Isabella Bank (ISBA) 10-Q 2024 Q3 Quarterly report

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 September 30, 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 7,435,398 as of November 12, 2024.

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	41
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	54
Item 4.	Controls and Procedures	54
PART II – OTHER INFORMATION		55
Item 1.	Legal Proceedings	55
Item 1A.	Risk Factors	55
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	55
Item 3.	Defaults Upon Senior Securities	55
Item 4.	Mine Safety Disclosures	55
Item 5.	Other Information	55
Item 6.	Exhibits	56
SIGNATURES		57

2

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

3

PART I – FINANCIAL INFORMATION

Item 1. Financial Statements.

INTERIM CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)

(Dollars in thousands)

	September 30 2024		December 31 2023
ASSETS
Cash and demand deposits due from banks	$	27,019	$	25,628
Fed Funds sold and interest bearing balances due from banks	359		8,044
Total cash and cash equivalents	27,378		33,672
AFS securities, at fair value	506,806		528,148
FHLB stock	12,762		12,762
Mortgage loans HFS	504		—
Loans	1,424,283		1,349,463
Less allowance for credit losses	12,635		13,108
Net loans	1,411,648		1,336,355
Premises and equipment	27,674		27,639
BOLI policies	34,625		33,892
Goodwill and other intangible assets	48,283		48,284
Other assets	37,221		38,216
Total assets	$	2,106,901	$	2,058,968
LIABILITIES AND SHAREHOLDERS’ EQUITY
Liabilities
Demand deposits	$	421,493	$	428,505
Interest bearing demand deposits	376,592		320,737
Savings	600,150		628,079
Certificates of deposit	383,597		346,374
Total deposits	1,781,832		1,723,695
Short-term borrowings	52,434		46,801
FHLB advances	15,000		40,000
Subordinated debt, net of unamortized issuance costs	29,402		29,335
Total borrowed funds	96,836		116,136
Other liabilities	15,248		16,735
Total liabilities	1,893,916		1,856,566
Shareholders’ equity
Common stock — no par value 15,000,000 shares authorized: issued and outstanding 7,438,720 shares in 2024 and 7,485,889 shares in 2023	125,218		127,323
Shares to be issued for deferred compensation obligations	3,981		3,693
Retained earnings	101,065		97,282
Accumulated other comprehensive income (loss)	(17,279)		(25,896)
Total shareholders’ equity	212,985		202,402
Total liabilities and shareholders' equity	$	2,106,901	$	2,058,968

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

4

INTERIM CONDENSED CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)

(Dollars in thousands except per share amounts)

	Three Months Ended   September 30				Nine Months Ended   September 30
	2024		2023		2024		2023
Interest income
Loans	$	20,230	$	17,270	$	57,150	$	48,090
AFS securities	2,749		2,963		8,437		9,230
FHLB stock	168		91		472		226
Federal funds sold and other	194		161		750		1,029
Total interest income	23,341		20,485		66,809		58,575
Interest expense
Deposits	7,631		5,015		22,107		11,953
Short-term borrowings	384		284		1,026		604
FHLB advances	571		617		1,597		887
Subordinated debt, net of unamortized issuance costs	267		267		799		799
Total interest expense	8,853		6,183		25,529		14,243
Net interest income	14,488		14,302		41,280		44,332
Provision for credit losses	946		(292)		1,508		(55)
Net interest income after provision for credit losses	13,542		14,594		39,772		44,387
Noninterest income
Service charges and fees	2,159		2,060		6,333		6,085
Wealth management fees	1,003		858		2,990		2,625
Earnings on BOLI policies	252		229		748		681
Net gain on sale of mortgage loans	37		109		138		232
Other	77		158		395		688
Total noninterest income	3,528		3,414		10,604		10,311
Noninterest expenses
Compensation and benefits	7,251		6,639		21,236		19,789
Occupancy and equipment	2,645		2,535		7,970		7,743
Other professional services	588		672		1,628		1,764
ATM and debit card fees	503		471		1,459		1,280
FDIC insurance premiums	291		228		823		689
Other	1,950		2,113		5,683		6,130
Total noninterest expenses	13,228		12,658		38,799		37,395
Income before income tax expense	3,842		5,350		11,577		17,303
Income tax expense	561		937		1,684		2,939
Net income	$	3,281	$	4,413	$	9,893	$	14,364
Earnings per common share
Basic	$	0.44	$	0.59	$	1.32	$	1.91
Diluted	0.44		0.58		1.32		1.89
Cash dividends per common share	0.28		0.28		0.84		0.84

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

5

INTERIM CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (UNAUDITED)

(Dollars in thousands)

	Three Months Ended   September 30				Nine Months Ended   September 30
	2024		2023		2024		2023
Net income	$	3,281	$	4,413	$	9,893	$	14,364
Unrealized gains (losses) on AFS securities	13,081		(6,708)		10,858		(5,736)
Reclassification adjustment for net (gains) losses included in net income	—		—		—		(67)
Tax effect (1)	(2,724)		1,394		(2,241)		1,266
Unrealized gains (losses) on AFS securities, net of tax	10,357		(5,314)		8,617		(4,537)
Comprehensive income (loss)	$	13,638	$	(901)	$	18,510	$	9,827

(1) See “Note 6 – Capital Ratios and Shareholders' Equity” for tax effect reconciliation.

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

6

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

(Dollars in thousands except per share amounts)

	Common Stock
	Common Shares Outstanding	Amount		Common Shares to be Issued for Deferred Compensation Obligations		Retained Earnings		Accumulated Other Comprehensive Income (Loss)		Totals
July 1, 2023	7,496,826	$	126,278	$	5,395	$	93,175	$	(36,417)	$	188,431
Comprehensive income (loss)	—	—		—		4,413		(5,314)		(901)
Issuance of common stock	17,473	362		—		—		—		362
Common stock transferred from the Rabbi Trust to satisfy deferred compensation obligations	—	1,803		(1,803)		—		—		—
Share-based payment awards under the Directors Plan	—	—		49		—		—		49
Share-based compensation expense recognized in earnings under the RSP	—	91		—		—		—		91
Common stock purchased for deferred compensation obligations	—	(357)		—		—		—		(357)
Common stock repurchased	(23,742)	(497)		—		—		—		(497)
Cash dividends paid ($0.28 per common share)	—	—		—		(2,055)		—		(2,055)
September 30, 2023	7,490,557	$	127,680	$	3,641	$	95,533	$	(41,731)	$	185,123
July 1, 2024	7,474,016	$	126,126	$	3,951	$	99,808	$	(27,636)	$	202,249
Comprehensive income (loss)	—	—		—		3,281		10,357		13,638
Issuance of common stock	17,580	350		—		—		—		350
Common stock transferred from the Rabbi Trust to satisfy deferred compensation obligations	—	23		(23)		—		—		—
Share-based payment awards under the Directors Plan	—	—		53		—		—		53
Share-based compensation expense recognized in earnings under the RSP	—	26		—		—		—		26
Common stock purchased for deferred compensation obligations	—	(290)		—		—		—		(290)
Common stock repurchased	(52,876)	(1,017)		—		—		—		(1,017)
Cash dividends paid ($0.28 per common share)	—	—		—		(2,024)		—		(2,024)
September 30, 2024	7,438,720	$	125,218	$	3,981	$	101,065	$	(17,279)	$	212,985

7

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

(Dollars in thousands except per share amounts)

	Common Stock
	Common Shares Outstanding	Amount		Common Shares to be Issued for Deferred Compensation Obligations		Retained Earnings		Accumulated Other Comprehensive Income (Loss)		Totals
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)	—	—		—		14,364		(4,537)		9,827
Issuance of common stock	55,456	1,208		—		—		—		1,208
Common stock transferred from the Rabbi Trust to satisfy deferred compensation obligations	—	1,841		(1,841)		—		—		—
Share-based payment awards under the Directors Plan	—	—		477		—		—		477
Share-based compensation expense recognized in earnings under the RSP	—	219		—		—		—		219
Common stock purchased for deferred compensation obligations	—	(1,333)		—		—		—		(1,333)
Common stock repurchased	(124,320)	(2,906)		—		—		—		(2,906)
Cash dividends paid ($0.84 per common share)	—	—		—		(6,162)		—		(6,162)
September 30, 2023	7,490,557	$	127,680	$	3,641	$	95,533	$	(41,731)	$	185,123
January 1, 2024	7,485,889	$	127,323	$	3,693	$	97,282	$	(25,896)	$	202,402
Comprehensive income (loss)	—	—		—		9,893		8,617		18,510
Issuance of common stock	61,560	1,190		—		—		—		1,190
Issuance of common stock for vested shares under the RSP	16,240	—		—		—		—		—
Common stock transferred from the Rabbi Trust to satisfy deferred compensation obligations	—	44		(44)		—		—		—
Share-based payment awards under the Directors Plan	—	—		332		—		—		332
Share-based compensation expense recognized in earnings under the RSP	—	71		—		—		—		71
Common stock purchased for deferred compensation obligations	—	(991)		—		—		—		(991)
Common stock repurchased	(124,969)	(2,419)		—		—		—		(2,419)
Cash dividends paid ($0.84 per common share)	—	—		—		(6,110)		—		(6,110)
September 30, 2024	7,438,720	$	125,218	$	3,981	$	101,065	$	(17,279)	$	212,985

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

8

INTERIM CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)

(Dollars in thousands)

	Nine Months Ended   September 30
	2024		2023
OPERATING ACTIVITIES
Net income	$	9,893	$	14,364
Reconciliation of net income to net cash provided by operating activities:
Provision for credit losses	1,508		(55)
Depreciation	1,555		1,482
Net amortization of AFS securities	1,017		1,120
Increase in cash value of BOLI policies, net of expenses	(733)		(666)
Share-based payment awards	403		696
Origination of loans HFS	(6,168)		(6,972)
Proceeds from loan sales	5,802		7,478
Net changes in:
Other assets	(1,033)		1,481
Other liabilities	270		(151)
Net cash provided by (used in) operating activities	12,514		18,777
INVESTING ACTIVITIES
Proceeds from sales, maturities, calls and prepayments of AFS securities	31,183		62,894
Purchases of AFS securities	—		(6,166)
Net loan principal (originations) collections	(77,151)		(70,614)
Purchases of premises and equipment	(1,590)		(2,889)
Funding of low income housing tax credit investments	(1,690)		(612)
Net cash provided by (used in) investing activities	(49,248)		(17,387)
FINANCING ACTIVITIES
Net increase (decrease) in deposits	58,137		25,199
Net increase (decrease) in short-term borrowings	5,633		(5,441)
Net increase (decrease) in FHLB advances	(25,000)		65,000
Cash dividends paid on common stock	(6,110)		(6,162)
Proceeds from issuance of common stock	1,190		1,208
Common stock repurchased	(2,419)		(2,906)
Common stock purchased for deferred compensation obligations	(991)		(1,333)
Net cash provided by (used in) financing activities	30,440		75,565
Increase (decrease) in cash and cash equivalents	(6,294)		76,955
Cash and cash equivalents at beginning of period	33,672		38,924
Cash and cash equivalents at end of period	$	27,378	$	115,879
SUPPLEMENTAL CASH FLOWS INFORMATION:
Interest paid	$	25,203	$	13,442
Income taxes paid	1,800		2,250
SUPPLEMENTAL NONCASH INFORMATION:
Investment in low income housing tax credits	—		5,000
Transfers of loans to foreclosed assets	350		341

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

9

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 and nine-month periods ended September 30, 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.

Certain amounts reported in the interim 2023 consolidated financial statements have been reclassified to conform with the 2024 presentation. 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:

	September 30, 2024
	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses		Fair Value
U.S. Treasury	$	230,909	$	—	$	10,080	$	220,829
States and political subdivisions	85,599		61		2,761		82,899
Auction rate money market preferred	3,200		—		83		3,117
Mortgage-backed securities	30,577		—		1,622		28,955
Collateralized mortgage obligations	169,339		5		5,580		163,764
Corporate	8,150		—		908		7,242
Total	$	527,774	$	66	$	21,034	$	506,806

	December 31, 2023
	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses		Fair Value
U.S. Treasury	$	231,218	$	—	$	16,417	$	214,801
States and political subdivisions	94,837		1,032		2,993		92,876
Auction rate money market preferred	3,200		—		269		2,931
Mortgage-backed securities	35,321		—		2,506		32,815
Collateralized mortgage obligations	187,248		—		9,473		177,775
Corporate	8,150		—		1,200		6,950
Total	$	559,974	$	1,032	$	32,858	$	528,148

10

The amortized cost and fair value of AFS securities by contractual maturity at September 30, 2024 are as follows:

	Maturing								Securities with Variable Monthly Payments or Noncontractual Maturities
	Due in One Year or Less		After One Year But Within Five Years		After Five Years But Within Ten Years		After Ten Years				Total
U.S. Treasury	$	19,944	$	210,965	$	—	$	—	$	—	$	230,909
States and political subdivisions	15,915		22,900		18,429		28,355		—		85,599
Auction rate money market preferred	—		—		—		—		3,200		3,200
Mortgage-backed securities	—		—		—		—		30,577		30,577
Collateralized mortgage obligations	—		—		—		—		169,339		169,339
Corporate	—		—		8,150		—		—		8,150
Total amortized cost	$	35,859	$	233,865	$	26,579	$	28,355	$	203,116	$	527,774
Fair value	$	35,539	$	223,815	$	24,943	$	26,673	$	195,836	$	506,806

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   September 30				Nine Months Ended   September 30
	2024		2023		2024		2023
Proceeds from sales of AFS securities	$	—	$	—	$	—	$	18,089
Realized gains (losses)	—		—		—		67
Applicable income tax expense (benefit)	—		—		—		14

11

The information in the following tables pertains to AFS securities with gross unrealized losses at September 30, 2024 and December 31, 2023, aggregated by investment category and length of time that individual securities have been in a continuous loss position.

