ISABELLA BANK Corp [ISBA] Filings

10-K 1 isba-20221231.htm 10-K isba-20221231

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-K


☒			ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the fiscal year ended December 31, 2022


☐			TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from to

Commission File Number: 0-18415

Isabella Bank Corporation

(Exact name of registrant as specified in its charter)


Michigan						38-2830092
(State or other jurisdiction of incorporation or organization)						(I.R.S. Employer identification No.)

401 North Main Street, Mount Pleasant, Michigan 48858

(Address of principal executive offices) (Zip Code)

Registrant’s telephone number, including area code (989) 772-9471

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


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

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

Common Stock - No Par Value

(Title of Class)

Indicated by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. ☐ Yes ☒ No

Indicated by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. ☐ Yes ☒ No

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 definition 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 has filed a report on and attestation to its management’s assessment of the effectiveness of its internal control over financial reporting under Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C. 7262(b)) by the registered public accounting firm that prepared or issued its audit report. ☒

If securities are registered pursuant to Section 12(b) of the Act, indicate by check mark whether the financial statements of the registrant included in the filing reflect the correction of an error to previously issued financial statements. ☐

Indicate by check mark whether any of those error corrections are restatements that required a recovery analysis of incentive-based compensation received by any of the registrant's executive officers during the relevant recovery period pursuant to §240.10D-1(b). ☐

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). ☐ Yes ☒ No

The aggregate market value of the voting stock held by non-affiliates of the registrant was $168,708,000 as of the last business day of the registrant’s most recently completed second fiscal quarter.

The number of common shares outstanding of the registrant’s Common Stock (no par value) was 7,561,414 as of March 3, 2023.

DOCUMENTS INCORPORATED BY REFERENCE

(Such documents are incorporated herein only to the extent specifically set forth in response to an item herein.)

Portions of the Isabella Bank Corporation Proxy Statement for its Annual Meeting of Shareholders to be held May 9, 2023 are incorporated by reference in this Form 10-K in response to Part III. The Isabella Bank Corporation Proxy Statement will be mailed on or before March 27, 2023.

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ISABELLA BANK CORPORATION

ANNUAL REPORT ON FORM 10-K

Table of Contents

PART I

Item 1.

Business

Item 1A.

Risk Factors

Item 1B.

Unresolved Staff Comments

Item 2.

Properties

Item 3.

Legal Proceedings

Item 4.

Mine Safety Disclosures

PART II

Item 5.

Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities

Item 6.

[Reserved]

Item 7.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

Item 7A.

Quantitative and Qualitative Disclosures about Market Risk

Item 8.

Financial Statements and Supplementary Data

Item 9.

Changes in and Disagreements With Accountants on Accounting and Financial Disclosure

Item 9A.

Controls and Procedures

Item 9B.

Other Information

Item 9C.

Disclosure Regarding Foreign Jurisdictions that Prevent Inspections

PART III

Item 10.

Directors, Executive Officers and Corporate Governance

Item 11.

Executive Compensation

Item 12.

Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters

Item 13.

Certain Relationships and Related Transactions, and Director Independence

Item 14.

Principal Accountant Fees and Services

PART IV

Item 15.

Exhibits and Financial Statement Schedules

Item 16.

Form 10-K Summary

SIGNATURES

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Forward Looking Statements

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

Glossary of Acronyms and Abbreviations

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


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

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PART I

Item 1. Business.

General

Isabella Bank Corporation is a registered financial services holding company that was incorporated in September 1988 under Michigan law. The Corporation's wholly owned subsidiary, Isabella Bank, has 29 banking offices located throughout Clare, Gratiot, Isabella, Mecosta, Midland, Montcalm, and Saginaw counties. The area includes significant agricultural production, manufacturing, retail, gaming and tourism, and several colleges and universities.

As used in Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations as well as in Item 8. Financial Statements and Supplementary Data, 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.

We are a community bank with a focus on providing high quality, personalized service at a fair price. We offer a broad array of banking and wealth management services to businesses, institutions, individuals and their families. We compete with other commercial banks, savings and loan associations, mortgage brokers, finance companies, credit unions, retail brokerage firms, and other companies providing financial services.

Lending activities include loans for commercial and agricultural operations and real estate purposes, residential real estate loans, and consumer loans. We limit lending activities primarily to local markets and purchased loans from the secondary market are minimal. We do not make loans to fund leveraged buyouts, have no foreign corporate or government loans, and have limited holdings of corporate debt securities. Our general lending philosophy is to limit concentrations to individuals and business segments. For additional information related to our lending strategies and policies, see “Note 4 – Loans and ALLL” of “Notes to Consolidated Financial Statements” in Item 8. Financial Statements and Supplementary Data.

Deposit services offered include checking accounts, savings accounts, certificates of deposit, direct deposits, cash management services, mobile and internet banking, electronic bill pay services, and automated teller machines. We also offer full service investment management, trust and estate services.

As of December 31, 2022, we had 347 full-time equivalent employees. We provide group life, health, accident, disability, and other insurance programs as well as a number of other employee benefit programs. None of our workforce is subject to collective bargaining agreements.

Available Information

Our SEC filings (including our Annual Report on Form 10-K, Quarterly Reports on Form 10-Q, Definitive Proxy Statements, Current Reports on Form 8-K and amendments to those reports) are available through our website (www.isabellabank.com). We will provide paper copies of our SEC reports free of charge upon request by a shareholder.

The SEC maintains a website (www.sec.gov) that contains reports, proxy and information statements and other information regarding Isabella Bank Corporation (CIK #0000842517) and other issuers.

Supervision and Regulation

The earnings and growth of the banking industry are affected by the credit policies of monetary authorities, including the FRB. An important function of the FRB is to regulate the national supply of bank credit in order to combat recessions and respond to inflationary pressures. Among the instruments of monetary policy used by the FRB to implement these objectives are open market operations in U.S. Treasury and U.S. Government Agency securities, changes in the discount rate on member bank borrowings, and changes in reserve requirements against member bank deposits. These methods are used in varying combinations to influence overall growth of bank loans, investments and deposits and also affect interest rates charged on loans or paid for deposits. The monetary policies of the FRB have had a significant effect on the operating results of commercial banks and related financial service providers in the past and are expected to continue to do so in the future. The effect of such policies upon our future business and earnings cannot be predicted.

