What changed in this filing

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Item 7. Management’s Discussion and Analysis

2022-03-15 compared with 2021-03-10 · 264 added, 184 removed, 580 unchanged (44% of the section changed)

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Net income and earnings per common share for the year ended December 31, 2020 were $10,885 and $1.37, respectively.

A decline in the interest rate environment was a large driver of a $3,134 decrease in interest income for 2020 when compared to 2019.

Interest expense on deposits and borrowings decreased $4,036 for the year ended December 31, 2020 when compared to the same period in 2019 primarily due to reduced interest rates and reduced reliance on higher-cost borrowings.

Net interest income increased by $902 for the year ended December 31, 2020 in comparison to the prior year.

The provision for loan losses increased by $1,635 in 2020 when compared to 2019 as the result of increased economic and environmental risk factors, predominantly driven by COVID-19.

Noninterest income for the year ended December 31, 2020 increased $6,384 when compared to 2019 mainly as a result of net gain on sold mortgage loans and the redemption of corporate owned life insurance policies.

Our joint venture investment in Corporate Settlement Solutions, LLC (“CSS”) also contributed to the variance in noninterest income.

We sold our membership interest in CSS during the fourth quarter of 2020, which resulted in a $394 reduction in income.

During the fourth quarter of 2019, we recorded a reduction of $3,566 in our joint venture investment in CSS due to CSS' recorded impairment of intangible assets.

Noninterest expenses for the year ended December 31, 2020 increased $8,183 when compared to 2019, which can be attributed to a $7,643 cost to extinguish $100,000 of FHLB advances.

As a result of this debt extinguishment, future interest expense and net yields are expected to be impacted favorably.

While we had a reduction in total interest income of $4,059 during 2021, compared to prior year, net interest income for the period ended December 31, 2021 increased by $2,354 from the prior year.

Developments leading to the decline in gross interest income during 2021 included the lowering of interest rates, and a pause in advances to mortgage brokers.

Conversely, we benefited from lower interest rates and a reduction in higher-cost borrowings as interest expense on deposits and borrowings decreased $6,413 for the year ended December 31, 2021 when compared to the same period in 2020.

The provision for loan losses decreased by $2,183 in 2021 when compared to the previous year.

During 2020, increased economic and environmental risk factors, predominantly driven by COVID-19, drove a significant increase in the provision.

While these risk factors remain, credit quality was strong during 2021.

As of December 31, 2021, total past due and nonaccrual loans were $4,031, or 0.31% of gross loans, compared to 0.78% as of December 31, 2020.

Additionally, net loan charge-offs were relatively low at $123.

Strong credit quality, coupled with improvement in economic factors, such as unemployment rates, resulted in a reduction in the ALLL and a provision reversal of $518 during 2021.

Noninterest income of $13,822 for the year ended December 31, 2021 decreased $601 when compared to 2020.

While service charges and fees, a component of noninterest income, increased $1,070 when compared to the previous year, 2020 also included an additional $1,022 related to gain on sale of loans and $620 related to gains from redemption of corporate owned life insurance policies.

Noninterest expenses for the year ended December 31, 2021 decreased $7,539 when compared to 2020, which can be attributed to a $7,643 cost to extinguish $100,000 of FHLB advances during the fourth quarter of 2020.

The remaining marginal increase of $104 can be attributed to disciplined operating expense controls.

As of December 31, 2021, total assets and assets under management were $2,032,158 and $2,827,245, respectively.

Assets under management include loans sold and serviced of $278,844 and investment and trust assets managed by Isabella Wealth of $516,243, in addition to assets on our consolidated balance sheet.

In the first half of 2020, the Bank’s investment and trust services business was re-engineered and rebranded as Isabella Wealth to enhance the client experience, build scalability, and expand market awareness.

Loans outstanding as of December 31, 2021 totaled $1,301,037.

During 2020, gross loans increased $51,741 which was largely the result of SBA PPP loans in the commercial loan portfolio.

Our securities portfolio declined $90,611 since December 31, 2019, predominantly as a result of increased monthly prepayments and payoffs of AFS securities.

Due to the flat yield curve that has existed for the last few years, the opportunity to identify new investment securities for purchase at an acceptable yield has been minimal.

Based on strategic objectives, we utilized this available cash flow to reduce higher-cost funding sources and other borrowings as they matured.

Total deposits increased $252,466 during the year, driven by growth in demand and savings deposits, and totaled $1,566,317 as of December 31, 2020.

During 2021, gross loans increased $62,726 which was largely the result of growth in the commercial and residential mortgage loan portfolios.

Our securities portfolio increased $151,373 since December 31, 2020, predominantly due to purchases of treasury securities, bringing our total securities portfolio to $490,601.

Total deposits increased $144,022 during the year and totaled $1,710,339 as of December 31, 2021.

This growth was primarily in demand and savings deposits, driven mostly from attracting new customers and funds from the SBA PPP and government stimulus.

All regulatory capital ratios for the Bank exceeded the minimum thresholds to be considered a “well capitalized” institution.

Our net yield on interest earning assets (FTE) was 2.87% for 2021 which declined from 2.96% in 2020.

Management implemented strategic programs focused on improving our net yield on interest earning assets, which includes enhanced pricing related to loans and a reduced reliance on higher-cost borrowed funds and brokered deposits as funding sources.

While these efforts have helped, the current interest rate environment has had a negative impact on the yield of interest earning assets and future improvements may be gradual.

We are committed to increasing earnings and shareholder value through growth in our loan portfolio while maintaining strong underwriting standards, growth in our wealth management services, managing operating costs and increasing our presence within our geographical footprint.

Management implemented strategic programs focused on improving our net yield as rates declined in 2020, which included enhanced pricing related to loans and a reduced reliance on higher-cost borrowed funds and brokered deposits as funding sources.

