isba-20211231

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-K


☒			ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the fiscal year ended December 31, 2021


☐			TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from to

Commission File Number: 0-18415

Isabella Bank Corporation

(Exact name of registrant as specified in its charter)


Michigan						38-2830092
(State or other jurisdiction of incorporation or organization)						(I.R.S. Employer identification No.)

401 North Main Street, Mount Pleasant, Michigan 48858

(Address of principal executive offices) (Zip Code)

Registrant’s telephone number, including area code (989) 772-9471

Securities registered pursuant to Section 12(b) of the Act:


Title of each class	Trading Symbol(s)	Name of each exchange on which registered
None	N/A	N/A

Securities registered pursuant to Section 12(g) of the Act:

Common Stock - No Par Value

(Title of Class)

Indicated by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. ☐ Yes ☒ No

Indicated by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. ☐ Yes ☒ No

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. ☒ Yes ☐ No

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). ☒ Yes ☐ No

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See definition of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer

☐

Accelerated filer

☐

Non-accelerated filer

☒

Smaller reporting company

☒

Emerging growth company

☐

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

Indicate by check mark whether the registrant has filed a report on and attestation to its management’s assessment of the effectiveness of its internal control over financial reporting under Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C. 7262(b)) by the registered public accounting firm that prepared or issued its audit report. ☒

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). ☐ Yes ☒ No

The aggregate market value of the voting stock held by non-affiliates of the registrant was $165,938,000 as of the last business day of the registrant’s most recently completed second fiscal quarter.

The number of common shares outstanding of the registrant’s Common Stock (no par value) was 7,534,136 as of March 11, 2022.

DOCUMENTS INCORPORATED BY REFERENCE

(Such documents are incorporated herein only to the extent specifically set forth in response to an item herein.)

Portions of the Isabella Bank Corporation Proxy Statement for its Annual Meeting of Shareholders to be held May 3, 2022 are incorporated by reference in this Form 10-K in response to Part III. The Isabella Bank Corporation Proxy Statement will be mailed on or before March 25, 2022.

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ISABELLA BANK CORPORATION

ANNUAL REPORT ON FORM 10-K

Table of Contents

PART I

Item 1.

Business

Item 1A.

Risk Factors

Item 1B.

Unresolved Staff Comments

Item 2.

Properties

Item 3.

Legal Proceedings

Item 4.

Mine Safety Disclosures

PART II

Item 5.

Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities

Item 6.

[Reserved]

Item 7.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

Item 7A.

Quantitative and Qualitative Disclosures about Market Risk

Item 8.

Financial Statements and Supplementary Data

Item 9.

Changes in and Disagreements With Accountants on Accounting and Financial Disclosure

Item 9A.

Controls and Procedures

Item 9B.

Other Information

Item 9C.

Disclosure Regarding Foreign Jurisdictions that Prevent Inspections

PART III

Item 10.

Directors, Executive Officers and Corporate Governance

Item 11.

Executive Compensation

Item 12.

Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters

Item 13.

Certain Relationships and Related Transactions, and Director Independence

Item 14.

Principal Accountant Fees and Services

PART IV

Item 15.

Exhibits and Financial Statement Schedules

Item 16.

Form 10-K Summary

SIGNATURES

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Forward Looking Statements

This report contains certain forward looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Rule 175 promulgated thereunder, and Section 21E of the Securities Exchange Act of 1934, as amended and Rule 3b-6 promulgated thereunder. We intend such forward looking statements to be covered by the safe harbor provisions for forward looking statements contained in the Private Securities Litigation Reform Act of 1995, and are included in this statement for purposes of these safe harbor provisions. Forward looking statements, which are based on certain assumptions and describe future plans, strategies and expectations, are generally identifiable by use of the words “believe,” “expect,” “intend,” “anticipate,” “estimate,” “project,” or similar expressions. Our ability to predict results or the actual effect of future plans or strategies is inherently uncertain. Factors which could have a material adverse effect on our operations and future prospects include, but are not limited to, changes in: interest rates, general economic conditions, federal or state tax laws, monetary and fiscal policy, a health crisis, the quality or composition of our loan or investment portfolio, demand for loan products, fluctuation in the value of collateral securing our loan portfolio, deposit flows, competition, cybersecurity risk, demand for financial services in our market area, and accounting principles, policies and guidelines. These risks and uncertainties should be considered in evaluating forward looking statements and undue reliance should not be placed on such statements. Further information concerning our business, including additional factors that could materially affect our consolidated financial results, is included in our filings with the SEC.

Glossary of Acronyms and Abbreviations

The acronyms and abbreviations identified below may be used throughout this Annual Report on Form 10-K or in our other SEC filings. You may find it helpful to refer back to this page while reading this report.


ACL: Allowance for credit losses						GAAP: U.S. generally accepted accounting principles
AFS: Available-for-sale						IFRS: International Financial Reporting Standards
ALCO: Asset-Liability Committee						IRR: Interest rate risk
ALLL: Allowance for loan and lease losses						ISDA: International Swaps and Derivatives Association
AOCI: Accumulated other comprehensive income						LIBOR: London Interbank Offered Rate
ASC: FASB Accounting Standards Codification						N/A: Not applicable
ASU: FASB Accounting Standards Update						N/M: Not meaningful
ATM: Automated teller machine						NAV: Net asset value
BHC Act: Bank Holding Company Act of 1956						NSF: Non-sufficient funds
CARES Act: Coronavirus Aid, Relief, and Economic Security Act						OCI: Other comprehensive income (loss)
CECL: Current expected credit losses						OMSR: Originated mortgage servicing rights
CFPB: Consumer Financial Protection Bureau						OREO: Other real estate owned
CIK: Central Index Key						OTTI: Other-than-temporary impairment
COVID-19: Coronavirus disease 2019						PBO: Projected benefit obligation
CRA: Community Reinvestment Act						PCAOB: Public Company Accounting Oversight Board
DIF: Deposit Insurance Fund						PPP: Paycheck Protection Program
DIFS: Department of Insurance and Financial Services						Rabbi Trust: A trust established to fund our Directors Plan
Directors Plan: Isabella Bank Corporation and Related Companies Deferred Compensation Plan for Directors						RSP: Isabella Bank Corporation Restricted Stock Plan
Dividend Reinvestment Plan: Isabella Bank Corporation Stockholder Dividend Reinvestment Plan and Employee Stock Purchase Plan						SBA: Small Business Administration
Exchange Act: Securities Exchange Act of 1934						SOFR: Secured Overnight Financing Rate
FASB: Financial Accounting Standards Board						SEC: U.S. Securities and Exchange Commission
FDIC: Federal Deposit Insurance Corporation						SOX: Sarbanes-Oxley Act of 2002
FFIEC: Federal Financial Institutions Examinations Council						Tax Act: Tax Cuts and Jobs Act, enacted December 22, 2017
FRB: Federal Reserve Bank						TDR: Troubled debt restructuring
FHLB: Federal Home Loan Bank						XBRL: eXtensible Business Reporting Language
Freddie Mac: Federal Home Loan Mortgage Corporation						Yield Curve: U.S. Treasury Yield Curve
FTE: Fully taxable equivalent

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PART I

Item 1. Business. (Dollars in thousands)

General

Isabella Bank Corporation is a registered financial services holding company that was incorporated in September 1988 under Michigan law. The Corporation's wholly owned subsidiary, Isabella Bank, has 30 banking offices located throughout Clare, Gratiot, Isabella, Mecosta, Midland, Montcalm, and Saginaw counties. The area includes significant agricultural production, manufacturing, retail, gaming and tourism, and several colleges and universities.

As used in Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations as well as in Item 8. Financial Statements and Supplementary Data, 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.

We are a community bank with a focus on providing high quality, personalized service at a fair price. We offer a broad array of banking and wealth management services to businesses, institutions, individuals and their families. We compete with other commercial banks, savings and loan associations, mortgage brokers, finance companies, credit unions, retail brokerage firms, and other companies providing financial services.

Lending activities include loans for commercial and agricultural operations and real estate purposes, residential real estate loans, and consumer loans. We limit lending activities primarily to local markets and purchased loans from the secondary market are minimal. We do not make loans to fund leveraged buyouts, have no foreign corporate or government loans, and have limited holdings of corporate debt securities. Our general lending philosophy is to limit concentrations to individuals and business segments. For additional information related to our lending strategies and policies, see “Note 4 – Loans and ALLL” of “Notes to Consolidated Financial Statements” in Item 8. Financial Statements and Supplementary Data.

Deposit services offered include checking accounts, savings accounts, certificates of deposit, direct deposits, cash management services, mobile and internet banking, electronic bill pay services, and automated teller machines. We also offer full service investment management, trust and estate services.

As of December 31, 2021, we had 330 full-time equivalent employees. We provide group life, health, accident, disability, and other insurance programs as well as a number of other employee benefit programs. None of our workforce is subject to collective bargaining agreements.

Available Information

Our SEC filings (including our Annual Report on Form 10-K, Quarterly Reports on Form 10-Q, Definitive Proxy Statements, Current Reports on Form 8-K and amendments to those reports) are available through our website (www.isabellabank.com). We will provide paper copies of our SEC reports free of charge upon request by a shareholder.

The SEC maintains a website (www.sec.gov) that contains reports, proxy and information statements and other information regarding Isabella Bank Corporation (CIK #0000842517) and other issuers.

Supervision and Regulation

The earnings and growth of the banking industry are affected by the credit policies of monetary authorities, including the FRB. An important function of the FRB is to regulate the national supply of bank credit in order to combat recessions and respond to inflationary pressures. Among the instruments of monetary policy used by the FRB to implement these objectives are open market operations in U.S. Treasury and U.S. Government Agency securities, changes in the discount rate on member bank borrowings, and changes in reserve requirements against member bank deposits. These methods are used in varying combinations to influence overall growth of bank loans, investments and deposits and also affect interest rates charged on loans or paid for deposits. The monetary policies of the FRB have had a significant effect on the operating results of commercial banks and related financial service providers in the past and are expected to continue to do so in the future. The effect of such policies upon our future business and earnings cannot be predicted.

We, as a financial holding company, are regulated under the BHC Act, and are subject to the supervision of the FRB. We are registered as a financial services holding company with the FRB and are subject to reporting requirements and inspections and audits. Under FRB policy, we are expected to act as a source of financial strength to the Bank and to commit resources to support its subsidiaries. This support may be required at times when, in the absence of such FRB policy, it would not otherwise be required to provide support.

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Under Michigan law, if the capital of a Michigan state chartered bank has become impaired by losses or otherwise, the Commissioner of the DIFS may require that the deficiency in capital be met by assessment upon the bank’s shareholders. Each shareholder would be responsible for a pro rata share of the deficiency, based on the amount of capital stock held by each shareholder. If an assessment is not paid by any shareholder within 30 days of the date of notice to the shareholder, sale of their stock will occur in order to pay such assessment.

Any capital loans by a bank holding company to any of its subsidiary banks are subordinate in right of payment to deposits and to certain other indebtedness of such subsidiary bank. In the event of a bank holding company’s bankruptcy, any commitment by the bank holding company to a federal bank regulatory agency to maintain the capital of a subsidiary bank will be assumed by the bankruptcy trustee and entitled to a priority of payment. This priority would apply to guarantees of capital plans under the FDIC Improvement Act of 1991.

SOX contains important requirements for public companies in the area of financial disclosure and corporate governance. In accordance with Section 302(a) of SOX, written certifications by our principal executive, financial, and accounting officers are required. These certifications attest that our quarterly and annual reports filed with the SEC do not contain any untrue statement of a material fact (see the certifications filed as Exhibits 31.1 and 31.2 to this Form 10-K for such certification of consolidated financial statements and other information for this 2021 Form 10-K). We have also implemented a program designed to comply with Section 404 of SOX, which included the identification of significant processes and accounts, documentation of the design effectiveness over process and entity level controls, and testing of the operating effectiveness of key controls. See Item 9A. Controls and Procedures for our evaluation of disclosure controls and procedures and internal control over financial reporting.

Certain additional information concerning regulatory guidelines for capital adequacy and other regulatory matters is presented herein under the caption “Capital” in Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations and in “Note 9 – Off-Balance-Sheet Activities, Commitments and Other Matters” and “Note 10 – Minimum Regulatory Capital Requirements” of “Notes to Consolidated Financial Statements” in Item 8. Financial Statements and Supplementary Data.

Isabella Bank

The Bank is supervised and regulated by DIFS and the FRB. These agencies and federal and state laws extensively regulate various aspects of the banking business including, among other things, permissible types and amounts of loans, investments and other activities, capital adequacy, branching, interest rates on loans and deposits, and the safety and soundness of banking practices.

Our deposits are insured up to applicable limits by the DIF of the FDIC and are subject to deposit insurance assessments to maintain the DIF. The FDIC assesses insurance premiums based upon a financial ratios method that takes into account asset and capital levels and supervisory ratings.

Banking laws and regulations restrict transactions by insured banks owned by a bank holding company. These restrictions include loans to and certain purchases from the parent holding company, non-bank and bank subsidiaries of the parent holding company. Additional restrictions apply to principal shareholders, officers, directors and their affiliates, and investments by the subsidiary bank in the shares or securities of the parent holding company (or any of the other non-bank or bank affiliates), or acceptance of such shares or securities as collateral security for loans to any borrower.

The Bank is subject to legal limitations on the frequency and amount of dividends that can be paid to Isabella Bank Corporation. For example, a Michigan state chartered bank may not declare a cash dividend or a dividend in kind except out of net profits then on hand after deducting all losses and bad debts, and then only if it will have a surplus amounting to not less than 20% of its capital after the payment of the dividend. Moreover, a Michigan state chartered bank may not declare or pay any cash dividend or dividend in kind until the cumulative dividends on its preferred stock, if any, have been paid in full. Further, if the surplus of a Michigan state chartered bank is at any time less than the amount of its capital, before the declaration of a cash dividend or dividend in kind, it must transfer to surplus not less than 10% of its net profits for the preceding six months (in the case of quarterly or semi-annual dividends) or the preceding two consecutive six month periods (in the case of annual dividends).

