EDGAR 10-K Filing

Company CIK: 842517
Filing Year: 2023
Filename: 842517_10-K_2023_0000842517-23-000055.json

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ITEM 1. BUSINESS
Item 1. Business.
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 29 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, 2022, we had 347 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.
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 2022 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
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.

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ITEM 1A. RISK FACTORS
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 since early 2020 as the result of COVID-19. The World Health Organization 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 remain uncertain and cannot be predicted. 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 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. 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 respond to those actions 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.
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.

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ITEM 1B. UNRESOLVED STAFF COMMENTS
Item 1B. Unresolved Staff Comments.
None.

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ITEM 2. PROPERTIES
Item 2. Properties.
Our executive offices are located at 401 North Main Street in Mount Pleasant, Michigan. In addition to this location, we own 28 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.

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ITEM 3. LEGAL PROCEEDINGS
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.

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ITEM 4. MINE SAFETY DISCLOSURE
Item 4. Mine Safety Disclosures.
Not applicable.
PART II

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ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY
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 7,559,421 shares are issued and outstanding as of December 31, 2022. As of that date, there were 2,739 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
First Quarter 62,813 $ 24.50 $ 26.00
Second Quarter 68,013 23.00 26.25
Third Quarter 80,927 21.39 24.95
Fourth Quarter 118,260 21.00 24.02
330,013
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
The following table sets forth the cash dividends paid for the quarters indicated:
Per Share
2022 2021
First Quarter $ 0.27 $ 0.27
Second Quarter 0.27 0.27
Third Quarter 0.27 0.27
Fourth Quarter 0.28 0.27
Total $ 1.09 $ 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.
The following table provides information for the unaudited three-month period ended December 31, 2022, 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 30 443,649
October 1 - 31 6,503 $ 21.37 6,503 437,146
November 1 - 30 14,173 23.00 14,173 422,973
December 1 - 31 3,147 23.20 3,147 419,826
Balance, December 31 23,823 $ 22.58 23,823 419,826
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.

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ITEM 6. SELECTED FINANCIAL DATA
Item 6. [Reserved]