While these efforts have helped, the current interest rate environment plus the elevated cash position has had a negative impact on the yield of interest earning assets.

Recent Events and Legislation

Restricted Stock Plan:

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

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 the 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.

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

Also on June 24, 2020, we made initial awards under the RSP to Isabella Bank's CEO, President, and CFO.

As of December 31, 2020, certain targets specified in the award agreements pursuant to the RSP were achieved and therefore, we recognized compensation expense of $14 pursuant to the RSP.

Additional disclosures about the RSP are included in “Note 13 – Benefit Plans” of “Notes to Consolidated Financial Statements” in Item 8.

Financial Statements and Supplementary Data.

Executive Cash Incentive Plan:

Also 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.

Impact of COVID-19:

Unexpected and unprecedented changes have occurred during 2020 and into 2021 as the result of COVID-19.

This aggressive and persistent virus causes a respiratory disease and can result in serious illness or death.

Unexpected and unprecedented changes have occurred during 2020 and 2021 as the result of COVID-19.

The World Health Organization has declared the situation a global pandemic.

The pandemic has created significant market volatility, economic uncertainty, and disruption to normal business operations around the world, with slowdowns and shutdowns affecting entire industries.

The Michigan governor issued on March 23, 2020 a stay-at-home order, which limited gatherings and travel, and required those in select businesses who were not deemed essential to sustain or protect life to stay home.

The Michigan stay-at-home order was in effect until early June.

Additional executive and Michigan State Health Department orders have been put in place since June 2020.

During the fourth quarter of 2020, certain restrictions were put in place on industries within our communities and continued through December 31, 2020.

The orders, as the result of COVID-19, led to financial stress for many businesses and their employees throughout the communities we serve.

The pandemic created significant market volatility, economic uncertainty, and disruption to normal business operations around the world, with slowdowns and shutdowns affecting entire industries.

The CARES Act, an unprecedented federal government support program, was enacted on March 27, 2020 in response to the COVID-19 pandemic.

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The CARES Act included the PPP, which enabled businesses to obtain a forgivable SBA loan to meet payroll, rent, utility, and mortgage interest obligations for the 24-week period following the loan origination, and re-open quickly once the public health crisis ends.

The first applications for PPP funds, with a term of two years, were accepted April 3, 2020.

During 2020, we were privileged to have facilitated more than 950 SBA PPP loans for a total of $99,459 and we are pleased to have the opportunity to provide additional funding in 2021 under an additional government stimulus program.

The first applications for PPP funds, with a term of two years, were accepted beginning on April 3, 2020.

During 2020, we facilitated more than 950 SBA PPP loans for a total of $99,459 and had the opportunity to continue providing funding in 2021 under an additional government stimulus program.

During 2021, we funded 845 SBA PPP loans for a total of $54,551 under this additional government stimulus program.

Bank regulators issued an interim rule that neutralizes the regulatory capital effects by allowing a zero percent risk weight, for capital purposes, to loans originated under the PPP.

The capital rule was issued April 9, 2020, with an immediate effective date.

During 2020, many of our customers expressed their general concern about the uncertain economic conditions, but it is still premature to reasonably predict the magnitude of the impact.

One measure we took to assist our customers included reduced service charges and fees on deposit accounts.

Since the COVID-19 pandemic led to an increase in the need for electronic services and products, we elected to temporarily waive certain charges and fees, and permanently remove some charges and fees, to ease the financial stress on our customers.

Since 2020, many customers have expressed their general concern about the uncertain economic conditions, but it is still premature to reasonably predict the magnitude of the impact.

One measure we deployed to assist our customers included changes to service charges and fees on deposit accounts.

Since the COVID-19 pandemic led to an increase in the need for electronic services and products, we elected to remove select deposit account charges and fees and temporarily waive others to ease the financial stress on our customers.

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

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

As of December 31, 2021, we had active loan payment deferrals totaling $159.

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.

These programs, along with the SBA PPP, could mask or delay the detection or reporting of deterioration in credit quality indicators.

The extent to which COVID-19 impacts our business will depend on future developments, which are highly uncertain and cannot be predicted with any accuracy.

Future developments include new information which may emerge concerning the severity of COVID-19 and the actions to contain the coronavirus or treat its impact, among others.

We expect the significance of the pandemic, including the extent of its effect on our financial and operational results, to be dictated by, among other factors, its duration, the success of efforts to contain it and the impact of actions taken in response, including the development and distribution of effective vaccines.

Uncertainty created by the pandemic is pervasive, and has impacted our operations, customers, and various areas of risk.

With the uncertainty created by COVID-19, it's challenging to determine the full impact

on our ongoing financial and operational results.

Pursuant to this guidance, short-term loan modifications meeting this criteria were not categorized as TDR as of December 31, 2021.

In response to the COVID-19 pandemic, we temporarily closed branch lobbies, modified staffing levels, and enabled employees to work remotely during most of 2020 and into 2021.

While branch operations and staffing levels have generally resumed to normal, the extent to which COVID-19 impacts our business will depend on future developments, which remain highly uncertain and cannot be predicted with any accuracy.

We expect the significance of the pandemic, including the extent of its effect on our financial and operational results, to be dictated by, among other factors, its duration, the success of efforts to contain the virus and variants to the virus and the impact of actions taken in response.

Uncertainty created by the pandemic is pervasive, and continues to impact our operations, customers, and various areas of risk.

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.

Subordinated Debt Issuance:

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”) to various institutional investors (the “Offering”).

The price for the Notes was 100% of the principal amount of the Notes.

The Notes are intended to qualify as Tier 2 capital for regulatory purposes.

