Item 7. Management’s Discussion and Analysis
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations.
(Dollars in thousands except per share amounts)
The following is management’s discussion and analysis of our financial condition and results of operations. This discussion and analysis is intended to provide a better understanding of the consolidated financial statements and statistical data included elsewhere in this Annual Report on Form 10-K.
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
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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year. 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.
Subsequent Events
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.
Other
We have not received, nor are aware of, any notices of regulatory actions as of March 11, 2025.
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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
PER SHARE
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
Book value (2)
28.32 27.04 24.63
Tangible book value (2)
21.82 20.59 18.25
Market price (2)
25.99 21.50 23.50
PERFORMANCE RATIOS
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)
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)
2,086 2,059 2,030
AFS securities (2)
489 528 580
Gross loans (2)
1,424 1,349 1,264
ACL (2)
13 13 10
Deposits (2)
1,747 1,724 1,744
Borrowed funds (2)
113 116 87
Shareholders' equity (2)
210 202 186
Wealth assets under management (2)
658 641 514
Net income 14 18 22
Interest income 90 80 66
Interest expense 34 22 5
Net interest income 56 58 60
Provision for credit losses 2 1 —
Noninterest income 15 14 14
Noninterest expenses 52 49 47
(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
Our significant accounting policies are set forth in “Note 1 – Significant Accounting Policies” of “Notes to Consolidated Financial Statements” in Item 8. Financial Statements and Supplementary Data. Of these significant accounting policies, we consider our policies regarding the ACL, acquisition intangibles and goodwill, and the determination of the fair value and assessment of credit related impairments of investment securities to be our most critical accounting policies.
The ACL requires our most subjective and complex judgment. Changes in economic conditions and other external factors can have a significant impact on the ACL and, therefore, the allowance for credit losses and results of operations. We have developed policies and procedures for assessing the appropriateness of the ACL, recognizing that this process requires a number of assumptions and estimates with respect to our loan portfolio. Our assessments may be impacted in future periods by changes in economic conditions, and the discovery of information with respect to borrowers which is not known to us at the time of the issuance of the consolidated financial statements. 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. Financial Statements and Supplementary Data.
U.S. generally accepted accounting principles require that we determine the fair value of the assets and liabilities of an acquired entity, and record the fair value on the date of acquisition. We employ a variety of measures in the determination of the fair value, including the use of discounted cash flow analysis, market appraisals, and projected future revenue streams. For certain items that we believe we have the appropriate expertise to determine the fair value, we may choose to use our own calculations of the value. In other cases, where the value is not easily determined, we consult with independent experts to determine the fair value of the identified asset or liability. Once valuations have been determined, the net difference between the price paid for the acquired entity and the net value of assets acquired on our balance sheet, including identifiable intangibles, is recorded as goodwill. Acquisition intangibles and goodwill are qualitatively 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. The market values for most AFS investment securities are typically obtained from outside sources and applied to individual securities within the portfolio. Municipal securities for which no readily determinable market values are available are priced using fair value curves which most closely match the securities' characteristics. 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.
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Average Balances, Interest Rates, and Net Interest Income
The following schedules present the daily average amount outstanding for each major category of interest earning assets, non-earning assets, interest bearing liabilities, and noninterest bearing liabilities for the last three years. These schedules also present an analysis of interest income and interest expense for the periods indicated. All interest income is reported on a FTE basis using a federal income tax rate of 21%. Loans in nonaccrual status, for the purpose of the following computations, are included in the average loan balances. FRB restricted equity holdings are included in other interest earning assets.
