UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q



ý☒			Quarterly Report Pursuant to Section 13 or 15(d) of The Securities Exchange Act of 1934

For the quarterly period ended September 30, ~~2019~~2020



¨☐			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)



~~Michigan~~

~~38-2830092~~

Michigan

38-2830092

(State or other jurisdiction of incorporation or organization)

(I.R.S. Employer Identification No.)

401 N. Main St

Mt. Pleasant

48858

(Address of principal executive offices)

(Zip code)

(989) 772-9471

(Registrant’s telephone number, including area code)

N/A

(Former name, former address and former fiscal year, if changed since last report)

Securities registered pursuant to Section 12(b) of the Act:



Title of each class	Trading Symbol(s)	Name of each exchange on which registered
None	N/A	N/A

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. ý☒ 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). ý☒ 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 the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer

¨☐

Accelerated filer

ý☐

Non-accelerated filer

¨☒

Smaller reporting company

ý☒

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 is a shell company (as defined in Rule 12b-2 of the Exchange Act). ¨☐ Yes ý☒ No

The number of common shares outstanding of the registrant’s Common Stock (no par value) was ~~7,939,808~~8,010,711 as of ~~November 5, 2019.~~October 27, 2020.

Table of Contents

ISABELLA BANK CORPORATION

QUARTERLY REPORT ON FORM 10-Q

Table of Contents

PART I – FINANCIAL INFORMATION

Item 1.

~~PART I – FINANCIAL INFORMATION~~Financial Statements

Item 1.2.

~~Financial Statements~~

~~Item 2.~~

Management’s Discussion and Analysis of Financial Condition and Results of Operations

3837

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

Item 4.

Controls and Procedures

PART II – OTHER INFORMATION

Item 1.

Legal Proceedings

Item 1A.

Risk Factors

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

Item 3.

Defaults Upon Senior Securities

6061

Item 4.

Mine Safety Disclosures

Item 5.

Item 6.

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,”~~“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 the 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 the 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 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 Quarterly Report on Form 10-Q 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 Losses~~credit losses			FTE: Fully taxable equivalent
AFS: Available-for-sale			GAAP: U.S. generally accepted accounting principles
~~AFS: Available-for-sale~~ALCO: Asset-Liability Committee			~~GLB Act: Gramm-Leach-Bliley Act of 1999~~IFRS: International Financial Reporting Standards
ALLL: Allowance for loan and lease losses			~~IFRS: International Financial Reporting Standards~~IRR: Interest rate risk
AOCI: Accumulated other comprehensive income			~~IRR: Interest rate risk~~
~~ASC: FASB Accounting Standards Codification~~	ISDA: International Swaps and Derivatives Association
ASC: FASB Accounting Standards Codification			LIBOR: London Interbank Offered Rate
ASU: FASB Accounting Standards Update			~~JOBS Act: Jumpstart our Business Startups Act~~N/A: Not applicable
ATM: Automated ~~Teller Machine~~teller machine			~~LIBOR: London Interbank Offered Rate~~N/M: Not meaningful
BHC Act: Bank Holding Company Act of 1956			~~N/A: Not applicable~~NAV: Net asset value
CARES Act: Coronavirus Aid, Relief, and Economic Security Act			NSF: Non-sufficient funds
CECL: Current ~~Expected Credit Losses~~expected credit losses			~~N/M: Not meaningful~~OCI: Other comprehensive income (loss)
CFPB: Consumer Financial Protection Bureau			~~NASDAQ: NASDAQ Stock Market Index~~OMSR: Originated mortgage servicing rights
CIK: Central Index Key			~~NASDAQ Banks: NASDAQ Bank Stock Index~~OREO: Other real estate owned
COVID-19: Coronavirus disease 2019			OTTI: Other-than-temporary impairment
CRA: Community Reinvestment Act			~~NAV: Net asset value~~PBO: Projected benefit obligation
DIF: Deposit Insurance Fund			~~NOW: Negotiable order of withdrawal~~PCAOB: Public Company Accounting Oversight Board
DIFS: Department of Insurance and Financial Services			~~NSF: Non-sufficient funds~~PPP: Paycheck Protection Program
Directors Plan: Isabella Bank Corporation and Related Companies Deferred Compensation Plan for Directors			~~OCI: Other comprehensive income (loss)~~Rabbi Trust: A trust established to fund our Directors Plan
Dividend Reinvestment Plan: Isabella Bank Corporation Stockholder Dividend Reinvestment Plan and Employee Stock Purchase Plan			~~OMSR: Originated mortgage servicing rights~~RSP: Isabella Bank Corporation Restricted Stock Plan
~~Dodd-Frank Act: Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010~~		~~OREO: Other real estate owned~~
~~ESOP: Employee Stock Ownership Plan~~	~~OTTI: Other-than-temporary impairment~~
Exchange Act: Securities Exchange Act of 1934		~~PBO: Projected benefit obligation~~SBA: Small Business Administration
FASB: Financial Accounting Standards Board			~~PCAOB: Public Company Accounting Oversight Board~~
~~FDI Act: Federal Deposit Insurance Act~~	~~Rabbi Trust: A trust established to fund our Directors Plan~~
~~FDIC: Federal Deposit Insurance Corporation~~	SEC: U.S. Securities and Exchange Commission
FDIC: Federal Deposit Insurance Corporation			SOX: Sarbanes-Oxley Act of 2002
FFIEC: Federal Financial Institutions Examinations Council			~~SOX: Sarbanes-Oxley Act of 2002~~
~~FRB: Federal Reserve Bank~~	Tax Act: Tax Cuts and Jobs Act, enacted December 22, 2017
FRB: Federal Reserve Bank			TDR: Troubled debt restructuring
FHLB: Federal Home Loan Bank			~~TDR: Troubled debt restructuring~~XBRL: eXtensible Business Reporting Language
Freddie Mac: Federal Home Loan Mortgage Corporation			~~XBRL: eXtensible Business Reporting Language~~
~~FTE: Fully taxable equivalent~~	Yield Curve: U.S. Treasury Yield Curve

Table of Contents

PART I – FINANCIAL INFORMATION

Item 1. Financial Statements.

INTERIM CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)

(Dollars in ~~thousands~~)

thousands)


	September 30 2019		December 31 2018				September 30 2020		December 31 2019
ASSETS						ASSETS
Cash and cash equivalents						Cash and cash equivalents
Cash and demand deposits due from banks	$	26,122	$	23,534		Cash and demand deposits due from banks	$	29,685	$	20,311
Interest bearing balances due from banks	8,209		49,937			Interest bearing balances due from banks	136,054		40,261
Fed funds sold						Fed funds sold	10		0
Total cash and cash equivalents	34,331		73,471			Total cash and cash equivalents	165,749		60,572
AFS securities, at fair value	445,529		494,834			AFS securities, at fair value	363,054		429,839
Mortgage loans AFS	1,912		358			Mortgage loans AFS	4,661		904
Loans						Loans
Commercial	708,735		659,529			Commercial	821,102		700,941
Agricultural	118,460		127,161			Agricultural	102,263		116,920
Residential real estate	292,311		275,343			Residential real estate	304,559		298,569
Consumer	72,298		66,674			Consumer	75,384		70,140
Gross loans	1,191,804		1,128,707			Gross loans	1,303,308		1,186,570
Less allowance for loan and lease losses	8,169		8,375			Less allowance for loan and lease losses	9,506		7,939
Net loans	1,183,635		1,120,332			Net loans	1,293,802		1,178,631
Premises and equipment	26,350		27,815			Premises and equipment	25,749		26,242
Corporate owned life insurance policies	28,261		27,733			Corporate owned life insurance policies	28,169		28,455
Accrued interest receivable	7,360		6,928			Accrued interest receivable	8,458		6,501
Equity securities without readily determinable fair values	25,130		24,948			Equity securities without readily determinable fair values	21,690		21,629
Goodwill and other intangible assets	48,396		48,451			Goodwill and other intangible assets	48,341		48,379
Other assets	12,780		17,632			Other assets	12,024		13,046
TOTAL ASSETS	$	1,813,684	$	1,842,502		TOTAL ASSETS	$	1,971,697	$	1,814,198
LIABILITIES AND SHAREHOLDERS’ EQUITY						LIABILITIES AND SHAREHOLDERS’ EQUITY
Deposits						Deposits
Noninterest bearing	$	242,179	$	236,534		Noninterest bearing	$	353,082	$	249,152
NOW accounts	230,579		235,287
Interest bearing demand deposits						Interest bearing demand deposits	287,809		229,865
Certificates of deposit under $250 and other savings	749,736		744,944			Certificates of deposit under $250 and other savings	754,409		739,023
Certificates of deposit over $250	86,279		75,928			Certificates of deposit over $250	99,795		95,811
Total deposits	1,308,773		1,292,693			Total deposits	1,495,095		1,313,851
Borrowed funds	277,386		340,299			Borrowed funds	238,349		275,999
Accrued interest payable and other liabilities	15,149		13,991			Accrued interest payable and other liabilities	15,708		14,166
Total liabilities	1,601,308		1,646,983			Total liabilities	1,749,152		1,604,016
Shareholders’ equity						Shareholders’ equity
Common stock — no par value 15,000,000 shares authorized; issued and outstanding 7,938,234 shares (including 44,189 shares held in the Rabbi Trust) in 2019 and 7,870,969 shares (including 16,673 shares held in the Rabbi Trust) in 2018	141,318		140,416
Common stock — no par value 15,000,000 shares authorized; issued and outstanding 8,007,901 shares (including 41,307 shares held in the Rabbi Trust) in 2020 and 7,910,804 shares (including 27,069 shares held in the Rabbi Trust) in 2019						Common stock — no par value 15,000,000 shares authorized; issued and outstanding 8,007,901 shares (including 41,307 shares held in the Rabbi Trust) in 2020 and 7,910,804 shares (including 27,069 shares held in the Rabbi Trust) in 2019	142,745		141,069
Shares to be issued for deferred compensation obligations	5,578		5,431			Shares to be issued for deferred compensation obligations	4,104		5,043
Retained earnings	63,334		57,357			Retained earnings	67,321		62,099
Accumulated other comprehensive income (loss)	2,146		(7,685		)	Accumulated other comprehensive income (loss)	8,375		1,971
Total shareholders’ equity	212,376		195,519			Total shareholders’ equity	222,545		210,182
TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY	$	1,813,684	$	1,842,502		TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY	$	1,971,697	$	1,814,198

See notes to interim condensed consolidated financial statements (unaudited).

Table of Contents

INTERIM CONDENSED CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)

(Dollars in thousands except per share ~~amounts~~)

amounts)


	Three Months Ended September 30					Nine Months Ended September 30					Three Months Ended September 30				Nine Months Ended September 30
	2019		2018			2019		2018			2020		2019		2020		2019
Interest income										Interest income
Loans, including fees	$	14,020	$	12,833		$	40,498	$	36,205	Loans, including fees	$	13,554	$	14,020	$	40,105	$	40,498
AFS securities										AFS securities
Taxable	1,691		2,031			5,522		6,263		Taxable	1,071		1,691		3,912		5,522
Nontaxable	1,151		1,301			3,611		4,014		Nontaxable	911		1,151		2,950		3,611
Federal funds sold and other	299		254			826		771		Federal funds sold and other	164		299		803		826
Total interest income	17,161		16,419			50,457		47,253		Total interest income	15,700		17,161		47,770		50,457
Interest expense										Interest expense
Deposits	2,980		2,436			8,563		6,712		Deposits	1,996		2,980		7,034		8,563
Borrowings	1,570		1,795			4,806		4,661		Borrowings	1,207		1,570		3,933		4,806
Total interest expense	4,550		4,231			13,369		11,373		Total interest expense	3,203		4,550		10,967		13,369
Net interest income	12,611		12,188			37,088		35,880		Net interest income	12,497		12,611		36,803		37,088
Provision for loan losses	193		(76		)	48		636		Provision for loan losses	516		193		1,409		48
Net interest income after provision for loan losses	12,418		12,264			37,040		35,244		Net interest income after provision for loan losses	11,981		12,418		35,394		37,040
Noninterest income										Noninterest income
Service charges and fees	1,705		1,557			4,706		4,533		Service charges and fees	1,950		1,705		4,689		4,706
Investment and Trust advisory fees	689		748			2,146		2,144
Wealth management fees										Wealth management fees	649		689		1,877		2,146
Net gain on sale of mortgage loans										Net gain on sale of mortgage loans	1,036		199		1,653		408
Gains from redemption of corporate owned life insurance policies										Gains from redemption of corporate owned life insurance policies	0		0		873		0
Earnings on corporate owned life insurance policies	190		185			564		551		Earnings on corporate owned life insurance policies	187		190		558		564
Net gain on sale of mortgage loans	199		171			408		339
Net gains on foreclosed assets	202		23			213		34
Net gains on sale of AFS securities	6		—			6		—
Other	283		194			721		515		Other	238		491		654		940
Total noninterest income	3,274		2,878			8,764		8,116		Total noninterest income	4,060		3,274		10,304		8,764
Noninterest expenses										Noninterest expenses
Compensation and benefits	5,971		5,845			17,650		17,018		Compensation and benefits	6,101		5,971		17,763		17,650
Furniture and equipment	1,427		1,473			4,330		4,459		Furniture and equipment	1,426		1,427		4,318		4,330
Occupancy	830		870			2,594		2,501		Occupancy	889		830		2,668		2,594
Other	2,392		2,899			7,584		8,004		Other	2,534		2,392		7,846		7,584
Total noninterest expenses	10,620		11,087			32,158		31,982		Total noninterest expenses	10,950		10,620		32,595		32,158
Income before federal income tax expense	5,072		4,055			13,646		11,378		Income before federal income tax expense	5,091		5,072		13,103		13,646
Federal income tax expense	630		359			1,520		887		Federal income tax expense	734		630		1,495		1,520
NET INCOME	$	4,442	$	3,696		$	12,126	$	10,491	NET INCOME	$	4,357	$	4,442	$	11,608	$	12,126
Earnings per common share										Earnings per common share
Basic	$	0.56	$	0.47		$	1.53	$	1.33	Basic	$	0.55	$	0.56	$	1.46	$	1.53
Diluted	$	0.55	$	0.46		$	1.50	$	1.30	Diluted	$	0.54	$	0.55	$	1.43	$	1.50
Cash dividends per common share	$	0.26	$	0.26		$	0.78	$	0.78	Cash dividends per common share	$	0.27	$	0.26	$	0.81	$	0.78

See notes to interim condensed consolidated financial statements (unaudited).

Table of Contents

INTERIM CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (UNAUDITED)

(Dollars in ~~thousands~~)

thousands)

Three Months Ended
September 30 Nine Months Ended
September 30
2019 2018 2019 2018
Net income $ 4,442
$ 3,696
$ 12,126
$ 10,491
Unrealized gains (losses) on AFS securities arising during the period 1,724
(2,513 ) 12,554
(12,548 )
Reclassification adjustment for net (gains) losses included in net income (6 ) —
(6 ) —
Tax effect ⁽¹⁾
(310 ) 522
(2,523 ) 2,648
Unrealized gains (losses) on AFS securities, net of tax 1,408
(1,991 ) 10,025
(9,900 )
Unrealized gains (losses) on derivative instruments arising during the period (37 ) 7
(245 ) 160
Tax effect ⁽¹⁾
8
(2 ) 51
(34 )
Unrealized gains (losses) on derivative instruments, net of tax (29 ) 5
(194 ) 126
Other comprehensive income (loss), net of tax 1,379
(1,986 ) 9,831
(9,774 )
Comprehensive income (loss) $ 5,821
$ 1,710
$ 21,957
$ 717


⁽¹⁾	~~See “Note 11 – Accumulated Other Comprehensive Income” for tax effect reconciliation.~~


	Three Months Ended September 30				Nine Months Ended September 30
	2020		2019		2020		2019
Net income	$	4,357	$	4,442	$	11,608	$	12,126
Unrealized gains (losses) on AFS securities arising during the period	(66)		1,724		8,304		12,554
Reclassification adjustment for net (gains) losses included in net income	0		(6)		(71)		(6)
Tax effect (1)	58		(310)		(1,714)		(2,523)
Unrealized gains (losses) on AFS securities, net of tax	(8)		1,408		6,519		10,025
Unrealized gains (losses) on derivative instruments arising during the period	20		(37)		(145)		(245)
Tax effect (1)	(4)		8		30		51
Unrealized gains (losses) on derivative instruments, net of tax	16		(29)		(115)		(194)
Other comprehensive income (loss), net of tax	8		1,379		6,404		9,831
Comprehensive income (loss)	$	4,365	$	5,821	$	18,012	$	21,957

(1)See “Note 10 – Accumulated Other Comprehensive Income” for tax effect reconciliation.

See notes to interim condensed consolidated financial statements (unaudited).