We, as a financial holding company, are regulated under the BHC Act, and are subject to the supervision of the FRB. We are registered as a financial services holding company with the FRB and are subject to reporting requirements and inspections and audits. Under FRB policy, we are expected to act as a source of financial strength to the Bank and to commit resources to support its subsidiaries. This support may be required at times when, in the absence of such FRB policy, it would not otherwise be required to provide support.

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Under Michigan law, if the capital of a Michigan state chartered bank has become impaired by losses or otherwise, the Commissioner of the DIFS may require that the deficiency in capital be met by assessment upon the bank’s shareholders. Each shareholder would be responsible for a pro rata share of the deficiency, based on the amount of capital stock held by each shareholder. If an assessment is not paid by any shareholder within 30 days of the date of notice to the shareholder, sale of their stock will occur in order to pay such assessment.

Any capital loans by a bank holding company to any of its subsidiary banks are subordinate in right of payment to deposits and to certain other indebtedness of such subsidiary bank. In the event of a bank holding company’s bankruptcy, any commitment by the bank holding company to a federal bank regulatory agency to maintain the capital of a subsidiary bank will be assumed by the bankruptcy trustee and entitled to a priority of payment. This priority would apply to guarantees of capital plans under the FDIC Improvement Act of 1991.

SOX contains important requirements for public companies in the area of financial disclosure and corporate governance. In accordance with Section 302(a) of SOX, written certifications by our principal executive, financial, and accounting officers are required. These certifications attest that our quarterly and annual reports filed with the SEC do not contain any untrue statement of a material fact (see the certifications filed as Exhibits 31.1 and 31.2 to this Form 10-K for such certification of consolidated financial statements and other information for this 2022 Form 10-K). We have also implemented a program designed to comply with Section 404 of SOX, which included the identification of significant processes and accounts, documentation of the design effectiveness over process and entity level controls, and testing of the operating effectiveness of key controls. See Item 9A. Controls and Procedures for our evaluation of disclosure controls and procedures and internal control over financial reporting.

Certain additional information concerning regulatory guidelines for capital adequacy and other regulatory matters is presented herein under the caption “Capital” in Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations and in “Note 9 – Off-Balance-Sheet Activities, Commitments and Other Matters” and “Note 10 – Minimum Regulatory Capital Requirements” of “Notes to Consolidated Financial Statements” in Item 8. Financial Statements and Supplementary Data.

Isabella Bank

The Bank is supervised and regulated by DIFS and the FRB. These agencies and federal and state laws extensively regulate various aspects of the banking business including, among other things, permissible types and amounts of loans, investments and other activities, capital adequacy, branching, interest rates on loans and deposits, and the safety and soundness of banking practices.

Our deposits are insured up to applicable limits by the DIF of the FDIC and are subject to deposit insurance assessments to maintain the DIF. The FDIC assesses insurance premiums based upon a financial ratios method that takes into account asset and capital levels and supervisory ratings.

Banking laws and regulations restrict transactions by insured banks owned by a bank holding company. These restrictions include loans to and certain purchases from the parent holding company, non-bank and bank subsidiaries of the parent holding company. Additional restrictions apply to principal shareholders, officers, directors and their affiliates, and investments by the subsidiary bank in the shares or securities of the parent holding company (or any of the other non-bank or bank affiliates), or acceptance of such shares or securities as collateral security for loans to any borrower.

The Bank is subject to legal limitations on the frequency and amount of dividends that can be paid to Isabella Bank Corporation. For example, a Michigan state chartered bank may not declare a cash dividend or a dividend in kind except out of net profits then on hand after deducting all losses and bad debts, and then only if it will have a surplus amounting to not less than 20% of its capital after the payment of the dividend. Moreover, a Michigan state chartered bank may not declare or pay any cash dividend or dividend in kind until the cumulative dividends on its preferred stock, if any, have been paid in full. Further, if the surplus of a Michigan state chartered bank is at any time less than the amount of its capital, before the declaration of a cash dividend or dividend in kind, it must transfer to surplus not less than 10% of its net profits for the preceding six months (in the case of quarterly or semi-annual dividends) or the preceding two consecutive six month periods (in the case of annual dividends).

The payment of dividends by Isabella Bank Corporation and the Bank is also affected by various regulatory requirements and policies, such as the requirement to keep adequate capital in compliance with regulatory guidelines. Federal laws impose further restrictions on the payment of dividends by insured banks that fail to meet specified capital levels. The FDIC may prevent an insured bank from paying dividends if the bank is in default of payment of any assessment due to the FDIC. In addition, payment of dividends by a bank may be prevented by the applicable federal regulatory authority if such payment is determined, by reason of the financial condition of such bank, to be an unsafe and unsound banking practice. The FRB and the

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FDIC have issued policy statements providing that bank holding companies and insured banks should generally pay dividends only out of current operating earnings. Additionally, the FRB Board of Governors requires a bank holding company to notify the FRB prior to increasing its cash dividend by more than 10% over the prior year.

The aforementioned regulations and restrictions may limit our ability to obtain funds from the Bank for our cash needs, including payment of dividends and operating expenses.

The activities and operations of the Bank are also subject to various federal and state laws and regulations.

Item 1A. Risk Factors.

In the normal course of business, we are exposed to various risks. These risks, if not managed correctly, could have a significant impact on our earnings, capital, share price, and ability to pay dividends. In order to effectively monitor and control the following risks, we utilize an enterprise risk model. We balance our strategic goals, including revenue and profitability objectives, with associated risks through the use of policies, systems, and procedures which have been adopted to identify, assess, control, monitor, and manage each risk area. We continually review the adequacy and effectiveness of these policies, systems, and procedures.

Our enterprise risk process covers each of the following areas.

