EDGAR 10-K Filing

Company CIK: 842517
Filing Year: 2025
Filename: 842517_10-K_2025_0000842517-25-000053.json

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ITEM 1. BUSINESS
Item 1. Business.
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.
As used in Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations as well as in Item 8. Financial Statements and Supplementary Data, references to “the Corporation”, “Isabella”, “we”, “our”, “us”, and similar terms refer to the consolidated entity consisting of Isabella Bank Corporation and its subsidiary. References to Isabella Bank or “the Bank” refers to Isabella Bank Corporation’s subsidiary, Isabella Bank.
We are a community bank with a focus on providing high quality, personalized service at a fair price. We offer a broad array of banking and wealth management services to businesses, institutions, individuals and their families. We compete with other commercial banks, savings and loan associations, mortgage brokers, finance companies, credit unions, retail brokerage firms, and other companies providing financial services.
Lending activities include loans for commercial and agricultural operations and real estate purposes, residential real estate loans, and consumer loans. We limit lending activities primarily to local markets and purchased loans from the secondary market are minimal. We do not make loans to fund leveraged buyouts, have no foreign corporate or government loans, and have limited holdings of corporate debt securities. Our general lending philosophy is to limit concentrations to individuals and business segments. For additional information related to our lending strategies and policies, see “Note 3 - Loans and ACL” of “Notes to Consolidated Financial Statements” in Item 8. Financial Statements and Supplementary Data.
Deposit services offered include checking accounts, savings accounts, certificates of deposit, direct deposits, cash management services, mobile and internet banking, and ATMs. We also offer full service investment management, trust and estate services.
As of December 31, 2024, we had 368 full-time equivalent employees. We provide group life, health, accident, disability, and other insurance programs as well as a number of other employee benefit programs. None of our workforce is subject to collective bargaining agreements.
Available Information
Our SEC filings (including our Annual Report on Form 10-K, Quarterly Reports on Form 10-Q, Definitive Proxy Statements, Current Reports on Form 8-K and amendments to those reports) are available through our website (www.isabellabank.com). We will provide paper copies of our SEC reports free of charge upon request by a shareholder.
The SEC maintains a website (www.sec.gov) that contains reports, proxy and information statements and other information regarding Isabella Bank Corporation (CIK #0000842517) and other issuers.
Supervision and Regulation
The earnings and growth of the banking industry are affected by the credit policies of monetary authorities, including the FRB. An important function of the FRB is to regulate the national supply of bank credit in order to combat recessions and respond to inflationary pressures. Among the instruments of monetary policy used by the FRB to implement these objectives are open market operations in U.S. Treasury and U.S. Government Agency securities, changes in the discount rate on member bank borrowings, and changes in reserve requirements against member bank deposits. These methods are used in varying combinations to influence overall growth of bank loans, investments and deposits and also affect interest rates charged on loans or paid for deposits. The monetary policies of the FRB have had a significant effect on the operating results of commercial banks and related financial service providers in the past and are expected to continue to do so in the future. The effect of such policies upon our future business and earnings cannot be predicted.
We, as a financial holding company, are regulated under the BHC Act, and are subject to the supervision of the FRB. We are registered as a financial services holding company with the FRB and are subject to reporting requirements and inspections and audits. Under FRB policy, we are expected to act as a source of financial strength to the Bank and to commit resources to support its subsidiaries. This support may be required at times when, in the absence of such FRB policy, it would not otherwise be required to provide support.
Under Michigan law, if the capital of a Michigan state chartered bank has become impaired by losses or otherwise, the Commissioner of the DIFS may require that the deficiency in capital be met by assessment upon the bank’s shareholders. Each shareholder would be responsible for a pro rata share of the deficiency, based on the amount of capital stock held by each shareholder. If an assessment is not paid by any shareholder within 30 days of the date of notice to the shareholder, sale of their stock will occur in order to pay such assessment.
Any capital loans by a bank holding company to any of its subsidiary banks are subordinate in right of payment to deposits and to certain other indebtedness of such subsidiary bank. In the event of a bank holding company’s bankruptcy, any commitment by the bank holding company to a federal bank regulatory agency to maintain the capital of a subsidiary bank will be assumed by the bankruptcy trustee and entitled to a priority of payment. This priority would apply to guarantees of capital plans under the FDIC Improvement Act of 1991.
SOX contains important requirements for public companies in the area of financial disclosure and corporate governance. In accordance with Section 302(a) of SOX, written certifications by our principal executive, financial, and accounting officers are required. These certifications attest that our quarterly and annual reports filed with the SEC do not contain any untrue statement of a material fact (see the certifications filed as Exhibits 31.1 and 31.2 to this Form 10-K for such certification of consolidated financial statements and other information for this 2024 Form 10-K). We have also implemented a program designed to comply with Section 404 of SOX, which included the identification of significant processes and accounts, documentation of the design effectiveness over process and entity level controls, and testing of the operating effectiveness of key controls. See Item 9A. Controls and Procedures for our evaluation of disclosure controls and procedures and internal control over financial reporting.
Certain additional information concerning regulatory guidelines for capital adequacy and other regulatory matters is presented herein under the caption “Capital” in Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations and in “Note 9 - Capital Ratios and Shareholders' Equity” and Note 14 - Off-Balance-Sheet Activities, Commitments and Other Matters of “Notes to Consolidated Financial Statements” in Item 8. Financial Statements and Supplementary Data.
Isabella Bank
The Bank is supervised and regulated by DIFS and the FRB. These agencies and federal and state laws extensively regulate various aspects of the banking business including, among other things, permissible types and amounts of loans, investments and other activities, capital adequacy, branching, interest rates on loans and deposits, and the safety and soundness of banking practices.
Our deposits are insured up to applicable limits by the DIF of the FDIC and are subject to deposit insurance assessments to maintain the DIF. The FDIC assesses insurance premiums based upon a financial ratios method that takes into account asset and capital levels and supervisory ratings.
Banking laws and regulations restrict transactions by insured banks owned by a bank holding company. These restrictions include loans to and certain purchases from the parent holding company, non-bank and bank subsidiaries of the parent holding company. Additional restrictions apply to principal shareholders, officers, directors and their affiliates, and investments by the subsidiary bank in the shares or securities of the parent holding company (or any of the other non-bank or bank affiliates), or acceptance of such shares or securities as collateral security for loans to any borrower.
The Bank is subject to legal limitations on the frequency and amount of dividends that can be paid to Isabella Bank Corporation. For example, a Michigan state chartered bank may not declare a cash dividend or a dividend in kind except out of net profits then on hand after deducting all losses and bad debts, and then only if it will have a surplus amounting to not less than 20% of its capital after the payment of the dividend. Moreover, a Michigan state chartered bank may not declare or pay any cash dividend or dividend in kind until the cumulative dividends on its preferred stock, if any, have been paid in full. Further, if the surplus of a Michigan state chartered bank is at any time less than the amount of its capital, before the declaration of a cash dividend or dividend in kind, it must transfer to surplus not less than 10% of its net profits for the preceding six months (in the case of quarterly or semi-annual dividends) or the preceding two consecutive six month periods (in the case of annual dividends).
The payment of dividends by Isabella Bank Corporation and the Bank is also affected by various regulatory requirements and policies, such as the requirement to keep adequate capital in compliance with regulatory guidelines. Federal laws impose further restrictions on the payment of dividends by insured banks that fail to meet specified capital levels. The FDIC may prevent an insured bank from paying dividends if the bank is in default of payment of any assessment due to the FDIC. In addition, payment of dividends by a bank may be prevented by the applicable federal regulatory authority if such payment is determined, by reason of the financial condition of such bank, to be an unsafe and unsound banking practice. The FRB and the
FDIC have issued policy statements providing that bank holding companies and insured banks should generally pay dividends only out of current operating earnings. Additionally, the FRB Board of Governors requires a bank holding company to notify the FRB prior to increasing its cash dividend by more than 10% over the prior year.
The aforementioned regulations and restrictions may limit our ability to obtain funds from the Bank for our cash needs, including payment of dividends and operating expenses.
The activities and operations of the Bank are also subject to various federal and state laws and regulations.

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ITEM 1A. RISK FACTORS
Item 1A. Risk Factors.
An investment in our common stock is subject to risks inherent to our business. The material risks and uncertainties that management believes affect us are described below. Before making an investment decision, you should carefully consider the risks and uncertainties described below, together with all the other information included or incorporated by reference herein. The risks and uncertainties described below are not the only ones facing us. Additional risks and uncertainties that management is not aware of or focused on or that management currently deems immaterial may also impair our business operations. This Annual Report on Form 10-K is qualified in its entirety by these risk factors.
If any of the events described in the risk factors should occur, our financial condition and results of operations could be materially and adversely affected. If this were to happen, the value of our securities could decline significantly, and you could lose all or part of your investment.
CREDIT RISKS
Deterioration in credit quality may adversely affect our earnings.
Our primary source of revenue is interest income derived from loans to individuals, small businesses, and commercial entities. As such, we are exposed to credit risk, which is the risk that borrowers may fail to meet their repayment obligations. Credit losses are inherent in the business of making loans and could have a material adverse effect on our operating results.
The credit quality of our loan portfolio can be influenced by several factors, including changes in economic conditions, the financial health of borrowers, industry-specific risks, and local market conditions. A downturn in the local or national economy could lead to higher unemployment rates, reduced consumer spending, and lower demand for credit, which in turn could increase the risk of loan defaults and charge-offs. Even in stable economic environments, we may experience higher-than-expected loan delinquencies or defaults, which could lead to increased provisions for loan losses and adversely impact our profitability and capital.
To manage the credit risk arising from lending activities, we maintain sound underwriting policies and procedures. We continuously monitor asset quality to determine the appropriateness of valuation allowances.
Credit losses could increase, and the allowance may not be adequate to cover actual loan losses.
We maintain an ACL to reserve for estimated expected credit losses within our loan portfolio. The level of the ACL reflects our evaluation of industry concentrations; specific credit risks; loan loss experience; loan portfolio quality; and economic, political and regulatory conditions. The determination of the appropriate level of the ACL inherently involves a high degree of subjectivity and requires management to make significant estimates related to current and expected future credit risks and trends, all of which may undergo material changes. Although management believes the ACL is appropriate to absorb probable losses within the loan portfolio, this allowance may not be adequate. An increase in the allowance would result in an expense for the period, thereby reducing the amount of reported net income, which may also adversely affect capital.
Concentrations within the loan portfolio may increase exposure to credit losses.
A financial institution’s exposure to risk increases if a disproportionate amount of the loan portfolio is extended to a single borrower, specific industry sector, or geographic area. A downturn in the economy, natural disaster, or industry-specific stressor may have a larger impact on the financial health of those borrowers, and in turn, the financial institution.
The Bank’s loan portfolio consists of consumer, commercial, and agricultural loans. While our risk management framework includes robust underwriting standards, diversified lending practices, and monitoring of concentration risk within the portfolio, unforeseen economic shocks or industry-specific downturns could still lead to higher-than-expected loan losses, charge-offs, and impairments to collateral.
INTEREST RATE AND LIQUIDITY RISKS
Changes in interest rates may reduce our net interest income.
As a financial institution, our earnings and cash flows are largely dependent upon our ability to generate net interest income. Interest rate risk results from the timing differences in the maturity or repricing frequency of a financial institution’s interest earning assets, such as loans and securities, and its interest-bearing liabilities, such as deposits and borrowed funds.
Interest rates are highly sensitive to many factors that are beyond our control, including general economic conditions, changes in monetary policy, demand for loans, securities and deposits, and policies of various governmental and regulatory agencies. We monitor the potential effects of changes in interest rates through simulations and gap analyses. To help mitigate the effects of changes in interest rates, we make significant efforts to stagger projected cash flows and maturities of interest sensitive assets and liabilities.
The value of our investment securities portfolio may be negatively impacted by fluctuations in the market, including credit deterioration of the issuers of individual securities.
A volatile interest rate environment, illiquid market, or decline in credit quality could require us to recognize a credit-related impairment to the investment securities held in our portfolio. We consider many factors in determining whether a credit-related impairment exists including the length of time and extent to which fair value has been less than cost, the investment credit rating, and the probability that the issuer will be unable to pay the amount when due. While we do not intend to sell a security in an unrealized loss position or before recovery of its cost basis, the presence of these risk factors could lead to impairment charges.
We are subject to liquidity risk in our operations, which could adversely impact our ability to fund various obligations.
Liquidity risk is the risk to earnings or capital arising from our inability to meet obligations, such as deposit withdrawals, loan disbursements, and other operating costs, when they come due without incurring unacceptable and significant costs. Liquidity risk includes the inability to manage unplanned changes in funding sources, or failure to address changes in market conditions that affect the ability to liquidate assets quickly and with minimal loss in value. Retail deposits, cash, and unencumbered AFS securities are our primary sources of liquidity, supplemented by alternative and wholesale funding sources. Our ability to manage liquidity will be hindered if we are unable to maintain access to funding or if adequate financing is not available to accommodate future growth at acceptable costs. In addition, if we rely too heavily on more expensive funding sources to support future growth, our operating margins and profitability would be adversely affected.
Minimum capital requirements may adversely affect our ability to pay cash dividends, reduce our profitability, or otherwise adversely affect our business, financial condition or results of operations.
As a banking organization, our capital and liquidity are subject to regulation and supervision by banking regulators. We are required to maintain minimum levels of capital. The need to maintain capital and liquidity could result in our being required to increase our regulatory capital, restrict our lending capacity, and may dilute shareholder value or limit our ability to pay dividends or otherwise return capital to our investors through stock repurchases.
Our access to funds from subsidiaries may be restricted.
The Corporation is a separate and distinct legal entity from the Bank and its non-banking subsidiaries. The Corporation depends on dividends, distributions and other payments from its banking and non-banking subsidiaries to fund dividend payments on its common stock, debt service of subordinated borrowings, fund stock repurchase program and to fund strategic initiatives or other obligations. The Corporation’s subsidiaries are subject to laws that authorize regulatory bodies to block or reduce the flow of funds from those subsidiaries to the Corporation based on assertion that certain payments from subsidiaries are considered an unsafe or unsound practice, which could impede our access to funds that we may need to make payments on our obligations or dividend payments, if and when declared from time to time by our board of directors in its sole discretion out of funds legally available for that purpose.
Earnings may not grow if we are unable to successfully attract core deposits and lending opportunities and execute opportunities to generate fee-based income.
Historically, our loan and deposit growth has been the principal factor in our increase in net-interest income. If we are unable to execute our business strategy of continued growth in loans and deposits, our earnings could be adversely impacted. The Corporation’s ability to continue to grow depends, in part, upon our ability to expand our market share, to successfully attract core deposits and identify loan and investment opportunities, as well as opportunities to generate fee-based income. Our ability
to manage growth successfully will also depend on whether we can continue to efficiently fund asset growth and maintain asset quality and cost controls, as well as on factors beyond our control, such as economic conditions and interest-rate trends.
Wholesale funding sources may prove insufficient to replace deposits, support operations and future growth.
We must maintain sufficient funds to respond to the needs of customers. To manage liquidity, we use several funding sources in addition to core deposit growth, loan repayments and maturities of loans and securities. These sources include FHLB and FRB advances, proceeds from the sale of securities and loans and liquidity resources at the holding company. Our ability to manage liquidity will be severely constrained if unable to maintain access to funding or if adequate financing is not available to accommodate future growth at acceptable costs. In addition, if we need to rely heavily on more expensive funding sources to support future growth, revenues may not increase proportionately to cover costs. In this case, our operating margins and profitability would be adversely affected.
Loss of deposits or a change in deposit mix could increase our cost of funding.
Deposits are a lower cost and stable source of funding. We compete with banks and other financial institutions for deposits. Funding costs may increase if deposits are lost and we are forced to replace them with more expensive sources of funding, if customers shift their deposits into higher cost products or if we need to raise interest rates to avoid losing deposits. Higher funding costs reduce our net interest income, net interest margin, and net income.
Prepayments of loans may negatively impact our business as customers may prepay the principal amount of their outstanding loans at any time.
The speeds at which such prepayments occur, as well as the size of such prepayments, are within the customers’ discretion. Fluctuations in interest rates, in certain circumstances, may also lead to high levels of loan prepayments, which may also have an adverse impact on net interest income. If customers prepay the principal amount of their loans, and we are unable to lend those funds to other borrowers or invest the funds at the same or higher interest rates, interest income will be reduced. A significant reduction in interest income could have a negative impact on our results of operations and financial condition.
Secondary mortgage market conditions may adversely affect our financial condition and earnings.
The secondary mortgage markets are impacted by interest rates and investor demand for residential mortgage loans and increased investor yield requirements for these loans. These conditions may fluctuate in the future. As a result, a prolonged period of secondary market illiquidity may reduce our loan production volumes, change loan portfolio composition, and reduce operating results. Secondary markets are affected by Fannie Mae, Freddie Mac, and Ginny Mae for loan purchases that meet their conforming loan requirements. These agencies could limit purchases of conforming loans due to capital constraints, changes in conforming loan criteria or other factors. Proposals to reform mortgage finance could affect the role of these agencies and the market for conforming loans.
OPERATIONAL AND REPUTATIONAL RISKS
Operational risks could lead to financial loss, litigation, and reputation risk.
Like most financial institutions, we are exposed to many types of operational risk. Operational risk is the risk of loss resulting from failed or inadequate internal processes, people, and systems or from external events. Errors or lapses in internal controls could result in financial loss, regulatory violations, or reputational damage. Our dependence upon automated systems may further increase the risk that system errors will result in losses that are difficult to detect. Operational risks may also arise from employee misconduct, including fraud or theft. These factors may lead to reputation risk and transaction risk.
Reputation risk is managed by developing and retaining marketplace confidence in handling customers’ financial transactions in an appropriate manner and protecting our safety and soundness. Transaction risk includes losses from fraud, error, the inability to deliver products or services, and loss or theft of information. Transaction risk also encompasses product development and delivery, transaction processing, information technology systems, and the Corporation’s internal control environment.
To minimize potential losses due to operational risks, we have established a robust system of internal controls that are regularly tested by our internal audit department in conjunction with external audit firms. While we strive to maintain robust internal controls and oversight, there is no guarantee that operational failures will be entirely avoided.
Unauthorized disclosure of sensitive or confidential client or customer information, whether through cyber-attacks, breach of computer systems or other means could severely harm the Company’s business.
See Item 1C. Cybersecurity.
Our operations rely on external vendors.
We rely upon certain external vendors for our daily operations, some of which provide critical functions. If one of these vendors fails to perform in accordance with their established performance standards or encounters financial, regulatory, or strategic issues, it could disrupt our operations and/or expose us to liability. While we have a formal vendor management program to assist in vendor selection and ongoing performance monitoring, the failure of a vendor to perform in accordance with contractual agreements could have a material adverse effect on our financial condition and results of operations.
The Bank may experience losses related to fraud or theft.
Reported fraud continues to increase on local, state, and national levels. The increased use of the internet and mobile devices to conduct financial and other everyday transactions, coupled with the increased sophistication and activities of criminals, increases the Bank’s security risks. Criminals are using social engineering and phishing attacks for identity theft and account takeover. ATM/debit card, check, real-time payment, and wire fraud are just a few examples of the channels used by criminals to steal money. While the Bank continues to invest in fraud prevention tactics and tools, along with educating the public about common scams, the losses from fraud and theft cannot be eliminated entirely.
The Bank’s framework for managing risk may not be effective in mitigating its risk and loss.
The Bank’s risk management framework seeks to mitigate risk and loss by ensuring a culture of risk management is integrated throughout the Bank’s operational processes, strategic planning, and business lines. The Bank has established policies and procedures intended to identify, measure, monitor, report and manage risk. This includes oversight of compliance, credit, legal, liquidity, market, operational, strategic, reputational, and wealth risk. If our risk management framework proves ineffective, we could incur losses, regulatory penalties, and reputational damage that may affect our financial condition or results of operations.
Impairment of goodwill could result in a negative impact on our results of operations.
Under current accounting standards, goodwill is not amortized but, instead, is subject to impairment tests on at least an annual basis or more frequently if an event occurs or circumstances change that reduce the fair value of a reporting unit below its carrying amount. A decline in our stock price or the occurrence of a triggering event following any of our quarterly earnings releases and prior to the filing of the periodic report for that period could, under certain circumstances, require performance of a goodwill impairment test and result in an impairment charge being recorded for that period which was not reflected in such earnings release. During 2024, our annual impairment test conducted in October, using discounted cash flows and market-based approaches, indicated that the estimated fair value of our sole reporting unit “Isabella Bank” exceeded the carrying value. In a future assessment, we could conclude that all or a portion of our goodwill is impaired, which would result in a non-cash charge to earnings.
STRATEGY AND EXTERNAL RISKS
Deterioration in national, state and local economic conditions may adversely affect our financial performance.
The results of operations for financial institutions, including our Bank, may be adversely affected by changes in local, state, and national economic conditions. We provide banking and financial services to individuals and businesses located primarily in the Bay, Clare, Gratiot, Isabella, Mecosta, Midland, Montcalm, and Saginaw counties in Michigan. The local economic conditions in these areas have a significant impact on the demand for our products and services, as well as the ability of our customers to repay loans, the value of the collateral securing loans, and the stability of our deposit funding sources. A significant decline in general economic conditions, caused by inflation, recession, acts of terrorism, international or domestic occurrences, a health crisis, unemployment, changes in securities markets or other factors could impact these local economic conditions and, in turn, could have a material adverse effect on our financial condition and results of operations.
An economic downturn in the state, national, or global markets, could also negatively impact our financial condition and results of our operations. Broader economic and geopolitical developments, including global trade tensions, political instability, and natural disasters, can create volatility in financial markets and affect the economic outlook. A significant decline in U.S. GDP, rising inflation, or prolonged high unemployment rates could reduce demand for loans, increase credit risk, and reduce consumer confidence. Geopolitical events, such as trade wars or foreign conflicts, can disrupt markets and introduce volatility, which may indirectly affect our operations by influencing local economic conditions, interest rates, and the availability of capital.
We continually monitor key economic indicators to anticipate the possible effects of downturns in the local, regional, and national economies.
Monetary policy and economic environment could impact our financial performance.
Our earnings are significantly affected by the monetary and fiscal policies of governmental authorities, including the FRB. Among the instruments of monetary policy used by the FRB to implement these objectives are open-market operations in U.S. Government securities and federal funds, changes in the discount rate on member bank borrowings, and changes in reserve requirements against member bank deposits. These instruments of monetary policy are used in varying combinations to influence the overall level of bank loans, investments, and deposits, and the interest rates charged on loans and paid for deposits.
The FRB frequently uses these instruments of monetary policy, especially its open-market operations and the discount rate, to influence the level of interest rates, thereby affecting the strength of the economy, the level of inflation, or the price of the dollar in foreign exchange markets. The monetary policies of the FRB have had a significant effect on the operating results of banking institutions in the past and are expected to continue to do so in the future. It is not possible to predict the nature of future changes in monetary and fiscal policies, or the effect which they may have on our business and earnings.
Wealth management business line could create risks associated with the industry.
Our wealth management operations present special risks not borne by institutions that focus exclusively on other traditional retail and commercial banking products. For example, the investment advisory industry is subject to fluctuations in the stock market and interest rate volatility that may have a significant adverse effect on transaction fees, client activity and client investment portfolio gains and losses. Also, additional or modified regulations may adversely affect our wealth management operations. In addition, our wealth management operations are dependent on our financial advisors, whose departure could result in the loss of a significant number of client accounts. A significant decline in fees and commissions or trading losses suffered in the investment portfolio could adversely affect our income and potentially require the contribution of additional capital to support our operations.
Strong competition within our markets may significantly impact profitability.
We compete with an ever-increasing array of financial service providers. See the section entitled “General” in Item 1. Business for additional competitor information. Competition from nationwide banks, as well as local institutions, continues to mount in our markets. To compete, we focus on quality customer service, making decisions at the local level, maintaining long-term customer relationships, building customer loyalty, and providing products and services designed to address the specific needs of customers. Failure to perform in any of these areas could significantly weaken our competitive position, which could adversely affect growth and profitability.
Market changes may adversely affect demand for our services and impact revenue, costs, and earnings.
Channels for servicing our customers are evolving rapidly, with less reliance on traditional branch facilities, increased use of e-commerce channels, and demand for relationship managers who can service multiple product lines. We have an ongoing process for evaluating the profitability of our branch system and other office and operational facilities. The identification of unprofitable operations and facilities can lead to restructuring charges and introduce the risk of disruptions to revenues and customer relationships. We compete with larger financial institutions who are rapidly evolving their service channels and escalating the costs of the service process.
The soundness of other financial institutions could adversely affect us.
Our ability to engage in routine funding transactions could be adversely affected by the actions and commercial soundness of other financial institutions. Financial services institutions are interrelated because of trading, clearing, counterparties and other relationships. Further, when volatility, market events or similar issues affect a subset of financial institutions, or when there are news reports or high-profile incidents relating to trends, concerns, and other issues in the banking industry, the ramifications can affect the sector, regardless of the effect, or lack thereof, on any specific institution. We have exposure to different industries and counterparties through transactions with counterparties in the bank and non-bank financial services industries, including brokers and dealers, commercial banks, investment banks and other institutional clients. As a result, defaults by, or even rumors or questions about, one or more bank or non-bank financial services companies, or the bank or non-bank financial services industries generally, have led to market-wide liquidity problems and could lead to losses or defaults by us or by other institutions. Future events of this nature could have an adverse effect on our business, financial condition and results of operations.
Expansion, growth, and acquisitions could negatively impact earnings if not successful.
We may grow organically both by geographic expansion and through business line expansion, as well as through acquisitions. Success of these activities depends on our ability to continue to maintain and develop an infrastructure appropriate to support
and integrate such growth. Success may also depend on acceptance of the Bank by customers in these new markets and, in the case of expansion through acquisitions, these factors include the long-term recruitment and retention of key personnel and acquired customer relationships. Profitability depends on whether the marginal revenue generated in the new markets will offset the increased expenses of operating a larger entity, with more staff, more locations, and more product offerings. Failure to achieve any of these success factors may have a negative impact on our financial condition and results of operations.
We may be adversely affected by continuous technological change.
The financial services industry is undergoing rapid technological change which includes the frequent introduction of new technology-driven products and services. The effective use of technology increases efficiency and enables financial institutions to better serve customers. Our future success depends, in part, upon our ability to address the needs of customers by using technology to provide products and services that will satisfy customer demands, as well as to create additional operational efficiencies.
The introduction of new products and services can entail significant time and resources. Our failure to manage risks and uncertainties associated with new products and services exposes us to enhanced risk of operational lapses which may result in the recognition of financial statement liabilities. Regulatory and internal control requirements, capital requirements, competitive alternatives, vendor relationships and shifting market preferences may also determine if such initiatives can be brought to market in a manner that is timely and attractive to our customers. Products and services relying on internet and mobile technologies may expose us to fraud and cybersecurity risks. Failure to successfully manage these risks in the development and implementation of new products or services could have a material adverse effect on our business and reputation.
LEGAL, REGULATORY AND COMPLIANCE RISKS
We are subject to extensive government regulation and supervision, and any regulatory changes may adversely affect us.
As a federally insured financial institution, we are subject to regulation and oversight by various regulatory bodies including the FDIC, DIFS, FRB, SEC, and the CFPB. Federal and state laws and regulations are designed primarily to protect the deposit insurance fund, consumers, and the stability of the U.S. financial system, and not necessarily our shareholders. If we do not appropriately comply with regulations, the Bank may be subject to fines, penalties or judgements, or material regulatory restrictions in its business.
The nature, extent, and timing of the adoption of significant new laws, changes in existing laws, or repeal of existing laws may have a material impact on our business, results of operations, and financial condition, the effect of which is impossible to predict in advance.
The Bank has a formal Compliance Risk Management Program in place to mitigate the risk of noncompliance with laws, regulations, or rulings. However, changes or stricter enforcement of these laws could lead to higher compliance costs or require adjustments to our business practices, which may affect profitability. Regulatory authorities have extensive discretion in connection with their supervisory and enforcement activities. This includes the imposition of restrictions on the operations of an institution, the classification of assets by the institution, and the appropriateness of an institution’s allowance for credit losses. Future regulatory changes or accounting pronouncements may also increase our regulatory capital requirements or adversely affect our regulatory capital levels.
Legal and regulatory proceedings could adversely affect us or the financial services industry in general.
We may be subject to various legal and regulatory proceedings in the future. Actions by regulatory agencies or significant litigation against us could require significant time and resources to respond to those actions and may lead to penalties. Whether the claims and legal action related to our performance are founded or unfounded, if such claims and legal actions are not resolved in a manner favorable to us, they may result in significant liability, adversely affect reputation, and reduce demand for our products and services. Any financial liability or reputational damage could have a material adverse effect on our business, financial condition and results of operations.
Societal responses to climate change could adversely affect the Bank’s business and performance, including indirectly through impacts on the Bank’s customers.
Concerns over the long-term impacts of climate change have led and may continue to lead to governmental efforts around the world to mitigate those impacts. Consumers and businesses also may change their behavior on their own because of these concerns. The Bank and its customers will need to respond to new laws and regulations, as well as consumer and business preferences resulting from climate change concerns. The Bank and its customers may face cost increases, asset value reductions, operating process changes, among other impacts. The impact on our customers will likely vary depending on their
specific attributes, including reliance on our role in carbon intensive activities that may be negatively affected by economic transition towards a lower-carbon economy. The Bank could experience a drop in demand for its products and services, particularly in certain sectors. In addition, the Bank could face reductions in creditworthiness on the part of some customers or in the value of assets securing loans. The Bank’s efforts to take these risks into account in making lending and other decisions, including by increasing business relationships with climate-resilient companies, may not be effective in protecting use from the negative impact of new laws and regulations or changes in consumer or business behavior.
Pandemics, severe weather, natural disasters, acts of war or terrorism, and other external events could significantly impact our business and the business of our customers.
Pandemics, severe weather, natural disasters, acts of war or terrorism, and other adverse external events could have a significant impact on our ability to conduct business. Such events could affect the stability of borrowers to repay outstanding loans, impair the value of collateral securing loans, cause significant property damage, result in loss of revenue and/or cause us to incur additional expenses. Such events may have a particularly negative impact upon the business of customers who are engaged in the hospitality industry in our markets, which could have a direct negative impact on our business and results of operations. Further, work-from-home and other modified business practices may introduce additional operational risks, including cybersecurity and execution risks, which may result in inefficiencies or delays, and may affect our ability to, or the way we conduct our business activities.We have developed and tested disaster recovery plans for all significant aspects of our operations to minimize disruption.
GENERAL RISK FACTORS
Changes in accounting policies or in accounting standards could materially affect our results of operations, and financial condition.
Accounting policies are fundamental to understanding our results of operations, and financial condition. Some of the accounting policies are critical because they require us to make difficult, subjective and complex judgments about matters that are inherently uncertain and because it is likely that materially different amounts would be reported under different conditions or using different assumptions. We may experience material losses if such estimates or assumptions underlying in our financial statements are incorrect.
From time to time, the FASB and the SEC change the financial accounting and reporting standards or the interpretation of those standards that govern the preparation of our external financial statements. These changes could materially impact how we report our results of operations and financial condition. New or revised standards could also require retroactive application, which could result in the restatement of our prior period financial statements in material amounts.
Internal controls may become ineffective in preventing or detecting material errors.
We regularly review and update our internal controls, disclosure controls and procedures, and corporate governance policies and procedures. Any system of controls, however well designed and operated, is based in part on certain assumptions and can provide only reasonable, not absolute, assurances that the objectives of the controls are met. Any failure or circumvention of our controls and procedures or failure to comply with regulations related to controls and procedures could have a material adverse effect on our business, results of operations, and financial condition.
We may be unable to attract and retain key personnel.
Our success depends, in large part, on our ability to attract and retain key personnel. Competition for qualified personnel in the financial services industry can be intense, and we may not be able to hire or retain the key personnel. The unexpected loss of key personnel could have an adverse impact on our business because of their skills, knowledge of the markets in which we operate, years of industry experience and the difficulty of promptly finding a qualified replacement.
Although publicly traded, our common stock has substantially less liquidity than stocks listed on NYSE, NYSE American and NASDAQ exchanges.
Our common stock is traded on the OTC market under the symbol “ISBA.” The development and maintenance of an active public trading market depends upon the existence of willing buyers and sellers, the presence of which is beyond our control. While we are a publicly traded company, the volume of trading activity in our stock is still relatively limited. Even if a more active market develops, there can be no assurance that such a market will continue, or that our shareholders will be able to sell their shares at or above the price at which they acquired shares.