Table of Contents

INTERIM CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY (UNAUDITED)

(Dollars in thousands except per share ~~amounts~~)

amounts)


																			Common Stock
	Common Stock																		Common Shares Outstanding	Amount		Common Shares to be Issued for Deferred Compensation Obligations		Retained Earnings		Accumulated Other Comprehensive Income (Loss)		Totals
	Common Shares Outstanding		Amount			Common Shares to be Issued for Deferred Compensation Obligations			Retained Earnings			Accumulated Other Comprehensive Income (Loss)			Totals
Balance, January 1, 2018	7,857,293		$	140,277		$	5,502		$	51,728		$	(2,602	)	$	194,905
Comprehensive income (loss)	—		—			—			10,491			(9,774		)	717
Adoption of ASU 2016-01	—		—			—			(223		)	223			—
Issuance of common stock	189,074		5,093			—			—			—			5,093
Common stock transferred from the Rabbi Trust to satisfy deferred compensation obligations	—		612			(612		)	—			—			—
Share-based payment awards under equity compensation plan	—		—			449			—			—			449
Common stock purchased for deferred compensation obligations	—		(290		)	—			—			—			(290		)
Common stock repurchased pursuant to publicly announced repurchase plan	(215,427	)	(6,212		)	—			—			—			(6,212		)
Cash dividends paid ($0.78 per common share)	—		—			—			(6,126		)	—			(6,126		)
Balance, September 30, 2018	7,830,940		$	139,480		$	5,339		$	55,870		$	(12,153	)	$	188,536
Balance, January 1, 2019	7,870,969		$	140,416		$	5,431		$	57,357		$	(7,685	)	$	195,519		Balance, January 1, 2019	7,870,969	$	140,416	$	5,431	$	57,357	$	(7,685)	$	195,519
Comprehensive income (loss)	—		—			—			12,126			9,831			21,957			Comprehensive income (loss)	—	—		—		12,126		9,831		21,957
Issuance of common stock	159,521		3,672			—			—			—			3,672			Issuance of common stock	159,521	3,672		—		—		—		3,672
Common stock transferred from the Rabbi Trust to satisfy deferred compensation obligations	—		268			(268		)	—			—			—			Common stock transferred from the Rabbi Trust to satisfy deferred compensation obligations	—	268		(268)		—		—		0
Share-based payment awards under equity compensation plan	—		—			415			—			—			415			Share-based payment awards under equity compensation plan	—	—		415		—		—		415
Common stock purchased for deferred compensation obligations	—		(898		)	—			—			—			(898		)	Common stock purchased for deferred compensation obligations	—	(898)		—		—		—		(898)
Common stock repurchased pursuant to publicly announced repurchase plan	(92,256	)	(2,140		)	—			—			—			(2,140		)	Common stock repurchased pursuant to publicly announced repurchase plan	(92,256)	(2,140)		—		—		—		(2,140)
Cash dividends paid ($0.78 per common share)	—		—			—			(6,149		)	—			(6,149		)	Cash dividends paid ($0.78 per common share)	—	—		—		(6,149)		—		(6,149)
Balance, September 30, 2019	7,938,234		$	141,318		$	5,578		$	63,334		$	2,146		$	212,376		Balance, September 30, 2019	7,938,234	$	141,318	$	5,578	$	63,334	$	2,146	$	212,376
Balance, January 1, 2020																		Balance, January 1, 2020	7,910,804	$	141,069	$	5,043	$	62,099	$	1,971	$	210,182
Comprehensive income (loss)																		Comprehensive income (loss)	—	—		—		11,608		6,404		18,012
Issuance of common stock																		Issuance of common stock	184,144	3,274		—		—		—		3,274
Common stock transferred from the Rabbi Trust to satisfy deferred compensation obligations																		Common stock transferred from the Rabbi Trust to satisfy deferred compensation obligations	—	1,273		(1,273)		—		—		0
Share-based payment awards under equity compensation plan																		Share-based payment awards under equity compensation plan	—	—		334		—		—		334
Common stock purchased for deferred compensation obligations																		Common stock purchased for deferred compensation obligations	—	(1,252)		—		—		—		(1,252)
Common stock repurchased pursuant to publicly announced repurchase plan																		Common stock repurchased pursuant to publicly announced repurchase plan	(87,047)	(1,619)		—		—		—		(1,619)
Cash dividends paid ($0.81 per common share)																		Cash dividends paid ($0.81 per common share)	—	—		—		(6,386)		—		(6,386)
Balance, September 30, 2020																		Balance, September 30, 2020	8,007,901	$	142,745	$	4,104	$	67,321	$	8,375	$	222,545

See notes to interim condensed consolidated financial statements (unaudited).

Table of Contents

INTERIM CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)

(Dollars in ~~thousands~~)thousands)


	Nine Months Ended September 30
	2020		2019
OPERATING ACTIVITIES
Net income	$	11,608	$	12,126
Reconciliation of net income to net cash provided by operating activities:
Undistributed earnings of equity securities without readily determinable fair values	(61)		(182)
Provision for loan losses	1,409		48
Depreciation	1,958		2,211
Amortization of OMSR	386		201
Amortization of acquisition intangibles	38		55
Net amortization of AFS securities	1,539		1,344
Net gains on sale of AFS securities	(71)		(6)
Net gain on sale of mortgage loans	(1,653)		(408)
OMSR impairment loss	316		81
Net gains on foreclosed assets	(43)		(213)
Increase in cash value of corporate owned life insurance policies, net of expenses	(521)		(528)
Gains from redemption of corporate owned life insurance policies	(873)		0
Share-based payment awards under equity compensation plan	334		415
Origination of loans held-for-sale	(82,464)		(26,514)
Proceeds from loan sales	80,360		25,368
Net changes in operating assets and liabilities which provided (used) cash:
Accrued interest receivable	(1,957)		(432)
Other assets	261		1,966
Accrued interest payable and other liabilities	370		1,551
Net cash provided by (used in) operating activities	10,936		17,083
INVESTING ACTIVITIES
Activity in AFS securities
Sales	26,855		33,840
Maturities, calls, and principal payments	72,013		61,170
Purchases	(25,318)		(34,495)
Net loan principal (originations) collections	(116,878)		(63,900)
Proceeds from sales of foreclosed assets	146		649
Purchases of premises and equipment	(1,465)		(746)
Purchases of corporate owned life insurance policies	(625)		0
Proceeds from redemption of corporate owned life insurance policies	2,305		0
Funding of low income housing tax credit investments	(403)		(393)
Net cash provided by (used in) investing activities	(43,370)		(3,875)

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Nine Months Ended
September 30
2019 2018
OPERATING ACTIVITIES
Net income $ 12,126
$ 10,491
Reconciliation of net income to net cash provided by operating activities:
Undistributed earnings of equity securities without readily determinable fair values (182 ) (143 )
Provision for loan losses 48
636
Depreciation 2,211
2,198
Amortization of OMSR 201
165
Amortization of acquisition intangibles 55
74
Net amortization of AFS securities 1,344
1,432
Net (gains) losses on sale of AFS securities (6 ) —
Net unrealized (gains) losses on equity securities, at fair value —
41
Net (gains) losses on sale of equity securities, at fair value —
(1 )
Net gain on sale of mortgage loans (408 ) (339 )
Net gains on foreclosed assets (213 ) (34 )
Increase in cash value of corporate owned life insurance policies, net of expenses (528 ) (521 )
Share-based payment awards under equity compensation plan 415
449
Origination of loans held-for-sale (26,514 ) (20,072 )
Proceeds from loan sales 25,368
19,160
Net changes in operating assets and liabilities which provided (used) cash:
Accrued interest receivable (432 ) (606 )
Other assets 2,047
348
Accrued interest payable and other liabilities 1,551
972
Net cash provided by (used in) operating activities 17,083
14,250
INVESTING ACTIVITIES
Activity in AFS securities
Sales 33,840
—
Maturities, calls, and principal payments 61,170
64,629
Purchases (34,495 ) (31,018 )
Sale of equity securities, at fair value —
3,537
Net loan principal (originations) collections (63,900 ) (48,862 )
Proceeds from sales of foreclosed assets 649
201
Purchases of premises and equipment (746 ) (1,934 )
Purchases of FHLB Stock —
(1,494 )
Funding of low income housing tax credit investments (393 ) (516 )
Net cash provided by (used in) investing activities (3,875 ) (15,457 )

INTERIM CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (continued)

(Dollars in ~~thousands~~)

thousands)


	Nine Months Ended September 30							Nine Months Ended September 30
	2019			2018				2020		2019
FINANCING ACTIVITIES							FINANCING ACTIVITIES
Net increase (decrease) in deposits	$	16,080		$	11,548		Net increase (decrease) in deposits	181,244		16,080
Net increase (decrease) in borrowed funds	(62,913		)	14,898			Net increase (decrease) in borrowed funds	(37,650)		(62,913)
Cash dividends paid on common stock	(6,149		)	(6,126		)	Cash dividends paid on common stock	(6,386)		(6,149)
Proceeds from issuance of common stock	3,672			5,093			Proceeds from issuance of common stock	3,274		3,672
Common stock repurchased	(2,140		)	(6,212		)	Common stock repurchased	(1,619)		(2,140)
Common stock purchased for deferred compensation obligations	(898		)	(290		)	Common stock purchased for deferred compensation obligations	(1,252)		(898)
Net cash provided by (used in) financing activities	(52,348		)	18,911			Net cash provided by (used in) financing activities	137,611		(52,348)
Increase (decrease) in cash and cash equivalents	(39,140		)	17,704			Increase (decrease) in cash and cash equivalents	105,177		(39,140)
Cash and cash equivalents at beginning of period	73,471			30,848			Cash and cash equivalents at beginning of period	60,572		73,471
Cash and cash equivalents at end of period	$	34,331		$	48,552		Cash and cash equivalents at end of period	$	165,749	$	34,331
SUPPLEMENTAL CASH FLOWS INFORMATION:							SUPPLEMENTAL CASH FLOWS INFORMATION:
Interest paid	$	13,325		$	11,249		Interest paid	$	11,164	$	13,325
Income taxes paid							Income taxes paid	$	556	$	0
SUPPLEMENTAL NONCASH INFORMATION:							SUPPLEMENTAL NONCASH INFORMATION:
Transfers of loans to foreclosed assets	$	722		$	215		Transfers of loans to foreclosed assets	$	298	$	722

See notes to interim condensed consolidated financial statements (unaudited).

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NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

(Dollars in thousands except per share ~~amounts~~)amounts)

Note 1 – Basis of Presentation

As used in these notes, as well as in Management's Discussion and Analysis of Financial Condition and Results of Operations,, 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~~refer to Isabella Bank ~~Corporation~~’sCorporation’s subsidiary, Isabella ~~Bank~~.Bank.

The accompanying unaudited interim condensed consolidated financial statements have been prepared in accordance with GAAP for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by GAAP for complete financial statements. In our opinion, all adjustments considered necessary for a fair presentation have been included. Operating results for the three and ~~nine~~ ~~month~~ nine-month periods ended September 30, ~~2019~~2020 are not necessarily indicative of the results that may be expected for the year ending December 31, ~~2019~~.2020. For further information, refer to our Annual Report on Form 10-K for the year ended December 31, ~~2018~~.2019.

Our accounting policies are materially the same as those discussed in Note 1 to the Consolidated Financial Statements included in our Annual Report on Form 10-K for the year ended December 31, ~~2018.~~2019.

Reclassifications: Certain amounts reported in the interim ~~2018~~2019 consolidated financial statements have been reclassified to conform with the ~~2019~~2020 presentation. Other assets and other liabilities on the interim condensed consolidated balance sheets were increased by $5,195 as of December 31, 2018 to reclassify pension and income tax related liabilities (pension: $3,470, income taxes $1,725). This resulted in a $5,195 increase in total assets and total liabilities as of December 31, 2018. All other balances and ratios were not materially impacted.

Note 2 – Accounting Standards Updates

Recently Adopted ~~Accounting Standards Updates~~

ASU No. ~~2016-02: “Leases~~2018-13: “Fair Value Measurement (Topic ~~842)”~~820): Disclosure Framework-Changes to the Disclosure Requirements for Fair Value Measurement”

In ~~February 2016,~~August 2018, ASU No. ~~2016-02~~2018-13 was issued and provided an updated framework related to ~~create~~ ~~Topic 842 - Leases~~ which requires recognition of lease assets and lease liabilities on the balance sheet for leases previously classified as operating leases. Accounting guidance is for both lessee and lessor accounting. Under lessee accounting, a lessee should recognize in the statement of financial position a liabilityfair value disclosures. For entities required to make ~~lease payments (the lease liability)~~disclosures about recurring or nonrecurring fair value measurements, the update provides disclosure modifications which include the removal, modification and ~~a right-of-use asset representing its right to use the underlying asset for the lease term.~~addition of specific disclosure requirements.

For finance leases, a lessee is required to do the following: 1) recognize a right-of-use asset and a lease liability, initially measured at the present value of the lease payments, in the statement of financial position; 2) recognize interest on the lease liability separately from amortization of the right-of-use asset in the statement of comprehensive income; and 3) classify repayments of the principal portion of the lease liability within financing activities and payments of interest on the lease liability and variable lease payments within operating activities in the statement of cash flows. For operating leases, a lessee is required to do the following: 1) recognize a right-of-use asset and a lease liability, initially measured at the present value of the lease payments, in the statement of financial position; 2) recognize a single lease cost, calculated so that the cost of the lease is allocated over the lease term on a generally straight-line basis; and 3) classify all cash payments within operating activities in the statement of cash flows.

~~The accounting applied by a lessor is largely unchanged from that applied under previous GAAP.~~ The new authoritative guidance was effective on January 1, ~~2019.~~2020 and did not have a significant impact on our financial statement disclosures.

ASU No. 2018-15: “Intangibles - Goodwill and Other - Internal-Use Software (Subtopic 350-40): Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract”

In August 2018, ASU No. 2018-15 was issued and provided guidance on the accounting for implementation, setup, and

other upfront costs (collectively referred to as implementation costs) for entities that are a customer in a hosting arrangement that is a service contract. The guidance also provided clarification on requirements to capitalize implementation costs and the required accounting for expenses related to capitalization of implementation costs.

The new authoritative guidance was effective January 1, 2020. We ~~reviewed our lease agreements to determine the appropriate treatment under this guidance.~~will review arrangements entered into prospectively. These changes ~~resulted in the recognition of~~are not expected to have a ~~$72 operating lease asset and liability~~significant impact on ~~the consolidated balance sheet as of January 1, 2019 which was restated prospectively. Given the current insignificant impact to~~ our operating results ~~further~~or financial statement ~~disclosures were not considered necessary as of September 30, 2019.~~disclosures.

Pending ~~Accounting Standards Updates~~

ASU No. 2016-13: “Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments”, as amended

In June 2016, ASU No. 2016-13 was issued and updated the measurement for credit losses for AFS debt securities and assets measured at amortized cost which ~~includes~~include loans, trade receivables, and any other financial assets with the contractual right to receive cash. Current GAAP requires an “incurred loss” methodology for recognizing credit losses that delays recognition until

it is probable a loss has been incurred. Under the incurred loss approach, entities are limited to a probable initial recognition threshold when credit losses are ~~measured under GAAP;~~measured; an entity generally only considers past events and current conditions in measuring the incurred loss.

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Under the new guidance, the incurred loss impairment methodology ~~in current GAAP~~ is replaced with a methodology that reflects current expected credit losses (CECL). This methodology requires consideration of a broader range of reasonable and supportable information to calculate credit loss estimates. The measurement of expected credit losses is based on relevant information about past events, including historical experience, current conditions, and reasonable and supportable forecasts that affect the collectability of the reported amount. An entity must use judgment in determining the relevant information and estimation methods that are appropriate in its circumstances which applies to assets measured either collectively or individually.

The update allows an entity to revert to historical loss information that is reflective of the contractual term (considering the effect of prepayments) for periods that are beyond the time frame for which the entity is able to develop reasonable and supportable forecasts. In addition, the disclosures of credit quality indicators in relation to the amortized cost of financing receivables, a current disclosure requirement, are further disaggregated by year of origination (or vintage). The vintage information will be useful for financial statement users to better assess changes in underwriting standards and credit quality trends in asset portfolios over time and the effect of those changes on credit losses.

Overall, the update will allow entities the ability to measure expected credit losses without the restriction of incurred or probable losses that exist under current GAAP. For users of the financial statements, the update requires disclosure of decision-useful information about the expected credit losses on financial instruments and other commitments to extend credit held by a reporting entity at each reporting date. The new authoritative guidance iswas originally effective for interim and annual periods beginning after December 15, ~~2019 and may have a significant impact on our operations and financial statement disclosures as well as that of the banking industry as a whole.~~2019. Effective October 16, 2019, the FASB approved and issued changes to the implementation date of this ~~guidance.~~guidance for some filers. As a ~~small~~smaller reporting company, as defined by the SEC, our implementation date was delayed from January 1, 2020 to January 1, 2023. Early adoption continues to be ~~permissible. While~~permissible under the revised implementation date; currently we ~~will consider an~~have no plans for early ~~adoption~~adoption. This guidance may have a significant impact on the results of ~~ASU 2016-13, we do not expect to early adopt effective January 1, 2020.~~our operations and financial statement disclosures as well as that of the banking industry as a whole.

We have invested a considerable amount of effort toward this guidance and will continue to invest considerable effort until our implementation date. AAn internal committee was formed and ~~has developed a road map to implementation, and the committee~~ is accountable for timely and accurate adoption of the guidance. A ~~company~~service provider that has focused on the ALLL for more than 10 years and serves hundreds of financial institutions has been engaged to provide us with education, advisory, and software solutions exclusively related to the ACL. We will run parallel processes which will help to ensure we are ready to calculate, review, and report the ACL by the required implementation date.

ASU No. ~~2018-13: “Fair Value Measurement (Topic 820): Disclosure Framework-Changes to the Disclosure Requirements for Fair Value Measurement”~~

In August 2018, ASU No. 2018-13 was issued and provided updated framework related to fair value disclosures. For entities required to make disclosures about recurring or nonrecurring fair value measurements, the update provides disclosure modifications which include the removal, modification and addition of specific disclosure requirements.

~~The new authoritative guidance is effective for interim and annual periods beginning after December 15, 2019 and will impact our financial statement disclosures.~~

~~ASU No.~~ 2018-14: “Compensation - Retirement Benefits - Defined Pension Plans - General (Subtopic 715-20): Disclosure Framework - Changes to the Disclosure Requirements for Defined Benefit Plans”

In August 2018, ASU No. 2018-14 was issued and provided an updated framework related to defined benefit plans. For employers that sponsor defined benefit pension or other postretirement plans, the update provides disclosure modifications which include the removal of six specific requirements, the addition of two specific requirements and clarification to existing requirements.

Disclosure additions include 1) the weighted-average interest crediting rates for cash balance plans and other plans with promised interest crediting rates; and 2) an explanation of the reasons for significant gains and losses related to changes in the benefit obligation for the period. Clarification items relate to 1) the projected benefit obligation (PBO) and fair value of plan assets for plans with PBOs in excess of plan assets; and 2) the accumulated benefit obligation (ABO) and fair value of plan assets for plans with ABOs in excess of plan assets.

The new authoritative guidance is effective for fiscal years ending after December 15, 2020, with early adoption permitted, and will likely impact our financial statement disclosures.

~~In August 2018, ASU No. 2018-15 was issued and provided guidance on the accounting for implementation, setup, and~~

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other upfront costs (collectively referred to as implementation costs) for entities that are a customer in a hosting arrangement that is a service contract. The guidance also provides clarification on requirements to capitalize implementation costs and the required accounting for expenses related to capitalization of implementation costs.

The new authoritative guidance is effective for interim and annual periods beginning after December 15, 2019, with early adoption permitted. The impact on our operating results and financial statement disclosures as a result of this update will depend upon our current and future arrangements and whether or not they meet the requirement to be capitalized.

