ISABELLA BANK CORP 10-Q

Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations. (Dollars in thousands except per share amounts and ratios, unless otherwise noted) The following is management's discussion and analysis of our financial condition and results of operations for the unaudited three months ended March 31, 2025 and 2024. This analysis should be read in conjunction with our Annual Report on Form 10-K for the year ended December 31, 2024 and with the unaudited interim condensed consolidated financial statements and notes, beginning on page 4 of this report. General Isabella Bank Corporation is a registered financial services holding company that was incorporated in September 1988 under Michigan law. The Corporation's wholly owned subsidiary, Isabella Bank, has 31 offices located throughout Bay, Clare, Gratiot, Isabella, Mecosta, Midland, Montcalm, and Saginaw counties. The area includes significant agricultural production, manufacturing, retail, gaming and tourism, and several colleges and universities. Forward-Looking Statements Information in this Quarterly Report on Form 10-Q 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 Corporation’s Annual Report on Form 10-K for the year ended December 31, 2024, 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 Quarterly Report on Form 10-Q 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 Quarterly Report on Form 10-Q 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. 38 Table of Contents Executive Summary Comparison of Operating Results for the three months ended March 31, 2025, and 2024, unless otherwise noted Net income in the first quarter of 2025 was $3,949, or $0.53 per diluted share, compared with $3,131, or $0.42 per diluted share, in the same quarter 2024. The non-GAAP measure of adjusted net income in the first quarter 2025 totaled $4,254, or $0.57 per diluted share, compared to $3,076 or $0.41 per diluted share, in the same quarter of 2024.The increase in net income for the comparative periods includes an increase in core loan interest income and a decline in provision for credit losses, offset by an increase in noninterest expenses. Net interest income was $14,525 in the first quarter of 2025 and $13,242 in the same quarter of 2024, representing 3.06% and 2.79% of earning assets, or NIM on an FTE basis, respectively. The current year quarter NIM included a four basis point benefit due to the recovery of contractual interest from nonaccruing loans that paid off during the quarter. The book yield from securities was 2.20% and 2.25% during the first quarters of 2025 and 2024, respectively. Our yield on loans expanded to 5.71% in the first quarter 2025, up from 5.38% in the same quarter of 2024. Excluding loan recoveries, the yield on loans was 5.65%. The expansion in loan yields was a result of higher rates on new loans and variable rate commercial loans that have, and continue to, reprice. At the end of the first quarter 2025, approximately 39% of commercial loans are fixed at rates that are lower than current market rates. Most of those fixed rate loans will contractually reprice to variable rates over the next four years. Our cost of interest-bearing liabilities decreased to 2.26% from 2.28% in the first quarter 2024 due to reductions to rates in the money market and certificate of deposit products. NIM continues to expand as loans reprice and the cost of interest bearing liabilities stabilizes. The provision for credit losses was a credit of $107 in the first quarter of 2025, which reflects the $160 change in the allowance for credit losses on loans and net recoveries totaling $52, offset by an increase in the reserve for unfunded commitments. The provision for loan losses in the same period of 2024 was $392 reflecting $265 for specific reserves and $46 in net charge offs. Noninterest income for the three months ended March 31, 2025 and 2024 was $3,528 and $3,468, respectively. Wealth management