ISABELLA BANK CORP Management’s Discussion and Analysis of Financial Condition and Results of Operations. (Form 10-Q)

0

FINANCIAL REVIEW OF BANQUE ISABELLA

(in thousands of dollars except per share amounts)

The following is management's discussion and analysis of our financial condition
and results of operations for the unaudited three and six-month periods ended
June 30, 2022 and 2021. This analysis should be read in conjunction with our
Annual Report on Form 10-K for the year ended December 31, 2021 and with the
unaudited interim condensed consolidated financial statements and notes,
beginning on page 4 of this report.

Summary

During the three and six months ended June 30, 2022, we reported net income of
$5,295 and $10,029 and earnings per common share of $0.70 and $1.33,
respectively. Net income and earnings per common share for the same periods of
2021 were $4,621 and $10,019 and $0.58 and $1.26, respectively. Net interest
income increased $2,492, or 9.62%, for the six-month period ended June 30, 2022
in comparison to the same period in 2021. While PPP loan fees declined, rising
interest rates and growth in loans and AFS securities, led to a $934 increase in
gross interest income during the six-month period ended June 30, 2022, compared
to the same period in 2021. We continued to benefit from a reduction in
higher-cost borrowings as interest expense on deposits and borrowings decreased
$1,558, or 38.79%, for the six-month period ended June 30, 2022 when compared to
the same period in 2021.

The provision for loan losses during the six months ended June 30, 2022 was
$522, compared to a net provision reversal of $492 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
June 30, 2022, as evidenced by total past due and nonaccrual loans which were
$1,505, or 0.12% of gross loans. Despite strong credit quality, the ALLL and
provision for loan losses increased during 2022 as a result of loan growth
during the second quarter.

Noninterest income increased $295 during the first six months of 2022 compared
to the same period in 2021. Service charges and fees increased $968, with $577
attributed to OMSR income. Offsetting this income was a $726 reduction in gain
on sale of mortgage loans, as residential mortgage originations sold in the
secondary market declined. Noninterest expenses for the first six months of 2022
increased $1,669 in comparison to the same period in 2021 and is primarily a
result of increased compensation, other losses, consulting, marketing, and
donations and community relations related expenses.

As of June 30, 2022, total assets and assets under management were $2,048,373
and $2,776,202, respectively. Assets under management include loans sold and
serviced of $273,294 and investment and trust assets managed by Isabella Wealth
of $454,535, in addition to assets on our consolidated balance sheet. Loans
outstanding as of June 30, 2022 totaled $1,271,910. Since December 31, 2021,
gross loans declined $29,127 as a result of a $34,710 reduction in advances to
mortgage brokers, which is included within the commercial loan portfolio. Total
deposits were $1,759,866 as of June 30, 2022, which was an increase of $49,527
since December 31, 2021. All regulatory capital ratios for the Bank exceeded the
minimum thresholds to be considered a "well capitalized" institution.

Our securities portfolio increased $66,989 from December 31, 2021, predominantly
due to $139,500 in purchases, although offset by maturities and an increase in
net unrealized losses. The unrealized loss on our AFS securities portfolio
resulted from the recent increases in short-term and intermediate-term benchmark
interest rates. As a result, this change in unrealized losses has reduced our
balance of shareholders' equity and negatively impacted our tangible book value.

Our net yield on interest earning assets (FTE) was 3.16% and 3.01% for the three
and six months ended June 30, 2022, as compared to 2.79% and 2.88% for the three
and six months ended June 30, 2021. The marked improvement is a result of
strategies management implemented in 2019 and 2020, focused on improving our net
yield as rates declined, including enhanced pricing related to loans and a
reduced reliance on higher-cost borrowed funds and brokered deposits. With rate
increases during the first two quarters of 2022, and anticipation of future rate
increases in the remainder of the year, we expect to see continued improvement
in our net yield on interest earning assets.

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Recent Events and Legislation

Impact of COVID-19: Unexpected and unprecedented changes have occurred since
early 2020 as the result of COVID-19. The full impact of the pandemic, including
the uncertainties surrounding the pandemic, remain in 2022. However, significant
progress has been made towards the development of 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 presented in the 2021 interim consolidated financial statements have been reclassified to conform to the 2022 presentation.

Subsequent events

We evaluated subsequent events after June 30, 2022 through the date our interim
condensed consolidated financial statements were issued for potential
recognition and disclosure. No subsequent events require financial statement
recognition or disclosure between June 30, 2022 and the date our interim
condensed consolidated financial statements were issued.


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Results of Operations (Unaudited)

The following table outlines our quarter-to-date results of operations and
provides certain performance measures as of, and for the three-month periods
ended:
                                           June 30              March 31           December 31          September 30           June 30
                                             2022                 2022                 2021                 2021                 2021
INCOME STATEMENT DATA
Interest income                         $    16,102          $    14,762          $    15,041          $    15,142          $    14,640
Interest expense                              1,175                1,283                1,567                1,829                1,927
Net interest income                          14,927               13,479               13,474               13,313               12,713
Provision for loan losses                       485                   37                   81                 (107)                  31
Noninterest income                            3,595                3,547                3,608                3,367                3,315
Noninterest expenses                         11,661               11,320               11,197               11,185               10,495
Federal income tax expense (benefit)          1,081                  935                1,010                  916                  881
Net income (loss)                       $     5,295          $     4,734          $     4,794          $     4,686          $     4,621
PER SHARE
Basic earnings                          $      0.70          $      0.63          $      0.63          $      0.59          $      0.58
Diluted earnings                        $      0.69          $      0.62          $      0.63          $      0.58          $      0.57
Dividends                               $      0.27          $      0.27          $      0.27          $      0.27          $      0.27
Tangible book value                     $     18.85          $     19.56          $     21.61          $     21.87          $     21.73
Quoted market value
High                                    $     26.25          $     26.00          $     29.00          $     26.74          $     23.90
Low                                     $     23.00          $     24.50          $     24.75          $     22.55          $     21.00
Close (1)                               $     24.80          $     25.85          $     25.50          $     26.03          $     23.00
Common shares outstanding (1)             7,553,113            7,542,758            7,532,641            7,926,610            7,946,658
PERFORMANCE RATIOS
Return on average total assets                 1.04  %              0.92  %              0.96  %              0.91  %              0.91  %
Return on average shareholders' equity        10.83  %              9.02  %              8.83  %              8.35  %              8.35  %
Return on average tangible
shareholders' equity                          14.38  %             11.72  %             11.31  %             10.65  %             10.69  %
Net interest margin yield (FTE)                3.16  %              2.86  %              2.86  %              2.85  %              2.79  %
BALANCE SHEET DATA (1)
Gross loans                             $ 1,271,910          $ 1,218,371          $ 1,301,037          $ 1,248,558          $ 1,206,663
AFS securities                          $   557,590          $   544,919          $   490,601          $   494,384          $   448,454
Total assets                            $ 2,048,373          $ 2,060,933          $ 2,032,158          $ 2,082,701          $ 2,031,407
Deposits                                $ 1,759,866          $ 1,764,161          $ 1,710,339          $ 1,692,316          $ 1,636,506
Borrowed funds                          $    86,450          $    90,534          $    99,320          $   156,655          $   161,395
Shareholders' equity                    $   190,680          $   195,842          $   211,048          $   221,642          $   220,990
Gross loans to deposits                       72.27  %             69.06  %             76.07  %             73.78  %             73.73  %
ASSETS UNDER MANAGEMENT (1)
Loans sold with servicing retained      $   273,294          $   275,556    