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ITEM 1B. UNRESOLVED STAFF COMMENTS
Item 1B. Unresolved Staff Comments.
None.

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ITEM 2. PROPERTIES
Item 2. Properties.
Our executive offices are located at 401 North Main Street in Mount Pleasant, Michigan. In addition to this location, we own 29 branches, two operations centers, and vacant land. We also lease property in Saginaw, Michigan which serves as a full-service branch and Bay City, Michigan which serves as a loan and wealth office. We continually monitor and assess the need for expansion and/or improvement of all facilities. In our opinion, each facility has sufficient capacity and is in good condition.

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ITEM 3. LEGAL PROCEEDINGS
Item 3. Legal Proceedings.
We are not involved in any material legal proceedings. While we are involved in ordinary, routine litigation incidental to our business, no such routine proceedings are expected to result in any material adverse effect on our consolidated operations, earnings, financial condition, or cash flows.

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ITEM 4. MINE SAFETY DISCLOSURE
Item 4. Mine Safety Disclosures.
Not applicable.
PART II

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ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY
Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities.
(Dollars in thousands except per share amounts)
Common Stock and Dividend Information
Our authorized common stock consists of 15,000,000 shares, of which 7,424,893 shares are issued and outstanding as of December 31, 2024. As of that date, there were 2,590 shareholders of record.
Our common stock is traded in the over-the-counter market. Our common stock is quoted on the OTCQX market tier of the OTC Markets Group Inc.’s ("OTC Markets") electronic quotation system (www.otcmarkets.com) under the symbol “ISBA”. Other trades in our common stock occur in privately negotiated transactions from time to time for which we may have little or no information.
We have reviewed the information available as to the range of reported high and low transactions as reported by OTC Markets. The following table sets forth our compilation of that information for the periods indicated. Price information obtained from OTC Markets reflects inter-dealer prices, without retail mark up, mark down, or commissions and may not necessarily represent actual transactions. The following compiled data is provided for information purposes only and should not be viewed as indicative of the actual or market value of our common stock.
Number of
Common Shares Sale Price
Low High
First Quarter 159,934 $ 18.25 $ 21.74
Second Quarter 141,728 17.75 19.85
Third Quarter 166,932 17.55 22.00
Fourth Quarter 161,772 20.10 26.23
Total 630,366
First Quarter 131,476 $ 22.08 $ 25.10
Second Quarter 123,123 19.13 26.00
Third Quarter 128,216 19.61 23.00
Fourth Quarter 111,755 19.75 22.00
Total 494,570
The following table sets forth the cash dividends paid for the quarters indicated:
Per Share
2024 2023
First Quarter $ 0.28 $ 0.28
Second Quarter 0.28 0.28
Third Quarter 0.28 0.28
Fourth Quarter 0.28 0.28
Total $ 1.12 $ 1.12
We have adopted and publicly announced a common stock repurchase plan. The plan was last amended on April 28, 2021, to allow for the repurchase of an additional 500,000 shares of common stock after that date. These authorizations do not have expiration dates. As shares are repurchased under this plan, they are retired with the status of authorized, but unissued, shares.
The following table provides information for the unaudited three-month period ended December 31, 2024, with respect to our common stock repurchase plan:
Common Shares Repurchased Total Number of Common Shares Purchased as Part of Publicly Announced Plan or Program Maximum Number of Common Shares That May Yet Be Purchased Under the Plans or Programs
Number Average Price
Per Common Share
Balance, September 30 145,837
October 1 - 31 9,135 $ 21.67 9,135 136,702
November 1 - 30 9,778 24.34 9,778 126,924
December 1 - 31 8,695 25.42 8,695 118,229
Balance, December 31 27,608 $ 23.80 27,608 118,229
Information concerning securities authorized for issuance under equity compensation plans appears under Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters.

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ITEM 6. SELECTED FINANCIAL DATA
Item 6. [Reserved]

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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.
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
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.
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
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.
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
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)
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.
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.
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 %
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
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
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.
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) Includes 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.
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.
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.
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