fees grew $40, or 4%, on relatively flat assets under management as compared to the first quarter of 2024, due to a change in product mix that generated higher administrative fees. AUM in the first quarter 2025 decreased 0.22% while the S&P 500 declined 4.6% in the same period. Earnings on BOLI policies increased $129 over the prior year quarter due to new investments in a separate account BOLI. Other noninterest income in the first quarter included a $55 loss on foreclosed assets, compared to a $69 gain in the first quarter 2024. Noninterest expenses for the three-month period ended March 31, 2025 increased $623, or 4.9%, in comparison to the same period in 2024. Compensation and benefit expenses increased $368 reflecting annual merit increases and higher medical insurance claims compared to the first quarter of 2024. Other professional services included $121 in legal fees related to our previously announced Nasdaq uplisting application. Income tax expense was $912, compared to $511 in the first quarter of 2024 and the ETR was 19% and 14%, respectively. The ETR in the first quarter 2025 included a one-time expense totaling $166 due to the taxes owed from the lifetime earnings on BOLI policies that were surrendered during the quarter. Excluding the one-time charge, the ETR was 15%, which is higher than the prior year quarter on higher pretax income. Financial Condition (March 31, 2025 to December 31, 2024 comparison) Total assets increased $16,346 to $2,102,587 as of March 31, 2025, primarily due to an increase of $38,681 in interest bearing cash, $18,997 in gross securities, and $10,951 increase in BOLI assets, offset by a $60,065 decrease in advances to mortgage brokers. Our AFS securities portfolio totaled $513,040 at March 31, 2025, increasing $24,011 at the end of first quarter 2025. The increase was driven by $40,362 in purchases of collateralized mortgage obligation securities with a weighted-average yield of 4.56%. Amortization and maturities of $21,058 partially offset the increase from purchases. Net unrealized losses at March 31, 2025 totaled $21,473, or 4.02%, of the portfolio and improved during the quarter due to the treasury portfolio rapidly approaching maturity and a decrease in market yields. The par value and corresponding book yields that are estimated to mature or payoff by year include: $54,500 in principal with a weighted-average book yield of 2.34% over the remainder of 2025; $217,400 at 1.17% in 2026; and $63,400 at 1.86% in 2027. Some of these securities amortize so the actual principal paydown may differ from these estimates. Loans outstanding as of March 31, 2025 totaled $1,367,724. Since December 31, 2024, gross loans have decreased $55,847 as a result of a reduction in advance to mortgage brokers. However, the decline in this non-core loan product has provided liquidity and the opportunity to refocus on loans that can be recorded on our balance sheet for longer terms and help to mitigate interest rate risk. 39 Table of Contents Core loans, which excludes advances to mortgage brokers, grew $4,218, driven by the commercial real estate and commercial and industrial loan portfolios of $4,787 and $4,326, respectively. Loan growth during the first quarter primarily was in the construction, real estate, and hospitality industries. The commercial pipeline is robust, with some anticipated loan closings in the first quarter extended into the second quarter 2025. Residential mortgages increased $6,476 as customers are favoring adjustable-rate loans, which are put on the balance sheet rather than sold in the secondary market. Core loan growth during the quarter was offset by a decline in agricultural and consumer loan portfolios that continue to roll off amid decreasing demand, competition and our adherence to credit quality standards. The ACL was $12,735 at March 31, 2025, a decrease of $160 from $12,895 at December 31, 2024. Most of the decline is due to