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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2023
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from              to
Commission File Number: 0-18415
Isabella Bank Corporation
(Exact name of registrant as specified in its charter)
Michigan38-2830092
(State or other jurisdiction of
incorporation or organization)
(I.R.S. Employer
identification No.)
401 North Main Street, Mount Pleasant, Michigan 48858
(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 classTrading Symbol(s)Name of each exchange on which registered
NoneN/AN/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 filerAccelerated filer
Non-accelerated filerSmaller reporting company
Emerging growth company
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.
Indicate by check mark whether the registrant has filed a report on and attestation to its management’s assessment of the effectiveness of its internal control over financial reporting under Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C. 7262(b)) by the registered public accounting firm that prepared or issued its audit report.
If securities are registered pursuant to Section 12(b) of the Act, indicate by check mark whether the financial statements of the registrant included in the filing reflect the correction of an error to previously issued financial statements.
Indicate by check mark whether any of those error corrections are restatements that required a recovery analysis of incentive-based compensation received by any of the registrant's executive officers during the relevant recovery period pursuant to §240.10D-1(b).
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).      Yes      No
The aggregate market value of the voting stock held by non-affiliates of the registrant was $142,188,000 as of the last business day of the registrant’s most recently completed second fiscal quarter.
The number of common shares outstanding of the registrant’s Common Stock (no par value) was 7,502,990 as of March 5, 2024.
DOCUMENTS INCORPORATED BY REFERENCE
(Such documents are incorporated herein only to the extent specifically set forth in response to an item herein.)
Portions of the Isabella Bank Corporation Proxy Statement for its Annual Meeting of Shareholders to be held May 7, 2024 are incorporated by reference in this Form 10-K in response to Part III. The Isabella Bank Corporation Proxy Statement will be mailed on or before March 25, 2024.
1

ISABELLA BANK CORPORATION
ANNUAL REPORT ON FORM 10-K
Table of Contents
PART I
Item 1.
Item 1A.
Item 1B.
Item 1C.
Item 2.
Item 3.
Item 4.
PART II
Item 5.
Item 6.
Item 7.
Item 7A.
Item 8.
Item 9.
Item 9A.
Item 9B.
Item 9C.
PART III
Item 10.
Item 11.
Item 12.
Item 13.
Item 14.
PART IV
Item 15.
Item 16.
SIGNATURES
2

Forward Looking Statements
This report contains certain forward looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Rule 175 promulgated thereunder, and Section 21E of the Securities Exchange Act of 1934, as amended and Rule 3b-6 promulgated thereunder. We intend such forward looking statements to be covered by the safe harbor provisions for forward looking statements contained in the Private Securities Litigation Reform Act of 1995, and are included in this statement for purposes of these safe harbor provisions. Forward looking statements, which are based on certain assumptions and describe future plans, strategies and expectations, are generally identifiable by use of the words “believe,” “expect,” “intend,” “anticipate,” “estimate,” “project,” or similar expressions. Our ability to predict results or the actual effect of future plans or strategies is inherently uncertain. Factors which could have a material adverse effect on our operations and future prospects include, but are not limited to, changes in: interest rates, general economic conditions, federal or state tax laws, monetary and fiscal policy, a health crisis, the quality or composition of our loan or investment portfolio, demand for loan products, fluctuation in the value of collateral securing our loan portfolio, deposit flows, competition, cybersecurity risk, demand for financial services in our market area, and accounting principles, policies and guidelines. These risks and uncertainties should be considered in evaluating forward looking statements and undue reliance should not be placed on such statements. Further information concerning our business, including additional factors that could materially affect our consolidated financial results, is included in our filings with the SEC.
Glossary of Acronyms and Abbreviations
The acronyms and abbreviations identified below may be used throughout this Annual Report on Form 10-K or in our other SEC filings. You may find it helpful to refer back to this page while reading this report.
ACL: Allowance for credit lossesFRB: Federal Reserve Bank
AFS: Available-for-saleFHLB: Federal Home Loan Bank
ALCO: Asset-Liability CommitteeFreddie Mac: Federal Home Loan Mortgage Corporation
ALLL: Allowance for loan and lease lossesFTE: Fully taxable equivalent
AOCI: Accumulated other comprehensive incomeGAAP: U.S. generally accepted accounting principles
ASC: FASB Accounting Standards CodificationIRR: Interest rate risk
ASU: FASB Accounting Standards UpdateIT: Information Technology
ATM: Automated teller machineN/A: Not applicable
BHC Act: Bank Holding Company Act of 1956N/M: Not meaningful
Board: Board of Directors of Isabella Bank CorporationNAV: Net asset value
CECL: Current expected credit lossesNSF: Non-sufficient funds
CFPB: Consumer Financial Protection BureauOCI: Other comprehensive income (loss)
CIK: Central Index KeyOMSR: Originated mortgage servicing rights
COVID-19: Coronavirus disease 2019OREO: Other real estate owned
DIF: Deposit Insurance FundPCAOB: Public Company Accounting Oversight Board
DIFS: Department of Insurance and Financial ServicesRabbi Trust: A trust established to fund our Directors Plan
Directors Plan: Isabella Bank Corporation and Related Companies Deferred Compensation Plan for DirectorsRSP: Isabella Bank Corporation Restricted Stock Plan
Dividend Reinvestment Plan: Isabella Bank Corporation Stockholder Dividend Reinvestment Plan and Employee Stock Purchase PlanSOFR: Secured Overnight Financing Rate
Exchange Act: Securities Exchange Act of 1934SEC: U.S. Securities and Exchange Commission
FASB: Financial Accounting Standards BoardSOX: Sarbanes-Oxley Act of 2002
FDIC: Federal Deposit Insurance CorporationXBRL: eXtensible Business Reporting Language
FFIEC: Federal Financial Institutions Examinations CouncilYield Curve: U.S. Treasury Yield Curve
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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 4 – Loans and ACL” of “Notes to Consolidated Financial Statements” in Item 8. Financial Statements and Supplementary Data.
Deposit services offered include checking accounts, savings accounts, certificates of deposit, direct deposits, cash management services, mobile and internet banking, and ATMs. We also offer full service investment management, trust and estate services.
As of December 31, 2023, we had 356 full-time equivalent employees. We provide group life, health, accident, disability, and other insurance programs as well as a number of other employee benefit programs. None of our workforce is subject to collective bargaining agreements.
