What changed in this filing

/stocks — the workspaceLOADING

Item 8. Financial Statements and Supplementary Data

2021-03-10 compared with 2020-03-16 · 392 added, 260 removed, 1306 unchanged (33% of the section changed)

38 unchanged sentences

Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

One Critical Audit Matter

The critical audit matter communicated below is a matter arising from the current period audit of the financial statements that was communicated or is required to be communicated to the corporation's audit committee and that:

(1) relates to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective or complex judgments.

The communication of the critical audit matter does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the account or disclosures to which it relates.

Allowance for Loan Losses

Description of the Matter

The Corporation’s loan portfolio totaled $1.238 billion as of December 31, 2020 and the associated allowance for loan and lease losses (ALLL) was $9.744 million.

As described in Notes 1 and 4 to the consolidated financial statements, the ALLL is established to absorb inherent losses that have been incurred or are probable within the existing portfolio of loans.

Management’s estimate of inherent losses within the loan portfolio is established using quantitative, as well as qualitative, considerations.

The Corporation’s methodology to determine the ALLL considers quantitative calculations including:

specific valuation allowances determined in accordance with ASC Topic 310 based on probable losses on specific loans, historical valuation allowances determined in accordance with ASC topic 450 based on historical loan loss experience for similar loans with similar characteristics and trends, supplemented, as necessary, by credit judgment to address observed changes in trends and conditions, and other relevant environmental and economic factors such as concentrations of credit risk, economic trends and conditions, changes in underwriting standards, experience and depth of lending staff, trends in delinquencies, and the level of net charge-offs (qualitative factor adjustments).

Auditing the Corporation’s ALLL involved a high degree of subjectivity due to the judgement involved in the management’s determination of commercial and agricultural loan credit risk ratings and identification and measurement of qualitative factor adjustments included in the estimate of the ALLL.

How We Addressed the Matter in Our Audit

We obtained an understanding of the Corporation’s process for establishing the ALLL and evaluated the design and tested the operating effectiveness of controls that address the risk of material misstatement related to the measurement of the ALLL.

We tested controls over management’s review of commercial and agricultural loan credit risk ratings, the data inputs utilized in the ALLL calculation, management’s identification and review of the qualitative factor adjustments, and management’s review and approval process over the final determination of the ALLL.

To test the commercial and agricultural loan credit risk ratings included in management’s estimate of the ALLL, we evaluated the methodology used, including management’s consideration of the individual commercial and agricultural loan portfolio segments, and tested the completeness and accuracy of data from underlying systems that was used in the determination of credit risk.

We performed procedures on a sample of commercial and agricultural loans to test the Corporation’s credit risk ratings by comparing key attributes used in the determination of the credit risk rating to supporting documentation such as borrowers’ financial statements, underlying collateral, financial health of the guarantor and loan payment history.

To test the measurement of qualitative factor adjustments included in management’s estimate of the ALLL, we evaluated the methodology and metrics, including testing the completeness and accuracy of data from underlying systems and other information.

We further evaluated management’s assessment of the qualitative factor adjustments by obtaining an understanding of the basis for any changes in underlying qualitative factor adjustments and giving consideration to prior period qualitative factor adjustments and other information available within the Corporation and from external sources focusing on both corroborating and contrary evidence.

/s/Rehmann Robson LLC

10 unchanged sentences

Mortgage loans AFS 2,741 904

Commercial 756,686 700,941

Agricultural 100,461 116,920

Residential real estate 307,543 298,569

Consumer 73,621 70,140

Gross loans 1,238,311 1,186,570

Less allowance for loan and lease losses 9,744 7,939

Net loans 1,228,567 1,178,631

Premises and equipment 25,140 26,242

3 unchanged sentences

Goodwill and other intangible assets 48,331 48,379

Other assets 14,174 11,491

TOTAL ASSETS $ 1,957,378 $ 1,812,643

LIABILITIES AND SHAREHOLDERS’ EQUITY

19 unchanged sentences

Common Shares

Common Shares to be

Outstanding Amount Common Shares to be

Obligations Retained

Earnings Accumulated

Comprehensive

Income (Loss)

Income (Loss) Totals

Balance, January 1, 2018 7,857,293 $ 140,277 $ 5,502 $ 51,728 $ ( 2,602 ) $ 194,905

Comprehensive income (loss) — — — 14,021 ( 5,306 ) 8,715

Reclassification resulting from the enactment of the Tax Act

Adoption of ASU 2016-01 — — — ( 223 ) 223 —

Issuance of common stock 261,693 6,864 — — — 6,864

Common stock transferred from the Rabbi Trust to satisfy deferred compensation obligations — 683 ( 683 ) — — —

Share-based payment awards under equity compensation plan

Share-based payment awards under the Directors Plan — — 612 — — 612

Common stock purchased for deferred compensation obligations — ( 401 ) — — — ( 401 )

3 unchanged sentences

Comprehensive income (loss) — — — 13,024 9,656 22,680

Adoption of ASU 2016-01

Issuance of common stock 209,583 4,876 — — — 4,876

Common stock transferred from the Rabbi Trust to satisfy deferred compensation obligations — 911 ( 911 ) — — —

Share-based payment awards under equity compensation plan

Share-based payment awards under the Directors Plan — — 523 — — 523

Common stock purchased for deferred compensation obligations — ( 1,131 ) — — — ( 1,131 )

5 unchanged sentences

Common stock transferred from the Rabbi Trust to satisfy deferred compensation obligations — 1,273 ( 1,273 ) — — —

Share-based payment awards under equity compensation plan

Share-based payment awards under the Directors Plan — — 413 — — 413

Share-based compensation expense recognized in earnings under the RSP — 14 — — — 14

Common stock purchased for deferred compensation obligations — ( 1,592 ) — — — ( 1,592 )

6 unchanged sentences

Year Ended December 31

2020 2019 2018

Interest income

1 unchanged sentence

AFS securities

Taxable 5,214 7,185 8,239

Nontaxable 3,830 4,728 5,279

Federal funds sold and other 1,026 1,201 1,117

1 unchanged sentence

Interest expense

Deposits 8,884 11,608 9,261

Borrowings 4,941 6,253 6,370

Total interest expense 13,825 17,861 15,631

4 unchanged sentences

Service charges and fees 6,544 6,347 6,210

Investment and Trust advisory fees

Earnings on corporate owned life insurance policies

Net gain on sale of mortgage loans 2,716 650 525

Net gains on foreclosed assets

Net gains on sale of AFS securities

Wealth management fees 2,578 2,792 2,836

Gains from redemption of corporate owned life insurance policies 891 — —

Earnings on corporate owned life insurance policies 755 764 742

Net income (loss) on joint venture investment 577 ( 3,108 ) 274

Other 362 594 394

Total noninterest income 14,423 8,039 10,981

1 unchanged sentence

Compensation and benefits 23,772 23,205 22,609

Loss on extinguishment of debt 7,643 — —

Furniture and equipment 5,787 5,866 6,055

Occupancy 3,557 3,418 3,263

Other 10,474 10,561 10,925

Total noninterest expenses 51,233 43,050 42,852

1 unchanged sentence

Federal income tax expense 987 1,380 1,363

NET INCOME $ 10,885 $ 13,024 $ 14,021

Earnings per common share

Basic $ 1.37 $ 1.65 $ 1.78

Diluted $ 1.34 $ 1.61 $ 1.74

Cash dividends per common share $ 1.08 $ 1.05 $ 1.04

3 unchanged sentences

Year Ended December 31

2020 2019 2018

Net income $ 10,885 $ 13,024 $ 14,021

Unrealized gains (losses) on AFS securities

3 unchanged sentences

Tax effect (1)

( 1,530 ) ( 2,458 ) 1,415

Unrealized gains (losses) on AFS securities, net of tax 5,873 9,812 ( 5,814 )

8 unchanged sentences

Tax effect (1)

12 ( 12 ) ( 128 )

Change in unrealized pension cost, net of tax ( 50 ) 46 482

6 unchanged sentences

Year Ended December 31

2020 2019 2018

OPERATING ACTIVITIES

Net income $ 10,885 $ 13,024 $ 14,021

Reconciliation of net income to net cash provided by operating activities:

1 unchanged sentence

Provision for loan losses 1,665 30 978

Depreciation 2,620 2,908 2,940

Amortization of OMSR 504 307 218

2 unchanged sentences

Net unrealized (gains) losses on equity securities, at fair value — — 41

Net (gains) losses on sale of AFS securities

Net gains on sale of AFS securities ( 71 ) ( 6 ) —

Net (gains) losses on sale of equity securities, at fair value — — ( 1 )

Net gain on sale of mortgage loans ( 2,716 ) ( 650 ) ( 525 )

Net gains on foreclosed assets

OMSR impairment loss 316 214 —

Net (gains) losses on foreclosed assets 51 ( 162 ) ( 49 )

Increase in cash value of corporate owned life insurance policies, net of expenses ( 708 ) ( 722 ) ( 707 )

