ISABELLA BANK Corp - Quarter Report: 2021 September (Form 10-Q)

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q


☒			Quarterly Report Pursuant to Section 13 or 15(d) of The Securities Exchange Act of 1934

For the quarterly period ended September 30, 2021


☐			Transition Report Pursuant to Section 13 or 15(d) of The Securities Exchange Act of 1934

For the transition period from to

Commission File Number: 0-18415

Isabella Bank Corporation

(Exact name of registrant as specified in its charter)

Michigan

38-2830092

(State or other jurisdiction of incorporation or organization)

(I.R.S. Employer Identification No.)

401 N. Main St

Mt. Pleasant

48858

(Address of principal executive offices)

(Zip code)

(989) 772-9471

(Registrant’s telephone number, including area code)

N/A

(Former name, former address and former fiscal year, if changed since last report)

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


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

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

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

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

Large accelerated filer

☐

Accelerated filer

☐

Non-accelerated filer

☒

Smaller reporting company

☒

Emerging growth company

☐

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

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

The number of common shares outstanding of the registrant’s Common Stock (no par value) was 7,654,317 as of October 27, 2021.

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ISABELLA BANK CORPORATION

QUARTERLY REPORT ON FORM 10-Q

Table of Contents

PART I – FINANCIAL INFORMATION

Item 1.

Financial Statements

Item 2.

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

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

Item 4.

Controls and Procedures

PART II – OTHER INFORMATION

Item 1.

Legal Proceedings

Item 1A.

Risk Factors

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

Item 3.

Defaults Upon Senior Securities

Item 4.

Mine Safety Disclosures

Item 5.

Item 6.

Forward Looking Statements

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

Glossary of Acronyms and Abbreviations

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


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

Table of Contents

PART I – FINANCIAL INFORMATION

Item 1. Financial Statements.

INTERIM CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)

(Dollars in thousands)


	September 30 2021		December 31 2020
ASSETS
Cash and cash equivalents
Cash and demand deposits due from banks	$	29,876	$	31,296
Interest bearing balances due from banks	176,606		215,344
Total cash and cash equivalents	206,482		246,640
AFS securities, at fair value	494,384		339,228
Mortgage loans AFS	818		2,741
Loans
Commercial	757,993		756,686
Agricultural	93,782		100,461
Residential real estate	321,620		307,543
Consumer	75,163		73,621
Gross loans	1,248,558		1,238,311
Less allowance for loan and lease losses	9,093		9,744
Net loans	1,239,465		1,228,567
Premises and equipment	24,569		25,140
Corporate owned life insurance policies	32,690		28,292
Equity securities without readily determinable fair values	17,383		17,383
Goodwill and other intangible assets	48,309		48,331
Accrued interest receivable and other assets	18,601		21,056
TOTAL ASSETS	$	2,082,701	$	1,957,378
LIABILITIES AND SHAREHOLDERS’ EQUITY
Deposits
Noninterest bearing	$	430,950	$	375,395
Interest bearing demand deposits	374,137		302,444
Certificates of deposit under $250 and other savings	806,185		781,286
Certificates of deposit over $250	81,044		107,192
Total deposits	1,692,316		1,566,317
Borrowed funds
Federal funds purchased and repurchase agreements	67,519		68,747
FHLB advances	60,000		90,000
Subordinated debt, net of unamortized issuance costs	29,136		—
Total borrowed funds	156,655		158,747
Accrued interest payable and other liabilities	12,088		13,726
Total liabilities	1,861,059		1,738,790
Shareholders’ equity
Common stock — no par value 15,000,000 shares authorized; issued and outstanding 7,926,610 shares (including 93,759 shares held in the Rabbi Trust) in 2021 and 7,997,247 shares (including 59,162 shares held in the Rabbi Trust) in 2020	140,004		142,247
Shares to be issued for deferred compensation obligations	4,455		4,183
Retained earnings	72,796		64,460
Accumulated other comprehensive income	4,387		7,698
Total shareholders’ equity	221,642		218,588
TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY	$	2,082,701	$	1,957,378

See notes to interim condensed consolidated financial statements (unaudited).

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INTERIM CONDENSED CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)

(Dollars in thousands except per share amounts)


	Three Months Ended September 30				Nine Months Ended September 30
	2021		2020		2021		2020
Interest income
Loans, including fees	$	13,033	$	13,554	$	38,634	$	40,105
AFS securities
Taxable	1,224		1,071		3,529		3,912
Nontaxable	725		911		2,393		2,950
Federal funds sold and other	160		164		516		803
Total interest income	15,142		15,700		45,072		47,770
Interest expense
Deposits	1,251		1,996		4,363		7,034
Borrowings
Federal funds purchased and repurchase agreements	13		7		40		22
FHLB advances	299		1,200		1,093		3,911
Subordinated debt, net of unamortized issuance costs	266		—		349		—
Total interest expense	1,829		3,203		5,845		10,967
Net interest income	13,313		12,497		39,227		36,803
Provision for loan losses	(107)		516		(599)		1,409
Net interest income after provision for loan losses	13,420		11,981		39,826		35,394
Noninterest income
Service charges and fees	1,964		1,950		5,489		4,689
Wealth management fees	772		649		2,274		1,877
Net gain on sale of mortgage loans	339		1,036		1,459		1,653
Earnings on corporate owned life insurance policies	201		187		577		558
Gains from redemption of corporate owned life insurance policies	—		—		150		873
Other	91		238		265		654
Total noninterest income	3,367		4,060		10,214		10,304
Noninterest expenses
Compensation and benefits	6,116		6,101		17,693		17,763
Furniture and equipment	1,349		1,426		4,049		4,318
Occupancy	866		889		2,726		2,668
Other	2,854		2,534		8,029		7,846
Total noninterest expenses	11,185		10,950		32,497		32,595
Income before federal income tax expense	5,602		5,091		17,543		13,103
Federal income tax expense	916		734		2,838		1,495
NET INCOME	$	4,686	$	4,357	$	14,705	$	11,608
Earnings per common share
Basic	$	0.59	$	0.55	$	1.85	$	1.46
Diluted	$	0.58	$	0.54	$	1.82	$	1.43
Cash dividends per common share	$	0.27	$	0.27	$	0.81	$	0.81

See notes to interim condensed consolidated financial statements (unaudited).

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INTERIM CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (UNAUDITED)

(Dollars in thousands)


	Three Months Ended September 30				Nine Months Ended September 30
	2021		2020		2021		2020
Net income	$	4,686	$	4,357	$	14,705	$	11,608
Unrealized gains (losses) on AFS securities arising during the period	(1,690)		(66)		(4,247)		8,304
Reclassification adjustment for net (gains) losses included in net income	—		—		—		(71)
Tax effect (1)	353		58		894		(1,714)
Unrealized gains (losses) on AFS securities, net of tax	(1,337)		(8)		(3,353)		6,519
Unrealized gains (losses) on derivative instruments arising during the period	—		20		53		(145)
Tax effect (1)	—		(4)		(11)		30
Unrealized gains (losses) on derivative instruments, net of tax	—		16		42		(115)
Other comprehensive income (loss), net of tax	(1,337)		8		(3,311)		6,404
Comprehensive income (loss)	$	3,349	$	4,365	$	11,394	$	18,012

(1)See “Note 10 – Accumulated Other Comprehensive Income” for tax effect reconciliation.

See notes to interim condensed consolidated financial statements (unaudited).

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INTERIM CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY (UNAUDITED)

(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)	—	—		—		11,608		6,404		18,012
Issuance of common stock	184,144	3,274		—		—		—		3,274
Common stock transferred from the Rabbi Trust to satisfy deferred compensation obligations	—	1,273		(1,273)		—		—		—
Share-based payment awards under the Directors Plan	—	—		334		—		—		334
Common stock purchased for deferred compensation obligations	—	(1,252)		—		—		—		(1,252)
Common stock repurchased pursuant to publicly announced repurchase plan	(87,047)	(1,619)		—		—		—		(1,619)
Cash dividends paid ($0.81 per common share)	—	—		—		(6,386)		—		(6,386)
Balance, September 30, 2020	8,007,901	$	142,745	$	4,104	$	67,321	$	8,375	$	222,545
Balance, January 1, 2021	7,997,247	$	142,247	$	4,183	$	64,460	$	7,698	$	218,588
Comprehensive income (loss)	—	—		—		14,705		(3,311)		11,394
Issuance of common stock	52,523	1,196		—		—		—		1,196
Common stock transferred from the Rabbi Trust to satisfy deferred compensation obligations	—	71		(71)		—		—		—
Share-based payment awards under the Directors Plan	—	—		343		—		—		343
Share-based compensation expense recognized in earnings under the RSP	—	58		—		—		—		58
Common stock purchased for deferred compensation obligations	—	(869)		—		—		—		(869)
Common stock repurchased pursuant to publicly announced repurchase plan	(123,160)	(2,699)		—		—		—		(2,699)
Cash dividends paid ($0.81 per common share)	—	—		—		(6,369)		—		(6,369)
Balance, September 30, 2021	7,926,610	$	140,004	$	4,455	$	72,796	$	4,387	$	221,642

See notes to interim condensed consolidated financial statements (unaudited).

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INTERIM CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)

(Dollars in thousands)


	Nine Months Ended September 30
	2021		2020
OPERATING ACTIVITIES
Net income	$	14,705	$	11,608
Reconciliation of net income to net cash provided by operating activities:
Undistributed earnings of equity securities without readily determinable fair values	—		(61)
Provision for loan losses	(599)		1,409
Depreciation	1,761		1,958
Amortization of OMSR	465		386
Amortization of acquisition intangibles	22		38
Amortization of subordinated debt issuance costs	30		—
Net amortization of AFS securities	1,656		1,539
Net gains on sale of AFS securities	—		(71)
Net gain on sale of mortgage loans	(1,459)		(1,653)
OMSR impairment loss	—		316
Net (gains) losses on foreclosed assets	1		(43)
Increase in cash value of corporate owned life insurance policies, net of expenses	(538)		(521)
Gains from redemption of corporate owned life insurance policies	(150)		(873)
Share-based payment awards under the Directors Plan	343		334
Share-based payment awards under the RSP	58		—
Origination of loans held-for-sale	(40,329)		(82,464)
Proceeds from loan sales	43,711		80,360
Net changes in operating assets and liabilities which provided (used) cash:
Other assets	1,811		(1,696)
Accrued interest payable and other liabilities	(325)		370
Net cash provided by (used in) operating activities	21,163		10,936
INVESTING ACTIVITIES
Activity in AFS securities
Sales	—		26,855
Maturities, calls, and principal payments	79,020		72,013
Purchases	(240,079)		(25,318)
Net loan principal (originations) collections	(10,583)		(116,878)
Proceeds from sales of foreclosed assets	462		146
Purchases of premises and equipment	(1,190)		(1,465)
Purchases of corporate owned life insurance policies	(4,272)		(625)
Proceeds from redemption of corporate owned life insurance policies	562		2,305
Funding of low income housing tax credit investments	(377)		(403)
Net cash provided by (used in) investing activities	(176,457)		(43,370)

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INTERIM CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (continued)

(Dollars in thousands)


	Nine Months Ended September 30
	2021		2020
FINANCING ACTIVITIES
Net increase (decrease) in deposits	$	125,999	$	181,244
Net increase (decrease) in fed funds purchased and repurchase agreements	(1,228)		2,350
Net increase (decrease) in FHLB advances	(30,000)		(40,000)
Issuance of subordinated debt, net of unamortized issuance costs	29,106		—
Cash dividends paid on common stock	(6,369)		(6,386)
Proceeds from issuance of common stock	1,196		3,274
Common stock repurchased	(2,699)		(1,619)
Common stock purchased for deferred compensation obligations	(869)		(1,252)
Net cash provided by (used in) financing activities	115,136		137,611
Increase (decrease) in cash and cash equivalents	(40,158)		105,177
Cash and cash equivalents at beginning of period	246,640		60,572
Cash and cash equivalents at end of period	$	206,482	$	165,749
SUPPLEMENTAL CASH FLOWS INFORMATION:
Interest paid	$	5,702	$	11,164
Income taxes paid	$	2,250	$	556
SUPPLEMENTAL NONCASH INFORMATION:
Transfers of loans to foreclosed assets	$	284	$	298

See notes to interim condensed consolidated financial statements (unaudited).

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NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

(Dollars in thousands except per share amounts)

Note 1 – Basis of Presentation

As used in these notes, as well as in Management's Discussion and Analysis of Financial Condition and Results of Operations, 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” refer to Isabella Bank Corporation’s subsidiary, Isabella Bank.

The accompanying unaudited interim condensed consolidated financial statements have been prepared in accordance with GAAP for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by GAAP for complete financial statements. In our opinion, all adjustments considered necessary for a fair presentation have been included. Operating results for the three and nine-month periods ended September 30, 2021 are not necessarily indicative of the results that may be expected for the year ending December 31, 2021. For further information, refer to our Annual Report on Form 10-K for the year ended December 31, 2020.

Our accounting policies are materially the same as those discussed in Note 1 to the Consolidated Financial Statements included in our Annual Report on Form 10-K for the year ended December 31, 2020.

Reclassifications: Certain amounts reported in the interim 2020 consolidated financial statements have been reclassified to conform with the 2021 presentation.

Note 2 – Accounting Standards Updates

Pending

ASU No. 2016-13: “Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments”, as amended

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.

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We have invested a considerable amount of effort toward this guidance and will continue to invest considerable effort until our implementation date. An internal committee was formed and is accountable for timely and accurate adoption of the guidance. A service provider that has focused on the ALLL for more than 10 years and serves hundreds of financial institutions has been engaged to provide us with education, advisory, and software solutions exclusively related to the ACL. We will run parallel processes which will help to ensure we are ready to calculate, review, and report the ACL by the required implementation date.