The COVID-19 pandemic may adversely affect our business

Unexpected and unprecedented changes have occurred since early 2020 as the result of COVID-19. The World Health Organization declared the situation a global pandemic. The pandemic created significant market volatility, economic uncertainty, and disruption to normal business operations around the world, with slowdowns and shutdowns affecting entire industries.

The extent to which COVID-19 impacts our business will depend on future developments, which remain uncertain and cannot be predicted. We expect the significance of the COVID-19 pandemic, including the extent of its effect on our financial and operational results, to be dictated by, among other factors, its duration, the success of efforts to contain it, and the impact of actions taken in response. Uncertainty created by the COVID-19 pandemic is pervasive, and has impacted our financial results, operations, customers, vendors, and various areas of risk. Areas of risk may include, but are not limited to, cybersecurity, credit, interest rate, litigation, and risk related to vendor services. With the uncertainty created by COVID-19, it's challenging to determine the full impact on our ongoing financial and operational results. 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.

Changes in credit quality and required allowance for loan and lease losses

To manage the credit risk arising from lending activities, our most significant source of credit risk, we maintain sound underwriting policies and procedures. We continuously monitor asset quality in order to determine the appropriateness of valuation allowances. These valuation allowances take into consideration various factors including, but not limited to, local, regional, and national economic conditions.

We maintain an ALLL to reserve for estimated incurred loan losses within our loan portfolio. The level of the ALLL reflects our evaluation of industry concentrations; specific credit risks; loan loss experience; loan portfolio quality; and economic, political and regulatory conditions. The determination of the appropriate level of the ALLL inherently involves a high degree of subjectivity and requires us to make significant estimates, all of which may undergo material changes.

Changes in economic conditions

An economic downturn within our local markets, as well as downturns in the state, national, or global markets, could negatively impact household and corporate incomes. This could lead to decreased demand for both loan and deposit products and lead to an increase of customers who fail to pay interest or principal on their loans. We continually monitor key economic indicators in an effort to anticipate the possible effects of downturns in the local, regional, and national economies.

Our success depends primarily on the general economic conditions of the State of Michigan and the specific local markets in which we operate. We provide banking and financial services to customers located primarily in the Clare, Gratiot, Isabella, Mecosta, Midland, Montcalm, and Saginaw counties in Michigan. The local economic conditions in these areas have a significant impact on the demand for our products and services, as well as the ability of our customers to repay loans, the value of the collateral securing loans, and the stability of our deposit funding sources. A significant decline in general economic conditions, caused by inflation, recession, acts of terrorism, international or domestic occurrences, a health crisis,

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unemployment, changes in securities markets or other factors could impact these local economic conditions and, in turn, could have a material adverse effect on our financial condition and results of operations.

Interest rate risk

IRR results from the timing differences in the maturity or repricing frequency of a financial institution’s interest earning assets and its interest bearing liabilities. We monitor the potential effects of changes in interest rates through simulations and gap analyses. To help mitigate the effects of changes in interest rates, we make significant efforts to stagger projected cash flows and maturities of interest sensitive assets and liabilities.

Liquidity risk

Liquidity risk is the risk to earnings or capital arising from our inability to meet our obligations when they come due without incurring unacceptable and significant costs. Liquidity risk includes the inability to manage unplanned changes in funding sources, or failure to address changes in market conditions that affect the ability to liquidate assets quickly and with minimal loss in value. We have significant borrowing capacity through correspondent banks and the ability to sell certain investments to fund potential cash shortages, which we may use to help mitigate this risk.

The value of investment securities may be negatively impacted by fluctuations in the market

A volatile, illiquid market or decline in credit quality could require us to recognize an OTTI loss related to the investment securities held in our portfolio. We consider many factors in determining whether an OTTI exists including the length of time and extent to which fair value has been less than cost, the investment credit rating, and the probability that the issuer will be unable to pay the amount when due. The presence of these factors could lead to impairment charges. These risks are mitigated by the fact that we do not intend to sell the security in an unrealized loss position and it is more likely than not that we will not have to sell the security before recovery of its cost basis.

Operational risk

Operational risk is the risk of loss resulting from failed or inadequate internal processes, staffing, information technology systems, or external events. These factors may lead to reputation risk and transaction risk. Reputation risk is managed by developing and retaining marketplace confidence in handling customers’ financial transactions in an appropriate manner and protecting our safety and soundness. Transaction risk includes losses from fraud, error, the inability to deliver products or services, and loss or theft of information. Transaction risk also encompasses product development and delivery, transaction processing, information technology systems, and the internal control environment.

To minimize potential losses due to operational risks, we have established a robust system of internal controls that are regularly tested by our internal audit department in conjunction with the services of certified public accounting firms who assist in performing such internal audit work. The focus of these internal audit procedures is to verify the validity and appropriateness of various transactions, processes, and controls. The results of these procedures are reported to our Audit Committee.

The adoption of, violations of, or nonconformance with laws, rules, regulations, or prescribed practices

The financial services industry and public companies are extensively regulated and must meet regulatory standards set by the FDIC, DIFS, FRB, FASB, SEC, PCAOB, CFPB, and other regulatory bodies. Federal and state laws and regulations are designed primarily to protect deposit insurance funds and consumers, and not necessarily to benefit our shareholders. The nature, extent, and timing of the adoption of significant new laws, changes in existing laws, or repeal of existing laws may have a material impact on our business, results of operations, and financial condition, the effect of which is impossible to predict at this time.

Our compliance department annually assesses the adequacy and effectiveness of our processes for controlling and managing our principal compliance risks.

Changes to the financial services industry as a result of regulatory changes or actions, or significant litigation

The financial services industry is extensively regulated by state and federal regulation that governs almost all aspects of our operations. Laws and regulations may change from time to time and are primarily intended for the protection of consumers, depositors, and the deposit insurance fund. The impact of any changes to laws and regulations or other actions by regulatory agencies may negatively impact us or our ability to increase the value of our business. Regulatory authorities have extensive discretion in connection with their supervisory and enforcement activities, including the imposition of restrictions on the operation of an institution, the classification of assets by the institution, and the appropriateness of an institution’s ALLL. Future regulatory changes or accounting pronouncements may increase our regulatory capital requirements or adversely affect

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our regulatory capital levels. Additionally, actions by regulatory agencies or significant litigation against us could require the dedication of significant time and resources to respond to those actions and may lead to penalties.