improvement in historical loss experience, driven by the recovery of three previously charged-off loans during the quarter totaling $136, which led to an $88 reduction in the allowance. Nonaccrual loans were $173 as of March 31, 2025 compared to $282 at December 31, 2024. Past due and accruing accounts between 30 to 89 days as a percentage of total loans was 0.41% at March 31, 2025, compared to 0.40% at year-end 2024. Overall, credit quality remains strong, and there are no negative trends. BOLI assets were $45,833 at March 31, 2025, an increase of $10,951 from December 31, 2024. The growth was mostly driven by a $10,583 investment of new policies in a separate account product at the beginning of January. The investment transaction included a surrender of $5,431 of existing general account policies and redeployment into a separate account BOLI. As part of BOLI restructuring, another $9,045 of general account policies will be exchanged for separate account BOLI, which is expected to be completed by the end of the third quarter. The separate account BOLI currently yields 5.4%, compared to a weighted-average yield of 2.9% from existing general account policies. Total deposits increased $50,849 from December 31, 2024, to $1,797,909 at March 31, 2025. The growth was driven by the interest-bearing demand, money market, and savings deposits, collectively increasing $60,380 as we continue to deepen customer relationships. Consumer demand for retail certificates of deposit accounts continues based on the rate environment, resulting in a $2,648 increase in the balance during the first three months of 2025. Adversely, demand deposits declined $12,179 during the first quarter 2025. Total equity was $215,556 at March 31, 2025 compared to $210,276 at year-end 2024. Our tangible book value per share was $22.58 as of March 31, 2025, compared to $21.82 on December 31, 2024. Net unrealized losses on AFS securities reduced tangible book value per share by $2.30 and $2.82 for the respective periods. Share repurchases totaled 45,582 during the first three months of 2025 for a value of $1,145 at an average price of $25.12. We continue to have robust liquidity levels and capital. As of March 31, 2025, we had $907,003 of unencumbered sources of liquidity and strong capital ratios; the Tier 1 Leverage Ratio was 8.96%, Tier 1 risk-based capital was 12.58%, and Total risk-based capital was 15.50%. Reclassifications Certain amounts reported in the interim 2024 consolidated financial statements have been reclassified to conform to the 2025 presentation. Subsequent Events On April 2, 2025, we recovered the full contractual balance of overdrawn deposit accounts from one customer. These accounts were charged off during the third quarter of 2024 in the amount of $1,622. Additionally, we collected all legal fees associated with the loss and the full contractual balance of all commercial loans outstanding with this customer. The recovery of losses and fees will be reflected in our second quarter 2025 results. We evaluated subsequent events after March 31, 2025 through the date our interim condensed consolidated financial statements were issued for potential recognition and disclosure. No other subsequent events require financial statement recognition or disclosure between March 31, 2025 and the date our interim condensed consolidated financial statements were issued. 