What changed in this filing

/stocks — the workspaceLOADING

Item 8. Financial Statements and Supplementary Data

2023-03-07 compared with 2022-03-15 · 63 added, 90 removed, 1551 unchanged (9% of the section changed)

64 unchanged sentences

Cash and demand deposits due from banks $ 27,420 $ 25,563

Interest bearing balances due from banks 79,767 215,344

Fed Funds sold and interest bearing balances due from banks 11,504 79,767

Total cash and cash equivalents 38,924 105,330

33 unchanged sentences

Retained earnings 89,748 75,592

Accumulated other comprehensive income 1,859 7,698

Accumulated other comprehensive income (loss) ( 37,194 ) 1,859

Total shareholders’ equity 186,210 211,048

14 unchanged sentences

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 )

47 unchanged sentences

Wealth management fees 3,005 3,071 2,578

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

Earnings on corporate owned life insurance policies 884 800 755

Net gain on sale of mortgage loans 631 1,694 2,716

Gains from redemption of corporate owned life insurance policies 57 271 891

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

Net income on joint venture investment — — 577

Other 359 372 362

58 unchanged sentences

Net gain on sale of mortgage loans ( 631 ) ( 1,694 ) ( 2,716 )

OMSR impairment loss — 316 214

Change in OMSR valuation allowance ( 532 ) — 316

Net (gains) losses on foreclosed assets ( 13 ) ( 39 ) 51

9 unchanged sentences

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

Other assets 1,208 ( 821 ) 1,512

Accrued interest receivable and other assets ( 2,813 ) 1,208 ( 821 )

Accrued interest payable and other liabilities 2,182 146 398

5 unchanged sentences

Purchases ( 210,869 ) ( 262,266 ) ( 28,658 )

Purchase of equity investments ( 250 ) — —

Sale of joint venture investment — — 1,000

4 unchanged sentences

Proceeds from redemption of corporate owned life insurance policies 359 1,114 2,387

Proceeds from sale of FHLB Stock 2,288 — —

Purchases of FRB Stock ( 401 ) — —

Funding of low income housing tax credit investments ( 46 ) ( 413 ) ( 429 )

248 unchanged sentences

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.

We invested a considerable amount of effort toward this guidance to be prepared for adoption on January 1, 2023.

An internal committee was formed and was 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 was engaged to provide us with education, advisory, and software solutions exclusively related to the ACL.

We ran parallel processes for over a year to ensure our calculation and analysis was complete by the required implementation date.

We fully adopted the new guidance as of January1, 2023.

Based on portfolio characteristics and economic conditions and expectations as of January 1, 2023, we recorded a combined increase to the ACL and reserve for unfunded commitments on January 1, 2023 of approximately $3,000 upon the adoption of ASU 2016-13.

Note 3 – AFS Securities

7 unchanged sentences

Total $ 625,605 $ 392 $ 45,516 $ 580,481

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

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

26 unchanged sentences

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

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.

The information on the following tables pertains to AFS securities with gross unrealized losses at December 31, 2022 and 2021 aggregated by investment category and length of time that individual securities have been in a continuous loss position.

December 31, 2022

2 unchanged sentences

States and political subdivisions 2,389 48,083 2,514 40,667 4,903

Auction rate money market preferred — — 858 2,342 858

Mortgage-backed securities 3,239 39,069 — — 3,239

Collateralized mortgage obligations 12,408 201,316 165 4,411 12,573

2 unchanged sentences

Number of securities in an unrealized loss position:

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

December 31, 2021

Less Than Twelve Months Twelve Months or More

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

States and political subdivisions 88 9,674 — — 88

Collateralized mortgage obligations 10 11,165 — — 10

Corporate 167 6,283 — — 167

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

Number of securities in an unrealized loss position:

The unrealized loss on our AFS securities portfolio resulted from the recent increases in short-term and intermediate-term interest rates.

As of December 31, 2022 and 2021, we conducted an analysis to determine whether any AFS securities currently in an unrealized loss position should be identified as other-than-temporarily impaired.

5 unchanged sentences

• 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.

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, 2022 and 2021, with the exception of one municipal bond previously identified in 2016 which had no activity during the period.

Note 4 – Loans and ALLL

23 unchanged sentences

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”).

We entered into a mortgage purchase program in 2016 with a financial institution where we participate in advances to mortgage brokers.

The mortgage brokers originate residential mortgage loans with the intent to sell them on the secondary market.

3 unchanged sentences

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

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

Under the participation agreement, we currently are not committed to participate.

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.

31 unchanged sentences

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

There have been no material changes to the ALLL and credit quality remained strong throughout 2022.

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

210 unchanged sentences

Commercial other — — — 1,724 62

Agricultural real estate — — — 553 11

Agricultural other — — — 169 —

Residential real estate senior liens 2,741 3,001 439 3,056 126

26 unchanged sentences

Home equity lines of credit 37 37 5 —

Consumer secured — — 1 —

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

3 unchanged sentences

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

Consumer — — — 1 —

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

33 unchanged sentences

TDRs $ 21,339 $ 25,725

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.

Note 5 – Premises and Equipment

17 unchanged sentences

Amortization expense associated with identifiable intangible assets was $ 15 , $ 29 , and $ 48 in 2022, 2021, and 2020, 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 associated with identifiable intangibles for each of the next three years succeeding December 31, 2022, and thereafter is as follows:

Estimated Amortization Expense

37 unchanged sentences

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:

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

Amount Rate Amount Rate

Fixed rate due 2022 $ — 0.00 % $ 20,000 1.97 %

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

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

4 unchanged sentences

The following table summarizes our outstanding notes at December 31:

Amount Rate Amount Rate

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

26 unchanged sentences

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.

