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Isabella Bank Corporation
ISBA
#8506
Rank
$0.30 B
Marketcap
๐Ÿ‡บ๐Ÿ‡ธ United States
Country
$39.67
Share price
0.79%
Change (1 day)
N/A
Change (1 year)
  1. Isabella Bank Corporation
  2. Quarterly Reports (10-Q)
  3. Financial Year FY2023 Q2

Isabella Bank Corporation - 10-Q quarterly report FY2023 Q2


Text size:
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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 June 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)
Michigan38-2830092
(State or other jurisdiction of incorporation or organization)(I.R.S. Employer Identification No.)
401 N. Main StMt. Pleasant MI48858
(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 classTrading Symbol(s)Name of each exchange on which registered
NoneN/AN/A
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    ☒  Yes    ☐  No
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).    ☒  Yes    ☐  No
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer☐Accelerated filer☐
Non-accelerated filer☒Smaller reporting company☒
Emerging growth company☐
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). ☐  Yes   ☒  No
The number of common shares outstanding of the registrant’s Common Stock (no par value) was 7,497,293 as of July 27, 2023.

ISABELLA BANK CORPORATION
QUARTERLY REPORT ON FORM 10-Q
Table of Contents
4
Item 1.
4
Item 2.
41
Item 3.
58
Item 4.
58
59
Item 1.
59
Item 1A.
59
Item 2.
59
Item 3.
59
Item 4.
59
Item 5.
59
Item 6.
60
61
2
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 lossesGAAP: U.S. generally accepted accounting principles
AFS: Available-for-saleIFRS: International Financial Reporting Standards
ALCO: Asset-Liability CommitteeIRR: Interest rate risk
ALLL: Allowance for loan and lease lossesISDA: International Swaps and Derivatives Association
AOCI: Accumulated other comprehensive incomeLIBOR: London Interbank Offered Rate
ASC: FASB Accounting Standards CodificationN/A: Not applicable
ASU: FASB Accounting Standards UpdateN/M: Not meaningful
ATM: Automated teller machineNAV: Net asset value
BHC Act: Bank Holding Company Act of 1956NSF: Non-sufficient funds
CARES Act: Coronavirus Aid, Relief, and Economic Security ActOCI: Other comprehensive income (loss)
CECL: Current expected credit lossesOMSR: Originated mortgage servicing rights
CFPB: Consumer Financial Protection BureauOREO: Other real estate owned
CIK: Central Index KeyOTTI: Other-than-temporary impairment
COVID-19: Coronavirus disease 2019PBO: Projected benefit obligation
CRA: Community Reinvestment ActPCAOB: Public Company Accounting Oversight Board
DIF: Deposit Insurance FundPPP: Paycheck Protection Program
DIFS: Department of Insurance and Financial ServicesRabbi Trust: A trust established to fund our Directors Plan
Directors Plan: Isabella Bank Corporation and Related Companies Deferred Compensation Plan for DirectorsRSP: Isabella Bank Corporation Restricted Stock Plan
Dividend Reinvestment Plan: Isabella Bank Corporation Stockholder Dividend Reinvestment Plan and Employee Stock Purchase PlanSBA: Small Business Administration
Exchange Act: Securities Exchange Act of 1934SOFR: Secured Overnight Financing Rate
FASB: Financial Accounting Standards BoardSEC: U.S. Securities and Exchange Commission
FDIC: Federal Deposit Insurance CorporationSOX: Sarbanes-Oxley Act of 2002
FFIEC: Federal Financial Institutions Examinations CouncilTax Act: Tax Cuts and Jobs Act, enacted December 22, 2017
FRB: Federal Reserve BankTDR: Troubled debt restructuring
FHLB: Federal Home Loan BankXBRL: eXtensible Business Reporting Language
Freddie Mac: Federal Home Loan Mortgage CorporationYield Curve: U.S. Treasury Yield Curve
FTE: Fully taxable equivalent
3
PART I – FINANCIAL INFORMATION
Item 1. Financial Statements.
INTERIM CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)
(Dollars in thousands)
June 30
2023		December 31
2022
ASSETS
Cash and cash equivalents
Cash and demand deposits due from banks$25,584 $27,420 
Fed Funds sold and interest bearing balances due from banks4,296 11,504 
Total cash and cash equivalents29,880 38,924 
AFS securities, at fair value530,497 580,481 
Mortgage loans AFS362 379 
Loans1,334,402 1,264,173 
Less allowance for credit losses12,833 9,850 
Net loans1,321,569 1,254,323 
Premises and equipment26,383 25,553 
Corporate owned life insurance policies33,433 32,988 
Equity securities without readily determinable fair values15,746 15,746 
Goodwill and other intangible assets48,285 48,287 
Accrued interest receivable and other assets36,293 33,586 
TOTAL ASSETS$2,042,448 $2,030,267 
LIABILITIES AND SHAREHOLDERS’ EQUITY
Deposits
Noninterest bearing$458,845 $494,346 
Interest bearing demand deposits335,922 372,155 
Certificates of deposit under $250 and other savings824,272 810,642 
Certificates of deposit over $25095,909 67,132 
Total deposits1,714,948 1,744,275 
Borrowed funds
Federal funds purchased and repurchase agreements37,102 57,771 
FHLB advances55,000 — 
Subordinated debt, net of unamortized issuance costs29,290 29,245 
Total borrowed funds121,392 87,016 
Accrued interest payable and other liabilities17,677 12,766 
Total liabilities1,854,017 1,844,057 
Shareholders’ equity
Common stock — no par value 15,000,000 shares authorized; issued and outstanding 7,496,826 shares (including 195,217 shares held in the Rabbi Trust) in 2023 and 7,559,421 shares (including 154,879 shares held in the Rabbi Trust) in 2022
126,278 128,651 
Shares to be issued for deferred compensation obligations5,395 5,005 
Retained earnings93,175 89,748 
Accumulated other comprehensive income (loss)(36,417)(37,194)
Total shareholders’ equity188,431 186,210 
TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY$2,042,448 $2,030,267 





See notes to interim condensed consolidated financial statements (unaudited).
4
INTERIM CONDENSED CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
(Dollars in thousands except per share amounts)
Three Months Ended 
 June 30		Six Months Ended 
 June 30
 2023202220232022
Interest income
Loans, including fees$15,931 $13,179 $30,820 $25,557 
AFS securities
Taxable2,382 2,027 4,884 3,642 
Nontaxable665 704 1,383 1,364 
Federal funds sold and other517 192 1,003 301 
Total interest income19,495 16,102 38,090 30,864 
Interest expense
Deposits4,109 854 6,938 1,790 
Borrowings
Federal funds purchased and repurchase agreements171 8 320 17 
FHLB advances270 47 270 119 
Subordinated debt, net of unamortized issuance costs266 266 532 532 
Total interest expense4,816 1,175 8,060 2,458 
Net interest income14,679 14,927 30,030 28,406 
Provision for credit losses196 485 237 522 
Net interest income after provision for credit losses14,483 14,442 29,793 27,884 
Noninterest income
Service charges and fees2,047 2,284 4,025 4,493 
Wealth management fees981 784 1,767 1,538 
Earnings on corporate owned life insurance policies226 222 452 432 
Net gain on sale of mortgage loans56 170 123 394 
Other294 135 530 285 
Total noninterest income3,604 3,595 6,897 7,142 
Noninterest expenses
Compensation and benefits6,561 6,037 13,150 12,111 
Furniture and equipment1,613 1,442 3,210 2,892 
Occupancy993 929 1,998 1,895 
Other3,372 3,253 6,379 6,083 
Total noninterest expenses12,539 11,661 24,737 22,981 
Income before federal income tax expense5,548 6,376 11,953 12,045 
Federal income tax expense918 1,081 2,002 2,016 
NET INCOME$4,630 $5,295 $9,951 $10,029 
Earnings per common share
Basic$0.62 $0.70 $1.32 $1.33 
Diluted$0.61 $0.69 $1.31 $1.31 
Cash dividends per common share$0.28 $0.27 $0.56 $0.54 





See notes to interim condensed consolidated financial statements (unaudited).
5
INTERIM CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (UNAUDITED)
(Dollars in thousands)
Three Months Ended 
 June 30		Six Months Ended 
 June 30
 2023202220232022
Net income$4,630 $5,295 $9,951 $10,029 
Unrealized gains (losses) on AFS securities arising during the period(7,638)(10,670)972 (33,598)
Reclassification adjustment for net (gains) losses included in net income(66)— (67)— 
Tax effect (1)
1,601 2,163 (128)6,899 
Unrealized gains (losses) on AFS securities, net of tax(6,103)(8,507)777 (26,699)
Comprehensive income (loss)$(1,473)$(3,212)$10,728 $(16,670)
(1)See “Note 9 – Accumulated Other Comprehensive Income” for tax effect reconciliation.
























See notes to interim condensed consolidated financial statements (unaudited).
6
INTERIM CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY (UNAUDITED)
(Dollars in thousands except per share amounts)
Common Stock
Common Shares
Outstanding		AmountCommon Shares to be
Issued for
Deferred
Compensation
Obligations		Retained
Earnings		Accumulated
Other
Comprehensive
Income (Loss)		Totals
January 1, 20227,532,641 $129,052 $4,545 $75,592 $1,859 $211,048 
Comprehensive income (loss)— — — 10,029 (26,699)(16,670)
Issuance of common stock36,238 907 — — — 907 
Common stock transferred from the Rabbi Trust to satisfy deferred compensation obligations— 3 (3)— — — 
Share-based payment awards under the Directors Plan— — 249 — — 249 
Share-based compensation expense recognized in earnings under the RSP— 77 — — — 77 
Common stock purchased for deferred compensation obligations— (527)— — — (527)
Common stock repurchased(15,766)(397)— — — (397)
Cash dividends paid ($0.54 per common share)
— — — (4,007)— (4,007)
June 30, 20227,553,113 $129,115 $4,791 $81,614 $(24,840)$190,680 
January 1, 20237,559,421 $128,651 $5,005 $89,748 $(37,194)$186,210 
Cumulative effect of accounting change - adoption of ASC 326— — — (2,417)— (2,417)
Comprehensive income (loss)— — — 9,951 777 10,728 
Issuance of common stock37,983 846 — — — 846 
Common stock transferred from the Rabbi Trust to satisfy deferred compensation obligations— 38 (38)— — — 
Share-based payment awards under the Directors Plan— — 428 — — 428 
Share-based compensation expense recognized in earnings under the RSP— 128 — — — 128 
Common stock purchased for deferred compensation obligations— (976)— — — (976)
Common stock repurchased(100,578)(2,409)— — — (2,409)
Cash dividends paid ($0.56 per common share)
— — — (4,107)— (4,107)
June 30, 20237,496,826 $126,278 $5,395 $93,175 $(36,417)$188,431 

















See notes to interim condensed consolidated financial statements (unaudited).
7
INTERIM CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(Dollars in thousands)
Six Months Ended 
 June 30
 20232022
OPERATING ACTIVITIES
Net income$9,951 $10,029 
Reconciliation of net income to net cash provided by operating activities:
Provision for credit losses237 522 
Depreciation994 1,077 
Amortization of OMSR77 55 
Amortization of acquisition intangibles2 8 
Amortization of subordinated debt issuance costs45 45 
Net amortization of AFS securities745 1,080 
Net gains on sale of AFS securities(67)— 
Net gain on sale of mortgage loans(123)(394)
Change in OMSR valuation allowance— (532)
Net (gains) losses on foreclosed assets(75)(4)
Increase in cash value of corporate owned life insurance policies, net of expenses(445)(411)
Gains from redemption of corporate owned life insurance policies— (57)
Share-based payment awards under the Directors Plan428 249 
Share-based payment awards under the RSP128 77 
Origination of loans held-for-sale(3,719)(12,708)
Proceeds from loan sales3,859 13,931 
Net changes in operating assets and liabilities which provided (used) cash:
Accrued interest receivable and other assets2,696 1,848 
Accrued interest payable and other liabilities208 (35)
Net cash provided by (used in) operating activities14,941 14,780 
INVESTING ACTIVITIES
Activity in AFS securities
Sales18,089 — 
Maturities, calls, and principal payments38,288 37,833 
Purchases(6,166)(139,500)
Net loan principal (originations) collections(70,397)29,099 
Proceeds from sales of foreclosed assets279 77 
Purchases of premises and equipment(1,824)(827)
Proceeds from redemption of corporate owned life insurance policies— 388 
Proceeds from sale of FHLB Stock— 2,288 
Funding of low income housing tax credit investments(612)(39)
Net cash provided by (used in) investing activities(22,343)(70,681)
8
INTERIM CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (continued)
(Dollars in thousands)
Six Months Ended 
 June 30
 20232022
FINANCING ACTIVITIES
Net increase (decrease) in deposits$(29,327)$49,527 
Net increase (decrease) in fed funds purchased and repurchase agreements(20,669)(2,915)
Net increase (decrease) in FHLB advances55,000 (10,000)
Cash dividends paid on common stock(4,107)(4,007)
Proceeds from issuance of common stock846 907 
Common stock repurchased(2,409)(397)
Common stock purchased for deferred compensation obligations(976)(527)
Net cash provided by (used in) financing activities(1,642)32,588 
Increase (decrease) in cash and cash equivalents(9,044)(23,313)
Cash and cash equivalents at beginning of period38,924 105,330 
Cash and cash equivalents at end of period$29,880 $82,017 
SUPPLEMENTAL CASH FLOWS INFORMATION:
Interest paid$7,715 $2,530 
Income taxes paid$1,400 $1,200 
SUPPLEMENTAL NONCASH INFORMATION:
Investment of low income housing tax credits$5,000 $— 
Transfers of loans to foreclosed assets$170 $103 





















