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Item 7. Management’s Discussion and Analysis

2025-03-12 compared with 2024-03-07 · 307 added, 452 removed, 281 unchanged (73% of the section changed)

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

ISABELLA BANK CORPORATION FINANCIAL REVIEW

(Dollars in thousands except per share amounts)

1 unchanged sentence

This discussion and analysis is intended to provide a better understanding of the consolidated financial statements and statistical data included elsewhere in this Annual Report on Form 10-K.

Forward-Looking Statements

Information in this Annual Report on Form 10-K contains certain forward looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Rule 175 promulgated thereunder, and Section 21E of the Securities Exchange Act of 1934, as amended and Rule 3b-6 promulgated thereunder.

We intend such forward looking statements to be covered by the safe harbor provisions for forward looking statements contained in the Private Securities Litigation Reform Act of 1995, and are included in this statement for purposes of these safe harbor provisions.

Forward-looking statements generally relate to losses, impact of events, financial condition, plans, objectives, outlook for earnings, revenues, expenses, capital and liquidity levels and ratios, asset levels, asset quality, financial position, and other matters regarding or affecting the Corporation and its future business and operations.

Forward-looking statements are typically identified by words or phrases such as “will likely result", “expect”, “plan”, “believe”, “estimate”, “anticipate”, “strategy”, “trend”, “forecast”, “outlook”, “project”, “intend”, “assume”, “outcome”, “continue”, “remain”, “potential”, “opportunity”, “comfortable”, “current”, “position”, “maintain”, “sustain”, “seek”,“achieve” and variations of such words and similar expressions, or future or conditional verbs such as will, would, should, could or may.

Although we believe the assumptions upon which these forward-looking statements are based are reasonable, any of these assumptions could prove to be inaccurate and the forward-looking statements based on these assumptions could be incorrect.

The matters discussed in these forward-looking statements are subject to various risks, uncertainties and other factors that could cause actual results and trends to differ materially from those made, projected, or implied in or by the forward-looking statements depending on a variety of uncertainties or other factors described in this report, or included in any subsequent filing by the Corporation with the Securities and Exchange Commission.

Forward-looking statements are based on beliefs and assumptions using information available at the time the statements are made.

The Corporation cautions you not to unduly rely on forward-looking statements because the assumptions, beliefs, expectations and projections about future events may, and often do, differ materially from actual results.

Any forward-looking statement speaks only as to the date on which it is made, and we undertake no obligation to update any forward-looking statement to reflect developments occurring after the statement is made.

Non-GAAP Financial Measures

Our accounting and reporting policies conform to GAAP and the prevailing practices in the financial services industry.

However, we also evaluate our performance by reference to certain additional financial measures discussed in this Annual Report on Form 10-K that we identify as being “non-GAAP financial measures.” In accordance with SEC rules, we classify a financial measure as being a non-GAAP financial measure if that financial measure excludes or includes amounts, or is subject to adjustments that have the effect of excluding or including amounts, as the case may be, in the most directly comparable measure calculated and presented in accordance with GAAP as in effect from time to time in the United States in our statements of income, balance sheets or statements of cash flows.

Non-GAAP financial measures do not include operating and other statistical measures or ratios, or statistical measures calculated using exclusively either financial measures calculated in accordance with GAAP, operating measures or other measures that are not non-GAAP financial measures or both.

The non-GAAP financial measures that we discuss in this Annual Report on Form 10-K should not be considered in isolation or as a substitute for the most directly comparable or other financial measures calculated in accordance with GAAP.

Moreover, the manner in which we calculate the non-GAAP financial measures that we discuss in this report may differ from that of other companies reporting measures with similar names.

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Executive Summary

We reported net income of $18,167 and earnings per common share of $2.42 for the year ended December 31, 2023.

Net income and earnings per common share for the same period of 2022 were $22,238 and $2.95, respectively.

Net interest income decreased $2,537, or 4.19%, during 2023 compared to 2022.

Rising interest rates and growth in core loans led to a $13,833, or 21.02%, increase in gross interest income during 2023 compared to 2022.

Conversely, rising interest rates on deposits and an increase in borrowings led to a $16,370 increase in interest expense for the year ended December 31, 2023 when compared to the same period in 2022.

The provision for credit losses during the year ended December 31, 2023 was $629, compared to $483 for the same period in 2022.

Credit quality remained strong at December 31, 2023, as evidenced by total past due and nonaccrual loans which were $4,964, or 0.37%, of gross loans.

While maintaining strong credit quality, the ACL and provision for loan losses increased during 2023 as a result of core loan growth and economic related risk factors.

Noninterest income increased $161 during 2023 compared to the same period in 2022.

This increase was driven by wealth management fees and ATM and debit card fee income, offset by a decrease in OMSR income and gain on sale of loans, as residential mortgages sold to the secondary market declined.

Noninterest expenses increased $2,490 in 2023, when compared to the same period in 2022, and was primarily a result of increased compensation, equipment expense, other losses, and FDIC insurance premiums.

As of December 31, 2023, total assets and assets under management were $2,058,968 and $2,948,751, respectively.

Assets under management include loans sold and serviced of $248,756 and investment and trust assets managed by Isabella Wealth of $641,027, in addition to assets on our consolidated balance sheet.

Loans outstanding as of December 31, 2023 totaled $1,349,463.

During 2023, gross loans grew $85,290 driven by growth in nearly all loan categories.

Total deposits were $1,723,695 as of December 31, 2023, declining $20,580, or 1.2%, during the year as competition for deposits remained strong throughout 2023.

All regulatory capital ratios for the Bank exceeded the minimum thresholds to be considered a "well capitalized" institution.

Our securities portfolio decreased $52,333 during 2023, predominantly due to maturities and principal paydowns.

Unrealized losses on our AFS securities portfolio were $31,826 at December 31, 2023, improving $13,298 since December 31, 2022.

Unrealized losses on our AFS securities portfolio resulted from increased short-term and intermediate-term benchmark interest rates throughout 2023.

As a result, the higher level of unrealized losses has reduced our balance of shareholders' equity and negatively impacted our tangible book value.

Management does not anticipate the need to sell securities and incur a loss as a result of the sale.

Our net yield on interest earning assets (FTE) was 3.05% for 2023, which decreased from 3.18% in 2022.

To maintain a competitive edge in a rising interest rate environment, we increased most of our deposit rates beginning in the fourth quarter of 2022 and in recent periods, increased our level of borrowings to fund loan growth.

As a result, this has negatively impacted our net yield on interest earning assets and further increases may slow improvement in our net yield on interest earning assets.

Recent Events and Legislation

2023 Bank Failures and the Condition of the Banking Industry:

In March 2023, disruptions in the industry resulted in FDIC seizures of three banking institutions.

Each bank had its own unique balance sheet issues, none of which exist at Isabella Bank.

Shortly after the FDIC takeovers, the Federal Reserve Bank and the Department of Treasury announced enhanced insurance coverage and a borrowing program to help banks in need of funding.

Isabella Bank continues to monitor such events, as well as industry and regulatory responses, to assure we are prepared for any changes that might affect the bank, including the ability to timely address economic uncertainty.

Impact of the Adoption of ASC 326 (CECL):

We adopted ASU No.

2016-13, as subsequently updated for certain clarifications, targeted relief and codification improvements, as of January 1, 2023.

Based on portfolio characteristics and economic conditions and expectations as of January 1, 2023, we recorded a combined pre-tax increase of $3,059 to the ACL and reserve for unfunded commitments on January 1, 2023 upon the adoption of ASU 2016-13;

this implementation resulted in a reduction to retained earnings of $2,417, net of tax, as of January 1, 2023.

In connection with the adoption of ASC 326, we revised certain accounting policies and implemented certain accounting policy elections, which are included in “Note 1 – Significant Accounting Policies” of our interim condensed consolidated financial statements.

Comparison of Operating Results for the year ended December 31, 2024 and 2023

We reported net income for the year ended December 31, 2024 of $13,889, or $1.86 per diluted share, compared with $18,167, or $2.40 per diluted share, for the same period of 2023.

The non-GAAP measure of net income was $15,016, or $2.01 per diluted share, compared to $17,989, or $2.37 per diluted share, for the respective periods.

The adjusted net income for 2024 excludes a net charge-off of $1,556 related to overdrawn deposit accounts from a single customer.