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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS
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 $22,238 and earnings per common share of $2.95 for the year ended December 31, 2022. Net income and earnings per common share for the same period of 2021 were $19,499 and $2.48, respectively. Net interest income increased $7,780, or 14.76%, during 2022 compared to 2021. While PPP loan fees declined, rising interest rates and growth in core loans and AFS securities led to a $5,685 or 9.46% increase in gross interest income during 2022 compared to 2021. We continued to benefit from the significant reduction in higher-cost borrowings as interest expense on deposits and borrowings decreased $2,095, or 28.26%, for the year ended December 31, 2022 when compared to the same period in 2021.
The provision for loan losses during the year ended December 31, 2022 was $483, compared to a net provision reversal of $518 for the same period in 2021. During 2020, increased economic and environmental risk factors, predominantly driven by COVID-19, drove a significant increase in the ALLL and provision expense. Strong credit quality, coupled with improvement in economic factors, such as unemployment rates, resulted in a reduction in the ALLL and a provision reversal during the first quarter of 2021. Credit quality remained strong at December 31, 2022, as evidenced by total past due and nonaccrual loans which were $11,130, or 0.88%, of gross loans. Despite strong credit quality, the ALLL and provision for loan losses increased during 2022 as a result of core loan growth and economic related risk factors.
Noninterest income decreased $156 during 2022 compared to the same period in 2021. Gain on sale of mortgages decreased $1,063, as residential mortgage originations sold in the secondary market declined. Offsetting this was an increase in service charges and fees of $1,116, with $619 of the increase attributed to OMSR income. Noninterest expenses increased $3,126 in 2022 when compared to the same period in 2021 and was primarily a result of increased compensation, other losses, donations and community relations related expenses.
As of December 31, 2022, total assets and assets under management were $2,030,267 and $2,808,391, respectively. Assets under management include loans sold and serviced of $264,206 and investment and trust assets managed by Isabella Wealth of $513,918, in addition to assets on our consolidated balance sheet. Loans outstanding as of December 31, 2022 totaled $1,264,173. During 2022, gross loans declined $36,864 which was largely the result of a $72,001 reduction in advances to mortgage brokers, which is included within the commercial loan portfolio; however, is not considered a component of our core lending business. During 2022, core loan growth totaled $35,137 and was driven by growth in all loan categories. Total deposits were $1,744,275 as of December 31, 2022, which was an increase of $33,936 since December 31, 2021. A majority of this growth was in the form of demand deposits. All regulatory capital ratios for the Bank exceeded the minimum thresholds to be considered a "well capitalized" institution.
Our securities portfolio increased $89,880 since December 31, 2021, predominantly due to $210,869 in purchases, although offset by maturities and an increase in net unrealized losses. The unrealized loss on our AFS securities portfolio resulted from the recent increases in short-term and intermediate-term benchmark interest rates. As a result, this change in unrealized losses has reduced our balance of shareholders' equity and negatively impacted our tangible book value. Management does not anticipate the need to sell securities and incur a loss as a result of the sale.
Our net yield on interest earning assets (FTE) was 3.18% for 2022 which increased from 2.87% in 2021. The marked improvement is a result of strategies management began implementing in 2019 and 2020, focused on positioning the Bank to benefit in a rising interest rate environment, including a reduced reliance on higher-cost borrowed funds and brokered deposits.
Recent Events and Legislation
Impact of COVID-19: Unexpected and unprecedented changes have occurred since early 2020 as the result of COVID-19. The full impact of the pandemic, including the uncertainties surrounding the pandemic, remain in 2022. However, significant progress has been made with vaccinations and medical treatments. Additionally, improved safety guidelines and the easing of restrictions have occurred since the onset of the pandemic. We expect the significance of the pandemic, including the extent of its effect on our financial and operational results, to be dictated by continued developments related to the COVID-19 pandemic. 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.
Reclassifications
Certain amounts reported in management's discussion and analysis of financial condition and results of operations for 2021 and 2020 have been reclassified to conform with the 2022 presentation.
Subsequent Events
In June 2016, the FASB issued ASU 2016-13 and updated the measurement for credit losses for AFS debt securities and assets measured at amortized cost, which include loans and any other financial assets with the contractual right to receive cash. The new approach requires the use of an expected credit loss model. The new CECL guidance was effective January 1, 2023 and we have fully adopted the new guidance as of that date.
Based on portfolio characteristics and economic conditions and expectations as of January 1, 2023, we recorded a combined increase to the ACL and reserve for unfunded commitments on January 1, 2023 of approximately $3,000 upon the adoption of ASU 2016-13.
We evaluated subsequent events after December 31, 2022 through the date our condensed consolidated financial statements were issued for potential recognition and disclosure. Outside of the adoption of CECL, no other subsequent events require financial statement recognition or disclosure between December 31, 2022 and the date our condensed consolidated financial statements were issued.
Other
We have not received, nor are aware of, any notices of regulatory actions as of March 6, 2023.
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:
2022 2021 2020
INCOME STATEMENT DATA
Interest income $ 65,798 $ 60,113 $ 64,172
Interest expense 5,317 7,412 13,825
Net interest income 60,481 52,701 50,347
Provision for loan losses 483 (518) 1,665
Noninterest income 13,666 13,822 14,423
Noninterest expenses 46,820 43,694 51,233
Federal income tax expense 4,606 3,848 987
Net income $ 22,238 $ 19,499 $ 10,885
PER SHARE
Basic earnings $ 2.95 $ 2.48 $ 1.37
Diluted earnings $ 2.91 $ 2.45 $ 1.34
Dividends $ 1.09 $ 1.08 $ 1.08
Tangible book value $ 18.25 $ 21.61 $ 21.29
Quoted market value
High $ 26.25 $ 29.00 $ 24.50
Low $ 21.00 $ 19.45 $ 15.60
Close (1)
$ 23.50 $ 25.50 $ 19.57
Common shares outstanding (1)
7,559,421 7,532,641 7,997,247
PERFORMANCE RATIOS
Return on average total assets 1.08 % 0.96 % 0.57 %
Return on average shareholders' equity 11.41 % 8.83 % 4.93 %
Return on average tangible shareholders' equity 15.17 % 11.31 % 6.34 %
Net interest margin yield (FTE) 3.18 % 2.87 % 2.96 %
BALANCE SHEET DATA (1)
Gross loans $ 1,264,173 $ 1,301,037 $ 1,238,311
AFS securities $ 580,481 $ 490,601 $ 339,228
Total assets $ 2,030,267 $ 2,032,158 $ 1,957,378
Deposits $ 1,744,275 $ 1,710,339 $ 1,566,317
Borrowed funds $ 87,016 $ 99,320 $ 158,747
Shareholders' equity $ 186,210 $ 211,048 $ 218,588
Gross loans to deposits 72.48 % 76.07 % 79.06 %
ASSETS UNDER MANAGEMENT (1)
Loans sold with servicing retained $ 264,206 $ 278,844 $ 301,377
Assets managed by Isabella Wealth $ 513,918 $ 516,243 $ 443,967
Total assets under management $ 2,808,391 $ 2,827,245 $ 2,702,722
ASSET QUALITY (1)
Nonperforming loans to gross loans 0.04 % 0.10 % 0.43 %
Nonperforming assets to total assets 0.05 % 0.08 % 0.31 %
ALLL to gross loans 0.78 % 0.70 % 0.79 %
CAPITAL RATIOS (1)
Shareholders' equity to assets 9.17 % 10.39 % 11.17 %
Tier 1 leverage 8.61 % 7.97 % 8.37 %
Common equity tier 1 capital 12.91 % 12.07 % 12.97 %
Tier 1 risk-based capital 12.91 % 12.07 % 12.97 %
Total risk-based capital 15.79 % 14.94 % 13.75 %
(1) At end of year
The following table outlines our interim results of operations and key performance measures as of, and for the unaudited periods ended:
Quarter to Date
December 31
2022 September 30
2022 June 30
2022 March 31
INCOME STATEMENT DATA
Total interest income $ 17,915 $ 17,019 $ 16,102 $ 14,762
Total interest expense 1,643 1,216 1,175 1,283
Net interest income 16,272 15,803 14,927 13,479
Provision for loan losses (57) 18 485 37
Noninterest income 3,272 3,252 3,595 3,547
Noninterest expenses 11,922 11,917 11,661 11,320
Federal income tax expense 1,357 1,233 1,081 935
Net income $ 6,322 $ 5,887 $ 5,295 $ 4,734
PER SHARE
Basic earnings $ 0.84 $ 0.78 $ 0.70 $ 0.63
Diluted earnings $ 0.83 $ 0.77 $ 0.69 $ 0.62
Dividends $ 0.28 $ 0.27 $ 0.27 $ 0.27
Quoted market value (1)
$ 23.50 $ 21.40 $ 24.80 $ 25.85
Tangible book value $ 18.25 $ 16.96 $ 18.85 $ 19.56
Quarter to Date
December 31
2021 September 30
2021 June 30
2021 March 31
INCOME STATEMENT DATA
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
(1) At end of period
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.
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.
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
2022 2021 2020
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)
$ 1,249,634 $ 53,283 4.26 % $ 1,208,141 $ 51,410 4.26 % $ 1,236,169 $ 54,102 4.38 %
Taxable investment securities 477,159 8,294 1.74 % 297,357 4,920 1.65 % 229,468 5,214 2.27 %
Nontaxable investment securities 107,158 3,933 3.67 % 117,997 4,235 3.59 % 140,665 5,189 3.69 %
Fed funds sold 10 - 2.42 % 5 - 0.02 % 4 - 0.06 %
Other 99,301 1,344 1.35 % 255,246 706 0.28 % 142,717 1,026 0.72 %
Total earning assets 1,933,262 66,854 3.46 % 1,878,746 61,271 3.26 % 1,749,023 65,531 3.75 %
NONEARNING ASSETS
Allowance for loan losses (9,477) (9,396) (8,837)
Cash and demand deposits due from banks 24,708 29,139 24,987
Premises and equipment 24,648 24,760 25,846
Accrued income and other assets 81,823 109,625 118,195
Total assets $ 2,054,964 $ 2,032,874 $ 1,909,214
INTEREST BEARING LIABILITIES
Interest bearing demand deposits $ 374,623 274 0.07 % $ 345,015 216 0.06 % $ 262,188 357 0.14 %
Savings deposits 630,574 1,135 0.18 % 558,102 616 0.11 % 456,088 1,212 0.27 %
Time deposits 270,296 2,612 0.97 % 336,094 4,610 1.37 % 387,881 7,315 1.89 %
Federal funds purchased and repurchase agreements 49,974 79 0.16 % 57,453 53 0.09 % 35,518 36 0.10 %
FHLB advances 7,863 152 1.93 % 69,342 1,302 1.88 % 210,451 4,905 2.33 %
Subordinated debt, net of unamortized issuance costs
29,200 1,065 3.65 % 17,000 615 3.62 % - - 0.00 %
Total interest bearing liabilities 1,362,530 5,317 0.39 % 1,383,006 7,412 0.54 % 1,352,126 13,825 1.02 %
NONINTEREST BEARING LIABILITIES
Demand deposits 482,781 416,247 320,820
Other 14,695 12,858 15,613
Shareholders’ equity 194,958 220,763 220,655
Total liabilities and shareholders’ equity $ 2,054,964 $ 2,032,874 $ 1,909,214
Net interest income (FTE) $ 61,537 $ 53,859 $ 51,706
Net yield on interest earning assets (FTE) 3.18 % 2.87 % 2.96 %
(1) Includes loans and mortgage loans AFS
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.
2022 Compared to 2021
Increase (Decrease) Due to 2021 Compared to 2020
Increase (Decrease) Due to
Volume Rate Net Volume Rate Net
Changes in interest income
Loans $ 1,769 $ 104 $ 1,873 $ (1,211) $ (1,481) $ (2,692)
Taxable investment securities 3,114 260 3,374 1,324 (1,618) (294)
Nontaxable investment securities (396) 94 (302) (817) (137) (954)
Fed Funds Sold - - - - - -
Other (659) 1,297 638 529 (849) (320)
Total changes in interest income 3,828 1,755 5,583 (175) (4,085) (4,260)
Changes in interest expense
Interest bearing demand deposits 20 38 58 90 (231) (141)
Savings deposits 89 430 519 227 (823) (596)
Time deposits (796) (1,202) (1,998) (889) (1,816) (2,705)
Federal funds purchased and repurchase agreements (8) 34 26 20 (3) 17
FHLB advances (1,187) 37 (1,150) (2,793) (810) (3,603)
Subordinated debt, net of unamortized issuance costs
445 5 450 615 - 615
Total changes in interest expense (1,437) (658) (2,095) (2,730) (3,683) (6,413)
Net change in interest margin (FTE) $ 5,265 $ 2,413 $ 7,678 $ 2,555 $ (402) $ 2,153
The interest rate increases during 2022 alleviated much of the pressure placed on our net interest margin. Additionally, SBA PPP fee income has supported our yield on total earning assets over the past two years. The recent rate increases, and future rate increases expected during 2023, should lead to continued improvement in our net yield on interest earning assets.
Average Yield / Rate for the Three-Month Periods Ended:
December 31
2022 September 30
2022 June 30
2022 March 31
2022 December 31
Total earning assets 3.77 % 3.53 % 3.41 % 3.13 % 3.19 %
Total interest bearing liabilities 0.49 % 0.35 % 0.34 % 0.37 % 0.45 %
Net yield on interest earning assets (FTE) 3.43 % 3.28 % 3.16 % 2.86 % 2.86 %