Available Information
Our SEC filings (including our Annual Report on Form 10-K, Quarterly Reports on Form 10-Q, Definitive Proxy Statements, Current Reports on Form 8-K and amendments to those reports) are available through our website (www.isabellabank.com). We will provide paper copies of our SEC reports free of charge upon request by a shareholder.
The SEC maintains a website (www.sec.gov) that contains reports, proxy and information statements and other information regarding Isabella Bank Corporation (CIK #0000842517) and other issuers.
Supervision and Regulation
The earnings and growth of the banking industry are affected by the credit policies of monetary authorities, including the FRB. An important function of the FRB is to regulate the national supply of bank credit in order to combat recessions and respond to inflationary pressures. Among the instruments of monetary policy used by the FRB to implement these objectives are open market operations in U.S. Treasury and U.S. Government Agency securities, changes in the discount rate on member bank borrowings, and changes in reserve requirements against member bank deposits. These methods are used in varying combinations to influence overall growth of bank loans, investments and deposits and also affect interest rates charged on loans or paid for deposits. The monetary policies of the FRB have had a significant effect on the operating results of commercial banks and related financial service providers in the past and are expected to continue to do so in the future. The effect of such policies upon our future business and earnings cannot be predicted.
We, as a financial holding company, are regulated under the BHC Act, and are subject to the supervision of the FRB. We are registered as a financial services holding company with the FRB and are subject to reporting requirements and inspections and audits. Under FRB policy, we are expected to act as a source of financial strength to the Bank and to commit resources to support its subsidiaries. This support may be required at times when, in the absence of such FRB policy, it would not otherwise be required to provide support.
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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 2023 Form 10-K). We have also implemented a program designed to comply with Section 404 of SOX, which included the identification of significant processes and accounts, documentation of the design effectiveness over process and entity level controls, and testing of the operating effectiveness of key controls. See Item 9A. Controls and Procedures for our evaluation of disclosure controls and procedures and internal control over financial reporting.
Certain additional information concerning regulatory guidelines for capital adequacy and other regulatory matters is presented herein under the caption “Capital” in Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations and in “Note 9 – Off-Balance-Sheet Activities, Commitments and Other Matters” and “Note 10 – Minimum Regulatory Capital Requirements” of “Notes to Consolidated Financial Statements” in Item 8. Financial Statements and Supplementary Data.
Isabella Bank
The Bank is supervised and regulated by DIFS and the FRB. These agencies and federal and state laws extensively regulate various aspects of the banking business including, among other things, permissible types and amounts of loans, investments and other activities, capital adequacy, branching, interest rates on loans and deposits, and the safety and soundness of banking practices.
Our deposits are insured up to applicable limits by the DIF of the FDIC and are subject to deposit insurance assessments to maintain the DIF. The FDIC assesses insurance premiums based upon a financial ratios method that takes into account asset and capital levels and supervisory ratings.
Banking laws and regulations restrict transactions by insured banks owned by a bank holding company. These restrictions include loans to and certain purchases from the parent holding company, non-bank and bank subsidiaries of the parent holding company. Additional restrictions apply to principal shareholders, officers, directors and their affiliates, and investments by the subsidiary bank in the shares or securities of the parent holding company (or any of the other non-bank or bank affiliates), or acceptance of such shares or securities as collateral security for loans to any borrower.
The Bank is subject to legal limitations on the frequency and amount of dividends that can be paid to Isabella Bank Corporation. For example, a Michigan state chartered bank may not declare a cash dividend or a dividend in kind except out of net profits then on hand after deducting all losses and bad debts, and then only if it will have a surplus amounting to not less than 20% of its capital after the payment of the dividend. Moreover, a Michigan state chartered bank may not declare or pay any cash dividend or dividend in kind until the cumulative dividends on its preferred stock, if any, have been paid in full. Further, if the surplus of a Michigan state chartered bank is at any time less than the amount of its capital, before the declaration of a cash dividend or dividend in kind, it must transfer to surplus not less than 10% of its net profits for the preceding six months (in the case of quarterly or semi-annual dividends) or the preceding two consecutive six month periods (in the case of annual dividends).
The payment of dividends by Isabella Bank Corporation and the Bank is also affected by various regulatory requirements and policies, such as the requirement to keep adequate capital in compliance with regulatory guidelines. Federal laws impose further restrictions on the payment of dividends by insured banks that fail to meet specified capital levels. The FDIC may prevent an insured bank from paying dividends if the bank is in default of payment of any assessment due to the FDIC. In addition, payment of dividends by a bank may be prevented by the applicable federal regulatory authority if such payment is determined, by reason of the financial condition of such bank, to be an unsafe and unsound banking practice. The FRB and the
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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.
In the normal course of business, we are exposed to various risks. These risks, if not managed correctly, could have a significant impact on our earnings, capital, share price, and ability to pay dividends. In order to effectively monitor and control the following risks, we utilize an enterprise risk model. We balance our strategic goals, including revenue and profitability objectives, with associated risks through the use of policies, systems, and procedures which have been adopted to identify, assess, control, monitor, and manage each risk area. We continually review the adequacy and effectiveness of these policies, systems, and procedures.
Our enterprise risk process covers each of the following areas.
Changes in credit quality and required allowance for credit losses
To manage the credit risk arising from lending activities, our most significant source of credit risk, we maintain sound underwriting policies and procedures. We continuously monitor asset quality in order to determine the appropriateness of valuation allowances. These valuation allowances take into consideration various factors including, but not limited to, local, regional, and national economic conditions.
We maintain an ACL to reserve for estimated expected credit losses within our loan portfolio. The level of the ACL reflects our evaluation of industry concentrations; specific credit risks; loan loss experience; loan portfolio quality; and economic, political and regulatory conditions. The determination of the appropriate level of the ACL inherently involves a high degree of subjectivity and requires us to make significant estimates, all of which may undergo material changes.
Changes in economic conditions
An economic downturn within our local markets, as well as downturns in the state, national, or global markets, could negatively impact household and corporate incomes. This could lead to decreased demand for both loan and deposit products and lead to an increase of customers who fail to pay interest or principal on their loans. We continually monitor key economic indicators in an effort to anticipate the possible effects of downturns in the local, regional, and national economies.