Note 3 – AFS Securities

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


	September 30, 2021
	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses		Fair Value
U.S. Treasury	$	192,556	$	36	$	523	$	192,069
States and political subdivisions	124,122		4,665		98		128,689
Auction rate money market preferred	3,200		46		—		3,246
Mortgage-backed securities	59,966		2,064		—		62,030
Collateralized mortgage obligations	97,875		2,892		—		100,767
Corporate	7,650		14		81		7,583
Total	$	485,369	$	9,717	$	702	$	494,384


	December 31, 2020
	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses		Fair Value
States and political subdivisions	$	137,710	$	5,946	$	—	$	143,656
Auction rate money market preferred	3,200		37		—		3,237
Mortgage-backed securities	85,926		2,726		—		88,652
Collateralized mortgage obligations	97,430		4,553		—		101,983
Corporate	1,700		—		—		1,700
Total	$	325,966	$	13,262	$	—	$	339,228

The amortized cost and fair value of AFS securities by contractual maturity at September 30, 2021 are as follows:


	Maturing								Securities with Variable Monthly Payments or Noncontractual Maturities
	Due in One Year or Less		After One Year But Within Five Years		After Five Years But Within Ten Years		After Ten Years				Total
U.S. Treasury	$	—	$	162,175	$	30,381	$	—	$	—	$	192,556
States and political subdivisions	15,042		60,038		21,498		27,544		—		124,122
Auction rate money market preferred	—		—		—		—		3,200		3,200
Mortgage-backed securities	—		—		—		—		59,966		59,966
Collateralized mortgage obligations	—		—		—		—		97,875		97,875
Corporate	—		—		6,150		1,500		—		7,650
Total amortized cost	$	15,042	$	222,213	$	58,029	$	29,044	$	161,041	$	485,369
Fair value	$	15,154	$	224,172	$	58,858	$	30,157	$	166,043	$	494,384

Expected maturities for government sponsored enterprises and states and political subdivisions may differ from contractual maturities because issuers may have the right to call or prepay obligations.

As the auction rate money market preferred investments have continual call dates, they are not reported by a specific maturity group. Because of their variable monthly payments, mortgage-backed securities and collateralized mortgage obligations are not reported by a specific maturity group.

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A summary of the sales activity of AFS securities was as follows for the:


	Three Months Ended September 30				Nine Months Ended September 30
	2021		2020		2021		2020
Proceeds from sales of AFS securities	$	—	$	—	$	—	$	26,855
Realized gains (losses)	$	—	$	—	$	—	$	71
Applicable income tax expense (benefit)	$	—	$	—	$	—	$	15

The following information pertains to AFS securities with gross unrealized losses at September 30, 2021, aggregated by investment category and length of time that individual securities have been in a continuous loss position. There were no AFS securities with gross unrealized losses in a continuous loss position at December 31, 2020.


	September 30, 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	$	523	$	161,652	$	—	$	—	$	523
States and political subdivisions	98		14,939		—		—		98
Corporate	81		4,369		—		—		81
Total	$	702	$	180,960	$	—	$	—	$	702
Number of securities in an unrealized loss position:			37				—		37

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

As of September 30, 2021 and December 31, 2020, we conducted an analysis to determine whether any AFS securities currently in an unrealized loss position should be identified as other-than-temporarily impaired. Such analyses considered, among other factors, the following criteria:

•Has the value of the investment declined more than what is deemed to be reasonable based on a risk and maturity adjusted discount rate?

•Is the investment credit rating below investment grade?

•Is it probable the issuer will be unable to pay the amount when due?

•Is it more likely than not that we will have to sell the security before recovery of its cost basis?

•Has the duration of the investment been extended?

Based on our analysis, which included the criteria outlined above and the fact that we have asserted that we do not have to sell any AFS securities in an unrealized loss position, we do not believe that the values of any AFS securities are other-than-temporarily impaired as of September 30, 2021 or December 31, 2020, with the exception of one municipal bond previously identified.

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Note 4 – Loans and ALLL

We grant commercial, agricultural, residential real estate, and consumer loans to customers situated primarily in Clare, Gratiot, Isabella, Mecosta, Midland, Montcalm, and Saginaw counties in Michigan. The ability of the borrowers to honor their repayment obligations is often dependent upon the real estate, agricultural, manufacturing, retail, gaming, tourism, health care, higher education, and general economic conditions of this region. Substantially all of our consumer and residential real estate loans are secured by various items of property, while commercial loans are secured primarily by real estate, business assets, and personal guarantees. A portion of loans are unsecured.

Loans that we have the intent and ability to hold in our portfolio are reported at their outstanding principal balance adjusted for any charge-offs, the ALLL, and deferred fees or costs. Unless a loan has a nonaccrual status, interest income is accrued over the term of the loan based on the principal amount outstanding. Loan origination fees and certain direct loan origination costs are capitalized and recognized as a component of interest income over the term of the loan using the appropriate amortization method.

The accrual of interest on commercial and agricultural loans, as well as residential real estate loans, is discontinued at the time a loan is 90 days or more past due unless the credit is well-secured and in the process of short-term collection. Upon transferring a loan to nonaccrual status, we perform an evaluation to determine the net realizable value of the underlying collateral. This evaluation is used to help determine if a charge-off is necessary. Consumer loans are typically charged-off no later than 180 days past due. Past due status is based on the contractual term of the loan. In all cases, a loan is placed in nonaccrual status at an earlier date if collection of principal or interest is considered doubtful.

When a loan is placed in nonaccrual status, all interest accrued in the current calendar year, but not collected, is reversed against interest income while interest accrued in prior calendar years, but not collected, is charged against the ALLL. Loans may be returned to accrual status after six months of continuous performance and achievement of current payment status.

Commercial and agricultural loans include loans for commercial real estate, commercial operating loans, advances to mortgage brokers, farmland and agricultural production, and loans to states and political subdivisions. Repayment of these loans is dependent upon the successful operation and management of a business. We minimize our risk by limiting the amount of direct credit exposure to any one borrower to $15,000. Borrowers with direct credit needs of more than $15,000 may be serviced through the use of loan participations with other commercial banks. Commercial and agricultural real estate loans commonly require loan-to-value limits of 80% or less. Depending upon the type of loan, past credit history, and current operating results, we may require the borrower to pledge accounts receivable, inventory, property, or equipment. Government agency guarantee may be required. Personal guarantees and/or life insurance beneficiary assignments are generally required from the owners of closely held corporations, partnerships, and sole proprietorships. In addition, we may require annual financial statements, prepare cash flow analyses, and review credit reports.

We entered into a mortgage purchase program in 2016 with a financial institution where we participate in advances to mortgage brokers (“advances”). The mortgage brokers originate residential mortgage loans with the intent to sell them on the secondary market. We participate in the advance to the mortgage broker, which is secured by the underlying mortgage loan, until it is ultimately sold on the secondary market. As such, the average life of each participated advance is approximately 20-30 days. Funds from the sale of the loan are used to pay off our participation in the advance to the mortgage broker. We classify these advances as commercial loans and include the outstanding balance in commercial loans on our consolidated balance sheets. Under the participation agreement, we committed to a maximum outstanding aggregate amount of $80,000. The difference between our outstanding balance and the maximum outstanding aggregate amount is classified as “Unfunded commitments under lines of credit” in the “Contractual Obligations and Loan Commitments” section of the Management's Discussion and Analysis of Financial Condition and Results of Operations of this report.

We offer adjustable rate mortgages, construction loans, and fixed rate residential real estate loans which have amortization periods up to a maximum of 30 years. We consider the anticipated direction of interest rates, balance sheet duration, the sensitivity of our balance sheet to changes in interest rates, our liquidity needs, and overall loan demand to determine whether or not to sell fixed rate loans to Freddie Mac.

Our lending policies generally limit the maximum loan-to-value ratio on residential real estate loans to 100% of the lower of the appraised value of the property or the purchase price. Private mortgage insurance is typically required on loans with loan-to-value ratios in excess of 80% unless the loan qualifies for government guarantees.

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Underwriting criteria for originated 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 September 30, 2021. The COVID-19 pandemic led to the temporary and some permanent closures of businesses throughout the communities in which we serve, which also led to increased unemployment. We increased the ALLL during 2020 as a result of increased economic and environmental related risk factors, primarily driven by COVID-19. While these risk factors remain, improvement in credit quality indicators resulted in a reduction to the ALLL during the first nine months of 2021.

Summaries of the ALLL and the recorded investment in loans by segments follows:



	Allowance for Loan Losses
	Three Months Ended September 30, 2021
	Commercial		Agricultural		Residential Real Estate		Consumer		Unallocated		Total
July 1, 2021	$	2,311	$	248	$	954	$	938	$	4,909	$	9,360
Charge-offs	(1)		(77)		—		(168)		—		(246)
Recoveries	22		1		29		34		—		86
Provision for loan losses	(801)		294		(226)		45		581		(107)
September 30, 2021	$	1,531	$	466	$	757	$	849	$	5,490	$	9,093

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	Allowance for Loan Losses
	Nine Months Ended September 30, 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)		—		(349)		—		(458)
Recoveries	121		6		132		147		—		406
Provision for loan losses	(720)		226		(738)		253		380		(599)
September 30, 2021	$	1,531	$	466	$	757	$	849	$	5,490	$	9,093


	Allowance for Loan Losses and Recorded Investment in Loans
	September 30, 2021
	Commercial		Agricultural		Residential Real Estate		Consumer		Unallocated		Total
ALLL
Individually evaluated for impairment	$	21	$	—	$	562	$	—	$	—	$	583
Collectively evaluated for impairment	1,510		466		195		849		5,490		8,510
Total	$	1,531	$	466	$	757	$	849	$	5,490	$	9,093
Loans
Individually evaluated for impairment	$	11,563	$	14,623	$	3,482	$	—			$	29,668
Collectively evaluated for impairment	746,430		79,159		318,138		75,163				1,218,890
Total	$	757,993	$	93,782	$	321,620	$	75,163			$	1,248,558



	Allowance for Loan Losses
	Three Months Ended September 30, 2020
	Commercial		Agricultural		Residential Real Estate		Consumer		Unallocated		Total
July 1, 2020	$	2,121	$	356	$	1,193	$	825	$	4,382	$	8,877
Charge-offs	(2)		—		(13)		(31)		—		(46)
Recoveries	81		2		36		40		—		159
Provision for loan losses	(255)		(16)		90		21		676		516
September 30, 2020	$	1,945	$	342	$	1,306	$	855	$	5,058	$	9,506


	Allowance for Loan Losses
	Nine Months Ended September 30, 2020
	Commercial		Agricultural		Residential Real Estate		Consumer		Unallocated		Total
January 1, 2020	$	1,914	$	634	$	2,047	$	922	$	2,422	$	7,939
Charge-offs	(7)		(22)		(28)		(213)		—		(270)
Recoveries	133		37		102		156		—		428
Provision for loan losses	(95)		(307)		(815)		(10)		2,636		1,409
September 30, 2020	$	1,945	$	342	$	1,306	$	855	$	5,058	$	9,506

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	Allowance for Loan Losses and Recorded Investment in Loans
	December 31, 2020
	Commercial		Agricultural		Residential Real Estate		Consumer		Unallocated		Total
ALLL
Individually evaluated for impairment	$	84	$	56	$	771	$	—	$	—	$	911
Collectively evaluated for impairment	2,078		255		592		798		5,110		8,833
Total	$	2,162	$	311	$	1,363	$	798	$	5,110	$	9,744
Loans
Individually evaluated for impairment	$	9,821	$	13,796	$	4,319	$	—			$	27,936
Collectively evaluated for impairment	746,865		86,665		303,224		73,621				1,210,375
Total	$	756,686	$	100,461	$	307,543	$	73,621			$	1,238,311

The following tables display the internally assigned credit risk ratings for commercial and agricultural credit exposures as of:


	September 30, 2021
	Commercial								Agricultural
	Real Estate		Other		Advances to Mortgage Brokers		Total		Real Estate		Other		Total		Total
Rating
1 - Excellent	$	—	$	161	$	—	$	161	$	—	$	—	$	—	$	161
2 - High quality	8,089		9,501		—		17,590		462		8		470		18,060
3 - High satisfactory	79,462		43,555		46,977		169,994		10,553		3,185		13,738		183,732
4 - Low satisfactory	421,240		111,863		—		533,103		34,263		16,553		50,816		583,919
5 - Special mention	12,880		2,144		—		15,024		13,827		3,791		17,618		32,642
6 - Substandard	15,308		6,652		—		21,960		4,468		3,861		8,329		30,289
7 - Vulnerable	37		124		—		161		2,536		275		2,811		2,972
8 - Doubtful	—		—		—		—		—		—		—		—
9 - Loss	—		—		—		—		—		—		—		—
Total	$	537,016	$	174,000	$	46,977	$	757,993	$	66,109	$	27,673	$	93,782	$	851,775


	December 31, 2020
	Commercial								Agricultural
	Real Estate		Other		Advances to Mortgage Brokers		Total		Real Estate		Other		Total		Total
Rating
1 - Excellent	$	—	$	—	$	—	$	—	$	—	$	—	$	—	$	—
2 - High quality	2,308		13,406		—		15,714		541		11		552		16,266
3 - High satisfactory	69,327		51,093		50,258		170,678		14,411		5,312		19,723		190,401
4 - Low satisfactory	403,733		122,025		—		525,758		34,464		17,600		52,064		577,822
5 - Special mention	15,049		6,174		—		21,223		13,137		3,240		16,377		37,600
6 - Substandard	15,854		6,130		—		21,984		5,267		2,693		7,960		29,944
7 - Vulnerable	26		1,303		—		1,329		3,208		387		3,595		4,924
8 - Doubtful	—		—		—		—		190		—		190		190
9 - Loss	—		—		—		—		—		—		—		—
Total	$	506,297	$	200,131	$	50,258	$	756,686	$	71,218	$	29,243	$	100,461	$	857,147

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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. 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.

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•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.

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9. LOSS – Charge-off

Credit is considered uncollectible and of such little value that their continuance as bankable assets is not warranted. This classification is for charged-off loans but does not mean that the asset has absolutely no recovery or salvage value. These loans are further characterized by:

•Liquidation or reorganization under Bankruptcy, with poor prospects of collection.

•Fraudulently overstated assets and/or earnings.

•Collateral has marginal or no value.

•Debtor cannot be located.

•Over 120 days delinquent.

