What changed in this filing

/stocks — the workspaceLOADING

Item 8. Financial Statements and Supplementary Data

2022-03-15 compared with 2021-03-10 · 140 added, 197 removed, 1501 unchanged (18% of the section changed)

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The following consolidated financial statements accompanied by the report of our independent registered public accounting firm are set forth beginning on the following page of this report:

Report of Independent Registered Public Accounting Firm

Report of Independent Registered Public Accounting Firm, Rehmann Robson LLC (PCAOB ID:

Consolidated Balance Sheets

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Supplementary data regarding quarterly results of operations is included in Item 7.

Selected Financial Data.

Management's Discussion and Analysis of Financial Condition and Results of Operations.

Report of Independent Registered Public Accounting Firm

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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.

The critical audit matter communicated below arising from the current period audit of the financial statements was communicated or is required to be communicated to the Corporation's audit committee and (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, nor our opinion on internal control over financial reporting, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates.

Allowance for Loan Losses

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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.

Auditing the Corporation’s ALLL involved a high degree of subjectivity due to the judgement involved in 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

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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.

We further evaluated management’s assessment of the qualitative factor adjustments by obtaining an understanding of the basis for relevant 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

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Corporate owned life insurance policies 32,472 28,292

Accrued interest receivable 6,882 6,501

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

Goodwill and other intangible assets 48,302 48,331

Other assets 14,174 11,491

Accrued interest receivable and other assets 19,982 21,056

TOTAL ASSETS $ 2,032,158 $ 1,957,378

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Borrowed funds

Federal funds purchased and repurchase agreements 50,162 68,747

FHLB advances 20,000 90,000

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

Total borrowed funds 99,320 158,747

Accrued interest payable and other liabilities 11,451 13,726

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issued and outstanding 7,532,641 shares (including 105,654 shares held in the Rabbi Trust) in 2021 and 7,997,247 shares (including 59,162 shares held in the Rabbi Trust) in 2020

129,052 142,247

Shares to be issued for deferred compensation obligations 4,545 4,183

Retained earnings 75,592 64,460

Accumulated other comprehensive income (loss) 7,698 1,971

Accumulated other comprehensive income 1,859 7,698

Total shareholders’ equity 211,048 218,588

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

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

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

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

Common stock repurchased pursuant to publicly announced repurchase plan ( 248,017 ) ( 7,007 ) — — — ( 7,007 )

Common stock repurchased ( 169,748 ) ( 4,003 ) — — — ( 4,003 )

Cash dividends paid ($ 1.05 per common share)

— — — ( 8,282 ) — ( 8,282 )

Balance, December 31, 2019 7,910,804 141,069 5,043 62,099 1,971 210,182

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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 )

Common stock repurchased pursuant to publicly announced repurchase plan ( 169,748 ) ( 4,003 ) — — — ( 4,003 )

Common stock repurchased ( 144,950 ) ( 2,702 ) — — — ( 2,702 )

Cash dividends paid ($ 1.08 per common share)

— — — ( 8,524 ) — ( 8,524 )

Balance, December 31, 2020 7,997,247 142,247 4,183 64,460 7,698 218,588

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Common stock purchased for deferred compensation obligations — ( 1,187 ) — — — ( 1,187 )

Common stock repurchased pursuant to publicly announced repurchase plan ( 144,950 ) ( 2,702 ) — — — ( 2,702 )

Common stock repurchased ( 532,042 ) ( 13,758 ) — — — ( 13,758 )

Cash dividends paid ($ 1.08 per common share)

— — — ( 8,367 ) — ( 8,367 )

Balance, December 31, 2021 7,532,641 $ 129,052 $ 4,545 $ 75,592 $ 1,859 $ 211,048

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Deposits 5,442 8,884 11,608

Borrowings 4,941 6,253 6,370

Federal funds purchased and repurchase agreements 53 36 48

FHLB advances 1,302 4,905 6,205

Subordinated debt, net of unamortized issuance costs

Total interest expense 7,412 13,825 17,861

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Service charges and fees 7,614 6,544 6,347

