the nine-month period ended September 30, 2023 compared to the same period in 2022. Conversely, rising interest rates on deposits and an increase in borrowings led to a $10,569 increase in interest expense for the nine-month period ended September 30, 2023 when compared to the same period in 2022.
Noninterest income decreased $83 during the first nine months of 2023 compared to the same period in 2022. This decline was driven by a $574 reduction in OMSR income and gain on the sale of loans of $336, offset by a $408 increase in wealth management fees. Noninterest expenses for the first nine months of 2023 increased $2,497, in comparison to the same period in 2022, and was primarily a result of increased compensation, equipment expense, and FDIC insurance premiums.
As of September 30, 2023, total assets and assets under management were $2,118,490 and $2,961,332, respectively. Assets under management include loans sold and serviced of $252,176 and investment and trust assets managed by Isabella Wealth of $590,666, in addition to assets on our consolidated balance sheet. Loans outstanding as of September 30, 2023 totaled $1,334,674. Since December 31, 2022, gross loans have increased $70,501 as a result of growth in advances to mortgage brokers and the commercial and consumer portfolios. Although competition for deposits continued through September 30, 2023, we experienced an increase in deposits. Total deposits were $1,769,474 as of September 30, 2023, increasing $25,199 since December 31, 2022. All regulatory capital ratios for the Bank exceeded the minimum thresholds to be considered a “well capitalized” institution.
Our securities portfolio totaled $516,897 at September 30, 2023 and included net unrealized losses of $50,927, or 8.97%, of the portfolio. The unrealized loss position on our AFS securities portfolio resulted from increases in short-term and intermediate-term benchmark interest rates. As a result, this change in unrealized losses has reduced our balance of shareholders' equity and negatively impacted our tangible book value. Management does not anticipate the need to sell securities and incur a loss as a result of such sale.
Our net yield on interest earning assets (FTE) was 3.02% and 3.12% for the three and nine months ended September 30, 2023, as compared to 3.28% and 3.10% for the three and nine months ended September 30, 2022. Management began implementing strategies in 2019, focused on positioning the Bank to benefit in a rising interest rate environment, including a reduced reliance on higher-cost borrowed funds and brokered deposits. To maintain a competitive edge in a rising interest rate environment, we increased most of our deposit rates beginning in the fourth quarter of 2022 and in recent periods, increased our level of borrowings to fund loan growth. As a result, this has negatively impacted our net yield on interest earning assets and further increases could slow the rate of growth in our net yield on interest earning assets during the remainder of the year.
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Recent Events and Legislation
Recent Bank Failures and the Condition of the Banking Industry: In March 2023, disruptions in the industry resulted in FDIC seizures of three banking institutions. Each bank had its own unique balance sheet issues, none of which exist at Isabella Bank. Shortly after the FDIC takeovers, the Federal Reserve Bank and the Department of Treasury announced enhanced insurance coverage and a borrowing program to help banks in need of funding. Isabella Bank continues to monitor such events, as well as industry and regulatory responses, to assure we are prepared for any changes that might affect the bank, including the ability to timely address economic uncertainty.
Impact of the Adoption of ASC 326 (CECL): We adopted ASU No. 2016-13, as subsequently updated for certain clarifications, targeted relief and codification improvements, as of January 1, 2023. Based on portfolio characteristics and economic conditions and expectations as of January 1, 2023, we recorded a combined pre-tax increase of $3,059 to the ACL and reserve for unfunded commitments on January 1, 2023 upon the adoption of ASU 2016-13; this implementation resulted in a reduction to retained earnings of $2,417, net of tax, as of January 1, 2023. In connection with the adoption of ASC 326, we revised certain accounting policies and implemented certain accounting policy elections, which are included in “Note 1 – Significant Accounting Policies” of our interim condensed consolidated financial statements.
Impact of COVID-19: Unexpected and unprecedented changes have occurred since early 2020 as the result of COVID-19. The full impact of the pandemic, including the economic uncertainties surrounding the pandemic, remain in 2023. However, significant progress has been made with vaccinations and medical treatments. Additionally, improved safety guidelines and the easing of restrictions have occurred since the onset of the pandemic. We expect the significance of the pandemic, including the extent of its effect on our financial and operational results, to be dictated by continued developments related to the COVID-19 pandemic. We continue to closely monitor external events and are in continual discussion with our customers to assess, prepare, and respond to conditions as they evolve.
Reclassifications
Certain amounts reported in the interim 2022 consolidated financial statements have been reclassified to conform to the 2023 presentation. Operating results for periods after January 1, 2023 are presented in accordance with ASC 326 while prior period amounts continue to be reported in accordance with previously applicable standards and the accounting policies described in our Annual Report on Form 10-K for the year ended December 31, 2022. In addition, the adoption of ASC 326 requires enhanced disclosures related to the significant estimates and judgments used in estimating credit losses.
Subsequent Events
We evaluated subsequent events after September 30, 2023 through the date our interim condensed consolidated financial statements were issued for potential recognition and disclosure. No subsequent events require financial statement recognition or disclosure between September 30, 2023 and the date our interim condensed consolidated financial statements were issued.
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Results of Operations (Unaudited)
The following table outlines our quarter-to-date results of operations and provides certain performance measures as of, and for the three-month periods ended:

