Isabella Bank Corp ISBA US Equity☆

isba-20231231

Table of Contents

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-K

For the fiscal year ended December 31, 2023

OR

For the transition period from to

Commission File Number: 0-18415

Isabella Bank Corporation

(Exact name of registrant as specified in its charter)

401 North Main Street, Mount Pleasant, Michigan48858

(Address of principal executive offices) (Zip Code)

Registrant’s telephone number, including area code (989)772-9471

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

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

Common Stock - No Par Value

(Title of Class)

Indicated by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. ☐ Yes ☒No

Indicated by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. ☐ Yes ☒No

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 definition 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 has filed a report on and attestation to its management’s assessment of the effectiveness of its internal control over financial reporting under Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C. 7262(b)) by the registered public accounting firm that prepared or issued its audit report. ☒

If securities are registered pursuant to Section 12(b) of the Act, indicate by check mark whether the financial statements of the registrant included in the filing reflect the correction of an error to previously issued financial statements. ☐

Indicate by check mark whether any of those error corrections are restatements that required a recovery analysis of incentive-based compensation received by any of the registrant's executive officers during the relevant recovery period pursuant to §240.10D-1(b). ☐

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

The aggregate market value of the voting stock held by non-affiliates of the registrant was $142,188,000 as of the last business day of the registrant’s most recently completed second fiscal quarter.

The number of common shares outstanding of the registrant’s Common Stock (no par value) was 7,502,990 as of March 5, 2024.

DOCUMENTS INCORPORATED BY REFERENCE

(Such documents are incorporated herein only to the extent specifically set forth in response to an item herein.)

Portions of the Isabella Bank Corporation Proxy Statement for its Annual Meeting of Shareholders to be held May 7, 2024 are incorporated by reference in this Form 10-K in response to Part III. The Isabella Bank Corporation Proxy Statement will be mailed on or before March 25, 2024.

1

Table of Contents

ISABELLA BANK CORPORATION

ANNUAL REPORT ON FORM 10-K

Table of Contents

PART I 4

Item 1. Business 4

Item 1A. Risk Factors 6

Item 1B. Unresolved Staff Comments 8

Item 1C. Cybersecurity 8

Item 2. Properties 10

Item 3. Legal Proceedings 10

Item 4. Mine Safety Disclosures 10

Item 6. [Reserved] 12

Item 7A. Quantitative and Qualitative Disclosures About Market Risk 33

Item 8. Financial Statements and Supplementary Data 34

Item 9A. Controls and Procedures 87

Item 9B. Other Information 88

Item 9C. Disclosure Regarding Foreign Jurisdictions that Prevent Inspections 88

PART III 89

Item 10. Directors, Executive Officers and Corporate Governance 89

Item 11. Executive Compensation 89

Item 14. Principal Accountant Fees and Services 90

Item 15. Exhibit and Financial Statement Schedules 91

SIGNATURES 93

2

Table of Contents

Forward Looking Statements

This report contains certain forward looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Rule 175 promulgated thereunder, and Section 21E of the Securities Exchange Act of 1934, as amended and Rule 3b-6 promulgated thereunder. We intend such forward looking statements to be covered by the safe harbor provisions for forward looking statements contained in the Private Securities Litigation Reform Act of 1995, and are included in this statement for purposes of these safe harbor provisions. Forward looking statements, which are based on certain assumptions and describe future plans, strategies and expectations, are generally identifiable by use of the words “believe,” “expect,” “intend,” “anticipate,” “estimate,” “project,” or similar expressions. Our ability to predict results or the actual effect of future plans or strategies is inherently uncertain. Factors which could have a material adverse effect on our operations and future prospects include, but are not limited to, changes in: interest rates, general economic conditions, federal or state tax laws, monetary and fiscal policy, a health crisis, the quality or composition of our loan or investment portfolio, demand for loan products, fluctuation in the value of collateral securing our loan portfolio, deposit flows, competition, cybersecurity risk, demand for financial services in our market area, and accounting principles, policies and guidelines. These risks and uncertainties should be considered in evaluating forward looking statements and undue reliance should not be placed on such statements. Further information concerning our business, including additional factors that could materially affect our consolidated financial results, is included in our filings with the SEC.

Glossary of Acronyms and Abbreviations

The acronyms and abbreviations identified below may be used throughout this Annual Report on Form 10-K 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 FRB: Federal Reserve Bank

AFS: Available-for-sale FHLB: Federal Home Loan Bank

ALLL: Allowance for loan and lease losses FTE: Fully taxable equivalent

ASC: FASB Accounting Standards Codification IRR: Interest rate risk

ASU: FASB Accounting Standards Update IT: Information Technology

ATM: Automated teller machine N/A: Not applicable

BHC Act: Bank Holding Company Act of 1956 N/M: Not meaningful

Board: Board of Directors of Isabella Bank Corporation NAV: Net asset value

CECL: Current expected credit losses NSF: Non-sufficient funds

CIK: Central Index Key OMSR: Originated mortgage servicing rights

COVID-19: Coronavirus disease 2019 OREO: Other real estate owned

DIF: Deposit Insurance Fund PCAOB: Public Company Accounting Oversight Board

FASB: Financial Accounting Standards Board SOX: Sarbanes-Oxley Act of 2002

3

Table of Contents

PART I

Item 1. Business.

General

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

As used in Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations as well as in Item 8. Financial Statements and Supplementary Data, references to “the Corporation”, “Isabella”, “we”, “our”, “us”, and similar terms refer to the consolidated entity consisting of Isabella Bank Corporation and its subsidiary. References to Isabella Bank or “the Bank” refers to Isabella Bank Corporation’s subsidiary, Isabella Bank.

We are a community bank with a focus on providing high quality, personalized service at a fair price. We offer a broad array of banking and wealth management services to businesses, institutions, individuals and their families. We compete with other commercial banks, savings and loan associations, mortgage brokers, finance companies, credit unions, retail brokerage firms, and other companies providing financial services.

Lending activities include loans for commercial and agricultural operations and real estate purposes, residential real estate loans, and consumer loans. We limit lending activities primarily to local markets and purchased loans from the secondary market are minimal. We do not make loans to fund leveraged buyouts, have no foreign corporate or government loans, and have limited holdings of corporate debt securities. Our general lending philosophy is to limit concentrations to individuals and business segments. For additional information related to our lending strategies and policies, see “Note 4 – Loans and ACL” of “Notes to Consolidated Financial Statements” in Item 8. Financial Statements and Supplementary Data.

Deposit services offered include checking accounts, savings accounts, certificates of deposit, direct deposits, cash management services, mobile and internet banking, and ATMs. We also offer full service investment management, trust and estate services.

As of December 31, 2023, we had 356 full-time equivalent employees. We provide group life, health, accident, disability, and other insurance programs as well as a number of other employee benefit programs. None of our workforce is subject to collective bargaining agreements.

Available Information

Our SEC filings (including our Annual Report on Form 10-K, Quarterly Reports on Form 10-Q, Definitive Proxy Statements, Current Reports on Form 8-K and amendments to those reports) are available through our website (www.isabellabank.com). We will provide paper copies of our SEC reports free of charge upon request by a shareholder.

The SEC maintains a website (www.sec.gov) that contains reports, proxy and information statements and other information regarding Isabella Bank Corporation (CIK #0000842517) and other issuers.

Supervision and Regulation

The earnings and growth of the banking industry are affected by the credit policies of monetary authorities, including the FRB. An important function of the FRB is to regulate the national supply of bank credit in order to combat recessions and respond to inflationary pressures. Among the instruments of monetary policy used by the FRB to implement these objectives are open market operations in U.S. Treasury and U.S. Government Agency securities, changes in the discount rate on member bank borrowings, and changes in reserve requirements against member bank deposits. These methods are used in varying combinations to influence overall growth of bank loans, investments and deposits and also affect interest rates charged on loans or paid for deposits. The monetary policies of the FRB have had a significant effect on the operating results of commercial banks and related financial service providers in the past and are expected to continue to do so in the future. The effect of such policies upon our future business and earnings cannot be predicted.

We, as a financial holding company, are regulated under the BHC Act, and are subject to the supervision of the FRB. We are registered as a financial services holding company with the FRB and are subject to reporting requirements and inspections and audits. Under FRB policy, we are expected to act as a source of financial strength to the Bank and to commit resources to support its subsidiaries. This support may be required at times when, in the absence of such FRB policy, it would not otherwise be required to provide support.

4

Table of Contents

Under Michigan law, if the capital of a Michigan state chartered bank has become impaired by losses or otherwise, the Commissioner of the DIFS may require that the deficiency in capital be met by assessment upon the bank’s shareholders. Each shareholder would be responsible for a pro rata share of the deficiency, based on the amount of capital stock held by each shareholder. If an assessment is not paid by any shareholder within 30 days of the date of notice to the shareholder, sale of their stock will occur in order to pay such assessment.