Note 3 – AFS Securities

The amortized cost and fair value of AFS securities,, with gross unrealized gains and losses, are as follows at:

September 30, 2019

Amortized
Cost Gross
Unrealized
Gains Gross
Unrealized
Losses Fair
Value
States and political subdivisions $ 170,897
$ 4,679
$ 1
$ 175,575
Auction rate money market preferred 3,200
—
111
3,089
Mortgage-backed securities 149,843
975
698
150,120
Collateralized mortgage obligations 115,452
1,501
208
116,745
Total $ 439,392
$ 7,155
$ 1,018
$ 445,529


										September 30, 2020
	December 31, 2018									Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses		Fair Value
	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses		Fair Value
Government sponsored enterprises	$	172	$	—	$	2	$	170
States and political subdivisions	188,992		2,125		251		190,866		States and political subdivisions	$	142,547	$	5,854	$	0	$	148,401
Auction rate money market preferred	3,200		—		646		2,554		Auction rate money market preferred	3,200		0		6		3,194
Mortgage-backed securities	189,688		76		5,280		184,484		Mortgage-backed securities	100,984		3,181		0		104,165
Collateralized mortgage obligations	119,193		71		2,504		116,760		Collateralized mortgage obligations	102,231		5,063		0		107,294
Total	$	501,245	$	2,272	$	8,683	$	494,834	Total	$	348,962	$	14,098	$	6	$	363,054


	December 31, 2019
	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses		Fair Value
States and political subdivisions	$	165,005	$	4,747	$	0	$	169,752
Auction rate money market preferred	3,200		0		81		3,119
Mortgage-backed securities	139,831		933		560		140,204
Collateralized mortgage obligations	115,944		1,007		187		116,764
Total	$	423,980	$	6,687	$	828	$	429,839

The amortized cost and fair value of AFS securities by contractual maturity at September 30, ~~2019~~2020 are as follows:


	Maturing								Securities with Variable Monthly Payments or Noncontractual Maturities									Maturing															Securities with Variable Monthly Payments or Noncontractual Maturities
	Due in One Year or Less		After One Year But Within Five Years		After Five Years But Within Ten Years		After Ten Years					Total					Due in One Year or Less				After One Year But Within Five Years				After Five Years But Within Ten Years				After Ten Years							Total
States and political subdivisions	$	29,273	$	70,436	$	44,018	$	27,170		$	—			$	170,897		States and political subdivisions		$	22,709			$	66,180			$	27,441			$	26,217			$	0			$	142,547
Auction rate money market preferred	—		—		—		—		3,200				3,200			Auction rate money market preferred		0				0				0				0				3,200				3,200
Mortgage-backed securities	—		—		—		—		149,843				149,843			Mortgage-backed securities		0				0				0				0			100,984				100,984
Collateralized mortgage obligations	—		—		—		—		115,452				115,452			Collateralized mortgage obligations		0				0				0				0			102,231				102,231
Total amortized cost	$	29,273	$	70,436	$	44,018	$	27,170	$	268,495			$	439,392		Total amortized cost		$	22,709			$	66,180			$	27,441			$	26,217		$	206,415			$	348,962
Fair value	$	29,378	$	71,963	$	45,538	$	28,696	$	269,954			$	445,529		Fair value		$	22,891			$	68,188			$	29,293			$	28,029		$	214,653			$	363,054

Expected maturities for government sponsored enterprises and states and political subdivisions may differ from contractual maturities because issuers may have the right to call or prepay obligations.

As the auction rate money market preferred investments have continual call dates, they are not reported by a specific maturity group. Because of their variable monthly payments, mortgage-backed securities and collateralized mortgage obligations are not reported by a specific maturity group.

A summary of the sales activity of AFS securities was as follows for the:


	Three Months Ended September 30				Nine Months Ended September 30
	2020		2019		2020		2019
Proceeds from sales of AFS securities	$	0	$	33,840	$	26,855	$	33,840
Realized gains (losses)	$	0	$	6	$	71	$	6
Applicable income tax expense (benefit)	$	0	$	1	$	15	$	1

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Three Months Ended
September 30 Nine Months Ended
September 30
2019 2018 2019 2018
Proceeds from sales of AFS securities $ 33,840
$ —
$ 33,840
$ —
Gross realized gains (losses) $ 6
$ —
$ 6
$ —
Applicable income tax expense (benefit) $ 1
$ —
$ 1
$ —

The following information pertains to AFS securities with gross unrealized losses at September 30, ~~2019~~2020 and December 31, ~~2018~~,2019, aggregated by investment category and length of time that individual securities have been in a continuous loss position.

September 30, 2019
Less Than Twelve Months Twelve Months or More

Gross
Unrealized
Losses Fair
Value Gross
Unrealized
Losses Fair
Value Total
Unrealized
Losses
States and political subdivisions $ 1
$ 797
$ —
$ —
$ 1
Auction rate money market preferred —
—
111
3,089
111
Mortgage-backed securities 4
5,943
694
66,703
698
Collateralized mortgage obligations 47
11,312
161
17,043
208
Total $ 52
$ 18,052
$ 966
$ 86,835
$ 1,018
Number of securities in an unrealized loss position: 10
23
33

December 31, 2018
Less Than Twelve Months Twelve Months or More

Gross
Unrealized
Losses Fair
Value Gross
Unrealized
Losses Fair
Value Total
Unrealized
Losses
Government sponsored enterprises $ —
$ —
$ 2
$ 170
$ 2
States and political subdivisions 83
14,732
168
15,090
251
Auction rate money market preferred —
—
646
2,554
646
Mortgage-backed securities 896
43,485
4,384
124,253
5,280
Collateralized mortgage obligations 199
21,886
2,305
87,929
2,504
Total $ 1,178
$ 80,103
$ 7,505
$ 229,996
$ 8,683
Number of securities in an unrealized loss position: 66
102
168


	September 30, 2020
	Less Than Twelve Months				Twelve Months or More
	Gross Unrealized Losses		Fair Value		Gross Unrealized Losses		Fair Value		Total Unrealized Losses
Auction rate money market preferred	$	0	$	0	$	6	$	3,194	$	6
Number of securities in an unrealized loss position:			0				2		2


	December 31, 2019
	Less Than Twelve Months				Twelve Months or More
	Gross Unrealized Losses		Fair Value		Gross Unrealized Losses		Fair Value		Total Unrealized Losses
Auction rate money market preferred	$	0	$	0	$	81	$	3,119	$	81
Mortgage-backed securities	3		3,974		557		49,701		560
Collateralized mortgage obligations	43		20,262		144		13,309		187
Total	$	46	$	24,236	$	782	$	66,129	$	828
Number of securities in an unrealized loss position:			9				19		28

The reduction in unrealized losses on our AFS securities portfolio resulted from recent decreases in intermediate-term and long-term benchmark interest rates.

As of September 30, ~~2019~~2020 and December 31, ~~2018,~~2019, we conducted an analysis to determine whether any AFS securities currently in an unrealized loss position should be identified as other-than-temporarily impaired. Such analyses considered, among other factors, the following criteria:

•Has the value of the investment declined more than what is deemed to be reasonable based on a risk and maturity adjusted discount rate?

•Is the investment credit rating below investment grade?

•Is it probable the issuer will be unable to pay the amount when due?

•Is it more likely than not that we will have to sell the security before recovery of its cost basis?

•Has the duration of the investment been extended?

Based on our analysis, which included the criteria outlined above and the fact that we have asserted that we do not have to sell any AFS securities in an unrealized loss position, we do not believe that the values of any AFS securities are other-than-temporarily

impaired as of September 30, ~~2019~~2020 or December 31, ~~2018,~~2019, with the exception of one municipal bond previously identified which had no activity during the period.

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Note 4 – Loans and ALLL

We grant commercial, agricultural, residential real estate, and consumer loans to customers situated primarily in Clare, Gratiot, Isabella, Mecosta, Midland, Montcalm, and Saginaw counties in Michigan. The ability of the borrowers to honor their repayment obligations is often dependent upon the real estate, agricultural, manufacturing, retail, gaming, tourism, health care, higher education, and general economic conditions of this region. Substantially all of our consumer and residential real estate loans are secured by various items of property, while commercial loans are secured primarily by real estate, business assets, and personal guarantees. A portion of loans are unsecured.

Loans that we have the intent and ability to hold in our portfolio are reported at their outstanding principal balance adjusted for any charge-offs,, the ALLL,, and ~~any~~ deferred fees or costs. ~~Interest~~Unless a loan has a nonaccrual status, interest income is accrued over the term of the loan based on the principal amount outstanding. Loan origination fees and certain direct loan origination costs are capitalized and recognized as a component of interest income over the term of the loan using the appropriate amortization ~~methods.~~method.

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. Past due status is based on the contractual term of the loan. In all cases, a loan is placed in nonaccrual status or ~~charged-off~~ at an earlier date if collection of principal or interest is considered doubtful.

When a loan is placed in nonaccrual status, or ~~charged-off~~, all interest accrued in the current calendar year, but not collected, is reversed against interest income while interest accrued in prior calendar years, but not collected, is charged against the ~~ALLL~~.ALLL. Loans may be returned to accrual status after six months of continuous performance and achievement of current payment status.

Commercial and agricultural loans include loans for commercial real estate, commercial operating loans, advances to mortgage brokers, farmland and agricultural production, and loans to states and political subdivisions. Repayment of these loans is dependent upon the successful operation and management of a business. We minimize our risk by limiting the amount of direct credit exposure to any one borrower to ~~$15,000~~.$15,000. Borrowers with direct credit needs of more than ~~$15,000~~$15,000 may be serviced through the use of loan participations with other commercial banks. Commercial and agricultural real estate loans commonly require loan-to-value limits of 80% or less. Depending upon the type of loan, past credit history, and current operating results, we may require the borrower to pledge accounts receivable, inventory, property, or equipment. Government agency guarantee may be required. Personal guarantees and/or life insurance beneficiary assignments are generally required from the owners of closely held corporations, partnerships, and sole proprietorships. In addition, we may require annual financial statements, prepare cash flow analyses, and review credit reports.

We entered into a mortgage purchase program in 2016 with a financial institution where we participate in advances to mortgage brokers (“advances”). The mortgage brokers originate residential mortgage loans with the intent to sell them on the secondary market. We participate in the advance to the mortgage broker, which is secured by the underlying mortgage loan, until it is ultimately sold on the secondary market. As such, the average life of each participated advance is approximately 20-30 days. Funds from the sale of the loan are used to pay off our participation in the advance to the mortgage broker. We classify these advances as commercial loans and include the outstanding balance in commercial loans on our consolidated balance ~~sheet.~~sheets. Under the participation agreement, we committed to a maximum outstanding aggregate amount of ~~$50,000.~~$80,000. The difference between our outstanding balance and the maximum outstanding aggregate amount is classified as “Unfunded commitments under lines of credit” in the “~~Contractual~~“Contractual Obligations and Loan ~~Commitments~~”Commitments” section of the Management's Discussion and Analysis of Financial Condition and Results of Operations of this report.

We offer adjustable rate mortgages, construction loans, and fixed rate residential real estate loans which have amortization periods up to a maximum of 30 years. We consider the anticipated direction of interest rates, balance sheet duration, the sensitivity of our balance sheet to changes in interest rates, our liquidity needs, and overall loan demand to determine whether or not to sell fixed rate loans to Freddie ~~Mac~~.Mac.

Our lending policies generally limit the maximum loan-to-value ratio on residential real estate loans to 100% of the lower of the appraised value of the property or the purchase price. Private mortgage insurance is typically required on loans with loan-to-value ratios in excess of 80% unless the loan qualifies for government guarantees.

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Underwriting criteria for originated residential real estate loans generally include:

•Evaluation of the borrower’s ability to make monthly payments.

•Evaluation of the value of the property securing the loan.

•Ensuring the payment of principal, interest, taxes, and hazard insurance does not exceed 28% of a borrower’s gross income.

•Ensuring all debt servicing does not exceed 40% of income.

•Verification of acceptable credit reports.

•Verification of employment, income, and financial information.

Appraisals are performed by independent appraisers and are reviewed for appropriateness. Generally, mortgage loan requests are reviewed by our mortgage loan committee or through a secondary market underwriting system; loans in excess of $1,000 require the approval of our Internal Loan Committee, the Executive Loan Committee, the Board of Directors’ Loan Committee, or the Board of Directors.

Consumer loans include secured and unsecured personal loans. Loans are amortized for a period of up to 15 years based on the age and value of the underlying collateral. The underwriting emphasis is on a borrower’s perceived intent and ability to pay rather than collateral value. No consumer loans are sold to the secondary market.

The ALLL is established as losses are estimated to have occurred through a provision for loan losses charged to earnings. ~~Loan losses~~Full or partial loan balances are charged against the ALLL when we believe ~~the~~ uncollectability ~~of the loan balance~~ is probable. Subsequent recoveries, if any, are credited to the ~~ALLL~~.ALLL.

The ALLL is evaluated on a regular basis for appropriateness. Our periodic review of the collectability of a loan considers historical experience, the nature and volume of the loan portfolio, adverse situations that may affect the borrower’s ability to repay, estimated value of any underlying collateral, and prevailing economic conditions. This evaluation is inherently subjective as it requires estimates that are susceptible to significant revision as more information becomes available.

The primary factors behind the determination of the level of the ALLL are specific allocations for impaired loans, historical loss percentages, as well as unallocated components. Specific allocations for impaired loans are primarily determined based on the difference between the loan’s outstanding balance and the present value of expected future cash flows discounted at the loan’s effective interest rate, or the fair value of the collateral, less costs to sell, if the loan is collateral dependent. Historical loss allocations are calculated at the loan class and segment levels based on a migration analysis of the loan portfolio, with the exception of advances to mortgage brokers, over the preceding five years. With no historical losses on advances to mortgage brokers, there is no allocation ~~in the commercial segment displayed in the following tables.~~related to this portfolio. The unallocated component of the allowance reflects the margin of imprecision inherent in the underlying assumptions used in the methodologies for estimating specific and general losses in the portfolio.

~~A summary~~While we have experienced fluctuations in credit quality indicators in recent periods, credit quality remained strong at September 30, 2020. However, the COVID-19 pandemic led to temporary and some permanent closures of ~~changes~~businesses throughout the communities in which we serve, which also led to increased unemployment. Therefore, we increased the ALLL during the first nine months of 2020 to account for inherent risk of probable losses within the loan portfolio as of September 30, 2020. We continue to monitor the economic impact from COVID-19 as it relates to credit risk to ensure the ALLL is appropriate.

Summaries of the ALLL and the recorded investment in loans by segments follows:

Allowance for Loan Losses
Three Months Ended September 30, 2019

Commercial Agricultural Residential Real Estate Consumer Unallocated Total
July 1, 2019 $ 2,080
$ 612
$ 1,882
$ 927
$ 2,536
$ 8,037
Charge-offs (21 ) (1 ) —
(121 ) —
(143 )
Recoveries 25
1
25
31
—
82
Provision for loan losses (24 ) (57 ) (38 ) 183
129
193
September 30, 2019 $ 2,060
$ 555
$ 1,869
$ 1,020
$ 2,665
$ 8,169


																			Allowance for Loan Losses
	Allowance for Loan Losses																		Three Months Ended September 30, 2020
	Nine Months Ended September 30, 2019																		Commercial		Agricultural		Residential Real Estate		Consumer		Unallocated		Total
	Commercial			Agricultural			Residential Real Estate			Consumer			Unallocated		Total
January 1, 2019	$	2,563		$	775		$	1,992		$	857		$	2,188	$	8,375
July 1, 2020																		July 1, 2020	$	2,121	$	356	$	1,193	$	825	$	4,382	$	8,877
Charge-offs	(134		)	(60		)	(96		)	(324		)	—		(614		)	Charge-offs	(2)		0		(13)		(31)		0		(46)
Recoveries	98			2			143			117			—		360			Recoveries	81		2		36		40		0		159
Provision for loan losses	(467		)	(162		)	(170		)	370			477		48			Provision for loan losses	(255)		(16)		90		21		676		516
September 30, 2019	$	2,060		$	555		$	1,869		$	1,020		$	2,665	$	8,169
September 30, 2020																		September 30, 2020	$	1,945	$	342	$	1,306	$	855	$	5,058	$	9,506

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	Allowance for Loan Losses
	Nine Months Ended September 30, 2020
	Commercial		Agricultural		Residential Real Estate		Consumer		Unallocated		Total
January 1, 2020	$	1,914	$	634	$	2,047	$	922	$	2,422	$	7,939
Charge-offs	(7)		(22)		(28)		(213)		0		(270)
Recoveries	133		37		102		156		0		428
Provision for loan losses	(95)		(307)		(815)		(10)		2,636		1,409
September 30, 2020	$	1,945	$	342	$	1,306	$	855	$	5,058	$	9,506


	Allowance for Loan Losses and Recorded Investment in Loans
	September 30, 2020
	Commercial		Agricultural		Residential Real Estate		Consumer		Unallocated		Total
ALLL
Individually evaluated for impairment	$	59	$	67	$	743	$	0	$	0	$	869
Collectively evaluated for impairment	1,886		275		563		855		5,058		8,637
Total	$	1,945	$	342	$	1,306	$	855	$	5,058	$	9,506
Loans
Individually evaluated for impairment	$	11,351	$	12,903	$	4,385	$	0			$	28,639
Collectively evaluated for impairment	809,751		89,360		300,174		75,384				1,274,669
Total	$	821,102	$	102,263	$	304,559	$	75,384			$	1,303,308


	Allowance for Loan Losses
	Three Months Ended September 30, 2019
	Commercial		Agricultural		Residential Real Estate		Consumer		Unallocated		Total
July 1, 2019	$	2,080	$	612	$	1,882	$	927	$	2,536	$	8,037
Charge-offs	(21)		(1)		0		(121)		0		(143)
Recoveries	25		1		25		31		0		82
Provision for loan losses	(24)		(57)		(38)		183		129		193
September 30, 2019	$	2,060	$	555	$	1,869	$	1,020	$	2,665	$	8,169


	Allowance for Loan Losses
	Nine Months Ended September 30, 2019
	Commercial		Agricultural		Residential Real Estate		Consumer		Unallocated		Total
January 1, 2019	$	2,563	$	775	$	1,992	$	857	$	2,188	$	8,375
Charge-offs	(134)		(60)		(96)		(324)		0		(614)
Recoveries	98		2		143		117		0		360
Provision for loan losses	(467)		(162)		(170)		370		477		48
September 30, 2019	$	2,060	$	555	$	1,869	$	1,020	$	2,665	$	8,169