See notes to interim condensed consolidated financial statements (unaudited).
9
NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(Dollars in thousands except per share amounts)
Note 1 – Significant Accounting Policies
Basis of Presentation and Consolidation: The consolidated financial statements include the accounts of Isabella Bank Corporation, a financial services holding company, and its wholly owned subsidiary, Isabella Bank. All intercompany balances and accounts have been eliminated in consolidation. References to “the Corporation”, “Isabella”, “we”, “our”, “us”, and similar terms refer to the consolidated entity consisting of Isabella Bank Corporation and its subsidiary. References to Isabella Bank or “the Bank” refers to Isabella Bank Corporation’s subsidiary, Isabella Bank.
The accompanying unaudited interim condensed consolidated financial statements have been prepared in accordance with GAAP for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by GAAP for complete financial statements. In our opinion, all adjustments considered necessary for a fair presentation have been included. Operating results for the three and six-month periods ended June 30, 2023 are not necessarily indicative of the results that may be expected for the year ending December 31, 2023. For further information, refer to our Annual Report on Form 10-K for the year ended December 31, 2022.
Use of Estimates: In preparing consolidated financial statements in conformity with accounting principles generally accepted in the United States of America, we make estimates and assumptions that affect the reported amounts of assets and liabilities as of the date of the consolidated balance sheet and reported amounts of revenues and expenses during the reporting year. Actual results could differ from those estimates.
Material estimates that are particularly susceptible to significant change in the near term relate to the determination of the ACL, the fair value of AFS investment securities, and the valuation of goodwill and other intangible assets.
Accounting Changes and Reclassifications: Certain amounts reported in the interim 2022 consolidated financial statements have been reclassified to conform with the 2023 presentation.
On January 1, 2023, we adopted ASU 2016-13, “Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments,” as subsequently updated for certain clarifications, targeted relief and codification improvements. ASC 326 updated the measurement for credit losses for AFS debt securities and assets measured at amortized cost, which includes loans, trade receivables, and any other financial assets with the contractual right to receive cash and requires enhanced disclosures related to the significant estimates and judgments used in estimating credit losses.
Prior to ASU No. 2016-13, GAAP required an “incurred loss” methodology for recognizing credit losses that delayed recognition until it was probable a loss has been incurred. Under the incurred loss approach, entities were limited to a probable initial recognition threshold when credit losses were measured; an entity generally considered only past events and current conditions when measuring the incurred loss.
We adopted ASC 326 using the modified retrospective method for all financial assets measured at amortized cost and off balance sheet credit exposures. Results for reporting periods beginning January 1, 2023 are presented under ASC 326, while prior period amounts continue to be reported in accordance with previously applicable GAAP and the accounting policies described in our Annual Report on Form 10-K for the year ended December 31, 2022. We recorded a net decrease to retained earnings of $2,417 as of January 1, 2023 for the cumulative effect of adopting ASC 326.
We adopted ASC 326 using the prospective transition approach for AFS debt securities for which other-than-temporary impairment had been recognized prior to January 1, 2023. As a result, the amortized cost basis remains the same before and after the effective date of ASC 326. The effective interest rate on these debt securities was not changed. Amounts previously recognized in accumulated other comprehensive income as of January 1, 2023 relating to improvements in cash flows expected to be collected will be accreted into income over the remaining life of the asset. Recoveries of amounts previously written off relating to improvements in cash flows beginning January 1, 2023 will be recorded in earnings when received.
10
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 estate461 5,532 5,993 (4,370)
Agricultural577 (247)330 195 
Residential real estate617 3,535 4,152 (2,793)
Consumer961 356 1,317 (281)
Unallocated6,374 (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
11
nonaccrual status is not recognized until qualifying for return to accrual status. Loans are returned to accrual status when all principal and interest amounts contractually due are brought current and future payments are reasonably assured. For loans not classified as nonaccrual, interest income continues to be accrued over the term of the loan based on the principal amount outstanding.
ACL - Loans: The ACL on loans is calculated in accordance with ASC 326 and is deducted from the amortized cost basis of loans to present our best estimate of the net amount expected to be collected. The ACL is established through a provision for credit losses charged to earnings. Loan losses are charged against the allowance when we believe the uncollectability of the loan balance is confirmed. Subsequent recoveries, if any, are credited to the allowance. We made an accounting policy election to exclude accrued interest receivable on loans from the estimate of credit losses.
We evaluate the ACL on a regular basis. Our periodic review of the collectability of loans considers historical experience, the nature and volume of the loan portfolio, adverse situations that may affect the borrower’s ability to repay, estimated value of any underlying collateral, prevailing economic conditions, and reasonable and supportable forecasts. This evaluation is inherently subjective as it requires estimates that are susceptible to significant revision as more information becomes available.
The ACL consists of a general component and loans individually analyzed. The general component covers loans not specifically analyzed and is based on historical loss experience, current conditions, and reasonable and supportable forecasts. The general component also includes uncertainties that we believe could affect our estimate of probable losses based on qualitative factors.
Loans in nonaccrual status are individually analyzed on a loan-by-loan basis. Loans evaluated individually are not included in the general, or pooled, component of the ACL. For collateralized loans, the loan's specific allowance is measured by the fair value of the collateral approach. The specific reserve is based on the fair value of the collateral, less costs to sell if foreclosure is probable, and an allowance is established when the collateral value is lower than the carrying value of the loan. When the discounted cash flow method is used to measure the loan's specific allowance, the effective interest rate is used to discount expected cash flows to incorporate expected prepayments. An allowance is established when the discounted cash flows are lower than the carrying value of the loan. Large groups of smaller-balance, homogeneous loans are collectively evaluated for measurement of an allowance.
Off Balance Sheet Credit Related Financial Instruments: In the ordinary course of business, we have entered into commitments to extend credit, including commitments under credit card arrangements, commercial lines of credit, home equity lines of credit, commercial letters of credit, and standby letters of credit. Such financial instruments are recorded only when funded. In connection with these commitments, we established an allowance for credit losses related to off-balance-sheet credit exposures. The allowance, recorded in a liability account, is calculated in accordance with ASC 326 and represents expected credit losses over the contractual period for which we are exposed to credit risk resulting from a contractual obligation to extend credit. The estimate of expected credit losses considers both the likelihood that funding will occur and the amount expected to be funded over the estimated remaining life of the commitment. The likelihood and expected amount of funding are based on historical utilization rates. No allowance is recognized if we have the unconditional right to cancel the obligation. The allowance is reported as a component of accrued interest payable and other liabilities in our consolidated balance sheets. Adjustments to the allowance are reported in our income statement as a component of provision for credit losses.
12
Note 2 – AFS Securities
The amortized cost and fair value of AFS securities, with gross unrealized gains and losses, are as follows at:
 June 30, 2023
Amortized
Cost		Gross
Unrealized
Gains		Gross
Unrealized
Losses		Fair
Value
U.S. Treasury$231,421 $— $22,068 $209,353 
States and political subdivisions99,231 757 4,746 95,242 
Auction rate money market preferred3,200 — 563 2,637 
Mortgage-backed securities38,731 — 3,199 35,532 
Collateralized mortgage obligations193,983 — 12,987 180,996 
Corporate8,150 — 1,413 6,737 
Total$574,716 $757 $44,976 $530,497 
 December 31, 2022
Amortized
Cost		Gross
Unrealized
Gains		Gross
Unrealized
Losses		Fair
Value
U.S. Treasury$231,622 $— $22,921 $208,701 
States and political subdivisions122,023 392 4,903 117,512 
Auction rate money market preferred3,200 — 858 2,342 
Mortgage-backed securities42,309 — 3,239 39,070 
Collateralized mortgage obligations218,301 — 12,573 205,728 
Corporate8,150 — 1,022 7,128 
Total$625,605 $392 $45,516 $580,481 
The amortized cost and fair value of AFS securities by contractual maturity at June 30, 2023 are as follows:
MaturingSecurities with Variable Monthly Payments or Noncontractual Maturities
Due in
One Year
or Less		After One
Year But
Within
Five Years		After Five
Years But
Within
Ten Years		After
Ten Years		Total
U.S. Treasury$— $231,421 $— $— $— $231,421 
States and political subdivisions13,548 32,194 20,956 32,533 — 99,231 
Auction rate money market preferred— — — — 3,200 3,200 
Mortgage-backed securities— — — — 38,731 38,731 
Collateralized mortgage obligations— — — — 193,983 193,983 
Corporate— — 8,150 — — 8,150 
Total amortized cost$13,548 $263,615 $29,106 $32,533 $235,914 $574,716 
Fair value$13,513 $241,669 $26,959 $29,191 $219,165 $530,497 
Expected maturities for government sponsored enterprises and states and political subdivisions may differ from contractual maturities because issuers may have the right to call or prepay obligations.
As the auction rate money market preferred investments have continual call dates, they are not reported by a specific maturity group. Because of their variable monthly payments, mortgage-backed securities and collateralized mortgage obligations are not reported by a specific maturity group. Approximately $146,000 of the amortized cost of the collateralized mortgage portfolio consist of agency commercial mortgage-backed securities with defined maturity dates of less than ten years.
13
A summary of the sales activity of AFS securities is as follows for the:
Three Months Ended 
 June 30		Six Months Ended 
 June 30
2023202220232022
Proceeds from sales of AFS securities$13,944 $— $18,089 $— 
Realized gains (losses)$66 $— $67 $— 
Applicable income tax expense (benefit)$14 $— $14 $— 
The following information pertains to AFS securities with gross unrealized losses at June 30, 2023 and December 31, 2022, aggregated by investment category and length of time that individual securities have been in a continuous loss position.
 June 30, 2023
 Less Than Twelve MonthsTwelve Months or More 
Gross
Unrealized
Losses		Fair
Value		Gross
Unrealized
Losses		Fair
Value		Total
Unrealized
Losses
U.S. Treasury$— $— $22,068 $209,353 $22,068 
States and political subdivisions242 16,972 4,504 38,371 4,746 
Auction rate money market preferred— — 563 2,637 563 
Mortgage-backed securities68 1,358 3,131 34,174 3,199 
Collateralized mortgage obligations3,597 67,725 9,390 113,271 12,987 
Corporate— — 1,413 6,737 1,413 
Total$3,907 $86,055 $41,069 $404,543 $44,976 
Number of securities in an unrealized loss position:62 225 287 
 December 31, 2022
 Less Than Twelve MonthsTwelve 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 subdivisions2,389 48,083 2,514 40,667 4,903 
Auction rate money market preferred— — 858 2,342 858 
Mortgage-backed securities3,239 39,070 — — 3,239 
Collateralized mortgage obligations12,408 201,315 165 4,411 12,573 
Corporate— — 1,022 7,128 1,022 
Total$19,424 $306,799 $26,092 $244,918 $45,516 
Number of securities in an unrealized loss position:178 266 444 
As of June 30, 2023, no allowance for credit losses has been recognized on AFS securities in an unrealized loss position, as management does not believe any of the securities are impaired due to reasons of credit quality. This is based on our analysis of the underlying risk characteristics, including credit ratings, and other qualitative factors related to our AFS securities and consideration of our historical credit loss experience and internal forecasts. The issuers of these securities continue to make timely principal and interest payments under the contractual terms of the securities. Furthermore, management does not have the intent to sell any of the securities classified as AFS in the table above, and believes it is more likely than not that we will not have to sell any such securities before a recovery of cost. The unrealized losses are due to increases in market interest rates over the yields available at the time the underlying securities were purchased. The fair value is expected to recover as the securities approach their respective maturity date or repricing date, or if the market yields for such investments decline.
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Note 3 – Loans and ACL
Loan Composition
The following table provides a detailed listing of our loan portfolio at:
June 30
2023		Percent of TotalDecember 31
2022		Percent of Total
Commercial and industrial
Secured$173,900 13.04 %$161,895 12.80 %
Unsecured21,014 1.57 %16,533 1.31 %
Total commercial and industrial194,914 14.61 %178,428 14.11 %
Commercial real estate
Commercial mortgage owner occupied183,460 13.75 %192,117 15.20 %
Commercial mortgage non-owner occupied215,402 16.14 %204,091 16.14 %
Commercial mortgage 1-4 family investor86,260 6.46 %85,278 6.75 %
Commercial mortgage multifamily79,132 5.93 %84,526 6.69 %
Total commercial real estate564,254 42.28 %566,012 44.78 %
Advances to mortgage brokers39,099 2.93 %— — %
Agricultural
Agricultural mortgage69,751 5.23 %73,002 5.77 %
Agricultural26,938 2.02 %31,983 2.53 %
Total agricultural96,689 7.25 %104,985 8.30 %
Residential real estate
Senior lien303,643 22.75 %300,225 23.75 %
Junior lien4,534 0.34 %3,282 0.26 %
Home equity lines of credit35,297 2.65 %33,187 2.63 %
Total residential real estate343,474 25.74 %336,694 26.64 %
Consumer
Secured - direct38,458 2.88 %37,127 2.94 %
Secured - indirect54,131 4.06 %37,814 2.98 %
Unsecured3,383 0.25 %3,113 0.25 %
Total consumer95,972 7.19 %78,054 6.17 %
Total$1,334,402 100.00 %$1,264,173 100.00 %
For a summary of the accounting policies related to loans, interest recognition, and the ACL for loans, including updates to such policies, refer to “Note 1 – Significant Accounting Policies” and our Annual Report on Form 10-K for the year ended December 31, 2022.
We grant commercial, agricultural, residential real estate, and consumer loans to customers situated primarily in Clare, Gratiot, Isabella, Mecosta, Midland, Montcalm, and Saginaw counties in Michigan. The ability of the borrowers to honor their repayment obligations is often dependent upon the real estate, agricultural, manufacturing, retail, gaming, tourism, health care, higher education, and general economic conditions of this region. Substantially all of our consumer and residential real estate loans are secured by various items of property, while commercial loans are secured primarily by real estate, business assets, and personal guarantees. A portion of loans are unsecured.
Loans that we have the intent and ability to hold in our portfolio are reported at their outstanding principal balance adjusted for any charge-offs, the ACL, and deferred fees or costs. Unless a loan has a nonaccrual status, interest income is accrued over the term of the loan based on the principal amount outstanding. Loan origination fees and certain direct loan origination costs are capitalized and recognized as a component of interest income over the term of the loan using the appropriate amortization method.

