Isabella Bank Corp: Form 10-Q for the period ended Jun 30, 2025

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

The following is management's discussion and analysis of our financial condition and results of operations for the unaudited periods covered by this Quarterly Report on Form 10-Q for the three and six months ended June 30, 2025 (this “Form 10-Q”). This analysis should be read in conjunction with our Annual Report on Form 10-K for the year ended December 31, 2024, as filed with the SEC on March 12, 2025 (the “2024 Annual Report on Form 10-K”) and with the unaudited interim condensed consolidated financial statements and notes, beginning on page 4 of this Form 10-Q. Unless we state otherwise or the context otherwise requires, references in this Form 10-Q to “we,” “our,” “us,” and “the Corporation” refer to Isabella Bank Corporation, a Michigan corporation and registered financial holding company, our wholly-owned banking subsidiary, Isabella Bank, and our other consolidated subsidiaries. References to the “Bank” refer to Isabella Bank.

General

Isabella Bank Corporation is a registered financial 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.

Cautionary Notice Regarding Forward-Looking Statements

This Form 10-Q contains statements that we believe are “forward-looking statements” within the meaning of Section 27A of the Securities Act and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). These forward-looking statements reflect our current views with respect to, among other things, future events and our financial performance. These statements are often, but not always, made through the use of words or phrases such as “may,” “might,” “should,” “could,” “predict,” “potential,” “believe,” “expect,” “continue,” “will,” “anticipate,” “seek,” “estimate,” “intend,” “plan,” “strive,” “projection,” “goal,” “target,” “outlook,” “aim,” “would,” “annualized” and “outlook,” or the negative version of those words or other comparable words or phrases of a future or forward-looking nature. These forward-looking statements are not historical facts, and are based on current expectations, estimates and projections about our industry, management’s beliefs and certain assumptions made by management, many of which, by their nature, are inherently uncertain and beyond our control. Accordingly, we caution you that any such forward-looking statements are not guarantees of future performance and are subject to risks, assumptions, estimates and uncertainties that are difficult to predict. Although we believe that the expectations reflected in these forward-looking statements are reasonable as of the date made, actual results may prove to be materially different from the results expressed or implied by the forward-looking statements.

There are or will be important factors that could cause our actual results to differ materially from those indicated in these forward-looking statements, including, but not limited to, the following:

