Equibles

10-Q

ISABELLA BANK CORP (ISBA)

10-Q 2024-05-02 For: 2024-03-31
View Original
Added on April 07, 2026

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

☒ Quarterly Report Pursuant to Section 13 or 15(d) of The Securities Exchange Act of 1934

For the quarterly period ended March 31, 2024

or

☐ Transition Report Pursuant to Section 13 or 15(d) of The Securities Exchange Act of 1934

For the transition period from                      to

Commission File Number: 0-18415

Isabella Bank Corporation

(Exact name of registrant as specified in its charter)

Michigan 38-2830092
(State or other jurisdiction of incorporation or organization) (I.R.S. Employer Identification No.)
401 N. Main St Mt. Pleasant MI 48858
(Address of principal executive offices) (Zip code)

(989) 772-9471

(Registrant’s telephone number, including area code)

N/A

(Former name, former address and former fiscal year, if changed since last report)

Securities registered pursuant to Section 12(b) of the Act:

Title of each class Trading Symbol(s) Name of each exchange on which registered
None N/A N/A

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    ☒  Yes    ☐  No

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).    ☒  Yes    ☐  No

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer ☐ Accelerated filer ☐
Non-accelerated filer ☒ Smaller reporting company ☒
Emerging growth company ☐

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). ☐  Yes   ☒  No

The number of common shares outstanding of the registrant’s Common Stock (no par value) was 7,474,799 as of April 30, 2024.

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ISABELLA BANK CORPORATION

QUARTERLY REPORT ON FORM 10-Q

Table of Contents

PART I – FINANCIAL INFORMATION 4
Item 1. Financial Statements 4
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations 40
Item 3. Quantitative and Qualitative Disclosures About Market Risk 55
Item 4. Controls and Procedures 55
PART II – OTHER INFORMATION 56
Item 1. Legal Proceedings 56
Item 1A. Risk Factors 56
Item 2. Unregistered Sales of Equity SecuritiesandUse of Proceeds 56
Item 3. Defaults Upon Senior Securities 56
Item 4. Mine Safety Disclosures 56
Item 5. Other Information 56
Item 6. Exhibits 57
SIGNATURES 58

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Forward Looking Statements

This report 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, which are based on certain assumptions and describe future plans, strategies and expectations, are generally identifiable by use of the words “believe”, “expect”, “intend”, “anticipate”, “estimate”, “project”, or similar expressions. Our ability to predict results or the actual effect of future plans or strategies is inherently uncertain. Factors which could have a material adverse effect on our operations and future prospects include, but are not limited to, changes in: interest rates, general economic conditions, federal or state tax laws, monetary and fiscal policy, a health crisis, the quality or composition of the loan or investment portfolio, demand for loan products, fluctuation in the value of collateral securing our loan portfolio, deposit flows, competition, cybersecurity risk, demand for financial services in our market area, and accounting principles, policies, practices and guidelines. These risks and uncertainties should be considered in evaluating forward looking statements and undue reliance should not be placed on such statements. Further information concerning our business, including additional factors that could materially affect our consolidated financial results, is included in our filings with the SEC.

Glossary of Acronyms and Abbreviations

The acronyms and abbreviations identified below may be used throughout this Quarterly Report on Form 10-Q or in our other SEC filings. You may find it helpful to refer back to this page while reading this report.

ACL: Allowance for credit losses Freddie Mac: Federal Home Loan Mortgage Corporation
AFS: Available-for-sale FTE: Fully taxable equivalent
ALCO: Asset-Liability Committee GAAP: U.S. generally accepted accounting principles
AOCI: Accumulated other comprehensive income IRR: Interest rate risk
ASC: FASB Accounting Standards Codification N/A: Not applicable
ASU: FASB Accounting Standards Update N/M: Not meaningful
ATM: Automated teller machine NAV: Net asset value
CECL: Current expected credit losses NSF: Non-sufficient funds
CIK: Central Index Key OCI: Other comprehensive income (loss)
DIF: Deposit Insurance Fund OMSR: Originated mortgage servicing rights
DIFS: Department of Insurance and Financial Services OREO: Other real estate owned
Directors Plan: Isabella Bank Corporation and Related Companies Deferred Compensation Plan for Directors Rabbi Trust: A trust established to fund our Directors Plan
Dividend Reinvestment Plan: Isabella Bank Corporation Stockholder Dividend Reinvestment Plan and Employee Stock Purchase Plan RSP: Isabella Bank Corporation Restricted Stock Plan
Exchange Act: Securities Exchange Act of 1934 SOFR: Secured Overnight Financing Rate
FASB: Financial Accounting Standards Board SEC: U.S. Securities and Exchange Commission
FDIC: Federal Deposit Insurance Corporation SOX: Sarbanes-Oxley Act of 2002
FFIEC: Federal Financial Institutions Examinations Council XBRL: eXtensible Business Reporting Language
FRB: Federal Reserve Bank Yield Curve: U.S. Treasury Yield Curve
FHLB: Federal Home Loan Bank

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PART I – FINANCIAL INFORMATION

Item 1. Financial Statements.

INTERIM CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)

(Dollars in thousands)

March 31<br>2024 December 31<br>2023
ASSETS
Cash and cash equivalents
Cash and demand deposits due from banks $ 22,987 $ 25,628
Fed Funds sold and interest bearing balances due from banks 2,231 8,044
Total cash and cash equivalents 25,218 33,672
AFS securities, at fair value 517,585 528,148
Mortgage loans AFS 366 —
Loans 1,365,508 1,349,463
Less allowance for credit losses 13,390 13,108
Net loans 1,352,118 1,336,355
Premises and equipment 27,951 27,639
Bank owned life insurance policies 34,131 33,892
Equity securities without readily determinable fair values 15,848 15,848
Goodwill and other intangible assets 48,284 48,284
Accrued interest receivable and other assets 36,075 35,130
TOTAL ASSETS $ 2,057,576 $ 2,058,968
LIABILITIES AND SHAREHOLDERS’ EQUITY
Deposits
Noninterest bearing $ 413,272 $ 428,505
Interest bearing demand deposits 349,401 320,737
Certificates of deposit under $250 and other savings 881,528 857,768
Certificates of deposit over $250 124,106 116,685
Total deposits 1,768,307 1,723,695
Borrowed funds
Federal funds purchased and repurchase agreements 42,998 46,801
FHLB advances — 40,000
Subordinated debt, net of unamortized issuance costs 29,357 29,335
Total borrowed funds 72,355 116,136
Accrued interest payable and other liabilities 16,240 16,735
Total liabilities 1,856,902 1,856,566
Shareholders’ equity
Common stock — no par value 15,000,000 shares authorized; issued and outstanding 7,488,101 shares (including 169,677 shares held in the Rabbi Trust) in 2024 and 7,485,889 shares (including 150,581 shares held in the Rabbi Trust) in 2023 126,656 127,323
Shares to be issued for deferred compensation obligations 3,890 3,693
Retained earnings 98,318 97,282
Accumulated other comprehensive income (loss) (28,190) (25,896)
Total shareholders’ equity 200,674 202,402
TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY $ 2,057,576 $ 2,058,968

See notes to interim condensed consolidated financial statements (unaudited).

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INTERIM CONDENSED CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)

(Dollars in thousands except per share amounts)

Three Months Ended <br> March 31
2024 2023
Interest income
Loans, including fees $ 18,057 $ 14,889
AFS securities
Taxable 2,258 2,502
Nontaxable 626 718
Federal funds sold and other 439 486
Total interest income 21,380 18,595
Interest expense
Deposits 7,163 2,829
Borrowings
Federal funds purchased and repurchase agreements 321 149
FHLB advances 388 —
Subordinated debt, net of unamortized issuance costs 266 266
Total interest expense 8,138 3,244
Net interest income 13,242 15,351
Provision for credit losses 392 41
Net interest income after provision for credit losses 12,850 15,310
Noninterest income
Service charges and fees 2,046 1,978
Wealth management fees 939 786
Earnings on bank owned life insurance policies 243 226
Net gain on sale of mortgage loans 34 67
Other 206 236
Total noninterest income 3,468 3,293
Noninterest expenses
Compensation and benefits 7,015 6,589
Furniture and equipment 1,675 1,597
Occupancy 1,031 1,005
Other 2,955 3,007
Total noninterest expenses 12,676 12,198
Income before federal income tax expense 3,642 6,405
Federal income tax expense 511 1,084
NET INCOME $ 3,131 $ 5,321
Earnings per common share
Basic $ 0.42 $ 0.70
Diluted $ 0.42 $ 0.70
Cash dividends per common share $ 0.28 $ 0.28

See notes to interim condensed consolidated financial statements (unaudited).

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INTERIM CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (UNAUDITED)

(Dollars in thousands)

Three Months Ended <br> March 31
2024 2023
Net income $ 3,131 $ 5,321
Unrealized gains (losses) on AFS securities arising during the period (2,926) 8,610
Reclassification adjustment for net (gains) losses included in net income — (1)
Tax effect (1) 632 (1,729)
Unrealized gains (losses) on AFS securities, net of tax (2,294) 6,880
Comprehensive income (loss) $ 837 $ 12,201

(1)See “Note 9 – Accumulated Other Comprehensive Income” for tax effect reconciliation.

See notes to interim condensed consolidated financial statements (unaudited).

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INTERIM CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY (UNAUDITED)

(Dollars in thousands except per share amounts)

Common Stock
Common Shares<br>Outstanding Amount Common Shares to be<br>Issued for<br>Deferred<br>Compensation<br>Obligations Retained<br>Earnings Accumulated<br>Other<br>Comprehensive<br>Income (Loss) Totals
January 1, 2023 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) — — — 5,321 6,880 12,201
Issuance of common stock 19,873 462 — — — 462
Common stock transferred from the Rabbi Trust to satisfy deferred compensation obligations — 7 (7) — — —
Share-based payment awards under the Directors Plan — — 346 — — 346
Share-based compensation expense recognized in earnings under the RSP — 42 — — — 42
Common stock purchased for deferred compensation obligations — (508) — — — (508)
Common stock repurchased (39,279) (937) — — — (937)
Cash dividends paid ($0.28 per common share) — — — (2,066) — (2,066)
March 31, 2023 7,540,015 $ 127,717 $ 5,344 $ 90,586 $ (30,314) $ 193,333
January 1, 2024 7,485,889 $ 127,323 $ 3,693 $ 97,282 $ (25,896) $ 202,402
Comprehensive income (loss) — — — 3,131 (2,294) 837
Issuance of common stock 22,456 447 — — — 447
Issuance of common stock for vested shares under the RSP 16,240 — — — — —
Common stock transferred from the Rabbi Trust to satisfy deferred compensation obligations — 21 (21) — — —
Share-based payment awards under the Directors Plan — — 218 — — 218
Share-based compensation expense recognized in earnings under the RSP — 25 — — — 25
Common stock purchased for deferred compensation obligations — (420) — — — (420)
Common stock repurchased (36,484) (740) — — — (740)
Cash dividends paid ($0.28 per common share) — — — (2,095) — (2,095)
March 31, 2024 7,488,101 $ 126,656 $ 3,890 $ 98,318 $ (28,190) $ 200,674

See notes to interim condensed consolidated financial statements (unaudited).

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INTERIM CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)

(Dollars in thousands)

Three Months Ended <br> March 31
2024 2023
OPERATING ACTIVITIES
Net income $ 3,131 $ 5,321
Reconciliation of net income to net cash provided by operating activities:
Provision for credit losses 392 41
Depreciation 506 478
Amortization of OMSR 37 36
Amortization of acquisition intangibles — 1
Amortization of subordinated debt issuance costs 22 22
Net amortization of AFS securities 353 372
Net gains on sale of AFS securities — (1)
Net gain on sale of mortgage loans (34) (67)
Net (gains) losses on foreclosed assets (69) (22)
Increase in cash value of corporate owned life insurance policies, net of expenses (239) (220)
Share-based payment awards under the Directors Plan 218 346
Share-based payment awards under the RSP 25 42
Origination of loans held-for-sale (1,690) (1,519)
Proceeds from loan sales 1,358 1,794
Net changes in operating assets and liabilities which provided (used) cash:
Accrued interest receivable and other assets (177) 1,913
Accrued interest payable and other liabilities (492) (968)
Net cash provided by (used in) operating activities 3,341 7,569
INVESTING ACTIVITIES
Activity in AFS securities
Sales — 4,145
Maturities, calls, and principal payments 7,284 22,090
Purchases — (6,166)
Net loan principal (originations) collections (16,354) (6,493)
Proceeds from sales of foreclosed assets 95 67
Purchases of premises and equipment (818) (1,229)
Funding of low income housing tax credit investments (3) (612)
Net cash provided by (used in) investing activities (9,796) 11,802

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INTERIM CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (continued)

(Dollars in thousands)

Three Months Ended <br> March 31
2024 2023
FINANCING ACTIVITIES
Net increase (decrease) in deposits $ 44,612 $ 69,253
Net increase (decrease) in fed funds purchased and repurchase agreements (3,803) (25,776)
Net increase (decrease) in FHLB advances (40,000) —
Cash dividends paid on common stock (2,095) (2,066)
Proceeds from issuance of common stock 447 462
Common stock repurchased (740) (937)
Common stock purchased for deferred compensation obligations (420) (508)
Net cash provided by (used in) financing activities (1,999) 40,428
Increase (decrease) in cash and cash equivalents (8,454) 59,799
Cash and cash equivalents at beginning of period 33,672 38,924
Cash and cash equivalents at end of period $ 25,218 $ 98,723
SUPPLEMENTAL CASH FLOWS INFORMATION:
Interest paid $ 7,844 $ 2,819
Income taxes paid $ — $ 100
SUPPLEMENTAL NONCASH INFORMATION:
Investment in low income housing tax credits $ — $ 5,000
Transfers of loans to foreclosed assets $ 199 $ 20

See notes to interim condensed consolidated financial statements (unaudited).