The decrease in adjusted net income primarily reflects the impact on net interest income due to slower repricing of earning assets as compared to the rising costs of interest bearing liabilities.

The decrease in net income for the comparative periods also included an increase in provision for credit losses and compensation expenses.

Net interest income was $55,835 in 2024 compared with $57,944 in the same period of 2023.

The comparison of NIM and yield on interest earning assets were 2.90% and 4.65% compared to 3.05%, and 4.17% for 2024 and 2023, respectively.

The book yield from securities was 2.22% and 2.26% during 2024 and 2023, respectively.

The weighted average maturity of our U.S.

Treasury portfolio is less than 1.4 years, and the proceeds are expected to be reinvested in market rate loans and securities, or to pay off borrowed funds.

The yield on loans expanded to 5.58%, from 5.02% due to higher rates on new loans and fixed rate commercial loans that have and continue to reprice to variable rates.

At the end of 2024, approximately 40% of commercial loans were fixed at rates lower than current market rates, but the majority will contractually reprice to variable rates over the next four years.

Our cost of interest bearing liabilities increased to 2.37% from 1.57% in 2023, but have stabilized in comparison to the first half of the year.

The provision for credit losses for the year ended December 31, 2024 was $1,884, compared to $629 for the same period in 2023.

The provision for 2024 includes the recovery of contractual principal of two previously charged-off commercial loans totaling $314.

Given these loan recoveries, our historical loss rate experience improved which provided a benefit of $435.

The benefits were offset by a $1,556 net charge-off related to an overdrawn deposit account from a single customer and additional reserves for core loan growth.

Noninterest income for the year ended December 31, 2024 was $14,576, an increase of $749, or 5.4%, in comparison to 2023.

Wealth management fees grew $484, or 13.6%, due to higher assets under management.

Managed assets increased $17,015 driven by growth in new accounts and higher security valuations.

Customer service fees increased $329, based on a higher number of transaction accounts.

Noninterest expenses were $52,129 for the year ended December 31, 2024, increasing $2,819 when compared to the same period in 2023.

Annual merit increases and medical claims resulted in a $2,671 increase in compensation and benefits.

Our efficiency ratio was 73.01% in 2024 compared to 67.76% in 2023 and the increase primarily reflects lower NIM and a relatively stable base of noninterest expense.

Financial Condition (December 31, 2024 to December 31, 2023 comparison)

Total assets were $2,086,241 at December 31, 2024, increasing $27,273 due to loan growth funded by deposits and amortization of AFS securities.

Our AFS securities portfolio totaled $489,029 at December 31, 2024, declining $39,119 due to municipal maturities and principal paydowns on mortgage-related securities.

Net unrealized losses on our AFS securities portfolio were $26,487 at December 31, 2024, improving $5,339 since December 31, 2023.

Net unrealized losses as a percentage of total AFS securities improved to 5.1% from 5.7% at the end of 2023 due to an increase in bond yields.

Bond rates may vary from quarter to quarter, however, unrealized losses are expected to decrease as most of the bond portfolio approaches its maturity over the next two years.

Loans outstanding as of December 31, 2024 totaled $1,423,571, increasing $74,108 since December 31, 2023.

Growth during 2024 was driven by an increase of $44,539 in advances to mortgage brokers, $35,156 in commercial and industrial loans, and $24,454 in residential loans, offset by a $16,797 decrease in commercial real estate loans.

The growth in commercial and industrial loans primarily was in the hotel management and construction industries.

The increase in residential loans was related to steady new volume and continued slowing of prepayments.

The decline in commercial real estate loans during 2024 included a $6.4 payoff during the fourth quarter on a relationship that had an elevated credit risk as well as declines in the multifamily real estate, healthcare, and hotel industries.

Core loans, which excludes advances to mortgage brokers, grew $29,569 or 2.2%.

The ACL was $12,895 at December 31, 2024, a decrease of $213 from $13,108 at December 31, 2023.

Most of the decrease is due to improvement in historical loss experience, which was driven by the recovery of previously charged-off loans during the

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This improvement was offset by core loan growth and the impact from a few commercial loans totaling $33,875 that migrated to a special mention risk rating during the fourth quarter.

The downgraded loans are well collateralized and are not an indication of a negative trend in the broader portfolio.

Nonaccrual loans were $282 as of December 31, 2024 compared to $982 at December 31, 2023.

Past due and accruing accounts between 30 to 89 days as a percentage of total loans was 0.40% at December 31, 2024, compared to 0.29% at year-end 2023.

Overall, credit quality remains strong, and there are no negative trends.

Total deposits were $1,747,060 as of December 31, 2024, increasing $23,365, or 1.4%, from December 31, 2023.

Retail certificates of deposit accounts were up $41,217, driven by continued demand due to the rate environment.

Interest bearing demand deposits increased $20,629, while savings and demand deposits declined $26,349 and $12,132, respectively.

The decline in savings products was driven in part by expected outflows of businesses and municipalities to fund large, regional projects and disintermediation into higher yielding accounts.

Total equity was $210,276 at December 31, 2024 compared to $202,402 at year-end 2023.

Our tangible book value per share was $21.82 as of December 31, 2024, compared to $20.59 on December 31, 2023.

Net unrealized losses on AFS securities reduced tangible book value per share by $2.82 and $3.37 for the respective periods.

Share repurchases totaled 152,577 during 2024 for a value of $3,076 at an average price of $20.16.

We continue to have robust liquidity levels and capital.

As of December 31, 2024, we had $776,672 of unencumbered sources of liquidity and strong capital ratios;

the Tier 1 Leverage Ratio was 8.86%, Tier 1 risk-based capital was 12.21%, and Total risk-based capital was 15.06%.

Reclassifications

Certain amounts reported in management's discussion and analysis of financial condition and results of operations for 2023 and 2022 have been reclassified to conform with the 2024 presentation.

Operating results for periods after January 1, 2023 are presented in accordance with ASC 326 while prior period amounts continue to be reported in accordance with previously applicable standards and the accounting policies described in our Annual Report on Form 10-K for the year ended December 31, 2022.

In addition, the adoption of ASC 326 requires enhanced disclosures related to the significant estimates and judgments used in estimating credit losses.

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.

We evaluated subsequent events after December 31, 2024 through the date our consolidated financial statements were issued for potential recognition and disclosure.

No subsequent events require financial statement recognition or disclosure between December 31, 2024 and the date our consolidated financial statements were issued.

We have not received, nor are aware of, any notices of regulatory actions as of March 11, 2025.

Results of Operations

(Dollars in thousands except per share amounts)

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

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Selected Financial Data

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

2024 2023 2022

INCOME STATEMENT DATA

Interest income $ 79,631 $ 65,798 $ 60,113

Interest expense 21,687 5,317 7,412

Net interest income 57,944 60,481 52,701

Provision for credit losses 629 483 (518)

Noninterest income 13,827 13,666 13,822

Noninterest expenses 49,310 46,820 43,694

Federal income tax expense 3,665 4,606 3,848

Net income $ 18,167 $ 22,238 $ 19,499

Basic earnings $ 1.86 $ 2.42 $ 2.95

Diluted earnings 1.86 2.40 2.91

Adjusted diluted earnings (1)

2.01 2.37 2.91

Dividends 1.12 1.12 1.09

Tangible book value (1)

Book value (2)

28.32 27.04 24.63

Quoted market value

High $ 26.00 $ 26.25 $ 29.00

Low $ 19.13 $ 21.00 $ 19.45

Tangible book value (2)

21.82 20.59 18.25

Common shares outstanding (1)

Market price (2)

25.99 21.50 23.50

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Return on average total assets 0.67 % 0.89 % 1.08 %

Adjusted return on average total assets (1)

0.72 % 0.88 % 1.08 %

Return on average shareholders' equity 6.73 % 9.52 % 11.41 %

Adjusted return on average shareholders' equity (1)

7.28 % 9.43 % 11.40 %

Return on average tangible shareholders' equity 8.78 % 12.75 % 15.17 %

Adjusted return on average tangible shareholders' equity (1)

9.50 % 12.63 % 15.16 %

Net interest margin yield (FTE) (1)

BALANCE SHEET DATA (1)

Gross loans $ 1,349,463 $ 1,264,173 $ 1,301,037

AFS securities $ 528,148 $ 580,481 $ 490,601

2.90 % 3.05 % 3.18 %

Efficiency ratio (1)