Allowance for Loan Losses and Recorded Investment in Loans
September 30, 2019

Commercial Agricultural Residential Real Estate Consumer Unallocated Total
ALLL
Individually evaluated for impairment $ 34
$ 132
$ 1,167
$ —
$ —
$ 1,333
Collectively evaluated for impairment 2,026
423
702
1,020
2,665
6,836
Total $ 2,060
$ 555
$ 1,869
$ 1,020
$ 2,665
$ 8,169
Loans
Individually evaluated for impairment $ 8,626
$ 13,766
$ 5,953
$ —
$ 28,345
Collectively evaluated for impairment 700,109
104,694
286,358
72,298
1,163,459
Total $ 708,735
$ 118,460
$ 292,311
$ 72,298
$ 1,191,804

Allowance for Loan Losses
Three Months Ended September 30, 2018

Commercial Agricultural Residential Real Estate Consumer Unallocated Total
July 1, 2018 $ 2,197
$ 982
$ 2,167
$ 882
$ 1,972
$ 8,200
Charge-offs —
(7 ) (61 ) (111 ) —
(179 )
Recoveries 79
1
37
38
—
155
Provision for loan losses (255 ) (194 ) 239
93
41
(76 )
September 30, 2018 $ 2,021
$ 782
$ 2,382
$ 902
$ 2,013
$ 8,100

Allowance for Loan Losses
Nine Months Ended September 30, 2018

Commercial Agricultural Residential Real Estate Consumer Unallocated Total
January 1, 2018 $ 1,706
$ 611
$ 2,563
$ 900
$ 1,920
$ 7,700
Charge-offs (450 ) (51 ) (100 ) (247 ) —
(848 )
Recoveries 282
2
162
166
—
612
Provision for loan losses 483
220
(243 ) 83
93
636
September 30, 2018 $ 2,021
$ 782
$ 2,382
$ 902
$ 2,013
$ 8,100

Allowance for Loan Losses and Recorded Investment in Loans
December 31, 2018

Commercial Agricultural Residential Real Estate Consumer Unallocated Total
ALLL
Individually evaluated for impairment $ 443
$ 132
$ 1,363
$ —
$ —
$ 1,938
Collectively evaluated for impairment 2,120
643
629
857
2,188
6,437
Total $ 2,563
$ 775
$ 1,992
$ 857
$ 2,188
$ 8,375
Loans
Individually evaluated for impairment $ 9,899
$ 14,298
$ 6,893
$ 9
$ 31,099
Collectively evaluated for impairment 649,630
112,863
268,450
66,665
1,097,608
Total $ 659,529

$ 127,161
$ 275,343
$ 66,674
$ 1,128,707
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	Allowance for Loan Losses and Recorded Investment in Loans
	December 31, 2019
	Commercial		Agricultural		Residential Real Estate		Consumer		Unallocated		Total
ALLL
Individually evaluated for impairment	$	15	$	26	$	1,073	$	0	$	0	$	1,114
Collectively evaluated for impairment	1,899		608		974		922		2,422		6,825
Total	$	1,914	$	634	$	2,047	$	922	$	2,422	$	7,939
Loans
Individually evaluated for impairment	$	7,865	$	14,840	$	5,486	$	0			$	28,191
Collectively evaluated for impairment	693,076		102,080		293,083		70,140				1,158,379
Total	$	700,941	$	116,920	$	298,569	$	70,140			$	1,186,570

The following tables display the internally assigned credit ~~quality indicators~~risk ratings for commercial and agricultural credit exposures ~~based on internally assigned credit risk ratings~~ as of:

September 30, 2019
Commercial Agricultural

Real Estate Other Advances to Mortgage Brokers Total Real Estate Other Total Total
Rating

1 - Excellent $ —
$ 10
$ —
$ 10
$ —
$ —
$ —
$ 10
2 - High quality 3,342
11,829
—
15,171
2,020
405
2,425
17,596
3 - High satisfactory 122,861
47,475
46,702
217,038
17,199
5,127
22,326
239,364
4 - Low satisfactory 358,474
89,422
—
447,896
45,622
20,746
66,368
514,264
5 - Special mention 16,623
6,127
—
22,750
8,313
4,317
12,630
35,380
6 - Substandard 3,761
477
—
4,238
6,342
3,849
10,191
14,429
7 - Vulnerable 390
1,242
—
1,632
2,744
1,776
4,520
6,152
8 - Doubtful —
—
—
—
—
—
—
—
9 - Loss —
—
—
—
—
—
—
—
Total $ 505,451
$ 156,582
$ 46,702
$ 708,735
$ 82,240
$ 36,220
$ 118,460
$ 827,195


	December 31, 2018																	September 30, 2020
	Commercial								Agricultural									Commercial								Agricultural
	Real Estate		Other		Advances to Mortgage Brokers		Total		Real Estate		Other		Total		Total			Real Estate		Other		Advances to Mortgage Brokers		Total		Real Estate		Other		Total		Total
Rating																	Rating
1 - Excellent	$	21	$	31	$	—	$	52	$	51	$	28	$	79	$	131	1 - Excellent	$	0	$	0	$	0	$	0	$	0	$	0	$	0	$	0
2 - High quality	4,564		13,473		—		18,037		2,729		613		3,342		21,379		2 - High quality	2,909		16,847		0		19,756		608		13		621		20,377
3 - High satisfactory	127,573		43,199		11,793		182,565		18,325		7,039		25,364		207,929		3 - High satisfactory	89,929		62,014		75,016		226,959		16,382		4,880		21,262		248,221
4 - Low satisfactory	344,920		84,634		—		429,554		46,636		19,344		65,980		495,534		4 - Low satisfactory	381,347		152,647		0		533,994		32,794		18,146		50,940		584,934
5 - Special mention	12,847		5,287		—		18,134		10,520		5,624		16,144		34,278		5 - Special mention	18,127		6,717		0		24,844		13,140		3,547		16,687		41,531
6 - Substandard	7,428		2,002		—		9,430		6,343		4,960		11,303		20,733		6 - Substandard	7,047		7,138		0		14,185		5,914		3,301		9,215		23,400
7 - Vulnerable	334		1,423		—		1,757		2,716		2,233		4,949		6,706		7 - Vulnerable	27		1,337		0		1,364		2,911		437		3,348		4,712
8 - Doubtful	—		—		—		—		—		—		—		—		8 - Doubtful	0		0		0		0		190		0		190		190
9 - Loss	—		—		—		—		—		—		—		—		9 - Loss	0		0		0		0		0		0		0		0
Total	$	497,687	$	150,049	$	11,793	$	659,529	$	87,320	$	39,841	$	127,161	$	786,690	Total	$	499,386	$	246,700	$	75,016	$	821,102	$	71,939	$	30,324	$	102,263	$	923,365


	December 31, 2019
	Commercial								Agricultural
	Real Estate		Other		Advances to Mortgage Brokers		Total		Real Estate		Other		Total		Total
Rating
1 - Excellent	$	0	$	390	$	0	$	390	$	0	$	0	$	0	$	390
2 - High quality	2,582		8,844		0		11,426		1,452		99		1,551		12,977
3 - High satisfactory	109,737		42,858		35,523		188,118		16,765		6,769		23,534		211,652
4 - Low satisfactory	377,198		94,847		0		472,045		42,798		20,861		63,659		535,704
5 - Special mention	15,372		3,470		0		18,842		7,165		3,754		10,919		29,761
6 - Substandard	4,874		3,625		0		8,499		9,136		3,836		12,972		21,471
7 - Vulnerable	390		1,231		0		1,621		2,711		1,574		4,285		5,906
8 - Doubtful	0		0		0		0		0		0		0		0
9 - Loss	0		0		0		0		0		0		0		0
Total	$	510,153	$	155,265	$	35,523	$	700,941	$	80,027	$	36,893	$	116,920	$	817,861

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Internally assigned credit risk ratings are reviewed, at a minimum, when loans are renewed or when management has knowledge of improvements or deterioration of the credit quality of individual credits. Descriptions of the internally assigned credit risk ratings for commercial and agricultural loans are as follows:

1. EXCELLENT – Substantially Risk Free

Credit has strong financial condition and solid earnings history, characterized by:

•High liquidity, strong cash flow, low leverage.

•Unquestioned ability to meet all obligations when due.

•Experienced management, with management succession in place.

•Secured by cash.

2. HIGH QUALITY – Limited Risk

Credit with sound financial condition and a positive trend in earnings supplemented by:

•Favorable liquidity and leverage ratios.

•Ability to meet all obligations when due.

��Management with successful track record.

•Steady and satisfactory earnings history.

•If loan is secured, collateral is of high quality and readily marketable.

•Access to alternative financing.

•Well defined primary and secondary source of repayment.

•If supported by guaranty, the financial strength and liquidity of the guarantor(s) are clearly evident.

3.HIGH SATISFACTORY – Reasonable Risk

Credit with satisfactory financial condition and further characterized by:

•Working capital adequate to support operations.

•Cash flow sufficient to pay debts as scheduled.

•Management experience and depth appear favorable.

•Loan performing according to terms.

•If loan is secured, collateral is acceptable and loan is fully protected.

4. LOW SATISFACTORY – Acceptable Risk

Credit with bankable risks, although some signs of weaknesses are shown:

•Would include most start-up businesses.

•Occasional instances of trade slowness or repayment delinquency – may have been 10-3010-30 days slow within the past year.

•Management’s abilities are apparent yet unproven.

•Weakness in primary source of repayment with adequate secondary source of repayment.

•Loan structure generally in accordance with policy.

•If secured, loan collateral coverage is marginal.

To be classified as less than satisfactory, only one of the following criteria must be met.

5. SPECIAL MENTION – Criticized

Credit constitutes an undue and unwarranted credit risk but not to the point of justifying a classification of substandard. The credit risk may be relatively minor yet constitutes an unwarranted risk in light of the circumstances surrounding a specific loan:

•Downward trend in sales, profit levels, and margins.

•Impaired working capital position.

•Cash flow is strained in order to meet debt repayment.

•Loan delinquency (30-60(30-60 days) and overdrafts may occur.

•Shrinking equity cushion.

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•Diminishing primary source of repayment and questionable secondary source.

•Management abilities are questionable.

•Weak industry conditions.

•Litigation pending against the borrower.

•Loan may need to be restructured to improve collateral position or reduce payments.

•Collateral or guaranty offers limited protection.

•Negative debt service coverage, however the credit is well collateralized and payments are current.

6. SUBSTANDARD – Classified

Credit is inadequately protected by the current net worth and paying capacity of the borrower or of the collateral pledged. There is a distinct possibility we will implement collection procedures if the loan deficiencies are not corrected. Any commercial loan placed in nonaccrual status will be rated “7” or worse. In addition, the following characteristics may apply:

•Sustained losses have severely eroded the equity and cash flow.

•Deteriorating liquidity.

•Serious management problems or internal fraud.

•Original repayment terms liberalized.

•Likelihood of bankruptcy.

•Inability to access other funding sources.

•Reliance on secondary source of repayment.

•Litigation filed against borrower.

•Interest non-accrual may be warranted.

•Collateral provides little or no value.

•Requires excessive attention of the loan officer.

•Borrower is uncooperative with loan officer.

7.VULNERABLE – Classified

Credit is considered “Substandard” and warrants placing in nonaccrual status. Risk of loss is being evaluated and exit strategy options are under review. Other characteristics that may apply:

•Insufficient cash flow to service debt.

•Minimal or no payments being received.

•Limited options available to avoid the collection process.

•Transition status, expect action will take place to collect loan without immediate progress being made.

8. DOUBTFUL – Workout

Credit has all the weaknesses inherent in a “Substandard” loan with the added characteristic that collection and/or liquidation is pending. The possibility of a loss is extremely high, but its classification as a loss is deferred until liquidation procedures are completed, or reasonably estimable. Other characteristics that may apply:

•Normal operations are severely diminished or have ceased.

•Seriously impaired cash flow.

•Original repayment terms materially altered.

•Secondary source of repayment is inadequate.

•Survivability as a “going concern” is impossible.

•Collection process has begun.

•Bankruptcy petition has been filed.

•Judgments have been filed.

•Portion of the loan balance has been ~~charged-off~~.charged-off.

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9. LOSS – Charge-off

Credit is considered uncollectible and of such little value that their continuance as bankable assets is not warranted. This classification is for charged-off loans but does not mean that the asset has absolutely no recovery or salvage value. These loans are further characterized by:

•Liquidation or reorganization under Bankruptcy, with poor prospects of collection.

•Fraudulently overstated assets and/or earnings.

•Collateral has marginal or no value.

•Debtor cannot be located.

•Over 120 days delinquent.

Our primary credit quality indicator for residential real estate and consumer loans is the individual loan’s past due aging. The following tables summarize the past due and current loans for the entire loan portfolio as of:


	September 30, 2020
	Accruing Interest and Past Due:								Total Past Due and Nonaccrual
	30-59 Days		60-89 Days		90 Days or More		Nonaccrual				Current		Total
Commercial
Commercial real estate	$	151	$	0	$	0	$	27	$	178	$	499,208	$	499,386
Commercial other	567		0		0		1,337		1,904		244,796		246,700
Advances to mortgage brokers	0		0		0		0		0		75,016		75,016
Total commercial	718		0		0		1,364		2,082		819,020		821,102
Agricultural
Agricultural real estate	270		95		0		3,101		3,466		68,473		71,939
Agricultural other	0		0		0		437		437		29,887		30,324
Total agricultural	270		95		0		3,538		3,903		98,360		102,263
Residential real estate
Senior liens	891		208		0		44		1,143		267,160		268,303
Junior liens	17		0		0		0		17		4,249		4,266
Home equity lines of credit	0		0		0		0		0		31,990		31,990
Total residential real estate	908		208		0		44		1,160		303,399		304,559
Consumer
Secured	68		0		0		0		68		71,762		71,830
Unsecured	4		0		0		0		4		3,550		3,554
Total consumer	72		0		0		0		72		75,312		75,384
Total	$	1,968	$	303	$	0	$	4,946	$	7,217	$	1,296,091	$	1,303,308

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September 30, 2019
Accruing Interest
and Past Due: Total Past Due and Nonaccrual

30-59
Days 60-89
Days 90 Days
or More Nonaccrual Current Total
Commercial
Commercial real estate $ 791
$ 282
$ —
$ 390
$ 1,463
$ 503,988
$ 505,451
Commercial other 451
19
—
1,242
1,712
154,870
156,582
Advances to mortgage brokers —
—
—
—
—
46,702
46,702
Total commercial 1,242
301
—
1,632
3,175
705,560
708,735
Agricultural
Agricultural real estate 280
—
—
2,744
3,024
79,216
82,240
Agricultural other —
—
—
1,776
1,776
34,444
36,220
Total agricultural 280
—
—
4,520
4,800
113,660
118,460
Residential real estate
Senior liens 301
593
40
736
1,670
248,995
250,665
Junior liens —
6
—
—
6
6,106
6,112
Home equity lines of credit 249
—
—
74
323
35,211
35,534
Total residential real estate 550
599
40
810
1,999
290,312
292,311
Consumer
Secured 136
17
—
—
153
68,258
68,411
Unsecured 4
5
—
—
9
3,878
3,887
Total consumer 140
22
—
—
162
72,136
72,298
Total $ 2,212
$ 922
$ 40
$ 6,962
$ 10,136
$ 1,181,668
$ 1,191,804


	December 31, 2018																		December 31, 2019
	Accruing Interest and Past Due:								Total Past Due and Nonaccrual						��				Accruing Interest and Past Due:											Total Past Due and Nonaccrual
	30-59 Days		60-89 Days		90 Days or More		Nonaccrual				Current			Total				30-59 Days			60-89 Days			90 Days or More			Nonaccrual						Current				Total
Commercial																		Commercial
Commercial real estate	$	60	$	—	$	—	$	334	$	394		$	497,293		$	497,687	Commercial real estate		$	139		$	30		$	0		$	390		$	559			$	509,594			$	510,153
Commercial other	277		628		—		1,423		2,328			147,721			150,049		Commercial other		531			156			0			1,231		1,918				153,347				155,265
Advances to mortgage brokers	—		—		—		—		—			11,793			11,793		Advances to mortgage brokers		0			0			0			0		0				35,523				35,523
Total commercial	337		628		—		1,757		2,722			656,807			659,529		Total commercial		670			186			0			1,621		2,477				698,464				700,941
Agricultural																	Agricultural
Agricultural real estate	428		—		—		2,716		3,144			84,176			87,320		Agricultural real estate		0			0			0			2,711		2,711				77,316				80,027
Agricultural other	—		—		—		2,233		2,233			37,608			39,841		Agricultural other		0			0			0			1,574		1,574				35,319				36,893
Total agricultural	428		—		—		4,949		5,377			121,784			127,161		Total agricultural		0			0			0			4,285		4,285				112,635				116,920
Residential real estate																	Residential real estate
Senior liens	2,254		203		113		554		3,124			233,438			236,562		Senior liens		3,463			258			0			557		4,278				253,894				258,172
Junior liens	2		6		—		—		8			6,001			6,009		Junior liens		65			0			0			0		65				5,766				5,831
Home equity lines of credit	76		—		—		—		76			32,696			32,772		Home equity lines of credit		157			0			0			72		229				34,337				34,566
Total residential real estate	2,332		209		113		554		3,208			272,135			275,343		Total residential real estate		3,685			258			0			629		4,572				293,997				298,569
Consumer																	Consumer
Secured	95		—		—		—		95			62,721			62,816		Secured		68			0			0			0		68				66,547				66,615
Unsecured	10		—		—		—		10			3,848			3,858		Unsecured		3			0			0			0		3				3,522				3,525
Total consumer	105		—		—		—		105			66,569			66,674		Total consumer		71			0			0			0		71				70,069				70,140
Total	$	3,202	$	837	$	113	$	7,260	$	11,412		$	1,117,295		$	1,128,707	Total		$	4,426		$	444		$	0		$	6,535	$	11,405			$	1,175,165			$	1,186,570

Impaired Loans

Loans may be classified as impaired if they meet one or more of the following criteria:


1.	1.There has been a charge-off of its principal balance (in whole or in part); 2.The loan has been classified as a TDR; or 3.The loan is in nonaccrual status. ~~There has been a~~ ~~charge-off~~ ~~of its principal balance (in whole or in part);~~


2.	~~The loan has been classified as a~~ ~~TDR; or~~


3.	~~The loan is in~~ ~~nonaccrual~~ ~~status.~~

Impairment is measured on a loan-by-loan basis for commercial and agricultural loans by comparing the loan’s outstanding balance to the present value of expected future cash flows discounted at the loan’s effective interest rate, or the fair value of the collateral, less costs to sell, if the loan is collateral dependent. Large groups of smaller-balance, homogeneous residential real estate and consumer loans are collectively evaluated for impairment by comparing the loan’s unpaid principal balance to the present value of expected future cash flows discounted at the loan’s effective interest rate.