The payment of dividends by Isabella Bank Corporation and the Bank is also affected by various regulatory requirements and policies, such as the requirement to keep adequate capital in compliance with regulatory guidelines. Federal laws impose further restrictions on the payment of dividends by insured banks that fail to meet specified capital levels. The FDIC may prevent an insured bank from paying dividends if the bank is in default of payment of any assessment due to the FDIC. In addition, payment of dividends by a bank may be prevented by the applicable federal regulatory authority if such payment is determined, by reason of the financial condition of such bank, to be an unsafe and unsound banking practice. The FRB and the

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FDIC have issued policy statements providing that bank holding companies and insured banks should generally pay dividends only out of current operating earnings. Additionally, the FRB Board of Governors requires a bank holding company to notify the FRB prior to increasing its cash dividend by more than 10% over the prior year.

The aforementioned regulations and restrictions may limit our ability to obtain funds from the Bank for our cash needs, including payment of dividends and operating expenses.

The activities and operations of the Bank are also subject to various federal and state laws and regulations.

Item 1A. Risk Factors.

In the normal course of business, we are exposed to various risks. These risks, if not managed correctly, could have a significant impact on our earnings, capital, share price, and ability to pay dividends. In order to effectively monitor and control the following risks, we utilize an enterprise risk model. We balance our strategic goals, including revenue and profitability objectives, with associated risks through the use of policies, systems, and procedures which have been adopted to identify, assess, control, monitor, and manage each risk area. We continually review the adequacy and effectiveness of these policies, systems, and procedures.

Our enterprise risk process covers each of the following areas.

The COVID-19 pandemic may adversely affect our business

Unexpected and unprecedented changes have occurred during 2020 and 2021 as the result of COVID-19. The World Health Organization has declared the situation a global pandemic. The pandemic created significant market volatility, economic uncertainty, and disruption to normal business operations around the world, with slowdowns and shutdowns affecting entire industries.

The extent to which COVID-19 impacts our business will depend on future developments, which are highly uncertain and cannot be predicted with any accuracy. Future developments include new information which may emerge concerning the severity of COVID-19 and the actions to contain the coronavirus or treat its impact, among others. We expect the significance of the COVID-19 pandemic, including the extent of its effect on our financial and operational results, to be dictated by, among other factors, its duration, the success of efforts to contain it and the impact of actions taken in response. Uncertainty created by the COVID-19 pandemic is pervasive, and has impacted our financial results, operations, customers, vendors and various areas of risk. Areas of risk may include, but are not limited to, cybersecurity, credit, interest rate, litigation and risk related to vendor services. With the uncertainty created by COVID-19, it's challenging to determine the full impact on our ongoing financial and operational results. We continue to closely monitor external events and are in continual discussion with our customers to assess, prepare and respond to conditions as they evolve.

Changes in credit quality and required allowance for loan and lease losses

To manage the credit risk arising from lending activities, our most significant source of credit risk, we maintain sound underwriting policies and procedures. We continuously monitor asset quality in order to determine the appropriateness of valuation allowances. These valuation allowances take into consideration various factors including, but not limited to, local, regional, and national economic conditions.

We maintain an ALLL to reserve for estimated incurred loan losses within our loan portfolio. The level of the ALLL reflects our evaluation of industry concentrations; specific credit risks; loan loss experience; loan portfolio quality; and economic, political and regulatory conditions. The determination of the appropriate level of the ALLL inherently involves a high degree of subjectivity and requires us to make significant estimates, all of which may undergo material changes.

Changes in economic conditions

An economic downturn within our local markets, as well as downturns in the state, national, or global markets, could negatively impact household and corporate incomes. This could lead to decreased demand for both loan and deposit products and lead to an increase of customers who fail to pay interest or principal on their loans. We continually monitor key economic indicators in an effort to anticipate the possible effects of downturns in the local, regional, and national economies.

Our success depends primarily on the general economic conditions of the State of Michigan and the specific local markets in which we operate. We provide banking and financial services to customers located primarily in the Clare, Gratiot, Isabella, Mecosta, Midland, Montcalm, and Saginaw counties in Michigan. The local economic conditions in these areas have a significant impact on the demand for our products and services, as well as the ability of our customers to repay loans, the value of the collateral securing loans, and the stability of our deposit funding sources. A significant decline in general economic

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conditions, caused by inflation, recession, acts of terrorism, international or domestic occurrences, a health crisis, unemployment, changes in securities markets or other factors could impact these local economic conditions and, in turn, could have a material adverse effect on our financial condition and results of operations.

Interest rate risk

IRR results from the timing differences in the maturity or repricing frequency of a financial institution’s interest earning assets and its interest bearing liabilities. We monitor the potential effects of changes in interest rates through simulations and gap analyses. To help mitigate the effects of changes in interest rates, we make significant efforts to stagger projected cash flows and maturities of interest sensitive assets and liabilities.

Liquidity risk

Liquidity risk is the risk to earnings or capital arising from our inability to meet our obligations when they come due without incurring unacceptable and significant costs. Liquidity risk includes the inability to manage unplanned changes in funding sources, or failure to address changes in market conditions that affect the ability to liquidate assets quickly and with minimal loss in value. We have significant borrowing capacity through correspondent banks and the ability to sell certain investments to fund potential cash shortages, which we may use to help mitigate this risk.

The value of investment securities may be negatively impacted by fluctuations in the market

A volatile, illiquid market or decline in credit quality could require us to recognize an OTTI loss related to the investment securities held in our portfolio. We consider many factors in determining whether an OTTI exists including the length of time and extent to which fair value has been less than cost, the investment credit rating, and the probability that the issuer will be unable to pay the amount when due. The presence of these factors could lead to impairment charges. These risks are mitigated by the fact that we do not intend to sell the security in an unrealized loss position and it is more likely than not that we will not have to sell the security before recovery of its cost basis.

Operational risk

Operational risk is the risk of loss resulting from failed or inadequate internal processes, staffing, information technology systems, or external events. These factors may lead to reputation risk and transaction risk. Reputation risk is managed by developing and retaining marketplace confidence in handling customers’ financial transactions in an appropriate manner and protecting our safety and soundness. Transaction risk includes losses from fraud, error, the inability to deliver products or services, and loss or theft of information. Transaction risk also encompasses product development and delivery, transaction processing, information technology systems, and the internal control environment.

To minimize potential losses due to operational risks, we have established a robust system of internal controls that are regularly tested by our internal audit department in conjunction with the services of certified public accounting firms who assist in performing such internal audit work. The focus of these internal audit procedures is to verify the validity and appropriateness of various transactions, processes, and controls. The results of these procedures are reported to our Audit Committee.

The adoption of, violations of, or nonconformance with laws, rules, regulations, or prescribed practices

The financial services industry and public companies are extensively regulated and must meet regulatory standards set by the FDIC, DIFS, FRB, FASB, SEC, PCAOB, CFPB, and other regulatory bodies. Federal and state laws and regulations are designed primarily to protect deposit insurance funds and consumers, and not necessarily to benefit our shareholders. The nature, extent, and timing of the adoption of significant new laws, changes in existing laws, or repeal of existing laws may have a material impact on our business, results of operations, and financial condition, the effect of which is impossible to predict at this time.

Our compliance department annually assesses the adequacy and effectiveness of our processes for controlling and managing our principal compliance risks.

Changes to the financial services industry as a result of regulatory changes or actions, or significant litigation

The financial services industry is extensively regulated by state and federal regulation that governs almost all aspects of our operations. Laws and regulations may change from time to time and are primarily intended for the protection of consumers, depositors, and the deposit insurance fund. The impact of any changes to laws and regulations or other actions by regulatory agencies may negatively impact us or our ability to increase the value of our business. Regulatory authorities have extensive discretion in connection with their supervisory and enforcement activities, including the imposition of restrictions on the operation of an institution, the classification of assets by the institution, and the appropriateness of an institution’s ALLL.

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Future regulatory changes or accounting pronouncements may increase our regulatory capital requirements or adversely affect our regulatory capital levels. Additionally, actions by regulatory agencies or significant litigation against us could require the dedication of significant time and resources to defend our business and may lead to penalties.

We may not adjust to changes in the financial services industry

Our financial performance depends in part on our ability to maintain and grow our core deposit customer base and expand our financial services to our existing and new customers. The increasingly competitive environment is, in part, a result of changes in technology and product delivery systems and the accelerating pace of consolidation among financial service providers. New competitors may emerge to increase the degree of competition for our products and services. Financial services and products are also constantly changing. Our financial performance is dependent upon customer demand for our products and services, our ability to develop and offer competitive financial products and services, and our ability to adapt to enhancements in financial technology.

We may be required to recognize an impairment of goodwill

Goodwill represents the excess of the amounts paid to acquire subsidiaries over the fair value of their net assets at the date of acquisition. The majority of the recorded goodwill is related to acquisitions of other banks, which were subsequently merged into Isabella Bank. If it is determined that the goodwill is impaired, we must write-down the goodwill by the amount of the impairment.

We may face pressure from purchasers of our residential mortgage loans to repurchase loans sold or reimburse purchasers for losses related to such loans

We generally sell the fixed rate long-term residential mortgage loans we originate to the secondary market. The purchasers of residential mortgage loans, such as government sponsored entities, increased their efforts to require sellers of residential mortgage loans to either repurchase loans previously sold, or reimburse the purchasers for losses incurred on foreclosed loans due to actual or alleged failure to strictly conform to the terms of the contract.

Consumers may decide not to use banks to complete their financial transactions

Technology and other changes are allowing customers to complete financial transactions without the involvement of banks. For example, consumers can now pay bills and transfer funds directly without banks. The process of diminishing or removing banks as intermediaries in financial transactions could result in the loss of fee income, as well as the loss of customer deposits and income generated from those deposits.

Unauthorized disclosure of sensitive or confidential client or customer information, whether through cyber attacks, breach of computer systems or other means

Our products, services and systems are accessed through critical company or third-party operations. This involves the storage, processing and transmission of sensitive data, including proprietary or confidential data, regulated data, and personal information of employees and customers. Successful breaches, employee wrongdoing, or human or technological error could result in unauthorized access to, disclosure, modification, misuse, loss, or destruction of company, customer, or other third party data or systems. Examples include theft of sensitive, regulated, or confidential data including personal information; loss of access to critical data or systems through ransomware, destructive attacks or other means; and business delays, service or system disruptions or denials of service.

Cybersecurity incidents have increased in number and severity and it is expected that these trends will continue. Should we, or third parties we do business with, fall victim to successful cyber attacks or experience other cybersecurity incidents, including the loss of personally identifiable customer or other sensitive data, the result could severely damage our reputation, expose us to the risks of litigation and liability, disrupt our operations and increase cybersecurity or other insurance premiums.

We have cybersecurity insurance, in the event a cybersecurity attack were to occur, covering expenses related to notification, credit monitoring, investigation, crisis management, public relations, and legal advice. In addition, we maintain insurance to cover restoration of data, certain physical damage or third-party injuries caused by potential cybersecurity incidents. However, damage and claims arising from such incidents may not be covered or may exceed the amount of any insurance available. Insurance policies are reviewed annually in detail.

A strong reputation is vital and requires utmost protection. An operating incident, significant cybersecurity disruption, or other adverse events may have a negative impact on our reputation which could make it more difficult for us to compete successfully for new opportunities, obtain necessary regulatory approvals, or severely reduce consumer demand for our products.

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Our estimates and assumptions may be incorrect

Our consolidated financial statements conform with GAAP, which require us to make estimates and assumptions that affect the amounts reported in the consolidated financial statements. Estimates are based on information available to us at the time the estimates are made. Actual results could differ from estimates. For further discussion regarding significant accounting estimates, see “Note 1 – Nature of Operations and Summary of Significant Accounting Policies” of “Notes to Consolidated Financial Statements” in Item 8. Financial Statements and Supplementary Data.

Disruption of infrastructure

Our operations depend upon our technological and physical infrastructure, including our equipment and facilities. Extended disruption of our vital infrastructure by fire, power loss, natural disaster, telecommunications failure, computer hacking and viruses, or other events outside of our control, could have a significant impact on our operations. We have developed and tested disaster recovery plans for all significant aspects of our operations.

Anti-takeover provisions

Our articles of incorporation include anti-takeover provisions that require a two-thirds majority vote of our shareholders to approve a sale of the Corporation. Additionally, changes to our articles of incorporation must be approved by a two-thirds majority vote of our shareholders.

Item 1B. Unresolved Staff Comments.

None.

Item 2. Properties.

Our executive offices are located at 401 North Main Street in Mount Pleasant, Michigan. In addition to this location, we own 29 branches, two operations centers, our previous main office building and vacant land. We also lease property in Saginaw, Michigan which serves as a full-service branch. Our facilities' current, planned, and best use is for conducting our current activities, with the exception of our previous main office location which is vacant. We continually monitor and assess the need for expansion and/or improvement of all facilities. In our opinion, each facility has sufficient capacity and is in good condition.

Item 3. Legal Proceedings.

We are not involved in any material legal proceedings. While we are involved in ordinary, routine litigation incidental to our business, no such routine proceedings are expected to result in any material adverse effect on our consolidated operations, earnings, financial condition, or cash flows.

Item 4. Mine Safety Disclosures.

Not applicable.

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PART II

Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities.

(Dollars in thousands except per share amounts)

Common Stock and Dividend Information

Our authorized common stock consists of 15,000,000 shares, of which 7,532,641 shares are issued and outstanding as of December 31, 2021. As of that date, there were 2,800 shareholders of record.

Our common stock is traded in the over-the-counter market. Our common stock is quoted on the OTCQX market tier of the OTC Markets Group Inc.’s ("OTC Markets") electronic quotation system (www.otcmarkets.com) under the symbol “ISBA”. Other trades in our common stock occur in privately negotiated transactions from time to time of which we may have little or no information.