Our success depends primarily on the general economic conditions of the State of Michigan and the specific local markets in which we operate. We provide banking and financial services to customers located primarily in 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.
Interest rate risk
IRR results from the timing differences in the maturity or repricing frequency of a financial institution’s interest earning assets and its interest bearing liabilities. We monitor the potential effects of changes in interest rates through simulations and gap analyses. To help mitigate the effects of changes in interest rates, we make significant efforts to stagger projected cash flows and maturities of interest sensitive assets and liabilities.
Liquidity risk
Liquidity risk is the risk to earnings or capital arising from our inability to meet our obligations when they come due without incurring unacceptable and significant costs. Liquidity risk includes the inability to manage unplanned changes in funding sources, or failure to address changes in market conditions that affect the ability to liquidate assets quickly and with minimal loss in value. We have significant borrowing capacity through correspondent banks and the ability to sell certain investments to fund potential cash shortages, which we may use to help mitigate this risk.
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The value of investment securities may be negatively impacted by fluctuations in the market
A volatile, illiquid market or decline in credit quality could require us to recognize credit-related impairment to the investment securities held in our portfolio. We consider many factors in determining whether a credit-related impairment exists including the length of time and extent to which fair value has been less than cost, the investment credit rating, and the probability that the issuer will be unable to pay the amount when due. The presence of these factors could lead to impairment charges. These risks are mitigated by the fact that we do not intend to sell the security in an unrealized loss position and it is more likely than not that we will not have to sell the security before recovery of its cost basis.
Operational risk
Operational risk is the risk of loss resulting from failed or inadequate internal processes, staffing, information technology systems, or external events. These factors may lead to reputation risk and transaction risk. Reputation risk is managed by developing and retaining marketplace confidence in handling customers’ financial transactions in an appropriate manner and protecting our safety and soundness. Transaction risk includes losses from fraud, error, the inability to deliver products or services, and loss or theft of information. Transaction risk also encompasses product development and delivery, transaction processing, information technology systems, and the internal control environment.
To minimize potential losses due to operational risks, we have established a robust system of internal controls that are regularly tested by our internal audit department in conjunction with the services of certified public accounting firms who assist in performing such internal audit work. The focus of these internal audit procedures is to verify the validity and appropriateness of various transactions, processes, and controls. The results of these procedures are reported to our Audit Committee.
The adoption of, violations of, or nonconformance with laws, rules, regulations, or prescribed practices
The financial services industry and public companies are extensively regulated and must meet regulatory standards set by the FDIC, DIFS, FRB, FASB, SEC, PCAOB, CFPB, and other regulatory bodies. Federal and state laws and regulations are designed primarily to protect deposit insurance funds and consumers, and not necessarily to benefit our shareholders. The nature, extent, and timing of the adoption of significant new laws, changes in existing laws, or repeal of existing laws may have a material impact on our business, results of operations, and financial condition, the effect of which is impossible to predict at this time.
Our compliance department annually assesses the adequacy and effectiveness of our processes for controlling and managing our principal compliance risks.
Changes to the financial services industry as a result of regulatory changes or actions, or significant litigation
The financial services industry is extensively regulated by state and federal regulation that governs almost all aspects of our operations. Laws and regulations may change from time to time and are primarily intended for the protection of consumers, depositors, and the deposit insurance fund. The impact of any changes to laws and regulations or other actions by regulatory agencies may negatively impact us or our ability to increase the value of our business. Regulatory authorities have extensive discretion in connection with their supervisory and enforcement activities, including the imposition of restrictions on the operation of an institution, the classification of assets by the institution, and the appropriateness of an institution’s ACL. Future regulatory changes or accounting pronouncements may increase our regulatory capital requirements or adversely affect our regulatory capital levels. Additionally, actions by regulatory agencies or significant litigation against us could require the dedication of significant time and resources to respond to those actions and may lead to penalties.
We may not adjust to changes in the financial services industry
Our financial performance depends in part on our ability to maintain and grow our core deposit customer base and expand our financial services to our existing and new customers. The increasingly competitive environment is, in part, a result of changes in technology and product delivery systems and the accelerating pace of consolidation among financial service providers. New competitors may emerge to increase the degree of competition for our products and services. Financial services and products are also constantly changing. Our financial performance is dependent upon customer demand for our products and services, our ability to develop and offer competitive financial products and services, and our ability to adapt to enhancements in financial technology.
We may be required to recognize an impairment of goodwill
Goodwill represents the excess of the amounts paid to acquire subsidiaries over the fair value of their net assets at the date of acquisition. The majority of the recorded goodwill is related to past acquisitions of other banks, which were subsequently
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merged into Isabella Bank. If it is determined that the goodwill is impaired, we must write-down the goodwill by the amount of the impairment.
We may face pressure from purchasers of our residential mortgage loans to repurchase loans sold or reimburse purchasers for losses related to such loans
We generally sell the fixed rate long-term residential mortgage loans we originate to the secondary market. The purchasers of residential mortgage loans, such as government sponsored entities, increased their efforts to require sellers of residential mortgage loans to either repurchase loans previously sold, or reimburse the purchasers for losses incurred on foreclosed loans due to actual or alleged failure to strictly conform to the terms of the contract.
Consumers may decide not to use banks to complete their financial transactions
Technology and other changes are allowing customers to complete financial transactions without the involvement of banks. For example, consumers can now pay bills and transfer funds directly without banks. The process of diminishing or removing banks as intermediaries in financial transactions could result in the loss of fee income, as well as the loss of customer deposits and income generated from those deposits.
Our estimates and assumptions may be incorrect
Our consolidated financial statements conform with GAAP, which require us to make estimates and assumptions that affect the amounts reported in the consolidated financial statements. Estimates are based on information available to us at the time the estimates are made. Actual results could differ from estimates. For further discussion regarding significant accounting estimates, see “Note 1 – Significant Accounting Policies” of “Notes to Consolidated Financial Statements” in Item 8. Financial Statements and Supplementary Data.
Unauthorized disclosure of sensitive or confidential client or customer information, whether through cyber attacks, breach of computer systems or other means
See Item 1C. Cybersecurity.
Disruption of infrastructure
Our operations depend upon our technological and physical infrastructure, including our equipment and facilities. Extended disruption of our vital infrastructure by fire, power loss, natural disaster, telecommunications failure, computer hacking and viruses, or other events outside of our control, could have a significant impact on our operations. We have developed and tested disaster recovery plans for all significant aspects of our operations.