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NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

(Dollars in thousands except per share amounts)

Note 1 – Basis of Presentation

As used in these notes, as well as in Management's Discussion and Analysis of Financial Condition and Results of Operations, 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.

The accompanying unaudited interim condensed consolidated financial statements have been prepared in accordance with GAAP for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by GAAP for complete financial statements. In our opinion, all adjustments considered necessary for a fair presentation have been included. Operating results for the three-month period ended March 31, 2024 are not necessarily indicative of the results that may be expected for the year ending December 31, 2024. For further information, refer to our Annual Report on Form 10-K for the year ended December 31, 2023.

Our accounting policies are materially the same as those discussed in Note 1 to the Consolidated Financial Statements included in our Annual Report on Form 10-K for the year ended December 31, 2023.

Note 2 – AFS Securities

The amortized cost and fair value of AFS securities, with gross unrealized gains and losses, are as follows at:

March 31, 2024
Amortized<br>Cost Gross<br>Unrealized<br>Gains Gross<br>Unrealized<br>Losses Fair<br>Value
U.S. Treasury $ 231,114 $ — $ 16,888 $ 214,226
States and political subdivisions 93,569 805 3,904 90,470
Auction rate money market preferred 3,200 — 187 3,013
Mortgage-backed securities 33,762 — 2,718 31,044
Collateralized mortgage obligations 182,542 — 10,711 171,831
Corporate 8,150 — 1,149 7,001
Total $ 552,337 $ 805 $ 35,557 $ 517,585
December 31, 2023
--- --- --- --- --- --- --- --- ---
Amortized<br>Cost Gross<br>Unrealized<br>Gains Gross<br>Unrealized<br>Losses Fair<br>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

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The amortized cost and fair value of AFS securities by contractual maturity at March 31, 2024 are as follows:

Maturing Securities with Variable Monthly Payments or Noncontractual Maturities
Due in<br>One Year<br>or Less After One<br>Year But<br>Within<br>Five Years After Five<br>Years But<br>Within<br>Ten Years After<br>Ten Years Total
U.S. Treasury $ 9,990 $ 221,124 $ — $ — $ — $ 231,114
States and political subdivisions 15,105 27,636 19,913 30,915 — 93,569
Auction rate money market preferred — — — — 3,200 3,200
Mortgage-backed securities — — — — 33,762 33,762
Collateralized mortgage obligations — — — — 182,542 182,542
Corporate — — 8,150 — — 8,150
Total amortized cost $ 25,095 $ 248,760 $ 28,063 $ 30,915 $ 219,504 $ 552,337
Fair value $ 25,158 $ 232,115 $ 26,197 $ 28,227 $ 205,888 $ 517,585

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 is as follows for the:

Three Months Ended <br> March 31
2024 2023
Proceeds from sales of AFS securities $ — $ 4,145
Realized gains (losses) $ — $ 1
Applicable income tax expense (benefit) $ — $ —

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The information in the following tables pertains to AFS securities with gross unrealized losses at March 31, 2024 and December 31, 2023, aggregated by investment category and length of time that individual securities have been in a continuous loss position.

March 31, 2024
Less Than Twelve Months Twelve Months or More
Gross<br>Unrealized<br>Losses Fair<br>Value Gross<br>Unrealized<br>Losses Fair<br>Value Total<br>Unrealized<br>Losses
U.S. Treasury $ — $ — $ 16,888 $ 214,226 $ 16,888
States and political subdivisions 86 14,347 3,818 41,225 3,904
Auction rate money market preferred — — 187 3,013 187
Mortgage-backed securities 1 3 2,717 31,041 2,718
Collateralized mortgage obligations — — 10,711 171,831 10,711
Corporate — — 1,149 7,001 1,149
Total $ 87 $ 14,350 $ 35,470 $ 468,337 $ 35,557
Number of securities in an unrealized loss position: 40 218 258
December 31, 2023
--- --- --- --- --- --- --- --- --- --- ---
Less Than Twelve Months Twelve Months or More
Gross<br>Unrealized<br>Losses Fair<br>Value Gross<br>Unrealized<br>Losses Fair<br>Value Total<br>Unrealized<br>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

The unrealized loss on our AFS securities portfolio resulted from the increase in short-term and intermediate-term interest rates.

As of March 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.

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Note 3 – Loans and ACL

Loan Composition

The following table provides a detailed listing of our loan portfolio at:

March 31, 2024 December 31, 2023
Balance Percent of Total Balance Percent of Total
Commercial and industrial
Secured $ 200,940 14.72 % $ 189,186 14.02 %
Unsecured 25,341 1.86 % 20,552 1.52 %
Total commercial and industrial 226,281 16.58 % 209,738 15.54 %
Commercial real estate
Commercial mortgage owner occupied 178,158 13.05 % 180,636 13.39 %
Commercial mortgage non-owner occupied 215,091 15.75 % 216,292 16.03 %
Commercial mortgage 1-4 family investor 90,812 6.65 % 89,208 6.61 %
Commercial mortgage multifamily 77,062 5.64 % 78,108 5.79 %
Total commercial real estate 561,123 41.09 % 564,244 41.82 %
Advances to mortgage brokers 29,688 2.17 % 18,541 1.37 %
Agricultural
Agricultural mortgage 67,891 4.97 % 69,044 5.12 %
Agricultural other 25,804 1.89 % 30,950 2.29 %
Total agricultural 93,695 6.86 % 99,994 7.41 %
Residential real estate
Senior lien 312,692 22.90 % 313,459 23.23 %
Junior lien 6,773 0.50 % 5,945 0.44 %
Home equity lines of credit 37,193 2.72 % 37,014 2.74 %
Total residential real estate 356,658 26.12 % 356,418 26.41 %
Consumer
Secured - direct 37,496 2.75 % 37,948 2.81 %
Secured - indirect 57,396 4.20 % 59,324 4.40 %
Unsecured 3,171 0.23 % 3,256 0.24 %
Total consumer 98,063 7.18 % 100,528 7.45 %
Total $ 1,365,508 100.00 % $ 1,349,463 100.00 %

We grant commercial, agricultural, residential real estate, and consumer loans to customers situated primarily in Bay, Clare, Gratiot, Isabella, Mecosta, Midland, Montcalm, and Saginaw counties in Michigan. The ability of the borrowers to honor their repayment obligations is often dependent upon the real estate, agricultural, manufacturing, retail, gaming, tourism, health care, higher education, and general economic conditions of this region. Substantially all of our consumer and residential real estate loans are secured by various items of property, while commercial loans are secured primarily by real estate, business assets, and personal guarantees. A portion of loans are 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.

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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 originated 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 generally 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.

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The following table summarizes nonaccrual loan data by class of loans as of:

March 31, 2024 December 31, 2023
Total Nonaccrual Loans Nonaccrual Loans with No ACL Total Nonaccrual Loans Nonaccrual Loans with No ACL
Commercial and industrial:
Secured $ 567 $ 292 $ 491 $ 435
Commercial real estate:
Commercial mortgage owner occupied 234 160 — —
Agricultural:
Agricultural mortgage 22 22 38 38
Agricultural other 167 167 167 167
Residential real estate:
Senior lien 293 293 286 286
Total $ 1,283 $ 934 $ 982 $ 926

The following tables summarize the past due and current loans for the entire loan portfolio as of:

March 31, 2024
Past Due: Accruing Loans 90 or More Days Past Due
30-59<br>Days 60-89<br>Days 90 Days<br>or More Current Total
Commercial and industrial
Secured $ 683 $ 92 $ 407 $ 199,758 $ 200,940 $ —
Unsecured — — — 25,341 25,341 —
Total commercial and industrial 683 92 407 225,099 226,281 —
Commercial real estate
Commercial mortgage owner occupied 701 234 — 177,223 178,158 —
Commercial mortgage non-owner occupied 2,421 — — 212,670 215,091 —
Commercial mortgage 1-4 family investor — — — 90,812 90,812 —
Commercial mortgage multifamily — — — 77,062 77,062 —
Total commercial real estate 3,122 234 — 557,767 561,123 —
Advances to mortgage brokers — — — 29,688 29,688 —
Agricultural
Agricultural mortgage — — — 67,891 67,891 —
Agricultural other 28 — — 25,776 25,804 —
Total agricultural 28 — — 93,667 93,695 —
Residential real estate
Senior lien 4,084 7 — 308,601 312,692 —
Junior lien 20 — — 6,753 6,773 —
Home equity lines of credit 47 — — 37,146 37,193 —
Total residential real estate 4,151 7 — 352,500 356,658 —
Consumer
Secured - direct 55 — — 37,441 37,496 —
Secured - indirect 127 — — 57,269 57,396 —
Unsecured 5 — — 3,166 3,171 —
Total consumer 187 — — 97,876 98,063 —
Total $ 8,171 $ 333 $ 407 $ 1,356,597 $ 1,365,508 $ —

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December 31, 2023
Past Due: Accruing Loans 90 or More Days Past Due
30-59<br>Days 60-89<br>Days 90 Days<br>or More Current Total
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

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Credit Quality Indicators

The following tables display commercial and agricultural loans by credit risk ratings and year of origination as of:

March 31, 2024
2024 2023 2022 2021 2020 Prior Revolving<br>Loans Revolving Loans Converted to Term Total
Commercial and industrial: Secured
Risk ratings 1-3 $ 662 $ 19,868 $ 4,473 $ 6,069 $ 6,286 $ 865 $ 9,260 $ — $ 47,483
Risk rating 4 14,523 38,158 32,961 18,951 3,675 3,876 29,694 — 141,838
Risk rating 5 2,425 292 314 217 114 100 1,771 — 5,233
Risk rating 6 — — 2,160 — 194 107 3,358 — 5,819
Risk rating 7 — 389 — — 178 — — — 567
Risk rating 8 — — — — — — — — —
Risk rating 9 — — — — — — — — —
Total $ 17,610 $ 58,707 $ 39,908 $ 25,237 $ 10,447 $ 4,948 $ 44,083 $ — $ 200,940
Current year-to-date gross charge-offs $ — $ — $ — $ — $ — $ — $ — $ — $ —
Commercial and industrial: Unsecured
Risk ratings 1-3 $ — $ 1,850 $ 203 $ 114 $ 48 $ 714 $ 4,969 $ — $ 7,898
Risk rating 4 1,755 3,835 2,563 476 448 — 8,296 — 17,373
Risk rating 5 — — 29 — — — 41 — 70
Risk rating 6 — — — — — — — — —
Risk rating 7 — — — — — — — — —
Risk rating 8 — — — — — — — — —
Risk rating 9 — — — — — — — — —
Total $ 1,755 $ 5,685 $ 2,795 $ 590 $ 496 $ 714 $ 13,306 $ — $ 25,341
Current year-to-date gross charge-offs $ — $ — $ — $ — $ — $ — $ — $ — $ —
Commercial real estate: Owner occupied
Risk ratings 1-3 $ 129 $ 3,681 $ 1,684 $ 12,472 $ 14,060 $ 3,518 $ 434 $ — $ 35,978
Risk rating 4 2,749 12,054 31,967 36,182 12,673 31,487 1,212 — 128,324
Risk rating 5 199 623 1,475 2,678 694 5,369 372 — 11,410
Risk rating 6 — 823 — 858 — 531 — — 2,212
Risk rating 7 — — — — 234 — — — 234
Risk rating 8 — — — — — — — — —
Risk rating 9 — — — — — — — — —
Total $ 3,077 $ 17,181 $ 35,126 $ 52,190 $ 27,661 $ 40,905 $ 2,018 $ — $ 178,158
Current year-to-date gross charge-offs $ — $ — $ — $ — $ — $ — $ — $ — $ —
Commercial real estate: Non-owner occupied
Risk ratings 1-3 $ 339 $ 63 $ 4,340 $ 6,428 $ 761 $ 1,897 $ — $ — $ 13,828
Risk rating 4 214 37,117 63,177 37,162 11,346 40,046 1,673 — 190,735
Risk rating 5 — — 228 5,787 — 3,437 — — 9,452
Risk rating 6 — 1,023 — — 53 — — — 1,076
Risk rating 7 — — — — — — — — —
Risk rating 8 — — — — — — — — —
Risk rating 9 — — — — — — — — —
Total $ 553 $ 38,203 $ 67,745 $ 49,377 $ 12,160 $ 45,380 $ 1,673 $ — $ 215,091
Current year-to-date gross charge-offs $ — $ — $ — $ — $ — $ — $ — $ — $ —