We may not adjust to changes in the financial services industry

Our financial performance depends in part on our ability to maintain and grow our core deposit customer base and expand our financial services to our existing and new customers. The increasingly competitive environment is, in part, a result of changes in technology and product delivery systems and the accelerating pace of consolidation among financial service providers. New competitors may emerge to increase the degree of competition for our products and services. Financial services and products are also constantly changing. Our financial performance is dependent upon customer demand for our products and services, our ability to develop and offer competitive financial products and services, and our ability to adapt to enhancements in financial technology.

We may be required to recognize an impairment of goodwill

Goodwill represents the excess of the amounts paid to acquire subsidiaries over the fair value of their net assets at the date of acquisition. The majority of the recorded goodwill is related to acquisitions of other banks, which were subsequently merged into Isabella Bank. If it is determined that the goodwill is impaired, we must write-down the goodwill by the amount of the impairment.

We may face pressure from purchasers of our residential mortgage loans to repurchase loans sold or reimburse purchasers for losses related to such loans

We generally sell the fixed rate long-term residential mortgage loans we originate to the secondary market. The purchasers of residential mortgage loans, such as government sponsored entities, increased their efforts to require sellers of residential mortgage loans to either repurchase loans previously sold, or reimburse the purchasers for losses incurred on foreclosed loans due to actual or alleged failure to strictly conform to the terms of the contract.

Consumers may decide not to use banks to complete their financial transactions

Technology and other changes are allowing customers to complete financial transactions without the involvement of banks. For example, consumers can now pay bills and transfer funds directly without banks. The process of diminishing or removing banks as intermediaries in financial transactions could result in the loss of fee income, as well as the loss of customer deposits and income generated from those deposits.

Unauthorized disclosure of sensitive or confidential client or customer information, whether through cyber attacks, breach of computer systems or other means

Our products, services and systems are accessed through critical company or third-party operations. This involves the storage, processing and transmission of sensitive data, including proprietary or confidential data, regulated data, and personal information of employees and customers. Successful breaches, employee wrongdoing, or human or technological error could result in unauthorized access to, disclosure, modification, misuse, loss, or destruction of company, customer, or other third party data or systems. Examples include theft of sensitive, regulated, or confidential data, including personal information; loss of access to critical data or systems through ransomware, destructive attacks, or other means; and business delays, service or system disruptions, or denials of service.

Cybersecurity incidents have increased in number and severity and it is expected that these trends will continue. Should we, or third parties we do business with, fall victim to successful cyber attacks or experience other cybersecurity incidents, including the loss of personally identifiable customer or other sensitive data, the result could severely damage our reputation, expose us to the risks of litigation and liability, disrupt our operations, and increase cybersecurity or other insurance premiums.

We have cybersecurity insurance, in the event a cybersecurity attack were to occur, covering expenses related to notification, credit monitoring, investigation, crisis management, public relations, and legal advice. In addition, we maintain insurance to cover restoration of data, certain physical damage, or third-party injuries caused by potential cybersecurity incidents. However, damage and claims arising from such incidents may not be covered or may exceed the amount of any insurance available. Insurance policies are reviewed annually in detail.

A strong reputation is vital and requires utmost protection. An operating incident, significant cybersecurity disruption, or other adverse events may have a negative impact on our reputation which could make it more difficult for us to compete successfully for new opportunities, obtain necessary regulatory approvals, or severely reduce consumer demand for our products.

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Our estimates and assumptions may be incorrect

Our consolidated financial statements conform with GAAP, which require us to make estimates and assumptions that affect the amounts reported in the consolidated financial statements. Estimates are based on information available to us at the time the estimates are made. Actual results could differ from estimates. For further discussion regarding significant accounting estimates, see “Note 1 – Nature of Operations and Summary of Significant Accounting Policies” of “Notes to Consolidated Financial Statements” in Item 8. Financial Statements and Supplementary Data.

Disruption of infrastructure

Our operations depend upon our technological and physical infrastructure, including our equipment and facilities. Extended disruption of our vital infrastructure by fire, power loss, natural disaster, telecommunications failure, computer hacking and viruses, or other events outside of our control, could have a significant impact on our operations. We have developed and tested disaster recovery plans for all significant aspects of our operations.

Anti-takeover provisions

Our articles of incorporation include anti-takeover provisions that require a two-thirds majority vote of our shareholders to approve a sale of the Corporation. Additionally, changes to our articles of incorporation must be approved by a two-thirds majority vote of our shareholders.

Item 1B. Unresolved Staff Comments.

None.

Item 2. Properties.

Our executive offices are located at 401 North Main Street in Mount Pleasant, Michigan. In addition to this location, we own 28 branches, two operations centers, our previous main office building and vacant land. We also lease property in Saginaw, Michigan which serves as a full-service branch. Our facilities' current, planned, and best use is for conducting our current activities, with the exception of our previous main office location which is vacant. We continually monitor and assess the need for expansion and/or improvement of all facilities. In our opinion, each facility has sufficient capacity and is in good condition.

Item 3. Legal Proceedings.

We are not involved in any material legal proceedings. While we are involved in ordinary, routine litigation incidental to our business, no such routine proceedings are expected to result in any material adverse effect on our consolidated operations, earnings, financial condition, or cash flows.

Item 4. Mine Safety Disclosures.

Not applicable.

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PART II

Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities.

(Dollars in thousands except per share amounts)

Common Stock and Dividend Information

Our authorized common stock consists of 15,000,000 shares, of which 7,559,421 shares are issued and outstanding as of December 31, 2022. As of that date, there were 2,739 shareholders of record.

Our common stock is traded in the over-the-counter market. Our common stock is quoted on the OTCQX market tier of the OTC Markets Group Inc.’s ("OTC Markets") electronic quotation system (www.otcmarkets.com) under the symbol “ISBA”. Other trades in our common stock occur in privately negotiated transactions from time to time of which we may have little or no information.