We intend to utilize the net proceeds from the Offering for general corporate purposes, including potential repurchases of common stock and/or merger and acquisition activity.

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.

Any such redemption will be at a redemption price equal to 100% of the principal amount of the Notes being redeemed, plus accrued and unpaid interest.

The Notes are not subject to redemption at the option of the holders.

Tender Offer :

On September 1, 2021, we announced the commencement of a “modified Dutch Auction” tender offer to purchase up to $20,000 in value of our common stock, or such lesser number of shares of our common stock as were properly tendered and not properly withdrawn, at a price not less than $23.00 nor greater than $27.00 per share.

The tender offer expired on October 13, 2021 and resulted in the purchase of 396,576.78534 shares at a price of $27.00 per share for a total amount of

approximately $10,708.

The remainder of the $20,000 not used in the tender offer may be deployed for general corporate purposes, including potential repurchases of our common stock.

Reclassifications

Certain amounts reported in management's discussion and analysis of financial condition and results of operations for 2020 and 2019 have been reclassified to conform with the 2021 presentation.

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.

Subsequent Events

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We have not received, nor are aware of, any notices of regulatory actions as of March 14, 2022.

Results of Operations

(Dollars in thousands except per share amounts)

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

2021 2020 2019

INCOME STATEMENT DATA

Interest income $ 60,113 $ 64,172 $ 67,306

Interest expense 7,412 13,825 17,861

Net interest income 52,701 50,347 49,445

Provision for loan losses ( 518 ) 1,665 30

Noninterest income 13,822 14,423 8,039

Noninterest expenses 43,694 51,233 43,050

Federal income tax expense (benefit) 3,848 987 1,380

Net income (loss) $ 19,499 $ 10,885 $ 13,024

Basic earnings (loss) $ 2.48 $ 1.37 $ 1.65

Diluted earnings (loss) $ 2.45 $ 1.34 $ 1.61

Dividends $ 1.08 $ 1.08 $ 1.05

Tangible book value $ 21.61 $ 21.29 $ 20.45

Quoted market value

High $ 29.00 $ 24.50 $ 24.80

Low $ 19.45 $ 15.60 $ 22.01

$ 25.50 $ 19.57 $ 24.31

Common shares outstanding (1)

7,532,641 7,997,247 7,910,804

PERFORMANCE RATIOS

Return on average total assets 0.96 % 0.57 % 0.72 %

Return on average shareholders' equity 8.83 % 4.93 % 6.25 %

Return on average tangible shareholders' equity 11.31 % 6.34 % 8.17 %

Net interest margin yield (FTE) 2.87 % 2.96 % 3.07 %

BALANCE SHEET DATA (1)

Gross loans $ 1,301,037 $ 1,238,311 $ 1,186,570

AFS securities $ 490,601 $ 339,228 $ 429,839

Total assets $ 2,032,158 $ 1,957,378 $ 1,814,198

Deposits $ 1,710,339 $ 1,566,317 $ 1,313,851

Borrowed funds $ 99,320 $ 158,747 $ 275,999

Shareholders' equity $ 211,048 $ 218,588 $ 210,182

Gross loans to deposits 76.07 % 79.06 % 90.31 %

ASSETS UNDER MANAGEMENT (1)

Loans sold with servicing retained $ 278,844 $ 301,377 $ 259,375

Assets managed by Isabella Wealth $ 516,243 $ 443,967 $ 436,181

Total assets under management $ 2,827,245 $ 2,702,722 $ 2,509,754

ASSET QUALITY (1)

Nonperforming loans to gross loans 0.10 % 0.43 % 0.55 %

Nonperforming assets to total assets 0.08 % 0.31 % 0.40 %

ALLL to gross loans 0.70 % 0.79 % 0.67 %

CAPITAL RATIOS (1)

Shareholders' equity to assets 10.39 % 11.17 % 11.59 %

Tier 1 leverage 7.97 % 8.37 % 9.01 %

Common equity tier 1 capital 12.07 % 12.97 % 12.56 %

Tier 1 risk-based capital 12.07 % 12.97 % 12.56 %

Total risk-based capital 14.94 % 13.75 % 13.18 %

(1) At end of year

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

Quarter to Date

2021 September 30

2021 March 31

Total interest income $ 15,041 $ 15,142 $ 14,640 $ 15,290

Total interest expense 1,567 1,829 1,927 2,089

Net interest income 13,474 13,313 12,713 13,201

Provision for loan losses 81 (107) 31 (523)

Noninterest income 3,608 3,367 3,315 3,532

Noninterest expenses 11,197 11,185 10,495 10,817

Federal income tax expense 1,010 916 881 1,041

Net income $ 4,794 $ 4,686 $ 4,621 $ 5,398

Basic earnings $ 0.63 $ 0.59 $ 0.58 $ 0.68

Diluted earnings 0.63 0.58 0.57 0.67

Dividends 0.27 0.27 0.27 0.27

Quoted market value (1)

25.50 26.03 23.00 21.75

Tangible book value 21.61 21.87 21.73 21.35

Quarter to Date

2020 September 30

2020 March 31

Total interest income $ 16,402 $ 15,700 $ 15,869 $ 16,201

Total interest expense 2,858 3,203 3,565 4,199

Net interest income 13,544 12,497 12,304 12,002

Provision for loan losses 256 516 105 788

Noninterest income 4,119 4,060 3,246 2,998

Noninterest expenses 18,638 10,950 10,700 10,945

Federal income tax expense (benefit) (508) 734 558 203

Net income (loss) $ (723) $ 4,357 $ 4,187 $ 3,064

Basic earnings (loss) $ (0.10) $ 0.55 $ 0.53 $ 0.39

Diluted earnings (loss) (0.10) 0.54 0.52 0.38

Dividends 0.27 0.27 0.27 0.27

Quoted market value (1)

19.57 16.74 18.25 18.00

Tangible book value 21.29 21.75 21.52 21.10

(1) At end of period

CRITICAL ACCOUNTING POLICIES

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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.