73.01 % 67.76 % 62.10 %

Gross loan to deposit ratio (2)

81.48 % 78.29 % 72.48 %

Shareholders' equity to total assets (2)

10.08 % 9.83 % 9.17 %

Tangible shareholders' equity to tangible assets (2)

7.95 % 7.66 % 7.78 %

FINANCIAL DATA (in millions)

Total assets (2)

Deposits $ 1,723,695 $ 1,744,275 $ 1,710,339

2,086 2,059 2,030

AFS securities (2)

Gross loans (2)

1,424 1,349 1,264

1,747 1,724 1,744

Borrowed funds (2)

Shareholders' equity (2)

Gross loans to deposits 78.29 % 72.48 % 76.07 %

ASSETS UNDER MANAGEMENT (1)

Loans sold with servicing retained $ 248,756 $ 264,206 $ 278,844

Assets managed by Isabella Wealth $ 641,027 $ 513,918 $ 516,243

Total assets under management $ 2,948,751 $ 2,808,391 $ 2,827,245

ASSET QUALITY (1)

Nonperforming loans to gross loans 0.08 % 0.04 % 0.10 %

Nonperforming assets to total assets 0.07 % 0.05 % 0.08 %

ACL to gross loans 0.97 % 0.78 % 0.70 %

CAPITAL RATIOS (1)

Shareholders' equity to assets 9.83 % 9.17 % 10.39 %

Tier 1 leverage 8.76 % 8.61 % 7.97 %

Common equity tier 1 capital 12.54 % 12.91 % 12.07 %

Tier 1 risk-based capital 12.54 % 12.91 % 12.07 %

Total risk-based capital 15.52 % 15.79 % 14.94 %

(1) At end of year

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

Quarter to Date

2023 September 30

2023 March 31

INCOME STATEMENT DATA

Total interest income $ 21,056 $ 20,485 $ 19,495 $ 18,595

Total interest expense 7,444 6,183 4,816 3,244

Net interest income 13,612 14,302 14,679 15,351

Provision for loan losses 684 (292) 196 41

Noninterest income 3,516 3,414 3,604 3,293

Noninterest expenses 11,915 12,658 12,539 12,198

Federal income tax expense 726 937 918 1,084

Wealth assets under management (2)

Net income 14 18 22

Basic earnings $ 0.51 $ 0.59 $ 0.62 $ 0.70

Diluted earnings $ 0.51 $ 0.58 $ 0.61 $ 0.70

Dividends $ 0.28 $ 0.28 $ 0.28 $ 0.28

Quoted market value (1)

$ 21.50 $ 21.05 $ 20.50 $ 24.80

Tangible book value (1)

$ 20.59 $ 18.27 $ 18.69 $ 19.24

Quarter to Date

2022 September 30

2022 March 31

INCOME STATEMENT DATA

Total interest income $ 17,915 $ 17,019 $ 16,102 $ 14,762

Total interest expense 1,643 1,216 1,175 1,283

Interest income 90 80 66

Interest expense 34 22 5

Net interest income 56 58 60

Provision for loan losses (57) 18 485 37

Provision for credit losses 2 1 —

Noninterest income 15 14 14

Noninterest expenses 52 49 47

Federal income tax expense 1,357 1,233 1,081 935

Net income $ 6,322 $ 5,887 $ 5,295 $ 4,734

Basic earnings $ 0.84 $ 0.78 $ 0.70 $ 0.63

Diluted earnings $ 0.83 $ 0.77 $ 0.69 $ 0.62

Dividends $ 0.28 $ 0.27 $ 0.27 $ 0.27

Quoted market value (1)

$ 23.50 $ 21.40 $ 24.80 $ 25.85

Tangible book value (1)

$ 18.25 $ 16.96 $ 18.85 $ 19.56

(1) Non-GAAP financial measure;

refer to the "Recconcilation of Non-GAAP Financial Measures" section

(2) At end of period

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CRITICAL ACCOUNTING POLICIES

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Our assessments may be impacted in future periods by changes in economic conditions, and the discovery of information with respect to borrowers which is not known to us at the time of the issuance of the consolidated financial statements.

Changes in the factors used by management to determine the appropriateness of the allowance or the availability of new information could cause the allowance to be increased or decreased in future periods.

Additionally, changes in circumstances related to individually large credits, or certain macroeconomic forecast assumptions may result in volatility.

Estimating how potential changes in economic factors might affect the overall allowance is challenging because a wide variety of factors and inputs are considered in the allowance estimate.

Changes in the factors and inputs may not occur at the same rate and may not be consistent across all product types.

Additionally, changes in factors and inputs may be directionally inconsistent, such that improvement in one factor may offset deterioration in others.

However, to consider the impact of a hypothetical stressed forecast, we estimated the ACL using forecast inputs that were severely unfavorable to the expected scenario for the external factors related to economic conditions, the value of underlying collateral, and the volume and severity of past due, nonaccrual, and adversely classified loans.

This stress scenario resulted in an ACL that is approximately $4,500 higher than the recorded ACL as of December 31, 2024.

For additional discussion concerning our ACL and related matters, see “ACL - Loans” and “Note 3 – Loans and ACL” of “Notes to Consolidated Financial Statements” in Item 8.

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Once valuations have been determined, the net difference between the price paid for the acquired entity and the net value of assets acquired on our balance sheet, including identifiable intangibles, is recorded as goodwill.

Acquisition intangibles and goodwill are qualitatively evaluated to determine if it is more likely than not that the carrying balance is impaired on at least an annual basis.

Acquisition intangibles and goodwill are qualitatively and quantitatively evaluated annually to determine if it is more likely than not that the carrying balance is impaired on at least an annual basis.

Based on the analysis completed, it was determined that our estimated fair value of Isabella Bank and Isabella Bank Corporation at December 31, 2024 was greater than our recorded book value and no impairment of goodwill was identified.

AFS securities are carried at fair value with changes in the fair value included as a component of other comprehensive income.

Declines in the fair value of AFS securities below their cost that are other-than-temporary are reflected as realized losses in the consolidated statements of income.

The market values for most AFS investment securities are typically obtained from outside sources and applied to individual securities within the portfolio.

6 unchanged sentences

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.

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Average Balances, Interest Rates, and Net Interest Income

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Loans in nonaccrual status, for the purpose of the following computations, are included in the average loan balances.

FRB and FHLB restricted equity holdings are included in other interest earning assets.

FRB restricted equity holdings are included in other interest earning assets.

Year Ended December 31

2024 2023 2022

Interest Average

Average Balance Tax Equivalent Interest Average Yield/Rate Average Balance Tax Equivalent Interest Average Yield/Rate Average Balance Tax Equivalent Interest Average Yield/Rate

INTEREST EARNING ASSETS

$ 1,385,287 $ 77,295 5.58 % $ 1,308,891 $ 65,670 5.02 % $ 1,249,634 $ 53,283 4.26 %

Taxable investment securities 485,718 9,399 1.94 % 477,159 8,294 1.74 % 297,357 4,920 1.65 %

Nontaxable investment securities 96,845 3,780 3.90 % 107,158 3,933 3.67 % 117,997 4,235 3.59 %

AFS securities (2)

540,433 12,023 2.22 % 582,563 13,179 2.26 % 584,317 12,227 2.09 %

FHLB stock 12,762 640 5.01 % 12,762 355 2.78 % 13,100 174 1.33 %

Fed funds sold 7 — 4.91 % 12 1 5.04 % 10 — 2.42 %

Other 41,965 1,804 4.30 % 99,301 1,344 1.35 % 255,246 706 0.28 %

Total earning assets 1,933,431 80,654 4.17 % 1,933,262 66,854 3.46 % 1,878,746 61,271 3.26 %

17,430 950 5.45 % 29,203 1,449 4.96 % 86,201 1,170 1.36 %

Total interest earning assets 1,955,919 90,908 4.65 % 1,933,431 80,654 4.17 % 1,933,262 66,854 3.46 %

NONEARNING ASSETS

2 unchanged sentences

Premises and equipment 27,915 26,589 24,648

Accrued income and other assets 74,319 81,823 109,625

Other assets 86,073 74,319 81,823

Total assets $ 2,081,011 $ 2,046,147 $ 2,054,964

1 unchanged sentence

Interest bearing demand deposits $ 348,192 1,398 0.40 % $ 346,875 1,086 0.31 % $ 374,623 274 0.07 %

