isba-20241231
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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
For the fiscal year ended December 31, 2024
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 $132,606,000 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 7,414,594 as of March 11, 2025.
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 6, 2025 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, 2025.
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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 13
Item 1C. Cybersecurity 13
Item 2. Properties 14
Item 3. Legal Proceedings 14
Item 4. Mine Safety Disclosures 14
Item 6. [Reserved] 16
Item 7A. Quantitative and Qualitative Disclosures About Market Risk 33
Item 8. Financial Statements and Supplementary Data 34
Item 9A. Controls and Procedures 89
Item 9B. Other Information 90
Item 9C. Disclosure Regarding Foreign Jurisdictions that Prevent Inspections 90
PART III 91
Item 10. Directors, Executive Officers and Corporate Governance 91
Item 11. Executive Compensation 91
Item 14. Principal Accountant Fees and Services 92
Item 15. Exhibit and Financial Statement Schedules 93
SIGNATURES 95
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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 FTE: Fully taxable equivalent
AFS: Available-for-sale GAAP: U.S. generally accepted accounting principles
ALCO: Asset-Liability Committee HFI: Held-for-investment
ALLL: Allowance for loan and lease losses HFS: Held-for-sale
AOCI: Accumulated other comprehensive income IRR: Interest rate risk
ASC: FASB Accounting Standards Codification IT: Information Technology
ASU: FASB Accounting Standards Update N/A: Not applicable
ATM: Automated teller machine N/M: Not meaningful
BHC Act: Bank Holding Company Act of 1956 NASDAQ: NASDAQ Stock Market Index
Board: Board of Directors of Isabella Bank Corporation NAV: Net asset value
BOLI: Bank-owned life insurance NIM: Net Interest Margin
CECL: Current expected credit losses NSF: Non-sufficient funds
CFPB: Consumer Financial Protection Bureau NYSE: New York Stock Exchange
CIK: Central Index Key OCI: Other comprehensive income (loss)
DIF: Deposit Insurance Fund OMSR: Originated mortgage servicing rights
FHLB: Federal Home Loan Bank XBRL: eXtensible Business Reporting Language
FRB: Federal Reserve Bank Yield Curve: U.S. Treasury Yield Curve
Freddie Mac: Federal Home Loan Mortgage Corporation
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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 3 – Loans and ACL” of “Notes to Consolidated Financial Statements” in Item 8. Financial Statements and Supplementary Data.
Deposit services offered include checking accounts, savings accounts, certificates of deposit, direct deposits, cash management services, mobile and internet banking, and ATMs. We also offer full service investment management, trust and estate services.
As of December 31, 2024, we had 368 full-time equivalent employees. We provide group life, health, accident, disability, and other insurance programs as well as a number of other employee benefit programs. None of our workforce is subject to collective bargaining agreements.
Available Information
Our SEC filings (including our Annual Report on Form 10-K, Quarterly Reports on Form 10-Q, Definitive Proxy Statements, Current Reports on Form 8-K and amendments to those reports) are available through our website (www.isabellabank.com). We will provide paper copies of our SEC reports free of charge upon request by a shareholder.
The SEC maintains a website (www.sec.gov) that contains reports, proxy and information statements and other information regarding Isabella Bank Corporation (CIK #0000842517) and other issuers.
Supervision and Regulation
The earnings and growth of the banking industry are affected by the credit policies of monetary authorities, including the FRB. An important function of the FRB is to regulate the national supply of bank credit in order to combat recessions and respond to inflationary pressures. Among the instruments of monetary policy used by the FRB to implement these objectives are open market operations in U.S. Treasury and U.S. Government Agency securities, changes in the discount rate on member bank borrowings, and changes in reserve requirements against member bank deposits. These methods are used in varying combinations to influence overall growth of bank loans, investments and deposits and also affect interest rates charged on loans or paid for deposits. The monetary policies of the FRB have had a significant effect on the operating results of commercial banks and related financial service providers in the past and are expected to continue to do so in the future. The effect of such policies upon our future business and earnings cannot be predicted.
We, as a financial holding company, are regulated under the BHC Act, and are subject to the supervision of the FRB. We are registered as a financial services holding company with the FRB and are subject to reporting requirements and inspections and audits. Under FRB policy, we are expected to act as a source of financial strength to the Bank and to commit resources to support its subsidiaries. This support may be required at times when, in the absence of such FRB policy, it would not otherwise be required to provide support.
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Under Michigan law, if the capital of a Michigan state chartered bank has become impaired by losses or otherwise, the Commissioner of the DIFS may require that the deficiency in capital be met by assessment upon the bank’s shareholders. Each shareholder would be responsible for a pro rata share of the deficiency, based on the amount of capital stock held by each shareholder. If an assessment is not paid by any shareholder within 30 days of the date of notice to the shareholder, sale of their stock will occur in order to pay such assessment.
Any capital loans by a bank holding company to any of its subsidiary banks are subordinate in right of payment to deposits and to certain other indebtedness of such subsidiary bank. In the event of a bank holding company’s bankruptcy, any commitment by the bank holding company to a federal bank regulatory agency to maintain the capital of a subsidiary bank will be assumed by the bankruptcy trustee and entitled to a priority of payment. This priority would apply to guarantees of capital plans under the FDIC Improvement Act of 1991.
SOX contains important requirements for public companies in the area of financial disclosure and corporate governance. In accordance with Section 302(a) of SOX, written certifications by our principal executive, financial, and accounting officers are required. These certifications attest that our quarterly and annual reports filed with the SEC do not contain any untrue statement of a material fact (see the certifications filed as Exhibits 31.1 and 31.2 to this Form 10-K for such certification of consolidated financial statements and other information for this 2024 Form 10-K). We have also implemented a program designed to comply with Section 404 of SOX, which included the identification of significant processes and accounts, documentation of the design effectiveness over process and entity level controls, and testing of the operating effectiveness of key controls. See Item 9A. Controls and Procedures for our evaluation of disclosure controls and procedures and internal control over financial reporting.
Certain additional information concerning regulatory guidelines for capital adequacy and other regulatory matters is presented herein under the caption “Capital” in Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations and in “Note 9 – Capital Ratios and Shareholders' Equity” and Note 14 – Off-Balance-Sheet Activities, Commitments and Other Matters of “Notes to Consolidated Financial Statements” in Item 8. Financial Statements and Supplementary Data.
Isabella Bank
The Bank is supervised and regulated by DIFS and the FRB. These agencies and federal and state laws extensively regulate various aspects of the banking business including, among other things, permissible types and amounts of loans, investments and other activities, capital adequacy, branching, interest rates on loans and deposits, and the safety and soundness of banking practices.
Our deposits are insured up to applicable limits by the DIF of the FDIC and are subject to deposit insurance assessments to maintain the DIF. The FDIC assesses insurance premiums based upon a financial ratios method that takes into account asset and capital levels and supervisory ratings.
Banking laws and regulations restrict transactions by insured banks owned by a bank holding company. These restrictions include loans to and certain purchases from the parent holding company, non-bank and bank subsidiaries of the parent holding company. Additional restrictions apply to principal shareholders, officers, directors and their affiliates, and investments by the subsidiary bank in the shares or securities of the parent holding company (or any of the other non-bank or bank affiliates), or acceptance of such shares or securities as collateral security for loans to any borrower.
The Bank is subject to legal limitations on the frequency and amount of dividends that can be paid to Isabella Bank Corporation. For example, a Michigan state chartered bank may not declare a cash dividend or a dividend in kind except out of net profits then on hand after deducting all losses and bad debts, and then only if it will have a surplus amounting to not less than 20% of its capital after the payment of the dividend. Moreover, a Michigan state chartered bank may not declare or pay any cash dividend or dividend in kind until the cumulative dividends on its preferred stock, if any, have been paid in full. Further, if the surplus of a Michigan state chartered bank is at any time less than the amount of its capital, before the declaration of a cash dividend or dividend in kind, it must transfer to surplus not less than 10% of its net profits for the preceding six months (in the case of quarterly or semi-annual dividends) or the preceding two consecutive six month periods (in the case of annual dividends).
The payment of dividends by Isabella Bank Corporation and the Bank is also affected by various regulatory requirements and policies, such as the requirement to keep adequate capital in compliance with regulatory guidelines. Federal laws impose further restrictions on the payment of dividends by insured banks that fail to meet specified capital levels. The FDIC may prevent an insured bank from paying dividends if the bank is in default of payment of any assessment due to the FDIC. In addition, payment of dividends by a bank may be prevented by the applicable federal regulatory authority if such payment is determined, by reason of the financial condition of such bank, to be an unsafe and unsound banking practice. The FRB and the
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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.
An investment in our common stock is subject to risks inherent to our business. The material risks and uncertainties that management believes affect us are described below. Before making an investment decision, you should carefully consider the risks and uncertainties described below, together with all the other information included or incorporated by reference herein. The risks and uncertainties described below are not the only ones facing us. Additional risks and uncertainties that management is not aware of or focused on or that management currently deems immaterial may also impair our business operations. This Annual Report on Form 10-K is qualified in its entirety by these risk factors.
If any of the events described in the risk factors should occur, our financial condition and results of operations could be materially and adversely affected. If this were to happen, the value of our securities could decline significantly, and you could lose all or part of your investment.