• potential recession in the United States and our market areas;
• the impacts related to or resulting from uncertainty in the banking industry as a whole;
• increased competition for deposits and related changes in deposit customer behavior;
• the lingering inflationary pressures, and the risk of the resurgence of elevated levels of inflation, in the United States and our market areas, and its impact on market interest rates, the economy and credit quality;
• our ability to effectively execute our expansion strategy and manage our growth, including identifying and consummating suitable acquisitions;
• business and economic conditions, particularly those affecting our market areas, as well as the concentration of our business in such market areas;
• adverse changes in customer spending and savings habits;
• the impact of pandemics, epidemics, or any other health-related crisis;
• high concentrations of loans secured by real estate located in our market areas;
• changes in unemployment rates in the United States and our market areas;
• risks associated with our commercial loan portfolio, including the risk for deterioration in value of the general business assets that secure such loans;
• potential changes in the prices, values and sales volumes of commercial and residential real estate securing our real estate loans;
• risks associated with our agricultural loan portfolio, including the heightened sensitivity to weather conditions, commodity prices, and other factors generally outside the borrowers and our control;
• risks related to the significant amount of credit that we have extended to a limited number of borrowers and in a limited geographic area;
• public funds deposits comprising a relatively high percentage of our deposits;
• potential impairment on the goodwill we have recorded or may record in connection with business acquisitions;
• our ability to maintain our reputation;
• our ability to successfully manage our credit risk and the sufficiency of our allowance for credit losses;
• our ability to attract, hire and retain qualified management personnel;
• our dependence on our management team, including our ability to retain executive officers and key employees and their customer and community relationships;
• interest rate fluctuations, which could have an adverse effect on our profitability;
• competition from banks, credit unions and other financial services providers;
• our ability to keep pace with technological change or difficulties we may experience when implementing new technologies;
• cybersecurity risk, including cyber incidents or other failures, disruptions or breaches of our operational or security systems or infrastructure, or those of our third-party vendors or other service providers, including as a result of a cyber-attack, could impact the Corporation’s reputation, increase regulatory oversight, and impact the financial results of the Corporation;
• our ability to maintain effective internal control over financial reporting;
• employee error, fraudulent activity by employees or customers and inaccurate or incomplete information about our customers and counterparties;
• increased capital requirements imposed by banking regulators, which may require us to raise capital at a time when capital is not available on favorable terms or at all;
• our ability to maintain adequate liquidity and to raise necessary capital to fund our acquisition strategy and operations or to meet increased minimum regulatory capital levels;
• costs and effects of litigation, investigations or similar matters to which we may be subject, including any effect on our reputation;
• natural disasters, severe weather, acts of god, acts of war or terrorism, geopolitical instability, public health outbreaks (such as coronavirus), other international or domestic calamities, and other events beyond our control, including as a result of in the policies of the current U.S. presidential administration or Congress;
• a deterioration of the credit rating for United States long-term sovereign debt or uncertainty regarding United States fiscal debt, deficit and budget matters;
• the impacts of tariffs, sanctions and other trade policies of the United States and its global trading counterparts and the resulting impact on the Corporation and its customers;
• compliance with governmental and regulatory requirements, including the Dodd-Frank Act Wall Street Reform and Consumer Protection Act (“Dodd-Frank Act”), Economic Growth, Regulatory Relief, and Consumer Protection Act of 2018 (“EGRRCPA”), and others relating to banking, consumer protection, securities and tax matters;
• changes in the laws, rules, regulations, interpretations or policies that apply to the Corporation’s business and operations, and any additional regulations, or repeals that may be forthcoming as a result thereof, which could cause the Corporation to incur additional costs and adversely affect the Corporation’s business environment, operations and financial results; and
• our ability to navigate the uncertain impacts of current and future governmental monetary and fiscal policies, including the current and future policies of the Board of Governors of the Federal Reserve System (“Federal Reserve”) and as a result of initiatives of the Trump administration.

The foregoing factors should not be construed as exhaustive and should be read together with the other cautionary statements included in this Form 10-Q and the risk factors set forth in our 2024 Annual Report on Form 10-K. Because of these risks and other uncertainties, our actual future results, performance or achievements, or industry results, may be materially different from the results indicated by the forward-looking statements in this Form 10-Q. In addition, our past results of operations are not necessarily indicative of our future results. Accordingly, you should not rely on any forward-looking statements, which represent our beliefs, assumptions and estimates only as of the dates on which such forward-looking statements were made.

Any forward-looking statement speaks only as of the date on which it is made, and we do not undertake any obligation to update or review any forward-looking statement, whether as a result of new information, future developments or otherwise, except as required by applicable law.

Non-GAAP Financial Measures

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

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

Available Information

The Corporation maintains an Internet web site at ir.isabellabank.com. The Corporation makes available, free of charge, on its web site (under ir.isabellabank.com/sec-filings/default) the Corporation’s annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and amendments to those reports filed or furnished pursuant to Section 13(a) or Section 15(d) of the Exchange Act as soon as reasonably practicable after the Corporation files such material with, or furnishes it to, the SEC. The Corporation also makes available, free of charge, through its web site (under ir.isabellabank.com/governance/governance-documents/default) links to the Corporation’s Code of Conduct and Business Ethics and the charters for its board committees. In addition, the SEC maintains an Internet site (at www.sec.gov (http://www.sec.gov) ) that contains reports, proxy and information statements, and other information regarding issuers that file electronically with the SEC.