Savings deposits 626,027 8,290 1.32 % 630,574 1,135 0.18 % 558,102 616 0.11 %

Time deposits 308,699 8,976 2.91 % 270,296 2,612 0.97 % 336,094 4,610 1.37 %

Federal funds purchased and repurchase agreements 43,061 961 2.23 % 49,974 79 0.16 % 57,453 53 0.09 %

Savings 611,689 13,363 2.18 % 626,027 8,290 1.32 % 630,574 1,135 0.18 %

Certificates of deposit 371,750 14,929 4.02 % 308,699 8,976 2.91 % 270,296 2,612 0.97 %

Short-term borrowings 45,124 1,439 3.19 % 43,061 961 2.23 % 49,974 79 0.16 %

FHLB advances 35,464 1,949 5.50 % 23,699 1,309 5.52 % 7,863 152 1.93 %

4 unchanged sentences

Demand deposits 416,927 461,689 482,781

Other 16,043 14,695 12,858

Other liabilities 16,088 16,043 14,695

Shareholders’ equity 206,401 190,767 194,958

2 unchanged sentences

Net yield on interest earning assets (FTE) (4)

(1) Includes loans and mortgage loans AFS

Net interest income is the amount by which interest income on earning assets exceeds the interest expense on interest bearing liabilities.

Net interest income is influenced by changes in the balance and mix of assets and liabilities, as well as market interest rates.

We exert some control over these factors;

however, FRB monetary policy and competition have a significant impact.

For analytical purposes, net interest income is adjusted to an FTE basis by including the income tax savings from interest on tax exempt loans and nontaxable investment securities, thus making year to year comparisons more meaningful.

The FTE adjustment is based on a federal income tax rate of 21%.

2.90 % 3.05 % 3.18 %

(1) Includes loans HFS and nonaccrual loans

(2) Average balances for AFS securities are based on amortized cost

(3) Includes average interest-bearing deposits with other banks, net of Federal Reserve daily cash letter

(4) Non-GAAP financial measure;

refer to the "Non-GAAP Financial Measures" section

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Volume and Rate Variance Analysis

11 unchanged sentences

Loans $ 3,980 $ 7,645 $ 11,625 $ 2,621 $ 9,766 $ 12,387

Taxable investment securities 151 954 1,105 3,114 260 3,374

Nontaxable investment securities (393) 240 (153) (396) 94 (302)

AFS securities (940) (216) (1,156) (37) 989 952

FHLB stock — 285 285 (5) 186 181

Fed funds sold — (1) (1) — 1 1

3 unchanged sentences

Interest bearing demand deposits 4 308 312 (22) 834 812

Savings deposits (8) 7,163 7,155 89 430 519

Time deposits 420 5,944 6,364 (796) (1,202) (1,998)

Federal funds purchased and repurchase agreements (12) 894 882 (8) 34 26

Savings (194) 5,267 5,073 (8) 7,163 7,155

Certificates of deposit 2,078 3,875 5,953 420 5,944 6,364

Short-term borrowings 48 430 478 (12) 894 882

FHLB advances 647 (7) 640 602 555 1,157

3 unchanged sentences

Net change in interest margin (FTE) $ (176) $ (2,026) $ (2,202) $ 413 $ (2,983) $ (2,570)

Over the past several quarters, rising rates on deposit accounts and an increase in borrowed funds have reversed the improvement in our net interest margin.

The higher interest rate environment is expected to continue to place pressure and slow improvement on our net yield on interest earning assets.

Average Yield / Rate for the Three-Month Periods Ended:

2023 September 30

2023 March 31

2023 December 31

Total earning assets 4.38 % 4.30 % 4.11 % 3.89 % 3.77 %

Total interest bearing liabilities 2.13 % 1.79 % 1.41 % 0.95 % 0.49 %

Net yield on interest earning assets (FTE) 2.85 % 3.02 % 3.11 % 3.22 % 3.43 %

Quarter to Date Net Interest Income (FTE)

2023 September 30

2023 March 31

2023 December 31

Total interest income (FTE) $ 21,302 $ 20,735 $ 19,750 $ 18,867 $ 18,183

Total interest expense 7,444 6,183 4,816 3,244 1,643

Net interest income (FTE) $ 13,858 $ 14,552 $ 14,934 $ 15,623 $ 16,540

Past Due and Nonaccrual Loans

Fluctuations in past due and nonaccrual loans can have a significant impact on the ACL.

To determine the potential impact, and corresponding estimated losses, we analyze our historical loss trends on loans past due greater than 30 days and nonaccrual loans for indications of additional deterioration.

Total Past Due and Nonaccrual Loans as of December 31

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The following table displays loan balances for the years ended December 31:

2024 2023 2022 2021 2020

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Commercial real estate 547,447 564,244 566,012 557,905 495,232

Advances to mortgage brokers 63,080 18,541 — 72,001 50,258

Agricultural 99,694 99,994 104,985 94,634 100,600

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Total $ 1,423,571 $ 1,349,463 $ 1,264,173 $ 1,301,037 $ 1,238,311

Total past due and nonaccrual loans to gross loans 0.37 % 0.88 % 0.31 % 0.78 % 0.96 %

The increase in past due and nonaccrual loans within the commercial real estate and residential loan portfolios at the end of 2022 was the result of one past due relationship, which has since improved.

The accrual of interest on commercial and agricultural loans, as well as residential real estate loans, is discontinued at the time a loan is 90 days or more past due unless the credit is well-secured and in the process of short-term collection.

Upon transferring a loan to nonaccrual status, we perform an evaluation to determine the net realizable value of the underlying collateral.

This evaluation is used to help determine if a charge-off is necessary.

Consumer loans are typically charged-off no later than 180 days past due.

Loans may be placed back on accrual status after six months of continued performance and achievement of current payment status.

The following table summarizes nonaccrual loans as of:

2023 September 30

2023 March 31

2023 December 31

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

2024 2023 2022

$ Change % Change $ Change % Change $ Change % Change

Commercial and industrial $ 35,156 16.76 % $ 31,310 17.55 % $ (2,547) (1.41) %

Commercial real estate (16,797) (2.98) % (1,768) (0.31) % 8,107 1.45 %

Advances to mortgage brokers 44,539 N/M 18,541 100.00 % (72,001) (100.00) %

Agricultural (300) (0.30) % (4,991) (4.75) % 10,351 10.94 %

Residential real estate 24,454 6.86 % 19,724 5.86 % 14,455 4.49 %

Total $ 982 $ 520 $ 414 $ 488 $ 457

Nonaccrual loans as a % of loans at end of period 0.07 % 0.04 % 0.03 % 0.04 % 0.04 %

A summary of loans past due by type and information related to nonaccrual status loans are included in “Note 4 – Loans and ACL” of “Notes to Consolidated Financial Statements” in Item 8.

Financial Statements and Supplementary Data.

Nonperforming Assets

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

2023 2022 2021 2020 2019

Nonaccrual loans $ 982 $ 457 $ 1,245 $ 5,313 $ 6,535

Accruing loans past due 90 days or more 87 — 97 — —

Total nonperforming loans 1,069 457 1,342 5,313 6,535

Foreclosed assets 406 439 211 527 456

Debt securities 12 77 131 230 230

Total nonperforming assets $ 1,487 $ 973 $ 1,684 $ 6,070 $ 7,221

Nonperforming loans as a % of total loans 0.08 % 0.04 % 0.10 % 0.43 % 0.55 %

Nonperforming assets as a % of total assets 0.07 % 0.05 % 0.08 % 0.31 % 0.40 %

The viability of any financial institution is ultimately determined by its management of risk.

Loans represent our single largest concentration of risk.

The ACL is our estimation of expected credit losses within the existing loan portfolio.

We allocate the ACL throughout the loan portfolio based on our assessment of the underlying risks associated within each loan segment.

Our assessments include allocations based on specific valuation allowances, historical charge-offs, internally assigned credit risk ratings, past due and nonaccrual balances, historical loss percentages, and other credit trends and risk characteristics, including current conditions and reasonable and supportable forecasts about the future.

Upon the adoption of ASC 326 on January 1, 2023, the total amount of the allowance for credit losses on loans estimated using the CECL methodology increased $2,744 compared to the total amount of the allowance for credit losses on loans estimated as of December 31, 2022 using the prior incurred loss methodology.

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.