15
Commercial and agricultural loans include loans for commercial real estate, commercial operating loans, advances to mortgage brokers, farmland and agricultural production, and loans to states and political subdivisions. Repayment of these loans is dependent upon the successful operation and management of a business. We minimize our risk by limiting the amount of direct credit exposure to any one borrower to $18,000. Borrowers with direct credit needs of more than $18,000 may be serviced through the use of loan participations with other commercial banks. Commercial and agricultural real estate loans commonly require loan-to-value limits of 80% or less. Depending upon the type of loan, past credit history, and current operating results, we may require the borrower to pledge accounts receivable, inventory, property, or equipment. Government agency guarantee may be required. Personal guarantees and/or life insurance beneficiary assignments are generally required from the owners of closely held corporations, partnerships, and sole proprietorships. In addition, we may require annual financial statements, prepare cash flow analyses, and review credit reports.
We offer adjustable rate mortgages, construction loans, and fixed rate residential real estate loans which have amortization periods up to a maximum of 30 years. We consider the anticipated direction of interest rates, balance sheet duration, the sensitivity of our balance sheet to changes in interest rates, our liquidity needs, and overall loan demand to determine whether or not to sell fixed rate loans to Freddie Mac.
Our lending policies generally limit the maximum loan-to-value ratio on residential real estate loans to 100% of the lower of the appraised value of the property or the purchase price. Private mortgage insurance is typically required on loans with loan-to-value ratios in excess of 80% unless the loan qualifies for government guarantees.
Underwriting criteria for originated residential real estate loans generally include:
•Evaluation of the borrower’s ability to make monthly payments.
•Evaluation of the value of the property securing the loan.
•Ensuring the payment of principal, interest, taxes, and hazard insurance does not exceed 28% of a borrower’s gross income.
•Ensuring all debt servicing does not exceed 40% of income.
•Verification of acceptable credit reports.
•Verification of employment, income, and financial information.
Appraisals are performed by independent appraisers and are reviewed for appropriateness. Generally, mortgage loan requests are reviewed by our mortgage loan committee or through a secondary market underwriting system; loans in excess of $1,000 require the approval of one or more of the following committees: Internal Loan Committee, the Executive Loan Committee, or the Board of Directors.
Consumer loans include secured and unsecured personal loans. Loans are amortized for a period of up to 15 years based on the age and value of the underlying collateral. The underwriting emphasis is on a borrower’s perceived intent and ability to pay rather than collateral value. No consumer loans are sold to the secondary market.
Nonaccrual and Past Due Loans
The accrual of interest on commercial and agricultural loans, as well as residential real estate loans, is discontinued at the time a loan is 90 days or more past due unless the credit is well-secured and in the process of short-term collection. Upon transferring a loan to nonaccrual status, we perform an evaluation to determine the net realizable value of the underlying collateral. This evaluation is used to help determine if a charge-off is necessary. Consumer loans are typically charged-off no later than 180 days past due. Past due status is based on the contractual term of the loan. In all cases, a loan is placed in nonaccrual status at an earlier date if collection of principal or interest is considered doubtful.
When a loan is placed in nonaccrual status, all interest accrued in the current calendar year, but not collected, is reversed against interest income while interest accrued in prior calendar years, but not collected, is charged against the ACL. Loans may be returned to accrual status after six months of continuous performance and achievement of current payment status.
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The following table summarizes nonaccrual loan data by class of loans as of:
 June 30, 2023December 31, 2022
 Total Nonaccrual LoansNonaccrual Loans with No ACLTotal Nonaccrual LoansNonaccrual Loans with No ACL
Commercial and industrial:
Secured$17 $17 $22 $22 
Commercial real estate:
Commercial mortgage 1-4 family investor— — 7474 
Agricultural:
Agricultural mortgage51 51 67 67 
Agricultural other167 167 167 167 
Residential real estate:
Senior lien179 179 127 107 
Total$414 $414 $457 $437 
The following tables summarize the past due and current loans for the entire loan portfolio as of:
 June 30, 2023
 Past Due:  Accruing Loans 90 or More Days Past Due
30-59
Days		60-89
Days		90 Days
or More		CurrentTotal
Commercial and industrial
Secured$— $— $— $173,900 $173,900 $— 
Unsecured— 8 — 21,006 21,014 — 
Total commercial and industrial— 8 — 194,906 194,914 — 
Commercial real estate
Commercial mortgage owner occupied— — — 183,460 183,460 — 
Commercial mortgage non-owner occupied2,494 — — 212,908 215,402 — 
Commercial mortgage 1-4 family investor— — — 86,260 86,260 — 
Commercial mortgage multifamily— — 79,132 79,132 — 
Total commercial real estate2,494 — — 561,760 564,254 — 
Advances to mortgage brokers— — — 39,099 39,099 — 
Agricultural
Agricultural mortgage— — — 69,751 69,751 — 
Agricultural— — — 26,938 26,938 — 
Total agricultural— — — 96,689 96,689 — 
Residential real estate
Senior lien190 421 133 302,899 303,643 133 
Junior lien— — — 4,534 4,534 — 
Home equity lines of credit— — — 35,297 35,297 — 
Total residential real estate190 421 133 342,730 343,474 133 
Consumer
Secured - direct4 — — 38,454 38,458 — 
Secured - indirect88 — — 54,043 54,131 — 
Unsecured11 — — 3,372 3,383 — 
Total consumer103 — — 95,869 95,972 — 
Total$2,787 $429 $133 $1,331,053 $1,334,402 $133 
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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		CurrentTotal
Commercial and industrial
Secured$536 $— $— $161,359 $161,895 $— 
Unsecured— — — 16,533 16,533 — 
Total commercial and industrial536 — — 177,892 178,428 — 
Commercial real estate
Commercial mortgage owner occupied94 — — 192,023 192,117 — 
Commercial mortgage non-owner occupied4,208 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 estate4,302 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 lien3,025 225 — 296,975 300,225 — 
Junior lien— — — 3,282 3,282 — 
Home equity lines of credit38 — — 33,149 33,187 — 
Total residential real estate3,063 225 — 333,406 336,694 — 
Consumer
Secured - direct1 — — 37,126 37,127 — 
Secured - indirect45 8 — 37,761 37,814 — 
Unsecured4 — — 3,109 3,113 — 
Total consumer50 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:
 June 30, 2023
20232022202120202019PriorRevolving
Loans		Revolving Loans Converted to TermTotal
Commercial and industrial: Secured
Risk ratings 1-3$3,386 $5,809 $7,251 $8,535 $1,200 $1,611 $13,124 $— $40,916 
Risk rating 416,076 36,547 24,460 6,124 2,849 1,654 34,619 — 122,329 
Risk rating 5427 3,063 286 372 172 643 2,058 — 7,021 
Risk rating 6178 — 13 258 20 171 2,977 — 3,617 
Risk rating 7— — — 17 — — — — 17 
Risk rating 8— — — — — — — — — 
Risk rating 9— — — — — — — — — 
Total$20,067 $45,419 $32,010 $15,306 $4,241 $4,079 $52,778 $— $173,900 
Current year-to-date gross charge-offs$— $— $— $— $— $— $— $— $— 
Commercial and industrial: Unsecured
Risk ratings 1-3$— $259 $158 $71 $115 $1,005 $7,266 $— $8,874 
Risk rating 4630 2,862 743 624 — — 7,192 — 12,051 
Risk rating 58 36 — — 2 — 43 — 89 
Risk rating 6— — — — — — — — — 
Risk rating 7— — — — — — — — — 
Risk rating 8— — — — — — — — — 
Risk rating 9— — — — — — — — — 
Total$638 $3,157 $901 $695 $117 $1,005 $14,501 $— $21,014 
Current year-to-date gross charge-offs$— $— $— $— $— $— $— $— $— 
Commercial real estate: Owner occupied
Risk ratings 1-3$1,585 $1,760 $13,033 $14,625 $985 $3,773 $970 $— $36,731 
Risk rating 47,372 31,816 40,924 13,966 14,066 21,960 6,311 — 136,415 
Risk rating 51,014 888 268 227 3,931 2,297 — — 8,625 
Risk rating 6— — 893 239 — 557 — — 1,689 
Risk rating 7— — — — — — — — — 
Risk rating 8— — — — — — — — — 
Risk rating 9— — — — — — — — — 
Total$9,971 $34,464 $55,118 $29,057 $18,982 $28,587 $7,281 $— $183,460 
Current year-to-date gross charge-offs$— $— $— $— $— $— $— $— $— 
Commercial real estate: Non-owner occupied
Risk ratings 1-3$74 $4,467 $6,682 $969 $80 $1,825 $105 $— $14,202 
Risk rating 425,531 48,951 38,433 12,150 7,809 43,754 13,984 — 190,612 
Risk rating 5— — — — — 3,576 5,921 — 9,497 
Risk rating 61,034 — — 57 — — — — 1,091 
Risk rating 7— — — — — — — — — 
Risk rating 8— — — — — — — — — 
Risk rating 9— — — — — — — — — 
Total$26,639 $53,418 $45,115 $13,176 $7,889 $49,155 $20,010 $— $215,402 
Current year-to-date gross charge-offs$— $— $— $— $— $— $— $— $— 
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June 30, 2023
20232022202120202019PriorRevolving
Loans		Revolving Loans Converted to TermTotal
Commercial real estate: 1-4 family investor
Risk ratings 1-3$— $992 $987 $930 $683 $1,088 $1,871 $— $6,551 
Risk rating 44,169 12,619 31,378 15,905 2,820 4,741 6,777 — 78,409 
Risk rating 5156 362 79 — 57 — — — 654 
Risk rating 6386 — — — 64 196 — — 646 
Risk rating 7— — — — — — — — — 
Risk rating 8— — — — — — — — — 
Risk rating 9— — — — — — — — — 
Total$4,711 $13,973 $32,444 $16,835 $3,624 $6,025 $8,648 $— $86,260 
Current year-to-date gross charge-offs$— $— $— $— $— $— $— $— $— 
Commercial real estate: Multifamily
Risk ratings 1-3$— $4,861 $2,122 $579 $— $1,951 $5,050 $— $14,563 
Risk rating 41,377 17,208 16,312 834 601 22,201 2,601 — 61,134 
Risk rating 5— — — 27 — — — — 27 
Risk rating 6— — 38 — — 3,003 367 — 3,408 
Risk rating 7— — — — — — — — — 
Risk rating 8— — — — — — — — — 
Risk rating 9— — — — — — — — — 
Total$1,377 $22,069 $18,472 $1,440 $601 $27,155 $8,018 $— $79,132 
Current year-to-date gross charge-offs$— $— $— $— $— $— $— $— $— 
Advances to mortgage brokers
Risk ratings 1-3$39,099 $— $— $— $— $— $— $— $39,099 
Current year-to-date gross charge-offs— — — — — — — — $— 
Agricultural mortgage
Risk ratings 1-3$318 $3,011 $1,179 $2,819 $835 $1,446 $75 $— $9,683 
Risk rating 43,369 13,225 9,325 6,222 4,119 6,305 2,926 — 45,491 
Risk rating 5126 4,391 5,916 714 188 60 90 — 11,485 
Risk rating 6856 — — — — 2,185 — — 3,041 
Risk rating 7— — — — — 51 — — 51 
Risk rating 8— — — — — — — — — 
Risk rating 9— — — — — — — — — 
Total$4,669 $20,627 $16,420 $9,755 $5,142 $10,047 $3,091 $— $69,751 
Current year-to-date gross charge-offs$— $— $— $— $— $4 $— $— $4 
Agricultural other
Risk ratings 1-3$191 $81 $129 $41 $268 $151 $1,412 $— $2,273 
Risk rating 4726 2,820 2,475 705 170 89 12,701 — 19,686 
Risk rating 5325 9 173 507 — 696 2,761 — 4,471 
Risk rating 6— — 34 — — 58 249 — 341 
Risk rating 7— — — — — 167 — — 167 
Risk rating 8— — — — — — — — — 
Risk rating 9— — — — — — — — — 
Total$1,242 $2,910 $2,811 $1,253 $438 $1,161 $17,123 $— $26,938 
Current year-to-date gross charge-offs$— $— $— $— $— $— $— $— $— 
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The following table displays the credit quality indicators for commercial and agricultural credit exposures based on internally assigned credit risk ratings as of:
 December 31, 2022
 CommercialAgricultural
Real EstateOtherTotalReal EstateOtherTotalTotal
Rating
1 - Excellent$— $— $— $— $— $— $— 
2 - High quality9,045 4,533 13,578 342 100 442 14,020 
3 - High satisfactory68,133 36,608 104,741 9,757 4,608 14,365 119,106 
4 - Low satisfactory462,361 126,733 589,094 44,258 21,214 65,472 654,566 
5 - Special mention20,770 7,447 28,217 12,262 4,634 16,896 45,113 
6 - Substandard5,629 3,085 8,714 6,316 1,260 7,576 16,290 
7 - Vulnerable74 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:
June 30, 2023
 20232022202120202019PriorRevolving
Loans		Revolving Loans Converted to TermTotal
Residential real estate: Senior lien
Current$18,810 $43,814 $83,552 $56,147 $25,005 $62,437 $7,478 $5,561 $302,804 
Past due 30-89 days— 294 — 48 — 185 — — 527 
Past due 90 or more days— — — — — 133 — — 133 
Nonaccrual51 — — — 43 85 — — 179 
Total$18,861 $44,108 $83,552 $56,195 $25,048 $62,840 $7,478 $5,561 $303,643 
Current year-to-date gross charge-offs$— $— $— $— $— $2 $— $— $2 
Residential real estate: Junior lien
Current$1,920 $1,450 $199 $150 $227 $588 $— $— $4,534 
Past due 30-89 days— — — — — — — — — 
Past due 90 or more days— — — — — — — — — 
Nonaccrual— — — — — — — — — 
Total$1,920 $1,450 $199 $150 $227 $588 $— $— $4,534 
Current year-to-date gross charge-offs$— $— $— $— $— $— $— $— $— 
Residential real estate: Home equity lines of credit
Current$222 $— $— $— $— $— $35,075 $— $35,297 
Past due 30-89 days— — — — — — — — — 
Past due 90 or more days— — — — — — — — — 
Nonaccrual— — — — — — — — — 
Total$222 $— $— $— $— $— $35,075 $— $35,297 
Current year-to-date gross charge-offs$— $— $— $— $— $— $— $— $— 
Consumer : Secured - direct
Current$9,843 $11,791 $7,983 $4,614 $2,208 $2,015 $— $— $38,454 
Past due 30-89 days— — — 4 — — — — 4 
Past due 90 or more days— — — — — — — — — 
Nonaccrual— — — — — — — — — 
Total$9,843 $11,791 $7,983 $4,618 $2,208 $2,015 $— $— $38,458 
Current year-to-date gross charge-offs$— $— $5 $— $— $— $— $— $5 
Consumer : Secured - indirect
Current$20,940 $12,860 $7,852 $6,239 $2,447 $3,706 $— $— $54,044 
Past due 30-89 days— — 30 — 39 18 — — 87 
Past due 90 or more days— — — — — — — — — 
Nonaccrual— — — — — — — — — 
Total$20,940 $12,860 $7,882 $6,239 $2,486 $3,724 $— $— $54,131 
Current year-to-date gross charge-offs$— $— $— $— $— $— $— $— $— 
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June 30, 2023
20232022202120202019PriorRevolving
Loans		Revolving Loans Converted to TermTotal
Consumer: Unsecured
Current$1,053 $1,141 $267 $162 $31 $4 $713 $— $3,371 
Past due 30-89 days— 6 3 2 — — 1 — 12 
Past due 90 or more days— — — — — — — — — 
Nonaccrual— — — — — — — — — 
Total$1,053 $1,147 $270 $164 $31 $4 $714 $— $3,383 
Current year-to-date gross charge-offs$172 $— $6 $— $— $4 $— $— $182 
Loan Modifications
A loan modification includes terms outside of normal lending practices to a borrower experiencing financial difficulty.
Typical modifications granted include, but are not limited to:
•Agreeing to interest rates below prevailing market rates for debt with similar risk characteristics.
•Extending the maturity date or amortization period beyond typical lending guidelines for loans with similar risk characteristics.
•Agreeing to an interest-only payment structure, delaying principal payments, or delaying payments.
•Forgiving principal.
To determine if a borrower is experiencing financial difficulty, factors we consider include:
•The borrower is currently in default on any debt.
•The borrower would likely default on any debt if the concession is not granted.
•The borrower’s cash flow is insufficient to service all debt if the concession is not granted.
•The borrower has declared, or is in the process of declaring, bankruptcy.
•The borrower is unlikely to continue as a going concern (if the entity is a business).
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The following is a summary of the amortized cost basis of loan modifications granted to borrowers experiencing financial difficulty for the:
Three Months Ended June 30
Term ExtensionInterest Rate Reduction
and Term Extension
Amortized Cost Basis% of Total Class of Financial ReceivableAmortized Cost Basis% of Total Class of Financial Receivable
Commercial real estate
Commercial mortgage non-owner occupied$1,034 0.48 %$— — %
Agricultural
Agricultural mortgage— — %28 0.04 %
Total$1,034 $28 
Six Months Ended June 30
Term ExtensionInterest Rate Reduction
and Term Extension
 Amortized Cost Basis% of Total Class of Financial ReceivableAmortized Cost Basis% of Total Class of Financial Receivable
Commercial real estate
Commercial mortgage non-owner occupied$1,034 0.48 %$— — %
Agricultural
Agricultural mortgage232 0.33 %28 0.04 %
Agricultural34 0.13 %— — %
Residential real estate
Senior lien5 — %— — %
Total$1,305 $28 
We do not modify any loans by forgiving principal or accrued interest. We had committed to advance $0 in additional funds to be disbursed in connection with modified loans at June 30, 2023, as displayed in the table above, at June 30, 2023.
The following table summarizes the financial effect of the modifications granted to borrowers experiencing financial difficulty for the:
Three Months Ended June 30Six Months Ended June 30
Weighted-Average Interest Rate ReductionWeighted-Average Term Extension (Years)Weighted-Average Interest Rate ReductionWeighted-Average Term Extension (Years)
Commercial real estate
Commercial mortgage non-owner occupiedN/A3.00N/A3.00
Agricultural
Agricultural mortgage4.50%1.754.50%1.08
AgriculturalN/AN/AN/A1.00
Residential real estate
Senior lienN/AN/AN/A2.60
There were no loans restructured during the three-month period ended June 30, 2022. During the six months ended June 30, 2022, there was one loan restructured, with a below market interest rate and extension of amortization period, in the amount of $98.
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We closely monitor the performance of loans that are modified to borrowers experiencing financial difficulty to understand the effectiveness of our modification efforts. The following tables summarize the performance of such loans that were modified during the three and six-month periods ended June 30, 2023.
 June 30, 2023
Past Due:
30-59 Days60-89 Days90 Days or MoreTotal Past Due
Commercial real estate
Commercial mortgage non-owner occupied$— $— $— $— 
Agricultural
Agricultural mortgage— — — — 
Total$— $— $— $— 
 June 30, 2023
Past Due:
30-59 Days60-89 Days90 Days or MoreTotal Past Due
Commercial real estate
Commercial mortgage non-owner occupied$— $— $— $— 
Agricultural
Agricultural mortgage— — — — 
Agricultural— — — — 
Residential real estate
Senior lien5 — — 5 
Total$5 $— $— $5 
We had no loans that defaulted in the three and six-month periods ended June 30, 2023 and 2022 which were modified within 12 months prior to the default date.
ACL - Loans
The credit quality of our loan portfolio is continuously monitored and is reflected within the ACL for loans. The ACL is an estimate of expected losses inherent within our loan portfolio. The ACL is adjusted by a credit loss expense, which is reported in earnings, and reduced by the charge-off of loan amounts, net of recoveries.
The ACL is evaluated on a regular basis for appropriateness. Our periodic review of the collectability of a loan considers historical experience, the nature and volume of the loan portfolio, adverse situations that may affect the borrower’s ability to repay, estimated value of any underlying collateral, and prevailing economic conditions. This evaluation is inherently subjective as it requires estimates that are susceptible to significant revision as more information becomes available.
The primary factors behind the determination of the level of the ACL are specific allocations for loans individually evaluated, historical loss percentages, delinquency status, and other credit trends and risk characteristics, including current conditions and reasonable and supportable forecasts about the future. Determining the appropriateness of the allowance is complex and requires judgment by management about the effect of matters that are inherently uncertain. In future periods evaluations of the overall loan portfolio, in light of the factors and forecasts then prevailing, may result in significant changes in the allowance and credit loss expense in those future periods.
The methodology for estimating the amount of expected credit losses reported in the ACL has two basic components: a component of individual loans that do not share risk characteristics with other loans; and a pooled component for estimated expected credit losses for pools of loans that share similar risk characteristics.
For a loan that does not share risk characteristics with other loans, an individual analysis is performed to measure an allowance. Loans in nonaccrual status are individually evaluated for specific allocation of the allowance using the fair value of collateral, less costs to sell if foreclosure is probable, or the discounted cash flow method. We do not recognize interest income on loans in nonaccrual status. For loans not classified as nonaccrual, interest income is recognized daily, as earned, according to the terms of the loan agreement and the principal amount outstanding.