Quarter to Date Net Interest Income (FTE)
December 31
2022 September 30
2022 June 30
2022 March 31
2022 December 31
Total interest income (FTE) $ 18,183 $ 17,276 $ 16,373 $ 15,022 $ 15,246
Total interest expense 1,643 1,216 1,175 1,283 1,567
Net interest income (FTE) $ 16,540 $ 16,060 $ 15,198 $ 13,739 $ 13,679
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
2022 September 30
2022 June 30
2022 March 31
2022 December 31
Total charge-offs $ 249 $ 173 $ 106 $ 91 $ 149
Total recoveries 479 132 117 155 78
Net loan charge-offs (recoveries) (230) 41 (11) (64) 71
Net loan charge-offs (recoveries) to average loans outstanding (0.02) % 0.00 % 0.00 % (0.01) % 0.01 %
Provision for loan losses $ (57) $ 18 $ 485 $ 37 $ 81
Provision for loan losses to average loans outstanding 0.00 % 0.00 % 0.04 % 0.00 % 0.01 %
ALLL $ 9,850 $ 9,677 $ 9,700 $ 9,204 $ 9,103
ALLL as a % of loans at end of period 0.78 % 0.78 % 0.76 % 0.76 % 0.70 %
The following table summarizes charge-off and recovery activity by loan segment for the year ended December 31, 2022:
Commercial Agricultural Residential Real Estate Consumer Total
Charge-offs $ 77 $ - $ - $ 542 $ 619
Recoveries 442 9 150 282 883
Net loan charge-offs (recoveries) $ (365) $ (9) $ (150) $ 260 $ (264)
Average loans outstanding $ 748,833 $ 93,621 $ 332,276 $ 74,338 $ 1,249,068
Net loan charge-offs (recoveries) to average loans outstanding (0.05) % (0.01) % (0.05) % 0.35 % (0.02) %
The following table summarizes charge-offs, recoveries, and provision for loan loss activity for the years ended December 31:
2022 2021 2020 2019 2018
ALLL at beginning of period $ 9,103 $ 9,744 $ 7,939 $ 8,375 $ 7,700
Charge-offs 619 607 381 948 1,101
Recoveries 883 484 521 482 798
Provision for loan losses 483 (518) 1,665 30 978
ALLL at end of period $ 9,850 $ 9,103 $ 9,744 $ 7,939 $ 8,375
Net loan charge-offs (recoveries) $ (264) $ 123 $ (140) $ 466 $ 303
Net loan charge-offs (recoveries) to average loans outstanding (0.02) % 0.01 % (0.01) % 0.04 % 0.03 %
ALLL as a % of loans at end of period 0.78 % 0.70 % 0.79 % 0.67 % 0.74 %
ALLL as a % of nonaccrual loans 2155.36 % 731.16 % 183.40 % 121.48 % 115.36 %
During 2020, we increased the ALLL 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. Despite strong credit quality, the ALLL increased during 2022 as a result of core loan growth during the year and increased economic related risk factors.
The following table illustrates the two main components of the ALLL as of:
December 31
2022 September 30
2022 June 30
2022 March 31
2022 December 31
ALLL
Individually evaluated for impairment $ 451 $ 474 $ 515 $ 573 $ 578
Collectively evaluated for impairment 9,399 9,203 9,185 8,631 8,525
Total $ 9,850 $ 9,677 $ 9,700 $ 9,204 $ 9,103
ALLL to gross loans
Individually evaluated for impairment 0.04 % 0.04 % 0.04 % 0.05 % 0.04 %
Collectively evaluated for impairment 0.74 % 0.74 % 0.72 % 0.71 % 0.66 %
Total 0.78 % 0.78 % 0.76 % 0.76 % 0.70 %
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:
2022 2021 2020 2019 2018
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 $ 1,321 58.61 $ 1,740 62.07 $ 2,162 61.10 $ 1,914 59.08 $ 2,563 58.43
Agricultural 577 8.25 289 7.22 311 8.11 634 9.85 775 11.27
Residential real estate 617 26.97 747 25.08 1,363 24.84 2,047 25.16 1,992 24.39
Consumer 961 6.17 908 5.63 798 5.95 922 5.91 857 5.91
Total Allocated 3,476 100.00 3,684 100.00 4,634 100.00 5,517 100.00 6,187 100.00
Unallocated 6,374 - 5,419 - 5,110 - 2,422 - 2,188 -
Total $ 9,850 100.00 $ 9,103 100.00 $ 9,744 100.00 $ 7,939 100.00 $ 8,375 100.00
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.
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
2022 2021 2020 2019 2018
Commercial $ 7,504 $ 561 $ 2,148 $ 2,477 $ 2,722
Agricultural 234 987 3,786 4,285 5,377
Residential real estate 3,333 2,287 3,580 4,572 3,208
Consumer 59 196 96 71 105
Total $ 11,130 $ 4,031 $ 9,610 $ 11,405 $ 11,412
Total past due and nonaccrual loans to gross loans 0.88 % 0.31 % 0.78 % 0.96 % 1.01 %
Past due and nonaccrual status loans, as a percentage of gross loans, has improved in recent years with the exception of 2022. During the fourth quarter, past due loans increased as a result of one commercial relationship. Therefore, we do not believe the recent increase is an indicator of credit deterioration.
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, 2022 or December 31, 2021.
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.
The following table provides a roll-forward of TDRs for the years ended December 31, 2021 and 2022:
Accruing Interest Nonaccrual Total
Number
of
Loans Balance Number
of
Loans Balance Number
of
Loans Balance
January 1, 2021 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
New modifications 4 2,969 - - 4 2,969
Principal advances (payments) - (2,188) - (105) - (2,293)
Loans paid off (24) (4,988) - - (24) (4,988)
Balances charged-off - - (1) (74) (1) (74)
December 31, 2022 78 $ 21,069 5 $ 270 83 $ 21,339
The following table summarizes our TDRs as of December 31:
2022 2021 2020
Accruing
Interest Nonaccrual Total Accruing
Interest Nonaccrual Total Accruing
Interest Nonaccrual Total
Current $ 20,844 $ 256 $ 21,100 $ 25,236 $ 294 $ 25,530 $ 22,017 $ 2,421 $ 24,438
Past due 30-59 days 225 - 225 40 85 125 183 - 183
Past due 60-89 days - - - - - - - - -
Past due 90 days or more - 14 14 - 70 70 - 309 309
Total $ 21,069 $ 270 $ 21,339 $ 25,276 $ 449 $ 25,725 $ 22,200 $ 2,730 $ 24,930
2019 2018
Accruing
Interest Nonaccrual Total Accruing
Interest Nonaccrual Total
Current $ 20,847 $ 507 $ 21,354 $ 21,794 $ 2,673 $ 24,467
Past due 30-59 days 346 - 346 899 - 899
Past due 60-89 days 1 - 1 707 - 707
Past due 90 days or more - 3,036 3,036 - 878 878
Total $ 21,194 $ 3,543 $ 24,737 $ 23,400 $ 3,551 $ 26,951
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.
Impaired Loans
The following is a summary of information pertaining to impaired loans as of December 31:
2022 2021
Recorded
Balance Unpaid
Principal
Balance Valuation
Allowance Recorded
Balance Unpaid
Principal
Balance Valuation
Allowance
TDRs
Commercial real estate $ 5,388 $ 5,643 $ 12 $ 5,707 $ 5,961 $ 9
Commercial other 2,793 2,793 - 3,246 3,246 4
Agricultural real estate 8,522 8,522 - 9,182 9,181 -
Agricultural other 2,413 2,413 - 4,543 4,543 -
Residential real estate senior liens 2,223 2,293 356 3,047 3,203 504
Total TDRs 21,339 21,664 368 25,725 26,134 517
Other impaired loans
Commercial real estate 161 223 - 314 377 -
Agricultural real estate - - - 356 357 -
Agricultural other - - - 108 108 -
Residential real estate senior liens 518 708 83 370 485 61
Home equity lines of credit - - - 37 37 -
Total other impaired loans 679 931 83 1,185 1,364 61
Total impaired loans $ 22,018 $ 22,595 $ 451 $ 26,910 $ 27,498 $ 578
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.
Nonperforming Assets
The following table summarizes our nonperforming assets as of December 31:
2022 2021 2020 2019 2018
Nonaccrual status loans $ 457 $ 1,245 $ 5,313 $ 6,535 $ 7,260
Accruing loans past due 90 days or more - 97 - - 113
Total nonperforming loans 457 1,342 5,313 6,535 7,373
Foreclosed assets 439 211 527 456 355
Debt securities 77 131 230 230 230
Total nonperforming assets $ 973 $ 1,684 $ 6,070 $ 7,221 $ 7,958
Nonperforming loans as a % of total loans 0.04 % 0.10 % 0.43 % 0.55 % 0.65 %
Nonperforming assets as a % of total assets 0.05 % 0.08 % 0.31 % 0.40 % 0.42 %
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. The level of nonperforming loans continued to improve and remains low in comparison to peer banks.
The following table summarizes nonaccrual loans as of December 31:
2022 2021 2020 2019 2018
Commercial $ 96 $ 341 $ 1,329 $ 1,621 $ 1,757
Agricultural 234 774 3,785 4,285 4,949
Residential real estate 127 130 199 629 554
Total $ 457 $ 1,245 $ 5,313 $ 6,535 $ 7,260
Nonaccrual loans as a % of loans at end of period 0.04 % 0.10 % 0.43 % 0.55 % 0.64 %
Included in the nonaccrual loan balances above were loans also classified as TDR as of December 31:
2022 2021 2020 2019 2018
Commercial $ 36 $ 139 $ 129 $ 390 $ 160
Agricultural 234 310 2,559 3,048 3,391
Residential real estate - - 42 105 -
Total $ 270 $ 449 $ 2,730 $ 3,543 $ 3,551
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.
Noninterest Income and Noninterest Expenses
Significant noninterest income balances are highlighted in the following table for the years ended December 31:
Change Change
2022 2021 $ % 2020 $ %
Service charges and fees
ATM and debit card fees $ 4,774 $ 4,600 $ 174 3.78 % $ 3,723 $ 877 23.56 %
Service charges and fees on deposit accounts 2,566 2,139 427 19.96 % 1,847 292 15.81 %
Freddie Mac servicing fee 669 747 (78) (10.44) % 625 122 19.52 %
Net OMSR income (loss) 435 (184) 619 336.41 % 44 (228) (518.18) %
Other fees for customer services 286 312 (26) (8.33) % 305 7 2.30 %
Total service charges and fees 8,730 7,614 1,116 14.66 % 6,544 1,070 16.35 %
Wealth management fees 3,005 3,071 (66) (2.15) % 2,578 493 19.12 %
Earnings on corporate owned life insurance policies 884 800 84 10.50 % 755 45 5.96 %
Net gain on sale of mortgage loans 631 1,694 (1,063) (62.75) % 2,716 (1,022) (37.63) %
Gains from redemption of corporate owned life insurance policies 57 271 (214) (78.97) % 891 (620) (69.58) %
Net income (loss) on joint venture investment - - - 0.00 % 577 (577) (100.00) %
Other 359 372 (13) (3.49) % 362 10 2.76 %
Total noninterest income $ 13,666 $ 13,822 $ (156) (1.13) % $ 14,423 $ (601) (4.17) %
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. During 2022, we experienced an increase in fees mainly due to an increase in the number of deposit accounts. Although we expect a continuation in deposit account growth in 2023, fee levels may not exceed 2022 due to continued regulatory discussions around the practice of service charges and fees.
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. During 2021, the volume of loans serviced decreased, while prepayment speeds continued to increase. Both of these factors contributed to the recognition of a loss during 2021. During 2022, prepayment speeds declined as a result of an increase in interest rates, resulting in income recognized during 2022. OMSR income during 2023 is not expected to exceed 2022 levels as a result of an anticipated decline in the volume of loans serviced.
In 2020 wealth management fees decreased mainly due to the decline in market values of assets under management. During 2021, we experienced an increase in wealth management fees driven by a combination of the growth in the stock market and increased new business activity. During 2022, there was strong growth in the portfolio, however the decline in the market offset the increase in fees related to growth. We expect wealth management fees to exceed 2022 levels in 2023, as a result of new business activity.
The amount of loans sold is driven by customer demand and balance sheet management strategies. We experienced a significant increase in loan demand in early 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, due to our liquidity position, thereby decreasing the number of mortgage loans sold, which had an impact on the net gain on loans sold. As a result of this change in strategy, coupled with a decline in loan demand, net gain on sale of mortgage loans declined in the second half of 2021 and during 2022. As demand is expected to remain at reduced levels in 2023, due to the rise in interest rates, net gain on sale of mortgage loans is not expected to exceed 2022 levels during 2023.
We recognized gains from the redemption of corporate owned life insurance policies in connection with the passing of retired bank employees.
We sold our membership interest in our joint venture investment in Corporate Settlement Solutions, LLC during the fourth quarter of 2020.
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
2022 2021 $ % 2020 $ %
Compensation and benefits $ 24,887 $ 23,749 $ 1,138 4.79 % $ 23,772 $ (23) (0.10) %
Furniture and equipment 6,006 5,462 544 9.96 % 5,787 (325) (5.62) %
Occupancy 3,691 3,661 30 0.82 % 3,557 104 2.92 %
Losses on extinguishment of debt - - - 0.00 % 7,643 (7,643) (100.00) %
Other
Audit, consulting, and legal fees 2,358 2,066 292 14.13 % 1,836 230 12.53 %
ATM and debit card fees 1,909 1,810 99 5.47 % 1,441 369 25.61 %
Marketing costs 1,056 939 117 12.46 % 877 62 7.07 %
Loan underwriting fees 1,004 849 155 18.26 % 825 24 2.91 %
Donations and community relations 923 705 218 30.92 % 723 (18) (2.49) %
Memberships and subscriptions 876 877 (1) (0.11) % 740 137 18.51 %
Director fees 790 703 87 12.38 % 695 8 1.15 %
FDIC insurance premiums 537 690 (153) (22.17) % 612 78 12.75 %
All other 2,783 2,183 600 27.49 % 2,725 (542) (19.89) %
Total other 12,236 10,822 1,414 13.07 % 10,474 348 3.32 %
Total noninterest expenses $ 46,820 $ 43,694 $ 3,126 7.15 % $ 51,233 $ (7,539) (14.72) %
During the fourth quarter of 2020, we incurred expense of $7,643 as a result of the extinguishment of $100,000 of FHLB advances.