	September 30, 2024
	Less Than Twelve Months				Twelve Months or More
	Gross Unrealized Losses		Fair Value		Gross Unrealized Losses		Fair Value		Total Unrealized Losses
U.S. Treasury	$	—	$	—	$	10,080	$	220,829	$	10,080
States and political subdivisions	50		5,741		2,711		39,536		2,761
Auction rate money market preferred	—		—		83		3,117		83
Mortgage-backed securities	—		—		1,622		28,955		1,622
Collateralized mortgage obligations	—		—		5,580		157,945		5,580
Corporate	—		—		908		7,242		908
Total	$	50	$	5,741	$	20,984	$	457,624	$	21,034
Number of securities in an unrealized loss position:			51				181		232

	December 31, 2023
	Less Than Twelve Months				Twelve Months or More
	Gross Unrealized Losses		Fair Value		Gross Unrealized Losses		Fair Value		Total Unrealized Losses
U.S. Treasury	$	—	$	—	$	16,417	$	214,801	$	16,417
States and political subdivisions	42		7,172		2,951		37,011		2,993
Auction rate money market preferred	—		—		269		2,931		269
Mortgage-backed securities	1		10		2,505		32,805		2,506
Collateralized mortgage obligations	116		4,554		9,357		173,221		9,473
Corporate	—		—		1,200		6,950		1,200
Total	$	159	$	11,736	$	32,699	$	467,719	$	32,858
Number of securities in an unrealized loss position:			22				186		208

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

As of September 30, 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 intend 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.

12

Note 3 – Loans and ACL

Loan Composition

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

	September 30, 2024				December 31, 2023
	Balance		Percent of Total		Balance		Percent of Total
Commercial and industrial
Secured	$	217,693	15.28	%	$	189,186	14.02	%
Unsecured	22,896		1.61	%	20,552		1.52	%
Total commercial and industrial	240,589		16.89	%	209,738		15.54	%
Commercial real estate
Commercial mortgage owner occupied	169,779		11.92	%	180,636		13.39	%
Commercial mortgage non-owner occupied	215,481		15.13	%	216,292		16.03	%
Commercial mortgage 1-4 family investor	92,154		6.47	%	89,208		6.61	%
Commercial mortgage multifamily	69,624		4.89	%	78,108		5.79	%
Total commercial real estate	547,038		38.41	%	564,244		41.82	%
Advances to mortgage brokers	76,187		5.35	%	18,541		1.37	%
Agricultural
Agricultural mortgage	66,789		4.69	%	69,044		5.12	%
Agricultural other	30,005		2.11	%	30,950		2.29	%
Total agricultural	96,794		6.80	%	99,994		7.41	%
Residential real estate
Senior lien	324,078		22.75	%	313,459		23.23	%
Junior lien	8,105		0.57	%	5,945		0.44	%
Home equity lines of credit	37,663		2.64	%	37,014		2.74	%
Total residential real estate	369,846		25.96	%	356,418		26.41	%
Consumer
Secured - direct	37,269		2.62	%	37,948		2.81	%
Secured - indirect	52,990		3.72	%	59,324		4.40	%
Unsecured	3,570		0.25	%	3,256		0.24	%
Total consumer	93,829		6.59	%	100,528		7.45	%
Total	$	1,424,283	100.00	%	$	1,349,463	100.00	%

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

13

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.

14

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

	September 30, 2024				December 31, 2023
	Total Nonaccrual Loans		Nonaccrual Loans with No ACL		Total Nonaccrual Loans		Nonaccrual Loans with No ACL
Commercial and industrial
Secured	$	95	$	95	$	491	$	435
Unsecured	25		25		—		—
Agricultural
Agricultural mortgage	—		—		38		38
Agricultural other	—		—		167		167
Residential real estate
Senior lien	427		427		286		286
Total	$	547	$	547	$	982	$	926

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

	September 30, 2024
	Past Due:										Accruing Loans 90 or More Days Past Due
	30-59 Days		60-89 Days		90 Days or More		Current		Total
Commercial and industrial
Secured	$	36	$	—	$	95	$	217,562	$	217,693	$	—
Unsecured	—		—		25		22,871		22,896		—
Total commercial and industrial	36		—		120		240,433		240,589		—
Commercial real estate
Commercial mortgage owner occupied	—		304		—		169,475		169,779		—
Commercial mortgage non-owner occupied	—		—		—		215,481		215,481		—
Commercial mortgage 1-4 family investor	62		—		—		92,092		92,154		—
Commercial mortgage multifamily	—		—		—		69,624		69,624		—
Total commercial real estate	62		304		—		546,672		547,038		—
Advances to mortgage brokers	—		—		—		76,187		76,187		—
Agricultural
Agricultural mortgage	3		—		—		66,786		66,789		—
Agricultural other	1,100		—		—		28,905		30,005		—
Total agricultural	1,103		—		—		95,691		96,794		—
Residential real estate
Senior lien	54		356		194		323,474		324,078		—
Junior lien	—		19		—		8,086		8,105		—
Home equity lines of credit	—		—		—		37,663		37,663		—
Total residential real estate	54		375		194		369,223		369,846		—
Consumer
Secured - direct	115		28		—		37,126		37,269		—
Secured - indirect	292		5		64		52,629		52,990		64
Unsecured	11		3		—		3,556		3,570		—
Total consumer	418		36		64		93,311		93,829		64
Total	$	1,673	$	715	$	378	$	1,421,517	$	1,424,283	$	64

15

	December 31, 2023
	Past Due:										Accruing Loans 90 or More Days Past Due
	30-59 Days		60-89 Days		90 Days 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

16

Credit Quality Indicators

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

	September 30, 2024
	2024		2023		2022		2021		2020		Prior		Revolving Loans		Revolving Loans Converted to Term		Total
Commercial and industrial: Secured
Risk ratings 1-3	$	11,104	$	17,451	$	4,126	$	5,557	$	5,135	$	462	$	7,947	$	—	$	51,782
Risk rating 4	30,323		39,808		29,100		16,531		2,656		2,774		31,072		—		152,264
Risk rating 5	3,628		241		362		175		46		69		3,520		—		8,041
Risk rating 6	154		283		2,001		81		166		61		2,765		—		5,511
Risk rating 7	—		—		—		—		95		—		—		—		95
Risk rating 8	—		—		—		—		—		—		—		—		—
Risk rating 9	—		—		—		—		—		—		—		—		—
Total	$	45,209	$	57,783	$	35,589	$	22,344	$	8,098	$	3,366	$	45,304	$	—	$	217,693
Current year-to-date gross charge-offs	$	—	$	277	$	33	$	—	$	17	$	—	$	—	$	—	$	327
Commercial and industrial: Unsecured
Risk ratings 1-3	$	375	$	1,977	$	203	$	84	$	48	$	615	$	1,599	$	—	$	4,901
Risk rating 4	2,455		3,505		2,452		418		398		—		8,700		—		17,928
Risk rating 5	—		—		—		—		—		—		42		—		42
Risk rating 6	—		—		—		—		—		—		—		—		—
Risk rating 7	—		—		—		—		—		—		25		—		25
Risk rating 8	—		—		—		—		—		—		—		—		—
Risk rating 9	—		—		—		—		—		—		—		—		—
Total	$	2,830	$	5,482	$	2,655	$	502	$	446	$	615	$	10,366	$	—	$	22,896
Current year-to-date gross charge-offs	$	—	$	—	$	—	$	—	$	—	$	8	$	1	$	—	$	9
Commercial real estate: Owner occupied
Risk ratings 1-3	$	481	$	3,871	$	1,594	$	12,158	$	13,476	$	3,034	$	120	$	—	$	34,734
Risk rating 4	15,403		11,503		30,018		35,965		10,310		22,628		1,239		—		127,066
Risk rating 5	198		904		893		73		670		803		372		—		3,913
Risk rating 6	75		823		—		1,409		1,146		513		100		—		4,066
Risk rating 7	—		—		—		—		—		—		—		—		—
Risk rating 8	—		—		—		—		—		—		—		—		—
Risk rating 9	—		—		—		—		—		—		—		—		—
Total	$	16,157	$	17,101	$	32,505	$	49,605	$	25,602	$	26,978	$	1,831	$	—	$	169,779
Current year-to-date gross charge-offs	$	—	$	—	$	—	$	—	$	—	$	—	$	—	$	—	$	—
Commercial real estate: Non-owner occupied
Risk ratings 1-3	$	334	$	56	$	4,528	$	6,297	$	554	$	1,821	$	—	$	—	$	13,590
Risk rating 4	16,800		35,649		62,959		34,962		10,718		29,667		1,084		—		191,839
Risk rating 5	—		—		221		5,690		—		3,078		—		—		8,989
Risk rating 6	—		1,012		—		—		51		—		—		—		1,063
Risk rating 7	—		—		—		—		—		—		—		—		—
Risk rating 8	—		—		—		—		—		—		—		—		—
Risk rating 9	—		—		—		—		—		—		—		—		—
Total	$	17,134	$	36,717	$	67,708	$	46,949	$	11,323	$	34,566	$	1,084	$	—	$	215,481
Current year-to-date gross charge-offs	$	—	$	—	$	—	$	—	$	—	$	—	$	—	$	—	$	—

17

	September 30, 2024
	2024		2023		2022		2021		2020		Prior		Revolving Loans		Revolving Loans Converted to Term		Total
Commercial real estate: 1-4 family investor
Risk ratings 1-3	$	640	$	—	$	1,139	$	810	$	860	$	979	$	2,062	$	—	$	6,490
Risk rating 4	7,004		12,902		10,578		29,190		14,203		4,175		6,406		—		84,458
Risk rating 5	—		147		343		73		—		53		—		—		616
Risk rating 6	—		541		—		—		—		49		—		—		590
Risk rating 7	—		—		—		—		—		—		—		—		—
Risk rating 8	—		—		—		—		—		—		—		—		—
Risk rating 9	—		—		—		—		—		—		—		—		—
Total	$	7,644	$	13,590	$	12,060	$	30,073	$	15,063	$	5,256	$	8,468	$	—	$	92,154
Current year-to-date gross charge-offs	$	—	$	—	$	—	$	—	$	—	$	—	$	—	$	—	$	—
Commercial real estate: Multifamily
Risk ratings 1-3	$	—	$	3,631	$	4,400	$	1,947	$	551	$	1,410	$	—	$	—	$	11,939
Risk rating 4	1,375		2,512		19,010		10,791		672		19,500		557		—		54,417
Risk rating 5	—		—		—		22		—		329		—		—		351
Risk rating 6	—		—		—		—		—		2,917		—		—		2,917
Risk rating 7	—		—		—		—		—		—		—		—		—
Risk rating 8	—		—		—		—		—		—		—		—		—
Risk rating 9	—		—		—		—		—		—		—		—		—
Total	$	1,375	$	6,143	$	23,410	$	12,760	$	1,223	$	24,156	$	557	$	—	$	69,624
Current year-to-date gross charge-offs	$	—	$	—	$	—	$	—	$	—	$	—	$	—	$	—	$	—
Advances to mortgage brokers
Risk ratings 1-3	$	76,187	$	—	$	—	$	—	$	—	$	—	$	—	$	—	$	76,187
Current year-to-date gross charge-offs	$	—	$	—	$	—	$	—	$	—	$	—	$	—	$	—	$	—
Agricultural mortgage
Risk ratings 1-3	$	80	$	—	$	2,727	$	1,100	$	2,576	$	1,136	$	2	$	—	$	7,621
Risk rating 4	3,144		4,569		13,161		8,534		6,312		9,243		1,418		—		46,381
Risk rating 5	—		1,338		2,894		5,640		—		1,133		661		—		11,666
Risk rating 6	60		—		—		—		—		1,061		—		—		1,121
Risk rating 7	—		—		—		—		—		—		—		—		—
Risk rating 8	—		—		—		—		—		—		—		—		—
Risk rating 9	—		—		—		—		—		—		—		—		—
Total	$	3,284	$	5,907	$	18,782	$	15,274	$	8,888	$	12,573	$	2,081	$	—	$	66,789
Current year-to-date gross charge-offs	$	—	$	—	$	—	$	—	$	—	$	—	$	—	$	—	$	—
Agricultural other
Risk ratings 1-3	$	476	$	523	$	62	$	101	$	4	$	299	$	1,885	$	—	$	3,350
Risk rating 4	1,878		1,339		2,049		2,018		511		560		13,152		—		21,507
Risk rating 5	1,694		44		4		30		438		—		1,457		—		3,667
Risk rating 6	—		172		—		90		—		—		1,219		—		1,481
Risk rating 7	—		—		—		—		—		—		—		—		—
Risk rating 8	—		—		—		—		—		—		—		—		—
Risk rating 9	—		—		—		—		—		—		—		—		—
Total	$	4,048	$	2,078	$	2,115	$	2,239	$	953	$	859	$	17,713	$	—	$	30,005
Current year-to-date gross charge-offs	$	—	$	—	$	—	$	—	$	—	$	—	$	—	$	—	$	—