| September 30 2023 |  | June 30 2023 |  | March 31 2023 |  | December 31 2022 |  | September 30 2022
INCOME STATEMENT DATA |  |  |  |  |  |  |  |  |
Interest income | $ | 20,485 |  |  | $ | 19,495 |  |  | $ | 18,595 |  |  | $ | 17,915 |  |  | $ | 17,019 |
Interest expense | 6,183 |  |  | 4,816 |  |  | 3,244 |  |  | 1,643 |  |  | 1,216 |
Net interest income | 14,302 |  |  | 14,679 |  |  | 15,351 |  |  | 16,272 |  |  | 15,803 |
Provision for credit losses | (292) |  |  | 196 |  |  | 41 |  |  | (57) |  |  | 18 |
Noninterest income | 3,414 |  |  | 3,604 |  |  | 3,293 |  |  | 3,272 |  |  | 3,252 |
Noninterest expenses | 12,658 |  |  | 12,539 |  |  | 12,198 |  |  | 11,922 |  |  | 11,917 |
Federal income tax expense | 937 |  |  | 918 |  |  | 1,084 |  |  | 1,357 |  |  | 1,233 |
Net income | $ | 4,413 |  |  | $ | 4,630 |  |  | $ | 5,321 |  |  | $ | 6,322 |  |  | $ | 5,887 |
PER SHARE |  |  |  |  |  |  |  |  |
Basic earnings | $ | 0.59 |  |  | $ | 0.62 |  |  | $ | 0.70 |  |  | $ | 0.84 |  |  | $ | 0.78 |
Diluted earnings | $ | 0.58 |  |  | $ | 0.61 |  |  | $ | 0.70 |  |  | $ | 0.83 |  |  | $ | 0.77 |
Dividends | $ | 0.28 |  |  | $ | 0.28 |  |  | $ | 0.28 |  |  | $ | 0.28 |  |  | $ | 0.27 |
Tangible book value | $ | 18.27 |  |  | $ | 18.69 |  |  | $ | 19.24 |  |  | $ | 18.25 |  |  | $ | 16.96 |
Quoted market value |  |  |  |  |  |  |  |  |
High | $ | 23.00 |  |  | $ | 26.00 |  |  | $ | 25.10 |  |  | $ | 24.02 |  |  | $ | 24.95 |
Low | $ | 19.61 |  |  | $ | 19.13 |  |  | $ | 22.08 |  |  | $ | 21.00 |  |  | $ | 21.39 |
Close (1) | $ | 21.05 |  |  | $ | 20.50 |  |  | $ | 24.80 |  |  | $ | 23.50 |  |  | $ | 21.40 |
Common shares outstanding (1) | 7,490,557 |  |  | 7,496,826 |  |  | 7,540,015 |  |  | 7,559,421 |  |  | 7,564,348 |
PERFORMANCE RATIOS |  |  |  |  |  |  |  |  |
Return on average total assets | 0.86 | % |  | 0.91 | % |  | 1.04 | % |  | 1.24 | % |  | 1.13 | %
Return on average shareholders' equity | 9.24 | % |  | 9.47 | % |  | 11.35 | % |  | 14.01 | % |  | 12.13 | %
Return on average tangible shareholders' equity | 12.37 | % |  | 12.58 | % |  | 15.28 | % |  | 19.14 | % |  | 16.15 | %
Net interest margin yield (FTE) | 3.02 | % |  | 3.11 | % |  | 3.22 | % |  | 3.43 | % |  | 3.28 | %
BALANCE SHEET DATA (1) |  |  |  |  |  |  |  |  |
Gross loans | $ | 1,334,674 |  |  | $ | 1,334,402 |  |  | $ | 1,270,651 |  |  | $ | 1,264,173 |  |  | $ | 1,236,151 |
AFS securities | $ | 516,897 |  |  | $ | 530,497 |  |  | $ | 568,650 |  |  | $ | 580,481 |  |  | $ | 581,233 |
Total assets | $ | 2,118,490 |  |  | $ | 2,042,448 |  |  | $ | 2,084,624 |  |  | $ | 2,030,267 |  |  | $ | 2,063,977 |
Deposits | $ | 1,769,474 |  |  | $ | 1,714,948 |  |  | $ | 1,813,528 |  |  | $ | 1,744,275 |  |  | $ | 1,791,033 |
Borrowed funds | $ | 146,642 |  |  | $ | 121,392 |  |  | $ | 61,262 |  |  | $ | 87,016 |  |  | $ | 81,704 |
Shareholders' equity | $ | 185,123 |  |  | $ | 188,431 |  |  | $ | 193,333 |  |  | $ | 186,210 |  |  | $ | 176,612 |
Gross loans to deposits | 75.43 | % |  | 77.81 | % |  | 70.07 | % |  | 72.48 | % |  | 69.02 | %
ASSETS UNDER MANAGEMENT (1) |  |  |  |  |  |  |  |  |
Loans sold with servicing retained | $ | 252,176 |  |  | $ | 254,934 |  |  | $ | 259,512 |  |  | $ | 264,206 |  |  | $ | 268,879 |
Assets managed by Isabella Wealth | $ | 590,666 |  |  | $ | 593,530 |  |  | $ | 571,453 |  |  | $ | 513,918 |  |  | $ | 464,136 |
Total assets under management | $ | 2,961,332 |  |  | $ | 2,890,912 |  |  | $ | 2,915,589 |  |  | $ | 2,808,391 |  |  | $ | 2,796,992 |
ASSET QUALITY (1) |  |  |  |  |  |  |  |  |
Nonperforming loans to gross loans | 0.04 | % |  | 0.04 | % |  | 0.04 | % |  | 0.04 | % |  | 0.05 | %
Nonperforming assets to total assets | 0.05 | % |  | 0.05 | % |  | 0.05 | % |  | 0.05 | % |  | 0.04 | %
ACL to gross loans | 0.96 | % |  | 0.96 | % |  | 0.99 | % |  | 0.78 | % |  | 0.78 | %
CAPITAL RATIOS (1) |  |  |  |  |  |  |  |  |
Shareholders' equity to assets | 8.74 | % |  | 9.23 | % |  | 9.27 | % |  | 9.17 | % |  | 8.56 | %
Tier 1 leverage | 8.77 | % |  | 8.70 | % |  | 8.58 | % |  | 8.61 | % |  | 8.44 | %
Common equity tier 1 capital | 12.43 | % |  | 12.39 | % |  | 12.71 | % |  | 12.91 | % |  | 12.92 | %
Tier 1 risk-based capital | 12.43 | % |  | 12.39 | % |  | 12.71 | % |  | 12.91 | % |  | 12.92 | %
Total risk-based capital | 15.39 | % |  | 15.37 | % |  | 15.77 | % |  | 15.79 | % |  | 15.85 | %

