ISABELLA BANK CORP 10-K

Item 8. Financial Statements and Supplementary Data. The following consolidated financial statements accompanied by the report of our independent registered public accounting firm are set forth beginning on the following page of this report: Report of Independent Registered Public Accounting Firm, Rehmann Robson LLC (PCAOB ID: 263 ) Consolidated Balance Sheets Consolidated Statements of Changes in Shareholders’ Equity Consolidated Statements of Income Consolidated Statements of Comprehensive Income (Loss) Consolidated Statements of Cash Flows Notes to Consolidated Financial Statements Supplementary data regarding quarterly results of operations is included in Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations. 34 Table of Contents Report of Independent Registered Public Accounting Firm Shareholders and Board of Directors Isabella Bank Corporation (the "Corporation") Mount Pleasant, Michigan Opinion on the Financial Statements and Internal Control over Financial Reporting We have audited the accompanying consolidated balance sheets of Isabella Bank Corporation as of December 31, 2023 and 2022, and the related consolidated statements of changes in shareholders’ equity, income, comprehensive income, and cash flows for each of the years in the three-year period ended December 31, 2023, and the related notes (collectively referred to as the financial statements). We also have audited Isabella Bank Corporation’s internal control over financial reporting as of December 31, 2023, based on criteria established in the Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework) (the COSO criteria). In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of Isabella Bank Corporation as of December 31, 2023 and 2022, and the consolidated results of their operations and their cash flows for each of the years in the three-year period ended December 31, 2023, in conformity with accounting principles generally accepted in the United States of America. Also, in our opinion Isabella Bank Corporation maintained, in all material respects, effective internal control over financial reporting as of December 31, 2023, based on the COSO criteria. Adoption of New Accounting Standard As discussed in Notes 1 and 4 to the consolidated financial statements, Isabella Bank Corporation changed its method for accounting for credit losses on loans in 2023. As explained below, auditing the Corporation's allowance for credit losses on loans, including adoption of the new accounting guidance related to the estimate of allowance for credit losses on loans, was a critical audit matter. Basis for Opinions Isabella Bank Corporation’s management is responsible for these consolidated financial statements, for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management’s Report on Internal Control over Financial Reporting. Our responsibility is to express opinions on Isabella Bank Corporation ’ s consolidated financial statements and on Isabella Bank Corporation ’s internal control over financial reporting based on our integrated audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (“PCAOB”) and are required to be independent with respect to Isabella Bank Corporation in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB. We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud, and whether effective internal control over financial reporting was maintained in all material respects. Our audits of the consolidated financial statements included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material misstatement exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. We believe that our audits provide a reasonable basis for our opinions. Definition and Limitations of Internal Control over Financial Reporting A corporation’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of consolidated financial statements for external purposes in accordance with generally accepted accounting principles. A corporation’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the corporation; (2) provide reasonable assurance that transactions are recorded as 35 Table of Contents necessary to permit preparation of consolidated financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the corporation are being made only in accordance with authorizations of management and directors of the corporation; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the corporation’s assets that could have a material effect on the consolidated financial statements. Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. One Critical Audit Matter The critical audit matter communicated below arising from the current period audit of the financial statements was communicated or is required to be communicated to the Corporation's audit committee and (1) relates to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective or complex judgments. The communication of the critical audit matter does not alter in any way our opinion on the consolidated financial statements, taken as a whole, nor our opinion on internal control over financial reporting, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates. Allowance for Credit Losses Description of the Matter The Corporation’s loan portfolio totaled $1.3 billion as of December 31, 2023 and the associated allowance for credit losses on loans was $13.1 million at that date. The Corporation’s unfunded loan commitments totaled $321.7 million, with an associated allowance for credit loss of $ 315 thousand. Together these amounts represent the allowances for credit losses (“ACL”). As described in Notes 1 and 4 to the consolidated financial statements, in the cases of loans, the allowance for credit losses is a contra-asset valuation account, calculated in accordance with ASC 326 that is deducted from the amortized cost basis of loans to present the net amount expected to be collected. As described in Notes 1 and 9 to the consolidated financial statements, in the case of unfunded loan commitments, the allowance for credit losses is a liability account, calculated in accordance with ASC 326, reported as a component of accrued interest payable and other liabilities. The Corporation adopted ASC 326 effective January 1, 2023. The amount of each allowance account represented management’s best estimate of current expected credit losses on these financial instruments considering all available information, from internal and external sources, relevant to assessing exposure to credit loss over the contractual term of the instrument. In calculating the allowance for credit losses, most loans were segmented into pools based upon similar characteristics and risk profiles. For each loan pool, management measured expected credit losses over the life of each loan utilizing a model which measured probability of default (“PD”), probability of attrition (“PA”), loss given default (“LGD”), and exposure at default (“EAD”). Expected credit losses were calculated as the product of PD (adjusted for attrition), LGD, and EAD. PD and PA were estimated by analyzing internally sourced data related to historical performance of each loan pool over an economic cycle. PD and PA were adjusted to reflect the current impact of certain macroeconomic variables as well as their expected changes over a reasonable and supportable forecast period. After the reasonable and supportable forecast period, the forecasted macroeconomic variables were reverted to their historical mean utilizing a rational, systematic basis. The LGD was based on historical recovery averages for each loan pool, adjusted to reflect the current impact of certain macroeconomic variables as well as their expected changes over the reasonable and supportable forecast period. EAD was estimated using a linear regression model that estimates the average percentage of the loan balance that remains at the time of default. In some cases, management determined that an individual loan exhibited unique risk characteristics which differentiated the loan from other loans with the identified loan pools. In such cases the loans were evaluated for expected credit losses on an individual basis and excluded from the collective evaluation. Management qualitatively adjusted model results for risk factors that were not considered within the modeling processes but were nonetheless relevant in assessing the expected credit losses within the loan pools. These qualitative factor adjustments modified management’s estimate of expected credit losses by a calculated percentage or amount based upon the estimated level of risk. Auditing management’s estimate of the ACL involved a high degree of subjectivity due to the nature of the qualitative factor adjustments included in the allowances for credit losses and complexity due to the implementation of the PD, PA, LGD, and EAD models (the “Models”). Management’s identification and measurement of the qualitative factor adjustments is highly judgmental and could have a significant effect on the ACL. How We Addressed the Matter in Our Integrated Audit We obtained an understanding of the Corporation’s process for establishing the ACL, including the implementation of Models and the qualitative factor adjustments of the ACL. We evaluated the design and tested the operating effectiveness of related controls over the reliability and accuracy of data used to calculate and estimate the various components of the ACL, the 36 Table of Contents accuracy of the calculation of the ACL, management’s review and approval of methodologies used to establish the ACL, validation procedures over the Models, analysis of changes in various components of the ACL relative to changes in the Corporation’s loan portfolio and economy and evaluation of the overall reasonableness and appropriateness of the ACL. In doing so, we tested the operating effectiveness of review and approval controls in the Corporation’s governance process designed to identify and assess the qualitative factor adjustments which is meant to measure expected credit losses associated with factors not captured fully in the other components of the ACL. To test the reasonableness of the qualitative factor adjustments, we performed audit procedures that included, among others testing the appropriateness of the methodologies used by the Corporation to estimate the ACL, testing the completeness and accuracy of data and information used by the Corporation in estimating the components of the ACL, assessing the reasonableness of the Models, evaluating the appropriateness of assumptions used in estimating the qualitative factor adjustments, analyzing the changes in assumptions and various components of the ACL relative to changes in the Corporation’s loan portfolio and the economy and evaluating the appropriateness and level of the qualitative factor adjustments. For example, we evaluated the appropriateness of the design and operation of the model, analyzed the changes, assumptions and modifications made to the qualitative factor adjustments, and evaluated the appropriateness and completeness of risk factors used in determining the amount of the qualitative factor adjustments. We also evaluated the data and information utilized by management to estimate the qualitative factor adjustments by independently obtaining internal and external data and information to assess the appropriateness of the data and information used by management and to consider the existence of new and potentially contradictory information used. In addition, we evaluated the overall ACL amounts, inclusive of the adjustments for the qualitative factor adjustments, and whether the amount appropriately reflects losses expected in the loan portfolio as of the consolidated balance sheet date by comparing the overall ACL to those established by similar banking institutions with similar loan portfolios. We also reviewed subsequent events and transactions and considered whether such information serves to corroborate or contradict the Corporation’s conclusion. /s/ Rehmann Robson LLC We have served as Isabella Bank Corporation's independent auditor since 1996. Saginaw, Michigan March 7, 2024 37 Table of Contents CONSOLIDATED BALANCE SHEETS (Dollars in thousands) December 31 2023 2022 ASSETS Cash and cash equivalents Cash and demand deposits due from banks $ 25,628 $ 27,420 Fed Funds sold and interest bearing balances due from banks 8,044 11,504 Total cash and cash equivalents 33,672 38,924 AFS securities, at fair value 528,148 580,481 Mortgage loans AFS — 379 Loans 1,349,463 1,264,173 Less allowance for credit losses 13,108 9,850 Net loans 1,336,355 1,254,323 Premises and equipment 27,639 25,553 Corporate owned life insurance policies 33,892 32,988 Equity securities without readily determinable fair values 15,848 15,746 Goodwill and other intangible assets 48,284 48,287 Accrued interest receivable and other assets 35,130 33,586 TOTAL ASSETS $ 2,058,968 $ 2,030,267 LIABILITIES AND SHAREHOLDERS’ EQUITY Deposits Noninterest bearing $ 428,505 $ 494,346 Interest bearing demand deposits 320,737 372,155 Certificates of deposit under $250 and other savings 857,768 810,642 Certificates of deposit over $250 116,685 67,132 Total deposits 1,723,695 1,744,275 Borrowed funds Federal funds purchased and repurchase agreements 46,801 57,771 FHLB advances 40,000 — Subordinated debt, net of unamortized issuance costs 29,335 29,245 Total borrowed funds 116,136 87,016 Accrued interest payable and other liabilities 16,735 12,766 Total liabilities 1,856,566 1,844,057 Shareholders’ equity Common stock — no par value 15,000,000 shares authorized; issued and outstanding 7,485,889 shares (including 150,581 shares held in the Rabbi Trust) in 2023 and 7,559,421 shares (including 154,879 shares held in the Rabbi Trust) in 2022 127,323 128,651 Shares to be issued for deferred compensation obligations 3,693 5,005 Retained earnings 97,282 89,748 Accumulated other comprehensive income (loss) ( 25,896 ) ( 37,194 ) Total shareholders’ equity 202,402 186,210 TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY $ 2,058,968 $ 2,030,267 The accompanying notes are an integral part of these consolidated financial statements. 38 Table of Contents CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY (Dollars in thousands except per share amounts) Common Stock Common Shares Outstanding Amount Common Shares to be Issued for Deferred Compensation Obligations Retained Earnings Accumulated Other Comprehensive Income (Loss) Totals Balance, January 1, 2021 7,997,247 $ 142,247 $ 4,183 $ 64,460 $ 7,698 $ 218,588 Comprehensive income (loss) — — — 19,499 ( 5,839 ) 13,660 Issuance of common stock 67,436 1,593 — — — 1,593 Common stock transferred from the Rabbi Trust to satisfy deferred compensation obligations — 71 ( 71 ) — — — Share-based payment awards under the Directors Plan — — 433 — — 433 Share-based compensation expense recognized in earnings under the RSP — 86 — — — 86 Common stock purchased for deferred compensation obligations — ( 1,187 ) — — — ( 1,187 ) Common stock repurchased ( 532,042 ) ( 13,758 ) — — — ( 13,758 ) Cash dividends paid ($ 1.08 per common share) — — — ( 8,367 ) — ( 8,367 ) Balance, December 31, 2021 7,532,641 129,052 4,545 75,592 1,859 211,048 Comprehensive income (loss) — — — 22,238 ( 39,053 ) ( 16,815 ) Issuance of common stock 74,445 1,762 — — — 1,762 Common stock transferred from the Rabbi Trust to satisfy deferred compensation obligations — 3 ( 3 ) — — — Share-based payment awards under the Directors Plan — — 463 — — 463 Share-based compensation expense recognized in earnings under the RSP — 147 — — — 147 Common stock purchased for deferred compensation obligations — ( 1,189 ) — — — ( 1,189 ) Common stock repurchased ( 47,665 ) ( 1,124 ) — — — ( 1,124 ) Cash dividends paid ($ 1.09 per common share) — — — ( 8,082 ) — ( 8,082 ) Balance, December 31, 2022 7,559,421 128,651 5,005 89,748 ( 37,194 ) 186,210 Cumulative effect of accounting change - adoption of ASC 326 — — — ( 2,417 ) — ( 2,417 ) Comprehensive income (loss) — — — 18,167 11,298 29,465 Issuance of common stock 75,488 1,617 — — — 1,617 Common stock transferred from the Rabbi Trust to satisfy deferred compensation obligations — 1,841 ( 1,841 ) — — — Share-based payment awards under the Directors Plan — — 529 — — 529 Share-based compensation expense recognized in earnings under the RSP — 253 — — — 253 Common stock purchased for deferred compensation obligations — ( 1,624 ) — — — ( 1,624 ) Common stock repurchased ( 149,020 ) ( 3,415 ) — — — ( 3,415 ) Cash dividends paid ($ 1.12 per common share) — — — ( 8,216 ) — ( 8,216 ) Balance, December 31, 2023 7,485,889 $ 127,323 $ 3,693 $ 97,282 $ ( 25,896 ) $ 202,402 The accompanying notes are an integral part of these consolidated financial statements. 39 Table of Contents CONSOLIDATED STATEMENTS OF INCOME (Dollars in thousands except per share amounts) Year Ended December 31 2023 2022 2021 Interest income Loans, including fees $ 65,670 $ 53,283 $ 51,410 AFS securities Taxable 9,514 8,363 4,920 Nontaxable 2,642 2,808 3,077 Federal funds sold and other 1,805 1,344 706 Total interest income 79,631 65,798 60,113 Interest expense Deposits 18,352 4,021 5,442 Borrowings Federal funds purchased and repurchase agreements 961 79 53 FHLB advances 1,309 152 1,302 Subordinated debt, net of unamortized issuance costs 1,065 1,065 615 Total interest expense 21,687 5,317 7,412 Net interest income 57,944 60,481 52,701 Provision for credit losses 629 483 ( 518 ) Net interest income after provision for credit losses 57,315 59,998 53,219 Noninterest income Service charges and fees 8,297 8,730 7,614 Wealth management fees 3,557 3,005 3,071 Earnings on corporate owned life insurance policies 920 884 800 Net gain on sale of mortgage loans 317 631 1,694 Other 736 416 643 Total noninterest income 13,827 13,666 13,822 Noninterest expenses Compensation and benefits 25,905 24,887 23,749 Furniture and equipment 6,519 6,006 5,462 Occupancy 3,778 3,691 3,661 Other 13,108 12,236 10,822 Total noninterest expenses 49,310 46,820 43,694 Income before federal income tax expense 21,832 26,844 23,347 Federal income tax expense 3,665 4,606 3,848 NET INCOME $ 18,167 $ 22,238 $ 19,499 Earnings per common share Basic $ 2.42 $ 2.95 $ 2.48 Diluted $ 2.40 $ 2.91 $ 2.45 Cash dividends per common share $ 1.12 $ 1.09 $ 1.08 The accompanying notes are an integral part of these consolidated financial statements. 