CREDIT RISKS
Deterioration in credit quality may adversely affect our earnings.
Our primary source of revenue is interest income derived from loans to individuals, small businesses, and commercial entities. As such, we are exposed to credit risk, which is the risk that borrowers may fail to meet their repayment obligations. Credit losses are inherent in the business of making loans and could have a material adverse effect on our operating results.
The credit quality of our loan portfolio can be influenced by several factors, including changes in economic conditions, the financial health of borrowers, industry-specific risks, and local market conditions. A downturn in the local or national economy could lead to higher unemployment rates, reduced consumer spending, and lower demand for credit, which in turn could increase the risk of loan defaults and charge-offs. Even in stable economic environments, we may experience higher-than-expected loan delinquencies or defaults, which could lead to increased provisions for loan losses and adversely impact our profitability and capital.
To manage the credit risk arising from lending activities, we maintain sound underwriting policies and procedures. We continuously monitor asset quality to determine the appropriateness of valuation allowances.
Credit losses could increase, and the allowance may not be adequate to cover actual loan losses.
We maintain an ACL to reserve for estimated expected credit losses within our loan portfolio. The level of the ACL reflects our evaluation of industry concentrations; specific credit risks; loan loss experience; loan portfolio quality; and economic, political and regulatory conditions. The determination of the appropriate level of the ACL inherently involves a high degree of subjectivity and requires management to make significant estimates related to current and expected future credit risks and trends, all of which may undergo material changes. Although management believes the ACL is appropriate to absorb probable losses within the loan portfolio, this allowance may not be adequate. An increase in the allowance would result in an expense for the period, thereby reducing the amount of reported net income, which may also adversely affect capital.
Concentrations within the loan portfolio may increase exposure to credit losses.
A financial institution’s exposure to risk increases if a disproportionate amount of the loan portfolio is extended to a single borrower, specific industry sector, or geographic area. A downturn in the economy, natural disaster, or industry-specific stressor may have a larger impact on the financial health of those borrowers, and in turn, the financial institution.
The Bank’s loan portfolio consists of consumer, commercial, and agricultural loans. While our risk management framework includes robust underwriting standards, diversified lending practices, and monitoring of concentration risk within the portfolio, unforeseen economic shocks or industry-specific downturns could still lead to higher-than-expected loan losses, charge-offs, and impairments to collateral.
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INTEREST RATE AND LIQUIDITY RISKS
Changes in interest rates may reduce our net interest income.
As a financial institution, our earnings and cash flows are largely dependent upon our ability to generate net interest income. Interest rate risk results from the timing differences in the maturity or repricing frequency of a financial institution’s interest earning assets, such as loans and securities, and its interest-bearing liabilities, such as deposits and borrowed funds.
Interest rates are highly sensitive to many factors that are beyond our control, including general economic conditions, changes in monetary policy, demand for loans, securities and deposits, and policies of various governmental and regulatory agencies. We monitor the potential effects of changes in interest rates through simulations and gap analyses. To help mitigate the effects of changes in interest rates, we make significant efforts to stagger projected cash flows and maturities of interest sensitive assets and liabilities.
The value of our investment securities portfolio may be negatively impacted by fluctuations in the market, including credit deterioration of the issuers of individual securities.
A volatile interest rate environment, illiquid market, or decline in credit quality could require us to recognize a credit-related impairment to the investment securities held in our portfolio. We consider many factors in determining whether a credit-related impairment exists including the length of time and extent to which fair value has been less than cost, the investment credit rating, and the probability that the issuer will be unable to pay the amount when due. While we do not intend to sell a security in an unrealized loss position or before recovery of its cost basis, the presence of these risk factors could lead to impairment charges.
We are subject to liquidity risk in our operations, which could adversely impact our ability to fund various obligations.
Liquidity risk is the risk to earnings or capital arising from our inability to meet obligations, such as deposit withdrawals, loan disbursements, and other operating costs, when they come due without incurring unacceptable and significant costs. Liquidity risk includes the inability to manage unplanned changes in funding sources, or failure to address changes in market conditions that affect the ability to liquidate assets quickly and with minimal loss in value. Retail deposits, cash, and unencumbered AFS securities are our primary sources of liquidity, supplemented by alternative and wholesale funding sources. Our ability to manage liquidity will be hindered if we are unable to maintain access to funding or if adequate financing is not available to accommodate future growth at acceptable costs. In addition, if we rely too heavily on more expensive funding sources to support future growth, our operating margins and profitability would be adversely affected.
Minimum capital requirements may adversely affect our ability to pay cash dividends, reduce our profitability, or otherwise adversely affect our business, financial condition or results of operations.
As a banking organization, our capital and liquidity are subject to regulation and supervision by banking regulators. We are required to maintain minimum levels of capital. The need to maintain capital and liquidity could result in our being required to increase our regulatory capital, restrict our lending capacity, and may dilute shareholder value or limit our ability to pay dividends or otherwise return capital to our investors through stock repurchases.
Our access to funds from subsidiaries may be restricted.
The Corporation is a separate and distinct legal entity from the Bank and its non-banking subsidiaries. The Corporation depends on dividends, distributions and other payments from its banking and non-banking subsidiaries to fund dividend payments on its common stock, debt service of subordinated borrowings, fund stock repurchase program and to fund strategic initiatives or other obligations. The Corporation’s subsidiaries are subject to laws that authorize regulatory bodies to block or reduce the flow of funds from those subsidiaries to the Corporation based on assertion that certain payments from subsidiaries are considered an unsafe or unsound practice, which could impede our access to funds that we may need to make payments on our obligations or dividend payments, if and when declared from time to time by our board of directors in its sole discretion out of funds legally available for that purpose.
Earnings may not grow if we are unable to successfully attract core deposits and lending opportunities and execute opportunities to generate fee-based income.
Historically, our loan and deposit growth has been the principal factor in our increase in net-interest income. If we are unable to execute our business strategy of continued growth in loans and deposits, our earnings could be adversely impacted. The Corporation’s ability to continue to grow depends, in part, upon our ability to expand our market share, to successfully attract core deposits and identify loan and investment opportunities, as well as opportunities to generate fee-based income. Our ability
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to manage growth successfully will also depend on whether we can continue to efficiently fund asset growth and maintain asset quality and cost controls, as well as on factors beyond our control, such as economic conditions and interest-rate trends.
Wholesale funding sources may prove insufficient to replace deposits, support operations and future growth.
We must maintain sufficient funds to respond to the needs of customers. To manage liquidity, we use several funding sources in addition to core deposit growth, loan repayments and maturities of loans and securities. These sources include FHLB and FRB advances, proceeds from the sale of securities and loans and liquidity resources at the holding company. Our ability to manage liquidity will be severely constrained if unable to maintain access to funding or if adequate financing is not available to accommodate future growth at acceptable costs. In addition, if we need to rely heavily on more expensive funding sources to support future growth, revenues may not increase proportionately to cover costs. In this case, our operating margins and profitability would be adversely affected.
Loss of deposits or a change in deposit mix could increase our cost of funding.
Deposits are a lower cost and stable source of funding. We compete with banks and other financial institutions for deposits. Funding costs may increase if deposits are lost and we are forced to replace them with more expensive sources of funding, if customers shift their deposits into higher cost products or if we need to raise interest rates to avoid losing deposits. Higher funding costs reduce our net interest income, net interest margin, and net income.
Prepayments of loans may negatively impact our business as customers may prepay the principal amount of their outstanding loans at any time.
The speeds at which such prepayments occur, as well as the size of such prepayments, are within the customers’ discretion. Fluctuations in interest rates, in certain circumstances, may also lead to high levels of loan prepayments, which may also have an adverse impact on net interest income. If customers prepay the principal amount of their loans, and we are unable to lend those funds to other borrowers or invest the funds at the same or higher interest rates, interest income will be reduced. A significant reduction in interest income could have a negative impact on our results of operations and financial condition.
Secondary mortgage market conditions may adversely affect our financial condition and earnings.
The secondary mortgage markets are impacted by interest rates and investor demand for residential mortgage loans and increased investor yield requirements for these loans. These conditions may fluctuate in the future. As a result, a prolonged period of secondary market illiquidity may reduce our loan production volumes, change loan portfolio composition, and reduce operating results. Secondary markets are affected by Fannie Mae, Freddie Mac, and Ginny Mae for loan purchases that meet their conforming loan requirements. These agencies could limit purchases of conforming loans due to capital constraints, changes in conforming loan criteria or other factors. Proposals to reform mortgage finance could affect the role of these agencies and the market for conforming loans.
OPERATIONAL AND REPUTATIONAL RISKS
Operational risks could lead to financial loss, litigation, and reputation risk.
Like most financial institutions, we are exposed to many types of operational risk. Operational risk is the risk of loss resulting from failed or inadequate internal processes, people, and systems or from external events. Errors or lapses in internal controls could result in financial loss, regulatory violations, or reputational damage. Our dependence upon automated systems may further increase the risk that system errors will result in losses that are difficult to detect. Operational risks may also arise from employee misconduct, including fraud or theft. These factors may lead to reputation risk and transaction risk.