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In determining the allowance for credit losses, we derive an estimated credit loss assumption from a model that categorizes loan pools based on loan type and credit risk ratings or delinquency bucket. This model calculates an expected loss percentage for each loan class by considering the probability of default, based on the migration of loans from performing to loss by credit risk ratings or delinquency buckets using life-of-loan analysis, and the historical severity of loss, based on the aggregate net lifetime losses incurred per loan class.
The default and severity factors used to calculate the allowance for credit losses for loans that share similar risk characteristics with other loans are adjusted for differences between the historical period used to calculate historical default and loss severity rates and expected conditions over the remaining lives of the loans in the portfolio. These qualitative factors are used to adjust the historical probabilities of default and severity of loss so that they reflect management's expectation of future conditions based on a reasonable and supportable forecast. To the extent the lives of the loans in the portfolio extend beyond the period for which a reasonable and supportable forecast can be made, the model reverts back to the historical rates of default and severity of loss. Qualitative factors include:
•Changes in lending policies and procedures, including changes in underwriting standards and collection, charge-off, recovery practices not considered elsewhere in estimating credit losses;
•Changes in the experience, ability, and depth of lending management and other relevant staff;
•Changes in interest rates;
•Changes in international, national, regional, and local economic factors (international, national, regional, and local);
•Changes in the nature and volume of the portfolio and in the terms of loans;
•Changes in the volume and severity of past due loans, the volume of nonaccrual loans, and the volume and severity of adversely classified or graded loans;
•Lack of current financial information;
•Competition, Legal, and Regulatory; and
•Changes in the value of underlying collateral.
Upon the adoption of ASC 326, the estimated ACL using the CECL methodology increased $2,744 compared to the ACL as of December 31, 2022 using the prior incurred loss model. The manner in which credit loss allowances are allocated to the individual portfolio segments was partly impacted by a change in the way the underlying loans within each segment are pooled for modeling purposes. The impact of varying economic conditions and portfolio risk factors are now a component of the credit loss models applied to each modeling pool. In that regard, the amounts allocated to the underlying pools of loans within each portfolio segment more directly reflect the economic variables and portfolio stress factors that correlate with credit losses within each portfolio. Under the prior methodology, allocations in excess of those derived from historical loss rates were recognized as unallocated. Nonetheless, despite fluctuations in the allocation of portions of the overall allowance to the various portfolio segments, the entire allowance is available to absorb any credit losses within the entire loan portfolio.
A summary of activity in the ACL by portfolio segment and the recorded investment in loans by segments follows:
 Allowance for Credit Losses
Three Months Ended June 30, 2023
Commercial and IndustrialCommercial Real EstateAgriculturalResidential Real EstateConsumerUnallocatedTotal
April 1, 2023$817 $6,036 $265 $4,113 $1,409 $— $12,640 
Charge-offs— 0(4)— (88)— (92)
Recoveries4 10 2 25 54 — 95 
Credit loss expense1 (78)1 35 231 — 190 
June 30, 2023$822 $5,968 $264 $4,173 $1,606 $— $12,833 
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 Allowance for Credit Losses
Six Months Ended June 30, 2023
Commercial and IndustrialCommercial Real EstateAgriculturalResidential Real EstateConsumerUnallocatedTotal
January 1, 2023$860 $461 $577 $617 $961 $6,374 $9,850 
Impact of the adoption of ASC 326(58)5,532 (247)3,535 356 (6,374)2,744 
Charge-offs— — (4)(2)(187)— (193)
Recoveries4 20 6 49 126 — 205 
Credit loss expense16 (45)(68)(26)350 — 227 
June 30, 2023$822 $5,968 $264 $4,173 $1,606 $— $12,833 
 Allowance for Loan Losses
Three Months Ended June 30, 2022
CommercialAgriculturalResidential Real EstateConsumerUnallocatedTotal
April 1, 2022$1,245 $383 $725 $708 $6,143 $9,204 
Charge-offs(3)— — (103)— (106)
Recoveries26 1 42 48 — 117 
Credit loss expense490 67 (128)670 (614)485 
June 30, 2022$1,758 $451 $639 $1,323 $5,529 $9,700 
 Allowance for Loan Losses
Six Months Ended June 30, 2022
CommercialAgriculturalResidential Real EstateConsumerUnallocatedTotal
January 1, 2022$1,740 $289 $747 $908 $5,419 $9,103 
Charge-offs(3)— — (194)— (197)
Recoveries40 3 70 159 — 272 
Credit loss expense(19)159 (178)450 110 522 
June 30, 2022$1,758 $451 $639 $1,323 $5,529 $9,700 
Allowance for Loan Losses and Recorded Investment in Loans
As of December 31, 2022
CommercialAgriculturalResidential Real EstateConsumerUnallocatedTotal
Allowance
Individually evaluated for impairment$12 $— $439 $— $— $451 
Collectively evaluated for impairment1,309 577 178 961 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 impairment736,098 94,050 333,953 78,054 1,242,155 
Total$744,440 $104,985 $336,694 $78,054 $1,264,173 
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The following table presents loans that were evaluated for expected credit losses on an individual basis and the related specific allocations, by loan segment as of:
 June 30, 2023December 31, 2022
Loan BalanceSpecific AllocationLoan BalanceSpecific Allocation
Commercial and industrial$— $— $— $— 
Commercial real estate— — 8,342 12 
Agricultural190 — 10,935 — 
Residential real estate80 — 2,741 439 
Consumer— — — — 
Total$270 $— $22,018 $451 
We have designated loans classified as collateral dependent for which we apply the practical expedient to measure the ACL based on the fair value of the collateral less cost to sell, when the repayment is expected to be provided substantially by the sale or operation of the collateral and the borrower is experiencing financial difficulty. The fair value of the collateral is based on appraisals, which may be adjusted due to their age, and the type, location, and condition of the property or area or general market conditions to reflect the expected change in value between the effective date of the appraisal and the measurement date. Appraisals are updated every one to two years depending on the type of loan and the total exposure of the borrower. Loans evaluated for expected credit losses on an individual basis with no allowance include $270 in collateral dependent loans.
Note 4 – Borrowed Funds
Federal funds purchased and repurchase agreements
Securities sold under repurchase agreements without stated maturity dates, federal funds purchased, and FRB Discount Window advances generally mature within one to four days from the transaction date.
A summary of borrowed funds without stated maturity dates was as follows for the:
Three Months Ended June 30
20232022
Maximum Month End BalanceAverage BalanceWeighted Average Interest Rate During the PeriodMaximum Month End BalanceAverage BalanceWeighted Average Interest Rate During the Period
Securities sold under agreements to repurchase without stated maturity dates$39,801 $35,447 1.64 %$50,243 $46,028 0.07 %
Federal funds purchased$— $48 6.13 %$— $1 0.91 %
FRB Discount Window$— $129 5.25 %$— $— — %
Six Months Ended June 30
20232022
Maximum Month End BalanceAverage BalanceWeighted Average Interest Rate During the PeriodMaximum Month End BalanceAverage BalanceWeighted Average Interest Rate During the Period
Securities sold under agreements to repurchase without stated maturity dates$54,236 $37,565 1.48 %$53,970 $47,534 0.07 %
Federal funds purchased$— $26 6.08 %$— $1 0.79 %
FRB Discount Window$— $65 5.25 %$— $— — %
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Securities sold under agreements to repurchase are classified as secured borrowings and are reflected at the amount of cash received in connection with the transaction. The securities underlying the agreements have a carrying value and a fair value of $40,723 and $58,291 at June 30, 2023 and December 31, 2022, respectively. Such securities remain under our control. We may be required to provide additional collateral based on the fair value of underlying securities.
Securities sold under repurchase agreements without stated maturity dates were as follows as of:
June 30, 2023December 31, 2022
AmountRateAmountRate
Securities sold under agreements to repurchase without stated maturity dates$37,102 2.30 %$57,771 0.49 %
We had pledged AFS securities and 1-4 family residential real estate loans in the following amounts at:
June 30
2023		December 31
2022
Pledged to secure borrowed funds$373,910 $347,331 
Pledged to secure repurchase agreements40,723 58,291 
Pledged for public deposits and for other purposes necessary or required by law72,986 48,698 
Total$487,619 $454,320 
AFS securities pledged to repurchase agreements without stated maturity dates consisted of the following at:
June 30
2023		December 31
2022
U.S. Treasury$35,988 $29,351 
States and political subdivisions— 11,037 
Mortgage-backed securities3,931 6,819 
Collateralized mortgage obligations804 11,084 
Total$40,723 $58,291 
AFS securities pledged to repurchase agreements are monitored to ensure the appropriate level is collateralized. In the event of maturities, calls, significant principal repayments, or significant decline in market values, we have an adequate level of AFS securities to pledge to satisfy collateral requirements.
As of June 30, 2023, we had the ability to borrow up to an additional $312,211, without pledging additional collateral.
FHLB advances
FHLB advances are collateralized by a blanket lien on all qualified 1-4 family residential real estate loans, specific AFS securities, and FHLB stock.
The following table lists the maturities and weighted average interest rates of FHLB advances as of:
June 30, 2023December 31, 2022
AmountRateAmountRate
Fixed rate due 2023$55,000 5.26 %$— — %
FHLB advances outstanding as of June 30, 2023 were short-term, with maturities within three weeks after June 30, 2023.

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Subordinated notes
On June 2, 2021, we completed a private placement of $30,000 in aggregate principal amount of 3.25% Fixed-to-Floating Rate Subordinated Notes due 2031 (the "Notes"). The Notes will initially bear a fixed interest rate of 3.25% until June 15, 2026, after which time until maturity on June 15, 2031, the interest rate will reset quarterly to an annual floating rate equal to the then-current 3-month SOFR plus 256 basis points. The Notes are redeemable by us at our option, in whole or in part, on or after June 15, 2026. The Notes are not subject to redemption at the option of the holders.
The following table summarizes our outstanding notes as of:
June 30, 2023December 31, 2022
AmountRateAmountRate
Fixed rate at 3.25% to floating, due 2031$30,000 3.25 %$30,000 3.25 %
Unamortized issuance costs(710)(755)
Total subordinated debt, net$29,290 $29,245 
Note 5 – Computation of Earnings Per Common Share
Basic earnings per common share represents income available to common shareholders divided by the weighted average number of common shares outstanding during the period. Diluted earnings per common share includes additional common shares that would have been outstanding if dilutive potential common shares had been issued. Potential common shares that may be issued relate solely to outstanding shares in the Directors Plan and grant awards under the RSP.
Earnings per common share have been computed based on the following for the:
 Three Months Ended 
 June 30		Six Months Ended 
 June 30
2023202220232022
Average number of common shares outstanding for basic calculation7,498,584 7,545,001 7,528,251 7,539,799 
Average potential effect of common shares in the Directors Plan (1)
38,166 74,936 43,793 79,213 
Average potential effect of common shares in the RSP30,777 30,208 29,569 26,345 
Average number of common shares outstanding used to calculate diluted earnings per common share7,567,527 7,650,145 7,601,613 7,645,357 
Net income$4,630 $5,295 $9,951 $10,029 
Earnings per common share
Basic$0.62 $0.70 $1.32 $1.33 
Diluted$0.61 $0.69 $1.31 $1.31 
(1)Exclusive of shares held in the Rabbi Trust

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Note 6 – Restricted Stock Plan
Under the RSP, an equity-based bonus plan, we award restricted stock bonuses to eligible employees on an annual basis that are not fully transferable or vested until certain conditions are met. Currently, the eligible employees are the Bank's CEO, President, and CFO. The RSP authorizes the issuance of unvested restricted stock to an eligible employee with a maximum award ranging from 25% to 40% of the employee’s annual salary, on a calendar year basis. The employee must also satisfy the annual performance targets and measures established by the Board of Directors. If these grant conditions are not satisfied, then the award of restricted shares will lapse or be adjusted appropriately, at the discretion of the Board of Directors. All Grant Agreements contain vesting conditions and clawback provisions.
A summary of changes in nonvested restricted stock awards is as follows for the:
Three Months Ended June 30
20232022
Number
of Shares		Fair
Value		Number
of Shares		Fair
Value
Balance, April 130,777 $683 26,846 $592 
Granted— — 3,362 87 
Vested— — — — 
Forfeited— — — — 
Balance, June 3030,777 $683 30,208 $679 
Six Months Ended June 30
20232022
Number
of Shares		Fair
Value		Number
of Shares		Fair
Value
Balance, January 127,072 $592 20,123 $418 
Granted3,705 91 10,085 261 
Vested— — — — 
Forfeited— — — — 
Balance, June 3030,777 $683 30,208 $679 
Expenses related to RSP awards during the three and six month periods ended June 30, 2023 were $86 and $128, and $46 and $77 for the three and six month periods ended June 30, 2022. As of June 30, 2023, there was $309 of total remaining unrecognized compensation expense related to nonvested restricted stock awards granted under the RSP. The remaining expense is expected to be recognized over a weighted-average service period of 1.91 years.
Note 7 – Other Noninterest Expenses
A summary of expenses included in other noninterest expenses is as follows for the:
Three Months Ended 
 June 30		Six Months Ended 
 June 30
2023202220232022
Audit, consulting, and legal fees$557 $605 $1,092 $1,154 
ATM and debit card fees409 508 809 942 
Other losses425 233 572 316 
Marketing costs240 364 485 603 
Memberships and subscriptions230 207 470 424 
FDIC insurance premiums233 131 461 256 
Donations and community relations256 139 440 426 
Loan underwriting fees216 215 431 397 
Director fees198 187 402 388 
All other608 664 1,217 1,177 
Total other noninterest expenses$3,372 $3,253 $6,379 $6,083 

