ISABELLA BANK CORP 10-K

Item 8. Financial Statements and Supplementary Data. 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, Rehmann Robson LLC (PCAOB ID: 263 ) Consolidated Balance Sheets Consolidated Statements of Changes in Shareholders’ Equity Consolidated Statements of Income Consolidated Statements of Comprehensive Income (Loss) Consolidated Statements of Cash Flows Notes to Consolidated Financial Statements Supplementary data regarding quarterly results of operations is included in Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations. 37 Table of Contents Report of Independent Registered Public Accounting Firm Shareholders and Board of Directors Isabella Bank Corporation Mount Pleasant, Michigan Opinion on the Financial Statements and Internal Control over Financial Reporting We have audited the accompanying consolidated balance sheets of Isabella Bank Corporation as of December 31, 2021 and 2020, and the related consolidated statements of changes in shareholders’ equity, income, comprehensive income, and cash flows for each of the years in the three-year period ended December 31, 2021, and the related notes (collectively referred to as the financial statements). We also have audited Isabella Bank Corporation’s internal control over financial reporting as of December 31, 2021, based on criteria established in the Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework) (the COSO criteria). In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of Isabella Bank Corporation as of December 31, 2021 and 2020, and the consolidated results of their operations and their cash flows for each of the years in the three-year period ended December 31, 2021, in conformity with accounting principles generally accepted in the United States of America. Also, in our opinion Isabella Bank Corporation maintained, in all material respects, effective internal control over financial reporting as of December 31, 2021, based on the COSO criteria. Basis for Opinions Isabella Bank Corporation’s management is responsible for these consolidated financial statements, for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management’s Report on Internal Control over Financial Reporting. Our responsibility is to express opinions on Isabella Bank Corporation ’ s consolidated financial statements and on Isabella Bank Corporation ’s internal control over financial reporting based on our integrated audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (“PCAOB”) and are required to be independent with respect to Isabella Bank Corporation in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB. We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud, and whether effective internal control over financial reporting was maintained in all material respects. Our audits of the consolidated financial statements included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material misstatement exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. We believe that our audits provide a reasonable basis for our opinions. Definition and Limitations of Internal Control over Financial Reporting A corporation’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of consolidated financial statements for external purposes in accordance with generally accepted accounting principles. A corporation’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the corporation; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of consolidated financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the corporation are being made only in accordance with authorizations of management and directors of the corporation; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the corporation’s assets that could have a material effect on the consolidated financial statements. 38 Table of Contents Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. One Critical Audit Matter The critical audit matter communicated below 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 Description of the Matter The Corporation’s loan portfolio totaled $1.301 billion as of December 31, 2021 and the associated allowance for loan and lease losses (ALLL) was $9.103 million. As described in Notes 1 and 4 to the consolidated financial statements, the ALLL is established to absorb inherent losses that have been incurred or are probable within the existing portfolio of loans. Management’s estimate of inherent losses within the loan portfolio is established using quantitative, as well as qualitative, considerations. The Corporation’s methodology to determine the ALLL considers quantitative calculations including: specific valuation allowances determined in accordance with ASC Topic 310 based on probable losses on specific loans, historical valuation allowances determined in accordance with ASC topic 450 based on historical loan loss experience for similar loans with similar characteristics and trends, supplemented, as necessary, by credit judgment to address observed changes in trends and conditions, and other relevant environmental and economic factors such as concentrations of credit risk, economic trends and conditions, changes in underwriting standards, experience and depth of lending staff, trends in delinquencies, and the level of net charge-offs (qualitative factor adjustments). Auditing the Corporation’s ALLL involved a high degree of subjectivity due to the judgement involved in management’s determination of commercial and agricultural loan credit risk ratings and identification and measurement of qualitative factor adjustments included in the estimate of the ALLL. How We Addressed the Matter in Our Audit We obtained an understanding of the Corporation’s process for establishing the ALLL and evaluated the design and tested the operating effectiveness of controls that address the risk of material misstatement related to the measurement of the ALLL. We tested controls over management’s review of commercial and agricultural loan credit risk ratings, the data inputs utilized in the ALLL calculation, management’s identification and review of the qualitative factor adjustments, and management’s review and approval process over the final determination of the ALLL. To test the commercial and agricultural loan credit risk ratings included in management’s estimate of the ALLL, we evaluated the methodology used, including management’s consideration of the individual commercial and agricultural loan portfolio segments, and tested the completeness and accuracy of data from underlying systems that was used in the determination of credit risk. We performed procedures on a sample of commercial and agricultural loans to test the Corporation’s credit risk ratings by comparing key attributes used in the determination of the credit risk rating to supporting documentation such as borrowers’ financial statements, underlying collateral, financial health of the guarantor and loan payment history. To test the measurement of qualitative factor adjustments included in management’s estimate of the ALLL, we evaluated the methodology and metrics, including testing the completeness and accuracy of data from underlying systems and other information. We further evaluated management’s assessment of the qualitative factor adjustments by obtaining an understanding of the basis for 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 We have served as Isabella Bank Corporation's independent auditor since 1996. Saginaw, Michigan March 15, 2022 39 Table of Contents CONSOLIDATED BALANCE SHEETS (Dollars in thousands) December 31 2021 2020 ASSETS Cash and cash equivalents Cash and demand deposits due from banks $ 25,563 $ 31,296 Interest bearing balances due from banks 79,767 215,344 Total cash and cash equivalents 105,330 246,640 AFS securities, at fair value 490,601 339,228 Mortgage loans AFS 1,735 2,741 Loans Commercial 807,439 756,686 Agricultural 93,955 100,461 Residential real estate 326,361 307,543 Consumer 73,282 73,621 Gross loans 1,301,037 1,238,311 Less allowance for loan and lease losses 9,103 9,744 Net loans 1,291,934 1,228,567 Premises and equipment 24,419 25,140 Corporate owned life insurance policies 32,472 28,292 Equity securities without readily determinable fair values 17,383 17,383 Goodwill and other intangible assets 48,302 48,331 Accrued interest receivable and other assets 19,982 21,056 TOTAL ASSETS $ 2,032,158 $ 1,957,378 LIABILITIES AND SHAREHOLDERS’ EQUITY Deposits Noninterest bearing $ 448,352 $ 375,395 Interest bearing demand deposits 364,563 302,444 Certificates of deposit under $250 and other savings 818,841 781,286 Certificates of deposit over $250 78,583 107,192 Total deposits 1,710,339 1,566,317 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 Total liabilities 1,821,110 1,738,790 Shareholders’ equity Common stock — no par value 15,000,000 shares authorized; 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 1,859 7,698 Total shareholders’ equity 211,048 218,588 TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY $ 2,032,158 $ 1,957,378 The accompanying notes are an integral part of these consolidated financial statements. 40 Table of Contents CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY (Dollars in thousands except per share amounts) Common Stock Common Shares Outstanding Amount Common Shares to be Issued for Deferred Compensation Obligations Retained Earnings Accumulated Other Comprehensive Income (Loss) Totals Balance, January 1, 2019 7,870,969 $ 140,416 $ 5,431 $ 57,357 $ ( 7,685 ) $ 195,519 Comprehensive income (loss) — — — 13,024 9,656 22,680 Issuance of common stock 209,583 4,876 — — — 4,876 Common stock transferred from the Rabbi Trust to satisfy deferred compensation obligations — 911 ( 911 ) — — — Share-based payment awards under the Directors Plan — — 523 — — 523 Common stock purchased for deferred compensation obligations — ( 1,131 ) — — — ( 1,131 ) 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 Comprehensive income (loss) — — — 10,885 5,727 16,612 Issuance of common stock 231,393 4,185 — — — 4,185 Common stock transferred from the Rabbi Trust to satisfy deferred compensation obligations — 1,273 ( 1,273 ) — — — 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 ( 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 Comprehensive income (loss) — — — 19,499 ( 5,839 ) 13,660 Issuance of common stock 67,436 1,593 — — — 1,593 Common stock transferred from the Rabbi Trust to satisfy deferred compensation obligations — 71 ( 71 ) — — — Share-based payment awards under the Directors Plan — — 433 — — 433 Share-based compensation expense recognized in earnings under the RSP — 86 — — — 86 Common stock purchased for deferred compensation obligations — ( 1,187 ) — — — ( 1,187 ) 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 The accompanying notes are an integral part of these consolidated financial statements. 41 Table of Contents CONSOLIDATED STATEMENTS OF INCOME (Dollars in thousands except per share amounts) Year Ended December 31 2021 2020 2019 Interest income Loans, including fees $ 51,410 $ 54,102 $ 54,192 AFS securities Taxable 4,920 5,214 7,185 Nontaxable 3,077 3,830 4,728 Federal funds sold and other 706 1,026 1,201 Total interest income 60,113 64,172 67,306 Interest expense Deposits 5,442 8,884 11,608 Borrowings Federal funds purchased and repurchase agreements 53 36 48 FHLB advances 1,302 4,905 6,205 Subordinated debt, net of unamortized issuance costs 615 — — Total 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 Net interest income after provision for loan losses 53,219 48,682 49,415 Noninterest income Service charges and fees 7,614 6,544 6,347 Wealth management fees 3,071 2,578 2,792 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 ) Other 372 362 594 Total noninterest income 13,822 14,423 8,039 Noninterest expenses Compensation and benefits 23,749 23,772 23,205 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 Total noninterest expenses 43,694 51,233 43,050 Income before federal income tax expense 23,347 11,872 14,404 Federal income tax expense 3,848 987 1,380 NET INCOME $ 19,499 $ 10,885 $ 13,024 Earnings per common share Basic $ 2.48 $ 1.37 $ 1.65 Diluted $ 2.45 $ 1.34 $ 1.61 Cash dividends per common share $ 1.08 $ 1.08 $ 1.05 The accompanying notes are an integral part of these consolidated financial statements. 42 Table of Contents CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (Dollars in thousands) Year Ended December 31 2021 2020 2019 Net income $ 19,499 $ 10,885 $ 13,024 Unrealized gains (losses) on AFS securities Unrealized gains (losses) arising during the period ( 8,371 ) 7,474 12,276 Reclassification adjustment for net realized (gains) losses included in net income — ( 71 ) ( 6 ) Comprehensive income (loss) before income tax (expense) benefit ( 8,371 ) 7,403 12,270 Tax effect (1) 1,759 ( 1,530 ) ( 2,458 ) Unrealized gains (losses) on AFS securities, net of tax ( 6,612 ) 5,873 9,812 Unrealized gains (losses) on derivative instruments Unrealized gains (losses) on derivative instruments arising during the period 53 ( 121 ) ( 256 ) Tax effect (1) ( 11 ) 25 54 Unrealized gains (losses) on derivative instruments, net of tax 42 ( 96 ) ( 202 ) Change in unrecognized pension cost on defined benefit pension plan Change in unrecognized pension cost arising during the period 955 ( 238 ) ( 210 ) Reclassification adjustment for net periodic benefit cost included in net income ( 31 ) 176 268 Net change in unrecognized pension cost 924 ( 62 ) 58 Tax effect (1) ( 193 ) 12 ( 12 ) Change in unrealized pension cost, net of tax 731 ( 50 ) 46 Other comprehensive income (loss), net of tax ( 5,839 ) 5,727 9,656 Comprehensive income (loss) $ 13,660 $ 16,612 $ 22,680 (1) See “Note 16 – Accumulated Other Comprehensive Income (Loss)” in the accompanying notes to consolidated financial statements for tax effect reconciliation. The accompanying notes are an integral part of these consolidated financial statements. 