Any capital loans by a bank holding company to any of its subsidiary banks are subordinate in right of payment to deposits and to certain other indebtedness of such subsidiary bank. In the event of a bank holding company’s bankruptcy, any commitment by the bank holding company to a federal bank regulatory agency to maintain the capital of a subsidiary bank will be assumed by the bankruptcy trustee and entitled to a priority of payment. This priority would apply to guarantees of capital plans under the FDIC Improvement Act of 1991.

SOX contains important requirements for public companies in the area of financial disclosure and corporate governance. In accordance with Section 302(a) of SOX, written certifications by our principal executive, financial, and accounting officers are required. These certifications attest that our quarterly and annual reports filed with the SEC do not contain any untrue statement of a material fact (see the certifications filed as Exhibits 31.1 and 31.2 to this Form 10-K for such certification of consolidated financial statements and other information for this 2023 Form 10-K). We have also implemented a program designed to comply with Section 404 of SOX, which included the identification of significant processes and accounts, documentation of the design effectiveness over process and entity level controls, and testing of the operating effectiveness of key controls. See Item 9A. Controls and Procedures for our evaluation of disclosure controls and procedures and internal control over financial reporting.

Certain additional information concerning regulatory guidelines for capital adequacy and other regulatory matters is presented herein under the caption “Capital” in Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations and in “Note 9 – Off-Balance-Sheet Activities, Commitments and Other Matters” and “Note 10 – Minimum Regulatory Capital Requirements” of “Notes to Consolidated Financial Statements” in Item 8. Financial Statements and Supplementary Data.

Isabella Bank

The Bank is supervised and regulated by DIFS and the FRB. These agencies and federal and state laws extensively regulate various aspects of the banking business including, among other things, permissible types and amounts of loans, investments and other activities, capital adequacy, branching, interest rates on loans and deposits, and the safety and soundness of banking practices.

Our deposits are insured up to applicable limits by the DIF of the FDIC and are subject to deposit insurance assessments to maintain the DIF. The FDIC assesses insurance premiums based upon a financial ratios method that takes into account asset and capital levels and supervisory ratings.

Banking laws and regulations restrict transactions by insured banks owned by a bank holding company. These restrictions include loans to and certain purchases from the parent holding company, non-bank and bank subsidiaries of the parent holding company. Additional restrictions apply to principal shareholders, officers, directors and their affiliates, and investments by the subsidiary bank in the shares or securities of the parent holding company (or any of the other non-bank or bank affiliates), or acceptance of such shares or securities as collateral security for loans to any borrower.

The Bank is subject to legal limitations on the frequency and amount of dividends that can be paid to Isabella Bank Corporation. For example, a Michigan state chartered bank may not declare a cash dividend or a dividend in kind except out of net profits then on hand after deducting all losses and bad debts, and then only if it will have a surplus amounting to not less than 20% of its capital after the payment of the dividend. Moreover, a Michigan state chartered bank may not declare or pay any cash dividend or dividend in kind until the cumulative dividends on its preferred stock, if any, have been paid in full. Further, if the surplus of a Michigan state chartered bank is at any time less than the amount of its capital, before the declaration of a cash dividend or dividend in kind, it must transfer to surplus not less than 10% of its net profits for the preceding six months (in the case of quarterly or semi-annual dividends) or the preceding two consecutive six month periods (in the case of annual dividends).

The payment of dividends by Isabella Bank Corporation and the Bank is also affected by various regulatory requirements and policies, such as the requirement to keep adequate capital in compliance with regulatory guidelines. Federal laws impose further restrictions on the payment of dividends by insured banks that fail to meet specified capital levels. The FDIC may prevent an insured bank from paying dividends if the bank is in default of payment of any assessment due to the FDIC. In addition, payment of dividends by a bank may be prevented by the applicable federal regulatory authority if such payment is determined, by reason of the financial condition of such bank, to be an unsafe and unsound banking practice. The FRB and the

5

Table of Contents

FDIC have issued policy statements providing that bank holding companies and insured banks should generally pay dividends only out of current operating earnings. Additionally, the FRB Board of Governors requires a bank holding company to notify the FRB prior to increasing its cash dividend by more than 10% over the prior year.

The aforementioned regulations and restrictions may limit our ability to obtain funds from the Bank for our cash needs, including payment of dividends and operating expenses.

The activities and operations of the Bank are also subject to various federal and state laws and regulations.

Item 1A. Risk Factors.

In the normal course of business, we are exposed to various risks. These risks, if not managed correctly, could have a significant impact on our earnings, capital, share price, and ability to pay dividends. In order to effectively monitor and control the following risks, we utilize an enterprise risk model. We balance our strategic goals, including revenue and profitability objectives, with associated risks through the use of policies, systems, and procedures which have been adopted to identify, assess, control, monitor, and manage each risk area. We continually review the adequacy and effectiveness of these policies, systems, and procedures.

Our enterprise risk process covers each of the following areas.

Changes in credit quality and required allowance for credit losses

To manage the credit risk arising from lending activities, our most significant source of credit risk, we maintain sound underwriting policies and procedures. We continuously monitor asset quality in order to determine the appropriateness of valuation allowances. These valuation allowances take into consideration various factors including, but not limited to, local, regional, and national economic conditions.

We maintain an ACL to reserve for estimated expected credit losses within our loan portfolio. The level of the ACL reflects our evaluation of industry concentrations; specific credit risks; loan loss experience; loan portfolio quality; and economic, political and regulatory conditions. The determination of the appropriate level of the ACL inherently involves a high degree of subjectivity and requires us to make significant estimates, all of which may undergo material changes.

Changes in economic conditions

An economic downturn within our local markets, as well as downturns in the state, national, or global markets, could negatively impact household and corporate incomes. This could lead to decreased demand for both loan and deposit products and lead to an increase of customers who fail to pay interest or principal on their loans. We continually monitor key economic indicators in an effort to anticipate the possible effects of downturns in the local, regional, and national economies.

Our success depends primarily on the general economic conditions of the State of Michigan and the specific local markets in which we operate. We provide banking and financial services to customers located primarily in theBay, Clare, Gratiot, Isabella, Mecosta, Midland, Montcalm, and Saginaw counties in Michigan. The local economic conditions in these areas have a significant impact on the demand for our products and services, as well as the ability of our customers to repay loans, the value of the collateral securing loans, and the stability of our deposit funding sources. A significant decline in general economic conditions, caused by inflation, recession, acts of terrorism, international or domestic occurrences, a health crisis, unemployment, changes in securities markets or other factors could impact these local economic conditions and, in turn, could have a material adverse effect on our financial condition and results of operations.

Interest rate risk

IRR results from the timing differences in the maturity or repricing frequency of a financial institution’s interest earning assets and its interest bearing liabilities. We monitor the potential effects of changes in interest rates through simulations and gap analyses. To help mitigate the effects of changes in interest rates, we make significant efforts to stagger projected cash flows and maturities of interest sensitive assets and liabilities.

Liquidity risk

Liquidity risk is the risk to earnings or capital arising from our inability to meet our obligations when they come due without incurring unacceptable and significant costs. Liquidity risk includes the inability to manage unplanned changes in funding sources, or failure to address changes in market conditions that affect the ability to liquidate assets quickly and with minimal loss in value. We have significant borrowing capacity through correspondent banks and the ability to sell certain investments to fund potential cash shortages, which we may use to help mitigate this risk.

6

Table of Contents

The value of investment securities may be negatively impacted by fluctuations in the market

A volatile, illiquid market or decline in credit quality could require us to recognize credit-related impairment to the investment securities held in our portfolio. We consider many factors in determining whether a credit-related impairment exists including the length of time and extent to which fair value has been less than cost, the investment credit rating, and the probability that the issuer will be unable to pay the amount when due. The presence of these factors could lead to impairment charges. These risks are mitigated by the fact that we do not intend to sell the security in an unrealized loss position and it is more likely than not that we will not have to sell the security before recovery of its cost basis.

Operational risk

Operational risk is the risk of loss resulting from failed or inadequate internal processes, staffing, information technology systems, or external events. These factors may lead to reputation risk and transaction risk. Reputation risk is managed by developing and retaining marketplace confidence in handling customers’ financial transactions in an appropriate manner and protecting our safety and soundness. Transaction risk includes losses from fraud, error, the inability to deliver products or services, and loss or theft of information. Transaction risk also encompasses product development and delivery, transaction processing, information technology systems, and the internal control environment.

To minimize potential losses due to operational risks, we have established a robust system of internal controls that are regularly tested by our internal audit department in conjunction with the services of certified public accounting firms who assist in performing such internal audit work. The focus of these internal audit procedures is to verify the validity and appropriateness of various transactions, processes, and controls. The results of these procedures are reported to our Audit Committee.