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

Wealth management fees 3,071 2,578 2,792

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

Net gain on sale of mortgage loans 1,694 2,716 650

Earnings on corporate owned life insurance policies 800 755 764

Gains from redemption of corporate owned life insurance policies 271 891 —

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

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Compensation and benefits 23,749 23,772 23,205

Loss on extinguishment of debt 7,643 — —

Furniture and equipment 5,462 5,787 5,866

Occupancy 3,661 3,557 3,418

Loss on extinguishment of debt — 7,643 —

Other 10,822 10,474 10,561

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Amortization of acquisition intangibles 29 48 72

Amortization of subordinated debt issuance costs 52 — —

Net amortization of AFS securities 2,233 2,044 1,784

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

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 ( 1,694 ) ( 2,716 ) ( 650 )

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Net changes in operating assets and liabilities which provided (used) cash:

Accrued interest receivable ( 381 ) 427 135

Other assets 1,208 ( 821 ) 1,512

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Purchases ( 262,266 ) ( 28,658 ) ( 39,896 )

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

Sale of joint venture investment — 1,000 —

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Proceeds from redemption of corporate owned life insurance policies 1,114 2,387 —

Purchases of FHLB Stock — — ( 1,350 )

Funding of low income housing tax credit investments ( 413 ) ( 429 ) ( 404 )

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Net increase (decrease) in deposits $ 144,022 $ 252,466 $ 21,158

Net increase (decrease) in borrowed funds ( 124,895 ) ( 64,300 ) ( 4,579 )

Net increase (decrease) in fed funds purchased and repurchase agreements ( 18,585 ) 37,748 ( 9,300 )

Net increase (decrease) in FHLB advances ( 70,000 ) ( 162,643 ) ( 55,000 )

Issuance of subordinated debt, net of unamortized issuance costs 29,106 — —

Cash dividends paid on common stock ( 8,367 ) ( 8,524 ) ( 8,282 )

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Isabella Bank Corporation is a financial services holding company offering a wide array of financial products and services in several mid-Michigan counties.

Our banking subsidiary, Isabella Bank, offers banking services through 30 locations, 24 hour banking services locally and nationally through shared automatic teller machines, 24 hour online banking, mobile banking, and direct deposits to businesses, institutions, individuals and their families.

Our banking subsidiary, Isabella Bank, offers banking services throughout 30 locations, 24 hour banking services locally and nationally through shared automatic teller machines, 24 hour online banking, mobile banking, and direct deposits to businesses, institutions, individuals and their families.

Lending services offered include commercial loans, agricultural loans, residential real estate loans, and consumer loans.

Deposit services include interest and noninterest bearing checking accounts, savings accounts, money market accounts, certificates of deposit, direct deposits, cash management services, mobile and internet banking, electronic bill pay services, and automated teller machines.

Other related financial products include trust and investment services, safe deposit box rentals, and credit life insurance.

Active competition, principally from other commercial banks, savings and loan associations, mortgage brokers, finance companies, credit unions, and retail brokerage firms exists in all of our principal markets.

Other related financial products include trust and investment services, safe deposit box rentals, and various insurance related products.

Active competition, principally from other commercial banks, savings and loan associations, mortgage brokers, finance companies, credit unions, retail brokerage firms, and insurance companies, exists in all of our principal markets.

Our results of operations can be significantly affected by changes in interest rates, changes in the local economic environment and changes in regulations.

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EQUITY SECURITIES WITHOUT READILY DETERMINABLE FAIR VALUES:

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

Included in equity securities without readily determinable fair values are our holdings in FHLB stock and FRB stock.

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

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Total $ 17,383 $ 17,383

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

EQUITY COMPENSATION PLANS:

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Certain amounts reported in the 2020 and 2019 consolidated financial statements have been reclassified to conform with the 2021 presentation.

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

“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

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

Under the new guidance, the incurred loss impairment methodology in current GAAP is replaced with a methodology that reflects current expected credit losses (CECL).