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Note 8 – Federal Income Taxes
The reconciliation of the provision for federal income taxes and the amount computed at the federal statutory tax rate of 21% of income before federal income tax expense is as follows for the:
Three Months Ended 
 June 30		Six Months Ended 
 June 30
2023202220232022
Income taxes at statutory rate$1,165 $1,339 $2,510 $2,529 
Effect of nontaxable income
Interest income on tax exempt municipal securities(136)(144)(284)(278)
Earnings on corporate owned life insurance policies(48)(48)(95)(103)
Other(5)(4)(12)(8)
Total effect of nontaxable income(189)(196)(391)(389)
Effect of nondeductible expenses10 6 19 17 
Effect of tax credits(68)(68)(136)(141)
Federal income tax expense$918 $1,081 $2,002 $2,016 
Note 9 – Accumulated Other Comprehensive Income
The following table summarizes the changes in AOCI by component for the:
Three Months Ended June 30
20232022
Unrealized
Gains
(Losses) on
AFS
Securities		Defined
Benefit
Pension Plan		TotalUnrealized
Gains
(Losses) on
AFS
Securities		Defined
Benefit
Pension Plan		Total
Balance, April 1$(28,948)$(1,366)$(30,314)$(14,319)$(2,014)$(16,333)
OCI before reclassifications(7,638)— (7,638)(10,670)— (10,670)
Amounts reclassified from AOCI(66)— (66)— — — 
Subtotal(7,704)— (7,704)(10,670)— (10,670)
Tax effect1,601 — 1,601 2,163 — 2,163 
OCI, net of tax(6,103)— (6,103)(8,507)— (8,507)
Balance, June 30$(35,051)$(1,366)$(36,417)$(22,826)$(2,014)$(24,840)
Six Months Ended June 30
20232022
Unrealized
Gains
(Losses) on
AFS
Securities		Defined
Benefit
Pension Plan		TotalUnrealized
Gains
(Losses) on
AFS
Securities		Defined
Benefit
Pension Plan		Total
Balance, January 1$(35,828)$(1,366)$(37,194)$3,873 $(2,014)$1,859 
OCI before reclassifications972 — 972 (33,598)— (33,598)
Amounts reclassified from AOCI(67)— (67)— — — 
Subtotal905 — 905 (33,598)— (33,598)
Tax effect(128)— (128)6,899 — 6,899 
OCI, net of tax777 — 777 (26,699)— (26,699)
Balance, June 30$(35,051)$(1,366)$(36,417)$(22,826)$(2,014)$(24,840)
Included in OCI for the three and six-month periods ended June 30, 2023 and 2022 are changes in unrealized gains and losses related to auction rate money market preferred stocks. These investments, for federal income tax purposes, have no deferred federal income taxes related to unrealized gains or losses given the nature of the investments.
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A summary of the components of unrealized gains on AFS securities included in OCI follows for the:
Three Months Ended June 30
 20232022
Auction Rate Money Market Preferred StocksAll Other AFS SecuritiesTotalAuction Rate Money Market Preferred StocksAll Other AFS SecuritiesTotal
Unrealized gains (losses) arising during the period$(79)$(7,559)$(7,638)$(370)$(10,300)$(10,670)
Reclassification adjustment for net (gains) losses included in net income— (66)(66)— — — 
Net unrealized gains (losses)(79)(7,625)(7,704)(370)(10,300)(10,670)
Tax effect— 1,601 1,601 — 2,163 2,163 
Unrealized gains (losses), net of tax$(79)$(6,024)$(6,103)$(370)$(8,137)$(8,507)
 Six Months Ended June 30
 20232022
Auction Rate Money Market Preferred StocksAll Other AFS SecuritiesTotalAuction Rate Money Market Preferred StocksAll Other AFS SecuritiesTotal
Unrealized gains (losses) arising during the period$295 $677 $972 $(745)$(32,853)$(33,598)
Reclassification adjustment for net (gains) losses included in net income— (67)(67)— — — 
Net unrealized gains (losses)295 610 905 (745)(32,853)(33,598)
Tax effect— (128)(128)— 6,899 6,899 
Unrealized gains (losses), net of tax$295 $482 $777 $(745)$(25,954)$(26,699)
Note 10 – Fair Value
Under fair value measurement and disclosure authoritative guidance, we group assets and liabilities measured at fair value into three levels, based on the markets in which the assets and liabilities are traded, and the reliability of the assumptions used to determine fair value, based on the prioritization of inputs in the valuation techniques. These levels are:
Level 1:Valuation is based upon quoted prices for identical instruments traded in active markets.
Level 2:Valuation is based upon quoted prices for similar instruments in active markets, quoted prices for identical or similar instruments in markets that are not active and model-based valuation techniques for which all significant assumptions are observable in the market.
Level 3:Valuation is generated from model-based techniques that use at least one significant assumption not observable in the market. These unobservable assumptions reflect estimates of assumptions that market participants would use in pricing the asset or liability.
The asset’s or liability’s fair value measurement level within the fair value hierarchy is based on the lowest level of any input that is significant to the fair value measurement. Valuation techniques maximize the use of observable inputs and minimize the use of unobservable inputs. Transfers between measurement levels are recognized at the end of reporting periods.
Fair value measurement requires the use of an exit price notion which may differ from entrance pricing. Generally, we believe our assets and liabilities classified as Level 1 or Level 2 approximate an exit price notion.
Following is a description of the valuation methodologies, key inputs, and an indication of the level of the fair value hierarchy in which the assets or liabilities are classified.
AFS securities: AFS securities are recorded at fair value on a recurring basis. Level 1 fair value measurement is based upon quoted prices for identical instruments. Level 2 fair value measurement is based upon quoted prices for similar instruments. If quoted prices are not available, fair values are measured using independent pricing models or other model-based valuation techniques such as the present value of future cash flows, adjusted for the security’s credit rating, prepayment assumptions and other factors such as credit loss and liquidity assumptions. The values for Level 1 and Level 2 investment securities are
35
generally obtained from an independent third party. On a quarterly basis, we compare the values provided to alternative pricing sources.
Loans: We do not record loans at fair value on a recurring basis. However, some loans are individually evaluated for ACL purposes, and a specific ACL may be established. To measure reserve, the fair value of the loan is estimated using the fair value of the collateral, less costs to sell if foreclosure is probable, or the present value of expected future cash flows discounted at the loan’s effective interest rate. Loans not requiring an allowance represent loans for which the fair value of the expected repayments or collateral exceed the recorded investments in such loans.
We review the net realizable values of the underlying collateral for collateral dependent loans on at least a quarterly basis for all loan types. To determine the collateral value, we utilize independent appraisals, broker price opinions, or internal evaluations. We review these valuations to determine whether an additional discount should be applied given the age of market information that may have been considered as well as other factors such as costs to sell an asset if it is determined that the collateral will be liquidated in connection with the ultimate settlement of the loan. We use these valuations to determine if any specific reserves or charge-offs are necessary. We may obtain new valuations in certain circumstances, including when there has been significant deterioration in the condition of the collateral, if the foreclosure process has begun, or if the existing valuation is deemed to be outdated.
The following tables list the quantitative information about loans measured at fair value on a nonrecurring basis as of:
June 30, 2023
Valuation TechniqueFair ValueUnobservable InputActual RangeWeighted Average
Collateral Dependent Loans -Discount applied to collateral:
Discounted value$270Real Estate
20%
20%
Equipment
25%
25%
December 31, 2022
Valuation TechniqueFair ValueUnobservable InputActual RangeWeighted Average
Discount applied to collateral:
Real Estate
20% - 30%
24%
Impaired Loans -Equipment
25% - 35%
31%
Discounted value$17,143Cash crop inventory40%40%
Livestock30%30%
Accounts receivable
25%
27%
Furniture, fixtures & equipment45%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:
 June 30, 2023
Carrying
Value		Estimated
Fair Value		Level 1Level 2Level 3
ASSETS
Cash and cash equivalents$29,880 $29,880 $29,880 $— $— 
Mortgage loans AFS362 365 — 365 — 
Gross loans1,334,402 1,288,352 — — 1,288,352 
Less allowance for credit losses12,833 12,833 — — 12,833 
Net loans1,321,569 1,275,519 — — 1,275,519 
Accrued interest receivable5,763 5,763 5,763 — — 
Equity securities without readily determinable fair values (1)
15,746 N/A— — — 
OMSR2,483 3,195 — 3,195 — 
LIABILITIES
Deposits without stated maturities1,401,411 1,401,411 1,401,411 — — 
Deposits with stated maturities313,537 305,375 — 305,375 — 
Federal funds purchased and repurchase agreements37,102 37,011 — 37,011 — 
FHLB advances55,000 55,001 — 55,001 — 
Subordinated debt, net of unamortized issuance costs
29,290 23,576 — 23,576 — 
Accrued interest payable600 600 600 — — 
 December 31, 2022
 Carrying
Value		Estimated
Fair Value		Level 1Level 2Level 3
ASSETS
Cash and cash equivalents$38,924 $38,924 $38,924 $— $— 
Mortgage loans AFS379 395 — 395 — 
Gross loans1,264,173 1,225,669 — — 1,225,669 
Less allowance for credit losses9,850 9,850 — — 9,850 
Net loans1,254,323 1,215,819 — — 1,215,819 
Accrued interest receivable7,472 7,472 7,472 — — 
Equity securities without readily determinable fair values (1)
15,746 N/A— — — 
OMSR2,559 3,174 — 3,174 — 
LIABILITIES
Deposits without stated maturities1,492,235 1,492,235 1,492,235 — — 
Deposits with stated maturities252,040 240,964 — 240,964 — 
Federal funds purchased and repurchase agreements57,771 57,581 — 57,581 — 
Subordinated debt, net of unamortized issuance costs
29,245 26,365 — 26,365 — 
Accrued interest payable255 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:
 June 30, 2023December 31, 2022
TotalLevel 1Level 2Level 3TotalLevel 1Level 2Level 3
Recurring items
AFS securities
U.S. Treasury$209,353 $— $209,353 $— $208,701 $— $208,701 $— 
States and political subdivisions95,242 — 95,242 — 117,512 — 117,512 — 
Auction rate money market preferred2,637 — 2,637 — 2,342 — 2,342 — 
Mortgage-backed securities35,532 — 35,532 — 39,070 — 39,070 — 
Collateralized mortgage obligations180,996 — 180,996 — 205,728 — 205,728 — 
Corporate6,737 — 6,737 — 7,128 — 7,128 — 
Total AFS securities530,497 — 530,497 — 580,481 — 580,481 — 
Nonrecurring items
Collateral dependent (net of ACL) in 2023
Impaired loans (net of the ALLL) in 2022		270 — — 270 17,143 — — 17,143 
Foreclosed assets405 — — 405 439 — — 439 
Total$531,172 $— $530,497 $675 $598,063 $— $580,481 $17,582 
Percent of assets and liabilities measured at fair value— %99.87 %0.13 %— %97.06 %2.94 %
We recorded an impairment related to foreclosed assets of $9 through earnings for the three and six month periods ended June 30, 2023, and $0 for the three and six month periods ended June 30, 2022. We had no other assets or liabilities recorded at fair value with changes fair value recognized through earnings, on a recurring basis or nonrecurring basis, as of June 30, 2023. Further, we had no unrealized gains and losses included in OCI for recurring Level 3 fair value measurements held at the end of the reporting period.
Note 11 – Operating Segments
Our reportable segments are based on legal entities that account for at least 10% of net operating results. The Bank as of June 30, 2023 and December 31, 2022 and for the three and six-month periods ended June 30, 2023 and 2022, represents approximately 90% or more of our consolidated total assets and operating results. As such, no additional segment reporting is presented.

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Note 12 – Parent Company Only Financial Information
Interim Condensed Balance Sheets
June 30
2023		December 31
2022
ASSETS
Cash on deposit at the Bank$14,158 $8,525 
Investments in subsidiaries154,405 158,125 
Premises and equipment1,164 1,171 
Other assets48,059 47,922 
TOTAL ASSETS$217,786 $215,743 
LIABILITIES AND SHAREHOLDERS’ EQUITY
Subordinated debt, net of unamortized issuance costs
$29,290 $29,245 
Other liabilities65 288 
Shareholders' equity188,431 186,210 
TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY$217,786 $215,743 
Interim Condensed Statements of Income
Three Months Ended 
 June 30		Six Months Ended 
 June 30
2023202220232022
Income
Dividends from subsidiaries$8,333 $1,000 $13,333 $1,800 
Interest income25 2 47 5 
Other income3 3 6 7 
Total income8,361 1,005 13,386 1,812 
Expenses
Interest expense266 266 532 532 
Management fee238 225 476 450 
Audit, consulting, and legal fees169 156 288 276 
Director fees112 99 223 205 
Other89 101 180 173 
Total expenses874 847 1,699 1,636 
Income before income tax benefit and equity in undistributed earnings of subsidiaries7,487 158 11,687 176 
Federal income tax benefit175 177 343 340 
Income before equity in undistributed earnings of subsidiaries7,662 335 12,030 516 
Undistributed earnings of subsidiaries(3,032)4,960 (2,079)9,513 
Net income$4,630 $5,295 $9,951 $10,029 
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Interim Condensed Statements of Cash Flows
Six Months Ended 
 June 30
20232022
Operating activities
Net income$9,951 $10,029 
Adjustments to reconcile net income to cash provided by operations
Undistributed earnings of subsidiaries2,079 (9,513)
Share-based payment awards under the Directors Plan428 249 
Share-based payment awards under the RSP128 77 
Amortization of subordinated debt issuance costs45 45 
Depreciation25 26 
Changes in operating assets and liabilities which provided (used) cash
Other assets(137)1,275 
Other liabilities(223)(51)
Net cash provided by (used in) operating activities12,296 2,137 
Investing activities
Net sales (purchases) of premises and equipment(17)— 
Net cash provided by (used in) investing activities(17)— 
Financing activities
Cash dividends paid on common stock(4,107)(4,007)
Proceeds from the issuance of common stock846 907 
Common stock repurchased(2,409)(397)
Common stock purchased for deferred compensation obligations(976)(527)
Net cash provided by (used in) financing activities(6,646)(4,024)
Increase (decrease) in cash and cash equivalents5,633 (1,887)
Cash and cash equivalents at beginning of period8,525 11,535 
Cash and cash equivalents at end of period$14,158 $9,648 
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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 six-month periods ended June 30, 2023 and 2022. This analysis should be read in conjunction with our Annual Report on Form 10-K for the year ended December 31, 2022 and with the unaudited interim condensed consolidated financial statements and notes, beginning on page 4 of this report.
Executive Summary
During the three and six months ended June 30, 2023, we reported net income of $4,630 and $9,951 and earnings per common share of $0.62 and $1.32, respectively. Net income and earnings per common share for the same period of 2022 were $5,295 and $10,029 and $0.70 and $1.33, respectively. Net interest income increased $1,624, or 5.72%, for the six-month period ended June 30, 2023 in comparison to the same period in 2022. Rising interest rates and growth in loans led to a $7,226 increase in gross interest income during the six-month period ended June 30, 2023 compared to the same period in 2022. Conversely, rising interest rates on deposits led to a $5,602 increase in interest expense for the six-month period ended June 30, 2023 when compared to the same period in 2022.
Noninterest income decreased $245 during the first six months of 2023 compared to the same period in 2022. This decline was driven by a $554 reduction in OMSR income. Noninterest expenses for the first six months of 2023 increased $1,756, in comparison to the same period in 2022, and was primarily a result of increased compensation, equipment expense, and FDIC insurance premiums.
As of June 30, 2023, total assets and assets under management were $2,042,448 and $2,890,912, respectively. Assets under management include loans sold and serviced of $254,934 and investment and trust assets managed by Isabella Wealth of $593,530, in addition to assets on our consolidated balance sheet. Loans outstanding as of June 30, 2023 totaled $1,334,402. Since December 31, 2022, gross loans increased $70,229 as a result of growth in advances to mortgage brokers and commercial and consumer portfolios. Consistent with industry trends, we've experienced a decline in deposits during the year as competition for deposits remains high. Total deposits were $1,714,948 as of June 30, 2023, decreasing $29,327 since December 31, 2022. All regulatory capital ratios for the Bank exceeded the minimum thresholds to be considered a “well capitalized” institution.
Our securities portfolio totaled $530,497 at June 30, 2023 and included net unrealized losses of $44,219, or 7.69%, of the portfolio. Market conditions led to a $905 improvement in unrealized losses at June 30, 2023 when compared to December 31, 2022. The unrealized loss position on our AFS securities portfolio resulted from increases in short-term and intermediate-term benchmark interest rates. As a result, this change in unrealized losses has reduced our balance of shareholders' equity and negatively impacted our tangible book value. Management does not anticipate the need to sell securities and incur a loss as a result of such sale.
Our net yield on interest earning assets (FTE) was 3.11% and 3.17% for the three and six months ended June 30, 2023, as compared to 3.16% and 3.01% for the three and six months ended June 30, 2022. Improvement in our yield on interest earning assets is a result of strategies management began implementing in 2019, focused on positioning the Bank to benefit in a rising interest rate environment, including a reduced reliance on higher-cost borrowed funds and brokered deposits. To maintain a competitive edge in a rising interest rate environment, we increased most of our deposit rates beginning in the fourth quarter of 2022. As a result, this has negatively impacted our net yield on interest earning assets and further improvement could slow the rate of growth in our net yield on interest earning assets during the remainder of the year.
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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, neither of which exist at Isabella Bank. Shortly after the FDIC takeovers, the Federal Reserve Bank and the Department of Treasury announced enhanced insurance coverage and a borrowing program to help banks in need of funding. Isabella Bank continues to monitor such events, as well as industry and regulatory responses, to assure we are prepared for any changes that might affect the bank, including the ability to timely address economic uncertainty.
Impact of the Adoption of ASC 326 (CECL): We adopted ASU No. 2016-13, as subsequently updated for certain clarifications, targeted relief and codification improvements, as of January 1, 2023. Based on portfolio characteristics and economic conditions and expectations as of January 1, 2023, we recorded a combined pre-tax increase of $3,059 to the ACL and reserve for unfunded commitments on January 1, 2023 upon the adoption of ASU 2016-13; this implementation resulted in a reduction to retained earnings of $2,417, net of tax, as of January 1, 2023. In connection with the adoption of ASC 326, we revised certain accounting policies and implemented certain accounting policy elections, which are included in “Note 1 – Significant Accounting Policies” of our interim condensed consolidated financial statements.
Impact of COVID-19: Unexpected and unprecedented changes have occurred since early 2020 as the result of COVID-19. The full impact of the pandemic, including the uncertainties surrounding the pandemic, remain in 2023. However, significant progress has been made with vaccinations and medical treatments. Additionally, improved safety guidelines and the easing of restrictions have occurred since the onset of the pandemic. We expect the significance of the pandemic, including the extent of its effect on our financial and operational results, to be dictated by continued developments related to the COVID-19 pandemic. We continue to closely monitor external events and are in continual discussion with our customers to assess, prepare, and respond to conditions as they evolve.
Reclassifications
Certain amounts reported in the interim 2022 consolidated financial statements have been reclassified to conform to the 2023 presentation. Operating results for periods after January 1, 2023 are presented in accordance with ASC 326 while prior period amounts continue to be reported in accordance with previously applicable standards and the accounting policies described in our Annual Report on Form 10-K for the year ended December 31, 2022. In addition, the adoption of ASC 326 requires enhanced disclosures related to the significant estimates and judgments used in estimating credit losses.
Subsequent Events
We evaluated subsequent events after June 30, 2023 through the date our interim condensed consolidated financial statements were issued for potential recognition and disclosure. No subsequent events require financial statement recognition or disclosure between June 30, 2023 and the date our interim condensed consolidated financial statements were issued.