The adoption of, violations of, or nonconformance with laws, rules, regulations, or prescribed practices

The financial services industry and public companies are extensively regulated and must meet regulatory standards set by the FDIC, DIFS, FRB, FASB, SEC, PCAOB, CFPB, and other regulatory bodies. Federal and state laws and regulations are designed primarily to protect deposit insurance funds and consumers, and not necessarily to benefit our shareholders. The nature, extent, and timing of the adoption of significant new laws, changes in existing laws, or repeal of existing laws may have a material impact on our business, results of operations, and financial condition, the effect of which is impossible to predict at this time.

Our compliance department annually assesses the adequacy and effectiveness of our processes for controlling and managing our principal compliance risks.

Changes to the financial services industry as a result of regulatory changes or actions, or significant litigation

The financial services industry is extensively regulated by state and federal regulation that governs almost all aspects of our operations. Laws and regulations may change from time to time and are primarily intended for the protection of consumers, depositors, and the deposit insurance fund. The impact of any changes to laws and regulations or other actions by regulatory agencies may negatively impact us or our ability to increase the value of our business. Regulatory authorities have extensive discretion in connection with their supervisory and enforcement activities, including the imposition of restrictions on the operation of an institution, the classification of assets by the institution, and the appropriateness of an institution’s ACL. Future regulatory changes or accounting pronouncements may increase our regulatory capital requirements or adversely affect our regulatory capital levels. Additionally, actions by regulatory agencies or significant litigation against us could require the dedication of significant time and resources to respond to those actions and may lead to penalties.

We may not adjust to changes in the financial services industry

Our financial performance depends in part on our ability to maintain and grow our core deposit customer base and expand our financial services to our existing and new customers. The increasingly competitive environment is, in part, a result of changes in technology and product delivery systems and the accelerating pace of consolidation among financial service providers. New competitors may emerge to increase the degree of competition for our products and services. Financial services and products are also constantly changing. Our financial performance is dependent upon customer demand for our products and services, our ability to develop and offer competitive financial products and services, and our ability to adapt to enhancements in financial technology.

We may be required to recognize an impairment of goodwill

Goodwill represents the excess of the amounts paid to acquire subsidiaries over the fair value of their net assets at the date of acquisition. The majority of the recorded goodwill is related to past acquisitions of other banks, which were subsequently

7

Table of Contents

merged into Isabella Bank. If it is determined that the goodwill is impaired, we must write-down the goodwill by the amount of the impairment.

We may face pressure from purchasers of our residential mortgage loans to repurchase loans sold or reimburse purchasers for losses related to such loans

We generally sell the fixed rate long-term residential mortgage loans we originate to the secondary market. The purchasers of residential mortgage loans, such as government sponsored entities, increased their efforts to require sellers of residential mortgage loans to either repurchase loans previously sold, or reimburse the purchasers for losses incurred on foreclosed loans due to actual or alleged failure to strictly conform to the terms of the contract.

Consumers may decide not to use banks to complete their financial transactions

Technology and other changes are allowing customers to complete financial transactions without the involvement of banks. For example, consumers can now pay bills and transfer funds directly without banks. The process of diminishing or removing banks as intermediaries in financial transactions could result in the loss of fee income, as well as the loss of customer deposits and income generated from those deposits.

Our estimates and assumptions may be incorrect

Our consolidated financial statements conform with GAAP, which require us to make estimates and assumptions that affect the amounts reported in the consolidated financial statements. Estimates are based on information available to us at the time the estimates are made. Actual results could differ from estimates. For further discussion regarding significant accounting estimates, see “Note 1 – Significant Accounting Policies” of “Notes to Consolidated Financial Statements” in Item 8. Financial Statements and Supplementary Data.

Unauthorized disclosure of sensitive or confidential client or customer information, whether through cyber attacks, breach of computer systems or other means

See Item 1C. Cybersecurity.

Disruption of infrastructure

Our operations depend upon our technological and physical infrastructure, including our equipment and facilities. Extended disruption of our vital infrastructure by fire, power loss, natural disaster, telecommunications failure, computer hacking and viruses, or other events outside of our control, could have a significant impact on our operations. We have developed and tested disaster recovery plans for all significant aspects of our operations.

Anti-takeover provisions

Our articles of incorporation include anti-takeover provisions that require a two-thirds majority vote of our shareholders to approve a sale of the Corporation. Additionally, changes to our articles of incorporation must be approved by a two-thirds majority vote of our shareholders.

Item 1B. Unresolved Staff Comments.

None.

Item 1C. Cybersecurity.

Cybersecurity Risk

As a financial institution, we may be the target of a security breach due to a cybersecurity attack. While we have not encountered a cybersecurity incident that has materially impacted our operations or financial results, a security breach due to a cyber-attack in the future could result in a material impact to us, our customers, and our third-party vendors. The risk of such event could increase in the future due to the expansion of mobile banking and other internet-based product offerings, our use of internet-based services for internal and external purposes, acquisition and integration of new products and other offerings, increased use of third-party software solutions, and the growing reliance on mobile devices.

Cybersecurity incidents have increased in number and severity and it is expected that these trends will continue. Techniques used in cyberattacks evolve frequently, are increasingly sophisticated, and may not be recognized until launched. Cyber-attacks can originate from a wide variety of sources, including both internal and external sources, cyber-criminals, hacktivists, groups linked to terrorist organizations or hostile countries, or third parties whose objective is to broadly disrupt the operations of

8

Table of Contents

financial institutions. We may be unable to fully prevent cyber-attacks due to the inability to anticipate, detect, or recognize threats to our systems, or to implement effective preventative measures against all breaches. In addition, we do not have control over the cybersecurity of the systems of our customers, counterparty, and third-party service providers.

Our products, services and systems are accessed through critical company or third-party operations. These operations involve the storage, processing and transmission of sensitive data, including proprietary or confidential data, regulated data, and personal information of employees and customers. Successful breaches, employee wrongdoing, or human or technological error could result in unauthorized access, disclosure, modification, misuse, loss, or destruction of company, customer, or other third-party data or systems. Examples of a breach include theft of sensitive, regulated, or confidential data, including personal information; loss of access to critical data or systems through ransomware, destructive attacks, or other means; and business delays, service or system disruptions, or denials of service.

Should we, or the third parties we do business with, fall victim to successful cyber-attacks or experience other cybersecurity incidents, the result could include negative consequences. Such consequences could include, but are not limited to: significant disruption of our operations and those of our customers, including losing access to important business systems; misappropriation of confidential information related to customers, counterparties, employees, or other parties; severe damage to our reputation; the inability, or extended delays in the ability, to fully recover and restore data that has been stolen, manipulated, or destroyed, or the inability to prevent systems from processing fraudulent transactions; violations of applicable privacy and other laws; financial loss to us or our customers, counterparties, or employees; exposure to the risk of litigation, regulation, and other liability, which may include fines or other penalties and increased cybersecurity or other insurance premiums. The extent of a particular cyber-attack and the steps we must take to investigate and respond to it may not be immediately clear, and it may take a significant amount of time before such an investigation can be completed.

We have cybersecurity insurance intended to cover expenses related to notification, credit monitoring, investigation, crisis management, public relations, and legal advice. In addition, we maintain insurance to cover restoration of data, certain physical damage, and third-party injuries caused by potential cybersecurity incidents. However, damage and claims arising from such incidents may not be covered or may exceed the amount of any insurance available. Insurance policies and coverage are reviewed at least annually in detail.

Risk Management

Cybersecurity threats are assessed, identified, and managed within our Enterprise Risk Management Framework. We use a multi-layered approach to effectively manage risk. This approach includes, but is not limited to: (1) employees who are responsible for and manage risk; (2) employees and systems that oversee, monitor, and report risk: and (3) independent assurance, evaluation, and oversight of risk management activities.

Our security strategy is a layered approach. We utilize multiple layers of defense, both internally and externally, to ensure the integrity of our systems and data. We engage reputable security partners (assessors, consultants, auditors, and other third parties) for real time analysis and protection of our network infrastructure. This includes the use of preventative and detective tools to monitor, block, and alert us to suspicious activity. We utilize industry and regulator recognized assessment tools, such as the FFIEC Cybersecurity Assessment Tool and the Ransomware Self-Assessment Tool, to identify potential cybersecurity threats as well as the impact they could have on the Bank. Dashboards are used to track and monitor cybersecurity activity and trends.

We have established programs in place to proactively mitigate and respond to cybersecurity risk. The Vendor Management Program provides management with a framework to evaluate new vendors and ensure ongoing monitoring of third parties, including the evaluation of cybersecurity risk. The Incident Response Plan provides a framework for management to respond to and minimize the impact of an incident involving our information technology systems, or that of one of our third-party providers. The Business Continuity Plan provides information to prepare for and manage a business disruption.

Governance

All employees play a critical role in managing cybersecurity risk. Our Enterprise Risk Management Framework utilizes the three lines of defense model to define roles and responsibilities to effectively manage risk. First line employees own and manage risk, the second line oversees, monitors, and reports risk, and the third line provides independent assurance of risk management activities.

