# Isabella Bank Corp: Form 10-Q for the period ended Sep 30, 2023

- Company: [Isabella Bank Corp](/companies/isba.md) (CIK 842517)
- Form: 10-Q
- Filed: 2023-10-27
- Accepted by EDGAR: Oct 27, 2023, 14:19 ET
- Period: 2023-09-30
- Accession: 0000842517-23-000186
- Inline XBRL: yes
- Main document: https://www.sec.gov/Archives/edgar/data/842517/000084251723000186/isba-20230930.htm
- All documents and exhibits: https://www.sec.gov/Archives/edgar/data/842517/000084251723000186/

## Figures reported in this filing

Standardized XBRL line items for the period ended 2023-09-30.

| Line item | Period | Value | XBRL concept |
| --- | --- | ---: | --- |
| Interest expense | 3 months, 2023-07-01 to 2023-09-30 | $6.2m | us-gaap:InterestExpense |
| Interest expense | 9 months, 2023-01-01 to 2023-09-30 | $14.2m | us-gaap:InterestExpense |
| Income tax | 3 months, 2023-07-01 to 2023-09-30 | $937.0k | us-gaap:IncomeTaxExpenseBenefit |
| Income tax | 9 months, 2023-01-01 to 2023-09-30 | $2.9m | us-gaap:IncomeTaxExpenseBenefit |
| Net income | 3 months, 2023-07-01 to 2023-09-30 | $4.4m | us-gaap:NetIncomeLoss |
| Net income | 9 months, 2023-01-01 to 2023-09-30 | $14.4m | us-gaap:NetIncomeLoss |
| Diluted EPS | 3 months, 2023-07-01 to 2023-09-30 | $0.58 | us-gaap:EarningsPerShareDiluted |
| Diluted EPS | 9 months, 2023-01-01 to 2023-09-30 | $1.89 | us-gaap:EarningsPerShareDiluted |
| Basic EPS | 3 months, 2023-07-01 to 2023-09-30 | $0.59 | us-gaap:EarningsPerShareBasic |
| Basic EPS | 9 months, 2023-01-01 to 2023-09-30 | $1.91 | us-gaap:EarningsPerShareBasic |
| Diluted shares (weighted) | 3 months, 2023-07-01 to 2023-09-30 | 7,570,374 shares | us-gaap:WeightedAverageNumberOfDilutedSharesOutstanding |
| Diluted shares (weighted) | 9 months, 2023-01-01 to 2023-09-30 | 7,591,664 shares | us-gaap:WeightedAverageNumberOfDilutedSharesOutstanding |
| Operating cash flow | 9 months, 2023-01-01 to 2023-09-30 | $18.5m | us-gaap:NetCashProvidedByUsedInOperatingActivities |
| Capital expenditure | 9 months, 2023-01-01 to 2023-09-30 | $2.9m | us-gaap:PaymentsToAcquirePropertyPlantAndEquipment |
| Dividends paid | 9 months, 2023-01-01 to 2023-09-30 | $6.2m | us-gaap:PaymentsOfDividendsCommonStock |
| Cash and equivalents | at 2023-09-30 | $115.9m | us-gaap:CashAndCashEquivalentsAtCarryingValue |
| Total assets | at 2023-09-30 | $2.12bn | us-gaap:Assets |
| Total liabilities | at 2023-09-30 | $1.93bn | us-gaap:Liabilities |
| Shareholders' equity | at 2023-09-30 | $185.1m | us-gaap:StockholdersEquity |

## Management's discussion and analysis

As filed, 62,774 characters.

### ISABELLA BANK CORPORATION FINANCIAL REVIEW

(Dollars in thousands except per share amounts)

The following is management's discussion and analysis of our financial condition and results of operations for the unaudited three and nine-month periods ended September 30, 2023 and 2022. This analysis should be read in conjunction with our Annual Report on Form 10-K for the year ended December 31, 2022 and with the unaudited interim condensed consolidated financial statements and notes, beginning on page 4 of this report.

### Executive Summary

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

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

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

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

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

### Recent Events and Legislation

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

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

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

### Reclassifications

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

### Subsequent Events

We evaluated subsequent events after September 30, 2023 through the date our interim condensed consolidated financial statements were issued for potential recognition and disclosure. No subsequent events require financial statement recognition or disclosure between September 30, 2023 and the date our interim condensed consolidated financial statements were issued.

### 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:

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

(1) At end of period

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

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

(1) At end of period

### 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.

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

(1) Includes loans and mortgage loans AFS

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

(1) Includes loans and mortgage loans AFS

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

### 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.

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

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

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

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

46

### Past Due and Nonaccrual Loans

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

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

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

The following table summarizes nonaccrual loans as of:

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

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

### Nonperforming Assets

The following table summarizes our nonperforming assets as of:

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

47

### ACL - Loans

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

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

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

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

48

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

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

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

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

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

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

### Noninterest Income and Noninterest Expenses

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

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

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

The decline in service charges and fees on deposit accounts is the result of the removal of NSF fees, effective May 1, 2023. As such, we do not anticipate service charges and fees on deposit accounts for 2023 to exceed 2022 levels.