The carrying amount of goodwill as of December 31, 2020 relied on assumptions and use of estimates pursuant to the valuations obtained.

Based on the valuation prepared, it was determined that our estimated fair value 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.

The carrying amount of goodwill as of December 31, 2020 relied on assumptions and use of estimates pursuant to the valuation obtained.

We did not observe any indications of a potential impairment to the carrying balance of goodwill during 2021.

As such, a valuation was not necessary to be performed as of December 31, 2021.

AFS securities are carried at fair value with changes in the fair value included as a component of other comprehensive income.

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Taxable investment securities 297,357 4,920 1.65 % 229,468 5,214 2.27 % 296,758 7,185 2.42 %

229,468 5,214 2.27 % 296,758 7,185 2.42 % 341,095 8,294 2.43 %

Nontaxable investment securities 117,997 4,235 3.59 % 140,665 5,189 3.69 % 169,049 6,380 3.77 %

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Time deposits 336,094 4,610 1.37 % 387,881 7,315 1.89 % 429,745 8,731 2.03 %

Borrowed funds 245,969 4,941 2.01 % 304,888 6,253 2.05 % 344,352 6,370 1.85 %

Federal funds purchased and repurchase agreements 57,453 53 0.09 % 35,518 36 0.10 % 32,093 48 0.15 %

FHLB advances 69,342 1,302 1.88 % 210,451 4,905 2.33 % 272,795 6,205 2.27 %

Subordinated debt, net of unamortized issuance costs

17,000 615 3.62 % — — — % — — — %

Total interest bearing liabilities 1,383,006 7,412 0.54 % 1,352,126 13,825 1.02 % 1,354,024 17,861 1.32 %

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Time deposits (889) (1,816) (2,705) (815) (601) (1,416)

Borrowed funds (1,186) (126) (1,312) (771) 654 (117)

Federal funds purchased and repurchase agreements 20 (3) 17 5 (17) (12)

FHLB advances (2,793) (810) (3,603) (1,450) 150 (1,300)

Subordinated debt, net of unamortized issuance costs

615 — 615 — — —

Total changes in interest expense (2,730) (3,683) (6,413) (1,832) (2,204) (4,036)

Net change in interest margin (FTE) $ 2,555 $ (402) $ 2,153 $ 3,873 $ (3,264) $ 609

The flattening of the yield curve continues to place pressure on our net interest margin.

Despite this pressure, we experienced improvement as a result of a decline in higher-cost deposits and borrowings.

The current low interest rate environment continues to place pressure on our net interest margin.

SBA PPP fee income has supported our yield on total earning assets.

Given the uncertainty in rates and the economic environment as a result of COVID-19, improvement in our net yield on interest earning assets could be gradual.

Average Yield / Rate for the Three-Month Periods Ended:

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ALLL as a % of loans at end of period 0.70 % 0.73 % 0.78 % 0.78 % 0.79 %

The following table summarizes our charge-off and recovery activity for the years ended December 31:

The following table summarizes charge-off and recovery activity by loan segment for the year ended December 31, 2021:

Commercial Agricultural Residential Real Estate Consumer Total

Charge-offs $ 32 $ 77 $ 12 $ 486 $ 607

Recoveries 133 12 162 177 484

Net loan charge-offs (recoveries) $ (101) $ 65 $ (150) $ 309 $ 123

Average loans outstanding 726,272 93,931 313,906 74,032 1,208,141

Net loan charge-offs (recoveries) to average loans outstanding (0.01) % 0.07 % (0.05) % 0.42 % 0.01 %

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

2021 2020 2019 2018 2017

ALLL at beginning of period $ 9,744 $ 7,939 $ 8,375 $ 7,700 $ 7,400

Commercial 7 143 575 263 57

Agricultural 24 240 51 2 —

Residential real estate 28 99 151 200 574

Consumer 322 466 324 306 285

Total charge-offs 381 948 1,101 771 916

Commercial 149 123 325 449 445

Agricultural 39 3 3 4 95

Residential real estate 136 189 261 206 287

Consumer 197 167 209 159 224

Total recoveries 521 482 798 818 1,051

Charge-offs 607 381 948 1,101 771

Recoveries 484 521 482 798 818

Provision for loan losses (518) 1,665 30 978 253

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ALLL as a % of loans at end of period 0.70 % 0.79 % 0.67 % 0.74 % 0.71 %

ALLL as a % of nonaccrual loans 731.16 % 183.40 % 121.48 % 115.36 % 254.38 %

While we have experienced fluctuations in credit quality indicators in recent periods, credit quality remained strong at December 31, 2021.

The COVID-19 pandemic led to some temporary and permanent closures of businesses throughout the communities in which we serve, which resulted in increased unemployment.

We increased the ALLL during the year as a result of increased economic and environmental related risk factors, primarily driven by COVID-19.

The COVID-19 pandemic led to the temporary and some permanent closures of businesses throughout the communities in which we serve, which also led to increased unemployment.

We increased the ALLL during 2020 as a result of increased economic and environmental related risk factors, primarily driven by COVID-19.

While these risk factors remain, improvement in credit quality indicators resulted in a reduction to the ALLL during 2021.

The economic impact from the COVID-19 pandemic could pose significant credit risk due to the potential inability of consumer and commercial borrowers to make contractual payments.

In late March 2020, we implemented payment programs for borrowers to alleviate the financial setback due to the temporary closure of businesses and lost wages.