We employ Information Technology staff to analyze and protect our network infrastructure. Members of our IT staff have relevant training and education in computer networks and systems, information security and intelligence, and hold industry certifications related to network security, enterprise IT governance, and risk and information systems control. In addition, our

9

Table of Contents

employees’ network with peer banks, participate in industry groups, and attend ongoing training to stay abreast of cybersecurity threats and best practices.

Within the Enterprise Risk Management Framework, we have established committees, both at the management and board level, to oversee risk, and ensure cybersecurity risk is escalated appropriately to the Board.

The Information Technology Risk Management Committee is chaired by the Chief Technology Officer and comprised of IT management and other key stakeholders from across the Bank. They are responsible for identifying, measuring, monitoring, and controlling risk generated within IT, including cybersecurity risk. This committee reviews and updates risk assessments as necessary and monitors activity through risk reports and dashboards. A cybersecurity dashboard, which includes a summary of key risk metrics, is reviewed and monitored by the IT Risk Management. The Chief Technology Officer and Information Security Officer provide quarterly reports to the Board Risk Committee.

The Board Risk Committee assists the Board in fulfilling its responsibilities related to the oversight of the Bank’s Enterprise Risk Management Framework. The Board Risk Committee oversees executive management's design, implementation, and maintenance of an effective risk management program to ensure compliance with laws and regulations, and operation within the parameters established in the Bank’s risk appetite statement. This includes a review of the cybersecurity dashboard which summarizes key risk indicators and identifies emerging risks.

The Board Risk Committee provides a verbal risk report and meeting minutes to the Board at least quarterly. This includes a discussion of key risks and effectiveness of internal controls. In addition, cybersecurity incidents are escalated to the Board in a timely manner using the processes defined within the Bank’s Incident Response Plan.

Item 2. Properties.

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

Item 3. Legal Proceedings.

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

Item 4. Mine Safety Disclosures.

Not applicable.

10

Table of Contents

PART II

Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities.

(Dollars in thousands except per share amounts)

Common Stock and Dividend Information

Our authorized common stock consists of 15,000,000 shares, of which 7,485,889 shares are issued and outstanding as of December 31, 2023. As of that date, there were 2,674 shareholders of record.

Our common stock is traded in the over-the-counter market. Our common stock is quoted on the OTCQX market tier of the OTC Markets Group Inc.’s ("OTC Markets") electronic quotation system (www.otcmarkets.com) under the symbol “ISBA”. Other trades in our common stock occur in privately negotiated transactions from time to time for which we may have little or no information.

We have reviewed the information available as to the range of reported high and low transactions as reported by OTC Markets. The following table sets forth our compilation of that information for the periods indicated. Price information obtained from OTC Markets reflects inter-dealer prices, without retail mark up, mark down, or commissions and may not necessarily represent actual transactions. The following compiled data is provided for information purposes only and should not be viewed as indicative of the actual or market value of our common stock.

Number ofCommon Shares Sale Price

Low High

The following table sets forth the cash dividends paid for the quarters indicated:

Per Share

We have adopted and publicly announced a common stock repurchase plan. The plan was last amended on April 28, 2021, to allow for the repurchase of an additional 500,000 shares of common stock after that date. These authorizations do not have expiration dates. As shares are repurchased under this plan, they are retired with the status of authorized, but unissued, shares.

11

Table of Contents

The following table provides information for the unaudited three-month period ended December 31, 2023, with respect to our common stock repurchase plan:

Number Average PricePer Common Share

Information concerning securities authorized for issuance under equity compensation plans appears under Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters.

Item 6. [Reserved]

12

Table of Contents

Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations.

ISABELLA BANK CORPORATION FINANCIAL REVIEW

(Dollars in thousands except per share amounts)

The following is management’s discussion and analysis of our financial condition and results of operations. This discussion and analysis is intended to provide a better understanding of the consolidated financial statements and statistical data included elsewhere in this Annual Report on Form 10-K.

Executive Summary

We reported net income of $18,167 and earnings per common share of $2.42 for the year ended December 31, 2023. Net income and earnings per common share for the same period of 2022 were $22,238 and $2.95, respectively. Net interest income decreased $2,537, or 4.19%, during 2023 compared to 2022. Rising interest rates and growth in core loans led to a $13,833, or 21.02%, increase in gross interest income during 2023 compared to 2022. Conversely, rising interest rates on deposits and an increase in borrowings led to a $16,370 increase in interest expense for the year ended December 31, 2023 when compared to the same period in 2022.

The provision for credit losses during the year ended December 31, 2023 was $629, compared to $483 for the same period in 2022. Credit quality remained strong at December 31, 2023, as evidenced by total past due and nonaccrual loans which were $4,964, or 0.37%, of gross loans. While maintaining strong credit quality, the ACL and provision for loan losses increased during 2023 as a result of core loan growth and economic related risk factors.

Noninterest income increased $161 during 2023 compared to the same period in 2022. This increase was driven by wealth management fees and ATM and debit card fee income, offset by a decrease in OMSR income and gain on sale of loans, as residential mortgages sold to the secondary market declined. Noninterest expenses increased $2,490 in 2023, when compared to the same period in 2022, and was primarily a result of increased compensation, equipment expense, other losses, and FDIC insurance premiums.

As of December 31, 2023, total assets and assets under management were $2,058,968 and $2,948,751, respectively. Assets under management include loans sold and serviced of $248,756 and investment and trust assets managed by Isabella Wealth of $641,027, in addition to assets on our consolidated balance sheet. Loans outstanding as of December 31, 2023 totaled $1,349,463. During 2023, gross loans grew $85,290 driven by growth in nearly all loan categories. Total deposits were $1,723,695 as of December 31, 2023, declining $20,580, or 1.2%, during the year as competition for deposits remained strong throughout 2023. All regulatory capital ratios for the Bank exceeded the minimum thresholds to be considered a "well capitalized" institution.

Our securities portfolio decreased $52,333 during 2023, predominantly due to maturities and principal paydowns. Unrealized losses on our AFS securities portfolio were $31,826 at December 31, 2023, improving $13,298 since December 31, 2022. Unrealized losses on our AFS securities portfolio resulted from increased short-term and intermediate-term benchmark interest rates throughout 2023. As a result, the higher level of unrealized losses has reduced our balance of shareholders' equity and negatively impacted our tangible book value. Management does not anticipate the need to sell securities and incur a loss as a result of the sale.

Our net yield on interest earning assets (FTE) was 3.05% for 2023, which decreased from 3.18% in 2022. To maintain a competitive edge in a rising interest rate environment, we increased most of our deposit rates beginning in the fourth quarter of 2022 and in recent periods, increased our level of borrowings to fund loan growth. As a result, this has negatively impacted our net yield on interest earning assets and further increases may slow improvement in our net yield on interest earning assets.

13

Table of Contents

Recent Events and Legislation

2023 Bank Failures and the Condition of the Banking Industry: In March 2023, disruptions in the industry resulted in FDIC seizures of three banking institutions. Each bank had its own unique balance sheet issues, none of which exist at Isabella Bank. Shortly after the FDIC takeovers, the Federal Reserve Bank and the Department of Treasury announced enhanced insurance coverage and a borrowing program to help banks in need of funding. Isabella Bank continues to monitor such events, as well as industry and regulatory responses, to assure we are prepared for any changes that might affect the bank, including the ability to timely address economic uncertainty.

Impact of the Adoption of ASC 326 (CECL): We adopted ASU No. 2016-13, as subsequently updated for certain clarifications, targeted relief and codification improvements, as of January 1, 2023. Based on portfolio characteristics and economic conditions and expectations as of January 1, 2023, we recorded a combined pre-tax increase of $3,059 to the ACL and reserve for unfunded commitments on January 1, 2023 upon the adoption of ASU 2016-13; this implementation resulted in a reduction to retained earnings of $2,417, net of tax, as of January 1, 2023. In connection with the adoption of ASC 326, we revised certain accounting policies and implemented certain accounting policy elections, which are included in “Note 1 – Significant Accounting Policies” of our interim condensed consolidated financial statements.

Reclassifications

Certain amounts reported in management's discussion and analysis of financial condition and results of operations for 2022 and 2021 have been reclassified to conform with the 2023 presentation.

Operating results for periods after January 1, 2023 are presented in accordance with ASC 326 while prior period amounts continue to be reported in accordance with previously applicable standards and the accounting policies described in our Annual Report on Form 10-K for the year ended December 31, 2022. In addition, the adoption of ASC 326 requires enhanced disclosures related to the significant estimates and judgments used in estimating credit losses.

Subsequent Events

We evaluated subsequent events after December 31, 2023 through the date our condensed consolidated financial statements were issued for potential recognition and disclosure. No subsequent events require financial statement recognition or disclosure between December 31, 2023 and the date our condensed consolidated financial statements were issued.

Other

We have not received, nor are aware of, any notices of regulatory actions as of March 6, 2024.