We have reviewed the information available as to the range of reported high and low transactions as reported by OTC Markets. The following table sets forth our compilation of that information for the periods indicated. Price information obtained from OTC Markets reflects inter-dealer prices, without retail mark up, mark down, or commissions and may not necessarily represent actual transactions. The following compiled data is provided for information purposes only and should not be viewed as indicative of the actual or market value of our common stock.


	Number of Common Shares	Sale Price
		Low		High
2021
First Quarter	179,524	$	19.45	$	22.50
Second Quarter	134,955	21.00		23.90
Third Quarter	356,226	22.55		26.74
Fourth Quarter	130,486	24.75		29.00
	801,191
2020
First Quarter	225,103	$	16.00	$	24.50
Second Quarter	92,068	15.60		19.50
Third Quarter	158,506	15.75		19.00
Fourth Quarter	342,179	15.73		21.95
	817,856

The following table sets forth the cash dividends paid for the quarters indicated:


	Per Share
	2021		2020
First Quarter	$	0.27	$	0.27
Second Quarter	0.27		0.27
Third Quarter	0.27		0.27
Fourth Quarter	0.27		0.27
Total	$	1.08	$	1.08

We have adopted and publicly announced a common stock repurchase plan. The plan was last amended on April 28, 2021, to allow for the repurchase of an additional 500,000 shares of common stock after that date. These authorizations do not have expiration dates. As shares are repurchased under this plan, they are retired with the status of authorized, but unissued, shares.

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The following table provides information for the unaudited three-month period ended December 31, 2021, with respect to our common stock repurchase plan:


	Common Shares Repurchased			Total Number of Common Shares Purchased as Part of Publicly Announced Plan or Program	Maximum Number of Common Shares That May Yet Be Purchased Under the Plans or Programs
	Number	Average Price Per Common Share
Balance, September 30					479,796
October 1 - 31	4,772	$	26.40	4,772	475,024
November 1 - 30	5,951	27.22		5,951	469,073
December 1 - 31	1,582	27.18		1,582	467,491
Balance, December 31	12,305	$	26.90	12,305	467,491

On September 1, 2021, we announced the commencement of a “modified Dutch Auction” tender offer to purchase up to $20,000 in value of our common stock, or such lesser number of shares of our common stock as were properly tendered and not properly withdrawn, at a price not less than $23.00 nor greater than $27.00 per share. The tender offer expired on October 13, 2021 and resulted in the purchase of 396,576.78534 shares at a price of $27.00 per share for a total amount of approximately $10,708. The remainder of the $20,000 not used in the tender offer may be deployed for general corporate purposes, including potential repurchases of our common stock.

Information concerning securities authorized for issuance under equity compensation plans appears under Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters.

Item 6. [Reserved]

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Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations.

ISABELLA BANK CORPORATION FINANCIAL REVIEW

(Dollars in thousands except per share amounts)

The following is management’s discussion and analysis of our financial condition and results of operations. This discussion and analysis is intended to provide a better understanding of the consolidated financial statements and statistical data included elsewhere in this Annual Report on Form 10-K.

Executive Summary

We reported net income of $19,499 and earnings per common share of $2.48 for the year ended December 31, 2021. Net income and earnings per common share for the year ended December 31, 2020 were $10,885 and $1.37, respectively. While we had a reduction in total interest income of $4,059 during 2021, compared to prior year, net interest income for the period ended December 31, 2021 increased by $2,354 from the prior year. Developments leading to the decline in gross interest income during 2021 included the lowering of interest rates, and a pause in advances to mortgage brokers. Conversely, we benefited from lower interest rates and a reduction in higher-cost borrowings as interest expense on deposits and borrowings decreased $6,413 for the year ended December 31, 2021 when compared to the same period in 2020.

The provision for loan losses decreased by $2,183 in 2021 when compared to the previous year. During 2020, increased economic and environmental risk factors, predominantly driven by COVID-19, drove a significant increase in the provision. While these risk factors remain, credit quality was strong during 2021. As of December 31, 2021, total past due and nonaccrual loans were $4,031, or 0.31% of gross loans, compared to 0.78% as of December 31, 2020. Additionally, net loan charge-offs were relatively low at $123. Strong credit quality, coupled with improvement in economic factors, such as unemployment rates, resulted in a reduction in the ALLL and a provision reversal of $518 during 2021.

Noninterest income of $13,822 for the year ended December 31, 2021 decreased $601 when compared to 2020. While service charges and fees, a component of noninterest income, increased $1,070 when compared to the previous year, 2020 also included an additional $1,022 related to gain on sale of loans and $620 related to gains from redemption of corporate owned life insurance policies. Noninterest expenses for the year ended December 31, 2021 decreased $7,539 when compared to 2020, which can be attributed to a $7,643 cost to extinguish $100,000 of FHLB advances during the fourth quarter of 2020. The remaining marginal increase of $104 can be attributed to disciplined operating expense controls.

As of December 31, 2021, total assets and assets under management were $2,032,158 and $2,827,245, respectively. Assets under management include loans sold and serviced of $278,844 and investment and trust assets managed by Isabella Wealth of $516,243, in addition to assets on our consolidated balance sheet. Loans outstanding as of December 31, 2021 totaled $1,301,037. During 2021, gross loans increased $62,726 which was largely the result of growth in the commercial and residential mortgage loan portfolios. Our securities portfolio increased $151,373 since December 31, 2020, predominantly due to purchases of treasury securities, bringing our total securities portfolio to $490,601. Total deposits increased $144,022 during the year and totaled $1,710,339 as of December 31, 2021. This growth was primarily in demand and savings deposits, driven mostly from attracting new customers and funds from the SBA PPP and government stimulus. All regulatory capital ratios for the Bank exceeded the minimum thresholds to be considered a “well capitalized” institution.

Our net yield on interest earning assets (FTE) was 2.87% for 2021 which declined from 2.96% in 2020. Management implemented strategic programs focused on improving our net yield as rates declined in 2020, which included enhanced pricing related to loans and a reduced reliance on higher-cost borrowed funds and brokered deposits as funding sources. While these efforts have helped, the current interest rate environment plus the elevated cash position has had a negative impact on the yield of interest earning assets.

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Recent Events and Legislation

Impact of COVID-19: Unexpected and unprecedented changes have occurred during 2020 and 2021 as the result of COVID-19. The World Health Organization has declared the situation a global pandemic. The pandemic created significant market volatility, economic uncertainty, and disruption to normal business operations around the world, with slowdowns and shutdowns affecting entire industries.

The CARES Act, an unprecedented federal government support program, was enacted on March 27, 2020 in response to the COVID-19 pandemic. It is a $2 trillion stimulus package intended to provide financial relief across the country. The CARES Act included the PPP, which enabled businesses to obtain a forgivable SBA loan to meet payroll, rent, utility, and mortgage interest obligations for the 24-week period following the loan origination, and re-open quickly once the public health crisis ends. The first applications for PPP funds, with a term of two years, were accepted beginning on April 3, 2020. During 2020, we facilitated more than 950 SBA PPP loans for a total of $99,459 and had the opportunity to continue providing funding in 2021 under an additional government stimulus program. During 2021, we funded 845 SBA PPP loans for a total of $54,551 under this additional government stimulus program. Bank regulators issued an interim rule that neutralizes the regulatory capital effects by allowing a zero percent risk weight, for capital purposes, to loans originated under the PPP. The capital rule was issued April 9, 2020, with an immediate effective date.

Since 2020, many customers have expressed their general concern about the uncertain economic conditions, but it is still premature to reasonably predict the magnitude of the impact. One measure we deployed to assist our customers included changes to service charges and fees on deposit accounts. Since the COVID-19 pandemic led to an increase in the need for electronic services and products, we elected to remove select deposit account charges and fees and temporarily waive others to ease the financial stress on our customers. Other measures we have taken to assist our customers include loan programs that provide short-term payment relief. Under these programs, borrowers whose loans were in good standing as of March 1, 2020 could elect to defer full or partial payments for a period not to exceed 180 days. Loan payment deferrals totaled $306,103, or 23.8% of gross loans, as of June 30, 2020. As of September 30, 2020, active loan payment deferrals declined to $103,858, or 8.0% of gross loans, as the majority of borrowers granted loan payment deferrals had reverted back to contractual payments. As of December 31, 2020, active loan payment deferrals declined even further and totaled $6,048, or 0.5% of gross loans. As of December 31, 2021, we had active loan payment deferrals totaling $159.

Bank regulators issued a statement on March 22, 2020, and a revised statement on April 7, 2020, which provided confirmation that short-term loan modifications made on a good faith basis in response to COVID-19 to borrowers with a current payment status are not categorized as TDRs. Pursuant to this guidance, short-term loan modifications meeting this criteria were not categorized as TDR as of December 31, 2021.

In response to the COVID-19 pandemic, we temporarily closed branch lobbies, modified staffing levels, and enabled employees to work remotely during most of 2020 and into 2021. While branch operations and staffing levels have generally resumed to normal, the extent to which COVID-19 impacts our business will depend on future developments, which remain highly uncertain and cannot be predicted with any accuracy. We expect the significance of the pandemic, including the extent of its effect on our financial and operational results, to be dictated by, among other factors, its duration, the success of efforts to contain the virus and variants to the virus and the impact of actions taken in response. Uncertainty created by the pandemic is pervasive, and continues to impact our operations, customers, and various areas of risk. We continue to closely monitor external events and are in continual discussion with our customers to assess, prepare and respond to conditions as they evolve.

Subordinated Debt Issuance: On June 2, 2021, we completed a private placement of $30,000 in aggregate principal amount of 3.25% Fixed-to-Floating Rate Subordinated Notes due 2031 (the “Notes”) to various institutional investors (the “Offering”). The price for the Notes was 100% of the principal amount of the Notes. The Notes are intended to qualify as Tier 2 capital for regulatory purposes. We intend to utilize the net proceeds from the Offering for general corporate purposes, including potential repurchases of common stock and/or merger and acquisition activity. The Notes will initially bear a fixed interest rate of 3.25% until June 15, 2026, after which time until maturity on June 15, 2031, the interest rate will reset quarterly to an annual floating rate equal to the then-current 3-month SOFR plus 256 basis points. The Notes are redeemable by us at our option, in whole or in part, on or after June 15, 2026. Any such redemption will be at a redemption price equal to 100% of the principal amount of the Notes being redeemed, plus accrued and unpaid interest. The Notes are not subject to redemption at the option of the holders.

Tender Offer: On September 1, 2021, we announced the commencement of a “modified Dutch Auction” tender offer to purchase up to $20,000 in value of our common stock, or such lesser number of shares of our common stock as were properly tendered and not properly withdrawn, at a price not less than $23.00 nor greater than $27.00 per share. The tender offer expired on October 13, 2021 and resulted in the purchase of 396,576.78534 shares at a price of $27.00 per share for a total amount of

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approximately $10,708. The remainder of the $20,000 not used in the tender offer may be deployed for general corporate purposes, including potential repurchases of our common stock.

Reclassifications

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

Subsequent Events

We evaluated subsequent events after December 31, 2021 through the date our consolidated financial statements were issued for potential recognition and disclosure. No subsequent events require financial statement recognition or disclosure between December 31, 2021 and the date our consolidated financial statements were issued.

Other

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

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Results of Operations

(Dollars in thousands except per share amounts)

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


	2021			2020			2019
INCOME STATEMENT DATA
Interest income	$	60,113		$	64,172		$	67,306
Interest expense	7,412			13,825			17,861
Net interest income	52,701			50,347			49,445
Provision for loan losses	(518)			1,665			30
Noninterest income	13,822			14,423			8,039
Noninterest expenses	43,694			51,233			43,050
Federal income tax expense (benefit)	3,848			987			1,380
Net income (loss)	$	19,499		$	10,885		$	13,024
PER SHARE
Basic earnings (loss)	$	2.48		$	1.37		$	1.65
Diluted earnings (loss)	$	2.45		$	1.34		$	1.61
Dividends	$	1.08		$	1.08		$	1.05
Tangible book value	$	21.61		$	21.29		$	20.45
Quoted market value
High	$	29.00		$	24.50		$	24.80
Low	$	19.45		$	15.60		$	22.01
Close (1)	$	25.50		$	19.57		$	24.31
Common shares outstanding (1)	7,532,641			7,997,247			7,910,804
PERFORMANCE RATIOS
Return on average total assets	0.96		%	0.57		%	0.72		%
Return on average shareholders' equity	8.83		%	4.93		%	6.25		%
Return on average tangible shareholders' equity	11.31		%	6.34		%	8.17		%
Net interest margin yield (FTE)	2.87		%	2.96		%	3.07		%
BALANCE SHEET DATA (1)
Gross loans	$	1,301,037		$	1,238,311		$	1,186,570
AFS securities	$	490,601		$	339,228		$	429,839
Total assets	$	2,032,158		$	1,957,378		$	1,814,198
Deposits	$	1,710,339		$	1,566,317		$	1,313,851
Borrowed funds	$	99,320		$	158,747		$	275,999
Shareholders' equity	$	211,048		$	218,588		$	210,182
Gross loans to deposits	76.07		%	79.06		%	90.31		%
ASSETS UNDER MANAGEMENT (1)
Loans sold with servicing retained	$	278,844		$	301,377		$	259,375
Assets managed by Isabella Wealth	$	516,243		$	443,967		$	436,181
Total assets under management	$	2,827,245		$	2,702,722		$	2,509,754
ASSET QUALITY (1)
Nonperforming loans to gross loans	0.10		%	0.43		%	0.55		%
Nonperforming assets to total assets	0.08		%	0.31		%	0.40		%
ALLL to gross loans	0.70		%	0.79		%	0.67		%
CAPITAL RATIOS (1)
Shareholders' equity to assets	10.39		%	11.17		%	11.59		%
Tier 1 leverage	7.97		%	8.37		%	9.01		%
Common equity tier 1 capital	12.07		%	12.97		%	12.56		%
Tier 1 risk-based capital	12.07		%	12.97		%	12.56		%
Total risk-based capital	14.94		%	13.75		%	13.18		%