40 Table of Contents Selected Financial Data (Unaudited) The following table outlines our results of operations and provides certain performance measures as of, and for the: Three Months Ended March 31 2025 December 31 2024 September 30 2024 June 30 2024 March 31 2024 PER SHARE Basic earnings $ 0.53 $ 0.54 $ 0.44 $ 0.47 $ 0.42 Diluted earnings 0.53 0.54 0.44 0.46 0.42 Adjusted diluted earnings (1) 0.57 0.52 0.61 0.46 0.41 Dividends 0.28 0.28 0.28 0.28 0.28 Book value (2) 29.10 28.32 28.63 27.06 26.80 Tangible book value (2) 22.58 21.82 22.14 20.60 20.35 Market price (2) 23.59 25.99 21.21 18.20 19.40 PERFORMANCE RATIOS Return on average total assets 0.77 % 0.76 % 0.62 % 0.68 % 0.61 % Adjusted return on average total assets (1) 0.83 % 0.74 % 0.87 % 0.68 % 0.60 % Return on average shareholders' equity 7.48 % 7.47 % 6.26 % 6.97 % 6.19 % Adjusted return on average shareholders' equity (1) 8.05 % 7.29 % 8.70 % 6.96 % 6.08 % Return on average tangible shareholders' equity 9.65 % 9.66 % 8.15 % 9.19 % 8.12 % Adjusted return on average tangible shareholders' equity (1) 10.40 % 9.43 % 11.32 % 9.17 % 7.97 % Net interest margin yield (FTE) (1) 3.06 % 2.98 % 2.96 % 2.82 % 2.79 % Efficiency ratio (1) 72.39 % 71.20 % 72.30 % 73.93 % 74.84 % Gross loan to deposit ratio (2) 76.07 % 81.48 % 79.93 % 80.22 % 77.22 % Shareholders' equity to total assets (2) 10.25 % 10.08 % 10.11 % 9.82 % 9.75 % Tangible shareholders' equity to tangible assets (2) 8.14 % 7.95 % 8.00 % 7.65 % 7.58 % FINANCIAL DATA (in millions) Total assets (2) 2,103 2,086 2,107 2,060 2,058 AFS securities (2) 513 489 507 506 518 Gross loans (2) 1,368 1,424 1,424 1,382 1,366 ACL (2) 13 13 13 13 13 Deposits (2) 1,798 1,747 1,782 1,722 1,768 Borrowed funds (2) 77 113 97 119 72 Shareholders' equity (2) 216 210 213 202 201 Wealth assets under management (2) 657 658 680 648 661 Net income 4 4 3 3 3 Interest income 23 23 23 22 21 Interest expense 8 9 9 9 8 Net interest income 15 15 14 14 13 Provision for credit losses — — 1 — — Noninterest income 4 4 4 4 3 Noninterest expenses 13 13 13 13 13 (1) Non-GAAP financial measure; refer to the "Reconciliation of Non-GAAP Financial Measures" section (2) At end of period 41 Table of Contents Average Balances, Interest Rates, and Net Interest Income The following schedules present the daily average amount outstanding for each major category of interest earning assets, non-earning assets, interest bearing liabilities, and noninterest bearing liabilities. These schedules also present an analysis of interest income and interest expense for the periods indicated. All interest income is reported on a FTE basis using a federal income tax rate of 21%. Loans in nonaccrual status, for the purpose of the following computations, are included in the average loan balances. FRB restricted equity holdings are included in other interest earning assets. Three Months Ended March 31, 2025 December 31, 2024 March 31, 2024 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) $ 1,370,765 $ 19,348 5.71 % $ 1,412,578 $ 20,145 5.66 % $ 1,348,749 $ 18,057 5.38 % AFS securities (2) 514,479 2,827 2.20 % 522,733 2,869 2.15 % 557,030 3,130 2.25 % FHLB stock 11,011 160 5.82 % 12,762 168 5.25 % 12,762 146 4.57 % Fed funds sold 4 — 4.32 % 8 — 4.54 % 7 — 5.43 % Other (3) 47,374 482 4.06 % 15,905 200 4.94 % 25,210 293 4.66 % Total interest earning assets 1,943,633 22,817 4.75 % 1,963,986 23,382 4.72 % 1,943,758 21,626 4.47 % NONEARNING ASSETS Allowance for credit losses (12,884) (12,598) (13,100) Cash and demand deposits due from banks 23,899 22,800 24,018 Premises and equipment 27,962 27,773 28,022 Other assets 102,927 92,608 84,059 Total assets $ 2,085,537 $ 2,094,569 $ 2,066,757 INTEREST BEARING LIABILITIES Interest bearing demand deposits $ 240,860 $ 242 0.41 % $ 232,271 $ 212 0.36 % $ 245,299 $ 201 0.33 % Money market deposits 460,663 2,929 2.58 % 436,235 2,970 2.71 % 451,476 3,212 2.86 % Savings 286,364 538 0.76 % 276,856 446 0.64 % 282,971 333 0.47 % Certificates of deposit 387,820 3,754 3.93 % 386,871 3,955 4.07 % 357,541 3,417 3.84 % Short-term borrowings 43,563 341 3.18 % 50,862 413 3.22 % 40,623 321 3.17 % FHLB advances 3,333 38 4.53 % 28,261 352 4.88 % 27,692 388 5.54 % Subordinated debt, net of unamortized issuance costs 29,433 266 3.62 % 29,410 266 3.62 % 29,342 266 3.63 % Total interest bearing liabilities 1,452,036 8,108 2.26 % 1,440,766 8,614 2.38 % 1,434,944 8,138 2.28 % NONINTEREST BEARING LIABILITIES AND SHAREHOLDERS' EQUITY Demand deposits 403,024 425,116 