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.

21 unchanged sentences

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.

The reserve balances related to correspondent banks amounted to $ 500 for the years ended December 31, 2022 and 2021.

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

58 unchanged sentences

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."

For further information related to 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:

37 unchanged sentences

Contributions — 64

Net periodic benefit cost 31 ( 176 )

Net periodic benefit cost (credit) ( 59 ) 31

Net change in unrecognized actuarial loss and prior service cost 821 924

Accrued pension benefit cost at December 31 $ ( 1,076 ) $ ( 2,095 )

Accrued pension liability at December 31 $ ( 314 ) $ ( 1,076 )

We have recorded the funded status of the plan in our consolidated balance sheets.

7 unchanged sentences

Settlement loss 109 — 152

Net periodic benefit cost $ ( 31 ) $ 176 $ 268

Net periodic benefit cost (credit) $ 59 $ ( 31 ) $ 176

During 2022, 2021 and 2020, settlement losses of $ 109 , $ 0 and $ 152 were recognized in connection with lump-sum benefit distributions, respectively.

71 unchanged sentences

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.

We provide an executive cash incentive plan, which 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.

4 unchanged sentences

Expenses related to this plan for 2022, 2021 and 2020 were $ 1,072 , $ 1,063 , and $ 1,101 , 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.

Under the RSP, an equity based bonus plan, 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.

11 unchanged sentences

Balance, December 31 27,072 $ 592 20,123 $ 418

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

Compensation expense related to the RSP for 2022, 2021, 2020 and was $ 147 , $ 86 , and $ 14 respectively.

As of December 31, 2022, there was $ 346 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 2.40 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.

Other Employee Benefit Plans

30 unchanged sentences

Marketing costs 1,056 939 877

Memberships and subscriptions 877 740 700

Loan underwriting fees 1,004 849 825

Donations and community relations 923 705 723

Memberships and subscriptions 876 877 740

Director fees 790 703 695

30 unchanged sentences

Core deposit premium and acquisition expenses 764 759

Net unrealized losses on AFS securities 9,296 —

Net unrecognized actuarial losses on pension plan 363 536

Net unrealized gains on derivative instruments — 11

Life insurance death benefit payable 497 497

6 unchanged sentences

Core deposit premium and acquisition expenses 984 947

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

Net unrealized gains on AFS securities — 1,018

Other 1,075 834

98 unchanged sentences

Accounts receivable 25 % 27 %

Liquor license 75 % 75 %

Furniture, fixtures & equipment 45 % 45 %

December 31, 2021

5 unchanged sentences

Livestock 30 % 30 %

Other inventory 50 % 50 %

Accounts receivable 50 % 50 %

1 unchanged sentence

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 (which are included in other assets) are subject to impairment testing.

23 unchanged sentences

Federal funds purchased and repurchase agreements 57,771 57,581 — 57,581 —

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

Subordinated debt, net of unamortized issuance costs

32 unchanged sentences

Total AFS securities 580,481 — 580,481 — 490,601 — 490,601 —

Derivative instruments — — — — 54 — 54 —

Nonrecurring items

Impaired loans (net of the ALLL) 17,143 — — 17,143 18,812 — — 18,812

OMSR 2,124 — 2,124 — 2,308 — 2,308 —

Foreclosed assets 439 — — 439 211 — — 211

1 unchanged sentence

Percent of assets and liabilities measured at fair value 0.00 % 97.06 % 2.94 % 0.00 % 96.27 % 3.73 %

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 recorded losses of $ 6 and $ 0 through earnings related fair value changes in foreclosed assets for the years ended December 31, 2022 and 2021.

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, 2022 and 2021.

11 unchanged sentences

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.

The Foundation owned 20,000 shares of our common stock as of December 31, 2022 and 2021.

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

16 unchanged sentences

Subordinated debt, net of unamortized issuance costs

$ 29,245 $ 29,158

Other liabilities 288 129

6 unchanged sentences

Interest income 15 12 1

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

Net income on CSS joint venture — — 577

Other income 14 17 —

30 unchanged sentences

Investing activities

Purchase of equity investments ( 250 ) — —

Sale of joint venture investment — — 1,000

Purchases of premises and equipment ( 2 ) ( 37 ) —

Net sales (purchases) of premises and equipment 260 ( 2 ) ( 37 )

Net cash provided by (used in) investing activities 10 ( 2 ) 963

9 unchanged sentences

Cash and cash equivalents at end of period $ 8,525 $ 11,535 $ 2,670

Note 21 – Subsequent Events

In June 2016, the FASB issued ASU 2016-13 and updated the measurement for credit losses for AFS debt securities and assets measured at amortized cost, which include loans and any other financial assets with the contractual right to receive cash.

The new approach requires the use of an expected credit loss model.

The new CECL guidance was effective January 1, 2023 and we have fully adopted the new guidance as of that date.

We evaluated subsequent events after December 31, 2022 through the date our condensed consolidated financial statements were issued for potential recognition and disclosure.

Outside of the adoption of CECL, no other subsequent events require financial statement recognition or disclosure between December 31, 2022 and the date our condensed consolidated financial statements were issued.

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

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

What changed 10-K

Item 8. Financial Statements and Supplementary Data