(1) At end of year

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


	Quarter to Date
	December 31 2021		September 30 2021		June 30 2021		March 31 2021
Total interest income	$	15,041	$	15,142	$	14,640	$	15,290
Total interest expense	1,567		1,829		1,927		2,089
Net interest income	13,474		13,313		12,713		13,201
Provision for loan losses	81		(107)		31		(523)
Noninterest income	3,608		3,367		3,315		3,532
Noninterest expenses	11,197		11,185		10,495		10,817
Federal income tax expense	1,010		916		881		1,041
Net income	$	4,794	$	4,686	$	4,621	$	5,398
PER SHARE
Basic earnings	$	0.63	$	0.59	$	0.58	$	0.68
Diluted earnings	0.63		0.58		0.57		0.67
Dividends	0.27		0.27		0.27		0.27
Quoted market value (1)	25.50		26.03		23.00		21.75
Tangible book value	21.61		21.87		21.73		21.35


	Quarter to Date
	December 31 2020		September 30 2020		June 30 2020		March 31 2020
Total interest income	$	16,402	$	15,700	$	15,869	$	16,201
Total interest expense	2,858		3,203		3,565		4,199
Net interest income	13,544		12,497		12,304		12,002
Provision for loan losses	256		516		105		788
Noninterest income	4,119		4,060		3,246		2,998
Noninterest expenses	18,638		10,950		10,700		10,945
Federal income tax expense (benefit)	(508)		734		558		203
Net income (loss)	$	(723)	$	4,357	$	4,187	$	3,064
PER SHARE
Basic earnings (loss)	$	(0.10)	$	0.55	$	0.53	$	0.39
Diluted earnings (loss)	(0.10)		0.54		0.52		0.38
Dividends	0.27		0.27		0.27		0.27
Quoted market value (1)	19.57		16.74		18.25		18.00
Tangible book value	21.29		21.75		21.52		21.10

(1) At end of period

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CRITICAL ACCOUNTING POLICIES

Our significant accounting policies are set forth in “Note 1 – Nature of Operations and Summary of Significant Accounting Policies” of “Notes to Consolidated Financial Statements” in Item 8. Financial Statements and Supplementary Data. Of these significant accounting policies, we consider our policies regarding the ALLL, acquisition intangibles and goodwill, and the determination of the fair value and assessment of OTTI of investment securities to be our most critical accounting policies.

The ALLL requires our most subjective and complex judgment. Changes in economic conditions and other external factors can have a significant impact on the ALLL and, therefore, the provision for loan losses and results of operations. We have developed policies and procedures for assessing the appropriateness of the ALLL, recognizing that this process requires a number of assumptions and estimates with respect to our loan portfolio. Our assessments may be impacted in future periods by changes in economic conditions, and the discovery of information with respect to borrowers which is not known to us at the time of the issuance of the consolidated financial statements. For additional discussion concerning our ALLL and related matters, see “Allowance for Loan and Lease Losses” and “Note 4 – Loans and ALLL” of “Notes to Consolidated Financial Statements” in Item 8. Financial Statements and Supplementary Data.

U.S. generally accepted accounting principles require that we determine the fair value of the assets and liabilities of an acquired entity, and record the fair value on the date of acquisition. We employ a variety of measures in the determination of the fair value, including the use of discounted cash flow analysis, market appraisals, and projected future revenue streams. For certain items that we believe we have the appropriate expertise to determine the fair value, we may choose to use our own calculations of the value. In other cases, where the value is not easily determined, we consult with independent experts to determine the fair value of the identified asset or liability. Once valuations have been determined, the net difference between the price paid for the acquired entity and the net value of assets acquired on our balance sheet, including identifiable intangibles, is recorded as goodwill. Acquisition intangibles and goodwill are qualitatively evaluated to determine if it is more likely than not that the carrying balance is impaired on at least an annual basis.

During the fourth quarter of 2020, we engaged a third-party valuation firm to perform a quantitative analysis of goodwill as of December 31, 2020. In determining the fair value of the Bank and Isabella Bank Corporation, the third-party firm assessed general economic conditions, industry and market considerations, the impact of recent events to financial performance, the market price of our common stock, and other relevant events. Based on the valuation prepared, it was determined that our estimated fair value of the Bank and Isabella Bank Corporation at December 31, 2020 were greater than our recorded book value and no impairment of goodwill was identified. The carrying amount of goodwill as of December 31, 2020 relied on assumptions and use of estimates pursuant to the valuation obtained. We did not observe any indications of a potential impairment to the carrying balance of goodwill during 2021. As such, a valuation was not necessary to be performed as of December 31, 2021.

AFS securities are carried at fair value with changes in the fair value included as a component of other comprehensive income. Declines in the fair value of AFS securities below their cost that are other-than-temporary are reflected as realized losses in the consolidated statements of income. We evaluate AFS securities for indications of losses that are considered other-than-temporary, if any, on a regular basis. The market values for most AFS investment securities are typically obtained from outside sources and applied to individual securities within the portfolio. Municipal securities for which no readily determinable market values are available are priced using fair value curves which most closely match the securities' characteristics.

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Average Balances, Interest Rates, and Net Interest Income

The following schedules present the daily average amount outstanding for each major category of interest earning assets, non-earning assets, interest bearing liabilities, and noninterest bearing liabilities for the last three years. These schedules also present an analysis of interest income and interest expense for the periods indicated. All interest income is reported on a FTE basis using a federal income tax rate of 21%. Loans in nonaccrual status, for the purpose of the following computations, are included in the average loan balances. FRB and FHLB restricted equity holdings are included in other interest earning assets.


	Year Ended December 31
	2021						2020						2019
	Average Balance		Tax Equivalent Interest		Average Yield / Rate		Average Balance		Tax Equivalent Interest		Average Yield / Rate		Average Balance		Tax Equivalent Interest		Average Yield / Rate
INTEREST EARNING ASSETS
Loans	$	1,208,141	$	51,410	4.26	%	$	1,236,169	$	54,102	4.38	%	$	1,162,210	$	54,192	4.66	%
Taxable investment securities	297,357		4,920		1.65	%	229,468		5,214		2.27	%	296,758		7,185		2.42	%
Nontaxable investment securities	117,997		4,235		3.59	%	140,665		5,189		3.69	%	169,049		6,380		3.77	%
Fed funds sold	5		—		0.02	%	4		—		0.06	%	64		2		2.48	%
Other	255,246		706		0.28	%	142,717		1,026		0.72	%	38,549		1,199		3.11	%
Total earning assets	1,878,746		61,271		3.26	%	1,749,023		65,531		3.75	%	1,666,630		68,958		4.14	%
NONEARNING ASSETS
Allowance for loan losses	(9,396)						(8,837)						(8,256)
Cash and demand deposits due from banks	29,139						24,987						20,057
Premises and equipment	24,760						25,846						27,035
Accrued income and other assets	109,625						118,195						108,073
Total assets	$	2,032,874					$	1,909,214					$	1,813,539
INTEREST BEARING LIABILITIES
Interest bearing demand deposits	$	345,015	$	216	0.06	%	$	262,188	$	357	0.14	%	$	230,570	$	305	0.13	%
Savings deposits	558,102		616		0.11	%	456,088		1,212		0.27	%	388,821		2,572		0.66	%
Time deposits	336,094		4,610		1.37	%	387,881		7,315		1.89	%	429,745		8,731		2.03	%
Federal funds purchased and repurchase agreements	57,453		53		0.09	%	35,518		36		0.10	%	32,093		48		0.15	%
FHLB advances	69,342		1,302		1.88	%	210,451		4,905		2.33	%	272,795		6,205		2.27	%
Subordinated debt, net of unamortized issuance costs	17,000		615		3.62	%	—		—		—	%	—		—		—	%
Total interest bearing liabilities	1,383,006		7,412		0.54	%	1,352,126		13,825		1.02	%	1,354,024		17,861		1.32	%
NONINTEREST BEARING LIABILITIES
Demand deposits	416,247						320,820						237,675
Other	12,858						15,613						13,337
Shareholders’ equity	220,763						220,655						208,503
Total liabilities and shareholders’ equity	$	2,032,874					$	1,909,214					$	1,813,539
Net interest income (FTE)			$	53,859					$	51,706					$	51,097
Net yield on interest earning assets (FTE)					2.87	%					2.96	%					3.07	%

(1) Includes taxable AFS securities and equity securities

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Net interest income is the amount by which interest income on earning assets exceeds the interest expense on interest bearing liabilities. Net interest income is influenced by changes in the balance and mix of assets and liabilities, as well as market interest rates. We exert some control over these factors; however, FRB monetary policy and competition have a significant impact. For analytical purposes, net interest income is adjusted to an FTE basis by including the income tax savings from interest on tax exempt loans and nontaxable investment securities, thus making year to year comparisons more meaningful. The FTE adjustment is based on a federal income tax rate of 21%.

Volume and Rate Variance Analysis

The following table sets forth the effect of volume and rate changes on interest income and expense for the periods indicated. For the purpose of this table, changes in interest due to volume and rate were determined as follows:

Volume—change in volume multiplied by the previous period's FTE rate.

Rate—change in the FTE rate multiplied by the previous period's volume.

All interest income presented in the table below is reported on a FTE basis using a federal income tax rate of 21%. The change in interest due to both volume and rate has been allocated to volume and rate changes in proportion to the relationship of the absolute dollar amounts of the change in each.


	2021 Compared to 2020 Increase (Decrease) Due to						2020 Compared to 2019 Increase (Decrease) Due to
	Volume		Rate		Net		Volume		Rate		Net
Changes in interest income
Loans	$	(1,211)	$	(1,481)	$	(2,692)	$	3,341	$	(3,431)	$	(90)
Taxable investment securities	1,324		(1,618)		(294)		(1,550)		(421)		(1,971)
Nontaxable investment securities	(817)		(137)		(954)		(1,050)		(141)		(1,191)
Fed Funds Sold	—		—		—		(1)		(1)		(2)
Other	529		(849)		(320)		1,301		(1,474)		(173)
Total changes in interest income	(175)		(4,085)		(4,260)		2,041		(5,468)		(3,427)
Changes in interest expense
Interest bearing demand deposits	90		(231)		(141)		43		9		52
Savings deposits	227		(823)		(596)		385		(1,745)		(1,360)
Time deposits	(889)		(1,816)		(2,705)		(815)		(601)		(1,416)
Federal funds purchased and repurchase agreements	20		(3)		17		5		(17)		(12)
FHLB advances	(2,793)		(810)		(3,603)		(1,450)		150		(1,300)
Subordinated debt, net of unamortized issuance costs	615		—		615		—		—		—
Total changes in interest expense	(2,730)		(3,683)		(6,413)		(1,832)		(2,204)		(4,036)
Net change in interest margin (FTE)	$	2,555	$	(402)	$	2,153	$	3,873	$	(3,264)	$	609

The current low interest rate environment continues to place pressure on our net interest margin. SBA PPP fee income has supported our yield on total earning assets. Given the uncertainty in rates and the economic environment as a result of COVID-19, improvement in our net yield on interest earning assets could be gradual.


	Average Yield / Rate for the Three-Month Periods Ended:
	December 31 2021		September 30 2021		June 30 2021		March 31 2021		December 31 2020
Total earning assets	3.19	%	3.23	%	3.20	%	3.43	%	3.66	%
Total interest bearing liabilities	0.45	%	0.52	%	0.56	%	0.62	%	0.83	%
Net yield on interest earning assets (FTE)	2.86	%	2.85	%	2.79	%	2.98	%	3.04	%

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	Quarter to Date Net Interest Income (FTE)
	December 31 2021		September 30 2021		June 30 2021		March 31 2021		December 31 2020
Total interest income (FTE)	$	15,246	$	15,452	$	14,954	$	15,619	$	16,722
Total interest expense	1,567		1,829		1,927		2,089		2,858
Net interest income (FTE)	$	13,679	$	13,623	$	13,027	$	13,530	$	13,864

Allowance for Loan and Lease Losses

The viability of any financial institution is ultimately determined by its management of credit risk. Loans represent our single largest concentration of risk. The ALLL is our estimation of incurred losses within the existing loan portfolio. We allocate the ALLL throughout the loan portfolio based on our assessment of the underlying risks associated within each loan segment. Our assessments include allocations based on specific impairment valuation allowances, historical charge-offs, internally assigned credit risk ratings, and past due and nonaccrual balances. A portion of the ALLL is not allocated to any one loan segment, but is instead a representation of other qualitative risks that reflect the margin of imprecision inherent in the underlying assumptions used in the methodologies for estimating specific and general losses in the portfolio.