Donations and community relations increased during 2022 as a result of initiatives designed to deepen and strengthen our relationship with the communities in which we operate and serve, which includes an expanded footprint. While government restrictions and temporary business closures related to COVID-19 impacted our ability to maintain the level of support in early 2021, we have since increased the level of community support. We intend to increase our community support in 2023, as a result expenses in 2023 are expected to exceed 2022 levels.
FDIC insurance premiums decreased in 2022 as a result of increased earnings and improved credit quality metrics. While we anticipate these trends to continue, FDIC insurance premiums are expected to increase in 2023 as a result of the recently approved increase in the base deposit insurance rate.
The fluctuations in all other noninterest expenses are spread throughout various categories, none of which are individually significant.
Analysis of Changes in Financial Condition
The following table shows the composition and changes in our balance sheet as of December 31:
Change
2022 2021 $ %
ASSETS
Cash and cash equivalents $ 38,924 $ 105,330 $ (66,406) (63.05) %
AFS securities
Amortized cost of AFS securities 625,605 485,710 139,895 28.80 %
Unrealized gains (losses) on AFS securities (45,124) 4,891 (50,015) N/M
AFS securities 580,481 490,601 89,880 18.32 %
Mortgage loans AFS 379 1,735 (1,356) (78.16) %
Loans
Gross loans 1,264,173 1,301,037 (36,864) (2.83) %
Less allowance for loan and lease losses 9,850 9,103 747 8.21 %
Net loans 1,254,323 1,291,934 (37,611) (2.91) %
Premises and equipment 25,553 24,419 1,134 4.64 %
Corporate owned life insurance policies 32,988 32,472 516 1.59 %
Equity securities without readily determinable fair values 15,746 17,383 (1,637) (9.42) %
Goodwill and other intangible assets 48,287 48,302 (15) (0.03) %
Accrued interest receivable and other assets 33,586 19,982 13,604 68.08 %
TOTAL ASSETS $ 2,030,267 $ 2,032,158 $ (1,891) (0.09) %
LIABILITIES AND SHAREHOLDERS’ EQUITY
Liabilities
Deposits $ 1,744,275 $ 1,710,339 $ 33,936 1.98 %
Borrowed funds 87,016 99,320 (12,304) (12.39) %
Accrued interest payable and other liabilities 12,766 11,451 1,315 11.48 %
Total liabilities 1,844,057 1,821,110 22,947 1.26 %
Shareholders’ equity 186,210 211,048 (24,838) (11.77) %
TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY $ 2,030,267 $ 2,032,158 $ (1,891) (0.09) %
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 2022 as a result of the purchase of AFS securities. These purchases were funded through deposit growth and a decline in loans during 2022.
AFS securities
The primary objective of our investing activities is to manage our overall exposure to changes in interest rates. Secondary considerations include ensuring ample access to liquidity, generating returns, and providing current income. 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 future maturities of higher-cost funding sources was prudently deployed to purchase AFS securities in future periods.
The following is a schedule of the carrying value of AFS securities as of December 31:
2022 2021 2020
U.S. Treasury $ 208,701 $ 209,703 $ -
States and political subdivisions 117,512 121,205 143,656
Auction rate money market preferred 2,342 3,242 3,237
Mortgage-backed securities 39,070 56,148 88,652
Collateralized mortgage obligations 205,728 92,301 101,983
Corporate 7,128 8,002 1,700
Total $ 580,481 $ 490,601 $ 339,228
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 2022, 2021, and 2020. 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, 2022. 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 $ - - $ 208,701 0.98 $ - - $ - - $ - -
States and political subdivisions 19,666 3.47 42,778 2.69 20,575 3.19 34,493 3.57 - -
Mortgage-backed securities - - - - - - - - 39,070 2.34
Collateralized mortgage obligations - - - - - - - - 205,728 2.87
Auction rate money market preferred - - - - - - - - 2,342 2.79
Corporate - - - - 7,128 3.78 - - - -
Total $ 19,666 3.47 $ 251,479 0.31 $ 27,703 3.34 $ 34,493 3.57 $ 247,140 2.79
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:
2022 2021 2020 2019 2018
Commercial $ 740,920 $ 807,439 $ 756,686 $ 700,941 $ 659,529
Agricultural 104,314 93,955 100,461 116,920 127,161
Residential real estate 340,885 326,361 307,543 298,569 275,343
Consumer 78,054 73,282 73,621 70,140 66,674
Total $ 1,264,173 $ 1,301,037 $ 1,238,311 $ 1,186,570 $ 1,128,707
The following table presents the change in the loan portfolio categories for the years ended December 31:
2022 2021 2020
$ Change % Change $ Change % Change $ Change % Change
Commercial $ (66,519) (8.24) % $ 50,753 6.71 % $ 55,745 7.95 %
Agricultural 10,359 11.03 % (6,506) (6.48) % (16,459) (14.08) %
Residential real estate 14,524 4.45 % 18,818 6.12 % 8,974 3.01 %
Consumer 4,772 6.51 % (339) (0.46) % 3,481 4.96 %
Total $ (36,864) (2.83) % $ 62,726 5.07 % $ 51,741 4.36 %
Advances to mortgage brokers, within the commercial loan portfolio, which is not considered a component of our core lending business, was the primary driver behind the fluctuations experienced since December 31, 2021, as participation in this mortgage purchase program paused during most of 2021 and again in 2022. We've recently experienced an increase in commercial loan demand, despite changes in advances to mortgage brokers and continued forgiveness of the remaining SBA PPP loans. As demand is expected to continue, we anticipate growth in the commercial loan portfolio in 2023. While Agricultural loans have increased in 2022 and are expected to continue in 2023, we do not anticipate the same level of growth experienced in 2022 as the result of the competitive lending environment. Residential mortgage lending activities have slowed during the year as a result of rising interest rates. As interest rates are expected to continue to increase in 2023, growth in residential and consumer loans is anticipated to continue but at a slower pace.
Accrued interest receivable and other assets
Other assets consist primarily of prepaid expenses, OMSR, and net deferred tax assets. The increase in accrued interest receivable and other assets during 2022 was due primarily to the change in the net deferred tax assets related to AFS securities. 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.
Deposits
Deposits are our primary source of funding. The following table presents the composition of the deposit portfolio as of December 31:
2022 2021 2020
Noninterest bearing demand deposits $ 494,346 $ 448,352 $ 375,395
Interest bearing demand deposits 372,155 364,563 302,444
Savings deposits 625,734 596,662 505,497
Certificates of deposit 251,541 297,696 358,165
Brokered certificates of deposit - - 14,029
Internet certificates of deposit 499 3,066 10,787
Total $ 1,744,275 $ 1,710,339 $ 1,566,317
The following table presents the change in the deposit categories for the years ended December 31:
2022 2021
$ Change % Change $ Change % Change
Noninterest bearing demand deposits $ 45,994 10.26 % $ 72,957 19.43 %
Interest bearing demand deposits 7,592 2.08 % 62,119 20.54 %
Savings deposits 29,072 4.87 % 91,165 18.03 %
Certificates of deposit (46,155) (15.50) % (60,469) (16.88) %
Brokered certificates of deposit - 0.00 % (14,029) (100.00) %
Internet certificates of deposit (2,567) (83.72) % (7,721) (71.58) %
Total $ 33,936 1.98 % $ 144,022 9.19 %
Total deposits have increased over the past 12 months with significant growth in non-contractual deposits, such as demand and savings deposits. While we experienced a decline in certificates of deposit over the past year, the decline has slowed as a result of the recent increase in the interest rate environment. We expect interest rates to continue to rise in 2023 and anticipate a shift of customers moving back to certificates of deposit products. Over the last few years, we used excess funds to reduce higher-cost deposits, such as brokered certificates of deposit.
The following table presents estimated balances of uninsured deposits as of December 31:
2022 2021 2020 2019 2018
Uninsured deposits $ 585,901 $ 548,213 $ 461,859 $ 336,399 $ 292,017
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, 2022 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 $ 12,568
Within 3 to 6 months 2,320
Within 6 to 12 months 13,194
Over 12 months 9,050
Total $ 37,132
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 as of December 31:
2022 2021 2020
Securities sold under agreements to repurchase without stated maturity dates $ 57,771 $ 50,162 $ 68,747
FHLB advances - 20,000 90,000
Subordinated debt, net of unamortized issuance costs 29,245 29,158 -
Total $ 87,016 $ 99,320 $ 158,747
Over the last few years, we used excess funds to reduce and payoff FHLB advances. 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.
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 74,445 shares or $1,762 of common stock during 2022, and 67,436 shares or $1,593 of common stock in 2021. 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 $463 and $433 during 2022 and 2021, respectively. We also grant restricted stock awards pursuant to the RSP, effective June 24, 2020. Pursuant to this plan, we increased shareholders’ equity by $147 and $86 during 2022 and 2021.
We have publicly announced a common stock repurchase plan. Pursuant to this plan, we repurchased 47,665 shares or $1,124 of common stock during 2022 and 135,465 shares or $3,050 during 2021. As of December 31, 2022, we were authorized to repurchase up to an additional 419,826 shares of common stock.
In the fourth quarter of 2021, we completed a “modified Dutch Auction” tender offer which 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 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%. 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:
2022 2021
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 12.91 % 7.00 % 6.50 % 12.07 % 7.00 % 6.50 %
Tier 1 capital 12.91 % 8.50 % 8.00 % 12.07 % 8.50 % 8.00 %
Total capital 15.79 % 10.50 % 10.00 % 14.94 % 10.50 % 10.00 %
Tier 1 leverage 8.61 % 4.00 % 5.00 % 7.97 % 4.00 % 5.00 %
There are no significant regulatory constraints placed on our capital. At December 31, 2022, 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.
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 $488,981 or 24.08% of assets as of December 31, 2022, compared to $495,259 or 24.37% as of December 31, 2021. The decline in the amount and percentage of primary liquidity is a result of investment purchases, with an offset in increased deposits. 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, 2022, we had available lines of credit of $344,393.
The frequency and complexity of our liquidity stress testing has increased since early 2020 and continues to evolve due to economic uncertainly as a result of COVID-19 and changes within the interest rate and economic environment. Our liquidity position remained strong at the end of 2022, which is illustrated in the following table:
December 31
Total cash and cash equivalents $ 38,924
Available lines of credit
Fed funds lines with correspondent banks 93,000
FHLB borrowings 237,407
FRB Discount Window 8,986
Other lines of credit 5,000
Total available lines of credit 344,393
Unencumbered lendable value of FRB collateral, estimated1
410,000
Total cash and liquidity $ 793,317
(1)Includes estimated unencumbered lendable value of FHLB collateral of $350,000
The following table summarizes our sources and uses of cash for the years ended December 31:
2022 2021 $ Variance
Net cash provided by (used in) operating activities $ 26,937 $ 25,501 $ 1,436
Net cash provided by (used in) investing activities (106,255) (229,635) 123,380
Net cash provided by (used in) financing activities 12,912 62,824 (49,912)
Increase (decrease) in cash and cash equivalents (66,406) (141,310) 74,904
Cash and cash equivalents January 1 105,330 246,640 (141,310)
Cash and cash equivalents December 31 $ 38,924 $ 105,330 $ (66,406)
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 ALCO 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.
The following table shows the maturity of loans outstanding at December 31, 2022 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 $ 81,025 $ 179,439 $ 180,130 $ 300,326 $ 740,920
Agricultural 16,386 24,245 26,495 37,188 104,314
Residential real estate 9,507 20,530 126,438 184,410 340,885
Consumer 1,789 33,163 43,102 - 78,054
Total $ 108,707 $ 257,377 $ 376,165 $ 521,924 $ 1,264,173
Fixed interest rates
Commercial $ 43,950 $ 132,293 $ 35,368 $ 3,356 $ 214,967
Agricultural 5,314 12,089 4,233 1,157 22,793
Residential real estate 6,070 11,278 95,053 23,063 135,464
Consumer 1,510 32,814 43,066 - 77,390
Total $ 56,844 $ 188,474 $ 177,720 $ 27,576 $ 450,614
Variable interest rates
Commercial $ 37,075 $ 47,146 $ 144,762 $ 296,970 $ 525,953
Agricultural 11,072 12,156 22,262 36,031 81,521
Residential real estate 3,437 9,252 31,385 161,347 205,421
Consumer 279 349 36 - 664
Total $ 51,863 $ 68,903 $ 198,445 $ 494,348 $ 813,559
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. Customer deposit levels may experience unusual fluctuations due to COVID-related government support programs ending, customer and business needs, and a potential decline in money supply as the Federal Reserve shrinks its balance sheet. 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.