43 Table of Contents CONSOLIDATED STATEMENTS OF CASH FLOWS (Dollars in thousands) Year Ended December 31 2021 2020 2019 OPERATING ACTIVITIES Net income $ 19,499 $ 10,885 $ 13,024 Reconciliation of net income to net cash provided by operating activities: Undistributed earnings of equity securities without readily determinable fair values — ( 394 ) 3,320 Provision for loan losses ( 518 ) 1,665 30 Depreciation 2,314 2,620 2,908 Amortization of OMSR 597 504 307 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 gains on sale of AFS securities — ( 71 ) ( 6 ) Net gain on sale of mortgage loans ( 1,694 ) ( 2,716 ) ( 650 ) OMSR impairment loss — 316 214 Net (gains) losses on foreclosed assets ( 39 ) 51 ( 162 ) Increase in cash value of corporate owned life insurance policies, net of expenses ( 751 ) ( 708 ) ( 722 ) Gains from redemption of corporate owned life insurance policies ( 271 ) ( 891 ) — Loss on sale of joint venture investment — 394 — Loss on extinguishment of debt — 7,643 — Share-based payment awards under the Directors Plan 433 413 523 Share-based payment awards under the RSP 86 14 — Deferred income tax expense (benefit) ( 523 ) ( 276 ) 408 Origination of loans held-for-sale ( 48,957 ) ( 114,323 ) ( 39,937 ) Proceeds from loan sales 51,657 115,202 40,041 Net changes in operating assets and liabilities which provided (used) cash: Other assets 1,208 ( 821 ) 1,512 Accrued interest payable and other liabilities 146 398 637 Net cash provided by (used in) operating activities 25,501 21,997 23,303 INVESTING ACTIVITIES Activity in AFS securities Sales — 26,855 33,840 Maturities, calls, and principal payments 100,289 97,844 81,543 Purchases ( 262,266 ) ( 28,658 ) ( 39,896 ) Sale of joint venture investment — 1,000 — Net loan principal (originations) collections ( 63,210 ) ( 52,132 ) ( 58,974 ) Proceeds from sales of foreclosed assets 716 409 706 Purchases of premises and equipment ( 1,593 ) ( 1,518 ) ( 1,335 ) Purchases of corporate owned life insurance policies ( 4,272 ) ( 625 ) — Proceeds from redemption of corporate owned life insurance policies 1,114 2,387 — Funding of low income housing tax credit investments ( 413 ) ( 429 ) ( 404 ) Net cash provided by (used in) investing activities ( 229,635 ) 45,133 15,480 44 Table of Contents CONSOLIDATED STATEMENTS OF CASH FLOWS (continued) (Dollars in thousands) Year Ended December 31 2021 2020 2019 FINANCING ACTIVITIES Net increase (decrease) in deposits $ 144,022 $ 252,466 $ 21,158 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 ) Proceeds from issuance of common stock 1,593 4,185 4,876 Common stock repurchased ( 13,758 ) ( 2,702 ) ( 4,003 ) Common stock purchased for deferred compensation obligations ( 1,187 ) ( 1,592 ) ( 1,131 ) Net cash provided by (used in) financing activities 62,824 118,938 ( 51,682 ) Increase (decrease) in cash and cash equivalents ( 141,310 ) 186,068 ( 12,899 ) Cash and cash equivalents at beginning of period 246,640 60,572 73,471 Cash and cash equivalents at end of period $ 105,330 $ 246,640 $ 60,572 SUPPLEMENTAL CASH FLOWS INFORMATION: Interest paid $ 7,601 $ 14,204 $ 17,827 Income taxes paid 4,050 846 745 SUPPLEMENTAL NONCASH INFORMATION: Transfers of loans to foreclosed assets $ 361 $ 531 $ 645 Note receivable arising from sale of joint venture investment — 3,227 — The accompanying notes are an integral part of these consolidated financial statements. 45 Table of Contents NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Dollars in thousands except per share amounts) Note 1 – Nature of Operations and Summary of Significant Accounting Policies BASIS OF PRESENTATION AND CONSOLIDATION: The consolidated financial statements include the accounts of Isabella Bank Corporation, a financial services holding company, and its wholly owned subsidiary, Isabella Bank. All intercompany balances and accounts have been eliminated in consolidation. References to “the Corporation”, “Isabella”, “we”, “our”, “us”, and similar terms refer to the consolidated entity consisting of Isabella Bank Corporation and its subsidiary. References to Isabella Bank or the “Bank” refers to Isabella Bank Corporation’s subsidiary, Isabella Bank. For additional information, see “Note 18 – Related Party Transactions.” NATURE OF OPERATIONS: 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 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 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. USE OF ESTIMATES: In preparing consolidated financial statements in conformity with accounting principles generally accepted in the United States of America, we make estimates and assumptions that affect the reported amounts of assets and liabilities as of the date of the consolidated balance sheet and reported amounts of revenues and expenses during the reporting year. Actual results could differ from those estimates. Material estimates that are particularly susceptible to significant change in the near term relate to the determination of the ALLL, the fair value of AFS investment securities, and the valuation of goodwill and other intangible assets. FAIR VALUE MEASUREMENTS : Fair value refers to the price that would be received to sell an asset or paid to transfer a liability (an exit price) in an orderly transaction between market participants in the market in which the reporting entity transacts such sales or transfers based on the assumptions market participants would use when pricing an asset or liability. Assumptions are developed based on prioritizing information within a fair value hierarchy that gives the highest priority to quoted prices in active markets and the lowest priority to unobservable data, such as the reporting entity’s own data. We may choose to measure eligible items at fair value at specified election dates. For assets and liabilities recorded at fair value, it is our policy to maximize the use of observable inputs and minimize the use of unobservable inputs when developing fair value measurements for those financial instruments for which there is an active market. In cases where the market for a financial asset or liability is not active, we include appropriate risk adjustments that market participants would make for nonperformance and liquidity risks when developing fair value measurements. Fair value measurements for assets and liabilities for which limited or no observable market data exists are accordingly based primarily upon estimates, are often calculated based on the economic and competitive environment, the characteristics of the asset or liability and other factors. Therefore, the results cannot be determined with precision and may not be realized in an actual sale or immediate settlement of the asset or liability. Additionally, there may be inherent weaknesses in any calculation technique, and changes in the underlying assumptions used, including discount rates and estimates of future cash flows, could significantly affect the results of current or future values. We utilize fair value measurements to record fair value adjustments to certain assets and liabilities and to determine fair value disclosures. Investment securities AFS and derivative instruments are recorded at fair value on a recurring basis. Additionally, from time to time, we may be required to record other assets and liabilities at fair value on a nonrecurring basis, such as mortgage loans AFS, impaired loans, foreclosed assets, OMSR, goodwill, and certain other assets and liabilities. These nonrecurring fair value adjustments typically involve the application of lower of cost or market accounting or write downs of individual assets. 46 Table of Contents Fair Value Hierarchy Under fair value measurement and disclosure authoritative guidance, we group assets and liabilities measured at fair value into three levels, based on the markets in which the assets and liabilities are traded, and the reliability of the assumptions used to determine fair value, based on the prioritization of inputs in the valuation techniques. These levels are: Level 1: Valuation is based upon quoted prices for identical instruments traded in active markets. Level 2: Valuation is based upon quoted prices for similar instruments in active markets, quoted prices for identical or similar instruments in markets that are not active and model based valuation techniques for which all significant assumptions are observable in the market. Level 3: Valuation is generated from model based techniques that use at least one significant assumption not observable in the market. These unobservable assumptions reflect estimates of assumptions that market participants would use in pricing the asset or liability. The asset’s or liability’s fair value measurement level within the fair value hierarchy is based on the lowest level of any input that is significant to the fair value measurement. Valuation techniques maximize the use of observable inputs and minimize the use of unobservable inputs. Transfers between measurement levels are recognized at the end of reporting periods. For further discussion of fair value considerations, refer to “Note 17 – Fair Value.” SIGNIFICANT GROUP CONCENTRATIONS OF CREDIT RISK : Most of our activities are conducted with customers located within the central Michigan area. A significant amount of our outstanding loans are secured by commercial and residential real estate. Other than these types of loans, there is no significant concentration to any other industry or any one customer. CASH AND CASH EQUIVALENTS: For purposes of the consolidated statements of cash flows, cash and cash equivalents include cash and balances due from banks, federal funds sold, and other deposit accounts. Generally, federal funds sold are for a one day period. We maintain deposit accounts in various financial institutions which generally exceed federally insured limits or are not insured. We do not believe we are exposed to any significant interest, credit or other financial risk as a result of these deposits. AFS SECURITIES: Purchases of investment securities are generally classified as AFS. However, we may elect to classify securities as either held to maturity or trading. Securities classified as AFS debt securities are recorded at fair value, with unrealized gains and losses, net of the effect of deferred income taxes, excluded from earnings and reported in other comprehensive income. Included in AFS securities are auction rate money market preferred securities. These investments, for federal income tax purposes, have no federal income tax impact given the nature of the investments. Auction rate money market preferred securities are recorded at fair value, with unrealized gains and losses excluded from earnings and reported in other comprehensive income. Purchase premiums and discounts are recognized in interest income using the interest method over the term of the securities. Realized gains and losses on the sale of AFS securities are determined using the specific identification method. AFS securities are reviewed quarterly for possible OTTI. In determining whether an OTTI exists for debt securities, we assert that: (a) we do not have the intent to sell the security; and (b) it is more likely than not we will not have to sell the security before recovery of its cost basis. If these conditions are not met, we recognize an OTTI charge through earnings for the difference between the debt security’s amortized cost basis and its fair value, and such amount is included in noninterest income. For debt securities that do not meet the above criteria, and we do not expect to recover the security’s amortized cost basis, the security is considered other-than-temporarily impaired. For these debt securities, we separate the total impairment into the credit risk loss component and the amount of the loss related to market and other risk factors. In order to determine the amount of the credit loss for a debt security, we calculate the recovery value by performing a discounted cash flow analysis based on the current cash flows and future cash flows we expect to recover. The amount of the total OTTI related to the credit risk is recognized in earnings and is included in noninterest income. The amount of the total OTTI related to other risk factors is recognized as a component of other comprehensive income. For debt securities that have recognized OTTI through earnings, if through subsequent evaluation there is a significant increase in the cash flow expected, the difference between the amortized cost basis and the cash flows expected to be collected is accreted as interest income. LOANS: Loans that we have the intent and ability to hold for the foreseeable future or until maturity or payoff are reported at their outstanding principal balance adjusted for any charge-offs, the ALLL, and any deferred fees or costs. Interest income on loans 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 yield methods. 47 Table of Contents The accrual of interest on agricultural, commercial and mortgage loans is discontinued at the time the loan is 90 days or more past due unless the credit is well secured and in the process of collection. Consumer loans are typically charged-off no later than 180 days past due. Past due status is based on contractual terms of the loan. In all cases, loans are placed in nonaccrual or charged-off at an earlier date if collection of principal or interest is considered doubtful. For loans that are placed on 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. Interest income on loans in nonaccrual status is not recognized until qualifying for return to accrual status. Loans are returned to accrual status when all principal and interest amounts contractually due are brought current and future payments are reasonably assured. For impaired loans not classified as nonaccrual, interest income continues to be accrued over the term of the loan based on the principal amount outstanding. ALLOWANCE FOR LOAN AND LEASE LOSSES: 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 allowance when we believe the uncollectability of the loan balance is confirmed. Subsequent recoveries, if any, are credited to the allowance. We evaluate the ALLL on a regular basis. Our periodic review of the collectability of loans considers historical experience, the nature and volume of the loan portfolio, adverse situations that may affect the borrower’s ability to repay, estimated value of any underlying collateral and prevailing economic conditions. This evaluation is inherently subjective as it requires estimates that are susceptible to significant revision as more information becomes available. The ALLL consists of specific, general, and unallocated components. The specific component relates to loans that are deemed to be impaired. For such loans that are analyzed for specific allowance allocations, an allowance is established when the discounted cash flows or collateral value, less costs to sell, of the impaired loan is lower than the carrying value of that loan. The general component covers non-impaired loans and is based on historical loss experience adjusted for current conditions. An unallocated component is maintained to cover uncertainties that we believe affect our estimate of probable losses based on qualitative factors. 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. Loans may be classified as impaired if they meet one or more of the following criteria: 1. There has been a charge-off of its principal balance; 2. The loan has been classified as a TDR; or 3. The loan is in nonaccrual status. Impairment is measured on a loan-by-loan basis by either the present value of expected future cash flows discounted at the loan’s effective interest rate, or the fair value of the collateral, less costs to sell, if the loan is collateral dependent. Large groups of smaller-balance, homogeneous loans are collectively evaluated for impairment. LOANS HELD FOR SALE: Mortgage loans held for sale on the secondary market are carried at the lower of cost or fair value as determined by aggregating outstanding commitments from investors or current investor yield requirements. Net unrealized losses, if any, would be recognized as a component of other noninterest expenses. Mortgage loans held for sale are sold with the mortgage servicing rights retained by us. Gains or losses on sales of mortgage loans are recognized based on the difference between the selling price and the carrying value of the related mortgage loans sold. TRANSFERS OF FINANCIAL ASSETS: Transfers of financial assets, including mortgage loans and participation loans, are accounted for as sales when control over the assets has been surrendered. Control over transferred assets is determined to be surrendered when 1) the assets have been legally isolated from us, 2) the transferee obtains the right (free of conditions that constrain it from taking advantage of the right) to pledge or exchange the transferred assets, and 3) we do not maintain effective control over the transferred assets through an agreement to repurchase them before their maturity. Other than servicing, we have no substantive continuing involvement related to these loans. SERVICING: Servicing assets are recognized as separate assets when rights are acquired through purchase or through sale of financial assets. We have no purchased servicing rights. For sales of mortgage loans, a portion of the cost of originating the loan is allocated to the servicing right based on relative fair value. Fair value is based on market prices for comparable mortgage servicing contracts, when available, or alternatively, is based on a valuation model that calculates the present value of estimated future net servicing income. The valuation model incorporates assumptions that market participants would use in estimating future net servicing income, such as the cost to service, the discount rate, the custodial earnings rate, an inflation rate, ancillary income, prepayment speeds and default rates and losses. 