Anti-takeover provisions
Our articles of incorporation include anti-takeover provisions that require a two-thirds majority vote of our shareholders to approve a sale of the Corporation. Additionally, changes to our articles of incorporation must be approved by a two-thirds majority vote of our shareholders.
Item 1B. Unresolved Staff Comments.
None.
Item 1C. Cybersecurity.
Cybersecurity Risk
As a financial institution, we may be the target of a security breach due to a cybersecurity attack. While we have not encountered a cybersecurity incident that has materially impacted our operations or financial results, a security breach due to a cyber-attack in the future could result in a material impact to us, our customers, and our third-party vendors. The risk of such event could increase in the future due to the expansion of mobile banking and other internet-based product offerings, our use of internet-based services for internal and external purposes, acquisition and integration of new products and other offerings, increased use of third-party software solutions, and the growing reliance on mobile devices.
Cybersecurity incidents have increased in number and severity and it is expected that these trends will continue. Techniques used in cyberattacks evolve frequently, are increasingly sophisticated, and may not be recognized until launched. Cyber-attacks can originate from a wide variety of sources, including both internal and external sources, cyber-criminals, hacktivists, groups linked to terrorist organizations or hostile countries, or third parties whose objective is to broadly disrupt the operations of
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financial institutions. We may be unable to fully prevent cyber-attacks due to the inability to anticipate, detect, or recognize threats to our systems, or to implement effective preventative measures against all breaches. In addition, we do not have control over the cybersecurity of the systems of our customers, counterparty, and third-party service providers.
Our products, services and systems are accessed through critical company or third-party operations. These operations involve the storage, processing and transmission of sensitive data, including proprietary or confidential data, regulated data, and personal information of employees and customers. Successful breaches, employee wrongdoing, or human or technological error could result in unauthorized access, disclosure, modification, misuse, loss, or destruction of company, customer, or other third-party data or systems. Examples of a breach include theft of sensitive, regulated, or confidential data, including personal information; loss of access to critical data or systems through ransomware, destructive attacks, or other means; and business delays, service or system disruptions, or denials of service.
Should we, or the third parties we do business with, fall victim to successful cyber-attacks or experience other cybersecurity incidents, the result could include negative consequences. Such consequences could include, but are not limited to: significant disruption of our operations and those of our customers, including losing access to important business systems; misappropriation of confidential information related to customers, counterparties, employees, or other parties; severe damage to our reputation; the inability, or extended delays in the ability, to fully recover and restore data that has been stolen, manipulated, or destroyed, or the inability to prevent systems from processing fraudulent transactions; violations of applicable privacy and other laws; financial loss to us or our customers, counterparties, or employees; exposure to the risk of litigation, regulation, and other liability, which may include fines or other penalties and increased cybersecurity or other insurance premiums. The extent of a particular cyber-attack and the steps we must take to investigate and respond to it may not be immediately clear, and it may take a significant amount of time before such an investigation can be completed.
We have cybersecurity insurance intended to cover expenses related to notification, credit monitoring, investigation, crisis management, public relations, and legal advice. In addition, we maintain insurance to cover restoration of data, certain physical damage, and third-party injuries caused by potential cybersecurity incidents. However, damage and claims arising from such incidents may not be covered or may exceed the amount of any insurance available. Insurance policies and coverage are reviewed at least annually in detail.
Risk Management
Cybersecurity threats are assessed, identified, and managed within our Enterprise Risk Management Framework. We use a multi-layered approach to effectively manage risk. This approach includes, but is not limited to: (1) employees who are responsible for and manage risk; (2) employees and systems that oversee, monitor, and report risk: and (3) independent assurance, evaluation, and oversight of risk management activities.
Our security strategy is a layered approach. We utilize multiple layers of defense, both internally and externally, to ensure the integrity of our systems and data. We engage reputable security partners (assessors, consultants, auditors, and other third parties) for real time analysis and protection of our network infrastructure. This includes the use of preventative and detective tools to monitor, block, and alert us to suspicious activity. We utilize industry and regulator recognized assessment tools, such as the FFIEC Cybersecurity Assessment Tool and the Ransomware Self-Assessment Tool, to identify potential cybersecurity threats as well as the impact they could have on the Bank. Dashboards are used to track and monitor cybersecurity activity and trends.
We have established programs in place to proactively mitigate and respond to cybersecurity risk. The Vendor Management Program provides management with a framework to evaluate new vendors and ensure ongoing monitoring of third parties, including the evaluation of cybersecurity risk. The Incident Response Plan provides a framework for management to respond to and minimize the impact of an incident involving our information technology systems, or that of one of our third-party providers. The Business Continuity Plan provides information to prepare for and manage a business disruption.
Governance
All employees play a critical role in managing cybersecurity risk. Our Enterprise Risk Management Framework utilizes the three lines of defense model to define roles and responsibilities to effectively manage risk. First line employees own and manage risk, the second line oversees, monitors, and reports risk, and the third line provides independent assurance of risk management activities.
We employ Information Technology staff to analyze and protect our network infrastructure. Members of our IT staff have relevant training and education in computer networks and systems, information security and intelligence, and hold industry certifications related to network security, enterprise IT governance, and risk and information systems control. In addition, our
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employees’ network with peer banks, participate in industry groups, and attend ongoing training to stay abreast of cybersecurity threats and best practices.
Within the Enterprise Risk Management Framework, we have established committees, both at the management and board level, to oversee risk, and ensure cybersecurity risk is escalated appropriately to the Board.
The Information Technology Risk Management Committee is chaired by the Chief Technology Officer and comprised         of IT management and other key stakeholders from across the Bank. They are responsible for identifying, measuring, monitoring, and controlling risk generated within IT, including cybersecurity risk. This committee reviews and updates risk assessments as necessary and monitors activity through risk reports and dashboards. A cybersecurity dashboard, which includes a summary of key risk metrics, is reviewed and monitored by the IT Risk Management. The Chief Technology Officer and Information Security Officer provide quarterly reports to the Board Risk Committee.