Our primary credit quality indicator for residential real estate and consumer loans is the individual loan’s past due aging. The following tables summarize the past due and current loans for the entire loan portfolio as of:


	September 30, 2021
	Accruing Interest and Past Due:								Total Past Due and Nonaccrual
	30-59 Days		60-89 Days		90 Days or More		Nonaccrual				Current		Total
Commercial
Commercial real estate	$	43	$	—	$	—	$	37	$	80	$	536,936	$	537,016
Commercial other	141		—		—		124		265		173,735		174,000
Advances to mortgage brokers	—		—		—		—		—		46,977		46,977
Total commercial	184		—		—		161		345		757,648		757,993
Agricultural
Agricultural real estate	—		49		—		2,536		2,585		63,524		66,109
Agricultural other	—		—		—		275		275		27,398		27,673
Total agricultural	—		49		—		2,811		2,860		90,922		93,782
Residential real estate
Senior liens	156		—		—		105		261		286,952		287,213
Junior liens	—		—		—		—		—		2,837		2,837
Home equity lines of credit	7		—		—		—		7		31,563		31,570
Total residential real estate	163		—		—		105		268		321,352		321,620
Consumer
Secured	17		—		—		—		17		72,268		72,285
Unsecured	8		—		—		—		8		2,870		2,878
Total consumer	25		—		—		—		25		75,138		75,163
Total	$	372	$	49	$	—	$	3,077	$	3,498	$	1,245,060	$	1,248,558

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	December 31, 2020
	Accruing Interest and Past Due:								Total Past Due and Nonaccrual
	30-59 Days		60-89 Days		90 Days or More		Nonaccrual				Current		Total
Commercial
Commercial real estate	$	333	$	—	$	—	$	26	$	359	$	505,938	$	506,297
Commercial other	486		—		—		1,303		1,789		198,342		200,131
Advances to mortgage brokers	—		—		—		—		—		50,258		50,258
Total commercial	819		—		—		1,329		2,148		754,538		756,686
Agricultural
Agricultural real estate	—		—		—		3,398		3,398		67,820		71,218
Agricultural other	1		—		—		387		388		28,855		29,243
Total agricultural	1		—		—		3,785		3,786		96,675		100,461
Residential real estate
Senior liens	3,203		145		—		199		3,547		269,425		272,972
Junior liens	25		—		—		—		25		3,791		3,816
Home equity lines of credit	8		—		—		—		8		30,747		30,755
Total residential real estate	3,236		145		—		199		3,580		303,963		307,543
Consumer
Secured	93		—		—		—		93		70,349		70,442
Unsecured	3		—		—		—		3		3,176		3,179
Total consumer	96		—		—		—		96		73,525		73,621
Total	$	4,152	$	145	$	—	$	5,313	$	9,610	$	1,228,701	$	1,238,311

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.

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The following is a summary of impaired loans as of:


	September 30, 2021						December 31, 2020
	Recorded Balance		Unpaid Principal Balance		Valuation Allowance		Recorded Balance		Unpaid Principal Balance		Valuation Allowance
Impaired loans with a valuation allowance
Commercial real estate	$	197	$	197	$	13	$	2,048	$	2,290	$	79
Commercial other	3,053		3,053		8		107		107		5
Agricultural real estate	—		—		—		1,994		1,994		54
Agricultural other	—		—		—		1,355		1,355		2
Residential real estate senior liens	3,482		3,754		562		4,319		4,661		771
Total impaired loans with a valuation allowance	6,732		7,004		583		9,823		10,407		911
Impaired loans without a valuation allowance
Commercial real estate	8,021		8,337				3,006		3,080
Commercial other	292		292				4,660		4,660
Agricultural real estate	9,814		9,814				8,681		8,731
Agricultural other	4,809		4,809				1,766		1,766
Total impaired loans without a valuation allowance	22,936		23,252				18,113		18,237
Impaired loans
Commercial	11,563		11,879		21		9,821		10,137		84
Agricultural	14,623		14,623		—		13,796		13,846		56
Residential real estate	3,482		3,754		562		4,319		4,661		771
Total impaired loans	$	29,668	$	30,256	$	583	$	27,936	$	28,644	$	911

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The following is a summary of impaired loans for the:



	Three Months Ended September 30
	2021				2020
	Average Recorded Balance		Interest Income Recognized		Average Recorded Balance		Interest Income Recognized
Impaired loans with a valuation allowance
Commercial real estate	$	1,377	$	3	$	1,564	$	37
Commercial other	3,090		35		442		13
Agricultural real estate	94		—		2,198		27
Agricultural other	—		—		1,355		18
Residential real estate senior liens	3,585		37		4,600		48
Total impaired loans with a valuation allowance	8,146		75		10,159		143
Impaired loans without a valuation allowance
Commercial real estate	7,013		121		3,285		43
Commercial other	305		9		4,503		59
Agricultural real estate	9,845		113		7,548		68
Agricultural other	4,794		58		1,947		21
Home equity lines of credit	—		—		56		—
Total impaired loans without a valuation allowance	21,957		301		17,339		191
Impaired loans
Commercial	11,785		168		9,794		152
Agricultural	14,733		171		13,048		134
Residential real estate	3,585		37		4,656		48
Consumer	—		—		—		—
Total impaired loans	$	30,103	$	376	$	27,498	$	334

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	Nine Months Ended September 30
	2021				2020
	Average Recorded Balance		Interest Income Recognized		Average Recorded Balance		Interest Income Recognized
Impaired loans with a valuation allowance
Commercial real estate	$	2,161	$	66	$	1,157	$	83
Commercial other	1,569		71		454		19
Agricultural real estate	737		11		2,100		77
Agricultural other	226		—		1,355		60
Residential real estate senior liens	3,908		115		4,998		152
Total impaired loans with a valuation allowance	8,601		263		10,064		391
Impaired loans without a valuation allowance
Commercial real estate	6,109		315		3,964		162
Commercial other	2,494		59		3,240		106
Agricultural real estate	9,760		378		7,590		214
Agricultural other	4,115		174		2,529		84
Home equity lines of credit	—		—		81		5
Consumer secured	—		—		1		—
Total impaired loans without a valuation allowance	22,478		926		17,405		571
Impaired loans
Commercial	12,333		511		8,815		370
Agricultural	14,838		563		13,574		435
Residential real estate	3,908		115		5,079		157
Consumer	—		—		1		—
Total impaired loans	$	31,079	$	1,189	$	27,469	$	962

As a result of line of credit agreements with borrowers, we had committed to advance $171 and $98 in additional funds to be disbursed in connection with impaired loans as of September 30, 2021 and December 31, 2020, respectively.

Troubled Debt Restructurings

A loan modification is considered to be a TDR when the modification includes terms outside of normal lending practices to a borrower who is experiencing financial difficulties.

Typical concessions granted include, but are not limited to:

•Agreeing to interest rates below prevailing market rates for debt with similar risk characteristics.

•Extending the amortization period beyond typical lending guidelines for loans with similar risk characteristics.

•Agreeing to an interest-only payment structure and delaying principal payments.

•Forgiving principal.

•Forgiving accrued interest.

To determine if a borrower is experiencing financial difficulties, factors we consider include:

•The borrower is currently in default on any debt.

•The borrower would likely default on any debt if the concession is not granted.

•The borrower’s cash flow is insufficient to service all debt if the concession is not granted.

•The borrower has declared, or is in the process of declaring, bankruptcy.

•The borrower is unlikely to continue as a going concern (if the entity is a business).

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The following is a summary of TDRs granted for the:



	Three Months Ended September 30
	2021					2020
	Number of Loans	Pre-Modification Recorded Investment		Post-Modification Recorded Investment		Number of Loans	Pre-Modification Recorded Investment		Post-Modification Recorded Investment
Commercial other	—	$	—	$	—	4	$	3,740	$	3,740


	Nine Months Ended September 30
	2021					2020
	Number of Loans	Pre-Modification Recorded Investment		Post-Modification Recorded Investment		Number of Loans	Pre-Modification Recorded Investment		Post-Modification Recorded Investment
Commercial other	5	$	4,761	$	4,761	6	$	4,702	$	4,702
Agricultural other	6	3,712		3,712		4	2,361		2,361
Residential real estate	—	—		—		2	94		94
Total	11	$	8,473	$	8,473	12	$	7,157	$	7,157

The following is a summary of concessions we granted to borrowers experiencing financial difficulty for the:



	Three Months Ended September 30
	2021						2020
	Below Market Interest Rate			Below Market Interest Rate and Extension of Amortization Period			Below Market Interest Rate			Below Market Interest Rate and Extension of Amortization Period
	Number of Loans	Pre-Modification Recorded Investment		Number of Loans	Pre-Modification Recorded Investment		Number of Loans	Pre-Modification Recorded Investment		Number of Loans	Pre-Modification Recorded Investment
Commercial other	—	$	—	—	$	—	1	$	68	3	$	3,672


	Nine Months Ended September 30
	2021						2020
	Below Market Interest Rate			Below Market Interest Rate and Extension of Amortization Period			Below Market Interest Rate			Below Market Interest Rate and Extension of Amortization Period
	Number of Loans	Pre-Modification Recorded Investment		Number of Loans	Pre-Modification Recorded Investment		Number of Loans	Pre-Modification Recorded Investment		Number of Loans	Pre-Modification Recorded Investment
Commercial other	1	$	3,189	4	$	1,572	2	$	987	4	$	3,715
Agricultural other	6	3,712		—	—		—	—		4	2,361
Residential real estate	—	—		—	—		—	—		2	94
Total	7	$	6,901	4	$	1,572	2	$	987	10	$	6,170

We did not restructure any loans by forgiving principal or accrued interest in the three and nine-month periods ended September 30, 2021 or 2020.

Based on our historical loss experience, losses associated with TDRs are not significantly different than other impaired loans within the same loan segment. As such, TDRs, including TDRs that have been modified in the past 12 months that subsequently defaulted, are analyzed in the same manner as other impaired loans within their respective loan segment.

We had no loans that defaulted in the three and nine-month periods ended September 30, 2021 and 2020 which were modified within 12 months prior to the default date.

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The following is a summary of TDR loan balances as of:


	September 30 2021		December 31 2020
TDRs	$	28,682	$	24,930

Measures we have taken to assist our customers in connection with the COVID-19 pandemic include loan programs that provide short-term payment relief. Under these programs, borrowers whose loans were in good standing as of March 1, 2020 could elect to defer full or partial payments for a period not to exceed 180 days. Bank regulators issued a statement on March 22, 2020, and a revised statement on April 7, 2020, which provided confirmation that short-term loan modifications made on a good faith basis in response to COVID-19 to borrowers with a current payment status are not categorized as TDRs. Pursuant to this guidance, borrowers granted a short-term loan modification meeting this criteria were not categorized as TDR as of September 30, 2021.

Note 5 – Borrowed Funds

Borrowed funds consist of the following obligations as of:


	September 30, 2021				December 31, 2020
	Amount		Rate		Amount		Rate
Securities sold under agreements to repurchase without stated maturity dates	$	67,519	0.08	%	$	68,747	0.13	%
FHLB advances	60,000		1.84	%	90,000		1.68	%
Subordinated debt, net of unamortized issuance costs	29,136		3.66	%	—		—	%
Total	$	156,655	1.42	%	$	158,747	1.01	%

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:


	September 30, 2021				December 31, 2020
	Amount		Rate		Amount		Rate
Fixed rate due 2021	$	30,000	1.98	%	$	50,000	1.91	%
Variable rate due 2021 (1)	—		—	%	10,000		0.52	%
Fixed rate due 2022	20,000		1.97	%	20,000		1.97	%
Fixed rate due 2026	10,000		1.17	%	10,000		1.17	%
Total	$	60,000	1.84	%	$	90,000	1.68	%

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

In October, the fixed rate FHLB advance due in 2026 was put by the FHLB, reducing our total FHLB advances to $50,000.

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 $67,542 and $68,773 at September 30, 2021 and December 31, 2020, respectively. Such securities remain under our control. We may be required to provide additional collateral based on the fair value of underlying securities.

Securities sold under repurchase agreements without stated maturity dates, federal funds purchased, and FRB Discount Window advances generally mature within one to four days from the transaction date. We had no federal funds purchased or FRB Discount Window advances during the three and nine-month periods ended September 30, 2021 and 2020.

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A summary of securities sold under repurchase agreements without stated maturity dates was as follows for the:



	Three Months Ended September 30
	2021						2020
	Maximum Month End Balance		Average Balance		Weighted Average Interest Rate During the Period		Maximum Month End Balance		Average Balance		Weighted Average Interest Rate During the Period
Securities sold under agreements to repurchase without stated maturity dates	$	67,519	$	62,790	0.10	%	$	33,349	$	30,578	0.10	%
Federal funds purchased	$	—	$	—	0.52	%	$	—	$	5	0.49	%


	Nine Months Ended September 30
	2021						2020
	Maximum Month End Balance		Average Balance		Weighted Average Interest Rate During the Period		Maximum Month End Balance		Average Balance		Weighted Average Interest Rate During the Period
Securities sold under agreements to repurchase without stated maturity dates	$	67,519	$	56,422	0.11	%	$	33,349	$	30,845	0.10	%
Federal funds purchased	$	80	$	2	0.40	%	$	—	$	2	0.49	%

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


	September 30 2021		December 31 2020
Pledged to secure borrowed funds	$	308,633	$	302,041
Pledged to secure repurchase agreements	67,542		68,773
Pledged for public deposits and for other purposes necessary or required by law	28,794		39,641
Total	$	404,969	$	410,455

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


	September 30 2021		December 31 2020
U.S. Treasury	$	19,782	$	—
States and political subdivisions	13,904		12,728
Mortgage-backed securities	17,141		30,250
Collateralized mortgage obligations	16,715		25,795
Total	$	67,542	$	68,773

AFS securities pledged to repurchase agreements are monitored to ensure the appropriate level is collateralized. In the event of maturities, calls, significant principal repayments, or significant decline in market values, we have an adequate level of AFS securities to pledge to satisfy collateral requirements.

As of September 30, 2021, we had the ability to borrow up to an additional $260,815, based on assets pledged as collateral. We had no investment securities that were restricted from being pledged for specific purposes.