Reputation risk is managed by developing and retaining marketplace confidence in handling customers’ financial transactions in an appropriate manner and protecting our safety and soundness. Transaction risk includes losses from fraud, error, the inability to deliver products or services, and loss or theft of information. Transaction risk also encompasses product development and delivery, transaction processing, information technology systems, and the Corporation’s internal control environment.
To minimize potential losses due to operational risks, we have established a robust system of internal controls that are regularly tested by our internal audit department in conjunction with external audit firms. While we strive to maintain robust internal controls and oversight, there is no guarantee that operational failures will be entirely avoided.
Unauthorized disclosure of sensitive or confidential client or customer information, whether through cyber-attacks, breach of computer systems or other means could severely harm the Company’s business.
See Item 1C. Cybersecurity.
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Our operations rely on external vendors.
We rely upon certain external vendors for our daily operations, some of which provide critical functions. If one of these vendors fails to perform in accordance with their established performance standards or encounters financial, regulatory, or strategic issues, it could disrupt our operations and/or expose us to liability. While we have a formal vendor management program to assist in vendor selection and ongoing performance monitoring, the failure of a vendor to perform in accordance with contractual agreements could have a material adverse effect on our financial condition and results of operations.
The Bank may experience losses related to fraud or theft.
Reported fraud continues to increase on local, state, and national levels. The increased use of the internet and mobile devices to conduct financial and other everyday transactions, coupled with the increased sophistication and activities of criminals, increases the Bank’s security risks. Criminals are using social engineering and phishing attacks for identity theft and account takeover. ATM/debit card, check, real-time payment, and wire fraud are just a few examples of the channels used by criminals to steal money. While the Bank continues to invest in fraud prevention tactics and tools, along with educating the public about common scams, the losses from fraud and theft cannot be eliminated entirely.
The Bank’s framework for managing risk may not be effective in mitigating its risk and loss.
The Bank’s risk management framework seeks to mitigate risk and loss by ensuring a culture of risk management is integrated throughout the Bank’s operational processes, strategic planning, and business lines. The Bank has established policies and procedures intended to identify, measure, monitor, report and manage risk. This includes oversight of compliance, credit, legal, liquidity, market, operational, strategic, reputational, and wealth risk. If our risk management framework proves ineffective, we could incur losses, regulatory penalties, and reputational damage that may affect our financial condition or results of operations.
Impairment of goodwill could result in a negative impact on our results of operations.
Under current accounting standards, goodwill is not amortized but, instead, is subject to impairment tests on at least an annual basis or more frequently if an event occurs or circumstances change that reduce the fair value of a reporting unit below its carrying amount. A decline in our stock price or the occurrence of a triggering event following any of our quarterly earnings releases and prior to the filing of the periodic report for that period could, under certain circumstances, require performance of a goodwill impairment test and result in an impairment charge being recorded for that period which was not reflected in such earnings release. During 2024, our annual impairment test conducted in October, using discounted cash flows and market-based approaches, indicated that the estimated fair value of our sole reporting unit “Isabella Bank” exceeded the carrying value. In a future assessment, we could conclude that all or a portion of our goodwill is impaired, which would result in a non-cash charge to earnings.
STRATEGY AND EXTERNAL RISKS
Deterioration in national, state and local economic conditions may adversely affect our financial performance.
The results of operations for financial institutions, including our Bank, may be adversely affected by changes in local, state, and national economic conditions. We provide banking and financial services to individuals and businesses located primarily in the Bay, Clare, Gratiot, Isabella, Mecosta, Midland, Montcalm, and Saginaw counties in Michigan. The local economic conditions in these areas have a significant impact on the demand for our products and services, as well as the ability of our customers to repay loans, the value of the collateral securing loans, and the stability of our deposit funding sources. A significant decline in general economic conditions, caused by inflation, recession, acts of terrorism, international or domestic occurrences, a health crisis, unemployment, changes in securities markets or other factors could impact these local economic conditions and, in turn, could have a material adverse effect on our financial condition and results of operations.
An economic downturn in the state, national, or global markets, could also negatively impact our financial condition and results of our operations. Broader economic and geopolitical developments, including global trade tensions, political instability, and natural disasters, can create volatility in financial markets and affect the economic outlook. A significant decline in U.S. GDP, rising inflation, or prolonged high unemployment rates could reduce demand for loans, increase credit risk, and reduce consumer confidence. Geopolitical events, such as trade wars or foreign conflicts, can disrupt markets and introduce volatility, which may indirectly affect our operations by influencing local economic conditions, interest rates, and the availability of capital.
We continually monitor key economic indicators to anticipate the possible effects of downturns in the local, regional, and national economies.
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Monetary policy and economic environment could impact our financial performance.
Our earnings are significantly affected by the monetary and fiscal policies of governmental authorities, including the FRB. Among the instruments of monetary policy used by the FRB to implement these objectives are open-market operations in U.S. Government securities and federal funds, changes in the discount rate on member bank borrowings, and changes in reserve requirements against member bank deposits. These instruments of monetary policy are used in varying combinations to influence the overall level of bank loans, investments, and deposits, and the interest rates charged on loans and paid for deposits.
The FRB frequently uses these instruments of monetary policy, especially its open-market operations and the discount rate, to influence the level of interest rates, thereby affecting the strength of the economy, the level of inflation, or the price of the dollar in foreign exchange markets. The monetary policies of the FRB have had a significant effect on the operating results of banking institutions in the past and are expected to continue to do so in the future. It is not possible to predict the nature of future changes in monetary and fiscal policies, or the effect which they may have on our business and earnings.
Wealth management business line could create risks associated with the industry.
Our wealth management operations present special risks not borne by institutions that focus exclusively on other traditional retail and commercial banking products. For example, the investment advisory industry is subject to fluctuations in the stock market and interest rate volatility that may have a significant adverse effect on transaction fees, client activity and client investment portfolio gains and losses. Also, additional or modified regulations may adversely affect our wealth management operations. In addition, our wealth management operations are dependent on our financial advisors, whose departure could result in the loss of a significant number of client accounts. A significant decline in fees and commissions or trading losses suffered in the investment portfolio could adversely affect our income and potentially require the contribution of additional capital to support our operations.
Strong competition within our markets may significantly impact profitability.
We compete with an ever-increasing array of financial service providers. See the section entitled “General” in Item 1. Business for additional competitor information. Competition from nationwide banks, as well as local institutions, continues to mount in our markets. To compete, we focus on quality customer service, making decisions at the local level, maintaining long-term customer relationships, building customer loyalty, and providing products and services designed to address the specific needs of customers. Failure to perform in any of these areas could significantly weaken our competitive position, which could adversely affect growth and profitability.
Market changes may adversely affect demand for our services and impact revenue, costs, and earnings.
Channels for servicing our customers are evolving rapidly, with less reliance on traditional branch facilities, increased use of e-commerce channels, and demand for relationship managers who can service multiple product lines. We have an ongoing process for evaluating the profitability of our branch system and other office and operational facilities. The identification of unprofitable operations and facilities can lead to restructuring charges and introduce the risk of disruptions to revenues and customer relationships. We compete with larger financial institutions who are rapidly evolving their service channels and escalating the costs of the service process.
The soundness of other financial institutions could adversely affect us.
Our ability to engage in routine funding transactions could be adversely affected by the actions and commercial soundness of other financial institutions. Financial services institutions are interrelated because of trading, clearing, counterparties and other relationships. Further, when volatility, market events or similar issues affect a subset of financial institutions, or when there are news reports or high-profile incidents relating to trends, concerns, and other issues in the banking industry, the ramifications can affect the sector, regardless of the effect, or lack thereof, on any specific institution. We have exposure to different industries and counterparties through transactions with counterparties in the bank and non-bank financial services industries, including brokers and dealers, commercial banks, investment banks and other institutional clients. As a result, defaults by, or even rumors or questions about, one or more bank or non-bank financial services companies, or the bank or non-bank financial services industries generally, have led to market-wide liquidity problems and could lead to losses or defaults by us or by other institutions. Future events of this nature could have an adverse effect on our business, financial condition and results of operations.
Expansion, growth, and acquisitions could negatively impact earnings if not successful.
We may grow organically both by geographic expansion and through business line expansion, as well as through acquisitions. Success of these activities depends on our ability to continue to maintain and develop an infrastructure appropriate to support
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and integrate such growth. Success may also depend on acceptance of the Bank by customers in these new markets and, in the case of expansion through acquisitions, these factors include the long-term recruitment and retention of key personnel and acquired customer relationships. Profitability depends on whether the marginal revenue generated in the new markets will offset the increased expenses of operating a larger entity, with more staff, more locations, and more product offerings. Failure to achieve any of these success factors may have a negative impact on our financial condition and results of operations.
We may be adversely affected by continuous technological change.
The financial services industry is undergoing rapid technological change which includes the frequent introduction of new technology-driven products and services. The effective use of technology increases efficiency and enables financial institutions to better serve customers. Our future success depends, in part, upon our ability to address the needs of customers by using technology to provide products and services that will satisfy customer demands, as well as to create additional operational efficiencies.
The introduction of new products and services can entail significant time and resources. Our failure to manage risks and uncertainties associated with new products and services exposes us to enhanced risk of operational lapses which may result in the recognition of financial statement liabilities. Regulatory and internal control requirements, capital requirements, competitive alternatives, vendor relationships and shifting market preferences may also determine if such initiatives can be brought to market in a manner that is timely and attractive to our customers. Products and services relying on internet and mobile technologies may expose us to fraud and cybersecurity risks. Failure to successfully manage these risks in the development and implementation of new products or services could have a material adverse effect on our business and reputation.