18

	December 31, 2023
	2023		2022		2021		2020		2019		Prior		Revolving Loans		Revolving Loans Converted to Term		Total
Commercial and industrial: Secured
Risk ratings 1-3	$	15,061	$	4,324	$	6,188	$	6,666	$	422	$	449	$	12,305	$	—	$	45,415
Risk rating 4	38,680		35,245		22,065		4,523		2,469		1,762		29,826		—		134,570
Risk rating 5	391		2,634		233		305		111		101		1,994		—		5,769
Risk rating 6	—		—		4		207		6		128		2,596		—		2,941
Risk rating 7	465		—		—		24		2		—		—		—		491
Risk rating 8	—		—		—		—		—		—		—		—		—
Risk rating 9	—		—		—		—		—		—		—		—		—
Total	$	54,597	$	42,203	$	28,490	$	11,725	$	3,010	$	2,440	$	46,721	$	—	$	189,186
Current year-to-date gross charge-offs	$	—	$	—	$	—	$	—	$	—	$	—	$	—	$	—	$	—
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	$	—	$	—	$	—	$	—	$	—	$	—	$	—	$	—	$	—

19

	December 31, 2023
	2023		2022		2021		2020		2019		Prior		Revolving Loans		Revolving Loans Converted to Term		Total
Commercial real estate: 1-4 family investor
Risk ratings 1-3	$	286	$	1,445	$	864	$	905	$	666	$	887	$	1,352	$	—	$	6,405
Risk rating 4	13,492		11,641		30,604		15,124		3,036		3,111		4,538		—		81,546
Risk rating 5	152		354		77		—		55		—		—		—		638
Risk rating 6	555		—		—		—		59		5		—		—		619
Risk rating 7	—		—		—		—		—		—		—		—		—
Risk rating 8	—		—		—		—		—		—		—		—		—
Risk rating 9	—		—		—		—		—		—		—		—		—
Total	$	14,485	$	13,440	$	31,545	$	16,029	$	3,816	$	4,003	$	5,890	$	—	$	89,208
Current year-to-date gross charge-offs	$	—	$	—	$	—	$	—	$	—	$	—	$	—	$	—	$	—
Commercial real estate: Multifamily
Risk ratings 1-3	$	4,509	$	4,682	$	2,053	$	568	$	—	$	1,515	$	—	$	—	$	13,327
Risk rating 4	2,792		19,465		15,981		813		549		21,263		554		—		61,417
Risk rating 5	—		—		—		4		—		—		—		—		4
Risk rating 6	—		—		32		—		—		3,328		—		—		3,360
Risk rating 7	—		—		—		—		—		—		—		—		—
Risk rating 8	—		—		—		—		—		—		—		—		—
Risk rating 9	—		—		—		—		—		—		—		—		—
Total	$	7,301	$	24,147	$	18,066	$	1,385	$	549	$	26,106	$	554	$	—	$	78,108
Current year-to-date gross charge-offs	$	—	$	—	$	—	$	—	$	—	$	—	$	—	$	—	$	—
Advances to mortgage brokers
Risk ratings 1-3	$	18,541	$	—	$	—	$	—	$	—	$	—	$	—	$	—	$	18,541
Current year-to-date gross charge-offs	$	—	$	—	$	—	$	—	$	—	$	—	$	—	$	—	$	—
Agricultural mortgage
Risk ratings 1-3	$	292	$	2,834	$	1,241	$	2,786	$	604	$	964	$	94	$	—	$	8,815
Risk rating 4	5,622		12,903		8,970		5,940		3,926		7,883		566		—		45,810
Risk rating 5	126		4,098		5,886		689		175		60		756		—		11,790
Risk rating 6	842		—		—		—		—		1,749		—		—		2,591
Risk rating 7	—		—		—		—		—		38		—		—		38
Risk rating 8	—		—		—		—		—		—		—		—		—
Risk rating 9	—		—		—		—		—		—		—		—		—
Total	$	6,882	$	19,835	$	16,097	$	9,415	$	4,705	$	10,694	$	1,416	$	—	$	69,044
Current year-to-date gross charge-offs	$	—	$	—	$	—	$	—	$	—	$	4	$	—	$	—	$	4
Agricultural other
Risk ratings 1-3	$	801	$	81	$	121	$	38	$	183	$	141	$	2,659	$	—	$	4,024
Risk rating 4	1,830		2,481		2,280		619		146		75		14,405		—		21,836
Risk rating 5	753		8		163		507		—		480		2,731		—		4,642
Risk rating 6	—		—		32		—		—		—		249		—		281
Risk rating 7	—		—		—		—		—		—		167		—		167
Risk rating 8	—		—		—		—		—		—		—		—		—
Risk rating 9	—		—		—		—		—		—		—		—		—
Total	$	3,384	$	2,570	$	2,596	$	1,164	$	329	$	696	$	20,211	$	—	$	30,950
Current year-to-date gross charge-offs	$	—	$	—	$	—	$	—	$	—	$	—	$	—	$	—	$	—

20

Internally assigned credit risk ratings are reviewed, at a minimum, when loans are renewed or when management has knowledge of improvements or deterioration of the credit quality of individual credits. Descriptions of the internally assigned credit risk ratings for commercial and agricultural loans are as follows:

1. EXCELLENT – Substantially Risk Free

Credit has strong financial condition and solid earnings history, characterized by:

•High liquidity, strong cash flow, low leverage.

•Unquestioned ability to meet all obligations when due.

•Experienced management, with management succession in place.

•Secured by cash.

2. HIGH QUALITY – Limited Risk

Credit with sound financial condition and a positive trend in earnings supplemented by:

•Favorable liquidity and leverage ratios.

•Ability to meet all obligations when due.

•Management with successful track record.

•Steady and satisfactory earnings history.

•If loan is secured, collateral is of high quality and readily marketable.

•Access to alternative financing.

•Well defined primary and secondary source of repayment.

•If supported by guaranty, the financial strength and liquidity of the guarantor(s) are clearly evident.

3. HIGH SATISFACTORY – Reasonable Risk

Credit with satisfactory financial condition and further characterized by:

•Working capital adequate to support operations.

•Cash flow sufficient to pay debts as scheduled.

•Management experience and depth appear favorable.

•Loan performing according to terms.

•If loan is secured, collateral is acceptable, and loan is fully protected.

4. SATISFACTORY – Acceptable Risk

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

•Would include most start-up businesses.

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

•Management’s abilities are apparent yet unproven.

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

•Loan structure generally in accordance with policy.

•If secured, loan collateral coverage is marginal.

21

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

5. SPECIAL MENTION – Criticized

Credit constitutes an undue and unwarranted credit risk but not to the point of justifying a classification of substandard. The credit risk may be relatively minor yet constitutes an unwarranted risk in light of the circumstances surrounding a specific loan:

•Downward trend in sales, profit levels, and margins.

•Impaired working capital position.

•Cash flow is strained in order to meet debt repayment.

•Loan delinquency (30-60 days) and overdrafts may occur.

•Shrinking equity cushion.

•Diminishing primary source of repayment and questionable secondary source.

•Management abilities are questionable.

•Weak industry conditions.

•Litigation pending against the borrower.

•Loan may need to be restructured to improve collateral position or reduce payments.

•Collateral or guaranty offers limited protection.

•Negative debt service coverage, however, the credit is well collateralized, and payments are current.

6. SUBSTANDARD – Classified

Credit is inadequately protected by the current net worth and paying capacity of the borrower or of the collateral pledged. There is a distinct possibility we will implement collection procedures if the loan deficiencies are not corrected. Any commercial loan placed in nonaccrual status will be rated “7” or worse. In addition, the following characteristics may apply:

•Sustained losses have severely eroded the equity and cash flow.

•Deteriorating liquidity.

•Serious management problems or internal fraud.

•Original repayment terms liberalized.

•Likelihood of bankruptcy.

•Inability to access other funding sources.

•Reliance on secondary source of repayment.

•Litigation filed against borrower.

•Interest non-accrual may be warranted.

•Collateral provides little or no value.

•Requires excessive attention of the loan officer.

•Borrower is uncooperative with loan officer.

7. VULNERABLE – Classified

Credit is considered “Substandard” and warrants placing in nonaccrual status. Risk of loss is being evaluated and exit strategy options are under review. Other characteristics that may apply:

•Insufficient cash flow to service debt.

•Minimal or no payments being received.

•Limited options available to avoid the collection process.

•Transition status, expect action will take place to collect loan without immediate progress being made.

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8. DOUBTFUL – Workout

Credit has all the weaknesses inherent in a “Substandard” loan with the added characteristic that collection and/or liquidation is pending. The possibility of a loss is extremely high, but its classification as a loss is deferred until liquidation procedures are completed, or reasonably estimable. Other characteristics that may apply:

•Normal operations are severely diminished or have ceased.

•Seriously impaired cash flow.

•Original repayment terms materially altered.

•Secondary source of repayment is inadequate.

•Survivability as a “going concern” is impossible.

•Collection process has begun.

•Bankruptcy petition has been filed.

•Judgments have been filed.

•Portion of the loan balance has been charged-off.

9. LOSS – Charge-off

Credit is considered uncollectible and of such little value that their continuance as bankable assets is not warranted. This classification is for charged-off loans but does not mean that the asset has absolutely no recovery or salvage value. These loans are further characterized by:

•Liquidation or reorganization under bankruptcy, with poor prospects of collection.

•Fraudulently overstated assets and/or earnings.

•Collateral has marginal or no value.

•Debtor cannot be located.

•Over 120 days delinquent.

23

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:

	September 30, 2024
	2024		2023		2022		2021		2020		Prior		Revolving Loans		Revolving Loans Converted to Term		Total
Residential real estate: Senior lien
Current	$	38,341	$	42,674	$	49,365	$	75,791	$	49,085	$	68,147	$	—	$	—	$	323,403
Past due 30-89 days	—		—		—		—		—		248		—		—		248
Past due 90 or more days	—		—		—		—		—		—		—		—		—
Nonaccrual	—		142		—		163		29		93		—		—		427
Total	$	38,341	$	42,816	$	49,365	$	75,954	$	49,114	$	68,488	$	—	$	—	$	324,078
Current year-to-date gross charge-offs	$	—	$	—	$	—	$	—	$	—	$	10	$	—	$	—	$	10
Residential real estate: Junior lien
Current	$	3,265	$	3,296	$	911	$	100	$	78	$	436	$	—	$	—	$	8,086
Past due 30-89 days	—		—		—		19		—		—		—		—		19
Past due 90 or more days	—		—		—		—		—		—		—		—		—
Nonaccrual	—		—		—		—		—		—		—		—		—
Total	$	3,265	$	3,296	$	911	$	119	$	78	$	436	$	—	$	—	$	8,105
Current year-to-date gross charge-offs	$	—	$	—	$	—	$	—	$	—	$	—	$	—	$	—	$	—
Residential real estate: Home equity lines of credit
Current	$	—	$	—	$	—	$	—	$	—	$	—	$	37,663	$	—	$	37,663
Past due 30-89 days	—		—		—		—		—		—		—		—		—
Past due 90 or more days	—		—		—		—		—		—		—		—		—
Nonaccrual	—		—		—		—		—		—		—		—		—
Total	$	—	$	—	$	—	$	—	$	—	$	—	$	37,663	$	—	$	37,663
Current year-to-date gross charge-offs	$	—	$	—	$	—	$	—	$	—	$	—	$	—	$	—	$	—
Consumer: Secured - direct
Current	$	9,965	$	10,612	$	7,386	$	4,482	$	2,434	$	2,247	$	—	$	—	$	37,126
Past due 30-89 days	110		—		24		4		—		5		—		—		143
Past due 90 or more days	—		—		—		—		—		—		—		—		—
Nonaccrual	—		—		—		—		—		—		—		—		—
Total	$	10,075	$	10,612	$	7,410	$	4,486	$	2,434	$	2,252	$	—	$	—	$	37,269
Current year-to-date gross charge-offs	$	—	$	73	$	—	$	—	$	27	$	2	$	—	$	—	$	102
Consumer: Secured - indirect
Current	$	6,669	$	24,463	$	8,426	$	5,384	$	4,327	$	3,360	$	—	$	—	$	52,629
Past due 30-89 days	38		137		58		—		41		23		—		—		297
Past due 90 or more days	—		—		64		—		—		—		—		—		64
Nonaccrual	—		—		—		—		—		—		—		—		—
Total	$	6,707	$	24,600	$	8,548	$	5,384	$	4,368	$	3,383	$	—	$	—	$	52,990
Current year-to-date gross charge-offs	$	—	$	43	$	—	$	—	$	—	$	—	$	—	$	—	$	43

24

	September 30, 2024
	2024		2023		2022		2021		2020		Prior		Revolving Loans		Revolving Loans Converted to Term		Total
Consumer: Unsecured
Current	$	1,513	$	825	$	323	$	32	$	25	$	1	$	837	$	—	$	3,556
Past due 30-89 days	6		3		—		—		—		—		5		—		14
Past due 90 or more days	—		—		—		—		—		—		—		—		—
Nonaccrual	—		—		—		—		—		—		—		—		—
Total	$	1,519	$	828	$	323	$	32	$	25	$	1	$	842	$	—	$	3,570
Current year-to-date gross charge-offs	$	1,939	$	12	$	21	$	—	$	—	$	1	$	21	$	—	$	1,994