These programs, along with the SBA PPP, could mask or delay the detection and reporting of deterioration in credit quality indicators.

We continue to monitor the economic impact from COVID-19 as it relates to credit risk to ensure the ALLL is appropriate.

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Total 0.70 % 0.73 % 0.78 % 0.78 % 0.79 %

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

2021 2020 2019 2018 2017

ALLL Allocation % of Gross Loans ALLL Allocation % of Gross Loans ALLL Allocation % of Gross Loans ALLL Allocation % of Gross Loans ALLL Allocation % of Gross Loans

Commercial $ 1,740 62.07 $ 2,162 61.10 $ 1,914 59.08 $ 2,563 58.43 $ 1,706 58.16

Agricultural 289 7.22 311 8.11 634 9.85 775 11.27 611 11.75

Residential real estate 747 25.08 1,363 24.84 2,047 25.16 1,992 24.39 2,563 24.95

Consumer 908 5.63 798 5.95 922 5.91 857 5.91 900 5.14

Total Allocated 3,684 100.00 4,634 100.00 5,517 100.00 6,187 100.00 5,780 100.00

Unallocated 5,419 — 5,110 — 2,422 — 2,188 — 1,920 —

Total $ 9,103 100.00 $ 9,744 100.00 $ 7,939 100.00 $ 8,375 100.00 $ 7,700 100.00

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.

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Total past due and nonaccrual loans to gross loans 0.31 % 0.78 % 0.96 % 1.01 % 0.90 %

Past due and nonaccrual status loans, as a percentage of gross loans, have improved over the last year and continue to be at low levels as a result of strong repayment performance.

Past due and nonaccrual status loans, as a percentage of gross loans, improved throughout 2021 and continue to be at low levels as a result of strong repayment performance.

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 “Notes to Consolidated Financial Statements” in Item 8.

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Loans paid off (30) (5,317) (2) (850) (32) (6,167)

Partial charge-offs — — — (65) — (65)

Transfers to OREO — — (2) (356) (2) (356)

Transfers to accrual status 1 104 (1) (104) — —

Transfers to nonaccrual status (6) (3,302) 6 3,302 — —

December 31, 2020 108 22,200 7 2,730 115 24,930

2 unchanged sentences

Loans paid off (22) (5,739) — — (22) (5,739)

Partial charge-offs — — — — — —

Transfers to OREO — — (2) (356) (2) (356)

Transfers to accrual status 3 2,127 (3) (2,127) — —

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Residential real estate senior liens 3,047 3,203 504 3,878 4,073 692

Home equity lines of credit — — — 12 312 —

Total TDRs 25,725 26,134 517 24,930 25,379 832

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Total $ 1,245 $ 5,313 $ 6,535 $ 7,260 $ 3,027

Nonaccrual loans as a % of loans at end of period 0.10 % 0.43 % 0.55 % 0.64 % 0.28 %

Included in the nonaccrual loan balances above were loans also classified as TDR as of December 31:

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Total service charges and fees 7,614 6,544 1,070 16.35 % 6,347 197 3.10 %

Net gain on sale of mortgage loans 2,716 650 2,066 317.85 % 525 125 23.81 %

Wealth management fees 3,071 2,578 493 19.12 % 2,792 (214) (7.66) %

Gains from redemption of corporate owned life insurance policies 891 — 891 N/M — — — %

Net gain on sale of mortgage loans 1,694 2,716 (1,022) (37.63) % 650 2,066 317.85 %

Earnings on corporate owned life insurance policies 800 755 45 5.96 % 764 (9) (1.18) %

Net income (loss) on joint venture investment 577 (3,108) 3,685 N/M 274 (3,382) N/M

Gains from redemption of corporate owned life insurance policies 271 891 (620) (69.58) % — 891 N/M

Net income (loss) on joint venture investment — 577 (577) (100.00) (3,108) 3,685 N/M

Other 372 362 10 2.76 % 594 (232) (39.06) %

Total noninterest income $ 13,822 $ 14,423 $ (601) (4.17) % $ 8,039 $ 6,384 79.41 %

Significant changes in noninterest income are detailed below:

ATM and debit card fees fluctuate from period to period based primarily on their usage.

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Service charges and fees on deposit accounts declined in 2020 as a result of waived fees.

In response to COVID-19, which has led to an increase in the need for electronic services and products, we elected to temporarily waive certain charges and fees, and permanently remove some charges and fees, to ease the financial stress of our customers.

As such, we expect service charges and fees in 2021 to approximate 2020 levels.

In response to the COVID-19 pandemic, which led to an increase in the need for electronic services and products, we elected to remove select deposit account related charges and fees and temporarily waived some charges and fees to ease the financial stress of our customers.

Despite some fees being removed or waived, fee income increased during 2021, but did not reach pre-pandemic levels.

As such, we expect service charges and fees in 2022 to approximate pre-pandemic 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.

Increased prepayment speeds, as a result of a decline in interest rates during the first quarter of 2020, were the primary driver of the losses recognized during the first half of 2020.

During the second half of 2020, the volume of loans serviced increased which resulted in an increase in the value of the servicing rights.

Increased prepayment speeds, as a result of a decline in interest rates during the first quarter of 2020, were the primary driver of the losses recognized during most of 2020.

During 2021, the volume of loans serviced decreased, which decreases the value of the servicing rights, and the increased prepayment speeds continued.

Both of these factors have contributed to the recognition of a loss during 2021.

OMSR income during 2022 may continue to experience fluctuations and could vary from 2021 levels.

Net gain on sale of mortgage loans fluctuates as the result of a change in the amount of loans sold and pricing.

The increase in wealth management fees in 2021 was driven by a combination of the growth in the stock market and increased new business activity.

During the first quarter of 2020, a decline in the stock market resulted in a decrease in the value of investment assets under management.