The Board Risk Committee assists the Board in fulfilling its responsibilities related to the oversight of the Bank’s     Enterprise Risk Management Framework. The Board Risk Committee oversees executive management's design, implementation, and maintenance of an effective risk management program to ensure compliance with laws and regulations, and operation within the parameters established in the Bank’s risk appetite statement. This includes a review of the cybersecurity dashboard which summarizes key risk indicators and identifies emerging risks.
The Board Risk Committee provides a verbal risk report and meeting minutes to the Board at least quarterly. This includes a discussion of key risks and effectiveness of internal controls. In addition, cybersecurity incidents are escalated to the Board in a timely manner using the processes defined within the Bank’s Incident Response Plan.
Item 2. Properties.
Our executive offices are located at 401 North Main Street in Mount Pleasant, Michigan. In addition to this location, we own 29 branches, two operations centers, and vacant land. We also lease property in Saginaw, Michigan which serves as a full-service branch and Bay City, Michigan which serves as a loan and wealth office. We continually monitor and assess the need for expansion and/or improvement of all facilities. In our opinion, each facility has sufficient capacity and is in good condition.
Item 3. Legal Proceedings.
We are not involved in any material legal proceedings. While we are involved in ordinary, routine litigation incidental to our business, no such routine proceedings are expected to result in any material adverse effect on our consolidated operations, earnings, financial condition, or cash flows.
Item 4. Mine Safety Disclosures.
Not applicable.
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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 7,485,889 shares are issued and outstanding as of December 31, 2023. As of that date, there were 2,674 shareholders of record.
Our common stock is traded in the over-the-counter market.  Our common stock is quoted on the OTCQX market tier of the OTC Markets Group Inc.’s ("OTC Markets") electronic quotation system (www.otcmarkets.com) under the symbol “ISBA”.  Other trades in our common stock occur in privately negotiated transactions from time to time for which we may have little or no information.
We have reviewed the information available as to the range of reported high and low transactions as reported by OTC Markets. The following table sets forth our compilation of that information for the periods indicated. Price information obtained from OTC Markets reflects inter-dealer prices, without retail mark up, mark down, or commissions and may not necessarily represent actual transactions. The following compiled data is provided for information purposes only and should not be viewed as indicative of the actual or market value of our common stock.
Number of
Common Shares
Sale Price
 LowHigh
2023
First Quarter131,476 $22.08 $25.10 
Second Quarter123,123 19.13 26.00 
Third Quarter128,216 19.61 23.00 
Fourth Quarter111,755 19.75 22.00 
494,570 
2022
First Quarter62,813 $24.50 $26.00 
Second Quarter68,013 23.00 26.25 
Third Quarter80,927 21.39 24.95 
Fourth Quarter118,260 21.00 24.02 
330,013 
The following table sets forth the cash dividends paid for the quarters indicated:
Per Share
 20232022
First Quarter$0.28 $0.27 
Second Quarter0.28 0.27 
Third Quarter0.28 0.27 
Fourth Quarter0.28 0.28 
Total$1.12 $1.09 
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, 2023, with respect to our common stock repurchase plan:
Common Shares RepurchasedTotal Number of Common Shares Purchased as Part of Publicly Announced Plan or ProgramMaximum Number of Common Shares That May Yet Be Purchased Under the Plans or Programs
NumberAverage Price
Per Common Share
Balance, September 30295,505 
October 1 - 316,671 $20.99 6,671 288,834 
November 1 - 306,684 20.20 6,684 282,150 
December 1 - 3111,344 20.63 11,344 270,806 
Balance, December 3124,699 $20.61 24,699 270,806 
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.
ISABELLA BANK CORPORATION FINANCIAL REVIEW
(Dollars in thousands except per share amounts)
The following is management’s discussion and analysis of our financial condition and results of operations. This discussion and analysis is intended to provide a better understanding of the consolidated financial statements and statistical data included elsewhere in this Annual Report on Form 10-K.
Executive Summary
We reported net income of $18,167 and earnings per common share of $2.42 for the year ended December 31, 2023. Net income and earnings per common share for the same period of 2022 were $22,238 and $2.95, respectively. Net interest income decreased $2,537, or 4.19%, during 2023 compared to 2022. Rising interest rates and growth in core loans led to a $13,833, or 21.02%, increase in gross interest income during 2023 compared to 2022. Conversely, rising interest rates on deposits and an increase in borrowings led to a $16,370 increase in interest expense for the year ended December 31, 2023 when compared to the same period in 2022.
The provision for credit losses during the year ended December 31, 2023 was $629, compared to $483 for the same period in 2022. Credit quality remained strong at December 31, 2023, as evidenced by total past due and nonaccrual loans which were $4,964, or 0.37%, of gross loans. While maintaining strong credit quality, the ACL and provision for loan losses increased during 2023 as a result of core loan growth and economic related risk factors.
Noninterest income increased $161 during 2023 compared to the same period in 2022. This increase was driven by wealth management fees and ATM and debit card fee income, offset by a decrease in OMSR income and gain on sale of loans, as residential mortgages sold to the secondary market declined. Noninterest expenses increased $2,490 in 2023, when compared to the same period in 2022, and was primarily a result of increased compensation, equipment expense, other losses, and FDIC insurance premiums.
As of December 31, 2023, total assets and assets under management were $2,058,968 and $2,948,751, respectively. Assets under management include loans sold and serviced of $248,756 and investment and trust assets managed by Isabella Wealth of $641,027, in addition to assets on our consolidated balance sheet. Loans outstanding as of December 31, 2023 totaled $1,349,463. During 2023, gross loans grew $85,290 driven by growth in nearly all loan categories. Total deposits were $1,723,695 as of December 31, 2023, declining $20,580, or 1.2%, during the year as competition for deposits remained strong throughout 2023. All regulatory capital ratios for the Bank exceeded the minimum thresholds to be considered a "well capitalized" institution.
Our securities portfolio decreased $52,333 during 2023, predominantly due to maturities and principal paydowns. Unrealized losses on our AFS securities portfolio were $31,826 at December 31, 2023, improving $13,298 since December 31, 2022. Unrealized losses on our AFS securities portfolio resulted from increased short-term and intermediate-term benchmark interest rates throughout 2023. As a result, the higher level of unrealized losses has reduced our balance of shareholders' equity and negatively impacted our tangible book value. Management does not anticipate the need to sell securities and incur a loss as a result of the sale.