The following table summarizes our charge-offs, recoveries, provision for loan losses, and ALLL balances as of, and for the unaudited three month periods ended:


	December 31 2021			September 30 2021			June 30 2021			March 31 2021			December 31 2020
Total charge-offs	$	149		$	246		$	53		$	159		$	111
Total recoveries	78			86			111			209			93
Net loan charge-offs (recoveries)	71			160			(58)			(50)			18
Net loan charge-offs (recoveries) to average loans outstanding	0.01		%	0.01		%	—		%	—		%	—		%
Provision for loan losses	$	81		$	(107)		$	31		$	(523)		$	256
Provision for loan losses to average loans outstanding	0.01		%	(0.01)		%	—		%	(0.04)		%	0.02		%
ALLL	$	9,103		$	9,093		$	9,360		$	9,271		$	9,744
ALLL as a % of loans at end of period	0.70		%	0.73		%	0.78		%	0.78		%	0.79		%

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


	Commercial			Agricultural			Residential Real Estate			Consumer			Total
Charge-offs	$	32		$	77		$	12		$	486		$	607
Recoveries	133			12			162			177			484
Net loan charge-offs (recoveries)	$	(101)		$	65		$	(150)		$	309		$	123
Average loans outstanding	726,272			93,931			313,906			74,032			1,208,141
Net loan charge-offs (recoveries) to average loans outstanding	(0.01)		%	0.07		%	(0.05)		%	0.42		%	0.01		%

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


	2021			2020			2019			2018			2017
ALLL at beginning of period	$	9,744		$	7,939		$	8,375		$	7,700		$	7,400
Charge-offs	607			381			948			1,101			771
Recoveries	484			521			482			798			818
Provision for loan losses	(518)			1,665			30			978			253
ALLL at end of period	$	9,103		$	9,744		$	7,939		$	8,375		$	7,700
Net loan charge-offs (recoveries)	$	123		$	(140)		$	466		$	303		$	(47)
Net loan charge-offs (recoveries) to average loans outstanding	0.01		%	(0.01)		%	0.04		%	0.03		%	—		%
ALLL as a % of loans at end of period	0.70		%	0.79		%	0.67		%	0.74		%	0.71		%
ALLL as a % of nonaccrual loans	731.16		%	183.40		%	121.48		%	115.36		%	254.38		%

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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.

The economic impact from the COVID-19 pandemic could pose significant credit risk due to the potential inability of consumer and commercial borrowers to make contractual payments. In late March 2020, we implemented payment programs for borrowers to alleviate the financial setback due to the temporary closure of businesses and lost wages. We continue to monitor the economic impact from COVID-19 as it relates to credit risk to ensure the ALLL is appropriate.

The following table illustrates the two main components of the ALLL as of:


	December 31 2021			September 30 2021			June 30 2021			March 31 2021			December 31 2020
ALLL
Individually evaluated for impairment	$	578		$	583		$	1,201		$	1,380		$	911
Collectively evaluated for impairment	8,525			8,510			8,159			7,891			8,833
Total	$	9,103		$	9,093		$	9,360		$	9,271		$	9,744
ALLL to gross loans
Individually evaluated for impairment	0.04		%	0.05		%	0.10		%	0.12		%	0.07		%
Collectively evaluated for impairment	0.66		%	0.68		%	0.68		%	0.66		%	0.72		%
Total	0.70		%	0.73		%	0.78		%	0.78		%	0.79		%

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


	2021			2020			2019			2018			2017
	ALLL Allocation		% of Gross Loans	ALLL Allocation		% of Gross Loans	ALLL Allocation		% of Gross Loans	ALLL Allocation		% of Gross Loans	ALLL Allocation		% of Gross Loans
Commercial	$	1,740	62.07	$	2,162	61.10	$	1,914	59.08	$	2,563	58.43	$	1,706	58.16
Agricultural	289		7.22	311		8.11	634		9.85	775		11.27	611		11.75
Residential real estate	747		25.08	1,363		24.84	2,047		25.16	1,992		24.39	2,563		24.95
Consumer	908		5.63	798		5.95	922		5.91	857		5.91	900		5.14
Total Allocated	3,684		100.00	4,634		100.00	5,517		100.00	6,187		100.00	5,780		100.00
Unallocated	5,419		—	5,110		—	2,422		—	2,188		—	1,920		—
Total	$	9,103	100.00	$	9,744	100.00	$	7,939	100.00	$	8,375	100.00	$	7,700	100.00

While we utilize our best judgment and information available, the ultimate adequacy of the ALLL is dependent upon a variety of factors beyond our control, including the performance of our borrowers, the economy, and changes in interest rates. We closely monitor overall credit quality indicators and our policies and procedures related to the analysis of the ALLL to ensure that the ALLL remains at an appropriate level.

For further discussion of the allocation of the ALLL, see “Note 4 – Loans and ALLL” of “Notes to Consolidated Financial Statements” in Item 8. Financial Statements and Supplementary Data.

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Loans Past Due and Loans in Nonaccrual Status

Fluctuations in past due and nonaccrual status loans can have a significant impact on the ALLL. To determine the potential impact, and corresponding estimated losses, we analyze our historical loss trends on loans past due greater than 30 days and nonaccrual status loans for indications of additional deterioration.


	Total Past Due and Nonaccrual Loans as of December 31
	2021			2020			2019			2018			2017
Commercial	$	561		$	2,148		$	2,477		$	2,722		$	2,518
Agricultural	987			3,786			4,285			5,377			2,367
Residential real estate	2,287			3,580			4,572			3,208			4,881
Consumer	196			96			71			105			70
Total	$	4,031		$	9,610		$	11,405		$	11,412		$	9,836
Total past due and nonaccrual loans to gross loans	0.31		%	0.78		%	0.96		%	1.01		%	0.90		%

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

A summary of loans past due and in nonaccrual status, including the composition of the ending balance of nonaccrual status loans by type, is included in “Note 4 – Loans and ALLL” of “Notes to Consolidated Financial Statements” in Item 8. Financial Statements and Supplementary Data.

Troubled Debt Restructurings

We have taken a proactive approach to modifying loans to assist borrowers who are willing to work with us, thus making them less likely to default, and to avoid foreclosure. This approach has permitted certain borrowers to develop a payment structure that will allow them to continue making payments in lieu of foreclosure. Modifications have been successful for us and our customers as very few of the modified loans have resulted in foreclosures. The majority of new modifications result in terms that satisfy our criteria for continued interest accrual. TDRs that have been placed in nonaccrual status may be placed back on accrual status after six months of continued performance and achievement of current payment status.

We restructure debt with borrowers who due to financial difficulties are unable to service their debt under the original terms. We may extend the amortization period, reduce interest rates, allow temporary interest-only payment structures, forgive principal, forgive interest, or grant a combination of these modifications. Typically, the modifications are for a period of three years or less. There were no TDRs that were government sponsored as of December 31, 2021 or December 31, 2020.

Losses associated with TDRs, if any, are included in the estimation of the ALLL during the quarter in which a loan is identified as a TDR, and we review the analysis of the ALLL estimation each reporting period thereafter to ensure its continued appropriateness.

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The following table provides a roll-forward of TDRs for the years ended December 31, 2020 and 2021:


	Accruing Interest			Nonaccrual			Total
	Number of Loans	Balance		Number of Loans	Balance		Number of Loans	Balance
January 1, 2020	122	$	21,194	9	$	3,543	131	$	24,737
New modifications	15	7,909		3	645		18	8,554
Principal advances (payments)	—	(1,690)		—	(148)		—	(1,838)
Loans paid off	(30)	(5,317)		(2)	(850)		(32)	(6,167)
Transfers to OREO	—	—		(2)	(356)		(2)	(356)
Transfers to accrual status	1	104		(1)	(104)		—	—
December 31, 2020	108	22,200		7	2,730		115	24,930
New modifications	11	8,473		—	—		11	8,473
Principal advances (payments)	—	(1,697)		—	(242)		—	(1,939)
Loans paid off	(22)	(5,739)		—	—		(22)	(5,739)
Transfers to accrual status	3	2,127		(3)	(2,127)		—	—
Transfers to nonaccrual status	(2)	(88)		2	88		—	—
December 31, 2021	98	$	25,276	6	$	449	104	$	25,725

The following table summarizes our TDRs as of December 31:


	2021						2020						2019
	Accruing Interest		Nonaccrual		Total		Accruing Interest		Nonaccrual		Total		Accruing Interest		Nonaccrual		Total
Current	$	25,236	$	294	$	25,530	$	22,017	$	2,421	$	24,438	$	20,847	$	507	$	21,354
Past due 30-59 days	40		85		125		183		—		183		346		—		346
Past due 60-89 days	—		—		—		—		—		—		1		—		1
Past due 90 days or more	—		70		70		—		309		309		—		3,036		3,036
Total	$	25,276	$	449	$	25,725	$	22,200	$	2,730	$	24,930	$	21,194	$	3,543	$	24,737


	2018						2017
	Accruing Interest		Nonaccrual		Total		Accruing Interest		Nonaccrual		Total
Current	$	21,794	$	2,673	$	24,467	$	21,234	$	—	$	21,234
Past due 30-59 days	899		—		899		1,778		805		2,583
Past due 60-89 days	707		—		707		219		708		927
Past due 90 days or more	—		878		878		53		1,400		1,453
Total	$	23,400	$	3,551	$	26,951	$	23,284	$	2,913	$	26,197

Additional disclosures about TDRs are included in “Note 4 – Loans and ALLL” of “Notes to Consolidated Financial Statements” in Item 8. Financial Statements and Supplementary Data.

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Impaired Loans

The following is a summary of information pertaining to impaired loans as of December 31:


	2021						2020
	Recorded Balance		Unpaid Principal Balance		Valuation Allowance		Recorded Balance		Unpaid Principal Balance		Valuation Allowance
TDRs
Commercial real estate	$	5,707	$	5,961	$	9	$	4,915	$	5,169	$	79
Commercial other	3,246		3,246		4		3,567		3,567		5
Agricultural real estate	9,182		9,181		—		9,667		9,667		54
Agricultural other	4,543		4,543		—		2,903		2,903		2
Residential real estate senior liens	3,047		3,203		504		3,878		4,073		692
Total TDRs	25,725		26,134		517		24,930		25,379		832
Other impaired loans
Commercial real estate	314		377		—		139		201		—
Commercial other	—		—		—		1,200		1,200		—
Agricultural real estate	356		357		—		1,008		1,058		—
Agricultural other	108		108		—		218		218		—
Residential real estate senior liens	370		485		61		441		588		79
Home equity lines of credit	37		37		—		—		—		—
Total other impaired loans	1,185		1,364		61		3,006		3,265		79
Total impaired loans	$	26,910	$	27,498	$	578	$	27,936	$	28,644	$	911

We continue to devote considerable attention to identifying impaired loans and adjusting the net carrying value of these loans to their current net realizable values through the establishment of a specific reserve or the recording of a charge-off.

Additional disclosures related to impaired loans are included in “Note 4 – Loans and ALLL” of “Notes to Consolidated Financial Statements” in Item 8. Financial Statements and Supplementary Data.

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Nonperforming Assets

The following table summarizes our nonperforming assets as of December 31:


	2021			2020			2019			2018			2017
Nonaccrual status loans	$	1,245		$	5,313		$	6,535		$	7,260		$	3,027
Accruing loans past due 90 days or more	97			—			—			113			395
Total nonperforming loans	1,342			5,313			6,535			7,373			3,422
Foreclosed assets	211			527			456			355			291
Debt securities	131			230			230			230			230
Total nonperforming assets	$	1,684		$	6,070		$	7,221		$	7,958		$	3,943
Nonperforming loans as a % of total loans	0.10		%	0.43		%	0.55		%	0.65		%	0.31		%
Nonperforming assets as a % of total assets	0.08		%	0.31		%	0.40		%	0.42		%	0.20		%

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. Loans may be placed back on accrual status after six months of continued performance and achievement of current payment status. While the level of nonperforming loans has fluctuated in recent periods, it remains low in comparison to peer banks.

The following table summarizes nonaccrual loans as of December 31:


	2021			2020			2019			2018			2017
Commercial	$	341		$	1,329		$	1,621		$	1,757		$	729
Agricultural	774			3,785			4,285			4,949			1,950
Residential real estate	130			199			629			554			348
Total	$	1,245		$	5,313		$	6,535		$	7,260		$	3,027
Nonaccrual loans as a % of loans at end of period	0.10		%	0.43		%	0.55		%	0.64		%	0.28		%

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


	2021		2020		2019		2018		2017
Commercial	$	139	$	129	$	390	$	160	$	729
Agricultural	310		2,559		3,048		3,391		1,950
Residential real estate	—		42		105		—		234
Total	$	449	$	2,730	$	3,543	$	3,551	$	2,913

Additional disclosures about nonaccrual status loans are included in “Note 4 – Loans and ALLL”of “Notes to Consolidated Financial Statements” in Item 8. Financial Statements and Supplementary Data.

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Noninterest Income and Noninterest Expenses

Significant noninterest income balances are highlighted in the following table for the years ended December 31:


					Change						Change
	2021		2020		$		%		2019		$		%
Service charges and fees
ATM and debit card fees	$	4,600	$	3,723	$	877	23.56	%	$	3,239	$	484	14.94	%
Service charges and fees on deposit accounts	2,139		1,847		292		15.81	%	2,328		(481)		(20.66)	%
Freddie Mac servicing fee	747		625		122		19.52	%	626		(1)		(0.16)	%
Net OMSR income (loss)	(184)		44		(228)		(518.18)	%	(170)		214		N/M
Other fees for customer services	312		305		7		2.30	%	324		(19)		(5.86)	%
Total service charges and fees	7,614		6,544		1,070		16.35	%	6,347		197		3.10	%
Wealth management fees	3,071		2,578		493		19.12	%	2,792		(214)		(7.66)	%
Net gain on sale of mortgage loans	1,694		2,716		(1,022)		(37.63)	%	650		2,066		317.85	%
Earnings on corporate owned life insurance policies	800		755		45		5.96	%	764		(9)		(1.18)	%
Gains from redemption of corporate owned life insurance policies	271		891		(620)		(69.58)	%	—		891		N/M
Net income (loss) on joint venture investment	—		577		(577)		(100.00)		(3,108)		3,685		N/M
Other	372		362		10		2.76	%	594		(232)		(39.06)	%
Total noninterest income	$	13,822	$	14,423	$	(601)	(4.17)	%	$	8,039	$	6,384	79.41	%

ATM and debit card fees fluctuate from period to period based primarily on their usage. While we do not anticipate significant changes to our ATM and debit card fee structure, we do expect that fee income will continue to increase in 2022 as the usage of ATM and debit cards continues to increase.

Service charges and fees on deposit accounts declined in 2020 as a result of waived fees. In response to the COVID-19 pandemic, which led to an increase in the need for electronic services and products, we elected to remove select deposit account related charges and fees and temporarily waived some charges and fees to ease the financial stress of our customers. Despite some fees being removed or waived, fee income increased during 2021, but did not reach pre-pandemic levels. As such, we expect service charges and fees in 2022 to approximate pre-pandemic levels.