LEGAL, REGULATORY AND COMPLIANCE RISKS
We are subject to extensive government regulation and supervision, and any regulatory changes may adversely affect us.
As a federally insured financial institution, we are subject to regulation and oversight by various regulatory bodies including the FDIC, DIFS, FRB, SEC, and the CFPB. Federal and state laws and regulations are designed primarily to protect the deposit insurance fund, consumers, and the stability of the U.S. financial system, and not necessarily our shareholders. If we do not appropriately comply with regulations, the Bank may be subject to fines, penalties or judgements, or material regulatory restrictions in its business.
The nature, extent, and timing of the adoption of significant new laws, changes in existing laws, or repeal of existing laws may have a material impact on our business, results of operations, and financial condition, the effect of which is impossible to predict in advance.
The Bank has a formal Compliance Risk Management Program in place to mitigate the risk of noncompliance with laws, regulations, or rulings. However, changes or stricter enforcement of these laws could lead to higher compliance costs or require adjustments to our business practices, which may affect profitability. Regulatory authorities have extensive discretion in connection with their supervisory and enforcement activities. This includes the imposition of restrictions on the operations of an institution, the classification of assets by the institution, and the appropriateness of an institution’s allowance for credit losses. Future regulatory changes or accounting pronouncements may also increase our regulatory capital requirements or adversely affect our regulatory capital levels.
Legal and regulatory proceedings could adversely affect us or the financial services industry in general.
We may be subject to various legal and regulatory proceedings in the future. Actions by regulatory agencies or significant litigation against us could require significant time and resources to respond to those actions and may lead to penalties. Whether the claims and legal action related to our performance are founded or unfounded, if such claims and legal actions are not resolved in a manner favorable to us, they may result in significant liability, adversely affect reputation, and reduce demand for our products and services. Any financial liability or reputational damage could have a material adverse effect on our business, financial condition and results of operations.
Societal responses to climate change could adversely affect the Bank’s business and performance, including indirectly through impacts on the Bank’s customers.
Concerns over the long-term impacts of climate change have led and may continue to lead to governmental efforts around the world to mitigate those impacts. Consumers and businesses also may change their behavior on their own because of these concerns. The Bank and its customers will need to respond to new laws and regulations, as well as consumer and business preferences resulting from climate change concerns. The Bank and its customers may face cost increases, asset value reductions, operating process changes, among other impacts. The impact on our customers will likely vary depending on their
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specific attributes, including reliance on our role in carbon intensive activities that may be negatively affected by economic transition towards a lower-carbon economy. The Bank could experience a drop in demand for its products and services, particularly in certain sectors. In addition, the Bank could face reductions in creditworthiness on the part of some customers or in the value of assets securing loans. The Bank’s efforts to take these risks into account in making lending and other decisions, including by increasing business relationships with climate-resilient companies, may not be effective in protecting use from the negative impact of new laws and regulations or changes in consumer or business behavior.
Pandemics, severe weather, natural disasters, acts of war or terrorism, and other external events could significantly impact our business and the business of our customers.
Pandemics, severe weather, natural disasters, acts of war or terrorism, and other adverse external events could have a significant impact on our ability to conduct business. Such events could affect the stability of borrowers to repay outstanding loans, impair the value of collateral securing loans, cause significant property damage, result in loss of revenue and/or cause us to incur additional expenses. Such events may have a particularly negative impact upon the business of customers who are engaged in the hospitality industry in our markets, which could have a direct negative impact on our business and results of operations. Further, work-from-home and other modified business practices may introduce additional operational risks, including cybersecurity and execution risks, which may result in inefficiencies or delays, and may affect our ability to, or the way we conduct our business activities.We have developed and tested disaster recovery plans for all significant aspects of our operations to minimize disruption.
GENERAL RISK FACTORS
Changes in accounting policies or in accounting standards could materially affect our results of operations, and financial condition.
Accounting policies are fundamental to understanding our results of operations, and financial condition. Some of the accounting policies are critical because they require us to make difficult, subjective and complex judgments about matters that are inherently uncertain and because it is likely that materially different amounts would be reported under different conditions or using different assumptions. We may experience material losses if such estimates or assumptions underlying in our financial statements are incorrect.
From time to time, the FASB and the SEC change the financial accounting and reporting standards or the interpretation of those standards that govern the preparation of our external financial statements. These changes could materially impact how we report our results of operations and financial condition. New or revised standards could also require retroactive application, which could result in the restatement of our prior period financial statements in material amounts.
Internal controls may become ineffective in preventing or detecting material errors.
We regularly review and update our internal controls, disclosure controls and procedures, and corporate governance policies and procedures. Any system of controls, however well designed and operated, is based in part on certain assumptions and can provide only reasonable, not absolute, assurances that the objectives of the controls are met. Any failure or circumvention of our controls and procedures or failure to comply with regulations related to controls and procedures could have a material adverse effect on our business, results of operations, and financial condition.
We may be unable to attract and retain key personnel.
Our success depends, in large part, on our ability to attract and retain key personnel. Competition for qualified personnel in the financial services industry can be intense, and we may not be able to hire or retain the key personnel. The unexpected loss of key personnel could have an adverse impact on our business because of their skills, knowledge of the markets in which we operate, years of industry experience and the difficulty of promptly finding a qualified replacement.
Although publicly traded, our common stock has substantially less liquidity than stocks listed on NYSE, NYSE American and NASDAQ exchanges.
Our common stock is traded on the OTC market under the symbol “ISBA.” The development and maintenance of an active public trading market depends upon the existence of willing buyers and sellers, the presence of which is beyond our control. While we are a publicly traded company, the volume of trading activity in our stock is still relatively limited. Even if a more active market develops, there can be no assurance that such a market will continue, or that our shareholders will be able to sell their shares at or above the price at which they acquired shares.
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Item 1B. Unresolved Staff Comments.
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 customer reliance on mobile devices.
Cybersecurity incidents have increased in number and severity and it is expected that these trends will continue. Techniques used in cyber-attacks 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 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 with whom we do business, 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
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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 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 periodically. In addition, the full Board reviews the Risk Management processes and results, and the Board's Audit Committee tracks any corrective actions identified in the Internal Audit process. 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.
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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 7,424,893 shares are issued and outstanding as of December 31, 2024. As of that date, there were 2,590 shareholders of record.
Our common stock is traded in the over-the-counter market. Our common stock is quoted on the OTCQX market tier of the OTC Markets Group Inc.’s ("OTC Markets") electronic quotation system (www.otcmarkets.com) under the symbol “ISBA”. Other trades in our common stock occur in privately negotiated transactions from time to time for which we may have little or no information.
We have reviewed the information available as to the range of reported high and low transactions as reported by OTC Markets. The following table sets forth our compilation of that information for the periods indicated. Price information obtained from OTC Markets reflects inter-dealer prices, without retail mark up, mark down, or commissions and may not necessarily represent actual transactions. The following compiled data is provided for information purposes only and should not be viewed as indicative of the actual or market value of our common stock.
Number 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.
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The following table provides information for the unaudited three-month period ended December 31, 2024, 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]
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Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations.
(Dollars in thousands except per share amounts)
The following is management’s discussion and analysis of our financial condition and results of operations. This discussion and analysis is intended to provide a better understanding of the consolidated financial statements and statistical data included elsewhere in this Annual Report on Form 10-K.
Forward-Looking Statements
Information in this Annual Report on Form 10-K contains certain forward looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Rule 175 promulgated thereunder, and Section 21E of the Securities Exchange Act of 1934, as amended and Rule 3b-6 promulgated thereunder. We intend such forward looking statements to be covered by the safe harbor provisions for forward looking statements contained in the Private Securities Litigation Reform Act of 1995, and are included in this statement for purposes of these safe harbor provisions. Forward-looking statements generally relate to losses, impact of events, financial condition, plans, objectives, outlook for earnings, revenues, expenses, capital and liquidity levels and ratios, asset levels, asset quality, financial position, and other matters regarding or affecting the Corporation and its future business and operations. Forward-looking statements are typically identified by words or phrases such as “will likely result", “expect”, “plan”, “believe”, “estimate”, “anticipate”, “strategy”, “trend”, “forecast”, “outlook”, “project”, “intend”, “assume”, “outcome”, “continue”, “remain”, “potential”, “opportunity”, “comfortable”, “current”, “position”, “maintain”, “sustain”, “seek”,“achieve” and variations of such words and similar expressions, or future or conditional verbs such as will, would, should, could or may. Although we believe the assumptions upon which these forward-looking statements are based are reasonable, any of these assumptions could prove to be inaccurate and the forward-looking statements based on these assumptions could be incorrect. The matters discussed in these forward-looking statements are subject to various risks, uncertainties and other factors that could cause actual results and trends to differ materially from those made, projected, or implied in or by the forward-looking statements depending on a variety of uncertainties or other factors described in this report, or included in any subsequent filing by the Corporation with the Securities and Exchange Commission. Forward-looking statements are based on beliefs and assumptions using information available at the time the statements are made. The Corporation cautions you not to unduly rely on forward-looking statements because the assumptions, beliefs, expectations and projections about future events may, and often do, differ materially from actual results. Any forward-looking statement speaks only as to the date on which it is made, and we undertake no obligation to update any forward-looking statement to reflect developments occurring after the statement is made.