Share-based payment awards under equity compensation plan

Gains from redemption of corporate owned life insurance policies ( 891 ) — —

Loss on sale of joint venture investment 394 — —

Loss on extinguishment of debt 7,643 — —

Share-based payment awards under the Directors Plan 413 523 612

Share-based payment awards under the RSP 14 — —

Deferred income tax expense (benefit) ( 276 ) 408 275

3 unchanged sentences

Accrued interest receivable ( 381 ) 427 135

Other assets ( 440 ) 1,085 115

Accrued interest payable and other liabilities 398 637 358

2 unchanged sentences

Activity in AFS securities

Sales 26,855 33,840 —

Maturities, calls, and principal payments 97,844 81,543 80,005

Purchases ( 28,658 ) ( 39,896 ) ( 35,211 )

Sale of equity securities, at fair value — — 3,537

Sale of joint venture investment 1,000 — —

Net loan principal (originations) collections ( 52,132 ) ( 58,974 ) ( 37,958 )

1 unchanged sentence

Purchases of premises and equipment ( 1,518 ) ( 1,335 ) ( 2,305 )

Purchases of corporate owned life insurance policies ( 625 ) — —

Proceeds from redemption of corporate owned life insurance policies 2,387 — —

Purchases of FHLB Stock — — ( 1,350 )

4 unchanged sentences

Year Ended December 31

2020 2019 2018

FINANCING ACTIVITIES

14 unchanged sentences

Transfers of loans to foreclosed assets $ 531 $ 645 $ 467

Note receivable arising from sale of joint venture investment 3,227 — —

The accompanying notes are an integral part of these consolidated financial statements.

19 unchanged sentences

Actual results could differ from those estimates.

Material estimates that are particularly susceptible to significant change in the near term relate to the determination of the ALLL , the fair value of AFS investment securities, the valuation of goodwill and other intangible assets and equity securities without readily determinable fair values related to our ownership interest in Corporate Settlement Solutions, LLC (“ CSS ”).

FAIR VALUE MEASUREMENTS :

120 unchanged sentences

Included in equity securities without readily determinable fair values are our holdings in FHLB stock and FRB stock as well as our joint venture investment in CSS.

We sold our membership interest in CSS during the fourth quarter of 2020, which reduced equity securities without readily determinable fair values $4,246 when compared to December 31, 2019.

Our investment in CSS was made in 2008.

We are not the managing entity of CSS and account for our investment under the equity method of accounting.

We were not the managing entity of CSS and accounted for our investment under the equity method of accounting.

Equity securities without readily determinable fair values consist of the following holdings as of December 31:

FHLB Stock $ 15,050 $ 15,050

Investment in joint venture — 4,246

FRB Stock 1,999 1,999

Other 334 334

Total $ 17,383 $ 21,629

For further discussion of our joint venture investment, refer to “Note 6 – Investment in Joint Venture.”

EQUITY COMPENSATION PLAN:

EQUITY COMPENSATION PLANS:

At December 31, 2020, the Directors Plan had 176,215 shares eligible to be issued to participants, for which the Rabbi Trust held 59,162 shares.

We had 205,004 shares to be issued at December 31, 2019, with 27,069 shares held in the Rabbi Trust.

Under the RSP, compensation expense for nonvested stock awards is based on the fair value of the award on the measurement date.

The fair value of nonvested stock awards is based on the date of the grant and is recognized over the requisite service period.

The impact of forfeitures of share-based payment awards on compensation expense is recognized as forfeitures occur.

Compensation costs relating to share-based payment transactions are recognized as the services are rendered, with the cost measured based on the fair value of the equity or liability instruments issued (see “Note 13 – Benefit Plans”).

28 unchanged sentences

Income tax expense is the tax payable or refundable for the year plus or minus the change during the year in deferred tax assets and liabilities.

On December 22, 2017, the Tax Act was enacted.

The law established a flat corporate federal statutory income tax rate of 21%.

In accordance with ASC 740, Income Taxes, the effect of income tax law changes on deferred taxes was recognized as a component of income tax expense related to continuing operations in the period in which the law was enacted.

As such, federal income tax expense for the year ended December 31, 2017 reflects the effect of the tax rate change on net deferred tax assets and liabilities (see “ Note 16 – Federal Income Taxes ” and “ Note 17 – Accumulated Other Comprehensive Income (Loss) ”).

We analyze our filing positions in the jurisdictions where we are required to file income tax returns, as well as all open tax years in these jurisdictions.

15 unchanged sentences

Certain amounts reported in the 2019 and 2018 consolidated financial statements have been reclassified to conform with the 2020 presentation.

Other assets and other liabilities on the consolidated balance sheets were increased by $5,195 as of December 31, 2018 to reclassify pension and income tax related liabilities (pension:

$3,470, income taxes:

This resulted in a $5,195 increase in total assets and total liabilities as of December 31, 2018.

All other balances and ratios were not materially impacted.

Other assets and other liabilities on the consolidated balance sheets were decreased by $1,555 as of December 31, 2019 to reclassify pension liabilities.

This resulted in a $1,555 decrease in total assets and total liabilities as of December 31, 2019.

All other balances and ratios were not materially impacted.

Note 2 – Accounting Standards Updates

Recently Adopted Accounting Standards Updates

“Leases (Topic 842)”

In February 2016, ASU No.

2016-02 was issued to create Topic 842 - Leases which requires recognition of lease assets and lease liabilities on the balance sheet for leases previously classified as operating leases.

Accounting guidance is for both lessee and lessor accounting.

Under lessee accounting, a lessee should recognize in the statement of financial position a liability to make lease payments (the lease liability) and a right-of-use asset representing its right to use the underlying asset for the lease term.

For finance leases, a lessee is required to do the following:

1) recognize a right-of-use asset and a lease liability, initially measured at the present value of the lease payments, in the statement of financial position;

2) recognize interest on the lease liability separately from amortization of the right-of-use asset in the statement of comprehensive income;

and 3) classify repayments of the principal portion of the lease liability within financing activities and payments of interest on the lease liability and variable lease payments within operating activities in the statement of cash flows.

For operating leases, a lessee is required to do the following:

1) recognize a right-of-use asset and a lease liability, initially measured at the present value of the lease payments, in the statement of financial position;

2) recognize a single lease cost, calculated so that the cost of the lease is allocated over the lease term on a generally straight-line basis;

and 3) classify all cash payments within operating activities in the statement of cash flows.

The accounting applied by a lessor is largely unchanged from that applied under previous GAAP.

The new authoritative guidance was effective on January 1, 2019.

We reviewed our lease agreements to determine the appropriate treatment under this guidance.

These changes resulted in the recognition of a $72 operating lease asset and liability on the consolidated balance sheet as of January 1, 2019 which was restated prospectively.

Given the current insignificant impact to our operating results, further financial statement disclosures were not considered necessary as of December 31, 2019 .

“Fair Value Measurement (Topic 820):

Disclosure Framework-Changes to the Disclosure Requirements for Fair Value Measurement”

In August 2018, ASU No.

2018-13 was issued and provided an updated framework related to fair value disclosures.

For entities required to make disclosures about recurring or nonrecurring fair value measurements, the update provides disclosure modifications which include the removal, modification and addition of specific disclosure requirements.

The new authoritative guidance was effective January 1, 2020 and did not have a significant impact on our financial statement disclosures.

“Compensation - Retirement Benefits - Defined Pension Plans - General (Subtopic 715-20):

Disclosure Framework - Changes to the Disclosure Requirements for Defined Benefit Plans”

In August 2018, ASU No.

2018-14 was issued and provided an updated framework related to defined benefit plans.

For employers that sponsor defined benefit pension or other postretirement plans, the update provides disclosure modifications which include the removal of six specific requirements, the addition of two specific requirements and clarification to existing requirements.

Disclosure additions include 1) the weighted-average interest crediting rates for cash balance plans and other plans with promised interest crediting rates;

2) an explanation of the reasons for significant gains and losses related to changes in the benefit obligation for the period.

Clarification items relate to 1) the projected benefit obligation (PBO) and fair value of plan assets for plans with PBOs in excess of plan assets;

and 2) the accumulated benefit obligation (ABO) and fair value of plan assets for plans with ABOs in excess of plan assets.

The new authoritative guidance was effective for fiscal years ending after December 15, 2020 and did not have a significant impact on our financial statement disclosures.

“Intangibles - Goodwill and Other - Internal-Use Software (Subtopic 350-40):

Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract”

In August 2018, ASU No.

2018-15 was issued and provided guidance on the accounting for implementation, setup, and other upfront costs (collectively referred to as implementation costs) for entities that are a customer in a hosting arrangement that is a service contract.

The guidance also provided clarification on requirements to capitalize implementation costs and the required accounting for expenses related to capitalization of implementation costs.

The new authoritative guidance was effective January 1, 2020.

We will review arrangements entered into prospectively.

These changes are not expected to have a significant impact on our operating results or financial statement disclosures.

Pending Accounting Standards Updates

4 unchanged sentences

Current GAAP requires an “incurred loss” methodology for recognizing credit losses that delays recognition until it is probable a loss has been incurred.

Under the incurred loss approach, entities are limited to a probable initial recognition threshold when credit losses are measured under GAAP;

Under the incurred loss approach, entities are limited to a probable initial recognition threshold when credit losses are measured;

an entity generally only considers past events and current conditions in measuring the incurred loss.