48 Table of Contents Servicing assets are evaluated for impairment based upon the fair value of the rights as compared to amortized cost. Impairment is determined by stratifying rights into tranches based on predominant risk characteristics, such as interest rate, loan type, and investor type. Impairment is recognized through a valuation allowance for an individual tranche, to the extent that fair value is less than the capitalized amount for the tranche. If we later determine that all or a portion of the impairment no longer exists for a particular tranche, a reduction of the valuation allowance may be recorded as an increase to income. Capitalized servicing rights are reported in other assets and are amortized into noninterest income in proportion to, and over the period of, the estimated future net servicing income of the underlying financial assets. The unpaid principal balance of mortgages serviced for others was $ 278,844 and $ 301,377 with capitalized servicing rights of $ 2,124 and $ 2,308 at December 31, 2021 and 2020, respectively, which are included in other assets. Servicing fee income is recorded for fees earned for servicing loans for others. The fees are based on a contractual percentage of the outstanding principal or a fixed amount per loan and are recorded as income when earned. We recorded servicing fee revenue of $ 747 , $ 625 , and $ 626 related to residential mortgage loans serviced for others during 2021, 2020, and 2019, respectively, which is included in other noninterest income. FORECLOSED ASSETS: Assets acquired through, or in lieu of, loan foreclosure are held for sale and are initially recorded at the lower of our carrying amount or fair value less estimated selling costs at the date of transfer, establishing a new cost basis. Any write downs based on the asset’s fair value at the date of acquisition are charged to the ALLL. After foreclosure, property held for sale is carried at the lower of the new cost basis or fair value less costs to sell. Impairment losses on property to be held and used are measured at the amount by which the carrying amount of property exceeds its fair value. Costs relating to holding these assets are expensed as incurred. We periodically perform valuations and any subsequent write downs are recorded as a charge to operations, if necessary, to reduce the carrying value of a property to the lower of our carrying amount or fair value less costs to sell. Foreclosed assets of $ 211 and $ 527 as of December 31, 2021 and 2020, respectively, are included in other assets. PREMISES AND EQUIPMENT: Land is carried at cost. Buildings and equipment are carried at cost, less accumulated depreciation which is computed principally by the straight-line method based upon the estimated useful lives of the related assets, which range from 3 to 40 years. Major improvements are capitalized and appropriately amortized based upon the useful lives of the related assets or the expected terms of the leases, if shorter, using the straight-line method. Maintenance, repairs and minor alterations are charged to current operations as expenditures occur. We annually review these assets to determine whether carrying values have been impaired. 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. Equity securities without readily determinable fair values consist of the following holdings as of December 31: 2021 2020 FHLB Stock $ 15,050 $ 15,050 FRB Stock 1,999 1,999 Other 334 334 Total $ 17,383 $ 17,383 EQUITY COMPENSATION PLANS: At December 31, 2021, the Directors Plan had 189,364 shares eligible to be issued to participants, for which the Rabbi Trust held 105,654 shares. We had 176,215 shares to be issued at December 31, 2020, with 59,162 shares held in the Rabbi Trust. Under the RSP, compensation expense for nonvested stock awards is based on the fair value of the award on the measurement date. The fair value of nonvested stock awards is based on the date of the grant and is recognized over the requisite service period. The impact of forfeitures of share-based payment awards on compensation expense is recognized as forfeitures occur. Compensation costs relating to share-based payment transactions are recognized as the services are rendered, with the cost measured based on the fair value of the equity or liability instruments issued (see “Note 12 – Benefit Plans”). CORPORATE OWNED LIFE INSURANCE: We have purchased life insurance policies on key members of management, partially for the purpose of funding certain post-retirement benefits. In the event of death of one of these individuals, we would receive a specified cash payment equal to the face value of the policy. Such policies are recorded at their cash surrender value, or the amount that can be realized on the balance sheet date. Increases in cash surrender value in excess of single premiums paid are reported as other noninterest income. 49 Table of Contents Of the purchased life insurance policies, we hold post retirement benefits with a present value estimated to be $ 2,843 and $ 2,810 as of December 31, 2021 and 2020, respectively, which is included in accrued interest payable and other liabilities. The expenses associated with these policies totaled $ 33 , $ 87 , and $ 125 for 2021, 2020, and 2019, respectively. ACQUISITION INTANGIBLES AND GOODWILL: We previously acquired branch facilities and related deposits in business combinations accounted for as a purchase. The acquisitions included amounts related to the valuation of customer deposit relationships (core deposit intangibles). Core deposit intangibles arising from acquisitions are included in goodwill and other intangible assets are being amortized over their estimated lives and evaluated for potential impairment on at least an annual basis. Goodwill, which represents the excess of the purchase price over identifiable assets, is not amortized but is evaluated for impairment on at least an annual basis. Acquisition intangibles and goodwill are typically qualitatively evaluated to determine if it is more likely than not that the carrying balance is impaired. If it is determined that the carrying balance is more likely than not to be impaired, we perform a cash flow valuation to determine the extent of the potential impairment. This valuation method requires a significant degree of our judgment. In the event the projected undiscounted net operating cash flows for these intangible assets are less than the carrying value, the asset is recorded at fair value as determined by the valuation model. OFF BALANCE SHEET CREDIT RELATED FINANCIAL INSTRUMENTS: In the ordinary course of business, we have entered into commitments to extend credit, including commitments under credit card arrangements, commercial lines of credit, home equity lines of credit, commercial letters of credit, and standby letters of credit. Such financial instruments are recorded only when funded. REVENUE RECOGNITION: Our revenue is comprised primarily of interest income, service charges and fees, gains on the sale of loans and AFS securities, earnings on corporate owned life insurance policies, and other noninterest income. Other noninterest income is typically service and performance driven in nature and comprised primarily of investment and trust advisory fees. We recognize revenue, excluding interest income and other income specifically scoped out, in accordance with ASC 606, Revenue From Contracts with Customers. Revenue is recognized when our performance obligation has been satisfied according to our contractual obligation. FEDERAL INCOME TAXES: Deferred income tax assets and liabilities are determined using the liability (or balance sheet) method. Under this method, the net deferred tax assets or liabilities are determined based on the tax effects of the temporary differences between the book and tax basis on the various balance sheet assets and liabilities and gives current recognition to changes in tax rates and laws. Valuation allowances are established, where necessary, to reduce deferred tax assets to the amount expected to be realized. Income tax expense is the tax payable or refundable for the year plus or minus the change during the year in deferred tax assets and liabilities. We analyze our filing positions in the jurisdictions where we are required to file income tax returns, as well as all open tax years in these jurisdictions. We also treat interest and penalties attributable to income taxes, to the extent they arise, as a component of our noninterest expenses. DEFINED BENEFIT PENSION PLAN: We maintain a noncontributory defined benefit pension plan, which was curtailed effective March 1, 2007. The service cost component of the defined benefit pension plan is included in “compensation and benefits” on the consolidated statements of income and is funded consistent with the requirements of federal laws and regulations. All other costs related to the defined benefit pension plan are included in “other” noninterest expenses on the consolidated statements of income. The current benefit obligation is included in "accrued interest payable and other liabilities" on the consolidated balance sheets. Inherent in the determination of defined benefit pension costs are assumptions concerning future events that will affect the amount and timing of required benefit payments under the plan. These assumptions include demographic assumptions such as mortality, a discount rate used to determine the current benefit obligation and a long-term expected rate of return on plan assets. Net periodic benefit cost includes the interest cost based on the assumed discount rate, an expected return on plan assets based on an actuarially derived market-related value of assets, and amortization of unrecognized net actuarial gains or losses. Actuarial gains and losses result from experience different from that assumed and from changes in assumptions (excluding asset gains and losses not yet reflected in market-related value). Amortization of actuarial gains and losses is included as a component of net periodic defined benefit pension cost. For additional information, see “Note 12 – Benefit Plans.” MARKETING COSTS: Marketing costs are expensed as incurred (see “Note 14 – Other Noninterest Expenses”). RECLASSIFICATIONS: Certain amounts reported in the 2020 and 2019 consolidated financial statements have been reclassified to conform with the 2021 presentation. 50 Table of Contents Note 2 – Accounting Standards Updates Pending Accounting Standards Updates ASU No. 2016-13: “Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments” In June 2016, ASU No. 2016-13 was issued and updated the measurement for credit losses for AFS debt securities and assets measured at amortized cost which include loans, trade receivables, and any other financial assets with the contractual right to receive cash. Current GAAP requires an “incurred loss” methodology for recognizing credit losses that delays recognition until it is probable a loss has been incurred. Under the incurred loss approach, entities are limited to a probable initial recognition threshold when credit losses are measured; an entity generally only considers past events and current conditions in measuring the incurred loss. 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. The measurement of expected credit losses is based on relevant information about past events, including historical experience, current conditions, and reasonable and supportable forecasts that affect the collectability of the reported amount. An entity must use judgment in determining the relevant information and estimation methods that are appropriate in its circumstances which applies to assets measured either collectively or individually. The update allows an entity to revert to historical loss information that is reflective of the contractual term (considering the effect of prepayments) for periods that are beyond the time frame for which the entity is able to develop reasonable and supportable forecasts. In addition, the disclosures of credit quality indicators in relation to the amortized cost of financing receivables, a current disclosure requirement, are further disaggregated by year of origination (or vintage). The vintage information will be useful for financial statement users to better assess changes in underwriting standards and credit quality trends in asset portfolios over time and the effect of those changes on credit losses. Overall, the update will allow entities the ability to measure expected credit losses without the restriction of incurred or probable losses that exist under current GAAP. 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 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 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. An internal committee was formed and is accountable for timely and accurate adoption of the guidance. A service provider that has focused on the ALLL for more than 10 years and serves hundreds of financial institutions has been engaged to provide us with education, advisory, and software solutions exclusively related to the ACL. We will run parallel processes which will help to ensure we are ready to calculate, review, and report the ACL by the required implementation date. 51 Table of Contents Note 3 – AFS Securities The amortized cost and fair value of AFS securities, with gross unrealized gains and losses, are as follows as of December 31: 2021 Amortized Cost Gross Unrealized Gains Gross Unrealized Losses Fair Value U.S. Treasury $ 212,379 $ — $ 2,676 $ 209,703 States and political subdivisions 116,836 4,457 88 121,205 Auction rate money market preferred 3,200 42 — 3,242 Mortgage-backed securities 54,710 1,438 — 56,148 Collateralized mortgage obligations 90,435 1,876 10 92,301 Corporate 8,150 19 167 8,002 Total $ 485,710 $ 7,832 $ 2,941 $ 490,601 2020 Amortized Cost Gross Unrealized Gains Gross Unrealized Losses Fair Value States and political subdivisions $ 137,710 $ 5,946 $ — $ 143,656 Auction rate money market preferred 3,200 37 — 3,237 Mortgage-backed securities 85,926 2,726 — 88,652 Collateralized mortgage obligations 97,430 4,553 — 101,983 Corporate 1,700 — — 1,700 Total $ 325,966 $ 13,262 $ — $ 339,228 The amortized cost and fair value of AFS securities by contractual maturity at December 31, 2021 are as follows: Maturing Securities with Variable Monthly Payments or Noncontractual Maturities Due in One Year or Less After One Year But Within Five Years After Five Years But Within Ten Years After Ten Years Total U.S. Treasury $ — $ 202,634 $ 9,745 $ — $ — $ 212,379 States and political subdivisions 15,898 54,344 19,351 27,243 — 116,836 Auction rate money market preferred — — — — 3,200 3,200 Mortgage-backed securities — — — — 54,710 54,710 Collateralized mortgage obligations — — — — 90,435 90,435 Corporate — — 8,150 — — 8,150 Total amortized cost $ 15,898 $ 256,978 $ 37,246 $ 27,243 $ 148,345 $ 485,710 Fair value $ 16,039 $ 256,332 $ 37,770 $ 28,769 $ 151,691 $ 490,601 Expected maturities for government sponsored enterprises and states and political subdivisions may differ from contractual maturities because issuers may have the right to call or prepay obligations. As the auction rate money market preferred investments have continual call dates, they are not reported by a specific maturity group. Because of their variable monthly payments, mortgage-backed securities and collateralized mortgage obligations are not reported by a specific maturity group. 