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ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
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
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.
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, 2022 and 2021, 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, 2022, 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, 2022, 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, 2022 and 2021, and the consolidated results of their operations and their cash flows for each of the years in the three-year period ended December 31, 2022, 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, 2022, 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.
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 $1.264 billion as of December 31, 2022 and the associated allowance for loan and lease losses (ALLL) was $9.850 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 7, 2023
CONSOLIDATED BALANCE SHEETS
(Dollars in thousands)
December 31
2022 2021
ASSETS
Cash and cash equivalents
Cash and demand deposits due from banks $ 27,420 $ 25,563
Fed Funds sold and interest bearing balances due from banks 11,504 79,767
Total cash and cash equivalents 38,924 105,330
AFS securities, at fair value 580,481 490,601
Mortgage loans AFS 379 1,735
Loans
Commercial 740,920 807,439
Agricultural 104,314 93,955
Residential real estate 340,885 326,361
Consumer 78,054 73,282
Gross loans 1,264,173 1,301,037
Less allowance for loan and lease losses 9,850 9,103
Net loans 1,254,323 1,291,934
Premises and equipment 25,553 24,419
Corporate owned life insurance policies 32,988 32,472
Equity securities without readily determinable fair values 15,746 17,383
Goodwill and other intangible assets 48,287 48,302
Accrued interest receivable and other assets 33,586 19,982
TOTAL ASSETS $ 2,030,267 $ 2,032,158
LIABILITIES AND SHAREHOLDERS’ EQUITY
Deposits
Noninterest bearing $ 494,346 $ 448,352
Interest bearing demand deposits 372,155 364,563
Certificates of deposit under $250 and other savings 810,642 818,841
Certificates of deposit over $250 67,132 78,583
Total deposits 1,744,275 1,710,339
Borrowed funds
Federal funds purchased and repurchase agreements 57,771 50,162
FHLB advances - 20,000
Subordinated debt, net of unamortized issuance costs 29,245 29,158
Total borrowed funds 87,016 99,320
Accrued interest payable and other liabilities 12,766 11,451
Total liabilities 1,844,057 1,821,110
Shareholders’ equity
Common stock - no par value 15,000,000 shares authorized; issued and outstanding 7,559,421 shares (including 154,879 shares held in the Rabbi Trust) in 2022 and 7,532,641 shares (including 105,654 shares held in the Rabbi Trust) in 2021
128,651 129,052
Shares to be issued for deferred compensation obligations 5,005 4,545
Retained earnings 89,748 75,592
Accumulated other comprehensive income (loss) (37,194) 1,859
Total shareholders’ equity 186,210 211,048
TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY $ 2,030,267 $ 2,032,158
The accompanying notes are an integral part of these consolidated financial statements.
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, 2020 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
Comprehensive income (loss) - - - 22,238 (39,053) (16,815)
Issuance of common stock 74,445 1,762 - - - 1,762
Common stock transferred from the Rabbi Trust to satisfy deferred compensation obligations - 3 (3) - - -
Share-based payment awards under the Directors Plan - - 463 - - 463
Share-based compensation expense recognized in earnings under the RSP - 147 - - - 147
Common stock purchased for deferred compensation obligations - (1,189) - - - (1,189)
Common stock repurchased (47,665) (1,124) - - - (1,124)
Cash dividends paid ($1.09 per common share)
- - - (8,082) - (8,082)
Balance, December 31, 2022 7,559,421 $ 128,651 $ 5,005 $ 89,748 $ (37,194) $ 186,210
The accompanying notes are an integral part of these consolidated financial statements.
CONSOLIDATED STATEMENTS OF INCOME
(Dollars in thousands except per share amounts)
Year Ended December 31
2022 2021 2020
Interest income
Loans, including fees $ 53,283 $ 51,410 $ 54,102
AFS securities
Taxable 8,363 4,920 5,214
Nontaxable 2,808 3,077 3,830
Federal funds sold and other 1,344 706 1,026
Total interest income 65,798 60,113 64,172
Interest expense
Deposits 4,021 5,442 8,884
Borrowings
Federal funds purchased and repurchase agreements 79 53 36
FHLB advances 152 1,302 4,905
Subordinated debt, net of unamortized issuance costs
1,065 615 -
Total interest expense 5,317 7,412 13,825
Net interest income 60,481 52,701 50,347
Provision for loan losses 483 (518) 1,665
Net interest income after provision for loan losses 59,998 53,219 48,682
Noninterest income
Service charges and fees 8,730 7,614 6,544
Wealth management fees 3,005 3,071 2,578
Earnings on corporate owned life insurance policies 884 800 755
Net gain on sale of mortgage loans 631 1,694 2,716
Gains from redemption of corporate owned life insurance policies 57 271 891
Net income on joint venture investment - - 577
Other 359 372 362
Total noninterest income 13,666 13,822 14,423
Noninterest expenses
Compensation and benefits 24,887 23,749 23,772
Furniture and equipment 6,006 5,462 5,787
Occupancy 3,691 3,661 3,557
Loss on extinguishment of debt - - 7,643
Other 12,236 10,822 10,474
Total noninterest expenses 46,820 43,694 51,233
Income before federal income tax expense 26,844 23,347 11,872
Federal income tax expense 4,606 3,848 987
NET INCOME $ 22,238 $ 19,499 $ 10,885
Earnings per common share
Basic $ 2.95 $ 2.48 $ 1.37
Diluted $ 2.91 $ 2.45 $ 1.34
Cash dividends per common share $ 1.09 $ 1.08 $ 1.08
The accompanying notes are an integral part of these consolidated financial statements.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(Dollars in thousands)
Year Ended December 31
2022 2021 2020
Net income $ 22,238 $ 19,499 $ 10,885
Unrealized gains (losses) on AFS securities
Unrealized gains (losses) arising during the period (50,015) (8,371) 7,474
Reclassification adjustment for net realized (gains) losses included in net income - - (71)
Comprehensive income (loss) before income tax (expense) benefit (50,015) (8,371) 7,403
Tax effect (1)
10,314 1,759 (1,530)
Unrealized gains (losses) on AFS securities, net of tax (39,701) (6,612) 5,873
Unrealized gains (losses) on derivative instruments
Unrealized gains (losses) on derivative instruments arising during the period - 53 (121)
Tax effect (1)
- (11) 25
Unrealized gains (losses) on derivative instruments, net of tax - 42 (96)
Change in unrecognized pension cost on defined benefit pension plan
Change in unrecognized pension cost arising during the period 762 955 (238)
Reclassification adjustment for net periodic benefit cost included in net income 59 (31) 176
Net change in unrecognized pension cost 821 924 (62)
Tax effect (1)
(173) (193) 12
Change in unrealized pension cost, net of tax 648 731 (50)
Other comprehensive income (loss), net of tax (39,053) (5,839) 5,727
Comprehensive income (loss) $ (16,815) $ 13,660 $ 16,612
(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.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in thousands)
Year Ended December 31
2022 2021 2020
OPERATING ACTIVITIES
Net income $ 22,238 $ 19,499 $ 10,885
Reconciliation of net income to net cash provided by operating activities:
Undistributed earnings of equity securities without readily determinable fair values - - (394)
Provision for loan losses 483 (518) 1,665
Depreciation 2,071 2,314 2,620
Amortization of OMSR 97 597 504
Amortization of acquisition intangibles 15 29 48
Amortization of subordinated debt issuance costs 87 52 -
Net amortization of AFS securities 2,018 2,233 2,044
Net gains on sale of AFS securities - - (71)
Net gain on sale of mortgage loans (631) (1,694) (2,716)
Change in OMSR valuation allowance (532) - 316
Net (gains) losses on foreclosed assets (13) (39) 51
Increase in cash value of corporate owned life insurance policies, net of expenses (818) (751) (708)
Gains from redemption of corporate owned life insurance policies (57) (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 463 433 413
Share-based payment awards under the RSP 147 86 14
Deferred income tax expense (benefit) 13 (523) (276)
Origination of loans held-for-sale (21,382) (48,957) (114,323)
Proceeds from loan sales 23,369 51,657 115,202
Net changes in operating assets and liabilities which provided (used) cash:
Accrued interest receivable and other assets (2,813) 1,208 (821)
Accrued interest payable and other liabilities 2,182 146 398
Net cash provided by (used in) operating activities 26,937 25,501 21,997
INVESTING ACTIVITIES
Activity in AFS securities
Sales - - 26,855
Maturities, calls, and principal payments 68,956 100,289 97,844
Purchases (210,869) (262,266) (28,658)
Purchase of equity investments (250) - -
Sale of joint venture investment - - 1,000
Net loan principal (originations) collections 36,672 (63,210) (52,132)
Proceeds from sales of foreclosed assets 241 716 409
Purchases of premises and equipment (3,205) (1,593) (1,518)
Purchases of corporate owned life insurance policies - (4,272) (625)
Proceeds from redemption of corporate owned life insurance policies 359 1,114 2,387
Proceeds from sale of FHLB Stock 2,288 - -
Purchases of FRB Stock (401) - -
Funding of low income housing tax credit investments (46) (413) (429)
Net cash provided by (used in) investing activities (106,255) (229,635) 45,133
CONSOLIDATED STATEMENTS OF CASH FLOWS (continued)
(Dollars in thousands)
Year Ended December 31
2022 2021 2020
FINANCING ACTIVITIES
Net increase (decrease) in deposits $ 33,936 $ 144,022 $ 252,466
Net increase (decrease) in fed funds purchased and repurchase agreements 7,609 (18,585) 37,748
Net increase (decrease) in FHLB advances (20,000) (70,000) (162,643)
Issuance of subordinated debt, net of unamortized issuance costs - 29,106 -
Cash dividends paid on common stock (8,082) (8,367) (8,524)
Proceeds from issuance of common stock 1,762 1,593 4,185
Common stock repurchased (1,124) (13,758) (2,702)
Common stock purchased for deferred compensation obligations (1,189) (1,187) (1,592)
Net cash provided by (used in) financing activities 12,912 62,824 118,938
Increase (decrease) in cash and cash equivalents (66,406) (141,310) 186,068
Cash and cash equivalents at beginning of period 105,330 246,640 60,572
Cash and cash equivalents at end of period $ 38,924 $ 105,330 $ 246,640
SUPPLEMENTAL CASH FLOWS INFORMATION:
Interest paid $ 5,313 $ 7,601 $ 14,204
Income taxes paid 4,425 4,050 846
SUPPLEMENTAL NONCASH INFORMATION:
Transfers of loans to foreclosed assets $ 456 $ 361 $ 531
Note receivable arising from sale of joint venture investment - - 3,227
The accompanying notes are an integral part of these consolidated financial statements.
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 29 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.
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.
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.
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 $264,206 and $278,844 with capitalized servicing rights of $2,559 and $2,124 at December 31, 2022 and 2021, 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 $669, $747, and $625 related to residential mortgage loans serviced for others during 2022, 2021, and 2020, 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 $439 and $211 as of December 31, 2022 and 2021, 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:
2022 2021
FHLB Stock $ 12,762 $ 15,050
FRB Stock 2,400 1,999
Other 584 334
Total $ 15,746 $ 17,383
EQUITY COMPENSATION PLANS: At December 31, 2022, the Directors Plan had 207,840 shares eligible to be issued to participants, for which the Rabbi Trust held 154,879 shares. We had 189,364 shares to be issued at December 31, 2021, with 105,654 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.
Of the purchased life insurance policies, we hold post retirement benefits with a present value estimated to be $2,905 and $2,843 as of December 31, 2022 and 2021, respectively, which is included in accrued interest payable and other liabilities. The expenses associated with these policies totaled $61, $33, and $87 for 2022, 2021, and 2020, 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 2021 and 2020 consolidated financial statements have been reclassified to conform with the 2022 presentation.
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 invested a considerable amount of effort toward this guidance to be prepared for adoption on January 1, 2023. An internal committee was formed and was accountable for timely and accurate adoption of the guidance. A service provider that has focused on the ALLL for more than 10 years and serves hundreds of financial institutions was engaged to provide us with education, advisory, and software solutions exclusively related to the ACL. We ran parallel processes for over a year to ensure our calculation and analysis was complete by the required implementation date.
We fully adopted the new guidance as of January1, 2023. Based on portfolio characteristics and economic conditions and expectations as of January 1, 2023, we recorded a combined increase to the ACL and reserve for unfunded commitments on January 1, 2023 of approximately $3,000 upon the adoption of ASU 2016-13.
Note 3 - AFS Securities
The amortized cost and fair value of AFS securities, with gross unrealized gains and losses, are as follows as of December 31:
Amortized
Cost Gross
Unrealized
Gains Gross
Unrealized
Losses Fair
Value
U.S. Treasury $ 231,622 $ - $ 22,921 $ 208,701
States and political subdivisions 122,023 392 4,903 117,512
Auction rate money market preferred 3,200 - 858 2,342
Mortgage-backed securities 42,309 - 3,239 39,070
Collateralized mortgage obligations 218,301 - 12,573 205,728
Corporate 8,150 - 1,022 7,128
Total $ 625,605 $ 392 $ 45,516 $ 580,481
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
The amortized cost and fair value of AFS securities by contractual maturity at December 31, 2022 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 $ - $ 231,622 $ - $ - $ - $ 231,622
States and political subdivisions 19,753 42,946 21,234 38,090 - 122,023
Auction rate money market preferred - - - - 3,200 3,200
Mortgage-backed securities - - - - 42,309 42,309
Collateralized mortgage obligations - - - - 218,301 218,301
Corporate - - 8,150 - - 8,150
Total amortized cost $ 19,753 $ 274,568 $ 29,384 $ 38,090 $ 263,810 $ 625,605
Fair value $ 19,666 $ 251,479 $ 27,703 $ 34,493 $ 247,140 $ 580,481
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.
A summary of the sales activity of AFS securities during the years ended December 31 is displayed in the following table.
2022 2021 2020
Proceeds from sales of AFS securities $ - $ - $ 26,855
Realized gains (losses) $ - $ - $ 71
Applicable income tax expense (benefit) $ - $ - $ 15
The information on the following tables pertains to AFS securities with gross unrealized losses at December 31, 2022 and 2021 aggregated by investment category and length of time that individual securities have been in a continuous loss position.
December 31, 2022
Less Than Twelve Months Twelve Months or More
Gross
Unrealized
Losses Fair
Value Gross
Unrealized
Losses Fair
Value Total
Unrealized
Losses
U.S. Treasury $ 1,388 $ 18,331 $ 21,533 $ 190,369 $ 22,921
States and political subdivisions 2,389 48,083 2,514 40,667 4,903
Auction rate money market preferred - - 858 2,342 858
Mortgage-backed securities 3,239 39,069 - - 3,239
Collateralized mortgage obligations 12,408 201,316 165 4,411 12,573
Corporate - - 1,022 7,128 1,022
Total $ 19,424 $ 306,799 $ 26,092 $ 244,917 $ 45,516
Number of securities in an unrealized loss position: 178 266 444
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 unrealized loss on our AFS securities portfolio resulted from the recent increases in short-term and intermediate-term interest rates.
As of December 31, 2022 and 2021, we conducted an analysis to determine whether any AFS securities currently in an unrealized loss position should be identified as other-than-temporarily impaired. 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, 2022 and 2021, with the exception of one municipal bond previously identified in 2016 which had no activity during the period.
Note 4 - Loans and ALLL
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 $18,000. Borrowers with direct credit needs of more than $18,000 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. 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 currently are not committed to participate.
We offer adjustable rate mortgages, construction loans, and fixed rate residential real estate loans which have amortization periods up to a maximum of 30 years. 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.
Underwriting criteria for residential real estate loans generally include:
•Evaluation of the borrower’s ability to make monthly payments.
•Evaluation of the value of the property securing the loan.
•Ensuring the payment of principal, interest, taxes, and hazard insurance does not exceed 28% of a borrower’s gross income.
•Ensuring all debt servicing does not exceed 40% of income.
•Verification of acceptable credit reports.
•Verification of employment, income, and financial information.
Appraisals are performed by independent appraisers and are reviewed for appropriateness. Generally, mortgage loan requests are reviewed by our mortgage loan committee or through a secondary market underwriting system; loans in excess of $1,000 require the approval of our Internal Loan Committee, the Executive Loan Committee, the Board of Directors’ Loan Committee, or the Board of Directors.