	December 31, 2023
	2023		2022		2021		2020		2019		Prior		Revolving Loans		Revolving Loans Converted to Term		Total
Residential real estate: Senior lien
Current	$	45,878	$	52,989	$	80,122	$	52,648	$	23,356	$	54,556	$	—	$	—	$	309,549
Past due 30-89 days	—		784		714		123		478		1,438		—		—		3,537
Past due 90 or more days	—		—		—		—		—		87		—		—		87
Nonaccrual	48		—		—		31		—		207		—		—		286
Total	$	45,926	$	53,773	$	80,836	$	52,802	$	23,834	$	56,288	$	—	$	—	$	313,459
Current year-to-date gross charge-offs	$	—	$	—	$	—	$	—	$	—	$	2	$	—	$	—	$	2
Residential real estate: Junior lien
Current	$	3,706	$	1,325	$	168	$	134	$	167	$	445	$	—	$	—	$	5,945
Past due 30-89 days	—		—		—		—		—		—		—		—		—
Past due 90 or more days	—		—		—		—		—		—		—		—		—
Nonaccrual	—		—		—		—		—		—		—		—		—
Total	$	3,706	$	1,325	$	168	$	134	$	167	$	445	$	—	$	—	$	5,945
Current year-to-date gross charge-offs	$	—	$	—	$	—	$	—	$	—	$	—	$	—	$	—	$	—
Residential real estate: Home equity lines of credit
Current	$	—	$	—	$	—	$	—	$	—	$	—	$	37,014	$	—	$	37,014
Past due 30-89 days	—		—		—		—		—		—		—		—		—
Past due 90 or more days	—		—		—		—		—		—		—		—		—
Nonaccrual	—		—		—		—		—		—		—		—		—
Total	$	—	$	—	$	—	$	—	$	—	$	—	$	37,014	$	—	$	37,014
Current year-to-date gross charge-offs	$	—	$	—	$	—	$	—	$	—	$	—	$	—	$	—	$	—
Consumer: Secured - direct
Current	$	14,813	$	10,037	$	6,468	$	3,473	$	1,682	$	1,472	$	—	$	—	$	37,945
Past due 30-89 days	—		—		—		3		—		—		—		—		3
Past due 90 or more days	—		—		—		—		—		—		—		—		—
Nonaccrual	—		—		—		—		—		—		—		—		—
Total	$	14,813	$	10,037	$	6,468	$	3,476	$	1,682	$	1,472	$	—	$	—	$	37,948
Current year-to-date gross charge-offs	$	—	$	—	$	5	$	—	$	—	$	—	$	—	$	—	$	5

25

	December 31, 2023
	2023		2022		2021		2020		2019		Prior		Revolving Loans		Revolving Loans Converted to Term		Total
Consumer: Secured - indirect
Current	$	30,900	$	10,977	$	6,887	$	5,376	$	2,030	$	2,973	$	—	$	—	$	59,143
Past due 30-89 days	123		—		—		30		3		25		—		—		181
Past due 90 or more days	—		—		—		—		—		—		—		—		—
Nonaccrual	—		—		—		—		—		—		—		—		—
Total	$	31,023	$	10,977	$	6,887	$	5,406	$	2,033	$	2,998	$	—	$	—	$	59,324
Current year-to-date gross charge-offs	$	—	$	—	$	—	$	—	$	—	$	—	$	—	$	—	$	—
Consumer: Unsecured
Current	$	1,576	$	740	$	144	$	86	$	7	$	—	$	694	$	—	$	3,247
Past due 30-89 days	—		9		—		—		—		—		—		—		9
Past due 90 or more days	—		—		—		—		—		—		—		—		—
Nonaccrual	—		—		—		—		—		—		—		—		—
Total	$	1,576	$	749	$	144	$	86	$	7	$	—	$	694	$	—	$	3,256
Current year-to-date gross charge-offs	$	172	$	—	$	6	$	—	$	—	$	4	$	—	$	—	$	182

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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There were no loan modification for the three months ended September 30, 2023. The following is a summary of the amortized cost basis of loan modifications granted to borrowers experiencing financial difficulty for the:

	Three Months Ended September 30, 2024
	Interest Rate Reduction
	Amortized Cost Basis		% of Total Class of Financial Receivable
Agricultural
Agricultural other	181		0.60	%
Total	$	181

	Nine Months Ended September 30, 2024
	Interest Rate Reduction				Other-Than-Insignificant Payment Delay				Term Extension				Other-Than-Insignificant Payment Delay and Term Extension
	Amortized Cost Basis		% of Total Class of Financial Receivable		Amortized Cost Basis		% of Total Class of Financial Receivable		Amortized Cost Basis		% of Total Class of Financial Receivable		Amortized Cost Basis		% of Total Class of Financial Receivable
Commercial and industrial
Secured	$	—	0.00	%	$	1,926	0.88	%	$	11	0.01	%	$	—	0.00	%
Commercial real estate
Commercial mortgage owner occupied	—		0.00	%	823		0.48	%	—		0.00	%	—		0.00	%
Agricultural
Agricultural mortgage	—		0.00	%	1,305		1.95	%	—		0.00	%	—		0.00	%
Agricultural other	181		0.60	%	—		0.00	%	—		0.00	%	1,038		3.46	%
Consumer
Secured - indirect	—		0.00	%	—		0.00	%	1		0.00	%	—		0.00	%
Total	$	181			$	4,054			$	12			$	1,038

	Nine Months Ended September 30, 2023
	Term Extension				Interest Rate Reduction and Term Extension
	Amortized Cost Basis		% of Total Class of Financial Receivable		Amortized Cost Basis		% of Total Class of Financial Receivable
Commercial real estate
Commercial mortgage non-owner occupied	$	1,034	0.48	%	$	—	0.00	%
Agricultural
Agricultural mortgage	232		0.33	%	26		0.04	%
Agricultural other	34		0.12	%	—		0.00	%
Residential real estate
Senior lien	5		0.00	%	—		0.00	%
Total	$	1,305			$	26

We do not modify any loans by forgiving principal or accrued interest. We had committed to advance $112 and $0 in additional funds to be disbursed in connection with modified loans at September 30, 2024 and 2023, respectively, as displayed in the tables above.

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

	Three Months Ended September 30
	2024	2023
	Weighted-Average Interest Rate Reduction	Weighted-Average Interest Rate Reduction
Agricultural
Agricultural other	0.50%	N/A

	Nine Months Ended September 30
	2024			2023
	Weighted-Average Interest Rate Reduction	Payment Delay Term	Weighted-Average Term Extension (Years)	Weighted-Average Interest Rate Reduction	Weighted-Average Term Extension (Years)
Commercial and industrial
Secured	N/A	4 months	3.00	N/A	N/A
Commercial real estate
Commercial mortgage owner occupied	N/A	7 months	N/A	N/A	N/A
Commercial mortgage non-owner occupied	N/A	N/A	N/A	N/A	3.00
Agricultural
Agricultural mortgage	N/A	5 months	0.50	4.50%	1.08
Agricultural other	0.50%	4 months	0.33	N/A	1.00
Residential real estate
Senior lien	N/A	N/A	N/A	N/A	2.60
Consumer
Secured - indirect	N/A	N/A	1.33	N/A	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 amortized cost basis of loans that have been modified within the past 12 months prior to:

	September 30, 2024
	Current		30-59 Days Past Due		60-89 Days Past Due		90 Days or More Past Due		Total
Commercial and industrial
Secured	$	1,937	$	—	$	—	$	—	$	1,937
Commercial real estate
Commercial mortgage owner occupied	823		—		—		—		823
Commercial mortgage multifamily	2,917		—		—		—		2,917
Agricultural
Agricultural mortgage	1,305		—		—		—		1,305
Agricultural other	1,219		—		—		—		1,219
Consumer
Secured - indirect	1		—		—		—		1
Total	$	8,202	$	—	$	—	$	—	$	8,202

	September 30, 2023 (1)
	Current		30-59 Days Past Due		60-89 Days Past Due		90 Days or More Past Due		Total
Commercial real estate
Commercial mortgage non-owner occupied	$	1,034	$	—	$	—	$	—	$	1,034
Agricultural
Agricultural mortgage	258		—		—		—		258
Agricultural other	34		—		—		—		34
Residential real estate
Senior lien	5		—		—		—		5
Total	$	1,331	$	—	$	—	$	—	$	1,331

(1) We adopted ASU 2022-02 - Financial Instruments - Credit Losses (Topic 326): Troubled Debt Restructurings and Vintage Disclosures effective January 1, 2023, therefore, the September 30, 2023 presentation only includes loans since the guidance became effective.

We had no loans that defaulted in the three and nine-month periods ended September 30, 2024 and 2023 which were modified within 12 months prior to the default date.

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ACL - Loans

The credit quality of our loan portfolio is continuously monitored and is reflected within the ACL for loans. The ACL is an estimate of expected losses inherent within our loan portfolio. The ACL is adjusted by a credit loss expense, which is reported in earnings, and reduced by the charge-off of loan amounts, net of recoveries.

The ACL is evaluated on a regular basis for appropriateness. Our periodic review of the collectability of a loan considers historical experience, the nature and volume of the loan portfolio, adverse situations that may affect the borrower’s ability to repay, estimated value of any underlying collateral, and prevailing economic conditions. This evaluation is inherently subjective as it requires estimates that are susceptible to significant revision as more information becomes available.

The primary factors behind the determination of the level of the ACL are specific allocations for loans individually evaluated, historical loss percentages, delinquency status, and other credit trends and risk characteristics, including current conditions and reasonable and supportable forecasts about the future. Determining the appropriateness of the allowance is complex and requires judgment by management about the effect of matters that are inherently uncertain. In future periods evaluations of the overall loan portfolio, in light of the factors and forecasts then prevailing, may result in significant changes in the allowance and credit loss expense in those future periods.

The methodology for estimating the amount of expected credit losses reported in the ACL has two basic components: a component of individual loans that do not share risk characteristics with other loans; and a pooled component for estimated expected credit losses for pools of loans that share similar risk characteristics.

For a loan that does not share risk characteristics with other loans, an individual analysis is performed to measure an allowance. Loans in nonaccrual status are individually evaluated for specific allocation of the allowance using the fair value of collateral, less costs to sell if foreclosure is probable, or the discounted cash flow method. We do not recognize interest income on loans in nonaccrual status. For loans not classified as nonaccrual, interest income is recognized daily, as earned, according to the terms of the loan agreement and the principal amount outstanding.

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

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

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

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

•Changes in interest rates;

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

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

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

•Lack of current financial information;

•Competition, legal, and regulatory; and

•Changes in the value of underlying collateral.

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

	Three Months Ended September 30, 2024
	Commercial and Industrial		Commercial Real Estate		Agricultural		Residential Real Estate		Consumer		Total
July 1, 2024	$	1,264	$	5,569	$	258	$	4,351	$	1,653	$	13,095
Charge-offs	—		—		—		—		(1,767)		(1,767)
Recoveries	6		318		—		20		64		408
Credit loss expense	(46)		(710)		—		(40)		1,695		899
September 30, 2024	$	1,224	$	5,177	$	258	$	4,331	$	1,645	$	12,635

	Nine Months Ended September 30, 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	(336)		—		—		(10)		(2,139)		(2,485)
Recoveries	10		353		2		112		210		687
Credit loss expense	582		(1,054)		(14)		(107)		1,918		1,325
September 30, 2024	$	1,224	$	5,177	$	258	$	4,331	$	1,645	$	12,635

	Three Months Ended September 30, 2023
	Commercial and Industrial		Commercial Real Estate		Agricultural		Residential Real Estate		Consumer		Total
July 1, 2023	$	822	$	5,968	$	264	$	4,173	$	1,606	$	12,833
Charge-offs	(29)		—		—		—		(150)		(179)
Recoveries	70		3		—		266		94		433
Credit loss expense	(34)		(101)		5		(281)		91		(320)
September 30, 2023	$	829	$	5,870	$	269	$	4,158	$	1,641	$	12,767

	Nine Months Ended September 30, 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	(29)		—		(4)		(2)		(337)		—		(372)
Recoveries	74		23		6		315		220		—		638
Credit loss expense	(18)		(146)		(63)		(307)		441		—		(93)
September 30, 2023	$	829	$	5,870	$	269	$	4,158	$	1,641	$	—	$	12,767

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

	September 30 2024			June 30 2024			March 31 2024			December 31 2023			September 30 2023
ACL
Individually evaluated	$	—		$	137		$	349		$	84		$	—
Collectively evaluated	12,635			12,958			13,041			13,024			12,767
Total	$	12,635		$	13,095		$	13,390		$	13,108		$	12,767
ACL to gross loans
Individually evaluated	0.00		%	0.01		%	0.03		%	0.01		%	0.00		%
Collectively evaluated	0.89		%	0.94		%	0.95		%	0.96		%	0.96		%
Total	0.89		%	0.95		%	0.98		%	0.97		%	0.96		%

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:

	September 30, 2024				December 31, 2023
	Loan Balance		Specific Allocation		Loan Balance		Specific Allocation
Commercial and industrial	$	—	$	—	$	465	$	56
Commercial real estate	—		—		234		28
Agricultural	—		—		181		—
Residential real estate	357		—		203		—
Consumer	—		—		—		—
Total	$	357	$	—	$	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 $357 in collateral dependent loans.