Non-GAAP Financial Measures
Our accounting and reporting policies conform to GAAP and the prevailing practices in the financial services industry. However, we also evaluate our performance by reference to certain additional financial measures discussed in this Annual Report on Form 10-K that we identify as being “non-GAAP financial measures.” In accordance with SEC rules, we classify a financial measure as being a non-GAAP financial measure if that financial measure excludes or includes amounts, or is subject to adjustments that have the effect of excluding or including amounts, as the case may be, in the most directly comparable measure calculated and presented in accordance with GAAP as in effect from time to time in the United States in our statements of income, balance sheets or statements of cash flows. Non-GAAP financial measures do not include operating and other statistical measures or ratios, or statistical measures calculated using exclusively either financial measures calculated in accordance with GAAP, operating measures or other measures that are not non-GAAP financial measures or both.
The non-GAAP financial measures that we discuss in this Annual Report on Form 10-K should not be considered in isolation or as a substitute for the most directly comparable or other financial measures calculated in accordance with GAAP. Moreover, the manner in which we calculate the non-GAAP financial measures that we discuss in this report may differ from that of other companies reporting measures with similar names.
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Executive Summary
Comparison of Operating Results for the year ended December 31, 2024 and 2023
We reported net income for the year ended December 31, 2024 of $13,889, or $1.86 per diluted share, compared with $18,167, or $2.40 per diluted share, for the same period of 2023. The non-GAAP measure of net income was $15,016, or $2.01 per diluted share, compared to $17,989, or $2.37 per diluted share, for the respective periods. The adjusted net income for 2024 excludes a net charge-off of $1,556 related to overdrawn deposit accounts from a single customer. The decrease in adjusted net income primarily reflects the impact on net interest income due to slower repricing of earning assets as compared to the rising costs of interest bearing liabilities. The decrease in net income for the comparative periods also included an increase in provision for credit losses and compensation expenses.
Net interest income was $55,835 in 2024 compared with $57,944 in the same period of 2023. The comparison of NIM and yield on interest earning assets were 2.90% and 4.65% compared to 3.05%, and 4.17% for 2024 and 2023, respectively. The book yield from securities was 2.22% and 2.26% during 2024 and 2023, respectively. The weighted average maturity of our U.S. Treasury portfolio is less than 1.4 years, and the proceeds are expected to be reinvested in market rate loans and securities, or to pay off borrowed funds. The yield on loans expanded to 5.58%, from 5.02% due to higher rates on new loans and fixed rate commercial loans that have and continue to reprice to variable rates. At the end of 2024, approximately 40% of commercial loans were fixed at rates lower than current market rates, but the majority will contractually reprice to variable rates over the next four years. Our cost of interest bearing liabilities increased to 2.37% from 1.57% in 2023, but have stabilized in comparison to the first half of the year.
The provision for credit losses for the year ended December 31, 2024 was $1,884, compared to $629 for the same period in 2023. The provision for 2024 includes the recovery of contractual principal of two previously charged-off commercial loans totaling $314. Given these loan recoveries, our historical loss rate experience improved which provided a benefit of $435. The benefits were offset by a $1,556 net charge-off related to an overdrawn deposit account from a single customer and additional reserves for core loan growth.
Noninterest income for the year ended December 31, 2024 was $14,576, an increase of $749, or 5.4%, in comparison to 2023. Wealth management fees grew $484, or 13.6%, due to higher assets under management. Managed assets increased $17,015 driven by growth in new accounts and higher security valuations. Customer service fees increased $329, based on a higher number of transaction accounts.
Noninterest expenses were $52,129 for the year ended December 31, 2024, increasing $2,819 when compared to the same period in 2023. Annual merit increases and medical claims resulted in a $2,671 increase in compensation and benefits. Our efficiency ratio was 73.01% in 2024 compared to 67.76% in 2023 and the increase primarily reflects lower NIM and a relatively stable base of noninterest expense.
Financial Condition (December 31, 2024 to December 31, 2023 comparison)
Total assets were $2,086,241 at December 31, 2024, increasing $27,273 due to loan growth funded by deposits and amortization of AFS securities.
Our AFS securities portfolio totaled $489,029 at December 31, 2024, declining $39,119 due to municipal maturities and principal paydowns on mortgage-related securities. Net unrealized losses on our AFS securities portfolio were $26,487 at December 31, 2024, improving $5,339 since December 31, 2023. Net unrealized losses as a percentage of total AFS securities improved to 5.1% from 5.7% at the end of 2023 due to an increase in bond yields. Bond rates may vary from quarter to quarter, however, unrealized losses are expected to decrease as most of the bond portfolio approaches its maturity over the next two years.
Loans outstanding as of December 31, 2024 totaled $1,423,571, increasing $74,108 since December 31, 2023. Growth during 2024 was driven by an increase of $44,539 in advances to mortgage brokers, $35,156 in commercial and industrial loans, and $24,454 in residential loans, offset by a $16,797 decrease in commercial real estate loans. The growth in commercial and industrial loans primarily was in the hotel management and construction industries. The increase in residential loans was related to steady new volume and continued slowing of prepayments. The decline in commercial real estate loans during 2024 included a $6.4 payoff during the fourth quarter on a relationship that had an elevated credit risk as well as declines in the multifamily real estate, healthcare, and hotel industries. Core loans, which excludes advances to mortgage brokers, grew $29,569 or 2.2%.
The ACL was $12,895 at December 31, 2024, a decrease of $213 from $13,108 at December 31, 2023. Most of the decrease is due to improvement in historical loss experience, which was driven by the recovery of previously charged-off loans during the
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year. This improvement was offset by core loan growth and the impact from a few commercial loans totaling $33,875 that migrated to a special mention risk rating during the fourth quarter. The downgraded loans are well collateralized and are not an indication of a negative trend in the broader portfolio. Nonaccrual loans were $282 as of December 31, 2024 compared to $982 at December 31, 2023. Past due and accruing accounts between 30 to 89 days as a percentage of total loans was 0.40% at December 31, 2024, compared to 0.29% at year-end 2023. Overall, credit quality remains strong, and there are no negative trends.
Total deposits were $1,747,060 as of December 31, 2024, increasing $23,365, or 1.4%, from December 31, 2023. Retail certificates of deposit accounts were up $41,217, driven by continued demand due to the rate environment. Interest bearing demand deposits increased $20,629, while savings and demand deposits declined $26,349 and $12,132, respectively. The decline in savings products was driven in part by expected outflows of businesses and municipalities to fund large, regional projects and disintermediation into higher yielding accounts.
Total equity was $210,276 at December 31, 2024 compared to $202,402 at year-end 2023. Our tangible book value per share was $21.82 as of December 31, 2024, compared to $20.59 on December 31, 2023. Net unrealized losses on AFS securities reduced tangible book value per share by $2.82 and $3.37 for the respective periods. Share repurchases totaled 152,577 during 2024 for a value of $3,076 at an average price of $20.16.
We continue to have robust liquidity levels and capital. As of December 31, 2024, we had $776,672 of unencumbered sources of liquidity and strong capital ratios; the Tier 1 Leverage Ratio was 8.86%, Tier 1 risk-based capital was 12.21%, and Total risk-based capital was 15.06%.
Reclassifications
Certain amounts reported in management's discussion and analysis of financial condition and results of operations for 2023 and 2022 have been reclassified to conform with the 2024 presentation.
Subsequent Events
We evaluated subsequent events after December 31, 2024 through the date our consolidated financial statements were issued for potential recognition and disclosure. No subsequent events require financial statement recognition or disclosure between December 31, 2024 and the date our consolidated financial statements were issued.
Other
We have not received, nor are aware of, any notices of regulatory actions as of March 11, 2025.
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Selected Financial Data
The following table outlines our results of operations and provides certain key performance measures as of, and for the years ended December 31:
PER SHARE
PERFORMANCE RATIOS
Return on average total assets 0.67 % 0.89 % 1.08 %
Adjusted return on average total assets (1) 0.72 % 0.88 % 1.08 %
Return on average shareholders' equity 6.73 % 9.52 % 11.41 %
Adjusted return on average shareholders' equity (1) 7.28 % 9.43 % 11.40 %
Return on average tangible shareholders' equity 8.78 % 12.75 % 15.17 %
Net interest margin yield (FTE) (1) 2.90 % 3.05 % 3.18 %
Shareholders' equity to total assets (2) 10.08 % 9.83 % 9.17 %
Tangible shareholders' equity to tangible assets (2) 7.95 % 7.66 % 7.78 %
FINANCIAL DATA (in millions)
Provision for credit losses 2 1 —
(1) Non-GAAP financial measure; refer to the "Recconcilation of Non-GAAP Financial Measures" section
(2) At end of period
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CRITICAL ACCOUNTING POLICIES
Our significant accounting policies are set forth in “Note 1 – Significant Accounting Policies” of “Notes to Consolidated Financial Statements” in Item 8. Financial Statements and Supplementary Data. Of these significant accounting policies, we consider our policies regarding the ACL, acquisition intangibles and goodwill, and the determination of the fair value and assessment of credit related impairments of investment securities to be our most critical accounting policies.