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March 31, 2024
2024 2023 2022 2021 2020 Prior Revolving<br>Loans Revolving Loans Converted to Term Total
Commercial real estate: 1-4 family investor
Risk ratings 1-3 $ 208 $ 284 $ 1,181 $ 846 $ 889 $ 1,221 $ 1,414 $ — $ 6,043
Risk rating 4 3,973 13,272 11,329 30,174 14,807 4,815 5,159 — 83,529
Risk rating 5 — 150 351 76 — 54 — — 631
Risk rating 6 — 551 — — — 58 — — 609
Risk rating 7 — — — — — — — — —
Risk rating 8 — — — — — — — — —
Risk rating 9 — — — — — — — — —
Total $ 4,181 $ 14,257 $ 12,861 $ 31,096 $ 15,696 $ 6,148 $ 6,573 $ — $ 90,812
Current year-to-date gross charge-offs $ — $ — $ — $ — $ — $ — $ — $ — $ —
Commercial real estate: Multifamily
Risk ratings 1-3 $ — $ 4,196 $ 4,589 $ 2,018 $ 562 $ 1,480 $ — $ — $ 12,845
Risk rating 4 — 2,564 19,300 15,817 801 21,591 795 — 60,868
Risk rating 5 — — — — — — — — —
Risk rating 6 — — — 29 — 3,320 — — 3,349
Risk rating 7 — — — — — — — — —
Risk rating 8 — — — — — — — — —
Risk rating 9 — — — — — — — — —
Total $ — $ 6,760 $ 23,889 $ 17,864 $ 1,363 $ 26,391 $ 795 $ — $ 77,062
Current year-to-date gross charge-offs $ — $ — $ — $ — $ — $ — $ — $ — $ —
Advances to mortgage brokers
Risk ratings 1-3 $ 29,688 $ — $ — $ — $ — $ — $ — $ — $ 29,688
Current year-to-date gross charge-offs $ — $ — $ — $ — $ — $ — $ — $ — $ —
Agricultural mortgage
Risk ratings 1-3 $ — $ 293 $ 2,822 $ 1,209 $ 2,628 $ 1,341 $ 6 $ — $ 8,299
Risk rating 4 1,353 5,033 11,379 8,802 5,809 9,681 1,049 — 43,106
Risk rating 5 228 527 5,366 5,777 683 790 674 — 14,045
Risk rating 6 — 837 — — — 1,582 — — 2,419
Risk rating 7 — — — — — 22 — — 22
Risk rating 8 — — — — — — — — —
Risk rating 9 — — — — — — — — —
Total $ 1,581 $ 6,690 $ 19,567 $ 15,788 $ 9,120 $ 13,416 $ 1,729 $ — $ 67,891
Current year-to-date gross charge-offs $ — $ — $ — $ — $ — $ — $ — $ — $ —
Agricultural other
Risk ratings 1-3 $ 249 $ 649 $ 62 $ 109 $ 37 $ 325 $ 1,127 $ — $ 2,558
Risk rating 4 423 1,380 2,359 2,123 551 93 10,901 — 17,830
Risk rating 5 — 50 6 73 499 480 2,938 — 4,046
Risk rating 6 — 472 — 117 — — 614 — 1,203
Risk rating 7 — — — — — — 167 — 167
Risk rating 8 — — — — — — — — —
Risk rating 9 — — — — — — — — —
Total $ 672 $ 2,551 $ 2,427 $ 2,422 $ 1,087 $ 898 $ 15,747 $ — $ 25,804
Current year-to-date gross charge-offs $ — $ — $ — $ — $ — $ — $ — $ — $ —

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December 31, 2023
2023 2022 2021 2020 2019 Prior Revolving<br>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 $ — $ — $ — $ — $ — $ — $ — $ — $ —
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 $ — $ — $ — $ — $ — $ — $ — $ — $ —
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 $ — $ — $ — $ — $ — $ — $ — $ — $ —

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December 31, 2023
2023 2022 2021 2020 2019 Prior Revolving<br>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 $ — $ — $ — $ — $ — $ — $ — $ — $ —
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 $ — $ — $ — $ — $ — $ — $ — $ — $ —

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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.

  1. 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.

  1. 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.

  1. LOW SATISFACTORY – Acceptable Risk

Credit with bankable risks, although some signs of weaknesses are shown:

•Would include most start-up businesses.

•Occasional instances of trade slowness or repayment delinquency – may have been 10-30 days slow within the past year.

•Management’s abilities are apparent yet unproven.

•Weakness in primary source of repayment with adequate secondary source of repayment.

•Loan structure generally in accordance with policy.

•If secured, loan collateral coverage is marginal.

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To be classified as less than satisfactory, only one of the following criteria must be met.

  1. 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.

  1. 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.

  1. 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.

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  1. 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.

  1. 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.

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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:

March 31, 2024
2024 2023 2022 2021 2020 Prior Revolving<br>Loans Revolving Loans Converted to Term Total
Residential real estate: Senior lien
Current $ 7,411 $ 44,777 $ 51,875 $ 78,773 $ 51,642 $ 74,002 $ — $ — $ 308,480
Past due 30-89 days — 121 861 897 280 1,760 — — 3,919
Past due 90 or more days — — — — — — — — —
Nonaccrual — 46 — — 30 217 — — 293
Total $ 7,411 $ 44,944 $ 52,736 $ 79,670 $ 51,952 $ 75,979 $ — $ — $ 312,692
Current year-to-date gross charge-offs $ — $ — $ — $ — $ — $ 1 $ — $ — $ 1
Residential real estate: Junior lien
Current $ 1,072 $ 3,757 $ 1,131 $ 140 $ 126 $ 527 $ — $ — $ 6,753
Past due 30-89 days — — — 20 — — — — 20
Past due 90 or more days — — — — — — — — —
Nonaccrual — — — — — — — — —
Total $ 1,072 $ 3,757 $ 1,131 $ 160 $ 126 $ 527 $ — $ — $ 6,773
Current year-to-date gross charge-offs $ — $ — $ — $ — $ — $ — $ — $ — $ —
Residential real estate: Home equity lines of credit
Current $ — $ — $ — $ — $ — $ — $ 37,146 $ — $ 37,146
Past due 30-89 days — — — — — — 47 — 47
Past due 90 or more days — — — — — — — — —
Nonaccrual — — — — — — — — —
Total $ — $ — $ — $ — $ — $ — $ 37,193 $ — $ 37,193
Current year-to-date gross charge-offs $ — $ — $ — $ — $ — $ — $ — $ — $ —
Consumer: Secured - direct
Current $ 3,921 $ 12,504 $ 9,223 $ 5,861 $ 3,102 $ 2,830 $ — $ — $ 37,441
Past due 30-89 days 1 19 9 — 12 14 — — 55
Past due 90 or more days — — — — — — — — —
Nonaccrual — — — — — — — — —
Total $ 3,922 $ 12,523 $ 9,232 $ 5,861 $ 3,114 $ 2,844 $ — $ — $ 37,496
Current year-to-date gross charge-offs $ — $ 62 $ — $ — $ — $ — $ — $ — $ 62
Consumer: Secured - indirect
Current $ 2,151 $ 28,849 $ 10,271 $ 6,407 $ 5,026 $ 4,565 $ — $ — $ 57,269
Past due 30-89 days — 78 — — 40 9 — — 127
Past due 90 or more days — — — — — — — — —
Nonaccrual — — — — — — — — —
Total $ 2,151 $ 28,927 $ 10,271 $ 6,407 $ 5,066 $ 4,574 $ — $ — $ 57,396
Current year-to-date gross charge-offs $ — $ — $ — $ — $ — $ — $ — $ — $ —

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March 31, 2024
2024 2023 2022 2021 2020 Prior Revolving<br>Loans Revolving Loans Converted to Term Total
Consumer: Unsecured
Current $ 442 $ 1,260 $ 572 $ 91 $ 59 $ 4 $ 738 $ — $ 3,166
Past due 30-89 days — — 5 — — — — — 5
Past due 90 or more days — — — — — — — — —
Nonaccrual — — — — — — — — —
Total $ 442 $ 1,260 $ 577 $ 91 $ 59 $ 4 $ 738 $ — $ 3,171
Current year-to-date gross charge-offs $ 107 $ 7 $ 14 $ — $ — $ — $ — $ — $ 128 December 31, 2023
--- --- --- --- --- --- --- --- --- --- --- --- --- --- --- --- --- --- ---
2023 2022 2021 2020 2019 Prior Revolving<br>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 $ — $ — $ 5 $ — $ — $ — $ — $ — $ 5

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December 31, 2023
2023 2022 2021 2020 2019 Prior Revolving<br>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 $ 91 $ — $ 3 $ — $ — $ — $ — $ — $ 94

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).

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The following is a summary of the amortized cost basis of loan modifications granted to borrowers experiencing financial difficulty for the:

Three Months Ended March 31, 2024
Other-Than-Insignificant Payment Delay Term Extension
Amortized Cost Basis % of Total Class of Financial Receivable Amortized Cost Basis % of Total Class of Financial Receivable
Commercial and industrial
Secured $ — — % $ 13 0.01 %
Commercial real estate
Commercial mortgage owner occupied 823 0.46 % — — %
Consumer
Secured - indirect — — % 2 — %
Total $ 823 $ 15
Three Months Ended March 31, 2023
--- --- --- --- ---
Term Extension
Amortized Cost Basis % of Total Class of Financial Receivable
Agricultural
Agricultural mortgage $ 232 0.33 %
Agricultural other 34 0.14 %
Residential real estate
Senior lien 5 — %
Total $ 271

We do not modify any loans by forgiving principal or accrued interest. We had committed to advance $0 in additional funds to be disbursed in connection with modified loans at March 31, 2024 and 2023, as displayed in the tables above.

The following is a summary of the financial effect of the modifications granted to borrowers experiencing financial difficulty for the:

Three Months Ended March 31
2024 2023
Payment Delay Term Weighted-Average Term Extension (Years) Weighted-Average Term Extension (Years)
Commercial and industrial
Secured N/A 3 years N/A
Commercial real estate
Commercial mortgage owner occupied 7 months N/A N/A
Agricultural
Agricultural mortgage N/A N/A 1 year
Agricultural other N/A N/A 1 year
Residential real estate
Senior lien N/A N/A 2.6 years
Consumer
Secured - indirect N/A 1.3 years N/A

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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 during the three-month periods ended March 31, 2024 and 2023:

March 31, 2024
Past Due:
30-59 Days 60-89 Days 90 Days or More Total Past Due
Commercial and industrial
Secured $ — $ — $ — $ —
Commercial real estate
Commercial mortgage owner occupied — — — —
Consumer
Secured - indirect — — — —
Total $ — $ — $ — $ —
March 31, 2023
--- --- --- --- --- --- --- --- ---
Past Due:
30-59 Days 60-89 Days 90 Days or More Total Past Due
Agricultural
Agricultural mortgage $ — $ — $ — $ —
Agricultural other — — — —
Residential real estate
Senior lien — — — —
Total $ — $ — $ — $ —

We had no loans that defaulted in the three-month periods ended March 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.

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In determining the allowance for credit losses, we derive an estimated credit loss assumption from a model that categorizes loan pools based on loan type and credit risk ratings or delinquency bucket. This model calculates an expected loss percentage for each loan class by considering the probability of default, based on the migration of loans from performing to loss by credit risk ratings or delinquency buckets using life-of-loan analysis, and the historical severity of loss, based on the aggregate net lifetime losses incurred per loan class.

The default and severity factors used to calculate the allowance for credit losses for loans that share similar risk characteristics with other loans are adjusted for differences between the historical period used to calculate historical default and loss severity rates and expected conditions over the remaining lives of the loans in the portfolio. These qualitative factors are used to adjust the historical probabilities of default and severity of loss so that they reflect management's expectation of future conditions based on a reasonable and supportable forecast. To the extent the lives of the loans in the portfolio extend beyond the period for which a reasonable and supportable forecast can be made, the model reverts back to the historical rates of default and severity of loss. Qualitative factors include:

•Changes in lending policies and procedures, including changes in underwriting standards and collection, charge-off, recovery practices not considered elsewhere in estimating credit losses;

•Changes in the experience, ability, and depth of lending management and other relevant staff;

•Changes in interest rates;

•Changes in international, national, regional, and local economic factors (international, national, regional, and local);

•Changes in the nature and volume of the portfolio and in the terms of loans;

•Changes in the volume and severity of past due loans, the volume of nonaccrual loans, and the volume and severity of adversely classified or graded loans;

•Lack of current financial information;

•Competition, legal, and regulatory; and

•Changes in the value of underlying collateral.

