HCB Financial : 2023 Annual Report

TABLE OF CONTENTS

To Our Shareholders

Financial Highlights

Key Graphs

Auditor's Report

Financial Report

Community Involvement

Remembering Bob Picking

Directors & Officers

Locations

4 6 7 8 10 40 41 42 43

All aspects of our business performed well, providing what has turned out to be the best financial outcome that we have been able to report in the history of our company.

To our shareholders

From the desk of Mark A. Kolanowski

On behalf of our directors and officers, it is my pleasure to present to you the HCB Financial Corp. 2023 Annual Report. To summarize the year for you, I would say that all aspects of our business performed well, providing what has turned out to be the best financial outcome that we have been able to report in the history of our company. For the twelve months ended December 31, 2023, net income was $5,014,831 or $4.84 per common share. This equates to a 64% improvement over our 2022 earnings of $3,062,536 or $2.95 per share. As you'll see from reviewing our financial highlights, we achieved record balance sheet levels in assets, deposits, and loans in 2023. During the year, total assets increased 19% to $561,431,846. Total deposits rose 21% to $507,166,413 and net loans increased by 1% to $312,974,175. While some of this deposit growth we deem to be temporary, we are particularly pleased with the growth we achieved in our core deposit base.

There are two main contributing factors driving our improved performance in 2023. First, the loan growth generated over the last two years from expanding our presence in Kent County and entering the Kalamazoo market has added higher yielding commercial loans to our loan portfolio mix. Second, a sharp increase in short-term interest rates has allowed us to turn our recent deposit growth into a meaningful earning asset. These factors, along with prudent management of our cost of funds, are the main contributors to our 31% increase in net interest income for the year. Looking at the balance sheet, our overall deposit activity remains strong for the fourth consecutive year. As noted above, we experienced significant deposit growth in 2023 with growth occurring in both retail and commercial core deposit accounts. Loan activity was somewhat slower than what we have experienced in recent years. Our modest growth was due in part to historically low mortgage activity and a planned reduction in our municipal loan portfolio. Loan quality remains strong with delinquency and charge-off activity at historically low levels.

Aside from our financial achievements, we made tremendous strides this past year in enhancing our products, our services, and the technology we deploy. While we tackled many new initiatives, I'd like to use this opportunity to provide a glimpse of the ongoing work we do to improve cybersecurity and protect customer information. The banking industry is constantly facing new and sophisticated cybersecurity threats so we must continue to invest judiciously in state-of-the-art technologies to enhance our security infrastructure. As we endeavor to uphold the highest standards of data protection and ensure secure banking operations, the decision to invest in a Security Information and Event Management solution in 2023 was a strategic imperative. This solution empowers us to proactively detect, respond to, and mitigate potential security incidents, reinforcing our commitment to safeguarding the financial well-being of our customers.

We also implemented a real-time fraud detection system that enables us to take proactive measures to identify and prevent fraudulent activities at the frontline, even before a deposit is processed. Additionally, we made significant strides in fortifying our data resilience and operational efficiency by greatly enhancing our data backup solution. This not only strengthened our data security but also considerably improved the targeted times for restoring our business systems and processes should a disruption ever occur. This milestone signifies our dedication to the highest customer service standards by ensuring seamless business operations and reinforcing our commitment to resilient business continuity.

There are many important changes within our leadership team that I'd like to bring to your attention. We congratulated two HCB officers for their successful careers and service to HCB upon their retirements. We welcomed two new officers to our leadership team and had the pleasure of promoting several officers within our leadership ranks. Those announcing retirements in 2023 included Jane M. DeBat with 34 years of service and Randoulph L. Teegardin with 40 years of service. There is no doubt that these career HCB bankers will be greatly missed, but we are thrilled for our colleagues as they each begin their new chapter in life. Most importantly, we are especially grateful for their dedication and many years of service.

