ISABELLA BANK Corp

Previous wording

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

Current wording

The following is management's discussion and analysis of our financial condition and results of operations for the unaudited three months ended June 30, 2024 and 2023. This analysis should be read in conjunction with our Annual Report on Form 10-K for the year ended December 31, 2023 and with the unaudited interim condensed consolidated financial statements and notes, beginning on page 4 of this report.

Previous wording

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

Current wording

For the three months ended June 30, 2024, we reported net income of $3,481 and earnings per share of $0.47. Net income and earnings per share for the same period of 2023 were $4,630 and $0.62, respectively. For the six months ended June 30, 2024, net income was $6,612 and earnings per share was $0.88. Net income and earnings per share for the same period of 2023 were $9,951 and $1.32, respectively. The decrease in net income in both comparative periods is principally due to a lower NIM as our interest earning assets have not repriced as quickly as our interest bearing liabilities in the current interest rate cycle.

Previous wording

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

Current wording

During the second quarter of 2024, net interest income was $13,550, as compared with $14,679 in the same quarter of 2023. Our yield on interest earning assets (FTE) was 2.83% for the three months ended June 30, 2024, as compared to 3.11% for the three months ended June 30, 2023. The book yield from securities was 2.23% and 2.26% during the second quarter of 2024 and 2023, respectively. The yield includes the effect of the investment of excess cash in shorter term U.S. Treasury securities following the COVID pandemic in 2021 and 2022. The weighted average maturity of our U.S. Treasury portfolio is approximately 2 years. Our yield on loans expanded to 5.49% in the second quarter 2024, up from 4.90% in the same quarter of 2023. Loan yields continued to expand due to higher rates on new loans and the repricing of fixed rate commercial loans to variable rates. At the end of the second quarter 2024, approximately 44% of commercial loans are fixed at rates that are lower than current market rates but will contractually reprice to variable rates over the next 3 to 5 years. Our cost of interest bearing liabilities increased to 2.37% from 1.41% in the second quarter 2023 due to several interest rate hikes throughout 2023 and the associated remix from noninterest bearing deposits into higher tier money market and certificate of deposit accounts. While we have experienced a downward trend in our NIM for the past several quarters, the second quarter 2024 marks a reversal as NIM expanded five basis points over the first quarter 2024.

Previous wording

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

Current wording

Noninterest income for the three months ended June 30, 2024 and 2023 was $3,608 and $3,604, respectively. Wealth management fees grew $67, or 6.8%, due to an increase in new accounts and higher market valuations. Customer service fees increased $81 compared to the same quarter of 2023 based on a higher number of transaction accounts. A decline in other income of $182, related to a few one-time items recorded in 2023, offset this growth. For the first half of 2024, noninterest income was $7,076, compared to $6,897 in the same period of 2023. The reasons for the increase in income for the six month comparison are the same as the three month comparison.

Previous wording

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

Current wording

Noninterest expenses for the three-month period ended June 30, 2024 increased $356, or 2.8%, in comparison to the same period in 2023. Annual merit increases and medical claim adjustments totaling $190 led to a $409 increase in compensation and benefits expenses. Higher card usage drove a $78 increase in ATM and debit card expenses. For the first half of 2024, noninterest expense was $25,571, compared to $24,737 in the period of 2023. The reasons for the increase in expense for the six month comparison are the same as the three month comparison. Our year-to-date efficiency ratio is 74.37% in 2024 compared to 66.12% in 2023, which primarily reflects lower NIM and a relatively stable base of noninterest expense.

Previous wording

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

Current wording

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

Previous wording

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

Current wording

Total deposits decreased $1,396 since December 31, 2023, to $1,722,299 at the end of the second quarter 2024. Consumer demand for retail CDs continues based on the rate environment, resulting in a $22,075 increase in the balance during the first half of 2024. Interest bearing demand deposits increased $17,592, while demand deposits declined $16,312.

Previous wording

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

Current wording

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

Previous wording

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

Current wording

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

Previous wording

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

Current wording

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 43,980 shares or $840 of common stock during the first six months of 2024, as compared to 37,983 shares or $846 of common stock during the same period in 2023. We offer the Directors Plan in which participants purchase stock units through deferred fees, in lieu of cash payments. Pursuant to this plan, we increased shareholders’ equity by $279 and $428 during the six-month periods ended June 30, 2024 and 2023, respectively. We also grant restricted stock awards pursuant to the RSP. Pursuant to this plan, we increased shareholders’ equity by $45 during the first six months of 2024, as compared to $128 during the same period in 2023.

Previous wording

We have publicly announced a common stock repurchase plan. Pursuant to this plan, we repurchased 36,484 shares or $740 of common stock during the first three months of 2024 and 39,279 shares or $937 during the first three months of 2023. As of March 31, 2024, we were authorized to repurchase up to an additional 234,322 shares of common stock.

Current wording

We have publicly announced a common stock repurchase plan. Pursuant to this plan, we repurchased 72,093 shares or $1,402 of common stock during the first six months of 2024 and 100,578 shares or $2,409 during the first six months of 2023. As of June 30, 2024, we were authorized to repurchase up to an additional 198,713 shares of common stock.

Previous wording

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

Current wording

The following table sets forth our ratios as of:

Previous wording

Our primary sources of liquidity are cash and cash equivalents and unencumbered AFS securities. These categories totaled $353,893 or 17.20% of assets as of March 31, 2024, compared to $381,417 or 18.52% as of December 31, 2023. The decrease in the amount and percentage of primary liquidity is a direct result of an increase in loans and a decrease in unencumbered AFS securities, collateralizing non-market funding. Liquidity is important for financial institutions because of their need to meet loan funding commitments, depositor withdrawal requests, and various other commitments including expansion of operations, investment opportunities, and payment of cash dividends. Based on these same factors, daily liquidity could vary significantly.

Current wording

Our primary sources of liquidity are cash and cash equivalents and unencumbered AFS securities. These categories totaled $339,911, or 16.50% of assets, as of June 30, 2024, compared to $381,417, or 18.52%, as of December 31, 2023. The decrease in the amount and percentage of primary liquidity is a direct result of an increase in loans and a decrease in unencumbered AFS securities collateralizing non-market funding. Liquidity is important for financial institutions because of their need to meet loan funding commitments, depositor withdrawal requests, and various other commitments including expansion of operations, investment opportunities, and payment of cash dividends. Based on these same factors, daily liquidity could vary significantly.

Previous wording

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

Current wording

Deposit accounts are our primary source of funds. Our secondary sources include the ability to borrow from the FHLB, from the FRB, and through various correspondent banks in the form of federal funds purchased and a line of credit. These funding methods typically carry a higher interest rate than traditional market deposit accounts. Some borrowed funds, including FHLB advances, FRB Discount Window advances, and repurchase agreements, require us to pledge assets, typically in the form of AFS securities or loans, as collateral. As of June 30, 2024, we had available lines of credit of $320,551.

Previous wording

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

Current wording

The frequency and complexity of our liquidity stress testing has increased due to economic uncertainty and changes within the interest rate and economic environment. Our liquidity position remained strong at June 30, 2024, which is illustrated in the following table:

Previous wording

(1)Includes estimated unencumbered lendable value of FHLB collateral of $210,000 and $230,000 as of March 31, 2024 and December 31, 2023, respectively.

Current wording

(1) Includes estimated unencumbered lendable value of FHLB collateral of $210,000 as of June 30, 2024.

Previous wording

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

Current wording

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.