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 is a summary of subordinated debt as of:


	September 30, 2021				December 31, 2020
	Amount		Rate		Amount		Rate
Subordinated debt, net of unamortized issuance costs	$	29,136	3.66	%	$	—	—	%

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Derivative Instruments

We may use interest rate swaps to manage exposure to interest rate risk and variability in cash flows. The interest rate swap, associated with our variable rate borrowings, was designated upon inception as cash flow hedges of forecasted interest payments. We entered into a LIBOR-based interest rate swap that involves the receipt of variable amounts in exchange for fixed rate payments, in effect converting variable rate debt to fixed rate debt.

Cash flow hedges are assessed for effectiveness using regression analysis. The effective portion of changes in fair value are recorded in OCI and subsequently reclassified into interest expense in the same period in which the related interest on the variable rate borrowings affects earnings. In the event that a portion of the changes in fair value were determined to be ineffective, the ineffective amount would be recorded in earnings.

The following table provides information on derivatives related to variable rate borrowings as of December 31, 2020. There were no derivatives related to variable rate borrowings as of September 30, 2021 as the interest rate swap related to borrowings matured during the second quarter of 2021.

December 31, 2020

Pay Rate

Receive Rate

Remaining Life (Years)

Notional Amount

Balance Sheet Location

Fair Value

Derivatives designated as hedging instruments

Cash Flow Hedges:

Interest rate swaps

1.56

3-Month LIBOR

0.3

10,000

Other liabilities

(54)

Derivatives contain an element of credit risk which arises from the possibility that we will incur a loss as a result of a counterparty failing to meet its contractual obligations. Credit risk is minimized through counterparty collateral, transaction limits and monitoring procedures. We also manage dealer credit risk by entering into interest rate derivatives only with primary and highly rated counterparties, the use of ISDA master agreements, and the use of counterparty limits.

Note 6 – Computation of Earnings Per Common Share

Basic earnings per common share represents income available to common shareholders divided by the weighted average number of common shares outstanding during the period. Diluted earnings per common share includes additional common shares that would have been outstanding if dilutive potential common shares had been issued. Potential common shares that may be issued relate solely to outstanding shares in the Directors Plan and grant awards under the RSP.

Earnings per common share have been computed based on the following for the:


	Three Months Ended September 30				Nine Months Ended September 30
	2021		2020		2021		2020
Average number of common shares outstanding for basic calculation	7,932,227		7,966,811		7,948,578		7,945,762
Average potential effect of common shares in the Directors Plan (1)	94,828		144,472		103,816		151,040
Average potential effect of common shares in the RSP	17,517		—		12,858		—
Average number of common shares outstanding used to calculate diluted earnings per common share	8,044,572		8,111,283		8,065,252		8,096,802
Net income	$	4,686	$	4,357	$	14,705	$	11,608
Earnings per common share
Basic	$	0.59	$	0.55	$	1.85	$	1.46
Diluted	$	0.58	$	0.54	$	1.82	$	1.43

(1)Exclusive of shares held in the Rabbi Trust

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Note 7 – Restricted Stock Plan

We adopted the RSP, an equity-based bonus plan, in 2020. Under the RSP, we may award restricted stock bonuses to eligible employees on an annual basis that are not fully transferable or vested until certain conditions are met. Currently, the eligible employees are the Corporation's President and CEO, CFO and the Bank's President. 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 is as follows for the:


	Three Months Ended September 30, 2021
	Number of Shares	Fair Value
Balance, July 1, 2021	16,257	$	334
Granted	3,866	84
Vested	—	—
Forfeited	—	—
Balance, September 30, 2021	20,123	$	418


	Nine Months Ended September 30, 2021
	Number of Shares	Fair Value
Balance, January 1, 2021	4,658	$	82
Granted	15,465	336
Vested	—	—
Forfeited	—	—
Balance, September 30, 2021	20,123	$	418

Expense related to RSP awards was $33 and $58 for the three and nine-month periods ended September 30, 2021. There was no expense for the three and nine-month periods ended September 30, 2020. As of September 30, 2021, 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 2.95 years.

Note 8 – Other Noninterest Expenses

A summary of expenses included in other noninterest expenses is as follows for the:


	Three Months Ended September 30				Nine Months Ended September 30
	2021		2020		2021		2020
Audit, consulting, and legal fees	$	665	$	417	$	1,553	$	1,348
ATM and debit card fees	473		373		1,352		1,024
Marketing costs	236		209		683		677
Memberships and subscriptions	234		188		662		546
Loan underwriting fees	238		199		628		577
FDIC insurance premiums	169		159		529		459
Director fees	166		168		505		527
Donations and community relations	198		131		452		566
All other	475		690		1,665		2,122
Total other noninterest expenses	$	2,854	$	2,534	$	8,029	$	7,846

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Note 9 – Federal Income Taxes

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:


	Three Months Ended September 30				Nine Months Ended September 30
	2021		2020		2021		2020
Income taxes at statutory rate	$	1,176	$	1,069	$	3,684	$	2,752
Effect of nontaxable income
Interest income on tax exempt municipal securities	(143)		(176)		(474)		(570)
Earnings on corporate owned life insurance policies	(43)		(40)		(153)		(301)
Other	(9)		(4)		(22)		(12)
Total effect of nontaxable income	(195)		(220)		(649)		(883)
Effect of nondeductible expenses	11		7		23		14
Effect of tax credits	(76)		(122)		(220)		(388)
Federal income tax expense	$	916	$	734	$	2,838	$	1,495

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Note 10 – Accumulated Other Comprehensive Income

The following table summarizes the changes in AOCI by component for the:



	Three Months Ended September 30
	2021								2020
	Unrealized Gains (Losses) on AFS Securities		Unrealized Gains (Losses) on Derivative Instruments		Defined Benefit Pension Plan		Total		Unrealized Gains (Losses) on AFS Securities		Unrealized Gains (Losses) on Derivative Instruments		Defined Benefit Pension Plan		Total
Balance, July 1	$	8,469	$	—	$	(2,745)	$	5,724	$	11,139	$	(77)	$	(2,695)	$	8,367
OCI before reclassifications	(1,690)		—		—		(1,690)		(66)		20		—		(46)
Tax effect	353		—		—		353		58		(4)				54
OCI, net of tax	(1,337)		—		—		(1,337)		(8)		16		—		8
Balance, September 30	$	7,132	$	—	$	(2,745)	$	4,387	$	11,131	$	(61)	$	(2,695)	$	8,375


	Nine Months Ended September 30
	2021								2020
	Unrealized Gains (Losses) on AFS Securities		Unrealized Gains (Losses) on Derivative Instruments		Defined Benefit Pension Plan		Total		Unrealized Gains (Losses) on AFS Securities		Unrealized Gains (Losses) on Derivative Instruments		Defined Benefit Pension Plan		Total
Balance, January 1	$	10,485	$	(42)	$	(2,745)	$	7,698	$	4,612	$	54	$	(2,695)	$	1,971
OCI before reclassifications	(4,247)		53		—		(4,194)		8,304		(145)		—		8,159
Amounts reclassified from AOCI	—		—		—		—		(71)		—		—		(71)
Subtotal	(4,247)		53		—		(4,194)		8,233		(145)		—		8,088
Tax effect	894		(11)		—		883		(1,714)		30		—		(1,684)
OCI, net of tax	(3,353)		42		—		(3,311)		6,519		(115)		—		6,404
Balance, September 30	$	7,132	$	—	$	(2,745)	$	4,387	$	11,131	$	(61)	$	(2,695)	$	8,375

Included in OCI for the three and nine-month periods ended September 30, 2021 and 2020 are changes in unrealized gains and losses related to auction rate money market preferred stocks. These investments, for federal income tax purposes, have no deferred federal income taxes related to unrealized gains or losses given the nature of the investments.

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A summary of the components of unrealized gains on AFS securities included in OCI follows for the:



	Three Months Ended September 30
	2021						2020
	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	$	(14)	$	(1,676)	$	(1,690)	$	215	$	(281)	$	(66)
Tax effect	—		353		353		—		58		58
Unrealized gains (losses), net of tax	$	(14)	$	(1,323)	$	(1,337)	$	215	$	(223)	$	(8)


	Nine Months Ended September 30
	2021						2020
	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	$	9	$	(4,256)	$	(4,247)	$	75	$	8,229	$	8,304
Reclassification adjustment for net (gains) losses included in net income	—		—		—		—		(71)		(71)
Net unrealized gains (losses)	9		(4,256)		(4,247)		75		8,158		8,233
Tax effect	—		894		894		—		(1,714)		(1,714)
Unrealized gains (losses), net of tax	$	9	$	(3,362)	$	(3,353)	$	75	$	6,444	$	6,519

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Note 11 – 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.

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The following tables list the quantitative fair value information about impaired loans as of:


	September 30, 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	$22,848	Cash crop inventory	40%	40%
		Livestock	30%	30%
		Accounts receivable	50%	50%
		Liquor license	75%	75%


	December 31, 2020
Valuation Technique	Fair Value	Unobservable Input	Actual Range	Weighted Average
		Discount applied to collateral:
		Real Estate	20% - 30%	23%
		Equipment	20% - 50%	32%
Discounted value	$19,540	Cash crop inventory	40%	40%
		Livestock	30%	30%
		Other inventory	50%	50%
		Accounts receivable	25% - 50%	27%
		Liquor license	75%	75%

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

Derivative instruments: Derivative instruments, consisting solely of interest rate swaps, are recorded at fair value on a recurring basis. Derivatives qualifying as cash flow hedges, when highly effective, are reported at fair value in other assets or other liabilities on our Consolidated Balance Sheets with changes in value recorded in OCI. Should the hedge no longer be considered effective, the ineffective portion of the change in fair value is recorded directly in earnings in the period in which the change occurs. The fair value of a derivative is determined by quoted market prices and model-based valuation techniques. As such, we classify derivative instruments as Level 2.

OMSR: OMSR (which are included in other assets) are subject to impairment testing. To test for impairment, we utilize a discounted cash flow analysis using interest rates and prepayment speed assumptions currently quoted for comparable instruments and discount rates. If the valuation model reflects a value less than the carrying value, OMSR are adjusted to fair value through a valuation allowance as determined by the model. As such, we classify OMSR subject to nonrecurring fair value adjustments as Level 2.

The preceding methods described may produce a fair value calculation that may not be indicative of net realizable value or reflective of future fair values. Although we believe our valuation methods are appropriate and consistent with other market participants, the use of different methodologies or assumptions to determine the fair value of certain financial instruments could result in a different fair value measurement.

Estimated Fair Values of Financial Instruments Not Recorded at Fair Value in their Entirety on a Recurring Basis

Disclosure of the estimated fair values of financial instruments, which differ from carrying values, often requires the use of estimates. In cases where quoted market values in an active market are not available, we use present value techniques and other valuation methods to estimate the fair values of our financial instruments. These valuation methods require considerable judgment and the resulting estimates of fair value can be significantly affected by the assumptions made and methods used.

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The carrying amount and estimated fair value of financial instruments not recorded at fair value in their entirety on a recurring basis were as follows as of:


	September 30, 2021
	Carrying Value		Estimated Fair Value		Level 1		Level 2		Level 3
ASSETS
Cash and cash equivalents	$	206,482	$	206,482	$	206,482	$	—	$	—
Mortgage loans AFS	818		837		—		837		—
Gross loans	1,248,558		1,247,792		—		—		1,247,792
Less allowance for loan and lease losses	9,093		9,093		—		—		9,093
Net loans	1,239,465		1,238,699		—		—		1,238,699
Accrued interest receivable	6,181		6,181		6,181		—		—
Equity securities without readily determinable fair values (1)	17,383		N/A		—		—		—
OMSR	2,180		2,755		—		2,755		—
LIABILITIES
Deposits without stated maturities	1,377,223		1,377,223		1,377,223		—		—
Deposits with stated maturities	315,093		317,860		—		317,860		—
Federal funds purchased and repurchase agreements	67,519		67,509		—		67,509		—
FHLB advances	60,000		60,323		—		60,323		—
Subordinated debt, net of unamortized issuance costs	29,136		27,835		—		27,835		—
Accrued interest payable	304		304		304		—		—


	December 31, 2020
	Carrying Value		Estimated Fair Value		Level 1		Level 2		Level 3
ASSETS
Cash and cash equivalents	$	246,640	$	246,640	$	246,640	$	—	$	—
Mortgage loans AFS	2,741		2,858		—		2,858		—
Gross loans	1,238,311		1,239,718		—		—		1,239,718
Less allowance for loan and lease losses	9,744		9,744		—		—		9,744
Net loans	1,228,567		1,229,974		—		—		1,229,974
Accrued interest receivable	6,882		6,882		6,882		—		—
Equity securities without readily determinable fair values (1)	17,383		N/A		—		—		—
OMSR	2,308		2,480		—		2,480		—
LIABILITIES
Deposits without stated maturities	1,183,336		1,183,336		1,183,336		—		—
Deposits with stated maturities	382,981		389,455		—		389,455		—
Federal funds purchased and repurchase agreements	68,747		68,738		—		68,738		—
FHLB advances	90,000		91,512		—		91,512		—
Subordinated debt, net of unamortized issuance costs	—		—		—		—		—
Accrued interest payable	481		481		481		—		—

(1)Due to the characteristics of equity securities without readily determinable fair values, they are not disclosed under a specific fair value hierarchy. When an impairment or write-down related to these securities is recorded, such amount would be classified as a nonrecurring Level 3 fair value adjustment.