Wealth management fees in 2022 are expected to continue to increase as a result of new business activity.

Net gain on sale of mortgage loans fluctuates as the result of changes in the amount of loans sold, loan pricing and 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 during 2020 which led to an increase in the number and dollar amount of loans sold during the year.

We experienced a significant increase in loan demand during most of 2020 and into 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.

As demand is expected to slow during 2021, net gain on sale of mortgage loans is not expected to exceed 2020 levels.

The decrease in wealth management fees, primarily during the first quarter of 2020, was driven by a decline in the stock market causing the value of investment assets under management to decrease.

While strategic additions in staffing have already led to new business within Isabella Wealth, wealth management fees during 2021 may not exceed 2020 levels due to the uncertainty in the stock market as a result of COVID-19.

We recognized income during 2020 due to the redemption of corporate owned life insurance policies in connection with the passing of three retired bank employees.

We sold our membership interest in our joint venture investment in CSS during the fourth quarter of 2020, which resulted in a $394 reduction in income.

In mid-2021, we decided to retain more loan originations on the balance sheet, thereby decreasing the number of mortgage loans sold, which had an impact on the net gain on loans sold in 2021.

As demand is expected to decline slightly in 2022, net gain on sale of mortgage loans is not expected to exceed 2021 levels.

We recognized income during 2021 and 2020 due to the redemption of corporate owned life insurance policies in connection with the passing of retired bank employees.

We sold our membership interest in our joint venture investment in Corporate Settlement Solutions, LLC (“CSS”) during the fourth quarter of 2020, which resulted in a $394 reduction in income.

As a result of a valuation during the fourth quarter of 2019, CSS recognized a $7,133 impairment related to intangible assets as of December 31, 2019.

Since we accounted for our investment in CSS under the equity method of accounting, we reduced our investment in CSS by $3,566 during the fourth quarter of 2019.

Since we accounted for our investment in CSS under the equity method of accounting, and were a 50% owner of CSS, we reduced our investment in CSS by $3,566 during the fourth quarter of 2019.

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

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Compensation and benefits $ 23,749 $ 23,772 $ (23) (0.10) % $ 23,205 $ 567 2.44 %

Losses on extinguishment of debt 7,643 — 7,643 N/M — — — %

Furniture and equipment 5,462 5,787 (325) (5.62) % 5,866 (79) (1.35) %

Occupancy 3,661 3,557 104 2.92 % 3,418 139 4.07 %

Losses on extinguishment of debt — 7,643 (7,643) (100.00) % — 7,643 N/M

Audit, consulting, and legal fees 2,066 1,836 230 12.53 % 1,884 (48) (2.55) %

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Marketing costs 939 877 62 7.07 % 762 115 15.09 %

Memberships and subscriptions 877 740 137 18.51 % 700 40 5.71 %

Loan underwriting fees 849 825 24 2.91 % 905 (80) (8.84) %

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Total noninterest expenses $ 43,694 $ 51,233 $ (7,539) (14.72) % $ 43,050 $ 8,183 19.01 %

Significant changes in noninterest expenses are detailed below:

During the fourth quarter of 2020, we incurred expense of $7,643 as a result of the extinguishment of $100,000 of FHLB advances.

Audit, consulting, and legal fees in 2018 included one-time charges related to income tax strategies.

As a result, 2020 and 2019 expenses were less than 2018 expenses.

We have experienced increased usage of ATM and debit cards which has resulted in increased income and also increased ATM and debit card expenses.

Based on the anticipated continuation of increased ATM and debit card usage, we expect expenses to increase in 2021.

Loan underwriting fees increased during the second half of 2018 and continued in the first quarter of 2019 as a result of new loan products, including first time home buyer and down payment assistance programs designed to generate residential mortgage growth.

Loan underwriting fees in 2019 did not exceed 2018 levels based on the nature of products offered during 2019.

Additionally, loan underwriting fees in 2020 did not exceed 2019 levels.

Fees in 2021 are expected to approximate 2020 levels.

Donations and community relations increased during 2019 as a result of initiatives designed to deepen and strengthen our relationship with the communities in which we operate and serve.

In addition to providing monetary contributions, some of these initiatives include volunteering our time, which is not a component of donations and community relations costs.

Government restrictions and temporary business closures related to COVID-19 impacted our ability to maintain their level of support in 2020.

Donations and community relations is expected to approximate 2020 levels in 2021.

We have experienced an increase in the usage of ATM and debit cards which has resulted in increased income and also increased ATM and debit card expenses.

Based on the anticipated continuation of increased ATM and debit card usage, we expect expenses to continue to increase in 2022.

As a result of an assessment credit of $440 received during the third quarter of 2019, FDIC insurance premiums declined in 2019 as compared to 2020 and 2021 expenses.

FDIC insurance premiums in 2021 are expected to approximate 2020 levels.

All other expenses declined during 2020 primarily as a result of reduced employee education and travel expenses.

Due to COVID-19, many events were cancelled or offered at no cost.

While education and travel expenses in 2021 are expected to exceed 2020 levels, expenses are not expected to resume normal levels and as a result, total all other expenses are not expected to resume normal levels.