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ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
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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ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Item 8. Financial Statements and Supplementary Data.
The following consolidated financial statements accompanied by the report of our independent registered public accounting firm are set forth beginning on the following page of this report:
Report of Independent Registered Public Accounting Firm, Rehmann Robson LLC (PCAOB ID: 263)
Consolidated Balance Sheets
Consolidated Statements of Income
Consolidated Statements of Comprehensive Income (Loss)
Consolidated Statements of Changes in Shareholders’ Equity
Consolidated Statements of Cash Flows
Notes to Consolidated Financial Statements
Supplementary data regarding results of operations is included in Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations.
Report of Independent Registered Public Accounting Firm
Shareholders and Board of Directors
Isabella Bank Corporation (the "Corporation")
Mount Pleasant, Michigan
Opinion on the Financial Statements and Internal Control over Financial Reporting
We have audited the accompanying consolidated balance sheets of Isabella Bank Corporation as of December 31, 2024 and 2023, and the related consolidated statements of changes in shareholders’ equity, income, comprehensive income, and cash flows for each of the years in the three-year period ended December 31, 2024, and the related notes (collectively referred to as the financial statements). We also have audited Isabella Bank Corporation’s internal control over financial reporting as of December 31, 2024, based on criteria established in the Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework) (the COSO criteria).
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of Isabella Bank Corporation as of December 31, 2024 and 2023, and the consolidated results of their operations and their cash flows for each of the years in the three-year period ended December 31, 2024, in conformity with accounting principles generally accepted in the United States of America. Also, in our opinion Isabella Bank Corporation maintained, in all material respects, effective internal control over financial reporting as of December 31, 2024, based on the COSO criteria.
Basis for Opinions
Isabella Bank Corporation’s management is responsible for these consolidated financial statements, for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management’s Report on Internal Control over Financial Reporting. Our responsibility is to express opinions on Isabella Bank Corporation’s consolidated financial statements and on Isabella Bank Corporation’s internal control over financial reporting based on our integrated audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (“PCAOB”) and are required to be independent with respect to Isabella Bank Corporation in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud, and whether effective internal control over financial reporting was maintained in all material respects.
Our audits of the consolidated financial statements included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material misstatement exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. We believe that our audits provide a reasonable basis for our opinions.
Definition and Limitations of Internal Control over Financial Reporting
A corporation’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of consolidated financial statements for external purposes in accordance with generally accepted accounting principles. A corporation’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the corporation; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of consolidated financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the corporation are being made only in accordance with authorizations of management and directors of the corporation; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the Corporation’s assets that could have a material effect on the consolidated financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
One Critical Audit Matter
The critical audit matter communicated below is a matter arising from the current period audit of the financial statements that was communicated or requires to be communicated to the audit committee and that: (1) relates to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective or complex judgments. The communication of the critical audit matter does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the account or disclosures to which it relates.
Allowance for Credit Losses
Description of the Matter
The Corporation’s loan portfolio totaled $1.4 billion as of December 31, 2024 and the associated allowance for credit losses on loans was $12.9 million at that date. The Corporation’s unfunded loan commitments totaled $341.3 million, with an associated allowance for credit loss of $512 thousand. Together these amounts represent the allowances for credit losses (“ACL”). As described in Notes 1 and 3 to the consolidated financial statements, in the cases of loans, the allowance for credit losses is a contra-asset valuation account, calculated in accordance with ASC 326 that is deducted from the amortized cost basis of loans to present the net amount expected to be collected. As described in Notes 1 and 14 to the consolidated financial statements, in the case of unfunded loan commitments, the allowance for credit losses is a liability account, calculated in accordance with ASC 326, reported as a component of other liabilities. The amount of each allowance account represented management’s best estimate of current expected credit losses on these financial instruments considering all available information, from internal and external sources, relevant to assessing exposure to credit loss over the contractual term of the instrument. In calculating the allowance for credit losses, most loans were segmented into pools based upon similar characteristics and risk profiles. For each loan pool, management measured expected credit losses over the life of each loan utilizing a model which measured probability of default (“PD”), probability of attrition (“PA”), loss given default (“LGD”), and exposure at default (“EAD”). Expected credit losses were calculated as the product of PD (adjusted for attrition), LGD, and EAD. PD and PA were estimated by analyzing internally sourced data related to historical performance of each loan pool over an economic cycle. PD and PA were adjusted to reflect the current impact of certain macroeconomic variables as well as their expected changes over a reasonable and supportable forecast period. After the reasonable and supportable forecast period, the forecasted macroeconomic variables were reverted to their historical mean utilizing a rational, systematic basis. The LGD was based on historical recovery averages for each loan pool, adjusted to reflect the current impact of certain macroeconomic variables as well as their expected changes over the reasonable and supportable forecast period. EAD was estimated using a linear regression model that estimates the average percentage of the loan balance that remains at the time of default. In some cases, management determined that an individual loan exhibited unique risk characteristics which differentiated the loan from other loans with the identified loan pools. In such cases the loans were evaluated for expected credit losses on an individual basis and excluded from the collective evaluation. Management qualitatively adjusted model results for risk factors that were not considered within the modeling processes but were nonetheless relevant in assessing the expected credit losses within the loan pools. These qualitative factor adjustments modified management’s estimate of expected credit losses by a calculated percentage or amount based upon the estimated level of risk.
Auditing management’s estimate of the ACL involved a high degree of subjectivity due to the nature of the qualitative factor adjustments included in the allowances for credit losses and complexity due to the implementation of the PD, PA, LGD, and EAD models (the “Models”). Management’s identification and measurement of the qualitative factor adjustments is highly judgmental and could have a significant effect on the ACL.
How We Addressed the Matter in Our Integrated Audit
We obtained an understanding of the Corporation’s process for establishing the ACL, including the implementation of Models and the qualitative factor adjustments of the ACL. We evaluated the design and tested the operating effectiveness of related controls over the reliability and accuracy of data used to calculate and estimate the various components of the ACL, the accuracy of the calculation of the ACL, management’s review and approval of methodologies used to establish the ACL, validation procedures over the Models, analysis of changes in various components of the ACL relative to changes in the Corporation’s loan portfolio and economy and evaluation of the overall reasonableness and appropriateness of the ACL. In doing so, we tested the operating effectiveness of review and approval controls in the Corporation’s governance process designed to identify and assess the qualitative factor adjustments which is meant to measure expected credit losses associated with factors not captured fully in the other components of the ACL.
To test the reasonableness of the qualitative factor adjustments, we performed audit procedures that included, among others testing the appropriateness of the methodologies used by the Corporation to estimate the ACL, testing the completeness and accuracy of data and information used by the Corporation in estimating the components of the ACL, assessing the reasonableness of the Models, evaluating the appropriateness of assumptions used in estimating the qualitative factor adjustments, analyzing the changes in assumptions and various components of the ACL relative to changes in the Corporation’s loan portfolio and the economy and evaluating the appropriateness and level of the qualitative factor adjustments. For example, we evaluated the appropriateness of the design and operation of the model, analyzed the changes, assumptions and modifications made to the qualitative factor adjustments, and evaluated the appropriateness and completeness of risk factors used in determining the amount of the qualitative factor adjustments. We also evaluated the data and information utilized by management to estimate the qualitative factor adjustments by independently obtaining internal and external data and information to assess the appropriateness of the data and information used by management and to consider the existence of new and potentially contradictory information used. In addition, we evaluated the overall ACL amounts, inclusive of the adjustments for the qualitative factor adjustments, and whether the amount appropriately reflects losses expected in the loan portfolio as of the consolidated balance sheet date by comparing the overall ACL to those established by similar banking institutions with similar loan portfolios. We also reviewed subsequent events and transactions and considered whether such information serves to corroborate or contradict the Corporation’s conclusion.
/s/Rehmann Robson LLC
Rehmann Robson LLC
We have served as Isabella Bank Corporation's independent auditor since 1996.
Saginaw, Michigan
March 12, 2025
CONSOLIDATED BALANCE SHEETS
(Dollars in thousands)
December 31
2024 2023
ASSETS
Cash and demand deposits due from banks $ 22,830 $ 25,628
Fed Funds sold and interest bearing balances due from banks 1,712 8,044
Total cash and cash equivalents 24,542 33,672
AFS securities, at fair value 489,029 528,148
FHLB stock 12,762 12,762
Mortgage loans HFS 242 -
Loans 1,423,571 1,349,463
Less allowance for credit losses 12,895 13,108
Net loans 1,410,676 1,336,355
Premises and equipment 27,659 27,639
Cash surrender value of BOLI 34,882 33,892
Goodwill and other intangible assets 48,283 48,284
Other assets 38,166 38,216
Total assets $ 2,086,241 $ 2,058,968
LIABILITIES AND SHAREHOLDERS’ EQUITY
Liabilities
Demand deposits $ 416,373 $ 428,505
Interest bearing demand deposits 341,366 320,737
Savings 601,730 628,079
Certificates of deposit 387,591 346,374
Total deposits 1,747,060 1,723,695
Short-term borrowings 53,567 46,801
FHLB advances 30,000 40,000
Subordinated debt, net of unamortized issuance costs 29,424 29,335
Total borrowed funds 112,991 116,136
Other liabilities 15,914 16,735
Total liabilities 1,875,965 1,856,566
Shareholders’ equity
Common stock - no par value 15,000,000 shares authorized; issued and outstanding 7,424,893 shares in 2024 and 7,485,889 shares in 2023
126,224 127,323
Shares to be issued for deferred compensation obligations 2,383 3,693
Retained earnings 103,024 97,282
Accumulated other comprehensive income (loss) (21,355) (25,896)
Total shareholders’ equity 210,276 202,402
Total liabilities and shareholders' equity $ 2,086,241 $ 2,058,968
The accompanying notes are an integral part of these consolidated financial statements.
CONSOLIDATED STATEMENTS OF INCOME
(Dollars in thousands except per share amounts)
Year Ended December 31
2024 2023 2022
Interest income
Loans $ 77,295 $ 65,670 $ 53,283
AFS securities 11,093 12,156 11,171
FHLB stock 640 355 174
Federal funds sold and other 950 1,450 1,170
Total interest income 89,978 79,631 65,798
Interest expense
Deposits 29,690 18,352 4,021
Short-term borrowings 1,439 961 79
FHLB advances 1,949 1,309 152
Subordinated debt
1,065 1,065 1,065
Total interest expense 34,143 21,687 5,317
Net interest income 55,835 57,944 60,481
Provision for credit losses 1,884 629 483
Net interest income after provision for credit losses 53,951 57,315 59,998
Noninterest income
Service charges and fees 8,626 8,297 8,730
Wealth management fees 4,041 3,557 3,005
Earnings on BOLI 1,007 920 884
Net gain on sale of mortgage loans 213 317 631
Other 689 736 416
Total noninterest income 14,576 13,827 13,666
Noninterest expenses
Compensation and benefits 28,576 25,905 24,887
Occupancy and equipment 10,524 10,297 9,697
Other professional services 2,212 2,340 2,358
ATM and debit card fees 1,975 1,767 1,909
Marketing 1,712 2,074 1,979
FDIC insurance premiums 1,132 922 537
Other losses 1,117 871 546
Memberships and subscriptions 928 1,042 876
Loan underwriting fees 866 927 1,004
Other 3,087 3,165 3,027
Total noninterest expenses 52,129 49,310 46,820
Income before income tax expense 16,398 21,832 26,844
Income tax expense 2,509 3,665 4,606
Net income $ 13,889 $ 18,167 $ 22,238
Earnings per common share
Basic $ 1.86 $ 2.42 $ 2.95
Diluted $ 1.86 $ 2.40 $ 2.91
Cash dividends per common share $ 1.12 $ 1.12 $ 1.09
The accompanying notes are an integral part of these consolidated financial statements.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(Dollars in thousands)
Year Ended December 31
2024 2023 2022
Net income $ 13,889 $ 18,167 $ 22,238
Unrealized gains (losses) on AFS securities
Unrealized gains (losses) during the period 5,339 13,365 (50,015)
Reclassification adjustment for net realized (gains) losses included in net income - (67) -
Comprehensive income (loss) before income tax (expense) benefit 5,339 13,298 (50,015)
Tax effect (1)
(1,098) (2,669) 10,314
Unrealized gains (losses) on AFS securities, net of tax 4,241 10,629 (39,701)
Change in unrecognized pension cost on defined benefit pension plan
Change in unrecognized pension cost during the period 462 752 762
Reclassification adjustment for net periodic benefit cost included in net income (82) 95 59
Net change in unrecognized pension cost 380 847 821
Tax effect (1)
(80) (178) (173)
Change in unrealized pension cost, net of tax 300 669 648
Other comprehensive income (loss), net of tax 4,541 11,298 (39,053)
Comprehensive income (loss) $ 18,430 $ 29,465 $ (16,815)
(1) See “Note 9 - Capital Ratios and Shareholders' Equity” in the accompanying notes to consolidated financial statements for tax effect reconciliation.
The accompanying notes are an integral part of these consolidated financial statements.
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY
(Dollars in thousands except per share amounts)
Common Stock
Common Shares
Outstanding Amount Common Shares to be
Issued for
Deferred
Compensation
Obligations Retained
Earnings Accumulated
Other
Comprehensive
Income (Loss) Totals
Balance, December 31, 2021 7,532,641 $ 129,052 $ 4,545 $ 75,592 $ 1,859 $ 211,048
Comprehensive income (loss) - - - 22,238 (39,053) (16,815)
Issuance of common stock 74,445 1,762 - - - 1,762
Common stock transferred from the Rabbi Trust to satisfy deferred compensation obligations - 3 (3) - - -
Share-based payment awards under the Directors Plan - - 463 - - 463
Share-based compensation expense recognized in earnings under the RSP - 147 - - - 147
Common stock purchased for deferred compensation obligations - (1,189) - - - (1,189)
Common stock repurchased (47,665) (1,124) - - - (1,124)
Cash dividends paid ($1.09 per common share)
- - - (8,082) - (8,082)
Balance, December 31, 2022 7,559,421 128,651 5,005 89,748 (37,194) 186,210
Cumulative effect of accounting change - adoption of ASC 326 - - - (2,417) - (2,417)
Comprehensive income (loss) - - - 18,167 11,298 29,465
Issuance of common stock 75,488 1,617 - - - 1,617
Common stock transferred from the Rabbi Trust to satisfy deferred compensation obligations - 1,841 (1,841) - - -
Share-based payment awards under the Directors Plan - - 529 - - 529
Share-based compensation expense recognized in earnings under the RSP - 253 - - - 253
Common stock purchased for deferred compensation obligations - (1,624) - - - (1,624)
Common stock repurchased (149,020) (3,415) - - - (3,415)
Cash dividends paid ($1.12 per common share)
- - - (8,216) - (8,216)
Balance, December 31, 2023 7,485,889 127,323 3,693 97,282 (25,896) 202,402
Comprehensive income (loss) - - - 13,889 4,541 18,430
Issuance of common stock 75,341 1,523 - - - 1,523
Issuance of common stock for vested shares under the RSP 16,240 - - - - -
Common stock transferred from the Rabbi Trust to satisfy deferred compensation obligations - 1,691 (1,691) - - -
Share-based payment awards under the Directors Plan - - 381 - - 381
Share-based compensation expense recognized in earnings under the RSP - 95 - - - 95
Common stock purchased for deferred compensation obligations - (1,332) - - - (1,332)
Common stock repurchased (152,577) (3,076) - - - (3,076)
Cash dividends paid ($1.12 per common share)
- - - (8,147) - (8,147)
Balance, December 31, 2024 7,424,893 $ 126,224 $ 2,383 $ 103,024 $ (21,355) $ 210,276
The accompanying notes are an integral part of these consolidated financial statements.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in thousands)
Year Ended December 31
2024 2023 2022
Operating activities
Net income $ 13,889 $ 18,167 $ 22,238
Reconciliation of net income to net cash provided by operating activities
Provision for credit losses 1,884 629 483
Depreciation 2,086 1,978 2,071
Net amortization of AFS securities 1,332 1,474 2,018
Net gain on sale of mortgage loans (213) (317) (631)
Change in OMSR valuation allowance 1 - (532)
Increase in cash value of BOLI (990) (904) (818)
Share-based payment awards 476 782 610
Deferred income tax expense (benefit) (310) 1,008 13
Origination of loans HFS (8,768) (9,657) (21,382)
Proceeds from loan sales 8,739 10,353 23,369
Net changes in:
Other assets 1,719 (427) (2,822)
Other liabilities (208) 1,096 2,269
Net cash provided by (used in) operating activities 19,637 24,182 26,886
Investing activities
Proceeds from sales, maturities, calls and prepayments of AFS securities 48,526 75,090 68,956
Purchases of AFS securities (5,400) (10,866) (210,869)
Net change in loans HFI (76,862) (85,783) 36,672
Purchases of premises and equipment (2,106) (4,064) (3,205)
Proceeds from sale of FHLB Stock - - 2,288
Low income housing tax credit investments (2,024) (623) (46)
Net cash provided by (used in) investing activities (37,866) (26,246) (106,204)
Financing activities
Net increase (decrease) in deposits $ 23,365 $ (20,580) $ 33,936
Net increase (decrease) in short-term borrowings 6,766 (10,970) 7,609
Net increase (decrease) in FHLB advances (10,000) 40,000 (20,000)
Cash dividends paid on common stock (8,147) (8,216) (8,082)
Proceeds from issuance of common stock 1,523 1,617 1,762
Common stock repurchased (3,076) (3,415) (1,124)
Common stock purchased for deferred compensation obligations (1,332) (1,624) (1,189)
Net cash provided by (used in) financing activities 9,099 (3,188) 12,912
Increase (decrease) in cash and cash equivalents (9,130) (5,252) (66,406)
Cash and cash equivalents at beginning of period 33,672 38,924 105,330
Cash and cash equivalents at end of period $ 24,542 $ 33,672 $ 38,924
Supplemental cash flows information
Interest paid $ 33,982 $ 21,052 $ 5,313
Income taxes paid 2,060 2,350 4,425
Supplemental noncash information
Investment in low income housing tax credits $ 1,500 $ 5,000 $ -
Transfers of loans to foreclosed assets 657 378 456
The accompanying notes are an integral part of these consolidated financial statements.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands except per share amounts)
Note 1 - Significant Accounting Policies
BASIS OF PRESENTATION AND CONSOLIDATION: The consolidated financial statements include the accounts of Isabella Bank Corporation, a financial services holding company, and its wholly owned subsidiary, Isabella Bank. All intercompany balances and accounts have been eliminated in consolidation. References to “the Corporation”, “Isabella”, “we”, “our”, “us”, and similar terms refer to the consolidated entity consisting of Isabella Bank Corporation and its subsidiary. References to Isabella Bank or “the Bank” refers to Isabella Bank Corporation’s subsidiary, Isabella Bank.
For additional information, see “Note 15 - Related Party Transactions.”
NATURE OF OPERATIONS: Isabella Bank Corporation is a financial services holding company offering a wide array of financial products and services in several mid-Michigan counties. Our banking subsidiary, Isabella Bank, offers banking services throughout 31 locations, offering lending and deposit services, trust and investment services, and various insurance related products.
OPERATING SEGMENTS: Segment information is prepared on the same basis that our CEO, who is our Chief Operating Decision Maker (“CODM”), manages our segments, evaluates financial results, and makes key operating decisions. While the CODM monitors the revenue streams of our various products and services, operations are managed, and financial performance is evaluated on a corporate-wide basis. Operating segments are aggregated into one as operating results for all segments are similar. Accordingly, all of the banking related operations are considered by management to be aggregated in one reportable operating segment.
The segment is also distinguished by the level of information provided to the CODM, who uses such information to review performance of various components of the business, which are then aggregated if operating performance, products and services, and geographical regions are similar. The CODM will evaluate the financial performance of our business components by evaluating revenue streams, significant expenses, and budget to actual results in assessing our reportable segment and in the determination of allocating resources. Further, the CODM uses revenue streams to evaluate product pricing and significant expenses to assess performance and evaluate return on assets.
Consolidated net income is used to benchmark results against our competitors. Benchmarking and the monitoring of budget to actual results are used in assessment performance and in establishing compensation. Revenue from banking operations consists primarily of loan and investment interest, deposit related fees, and wealth fees. Interest expense, provision for credit losses, compensation, and occupancy and equipment costs provide the significant expenses in our banking operations. All operations are domestic.
RECLASSIFICATIONS: Certain amounts reported in the 2023 and 2022 consolidated financial statements have been reclassified to conform with the 2024 presentation.
USE OF ESTIMATES: In preparing consolidated financial statements in conformity with accounting principles generally accepted in the United States of America, we make estimates and assumptions that affect the reported amounts of assets and liabilities as of the date of the consolidated balance sheet and reported amounts of revenues and expenses during the reporting year. Actual results could differ from those estimates.
Material estimates that are particularly susceptible to significant change in the near term relate to the determination of the ACL, the fair value of AFS investment securities, and the valuation of goodwill and other intangible assets.
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.
FAIR VALUE MEASUREMENTS: Fair value refers to the price that would be received to sell an asset or paid to transfer a liability (an exit price) in an orderly transaction between market participants in the market in which the reporting entity transacts such sales or transfers based on the assumptions market participants would use when pricing an asset or liability. Assumptions are developed based on prioritizing information within a fair value hierarchy that gives the highest priority to quoted prices in active markets and the lowest priority to unobservable data, such as the reporting entity’s own data. We may choose to measure eligible items at fair value at specified election dates.
For assets and liabilities recorded at fair value, it is our policy to maximize the use of observable inputs and minimize the use of unobservable inputs when developing fair value measurements for those financial instruments for which there is an active
market. In cases where the market for a financial asset or liability is not active, we include appropriate risk adjustments that market participants would make for nonperformance and liquidity risks when developing fair value measurements. Fair value measurements for assets and liabilities for which limited or no observable market data exists are accordingly based primarily upon estimates, are often calculated based on the economic and competitive environment, the characteristics of the asset or liability and other factors. Therefore, the results cannot be determined with precision and may not be realized in an actual sale or immediate settlement of the asset or liability. Additionally, there may be inherent weaknesses in any calculation technique, and changes in the underlying assumptions used, including discount rates and estimates of future cash flows, could significantly affect the results of current or future values.
We utilize fair value measurements to record fair value adjustments to certain assets and liabilities and to determine fair value disclosures. Investment securities AFS are recorded at fair value on a recurring basis. Additionally, from time to time, we may be required to record other assets and liabilities at fair value on a nonrecurring basis, such as mortgage loans AFS, collateral dependent loans, foreclosed assets, OMSR, goodwill, and certain other assets and liabilities. These nonrecurring fair value adjustments typically involve the application of lower of cost or market accounting or write downs of individual assets.
Fair Value Hierarchy
Under fair value measurement and disclosure authoritative guidance, we group assets and liabilities measured at fair value into three levels, based on the markets in which the assets and liabilities are traded, and the reliability of the assumptions used to determine fair value, based on the prioritization of inputs in the valuation techniques. These levels are:
Level 1: Valuation is based upon quoted prices for identical instruments traded in active markets.
Level 2: Valuation is based upon quoted prices for similar instruments in active markets, quoted prices for identical or similar instruments in markets that are not active and model based valuation techniques for which all significant assumptions are observable in the market.
Level 3: Valuation is generated from model based techniques that use at least one significant assumption not observable in the market. These unobservable assumptions reflect estimates of assumptions that market participants would use in pricing the asset or liability.
The asset’s or liability’s fair value measurement level within the fair value hierarchy is based on the lowest level of any input that is significant to the fair value measurement. Valuation techniques maximize the use of observable inputs and minimize the use of unobservable inputs. Transfers between measurement levels are recognized at the end of reporting periods.
For further discussion of fair value considerations, refer to “Note 13 - Fair Value.”
SIGNIFICANT GROUP CONCENTRATIONS OF CREDIT RISK: Most of our activities are conducted with customers located within the central Michigan area. A significant amount of our outstanding loans are secured by commercial and residential real estate. Other than these types of loans, there is no significant concentration to any other industry or any one customer.
CASH AND CASH EQUIVALENTS: For purposes of the consolidated statements of cash flows, cash and cash equivalents include cash and balances due from banks, federal funds sold, and other deposit accounts. Generally, federal funds sold are for a one day period. We maintain deposit accounts in various financial institutions which generally exceed federally insured limits or are not insured. We do not believe we are exposed to any significant interest, credit or other financial risk as a result of these deposits.
AFS SECURITIES: Purchases of investment securities are generally classified as AFS. However, we may elect to classify securities as either held to maturity or trading. Securities classified as AFS debt securities are recorded at fair value, with unrealized gains and losses, net of the effect of deferred income taxes, excluded from earnings and reported in other comprehensive income (loss). Included in AFS securities are auction rate money market preferred securities. These investments, for federal income tax purposes, have no federal income tax impact given the nature of the investments. Auction rate money market preferred securities are recorded at fair value, with unrealized gains and losses excluded from earnings and reported in other comprehensive income (loss). Purchase premiums and discounts are recognized in interest income using the interest method over the term of the securities. Realized gains and losses on the sale of AFS securities are determined using the specific identification method.
ACL - AFS SECURITIES: AFS securities are reviewed quarterly for possible credit impairment. In determining whether a credit-related impairment exists for debt securities, we assess whether: (a) we do not have the intent to sell the security; and (b) it is more likely than not we will not have to sell the security before recovery of its cost basis. If either of these conditions are met, any previously recognized allowances are charged-off and the security's amortized cost is written down to fair value
through income. If these conditions are not met, the security is evaluated to determine whether the decline in fair value has resulted from credit losses or other factors.
In order to determine the amount of the credit loss for a debt security, we calculate the recovery value by performing a discounted cash flow analysis based on the current cash flows and future cash flows we expect to recover. If the present value of cash flows expected to be collected is less than the amortized cost basis, a credit loss exists and an allowance for credit losses is recorded for the credit loss, limited by the amount that the fair value is less than the amortized cost basis. The amount of the impairment related to other risk factors is recognized as a component of other comprehensive income. Adjustments to the allowance are reported in the income statement as a provision for credit losses.
We made an accounting policy election to exclude accrued interest receivable on AFS securities from the estimate of credit losses. Accrued interest receivable on AFS securities was $1,701 and $2,247 at December 31, 2024, and 2023, which is included in other assets. AFS securities are charged-off against the allowance or, in the absence of any allowance, written down through income when deemed uncollectible by management, or when criteria regarding intent or requirement to sell is met.
LOANS: Loans held for investment are reported at amortized cost. Amortized cost is the principal balance outstanding net of the unamortized balance of deferred fees and costs and any unamortized premium or discount on loan purchases or acquired. Interest income on loans is accrued over the term of the loan based on the principal amount outstanding. Loan origination fees and certain direct loan origination costs are capitalized and recognized as a component of interest income over the term of the loan using the appropriate yield methods.
NONPERFORMING LOANS: The accrual of interest on agricultural, commercial and mortgage loans is discontinued at the time the loan is 90 days or more past due unless the credit is well secured and in the process of collection. Consumer loans are typically charged-off no later than 180 days past due. Past due status is based on contractual terms of the loan. In all cases, loans are placed in nonaccrual status or charged-off at an earlier date if collection of principal or interest is considered doubtful. For loans that are placed on nonaccrual status or charged-off, all interest accrued in the current calendar year, but not collected, is reversed against interest income while interest accrued in prior calendar years, but not collected is charged against the ACL. Interest income on loans in nonaccrual status is not recognized until qualifying for return to accrual status. Loans are returned to accrual status when all principal and interest amounts contractually due are brought current and future payments are reasonably assured. For loans not classified as nonaccrual, interest income continues to be accrued over the term of the loan based on the principal amount outstanding.
ACL - LOANS: The ACL is established through a provision for credit losses charged to earnings. Loan losses are charged against the allowance when we believe the uncollectability of the loan balance is confirmed. Subsequent recoveries, if any, are credited to the allowance. We made an accounting policy election to exclude accrued interest receivable on loans from the estimate of credit losses. Accrued interest receivable on loans was $6,384 and $5,920 at December 31, 2024, and 2023, which is included in other assets.
We evaluate the ACL on a regular basis. Our periodic review of the collectability of loans considers historical experience, the nature and volume of the loan portfolio, adverse situations that may affect the borrower’s ability to repay, estimated value of any underlying collateral, prevailing economic conditions, and reasonable and supportable forecasts. This evaluation is inherently subjective as it requires estimates that are susceptible to significant revision as more information becomes available.
The ACL consists of a general component and loans individually analyzed. The general component covers loans not specifically analyzed and is based on historical loss experience, current conditions, and reasonable and supportable forecasts. The general component also includes uncertainties that we believe could affect our estimate of probable losses based on qualitative factors.
Loans in nonaccrual status are individually analyzed on a loan-by-loan basis. Loans evaluated individually are not included in the general, or pooled, component of the ACL. For collateralized loans, the loan's specific allowance is measured by the fair value of the collateral approach. The specific reserve is based on the fair value of the collateral, less costs to sell if foreclosure is probable, and an allowance is established when the collateral value is lower than the carrying value of the loan. When the discounted cash flow method is used to measure the loan's specific allowance, the effective interest rate is used to discount expected cash flows to incorporate expected prepayments. An allowance is established when the discounted cash flows are lower than the carrying value of the loan. For large groups of smaller-balance, homogeneous loans, we may collectively evaluate these loans for measurement of an allowance.
LOAN MODIFICATIONS: A loan modification includes terms outside of normal lending practices to a borrower experiencing financial difficulty. Loans are considered to have been modified when, due to a borrower’s financial difficulties, certain concessions are made to the borrower that would not otherwise consider. Modifications may include interest rate reductions, principal or interest forgiveness, forbearance, and other actions intended to minimize economic loss and to avoid
foreclosure or repossession of collateral. We closely monitor the performance of loans that are modified to borrowers experiencing financial difficulty to understand the effectiveness of our modification efforts.
LOANS HELD FOR SALE: Mortgage loans held for sale on the secondary market are carried at the lower of cost or fair value as determined by aggregating outstanding commitments from investors or current investor yield requirements. Net unrealized losses, if any, would be recognized as a component of other noninterest expenses.
Mortgage loans held for sale are sold with the mortgage servicing rights retained by us. Gains or losses on sales of mortgage loans are recognized based on the difference between the selling price and the carrying value of the related mortgage loans sold.
ACCRUED INTEREST: Accrued interest receivable balances are presented within other assets on the consolidated balance sheet. Accrued interest is excluded from the measurement of the allowance for credit losses, including investments and loans. Generally, accrued interest is reversed when a loan is placed in nonaccrual status or charged off. Current year accrued interest is reversed through interest income while accrued interest from prior years is charged off through the ACL.
TRANSFERS OF FINANCIAL ASSETS: Transfers of financial assets, including mortgage loans and participation loans, are accounted for as sales when control over the assets has been surrendered. Control over transferred assets is determined to be surrendered when 1) the assets have been legally isolated from us, 2) the transferee obtains the right (free of conditions that constrain it from taking advantage of the right) to pledge or exchange the transferred assets, and 3) we do not maintain effective control over the transferred assets through an agreement to repurchase them before their maturity. Other than servicing, we have no substantive continuing involvement related to these loans.
CAPITALIZED MORTGAGE SERVICING RIGHTS: Servicing assets are recognized as separate assets when rights are acquired through purchase or through sale of financial assets. We have no purchased servicing rights. For sales of mortgage loans, a portion of the cost of originating the loan is allocated to the servicing right based on relative fair value. Fair value is based on market prices for comparable mortgage servicing contracts, when available, or alternatively, is based on a valuation model that calculates the present value of estimated future net servicing income. The valuation model incorporates assumptions that market participants would use in estimating future net servicing income, such as the cost to service, the discount rate, the custodial earnings rate, an inflation rate, ancillary income, prepayment speeds and default rates and losses.
Servicing assets are evaluated for impairment based upon the fair value of the rights as compared to amortized cost. Impairment is determined by stratifying rights into tranches based on predominant risk characteristics, such as interest rate, loan type, and investor type. Impairment is recognized through a valuation allowance for an individual tranche, to the extent that fair value is less than the capitalized amount for the tranche. If we later determine that all or a portion of the impairment no longer exists for a particular tranche, a reduction of the valuation allowance may be recorded as an increase to income. Capitalized servicing rights are reported in other assets and are amortized into noninterest income in proportion to, and over the period of, the estimated future net servicing income of the underlying financial assets. The unpaid principal balance of mortgages serviced for others was $231,143 and $248,756 with capitalized servicing rights of $2,185 and $2,422 at December 31, 2024 and 2023, respectively.
Servicing fee income is recorded for fees earned for servicing loans for others. The fees are based on a contractual percentage of the outstanding principal or a fixed amount per loan and are recorded as income when earned. We recorded servicing fee revenue of $588, $630, and $669 related to residential mortgage loans serviced for others during 2024, 2023, and 2022, respectively, which is included in service charges and fees.
FORECLOSED ASSETS: Assets acquired through, or in lieu of, loan foreclosure are held for sale and are initially recorded at the lower of our carrying amount or fair value less estimated selling costs at the date of transfer, establishing a new cost basis. Any write downs based on the asset’s fair value at the date of acquisition are charged to the ACL. After foreclosure, property held for sale is carried at the lower of the new cost basis or fair value less costs to sell. Impairment losses on property to be held and used are measured at the amount by which the carrying amount of property exceeds its fair value. Costs relating to holding these assets are expensed as incurred. We periodically perform valuations and any subsequent write downs are recorded as a charge to operations, if necessary, to reduce the carrying value of a property to the lower of our carrying amount or fair value less costs to sell. Foreclosed assets of $544 and $406 as of December 31, 2024 and 2023, respectively, are included in other assets.
PREMISES AND EQUIPMENT: Land is carried at cost. Buildings and equipment are carried at cost, less accumulated depreciation which is computed principally by the straight-line method based upon the estimated useful lives of the related assets, which range from 3 to 40 years. Major improvements are capitalized and appropriately amortized based upon the useful lives of the related assets or the expected terms of the leases, if shorter, using the straight-line method. Maintenance, repairs and minor alterations are charged to current operations as expenditures occur. We annually review these assets to determine whether carrying values have been impaired.
EQUITY SECURITIES WITHOUT READILY DETERMINABLE FAIR VALUES: We hold equity securities without readily determinable fair values which include our holdings of FHLB stock and FRB stock. Equity securities without readily determinable fair values, with the exception of FHLB stock, are included in other assets. Equity securities without readily determinable fair values consist of the following holdings as of December 31:
2024 2023
FHLB Stock $ 12,762 $ 12,762
FRB Stock 2,400 2,400
Other 686 686
Total $ 15,848 $ 15,848
EQUITY COMPENSATION PLANS: At December 31, 2024, the Directors Plan had 101,493 shares eligible to be issued to participants, for which the Rabbi Trust held 142,535 shares. We had 154,119 shares to be issued at December 31, 2023, with 150,581 shares held in the Rabbi Trust.
Under the RSP, compensation expense for nonvested stock awards is based on the fair value of the award on the measurement date. The fair value of nonvested stock awards is based on the date of the grant and is recognized over the requisite service period. The impact of forfeitures of share-based payment awards on compensation expense is recognized as forfeitures occur.
Compensation costs relating to share-based payment transactions are recognized as the services are rendered, with the cost measured based on the fair value of the equity or liability instruments issued on the grant date (see “Note 8 - Benefit Plans”).
BANK OWNED LIFE INSURANCE: We have purchased life insurance policies on key members of management, partially for the purpose of funding certain post-retirement benefits. In the event of death of one of these individuals, we would receive a specified cash payment equal to the face value of the policy. Such policies are recorded at their cash surrender value, or the amount that can be realized on the balance sheet date. Increases in cash surrender value in excess of single premiums paid are reported as earnings on BOLI policies.
Of the purchased life insurance policies, we hold post retirement benefits with a present value estimated to be $2,687 and $2,515 as of December 31, 2024 and 2023, respectively, which is included in other liabilities. The expenses associated with these policies totaled $172, $173, and $61 for 2024, 2023, and 2022, respectively, which are included in compensation and benefits expense and other noninterest expenses.
ACQUISITION INTANGIBLES AND GOODWILL: We previously acquired branch facilities and related deposits in business combinations accounted for as a purchase. The acquisitions included amounts related to the valuation of customer deposit relationships (core deposit intangibles). Core deposit intangibles arising from acquisitions are included in goodwill and other intangible assets are being amortized over their estimated lives and evaluated for potential impairment on at least an annual basis. Goodwill, which represents the excess of the purchase price over identifiable assets, is not amortized but is evaluated for impairment on at least an annual basis. Acquisition intangibles and goodwill are qualitatively evaluated to determine if it is more likely than not that the carrying balance is impaired. On at least an annual basis we perform a cash flow, trading multiples, and acquisition multiples valuation to determine if the carrying balance is impaired and to what extent goodwill is impaired. This valuation method requires a significant degree of our judgment. In the event the projected undiscounted net operating cash flows for these intangible assets are less than the carrying value, the asset is recorded at fair value as determined by the valuation model.
OFF BALANCE SHEET CREDIT RELATED FINANCIAL INSTRUMENTS: In the ordinary course of business, we have entered into commitments to extend credit, including commitments under credit card arrangements, commercial lines of credit, home equity lines of credit, commercial letters of credit, and standby letters of credit. Such financial instruments are recorded only when funded. In connection with these commitments, we established an allowance for credit losses related to off-balance-sheet credit exposures. The allowance, recorded in a liability account, is calculated in accordance with ASC 326 and represents expected credit losses over the contractual period for which we are exposed to credit risk resulting from a contractual obligation to extend credit. The estimate of expected credit losses considers both the likelihood that funding will occur and the amount expected to be funded over the estimated remaining life of the commitment. The likelihood and expected amount of
funding are based on historical utilization rates. No allowance is recognized if we have the unconditional right to cancel the obligation. The allowance is reported as a component of other liabilities. Adjustments to the allowance are reported in our income statement as a component of provision for credit losses.
REVENUE RECOGNITION: Our revenue is comprised primarily of interest income, service charges and fees, gains on the sale of loans and AFS securities, earnings on corporate owned life insurance policies, and other noninterest income. Other noninterest income is typically service and performance driven in nature and comprised primarily of investment and trust advisory fees. We recognize revenue, excluding interest income and other income specifically scoped out, in accordance with ASC 606, Revenue From Contracts with Customers. Revenue is recognized when our performance obligation has been satisfied according to our contractual obligation.
For additional information, see “Note 11 - Revenue.”
WEALTH MANAGEMENT: Wealth management assets held in a fiduciary or agent capacity are not included in our consolidated balance sheets because the ownership is held by customers. Trust and investment management fees are primarily comprised of fees earned from investment management, trust administration, tax return preparation, and financial planning.
FEDERAL INCOME TAXES: Deferred income tax assets and liabilities are determined using the liability (or balance sheet) method. Under this method, the net deferred tax assets or liabilities are determined based on the tax effects of the temporary differences between the book and tax basis on the various balance sheet assets and liabilities and gives current recognition to changes in tax rates and laws. Valuation allowances are established, where necessary, to reduce deferred tax assets to the amount expected to be realized. Income tax expense is the tax payable or refundable for the year plus or minus the change during the year in deferred tax assets and liabilities.
We analyze our filing positions in the jurisdictions where we are required to file income tax returns, as well as all open tax years in these jurisdictions. We also treat interest and penalties attributable to income taxes, to the extent they arise, as a component of our noninterest expenses.
EARNINGS PER SHARE: Basic earnings per common share represents income available to common shareholders divided by the weighted average number of common shares outstanding during the period. Diluted earnings per common share includes additional common shares that would have been outstanding if dilutive potential common shares had been issued.
A reconciliation of basic earnings per common share and diluted earnings per common share for the reported periods is provided in Note 10 - Computation of Earnings Per Common Share.
DEFINED BENEFIT PENSION PLAN: We maintain a noncontributory defined benefit pension plan, which was curtailed effective March 1, 2007. The service cost component of the defined benefit pension plan is included in compensation and benefits and is funded consistent with the requirements of federal laws and regulations. All other costs related to the defined benefit pension plan are included in other noninterest expenses. The current benefit obligation is included in other liabilities. Inherent in the determination of defined benefit pension costs are assumptions concerning future events that will affect the amount and timing of required benefit payments under the plan. These assumptions include demographic assumptions such as mortality, a discount rate used to determine the current benefit obligation and a long-term expected rate of return on plan assets. Net periodic benefit cost includes the interest cost based on the assumed discount rate, an expected return on plan assets based on an actuarially derived market-related value of assets, and amortization of unrecognized net actuarial gains or losses. Actuarial gains and losses result from experience different from that assumed and from changes in assumptions (excluding asset gains and losses not yet reflected in market-related value). Amortization of actuarial gains and losses is included as a component of net periodic defined benefit pension cost.