The Corporation routinely posts important information for investors on its web site (under ir.isabellabank.com and, more specifically, under the News tab at ir.isabellabank.com/news/default). The Corporation intends to use its web site as a means of disclosing material non-public information and for complying with its disclosure obligations under SEC Regulation FD (Fair Disclosure). Accordingly, investors should monitor the Corporation’s web site, in addition to following the Corporation’s press releases, SEC filings, public conference calls, presentations and webcasts.

The information contained on, or that may be accessed through, the Corporation’s web site is not incorporated by reference into, and is not a part of, this Form 10-Q.

Executive Summary

Comparison of Operating Results for the three and six months ended June 30, 2025, and 2024, unless otherwise noted

Net income in the second quarter of 2025 was $5,031, or $0.68 per diluted share, compared with $3,481, or $0.46 per diluted share, in the same quarter 2024. The non-GAAP measure of adjusted net income in the second quarter 2025 totaled $4,096, or $0.55 per diluted share, compared to $3,476 or $0.46 per diluted share, in the same quarter of 2024.

Net income for the year-to-date period of 2025 was $8,980, or $1.21 per diluted share, compared with $6,612, or $0.88 per diluted share, in the same period of 2024. Adjusted net income was $8,350, or $1.13 per diluted share, compared with $6,553, or $0.87 per diluted share, for the respective periods.

Net interest income was $15,129 in the second quarter of 2025 and $13,550 in the same quarter of 2024, representing 3.14% and 2.82% of earning assets, or NIM on an FTE basis, respectively. The book yield from securities was 2.38% and 2.17% during the second quarters of 2025 and 2024, respectively. Our yield on loans expanded to 5.71% in the second quarter 2025, up from 5.50% in the same quarter of 2024. The expansion in loan yields was a result of higher rates on new loans and variable rate commercial loans that continue to reprice. At the end of the second quarter 2025, approximately 38% of commercial loans were fixed at rates that are lower than current market. Most of those fixed rate loans will contractually reprice to variable rates over the next four years. Our cost of interest-bearing liabilities in the second quarter 2025 decreased to 2.24% from 2.38% in the second quarter 2024 due to reductions to rates in the money market and certificate of deposit products. NIM is expected to continue to expand as loans reprice and the cost of interest-bearing liabilities stabilizes.

For the first six months of 2025, net interest income was $29,654 compared with $26,792 in the same period of 2024. The comparison of NIM and yield on interest earning assets for the six months ending June 30, 2025 were 3.10% and 4.78%, respectively, compared to 2.81% and 4.54%, respectively, for the same period in 2024. The yield on loans expanded to 5.72%, from 5.45%, and our cost of interest bearing liabilities decreased to 2.25% from 2.33% for the first six months of 2025 and 2024, respectively. The explanations for the improvement in NIM are consistent with those provided in the year-over-year three month comparison above.

The provision for credit losses was a credit of $1,099 in the second quarter of 2025, which reflects net recoveries totaling $1,432, partially offset by a $242 increase in the ACL on loans and an increase in the reserve for unfunded commitments. Recoveries totaled $1,822, of which $1,556 were related to overdrawn deposit accounts from a single customer charged off during the third quarter of 2024. The provision for loan losses in the same period of 2024 was $170 due to growth in core loans, which excludes advances to mortgage brokers (non-GAAP), and unfunded commitments.

For the first half of 2025, provision for credit losses was a credit of $1,206 compared to a provision of $562 in the same period of 2024. The drivers of the credit and provision for the six month comparison are consistent with those provided in the three month comparison above. Credit quality remains strong with low levels of past due and nonaccrual loans and net charge offs. The Corporation continues to closely monitor credit quality in light of the continued economic uncertainty caused by, among other factors, the interest rate environment, employment data in recent periods, continued uncertainty regarding U.S. trade and tariff policy and the lingering inflationary pressures, and the risk of the resurgence of elevated levels of inflation, in the United States and our market areas. Accordingly, additional provisions for credit losses may be necessary in future periods.