$278,844 $285,392 $290,033
Assets managed by Isabella Wealth $454,535 $501,829

$516,243 $491,784 $493,287
Total assets under management

           $ 2,776,202          $ 2,838,318    

$2,827,245 $2,859,877 $2,814,727
ASSET QUALITY (1) Non-performing receivables on gross receivables

             0.05  %              0.06  %              0.10  %              0.25  %              0.28  %
Nonperforming assets to total assets           0.05  %              0.05  %              0.08  %              0.18  %              0.19  %
ALLL to gross loans                            0.76  %              0.76  %              0.70  %              0.73  %              0.78  %
CAPITAL RATIOS (1)
Shareholders' equity to assets                 9.31  %              9.50  %             10.39  %             10.64  %             10.88  %
Tier 1 leverage                                8.38  %              8.12  %              7.97  %              8.37  %              8.46  %
Common equity tier 1 capital                  12.44  %             12.83  %             12.07  %             13.07  %             13.81  %
Tier 1 risk-based capital                     12.44  %             12.83  %             12.07  %             13.07  %             13.81  %
Total risk-based capital                      15.33  %             15.84  %             14.94  %             16.03  %             17.00  %


(1) At end of period
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The following table outlines our year-to-date results of operations and provides
certain performance measures as of, and for the six-month periods ended:
                                                              June 30              June 30              June 30
                                                                2022                 2021                 2020
INCOME STATEMENT DATA
Interest income                                            $    30,864          $    29,930          $    32,070
Interest expense                                                 2,458                4,016                7,764
Net interest income                                             28,406               25,914               24,306
Provision for loan losses                                          522                 (492)                 893
Noninterest income                                               7,142                6,847                6,244
Noninterest expenses                                            22,981               21,312               21,645
Federal income tax expense                                       2,016                1,922                  761
Net income                                                 $    10,029          $    10,019          $     7,251
PER SHARE
Basic earnings                                             $      1.33          $      1.26          $      0.91
Diluted earnings                                           $      1.31          $      1.24          $      0.90
Dividends                                                  $      0.54          $      0.54          $      0.54
Tangible book value                                        $     18.85          $     21.73          $     21.52
Quoted market value
High                                                       $     26.25          $     23.90          $     24.50
Low                                                        $     23.00          $     19.45          $     15.60
Close (1)                                                  $     24.80          $     23.00          $     18.25
Common shares outstanding (1)                                7,553,113            7,946,658            7,977,019
PERFORMANCE RATIOS
Return on average total assets                                    0.98  %              1.00  %              0.78  %
Return on average shareholders' equity                            9.89  %              9.06  %              6.67  %
Return on average tangible shareholders' equity                  13.00  %             11.61  %              4.30  %
Net interest margin yield (FTE)                                   3.01  %              2.88  %              2.95  %
BALANCE SHEET DATA (1)
Gross loans                                                $ 1,271,910          $ 1,206,663          $ 1,284,385
AFS securities                                             $   557,590          $   448,454          $   380,414
Total assets                                               $ 2,048,373          $ 2,031,407          $ 1,913,227
Deposits                                                   $ 1,759,866          $ 1,636,506          $ 1,440,678
Borrowed funds                                             $    86,450          $   161,395          $   236,268
Shareholders' equity                                       $   190,680          $   220,990          $   219,991
Gross loans to deposits                                          72.27  %             73.73  %             89.15  %
ASSETS UNDER MANAGEMENT (1)
Loans sold with servicing retained                         $   273,294          $   290,033          $   263,332
Assets managed by Isabella Wealth                          $   454,535          $   493,287          $   395,214
Total assets under management                              $ 2,776,202          $ 2,814,727          $ 2,571,773
ASSET QUALITY (1)
Nonperforming loans to gross loans                                0.05  %              0.28  %              0.42  %
Nonperforming assets to total assets                              0.05  %              0.19  %              0.33  %
ALLL to gross loans                                               0.76  %              0.78  %              0.69  %
CAPITAL RATIOS (1)
Shareholders' equity to assets                                    9.31  %             10.88  %             11.50  %
Tier 1 leverage                                                   8.38  %              8.46  %              8.86  %
Common equity tier 1 capital                                     12.44  %             13.81  %             12.90  %
Tier 1 risk-based capital                                        12.44  %             13.81  %             12.90  %
Total risk-based capital                                         15.33  %             17.00  %             13.60  %


(1) At end of period
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Average Balances, Interest Rates, and Net Interest Income

The following schedules present the daily average amount outstanding for each
major category of interest earning assets, non-earning assets, interest bearing
liabilities, and noninterest bearing liabilities. These schedules also present
an analysis of interest income and interest expense for the periods indicated.
All interest income is reported on a FTE basis using a federal income tax rate
of 21%. Loans in nonaccrual status, for the purpose of the following
computations, are included in the average loan balances. FRB and FHLB restricted
equity holdings are included in other interest earning assets.
                                                                                                               Three Months Ended
                                                    June 30, 2022                                                March 31, 2022                                                 June 30, 2021
                                                         Tax                Average                                    Tax                Average                                    Tax                Average
                                  Average             Equivalent            Yield /             Average             Equivalent            Yield /             Average             Equivalent            Yield /
                                  Balance              Interest              Rate               Balance              Interest              Rate               Balance              Interest              Rate
INTEREST EARNING ASSETS
Loans                          $ 1,259,573          $    13,179                4.19  %       $ 1,235,788          $    12,378                4.01  %       $ 1,200,998          $    12,504                4.16  %
Taxable investment securities      475,010                2,027                1.71  %           421,503                1,615                1.53  %           281,245                1,140                1.62  %
Nontaxable investment
securities                         109,367                  975                3.57  %           101,604                  920                3.62  %           122,514                1,117                3.65  %
Fed funds sold                           6                    -                1.47  %                 3                    -                0.06  %                 3                    -                0.01  %
Other                               77,176                  192                1.00  %           163,353                  109                0.27  %           265,227                  193                0.29  %
Total earning assets             1,921,132               16,373                3.41  %         1,922,251               15,022                3.13  %         1,869,987               14,954                3.20  %
NONEARNING ASSETS
Allowance for loan losses           (9,288)                                                       (9,128)                                               

(9,326)

Cash and demand deposits due
from banks                          22,838                                                        26,839                                                

28,629

Premises and equipment              24,269                                                        24,461                                                

24,826

Accrued income and other
assets                              84,590                                                       102,805                                                