The ACL requires our most subjective and complex judgment. Changes in economic conditions and other external factors can have a significant impact on the ACL and, therefore, the allowance for credit losses and results of operations. We have developed policies and procedures for assessing the appropriateness of the ACL, recognizing that this process requires a number of assumptions and estimates with respect to our loan portfolio. Our assessments may be impacted in future periods by changes in economic conditions, and the discovery of information with respect to borrowers which is not known to us at the time of the issuance of the consolidated financial statements. Changes in the factors used by management to determine the appropriateness of the allowance or the availability of new information could cause the allowance to be increased or decreased in future periods. Additionally, changes in circumstances related to individually large credits, or certain macroeconomic forecast assumptions may result in volatility.
Estimating how potential changes in economic factors might affect the overall allowance is challenging because a wide variety of factors and inputs are considered in the allowance estimate. Changes in the factors and inputs may not occur at the same rate and may not be consistent across all product types. Additionally, changes in factors and inputs may be directionally inconsistent, such that improvement in one factor may offset deterioration in others. However, to consider the impact of a hypothetical stressed forecast, we estimated the ACL using forecast inputs that were severely unfavorable to the expected scenario for the external factors related to economic conditions, the value of underlying collateral, and the volume and severity of past due, nonaccrual, and adversely classified loans. This stress scenario resulted in an ACL that is approximately $4,500 higher than the recorded ACL as of December 31, 2024.
For additional discussion concerning our ACL and related matters, see “ACL - Loans” and “Note 3 – Loans and ACL” of “Notes to Consolidated Financial Statements” in Item 8. Financial Statements and Supplementary Data.
U.S. generally accepted accounting principles require that we determine the fair value of the assets and liabilities of an acquired entity, and record the fair value on the date of acquisition. We employ a variety of measures in the determination of the fair value, including the use of discounted cash flow analysis, market appraisals, and projected future revenue streams. For certain items that we believe we have the appropriate expertise to determine the fair value, we may choose to use our own calculations of the value. In other cases, where the value is not easily determined, we consult with independent experts to determine the fair value of the identified asset or liability. Once valuations have been determined, the net difference between the price paid for the acquired entity and the net value of assets acquired on our balance sheet, including identifiable intangibles, is recorded as goodwill. Acquisition intangibles and goodwill are qualitatively and quantitatively evaluated annually to determine if it is more likely than not that the carrying balance is impaired on at least an annual basis. Based on the analysis completed, it was determined that our estimated fair value of Isabella Bank and Isabella Bank Corporation at December 31, 2024 was greater than our recorded book value and no impairment of goodwill was identified.
AFS securities are carried at fair value with changes in the fair value included as a component of other comprehensive income. The market values for most AFS investment securities are typically obtained from outside sources and applied to individual securities within the portfolio. Municipal securities for which no readily determinable market values are available are priced using fair value curves which most closely match the securities' characteristics. AFS securities are reviewed quarterly for possible credit impairment. In determining whether a credit-related impairment exists for debt securities, we assess whether: (a) we do not have the intent to sell the security; and (b) it is more likely than not we will not have to sell the security before recovery of its cost basis. If either of these conditions are met, any previously recognized allowances are charged-off and the security's amortized cost is written down to fair value through income. If these conditions are not met, the security is evaluated to determine whether the decline in fair value has resulted from credit losses or other factors.
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Average Balances, Interest Rates, and Net Interest Income
The following schedules present the daily average amount outstanding for each major category of interest earning assets, non-earning assets, interest bearing liabilities, and noninterest bearing liabilities for the last three years. These schedules also present an analysis of interest income and interest expense for the periods indicated. All interest income is reported on a FTE basis using a federal income tax rate of 21%. Loans in nonaccrual status, for the purpose of the following computations, are included in the average loan balances. FRB restricted equity holdings are included in other interest earning assets.
Year Ended December 31
INTEREST EARNING ASSETS
NONEARNING ASSETS
INTEREST BEARING LIABILITIES
NONINTEREST BEARING LIABILITIES
Net yield on interest earning assets (FTE) (4) 2.90 % 3.05 % 3.18 %
(1) Includes loans HFS and nonaccrual loans
(2) Average balances for AFS securities are based on amortized cost
(3) Includes average interest-bearing deposits with other banks, net of Federal Reserve daily cash letter
(4) Non-GAAP financial measure; refer to the "Non-GAAP Financial Measures" section
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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) — 1 1
Changes in interest expense
Subordinated debt, net of unamortized issuance costs 3 (3) — 3 (3) —
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Loans
The following table displays loan balances 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
The following table presents the composition of our commercial real estate portfolio by industry as of December 31:
Balance Percent of Total Balance Percent of Total
Real estate
Commercial real estate loans are subject to a varying degree of risk from changes in interest rates and economic conditions. To control these risks, we maintain strict underwriting standards, lending limits to a single borrower, loan to collateral value limits, and a defined market area. We also monitor and limit loan concentrations to specific industries. Our practices also include appropriate loan reviews, and monitoring of past due levels, concentrations, industry trends, and other qualitative factors.
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The following table illustrates the amounts of the ACLandALLL allocated to each 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 3 – Loans and ACL” of “Notes to Consolidated Financial Statements” in Item 8. Financial Statements and Supplementary Data.
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AFS Securities
The following is a schedule of maturities of AFS securities and their weighted average yields as of December 31, 2024. Weighted average yields have been computed on an FTE basis using a tax rate of 21%. Our auction rate money market preferred investments are long-term floating rate instruments. The issuers of auction rate securities generally have the right to redeem or refinance the debt. Because of their lack of contractual maturities, auction rate money market preferred stocks are not reported by a specific maturity group. Mortgage-backed securities and collateralized mortgage obligations are not reported by a specific maturity group due to their variable monthly payments. Expected maturities may differ from contractual maturities because issuers may have the right to call or prepay obligations.
Maturing
Mortgage-backed securities — — — — — — — — 26,886 2.38
Collateralized mortgage obligations — — — — — — — — 154,674 2.94
Auction rate money market preferred — — — — — — — — 3,044 6.74
Deposits
The following table displays deposit balances as of December 31:
The following table displays the change in deposit balances for the years ended December 31:
$ Change % Change $ Change % Change $ Change % Change
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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, 2024 is presented in the table below. Estimated uninsured certificates of deposit is based on individual accounts and does not reflect uninsured balances by account owner.
Maturity
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Asset Quality Analysis
The following table outlines our asset quality analysis as of, and for the years ended December 31:
NONPERFORMING ASSETS
Commercial and industrial $ — $ 491 $ 82
Commercial real estate — — 14
Consumer — — —
Accruing loans past due 90 days or more 19 87 —
Debt securities — 12 77
Nonperforming loans to gross loans 0.02 % 0.08 % 0.04 %
Nonperforming assets to total assets 0.04 % 0.07 % 0.05 %
Nonaccrual loans to gross loans 0.02 % 0.07 % 0.04 %
ACL as a % of nonaccrual loans N/M N/M N/M
ALLOWANCE FOR CREDIT LOSSES
Impact of the adoption of ASC 326 — 2,744 —
Reserve for unfunded commitments 512 315 —
Provision for credit losses - unfunded commitments 197 — —
Reserve to unfunded commitments 0.15 % 0.10 % 0.00 %
NET LOAN CHARGE-OFFS (RECOVERIES)
Commercial real estate (355) (26) (29)
Agricultural (6) (8) (9)
Net (recoveries) charge-offs to average loans 0.14 % 0.01 % (0.02) %
DELINQUENT AND NONACCRUAL LOANS
Accruing loans past due 90 days or more 19 87 —
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Capital
Capital consists solely of common stock, retained earnings, and accumulated other comprehensive income (loss). We are authorized to raise capital through dividend reinvestment, employee and director stock purchases, and shareholder stock purchases. Pursuant to these authorizations, we issued 75,341 shares or $1,523 of common stock during 2024, and 75,488 shares or $1,617 of common stock in 2023. We offer the Directors Plan in which participants purchase stock units through deferred fees, in lieu of cash payments. Pursuant to this plan, we increased shareholders’ equity by $381 and $529 during 2024 and 2023, respectively. We also grant restricted stock awards pursuant to the RSP. Pursuant to this plan, we increased shareholders’ equity by $95 and $253 during 2024 and 2023.
We have publicly announced a common stock repurchase plan. Pursuant to this plan, we repurchased 152,577 shares or $3,076 of common stock during 2024 and 149,020 shares or $3,415 during 2023. As of December 31, 2024, we were authorized to repurchase up to an additional 118,229 shares of common stock.
The FRB has established minimum risk-based capital guidelines. Pursuant to these guidelines, a framework has been established that assigns risk weights to each category of on and off-balance-sheet items to arrive at risk adjusted total assets. Regulatory capital is divided by the risk adjusted assets with the resulting ratio compared to the minimum standard to determine whether a corporation has adequate capital.
The following table sets forth these requirements and our ratios as of December 31:
Liquidity
Liquidity is monitored regularly by our ALCO, which consists of members of senior management. The committee reviews projected cash flows, key ratios, and liquidity available from both primary and secondary sources.