40 Table of Contents CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (Dollars in thousands) Year Ended December 31 2023 2022 2021 Net income $ 18,167 $ 22,238 $ 19,499 Unrealized gains (losses) on AFS securities Unrealized gains (losses) arising during the period 13,365 ( 50,015 ) ( 8,371 ) Reclassification adjustment for net realized (gains) losses included in net income ( 67 ) — — Comprehensive income (loss) before income tax (expense) benefit 13,298 ( 50,015 ) ( 8,371 ) Tax effect (1) ( 2,669 ) 10,314 1,759 Unrealized gains (losses) on AFS securities, net of tax 10,629 ( 39,701 ) ( 6,612 ) Unrealized gains (losses) on derivative instruments Unrealized gains (losses) on derivative instruments arising during the period — — 53 Tax effect (1) — — ( 11 ) Unrealized gains (losses) on derivative instruments, net of tax — — 42 Change in unrecognized pension cost on defined benefit pension plan Change in unrecognized pension cost arising during the period 752 762 955 Reclassification adjustment for net periodic benefit cost included in net income 95 59 ( 31 ) Net change in unrecognized pension cost 847 821 924 Tax effect (1) ( 178 ) ( 173 ) ( 193 ) Change in unrealized pension cost, net of tax 669 648 731 Other comprehensive income (loss), net of tax 11,298 ( 39,053 ) ( 5,839 ) Comprehensive income (loss) $ 29,465 $ ( 16,815 ) $ 13,660 (1) See “Note 16 – Accumulated Other Comprehensive Income (Loss)” in the accompanying notes to consolidated financial statements for tax effect reconciliation. The accompanying notes are an integral part of these consolidated financial statements. 41 Table of Contents CONSOLIDATED STATEMENTS OF CASH FLOWS (Dollars in thousands) Year Ended December 31 2023 2022 2021 OPERATING ACTIVITIES Net income $ 18,167 $ 22,238 $ 19,499 Reconciliation of net income to net cash provided by operating activities: Provision for credit losses 629 483 ( 518 ) Depreciation 1,978 2,071 2,314 Amortization of OMSR 137 97 597 Amortization of acquisition intangibles 3 15 29 Amortization of subordinated debt issuance costs 90 87 52 Net amortization of AFS securities 1,474 2,018 2,233 Net gains on sale of AFS securities ( 67 ) — — Net gain on sale of mortgage loans ( 317 ) ( 631 ) ( 1,694 ) Change in OMSR valuation allowance — ( 532 ) — Net (gains) losses on foreclosed assets ( 158 ) ( 13 ) ( 39 ) Increase in cash value of corporate owned life insurance policies, net of expenses ( 904 ) ( 818 ) ( 751 ) Gains from redemption of corporate owned life insurance policies — ( 57 ) ( 271 ) Share-based payment awards under the Directors Plan 529 463 433 Share-based payment awards under the RSP 253 147 86 Deferred income tax expense (benefit) 1,008 13 ( 523 ) Origination of loans held-for-sale ( 9,657 ) ( 21,382 ) ( 48,957 ) Proceeds from loan sales 10,353 23,369 51,657 Net changes in operating assets and liabilities which provided (used) cash: Accrued interest receivable and other assets ( 809 ) ( 2,813 ) 1,208 Accrued interest payable and other liabilities 1,006 2,182 146 Net cash provided by (used in) operating activities 23,715 26,937 25,501 INVESTING ACTIVITIES Activity in AFS securities Sales 18,089 — — Maturities, calls, and principal payments 57,001 68,956 100,289 Purchases ( 10,866 ) ( 210,869 ) ( 262,266 ) Purchase of equity investments ( 102 ) ( 250 ) — Net loan principal (originations) collections ( 85,783 ) 36,672 ( 63,210 ) Proceeds from sales of foreclosed assets 569 241 716 Purchases of premises and equipment ( 4,064 ) ( 3,205 ) ( 1,593 ) Purchases of corporate owned life insurance policies — — ( 4,272 ) Proceeds from redemption of corporate owned life insurance policies — 359 1,114 Proceeds from sale of FHLB Stock — 2,288 — Purchases of FRB Stock — ( 401 ) — Funding of low income housing tax credit investments ( 623 ) ( 46 ) ( 413 ) Net cash provided by (used in) investing activities ( 25,779 ) ( 106,255 ) ( 229,635 ) 42 Table of Contents CONSOLIDATED STATEMENTS OF CASH FLOWS (continued) (Dollars in thousands) Year Ended December 31 2023 2022 2021 FINANCING ACTIVITIES Net increase (decrease) in deposits $ ( 20,580 ) $ 33,936 $ 144,022 Net increase (decrease) in fed funds purchased and repurchase agreements ( 10,970 ) 7,609 ( 18,585 ) Net increase (decrease) in FHLB advances 40,000 ( 20,000 ) ( 70,000 ) Issuance of subordinated debt, net of unamortized issuance costs — — 29,106 Cash dividends paid on common stock ( 8,216 ) ( 8,082 ) ( 8,367 ) Proceeds from issuance of common stock 1,617 1,762 1,593 Common stock repurchased ( 3,415 ) ( 1,124 ) ( 13,758 ) Common stock purchased for deferred compensation obligations ( 1,624 ) ( 1,189 ) ( 1,187 ) Net cash provided by (used in) financing activities ( 3,188 ) 12,912 62,824 Increase (decrease) in cash and cash equivalents ( 5,252 ) ( 66,406 ) ( 141,310 ) Cash and cash equivalents at beginning of period 38,924 105,330 246,640 Cash and cash equivalents at end of period $ 33,672 $ 38,924 $ 105,330 SUPPLEMENTAL CASH FLOWS INFORMATION: Interest paid $ 21,052 $ 5,313 $ 7,601 Income taxes paid 2,350 4,425 4,050 SUPPLEMENTAL NONCASH INFORMATION: Investment in low income housing tax credits $ 5,000 $ — $ — Transfers of loans to foreclosed assets 378 456 361 The accompanying notes are an integral part of these consolidated financial statements. 43 Table of Contents NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Dollars in thousands except per share amounts) Note 1 – Significant Accounting Policies BASIS OF PRESENTATION AND CONSOLIDATION: The consolidated financial statements include the accounts of Isabella Bank Corporation, a financial services holding company, and its wholly owned subsidiary, Isabella Bank. All intercompany balances and accounts have been eliminated in consolidation. References to “the Corporation”, “Isabella”, “we”, “our”, “us”, and similar terms refer to the consolidated entity consisting of Isabella Bank Corporation and its subsidiary. References to Isabella Bank or “the Bank” refers to Isabella Bank Corporation’s subsidiary, Isabella Bank. For additional information, see “Note 18 – Related Party Transactions.” NATURE OF OPERATIONS: Isabella Bank Corporation is a financial services holding company offering a wide array of financial products and services in several mid-Michigan counties. Our banking subsidiary, Isabella Bank, offers banking services throughout 31 locations, 24 hour banking services locally and nationally through shared ATMs, online banking, mobile banking, and direct deposits to businesses, institutions, individuals and their families. Lending services offered include commercial loans, agricultural loans, residential real estate loans, and consumer loans. Deposit services include interest and noninterest bearing checking accounts, savings accounts, money market accounts, certificates of deposit, direct deposits, cash management services, mobile and internet banking, and ATMs. Other related financial products include trust and investment services, safe deposit box rentals, and various insurance related products. Active competition, principally from other commercial banks, savings and loan associations, mortgage brokers, finance companies, credit unions, retail brokerage firms, and insurance companies, exists in all of our principal markets. Our results of operations can be significantly affected by changes in interest rates, changes in the local economic environment and changes in regulations. USE OF ESTIMATES: In preparing consolidated financial statements in conformity with accounting principles generally accepted in the United States of America, we make estimates and assumptions that affect the reported amounts of assets and liabilities as of the date of the consolidated balance sheet and reported amounts of revenues and expenses during the reporting year. Actual results could differ from those estimates. Material estimates that are particularly susceptible to significant change in the near term relate to the determination of the ACL, the fair value of AFS investment securities, and the valuation of goodwill and other intangible assets. ACCOUNTING CHANGES AND RECLASSIFICATIONS: Certain amounts reported in the 2022 and 2021 consolidated financial statements have been reclassified to conform with the 2023 presentation. On January 1, 2023, we adopted ASU 2016-13, “Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments,” as subsequently updated for certain clarifications, targeted relief and codification improvements. ASC 326 updated the measurement for credit losses for AFS debt securities and assets measured at amortized cost, which includes loans, trade receivables, and any other financial assets with the contractual right to receive cash and requires enhanced disclosures related to the significant estimates and judgments used in estimating credit losses. Prior to ASU No. 2016-13, GAAP required an “incurred loss” methodology for recognizing credit losses that delayed recognition until it was probable a loss has been incurred. Under the incurred loss approach, entities were limited to a probable initial recognition threshold when credit losses were measured; an entity generally considered only past events and current conditions when measuring the incurred loss. We adopted ASC 326 using the modified retrospective method for all financial assets measured at amortized cost and off balance sheet credit exposures. Results for reporting periods beginning January 1, 2023 are presented under ASC 326, while prior period amounts continue to be reported in accordance with previously applicable GAAP and the accounting policies described in our Annual Report on Form 10-K for the year ended December 31, 2022. We recorded a net decrease to retained earnings of $ 2,417 as of January 1, 2023 for the cumulative effect of adopting ASC 326. We adopted ASC 326 using the prospective transition approach for AFS debt securities for which other-than-temporary impairment had been recognized prior to January 1, 2023. As a result, the amortized cost basis remains the same before and after the effective date of ASC 326. The effective interest rate on these debt securities was not changed. Amounts previously recognized in accumulated other comprehensive income as of January 1, 2023 relating to improvements in cash flows expected to be collected will be accreted into income over the remaining life of the asset. Recoveries of amounts previously written off relating to improvements in cash flows beginning January 1, 2023 will be recorded in earnings when received. 44 Table of Contents The following table details the impact of the adoption of ASC 326: January 1, 2023 Pre-Adoption Allowance Impact of Adoption Post-Adoption Allowance Cumulative Effect on Retained Earnings Loans: Commercial and industrial $ 860 $ ( 58 ) $ 802 $ 46 Commercial real estate 461 5,532 5,993 ( 4,370 ) Agricultural 577 ( 247 ) 330 195 Residential real estate 617 3,535 4,152 ( 2,793 ) Consumer 961 356 1,317 ( 281 ) Unallocated 6,374 ( 6,374 ) — 5,035 Total $ 9,850 $ 2,744 $ 12,594 $ ( 2,168 ) Off-balance-sheet credit exposures $ — $ 315 $ 315 $ ( 249 ) In connection with the adoption of ASC 326, we revised certain accounting policies and implemented certain accounting policy elections, which are provided below. All other 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, 2022. FAIR VALUE MEASUREMENTS: Fair value refers to the price that would be received to sell an asset or paid to transfer a liability (an exit price) in an orderly transaction between market participants in the market in which the reporting entity transacts such sales or transfers based on the assumptions market participants would use when pricing an asset or liability. Assumptions are developed based on prioritizing information within a fair value hierarchy that gives the highest priority to quoted prices in active markets and the lowest priority to unobservable data, such as the reporting entity’s own data. We may choose to measure eligible items at fair value at specified election dates. For assets and liabilities recorded at fair value, it is our policy to maximize the use of observable inputs and minimize the use of unobservable inputs when developing fair value measurements for those financial instruments for which there is an active market. In cases where the market for a financial asset or liability is not active, we include appropriate risk adjustments that market participants would make for nonperformance and liquidity risks when developing fair value measurements. Fair value measurements for assets and liabilities for which limited or no observable market data exists are accordingly based primarily upon estimates, are often calculated based on the economic and competitive environment, the characteristics of the asset or liability and other factors. Therefore, the results cannot be determined with precision and may not be realized in an actual sale or immediate settlement of the asset or liability. Additionally, there may be inherent weaknesses in any calculation technique, and changes in the underlying assumptions used, including discount rates and estimates of future cash flows, could significantly affect the results of current or future values. We utilize fair value measurements to record fair value adjustments to certain assets and liabilities and to determine fair value disclosures. Investment securities AFS and derivative instruments are recorded at fair value on a recurring basis. Additionally, from time to time, we may be required to record other assets and liabilities at fair value on a nonrecurring basis, such as mortgage loans AFS, collateral dependent loans, foreclosed assets, OMSR, goodwill, and certain other assets and liabilities. These nonrecurring fair value adjustments typically involve the application of lower of cost or market accounting or write downs of individual assets. 45 Table of Contents Fair Value Hierarchy Under fair value measurement and disclosure authoritative guidance, we group assets and liabilities measured at fair value into three levels, based on the markets in which the assets and liabilities are traded, and the reliability of the assumptions used to determine fair value, based on the prioritization of inputs in the valuation techniques. These levels are: Level 1: Valuation is based upon quoted prices for identical instruments traded in active markets. Level 2: Valuation is based upon quoted prices for similar instruments in active markets, quoted prices for identical or similar instruments in markets that are not active and model based valuation techniques for which all significant assumptions are observable in the market. Level 3: Valuation is generated from model based techniques that use at least one significant assumption not observable in the market. These unobservable assumptions reflect estimates of assumptions that market participants would use in pricing the asset or liability. The asset’s or liability’s fair value measurement level within the fair value hierarchy is based on the lowest level of any input that is significant to the fair value measurement. Valuation techniques maximize the use of observable inputs and minimize the use of unobservable inputs. Transfers between measurement levels are recognized at the end of reporting periods. For further discussion of fair value considerations, refer to “Note 17 – Fair Value.” SIGNIFICANT GROUP CONCENTRATIONS OF CREDIT RISK: Most of our activities are conducted with customers located within the central Michigan area. A significant amount of our outstanding loans are secured by commercial and residential real estate. Other than these types of loans, there is no significant concentration to any other industry or any one customer. CASH AND CASH EQUIVALENTS: For purposes of the consolidated statements of cash flows, cash and cash equivalents include cash and balances due from banks, federal funds sold, and other deposit accounts. Generally, federal funds sold are for a one day period. We maintain deposit accounts in various financial institutions which generally exceed federally insured limits or are not insured. We do not believe we are exposed to any significant interest, credit or other financial risk as a result of these deposits. AFS SECURITIES: Purchases of investment securities are generally classified as AFS. However, we may elect to classify securities as either held to maturity or trading. Securities classified as AFS debt securities are recorded at fair value, with unrealized gains and losses, net of the effect of deferred income taxes, excluded from earnings and reported in other comprehensive income (loss). Included in AFS securities are auction rate money market preferred securities. These investments, for federal income tax purposes, have no federal income tax impact given the nature of the investments. Auction rate money market preferred securities are recorded at fair value, with unrealized gains and losses excluded from earnings and reported in other comprehensive income (loss). Purchase premiums and discounts are recognized in interest income using the interest method over the term of the securities. Realized gains and losses on the sale of AFS securities are determined using the specific identification method. ACL - AFS SECURITIES: AFS securities are reviewed quarterly for possible credit impairment. In determining whether a credit-related impairment exists for debt securities, we assess whether: (a) we do not have the intent to sell the security; and (b) it is more likely than not we will not have to sell the security before recovery of its cost basis. If either of these conditions are met, any previously recognized allowances are charged-off and the security's amortized cost is written down to fair value through income. If these conditions are not met, the security is evaluated to determine whether the decline in fair value has resulted from credit losses or other factors. In order to determine the amount of the credit loss for a debt security, we calculate the recovery value by performing a discounted cash flow analysis based on the current cash flows and future cash flows we expect to recover. If the present value of cash flows expected to be collected is less than the amortized cost basis, a credit loss exists and an allowance for credit losses is recorded for the credit loss, limited by the amount that the fair value is less than the amortized cost basis. The amount of the impairment related to other risk factors is recognized as a component of other comprehensive income. Adjustments to the allowance are reported in the income statement as a