412,228 Other liabilities 16,265 15,775 16,151 Shareholders’ equity 214,212 212,912 203,434 Total liabilities and shareholders’ equity $ 2,085,537 $ 2,094,569 $ 2,066,757 Net interest income (FTE) $ 14,709 $ 14,768 $ 13,488 Net yield on interest earning assets (FTE) (4) 3.06 % 2.98 % 2.79 % (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 42 Table of Contents Loans The following table displays loan balances as of: March 31 2025 December 31 2024 September 30 2024 June 30 2024 March 31 2024 Annualized Growth % Quarter to Date Commercial and industrial $ 249,220 $ 244,894 $ 240,589 $ 238,245 $ 226,281 7.07 % Commercial real estate 552,234 547,447 547,038 547,005 561,123 3.50 % Advances to mortgage brokers 3,015 63,080 76,187 39,300 29,688 N/M Agricultural 94,359 99,694 96,794 94,996 93,695 (21.41) % Total commercial loans 898,828 955,115 960,608 919,546 910,787 (23.57) % Residential real estate 387,348 380,872 369,846 365,188 356,658 6.80 % Consumer 81,548 87,584 93,829 96,902 98,063 (27.57) % Total $ 1,367,724 $ 1,423,571 $ 1,424,283 $ 1,381,636 $ 1,365,508 (15.69) % The following table presents the composition of our commercial real estate portfolio by industry as of: March 31, 2025 December 31, 2024 Balance Percent of Total Balance Percent of Total Real estate 1-4 family investor $ 87,760 15.89 % $ 86,736 15.84 % Multifamily 60,846 11.02 % 61,033 11.15 % All other 153,050 27.71 % 147,566 26.96 % Hotels 83,511 15.12 % 83,426 15.24 % Health care 42,482 7.69 % 43,197 7.89 % Retail trade 33,266 6.02 % 33,586 6.14 % Manufacturing 13,686 2.48 % 12,381 2.26 % Accommodation services 11,597 2.10 % 11,786 2.15 % Construction 11,252 2.04 % 10,901 1.99 % Educational services 11,018 2.00 % 11,160 2.04 % Wholesale trade 10,720 1.94 % 10,918 1.99 % Other 33,046 5.99 % 34,757 6.35 % Total commercial real estate $ 552,234 100.00 % $ 547,447 100.00 % 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. Deposits The following table displays deposit balances as of: March 31 2025 December 31 2024 September 30 2024 June 30 2024 March 31 2024 Annualized Growth % Quarter to Date Noninterest bearing demand deposits $ 404,194 $ 416,373 $ 421,493 $ 412,193 $ 413,272 (11.70) % Interest bearing demand deposits 243,939 237,548 228,902 232,660 250,314 10.76 % Money market deposits 473,138 423,883 471,745 429,150 453,014 46.48 % Savings 286,399 281,665 276,095 279,847 285,564 6.72 % Certificates of deposit 390,239 387,591 383,597 368,449 366,143 2.73 % Total $ 1,797,909 $ 1,747,060 $ 1,781,832 $ 1,722,299 $ 1,768,307 11.64 % 43 Table of Contents Asset Quality Analysis The following table outlines our quarter-to-date asset quality analysis as of, and for the three-month periods ended: March 31 2025 December 31 2024 September 30 2024 June 30 2024 March 31 2024 NONPERFORMING ASSETS Commercial and industrial $ — $ — $ 120 $ 271 $ 567 Commercial real estate — — — — 234 Agricultural — — — 167 189 Residential real estate 173 282 427 556 293 Consumer — — — — — Total nonaccrual loans 173 282 547 994 1,283 Accruing loans past due 90 days or more 26 19 64 15 — Total nonperforming loans 199 301 611 1,009 1,283 Foreclosed assets 649 544 546 629 579 Debt securities — — 12 12 12 Total nonperforming assets $ 848 $ 845 $ 1,169 $ 1,650 $ 1,874 Nonperforming loans to gross loans 0.01 % 0.02 % 0.04 % 0.07 % 0.09 % Nonperforming assets to total assets 0.04 % 0.04 % 0.06 % 0.08 % 0.09 % Nonaccrual loans to gross loans 0.01 % 0.02 % 0.04 % 0.07 % 0.09 % ACL as a % of nonaccrual loans N/M N/M N/M N/M N/M ALLOWANCE FOR CREDIT LOSSES Allowance at beginning of period $ 12,895 $ 12,635 $ 13,095 $ 13,390 $ 13,108 Charge-offs 172 299 1,767 527 191 Recoveries 224 197 408 134 145 Net loan charge-offs (recoveries) (52) 102 1,359 393 46 (Reversal of) provision for credit losses - loans (212) 362 899 98 328 Allowance at end of period $ 12,735 $ 12,895 $ 12,635 $ 13,095 $ 13,390 ACL to gross loans 0.93 % 0.91 % 0.89 % 0.95 % 0.98 % Reserve