12 unchanged sentences

Early adoption continues to be permissible under the revised implementation date.

currently we have no plans for early adoption.

This guidance may have a significant impact on our operations and financial statement disclosures as well as that of the banking industry as a whole.

We have invested a considerable amount of effort toward this guidance and will continue to invest considerable effort until our implementation date.

A committee was formed and is accountable for timely and accurate adoption of the guidance.

An internal committee was formed and is accountable for timely and accurate adoption of the guidance.

A service provider that has focused on the ALLL for more than 10 years and serves hundreds of financial institutions has been engaged to provide us with education, advisory, and software solutions exclusively related to the ACL.

We will run parallel processes which will help to ensure we are ready to calculate, review, and report the ACL by the required implementation date.

“Fair Value Measurement (Topic 820):

Disclosure Framework-Changes to the Disclosure Requirements for Fair Value Measurement”

In August 2018, ASU No.

2018-13 was issued and provided an updated framework related to fair value disclosures.

The new authoritative guidance is effective for interim and annual periods beginning after December 15, 2019 and will impact our financial statement disclosures.

“Compensation - Retirement Benefits - Defined Pension Plans - General (Subtopic 715-20):

Disclosure Framework - Changes to the Disclosure Requirements for Defined Benefit Plans”

In August 2018, ASU No.

2018-14 was issued and provided an updated framework related to defined benefit plans.

Disclosure additions include 1) the weighted-average interest crediting rates for cash balance plans and other plans with promised interest crediting rates;

2) an explanation of the reasons for significant gains and losses related to changes in the benefit obligation for the period.

Clarification items relate to 1) the projected benefit obligation (PBO) and fair value of plan assets for plans with PBOs in excess of plan assets;

and 2) the accumulated benefit obligation (ABO) and fair value of plan assets for plans with ABOs in excess of plan assets.

The new authoritative guidance is effective for fiscal years ending after December 15, 2020, with early adoption permitted, and will likely impact our financial statement disclosures.

“Intangibles - Goodwill and Other - Internal-Use Software (Subtopic 350-40):

Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract”

In August 2018, ASU No.

The guidance also provides clarification on requirements to capitalize implementation costs and the required accounting for expenses related to capitalization of implementation costs.

The new authoritative guidance is effective for interim and annual periods beginning after December 15, 2019.

Based on prospective approach, we will review future arrangements to determine the appropriate treatment under this guidance.

These changes are not expected to have a significant impact on our operating results or financial statement disclosures upon adoption.

Note 3 – AFS Securities

4 unchanged sentences

Collateralized mortgage obligations 97,430 4,553 — 101,983

Government sponsored enterprises

Corporate 1,700 — — 1,700

Total $ 325,966 $ 13,262 $ — $ 339,228

States and political subdivisions $ 165,005 $ 4,747 $ — $ 169,752

2 unchanged sentences

Collateralized mortgage obligations 115,944 1,007 187 116,764

Total $ 423,980 $ 6,687 $ 828 $ 429,839

The amortized cost and fair value of AFS securities by contractual maturity at December 31, 2020 are as follows:

Securities with Variable Monthly Payments or Noncontractual Maturities

Maturing Securities with Variable Monthly Payments or Noncontractual Maturities

or Less After One

Five Years After Five

Ten Years After

Ten Years Total

States and political subdivisions $ 23,754 $ 63,781 $ 24,055 $ 26,120 $ — $ 137,710

2 unchanged sentences

Collateralized mortgage obligations — — — — 97,430 97,430

Corporate — — 1,700 — — 1,700

Total amortized cost $ 23,754 $ 63,781 $ 25,755 $ 26,120 $ 186,556 $ 325,966

Fair value $ 23,922 $ 65,462 $ 26,990 $ 28,982 $ 193,872 $ 339,228

Expected maturities for government sponsored enterprises and states and political subdivisions may differ from contractual maturities because issuers may have the right to call or prepay obligations.

2 unchanged sentences

A summary of the sales activity of AFS securities during the years ended December 31 is displayed in the following table.

2020 2019 2018

Proceeds from sales of AFS securities $ 26,855 $ 33,840 $ —

1 unchanged sentence

Applicable income tax expense (benefit) $ 15 $ 1 $ —

(1) Calculations are based on a federal income tax rate of 21% in 2019 and 2018 and 34% in 2017.

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

Less Than Twelve Months

Twelve Months or More

States and political subdivisions

Auction rate money market preferred

Mortgage-backed securities

Collateralized mortgage obligations

Number of securities in an unrealized loss position:

Less Than Twelve Months

Twelve Months or More

Government sponsored enterprises

States and political subdivisions

There were no AFS securities with gross unrealized losses in a continuous loss position at December 31, 2020.

Less Than Twelve Months Twelve Months or More

Auction rate money market preferred — — 81 3,119 81

1 unchanged sentence

Collateralized mortgage obligations 43 20,262 144 13,309 187

Total $ 46 $ 24,236 $ 782 $ 66,129 $ 828

Number of securities in an unrealized loss position:

38 unchanged sentences

We classify these advances as commercial loans and include the outstanding balance in commercial loans on our consolidated balance sheets.

Under the participation agreement, we committed to a maximum outstanding aggregate amount of $50,000 .

Under the participation agreement, we committed to a maximum outstanding aggregate amount of $80,000 as of December 31, 2020.

During the first quarter of 2021, the maximum outstanding aggregate amount was reduced to $40,000.

The difference between our outstanding balance and the maximum outstanding aggregate amount is classified as “Unfunded commitments under lines of credit” in the “Contractual Obligations and Loan Commitments” section of the Management's Discussion and Analysis of Financial Condition and Results of Operations of this report.

31 unchanged sentences

Year Ended December 31, 2020

Residential Real Estate

Commercial Agricultural Residential Real Estate Consumer Unallocated Total

January 1, 2020 $ 1,914 $ 634 $ 2,047 $ 922 $ 2,422 $ 7,939

Charge-offs ( 7 ) ( 24 ) ( 28 ) ( 322 ) — ( 381 )

Recoveries 149 39 136 197 — 521

Provision for loan losses 106 ( 338 ) ( 792 ) 1 2,688 1,665

2 unchanged sentences

Year Ended December 31, 2019

Residential Real Estate

Commercial Agricultural Residential Real Estate Consumer Unallocated Total

January 1, 2019 $ 2,563 $ 775 $ 1,992 $ 857 $ 2,188 $ 8,375

Charge-offs ( 143 ) ( 240 ) ( 99 ) ( 466 ) — ( 948 )

Recoveries 123 3 189 167 — 482

Provision for loan losses ( 629 ) 96 ( 35 ) 364 234 30

2 unchanged sentences

As of December 31, 2020

Residential Real Estate

Commercial Agricultural Residential Real Estate Consumer Unallocated Total

Individually evaluated for impairment $ 84 $ 56 $ 771 $ — $ — $ 911

Collectively evaluated for impairment 2,078 255 592 798 5,110 8,833

Total $ 2,162 $ 311 $ 1,363 $ 798 $ 5,110 $ 9,744

Individually evaluated for impairment $ 9,821 $ 13,796 $ 4,319 $ — $ 27,936

Collectively evaluated for impairment 746,865 86,665 303,224 73,621 1,210,375

Total $ 756,686 $ 100,461 $ 307,543 $ 73,621 $ 1,238,311

Allowance for Loan Losses and Recorded Investment in Loans

As of December 31, 2019

Residential Real Estate

Commercial Agricultural Residential Real Estate Consumer Unallocated Total

Individually evaluated for impairment $ 15 $ 26 $ 1,073 $ — $ — $ 1,114

Collectively evaluated for impairment 1,899 608 974 922 2,422 6,825

Total $ 1,914 $ 634 $ 2,047 $ 922 $ 2,422 $ 7,939

Individually evaluated for impairment $ 7,865 $ 14,840 $ 5,486 $ — $ 28,191

Collectively evaluated for impairment 693,076 102,080 293,083 70,140 1,158,379

Total $ 700,941 $ 116,920 $ 298,569 $ 70,140 $ 1,186,570

The following tables display the credit quality indicators for commercial and agricultural credit exposures based on internally assigned credit risk ratings as of December 31:

Advances to Mortgage Brokers

Commercial Agricultural

Real Estate Other Advances to Mortgage Brokers Total Real Estate Other Total Total

1 - Excellent $ — $ — $ — $ — $ — $ — $ — $ —

5 unchanged sentences

7 - Vulnerable 26 1,303 — 1,329 3,208 387 3,595 4,924

Advances to Mortgage Brokers

8 - Doubtful — — — — 190 — 190 190

9 - Loss — — — — — — — —

Total $ 506,297 $ 200,131 $ 50,258 $ 756,686 $ 71,218 $ 29,243 $ 100,461 $ 857,147

Commercial Agricultural

Real Estate Other Advances to Mortgage Brokers Total Real Estate Other Total Total

1 - Excellent $ — $ 390 $ — $ 390 $ — $ — $ — $ 390

5 unchanged sentences

7 - Vulnerable 390 1,231 — 1,621 2,711 1,574 4,285 5,906

8 - Doubtful — — — — — — — —

9 - Loss — — — — — — — —

Total $ 510,153 $ 155,265 $ 35,523 $ 700,941 $ 80,027 $ 36,893 $ 116,920 $ 817,861

Internally assigned credit risk ratings are reviewed, at a minimum, when loans are renewed or when management has knowledge of improvements or deterioration of the credit quality of individual credits.