Consumer loans include secured and unsecured personal loans. Loans are amortized for a period of up to 15 years based on the age and value of the underlying collateral. The underwriting emphasis is on a borrower’s perceived intent and ability to pay rather than collateral value. No consumer loans are sold to the secondary market.
The ALLL is established as losses are estimated to have occurred through a provision for loan losses charged to earnings. Full or partial loan balances are charged against the ALLL when we believe uncollectability is probable. Subsequent recoveries, if any, are credited to the ALLL
The ALLL is evaluated on a regular basis for appropriateness. Our periodic review of the collectability of a loan considers historical experience, the nature and volume of the loan portfolio, adverse situations that may affect the borrower’s ability to repay, estimated value of any underlying collateral, and prevailing economic conditions. This evaluation is inherently subjective as it requires estimates that are susceptible to significant revision as more information becomes available.
The primary factors behind the determination of the level of the ALLL are specific allocations for impaired loans, historical loss percentages, as well as unallocated components. Specific allocations for impaired loans are primarily determined based on the difference between the loan’s outstanding balance and the present value of expected future cash flows discounted at the loan’s effective interest rate, or the fair value of the collateral, less costs to sell, if the loan is collateral dependent. Historical loss allocations are calculated at the loan class and segment levels based on a migration analysis of the loan portfolio, with the exception of advances to mortgage brokers, over the preceding five years. With no historical losses on advances to mortgage brokers, there is no allocation related to this portfolio. The unallocated component of the allowance reflects the margin of imprecision inherent in the underlying assumptions used in the methodologies for estimating specific and general losses in the portfolio.
While we have experienced fluctuations in credit quality indicators in recent periods, credit quality remained strong at December 31, 2022. 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. There have been no material changes to the ALLL and credit quality remained strong throughout 2022.
A summary of changes in the ALLL and the recorded investment in loans by segments follows:
Allowance for Loan Losses
Year Ended December 31, 2022
Commercial Agricultural Residential Real Estate Consumer Unallocated Total
January 1, 2022 $ 1,740 $ 289 $ 747 $ 908 $ 5,419 $ 9,103
Charge-offs (77) - - (542) - (619)
Recoveries 442 9 150 282 - 883
Provision for loan losses (784) 279 (280) 313 955 483
December 31, 2022 $ 1,321 $ 577 $ 617 $ 961 $ 6,374 $ 9,850
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
Allowance for Loan Losses and Recorded Investment in Loans
As of December 31, 2022
Commercial Agricultural Residential Real Estate Consumer Unallocated Total
ALLL
Individually evaluated for impairment $ 12 $ - $ 439 $ - $ - $ 451
Collectively evaluated for impairment 1,309 577 178 961 6,374 9,399
Total $ 1,321 $ 577 $ 617 $ 961 $ 6,374 $ 9,850
Loans
Individually evaluated for impairment $ 8,342 $ 10,935 $ 2,741 $ - $ 22,018
Collectively evaluated for impairment 732,578 93,379 338,144 78,054 1,242,155
Total $ 740,920 $ 104,314 $ 340,885 $ 78,054 $ 1,264,173
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
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:
Commercial Agricultural
Real Estate Other Advances to Mortgage Brokers Total Real Estate Other Total Total
Rating
1 - Excellent $ - $ - $ - $ - $ - $ - $ - $ -
2 - High quality 9,045 4,533 - 13,578 342 100 442 14,020
3 - High satisfactory 68,133 36,608 - 104,741 9,757 4,608 14,365 119,106
4 - Low satisfactory 471,009 114,565 - 585,574 43,587 21,214 64,801 650,375
5 - Special mention 20,770 7,447 - 28,217 12,262 4,634 16,896 45,113
6 - Substandard 5,629 3,085 - 8,714 6,316 1,260 7,576 16,290
7 - Vulnerable 74 22 - 96 67 167 234 330
8 - Doubtful - - - - - - - -
9 - Loss - - - - - - - -
Total $ 574,660 $ 166,260 $ - $ 740,920 $ 72,331 $ 31,983 $ 104,314 $ 845,234
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
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.
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.
•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.
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:
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 $ 4,553 $ 2,570 $ - $ 74 $ 7,197 $ 567,463 $ 574,660
Commercial other 285 - - 22 307 165,953 166,260
Advances to mortgage brokers - - - - - - -
Total commercial 4,838 2,570 - 96 7,504 733,416 740,920
Agricultural
Agricultural real estate - - - 67 67 72,264 72,331
Agricultural other - - - 167 167 31,816 31,983
Total agricultural - - - 234 234 104,080 104,314
Residential real estate
Senior liens 2,943 225 - 127 3,295 301,606 304,901
Junior liens - - - - - 3,282 3,282
Home equity lines of credit 38 - - - 38 32,664 32,702
Total residential real estate 2,981 225 - 127 3,333 337,552 340,885
Consumer
Secured 47 8 - - 55 74,886 74,941
Unsecured 4 - - - 4 3,109 3,113
Total consumer 51 8 - - 59 77,995 78,054
Total $ 7,870 $ 2,803 $ - $ 457 $ 11,130 $ 1,253,043 $ 1,264,173
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
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:
Recorded Balance Unpaid Principal Balance Valuation Allowance Average Recorded Balance Interest Income Recognized
Impaired loans with a valuation allowance
Commercial real estate $ 183 $ 184 $ 12 $ 189 $ 12
Commercial other - - - 1,724 62
Residential real estate senior liens 2,741 3,001 439 3,056 126
Total impaired loans with a valuation allowance 2,924 3,185 451 4,969 200
Impaired loans without a valuation allowance
Commercial real estate 5,366 5,682 5,514 338
Commercial other 2,793 2,793 626 58
Agricultural real estate 8,522 8,522 8,568 468
Agricultural other 2,413 2,413 2,984 157
Home equity lines of credit - - 5 -
Total impaired loans without a valuation allowance 19,094 19,410 17,697 1,021
Impaired loans
Commercial 8,342 8,659 12 8,053 470
Agricultural 10,935 10,935 - 11,552 625
Residential real estate 2,741 3,001 439 3,061 126
Total impaired loans $ 22,018 $ 22,595 $ 451 $ 22,666 $ 1,221
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
We had committed to advance $0 and $266 in additional funds to be disbursed in connection with impaired loans, which includes TDRs, as of December 31, 2022 and 2021, 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).
The following is a summary of information pertaining to TDRs granted in the years ended December 31:
2022 2021
Number of Loans Pre-Modification Recorded Investment Post-Modification Recorded Investment Number of Loans Pre-Modification Recorded Investment Post-Modification Recorded Investment
Commercial other 3 $ 2,871 $ 2,871 5 $ 4,761 $ 4,761
Agricultural other - - - 6 3,712 3,712
Residential real estate 1 98 98 - - -
Total 4 $ 2,969 $ 2,969 11 $ 8,473 $ 8,473
The following table summarizes the nature of the concessions we granted to borrowers in financial difficulty in the years ended December 31:
2022 2021
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 3 $ 2,871 - $ - 1 $ 3,189 4 $ 1,572
Agricultural other - - - - 6 3,712 - -
Residential real estate - - 1 98 - - - -
Total 3 $ 2,871 1 $ 98 7 $ 6,901 4 $ 1,572
We did not restructure any loans by forgiving principal or accrued interest during 2022 or 2021.
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, 2022 and 2021, which were modified within 12 months prior to the default date.
The following is a summary of TDR loan balances as of December 31:
2022 2021
TDRs $ 21,339 $ 25,725
Note 5 - Premises and Equipment
A summary of premises and equipment at December 31 follows:
2022 2021
Land $ 5,904 $ 6,164
Buildings and improvements 31,260 30,738
Furniture and equipment 35,906 36,132
Total 73,070 73,034
Less: accumulated depreciation 47,517 48,615
Premises and equipment, net $ 25,553 $ 24,419
Depreciation expense amounted to $2,071, $2,314, and $2,620 in 2022, 2021, and 2020, respectively.
Note 6 - Goodwill and Other Intangible Assets
The carrying amount of goodwill was $48,282 at December 31, 2022 and 2021.
Identifiable intangible assets were as follows as of December 31:
Gross
Intangible
Assets Accumulated
Amortization Net
Intangible
Assets
Core deposit premium resulting from acquisitions $ 5,579 $ 5,574 $ 5
Gross
Intangible
Assets Accumulated
Amortization Net
Intangible
Assets
Core deposit premium resulting from acquisitions $ 5,579 $ 5,559 $ 20
Amortization expense associated with identifiable intangible assets was $15, $29, and $48 in 2022, 2021, and 2020, respectively.
Estimated amortization expense associated with identifiable intangibles for each of the next three years succeeding December 31, 2022, and thereafter is as follows:
Estimated Amortization Expense
2023 $ 2
2024 2
2025 1
Total $ 5
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
2023 $ 153,482
2024 41,744
2025 23,288
2026 18,364
2027 15,055
Thereafter 107
Total $ 252,040
Interest expense on time deposits greater than $250 was $621 in 2022, $980 in 2021 and $1,883 in 2020.
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, 2022 and 2021. 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:
2022 2021
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 $ 58,140 $ 49,973 0.16 % $ 71,059 $ 57,451 0.09 %
Federal funds purchased - 1 3.02 % 80 2 0.47 %
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 $58,291 and $50,173 at December 31, 2022 and 2021, 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:
2022 2021
Amount Rate Amount Rate
Securities sold under agreements to repurchase without stated maturity dates $ 57,771 0.49 % $ 50,162 0.07 %
We had pledged AFS securities and 1-4 family residential real estate loans in the following amounts at December 31:
2022 2021
Pledged to secure borrowed funds $ 347,331 $ 334,415
Pledged to secure repurchase agreements 58,291 50,173
Pledged for public deposits and for other purposes necessary or required by law 48,698 28,154
Total $ 454,320 $ 412,742
AFS securities pledged to repurchase agreements without stated maturity dates consisted of the following at December 31:
2022 2021
U.S. Treasury $ 29,351 $ 9,711
States and political subdivisions 11,037 13,491
Mortgage-backed securities 6,819 13,174
Collateralized mortgage obligations 11,084 13,797
Total $ 58,291 $ 50,173
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, 2022, we had the ability to borrow up to an additional $344,393, 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:
2022 2021
Amount Rate Amount Rate
Fixed rate due 2022 $ - 0.00 % $ 20,000 1.97 %
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:
2022 2021
Amount Rate Amount Rate
Fixed rate at 3.25% to floating, due 2031 $ 30,000 3.25 % $ 30,000 3.25 %
Unamortized issuance costs (755) (842)
Total subordinated debt, net $ 29,245 $ 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:
2022 2021
Unfunded commitments under lines of credit $ 264,902 $ 231,120
Commercial and standby letters of credit 1,321 1,738
Commitments to grant loans 24,770 32,448
Total $ 290,993 $ 265,306
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.
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 $0 and $788 at December 31, 2022 and 2021, 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 $379 and $2,255 at December 31, 2022 and 2021, respectively. The fair value of these forward loan sale commitments was $394 and $2,330 at December 31, 2022 and 2021, 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
Correspondent banks may require us to maintain minimum cash reserve balances. The reserve balances related to correspondent banks amounted to $500 for the years ended December 31, 2022 and 2021.
Banking regulations limit the transfer of assets in the form of dividends, loans, or advances from the Bank to the Corporation. At December 31, 2022, 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, 2023, the amount available to the Corporation for dividends from the Bank, without regulatory approval, was approximately $39,800.
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, 2022 and 2021, 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, 2022 and 2021, 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, 2022
Common equity Tier 1 capital to risk weighted assets
Isabella Bank $ 190,060 14.07 % $ 94,565 7.00 % $ 87,811 6.50 %
Consolidated 175,112 12.91 % 94,948 7.00 % N/A N/A
Tier 1 capital to risk weighted assets
Isabella Bank 190,060 14.07 % 114,829 8.50 % 108,075 8.00 %
Consolidated 175,112 12.91 % 115,295 8.50 % N/A N/A
Total capital to risk weighted assets
Isabella Bank 199,910 14.80 % 141,848 10.50 % 135,093 10.00 %
Consolidated 214,207 15.79 % 142,423 10.50 % N/A N/A
Tier 1 capital to average assets
Isabella Bank 190,060 9.36 % 81,181 4.00 % 101,476 5.00 %
Consolidated 175,112 8.61 % 81,392 4.00 % N/A N/A
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
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. For further information related to potential common shares that may be issued relate solely to outstanding shares in the Directors Plan and grant awards under the RSP, see "Note 12 - Benefit Plans."
Earnings per common share have been computed based on the following for the years ended December 31:
2022 2021 2020
Average number of common shares outstanding for basic calculation 7,549,878 7,853,398 7,959,705
Average potential effect of common shares in the Directors Plan (1)
70,329 99,813 143,878
Average potential effect of common shares in the RSP 27,405 12,750 2,508
Average number of common shares outstanding used to calculate diluted earnings per common share 7,647,612 7,965,961 8,106,091
Net income $ 22,238 $ 19,499 $ 10,885
Earnings per common share
Basic $ 2.95 $ 2.48 $ 1.37
Diluted $ 2.91 $ 2.45 $ 1.34
(1) Exclusive of shares held in the Rabbi Trust
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 2022, 2021 and 2020, expenses attributable to the plan were $805, $792, and $813, 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:
2022 2021
Change in benefit obligation
Benefit obligation, January 1 $ 9,725 $ 10,358
Interest cost 224 233
Actuarial loss (gain) (2,236) (357)
Benefits paid, including plan expenses (817) (509)
Benefit obligation, December 31 6,896 9,725
Change in plan assets
Fair value of plan assets, January 1 8,649 8,263
Investment return (loss) (1,250) 831
Contributions - 64
Benefits paid, including plan expenses (817) (509)
Fair value of plan assets, December 31 6,582 8,649
Deficiency in funded status at December 31, included on the consolidated balance sheets in accrued interest payable and other liabilities $ (314) $ (1,076)
Accumulated benefit obligation at December 31 $ 6,896 $ 9,725
2022 2021
Change in accrued pension benefit costs
Accrued benefit cost at January 1 $ (1,076) $ (2,095)
Contributions - 64
Net periodic benefit cost (credit) (59) 31
Net change in unrecognized actuarial loss and prior service cost 821 924
Accrued pension liability at December 31 $ (314) $ (1,076)
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).
The components of net periodic benefit cost are as follows for the years ended December 31:
2022 2021 2020
Interest cost on benefit obligation $ 224 $ 233 $ 306
Expected return on plan assets (490) (486) (488)
Amortization of unrecognized actuarial net loss 216 222 206
Settlement loss 109 - 152
Net periodic benefit cost (credit) $ 59 $ (31) $ 176
During 2022, 2021 and 2020, settlement losses of $109, $0 and $152 were recognized in connection with lump-sum benefit distributions, respectively. 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, 2022 includes net unrecognized pension costs before income taxes of $1,729.
The actuarial assumptions used in determining the benefit obligation are as follows for the years ended December 31:
2022 2021 2020
Discount rate 4.88 % 2.43 % 2.30 %
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:
2022 2021 2020
Discount rate 2.43 % 2.30 % 3.07 %
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.
The fair values of our pension plan assets by asset category were as follows as of December 31:
2022 2021
Total (Level 2) Total (Level 2)
Short-term investments $ 235 $ 235 $ 127 $ 127
Common collective trusts
Fixed income 2,983 2,983 3,750 3,750
Equity investments 3,364 3,364 4,772 4,772
Total $ 6,582 $ 6,582 $ 8,649 $ 8,649
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, 2022 and 2021:
•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 2023 to approximate net contribution costs.
Estimated future benefit payments are as follows for the next ten years:
Estimated Benefit Payments
2023 $ 800
2024 564
2025 669
2026 713
2027 546
2028 - 2032 2,557
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.
The components of shares eligible to be issued under the Directors Plan were as follows as of December 31:
2022 2021
Eligible
Shares Market
Value Eligible
Shares Market
Value
Unissued 52,961 $ 1,245 83,710 $ 2,135
Shares held in Rabbi Trust 154,879 3,640 105,654 2,694
Total 207,840 $ 4,885 189,364 $ 4,829
Cash Incentive Plans
Executive Cash Incentive Plan
We provide an executive cash incentive plan, which provides separate potential payouts for Isabella Bank's CEO, President, and CFO based on achievement of personal and corporate goals. The potential payouts under the plan range from 20% to 30% of the employee's annual salary. Expenses related to this plan for 2022, 2021, and 2020 were $252, $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 2022, 2021 and 2020 were $1,072, $1,063, and $1,101, respectively.
Restricted Stock Plan