52 Table of Contents A summary of the sales activity of AFS securities during the years ended December 31 is displayed in the following table. 2021 2020 2019 Proceeds from sales of AFS securities $ — $ 26,855 $ 33,840 Realized gains (losses) $ — $ 71 $ 6 Applicable income tax expense (benefit) $ — $ 15 $ 1 The following information pertains to AFS securities with gross unrealized losses at December 31, 2021 aggregated by investment category and length of time that individual securities have been in a continuous loss position. 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 Gross Unrealized Losses Fair Value Gross Unrealized Losses Fair Value Total Unrealized Losses U.S. 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: 40 — 40 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. Such analyses considered, among other factors, the following criteria: • Has the value of the investment declined more than what is deemed to be reasonable based on a risk and maturity adjusted discount rate? • Is the investment credit rating below investment grade? • Is it probable the issuer will be unable to pay the amount when due? • Is it more likely than not that we will have to sell the security before recovery of its cost basis? • Has the duration of the investment been extended? Based on our analysis, which included the criteria outlined above and the fact that we have asserted that we do not have to sell any AFS securities in an unrealized loss position, we do not believe that the values of any AFS securities are other-than-temporarily impaired as of December 31, 2021 and 2020, with the exception of one municipal bond previously identified which had no activity during the period. 53 Table of Contents Note 4 – Loans and ALLL 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, 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 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. Upon transferring a loan to nonaccrual status, we perform an evaluation to determine the net realizable value of the underlying collateral. This evaluation is used to help determine if a charge-off is necessary. Consumer loans are typically charged-off no later than 180 days past due. Past due status is based on the contractual term of the loan. 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. Commercial and agricultural loans include loans for commercial real estate, commercial operating loans, advances to mortgage brokers, farmland and agricultural production, and loans to states and political subdivisions. Repayment of these loans is dependent upon the successful operation and management of a business. We minimize our risk by limiting the amount of direct credit exposure to any one borrower to $ 15,000 . Borrowers with direct credit needs of more than $ 15,000 may be serviced through the use of loan participations with other commercial banks. Commercial and agricultural real estate loans commonly require loan-to-value limits of 80 % or less. 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. 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.. We entered into a mortgage purchase program in 2016 with a financial institution where we participate in advances to mortgage brokers (“advances”). The mortgage brokers originate residential mortgage loans with the intent to sell them on the secondary market. We participate in the advance to the mortgage broker, which is secured by the underlying mortgage loan, until it is ultimately sold on the secondary market. As such, the average life of each participated advance is approximately 20-30 days. Funds from the sale of the loan are used to pay off our participation in the advance to the mortgage broker. We classify these advances as commercial loans and include the outstanding balance in commercial loans on our consolidated balance sheets. Under the participation agreement, we committed to a maximum outstanding aggregate amount of $80,000 as of December 31, 2021. 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. We offer adjustable rate mortgages, construction loans, and fixed rate residential real estate loans which have amortization periods up to a maximum of 30 years. We consider the anticipated direction of interest rates, balance sheet duration, the sensitivity of our balance sheet to changes in interest rates, our liquidity needs, and overall loan demand to determine whether or not to sell fixed rate loans to Freddie Mac. Our lending policies generally limit the maximum loan-to-value ratio on residential real estate loans to 100 % of the lower of the appraised value of the property or the purchase price. Private mortgage insurance is typically required on loans with loan-to-value ratios in excess of 80 % unless the loan qualifies for government guarantees. 54 Table of Contents Underwriting criteria for residential real estate loans generally include: • Evaluation of the borrower’s ability to make monthly payments. • Evaluation of the value of the property securing the loan. • Ensuring the payment of principal, interest, taxes, and hazard insurance does not exceed 28 % of a borrower’s gross income. • Ensuring all debt servicing does not exceed 40 % of income. • Verification of acceptable credit reports. • Verification of employment, income, and financial information. Appraisals are performed by independent appraisers and are reviewed for appropriateness. Generally, mortgage loan requests are reviewed by our mortgage loan committee or through a secondary market underwriting system; loans in excess of $ 1,000 require the approval of our Internal Loan Committee, the Executive Loan Committee, the Board of Directors’ Loan Committee, or the Board of Directors. Consumer loans include secured and unsecured personal loans. Loans are amortized for a period of up to 15 years based on the age and value of the underlying collateral. The underwriting emphasis is on a borrower’s perceived intent and ability to pay rather than collateral value. No consumer loans are sold to the secondary market. The ALLL is established as losses are estimated to have occurred through a provision for loan losses charged to earnings. 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 The ALLL is evaluated on a regular basis for appropriateness. Our periodic review of the collectability of a loan considers historical experience, the nature and volume of the loan portfolio, adverse situations that may affect the borrower’s ability to repay, estimated value of any underlying collateral, and prevailing economic conditions. This evaluation is inherently subjective as it requires estimates that are susceptible to significant revision as more information becomes available. The primary factors behind the determination of the level of the ALLL are specific allocations for impaired loans, historical loss percentages, as well as unallocated components. Specific allocations for impaired loans are primarily determined based on the difference between the loan’s outstanding balance and the present value of expected future cash flows discounted at the loan’s effective interest rate, or the fair value of the collateral, less costs to sell, if the loan is collateral dependent. 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 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: Allowance for Loan Losses Year Ended December 31, 2021 Commercial Agricultural Residential Real Estate Consumer Unallocated Total January 1, 2021 $ 2,162 $ 311 $ 1,363 $ 798 $ 5,110 $ 9,744 Charge-offs ( 32 ) ( 77 ) ( 12 ) ( 486 ) — ( 607 ) Recoveries 133 12 162 177 — 484 Provision for loan losses ( 523 ) 43 ( 766 ) 419 309 ( 518 ) December 31, 2021 $ 1,740 $ 289 $ 747 $ 908 $ 5,419 $ 9,103 55 Table of Contents Allowance for Loan Losses Year Ended December 31, 2020 Commercial Agricultural Residential Real Estate Consumer Unallocated Total January 1, 2020 $ 1,914 $ 634 $ 2,047 $ 922 $ 2,422 $ 7,939 Charge-offs ( 7 ) ( 24 ) ( 28 ) ( 322 ) — ( 381 ) Recoveries 149 39 136 197 — 521 Provision for loan losses 106 ( 338 ) ( 792 ) 1 2,688 1,665 December 31, 2020 $ 2,162 $ 311 $ 1,363 $ 798 $ 5,110 $ 9,744 Allowance for Loan Losses and Recorded Investment in Loans As of December 31, 2021 Commercial Agricultural Residential Real Estate Consumer Unallocated Total ALLL Individually evaluated for impairment $ 13 $ — $ 565 $ — $ — $ 578 Collectively evaluated for impairment 1,727 289 182 908 5,419 8,525 Total $ 1,740 $ 289 $ 747 $ 908 $ 5,419 $ 9,103 Loans Individually evaluated for impairment $ 9,267 $ 14,189 $ 3,454 $ — $ 26,910 Collectively evaluated for impairment 798,172 79,766 322,907 73,282 1,274,127 Total $ 807,439 $ 93,955 $ 326,361 $ 73,282 $ 1,301,037 Allowance for Loan Losses and Recorded Investment in Loans As of December 31, 2020 Commercial Agricultural Residential Real Estate Consumer Unallocated Total ALLL Individually evaluated for impairment $ 84 $ 56 $ 771 $ — $ — $ 911 Collectively evaluated for impairment 2,078 255 592 798 5,110 8,833 Total $ 2,162 $ 311 $ 1,363 $ 798 $ 5,110 $ 9,744 Loans Individually evaluated for impairment $ 9,821 $ 13,796 $ 4,319 $ — $ 27,936 Collectively evaluated for impairment 746,865 86,665 303,224 73,621 1,210,375 Total $ 756,686 $ 100,461 $ 307,543 $ 73,621 $ 1,238,311 56 Table of Contents The following tables display the credit quality indicators for commercial and agricultural credit exposures based on internally assigned credit risk ratings as of December 31: 2021 Commercial Agricultural Real Estate Other Advances to Mortgage Brokers Total Real Estate Other Total Total Rating 1 - Excellent $ — $ 300 $ — $ 300 $ — $ — $ — $ 300 2 - High quality 9,010 6,881 — 15,891 453 — 453 16,344 3 - High satisfactory 86,135 46,087 72,001 204,223 9,361 4,295 13,656 217,879 4 - Low satisfactory 448,489 104,375 — 552,864 36,483 15,986 52,469 605,333 5 - Special mention 13,212 1,351 — 14,563 13,096 3,452 16,548 31,111 6 - Substandard 13,519 5,738 — 19,257 6,252 3,803 10,055 29,312 7 - Vulnerable 222 119 — 341 499 275 774 1,115 8 - Doubtful — — — — — — — — 9 - Loss — — — — — — — — Total $ 570,587 $ 164,851 $ 72,001 $ 807,439 $ 66,144 $ 27,811 $ 93,955 $ 901,394 2020 Commercial Agricultural Real Estate Other Advances to Mortgage Brokers Total Real Estate Other Total Total Rating 1 - Excellent $ — $ — $ — $ — $ — $ — $ — $ — 2 - High quality 2,308 13,406 — 15,714 541 11 552 16,266 3 - High satisfactory 69,327 51,093 50,258 170,678 14,411 5,312 19,723 190,401 4 - Low satisfactory 403,733 122,025 — 525,758 34,464 17,600 52,064 577,822 5 - Special mention 15,049 6,174 — 21,223 13,137 3,240 16,377 37,600 6 - Substandard 15,854 6,130 — 21,984 5,267 2,693 7,960 29,944 7 - Vulnerable 26 1,303 — 1,329 3,208 387 3,595 4,924 8 - Doubtful — — — — 190 — 190 190 9 - Loss — — — — — — — — Total $ 506,297 $ 200,131 $ 50,258 $ 756,686 $ 71,218 $ 29,243 $ 100,461 $ 857,147 Internally assigned credit risk ratings are reviewed, at a minimum, when loans are renewed or when management has knowledge of improvements or deterioration of the credit quality of individual credits. Descriptions of the internally assigned credit risk ratings for commercial and agricultural loans are as follows: 1. EXCELLENT – Substantially Risk Free Credit has strong financial condition and solid earnings history, characterized by: • High liquidity, strong cash flow, low leverage. • Unquestioned ability to meet all obligations when due. • Experienced management, with management succession in place. • Secured by cash. 57 Table of Contents 2. HIGH QUALITY – Limited Risk Credit with sound financial condition and a positive trend in earnings supplemented by: • Favorable liquidity and leverage ratios. • Ability to meet all obligations when due. • Management with successful track record. • Steady and satisfactory earnings history. • If loan is secured, collateral is of high quality and readily marketable. • Access to alternative financing. • Well defined primary and secondary source of repayment. • If supported by guaranty, the financial strength and liquidity of the guarantor(s) are clearly evident. 3. HIGH SATISFACTORY – Reasonable Risk Credit with satisfactory financial condition and further characterized by: • Working capital adequate to support operations. • Cash flow sufficient to pay debts as scheduled. • Management experience and depth appear favorable. • Loan performing according to terms. • If loan is secured, collateral is acceptable and loan is fully protected. 4. LOW SATISFACTORY – Acceptable Risk Credit with bankable risks, although some signs of weaknesses are shown: • Would include most start-up businesses. • Occasional instances of trade slowness or repayment delinquency – may have been 10 - 30 days slow within the past year. • Management’s abilities are apparent yet unproven. • Weakness in primary source of repayment with adequate secondary source of repayment. • Loan structure generally in accordance with policy. • If secured, loan collateral coverage is marginal. To be classified as less than satisfactory, only one of the following criteria must be met. 5. SPECIAL MENTION – Criticized Credit constitutes an undue and unwarranted credit risk but not to the point of justifying a classification of substandard. The credit risk may be relatively minor yet constitutes an unwarranted risk in light of the circumstances surrounding a specific loan: • Downward trend in sales, profit levels, and margins. • Impaired working capital position. • Cash flow is strained in order to meet debt repayment. • Loan delinquency ( 30 - 60 days) and overdrafts may occur. • Shrinking equity cushion. • Diminishing primary source of repayment and questionable secondary source. • Management abilities are questionable. • Weak industry conditions. • Litigation pending against the borrower. 58 Table of Contents • Loan may need to be restructured to improve collateral position or reduce payments. • Collateral or guaranty offers limited protection. • Negative debt service coverage, however the credit is well collateralized and payments are current. 6. SUBSTANDARD – Classified Credit is inadequately protected by the current net worth and paying capacity of the borrower or of the collateral pledged. There is a distinct possibility we will implement collection procedures if the loan deficiencies are not corrected. Any commercial loan placed in nonaccrual status will be rated “7” or worse. In addition, the following characteristics may apply: • Sustained losses have severely eroded the equity and cash flow. • Deteriorating liquidity. • Serious management problems or internal fraud. • Original repayment terms liberalized. • Likelihood of bankruptcy. • Inability to access other funding sources. • Reliance on secondary source of repayment. • Litigation filed against borrower. • Interest non-accrual may be warranted. • Collateral provides little or no value. • Requires excessive attention of the loan officer. • Borrower is uncooperative with loan officer. 