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Note 4 – Borrowed Funds

Short-term borrowings

Short-term borrowings include securities sold under repurchase agreements without stated maturity dates, federal funds purchased, and FRB Discount Window advances, which all generally mature within one to four days from the transaction date.

A summary of short-term borrowed funds without stated maturity dates was as follows for the:

	Three Months Ended September 30
	2024						2023
	Maximum Month End Balance		Average Balance		Weighted Average Interest Rate During the Period		Maximum Month End Balance		Average Balance		Weighted Average Interest Rate During the Period
Securities sold under agreements to repurchase without stated maturity dates	$	56,051	$	48,151	3.18	%	$	54,327	$	46,574	1.90	%
Federal funds purchased	—		—		0.00	%	—		1		6.13	%
FRB Discount Window	5,300		153		5.18	%	—		135		5.30	%

	Nine Months Ended September 30
	2024						2023
	Maximum Month End Balance		Average Balance		Weighted Average Interest Rate During the Period		Maximum Month End Balance		Average Balance		Weighted Average Interest Rate During the Period
Securities sold under agreements to repurchase without stated maturity dates	$	56,051	$	43,140	3.17	%	$	54,327	$	40,601	1.64	%
Federal funds purchased	—		1		6.52	%	—		17		6.08	%
FRB Discount Window	5,300		56		5.21	%	—		89		5.28	%

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 $68,327 and $67,764 at September 30, 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:

	September 30, 2024				December 31, 2023
	Amount		Rate		Amount		Rate
Securities sold under agreements to repurchase without stated maturity dates	$	47,134	3.17	%	$	46,801	3.11	%

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

	September 30 2024		December 31 2023
Pledged to secure borrowed funds	$	387,466	$	391,529
Pledged to secure repurchase agreements	68,327		67,764
Pledged for public deposits and for other purposes necessary or required by law	96,356		84,099
Total	$	552,149	$	543,392

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

	September 30 2024		December 31 2023
U.S. Treasury	$	57,296	$	55,623
Mortgage-backed securities	8,559		9,462
Collateralized mortgage obligations	2,472		2,679
Total	$	68,327	$	67,764

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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 September 30, 2024, we had the ability to borrow up to an additional $360,440 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:

	September 30, 2024				December 31, 2023
	Amount		Rate		Amount		Rate
Fixed rate due 2024	$	15,000	5.00	%	$	40,000	5.55	%

Subordinated notes

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

The following table summarizes our outstanding notes as of:

	September 30, 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	(598)				(665)
Total subordinated debt, net	$	29,402			$	29,335

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   September 30				Nine Months Ended   September 30
	2024		2023		2024		2023
Average number of common shares outstanding for basic calculation	7,454,097		7,495,168		7,475,571		7,517,680
Average potential effect of common shares in the Directors Plan (1)	—		45,637		—		44,415
Average potential effect of common shares in the RSP	19,087		29,569		16,833		29,569
Average number of common shares outstanding used to calculate diluted earnings per common share	7,473,184		7,570,374		7,492,404		7,591,664
Net income	$	3,281	$	4,413	$	9,893	$	14,364
Earnings per common share
Basic	$	0.44	$	0.59	$	1.32	$	1.91
Diluted	0.44		0.58		1.32		1.89

(1) Exclusive of shares held in the Rabbi Trust

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Note 6 – Capital Ratios and Shareholders' Equity

As of September 30, 2024 and December 31, 2023, the most recent notifications from the FRB and the FDIC categorized us as well capitalized under the regulatory framework for prompt corrective action. To be categorized as well capitalized, an institution must maintain total risk-based, Tier 1 risk-based, Common Equity Tier 1, and Tier 1 leverage ratios as set forth in the following tables. The minimum requirements presented below include the minimum required capital levels based on the Basel III Capital Rules. Capital requirements to be considered well capitalized are based upon prompt corrective action regulations, as amended to reflect the changes under the Basel III Capital Rules. There were no conditions or events since the notifications that we believe have changed our categories. The following tables set forth these requirements and our ratios as of:

	September 30, 2024
	Actual				Minimum Capital Requirement				Minimum To Be Well Capitalized Under Prompt Corrective Action Provisions
	Amount		Ratio		Amount		Ratio		Amount		Ratio
Common equity Tier 1 capital to risk weighted assets
Isabella Bank	$	173,019	11.52	%	$	105,136	7.00	%	$	97,627	6.50	%
Consolidated	181,981		12.08	%	105,507		7.00	%	N/A		N/A
Tier 1 capital to risk weighted assets
Isabella Bank	173,019		11.52	%	127,665		8.50	%	120,156		8.00	%
Consolidated	181,981		12.08	%	128,116		8.50	%	N/A		N/A
Total capital to risk weighted assets
Isabella Bank	186,151		12.39	%	157,704		10.50	%	150,195		10.00	%
Consolidated	224,516		14.90	%	158,261		10.50	%	N/A		N/A
Tier 1 capital to average assets
Isabella Bank	173,019		8.35	%	82,851		4.00	%	103,564		5.00	%
Consolidated	181,981		8.77	%	83,044		4.00	%	N/A		N/A

	December 31, 2023
	Actual				Minimum Capital Requirement				Minimum To Be Well Capitalized Under Prompt Corrective Action Provisions
	Amount		Ratio		Amount		Ratio		Amount		Ratio
Common equity Tier 1 capital to risk weighted assets
Isabella Bank	$	178,316	12.48	%	$	100,043	7.00	%	$	92,897	6.50	%
Consolidated	180,014		12.54	%	100,449		7.00	%	N/A		N/A
Tier 1 capital to risk weighted assets
Isabella Bank	178,316		12.48	%	121,481		8.50	%	114,335		8.00	%
Consolidated	180,014		12.54	%	121,973		8.50	%	N/A		N/A
Total capital to risk weighted assets
Isabella Bank	191,739		13.42	%	150,065		10.50	%	142,919		10.00	%
Consolidated	222,772		15.52	%	150,673		10.50	%	N/A		N/A
Tier 1 capital to average assets
Isabella Bank	178,316		8.71	%	81,935		4.00	%	102,419		5.00	%
Consolidated	180,014		8.76	%	82,154		4.00	%	N/A		N/A

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 September 30, 2024, the Bank exceeded all minimum capital requirements.

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

	Three Months Ended September 30
	2024				2023
	Unrealized Gains (Losses) on AFS Securities		Defined Benefit Pension Plan		Total		Unrealized Gains (Losses) on AFS Securities		Defined Benefit Pension Plan		Total
Balance, July 1	$	(26,939)	$	(697)	$	(27,636)	$	(35,051)	$	(1,366)	$	(36,417)
OCI before reclassifications	13,081		—		13,081		(6,708)		—		(6,708)
Amounts reclassified from AOCI	—		—		—		—		—		—
Subtotal	13,081		—		13,081		(6,708)		—		(6,708)
Tax effect	(2,724)		—		(2,724)		1,394		—		1,394
OCI, net of tax	10,357		—		10,357		(5,314)		—		(5,314)
Balance, September 30	$	(16,582)	$	(697)	$	(17,279)	$	(40,365)	$	(1,366)	$	(41,731)

	Nine Months Ended September 30
	2024						2023
	Unrealized Gains (Losses) on AFS Securities		Defined Benefit Pension Plan		Total		Unrealized Gains (Losses) on AFS Securities		Defined Benefit Pension Plan		Total
Balance, January 1	$	(25,199)	$	(697)	$	(25,896)	$	(35,828)	$	(1,366)	$	(37,194)
OCI before reclassifications	10,858		—		10,858		(5,736)		—		(5,736)
Amounts reclassified from AOCI	—		—		—		(67)		—		(67)
Subtotal	10,858		—		10,858		(5,803)		—		(5,803)
Tax effect	(2,241)		—		(2,241)		1,266		—		1,266
OCI, net of tax	8,617		—		8,617		(4,537)		—		(4,537)
Balance, September 30	$	(16,582)	$	(697)	$	(17,279)	$	(40,365)	$	(1,366)	$	(41,731)

Included in OCI for the three and nine-month periods ended September 30, 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.

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A summary of the components of unrealized gains on AFS securities included in OCI follows for the:

	Three Months Ended September 30
	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	$	109	$	12,972	$	13,081	$	(67)	$	(6,641)	$	(6,708)
Tax effect	—		(2,724)		(2,724)		—		1,394		1,394
Unrealized gains (losses), net of tax	$	109	$	10,248	$	10,357	$	(67)	$	(5,247)	$	(5,314)

	Nine Months Ended September 30
	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	$	186	$	10,672	$	10,858	$	228	$	(5,964)	$	(5,736)
Reclassification adjustment for net (gains) losses included in net income	—		—		—		—		(67)		(67)
Net unrealized gains (losses)	186		10,672		10,858		228		(6,031)		(5,803)
Tax effect	—		(2,241)		(2,241)		—		1,266		1,266
Unrealized gains (losses), net of tax	$	186	$	8,431	$	8,617	$	228	$	(4,765)	$	(4,537)

Note 7 – 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.

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

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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:

September 30, 2024
Valuation Technique	Fair Value	Unobservable Input	Actual Range	Weighted Average
Collateral Dependent Loans -		Discount applied to collateral:
Discounted value	$357	Real Estate	20%	20%

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 3.

The following table lists the quantitative information about OMSR fair value measurement as of:

September 30, 2024
Valuation Technique	Fair Value		Unobservable Input	Rate
Discounted cash flow	$	2,277	Constant prepayment rate	7%
			Discount rate	11%

During the third quarter of 2024, the classification of OMSR was changed from Level 2 to Level 3. We elected to reevaluate our process for testing for impairment, which included a change in the third-party provider for the valuation. Our valuation is generated using a model-based approach that relies upon significant assumptions not observable in the market. As such, the Level 3 classification is most appropriate based on the valuation approach.

As a result of the change described above, Level 3 transfers in and Level 2 transfer out totaled $2,277 as of September 30, 2024. There were no other transfers to or from Levels 1, 2, or 3 as of September 30, 2024 or December 31, 2023.

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

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

Disclosure of the estimated fair values of financial instruments, which differ from carrying values, often requires the use of estimates. In cases where quoted market values in an active market are not available, we use present value techniques and other valuation methods to estimate the fair values of our financial instruments. These valuation methods require considerable judgment and the resulting estimates of fair value can be significantly affected by the assumptions made and methods used.

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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:

	September 30, 2024
	Carrying Value		Estimated Fair Value		Level 1		Level 2		Level 3
ASSETS
Cash and cash equivalents	$	27,378	$	27,378	$	27,378	$	—	$	—
FHLB stock (1)	12,762		N/A		—		—		—
Mortgage loans HFS	504		513		—		513		—
Gross loans	1,424,283		1,367,235		—		—		1,367,235
Less allowance for credit losses	12,635		12,635		—		—		12,635
Net loans	1,411,648		1,354,600		—		—		1,354,600
Accrued interest receivable	8,567		8,567		8,567		—		—
Equity securities without readily determinable fair values (1)	3,086		N/A		—		—		—
OMSR	2,218		2,277		—		—		2,277
LIABILITIES
Deposits without stated maturities	1,398,235		1,398,235		1,398,235		—		—
Deposits with stated maturities	383,597		381,378		—		381,378		—
Short-term borrowings	52,434		52,360		—		52,360		—
FHLB advances	15,000		15,000		—		15,000		—
Subordinated debt, net of unamortized issuance costs	29,402		27,147		—		27,147		—
Accrued interest payable	973		973		973		—		—

	December 31, 2023
	Carrying Value		Estimated Fair Value		Level 1		Level 2		Level 3
ASSETS
Cash and cash equivalents	$	33,672	$	33,672	$	33,672	$	—	$	—
FHLB stock (1)	12,762		N/A		—		—		—
Mortgage loans HFS	—		—		—		—		—
Gross loans	1,349,463		1,292,458		—		—		1,292,458
Less allowance for credit losses	13,108		13,108		—		—		13,108
Net loans	1,336,355		1,279,350		—		—		1,279,350
Accrued interest receivable	8,167		8,167		8,167		—		—
Equity securities without readily determinable fair values (1)	3,086		N/A		—		—		—
OMSR	2,422		3,164		—		3,164		—
LIABILITIES
Deposits without stated maturities	1,377,321		1,377,321		1,377,321		—		—
Deposits with stated maturities	346,374		341,489		—		341,489		—
Short-term borrowings	46,801		46,704		—		46,704		—
FHLB advances	40,000		40,000		—		40,000		—
Subordinated debt, net of unamortized issuance costs	29,335		26,146		—		26,146		—
Accrued interest payable	890		890		890		—		—

(1) Due to the characteristics of equity securities without readily determinable fair values, they are not disclosed under a specific fair value hierarchy. When an impairment or write-down related to these securities is recorded, such amount would be classified as a nonrecurring Level 3 fair value adjustment.