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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:
June 30
2023		March 31
2023		December 31
2022		September 30
2022		June 30
2022
INCOME STATEMENT DATA
Interest income$19,495 $18,595 $17,915 $17,019 $16,102 
Interest expense4,816 3,244 1,643 1,216 1,175 
Net interest income14,679 15,351 16,272 15,803 14,927 
Provision for credit losses196 41 (57)18 485 
Noninterest income3,604 3,293 3,272 3,252 3,595 
Noninterest expenses12,539 12,198 11,922 11,917 11,661 
Federal income tax expense918 1,084 1,357 1,233 1,081 
Net income$4,630 $5,321 $6,322 $5,887 $5,295 
PER SHARE
Basic earnings$0.62 $0.70 $0.84 $0.78 $0.70 
Diluted earnings$0.61 $0.70 $0.83 $0.77 $0.69 
Dividends$0.28 $0.28 $0.28 $0.27 $0.27 
Tangible book value$18.69 $19.24 $18.25 $16.96 $18.85 
Quoted market value
High$26.00 $25.10 $24.02 $24.95 $26.25 
Low$19.13 $22.08 $21.00 $21.39 $23.00 
Close (1)
$20.50 $24.80 $23.50 $21.40 $24.80 
Common shares outstanding (1)
7,496,826 7,540,015 7,559,421 7,564,348 7,553,113 
PERFORMANCE RATIOS
Return on average total assets0.91 %1.04 %1.24 %1.13 %1.04 %
Return on average shareholders' equity9.47 %11.35 %14.01 %12.13 %10.83 %
Return on average tangible shareholders' equity12.58 %15.28 %19.14 %16.15 %14.38 %
Net interest margin yield (FTE)3.11 %3.22 %3.43 %3.28 %3.16 %
BALANCE SHEET DATA (1)
Gross loans$1,334,402 $1,270,651 $1,264,173 $1,236,151 $1,271,910 
AFS securities$530,497 $568,650 $580,481 $581,233 $557,590 
Total assets$2,042,448 $2,084,624 $2,030,267 $2,063,977 $2,048,373 
Deposits$1,714,948 $1,813,528 $1,744,275 $1,791,033 $1,759,866 
Borrowed funds$121,392 $61,262 $87,016 $81,704 $86,450 
Shareholders' equity$188,431 $193,333 $186,210 $176,612 $190,680 
Gross loans to deposits77.81 %70.07 %72.48 %69.02 %72.27 %
ASSETS UNDER MANAGEMENT (1)
Loans sold with servicing retained$254,934 $259,512 $264,206 $268,879 $273,294 
Assets managed by Isabella Wealth$593,530 $571,453 $513,918 $464,136 $454,535 
Total assets under management$2,890,912 $2,915,589 $2,808,391 $2,796,992 $2,776,202 
ASSET QUALITY (1)
Nonperforming loans to gross loans0.04 %0.04 %0.04 %0.05 %0.05 %
Nonperforming assets to total assets0.05 %0.05 %0.05 %0.04 %0.05 %
ACL to gross loans0.96 %0.99 %0.78 %0.78 %0.76 %
CAPITAL RATIOS (1)
Shareholders' equity to assets9.23 %9.27 %9.17 %8.56 %9.31 %
Tier 1 leverage8.70 %8.58 %8.61 %8.44 %8.38 %
Common equity tier 1 capital12.39 %12.71 %12.91 %12.92 %12.44 %
Tier 1 risk-based capital12.39 %12.71 %12.91 %12.92 %12.44 %
Total risk-based capital15.37 %15.77 %15.79 %15.85 %15.33 %
(1) At end of period
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The following table outlines our year-to-date results of operations and provides certain performance measures as of, and for the six-month periods ended:
June 30
2023		June 30
2022		June 30
2021
INCOME STATEMENT DATA
Interest income$38,090 $30,864 $29,930 
Interest expense8,060 2,458 4,016 
Net interest income30,030 28,406 25,914 
Provision for credit losses237 522 (492)
Noninterest income6,897 7,142 6,847 
Noninterest expenses24,737 22,981 21,312 
Federal income tax expense2,002 2,016 1,922 
Net income$9,951 $10,029 $10,019 
PER SHARE
Basic earnings$1.32 $1.33 $1.26 
Diluted earnings$1.31 $1.31 $1.24 
Dividends$0.56 $0.54 $0.54 
Tangible book value$18.69 $18.85 $21.73 
Quoted market value
High$26.00 $26.25 $23.90 
Low$19.13 $23.00 $19.45 
Close (1)
$20.50 $24.80 $23.00 
Common shares outstanding (1)
7,496,826 7,553,113 7,946,658 
PERFORMANCE RATIOS
Return on average total assets0.97 %0.98 %1.00 %
Return on average shareholders' equity10.39 %9.89 %9.06 %
Return on average tangible shareholders' equity13.89 %13.00 %11.61 %
Net interest margin yield (FTE)3.17 %3.01 %2.88 %
BALANCE SHEET DATA (1)
Gross loans$1,334,402 $1,271,910 $1,206,663 
AFS securities$530,497 $557,590 $448,454 
Total assets$2,042,448 $2,048,373 $2,031,407 
Deposits$1,714,948 $1,759,866 $1,636,506 
Borrowed funds$121,392 $86,450 $161,395 
Shareholders' equity$188,431 $190,680 $220,990 
Gross loans to deposits77.81 %72.27 %73.73 %
ASSETS UNDER MANAGEMENT (1)
Loans sold with servicing retained$254,934 $273,294 $290,033 
Assets managed by Isabella Wealth$593,530 $454,535 $493,287 
Total assets under management$2,890,912 $2,776,202 $2,814,727 
ASSET QUALITY (1)
Nonperforming loans to gross loans0.04 %0.05 %0.28 %
Nonperforming assets to total assets0.05 %0.05 %0.19 %
ACL to gross loans0.96 %0.76 %0.78 %
CAPITAL RATIOS (1)
Shareholders' equity to assets9.23 %9.31 %10.88 %
Tier 1 leverage8.70 %8.38 %8.46 %
Common equity tier 1 capital12.39 %12.44 %13.81 %
Tier 1 risk-based capital12.39 %12.44 %13.81 %
Total risk-based capital15.37 %15.33 %17.00 %
(1) At end of period

44
Average Balances, Interest Rates, and Net Interest Income
The following schedules present the daily average amount outstanding for each major category of interest earning assets, non-earning assets, interest bearing liabilities, and noninterest bearing liabilities. These schedules also present an analysis of interest income and interest expense for the periods indicated. All interest income is reported on a FTE basis using a federal income tax rate of 21%. Loans in nonaccrual status, for the purpose of the following computations, are included in the average loan balances. FRB and FHLB restricted equity holdings are included in other interest earning assets.
Three Months Ended
June 30, 2023March 31, 2023June 30, 2022
Average
Balance		Tax
Equivalent
Interest		Average
Yield /
Rate		Average
Balance		Tax
Equivalent
Interest		Average
Yield /
Rate		Average
Balance		Tax
Equivalent
Interest		Average
Yield /
Rate
INTEREST EARNING ASSETS
Loans (1)
$1,300,593 $15,931 4.90 %$1,268,269 $14,889 4.70 %$1,259,573 $13,179 4.19 %
Taxable investment securities485,897 2,356 1.94 %504,889 2,471 1.96 %475,010 2,027 1.71 %
Nontaxable investment securities97,755 946 3.87 %106,240 1,021 3.84 %109,367 975 3.57 %
Fed funds sold4 — 4.70 %17 — 4.50 %6 — 1.47 %
Other37,664 517 5.49 %60,583 486 3.21 %77,176 192 1.00 %
Total earning assets1,921,913 19,750 4.11 %1,939,998 18,867 3.89 %1,921,132 16,373 3.41 %
NONEARNING ASSETS
Allowance for credit losses(12,759)(12,660)(9,288)
Cash and demand deposits due from banks24,807 25,039 22,838 
Premises and equipment26,401 25,864 24,269 
Accrued income and other assets80,374 71,063 84,590 
Total assets$2,040,736 $2,049,304 $2,043,541 
INTEREST BEARING LIABILITIES
Interest bearing demand deposits$348,341 $194 0.22 %$379,717 $146 0.15 %$375,123 $56 0.06 %
Savings deposits628,673 1,849 1.18 %645,987 1,466 0.91 %627,916 171 0.11 %
Time deposits303,117 2,066 2.73 %267,463 1,217 1.82 %274,284 627 0.91 %
Federal funds purchased and repurchase agreements35,495 171 1.93 %39,709 149 1.50 %46,029 8 0.07 %
FHLB advances20,404 270 5.29 %— — — %10,000 47 1.88 %
Subordinated debt, net of unamortized issuance costs
29,275 266 3.63 %29,253 266 3.64 %29,188 266 3.65 %
Total interest bearing liabilities1,365,305 4,816 1.41 %1,362,129 3,244 0.95 %1,362,540 1,175 0.34 %
NONINTEREST BEARING LIABILITIES
Demand deposits462,953 486,491 470,139 
Other16,906 13,094 15,237 
Shareholders’ equity195,572 187,590 195,625 
Total liabilities and shareholders’ equity$2,040,736 $2,049,304 $2,043,541 
Net interest income (FTE)$14,934 $15,623 $15,198 
Net yield on interest earning assets (FTE)3.11 %3.22 %3.16 %
(1) Includes loans and mortgage loans AFS
45
Six Months Ended
June 30, 2023June 30, 2022
Average
Balance		Tax
Equivalent
Interest		Average
Yield /
Rate		Average
Balance		Tax
Equivalent
Interest		Average
Yield /
Rate
INTEREST EARNING ASSETS
Loans (1)
$1,284,520 $30,820 4.80 %$1,247,746 $25,557 4.10 %
Taxable investment securities495,340 4,827 1.95 %448,405 3,642 1.62 %
Nontaxable investment securities101,973 1,967 3.86 %105,507 1,895 3.59 %
Fed funds sold10 — 4.77 %4 — 1.12 %
Other49,059 1,003 4.09 %120,027 301 0.50 %
Total earning assets1,930,902 38,617 4.00 %1,921,689 31,395 3.27 %
NONEARNING ASSETS
Allowance for credit losses(12,709)(9,209)
Cash and demand deposits due from banks24,918 24,827 
Premises and equipment26,132 24,364 
Accrued income and other assets75,746 93,648 
Total assets$2,044,989 $2,055,319 
INTEREST BEARING LIABILITIES
Interest bearing demand deposits$363,942 $340 0.19 %$379,275 $106 0.06 %
Savings deposits637,281 3,315 1.04 %621,661 330 0.11 %
Time deposits285,389 3,283 2.30 %282,172 1,354 0.96 %
Federal funds purchased and repurchase agreements37,656 320 1.70 %47,535 17 0.07 %
FHLB advances10,193 270 5.30 %12,431 119 1.91 %
Subordinated debt, net of unamortized issuance costs
29,264 532 3.64 %29,177 532 3.65 %
Total interest bearing liabilities1,363,725 8,060 1.18 %1,372,251 2,458 0.36 %
NONINTEREST BEARING LIABILITIES
Demand deposits474,656 464,271 
Other15,005 16,061 
Shareholders’ equity191,603 202,736 
Total liabilities and shareholders’ equity$2,044,989 $2,055,319 
Net interest income (FTE)$30,557 $28,937 
Net yield on interest earning assets (FTE)3.17 %3.01 %
(1) Includes loans and mortgage loans AFS
Net interest income is the amount by which interest income on earning assets exceeds the interest expense on interest bearing liabilities. Net interest income is influenced by changes in the balance and mix of assets and liabilities, as well as market interest rates. While we exert some control over these factors, FRB monetary policy and competition have a significant impact. For analytical purposes, net interest income is adjusted to an FTE basis by including the income tax savings from interest on tax exempt loans and nontaxable investment securities, thus making year to year comparisons more meaningful.
46
Volume and Rate Variance Analysis
The following table sets forth the effect of volume and rate changes on interest income and expense for the periods indicated. Changes in interest due to volume and rate were determined as follows:
Volume—change in volume multiplied by the previous period's rate.
Rate—change in the FTE rate multiplied by the previous period's volume.
The change in interest due to both volume and rate has been allocated to volume and rate changes in proportion to the relationship of the absolute dollar amounts of the change in each.
 Three Months Ended 
 June 30, 2023 Compared to 
 March 31, 2023 
 Increase (Decrease) Due to		Three Months Ended 
 June 30, 2023 Compared to  
 June 30, 2022 
  Increase (Decrease) Due to		Six Months Ended 
 June 30, 2023 Compared to 
 June 30, 2022 
 Increase (Decrease) Due to
VolumeRateNetVolumeRateNetVolumeRateNet
Changes in interest income
Loans$386 $656 $1,042 $441 $2,311 $2,752 $772 $4,491 $5,263 
Taxable investment securities(92)(23)(115)47 282 329 408 777 1,185 
Nontaxable investment securities(82)7 (75)(108)79 (29)(65)137 72 
Other(229)260 31 (144)469 325 (275)977 702 
Total changes in interest income(17)900 883 236 3,141 3,377 840 6,382 7,222 
Changes in interest expense
Interest bearing demand deposits(13)61 48 (4)142 138 (4)238 234 
Savings deposits(40)423 383 — 1,678 1,678 8 2,977 2,985 
Time deposits179 670 849 72 1,367 1,439 16 1,913 1,929 
Federal funds purchased and repurchase agreements(17)39 22 (2)165 163 (4)307 303 
FHLB advances270 — 270 81 142 223 (25)176 151 
Subordinated debt, net of unamortized issuance costs
— — — 1 (1)— 2 (2)— 
Total changes in interest expense379 1,193 1,572 148 3,493 3,641 (7)5,609 5,602 
Net change in interest margin (FTE)$(396)$(293)$(689)$88 $(352)$(264)$847 $773 $1,620 
The interest rate increases during 2022 and the first half of 2023 have alleviated much of the pressure placed on our net interest margin. Over the past several quarters, rising rates on deposit accounts has slowed growth in our net interest margin. With the potential for additional rate increases during the remainder of the year, we should see improvement in net yield on interest earning assets but at slower rates than recent periods.
 Average Yield / Rate for the Three-Month Periods Ended:
June 30
2023		March 31
2023		December 31
2022		September 30
2022		June 30
2022
Total earning assets4.11 %3.89 %3.77 %3.53 %3.41 %
Total interest bearing liabilities1.41 %0.95 %0.49 %0.35 %0.34 %
Net yield on interest earning assets (FTE)3.11 %3.22 %3.43 %3.28 %3.16 %
 Quarter to Date Net Interest Income (FTE)
June 30
2023		March 31
2023		December 31
2022		September 30
2022		June 30
2022
Total interest income (FTE)$19,750 $18,867 $18,183 $17,276 $16,373 
Total interest expense4,816 3,244 1,643 1,216 1,175 
Net interest income (FTE)$14,934 $15,623 $16,540 $16,060 $15,198 