Noninterest income for the three months ended June 30, 2025 and 2024 was $3,686 and $3,608, respectively. Service charges and fees increased $48 as a result of profitability initiatives designed to increase fee income. Wealth management fees grew $36 due to growth in assets under management as compared to the second quarter of 2024. AUM totaled $678,959, $656,617, and $647,850 as of June 30, 2025, March 31, 2025, and June 30, 2024, respectively. Earnings on BOLI policies increased $47 over the prior year quarter due to new investments in a separate account BOLI, which was offset in part by a one-time expense of $120 due to restructuring charges. For the first six months of 2025, noninterest income was $7,214, compared to $7,076 in the same period of 2024. Service charges and fees, wealth management fees, and earnings on BOLI policies increased $89, $76, and $176, respectively. The reasons for the increase in noninterest income for the six month comparison are the same as the three month comparison.

Noninterest expenses for the three-month period ended June 30, 2025 increased $850 in comparison to the same period in 2024. Compensation and benefit expenses increased $526 reflecting annual merit increases in 2025, incentives, and higher medical insurance claims compared to the second quarter of 2024. Other professional services increased $336 primarily due to $173 in fees related to profitability initiative costs and $47 in legal fees related to our Nasdaq uplisting. For the first six months of 2025, noninterest expenses were $27,044, compared to $25,571 in the same period of 2024. Compensation and benefits increased $894 for the same reasons as the three month comparison. Other professional service fees increased $534 principally due to the second quarter profitability initiative costs and $168 in legal fees related to our Nasdaq uplisting.

Income tax expense for the three months ended June 30, 2025 and 2024 was $1,138 and $612 and the ETR was 18% and 15%, respectively. The increase in the ETR was primarily due to a higher annual forecast of pretax income. Income tax expense for the first six months of 2025 was $2,050, compared to $1,123 in the same period of 2024 and the ETR was 19% and 15%, respectively. The ETR in the first six months of 2025 included a one-time expense totaling $166 due to the taxes owed from the lifetime earnings on BOLI policies that were surrendered during the first quarter. Excluding the one-time charge, the ETR was 17%, which is higher than the prior year due to a higher annual forecast of pretax income.

Financial Condition (June 30, 2025 to December 31, 2024 comparison)

Total assets increased $69,927 to $2,156,168 as of June 30, 2025, primarily due to an increase of $72,596 in interest bearing cash, $11,531 increase in AFS securities, and a $10,892 increase in BOLI policies, offset by a $26,058 decrease in gross loans.

Our AFS securities portfolio totaled $500,560 at June 30, 2025, increasing $11,531 at the end of second quarter 2025. The increase was driven by $51,000 in purchases with a weighted-average yield of 4.63%. Amortization and maturities of $47,819 offset the increase from purchases. Net unrealized losses at June 30, 2025 totaled $17,594, or 3.40%, of the portfolio and improved during the quarter due to the treasury portfolio rapidly approaching maturity and a decrease in market yields. The par value and corresponding book yields that are estimated to mature or payoff by year include: $28,200 in principal with a weighted-average book yield of 2.36% over the remainder of 2025; $217,400 at 1.17% in 2026; and $63,000 at 1.87% in 2027. Some of these securities amortize so the actual principal paydown may differ from these estimates.

Gross loans decreased $26,058 to $1,397,513 as of June 30, 2025 totaled $1,397,513. While core loans (non-GAAP) grew $34,017, advances to mortgage brokers decreased $60,075 due to lower participation demand from our counterparty. However, the decline in advances to mortgage brokers has provided liquidity to refocus on loans that can be recorded on our balance sheet for longer terms and help to mitigate interest rate risk.