106,780

Total assets                   $ 2,043,541                                                   $ 2,067,228                                                   $ 2,020,896
INTEREST BEARING LIABILITIES
Interest bearing demand
deposits                       $   375,123          $        56                0.06  %       $   383,474          $        50                0.05  %       $   330,586          $        45                0.05  %
Savings deposits                   627,916                  171                0.11  %           615,335                  159                0.10  %           550,145                  149                0.11  %
Time deposits                      274,284                  627                0.91  %           290,146                  727                1.00  %           347,155                1,250                1.44  %
Federal funds purchased and
repurchase agreements               46,029                    8                0.07  %            49,058                    9                0.07  %            52,239                   11                0.08  %
FHLB advances                       10,000                   47                1.88  %            14,889                   72                1.93  %            84,725                  389                1.84  %
Subordinated debt, net of
unamortized issuance costs          29,188                  266                3.65  %            29,166                  266                3.65  %             9,551                   83                3.48  %
Total interest bearing
liabilities                      1,362,540                1,175                0.34  %         1,382,068                1,283                0.37  %         1,374,401                1,927                0.56  %
NONINTEREST BEARING
LIABILITIES
Demand deposits                    470,139                                                       458,343                                                       412,600
Other                               15,237                                                        16,898                                                        12,478
Shareholders' equity               195,625                                                       209,919                                                

221 417

Total liabilities and
shareholders' equity           $ 2,043,541                                                   $ 2,067,228                                                   $ 2,020,896
Net interest income (FTE)                           $    15,198                                                   $    13,739                                                   $    13,027
Net yield on interest earning
assets (FTE)                                                                   3.16  %                                                       2.86  %                                                       2.79  %


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Contents

                                                                                             Six Months Ended
                                                                June 30, 2022                                                June 30, 2021
                                                                      Tax               Average                                    Tax               Average
                                               Average             Equivalent           Yield /             Average             Equivalent           Yield /
                                               Balance              Interest              Rate              Balance              Interest              Rate
INTEREST EARNING ASSETS
Loans                                       $ 1,247,746          $    25,557               4.10  %       $ 1,201,344          $    25,601               4.26  %
Taxable investment securities                   448,405                3,642               1.62  %           236,099                2,305               1.95  %
Nontaxable investment securities                105,507                1,895               3.59  %           127,157                2,311               3.63  %
Fed funds sold                                        4                    -               1.12  %                 3                    -               0.01  %
Other                                           120,027                  301               0.50  %           280,083                  356               0.25  %
Total earning assets                          1,921,689               31,395               3.27  %         1,844,686               30,573               3.31  %
NONEARNING ASSETS
Allowance for loan losses                        (9,209)                                                      (9,574)
Cash and demand deposits due from banks          24,827                                                       28,787
Premises and equipment                           24,364                                                       24,987
Accrued income and other assets                  93,648                                                      109,898
Total assets                                $ 2,055,319                                                  $ 1,998,784
INTEREST BEARING LIABILITIES
Interest bearing demand deposits            $   379,275          $       106               0.06  %       $   322,931          $       122               0.08  %
Savings deposits                                621,661                  330               0.11  %           540,776                  298               0.11  %
Time deposits                                   282,172                1,354               0.96  %           357,466                2,692               1.51  %
Federal funds purchased and repurchase
agreements                                       47,535                   17               0.07  %            53,187                   27               0.10  %
FHLB advances                                    12,431                  119               1.91  %            87,348                  794               1.82  %
Subordinated debt, net of unamortized
issuance costs                                   29,177                  532               3.65  %             4,665                   83               3.56  %
Total interest bearing liabilities            1,372,251                2,458               0.36  %         1,366,373                4,016               0.59  %
NONINTEREST BEARING LIABILITIES
Demand deposits                                 464,271                                                      397,959
Other                                            16,061                                                       13,311
Shareholders' equity                            202,736                                                      221,141
Total liabilities and shareholders' equity  $ 2,055,319                                                  $ 1,998,784
Net interest income (FTE)                                        $    28,937                                                  $    26,557
Net yield on interest earning assets (FTE)                                                 3.01  %                                                      

2.88%


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.

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Volume and Rate Variance Analysis

The following table sets forth the effect of volume and rate changes on interest
income and expense for the periods indicated. Changes in interest due to volume
and rate were determined as follows:

Volume – change in volume multiplied by the rate of the previous period.

Rate of change of the ETP rate multiplied by the volume of the previous period.

The variation in interest due to both volume and rate was attributed to volume and rate variations in proportion to the relationship between the absolute dollar amounts of the variation of each.

                                          Three Months Ended                                  Three Months Ended                                       

Semester completed

                                       June 30, 2022 Compared to                           June 30, 2022 Compared to                               June 

30, 2022 Compared to

                                             March 31, 2022                                      June 30, 2021                                           June 30, 2021
                                       Increase (Decrease) Due to                           Increase (Decrease) Due to                            

Increase (decrease) due to

                                 Volume            Rate            Net               Volume             Rate            Net                Volume                Rate              Net
Changes in interest income
Loans                         $     241          $ 560          $   801          $       613          $  62          $   675          $      970              $ (1,014)         $   (44)
Taxable investment securities       217            195              412                  824             63              887               1,779                  (442)           1,337
Nontaxable investment
securities                           69            (14)              55                 (118)           (24)            (142)               (389)                  (27)            (416)
Other                               (83)           166               83                 (212)           211               (1)               (277)                  222              (55)
Total changes in interest
income                              444            907            1,351                1,107            312            1,419               2,083                (1,261)             822
Changes in interest expense
Interest bearing demand
deposits                             (1)             7                6                    6              5               11                  19                   (35)             (16)
Savings deposits                      3              9               12                   21              1               22                  43                   (11)              32
Time deposits                       (38)           (62)            (100)                (227)          (396)            (623)               (491)                 (847)          (1,338)
Federal funds purchased and
repurchase agreements                (1)             -               (1)                  (1)            (2)              (3)                 (3)                   (7)             (10)
FHLB advances                       (23)            (2)             (25)                (351)             9             (342)               (715)                   40             (675)
Subordinated debt, net of
unamortized issuance costs            -              -                -                  179              4              183                 447                     2              449
Total changes in interest
expense                             (60)           (48)            (108)                (373)          (379)            (752)               (700)                 (858)          (1,558)
Net change in interest margin
(FTE)                         $     504          $ 955          $ 1,459          $     1,480          $ 691          $ 2,171          $    2,783              $   (403)         $ 2,380


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

Average yield/rate for the three-month periods ended:

                                              June 30                March 31                December 31                September 30                June 30
                                                2022                   2022                      2021                       2021                      2021
Total earning assets                               3.41  %                 3.13  %                    3.19  %                     3.23  %                3.20  %
Total interest bearing liabilities                 0.34  %                 0.37  %                    0.45  %                     0.52  %                0.56  %
Net yield on interest earning assets
(FTE)                                              3.16  %                 2.86  %                    2.86  %                     2.85  %                2.79  %