47
Past Due and Nonaccrual Loans
Fluctuations in past due and nonaccrual loans can have a significant impact on the ACL. To determine the potential impact, and corresponding estimated losses, we analyze our historical loss trends on loans past due greater than 30 days and nonaccrual loans for indications of additional deterioration.
 Total Past Due and Nonaccrual Loans
June 30
2023		March 31
2023		December 31
2022		September 30
2022		June 30
2022
Commercial and industrial$25 $291 $307 $348 $350 
Commercial real estate2,495 2,844 7,197 2,399 82 
Agricultural218 588 234 574 271 
Residential real estate838 2,365 3,333 507 345 
Consumer103 43 59 180 457 
Total$3,679 $6,131 $11,130 $4,008 $1,505 
Total past due and nonaccrual loans to gross loans0.28 %0.48 %0.88 %0.32 %0.12 %
The increase in past due and nonaccrual loans within the commercial and residential loan portfolios was the result of one past due relationship, which has since improved. Therefore, we do not believe the recent increase is an indicator of credit deterioration.
The accrual of interest on commercial and agricultural loans, as well as residential real estate loans, is discontinued at the time a loan is 90 days or more past due unless the credit is well-secured and in the process of short-term collection. Upon transferring a loan to nonaccrual status, we perform an evaluation to determine the net realizable value of the underlying collateral. This evaluation is used to help determine if a charge-off is necessary. Consumer loans are typically charged-off no later than 180 days past due. Loans may be placed back on accrual status after six months of continued performance and achievement of current payment status. The level of nonperforming loans continued to decline and remains low in comparison to peer banks.
The following table summarizes nonaccrual loans as of:
June 30
2023		March 31
2023		December 31
2022		September 30
2022		June 30
2022
Commercial and industrial$17 $20 $22 $100 $102 
Commercial real estate— 57 74 78 82 
Agricultural218 232 234 266 271 
Residential real estate179 179 127 136 85 
Total$414 $488 $457 $580 $540 
Nonaccrual loans as a % of loans at end of period0.03 %0.04 %0.04 %0.05 %0.04 %
A summary of loans past due and in nonaccrual status, including the composition of the ending balance of nonaccrual status loans by type, is included in “Note 3 – Loans and ACL” of our interim condensed consolidated financial statements.
Nonperforming Assets
The following table summarizes our nonperforming assets as of:
June 30
2023		March 31
2023		December 31
2022		September 30
2022		June 30
2022
Nonaccrual loans$414 $488 $457 $580 $540 
Accruing loans past due 90 days or more133 — — 21 119 
Total nonperforming loans547 488 457 601 659 
Foreclosed assets405 414 439 240 241 
Debt securities77 77 77 77 131 
Total nonperforming assets$1,029 $979 $973 $918 $1,031 
Nonperforming loans as a % of total loans0.04 %0.04 %0.04 %0.05 %0.05 %
Nonperforming assets as a % of total assets0.05 %0.05 %0.05 %0.04 %0.05 %
48
ACL - Loans
The viability of any financial institution is ultimately determined by its management of credit risk. Loans represent our single largest concentration of risk. The ACL is our estimation of expected losses within the existing loan portfolio. We allocate the ACL throughout the loan portfolio based on our assessment of the underlying risks associated within each loan segment. Our assessments include allocations based on specific valuation allowances, historical charge-offs, internally assigned credit risk ratings, past due and nonaccrual balances, historical loss percentages, and other credit trends and risk characteristics, including current conditions and reasonable and supportable forecasts about the future.
Upon the adoption of ASC 326 on January 1, 2023, the total amount of the allowance for credit losses on loans estimated using the CECL methodology increased $2,744 compared to the total amount of the allowance for credit losses on loans estimated as of December 31, 2022 using the prior incurred loss methodology. The manner in which credit loss allowances are allocated to the individual portfolio segments was partly impacted by a change in the way the underlying loans within each segment are pooled for modeling purposes. The impact of varying economic conditions and portfolio risk factors are now a component of the credit loss models applied to each modeling pool. In that regard, the amounts allocated to the underlying pools of loans within each portfolio segment more directly reflect the economic variables and portfolio stress factors that correlate with credit losses within each portfolio. Under the prior methodology, allocations in excess of those derived from historical loss rates were recognized as unallocated. Nonetheless, despite fluctuations in the allocation of portions of the overall allowance to the various portfolio segments, the entire allowance is available to absorb any credit losses within the entire loan portfolio.
The following table summarizes our charge-offs, recoveries, provision for credit losses, and ACL balances as of, and for the:
Three Months Ended 
 June 30		Six Months Ended 
 June 30
2023202220232022
Allowance at beginning of period$12,640 $9,204 $9,850 $9,103 
Adoption of ASC 326— — 2,744 — 
Charge-offs
Commercial and industrial— 3 — 3 
Commercial real estate— — — — 
Agricultural4 — 4 — 
Residential real estate— — 2 — 
Consumer88 103 187 194 
Total charge-offs92 106 193 197 
Recoveries
Commercial and industrial4 26 4 40 
Commercial real estate10 — 20 — 
Agricultural2 1 6 3 
Residential real estate25 42 49 70 
Consumer54 48 126 159 
Total recoveries95 117 205 272 
Net loan charge-offs (recoveries)(3)(11)(12)(75)
Provision for credit losses190 485 227 522 
Allowance at end of period$12,833 $9,700 $12,833 $9,700 
Net loan charge-offs (recoveries) to average loans outstanding0.00 %0.00 %0.00 %(0.01)%
49
The following table summarizes our charge-offs, recoveries, provisions for credit losses, and ACL balances as of, and for the three-month periods ended:
June 30
2023		March 31
2023		December 31
2022		September 30
2022		June 30
2022
Total charge-offs$92 $101 $249 $173 $106 
Total recoveries95 110 479 132 117 
Net loan charge-offs (recoveries)(3)(9)(230)41 (11)
Net loan charge-offs (recoveries) to average loans outstanding0.00 %0.00 %(0.02)%0.00 %0.00 %
Provision for credit losses$190 $37 $(57)$18 $485 
Provision for credit losses to average loans outstanding0.01 %0.00 %0.00 %— %0.04 %
ACL$12,833 $12,640 $9,850 $9,677 $9,700 
ACL as a % of loans at end of period0.96 %0.99 %0.78 %0.78 %0.76 %
ACL as a % of nonaccrual loans3,099.76 %2,590.16 %2,155.36 %1,668.45 %1,796.30 %
The following table illustrates the two main components of the ACL as of:
June 30
2023		March 31
2023		December 31
2022		September 30
2022		June 30
2022
ACL
Individually evaluated$— $— $451 $474 $515 
Collectively evaluated12,833 12,640 9,399 9,203 9,185 
Total$12,833 $12,640 $9,850 $9,677 $9,700 
ACL to gross loans
Individually evaluated0.00 %0.00 %0.04 %0.04 %0.04 %
Collectively evaluated0.96 %0.99 %0.74 %0.74 %0.72 %
Total0.96 %0.99 %0.78 %0.78 %0.76 %
While we utilize our best judgment and information available, the ultimate adequacy of the ACL is dependent upon a variety of factors beyond our control, including the performance of our borrowers, the economy, and changes in interest rates. We closely monitor overall credit quality indicators and our policies and procedures related to the analysis of the ACL to ensure that the ACL remains at an appropriate level.
For further discussion of the allocation of the ACL, see “Note 3 – Loans and ACL” of our interim condensed consolidated financial statements.
50
Noninterest Income and Noninterest Expenses
Significant noninterest income balances are highlighted in the following tables for the:
Three Months Ended June 30
   Change
20232022$%
Service charges and fees
ATM and debit card fees$1,244 $1,202 $42 3.49 %
Service charges and fees on deposit accounts588 631 (43)(6.81)%
Freddie Mac servicing fee162 167 (5)(2.99)%
Net OMSR income (loss)(41)213 (254)(119.25)%
Other fees for customer services94 71 23 32.39 %
Total service charges and fees2,047 2,284 (237)(10.38)%
Wealth management fees981 784 197 25.13 %
Earnings on corporate owned life insurance policies226 222 4 1.80 %
Net gain on sale of mortgage loans56 170 (114)(67.06)%
All other294 135 159 117.78 %
Total noninterest income$3,604 $3,595 $9 0.25 %
Six Months Ended June 30
   Change
20232022$%
Service charges and fees
ATM and debit card fees$2,404 $2,295 $109 4.75 %
Service charges and fees on deposit accounts1,199 1,240 (41)(3.31)%
Freddie Mac servicing fee321 338 (17)(5.03)%
Net OMSR income (loss)(77)477 (554)(116.14)%
Other fees for customer services178 143 35 24.48 %
Total service charges and fees4,025 4,493 (468)(10.42)%
Wealth management fees1,767 1,538 229 14.89 %
Earnings on corporate owned life insurance policies452 432 20 4.63 %
Net gain on sale of mortgage loans123 394 (271)(68.78)%
All other530 285 245 85.96 %
Total noninterest income$6,897 $7,142 $(245)(3.43)%
OMSR income results are driven, in part, by changes in offering rates on residential mortgage loans, anticipated prepayments in the servicing-retained portfolio, and the volume of loans within the servicing-retained portfolio. Decreased prepayment speeds, as a result of an increase in interest rates, was the primary driver of the income recognized during 2022. A decline in volume of originated loans and the balance of loans serviced led to OMSR losses during the first half of 2023. Income during 2023 will be driven by the volume of loans originated within the servicing-retained portfolio, along with any further future increases in interest rates.
The amount of loans sold is driven by customer demand and balance sheet management strategies. Loan demand declined in the first half of 2023 compared to the prior year. With fewer mortgage loans being originated and sold, we've experienced a decline in net gain on sale of mortgage loans. Demand is expected to continue to be slow during the remainder of 2023 due to the continual rise in interest rates and as a result, net gain on sale of mortgage loans is not expected to exceed 2022 levels.
The fluctuations in all other noninterest income are spread throughout various categories, none of which are individually significant.
51
Significant noninterest expense balances are highlighted in the following tables for the:
Three Months Ended June 30
  Change
20232022$%
Compensation and benefits$6,561 $6,037 $524 8.68 %
Furniture and equipment1,613 1,442 171 11.86 %
Occupancy993 929 64 6.89 %
Other
Audit, consulting, and legal fees557 605 (48)(7.93)%
ATM and debit card fees409 508 (99)(19.49)%
Other losses425 233 192 82.40 %
Marketing costs240 364 (124)(34.07)%
Memberships and subscriptions230 207 23 11.11 %
FDIC insurance premiums233 131 102 77.86 %
Donations and community relations256 139 117 84.17 %
Loan underwriting fees216 215 1 0.47 %
Director fees198 187 11 5.88 %
All other608 664 (56)(8.43)%
Total other noninterest expenses3,372 3,253 119 3.66 %
Total noninterest expenses$12,539 $11,661 $878 7.53 %
Six Months Ended June 30
  Change
20232022$%
Compensation and benefits$13,150 $12,111 $1,039 8.58 %
Furniture and equipment3,210 2,892 318 11.00 %
Occupancy1,998 1,895 103 5.44 %
Other
Audit, consulting, and legal fees1,092 1,154 (62)(5.37)%
ATM and debit card fees809 942 (133)(14.12)%
Other losses572 316 256 81.01 %
Marketing costs485 603 (118)(19.57)%
Memberships and subscriptions470 424 46 10.85 %
FDIC insurance premiums461 256 205 80.08 %
Donations and community relations440 426 14 3.29 %
Loan underwriting fees431 397 34 8.56 %
Director fees402 388 14 3.61 %
All other1,217 1,177 40 3.40 %
Total other noninterest expenses6,379 6,083 296 4.87 %
Total noninterest expenses$24,737 $22,981 $1,756 7.64 %
The increase in compensation and benefits was the result of employee merit increases and staff additions for a new branch, opened March of 2023. Compensation and benefits expense for the remainder of 2023 is expected to exceed 2022 levels.
Furniture and equipment expense has increased due to an initiative towards leased ATMs, implemented during the second half of 2022, leading to increased equipment expense. As a result of this initiative, overall expense for 2023 is expected to exceed expense from 2022.
During the second quarter of 2023, we recognized a loss related to the settlement of a business matter. No further losses are anticipated related to this matter. As such, other losses for the remainder of 2023 are expected to approximate 2022 levels.
52
The decline in Marketing cost is due to an implementation of a new and enhanced online banking platform that took place in the second quarter of 2022.
The FDIC adopted a final rule, applicable to all insured depository institutions, to increase initial base deposit insurance assessment rate schedules uniformly by 2 basis point, beginning in the first quarterly assessment period of 2023. The increase in assessment rate schedules is intended to increase the likelihood that the reserve ratio of the Deposit Insurance fund reaches the statutory minimum of 1.35 percent by the statutory deadline of September 30, 2028. FDIC expense for the remainder of 2023 will continue to exceed 2022 levels.
The fluctuations in all other noninterest expenses are spread throughout various categories, none of which are individually significant.
Analysis of Changes in Financial Condition
June 30
2023		December 31
2022		$ Change% Change
(unannualized)
ASSETS
Cash and cash equivalents$29,880 $38,924 $(9,044)(23.24)%
AFS securities
Amortized cost of AFS securities574,716 625,605 (50,889)(8.13)%
Unrealized gains (losses) on AFS securities(44,219)(45,124)905 N/M
AFS securities530,497 580,481 (49,984)(8.61)%
Mortgage loans AFS362 379 (17)(4.49)%
Loans
Loans1,334,402 1,264,173 70,229 5.56 %
Less allowance for credit losses12,833 9,850 2,983 30.28 %
Net loans1,321,569 1,254,323 67,246 5.36 %
Premises and equipment26,383 25,553 830 3.25 %
Corporate owned life insurance policies33,433 32,988 445 1.35 %
Equity securities without readily determinable fair values15,746 15,746 — — %
Goodwill and other intangible assets48,285 48,287 (2)— %
Accrued interest receivable and other assets36,293 33,586 2,707 8.06 %
TOTAL ASSETS$2,042,448 $2,030,267 $12,181 0.60 %
LIABILITIES AND SHAREHOLDERS’ EQUITY
Liabilities
Deposits$1,714,948 $1,744,275 $(29,327)(1.68)%
Borrowed funds121,392 87,016 34,376 39.51 %
Accrued interest payable and other liabilities17,677 12,766 4,911 38.47 %
Total liabilities1,854,017 1,844,057 9,960 0.54 %
Shareholders’ equity188,431 186,210 2,221 1.19 %
TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY$2,042,448 $2,030,267 $12,181 0.60 %
As shown above, total assets increased $12,181 from December 31, 2022, driven primarily by an increase in loans, partially offset by a decline in AFS securities. Total loans grew $70,229, largely driven by an increase in advance to mortgage brokers and the commercial and consumer portfolios, offset by a decline in the agricultural portfolio. With the decline in deposits, loan growth was funded by maturities and principal paydowns within the AFS securities portfolio, as well as short-term borrowed funds.