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Financial Instruments Recorded at Fair Value

The table below presents the recorded amount of assets and liabilities measured at fair value on:


	September 30, 2021											December 31, 2020
	Total		Level 1			Level 2			Level 3			Total		Level 1			Level 2			Level 3
Recurring items
AFS securities
U.S. Treasury	$	192,069	$	—		$	192,069		$	—		$	—	$	—		$	—		$	—
States and political subdivisions	128,689		—			128,689			—			143,656		—			143,656			—
Auction rate money market preferred	3,246		—			3,246			—			3,237		—			3,237			—
Mortgage-backed securities	62,030		—			62,030			—			88,652		—			88,652			—
Collateralized mortgage obligations	100,767		—			100,767			—			101,983		—			101,983			—
Corporate	7,583		—			7,583			—			1,700		—			1,700			—
Total AFS securities	494,384		—			494,384			—			339,228		—			339,228			—
Derivative instruments	—		—			—			—			54		—			54			—
Nonrecurring items
Impaired loans (net of the ALLL)	22,848		—			—			22,848			19,540		—			—			19,540
OMSR	2,180		—			2,180			—			2,308		—			2,308			—
Total	$	519,412	$	—		$	496,564		$	22,848		$	361,130	$	—		$	341,590		$	19,540
Percent of assets and liabilities measured at fair value			—		%	95.60		%	4.40		%			—		%	94.59		%	5.41		%

We recorded an impairment related to OMSR of $0 and $316 through earnings for the nine-month period ended September 30, 2021 and 2020, respectively. 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 September 30, 2021. Further, we had no unrealized gains and losses included in OCI for recurring Level 3 fair value measurements held at the end of the reporting period.

Note 12 – Operating Segments

Our reportable segments are based on legal entities that account for at least 10% of net operating results. The Bank as of September 30, 2021 and December 31, 2020 and for the three and nine-month periods ended September 30, 2021 and 2020, represents approximately 90% or more of our consolidated total assets and operating results. As such, no additional segment reporting is presented.

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Note 13 – Parent Company Only Financial Information

Interim Condensed Balance Sheets


	September 30 2021		December 31 2020
ASSETS
Cash on deposit at the Bank	$	25,844	$	2,670
Investments in subsidiaries	176,212		166,096
Premises and equipment	1,492		1,529
Other assets	47,679		48,352
TOTAL ASSETS	$	251,227	$	218,647
LIABILITIES AND SHAREHOLDERS’ EQUITY
Subordinated debt, net of unamortized issuance costs	$	29,136	$	—
Other liabilities	449		59
Shareholders' equity	221,642		218,588
TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY	$	251,227	$	218,647

Interim Condensed Statements of Income


	Three Months Ended September 30				Nine Months Ended September 30
	2021		2020		2021		2020
Income
Dividends from subsidiaries	$	800	$	2,600	$	2,800	$	6,200
Interest income	7		—		8		1
Other income	4		181		14		308
Total income	811		2,781		2,822		6,509
Expenses
Interest expense	266		3		349		4
Occupancy and equipment	16		15		49		45
Audit, consulting, and legal fees	187		119		440		426
Director fees	87		86		258		269
Other	277		279		852		881
Total expenses	833		502		1,948		1,625
Income before income tax benefit and equity in undistributed earnings of subsidiaries	(22)		2,279		874		4,884
Federal income tax benefit	172		67		403		276
Income before equity in undistributed earnings of subsidiaries	150		2,346		1,277		5,160
Undistributed earnings of subsidiaries	4,536		2,011		13,428		6,448
Net income	$	4,686	$	4,357	$	14,705	$	11,608

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Interim Condensed Statements of Cash Flows


	Nine Months Ended September 30
	2021		2020
Operating activities
Net income	$	14,705	$	11,608
Adjustments to reconcile net income to cash provided by operations
Undistributed earnings of subsidiaries	(13,428)		(6,448)
Undistributed earnings of equity securities without readily determinable fair values	—		(61)
Share-based payment awards under the Directors Plan	343		334
Share-based payment awards under the RSP	58		—
Amortization of subordinated debt issuance costs	30		—
Depreciation	38		34
Changes in operating assets and liabilities which provided (used) cash
Other assets	673		(236)
Other liabilities	390		19
Net cash provided by (used in) operating activities	2,809		5,250
Investing activities
Financing activities
Issuance of subordinated debt, net of unamortized issuance costs	29,106		—
Cash dividends paid on common stock	(6,369)		(6,386)
Proceeds from the issuance of common stock	1,196		3,274
Common stock repurchased	(2,699)		(1,619)
Common stock purchased for deferred compensation obligations	(869)		(1,252)
Net cash provided by (used in) financing activities	20,365		(5,983)
Increase (decrease) in cash and cash equivalents	23,174		(733)
Cash and cash equivalents at beginning of period	2,670		1,360
Cash and cash equivalents at end of period	$	25,844	$	627

Note 14 – Subsequent Events

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

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Item 2. 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 for the unaudited three and nine-month periods ended September 30, 2021 and 2020. This analysis should be read in conjunction with our Annual Report on Form 10-K for the year ended December 31, 2020 and with the unaudited interim condensed consolidated financial statements and notes, beginning on page 4 of this report.

Executive Summary

During the three and nine months ended September 30, 2021, we reported net income of $4,686 and $14,705 and earnings per common share of $0.59 and $1.85, respectively. Net income and earnings per common share for the same periods of 2020 were $4,357 and $11,608 and $0.55 and $1.46, respectively. Net interest income increased by $2,424 for the nine-month period ended September 30, 2021 in comparison to the same period in 2020. While we had a reduction in gross interest income for the first nine months of 2021, SBA PPP loan fees helped offset that reduction. Developments leading to the decline included the lowering in interest rates, and a temporary pause in advances to mortgage brokers, resulting in a decrease in interest income of $2,698 for the first nine months of 2021 compared to the same period in 2020. Conversely, we benefited from lower interest rates and a reduction in higher-cost borrowings as interest expense on deposits and borrowings decreased $5,122 for the nine-month period ended September 30, 2021 compared to the same period in 2020.

The provision for loan losses decreased by $2,008 for the nine-month period ended September 30, 2021 compared to the same period in 2020. During 2020, increased economic and environmental risk factors, predominantly driven by COVID-19, drove a significant increase in the provision. While these risk factors remain, credit quality has been strong during 2021. As of September 30, 2021, total past due and nonaccrual loans were $3,498, or 0.28% of gross loans. Additionally, during the first nine months of 2021, net loan charge-offs were low at $52. 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 nine months of 2021.

Noninterest income decreased $90 during the first nine months of 2021 compared to the same period in 2020. While service charges and fees, a component of noninterest income, increased $800 when comparing results for the first nine months of 2021 as compared to the same period in 2020, 2020 also included an additional $723 related to gains from redemption of corporate owned life insurance policies. Noninterest expenses for the first nine months of 2021 declined $98 in comparison to the same period in 2020 and is a direct result of disciplined operating expense control.

As of September 30, 2021, total assets and assets under management were $2,082,701 and $2,859,877, respectively. Assets under management include loans sold and serviced of $285,392 and investment and trust assets managed by Isabella Wealth of $491,784, in addition to assets on our consolidated balance sheet. Loans outstanding as of September 30, 2021 totaled $1,248,558. Since December 31, 2020, PPP loans declined by $20,350 related to PPP loan forgiveness while residential mortgage loans increased $14,077, contributing to a net increase in gross loans of $10,247. Our securities portfolio increased $155,156 since December 31, 2020, predominantly due to purchases of treasury securities. Total deposits were $1,692,316 as of September 30, 2021, which was an increase of $125,999 since December 31, 2020. Increases in demand and savings deposits, largely as a result of SBA PPP and government stimulus funds, were the main drivers of the increase in deposits. All regulatory capital ratios for the Bank exceeded the minimum thresholds to be considered a “well capitalized” institution.

Our net yield on interest earning assets (FTE) was 2.85% and 2.87% for the three and nine months ended September 30, 2021, as compared to 2.89% and 2.93% for the three and nine months ended September 30, 2020. Management implemented strategic programs focused on improving our net yield on interest earning assets, which includes enhanced pricing related to loans and a reduced reliance on higher-cost borrowed funds and brokered deposits as funding sources. While these efforts have helped, the current interest rate environment plus the elevated cash position has had a negative impact on the yield of interest earning assets and future improvements may be gradual. We are committed to increasing earnings and shareholder value through growth in our loan portfolio while maintaining strong underwriting standards, growth in our wealth management services, managing operating costs and increasing our market share within our geographical footprint.

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Recent Events and Legislation

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

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

Since 2020, many customers have expressed their general concern about the uncertain economic conditions, but it is still premature to reasonably predict the magnitude of the impact. One measure we deployed to assist our customers included changes to service charges and fees on deposit accounts. Since the COVID-19 pandemic led to an increase in the need for electronic services and products, we elected to remove select deposit account charges and fees and temporarily waive others to ease the financial stress on our customers. Other measures we have taken to assist our customers include loan programs that provide short-term payment relief. Under these programs, borrowers whose loans were in good standing as of March 1, 2020 could elect to defer full or partial payments for a period not to exceed 180 days. Loan payment deferrals totaled $306,103, or 23.8% of gross loans, as of June 30, 2020. As of September 30, 2020, active loan payment deferrals declined to $103,858, or 8.0% of gross loans, as the majority of borrowers granted loan payment deferrals had reverted back to contractual payments. As of December 31, 2020, active loan payment deferrals declined even further and totaled $6,048, or 0.5% of gross loans. As of September 30, 2021, we had active loan payment deferrals totaling $20,291, or 1.6% of gross loans.

Bank regulators issued a statement on March 22, 2020, and a revised statement on April 7, 2020, which provided confirmation that short-term loan modifications made on a good faith basis in response to COVID-19 to borrowers with a current payment status are not categorized as TDRs. Pursuant to this guidance, short-term loan modifications meeting this criteria were not categorized as TDR as of September 30, 2021. These programs, along with the SBA PPP, could mask or delay the detection or reporting of deterioration in credit quality indicators.

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

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

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Reclassifications

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

Subsequent Events

We evaluated subsequent events after September 30, 2021 through the date our interim condensed consolidated financial statements were issued for potential recognition and disclosure. No subsequent events, with the exception of the tender offer, require financial statement recognition or disclosure between September 30, 2021 and the date our interim condensed consolidated financial statements were issued.

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Results of Operations (Unaudited)

The following table outlines our quarter-to-date results of operations and provides certain performance measures as of, and for the three-month periods ended:


	September 30 2021			June 30 2021			March 31 2021			December 31 2020			September 30 2020
INCOME STATEMENT DATA
Interest income	$	15,142		$	14,640		$	15,290		$	16,402		$	15,700
Interest expense	1,829			1,927			2,089			2,858			3,203
Net interest income	13,313			12,713			13,201			13,544			12,497
Provision for loan losses	(107)			31			(523)			256			516
Noninterest income	3,367			3,315			3,532			4,119			4,060
Noninterest expenses	11,185			10,495			10,817			18,638			10,950
Federal income tax expense (benefit)	916			881			1,041			(508)			734
Net income (loss)	$	4,686		$	4,621		$	5,398		$	(723)		$	4,357
PER SHARE
Basic earnings (loss)	$	0.59		$	0.58		$	0.68		$	(0.10)		$	0.55
Diluted earnings (loss)	$	0.58		$	0.57		$	0.67		$	(0.10)		$	0.54
Dividends	$	0.27		$	0.27		$	0.27		$	0.27		$	0.27
Tangible book value	$	21.87		$	21.73		$	21.35		$	21.29		$	21.75
Quoted market value
High	$	26.74		$	23.90		$	22.50		$	21.95		$	19.00
Low	$	22.55		$	21.00		$	19.45		$	15.73		$	15.75
Close (1)	$	26.03		$	23.00		$	21.75		$	19.57		$	16.74
Common shares outstanding (1)	7,926,610			7,946,658			7,958,883			7,997,247			8,007,901
PERFORMANCE RATIOS
Return on average total assets	0.91		%	0.91		%	1.09		%	(0.15)		%	0.90		%
Return on average shareholders' equity	8.35		%	8.35		%	9.78		%	(1.30)		%	7.78		%
Return on average tangible shareholders' equity	10.65		%	10.69		%	12.53		%	(1.63)		%	9.93		%
Net interest margin yield (FTE)	2.85		%	2.79		%	2.98		%	3.04		%	2.89		%
BALANCE SHEET DATA (1)
Gross loans	$	1,248,558		$	1,206,663		$	1,195,918		$	1,238,311		$	1,303,308
AFS securities	$	494,384		$	448,454		$	367,324		$	339,228		$	363,054
Total assets	$	2,082,701		$	2,031,407		$	2,015,432		$	1,957,378		$	1,971,697
Deposits	$	1,692,316		$	1,636,506		$	1,643,581		$	1,566,317		$	1,495,095
Borrowed funds	$	156,655		$	161,395		$	141,967		$	158,747		$	238,349
Shareholders' equity	$	221,642		$	220,990		$	218,282		$	218,588		$	222,545
Gross loans to deposits	73.78		%	73.73		%	72.76		%	79.06		%	87.17		%
ASSETS UNDER MANAGEMENT (1)
Loans sold with servicing retained	$	285,392		$	290,033		$	298,514		$	301,377		$	289,524
Assets managed by Isabella Wealth	$	491,784		$	493,287		$	454,459		$	443,967		$	403,730
Total assets under management	$	2,859,877		$	2,814,727		$	2,768,405		$	2,702,722		$	2,664,951
ASSET QUALITY (1)
Nonperforming loans to gross loans	0.25		%	0.28		%	0.38		%	0.43		%	0.38		%
Nonperforming assets to total assets	0.18		%	0.19		%	0.26		%	0.31		%	0.30		%
ALLL to gross loans	0.73		%	0.78		%	0.78		%	0.79		%	0.73		%
CAPITAL RATIOS (1)
Shareholders' equity to assets	10.64		%	10.88		%	10.83		%	11.17		%	11.29		%
Tier 1 leverage	8.37		%	8.46		%	8.56		%	8.37		%	8.76		%
Common equity tier 1 capital	13.07		%	13.81		%	13.77		%	12.97		%	12.90		%
Tier 1 risk-based capital	13.07		%	13.81		%	13.77		%	12.97		%	12.90		%
Total risk-based capital	16.03		%	17.00		%	14.54		%	13.75		%	13.64		%

(1) At end of period

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The following table outlines our year-to-date results of operations and provides certain performance measures as of, and for the nine-month periods ended:


	September 30 2021			September 30 2020			September 30 2019
INCOME STATEMENT DATA
Interest income	$	45,072		$	47,770		$	50,457
Interest expense	5,845			10,967			13,369
Net interest income	39,227			36,803			37,088
Provision for loan losses	(599)			1,409			48
Noninterest income	10,214			10,304			8,764
Noninterest expenses	32,497			32,595			32,158
Federal income tax expense	2,838			1,495			1,520
Net income	$	14,705		$	11,608		$	12,126
PER SHARE
Basic earnings	$	1.85		$	1.46		$	1.53
Diluted earnings	$	1.82		$	1.43		$	1.50
Dividends	$	0.81		$	0.81		$	0.78
Tangible book value	$	21.87		$	21.75		$	20.66
Quoted market value
High	$	26.74		$	24.50		$	24.50
Low	$	19.45		$	15.60		$	22.01
Close (1)	$	26.03		$	16.74		$	22.30
Common shares outstanding (1)	7,926,610			8,007,901			7,938,234
PERFORMANCE RATIOS
Return on average total assets	0.97		%	0.82		%	0.89		%
Return on average shareholders' equity	8.82		%	7.04		%	7.85		%
Return on average tangible shareholders' equity	11.28		%	9.05		%	10.29		%
Net interest margin yield (FTE)	2.87		%	2.93		%	3.07		%
BALANCE SHEET DATA (1)
Gross loans	$	1,248,558		$	1,303,308		$	1,191,804
AFS securities	$	494,384		$	363,054		$	445,529
Total assets	$	2,082,701		$	1,971,697		$	1,813,684
Deposits	$	1,692,316		$	1,495,095		$	1,308,773
Borrowed funds	$	156,655		$	238,349		$	277,386
Shareholders' equity	$	221,642		$	222,545		$	212,376
Gross loans to deposits	73.78		%	87.17		%	91.06		%
ASSETS UNDER MANAGEMENT (1)
Loans sold with servicing retained	$	285,392		$	289,524		$	258,873
Assets managed by Isabella Wealth	$	491,784		$	403,730		$	475,574
Total assets under management	$	2,859,877		$	2,664,951		$	2,548,131
ASSET QUALITY (1)
Nonperforming loans to gross loans	0.25		%	0.38		%	0.59		%
Nonperforming assets to total assets	0.18		%	0.30		%	0.42		%
ALLL to gross loans	0.73		%	0.73		%	0.69		%
CAPITAL RATIOS (1)
Shareholders' equity to assets	10.64		%	11.29		%	11.71		%
Tier 1 leverage	8.37		%	8.76		%	9.16		%
Common equity tier 1 capital	13.07		%	12.90		%	12.58		%
Tier 1 risk-based capital	13.07		%	12.90		%	12.58		%
Total risk-based capital	16.03		%	13.64		%	13.21		%

(1) At end of period

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Average Balances, Interest Rates, and Net Interest Income

The following schedules present the daily average amount outstanding for each major category of interest earning assets, non-earning assets, interest bearing liabilities, and noninterest bearing liabilities. 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.


	Three Months Ended
	September 30, 2021						June 30, 2021						September 30, 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	$	1,203,468	$	13,033	4.33	%	$	1,200,998	$	12,504	4.16	%	$	1,275,297	$	13,554	4.25	%
Taxable investment securities	332,056		1,224		1.47	%	281,245		1,140		1.62	%	223,119		1,071		1.92	%
Nontaxable investment securities	113,857		1,035		3.64	%	122,514		1,117		3.65	%	135,168		1,238		3.66	%
Fed funds sold	4		—		0.02	%	3		—		0.01	%	—		—		—	%
Other	262,023		160		0.24	%	265,227		193		0.29	%	140,042		164		0.47	%
Total earning assets	1,911,408		15,452		3.23	%	1,869,987		14,954		3.20	%	1,773,626		16,027		3.61	%
NONEARNING ASSETS
Allowance for loan losses	(9,361)						(9,326)						(8,996)
Cash and demand deposits due from banks	30,120						28,629						29,311
Premises and equipment	24,540						24,826						25,627
Accrued income and other assets	109,750						106,780						122,279
Total assets	$	2,066,457					$	2,020,896					$	1,941,847
INTEREST BEARING LIABILITIES
Interest bearing demand deposits	$	366,345	$	46	0.05	%	$	330,586	$	45	0.05	%	$	277,695	$	94	0.14	%
Savings deposits	565,814		161		0.11	%	550,145		149		0.11	%	462,867		173		0.15	%
Time deposits	323,322		1,044		1.29	%	347,155		1,250		1.44	%	375,916		1,729		1.84	%
Federal funds purchased and repurchase agreements	62,790		13		0.08	%	52,239		11		0.08	%	30,583		7		0.09	%
FHLB advances	62,718		299		1.91	%	84,725		389		1.84	%	205,000		1,200		2.34	%
Subordinated debt, net of unamortized issuance costs	29,124		266		3.65	%	9,551		83		3.48	%	—		—		—	%
Total interest bearing liabilities	1,410,113		1,829		0.52	%	1,374,401		1,927		0.56	%	1,352,061		3,203		0.95	%
NONINTEREST BEARING LIABILITIES
Demand deposits	419,017						412,600						349,212
Other	12,826						12,478						16,441
Shareholders’ equity	224,501						221,417						224,133
Total liabilities and shareholders’ equity	$	2,066,457					$	2,020,896					$	1,941,847
Net interest income (FTE)			$	13,623					$	13,027					$	12,824
Net yield on interest earning assets (FTE)					2.85	%					2.79	%					2.89	%

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	Nine Months Ended
	September 30, 2021						September 30, 2020
	Average Balance		Tax Equivalent Interest		Average Yield / Rate		Average Balance		Tax Equivalent Interest		Average Yield / Rate
INTEREST EARNING ASSETS
Loans	$	1,202,060	$	38,634	4.29	%	$	1,228,579	$	40,105	4.35	%
Taxable investment securities	268,435		3,529		1.75	%	237,509		3,912		2.20	%
Nontaxable investment securities	122,675		3,346		3.64	%	142,893		3,989		3.72	%
Fed funds sold	3		—		0.01	%	4		—		0.07	%
Other	273,997		516		0.25	%	114,108		803		0.94	%
Total earning assets	1,867,170		46,025		3.29	%	1,723,093		48,809		3.78	%
NONEARNING ASSETS
Allowance for loan losses	(9,502)						(8,580)
Cash and demand deposits due from banks	29,236						23,772
Premises and equipment	24,836						25,911
Accrued income and other assets	109,835						117,852
Total assets	$	2,021,575					$	1,882,048
INTEREST BEARING LIABILITIES
Interest bearing demand deposits	$	337,561	$	168	0.07	%	$	254,283	$	263	0.14	%
Savings deposits	549,213		459		0.11	%	445,702		1,064		0.32	%
Time deposits	345,960		3,736		1.44	%	389,375		5,707		1.95	%
Federal funds purchased and repurchase agreements	56,424		40		0.09	%	30,847		22		0.10	%
FHLB advances	79,048		1,093		1.84	%	222,445		3,911		2.34	%
Subordinated debt, net of unamortized issuance costs	12,907		349		3.61	%	—		—		—	%
Total interest bearing liabilities	1,381,113		5,845		0.56	%	1,342,652		10,967		1.09	%
NONINTEREST BEARING LIABILITIES
Demand deposits	405,046						304,322
Other	13,144						15,314
Shareholders’ equity	222,272						219,760
Total liabilities and shareholders’ equity	$	2,021,575					$	1,882,048
Net interest income (FTE)			$	40,180					$	37,842
Net yield on interest earning assets (FTE)					2.87	%					2.93	%

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. While we exert some control over these factors, 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.

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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. Changes in interest due to volume and rate were determined as follows:

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

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

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.


	Three Months Ended September 30, 2021 Compared to June 30, 2021 Increase (Decrease) Due to						Three Months Ended September 30, 2021 Compared to September 30, 2020 Increase (Decrease) Due to						Nine Months Ended September 30, 2021 Compared to September 30, 2020 Increase (Decrease) Due to
	Volume		Rate		Net		Volume		Rate		Net		Volume		Rate		Net
Changes in interest income
Loans	$	26	$	503	$	529	$	(774)	$	253	$	(521)	$	(858)	$	(613)	$	(1,471)
Taxable investment securities	194		(110)		84		441		(288)		153		469		(852)		(383)
Nontaxable investment securities	(79)		(3)		(82)		(194)		(9)		(203)		(553)		(90)		(643)
Other	(2)		(31)		(33)		99		(103)		(4)		584		(871)		(287)
Total changes in interest income	139		359		498		(428)		(147)		(575)		(358)		(2,426)		(2,784)
Changes in interest expense
Interest bearing demand deposits	5		(4)		1		24		(72)		(48)		69		(164)		(95)
Savings deposits	4		8		12		34		(46)		(12)		205		(810)		(605)
Time deposits	(82)		(124)		(206)		(219)		(466)		(685)		(586)		(1,385)		(1,971)
Federal funds purchased and repurchase agreements	2		—		2		7		(1)		6		18		—		18
FHLB advances	(104)		14		(90)		(711)		(190)		(901)		(2,117)		(701)		(2,818)
Subordinated debt, net of unamortized issuance costs	179		4		183		266		—		266		349		—		349
Total changes in interest expense	4		(102)		(98)		(599)		(775)		(1,374)		(2,062)		(3,060)		(5,122)
Net change in interest margin (FTE)	$	135	$	461	$	596	$	171	$	628	$	799	$	1,704	$	634	$	2,338

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


	Average Yield / Rate for the Three-Month Periods Ended:
	September 30 2021		June 30 2021		March 31 2021		December 31 2020		September 30 2020
Total earning assets	3.23	%	3.20	%	3.43	%	3.66	%	3.61	%
Total interest bearing liabilities	0.52	%	0.56	%	0.62	%	0.83	%	0.95	%
Net yield on interest earning assets (FTE)	2.85	%	2.79	%	2.98	%	3.04	%	2.89	%


	Quarter to Date Net Interest Income (FTE)
	September 30 2021		June 30 2021		March 31 2021		December 31 2020		September 30 2020
Total interest income (FTE)	$	15,452	$	14,954	$	15,619	$	16,722	$	16,027
Total interest expense	1,829		1,927		2,089		2,858		3,203
Net interest income (FTE)	$	13,623	$	13,027	$	13,530	$	13,864	$	12,824

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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:


	Three Months Ended September 30						Nine Months Ended September 30
	2021			2020			2021			2020
ALLL at beginning of period	$	9,360		$	8,877		$	9,744		$	7,939
Charge-offs
Commercial	1			2			32			7
Agricultural	77			—			77			22
Residential real estate	—			13			—			28
Consumer	168			31			349			213
Total charge-offs	246			46			458			270
Recoveries
Commercial	22			81			121			133
Agricultural	1			2			6			37
Residential real estate	29			36			132			102
Consumer	34			40			147			156
Total recoveries	86			159			406			428
Net loan charge-offs (recoveries)	160			(113)			52			(158)
Provision for loan losses	(107)			516			(599)			1,409
ALLL at end of period	$	9,093		$	9,506		$	9,093		$	9,506
Net loan charge-offs (recoveries) to average loans outstanding	0.01		%	(0.01)		%	—		%	(0.01)		%

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


	September 30 2021			June 30 2021			March 31 2021			December 31 2020			September 30 2020
Total charge-offs	$	246		$	53		$	159		$	111		$	46
Total recoveries	86			111			209			93			159
Net loan charge-offs (recoveries)	160			(58)			(50)			18			(113)
Net loan charge-offs (recoveries) to average loans outstanding	0.01		%	—		%	—		%	—		%	(0.01)		%
Provision for loan losses	$	(107)		$	31		$	(523)		$	256		$	516
Provision for loan losses to average loans outstanding	(0.01)		%	—		%	(0.04)		%	0.02		%	0.04		%
ALLL	$	9,093		$	9,360		$	9,271		$	9,744		$	9,506
ALLL as a % of loans at end of period	0.73		%	0.78		%	0.78		%	0.79		%	0.73		%

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The economic impact from the COVID-19 pandemic could pose significant credit risk due to the potential inability of consumer and commercial borrowers to make contractual payments. In late March 2020, we implemented payment programs for borrowers to alleviate the financial setback due to the temporary closure of businesses and lost wages. These programs, along with the SBA PPP and government stimulus funding, could mask or delay the detection or reporting of deterioration in credit quality indicators. We continue to monitor the economic impact from COVID-19 as it relates to credit risk to ensure the ALLL is appropriate.

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


	September 30 2021			June 30 2021			March 31 2021			December 31 2020			September 30 2020
ALLL
Individually evaluated for impairment	$	583		$	1,201		$	1,380		$	911		$	869
Collectively evaluated for impairment	8,510			8,159			7,891			8,833			8,637
Total	$	9,093		$	9,360		$	9,271		$	9,744		$	9,506
ALLL to gross loans
Individually evaluated for impairment	0.05		%	0.10		%	0.12		%	0.07		%	0.07		%
Collectively evaluated for impairment	0.68		%	0.68		%	0.66		%	0.72		%	0.66		%
Total	0.73		%	0.78		%	0.78		%	0.79		%	0.73		%

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 our interim condensed consolidated financial statements.

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
	September 30 2021			June 30 2021			March 31 2021			December 31 2020			September 30 2020
Commercial	$	345		$	513		$	1,434		$	2,148		$	2,082
Agricultural	2,860			3,014			3,051			3,786			3,903
Residential real estate	268			277			1,344			3,580			1,160
Consumer	25			109			34			96			72
Total	$	3,498		$	3,913		$	5,863		$	9,610		$	7,217
Total past due and nonaccrual loans to gross loans	0.28		%	0.32		%	0.49		%	0.78		%	0.55		%

Loans past due and in nonaccrual status continued to decline during the third quarter of 2021 as a result of increased credit quality. 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 our interim condensed consolidated financial statements.

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Troubled Debt Restructurings

We have taken a proactive approach 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 accept 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 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 September 30, 2021 or December 31, 2020.