For additional information, see “Note 8 - Benefit Plans.”
MARKETING COSTS: Marketing costs are expensed as incurred and are included in other noninterest expenses.
ACCOUNTING STANDARDS UPDATE:
Recently Adopted Accounting Standards
ASU No. 2023-07: “Segment Reporting (Topic 280): Improvements to Reportable Segment Disclosures”
ASU No. 2023-07, issued in November 2023, requires public business entities with a single reportable segment to provide the disclosures required by this standard and the existing segment disclosures in Topic 280 on an interim and annual basis. The ASU updates reportable segment disclosure requirements, primarily through requiring enhanced disclosures about significant segment expenses and information used to assess segment performance. The new authoritative guidance is effective for annual
periods beginning after December 15, 2023. We adopted the this standard on a retrospective basis, which did not have a material impact on our consolidated financial statements.
Pending Accounting Standards
ASU No. 2023-09: “Income Tax (Topic 740): Improvement to Income tax Disclosures"
In December 2023, ASU No. 2023-09 was issued to enhance the transparency and decision usefulness of income tax disclosures. The existing disclosure is being enhanced to provide information to help investors, lenders, creditors and all other allocators of capital asses how an entity's operations and related tax risks and tax planning and operational opportunities affect its tax rate and prospects for future cash flows. The new authoritative guidance is effective for annual periods beginning after December 15, 2024 and will not have a significant impact on our operations or financial statement disclosures.
ASU No. 2024-03: “Income Statement-Reporting Comprehensive Income-Expense Disaggregation Disclosures (Subtopic 220-40): Disaggregation of Income Statement Expenses"
In November 2024, ASU No. 2024-03 was issued to improve the disclosures about a public business entity’s expenses and address requests from investors for more detailed information about the types of expenses (including purchases of inventory, employee compensation, depreciation, amortization, and depletion) in commonly presented expense captions (such as cost of sales, selling general and administrative expense, and research and development). The new authoritative guidance is effective for annual periods beginning after December 15, 2026, and interim periods within annual reporting periods beginning after December 15, 2027, as clarified in ASU No. 2025-01 issued in January 2025. The new authoritative guidance under ASU No. 2024-03 is not expected to have a significant impact on our operations or financial statement disclosures.
Note 2 - AFS Securities
The amortized cost and fair value of AFS securities, with gross unrealized gains and losses, are as follows as of December 31:
Amortized
Cost Gross
Unrealized
Gains Gross
Unrealized
Losses Fair
Value
U.S. Treasury $ 230,807 $ - $ 10,236 $ 220,571
States and political subdivisions 81,135 9 4,576 76,568
Auction rate money market preferred 3,200 - 156 3,044
Mortgage-backed securities 29,068 - 2,182 26,886
Collateralized mortgage obligations 163,156 - 8,482 154,674
Corporate 8,150 - 864 7,286
Total $ 515,516 $ 9 $ 26,496 $ 489,029
Amortized
Cost Gross
Unrealized
Gains Gross
Unrealized
Losses Fair
Value
U.S. Treasury $ 231,218 $ - $ 16,417 $ 214,801
States and political subdivisions 94,837 1,032 2,993 92,876
Auction rate money market preferred 3,200 - 269 2,931
Mortgage-backed securities 35,321 - 2,506 32,815
Collateralized mortgage obligations 187,248 - 9,473 177,775
Corporate 8,150 - 1,200 6,950
Total $ 559,974 $ 1,032 $ 32,858 $ 528,148
The amortized cost and fair value of AFS securities by contractual maturity at December 31, 2024 are as follows:
Maturing Securities with Variable Monthly Payments or Noncontractual Maturities
Due in
One Year
or Less After One
Year But
Within
Five Years After Five
Years But
Within
Ten Years After
Ten Years Total
U.S. Treasury $ 29,926 $ 200,881 $ - $ - $ - $ 230,807
States and political subdivisions 14,393 21,300 18,239 27,203 - 81,135
Auction rate money market preferred - - - - 3,200 3,200
Mortgage-backed securities - - - - 29,068 29,068
Collateralized mortgage obligations - - - - 163,156 163,156
Corporate - - 8,150 - - 8,150
Total amortized cost $ 44,319 $ 222,181 $ 26,389 $ 27,203 $ 195,424 $ 515,516
Fair value $ 43,882 $ 211,893 $ 24,305 $ 24,345 $ 184,604 $ 489,029
Expected maturities for government sponsored enterprises and states and political subdivisions may differ from contractual maturities because issuers may have the right to call or prepay obligations.
As the auction rate money market preferred investments have continual call dates, they are not reported by a specific maturity group. Because of their variable monthly payments, mortgage-backed securities and collateralized mortgage obligations are not reported by a specific maturity group.
A summary of the sales activity of AFS securities during the years ended December 31 is displayed in the following table.
2024 2023 2022
Proceeds from sales of AFS securities $ - $ 18,089 $ -
Realized gains (losses) - 67 -
Applicable income tax expense (benefit) - 14 -
The information in the following tables pertains to AFS securities with gross unrealized losses aggregated by investment category and length of time that individual securities have been in a continuous loss position at December 31:
Less Than Twelve Months Twelve Months or More
Gross
Unrealized
Losses Fair
Value Gross
Unrealized
Losses Fair
Value Total
Unrealized
Losses
U.S. Treasury $ - $ - $ 10,236 $ 220,571 $ 10,236
States and political subdivisions 486 23,553 4,090 36,796 4,576
Auction rate money market preferred - - 156 3,044 156
Mortgage-backed securities - - 2,182 26,886 2,182
Collateralized mortgage obligations 185 5,646 8,297 149,028 8,482
Corporate - - 864 7,286 864
Total $ 671 $ 29,199 $ 25,825 $ 443,611 $ 26,496
Number of securities in an unrealized loss position: 175 178 353
Less Than Twelve Months Twelve Months or More
Gross
Unrealized
Losses Fair
Value Gross
Unrealized
Losses Fair
Value Total
Unrealized
Losses
U.S. Treasury $ - $ - $ 16,417 $ 214,801 $ 16,417
States and political subdivisions 42 7,172 2,951 37,011 2,993
Auction rate money market preferred - - 269 2,931 269
Mortgage-backed securities 1 10 2,505 32,805 2,506
Collateralized mortgage obligations 116 4,554 9,357 173,221 9,473
Corporate - - 1,200 6,950 1,200
Total $ 159 $ 11,736 $ 32,699 $ 467,719 $ 32,858
Number of securities in an unrealized loss position: 22 186 208
As of December 31, 2024, no allowance for credit losses has been recognized on AFS securities in an unrealized loss position, as management does not believe any of the securities are impaired due to reasons of credit quality. This is based on our analysis of the underlying risk characteristics, including credit ratings, and other qualitative factors related to our AFS securities and consideration of our historical credit loss experience and internal forecasts. The issuers of these securities continue to make timely principal and interest payments under the contractual terms of the securities. Furthermore, management does not have the intent to sell any of the securities classified as AFS in the table above, and believes it is more likely than not that we will not have to sell any such securities before a recovery of cost. The unrealized losses are due to increases in market interest rates over the yields available at the time the underlying securities were purchased. The fair value is expected to recover as the securities approach their respective maturity date or repricing date, or if the market yields for such investments decline.
Note 3 - Loans and ACL
Loan Composition
The following table provides a detailed listing of our loan portfolio at December 31:
2024 2023
Balance Percent of Total Balance Percent of Total
Commercial and industrial
Secured $ 221,510 15.56 % $ 189,186 14.02 %
Unsecured 23,384 1.64 % 20,552 1.52 %
Total commercial and industrial 244,894 17.20 % 209,738 15.54 %
Commercial real estate
Commercial mortgage owner occupied 178,376 12.53 % 180,636 13.39 %
Commercial mortgage non-owner occupied 208,118 14.62 % 216,292 16.03 %
Commercial mortgage 1-4 family investor 92,497 6.50 % 89,208 6.61 %
Commercial mortgage multifamily 68,456 4.81 % 78,108 5.79 %
Total commercial real estate 547,447 38.46 % 564,244 41.82 %
Advances to mortgage brokers 63,080 4.43 % 18,541 1.37 %
Agricultural
Agricultural mortgage 67,550 4.75 % 69,044 5.12 %
Agricultural other 32,144 2.26 % 30,950 2.29 %
Total agricultural 99,694 7.01 % 99,994 7.41 %
Residential real estate
Senior lien 332,743 23.37 % 313,459 23.23 %
Junior lien 8,655 0.61 % 5,945 0.44 %
Home equity lines of credit 39,474 2.77 % 37,014 2.74 %
Total residential real estate 380,872 26.75 % 356,418 26.41 %
Consumer
Secured - direct 35,050 2.46 % 37,948 2.81 %
Secured - indirect 49,136 3.45 % 59,324 4.40 %
Unsecured 3,398 0.24 % 3,256 0.24 %
Total consumer 87,584 6.15 % 100,528 7.45 %
Total $ 1,423,571 100.00 % $ 1,349,463 100.00 %
We grant commercial, agricultural, residential real estate, and consumer loans to customers primarily in Bay, Clare, Gratiot, Isabella, Mecosta, Midland, Montcalm, and Saginaw counties in Michigan. The ability of borrowers to honor their repayment obligations is often dependent upon the real estate, agricultural, manufacturing, retail, gaming, tourism, health care, higher education, and general economic conditions of this region. Substantially all of our consumer and residential real estate loans are secured by various items of property, while commercial loans are secured primarily by real estate, business assets, and personal guarantees. A portion of loans is unsecured.
Loans that we have the intent and ability to hold in our portfolio are reported at their outstanding principal balance adjusted for any charge-offs, the ACL, and deferred fees or costs. Unless a loan has a nonaccrual status, interest income is accrued over the term of the loan based on the principal amount outstanding. Loan origination fees and certain direct loan origination costs are capitalized and recognized as a component of interest income over the term of the loan using the appropriate amortization method.
Commercial and agricultural loans include loans for commercial real estate, commercial operating loans, advances to mortgage brokers, farmland and agricultural production, and loans to states and political subdivisions. Repayment of these loans is dependent upon the successful operation and management of a business. We minimize our risk by limiting the amount of direct credit exposure to any one borrower to $18,000. Borrowers with direct credit needs of more than $18,000 may be serviced through the use of loan participations with other commercial banks. Commercial and agricultural real estate loans commonly require loan-to-value limits of 80% or less. Depending upon the type of loan, past credit history, and current operating results, we may require the borrower to pledge accounts receivable, inventory, property, or equipment. Government agency guarantee may be required. Personal guarantees and/or life insurance beneficiary assignments are generally required from the owners of
closely held corporations, partnerships, and sole proprietorships. In addition, we may require annual financial statements, prepare cash flow analyses, and review credit reports.
We offer adjustable rate mortgages, construction loans, and fixed rate residential real estate loans which have amortization periods up to a maximum of 30 years. We consider the anticipated direction of interest rates, balance sheet duration, the sensitivity of our balance sheet to changes in interest rates, our liquidity needs, and overall loan demand to determine whether or not to sell fixed rate loans to Freddie Mac.
Our lending policies generally limit the maximum loan-to-value ratio on residential real estate loans to 100% of the lower of the appraised value of the property or the purchase price. Private mortgage insurance is typically required on loans with loan-to-value ratios in excess of 80% unless the loan qualifies for government guarantees.
Underwriting criteria for residential real estate loans generally include:
•Evaluation of the borrower’s ability to make monthly payments.
•Evaluation of the value of the property securing the loan.
•Ensuring the payment of principal, interest, taxes, and hazard insurance does not exceed 28% of a borrower’s gross income.
•Ensuring all debt servicing does not exceed 40% of income.
•Verification of acceptable credit reports.
•Verification of employment, income, and financial information.
Appraisals are performed by independent appraisers and are reviewed for appropriateness. Generally, mortgage loan requests are reviewed by our mortgage loan committee or through a secondary market underwriting system; loans in excess of $1,000 require the approval of one or more of the following committees: Internal Loan Committee, the Executive Loan Committee, or the Board of Directors.
Consumer loans include secured and unsecured personal loans. Loans are amortized for a period of up to 15 years based on the age and value of the underlying collateral. The underwriting emphasis is on a borrower’s perceived intent and ability to pay rather than collateral value. No consumer loans are sold to the secondary market.
Nonaccrual and Past Due Loans
The accrual of interest on commercial and agricultural loans, as well as residential real estate loans, is discontinued at the time a loan is 90 days or more past due unless the credit is well-secured and in the process of short-term collection. Upon transferring a loan to nonaccrual status, we perform an evaluation to determine the net realizable value of the underlying collateral. This evaluation is used to help determine if a charge-off is necessary. Consumer loans are typically charged-off no later than 180 days past due. Past due status is based on the contractual term of the loan. In all cases, a loan is placed in nonaccrual status at an earlier date if collection of principal or interest is considered doubtful.
When a loan is placed in nonaccrual status, all interest accrued in the current calendar year, but not collected, is reversed against interest income while interest accrued in prior calendar years, but not collected, is charged against the ACL. Loans may be returned to accrual status after six months of continuous performance and achievement of current payment status.
The following table summarizes nonaccrual loan data by class of loans as of December 31:
2024 2023
Total Nonaccrual Loans Nonaccrual Loans with No ACL Total Nonaccrual Loans Nonaccrual Loans with No ACL
Commercial and industrial
Secured $ - $ - $ 491 $ 435
Agricultural
Agricultural mortgage - - 38 38
Agricultural other - - 167 167
Residential real estate
Senior lien 282 282 286 286
Total $ 282 $ 282 $ 982 $ 926
The following tables summarize the past due and current loans for the entire loan portfolio as of December 31:
Past Due:
30-59
Days 60-89
Days 90 Days
or More Current Total Accruing Loans 90 or More Days Past Due
Commercial and industrial
Secured $ 328 $ - $ - $ 221,182 $ 221,510 $ -
Unsecured - 50 - 23,334 23,384 -
Total commercial and industrial 328 50 - 244,516 244,894 -
Commercial real estate
Commercial mortgage owner occupied 25 304 - 178,047 178,376 -
Commercial mortgage non-owner occupied 792 - - 207,326 208,118 -
Commercial mortgage 1-4 family investor - - - 92,497 92,497 -
Commercial mortgage multifamily - - - 68,456 68,456 -
Total commercial real estate 817 304 - 546,326 547,447 -
Advances to mortgage brokers - - - 63,080 63,080 -
Agricultural
Agricultural mortgage - - - 67,550 67,550 -
Agricultural other - - - 32,144 32,144 -
Total agricultural - - - 99,694 99,694 -
Residential real estate
Senior lien 3,846 148 163 328,586 332,743 -
Junior lien 19 - - 8,636 8,655 -
Home equity lines of credit 10 - - 39,464 39,474 -
Total residential real estate 3,875 148 163 376,686 380,872 -
Consumer
Secured - direct 15 - 19 35,016 35,050 19
Secured - indirect 232 - - 48,904 49,136 -
Unsecured 4 - - 3,394 3,398 -
Total consumer 251 - 19 87,314 87,584 19
Total $ 5,271 $ 502 $ 182 $ 1,417,616 $ 1,423,571 $ 19
Past Due:
30-59
Days 60-89
Days 90 Days
or More Current Total Accruing Loans 90 or More Days Past Due
Commercial and industrial
Secured $ 165 $ 290 $ 201 $ 188,530 $ 189,186 $ -
Unsecured - - - 20,552 20,552 -
Total commercial and industrial 165 290 201 209,082 209,738 -
Commercial real estate
Commercial mortgage owner occupied - - - 180,636 180,636 -
Commercial mortgage non-owner occupied - - - 216,292 216,292 -
Commercial mortgage 1-4 family investor - - - 89,208 89,208 -
Commercial mortgage multifamily - - - 78,108 78,108 -
Total commercial real estate - - - 564,244 564,244 -
Advances to mortgage brokers - - - 18,541 18,541 -
Agricultural
Agricultural mortgage - - - 69,044 69,044 -
Agricultural other - - - 30,950 30,950 -
Total agricultural - - - 99,994 99,994 -
Residential real estate
Senior lien 3,188 349 201 309,721 313,459 87
Junior lien - - - 5,945 5,945 -
Home equity lines of credit - - - 37,014 37,014 -
Total residential real estate 3,188 349 201 352,680 356,418 87
Consumer
Secured - direct 3 - - 37,945 37,948 -
Secured - indirect 181 - - 59,143 59,324 -
Unsecured 9 - - 3,247 3,256 -
Total consumer 193 - - 100,335 100,528 -
Total $ 3,546 $ 639 $ 402 $ 1,344,876 $ 1,349,463 $ 87
Credit Quality Indicators
The following tables display commercial and agricultural loans by credit risk ratings and year of origination as of December 31:
2024 2023 2022 2021 2020 Prior Revolving
Loans Revolving Loans Converted to Term Total
Commercial and industrial: Secured
Risk ratings 1-3 $ 13,303 $ 15,074 $ 3,078 $ 4,975 $ 4,437 $ 368 $ 10,316 $ - $ 51,551
Risk rating 4 38,143 38,393 17,252 15,561 2,035 2,191 28,145 - 141,720
Risk rating 5 3,627 559 11,644 164 137 53 6,626 - 22,810
Risk rating 6 126 288 1,841 71 - 10 3,093 - 5,429
Risk rating 7 - - - - - - - - -
Risk rating 8 - - - - - - - - -
Risk rating 9 - - - - - - - - -
Total $ 55,199 $ 54,314 $ 33,815 $ 20,771 $ 6,609 $ 2,622 $ 48,180 $ - $ 221,510
Current year-to-date gross charge-offs $ - $ 277 $ 33 $ - $ 38 $ - $ - $ - $ 348
Commercial and industrial: Unsecured
Risk ratings 1-3 $ 378 $ 1,967 $ 203 $ 69 $ 48 $ 414 $ 1,966 $ - $ 5,045
Risk rating 4 3,073 2,049 2,388 268 370 - 8,896 - 17,044
Risk rating 5 100 - - 121 - - 1,074 - 1,295
Risk rating 6 - - - - - - - - -
Risk rating 7 - - - - - - - - -
Risk rating 8 - - - - - - - - -
Risk rating 9 - - - - - - - - -
Total $ 3,551 $ 4,016 $ 2,591 $ 458 $ 418 $ 414 $ 11,936 $ - $ 23,384
Current year-to-date gross charge-offs $ - $ - $ - $ - $ - $ 8 $ 25 $ - $ 33
Commercial real estate: Owner occupied
Risk ratings 1-3 $ 1,963 $ 4,032 $ 1,694 $ 11,125 $ 13,300 $ 4,421 $ 221 $ - $ 36,756
Risk rating 4 24,878 11,550 29,307 35,974 9,780 20,260 1,590 - 133,339
Risk rating 5 197 487 876 72 653 791 372 - 3,448
Risk rating 6 1,354 1,123 - 636 1,117 504 99 - 4,833
Risk rating 7 - - - - - - - - -
Risk rating 8 - - - - - - - - -
Risk rating 9 - - - - - - - - -
Total $ 28,392 $ 17,192 $ 31,877 $ 47,807 $ 24,850 $ 25,976 $ 2,282 $ - $ 178,376
Current year-to-date gross charge-offs $ - $ - $ - $ - $ - $ - $ - $ - $ -
Commercial real estate: Non-owner occupied
Risk ratings 1-3 $ 644 $ 795 $ 5,568 $ 5,178 $ 348 $ 1,781 $ - $ - $ 14,314
Risk rating 4 7,902 34,664 61,524 35,620 4,375 29,178 497 - 173,760
Risk rating 5 9,726 - 218 1,681 6,154 709 500 - 18,988
Risk rating 6 - 1,006 - - 50 - - - 1,056
Risk rating 7 - - - - - - - - -
Risk rating 8 - - - - - - - - -
Risk rating 9 - - - - - - - - -
Total $ 18,272 $ 36,465 $ 67,310 $ 42,479 $ 10,927 $ 31,668 $ 997 $ - $ 208,118
Current year-to-date gross charge-offs $ - $ - $ - $ - $ - $ - $ - $ - $ -
2024 2023 2022 2021 2020 Prior Revolving
Loans Revolving Loans Converted to Term Total
Commercial real estate: 1-4 family investor
Risk ratings 1-3 $ 1,165 $ - $ 2,632 $ 791 $ 846 $ 965 $ 3,076 $ - $ 9,475
Risk rating 4 9,399 12,535 8,911 28,666 13,930 3,640 4,750 - 81,831
Risk rating 5 - 145 339 72 - 52 - - 608
Risk rating 6 - 536 - - - 47 - - 583
Risk rating 7 - - - - - - - - -
Risk rating 8 - - - - - - - - -
Risk rating 9 - - - - - - - - -
Total $ 10,564 $ 13,216 $ 11,882 $ 29,529 $ 14,776 $ 4,704 $ 7,826 $ - $ 92,497
Current year-to-date gross charge-offs $ - $ - $ - $ - $ - $ - $ - $ - $ -
Commercial real estate: Multifamily
Risk ratings 1-3 $ 638 $ 3,383 $ 1,697 $ 936 $ 545 $ 746 $ 150 $ - $ 8,095
Risk rating 4 2,081 1,957 21,446 11,646 664 19,617 64 - 57,475
Risk rating 5 - - - - - - - - -
Risk rating 6 - - - - - 2,886 - - 2,886
Risk rating 7 - - - - - - - - -
Risk rating 8 - - - - - - - - -
Risk rating 9 - - - - - - - - -
Total $ 2,719 $ 5,340 $ 23,143 $ 12,582 $ 1,209 $ 23,249 $ 214 $ - $ 68,456
Current year-to-date gross charge-offs $ - $ - $ - $ - $ - $ - $ - $ - $ -
Advances to mortgage brokers
Risk ratings 1-3 $ 63,080 $ - $ - $ - $ - $ - $ - $ - $ 63,080
Current year-to-date gross charge-offs $ - $ - $ - $ - $ - $ - $ - $ - $ -
Agricultural mortgage
Risk ratings 1-3 $ 792 $ - $ 2,700 $ 2,144 $ 2,550 $ 1,250 $ 34 $ - $ 9,470
Risk rating 4 4,410 4,118 12,959 6,968 5,737 8,586 1,322 - 44,100
Risk rating 5 281 1,521 1,342 5,757 - 1,364 1,045 - 11,310
Risk rating 6 60 - 1,550 - - 1,060 - - 2,670
Risk rating 7 - - - - - - - - -
Risk rating 8 - - - - - - - - -
Risk rating 9 - - - - - - - - -
Total $ 5,543 $ 5,639 $ 18,551 $ 14,869 $ 8,287 $ 12,260 $ 2,401 $ - $ 67,550
Current year-to-date gross charge-offs $ - $ - $ - $ - $ - $ - $ - $ - $ -
Agricultural other
Risk ratings 1-3 $ 634 $ 523 $ 106 $ 137 $ 2 $ 210 $ 3,635 $ - $ 5,247
Risk rating 4 1,940 1,328 1,863 1,893 463 550 13,531 - 21,568
Risk rating 5 1,683 - - - 438 - 608 - 2,729
Risk rating 6 - 172 - 90 - - 2,338 - 2,600
Risk rating 7 - - - - - - - - -
Risk rating 8 - - - - - - - - -
Risk rating 9 - - - - - - - - -
Total $ 4,257 $ 2,023 $ 1,969 $ 2,120 $ 903 $ 760 $ 20,112 $ - $ 32,144
Current year-to-date gross charge-offs $ - $ - $ - $ - $ - $ - $ - $ - $ -
2023 2022 2021 2020 2019 Prior Revolving
Loans Revolving Loans Converted to Term Total
Commercial and industrial: Secured
Risk ratings 1-3 $ 15,061 $ 4,324 $ 6,188 $ 6,666 $ 422 $ 449 $ 12,305 $ - $ 45,415
Risk rating 4 38,680 35,245 22,065 4,523 2,469 1,762 29,826 - 134,570
Risk rating 5 391 2,634 233 305 111 101 1,994 - 5,769
Risk rating 6 - - 4 207 6 128 2,596 - 2,941
Risk rating 7 465 - - 24 2 - - - 491
Risk rating 8 - - - - - - - - -
Risk rating 9 - - - - - - - - -
Total $ 54,597 $ 42,203 $ 28,490 $ 11,725 $ 3,010 $ 2,440 $ 46,721 $ - $ 189,186
Current year-to-date gross charge-offs $ 200 $ - $ - $ - $ - $ - $ - $ - $ 200
Commercial and industrial: Unsecured
Risk ratings 1-3 $ 2,200 $ 259 $ 129 $ 71 $ 96 $ 707 $ 1,663 $ - $ 5,125
Risk rating 4 3,988 3,117 517 470 - - 7,274 - 15,366
Risk rating 5 - 31 - - - - 30 - 61
Risk rating 6 - - - - - - - - -
Risk rating 7 - - - - - - - - -
Risk rating 8 - - - - - - - - -
Risk rating 9 - - - - - - - - -
Total $ 6,188 $ 3,407 $ 646 $ 541 $ 96 $ 707 $ 8,967 $ - $ 20,552
Current year-to-date gross charge-offs $ 8 $ - $ - $ - $ - $ - $ 68 $ - $ 76
Commercial real estate: Owner occupied
Risk ratings 1-3 $ 3,592 $ 1,712 $ 12,655 $ 14,228 $ 761 $ 3,313 $ 211 $ - $ 36,472
Risk rating 4 12,148 33,392 39,406 14,086 13,384 19,942 1,506 - 133,864
Risk rating 5 1,460 727 195 220 3,829 1,761 464 - 8,656
Risk rating 6 - - 870 234 - 540 - - 1,644
Risk rating 7 - - - - - - - - -
Risk rating 8 - - - - - - - - -
Risk rating 9 - - - - - - - - -
Total $ 17,200 $ 35,831 $ 53,126 $ 28,768 $ 17,974 $ 25,556 $ 2,181 $ - $ 180,636
Current year-to-date gross charge-offs $ - $ - $ - $ - $ - $ - $ - $ - $ -
Commercial real estate: Non-owner occupied
Risk ratings 1-3 $ 67 $ 4,383 $ 6,496 $ 827 $ 172 $ 1,766 $ - $ - $ 13,711
Risk rating 4 37,906 62,979 37,583 11,534 7,589 32,941 1,650 - 192,182
Risk rating 5 - - 5,838 - - 3,478 - - 9,316
Risk rating 6 1,029 - - 54 - - - - 1,083
Risk rating 7 - - - - - - - - -
Risk rating 8 - - - - - - - - -
Risk rating 9 - - - - - - - - -
Total $ 39,002 $ 67,362 $ 49,917 $ 12,415 $ 7,761 $ 38,185 $ 1,650 $ - $ 216,292
Current year-to-date gross charge-offs $ - $ - $ - $ - $ - $ - $ - $ - $ -
2023 2022 2021 2020 2019 Prior Revolving
Loans Revolving Loans Converted to Term Total
Commercial real estate: 1-4 family investor
Risk ratings 1-3 $ 286 $ 1,445 $ 864 $ 905 $ 666 $ 887 $ 1,352 $ - $ 6,405
Risk rating 4 13,492 11,641 30,604 15,124 3,036 3,111 4,538 - 81,546
Risk rating 5 152 354 77 - 55 - - - 638
Risk rating 6 555 - - - 59 5 - - 619
Risk rating 7 - - - - - - - - -
Risk rating 8 - - - - - - - - -
Risk rating 9 - - - - - - - - -
Total $ 14,485 $ 13,440 $ 31,545 $ 16,029 $ 3,816 $ 4,003 $ 5,890 $ - $ 89,208
Current year-to-date gross charge-offs $ - $ - $ - $ - $ - $ - $ - $ - $ -
Commercial real estate: Multifamily
Risk ratings 1-3 $ 4,509 $ 4,682 $ 2,053 $ 568 $ - $ 1,515 $ - $ - $ 13,327
Risk rating 4 2,792 19,465 15,981 813 549 21,263 554 - 61,417
Risk rating 5 - - - 4 - - - - 4
Risk rating 6 - - 32 - - 3,328 - - 3,360
Risk rating 7 - - - - - - - - -
Risk rating 8 - - - - - - - - -
Risk rating 9 - - - - - - - - -
Total $ 7,301 $ 24,147 $ 18,066 $ 1,385 $ 549 $ 26,106 $ 554 $ - $ 78,108
Current year-to-date gross charge-offs $ - $ - $ - $ - $ - $ - $ - $ - $ -
Advances to mortgage brokers
Risk ratings 1-3 $ 18,541 $ - $ - $ - $ - $ - $ - $ - $ 18,541
Current year-to-date gross charge-offs $ - $ - $ - $ - $ - $ - $ - $ - $ -
Agricultural mortgage
Risk ratings 1-3 $ 292 $ 2,834 $ 1,241 $ 2,786 $ 604 $ 964 $ 94 $ - $ 8,815
Risk rating 4 5,622 12,903 8,970 5,940 3,926 7,883 566 - 45,810
Risk rating 5 126 4,098 5,886 689 175 60 756 - 11,790
Risk rating 6 842 - - - - 1,749 - - 2,591
Risk rating 7 - - - - - 38 - - 38
Risk rating 8 - - - - - - - - -
Risk rating 9 - - - - - - - - -
Total $ 6,882 $ 19,835 $ 16,097 $ 9,415 $ 4,705 $ 10,694 $ 1,416 $ - $ 69,044
Current year-to-date gross charge-offs $ - $ - $ - $ - $ - $ 4 $ - $ - $ 4
Agricultural other
Risk ratings 1-3 $ 801 $ 81 $ 121 $ 38 $ 183 $ 141 $ 2,659 $ - $ 4,024
Risk rating 4 1,830 2,481 2,280 619 146 75 14,405 - 21,836
Risk rating 5 753 8 163 507 - 480 2,731 - 4,642
Risk rating 6 - - 32 - - - 249 - 281
Risk rating 7 - - - - - - 167 - 167
Risk rating 8 - - - - - - - - -
Risk rating 9 - - - - - - - - -
Total $ 3,384 $ 2,570 $ 2,596 $ 1,164 $ 329 $ 696 $ 20,211 $ - $ 30,950
Current year-to-date gross charge-offs $ - $ - $ - $ - $ - $ - $ - $ - $ -
We have certain lending policies and procedures in place designed to maximize loan income within an acceptable level of risk. The Board reviews and approves these policies and procedures on a regular basis. A reporting system supplements the review process by providing management and the Board with frequent reports related to loan production, loan quality, and concentration of credit, loan delinquencies, nonperforming loans and potential problem loans. We seek to diversify the loan portfolio as a means of managing risk associated with fluctuations in economic conditions.
Internally assigned credit risk ratings are reviewed, at a minimum, when loans are renewed or when management has knowledge of improvements or deterioration of the credit quality of individual credits. Descriptions of the internally assigned credit risk ratings for commercial and agricultural loans are as follows:
1. EXCELLENT - Substantially Risk Free
Credit has strong financial condition and solid earnings history, characterized by:
•High liquidity, strong cash flow, low leverage.
•Unquestioned ability to meet all obligations when due.
•Experienced management, with management succession in place.
•Secured by cash.
2. HIGH QUALITY - Limited Risk
Credit with sound financial condition and a positive trend in earnings supplemented by:
•Favorable liquidity and leverage ratios.
•Ability to meet all obligations when due.
•Management with successful track record.
•Steady and satisfactory earnings history.
•If loan is secured, collateral is of high quality and readily marketable.
•Access to alternative financing.
•Well defined primary and secondary source of repayment.
•If supported by guaranty, the financial strength and liquidity of the guarantor(s) are clearly evident.
3. HIGH SATISFACTORY - Reasonable Risk
Credit with satisfactory financial condition and further characterized by:
•Working capital adequate to support operations.
•Cash flow sufficient to pay debts as scheduled.
•Management experience and depth appear favorable.
•Loan performing according to terms.
•If loan is secured, collateral is acceptable and loan is fully protected.
4. SATISFACTORY - Acceptable Risk
Credit with bankable risks, although some signs of weaknesses are shown:
•Would include most start-up businesses.
•Occasional instances of trade slowness or repayment delinquency - may have been 10-30 days slow within the past year.
•Management’s abilities are apparent yet unproven.
•Weakness in primary source of repayment with adequate secondary source of repayment.
•Loan structure generally in accordance with policy.
•If secured, loan collateral coverage is marginal.
To be classified as less than satisfactory, only one of the following criteria must be met.
5. SPECIAL MENTION - Criticized
Credit constitutes an undue and unwarranted credit risk but not to the point of justifying a classification of substandard. The credit risk may be relatively minor yet constitutes an unwarranted risk in light of the circumstances surrounding a specific loan:
•Downward trend in sales, profit levels, and margins.
•Impaired working capital position.
•Cash flow is strained in order to meet debt repayment.
•Loan delinquency (30-60 days) and overdrafts may occur.
•Shrinking equity cushion.
•Diminishing primary source of repayment and questionable secondary source.
•Management abilities are questionable.
•Weak industry conditions.
•Litigation pending against the borrower.
•Loan may need to be restructured to improve collateral position or reduce payments.
•Collateral or guaranty offers limited protection.
•Negative debt service coverage, however the credit is well collateralized and payments are current.
6. SUBSTANDARD - Classified
Credit is inadequately protected by the current net worth and paying capacity of the borrower or of the collateral pledged. There is a distinct possibility we will implement collection procedures if the loan deficiencies are not corrected. Any commercial loan placed in nonaccrual status will be rated “7” or worse. In addition, the following characteristics may apply:
•Sustained losses have severely eroded the equity and cash flow.
•Deteriorating liquidity.
•Serious management problems or internal fraud.
•Original repayment terms liberalized.
•Likelihood of bankruptcy.
•Inability to access other funding sources.
•Reliance on secondary source of repayment.
•Litigation filed against borrower.
•Interest non-accrual may be warranted.
•Collateral provides little or no value.
•Requires excessive attention of the loan officer.
•Borrower is uncooperative with loan officer.
7. VULNERABLE - Classified
Credit is considered “Substandard” and warrants placing in nonaccrual status. Risk of loss is being evaluated and exit strategy options are under review. Other characteristics that may apply:
•Insufficient cash flow to service debt.
•Minimal or no payments being received.
•Limited options available to avoid the collection process.
•Transition status, expect action will take place to collect loan without immediate progress being made.
8. DOUBTFUL - Workout
Credit has all the weaknesses inherent in a “Substandard” loan with the added characteristic that collection and/or liquidation is pending. The possibility of a loss is extremely high, but its classification as a loss is deferred until liquidation procedures are completed, or reasonably estimable. Other characteristics that may apply:
•Normal operations are severely diminished or have ceased.
•Seriously impaired cash flow.
•Original repayment terms materially altered.
•Secondary source of repayment is inadequate.
•Survivability as a “going concern” is impossible.
•Collection process has begun.
•Bankruptcy petition has been filed.
•Judgments have been filed.
•Portion of the loan balance has been charged-off.
9. LOSS - Charge-off
Credit is considered uncollectible and of such little value that their continuance as bankable assets is not warranted. This classification is for charged-off loans but does not mean that the asset has absolutely no recovery or salvage value. These loans are further characterized by:
•Liquidation or reorganization under bankruptcy, with poor prospects of collection.
•Fraudulently overstated assets and/or earnings.
•Collateral has marginal or no value.
•Debtor cannot be located.
•Over 120 days delinquent.
Our primary credit quality indicator for residential real estate and consumer loans is the individual loan’s past due status. The following tables display residential real estate and consumer loans by payment status and year of origination as of December 31:
2024 2023 2022 2021 2020 Prior Revolving
Loans Revolving Loans Converted to Term Total
Residential real estate: Senior lien
Current $ 55,991 $ 35,105 $ 45,916 $ 73,607 $ 47,057 $ 62,303 $ - $ 8,579 $ 328,558
Past due 30-89 days 173 162 331 287 907 2,043 - - 3,903
Past due 90 or more days - - - - - - - - -
Nonaccrual - - - 163 28 91 - - 282
Total $ 56,164 $ 35,267 $ 46,247 $ 74,057 $ 47,992 $ 64,437 $ - $ 8,579 $ 332,743
Current year-to-date gross charge-offs $ - $ - $ - $ - $ - $ 10 $ - $ - $ 10
Residential real estate: Junior lien
Current $ 4,229 $ 3,092 $ 800 $ 86 $ 71 $ 358 $ - $ - $ 8,636
Past due 30-89 days - - - 19 - - - - 19
Past due 90 or more days - - - - - - - - -
Nonaccrual - - - - - - - - -
Total $ 4,229 $ 3,092 $ 800 $ 105 $ 71 $ 358 $ - $ - $ 8,655
Current year-to-date gross charge-offs $ - $ - $ - $ - $ - $ - $ - $ - $ -
Residential real estate: Home equity lines of credit
Current $ - $ - $ - $ - $ - $ - $ 39,464 $ - $ 39,464
Past due 30-89 days - - - - - - 10 - 10
Past due 90 or more days - - - - - - - - -
Nonaccrual - - - - - - - - -
Total $ - $ - $ - $ - $ - $ - $ 39,474 $ - $ 39,474
Current year-to-date gross charge-offs $ - $ - $ - $ - $ - $ - $ - $ - $ -
Consumer: Secured - direct
Current $ 10,990 $ 9,498 $ 6,535 $ 3,947 $ 2,166 $ 1,880 $ - $ - $ 35,016
Past due 30-89 days - - 15 - - - - - 15
Past due 90 or more days - - - - 19 - - - 19
Nonaccrual - - - - - - - - -
Total $ 10,990 $ 9,498 $ 6,550 $ 3,947 $ 2,185 $ 1,880 $ - $ - $ 35,050
Current year-to-date gross charge-offs $ 16 $ 93 $ 9 $ - $ 27 $ 8 $ - $ - $ 153
Consumer: Secured - indirect
Current $ 6,526 $ 22,624 $ 7,682 $ 4,990 $ 4,018 $ 3,064 $ - $ - $ 48,904
Past due 30-89 days 42 51 50 28 54 7 - - 232
Past due 90 or more days - - - - - - - - -
Nonaccrual - - - - - - - - -
Total $ 6,568 $ 22,675 $ 7,732 $ 5,018 $ 4,072 $ 3,071 $ - $ - $ 49,136
Current year-to-date gross charge-offs $ - $ 67 $ 64 $ - $ - $ 3 $ - $ - $ 134
2024 2023 2022 2021 2020 Prior Revolving
Loans Revolving Loans Converted to Term Total
Consumer: Unsecured
Current $ 1,654 $ 656 $ 211 $ 22 $ 16 $ - $ 835 $ - $ 3,394
Past due 30-89 days - - 2 - - - 2 - 4
Past due 90 or more days - - - - - - - - -
Nonaccrual - - - - - - - - -
Total $ 1,654 $ 656 $ 213 $ 22 $ 16 $ - $ 837 $ - $ 3,398
Current year-to-date gross charge-offs $ 2,047 $ 15 $ 21 $ - $ - $ 2 $ 21 $ - $ 2,106
2023 2022 2021 2020 2019 Prior Revolving
Loans Revolving Loans Converted to Term Total
Residential real estate: Senior lien
Current $ 45,878 $ 52,989 $ 80,122 $ 52,648 $ 23,356 $ 54,556 $ - $ - $ 309,549
Past due 30-89 days - 784 714 123 478 1,438 - - 3,537
Past due 90 or more days - - - - - 87 - - 87
Nonaccrual 48 - - 31 - 207 - - 286
Total $ 45,926 $ 53,773 $ 80,836 $ 52,802 $ 23,834 $ 56,288 $ - $ - $ 313,459
Current year-to-date gross charge-offs $ - $ - $ - $ - $ - $ 2 $ - $ - $ 2
Residential real estate: Junior lien
Current $ 3,706 $ 1,325 $ 168 $ 134 $ 167 $ 445 $ - $ - $ 5,945
Past due 30-89 days - - - - - - - - -
Past due 90 or more days - - - - - - - - -
Nonaccrual - - - - - - - - -
Total $ 3,706 $ 1,325 $ 168 $ 134 $ 167 $ 445 $ - $ - $ 5,945
Current year-to-date gross charge-offs $ - $ - $ - $ - $ - $ - $ - $ - $ -
Residential real estate: Home equity lines of credit
Current $ - $ - $ - $ - $ - $ - $ 37,014 $ - $ 37,014
Past due 30-89 days - - - - - - - - -
Past due 90 or more days - - - - - - - - -
Nonaccrual - - - - - - - - -
Total $ - $ - $ - $ - $ - $ - $ 37,014 $ - $ 37,014
Current year-to-date gross charge-offs $ - $ - $ - $ - $ - $ - $ - $ - $ -
Consumer: Secured - direct
Current $ 14,813 $ 10,037 $ 6,468 $ 3,473 $ 1,682 $ 1,472 $ - $ - $ 37,945
Past due 30-89 days - - - 3 - - - - 3
Past due 90 or more days - - - - - - - - -
Nonaccrual - - - - - - - - -
Total $ 14,813 $ 10,037 $ 6,468 $ 3,476 $ 1,682 $ 1,472 $ - $ - $ 37,948
Current year-to-date gross charge-offs $ 139 $ 12 $ 6 $ - $ 3 $ - $ - $ - $ 160
2023 2022 2021 2020 2019 Prior Revolving
Loans Revolving Loans Converted to Term Total
Consumer: Secured - indirect
Current $ 30,900 $ 10,977 $ 6,887 $ 5,376 $ 2,030 $ 2,973 $ - $ - $ 59,143
Past due 30-89 days 123 - - 30 3 25 - - 181
Past due 90 or more days - - - - - - - - -
Nonaccrual - - - - - - - - -
Total $ 31,023 $ 10,977 $ 6,887 $ 5,406 $ 2,033 $ 2,998 $ - $ - $ 59,324
Current year-to-date gross charge-offs $ - $ - $ - $ - $ - $ - $ - $ - $ -
Consumer: Unsecured
Current $ 1,576 $ 740 $ 144 $ 86 $ 7 $ - $ 694 $ - $ 3,247
Past due 30-89 days - 9 - - - - - - 9
Past due 90 or more days - - - - - - - - -
Nonaccrual - - - - - - - - -
Total $ 1,576 $ 749 $ 144 $ 86 $ 7 $ - $ 694 $ - $ 3,256
Current year-to-date gross charge-offs $ 344 $ 21 $ 13 $ 2 $ - $ 1 $ 1 $ - $ 382
Loan Modifications
A loan modification includes terms outside of normal lending practices to a borrower experiencing financial difficulty.
Typical modifications granted include, but are not limited to:
•Agreeing to interest rates below prevailing market rates for debt with similar risk characteristics.
•Extending the maturity date or amortization period beyond typical lending guidelines for loans with similar risk characteristics.
•Agreeing to an interest-only payment structure, delaying principal payments, or delaying payments.
•Forgiving principal.
To determine if a borrower is experiencing financial difficulty, factors we consider include:
•The borrower is currently in default on any debt.
•The borrower would likely default on any debt if the concession is not granted.
•The borrower’s cash flow is insufficient to service all debt if the concession is not granted.
•The borrower has declared, or is in the process of declaring, bankruptcy.
•The borrower is unlikely to continue as a going concern (if the entity is a business).
The following is a summary of the amortized cost basis of loan modifications granted to borrowers experiencing financial difficulty for the years ended December 31:
Interest Rate Reduction Other-Than-Insignificant Payment Delay Term Extension Other-Than-Insignificant Payment Delay and Term Extension
Amortized Cost Basis % of Total Class of Financial Receivable Amortized Cost Basis % of Total Class of Financial Receivable Amortized Cost Basis % of Total Class of Financial Receivable Amortized Cost Basis % of Total Class of Financial Receivable
Commercial and industrial
Secured $ - 0.00 % $ 1,782 0.80 % $ 10 0.00 % $ - 0.00 %
Commercial real estate
Commercial mortgage owner occupied - 0.00 % 818 0.46 % 1,353 0.76 % - 0.00 %
Agricultural
Agricultural mortgage - 0.00 % 1,305 1.93 % 281 0.42 % - 0.00 %
Agricultural other 132 0.41 % - 0.00 % - 0.00 % 1,107 3.44 %
Consumer
Secured - indirect - 0.00 % - 0.00 % 1 0.00 % - 0.00 %
Total $ 132 $ 3,905 $ 1,645 $ 1,107
Other-Than-Insignificant Payment Delay Term Extension Interest Rate Reduction
and Term Extension
Amortized Cost Basis % of Total Class of Financial Receivable Amortized Cost Basis % of Total Class of Financial Receivable Amortized Cost Basis % of Total Class of Financial Receivable
Commercial real estate
Commercial mortgage owner occupied $ 118 0.07 % $ - 0.00 % $ - 0.00 %
Commercial mortgage non-owner occupied - 0.00 % 1,030 0.48 % - 0.00 %
Commercial mortgage multifamily 2,977 3.81 % - 0.00 % - 0.00 %
Agricultural
Agricultural mortgage - 0.00 % 227 0.33 % 24 0.03 %
Agricultural other - 0.00 % 32 0.10 % - 0.00 %
Residential real estate
Senior lien - 0.00 % 5 0.00 % - 0.00 %
Total $ 3,095 $ 1,294 $ 24
We do not modify any loans by forgiving principal or accrued interest. We had committed to advance $43 and $0 in additional funds in connection with modified loans at December 31, 2024 and 2023, respectively, as displayed in the tables above.
The following tables summarize the financial effect of the modifications granted to borrowers experiencing financial difficulty for the years ended December 31:
Payment Delay Term Weighted-Average Interest Rate Reduction Weighted-Average Term Extension (Years)
Commercial and industrial
Secured 4 months N/A 3.00
Commercial real estate
Commercial mortgage owner occupied 7 months N/A 3.00
Agricultural
Agricultural mortgage 5 months N/A 6.27
Agricultural other 4 months 0.50% 0.33
Consumer
Secured - indirect N/A N/A 1.33
Payment Delay Term Weighted-Average Interest Rate Reduction Weighted-Average Term Extension (Years)
Commercial real estate
Commercial mortgage owner occupied 6 months N/A N/A
Commercial mortgage non-owner occupied N/A N/A 3.00
Commercial mortgage multifamily 6 months N/A N/A
Agricultural
Agricultural mortgage N/A 4.50% 1.08
Agricultural other N/A N/A 1.00
Residential real estate
Senior lien N/A N/A 2.60
We closely monitor the performance of loans that are modified to borrowers experiencing financial difficulty to understand the effectiveness of our modification efforts. The following tables summarize the performance of such loans that were modified within the past 12 months prior to December 31:
Current 30-59 Days
Past Due 60-89 Days
Past Due 90 Days or
More Past Due Total
Commercial and industrial
Secured $ 1,782 $ 10 $ - $ - $ 1,792
Commercial real estate
Commercial mortgage owner occupied 2,171 - - - 2,171
Agricultural
Agricultural mortgage 1,586 - - - 1,586
Agricultural other 1,239 - - - 1,239
Consumer
Secured - indirect 1 - - - 1
Total $ 6,779 $ 10 $ - $ - $ 6,789
Current 30-59 Days
Past Due 60-89 Days
Past Due 90 Days or
More Past Due Total
Commercial real estate
Commercial mortgage owner occupied $ 118 $ - $ - $ - $ 118
Commercial mortgage non-owner occupied 1,030 - - - 1,030
Commercial mortgage multifamily 2,977 - - - 2,977
Agricultural
Agricultural mortgage 251 - - - 251
Agricultural other 32 - - - 32
Residential real estate
Senior lien - - - 5 5
Total $ 4,408 $ - $ - $ 5 $ 4,413
We had no loans that defaulted for the years ended December 31, 2024 and 2023 which were modified within 12 months prior to the default date.
ACL - Loans
The credit quality of our loan portfolio is continuously monitored and is reflected within the ACL for loans. The ACL is an estimate of expected losses inherent within our loan portfolio. The ACL is adjusted by a credit loss expense, which is reported in earnings, and reduced by the charge-off of loan amounts, net of recoveries.
The ACL is evaluated on a regular basis for appropriateness. Our periodic review of the collectability of a loan considers historical experience, the nature and volume of the loan portfolio, adverse situations that may affect the borrower’s ability to repay, estimated value of any underlying collateral, and prevailing economic conditions. This evaluation is inherently subjective as it requires estimates that are susceptible to significant revision as more information becomes available.
The primary factors behind the determination of the level of the ACL are specific allocations for loans individually evaluated, historical loss percentages, delinquency status, and other credit trends and risk characteristics, including current conditions and reasonable and supportable forecasts about the future. Determining the appropriateness of the allowance is complex and requires judgment by management about the effect of matters that are inherently uncertain. In future periods evaluations of the overall loan portfolio, in light of the factors and forecasts then prevailing, may result in significant changes in the allowance and credit loss expense in those future periods.
The methodology for estimating the amount of expected credit losses reported in the ACL has two basic components: a component of individual loans that do not share risk characteristics with other loans; and a pooled component for estimated expected credit losses for pools of loans that share similar risk characteristics.
For a loan that does not share risk characteristics with other loans, an individual analysis is performed to measure an allowance. Loans in nonaccrual status are individually evaluated for specific allocation of the allowance using the fair value of collateral, less costs to sell if foreclosure is probable, or the discounted cash flow method. We do not recognize interest income on loans in nonaccrual status. For loans not classified as nonaccrual, interest income is recognized daily, as earned, according to the terms of the loan agreement and the principal amount outstanding.
In determining the allowance for credit losses, we derive an estimated credit loss assumption from a model that categorizes loan pools based on loan type and credit risk ratings or delinquency bucket. This model calculates an expected loss percentage for each loan class by considering the probability of default, based on the migration of loans from performing to loss by credit risk ratings or delinquency buckets using life-of-loan analysis, and the historical severity of loss, based on the aggregate net lifetime losses incurred per loan class.
The default and severity factors used to calculate the allowance for credit losses for loans that share similar risk characteristics with other loans are adjusted for differences between the historical period used to calculate historical default and loss severity rates and expected conditions over the remaining lives of the loans in the portfolio. These qualitative factors are used to adjust the historical probabilities of default and severity of loss so that they reflect management's expectation of future conditions based on a reasonable and supportable forecast. To the extent the lives of the loans in the portfolio extend beyond the period for which a reasonable and supportable forecast can be made, the model reverts back to the historical rates of default and severity of loss. Qualitative factors include:
•Changes in lending policies and procedures, including changes in underwriting standards and collection, charge-off, recovery practices not considered elsewhere in estimating credit losses;
•Changes in the experience, ability, and depth of lending management and other relevant staff;
•Changes in interest rates;
•Changes in international, national, regional, and local economic factors;
•Changes in the nature and volume of the portfolio and in the terms of loans;
•Changes in the volume and severity of past due loans, the volume of nonaccrual loans, and the volume and severity of adversely classified or graded loans;
•Lack of current financial information;
•Competition, legal, and regulatory; and
•Changes in the value of underlying collateral.
A summary of changes in the ACL and the recorded investment in loans by segments are as follows for the years ended December 31:
Commercial and Industrial Commercial Real Estate Agricultural Residential Real Estate Consumer Total
December 31, 2023 $ 968 $ 5,878 $ 270 $ 4,336 $ 1,656 $ 13,108
Charge-offs (381) - - (10) (2,393) (2,784)
Recoveries 42 355 6 128 353 884
Credit loss expense 687 (1,062) 11 67 1,984 1,687
December 31, 2024 $ 1,316 $ 5,171 $ 287 $ 4,521 $ 1,600 $ 12,895
Commercial and Industrial Commercial Real Estate Agricultural Residential Real Estate Consumer Unallocated Total
December 31, 2022 $ 860 $ 461 $ 577 $ 617 $ 961 $ 6,374 $ 9,850
Impact of the adoption of ASC 326 (58) 5,532 (247) 3,535 356 (6,374) 2,744
Charge-offs (276) - (4) (2) (542) - (824)
Recoveries 79 26 12 329 263 - 709
Credit loss expense 363 (141) (68) (143) 618 - 629
December 31, 2023 $ 968 $ 5,878 $ 270 $ 4,336 $ 1,656 $ - $ 13,108
The following table illustrates the two main components of the ACL as of December 31:
2024 2023
ACL
Individually evaluated $ - $ 84
Collectively evaluated 12,895 13,024
Total $ 12,895 $ 13,108
ACL to gross loans
Individually evaluated - % 0.01 %
Collectively evaluated 0.91 % 0.96 %
Total 0.91 % 0.97 %
The following table presents loans that were evaluated for expected credit losses on an individual basis and the related specific allocations, by loan segment as of December 31:
2024 2023
Loan Balance Specific Allocation Loan Balance Specific Allocation
Commercial and industrial $ - $ - $ 465 $ 56
Commercial real estate - - 234 28
Agricultural - - 181 -
Residential real estate 254 - 203 -
Consumer - - - -
Total $ 254 $ - $ 1,083 $ 84
We have designated loans classified as collateral dependent for which we apply the practical expedient to measure the ACL based on the fair value of the collateral less cost to sell, when the repayment is expected to be provided substantially by the sale or operation of the collateral and the borrower is experiencing financial difficulty. The fair value of the collateral is based on appraisals, which may be adjusted due to their age, and the type, location, and condition of the property or area or general market conditions to reflect the expected change in value between the effective date of the appraisal and the measurement date. Appraisals are updated every one to two years depending on the type of loan and the total exposure of the borrower. Loans evaluated for expected credit losses on an individual basis include $254 in collateral dependent loans.
Note 4 - Premises and Equipment
A summary of premises and equipment at December 31 follows:
2024 2023
Land $ 6,309 $ 6,309
Buildings and improvements 36,370 34,984
Furniture and equipment 33,960 35,528
Total 76,639 76,821
Less: accumulated depreciation 48,980 49,182
Premises and equipment, net $ 27,659 $ 27,639
Depreciation expense amounted to $2,086, $1,978, and $2,071 in 2024, 2023, and 2022, respectively.
Note 5 - Goodwill and Other Intangible Assets
The carrying amount of goodwill was $48,282 at December 31, 2024 and 2023.
Identifiable intangible assets were as follows as of December 31:
Gross
Intangible
Assets Accumulated
Amortization Net
Intangible
Assets
Core deposit premium resulting from acquisitions $ 5,579 $ 5,578 $ 1
Gross
Intangible
Assets Accumulated
Amortization Net
Intangible
Assets
Core deposit premium resulting from acquisitions $ 5,579 $ 5,577 $ 2
Amortization expense associated with identifiable intangible assets was $1, $3, and $15 in 2024, 2023, and 2022, respectively.
Note 6 - Deposits