Under the RSP, an equity based bonus plan, we may award restricted stock bonuses to eligible employees on an annual basis that are not fully transferable or vested until certain conditions are met. Currently, the eligible employees are the Bank's CEO, President and CFO. 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:
2022 2021
Number
of Shares Fair
Value Number
of Shares Fair
Value
Balance, January 1 20,123 $ 418 4,658 $ 82
Granted 6,949 174 15,465 336
Vested - - - -
Forfeited - - - -
Balance, December 31 27,072 $ 592 20,123 $ 418
Compensation expense related to the RSP for 2022, 2021, 2020 and was $147, $86, and $14 respectively. As of December 31, 2022, there was $346 of total remaining unrecognized compensation expense related to nonvested restricted stock awards granted under the RSP. The remaining expense is expected to be recognized over a weighted-average service period of 2.40 years.
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 2022, 2021 and 2020 were $251, $352, and $373, 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 $3,026 in 2022, $3,297 in 2021 and $1,868 in 2020.
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, 2022, 2021 and 2020, 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, 2022, 2021 and 2020.
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:
2022 2021 2020
Debit card income $ 3,783 $ 3,623 $ 2,961
Trust service fees 2,622 2,707 2,294
Investment advisory fees 383 364 284
Service charges and fees related to deposit accounts 345 312 290
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:
2022 2021 2020
Audit, consulting, and legal fees $ 2,358 $ 2,066 $ 1,836
ATM and debit card fees 1,909 1,810 1,441
Marketing costs 1,056 939 877
Loan underwriting fees 1,004 849 825
Donations and community relations 923 705 723
Memberships and subscriptions 876 877 740
Director fees 790 703 695
FDIC insurance premiums 537 690 612
All other 2,783 2,183 2,725
Total other noninterest expenses $ 12,236 $ 10,822 $ 10,474
Note 15 - Federal Income Taxes
Components of the consolidated provision for federal income taxes are summarized as follows for the years ended December 31:
2022 2021 2020
Currently payable $ 4,593 $ 4,371 $ 1,263
Deferred expense (benefit) 13 (523) (276)
Income tax expense $ 4,606 $ 3,848 $ 987
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:
2022 2021 2020
Income taxes at statutory rate $ 5,637 $ 4,903 $ 2,493
Effect of nontaxable income
Interest income on tax exempt municipal securities (587) (643) (802)
Earnings on corporate owned life insurance policies (197) (225) (346)
Other 329 312 288
Total effect of nontaxable income (455) (556) (860)
Effect of nondeductible expenses 45 46 68
Effect of tax credits (621) (617) (830)
Unrecognized deferred tax benefit on joint venture investment - 72 116
Federal income tax expense $ 4,606 $ 3,848 $ 987
The losses recognized for December 31, 2021 and 2020 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, 2022, 2021 and 2020 related to our investment and capital loss in CSS.
Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for federal income tax purposes. 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:
2022 2021
Deferred tax assets
Allowance for loan losses $ 1,848 $ 1,635
Deferred compensation 1,648 1,553
Employee benefit plans 82 98
Core deposit premium and acquisition expenses 764 759
Net unrealized losses on AFS securities 9,296 -
Net unrecognized actuarial losses on pension plan 363 536
Life insurance death benefit payable 497 497
Other 789 867
Total deferred tax assets 15,287 5,945
Deferred tax liabilities
Prepaid pension cost 297 309
Premises and equipment 1,590 1,729
Accretion on securities 166 61
Core deposit premium and acquisition expenses 984 947
Net unrealized gains on AFS securities - 1,018
Other 1,075 834
Total deferred tax liabilities 4,112 4,898
Net deferred tax assets (liabilities) $ 11,175 $ 1,047
While we are subject to U.S. federal income tax, we are no longer subject to examination by taxing authorities for years before 2019. 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, 2022 and 2021 and we are not aware of any claims for such amounts by federal income tax authorities.
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, 2020, 2021 and 2022 (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, 2020 $ 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
OCI before reclassifications (50,015) - 762 (49,253)
Amounts reclassified from AOCI - - 59 59
Subtotal (50,015) - 821 (49,194)
Tax effect 10,314 - (173) 10,141
OCI, net of tax (39,701) - 648 (39,053)
Balance, December 31, 2022 $ (35,828) $ - $ (1,366) $ (37,194)
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.
A summary of the components of unrealized gains on AFS securities included in OCI follows for the years ended December 31:
2022 2021 2020
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 $ (900) $ (49,115) $ (50,015) $ 5 $ (8,376) $ (8,371) $ 118 $ 7,356 $ 7,474
Reclassification adjustment for net (gains) losses included in net income - - - - - - - (71) (71)
Net unrealized gains (losses) (900) (49,115) (50,015) 5 (8,376) (8,371) 118 7,285 7,403
Tax effect - 10,314 10,314 - 1,759 1,759 - (1,530) (1,530)
Unrealized gains (losses), net of tax $ (900) $ (38,801) $ (39,701) $ 5 $ (6,617) $ (6,612) $ 118 $ 5,755 $ 5,873
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
2022 2021 2020
Unrealized gains (losses) on AFS securities
$ - $ - $ 71 Net gains on sale of AFS securities
- - 15 Federal income tax expense
$ - $ - $ 56 Net income
Change in unrecognized pension cost on defined benefit pension plan
$ 59 $ (31) $ 176 Other noninterest expenses
12 (7) 37 Federal income tax (benefit) expense
$ 47 $ (24) $ 139 Net income
Note 17 - Fair Value
Under fair value measurement and disclosure authoritative guidance, we group assets and liabilities measured at fair value into three levels, based on the markets in which the assets and liabilities are traded, and the reliability of the assumptions used to determine fair value, based on the prioritization of inputs in the valuation techniques. These levels are:
Level 1: Valuation is based upon quoted prices for identical instruments traded in active markets.
Level 2: Valuation is based upon quoted prices for similar instruments in active markets, quoted prices for identical or similar instruments in markets that are not active and model based valuation techniques for which all significant assumptions are observable in the market.
Level 3: Valuation is generated from model based techniques that use at least one significant assumption not observable in the market. These unobservable assumptions reflect estimates of assumptions that market participants would use in pricing the asset or liability.
The asset’s or liability’s fair value measurement level within the fair value hierarchy is based on the lowest level of any input that is significant to the fair value measurement. Valuation techniques maximize the use of observable inputs and minimize the use of unobservable inputs. Transfers between measurement levels are recognized at the end of reporting periods.
Fair value measurement requires the use of an exit price notion which may differ from entrance pricing. Generally, we believe our assets and liabilities classified as Level 1 or Level 2 approximate an exit price notion.
Following is a description of the valuation methodologies, key inputs, and an indication of the level of the fair value hierarchy in which the assets or liabilities are classified.
AFS securities: AFS securities are recorded at fair value on a recurring basis. Level 1 fair value measurement is based upon quoted prices for identical instruments. Level 2 fair value measurement is based upon quoted prices for similar instruments. If quoted prices are not available, fair values are measured using independent pricing models or other model based valuation techniques such as the present value of future cash flows, adjusted for the security’s credit rating, prepayment assumptions and other factors such as credit loss and liquidity assumptions. The values for Level 1 and Level 2 investment securities are generally obtained from an independent third party. On a quarterly basis, we compare the values provided to alternative pricing sources.
Loans: We do not record loans at fair value on a recurring basis. However, some loans are classified as impaired and a specific allowance for loan losses may be established. Loans for which it is probable that payment of interest and principal will be significantly different than the contractual terms of the original loan agreement are considered impaired. Once a loan is identified as impaired, we measure the estimated impairment. The fair value of impaired loans is estimated using one of several methods, including the present value of expected future cash flows discounted at the loan’s effective interest rate, or the fair value of the collateral, less costs to sell, if the loan is collateral dependent. Those impaired loans not requiring an allowance represent loans for which the fair value of the expected repayments or collateral exceed the recorded investments in such loans.
We review the net realizable values of the underlying collateral for collateral dependent impaired loans on at least a quarterly basis for all loan types. To determine the collateral value, we utilize independent appraisals, broker price opinions, or internal evaluations. We review these valuations to determine whether an additional discount should be applied given the age of market information that may have been considered as well as other factors such as costs to sell an asset if it is determined that the collateral will be liquidated in connection with the ultimate settlement of the loan. We use these valuations to determine if any specific reserves or charge-offs are necessary. We may obtain new valuations in certain circumstances, including when there has been significant deterioration in the condition of the collateral, if the foreclosure process has begun, or if the existing valuation is deemed to be outdated.
The following tables list the quantitative fair value information about impaired loans as of:
December 31, 2022
Valuation Technique Fair Value Unobservable Input Actual Range Weighted Average
Discount applied to collateral:
Real Estate 20% - 30%
24%
Equipment 25% - 35%
31%
Discounted value $17,143 Cash crop inventory 40% 40%
Livestock 30% 30%
Accounts receivable 25% 27%
Furniture, fixtures & equipment 45% 45%
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%
Collateral discount rates may have ranges to accommodate differences in the age of the independent appraisal, broker price opinion, or internal evaluation.
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.
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:
Carrying
Value Estimated
Fair Value Level 1 Level 2 Level 3
ASSETS
Cash and cash equivalents $ 38,924 $ 38,924 $ 38,924 $ - $ -
Mortgage loans AFS 379 395 - 395 -
Gross loans 1,264,173 1,225,669 - - 1,225,669
Less allowance for loan and lease losses 9,850 9,850 - - 9,850
Net loans 1,254,323 1,215,819 - - 1,215,819
Accrued interest receivable 7,472 7,472 7,472 - -
Equity securities without readily determinable fair values (1)
15,746 N/A - - -
OMSR 2,559 3,174 - 3,174 -
LIABILITIES
Deposits without stated maturities 1,492,235 1,492,235 1,492,235 - -
Deposits with stated maturities 252,040 240,964 - 240,964 -
Federal funds purchased and repurchase agreements 57,771 57,581 - 57,581 -
Subordinated debt, net of unamortized issuance costs
29,245 26,365 - 26,365 -
Accrued interest payable 255 255 255 - -
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 - -
(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.
Financial Instruments Recorded at Fair Value
The table below presents the recorded amount of assets and liabilities measured at fair value on December 31:
2022 2021
Total Level 1 Level 2 Level 3 Total Level 1 Level 2 Level 3
Recurring items
AFS securities
U.S. Treasury $ 208,701 $ - $ 208,701 $ - $ 209,703 $ - $ 209,703 $ -
States and political subdivisions 117,512 - 117,512 - 121,205 - 121,205 -
Auction rate money market preferred 2,342 - 2,342 - 3,242 - 3,242 -
Mortgage-backed securities 39,070 - 39,070 - 56,148 - 56,148 -
Collateralized mortgage obligations 205,728 - 205,728 - 92,301 - 92,301 -
Corporate 7,128 - 7,128 - 8,002 - 8,002 -
Total AFS securities 580,481 - 580,481 - 490,601 - 490,601 -
Nonrecurring items
Impaired loans (net of the ALLL) 17,143 - - 17,143 18,812 - - 18,812
Foreclosed assets 439 - - 439 211 - - 211
Total $ 598,063 $ - $ 580,481 $ 17,582 $ 509,624 $ - $ 490,601 $ 19,023
Percent of assets and liabilities measured at fair value 0.00 % 97.06 % 2.94 % 0.00 % 96.27 % 3.73 %
We recorded losses of $6 and $0 through earnings related fair value changes in foreclosed assets for the years ended December 31, 2022 and 2021. We had no other assets or liabilities recorded at fair value with changes in fair value recognized through earnings, on a recurring basis or nonrecurring basis, as of December 31, 2022 and 2021.
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:
2022 2021
Balance, January 1 $ 22,558 $ 2,977
New loans 1,829 43,264
Repayments (3,424) (23,683)
Balance, December 31 $ 20,963 $ 22,558
Total deposits of these principal officers and directors and their affiliates amounted to $12,317 and $15,268 at December 31, 2022 and 2021, 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, 2022 and 2021. Such shares are included in the computation of dividends and earnings per share.
The following table displays total assets of, and our donations to, the Foundation as of, and for the years ended December 31:
2022 2021 2020
Total assets $ 1,385 $ 1,511 $ 1,286
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, 2022, 2021, and 2020 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
2022 2021
ASSETS
Cash on deposit at the Bank $ 8,525 $ 11,535
Investments in subsidiaries 158,125 178,395
Premises and equipment 1,171 1,482
Other assets 47,922 48,923
TOTAL ASSETS $ 215,743 $ 240,335
LIABILITIES AND SHAREHOLDERS’ EQUITY
Subordinated debt, net of unamortized issuance costs
$ 29,245 $ 29,158
Other liabilities 288 129
Shareholders' equity 186,210 211,048
TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY $ 215,743 $ 240,335
Condensed Statements of Income
Year Ended December 31
2022 2021 2020
Income
Dividends from subsidiaries $ 6,000 $ 3,600 $ 9,300
Interest income 15 12 1
Net income on CSS joint venture - - 577
Other income 14 17 -
Total income 6,029 3,629 9,878
Expenses
Interest expense 1,065 615 5
Occupancy and equipment 67 67 61
Audit, consulting, and legal fees 522 590 573
Director fees 417 352 356
Other 1,172 1,145 1,167
Total expenses 3,243 2,769 2,162
Income before income tax benefit and equity in undistributed earnings of subsidiaries 2,786 860 7,716
Federal income tax benefit 670 500 216
Income before equity in undistributed earnings of subsidiaries 3,456 1,360 7,932
Undistributed earnings of subsidiaries 18,782 18,139 2,953
Net income $ 22,238 $ 19,499 $ 10,885
Condensed Statements of Cash Flows
Year Ended December 31
2022 2021 2020
Operating activities
Net income $ 22,238 $ 19,499 $ 10,885
Adjustments to reconcile net income to cash provided by operations
Undistributed earnings of subsidiaries (18,782) (18,139) (2,953)
Undistributed earnings of equity securities without readily determinable fair values - - (394)
Loss on sale of joint venture investment - - 394
Share-based payment awards under the Directors Plan 463 433 413
Share-based payment awards under the RSP 147 86 14
Amortization of subordinated debt issuance costs 87 52 -
Depreciation 50 50 47
Deferred income tax expense (benefit) (133) (267) 351
Changes in operating assets and liabilities which provided (used) cash
Other assets 1,383 (304) 183
Other liabilities 160 70 40
Net cash provided by (used in) operating activities 5,613 1,480 8,980
Investing activities
Purchase of equity investments (250) - -
Sale of joint venture investment - - 1,000
Net sales (purchases) of premises and equipment 260 (2) (37)
Net cash provided by (used in) investing activities 10 (2) 963
Financing activities
Issuance of subordinated debt, net of unamortized issuance costs
- 29,106 -
Cash dividends paid on common stock (8,082) (8,367) (8,524)
Proceeds from the issuance of common stock 1,762 1,593 4,185
Common stock repurchased (1,124) (13,758) (2,702)
Common stock purchased for deferred compensation obligations (1,189) (1,187) (1,592)
Net cash provided by (used in) financing activities (8,633) 7,387 (8,633)
Increase (decrease) in cash and cash equivalents (3,010) 8,865 1,310
Cash and cash equivalents at beginning of period 11,535 2,670 1,360
Cash and cash equivalents at end of period $ 8,525 $ 11,535 $ 2,670
Note 21 - Subsequent Events
In June 2016, the FASB issued ASU 2016-13 and updated the measurement for credit losses for AFS debt securities and assets measured at amortized cost, which include loans and any other financial assets with the contractual right to receive cash. The new approach requires the use of an expected credit loss model. The new CECL guidance was effective January 1, 2023 and we have fully adopted the new guidance as of that date.
Based on portfolio characteristics and economic conditions and expectations as of January 1, 2023, we recorded a combined increase to the ACL and reserve for unfunded commitments on January 1, 2023 of approximately $3,000 upon the adoption of ASU 2016-13.
We evaluated subsequent events after December 31, 2022 through the date our condensed consolidated financial statements were issued for potential recognition and disclosure. Outside of the adoption of CECL, no other subsequent events require financial statement recognition or disclosure between December 31, 2022 and the date our condensed consolidated financial statements were issued.