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

The following tables provide roll-forwards of TDRs for the:



	Three Months Ended September 30, 2021
	Accruing Interest			Nonaccrual			Total
	Number of Loans	Balance		Number of Loans	Balance		Number of Loans	Balance
July 1, 2021	101	$	26,785	8	$	2,562	109	$	29,347
Principal advances (payments)	—	(235)		—	(28)		—	(263)
Loans paid off	(3)	(402)		—	—		(3)	(402)
Transfers to accrual status	1	41		(1)	(41)		—	—
September 30, 2021	99	$	26,189	7	$	2,493	106	$	28,682


	Nine Months Ended September 30, 2021
	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)	—	(1,073)		—	(235)		—	(1,308)
Loans paid off	(20)	(3,413)		—	—		(20)	(3,413)
Transfers to accrual status	1	41		(1)	(41)		—	—
Transfers to nonaccrual status	(1)	(39)		1	39		—	—
September 30, 2021	99	$	26,189	7	$	2,493	106	$	28,682



	Three Months Ended September 30, 2020
	Accruing Interest			Nonaccrual			Total
	Number of Loans	Balance		Number of Loans	Balance		Number of Loans	Balance
July 1, 2020	111	$	20,589	5	$	2,596	116	$	23,185
New modifications	3	3,630		1	110		4	3,740
Principal advances (payments)	—	(206)		—	(9)		—	(215)
Loans paid off	(7)	(756)		—	—		(7)	(756)
September 30, 2020	107	$	23,257	6	$	2,697	113	$	25,954


	Nine Months Ended September 30, 2020
	Accruing Interest			Nonaccrual			Total
	Number of Loans	Balance		Number of Loans	Balance		Number of Loans	Balance
January 1, 2020	122	$	21,194	9	$	3,543	131	$	24,737
New modifications	10	6,554		2	603		12	7,157
Principal advances (payments)	—	(1,280)		—	(139)		—	(1,419)
Loans paid off	(26)	(3,315)		(2)	(850)		(28)	(4,165)
Transfers to OREO	—	—		(2)	(356)		(2)	(356)
Transfers to accrual status	1	104		(1)	(104)		—	—
September 30, 2020	107	$	23,257	6	$	2,697	113	$	25,954

The following table summarizes our TDRs as of:


	September 30, 2021						December 31, 2020
	Accruing Interest		Nonaccrual		Total		Accruing Interest		Nonaccrual		Total		Total Change
Current	$	26,095	$	2,471	$	28,566	$	22,017	$	2,421	$	24,438	$	4,128
Past due 30-59 days	45		—		45		183		—		183		(138)
Past due 60-89 days	49		—		49		—		—		—		49
Past due 90 days or more	—		22		22		—		309		309		(287)
Total	$	26,189	$	2,493	$	28,682	$	22,200	$	2,730	$	24,930	$	3,752

Additional disclosures about TDRs are included in “Note 4 – Loans and ALLL” of our interim condensed consolidated financial statements.

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Impaired Loans

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


	September 30, 2021						December 31, 2020
	Recorded Balance		Unpaid Principal Balance		Valuation Allowance		Recorded Balance		Unpaid Principal Balance		Valuation Allowance
TDRs
Commercial real estate	$	8,085	$	8,339	$	13	$	4,915	$	5,169	$	79
Commercial other	3,345		3,345		8		3,567		3,567		5
Agricultural real estate	9,457		9,457		—		9,667		9,667		54
Agricultural other	4,701		4,701		—		2,903		2,903		2
Residential real estate senior liens	3,094		3,250		500		3,878		4,073		692
Total TDRs	28,682		29,092		521		24,930		25,379		832
Other impaired loans
Commercial real estate	133		195		—		139		201		—
Commercial other	—		—		—		1,200		1,200		—
Agricultural real estate	357		357		—		1,008		1,058		—
Agricultural other	108		108		—		218		218		—
Residential real estate senior liens	388		504		62		441		588		79
Total other impaired loans	986		1,164		62		3,006		3,265		79
Total impaired loans	$	29,668	$	30,256	$	583	$	27,936	$	28,644	$	911

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

Additional disclosures related to impaired loans are included in “Note 4 – Loans and ALLL” of our interim condensed consolidated financial statements.

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Nonperforming Assets

The following table summarizes our nonperforming assets as of:


	September 30 2021			June 30 2021			March 31 2021			December 31 2020			September 30 2020
Nonaccrual status loans	$	3,077		$	3,329		$	4,532		$	5,313		$	4,946
Accruing loans past due 90 days or more	—			—			—			—			—
Total nonperforming loans	3,077			3,329			4,532			5,313			4,946
Foreclosed assets	348			365			384			527			651
Debt securities	230			230			230			230			230
Total nonperforming assets	$	3,655		$	3,924		$	5,146		$	6,070		$	5,827
Nonperforming loans as a % of total loans	0.25		%	0.28		%	0.38		%	0.43		%	0.38		%
Nonperforming assets as a % of total assets	0.18		%	0.19		%	0.26		%	0.31		%	0.30		%

The accrual of interest on commercial and agricultural loans, as well as residential real estate loans, is discontinued at the time a loan is 90 days or more past due unless the credit is well-secured and in the process of short-term collection. Upon transferring a loan to nonaccrual status, we perform an evaluation to determine the net realizable value of the underlying collateral. This evaluation is used to help determine if a charge-off is necessary. Consumer loans are typically charged-off no later than 180 days past due. Loans may be placed back on accrual status after six months of continued performance and achievement of current payment status. While the level of nonperforming loans has fluctuated in recent periods, it remains low in comparison to peer banks.

The following table summarizes nonaccrual loans as of:


	September 30 2021		June 30 2021		March 31 2021		December 31 2020		September 30 2020
Commercial	$	161	$	182	$	1,328	$	1,329	$	1,364
Agricultural	2,811		3,014		3,051		3,785		3,538
Residential real estate	105		133		153		199		44
Total	$	3,077	$	3,329	$	4,532	$	5,313	$	4,946

Included in the nonaccrual loan balances above were loans currently classified as TDR as of:


	September 30 2021		June 30 2021		March 31 2021		December 31 2020		September 30 2020
Commercial	$	146	$	159	$	127	$	129	$	134
Agricultural	2,347		2,362		2,399		2,559		2,563
Residential real estate	—		41		42		42		—
Total	$	2,493	$	2,562	$	2,568	$	2,730	$	2,697

Additional disclosures about nonaccrual status loans are included in “Note 4 – Loans and ALLL” of our interim condensed consolidated financial statements.

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Noninterest Income and Noninterest Expenses

Significant noninterest income balances are highlighted in the following tables for the:



	Three Months Ended September 30
					Change
	2021		2020		$		%
Service charges and fees
ATM and debit card fees	$	1,156	$	1,003	$	153	15.25	%
Service charges and fees on deposit accounts	601		436		165		37.84	%
Freddie Mac servicing fee	177		162		15		9.26	%
Net OMSR income (loss)	(28)		271		(299)		(110.33)	%
Other fees for customer services	58		78		(20)		(25.64)	%
Total service charges and fees	1,964		1,950		14		0.72	%
Wealth management fees	772		649		123		18.95	%
Net gain on sale of mortgage loans	339		1,036		(697)		(67.28)	%
Earnings on corporate owned life insurance policies	201		187		14		7.49	%
Other
Net income (loss) on joint venture investment	—		181		(181)		(100.00)	%
All other	91		57		34		59.65	%
Total other	91		238		(147)		(61.76)	%
Total noninterest income	$	3,367	$	4,060	$	(693)	(17.07)	%


	Nine Months Ended September 30
					Change
	2021		2020		$		%
Service charges and fees
ATM and debit card fees	$	3,282	$	2,680	$	602	22.46	%
Service charges and fees on deposit accounts	1,518		1,373		145		10.56	%
Freddie Mac servicing fee	572		476		96		20.17	%
Net OMSR income (loss)	(128)		(79)		(49)		(62.03)	%
Other fees for customer services	245		239		6		2.51	%
Total service charges and fees	5,489		4,689		800		17.06	%
Wealth management fees	2,274		1,877		397		21.15	%
Net gain on sale of mortgage loans	1,459		1,653		(194)		(11.74)	%
Earnings on corporate owned life insurance policies	577		558		19		3.41	%
Gains from redemption of corporate owned life insurance policies	150		873		(723)		(82.82)	%
Other
Net income (loss) on joint venture investment	—		308		(308)		(100.00)	%
All other	265		346		(81)		(23.41)	%
Total other	265		654		(389)		(59.48)	%
Total noninterest income	$	10,214	$	10,304	$	(90)	(0.87)	%

ATM and debit card fees fluctuate from period to period based primarily on their usage. The usage of ATM and debit cards has increased during 2021 and this trend is expected to continue during the remainder of 2021. As such, we anticipate fees during the remainder of 2021 will continue to increase as a result of usage.

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 waive some charges and fees to ease the financial stress of our customers. Despite

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some fees being removed, fee income has increased during 2021 but has yet to reach pre-pandemic levels. As such, service charges and fees during the remainder of 2021 are expected to exceed 2020 levels.

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

The increase in wealth management fees in the first nine months of 2021 was driven by a combination of the growth in the stock market and increased new business activity in comparison to the same period last year. Wealth management fees during the remainder of 2021 is expected to exceed 2020 levels.

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

We recognized gains during the first nine months of 2021 and 2020 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 noninterest income are spread throughout various categories, none of which are individually significant.

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Significant noninterest expense balances are highlighted in the following tables for the:



	Three Months Ended September 30
					Change
	2021		2020		$		%
Compensation and benefits	$	6,116	$	6,101	$	15	0.25	%
Furniture and equipment	1,349		1,426		(77)		(5.40)	%
Occupancy	866		889		(23)		(2.59)	%
Other
Audit, consulting, and legal fees	665		417		248		59.47	%
ATM and debit card fees	473		373		100		26.81	%
Marketing costs	236		209		27		12.92	%
Memberships and subscriptions	234		188		46		24.47	%
Loan underwriting fees	238		199		39		19.60	%
FDIC insurance premiums	169		159		10		6.29	%
Director fees	166		168		(2)		(1.19)	%
Donations and community relations	198		131		67		51.15	%
All other	475		690		(215)		(31.16)	%
Total other noninterest expenses	2,854		2,534		320		12.63	%
Total noninterest expenses	$	11,185	$	10,950	$	235	2.15	%


	Nine Months Ended September 30
					Change
	2021		2020		$		%
Compensation and benefits	$	17,693	$	17,763	$	(70)	(0.39)	%
Furniture and equipment	4,049		4,318		(269)		(6.23)	%
Occupancy	2,726		2,668		58		2.17	%
Other
Audit, consulting, and legal fees	1,553		1,348		205		15.21	%
ATM and debit card fees	1,352		1,024		328		32.03	%
Marketing costs	683		677		6		0.89	%
Memberships and subscriptions	662		546		116		21.25	%
Loan underwriting fees	628		577		51		8.84	%
FDIC insurance premiums	529		459		70		15.25	%
Director fees	505		527		(22)		(4.17)	%
Donations and community relations	452		566		(114)		(20.14)	%
All other	1,665		2,122		(457)		(21.54)	%
Total other noninterest expenses	8,029		7,846		183		2.33	%
Total noninterest expenses	$	32,497	$	32,595	$	(98)	(0.30)	%

We have experienced increased usage of ATM and debit cards which has resulted in increased income and also increased ATM and debit card expenses. Based on the anticipated continuation of increased ATM and debit card usage, expenses during the remainder of 2021 are anticipated to exceed 2020 levels.

Donations and community relations increased during 2020 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. In addition to providing monetary contributions, some of these initiatives include volunteering our time, which is not a component of donations and community relations costs. While government restrictions and temporary business closures related to COVID-19 impacted our ability to maintain the level of support in the first quarter of 2021, we have since increased the level of community support during the second and third quarters of 2021.

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

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Analysis of Changes in Financial Condition


	September 30 2021		December 31 2020		$ Change		% Change (unannualized)
ASSETS
Cash and cash equivalents	$	206,482	$	246,640	$	(40,158)	(16.28)	%
AFS securities
Amortized cost of AFS securities	485,369		325,966		159,403		48.90	%
Unrealized gains (losses) on AFS securities	9,015		13,262		(4,247)		(32.02)	%
AFS securities	494,384		339,228		155,156		45.74	%
Mortgage loans AFS	818		2,741		(1,923)		(70.16)	%
Loans
Gross loans	1,248,558		1,238,311		10,247		0.83	%
Less allowance for loan and lease losses	9,093		9,744		(651)		(6.68)	%
Net loans	1,239,465		1,228,567		10,898		0.89	%
Premises and equipment	24,569		25,140		(571)		(2.27)	%
Corporate owned life insurance policies	32,690		28,292		4,398		15.55	%
Equity securities without readily determinable fair values	17,383		17,383		—		—	%
Goodwill and other intangible assets	48,309		48,331		(22)		(0.05)	%
Accrued interest receivable and other assets	18,601		21,056		(2,455)		(11.66)	%
TOTAL ASSETS	$	2,082,701	$	1,957,378	$	125,323	6.40	%
LIABILITIES AND SHAREHOLDERS’ EQUITY
Liabilities
Deposits	$	1,692,316	$	1,566,317	$	125,999	8.04	%
Borrowed funds	156,655		158,747		(2,092)		(1.32)	%
Accrued interest payable and other liabilities	12,088		13,726		(1,638)		(11.93)	%
Total liabilities	1,861,059		1,738,790		122,269		7.03	%
Shareholders’ equity	221,642		218,588		3,054		1.40	%
TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY	$	2,082,701	$	1,957,378	$	125,323	6.40	%

As shown above, total assets increased $125,323 from December 31, 2020, driven primarily by an increase in AFS securities. Purchases of AFS securities during 2021 totaled $240,079 and were partially funded by a $125,999 increase in customer deposits. We experienced a $10,247 increase in loans during the first nine months of 2021 which was largely driven by an increase in residential mortgages.