A summary of activity in the ACL by portfolio segment and the recorded investment in loans by segments follows for the:

Three Months Ended March 31, 2024
Commercial and Industrial Commercial Real Estate Agricultural Residential Real Estate Consumer Total
January 1, 2024 $ 968 $ 5,878 $ 270 $ 4,336 $ 1,656 $ 13,108
Charge-offs — — — (1) (190) (191)
Recoveries 2 6 2 64 71 145
Credit loss expense 297 19 (7) (91) 110 328
March 31, 2024 $ 1,267 $ 5,903 $ 265 $ 4,308 $ 1,647 $ 13,390
Three Months Ended March 31, 2023
--- --- --- --- --- --- --- --- --- --- --- --- --- --- ---
Commercial and Industrial Commercial Real Estate Agricultural Residential Real Estate Consumer Unallocated Total
January 1, 2023 $ 860 $ 461 $ 577 $ 617 $ 961 $ 6,374 $ 9,850
Impact of the adoption of ASC 326 (58) 5,532 (247) 3,535 356 (6,374) 2,744
Charge-offs — — — (2) (99) — (101)
Recoveries — 10 4 24 72 — 110
Credit loss expense 15 33 (69) (61) 119 — 37
March 31, 2023 $ 817 $ 6,036 $ 265 $ 4,113 $ 1,409 $ — $ 12,640

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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:

March 31, 2024 December 31, 2023
Loan Balance Specific Allocation Loan Balance Specific Allocation
Commercial and industrial $ 550 $ 275 $ 465 $ 56
Commercial real estate 234 74 234 28
Agricultural 167 — 181 —
Residential real estate 217 — 203 —
Consumer — — — —
Total $ 1,168 $ 349 $ 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 $1,168 in collateral dependent loans.

Note 4 – Borrowed Funds

Federal funds purchased and repurchase agreements

Securities sold under repurchase agreements without stated maturity dates, and federal funds purchased generally mature within one to four days from the transaction date.

We had no FRB Discount Window advances during the three-month periods ended March 31, 2024 and 2023. A summary of borrowed funds without stated maturity dates was as follows for the:

Three Months Ended March 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 $ 43,250 $ 40,621 3.15 % $ 54,236 $ 39,706 1.33 %
Federal funds purchased $ — $ 2 6.52 % $ — $ 3 5.27 %

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 $67,088 and $67,764 at March 31, 2024 and December 31, 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 as of:

March 31, 2024 December 31, 2023
Amount Rate Amount Rate
Securities sold under agreements to repurchase without stated maturity dates $ 42,998 3.17 % $ 46,801 3.11 %

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We had pledged AFS securities and 1-4 family residential real estate loans in the following amounts at:

March 31<br>2024 December 31<br>2023
Pledged to secure borrowed funds $ 377,896 $ 391,529
Pledged to secure repurchase agreements 67,088 67,764
Pledged for public deposits and for other purposes necessary or required by law 93,455 84,099
Total $ 538,439 $ 543,392

AFS securities pledged to repurchase agreements without stated maturity dates consisted of the following at:

March 31<br>2024 December 31<br>2023
U.S. Treasury $ 55,504 $ 55,623
Mortgage-backed securities 9,004 9,462
Collateralized mortgage obligations 2,580 2,679
Total $ 67,088 $ 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 March 31, 2024, we had the ability to borrow up to an additional $374,707, 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 maturities and weighted average interest rates of FHLB advances as of:

March 31, 2024 December 31, 2023
Amount Rate Amount Rate
Fixed rate due 2024 $ — — % $ 40,000 5.55 %

Subordinated notes

On June 2, 2021, we completed a private placement of $30,000 in aggregate principal amount of 3.25% Fixed-to-Floating Rate Subordinated Notes due 2031 (the "Notes"). The Notes will initially bear a fixed interest rate of 3.25% until June 15, 2026, after which time until maturity on June 15, 2031, the interest rate will reset quarterly to an annual floating rate equal to the then-current 3-month SOFR plus 256 basis points. The Notes are redeemable by us at our option, in whole or in part, on or after June 15, 2026. The Notes are not subject to redemption at the option of the holders.

The following table summarizes our outstanding notes as of:

March 31, 2024 December 31, 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 (643) (665)
Total subordinated debt, net $ 29,357 $ 29,335

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Note 5 – 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. Potential common shares that may be issued relate solely to outstanding shares in the Directors Plan and grant awards under the RSP.

Earnings per common share have been computed based on the following for the:

Three Months Ended <br> March 31
2024 2023
Average number of common shares outstanding for basic calculation 7,493,334 7,556,585
Average potential effect of common shares in the Directors Plan (1) — 49,484
Average potential effect of common shares in the RSP 14,405 28,348
Average number of common shares outstanding used to calculate diluted earnings per common share 7,507,739 7,634,417
Net income $ 3,131 $ 5,321
Earnings per common share
Basic $ 0.42 $ 0.70
Diluted $ 0.42 $ 0.70

(1)Exclusive of shares held in the Rabbi Trust

Note 6 – Restricted Stock Plan

Under the RSP, an equity-based bonus plan, we 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 and President. The RSP authorizes the issuance of unvested restricted stock to an eligible employee with a maximum award ranging from 30% 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 is as follows for the:

Three Months Ended March 31
2024 2023
Number<br>of Shares Fair<br>Value Number<br>of Shares Fair<br>Value
Balance, January 1 27,072 $ 592 27,072 $ 592
Granted 6,686 130 3,705 91
Vested (16,240) (345) — —
Forfeited — — — —
Balance, March 31 17,518 $ 377 30,777 $ 683

Expenses related to the RSP awards during the three months ended March 31, 2024 and 2023 were $25 and $42. As of March 31, 2024, there was $202 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 2.11 years.

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Note 7 – Other Noninterest Expenses

A summary of expenses included in other noninterest expenses is as follows for the:

Three Months Ended <br> March 31
2024 2023
Audit, consulting, and legal fees $ 513 $ 535
ATM and debit card fees 469 400
FDIC insurance premiums 252 228
Marketing costs 244 245
Memberships and subscriptions 228 240
Loan underwriting fees 183 215
Donations and community relations 182 184
Director fees 176 204
All other 708 756
Total other noninterest expenses $ 2,955 $ 3,007

Note 8 – Federal Income Taxes

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:

Three Months Ended <br> March 31
2024 2023
Income taxes at statutory rate $ 765 $ 1,345
Effect of nontaxable income
Interest income on tax exempt municipal securities (121) (148)
Earnings on corporate owned life insurance policies (51) (47)
Other (6) (7)
Total effect of nontaxable income (178) (202)
Effect of nondeductible expenses 8 9
Effect of tax credits (84) (68)
Federal income tax expense $ 511 $ 1,084

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Note 9 – Accumulated Other Comprehensive Income

The following table summarizes the changes in AOCI by component for the:

Three Months Ended March 31
2024 2023
Unrealized<br>Gains<br>(Losses) on<br>AFS<br>Securities Defined<br>Benefit<br>Pension Plan Total Unrealized<br>Gains<br>(Losses) on<br>AFS<br>Securities Defined<br>Benefit<br>Pension Plan Total
Balance, January 1 $ (25,199) $ (697) $ (25,896) $ (35,828) $ (1,366) $ (37,194)
OCI before reclassifications (2,926) — (2,926) 8,610 — 8,610
Amounts reclassified from AOCI — — — (1) — (1)
Subtotal (2,926) — (2,926) 8,609 — 8,609
Tax effect 632 — 632 (1,729) — (1,729)
OCI, net of tax (2,294) — (2,294) 6,880 — 6,880
Balance, March 31 $ (27,493) $ (697) $ (28,190) $ (28,948) $ (1,366) $ (30,314)

Included in OCI for the three-month periods ended March 31, 2024 and 2023 are changes in unrealized gains and losses related to certain auction rate money market preferred stocks. These investments, 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:

Three Months Ended March 31
2024 2023
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 $ 82 $ (3,008) $ (2,926) $ 374 $ 8,236 $ 8,610
Reclassification adjustment for net (gains) losses included in net income — — — — (1) (1)
Net unrealized gains (losses) 82 (3,008) (2,926) 374 8,235 8,609
Tax effect — 632 632 — (1,729) (1,729)
Unrealized gains (losses), net of tax $ 82 $ (2,376) $ (2,294) $ 374 $ 6,506 $ 6,880

Note 10 – Fair Value

Under fair value measurement and disclosure authoritative guidance, we group assets and liabilities measured at fair value into three levels, based on the markets in which the assets and liabilities are traded, and the reliability of the assumptions used to determine fair value, based on the prioritization of inputs in the valuation techniques. These levels are:

Level 1: Valuation is based upon quoted prices for identical instruments traded in active markets.
Level 2: Valuation is based upon quoted prices for similar instruments in active markets, quoted prices for identical or similar instruments in markets that are not active and model-based valuation techniques for which all significant assumptions are observable in the market.
Level 3: Valuation is generated from model-based techniques that use at least one significant assumption not observable in the market. These unobservable assumptions reflect estimates of assumptions that market participants would use in pricing the asset or liability.

The asset’s or liability’s fair value measurement level within the fair value hierarchy is based on the lowest level of any input that is significant to the fair value measurement. Valuation techniques maximize the use of observable inputs and minimize the use of unobservable inputs. Transfers between measurement levels are recognized at the end of reporting periods.

Fair value measurement requires the use of an exit price notion which may differ from entrance pricing. Generally, we believe our assets and liabilities classified as Level 1 or Level 2 approximate an exit price notion.

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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 information about loans measured at fair value on a nonrecurring basis as of:

March 31, 2024
Valuation Technique Fair Value Unobservable Input Actual Range Weighted Average
Collateral Dependent Loans - Discount applied to collateral:
Discounted value $1,168 Real Estate 20% 20%
Equipment 25% - 35% 31%
Accounts receivable 50% 50%
December 31, 2023
--- --- --- --- ---
Valuation Technique Fair Value Unobservable Input Actual Range Weighted Average
Collateral Dependent Loans - Discount applied to collateral:
Discounted value $1,083 Real Estate 20% 20%
Equipment 25% - 35% 33%
Accounts receivable 25% 25%

Collateral discount rates may have ranges to accommodate differences in the age of the independent appraisal, broker price opinion, or internal evaluation.

OMSR: OMSR (which are included in other assets) are subject to impairment testing. To test for impairment, we utilize a discounted cash flow analysis using interest rates and prepayment speed assumptions currently quoted for comparable instruments and discount rates. If the valuation model reflects a value less than the carrying value, OMSR are adjusted to fair value through a valuation allowance as determined by the model. As such, we classify OMSR subject to nonrecurring fair value adjustments as Level 2.

The preceding methods described may produce a fair value calculation that may not be indicative of net realizable value or reflective of future fair values. Although we believe our valuation methods are appropriate and consistent with other market participants, the use of different methodologies or assumptions to determine the fair value of certain financial instruments could result in a different fair value measurement.

Estimated Fair Values of Financial Instruments Not Recorded at Fair Value in their Entirety on a Recurring Basis

Disclosure of the estimated fair values of financial instruments, which differ from carrying values, often requires the use of estimates. In cases where quoted market values in an active market are not available, we use present value techniques and other

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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:

March 31, 2024
Carrying<br>Value Estimated<br>Fair Value Level 1 Level 2 Level 3
ASSETS
Cash and cash equivalents $ 25,218 $ 25,218 $ 25,218 $ — $ —
Mortgage loans AFS 366 371 — 371 —
Gross loans 1,365,508 1,303,850 — — 1,303,850
Less allowance for credit losses 13,390 13,390 — — 13,390
Net loans 1,352,118 1,290,460 — — 1,290,460
Accrued interest receivable 8,645 8,645 8,645 — —
Equity securities without readily determinable fair values (1) 15,848 N/A — — —
OMSR 2,385 3,104 — 3,104 —
LIABILITIES
Deposits without stated maturities 1,402,164 1,402,164 1,402,164 — —
Deposits with stated maturities 366,143 361,532 — 361,532 —
Federal funds purchased and repurchase agreements 42,998 42,914 — 42,914 —
Subordinated debt, net of unamortized issuance costs 29,357 26,410 — 26,410 —
Accrued interest payable 941 941 941 — —
December 31, 2023
--- --- --- --- --- --- --- --- --- --- ---
Carrying<br>Value Estimated<br>Fair Value Level 1 Level 2 Level 3
ASSETS
Cash and cash equivalents $ 33,672 $ 33,672 $ 33,672 $ — $ —
Mortgage loans AFS — — — — —
Gross loans 1,349,463 1,292,458 — — 1,292,458
Less allowance for credit losses 13,108 13,108 — — 13,108
Net loans 1,336,355 1,279,350 — — 1,279,350
Accrued interest receivable 8,167 8,167 8,167 — —
Equity securities without readily determinable fair values (1) 15,848 N/A — — —
OMSR 2,422 3,164 — 3,164 —
LIABILITIES
Deposits without stated maturities 1,377,321 1,377,321 1,377,321 — —
Deposits with stated maturities 346,374 341,489 — 341,489 —
Federal funds purchased and repurchase agreements 46,801 46,704 — 46,704 —
FHLB advances 40,000 40,000 — 40,000 —
Subordinated debt, net of unamortized issuance costs 29,335 26,146 — 26,146 —
Accrued interest payable 890 890 890 — —

(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.