Scheduled annual maturities of time deposits for each of the next five years, and thereafter, are as follows:
Scheduled Maturities of Time Deposits
2025 $ 340,229
2026 28,909
2027 8,451
2028 5,836
2029 4,102
Thereafter 64
Total $ 387,591
Interest expense on time deposits greater than $250 was $5,540 in 2024, $3,419 in 2023, and $621 in 2022.
Note 7 - Borrowed Funds
Short-term borrowings
Securities sold under repurchase agreements without stated maturity dates, federal funds purchased, and FRB Discount Window advances generally mature within one to four days from the transaction date.
A summary of borrowed funds without stated maturity dates was as follows for the years ended December 31:
2024 2023
Maximum Month End Balance Average Balance Weighted Average Interest Rate During the Period Maximum Month End Balance Average Balance Weighted Average Interest Rate During the Period
Securities sold under agreements to repurchase without stated maturity dates $ 56,051 $ 44,808 3.18 % $ 55,722 $ 42,982 2.22 %
Federal funds purchased - 1 5.55 % - 13 6.13 %
FRB Discount Window 5,300 315 4.80 % - 66 5.34 %
Securities sold under agreements to repurchase are classified as secured borrowings and are reflected at the amount of cash received in connection with the transaction. The securities underlying the agreements have a carrying value and a fair value of $67,539 and $67,764 at December 31, 2024 and 2023, respectively. Such securities remain under our control. We may be required to provide additional collateral based on the fair value of underlying securities.
Securities sold under repurchase agreements without stated maturity dates were as follows at December 31:
2024 2023
Amount Rate Amount Rate
Securities sold under agreements to repurchase without stated maturity dates $ 53,567 3.18 % $ 46,801 3.11 %
We had pledged AFS securities and 1-4 family residential real estate loans in the following amounts at December 31:
2024 2023
Pledged to secure borrowed funds $ 395,286 $ 391,529
Pledged to secure repurchase agreements 67,539 67,764
Pledged for public deposits and for other purposes necessary or required by law 86,162 84,099
Total $ 548,987 $ 543,392
AFS securities pledged to repurchase agreements without stated maturity dates consisted of the following at December 31:
2024 2023
U.S. Treasury $ 57,271 $ 55,623
Mortgage-backed securities 7,979 9,462
Collateralized mortgage obligations 2,289 2,679
Total $ 67,539 $ 67,764
AFS securities pledged to repurchase agreements are monitored to ensure the appropriate level is collateralized. In the event of maturities, calls, significant principal repayments, or significant decline in market values, we have an adequate level of AFS securities to pledge to satisfy collateral requirements.
As of December 31, 2024, we had the ability to borrow up to an additional $342,130, without pledging additional collateral.
FHLB advances
FHLB advances are collateralized by a blanket lien on all qualified 1-4 family residential real estate loans, specific AFS securities, and FHLB stock.
The following table lists the maturity and weighted average interest rate of FHLB advances as of December 31:
2024 2023
Amount Rate Amount Rate
Fixed rate due 2024 $ - 0.00 % $ 40,000 5.55 %
Fixed rate due 2025 30,000 4.52 % - 0.00 %
FHLB advances outstanding as of December 31, 2024 were short-term, with maturities within one week after December 31, 2024.
Subordinated Notes
We have $30,000 in aggregate principal amount of 3.25% Fixed-to-Floating Rate Subordinated Notes due 2031 (the "Notes"). The Notes will initially bear a fixed interest rate of 3.25% until June 15, 2026, after which time until maturity on June 15, 2031, the interest rate will reset quarterly to an annual floating rate equal to the then-current 3-month SOFR plus 256 basis points. The Notes are redeemable by us at our option, in whole or in part, on or after June 15, 2026. The Notes are not subject to redemption at the option of the holders.
The following table summarizes our outstanding notes at December 31:
2024 2023
Amount Rate Amount Rate
Fixed rate at 3.25% to floating, due 2031 $ 30,000 3.25 % $ 30,000 3.25 %
Unamortized issuance costs (576) (665)
Total subordinated debt, net $ 29,424 $ 29,335
Note 8 - Benefit Plans
401(k) Plan
We have a 401(k) plan in which substantially all employees are eligible to participate. Employees may contribute up to 100% of their compensation subject to certain limits based on federal tax laws. The plan includes a matching safe harbor contribution for all eligible employees equal to 100% of the first 5.0% of an employee's compensation contributed to the Plan during the year. Employees are 100% vested in the safe harbor matching contributions.
For 2024, 2023 and 2022, expenses attributable to the plan were $965, $885, and $805, respectively.
Defined Benefit Pension Plan
We maintain a noncontributory defined benefit pension plan, which was curtailed effective March 1, 2007. As a result of the curtailment, future salary increases are no longer considered (the projected benefit obligation is equal to the accumulated benefit obligation), and plan benefits are based on years of service and the individual employee’s five highest consecutive years of compensation out of the last ten years of service through March 1, 2007.
Changes in the projected benefit obligation and plan assets during each year, the funded status of the plan, and the net amount recognized in our consolidated balance sheets using an actuarial measurement date of December 31, are summarized as follows during the years ended December 31:
2024 2023
Change in benefit obligation
Benefit obligation, beginning balance $ 6,628 $ 6,896
Interest cost 294 317
Actuarial loss (gain) (76) (241)
Benefits paid, including plan expenses (443) (344)
Benefit obligation, ending balance 6,403 6,628
Change in plan assets
Fair value of plan assets, beginning balance 7,066 6,582
Investment return (loss) 680 828
Contributions - -
Benefits paid, including plan expenses (443) (344)
Fair value of plan assets, ending balance 7,303 7,066
Surplus (deficiency) in funded status, ending balance $ 900 $ 438
Accumulated benefit obligation, ending balance $ 6,403 $ 6,628
2024 2023
Change in accrued pension benefit costs
Accrued benefit cost, beginning balance $ 438 $ (314)
Contributions - -
Net periodic benefit (cost) credit 82 (95)
Net change in unrecognized actuarial loss and prior service cost 380 847
Prepaid (accrued) pension liability, ending balance $ 900 $ 438
The funded status of the plan is recorded in our consolidated balance sheets. We adjust the funded status in a prepaid account and the underfunded status in a liability account to reflect the current funded status of the plan. Any gains or losses that arise during the year but are not recognized as components of net periodic benefit cost are recognized as a component of other comprehensive income (loss).
The components of net periodic benefit cost are as follows for the years ended December 31:
2024 2023 2022
Interest cost on benefit obligation $ 294 $ 317 $ 224
Expected return on plan assets (402) (371) (490)
Amortization of unrecognized actuarial net loss 26 149 216
Settlement loss - - 109
Net periodic benefit cost (credit) $ (82) $ 95 $ 59
Settlement losses during 2022 were recognized in connection with lump-sum benefit distributions. Many plan participants elect to receive their retirement benefit payments in the form of lump-sum settlements. Pro rata settlement losses, which can occasionally occur as a result of these lump-sum distributions, are recognized only in years when the total of such distributions exceed the sum of the service and interest expense components of net periodic benefit cost.
The components of accumulated other comprehensive income are as follows for the years ended December 31:
2024 2023 2022
Transition (asset) obligation $ - $ - $ -
Net (gain) loss 502 882 1,729
Past service (credit) cost - - -
Accumulated other comprehensive income $ 502 $ 882 $ 1,729
The actuarial assumptions used in determining the benefit obligation are as follows for the years ended December 31:
2024 2023 2022
Discount rate 5.32 % 4.69 % 4.88 %
Expected long-term rate of return on plan assets 6.00 % 6.00 % 6.00 %
The actuarial weighted average assumptions used in determining the net periodic pension costs are as follows for the years ended December 31:
2024 2023 2022
Discount rate 4.69 % 4.88 % 2.43 %
Expected long-term rate of return on plan assets 6.00 % 6.00 % 6.00 %
As a result of the curtailment of the Plan, there is no rate of compensation increase considered in the above assumptions.
The expected long-term rate of return is an estimate of anticipated future long-term rates of return on plan assets as measured on a market value basis. Factors considered in arriving at this assumption include:
•Historical long-term rates of return for broad asset classes.
•Actual past rates of return achieved by the plan.
•The general mix of assets held by the plan.
•The stated investment policy for the plan.
The selected rate of return is net of anticipated investment related expenses.
Pension Plan Assets
Our overall investment strategy is to moderately grow the portfolio by investing 50% of the portfolio in equity securities and 50% in fixed income securities. This strategy is designed to generate a long-term rate of return of 6.00%. Equity securities primarily consist of the S&P 500 Index with a smaller allocation to the Small Cap and International Index. Fixed income securities are invested in the Bond Market Index. The plan has appropriate assets invested in short-term investments to meet near term benefit payments.
The asset mix and the sector weighting of the investments are determined by our benefits committee, which is comprised of members of our management. To manage the plan, we retain a third party investment advisor to conduct consultations. We review the performance of the advisor at least annually.
The fair values of our pension plan assets by asset category were as follows as of December 31:
2024 2023
Total (Level 2) Total (Level 2)
Short-term investments $ 234 $ 234 $ 103 $ 103
Common collective trusts
Fixed income 3,322 3,322 3,273 3,273
Equity investments 3,747 3,747 3,690 3,690
Total $ 7,303 $ 7,303 $ 7,066 $ 7,066
The following is a description of the valuation methodologies used for assets measured at fair value. There have been no changes in the methodologies used at December 31, 2024 and 2023:
•Short-term investments: Shares of a money market portfolio valued at amortized cost, which approximates fair value.
•Common collective trusts: These investments are public investment securities valued using the NAV provided by a third party investment advisor. The NAV is quoted on a private market that is not active; however, the unit price is based on underlying investments which are traded on an active market.
We anticipate contributions to the plan in 2025 to approximate net contribution costs.
Estimated future benefit payments are as follows for the next ten years:
Estimated Benefit Payments
2025 $ 915
2026 724
2027 553
2028 546
2029 532
2030 - 2034 2,356
Directors Plan
Pursuant to the terms of the Directors Plan, our directors are required to invest at least 25% of their board fees in our common stock. These stock investments can be made either through deferred fees or through the purchase of shares through the Dividend Reinvestment Plan. Deferred fees, under the Directors Plan, are converted on a quarterly basis into stock units of our common stock based on the fair value of a share of our common stock as of the relevant valuation date. Stock units credited to a participant’s account are eligible for stock and cash dividends as declared. Dividend Reinvestment Plan shares are purchased pursuant to the Dividend Reinvestment Plan.
Distribution of deferred fees from the Directors Plan occurs when the participant retires from the Board of Directors or upon the occurrence of certain other events. The participant is eligible to receive a distribution in the form of shares of our common stock of all of the stock units that are then in his or her account, and any unconverted cash will be converted to and rounded up to whole shares of stock and distributed, as well. The Directors Plan does not allow for cash settlement, and therefore, such share-based payment awards qualify for classification as equity. We may use authorized but unissued shares or purchase shares of common stock on the open market to meet our obligations under the Directors Plan.
We maintain the Rabbi Trust to fund the Directors Plan. The Rabbi Trust is an irrevocable grantor trust to which we may contribute assets for the limited purpose of funding a nonqualified deferred compensation plan. Although we may not use the assets of the Rabbi Trust for any purpose other than meeting our obligations under the Directors Plan, the assets of the Rabbi Trust remain subject to the claims of our creditors and are included in the consolidated financial statements. We may contribute cash or common stock to the Rabbi Trust from time to time for the sole purpose of funding the Directors Plan. The Rabbi Trust will use any cash that we contribute to purchase shares of our common stock on the open market. Shares held in the Rabbi Trust are included in the calculation of earnings per share.
The components of shares eligible to be issued under the Directors Plan were as follows as of December 31:
2024 2023
Eligible
Shares Market
Value Eligible
Shares Market
Value
Unissued 101,493 $ 2,638 154,119 $ 3,313
Shares held in Rabbi Trust 142,535 3,704 150,581 3,237
Cash Incentive Plans
Executive Cash Incentive Plan
We provide an executive cash incentive plan, which provides separate potential payouts for Isabella Bank's CEO, President, and CFO based on achievement of personal and corporate goals. The potential payouts under the plan range from 22% to 35% of the employee's annual salary. Expenses related to this plan for 2024, 2023, and 2022 were $103, $53, and $252 respectively.
Employee Cash Incentive Plan
We provide cash incentive plans to reward employees above and beyond their base salaries when our performance and operating profitability exceed established annual targets. Incentives are also awarded for achievement of personal performance goals. Expenses related to this plan for 2024, 2023 and 2022 were $1,485, $796, and $1,072, respectively.
Restricted Stock Plan
Under the RSP, an equity based bonus plan, we may award restricted stock bonuses to eligible employees on an annual basis that are not fully transferable or vested until certain conditions are met. Currently, the eligible employees are the Bank's CEO, President, and CFO. The RSP authorizes the issuance of unvested restricted stock to an eligible employee with a maximum award ranging from 25% to 40% of the employee’s annual salary, on a calendar year basis. The employee must also satisfy the annual performance targets and measures established by the Board of Directors. If these grant conditions are not satisfied, then the award of restricted shares will lapse or be adjusted appropriately, at the discretion of the Board of Directors. All such grant agreements contain vesting conditions and clawback provisions.
A summary of changes in nonvested restricted stock awards follows for the years ended December 31:
2024 2023
Number
of Shares Fair
Value Number
of Shares Fair
Value
Beginning balance 27,072 $ 592 27,072 $ 592
Granted 3,901 76 - -
Vested (16,240) (345) - -
Forfeited - - - -
Ending balance 14,733 $ 323 27,072 $ 592
Expenses related to the RSP for 2024, 2023, 2022 were $95, $253, and $147 respectively. As of December 31, 2024, there was $88 of total remaining unrecognized compensation expense related to nonvested restricted stock awards granted under the RSP. The remaining expense is expected to be recognized over a weighted-average service period of 2.38 years.
Other Employee Benefit Plans
We maintain nonqualified defined contribution retirement plans to provide supplemental retirement benefits to specified participants. Expenses related to these programs for 2024, 2023 and 2022 were $529, $345, and $251, respectively. Expenses are recognized over the participants’ expected years of service.
We maintain a self-funded medical plan under which we are responsible for the first $100 per year of claims made by a covered family. Expenses are accrued based on estimates of the aggregate liability for claims incurred and our experience. Expenses were $2,895 in 2024, $2,281 in 2023 and $3,026 in 2022.
Note 9 - Capital Ratios and Shareholders' Equity
The Corporation (on a consolidated basis) and the Bank are subject to various regulatory capital requirements administered by the FRB and the FDIC. Failure to meet minimum capital requirements can initiate mandatory and possibly additional discretionary actions by the FRB and the FDIC that, if undertaken, could have a material effect on our financial statements. Under regulatory capital adequacy guidelines and the regulatory framework for prompt corrective action, we must meet specific capital guidelines that include quantitative measures of assets, liabilities, capital, and certain off-balance-sheet items, as calculated under regulatory accounting standards. Our capital amounts and classifications are also subject to qualitative judgments by the FRB and the FDIC about components, risk weightings, and other factors. Prompt corrective action provisions are not applicable to bank holding companies.
Quantitative measures established by regulation to ensure capital adequacy require us to maintain minimum amounts and ratios (set forth in the following table) of total capital, tier 1 capital, and common equity tier 1 capital (as defined in the regulations) to risk-weighted assets (as defined) and tier 1 capital to average assets (as defined). As of December 31, 2024 and 2023, we met all capital adequacy requirements.
The FRB has established minimum risk-based capital guidelines. Pursuant to these guidelines, a framework has been established that assigns risk weights to each category of on and off-balance-sheet items to arrive at risk adjusted total assets. Regulatory capital is divided by the risk adjusted assets with the resulting ratio compared to the minimum standard to determine whether a corporation has adequate capital. The common equity tier 1 capital ratio has a minimum requirement of 4.50%. The minimum standard for primary, or Tier 1 capital is 6.00% and the minimum standard for total capital is 8.00%.
As of December 31, 2024 and 2023, the most recent notifications from the FRB and the FDIC categorized us as well capitalized under the regulatory framework for prompt corrective action. To be categorized as well capitalized, an institution must maintain total risk-based, Tier 1 risk-based, Common Equity Tier 1, and Tier 1 leverage ratios as set forth in the following tables. 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 Basel III Capital Rules. There were no conditions or events since the notifications that we believe have changed our categories. The following tables set forth these requirements and our ratios as of December 31:
Actual Minimum Capital
Required Plus Capital Conservation Buffer Minimum Capital
Required To Be Considered
Well Capitalized (1)
Amount Ratio Amount Ratio Amount Ratio
Common equity Tier 1 capital to risk weighted assets
Isabella Bank $ 172,589 11.53 % $ 104,783 7.00 % $ 97,299 6.50 %
Consolidated 183,348 12.21 % 105,136 7.00 % N/A N/A
Tier 1 capital to risk weighted assets
Isabella Bank 172,589 11.53 % 127,237 8.50 % 119,753 8.00 %
Consolidated 183,348 12.21 % 127,665 8.50 % N/A N/A
Total capital to risk weighted assets
Isabella Bank 185,997 12.43 % 157,175 10.50 % 149,691 10.00 %
Consolidated 226,179 15.06 % 157,703 10.50 % N/A N/A
Tier 1 capital to average assets
Isabella Bank 172,589 8.36 % 82,602 4.00 % 103,252 5.00 %
Consolidated 183,348 8.86 % 82,803 4.00 % N/A N/A
Actual Minimum Capital
Required Plus Capital Conservation Buffer Minimum Capital
Required To Be Considered
Well Capitalized (1)
Amount Ratio Amount Ratio Amount Ratio
Common equity Tier 1 capital to risk weighted assets
Isabella Bank $ 178,316 12.48 % $ 100,043 7.00 % $ 92,897 6.50 %
Consolidated 180,014 12.54 % 100,449 7.00 % N/A N/A
Tier 1 capital to risk weighted assets
Isabella Bank 178,316 12.48 % 121,481 8.50 % 114,335 8.00 %
Consolidated 180,014 12.54 % 121,973 8.50 % N/A N/A
Total capital to risk weighted assets
Isabella Bank 191,739 13.42 % 150,065 10.50 % 142,919 10.00 %
Consolidated 222,772 15.52 % 150,673 10.50 % N/A N/A
Tier 1 capital to average assets
Isabella Bank 178,316 8.71 % 81,935 4.00 % 102,419 5.00 %
Consolidated 180,014 8.76 % 82,154 4.00 % N/A N/A
(1) "Well-capitalized" minimum Common Equity Tier 1 to Risk-Weighted and Leverage Ratio are not formally defined under applicable regulations for bank holding companies.
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, 2024, the Bank exceeded all minimum capital requirements.
The following table provides a roll-forward of the changes in AOCI by component for the years ended December 31, 2022, 2023, and 2024 (net of tax):
Unrealized
Gains
(Losses) on
AFS
Securities Change in Unrecognized Pension Cost on Defined
Benefit
Pension Plan Total
Balance, December 31, 2021 $ 3,873 $ (2,014) $ 1,859
OCI before reclassifications (50,015) 762 (49,253)
Amounts reclassified from AOCI - 59 59
Subtotal (50,015) 821 (49,194)
Tax effect 10,314 (173) 10,141
OCI, net of tax (39,701) 648 (39,053)
Balance, December 31, 2022 (35,828) (1,366) (37,194)
OCI before reclassifications 13,365 752 14,117
Amounts reclassified from AOCI (67) 95 28
Subtotal 13,298 847 14,145
Tax effect (2,669) (178) (2,847)
OCI, net of tax 10,629 669 11,298
Balance, December 31, 2023 (25,199) (697) (25,896)
OCI before reclassifications 5,339 462 5,801
Amounts reclassified from AOCI - (82) (82)
Subtotal 5,339 380 5,719
Tax effect (1,098) (80) (1,178)
OCI, net of tax 4,241 300 4,541
Balance, December 31, 2024 $ (20,958) $ (397) $ (21,355)
Included in OCI are changes in unrealized gains and losses related to auction rate money market preferred stocks. Auction rate money market preferred stocks, for federal income tax purposes, have no deferred federal income taxes related to unrealized gains or losses given the nature of the investments.
A summary of the components of unrealized gains on AFS securities included in OCI follows for the years ended December 31:
2024 2023 2022
Auction Rate Money Market Preferred Stocks All Other AFS Securities Total Auction Rate Money Market Preferred Stocks All Other AFS Securities Total Auction Rate Money Market Preferred Stocks All Other AFS Securities Total
Unrealized gains (losses) arising during the period $ 113 $ 5,226 $ 5,339 $ 589 $ 12,776 $ 13,365 $ (900) $ (49,115) $ (50,015)
Reclassification adjustment for net (gains) losses included in net income - - - - (67) (67) - - -
Net unrealized gains (losses) 113 5,226 5,339 589 12,709 13,298 (900) (49,115) (50,015)
Tax effect - (1,098) (1,098) - (2,669) (2,669) - 10,314 10,314
Unrealized gains (losses), net of tax $ 113 $ 4,128 $ 4,241 $ 589 $ 10,040 $ 10,629 $ (900) $ (38,801) $ (39,701)
The following table details reclassification adjustments and the related affected line items in our consolidated statements of income for the years ended December 31:
Details about AOCI components Amount
Reclassified from
AOCI Affected Line Item in the
Consolidated
Statements of Income
2024 2023 2022
Unrealized gains (losses) on AFS securities
$ - $ 67 $ - Other noninterest income
- 14 - Income tax expense
$ - $ 53 $ - Net income
Change in unrecognized pension cost on defined benefit pension plan
$ (82) $ 95 $ 59 Other noninterest expenses
(17) 20 12 Income tax expense
$ (65) $ 75 $ 47 Net income
Note 10 - Computation of Earnings Per Common Share
Basic earnings per common share represents income available to common shareholders divided by the weighted average number of common shares outstanding during the period. Diluted earnings per common share includes additional common shares that would have been outstanding if dilutive potential common shares had been issued. For further information related to potential common shares that may be issued relate solely to outstanding shares in the Directors Plan and grant awards under the RSP, see "Note 8 - Benefit Plans."
Earnings per common share have been computed based on the following for the years ended December 31:
2024 2023 2022
Average number of common shares outstanding for basic calculation 7,465,343 7,511,591 7,549,878
Average potential effect of common shares in the Directors Plan (1)
- 34,962 70,329
Average potential effect of common shares in the RSP 17,031 28,939 27,405
Average number of common shares outstanding used to calculate diluted earnings per common share 7,482,374 7,575,492 7,647,612
Net income $ 13,889 $ 18,167 $ 22,238
Earnings per common share
Basic $ 1.86 $ 2.42 $ 2.95
Diluted $ 1.86 $ 2.40 $ 2.91
(1) Exclusive of shares held in the Rabbi Trust
Note 11 - Revenue
Our revenue is comprised primarily of interest income, service charges and fees, gains on the sale of loans and AFS securities, earnings on corporate owned life insurance policies, and other noninterest income. Other noninterest income is typically service and performance driven in nature and comprised primarily of investment and trust advisory fees. We recognize revenue, excluding interest income, in accordance with ASC 606, Revenue From Contracts with Customers. Revenue is recognized when our performance obligation has been satisfied according to our contractual obligation.
We record receivables when revenue is unpaid and collectability is reasonably assured. Accounts receivable balances primarily represent amounts due from customers for which revenue has been recognized. Accounts receivable balances are recorded in the consolidated balance sheets in accrued interest receivable and other assets. For the years ended December 31, 2024, 2023 and 2022, we satisfied our performance obligations pursuant to contracts with customers. As a result, we have not recorded any contract assets or liabilities. We estimate no returns or allowances for the years ended December 31, 2024, 2023 and 2022.
Our contracts with customers define our performance obligations with clearly established pricing which did not require us to allocate or disaggregate revenue by performance obligation. A summary of revenue recognized for each major category of contracts with customers, subject to ASC 606, is as follows for the years ended December 31:
2024 2023 2022
Debit card income $ 4,151 $ 4,063 $ 3,783
Trust service fees 3,438 3,110 2,622
Investment advisory fees 603 447 383
Service charges and fees related to deposit accounts 450 362 345
A significant portion of our revenue consists of interest income which is not subject to the requirements set forth in ASC 606.
Note 12 - Federal Income Taxes
Components of the consolidated provision for federal income taxes are summarized as follows for the years ended December 31:
2024 2023 2022
Federal tax expense $ 2,819 $ 2,657 $ 4,593
Deferred expense (benefit) (310) 1,008 13
Income tax expense $ 2,509 $ 3,665 $ 4,606
The reconciliation of the provision for federal income taxes and the amount computed at the federal statutory tax rate of 21% of income before federal income tax expense is as follows for the years ended December 31:
2024 2023 2022
Income taxes at statutory rate $ 3,444 $ 4,585 $ 5,637
Effect of nontaxable income
Interest income on tax exempt municipal securities (490) (552) (587)
Earnings on corporate owned life insurance policies (211) (193) (197)
Other 497 292 329
Total effect of nontaxable income (204) (453) (455)
Effect of nondeductible expenses 93 86 45
Effect of tax credits (824) (602) (621)
Unrecognized deferred tax benefit - 49 -
Federal income tax expense $ 2,509 $ 3,665 $ 4,606
The unrecognized deferred tax benefit recorded during 2023 related to a low income housing tax credit investment. The sale of this investment resulted in a capital loss carryforward that is unlikely to be recognized in the foreseeable future. As such, we did not recognize a deferred tax asset as of December 31, 2024 and 2023 related to our low income housing tax credit investment.
Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for federal income tax purposes. Significant components of our deferred tax assets and liabilities, measured at the 21% statutory rate, included in other assets on our consolidated balance sheets, are summarized as follows as of December 31:
2024 2023
Deferred tax assets
Allowance for credit losses $ 2,715 $ 2,658
Deferred compensation 1,148 1,388
Employee benefit plans 112 80
Core deposit premium and acquisition expenses 764 764
Net unrealized losses on AFS securities 5,529 6,627
Net unrecognized actuarial losses on pension plan 105 185
Life insurance death benefit payable 497 497
Other 813 821
Total deferred tax assets 11,683 13,020
Deferred tax liabilities
Prepaid pension cost 294 277
Premises and equipment 1,592 2,251
Accretion on securities 482 315
Core deposit premium and acquisition expenses 1,059 1,022
Other 1,162 1,236
Total deferred tax liabilities 4,589 5,101
Net deferred tax assets (liabilities) $ 7,094 $ 7,919
While we are subject to U.S. federal income tax, we are no longer subject to examination by taxing authorities for years before 2021. There are no material uncertain tax positions requiring recognition in our consolidated financial statements. We do not expect the total amount of unrecognized tax benefits to significantly increase in the next twelve months.
We recognize interest and/or penalties related to income tax matters in income tax expense. We do not have any amounts accrued for interest and penalties at December 31, 2024 and 2023 and we are not aware of any claims for such amounts by federal income tax authorities.
Note 13 - Fair Value
Fair value measurement requires the use of an exit price notion which may differ from entrance pricing. Generally, we believe our assets and liabilities classified as Level 1 or Level 2 approximate an exit price notion.
The following is a description of the valuation methodologies, key inputs, and an indication of the level of the fair value hierarchy in which the assets or liabilities are classified.
AFS securities: AFS securities are recorded at fair value on a recurring basis. Level 1 fair value measurement is based upon quoted prices for identical instruments. Level 2 fair value measurement is based upon quoted prices for similar instruments. If quoted prices are not available, fair values are measured using independent pricing models or other model based valuation techniques such as the present value of future cash flows, adjusted for the security’s credit rating, prepayment assumptions and other factors such as credit loss and liquidity assumptions. The values for Level 1 and Level 2 investment securities are generally obtained from an independent third party. On a quarterly basis, we compare the values provided to alternative pricing sources.
Loans: We do not record loans at fair value on a recurring basis. However, some loans are individually evaluated for ACL purposes, and a specific ACL may be established. To measure reserve, the fair value of the loan is estimated using the fair value of the collateral, less costs to sell if foreclosure is probable, or the present value of expected future cash flows discounted at the loan’s effective interest rate. Loans not requiring an allowance represent loans for which the fair value of the expected repayments or collateral exceed the recorded investments in such loans.
We review the net realizable values of the underlying collateral for collateral dependent loans on at least a quarterly basis for all loan types. To determine the collateral value, we utilize independent appraisals, broker price opinions, or internal evaluations. We review these valuations to determine whether an additional discount should be applied given the age of market information that may have been considered as well as other factors such as costs to sell an asset if it is determined that the collateral will be liquidated in connection with the ultimate settlement of the loan. We use these valuations to determine if any specific reserves or charge-offs are necessary. We may obtain new valuations in certain circumstances, including when there has been significant deterioration in the condition of the collateral, if the foreclosure process has begun, or if the existing valuation is deemed to be outdated.
The following tables list the quantitative fair value information about loans measured at fair value on a nonrecurring basis as of December 31:
Valuation Technique Fair Value Unobservable Input Actual Range Weighted Average
Collateral Dependent Loans Discount applied to collateral:
Discounted value $ 254 Real Estate 20 % 20 %
Valuation Technique Fair Value Unobservable Input Actual Range Weighted Average
Collateral Dependent Loans Discount applied to collateral:
Discounted value $ 1,083 Real Estate 20 % 20 %
Equipment 25% - 35%
33 %
Accounts receivable 25 % 25 %
Collateral discount rates may have ranges to accommodate differences in the age of the independent appraisal, broker price opinion, or internal evaluation.
OMSR: OMSR (which are included in other assets) are subject to impairment testing. To test for impairment, we utilize a discounted cash flow analysis using interest rates and prepayment speed assumptions currently quoted for comparable instruments and discount rates. If the valuation model reflects a value less than the carrying value, OMSR are adjusted to fair value through a valuation allowance as determined by the model. As such, we classify OMSR subject to nonrecurring fair value adjustments as Level 3.
The following table lists the quantitative information about OMSR fair value measurement as of December 31:
Valuation Technique Fair Value Unobservable Input Rate
Discounted cash flow $ 2,483 Constant prepayment rate 7 %
Discount rate 11 %
During the third quarter of 2024, the classification of OMSR was changed from Level 2 to Level 3. We elected to reevaluate our process for testing for impairment, which included a change in the third-party provider for the valuation. Our valuation is generated using a model-based approach that relies upon significant assumptions not observable in the market. As such, the Level 3 classification is most appropriate based on the valuation approach.
As a result of the change described above, Level 3 transfers in and Level 2 transfer out totaled $2,483 as of December 31, 2024. There were no other transfers to or from Levels 1, 2, or 3 as of December 31, 2024 or December 31, 2023.
The preceding methods described may produce a fair value calculation that may not be indicative of net realizable value or reflective of future fair values. Although we believe our valuation methods are appropriate and consistent with other market participants, the use of different methodologies or assumptions to determine the fair value of certain financial instruments could result in a different fair value measurement.
Estimated Fair Values of Financial Instruments Not Recorded at Fair Value in their Entirety on a Recurring Basis
Disclosure of the estimated fair values of financial instruments, which differ from carrying values, often requires the use of estimates. In cases where quoted market values in an active market are not available, we use present value techniques and other valuation methods to estimate the fair values of our financial instruments. These valuation methods require considerable judgment and the resulting estimates of fair value can be significantly affected by the assumptions made and methods used.
The carrying amount and estimated fair value of financial instruments not recorded at fair value in their entirety on a recurring basis were as follows as of December 31:
Carrying
Value Estimated
Fair Value Level 1 Level 2 Level 3
ASSETS
Cash and cash equivalents $ 24,542 $ 24,542 $ 24,542 $ - $ -
FHLB stock (1)
12,762 N/A - - -
Mortgage loans HFS 242 247 - 247 -
Gross loans 1,423,571 1,363,883 - - 1,363,883
Less allowance for credit losses 12,895 12,895 - - 12,895
Net loans 1,410,676 1,350,988 - - 1,350,988
Accrued interest receivable 8,085 8,085 8,085 - -
Equity securities without readily determinable fair values (1)
3,086 N/A - - -
OMSR 2,185 2,483 - - 2,483
LIABILITIES
Deposits without stated maturities 1,359,469 1,359,469 1,359,469 - -
Deposits with stated maturities 387,591 385,200 - 385,200 -
Short-term borrowings 53,567 53,503 - 53,503 -
FHLB advances 30,000 30,000 - 30,000 -
Subordinated debt, net of unamortized issuance costs
29,424 27,658 - 27,658 -
Accrued interest payable 1,051 1,051 1,051 - -
Carrying
Value Estimated
Fair Value Level 1 Level 2 Level 3
ASSETS
Cash and cash equivalents $ 33,672 $ 33,672 $ 33,672 $ - $ -
FHLB stock (1)
12,762 N/A - - -
Mortgage loans HFS - - - - -
Gross loans 1,349,463 1,292,458 - - 1,292,458
Less allowance for credit losses 13,108 13,108 - - 13,108
Net loans 1,336,355 1,279,350 - - 1,279,350
Accrued interest receivable 8,167 8,167 8,167 - -
Equity securities without readily determinable fair values (1)
3,086 N/A - - -
OMSR 2,422 3,164 - 3,164 -
LIABILITIES
Deposits without stated maturities 1,377,321 1,377,321 1,377,321 - -
Deposits with stated maturities 346,374 341,489 - 341,489 -
Short-term borrowings 46,801 46,704 - 46,704 -
FHLB advances 40,000 40,000 - 40,000 -
Subordinated debt, net of unamortized issuance costs 29,335 26,146 - 26,146 -
Accrued interest payable 890 890 890 - -
(1) Due to the characteristics of equity securities without readily determinable fair values, they are not disclosed under a specific fair value hierarchy. When an impairment or write-down related to these securities is recorded, such amount would be classified as a nonrecurring Level 3 fair value adjustment.
Financial Instruments Recorded at Fair Value
The table below presents the recorded amount of assets and liabilities measured at fair value on December 31:
2024 2023
Total Level 1 Level 2 Level 3 Total Level 1 Level 2 Level 3
Recurring items
AFS securities
U.S. Treasury $ 220,571 $ - $ 220,571 $ - $ 214,801 $ - $ 214,801 $ -
States and political subdivisions 76,568 - 76,568 - 92,876 - 92,876 -
Auction rate money market preferred 3,044 - 3,044 - 2,931 - 2,931 -
Mortgage-backed securities 26,886 - 26,886 - 32,815 - 32,815 -
Collateralized mortgage obligations 154,674 - 154,674 - 177,775 - 177,775 -
Corporate 7,286 - 7,286 - 6,950 - 6,950 -
Total AFS securities 489,029 - 489,029 - 528,148 - 528,148 -
Nonrecurring items
Collateral dependent (net of ACL) 254 - - 254 1,083 - - 1,083
OMSR 2,185 - - 2,185 2,422 - 2,422 -
Foreclosed assets 544 - - 544 406 - - 406
Total $ 492,012 $ - $ 489,029 $ 2,983 $ 532,059 $ - $ 530,570 $ 1,489
Percent of assets and liabilities measured at fair value 0.00 % 99.39 % 0.61 % 0.00 % 99.72 % 0.28 %
We recorded losses of $1 and $0 through earnings related to fair value changes in OMSR for the years ended December 31, 2024 and 2023. We also recorded losses of $0 and $132 through earnings related to fair value changes in foreclosed assets for the years ended December 31, 2024 and 2023. We had no other assets or liabilities recorded at fair value with changes in fair value recognized through earnings, on a recurring basis or nonrecurring basis, as of December 31, 2024 and 2023.
Note 14 - Off-Balance-Sheet Activities, Commitments and Other Matters
Credit-Related Financial Instruments
We are party to credit related financial instruments with off-balance-sheet risk. These financial instruments are entered into in the normal course of business to meet the financing needs of our customers. These financial instruments involve, to varying degrees, elements of credit and IRR in excess of the amounts recognized in the consolidated balance sheets. The contractual or notional amounts of these instruments reflect the extent of involvement we have in a particular class of financial instrument.
The following table summarizes our credit related financial instruments with off-balance-sheet risk as of December 31:
2024 2023
Unfunded commitments under lines of credit $ 312,577 $ 313,646
Commercial and standby letters of credit 2,125 1,624
Commitments to originate new loans 26,558 6,460
Total $ 341,260 $ 321,730
Unfunded commitments under lines of credit are commitments for possible future extensions of credit to existing customers. These commitments may expire without being drawn upon and do not necessarily represent future cash requirements. Advances to mortgage brokers are also included in unfunded commitments under lines of credit. The unfunded commitment amount is the difference between our outstanding balances and maximum outstanding aggregate amount.
Commitments to originate new loans are agreements to lend to a customer as long as there is no violation of any condition established in the contract. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. The amount of collateral obtained, if it is deemed necessary, is based on management's credit evaluation of the customer. Commitments to grant loans include residential mortgage loans that may be committed to be sold to the secondary market.
Commercial and standby letters of credit are conditional commitments we issued to guarantee the performance of a customer to a third party. Those guarantees are primarily issued to support private borrowing arrangements, including commercial paper,
bond financing, and similar transactions. These commitments to extend credit and letters of credit generally mature within one year. The credit risk involved in these transactions is essentially the same as that involved in extending loans to customers. We evaluate each customer’s credit worthiness on a case-by-case basis. The amount of collateral obtained, if deemed necessary upon the extension of credit, is based on our credit evaluation of the borrower. While we consider standby letters of credit to be guarantees, the amount of the liability related to such guarantees on the commitment date is not significant and a liability related to such guarantees is not recorded on the consolidated balance sheets.
Our exposure to credit-related loss in the event of nonperformance by the counter parties to the financial instruments for commitments to extend credit and standby letters of credit could be up to the contractual notional amount of those instruments. We use the same credit policies as we do for extending loans to customers. No significant losses are anticipated as a result of these commitments.
Derivative Loan Commitments
Mortgage loan commitments are referred to as derivative loan commitments if the loan that will result from exercise of the commitment will be held for sale upon funding. We enter into commitments to fund residential mortgage loans at specific times in the future, with the intention that these loans will subsequently be sold in the secondary market. A mortgage loan commitment binds us to lend funds to a potential borrower at a specified interest rate within a specified period of time, generally up to 60 days after inception of the rate lock.
Outstanding derivative loan commitments expose us to the risk that the price of the loans arising from the exercise of the loan commitment might decline from the inception of the rate lock to funding of the loan due to increases in mortgage interest rates. If interest rates increase, the value of these loan commitments decreases. Conversely, if interest rates decrease, the value of these loan commitments increase. There were no undesignated interest rate lock commitments at December 31, 2024 and 2023.
Forward Loan Sale Commitments
To protect against the price risk inherent in derivative loan commitments, we utilize both “mandatory delivery” and “best efforts” forward loan sale commitments to mitigate the risk of potential decreases in the values of loan that would result from the exercise of the derivative loan commitments.
With a “mandatory delivery” contract, we commit to deliver a certain principal amount of mortgage loans to an investor at a specified price on or before a specified date. If we fail to deliver the amount of mortgages necessary to fulfill the commitment by the specified date, we are obligated to pay a “pair-off” fee, based on then current market prices, to the investor to compensate the investor for the shortfall.
With a “best efforts” contract, we commit to deliver an individual mortgage loan of a specified principal amount and quality to an investor if the loan to the underlying borrower closes. Generally, the price the investor will pay the seller for an individual loan is specified prior to the loan being funded (e.g. on the same day the lender commits to lend funds to a potential borrower).
We expect that these forward loan sale commitments will experience changes in fair value opposite to the change in fair value of derivative loan commitments. There were undesignated forward loan sale commitments of $242 and $0 at December 31, 2024 and 2023, respectively. The fair value of these forward loan sale commitments was $247 and $0 at December 31, 2024 and 2023, respectively.
The fair values of the rate lock loan commitments related to the origination of mortgage loans that will be held for sale and the forward loan sale commitments are deemed insignificant by management and, accordingly, are not recorded in our consolidated financial statements.
ACL - Off-Balance-Sheet Credit Commitments
In connection with the commitments for credit-related financial instruments discussed above, we established an allowance for credit losses related to this off-balance-sheet credit exposure. The allowance, recorded in a liability account, is calculated in accordance with ASC 326 and represents expected credit losses over the contractual period for which we are exposed to credit risk resulting from a contractual obligation to extend credit. The estimate of expected credit losses considers both the likelihood that funding will occur and the amount expected to be funded over the estimated remaining life of the commitment. The likelihood and expected amount of funding are based on historical utilization rates. No allowance is recognized if we have the unconditional right to cancel the obligation.
The allowance was $512 and $315 at December 31, 2024 and 2023, and is reported as a component of other liabilities. Adjustments to the allowance are reported in our income statement as a component of provision for credit losses.
Other Matters
Correspondent banks may require us to maintain minimum cash reserve balances. The reserve balances related to correspondent banks amounted to $450 and $250 for the years ended December 31, 2024 and 2023.
Banking regulations limit the transfer of assets in the form of dividends, loans, or advances from the Bank to the Corporation. At December 31, 2024, substantially all of the Bank’s assets were restricted from transfer to the Corporation in the form of loans or advances. Bank dividends are the principal source of funds for the Corporation. Payment of dividends without regulatory approval is limited to the current year’s retained net income plus retained net income for the preceding two years, less any required transfers to common stock. At January 1, 2025, the amount available to the Corporation for dividends from the Bank, without regulatory approval, was approximately $3,700.
Note 15 - Related Party Transactions
In the ordinary course of business, we grant loans to principal officers and directors and their affiliates (including their families and companies in which they have 10% or more ownership). Annual activity consisted of the following for the years ended December 31:
2024 2023
Balance, January 1 $ 19,527 $ 20,963
New loans 1,962 569
Repayments (18,538) (2,005)
Balance, December 31 $ 2,951 $ 19,527
Total deposits of these principal officers and directors and their affiliates amounted to $4,024 and $7,735 at December 31, 2024 and 2023, respectively.
From time to time, we make charitable donations to The Isabella Bank Foundation (the “Foundation”), which is a non-controlled nonprofit organization formed for the purpose of distributing charitable donations to recipient organizations generally located in the communities we serve. Our donations are recognized as expense when paid to the Foundation. The assets and transactions of the Foundation are not included in our consolidated financial statements.
Assets of the Foundation include cash and cash equivalents, certificates of deposit, and shares of Isabella Bank Corporation common stock. The Foundation owned 20,000 shares of our common stock as of December 31, 2024 and 2023. Such shares are included in the computation of dividends and earnings per share.
The following table displays total assets of, and our donations to, the Foundation as of, and for the years ended December 31:
2024 2023 2022
Total assets $ 1,236 $ 1,221 $ 1,385
Donations - - 50
Note 16 - Parent Company Only Financial Information
Condensed Balance Sheets
December 31
2024 2023
Assets
Cash on deposit at the Bank $ 34,498 $ 25,010
Investments in subsidiaries 156,486 157,671
Premises and equipment 1,140 1,196
Other assets 47,663 47,949
Total assets $ 239,787 $ 231,826
Liabilities and Shareholders' Equity
Subordinated debt, net of unamortized issuance costs
$ 29,424 $ 29,335
Other liabilities 87 89
Shareholders' equity 210,276 202,402
Total liabilities and shareholders' equity $ 239,787 $ 231,826
Condensed Statements of Income
Year Ended December 31
2024 2023 2022
Income
Dividends from subsidiaries $ 22,000 $ 30,000 $ 6,000
Interest income 511 191 15
Other income 11 13 14
Total income 22,522 30,204 6,029
Expenses
Management fee 1,188 952 900
Interest expense 1,065 1,065 1,065
Audit, consulting, and legal fees 561 577 522
Director fees 357 408 417
Other 362 354 339
Total expenses 3,533 3,356 3,243
Income before income tax benefit and equity in undistributed earnings of subsidiaries 18,989 26,848 2,786
Federal income tax benefit 626 654 670
Income before equity in undistributed earnings of subsidiaries 19,615 27,502 3,456
Undistributed earnings of subsidiaries (5,726) (9,335) 18,782
Net income $ 13,889 $ 18,167 $ 22,238
Condensed Statements of Cash Flows
Year Ended December 31
2024 2023 2022
Operating activities
Net income $ 13,889 $ 18,167 $ 22,238
Adjustments to reconcile net income to cash provided by operations
Undistributed earnings of subsidiaries 5,726 9,335 (18,782)
Share-based payment awards 476 782 610
Amortization of subordinated debt issuance costs 89 90 87
Depreciation 56 52 50
Deferred income tax expense (benefit) 313 228 (133)
Net changes in:
Other assets (27) (255) 1,383
Other liabilities (2) (199) 160
Net cash provided by (used in) operating activities 20,520 28,200 5,613
Investing activities
Purchase of equity investments - - (250)
Net (purchases) sales of premises and equipment - (77) 260
Net cash provided by (used in) investing activities - (77) 10
Financing activities
Cash dividends paid on common stock (8,147) (8,216) (8,082)
Proceeds from the issuance of common stock 1,523 1,617 1,762
Common stock repurchased (3,076) (3,415) (1,124)
Common stock purchased for deferred compensation obligations (1,332) (1,624) (1,189)
Net cash provided by (used in) financing activities (11,032) (11,638) (8,633)
Increase (decrease) in cash and cash equivalents 9,488 16,485 (3,010)
Cash and cash equivalents at beginning of period 25,010 8,525 11,535
Cash and cash equivalents at end of period $ 34,498 $ 25,010 $ 8,525