99 unchanged sentences

Total Past Due and Nonaccrual

or More Nonaccrual Current Total

Commercial real estate $ 333 $ — $ — $ 26 $ 359 $ 505,938 $ 506,297

6 unchanged sentences

Residential real estate

Senior liens 3,203 145 — 199 3,547 269,425 272,972

Junior liens 25 — — — 25 3,791 3,816

Home equity lines of credit 8 — — — 8 30,747 30,755

Total residential real estate 3,236 145 — 199 3,580 303,963 307,543

Secured 93 — — — 93 70,349 70,442

Unsecured 3 — — — 3 3,176 3,179

Total consumer 96 — — — 96 73,525 73,621

Total $ 4,152 $ 145 $ — $ 5,313 $ 9,610 $ 1,228,701 $ 1,238,311

Accruing Interest

1 unchanged sentence

Total Past Due and Nonaccrual

or More Nonaccrual Current Total

Commercial real estate $ 139 $ 30 $ — $ 390 $ 559 $ 509,594 $ 510,153

6 unchanged sentences

Residential real estate

Senior liens 3,463 258 — 557 4,278 253,894 258,172

Junior liens 65 — — — 65 5,766 5,831

Home equity lines of credit 157 — — 72 229 34,337 34,566

Total residential real estate 3,685 258 — 629 4,572 293,997 298,569

Secured 68 — — — 68 66,547 66,615

Unsecured 3 — — — 3 3,522 3,525

Total consumer 71 — — — 71 70,069 70,140

Total $ 4,426 $ 444 $ — $ 6,535 $ 11,405 $ 1,175,165 $ 1,186,570

Impaired Loans

8 unchanged sentences

The following summarizes information pertaining to impaired loans as of, and for the years ended, December 31:

Recorded Balance

Unpaid Principal Balance

Valuation Allowance

Average Recorded Balance

Interest Income Recognized

Recorded Balance Unpaid Principal Balance Valuation Allowance Average Recorded Balance Interest Income Recognized

Impaired loans with a valuation allowance

15 unchanged sentences

Impaired loans

Commercial 9,821 10,137 84 9,257 501

Agricultural 13,796 13,846 56 13,519 588

Residential real estate 4,319 4,661 771 4,897 202

Consumer — — — 1 —

Total impaired loans $ 27,936 $ 28,644 $ 911 $ 27,674 $ 1,291

Recorded Balance

Unpaid Principal Balance

Valuation Allowance

Average Recorded Balance

Interest Income Recognized

Recorded Balance Unpaid Principal Balance Valuation Allowance Average Recorded Balance Interest Income Recognized

Impaired loans with a valuation allowance

15 unchanged sentences

Impaired loans

Commercial 7,865 8,246 15 8,998 198

Agricultural 14,840 14,890 26 13,950 584

Residential real estate 5,486 6,215 1,073 6,279 120

Consumer — — — 5 —

Total impaired loans $ 28,191 $ 29,351 $ 1,114 $ 29,232 $ 902

15 unchanged sentences

The following is a summary of information pertaining to TDRs granted in the years ended December 31:

Number of Loans

Pre-Modification Recorded Investment

Post-Modification Recorded Investment

Number of Loans

Pre-Modification Recorded Investment

Post-Modification Recorded Investment

Number of Loans Pre-Modification Recorded Investment Post-Modification Recorded Investment Number of Loans Pre-Modification Recorded Investment Post-Modification Recorded Investment

Commercial other 10 $ 5,224 $ 5,224 3 $ 1,188 $ 1,188

1 unchanged sentence

Residential real estate 3 136 136 1 17 17

Total 18 $ 8,554 $ 8,554 11 $ 4,491 $ 4,491

The following table summarizes the nature of the concessions we granted to borrowers in financial difficulty in the years ended December 31:

Below Market Interest Rate

Below Market Interest Rate and Extension of Amortization Period

Below Market Interest Rate

Below Market Interest Rate and Extension of Amortization Period

Number of Loans

Pre-Modification Recorded Investment

Number of Loans

Pre-Modification Recorded Investment

Number of Loans

Pre-Modification Recorded Investment

Number of Loans

Pre-Modification Recorded Investment

Below Market Interest Rate Below Market Interest Rate and Extension of Amortization Period Below Market Interest Rate Below Market Interest Rate and Extension of Amortization Period

Number of Loans Pre-Modification Recorded Investment Number of Loans Pre-Modification Recorded Investment Number of Loans Pre-Modification Recorded Investment Number of Loans Pre-Modification Recorded Investment

Commercial other 2 $ 987 8 $ 4,237 — $ — 3 $ 1,188

1 unchanged sentence

Residential real estate — — 3 136 — — 1 17

Total 2 $ 987 16 $ 7,567 2 $ 1,189 9 $ 3,302

We did not restructure any loans by forgiving principal or accrued interest during 2020 or 2019.

3 unchanged sentences

The following is a summary of TDR loan balances as of December 31:

TDRs $ 24,930 $ 24,737

Measures we have taken to assist our customers include loan programs that provide short-term payment relief.

Under these programs, borrowers whose loans were in good standing as of March 1, 2020 could elect to defer full or partial payments for a period not to exceed 180 days.

Loan payment deferrals totaled $306,103, or 23.8% of gross loans, as of June 30, 2020.

As of September 30, 2020, active loan payment deferrals declined to $103,858, or 8.0% of gross loans, as the majority of borrowers granted loan payment deferrals had reverted back to contractual payments.

As of December 31, 2020, active loan payment deferrals declined even further and totaled $6,048, or 0.5% of gross loans.

Bank regulators issued a statement on March 22, 2020, and a revised statement on April 7, 2020, which provided confirmation that short-term loan modifications made on a good faith basis in response to COVID-19 to borrowers with a current payment status are not categorized as TDRs.

Pursuant to this guidance, borrowers granted a short-term loan modification meeting this criteria were not categorized as TDR as of December 31, 2020.

Note 5 – Premises and Equipment

A summary of premises and equipment at December 31 follows:

Land $ 6,164 $ 6,336

Buildings and improvements 30,503 30,257

Furniture and equipment 35,896 35,121

Total 72,563 71,714

accumulated depreciation 47,423 45,472

5 unchanged sentences

The purpose of the joint venture was to help IBT Title expand its service area and to take advantage of economies of scale.

As a 50% owner of the membership units of this entity, we account for our investment under the equity method of accounting, and our share of income and loss from the joint venture is included in noninterest income.

The following tables provide financial information for CSS .

Condensed Balance Sheets

Cash and cash equivalents

Accounts receivable

Premises and equipment

LIABILITIES AND SHAREHOLDERS’ EQUITY

Escrow funds payable

Notes payable

Other liabilities

Members' equity

TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY

Condensed Statements of Income

Year Ended December 31

Title premiums and other fees

Property reports

Cost of services

Property reports

Compensation and benefits

Occupancy and equipment

Impairment of goodwill and title plants

Total expenses

Net (loss) income

As a 50 % owner of the membership units of this entity, we accounted for our investment under the equity method of accounting, and our share of income and loss from the joint venture is included in noninterest income.

CSS is a limited liability company.

1 unchanged sentence

During the second half of 2019, a new line of business was proposed by the CSS General Manager which did not interest us as it was unrelated to the Bank's core business.

Subsequently, the General Manager of CSS chose to have a company valuation performed during the fourth quarter of 2019 for purposes of investor planning, and the independent, third-party valuation identified that CSS ’ intangible assets required an impairment of $7,133 .

Subsequently, the General Manager of CSS chose to have a company valuation performed by a third party during the fourth quarter of 2019 for purposes of investor planning.

The independent, third-party valuation identified that CSS’ intangible assets required an impairment of $7,133.

As a 50 % owner of the membership units of CSS, we recognized the reduced value of our investment which resulted in a reduction to income of $3,566 in the fourth quarter of 2019.

While we continually analyze all investments, there are no current plans to change our ownership or investment in CSS .

We sold our membership interest in CSS during the fourth quarter of 2020, which reduced equity securities without readily determinable fair values $4,246 when compared to December 31, 2019.

As a result of this transaction, we received a $1,000 down payment, recorded a receivable in the amount of $3,227 and recorded a loss of $394.

In 2020, our share of income was $ 577 , including the reduction of $394 from the sale.

Note 7 – Goodwill and Other Intangible Assets

Goodwill represents the excess of the amounts paid to acquire subsidiaries over the fair value of their net assets at the date of acquisition.

The majority of the recorded goodwill is related to acquisitions of other banks, which were subsequently merged into Isabella Bank.

If it is determined that the goodwill is impaired, a write-down of goodwill by the amount of the impairment would be required.

The carrying amount of goodwill was $ 48,282 at December 31, 2020 and 2019.