Under the new guidance, the incurred loss impairment methodology is replaced with a methodology that reflects current expected credit losses (CECL).

This methodology requires consideration of a broader range of reasonable and supportable information to calculate credit loss estimates.

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For users of the financial statements, the update requires disclosure of decision-useful information about the expected credit losses on financial instruments and other commitments to extend credit held by a reporting entity at each reporting date.

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

Effective October 16, 2019, the FASB approved changes to the implementation date of this guidance for some filers.

As a small reporting company, as defined by the SEC, our implementation date was delayed from January 1, 2020 to January 1, 2023.

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

Effective October 16, 2019, the FASB approved and issued changes to the implementation date of this guidance for some filers.

As a smaller reporting company, as defined by the SEC, our implementation date was delayed from January 1, 2020 to January 1, 2023.

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

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.

This guidance may have a significant impact on the results of 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.

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The amortized cost and fair value of AFS securities, with gross unrealized gains and losses, are as follows as of December 31:

Treasury $ 212,379 $ — $ 2,676 $ 209,703

States and political subdivisions 116,836 4,457 88 121,205

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

Corporate 1,700 — — 1,700

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

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Ten Years Total

Treasury $ — $ 202,634 $ 9,745 $ — $ — $ 212,379

States and political subdivisions 15,898 54,344 19,351 27,243 — 116,836

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

December 31, 2021

Less Than Twelve Months Twelve Months or More

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

Mortgage-backed securities 3 3,974 557 49,701 560

Treasury $ 2,676 $ 209,703 $ — $ — $ 2,676

States and political subdivisions 88 9,674 — — 88

Collateralized mortgage obligations 10 11,165 — — 10

Corporate 167 6,283 — — 167

Total $ 2,941 $ 236,825 $ — $ — $ 2,941

Number of securities in an unrealized loss position:

The reduction in unrealized losses on our AFS securities portfolio resulted from recent decreases in intermediate-term and long-term benchmark interest rates.

The reduction in unrealized gains on our AFS securities portfolio resulted from the recent increases in intermediate-term and long-term benchmark interest rates.

As of December 31, 2021 and 2020, we conducted an analysis to determine whether any AFS securities currently in an unrealized loss position should be identified as other-than-temporarily impaired.

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We grant commercial, agricultural, residential real estate, and consumer loans to customers situated primarily in Clare, Gratiot, Isabella, Mecosta, Midland, Montcalm, and Saginaw counties in Michigan.

The ability of the borrowers to honor their repayment obligations is often dependent upon the real estate, agricultural, manufacturing, retail, gaming, tourism, higher education, and general economic conditions of this region.

The ability of the borrowers to honor their repayment obligations is often dependent upon the real estate, agricultural, manufacturing, retail, gaming, tourism, health care, higher education, and general economic conditions of this region.

Substantially all of our consumer and residential real estate loans are secured by various items of property, while commercial loans are secured primarily by real estate, business assets, and personal guarantees.

A portion of loans are unsecured.

Loans that we have the intent and ability to hold in our portfolio are reported at their outstanding principal balance adjusted for any charge-offs, the ALLL, and any deferred fees or costs.

Interest income is accrued over the term of the loan based on the principal amount outstanding.

Loan origination fees and certain direct loan origination costs are capitalized and recognized as a component of interest income over the term of the loan using the appropriate amortization methods.

Loans that we have the intent and ability to hold in our portfolio are reported at their outstanding principal balance adjusted for any charge-offs, the ALLL, and deferred fees or costs.

Unless a loan has a nonaccrual status, interest income is accrued over the term of the loan based on the principal amount outstanding.

Loan origination fees and certain direct loan origination costs are capitalized and recognized as a component of interest income over the term of the loan using the appropriate amortization method.

The accrual of interest on commercial and agricultural loans, as well as residential real estate loans, is discontinued at the time a loan is 90 days or more past due unless the credit is well-secured and in the process of short-term collection.

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Past due status is based on the contractual term of the loan.