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Financial Instruments Recorded at Fair Value

The table below presents the recorded amount of assets and liabilities measured at fair value on:

March 31, 2024 December 31, 2023
Total Level 1 Level 2 Level 3 Total Level 1 Level 2 Level 3
Recurring items
AFS securities
U.S. Treasury $ 214,226 $ — $ 214,226 $ — $ 214,801 $ — $ 214,801 $ —
States and political subdivisions 90,470 — 90,470 — 92,876 — 92,876 —
Auction rate money market preferred 3,013 — 3,013 — 2,931 — 2,931 —
Mortgage-backed securities 31,044 — 31,044 — 32,815 — 32,815 —
Collateralized mortgage obligations 171,831 — 171,831 — 177,775 — 177,775 —
Corporate 7,001 — 7,001 — 6,950 — 6,950 —
Total AFS securities 517,585 — 517,585 — 528,148 — 528,148 —
Nonrecurring items
Collateral dependent (net of ACL) 1,168 — — 1,168 1,083 — — 1,083
Total $ 518,753 $ — $ 517,585 $ 1,168 $ 529,231 $ — $ 528,148 $ 1,083
Percent of assets and liabilities measured at fair value — % 99.77 % 0.23 % 0.00 % 99.80 % 0.20 %

We had no assets or liabilities recorded at fair value with changes in fair value recognized through earnings, on a recurring basis or nonrecurring basis, as of March 31, 2024. Further, we had no unrealized gains and losses included in OCI for recurring Level 3 fair value measurements held at the end of the reporting period.

Note 11 – Operating Segments

Our reportable segments are based on legal entities that account for at least 10% of net operating results. The Bank as of March 31, 2024 and December 31, 2023 and for the three-month periods ended March 31, 2024 and 2023, represents approximately 90% or more of our consolidated total assets and operating results. As such, no additional segment reporting is presented.

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Note 12 – Parent Company Only Financial Information

Interim Condensed Balance Sheets

March 31<br>2024 December 31<br>2023
ASSETS
Cash on deposit at the Bank $ 27,902 $ 25,010
Investments in subsidiaries 153,127 157,671
Premises and equipment 1,182 1,196
Other assets 48,175 47,949
TOTAL ASSETS $ 230,386 $ 231,826
LIABILITIES AND SHAREHOLDERS’ EQUITY
Subordinated debt, net of unamortized issuance costs $ 29,357 $ 29,335
Other liabilities 355 89
Shareholders' equity 200,674 202,402
TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY $ 230,386 $ 231,826

Interim Condensed Statements of Income

Three Months Ended <br> March 31
2024 2023
Income
Dividends from subsidiaries $ 6,000 $ 5,000
Interest income 108 22
Other income 3 3
Total income 6,111 5,025
Expenses
Interest expense 266 266
Management fee 297 238
Audit, consulting, and legal fees 142 119
Director fees 94 111
Other 96 91
Total expenses 895 825
Income before income tax benefit and equity in undistributed earnings of subsidiaries 5,216 4,200
Federal income tax benefit 165 168
Income before equity in undistributed earnings of subsidiaries 5,381 4,368
Undistributed earnings of subsidiaries (2,250) 953
Net income $ 3,131 $ 5,321

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Interim Condensed Statements of Cash Flows

Three Months Ended <br> March 31
2024 2023
Operating activities
Net income $ 3,131 $ 5,321
Adjustments to reconcile net income to cash provided by operations
Undistributed earnings of subsidiaries 2,250 (953)
Share-based payment awards under the Directors Plan 218 346
Share-based payment awards under the RSP 25 42
Amortization of subordinated debt issuance costs 22 22
Depreciation 14 13
Changes in operating assets and liabilities which provided (used) cash
Other assets (226) (135)
Other liabilities 266 50
Net cash provided by (used in) operating activities 5,700 4,706
Investing activities - none
Financing activities
Cash dividends paid on common stock (2,095) (2,066)
Proceeds from the issuance of common stock 447 462
Common stock repurchased (740) (937)
Common stock purchased for deferred compensation obligations (420) (508)
Net cash provided by (used in) financing activities (2,808) (3,049)
Increase (decrease) in cash and cash equivalents 2,892 1,657
Cash and cash equivalents at beginning of period 25,010 8,525
Cash and cash equivalents at end of period $ 27,902 $ 10,182

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Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations.

ISABELLA BANK CORPORATION FINANCIAL REVIEW

(Dollars in thousands except per share amounts)

The following is management's discussion and analysis of our financial condition and results of operations for the unaudited three-month periods ended March 31, 2024 and 2023. This analysis should be read in conjunction with our Annual Report on Form 10-K for the year ended December 31, 2023 and with the unaudited interim condensed consolidated financial statements and notes, beginning on page 4 of this report.

Executive Summary

Results of Operations (March 31, 2024 to March 31, 2023 quarterly comparison)

During the three months ended March 31, 2024, we reported net income of $3,131 and earnings per common share of $0.42. Net income and earnings per common share for the same period of 2023 were $5,321 and $0.70, respectively.

Net interest income decreased $2,109 for the three-month period ended March 31, 2024 in comparison to the same period in 2023. The impact of higher rates has resulted in a slower repricing of earning assets than interest bearing liabilities and has had a negative impact on our net interest margin in the short term. Rising interest rates and growth in loans led to a $2,785 increase in gross interest income during the three-month period ended March 31, 2024 compared to the same period in 2023. Conversely, rising interest rates on deposits and an increase in borrowings led to a $4,894 increase in interest expense for the three-month period ended March 31, 2024 when compared to the same period in 2023.

Our net yield on interest earning assets (FTE) was 2.78% for the three months ended March 31, 2024, as compared to 3.22% for the three months ended March 31, 2023. The book yield from securities was 2.25% and 2.29% at March 31, 2024 and 2023. The yield includes the effect of the investment of excess cash in shorter term US treasury securities following the COVID pandemic in 2021 and 2022. As a result, these securities will mature over the next 2 to 5 years, and the proceeds are expected to be reinvested in market rate loans and securities. The yield on loans expanded to 5.36% in the first quarter 2024, up from 4.70% in the same quarter of 2023. Approximately 46% of commercial loans are fixed at rates that are lower than current market rates but will contractually reprice to variable rates over the next 3 to 5 years which will improve the overall yield on earning assets. To maintain liquidity, we increased most of our deposit rates beginning in the fourth quarter of 2022 and in recent periods, increased our level of borrowings to fund loan growth. Our cost of interest-bearing liabilities increased to 2.27% from 0.95% in the first quarter 2023 due to several interest rate hikes throughout 2023.

The provision for credit losses was $392 in the first quarter of 2024 and was $41 in the same quarter of 2023. The change was largely due to loan growth and a few specific reserves on commercial loans that were downgraded in the first quarter of 2024.

Noninterest income increased $175, or 5.3%, during the first three months of 2024 compared to the same period in 2023. Wealth management fees grew $153 due to an increase in new accounts and higher market valuations. Customer service fees increased $55 as compared to the same quarter of 2023 on a higher number of transaction accounts. A decline in gain on the sale of loans of $33 offset this growth.

Noninterest expenses for the first three months of 2024 increased $478, or 3.9%, in comparison to the same period in 2023. Annual merit increases and medical claim adjustments totaling $225 led to a $426 increase in compensation and benefits expenses.

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

As of March 31, 2024, total assets and assets under management were $2,057,576 and $2,963,050, respectively. Assets under management include loans sold and serviced of $244,829 and investment and trust assets managed by Isabella Wealth of $660,645, in addition to assets on our consolidated balance sheet. All regulatory capital ratios for the Bank exceeded the minimum thresholds to be considered a “well capitalized” institution.

Our AFS securities portfolio totaled $517,585 at March 31, 2024 and included net unrealized losses of $34,752, or 6.29%, of the portfolio. The unrealized loss position on our AFS securities portfolio resulted from increases in short-term and intermediate-term benchmark interest rates. As a result, this change in unrealized losses has reduced our balance of shareholders' equity and negatively impacted our tangible book value. Our tangible book value per share was $20.35 as of March 31, 2024, compared to $20.59 on December 31, 2023. Unrealized losses on securities, net of taxes, reduced tangible book value per share by $3.67 and $3.36 at the end of those respective periods. Management does not anticipate the need to sell securities and incur a loss as a result of such sale.

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Loans outstanding as of March 31, 2024 totaled $1,365,508. Since December 31, 2023, gross loans have increased $16,045 as a result of growth in the commercial portfolio and advances to mortgage brokers as we selectively expanded our book of business across many industries. Residential loan volume remained stable during the quarter as originations kept pace with pay downs, as well as a few sales in the secondary market. Demand for mortgages remains low given prevailing market rates, housing prices and low inventory.

The ACL increased $282 to $13,390 at the end of the first quarter 2024 due to loan growth and specific reserves on a few small commercial loans whose credit ratings were downgraded. Nonaccruing loans increased $301 to $1,283, principally due to one commercial credit that is expected to be settled in the near-term. Past due accounts between 30 to 89 days as a percentage of total loans was 0.62% during the first quarter 2024, compared to 0.31% at year-end 2023. Overall, credit quality remains strong, and there are no negative trends.

Total deposits increased $44,612 since December 31, 2023 to $1,768,307 at the end of the first quarter 2024. Consumer demand for retail CDs continues based on the rate environment, resulting in a $19,769 increase in the balance during the quarter. Other interest-bearing deposits increased $40,076, which underscores strong relationships the Bank continues to build in the communities we serve. Noninterest deposits decreased $15,233, which is consistent in seasonal trends in our markets. Additionally, the strong inflow of deposits provided the opportunity to payoff $40,000 of higher cost FHLB advances during the quarter.

Subsequent Events

We evaluated subsequent events after March 31, 2024 through the date our interim condensed consolidated financial statements were issued for potential recognition and disclosure. No subsequent events require financial statement recognition or disclosure between March 31, 2024 and the date our interim condensed consolidated financial statements were issued.

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Results of Operations (Unaudited)

The following table outlines our quarter-to-date results of operations and provides certain performance measures as of, and for the three-month periods ended:

March 31<br>2024 December 31<br>2023 September 30<br>2023 June 30<br>2023 March 31<br>2023
INCOME STATEMENT DATA
Interest income $ 21,380 $ 21,056 $ 20,485 $ 19,495 $ 18,595
Interest expense 8,138 7,444 6,183 4,816 3,244
Net interest income 13,242 13,612 14,302 14,679 15,351
Provision for credit losses 392 684 (292) 196 41
Noninterest income 3,468 3,516 3,414 3,604 3,293
Noninterest expenses 12,676 11,915 12,658 12,539 12,198
Federal income tax expense 511 726 937 918 1,084
Net income $ 3,131 $ 3,803 $ 4,413 $ 4,630 $ 5,321
PER SHARE
Basic earnings $ 0.42 $ 0.51 $ 0.59 $ 0.62 $ 0.70
Diluted earnings 0.42 0.51 0.58 0.61 0.70
Dividends 0.28 0.28 0.28 0.28 0.28
Tangible book value (1) 20.35 20.59 18.27 18.69 19.24
Quoted market value
High 21.74 22.00 23.00 26.00 25.10
Low 18.25 19.75 19.61 19.13 22.08
Market price (1) 19.40 21.50 21.05 20.50 24.80
Common shares outstanding (1) 7,488,101 7,485,889 7,490,557 7,496,826 7,540,015
PERFORMANCE RATIOS
Return on average total assets 0.61 % 0.74 % 0.86 % 0.91 % 1.04 %
Return on average shareholders' equity 6.16 % 8.05 % 9.24 % 9.47 % 11.35 %
Return on average tangible shareholders' equity 8.07 % 10.82 % 12.37 % 12.58 % 15.28 %
Net interest margin yield (FTE) 2.78 % 2.85 % 3.02 % 3.11 % 3.22 %
BALANCE SHEET DATA (1)
Gross loans $ 1,365,508 $ 1,349,463 $ 1,334,674 $ 1,334,402 $ 1,270,651
AFS securities 517,585 528,148 516,897 530,497 568,650
Total assets 2,057,576 2,058,968 2,118,490 2,042,448 2,084,624
Deposits 1,768,307 1,723,695 1,769,474 1,714,948 1,813,528
Borrowed funds 72,355 116,136 146,642 121,392 61,262
Shareholders' equity 200,674 202,402 185,123 188,431 193,333
Gross loans to deposits 77.22 % 78.29 % 75.43 % 77.81 % 70.07 %
ASSETS UNDER MANAGEMENT (1)
Loans sold with servicing retained $ 244,829 $ 248,756 $ 252,176 $ 254,934 $ 259,512
Assets managed by Isabella Wealth 660,645 641,027 590,666 593,530 571,453
Total assets under management 2,963,050 2,948,751 2,961,332 2,890,912 2,915,589
ASSET QUALITY (1)
Nonperforming loans to gross loans 0.09 % 0.08 % 0.04 % 0.04 % 0.04 %
Nonperforming assets to total assets 0.09 % 0.07 % 0.05 % 0.05 % 0.05 %
ACL to gross loans 0.98 % 0.97 % 0.96 % 0.96 % 0.99 %
CAPITAL RATIOS (1)
Shareholders' equity to assets 9.75 % 9.83 % 8.74 % 9.23 % 9.27 %
Tier 1 leverage 8.80 % 8.76 % 8.77 % 8.70 % 8.58 %
Common equity tier 1 capital 12.36 % 12.54 % 12.43 % 12.39 % 12.71 %
Tier 1 risk-based capital 12.36 % 12.54 % 12.43 % 12.39 % 12.71 %
Total risk-based capital 15.31 % 15.52 % 15.39 % 15.37 % 15.77 %