We were fortunate to add two talented bankers to our senior officer team during the course of the year. Chelsey A. Foster joined us in January as Senior Vice President of Business Development. Chelsey brings a diverse background to his new position, with a career beginning in economic development, evolving into local government management, before leading into a career as a community bank leader. In October, Toni C. Murphy joined us and serves as Vice President of Human Resources. Toni has an extensive background in banking with proven leadership skills in sales, operations, wealth management and talent development. It was my pleasure this past year to announce the promotion of several of my HCB leadership teammates. Robert G. Ranes, Jr. was named Senior Vice President and Chief Lending Officer. Rob joined HCB in 1994 as a management trainee. He held numerous retail positions of increasing responsibility before becoming a Commercial Banking Vice President in 2006 and Senior Vice President of Lending in 2011. Kimberly G. Finkbeiner was promoted to Senior Vice President and Chief Information Officer. Kim joined HCB in 2013 as Vice President of Operations. During her tenure, Kim has assumed greater responsibilities in the areas of Information Security as well as Deposit and Loan Operations. Linda G. Engle was appointed Senior Vice President and Marshall Market President. Linda began her career with HCB in 2012 as a Commercial Loan Officer. Soon after she became an Assistant Vice President and received the Vice President designation at the end of 2019.

I hope that you will be able to join us for our Annual Meeting which will be held on Wednesday, April 17, 2024, at 1:00 p.m. in the Main Office of Highpoint Community Bank. It is important that your shares of HCB Financial Corp. common stock be represented at the meeting. Whether you are able to attend or not, please complete and return the enclosed proxy in advance of the meeting. This will allow us to tally the votes prior to the meeting and proceed without undue delay. Our directors, officers and I look forward to seeing as many of you there as possible.

Yours truly,

Mark A. Kolanowski

President and Chief Executive Officer

Financial Highlights

AT YEAR-END

2023

2022

% CHANGE

Assets

$561,432

$472,144 19%

DepositsLoans, netInvestments

$507,166 $312,974 $79,422

$418,739 21%

$311,224 1%

$98,706 -20%

Stockholder's Equity

$37,227

$32,918 13%

2023

PER SHARE

2022

% CHANGE

Dividends per share

$1.09

$0.91 20%

Net income per share

4.84

2.95 64%

Book value at year end

35.91

31.76 13%

Dollar amounts in thousands, except per-share data.

Key Graphs

TOTAL ASSETS (MILLIONS)

NET LOANS (MILLIONS)

2023

2022

2021

2020

$561

2019

2023

2022

2021

2020

2019

$472

$462

$395

$324

$313

$311

$238

$242

$218

TOTAL DEPOSITS (MILLIONS)

EARNINGS (THOUSANDS)

2023

2022

2021

2020

2019

2023

2022

2021

2020

2019

$334

$507

$419

$401

$265

$5,015

$3,063

$2,360

$2,708

$2,278

BOOK VALUE (PER SHARE, IN DOLLARS)

DIVIDEND PAYOUT RATIO

2023

2022

2021

2020

2019

2023

2022

2021

2020

2019

$35.91

$34.11

$31.76

$33.55

$31.26

23%

31%

38%

33%

36%

Independent Auditor's Report

To the Board of Directors

HCB Financial Corp.

Opinion

We have audited the consolidated financial statements of HCB Financial Corp. (the "Company"), which comprise the consolidated balance sheet as of December 31, 2023 and 2022 and the related consolidated statements of income, comprehensive income, stockholders' equity, and cash flows for the years then ended, and the related notes to the consolidated financial statements.

In our opinion, the accompanying consolidated financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2023 and 2022 and the results of its operations and its cash flows for the years then ended in accordance with accounting principles generally accepted in the United States of America.

Basis for Opinion

We conducted our audits in accordance with auditing standards generally accepted in the United States of America (GAAS). Our responsibilities under those standards are further described in the Auditor's Responsibilities for the Audits of the Consolidated Financial Statements section of our report. We are required to be independent of the Company and to meet our ethical responsibilities in accordance with the relevant ethical requirements relating to our audit. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion.

Responsibilities of Management for the Consolidated Financial Statements

Management is responsible for the preparation and fair presentation of the consolidated financial statements in accordance with accounting principles generally accepted in the United States of America and for the design, implementation, and maintenance of internal control relevant to the preparation and fair presentation of consolidated financial statements that are free from material misstatement, whether due to fraud or error.

In preparing the consolidated financial statements, management is required to evaluate whether there are conditions or events, considered in the aggregate, that raise substantial doubt about the Company's ability to continue as a going concern within one year after the date that the consolidated financial statements are issued or available to be issued.