for unfunded commitments 617 512 498 450 379 Provision for credit losses - unfunded commitments 105 14 47 72 64 Reserve to unfunded commitments 0.14 % 0.15 % 0.15 % 0.14 % 0.11 % NET LOAN CHARGE-OFFS (RECOVERIES) Commercial and industrial $ (80) $ 13 $ (6) $ 334 $ (2) Commercial real estate (2) (2) (318) (29) (6) Agricultural — (4) — — (2) Residential real estate (13) (16) (20) (19) (63) Consumer 43 111 1,703 107 119 Total $ (52) $ 102 $ 1,359 $ 393 $ 46 Net (recoveries) charge-offs (Quarter to Date annualized to average loans) (0.02) % 0.03 % 0.39 % 0.11 % 0.01 % Net (recoveries) charge-offs (Year to Date annualized to average loans) (0.02) % 0.14 % 0.17 % 0.00 % 0.01 % DELINQUENT AND NONACCRUAL LOANS Accruing loans 30-89 days past due $ 5,555 $ 5,682 $ 2,226 $ 1,484 $ 7,938 Accruing loans past due 90 days or more 26 19 64 15 — Total accruing past due loans 5,581 5,701 2,290 1,499 7,938 Nonaccrual loans 173 282 547 994 1,283 Total past due and nonaccrual loans $ 5,754 $ 5,983 $ 2,837 $ 2,493 $ 9,221 44 Table of Contents 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 17,332 shares or $419 of common stock during the first three months of 2025, as compared to 22,456 shares or $447 of common stock during the same period in 2024. 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 $167 and $218 during the three-month periods ended March 31, 2025 and 2024, respectively. We also grant restricted stock awards pursuant to the RSP. Pursuant to this plan, we increased shareholders’ equity by $7 during the first three months of 2025, as compared to $25 during the same period in 2024. We have publicly announced a common stock repurchase plan. Pursuant to this plan, we repurchased 45,582 shares or $1,145 of common stock during the first three months of 2025 and 36,484 shares or $740 during the first three months of 2024. As of March 31, 2025, we were authorized to repurchase up to an additional 72,647 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 our ratios as of: March 31 2025 December 31 2024 September 30 2024 June 30 2024 March 31 2024 Common equity tier 1 capital 12.58 % 12.21 % 12.08 % 12.37 % 12.36 % Tier 1 capital 12.58 % 12.21 % 12.08 % 12.37 % 12.36 % Total capital 15.50 % 15.06 % 14.90 % 15.29 % 15.31 % Tier 1 leverage 8.96 % 8.86 % 8.77 % 8.83 % 8.80 % 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. Cash, cash equivalents and unencumbered AFS securities totaled $427,091, or 20.31% of assets, as of March 31, 2025, compared to $330,876, or 15.86%, as of December 31, 2024. The increase in the amount and percentage of primary liquidity is a direct result of an increase in cash, driven by loan payoffs and deposit growth, and an increase in unencumbered AFS securities. 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 lines 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 March 31, 2025, we had available lines of credit of $377,824. 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. 45 Table of Contents Our liquidity position remained strong at March 31, 2025, which is illustrated in the following table: March 31 2025 December 31 2024 September 30 2024 June 30 2024 March 31 2024 Total cash and cash equivalents $ 69,179 $ 24,542 $ 27,378 $ 23,559 $ 25,218 Brokered CD capacity 120,000 120,000 120,000 120,000 120,000 Available lines of credit Fed funds lines with correspondent banks 93,000 93,000 93,000 93,000 93,000 FHLB borrowings 250,884 215,432 233,552 194,403 248,624 FRB Discount Window 28,940 28,698 28,888 28,148 28,083 Other lines of credit 5,000 5,000 5,000 5,000 5,000 Total available lines of credit 377,824 342,130 360,440 320,551 374,707 Unencumbered lendable value of FRB collateral, estimated (1) 340,000 290,000 290,000 290,000 310,000 Total cash and liquidity $ 907,003 $ 776,672 $ 797,818 $ 754,110 $ 829,925 Uninsured deposits $ 687,341 $ 645,764 $ 687,990 $ 623,245 $ 658,564 Coverage ratio of uninsured deposits with total cash and liquidity 132 % 120 % 116 % 121 % 126 % (1) In cludes estimated unencumbered lendable value of FHLB collateral of $260,000 as of March 31, 2025. 