We do not recognize interest income on impaired loans in nonaccrual status. For impaired loans not classified as nonaccrual, interest income is recognized daily, as earned, according to the terms of the loan agreement and the principal amount outstanding.

Table of Contents

The following is a summary of ~~information pertaining to~~ impaired loans as of:


	September 30, 2020						December 31, 2019
	Recorded Balance		Unpaid Principal Balance		Valuation Allowance		Recorded Balance		Unpaid Principal Balance		Valuation Allowance
Impaired loans with a valuation allowance
Commercial real estate	$	2,082	$	2,325	$	57	$	517	$	635	$	15
Commercial other	883		883		2		0		0		0
Agricultural real estate	2,195		2,244		65		1,509		1,509		12
Agricultural other	1,355		1,355		2		1,355		1,355		14
Residential real estate senior liens	4,385		4,726		743		5,401		5,830		1,073
Total impaired loans with a valuation allowance	10,900		11,533		869		8,782		9,329		1,114
Impaired loans without a valuation allowance
Commercial real estate	2,640		2,714				4,961		5,224
Commercial other	5,746		5,746				2,387		2,387
Agricultural real estate	7,406		7,406				8,372		8,422
Agricultural other	1,947		1,947				3,604		3,604
Home equity lines of credit	0		0				85		385
Total impaired loans without a valuation allowance	17,739		17,813				19,409		20,022
Impaired loans
Commercial	11,351		11,668		59		7,865		8,246		15
Agricultural	12,903		12,952		67		14,840		14,890		26
Residential real estate	4,385		4,726		743		5,486		6,215		1,073
Total impaired loans	$	28,639	$	29,346	$	869	$	28,191	$	29,351	$	1,114

Table of Contents

September 30, 2019 December 31, 2018

Recorded Balance Unpaid Principal Balance Valuation Allowance Recorded Balance Unpaid Principal Balance Valuation Allowance
Impaired loans with a valuation allowance
Commercial real estate $ 947
$ 1,190
$ 29
$ 3,969
$ 4,211
$ 437
Commercial other 11
11
5
12
12
6
Agricultural real estate 1,512
1,512
101
392
392
112
Agricultural other 1,347
1,347
31
44
44
20
Residential real estate senior liens 5,845
6,315
1,165
6,834
7,289
1,361
Residential real estate junior liens 12
12
2
12
12
2
Total impaired loans with a valuation allowance 9,674
10,387
1,333
11,263
11,960
1,938
Impaired loans without a valuation allowance
Commercial real estate 5,139
5,278
2,794
2,947

Commercial other 2,529
2,529
3,124
3,231

Agricultural real estate 7,005
7,005
7,618
7,618

Agricultural other 3,902
3,902
6,244
6,287

Home equity lines of credit 96
396
47
347

Consumer secured —
—
9
9

Total impaired loans without a valuation allowance 18,671
19,110
19,836
20,439

Impaired loans
Commercial 8,626
9,008
34
9,899
10,401
443
Agricultural 13,766
13,766
132
14,298
14,341
132
Residential real estate 5,953
6,723
1,167
6,893
7,648
1,363
Consumer —
—
—
9
9
—
Total impaired loans $ 28,345
$ 29,497
$ 1,333
$ 31,099
$ 32,399
$ 1,938

The following is a summary of ~~information pertaining to~~ impaired loans for the:


	Three Months Ended September 30
	2020				2019
	Average Recorded Balance		Interest Income Recognized		Average Recorded Balance		Interest Income Recognized
Impaired loans with a valuation allowance
Commercial real estate	$	1,564	$	37	$	1,546	$	2
Commercial other	442		13		11		0
Agricultural real estate	2,198		27		1,513		10
Agricultural other	1,355		18		1,292		11
Residential real estate senior liens	4,600		48		6,096		14
Residential real estate junior liens	0		0		12		0
Total impaired loans with a valuation allowance	10,159		143		10,470		37
Impaired loans without a valuation allowance
Commercial real estate	3,285		43		4,664		12
Commercial other	4,503		59		2,607		7
Agricultural real estate	7,548		68		6,995		45
Agricultural other	1,947		21		3,820		45
Home equity lines of credit	56		0		63		0
Consumer secured	0		0		4		0
Total impaired loans without a valuation allowance	17,339		191		18,153		109
Impaired loans
Commercial	9,794		152		8,828		21
Agricultural	13,048		134		13,620		111
Residential real estate	4,656		48		6,171		14
Consumer	0		0		4		0
Total impaired loans	$	27,498	$	334	$	28,623	$	146

Table of Contents


	Three Months Ended September 30									Nine Months Ended September 30
	2019				2018					2020				2019
	Average Recorded Balance		Interest Income Recognized		Average Recorded Balance		Interest Income Recognized			Average Recorded Balance		Interest Income Recognized		Average Recorded Balance		Interest Income Recognized
Impaired loans with a valuation allowance									Impaired loans with a valuation allowance
Commercial real estate	$	1,546	$	2	$	4,195	$	14	Commercial real estate	$	1,157	$	83	$	2,484	$	58
Commercial other	11		—		778		16		Commercial other	454		19		11		0
Agricultural real estate	1,513		10		673		40		Agricultural real estate	2,100		77		951		73
Agricultural other	1,292		11		324		45		Agricultural other	1,355		60		659		20
Residential real estate senior liens	6,096		14		7,512		17		Residential real estate senior liens	4,998		152		6,406		101
Residential real estate junior liens	12		—		18		—		Residential real estate junior liens	0		0		12		0
Total impaired loans with a valuation allowance	10,470		37		13,500		132		Total impaired loans with a valuation allowance	10,064		391		10,523		252
Impaired loans without a valuation allowance									Impaired loans without a valuation allowance
Commercial real estate	4,664		12		3,076		8		Commercial real estate	3,964		162		3,979		86
Commercial other	2,607		7		1,396		2		Commercial other	3,240		106		2,776		41
Agricultural real estate	6,995		45		7,193		137		Agricultural real estate	7,590		214		7,308		110
Agricultural other	3,820		45		5,786		68		Agricultural other	2,529		84		4,913		201
Home equity lines of credit	63		—		59		—		Home equity lines of credit	81		5		47		6
Consumer secured	4		—		11		—		Consumer secured	1		0		7		0
Total impaired loans without a valuation allowance	18,153		109		17,521		215		Total impaired loans without a valuation allowance	17,405		571		19,030		444
Impaired loans									Impaired loans
Commercial	8,828		21		9,445		40		Commercial	8,815		370		9,250		185
Agricultural	13,620		111		13,976		290		Agricultural	13,574		435		13,831		404
Residential real estate	6,171		14		7,589		17		Residential real estate	5,079		157		6,465		107
Consumer	4		—		11		—		Consumer	1		0		7		0
Total impaired loans	$	28,623	$	146	$	31,021	$	347	Total impaired loans	$	27,469	$	962	$	29,553	$	696

Nine Months Ended September 30
2019 2018

Average Recorded Balance Interest Income Recognized Average Recorded Balance Interest Income Recognized
Impaired loans with a valuation allowance
Commercial real estate $ 2,484
$ 58
$ 4,739
$ 118
Commercial other 11
—
1,263
55
Agricultural real estate 951
73
584
46
Agricultural other 659
20
108
45
Residential real estate senior liens 6,406
101
7,694
107
Residential real estate junior liens 12
—
29
—
Total impaired loans with a valuation allowance 10,523
252

14,417

371
Impaired loans without a valuation allowance
Commercial real estate 3,979
86
2,763
55
Commercial other 2,776
41
1,297
21
Agricultural real estate 7,308
110
7,600
414
Agricultural other 4,913
201
4,105
219
Home equity lines of credit 47
6
68
5
Consumer secured 7
—
13
—
Total impaired loans without a valuation allowance 19,030
444
15,846
714
Impaired loans
Commercial 9,250
185
10,062
249
Agricultural 13,831
404
12,397
724
Residential real estate 6,465
107
7,791
112
Consumer 7
—
13
—
Total impaired loans $ 29,553
$ 696
$ 30,263
$ 1,085

WeAs a result of line of credit agreements with borrowers, we had committed to advance ~~$228~~$101 and ~~$542~~$175 in additional funds to be disbursed in connection with impaired loans ~~which includes TDRs,~~ as of September 30, ~~2019~~2020 and December 31, ~~2018~~,2019, respectively.

Troubled Debt Restructurings

A loan modification is considered to be a TDR when the modification includes terms outside of normal lending practices to a borrower who is experiencing financial difficulties.

Typical concessions granted include, but are not limited to:

•Agreeing to interest rates below prevailing market rates for debt with similar risk characteristics.

•Extending the amortization period beyond typical lending guidelines for loans with similar risk characteristics.

•Agreeing to an ~~interest only~~interest-only payment structure and delaying principal payments.

•Forgiving principal.

•Forgiving accrued interest.

To determine if a borrower is experiencing financial difficulties, factors we consider include:

•The borrower is currently in default on any ~~of their~~ debt.

•The borrower would likely default on any ~~of their~~ debt if the concession is not granted.

•The borrower’s cash flow is insufficient to service all ~~of their~~ debt if the concession is not granted.

•The borrower has declared, or is in the process of declaring, bankruptcy.

•The borrower is unlikely to continue as a going concern (if the entity is a business).

Table of Contents

The following is a summary of ~~information pertaining to~~ TDRs granted for the:

Three Months Ended September 30
2019 2018

Number of Loans Pre-Modification Recorded Investment Post-Modification Recorded Investment Number of Loans Pre-Modification Recorded Investment Post-Modification Recorded Investment
Agricultural other 1
$ 25
$ 25
7
$ 1,327
$ 1,327
Residential real estate —
—
—
1
99
99
Total 1
$ 25
$ 25
8
$ 1,426
$ 1,426


	Nine Months Ended September 30											Three Months Ended September 30
	2019					2018						2020					2019
	Number of Loans	Pre-Modification Recorded Investment		Post-Modification Recorded Investment		Number of Loans	Pre-Modification Recorded Investment		Post-Modification Recorded Investment			Number of Loans	Pre-Modification Recorded Investment		Post-Modification Recorded Investment		Number of Loans	Pre-Modification Recorded Investment		Post-Modification Recorded Investment
Commercial other	2	$	184	$	184	4	$	1,360	$	1,360	Commercial other	4	$	3,740	$	3,740	0	$	0	$	0
Agricultural other	4	1,859		1,859		22	5,718		5,694		Agricultural other	0	0		0		1	25		25
Residential real estate	—	—		—		8	593		593
Total	6	$	2,043	$	2,043	34	$	7,671	$	7,647	Total	4	$	3,740	$	3,740	1	$	25	$	25


	Nine Months Ended September 30
	2020					2019
	Number of Loans	Pre-Modification Recorded Investment		Post-Modification Recorded Investment		Number of Loans	Pre-Modification Recorded Investment		Post-Modification Recorded Investment
Commercial other	6	$	4,702	$	4,702	2	$	184	$	184
Agricultural other	4	2,361		2,361		4	1,859		1,859
Residential real estate	2	94		94		0	0		0
Total	12	$	7,157	$	7,157	6	$	2,043	$	2,043

The following is a summary of concessions we granted to borrowers inexperiencing financial difficulty for the:

Three Months Ended September 30
2019 2018

Below Market Interest Rate Below Market Interest Rate and Extension of Amortization Period Below Market Interest Rate Below Market Interest Rate and Extension of Amortization Period
Number of Loans Pre-Modification Recorded Investment Number of Loans Pre-Modification Recorded Investment Number of Loans Pre-Modification Recorded Investment Number of Loans Pre-Modification Recorded Investment
Agricultural other 1
$ 25
—
$ —
5
$ 476
2
$ 851
Residential real estate —
—
—
—
1
99
—
—
Total 1
$ 25
—
$ —
6
$ 575
2
$ 851


	Nine Months Ended September 30													Three Months Ended September 30
	2019						2018							2020						2019
	Below Market Interest Rate			Below Market Interest Rate and Extension of Amortization Period			Below Market Interest Rate			Below Market Interest Rate and Extension of Amortization Period				Below Market Interest Rate			Below Market Interest Rate and Extension of Amortization Period			Below Market Interest Rate			Below Market Interest Rate and Extension of Amortization Period
	Number of Loans	Pre-Modification Recorded Investment		Number of Loans	Pre-Modification Recorded Investment		Number of Loans	Pre-Modification Recorded Investment		Number of Loans	Pre-Modification Recorded Investment			Number of Loans	Pre-Modification Recorded Investment		Number of Loans	Pre-Modification Recorded Investment		Number of Loans	Pre-Modification Recorded Investment		Number of Loans	Pre-Modification Recorded Investment
Commercial other	—	$	—	2	$	184	1	$	174	3	$	1,186	Commercial other	1	$	68	3	$	3,672	0	$	0	0	$	0
Agricultural other	1	25		3	1,834		12	2,345		10	3,373		Agricultural other	0	0		0	0		1	25		0	0
Residential real estate	—	—		—	—		2	155		6	438
Total	1	$	25	5	$	2,018	15	$	2,674	19	$	4,997	Total	1	$	68	3	$	3,672	1	$	25	0	$	0


	Nine Months Ended September 30
	2020						2019
	Below Market Interest Rate			Below Market Interest Rate and Extension of Amortization Period			Below Market Interest Rate			Below Market Interest Rate and Extension of Amortization Period
	Number of Loans	Pre-Modification Recorded Investment		Number of Loans	Pre-Modification Recorded Investment		Number of Loans	Pre-Modification Recorded Investment		Number of Loans	Pre-Modification Recorded Investment
Commercial other	2	$	987	4	$	3,715	0	$	0	2	$	184
Agricultural other	0	0		4	2,361		1	25		3	1,834
Residential real estate	0	0		2	94		0	0		0	0
Total	2	$	987	10	$	6,170	1	$	25	5	$	2,018

We did not restructure any loans by forgiving principal or accrued interest in the three and ~~nine~~ ~~month~~nine-month periods ended September 30, ~~2019~~2020 or ~~2018~~.2019.

Based on our historical loss experience, losses associated with TDRs are not significantly different than other impaired loans within the same loan segment. As such, TDRs,, including TDRs that have been modified in the past 12 months that subsequently defaulted, are analyzed in the same manner as other impaired loans within their respective loan segment.

Table of Contents

We had no0 loans that defaulted in the three and ~~nine~~ ~~month~~nine-month periods ended September 30, ~~2019~~2020 and ~~2018~~2019 which were modified within 12 months prior to the default date.

The following is a summary of TDR loan balances as of:


	September 30 2020		December 31 2019
TDRs	$	25,954	$	24,737

Measures we have taken to assist our customers in connection with the COVID-19 pandemic include loan programs that provide short-term payment relief. Under these programs, borrowers whose loans were in good standing as of March 1, 2020 could elect to defer full or partial payments for a period not to exceed 180 days. As of September 30, 2020, we had active loan payment deferrals totaling $98,680, or 7.6% of gross loans. This compares favorably to $306,103, or 23.8% of gross loans, as of June 30, 2020 as the majority of borrowers granted loan payment deferrals had reverted back to contractual payments as of September 30, 2020.

Bank regulators issued a statement on March 22, 2020, and a revised statement on April 7, 2020, which provided confirmation that short-term loan modifications made on a good faith basis in response to COVID-19 to borrowers with a current payment status are not categorized as TDRs. Pursuant to this guidance, borrowers granted a short-term loan modification meeting this criteria were not categorized as TDR as of September 30, 2020.

September 30
2019 December 31
2018
TDRs $ 24,699
$ 26,951

Note 5 – ~~Equity Securities Without Readily Determinable Fair Values~~

Included in equity securities without readily determinable fair values are restricted securities, which are carried at cost, and investments in unconsolidated entities accounted for under the equity method of accounting.

~~Equity securities without readily determinable fair values consist of the following as of:~~

September 30
2019 December 31
2018
FHLB Stock $ 15,050
$ 15,050
Corporate Settlement Solutions, LLC 7,747
7,565
FRB Stock 1,999
1,999
Other 334
334
Total $ 25,130
$ 24,948

~~Note 6 –~~ Borrowed Funds

Borrowed funds consist of the following obligations as of:


	September 30, 2019				December 31, 2018					September 30, 2020				December 31, 2019
	Amount		Rate		Amount		Rate			Amount		Rate		Amount		Rate
FHLB advances	$	245,000	2.34	%	$	300,000	2.20	%	FHLB advances	$	205,000	2.24	%	$	245,000	2.32	%
Securities sold under agreements to repurchase without stated maturity dates	32,386		0.11	%	40,299		0.11	%	Securities sold under agreements to repurchase without stated maturity dates	33,349		0.09	%	30,999		0.09	%
Total	$	277,386	2.08	%	$	340,299	1.95	%	Total	$	238,349	1.94	%	$	275,999	2.07	%

FHLB advances are collateralized by a blanket lien on all qualified 1-4 family residential real estate loans, specific AFS securities, and FHLB stock.

The following table lists the maturities and weighted average interest rates of FHLB advances as of:


										September 30, 2020				December 31, 2019
	September 30, 2019				December 31, 2018					Amount		Rate		Amount		Rate
	Amount		Rate		Amount		Rate
Fixed rate due 2019	$	—	—	%	$	100,000	1.94	%
Fixed rate due 2020	55,000		2.18	%	55,000		2.18	%	Fixed rate due 2020	$	15,000	1.75	%	$	55,000	2.18	%
Fixed rate due 2021	50,000		1.91	%	50,000		1.91	%	Fixed rate due 2021	50,000		1.91	%	50,000		1.91	%
Variable rate due 2021 ⁽¹⁾	10,000		2.47	%	10,000		2.93	%	Variable rate due 2021 (1)	10,000		0.58	%	10,000		2.20	%
Fixed rate due 2022	20,000		1.97	%	20,000		1.97	%	Fixed rate due 2022	20,000		1.97	%	20,000		1.97	%
Fixed rate due 2023	45,000		2.97	%	35,000		3.17	%	Fixed rate due 2023	45,000		2.97	%	45,000		2.97	%
Fixed rate due 2024	55,000		2.68	%	20,000		2.96	%	Fixed rate due 2024	55,000		2.68	%	55,000		2.68	%
Fixed rate due 2026	10,000		1.17	%	10,000		1.17	%	Fixed rate due 2026	10,000		1.17	%	10,000		1.17	%
Total	$	245,000	2.34	%	$	300,000	2.20	%	Total	$	205,000	2.24	%	$	245,000	2.32	%


(1)Hedged advance (see “Derivative Instruments” section below) ⁽¹⁾	~~Hedged advance (see “Derivative Instruments” section below)~~

Securities sold under agreements to repurchase are classified as secured borrowings and are reflected at the amount of cash received in connection with the transaction. The securities underlying the agreements have a carrying value and a fair value of ~~$32,405~~$33,375 and ~~$40,316~~$31,020 at September 30, ~~2019~~2020 and December 31, ~~2018~~,2019, respectively. Such securities remain under our control. We may be required to provide additional collateral based on the fair value of underlying securities.