We have reviewed the information available as to the range of reported high and low transactions as reported by OTC Markets. The following table sets forth our compilation of that information for the periods indicated. Price information obtained from OTC Markets reflects inter-dealer prices, without retail mark up, mark down, or commissions and may not necessarily represent actual transactions. The following compiled data is provided for information purposes only and should not be viewed as indicative of the actual or market value of our common stock.


	Number of Common Shares	Sale Price
		Low		High
2022
First Quarter	62,813	$	24.50	$	26.00
Second Quarter	68,013	23.00		26.25
Third Quarter	80,927	21.39		24.95
Fourth Quarter	118,260	21.00		24.02
	330,013
2021
First Quarter	179,524	$	19.45	$	22.50
Second Quarter	134,955	21.00		23.90
Third Quarter	356,226	22.55		26.74
Fourth Quarter	130,486	24.75		29.00
	801,191

The following table sets forth the cash dividends paid for the quarters indicated:


	Per Share
	2022		2021
First Quarter	$	0.27	$	0.27
Second Quarter	0.27		0.27
Third Quarter	0.27		0.27
Fourth Quarter	0.28		0.27
Total	$	1.09	$	1.08

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 shares are repurchased under this plan, they are retired with the status of authorized, but unissued, shares.

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The following table provides information for the unaudited three-month period ended December 31, 2022, with respect to our common stock repurchase plan:


	Common Shares Repurchased			Total Number of Common Shares Purchased as Part of Publicly Announced Plan or Program	Maximum Number of Common Shares That May Yet Be Purchased Under the Plans or Programs
	Number	Average Price Per Common Share
Balance, September 30					443,649
October 1 - 31	6,503	$	21.37	6,503	437,146
November 1 - 30	14,173	23.00		14,173	422,973
December 1 - 31	3,147	23.20		3,147	419,826
Balance, December 31	23,823	$	22.58	23,823	419,826

Information concerning securities authorized for issuance under equity compensation plans appears under Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters.

Item 6. [Reserved]

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Item 7. 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. This discussion and analysis is intended to provide a better understanding of the consolidated financial statements and statistical data included elsewhere in this Annual Report on Form 10-K.

Executive Summary

We reported net income of $22,238 and earnings per common share of $2.95 for the year ended December 31, 2022. Net income and earnings per common share for the same period of 2021 were $19,499 and $2.48, respectively. Net interest income increased $7,780, or 14.76%, during 2022 compared to 2021. While PPP loan fees declined, rising interest rates and growth in core loans and AFS securities led to a $5,685 or 9.46% increase in gross interest income during 2022 compared to 2021. We continued to benefit from the significant reduction in higher-cost borrowings as interest expense on deposits and borrowings decreased $2,095, or 28.26%, for the year ended December 31, 2022 when compared to the same period in 2021.

The provision for loan losses during the year ended December 31, 2022 was $483, compared to a net provision reversal of $518 for the same period in 2021. During 2020, increased economic and environmental risk factors, predominantly driven by COVID-19, drove a significant increase in the ALLL and provision expense. Strong credit quality, coupled with improvement in economic factors, such as unemployment rates, resulted in a reduction in the ALLL and a provision reversal during the first quarter of 2021. Credit quality remained strong at December 31, 2022, as evidenced by total past due and nonaccrual loans which were $11,130, or 0.88%, of gross loans. Despite strong credit quality, the ALLL and provision for loan losses increased during 2022 as a result of core loan growth and economic related risk factors.

Noninterest income decreased $156 during 2022 compared to the same period in 2021. Gain on sale of mortgages decreased $1,063, as residential mortgage originations sold in the secondary market declined. Offsetting this was an increase in service charges and fees of $1,116, with $619 of the increase attributed to OMSR income. Noninterest expenses increased $3,126 in 2022 when compared to the same period in 2021 and was primarily a result of increased compensation, other losses, donations and community relations related expenses.

As of December 31, 2022, total assets and assets under management were $2,030,267 and $2,808,391, respectively. Assets under management include loans sold and serviced of $264,206 and investment and trust assets managed by Isabella Wealth of $513,918, in addition to assets on our consolidated balance sheet. Loans outstanding as of December 31, 2022 totaled $1,264,173. During 2022, gross loans declined $36,864 which was largely the result of a $72,001 reduction in advances to mortgage brokers, which is included within the commercial loan portfolio; however, is not considered a component of our core lending business. During 2022, core loan growth totaled $35,137 and was driven by growth in all loan categories. Total deposits were $1,744,275 as of December 31, 2022, which was an increase of $33,936 since December 31, 2021. A majority of this growth was in the form of demand deposits. All regulatory capital ratios for the Bank exceeded the minimum thresholds to be considered a "well capitalized" institution.

Our securities portfolio increased $89,880 since December 31, 2021, predominantly due to $210,869 in purchases, although offset by maturities and an increase in net unrealized losses. The unrealized loss on our AFS securities portfolio resulted from the recent increases in short-term and intermediate-term benchmark interest rates. As a result, this change in unrealized losses has reduced our balance of shareholders' equity and negatively impacted our tangible book value. Management does not anticipate the need to sell securities and incur a loss as a result of the sale.

Our net yield on interest earning assets (FTE) was 3.18% for 2022 which increased from 2.87% in 2021. The marked improvement is a result of strategies management began implementing in 2019 and 2020, 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.

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Recent Events and Legislation

Impact of COVID-19: Unexpected and unprecedented changes have occurred since early 2020 as the result of COVID-19. The full impact of the pandemic, including the uncertainties surrounding the pandemic, remain in 2022. However, significant progress has been made with vaccinations and medical treatments. Additionally, improved safety guidelines and the easing of restrictions have occurred since the onset of the pandemic. We expect the significance of the pandemic, including the extent of its effect on our financial and operational results, to be dictated by continued developments related to the COVID-19 pandemic. We continue to closely monitor external events and are in continual discussion with our customers to assess, prepare, and respond to conditions as they evolve.