(1) At end of period
42

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

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

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

(1) Includes loans and mortgage loans AFS
44

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

(1) Includes loans and mortgage loans AFS
Net interest income is the amount by which interest income on earning assets exceeds the interest expense on interest bearing liabilities. Net interest income is influenced by changes in the balance and mix of assets and liabilities, as well as market interest rates. While we exert some control over these factors, FRB monetary policy and competition have a significant impact. For analytical purposes, net interest income is adjusted to an FTE basis by including the income tax savings from interest on tax exempt loans and nontaxable investment securities, thus making year to year comparisons more meaningful.
45

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

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

| Average Yield / Rate for the Three-Month Periods Ended:
| September 30 2023 |  | June 30 2023 |  | March 31 2023 |  | December 31 2022 |  | September 30 2022
Total earning assets | 4.30 | % |  | 4.11 | % |  | 3.89 | % |  | 3.77 | % |  | 3.53 | %
Total interest bearing liabilities | 1.79 | % |  | 1.41 | % |  | 0.95 | % |  | 0.49 | % |  | 0.35 | %
Net yield on interest earning assets (FTE) | 3.02 | % |  | 3.11 | % |  | 3.22 | % |  | 3.43 | % |  | 3.28 | %

| Quarter to Date Net Interest Income (FTE)
| September 30 2023 |  | June 30 2023 |  | March 31 2023 |  | December 31 2022 |  | September 30 2022
Total interest income (FTE) | $ | 20,735 |  |  | $ | 19,750 |  |  | $ | 18,867 |  |  | $ | 18,183 |  |  | $ | 17,276 |
Total interest expense | 6,183 |  |  | 4,816 |  |  | 3,244 |  |  | 1,643 |  |  | 1,216 |
Net interest income (FTE) | $ | 14,552 |  |  | $ | 14,934 |  |  | $ | 15,623 |  |  | $ | 16,540 |  |  | $ | 16,060 |

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

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

The increase in past due and nonaccrual loans within the commercial and residential loan portfolios at the end of 2022 was the result of one past due relationship, which has since improved. The accrual of interest on commercial and agricultural loans, as well as residential real estate loans, is discontinued at the time a loan is 90 days or more past due unless the credit is well-secured and in the process of short-term collection. Upon transferring a loan to nonaccrual status, we perform an evaluation to determine the net realizable value of the underlying collateral. This evaluation is used to help determine if a charge-off is necessary. Consumer loans are typically charged-off no later than 180 days past due. Loans may be placed back on accrual status after six months of continued performance and achievement of current payment status.
The following table summarizes nonaccrual loans as of:

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

A summary of loans past due and in nonaccrual status, including the composition of the ending balance of nonaccrual status loans by type, is included in “Note 3 – Loans and ACL” of our interim condensed consolidated financial statements.
Nonperforming Assets
The following table summarizes our nonperforming assets as of:

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

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ACL - Loans
The viability of any financial institution is ultimately determined by its management of credit risk. Loans represent our single largest concentration of risk. The ACL is our estimation of expected losses within the existing loan portfolio. We allocate the ACL throughout the loan portfolio based on our assessment of the underlying risks associated within each loan segment. Our assessments include allocations based on specific valuation allowances, historical charge-offs, internally assigned credit risk ratings, past due and nonaccrual balances, historical loss percentages, and other credit trends and risk characteristics, including current conditions and reasonable and supportable forecasts about the future.
Upon the adoption of ASC 326 on January 1, 2023, the total amount of the allowance for credit losses on loans estimated using the CECL methodology increased $2,744 compared to the total amount of the allowance for credit losses on loans estimated as of December 31, 2022 using the prior incurred loss methodology. The manner in which credit loss allowances are allocated to the individual portfolio segments was partly impacted by a change in the way the underlying loans within each segment are pooled for modeling purposes. The impact of varying economic conditions and portfolio risk factors are now a component of the credit loss models applied to each modeling pool. In that regard, the amounts allocated to the underlying pools of loans within each portfolio segment more directly reflect the economic variables and portfolio stress factors that correlate with credit losses within each portfolio. Under the prior methodology, allocations in excess of those derived from historical loss rates were recognized as unallocated. Nonetheless, despite fluctuations in the allocation of portions of the overall allowance to the various portfolio segments, the entire allowance is available to absorb any credit losses within the entire loan portfolio.
The following table summarizes our charge-offs, recoveries, provision for credit losses, and ACL balances as of, and for the:

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

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

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

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

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

While we utilize our best judgment and information available, the ultimate adequacy of the ACL is dependent upon a variety of factors beyond our control, including the performance of our borrowers, the economy, and changes in interest rates. We closely monitor overall credit quality indicators and our policies and procedures related to the analysis of the ACL to ensure that the ACL remains at an appropriate level.
For further discussion of the allocation of the ACL, see “Note 3 – Loans and ACL” of our interim condensed consolidated financial statements.
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Noninterest Income and Noninterest Expenses
Significant noninterest income balances are highlighted in the following tables for the:

| Three Months Ended September 30
|  |  |  |  | Change
| 2023 |  | 2022 |  | $ |  | %
Service charges and fees |  |  |  |  |  |  |
ATM and debit card fees | $ | 1,250 |  |  | $ | 1,212 |  |  | $ | 38 |  |  | 3.14 | %
Service charges and fees on deposit accounts | 598 |  |  | 673 |  |  | (75) |  |  | (11.14) | %
Freddie Mac servicing fee | 154 |  |  | 168 |  |  | (14) |  |  | (8.33) | %
Net OMSR income (loss) | (20) |  |  | — |  |  | (20) |  |  | — | %
Other fees for customer services | 78 |  |  | 69 |  |  | 9 |  |  | 13.04 | %
Total service charges and fees | 2,060 |  |  | 2,122 |  |  | (62) |  |  | (2.92) | %
Wealth management fees | 858 |  |  | 679 |  |  | 179 |  |  | 26.36 | %
Earnings on corporate owned life insurance policies | 229 |  |  | 223 |  |  | 6 |  |  | 2.69 | %
Net gain on sale of mortgage loans | 109 |  |  | 174 |  |  | (65) |  |  | (37.36) | %
All other | 158 |  |  | 54 |  |  | 104 |  |  | 192.59 | %
Total noninterest income | $ | 3,414 |  |  | $ | 3,252 |  |  | $ | 162 |  |  | 4.98 | %

| Nine Months Ended September 30
|  |  |  |  | Change
| 2023 |  | 2022 |  | $ |  | %
Service charges and fees |  |  |  |  |  |  |
ATM and debit card fees | $ | 3,654 |  |  | $ | 3,507 |  |  | $ | 147 |  |  | 4.19 | %
Service charges and fees on deposit accounts | 1,797 |  |  | 1,913 |  |  | (116) |  |  | (6.06) | %
Freddie Mac servicing fee | 475 |  |  | 506 |  |  | (31) |  |  | (6.13) | %
Net OMSR income (loss) | (97) |  |  | 477 |  |  | (574) |  |  | (120.34) | %
Other fees for customer services | 256 |  |  | 212 |  |  | 44 |  |  | 20.75 | %
Total service charges and fees | 6,085 |  |  | 6,615 |  |  | (530) |  |  | (8.01) | %
Wealth management fees | 2,625 |  |  | 2,217 |  |  | 408 |  |  | 18.40 | %
Earnings on corporate owned life insurance policies | 681 |  |  | 655 |  |  | 26 |  |  | 3.97 | %
Net gain on sale of mortgage loans | 232 |  |  | 568 |  |  | (336) |  |  | (59.15) | %
All other | 688 |  |  | 339 |  |  | 349 |  |  | 102.95 | %
Total noninterest income | $ | 10,311 |  |  | $ | 10,394 |  |  | $ | (83) |  |  | (0.80) | %

The decline in service charges and fees on deposit accounts is the result of the removal of NSF fees, effective May 1, 2023. As such, we do not anticipate service charges and fees on deposit accounts for 2023 to exceed 2022 levels.
OMSR income results are driven, in part, by changes in offering rates on residential mortgage loans, anticipated prepayments in the servicing-retained portfolio, and the volume of loans within the servicing-retained portfolio. Decreased prepayment speeds, as a result of an increase in interest rates, was the primary driver of the income recognized during 2022. A decline in volume of originated loans and the balance of loans serviced led to OMSR losses during the first nine months of 2023. Income during the remainder of 2023 will be driven by the volume of loans originated within the servicing-retained portfolio, along with any further future increases in interest rates.
The increase in wealth management fees is due to an increase in new accounts and market growth. Wealth management fees for 2023 are expected to continue to exceed 2022 levels for the remainder of the year.
The amount of loans sold is driven by customer demand and balance sheet management strategies. Loan demand declined during the first nine months of 2023 compared to the prior year. With fewer mortgage loans being originated and sold, we experienced a decline in net gain on sale of mortgage loans. Demand is not expected to change during the remainder of 2023 due to the continual rise in interest rates and as a result, net gain on sale of mortgage loans is not expected to exceed 2022 levels.
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The fluctuations in all other noninterest income are spread throughout various categories, none of which are individually significant.
Significant noninterest expense balances are highlighted in the following tables for the:

| Three Months Ended September 30
|  |  |  |  | Change
| 2023 |  | 2022 |  | $ |  | %
Compensation and benefits | $ | 6,639 |  |  | $ | 6,369 |  |  | $ | 270 |  |  | 4.24 | %
Furniture and equipment | 1,612 |  |  | 1,490 |  |  | 122 |  |  | 8.19 | %
Occupancy | 923 |  |  | 918 |  |  | 5 |  |  | 0.54 | %
Other |  |  |  |  |  |  |
Audit, consulting, and legal fees | 672 |  |  | 595 |  |  | 77 |  |  | 12.94 | %
ATM and debit card fees | 471 |  |  | 543 |  |  | (72) |  |  | (13.26) | %
Marketing costs | 398 |  |  | 209 |  |  | 189 |  |  | 90.43 | %
Other losses | 198 |  |  | 93 |  |  | 105 |  |  | 112.90 | %
Memberships and subscriptions | 259 |  |  | 230 |  |  | 29 |  |  | 12.61 | %
Donations and community relations | 252 |  |  | 239 |  |  | 13 |  |  | 5.44 | %
FDIC insurance premiums | 228 |  |  | 138 |  |  | 90 |  |  | 65.22 | %
Loan underwriting fees | 206 |  |  | 243 |  |  | (37) |  |  | (15.23) | %
Director fees | 179 |  |  | 210 |  |  | (31) |  |  | (14.76) | %
All other | 621 |  |  | 640 |  |  | (19) |  |  | (2.97) | %
Total other noninterest expenses | 3,484 |  |  | 3,140 |  |  | 344 |  |  | 10.96 | %
Total noninterest expenses | $ | 12,658 |  |  | $ | 11,917 |  |  | $ | 741 |  |  | 6.22 | %