Securities sold under repurchase agreements without stated maturity dates, federal funds purchased, and FRB Discount Window advances generally mature within one to four days from the transaction date. ~~The following tables provide a~~We had no FRB Discount Window advances during the three and nine-month periods ended September 30, 2020 and 2019.

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A summary of securities sold under repurchase agreements without stated maturity dates and federal funds ~~purchased. We had no FRB~~purchased was as follows for the:


	Three Months Ended September 30
	2020						2019
	Maximum Month End Balance		Average Balance		Weighted Average Interest Rate During the Period		Maximum Month End Balance		Average Balance		Weighted Average Interest Rate During the Period
Securities sold under agreements to repurchase without stated maturity dates	$	33,349	$	30,578	0.10	%	$	32,386	$	32,520	0.09	%
Federal funds purchased	$	0	$	5	0.49	%	$	0	$	317	2.61	%

~~Discount Window advances during the three and nine month periods ended September 30, 2019 and 2018.~~


	Three Months Ended September 30													Nine Months Ended September 30
	2019						2018							2020						2019
	Maximum Month End Balance		Average Balance		Weighted Average Interest Rate During the Period		Maximum Month End Balance		Average Balance		Weighted Average Interest Rate During the Period			Maximum Month End Balance		Average Balance		Weighted Average Interest Rate During the Period		Maximum Month End Balance		Average Balance		Weighted Average Interest Rate During the Period
Securities sold under agreements to repurchase without stated maturity dates	$	32,386	$	32,520	0.09	%	$	40,346	$	34,886	0.09	%	Securities sold under agreements to repurchase without stated maturity dates	$	33,349	$	30,845	0.10	%	$	37,441	$	31,350	0.10	%
Federal funds purchased	—		317		2.61	%	—		1,375		1.90	%	Federal funds purchased	$	0	$	2	0.49	%	$	7,070	$	919	2.64	%

Nine Months Ended September 30
2019 2018
Maximum Month End Balance Average Balance Weighted Average Interest Rate During the Period Maximum Month End Balance Average Balance Weighted Average Interest Rate During the Period
Securities sold under agreements to repurchase without stated maturity dates $ 37,441
$ 31,350
0.10 % $ 40,346
$ 34,608
0.14 %
Federal funds purchased 7,070
919
2.64 % 16,200
5,000
2.52 %

We had pledged AFS securities and 1-4 family residential real estate loans in the following amounts at:


	September 30 2019		December 31 2018			September 30 2020		December 31 2019
Pledged to secure borrowed funds	$	370,053	$	431,430	Pledged to secure borrowed funds	$	340,685	$	368,310
Pledged to secure repurchase agreements	32,405		40,316		Pledged to secure repurchase agreements	33,375		31,020
Pledged for public deposits and for other purposes necessary or required by law	62,899		58,107		Pledged for public deposits and for other purposes necessary or required by law	40,493		59,537
Total	$	465,357	$	529,853	Total	$	414,553	$	458,867

AFS securities pledged to repurchase agreements without stated maturity dates consisted of the following at:


	September 30 2019		December 31 2018			September 30 2020		December 31 2019
States and political subdivisions	$	32,405	$	23,268	States and political subdivisions	$	17,026	$	31,020
Mortgage-backed securities	—		10,736		Mortgage-backed securities	9,081		0
Collateralized mortgage obligations	—		6,312		Collateralized mortgage obligations	7,268		0
Total	$	32,405	$	40,316	Total	$	33,375	$	31,020

AFS securities pledged to repurchase agreements are monitored to ensure the appropriate level is collateralized. In the event of maturities, calls, significant principal repayments, or significant decline in market values, we have an adequate level of AFS securities to pledge to satisfy ~~required collateral.~~collateral requirements.

As of September 30, ~~2019~~,2020, we had the ability to borrow up to an additional ~~$137,016~~,$150,819, based on assets pledged as collateral. We had no investment securities that were restricted ~~to be~~from being pledged for specific purposes.

Derivative Instruments

We ~~have entered into~~use interest rate swaps to manage exposure to interest rate risk and variability in cash flows. The interest rate swaps, associated with our variable rate borrowings, are designated upon inception as cash flow hedges of forecasted interest payments. We have entered into LIBOR-based interest rate swaps that involve the receipt of variable amounts in exchange for fixed rate payments, in effect converting variable rate debt to fixed rate debt.

Cash flow hedges are assessed for effectiveness using regression analysis. The effective portion of changes in fair value are recorded in OCI and subsequently reclassified into interest expense in the same period in which the related interest on the

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variable rate borrowings affects earnings. In the event that a portion of the changes in fair value were determined to be ineffective, the ineffective amount would be recorded in earnings.

The following tables provide information on derivatives related to variable rate borrowings as of:

September 30, 2019

Pay Rate Receive Rate Remaining Life (Years) Notional Amount Balance Sheet Location Fair Value
Derivatives designated as hedging instruments
Cash Flow Hedges:
Interest rate swaps 1.56 % 3-Month LIBOR 1.6 $ 10,000
Other Assets $ 78

December 31, 2018

September 30, 2020

Pay Rate

Receive Rate

Remaining Life (Years)

Notional Amount

Balance Sheet Location

Fair Value

Pay Rate

Receive Rate

Remaining Life (Years)

Notional Amount

Balance Sheet Location

Fair Value

Derivatives designated as hedging instruments

Cash Flow Hedges:

Interest rate swaps

1.56

3-Month LIBOR

2.3

10,000

Other Assets

323

Interest rate swaps

1.56

3-Month LIBOR

0.6

10,000

Other liabilities

(78)

December 31, 2019

Pay Rate

Receive Rate

Remaining Life (Years)

Notional Amount

Balance Sheet Location

Fair Value

Derivatives designated as hedging instruments

Cash Flow Hedges:

Interest rate swaps

1.56

3-Month LIBOR

1.3

10,000

Other assets

Derivatives contain an element of credit risk which arises from the possibility that we will incur a loss as a result of a counterparty failing to meet its contractual obligations. Credit risk is minimized through counterparty collateral, transaction limits and monitoring procedures. We also manage dealer credit risk by entering into interest rate derivatives only with primary and highly rated counterparties, the use of ISDA master agreements, and the use of counterparty limits. We do not anticipate any losses from failure of interest rate derivative counterparties to honor their obligations.

~~Note 7 – Revenue~~

Our revenue is comprised primarily of interest income, service charges and fees, gains on the sale of loans and AFS securities, earnings on corporate owned life insurance policies, and other noninterest income. Other noninterest income is typically service and performance driven in nature and comprised primarily of investment and trust advisory fees. We recognize revenue, excluding interest income, in accordance with ASC 606, ~~Revenue From Contracts with Customers. Revenue is recognized when our performance obligation has been satisfied according to our contractual obligation.~~

We record receivables when revenue is unpaid and collectability is reasonably assured. Accounts receivable balances primarily represent amounts due from customers for which revenue has been recognized. Accounts receivable balances are recorded in the consolidated balance sheets in accrued interest receivable and other assets. For the three and nine month periods ended September 30, 2019 and 2018, we satisfied our performance obligations pursuant to contracts with customers. As a result, we have not recorded any contract assets or liabilities. We estimate no returns or allowances for the three and nine month periods ended September 30, 2019 and 2018.

Our contracts with customers define our performance obligations with clearly established pricing which does not require us to allocate or disaggregate revenue by performance obligation. A summary of revenue recognized for each major category of contracts with customers, subject to ASC 606, is as follows for the:

Three Months Ended
September 30 Nine Months Ended
September 30

2019 2018 2019 2018
Debit card income $ 672
$ 600
$ 1,912
$ 1,809
Trust service fees 566
562
1,677
1,628
Investment advisory fees 123
186
469
516
Service charges and fees related to deposit accounts 78
83
236
250
Total $ 1,439
$ 1,431
$ 4,294
$ 4,203

~~A large portion of our revenue consists of interest income which is not subject to the requirements set forth in ASC 606.~~

Note 6 – Computation of Earnings Per Common Share

Basic earnings per common share represents income available to common shareholders divided by the weighted average number of common shares outstanding during the period. Diluted earnings per common share includes additional common shares that would have been outstanding if dilutive potential common shares had been issued. Potential common shares that may be issued relate solely to outstanding shares in the Directors Plan.

Earnings per common share have been computed based on the following for the:


	Three Months Ended September 30				Nine Months Ended September 30
	2020		2019		2020		2019
Average number of common shares outstanding for basic calculation	7,966,811		7,925,332		7,945,762		7,904,568
Average potential effect of common shares in the Directors Plan (1)	144,472		181,536		151,040		186,720
Average number of common shares outstanding used to calculate diluted earnings per common share	8,111,283		8,106,868		8,096,802		8,091,288
Net income	$	4,357	$	4,442	$	11,608	$	12,126
Earnings per common share
Basic	$	0.55	$	0.56	$	1.46	$	1.53
Diluted	$	0.54	$	0.55	$	1.43	$	1.50

(1)Exclusive of shares held in the Rabbi Trust

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Note 7 – Restricted Stock Plan

On June 24, 2020 we adopted the RSP, an equity-based bonus plan. The primary purpose of the plan is to promote our growth and profitability by attracting and retaining executive officers and key employees of outstanding competence through ownership of equity that provides them with incentives to achieve corporate objectives. In connection with the adoption of the RSP, the Isabella Bank Corporation Stock Award Incentive Plan was terminated.

Under the RSP, we may award restricted stock bonuses to eligible employees on an annual basis that are not fully transferable or vested until certain conditions are met. Currently, the eligible employees are the Corporation's President and CEO, CFO and the Bank's President. The RSP authorizes the issuance of unvested restricted stock to an eligible employee with a maximum award ranging from 25% to 40% of the employee’s annual salary, on a calendar year basis. The employee must also satisfy the annual performance targets and measures established by the Board of Directors. If these grant conditions are not satisfied, then the award of restricted shares will lapse or be adjusted appropriately, at the discretion of the Board of Directors.

Also on June 24, 2020, we made initial grants under the RSP to eligible employees listed above. All Grant Agreements contain vesting conditions and clawback provisions. As of September 30, 2020, we did not believe the achievement of the targets specified in an award pursuant to the RSP to be probable and therefore, did not recognize any compensation expense pursuant to the RSP.

Note 8 – Other Noninterest Expenses

A summary of expenses included in other noninterest expenses is as follows for the:


	Three Months Ended September 30				Nine Months Ended September 30
	2020		2019		2020		2019
Audit, consulting, and legal fees	$	417	$	500	$	1,348	$	1,406
ATM and debit card fees	373		308		1,024		854
Marketing costs	209		248		677		561
Loan underwriting fees	199		185		577		669
Donations and community relations	131		330		566		660
Memberships and subscriptions	188		176		546		519
Director fees	168		195		527		592
FDIC insurance premiums	159		(282)		459		50
Postage and freight	118		112		370		362
All other	572		620		1,752		1,911
Total other noninterest expenses	$	2,534	$	2,392	$	7,846	$	7,584

Three Months Ended
September 30 Nine Months Ended
September 30
2019 2018 2019 2018
Audit, consulting, and legal fees $ 508
$ 566
$ 1,424
$ 1,745
ATM and debit card fees 308
246
854
712
Loan underwriting fees 185
339
669
653
Donations and community relations 330
141
660
502
Director fees 195
212
592
643
Marketing costs 248
285
561
544
Memberships and subscriptions 176
153
519
422
Education and travel 72
130
285
346
FDIC insurance premiums (282 ) 185
50
505
All other 652
642
1,970
1,932
Total other $ 2,392
$ 2,899
$ 7,584
$ 8,004

Note 9 – Federal Income Taxes

The reconciliation of the provision for federal income taxes and the amount computed at the federal statutory tax rate of income before federal income tax expense is as follows for the:


	Three Months Ended September 30				Nine Months Ended September 30
	2020		2019		2020		2019
Income taxes at statutory rate	$	1,069	$	1,065	$	2,752	$	2,866
Effect of nontaxable income
Interest income on tax exempt municipal securities	(176)		(224)		(570)		(704)
Earnings on corporate owned life insurance policies	(40)		(39)		(301)		(118)
Other	(4)		(4)		(12)		(12)
Total effect of nontaxable income	(220)		(267)		(883)		(834)
Effect of nondeductible expenses	7		14		14		27
Effect of tax credits	(122)		(182)		(388)		(539)
Federal income tax expense	$	734	$	630	$	1,495	$	1,520

Three Months Ended
September 30 Nine Months Ended
September 30
2019 2018 2019 2018
Income taxes at statutory rate $ 1,065
$ 851
$ 2,866
$ 2,389
Effect of nontaxable income
Interest income on tax exempt municipal securities (224 ) (259 ) (704 ) (797 )
Earnings on corporate owned life insurance policies (39 ) (35 ) (118 ) (109 )
Effect of tax credits (182 ) (200 ) (539 ) (601 )
Other (4 ) (6 ) (12 ) (25 )
Total effect of nontaxable income (449 ) (500 ) (1,373 ) (1,532 )
Effect of nondeductible expenses 14
8
27
30
Federal income tax expense $ 630
$ 359
$ 1,520
$ 887

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Note 10 – ~~Computation~~Accumulated Other Comprehensive Income

The following table summarizes the changes in AOCI by component for the:


	Three Months Ended September 30
	2020								2019
	Unrealized Gains (Losses) on AFS Securities		Unrealized Gains (Losses) on Derivative Instruments		Defined Benefit Pension Plan		Total		Unrealized Gains (Losses) on AFS Securities		Unrealized Gains (Losses) on Derivative Instruments		Defined Benefit Pension Plan		Total
Balance, July 1	$	11,139	$	(77)	$	(2,695)	$	8,367	$	3,417	$	91	$	(2,741)	$	767
OCI before reclassifications	(66)		20		0		(46)		1,724		(37)		0		1,687
Amounts reclassified from AOCI	0		0		0		0		(6)		0		0		(6)
Subtotal	(66)		20		0		(46)		1,718		(37)		0		1,681
Tax effect	58		(4)				54		(310)		8		0		(302)
OCI, net of tax	(8)		16		0		8		1,408		(29)		0		1,379
Balance, September 30	$	11,131	$	(61)	$	(2,695)	$	8,375	$	4,825	$	62	$	(2,741)	$	2,146


	Nine Months Ended September 30
	2020								2019
	Unrealized Gains (Losses) on AFS Securities		Unrealized Gains (Losses) on Derivative Instruments		Defined Benefit Pension Plan		Total		Unrealized Gains (Losses) on AFS Securities		Unrealized Gains (Losses) on Derivative Instruments		Defined Benefit Pension Plan		Total
Balance, January 1	$	4,612	$	54	$	(2,695)	$	1,971	$	(5,200)	$	256	$	(2,741)	$	(7,685)
OCI before reclassifications	8,304		(145)		0		8,159		12,554		(245)		0		12,309
Amounts reclassified from AOCI	(71)		0		0		(71)		(6)		0		0		(6)
Subtotal	8,233		(145)		0		8,088		12,548		(245)		0		12,303
Tax effect	(1,714)		30		0		(1,684)		(2,523)		51		0		(2,472)
OCI, net of tax	6,519		(115)		0		6,404		10,025		(194)		0		9,831
Balance, September 30	$	11,131	$	(61)	$	(2,695)	$	8,375	$	4,825	$	62	$	(2,741)	$	2,146

Included in OCI for the three and nine-month periods ended September 30, 2020 and 2019 are changes in unrealized gains and losses related to auction rate money market preferred stocks. These investments, for federal income tax purposes, have no deferred federal income taxes related to unrealized gains or losses given the nature of ~~Earnings Per Common Share~~the investments.

~~Basic earnings per common share represents income available to common shareholders divided by~~

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A summary of the ~~weighted average number~~components of common shares outstanding during the period. Diluted earnings per common share includes additional common shares that would have been outstanding if dilutive potential common shares had been issued. Potential common shares that may be issued relate solely to outstanding sharesunrealized gains on AFS securities included in ~~the~~ ~~Directors Plan~~.OCI follows for the:

~~Earnings per common share have been computed~~


	Three Months Ended September 30
	2020						2019
	Auction Rate Money Market Preferred Stocks		All Other AFS Securities		Total		Auction Rate Money Market Preferred Stocks		All Other AFS Securities		Total
Unrealized gains (losses) arising during the period	$	215	$	(281)	$	(66)	$	240	$	1,484	$	1,724
Reclassification adjustment for net (gains) losses included in net income	0		0		0		0		(6)		(6)
Net unrealized gains (losses)	215		(281)		(66)		240		1,478		1,718
Tax effect	0		58		58		0		(310)		(310)
Unrealized gains (losses), net of tax	$	215	$	(223)	$	(8)	$	240	$	1,168	$	1,408


	Nine Months Ended September 30
	2020						2019
	Auction Rate Money Market Preferred Stocks		All Other AFS Securities		Total		Auction Rate Money Market Preferred Stocks		All Other AFS Securities		Total
Unrealized gains (losses) arising during the period	$	75	$	8,229	$	8,304	$	535	$	12,019	$	12,554
Reclassification adjustment for net (gains) losses included in net income	0		(71)		(71)		0		(6)		(6)
Net unrealized gains (losses)	75		8,158		8,233		535		12,013		12,548
Tax effect	0		(1,714)		(1,714)		0		(2,523)		(2,523)
Unrealized gains (losses), net of tax	$	75	$	6,444	$	6,519	$	535	$	9,490	$	10,025

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Note 11 – Fair Value

Under fair value measurement and disclosure authoritative guidance, we group assets and liabilities measured at fair value into three levels, based on the ~~following for the:~~

markets in which the assets and liabilities are traded, and the reliability of the assumptions used to determine fair value, based on the prioritization of inputs in the valuation techniques. These levels are:

Three Months Ended
September 30 Nine Months Ended
September 30

2019 2018 2019 2018
Average number of common shares outstanding for basic calculation 7,925,332
7,851,448
7,904,568
7,876,941
Average potential effect of common shares in the Directors Plan ⁽¹⁾
181,536
200,597
186,720
199,488
Average number of common shares outstanding used to calculate diluted earnings per common share 8,106,868
8,052,045
8,091,288
8,076,429
Net income $ 4,442
$ 3,696
$ 12,126
$ 10,491
Earnings per common share
Basic $ 0.56
$ 0.47
$ 1.53
$ 1.33
Diluted $ 0.55
$ 0.46
$ 1.50
$ 1.30


⁽¹⁾ Level 1:			~~Exclusive of shares held~~Valuation is based upon quoted prices for identical instruments traded in active markets.
Level 2:			Valuation is based upon quoted prices for similar instruments in active markets, quoted prices for identical or similar instruments in markets that are not active and model-based valuation techniques for which all significant assumptions are observable in the ~~Rabbi Trust~~market.
Level 3:			Valuation is generated from model-based techniques that use at least one significant assumption not observable in the market. These unobservable assumptions reflect estimates of assumptions that market participants would use in pricing the asset or liability.