                                               Quarter to Date Net Interest Income (FTE)
                                June 30       March 31      December 31       September 30       June 30
                                 2022           2022            2021              2021             2021
Total interest income (FTE)   $  16,373      $ 15,022      $     15,246      $      15,452      $ 14,954
Total interest expense            1,175         1,283             1,567              1,829         1,927
Net interest income (FTE)     $  15,198      $ 13,739      $     13,679      $      13,623      $ 13,027



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Allowance for Loan and Lease Losses

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

The following table summarizes our charges, recoveries, loan loss provisions and ALLL balances from and for:

                                                 Three Months Ended                      Six Months Ended
                                                        June 30                                June 30
                                               2022                2021               2022                2021
ALLL at beginning of period                $    9,204          $   9,271          $    9,103          $   9,744
Charge-offs
Commercial                                          3                  -                   3                 31
Agricultural                                        -                  -                   -                  -
Residential real estate                             -                  -                   -                  -
Consumer                                          103                 53                 194                181
Total charge-offs                                 106                 53                 197                212
Recoveries
Commercial                                         26                 17                  40                 99
Agricultural                                        1                  3                   3                  5
Residential real estate                            42                 48                  70                103
Consumer                                           48                 43                 159                113
Total recoveries                                  117                111                 272                320
Net loan charge-offs (recoveries)                 (11)               (58)                (75)              (108)
Provision for loan losses                         485                 31                 522               (492)
ALLL at end of period                      $    9,700          $   9,360          $    9,700          $   9,360
Net loan charge-offs (recoveries) to
average loans outstanding                        0.00  %            0.00  %            (0.01) %           (0.01) %


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

                                       June 30            March 31           December 31          September 30          June 30
                                        2022                2022                 2021                 2021               2021
Total charge-offs                   $      106          $       91          $       149          $       246          $     53
Total recoveries                           117                 155                   78                   86               111
Net loan charge-offs (recoveries)          (11)                (64)                  71                  160               (58)
Net loan charge-offs (recoveries)
to average loans outstanding              0.00  %            (0.01) %              0.01  %              0.01  %           0.00  %
Provision for loan losses           $      485          $       37          

$81 $ (107) $31
Allowance for loan losses relative to average outstanding loans

                 0.04  %             0.00  %              0.01  %             (0.01) %           0.00  %
ALLL                                $    9,700          $    9,204          

$9,103 $9,093 $9,360
ALLL as % of loans at end of period

                                    0.76  %             0.76  %              0.70  %              0.73  %           0.78  %

ALLL as % of outstanding loans 1,796.30% 1,232.13%

      731.16  %            295.52  %         281.17  %


During 2020, we increased the ALLL as a result of increased economic and
environmental related risk factors, primarily driven by COVID-19. While these
risk factors remain, improvement in credit quality indicators resulted in a
reduction to the ALLL during the first quarter of 2021. While we have
experienced fluctuations in credit quality indicators in recent periods, credit
quality remained strong at June 30, 2022. Despite strong credit quality, the
ALLL increased during the second quarter of 2022 as a result of loan growth
during the quarter and increased economic and environmental related risk
factors.

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The following table illustrates the two main components of the ALLL as of:
                                     June 30          March 31          December 31          September 30          June 30
                                      2022              2022                2021                 2021               2021
ALLL
Individually evaluated for
impairment                         $    515          $    573          $       578          $       583          $  1,201
Collectively evaluated for
impairment                            9,185             8,631                8,525                8,510             8,159
Total                              $  9,700          $  9,204          $     9,103          $     9,093          $  9,360
ALLL to gross loans
Individually evaluated for
impairment                             0.04  %           0.05  %              0.04  %              0.05  %           0.10  %
Collectively evaluated for
impairment                             0.72  %           0.71  %              0.66  %              0.68  %           0.68  %
Total                                  0.76  %           0.76  %              0.70  %              0.73  %           0.78  %


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

For further details on the breakdown of ALLL, see “Note 4 – Loans and ALLL” to our condensed interim consolidated financial statements.

Delinquent loans and loans in non-recognition status

Fluctuations in delinquent and unaccrued loans can have a significant impact on the ALLL. To determine the potential impact and corresponding estimated losses, we analyze our historical loss trends on loans more than 30 days past due and loans in non-recognition status for indications of further deterioration.

                                                                    Total Past Due and Nonaccrual Loans
                                           June 30          March 31          December 31          September 30          June 30
                                            2022              2022                2021                 2021               2021
Commercial                               $    432          $    412          $       561          $       345          $    513
Agricultural                                  271               283                  987                2,860             3,014
Residential real estate                       345             1,560                2,287                  268               277
Consumer                                      457               109                  196                   25               109
Total                                    $  1,505          $  2,364        

$4,031 $3,498 $3,913
Total past due and unexpired loans to gross loans

                                  0.12  %           0.19  %              0.31  %              0.28  %           0.32  %


Loans past due and in nonaccrual status continued to decline during the second
quarter of 2022 as a result of increased credit quality. A summary of loans past
due and in nonaccrual status, including the composition of the ending balance of
nonaccrual status loans by type, is included in "Note 4 - Loans and ALLL" of our
interim condensed consolidated financial statements.


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Troubled Debt Restructurings

We have taken a proactive approach modifying loans to assist borrowers who are
willing to work with us, thus making them less likely to default, and to avoid
foreclosure. This approach has permitted certain borrowers to develop a payment
structure that will allow them to continue making payments in lieu of
foreclosure. Modifications have been successful for us and our customers as very
few of the modified loans have resulted in foreclosures. The majority of
modifications result in terms that satisfy our criteria for continued interest
accrual. TDRs that have been placed in nonaccrual status may be placed back on
accrual status after six months of continued performance and achievement of
current payment status.

We restructure debt with borrowers who, due to financial difficulties, are
unable to service their debt under the original terms. We may extend the
amortization period, reduce interest rates, allow temporary interest-only
payment structures, forgive principal, forgive interest, or grant a combination
of these modifications. Typically, the modifications are for a period of three
years or less.

Losses associated with TDRs, if any, are included in the estimation of the ALLL
during the quarter in which a loan is identified as a TDR, and we review the
analysis of the ALLL estimation each reporting period thereafter to ensure its
continued appropriateness.