Core loans (non-GAAP) grew $34,017, led by growth in the commercial and industrial and commercial real estate portfolios of $7,096 and $22,665, respectively. Commercial loan growth during the year was in the real estate, construction, and hospitality industries. While our commercial pipeline is strong at the beginning of the third quarter, our ability to grow the loan portfolio is subject to uncertainties around timing and funding, customer demand, and overall economic conditions. Residential mortgages increased $17,796 since year-end 2024 with $11,320 of growth in the second quarter as construction drawdowns and seasonal patterns occurred. Most residential originations were adjustable rate products, which are put on the balance sheet rather than sold in the secondary market. The consumer loan portfolio continues to roll off amid decreasing demand, competition and our adherence to credit quality standards.

The ACL was $12,977 at June 30, 2025, an increase of $82 from $12,895 at December 31, 2024. The increase is due to core loan growth (non-GAAP), offset by improvement in historical loss experience driven by the recovery of previously charged-off loans during the year. Nonaccrual loans were $1,164 as of June 30, 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 0.08% at June 30, 2025, compared to 0.40% at year-end 2024. Overall, credit quality remains strong, and there are no negative trends.

BOLI assets were $45,774 at June 30, 2025, an increase of $10,892 from December 31, 2024. The growth was mostly driven by a $10,583 investment of new policies in a separate account product at the beginning of January. In the first half of 2025, we also surrendered and/or exchanged $13,721 of existing general account policies and redeployed the funds into a separate account BOLI. As part of BOLI restructuring, another $914 of general account policies will be exchanged for separate account BOLI, which is expected to be completed by the end of the third quarter of 2025. The separate account BOLI currently yields 5.4%, compared to a weighted-average yield of 2.9% from existing general account policies.

Total deposits increased $102,316 from December 31, 2024, to $1,849,376 at June 30, 2025. The growth was driven by demand and money market deposits. The $77,104 increase in demand deposits was primarily driven by one customer with large deposits during the second quarter that are expected to be withdrawn by the customer by the end of the year. Consumer demand for retail certificates of deposit accounts continues based on the rate environment, resulting in a $8,341 increase in the balance during the first six months of 2025.

Total equity was $220,500, or $29.95 per share, at June 30, 2025 compared to $210,276, or $28.32 per share, at year-end 2024. Our tangible book value per share (non-GAAP) was $23.39 as of June 30, 2025, compared to $21.82 on December 31, 2024. Net unrealized losses on AFS securities reduced tangible book value per share by $1.90 and $2.82 for the respective periods. Share repurchases totaled 103,406 during the first six months of 2025 for a value of $2,650 at an average price of $25.63.

We continue to have robust liquidity levels and capital. As of June 30, 2025, we had $925,528 of unencumbered sources of liquidity and strong capital ratios; the Tier 1 Leverage Ratio was 9.04%, Tier 1 risk-based capital was 12.46%, and Total risk-based capital was 15.34%.

Recent Events

On July 4, 2025, the One Big Beautiful Bill Act (the “OBBBA”) was signed into law by President Trump, which includes a broad range of tax reform provisions affecting businesses, including extending and modifying certain key provisions from the Tax Cuts and Jobs Act of 2017 and expanding certain incentives from the Inflation Reduction Act of 2022 while accelerating the phase-out of others. The Corporation continues to evaluate the OBBBA but does not anticipate that the OBBBA will have a material impact on the Corporation’s Consolidated Financial Statements. As the legislation was signed into law after the close of the second quarter of 2025, the impacts are not included in the Corporation’s operating results for the three and six months ended June 30, 2025.

Nasdaq Listing

Beginning with the opening of trading on Monday, May 12, 2025, our shares of common stock were listed for trading on The Nasdaq Capital Market under our current symbol, “ISBA.” Prior to this listing on Nasdaq, our shares of common stock were listed on the OTCQX under the same symbol through May 9, 2025.

Reclassifications

Certain amounts reported in the interim 2024 consolidated financial statements have been reclassified to conform to the 2025 presentation. Additionally, certain amounts reported as commercial and industrial loans have been reclassified as commercial real estate loans to conform to the June 30, 2025 presentation.