The asset’s or liability’s fair value measurement level within the fair value hierarchy is based on the lowest level of any input that is significant to the fair value measurement. Valuation techniques maximize the use of observable inputs and minimize the use of unobservable inputs. Transfers between measurement levels are recognized at the end of reporting periods.

Fair value measurement requires the use of an exit price notion which may differ from entrance pricing. Generally we believe our assets and liabilities classified as Level 1 or Level 2 approximate an exit price notion.

Following is a description of the valuation methodologies, key inputs, and an indication of the level of the fair value hierarchy in which the assets or liabilities are classified.

AFS securities: AFS securities are recorded at fair value on a recurring basis. Level 1 fair value measurement is based upon quoted prices for identical instruments. Level 2 fair value measurement is based upon quoted prices for similar instruments. If quoted prices are not available, fair values are measured using independent pricing models or other model-based valuation techniques such as the present value of future cash flows, adjusted for the security’s credit rating, prepayment assumptions and other factors such as credit loss and liquidity assumptions. The values for Level 1 and Level 2 investment securities are generally obtained from an independent third party. On a quarterly basis, we compare the values provided to alternative pricing sources.

Loans: We do not record loans at fair value on a recurring basis. However, some loans are classified as impaired and a specific allowance for loan losses may be established. Loans for which it is probable that payment of interest and principal will be significantly different than the contractual terms of the original loan agreement are considered impaired. Once a loan is identified as impaired, we measure the estimated impairment. The fair value of impaired loans is estimated using one of several methods, including the present value of expected future cash flows discounted at the loan’s effective interest rate, or the fair value of the collateral, less costs to sell, if the loan is collateral dependent. Those impaired loans not requiring an allowance represent loans for which the fair value of the expected repayments or collateral exceed the recorded investments in such loans.

We review the net realizable values of the underlying collateral for collateral dependent impaired loans on at least a quarterly basis for all loan types. To determine the collateral value, we utilize independent appraisals, broker price opinions, or internal evaluations. We review these valuations to determine whether an additional discount should be applied given the age of market information that may have been considered as well as other factors such as costs to sell an asset if it is determined that the collateral will be liquidated in connection with the ultimate settlement of the loan. We use these valuations to determine if any specific reserves or charge-offs are necessary. We may obtain new valuations in certain circumstances, including when there has been significant deterioration in the condition of the collateral, if the foreclosure process has begun, or if the existing valuation is deemed to be outdated.

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The following tables list the quantitative fair value information about impaired loans as of:


	September 30, 2020
Valuation Technique	Fair Value	Unobservable Input	Actual Range	Weighted Average
		Discount applied to collateral:
		Real Estate	20% - 40%	25%
		Equipment	20% - 40%	32%
Discounted value	$19,333	Cash crop inventory	40%	40%
		Livestock	30%	30%
		Other inventory	50%	50%
		Accounts receivable	25% - 50%	26%


	December 31, 2019
Valuation Technique	Fair Value	Unobservable Input	Actual Range	Weighted Average
		Discount applied to collateral:
		Real Estate	20% - 30%	22%
		Equipment	20% - 40%	32%
Discounted value	$19,135	Cash crop inventory	40%	40%
		Livestock	30%	30%
		Other inventory	50%	50%
		Accounts receivable	25% - 50%	28%

Collateral discount rates may have ranges to accommodate differences in the age of the independent appraisal, broker price opinion, or internal evaluation.

Derivative instruments: Derivative instruments, consisting solely of interest rate swaps, are recorded at fair value on a recurring basis. Derivatives qualifying as cash flow hedges, when highly effective, are reported at fair value in other assets or other liabilities on our Consolidated Balance Sheets with changes in value recorded in OCI. Should the hedge no longer be considered effective, the ineffective portion of the change in fair value is recorded directly in earnings in the period in which the change occurs. The fair value of a derivative is determined by quoted market prices and model-based valuation techniques. As such, we classify derivative instruments as Level 2.

OMSR: OMSR (which are included in other assets) are subject to impairment testing. To test for impairment, we utilize a discounted cash flow analysis using interest rates and prepayment speed assumptions currently quoted for comparable instruments and discount rates. If the valuation model reflects a value less than the carrying value, OMSR are adjusted to fair value through a valuation allowance as determined by the model. As such, we classify OMSR subject to nonrecurring fair value adjustments as Level 2.

The preceding methods described may produce a fair value calculation that may not be indicative of net realizable value or reflective of future fair values. Although we believe our valuation methods are appropriate and consistent with other market participants, the use of different methodologies or assumptions to determine the fair value of certain financial instruments could result in a different fair value measurement.

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Estimated Fair Values of Financial Instruments Not Recorded at Fair Value in their Entirety on a Recurring Basis

Disclosure of the estimated fair values of financial instruments, which differ from carrying values, often requires the use of estimates. In cases where quoted market values in an active market are not available, we use present value techniques and other valuation methods to estimate the fair values of our financial instruments. These valuation methods require considerable judgment and the resulting estimates of fair value can be significantly affected by the assumptions made and methods used.

The carrying amount and estimated fair value of financial instruments not recorded at fair value in their entirety on a recurring basis were as follows as of:


	September 30, 2020
	Carrying Value		Estimated Fair Value		Level 1		Level 2		Level 3
ASSETS
Cash and cash equivalents	$	165,749	$	165,749	$	165,749	$	0	$	0
Mortgage loans AFS	4,661		4,701		0		4,701		0
Gross loans	1,303,308		1,303,380		0		0		1,303,380
Less allowance for loan and lease losses	9,506		9,506		0		0		9,506
Net loans	1,293,802		1,293,874		0		0		1,293,874
Accrued interest receivable	8,458		8,458		8,458		0		0
Equity securities without readily determinable fair values (1)	21,690		N/A		0		0		0
OMSR	2,185		2,221		0		2,221		0
LIABILITIES
Deposits without stated maturities	1,115,374		1,115,374		1,115,374		0		0
Deposits with stated maturities	379,721		387,369		0		387,369		0
Borrowed funds	238,349		247,211		0		247,211		0
Accrued interest payable	663		663		663		0		0


	December 31, 2019
	Carrying Value		Estimated Fair Value		Level 1		Level 2		Level 3
ASSETS
Cash and cash equivalents	$	60,572	$	60,572	$	60,572	$	0	$	0
Mortgage loans AFS	904		925		0		925		0
Gross loans	1,186,570		1,170,370		0		0		1,170,370
Less allowance for loan and lease losses	7,939		7,939		0		0		7,939
Net loans	1,178,631		1,162,431		0		0		1,162,431
Accrued interest receivable	6,501		6,501		6,501		0		0
Equity securities without readily determinable fair values (1)	21,629		N/A		0		0		0
OMSR	2,264		2,264		0		2,264		0
LIABILITIES
Deposits without stated maturities	906,232		906,232		906,232		0		0
Deposits with stated maturities	407,619		409,600		0		409,600		0
Borrowed funds	275,999		278,761		0		278,761		0
Accrued interest payable	860		860		860		0		0

(1)Due to the characteristics of equity securities without readily determinable fair values, they are not disclosed under a specific fair value hierarchy. When an impairment or write-down related to these securities is recorded, such amount would be classified as a nonrecurring Level 3 fair value adjustment.

Table of Contents

Financial Instruments Recorded at Fair Value

The table below presents the recorded amount of assets and liabilities measured at fair value on:


	September 30, 2020											December 31, 2019
	Total		Level 1			Level 2			Level 3			Total		Level 1			Level 2			Level 3
Recurring items
AFS securities
States and political subdivisions	$	148,401	$	0		$	148,401		$	0		$	169,752	$	0		$	169,752		$	0
Auction rate money market preferred	3,194		0			3,194			0			3,119		0			3,119			0
Mortgage-backed securities	104,165		0			104,165			0			140,204		0			140,204			0
Collateralized mortgage obligations	107,294		0			107,294			0			116,764		0			116,764			0
Total AFS securities	363,054		0			363,054			0			429,839		0			429,839			0
Derivative instruments	78		0			78			0			67		0			67			0
Nonrecurring items
Impaired loans (net of the ALLL)	19,333		0			0			19,333			19,135		0			0			19,135
OMSR	2,185		0			2,185			0			2,264		0			2,264			0
Total	$	384,650	$	0		$	365,317		$	19,333		$	451,305	$	0		$	432,170		$	19,135
Percent of assets and liabilities measured at fair value			0		%	94.97		%	5.03		%			0		%	95.76		%	4.24		%

We recorded an impairment related to OMSR of $316 and $81 through earnings for the nine-month period ended September 30, 2020 and 2019, respectively. We had no other assets or liabilities recorded at fair value with changes in fair value recognized through earnings, on a recurring basis or nonrecurring basis, as of September 30, 2020. Further, we had no unrealized gains and losses for the period included in OCI for recurring Level 3 fair value measurements held at the end of the reporting period.

Note 1112 – ~~Accumulated Other Comprehensive Income~~Operating Segments

Our reportable segments are based on legal entities that account for at least 10% of net operating results. The ~~following table summarizes the changes in AOCI by component for the:~~

Three Months Ended September 30
2019 2018

Unrealized
Gains
(Losses) on
AFS
Securities Unrealized
Gains
(Losses) on Derivative Instruments Defined
Benefit
Pension Plan Total Unrealized
Gains
(Losses) on
AFS
Securities Unrealized
Gains
(Losses) on Derivative Instruments Defined
Benefit
Pension Plan Total
Balance, July 1 $ 3,417
$ 91
$ (2,741 ) $ 767
$ (7,295 ) $ 351
$ (3,223 ) $ (10,167 )
OCI before reclassifications 1,724
(37 ) —
1,687
(2,513 ) 7
—
(2,506 )
Amounts reclassified from AOCI (6 ) —
—
(6 ) —
—
—
—
Subtotal 1,718
(37 ) —
1,681
(2,513 ) 7
—
(2,506 )
Tax effect (310 ) 8
—
(302 ) 522
(2 ) —
520
OCI, net of tax 1,408
(29 ) —
1,379
(1,991 ) 5
—
(1,986 )
Balance,
September 30 $ 4,825
$ 62
$ (2,741 ) $ 2,146
$ (9,286 ) $ 356
$ (3,223 ) $ (12,153 )

Nine Months Ended September 30
2019 2018

Unrealized
Gains
(Losses) on
AFS
Securities Unrealized
Gains
(Losses) on Derivative Instruments Defined
Benefit
Pension Plan Total Unrealized
Gains
(Losses) on
AFS
Securities Unrealized
Gains
(Losses) on Derivative Instruments Defined
Benefit
Pension Plan Total
Balance, January 1 $ (5,200 ) $ 256
$ (2,741 ) $ (7,685 ) $ 391
$ 230
$ (3,223 ) $ (2,602 )
OCI before reclassifications 12,554
(245 ) —
12,309
(12,548 ) 160
—
(12,388 )
Amounts reclassified from AOCI (6 ) —
—
(6 ) —
—
—
—
Subtotal 12,548
(245 ) —
12,303
(12,548 ) 160
—
(12,388 )
Tax effect (2,523 ) 51
—
(2,472 ) 2,648
(34 ) —
2,614
OCI, net of tax 10,025
(194 ) —
9,831
(9,900 )
126

—

(9,774 )
Adoption of ASU 2016-01 —
—
—
—
223
—
—
223
Balance,
September 30 $ 4,825
$ 62
$ (2,741 ) $ 2,146
$ (9,286 ) $ 356
$ (3,223 ) $ (12,153 )

~~Included in OCI~~Bank as of September 30, 2020 and December 31, 2019 and for the three and ~~nine month~~nine-month periods ended September 30, 2020 and 2019, ~~and 2018 are changes in unrealized gains and losses related to auction rate money market preferred stocks. These investments, for federal income tax purposes, have~~ no ~~deferred federal income taxes related to unrealized gains~~represent approximately 90% or ~~losses given the nature~~more of ~~the investments.~~

~~A summary of the components of unrealized gains on AFS securities included in OCI follows for the:~~

Three Months Ended September 30
2019 2018

Auction Rate Money Market Preferred Stocks All Other AFS Securities Total Auction Rate Money Market Preferred and Preferred Stocks All Other AFS Securities Total
Unrealized gains (losses) arising during the period $ 240
$ 1,484
$ 1,724
$ (27 ) $ (2,486 ) $ (2,513 )
Reclassification adjustment for net (gains) losses included in net income —
(6 ) (6 ) —
—
—
Net unrealized gains (losses) 240
1,478
1,718
(27 ) (2,486 ) (2,513 )
Tax effect —
(310 ) (310 ) —
522
522
Unrealized gains (losses), net of tax $ 240
$ 1,168
$ 1,408
$ (27 ) $ (1,964 ) $ (1,991 )

Nine Months Ended September 30
2019 2018

Auction Rate Money Market Preferred Stocks All Other AFS Securities Total Auction Rate Money Market Preferred and Preferred Stocks All Other AFS Securities Total
Unrealized gains (losses) arising during the period $ 535
$ 12,019
$ 12,554
$ 59
$ (12,607 ) $ (12,548 )
Reclassification adjustment for net (gains) losses included in net income —
(6 ) (6 ) —
—
—
Net unrealized gains (losses) 535
12,013
12,548
59
(12,607 ) (12,548 )
Tax effect —
(2,523 ) (2,523 ) —
2,648
2,648
Unrealized gains (losses), net of tax $ 535
$ 9,490
$ 10,025
$ 59

$ (9,959 )
$ (9,900 )

~~Note 12 –~~ ~~Fair Value~~

~~Under fair value measurement and disclosure authoritative guidance, we group~~our consolidated total assets and liabilities measured at fair value into three levels, based on the markets in which the assets and liabilities are traded, and the reliability of the assumptions used to determine fair value, based on the prioritization of inputs in the valuation techniques. These levels are:



~~Level 1:~~	~~Valuation is based upon quoted prices for identical instruments traded in active markets.~~
~~Level 2:~~	Valuation is based upon quoted prices for similar instruments in active markets, quoted prices for identical or similar instruments in markets that are not active and model based valuation techniques for which all significant assumptions are observable in the market.
~~Level 3:~~	Valuation is generated from model based techniques that use at least one significant assumption not observable in the market. These unobservable assumptions reflect estimates of assumptions that market participants would use in pricing the asset or liability.

~~Following is a description of the valuation methodologies, key inputs, and an indication of the level of the fair value hierarchy in which the assets or liabilities are classified.~~

~~AFS securities:~~ AFS securities are recorded at fair value on a recurring basis. Level 1 fair value measurement is based upon quoted prices for identical instruments. Level 2 fair value measurement is based upon quoted prices for similar instruments. If quoted prices are not available, fair values are measured using independent pricing models or other model based valuation techniques such as the present value of future cash flows, adjusted for the security’s credit rating, prepayment assumptions and other factors such as credit loss and liquidity assumptions. The values for Level 1 and Level 2 investment securities are generally obtained from an independent third party. On a quarterly basis, we compare the values provided to alternative pricing sources.

~~Loans~~: ~~We do not record loans at fair value on a recurring basis. However, from~~ ~~time-to-time~~, loans are classified as impaired and a specific allowance for loan losses may be established. Loans for which it is probable that payment of interest and principal will be significantly different than the contractual terms of the original loan agreement are considered impaired. Once a loan is identified as impaired, we measure the estimated impairment. The fair value of impaired loans is estimated using one of several methods, including the present value of expected future cash flows discounted at the loan’s effective interest rate, or the fair value of the collateral, less costs to sell, if the loan is collateral dependent. Those impaired loans not requiring an allowance represent loans for which the fair value of the expected repayments or collateral exceed the recorded investments in such loans.

We review the net realizable values of the underlying collateral for collateral dependent impaired loans on at least a quarterly basis for all loan types. To determine the collateral value, we utilize independent appraisals, broker price opinions, or internal evaluations. We review these valuations to determine whether an additional discount should be applied given the age of market information that may have been considered as well as other factors such as costs to sell an asset if it is determined that the collateral will be liquidated in connection with the ultimate settlement of the loan. We use these valuations to determine if any specific reserves or ~~charge-offs~~ are necessary. We may obtain new valuations in certain circumstances, including when there has been significant deterioration in the condition of the collateral, if the foreclosure process has begun, or if the existing valuation is deemed to be outdated.

~~The following tables list the quantitative fair value information about impaired loans as of:~~

September 30, 2019
Valuation Technique Fair Value Unobservable Input Actual Range
Discount applied to collateral:
Real Estate 20% - 30%
Equipment 20% - 50%
Cash crop inventory 30% - 40%
Discounted value $18,940 Livestock 30%
Other inventory 50%
Accounts receivable 25% - 50%
Liquor license 75%
Furniture, fixtures & equipment 45%

December 31, 2018
Valuation Technique Fair Value Unobservable Input Actual Range
Discount applied to collateral:
Real Estate 20% - 30%
Equipment 20% - 40%
Cash crop inventory 30% - 40%
Discounted value $20,045 Livestock 30%
Other inventory 45% - 50%
Accounts receivable 50%
Liquor license 75%
Furniture, fixtures & equipment 35% - 45%

~~Collateral discount rates may have ranges to accommodate differences in the age of the independent appraisal, broker price opinion, or internal evaluation.~~

~~Derivative instruments:~~ Derivative instruments, consisting solely of interest rate swaps, are recorded at fair value on a recurring basis. Derivatives qualifying as cash flow hedges, when highly effective, are reported at fair value in other assets or other liabilities on our Consolidated Balance Sheets with changes in value recorded in OCI. Should the hedge no longer be considered effective, the ineffective portion of the change in fair value is recorded directly in earnings in the period in which the change occurs. The fair value of a derivative is determined by quoted market prices and model-based valuation techniques.operating results. As such, ~~we classify derivative instruments as Level 2.~~no additional segment reporting is presented.