provision for credit losses. We made an accounting policy election to exclude accrued interest receivable on AFS securities from the estimate of credit losses. Accrued interest receivable on AFS securities was $ 2,247 at December 31, 2023. AFS securities are charged-off against the allowance or, in the absence of any allowance, written down through income when deemed uncollectible by management, or when criteria regarding intent or requirement to sell is met. 46 Table of Contents LOANS: Loans that we have the intent and ability to hold for the foreseeable future or until maturity or payoff are reported at their outstanding principal balance adjusted for any charge-offs, the ACL, and any deferred fees or costs. Interest income on loans is accrued over the term of the loan based on the principal amount outstanding. Loan origination fees and certain direct loan origination costs are capitalized and recognized as a component of interest income over the term of the loan using the appropriate yield methods. The accrual of interest on agricultural, commercial and mortgage loans is discontinued at the time the loan is 90 days or more past due unless the credit is well secured and in the process of collection. Consumer loans are typically charged-off no later than 180 days past due. Past due status is based on contractual terms of the loan. In all cases, loans are placed in nonaccrual status or charged-off at an earlier date if collection of principal or interest is considered doubtful. For loans that are placed on nonaccrual status or charged-off, all interest accrued in the current calendar year, but not collected, is reversed against interest income while interest accrued in prior calendar years, but not collected is charged against the ACL. Interest income on loans in nonaccrual status is not recognized until qualifying for return to accrual status. Loans are returned to accrual status when all principal and interest amounts contractually due are brought current and future payments are reasonably assured. For loans not classified as nonaccrual, interest income continues to be accrued over the term of the loan based on the principal amount outstanding. ACL - LOANS: The ACL on loans is calculated in accordance with ASC 326 and is deducted from the amortized cost basis of loans to present our best estimate of the net amount expected to be collected. The ACL is established through a provision for credit losses charged to earnings. Loan losses are charged against the allowance when we believe the uncollectability of the loan balance is confirmed. Subsequent recoveries, if any, are credited to the allowance. We made an accounting policy election to exclude accrued interest receivable on loans from the estimate of credit losses. Accrued interest receivable on loans was $ 5,920 at December 31, 2023. We evaluate the ACL on a regular basis. Our periodic review of the collectability of loans considers historical experience, the nature and volume of the loan portfolio, adverse situations that may affect the borrower’s ability to repay, estimated value of any underlying collateral, prevailing economic conditions, and reasonable and supportable forecasts. This evaluation is inherently subjective as it requires estimates that are susceptible to significant revision as more information becomes available. The ACL consists of a general component and loans individually analyzed. The general component covers loans not specifically analyzed and is based on historical loss experience, current conditions, and reasonable and supportable forecasts. The general component also includes uncertainties that we believe could affect our estimate of probable losses based on qualitative factors. Loans in nonaccrual status are individually analyzed on a loan-by-loan basis. Loans evaluated individually are not included in the general, or pooled, component of the ACL. For collateralized loans, the loan's specific allowance is measured by the fair value of the collateral approach. The specific reserve is based on the fair value of the collateral, less costs to sell if foreclosure is probable, and an allowance is established when the collateral value is lower than the carrying value of the loan. When the discounted cash flow method is used to measure the loan's specific allowance, the effective interest rate is used to discount expected cash flows to incorporate expected prepayments. An allowance is established when the discounted cash flows are lower than the carrying value of the loan. For large groups of smaller-balance, homogeneous loans, we may collectively evaluate these loans for measurement of an allowance. LOANS HELD FOR SALE: Mortgage loans held for sale on the secondary market are carried at the lower of cost or fair value as determined by aggregating outstanding commitments from investors or current investor yield requirements. Net unrealized losses, if any, would be recognized as a component of other noninterest expenses. Mortgage loans held for sale are sold with the mortgage servicing rights retained by us. Gains or losses on sales of mortgage loans are recognized based on the difference between the selling price and the carrying value of the related mortgage loans sold. TRANSFERS OF FINANCIAL ASSETS: Transfers of financial assets, including mortgage loans and participation loans, are accounted for as sales when control over the assets has been surrendered. Control over transferred assets is determined to be surrendered when 1) the assets have been legally isolated from us, 2) the transferee obtains the right (free of conditions that constrain it from taking advantage of the right) to pledge or exchange the transferred assets, and 3) we do not maintain effective control over the transferred assets through an agreement to repurchase them before their maturity. Other than servicing, we have no substantive continuing involvement related to these loans. 47 Table of Contents SERVICING: Servicing assets are recognized as separate assets when rights are acquired through purchase or through sale of financial assets. We have no purchased servicing rights. For sales of mortgage loans, a portion of the cost of originating the loan is allocated to the servicing right based on relative fair value. Fair value is based on market prices for comparable mortgage servicing contracts, when available, or alternatively, is based on a valuation model that calculates the present value of estimated future net servicing income. The valuation model incorporates assumptions that market participants would use in estimating future net servicing income, such as the cost to service, the discount rate, the custodial earnings rate, an inflation rate, ancillary income, prepayment speeds and default rates and losses. Servicing assets are evaluated for impairment based upon the fair value of the rights as compared to amortized cost. Impairment is determined by stratifying rights into tranches based on predominant risk characteristics, such as interest rate, loan type, and investor type. Impairment is recognized through a valuation allowance for an individual tranche, to the extent that fair value is less than the capitalized amount for the tranche. If we later determine that all or a portion of the impairment no longer exists for a particular tranche, a reduction of the valuation allowance may be recorded as an increase to income. Capitalized servicing rights are reported in other assets and are amortized into noninterest income in proportion to, and over the period of, the estimated future net servicing income of the underlying financial assets. The unpaid principal balance of mortgages serviced for others was $ 248,756 and $ 264,206 with capitalized servicing rights of $ 2,422 and $ 2,559 at December 31, 2023 and 2022, respectively, which are included in other assets. Servicing fee income is recorded for fees earned for servicing loans for others. The fees are based on a contractual percentage of the outstanding principal or a fixed amount per loan and are recorded as income when earned. We recorded servicing fee revenue of $ 630 , $ 669 , and $ 747 related to residential mortgage loans serviced for others during 2023, 2022, and 2021, respectively, which is included in other noninterest income. FORECLOSED ASSETS: Assets acquired through, or in lieu of, loan foreclosure are held for sale and are initially recorded at the lower of our carrying amount or fair value less estimated selling costs at the date of transfer, establishing a new cost basis. Any write downs based on the asset’s fair value at the date of acquisition are charged to the ACL. After foreclosure, property held for sale is carried at the lower of the new cost basis or fair value less costs to sell. Impairment losses on property to be held and used are measured at the amount by which the carrying amount of property exceeds its fair value. Costs relating to holding these assets are expensed as incurred. We periodically perform valuations and any subsequent write downs are recorded as a charge to operations, if necessary, to reduce the carrying value of a property to the lower of our carrying amount or fair value less costs to sell. Foreclosed assets of $ 406 and $ 439 as of December 31, 2023 and 2022, respectively, are included in other assets. PREMISES AND EQUIPMENT: Land is carried at cost. Buildings and equipment are carried at cost, less accumulated depreciation which is computed principally by the straight-line method based upon the estimated useful lives of the related assets, which range from 3 to 40 years. Major improvements are capitalized and appropriately amortized based upon the useful lives of the related assets or the expected terms of the leases, if shorter, using the straight-line method. Maintenance, repairs and minor alterations are charged to current operations as expenditures occur. We annually review these assets to determine whether carrying values have been impaired. EQUITY SECURITIES WITHOUT READILY DETERMINABLE FAIR VALUES: Included in equity securities without readily determinable fair values are our holdings in FHLB stock and FRB stock. Equity securities without readily determinable fair values consist of the following holdings as of December 31: 2023 2022 FHLB Stock $ 12,762 $ 12,762 FRB Stock 2,400 2,400 Other 686 584 Total $ 15,848 $ 15,746 EQUITY COMPENSATION PLANS: At December 31, 2023, the Directors Plan had 154,119 shares eligible to be issued to participants, for which the Rabbi Trust held 150,581 shares. We had 207,840 shares to be issued at December 31, 2022, with 154,879 shares held in the Rabbi Trust. Under the RSP, compensation expense for nonvested stock awards is based on the fair value of the award on the measurement date. The fair value of nonvested stock awards is based on the date of the grant and is recognized over the requisite service period. The impact of forfeitures of share-based payment awards on compensation expense is recognized as forfeitures occur. Compensation costs relating to share-based payment transactions are recognized as the services are rendered, with the cost measured based on the fair value of the equity or liability instruments issued (see “Note 12 – Benefit Plans”). 48 Table of Contents CORPORATE OWNED LIFE INSURANCE: We have purchased life insurance policies on key members of management, partially for the purpose of funding certain post-retirement benefits. In the event of death of one of these individuals, we would receive a specified cash payment equal to the face value of the policy. Such policies are recorded at their cash surrender value, or the amount that can be realized on the balance sheet date. Increases in cash surrender value in excess of single premiums paid are reported as other noninterest income. Of the purchased life insurance policies, we hold post retirement benefits with a present value estimated to be $ 2,515 and $ 2,905 as of December 31, 2023 and 2022, respectively, which is included in accrued interest payable and other liabilities. The expenses associated with these policies totaled $ 173 , $ 61 , and $ 33 for 2023, 2022, and 2021, respectively. ACQUISITION INTANGIBLES AND GOODWILL: We previously acquired branch facilities and related deposits in business combinations accounted for as a purchase. The acquisitions included amounts related to the valuation of customer deposit relationships (core deposit intangibles). Core deposit intangibles arising from acquisitions are included in goodwill and other intangible assets are being amortized over their estimated lives and evaluated for potential impairment on at least an annual basis. Goodwill, which represents the excess of the purchase price over identifiable assets, is not amortized but is evaluated for impairment on at least an annual basis. Acquisition intangibles and goodwill are typically qualitatively evaluated to determine if it is more likely than not that the carrying balance is impaired. If it is determined that the carrying balance is more likely than not to be impaired, we perform a cash flow valuation to determine the extent of the potential impairment. This valuation method requires a significant degree of our judgment. In the event the projected undiscounted net operating cash flows for these intangible assets are less than the carrying value, the asset is recorded at fair value as determined by the valuation model. OFF BALANCE SHEET CREDIT RELATED FINANCIAL INSTRUMENTS: In the ordinary course of business, we have entered into commitments to extend credit, including commitments under credit card arrangements, commercial lines of credit, home equity lines of credit, commercial letters of credit, and standby letters of credit. Such financial instruments are recorded only when funded. In connection with these commitments, we established an allowance for credit losses related to off-balance-sheet credit exposures. The allowance, recorded in a liability account, is calculated in accordance with ASC 326 and represents expected credit losses over the contractual period for which we are exposed to credit risk resulting from a contractual obligation to extend credit. The estimate of expected credit losses considers both the likelihood that funding will occur and the amount expected to be funded over the estimated remaining life of the commitment. The likelihood and expected amount of funding are based on historical utilization rates. No allowance is recognized if we have the unconditional right to cancel the obligation. The allowance is reported as a component of accrued interest payable and other liabilities in our consolidated balance sheets. Adjustments to the allowance are reported in our income statement as a component of provision for credit losses. REVENUE RECOGNITION: Our revenue is comprised primarily of interest income, service charges and fees, gains on the sale of loans and AFS securities, earnings on corporate owned life insurance policies, and other noninterest income. Other noninterest income is typically service and performance driven in nature and comprised primarily of investment and trust advisory fees. We recognize revenue, excluding interest income and other income specifically scoped out, in accordance with ASC 606, Revenue From Contracts with Customers. Revenue is recognized when our performance obligation has been satisfied according to our contractual obligation. FEDERAL INCOME TAXES: Deferred income tax assets and liabilities are determined using the liability (or balance sheet) method. Under this method, the net deferred tax assets or liabilities are determined based on the tax effects of the temporary differences between the book and tax basis on the various balance sheet assets and liabilities and gives current recognition to changes in tax rates and laws. Valuation allowances are established, where necessary, to reduce deferred tax assets to the amount expected to be realized. Income tax expense is the tax payable or refundable for the year plus or minus the change during the year in deferred tax assets and liabilities. We analyze our filing positions in the jurisdictions where we are required to file income tax returns, as well as all open tax years in these jurisdictions. We also treat interest and penalties attributable to income taxes, to the extent they arise, as a component of our noninterest expenses. DEFINED BENEFIT PENSION PLAN: We maintain a noncontributory defined benefit pension plan, which was curtailed effective March 1, 2007. The service cost component of the defined benefit pension plan is included in “compensation and benefits” on the consolidated statements of income and is funded consistent with the requirements of federal laws and regulations. All other costs related to the defined benefit pension plan are included in “other” noninterest expenses on the consolidated statements of income. The current benefit obligation is included in "accrued interest payable and other liabilities" on the consolidated balance sheets. Inherent in the determination of defined benefit pension costs are assumptions concerning future events that will affect the amount and timing of required benefit payments under the plan. These assumptions include demographic assumptions such as mortality, a discount rate used to determine the current benefit obligation and a long-term 49 Table of Contents expected rate of return on plan assets. Net periodic benefit cost includes the interest cost based on the assumed discount rate, an expected return on plan assets based on an actuarially derived market-related value of assets, and amortization of unrecognized net actuarial gains or losses. Actuarial gains and losses result from experience different from that assumed and from changes in assumptions (excluding asset gains and losses not yet reflected in market-related value). Amortization of actuarial gains and losses is included as a component of net periodic defined benefit pension cost. For additional information, see “Note 12 – Benefit Plans.” MARKETING COSTS: Marketing costs are expensed as incurred (see “Note 14 – Other Noninterest Expenses”). Note 2 – Accounting Standards Updates Pending Accounting Standards Updates ASU No. 2023-09: “Income Tax (Topic 740): Improvement to Income tax Disclosures In December 2023, ASU No. 2023-09 was issued to enhance the transparency and decision usefulness of income tax disclosures. The existing disclosure is being enhanced to provide information to help investors, lenders, creditors and all other allocators of capital asses how an entity's operations and related tax risks and tax planning and operational opportunities affect its tax rate and prospects for future cash flows. The new authoritative guidance is effective for interim and annual periods beginning after December 15, 2024 and is not expected to have a significant impact on our operations or financial statement disclosures. Note 3 – AFS Securities The amortized cost and fair value of AFS securities, with gross unrealized gains and losses, are as follows as of December 31: 2023 Amortized Cost Gross Unrealized Gains Gross Unrealized Losses Fair Value U.S. Treasury $ 231,218 $ — $ 16,417 $ 214,801 States and political subdivisions 94,837 1,032 2,993 92,876 Auction rate money market preferred 3,200 — 269 2,931 Mortgage-backed securities 35,321 — 2,506 32,815 Collateralized mortgage obligations 187,248 — 9,473 177,775 Corporate 8,150 — 1,200 6,950 Total $ 559,974 $ 1,032 $ 32,858 $ 528,148 2022 Amortized Cost Gross Unrealized Gains Gross Unrealized Losses Fair Value U.S. Treasury $ 231,622 $ — $ 22,921 $ 208,701 States and political subdivisions 122,023 392 4,903 117,512 Auction rate money market preferred 3,200 — 858 2,342 Mortgage-backed securities 42,309 — 3,239 39,070 Collateralized mortgage obligations 218,301 — 12,573 205,728 Corporate 8,150 — 1,022 7,128 Total $ 625,605 $ 392 $ 45,516 $ 580,481 50 Table of Contents The amortized cost and fair value of AFS securities by contractual maturity at December 31, 2023 are as follows: Maturing Securities with Variable Monthly Payments or Noncontractual Maturities Due in One Year or Less After One Year But Within Five Years After Five Years But Within Ten Years After Ten Years Total U.S. Treasury $ — $ 231,218 $ — $ — $ — $ 231,218 States and political subdivisions 15,461 28,082 20,003 31,291 — 94,837 Auction rate money market preferred — — — — 3,200 3,200 Mortgage-backed securities — — — — 35,321 35,321 Collateralized mortgage obligations — — — — 187,248 187,248 Corporate — — 8,150 — — 8,150 Total amortized cost $ 15,461 $ 259,300 $ 28,153 $ 31,291 $ 225,769 $ 559,974 Fair value $ 15,907 $ 242,998 $ 26,400 $ 29,322 $ 213,521 $ 528,148 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. Approximately $143,000 of the amortized cost of the collateralized mortgage portfolio consist of agency commercial mortgage-backed securities with defined maturity dates of less than ten years. A summary of the sales activity of AFS securities during the years ended December 31 is displayed in the following table. 