| Nine Months Ended September 30
|  |  |  |  | Change
| 2023 |  | 2022 |  | $ |  | %
Compensation and benefits | $ | 19,789 |  |  | $ | 18,480 |  |  | $ | 1,309 |  |  | 7.08 | %
Furniture and equipment | 4,822 |  |  | 4,382 |  |  | 440 |  |  | 10.04 | %
Occupancy | 2,921 |  |  | 2,813 |  |  | 108 |  |  | 3.84 | %
Other |  |  |  |  |  |  |
Audit, consulting, and legal fees | 1,764 |  |  | 1,749 |  |  | 15 |  |  | 0.86 | %
ATM and debit card fees | 1,280 |  |  | 1,485 |  |  | (205) |  |  | (13.80) | %
Marketing costs | 883 |  |  | 812 |  |  | 71 |  |  | 8.74 | %
Other losses | 770 |  |  | 409 |  |  | 361 |  |  | 88.26 | %
Memberships and subscriptions | 729 |  |  | 654 |  |  | 75 |  |  | 11.47 | %
Donations and community relations | 692 |  |  | 665 |  |  | 27 |  |  | 4.06 | %
FDIC insurance premiums | 689 |  |  | 394 |  |  | 295 |  |  | 74.87 | %
Loan underwriting fees | 637 |  |  | 640 |  |  | (3) |  |  | (0.47) | %
Director fees | 581 |  |  | 598 |  |  | (17) |  |  | (2.84) | %
All other | 1,838 |  |  | 1,817 |  |  | 21 |  |  | 1.16 | %
Total other noninterest expenses | 9,863 |  |  | 9,223 |  |  | 640 |  |  | 6.94 | %
Total noninterest expenses | $ | 37,395 |  |  | $ | 34,898 |  |  | $ | 2,497 |  |  | 7.16 | %

The increase in compensation and benefits was the result of employee merit increases and staff additions for a new branch, opened March of 2023. Compensation and benefits expense for the remainder of 2023 is expected to exceed 2022 levels.
Furniture and equipment expense has increased due to an initiative towards leased ATMs, implemented during the second half of 2022, leading to increased equipment expense. As a result of this initiative, overall expense for 2023 is expected to exceed expense from 2022.
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During the second quarter of 2023, we recognized a loss related to the settlement of a business matter. No further losses are anticipated related to this matter. As such, other losses for the remainder of 2023 are expected to approximate 2022 levels.
The FDIC adopted a final rule, applicable to all insured depository institutions, to increase initial base deposit insurance assessment rate schedules uniformly by 2 basis point, beginning in the first quarterly assessment period of 2023. The increase in assessment rate schedules is intended to increase the likelihood that the reserve ratio of the Deposit Insurance fund reaches the statutory minimum of 1.35 percent by the statutory deadline of September 30, 2028. As such, FDIC premiums for the remainder of 2023 will continue to exceed 2022 levels.
The fluctuations in all other noninterest expenses are spread throughout various categories, none of which are individually significant.
Analysis of Changes in Financial Condition

| September 30 2023 |  | December 31 2022 |  | $ Change |  | % Change (unannualized)
ASSETS |  |  |  |  |  |  |
Cash and cash equivalents | $ | 115,879 |  |  | $ | 38,924 |  |  | $ | 76,955 |  |  | 197.71 | %
AFS securities |  |  |  |  |  |  |
Amortized cost of AFS securities | 567,824 |  |  | 625,605 |  |  | (57,781) |  |  | (9.24) | %
Unrealized gains (losses) on AFS securities | (50,927) |  |  | (45,124) |  |  | (5,803) |  |  | 12.86 | %
AFS securities | 516,897 |  |  | 580,481 |  |  | (63,584) |  |  | (10.95) | %
Mortgage loans AFS | 105 |  |  | 379 |  |  | (274) |  |  | (72.30) | %
Loans |  |  |  |  |  |  |
Loans | 1,334,674 |  |  | 1,264,173 |  |  | 70,501 |  |  | 5.58 | %
Less allowance for credit losses | 12,767 |  |  | 9,850 |  |  | 2,917 |  |  | 29.61 | %
Net loans | 1,321,907 |  |  | 1,254,323 |  |  | 67,584 |  |  | 5.39 | %
Premises and equipment | 26,960 |  |  | 25,553 |  |  | 1,407 |  |  | 5.51 | %
Corporate owned life insurance policies | 33,654 |  |  | 32,988 |  |  | 666 |  |  | 2.02 | %
Equity securities without readily determinable fair values | 15,848 |  |  | 15,746 |  |  | 102 |  |  | 0.65 | %
Goodwill and other intangible assets | 48,285 |  |  | 48,287 |  |  | (2) |  |  | — | %
Accrued interest receivable and other assets | 38,955 |  |  | 33,586 |  |  | 5,369 |  |  | 15.99 | %
TOTAL ASSETS | $ | 2,118,490 |  |  | $ | 2,030,267 |  |  | $ | 88,223 |  |  | 4.35 | %
LIABILITIES AND SHAREHOLDERS’ EQUITY |  |  |  |  |  |  |
Liabilities |  |  |  |  |  |  |
Deposits | $ | 1,769,474 |  |  | $ | 1,744,275 |  |  | $ | 25,199 |  |  | 1.44 | %
Borrowed funds | 146,642 |  |  | 87,016 |  |  | 59,626 |  |  | 68.52 | %
Accrued interest payable and other liabilities | 17,251 |  |  | 12,766 |  |  | 4,485 |  |  | 35.13 | %
Total liabilities | 1,933,367 |  |  | 1,844,057 |  |  | 89,310 |  |  | 4.84 | %
Shareholders’ equity | 185,123 |  |  | 186,210 |  |  | (1,087) |  |  | (0.58) | %
TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY | $ | 2,118,490 |  |  | $ | 2,030,267 |  |  | $ | 88,223 |  |  | 4.35 | %