14

Table of Contents

Results of Operations

(Dollars in thousands except per share amounts)

The following table outlines the results of operations and provides certain key performance measures as of, and for the years ended, December 31:

INCOME STATEMENT DATA

PER SHARE

Quoted market value

PERFORMANCE RATIOS

Return on average total assets 0.89 % 1.08 % 0.96 %

Return on average shareholders' equity 9.52 % 11.41 % 8.83 %

Return on average tangible shareholders' equity 12.75 % 15.17 % 11.31 %

Net interest margin yield (FTE) 3.05 % 3.18 % 2.87 %

BALANCE SHEET DATA (1)

ASSETS UNDER MANAGEMENT (1)

ASSET QUALITY (1)

Nonperforming loans to gross loans 0.08 % 0.04 % 0.10 %

Nonperforming assets to total assets 0.07 % 0.05 % 0.08 %

CAPITAL RATIOS (1)

Shareholders' equity to assets 9.83 % 9.17 % 10.39 %

(1) At end of year

15

Table of Contents

The following table outlines our interim results of operations and key performance measures as of, and for the unaudited periods ended:

Quarter to Date

INCOME STATEMENT DATA

PER SHARE

Quarter to Date

INCOME STATEMENT DATA

PER SHARE

(1) At end of period

16

Table of Contents

CRITICAL ACCOUNTING POLICIES

Our significant accounting policies are set forth in “Note 1 – Significant Accounting Policies” of “Notes to Consolidated Financial Statements” in Item 8. Financial Statements and Supplementary Data. Of these significant accounting policies, we consider our policies regarding the ACL, acquisition intangibles and goodwill, and the determination of the fair value and assessment of credit related impairments of investment securities to be our most critical accounting policies.

The ACL requires our most subjective and complex judgment. Changes in economic conditions and other external factors can have a significant impact on the ACL and, therefore, the allowance for credit losses and results of operations. We have developed policies and procedures for assessing the appropriateness of the ACL, recognizing that this process requires a number of assumptions and estimates with respect to our loan portfolio. Our assessments may be impacted in future periods by changes in economic conditions, and the discovery of information with respect to borrowers which is not known to us at the time of the issuance of the consolidated financial statements. For additional discussion concerning our ACL and related matters, see “ACL - Loans” and “Note 4 – Loans and ACL” of “Notes to Consolidated Financial Statements” in Item 8. Financial Statements and Supplementary Data.

U.S. generally accepted accounting principles require that we determine the fair value of the assets and liabilities of an acquired entity, and record the fair value on the date of acquisition. We employ a variety of measures in the determination of the fair value, including the use of discounted cash flow analysis, market appraisals, and projected future revenue streams. For certain items that we believe we have the appropriate expertise to determine the fair value, we may choose to use our own calculations of the value. In other cases, where the value is not easily determined, we consult with independent experts to determine the fair value of the identified asset or liability. Once valuations have been determined, the net difference between the price paid for the acquired entity and the net value of assets acquired on our balance sheet, including identifiable intangibles, is recorded as goodwill. Acquisition intangibles and goodwill are qualitatively evaluated to determine if it is more likely than not that the carrying balance is impaired on at least an annual basis.

AFS securities are carried at fair value with changes in the fair value included as a component of other comprehensive income. Declines in the fair value of AFS securities below their cost that are other-than-temporary are reflected as realized losses in the consolidated statements of income. The market values for most AFS investment securities are typically obtained from outside sources and applied to individual securities within the portfolio. Municipal securities for which no readily determinable market values are available are priced using fair value curves which most closely match the securities' characteristics. AFS securities are reviewed quarterly for possible credit impairment. In determining whether a credit-related impairment exists for debt securities, we assess whether: (a) we do not have the intent to sell the security; and (b) it is more likely than not we will not have to sell the security before recovery of its cost basis. If either of these conditions are met, any previously recognized allowances are charged-off and the security's amortized cost is written down to fair value through income. If these conditions are not met, the security is evaluated to determine whether the decline in fair value has resulted from credit losses or other factors.

17

Table of Contents

Average Balances, Interest Rates, and Net Interest Income

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

Year Ended December 31

INTEREST EARNING ASSETS

NONEARNING ASSETS

INTEREST BEARING LIABILITIES

NONINTEREST BEARING LIABILITIES

Net yield on interest earning assets (FTE) 3.05 % 3.18 % 2.87 %

(1) Includes loans and mortgage loans AFS

18

Table of Contents

Net interest income is the amount by which interest income on earning assets exceeds the interest expense on interest bearing liabilities. Net interest income is influenced by changes in the balance and mix of assets and liabilities, as well as market interest rates. We exert some control over these factors; however, FRB monetary policy and competition have a significant impact. For analytical purposes, net interest income is adjusted to an FTE basis by including the income tax savings from interest on tax exempt loans and nontaxable investment securities, thus making year to year comparisons more meaningful. The FTE adjustment is based on a federal income tax rate of 21%.

Volume and Rate Variance Analysis

The following table sets forth the effect of volume and rate changes on interest income and expense for the periods indicated. For the purpose of this table, changes in interest due to volume and rate were determined as follows:

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

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

All interest income presented in the table below is reported on a FTE basis using a federal income tax rate of 21%. The change in interest due to both volume and rate has been allocated to volume and rate changes in proportion to the relationship of the absolute dollar amounts of the change in each.

Volume Rate Net Volume Rate Net

Changes in interest income

Fed Funds Sold — 1 1 — — —

Changes in interest expense

Federal funds purchased and repurchase agreements (12) 894 882 (8) 34 26

Subordinated debt, net of unamortized issuance costs 3 (3) — 445 5 450

Over the past several quarters, rising rates on deposit accounts and an increase in borrowed funds have reversed the improvement in our net interest margin. The higher interest rate environment is expected to continue to place pressure and slow improvement on our net yield on interest earning assets.

Average Yield / Rate for the Three-Month Periods Ended:

Net yield on interest earning assets (FTE) 2.85 % 3.02 % 3.11 % 3.22 % 3.43 %

19

Table of Contents

Quarter to Date Net Interest Income (FTE)

Past Due and Nonaccrual Loans

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

Total Past Due and Nonaccrual Loans as of December 31

The increase in past due and nonaccrual loans within the commercial real estate and residential loan portfolios at the end of 2022 was the result of one past due relationship, which has since improved. The accrual of interest on commercial and agricultural loans, as well as residential real estate loans, is discontinued at the time a loan is 90 days or more past due unless the credit is well-secured and in the process of short-term collection. Upon transferring a loan to nonaccrual status, we perform an evaluation to determine the net realizable value of the underlying collateral. This evaluation is used to help determine if a charge-off is necessary. Consumer loans are typically charged-off no later than 180 days past due. Loans may be placed back on accrual status after six months of continued performance and achievement of current payment status.

The following table summarizes nonaccrual loans as of:

Commercial real estate — — — 57 14

A summary of loans past due by type and information related to nonaccrual status loans are included in “Note 4 – Loans and ACL” of “Notes to Consolidated Financial Statements” in Item 8. Financial Statements and Supplementary Data.

20

Table of Contents

Nonperforming Assets

The following table summarizes our nonperforming assets as of December 31:

Accruing loans past due 90 days or more 87 — 97 — —

Nonperforming loans as a % of total loans 0.08 % 0.04 % 0.10 % 0.43 % 0.55 %

Nonperforming assets as a % of total assets 0.07 % 0.05 % 0.08 % 0.31 % 0.40 %

ACL - Loans

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

Upon the adoption of ASC 326 on January 1, 2023, the total amount of the allowance for credit losses on loans estimated using the CECL methodology increased $2,744 compared to the total amount of the allowance for credit losses on loans estimated as of December 31, 2022 using the prior incurred loss methodology. The manner in which credit loss allowances are allocated to the individual portfolio segments was partly impacted by a change in the way the underlying loans within each segment are pooled for modeling purposes. The impact of varying economic conditions and portfolio risk factors are now a component of the credit loss models applied to each modeling pool. In that regard, the amounts allocated to the underlying pools of loans within each portfolio segment more directly reflect the economic variables and portfolio stress factors that correlate with credit losses within each portfolio. Under the prior methodology, allocations in excess of those derived from historical loss rates were recognized as unallocated. Nonetheless, despite fluctuations in the allocation of portions of the overall allowance to the various portfolio segments, the entire allowance is available to absorb any credit losses within the entire loan portfolio.

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

Net loan charge-offs (recoveries) 381 (254) (3) (9) (230)

Provision for credit losses - loans $ 684 $ (320) $ 190 $ 37 $ (57)

21

Table of Contents

The following table summarizes charge-off and recovery activity by loan segment for the year ended December 31, 2023:

The following table summarizes charge-offs, recoveries, and provision for credit loss activity for the years ended December 31:

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

ACL

Individually evaluated $ 84 $ — $ — $ — $ 451

ACL to gross loans

22

Table of Contents

The following table illustrates the amounts of the ACL and ALLL allocated to each loan segment and the percentage of these loan segments to gross loans as of December 31:

While we utilize our best judgment and information available, the ultimate adequacy of the ACL is dependent upon a variety of factors beyond our control, including the performance of our borrowers, the economy, and changes in interest rates. We closely monitor overall credit quality indicators and our policies and procedures related to the analysis of the ACL to ensure that the ACL remains at an appropriate level.