Year Ended December 31
2024 2023 2022
Average Balance Tax Equivalent Interest Average Yield/Rate Average Balance Tax Equivalent Interest Average Yield/Rate Average Balance Tax Equivalent Interest Average Yield/Rate
INTEREST EARNING ASSETS
Loans (1)
$ 1,385,287 $ 77,295 5.58 % $ 1,308,891 $ 65,670 5.02 % $ 1,249,634 $ 53,283 4.26 %
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 (3)
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
Allowance for credit losses (13,061) (12,784) (9,477)
Cash and demand deposits due from banks 24,165 24,592 24,708
Premises and equipment 27,915 26,589 24,648
Other assets 86,073 74,319 81,823
Total assets $ 2,081,011 $ 2,046,147 $ 2,054,964
INTEREST BEARING LIABILITIES
Interest bearing demand deposits $ 348,192 1,398 0.40 % $ 346,875 1,086 0.31 % $ 374,623 274 0.07 %
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 %
Subordinated debt, net of unamortized issuance costs
29,376 1,065 3.63 % 29,287 1,065 3.64 % 29,200 1,065 3.65 %
Total interest bearing liabilities 1,441,595 34,143 2.37 % 1,377,648 21,687 1.57 % 1,362,530 5,317 0.39 %
NONINTEREST BEARING LIABILITIES
Demand deposits 416,927 461,689 482,781
Other liabilities 16,088 16,043 14,695
Shareholders’ equity 206,401 190,767 194,958
Total liabilities and shareholders’ equity $ 2,081,011 $ 2,046,147 $ 2,054,964
Net interest income (FTE) $ 56,765 $ 58,967 $ 61,537
Net yield on interest earning assets (FTE) (4)
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
The following table sets forth the effect of volume and rate changes on interest income and expense for the periods indicated. For the purpose of this table, changes in interest due to volume and rate were determined as follows:
Volume—change in volume multiplied by the previous period's FTE rate.
Rate—change in the FTE rate multiplied by the previous period's volume.
All interest income presented in the table below is reported on a FTE basis using a federal income tax rate of 21%. The change in interest due to both volume and rate has been allocated to volume and rate changes in proportion to the relationship of the absolute dollar amounts of the change in each.
2024 Compared to 2023
Increase (Decrease) Due to 2023 Compared to 2022
Increase (Decrease) Due to
Volume Rate Net Volume Rate Net
Changes in interest income
Loans $ 3,980 $ 7,645 $ 11,625 $ 2,621 $ 9,766 $ 12,387
AFS securities (940) (216) (1,156) (37) 989 952
FHLB stock — 285 285 (5) 186 181
Fed funds sold — (1) (1) — 1 1
Other (630) 131 (499) (1,183) 1,462 279
Total changes in interest income 2,410 7,844 10,254 1,396 12,404 13,800
Changes in interest expense
Interest bearing demand deposits 4 308 312 (22) 834 812
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
Subordinated debt, net of unamortized issuance costs
3 (3) — 3 (3) —
Total changes in interest expense 2,586 9,870 12,456 983 15,387 16,370
Net change in interest margin (FTE) $ (176) $ (2,026) $ (2,202) $ 413 $ (2,983) $ (2,570)
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Loans
The following table displays loan balances for the years ended December 31:
2024 2023 2022 2021 2020
Commercial and industrial $ 244,894 $ 209,738 $ 178,428 $ 180,975 $ 215,101
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
Residential real estate 380,872 356,418 336,694 322,239 303,500
Consumer 87,584 100,528 78,054 73,283 73,620
Total $ 1,423,571 $ 1,349,463 $ 1,264,173 $ 1,301,037 $ 1,238,311
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 %
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 presents the composition of our commercial real estate portfolio by industry as of December 31:
2024 2023
Balance Percent of Total Balance Percent of Total
Real estate
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 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
Commercial real estate 5,171 38.46 5,878 41.82 461 44.78 1,060 42.89 1,458 39.99
Advances to mortgage brokers — 4.43 — 1.37 — — — 5.53 — 4.06
Agricultural 287 7.01 270 7.41 577 8.30 289 7.27 311 8.12
Residential real estate 4,521 26.75 4,336 26.41 617 26.64 747 24.77 1,363 24.51
Consumer 1,600 6.15 1,656 7.45 961 6.17 908 5.63 798 5.95
Total allocated 12,895 100.00 13,108 100.00 3,476 100.00 3,684 100.00 4,634 100.00
Unallocated — — — — 6,374 — 5,419 — 5,110 —
Total $ 12,895 100.00 $ 13,108 100.00 $ 9,850 100.00 $ 9,103 100.00 $ 9,744 100.00
While we utilize our best judgment and information available, the ultimate adequacy of the ACL is dependent upon a variety of factors beyond our control, including the performance of our borrowers, the economy, and changes in interest rates. We closely monitor overall credit quality indicators and our policies and procedures related to the analysis of the ACL to ensure that the ACL remains at an appropriate level.