In all cases, a loan is placed in nonaccrual status or charged-off at an earlier date if collection of principal or interest is considered doubtful.

When a loan is placed in nonaccrual status or charged-off, all interest accrued in the current calendar year, but not collected, is reversed against interest income while interest accrued in prior calendar years, but not collected, is charged against the ALLL.

In all cases, a loan is placed in nonaccrual status at an earlier date if collection of principal or interest is considered doubtful.

When a loan is placed in nonaccrual status, all interest accrued in the current calendar year, but not collected, is reversed against interest income while interest accrued in prior calendar years, but not collected, is charged against the ALLL.

Loans may be returned to accrual status after six months of continuous performance and achievement of current payment status.

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Depending upon the type of loan, past credit history, and current operating results, we may require the borrower to pledge accounts receivable, inventory, property, or equipment.

Personal guarantees are generally required from the owners of closely held corporations, partnerships, and sole proprietorships.

Government agency guarantee may be required.

Personal guarantees and/or life insurance beneficiary assignments are generally required from the owners of closely held corporations, partnerships, and sole proprietorships.

In addition, we may require annual financial statements, prepare cash flow analyses, and review credit reports..

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Under the participation agreement, we committed to a maximum outstanding aggregate amount of $80,000 as of December 31, 2021.

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.

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The ALLL is established as losses are estimated to have occurred through a provision for loan losses charged to earnings.

Loan losses are charged against the ALLL when we believe the uncollectability of the loan balance is probable.

Full or partial loan balances are charged against the ALLL when we believe uncollectability is probable.

Subsequent recoveries, if any, are credited to the ALLL

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Historical loss allocations are calculated at the loan class and segment levels based on a migration analysis of the loan portfolio, with the exception of advances to mortgage brokers, over the preceding five years .

With no historical losses on advances to mortgage brokers, there is no allocation in the commercial segment displayed in the following tables.

With no historical losses on advances to mortgage brokers, there is no allocation related to this portfolio.

The unallocated component of the allowance reflects the margin of imprecision inherent in the underlying assumptions used in the methodologies for estimating specific and general losses in the portfolio.

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 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.

A summary of changes in the ALLL and the recorded investment in loans by segments follows:

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Residential real estate senior liens 3,417 3,688 565 3,794 151

Residential real estate junior liens — — — — —

Total impaired loans with a valuation allowance 6,411 6,683 578 8,093 334

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Home equity lines of credit 37 37 5 —

Consumer secured — — 1 —

Total impaired loans without a valuation allowance 20,499 20,815 22,289 1,400

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Residential real estate 3,454 3,725 565 3,799 151

Consumer — — — 1 —

Total impaired loans $ 26,910 $ 27,498 $ 578 $ 30,382 $ 1,734

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Residential real estate senior liens 4,319 4,661 771 4,836 197

Residential real estate junior liens — — — 11 —

Total impaired loans with a valuation allowance 9,823 10,407 911 10,138 519

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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.

Pursuant to this guidance, borrowers granted a short-term loan modification meeting this criteria were not categorized as TDR as of December 31, 2021 or 2020.

Note 5 – Premises and Equipment

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Depreciation expense amounted to $ 2,314 , $ 2,620 , and $ 2,908 in 2021, 2020, and 2019, respectively.

Note 6 – Investment in Joint Venture

In 2008, we merged the assets of our wholly owned subsidiary, IBT Title and Insurance Agency, Inc.

(“IBT Title”) into a 50/50 joint venture with Corporate Title Agency, LLC, a third-party business based in Traverse City, Michigan, to form CSS.

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 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.

Therefore, federal taxable income and deductions are passed through to the members, and no provision for federal income taxes is reflected in the condensed statements of income.

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 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.

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 6 – 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, 2021 and 2020.

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:

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Amortization expense associated with identifiable intangible assets was $ 29 , $ 48 , and $ 72 in 2021, 2020, and 2019, respectively.