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

2023 September 30

2023 March 31

2023 December 31

Total charge-offs $ 452 $ 179 $ 92 $ 101 $ 249

Total recoveries 71 433 95 110 479

Net loan charge-offs (recoveries) 381 (254) (3) (9) (230)

Net loan charge-offs (recoveries) to average loans outstanding 0.03 % (0.02) % 0.00 % 0.00 % (0.02) %

Provision for credit losses - loans $ 684 $ (320) $ 190 $ 37 $ (57)

Provision for credit losses to average loans outstanding 0.05 % (0.02) % 0.01 % 0.00 % 0.00 %

ACL $ 13,108 $ 12,767 $ 12,833 $ 12,640 $ 9,850

ACL as a % of loans at end of period 0.97 % 0.96 % 0.96 % 0.99 % 0.78 %

The following table summarizes charge-off and recovery activity by loan segment for the year ended December 31, 2023:

Commercial and Industrial Commercial Real Estate Agricultural Residential Real Estate Consumer Total

Charge-offs $ 276 $ — $ 4 $ 2 $ 542 $ 824

Recoveries 79 26 12 329 263 709

Net loan charge-offs (recoveries) $ 197 $ (26) $ (8) $ (327) $ 279 $ 115

Average loans outstanding $ 203,390 $ 547,166 $ 96,967 $ 345,630 $ 97,485 $ 1,290,638

Net loan charge-offs (recoveries) to average loans outstanding 0.10 % — % (0.01) % (0.09) % 0.29 % 0.01 %

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

2023 2022 2021 2020 2019

Allowance at beginning of period $ 9,850 $ 9,103 $ 9,744 $ 7,939 $ 8,375

Adoption of ASC 326 2,744 — — — —

Charge-offs 824 619 607 381 948

Recoveries 709 883 484 521 482

Provision for credit losses - loans 629 483 (518) 1,665 30

Allowance at end of period $ 13,108 $ 9,850 $ 9,103 $ 9,744 $ 7,939

Net loan charge-offs (recoveries) $ 115 $ (264) $ 123 $ (140) $ 466

Net loan charge-offs (recoveries) to average loans outstanding 0.01 % (0.02) % 0.01 % (0.01) % 0.04 %

ACL as a % of loans at end of period 0.97 % 0.78 % 0.70 % 0.79 % 0.67 %

ACL as a % of nonaccrual loans 1334.83 % 2155.36 % 731.16 % 183.40 % 121.48 %

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

2023 September 30

2023 March 31

2023 December 31

Individually evaluated $ 84 $ — $ — $ — $ 451

Collectively evaluated 13,024 12,767 12,833 12,640 9,399

Total $ 13,108 $ 12,767 $ 12,833 $ 12,640 $ 9,850

ACL to gross loans

Individually evaluated 0.01 % 0.00 % 0.00 % 0.00 % 0.04 %

Collectively evaluated 0.96 % 0.96 % 0.96 % 0.99 % 0.74 %

Consumer (12,944) (12.88) % 22,474 28.79 % 4,771 6.51 %

Total $ 74,108 5.49 % $ 85,290 6.75 % $ (36,864) (2.83) %

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

The following table presents the composition of our commercial real estate portfolio by industry as of December 31:

Balance Percent of Total Balance Percent of Total

Non-owner occupied $ 122,280 22.34 % $ 129,016 22.87 %

1-4 family investor 92,497 16.90 % 89,208 15.81 %

Multifamily 68,456 12.50 % 78,108 13.84 %

Owner occupied 25,286 4.62 % 27,758 4.92 %

Hotels 83,318 15.22 % 82,650 14.65 %

Health care 36,493 6.67 % 40,249 7.13 %

Retail trade 33,508 6.12 % 34,622 6.14 %

Manufacturing 12,238 2.24 % 12,341 2.19 %

Accommodation services 11,436 2.09 % 11,277 2.00 %

Educational services 11,160 2.04 % 11,589 2.05 %

Wholesale trade 10,918 1.99 % 10,308 1.83 %

Construction 8,422 1.54 % 5,079 0.90 %

Other 31,435 5.73 % 32,039 5.67 %

Total commercial real estate $ 547,447 100.00 % $ 564,244 100.00 %

Commercial real estate loans are subject to a varying degree of risk from changes in interest rates and economic conditions.

To control these risks, we maintain strict underwriting standards, lending limits to a single borrower, loan to collateral value limits, and a defined market area.

We also monitor and limit loan concentrations to specific industries.

Our practices also include appropriate loan reviews, and monitoring of past due levels, concentrations, industry trends, and other qualitative factors.

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

2024 2023 2022 2021 2020

ACL Allocation % of Gross Loans ALLL Allocation % of Gross Loans ALLL Allocation % of Gross Loans ALLL Allocation % of Gross Loans ALLL Allocation % of Gross Loans

ACL Allocation % of Gross Loans ACL Allocation % of Gross Loans ALLL Allocation % of Gross Loans ALLL Allocation % of Gross Loans ALLL Allocation % of Gross Loans

Commercial and industrial $ 1,316 17.20 $ 968 15.54 $ 860 14.11 $ 680 13.91 $ 704 17.37

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Financial Statements and Supplementary Data.

Noninterest Income and Noninterest Expenses

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

Change Change

2023 2022 $ % 2021 $ %

Service charges and fees

ATM and debit card fees $ 5,051 $ 4,774 $ 277 5.80 % $ 4,600 $ 174 3.78 %

Service charges and fees on deposit accounts 2,413 2,566 (153) (5.96) % 2,139 427 19.96 %

Freddie Mac servicing fee 630 669 (39) (5.83) % 747 (78) (10.44) %

Net OMSR income (loss) (137) 435 (572) (131.49) % (184) 619 336.41 %

Other fees for customer services 340 286 54 18.88 % 312 (26) (8.33) %

Total service charges and fees 8,297 8,730 (433) (4.96) % 7,614 1,116 14.66 %

Wealth management fees 3,557 3,005 552 18.37 % 3,071 (66) (2.15) %

Earnings on corporate owned life insurance policies 920 884 36 4.07 % 800 84 10.50 %

Net gain on sale of mortgage loans 317 631 (314) (49.76) % 1,694 (1,063) (62.75) %

Other 736 416 320 76.92 % 643 (227) (35.30) %

Total noninterest income $ 13,827 $ 13,666 $ 161 1.18 % $ 13,822 $ (156) (1.13) %

During 2022, we experienced an increase in service charges and fees on deposit accounts mainly due to an increase in the number of deposit accounts.

Although deposit accounts continued to grow in 2023, we experienced a decline in fees due to the discontinuation of NSF fees.

Although we expect a continuation in deposit account growth in 2024, fee levels may not exceed 2023 due to continued regulatory discussions around the practice of service charges and fees.

OMSR income results are driven, in part, by changes in offering rates on residential mortgage loans, anticipated prepayments in the servicing-retained portfolio, and the volume of loans within the servicing-retained portfolio.

During 2022, prepayment speeds declined as a result of an increase in interest rates, resulting in income recognized during 2022.

During 2023 the volume of loans serviced decreased, resulting in the recognition of losses.

OMSR income during 2024 may continue to experience fluctuations and could vary from 2023 levels.

During 2023, we experienced an increase in wealth management fees driven by a combination of the growth in the stock market and increased new business activity.

During 2022, there was strong growth in assets managed by Isabella Wealth, however the decline in the market offset the increase in fees related to growth in new business.

We expect wealth management fees to exceed 2023 levels in 2024 as a result of new business activity.

The amount of loans sold is driven by customer demand and balance sheet management strategies.

We experienced a significant increase in loan demand in early 2021 which led to an increase in the number and dollar amount of loans sold;

as such, net gain on sale of mortgage loans increased significantly.

In mid-2021, we decided to retain more loan originations on the balance sheet, due to our liquidity position, thereby decreasing the number of mortgage loans sold, which had an impact on the net gain on loans sold.

As a result of this change in strategy, coupled with a decline in loan demand due to increased interest rates, net gain on sale of mortgage loans declined in the second half of 2021 and during 2022.

During 2023, we experienced a decrease in gain on sale of mortgage loans as loan demand continued to decline.

As demand is expected to remain at reduced levels in 2024, gain on sale of mortgage loans is not expected to exceed 2023 levels during 2024.