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

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

Analysis of Changes in Financial Condition

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2021 2020 $ %

Cash and cash equivalents $ 246,640 $ 60,572 $ 186,068 N/M

Cash and cash equivalents $ 105,330 $ 246,640 $ (141,310) (57.29) %

AFS securities

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AFS securities 490,601 339,228 151,373 44.62 %

Mortgage loans AFS 2,741 904 1,837 N/M

Mortgage loans AFS 1,735 2,741 (1,006) (36.70) %

Gross loans 1,301,037 1,238,311 62,726 5.07 %

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Corporate owned life insurance policies 32,472 28,292 4,180 14.77 %

Accrued interest receivable 6,882 6,501 381 5.86 %

Equity securities without readily determinable fair values 17,383 17,383 — — %

Goodwill and other intangible assets 48,302 48,331 (29) (0.06) %

Other assets 14,174 11,491 2,683 23.35 %

Accrued interest receivable and other assets 19,982 21,056 (1,074) (5.10) %

TOTAL ASSETS $ 2,032,158 $ 1,957,378 $ 74,780 3.82 %

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Included in cash and cash equivalents are funds held with the FRB which fluctuate from period to period.

Cash levels increased significantly during 2020 as a result of increased monthly prepayments and payoffs of AFS securities, funding from the SBA for PPP loan forgiveness, and an increase in customer deposits.

During 2020, excess funds were used to pay maturing long-term borrowings, extinguish long-term borrowings, and pay other short-term liabilities.

Payments for maturing borrowings is expected to continue in 2021.

Cash levels decreased significantly during 2021 as a result of loan growth and payments for maturing long-term borrowings and other short-term liabilities.

During 2021, excess funds from deposit growth were used to purchase AFS securities.

AFS securities

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2021 2020 2019

Government sponsored enterprises $ — $ — $ 170

Treasury $ 209,703 $ — $ —

States and political subdivisions 121,205 143,656 169,752

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Amount Yield (%) Amount Yield (%) Amount Yield (%) Amount Yield (%) Amount Yield (%)

Treasury $ — — $ 200,030 — $ 9,673 — $ — — $ — —

States and political subdivisions 16,039 2.92 56,302 2.89 20,095 3.22 28,769 3.34 — —

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Total $ 62,726 5.07 % $ 51,741 4.36 % $ 57,863 5.13 %

Loan demand has been negatively impacted by the pandemic and competition for new commercial loan opportunities continues to be strong.

Growth in the commercial loan portfolio during 2020 was driven by SBA PPP loans.

While we expect loan forgiveness on the remaining SBA PPP loans during 2021, we are still expecting overall growth during 2021 within the commercial portfolio as we continue to provide attractive and competitive loan products.

Agricultural loans continued to decline in 2020 due to the competitive environment.

Residential real estate and consumer loans have experienced growth over the last year and continued growth is expected in 2021.

Equity securities without readily determinable fair values

Included in equity securities without readily determinable fair values are restricted securities, which are carried at cost, and our joint venture investment in CSS accounted for under the equity method of accounting.

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.

For more information related to this investment, refer to “Note 1 – Nature of Operations and Summary of Significant Accounting Policies”, “Note 6 – Investment in Joint Venture”, and “Note 18 – Fair Value” of “Notes to Consolidated Financial Statements” in Item 8.

Financial Statements and Supplementary Data.

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 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, we decided to engage a reputable, third-party valuation firm to perform a quantitative analysis of goodwill as of December 31 , 2020.

Based on the valuation prepared, it was determined that our

estimated fair values of the Bank and Isabella Bank Corporation at Dece mber 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 COVID-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.

Other assets consist primarily of prepaid expenses, OMSR, receivables, and net deferred tax assets.

As a result of the sale in our joint venture investment in CSS, we recorded a $3,227 receivable related to this transaction.

Loan demand has been negatively impacted by competition for new commercial loan opportunities while some customers hesitated to borrow due to the pandemic.

While we've recently experienced an increase in commercial loan demand, advances to mortgage brokers, within the commercial loan portfolio, was the primary driver behind the growth during 2021.

While we anticipate a decline in advances to mortgage brokers in 2022, we expect the commercial loan portfolio to increase with increased demand.

Agricultural loans have declined over the last year due to the competitive lending environment.

We expect the competitive environment for agricultural loans to remain strong.

Residential mortgage lending activities have increased since mid-2020 as interest rates declined.

Growth is expected to continue in both the residential mortgage and consumer loan portfolios during 2022.

Other assets consist primarily of prepaid expenses, OMSR, and net deferred tax assets.

For more information related to estimates and deferred taxes, refer to “Note 1 – Nature of Operations and Summary of Significant Accounting Policies” and “Note 15 – Federal Income Taxes” of “Notes to Consolidated Financial Statements” in Item 8.

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Total deposits have increased over the past 12 months with significant growth in non-contractual deposits, such as demand and savings deposits.

This trend is anticipated to continue during 2021 as the financial markets continue to exhibit significant signs of instability.

Additionally, government stimulus programs have driven growth in deposits.

We experienced a decline in certificates of deposit over the past year as a result of the low interest rate environment.

Brokered certificates of deposit offer another source of funding and may fluctuate from period to period based on our funding needs, including changes in assets such as loans and investments.

During 2019 and 2020, we used excess funds to reduce higher-cost deposits, such as brokered certificates of deposit.

This trend is expected to continue into 2021.

The remaining maturity of certificates of deposit of $250 or more as of December 31, 2020 was as follows:

This trend is anticipated to continue into 2022 as the financial markets continue to exhibit signs of instability.

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.

During 2020, we used excess funds to reduce higher-cost deposits, such as brokered certificates of deposit.

This trend continued in 2021 as we paid off the remaining balance of brokered deposits as they matured.

The following table presents estimated balances of uninsured deposits for the years ended December 31:

2021 2020 2019 2018 2017

Uninsured deposits $ 548,213 $ 461,859 $ 336,399 $ 292,017 $ 279,037

Uninsured deposits are the portion of deposit accounts in U.S.

offices that exceed the FDIC insurance limits.

The balance provided above are estimates and reflect the methodologies and assumptions used for regulatory reporting of uninsured deposits.