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

| September 30 2023 |  | December 31 2022 |  | $ Change |  | % Change (unannualized)
Commercial and industrial | $ | 195,814 |  |  | $ | 178,428 |  |  | $ | 17,386 |  |  | 9.74 | %
Commercial real estate | 566,639 |  |  | 566,012 |  |  | 627 |  |  | 0.11 | %
Advances to mortgage brokers | 24,807 |  |  | — |  |  | 24,807 |  |  | N/M
Agricultural | 99,233 |  |  | 104,985 |  |  | (5,752) |  |  | (5.48) | %
Residential real estate | 348,196 |  |  | 336,694 |  |  | 11,502 |  |  | 3.42 | %
Consumer | 99,985 |  |  | 78,054 |  |  | 21,931 |  |  | 28.10 | %
Total | $ | 1,334,674 |  |  | $ | 1,264,173 |  |  | $ | 70,501 |  |  | 5.58 | %

The following table displays loan balances as of:

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

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

| September 30 2023 |  | December 31 2022 |  | $ Change |  | % Change (unannualized)
Noninterest bearing demand deposits | $ | 445,043 |  |  | $ | 494,346 |  |  | $ | (49,303) |  |  | (9.97) | %
Interest bearing demand deposits | 363,558 |  |  | 372,155 |  |  | (8,597) |  |  | (2.31) | %
Savings deposits | 628,795 |  |  | 625,734 |  |  | 3,061 |  |  | 0.49 | %
Certificates of deposit | 331,829 |  |  | 251,541 |  |  | 80,288 |  |  | 31.92 | %
Internet certificates of deposit | 249 |  |  | 499 |  |  | (250) |  |  | (50.10) | %
Total | $ | 1,769,474 |  |  | $ | 1,744,275 |  |  | $ | 25,199 |  |  | 1.44 | %

The following table displays deposit balances as of:

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

Total deposits have fluctuated significantly over the past 12 months with an overall decline in non-contractual deposits, such as demand and savings deposits. At the end of the third quarter, we experienced significant deposit growth related primarily to
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interest bearing demand and certificates of deposit accounts. We have experienced significant growth in certificates of deposit during the first nine months of 2023 as a result of the recent increase in the interest rate environment. We expect interest rates to continue to rise through the fourth quarter of 2023 due to competitive pressures, and anticipate a continuation in the shift of customers moving to higher interest earning products.
The primary objective of our investing activities is to manage our overall exposure to changes in interest rates. Secondary considerations include ensuring ample access to liquidity, generating returns, and providing current income. The following table displays fair values of AFS securities as of:

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

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

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

In 2021, we completed a private placement of $30,000 in aggregate principal amount of 3.25% Fixed-to-Floating Rate Subordinated Notes due 2031 (the "Notes"). The Notes will initially bear a fixed interest rate of 3.25% until June 15, 2026, after which time until maturity on June 15, 2031, the interest rate will reset quarterly to an annual floating rate equal to the then-current 3-month SOFR plus 256 basis points. The Notes are redeemable by us at our option, in whole or in part, on or after June 15, 2026. The Notes are not subject to redemption at the option of the holders.
Contractual Obligations and Loan Commitments
We have various financial obligations, including contractual obligations and commitments related to deposits and borrowings, which may require future cash payments. We also have loan related commitments that may impact liquidity. The commitments include unused lines of credit, commercial and standby letters of credit, and commitments to grant loans. These commitments to grant loans include residential mortgage loans with the majority committed to be sold to the secondary market. Many of these commitments historically have expired without being drawn upon and do not necessarily represent our future cash requirements.
We are party to credit related financial instruments with off-balance-sheet risk. These financial instruments are entered into in the normal course of business to meet the financing needs of our customers. These financial instruments involve, to varying degrees, elements of credit and interest rate risk in excess of the amounts recognized in the consolidated balance sheets. The contractual or notional amounts of these instruments reflect the extent of involvement we have in a particular class of financial instrument.
Our exposure to credit-related loss in the event of nonperformance by the counterparties to the financial instruments for commitments to extend credit and standby letters of credit could be up to the contractual notional amount of those instruments. We use the same credit policies when analyzing the creditworthiness of counterparties as we do for extending loans to customers. No significant losses are anticipated as a result of these commitments.
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Capital
Capital consists solely of common stock, retained earnings, and accumulated other comprehensive income (loss). We are authorized to raise capital through dividend reinvestment, employee and director stock purchases, and shareholder stock purchases. Pursuant to these authorizations, we issued 55,456 shares or $1,208 of common stock during the first nine months of 2023, as compared to 55,549 shares or $1,344 of common stock during the same period in 2022. We also offer the Directors Plan in which participants purchase stock units through deferred fees, in lieu of cash payments. Pursuant to this plan, we increased shareholders’ equity by $477 and $346 during the nine-month periods ended September 30, 2023 and 2022, respectively. We also grant restricted stock awards pursuant to the RSP. Pursuant to this plan, we increased shareholders’ equity by $219 during the first nine months of 2023, as compared to $108 during the same period in 2022.
We have publicly announced a common stock repurchase plan. Pursuant to this plan, we repurchased 124,320 shares or $2,906 of common stock during the first nine months of 2023 and 23,842 shares or $585 during the first nine months of 2022. As of September 30, 2023, we were authorized to repurchase up to an additional 295,505 shares of common stock.
The FRB has established minimum risk-based capital guidelines. Pursuant to these guidelines, a framework has been established that assigns risk weights to each category of on and off-balance-sheet items to arrive at risk adjusted total assets. Regulatory capital is divided by the risk adjusted assets with the resulting ratio compared to the minimum standard to determine whether a corporation has adequate capital.
The common equity tier 1 capital ratio has a minimum requirement of 4.50%. The minimum standard for primary, or Tier 1 capital is 6.00% and the minimum standard for total capital is 8.00%. The minimum requirements presented below include the minimum required capital levels based on the Basel III Capital Rules. Capital requirements to be considered well capitalized are based upon prompt corrective action regulations, as amended to reflect the changes under the Basel III Capital Rules. The following table sets forth these requirements and our ratios as of:

| September 30, 2023 |  | December 31, 2022
| Actual |  | Minimum Required - BASEL III |  | Required to be Considered Well Capitalized |  | Actual |  | Minimum Required - BASEL III |  | Required to be Considered Well Capitalized
Common equity tier 1 capital | 12.43 | % |  | 7.00 | % |  | 6.50 | % |  | 12.91 | % |  | 7.00 | % |  | 6.50 | %
Tier 1 capital | 12.43 | % |  | 8.50 | % |  | 8.00 | % |  | 12.91 | % |  | 8.50 | % |  | 8.00 | %
Total capital | 15.39 | % |  | 10.50 | % |  | 10.00 | % |  | 15.79 | % |  | 10.50 | % |  | 10.00 | %
Tier 1 leverage | 8.77 | % |  | 4.00 | % |  | 5.00 | % |  | 8.61 | % |  | 4.00 | % |  | 5.00 | %

Total capital includes Tier 1 capital and Tier 2 capital. Tier 2 capital includes a permissible portion of the allowances for credit losses and subordinated debt, net of unamortized issuance costs. There are no significant regulatory constraints placed on our capital. At September 30, 2023, the Bank exceeded all minimum capital requirements.
Liquidity
Liquidity is monitored regularly by our ALCO, which consists of members of senior management. The committee reviews projected cash flows, key ratios, and liquidity available from both primary and secondary sources.
Our primary sources of liquidity are cash and cash equivalents and unencumbered AFS securities. These categories totaled $457,002 or 21.57% of assets as of September 30, 2023, compared to $488,981 or 24.08% as of December 31, 2022. The decrease in the amount and percentage of primary liquidity is a direct result of an increase in loans and a decrease in unencumbered AFS securities, collateralizing non-market funding. Liquidity is important for financial institutions because of their need to meet loan funding commitments, depositor withdrawal requests, and various other commitments including expansion of operations, investment opportunities, and payment of cash dividends. Based on these same factors, daily liquidity could vary significantly.
Deposit accounts are our primary source of funds. Our secondary sources include the ability to borrow from the FHLB, from the FRB, and through various correspondent banks in the form of federal funds purchased and a line of credit. These funding methods typically carry a higher interest rate than traditional market deposit accounts. Some borrowed funds, including FHLB advances, FRB Discount Window advances, and repurchase agreements, require us to pledge assets, typically in the form of AFS securities or loans, as collateral. As of September 30, 2023, we had available lines of credit of $287,910.
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The frequency and complexity of our liquidity stress testing has increased since early 2020 and continues to evolve due to economic uncertainly as a result of COVID-19 and changes within the interest rate and economic environment. Our liquidity position remained strong at September 30, 2023, which is illustrated in the following table:

| September 30 2023
Total cash and cash equivalents | $ | 115,879 |
Available lines of credit |
Fed funds lines with correspondent banks | 73,000 |
FHLB borrowings | 182,125 |
FRB Discount Window | 27,785 |
Other lines of credit | 5,000 |
Total available lines of credit | 287,910 |
Unencumbered lendable value of FRB collateral, estimated 1 | 320,000 |
Total cash and liquidity | $ | 723,789 |

(1)Includes estimated unencumbered lendable value of FHLB collateral of $230,000
The following table summarizes our sources and uses of cash for the nine-month period ended September 30:

| 2023 |  | 2022 |  | $ Variance
Net cash provided by (used in) operating activities | $ | 18,458 |  |  | $ | 20,429 |  |  | $ | (1,971) |
Net cash provided by (used in) investing activities | (17,068) |  |  | (83,778) |  |  | 66,710 |
Net cash provided by (used in) financing activities | 75,565 |  |  | 56,931 |  |  | 18,634 |
Increase (decrease) in cash and cash equivalents | 76,955 |  |  | (6,418) |  |  | 83,373 |
Cash and cash equivalents January 1 | 38,924 |  |  | 105,330 |  |  | (66,406) |
Cash and cash equivalents September 30 | $ | 115,879 |  |  | $ | 98,912 |  |  | $ | 16,967 |