For further discussion of the allocation of the ACL, see “Note 3 – Loans and ACL” of “Notes to Consolidated Financial Statements” in Item 8. Financial Statements and Supplementary Data.
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AFS Securities
The following is a schedule of maturities of AFS securities and their weighted average yields as of December 31, 2024. Weighted average yields have been computed on an FTE basis using a tax rate of 21%. Our auction rate money market preferred investments are long-term floating rate instruments. The issuers of auction rate securities generally have the right to redeem or refinance the debt. Because of their lack of contractual maturities, auction rate money market preferred stocks are not reported by a specific maturity group. Mortgage-backed securities and collateralized mortgage obligations are not reported by a specific maturity group due to their variable monthly payments. Expected maturities may differ from contractual maturities because issuers may have the right to call or prepay obligations.
Maturing
Within
One Year After One
Year But
Within
Five Years After Five
Years But
Within
Ten Years After
Ten Years Securities with
Variable Monthly
Payments or
Noncontractual
Maturities
Amount Yield (%) Amount Yield (%) Amount Yield (%) Amount Yield (%) Amount Yield (%)
U.S. Treasury $ 29,504 1.02 $ 191,067 0.97 $ — — $ — — $ — —
States and political subdivisions 14,378 3.37 20,826 3.18 17,019 3.02 24,345 3.65 — —
Mortgage-backed securities — — — — — — — — 26,886 2.38
Collateralized mortgage obligations — — — — — — — — 154,674 2.94
Auction rate money market preferred — — — — — — — — 3,044 6.74
Corporate — — — — 7,286 378.00 — —
Total $ 43,882 0.76 $ 211,893 0.24 $ 24,305 3.25 $ 24,345 3.65 $ 184,604 2.92
Deposits
The following table displays deposit balances as of December 31:
2024 2023 2022 2021 2020
Noninterest bearing demand deposits $ 416,373 $ 428,505 $ 494,346 $ 448,352 $ 375,395
Interest bearing demand deposits 341,366 320,737 372,155 364,563 302,444
Savings 601,730 628,079 625,734 596,662 505,497
Certificates of deposit 387,591 346,374 252,040 300,762 382,981
Total $ 1,747,060 $ 1,723,695 $ 1,744,275 $ 1,710,339 $ 1,566,317
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 (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) %
Total $ 23,365 1.36 % $ (20,580) (1.18) % $ 33,936 1.98 %
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The following table presents estimated balances of uninsured deposits as of December 31:
2024 2023 2022 2021 2020
Uninsured deposits $ 645,764 $ 600,381 $ 585,901 $ 548,213 $ 461,859
Uninsured deposits are the portion of deposit accounts in U.S. offices that exceed the FDIC insurance limits. The balance provided above are estimates and reflect the methodologies and assumptions used for regulatory reporting of uninsured deposits. The remaining maturity of estimated uninsured certificates of deposit, by account, as of December 31, 2024 is presented in the table below. Estimated uninsured certificates of deposit is based on individual accounts and does not reflect uninsured balances by account owner.
Maturity
Within 3 months $ 25,046
Within 3 to 6 months 9,536
Within 6 to 12 months 26,186
Over 12 months 4,425
Total $ 65,193
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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
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)
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
Capital consists solely of common stock, retained earnings, and accumulated other comprehensive income (loss). We are authorized to raise capital through dividend reinvestment, employee and director stock purchases, and shareholder stock purchases. Pursuant to these authorizations, we issued 75,341 shares or $1,523 of common stock during 2024, and 75,488 shares or $1,617 of common stock in 2023. We offer the Directors Plan in which participants purchase stock units through deferred fees, in lieu of cash payments. Pursuant to this plan, we increased shareholders’ equity by $381 and $529 during 2024 and 2023, respectively. 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.
We have publicly announced a common stock repurchase plan. Pursuant to this plan, we repurchased 152,577 shares or $3,076 of common stock during 2024 and 149,020 shares or $3,415 during 2023. As of December 31, 2024, we were authorized to repurchase up to an additional 118,229 shares of common stock.