Estimated amortization expense associated with identifiable intangibles for each of the next five years succeeding December 31, 2020, and thereafter is as follows:

Estimated amortization expense associated with identifiable intangibles for each of the next four years succeeding December 31, 2021, and thereafter is as follows:

Estimated Amortization Expense

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Note 8 – Borrowed Funds

Borrowed funds consist of the following obligations at December 31:

Amount Rate Amount Rate

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

Federal funds purchased and repurchase agreements

Securities sold under repurchase agreements without stated maturity dates, federal funds purchased, and FRB Discount Window advances generally mature within one to four days from the transaction date.

We had no FRB Discount Window advances for the years ended December 31, 2021 and 2020.

The following table provides a summary of securities sold under repurchase agreements without stated maturity dates and federal funds purchased for the years ended 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

Securities sold under agreements to repurchase without stated maturity dates $ 71,059 $ 57,451 0.09 % $ 83,499 $ 35,514 0.10 %

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:

Amount Rate Amount Rate

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

Fixed rate due 2021 50,000 1.91 % 50,000 1.91 %

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 %

Fixed rate due 2023 — — % 45,000 2.97 %

Fixed rate due 2024 — — % 55,000 2.68 %

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)

Federal funds purchased 80 2 0.47 % — 4 0.49 %

Securities sold under agreements to repurchase are classified as secured borrowings and are reflected at the amount of cash received in connection with the transaction.

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We may be required to provide additional collateral based on the fair value of underlying securities.

We had no FRB Discount Window advances for the years ended December 31, 2020 and 2019.

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

Securities sold under repurchase agreements without stated maturity dates were as follows at December 31:

Amount Rate Amount Rate

Securities sold under agreements to repurchase without stated maturity dates $ 50,162 0.07 % $ 68,747 0.13 %

Federal funds purchased — 4 0.49 % 7,070 687 2.64 %

We had pledged AFS securities and 1-4 family residential real estate loans in the following amounts at December 31:

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

Treasury $ 9,711 $ —

States and political subdivisions 13,491 12,728

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

In the event of maturities, calls, significant principal repayments, or significant decline in market values, we have an adequate level of AFS securities available to pledge to satisfy required collateral.

As of December 31, 2020, we had the ability to borrow up to an additional $ 214,625 , based on assets pledged as collateral.

We had no investment securities that were restricted to be pledged for specific purposes.

In the event of maturities, calls, significant principal repayments, or significant decline in market values, we have an adequate level of AFS securities to pledge to satisfy collateral requirements.

As of December 31, 2021, we had the ability to borrow up to an additional $ 298,662 , without pledging additional collateral.

FHLB advances

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

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

Amount Rate Amount Rate

Fixed rate due 2021 $ — — % $ 50,000 1.91 %

Variable rate due 2021 (1)

— — % 10,000 0.52 %

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

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

Total $ 20,000 1.97 % $ 90,000 1.68 %

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

In October 2021, the fixed rate FHLB advance due in 2026 was put by the FHLB.

Derivative Instruments

We have entered into interest rate swaps to manage exposure to interest rate risk and variability in cash flows.

The interest rate swaps, associated with our variable rate borrowings, are designated upon inception as cash flow hedges of forecasted interest payments.

We have entered into LIBOR-based interest rate swaps that involve the receipt of variable amounts in exchange for fixed rate payments, in effect converting variable rate debt to fixed rate debt.

We may use interest rate swaps to manage exposure to interest rate risk and variability in cash flows.

The interest rate swap, associated with our variable rate borrowings, was designated upon inception as cash flow hedges of forecasted interest payments.

We entered into a LIBOR-based interest rate swap that involves the receipt of variable amounts in exchange for fixed rate payments, in effect converting variable rate debt to fixed rate debt.

Cash flow hedges are assessed for effectiveness using regression analysis.

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In the event that a portion of the changes in fair value were determined to be ineffective, the ineffective amount would be recorded in earnings.

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

The following table provides information on derivatives related to variable rate borrowings as of December 31, 2020.