2023 2022 2021 Proceeds from sales of AFS securities $ 18,089 $ — $ — Realized gains (losses) $ 67 $ — $ — Applicable income tax expense (benefit) $ 14 $ — $ — The information on the following tables pertains to AFS securities with gross unrealized losses at December 31, 2023 and 2022 aggregated by investment category and length of time that individual securities have been in a continuous loss position. December 31, 2023 Less Than Twelve Months Twelve Months or More Gross Unrealized Losses Fair Value Gross Unrealized Losses Fair Value Total Unrealized Losses U.S. Treasury $ — $ — $ 16,417 $ 214,801 $ 16,417 States and political subdivisions 42 7,172 2,951 37,011 2,993 Auction rate money market preferred — — 269 2,931 269 Mortgage-backed securities 1 10 2,505 32,805 2,506 Collateralized mortgage obligations 116 4,554 9,357 173,221 9,473 Corporate — — 1,200 6,950 1,200 Total $ 159 $ 11,736 $ 32,699 $ 467,719 $ 32,858 Number of securities in an unrealized loss position: 22 186 208 51 Table of Contents December 31, 2022 Less Than Twelve Months Twelve Months or More Gross Unrealized Losses Fair Value Gross Unrealized Losses Fair Value Total Unrealized Losses U.S. Treasury $ 1,388 $ 18,331 $ 21,533 $ 190,370 $ 22,921 States and political subdivisions 2,389 48,083 2,514 40,667 4,903 Auction rate money market preferred — — 858 2,342 858 Mortgage-backed securities 3,239 39,070 — — 3,239 Collateralized mortgage obligations 12,408 201,317 165 4,411 12,573 Corporate — — 1,022 7,128 1,022 Total $ 19,424 $ 306,801 $ 26,092 $ 244,918 $ 45,516 Number of securities in an unrealized loss position: 178 266 444 The unrealized loss on our AFS securities portfolio resulted from the increase in short-term and intermediate-term interest rates. As of December 31, 2023, no allowance for credit losses has been recognized on AFS securities in an unrealized loss position, as management does not believe any of the securities are impaired due to reasons of credit quality. This is based on our analysis of the underlying risk characteristics, including credit ratings, and other qualitative factors related to our AFS securities and consideration of our historical credit loss experience and internal forecasts. The issuers of these securities continue to make timely principal and interest payments under the contractual terms of the securities. Furthermore, management does not have the intent to sell any of the securities classified as AFS in the table above, and believes it is more likely than not that we will not have to sell any such securities before a recovery of cost. The unrealized losses are due to increases in market interest rates over the yields available at the time the underlying securities were purchased. The fair value is expected to recover as the securities approach their respective maturity date or repricing date, or if the market yields for such investments decline. 52 Table of Contents Note 4 – Loans and ACL Loan Composition The following table provides a detailed listing of our loan portfolio at December 31: 2023 2022 Balance Percent of Total Balance Percent of Total Commercial and industrial Secured $ 189,186 14.02 % $ 161,895 12.80 % Unsecured 20,552 1.52 % 16,533 1.31 % Total commercial and industrial 209,738 15.54 % 178,428 14.11 % Commercial real estate Commercial mortgage owner occupied 180,636 13.39 % 192,117 15.20 % Commercial mortgage non-owner occupied 216,292 16.03 % 204,091 16.14 % Commercial mortgage 1-4 family investor 89,208 6.61 % 85,278 6.75 % Commercial mortgage multifamily 78,108 5.79 % 84,526 6.69 % Total commercial real estate 564,244 41.82 % 566,012 44.78 % Advances to mortgage brokers 18,541 1.37 % — — % Agricultural Agricultural mortgage 69,044 5.12 % 73,002 5.77 % Agricultural 30,950 2.29 % 31,983 2.53 % Total agricultural 99,994 7.41 % 104,985 8.30 % Residential real estate Senior lien 313,459 23.23 % 300,225 23.75 % Junior lien 5,945 0.44 % 3,282 0.26 % Home equity lines of credit 37,014 2.74 % 33,187 2.63 % Total residential real estate 356,418 26.41 % 336,694 26.64 % Consumer Secured - direct 37,948 2.81 % 37,127 2.94 % Secured - indirect 59,324 4.40 % 37,814 2.98 % Unsecured 3,256 0.24 % 3,113 0.25 % Total consumer 100,528 7.45 % 78,054 6.17 % Total $ 1,349,463 100.00 % $ 1,264,173 100.00 % We grant commercial, agricultural, residential real estate, and consumer loans to customers situated primarily in Bay, 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 is 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 ACL, 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. Commercial and agricultural loans include loans for commercial real estate, commercial operating loans, advances to mortgage brokers, farmland and agricultural production, and loans to states and political subdivisions. Repayment of these loans is dependent upon the successful operation and management of a business. We minimize our risk by limiting the amount of direct credit exposure to any one borrower to $ 18,000 . Borrowers with direct credit needs of more than $ 18,000 may be serviced through the use of loan participations with other commercial banks. Commercial and agricultural real estate loans commonly require loan-to-value limits of 80 % or less. Depending upon the type of loan, past credit history, and current operating results, we may require the borrower to pledge accounts receivable, inventory, property, or equipment. Government agency guarantee may be required. Personal guarantees and/or life insurance beneficiary assignments are generally required from the owners of 53 Table of Contents closely held corporations, partnerships, and sole proprietorships. In addition, we may require annual financial statements, prepare cash flow analyses, and review credit reports. We offer adjustable rate mortgages, construction loans, and fixed rate residential real estate loans which have amortization periods up to a maximum of 30 years. We consider the anticipated direction of interest rates, balance sheet duration, the sensitivity of our balance sheet to changes in interest rates, our liquidity needs, and overall loan demand to determine whether or not to sell fixed rate loans to Freddie Mac. Our lending policies generally limit the maximum loan-to-value ratio on residential real estate loans to 100 % of the lower of the appraised value of the property or the purchase price. Private mortgage insurance is typically required on loans with loan-to-value ratios in excess of 80 % unless the loan qualifies for government guarantees. Underwriting criteria for residential real estate loans generally include: • Evaluation of the borrower’s ability to make monthly payments. • Evaluation of the value of the property securing the loan. • Ensuring the payment of principal, interest, taxes, and hazard insurance does not exceed 28 % of a borrower’s gross income. • Ensuring all debt servicing does not exceed 40 % of income. • Verification of acceptable credit reports. • Verification of employment, income, and financial information. Appraisals are performed by independent appraisers and are reviewed for appropriateness. Generally, mortgage loan requests are reviewed by our mortgage loan committee or through a secondary market underwriting system; loans in excess of $ 1,000 require the approval of one or more of the following committees: Internal Loan Committee, the Executive 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. Nonaccrual and Past Due Loans 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 ACL. Loans may be returned to accrual status after six months of continuous performance and achievement of current payment status. The following table summarizes nonaccrual loan data by class of loans as of December 31: 2023 2022 Total Nonaccrual Loans Nonaccrual Loans with No ACL Total Nonaccrual Loans Nonaccrual Loans with No ACL Commercial and industrial: Secured $ 491 $ 435 $ 82 $ 82 Commercial real estate: Commercial mortgage 1-4 family investor — — 14 14 Agricultural: Agricultural mortgage 38 38 67 67 Agricultural other 167 167 167 167 Residential real estate: Senior lien 286 286 127 107 Total $ 982 $ 926 $ 457 $ 437 54 Table of Contents The following tables summarize the past due and current loans for the entire loan portfolio as of December 31: 2023 Past Due: 30-59 Days 60-89 Days 90 Days or More Current Total Accruing Loans 90 or More Days Past Due Commercial and industrial Secured $ 165 $ 290 $ 201 $ 188,530 $ 189,186 $ — Unsecured — — — 20,552 20,552 — Total commercial and industrial 165 290 201 209,082 209,738 — Commercial real estate Commercial mortgage owner occupied — — — 180,636 180,636 — Commercial mortgage non-owner occupied — — — 216,292 216,292 — Commercial mortgage 1-4 family investor — — — 89,208 89,208 — Commercial mortgage multifamily — — — 78,108 78,108 — Total commercial real estate — — — 564,244 564,244 — Advances to mortgage brokers — — — 18,541 18,541 — Agricultural Agricultural mortgage — — — 69,044 69,044 — Agricultural — — — 30,950 30,950 — Total agricultural — — — 99,994 99,994 — Residential real estate Senior lien 3,188 349 201 309,721 313,459 87 Junior lien — — — 5,945 5,945 — Home equity lines of credit — — — 37,014 37,014 — Total residential real estate 3,188 349 201 352,680 356,418 87 Consumer Secured - direct 3 — — 37,945 37,948 — Secured - indirect 181 — — 59,143 59,324 — Unsecured 9 — — 3,247 3,256 — Total consumer 193 — — 100,335 100,528 — Total $ 3,546 $ 639 $ 402 $ 1,344,876 $ 1,349,463 $ 87 55 Table of Contents 2022 Past Due: 30-59 Days 60-89 Days 90 Days or More Current Total Accruing Loans 90 or More Days Past Due Commercial and industrial Secured $ 536 $ — $ — $ 161,359 $ 161,895 $ — Unsecured — — — 16,533 16,533 — Total commercial and industrial 536 — — 177,892 178,428 — Commercial real estate Commercial mortgage owner occupied 94 — — 192,023 192,117 — Commercial mortgage non-owner occupied 4,208 2,570 — 197,313 204,091 — Commercial mortgage 1-4 family investor — — 14 85,264 85,278 — Commercial mortgage multifamily — — — 84,526 84,526 — Total commercial real estate 4,302 2,570 14 559,126 566,012 — Advances to mortgage brokers — — — — — — Agricultural Agricultural mortgage — — — 73,002 73,002 — Agricultural — — — 31,983 31,983 — Total agricultural — — — 104,985 104,985 — Residential real estate Senior lien 3,025 225 — 296,975 300,225 — Junior lien — — — 3,282 3,282 — Home equity lines of credit 38 — — 33,149 33,187 — Total residential real estate 3,063 225 — 333,406 336,694 — Consumer Secured - direct 1 — — 37,126 37,127 — Secured - indirect 45 8 — 37,761 37,814 — Unsecured 4 — — 3,109 3,113 — Total consumer 50 8 — 77,996 78,054 — Total $ 7,951 $ 2,803 $ 14 $ 1,253,405 $ 1,264,173 $ — 56 Table of Contents Credit Quality Indicators The following table displays commercial and agricultural loans by credit risk ratings and year of origination as of December 31: 2023 2023 2022 2021 2020 2019 Prior Revolving Loans Revolving Loans Converted to Term Total Commercial and industrial: Secured Risk ratings 1-3 $ 15,061 $ 4,324 $ 6,188 $ 6,666 $ 422 $ 449 $ 12,305 $ — $ 45,415 Risk rating 4 38,680 35,245 22,065 4,523 2,469 1,762 29,826 — 134,570 Risk rating 5 391 2,634 233 305 111 101 1,994 — 5,769 Risk rating 6 — — 4 207 6 128 2,596 — 2,941 Risk rating 7 465 — — 24 2 — — — 491 Risk rating 8 — — — — — — — — — Risk rating 9 — — — — — — — — — Total $ 54,597 $ 42,203 $ 28,490 $ 11,725 $ 3,010 $ 2,440 $ 46,721 $ — $ 189,186 Current year-to-date gross charge-offs $ 200 $ — $ — $ — $ — $ — $ — $ — $ 200 Commercial and industrial: Unsecured Risk ratings 1-3 $ 2,200 $ 259 $ 129 $ 71 $ 96 $ 707 $ 1,663 $ — $ 5,125 Risk rating 4 3,988 3,117 517 470 — — 7,274 — 15,366 Risk rating 5 — 31 — — — — 30 — 61 Risk rating 6 — — — — — — — — — Risk rating 7 — — — — — — — — — Risk rating 8 — — — — — — — — — Risk rating 9 — — — — — — — — — Total $ 6,188 $ 3,407 $ 646 $ 541 $ 96 $ 707 $ 8,967 $ — $ 20,552 Current year-to-date gross charge-offs $ 8 $ — $ — $ — $ — $ — $ 68 $ — $ 76 Commercial real estate: Owner occupied Risk ratings 1-3 $ 3,592 $ 1,712 $ 12,655 $ 14,228 $ 761 $ 3,313 $ 211 $ — $ 36,472 Risk rating 4 12,148 33,392 39,406 14,086 13,384 19,942 1,506 — 133,864 Risk rating 5 1,460 727 195 220 3,829 1,761 464 — 8,656 Risk rating 6 — — 870 234 — 540 — — 1,644 Risk rating 7 — — — — — — — — — Risk rating 8 — — — — — — — — — Risk rating 9 — — — — — — — — — Total $ 17,200 $ 35,831 $ 53,126 $ 28,768 $ 17,974 $ 25,556 $ 2,181 $ — $ 180,636 Current year-to-date gross charge-offs $ — $ — $ — $ — $ — $ — $ — $ — $ — Commercial real estate: Non-owner occupied Risk ratings 1-3 $ 67 $ 4,383 $ 6,496 $ 827 $ 172 $ 1,766 $ — $ — $ 13,711 Risk rating 4 37,906 62,979 37,583 11,534 7,589 32,941 1,650 — 192,182 Risk rating 5 — — 5,838 — — 3,478 — — 9,316 Risk rating 6 1,029 — — 54 — — — — 1,083 Risk rating 7 — — — — — — — — — Risk rating 8 — — — — — — — — — Risk rating 9 — — — — — — — — — Total $ 39,002 $ 67,362 $ 49,917 $ 12,415 $ 7,761 $ 38,185 $ 1,650 $ — $ 216,292 Current year-to-date gross charge-offs $ — $ — $ — $ — $ — $ — $ — $ — $ — 57 Table of Contents 2023 2023 2022 2021 2020 2019 Prior Revolving Loans Revolving Loans Converted to Term Total Commercial real estate: 1-4 family investor Risk ratings 1-3 $ 286 $ 1,445 $ 864 $ 905 $ 666 $ 887 $ 1,352 $ — $ 6,405 Risk rating 4 13,492 11,641 30,604 15,124 3,036 3,111 4,538 — 81,546 Risk rating 5 152 354 77 — 55 — — — 638 Risk rating 6 555 — — — 59 5 — — 619 Risk rating 7 — — — — — — — — — Risk rating 8 — — — — — — — — — Risk rating 9 — — — — — — — — — Total $ 14,485 $ 13,440 $ 31,545 $ 16,029 $ 3,816 $ 4,003 $ 5,890 $ — $ 89,208 Current year-to-date gross charge-offs $ — $ — $ — $ — $ — $ — $ — $ — $ — Commercial real estate: Multifamily Risk ratings 1-3 $ 4,509 $ 4,682 $ 2,053 $ 568 $ — $ 1,515 $ — $ — $ 13,327 Risk rating 4 2,792 19,465 15,981 813 549 21,263 554 — 61,417 Risk rating 5 — — — 4 — — — — 4 Risk rating 6 — — 32 — — 3,328 — — 3,360 Risk rating 7 — — — — — — — — — Risk rating 8 — — — — — — — — — Risk rating 9 — — — — — — — — — Total $ 7,301 $ 24,147 $ 18,066 $ 1,385 $ 549 $ 26,106 $ 554 $ — $ 78,108 Current year-to-date gross charge-offs $ — $ — $ — $ — $ — $ — $ — $ — $ — Advances to mortgage brokers Risk ratings 1-3 $ 18,541 $ — $ — $ — $ — $ — $ — $ — $ 18,541 Current year-to-date gross charge-offs $ — $ — $ — $ — $ — $ — $ — $ — $ — Agricultural mortgage Risk ratings 1-3 $ 292 $ 2,834 $ 1,241 $ 2,786 $ 604 $ 964 $ 94 $ — $ 8,815 Risk rating 4 5,622 12,903 8,970 5,940 3,926 7,883 566 — 45,810 Risk rating 5 126 4,098 5,886 689 175 60 756 — 11,790 Risk rating 6 842 — — — — 1,749 — — 2,591 Risk rating 7 — — — — — 38 — — 38 Risk rating 8 — — — — — — — — — Risk rating 9 — — — — — — — — — Total $ 6,882 $ 19,835 $ 16,097 $ 9,415 $ 4,705 $ 10,694 $ 1,416 $ — $ 69,044 Current year-to-date gross charge-offs $ — $ — $ — $ — $ — $ 4 $ — $ — $ 4 Agricultural other Risk ratings 1-3 $ 801 $ 81 $ 121 $ 38 $ 183 $ 141 $ 2,659 $ — $ 4,024 Risk rating 4 1,830 2,481 2,280 619 146 75 14,405 — 21,836 Risk rating 5 753 8 163 507 — 480 2,731 — 4,642 Risk rating 6 — — 32 — — — 249 — 281 Risk rating 7 — — — — — — 167 — 167 Risk rating 8 — — — — — — — — — Risk rating 9 — — — — — — — — — Total $ 3,384 $ 2,570 $ 2,596 $ 1,164 $ 329 $ 696 $ 20,211 $ — $ 30,950 Current year-to-date gross charge-offs $ — $ — $ — $ — $ — $ — $ — $ — $ — 58 Table of Contents The following table displays the credit quality indicators for commercial and agricultural credit exposures based on internally assigned credit risk ratings as of December 31: 2022 Commercial Agricultural Real Estate Other Advances to Mortgage Brokers Total Real Estate Other Total Total Rating 1 - Excellent $ — $ — $ — $ — $ — $ — $ — $ — 2 - High quality 9,045 4,533 — 13,578 342 100 442 14,020 3 - High satisfactory 68,133 36,608 — 104,741 9,757 4,608 14,365 119,106 4 - Low satisfactory 462,421 126,673 — 589,094 44,258 21,214 65,472 654,566 5 - Special mention 20,770 7,447 — 28,217 12,262 4,634 16,896 45,113 6 - Substandard 5,629 3,085 — 8,714 6,316 1,260 7,576 16,290 7 - Vulnerable 14 82 — 96 67 167 234 330 8 - Doubtful — — — — — — — — 9 - Loss — — — — — — — — Total $ 566,012 $ 178,428 $ — $ 744,440 $ 73,002 $ 31,983 $ 104,985 $ 849,425 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. 