The FRB has established minimum risk-based capital guidelines. Pursuant to these guidelines, a framework has been established that assigns risk weights to each category of on and off-balance-sheet items to arrive at risk adjusted total assets. Regulatory capital is divided by the risk adjusted assets with the resulting ratio compared to the minimum standard to determine whether a corporation has adequate capital.
The following table sets forth these requirements and our ratios as of December 31:
2024 2023
Actual Minimum Required - BASEL III Required to be Considered Well Capitalized Actual Minimum Required - BASEL III Required to be Considered Well Capitalized
Common equity tier 1 capital 12.21 % 7.00 % 6.50 % 12.54 % 7.00 % 6.50 %
Tier 1 capital 12.21 % 8.50 % 8.00 % 12.54 % 8.50 % 8.00 %
Total capital 15.06 % 10.50 % 10.00 % 15.52 % 10.50 % 10.00 %
Tier 1 leverage 8.86 % 4.00 % 5.00 % 8.76 % 4.00 % 5.00 %
Liquidity
Liquidity is monitored regularly by our ALCO, which consists of members of senior management. The committee reviews projected cash flows, key ratios, and liquidity available from both primary and secondary sources.
Our primary sources of liquidity are 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. The decline in the amount and percentage of primary liquidity is a direct result of an increase in loans and a decrease in unencumbered AFS securities collateralizing non-market funding. Liquidity is important for financial institutions because of their need to meet loan funding commitments, depositor withdrawal requests, and various other commitments including expansion of operations, investment opportunities, and payment of cash dividends. Based on these same factors, daily liquidity could vary significantly.
Our secondary sources include the ability to borrow from the FHLB, from the FRB, and through various correspondent banks in the form of federal funds purchased and a line of credit. These funding methods typically carry a higher interest rate than traditional market deposit accounts. Some borrowed funds, including FHLB advances, FRB Discount Window advances, and repurchase agreements, require us to pledge assets, typically in the form of AFS securities or loans, as collateral. As of December 31, 2024, we had available lines of credit of $342,130.
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:
2024 2023
Total cash and cash equivalents $ 24,542 $ 33,672
Brokered CD capacity 120,000 120,000
Available lines of credit
Fed funds lines with correspondent banks 93,000 93,000
FHLB borrowings 215,432 211,860
FRB Discount Window 28,698 28,220
Other lines of credit 5,000 5,000
Total available lines of credit 342,130 338,080
Unencumbered lendable value of FRB collateral, estimated (1)
290,000 320,000
Total cash and liquidity $ 776,672 $ 811,752
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.
Fair Value
We utilize fair value measurements to record fair value adjustments to certain assets and liabilities and to determine fair value disclosures. AFS securities, cash flow hedge derivative instruments and certain liabilities are recorded at fair value on a recurring basis. Additionally, from time to time, we may be required to record at fair value other assets on a nonrecurring basis, such as mortgage loans AFS, impaired loans, goodwill, foreclosed assets, OMSR, and certain other assets and liabilities. These nonrecurring fair value adjustments typically involve the application of lower of cost or market accounting or write downs of individual assets.
For further information regarding fair value measurements, see “Note 1 – Significant Accounting Policies” and “Note 13 – Fair Value” of “Notes to Consolidated Financial Statements” in Item 8. Financial Statements and Supplementary Data.
Market Risk
Our primary market risks are interest rate risk and liquidity risk. IRR is the exposure of our net interest income to changes in interest rates. IRR results from the difference in the maturity or repricing frequency of a financial institution's interest earning assets and its interest bearing liabilities. Managing IRR is the fundamental method by which financial institutions earn income and create shareholder value. Excessive exposure to IRR could pose a significant risk to our earnings and capital.
The FRB has adopted a policy requiring banks to effectively manage the various risks that can have a material impact on safety and soundness. The risks include credit, interest rate, liquidity, operational, and reputational. We have policies, procedures, and internal controls for measuring and managing these risks. Specifically, our ALCO policy and procedures include defining acceptable types and terms of investments and funding sources, liquidity requirements, limits on investments in long-term assets, limiting the mismatch in repricing opportunities of assets and liabilities, and the frequency of measuring and reporting to our Board of Directors.