39

Financial Instruments Recorded at Fair Value

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

	September 30, 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	$	220,829	$	—		$	220,829		$	—		$	214,801	$	—		$	214,801		$	—
States and political subdivisions	82,899		—			82,899			—			92,876		—			92,876			—
Auction rate money market preferred	3,117		—			3,117			—			2,931		—			2,931			—
Mortgage-backed securities	28,955		—			28,955			—			32,815		—			32,815			—
Collateralized mortgage obligations	163,764		—			163,764			—			177,775		—			177,775			—
Corporate	7,242		—			7,242			—			6,950		—			6,950			—
Total AFS securities	506,806		—			506,806			—			528,148		—			528,148			—
Nonrecurring items
Collateral dependent (net of ACL)	357		—			—			357			1,083		—			—			1,083
OMSR	2,218		—			—			2,218			2,422		—			2,422			—
Foreclosed assets	546		—			—			546			406		—			—			406
Total	$	509,927	$	—		$	506,806		$	3,121		$	532,059	$	—		$	530,570		$	1,489
Percent of assets and liabilities measured at fair value			0.00		%	99.39		%	0.61		%			0.00		%	99.72		%	0.28		%

We recorded an impairment related to OMSR of $21 through earnings for the three and nine month periods ended September 30, 2024 and $0 for the three and nine month periods ended September 30, 2023. We also recorded an impairment related to foreclosed assets of $0 through earnings for the three and nine month periods ended September 30, 2024 and $27 and $36 for the three and nine month periods ended September 30, 2023 We had no other assets or liabilities recorded at fair value with changes in fair value recognized through earnings, on a recurring basis or nonrecurring basis, as of September 30, 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.

40

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

(Dollars in thousands except per share amounts and ratios)

The following is management's discussion and analysis of our financial condition and results of operations for the unaudited three and nine months ended September 30, 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.

General

Isabella Bank Corporation is a registered financial services holding company that was incorporated in September 1988 under Michigan law. The Corporation's wholly owned subsidiary, Isabella Bank, has 31 offices located throughout Bay, Clare, Gratiot, Isabella, Mecosta, Midland, Montcalm, and Saginaw counties. The area includes significant agricultural production, manufacturing, retail, gaming and tourism, and several colleges and universities.

Forward-Looking Statements

Information in this Quarterly Report on Form 10-Q contains certain forward looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Rule 175 promulgated thereunder, and Section 21E of the Securities Exchange Act of 1934, as amended and Rule 3b-6 promulgated thereunder. We intend such forward looking statements to be covered by the safe harbor provisions for forward looking statements contained in the Private Securities Litigation Reform Act of 1995, and are included in this statement for purposes of these safe harbor provisions. Forward-looking statements generally relate to losses, impact of events, financial condition, plans, objectives, outlook for earnings, revenues, expenses, capital and liquidity levels and ratios, asset levels, asset quality, financial position, and other matters regarding or affecting the Corporation and its future business and operations. Forward-looking statements are typically identified by words or phrases such as “will likely result", “expect”, “plan”, “believe”, “estimate”, “anticipate”, “strategy”, “trend”, “forecast”, “outlook”, “project”, “intend”, “assume”, “outcome”, “continue”, “remain”, “potential”, “opportunity”, “comfortable”, “current”, “position”, “maintain”, “sustain”, “seek”,“achieve” and variations of such words and similar expressions, or future or conditional verbs such as will, would, should, could or may. Although we believe the assumptions upon which these forward-looking statements are based are reasonable, any of these assumptions could prove to be inaccurate and the forward-looking statements based on these assumptions could be incorrect. The matters discussed in these forward-looking statements are subject to various risks, uncertainties and other factors that could cause actual results and trends to differ materially from those made, projected, or implied in or by the forward-looking statements depending on a variety of uncertainties or other factors described in Corporation’s Annual Report on Form 10-K for the year ended December 31, 2023, or included in any subsequent filing by the Corporation with the Securities and Exchange Commission. Forward-looking statements are based on beliefs and assumptions using information available at the time the statements are made. The Corporation cautions you not to unduly rely on forward-looking statements because the assumptions, beliefs, expectations and projections about future events may, and often do, differ materially from actual results. Any forward-looking statement speaks only as to the date on which it is made, and we undertake no obligation to update any forward-looking statement to reflect developments occurring after the statement is made.

Non-GAAP Financial Measures

Our accounting and reporting policies conform to GAAP and the prevailing practices in the financial services industry. However, we also evaluate our performance by reference to certain additional financial measures discussed in this Quarterly Report on Form 10-Q that we identify as being “non-GAAP financial measures.” In accordance with SEC rules, we classify a financial measure as being a non-GAAP financial measure if that financial measure excludes or includes amounts, or is subject to adjustments that have the effect of excluding or including amounts, as the case may be, in the most directly comparable measure calculated and presented in accordance with GAAP as in effect from time to time in the United States in our statements of income, balance sheets or statements of cash flows. Non-GAAP financial measures do not include operating and other statistical measures or ratios, or statistical measures calculated using exclusively either financial measures calculated in accordance with GAAP, operating measures or other measures that are not non-GAAP financial measures or both.

The non-GAAP financial measures that we discuss in this Quarterly Report on Form 10-Q should not be considered in isolation or as a substitute for the most directly comparable or other financial measures calculated in accordance with GAAP. Moreover, the manner in which we calculate the non-GAAP financial measures that we discuss in this report may differ from that of other companies reporting measures with similar names.

41

Executive Summary

Comparison of Operating Results for the three and nine months ended September 30, 2024, and 2023, unless otherwise noted

Net income in the third quarter of 2024 was $3,281, or $0.44 per diluted share, compared with $4,413, or $0.58 per diluted share, in the same quarter 2023. The non-GAAP measure of adjusted net income in the third quarter 2024 totaled $4,559, or $0.61 per diluted share, compared to $4,354 or $0.58 per diluted share, in the same quarter of 2023. Adjusted net income in the current year quarter excludes a $1,622 charge-off related to overdrawn deposit accounts from a single customer.

Net income for the year-to-date period of 2024 was $9,893, or $1.32 per diluted share, compared with $14,364, or $1.89 per diluted share, in the same period of 2023. Adjusted net income was $11,112, or $1.48 per diluted share, compared with $14,193, or $1.87 per diluted share, for the respective periods. The decrease in adjusted net income primarily reflects lower net interest income due to slower repricing of earning assets as compared to the rising costs of interest bearing liabilities. The decrease in net income for the comparative periods also included an increase in provision and compensation expenses.

Net interest income was $14,488 in the third quarter of 2024 and $14,302 in the same quarter of 2023 representing 2.98% and 2.99% of earning assets, or NIM on an FTE basis, respectively. The current year quarter NIM included a 6 basis point benefit due to the recovery of the contractual interest of two previously charged-off commercial loans. The book yield from securities was 2.21% and 2.23% during the third quarters of 2024 and 2023, respectively. The weighted average maturity of our U.S. Treasury portfolio is less than two years, and the future proceeds are expected to be reinvested in market rate loans and securities, or to pay off borrowed funds. Our yield on loans expanded to 5.73% in the third quarter 2024, up from 5.17% in the same quarter of 2023, which includes an increase of 8 basis points due to the recovery of previously charged-off loans. Overall, our loan yields continued to expand due to higher rates on new loans and fixed rate commercial loans that have and continue repricing to variable rates. At the end of the third quarter 2024, approximately 41% of commercial loans are fixed at rates that are lower than current market rates. Most of those fixed rate loans will contractually reprice to variable rates over the next three to five years. Our cost of interest bearing liabilities increased to 2.43% from 1.77% in the third quarter 2023 due to several interest rate hikes throughout 2023 and the associated remix from noninterest bearing deposits into higher tier money market and certificate of deposit accounts. While we have experienced a downward trend in our NIM over the past several quarters, we are seeing a reversal of this trend as NIM has expanded 19 basis points over the last two quarters of 2024 as loans reprice and the cost of interest bearing liabilities stabilize.

For the first nine months of 2024, net interest income was $41,280 compared with $44,332 in the same period of 2023. The comparison of NIM and yield on interest earning assets for the first nine months of 2024 were 2.87% and 4.62% compared to 3.13%, and 4.11% for the same period 2023. The yield on loans expanded to 5.55%, from 4.95%, and our cost of interest bearing liabilities increased to 2.37% from 1.39% for the nine months of 2024 and 2023, respectively. The explanations for the improvement in NIM are consistent with those provided in the year-over-year three-month comparison above.

The provision for credit losses was $946 in the third quarter of 2024, compared to a credit of $292 for the same period in 2023. The provision for the current year quarter includes the impact from the recovery of the contractual principal of two previously charged-off commercial loans totaling $314. Given the loan recoveries, our historical loss rate experience improved which provided a benefit of $435 during the quarter. The benefits were offset by a $1,622 charge-off related to overdrawn deposit accounts from a single customer. The loans to the customer and related parties are well collateralized, and no additional credit provisioning was necessary in the third quarter. The credit in the prior year quarter mostly reflects loan recoveries in excess of charge-offs during the period.

For the first nine months of 2024, provision for credit losses was $1,508 and a reversal of $55 in the same period of 2023. The reasons for the increase in provision for the nine month comparison are the same as the three month comparison. Net loan charge-offs have been at historic lows for the past five years due to our disciplined underwriting standards.

Noninterest income for the three months ended September 30, 2024 and 2023 was $3,528 and $3,414, respectively. Wealth management fees grew $145, or 17%, due to an increase in new accounts and higher market valuations. Customer service fees increased $99 compared to the same quarter of 2023 based on a higher number of transaction accounts. For the nine months of 2024, noninterest income was $10,604, compared to $10,311 in the same period of 2023. The reasons for the increase in income for the nine month comparison are the same as the three month comparison.

Noninterest expenses for the three-month period ended September 30, 2024 increased $570, or 4.5%, in comparison to the same period in 2023. Compensation and benefit expenses increased $612 reflecting annual merit increases in 2024, and higher incentive compensation as compared to the third quarter of 2023. For the first nine months of 2024, noninterest expenses were $38,799, compared to $37,395 in the same period of 2023. Annual merit increases and medical claims resulted in a $1,447 increase in compensation and benefit expenses for the first nine months of 2024. Our year-to-date efficiency ratio is 73.65% in 2024 compared to 67.56% in 2023, which primarily reflects lower NIM and a relatively stable base of noninterest expense.

42

Financial Condition (September 30, 2024 to December 31, 2023 comparison)

Total assets increased $47,933 to $2,106,901 as of September 30, 2024 due to loan growth funded by growth in deposits during the third quarter. Excess cash generated during the first nine months of 2024 was used to pay off wholesale borrowings totaling $19,633.

Our AFS securities portfolio totaled $506,806 at September 30, 2024, declining $21,342 due to municipal maturities and principal paydowns on mortgage-related securities. Net unrealized losses at September 30, 2024 totaled $20,968, or 3.97%, of the portfolio. The unrealized loss position on our AFS securities portfolio resulted from increases in short-term and intermediate-term benchmark interest rates. Our bond portfolio has a very short remaining life with $220,000 of the U.S. Treasury portfolio maturing by the end of 2026. The $169,339 Collateral Mortgage Obligation portfolio has a projected weighted-average life of 3.5 years and most bonds are bulleted in structure. Nearly half of the tax-exempt municipal portfolio will mature over the next five years.

Loans outstanding as of September 30, 2024 totaled $1,424,283. Since December 31, 2023, gross loans have increased $74,820 as a result of growth in commercial loans and increased participation in advances to mortgage brokers. Additional loan growth came from the residential real estate portfolio due to the slowing of prepayments on steady new volume. At the end of September, $12.6 million of commercial real estate construction loans were closed and are expected to be funded early in the fourth quarter.

The ACL was $12,635 at September 30, 2024, a decrease of $473 from $13,108 at December 31, 2023. Most of the decrease is due to improvement in historical loss experience, which was driven by the recovery of two previously charged-off loans during the quarter totaling $314. Nonaccrual loans were $547 as of September 30, 2024 compared to $926 at December 31, 2023. Past due and accruing accounts between 30 to 89 days as a percentage of total loans was 0.16% at September 30, 2024, compared to 0.29% at year-end 2023. Overall, credit quality remains strong, and there are no negative trends.

Total deposits increased $58,137 since December 31, 2023, to $1,781,832 at the end of the third quarter 2024. Consumer demand for retail certificates of deposit accounts continues based on the rate environment, resulting in a $37,223 increase in the balance during the first nine months of 2024. Interest bearing demand deposits increased $55,855, while savings and demand deposits declined $27,929 and $7,012, respectively.

Total equity was $212,985 at September 30, 2024 compared to $202,402 at year-end 2023. Our tangible book value per share was $22.14 as of September 30, 2024, compared to $20.59 on December 31, 2023. Net unrealized losses on AFS securities reduced tangible book value per share by $2.23 and $3.37 for the respective periods. Share repurchases totaled 124,969 during the first nine months of 2024 for a value of $2,419 at an average price of $19.36.

We continue to have robust liquidity levels and capital. As of September 30, 2024, we had $797,818 of unencumbered sources of liquidity and strong capital ratios; the Tier 1 Leverage Ratio was 8.77%, Tier 1 risk-based capital was 12.08%, and Total risk-based capital was 14.90%.

Reclassifications

Certain amounts reported in the interim 2023 consolidated financial statements have been reclassified to conform to the 2024 presentation.