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, collateral dependent 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 7 – Fair Value” of our interim condensed consolidated financial statements. Market Risk Our primary market risks are interest rate risk and liquidity risk. IRR is the exposure of our net interest income to changes in interest rates. IRR results from the difference in the maturity or repricing frequency of a financial institution's interest earning assets and its interest-bearing liabilities. Managing IRR is the fundamental method by which financial institutions earn income and create shareholder value. Excessive exposure to IRR could pose a significant risk to our earnings and capital. The FRB has adopted a policy requiring banks to effectively manage the various risks that can have a material impact on safety and soundness. The risks include credit, interest rate, liquidity, operational, and reputational. We have policies, procedures, and internal controls for measuring and managing these risks. Specifically, our ALCO policy and procedures include defining acceptable types and terms of investments and funding sources, liquidity requirements, limits on investments in long-term assets, limiting the mismatch in repricing opportunities of assets and liabilities, and the frequency of measuring and reporting to our Board of Directors. The primary technique to measure IRR is simulation analysis. Simulation analysis forecasts the effects on the balance sheet structure and net interest income under a variety of scenarios that incorporate changes in interest rates, the shape of yield curves, interest rate relationships, loan prepayments, and funding sources. These forecasts are compared against net interest income projected in a stable interest rate environment. While many assets and liabilities reprice either at maturity or in accordance with their contractual terms, several balance sheet components demonstrate characteristics that require an evaluation to more accurately reflect their repricing behavior. Key assumptions in the simulation analysis include prepayments on loans, probable calls of investment securities, changes in market conditions, loan volumes and loan pricing, deposit sensitivity, and customer preferences. These assumptions are inherently uncertain as they are subject to fluctuation and revision in a dynamic rate environment. As a result, the simulation analysis cannot precisely forecast the impact of rising and falling interest rates on net interest income. Actual results will differ from simulated results due to many other factors, including changes in balance sheet components, interest rate changes, changes in market conditions, and management strategies. We regularly monitor our projected net interest income sensitivity to ensure that it remains within established limits. 46 Table of Contents The following tables summarize our interest rate sensitivity for 12 and 24 months as of March 31, 2025 and December 31, 2024. 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. March 31, 2025 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 (4.74) % (2.14) % 2.00 % 3.99 % (6.32) % (3.14) % 1.98 % 3.48 % 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 % 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. Contractual Obligations and Loan Commitments We have various financial obligations, including contractual obligations and commitments related to deposits and borrowings, which may require future cash payments. We also have loan related commitments that may impact liquidity. The commitments include unused lines of credit, commercial and standby letters of credit, and commitments to grant loans. These commitments to grant loans include residential mortgage loans with the majority committed to be sold