The following table outlines the changes in loan balances:


	September 30 2021		December 31 2020		$ Change		% Change (unannualized)
Commercial	$	757,993	$	756,686	$	1,307	0.17	%
Agricultural	93,782		100,461		(6,679)		(6.65)	%
Residential real estate	321,620		307,543		14,077		4.58	%
Consumer	75,163		73,621		1,542		2.09	%
Total	$	1,248,558	$	1,238,311	$	10,247	0.83	%

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The following table displays loan balances as of:


	September 30 2021		June 30 2021		March 31 2021		December 31 2020		September 30 2020
Commercial	$	757,993	$	723,888	$	725,540	$	756,686	$	821,102
Agricultural	93,782		95,197		91,629		100,461		102,263
Residential real estate	321,620		312,567		305,909		307,543		304,559
Consumer	75,163		75,011		72,840		73,621		75,384
Total	$	1,248,558	$	1,206,663	$	1,195,918	$	1,238,311	$	1,303,308

Loan demand has been negatively impacted by the strong competition for new commercial loan opportunities while some customers hesitated to borrow due to the pandemic. Advances to mortgage brokers, within the commercial loan portfolio, was the driver behind the decline during 2021 as participation in this mortgage purchase program halted during most of 2021. At the end of the third quarter, activity with mortgage brokers resumed and contributed to the growth in the commercial portfolio. While we've recently experienced an increase in commercial loan demand, forgiveness of the remaining SBA PPP loans could lead to a decline in the commercial loan portfolio during the remainder of 2021. Agricultural loans have declined over the last year due to the competitive lending environment. Residential mortgage lending activities have increased since mid-2020 as interest rates declined. Growth is expected to continue in both the residential mortgage and consumer loan portfolios during the remainder of 2021.

The following table outlines the changes in deposit balances:


	September 30 2021		December 31 2020		$ Change		% Change (unannualized)
Noninterest bearing demand deposits	$	430,950	$	375,395	$	55,555	14.80	%
Interest bearing demand deposits	374,137		302,444		71,693		23.70	%
Savings deposits	572,136		505,497		66,639		13.18	%
Certificates of deposit	312,027		358,165		(46,138)		(12.88)	%
Brokered certificates of deposit	—		14,029		(14,029)		(100.00)	%
Internet certificates of deposit	3,066		10,787		(7,721)		(71.58)	%
Total	$	1,692,316	$	1,566,317	$	125,999	8.04	%

The following table displays deposit balances as of:


	September 30 2021		June 30 2021		March 31 2021		December 31 2020		September 30 2020
Noninterest bearing demand deposits	$	430,950	$	428,410	$	404,710	$	375,395	$	353,082
Interest bearing demand deposits	374,137		326,971		328,440		302,444		287,809
Savings deposits	572,136		549,134		555,688		505,497		474,483
Certificates of deposit	312,027		326,214		331,413		358,165		354,210
Brokered certificates of deposit	—		—		14,029		14,029		14,029
Internet certificates of deposit	3,066		5,777		9,301		10,787		11,482
Total	$	1,692,316	$	1,636,506	$	1,643,581	$	1,566,317	$	1,495,095

Total deposits have increased over the past 12 months with significant growth in non-contractual deposits, such as demand and savings deposits. This trend is anticipated to continue during 2021 as the financial markets continue to exhibit significant signs of instability. Additionally, government stimulus programs have driven growth in deposits. We experienced a decline in certificates of deposit over the past year as a result of the low interest rate environment with customers moving their funds into demand and savings accounts. Brokered certificates of deposit offer another source of funding and may fluctuate from period to period based on our funding needs, including changes in assets such as loans and investments. During 2020, we used excess funds to reduce higher-cost deposits, such as brokered certificates of deposit. This trend continued in 2021 as we paid off the remaining balance of brokered deposits as they matured. This is expected to continue with other higher-cost deposits during the remainder of 2021.

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

The following table displays fair values of AFS securities as of:


	September 30 2021		June 30 2021		March 31 2021		December 31 2020		September 30 2020
U.S. Treasury	$	192,069	$	132,593	$	29,371	$	—	$	—
States and political subdivisions	128,689		130,960		140,329		143,656		148,401
Auction rate money market preferred	3,246		3,260		3,224		3,237		3,194
Mortgage-backed securities	62,030		68,155		75,835		88,652		104,165
Collateralized mortgage obligations	100,767		109,294		116,865		101,983		107,294
Corporate	7,583		4,192		1,700		1,700		—
Total	$	494,384	$	448,454	$	367,324	$	339,228	$	363,054

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 displays borrowed funds balances as of:


	September 30 2021		June 30 2021		March 31 2021		December 31 2020		September 30 2020
FHLB advances	$	60,000	$	70,000	$	90,000	$	90,000	$	205,000
Securities sold under agreements to repurchase without stated maturity dates	67,519		62,274		51,967		68,747		33,349
Subordinated debt, net of unamortized issuance costs	29,136		29,121		—		—		—
Total	$	156,655	$	161,395	$	141,967	$	158,747	$	238,349

During the fourth quarter of 2020, we elected to extinguish $100,000 of FHLB advances based on our level of cash reserves and strategic initiatives. Due to a significant increase in one account during the fourth quarter of 2020 and the second quarter of 2021, our level of securities sold under agreements to repurchase increased as of December 31, 2020 and June 30, 2021. These increases are expected to be short-term; therefore, we anticipate a decline in the balance of securities sold under agreements during the remainder of 2021. On June 2, 2021, we completed a private placement of $30,000 in aggregate principal amount of 3.25% Fixed-to-Floating Rate Subordinated Notes due 2031 (the "Notes"). The Notes will initially bear a fixed interest rate of 3.25% until June 15, 2026, after which time until maturity on June 15, 2031, the interest rate will reset quarterly to an annual floating rate equal to the then-current 3-month SOFR plus 256 basis points. The Notes are redeemable by us at our option, in whole or in part, on or after June 15, 2026. The Notes are not subject to redemption at the option of the holders.

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 represent our future cash requirements.

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 interest rate risk 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.

Our exposure to credit-related loss in the event of nonperformance by the counterparties 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.

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We use the same credit policies when analyzing the creditworthiness of counterparties as we do for extending loans to customers. No significant losses are anticipated as a result of these commitments.

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 52,523 shares or $1,196 of common stock during the first nine months of 2021, as compared to 184,144 shares or $3,274 of common stock during the same period in 2020. In early 2021, we implemented a change to our dividend reinvestment plan which impacted the volume of shares issued. We also 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 $343 and $334 during the nine-month periods ended September 30, 2021 and 2020, respectively. We also grant restricted stock awards pursuant to the RSP. Pursuant to this plan, we increased shareholders’ equity by $58 during the first nine months of 2021.

We have publicly announced a common stock repurchase plan. Pursuant to this plan, we repurchased 123,160 shares or $2,699 of common stock during the first nine months of 2021 and 87,047 shares or $1,619 during the first nine months of 2020. As of September 30, 2021, we were authorized to repurchase up to an additional 479,796 shares of common stock.

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:


	September 30, 2021						December 31, 2020
	Actual		Minimum Required - BASEL III		Required to be Considered Well Capitalized		Actual		Minimum Required - BASEL III		Required to be Considered Well Capitalized
Common equity tier 1 capital	13.07	%	7.00	%	6.50	%	12.97	%	7.00	%	6.50	%
Tier 1 capital	13.07	%	8.50	%	8.00	%	12.97	%	8.50	%	8.00	%
Total capital	16.03	%	10.50	%	10.00	%	13.75	%	10.50	%	10.00	%
Tier 1 leverage	8.37	%	4.00	%	5.00	%	8.37	%	4.00	%	5.00	%

Total capital includes Tier 1 capital and Tier 2 capital. Tier 2 capital includes a permissible portion of the allowances for loan and lease losses and subordinated debt, net of unamortized issuance costs. There are no significant regulatory constraints placed on our capital. At September 30, 2021, the Bank also exceeded minimum capital requirements.

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 $584,135 or 28.05% of assets as of September 30, 2021, compared to $444,051 or 22.69% as of December 31, 2020. The increase in the amount and percentage of primary liquidity is a direct result of an increase in market deposits and a deliberate reduction in non-market funding which required collateralization. Liquidity is important for financial institutions because of their need to meet loan funding commitments, depositor withdrawal requests, and various other commitments including expansion of operations, investment opportunities, and payment of cash dividends. Based on these same factors, daily liquidity could vary significantly.

Deposit accounts are our primary source of funds. Our secondary sources include the ability to borrow from the FHLB, from the FRB, and through various correspondent banks in the form of federal funds purchased and a line of credit. These funding methods typically carry a higher interest rate than traditional market deposit accounts. In recent periods, we have elected to use excess funds to reduce borrowings and other higher-cost funding sources. Some borrowed funds, including FHLB advances,

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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 September 30, 2021, we had available lines of credit of $260,815.

Our stress testing of liquidity increased during 2020 and continues to evolve due to economic uncertainly as a result of COVID-19. Our liquidity position remained strong at September 30, 2021, which is illustrated in the following table:


	September 30 2021
Total cash and cash equivalents	$	206,482
Available lines of credit
Fed funds lines with correspondent banks	93,000
FHLB borrowings	151,581
FRB Discount Window	11,234
Other lines of credit	5,000
Total available lines of credit	260,815
Unencumbered lendable value of FRB collateral, estimated1	340,000
Total cash and liquidity	$	807,297

(1)Includes estimated unencumbered lendable value of FHLB collateral of $270,000

The following table summarizes our sources and uses of cash for the nine-month period ended September 30:


	2021		2020		$ Variance
Net cash provided by (used in) operating activities	$	21,163	$	10,936	$	10,227
Net cash provided by (used in) investing activities	(176,457)		(43,370)		(133,087)
Net cash provided by (used in) financing activities	115,136		137,611		(22,475)
Increase (decrease) in cash and cash equivalents	(40,158)		105,177		(145,335)
Cash and cash equivalents January 1	246,640		60,572		186,068
Cash and cash equivalents September 30	$	206,482	$	165,749	$	40,733

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 11 – Fair Value” of our interim condensed consolidated financial statements.

Market Risk

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

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

The primary technique to measure IRR is simulation analysis. Simulation analysis forecasts the effects on the balance sheet structure and net interest income under a variety of scenarios that incorporate changes in interest rates, the shape of yield curves, interest rate relationships, loan prepayments, and funding sources. These forecasts are compared against net interest income projected in a stable interest rate environment. While many assets and liabilities reprice either at maturity or in

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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.

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

Item 3. Quantitative and Qualitative Disclosures about Market Risk.

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

Item 4. 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 September 30, 2021, pursuant to Exchange Act Rule 13a-15. Based upon that evaluation, the Principal Executive Officer and Principal Financial Officer concluded that our disclosure controls and procedures as of September 30, 2021, were effective to ensure that information required to be disclosed in reports that we file or submit under the Exchange Act are recorded, processed, summarized and reported within the time periods specified in SEC rules and forms.

CHANGES IN INTERNAL CONTROL OVER FINANCIAL REPORTING

During the most recent fiscal quarter, no change occurred in our internal control over financial reporting that materially affected, or is likely to materially affect, our internal control over financial reporting.

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PART II – OTHER INFORMATION

Item 1. Legal Proceedings.

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

Item 1A. Risk Factors.

There have been no material changes to the risk factors disclosed in Item 1A in our Annual Report on Form 10-K for the year ended December 31, 2020.

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.

(A)None

(B)None

(C)Repurchases of Common Stock

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 common shares are repurchased under this plan, they are retired and revert back to the status of authorized, but unissued common shares.

The following table provides information for the three-month period ended September 30, 2021, with respect to this 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, June 30					515,476
July 1 - 31	1,847	$	23.28	1,847	513,629
August 1 - 31	31,551	23.33		31,551	482,078
September 1 - 30	2,282	26.29		2,282	479,796
Balance, September 30	35,680	$	23.51	35,680	479,796

Item 3. Defaults Upon Senior Securities.

Not applicable.

Item 4. Mine Safety Disclosures.

Not applicable.

Item 5. Other Information.

Not applicable.

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Item 6. Exhibits.

(a) Exhibits


Exhibit Number						Exhibits

4.1						Indenture, dated as of June 2, 2021, by and between Isabella Bank Corporation and UMB Bank, National Association, as trustee (incorporated by reference to Exhibit 4.1 to the Registrant’s Current Report on Form 8-K filed with the SEC on June 2, 2021)

4.2						Form of 3.25% Fixed-to-Floating Rate Subordinated Note due 2031 (included in the Indenture included as Exhibit 4.1 to this Quarterly Report on Form 10-Q)

10.1						Form of Subordinated Note Purchase Agreement, dated as of June 2, 2021, by and among the Corporation and the several Purchasers (incorporated by reference to Exhibit 10.1 to the Registrant’s Current Report on Form 8-K filed with the SEC on June 2, 2021)

10.2						Form of Registration Rights Agreement, dated as of June 2, 2021, by and among the Corporation and the several Purchasers (incorporated by reference to Exhibit 10.2 to the Registrant’s Current Report on Form 8-K filed with the SEC on June 2, 2021)

31.1						Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 by the Principal Executive Officer

31.2						Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 by the Principal Financial Officer

32						Section 1350 Certification of Principal Executive Officer and Principal Financial Officer

101.1*						101.INS (Inline XBRL Instance Document)

						101.SCH (Inline XBRL Taxonomy Extension Schema Document)

						101.CAL (Inline XBRL Calculation Linkbase Document)

						101.LAB (Inline XBRL Taxonomy Label Linkbase Document)

						101.DEF (Inline XBRL Taxonomy Linkbase Document)

						101.PRE (Inline XBRL Taxonomy Presentation Linkbase Document)

104						Cover Page Interactive Data File

* In accordance with Rule 406T of Regulations S-T, the XBRL related information shall not be deemed to be “filed” for purposes of Section 18 of the Exchange Act, or otherwise subject to the liability of that section, and shall not be part of any registration statement or other document filed under the Securities Act or the Exchange Act, except as shall be expressly set forth by specific reference in such filing.

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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

Isabella Bank Corporation

Date:

October 28, 2021

/s/ Jae A. Evans

Jae A. Evans

President, Chief Executive Officer

(Principal Executive Officer)

Date:

October 28, 2021

/s/ Neil M. McDonnell

Neil M. McDonnell

Chief Financial Officer

(Principal Financial Officer)