OMSR income results are driven, in part, by changes in offering rates on residential mortgage loans, anticipated prepayments in the servicing-retained portfolio, and the volume of loans within the servicing-retained portfolio. Increased prepayment speeds, as a result of a decline in interest rates during the first quarter of 2020, were the primary driver of the losses recognized during most of 2020. During 2021, the volume of loans serviced decreased, which decreases the value of the servicing rights, and the increased prepayment speeds continued. Both of these factors have contributed to the recognition of a loss during 2021. OMSR income during 2022 may continue to experience fluctuations and could vary from 2021 levels.

The increase in wealth management fees in 2021 was driven by a combination of the growth in the stock market and increased new business activity. During the first quarter of 2020, a decline in the stock market resulted in a decrease in the value of investment assets under management. Wealth management fees in 2022 are expected to continue to increase as a result of new business activity.

Net gain on sale of mortgage loans fluctuates as the result of changes in the amount of loans sold, loan pricing and interest rates. The amount of loans sold is driven by customer demand and balance sheet management strategies. We experienced a significant increase in loan demand during most of 2020 and into 2021 which led to an increase in the number and dollar amount of loans sold. As such, net gain on sale of mortgage loans increased significantly. In mid-2021, we decided to retain more loan originations on the balance sheet, thereby decreasing the number of mortgage loans sold, which had an impact on the net gain on loans sold in 2021. As demand is expected to decline slightly in 2022, net gain on sale of mortgage loans is not expected to exceed 2021 levels.

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

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We sold our membership interest in our joint venture investment in Corporate Settlement Solutions, LLC (“CSS”) during the fourth quarter of 2020, which resulted in a $394 reduction in income. As a result of a valuation during the fourth quarter of 2019, CSS recognized a $7,133 impairment related to intangible assets as of December 31, 2019. Since we accounted for our investment in CSS under the equity method of accounting, and were a 50% owner of CSS, we reduced our investment in CSS by $3,566 during the fourth quarter of 2019.

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

Significant noninterest expense balances are highlighted in the following table for the years ended December 31:


					Change						Change
	2021		2020		$		%		2019		$		%
Compensation and benefits	$	23,749	$	23,772	$	(23)	(0.10)	%	$	23,205	$	567	2.44	%
Furniture and equipment	5,462		5,787		(325)		(5.62)	%	5,866		(79)		(1.35)	%
Occupancy	3,661		3,557		104		2.92	%	3,418		139		4.07	%
Losses on extinguishment of debt	—		7,643		(7,643)		(100.00)	%	—		7,643		N/M
Other
Audit, consulting, and legal fees	2,066		1,836		230		12.53	%	1,884		(48)		(2.55)	%
ATM and debit card fees	1,810		1,441		369		25.61	%	1,210		231		19.09	%
Marketing costs	939		877		62		7.07	%	762		115		15.09	%
Memberships and subscriptions	877		740		137		18.51	%	700		40		5.71	%
Loan underwriting fees	849		825		24		2.91	%	905		(80)		(8.84)	%
Donations and community relations	705		723		(18)		(2.49)	%	1,026		(303)		(29.53)	%
Director fees	703		695		8		1.15	%	788		(93)		(11.80)	%
FDIC insurance premiums	690		612		78		12.75	%	211		401		190.05	%
All other	2,183		2,725		(542)		(19.89)	%	3,075		(350)		(11.38)	%
Total other	10,822		10,474		348		3.32	%	10,561		(87)		(0.82)	%
Total noninterest expenses	$	43,694	$	51,233	$	(7,539)	(14.72)	%	$	43,050	$	8,183	19.01	%

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

We have experienced an increase in the usage of ATM and debit cards which has resulted in increased income and also increased ATM and debit card expenses. Based on the anticipated continuation of increased ATM and debit card usage, we expect expenses to continue to increase in 2022.

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

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

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Analysis of Changes in Financial Condition

The following table shows the composition and changes in our balance sheet as of December 31:


					Change
	2021		2020		$		%
ASSETS
Cash and cash equivalents	$	105,330	$	246,640	$	(141,310)	(57.29)	%
AFS securities
Amortized cost of AFS securities	485,710		325,966		159,744		49.01	%
Unrealized gains (losses) on AFS securities	4,891		13,262		(8,371)		(63.12)	%
AFS securities	490,601		339,228		151,373		44.62	%
Mortgage loans AFS	1,735		2,741		(1,006)		(36.70)	%
Loans
Gross loans	1,301,037		1,238,311		62,726		5.07	%
Less allowance for loan and lease losses	9,103		9,744		(641)		(6.58)	%
Net loans	1,291,934		1,228,567		63,367		5.16	%
Premises and equipment	24,419		25,140		(721)		(2.87)	%
Corporate owned life insurance policies	32,472		28,292		4,180		14.77	%
Equity securities without readily determinable fair values	17,383		17,383		—		—	%
Goodwill and other intangible assets	48,302		48,331		(29)		(0.06)	%
Accrued interest receivable and other assets	19,982		21,056		(1,074)		(5.10)	%
TOTAL ASSETS	$	2,032,158	$	1,957,378	$	74,780	3.82	%
LIABILITIES AND SHAREHOLDERS’ EQUITY
Liabilities
Deposits	$	1,710,339	$	1,566,317	$	144,022	9.19	%
Borrowed funds	99,320		158,747		(59,427)		(37.44)	%
Accrued interest payable and other liabilities	11,451		13,726		(2,275)		(16.57)	%
Total liabilities	1,821,110		1,738,790		82,320		4.73	%
Shareholders’ equity	211,048		218,588		(7,540)		(3.45)	%
TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY	$	2,032,158	$	1,957,378	$	74,780	3.82	%

A discussion of changes in balance sheet amounts by major categories follows:

Cash and cash equivalents

Included in cash and cash equivalents are funds held with the FRB which fluctuate from period to period. Cash levels decreased significantly during 2021 as a result of loan growth and payments for maturing long-term borrowings and other short-term liabilities. During 2021, excess funds from deposit growth were used to purchase AFS securities.

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AFS securities

The primary objective of our investing activities is to provide for safety of the principal invested. Secondary considerations include providing earnings and liquidity while managing our overall exposure to changes in interest rates. Over the last two years, the flat yield curve encouraged the use of excess funds to reduce higher-cost borrowings as opposed to investing in AFS securities. However, based on balance sheet strategies, excess funds above what is required to retire higher-cost funding sources may prudently be deployed to purchase of AFS securities in future periods.

The following is a schedule of the carrying value of AFS securities as of December 31:


	2021		2020		2019
U.S. Treasury	$	209,703	$	—	$	—
States and political subdivisions	121,205		143,656		169,752
Auction rate money market preferred	3,242		3,237		3,119
Mortgage-backed securities	56,148		88,652		140,204
Collateralized mortgage obligations	92,301		101,983		116,764
Corporate	8,002		1,700		—
Total	$	490,601	$	339,228	$	429,839

Excluding those holdings in government sponsored enterprises and municipalities within the State of Michigan, there were no investments in securities of any one issuer that exceeded 10% of shareholders’ equity during 2021, 2020, and 2019. We have a policy prohibiting investments in securities that we deem unsuitable due to their inherent credit or market risks. Prohibited investments include stripped mortgage-backed securities, zero coupon bonds, nongovernment agency asset-backed securities, and structured notes. Our holdings in mortgage-backed securities and collateralized mortgage obligations include only government agencies and government sponsored agencies as we hold no investments in private label mortgage-backed securities or collateralized mortgage obligations.

The following is a schedule of maturities of AFS securities and their weighted average yields as of December 31, 2021. Weighted average yields have been computed on an FTE basis using a tax rate of 21%. Our auction rate money market preferred investments are long-term floating rate instruments. The issuers of auction rate securities generally have the right to redeem or refinance the debt. Because of their lack of contractual maturities, auction rate money market preferred stocks are not reported by a specific maturity group. Mortgage-backed securities and collateralized mortgage obligations are not reported by a specific maturity group due to their variable monthly payments. Expected maturities may differ from contractual maturities because issuers may have the right to call or prepay obligations.


	Maturing
	Within One Year			After One Year But Within Five Years			After Five Years But Within Ten Years			After Ten Years			Securities with Variable Monthly Payments or Noncontractual Maturities
	Amount		Yield (%)	Amount		Yield (%)	Amount		Yield (%)	Amount		Yield (%)	Amount		Yield (%)
U.S. Treasury	$	—	—	$	200,030	—	$	9,673	—	$	—	—	$	—	—
States and political subdivisions	16,039		2.92	56,302		2.89	20,095		3.22	28,769		3.34	—		—
Mortgage-backed securities	—		—	—		—	—		—	—		—	56,148		2.19
Collateralized mortgage obligations	—		—	—		—	—		—	—		—	92,301		2.03
Auction rate money market preferred	—		—	—		—	—		—	—		—	3,242		6.27
Corporate	—		—	—		—	8,002		3.77	—		—	—		—
Total	$	16,039	2.92	$	256,332	0.63	$	37,770	2.51	$	28,769	3.34	$	151,691	2.18

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Loans

Loans are the largest component of earning assets. The proper management of credit and market risk inherent in the loan portfolio is critical to our financial stability. To control these risks, we have adopted strict underwriting standards, lending limits to a single borrower, loan to collateral value limits, and a defined market area. We also monitor and limit loan concentrations to specific industries. We have no foreign loans and there were no concentrations greater than 10% of total loans that are not disclosed as a separate category in the following table.

The following table presents the composition of the loan portfolio for the years ended December 31:


	2021		2020		2019		2018		2017
Commercial	$	807,439	$	756,686	$	700,941	$	659,529	$	634,759
Agricultural	93,955		100,461		116,920		127,161		128,269
Residential real estate	326,361		307,543		298,569		275,343		272,368
Consumer	73,282		73,621		70,140		66,674		56,123
Total	$	1,301,037	$	1,238,311	$	1,186,570	$	1,128,707	$	1,091,519

The following table presents the change in the loan portfolio categories for the years ended December 31:


	2021				2020				2019
	$ Change		% Change		$ Change		% Change		$ Change		% Change
Commercial	$	50,753	6.71	%	$	55,745	7.95	%	$	41,412	6.28	%
Agricultural	(6,506)		(6.48)	%	(16,459)		(14.08)	%	(10,241)		(8.05)	%
Residential real estate	18,818		6.12	%	8,974		3.01	%	23,226		8.44	%
Consumer	(339)		(0.46)	%	3,481		4.96	%	3,466		5.20	%
Total	$	62,726	5.07	%	$	51,741	4.36	%	$	57,863	5.13	%

Loan demand has been negatively impacted by competition for new commercial loan opportunities while some customers hesitated to borrow due to the pandemic. While we've recently experienced an increase in commercial loan demand, advances to mortgage brokers, within the commercial loan portfolio, was the primary driver behind the growth during 2021. While we anticipate a decline in advances to mortgage brokers in 2022, we expect the commercial loan portfolio to increase with increased demand. Agricultural loans have declined over the last year due to the competitive lending environment. We expect the competitive environment for agricultural loans to remain strong. Residential mortgage lending activities have increased since mid-2020 as interest rates declined. Growth is expected to continue in both the residential mortgage and consumer loan portfolios during 2022.

Other assets

Other assets consist primarily of prepaid expenses, OMSR, and net deferred tax assets. For more information related to estimates and deferred taxes, refer to “Note 1 – Nature of Operations and Summary of Significant Accounting Policies” and “Note 15 – Federal Income Taxes” of “Notes to Consolidated Financial Statements” in Item 8. Financial Statements and Supplementary Data.

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Deposits

Deposits are our primary source of funding. The following table presents the composition of the deposit portfolio as of December 31:


	2021		2020		2019
Noninterest bearing demand deposits	$	448,352	$	375,395	$	249,152
Interest bearing demand deposits	364,563		302,444		229,865
Savings deposits	596,662		505,497		427,215
Certificates of deposit	297,696		358,165		365,049
Brokered certificates of deposit	—		14,029		27,458
Internet certificates of deposit	3,066		10,787		15,112
Total	$	1,710,339	$	1,566,317	$	1,313,851

The following table presents the change in the deposit categories for the years ended December 31:


	2021				2020
	$ Change		% Change		$ Change		% Change
Noninterest bearing demand deposits	$	72,957	19.43	%	$	126,243	50.67	%
Interest bearing demand deposits	62,119		20.54	%	72,579		31.57	%
Savings deposits	91,165		18.03	%	78,282		18.32	%
Certificates of deposit	(60,469)		(16.88)	%	(6,884)		(1.89)	%
Brokered certificates of deposit	(14,029)		(100.00)	%	(13,429)		(48.91)	%
Internet certificates of deposit	(7,721)		(71.58)	%	(4,325)		(28.62)	%
Total	$	144,022	9.19	%	$	252,466	19.22	%

Total deposits have increased over the past 12 months with significant growth in non-contractual deposits, such as demand and savings deposits. This trend is anticipated to continue into 2022 as the financial markets continue to exhibit signs of instability. We experienced a decline in certificates of deposit over the past year as a result of the low interest rate environment with customers moving their funds into demand and savings accounts. During 2020, we used excess funds to reduce higher-cost deposits, such as brokered certificates of deposit. This trend continued in 2021 as we paid off the remaining balance of brokered deposits as they matured.

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


	2021		2020		2019		2018		2017
Uninsured deposits	$	548,213	$	461,859	$	336,399	$	292,017	$	279,037

Uninsured deposits are the portion of deposit accounts in U.S. offices that exceed the FDIC insurance limits. The balance provided above are estimates and reflect the methodologies and assumptions used for regulatory reporting of uninsured deposits. The remaining maturity of estimated uninsured certificates of deposit, by account, as of December 31, 2021 is presented in the table below. Estimated uninsured certificates of deposit is based on individual accounts and does not reflect uninsured balances by account owner.