59 Table of Contents 4. LOW SATISFACTORY – Acceptable Risk Credit with bankable risks, although some signs of weaknesses are shown: • Would include most start-up businesses. • Occasional instances of trade slowness or repayment delinquency – may have been 10 - 30 days slow within the past year. • Management’s abilities are apparent yet unproven. • Weakness in primary source of repayment with adequate secondary source of repayment. • Loan structure generally in accordance with policy. • If secured, loan collateral coverage is marginal. To be classified as less than satisfactory, only one of the following criteria must be met. 5. SPECIAL MENTION – Criticized Credit constitutes an undue and unwarranted credit risk but not to the point of justifying a classification of substandard. The credit risk may be relatively minor yet constitutes an unwarranted risk in light of the circumstances surrounding a specific loan: • Downward trend in sales, profit levels, and margins. • Impaired working capital position. • Cash flow is strained in order to meet debt repayment. • Loan delinquency ( 30 - 60 days) and overdrafts may occur. • Shrinking equity cushion. • Diminishing primary source of repayment and questionable secondary source. • Management abilities are questionable. • Weak industry conditions. • Litigation pending against the borrower. • Loan may need to be restructured to improve collateral position or reduce payments. • Collateral or guaranty offers limited protection. • Negative debt service coverage, however the credit is well collateralized and payments are current. 6. SUBSTANDARD – Classified Credit is inadequately protected by the current net worth and paying capacity of the borrower or of the collateral pledged. There is a distinct possibility we will implement collection procedures if the loan deficiencies are not corrected. Any commercial loan placed in nonaccrual status will be rated “7” or worse. In addition, the following characteristics may apply: • Sustained losses have severely eroded the equity and cash flow. • Deteriorating liquidity. • Serious management problems or internal fraud. • Original repayment terms liberalized. • Likelihood of bankruptcy. • Inability to access other funding sources. • Reliance on secondary source of repayment. • Litigation filed against borrower. • Interest non-accrual may be warranted. • Collateral provides little or no value. 60 Table of Contents • Requires excessive attention of the loan officer. • Borrower is uncooperative with loan officer. 7. VULNERABLE – Classified Credit is considered “Substandard” and warrants placing in nonaccrual status. Risk of loss is being evaluated and exit strategy options are under review. Other characteristics that may apply: • Insufficient cash flow to service debt. • Minimal or no payments being received. • Limited options available to avoid the collection process. • Transition status, expect action will take place to collect loan without immediate progress being made. 8. DOUBTFUL – Workout Credit has all the weaknesses inherent in a “Substandard” loan with the added characteristic that collection and/or liquidation is pending. The possibility of a loss is extremely high, but its classification as a loss is deferred until liquidation procedures are completed, or reasonably estimable. Other characteristics that may apply: • Normal operations are severely diminished or have ceased. • Seriously impaired cash flow. • Original repayment terms materially altered. • Secondary source of repayment is inadequate. • Survivability as a “going concern” is impossible. • Collection process has begun. • Bankruptcy petition has been filed. • Judgments have been filed. • Portion of the loan balance has been charged-off. 9. LOSS – Charge-off Credit is considered uncollectible and of such little value that their continuance as bankable assets is not warranted. This classification is for charged-off loans but does not mean that the asset has absolutely no recovery or salvage value. These loans are further characterized by: • Liquidation or reorganization under bankruptcy, with poor prospects of collection. • Fraudulently overstated assets and/or earnings. • Collateral has marginal or no value. • Debtor cannot be located. • Over 120 days delinquent. 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. 61 Table of Contents Our primary credit quality indicator for residential real estate and consumer loans is the individual loan’s past due status. The following table displays residential real estate and consumer loans by payment status and year of origination as of December 31: 2023 2023 2022 2021 2020 2019 Prior Revolving Loans Revolving Loans Converted to Term Total Residential real estate: Senior lien Current $ 45,878 $ 52,989 $ 80,122 $ 52,648 $ 23,356 $ 54,556 $ — $ — $ 309,549 Past due 30-89 days — 784 714 123 478 1,438 — — 3,537 Past due 90 or more days — — — — — 87 — — 87 Nonaccrual 48 — — 31 — 207 — — 286 Total $ 45,926 $ 53,773 $ 80,836 $ 52,802 $ 23,834 $ 56,288 $ — $ — $ 313,459 Current year-to-date gross charge-offs $ — $ — $ — $ — $ — $ 2 $ — $ — $ 2 Residential real estate: Junior lien Current $ 3,706 $ 1,325 $ 168 $ 134 $ 167 $ 445 $ — $ — $ 5,945 Past due 30-89 days — — — — — — — — — Past due 90 or more days — — — — — — — — — Nonaccrual — — — — — — — — — Total $ 3,706 $ 1,325 $ 168 $ 134 $ 167 $ 445 $ — $ — $ 5,945 Current year-to-date gross charge-offs $ — $ — $ — $ — $ — $ — $ — $ — $ — Residential real estate: Home equity lines of credit Current $ — $ — $ — $ — $ — $ — $ 37,014 $ — $ 37,014 Past due 30-89 days — — — — — — — — — Past due 90 or more days — — — — — — — — — Nonaccrual — — — — — — — — — Total $ — $ — $ — $ — $ — $ — $ 37,014 $ — $ 37,014 Current year-to-date gross charge-offs $ — $ — $ — $ — $ — $ — $ — $ — $ — Consumer : Secured - direct Current $ 14,813 $ 10,037 $ 6,468 $ 3,473 $ 1,682 $ 1,472 $ — $ — $ 37,945 Past due 30-89 days — — — 3 — — — — 3 Past due 90 or more days — — — — — — — — — Nonaccrual — — — — — — — — — Total $ 14,813 $ 10,037 $ 6,468 $ 3,476 $ 1,682 $ 1,472 $ — $ — $ 37,948 Current year-to-date gross charge-offs $ 139 $ 12 $ 6 $ — $ 3 $ — $ — $ — $ 160 Consumer : Secured - indirect Current $ 30,900 $ 10,977 $ 6,887 $ 5,376 $ 2,030 $ 2,973 $ — $ — $ 59,143 Past due 30-89 days 123 — — 30 3 25 — — 181 Past due 90 or more days — — — — — — — — — Nonaccrual — — — — — — — — — Total $ 31,023 $ 10,977 $ 6,887 $ 5,406 $ 2,033 $ 2,998 $ — $ — $ 59,324 Current year-to-date gross charge-offs $ — $ — $ — $ — $ — $ — $ — $ — $ — 62 Table of Contents 2023 2023 2022 2021 2020 2019 Prior Revolving Loans Revolving Loans Converted to Term Total Consumer: Unsecured Current $ 1,576 $ 740 $ 144 $ 86 $ 7 $ — $ 694 $ — $ 3,247 Past due 30-89 days — 9 — — — — — — 9 Past due 90 or more days — — — — — — — — — Nonaccrual — — — — — — — — — Total $ 1,576 $ 749 $ 144 $ 86 $ 7 $ — $ 694 $ — $ 3,256 Current year-to-date gross charge-offs $ 344 $ 21 $ 13 $ 2 $ — $ 1 $ 1 $ — $ 382 Loan Modifications A loan modification includes terms outside of normal lending practices to a borrower experiencing financial difficulty. Typical modifications granted include, but are not limited to: • Agreeing to interest rates below prevailing market rates for debt with similar risk characteristics. • Extending the maturity date or amortization period beyond typical lending guidelines for loans with similar risk characteristics. • Agreeing to an interest-only payment structure, delaying principal payments, or delaying payments. • Forgiving principal. To determine if a borrower is experiencing financial difficulty, 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). The following is a summary of the amortized cost basis of loan modifications granted to borrowers experiencing financial difficulty for the year ended December 31, 2023. 2023 Other-Than-Insignificant Payment Delay Term Extension Interest Rate Reduction and Term Extension Amortized Cost Basis % of Total Class of Financial Receivable Amortized Cost Basis % of Total Class of Financial Receivable Amortized Cost Basis % of Total Class of Financial Receivable Commercial real estate Commercial mortgage owner occupied $ 118 0.07 % $ — — % $ — — % Commercial mortgage non-owner occupied — — % 1,030 0.48 % — — % Commercial mortgage multifamily 2,977 3.81 % — — % — — % Agricultural Agricultural mortgage — — % 227 0.33 % 24 0.03 % Agricultural — — % 32 0.10 % — — % Residential real estate Senior lien — — % 5 — % — — % Total $ 3,095 $ 1,294 $ 24 63 Table of Contents We do not modify any loans by forgiving principal or accrued interest. We had committed to advance $ 0 in additional funds in connection with modified loans at December 31, 2023, as displayed in the table above. The following table summarizes the financial effect of the modifications granted to borrowers experiencing financial difficulty for the year ended December 31: 2023 Payment Delay Term Weighted-Average Interest Rate Reduction Weighted-Average Term Extension (Years) Commercial real estate Commercial mortgage owner occupied 6 months N/A N/A Commercial mortgage non-owner occupied N/A N/A 3.00 Commercial mortgage multifamily 6 months N/A N/A Agricultural Agricultural mortgage N/A 4.50 % 1.08 Agricultural N/A N/A 1.00 Residential real estate Senior lien N/A N/A 2.60 For the year ended December 31, 2022, there were four loans restructured, three with a below market interest rate in the amount of $ 2,871 , and one with both a below market interest rate and extension of amortization period in the amount of $ 98 . Total restructured loans for the year ended December 31, 2022 was $ 2,969 . We closely monitor the performance of loans that are modified to borrowers experiencing financial difficulty to understand the effectiveness of our modification efforts. The following table summarizes the performance of such loans that were modified during the year ended December 31, 2023. December 31, 2023 Past Due: 30-59 Days 60-89 Days 90 Days or More Total Past Due Residential real estate Senior lien $ — $ — $ 5 $ 5 Total $ — $ — $ 5 $ 5 We had no loans that defaulted for the years ended December 31, 2023 and 2022 which were modified within 12 months prior to the default date. ACL - Loans The credit quality of our loan portfolio is continuously monitored and is reflected within the ACL for loans. The ACL is an estimate of expected losses inherent within our loan portfolio. The ACL is adjusted by a credit loss expense, which is reported in earnings, and reduced by the charge-off of loan amounts, net of recoveries. The ACL 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 ACL are specific allocations for loans individually evaluated, historical loss percentages, delinquency status, and other credit trends and risk characteristics, including current conditions and reasonable and supportable forecasts about the future. Determining the appropriateness of the allowance is complex and requires judgment by management about the effect of matters that are inherently uncertain. In future periods evaluations of the overall loan portfolio, in light of the factors and forecasts then prevailing, may result in significant changes in the allowance and credit loss expense in those future periods. The methodology for estimating the amount of expected credit losses reported in the ACL has two basic components: a component of individual loans that do not share risk characteristics with other loans; and a pooled component for estimated expected credit losses for pools of loans that share similar risk characteristics. 64 Table of Contents For a loan that does not share risk characteristics with other loans, an individual analysis is performed to measure an allowance. Loans in nonaccrual status are individually evaluated for specific allocation of the allowance using the fair value of collateral, less costs to sell if foreclosure is probable, or the discounted cash flow method. We do not recognize interest income on loans in nonaccrual status. For 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. In determining the allowance for credit losses, we derive an estimated credit loss assumption from a model that categorizes loan pools based on loan type and credit risk ratings or delinquency bucket. This model calculates an expected loss percentage for each loan class by considering the probability of default, based on the migration of loans from performing to loss by credit risk ratings or delinquency buckets using life-of-loan analysis, and the historical severity of loss, based on the aggregate net lifetime losses incurred per loan class. The default and severity factors used to calculate the allowance for credit losses for loans that share similar risk characteristics with other loans are adjusted for differences between the historical period used to calculate historical default and loss severity rates and expected conditions over the remaining lives of the loans in the portfolio. These qualitative factors are used to adjust the historical probabilities of default and severity of loss so that they reflect management's expectation of future conditions based on a reasonable and supportable forecast. To the extent the lives of the loans in the portfolio extend beyond the period for which a reasonable and supportable forecast can be made, the model reverts back to the historical rates of default and severity of loss. Qualitative factors include: • Changes in lending policies and procedures, including changes in underwriting standards and collection, charge-off, recovery practices not considered elsewhere in estimating credit losses; • Changes in the experience, ability, and depth of lending management and other relevant staff; • Changes in interest rates; • Changes in international, national, regional, and local economic factors (international, national, regional, and local); • Changes in the nature and volume of the portfolio and in the terms of loans; • Changes in the volume and severity of past due loans, the volume of nonaccrual loans, and the volume and severity of adversely classified or graded loans; • Lack of current financial information; • Competition, legal, and regulatory; and • Changes in the value of underlying collateral. Upon the adoption of ASC 326, the estimated ACL using the CECL methodology increased $2,744 compared to the ACL as of December 31, 2022 using the prior incurred loss model. The manner in which credit loss allowances are allocated to the individual portfolio segments was partly impacted by a change in the way the underlying loans within each segment are pooled for modeling purposes. The impact of varying economic conditions and portfolio risk factors are now a component of the credit loss models applied to each modeling pool. In that regard, the amounts allocated to the underlying pools of loans within each portfolio segment more directly reflect the economic variables and portfolio stress factors that correlate with credit losses within each portfolio. Under the prior methodology, allocations in excess of those derived from historical loss rates were recognized as unallocated. Nonetheless, despite fluctuations in the allocation of portions of the overall allowance to the various portfolio segments, the entire allowance is available to absorb any credit losses within the entire loan portfolio. A summary of changes in the ACL and the recorded investment in loans by segments follows: Allowance for Credit Losses Year Ended December 31, 2023 Commercial and Industrial Commercial Real Estate Agricultural Residential Real Estate Consumer Unallocated Total January 1, 2023 $ 860 $ 461 $ 577 $ 617 $ 961 $ 6,374 $ 9,850 Impact of the adoption of ASC 326 ( 58 ) 5,532 ( 247 ) 3,535 356 ( 6,374 ) 2,744 Charge-offs ( 276 ) — ( 4 ) ( 2 ) ( 542 ) — ( 824 ) Recoveries 79 26 12 329 263 — 709 Credit loss expense 363 ( 141 ) ( 68 ) ( 143 ) 618 — 629 December 31, 2023 $ 968 $ 5,878 $ 270 $ 4,336 $ 1,656 $ — $ 13,108 65 Table of Contents Allowance for Loan Losses Year Ended December 31, 2022 Commercial Agricultural Residential Real Estate Consumer Unallocated Total January 1, 2022 $ 1,740 $ 289 $ 747 $ 908 $ 5,419 $ 9,103 Charge-offs ( 77 ) — — ( 542 ) — ( 619 ) Recoveries 442 9 150 282 — 883 Credit loss expense ( 784 ) 279 ( 280 ) 313 955 483 December 31, 2022 $ 1,321 $ 577 $ 617 $ 961 $ 6,374 $ 9,850 Allowance for Loan Losses and Recorded Investment in Loans As of December 31, 2022 Commercial Agricultural Residential Real Estate Consumer Unallocated Total Allowance Individually evaluated for impairment $ 12 $ — $ 439 $ — $ — $ 451 Collectively evaluated for impairment 1,309 577 178 961 6,374 9,399 Total $ 1,321 $ 577 $ 617 $ 961 $ 6,374 $ 9,850 Loans Individually evaluated for impairment $ 8,342 $ 10,935 $ 2,741 $ — $ 22,018 Collectively evaluated for impairment 736,098 94,050 333,953 78,054 1,242,155 Total $ 744,440 $ 104,985 $ 336,694 $ 78,054 $ 1,264,173 The following table presents loans that were evaluated for expected credit losses on an individual basis and the related specific allocations, by loan segment as of December 31: 2023 2022 Loan Balance Specific Allocation Loan Balance Specific Allocation Commercial and industrial $ 465 $ 56 $ — $ — Commercial real estate 234 28 8,342 12 Agricultural 181 — 10,935 — Residential real estate 203 — 2,741 439 Consumer — — — — Total $ 1,083 $ 84 $ 22,018 $ 451 We have designated loans classified as collateral dependent for which we apply the practical expedient to measure the ACL based on the fair value of the collateral less cost to sell, when the repayment is expected to be provided substantially by the sale or operation of the collateral and the borrower is experiencing financial difficulty. The fair value of the collateral is based on appraisals, which may be adjusted due to their age, and the type, location, and condition of the property or area or general market conditions to reflect the expected change in value between the effective date of the appraisal and the measurement date. Appraisals are updated every one to two years depending on the type of loan and the total exposure of the borrower. Loans evaluated for expected credit losses on an individual basis include $1,083 in collateral dependent loans. 