The following tables provide TDR roll-forwards for:

Three months completed June 30, 2022

                                           Accruing Interest                         Nonaccrual                               Total
                                        Number                                Number                                 Number
                                          of                                    of                                     of
                                        Loans             Balance              Loans              Balance            Loans             Balance
April 1, 2022                              95           $ 22,335                     6          $    410               101           $ 22,745
New modifications                           -                  -                     -                 -                 -                  -
Principal advances (payments)               -                 61                     -               (19)                -                 42
Loans paid off                             (6)              (393)                    -                 -                (6)              (393)
June 30, 2022                              89           $ 22,003                     6          $    391                95           $ 22,394


                                                       Six Months Ended June 30, 2022
                                    Accruing Interest              Nonaccrual                  Total
                                  Number                      Number                    Number
                                    of                          of                        of
                                   Loans        Balance       Loans       Balance       Loans       Balance
January 1, 2022                        98      $ 25,276           6      $    449       104        $ 25,725
New modifications                       1            98           -             -         1              98
Principal advances (payments)           -        (1,675)          -           (58)        -          (1,733)
Loans paid off                        (10)       (1,696)          -             -       (10)         (1,696)

June 30, 2022                          89      $ 22,003           6      $    391        95        $ 22,394


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                                                       Three Months Ended June 30, 2021
                                     Accruing Interest             Nonaccrual                  Total
                                   Number                      Number                   Number
                                     of                          of                       of
                                    Loans        Balance       Loans       Balance      Loans       Balance
April 1, 2021                          113      $ 28,947           7      $ 2,568       120        $ 31,515
New modifications                        2           109           -            -         2             109
Principal advances (payments)            -           222           -          (45)        -             177
Loans paid off                         (13)       (2,454)          -            -       (13)         (2,454)
Transfers to nonaccrual status          (1)          (39)          1           39         -               -
June 30, 2021                          101        26,785           8      $ 2,562       109        $ 29,347


                                                        Six Months Ended June 30, 2021
                                     Accruing Interest              Nonaccrual                  Total
                                    Number                      Number                   Number
                                      of                          of                       of
                                    Loans         Balance       Loans       Balance      Loans       Balance
January 1, 2021                         108      $ 22,200           7      $ 2,730       115        $ 24,930
New modifications                        11         8,473           -            -        11           8,473
Principal advances (payments)             -          (838)          -         (207)        -          (1,045)
Loans paid off                          (17)       (3,011)          -            -       (17)         (3,011)
Transfers to nonaccrual status           (1)          (39)          1           39         -               -

June 30, 2021                           101      $ 26,785           8      $ 2,562       109        $ 29,347

The following table summarizes our ToRs as of:

                                              June 30, 2022                                         December 31, 2021
                             Accruing                                                Accruing                                                  Total
                             Interest          Nonaccrual            Total           Interest          Nonaccrual            Total            Change
Current                     $ 21,905          $      258          $ 22,163          $ 25,236          $      294          $ 25,530          $ (3,367)
Past due 30-59 days                -                  41                41                40                  85               125               (84)
Past due 60-89 days                -                   -                 -                 -                   -                 -                 -
Past due 90 days or more          98                  92               190                 -                  70                70               120
Total                       $ 22,003          $      391          $ 22,394          $ 25,276          $      449          $ 25,725          $ (3,331)

Additional information on TDRs is included in “Note 4 – Loans and ALLL” to our condensed interim consolidated financial statements.

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Impaired Loans

The following is a summary of information pertaining to impaired loans as of:
                                                       June 30, 2022                                          December 31, 2021
                                                          Unpaid                                                   Unpaid
                                      Recorded          Principal           Valuation          Recorded          Principal           Valuation
                                       Balance           Balance            Allowance           Balance           Balance            Allowance
TDRs
Commercial real estate               $  5,420          $   5,673          $       19          $  5,707          $   5,961          $        9
Commercial other                        3,042              3,042                   8             3,246              3,246                   4
Agricultural real estate                8,665              8,665                   -             9,182              9,181                   -
Agricultural other                      2,692              2,692                   -             4,543              4,543                   -
Residential real estate senior liens    2,575              2,712                 421             3,047              3,203                 504
Total TDRs                             22,394             22,784                 448            25,725             26,134                 517
Other impaired loans
Commercial real estate                    169                231                   -               314                377                   -
Agricultural real estate                    -                  -                   -               356                357                   -
Agricultural other                          -                  -                   -               108                108                   -
Residential real estate senior liens      419                554                  67               370                485                  61
Home equity lines of credit                 -                  -                   -                37                 37                   -
Total other impaired loans                588                785                  67             1,185              1,364                  61
Total impaired loans                 $ 22,982          $  23,569          $      515          $ 26,910          $  27,498          $      578


We continue to devote considerable attention to identifying impaired loans and
adjusting the net carrying value of these loans to their current net realizable
values through the establishment of a specific reserve or the recognition of a
charge-off.

Additional information relating to impaired loans is included in “Note 4 – Loans and ALLL” to our condensed interim consolidated financial statements.

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Nonperforming Assets

The following table summarizes our non-performing assets as of:

                                       June 30          March 31          

the 31st of December September 30 June 30th

                                        2022              2022                2021                 2021               2021
Nonaccrual status loans              $    540          $    747          $     1,245          $     3,077          $  3,329
Accruing loans past due 90 days or
more                                      119                 -                   97                    -                 -
Total nonperforming loans                 659               747                1,342                3,077             3,329
Foreclosed assets                         241               187                  211                  348               365
Debt securities                           131               131                  131                  230               230
Total nonperforming assets           $  1,031          $  1,065          $     1,684          $     3,655          $  3,924
Nonperforming loans as a % of total
loans                                    0.05  %           0.06  %              0.10  %              0.25  %           0.28  %
Nonperforming assets as a % of total
assets                                   0.05  %           0.05  %              0.08  %              0.18  %           0.19  %


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

The following table summarizes outstanding loans as at:

                                      June 30            March 31          December 31          September 30          June 30
                                        2022               2022                2021                 2021               2021
Commercial                          $     184          $     319          $       341          $       161          $    182
Agricultural                              271                283                  774                2,811             3,014
Residential real estate                    85                145                  130                  105               133
Total                               $     540          $     747          $     1,245          $     3,077          $  3,329
Nonaccrual loans as a % of loans at
end of period                            0.04  %            0.06  %              0.10  %              0.25  %           0.28  %


Included in the nonaccrual loan balances above were loans currently classified
as TDR as of:
                            June 30       March 31       December 31       September 30       June 30
                              2022          2022             2021              2021            2021
Commercial                 $    120      $     127      $        139      $         146      $   159
Agricultural                    271            283               310              2,347        2,362
Residential real estate           -              -                 -                  -           41
Total                      $    391      $     410      $        449      $       2,493      $ 2,562

Additional information on unrecognized loans is included in “Note 4 – Loans and ALLL” to our condensed interim consolidated financial statements.