Our primary sources of liquidity are retail deposits, cash and cash equivalents, and unencumbered AFS securities. These categories totaled $330,876 or 15.86% of assets as of December 31, 2024, compared to $381,417 or 18.52% as of December 31, 2023. The decline in the amount and percentage of primary liquidity is a direct result of an increase in loans and a decrease in unencumbered AFS securities collateralizing non-market funding. Liquidity is important for financial institutions because of their need to meet loan funding commitments, depositor withdrawal requests, and various other commitments including expansion of operations, investment opportunities, and payment of cash dividends. Based on these same factors, daily liquidity could vary significantly.
Our secondary sources include the ability to borrow from the FHLB, from the FRB, and through various correspondent banks in the form of federal funds purchased and a line of credit. These funding methods typically carry a higher interest rate than traditional market deposit accounts. Some borrowed funds, including FHLB advances, FRB Discount Window advances, and repurchase agreements, require us to pledge assets, typically in the form of AFS securities or loans, as collateral. As of December 31, 2024, we had available lines of credit of $342,130.
We monitor our daily liquidity position to meet our cash flow needs. We also forecast anticipated funding needs for changes in interest rates and economic conditions, the scheduled maturity and interest rate sensitivity of the investment and loan portfolios and deposits, and regulatory capital requirements. Our liquidity stress testing is designed with consideration of these and other factors that could pose undue risk to liquidity.
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Our liquidity position remained strong at the end of 2024. Components of liquidity are illustrated in the following table as of December 31:
Available lines of credit
Fed funds lines with correspondent banks 93,000 93,000
Unencumbered lendable value of FRB collateral, estimated (1) 290,000 320,000
Coverage ratio of uninsured deposits with total cash and liquidity 120 % 135 %
(1) Includes estimated unencumbered lendable value of FHLB collateral of $200,000 and $230,000 as of December 31, 2024 and 2023, respectively.
Fair Value
We utilize fair value measurements to record fair value adjustments to certain assets and liabilities and to determine fair value disclosures. AFS securities, cash flow hedge derivative instruments and certain liabilities are recorded at fair value on a recurring basis. Additionally, from time to time, we may be required to record at fair value other assets on a nonrecurring basis, such as mortgage loans AFS, impaired loans, goodwill, foreclosed assets, OMSR, and certain other assets and liabilities. These nonrecurring fair value adjustments typically involve the application of lower of cost or market accounting or write downs of individual assets.
For further information regarding fair value measurements, see “Note 1 – Significant Accounting Policies” and “Note 13 – Fair Value” of “Notes to Consolidated Financial Statements” in Item 8. Financial Statements and Supplementary Data.
Market Risk
Our primary market risks are interest rate risk and liquidity risk. IRR is the exposure of our net interest income to changes in interest rates. IRR results from the difference in the maturity or repricing frequency of a financial institution's interest earning assets and its interest bearing liabilities. Managing IRR is the fundamental method by which financial institutions earn income and create shareholder value. Excessive exposure to IRR could pose a significant risk to our earnings and capital.
The FRB has adopted a policy requiring banks to effectively manage the various risks that can have a material impact on safety and soundness. The risks include credit, interest rate, liquidity, operational, and reputational. We have policies, procedures, and internal controls for measuring and managing these risks. Specifically, our ALCO policy and procedures include defining acceptable types and terms of investments and funding sources, liquidity requirements, limits on investments in long-term assets, limiting the mismatch in repricing opportunities of assets and liabilities, and the frequency of measuring and reporting to our Board of Directors.
The primary technique to measure IRR is simulation analysis. Simulation analysis forecasts the effects on the balance sheet structure and net interest income under a variety of scenarios that incorporate changes in interest rates, the shape of the yield curve, interest rate relationships, loan prepayments, and funding sources. These forecasts are compared against net interest income projected in a stable interest rate environment. While many assets and liabilities reprice either at maturity or in accordance with their contractual terms, several balance sheet components demonstrate characteristics that require an evaluation to more accurately reflect their repricing behavior. Key assumptions in the simulation analysis include prepayments on loans, probable calls of investment securities, changes in market conditions, loan volumes and loan pricing, deposit sensitivity, and customer preferences. These assumptions are inherently uncertain as they are subject to fluctuation and revision in a dynamic rate environment. As a result, the simulation analysis cannot precisely forecast the impact of rising and falling interest rates on net interest income. Actual results will differ from simulated results due to many other factors, including changes in balance sheet components, interest rate changes, changes in market conditions, and management strategies. We regularly monitor our projected net interest income sensitivity to ensure that it remains within established limits.
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The following tables summarize our interest rate sensitivity for 12 and 24 months as of December 31, 2024 and 2023. The results displayed in the tables reflect the modeling of immediate shifts in the yield curve and a flat balance sheet and do not reflect actual or expected changes.
Gap analysis, the secondary method to measure IRR, measures the cash flows and/or the earliest repricing of our interest bearing assets and liabilities. This analysis is useful for measuring trends in the repricing characteristics of the balance sheet. Significant assumptions are required in this process because of the embedded repricing options contained in assets and liabilities. Residential real estate and consumer loans allow the borrower to repay the balance prior to maturity without penalty, while commercial and agricultural loans may have prepayment penalties. The amount of prepayments is dependent upon many factors, including the interest rate of a given loan in comparison to the current offering rates, the level of home sales, and the overall availability of credit in the marketplace. Generally, a decrease in interest rates will result in an increase in cash flows from these assets. Savings and demand accounts may generally be withdrawn on request without prior notice. The timing of cash flows from these deposits is estimated based on historical experience. Certificates of deposit have penalties that discourage early withdrawals.
We do not believe there has been a material change in the nature or categories of our primary market risk exposure, or the particular markets that present the primary risk of loss. We do not know of or expect there to be any material change in the general nature of our primary market risk exposure in the near term, and we do not expect to make material changes to our market risk methods in the near term. We may change those methods in the future to adapt to changes in circumstances or to implement new techniques.
Gap analysis is also utilized as a method to measure interest rate sensitivity. Interest rate sensitivity is determined by the amount of earning assets and interest bearing liabilities repricing within a specific time period, and their relative sensitivity to a change in interest rates. We strive to achieve reasonable stability in the net interest margin through periods of changing interest rates.
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The following table shows the maturity of loans outstanding at December 31, 2024 based on contractual terms. Also provided are the amounts classified according to the sensitivity to changes in interest rates.
1 Yearor Less 1 to 5Years 5 to 15Years Over 15Years Total
Fixed interest rates
Variable interest rates
Advances to mortgage brokers — — — — —
Contractual Obligations and Loan Commitments
We have various financial obligations, including contractual obligations and commitments related to deposits and borrowings, which may require future cash payments. We also have loan related commitments that may impact liquidity. The commitments include unused lines of credit, commercial and standby letters of credit, and commitments to grant loans. These commitments to grant loans include residential mortgage loans with the majority committed to be sold to the secondary market. Many of these commitments historically have expired without being drawn upon and do not necessarily represent our future cash requirements.
For additional disclosure related to Contractual Obligations and Loan Commitments, see “Note 14 – Off-Balance-Sheet Activities, Commitments and Other Matters” of “Notes to Consolidated Financial Statements” in Item 8. Financial Statements and Supplementary Data.
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Reconciliation of Non-GAAP Financial Measures
The following tables provide a detailed analysis, and reconciliation for, our non-GAAP financial measures as of, and for the years ended December 31:
Nonrecurring items
Net gains on sale of AFS securities — 67 —
Net gains on foreclosed assets 153 158 13
Overdraft (charge-off) recoveries (1) (1,556) — —
Profitability initiative cost (23) — —
Amortization of acquisition intangibles 1 3 15
Tax equivalent adjustment for net interest margin 930 1,023 1,056
Tax equivalent adjustment for efficiency ratio 211 193 186
Nonrecurring items
Net gains on sale of AFS securities — 67 —
Net gains on foreclosed assets 153 158 13
Net yield on interest earning assets (FTE) (C/E) 2.90 % 3.05 % 3.18 %
Adjusted diluted earnings per share (A/I) $ 2.01 $ 2.37 $ 2.91
Adjusted return on average assets (A/F) 0.72 % 0.88 % 1.08 %
Adjusted return on average shareholders' equity (A/G) 7.28 % 9.43 % 11.40 %
(1) Includes provision for credit losses related to overdrawn deposit accounts from a single customer in the third quarter of 2024.
(2) Whole shares
Item 7A. Quantitative and Qualitative Disclosures About Market Risk.
The information presented in the section captioned “Market Risk” in Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations is incorporated herein by reference.
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Item 8. Financial Statements and Supplementary Data.
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 Income
Consolidated Statements of Comprehensive Income (Loss)
Consolidated Statements of Changes in Shareholders’ Equity
Consolidated Statements of Cash Flows
Notes to Consolidated Financial Statements
Supplementary data regarding results of operations is included in Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations.