The decline in economic conditions, as a result of the COVID-19 pandemic and other factors, led to a significant decline in the stock market causing the value of investments, including our stock, to decline.

Our stock price was negatively impacted in March 2020, which continued during most of 2020.

Since the price of our stock increased but had not fully recovered through the fourth quarter, w e decided to engage a third-party valuation firm to perform a quantitative analysis of goodwill as of December 31, 2020.

In determining the fair value of the Bank and Isabella Bank Corporation, the third-party firm assessed general economic conditions, industry and market considerations, the impact of recent events to financial performance, the market price of our common stock, and other relevant events.

Based on the valuation prepared, it was determined that our estimated fair values of the Bank and Isabella Bank Corporation at December 31, 2020 were greater than our recorded book value and no impairment of goodwill was identified.

Furthermore, management noted that despite the decline of the market capitalization as a result of the CO VID-19 pandemic, our financial performance remained positive.

This is evidenced by our financial results, strong credit quality indicators, increased liquidity position, as well as the strong capital position.

Finally, by the end of the fourth quarter, our stock price had increased to levels consistent with prices prior to the second quarter of 2020.

Based on these factors and the results of the independent quantitative analysis of goodwill, management concluded that it was more likely than not that there was no goodwill impairment as of December 31, 2020.

Identifiable intangible assets were as follows as of December 31:

Assets Accumulated

Amortization Net

Core deposit premium resulting from acquisitions $ 5,579 $ 5,530 $ 49

Assets Accumulated

Amortization Net

Core deposit premium resulting from acquisitions $ 5,579 $ 5,482 $ 97

5 unchanged sentences

Scheduled Maturities of Time Deposits

2021 $ 235,283

Thereafter 162

Total $ 382,981

Interest expense on time deposits greater than $250 was $ 1,883 in 2020, $ 2,001 in 2019 and $ 1,280 in 2018.

1 unchanged sentence

Borrowed funds consist of the following obligations at December 31:

Amount Rate Amount Rate

FHLB advances $ 90,000 1.68 % $ 245,000 2.32 %

Securities sold under agreements to repurchase without stated maturity dates 68,747 0.13 % 30,999 0.09 %

Total $ 158,747 1.01 % $ 275,999 2.07 %

FHLB advances are collateralized by a blanket lien on all qualified 1-4 family residential real estate loans, specific AFS securities, and FHLB stock.

During the fourth quarter of 2020, we elected to extinguish $100,000 of FHLB advances based on our level of cash reserves and strategic initiatives.

Due to a significant increase in one account during the fourth quarter of 2020, our level of securities sold under agreements to repurchase increased as of December 31, 2020.

The following table lists the maturities and weighted average interest rates of FHLB advances as of December 31:

Fixed rate due 2019

Amount Rate Amount Rate

Fixed rate due 2020 $ — — % $ 55,000 2.18 %

1 unchanged sentence

Variable rate due 2021 (1)

10,000 0.52 % 10,000 2.20 %

Fixed rate due 2022 20,000 1.97 % 20,000 1.97 %

2 unchanged sentences

Fixed rate due 2026 10,000 1.17 % 10,000 1.17 %

Total $ 90,000 1.68 % $ 245,000 2.32 %

(1) Hedged advance (see “Derivative Instruments” section below)

6 unchanged sentences

The following table provides a summary of securities sold under repurchase agreements without stated maturity dates and federal funds purchased at December 31:

Maximum Month End Balance

Average Balance

Weighted Average Interest Rate During the Period

Maximum Month End Balance

Average Balance

Weighted Average Interest Rate During the Period

Maximum Month End Balance Average Balance Weighted Average Interest Rate During the Period Maximum Month End Balance Average Balance Weighted Average Interest Rate During the Period

Securities sold under agreements to repurchase without stated maturity dates $ 83,499 $ 35,514 0.10 % $ 37,441 $ 31,406 0.10 %

4 unchanged sentences

Pledged for public deposits and for other purposes necessary or required by law 39,641 59,537

Total $ 410,455 $ 458,867

AFS securities pledged to repurchase agreements without stated maturity dates consisted of the following at December 31:

2 unchanged sentences

Collateralized mortgage obligations 25,795 —

Total $ 68,773 $ 31,020

AFS securities pledged to repurchase agreements are monitored to ensure the appropriate level is collateralized.

10 unchanged sentences

The following tables provide information on derivatives related to variable rate borrowings as of December 31:

Remaining Life (Years)

Notional Amount

Balance Sheet Location

Pay Rate Receive Rate Remaining Life (Years) Notional Amount Balance Sheet Location Fair Value

Derivatives designated as hedging instruments

Cash Flow Hedges:

Interest rate swaps

3-Month LIBOR

Remaining Life (Years)

Notional Amount

Balance Sheet Location

Interest rate swaps 1.56 % 3-Month LIBOR 0.3 $ 10,000 Other liabilities $ ( 54 )

Pay Rate Receive Rate Remaining Life (Years) Notional Amount Balance Sheet Location Fair Value

Derivatives designated as hedging instruments

Cash Flow Hedges:

Interest rate swaps

3-Month LIBOR

Interest rate swaps 1.56 % 3-Month LIBOR 1.3 $ 10,000 Other assets $ 67

Derivatives contain an element of credit risk which arises from the possibility that we will incur a loss as a result of a counterparty failing to meet its contractual obligations.

12 unchanged sentences

Commitments to grant loans 26,939 20,778

Total $ 274,540 $ 228,224

Unfunded commitments under lines of credit are commitments for possible future extensions of credit to existing customers.

36 unchanged sentences

Other Matters

Banking regulations require us to maintain cash reserve balances in currency or deposits with the FRB .

At December 31, 2019 and 2018 , the reserve balances amounted to $1,341 and $1,220 , respectively.

Banking regulations required us to maintain cash reserve balances in currency or deposits with the FRB until March of 2020 when reserve requirements were reduced to zero.

At December 31, 2019 the reserve balance amounted to $ 1,341 .

Additionally, correspondent banks may require us to maintain minimum cash reserve balances.

At December 31, 2019 and 2018 , the reserve balances related to correspondent banks amounted to $400 .

At December 31, 2020 and 2019, the reserve balances related to correspondent banks amounted to $ 500 and $ 400 , respectively.

Banking regulations limit the transfer of assets in the form of dividends, loans, or advances from the Bank to the Corporation.

14 unchanged sentences

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.

On July 2, 2013, the FRB published revised BASEL III Capital standards for banks.

The final rules redefine what is included or deducted from equity capital, changes risk weighting for certain on and off-balance sheet assets, increases the minimum required equity capital to be considered well capitalized, and introduces a capital cushion buffer.

The rules, which were gradually phased in between 2015 and 2019, did not have a material impact on the Corporation but does require us to hold more capital than we have historically.

Effective January 1, 2015, the minimum standard for primary, or Tier 1, capital increased from 4.00% to 6.00% .

The minimum standard for total capital is 8.00% .

Also effective January 1, 2015 was the new common equity tier 1 capital ratio which had a minimum requirement of 4.50% .

Beginning on January 1, 2016 the capital conservation buffer went into effect which increased the required levels each year through 2019.

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%.

As of December 31, 2020 and 2019, the most recent notifications from the FRB and the FDIC categorized us as well capitalized under the regulatory framework for prompt corrective action.

2 unchanged sentences

Our actual capital amounts and ratios are also presented in the table.

Minimum To Be Well

Actual Minimum

Requirement Minimum To Be Well

Capitalized Under Prompt

Corrective Action Provisions

Amount Ratio Amount Ratio Amount Ratio

December 31, 2020

1 unchanged sentence

Isabella Bank $ 153,102 12.28 % $ 87,273 7.000 % $ 81,039 6.50 %

Consolidated 162,532 12.97 % 87,675 7.000 % N/A N/A

Tier 1 capital to risk weighted assets

Isabella Bank 153,102 12.28 % 105,975 8.500 % 99,741 8.00 %

Consolidated 162,532 12.97 % 106,462 8.500 % N/A N/A

Total capital to risk weighted assets

Isabella Bank 162,846 13.06 % 130,910 10.500 % 124,676 10.00 %

Consolidated 172,276 13.75 % 131,512 10.500 % N/A N/A

Tier 1 capital to average assets

Isabella Bank 153,102 7.97 % 76,814 4.00 % 96,018 5.00 %

Minimum To Be Well

Consolidated 162,532 8.37 % 77,671 4.00 % N/A N/A

Actual Minimum

Requirement Minimum To Be Well

Capitalized Under Prompt Corrective Action Provisions

Amount Ratio Amount Ratio Amount Ratio

December 31, 2019

1 unchanged sentence

Isabella Bank $ 150,093 11.86 % $ 88,587 7.000 % $ 82,260 6.50 %

Consolidated 159,794 12.56 % 89,090 7.000 % N/A N/A

Tier 1 capital to risk weighted assets

Isabella Bank 150,093 11.86 % 107,570 8.500 % 101,243 8.00 %

Consolidated 159,794 12.56 % 108,180 8.500 % N/A N/A

Total capital to risk weighted assets

Isabella Bank 158,032 12.49 % 132,881 10.500 % 126,554 10.00 %

Consolidated 167,733 13.18 % 133,635 10.500 % N/A N/A

Tier 1 capital to average assets

Isabella Bank 150,093 8.54 % 70,288 4.000 % 87,861 5.00 %

Consolidated 159,794 9.01 % 70,945 4.000 % N/A N/A

Note 12 – Computation of Earnings Per Common Share

1 unchanged sentence

Diluted earnings per common share includes additional common shares that would have been outstanding if dilutive potential common shares had been issued.