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

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

Change Change

2023 2022 $ % 2021 $ %

Compensation and benefits $ 25,905 $ 24,887 $ 1,018 4.09 % $ 23,749 $ 1,138 4.79 %

Furniture and equipment 6,519 6,006 513 8.54 % 5,462 544 9.96 %

Occupancy 3,778 3,691 87 2.36 % 3,661 30 0.82 %

Audit, consulting, and legal fees 2,340 2,358 (18) (0.76) % 2,066 292 14.13 %

ATM and debit card fees 1,767 1,909 (142) (7.44) % 1,810 99 5.47 %

Marketing costs 1,159 1,056 103 9.75 % 939 117 12.46 %

Memberships and subscriptions 1,042 876 166 18.95 % 877 (1) (0.11) %

Loan underwriting fees 927 1,004 (77) (7.67) % 849 155 18.26 %

FDIC insurance premiums 922 537 385 71.69 % 690 (153) (22.17) %

Donations and community relations 915 923 (8) (0.87) % 705 218 30.92 %

Other losses 871 546 325 59.52 % 194 352 181.44 %

Director fees 764 790 (26) (3.29) % 703 87 12.38 %

All other 2,401 2,237 164 7.33 % 1,989 248 12.47 %

Total other noninterest expenses 13,108 12,236 872 7.13 % 10,822 1,414 13.07 %

Total noninterest expenses $ 49,310 $ 46,820 $ 2,490 5.32 % $ 43,694 $ 3,126 7.15 %

The increase in compensation and benefits has been driven by merit increases and our employee incentive plans.

We closely monitor compensation levels to ensure we attract and retain talent in a competitive labor market.

While expenses related to our employee incentive plans fluctuate based on financial performance, compensation and benefits expense in 2024 is expected to continue to increase as a result of anticipated merit increases and insurance related benefits.

The decrease in ATM and debit card fees is primarily the result of a cost savings related to vendor reporting services.

While the savings in the service fees will continue, ATM and debit card fees are expected to exceed 2023 levels in 2024 as a result of the continuation of increased card usage.

The increase in FDIC insurance premiums is due to the FDIC adopting a final rule, applicable to all insured depository institutions, to increase initial base deposit insurance assessment rate schedules uniformly by 2 basis points, beginning in the first quarterly assessment period of 2023.

The increase in assessment rate schedules is intended to increase the likelihood that the reserve ratio of the Deposit Insurance fund reaches the statutory minimum of 1.35 percent by the statutory deadline of September 30, 2028.

FDIC premiums are expected to maintain 2023 levels into 2024.

Donations and community relations increased during 2022 as a result of initiatives designed to deepen and strengthen our relationship with the communities in which we operate and serve, which includes an expanded footprint.

During 2023 we maintained the same level of community support as in 2022.

In 2024 we do not expect donations and community relations to exceed 2023 levels.

During the second quarter of 2023, we recognized a loss related to the settlement of a business matter.

No further losses are anticipated related to this matter.

As such, other losses are expected to decline during 2024 when compared to 2023 levels.

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

Analysis of Changes in Financial Condition

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

2023 2022 $ %

Cash and cash equivalents $ 33,672 $ 38,924 $ (5,252) (13.49) %

AFS securities

Amortized cost of AFS securities 559,974 625,605 (65,631) (10.49) %

Unrealized gains (losses) on AFS securities (31,826) (45,124) 13,298 N/M

AFS securities 528,148 580,481 (52,333) (9.02) %

Mortgage loans AFS — 379 (379) (100.00) %

Loans 1,349,463 1,264,173 85,290 6.75 %

Less allowance for credit losses 13,108 9,850 3,258 33.08 %

Net loans 1,336,355 1,254,323 82,032 6.54 %

Premises and equipment 27,639 25,553 2,086 8.16 %

Corporate owned life insurance policies 33,892 32,988 904 2.74 %

Equity securities without readily determinable fair values 15,848 15,746 102 0.65 %

Goodwill and other intangible assets 48,284 48,287 (3) (0.01) %

Accrued interest receivable and other assets 35,130 33,586 1,544 4.60 %

TOTAL ASSETS $ 2,058,968 $ 2,030,267 $ 28,701 1.41 %

LIABILITIES AND SHAREHOLDERS’ EQUITY

Deposits $ 1,723,695 $ 1,744,275 $ (20,580) (1.18) %

Borrowed funds 116,136 87,016 29,120 33.47 %

Accrued interest payable and other liabilities 16,735 12,766 3,969 31.09 %

Total liabilities 1,856,566 1,844,057 12,509 0.68 %

Shareholders’ equity 202,402 186,210 16,192 8.70 %

TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY $ 2,058,968 $ 2,030,267 $ 28,701 1.41 %

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

Cash and cash equivalents

Included in cash and cash equivalents are funds held with the FRB which fluctuate from period to period.

Cash levels declined slightly during 2023 driven by funding for loan growth.

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AFS Securities

The primary objective of our investing activities is to manage our overall exposure to changes in interest rates.

Secondary considerations include ensuring ample access to liquidity, generating returns, and providing current income.

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

2023 2022 2021

Treasury $ 214,801 $ 208,701 $ 209,703

States and political subdivisions 92,876 117,512 121,205

Auction rate money market preferred 2,931 2,342 3,242

Mortgage-backed securities 32,815 39,070 56,148

Collateralized mortgage obligations 177,775 205,728 92,301

Corporate 6,950 7,128 8,002

Total $ 528,148 $ 580,481 $ 490,601

Excluding those holdings in government sponsored enterprises and municipalities within the State of Michigan, there were no investments in securities of any one issuer that exceeded 10% of shareholders’ equity during 2023, 2022, and 2021.

We have a policy prohibiting investments in securities that we deem unsuitable due to their inherent credit or market risks.

Prohibited investments include stripped mortgage-backed securities, zero coupon bonds, non-government agency asset-backed securities, and structured notes.

Our holdings in mortgage-backed securities and collateralized mortgage obligations include only government agencies and government sponsored agencies as we hold no investments in private label mortgage-backed securities or collateralized mortgage obligations.

The following is a schedule of maturities of AFS securities and their weighted average yields as of December 31, 2024.

19 unchanged sentences

Total $ 43,882 0.76 $ 211,893 0.24 $ 24,305 3.25 $ 24,345 3.65 $ 184,604 2.92

Loans are the largest component of earning assets.

The proper management of credit and market risk inherent in the loan portfolio is critical to our financial stability.

To control these risks, we have adopted strict underwriting standards, lending limits to a single borrower, loan to collateral value limits, and a defined market area.

We also monitor and limit loan concentrations to specific industries.

We have no foreign loans and there were no concentrations greater than 10% of total loans that are not disclosed as a separate category in the following table.

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

2023 2022 2021 2020 2019

Commercial and industrial $ 209,738 $ 178,428 $ 180,975 $ 215,101 $ 169,116

Commercial real estate 564,244 566,012 557,905 495,232 500,876

Advances to mortgage brokers 18,541 — 72,001 50,258 35,523

Agricultural 99,994 104,985 94,634 100,600 117,136

Residential real estate 356,418 336,694 322,239 303,500 293,779

Consumer 100,528 78,054 73,283 73,620 70,140

Total $ 1,349,463 $ 1,264,173 $ 1,301,037 $ 1,238,311 $ 1,186,570

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

2023 2022 2021

$ Change % Change $ Change % Change $ Change % Change

Commercial and industrial $ 31,310 17.55 % $ (2,547) (1.41) % $ (34,126) (15.87) %

Commercial real estate (1,768) (0.31) % 8,107 1.45 % 62,673 12.66 %

Advances to mortgage brokers 18,541 100.00 % (72,001) (100.00) % 21,743 43.26 %

Agricultural (4,991) (4.75) % 10,351 10.94 % (5,966) (5.93) %

Residential real estate 19,724 5.86 % 14,455 4.49 % 18,739 6.17 %

Consumer 22,474 28.79 % 4,771 6.51 % (337) (0.46) %

Total $ 85,290 6.75 % $ (36,864) (2.83) % $ 62,726 5.07 %

We've experienced an increase in the commercial loan portfolio in recent periods as demand has increased.

With the increased activity in mortgage lending in the second quarter of 2023, we elected to resume participation in a mortgage purchase program.

Our participation in this program paused during most of 2022 and the first quarter of 2023 due to low mortgage volume.

Residential mortgage lending activities continues to increase despite increased interest rates.