(1) At end of period

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The following table outlines our year-to-date results of operations and provides certain performance measures as of, and for the three-month periods ended:

March 31<br>2024 March 31<br>2023 March 31<br>2022
INCOME STATEMENT DATA
Interest income $ 21,380 $ 18,595 $ 14,762
Interest expense 8,138 3,244 1,283
Net interest income 13,242 15,351 13,479
Provision for credit losses 392 41 37
Noninterest income 3,468 3,293 3,547
Noninterest expenses 12,676 12,198 11,320
Federal income tax expense 511 1,084 935
Net income $ 3,131 $ 5,321 $ 4,734
PER SHARE
Basic earnings $ 0.42 $ 0.70 $ 0.63
Diluted earnings $ 0.42 $ 0.70 $ 0.62
Dividends $ 0.28 $ 0.28 $ 0.27
Tangible book value (1) $ 20.35 $ 19.24 $ 19.56
Quoted market value
High $ 21.74 $ 25.10 $ 26.00
Low $ 18.25 $ 22.08 $ 24.50
Market price (1) $ 19.40 $ 24.80 $ 25.85
Common shares outstanding (1) 7,488,101 7,540,015 7,542,758
PERFORMANCE RATIOS
Return on average total assets 0.61 % 1.04 % 0.92 %
Return on average shareholders' equity 6.16 % 11.35 % 9.02 %
Return on average tangible shareholders' equity 8.07 % 15.28 % 11.72 %
Net interest margin yield (FTE) 2.78 % 3.22 % 2.86 %
BALANCE SHEET DATA (1)
Gross loans $ 1,365,508 $ 1,270,651 $ 1,218,371
AFS securities $ 517,585 $ 568,650 $ 544,919
Total assets $ 2,057,576 $ 2,084,624 $ 2,060,933
Deposits $ 1,768,307 $ 1,813,528 $ 1,764,161
Borrowed funds $ 72,355 $ 61,262 $ 90,534
Shareholders' equity $ 200,674 $ 193,333 $ 195,842
Gross loans to deposits 77.22 % 70.07 % 69.06 %
ASSETS UNDER MANAGEMENT (1)
Loans sold with servicing retained $ 244,829 $ 259,512 $ 275,556
Assets managed by Isabella Wealth $ 660,645 $ 571,453 $ 501,829
Total assets under management $ 2,963,050 $ 2,915,589 $ 2,838,318
ASSET QUALITY (1)
Nonperforming loans to gross loans 0.09 % 0.04 % 0.06 %
Nonperforming assets to total assets 0.09 % 0.05 % 0.05 %
ACL to gross loans 0.98 % 0.99 % 0.76 %
CAPITAL RATIOS (1)
Shareholders' equity to assets 9.75 % 9.27 % 9.50 %
Tier 1 leverage 8.80 % 8.58 % 8.12 %
Common equity tier 1 capital 12.36 % 12.71 % 12.83 %
Tier 1 risk-based capital 12.36 % 12.71 % 12.83 %
Total risk-based capital 15.31 % 15.77 % 15.84 %

(1) At end of period

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Average Balances, Interest Rates, and Net Interest Income

The following schedules present the daily average amount outstanding for each major category of interest earning assets, non-earning assets, interest bearing liabilities, and noninterest bearing liabilities. 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 and FHLB restricted equity holdings are included in other interest earning assets.

Three Months Ended
March 31, 2024 December 31, 2023 March 31, 2023
Average<br>Balance Tax<br>Equivalent<br>Interest Average<br>Yield /<br>Rate Average<br>Balance Tax<br>Equivalent<br>Interest Average<br>Yield /<br>Rate Average<br>Balance Tax<br>Equivalent<br>Interest Average<br>Yield /<br>Rate
INTEREST EARNING ASSETS
Loans (1) $ 1,348,749 $ 18,057 5.36 % $ 1,340,271 $ 17,580 5.25 % $ 1,268,269 $ 14,889 4.70 %
Taxable investment securities 467,974 2,228 1.90 % 473,660 2,274 1.92 % 504,889 2,471 1.96 %
Nontaxable investment securities 89,056 902 4.05 % 90,408 899 3.98 % 106,240 1,021 3.84 %
Fed funds sold 7 — 5.69 % 13 — 5.76 % 17 — 4.50 %
Other 37,972 439 4.62 % 39,585 549 5.55 % 60,583 486 3.21 %
Total earning assets 1,943,758 21,626 4.45 % 1,943,937 21,302 4.38 % 1,939,998 18,867 3.89 %
NONEARNING ASSETS
Allowance for credit losses (13,100) (12,780) (12,660)
Cash and demand deposits due from banks 24,018 23,244 25,039
Premises and equipment 28,022 27,444 25,864
Accrued income and other assets 84,059 71,592 71,063
Total assets $ 2,066,757 $ 2,053,437 $ 2,049,304
INTEREST BEARING LIABILITIES
Interest bearing demand deposits $ 345,842 $ 413 0.48 % $ 317,996 $ 504 0.63 % $ 379,717 $ 146 0.15 %
Savings deposits 633,904 3,333 2.10 % 634,539 2,819 1.78 % 645,987 1,466 0.91 %
Time deposits 357,541 3,417 3.82 % 338,852 3,076 3.63 % 267,463 1,217 1.82 %
Federal funds purchased and repurchase agreements 40,623 321 3.16 % 50,049 357 2.85 % 39,709 149 1.50 %
FHLB advances 27,692 388 5.60 % 29,674 422 5.69 % — — — %
Subordinated debt, net of unamortized issuance costs 29,342 266 3.63 % 29,320 266 3.63 % 29,253 266 3.64 %
Total interest bearing liabilities 1,434,944 8,138 2.27 % 1,400,430 7,444 2.13 % 1,362,129 3,244 0.95 %
NONINTEREST BEARING LIABILITIES
Demand deposits 412,228 446,747 486,491
Other 16,151 17,302 13,094
Shareholders’ equity 203,434 188,958 187,590
Total liabilities and shareholders’ equity $ 2,066,757 $ 2,053,437 $ 2,049,304
Net interest income (FTE) $ 13,488 $ 13,858 $ 15,623
Net yield on interest earning assets (FTE) 2.78 % 2.85 % 3.22 %

(1) Includes loans and mortgage loans AFS

Three Months Ended

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Net interest income is the amount by which interest income on earning assets exceeds the interest expense on interest bearing liabilities. Net interest income is influenced by changes in the balance and mix of assets and liabilities, as well as market interest rates. While we exert some control over these factors, FRB monetary policy and competition have a significant impact. For analytical purposes, net interest income is adjusted to an FTE basis by including the income tax savings from interest on tax exempt loans and nontaxable investment securities, thus making year to year comparisons more meaningful.

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. Changes in interest due to volume and rate were determined as follows:

Volume—change in volume multiplied by the previous period's rate.

Rate—change in the FTE rate multiplied by the previous period's volume.

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.

Three Months Ended <br> March 31, 2024 Compared to <br> December 31, 2023 <br> Increase (Decrease) Due to Three Months Ended <br> March 31, 2024 Compared to <br> March 31, 2023 <br> Increase (Decrease) Due to
Volume Rate Net Volume Rate Net
Changes in interest income
Loans $ 112 $ 365 $ 477 $ 986 $ 2,182 $ 3,168
Taxable investment securities (27) (19) (46) (177) (66) (243)
Nontaxable investment securities (14) 17 3 (172) 53 (119)
Fed Funds Sold — — — — — —
Other (22) (88) (110) (218) 171 (47)
Total changes in interest income 49 275 324 419 2,340 2,759
Changes in interest expense
Interest bearing demand deposits 41 (132) (91) (14) 281 267
Savings deposits (3) 517 514 (28) 1,895 1,867
Time deposits 174 167 341 516 1,684 2,200
Federal funds purchased and repurchase agreements (72) 36 (36) 4 168 172
FHLB advances (28) (6) (34) 388 — 388
Subordinated debt, net of unamortized issuance costs — — — 1 (1) —
Total changes in interest expense 112 582 694 867 4,027 4,894
Net change in interest margin (FTE) $ (63) $ (307) $ (370) $ (448) $ (1,687) $ (2,135)

Over the past several quarters, rising rates on deposit accounts and an increase in borrowed funds have reversed our recent improvement in our net interest margin. With the repricing of fixed rate loans and maturity of investment securities over the next 2 to 5 years, we expect to see improvement in net yield on interest earning assets.

Average Yield / Rate for the Three-Month Periods Ended:
March 31<br>2024 December 31<br>2023 September 30<br>2023 June 30<br>2023 March 31<br>2023
Total earning assets 4.45 % 4.38 % 4.30 % 4.11 % 3.89 %
Total interest bearing liabilities 2.27 % 2.13 % 1.79 % 1.41 % 0.95 %
Net yield on interest earning assets (FTE) 2.78 % 2.85 % 3.02 % 3.11 % 3.22 %
Quarter to Date Net Interest Income (FTE)
--- --- --- --- --- --- --- --- --- --- ---
March 31<br>2024 December 31<br>2023 September 30<br>2023 June 30<br>2023 March 31<br>2023
Total interest income (FTE) $ 21,626 $ 21,302 $ 20,735 $ 19,750 $ 18,867
Total interest expense 8,138 7,444 6,183 4,816 3,244
Net interest income (FTE) $ 13,488 $ 13,858 $ 14,552 $ 14,934 $ 15,623

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Past Due and Nonaccrual Loans

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

Total Past Due and Nonaccrual Loans
March 31<br>2024 December 31<br>2023 September 30<br>2023 June 30<br>2023 March 31<br>2023
Commercial and industrial $ 1,182 $ 656 $ 207 $ 25 $ 291
Commercial real estate 3,356 — — 2,495 2,844
Agricultural 217 205 219 218 588
Residential real estate 4,279 3,910 756 838 2,365
Consumer 187 193 53 103 43
Total $ 9,221 $ 4,964 $ 1,235 $ 3,679 $ 6,131
Total past due and nonaccrual loans to gross loans 0.68 % 0.37 % 0.09 % 0.28 % 0.48 %

The increase in past due and nonaccrual loans within the commercial real estate portfolio is mainly related to one relationship at the end of the quarter. The accrual of interest on commercial and agricultural loans, as well as residential real estate loans, is discontinued at the time a loan is 90 days or more past due unless the credit is well-secured and in the process of short-term collection. Upon transferring a loan to nonaccrual status, we perform an evaluation to determine the net realizable value of the underlying collateral. This evaluation is used to help determine if a charge-off is necessary. Consumer loans are typically charged-off no later than 180 days past due. Loans may be placed back on accrual status after six months of continued performance and achievement of current payment status.

The following table summarizes nonaccrual loans as of:

March 31<br>2024 December 31<br>2023 September 30<br>2023 June 30<br>2023 March 31<br>2023
Commercial and industrial $ 567 $ 491 $ 17 $ 17 $ 20
Commercial real estate 234 — — — 57
Agricultural 189 205 208 218 232
Residential real estate 293 286 295 179 179
Total $ 1,283 $ 982 $ 520 $ 414 $ 488
Nonaccrual loans as a % of loans at end of period 0.09 % 0.07 % 0.04 % 0.03 % 0.04 %

A summary of loans past due by type and information related to nonaccrual status loans are included in “Note 3 – Loans and ACL” of our interim condensed consolidated financial statements.

Nonperforming Assets

The following table summarizes our nonperforming assets as of:

March 31<br>2024 December 31<br>2023 September 30<br>2023 June 30<br>2023 March 31<br>2023
Nonaccrual loans $ 1,283 $ 982 $ 520 $ 414 $ 488
Accruing loans past due 90 days or more — 87 — 133 —
Total nonperforming loans 1,283 1,069 520 547 488
Foreclosed assets 579 406 509 405 414
Debt securities 12 12 77 77 77
Total nonperforming assets $ 1,874 $ 1,487 $ 1,106 $ 1,029 $ 979
Nonperforming loans as a % of total loans 0.09 % 0.08 % 0.04 % 0.04 % 0.04 %
Nonperforming assets as a % of total assets 0.09 % 0.07 % 0.05 % 0.05 % 0.05 %

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ACL - Loans

The viability of any financial institution is ultimately determined by its management of credit risk. Loans represent our single largest concentration of risk. The ACL is our estimation of expected losses within the existing loan portfolio. We allocate the ACL throughout the loan portfolio based on our assessment of the underlying risks associated within each loan segment. Our assessments include allocations based on specific valuation allowances, historical charge-offs, internally assigned credit risk ratings, past due and nonaccrual balances, historical loss percentages, and other credit trends and risk characteristics, including current conditions and reasonable and supportable forecasts about the future.