There were no derivatives related to variable rate borrowings as of December 31, 2021 as the interest rate swap related to borrowings matured during the second quarter of 2021.

December 31, 2020

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

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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 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.

Credit risk is minimized through counterparty collateral, transaction limits and monitoring procedures.

Credit risk is minimized through counterparty collateral, transaction

limits and monitoring procedures.

We also manage dealer credit risk by entering into interest rate derivatives only with primary and highly rated counterparties, the use of ISDA master agreements, and the use of counterparty limits.

We do not anticipate any losses from failure of interest rate derivative counterparties to honor their obligations.

Subordinated Notes

On June 2, 2021, we completed a private placement of $30,000 in aggregate principal amount of 3.25% Fixed-to-Floating Rate Subordinated Notes due 2031 (the "Notes").

The Notes will initially bear a fixed interest rate of 3.25% until June 15, 2026, after which time until maturity on June 15, 2031, the interest rate will reset quarterly to an annual floating rate equal to the then-current 3-month SOFR plus 256 basis points.

The Notes are redeemable by us at our option, in whole or in part, on or after June 15, 2026.

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

The following table summarizes our outstanding notes at December 31:

Fixed rate at 3.25% to floating, due 2031 $ 30,000 3.25 %

Unamortized issuance costs ( 842 )

Total subordinated debt, net $ 29,158

Note 9 – Off-Balance-Sheet Activities, Commitments and Other Matters

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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.

Correspondent banks may require us to maintain minimum cash reserve balances.

At December 31, 2021 and 2020, the reserve balances related to correspondent banks amounted to $ 500 and $ 500 , respectively.

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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 .

Expenses related to this plan for 2021 and 2020 were $ 253 and $ 165 , respectively.

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

Incentives are also awarded for achievement of personal performance goals.

Expenses related to this plan for 2021, 2020 and 2019 were $ 1,063 , $ 1,101 , and $ 1,070 , respectively.

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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.

We adopted the RSP, an equity-based bonus plan, in 2020.

Under the RSP, we may award restricted stock bonuses to eligible employees on an annual basis that are not fully transferable or vested until certain conditions are met.

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

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.

The employee must also satisfy the annual 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:

All Grant Agreements contain vesting conditions and clawback provisions.

A summary of changes in nonvested restricted stock awards follows for the years ended December 31:

of Shares Fair

Balance, January 1 4,658 $ 82 — $ —

Granted 15,465 336 4,658 82

Vested — — — —

Forfeited — — — —

Balance, December 31 20,123 $ 418 4,658 $ 82

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

Compensation expense related to the RSP for 2021 and 2020 were $ 86 and $ 14 , respectively.

As of December 31, 2021, there was $ 319 of total remaining unrecognized compensation expense related to nonvested restricted stock awards granted under the RSP.

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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.

Under this plan, common 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 was $ 171 for 2019.

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

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Marketing costs 939 877 762

Memberships and subscriptions 877 740 700

Loan underwriting fees 849 825 905

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Income tax expense $ 3,848 $ 987 $ 1,380

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:

The reconciliation of the provision for federal income taxes and the amount computed at the federal statutory tax rate of 21 % of income before federal income tax expense is as follows for the year ended December 31:

2021 2020 2019

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Federal income tax expense $ 3,848 $ 987 $ 1,380

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.

The losses recognized for December 31, 2021, 2020 and 2019 related to our joint venture investment in CSS, which was sold during the fourth quarter of 2020.

The sale of this investment resulted in a capital loss carryforward that is unlikely to be recognized in the foreseeable future.

As such, we did not recognize a deferred tax asset as of December 31, 2021, 2020 and 2019 related to our investment and capital loss 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.

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Net unrealized gains on available-for-sale securities 1,018 2,777

Net unrealized gains on derivative instruments — 14

Other 834 956

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

Adoption of ASU 2016-01 223 — — 223

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

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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.

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:

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$ ( 31 ) $ 176 $ 268 Other noninterest expenses

37 56 72 Federal income tax expense

( 7 ) 37 56 Federal income tax (benefit) expense

$ ( 24 ) $ 139 $ 212 Net income

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We do not record loans at fair value on a recurring basis.