As interest rates are expected to remain high throughout 2024, growth in residential loans is anticipated to continue, but at a slower pace.

We've experienced growth in the consumer portfolio and expect this trend to continue in 2024.

Accrued interest receivable and other assets

Other assets consist primarily of prepaid expenses, OMSR, and net deferred tax assets.

For more information related to estimates and deferred taxes, refer to “Note 1 – Significant Accounting Policies” and “Note 15 – Federal Income Taxes” of “Notes to Consolidated Financial Statements” in Item 8.

Financial Statements and Supplementary Data.

Deposits are our primary source of funding.

The following table presents the composition of the deposit portfolio as of December 31:

The following table displays deposit balances as of December 31:

2024 2023 2022 2021 2020

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Interest bearing demand deposits 341,366 320,737 372,155 364,563 302,444

Savings deposits 628,079 625,734 596,662

Savings 601,730 628,079 625,734 596,662 505,497

Certificates of deposit 387,591 346,374 252,040 300,762 382,981

Internet certificates of deposit 249 499 3,066

Total $ 1,747,060 $ 1,723,695 $ 1,744,275 $ 1,710,339 $ 1,566,317

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

$ Change % Change $ Change % Change

The following table displays the change in deposit balances for the years ended December 31:

2024 2023 2022

$ Change % Change $ Change % Change $ Change % Change

Noninterest bearing demand deposits $ (12,132) (2.83) % $ (65,841) (13.32) % $ 45,994 10.26 %

Interest bearing demand deposits 20,629 6.43 % (51,418) (13.82) % 7,592 2.08 %

Savings deposits 2,345 0.37 % 29,072 4.87 %

Savings (26,349) (4.20) % 2,345 0.37 % 29,072 4.87 %

Certificates of deposit 41,217 11.90 % 94,334 37.43 % (48,722) (16.20) %

Internet certificates of deposit (250) (50.10) % (2,567) (83.72) %

Total $ 23,365 1.36 % $ (20,580) (1.18) % $ 33,936 1.98 %

Total deposits have decreased over the past 12 months driven by a decline in demand deposits.

We have experienced significant growth in certificates of deposit accounts during 2023 as a result of increased interest rates.

We expect interest rates on deposits to continue to rise into 2024 due to competitive pressures, and anticipate a continuation in the shift of customers moving to higher interest earning products.

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The following table presents estimated balances of uninsured deposits as of December 31:

11 unchanged sentences

Total $ 65,193

Borrowed Funds

Borrowed funds include FHLB advances, securities sold under agreements to repurchase, subordinated debt, and federal funds purchased.

The balance of borrowed funds fluctuates from period to period based on our funding needs that arise from changes in loans, investments, and deposits.

To provide balance sheet growth, we may utilize borrowings and brokered deposits to fund earning assets.

The following table presents borrowed funds balances as of December 31:

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Asset Quality Analysis

The following table outlines our asset quality analysis as of, and for the years ended December 31:

2024 2023 2022

Securities sold under agreements to repurchase without stated maturity dates $ 46,801 $ 57,771 $ 50,162

FHLB advances 40,000 — 20,000

Subordinated debt, net of unamortized issuance costs 29,335 29,245 29,158

NONPERFORMING ASSETS

Commercial and industrial $ — $ 491 $ 82

Commercial real estate — — 14

Agricultural — 205 234

Residential real estate 282 286 127

Consumer — — —

Total nonaccrual loans 282 982 457

Accruing loans past due 90 days or more 19 87 —

Total nonperforming loans 301 1,069 457

Foreclosed assets 544 406 439

Debt securities — 12 77

Total nonperforming assets $ 845 $ 1,487 $ 973

Nonperforming loans to gross loans 0.02 % 0.08 % 0.04 %

Nonperforming assets to total assets 0.04 % 0.07 % 0.05 %

Nonaccrual loans to gross loans 0.02 % 0.07 % 0.04 %

ACL as a % of nonaccrual loans N/M N/M N/M

ALLOWANCE FOR CREDIT LOSSES

Allowance at beginning of period $ 13,108 $ 9,850 $ 9,103

Impact of the adoption of ASC 326 — 2,744 —

Charge-offs 2,784 824 619

Recoveries 884 709 883

Net loan charge-offs (recoveries) 1,900 115 (264)

Provision for credit losses - loans 1,687 629 483

Allowance at end of period $ 12,895 $ 13,108 $ 9,850

ACL to gross loans 0.91 % 0.97 % 0.78 %

Reserve for unfunded commitments 512 315 —

Provision for credit losses - unfunded commitments 197 — —

Reserve to unfunded commitments 0.15 % 0.10 % 0.00 %

NET LOAN CHARGE-OFFS (RECOVERIES)

Commercial and industrial $ 339 $ 197 $ (336)

Commercial real estate (355) (26) (29)

Agricultural (6) (8) (9)

Residential real estate (118) (327) (150)

Consumer 2,040 279 260

Total $ 1,900 $ 115 $ (264)

FHLB advances outstanding as of December 31, 2023 were short-term, with maturities within a week after December 31, 2023.

In 2021, we completed a private placement of $30,000 in aggregate principal amount of 3.25% Fixed-to-Floating Rate Subordinated Notes due 2031 (the "Notes").

The Notes will initially bear a fixed interest rate of 3.25% until June 15, 2026, after which time until maturity on June 15, 2031, the interest rate will reset quarterly to an annual floating rate equal to the then-current 3-month SOFR plus 256 basis points.

The Notes are redeemable by us at our option, in whole or in part, on or after June 15, 2026.

The Notes are not subject to redemption at the option of the holders.

For additional disclosure related to borrowed funds, see “Note 8 – Borrowed Funds” of “Notes to Consolidated Financial Statements” in Item 8.

Financial Statements and Supplementary Data.

Accrued interest payable and other liabilities

Included in accrued interest payable and other liabilities are obligations related to our defined benefit pension plan and other employee benefits.

For more information on the defined benefit pension plan and other employee benefits, see “Note 12 – Benefit Plans” of “Notes to Consolidated Financial Statements” in Item 8.

Financial Statements and Supplementary Data.

Contractual Obligations and Loan Commitments

We have various financial obligations, including contractual obligations and commitments related to deposits and borrowings, which may require future cash payments.

We also have loan related commitments that may impact liquidity.

The commitments include unused lines of credit, commercial and standby letters of credit, and commitments to grant loans.

These commitments to grant loans include residential mortgage loans with the majority committed to be sold to the secondary market.

Many of these commitments historically have expired without being drawn upon and do not necessarily indicate our future cash requirements.

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

Financial Statements and Supplementary Data.

Net (recoveries) charge-offs to average loans 0.14 % 0.01 % (0.02) %

DELINQUENT AND NONACCRUAL LOANS

Accruing loans 30-89 days past due $ 5,682 $ 3,895 10,673

Accruing loans past due 90 days or more 19 87 —

Total accruing past due loans 5,701 3,982 10,673

Nonaccrual loans 282 982 457

Total past due and nonaccrual loans $ 5,983 $ 4,964 $ 11,130

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Capital consists solely of common stock, retained earnings, and accumulated other comprehensive income (loss).

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Pursuant to this plan, we increased shareholders’ equity by $381 and $529 during 2024 and 2023, respectively.

We also grant restricted stock awards pursuant to the RSP, effective June 24, 2020.

We also grant restricted stock awards pursuant to the RSP.

Pursuant to this plan, we increased shareholders’ equity by $95 and $253 during 2024 and 2023.

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Regulatory capital is divided by the risk adjusted assets with the resulting ratio compared to the minimum standard to determine whether a corporation has adequate capital.

The common equity tier 1 capital ratio has a minimum requirement of 4.50%.

The minimum standard for primary, or Tier 1 capital is 6.00% and the minimum standard for total capital is 8.00%.

The minimum requirements presented below include the minimum required capital levels based on the Basel III Capital Rules.

Capital requirements to be considered well capitalized are based upon prompt corrective action regulations, as amended to reflect the changes under the Basel III Capital Rules.

The following table sets forth these requirements and our ratios as of December 31:

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Tier 1 leverage 8.86 % 4.00 % 5.00 % 8.76 % 4.00 % 5.00 %

Total capital includes Tier 1 capital and Tier 2 capital.

Tier 2 capital includes a permissible portion of the allowances for credit losses and subordinated debt, net of unamortized issuance costs.

There are no significant regulatory constraints placed on our capital.