The remaining maturity of estimated uninsured certificates of deposit, by account, as of December 31, 2021 is presented in the table below.

Estimated uninsured certificates of deposit is based on individual accounts and does not reflect uninsured balances by account owner.

Within 3 months $ 14,324

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Borrowed Funds

Borrowed funds include FHLB advances, securities sold under agreements to repurchase, and federal funds purchased.

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.

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2021 2020 2019

FHLB advances $ 90,000 $ 245,000 $ 300,000

Securities sold under agreements to repurchase without stated maturity dates $ 50,162 $ 68,747 $ 30,999

FHLB advances 20,000 90,000 245,000

Subordinated debt, net of unamortized issuance costs 29,158 — —

Total $ 99,320 $ 158,747 $ 275,999

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 deposit accounts during the fourth quarter of 2020, our level of securities sold under agreements to repurchase increased as of December 31, 2020.

We believe this to be a short-term increase and expect the balance of securities sold under agreements to repurchase to decline in the first half of 2021.

We had no fed funds purchased for the years ended December 31, 2020, 2019, or 2018.

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.

This increase was short-term and balances declined during 2021.

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 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.

For additional disclosure related to borrowed funds, see “Note 8 – Borrowed Funds” of “Notes to Consolidated Financial Statements” in Item 8.

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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.

Many of these commitments historically have expired without being drawn upon and do not necessarily indicate our future cash requirements.

For additional disclosure related to Contractual Obligations and Loan Commitments, see “Note 9 – Off-Balance-Sheet Activities, Commitments and Other Matters” of “Notes to Consolidated Financial Statements” in Item 8.

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We also grant restricted stock awards pursuant to the RSP, effective June 24, 2020.

Pursuant to this plan, we increased shareholders’ equity by $14 during 2020.

We have a publicly announced common stock repurchase plan.

Pursuant to this plan, we increased shareholders’ equity by $86 and $14 during 2021 and 2020.

We have publicly announced a common stock repurchase plan.

Pursuant to this plan, we repurchased 135,465 shares or $3,050 of common stock during 2021 and 144,950 shares or $2,702 during 2020.

As of December 31, 2021, we were authorized to repurchase up to an additional 467,491 shares of common stock.

The tender offer expired on October 13, 2021 and resulted in the purchase of 396,576.78534 shares at a price of $27.00 per share for a total amount of approximately $10,708.

The remainder of the $20,000 not used in the tender offer may be deployed for general corporate purposes, including potential repurchases of our common stock.

The FRB has established minimum risk-based capital guidelines.

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These categories totaled $495,259 or 24.37% of assets as of December 31, 2021 as compared to $444,051 or 22.69% as of December 31, 2020.

The increase in both the amount and percentage of primary liquidity is a direct result of an increase in market deposits and a

deliberate reduction in non-market funding which required collateralization.

The increase in both the amount and percentage of primary liquidity is a direct result of an increase in market deposits 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.

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These funding methods typically carry a higher interest rate than traditional market deposit accounts.

In recent periods, we have elected to use excess funds and proceeds from the sale of AFS securities to reduce borrowings and other higher-cost funding sources.

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.

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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.

While many assets and liabilities reprice either at maturity or in accordance with their contractual terms, several balance sheet components demonstrate characteristics that require an evaluation to more accurately reflect their repricing behavior.

Key assumptions in the simulation analysis include prepayments on loans, probable calls of investment securities, changes in market conditions, loan volumes and loan pricing, deposit sensitivity, and customer preferences.

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One specific focus of interest rate sensitivity is the loan portfolio, primarily with commercial and agricultural loans.

The following table shows the maturity of commercial and agricultural loans outstanding at December 31, 2020.

Also provided are the amounts due after one year, classified according to the sensitivity to changes in interest rates.

The following table shows the maturity of loans outstanding at December 31, 2021 based on contractual terms.

Also provided are the amounts classified according to the sensitivity to changes in interest rates.

or Less 1 to 5

Commercial and agricultural $ 179,820 $ 374,313 $ 303,014 $ 857,147

Interest sensitivity

Loans maturing after one year that have:

Years 5 to 15

Years Over 15

Commercial $ 165,334 $ 244,084 $ 178,898 $ 219,123 $ 807,439

Agricultural 18,375 30,980 18,480 26,120 93,955

Residential real estate 17,690 25,799 125,653 157,219 326,361

Consumer 1,886 30,470 40,926 — 73,282

Total $ 203,285 $ 331,333 $ 363,957 $ 402,462 $ 1,301,037

Fixed interest rates

Commercial $ 112,268 $ 190,942 $ 70,918 $ 10,072 $ 384,200

Agricultural 8,720 21,019 4,377 850 34,966

Residential real estate 14,517 13,740 97,648 20,668 146,573

Consumer 1,545 30,246 40,884 — 72,675

Total $ 137,050 $ 255,947 $ 213,827 $ 31,590 $ 638,414

Variable interest rates

Commercial $ 53,066 $ 53,142 $ 107,980 $ 209,051 $ 423,239

Agricultural 9,655 9,961 14,103 25,270 58,989

Residential real estate 3,173 12,059 28,005 136,551 179,788

Consumer 341 224 42 — 607

Total $ 66,235 $ 75,386 $ 150,130 $ 370,872 $ 662,623

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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.

The SBA PPP loan is a new instrument and has payment characteristics that are still uncertain.

In late March 2020, we implemented loan repayment programs for customers to alleviate the financial setback caused by the temporary closure of businesses and lost wages.

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 short period of time.

The SBA PPP loan is a newer instrument and has payment characteristics that could create uncertainty in our assumptions.

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 this crisis begins to reveal itself.

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.

Quantitative and Qualitative Disclosures About Market Risk.

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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 7. Management’s Discussion and Analysis