66 Table of Contents Note 5 – Premises and Equipment A summary of premises and equipment at December 31 follows: 2023 2022 Land $ 6,309 $ 5,904 Buildings and improvements 34,984 31,260 Furniture and equipment 35,528 35,906 Total 76,821 73,070 Less: accumulated depreciation 49,182 47,517 Premises and equipment, net $ 27,639 $ 25,553 Depreciation expense amounted to $ 1,978 , $ 2,071 , and $ 2,314 in 2023, 2022, and 2021, respectively. Note 6 – Goodwill and Other Intangible Assets The carrying amount of goodwill was $ 48,282 at December 31, 2023 and 2022. Identifiable intangible assets were as follows as of December 31: 2023 Gross Intangible Assets Accumulated Amortization Net Intangible Assets Core deposit premium resulting from acquisitions $ 5,579 $ 5,577 $ 2 2022 Gross Intangible Assets Accumulated Amortization Net Intangible Assets Core deposit premium resulting from acquisitions $ 5,579 $ 5,574 $ 5 Amortization expense associated with identifiable intangible assets was $ 3 , $ 15 , and $ 29 in 2023, 2022, and 2021, respectively. Estimated amortization expense associated with identifiable intangibles for each of the next two years succeeding December 31, 2023, and thereafter is as follows: Estimated Amortization Expense 2024 $ 1 2025 1 Total $ 2 Note 7 – Deposits Scheduled annual maturities of time deposits for each of the next five years, and thereafter, are as follows: Scheduled Maturities of Time Deposits 2024 $ 289,393 2025 30,048 2026 10,921 2027 9,649 2028 6,300 Thereafter 63 Total $ 346,374 Interest expense on time deposits greater than $250 was $ 3,419 in 2023, $ 621 in 2022 and $ 980 in 2021. 67 Table of Contents Note 8 – Borrowed Funds Federal funds purchased and repurchase agreements Securities sold under repurchase agreements without stated maturity dates, federal funds purchased, and FRB Discount Window advances generally mature within one to four days from the transaction date. A summary of borrowed funds without stated maturity dates was as follows for the years ended December 31: 2023 2022 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 $ 55,722 $ 42,982 2.22 % $ 58,140 $ 49,973 0.16 % Federal funds purchased — 13 6.13 % — 1 3.02 % FRB Discount Window — 66 5.34 % — — — % 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 $ 67,764 and $ 58,291 at December 31, 2023 and 2022, respectively. Such securities remain under our control. We may be required to provide additional collateral based on the fair value of underlying securities. Securities sold under repurchase agreements without stated maturity dates were as follows at December 31: 2023 2022 Amount Rate Amount Rate Securities sold under agreements to repurchase without stated maturity dates $ 46,801 3.11 % $ 57,771 0.49 % We had pledged AFS securities and 1-4 family residential real estate loans in the following amounts at December 31: 2023 2022 Pledged to secure borrowed funds $ 391,529 $ 347,331 Pledged to secure repurchase agreements 67,764 58,291 Pledged for public deposits and for other purposes necessary or required by law 84,099 48,698 Total $ 543,392 $ 454,320 AFS securities pledged to repurchase agreements without stated maturity dates consisted of the following at December 31: 2023 2022 U.S. Treasury $ 55,623 $ 29,351 States and political subdivisions — 11,037 Mortgage-backed securities 9,462 6,819 Collateralized mortgage obligations 2,679 11,084 Total $ 67,764 $ 58,291 AFS securities pledged to repurchase agreements are monitored to ensure the appropriate level is collateralized. In the event of maturities, calls, significant principal repayments, or significant decline in market values, we have an adequate level of AFS securities to pledge to satisfy collateral requirements. As of December 31, 2023, we had the ability to borrow up to an additional $ 338,080 , without pledging additional collateral. 68 Table of Contents FHLB advances FHLB advances are collateralized by a blanket lien on all qualified 1-4 family residential real estate loans, specific AFS securities, and FHLB stock. The following table lists the maturity and weighted average interest rate of FHLB advances as of: 2023 2022 Amount Rate Amount Rate Fixed rate due 2024 $ 40,000 5.55 % $ — — % FHLB advances outstanding as of December 31, 2023 were short-term, with maturities within one week after December 31, 2023. Subordinated Notes On June 2, 2021, we completed a private placement of $30,000 in aggregate principal amount of 3.25% Fixed-to-Floating Rate Subordinated Notes due 2031 (the "Notes"). The Notes will initially bear a fixed interest rate of 3.25% until June 15, 2026, after which time until maturity on June 15, 2031, the interest rate will reset quarterly to an annual floating rate equal to the then-current 3-month SOFR plus 256 basis points. The Notes are redeemable by us at our option, in whole or in part, on or after June 15, 2026. The Notes are not subject to redemption at the option of the holders. The following table summarizes our outstanding notes at December 31: 2023 2022 Amount Rate Amount Rate Fixed rate at 3.25% to floating, due 2031 $ 30,000 3.25 % $ 30,000 3.25 % Unamortized issuance costs ( 665 ) ( 755 ) Total subordinated debt, net $ 29,335 $ 29,245 Note 9 – Off-Balance-Sheet Activities, Commitments and Other Matters Credit-Related Financial Instruments We are party to credit related financial instruments with off-balance-sheet risk. These financial instruments are entered into in the normal course of business to meet the financing needs of our customers. These financial instruments involve, to varying degrees, elements of credit and IRR in excess of the amounts recognized in the consolidated balance sheets. The contractual or notional amounts of these instruments reflect the extent of involvement we have in a particular class of financial instrument. The following table summarizes our credit related financial instruments with off-balance-sheet risk as of December 31: 2023 2022 Unfunded commitments under lines of credit $ 313,646 $ 264,902 Commercial and standby letters of credit 1,624 1,321 Commitments to grant loans 6,460 24,770 Total $ 321,730 $ 290,993 Unfunded commitments under lines of credit are commitments for possible future extensions of credit to existing customers. These commitments may expire without being drawn upon and do not necessarily represent future cash requirements. Advances to mortgage brokers are also included in unfunded commitments under lines of credit. The unfunded commitment amount is the difference between our outstanding balances and maximum outstanding aggregate amount. Commitments to grant loans are agreements to lend to a customer as long as there is no violation of any condition established in the contract. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. The amount of collateral obtained, if it is deemed necessary, is based on management's credit evaluation of the customer. Commitments to grant loans include residential mortgage loans that may be committed to be sold to the secondary market. 69 Table of Contents Commercial and standby letters of credit are conditional commitments we issued to guarantee the performance of a customer to a third party. Those guarantees are primarily issued to support private borrowing arrangements, including commercial paper, bond financing, and similar transactions. These commitments to extend credit and letters of credit generally mature within one year . The credit risk involved in these transactions is essentially the same as that involved in extending loans to customers. We evaluate each customer’s credit worthiness on a case-by-case basis. The amount of collateral obtained, if deemed necessary upon the extension of credit, is based on our credit evaluation of the borrower. While we consider standby letters of credit to be guarantees, the amount of the liability related to such guarantees on the commitment date is not significant and a liability related to such guarantees is not recorded on the consolidated balance sheets. Our exposure to credit-related loss in the event of nonperformance by the counter parties to the financial instruments for commitments to extend credit and standby letters of credit could be up to the contractual notional amount of those instruments. We use the same credit policies as we do for extending loans to customers. No significant losses are anticipated as a result of these commitments. ACL - Off-Balance-Sheet Credit Commitments In connection with the commitments for credit-related financial instruments discussed above, we established an allowance for credit losses related to this off-balance-sheet credit exposure. The allowance, recorded in a liability account, is calculated in accordance with ASC 326 and represents expected credit losses over the contractual period for which we are exposed to credit risk resulting from a contractual obligation to extend credit. The estimate of expected credit losses considers both the likelihood that funding will occur and the amount expected to be funded over the estimated remaining life of the commitment. The likelihood and expected amount of funding are based on historical utilization rates. No allowance is recognized if we have the unconditional right to cancel the obligation. The allowance was $ 315 at December 31, 2023 and is reported as a component of accrued interest payable and other liabilities in our consolidated balance sheets. Adjustments to the allowance are reported in our income statement as a component of provision for credit losses. Derivative Loan Commitments Mortgage loan commitments are referred to as derivative loan commitments if the loan that will result from exercise of the commitment will be held for sale upon funding. We enter into commitments to fund residential mortgage loans at specific times in the future, with the intention that these loans will subsequently be sold in the secondary market. A mortgage loan commitment binds us to lend funds to a potential borrower at a specified interest rate within a specified period of time, generally up to 60 days after inception of the rate lock. Outstanding derivative loan commitments expose us to the risk that the price of the loans arising from the exercise of the loan commitment might decline from the inception of the rate lock to funding of the loan due to increases in mortgage interest rates. If interest rates increase, the value of these loan commitments decreases. Conversely, if interest rates decrease, the value of these loan commitments increase. There were no undesignated interest rate lock commitments at December 31, 2023 and 2022. Forward Loan Sale Commitments To protect against the price risk inherent in derivative loan commitments, we utilize both “mandatory delivery” and “best efforts” forward loan sale commitments to mitigate the risk of potential decreases in the values of loan that would result from the exercise of the derivative loan commitments. With a “mandatory delivery” contract, we commit to deliver a certain principal amount of mortgage loans to an investor at a specified price on or before a specified date. If we fail to deliver the amount of mortgages necessary to fulfill the commitment by the specified date, we are obligated to pay a “pair-off” fee, based on then current market prices, to the investor to compensate the investor for the shortfall. With a “best efforts” contract, we commit to deliver an individual mortgage loan of a specified principal amount and quality to an investor if the loan to the underlying borrower closes. Generally, the price the investor will pay the seller for an individual loan is specified prior to the loan being funded (e.g. on the same day the lender commits to lend funds to a potential borrower). We expect that these forward loan sale commitments will experience changes in fair value opposite to the change in fair value of derivative loan commitments. There were undesignated forward loan sale commitments of $ 0 and $ 379 at December 31, 2023 and 2022, respectively. The fair value of these forward loan sale commitments was $ 0 and $ 394 at December 31, 2023 and 2022, respectively. 70 Table of Contents The fair values of the rate lock loan commitments related to the origination of mortgage loans that will be held for sale and the forward loan sale commitments are deemed insignificant by management and, accordingly, are not recorded in our consolidated financial statements. Other Matters Correspondent banks may require us to maintain minimum cash reserve balances. The reserve balances related to correspondent banks amounted to $ 250 and $ 500 for the years ended December 31, 2023 and 2022. Banking regulations limit the transfer of assets in the form of dividends, loans, or advances from the Bank to the Corporation. At December 31, 2023, substantially all of the Bank’s assets were restricted from transfer to the Corporation in the form of loans or advances. Bank dividends are the principal source of funds for the Corporation. Payment of dividends without regulatory approval is limited to the current year’s retained net income plus retained net income for the preceding two years, less any required transfers to common stock. At January 1, 2024, the amount available to the Corporation for dividends from the Bank, without regulatory approval, was approximately $ 27,600 . Note 10 – Minimum Regulatory Capital Requirements The Corporation (on a consolidated basis) and the Bank are subject to various regulatory capital requirements administered by the FRB and the FDIC. Failure to meet minimum capital requirements can initiate mandatory and possibly additional discretionary actions by the FRB and the FDIC that, if undertaken, could have a material effect on our financial statements. Under regulatory capital adequacy guidelines and the regulatory framework for prompt corrective action, we must meet specific capital guidelines that include quantitative measures of assets, liabilities, capital, and certain off-balance-sheet items, as calculated under regulatory accounting standards. Our capital amounts and classifications are also subject to qualitative judgments by the FRB and the FDIC about components, risk weightings, and other factors. Prompt corrective action provisions are not applicable to bank holding companies. Quantitative measures established by regulation to ensure capital adequacy require us to maintain minimum amounts and ratios (set forth in the following table) of total capital, tier 1 capital, and common equity tier 1 capital (as defined in the regulations) to risk-weighted assets (as defined) and tier 1 capital to average assets (as defined). We believe, as of December 31, 2023 and 2022, that we met all capital adequacy requirements. The FRB has established minimum risk-based capital guidelines. Pursuant to these guidelines, a framework has been established that assigns risk weights to each category of on and off-balance-sheet items to arrive at risk adjusted total assets. Regulatory capital is divided by the risk adjusted assets with the resulting ratio compared to the minimum standard to determine whether a corporation has adequate capital. The common equity tier 1 capital ratio has a minimum requirement of 4.50%. The minimum standard for primary, or Tier 1 capital is 6.00% and the minimum standard for total capital is 8.00%. 71 Table of Contents As of December 31, 2023 and 2022, the most recent notifications from the FRB and the FDIC categorized us as well capitalized under the regulatory framework for prompt corrective action. To be categorized as well capitalized, an institution must maintain total risk-based, Tier 1 risk-based, Common Equity Tier 1, and Tier 1 leverage ratios as set forth in the following tables. There were no conditions or events since the notifications that we believe have changed our categories. Our actual capital amounts and ratios are also presented in the table. Actual Minimum Capital Requirement Minimum To Be Well Capitalized Under Prompt Corrective Action Provisions Amount Ratio Amount Ratio Amount Ratio December 31, 2023 Common equity Tier 1 capital to risk weighted assets Isabella Bank $ 178,316 12.48 % $ 100,043 7.00 % $ 92,897 6.50 % Consolidated 180,014 12.54 % 100,449 7.00 % N/A N/A Tier 1 capital to risk weighted assets Isabella Bank 178,316 12.48 % 121,481 8.50 % 114,335 8.00 % Consolidated 180,014 12.54 % 121,973 8.50 % N/A N/A Total capital to risk weighted assets Isabella Bank 191,739 13.42 % 150,065 10.50 % 142,919 10.00 % Consolidated 222,772 15.52 % 150,673 10.50 % N/A N/A Tier 1 capital to average assets Isabella Bank 178,316 8.71 % 81,935 4.00 % 102,419 5.00 % Consolidated 180,014 8.76 % 82,154 4.00 % N/A N/A Actual Minimum Capital Requirement Minimum To Be Well Capitalized Under Prompt Corrective Action Provisions Amount Ratio Amount Ratio Amount Ratio December 31, 2022 Common equity Tier 1 capital to risk weighted assets Isabella Bank $ 190,060 14.07 % $ 94,565 7.00 % $ 87,811 6.50 % Consolidated 175,112 12.91 % 94,948 7.00 % N/A N/A Tier 1 capital to risk weighted assets Isabella Bank 190,060 14.07 % 114,829 8.50 % 108,075 8.00 % Consolidated 175,112 12.91 % 115,295 8.50 % N/A N/A Total capital to risk weighted assets Isabella Bank 199,910 14.80 % 141,848 10.50 % 135,093 10.00 % Consolidated 214,207 15.79 % 142,423 10.50 % N/A N/A Tier 1 capital to average assets Isabella Bank 190,060 9.36 % 81,181 4.00 % 101,476 5.00 % Consolidated 175,112 8.61 % 81,392 4.00 % N/A N/A 72 Table of Contents Note 11 – Computation of Earnings Per Common Share Basic earnings per common share represents income available to common shareholders divided by the weighted average number of common shares outstanding during the period. Diluted earnings per common share includes additional common shares that would have been outstanding if dilutive potential common shares had been issued. For further information related to potential common shares that may be issued relate solely to outstanding shares in the Directors Plan and grant awards under the RSP, see "Note 12 – Benefit Plans." Earnings per common share have been computed based on the following for the years ended December 31: 2023 2022 2021 Average number of common shares outstanding for basic calculation 7,511,591 7,549,878 7,853,398 Average potential effect of common shares in the Directors Plan (1) 34,962 70,329 99,813 Average potential effect of common shares in the RSP 28,939 27,405 12,750 Average number of common shares outstanding used to calculate diluted earnings per common share 7,575,492 7,647,612 7,965,961 Net income $ 18,167 $ 22,238 $ 19,499 Earnings per common share Basic $ 2.42 $ 2.95 $ 2.48 Diluted $ 2.40 $ 2.91 $ 2.45 (1) Exclusive of shares held in the Rabbi Trust Note 12 – Benefit Plans 401(k) Plan We have a 401(k) plan in which substantially all employees are eligible to participate. Employees may contribute up to 100 % of their compensation subject to certain limits based on federal tax laws. The plan was amended in 2013 to provide a matching safe harbor contribution for all eligible employees equal to 100 % of the first 5.0 % of an employee's compensation contributed to the Plan during the year. Employees are 100 % vested in the safe harbor matching contributions. For 2023, 2022 and 2021, expenses attributable to the plan were $ 885 , $ 805 , and $ 792 , respectively. Defined Benefit Pension Plan We maintain a noncontributory defined benefit pension plan, which was curtailed effective March 1, 2007. As a result of the curtailment, future salary increases are no longer considered (the projected benefit obligation is equal to the accumulated benefit obligation), and plan benefits are based on years of service and the individual employee’s five highest consecutive years of compensation out of the last ten years of service through March 1, 2007. 