Potential common shares that may be issued relate solely to outstanding shares in the Directors Plan , see " Note 13 – Benefit Plans ."

Potential common shares that may be issued relate solely to outstanding shares in the Directors Plan and grant awards under the RSP, see "Note 13 – Benefit Plans."

Earnings per common share have been computed based on the following for the years ended December 31:

2020 2019 2018

Average number of common shares outstanding for basic calculation 7,959,705 7,909,794 7,872,077

Average potential effect of common shares in the Directors Plan (1)

143,878 185,248 200,771

Average potential effect of common shares in the RSP 2,508 — —

Average number of common shares outstanding used to calculate diluted earnings per common share 8,106,091 8,095,042 8,072,848

Net income $ 10,885 $ 13,024 $ 14,021

Earnings per common share

Basic $ 1.37 $ 1.65 $ 1.78

Diluted $ 1.34 $ 1.61 $ 1.74

(1) Exclusive of shares held in the Rabbi Trust

22 unchanged sentences

Deficiency in funded status at December 31, included on the consolidated balance sheets in accrued interest payable and other liabilities $ ( 2,095 ) $ ( 1,857 )

Accumulated benefit obligation at December 31 $ 10,358 $ 10,209

Change in accrued pension benefit costs

8 unchanged sentences

The components of net periodic benefit cost are as follows for the years ended December 31:

2020 2019 2018

Interest cost on benefit obligation $ 306 $ 378 $ 388

6 unchanged sentences

Pro rata settlement losses, which can occasionally occur as a result of these lump-sum distributions, are recognized only in years when the total of such distributions exceed the sum of the service and interest expense components of net periodic benefit cost.

Accumulated other comprehensive income at December 31, 2019 includes net unrecognized pension costs before income taxes of $3,412 , of which $23 is expected to be amortized into benefit cost during 2020 .

Accumulated other comprehensive income at December 31, 2020 includes net unrecognized pension costs before income taxes of $ 3,474 .

The actuarial assumptions used in determining the benefit obligation are as follows for the years ended December 31:

2020 2019 2018

Discount rate 2.30 % 3.07 % 4.11 %

1 unchanged sentence

The actuarial weighted average assumptions used in determining the net periodic pension costs are as follows for the years ended December 31:

2020 2019 2018

Discount rate 3.07 % 4.11 % 3.48 %

18 unchanged sentences

The fair values of our pension plan assets by asset category were as follows as of December 31:

Total (Level 2) Total (Level 2)

Short-term investments $ 69 $ 69 $ 218 $ 218

Common collective trusts

Fixed income 3,851 3,851 3,823 3,823

Equity investments 4,343 4,343 4,311 4,311

Total $ 8,263 $ 8,263 $ 8,352 $ 8,352

The following is a description of the valuation methodologies used for assets measured at fair value.

7 unchanged sentences

We anticipate contributions to the plan in 2021 to approximate net contribution costs.

The components of projected net periodic benefit cost are as follows for the year ending:

December 31, 2020

Interest cost on projected benefit obligation

Expected return on plan assets

Amortization of unrecognized actuarial net loss

Net periodic benefit cost

Estimated future benefit payments are as follows for the next ten years:

Estimated Benefit Payments

2026 - 2030 2,322

Directors Plan

2 unchanged sentences

Deferred fees, under the Directors Plan, are converted on a quarterly basis into stock units of our common stock based on the fair value of a share of our common stock as of the relevant valuation date.

Stock units credited to

a participant’s account are eligible for stock and cash dividends as declared.

Stock units credited to a participant’s account are eligible for stock and cash dividends as declared.

Dividend Reinvestment Plan shares are purchased pursuant to the Dividend Reinvestment Plan.

Distribution of deferred fees from the Directors Plan occurs when the participant retires from the Board or upon the occurrence of certain other events.

Distribution of deferred fees from the Directors Plan occurs when the participant retires from the Board of Directors or upon the occurrence of certain other events.

The participant is eligible to receive a distribution in the form of shares of our common stock of all of the stock units that are then in his or her account, and any unconverted cash will be converted to and rounded up to whole shares of stock and distributed, as well.

8 unchanged sentences

The components of shares eligible to be issued under the Directors Plan were as follows as of December 31:

Shares Market

Value Eligible

Shares Market

Unissued 117,053 $ 2,291 177,935 $ 4,326

Shares held in Rabbi Trust 59,162 1,158 27,069 658

Total 176,215 $ 3,449 205,004 $ 4,984

Cash Incentive Plans

Executive Cash Incentive Plan

On June 24, 2020, we amended and restated the Isabella Bank Corporation Employee Cash Incentive Plans to create two separate plans:

one for non-executive employees and the other, the Isabella Bank Corporation Executive Cash Incentive Plan for executive employees.

The executive plan provides separate potential payouts for Isabella Bank's CEO, President and CFO based on achievement of personal and corporate goals.

The potential payouts under the plan range from 20% to 30% of the employee's annual salary.

Expenses related to this plan for 2020 were $ 165 .

Employee Cash Incentive Plan

We provide cash incentive plans to reward employees above and beyond their base salaries when our performance and operating profitability exceed established annual targets.

Incentives are also awarded for achievement of personal performance goals.

Incentives are also awarded for achievement of personal performance

Expenses related to this plan for 2020, 2019 and 2018 were $ 1,101 , $ 1,070 , and $ 500 , respectively.

Prior to 2020, such expenses included cash incentives for all eligible employees, including executives.

Restricted Stock Plan

On June 24, 2020 the Board of Directors adopted the RSP, an equity-based bonus plan.

The primary purpose of the plan is to promote our growth and profitability by attracting and retaining executive officers and key employees of outstanding competence through ownership of equity that provides them with incentives to achieve corporate objectives.

In connection with the adoption of the RSP, the Isabella Bank Corporation Stock Award Incentive Plan was terminated.

The RSP authorizes the issuance of unvested restricted stock to an eligible employee with a maximum award ranging from 25 % to 40 % of the employee’s annual salary, on a calendar year basis.

Under the RSP, the Board of Directors may grant restricted stock awards to eligible employees on an annual basis based on satisfactory achievement of performance targets and measures established by the Board of Directors.

If these grant conditions are not satisfied, then the award of restricted shares will lapse or be adjusted appropriately, at the discretion of the Board of Directors.

Restricted stock awards granted are not fully transferable or vested until certain conditions are met, as stated in the plan.

Also on June 24, 2020 we made initial awards under the RSP.

Currently, the eligible employees are Isabella Bank's CEO, President, and CFO.

A summary of changes in nonvested restricted stock awards for the year follows:

of Shares Fair

Balance, January 1, 2020 — $ —

Granted 4,658 82

Forfeited — —

Balance, December 31, 2020 4,658 $ 82

Compensation expense related to the RSP was $ 14 for 2020.

As of December 31, 2020, there was $ 68 of total remaining unrecognized compensation expense related to nonvested restricted stock awards granted under the RSP.

The remaining expense is expected to be recognized over a weighted-average service period of 3.17 years.

Stock Award Incentive Plan

We maintain an equity incentive plan for the purpose of promoting growth and operating profitability, as well as attracting and retaining executive officers of outstanding competence, through ownership of equity.

Stock may be granted to specified individuals subject to certain conditions, and transfer of shares granted under the plan is restricted.

We maintained an equity incentive plan for the purpose of promoting growth and operating profitability, as well as attracting and retaining executive officers of outstanding competence, through ownership of equity.

Under this plan, stock was granted to specified individuals subject to certain conditions, and the transfer of shares granted under the plan is restricted.

Expenses related to this plan for 2019 and 2018 were $ 171 and $ 45 , respectively.

This plan was terminated in 2020 with the adoption of our Restricted Stock Plan.

Other Employee Benefit Plans

13 unchanged sentences

Accounts receivable balances are recorded in the consolidated balance sheets in accrued interest receivable and other assets.

For the years ended December 31, 2019 , 2018

and 2017 , we satisfied our performance obligations pursuant to contracts with customers.

For the years ended December 31, 2020, 2019 and 2018, we satisfied our performance obligations pursuant to contracts with customers.

As a result, we have not recorded any contract assets or liabilities.

2 unchanged sentences

A summary of revenue recognized for each major category of contracts with customers, subject to ASC 606, is as follows for the years ended December 31:

2020 2019 2018

Debit card income $ 2,961 $ 2,667 $ 2,487

2 unchanged sentences

Service charges and fees related to deposit accounts 290 317 332

A large portion of our revenue consists of interest income which is not subject to the requirements set forth in ASC 606.

A significant portion of our revenue consists of interest income which is not subject to the requirements set forth in ASC 606.