For further discussion of the allocation of the ACL, see “Note 4 – Loans and ACL” of “Notes to Consolidated Financial Statements” in Item 8. Financial Statements and Supplementary Data.

23

Table of Contents

Noninterest Income and Noninterest Expenses

Significant noninterest income balances are highlighted in the following table for the years ended December 31:

Change Change

Service charges and fees

During 2022, we experienced an increase in service charges and fees on deposit accounts mainly due to an increase in the number of deposit accounts. Although deposit accounts continued to grow in 2023, we experienced a decline in fees due to the discontinuation of NSF fees. Although we expect a continuation in deposit account growth in 2024, fee levels may not exceed 2023 due to continued regulatory discussions around the practice of service charges and fees.

OMSR income results are driven, in part, by changes in offering rates on residential mortgage loans, anticipated prepayments in the servicing-retained portfolio, and the volume of loans within the servicing-retained portfolio. During 2022, prepayment speeds declined as a result of an increase in interest rates, resulting in income recognized during 2022. During 2023 the volume of loans serviced decreased, resulting in the recognition of losses. OMSR income during 2024 may continue to experience fluctuations and could vary from 2023 levels.

During 2023, we experienced an increase in wealth management fees driven by a combination of the growth in the stock market and increased new business activity. During 2022, there was strong growth in assets managed by Isabella Wealth, however the decline in the market offset the increase in fees related to growth in new business. We expect wealth management fees to exceed 2023 levels in 2024 as a result of new business activity.

The amount of loans sold is driven by customer demand and balance sheet management strategies. We experienced a significant increase in loan demand in early 2021 which led to an increase in the number and dollar amount of loans sold; as such, net gain on sale of mortgage loans increased significantly. In mid-2021, we decided to retain more loan originations on the balance sheet, due to our liquidity position, thereby decreasing the number of mortgage loans sold, which had an impact on the net gain on loans sold. As a result of this change in strategy, coupled with a decline in loan demand due to increased interest rates, net gain on sale of mortgage loans declined in the second half of 2021 and during 2022. During 2023, we experienced a decrease in gain on sale of mortgage loans as loan demand continued to decline. As demand is expected to remain at reduced levels in 2024, gain on sale of mortgage loans is not expected to exceed 2023 levels during 2024.

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

24

Table of Contents

Significant noninterest expense balances are highlighted in the following table for the years ended December 31:

Change Change

Other

The increase in compensation and benefits has been driven by merit increases and our employee incentive plans. We closely monitor compensation levels to ensure we attract and retain talent in a competitive labor market. While expenses related to our employee incentive plans fluctuate based on financial performance, compensation and benefits expense in 2024 is expected to continue to increase as a result of anticipated merit increases and insurance related benefits.

The decrease in ATM and debit card fees is primarily the result of a cost savings related to vendor reporting services. While the savings in the service fees will continue, ATM and debit card fees are expected to exceed 2023 levels in 2024 as a result of the continuation of increased card usage.

The increase in FDIC insurance premiums is due to the FDIC adopting a final rule, applicable to all insured depository institutions, to increase initial base deposit insurance assessment rate schedules uniformly by 2 basis points, beginning in the first quarterly assessment period of 2023. The increase in assessment rate schedules is intended to increase the likelihood that the reserve ratio of the Deposit Insurance fund reaches the statutory minimum of 1.35 percent by the statutory deadline of September 30, 2028. FDIC premiums are expected to maintain 2023 levels into 2024.

Donations and community relations increased during 2022 as a result of initiatives designed to deepen and strengthen our relationship with the communities in which we operate and serve, which includes an expanded footprint. During 2023 we maintained the same level of community support as in 2022. In 2024 we do not expect donations and community relations to exceed 2023 levels.

During the second quarter of 2023, we recognized a loss related to the settlement of a business matter. No further losses are anticipated related to this matter. As such, other losses are expected to decline during 2024 when compared to 2023 levels.

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

25

Table of Contents

Analysis of Changes in Financial Condition

The following table shows the composition and changes in our balance sheet as of December 31:

Change

ASSETS

AFS securities

LIABILITIES AND SHAREHOLDERS’ EQUITY

Liabilities

A discussion of changes in balance sheet amounts by major categories follows:

Cash and cash equivalents

Included in cash and cash equivalents are funds held with the FRB which fluctuate from period to period. Cash levels declined slightly during 2023 driven by funding for loan growth.

26

Table of Contents

AFS securities

The primary objective of our investing activities is to manage our overall exposure to changes in interest rates. Secondary considerations include ensuring ample access to liquidity, generating returns, and providing current income. The following is a schedule of the carrying value of AFS securities as of December 31:

Excluding those holdings in government sponsored enterprises and municipalities within the State of Michigan, there were no investments in securities of any one issuer that exceeded 10% of shareholders’ equity during 2023, 2022, and 2021. We have a policy prohibiting investments in securities that we deem unsuitable due to their inherent credit or market risks. Prohibited investments include stripped mortgage-backed securities, zero coupon bonds, non-government agency asset-backed securities, and structured notes. Our holdings in mortgage-backed securities and collateralized mortgage obligations include only government agencies and government sponsored agencies as we hold no investments in private label mortgage-backed securities or collateralized mortgage obligations.

The following is a schedule of maturities of AFS securities and their weighted average yields as of December 31, 2023. Weighted average yields have been computed on an FTE basis using a tax rate of 21%. Our auction rate money market preferred investments are long-term floating rate instruments. The issuers of auction rate securities generally have the right to redeem or refinance the debt. Because of their lack of contractual maturities, auction rate money market preferred stocks are not reported by a specific maturity group. Mortgage-backed securities and collateralized mortgage obligations are not reported by a specific maturity group due to their variable monthly payments. Expected maturities may differ from contractual maturities because issuers may have the right to call or prepay obligations.

Maturing

U.S. Treasury $ — — $ 214,801 0.98 $ — — $ — — $ — —

Mortgage-backed securities — — — — — — — — 32,815 2.36

Collateralized mortgage obligations — — — — — — — — 177,775 2.91

Auction rate money market preferred — — — — — — — — 2,931 7.78

Corporate — — — — 6,950 3.78 — — — —

27

Table of Contents

Loans

Loans are the largest component of earning assets. The proper management of credit and market risk inherent in the loan portfolio is critical to our financial stability. To control these risks, we have adopted 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. We have no foreign loans and there were no concentrations greater than 10% of total loans that are not disclosed as a separate category in the following table.

The following table presents the composition of the loan portfolio for the years ended December 31:

The following table presents the change in the loan portfolio categories for the years ended December 31:

$ Change % Change $ Change % Change $ Change % Change

We've experienced an increase in the commercial loan portfolio in recent periods as demand has increased. With the increased activity in mortgage lending in the second quarter of 2023, we elected to resume participation in a mortgage purchase program. Our participation in this program paused during most of 2022 and the first quarter of 2023 due to low mortgage volume. Residential mortgage lending activities continues to increase despite increased interest rates. As interest rates are expected to remain high throughout 2024, growth in residential loans is anticipated to continue, but at a slower pace. We've experienced growth in the consumer portfolio and expect this trend to continue in 2024.

Accrued interest receivable and other assets

Other assets consist primarily of prepaid expenses, OMSR, and net deferred tax assets. For more information related to estimates and deferred taxes, refer to “Note 1 – Significant Accounting Policies” and “Note 15 – Federal Income Taxes” of “Notes to Consolidated Financial Statements” in Item 8. Financial Statements and Supplementary Data.

28

Table of Contents

Deposits

Deposits are our primary source of funding. The following table presents the composition of the deposit portfolio as of December 31:

The following table presents the change in the deposit categories for the years ended December 31:

$ Change % Change $ Change % Change

Total deposits have decreased over the past 12 months driven by a decline in demand deposits. We have experienced significant growth in certificates of deposit accounts during 2023 as a result of increased interest rates. We expect interest rates on deposits to continue to rise into 2024 due to competitive pressures, and anticipate a continuation in the shift of customers moving to higher interest earning products.

The following table presents estimated balances of uninsured deposits as of December 31:

Uninsured deposits are the portion of deposit accounts in U.S. offices that exceed the FDIC insurance limits. The balance provided above are estimates and reflect the methodologies and assumptions used for regulatory reporting of uninsured deposits. The remaining maturity of estimated uninsured certificates of deposit, by account, as of December 31, 2023 is presented in the table below. Estimated uninsured certificates of deposit is based on individual accounts and does not reflect uninsured balances by account owner.