7. VULNERABLE – Classified Credit is considered “Substandard” and warrants placing in nonaccrual status. Risk of loss is being evaluated and exit strategy options are under review. Other characteristics that may apply: • Insufficient cash flow to service debt. • Minimal or no payments being received. • Limited options available to avoid the collection process. • Transition status, expect action will take place to collect loan without immediate progress being made. 8. DOUBTFUL – Workout Credit has all the weaknesses inherent in a “Substandard” loan with the added characteristic that collection and/or liquidation is pending. The possibility of a loss is extremely high, but its classification as a loss is deferred until liquidation procedures are completed, or reasonably estimable. Other characteristics that may apply: • Normal operations are severely diminished or have ceased. • Seriously impaired cash flow. • Original repayment terms materially altered. • Secondary source of repayment is inadequate. • Survivability as a “going concern” is impossible. • Collection process has begun. • Bankruptcy petition has been filed. • Judgments have been filed. • Portion of the loan balance has been charged-off. 59 Table of Contents 9. LOSS – Charge-off Credit is considered uncollectible and of such little value that their continuance as bankable assets is not warranted. This classification is for charged-off loans but does not mean that the asset has absolutely no recovery or salvage value. These loans are further characterized by: • Liquidation or reorganization under Bankruptcy, with poor prospects of collection. • Fraudulently overstated assets and/or earnings. • Collateral has marginal or no value. • Debtor cannot be located. • Over 120 days delinquent. Our primary credit quality indicator for residential real estate and consumer loans is the individual loan’s past due aging. The following tables summarize the past due and current loans for the entire loan portfolio as of December 31: 2021 Accruing Interest and Past Due: Total Past Due and Nonaccrual 30-59 Days 60-89 Days 90 Days or More Nonaccrual Current Total Commercial Commercial real estate $ 135 $ — $ — $ 222 $ 357 $ 570,230 $ 570,587 Commercial other 85 — — 119 204 164,647 164,851 Advances to mortgage brokers — — — — — 72,001 72,001 Total commercial 220 — — 341 561 806,878 807,439 Agricultural Agricultural real estate 213 — — 499 712 65,432 66,144 Agricultural other — — — 275 275 27,536 27,811 Total agricultural 213 — — 774 987 92,968 93,955 Residential real estate Senior liens 2,016 37 97 93 2,243 290,900 293,143 Junior liens — — — — — 2,439 2,439 Home equity lines of credit 7 — — 37 44 30,735 30,779 Total residential real estate 2,023 37 97 130 2,287 324,074 326,361 Consumer Secured 186 — — — 186 70,259 70,445 Unsecured 10 — — — 10 2,827 2,837 Total consumer 196 — — — 196 73,086 73,282 Total $ 2,652 $ 37 $ 97 $ 1,245 $ 4,031 $ 1,297,006 $ 1,301,037 60 Table of Contents 2020 Accruing Interest and Past Due: Total Past Due and Nonaccrual 30-59 Days 60-89 Days 90 Days or More Nonaccrual Current Total Commercial Commercial real estate $ 333 $ — $ — $ 26 $ 359 $ 505,938 $ 506,297 Commercial other 486 — — 1,303 1,789 198,342 200,131 Advances to mortgage brokers — — — — — 50,258 50,258 Total commercial 819 — — 1,329 2,148 754,538 756,686 Agricultural Agricultural real estate — — — 3,398 3,398 67,820 71,218 Agricultural other 1 — — 387 388 28,855 29,243 Total agricultural 1 — — 3,785 3,786 96,675 100,461 Residential real estate Senior liens 3,203 145 — 199 3,547 269,425 272,972 Junior liens 25 — — — 25 3,791 3,816 Home equity lines of credit 8 — — — 8 30,747 30,755 Total residential real estate 3,236 145 — 199 3,580 303,963 307,543 Consumer Secured 93 — — — 93 70,349 70,442 Unsecured 3 — — — 3 3,176 3,179 Total consumer 96 — — — 96 73,525 73,621 Total $ 4,152 $ 145 $ — $ 5,313 $ 9,610 $ 1,228,701 $ 1,238,311 61 Table of Contents Impaired Loans Loans may be classified as impaired if they meet one or more of the following criteria: 1. There has been a charge-off of its principal balance (in whole or in part); 2. The loan has been classified as a TDR; or 3. The loan is in nonaccrual status. Impairment is measured on a loan-by-loan basis for commercial and agricultural loans by comparing the loan’s outstanding balance to the present value of expected future cash flows discounted at the loan’s effective interest rate, or the fair value of the collateral, less costs to sell, if the loan is collateral dependent. Large groups of smaller-balance, homogeneous residential real estate and consumer loans are collectively evaluated for impairment by comparing the loan’s unpaid principal balance to the present value of expected future cash flows discounted at the loan’s effective interest rate. We do not recognize interest income on impaired loans in nonaccrual status. For impaired loans not classified as nonaccrual, interest income is recognized daily, as earned, according to the terms of the loan agreement and the principal amount outstanding. The following summarizes information pertaining to impaired loans as of, and for the years ended, December 31: 2021 Recorded Balance Unpaid Principal Balance Valuation Allowance Average Recorded Balance Interest Income Recognized Impaired loans with a valuation allowance Commercial real estate $ 192 $ 193 $ 9 $ 1,668 $ 69 Commercial other 2,802 2,802 4 1,909 103 Agricultural real estate — — — 553 11 Agricultural other — — — 169 — Residential real estate senior liens 3,417 3,688 565 3,794 151 Total impaired loans with a valuation allowance 6,411 6,683 578 8,093 334 Impaired loans without a valuation allowance Commercial real estate 5,829 6,145 6,313 398 Commercial other 444 444 1,963 68 Agricultural real estate 9,538 9,538 9,739 699 Agricultural other 4,651 4,651 4,269 235 Home equity lines of credit 37 37 5 — Total impaired loans without a valuation allowance 20,499 20,815 22,289 1,400 Impaired loans Commercial 9,267 9,584 13 11,853 638 Agricultural 14,189 14,189 — 14,730 945 Residential real estate 3,454 3,725 565 3,799 151 Total impaired loans $ 26,910 $ 27,498 $ 578 $ 30,382 $ 1,734 62 Table of Contents 2020 Recorded Balance Unpaid Principal Balance Valuation Allowance Average Recorded Balance Interest Income Recognized Impaired loans with a valuation allowance Commercial real estate $ 2,048 $ 2,290 $ 79 $ 1,384 $ 121 Commercial other 107 107 5 464 20 Agricultural real estate 1,994 1,994 54 2,099 103 Agricultural other 1,355 1,355 2 1,355 78 Residential real estate senior liens 4,319 4,661 771 4,836 197 Total impaired loans with a valuation allowance 9,823 10,407 911 10,138 519 Impaired loans without a valuation allowance Commercial real estate 3,006 3,080 3,679 210 Commercial other 4,660 4,660 3,730 150 Agricultural real estate 8,681 8,731 7,704 302 Agricultural other 1,766 1,766 2,361 105 Home equity lines of credit — — 61 5 Consumer secured — — 1 — Total impaired loans without a valuation allowance 18,113 18,237 17,536 772 Impaired loans Commercial 9,821 10,137 84 9,257 501 Agricultural 13,796 13,846 56 13,519 588 Residential real estate 4,319 4,661 771 4,897 202 Consumer — — — 1 — Total impaired loans $ 27,936 $ 28,644 $ 911 $ 27,674 $ 1,291 We had committed to advance $ 266 and $ 98 in additional funds to be disbursed in connection with impaired loans, which includes TDRs, as of December 31, 2021 and 2020, respectively. Troubled Debt Restructurings A loan modification is considered to be a TDR when the modification includes terms outside of normal lending practices to a borrower who is experiencing financial difficulties. Typical concessions granted include, but are not limited to: 1. Agreeing to interest rates below prevailing market rates for debt with similar risk characteristics. 2. Extending the amortization period beyond typical lending guidelines for loans with similar risk characteristics. 3. Agreeing to an interest only payment structure and delaying principal payments. 4. Forgiving principal. 5. Forgiving accrued interest. To determine if a borrower is experiencing financial difficulties, factors we consider include: 1. The borrower is currently in default on any of their debt. 2. The borrower would likely default on any of their debt if the concession is not granted. 3. The borrower’s cash flow is insufficient to service all of their debt if the concession is not granted. 4. The borrower has declared, or is in the process of declaring, bankruptcy. 5. The borrower is unlikely to continue as a going concern (if the entity is a business). 63 Table of Contents The following is a summary of information pertaining to TDRs granted in the years ended December 31: 2021 2020 Number of Loans Pre-Modification Recorded Investment Post-Modification Recorded Investment Number of Loans Pre-Modification Recorded Investment Post-Modification Recorded Investment Commercial other 5 $ 4,761 $ 4,761 10 $ 5,224 $ 5,224 Agricultural other 6 3,712 3,712 5 3,194 3,194 Residential real estate — — — 3 136 136 Total 11 $ 8,473 $ 8,473 18 $ 8,554 $ 8,554 The following table summarizes the nature of the concessions we granted to borrowers in financial difficulty in the years ended December 31: 2021 2020 Below Market Interest Rate Below Market Interest Rate and Extension of Amortization Period Below Market Interest Rate Below Market Interest Rate and Extension of Amortization Period Number of Loans Pre-Modification Recorded Investment Number of Loans Pre-Modification Recorded Investment Number of Loans Pre-Modification Recorded Investment Number of Loans Pre-Modification Recorded Investment Commercial other 1 $ 3,189 4 $ 1,572 2 $ 987 8 $ 4,237 Agricultural other 6 3,712 — — — — 5 3,194 Residential real estate — — — — — — 3 136 Total 7 $ 6,901 4 $ 1,572 2 $ 987 16 $ 7,567 We did not restructure any loans by forgiving principal or accrued interest during 2021 or 2020. Based on our historical loss experience, losses associated with TDRs are not significantly different than other impaired loans within the same loan segment. As such, TDRs, including TDRs that have been modified in the past 12 months that subsequently defaulted, are analyzed in the same manner as other impaired loans within their respective loan segment. We had no loans that defaulted in the years ended December 31, 2021 and 2020, which were modified within 12 months prior to the default date. The following is a summary of TDR loan balances as of December 31: 2021 2020 TDRs $ 25,725 $ 24,930 Measures we have taken to assist our customers include loan programs that provide short-term payment relief. Under these programs, borrowers whose loans were in good standing as of March 1, 2020 could elect to defer full or partial payments for a period not to exceed 180 days. 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, 2021 or 2020. 64 Table of Contents Note 5 – Premises and Equipment A summary of premises and equipment at December 31 follows: 2021 2020 Land $ 6,164 $ 6,164 Buildings and improvements 30,738 30,503 Furniture and equipment 36,132 35,896 Total 73,034 72,563 Less: accumulated depreciation 48,615 47,423 Premises and equipment, net $ 24,419 $ 25,140 Depreciation expense amounted to $ 2,314 , $ 2,620 , and $ 2,908 in 2021, 2020, and 2019, respectively. Note 6 – Goodwill and Other Intangible Assets The carrying amount of goodwill was $ 48,282 at December 31, 2021 and 2020. Identifiable intangible assets were as follows as of December 31: 2021 Gross Intangible Assets Accumulated Amortization Net Intangible Assets Core deposit premium resulting from acquisitions $ 5,579 $ 5,559 $ 20 2020 Gross Intangible Assets Accumulated Amortization Net Intangible Assets Core deposit premium resulting from acquisitions $ 5,579 $ 5,530 $ 49 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 four years succeeding December 31, 2021, and thereafter is as follows: Estimated Amortization Expense 2022 $ 15 2023 2 2024 2 2025 1 Total $ 20 65 Table of Contents Note 7 – Deposits Scheduled annual maturities of time deposits for each of the next five years, and thereafter, are as follows: Scheduled Maturities of Time Deposits 2022 $ 180,936 2023 55,448 2024 21,215 2025 23,163 2026 19,919 Thereafter 81 Total $ 300,762 Interest expense on time deposits greater than $250 was $ 980 in 2021, $ 1,883 in 2020 and $ 2,001 in 2019. Note 8 – Borrowed Funds 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: 2021 2020 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 % 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. The securities underlying the agreements have a carrying value and a fair value of $ 50,173 and $ 68,773 at December 31, 2021 and 2020, respectively. Such securities remain under our control. We may be required to provide additional collateral based on the fair value of underlying securities. Securities sold under repurchase agreements without stated maturity dates were as follows at December 31: 2021 2020 Amount Rate Amount Rate Securities sold under agreements to repurchase without stated maturity dates $ 50,162 0.07 % $ 68,747 0.13 % We had pledged AFS securities and 1-4 family residential real estate loans in the following amounts at December 31: 2021 2020 Pledged to secure borrowed funds $ 334,415 $ 302,041 Pledged to secure repurchase agreements 50,173 68,773 Pledged for public deposits and for other purposes necessary or required by law 28,154 39,641 Total $ 412,742 $ 410,455 66 Table of Contents AFS securities pledged to repurchase agreements without stated maturity dates consisted of the following at December 31: 2021 2020 U.S. Treasury $ 9,711 $ — States and political subdivisions 13,491 12,728 Mortgage-backed securities 13,174 30,250 Collateralized mortgage obligations 13,797 25,795 Total $ 50,173 $ 68,773 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 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: 2021 2020 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 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. The effective portion of changes in fair value are recorded in OCI and subsequently reclassified into interest expense in the same period in which the related interest on the variable rate borrowings affects earnings. 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 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 Derivatives designated as hedging instruments Cash Flow Hedges: Interest rate swaps 1.56 % 3-Month LIBOR 0.3 $ 10,000 Other liabilities $ ( 54 ) 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 67 Table of Contents 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. 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: 2021 Amount Rate 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 Credit-Related Financial Instruments We are party to credit related financial instruments with off-balance-sheet risk. These financial instruments are entered into in the normal course of business to meet the financing needs of our customers. These financial instruments involve, to varying degrees, elements of credit and IRR in excess of the amounts recognized in the consolidated balance sheets. The contractual or notional amounts of these instruments reflect the extent of involvement we have in a particular class of financial instrument. The following table summarizes our credit related financial instruments with off-balance-sheet risk as of December 31: 2021 2020 Unfunded commitments under lines of credit $ 231,120 $ 241,637 Commercial and standby letters of credit 1,738 5,964 Commitments to grant loans 32,448 26,939 Total $ 265,306 $ 274,540 Unfunded commitments under lines of credit are commitments for possible future extensions of credit to existing customers. These commitments may expire without being drawn upon and do not necessarily represent future cash requirements. Advances to mortgage brokers are also included in unfunded commitments under lines of credit. The unfunded commitment amount is the difference between our outstanding balances and maximum outstanding aggregate amount. Commitments to grant loans are agreements to lend to a customer as long as there is no violation of any condition established in the contract. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. The amount of collateral obtained, if it is deemed necessary, is based on management's credit evaluation of the customer. Commitments to grant loans include residential mortgage loans that may be committed to be sold to the secondary market. Commercial and standby letters of credit are conditional commitments we issued to guarantee the performance of a customer to a third party. Those guarantees are primarily issued to support private borrowing arrangements, including commercial paper, bond financing, and similar transactions. These commitments to extend credit and letters of credit generally mature within one year . The credit risk involved in these transactions is essentially the same as that involved in extending loans to customers. We evaluate each customer’s credit worthiness on a case-by-case basis. The amount of collateral obtained, if deemed necessary upon the extension of credit, is based on our credit evaluation of the borrower. While we consider standby letters of credit to be guarantees, the amount of the liability related to such guarantees on the commitment date is not significant and a liability related to such guarantees is not recorded on the consolidated balance sheets. Our exposure to credit-related loss in the event of nonperformance by the counter parties to the financial instruments for commitments to extend credit and standby letters of credit could be up to the contractual notional amount of those instruments. We use the same credit policies as we do for extending loans to customers. No significant losses are anticipated as a result of these commitments. 68 Table of Contents Derivative Loan Commitments Mortgage loan commitments are referred to as derivative loan commitments if the loan that will result from exercise of the commitment will be held for sale upon funding. We enter into commitments to fund residential mortgage loans at specific times in the future, with the intention that these loans will subsequently be sold in the secondary market. A mortgage loan commitment binds us to lend funds to a potential borrower at a specified interest rate within a specified period of time, generally up to 60 days after inception of the rate lock. Outstanding derivative loan commitments expose us to the risk that the price of the loans arising from the exercise of the loan commitment might decline from the inception of the rate lock to funding of the loan due to increases in mortgage interest rates. If interest rates increase, the value of these loan commitments decreases. Conversely, if interest rates decrease, the value of these loan commitments increase. The notional amount of undesignated interest rate lock commitments was $ 788 and $ 3,557 at December 31, 2021 and 2020, respectively. Forward Loan Sale Commitments To protect against the price risk inherent in derivative loan commitments, we utilize both “mandatory delivery” and “best efforts” forward loan sale commitments to mitigate the risk of potential decreases in the values of loan that would result from the exercise of the derivative loan commitments. With a “mandatory delivery” contract, we commit to deliver a certain principal amount of mortgage loans to an investor at a specified price on or before a specified date. If we fail to deliver the amount of mortgages necessary to fulfill the commitment by the specified date, we are obligated to pay a “pair-off” fee, based on then current market prices, to the investor to compensate the investor for the shortfall. With a “best efforts” contract, we commit to deliver an individual mortgage loan of a specified principal amount and quality to an investor if the loan to the underlying borrower closes. Generally, the price the investor will pay the seller for an individual loan is specified prior to the loan being funded (e.g. on the same day the lender commits to lend funds to a potential borrower). We expect that these forward loan sale commitments will experience changes in fair value opposite to the change in fair value of derivative loan commitments. The notional amount of undesignated forward loan sale commitments was $ 2,255 and $ 4,661 at December 31, 2021 and 2020, respectively. The fair value of these forward loan sale commitments was $ 2,330 and $ 4,778 at December 31, 2021 and 2020, respectively. The fair values of the rate lock loan commitments related to the origination of mortgage loans that will be held for sale and the forward loan sale commitments are deemed insignificant by management and, accordingly, are not recorded in our consolidated financial statements. Other Matters 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. 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. Banking regulations limit the transfer of assets in the form of dividends, loans, or advances from the Bank to the Corporation. At December 31, 2021, substantially all of the Bank’s assets were restricted from transfer to the Corporation in the form of loans or advances. Bank dividends are the principal source of funds for the Corporation. Payment of dividends without regulatory approval is limited to the current year’s retained net income plus retained net income for the preceding two years, less any required transfers to common stock. At January 1, 2022, the amount available to the Corporation for dividends from the Bank, without regulatory approval, was approximately $ 30,500 . 69 Table of Contents Note 10 – Minimum Regulatory Capital Requirements The Corporation (on a consolidated basis) and the Bank are subject to various regulatory capital requirements administered by the FRB and the FDIC. Failure to meet minimum capital requirements can initiate mandatory and possibly additional discretionary actions by the FRB and the FDIC that, if undertaken, could have a material effect on our financial statements. Under regulatory capital adequacy guidelines and the regulatory framework for prompt corrective action, we must meet specific capital guidelines that include quantitative measures of assets, liabilities, capital, and certain off-balance-sheet items, as calculated under regulatory accounting standards. Our capital amounts and classifications are also subject to qualitative judgments by the FRB and the FDIC about components, risk weightings, and other factors. Prompt corrective action provisions are not applicable to bank holding companies. Quantitative measures established by regulation to ensure capital adequacy require us to maintain minimum amounts and ratios (set forth in the following table) of total capital, tier 1 capital, and common equity tier 1 capital (as defined in the regulations) to risk-weighted assets (as defined) and tier 1 capital to average assets (as defined). We believe, as of December 31, 2021 and 2020, that we met all capital adequacy requirements. The FRB has established minimum risk-based capital guidelines. Pursuant to these guidelines, a framework has been established that assigns risk weights to each category of on and off-balance-sheet items to arrive at risk adjusted total assets. Regulatory capital is divided by the risk adjusted assets with the resulting ratio compared to the minimum standard to determine whether a corporation has adequate capital. The common equity tier 1 capital ratio has a minimum requirement of 4.50%. The minimum standard for primary, or Tier 1 capital is 6.00% and the minimum standard for total capital is 8.00%. As of December 31, 2021 and 2020, the most recent notifications from the FRB and the FDIC categorized us as well capitalized under the regulatory framework for prompt corrective action. To be categorized as well capitalized, an institution must maintain total risk-based, Tier 1 risk-based, Common Equity Tier 1, and Tier 1 leverage ratios as set forth in the following tables. There were no conditions or events since the notifications that we believe have changed our categories. Our actual capital amounts and ratios are also presented in the table. Actual Minimum Capital Requirement Minimum To Be Well Capitalized Under Prompt Corrective Action Provisions Amount Ratio Amount Ratio Amount Ratio December 31, 2021 Common equity Tier 1 capital to risk weighted assets Isabella Bank $ 171,255 12.91 % $ 92,849 7.00 % $ 86,217 6.50 % Consolidated 160,871 12.07 % 93,297 7.00 % N/A N/A Tier 1 capital to risk weighted assets Isabella Bank 171,255 12.91 % 112,746 8.50 % 106,114 8.00 % Consolidated 160,871 12.07 % 113,289 8.50 % N/A N/A Total capital to risk weighted assets Isabella Bank 180,358 13.60 % 139,274 10.50 % 132,642 10.00 % Consolidated 199,132 14.94 % 139,945 10.50 % N/A N/A Tier 1 capital to average assets Isabella Bank 171,255 8.54 % 80,171 4.00 % 100,214 5.00 % Consolidated 160,871 7.97 % 80,733 4.00 % N/A N/A 70 Table of Contents Actual Minimum Capital Requirement Minimum To Be Well Capitalized Under Prompt Corrective Action Provisions Amount Ratio Amount Ratio Amount Ratio December 31, 2020 Common equity Tier 1 capital to risk weighted assets Isabella Bank $ 153,102 12.28 % $ 87,273 7.00 % $ 81,039 6.50 % Consolidated 162,532 12.97 % 87,675 7.00 % N/A N/A Tier 1 capital to risk weighted assets Isabella Bank 153,102 12.28 % 105,975 8.50 % 99,741 8.00 % Consolidated 162,532 12.97 % 106,462 8.50 % N/A N/A Total capital to risk weighted assets Isabella Bank 162,846 13.06 % 130,910 10.50 % 124,676 10.00 % Consolidated 172,276 13.75 % 131,512 10.50 % N/A N/A Tier 1 capital to average assets Isabella Bank 153,102 7.97 % 76,814 4.00 % 96,018 5.00 % Consolidated 162,532 8.37 % 77,671 4.00 % N/A N/A Note 11 – Computation of Earnings Per Common Share Basic earnings per common share represents income available to common shareholders divided by the weighted average number of common shares outstanding during the period. Diluted earnings per common share includes additional common shares that would have been outstanding if dilutive potential common shares had been issued. Potential common shares that may be issued relate solely to outstanding shares in the Directors Plan and grant awards under the RSP, see "Note 12 – Benefit Plans." Earnings per common share have been computed based on the following for the years ended December 31: 2021 2020 2019 Average number of common shares outstanding for basic calculation 7,853,398 7,959,705 7,909,794 Average potential effect of common shares in the Directors Plan (1) 99,813 143,878 185,248 Average potential effect of common shares in the RSP 12,750 2,508 — Average number of common shares outstanding used to calculate diluted earnings per common share 7,965,961 8,106,091 8,095,042 Net income $ 19,499 $ 10,885 $ 13,024 Earnings per common share Basic $ 2.48 $ 1.37 $ 1.65 Diluted $ 2.45 $ 1.34 $ 1.61 (1) Exclusive of shares held in the Rabbi Trust 71 Table of Contents Note 12 – Benefit Plans 401(k) Plan We have a 401(k) plan in which substantially all employees are eligible to participate. Employees may contribute up to 100 % of their compensation subject to certain limits based on federal tax laws. The plan was amended in 2013 to provide a matching safe harbor contribution for all eligible employees equal to 100 % of the first 5.0 % of an employee's compensation contributed to the Plan during the year. Employees are 100 % vested in the safe harbor matching contributions. For 2021, 2020 and 2019, expenses attributable to the plan were $ 792 , $ 813 , and $ 764 , respectively. Defined Benefit Pension Plan We maintain a noncontributory defined benefit pension plan, which was curtailed effective March 1, 2007. As a result of the curtailment, future salary increases are no longer considered (the projected benefit obligation is equal to the accumulated benefit obligation), and plan benefits are based on years of service and the individual employee’s five highest consecutive years of compensation out of the last ten years of service through March 1, 2007. Changes in the projected benefit obligation and plan assets during each year, the funded status of the plan, and the net amount recognized in our consolidated balance sheets using an actuarial measurement date of December 31, are summarized as follows during the years ended December 31: 2021 2020 Change in benefit obligation Benefit obligation, January 1 $ 10,358 $ 10,209 Interest cost 233 306 Actuarial loss (gain) ( 357 ) 682 Benefits paid, including plan expenses ( 509 ) ( 839 ) Benefit obligation, December 31 9,725 10,358 Change in plan assets Fair value of plan assets, January 1 8,263 8,352 Investment return (loss) 831 750 Contributions 64 — Benefits paid, including plan expenses ( 509 ) ( 839 ) Fair value of plan assets, December 31 8,649 8,263 Deficiency in funded status at December 31, included on the consolidated balance sheets in accrued interest payable and other liabilities $ ( 1,076 ) $ ( 2,095 ) Accumulated benefit obligation at December 31 $ 9,725 $ 10,358 2021 2020 Change in accrued pension benefit costs Accrued benefit cost at January 1 $ ( 2,095 ) $ ( 1,857 ) Contributions 64 — Net periodic benefit cost 31 ( 176 ) Net change in unrecognized actuarial loss and prior service cost 924 ( 62 ) Accrued pension benefit cost at December 31 $ ( 1,076 ) $ ( 2,095 ) We have recorded the funded status of the plan in our consolidated balance sheets. We adjust the underfunded status in a liability account to reflect the current funded status of the plan. Any gains or losses that arise during the year but are not recognized as components of net periodic benefit cost are recognized as a component of other comprehensive income (loss). 72 Table of Contents The components of net periodic benefit cost are as follows for the years ended December 31: 2021 2020 2019 Interest cost on benefit obligation $ 233 $ 306 $ 378 Expected return on plan assets ( 486 ) ( 488 ) ( 452 ) Amortization of unrecognized actuarial net loss 222 206 214 Settlement loss — 152 128 Net periodic benefit cost $ ( 31 ) $ 176 $ 268 During 2021, 2020 and 2019, settlement losses of $ 0 , $ 152 and $ 128 were recognized in connection with lump-sum benefit distributions, respectively. Many plan participants elect to receive their retirement benefit payments in the form of lump-sum settlements. Pro rata settlement losses, which can occasionally occur as a result of these lump-sum distributions, are recognized only in years when the total of such distributions exceed the sum of the service and interest expense components of net periodic benefit cost. Accumulated other comprehensive income at December 31, 2021 includes net unrecognized pension costs before income taxes of $ 2,550 . The actuarial assumptions used in determining the benefit obligation are as follows for the years ended December 31: 2021 2020 2019 Discount rate 2.43 % 2.30 % 3.07 % Expected long-term rate of return on plan assets 6.00 % 6.00 % 6.00 % The actuarial weighted average assumptions used in determining the net periodic pension costs are as follows for the years ended December 31: 2021 2020 2019 Discount rate 2.30 % 3.07 % 4.11 % Expected long-term rate of return on plan assets 6.00 % 6.00 % 6.00 % As a result of the curtailment of the Plan, there is no rate of compensation increase considered in the above assumptions. The expected long-term rate of return is an estimate of anticipated future long-term rates of return on plan assets as measured on a market value basis. Factors considered in arriving at this assumption include: • Historical long-term rates of return for broad asset classes. • Actual past rates of return achieved by the plan. • The general mix of assets held by the plan. • The stated investment policy for the plan. The selected rate of return is net of anticipated investment related expenses. Pension Plan Assets Our overall investment strategy is to moderately grow the portfolio by investing 50 % of the portfolio in equity securities and 50 % in fixed income securities. This strategy is designed to generate a long-term rate of return of 6.00%. Equity securities primarily consist of the S&P 500 Index with a smaller allocation to the Small Cap and International Index. Fixed income securities are invested in the Bond Market Index. The plan has appropriate assets invested in short-term investments to meet near term benefit payments. The asset mix and the sector weighting of the investments are determined by our benefits committee, which is comprised of members of our management. To manage the plan, we retain a third party investment advisor to conduct consultations. We review the performance of the advisor at least annually. 