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ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS
Item 9. Changes in and Disagreements With Accountants on Accounting and Financial Disclosure.
None.

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ITEM 9A. CONTROLS AND PROCEDURES
Item 9A. Controls and Procedures.
DISCLOSURE CONTROLS AND PROCEDURES
We carried out an evaluation, under the supervision and with the participation of the Principal Executive Officer and Principal Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures (as such term is defined in Rules 13a-15(e) and 15(d)-15(e) under the Exchange Act) as of December 31, 2024, pursuant to Exchange Act Rule 13a-15. Based upon that evaluation, the Principal Executive Officer and Principal Financial Officer concluded that our disclosure controls and procedures as of December 31, 2024, were effective to ensure that information required to be disclosed in reports that we file or submit under the Exchange Act are recorded, processed, summarized and reported within the time periods specified in SEC rules and forms.
CHANGES IN INTERNAL CONTROL OVER FINANCIAL REPORTING
We also conducted an evaluation of internal control over financial reporting to determine whether any changes occurred during the quarter ended December 31, 2024, that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting. Based on this evaluation, we have concluded that there have been no such changes during the quarter ended December 31, 2024.
Management’s Report on Internal Control Over Financial Reporting
We are responsible for the preparation and integrity of our published consolidated financial statements. The consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America and, accordingly, include amounts based on judgments and estimates. We also prepared the other information included in the Annual Report on Form 10-K and are responsible for the accuracy and consistency with the consolidated financial statements.
We are responsible for establishing and maintaining a system of internal control over financial reporting, which is intended to provide reasonable assurance to our management and Board of Directors regarding the reliability of our consolidated financial statements. The system includes but is not limited to:
•A documented organizational structure and division of responsibility;
•Established policies and procedures, including a code of conduct to foster a strong ethical climate which is communicated throughout our Corporation;
•Internal auditors that monitor the operation of the internal control system and report findings and recommendations to management and the Audit Committee;
•Procedures for taking action in response to an internal audit finding or recommendation;
•Regular reviews of our consolidated financial statements by qualified individuals; and
•The careful selection, training and development of our people.
There are inherent limitations in the effectiveness of any system of internal control, including the possibility of human error and the circumvention or overriding of controls. Also, the effectiveness of an internal control system may change over time. We have implemented a system of internal control that was designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of consolidated financial statements for external purposes in accordance with generally accepted accounting principles.
We have assessed our internal control system in relation to criteria for effective internal control over financial reporting described in “Internal Control-Integrated Framework” issued by the Committee of Sponsoring Organizations (2013 framework) of the Treadway Commission.
Based upon these criteria, we believe that, as of December 31, 2024, our system of internal control over financial reporting was effective.
Our independent registered public accounting firm, Rehmann Robson LLC ("Rehmann"), has audited our 2024 consolidated financial statements and our internal control over financial reporting as of December 31, 2024. Rehmann was given unrestricted access to all financial records and related data, including minutes of all meetings of stockholders, the Board of Directors and committees of the Board of Directors. Rehmann has issued an unqualified audit opinion on our 2024
consolidated financial statements and an unqualified opinion on the effectiveness of our internal controls as of December 31, 2024, as a result of the integrated audit.
Isabella Bank Corporation
By:
/s/ Jerome E. Schwind
Jerome E. Schwind
President and Chief Executive Officer
(Principal Executive Officer)
March 12, 2025
/s/ William M. Schaefer
William M. Schaefer
Chief Financial Officer
(Principal Financial Officer)
March 12, 2025