Our net yield on interest earning assets (FTE) was 3.05% for 2023, which decreased from 3.18% in 2022. To maintain a competitive edge in a rising interest rate environment, we increased most of our deposit rates beginning in the fourth quarter of 2022 and in recent periods, increased our level of borrowings to fund loan growth. As a result, this has negatively impacted our net yield on interest earning assets and further increases may slow improvement in our net yield on interest earning assets.
13

Recent Events and Legislation
2023 Bank Failures and the Condition of the Banking Industry: In March 2023, disruptions in the industry resulted in FDIC seizures of three banking institutions. Each bank had its own unique balance sheet issues, none of which exist at Isabella Bank. Shortly after the FDIC takeovers, the Federal Reserve Bank and the Department of Treasury announced enhanced insurance coverage and a borrowing program to help banks in need of funding. Isabella Bank continues to monitor such events, as well as industry and regulatory responses, to assure we are prepared for any changes that might affect the bank, including the ability to timely address economic uncertainty.
Impact of the Adoption of ASC 326 (CECL): We adopted ASU No. 2016-13, as subsequently updated for certain clarifications, targeted relief and codification improvements, as of January 1, 2023. Based on portfolio characteristics and economic conditions and expectations as of January 1, 2023, we recorded a combined pre-tax increase of $3,059 to the ACL and reserve for unfunded commitments on January 1, 2023 upon the adoption of ASU 2016-13; this implementation resulted in a reduction to retained earnings of $2,417, net of tax, as of January 1, 2023. In connection with the adoption of ASC 326, we revised certain accounting policies and implemented certain accounting policy elections, which are included in “Note 1 – Significant Accounting Policies” of our interim condensed consolidated financial statements.
Reclassifications
Certain amounts reported in management's discussion and analysis of financial condition and results of operations for 2022 and 2021 have been reclassified to conform with the 2023 presentation.
Operating results for periods after January 1, 2023 are presented in accordance with ASC 326 while prior period amounts continue to be reported in accordance with previously applicable standards and the accounting policies described in our Annual Report on Form 10-K for the year ended December 31, 2022. In addition, the adoption of ASC 326 requires enhanced disclosures related to the significant estimates and judgments used in estimating credit losses.
Subsequent Events
We evaluated subsequent events after December 31, 2023 through the date our condensed consolidated financial statements were issued for potential recognition and disclosure. No subsequent events require financial statement recognition or disclosure between December 31, 2023 and the date our condensed consolidated financial statements were issued.
Other
We have not received, nor are aware of, any notices of regulatory actions as of March 6, 2024.

14

Results of Operations
(Dollars in thousands except per share amounts)
The following table outlines the results of operations and provides certain key performance measures as of, and for the years ended, December 31:
202320222021
INCOME STATEMENT DATA
Interest income$79,631 $65,798 $60,113 
Interest expense21,687 5,317 7,412 
Net interest income57,944 60,481 52,701 
Provision for credit losses629 483 (518)
Noninterest income13,827 13,666 13,822 
Noninterest expenses49,310 46,820 43,694 
Federal income tax expense3,665 4,606 3,848 
Net income$18,167 $22,238 $19,499 
PER SHARE
Basic earnings$2.42 $2.95 $2.48 
Diluted earnings$2.40 $2.91 $2.45 
Dividends$1.12 $1.09 $1.08 
Tangible book value (1)
$20.59 $18.25 $21.61 
Quoted market value
High$26.00 $26.25 $29.00 
Low$19.13 $21.00 $19.45 
Close (1)
$21.50 $23.50 $25.50 
Common shares outstanding (1)
7,485,889 7,559,421 7,532,641 
PERFORMANCE RATIOS
Return on average total assets0.89 %1.08 %0.96 %
Return on average shareholders' equity9.52 %11.41 %8.83 %
Return on average tangible shareholders' equity12.75 %15.17 %11.31 %
Net interest margin yield (FTE)3.05 %3.18 %2.87 %
BALANCE SHEET DATA (1)
Gross loans$1,349,463 $1,264,173 $1,301,037 
AFS securities$528,148 $580,481 $490,601 
Total assets$2,058,968 $2,030,267 $2,032,158 
Deposits$1,723,695 $1,744,275 $1,710,339 
Borrowed funds$116,136 $87,016 $99,320 
Shareholders' equity$202,402 $186,210 $211,048 
Gross loans to deposits78.29 %72.48 %76.07 %
ASSETS UNDER MANAGEMENT (1)
Loans sold with servicing retained$248,756 $264,206 $278,844 
Assets managed by Isabella Wealth$641,027 $513,918 $516,243 
Total assets under management$2,948,751 $2,808,391 $2,827,245 
ASSET QUALITY (1)
Nonperforming loans to gross loans0.08 %0.04 %0.10 %
Nonperforming assets to total assets0.07 %0.05 %0.08 %
ACL to gross loans0.97 %0.78 %0.70 %
CAPITAL RATIOS (1)
Shareholders' equity to assets9.83 %9.17 %10.39 %
Tier 1 leverage8.76 %8.61 %7.97 %
Common equity tier 1 capital12.54 %12.91 %12.07 %
Tier 1 risk-based capital12.54 %12.91 %12.07 %
Total risk-based capital15.52 %15.79 %14.94 %
(1) At end of year
15

The following table outlines our interim results of operations and key performance measures as of, and for the unaudited periods ended:
Quarter to Date
December 31
2023
September 30
2023
June 30
2023
March 31
2023
INCOME STATEMENT DATA
Total interest income$21,056 $20,485 $19,495 $18,595 
Total interest expense7,444 6,183 4,816 3,244 
Net interest income13,612 14,302 14,679 15,351 
Provision for loan losses684 (292)196 41 
Noninterest income3,516 3,414 3,604 3,293 
Noninterest expenses11,915 12,658 12,539 12,198 
Federal income tax expense 726 937 918 1,084 
Net income $3,803 $4,413 $4,630 $5,321 
PER SHARE
Basic earnings $0.51 $0.59 $0.62 $0.70 
Diluted earnings $0.51 $0.58 $0.61 $0.70 
Dividends$0.28 $0.28 $0.28 $0.28 
Quoted market value (1)
$21.50 $21.05 $20.50 $24.80 
Tangible book value (1)
$20.59 $18.27 $18.69 $19.24 
Quarter to Date
December 31
2022
September 30
2022
June 30
2022
March 31
2022
INCOME STATEMENT DATA
Total interest income$17,915 $17,019 $16,102 $14,762 
Total interest expense1,643 1,216 1,175 1,283 
Net interest income16,272 15,803 14,927 13,479 
Provision for loan losses(57)18 485 37 
Noninterest income3,272 3,252 3,595 3,547 
Noninterest expenses11,922 11,917 11,661 11,320 
Federal income tax expense1,357 1,233 1,081 935 
Net income$6,322 $5,887 $5,295 $4,734 
PER SHARE
Basic earnings$0.84 $0.78 $0.70 $0.63 
Diluted earnings $0.83 $0.77 $0.69 $0.62 
Dividends$0.28 $0.27 $0.27 $0.27 
Quoted market value (1)
$23.50 $21.40 $24.80 $25.85 
Tangible book value (1)
$18.25 $16.96 $18.85 $19.56 
(1) At end of period

16

CRITICAL ACCOUNTING POLICIES
Our significant accounting policies are set forth in “Note 1 – Significant Accounting Policies” of “Notes to Consolidated Financial Statements” in Item 8. Financial Statements and Supplementary Data. Of these significant accounting policies, we consider our policies regarding the ACL, acquisition intangibles and goodwill, and the determination of the fair value and assessment of credit related impairments of investment securities to be our most critical accounting policies.