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Noninterest Income and Noninterest Expenses

Significant non-interest revenue balances are highlighted in the following tables for:

Three months completed June 30th

                                                                                                         Change
                                                      2022                  2021                $                    %
Service charges and fees
ATM and debit card fees                        $    1,202               $   1,127          $      75                  6.65  %
Service charges and fees on deposit accounts          631                     481                150                 31.19  %
Net OMSR income (loss)                                213                     (68)               281                      N/M
Freddie Mac servicing fee                             167                     181                (14)                (7.73) %
Other fees for customer services                       71                     109                (38)               (34.86) %
Total service charges and fees                      2,284                   1,830                454                 24.81  %
Wealth management fees                                784                     806                (22)                (2.73) %
Earnings on corporate owned life insurance
policies                                              222                     190                 32                 16.84  %
Net gain on sale of mortgage loans                    170                     375               (205)               (54.67) %
All other                                             135                     114                 21                 18.42  %
Total noninterest income                       $    3,595               $   3,315          $     280                  8.45  %


                                                                         Six Months Ended June 30
                                                                                                       Change
                                                     2022                 2021                $                    %
Service charges and fees
ATM and debit card fees                        $    2,295             $   2,126          $     169                  7.95  %
Service charges and fees on deposit accounts        1,240                   917                323                 35.22  %
Net OMSR income (loss)                                477                  (100)               577                      N/M
Freddie Mac servicing fee                             338                   395                (57)               (14.43) %
Other fees for customer services                      143                   187                (44)               (23.53) %
Total service charges and fees                      4,493                 3,525                968                 27.46  %
Wealth management fees                              1,538                 1,502                 36                  2.40  %
Earnings on corporate owned life insurance
policies                                              432                   376                 56                 14.89  %
Net gain on sale of mortgage loans                    394                 1,120               (726)               (64.82) %
All other                                             285                   324                (39)               (12.04) %
Total noninterest income                       $    7,142             $   6,847          $     295                  4.31  %


Service charges and fees on deposit accounts increased during the first six
months of 2022, mainly due to an increase in the number of deposit accounts.
Service charges and fees during the remainder of 2022 are expected to exceed
2021 levels.

OMSR income results are driven, in part, by changes in offering rates on
residential mortgage loans, anticipated prepayments in the servicing-retained
portfolio, and the volume of loans within the servicing-retained portfolio.
Decreased prepayment speeds, as a result of an increase in interest rates, was
the primary driver of the income recognized during the first half of 2022.
Income during the remainder of 2022 will be driven by the volume of loans
originated within the servicing-retained portfolio, which could reduce gains
driven by the rise in interest rates.

The amount of loans sold is driven by customer demand and balance sheet
management strategies. We experienced a significant increase in loan demand in
early 2021 which led to an increase in the number and dollar amount of loans
sold; as such, net gain on sale of mortgage loans increased significantly. In
mid-2021, we decided to retain more loan originations on the balance sheet, due
to our liquidity position, thereby decreasing the number of mortgage loans sold,
which had an impact on the net gain on loans sold. As a result of this change in
strategy, coupled with a decline in loan demand, net gain on sale of mortgage
loans has declined in comparison to the prior year. As demand is expected to
slow during the remainder of 2022, net gain on sale of mortgage loans is not
expected to exceed 2021 levels.

Fluctuations in all other non-interest income are broken down into various categories, none of which are individually significant.

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Contents

Significant noninterest expense balances are highlighted in the following tables
for the:
                                                 Three Months Ended June 30
                                                                          Change
                                        2022           2021           $            %
Compensation and benefits           $    6,037      $  5,700      $   337        5.91  %
Furniture and equipment                  1,442         1,327          115        8.67  %
Occupancy                                  929           915           14        1.53  %
Other
Audit, consulting, and legal fees          605           452          153       33.85  %
ATM and debit card fees                    508           462           46        9.96  %
Marketing costs                            364           238          126       52.94  %
Donations and community relations          139           108           31       28.70  %
Memberships and subscriptions              207           217          (10)      (4.61) %
Loan underwriting fees                     215           200           15        7.50  %
Director fees                              187           180            7        3.89  %
FDIC insurance premiums                    131           129            2        1.55  %
All other                                  897           567          330       58.20  %
Total other noninterest expenses         3,253         2,553          700       27.42  %
Total noninterest expenses          $   11,661      $ 10,495      $ 1,166       11.11  %


                                                 Six Months Ended June 30
                                                                        Change
                                       2022          2021           $            %
Compensation and benefits           $ 12,111      $ 11,577      $   534         4.61  %
Furniture and equipment                2,892         2,700          192         7.11  %
Occupancy                              1,895         1,860           35         1.88  %
Other
Audit, consulting, and legal fees      1,154           888          266        29.95  %
ATM and debit card fees                  942           879           63         7.17  %
Marketing costs                          603           447          156        34.90  %
Donations and community relations        426           254          172        67.72  %
Memberships and subscriptions            424           428           (4)       (0.93) %
Loan underwriting fees                   397           390            7         1.79  %
Director fees                            388           339           49        14.45  %
FDIC insurance premiums                  256           360         (104)      (28.89) %
All other                              1,493         1,190          303        25.46  %
Total other noninterest expenses       6,083         5,175          908        17.55  %
Total noninterest expenses          $ 22,981      $ 21,312      $ 1,669         7.83  %


Audit, consulting, and legal fees have increased as a result of legal and other
professional services related expenses. While these expenses are not expected to
continue to increase at this level, fees are anticipated to exceed 2021 levels
for the remainder of 2022.

Marketing expenses increased during the second quarter of 2022 as a result of
the implementation of a new and enhanced online banking platform designed to
increase customer experience. As such, marketing expenses are expected to exceed
2021 levels for the remainder of 2022.

Donations and community relations increased during 2022 as a result of
initiatives designed to deepen and strengthen our relationship with the
communities in which we operate and serve, which includes an expanded footprint.
While government restrictions and temporary business closures related to
COVID-19 impacted our ability to maintain the level of support in early 2021, we
have since increased the level of community support.

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

Analysis of changes in the financial situation

                                               June 30            December 31                                    % Change
                                                 2022                 2021              $ Change              (unannualized)
ASSETS
Cash and cash equivalents                   $    82,017          $   105,330          $ (23,313)                        (22.13) %
AFS securities
Amortized cost of AFS securities                586,297              485,710            100,587                          20.71  %
Unrealized gains (losses) on AFS securities     (28,707)               4,891            (33,598)                              N/M
AFS securities                                  557,590              490,601             66,989                          13.65  %
Mortgage loans AFS                                  906                1,735               (829)                        (47.78) %
Loans
Gross loans                                   1,271,910            1,301,037            (29,127)                         (2.24) %
Less allowance for loan and lease losses          9,700                9,103                597                           6.56  %
Net loans                                     1,262,210            1,291,934            (29,724)                         (2.30) %
Premises and equipment                           24,169               24,419               (250)                         (1.02) %
Corporate owned life insurance policies          32,552               32,472                 80                           0.25  %
Equity securities without readily
determinable fair values                         15,095               17,383             (2,288)                        (13.16) %
Goodwill and other intangible assets             48,294               48,302                 (8)                         (0.02) %
Accrued interest receivable and other
assets                                           25,540               19,982              5,558                          27.82  %
TOTAL ASSETS                                $ 2,048,373          $ 2,032,158          $  16,215                           0.80  %
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities
Deposits                                    $ 1,759,866          $ 1,710,339          $  49,527                           2.90  %
Borrowed funds                                   86,450               99,320            (12,870)                        (12.96) %
Accrued interest payable and other
liabilities                                      11,377               11,451                (74)                         (0.65) %
Total liabilities                             1,857,693            1,821,110             36,583                           2.01  %
Shareholders' equity                            190,680              211,048            (20,368)                         (9.65) %

TOTAL LIABILITIES AND EQUITY $2,048,373 $2,032,158 $16,215

                           0.80  %


As shown above, total assets increased $16,215 from December 31, 2021, driven
primarily by an increase in AFS securities. Purchases of AFS securities were
partially funded by a $49,527 increase in deposits. We experienced a $29,127
decrease in loans during the first six months of 2022 which was largely driven
by a $34,710 decrease in advances to mortgage brokers, which are included within
the commercial loan portfolio.