Maturity

29

Table of Contents

Borrowed Funds

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

The following table presents borrowed funds balances as of December 31:

FHLB advances outstanding as of December 31, 2023 were short-term, with maturities within a week after December 31, 2023. In 2021, we completed a private placement of $30,000 in aggregate principal amount of 3.25% Fixed-to-Floating Rate Subordinated Notes due 2031 (the "Notes"). The Notes will initially bear a fixed interest rate of 3.25% until June 15, 2026, after which time until maturity on June 15, 2031, the interest rate will reset quarterly to an annual floating rate equal to the then-current 3-month SOFR plus 256 basis points. The Notes are redeemable by us at our option, in whole or in part, on or after June 15, 2026. The Notes are not subject to redemption at the option of the holders. For additional disclosure related to borrowed funds, see “Note 8 – Borrowed Funds” of “Notes to Consolidated Financial Statements” in Item 8. Financial Statements and Supplementary Data.

Accrued interest payable and other liabilities

Included in accrued interest payable and other liabilities are obligations related to our defined benefit pension plan and other employee benefits. For more information on the defined benefit pension plan and other employee benefits, see “Note 12 – Benefit Plans” of “Notes to Consolidated Financial Statements” in Item 8. Financial Statements and Supplementary Data.

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 indicate our future cash requirements.

For additional disclosure related to Contractual Obligations and Loan Commitments, see “Note 9 – Off-Balance-Sheet Activities, Commitments and Other Matters” of “Notes to Consolidated Financial Statements” in Item 8. Financial Statements and Supplementary Data.

Capital

Capital consists solely of common stock, retained earnings, and accumulated other comprehensive income (loss). We are authorized to raise capital through dividend reinvestment, employee and director stock purchases, and shareholder stock purchases. Pursuant to these authorizations, we issued 75,488 shares or $1,617 of common stock during 2023, and 74,445 shares or $1,762 of common stock in 2022. 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 $529 and $463 during 2023 and 2022, respectively. We also grant restricted stock awards pursuant to the RSP, effective June 24, 2020. Pursuant to this plan, we increased shareholders’ equity by $253 and $147 during 2023 and 2022.

We have publicly announced a common stock repurchase plan. Pursuant to this plan, we repurchased 149,020 shares or $3,415 of common stock during 2023 and 47,665 shares or $1,124 during 2022. As of December 31, 2023, we were authorized to repurchase up to an additional 270,806 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.

30

Table of Contents

The common equity tier 1 capital ratio has a minimum requirement of 4.50%. The minimum standard for primary, or Tier 1 capital is 6.00% and the minimum standard for total capital is 8.00%. The minimum requirements presented below include the minimum required capital levels based on the Basel III Capital Rules. Capital requirements to be considered well capitalized are based upon prompt corrective action regulations, as amended to reflect the changes under the Basel III Capital Rules. The following table sets forth these requirements and our ratios as of December 31:

Total capital includes Tier 1 capital and Tier 2 capital. Tier 2 capital includes a permissible portion of the allowances for credit losses and subordinated debt, net of unamortized issuance costs. There are no significant regulatory constraints placed on our capital. At December 31, 2023, the Bank exceeded minimum capital requirements. For further information regarding the Bank’s capital requirements, see “Note 10 – Minimum Regulatory Capital Requirements” of “Notes to Consolidated Financial Statements” in Item 8. Financial Statements and Supplementary Data.

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 $381,417 or 18.52% of assets as of December 31, 2023, compared to $488,981 or 24.08% as of December 31, 2022. The decline in the amount and percentage of primary liquidity is a direct result of an increase in loans and a decrease in unencumbered AFS securities collateralizing non-market funding. Liquidity is important for financial institutions because of their need to meet loan funding commitments, depositor withdrawal requests, and various other commitments including expansion of operations, investment opportunities, and payment of cash dividends. Based on these same factors, daily liquidity could vary significantly.

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 December 31, 2023, we had available lines of credit of $338,080.

The frequency and complexity of our liquidity stress testing has increased due to economic uncertainly and changes within the interest rate and economic environment. Our liquidity position remained strong at the end of 2023, which is illustrated in the following table:

Total cash and cash equivalents $ 33,672

Available lines of credit

Fed funds lines with correspondent banks 93,000

FRB Discount Window 28,220

Other lines of credit 5,000

Total available lines of credit 338,080

Unencumbered lendable value of FRB collateral, estimated1 320,000

Total cash and liquidity $ 691,752

(1)Includes estimated unencumbered lendable value of FHLB collateral of $230,000

31

Table of Contents

The following table summarizes our sources and uses of cash for the years ended December 31:

Net cash provided by (used in) operating activities $ 23,715 $ 26,937 $ (3,222)

Net cash provided by (used in) financing activities (3,188) 12,912 (16,100)

Increase (decrease) in cash and cash equivalents (5,252) (66,406) 61,154

Fair Value

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

For further information regarding fair value measurements, see “Note 1 – Significant Accounting Policies” and “Note 17 – Fair Value” of “Notes to Consolidated Financial Statements” in Item 8. Financial Statements and Supplementary Data.

Market Risk

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

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

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

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

32

Table of Contents

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. One specific focus of interest rate sensitivity is the loan portfolio, primarily with commercial and agricultural loans.

The following table shows the maturity of loans outstanding at December 31, 2023 based on contractual terms. Also provided are the amounts classified according to the sensitivity to changes in interest rates.

1 Yearor Less 1 to 5Years 5 to 15Years Over 15Years Total

Fixed interest rates

Variable interest rates

Advances to mortgage brokers — — — — —

Item 7A. Quantitative and Qualitative Disclosures About Market Risk.

The information presented in the section captioned “Market Risk” in Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations is incorporated herein by reference.

33

Table of Contents

Item 8. Financial Statements and Supplementary Data.

The following consolidated financial statements accompanied by the report of our independent registered public accounting firm are set forth beginning on the following page of this report:

Consolidated Balance Sheets

Consolidated Statements of Changes in Shareholders’ Equity

Consolidated Statements of Income

Consolidated Statements of Comprehensive Income (Loss)

Consolidated Statements of Cash Flows

Notes to Consolidated Financial Statements

Supplementary data regarding quarterly results of operations is included in Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations.

34

Table of Contents

Report of Independent Registered Public Accounting Firm

Shareholders and Board of Directors

Isabella Bank Corporation (the "Corporation")

Mount Pleasant, Michigan

Opinion on the Financial Statements and Internal Control over Financial Reporting

We have audited the accompanying consolidated balance sheets of Isabella Bank Corporation as of December 31, 2023 and 2022, and the related consolidated statements of changes in shareholders’ equity, income, comprehensive income, and cash flows for each of the years in the three-year period ended December 31, 2023, and the related notes (collectively referred to as the financial statements). We also have audited Isabella Bank Corporation’s internal control over financial reporting as of December 31, 2023, based on criteria established in the Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework) (the COSO criteria).

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of Isabella Bank Corporation as of December 31, 2023 and 2022, and the consolidated results of their operations and their cash flows for each of the years in the three-year period ended December 31, 2023, in conformity with accounting principles generally accepted in the United States of America. Also, in our opinion Isabella Bank Corporation maintained, in all material respects, effective internal control over financial reporting as of December 31, 2023, based on the COSO criteria.

Adoption of New Accounting Standard

As discussed in Notes 1 and 4 to the consolidated financial statements, Isabella Bank Corporation changed its method for accounting for credit losses on loans in 2023. As explained below, auditing the Corporation's allowance for credit losses on loans, including adoption of the new accounting guidance related to the estimate of allowance for credit losses on loans, was a critical audit matter.

Basis for Opinions

Isabella Bank Corporation’s management is responsible for these consolidated financial statements, for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management’s Report on Internal Control over Financial Reporting. Our responsibility is to express opinions on Isabella Bank Corporation’s consolidated financial statements and on Isabella Bank Corporation’s internal control over financial reporting based on our integrated audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (“PCAOB”) and are required to be independent with respect to Isabella Bank Corporation in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud, and whether effective internal control over financial reporting was maintained in all material respects.

Our audits of the consolidated financial statements included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material misstatement exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. We believe that our audits provide a reasonable basis for our opinions.

Definition and Limitations of Internal Control over Financial Reporting

A corporation’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of consolidated financial statements for external purposes in accordance with generally accepted accounting principles. A corporation’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the corporation; (2) provide reasonable assurance that transactions are recorded as

35

Table of Contents

necessary to permit preparation of consolidated financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the corporation are being made only in accordance with authorizations of management and directors of the corporation; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the corporation’s assets that could have a material effect on the consolidated financial statements.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

One Critical Audit Matter

The critical audit matter communicated below arising from the current period audit of the financial statements was communicated or is required to be communicated to the Corporation's audit committee and (1) relates to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective or complex judgments. The communication of the critical audit matter does not alter in any way our opinion on the consolidated financial statements, taken as a whole, nor our opinion on internal control over financial reporting, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates.