The ACL requires our most subjective and complex judgment. Changes in economic conditions and other external factors can have a significant impact on the ACL and, therefore, the allowance for credit losses and results of operations. We have developed policies and procedures for assessing the appropriateness of the ACL, recognizing that this process requires a number of assumptions and estimates with respect to our loan portfolio. Our assessments may be impacted in future periods by changes in economic conditions, and the discovery of information with respect to borrowers which is not known to us at the time of the issuance of the consolidated financial statements. For additional discussion concerning our ACL and related matters, see “ACL - Loans” and “Note 4 – Loans and ACL” of “Notes to Consolidated Financial Statements” in Item 8. Financial Statements and Supplementary Data.
U.S. generally accepted accounting principles require that we determine the fair value of the assets and liabilities of an acquired entity, and record the fair value on the date of acquisition. We employ a variety of measures in the determination of the fair value, including the use of discounted cash flow analysis, market appraisals, and projected future revenue streams. For certain items that we believe we have the appropriate expertise to determine the fair value, we may choose to use our own calculations of the value. In other cases, where the value is not easily determined, we consult with independent experts to determine the fair value of the identified asset or liability. Once valuations have been determined, the net difference between the price paid for the acquired entity and the net value of assets acquired on our balance sheet, including identifiable intangibles, is recorded as goodwill. Acquisition intangibles and goodwill are qualitatively evaluated to determine if it is more likely than not that the carrying balance is impaired on at least an annual basis.
AFS securities are carried at fair value with changes in the fair value included as a component of other comprehensive income. Declines in the fair value of AFS securities below their cost that are other-than-temporary are reflected as realized losses in the consolidated statements of income. The market values for most AFS investment securities are typically obtained from outside sources and applied to individual securities within the portfolio. Municipal securities for which no readily determinable market values are available are priced using fair value curves which most closely match the securities' characteristics. AFS securities are reviewed quarterly for possible credit impairment. In determining whether a credit-related impairment exists for debt securities, we assess whether: (a) we do not have the intent to sell the security; and (b) it is more likely than not we will not have to sell the security before recovery of its cost basis. If either of these conditions are met, any previously recognized allowances are charged-off and the security's amortized cost is written down to fair value through income. If these conditions are not met, the security is evaluated to determine whether the decline in fair value has resulted from credit losses or other factors.
17

Average Balances, Interest Rates, and Net Interest Income
The following schedules present the daily average amount outstanding for each major category of interest earning assets, non-earning assets, interest bearing liabilities, and noninterest bearing liabilities for the last three years. These schedules also present an analysis of interest income and interest expense for the periods indicated. All interest income is reported on a FTE basis using a federal income tax rate of 21%. Loans in nonaccrual status, for the purpose of the following computations, are included in the average loan balances. FRB and FHLB restricted equity holdings are included in other interest earning assets.
Year Ended December 31
202320222021
Average
Balance
Tax
Equivalent
Interest
Average
Yield /
Rate
Average
Balance
Tax
Equivalent
Interest
Average
Yield /
Rate
Average
Balance
Tax
Equivalent
Interest
Average
Yield /
Rate
INTEREST EARNING ASSETS
Loans (1)
$1,308,891 $65,670 5.02 %$1,249,634 $53,283 4.26 %$1,208,141 $51,410 4.26 %
Taxable investment securities485,718 9,399 1.94 %477,159 8,294 1.74 %297,357 4,920 1.65 %
Nontaxable investment securities96,845 3,780 3.90 %107,158 3,933 3.67 %117,997 4,235 3.59 %
Fed funds sold12 5.04 %10 — 2.42 %— 0.02 %
Other41,965 1,804 4.30 %99,301 1,344 1.35 %255,246 706 0.28 %
Total earning assets1,933,431 80,654 4.17 %1,933,262 66,854 3.46 %1,878,746 61,271 3.26 %
NONEARNING ASSETS
Allowance for credit losses(12,784)(9,477)(9,396)
Cash and demand deposits due from banks24,592 24,708 29,139 
Premises and equipment26,589 24,648 24,760 
Accrued income and other assets74,319 81,823 109,625 
Total assets$2,046,147 $2,054,964 $2,032,874 
INTEREST BEARING LIABILITIES
Interest bearing demand deposits$346,875 1,086 0.31 %$374,623 274 0.07 %$345,015 216 0.06 %
Savings deposits626,027 8,290 1.32 %630,574 1,135 0.18 %558,102 616 0.11 %
Time deposits308,699 8,976 2.91 %270,296 2,612 0.97 %336,094 4,610 1.37 %
Federal funds purchased and repurchase agreements43,061 961 2.23 %49,974 79 0.16 %57,453 53 0.09 %
FHLB advances23,699 1,309 5.52 %7,863 152 1.93 %69,342 1,302 1.88 %
Subordinated debt, net of unamortized issuance costs
29,287 1,065 3.64 %29,200 1,065 3.65 %17,000 615 3.62 %
Total interest bearing liabilities1,377,648 21,687 1.57 %1,362,530 5,317 0.39 %1,383,006 7,412 0.54 %
NONINTEREST BEARING LIABILITIES
Demand deposits461,689 482,781 416,247 
Other16,043 14,695 12,858 
Shareholders’ equity190,767 194,958 220,763 
Total liabilities and shareholders’ equity$2,046,147 $2,054,964 $2,032,874 
Net interest income (FTE)$58,967 $61,537 $53,859 
Net yield on interest earning assets (FTE)3.05 %3.18 %2.87 %
(1) Includes loans and mortgage loans AFS
18

Net interest income is the amount by which interest income on earning assets exceeds the interest expense on interest bearing liabilities. Net interest income is influenced by changes in the balance and mix of assets and liabilities, as well as market interest rates. We exert some control over these factors; however, FRB monetary policy and competition have a significant impact. For analytical purposes, net interest income is adjusted to an FTE basis by including the income tax savings from interest on tax exempt loans and nontaxable investment securities, thus making year to year comparisons more meaningful. The FTE adjustment is based on a federal income tax rate of 21%.