Subsequent Events

We evaluated subsequent events after June 30, 2025 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 June 30, 2025 and the date our interim condensed consolidated financial statements were issued.

Selected Financial Data (Unaudited)

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

(1) Non-GAAP financial measure; refer to the "Reconciliation of Non-GAAP Financial Measures" section of this Form 10-Q.

(2) At end of period.

Average Balances, Interest Rates, and Net Interest Income

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

Three Months Ended

47

(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.

Loans

The following table displays loan balances as of:

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

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.

Deposits

The following table displays deposit balances as of:

49

Asset Quality Analysis

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

50

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 28,830 shares or $759 of common stock during the first six months of 2025, as compared to 43,980 shares or $840 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 $201 and $279 during the six-month periods ended June 30, 2025 and 2024, respectively. We also grant restricted stock awards pursuant to the RSP. Pursuant to this plan, we increased shareholders’ equity by $21 during the first six months of 2025, as compared to $45 during the same period in 2024.

We have publicly announced a common stock repurchase program. Pursuant to this repurchase program, we repurchased 103,406 shares or $2,650 of common stock during the first six months of 2025 and 72,093 shares or $1,402 of common stock during the first six months of 2024. As of June 30, 2025, we were authorized to repurchase up to an additional 514,823 shares of common stock under the repurchae program.

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. At June 30, 2025, we and the Bank were “well capitalized” under the regulatory framework for prompt corrective action. Management believes that no conditions or events have occurred since June 30, 2025 that would materially adversely change such capital classifications. From time to time, we may need to raise additional capital to support our and the Bank’s further growth and to maintain our “well capitalized” status.

The following table sets forth our consolidated capital ratios as of:

Community Bank Leverage Ratio

On September 17, 2019, the federal banking agencies jointly finalized a rule to be effective January 1, 2020 and intended to simplify the regulatory capital requirements described above for qualifying community banking organizations that opt into the Community Bank Leverage Ratio (“CBLR”) framework, as required by Section 201 of the EGRRCPA. The final rule became effective on January 1, 2020, and the CBLR framework became available for banks to use beginning with their March 31, 2020 Call Reports. Under the final rule, if a qualifying community banking organization opts into the CBLR framework and meets all requirements under the framework, it will be considered to have met the well-capitalized ratio requirements under the “prompt corrective action” regulations described above and will not be required to report or calculate risk-based capital. In order to qualify for the CBLR framework, a community banking organization must have a tier 1 leverage ratio of greater than 9%, less than $10 billion in total consolidated assets, and limited amounts of off-balance sheet exposures and trading assets and liabilities. Although the Corporation and the Bank are qualifying community banking organizations, the Corporation and the Bank have elected not to opt in to the CBLR framework at this time and will continue to follow the Basel III capital requirements as described in “Note 6 – Capital Ratios and Shareholders' Equity” of our interim condensed consolidated financial statements included with this Form 10-Q.

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. Cash, cash equivalents and unencumbered AFS securities totaled $453,330, or 21.02% of assets, as of June 30, 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 deposit growth. 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 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 June 30, 2025, we had available lines of credit of $376,974.

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.

Our liquidity position remained strong at June 30, 2025, which is illustrated in the following table:

(1) Includes estimated unencumbered lendable value of FHLB collateral of $250,000 as of June 30, 2025.

Fair Value

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

For further information regarding fair value measurements see “Note 7 – Fair Value” of our interim condensed consolidated financial statements included with this Form 10-Q.

Interest Rate Sensitivity and Market Risk

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

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

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

The following tables summarize our interest rate sensitivity for 12 and 24 months as of June 30, 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.

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

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

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

Contractual Obligations and Loan Commitments

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

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

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

Impact of Inflation

Our consolidated financial statements and related notes included elsewhere in this Form 10-Q have been prepared in accordance with GAAP. GAAP requires the measurement of financial position and operating results in terms of historical dollars, without considering changes in the relative value of money over time due to inflation or recession.