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ITEM 9B. OTHER INFORMATION
Item 9B. Other Information.
Securities Trading Plans of Executive Officers
During the fiscal quarter ended December 31, 2024, none of the Corporation’s directors or officers adopted, modified or terminated a Rule 10b5-1 trading arrangement, or a non-Rule 10b5-1 trading arrangement, in each case as defined in Item 408 of Regulation S-K.

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ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
Item 10. Directors, Executive Officers and Corporate Governance.
For information concerning our directors and certain executive officers, see “Election of Directors” and “Delinquent Section 16(a) Reports” in our Proxy Statement for the Annual Meeting of Shareholders to be held May 6, 2025 (“Proxy Statement”) which is incorporated herein by reference.
For Information concerning our Audit Committee financial experts, see “Committees of the Board of Directors and Meeting Attendance” in the Proxy Statement which is incorporated herein by reference.
We have adopted a Code of Conduct and Business Ethics that applies to the principal executive officer, the principal financial officer and the principal accounting officer or controller of the Corporation. We shall provide to any person without charge upon request, a copy of our Code of Conduct and Business Ethics. Written requests should be sent to: Secretary, Isabella Bank Corporation, 401 North Main Street, Mount Pleasant, Michigan 48858.
We have an insider trading policy governing the purchase, sale and other disposition of the Corporation’s common stock that applies to the Corporation’s directors, executive officers and specifically designated individuals of the Corporation and the Bank as determined from time to time by the Corporation’s Board of Directors. We believe that our insider trading policy is reasonably designed to promote compliance with insider trading laws, rules and regulations. A copy of the Corporation’s insider trading policy is filed as Exhibit 19 to this Annual Report on Form 10-K.