The primary technique to measure IRR is simulation analysis. Simulation analysis forecasts the effects on the balance sheet structure and net interest income under a variety of scenarios that incorporate changes in interest rates, the shape of the yield curve, interest rate relationships, loan prepayments, and funding sources. These forecasts are compared against net interest income projected in a stable interest rate environment. While many assets and liabilities reprice either at maturity or in accordance with their contractual terms, several balance sheet components demonstrate characteristics that require an evaluation to more accurately reflect their repricing behavior. Key assumptions in the simulation analysis include prepayments on loans, probable calls of investment securities, changes in market conditions, loan volumes and loan pricing, deposit sensitivity, and customer preferences. These assumptions are inherently uncertain as they are subject to fluctuation and revision in a dynamic rate environment. As a result, the simulation analysis cannot precisely forecast the impact of rising and falling interest rates on net interest income. Actual results will differ from simulated results due to many other factors, including changes in balance sheet components, interest rate changes, changes in market conditions, and management strategies. We regularly monitor our projected net interest income sensitivity to ensure that it remains within established limits.
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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. This analysis is useful for measuring trends in the repricing characteristics of the balance sheet. Significant assumptions are required in this process because of the embedded repricing options contained in assets and liabilities. Residential real estate and consumer loans allow the borrower to repay the balance prior to maturity without penalty, while commercial and agricultural loans may have prepayment penalties. The amount of prepayments is dependent upon many factors, including the interest rate of a given loan in comparison to the current offering rates, the level of home sales, and the overall availability of credit in the marketplace. Generally, a decrease in interest rates will result in an increase in cash flows from these assets. Savings and demand accounts may generally be withdrawn on request without prior notice. The timing of cash flows from these deposits is estimated based on historical experience. Certificates of deposit have penalties that discourage early withdrawals.
We do not believe there has been a material change in the nature or categories of our primary market risk exposure, or the particular markets that present the primary risk of loss. We do not know of or expect there to be any material change in the general nature of our primary market risk exposure in the near term, and we do not expect to make material changes to our market risk methods in the near term. We may change those methods in the future to adapt to changes in circumstances or to implement new techniques.
Gap analysis is also utilized as a method to measure interest rate sensitivity. Interest rate sensitivity is determined by the amount of earning assets and interest bearing liabilities repricing within a specific time period, and their relative sensitivity to a change in interest rates. We strive to achieve reasonable stability in the net interest margin through periods of changing interest rates.
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The following table shows the maturity of loans outstanding at December 31, 2024 based on contractual terms. Also provided are the amounts classified according to the sensitivity to changes in interest rates.
1 Year
or Less 1 to 5
Years 5 to 15
Years Over 15
Years Total
Commercial and industrial $ 41,539 $ 98,182 $ 45,416 $ 59,757 $ 244,894
Commercial real estate 23,420 69,062 137,341 317,624 547,447
Advances to mortgage brokers 63,080 — — — 63,080
Agricultural 16,047 20,257 28,043 35,347 99,694
Residential real estate 3,627 15,410 130,927 230,908 380,872
Consumer 2,115 43,616 41,401 452 87,584
Total $ 149,828 $ 246,527 $ 383,128 $ 644,088 $ 1,423,571
Fixed interest rates
Commercial and industrial $ 6,859 $ 70,685 $ 20,799 $ 76 $ 98,419
Commercial real estate 19,224 58,934 12,298 5,259 95,715
Advances to mortgage brokers 63,080 — — — 63,080
Agricultural 2,653 8,520 2,577 352 14,102
Residential real estate 2,244 5,570 91,829 20,907 120,550
Consumer 1,840 43,143 41,312 452 86,747
Total $ 95,900 $ 186,852 $ 168,815 $ 27,046 $ 478,613
Variable interest rates
Commercial and industrial $ 34,680 $ 27,497 $ 24,617 $ 59,681 $ 146,475
Commercial real estate 4,196 10,128 125,043 312,365 451,732
Advances to mortgage brokers — — — — —
Agricultural 13,394 11,737 25,466 34,995 85,592
Residential real estate 1,383 9,840 39,098 210,001 260,322
Consumer 275 473 89 — 837
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)
(1,556) — —
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
Item 7A. Quantitative and Qualitative Disclosures About Market Risk.
The information presented in the section captioned “Market Risk” in Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations is incorporated herein by reference.
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