73 Table of Contents The fair values of our pension plan assets by asset category were as follows as of December 31: 2021 2020 Total (Level 2) Total (Level 2) Short-term investments $ 127 $ 127 $ 69 $ 69 Common collective trusts Fixed income 3,750 3,750 3,851 3,851 Equity investments 4,772 4,772 4,343 4,343 Total $ 8,649 $ 8,649 $ 8,263 $ 8,263 The following is a description of the valuation methodologies used for assets measured at fair value. There have been no changes in the methodologies used at December 31, 2021 and 2020: • Short-term investments: Shares of a money market portfolio valued at amortized cost, which approximates fair value. • Common collective trusts: These investments are public investment securities valued using the NAV provided by a third party investment advisor. The NAV is quoted on a private market that is not active; however, the unit price is based on underlying investments which are traded on an active market. We anticipate contributions to the plan in 2022 to approximate net contribution costs. Estimated future benefit payments are as follows for the next ten years: Estimated Benefit Payments 2022 $ 1,042 2023 650 2024 601 2025 714 2026 875 2027 - 2031 2,935 Directors Plan Pursuant to the terms of the Directors Plan, our directors are required to invest at least 25% of their board fees in our common stock. These stock investments can be made either through deferred fees or through the purchase of shares through the Dividend Reinvestment Plan. Deferred fees, under the Directors Plan, are converted on a quarterly basis into stock units of our common stock based on the fair value of a share of our common stock as of the relevant valuation date. Stock units credited to a participant’s account are eligible for stock and cash dividends as declared. Dividend Reinvestment Plan shares are purchased pursuant to the Dividend Reinvestment Plan. Distribution of deferred fees from the Directors Plan occurs when the participant retires from the Board of Directors or upon the occurrence of certain other events. The participant is eligible to receive a distribution in the form of shares of our common stock of all of the stock units that are then in his or her account, and any unconverted cash will be converted to and rounded up to whole shares of stock and distributed, as well. The Directors Plan does not allow for cash settlement, and therefore, such share-based payment awards qualify for classification as equity. We may use authorized but unissued shares or purchase shares of common stock on the open market to meet our obligations under the Directors Plan. We maintain the Rabbi Trust to fund the Directors Plan. The Rabbi Trust is an irrevocable grantor trust to which we may contribute assets for the limited purpose of funding a nonqualified deferred compensation plan. Although we may not use the assets of the Rabbi Trust for any purpose other than meeting our obligations under the Directors Plan, the assets of the Rabbi Trust remain subject to the claims of our creditors and are included in the consolidated financial statements. We may contribute cash or common stock to the Rabbi Trust from time to time for the sole purpose of funding the Directors Plan. The Rabbi Trust will use any cash that we contribute to purchase shares of our common stock on the open market. Shares held in the Rabbi Trust are included in the calculation of earnings per share. 74 Table of Contents The components of shares eligible to be issued under the Directors Plan were as follows as of December 31: 2021 2020 Eligible Shares Market Value Eligible Shares Market Value Unissued 83,710 $ 2,135 117,053 $ 2,291 Shares held in Rabbi Trust 105,654 2,694 59,162 1,158 Total 189,364 $ 4,829 176,215 $ 3,449 Cash Incentive Plans Executive Cash Incentive Plan On June 24, 2020, we amended and restated the Isabella Bank Corporation Employee Cash Incentive Plans to create two separate plans: one for non-executive employees and the other, the Isabella Bank Corporation Executive Cash Incentive Plan for executive employees. The executive plan provides separate potential payouts for Isabella Bank's CEO, President and CFO based on achievement of personal and corporate goals. The potential payouts under the plan range from 20% to 30% of the employee's annual salary. Expenses related to this plan for 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 goals. Expenses related to this plan for 2021, 2020 and 2019 were $ 1,063 , $ 1,101 , and $ 1,070 , respectively. Prior to 2020, such expenses included cash incentives for all eligible employees, including executives. Restricted Stock Plan 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. 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. 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: 2021 2020 Number of Shares Fair Value Number of Shares Fair Value 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 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. The remaining expense is expected to be recognized over a weighted-average service period of 2.71 years. Stock Award Incentive Plan 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, 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. 75 Table of Contents Other Employee Benefit Plans We maintain nonqualified defined contribution retirement plans to provide supplemental retirement benefits to specified participants. Expenses related to these programs for 2021, 2020 and 2019 were $ 352 , $ 373 , and $ 355 , respectively. Expenses are recognized over the participants’ expected years of service. We maintain a self-funded medical plan under which we are responsible for the first $ 100 per year of claims made by a covered family. Expenses are accrued based on estimates of the aggregate liability for claims incurred and our experience. Expenses were $ 3,297 in 2021, $ 1,868 in 2020 and $ 2,445 in 2019. Note 13 – Revenue Our revenue is comprised primarily of interest income, service charges and fees, gains on the sale of loans and AFS securities, earnings on corporate owned life insurance policies, and other noninterest income. Other noninterest income is typically service and performance driven in nature and comprised primarily of investment and trust advisory fees. We recognize revenue, excluding interest income, in accordance with ASC 606, Revenue From Contracts with Customers. Revenue is recognized when our performance obligation has been satisfied according to our contractual obligation. We record receivables when revenue is unpaid and collectability is reasonably assured. Accounts receivable balances primarily represent amounts due from customers for which revenue has been recognized. Accounts receivable balances are recorded in the consolidated balance sheets in accrued interest receivable and other assets. For the years ended December 31, 2021, 2020 and 2019, we satisfied our performance obligations pursuant to contracts with customers. As a result, we have not recorded any contract assets or liabilities. We estimate no returns or allowances for the years ended December 31, 2021, 2020 and 2019. Our contracts with customers define our performance obligations with clearly established pricing which did not require us to allocate or disaggregate revenue by performance obligation. A summary of revenue recognized for each major category of contracts with customers, subject to ASC 606, is as follows for the years ended December 31: 2021 2020 2019 Debit card income $ 3,623 $ 2,961 $ 2,667 Trust service fees 2,707 2,294 2,269 Investment advisory fees 364 284 523 Service charges and fees related to deposit accounts 312 290 317 A significant portion of our revenue consists of interest income which is not subject to the requirements set forth in ASC 606. Note 14 – Other Noninterest Expenses A summary of expenses included in other noninterest expenses is as follows for the years ended December 31: 2021 2020 2019 Audit, consulting, and legal fees $ 2,066 $ 1,836 $ 1,884 ATM and debit card fees 1,810 1,441 1,210 Marketing costs 939 877 762 Memberships and subscriptions 877 740 700 Loan underwriting fees 849 825 905 Donations and community relations 705 723 1,026 Director fees 703 695 788 FDIC insurance premiums 690 612 211 All other 2,183 2,725 3,075 Total other noninterest expenses $ 10,822 $ 10,474 $ 10,561 76 Table of Contents Note 15 – Federal Income Taxes Components of the consolidated provision for federal income taxes are summarized as follows for the years ended December 31: 2021 2020 2019 Currently payable $ 4,371 $ 1,263 $ 972 Deferred expense (benefit) ( 523 ) ( 276 ) 408 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 21 % of income before federal income tax expense is as follows for the year ended December 31: 2021 2020 2019 Income taxes at statutory rate $ 4,903 $ 2,493 $ 3,025 Effect of nontaxable income Interest income on tax exempt municipal securities ( 643 ) ( 802 ) ( 990 ) Earnings on corporate owned life insurance policies ( 225 ) ( 346 ) ( 160 ) Other 312 288 283 Total effect of nontaxable income ( 556 ) ( 860 ) ( 867 ) Effect of nondeductible expenses 46 68 108 Effect of tax credits ( 617 ) ( 830 ) ( 984 ) Unrecognized deferred tax benefit on joint venture investment 72 116 98 Federal income tax expense $ 3,848 $ 987 $ 1,380 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. 77 Table of Contents Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for federal income tax purposes. Significant components of our deferred tax assets and liabilities, measured at the 21% statutory rate, included in other assets and other liabilities on our consolidated balance sheets, are summarized as follows as of December 31: 2021 2020 Deferred tax assets Allowance for loan losses $ 1,635 $ 1,724 Deferred compensation 1,553 1,475 Employee benefit plans 98 59 Core deposit premium and acquisition expenses 759 751 Net unrecognized actuarial losses on pension plan 536 729 Net unrealized gains on derivative instruments — 11 Life insurance death benefit payable 497 497 Other 867 890 Total deferred tax assets 5,945 6,136 Deferred tax liabilities Prepaid pension cost 309 290 Premises and equipment 1,729 2,196 Accretion on securities 61 36 Core deposit premium and acquisition expenses 947 910 Net unrealized gains on available-for-sale securities 1,018 2,777 Other 834 956 Total deferred tax liabilities 4,898 7,165 Net deferred tax assets (liabilities) $ 1,047 $ ( 1,029 ) While we are subject to U.S. federal income tax, we are no longer subject to examination by taxing authorities for years before 2018. There are no material uncertain tax positions requiring recognition in our consolidated financial statements. We do not expect the total amount of unrecognized tax benefits to significantly increase in the next twelve months. We recognize interest and/or penalties related to income tax matters in income tax expense. We do not have any amounts accrued for interest and penalties at December 31, 2021 and 2020 and we are not aware of any claims for such amounts by federal income tax authorities. 78 Table of Contents Note 16 – Accumulated Other Comprehensive Income (Loss) AOCI includes net income as well as unrealized gains and losses, net of tax, on AFS securities and derivative instruments, as well as changes in the funded status of our defined benefit pension plan. Unrealized gains and losses and changes in the funded status of the pension plan, net of tax, are excluded from net income, and are reflected as a direct charge or credit to shareholders’ equity. Comprehensive income (loss) and the related components are disclosed in the consolidated statements of comprehensive income. The following table provides a roll-forward of the changes in AOCI by component for the years ended December 31, 2019, 2020 and 2021 (net of tax): Unrealized Gains (Losses) on AFS Securities Unrealized Gains (Losses) on Derivative Instruments Change in Unrecognized Pension Cost on Defined Benefit Pension Plan Total Balance, January 1, 2019 $ ( 5,200 ) $ 256 $ ( 2,741 ) $ ( 7,685 ) OCI before reclassifications 12,276 ( 256 ) ( 210 ) 11,810 Amounts reclassified from AOCI ( 6 ) — 268 262 Subtotal 12,270 ( 256 ) 58 12,072 Tax effect ( 2,458 ) 54 ( 12 ) ( 2,416 ) OCI, net of tax 9,812 ( 202 ) 46 9,656 Balance, December 31, 2019 4,612 54 ( 2,695 ) 1,971 OCI before reclassifications 7,474 ( 121 ) ( 238 ) 7,115 Amounts reclassified from AOCI ( 71 ) — 176 105 Subtotal 7,403 ( 121 ) ( 62 ) 7,220 Tax effect ( 1,530 ) 25 12 ( 1,493 ) OCI, net of tax 5,873 ( 96 ) ( 50 ) 5,727 Balance, December 31, 2020 10,485 ( 42 ) ( 2,745 ) 7,698 OCI before reclassifications ( 8,371 ) 53 955 ( 7,363 ) Amounts reclassified from AOCI — — ( 31 ) ( 31 ) Subtotal ( 8,371 ) 53 924 ( 7,394 ) Tax effect 1,759 ( 11 ) ( 193 ) 1,555 OCI, net of tax ( 6,612 ) 42 731 ( 5,839 ) Balance, December 31, 2021 $ 3,873 $ — $ ( 2,014 ) $ 1,859 Included in OCI are changes in unrealized gains and losses related to auction rate money market preferred stocks. Auction rate money market preferred stocks, for federal income tax purposes, have no deferred federal income taxes related to unrealized gains or losses given the nature of the investments. 