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ITEM 11. EXECUTIVE COMPENSATION
Item 11. Executive Compensation.
For information concerning executive compensation, see “Executive Officers” in the Proxy Statement which is incorporated herein by reference.

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ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters.
For information concerning the security ownership of certain owners and management, see “Security Ownership of Certain Beneficial Owners and Management” in the Proxy Statement which is incorporated herein by reference.
Equity Compensation Plan Information
The following table provides information as of December 31, 2024, with respect to compensation plans under which our common shares are authorized for issuance to directors, officers or employees in exchange for consideration in the form of goods or services.
Plan Category Number of Securities
to be Issued
Upon Exercise of
Outstanding
Options, Warrants,
and Rights
(A) Weighted Average
Exercise Price
of Outstanding
Options, Warrants,
and Rights
(B) Number of Securities
Remaining
Available for Future
Issuance Under Equity
Compensation Plans
(Excluding Securities
Reflected in Column (A))
(C)
Equity compensation plans approved by shareholders:
None - - -
Equity compensation plans not approved by shareholders:
Deferred director compensation plan (1)
101,493 (3) - (5) - (6)
Restricted Stock Plan (2)
14,733 (4) - (5) - (6)
Total 116,226
(1) Pursuant to the terms of the Directors Plan, our directors are required to invest at least 25% of their board fees in our common stock. These stock investments can be made either through deferred fees or through the purchase of shares through the Dividend Reinvestment Plan. Deferred fees, under the Directors Plan, are converted on a quarterly basis into stock units of our common stock based on the fair value of a share of our common stock as of the relevant valuation date. Stock units credited to a participant’s account are eligible for stock and cash dividends as declared. Dividend Reinvestment Plan shares are purchased pursuant to the Dividend Reinvestment Plan.
Distribution of deferred fees from the Directors Plan occurs when the participant retires from the Board of Directors or upon the occurrence of certain other events. The participant is eligible to receive a distribution in the form of shares of our common stock of all of the stock units that are then in his or her account, and any unconverted cash will be converted to and rounded up to whole shares of stock and distributed, as well. The Directors Plan does not allow for cash settlement, and therefore, such
share-based payment awards qualify for classification as equity. We may use authorized but unissued shares or purchase shares of common stock on the open market to meet our obligations under the Directors Plan.
(2) The RSP is an equity-based bonus plan. Under the plan, we may award restricted stock bonuses to eligible employees on an annual basis that are not fully transferable. Currently, the eligible employees are Isabella Bank's CEO, President, and CFO. The RSP authorizes the issuance of unvested restricted stock to an eligible employee with a maximum award ranging from 25% to 40% of the employee’s annual salary, on a calendar year basis. The employee must also satisfy the annual performance targets and measures established by the Board of Directors. If these grant conditions are not satisfied, then the award of restricted shares will lapse or be adjusted appropriately, at the discretion of the Board of Directors. Awards are converted to shares upon payment to the participant based on the market value of our common stock on the date of award.
(3) As of December 31, 2024, the Directors Plan had 101,493 shares eligible to be distributed under the Directors Plan. The Rabbi Trust holds 142,535 shares for the benefit of participants pursuant to the Directors Plan.
(4) This amount includes shares subject to outstanding stock awards at the maximum amount of shares issuable under such awards. However, payout of incentive awards is contingent on the individual and the Corporation reaching certain levels of performance. If the performance criteria for these awards are not fully satisfied, the award recipient will receive less than the maximum number of shares eligible under these grants and may receive nothing from these grants. Additionally, this amount assumes the closing price of our common stock as of the award grant dates for purposes of the conversion from awards to common stock.
(5) The Directors Plan and the RSP do not have an exercise price.
(6) There is no maximum number of shares available for issuance under the Directors Plan and the RSP has a maximum number of 100,000 shares.

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ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Item 13. Certain Relationships and Related Transactions, and Director Independence.
For information, see “Indebtedness of and Transactions with Management” and “Election of Directors” in the Proxy Statement, which is incorporated herein by reference.

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ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES
Item 14. Principal Accountant Fees and Services.
For information concerning our principal accountant fees and services see “Fees for Professional Services Provided by Rehmann” and “Pre-Approval Policies and Procedures” in our Proxy Statement which is incorporated herein by reference.
PART IV

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ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES
Item 15. Exhibit and Financial Statement Schedules.
(a) (1) Financial Statements: The following documents are filed as part of Item 8 of this report:
Report of Independent Registered Public Accounting Firm, Rehmann Robson LLC (PCAOB ID: 263)
Consolidated Balance Sheets
Consolidated Statements of Income
Consolidated Statements of Comprehensive Income (Loss)
Consolidated Statements of Changes in Shareholders’ Equity
Consolidated Statements of Cash Flows
Notes to Consolidated Financial Statements
(2) Financial Statement Schedules: All schedules are omitted because they are neither applicable nor required, or because the required information is included in the consolidated financial statements or related notes.
(3) See the exhibits listed below under Item 15(b):
(b) The following exhibits required by Item 601 of Regulation S-K are filed as part of this report:
3.1 Amended Articles of Incorporation (1)
3.2 Amendment to the Articles of Incorporation (2)
3.3 Amendment to the Articles of Incorporation (3)
3.4
Amendment to the Articles of Incorporation (4)
3.5
Amendment to the Articles of Incorporation (7)
3.6
Amended Bylaws (5)
3.7
Amendment to Bylaws (6)
3.8
Amendment to Bylaws (9)
3.9
Amendment to Bylaws (10)
4.1
Indenture, dated as of June 2, 2021, by and between Isabella Bank Corporation and UMB Bank, National Association, as trustee (14)
4.2
Form of 3.25% Fixed-to-Floating Rate Subordinated Note due 2031 (14)
10.1
Isabella Bank Corporation and Related Companies Deferred Compensation Plan for Directors* (8)
10.2
Isabella Bank Corporation Retirement Bonus Plan* (11)
10.3
Isabella Bank Corporation Split Dollar Plan* (12)
10.4
Isabella Bank Corporation Supplemental Executive Retirement Plan* (13)
10.5
Isabella Bank Corporation Restricted Stock Plan* (13)
10.6
Isabella Bank Corporation Executive Cash Incentive Plan* (13)
10.7
Isabella Bank Corporation Executive Clawback Policy* (13)
10.8
Form of Subordinated Note Purchase Agreement, dated as of June 2, 2021, by and among the Corporation and the several Purchasers (14)
10.9
Form of Registration Rights Agreement, dated as of June 2, 2021, by and among the Corporation and the several Purchasers (14)
Isabella Bank Corporation Directors and Executive Officers Operating Policy on Trading in ISBA Common Stock
Subsidiaries of the Registrant
Consent of Rehmann Robson LLC, Independent Registered Public Accounting Firm
31.1
Certification pursuant to section 302 of the Sarbanes-Oxley Act of 2002 by the Chief Executive Officer
31.2
Certification pursuant to section 302 of the Sarbanes-Oxley Act of 2002 by the Chief Financial Officer
Section 1350 Certification of Chief Executive Officer and Chief Financial Officer
101.INS XBRL Interactive Data File**
101.SCH XBRL Interactive Data File**
101.CAL XBRL Interactive Data File**
101.LAB XBRL Interactive Data File**
101.PRE XBRL Interactive Data File**
101.DEF XBRL Interactive Data File**
104 Cover Page Interactive Data File
* Management Contract or Compensatory Plan or Arrangement.
** As provided by Rule 406T in Regulation S-T, this information is furnished and not filed for purposes of Sections 11 and 12 of the Securities Act of 1933 and Section 18 of the Exchange Act
(1) Previously filed as an Exhibit to the Isabella Bank Corporation Form 10-K, filed March 12, 1991, and incorporated herein by reference
(2) Previously filed as an Exhibit to the Isabella Bank Corporation Form 10-K, filed March 26, 1994, and incorporated herein by reference.
(3) Previously filed as an Exhibit to Isabella Bank Corporation Form 10-K, filed March 22, 2000, and incorporated herein by reference.
(4) Previously filed as an Exhibit to Isabella Bank Corporation Form 10-K, filed March 27, 2001, and incorporated herein by reference.
(5) Previously filed as an Exhibit to Isabella Bank Corporation Form 10-K, filed March 16, 2005, and incorporated herein by reference.
(6) Previously filed as an Exhibit to Isabella Bank Corporation Form 8-K, filed November 22, 2006, and incorporated herein by reference.
(7) Previously filed as an Exhibit to Isabella Bank Corporation Form 8-K, filed May 16, 2008, and incorporated herein by reference.
(8) Previously filed as an Exhibit to Isabella Bank Corporation Form 8-K, filed March 13, 2019, and incorporated herein by reference.
(9) Previously filed as an Exhibit to Isabella Bank Corporation Form 8-K, filed August 28, 2009, and incorporated herein by reference.
(10) Previously filed as an Exhibit to Isabella Bank Corporation Form 8-K, filed December 23, 2009, and incorporated herein by reference.
(11) Previously filed as an Exhibit to Isabella Bank Corporation Form 8-K, filed December 19, 2008, and incorporated herein by reference.
(12) Previously filed as an Exhibit to Isabella Bank Corporation Form 8-K, filed March 31, 2015, and incorporated herein by reference.
(13) Previously filed as an Exhibit to Isabella Bank Corporation Form 8-K, filed April 1, 2024, and incorporated herein by reference.
(14) Previously filed as an Exhibit to Isabella Bank Corporation Form 8-K, filed June 2, 2021, and incorporated herein by reference.