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

Three Months Ended <br> March 31
2024 2023
Allowance at beginning of period $ 13,108 $ 9,850
Adoption of ASC 326 — 2,744
Charge-offs
Commercial and industrial — —
Commercial real estate — —
Agricultural — —
Residential real estate 1 2
Consumer 190 99
Total charge-offs 191 101
Recoveries
Commercial and industrial 2 —
Commercial real estate 6 10
Agricultural 2 4
Residential real estate 64 24
Consumer 71 72
Total recoveries 145 110
Net loan charge-offs (recoveries) 46 (9)
Provision for credit losses - loans 328 37
Allowance at end of period $ 13,390 $ 12,640
Net loan charge-offs (recoveries) to average loans outstanding 0.00 % 0.00 %

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

March 31<br>2024 December 31<br>2023 September 30<br>2023 June 30<br>2023 March 31<br>2023
Total charge-offs $ 191 $ 452 $ 179 $ 92 $ 101
Total recoveries 145 71 433 95 110
Net loan charge-offs (recoveries) 46 381 (254) (3) (9)
Net loan charge-offs (recoveries) to average loans outstanding 0.00 % 0.03 % (0.02) % 0.00 % 0.00 %
Provision for credit losses - loans $ 328 $ 722 $ (320) $ 190 $ 37
Provision for credit losses to average loans outstanding 0.02 % 0.05 % (0.02) % 0.01 % 0.00 %
ACL $ 13,390 $ 13,108 $ 12,767 $ 12,833 $ 12,640
ACL as a % of loans at end of period 0.98 % 0.97 % 0.96 % 0.96 % 0.99 %
ACL as a % of nonaccrual loans 1,043.65 % 1,334.83 % 2,455.19 % 3,099.76 % 2,590.16 %

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

March 31<br>2024 December 31<br>2023 September 30<br>2023 June 30<br>2023 March 31<br>2023
ACL
Individually evaluated $ 349 $ 84 $ — $ — $ —
Collectively evaluated 13,041 13,024 12,767 12,833 12,640
Total $ 13,390 $ 13,108 $ 12,767 $ 12,833 $ 12,640
ACL to gross loans
Individually evaluated 0.03 % 0.01 % 0.00 % 0.00 % 0.00 %
Collectively evaluated 0.95 % 0.96 % 0.96 % 0.96 % 0.99 %
Total 0.98 % 0.97 % 0.96 % 0.96 % 0.99 %

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 our interim condensed consolidated financial statements.

Noninterest Income and Noninterest Expenses

Significant noninterest income balances are highlighted in the following tables for the:

Three Months Ended March 31
Change
2024 2023 %
Service charges and fees
ATM and debit card fees $ 1,215 $ 1,160 4.74 %
Service charges and fees on deposit accounts 614 611 3 0.49 %
Freddie Mac servicing fee 150 159 (9) (5.66) %
Net OMSR income (loss) (37) (36) (1) (2.78) %
Other fees for customer services 104 84 20 23.81 %
Total service charges and fees 2,046 1,978 68 3.44 %
Wealth management fees 939 786 153 19.47 %
Earnings on corporate owned life insurance policies 243 226 17 7.52 %
Net gain on sale of mortgage loans 34 67 (33) (49.25) %
All other 206 236 (30) (12.71) %
Total noninterest income $ 3,468 $ 3,293 5.31 %

All values are in US Dollars.

OMSR income results are driven, in part, by changes in offering rates on residential mortgage loans, anticipated prepayments in the servicing-retained portfolio, and the volume of loans within the servicing-retained portfolio. The decline in the volume of originated loans and balance of loans serviced led to net OMSR losses during the first three months of 2024 and 2023.

The increase in wealth management fees is due to an increase in new accounts and market growth. Wealth management fees for the remainder of 2024 are expected to exceed 2023 levels.

The amount of loans sold is driven by customer demand and balance sheet management strategies. With fewer mortgage loans being originated and sold, we experienced a decline in net gain on sale of mortgage loans. While demand is expected to increase during the remainder of 2024, income for 2024 may not exceed 2023 levels.

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

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Significant noninterest expense balances are highlighted in the following tables for the:

Three Months Ended March 31
Change
2024 2023 %
Compensation and benefits $ 7,015 $ 6,589 6.47 %
Furniture and equipment 1,675 1,597 78 4.88 %
Occupancy 1,031 1,005 26 2.59 %
Other
Audit, consulting, and legal fees 513 535 (22) (4.11) %
ATM and debit card fees 469 400 69 17.25 %
FDIC insurance premiums 252 228 24 10.53 %
Marketing costs 244 245 (1) (0.41) %
Memberships and subscriptions 228 240 (12) (5.00) %
Loan underwriting fees 183 215 (32) (14.88) %
Donations and community relations 182 184 (2) (1.09) %
Director fees 176 204 (28) (13.73) %
All other 708 756 (48) (6.35) %
Total other noninterest expenses 2,955 3,007 (52) (1.73) %
Total noninterest expenses $ 12,676 $ 12,198 3.92 %

All values are in US Dollars.

The increase in compensation and benefits was driven by annual merit increases and increased medical claims totaling $225. Compensation and benefit expense is expected to exceed 2023 levels for the remainder of 2024 as a result of additional merit increases and insurance related benefits.

The increase in ATM and debit card fees is the result of increased card usage. As ATM and debit card usage is expected to continue to increase, fees for the remainder of 2024 are expected to exceed 2023 levels.

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

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Analysis of Changes in Financial Condition

March 31<br>2024 December 31<br>2023 Change % Change<br>(unannualized)
ASSETS
Cash and cash equivalents $ 25,218 $ 33,672 (25.11) %
AFS securities
Amortized cost of AFS securities 552,337 559,974 (7,637) (1.36) %
Unrealized gains (losses) on AFS securities (34,752) (31,826) (2,926) 9.19 %
AFS securities 517,585 528,148 (10,563) (2.00) %
Mortgage loans AFS 366 — 366 N/M
Loans 1,365,508 1,349,463 16,045 1.19 %
Less allowance for credit losses 13,390 13,108 282 2.15 %
Net loans 1,352,118 1,336,355 15,763 1.18 %
Premises and equipment 27,951 27,639 312 1.13 %
Bank owned life insurance policies 34,131 33,892 239 0.71 %
Equity securities without readily determinable fair values 15,848 15,848 — — %
Goodwill and other intangible assets 48,284 48,284 — — %
Accrued interest receivable and other assets 36,075 35,130 945 2.69 %
TOTAL ASSETS $ 2,057,576 $ 2,058,968 (0.07) %
LIABILITIES AND SHAREHOLDERS’ EQUITY
Liabilities
Deposits $ 1,768,307 $ 1,723,695 2.59 %
Borrowed funds 72,355 116,136 (43,781) (37.70) %
Accrued interest payable and other liabilities 16,240 16,735 (495) (2.96) %
Total liabilities 1,856,902 1,856,566 336 0.02 %
Shareholders’ equity 200,674 202,402 (1,728) (0.85) %
TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY $ 2,057,576 $ 2,058,968 (0.07) %

All values are in US Dollars.

As shown above, total assets decreased $1,392 from December 31, 2023, driven primarily by a decline in the level of cash and investment securities to fund loan growth. Total loans grew $16,045, largely driven by an increase in advances to mortgage brokers and growth in the commercial portfolio. Total deposits grew $44,612 from December 31, 2023 and funded the paydown of borrowed funds.

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The following table outlines the changes in loan balances:

March 31<br>2024 December 31<br>2023 Change % Change<br>(unannualized)
Commercial and industrial $ 226,281 $ 209,738 7.89 %
Commercial real estate 561,123 564,244 (3,121) (0.55) %
Advances to mortgage brokers 29,688 18,541 11,147 60.12 %
Agricultural 93,695 99,994 (6,299) (6.30) %
Residential real estate 356,658 356,418 240 0.07 %
Consumer 98,063 100,528 (2,465) (2.45) %
Total $ 1,365,508 $ 1,349,463 1.19 %

All values are in US Dollars.

The following table displays loan balances as of:

March 31<br>2024 December 31<br>2023 September 30<br>2023 June 30<br>2023 March 31<br>2023
Commercial and industrial $ 226,281 $ 209,738 $ 195,814 $ 194,914 $ 189,185
Commercial real estate 561,123 564,244 566,639 564,254 566,410
Advances to mortgage brokers 29,688 18,541 24,807 39,099 —
Agricultural 93,695 99,994 99,233 96,689 94,760
Residential real estate 356,658 356,418 348,196 343,474 336,186
Consumer 98,063 100,528 99,985 95,972 84,110
Total $ 1,365,508 $ 1,349,463 $ 1,334,674 $ 1,334,402 $ 1,270,651

We've experienced an increase in the commercial loan portfolio in recent periods as demand has increased. Increased activity in mortgage lending in the second quarter of 2023 allowed us to resume participation in a mortgage purchase program. Growth in the agricultural portfolio is expected during the remainder of 2024. Residential mortgage lending activities have slowed over the last year as a result of rising interest rates. As interest rates are expected to stabilize and fall in late 2024, growth in residential loans is anticipated during the remainder of 2024. While the consumer portfolio declined during the first quarter of 2024, continued growth is expected during 2024.

The following table outlines the changes in deposit balances:

March 31<br>2024 December 31<br>2023 Change % Change<br>(unannualized)
Noninterest bearing demand deposits $ 413,272 $ 428,505 (3.55) %
Interest bearing demand deposits 349,401 320,737 28,664 8.94 %
Savings deposits 639,491 628,079 11,412 1.82 %
Certificates of deposit 366,143 346,374 19,769 5.71 %
Total $ 1,768,307 $ 1,723,695 2.59 %

All values are in US Dollars.

The following table displays deposit balances as of:

March 31<br>2024 December 31<br>2023 September 30<br>2023 June 30<br>2023 March 31<br>2023
Noninterest bearing demand deposits $ 413,272 $ 428,505 $ 445,043 $ 458,845 $ 478,829
Interest bearing demand deposits 349,401 320,737 363,558 335,922 383,602
Savings deposits 639,491 628,079 628,795 606,644 662,495
Certificates of deposit 366,143 346,374 332,078 313,537 288,602
Total $ 1,768,307 $ 1,723,695 $ 1,769,474 $ 1,714,948 $ 1,813,528

Total deposits have fluctuated significantly over the past 12 months with an overall decline in non-contractual deposits, such as demand and savings deposits. During the first quarter of 2024, interest bearing deposits continue to grow as deposit rates remain high. We expect interest rates to continue to rise throughout 2024 due to competitive pressure, and anticipate a continuation in the shift of customers moving to higher interest-earning products.

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The primary objective of our investing activities is to manage our overall exposure to changes in interest rates. Secondary considerations include ensuring ample access to liquidity, generating returns, and providing current income. The following table displays fair values of AFS securities as of:

March 31<br>2024 December 31<br>2023 September 30<br>2023 June 30<br>2023 March 31<br>2023
U.S. Treasury $ 214,226 $ 214,801 $ 209,182 $ 209,353 $ 212,086
States and political subdivisions 90,470 92,876 89,773 95,242 108,719
Auction rate money market preferred 3,013 2,931 2,570 2,637 2,716
Mortgage-backed securities 31,044 32,815 32,923 35,532 37,797
Collateralized mortgage obligations 171,831 177,775 175,630 180,996 200,252
Corporate 7,001 6,950 6,819 6,737 7,080
Total $ 517,585 $ 528,148 $ 516,897 $ 530,497 $ 568,650

Borrowed funds include FHLB advances, securities sold under agreements to repurchase, subordinated debt, and federal funds purchased. The balance of borrowed funds fluctuates from period to period based on our funding needs that arise from changes in loans, investments, and deposits. To provide balance sheet growth, we may utilize borrowings and brokered deposits to fund earning assets.

The following table displays borrowed funds balances as of:

March 31<br>2024 December 31<br>2023 September 30<br>2023 June 30<br>2023 March 31<br>2023
Securities sold under agreements to repurchase without stated maturity dates $ 42,998 $ 46,801 $ 52,330 $ 37,102 $ 31,995
FHLB advances — 40,000 65,000 55,000 —
Subordinated debt, net of unamortized issuance costs 29,357 29,335 29,312 29,290 29,267
Total $ 72,355 $ 116,136 $ 146,642 $ 121,392 $ 61,262

In 2021, we completed a private placement of $30,000 in aggregate principal amount of 3.25% Fixed-to-Floating Rate Subordinated Notes due 2031 (the "Notes"). The Notes will initially bear a fixed interest rate of 3.25% until June 15, 2026, after which time until maturity on June 15, 2031, the interest rate will reset quarterly to an annual floating rate equal to the then-current 3-month SOFR plus 256 basis points. The Notes are redeemable by us at our option, in whole or in part, on or after June 15, 2026. The Notes are not subject to redemption at the option of the holders.

Contractual Obligations and Loan Commitments

We have various financial obligations, including contractual obligations and commitments related to deposits and borrowings, which may require future cash payments. We also have loan related commitments that may impact liquidity. The commitments include unused lines of credit, commercial and standby letters of credit, and commitments to grant loans. These commitments to grant loans include residential mortgage loans with the majority committed to be sold to the secondary market. Many of these commitments historically have expired without being drawn upon and do not necessarily represent our future cash requirements.