to the secondary market. Many of these commitments historically have expired without being drawn upon and do not necessarily represent our future cash requirements. We are party to credit related financial instruments with off-balance-sheet risk. These financial instruments are entered into in the normal course of business to meet the financing needs of our customers. These financial instruments involve, to varying degrees, elements of credit and interest rate risk in excess of the amounts recognized in the consolidated balance sheets. The contractual or notional amounts of these instruments reflect the extent of involvement we have in a particular class of financial instrument. Our exposure to credit-related loss in the event of nonperformance by the counterparties to the financial instruments for commitments to extend credit and standby letters of credit could be up to the contractual notional amount of those instruments. We use the same credit policies when analyzing the creditworthiness of counterparties as we do for extending loans to customers. No significant losses are anticipated as a result of these commitments. 47 Table of Contents 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: Three Months Ended March 31 2025 December 31 2024 September 30 2024 June 30 2024 March 31 2024 Net income $ 3,949 $ 3,996 $ 3,281 $ 3,481 $ 3,131 Net gains (losses) on foreclosed assets (55) 74 4 6 69 Overdraft (charge-off) recoveries (1) — 66 (1,622) — — Profitability initiative cost — (23) — — — Legal fees related to Nasdaq (2) (121) — — — — Income tax impact on items above 37 (25) 340 (1) (14) Income tax expense on BOLI surrender (3) (166) — — — — Adjusted net income (A) $ 4,254 $ 3,904 $ 4,559 $ 3,476 $ 3,076 Noninterest expenses $ 13,299 $ 13,330 $ 13,228 $ 12,895 $ 12,676 Amortization of acquisition intangibles 1 1 — 1 — Adjusted noninterest expense (B) $ 13,298 $ 13,329 $ 13,228 $ 12,894 $ 12,676 Net interest income $ 14,525 $ 14,555 $ 14,488 $ 13,550 $ 13,242 Tax equivalent adjustment for net interest margin 184 213 232 237 246 Net interest income (FTE) (C) 14,709 14,768 14,720 13,787 13,488 Noninterest income 3,528 3,972 3,528 3,608 3,468 Tax equivalent adjustment for efficiency ratio 78 54 53 53 51 Adjusted revenue (FTE) 18,315 18,794 18,301 17,448 17,007 Nonrecurring items Net gains (losses) on foreclosed assets (55) 74 4 6 69 Total nonrecurring items (55) 74 4 6 69 Adjusted revenue (D) $ 18,370 $ 18,720 $ 18,297 $ 17,442 $ 16,938 Efficiency ratio (B/D) 72.39 % 71.20 % 72.30 % 73.93 % 74.84 % Average earning assets (E) 1,943,633 1,963,986 1,967,552 1,948,173 1,943,758 Net yield on interest earning assets (FTE) (C/E) 3.06 % 2.98 % 2.96 % 2.82 % 2.79 % Average assets (F) 2,085,537 2,094,569 2,095,200 2,067,211 2,066,757 Average shareholders' equity (G) 214,212 212,912 208,444 200,734 203,434 Average tangible shareholders' equity (H) 165,929 164,629 160,161 152,451 155,150 Average diluted shares outstanding (4) (I) 7,432,162 7,451,718 7,473,184 7,494,828 7,507,739 Adjusted diluted earnings per share (A/I) $ 0.57 $ 0.52 $ 0.61 $ 0.46 $ 0.41 Adjusted return on average assets (A/F) 0.83 % 0.74 % 0.87 % 0.68 % 0.60 % Adjusted return on average shareholders' equity (A/G) 8.05 % 7.29 % 8.70 % 6.96 % 6.08 % Adjusted return on average tangible shareholders' equity (A/H) 10.40 % 9.43 % 11.32 % 9.17 % 7.97 % (1) Includes provision for credit losses related to overdrawn deposit accounts from a single customer in the third quarter of 2024 (2) Included in Other professional services in the consolidated statements of income (3) Income tax expense on life to date earnings on BOLI policies surrendered (4) Whole shares 48 Table of Contents Item 3. Quantitative and Qualitative Disclosures about Market Risk. The information presented in the section captioned “Market Risk” in Management's Discussion and Analysis of Financial Condition and Results of Operations is incorporated herein by reference.