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The following table outlines the changes in loan balances:
                              June 30        December 31                        % Change
                               2022             2021          $ Change       (unannualized)
Commercial                 $   772,567      $   807,439      $ (34,872)             (4.32) %
Agricultural                    94,726           93,955            771               0.82  %
Residential real estate        329,795          326,361          3,434               1.05  %
Consumer                        74,822           73,282          1,540               2.10  %
Total                      $ 1,271,910      $ 1,301,037      $ (29,127)             (2.24) %

The following table displays loan balances at:

                                           June 30              March 31           December 31          September 30            June 30
                                             2022                 2022                 2021                 2021                  2021
Commercial                              $   772,567          $   727,614          $   807,439          $    757,993          $   723,888
Agricultural                                 94,726               88,169               93,955                93,782               95,197
Residential real estate                     329,795              328,559              326,361               321,620              312,567
Consumer                                     74,822               74,029               73,282                75,163               75,011
Total                                   $ 1,271,910          $ 1,218,371          $ 1,301,037          $  1,248,558          $ 1,206,663


Loan demand has been negatively impacted by the strong competition for new
commercial loan opportunities while some customers hesitated to borrow due to
the pandemic. Advances to mortgage brokers, within the commercial loan
portfolio, was the driver behind the increase as of December 31, 2021, and the
decline during the first quarter of 2022, as participation in this mortgage
purchase program paused during most of 2021 and again in 2022. We've recently
experienced an increase in commercial loan demand, despite changes in advances
to mortgage brokers and continued forgiveness of the remaining SBA PPP loans. As
demand is expected to continue, we anticipate growth in the commercial loan
portfolio during the remainder of 2022. While Agricultural loans have increased,
we may continue to experience fluctuations due to the competitive lending
environment. Residential mortgage lending activities has slowed during the year
as a result of rising interest rates. As interest rates are expected to continue
to increase during the remainder in 2022, growth in residential and consumer
loans is anticipated to continue but at a slower pace.

The following table shows the changes in deposit balances:

                                              June 30            December 31                                    % Change
                                                2022                 2021              $ Change              (unannualized)

Sight deposits not bearing interest $488,110 $448,352

          $  39,758                           8.87  %
Interest bearing demand deposits               370,284              364,563              5,721                           1.57  %
Savings deposits                               635,397              596,662             38,735                           6.49  %
Certificates of deposit                        265,477              297,696            (32,219)                        (10.82) %
Internet certificates of deposit                   598                3,066             (2,468)                        (80.50) %
Total                                      $ 1,759,866          $ 1,710,339          $  49,527                           2.90  %

The following table shows the deposit balances as of:

                                   June 30              March 31           December 31          September 30            June 30
                                     2022                 2022                 2021                 2021                  2021
Noninterest bearing demand
deposits                        $   488,110          $   461,473          $ 

448 352 $430,950 $428,410
Interest-bearing sight deposits

                            370,284              387,187              364,563               374,137              326,971
Savings deposits                    635,397              635,195              596,662               572,136              549,134
Certificates of deposit             265,477              279,708              297,696               312,027              326,214
Internet certificates of
deposit                                 598                  598                3,066                 3,066                5,777
Total                           $ 1,759,866          $ 1,764,161          $ 1,710,339          $  1,692,316          $ 1,636,506


Total deposits have increased over the past 12 months with significant growth in
non-contractual deposits, such as demand and savings deposits. We experienced a
decline in certificates of deposit over the past year as a result of the low
interest rate environment with customers moving their funds into demand and
savings accounts. Over the last few years, we used excess funds to reduce
higher-cost deposits, such as brokered certificates of deposit.

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The primary objective of our investing activities is to provide for safety of
the principal invested. Secondary considerations include providing earnings and
liquidity while managing our overall exposure to changes in interest rates. Over
the last two years, the flat yield curve encouraged the use of excess funds to
reduce higher-cost borrowings as opposed to investing in AFS securities.
However, based on balance sheet strategies, excess funds above what is required
to retire future maturities of higher-cost funding sources was prudently
deployed to purchase AFS securities in future periods.

The following table shows the fair values ​​of AFS securities at:

                                    June 30            March 31           December 31           September 30           June 30
                                      2022               2022                2021                   2021                 2021
U.S. Treasury                     $ 214,474          $ 218,268          $  

209 703 $192,069 $132,593
States and political subdivisions 119,649

            114,015               121,205                128,689            130,960
Auction rate money market
preferred                             2,497              2,867                 3,242                  3,246              3,260
Mortgage-backed securities           45,796             49,578                56,148                 62,030             68,155
Collateralized mortgage
obligations                         167,572            152,441                92,301                100,767            109,294
Corporate                             7,602              7,750                 8,002                  7,583              4,192
Total                             $ 557,590          $ 544,919          $    490,601          $     494,384          $ 448,454


Borrowed funds include FHLB advances, securities sold under agreements to
repurchase, subordinated debt, and federal funds purchased. The balance of
borrowed funds fluctuates from period to period based on our funding needs that
arise from changes in loans, investments, and deposits. To provide balance sheet
growth, we may utilize borrowings and brokered deposits to fund earning assets.
The following table displays borrowed funds balances as of:
                                       June 30            March 31           December 31           September 30           June 30
                                         2022               2022                2021                   2021                 2021
Securities sold under agreements to
repurchase without stated maturity
dates                                $  47,247          $  51,353          

$50,162 $67,519 $62,274
Advances from the FHLB

                           10,000             10,000                20,000                 60,000             70,000
Fixed rate at 3.25% to floating, due
2031                                    29,203             29,181                29,158                 29,136             29,121
Total                                $  86,450          $  90,534          $     99,320          $     156,655          $ 161,395


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

Contractual obligations and loan commitments

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

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

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


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Capital

Capital consists solely of common stock, retained earnings, and accumulated
other comprehensive income (loss). We are authorized to raise capital through
dividend reinvestment, employee and director stock purchases, and shareholder
stock purchases. Pursuant to these authorizations, we issued 36,238 shares or
$907 of common stock during the first six months of 2022, as compared to 36,891
shares or $806 of common stock during the same period in 2021. We also offer the
Directors Plan in which participants purchase stock units through deferred fees,
in lieu of cash payments. Pursuant to this plan, we increased shareholders'
equity by $249 and $256 during the six-month periods ended June 30, 2022 and
2021, respectively. We also grant restricted stock awards pursuant to the RSP.
Pursuant to this plan, we increased shareholders' equity by $77 during the first
six months of 2022, as compared to $25 during the same period in 2021.

