ISABELLA BANK CORP

Previous wording

(Dollars in thousands except per share amounts and ratios)

Current wording

(Dollars in thousands except per share amounts and ratios, unless otherwise noted)

Previous wording

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

Current wording

The following is management's discussion and analysis of our financial condition and results of operations for the unaudited three months ended March 31, 2025 and 2024. This analysis should be read in conjunction with our Annual Report on Form 10-K for the year ended December 31, 2024 and with the unaudited interim condensed consolidated financial statements and notes, beginning on page 4 of this report.

Previous wording

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

Current wording

Comparison of Operating Results for the three months ended March 31, 2025, and 2024, unless otherwise noted

Previous wording

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

Current wording

Net income in the first quarter of 2025 was $3,949, or $0.53 per diluted share, compared with $3,131, or $0.42 per diluted share, in the same quarter 2024. The non-GAAP measure of adjusted net income in the first quarter 2025 totaled $4,254, or $0.57 per diluted share, compared to $3,076 or $0.41 per diluted share, in the same quarter of 2024.The increase in net income for the comparative periods includes an increase in core loan interest income and a decline in provision for credit losses, offset by an increase in noninterest expenses.

Previous wording

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

Current wording

Net interest income was $14,525 in the first quarter of 2025 and $13,242 in the same quarter of 2024, representing 3.06% and 2.79% of earning assets, or NIM on an FTE basis, respectively. The current year quarter NIM included a four basis point benefit due to the recovery of contractual interest from nonaccruing loans that paid off during the quarter. The book yield from securities was 2.20% and 2.25% during the first quarters of 2025 and 2024, respectively. Our yield on loans expanded to 5.71% in the first quarter 2025, up from 5.38% in the same quarter of 2024. Excluding loan recoveries, the yield on loans was 5.65%. The expansion in loan yields was a result of higher rates on new loans and variable rate commercial loans that have, and continue to, reprice. At the end of the first quarter 2025, approximately 39% of commercial loans are fixed at rates that are lower than current market rates. Most of those fixed rate loans will contractually reprice to variable rates over the next four years. Our cost of interest-bearing liabilities decreased to 2.26% from 2.28% in the first quarter 2024 due to reductions to rates in the money market and certificate of deposit products. NIM continues to expand as loans reprice and the cost of interest bearing liabilities stabilizes.

Previous wording

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

Current wording

The ACL was $12,735 at March 31, 2025, a decrease of $160 from $12,895 at December 31, 2024. Most of the decline is due to improvement in historical loss experience, driven by the recovery of three previously charged-off loans during the quarter totaling $136, which led to an $88 reduction in the allowance. Nonaccrual loans were $173 as of March 31, 2025 compared to $282 at December 31, 2024. Past due and accruing accounts between 30 to 89 days as a percentage of total loans was 0.41% at March 31, 2025, compared to 0.40% at year-end 2024. Overall, credit quality remains strong, and there are no negative trends.

Previous wording

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

Current wording

Total deposits increased $50,849 from December 31, 2024, to $1,797,909 at March 31, 2025. The growth was driven by the interest-bearing demand, money market, and savings deposits, collectively increasing $60,380 as we continue to deepen customer relationships. Consumer demand for retail certificates of deposit accounts continues based on the rate environment, resulting in a $2,648 increase in the balance during the first three months of 2025. Adversely, demand deposits declined $12,179 during the first quarter 2025.

Previous wording

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

Current wording

Total equity was $215,556 at March 31, 2025 compared to $210,276 at year-end 2024. Our tangible book value per share was $22.58 as of March 31, 2025, compared to $21.82 on December 31, 2024. Net unrealized losses on AFS securities reduced tangible book value per share by $2.30 and $2.82 for the respective periods. Share repurchases totaled 45,582 during the first three months of 2025 for a value of $1,145 at an average price of $25.12.

Previous wording

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

Current wording

We continue to have robust liquidity levels and capital. As of March 31, 2025, we had $907,003 of unencumbered sources of liquidity and strong capital ratios; the Tier 1 Leverage Ratio was 8.96%, Tier 1 risk-based capital was 12.58%, and Total risk-based capital was 15.50%.

Previous wording

We evaluated subsequent events after September 30, 2024 through the date our interim condensed consolidated financial statements were issued for potential recognition and disclosure. No subsequent events require financial statement recognition or disclosure between September 30, 2024 and the date our interim condensed consolidated financial statements were issued.

Current wording

We evaluated subsequent events after March 31, 2025 through the date our interim condensed consolidated financial statements were issued for potential recognition and disclosure. No other subsequent events require financial statement recognition or disclosure between March 31, 2025 and the date our interim condensed consolidated financial statements were issued.

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

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 17,332 shares or $419 of common stock during the first three months of 2025, as compared to 22,456 shares or $447 of common stock during the same period in 2024. 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 $167 and $218 during the three-month periods ended March 31, 2025 and 2024, respectively. We also grant restricted stock awards pursuant to the RSP. Pursuant to this plan, we increased shareholders’ equity by $7 during the first three months of 2025, as compared to $25 during the same period in 2024.

Previous wording

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

Current wording

We have publicly announced a common stock repurchase plan. Pursuant to this plan, we repurchased 45,582 shares or $1,145 of common stock during the first three months of 2025 and 36,484 shares or $740 during the first three months of 2024. As of March 31, 2025, we were authorized to repurchase up to an additional 72,647 shares of common stock.

Previous wording

Our primary sources of liquidity are cash and cash equivalents and unencumbered AFS securities. These categories totaled $340,365, or 16.15% of assets, as of September 30, 2024, compared to $381,417, or 18.52%, as of December 31, 2023. The decrease in the amount and percentage of primary liquidity is a direct result of an increase in loans and a decrease in unencumbered AFS securities collateralizing non-market funding. Liquidity is important for financial institutions because of their need to meet loan funding commitments, depositor withdrawal requests, and various other commitments including expansion of operations, investment opportunities, and payment of cash dividends. Based on these same factors, daily liquidity could vary significantly.

Current wording

Our primary sources of liquidity are retail deposits, cash and cash equivalents, and unencumbered AFS securities. Cash, cash equivalents and unencumbered AFS securities totaled $427,091, or 20.31% of assets, as of March 31, 2025, compared to $330,876, or 15.86%, as of December 31, 2024. The increase in the amount and percentage of primary liquidity is a direct result of an increase in cash, driven by loan payoffs and deposit growth, and an increase in unencumbered AFS securities. 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 September 30, 2024, we had available lines of credit of $360,440.

Current wording

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 lines 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, 2025, we had available lines of credit of $377,824.

Previous wording

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

Current wording

(1) Includes estimated unencumbered lendable value of FHLB collateral of $260,000 as of March 31, 2025.

Previous wording

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

Current wording

The following tables summarize our interest rate sensitivity for 12 and 24 months as of March 31, 2025 and December 31, 2024. 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.