73 Table of Contents Changes in the projected benefit obligation and plan assets during each year, the funded status of the plan, and the net amount recognized in our consolidated balance sheets using an actuarial measurement date of December 31, are summarized as follows during the years ended December 31: 2023 2022 Change in benefit obligation Benefit obligation, January 1 $ 6,896 $ 9,725 Interest cost 317 224 Actuarial loss (gain) ( 241 ) ( 2,236 ) Benefits paid, including plan expenses ( 344 ) ( 817 ) Benefit obligation, December 31 6,628 6,896 Change in plan assets Fair value of plan assets, January 1 6,582 8,649 Investment return (loss) 828 ( 1,250 ) Contributions — — Benefits paid, including plan expenses ( 344 ) ( 817 ) Fair value of plan assets, December 31 7,066 6,582 Surplus (deficiency) in funded status at December 31, included on the consolidated balance sheets in accrued interest payable and other liabilities $ 438 $ ( 314 ) Accumulated benefit obligation at December 31 $ 6,628 $ 6,896 2023 2022 Change in accrued pension benefit costs Accrued benefit cost at January 1 $ ( 314 ) $ ( 1,076 ) Contributions — — Net periodic benefit cost (credit) ( 95 ) ( 59 ) Net change in unrecognized actuarial loss and prior service cost 847 821 Prepaid (accrued) pension liability at December 31 $ 438 $ ( 314 ) We have recorded the funded status of the plan in our consolidated balance sheets. We adjust the funded status in a prepaid account and the underfunded status in a liability account to reflect the current funded status of the plan. Any gains or losses that arise during the year but are not recognized as components of net periodic benefit cost are recognized as a component of other comprehensive income (loss). The components of net periodic benefit cost are as follows for the years ended December 31: 2023 2022 2021 Interest cost on benefit obligation $ 317 $ 224 $ 233 Expected return on plan assets ( 371 ) ( 490 ) ( 486 ) Amortization of unrecognized actuarial net loss 149 216 222 Settlement loss — 109 — Net periodic benefit cost (credit) $ 95 $ 59 $ ( 31 ) Settlement losses during 2022 were recognized in connection with lump-sum benefit distributions. Many plan participants elect to receive their retirement benefit payments in the form of lump-sum settlements. Pro rata settlement losses, which can occasionally occur as a result of these lump-sum distributions, are recognized only in years when the total of such distributions exceed the sum of the service and interest expense components of net periodic benefit cost. Accumulated other comprehensive income at December 31, 2023 includes net unrecognized pension costs before income taxes of $ 882 . 74 Table of Contents The actuarial assumptions used in determining the benefit obligation are as follows for the years ended December 31: 2023 2022 2021 Discount rate 4.69 % 4.88 % 2.43 % Expected long-term rate of return on plan assets 6.00 % 6.00 % 6.00 % The actuarial weighted average assumptions used in determining the net periodic pension costs are as follows for the years ended December 31: 2023 2022 2021 Discount rate 4.88 % 2.43 % 2.30 % Expected long-term rate of return on plan assets 6.00 % 6.00 % 6.00 % As a result of the curtailment of the Plan, there is no rate of compensation increase considered in the above assumptions. The expected long-term rate of return is an estimate of anticipated future long-term rates of return on plan assets as measured on a market value basis. Factors considered in arriving at this assumption include: • Historical long-term rates of return for broad asset classes. • Actual past rates of return achieved by the plan. • The general mix of assets held by the plan. • The stated investment policy for the plan. The selected rate of return is net of anticipated investment related expenses. Pension Plan Assets Our overall investment strategy is to moderately grow the portfolio by investing 50 % of the portfolio in equity securities and 50 % in fixed income securities. This strategy is designed to generate a long-term rate of return of 6.00%. Equity securities primarily consist of the S&P 500 Index with a smaller allocation to the Small Cap and International Index. Fixed income securities are invested in the Bond Market Index. The plan has appropriate assets invested in short-term investments to meet near term benefit payments. The asset mix and the sector weighting of the investments are determined by our benefits committee, which is comprised of members of our management. To manage the plan, we retain a third party investment advisor to conduct consultations. We review the performance of the advisor at least annually. The fair values of our pension plan assets by asset category were as follows as of December 31: 2023 2022 Total (Level 2) Total (Level 2) Short-term investments $ 103 $ 103 $ 235 $ 235 Common collective trusts Fixed income 3,273 3,273 2,983 2,983 Equity investments 3,690 3,690 3,364 3,364 Total $ 7,066 $ 7,066 $ 6,582 $ 6,582 The following is a description of the valuation methodologies used for assets measured at fair value. There have been no changes in the methodologies used at December 31, 2023 and 2022: • Short-term investments: Shares of a money market portfolio valued at amortized cost, which approximates fair value. • Common collective trusts: These investments are public investment securities valued using the NAV provided by a third party investment advisor. The NAV is quoted on a private market that is not active; however, the unit price is based on underlying investments which are traded on an active market. We anticipate contributions to the plan in 2024 to approximate net contribution costs. 75 Table of Contents Estimated future benefit payments are as follows for the next ten years: Estimated Benefit Payments 2024 $ 721 2025 656 2026 685 2027 533 2028 545 2029 - 2033 2,342 Directors Plan Pursuant to the terms of the Directors Plan, our directors are required to invest at least 25% of their board fees in our common stock. These stock investments can be made either through deferred fees or through the purchase of shares through the Dividend Reinvestment Plan. Deferred fees, under the Directors Plan, are converted on a quarterly basis into stock units of our common stock based on the fair value of a share of our common stock as of the relevant valuation date. Stock units credited to a participant’s account are eligible for stock and cash dividends as declared. Dividend Reinvestment Plan shares are purchased pursuant to the Dividend Reinvestment Plan. Distribution of deferred fees from the Directors Plan occurs when the participant retires from the Board of Directors or upon the occurrence of certain other events. The participant is eligible to receive a distribution in the form of shares of our common stock of all of the stock units that are then in his or her account, and any unconverted cash will be converted to and rounded up to whole shares of stock and distributed, as well. The Directors Plan does not allow for cash settlement, and therefore, such share-based payment awards qualify for classification as equity. We may use authorized but unissued shares or purchase shares of common stock on the open market to meet our obligations under the Directors Plan. We maintain the Rabbi Trust to fund the Directors Plan. The Rabbi Trust is an irrevocable grantor trust to which we may contribute assets for the limited purpose of funding a nonqualified deferred compensation plan. Although we may not use the assets of the Rabbi Trust for any purpose other than meeting our obligations under the Directors Plan, the assets of the Rabbi Trust remain subject to the claims of our creditors and are included in the consolidated financial statements. We may contribute cash or common stock to the Rabbi Trust from time to time for the sole purpose of funding the Directors Plan. The Rabbi Trust will use any cash that we contribute to purchase shares of our common stock on the open market. Shares held in the Rabbi Trust are included in the calculation of earnings per share. The components of shares eligible to be issued under the Directors Plan were as follows as of December 31: 2023 2022 Eligible Shares Market Value Eligible Shares Market Value Unissued 3,538 $ 76 52,961 $ 1,245 Shares held in Rabbi Trust 150,581 3,237 154,879 3,640 Total 154,119 $ 3,313 207,840 $ 4,885 Cash Incentive Plans Executive Cash Incentive Plan We provide an executive cash incentive plan, which provides separate potential payouts for Isabella Bank's CEO, President, and CFO based on achievement of personal and corporate goals. The potential payouts under the plan range from 22% to 35% of the employee's annual salary. Expenses related to this plan for 2023, 2022, and 2021 were $ 53 , $ 252 , and $ 253 respectively. Employee Cash Incentive Plan We provide cash incentive plans to reward employees above and beyond their base salaries when our performance and operating profitability exceed established annual targets. Incentives are also awarded for achievement of personal performance goals. Expenses related to this plan for 2023, 2022 and 2021 were $ 796 , $ 1,072 , and $ 1,063 , respectively. 76 Table of Contents Restricted Stock Plan Under the RSP, an equity based bonus plan, we may award restricted stock bonuses to eligible employees on an annual basis that are not fully transferable or vested until certain conditions are met. Currently, the eligible employees are the Bank's CEO, President, and CFO. The RSP authorizes the issuance of unvested restricted stock to an eligible employee with a maximum award ranging from 25 % to 40 % of the employee’s annual salary, on a calendar year basis. The employee must also satisfy the annual performance targets and measures established by the Board of Directors. If these grant conditions are not satisfied, then the award of restricted shares will lapse or be adjusted appropriately, at the discretion of the Board of Directors. All such Grant Agreements contain vesting conditions and clawback provisions. A summary of changes in nonvested restricted stock awards follows for the years ended December 31: 2023 2022 Number of Shares Fair Value Number of Shares Fair Value Balance, January 1 27,072 $ 592 20,123 $ 418 Granted — — 6,949 174 Vested — — — — Forfeited — — — — Balance, December 31 27,072 $ 592 27,072 $ 592 Expenses related to the RSP for 2023, 2022, 2021 were $ 253 , $ 147 , and $ 86 respectively. As of December 31, 2023, there was $ 92 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 1.55 years. Other Employee Benefit Plans We maintain nonqualified defined contribution retirement plans to provide supplemental retirement benefits to specified participants. Expenses related to these programs for 2023, 2022 and 2021 were $ 345 , $ 251 , and $ 352 , respectively. Expenses are recognized over the participants’ expected years of service. We maintain a self-funded medical plan under which we are responsible for the first $ 100 per year of claims made by a covered family. Expenses are accrued based on estimates of the aggregate liability for claims incurred and our experience. Expenses were $ 2,281 in 2023, $ 3,026 in 2022 and $ 3,297 in 2021. Note 13 – Revenue Our revenue is comprised primarily of interest income, service charges and fees, gains on the sale of loans and AFS securities, earnings on corporate owned life insurance policies, and other noninterest income. Other noninterest income is typically service and performance driven in nature and comprised primarily of investment and trust advisory fees. We recognize revenue, excluding interest income, in accordance with ASC 606, Revenue From Contracts with Customers. Revenue is recognized when our performance obligation has been satisfied according to our contractual obligation. We record receivables when revenue is unpaid and collectability is reasonably assured. Accounts receivable balances primarily represent amounts due from customers for which revenue has been recognized. Accounts receivable balances are recorded in the consolidated balance sheets in accrued interest receivable and other assets. For the years ended December 31, 2023, 2022 and 2021, we satisfied our performance obligations pursuant to contracts with customers. As a result, we have not recorded any contract assets or liabilities. We estimate no returns or allowances for the years ended December 31, 2023, 2022 and 2021. Our contracts with customers define our performance obligations with clearly established pricing which did not require us to allocate or disaggregate revenue by performance obligation. A summary of revenue recognized for each major category of contracts with customers, subject to ASC 606, is as follows for the years ended December 31: 2023 2022 2021 Debit card income $ 4,063 $ 3,783 $ 3,623 Trust service fees 3,110 2,622 2,707 Investment advisory fees 447 383 364 Service charges and fees related to deposit accounts 362 345 312 A significant portion of our revenue consists of interest income which is not subject to the requirements set forth in ASC 606. 77 Table of Contents Note 14 – Other Noninterest Expenses A summary of expenses included in other noninterest expenses is as follows for the years ended December 31: 2023 2022 2021 Audit, consulting, and legal fees $ 2,340 $ 2,358 $ 2,066 ATM and debit card fees 1,767 1,909 1,810 Marketing costs 1,159 1,056 939 Memberships and subscriptions 1,042 876 877 Loan underwriting fees 927 1,004 849 FDIC insurance premiums 922 537 690 Donations and community relations 915 923 705 Other losses 871 546 194 Director fees 764 790 703 All other 2,401 2,237 1,989 Total other noninterest expenses $ 13,108 $ 12,236 $ 10,822 Note 15 – Federal Income Taxes Components of the consolidated provision for federal income taxes are summarized as follows for the years ended December 31: 2023 2022 2021 Currently payable $ 2,657 $ 4,593 $ 4,371 Deferred expense (benefit) 1,008 13 ( 523 ) Income tax expense $ 3,665 $ 4,606 $ 3,848 The reconciliation of the provision for federal income taxes and the amount computed at the federal statutory tax rate of 21 % of income before federal income tax expense is as follows for the year ended December 31: 2023 2022 2021 Income taxes at statutory rate $ 4,585 $ 5,637 $ 4,903 Effect of nontaxable income Interest income on tax exempt municipal securities ( 552 ) ( 587 ) ( 643 ) Earnings on corporate owned life insurance policies ( 193 ) ( 197 ) ( 225 ) Other 292 329 312 Total effect of nontaxable income ( 453 ) ( 455 ) ( 556 ) Effect of nondeductible expenses 86 45 46 Effect of tax credits ( 602 ) ( 621 ) ( 617 ) Unrecognized deferred tax benefit 49 — 72 Federal income tax expense $ 3,665 $ 4,606 $ 3,848 The unrecognized deferred tax benefit recorded during 2023 related to a low income housing tax credit investment. The unrecognized deferred tax benefit recorded during 2021 related to our joint venture investment in Corporate Settlement Solutions, LLC, which was sold during the fourth quarter of 2020. The sale of each investment resulted in a capital loss carryforward that is unlikely to be recognized in the foreseeable future. As such, we did not recognize a deferred tax asset as of December 31, 2023, 2022 and 2021 related to our low income housing tax credit investment or the investment in Corporate Settlement Solutions, LLC. 78 Table of Contents Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for federal income tax purposes. Significant components of our deferred tax assets and liabilities, measured at the 21% statutory rate, included in other assets on our consolidated balance sheets, are summarized as follows as of December 31: 2023 2022 Deferred tax assets Allowance for credit losses $ 2,658 $ 1,848 Deferred compensation 1,388 1,648 Employee benefit plans 80 82 Core deposit premium and acquisition expenses 764 764 Net unrealized losses on AFS securities 6,627 9,296 Net unrecognized actuarial losses on pension plan 185 363 Life insurance death benefit payable 497 497 Other 821 789 Total deferred tax assets 13,020 15,287 Deferred tax liabilities Prepaid pension cost 277 297 Premises and equipment 2,251 1,590 Accretion on securities 315 166 Core deposit premium and acquisition expenses 1,022 984 Other 1,236 1,075 Total deferred tax liabilities 5,101 4,112 Net deferred tax assets (liabilities) $ 7,919 $ 11,175 While we are subject to U.S. federal income tax, we are no longer subject to examination by taxing authorities for years before 2020. There are no material uncertain tax positions requiring recognition in our consolidated financial statements. We do not expect the total amount of unrecognized tax benefits to significantly increase in the next twelve months. We recognize interest and/or penalties related to income tax matters in income tax expense. We do not have any amounts accrued for interest and penalties at December 31, 2023 and 2022 and we are not aware of any claims for such amounts by federal income tax authorities. 