The Corporation’s asset and liability structure is substantially different from that of an industrial company in that virtually all assets and liabilities of the Corporation are monetary in nature. Management believes the impact of inflation on financial results depends upon the Corporation’s ability to react to changes in interest rates and by such reaction, reduce the inflationary impact on performance. Interest rates do not necessarily move in the same direction, or at the same magnitude, as the prices of other goods and services. However, other operating expenses do reflect general levels of inflation. Management seeks to manage the relationship between interest rate-sensitive assets and liabilities in order to protect against wide net interest income fluctuations, including those resulting from inflation.

Various information shown elsewhere in this Form 10-Q will assist in the understanding of how well the Corporation is positioned to react to changing interest rates and inflationary trends. In particular, additional information related to the Corporation’s interest rate-sensitive assets and liabilities is contained in this Item 2, “Management's Discussion and Analysis of Financial Condition and Results of Operations” of this Form 10-Q under the heading “Interest Rate Sensitivity and Market Risk.”

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:

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(1) Includes reversal of provision for credit losses in the first quarter of 2025 and provision for credit losses in the third quarter of 2024 related to overdrawn deposit accounts from a single customer.

(2) Included in Other professional services in the consolidated statements of income.

(3) Income tax expense on life to date earnings on BOLI policies surrendered.

(4) Included as a reduction to Earnings on BOLI in the consolidated statements of income.

(5) Whole shares.

The information presented in the section captioned “Interest Rate Sensitivity and Market Risk” in Part I, Item 2, “Management's Discussion and Analysis of Financial Condition and Results of Operations,” of this Form 10-Q is incorporated herein by reference.

DISCLOSURE CONTROLS AND PROCEDURES

We carried out an evaluation, under the supervision and with the participation of the Principal Executive Officer and Principal Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures (as such term is defined in Rules 13a-15(e) and 15(d)-15(e) under the Exchange Act) as of June 30, 2025, pursuant to Exchange Act Rule 13a-15. Based upon that evaluation, the Principal Executive Officer and Principal Financial Officer concluded that our disclosure controls and procedures as of June 30, 2025, were effective to ensure that information required to be disclosed in reports that we file or submit under the Exchange Act are recorded, processed, summarized and reported within the time periods specified in SEC rules and forms.

CHANGES IN INTERNAL CONTROL OVER FINANCIAL REPORTING

During the most recent fiscal quarter, no change occurred in our internal control over financial reporting that materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

In evaluating an investment in any of our securities, investors should consider carefully, among other things, information under the heading “Cautionary Notice Regarding Forward-Looking Statements” in Part I, Item 2, “Management's Discussion and Analysis of Financial Condition and Results of Operations,” of this Form 10-Q and the risk factors previously disclosed under the heading “Risk Factors” in Part I, Item 1A of our 2024 Annual Report on Form 10-K. Management believes there have been no material changes in the risk factors disclosed by the Corporation in Part I, Item 1A, “Risk Factors,” of the 2024 Annual Report on Form 10-K. Additional risks and uncertainties not currently known to us or that we currently deem to be immaterial also may materially adversely affect our business, financial condition and/or operating results.

During 2025, the Corporation identified and added the following risk factor. This factor should be considered when reviewing the risk factors previously disclosed by the Corporation under the heading “Risk Factors” in Part I, Item 1A of our 2024 Annual Report on Form 10-K.

An active public trading market may not be sustained.

We completed our Nasdaq uplisting, and the Company’s common stock began trading on the Nasdaq Capital Market, on May 12, 2025. An active trading market for shares of our common stock may not be sustained. If an active trading market is not sustained, you may have difficulty selling your shares of our common stock at an attractive price, or at all. Consequently, you may not be able to sell your shares of our common stock at or above an attractive price at the time that you would like to sell.