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Report of Independent Registered Public Accounting Firm
Shareholders and Board of Directors
Isabella Bank Corporation (the "Corporation")
Mount Pleasant, Michigan
Opinion on the Financial Statements and Internal Control over Financial Reporting
We have audited the accompanying consolidated balance sheets of Isabella Bank Corporation as of December 31, 2024 and 2023, and the related consolidated statements of changes in shareholders’ equity, income, comprehensive income, and cash flows for each of the years in the three-year period ended December 31, 2024, and the related notes (collectively referred to as the financial statements). We also have audited Isabella Bank Corporation’s internal control over financial reporting as of December 31, 2024, based on criteria established in the Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework) (the COSO criteria).
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of Isabella Bank Corporation as of December 31, 2024 and 2023, and the consolidated results of their operations and their cash flows for each of the years in the three-year period ended December 31, 2024, in conformity with accounting principles generally accepted in the United States of America. Also, in our opinion Isabella Bank Corporation maintained, in all material respects, effective internal control over financial reporting as of December 31, 2024, based on the COSO criteria.
Basis for Opinions
Isabella Bank Corporation’smanagement is responsible for these consolidated financial statements, for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management’s Report on Internal Control over Financial Reporting. Our responsibility is to express opinions on Isabella Bank Corporation’s consolidated financial statements and on Isabella Bank Corporation’s internal control over financial reporting based on our integrated audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (“PCAOB”) and are required to be independent with respect to Isabella Bank Corporation in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud, and whether effective internal control over financial reporting was maintained in all material respects.
Our audits of the consolidated financial statements included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material misstatement exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. We believe that our audits provide a reasonable basis for our opinions.
Definition and Limitations of Internal Control over Financial Reporting
A corporation’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of consolidated financial statements for external purposes in accordance with generally accepted accounting principles.A corporation’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the corporation; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of consolidated financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the corporation are being made only in accordance with authorizations of management and directors of the corporation; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the Corporation’s assets that could have a material effect on the consolidated financial statements.
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Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
One Critical Audit Matter
The critical audit matter communicated below is a matter arising from the current period audit of the financial statements that was communicated or requires to be communicated to the audit committee and that: (1) relates to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective or complex judgments. The communication of the critical audit matter does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the account or disclosures to which it relates.
Allowance for Credit Losses
Description of the Matter
The Corporation’s loan portfolio totaled $1.4 billion as of December 31, 2024 and the associated allowance for credit losses on loans was $12.9 million at that date. The Corporation’s unfunded loan commitments totaled $341.3 million, with an associated allowance for credit loss of $512 thousand. Together these amounts represent the allowances for credit losses (“ACL”). As described in Notes 1 and 3 to the consolidated financial statements, in the cases of loans, the allowance for credit losses is a contra-asset valuation account, calculated in accordance with ASC 326 that is deducted from the amortized cost basis of loans to present the net amount expected to be collected. As described in Notes 1 and 14 to the consolidated financial statements, in the case of unfunded loan commitments, the allowance for credit losses is a liability account, calculated in accordance with ASC 326, reported as a component of other liabilities. The amount of each allowance account represented management’s best estimate of current expected credit losses on these financial instruments considering all available information, from internal and external sources, relevant to assessing exposure to credit loss over the contractual term of the instrument. In calculating the allowance for credit losses, most loans were segmented into pools based upon similar characteristics and risk profiles. For each loan pool, management measured expected credit losses over the life of each loan utilizing a model which measured probability of default (“PD”), probability of attrition (“PA”), loss given default (“LGD”), and exposure at default (“EAD”). Expected credit losses were calculated as the product of PD (adjusted for attrition), LGD, and EAD. PD and PA were estimated by analyzing internally sourced data related to historical performance of each loan pool over an economic cycle. PD and PA were adjusted to reflect the current impact of certain macroeconomic variables as well as their expected changes over a reasonable and supportable forecast period. After the reasonable and supportable forecast period, the forecasted macroeconomic variables were reverted to their historical mean utilizing a rational, systematic basis. The LGD was based on historical recovery averages for each loan pool, adjusted to reflect the current impact of certain macroeconomic variables as well as their expected changes over the reasonable and supportable forecast period. EAD was estimated using a linear regression model that estimates the average percentage of the loan balance that remains at the time of default. In some cases, management determined that an individual loan exhibited unique risk characteristics which differentiated the loan from other loans with the identified loan pools. In such cases the loans were evaluated for expected credit losses on an individual basis and excluded from the collective evaluation. Management qualitatively adjusted model results for risk factors that were not considered within the modeling processes but were nonetheless relevant in assessing the expected credit losses within the loan pools. These qualitative factor adjustments modified management’s estimate of expected credit losses by a calculated percentage or amount based upon the estimated level of risk.
Auditing management’s estimate of the ACL involved a high degree of subjectivity due to the nature of the qualitative factor adjustments included in the allowances for credit losses and complexity due to the implementation of the PD, PA, LGD, and EAD models (the “Models”). Management’s identification and measurement of the qualitative factor adjustments is highly judgmental and could have a significant effect on the ACL.
How We Addressed the Matter in Our Integrated Audit
We obtained an understanding of the Corporation’s process for establishing the ACL, including the implementation of Models and the qualitative factor adjustments of the ACL. We evaluated the design and tested the operating effectiveness of related controls over the reliability and accuracy of data used to calculate and estimate the various components of the ACL, the accuracy of the calculation of the ACL, management’s review and approval of methodologies used to establish the ACL, validation procedures over the Models, analysis of changes in various components of the ACL relative to changes in the Corporation’s loan portfolio and economy and evaluation of the overall reasonableness and appropriateness of the ACL. In doing so, we tested the operating effectiveness of review and approval controls in the Corporation’s governance process designed to identify and assess the qualitative factor adjustments which is meant to measure expected credit losses associated with factors not captured fully in the other components of the ACL.
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To test the reasonableness of the qualitative factor adjustments, we performed audit procedures that included, among others testing the appropriateness of the methodologies used by the Corporation to estimate the ACL, testing the completeness and accuracy of data and information used by the Corporation in estimating the components of the ACL, assessing the reasonableness of the Models, evaluating the appropriateness of assumptions used in estimating the qualitative factor adjustments, analyzing the changes in assumptions and various components of the ACL relative to changes in the Corporation’s loan portfolio and the economy and evaluating the appropriateness and level of the qualitative factor adjustments. For example, we evaluated the appropriateness of the design and operation of the model, analyzed the changes, assumptions and modifications made to the qualitative factor adjustments, and evaluated the appropriateness and completeness of risk factors used in determining the amount of the qualitative factor adjustments. We also evaluated the data and information utilized by management to estimate the qualitative factor adjustments by independently obtaining internal and external data and information to assess the appropriateness of the data and information used by management and to consider the existence of new and potentially contradictory information used. In addition, we evaluated the overall ACL amounts, inclusive of the adjustments for the qualitative factor adjustments, and whether the amount appropriately reflects losses expected in the loan portfolio as of the consolidated balance sheet date by comparing the overall ACL to those established by similar banking institutions with similar loan portfolios. We also reviewed subsequent events and transactions and considered whether such information serves to corroborate or contradict the Corporation’s conclusion.
/s/Rehmann Robson LLC
Rehmann Robson LLC
We have served as Isabella Bank Corporation's independent auditor since 1996.
Saginaw, Michigan
March 12, 2025
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CONSOLIDATED BALANCE SHEETS
(Dollars in thousands)
December 31
ASSETS
Cash and demand deposits due from banks $ 22,830 $ 25,628
Fed Funds sold and interest bearing balances due from banks 1,712 8,044
Mortgage loans HFS 242 —
LIABILITIES AND SHAREHOLDERS’ EQUITY
Liabilities
Subordinated debt, net of unamortized issuance costs 29,424 29,335
Shareholders’ equity
Shares to be issued for deferred compensation obligations 2,383 3,693
Accumulated other comprehensive income (loss) (21,355) (25,896)
The accompanying notes are an integral part of these consolidated financial statements.
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CONSOLIDATED STATEMENTS OF INCOME
(Dollars in thousands except per share amounts)
Year Ended December 31
Interest income
Interest expense
Noninterest income
Net gain on sale of mortgage loans 213 317 631
Noninterest expenses
Earnings per common share
Cash dividends per common share $ 1.12 $ 1.12 $ 1.09
The accompanying notes are an integral part of these consolidated financial statements.
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CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(Dollars in thousands)
Year Ended December 31
Unrealized gains (losses) on AFS securities
Unrealized gains (losses) on AFS securities, net of tax 4,241 10,629 (39,701)
Change in unrecognized pension cost on defined benefit pension plan
Change in unrecognized pension cost during the period 462 752 762
Net change in unrecognized pension cost 380 847 821
Change in unrealized pension cost, net of tax 300 669 648
(1) See “Note 9 – Capital Ratios and Shareholders' Equity” in the accompanying notes to consolidated financial statements for tax effect reconciliation.
The accompanying notes are an integral part of these consolidated financial statements.
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CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY
(Dollars in thousands except per share amounts)
Common Stock
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)
Issuance of common stock for vested shares under the RSP 16,240 — — — — —
Share-based payment awards under the Directors Plan — — 381 — — 381
Cash dividends paid ($1.12 per common share) — — — (8,147) — (8,147)
The accompanying notes are an integral part of these consolidated financial statements.
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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
Net gain on sale of mortgage loans (213) (317) (631)
Change in OMSR valuation allowance 1 — (532)
Increase in cash value of BOLI (990) (904) (818)