We have publicly announced a common stock repurchase plan. Pursuant to this
plan, we repurchased 15,766 shares or $397 of common stock during the first six
months of 2022 and 87,480 shares or $1,860 during the first six months of 2021.
As of June 30, 2022, we were authorized to repurchase up to an additional
451,725 shares of common stock.

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

The common equity tier 1 capital ratio has a minimum requirement of 4.50%. The
minimum standard for primary, or Tier 1 capital is 6.00% and the minimum
standard for total capital is 8.00%. The minimum requirements presented below
include the minimum required capital levels based on the Basel III Capital
Rules. Capital requirements to be considered well capitalized are based upon
prompt corrective action regulations, as amended to reflect the changes under
the Basel III Capital Rules. The following table sets forth these requirements
and our ratios as of:
                                                     June 30, 2022                                                      December 31, 2021
                                                                         Required to be                                                         Required to be
                                                Minimum Required         Considered Well                               Minimum Required         Considered Well
                                Actual            - BASEL III              Capitalized               Actual              - BASEL III              Capitalized
Common equity tier 1 capital     12.44  %                7.00  %                   6.50  %              12.07  %                7.00  %                   6.50  %
Tier 1 capital                   12.44  %                8.50  %                   8.00  %              12.07  %                8.50  %                   8.00  %
Total capital                    15.33  %               10.50  %                  10.00  %              14.94  %               10.50  %                  10.00  %
Tier 1 leverage                   8.38  %                4.00  %                   5.00  %               7.97  %                4.00  %                   5.00  %


Total capital includes Tier 1 capital and Tier 2 capital. Tier 2 capital
includes a permissible portion of the allowances for loan and lease losses and
subordinated debt, net of unamortized issuance costs. There are no significant
regulatory constraints placed on our capital. At June 30, 2022, the Bank also
exceeded minimum capital requirements.

Liquidity

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

Our primary sources of liquidity are cash and cash equivalents and unencumbered
AFS securities. These categories totaled $551,875 or 26.94% of assets as of
June 30, 2022, compared to $495,169 or 24.37% as of December 31, 2021. The
increase in the amount and percentage of primary liquidity is a direct result of
an increase in market deposits, an increase in unencumbered AFS securities from
purchases during the first half of 2022, and a deliberate reduction in
non-market funding which required collateralization. Liquidity is important for
financial institutions because of their need to meet loan funding commitments,
depositor withdrawal requests, and various other commitments including expansion
of operations, investment opportunities, and payment of cash dividends. Based on
these same factors, daily liquidity could vary significantly.

Deposit accounts are our primary source of funds. Our secondary sources include
the ability to borrow from the FHLB, from the FRB, and through various
correspondent banks in the form of federal funds purchased and a line of credit.
These funding methods typically carry a higher interest rate than traditional
market deposit accounts. In recent periods, we have elected to use excess funds
to reduce borrowings and other higher-cost funding sources. Some borrowed funds,
including FHLB advances, FRB Discount Window advances, and repurchase
agreements, require us to pledge assets, typically in the form of AFS securities
or loans, as collateral. As of June 30, 2022, we had available lines of credit
of $328,182.

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Our stress testing of liquidity increased since early 2020 and continues to
evolve due to economic uncertainly as a result of COVID-19. Our liquidity
position remained strong at June 30, 2022, which is illustrated in the following
table:
                                                              June 30
                                                               2022
Total cash and cash equivalents                             $  82,017
Available lines of credit
Fed funds lines with correspondent banks                       93,000
FHLB borrowings                                               225,244
FRB Discount Window                                             4,938
Other lines of credit                                           5,000
Total available lines of credit                               328,182

Loanable value unencumbered by FRB collateral, estimated1 340,000 Total cash and liquid assets

                                    $ 750,199


(1) Includes the estimated unencumbered loanable value of the FHLB collateral of $280,000

The following table summarizes our sources and uses of cash for the six-month period ended June 30th:

                                                         2022          2021         $ Variance
Net cash provided by (used in) operating activities   $ 14,780      $  15,861      $   (1,081)
Net cash provided by (used in) investing activities    (70,681)       (81,218)         10,537
Net cash provided by (used in) financing activities     32,588         66,906         (34,318)
Increase (decrease) in cash and cash equivalents       (23,313)         1,549         (24,862)
Cash and cash equivalents January 1                    105,330        246,640        (141,310)
Cash and cash equivalents June 30                     $ 82,017      $ 248,189      $ (166,172)


Fair Value

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

For more information regarding fair value measurements, see “Note 11 – Fair value” to our condensed interim consolidated financial statements.

Market risk

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

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

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

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probable calls of investment securities, changes in market conditions, loan
volumes and loan pricing, deposit sensitivity, and customer preferences. These
assumptions are inherently uncertain as they are subject to fluctuation and
revision in a dynamic rate environment. As a result, the simulation analysis
cannot precisely forecast the impact of rising and falling interest rates on net
interest income. Actual results will differ from simulated results due to many
other factors, including changes in balance sheet components, interest rate
changes, changes in market conditions, and management strategies. We regularly
monitor our projected net interest income sensitivity to ensure that it remains
within established limits.

Gap analysis, the secondary method to measure IRR, measures the cash flows
and/or the earliest repricing of our interest bearing assets and liabilities.
This analysis is useful for measuring trends in the repricing characteristics of
the balance sheet. Significant assumptions are required in this process because
of the embedded repricing options contained in assets and liabilities.
Residential real estate and consumer loans allow the borrower to repay the
balance prior to maturity without penalty, while commercial and agricultural
loans may have prepayment penalties. The amount of prepayments is dependent upon
many factors, including the interest rate of a given loan in comparison to the
current offering rates, the level of home sales, and the overall availability of
credit in the market place. Generally, a decrease in interest rates will result
in an increase in cash flows from these assets. A significant portion of our
securities are callable or have prepayment options. The call and prepayment
options are more likely to be exercised in a period of decreasing interest
rates. Savings and demand accounts may generally be withdrawn on request without
prior notice. The timing of cash flows from these deposits is estimated based on
historical experience. Certificates of deposit have penalties that discourage
early withdrawals.

We do not believe there has been a material change in the nature or categories
of our primary market risk exposure, or the particular markets that present the
primary risk of loss. We do not know of or expect there to be any material
change in the general nature of our primary market risk exposure in the near
term, and we do not expect to make material changes to our market risk methods
in the near term. We may change those methods in the future to adapt to changes
in circumstances or to implement new techniques.

Our primary market risk exposures related to the COVID-19 pandemic remain
uncertain. A review of our market risk methods are ongoing and modeling is
incorporating additional assumptions to account for this uncertainty related to
this crisis. Repricing, cash flows, and prepayment projections for loans and
mortgage-backed securities are not expected to behave as they would be expected
to in a more stable interest rate environment. Customer deposit levels may
experience unusual fluctuations due to government support programs, customer and
business needs, and general money supply. We continue to closely monitor
customer and economic indicators to develop more precise market risk assumptions
as the economic impact of the crisis continues to reveal itself.

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