Maturity
Within 3 months	$	14,324
Within 3 to 6 months	2,464
Within 6 to 12 months	12,900
Over 12 months	11,645
Total	$	41,333

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Borrowed Funds

Borrowed funds include FHLB advances, securities sold under agreements to repurchase, subordinated debt, and federal funds purchased. The balance of borrowed funds fluctuates from period to period based on our funding needs that arise from changes in loans, investments, and deposits. To provide balance sheet growth, we may utilize borrowings and brokered deposits to fund earning assets.

The following table presents borrowed funds balances for the years ended December 31:


	2021		2020		2019
Securities sold under agreements to repurchase without stated maturity dates	$	50,162	$	68,747	$	30,999
FHLB advances	20,000		90,000		245,000
Subordinated debt, net of unamortized issuance costs	29,158		—		—
Total	$	99,320	$	158,747	$	275,999

During the fourth quarter of 2020, we elected to extinguish $100,000 of FHLB advances based on our level of cash reserves and strategic initiatives. Due to a significant increase in one account during the fourth quarter of 2020, our level of securities sold under agreements to repurchase increased as of December 31, 2020. This increase was short-term and balances declined during 2021. On June 2, 2021, we completed a private placement of $30,000 in aggregate principal amount of 3.25% Fixed-to-Floating Rate Subordinated Notes due 2031 (the "Notes"). The Notes 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. For additional disclosure related to borrowed funds, see “Note 8 – Borrowed Funds” of “Notes to Consolidated Financial Statements” in Item 8. Financial Statements and Supplementary Data.

Accrued interest payable and other liabilities

Included in accrued interest payable and other liabilities are obligations related to our defined benefit pension plan and other employee benefits. For more information on the defined benefit pension plan and other employee benefits, see “Note 12 – Benefit Plans” of “Notes to Consolidated Financial Statements” in Item 8. Financial Statements and Supplementary Data.

Contractual Obligations and Loan Commitments

We have various financial obligations, including contractual obligations and commitments related to deposits and borrowings, which may require future cash payments. We also have loan related commitments that may impact liquidity. The commitments include unused lines of credit, commercial and standby letters of credit, and commitments to grant loans. These commitments to grant loans include residential mortgage loans with the majority committed to be sold to the secondary market. Many of these commitments historically have expired without being drawn upon and do not necessarily indicate our future cash requirements.

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

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Capital

Capital consists solely of common stock, retained earnings, and accumulated other comprehensive income (loss). We are authorized to raise capital through dividend reinvestment, employee and director stock purchases, and shareholder stock purchases. Pursuant to these authorizations, we issued 67,436 shares or $1,593 of common stock during 2021, and 231,393 shares or $4,185 of common stock in 2020. We offer the Directors Plan in which participants purchase stock units through deferred fees, in lieu of cash payments. Pursuant to this plan, we increased shareholders’ equity by $433 and $413 during 2021 and 2020, respectively. We also grant restricted stock awards pursuant to the RSP, effective June 24, 2020. Pursuant to this plan, we increased shareholders’ equity by $86 and $14 during 2021 and 2020.

We have publicly announced a common stock repurchase plan. Pursuant to this plan, we repurchased 135,465 shares or $3,050 of common stock during 2021 and 144,950 shares or $2,702 during 2020. As of December 31, 2021, we were authorized to repurchase up to an additional 467,491 shares of common stock.

The 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%. The minimum requirements presented below include the minimum required capital levels based on the Basel III Capital Rules. Capital requirements to be considered well capitalized are based upon prompt corrective action regulations, as amended to reflect the changes under the Basel III Capital Rules. The following table sets forth these requirements and our ratios as of December 31:


	2021						2020
	Actual		Minimum Required - BASEL III		Required to be Considered Well Capitalized		Actual		Minimum Required - BASEL III		Required to be Considered Well Capitalized
Common equity tier 1 capital	12.07	%	7.00	%	6.50	%	12.97	%	7.00	%	6.50	%
Tier 1 capital	12.07	%	8.50	%	8.00	%	12.97	%	8.50	%	8.00	%
Total capital	14.94	%	10.50	%	10.00	%	13.75	%	10.50	%	10.00	%
Tier 1 leverage	7.97	%	4.00	%	5.00	%	8.37	%	4.00	%	5.00	%

There are no significant regulatory constraints placed on our capital. At December 31, 2021, the Bank exceeded minimum capital requirements. For further information regarding the Bank’s capital requirements, see “Note 10 – Minimum Regulatory Capital Requirements” of “Notes to Consolidated Financial Statements” in Item 8. Financial Statements and Supplementary Data.

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Fair Value

We utilize fair value measurements to record fair value adjustments to certain assets and liabilities and to determine fair value disclosures. AFS securities, cash flow hedge derivative instruments and certain liabilities are recorded at fair value on a recurring basis. Additionally, from time to time, we may be required to record at fair value other assets on a nonrecurring basis, such as mortgage loans AFS, impaired loans, goodwill, foreclosed assets, OMSR, 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.

For further information regarding fair value measurements, see “Note 1 – Nature of Operations and Summary of Significant Accounting Policies” and “Note 17 – Fair Value” of “Notes to Consolidated Financial Statements” in Item 8. Financial Statements and Supplementary Data.

Liquidity

Liquidity is monitored regularly by our ALCO, which consists of members of senior management. The committee reviews projected cash flows, key ratios, and liquidity available from both primary and secondary sources.

Our primary sources of liquidity are cash and cash equivalents and unencumbered AFS securities. These categories totaled $495,259 or 24.37% of assets as of December 31, 2021 as compared to $444,051 or 22.69% as of December 31, 2020. The increase in both the amount and percentage of primary liquidity is a direct result of an increase in market deposits and a deliberate reduction in non-market funding which required collateralization. Liquidity is important for financial institutions because of their need to meet loan funding commitments, depositor withdrawal requests, and various other commitments including expansion of operations, investment opportunities, and payment of cash dividends. Based on these same factors, daily liquidity could vary significantly.

Deposit accounts are our primary source of funds. Our secondary sources include the ability to borrow from the FHLB, from the FRB, and through various correspondent banks in the form of federal funds purchased and a line of credit. These funding methods typically carry a higher interest rate than traditional market deposit accounts. In recent periods, we have elected to use excess funds to reduce borrowings and other higher-cost funding sources. Some borrowed funds, including FHLB advances, FRB Discount Window advances, and repurchase agreements, require us to pledge assets, typically in the form of AFS securities or loans, as collateral. As of December 31, 2021, we had available lines of credit of $298,662.

Our stress testing of liquidity increased during 2020 and continues to evolve due to economic uncertainly as a result of COVID-19. Our liquidity position remained strong at the end of 2021 which is illustrated in the following table:


	December 31 2021
Total cash and cash equivalents	$	105,330
Available lines of credit
Fed funds lines with correspondent banks	93,000
FHLB borrowings	192,260
FRB Discount Window	8,402
Other lines of credit	5,000
Total available lines of credit	298,662
Unencumbered lendable value of FRB collateral, estimated1	350,000
Total cash and liquidity	$	753,992

(1)Includes estimated unencumbered lendable value of FHLB collateral of $280,000

The following table summarizes our sources and uses of cash for the years ended December 31:


	2021		2020		$ Variance
Net cash provided by (used in) operating activities	$	25,501	$	21,997	$	3,504
Net cash provided by (used in) investing activities	(229,635)		45,133		(274,768)
Net cash provided by (used in) financing activities	62,824		118,938		(56,114)
Increase (decrease) in cash and cash equivalents	(141,310)		186,068		(327,378)
Cash and cash equivalents January 1	246,640		60,572		186,068
Cash and cash equivalents December 31	$	105,330	$	246,640	$	(141,310)

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Market Risk

Our primary market risks are interest rate risk and liquidity risk. IRR is the exposure of our net interest income to changes in interest rates. IRR results from the difference in the maturity or repricing frequency of a financial institution's interest earning assets and its interest bearing liabilities. Managing IRR is the fundamental method by which financial institutions earn income and create shareholder value. Excessive exposure to IRR could pose a significant risk to our earnings and capital.

The FRB has adopted a policy requiring banks to effectively manage the various risks that can have a material impact on safety and soundness. The risks include credit, interest rate, liquidity, operational, and reputational. We have policies, procedures, and internal controls for measuring and managing these risks. Specifically, our Funds Management policy and procedures include defining acceptable types and terms of investments and funding sources, liquidity requirements, limits on investments in long-term assets, limiting the mismatch in repricing opportunities of assets and liabilities, and the frequency of measuring and reporting to our Board of Directors.

The primary technique to measure IRR is simulation analysis. Simulation analysis forecasts the effects on the balance sheet structure and net interest income under a variety of scenarios that incorporate changes in interest rates, the shape of yield curves, interest rate relationships, loan prepayments, and funding sources. These forecasts are compared against net interest income projected in a stable interest rate environment. While many assets and liabilities reprice either at maturity or in accordance with their contractual terms, several balance sheet components demonstrate characteristics that require an evaluation to more accurately reflect their repricing behavior. Key assumptions in the simulation analysis include prepayments on loans, probable calls of investment securities, changes in market conditions, loan volumes and loan pricing, deposit sensitivity, and customer preferences. These assumptions are inherently uncertain as they are subject to fluctuation and revision in a dynamic rate environment. As a result, the simulation analysis cannot precisely forecast the impact of rising and falling interest rates on net interest income. Actual results will differ from simulated results due to many other factors, including changes in balance sheet components, interest rate changes, changes in market conditions, and management strategies. We regularly monitor our projected net interest income sensitivity to ensure that it remains within established limits.

Gap analysis, the secondary method to measure IRR, measures the cash flows and/or the earliest repricing of our interest bearing assets and liabilities. This analysis is useful for measuring trends in the repricing characteristics of the balance sheet. Significant assumptions are required in this process because of the embedded repricing options contained in assets and liabilities. Residential real estate and consumer loans allow the borrower to repay the balance prior to maturity without penalty, while commercial and agricultural loans may have prepayment penalties. The amount of prepayments is dependent upon many factors, including the interest rate of a given loan in comparison to the current offering rates, the level of home sales, and the overall availability of credit in the market place. Generally, a decrease in interest rates will result in an increase in cash flows from these assets. A significant portion of our securities are callable or have prepayment options. The call and prepayment options are more likely to be exercised in a period of decreasing interest rates. Savings and demand accounts may generally be withdrawn on request without prior notice. The timing of cash flows from these deposits is estimated based on historical experience. Certificates of deposit have penalties that discourage early withdrawals.

We do not believe there has been a material change in the nature or categories of our primary market risk exposure, or the particular markets that present the primary risk of loss. We do not know of or expect there to be any material change in the general nature of our primary market risk exposure in the near term, and we do not expect to make material changes to our market risk methods in the near term. We may change those methods in the future to adapt to changes in circumstances or to implement new techniques.

Gap analysis is also utilized as a method to measure interest rate sensitivity. Interest rate sensitivity is determined by the amount of earning assets and interest bearing liabilities repricing within a specific time period, and their relative sensitivity to a change in interest rates. We strive to achieve reasonable stability in the net interest margin through periods of changing interest rates. One specific focus of interest rate sensitivity is the loan portfolio, primarily with commercial and agricultural loans.

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The following table shows the maturity of loans outstanding at December 31, 2021 based on contractual terms. Also provided are the amounts classified according to the sensitivity to changes in interest rates.


	1 Year or Less		1 to 5 Years		5 to 15 Years		Over 15 Years		Total
Commercial	$	165,334	$	244,084	$	178,898	$	219,123	$	807,439
Agricultural	18,375		30,980		18,480		26,120		93,955
Residential real estate	17,690		25,799		125,653		157,219		326,361
Consumer	1,886		30,470		40,926		—		73,282
Total	$	203,285	$	331,333	$	363,957	$	402,462	$	1,301,037

Fixed interest rates
Commercial	$	112,268	$	190,942	$	70,918	$	10,072	$	384,200
Agricultural	8,720		21,019		4,377		850		34,966
Residential real estate	14,517		13,740		97,648		20,668		146,573
Consumer	1,545		30,246		40,884		—		72,675
Total	$	137,050	$	255,947	$	213,827	$	31,590	$	638,414

Variable interest rates
Commercial	$	53,066	$	53,142	$	107,980	$	209,051	$	423,239
Agricultural	9,655		9,961		14,103		25,270		58,989
Residential real estate	3,173		12,059		28,005		136,551		179,788
Consumer	341		224		42		—		607
Total	$	66,235	$	75,386	$	150,130	$	370,872	$	662,623

Our primary market risk exposures related to the COVID-19 pandemic remain uncertain. A review of our market risk methods are ongoing and modeling is incorporating additional assumptions to account for this uncertainty related to this crisis. Repricing, cash flows, and prepayment projections for loans and mortgage-backed securities are not expected to behave as they would be expected to in a more stable interest rate environment. The SBA PPP loan is a newer instrument and has payment characteristics that could create uncertainty in our assumptions. Customer deposit levels may experience unusual fluctuations due to government support programs, customer and business needs, and general money supply. We continue to closely monitor customer and economic indicators to develop more precise market risk assumptions as the economic impact of the crisis continues to reveal itself.

Item 7A. Quantitative and Qualitative Disclosures About Market Risk.

The information presented in the section captioned “Market Risk” in Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations is incorporated herein by reference.

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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.

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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.

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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

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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.

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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.

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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.

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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.

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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

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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.

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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.

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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.

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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.

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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.

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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.

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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.

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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.

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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.

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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.

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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.

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

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	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

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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.

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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.

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•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.

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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

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	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

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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

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	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).

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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.

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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

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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

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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

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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.

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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.

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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

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	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

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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).

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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.

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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.

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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.

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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

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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.

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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.

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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.

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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

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Note 17 – Fair Value


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.

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.

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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.

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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.

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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.