Reclassifications

Certain amounts reported in management's discussion and analysis of financial condition and results of operations for 2021 and 2020 have been reclassified to conform with the 2022 presentation.

Subsequent Events

In June 2016, the FASB issued ASU 2016-13 and updated the measurement for credit losses for AFS debt securities and assets measured at amortized cost, which include loans and any other financial assets with the contractual right to receive cash. The new approach requires the use of an expected credit loss model. The new CECL guidance was effective January 1, 2023 and we have fully adopted the new guidance as of that date.

Based on portfolio characteristics and economic conditions and expectations as of January 1, 2023, we recorded a combined increase to the ACL and reserve for unfunded commitments on January 1, 2023 of approximately $3,000 upon the adoption of ASU 2016-13.

We evaluated subsequent events after December 31, 2022 through the date our condensed consolidated financial statements were issued for potential recognition and disclosure. Outside of the adoption of CECL, no other subsequent events require financial statement recognition or disclosure between December 31, 2022 and the date our condensed consolidated financial statements were issued.

Other

We have not received, nor are aware of, any notices of regulatory actions as of March 6, 2023.

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Results of Operations

(Dollars in thousands except per share amounts)

The following table outlines the results of operations and provides certain key performance measures as of, and for the years ended, December 31:


	2022			2021			2020
INCOME STATEMENT DATA
Interest income	$	65,798		$	60,113		$	64,172
Interest expense	5,317			7,412			13,825
Net interest income	60,481			52,701			50,347
Provision for loan losses	483			(518)			1,665
Noninterest income	13,666			13,822			14,423
Noninterest expenses	46,820			43,694			51,233
Federal income tax expense	4,606			3,848			987
Net income	$	22,238		$	19,499		$	10,885
PER SHARE
Basic earnings	$	2.95		$	2.48		$	1.37
Diluted earnings	$	2.91		$	2.45		$	1.34
Dividends	$	1.09		$	1.08		$	1.08
Tangible book value	$	18.25		$	21.61		$	21.29
Quoted market value
High	$	26.25		$	29.00		$	24.50
Low	$	21.00		$	19.45		$	15.60
Close (1)	$	23.50		$	25.50		$	19.57
Common shares outstanding (1)	7,559,421			7,532,641			7,997,247
PERFORMANCE RATIOS
Return on average total assets	1.08		%	0.96		%	0.57		%
Return on average shareholders' equity	11.41		%	8.83		%	4.93		%
Return on average tangible shareholders' equity	15.17		%	11.31		%	6.34		%
Net interest margin yield (FTE)	3.18		%	2.87		%	2.96		%
BALANCE SHEET DATA (1)
Gross loans	$	1,264,173		$	1,301,037		$	1,238,311
AFS securities	$	580,481		$	490,601		$	339,228
Total assets	$	2,030,267		$	2,032,158		$	1,957,378
Deposits	$	1,744,275		$	1,710,339		$	1,566,317
Borrowed funds	$	87,016		$	99,320		$	158,747
Shareholders' equity	$	186,210		$	211,048		$	218,588
Gross loans to deposits	72.48		%	76.07		%	79.06		%
ASSETS UNDER MANAGEMENT (1)
Loans sold with servicing retained	$	264,206		$	278,844		$	301,377
Assets managed by Isabella Wealth	$	513,918		$	516,243		$	443,967
Total assets under management	$	2,808,391		$	2,827,245		$	2,702,722
ASSET QUALITY (1)
Nonperforming loans to gross loans	0.04		%	0.10		%	0.43		%
Nonperforming assets to total assets	0.05		%	0.08		%	0.31		%
ALLL to gross loans	0.78		%	0.70		%	0.79		%
CAPITAL RATIOS (1)
Shareholders' equity to assets	9.17		%	10.39		%	11.17		%
Tier 1 leverage	8.61		%	7.97		%	8.37		%
Common equity tier 1 capital	12.91		%	12.07		%	12.97		%
Tier 1 risk-based capital	12.91		%	12.07		%	12.97		%
Total risk-based capital	15.79		%	14.94		%	13.75		%

(1) At end of year

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The following table outlines our interim results of operations and key performance measures as of, and for the unaudited periods ended:


	Quarter to Date
	December 31 2022		September 30 2022		June 30 2022		March 31 2022
INCOME STATEMENT DATA
Total interest income	$	17,915	$	17,019	$	16,102	$	14,762
Total interest expense	1,643		1,216		1,175		1,283
Net interest income	16,272		15,803		14,927		13,479
Provision for loan losses	(57)		18		485		37
Noninterest income	3,272		3,252		3,595		3,547
Noninterest expenses	11,922		11,917		11,661		11,320
Federal income tax expense	1,357		1,233		1,081		935
Net income	$	6,322	$	5,887	$	5,295	$	4,734
PER SHARE
Basic earnings	$	0.84	$	0.78	$	0.70	$	0.63
Diluted earnings	$	0.83	$	0.77	$	0.69	$	0.62
Dividends	$	0.28	$	0.27	$	0.27	$	0.27
Quoted market value (1)	$	23.50	$	21.40	$	24.80	$	25.85
Tangible book value	$	18.25	$	16.96	$	18.85	$	19.56


	Quarter to Date
	December 31 2021		September 30 2021		June 30 2021		March 31 2021
INCOME STATEMENT DATA
Total interest income	$	15,041	$	15,142	$	14,640	$	15,290
Total interest expense	1,567		1,829		1,927		2,089
Net interest income	13,474		13,313		12,713		13,201
Provision for loan losses	81		(107)		31		(523)
Noninterest income	3,608		3,367		3,315		3,532
Noninterest expenses	11,197		11,185		10,495		10,817
Federal income tax expense	1,010		916		881		1,041
Net income	$	4,794	$	4,686	$	4,621	$	5,398
PER SHARE
Basic earnings	$	0.63	$	0.59	$	0.58	$	0.68
Diluted earnings	$	0.63	$	0.58	$	0.57	$	0.67
Dividends	$	0.27	$	0.27	$	0.27	$	0.27
Quoted market value (1)	$	25.50	$	26.03	$	23.00	$	21.75
Tangible book value	$	21.61	$	21.87	$	21.73	$	21.35

(1) At end of period

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CRITICAL ACCOUNTING POLICIES

Our significant accounting policies are set forth in “Note 1 – Nature of Operations and Summary of Significant Accounting Policies” of “Notes to Consolidated Financial Statements” in Item 8. Financial Statements and Supplementary Data. Of these significant accounting policies, we consider our policies regarding the ALLL, acquisition intangibles and goodwill, and the determination of the fair value and assessment of OTTI of investment securities to be our most critical accounting policies.