We are party to credit related financial instruments with off-balance-sheet risk. These financial instruments are entered into in the normal course of business to meet the financing needs of our customers. These financial instruments involve, to varying degrees, elements of credit and interest rate risk in excess of the amounts recognized in the consolidated balance sheets. The contractual or notional amounts of these instruments reflect the extent of involvement we have in a particular class of financial instrument.

Our exposure to credit-related loss in the event of nonperformance by the counterparties to the financial instruments for commitments to extend credit and standby letters of credit could be up to the contractual notional amount of those instruments. We use the same credit policies when analyzing the creditworthiness of counterparties as we do for extending loans to customers. No significant losses are anticipated as a result of these commitments.

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Capital

Capital consists solely of common stock, retained earnings, and accumulated other comprehensive income (loss). We are authorized to raise capital through dividend reinvestment, employee and director stock purchases, and shareholder stock purchases. Pursuant to these authorizations, we issued 22,456 shares or $447 of common stock during the first three months of 2024, as compared to 19,873 shares or $462 of common stock during the same period 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 $218 and $346 during the three-month periods ended March 31, 2024 and 2023, respectively. We also grant restricted stock awards pursuant to the RSP. Pursuant to this plan, we increased shareholders’ equity by $25 during the first three months of 2024, as compared to $42 during the same period in 2023.

We have publicly announced a common stock repurchase plan. Pursuant to this plan, we repurchased 36,484 shares or $740 of common stock during the first three months of 2024 and 39,279 shares or $937 during the first three months of 2023. As of March 31, 2024, we were authorized to repurchase up to an additional 234,322 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 common equity tier 1 capital ratio has a minimum requirement of 4.50%. The minimum standard for primary, or Tier 1 capital is 6.00% and the minimum standard for total capital is 8.00%. The minimum requirements presented below include the minimum required capital levels based on the Basel III Capital Rules. Capital requirements to be considered well capitalized are based upon prompt corrective action regulations, as amended to reflect the changes under the Basel III Capital Rules. The following table sets forth these requirements and our ratios as of:

March 31, 2024 December 31, 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 12.36 % 7.00 % 6.50 % 12.54 % 7.00 % 6.50 %
Tier 1 capital 12.36 % 8.50 % 8.00 % 12.54 % 8.50 % 8.00 %
Total capital 15.31 % 10.50 % 10.00 % 15.52 % 10.50 % 10.00 %
Tier 1 leverage 8.80 % 4.00 % 5.00 % 8.76 % 4.00 % 5.00 %

Total capital includes Tier 1 capital and Tier 2 capital. Tier 2 capital includes a permissible portion of the allowances for credit losses and subordinated debt, net of unamortized issuance costs. There are no significant regulatory constraints placed on our capital. At March 31, 2024, the Bank exceeded all minimum capital requirements.

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 cash and cash equivalents and unencumbered AFS securities. These categories totaled $353,893 or 17.20% of assets as of March 31, 2024, compared to $381,417 or 18.52% as of December 31, 2023. The decrease 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.

Deposit accounts are our primary source of funds. Our secondary sources include the ability to borrow from the FHLB, from the FRB, and through various correspondent banks in the form of federal funds purchased and a line of credit. These funding methods typically carry a higher interest rate than traditional market deposit accounts. Some borrowed funds, including FHLB advances, FRB Discount Window advances, and repurchase agreements, require us to pledge assets, typically in the form of AFS securities or loans, as collateral. As of March 31, 2024, we had available lines of credit of $374,707.

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The frequency and complexity of our liquidity stress testing has increased due to economic uncertainly and changes within the interest rate and economic environment. Our liquidity position remained strong at March 31, 2024, which is illustrated in the following table:

March 31<br>2024 December 31<br>2023
Total cash and cash equivalents $ 25,218 $ 33,672
Available lines of credit
Fed funds lines with correspondent banks 93,000 93,000
FHLB borrowings 248,624 211,860
FRB Discount Window 28,083 28,220
Other lines of credit 5,000 5,000
Total available lines of credit 374,707 338,080
Unencumbered lendable value of FRB collateral, estimated1 310,000 320,000
Total cash and liquidity $ 709,925 $ 691,752
Uninsured deposits $ 658,564 $ 600,381
Coverage ratio of uninsured deposits with total cash and liquidity 108 % 115 %

(1)Includes estimated unencumbered lendable value of FHLB collateral of $210,000 and $230,000 as of March 31, 2024 and December 31, 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, collateral dependent loans, goodwill, foreclosed assets, OMSR, and certain other assets and liabilities. These nonrecurring fair value adjustments typically involve the application of lower of cost or market accounting or write downs of individual assets.

For further information regarding fair value measurements see “Note 10 – Fair Value” of our interim condensed consolidated financial statements.

Market Risk

Our primary market risks are interest rate risk and liquidity risk. IRR is the exposure of our net interest income to changes in interest rates. IRR results from the difference in the maturity or repricing frequency of a financial institution's interest earning assets and its interest bearing liabilities. Managing IRR is the fundamental method by which financial institutions earn income and create shareholder value. Excessive exposure to IRR could pose a significant risk to our earnings and capital.

The FRB has adopted a policy requiring banks to effectively manage the various risks that can have a material impact on safety and soundness. The risks include credit, interest rate, liquidity, operational, and reputational. We have policies, procedures, and internal controls for measuring and managing these risks. Specifically, our ALCO policy and procedures include defining acceptable types and terms of investments and funding sources, liquidity requirements, limits on investments in long-term assets, limiting the mismatch in repricing opportunities of assets and liabilities, and the frequency of measuring and reporting to our Board of Directors.

The primary technique to measure IRR is simulation analysis. Simulation analysis forecasts the effects on the balance sheet structure and net interest income under a variety of scenarios that incorporate changes in interest rates, the shape of yield curves, interest rate relationships, loan prepayments, and funding sources. These forecasts are compared against net interest income projected in a stable interest rate environment. While many assets and liabilities reprice either at maturity or in accordance with their contractual terms, several balance sheet components demonstrate characteristics that require an evaluation to more accurately reflect their repricing behavior. Key assumptions in the simulation analysis include prepayments on loans, probable calls of investment securities, changes in market conditions, loan volumes and loan pricing, deposit sensitivity, and customer preferences. These assumptions are inherently uncertain as they are subject to fluctuation and revision in a dynamic rate environment. As a result, the simulation analysis cannot precisely forecast the impact of rising and falling interest rates on net interest income. Actual results will differ from simulated results due to many other factors, including changes in balance sheet components, interest rate changes, changes in market conditions, and management strategies. We regularly monitor our projected net interest income sensitivity to ensure that it remains within established limits.

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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 market place. Generally, a decrease in interest rates will result in an increase in cash flows from these assets. A significant portion of our securities are callable or have prepayment options. The call and prepayment options are more likely to be exercised in a period of decreasing interest rates. Savings and demand accounts may generally be withdrawn on request without prior notice. 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.

Item 3. Quantitative and Qualitative Disclosures about Market Risk.

The information presented in the section captioned “Market Risk” in Management's Discussion and Analysis of Financial Condition and Results of Operations is incorporated herein by reference.

Item 4. 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 March 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 March 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

During the most recent fiscal quarter, no change occurred in our internal control over financial reporting that materially affected, or is likely to materially affect, our internal control over financial reporting.

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PART II – OTHER INFORMATION

Item 1. Legal Proceedings.

We are not involved in any material legal proceedings. We are involved in ordinary, routine litigation incidental to our business; however, no such routine proceedings are expected to result in any material adverse effect on operations, earnings, financial condition, or cash flows.

Item 1A. Risk Factors.

There have been no material changes to the risk factors disclosed in Item 1A in our Annual Report on Form 10-K for the year ended December 31, 2023.

Item 2. Unregistered Sales of Equity Securities, Use of Proceeds, and Issuer Purchases of Equity Securities.

(A)None

(B)None

(C)Repurchases of Common Stock

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 common shares are repurchased under this plan, they are retired with the status of authorized, but unissued, shares.

The following table provides information for the three-month period ended March 31, 2024, with respect to this 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<br>Per Common Share
December 31, 2023 270,806
January 1 - 31 8,711 $ 21.58 8,711 262,095
February 1 - 29 12,945 20.47 12,945 249,150
March 1 - 31 14,828 19.36 14,828 234,322
March 31, 2024 36,484 $ 20.28 36,484 234,322

Item 3. Defaults Upon Senior Securities.

Not applicable.

Item 4. Mine Safety Disclosures.

Not applicable.

Item 5. Other Information.

Securities Trading Plans of Executive Officers

During the fiscal quarter ended March 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 6. Exhibits.

(a) Exhibits

Exhibit Number Exhibits
4.1 Indenture, dated as of June 2, 2021, by and between Isabella Bank Corporation and UMB Bank, National Association, as trustee (incorporated by reference to Exhibit 4.1 to the Registrant’s Current Report on Form 8-K filed with the SEC on June 2, 2021)
4.2 Form of 3.25% Fixed-to-Floating Rate Subordinated Note due 2031 (included in the Indenture included as Exhibit 4.1 to this Quarterly Report on Form 10-Q)
10.1 Form of Subordinated Note Purchase Agreement, dated as of June 2, 2021, by and among the Corporation and the several Purchasers (incorporated by reference to Exhibit 10.1 to the Registrant’s Current Report on Form 8-K filed with the SEC on June 2, 2021)
10.2 Form of Registration Rights Agreement, dated as of June 2, 2021, by and among the Corporation and the several Purchasers (incorporated by reference to Exhibit 10.2 to the Registrant’s Current Report on Form 8-K filed with the SEC on June 2, 2021)
31.1 Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 by the Principal Executive Officer
31.2 Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 by the Principal Financial Officer
32 Section 1350 Certification of Principal Executive Officer and Principal Financial Officer
101.1* 101.INS (Inline XBRL Instance Document)
101.SCH (Inline XBRL Taxonomy Extension Schema Document)
101.CAL (Inline XBRL Calculation Linkbase Document)
101.LAB (Inline XBRL Taxonomy Label Linkbase Document)
101.DEF (Inline XBRL Taxonomy Linkbase Document)
101.PRE (Inline XBRL Taxonomy Presentation Linkbase Document)
104 Cover Page Interactive Data File

*    In accordance with Rule 406T of Regulations S-T, the XBRL related information shall not be deemed to be “filed” for purposes of Section 18 of the Exchange Act, or otherwise subject to the liability of that section, and shall not be part of any registration statement or other document filed under the Securities Act or the Exchange Act, except as shall be expressly set forth by specific reference in such filing.

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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

Isabella Bank Corporation
Date: May 2, 2024 /s/ Jerome E. Schwind
Jerome E. Schwind
President and Chief Executive Officer
(Principal Executive Officer)
Date: May 2, 2024 /s/ William M. Schaefer
William M. Schaefer
Chief Financial Officer
(Principal Financial Officer)

58

Document

Exhibit 31.1

I, Jerome E. Schwind, certify that:

1.I have reviewed this Quarterly Report on Form 10-Q of Isabella Bank Corporation (the “registrant”).

2.Based on my knowledge, this Quarterly Report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this Quarterly Report.

3.Based on my knowledge, the consolidated financial statements, and other financial information included in this Quarterly Report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this Quarterly Report.

4.The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

a)designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under my supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this Quarterly Report is being prepared;

b)designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under my supervision, 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;

c)evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

d)disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5.The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of registrant’s board of directors:

a)all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

b)any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date: May 2, 2024 /s/ Jerome E. Schwind
President and Chief Executive Officer
(Principal Executive Officer)

Document

Exhibit 31.2

I, William M. Schaefer, certify that:

1.I have reviewed this Quarterly Report on Form 10-Q of Isabella Bank Corporation (the “registrant”).

2.Based on my knowledge, this Quarterly Report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this Quarterly Report.

3.Based on my knowledge, the consolidated financial statements, and other financial information included in this Quarterly Report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this Quarterly Report.

4.The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

a)designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under my supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this Quarterly Report is being prepared;

b)designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under my supervision, 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;

c)evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

d)disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5.The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of registrant’s board of directors:

a)all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

b)any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date: May 2, 2024 /s/ William M. Schaefer
Chief Financial Officer
(Principal Financial Officer)

Document

Exhibit 32

CERTIFICATION PURSUANT TO

18 U.S.C. SECTION 1350,

AS ADOPTED PURSUANT TO

SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

In connection with the Quarterly Report of Isabella Bank Corporation (the “Corporation”) on Form 10-Q for the quarterly period ended March 31, 2024 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), Jerome E. Schwind, President and Chief Executive Officer and William M. Schaefer, Chief Financial Officer of the Corporation, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that:

(1)The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and

(2)The information contained in the Report fairly presents, in all material respects, the consolidated financial condition and results of operations of the Corporation.

/s/ Jerome E. Schwind
President and Chief Executive Officer
(Principal Executive Officer)
May 2, 2024
/s/ William M. Schaefer
Chief Financial Officer
(Principal Financial Officer)
May 2, 2024

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