At December 31, 2023, the Bank exceeded minimum capital requirements.

For further information regarding the Bank’s capital requirements, see “Note 10 – Minimum Regulatory Capital Requirements” of “Notes to Consolidated Financial Statements” in Item 8.

Financial Statements and Supplementary Data.

Liquidity is monitored regularly by our ALCO, which consists of members of senior management.

The committee reviews projected cash flows, key ratios, and liquidity available from both primary and secondary sources.

Our primary sources of liquidity are cash and cash equivalents and unencumbered AFS securities.

Our primary sources of liquidity are retail deposits, cash and cash equivalents, and unencumbered AFS securities.

These categories totaled $330,876 or 15.86% of assets as of December 31, 2024, compared to $381,417 or 18.52% as of December 31, 2023.

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Based on these same factors, daily liquidity could vary significantly.

Deposit accounts are our primary source of funds.

Our secondary sources include the ability to borrow from the FHLB, from the FRB, and through various correspondent banks in the form of federal funds purchased and a line of credit.

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As of December 31, 2024, we had available lines of credit of $342,130.

The frequency and complexity of our liquidity stress testing has increased due to economic uncertainly and changes within the interest rate and economic environment.

Our liquidity position remained strong at the end of 2023, which is illustrated in the following table:

We monitor our daily liquidity position to meet our cash flow needs.

We also forecast anticipated funding needs for changes in interest rates and economic conditions, the scheduled maturity and interest rate sensitivity of the investment and loan portfolios and deposits, and regulatory capital requirements.

Our liquidity stress testing is designed with consideration of these and other factors that could pose undue risk to liquidity.

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Our liquidity position remained strong at the end of 2024.

Components of liquidity are illustrated in the following table as of December 31:

Total cash and cash equivalents $ 24,542 $ 33,672

Brokered CD capacity 120,000 120,000

Available lines of credit

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Unencumbered lendable value of FRB collateral, estimated (1)

290,000 320,000

Total cash and liquidity $ 776,672 $ 811,752

(1) Includes estimated unencumbered lendable value of FHLB collateral of $230,000

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

2023 2022 $ Variance

Net cash provided by (used in) operating activities $ 23,715 $ 26,937 $ (3,222)

Net cash provided by (used in) investing activities (25,779) (106,255) 80,476

Net cash provided by (used in) financing activities (3,188) 12,912 (16,100)

Increase (decrease) in cash and cash equivalents (5,252) (66,406) 61,154

Cash and cash equivalents January 1 38,924 105,330 (66,406)

Cash and cash equivalents December 31 $ 33,672 $ 38,924 $ (5,252)

Uninsured deposits $ 645,764 $ 600,381

Coverage ratio of uninsured deposits with total cash and liquidity 120 % 135 %

(1) In cludes estimated unencumbered lendable value of FHLB collateral of $200,000 and $230,000 as of December 31, 2024 and 2023, respectively.

We utilize fair value measurements to record fair value adjustments to certain assets and liabilities and to determine fair value disclosures.

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We regularly monitor our projected net interest income sensitivity to ensure that it remains within established limits.

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The following tables summarize our interest rate sensitivity for 12 and 24 months as of December 31, 2024 and 2023.

The results displayed in the tables reflect the modeling of immediate shifts in the yield curve and a flat balance sheet and do not reflect actual or expected changes.

December 31, 2024

12 Months 24 Months

Immediate basis point change assumption (short-term) -200 -100 100 200 -200 -100 100 200

Percent change in net interest income vs.

constant rate (3.44) % (1.55) % 1.45 % 2.83 % (4.67) % (2.18) % 1.22 % 2.00 %

December 31, 2023

12 Months 24 Months

Immediate basis point change assumption (short-term) -200 -100 100 200 -200 -100 100 200

Percent change in net interest income vs.

constant rate 0.94 % 0.49 % (0.54) % (1.07) % 1.41 % 0.97 % (0.61) % (1.37) %

Gap analysis, the secondary method to measure IRR, measures the cash flows and/or the earliest repricing of our interest bearing assets and liabilities.

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Residential real estate and consumer loans allow the borrower to repay the balance prior to maturity without penalty, while commercial and agricultural loans may have prepayment penalties.

The amount of prepayments is dependent upon many factors, including the interest rate of a given loan in comparison to the current offering rates, the level of home sales, and the overall availability of credit in the market place.

Generally, a decrease in interest rates will result in an increase in cash flows from these assets.

A significant portion of our securities are callable or have prepayment options.

The call and prepayment options are more likely to be exercised in a period of decreasing interest rates.

Savings and demand accounts may generally be withdrawn on request without prior notice.

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We strive to achieve reasonable stability in the net interest margin through periods of changing interest rates.

One specific focus of interest rate sensitivity is the loan portfolio, primarily with commercial and agricultural loans.

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The following table shows the maturity of loans outstanding at December 31, 2024 based on contractual terms.

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Total $ 53,928 $ 59,675 $ 214,313 $ 617,042 $ 944,958

Contractual Obligations and Loan Commitments

We have various financial obligations, including contractual obligations and commitments related to deposits and borrowings, which may require future cash payments.

We also have loan related commitments that may impact liquidity.

The commitments include unused lines of credit, commercial and standby letters of credit, and commitments to grant loans.

These commitments to grant loans include residential mortgage loans with the majority committed to be sold to the secondary market.

Many of these commitments historically have expired without being drawn upon and do not necessarily represent our future cash requirements.

For additional disclosure related to Contractual Obligations and Loan Commitments, see “Note 14 – Off-Balance-Sheet Activities, Commitments and Other Matters” of “Notes to Consolidated Financial Statements” in Item 8.

Financial Statements and Supplementary Data.

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Reconciliation of Non-GAAP Financial Measures

The following tables provide a detailed analysis, and reconciliation for, our non-GAAP financial measures as of, and for the years ended December 31:

2024 2023 2022

Net income $ 13,889 $ 18,167 $ 22,238

Nonrecurring items

Net gains on sale of AFS securities — 67 —

Net gains on foreclosed assets 153 158 13

Overdraft (charge-off) recoveries (1)

Profitability initiative cost (23) — —

Income tax impact 299 (47) (3)

Total nonrecurring items (1,127) 178 10

Adjusted net income (A) $ 15,016 $ 17,989 $ 22,228

Noninterest expenses $ 52,129 $ 49,310 $ 46,820

Amortization of acquisition intangibles 1 3 15

Adjusted noninterest expense (B) $ 52,128 $ 49,307 $ 46,805

Net interest income $ 55,835 $ 57,944 $ 60,481

Tax equivalent adjustment for net interest margin 930 1,023 1,056

Net interest income (FTE) (C) 56,765 58,967 61,537

Noninterest income 14,576 13,827 13,666

Tax equivalent adjustment for efficiency ratio 211 193 186

Adjusted revenue (FTE) 71,552 72,987 75,389

Nonrecurring items

Net gains on sale of AFS securities — 67 —

Net gains on foreclosed assets 153 158 13

Total nonrecurring items 153 225 13

Adjusted revenue (D) $ 71,399 $ 72,762 $ 75,376

Efficiency ratio (B/D) 73.01 % 67.76 % 62.10 %

Average earning assets (E) 1,955,919 1,933,431 1,933,262

Net yield on interest earning assets (FTE) (C/E) 2.90 % 3.05 % 3.18 %

Average assets (F) 2,081,011 2,046,147 2,054,964

Average shareholders' equity (G) 206,401 190,767 194,958

Average tangible shareholders' equity (H) 158,118 142,482 146,663

Average diluted shares outstanding (2)

(I) 7,482,374 7,575,492 7,647,612

Adjusted diluted earnings per share (A/I) $ 2.01 $ 2.37 $ 2.91

Adjusted return on average assets (A/F) 0.72 % 0.88 % 1.08 %

Adjusted return on average shareholders' equity (A/G) 7.28 % 9.43 % 11.40 %

Adjusted return on average tangible shareholders' equity (A/H) 9.50 % 12.63 % 15.16 %

(1) Includes provision for credit losses related to overdrawn deposit accounts from a single customer in the third quarter of 2024.

(2) Whole shares

Quantitative and Qualitative Disclosures About Market Risk.

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Management's Discussion and Analysis of Financial Condition and Results of Operations is incorporated herein by reference.

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

What changed 10-K

Item 7. Management’s Discussion and Analysis