The ALLL requires our most subjective and complex judgment. Changes in economic conditions and other external factors can have a significant impact on the ALLL and, therefore, the provision for loan losses and results of operations. We have developed policies and procedures for assessing the appropriateness of the ALLL, recognizing that this process requires a number of assumptions and estimates with respect to our loan portfolio. Our assessments may be impacted in future periods by changes in economic conditions, and the discovery of information with respect to borrowers which is not known to us at the time of the issuance of the consolidated financial statements. For additional discussion concerning our ALLL and related matters, see “Allowance for Loan and Lease Losses” and “Note 4 – Loans and ALLL” of “Notes to Consolidated Financial Statements” in Item 8. Financial Statements and Supplementary Data.

U.S. generally accepted accounting principles require that we determine the fair value of the assets and liabilities of an acquired entity, and record the fair value on the date of acquisition. We employ a variety of measures in the determination of the fair value, including the use of discounted cash flow analysis, market appraisals, and projected future revenue streams. For certain items that we believe we have the appropriate expertise to determine the fair value, we may choose to use our own calculations of the value. In other cases, where the value is not easily determined, we consult with independent experts to determine the fair value of the identified asset or liability. Once valuations have been determined, the net difference between the price paid for the acquired entity and the net value of assets acquired on our balance sheet, including identifiable intangibles, is recorded as goodwill. Acquisition intangibles and goodwill are qualitatively evaluated to determine if it is more likely than not that the carrying balance is impaired on at least an annual basis.

AFS securities are carried at fair value with changes in the fair value included as a component of other comprehensive income. Declines in the fair value of AFS securities below their cost that are other-than-temporary are reflected as realized losses in the consolidated statements of income. We evaluate AFS securities for indications of losses that are considered other-than-temporary, if any, on a regular basis. The market values for most AFS investment securities are typically obtained from outside sources and applied to individual securities within the portfolio. Municipal securities for which no readily determinable market values are available are priced using fair value curves which most closely match the securities' characteristics.

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Average Balances, Interest Rates, and Net Interest Income

The following schedules present the daily average amount outstanding for each major category of interest earning assets, non-earning assets, interest bearing liabilities, and noninterest bearing liabilities for the last three years. 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.


	Year Ended December 31
	2022						2021						2020
	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)	$	1,249,634	$	53,283	4.26	%	$	1,208,141	$	51,410	4.26	%	$	1,236,169	$	54,102	4.38	%
Taxable investment securities	477,159		8,294		1.74	%	297,357		4,920		1.65	%	229,468		5,214		2.27	%
Nontaxable investment securities	107,158		3,933		3.67	%	117,997		4,235		3.59	%	140,665		5,189		3.69	%
Fed funds sold	10		—		2.42	%	5		—		0.02	%	4		—		0.06	%
Other	99,301		1,344		1.35	%	255,246		706		0.28	%	142,717		1,026		0.72	%
Total earning assets	1,933,262		66,854		3.46	%	1,878,746		61,271		3.26	%	1,749,023		65,531		3.75	%
NONEARNING ASSETS
Allowance for loan losses	(9,477)						(9,396)						(8,837)
Cash and demand deposits due from banks	24,708						29,139						24,987
Premises and equipment	24,648						24,760						25,846
Accrued income and other assets	81,823						109,625						118,195
Total assets	$	2,054,964					$	2,032,874					$	1,909,214
INTEREST BEARING LIABILITIES
Interest bearing demand deposits	$	374,623	274		0.07	%	$	345,015	216		0.06	%	$	262,188	357		0.14	%
Savings deposits	630,574		1,135		0.18	%	558,102		616		0.11	%	456,088		1,212		0.27	%
Time deposits	270,296		2,612		0.97	%	336,094		4,610		1.37	%	387,881		7,315		1.89	%
Federal funds purchased and repurchase agreements	49,974		79		0.16	%	57,453		53		0.09	%	35,518		36		0.10	%
FHLB advances	7,863		152		1.93	%	69,342		1,302		1.88	%	210,451		4,905		2.33	%
Subordinated debt, net of unamortized issuance costs	29,200		1,065		3.65	%	17,000		615		3.62	%	—		—		0.00	%
Total interest bearing liabilities	1,362,530		5,317		0.39	%	1,383,006		7,412		0.54	%	1,352,126		13,825		1.02	%
NONINTEREST BEARING LIABILITIES
Demand deposits	482,781						416,247						320,820
Other	14,695						12,858						15,613
Shareholders’ equity	194,958						220,763						220,655
Total liabilities and shareholders’ equity	$	2,054,964					$	2,032,874					$	1,909,214
Net interest income (FTE)			$	61,537					$	53,859					$	51,706
Net yield on interest earning assets (FTE)					3.18	%					2.87	%					2.96	%

(1) Includes loans and mortgage loans AFS

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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. We exert some control over these factors; however, 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. The FTE adjustment is based on a federal income tax rate of 21%.

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. For the purpose of this table, changes in interest due to volume and rate were determined as follows:

Volume—change in volume multiplied by the previous period's FTE rate.

Rate—change in the FTE rate multiplied by the previous period's volume.

All interest income presented in the table below is reported on a FTE basis using a federal income tax rate of 21%. 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.