53
The following table outlines the changes in loan balances:
June 30
2023		December 31
2022		$ Change% Change
(unannualized)
Commercial and industrial$194,914 $178,428 $16,486 9.24 %
Commercial real estate564,254 566,012 (1,758)(0.31)%
Advances to mortgage brokers39,099 — 39,099 N/M
Agricultural96,689 104,985 (8,296)(7.90)%
Residential real estate343,474 336,694 6,780 2.01 %
Consumer95,972 78,054 17,918 22.96 %
Total$1,334,402 $1,264,173 $70,229 5.56 %
The following table displays loan balances as of:
June 30
2023		March 31
2023		December 31
2022		September 30
2022		June 30
2022
Commercial and industrial$194,914 $189,185 $178,428 $180,124 $175,674 
Commercial real estate564,254 566,410 566,012 552,399 559,602 
Advances to mortgage brokers39,099 — — 1,484 37,291 
Agricultural96,689 94,760 104,985 97,527 94,726 
Residential real estate343,474 336,186 336,694 330,232 329,795 
Consumer95,972 84,110 78,054 74,385 74,822 
Total$1,334,402 $1,270,651 $1,264,173 $1,236,151 $1,271,910 
We've experienced an increase in commercial loan demand in recent periods, with demand expected to continue during the remainder of the year. During the second quarter of 2023, we resumed participation in advances to mortgage brokers. Our participation in this mortgage purchase program paused during most of 2022 and the first quarter of 2023 due to low mortgage volume. Continued growth in the agricultural portfolio is expected during the remainder of 2023, but not at the same level of growth experienced in 2022 as the result of the competitive lending environment. Residential mortgage lending activities have slowed over the last year as a result of rising interest rates. As interest rates are expected to remain high throughout 2023, growth in residential loans is anticipated to continue but at a slower pace. We've experienced steady growth in the consumer portfolio and expect this trend to continue during the remainder of 2023.
The following table outlines the changes in deposit balances:
June 30
2023		December 31
2022		$ Change% Change
(unannualized)
Noninterest bearing demand deposits$458,845 $494,346 $(35,501)(7.18)%
Interest bearing demand deposits335,922 372,155 (36,233)(9.74)%
Savings deposits606,644 625,734 (19,090)(3.05)%
Certificates of deposit313,288 251,541 61,747 24.55 %
Internet certificates of deposit249 499 (250)(50.10)%
Total$1,714,948 $1,744,275 $(29,327)(1.68)%
The following table displays deposit balances as of:
June 30
2023		March 31
2023		December 31
2022		September 30
2022		June 30
2022
Noninterest bearing demand deposits$458,845 $478,829 $494,346 $510,127 $488,110 
Interest bearing demand deposits335,922 383,602 372,155 368,537 370,284 
Savings deposits606,644 662,495 625,734 651,129 635,397 
Certificates of deposit313,288 288,103 251,541 260,741 265,477 
Internet certificates of deposit249 499 499 499 598 
Total$1,714,948 $1,813,528 $1,744,275 $1,791,033 $1,759,866 
Total deposits have fluctuated significantly over the past 12 months with an overall decline in non-contractual deposits, such as demand and savings deposits. We have experienced significant growth in certificates of deposit during the first half of 2023
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as a result of the recent increase in the interest rate environment. We expect interest rates to continue to rise in 2023 and anticipate a continuation in the shift of customers moving to higher interest earning products.
The primary objective of our investing activities is to manage our overall exposure to changes in interest rates. Secondary considerations include ensuring ample access to liquidity, generating returns, and providing current income. The following table displays fair values of AFS securities as of:
June 30
2023		March 31
2023		December 31
2022		September 30
2022		June 30
2022
U.S. Treasury$209,353 $212,086 $208,701 $206,791 $214,474 
States and political subdivisions95,242 108,719 117,512 114,000 119,649 
Auction rate money market preferred2,637 2,716 2,342 2,479 2,497 
Mortgage-backed securities35,532 37,797 39,070 41,042 45,796 
Collateralized mortgage obligations180,996 200,252 205,728 209,720 167,572 
Corporate6,737 7,080 7,128 7,201 7,602 
Total$530,497 $568,650 $580,481 $581,233 $557,590 
Borrowed funds include FHLB advances, securities sold under agreements to repurchase, subordinated debt, and federal funds purchased. The balance of borrowed funds fluctuates from period to period based on our funding needs that arise from changes in loans, investments, and deposits. To provide balance sheet growth, we may utilize borrowings and brokered deposits to fund earning assets, which occurred during the second quarter of 2023. The increase in borrowings during the second quarter was the result of short-term FHLB advances, with maturities within three weeks after June 30, 2023.
The following table displays borrowed funds balances as of:
June 30
2023		March 31
2023		December 31
2022		September 30
2022		June 30
2022
Securities sold under agreements to repurchase without stated maturity dates$37,102 $31,995 $57,771 $52,479 $47,247 
FHLB advances55,000 — — — 10,000 
Fixed rate at 3.25% to floating, due 203129,290 29,267 29,245 29,225 29,203 
Total$121,392 $61,262 $87,016 $81,704 $86,450 
In 2021, we completed a private placement of $30,000 in aggregate principal amount of 3.25% Fixed-to-Floating Rate Subordinated Notes due 2031 (the "Notes"). The Notes will initially bear a fixed interest rate of 3.25% until June 15, 2026, after which time until maturity on June 15, 2031, the interest rate will reset quarterly to an annual floating rate equal to the then-current 3-month SOFR plus 256 basis points. The Notes are redeemable by us at our option, in whole or in part, on or after June 15, 2026. The Notes are not subject to redemption at the option of the holders.
Contractual Obligations and Loan Commitments
We have various financial obligations, including contractual obligations and commitments related to deposits and borrowings, which may require future cash payments. We also have loan related commitments that may impact liquidity. The commitments include unused lines of credit, commercial and standby letters of credit, and commitments to grant loans. These commitments to grant loans include residential mortgage loans with the majority committed to be sold to the secondary market. Many of these commitments historically have expired without being drawn upon and do not necessarily represent our future cash requirements.
We are party to credit related financial instruments with off-balance-sheet risk. These financial instruments are entered into in the normal course of business to meet the financing needs of our customers. These financial instruments involve, to varying degrees, elements of credit and interest rate risk in excess of the amounts recognized in the consolidated balance sheets. The contractual or notional amounts of these instruments reflect the extent of involvement we have in a particular class of financial instrument.
Our exposure to credit-related loss in the event of nonperformance by the counterparties to the financial instruments for commitments to extend credit and standby letters of credit could be up to the contractual notional amount of those instruments. We use the same credit policies when analyzing the creditworthiness of counterparties as we do for extending loans to customers. No significant losses are anticipated as a result of these commitments.

55
Capital
Capital consists solely of common stock, retained earnings, and accumulated other comprehensive income (loss). We are authorized to raise capital through dividend reinvestment, employee and director stock purchases, and shareholder stock purchases. Pursuant to these authorizations, we issued 37,983 shares or $846 of common stock during the first six months of 2023, as compared to 36,238 shares or $907 of common stock during the same period in 2022. We also offer the Directors Plan in which participants purchase stock units through deferred fees, in lieu of cash payments. Pursuant to this plan, we increased shareholders’ equity by $428 and $249 during the six-month periods ended June 30, 2023 and 2022, respectively. We also grant restricted stock awards pursuant to the RSP. Pursuant to this plan, we increased shareholders’ equity by $128 during the first six months of 2023, as compared to $77 during the same period in 2022.
We have publicly announced a common stock repurchase plan. Pursuant to this plan, we repurchased 100,578 shares or $2,409 of common stock during the first six months of 2023 and 15,766 shares or $397 during the first six months of 2022. As of June 30, 2023, we were authorized to repurchase up to an additional 319,248 shares of common stock.
The FRB has established minimum risk-based capital guidelines. Pursuant to these guidelines, a framework has been established that assigns risk weights to each category of on and off-balance-sheet items to arrive at risk adjusted total assets. Regulatory capital is divided by the risk adjusted assets with the resulting ratio compared to the minimum standard to determine whether a corporation has adequate capital.
The common equity tier 1 capital ratio has a minimum requirement of 4.50%. The minimum standard for primary, or Tier 1 capital is 6.00% and the minimum standard for total capital is 8.00%. The minimum requirements presented below include the minimum required capital levels based on the Basel III Capital Rules. Capital requirements to be considered well capitalized are based upon prompt corrective action regulations, as amended to reflect the changes under the Basel III Capital Rules. The following table sets forth these requirements and our ratios as of:
June 30, 2023December 31, 2022
ActualMinimum Required - BASEL IIIRequired to be Considered Well CapitalizedActualMinimum Required - BASEL IIIRequired to be Considered Well Capitalized
Common equity tier 1 capital12.39 %7.00 %6.50 %12.91 %7.00 %6.50 %
Tier 1 capital12.39 %8.50 %8.00 %12.91 %8.50 %8.00 %
Total capital15.37 %10.50 %10.00 %15.79 %10.50 %10.00 %
Tier 1 leverage8.70 %4.00 %5.00 %8.61 %4.00 %5.00 %
Total capital includes Tier 1 capital and Tier 2 capital. Tier 2 capital includes a permissible portion of the allowances for loan and lease losses and subordinated debt, net of unamortized issuance costs. There are no significant regulatory constraints placed on our capital. At June 30, 2023, the Bank also exceeded minimum capital requirements.
Liquidity
Liquidity is monitored regularly by our ALCO, which consists of members of senior management. The committee reviews projected cash flows, key ratios, and liquidity available from both primary and secondary sources.
Our primary sources of liquidity are cash and cash equivalents and unencumbered AFS securities. These categories totaled $410,714 or 20.11% of assets as of June 30, 2023, compared to $488,981 or 24.08% as of December 31, 2022. The decrease in the amount and percentage of primary liquidity is a direct result of an increase in loans, decrease in market deposits, and a decrease in unencumbered AFS securities, collateralizing non-market funding. Liquidity is important for financial institutions because of their need to meet loan funding commitments, depositor withdrawal requests, and various other commitments including expansion of operations, investment opportunities, and payment of cash dividends. Based on these same factors, daily liquidity could vary significantly.
Deposit accounts are our primary source of funds. Our secondary sources include the ability to borrow from the FHLB, from the FRB, and through various correspondent banks in the form of federal funds purchased and a line of credit. These funding methods typically carry a higher interest rate than traditional market deposit accounts. Some borrowed funds, including FHLB advances, FRB Discount Window advances, and repurchase agreements, require us to pledge assets, typically in the form of AFS securities or loans, as collateral. As of June 30, 2023, we had available lines of credit of $312,211.
56
The frequency and complexity of our liquidity stress testing has increased since early 2020 and continues to evolve due to economic uncertainly as a result of COVID-19 and changes within the interest rate and economic environment. Our liquidity position remained strong at June 30, 2023, which is illustrated in the following table:
June 30
2023
Total cash and cash equivalents$29,880 
Available lines of credit
Fed funds lines with correspondent banks93,000 
FHLB borrowings186,284 
FRB Discount Window27,927 
Other lines of credit5,000 
Total available lines of credit312,211 
Unencumbered lendable value of FRB collateral, estimated1
360,000 
Total cash and liquidity$702,091 
(1)Includes estimated unencumbered lendable value of FHLB collateral of $260,000
The following table summarizes our sources and uses of cash for the six-month period ended June 30:
20232022$ Variance
Net cash provided by (used in) operating activities$14,941 $14,780 $161 
Net cash provided by (used in) investing activities(22,343)(70,681)48,338 
Net cash provided by (used in) financing activities(1,642)32,588 (34,230)
Increase (decrease) in cash and cash equivalents(9,044)(23,313)14,269 
Cash and cash equivalents January 138,924 105,330 (66,406)
Cash and cash equivalents June 30$29,880 $82,017 $(52,137)
Fair Value
We utilize fair value measurements to record fair value adjustments to certain assets and liabilities and to determine fair value disclosures. AFS securities, cash flow hedge derivative instruments and certain liabilities are recorded at fair value on a recurring basis. Additionally, from time to time, we may be required to record at fair value other assets on a nonrecurring basis, such as mortgage loans AFS, collateral dependent loans, goodwill, foreclosed assets, OMSR, and certain other assets and liabilities. These nonrecurring fair value adjustments typically involve the application of lower of cost or market accounting or write downs of individual assets.
For further information regarding fair value measurements see “Note 10 – Fair Value” of our interim condensed consolidated financial statements.
Market Risk
Our primary market risks are interest rate risk and liquidity risk. IRR is the exposure of our net interest income to changes in interest rates. IRR results from the difference in the maturity or repricing frequency of a financial institution's interest earning assets and its interest bearing liabilities. Managing IRR is the fundamental method by which financial institutions earn income and create shareholder value. Excessive exposure to IRR could pose a significant risk to our earnings and capital.
The FRB has adopted a policy requiring banks to effectively manage the various risks that can have a material impact on safety and soundness. The risks include credit, interest rate, liquidity, operational, and reputational. We have policies, procedures, and internal controls for measuring and managing these risks. Specifically, our ALCO policy and procedures include defining acceptable types and terms of investments and funding sources, liquidity requirements, limits on investments in long-term assets, limiting the mismatch in repricing opportunities of assets and liabilities, and the frequency of measuring and reporting to our Board of Directors.
The primary technique to measure IRR is simulation analysis. Simulation analysis forecasts the effects on the balance sheet structure and net interest income under a variety of scenarios that incorporate changes in interest rates, the shape of yield curves, interest rate relationships, loan prepayments, and funding sources. These forecasts are compared against net interest income projected in a stable interest rate environment. While many assets and liabilities reprice either at maturity or in accordance with their contractual terms, several balance sheet components demonstrate characteristics that require an evaluation
57
to more accurately reflect their repricing behavior. Key assumptions in the simulation analysis include prepayments on loans, probable calls of investment securities, changes in market conditions, loan volumes and loan pricing, deposit sensitivity, and customer preferences. These assumptions are inherently uncertain as they are subject to fluctuation and revision in a dynamic rate environment. As a result, the simulation analysis cannot precisely forecast the impact of rising and falling interest rates on net interest income. Actual results will differ from simulated results due to many other factors, including changes in balance sheet components, interest rate changes, changes in market conditions, and management strategies. We regularly monitor our projected net interest income sensitivity to ensure that it remains within established limits.
Gap analysis, the secondary method to measure IRR, measures the cash flows and/or the earliest repricing of our interest bearing assets and liabilities. This analysis is useful for measuring trends in the repricing characteristics of the balance sheet. Significant assumptions are required in this process because of the embedded repricing options contained in assets and liabilities. Residential real estate and consumer loans allow the borrower to repay the balance prior to maturity without penalty, while commercial and agricultural loans may have prepayment penalties. The amount of prepayments is dependent upon many factors, including the interest rate of a given loan in comparison to the current offering rates, the level of home sales, and the overall availability of credit in the market place. Generally, a decrease in interest rates will result in an increase in cash flows from these assets. A significant portion of our securities are callable or have prepayment options. The call and prepayment options are more likely to be exercised in a period of decreasing interest rates. Savings and demand accounts may generally be withdrawn on request without prior notice. The timing of cash flows from these deposits is estimated based on historical experience. Certificates of deposit have penalties that discourage early withdrawals.
We do not believe there has been a material change in the nature or categories of our primary market risk exposure, or the particular markets that present the primary risk of loss. We do not know of or expect there to be any material change in the general nature of our primary market risk exposure in the near term, and we do not expect to make material changes to our market risk methods in the near term. We may change those methods in the future to adapt to changes in circumstances or to implement new techniques.
Gap analysis is also utilized as a method to measure interest rate sensitivity. Interest rate sensitivity is determined by the amount of earning assets and interest bearing liabilities repricing within a specific time period, and their relative sensitivity to a change in interest rates. We strive to achieve reasonable stability in the net interest margin through periods of changing interest rates. One specific focus of interest rate sensitivity is the loan portfolio, primarily with commercial and agricultural loans..
Item 3. Quantitative and Qualitative Disclosures about Market Risk.
The information presented in the section captioned “Market Risk” in Management's Discussion and Analysis of Financial Condition and Results of Operations is incorporated herein by reference.
Item 4. Controls and Procedures.
DISCLOSURE CONTROLS AND PROCEDURES
We carried out an evaluation, under the supervision and with the participation of the Principal Executive Officer and Principal Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures (as such term is defined in Rules 13a-15(e) and 15(d)-15(e) under the Exchange Act) as of June 30, 2023, pursuant to Exchange Act Rule 13a-15. Based upon that evaluation, the Principal Executive Officer and Principal Financial Officer concluded that our disclosure controls and procedures as of June 30, 2023, were effective to ensure that information required to be disclosed in reports that we file or submit under the Exchange Act are recorded, processed, summarized and reported within the time periods specified in SEC rules and forms.
CHANGES IN INTERNAL CONTROL OVER FINANCIAL REPORTING
During the most recent fiscal quarter, no change occurred in our internal control over financial reporting that materially affected, or is likely to materially affect, our internal control over financial reporting.

58
PART II – OTHER INFORMATION
Item 1. Legal Proceedings.
We are not involved in any material legal proceedings. We are involved in ordinary, routine litigation incidental to our business; however, no such routine proceedings are expected to result in any material adverse effect on operations, earnings, financial condition, or cash flows.
Item 1A. Risk Factors.
There have been no material changes to the risk factors disclosed in Item 1A in our Annual Report on Form 10-K for the year ended December 31, 2022.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.
(A)None
(B)None
(C)Repurchases of Common Stock
We have adopted and publicly announced a common stock repurchase plan. The plan was last amended on April 28, 2021, to allow for the repurchase of an additional 500,000 shares of common stock after that date. These authorizations do not have expiration dates. As common shares are repurchased under this plan, they are retired with the status of authorized, but unissued, shares.
The following table provides information for the three-month period ended June 30, 2023, with respect to this plan:
 Common Shares RepurchasedTotal Number of Common Shares Purchased as Part of Publicly Announced Plan or ProgramMaximum Number of Common Shares That May Yet Be Purchased Under the Plans or Programs
NumberAverage Price
Per Common Share
March 31, 2023380,547 
April 1 - 3047,490 $24.87 47,490 333,057 
May 1 - 317,727 20.32 7,727 325,330 
June 1 - 306,082 21.70 6,082 319,248 
June 30, 202361,299 $23.98 61,299 319,248 
Item 3. Defaults Upon Senior Securities.
Not applicable.
Item 4. Mine Safety Disclosures.
Not applicable.
Item 5. Other Information.
Not applicable.
59

Item 6. Exhibits.
(a) Exhibits
Exhibit NumberExhibits
4.1
4.2
10.1
10.2
31.1
31.2
32
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)
104Cover 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.
60
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
Isabella Bank Corporation
Date:July 28, 2023/s/ Jae A. Evans
Jae A. Evans
President and Chief Executive Officer
(Principal Executive Officer)
Date:July 28, 2023/s/ Neil M. McDonnell
Neil M. McDonnell
Chief Financial Officer
(Principal Financial Officer)
61

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