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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

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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

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Item 9. Changes in and Disagreements With Accountants on Accounting and Financial Disclosure.

None.

Item 9A. Controls and Procedures.

DISCLOSURE CONTROLS AND PROCEDURES

We carried out an evaluation, under the supervision and with the participation of the Principal Executive Officer and Principal Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures (as such term is defined in Rules 13a-15(e) and 15(d)-15(e) under the Exchange Act) as of December 31, 2021, pursuant to Exchange Act Rule 13a-15. Based upon that evaluation, the Principal Executive Officer and Principal Financial Officer concluded that our disclosure controls and procedures as of December 31, 2021, were effective to ensure that information required to be disclosed in reports that we file or submit under the Exchange Act are recorded, processed, summarized and reported within the time periods specified in SEC rules and forms.

CHANGES IN INTERNAL CONTROL OVER FINANCIAL REPORTING

We also conducted an evaluation of internal control over financial reporting to determine whether any changes occurred during the quarter ended December 31, 2021, that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting. Based on this evaluation, we have concluded that there have been no such changes during the quarter ended December 31, 2021.

Management’s Report on Internal Control Over Financial Reporting

We are responsible for the preparation and integrity of our published consolidated financial statements. The consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America and, accordingly, include amounts based on judgments and estimates. We also prepared the other information included in the Annual Report on Form 10-K and are responsible for the accuracy and consistency with the consolidated financial statements.

We are responsible for establishing and maintaining a system of internal control over financial reporting, which is intended to provide reasonable assurance to our management and Board of Directors regarding the reliability of our consolidated financial statements. The system includes but is not limited to:

•A documented organizational structure and division of responsibility;

•Established policies and procedures, including a code of conduct to foster a strong ethical climate which is communicated throughout our Corporation;

•Internal auditors that monitor the operation of the internal control system and report findings and recommendations to management and the Audit Committee;

•Procedures for taking action in response to an internal audit finding or recommendation;

•Regular reviews of our consolidated financial statements by qualified individuals; and

•The careful selection, training and development of our people.

There are inherent limitations in the effectiveness of any system of internal control, including the possibility of human error and the circumvention or overriding of controls. Also, the effectiveness of an internal control system may change over time. We have implemented a system of internal control that was 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.

We have assessed our internal control system in relation to criteria for effective internal control over financial reporting described in “Internal Control-Integrated Framework” issued by the Committee of Sponsoring Organizations (2013 framework) of the Treadway Commission.

Based upon these criteria, we believe that, as of December 31, 2021, our system of internal control over financial reporting was effective.

Our independent registered public accounting firm, Rehmann Robson LLC ("Rehmann"), has audited our 2021 consolidated financial statements and our internal control over financial reporting as of December 31, 2021. Rehmann was given unrestricted access to all financial records and related data, including minutes of all meetings of stockholders, the Board of Directors and committees of the Board of Directors. Rehmann has issued an unqualified audit opinion on our 2021

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consolidated financial statements and an unqualified opinion on the effectiveness of our internal controls as of December 31, 2021, as a result of the integrated audit.

Isabella Bank Corporation


By:
/s/ Jae A. Evans
Jae A. Evans
President and Chief Executive Officer
(Principal Executive Officer)
March 15, 2022

/s/ Neil M. McDonnell
Neil M. McDonnell
Chief Financial Officer
(Principal Financial Officer)
March 15, 2022

Item 9B. Other Information.

None.

Item 9C. Disclosure Regarding Foreign Jurisdictions that Prevent Inspections.

Not applicable.

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PART III

Item 10. Directors, Executive Officers and Corporate Governance.

For information concerning our directors and certain executive officers, see “Election of Directors” and “Delinquent Section 16(a) Reports” in our Proxy Statement for the Annual Meeting of Shareholders to be held May 3, 2022 (“Proxy Statement”) which is incorporated herein by reference.

For Information concerning our Audit Committee financial experts, see “Committees of the Board of Directors and Meeting Attendance” in the Proxy Statement which is incorporated herein by reference.

We have adopted a Code of Conduct and Business Ethics that applies to the principal executive officer, the principal financial officer and the principal accounting officer or controller of the Corporation. We shall provide to any person without charge upon request, a copy of our Code of Conduct and Business Ethics. Written requests should be sent to: Secretary, Isabella Bank Corporation, 401 North Main Street, Mount Pleasant, Michigan 48858.

Item 11. Executive Compensation.

For information concerning executive compensation, see “Executive Officers” and “Remuneration of Directors” in the Proxy Statement which is incorporated herein by reference.

Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters.

For information concerning the security ownership of certain owners and management, see “Security Ownership of Certain Beneficial Owners and Management” in the Proxy Statement which is incorporated herein by reference.

Equity Compensation Plan Information

The following table provides information as of December 31, 2021, with respect to compensation plans under which our common shares are authorized for issuance to directors, officers or employees in exchange for consideration in the form of goods or services.


Plan Category	Number of Securities to be Issued Upon Exercise of Outstanding Options, Warrants, and Rights (A)		Weighted Average Exercise Price of Outstanding Options, Warrants, and Rights (B)		Number of Securities Remaining Available for Future Issuance Under Equity Compensation Plans (Excluding Securities Reflected in Column (A)) (C)
Equity compensation plans approved by shareholders:
None	—		—		—
Equity compensation plans not approved by shareholders:
Deferred director compensation plan (1)	83,710	(3)	—	(5)	—	(6)
Restricted Stock Plan (2)	20,123	(4)	—	(5)	—	(6)
Total	103,833

(1) 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.

(2) The RSP is an equity-based bonus plan. Under the plan, we may award restricted stock bonuses to eligible employees on an annual basis that are not fully transferable. Currently, the eligible employees are Isabella 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%

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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. Awards are converted to shares upon payment to the participant based on the market value of our common stock on the date of award.

(3) As of December 31, 2021, the Directors Plan had 189,364 shares eligible to be distributed under the Directors Plan. The Rabbi Trust holds 105,654 shares for the benefit of participants pursuant to the Directors Plan. Accordingly, such shares are not included in the number of securities issuable in column (A).

(4) This amount includes shares subject to outstanding stock awards at the maximum amount of shares issuable under such awards. However, payout of incentive awards is contingent on the individual and the Corporation reaching certain levels of performance. If the performance criteria for these awards are not fully satisfied, the award recipient will receive less than the maximum number of shares eligible under these grants and may receive nothing from these grants. Additionally, this amount assumes the closing price of our common stock as of the award grant dates for purposes of the conversion from awards to common stock.

(5) The Directors Plan and the RSP do not have an exercise price.

(6) There is no maximum number of shares available for issuance under the Directors Plan and the RSP has a maximum number of 100,000 shares.

Item 13. Certain Relationships and Related Transactions, and Director Independence.

For information, see “Indebtedness of and Transactions with Management” and “Election of Directors” in the Proxy Statement, which is incorporated herein by reference.

Item 14. Principal Accountant Fees and Services.

For information concerning our principal accountant fees and services see “Fees for Professional Services Provided by Rehmann Robson LLC” and “Pre-approval Policies and Procedures” in our Proxy Statement which is incorporated herein by reference.

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PART IV

Item 15. Exhibits and Financial Statement Schedules.


(a)	(1)	Financial Statements: The following documents are filed as part of Item 8 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

	(2)	Financial Statement Schedules: All schedules are omitted because they are neither applicable nor required, or because the required information is included in the consolidated financial statements or related notes.

	(3)	See the exhibits listed below under Item 15(b):

(b)	The following exhibits required by Item 601 of Regulation S-K are filed as part of this report:

	3.1	Amended Articles of Incorporation (1)
	3.2	Amendment to the Articles of Incorporation (2)
	3.3	Amendment to the Articles of Incorporation (3)
	3.4	Amendment to the Articles of Incorporation (4)
	3.5	Amendment to the Articles of Incorporation (7)
	3.6	Amended Bylaws (5)
	3.7	Amendment to Bylaws (6)
	3.8	Amendment to Bylaws (9)
	3.9	Amendment to Bylaws (10)
	4.1	Indenture, dated as of June 2, 2021, by and between Isabella Bank Corporation and UMB Bank, National Association, as trustee (16)
	4.2	Form of 3.25% Fixed-to-Floating Rate Subordinated Note due 2031 (16)
	10.1	Isabella Bank Corporation and Related Companies Deferred Compensation Plan for Directors* (8)
	10.2	Isabella Bank Corporation Split Dollar Plan* (12)
	10.3	Isabella Bank Corporation Retirement Bonus Plan* (11)
	10.4	Isabella Bank Corporation Supplemental Executive Retirement Plan* (13)
	10.5	Amendment to the Isabella Bank Corporation Supplemental Executive Retirement Plan* (14)
	10.6	Isabella Bank Corporation Restricted Stock Plan* (15)
	10.7	Amendment to the Isabella Bank Corporation Restricted Stock Plan*
	10.8	Isabella Bank Corporation Executive Cash Incentive Plan* (15)
	10.9	Form of Subordinated Note Purchase Agreement, dated as of June 2, 2021, by and among the Corporation and the several Purchasers (16)
	10.1 0	Form of Registration Rights Agreement, dated as of June 2, 2021, by and among the Corporation and the several Purchasers (16)
	21	Subsidiaries of the Registrant
	23	Consent of Rehmann Robson LLC, Independent Registered Public Accounting Firm
	31.1	Certification pursuant to section 302 of the Sarbanes-Oxley Act of 2002 by the Chief Executive Officer
	31.2	Certification pursuant to section 302 of the Sarbanes-Oxley Act of 2002 by the Chief Financial Officer
	32	Section 1350 Certification of Chief Executive Officer and Chief Financial Officer

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						101.INS			XBRL Interactive Data File**
						101.SCH			XBRL Interactive Data File**
						101.CAL			XBRL Interactive Data File**
						101.LAB			XBRL Interactive Data File**
						101.PRE			XBRL Interactive Data File**
						101.DEF			XBRL Interactive Data File**
						104			Cover Page Interactive Data File


*						Management Contract or Compensatory Plan or Arrangement.
**						As provided by Rule 406T in Regulation S-T, this information is furnished and not filed for purposes of Sections 11 and 12 of the Securities Act of 1933 and Section 18 of the Exchange Act
(1)						Previously filed as an Exhibit to the Isabella Bank Corporation Form 10-K, filed March 12, 1991, and incorporated herein by reference
(2)						Previously filed as an Exhibit to the Isabella Bank Corporation Form 10-K, filed March 26, 1994, and incorporated herein by reference.
(3)						Previously filed as an Exhibit to Isabella Bank Corporation Form 10-K, filed March 22, 2000, and incorporated herein by reference.
(4)						Previously filed as an Exhibit to Isabella Bank Corporation Form 10-K, filed March 27, 2001, and incorporated herein by reference.
(5)						Previously filed as an Exhibit to Isabella Bank Corporation Form 10-K, filed March 16, 2005, and incorporated herein by reference.
(6)						Previously filed as an Exhibit to Isabella Bank Corporation Form 8-K, filed November 22, 2006, and incorporated herein by reference.
(7)						Previously filed as an Exhibit to Isabella Bank Corporation Form 8-K, filed May 16, 2008, and incorporated herein by reference.
(8)						Previously filed as an Exhibit to Isabella Bank Corporation Form 8-K, filed March 13, 2019, and incorporated herein by reference.
(9)						Previously filed as an Exhibit to Isabella Bank Corporation Form 8-K, filed August 28, 2009, and incorporated herein by reference.
(10)						Previously filed as an Exhibit to Isabella Bank Corporation Form 8-K, filed December 23, 2009, and incorporated herein by reference.
(11)						Previously filed as an Exhibit to Isabella Bank Corporation Form 8-K, filed December 19, 2008, and incorporated herein by reference.
(12)						Previously filed as an Exhibit to Isabella Bank Corporation Form 8-K, filed March 31, 2015, and incorporated herein by reference.
(13)						Previously filed as an Exhibit to Isabella Bank Corporation Form 8-K, filed April 27, 2015, and incorporated herein by reference.
(14)						Previously filed as an Exhibit to Isabella Bank Corporation Form 8-K, filed February 12, 2019, and incorporated herein by reference.
(15)						Previously filed as an Exhibit to Isabella Bank Corporation Form 8-K, filed June 26, 2020, and incorporated herein by reference.
(16)						Previously filed as an Exhibit to Isabella Bank Corporation Form 8-K, filed June 2, 2021, and incorporated herein by reference.

Item 16. Form 10-K Summary.

Not applicable.

Table of Contents

SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

ISABELLA BANK CORPORATION

(Registrant)

By:

/s/ Jae A. Evans

Date:

March 15, 2022

Jae A. Evans, President and Chief Executive Officer

(Principal Executive Officer)

Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.

Signatures

Capacity

Date

/s/ Dr. Jeffrey J. Barnes

Director

March 15, 2022

Dr. Jeffrey J. Barnes

/s/ Jill Bourland

Director

March 15, 2022

Jill Bourland

/s/ Jae A. Evans

President, Chief Executive Officer
(Principal Executive Officer), and Director

March 15, 2022

Jae A. Evans

/s/ Jennifer L. Gill

Controller

March 15, 2022

Jennifer L. Gill

/s/ Thomas L. Kleinhardt

Director

March 15, 2022

Thomas L. Kleinhardt

/s/ Neil M. McDonnell

Chief Financial Officer (Principal Financial Officer)

March 15, 2022

Neil M. McDonnell

/s/ Richard L. McGuirk

Director

March 15, 2022

Richard L. McGuirk

/s/ Sarah R. Opperman

Director

March 15, 2022

Sarah R. Opperman

/s/ Chad R. Payton

Director

March 15, 2022

Chad R. Payton

/s/ Vicki L. Rupp

Director

March 15, 2022

Vicki L. Rupp

/s/ Jerome Schwind

Isabella Bank President and Director

March 15, 2022

Jerome Schwind

/s/ Gregory V. Varner

Director

March 15, 2022

Gregory V. Varner