	2022 Compared to 2021 Increase (Decrease) Due to						2021 Compared to 2020 Increase (Decrease) Due to
	Volume		Rate		Net		Volume		Rate		Net
Changes in interest income
Loans	$	1,769	$	104	$	1,873	$	(1,211)	$	(1,481)	$	(2,692)
Taxable investment securities	3,114		260		3,374		1,324		(1,618)		(294)
Nontaxable investment securities	(396)		94		(302)		(817)		(137)		(954)
Fed Funds Sold	—		—		—		—		—		—
Other	(659)		1,297		638		529		(849)		(320)
Total changes in interest income	3,828		1,755		5,583		(175)		(4,085)		(4,260)
Changes in interest expense
Interest bearing demand deposits	20		38		58		90		(231)		(141)
Savings deposits	89		430		519		227		(823)		(596)
Time deposits	(796)		(1,202)		(1,998)		(889)		(1,816)		(2,705)
Federal funds purchased and repurchase agreements	(8)		34		26		20		(3)		17
FHLB advances	(1,187)		37		(1,150)		(2,793)		(810)		(3,603)
Subordinated debt, net of unamortized issuance costs	445		5		450		615		—		615
Total changes in interest expense	(1,437)		(658)		(2,095)		(2,730)		(3,683)		(6,413)
Net change in interest margin (FTE)	$	5,265	$	2,413	$	7,678	$	2,555	$	(402)	$	2,153

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


	Average Yield / Rate for the Three-Month Periods Ended:
	December 31 2022		September 30 2022		June 30 2022		March 31 2022		December 31 2021
Total earning assets	3.77	%	3.53	%	3.41	%	3.13	%	3.19	%
Total interest bearing liabilities	0.49	%	0.35	%	0.34	%	0.37	%	0.45	%
Net yield on interest earning assets (FTE)	3.43	%	3.28	%	3.16	%	2.86	%	2.86	%

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	Quarter to Date Net Interest Income (FTE)
	December 31 2022		September 30 2022		June 30 2022		March 31 2022		December 31 2021
Total interest income (FTE)	$	18,183	$	17,276	$	16,373	$	15,022	$	15,246
Total interest expense	1,643		1,216		1,175		1,283		1,567
Net interest income (FTE)	$	16,540	$	16,060	$	15,198	$	13,739	$	13,679

Allowance for Loan and Lease Losses

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

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


	December 31 2022			September 30 2022			June 30 2022			March 31 2022			December 31 2021
Total charge-offs	$	249		$	173		$	106		$	91		$	149
Total recoveries	479			132			117			155			78
Net loan charge-offs (recoveries)	(230)			41			(11)			(64)			71
Net loan charge-offs (recoveries) to average loans outstanding	(0.02)		%	0.00		%	0.00		%	(0.01)		%	0.01		%
Provision for loan losses	$	(57)		$	18		$	485		$	37		$	81
Provision for loan losses to average loans outstanding	0.00		%	0.00		%	0.04		%	0.00		%	0.01		%
ALLL	$	9,850		$	9,677		$	9,700		$	9,204		$	9,103
ALLL as a % of loans at end of period	0.78		%	0.78		%	0.76		%	0.76		%	0.70		%

The following table summarizes charge-off and recovery activity by loan segment for the year ended December 31, 2022:


	Commercial			Agricultural			Residential Real Estate			Consumer			Total
Charge-offs	$	77		$	—		$	—		$	542		$	619
Recoveries	442			9			150			282			883
Net loan charge-offs (recoveries)	$	(365)		$	(9)		$	(150)		$	260		$	(264)
Average loans outstanding	$	748,833		$	93,621		$	332,276		$	74,338		$	1,249,068
Net loan charge-offs (recoveries) to average loans outstanding	(0.05)		%	(0.01)		%	(0.05)		%	0.35		%	(0.02)		%

The following table summarizes charge-offs, recoveries, and provision for loan loss activity for the years ended December 31:


	2022			2021			2020			2019			2018
ALLL at beginning of period	$	9,103		$	9,744		$	7,939		$	8,375		$	7,700
Charge-offs	619			607			381			948			1,101
Recoveries	883			484			521			482			798
Provision for loan losses	483			(518)			1,665			30			978
ALLL at end of period	$	9,850		$	9,103		$	9,744		$	7,939		$	8,375
Net loan charge-offs (recoveries)	$	(264)		$	123		$	(140)		$	466		$	303
Net loan charge-offs (recoveries) to average loans outstanding	(0.02)		%	0.01		%	(0.01)		%	0.04		%	0.03		%
ALLL as a % of loans at end of period	0.78		%	0.70		%	0.79		%	0.67		%	0.74		%
ALLL as a % of nonaccrual loans	2155.36		%	731.16		%	183.40		%	121.48		%	115.36		%

Table of Contents

During 2020, we increased the ALLL as a result of increased economic and environmental related risk factors, primarily driven by COVID-19. While these risk factors remain, improvement in credit quality indicators resulted in a reduction to the ALLL during 2021. Despite strong credit quality, the ALLL increased during 2022 as a result of core loan growth during the year and increased economic related risk factors.

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


	December 31 2022			September 30 2022			June 30 2022			March 31 2022			December 31 2021
ALLL
Individually evaluated for impairment	$	451		$	474		$	515		$	573		$	578
Collectively evaluated for impairment	9,399			9,203			9,185			8,631			8,525
Total	$	9,850		$	9,677		$	9,700		$	9,204		$	9,103
ALLL to gross loans
Individually evaluated for impairment	0.04		%	0.04		%	0.04		%	0.05		%	0.04		%
Collectively evaluated for impairment	0.74		%	0.74		%	0.72		%	0.71		%	0.66		%
Total	0.78		%	0.78		%	0.76		%	0.76		%	0.70		%

The following table illustrates the amounts of the ALLL allocated to each loan segment and the percentage of these loan segments to gross loans as of December 31:


	2022			2021			2020			2019			2018
	ALLL Allocation		% of Gross Loans	ALLL Allocation		% of Gross Loans	ALLL Allocation		% of Gross Loans	ALLL Allocation		% of Gross Loans	ALLL Allocation		% of Gross Loans
Commercial	$	1,321	58.61	$	1,740	62.07	$	2,162	61.10	$	1,914	59.08	$	2,563	58.43
Agricultural	577		8.25	289		7.22	311		8.11