Note 15 – Other Noninterest Expenses

A summary of expenses included in other noninterest expenses is as follows for the years ended December 31:

2020 2019 2018

Audit, consulting, and legal fees $ 1,836 $ 1,884 $ 2,222

ATM and debit card fees 1,441 1,210 1,036

Donations and community relations

Marketing costs 877 762 596

Loan underwriting fees 825 905 1,016

Donations and community relations 723 1,026 710

Director fees 695 788 858

Marketing costs

FDIC insurance premiums 612 211 726

All other 3,465 3,775 3,761

Total other noninterest expenses $ 10,474 $ 10,561 $ 10,925

Note 16 – Federal Income Taxes

Components of the consolidated provision for federal income taxes are as follows for the years ended December 31 :

Components of the consolidated provision for federal income taxes are summarized as follows for the years ended December 31:

2020 2019 2018

Currently payable $ 1,263 $ 972 $ 1,088

Deferred expense

Deferred expense (benefit) ( 276 ) 408 275

Income tax expense $ 987 $ 1,380 $ 1,363

In 2017, we implemented tax strategies which resulted in changes to our federal income tax components, as illustrated above.

These strategies, which were primarily related to premises and equipment, significantly decreased our taxes currently payable and led to an increase in our level of alternative minimum tax.

Changes in these deferred tax components are displayed in the deferred tax assets and liabilities table on the following page.

On December 22, 2017, the Tax Act was enacted.

The law established a flat corporate federal statutory income tax rate of 21%, effective January 1, 2018, and eliminated the corporate alternative minimum tax.

The new tax law provided for a wide array of changes with only some having a direct impact on our federal income tax expense.

Some of these changes included, but were not limited to, the following items:

limits to the deduction for net interest expense;

immediate expense (for tax purposes) for certain qualified depreciable assets;

elimination or reduction of certain deductions related to meals and entertainment expenses;

and limits to the deductibility of deposit insurance premiums.

In accordance with ASC 740, Income Taxes, the effect of income tax law changes on deferred taxes are recognized as a component of income tax expense related to continuing operations in the period in which the law was enacted.

As such, federal income tax expense for the year ended December 31, 2017 reflects the effect of the tax rate change on net deferred tax assets and liabilities.

This requirement also applies to items initially recognized in other comprehensive income.

In January 2018, FASB issued ASU 2018-02 which allowed for the "stranded" tax effects in AOCI to be reclassified to retained earnings rather

than income tax expense.

We early adopted this guidance and applied this accounting alternative in our consolidated statements of changes in shareholders equity as of December 31, 2017.

The reconciliation of the provision for federal income taxes and the amount computed at the federal statutory tax rate of income before federal income tax expense is as follows for the year ended December 31:

2020 2019 2018

Income taxes at statutory rate $ 2,493 $ 3,025 $ 3,231

2 unchanged sentences

Earnings on corporate owned life insurance policies ( 346 ) ( 160 ) ( 148 )

Deferred tax adjustment resulting from the statutory rate reduction pursuant to the Tax Act

Other 288 283 231

Total effect of nontaxable income ( 860 ) ( 867 ) ( 1,023 )

3 unchanged sentences

Federal income tax expense $ 987 $ 1,380 $ 1,363

The loss recognized during the fourth quarter of 2019 related to our joint venture investment in CSS is unlikely to reverse in the foreseeable future.

As such, we did not record a deferred tax asset related to our investment in CSS as of December 31, 2019 .

The losses recognized during 2019 and 2020 related to our joint venture investment in CSS are unlikely to reverse in the foreseeable future.

As such, we did not record a deferred tax asset as of December 31, 2020 related to our investment in CSS.

Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for federal income tax purposes.

Significant components of our deferred tax assets and liabilities, measured at the 21% statutory rate, included in other assets and other liabilities in the accompanying consolidated balance sheets, are as follows as of December 31 :

Significant components of our deferred tax assets and liabilities, measured at the 21% statutory rate, included in other assets and other liabilities on our consolidated balance sheets, are summarized as follows as of December 31:

Deferred tax assets

Allowance for loan losses $ 1,724 $ 1,255

Deferred directors’ fees

Deferred compensation 1,475 1,615

Employee benefit plans 59 77

1 unchanged sentence

Net unrecognized actuarial losses on pension plan 729 717

Net unrealized losses on available-for-sale securities

Net unrealized gains on derivative instruments 11 —

Life insurance death benefit payable 497 497

Alternative minimum tax

Other 890 771

Total deferred tax assets 6,136 5,674

6 unchanged sentences

Net unrealized gains on derivative instruments — 14

Other 956 1,157

Total deferred tax liabilities 7,165 5,513

Net deferred tax assets (liabilities) $ ( 1,029 ) $ 161

We are subject to U.S.

federal income tax;

however, we are no longer subject to examination by taxing authorities for years before 2016 .

While we are subject to U.S.

federal income tax, we are no longer subject to examination by taxing authorities for years before 2017.

There are no material uncertain tax positions requiring recognition in our consolidated financial statements.

7 unchanged sentences

The following table provides a roll-forward of the changes in AOCI by component for the years ended December 31, 2018, 2019 and 2020 (net of tax):

(Losses) on Derivative Instruments

Change in Unrecognized Pension Cost on Defined

Securities Unrealized

(Losses) on Derivative Instruments Change in Unrecognized Pension Cost on Defined

Pension Plan Total

Balance, January 1, 2018 $ 391 $ 230 $ ( 3,223 ) $ ( 2,602 )

1 unchanged sentence

Amounts reclassified from AOCI — — 345 345

Subtotal ( 7,229 ) 33 610 ( 6,586 )

Tax effect 1,415 ( 7 ) ( 128 ) 1,280

OCI, net of tax ( 5,814 ) 26 482 ( 5,306 )

One-time non-cash tax rate adjustment due to the Tax Act

Adoption of ASU 2016-01 223 — — 223

Balance, December 31, 2018 ( 5,200 ) 256 ( 2,741 ) ( 7,685 )

1 unchanged sentence

Amounts reclassified from AOCI ( 6 ) — 268 262

Subtotal 12,270 ( 256 ) 58 12,072

Tax effect ( 2,458 ) 54 ( 12 ) ( 2,416 )

OCI, net of tax 9,812 ( 202 ) 46 9,656

Adoption of ASU 2016-01

Balance, December 31, 2019 4,612 54 ( 2,695 ) 1,971

1 unchanged sentence

Amounts reclassified from AOCI ( 71 ) — 176 105

Subtotal 7,403 ( 121 ) ( 62 ) 7,220

Tax effect ( 1,530 ) 25 12 ( 1,493 )

OCI, net of tax 5,873 ( 96 ) ( 50 ) 5,727

Balance, December 31, 2020 $ 10,485 $ ( 42 ) $ ( 2,745 ) $ 7,698

Included in OCI for the year ended December 31, 2017 are changes in unrealized gains and losses related to auction rate money market preferred stocks and preferred stocks, or equity securities.

Changes in unrealized gains and losses related to equity securities were not included in OCI after the adoption of ASU 2016-01, effective January 1, 2018.

Included in OCI are changes in unrealized gains and losses related to auction rate money market preferred stocks.

Auction rate money market preferred stocks, for federal income tax purposes, have no deferred federal income taxes related to unrealized gains or losses given the nature of the investments.

In accordance with the Tax Act , the effect of income tax law changes on deferred taxes also applies to items recognized in other comprehensive income.

In January 2018, FASB issued ASU 2018-02 which allowed for the "stranded" tax effects in AOCI to be reclassified to retained earnings rather than income tax expense.

We early adopted this guidance and applied this accounting alternative in our consolidated statements of changes in shareholders equity as of December 31, 2017.

Changes in unrealized gains and losses related to investments in equity securities were not included in OCI after the adoption of ASU 2016-01, effective January 1, 2018.

A summary of the components of unrealized gains on AFS securities included in OCI follows for the years ended December 31:

Auction Rate Money Market Preferred Stocks

All Other AFS Securities

Auction Rate Money Market Preferred Stocks

All Other AFS Securities

Auction Rate Money Market Preferred and Preferred Stocks

All Other AFS securities

2020 2019 2018

Auction Rate Money Market Preferred Stocks All Other AFS Securities Total Auction Rate Money Market Preferred Stocks All Other AFS Securities Total Auction Rate Money Market Preferred Stocks All Other AFS Securities Total

Unrealized gains (losses) arising during the period $ 118 $ 7,356 $ 7,474 $ 565 $ 11,711 $ 12,276 $ ( 495 ) $ ( 6,734 ) $ ( 7,229 )

3 unchanged sentences

Unrealized gains (losses), net of tax $ 118 $ 5,755 $ 5,873 $ 565 $ 9,247 $ 9,812 $ ( 495 ) $ ( 5,319 ) $ ( 5,814 )

(1) Calculations are based on a federal income tax rate of 21% in 2019 and 2018 and 34% in 2017.