Auditor's Responsibilities for the Audits of the Consolidated Financial Statements

Our objectives are to obtain reasonable assurance about whether the consolidated financial statements as a whole are free from material misstatement, whether due to fraud or error, and to issue an auditor's report that includes our opinion. Reasonable assurance is a high level of assurance but is not absolute assurance and, therefore, is not a guarantee that audits conducted in accordance with GAAS will always detect a material misstatement when it exists. The risk of not detecting a material misstatement resulting from fraud is higher than for one resulting from error, as fraud may involve collusion, forgery, intentional omissions, misrepresentations, or the override of internal control. Misstatements are considered material if there is a substantial likelihood that, individually or in the aggregate, they would influence the judgment made by a reasonable user based on the consolidated financial statements.

To the Board of Directors HCB Financial Corp.

In performing audits in accordance with GAAS, we:

•

Exercise professional judgment and maintain professional skepticism throughout the audits.

•

Identify and assess the risks of material misstatement of the consolidated financial statements, whether due to fraud or error, and design and perform audit procedures responsive to those risks. Such procedures include examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements.

•

Obtain an understanding of internal control relevant to the audits in order to design audit procedures that are appropriate in the circumstances but not for the purpose of expressing an opinion on the effectiveness of the Company's internal control. Accordingly, no such opinion is expressed.

•

Evaluate the appropriateness of accounting policies used and the reasonableness of significant accounting estimates made by management, as well as evaluate the overall presentation of the consolidated financial statements.

•

Conclude whether, in our judgment, there are conditions or events, considered in the aggregate, that raise substantial doubt about the Company's ability to continue as a going concern for a reasonable period of time.

We are required to communicate with those charged with governance regarding, among other matters, the planned scope and timing of the audits, significant audit findings, and certain internal control-related matters that we identified during the audits.

Other Information

Management is responsible for the other information included in the annual report. The other information comprises the letter to shareholders, financial highlights, and key graphs but does not include the consolidated financial statements and our auditor's report thereon. Our opinion on the consolidated financial statements does not cover the other information, and we do not express an opinion or any form of assurance thereon.

In connection with our audits of the consolidated financial statements, our responsibility is to read the other information and consider whether a material inconsistency exists between the other information and the consolidated financial statements or whether the other information otherwise appears to be materially misstated. If, based on the work performed, we conclude that an uncorrected material misstatement of the other information exists, we are required to describe it in our report.

February 13, 2024

HCB Financial Corp. Consolidated Balance Sheets December 31, 2023 and 2022

2023

2022

Assets

Cash and cash equivalents

Interest-bearing time deposits in other financial institutions Securities available-for-sale

Restricted investment in Federal Home Loan Bank stock Loans, net of allowance of $2,922,603 at 2023 and $2,153,266 at 2022

Premises and equipment, net Other real estate owned, net Bank owned life insurance

Accrued interest receivable and other assets Total assets

Liabilities and Stockholders' Equity

Liabilities:

Deposits:

Non-interest-bearing

Interest-bearing

Federal Home Loan Bank advances Accrued interest payable and other liabilities Total liabilities

Stockholders' equity:

Common stock, no par value - 1,500,000 shares authorized; issued and outstanding of 1,036,600 in 2023 and 2022

Capital surplus

Retained earnings

Accumulated other comprehensive loss

Total stockholders' equity

Total liabilities and stockholders' equity

• $ 151,710,926 $ 44,453,796 3,969,000 4,465,000 73,940,870 92,729,412 1,512,100 1,512,100

  312,974,175 311,223,552 6,379,032 6,800,670

  -

  277,074

  7,118,454 6,944,051 3,827,289 3,738,837

  $

  561,431,846

  $ 472,144,492

• $ 104,119,599 $ 98,599,623 403,046,814 320,139,168 507,166,413 418,738,791 14,000,000 19,000,000 3,038,504 1,487,823 524,204,917 439,226,614

1,579,112 1,579,112 2,529,905 2,529,905 36,410,150 32,891,673

(3,292,238)

(4,082,812)

37,226,929 32,917,878

$

561,431,846

$ 472,144,492

See accompanying notes

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