Allowance for Credit Losses

Description of the Matter

The Corporation’s loan portfolio totaled $1.3 billion as of December 31, 2023 and the associated allowance for credit losses on loans was $13.1 million at that date. The Corporation’s unfunded loan commitments totaled $321.7 million, with an associated allowance for credit loss of $315 thousand. Together these amounts represent the allowances for credit losses (“ACL”). As described in Notes 1 and 4 to the consolidated financial statements, in the cases of loans, the allowance for credit losses is a contra-asset valuation account, calculated in accordance with ASC 326 that is deducted from the amortized cost basis of loans to present the net amount expected to be collected. As described in Notes 1 and 9 to the consolidated financial statements, in the case of unfunded loan commitments, the allowance for credit losses is a liability account, calculated in accordance with ASC 326, reported as a component of accrued interest payable and other liabilities. The Corporation adopted ASC 326 effective January 1, 2023. The amount of each allowance account represented management’s best estimate of current expected credit losses on these financial instruments considering all available information, from internal and external sources, relevant to assessing exposure to credit loss over the contractual term of the instrument. In calculating the allowance for credit losses, most loans were segmented into pools based upon similar characteristics and risk profiles. For each loan pool, management measured expected credit losses over the life of each loan utilizing a model which measured probability of default (“PD”), probability of attrition (“PA”), loss given default (“LGD”), and exposure at default (“EAD”). Expected credit losses were calculated as the product of PD (adjusted for attrition), LGD, and EAD. PD and PA were estimated by analyzing internally sourced data related to historical performance of each loan pool over an economic cycle. PD and PA were adjusted to reflect the current impact of certain macroeconomic variables as well as their expected changes over a reasonable and supportable forecast period. After the reasonable and supportable forecast period, the forecasted macroeconomic variables were reverted to their historical mean utilizing a rational, systematic basis. The LGD was based on historical recovery averages for each loan pool, adjusted to reflect the current impact of certain macroeconomic variables as well as their expected changes over the reasonable and supportable forecast period. EAD was estimated using a linear regression model that estimates the average percentage of the loan balance that remains at the time of default. In some cases, management determined that an individual loan exhibited unique risk characteristics which differentiated the loan from other loans with the identified loan pools. In such cases the loans were evaluated for expected credit losses on an individual basis and excluded from the collective evaluation. Management qualitatively adjusted model results for risk factors that were not considered within the modeling processes but were nonetheless relevant in assessing the expected credit losses within the loan pools. These qualitative factor adjustments modified management’s estimate of expected credit losses by a calculated percentage or amount based upon the estimated level of risk.

Auditing management’s estimate of the ACL involved a high degree of subjectivity due to the nature of the qualitative factor adjustments included in the allowances for credit losses and complexity due to the implementation of the PD, PA, LGD, and EAD models (the “Models”). Management’s identification and measurement of the qualitative factor adjustments is highly judgmental and could have a significant effect on the ACL.

How We Addressed the Matter in Our Integrated Audit

We obtained an understanding of the Corporation’s process for establishing the ACL, including the implementation of Models and the qualitative factor adjustments of the ACL. We evaluated the design and tested the operating effectiveness of related controls over the reliability and accuracy of data used to calculate and estimate the various components of the ACL, the

36

Table of Contents

accuracy of the calculation of the ACL, management’s review and approval of methodologies used to establish the ACL, validation procedures over the Models, analysis of changes in various components of the ACL relative to changes in the Corporation’s loan portfolio and economy and evaluation of the overall reasonableness and appropriateness of the ACL. In doing so, we tested the operating effectiveness of review and approval controls in the Corporation’s governance process designed to identify and assess the qualitative factor adjustments which is meant to measure expected credit losses associated with factors not captured fully in the other components of the ACL.

To test the reasonableness of the qualitative factor adjustments, we performed audit procedures that included, among others testing the appropriateness of the methodologies used by the Corporation to estimate the ACL, testing the completeness and accuracy of data and information used by the Corporation in estimating the components of the ACL, assessing the reasonableness of the Models, evaluating the appropriateness of assumptions used in estimating the qualitative factor adjustments, analyzing the changes in assumptions and various components of the ACL relative to changes in the Corporation’s loan portfolio and the economy and evaluating the appropriateness and level of the qualitative factor adjustments. For example, we evaluated the appropriateness of the design and operation of the model, analyzed the changes, assumptions and modifications made to the qualitative factor adjustments, and evaluated the appropriateness and completeness of risk factors used in determining the amount of the qualitative factor adjustments. We also evaluated the data and information utilized by management to estimate the qualitative factor adjustments by independently obtaining internal and external data and information to assess the appropriateness of the data and information used by management and to consider the existence of new and potentially contradictory information used. In addition, we evaluated the overall ACL amounts, inclusive of the adjustments for the qualitative factor adjustments, and whether the amount appropriately reflects losses expected in the loan portfolio as of the consolidated balance sheet date by comparing the overall ACL to those established by similar banking institutions with similar loan portfolios. We also reviewed subsequent events and transactions and considered whether such information serves to corroborate or contradict the Corporation’s conclusion.

/s/Rehmann Robson LLC

We have served as Isabella Bank Corporation's independent auditor since 1996.

Saginaw, Michigan

March 7, 2024

37

Table of Contents

CONSOLIDATED BALANCE SHEETS

(Dollars in thousands)

December 31

ASSETS

Cash and cash equivalents

Cash and demand deposits due from banks $ 25,628 $ 27,420

Fed Funds sold and interest bearing balances due from banks 8,044 11,504

Mortgage loans AFS — 379

Corporate owned life insurance policies 33,892 32,988

Equity securities without readily determinable fair values 15,848 15,746

Accrued interest receivable and other assets 35,130 33,586

LIABILITIES AND SHAREHOLDERS’ EQUITY

Deposits

Borrowed funds

Federal funds purchased and repurchase agreements 46,801 57,771

Subordinated debt, net of unamortized issuance costs 29,335 29,245

Accrued interest payable and other liabilities 16,735 12,766

Shareholders’ equity

Shares to be issued for deferred compensation obligations 3,693 5,005

Accumulated other comprehensive income (loss) (25,896) (37,194)

The accompanying notes are an integral part of these consolidated financial statements.

38

Table of Contents

CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY

(Dollars in thousands except per share amounts)

Common Stock

Share-based payment awards under the Directors Plan — — 433 — — 433

Cash dividends paid ($1.08 per common share) — — — (8,367) — (8,367)

Share-based payment awards under the Directors Plan — — 463 — — 463

Cash dividends paid ($1.09 per common share) — — — (8,082) — (8,082)

Share-based payment awards under the Directors Plan — — 529 — — 529

Cash dividends paid ($1.12 per common share) — — — (8,216) — (8,216)

The accompanying notes are an integral part of these consolidated financial statements.

39

Table of Contents

CONSOLIDATED STATEMENTS OF INCOME

(Dollars in thousands except per share amounts)

Year Ended December 31

Interest income

AFS securities

Interest expense

Borrowings

Federal funds purchased and repurchase agreements 961 79 53

Subordinated debt, net of unamortized issuance costs 1,065 1,065 615

Noninterest income

Earnings on corporate owned life insurance policies 920 884 800

Noninterest expenses

Earnings per common share

Cash dividends per common share $ 1.12 $ 1.09 $ 1.08

The accompanying notes are an integral part of these consolidated financial statements.

40

Table of Contents

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(Dollars in thousands)

Year Ended December 31

Unrealized gains (losses) on AFS securities

Unrealized gains (losses) arising during the period 13,365 (50,015) (8,371)

Unrealized gains (losses) on AFS securities, net of tax 10,629 (39,701) (6,612)

Unrealized gains (losses) on derivative instruments

Tax effect (1) — — (11)

Unrealized gains (losses) on derivative instruments, net of tax — — 42

Change in unrecognized pension cost on defined benefit pension plan

Change in unrecognized pension cost arising during the period 752 762 955

Net change in unrecognized pension cost 847 821 924

Change in unrealized pension cost, net of tax 669 648 731

(1)See “Note 16 – Accumulated Other Comprehensive Income (Loss)” in the accompanying notes to consolidated financial statements for tax effect reconciliation.

The accompanying notes are an integral part of these consolidated financial statements.

41

Table of Contents

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Dollars in thousands)

Year Ended December 31

OPERATING ACTIVITIES

Reconciliation of net income to net cash provided by operating activities:

Amortization of acquisition intangibles 3 15 29

Amortization of subordinated debt issuance costs 90 87 52

Net gains on sale of AFS securities (67) — —

Net gain on sale of mortgage loans (317) (631) (1,694)

Change in OMSR valuation allowance — (532) —

Net (gains) losses on foreclosed assets (158) (13) (39)

Gains from redemption of corporate owned life insurance policies — (57) (271)

Share-based payment awards under the Directors Plan 529 463 433

Share-based payment awards under the RSP 253 147 86

Deferred income tax expense (benefit) 1,008 13 (523)

Net changes in operating assets and liabilities which provided (used) cash:

Accrued interest receivable and other assets (809) (2,813) 1,208