The following table details reclassification adjustments and the related affected line items in our consolidated statements of income for the years ended December 31:

Details about AOCI components

Details about AOCI components Amount

Reclassified from

Affected Line Item in the

AOCI Affected Line Item in the

Statements of Income

2020 2019 2018

Unrealized gains (losses) on AFS securities

1 unchanged sentence

15 1 — Federal income tax expense

$ 56 $ 5 $ — Net income

Change in unrecognized pension cost on defined benefit pension plan

1 unchanged sentence

37 56 72 Federal income tax expense

(1) Calculations are based on a federal income tax rate of 21% in 2019 and 2018 and 34% in 2017.

$ 139 $ 212 $ 273 Net income

Note 18 – Fair Value

31 unchanged sentences

December 31, 2020

Valuation Technique

Unobservable Input

Valuation Technique Fair Value Unobservable Input Actual Range Weighted Average

Discount applied to collateral:

Discounted value

Cash crop inventory

Real Estate 20% - 30% 23%

Equipment 20% - 50% 32%

Discounted value $ 19,540 Cash crop inventory 40 % 40%

Livestock 30 % 30%

Other inventory 50 % 50%

Accounts receivable 25% - 50% 27%

Liquor license 75 % 75%

December 31, 2019

Valuation Technique

Unobservable Input

Valuation Technique Fair Value Unobservable Input Actual Range Weighted Average

Discount applied to collateral:

Cash crop inventory

Discounted value

Real Estate 20% - 30% 22%

Equipment 20% - 40% 32%

Discounted value $ 19,135 Cash crop inventory 40 % 40%

Livestock 30 % 30%

Other inventory 50 % 50%

Accounts receivable 25% - 50% 28%

Liquor license

Furniture, fixtures & equipment

Collateral discount rates may have ranges to accommodate differences in the age of the independent appraisal, broker price opinion, or internal evaluation.

10 unchanged sentences

Equity securities without readily determinable fair values:

Equity securities without readily determinable fair values include our holdings in FHLB stock and FRB stock as well as our ownership interest in CSS .

As a 50% investor of the membership units in CSS , we account for our investment under the equity method of accounting.

Equity securities without readily determinable fair values include our holdings in FHLB stock and FRB stock as well as our membership interest in CSS.

As a 50% investor of the membership units in CSS, we accounted for our investment under the equity method of accounting.

The General Manager of CSS, through the normal course of business, chose to evaluate its operations of the company and obtained an independent, third-party valuation of the company during the fourth quarter of 2019.

1 unchanged sentence

As such, we classify such equity securities instruments as Level 3 with the related impairment in 2019 a nonrecurring Level 3 fair value adjustment.

We sold our membership interest in CSS during the fourth quarter of 2020.

The preceding methods described may produce a fair value calculation that may not be indicative of net realizable value or reflective of future fair values.

5 unchanged sentences

The carrying amount and estimated fair value of financial instruments not recorded at fair value in their entirety on a recurring basis were as follows as of December 31:

Value Estimated

Fair Value Level 1 Level 2 Level 3

Cash and cash equivalents $ 246,640 $ 246,640 $ 246,640 $ — $ —

Mortgage loans AFS 2,741 2,858 — 2,858 —

Gross loans 1,238,311 1,239,718 — — 1,239,718

Less allowance for loan and lease losses 9,744 9,744 — — 9,744

Net loans 1,228,567 1,229,974 — — 1,229,974

Accrued interest receivable 6,882 6,882 6,882 — —

Equity securities without readily determinable fair values (1)

17,383 N/A — — —

OMSR 2,308 2,480 — 2,480 —

Deposits without stated maturities 1,183,336 1,183,336 1,183,336 — —

2 unchanged sentences

Accrued interest payable 481 481 481 — —

Value Estimated

Fair Value Level 1 Level 2 Level 3

Cash and cash equivalents $ 60,572 $ 60,572 $ 60,572 $ — $ —

Mortgage loans AFS 904 925 — 925 —

Gross loans 1,186,570 1,170,370 — — 1,170,370

Less allowance for loan and lease losses 7,939 7,939 — — 7,939

Net loans 1,178,631 1,162,431 — — 1,162,431

Accrued interest receivable 6,501 6,501 6,501 — —

Equity securities without readily determinable fair values (1)

21,629 N/A — — —

OMSR 2,264 2,264 — 2,264 —

Deposits without stated maturities 906,232 906,232 906,232 — —

6 unchanged sentences

The table below presents the recorded amount of assets and liabilities measured at fair value on December 31:

Total Level 1 Level 2 Level 3 Total Level 1 Level 2 Level 3

Recurring items

AFS securities

Government-sponsored enterprises

States and political subdivisions $ 143,656 $ — $ 143,656 $ — $ 169,752 $ — $ 169,752 $ —

2 unchanged sentences

Collateralized mortgage obligations 101,983 — 101,983 — 116,764 — 116,764 —

Corporate 1,700 — 1,700 — — — — —

Total AFS securities 339,228 — 339,228 — 429,839 — 429,839 —

2 unchanged sentences

Impaired loans (net of the ALLL) 19,540 — — 19,540 19,135 — — 19,135

OMSR 2,308 — 2,308 — 2,264 — 2,264 —

Investment in CSS — — — — 4,246 — — 4,246

Foreclosed assets 527 — — 527 456 — — 456

Total $ 361,657 $ — $ 341,590 $ 20,067 $ 456,007 $ — $ 432,170 $ 23,837

Percent of assets and liabilities measured at fair value — % 94.45 % 5.55 % — % 94.77 % 5.23 %

We recorded $111 and $0 through earnings related to fair value changes in foreclosed assets for the years ended December 31, 2019 and 2018 .

We recorded an impairment related to OMSR of $ 316 and $ 214 through earnings for the years ended December 31, 2020 and 2019.

We recorded a reduction to our investment in CSS of $3,566 and $0 through earnings for the years ended December 31, 2019 and 2018 .

We recorded a reduction to our investment in CSS of $ 3,566 through earnings for the years ended December 31, 2019.

We recorded losses of $ 41 and gains of $ 111 through earnings related fair value changes in foreclosed assets for the years ended December 31, 2020 and 2019.

We had no other assets or liabilities recorded at fair value with changes in fair value recognized through earnings, on a recurring basis or nonrecurring basis, as of December 31, 2020 and 2019.

3 unchanged sentences

Balance, January 1 $ 3,695 $ 3,343

New loans 837 1,584

Repayments ( 1,555 ) ( 1,232 )

Balance, December 31 $ 2,977 $ 3,695

7 unchanged sentences

The following table displays total assets of, and our donations to, the Foundation as of, and for the years ended December 31:

2020 2019 2018

Total assets $ 1,286 $ 1,678 $ 1,731

Donations $ — $ 50 $ —

Note 20 – Operating Segments

7 unchanged sentences

Premises and equipment 1,529 1,539

Other assets 48,352 49,887

TOTAL ASSETS $ 218,647 $ 210,201

LIABILITIES AND SHAREHOLDERS’ EQUITY

4 unchanged sentences

Year Ended December 31

2020 2019 2018

Dividends from subsidiaries $ 9,300 $ 7,800 $ 13,100

1 unchanged sentence

Net income (loss) on CSS joint venture 577 ( 3,108 ) 274

Other income (loss) — — 2,756

Total income 9,878 4,699 16,131

Compensation and benefits — — 4,132

2 unchanged sentences

Director fees 356 368 413

Other 1,172 1,165 796

Total expenses 2,162 2,069 6,628

3 unchanged sentences

Undistributed earnings of subsidiaries 2,953 9,410 3,769

Net income $ 10,885 $ 13,024 $ 14,021

Condensed Statements of Cash Flows

Year Ended December 31

2020 2019 2018

Operating activities

Net income $ 10,885 $ 13,024 $ 14,021

Adjustments to reconcile net income to cash provided by operations

1 unchanged sentence

Undistributed earnings of equity securities without readily determinable fair values ( 394 ) 3,320 ( 144 )

Share-based payment awards under equity compensation plan

Loss on sale of joint venture investment 394 — —

Share-based payment awards under the Directors Plan 413 523 612

Share-based payment awards under the RSP 14 — —

Depreciation 47 46 134

Deferred income tax expense (benefit) 351 114 ( 31 )

Changes in operating assets and liabilities which provided (used) cash

Other assets 183 ( 285 ) 1,237

Other liabilities 40 69 ( 937 )

1 unchanged sentence

Investing activities

Maturities, calls, principal payments, and sales of AFS securities

Sale of joint venture investment 1,000 — —

Purchases of premises and equipment ( 37 ) — ( 96 )

15 unchanged sentences

A portion of employee compensation and benefit expenses, as well as some expenses related to capital assets, are now recognized by the holding company through a management fee paid to the Bank.

Note 22 – Subsequent Events

We evaluated subsequent events for potential recognition and disclosure through the date the consolidated financial statements were issued.

Events or transactions occurring after December 31, 2019 , but prior to the date the consolidated financial statements were issued, include anticipated proceeds from the redemption of a corporate owned life insurance policy.

Proceeds, from the death benefit on an insurance policy on the life of a former executive officer, are estimated at $500 and will be recognized as noninterest income during 2020.

Changes in and Disagreements With Accountants on Accounting and Financial Disclosure.

Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-K

Item 8. Financial Statements and Supplementary Data