OMSR income results are driven, in part, by changes in offering rates on residential mortgage loans, anticipated prepayments in the servicing-retained portfolio, and the volume of loans within the servicing-retained portfolio. Decreased prepayment speeds, as a result of an increase in interest rates, was the primary driver of the income recognized during 2022. A decline in volume of originated loans and the balance of loans serviced led to OMSR losses during the first nine months of 2023. Income during the remainder of 2023 will be driven by the volume of loans originated within the servicing-retained portfolio, along with any further future increases in interest rates.

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

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

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

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

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

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

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

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

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

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

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

### Analysis of Changes in Financial Condition

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

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

The following table outlines the changes in loan balances:

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

The following table displays loan balances as of:

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

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

The following table outlines the changes in deposit balances:

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

The following table displays deposit balances as of:

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

Total deposits have fluctuated significantly over the past 12 months with an overall decline in non-contractual deposits, such as demand and savings deposits. At the end of the third quarter, we experienced significant deposit growth related primarily to interest bearing demand and certificates of deposit accounts. We have experienced significant growth in certificates of deposit during the first nine months of 2023 as a result of the recent increase in the interest rate environment. We expect interest rates to continue to rise through the fourth quarter of 2023 due to competitive pressures, and anticipate a continuation in the shift of customers moving to higher interest earning products.

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

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

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

The following table displays borrowed funds balances as of:

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

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

### Contractual Obligations and Loan Commitments

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

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

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

### Capital

Capital consists solely of common stock, retained earnings, and accumulated other comprehensive income (loss). We are authorized to raise capital through dividend reinvestment, employee and director stock purchases, and shareholder stock purchases. Pursuant to these authorizations, we issued 55,456 shares or $1,208 of common stock during the first nine months of 2023, as compared to 55,549 shares or $1,344 of common stock during the same period in 2022. We also offer the Directors Plan in which participants purchase stock units through deferred fees, in lieu of cash payments. Pursuant to this plan, we increased shareholders’ equity by $477 and $346 during the nine-month periods ended September 30, 2023 and 2022, respectively. We also grant restricted stock awards pursuant to the RSP. Pursuant to this plan, we increased shareholders’ equity by $219 during the first nine months of 2023, as compared to $108 during the same period in 2022.

We have publicly announced a common stock repurchase plan. Pursuant to this plan, we repurchased 124,320 shares or $2,906 of common stock during the first nine months of 2023 and 23,842 shares or $585 during the first nine months of 2022. As of September 30, 2023, we were authorized to repurchase up to an additional 295,505 shares of common stock.

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

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

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

Total capital includes Tier 1 capital and Tier 2 capital. Tier 2 capital includes a permissible portion of the allowances for credit losses and subordinated debt, net of unamortized issuance costs. There are no significant regulatory constraints placed on our capital. At September 30, 2023, the Bank exceeded all minimum capital requirements.

### Liquidity

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

Our primary sources of liquidity are cash and cash equivalents and unencumbered AFS securities. These categories totaled $457,002 or 21.57% of assets as of September 30, 2023, compared to $488,981 or 24.08% as of December 31, 2022. The decrease in the amount and percentage of primary liquidity is a direct result of an increase in loans and a decrease in unencumbered AFS securities, collateralizing non-market funding. Liquidity is important for financial institutions because of their need to meet loan funding commitments, depositor withdrawal requests, and various other commitments including expansion of operations, investment opportunities, and payment of cash dividends. Based on these same factors, daily liquidity could vary significantly.

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

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

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

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

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

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

### Fair Value

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

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

### Market Risk

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

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

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

## Market risk

As filed, 190 characters.

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.

## Controls and procedures

As filed, 1,098 characters.

### DISCLOSURE CONTROLS AND PROCEDURES

We carried out an evaluation, under the supervision and with the participation of the Principal Executive Officer and Principal Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures (as such term is defined in Rules 13a-15(e) and 15(d)-15(e) under the Exchange Act) as of September 30, 2023, pursuant to Exchange Act Rule 13a-15. Based upon that evaluation, the Principal Executive Officer and Principal Financial Officer concluded that our disclosure controls and procedures as of September 30, 2023, were effective to ensure that information required to be disclosed in reports that we file or submit under the Exchange Act are recorded, processed, summarized and reported within the time periods specified in SEC rules and forms.

### CHANGES IN INTERNAL CONTROL OVER FINANCIAL REPORTING

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

## Risk factors

As filed, 148 characters.

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.

Filed Oct 27, 2023.
Source: SEC EDGAR, the filing index for accession 0000842517-23-000186. Last ingested by Listed: Nov 2, 2026, 18:25 ET. No prices; not investment advice.