79 Table of Contents Note 16 – Accumulated Other Comprehensive Income (Loss) AOCI includes net income as well as unrealized gains and losses, net of tax, on AFS securities and derivative instruments, as well as changes in the funded status of our defined benefit pension plan. Unrealized gains and losses and changes in the funded status of the pension plan, net of tax, are excluded from net income, and are reflected as a direct charge or credit to shareholders’ equity. Comprehensive income (loss) and the related components are disclosed in the consolidated statements of comprehensive income. The following table provides a roll-forward of the changes in AOCI by component for the years ended December 31, 2021, 2022 and 2023 (net of tax): Unrealized Gains (Losses) on AFS Securities Unrealized Gains (Losses) on Derivative Instruments Change in Unrecognized Pension Cost on Defined Benefit Pension Plan Total Balance, January 1, 2021 $ 10,485 $ ( 42 ) $ ( 2,745 ) $ 7,698 OCI before reclassifications ( 8,371 ) 53 955 ( 7,363 ) Amounts reclassified from AOCI — — ( 31 ) ( 31 ) Subtotal ( 8,371 ) 53 924 ( 7,394 ) Tax effect 1,759 ( 11 ) ( 193 ) 1,555 OCI, net of tax ( 6,612 ) 42 731 ( 5,839 ) Balance, December 31, 2021 3,873 — ( 2,014 ) 1,859 OCI before reclassifications ( 50,015 ) — 762 ( 49,253 ) Amounts reclassified from AOCI — — 59 59 Subtotal ( 50,015 ) — 821 ( 49,194 ) Tax effect 10,314 — ( 173 ) 10,141 OCI, net of tax ( 39,701 ) — 648 ( 39,053 ) Balance, December 31, 2022 ( 35,828 ) — ( 1,366 ) ( 37,194 ) OCI before reclassifications 13,365 — 752 14,117 Amounts reclassified from AOCI ( 67 ) — 95 28 Subtotal 13,298 — 847 14,145 Tax effect ( 2,669 ) — ( 178 ) ( 2,847 ) OCI, net of tax 10,629 — 669 11,298 Balance, December 31, 2023 $ ( 25,199 ) $ — $ ( 697 ) $ ( 25,896 ) Included in OCI are changes in unrealized gains and losses related to auction rate money market preferred stocks. Auction rate money market preferred stocks, for federal income tax purposes, have no deferred federal income taxes related to unrealized gains or losses given the nature of the investments. A summary of the components of unrealized gains on AFS securities included in OCI follows for the years ended December 31: 2023 2022 2021 Auction Rate Money Market Preferred Stocks All Other AFS Securities Total Auction Rate Money Market Preferred Stocks All Other AFS Securities Total Auction Rate Money Market Preferred Stocks All Other AFS Securities Total Unrealized gains (losses) arising during the period $ 589 $ 12,776 $ 13,365 $ ( 900 ) $ ( 49,115 ) $ ( 50,015 ) $ 5 $ ( 8,376 ) $ ( 8,371 ) Reclassification adjustment for net (gains) losses included in net income — ( 67 ) ( 67 ) — — — — — — Net unrealized gains (losses) 589 12,709 13,298 ( 900 ) ( 49,115 ) ( 50,015 ) 5 ( 8,376 ) ( 8,371 ) Tax effect — ( 2,669 ) ( 2,669 ) — 10,314 10,314 — 1,759 1,759 Unrealized gains (losses), net of tax $ 589 $ 10,040 $ 10,629 $ ( 900 ) $ ( 38,801 ) $ ( 39,701 ) $ 5 $ ( 6,617 ) $ ( 6,612 ) 80 Table of Contents The following table details reclassification adjustments and the related affected line items in our consolidated statements of income for the years ended December 31: Details about AOCI components Amount Reclassified from AOCI Affected Line Item in the Consolidated Statements of Income 2023 2022 2021 Unrealized gains (losses) on AFS securities $ 67 $ — $ — Net gains on sale of AFS securities 14 — — Federal income tax expense $ 53 $ — $ — Net income Change in unrecognized pension cost on defined benefit pension plan $ 95 $ 59 $ ( 31 ) Other noninterest expenses 20 12 ( 7 ) Federal income tax (benefit) expense $ 75 $ 47 $ ( 24 ) Net income Note 17 – Fair Value Under fair value measurement and disclosure authoritative guidance, we group assets and liabilities measured at fair value into three levels, based on the markets in which the assets and liabilities are traded, and the reliability of the assumptions used to determine fair value, based on the prioritization of inputs in the valuation techniques. These levels are: Level 1: Valuation is based upon quoted prices for identical instruments traded in active markets. Level 2: Valuation is based upon quoted prices for similar instruments in active markets, quoted prices for identical or similar instruments in markets that are not active and model based valuation techniques for which all significant assumptions are observable in the market. Level 3: Valuation is generated from model based techniques that use at least one significant assumption not observable in the market. These unobservable assumptions reflect estimates of assumptions that market participants would use in pricing the asset or liability. The asset’s or liability’s fair value measurement level within the fair value hierarchy is based on the lowest level of any input that is significant to the fair value measurement. Valuation techniques maximize the use of observable inputs and minimize the use of unobservable inputs. Transfers between measurement levels are recognized at the end of reporting periods. Fair value measurement requires the use of an exit price notion which may differ from entrance pricing. Generally, we believe our assets and liabilities classified as Level 1 or Level 2 approximate an exit price notion. Following is a description of the valuation methodologies, key inputs, and an indication of the level of the fair value hierarchy in which the assets or liabilities are classified. AFS securities: AFS securities are recorded at fair value on a recurring basis. Level 1 fair value measurement is based upon quoted prices for identical instruments. Level 2 fair value measurement is based upon quoted prices for similar instruments. If quoted prices are not available, fair values are measured using independent pricing models or other model based valuation techniques such as the present value of future cash flows, adjusted for the security’s credit rating, prepayment assumptions and other factors such as credit loss and liquidity assumptions. The values for Level 1 and Level 2 investment securities are generally obtained from an independent third party. On a quarterly basis, we compare the values provided to alternative pricing sources. Loans: We do not record loans at fair value on a recurring basis. However, some loans are individually evaluated for ACL purposes, and a specific ACL may be established. To measure reserve, the fair value of the loan is estimated using the fair value of the collateral, less costs to sell if foreclosure is probable, or the present value of expected future cash flows discounted at the loan’s effective interest rate. 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 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 81 Table of Contents information that may have been considered as well as other factors such as costs to sell an asset if it is determined that the collateral will be liquidated in connection with the ultimate settlement of the loan. We use these valuations to determine if any specific reserves or charge-offs are necessary. We may obtain new valuations in certain circumstances, including when there has been significant deterioration in the condition of the collateral, if the foreclosure process has begun, or if the existing valuation is deemed to be outdated. The following tables list the quantitative fair value information about loans measured at fair value on a nonrecurring basis as of: December 31, 2023 Valuation Technique Fair Value Unobservable Input Actual Range Weighted Average Collateral Dependent Loans - Discount applied to collateral: Discounted value $ 1,083 Real Estate 20 % 20 % Equipment 25 % - 35 % 33 % Accounts receivable 25 % 25 % December 31, 2022 Valuation Technique Fair Value Unobservable Input Actual Range Weighted Average Discount applied to collateral: Real Estate 20 % - 30 % 24 % Impaired Loans - Equipment 25 % - 35 % 31 % Discounted value $ 17,143 Cash crop inventory 40 % 40 % Livestock 30 % 30 % Accounts receivable 25 % 27 % Furniture, fixtures & equipment 45 % 45 % Collateral discount rates may have ranges to accommodate differences in the age of the independent appraisal, broker price opinion, or internal evaluation. OMSR: OMSR (which are included in other assets) are subject to impairment testing. To test for impairment, we utilize a discounted cash flow analysis using interest rates and prepayment speed assumptions currently quoted for comparable instruments and discount rates. If the valuation model reflects a value less than the carrying value, OMSR are adjusted to fair value through a valuation allowance as determined by the model. As such, we classify OMSR subject to nonrecurring fair value adjustments as Level 2. The preceding methods described may produce a fair value calculation that may not be indicative of net realizable value or reflective of future fair values. Although we believe our valuation methods are appropriate and consistent with other market participants, the use of different methodologies or assumptions to determine the fair value of certain financial instruments could result in a different fair value measurement. Estimated Fair Values of Financial Instruments Not Recorded at Fair Value in their Entirety on a Recurring Basis Disclosure of the estimated fair values of financial instruments, which differ from carrying values, often requires the use of estimates. In cases where quoted market values in an active market are not available, we use present value techniques and other valuation methods to estimate the fair values of our financial instruments. These valuation methods require considerable judgment and the resulting estimates of fair value can be significantly affected by the assumptions made and methods used. 82 Table of Contents The carrying amount and estimated fair value of financial instruments not recorded at fair value in their entirety on a recurring basis were as follows as of December 31: 2023 Carrying Value Estimated Fair Value Level 1 Level 2 Level 3 ASSETS Cash and cash equivalents $ 33,672 $ 33,672 $ 33,672 $ — $ — Mortgage loans AFS — — — — — Gross loans 1,349,463 1,292,458 — — 1,292,458 Less allowance for credit losses 13,108 13,108 — — 13,108 Net loans 1,336,355 1,279,350 — — 1,279,350 Accrued interest receivable 8,167 8,167 8,167 — — Equity securities without readily determinable fair values (1) 15,848 N/A — — — OMSR 2,422 3,164 — 3,164 — LIABILITIES Deposits without stated maturities 1,377,321 1,377,321 1,377,321 — — Deposits with stated maturities 346,374 341,489 — 341,489 — Federal funds purchased and repurchase agreements 46,801 46,704 — 46,704 — FHLB advances 40,000 40,000 — 40,000 — Subordinated debt, net of unamortized issuance costs 29,335 26,146 — 26,146 — Accrued interest payable 890 890 890 — — 2022 Carrying Value Estimated Fair Value Level 1 Level 2 Level 3 ASSETS Cash and cash equivalents $ 38,924 $ 38,924 $ 38,924 $ — $ — Mortgage loans AFS 379 395 — 395 — Gross loans 1,264,173 1,225,669 — — 1,225,669 Less allowance for credit losses 9,850 9,850 — — 9,850 Net loans 1,254,323 1,215,819 — — 1,215,819 Accrued interest receivable 7,472 7,472 7,472 — — Equity securities without readily determinable fair values (1) 15,746 N/A — — — OMSR 2,559 3,174 — 3,174 — LIABILITIES Deposits without stated maturities 1,492,235 1,492,235 1,492,235 — — Deposits with stated maturities 252,040 240,964 — 240,964 — Federal funds purchased and repurchase agreements 57,771 57,581 — 57,581 — FHLB advances — — — — — Subordinated debt, net of unamortized issuance costs 29,245 26,365 — 26,365 — Accrued interest payable 255 255 255 — — (1) Due to the characteristics of equity securities without readily determinable fair values, they are not disclosed under a specific fair value hierarchy. When an impairment or write-down related to these securities is recorded, such amount would be classified as a nonrecurring Level 3 fair value adjustment . 83 Table of Contents Financial Instruments Recorded at Fair Value The table below presents the recorded amount of assets and liabilities measured at fair value on December 31: 2023 2022 Total Level 1 Level 2 Level 3 Total Level 1 Level 2 Level 3 Recurring items AFS securities U.S. Treasury $ 214,801 $ — $ 214,801 $ — $ 208,701 $ — $ 208,701 $ — States and political subdivisions 92,876 — 92,876 — 117,512 — 117,512 — Auction rate money market preferred 2,931 — 2,931 — 2,342 — 2,342 — Mortgage-backed securities 32,815 — 32,815 — 39,070 — 39,070 — Collateralized mortgage obligations 177,775 — 177,775 — 205,728 — 205,728 — Corporate 6,950 — 6,950 — 7,128 — 7,128 — Total AFS securities 528,148 — 528,148 — 580,481 — 580,481 — Nonrecurring items Collateral dependent (net of ACL) in 2023 Impaired loans (net of the ALLL) in 2022 1,083 — — 1,083 17,143 — — 17,143 Foreclosed assets 406 — — 406 439 — — 439 Total $ 529,637 $ — $ 528,148 $ 1,489 $ 598,063 $ — $ 580,481 $ 17,582 Percent of assets and liabilities measured at fair value 0.00 % 99.72 % 0.28 % 0.00 % 97.06 % 2.94 % We recorded losses of $ 132 and $ 6 through earnings related fair value changes in foreclosed assets for the years ended December 31, 2023 and 2022. We had no other assets or liabilities recorded at fair value with changes in fair value recognized through earnings, on a recurring basis or nonrecurring basis, as of December 31, 2023 and 2022. Note 18 – Related Party Transactions In the ordinary course of business, we grant loans to principal officers and directors and their affiliates (including their families and companies in which they have 10% or more ownership). Annual activity consisted of the following for the years ended December 31: 2023 2022 Balance, January 1 $ 20,963 $ 22,558 New loans 569 1,829 Repayments ( 2,005 ) ( 3,424 ) Balance, December 31 $ 19,527 $ 20,963 Total deposits of these principal officers and directors and their affiliates amounted to $ 7,735 and $ 12,317 at December 31, 2023 and 2022, respectively. From time to time, we make charitable donations to The Isabella Bank Foundation (the “Foundation”), which is a non-controlled nonprofit organization formed for the purpose of distributing charitable donations to recipient organizations generally located in the communities we serve. Our donations are recognized as expense when paid to the Foundation. The assets and transactions of the Foundation are not included in our consolidated financial statements. Assets of the Foundation include cash and cash equivalents, certificates of deposit, and shares of Isabella Bank Corporation common stock. The Foundation owned 20,000 shares of our common stock as of December 31, 2023 and 2022. Such shares are included in the computation of dividends and earnings per share. The following table displays total assets of, and our donations to, the Foundation as of, and for the years ended December 31: 2023 2022 2021 Total assets $ 1,221 $ 1,385 $ 1,511 Donations $ — $ 50 $ 50 84 Table of Contents Note 19 – Operating Segments Our reportable segments are based on legal entities that account for at least 10% of net operating results. The operations of the Bank as of December 31, 2023, 2022, and 2021 represent approximately 90 % or more of our consolidated total assets and operating results. As such, no additional segment reporting is presented. Note 20 – Parent Company Only Financial Information Condensed Balance Sheets December 31 2023 2022 ASSETS Cash on deposit at the Bank $ 25,010 $ 8,525 Investments in subsidiaries 157,671 158,125 Premises and equipment 1,196 1,171 Other assets 47,949 47,922 TOTAL ASSETS $ 231,826 $ 215,743 LIABILITIES AND SHAREHOLDERS’ EQUITY Subordinated debt, net of unamortized issuance costs $ 29,335 $ 29,245 Other liabilities 89 288 Shareholders' equity 202,402 186,210 TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY $ 231,826 $ 215,743 Condensed Statements of Income Year Ended December 31 2023 2022 2021 Income Dividends from subsidiaries $ 30,000 $ 6,000 $ 3,600 Interest income 191 15 12 Other income 13 14 17 Total income 30,204 6,029 3,629 Expenses Interest expense 1,065 1,065 615 Management fee 952 900 854 Audit, consulting, and legal fees 577 522 590 Director fees 408 417 352 Other 354 339 358 Total expenses 3,356 3,243 2,769 Income before income tax benefit and equity in undistributed earnings of subsidiaries 26,848 2,786 860 Federal income tax benefit 654 670 500 Income before equity in undistributed earnings of subsidiaries 27,502 3,456 1,360 Undistributed earnings of subsidiaries ( 9,335 ) 18,782 18,139 Net income $ 18,167 $ 22,238 $ 19,499 85 Table of Contents Condensed Statements of Cash Flows Year Ended December 31 2023 2022 2021 Operating activities Net income $ 18,167 $ 22,238 $ 19,499 Adjustments to reconcile net income to cash provided by operations Undistributed earnings of subsidiaries 9,335 ( 18,782 ) ( 18,139 ) Share-based payment awards under the Directors Plan 529 463 433 Share-based payment awards under the RSP 253 147 86 Amortization of subordinated debt issuance costs 90 87 52 Depreciation 52 50 50 Deferred income tax expense (benefit) 228 ( 133 ) ( 267 ) Changes in operating assets and liabilities which provided (used) cash Other assets ( 255 ) 1,383 ( 304 ) Other liabilities ( 199 ) 160 70 Net cash provided by (used in) operating activities 28,200 5,613 1,480 Investing activities Purchase of equity investments — ( 250 ) — Net (purchases) sales of premises and equipment ( 77 ) 260 ( 2 ) Net cash provided by (used in) investing activities ( 77 ) 10 ( 2 ) Financing activities Issuance of subordinated debt, net of unamortized issuance costs — — 29,106 Cash dividends paid on common stock ( 8,216 ) ( 8,082 ) ( 8,367 ) Proceeds from the issuance of common stock 1,617 1,762 1,593 Common stock repurchased ( 3,415 ) ( 1,124 ) ( 13,758 ) Common stock purchased for deferred compensation obligations ( 1,624 ) ( 1,189 ) ( 1,187 ) Net cash provided by (used in) financing activities ( 11,638 ) ( 8,633 ) 7,387 Increase (decrease) in cash and cash equivalents 16,485 ( 3,010 ) 8,865 Cash and cash equivalents at beginning of period 8,525 11,535 2,670 Cash and cash equivalents at end of period $ 25,010 $ 8,525 $ 11,535 Note 21 – Subsequent Events We evaluated subsequent events after December 31, 2023 through the date our condensed consolidated financial statements were issued for potential recognition and disclosure. No subsequent events require financial statement recognition or disclosure between December 31, 2023 and the date our condensed consolidated financial statements were issued. 86 Table of Contents Item 9. Changes in and Disagreements With Accountants on Accounting and Financial Disclosure. None.