Subsequent Events

We evaluated subsequent events after September 30, 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 September 30, 2024 and the date our interim condensed consolidated financial statements were issued.

43

Selected Financial Data (Unaudited)

The following table outlines our results of operations and provides certain performance measures as of, and for the:

	Three Months Ended															Nine Months Ended
	September 30 2024			June 30 2024			March 31 2024			December 31 2023			September 30 2023			September 30 2024			September 30 2023
PER SHARE
Basic earnings	$	0.44		$	0.47		$	0.42		$	0.51		$	0.59		$	1.32		$	1.91
Diluted earnings	0.44			0.46			0.42			0.51			0.58			1.32			1.89
Adjusted diluted earnings (2)	0.61			0.46			0.41			0.50			0.58			1.48			1.87
Dividends	0.28			0.28			0.28			0.28			0.28			0.84			0.84
Book value (1)	28.63			27.06			26.80			27.04			24.71			28.63			24.71
Tangible book value (1)	22.14			20.60			20.35			20.59			18.27			22.14			18.27
Market price (1)	21.21			18.20			19.40			21.50			21.05			21.21			21.05
PERFORMANCE RATIOS
Return on average total assets	0.62		%	0.68		%	0.61		%	0.73		%	0.86		%	0.64		%	0.94		%
Adjusted return on average total assets (2)	0.87		%	0.68		%	0.60		%	0.73		%	0.85		%	0.71		%	0.93		%
Return on average shareholders' equity	6.26		%	6.97		%	6.19		%	7.98		%	9.17		%	6.47		%	10.04		%
Adjusted return on average shareholders' equity (2)	8.70		%	6.96		%	6.08		%	7.97		%	9.05		%	7.27		%	9.92		%
Return on average tangible shareholders' equity	8.15		%	9.19		%	8.12		%	10.73		%	12.27		%	8.48		%	13.42		%
Adjusted return on average tangible shareholders' equity (2)	11.32		%	9.17		%	7.97		%	10.71		%	12.11		%	9.52		%	13.26		%
Net interest margin yield (FTE) (2)	2.98		%	2.85		%	2.79		%	2.83		%	2.99		%	2.87		%	3.13		%
Efficiency ratio (2)	72.30		%	73.93		%	74.84		%	68.41		%	70.56		%	73.65		%	67.56		%
Gross loan to deposit ratio (1)	79.93		%	80.22		%	77.22		%	78.29		%	75.43		%	79.93		%	75.43		%
Shareholders' equity to total assets (1)	10.11		%	9.82		%	9.75		%	9.83		%	8.74		%	10.11		%	8.74		%
Tangible shareholders' equity to tangible assets (1)	8.00		%	7.65		%	7.58		%	7.66		%	6.61		%	8.00		%	6.61		%
FINANCIAL DATA (in millions)
Total assets (1)	2,107			2,060			2,058			2,059			2,118			2,107			2,118
AFS securities (1)	507			506			518			528			517			507			517
Gross loans (1)	1,424			1,382			1,366			1,349			1,335			1,424			1,335
ACL (1)	13			13			13			13			13			13			13
Deposits (1)	1,782			1,722			1,768			1,724			1,769			1,782			1,769
Borrowed funds (1)	97			119			72			116			147			97			147
Shareholders' equity (1)	213			202			201			202			185			213			185
Wealth assets under management (1)	680			648			661			641			591			680			591
Net income	3			3			3			4			4			10			14
Interest income	23			22			21			21			20			67			59
Interest expense	9			9			8			7			6			26			14
Net interest income	14			14			13			14			14			41			44
Provision for credit losses	1			—			—			1			—			2			—
Noninterest income	4			4			3			4			3			11			10
Noninterest expenses	13			13			13			12			13			39			37

(1) At end of period

(2) Non-GAAP financial measure; refer to the "Recconcilation of Non-GAAP Financial Measures" section

44

Average Balances, Interest Rates, and Net Interest Income

The following schedules present the daily average amount outstanding for each major category of interest earning assets, non-earning assets, interest bearing liabilities, and noninterest bearing liabilities. These schedules also present an analysis of interest income and interest expense for the periods indicated. All interest income is reported on a FTE basis using a federal income tax rate of 21%. Loans in nonaccrual status, for the purpose of the following computations, are included in the average loan balances. FRB restricted equity holdings are included in other interest earning assets.

	Three Months Ended
	September 30, 2024						June 30, 2024						September 30, 2023
	Average Balance		Tax Equivalent Interest		Average Yield / Rate		Average Balance		Tax Equivalent Interest		Average Yield / Rate		Average Balance		Tax Equivalent Interest		Average Yield / Rate
INTEREST EARNING ASSETS
Loans (1)	$	1,403,810	$	20,230	5.73	%	$	1,375,523	$	18,863	5.52	%	$	1,325,455	$	17,270	5.17	%
AFS securities (2)	536,379		2,981		2.21	%	545,827		3,041		2.24	%	572,038		3,213		2.23	%
FHLB stock	12,762		168		5.24	%	12,762		158		4.98	%	12,762		91		2.83	%
Fed funds sold	4		—		5.55	%	7		—		5.51	%	13		—		5.47	%
Other (3)	14,597		194		5.29	%	14,054		263		7.53	%	17,638		161		3.62	%
Total interest earning assets	1,967,552		23,573		4.77	%	1,948,173		22,325		4.61	%	1,927,906		20,735		4.27	%
NONEARNING ASSETS
Allowance for credit losses	(13,125)						(13,431)						(12,937)
Cash and demand deposits due from banks	25,903						23,931						25,287
Premises and equipment	27,868						27,999						26,629
Other assets	87,002						80,539						74,244
Total assets	$	2,095,200					$	2,067,211					$	2,041,129
INTEREST BEARING LIABILITIES
Interest bearing demand deposits	$	358,383	$	295	0.33	%	$	342,931	$	334	0.39	%	$	342,175	$	242	0.28	%
Savings	599,679		3,437		2.28	%	613,601		3,321		2.18	%	595,372		2,156		1.44	%
Certificates of deposit	375,936		3,899		4.13	%	366,440		3,658		4.01	%	324,399		2,617		3.20	%
Short-term borrowings	48,151		384		3.17	%	40,593		321		3.18	%	46,574		284		2.42	%
FHLB advances	40,588		571		5.60	%	45,510		638		5.64	%	44,429		617		5.51	%
Subordinated debt, net of unamortized issuance costs	29,388		267		3.61	%	29,365		266		3.64	%	29,298		267		3.62	%
Total interest bearing liabilities	1,452,125		8,853		2.43	%	1,438,440		8,538		2.39	%	1,382,247		6,183		1.77	%
NONINTEREST BEARING LIABILITIES AND SHAREHOLDERS' EQUITY
Demand deposits	418,973						411,282						451,123
Other liabilities	15,658						16,755						16,802
Shareholders’ equity	208,444						200,734						190,957
Total liabilities and shareholders’ equity	$	2,095,200					$	2,067,211					$	2,041,129
Net interest income (FTE)			$	14,720					$	13,787					$	14,552
Net yield on interest earning assets (FTE) (4)					2.98	%					2.85	%					2.99	%

(1) Includes loans HFS and nonaccrual loans

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

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

(4) Non-GAAP financial measure; refer to the "Non-GAAP Financial Measures" section

45

	Nine Months Ended
	September 30, 2024						September 30, 2023
	Average Balance		Tax Equivalent Interest		Average Yield/Rate		Average Balance		Tax Equivalent Interest		Average Yield/Rate
INTEREST EARNING ASSETS
Loans (1)	$	1,376,122	$	57,150	5.55	%	$	1,298,316	$	48,090	4.95	%
AFS securities (2)	546,376		9,153		2.24	%	588,796		10,007		2.27	%
FHLB stock	12,762		472		4.94	%	12,762		226		2.37	%
Fed funds sold	6		—		5.59	%	11		—		5.08	%
Other (3)	17,941		750		5.58	%	30,005		1,029		4.59	%
Total interest earning assets	1,953,207		67,525		4.62	%	1,929,890		59,352		4.11	%
NONEARNING ASSETS
Allowance for credit losses	(13,216)						(12,786)
Cash and demand deposits due from banks	24,623						25,043
Premises and equipment	27,962						26,300
Other assets	83,878						75,239
Total assets	$	2,076,454					$	2,043,686
INTEREST BEARING LIABILITIES
Interest bearing demand deposits	$	349,086	$	1,042	0.40	%	$	356,608	$	582	0.22	%
Savings	615,668		10,091		2.19	%	623,157		5,471		1.17	%
Certificates of deposit	366,672		10,974		4.00	%	298,535		5,900		2.64	%
Short-term borrowings	43,197		1,026		3.17	%	40,707		604		1.98	%
FHLB advances	37,883		1,597		5.63	%	21,685		887		5.47	%
Subordinated debt, net of unamortized issuance costs	29,365		799		3.63	%	29,275		799		3.65	%
Total interest bearing liabilities	1,441,871		25,529		2.37	%	1,369,967		14,243		1.39	%
NONINTEREST BEARING LIABILITIES AND SHAREHOLDERS' EQUITY
Demand deposits	414,179						466,725
Other liabilities	16,183						15,619
Shareholders’ equity	204,221						191,375
Total liabilities and shareholders’ equity	$	2,076,454					$	2,043,686
Net interest income (FTE)			$	41,996					$	45,109
Net yield on interest earning assets (FTE) (4)					2.87	%					3.13	%

(1) Includes loans HFS and nonaccrual loans

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

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

(4) Non-GAAP financial measure; refer to the "Non-GAAP Financial Measures" section

46

Loans

The following table displays loan balances as of:

	September 30 2024		June 30 2024		March 31 2024		December 31 2023		September 30 2023		Annualized Growth % Quarter to Date		Annualized Growth % Year to Date
Commercial and industrial	$	240,589	$	238,245	$	226,281	$	209,738	$	195,814	3.94	%	19.61	%
Commercial real estate	547,038		547,005		561,123		564,244		566,639		0.02	%	(4.07)	%
Advances to mortgage brokers	76,187		39,300		29,688		18,541		24,807		N/M		N/M
Agricultural	96,794		94,996		93,695		99,994		99,233		7.57	%	(4.27)	%
Total commercial loans	960,608		919,546		910,787		892,517		886,493		17.86	%	10.17	%
Residential real estate	369,846		365,188		356,658		356,418		348,196		5.10	%	5.02	%
Consumer	93,829		96,902		98,063		100,528		99,985		(12.68)	%	(8.89)	%
Total	$	1,424,283	$	1,381,636	$	1,365,508	$	1,349,463	$	1,334,674	12.35	%	7.39	%

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

	September 30, 2024				December 31, 2023
	Balance		Percent of Total		Balance		Percent of Total
Real estate
Non-owner occupied	$	129,595	23.69	%	$	129,016	22.87	%
1-4 family investor	92,154		16.85	%	89,208		15.81	%
Multifamily	69,624		12.73	%	78,108		13.84	%
Owner occupied	25,395		4.64	%	27,758		4.92	%
Hotels	79,397		14.51	%	82,650		14.65	%
Health care	35,812		6.55	%	40,249		7.13	%
Retail trade	34,087		6.23	%	34,622		6.14	%
Manufacturing	11,687		2.14	%	12,341		2.19	%
Accommodation services	11,547		2.11	%	11,277		2.00	%
Educational services	11,188		2.05	%	11,589		2.05	%
Wholesale trade	11,007		2.01	%	10,308		1.83	%
Construction	4,056		0.74	%	5,079		0.90	%
Other	31,489		5.75	%	32,039		5.67	%
Total commercial real estate	$	547,038	100.00	%	$	564,244	100.00	%

Commercial real estate loans are subject to a varying degree of risk from changes in interest rates and economic conditions. To control these risks, we maintain strict underwriting standards, lending limits to a single borrower, loan to collateral value limits, and a defined market area. We also monitor and limit loan concentrations to specific industries. Our practices also include appropriate loan reviews, and monitoring of past due levels, concentrations, industry trends, and other qualitative factors.