However, from time to time, loans are classified as impaired and a specific allowance for loan losses may be established.

However, some loans are classified as impaired and a specific allowance for loan losses may be established.

Loans for which it is probable that payment of interest and principal will be significantly different than the contractual terms of the original loan agreement are considered impaired.

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Livestock 30 % 30 %

Other inventory 50 % 50%

Accounts receivable 50 % 50 %

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Accounts receivable 25 % - 50 %

Liquor license 75 % 75 %

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

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As such, we classify OMSR subject to nonrecurring fair value adjustments as Level 2.

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 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.

As of December 31, 2019, our recorded investment in CSS relied on assumptions and use of estimates pursuant to the valuation.

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.

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Deposits with stated maturities 300,762 301,216 — 301,216 —

Borrowed funds 158,747 160,250 — 160,250 —

Federal funds purchased and repurchase agreements 50,162 50,153 — 50,153 —

FHLB advances 20,000 20,120 — 20,120 —

Subordinated debt, net of unamortized issuance costs

29,158 27,435 — 27,435 —

Accrued interest payable 251 251 251 — —

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Deposits with stated maturities 382,981 389,455 — 389,455 —

Borrowed funds 275,999 278,761 — 278,761 —

Federal funds purchased and repurchase agreements 68,747 68,738 — 68,738 —

FHLB advances 90,000 91,512 — 91,512 —

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

Accrued interest payable 481 481 481 — —

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AFS securities

Treasury $ 209,703 $ — $ 209,703 $ — $ — $ — $ — $ —

States and political subdivisions 121,205 — 121,205 — 143,656 — 143,656 —

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OMSR 2,124 — 2,124 — 2,308 — 2,308 —

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

Foreclosed assets 211 — — 211 527 — — 527

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We recorded an impairment related to OMSR of $ 0 and $ 316 through earnings for the years ended December 31, 2021 and 2020.

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 recorded gains of $ 0 and losses of $ 41 through earnings related fair value changes in foreclosed assets for the years ended December 31, 2021 and 2020.

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, 2021 and 2020.

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Assets of the Foundation include cash and cash equivalents, certificates of deposit, and shares of Isabella Bank Corporation common stock.

The Foundation owned 44,350 shares of our common stock as of December 31, 2020 and 2019, respectively.

The Foundation owned 20,000 shares of our common stock as of December 31, 2021 and 44,350 shares as of December 31, 2020.

Such shares are included in the computation of dividends and earnings per share.

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LIABILITIES AND SHAREHOLDERS’ EQUITY

Subordinated debt, net of unamortized issuance costs

Other liabilities 129 59

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

Other income (loss) — — 2,756

Other income 17 — —

Total income 3,629 9,878 4,699

Compensation and benefits — — 4,132

Interest expense 615 5 —

Occupancy and equipment 67 61 59

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Share-based payment awards under the RSP 86 14 —

Amortization of subordinated debt issuance costs 52 — —

Depreciation 50 47 46

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Financing activities

Issuance of subordinated debt, net of unamortized issuance costs

Cash dividends paid on common stock ( 8,367 ) ( 8,524 ) ( 8,282 )

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Cash and cash equivalents at end of period $ 11,535 $ 2,670 $ 1,360

On January 1, 2019, there was a transaction to restructure the Bank and the parent holding company for the purpose of better-organizing the entities for present and future needs.

The transaction is expected to produce future benefits for us in the form of reduced operational costs and better-managed risk.

Assets and liabilities transferred from the parent company to the Bank related primarily to capital assets, net deferred income tax asset, prepaid assets, employee benefits payable, accrued expenses, and a pension plan.

Effective January 1, 2019, employee compensation and benefit expenses are now recognized directly by the Bank, where expenses related to certain administrative functions were previously recognized by the parent holding company.

Similarly, expenses related to most capital assets are now recognized directly by the Bank.

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.

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