Volume and Rate Variance Analysis
The following table sets forth the effect of volume and rate changes on interest income and expense for the periods indicated. For the purpose of this table, changes in interest due to volume and rate were determined as follows:
Volume—change in volume multiplied by the previous period's FTE rate.
Rate—change in the FTE rate multiplied by the previous period's volume.
All interest income presented in the table below is reported on a FTE basis using a federal income tax rate of 21%. The change in interest due to both volume and rate has been allocated to volume and rate changes in proportion to the relationship of the absolute dollar amounts of the change in each.
 2023 Compared to 2022 
 Increase (Decrease) Due to
2022 Compared to 2021 
 Increase (Decrease) Due to
VolumeRateNetVolumeRateNet
Changes in interest income
Loans$2,621 $9,766 $12,387 $1,769 $104 $1,873 
Taxable investment securities151 954 1,105 3,114 260 3,374 
Nontaxable investment securities(393)240 (153)(396)94 (302)
Fed Funds Sold— — — — 
Other(1,130)1,590 460 (659)1,297 638 
Total changes in interest income1,249 12,551 13,800 3,828 1,755 5,583 
Changes in interest expense
Interest bearing demand deposits(22)834 812 20 38 58 
Savings deposits(8)7,163 7,155 89 430 519 
Time deposits420 5,944 6,364 (796)(1,202)(1,998)
Federal funds purchased and repurchase agreements(12)894 882 (8)34 26 
FHLB advances602 555 1,157 (1,187)37 (1,150)
Subordinated debt, net of unamortized issuance costs
(3)— 445 450 
Total changes in interest expense983 15,387 16,370 (1,437)(658)(2,095)
Net change in interest margin (FTE)$266 $(2,836)$(2,570)$5,265 $2,413 $7,678 
Over the past several quarters, rising rates on deposit accounts and an increase in borrowed funds have reversed the improvement in our net interest margin. The higher interest rate environment is expected to continue to place pressure and slow improvement on our net yield on interest earning assets.
 Average Yield / Rate for the Three-Month Periods Ended:
December 31
2023
September 30
2023
June 30
2023
March 31
2023
December 31
2022
Total earning assets4.38 %4.30 %4.11 %3.89 %3.77 %
Total interest bearing liabilities2.13 %1.79 %1.41 %0.95 %0.49 %
Net yield on interest earning assets (FTE)2.85 %3.02 %3.11 %3.22 %3.43 %
19

Quarter to Date Net Interest Income (FTE)
December 31
2023
September 30
2023
June 30
2023
March 31
2023
December 31
2022
Total interest income (FTE)$21,302 $20,735 $19,750 $18,867 $18,183 
Total interest expense7,444 6,183 4,816 3,244 1,643 
Net interest income (FTE)$13,858 $14,552 $14,934 $15,623 $16,540 
Past Due and Nonaccrual Loans
Fluctuations in past due and nonaccrual loans can have a significant impact on the ACL. To determine the potential impact, and corresponding estimated losses, we analyze our historical loss trends on loans past due greater than 30 days and nonaccrual loans for indications of additional deterioration.
Total Past Due and Nonaccrual Loans as of December 31
20232022202120202019
Commercial and industrial$656 $617 $203 $1,790 $1,936 
Commercial real estate— 6,887 358 358 559 
Agricultural205 234 987 3,786 4,285 
Residential real estate3,910 3,333 2,287 3,580 4,554 
Consumer193 59 196 96 71 
Total$4,964 $11,130 $4,031 $9,610 $11,405 
Total past due and nonaccrual loans to gross loans0.37 %0.88 %0.31 %0.78 %0.96 %
The increase in past due and nonaccrual loans within the commercial real estate and residential loan portfolios at the end of 2022 was the result of one past due relationship, which has since improved. The accrual of interest on commercial and agricultural loans, as well as residential real estate loans, is discontinued at the time a loan is 90 days or more past due unless the credit is well-secured and in the process of short-term collection. Upon transferring a loan to nonaccrual status, we perform an evaluation to determine the net realizable value of the underlying collateral. This evaluation is used to help determine if a charge-off is necessary. Consumer loans are typically charged-off no later than 180 days past due. Loans may be placed back on accrual status after six months of continued performance and achievement of current payment status.
The following table summarizes nonaccrual loans as of:
December 31
2023
September 30
2023
June 30
2023
March 31
2023
December 31
2022
Commercial and industrial$491 $17 $17 $20 $82 
Commercial real estate— — — 57 14 
Agricultural205 208 218 232 234 
Residential real estate286 295 179 179 127 
Total$982 $520 $414 $488 $457 
Nonaccrual loans as a % of loans at end of period0.07 %0.04 %0.03 %0.04 %0.04 %
A summary of loans past due by type and information related to nonaccrual status loans are included in “Note 4 – Loans and ACL” of “Notes to Consolidated Financial Statements” in Item 8. Financial Statements and Supplementary Data.
20

Nonperforming Assets
The following table summarizes our nonperforming assets as of December 31:
20232022202120202019
Nonaccrual loans$982 $457 $1,245 $5,313 $6,535 
Accruing loans past due 90 days or more87 — 97 — — 
Total nonperforming loans1,069 457 1,342 5,313