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ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS
Item 9. Changes in and Disagreements With Accountants on Accounting and Financial Disclosure.
None.

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ITEM 9A. CONTROLS AND PROCEDURES
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, 2022, 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, 2022, 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, 2022, 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, 2022.
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, 2022, our system of internal control over financial reporting was effective.
Our independent registered public accounting firm, Rehmann Robson LLC ("Rehmann"), has audited our 2022 consolidated financial statements and our internal control over financial reporting as of December 31, 2022. 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 2022
consolidated financial statements and an unqualified opinion on the effectiveness of our internal controls as of December 31, 2022, 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 7, 2023
/s/ Neil M. McDonnell
Neil M. McDonnell
Chief Financial Officer
(Principal Financial Officer)
March 7, 2023

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ITEM 9B. OTHER INFORMATION
Item 9B. Other Information.
None.

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ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
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 9, 2023 (“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.

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ITEM 11. EXECUTIVE COMPENSATION
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.

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ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
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, 2022, 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)
52,961 (3) - (5) - (6)
Restricted Stock Plan (2)
27,072 (4) - (5) - (6)
Total 80,033
(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.
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.
(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%
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, 2022, the Directors Plan had 207,840 shares eligible to be distributed under the Directors Plan. The Rabbi Trust holds 154,879 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.

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ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
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.

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ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES
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.
PART IV

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ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES
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*(17)
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)
10.10
Form of Registration Rights Agreement, dated as of June 2, 2021, by and among the Corporation and the several Purchasers (16)
Subsidiaries of the Registrant
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
Section 1350 Certification of Chief Executive Officer and Chief Financial Officer
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.
(17) Previously filed as an Exhibit to Isabella Bank Corporation Form 10-K, filed March 15, 2022, and incorporated herein by reference.