79 Table of Contents A summary of the components of unrealized gains on AFS securities included in OCI follows for the years ended December 31: 2021 2020 2019 Auction Rate Money Market Preferred Stocks All Other AFS Securities Total Auction Rate Money Market Preferred Stocks All Other AFS Securities Total Auction Rate Money Market Preferred Stocks All Other AFS Securities Total Unrealized gains (losses) arising during the period $ 5 $ ( 8,376 ) $ ( 8,371 ) $ 118 $ 7,356 $ 7,474 $ 565 $ 11,711 $ 12,276 Reclassification adjustment for net (gains) losses included in net income — — — — ( 71 ) ( 71 ) — ( 6 ) ( 6 ) Net unrealized gains (losses) 5 ( 8,376 ) ( 8,371 ) 118 7,285 7,403 565 11,705 12,270 Tax effect — 1,759 1,759 — ( 1,530 ) ( 1,530 ) — ( 2,458 ) ( 2,458 ) Unrealized gains (losses), net of tax $ 5 $ ( 6,617 ) $ ( 6,612 ) $ 118 $ 5,755 $ 5,873 $ 565 $ 9,247 $ 9,812 The following table details reclassification adjustments and the related affected line items in our consolidated statements of income for the years ended December 31: Details about AOCI components Amount Reclassified from AOCI Affected Line Item in the Consolidated Statements of Income 2021 2020 2019 Unrealized gains (losses) on AFS securities $ — $ 71 $ 6 Net gains on sale of AFS securities — 15 1 Federal income tax expense $ — $ 56 $ 5 Net income Change in unrecognized pension cost on defined benefit pension plan $ ( 31 ) $ 176 $ 268 Other noninterest expenses ( 7 ) 37 56 Federal income tax (benefit) expense $ ( 24 ) $ 139 $ 212 Net income 80 Table of Contents Note 17 – Fair Value Under fair value measurement and disclosure authoritative guidance, we group assets and liabilities measured at fair value into three levels, based on the markets in which the assets and liabilities are traded, and the reliability of the assumptions used to determine fair value, based on the prioritization of inputs in the valuation techniques. These levels are: Level 1: Valuation is based upon quoted prices for identical instruments traded in active markets. Level 2: Valuation is based upon quoted prices for similar instruments in active markets, quoted prices for identical or similar instruments in markets that are not active and model based valuation techniques for which all significant assumptions are observable in the market. Level 3: Valuation is generated from model based techniques that use at least one significant assumption not observable in the market. These unobservable assumptions reflect estimates of assumptions that market participants would use in pricing the asset or liability. The asset’s or liability’s fair value measurement level within the fair value hierarchy is based on the lowest level of any input that is significant to the fair value measurement. Valuation techniques maximize the use of observable inputs and minimize the use of unobservable inputs. Transfers between measurement levels are recognized at the end of reporting periods. Fair value measurement requires the use of an exit price notion which may differ from entrance pricing. Generally, we believe our assets and liabilities classified as Level 1 or Level 2 approximate an exit price notion. Following is a description of the valuation methodologies, key inputs, and an indication of the level of the fair value hierarchy in which the assets or liabilities are classified. AFS securities: AFS securities are recorded at fair value on a recurring basis. Level 1 fair value measurement is based upon quoted prices for identical instruments. Level 2 fair value measurement is based upon quoted prices for similar instruments. If quoted prices are not available, fair values are measured using independent pricing models or other model based valuation techniques such as the present value of future cash flows, adjusted for the security’s credit rating, prepayment assumptions and other factors such as credit loss and liquidity assumptions. The values for Level 1 and Level 2 investment securities are generally obtained from an independent third party. On a quarterly basis, we compare the values provided to alternative pricing sources. Loans: We do not record loans at fair value on a recurring basis. 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. Once a loan is identified as impaired, we measure the estimated impairment. The fair value of impaired loans is estimated using one of several methods, including the present value of expected future cash flows discounted at the loan’s effective interest rate, or the fair value of the collateral, less costs to sell, if the loan is collateral dependent. Those impaired loans not requiring an allowance represent loans for which the fair value of the expected repayments or collateral exceed the recorded investments in such loans. We review the net realizable values of the underlying collateral for collateral dependent impaired loans on at least a quarterly basis for all loan types. To determine the collateral value, we utilize independent appraisals, broker price opinions, or internal evaluations. We review these valuations to determine whether an additional discount should be applied given the age of market information that may have been considered as well as other factors such as costs to sell an asset if it is determined that the collateral will be liquidated in connection with the ultimate settlement of the loan. We use these valuations to determine if any specific reserves or charge-offs are necessary. We may obtain new valuations in certain circumstances, including when there has been significant deterioration in the condition of the collateral, if the foreclosure process has begun, or if the existing valuation is deemed to be outdated. 81 Table of Contents The following tables list the quantitative fair value information about impaired loans as of: December 31, 2021 Valuation Technique Fair Value Unobservable Input Actual Range Weighted Average Discount applied to collateral: Real Estate 20 % - 30 % 23 % Equipment 20 % - 35 % 28 % Discounted value $ 18,812 Cash crop inventory 40 % 40 % Livestock 30 % 30 % Accounts receivable 50 % 50 % Liquor license 75 % 75 % December 31, 2020 Valuation Technique Fair Value Unobservable Input Actual Range Weighted Average Discount applied to collateral: Real Estate 20 % - 30 % 23 % Equipment 20 % - 50 % 32 % Discounted value $ 19,540 Cash crop inventory 40 % 40 % Livestock 30 % 30 % Other inventory 50 % 50 % Accounts receivable 25 % - 50 % 27 % Liquor license 75 % 75 % Collateral discount rates may have ranges to accommodate differences in the age of the independent appraisal, broker price opinion, or internal evaluation. Derivative instruments: Derivative instruments, consisting solely of interest rate swaps, are recorded at fair value on a recurring basis. Derivatives qualifying as cash flow hedges, when highly effective, are reported at fair value in other assets or other liabilities on our Consolidated Balance Sheets with changes in value recorded in OCI. Should the hedge no longer be considered effective, the ineffective portion of the change in fair value is recorded directly in earnings in the period in which the change occurs. The fair value of a derivative is determined by quoted market prices and model-based valuation techniques. As such, we classify derivative instruments as Level 2. OMSR: OMSR (which are included in other assets) are subject to impairment testing. To test for impairment, we utilize a discounted cash flow analysis using interest rates and prepayment speed assumptions currently quoted for comparable instruments and discount rates. If the valuation model reflects a value less than the carrying value, OMSR are adjusted to fair value through a valuation allowance as determined by the model. As such, we classify OMSR subject to nonrecurring fair value adjustments as Level 2. 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. Although we believe our valuation methods are appropriate and consistent with other market participants, the use of different methodologies or assumptions to determine the fair value of certain financial instruments could result in a different fair value measurement. Estimated Fair Values of Financial Instruments Not Recorded at Fair Value in their Entirety on a Recurring Basis Disclosure of the estimated fair values of financial instruments, which differ from carrying values, often requires the use of estimates. In cases where quoted market values in an active market are not available, we use present value techniques and other valuation methods to estimate the fair values of our financial instruments. These valuation methods require considerable judgment and the resulting estimates of fair value can be significantly affected by the assumptions made and methods used. 82 Table of Contents The carrying amount and estimated fair value of financial instruments not recorded at fair value in their entirety on a recurring basis were as follows as of December 31: 2021 Carrying Value Estimated Fair Value Level 1 Level 2 Level 3 ASSETS Cash and cash equivalents $ 105,330 $ 105,330 $ 105,330 $ — $ — Mortgage loans AFS 1,735 1,797 — 1,797 — Gross loans 1,301,037 1,296,841 — — 1,296,841 Less allowance for loan and lease losses 9,103 9,103 — — 9,103 Net loans 1,291,934 1,287,738 — — 1,287,738 Accrued interest receivable 5,804 5,804 5,804 — — Equity securities without readily determinable fair values (1) 17,383 N/A — — — OMSR 2,124 2,753 — 2,753 — LIABILITIES Deposits without stated maturities 1,409,577 1,409,577 1,409,577 — — Deposits with stated maturities 300,762 301,216 — 301,216 — 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 — — 2020 Carrying Value Estimated Fair Value Level 1 Level 2 Level 3 ASSETS Cash and cash equivalents $ 246,640 $ 246,640 $ 246,640 $ — $ — Mortgage loans AFS 2,741 2,858 — 2,858 — Gross loans 1,238,311 1,239,718 — — 1,239,718 Less allowance for loan and lease losses 9,744 9,744 — — 9,744 Net loans 1,228,567 1,229,974 — — 1,229,974 Accrued interest receivable 6,882 6,882 6,882 — — Equity securities without readily determinable fair values (1) 17,383 N/A — — — OMSR 2,308 2,480 — 2,480 — LIABILITIES Deposits without stated maturities 1,183,336 1,183,336 1,183,336 — — Deposits with stated maturities 382,981 389,455 — 389,455 — 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 — — (1) Due to the characteristics of equity securities without readily determinable fair values, they are not disclosed under a specific fair value hierarchy. When an impairment or write-down related to these securities is recorded, such amount would be classified as a nonrecurring Level 3 fair value adjustment . 83 Table of Contents Financial Instruments Recorded at Fair Value The table below presents the recorded amount of assets and liabilities measured at fair value on December 31: 2021 2020 Total Level 1 Level 2 Level 3 Total Level 1 Level 2 Level 3 Recurring items AFS securities U.S. Treasury $ 209,703 $ — $ 209,703 $ — $ — $ — $ — $ — States and political subdivisions 121,205 — 121,205 — 143,656 — 143,656 — Auction rate money market preferred 3,242 — 3,242 — 3,237 — 3,237 — Mortgage-backed securities 56,148 — 56,148 — 88,652 — 88,652 — Collateralized mortgage obligations 92,301 — 92,301 — 101,983 — 101,983 — Corporate 8,002 — 8,002 — 1,700 — 1,700 — Total AFS securities 490,601 — 490,601 — 339,228 — 339,228 — Derivative instruments — — — — 54 — 54 — Nonrecurring items Impaired loans (net of the ALLL) 18,812 — — 18,812 19,540 — — 19,540 OMSR 2,124 — 2,124 — 2,308 — 2,308 — Foreclosed assets 211 — — 211 527 — — 527 Total $ 511,748 $ — $ 492,725 $ 19,023 $ 361,657 $ — $ 341,590 $ 20,067 Percent of assets and liabilities measured at fair value — % 96.28 % 3.72 % — % 94.45 % 5.55 % We recorded an impairment related to OMSR of $ 0 and $ 316 through earnings for the years ended December 31, 2021 and 2020. 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. Note 18 – Related Party Transactions In the ordinary course of business, we grant loans to principal officers and directors and their affiliates (including their families and companies in which they have 10% or more ownership). Annual activity consisted of the following for the years ended December 31: 2021 2020 Balance, January 1 $ 2,977 $ 3,695 New loans 43,264 837 Repayments ( 23,683 ) ( 1,555 ) Balance, December 31 $ 22,558 $ 2,977 Total deposits of these principal officers and directors and their affiliates amounted to $ 15,268 and $ 7,604 at December 31, 2021 and 2020, respectively. From time to time, we make charitable donations to The Isabella Bank Foundation (the “Foundation”), which is a non-controlled nonprofit organization formed for the purpose of distributing charitable donations to recipient organizations generally located in the communities we serve. Our donations are recognized as expense when paid to the Foundation. The assets and transactions of the Foundation are not included in our consolidated financial statements. Assets of the Foundation include cash and cash equivalents, certificates of deposit, and shares of Isabella Bank Corporation common stock. 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. 84 Table of Contents The following table displays total assets of, and our donations to, the Foundation as of, and for the years ended December 31: 2021 2020 2019 Total assets $ 1,511 $ 1,286 $ 1,678 Donations $ 50 $ — $ 50 Note 19 – Operating Segments Our reportable segments are based on legal entities that account for at least 10% of net operating results. The operations of the Bank as of December 31, 2021, 2020, and 2019 represent approximately 90 % or more of our consolidated total assets and operating results. As such, no additional segment reporting is presented. Note 20 – Parent Company Only Financial Information Condensed Balance Sheets December 31 2021 2020 ASSETS Cash on deposit at the Bank $ 11,535 $ 2,670 Investments in subsidiaries 178,395 166,096 Premises and equipment 1,482 1,529 Other assets 48,923 48,352 TOTAL ASSETS $ 240,335 $ 218,647 LIABILITIES AND SHAREHOLDERS’ EQUITY Subordinated debt, net of unamortized issuance costs $ 29,158 $ — Other liabilities 129 59 Shareholders' equity 211,048 218,588 TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY $ 240,335 $ 218,647 Condensed Statements of Income Year Ended December 31 2021 2020 2019 Income Dividends from subsidiaries $ 3,600 $ 9,300 $ 7,800 Interest income 12 1 7 Net income (loss) on CSS joint venture — 577 ( 3,108 ) Other income 17 — — Total income 3,629 9,878 4,699 Expenses Interest expense 615 5 — Occupancy and equipment 67 61 59 Audit, consulting, and legal fees 590 573 477 Director fees 352 356 368 Other 1,145 1,167 1,165 Total expenses 2,769 2,162 2,069 Income before income tax benefit and equity in undistributed earnings of subsidiaries 860 7,716 2,630 Federal income tax benefit 500 216 984 Income before equity in undistributed earnings of subsidiaries 1,360 7,932 3,614 Undistributed earnings of subsidiaries 18,139 2,953 9,410 Net income $ 19,499 $ 10,885 $ 13,024 85 Table of Contents Condensed Statements of Cash Flows Year Ended December 31 2021 2020 2019 Operating activities Net income $ 19,499 $ 10,885 $ 13,024 Adjustments to reconcile net income to cash provided by operations Undistributed earnings of subsidiaries ( 18,139 ) ( 2,953 ) ( 9,410 ) Undistributed earnings of equity securities without readily determinable fair values — ( 394 ) 3,320 Loss on sale of joint venture investment — 394 — Share-based payment awards under the Directors Plan 433 413 523 Share-based payment awards under the RSP 86 14 — Amortization of subordinated debt issuance costs 52 — — Depreciation 50 47 46 Deferred income tax expense (benefit) ( 267 ) 351 114 Changes in operating assets and liabilities which provided (used) cash Other assets ( 304 ) 183 ( 285 ) Other liabilities 70 40 69 Net cash provided by (used in) operating activities 1,480 8,980 7,401 Investing activities Sale of joint venture investment — 1,000 — Purchases of premises and equipment ( 2 ) ( 37 ) — Net cash provided by (used in) investing activities ( 2 ) 963 — Financing activities Issuance of subordinated debt, net of unamortized issuance costs 29,106 — — Cash dividends paid on common stock ( 8,367 ) ( 8,524 ) ( 8,282 ) Proceeds from the issuance of common stock 1,593 4,185 4,876 Common stock repurchased ( 13,758 ) ( 2,702 ) ( 4,003 ) Common stock purchased for deferred compensation obligations ( 1,187 ) ( 1,592 ) ( 1,131 ) Net cash provided by (used in) financing activities 7,387 ( 8,633 ) ( 8,540 ) Increase (decrease) in cash and cash equivalents 8,865 1,310 ( 1,139 ) Cash and cash equivalents at beginning of period 2,670 1,360 2,499 Cash and cash equivalents at end of period $ 11,535 $ 2,670 $ 1,360 86 Table of Contents Item 9. Changes in and Disagreements With Accountants on Accounting and Financial Disclosure. None.