47

Deposits

The following table displays deposit balances as of:

	September 30 2024		June 30 2024		March 31 2024		December 31 2023		September 30 2023		Annualized Growth % Quarter to Date		Annualized Growth % Year to Date
Noninterest bearing demand deposits	$	421,493	$	412,193	$	413,272	$	428,505	$	445,043	9.02	%	(2.18)	%
Interest bearing demand deposits	376,592		338,329		349,401		320,737		363,558		45.24	%	23.22	%
Savings	600,150		603,328		639,491		628,079		628,795		(2.11)	%	(5.93)	%
Certificates of deposit	383,597		368,449		366,143		346,374		332,078		16.45	%	14.33	%
Total	$	1,781,832	$	1,722,299	$	1,768,307	$	1,723,695	$	1,769,474	13.83	%	4.50	%

48

Asset Quality Analysis

The following table outlines our quarter-to-date asset quality analysis as of, and for the three-month periods ended:

	September 30 2024			June 30 2024			March 31 2024			December 31 2023			September 30 2023
NONPERFORMING ASSETS
Commercial and industrial	$	120		$	271		$	567		$	491		$	17
Commercial real estate	—			—			234			—			—
Agricultural	—			167			189			205			208
Residential real estate	427			556			293			286			295
Consumer	—			—			—			—			—
Total nonaccrual loans	547			994			1,283			982			520
Accruing loans past due 90 days or more	64			15			—			87			—
Total nonperforming loans	611			1,009			1,283			1,069			520
Foreclosed assets	546			629			579			406			509
Debt securities	12			12			12			12			77
Total nonperforming assets	$	1,169		$	1,650		$	1,874		$	1,487		$	1,106
Nonperforming loans to gross loans	0.04		%	0.07		%	0.09		%	0.08		%	0.04		%
Nonperforming assets to total assets	0.06		%	0.08		%	0.09		%	0.07		%	0.05		%
ACL as a % of nonaccrual loans	2,309.87		%	1,317.40		%	1,043.65		%	1,334.83		%	2,455.19		%
ALLOWANCE FOR CREDIT LOSSES
Allowance at beginning of period	$	13,095		$	13,390		$	13,108		$	12,767		$	12,833
Charge-offs	1,767			527			191			452			179
Recoveries	408			134			145			71			433
Net loan charge-offs (recoveries)	1,359			393			46			381			(254)
Provision for credit losses - loans	899			98			328			722			(320)
Allowance at end of period	$	12,635		$	13,095		$	13,390		$	13,108		$	12,767
ACL to gross loans	0.89		%	0.95		%	0.98		%	0.97		%	0.96		%
Reserve for unfunded commitments	498			450			379			315			352
Provision for credit losses - unfunded commitments	47			72			64			(38)			28
Reserve to unfunded commitments	0.15		%	0.14		%	0.11		%	0.10		%	0.11		%
NET LOAN CHARGE-OFFS (RECOVERIES)
Commercial and industrial	$	(6)		$	334		$	(2)		$	242		$	(41)
Commercial real estate	(318)			(29)			(6)			(3)			(3)
Agricultural	—			—			(2)			(6)			—
Residential real estate	(20)			(19)			(63)			(14)			(266)
Consumer	1,703			107			119			162			56
Total	$	1,359		$	393		$	46		$	381		$	(254)
Net (recoveries) charge-offs (Quarter to Date annualized to average loans)	0.39		%	0.11		%	0.01		%	0.11		%	(0.08)		%
Net (recoveries) charge-offs (Year to Date annualized to average loans)	0.17		%	0.00		%	0.00		%	0.00		%	(0.03)		%
DELINQUENT AND NONACCRUAL LOANS
Accruing loans 30-89 days past due	$	2,226		$	1,484		$	7,938		$	3,895		$	715
Accruing loans past due 90 days or more	64			15			—			87			—
Total accruing past due loans	2,290			1,499			7,938			3,982			715
Nonaccrual loans	547			994			1,283			982			520
Total past due and nonaccrual loans	$	2,837		$	2,493		$	9,221		$	4,964		$	1,235

49

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 61,560 shares or $1,190 of common stock during the first nine months of 2024, as compared to 55,456 shares or $1,208 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 $332 and $477 during the nine-month periods ended September 30, 2024 and 2023, respectively. We also grant restricted stock awards pursuant to the RSP. Pursuant to this plan, we increased shareholders’ equity by $71 during the first nine months of 2024, as compared to $219 during the same period in 2023.

We have publicly announced a common stock repurchase plan. Pursuant to this plan, we repurchased 124,969 shares or $2,419 of common stock during the first nine months of 2024 and 124,320 shares or $2,906 during the first nine months of 2023. As of September 30, 2024, we were authorized to repurchase up to an additional 145,837 shares of common stock.

The FRB has established minimum risk-based capital guidelines. Pursuant to these guidelines, a framework has been established that assigns risk weights to each category of on and off-balance-sheet items to arrive at risk adjusted total assets. Regulatory capital is divided by the risk adjusted assets with the resulting ratio compared to the minimum standard to determine whether a corporation has adequate capital.

The following table sets forth our ratios as of:

	September 30 2024		June 30 2024		March 31 2024		December 31 2023		September 30 2023
Common equity tier 1 capital	12.08	%	12.37	%	12.36	%	12.54	%	12.43	%
Tier 1 capital	12.08	%	12.37	%	12.36	%	12.54	%	12.43	%
Total capital	14.90	%	15.29	%	15.31	%	15.52	%	15.39	%
Tier 1 leverage	8.77	%	8.83	%	8.80	%	8.76	%	8.77	%

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 $340,365, or 16.15% of assets, as of September 30, 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 September 30, 2024, we had available lines of credit of $360,440.

We monitor our daily liquidity position to meet our cash flow needs. We also forecast anticipated funding needs for changes in interest rates and economic conditions, the scheduled maturity and interest rate sensitivity of the investment and loan portfolios and deposits, and regulatory capital requirements. Our liquidity stress testing is designed with consideration of these and other factors that could pose undue risk to liquidity.

50

Our liquidity position remained strong at September 30, 2024, which is illustrated in the following table:

	September 30 2024			June 30 2024			March 31 2024			December 31 2023			September 30 2023
Total cash and cash equivalents	$	27,378		$	23,559		$	25,218		$	33,672		$	115,879
Brokered CD capacity	120,000			120,000			120,000			120,000			120,000
Available lines of credit
Fed funds lines with correspondent banks	93,000			93,000			93,000			93,000			73,000
FHLB borrowings	233,552			194,403			248,624			211,860			182,125
FRB Discount Window	28,888			28,148			28,083			28,220			27,785
Other lines of credit	5,000			5,000			5,000			5,000			5,000
Total available lines of credit	360,440			320,551			374,707			338,080			287,910
Unencumbered lendable value of FRB collateral, estimated (1)	290,000			290,000			310,000			320,000			320,000
Total cash and liquidity	$	797,818		$	754,110		$	829,925		$	811,752		$	843,789
Uninsured deposits	$	687,990		$	623,245		$	658,564		$	600,381		$	615,633
Coverage ratio of uninsured deposits with total cash and liquidity	116		%	121		%	126		%	135		%	137		%

(1) Includes estimated unencumbered lendable value of FHLB collateral of $200,000 as of September 30, 2024.

Fair Value

We utilize fair value measurements to record fair value adjustments to certain assets and liabilities and to determine fair value disclosures. AFS securities, cash flow hedge derivative instruments and certain liabilities are recorded at fair value on a recurring basis. Additionally, from time to time, we may be required to record at fair value other assets on a nonrecurring basis, such as mortgage loans AFS, collateral dependent loans, goodwill, foreclosed assets, OMSR, and certain other assets and liabilities. These nonrecurring fair value adjustments typically involve the application of lower of cost or market accounting or write downs of individual assets.

For further information regarding fair value measurements see “Note 7 – Fair Value” of our interim condensed consolidated financial statements.

Market Risk

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

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

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

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The following table summarizes our interest rate sensitivity for 12 and 24 months as of September 30, 2024. The results displayed in the table reflect the modeling of immediate shifts in the yield curve and a flat balance sheet and may not reflect actual or expected changes.

	September 30, 2024
	12 Months								24 Months
Immediate basis point change assumption (short-term)	-200		-100		100		200		-200		-100		100		200
Percent change in net interest income vs. constant rate	(3.64)	%	(1.23)	%	4.15	%	4.86	%	(9.34)	%	(3.64)	%	6.44	%	0.66	%

Gap analysis, the secondary method to measure IRR, measures the cash flows and/or the earliest repricing of our interest bearing assets and liabilities. This analysis is useful for measuring trends in the repricing characteristics of the balance sheet. Significant assumptions are required in this process because of the embedded repricing options contained in assets and liabilities. Residential real estate and consumer loans allow the borrower to repay the balance prior to maturity without penalty, while commercial and agricultural loans may have prepayment penalties. The amount of prepayments is dependent upon many factors, including the interest rate of a given loan in comparison to the current offering rates, the level of home sales, and the overall availability of credit in the marketplace. Generally, a decrease in interest rates will result in an increase in cash flows from these assets. Savings and demand accounts may generally be withdrawn on request without prior notice. The timing of cash flows from these deposits is estimated based on historical experience. Certificates of deposit have penalties that discourage early withdrawals.

We do not believe there has been a material change in the nature or categories of our primary market risk exposure, or the particular markets that present the primary risk of loss. We do not know of or expect there to be any material change in the general nature of our primary market risk exposure in the near term, and we do not expect to make material changes to our market risk methods in the near term. We may change those methods in the future to adapt to changes in circumstances or to implement new techniques.

Gap analysis is also utilized as a method to measure interest rate sensitivity. Interest rate sensitivity is determined by the amount of earning assets and interest bearing liabilities repricing within a specific time period, and their relative sensitivity to a change in interest rates. We strive to achieve reasonable stability in the net interest margin through periods of changing interest rates.

Contractual Obligations and Loan Commitments

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

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

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

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Reconciliation of Non-GAAP Financial Measures

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

		Three Months Ended															Nine Months Ended
		September 30 2024			June 30 2024			March 31 2024			December 31 2023			September 30 2023			September 30 2024			September 30 2023
Net income		$	3,281		$	3,481		$	3,131		$	3,803		$	4,413		$	9,893		$	14,364
Nonrecurring items:
Net gains on sale of AFS securities		—			—			—			—			—			—			67
Net gains (losses) on foreclosed assets		4			6			69			8			75			79			150
Other (1)		(1,622)			—			—			—			—			(1,622)			—
Income tax impact		340			(1)			(14)			(2)			(16)			324			(46)
Total nonrecurring items		(1,278)			5			55			6			59			(1,219)			171
Adjusted net income	(A)	$	4,559		$	3,476		$	3,076		$	3,797		$	4,354		$	11,112		$	14,193
Noninterest expenses		$	13,228		$	12,895		$	12,676		$	11,915		$	12,658		$	38,799		$	37,395
Amortization of acquisition intangibles		—			1			—			1			—			1			2
Adjusted noninterest expense	(B)	$	13,228		$	12,894		$	12,676		$	11,914		$	12,658		$	38,798		$	37,393
Net interest income		$	14,488		$	13,550		$	13,242		$	13,612		$	14,302		$	41,280		$	44,332
Tax equivalent adjustment for net interest margin		232			237			246			246			250			716			777
Net interest income (FTE)	(C)	14,720			13,787			13,488			13,858			14,552			41,996			45,109
Noninterest income		3,528			3,608			3,468			3,516			3,414			10,604			10,311
Tax equivalent adjustment for efficiency ratio		53			53			51			50			48			157			143
Adjusted revenue (FTE)		18,301			17,448			17,007			17,424			18,014			52,757			55,563
Nonrecurring items
Net gains on sale of AFS securities		—			—			—			—			—			—			67
Net gains (losses) on foreclosed assets		4			6			69			8			75			79			150
Total nonrecurring items		4			6			69			8			75			79			217
Adjusted revenue	(D)	$	18,297		$	17,442		$	16,938		$	17,416		$	17,939		$	52,678		$	55,346
Efficiency ratio	(B/D)	72.30		%	73.93		%	74.84		%	68.41		%	70.56		%	73.65		%	67.56		%
Average earning assets	(E)	1,967,552			1,948,173			1,943,758			1,943,937			1,927,906			1,953,207			1,929,890
Net yield on interest earning assets (FTE)	(C/E)	2.98		%	2.85		%	2.79		%	2.83		%	2.99		%	2.87		%	3.13		%

(1) Provision for credit losses impact of a $1,622 charge-off related to overdrawn deposit accounts from a single customer.

53

		Three Months Ended															Nine Months Ended
		September 30 2024			June 30 2024			March 31 2024			December 31 2023			September 30 2023			September 30 2024			September 30 2023
Average assets	(F)	2,095,200			2,067,211			2,066,757			2,053,437			2,041,129			2,076,454			2,043,686
Average shareholders' equity	(G)	208,444			200,734			203,434			188,958			190,957			204,221			191,375
Average tangible shareholders' equity	(H)	160,161			152,451			155,150			140,674			142,672			155,938			143,089
Average diluted shares outstanding (2)	(I)	7,473,184			7,494,828			7,507,739			7,526,515			7,570,374			7,492,404			7,591,664
Adjusted diluted earnings per share	(A/I)	$	0.61		$	0.46		$	0.41		$	0.50		$	0.58		$	1.48		$	1.87
Adjusted return on average assets	(A/F)	0.87		%	0.68		%	0.60		%	0.73		%	0.85		%	0.71		%	0.93		%
Adjusted return on average shareholders' equity	(A/G)	8.70		%	6.96		%	6.08		%	7.97		%	9.05		%	7.27		%	9.92		%
Adjusted return on average tangible shareholders' equity	(A/H)	11.32		%	9.17		%	7.97		%	10.71		%	12.11		%	9.52		%	13.26		%

(2) Whole shares

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 September 30, 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 September 30, 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 reasonably 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 September 30, 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 Per Common Share
June 30, 2024					198,713
July 1 - 31	9,656	$	18.43	9,656	189,057
August 1 - 31	37,768	19.36		37,768	151,289
September 1 - 30	5,452	19.81		5,452	145,837
September 30, 2024	52,876	$	19.23	52,876	145,837

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 September 30, 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:	November 14, 2024		/s/ Jerome E. Schwind
			Jerome E. Schwind
			President and Chief Executive Officer
			(Principal Executive Officer)
Date:	November 14, 2024		/s/ William M. Schaefer
			William M. Schaefer
			Chief Financial Officer
			(Principal Financial Officer)

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