Fair Value
We utilize fair value measurements to record fair value adjustments to certain assets and liabilities and to determine fair value disclosures. AFS securities, cash flow hedge derivative instruments and certain liabilities are recorded at fair value on a recurring basis. Additionally, from time to time, we may be required to record at fair value other assets on a nonrecurring basis, such as mortgage loans AFS, collateral dependent loans, goodwill, foreclosed assets, OMSR, and certain other assets and liabilities. These nonrecurring fair value adjustments typically involve the application of lower of cost or market accounting or write downs of individual assets.
For further information regarding fair value measurements see “Note 10 – Fair Value” of our interim condensed consolidated financial statements.
Market Risk
Our primary market risks are interest rate risk and liquidity risk. IRR is the exposure of our net interest income to changes in interest rates. IRR results from the difference in the maturity or repricing frequency of a financial institution's interest earning assets and its interest bearing liabilities. Managing IRR is the fundamental method by which financial institutions earn income and create shareholder value. Excessive exposure to IRR could pose a significant risk to our earnings and capital.
The FRB has adopted a policy requiring banks to effectively manage the various risks that can have a material impact on safety and soundness. The risks include credit, interest rate, liquidity, operational, and reputational. We have policies, procedures, and internal controls for measuring and managing these risks. Specifically, our ALCO policy and procedures include defining acceptable types and terms of investments and funding sources, liquidity requirements, limits on investments in long-term assets, limiting the mismatch in repricing opportunities of assets and liabilities, and the frequency of measuring and reporting to our Board of Directors.
The primary technique to measure IRR is simulation analysis. Simulation analysis forecasts the effects on the balance sheet structure and net interest income under a variety of scenarios that incorporate changes in interest rates, the shape of yield curves, interest rate relationships, loan prepayments, and funding sources. These forecasts are compared against net interest income projected in a stable interest rate environment. While many assets and liabilities reprice either at maturity or in accordance with their contractual terms, several balance sheet components demonstrate characteristics that require an evaluation
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to more accurately reflect their repricing behavior. Key assumptions in the simulation analysis include prepayments on loans, probable calls of investment securities, changes in market conditions, loan volumes and loan pricing, deposit sensitivity, and customer preferences. These assumptions are inherently uncertain as they are subject to fluctuation and revision in a dynamic rate environment. As a result, the simulation analysis cannot precisely forecast the impact of rising and falling interest rates on net interest income. Actual results will differ from simulated results due to many other factors, including changes in balance sheet components, interest rate changes, changes in market conditions, and management strategies. We regularly monitor our projected net interest income sensitivity to ensure that it remains within established limits.
Gap analysis, the secondary method to measure IRR, measures the cash flows and/or the earliest repricing of our interest bearing assets and liabilities. This analysis is useful for measuring trends in the repricing characteristics of the balance sheet. Significant assumptions are required in this process because of the embedded repricing options contained in assets and liabilities. Residential real estate and consumer loans allow the borrower to repay the balance prior to maturity without penalty, while commercial and agricultural loans may have prepayment penalties. The amount of prepayments is dependent upon many factors, including the interest rate of a given loan in comparison to the current offering rates, the level of home sales, and the overall availability of credit in the market place. Generally, a decrease in interest rates will result in an increase in cash flows from these assets. A significant portion of our securities are callable or have prepayment options. The call and prepayment options are more likely to be exercised in a period of decreasing interest rates. Savings and demand accounts may generally be withdrawn on request without prior notice. The timing of cash flows from these deposits is estimated based on historical experience. Certificates of deposit have penalties that discourage early withdrawals.
We do not believe there has been a material change in the nature or categories of our primary market risk exposure, or the particular markets that present the primary risk of loss. We do not know of or expect there to be any material change in the general nature of our primary market risk exposure in the near term, and we do not expect to make material changes to our market risk methods in the near term. We may change those methods in the future to adapt to changes in circumstances or to implement new techniques.
Gap analysis is also utilized as a method to measure interest rate sensitivity. Interest rate sensitivity is determined by the amount of earning assets and interest bearing liabilities repricing within a specific time period, and their relative sensitivity to a change in interest rates. We strive to achieve reasonable stability in the net interest margin through periods of changing interest rates.
Item 3. Quantitative and Qualitative Disclosures about Market Risk.
The information presented in the section captioned “Market Risk” in Management's Discussion and Analysis of Financial Condition and Results of Operations is incorporated herein by reference.
Item 4. Controls and Procedures.
DISCLOSURE CONTROLS AND PROCEDURES
We carried out an evaluation, under the supervision and with the participation of the Principal Executive Officer and Principal Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures (as such term is defined in Rules 13a-15(e) and 15(d)-15(e) under the Exchange Act) as of September 30, 2023, pursuant to Exchange Act Rule 13a-15. Based upon that evaluation, the Principal Executive Officer and Principal Financial Officer concluded that our disclosure controls and procedures as of September 30, 2023, were effective to ensure that information required to be disclosed in reports that we file or submit under the Exchange Act are recorded, processed, summarized and reported within the time periods specified in SEC rules and forms.
CHANGES IN INTERNAL CONTROL OVER FINANCIAL REPORTING
During the most recent fiscal quarter, no change occurred in our internal control over financial reporting that materially affected, or is likely to materially affect, our internal control over financial reporting.
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PART II – OTHER INFORMATION
Item 1. Legal Proceedings.
We are not involved in any material legal proceedings. We are involved in ordinary, routine litigation incidental to our business; however, no such routine proceedings are expected to result in any material adverse effect on operations, earnings, financial condition, or cash flows.
Item 1A. Risk Factors.
There have been no material changes to the risk factors disclosed in Item 1A in our Annual Report on Form 10-K for the year ended December 31, 2022.
Item 2. Unregistered Sales of Equity Securities, Use of Proceeds, and Issuer Purchases of Equity Securities.
(A)None
(B)None
(C)Repurchases of Common Stock
We have adopted and publicly announced a common stock repurchase plan. The plan was last amended on April 28, 2021, to allow for the repurchase of an additional 500,000 shares of common stock after that date. These authorizations do not have expiration dates. As common shares are repurchased under this plan, they are retired with the status of authorized, but unissued, shares.
The following table provides information for the three-month period ended September 30, 2023, with respect to this plan:

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

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

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

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

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

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