~~OMSR:~~ OMSR (which are included in other assets) are subject to impairment testing. To test for impairment, we utilize a discounted cash flow analysis using interest rates and prepayment speed assumptions currently quoted for comparable instruments and discount rates. If the valuation model reflects a value less than the carrying value, OMSR are adjusted to fair value through a valuation allowance as determined by the model. As such, we classify OMSR subject to nonrecurring fair value adjustments as Level 2.

~~Estimated Fair Values of Financial Instruments Not Recorded at Fair Value in their Entirety on a Recurring Basis~~

~~The carrying amount and estimated fair value of financial instruments not recorded at fair value in their entirety on a recurring basis were as follows as of:~~

September 30, 2019

Carrying
Value Estimated
Fair Value Level 1 Level 2 Level 3
ASSETS
Cash and cash equivalents $ 34,331
$ 34,331
$ 34,331
$ —
$ —
Mortgage loans AFS 1,912
1,928
—
1,928
—
Gross loans 1,191,804
1,175,721
—
—
1,175,721
Less allowance for loan and lease losses 8,169
8,169
—
—
8,169
Net loans 1,183,635
1,167,552
—
—
1,167,552
Accrued interest receivable 7,360
7,360
7,360
—
—
Equity securities without readily determinable fair values ⁽¹⁾
25,130
N/A
—
—
—
OMSR 2,375
2,375
—
2,375
—
LIABILITIES
Deposits without stated maturities 882,688
882,688
882,688
—
—
Deposits with stated maturities 426,085
427,536
—
427,536
—
Borrowed funds 277,386
280,203
—
280,203
—
Accrued interest payable 870
870
870
—
—

December 31, 2018
Carrying
Value Estimated
Fair Value Level 1 Level 2 Level 3
ASSETS
Cash and cash equivalents $ 73,471
$ 73,471
$ 73,471
$ —
$ —
Mortgage loans AFS 358
365
—
365
—
Gross loans 1,128,707
1,099,645
—
—
1,099,645
Less allowance for loan and lease losses 8,375
8,375
—
—
8,375
Net loans 1,120,332
1,091,270
—
—
1,091,270
Accrued interest receivable 6,928
6,928
6,928
—
—
Equity securities without readily determinable fair values ⁽¹⁾
24,948
N/A
—
—
—
OMSR 2,434
2,602
—
2,602
—
LIABILITIES
Deposits without stated maturities 859,073
859,073
859,073
—
—
Deposits with stated maturities 433,620
425,993
—
425,993
—
Borrowed funds 340,299
333,829
—
333,829
—
Accrued interest payable 826
826
826
—
—


⁽¹⁾	Due to the characteristics of equity securities without readily determinable fair values, they are not disclosed under a specific fair value hierarchy. If we were to record an impairment adjustment related to these securities, such amount would be classified as a nonrecurring Level 3 fair value adjustment.

~~Financial Instruments Recorded at Fair Value~~

~~The table below presents the recorded amount of assets and liabilities measured at fair value on:~~

September 30, 2019 December 31, 2018

Total Level 1 Level 2 Level 3 Total Level 1 Level 2 Level 3
Recurring items
AFS securities
Government-sponsored enterprises $ —
$ —
$ —
$ —
$ 170
$ —
$ 170
$ —
States and political subdivisions 175,575
—
175,575
—
190,866
—
190,866
—
Auction rate money market preferred 3,089
—
3,089
—
2,554
—
2,554
—
Mortgage-backed securities 150,120
—
150,120
—
184,484
—
184,484
—
Collateralized mortgage obligations 116,745
—
116,745
—
116,760
—
116,760
—
Total AFS securities 445,529
—
445,529
—
494,834
—
494,834
—
Derivative instruments 78
—
78
—
323
—
323
—
Nonrecurring items
Impaired loans (net of the ALLL) 18,940
—
—
18,940
20,045
—
—
20,045
Total $ 464,547
$ —
$ 445,607
$ 18,940
$ 515,202
$ —
$ 495,157
$ 20,045
Percent of assets and liabilities measured at fair value — % 95.92 % 4.08 % — % 96.11 % 3.89 %

~~We had no assets or liabilities recorded at fair value with changes in fair value recognized through earnings, on a recurring basis or nonrecurring basis, as of September 30, 2019.~~

Note 13 – Parent Company Only Financial Information

Interim Condensed Balance Sheets


	September 30 2020		December 31 2019
ASSETS
Cash on deposit at the Bank	$	627	$	1,360
Investments in subsidiaries	170,268		157,415
Premises and equipment	1,505		1,539
Other assets	50,184		49,887
TOTAL ASSETS	$	222,584	$	210,201
LIABILITIES AND SHAREHOLDERS’ EQUITY
Other liabilities	$	39	$	19
Shareholders' equity	222,545		210,182
TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY	$	222,584	$	210,201

Table of Contents

September 30
2019 December 31
2018
ASSETS
Cash on deposit at the Bank $ 2,447
$ 2,499
Investments in subsidiaries 156,850
143,942
Premises and equipment 1,551
1,912
Other assets 52,119
51,674
TOTAL ASSETS $ 212,967
$ 200,027
LIABILITIES AND SHAREHOLDERS’ EQUITY
Other liabilities $ 591
$ 4,508
Shareholders' equity 212,376
195,519
TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY $ 212,967
$ 200,027

Interim Condensed Statements of Income


	Three Months Ended September 30					Nine Months Ended September 30					Three Months Ended September 30				Nine Months Ended September 30
	2019		2018			2019		2018			2020		2019		2020		2019
Income										Income
Dividends from subsidiaries	$	2,400	$	4,900		$	5,500	$	10,900	Dividends from subsidiaries	$	2,600	$	2,400	$	6,200	$	5,500
Interest income	1		1			5		1		Interest income	0		1		1		5
Other income	181		812			394		2,342
Other income (loss)										Other income (loss)	181		181		308		394
Total income	2,582		5,713			5,899		13,243		Total income	2,781		2,582		6,509		5,899
Expenses										Expenses
Compensation and benefits	—		1,068			—		3,227
Occupancy and equipment	15		129			44		378		Occupancy and equipment	15		15		45		44
Audit, consulting, and legal fees	110		154			355		586		Audit, consulting, and legal fees	119		110		426		355
Director fees	90		106			277		313		Director fees	86		90		269		277
Other	254		142			872		450		Other	282		254		885		872
Total expenses	469		1,599			1,548		4,954		Total expenses	502		469		1,625		1,548
Income before income tax benefit and equity in undistributed earnings of subsidiaries	2,113		4,114			4,351		8,289		Income before income tax benefit and equity in undistributed earnings of subsidiaries	2,279		2,113		4,884		4,351
Federal income tax benefit	60		165			239		545		Federal income tax benefit	67		60		276		239
Income before equity in undistributed earnings of subsidiaries	2,173		4,279			4,590		8,834		Income before equity in undistributed earnings of subsidiaries	2,346		2,173		5,160		4,590
Undistributed earnings of subsidiaries	2,269		(583		)	7,536		1,657		Undistributed earnings of subsidiaries	2,011		2,269		6,448		7,536
Net income	$	4,442	$	3,696		$	12,126	$	10,491	Net income	$	4,357	$	4,442	$	11,608	$	12,126

Interim Condensed Statements of Cash Flows


	Nine Months Ended September 30
	2020		2019
Operating activities
Net income	$	11,608	$	12,126
Adjustments to reconcile net income to cash provided by operations
Undistributed earnings of subsidiaries	(6,448)		(7,536)
Undistributed earnings of equity securities without readily determinable fair values	(61)		(182)
Share-based payment awards under equity compensation plan	334		415
Depreciation	34		34
Changes in operating assets and liabilities which provided (used) cash
Other assets	(236)		(35)
Other liabilities	19		641
Net cash provided by (used in) operating activities	5,250		5,463
Investing activities - none
Financing activities
Cash dividends paid on common stock	(6,386)		(6,149)
Proceeds from the issuance of common stock	3,274		3,672
Common stock repurchased	(1,619)		(2,140)
Common stock purchased for deferred compensation obligations	(1,252)		(898)
Net cash provided by (used in) financing activities	(5,983)		(5,515)
Increase (decrease) in cash and cash equivalents	(733)		(52)
Cash and cash equivalents at beginning of period	1,360		2,499
Cash and cash equivalents at end of period	$	627	$	2,447

Nine Months Ended
September 30

2019 2018
Operating activities
Net income $ 12,126
$ 10,491
Adjustments to reconcile net income to cash provided by operations
Undistributed earnings of subsidiaries (7,536 ) (1,657 )
Undistributed earnings of equity securities without readily determinable fair values (182 ) (143 )
Share-based payment awards under equity compensation plan 415
449
Depreciation 34
98
Changes in operating assets and liabilities which provided (used) cash
Other assets (35 ) 1,080
Other liabilities 641
(597 )
Net cash provided by (used in) operating activities 5,463
9,721
Investing activities
Sales (purchases) of premises and equipment —
(79 )
Net cash provided by (used in) investing activities —
(79 )
Financing activities
Cash dividends paid on common stock (6,149 ) (6,126 )
Proceeds from the issuance of common stock 3,672
5,093
Common stock repurchased (2,140 ) (6,212 )
Common stock purchased for deferred compensation obligations (898 ) (290 )
Net cash provided by (used in) financing activities (5,515 ) (7,535 )
Increase (decrease) in cash and cash equivalents (52 ) 2,107
Cash and cash equivalents at beginning of period 2,499
185
Cash and cash equivalents at end of period $ 2,447
$ 2,292

Table of Contents

On January 1, 2019, there was a transaction to restructure the Bank and the parent holding company for the purpose of better-organizing the entities for present and future needs. The transaction is expected to produce future benefits for us in the form of reduced operational costs and better-managed risk. Assets and liabilities transferred from the parent company to the Bank relate primarily to capital assets, net deferred income tax asset, prepaid assets, employee benefits payable, accrued expenses, and a pension plan. Effective January 1, 2019, employee compensation and benefit expenses will be recognized directly by the Bank, where expenses related to certain administrative functions were previously recognized by the parent holding company. Similarly, expenses related to most capital assets will be recognized directly by the Bank. A portion of employee compensation and benefit expenses, as well as some expenses related to capital assets, will be recognized by the holding company through a management fee paid to the Bank.

~~Note 14 –~~ ~~Operating Segments~~

~~Our reportable segments are based on legal entities that account for at least~~ ~~10%~~ ~~of net operating results. The operations of the Bank as of~~ ~~September 30, 2019~~ ~~and~~ ~~2018~~ ~~and each of the~~ ~~three and nine~~ ~~month periods then ended, represent approximately~~ ~~90%~~ ~~or more of our consolidated total assets and operating results. As such, no additional segment reporting is presented.~~

Item 2. Management's Discussion and Analysis of Financial Condition and Results of ~~Operations~~.Operations.

ISABELLA BANK CORPORATION FINANCIAL REVIEW

(Dollars in thousands except per share ~~amounts~~)amounts)

~~This section~~The following is ~~a review~~management's discussion and analysis of our financial condition and ~~the~~ results of ~~our~~ operations for the unaudited three and ~~nine month~~nine-month periods ended September 30, ~~2019~~2020 and ~~2018.~~2019. This analysis should be read in conjunction with our Annual Report on Form 10-K for the year ended December 31, ~~2018~~2019 and with the unaudited interim condensed consolidated financial statements and notes, beginning on page 4 of this report.

Executive Summary

During the three and nine months ended September 30, ~~2019,~~2020, we reported net income of ~~$4,442~~$4,357 and ~~$12,126~~$11,608 and earnings per common share of ~~$0.56~~$0.55 and ~~$1.53,~~$1.46, respectively. Net income and earnings per common share for the same periods of ~~2018~~2019 were ~~$3,696~~$4,442 and ~~$10,491~~$12,126 and ~~$0.47~~$0.56 and ~~$1.33,~~$1.53, respectively. A ~~combination of improved yields and growth~~decline in ~~our loan portfolio over~~ the ~~past twelve months were~~interest rate environment was a large ~~drivers~~driver of a ~~$3,204 increase~~$2,687 decrease in interest income for the first nine months of ~~2019~~2020 compared to the same period in ~~2018.~~2019. Interest expense on deposits and borrowings ~~increased $1,996~~decreased $2,402 for the ~~nine month~~nine-month period ended September 30, ~~2019 when~~2020 compared to the same period in ~~2018~~2019 primarily due to ~~higher~~reduced interest ~~rates.~~rates and reduced reliance on higher-cost borrowings. Net interest income decreased by $285 for the nine-month period ended September 30, 2020 in comparison to the same period in 2019. The provision for loan losses increased by $1,361 for the nine-month period ended September 30, 2020 compared to the same period in 2019 as the result of increased economic and environmental risk factors, predominantly driven by COVID-19. Noninterest income increased ~~$648~~$1,540 during the first nine months of ~~2019 when~~2020 compared to the same period in ~~2018~~2019, mainly as ~~we experienced an increase in debit card transaction fees~~a result of gains from the redemption of corporate owned life insurance policies and ~~gains related to foreclosed assets.~~net gain on sold mortgage loans. Noninterest expenses for the first nine months of ~~2019~~2020 exceeded ~~noninterest expenses for~~ the same period in ~~2018~~2019 by ~~$176. Expenses related~~$437, primarily due to ~~our employee incentive plans account for a portion of this increase, which was partially offset by~~ an FDIC assessment credit ~~reduced audit and consulting fees, and ongoing cost control initiatives. These initiatives include managing employee turnover, capital expenditures and vendor costs.~~recognized during the third quarter of 2019.

As of September 30, ~~2019,~~2020, total assets and assets under management were ~~$1,813,684~~$1,971,697 and ~~$2,548,131,~~$2,664,951, respectively. Assets under management include loans sold and serviced of ~~$258,873~~$289,524 and investment and trust assets managed by ~~our Investment and Trust Services Department~~Isabella Wealth of ~~$475,574,~~$403,730, in addition to assets on our consolidated balance sheet. AsIn the first half of 2020, the Bank’s investment and trust services business was re-engineered and rebranded as Isabella Wealth to enhance the client experience, build scalability and expand market awareness.

Our securities portfolio has strategically declined $66,785 since December 31, 2019, predominantly as a result of maturities and sales of AFS securities. Due to the flat yield curve that has existed for ~~several months,~~over a year, the opportunity to identify new investment securities for purchase at an acceptable yield has been minimal. Therefore, our securities portfolio has declined $49,305 since December 31, 2018. Based on strategic objectives, we utilized this available cash flow to reduce borrowings as they mature and other high-cost funding sources, resulting in a decline in total assets as of September 30, 2019 when compared to December 31, 2018. Loans outstanding as of September 30, ~~2019~~2020 totaled ~~$1,191,804.~~$1,303,308. During the first nine months of ~~2019,~~2020, gross loans increased ~~$63,097~~$116,738 which was largely driven by ~~growth in our commercial loan portfolio.~~SBA PPP loans. Total deposits ~~increased $16,080 during the year, primarily due to increases in savings and trust related deposits, and totaled $1,308,773~~were $1,495,095 as of September 30, ~~2019.~~2020 and increased $181,244 during the first nine months of 2020. Demand and savings deposits were the main drivers of the increase in deposits, largely as a result of SBA PPP and government stimulus funds. All regulatory capital ratios for the Bank exceeded the minimum thresholds to be considered a “well capitalized” institution.

Our net yield on interest earning assets (FTE) was 2.89% and 2.93% for the three and nine months ended September 30, 2020. This compares to 3.13% and 3.07% for the three and nine months ended September 30, ~~2019, respectively. This compares to 2.97% in both the three and nine months ended September 30, 2018.~~2019. Management has ~~implemented various initiatives which, over time, are expected to continue to improve~~put in place strategic programs focused on improving our net yield on interest earning ~~assets. These initiatives included transitioning~~assets, which includes enhanced pricing related to loans and deposits and a ~~larger percentage of assets from lower yielding investment securities to higher yielding loan opportunities, continued growth of the loan portfolio,~~ reduced reliance on ~~borrowings~~higher-cost borrowed funds and brokered deposits as funding sources. However, the current interest rate environment has had a negative impact on our net yields on interest earning assets and ~~enhanced pricing strategies related to loan and deposit products.~~future improvement may be gradual. We are actively committed to increasing earnings and shareholder value through growth in our loan portfolio while maintaining strong underwriting standards, growth in our ~~investment~~wealth management services, managing operating costs and ~~trust services,~~ increasing our presence within our geographical ~~footprint, and managing operating costs.~~footprint.

Recent Events and Legislation

Restricted Stock Plan:On ~~December 22, 2017,~~June 24, 2020 we adopted the ~~Tax~~RSP, an equity-based bonus plan. Under the RSP, we may award restricted stock bonuses to eligible employees on an annual basis that are not fully transferable or vested until certain conditions are met. The RSP authorizes the issuance of unvested restricted stock to an eligible employee with a maximum award ranging from 25% to 40% of the employee’s annual salary, on a calendar year basis. The employee must also satisfy the annual performance targets and measures established by the Board of Directors. If these grant conditions are not satisfied, then the award of restricted shares will lapse or be adjusted appropriately, at the discretion of the Board of Directors. In connection with the adoption of the RSP, the Isabella Bank Corporation Stock Award Incentive Plan was terminated.

Table of Contents

Also on June 24, 2020, we made initial grants under the RSP to the Corporation's President and CEO, CFO and the Bank's President. All Grant Agreements contain vesting conditions and clawback provisions. As of September 30, 2020, we did not believe the achievement of the targets specified in an award pursuant to the RSP to be probable and therefore, did not recognize any compensation expense pursuant to the RSP.

Impact of COVID-19: Unexpected and unprecedented changes have occurred during the year as the result of COVID-19. This aggressive and persistent virus causes a respiratory disease that currently has no approved vaccine or antiviral treatment and can result in serious illness or death. The World Health Organization has declared the situation a global pandemic.

The pandemic has created significant market volatility, economic uncertainty, and disruption to normal business operations around the world, with slowdowns and shutdowns affecting entire industries. The Michigan governor issued on March 23, 2020 a stay-at-home order, which limited gatherings and travel, and required those in select businesses who were not deemed essential to sustain or protect life to stay home. The Michigan stay-at-home order was in effect until early June. The orders, as the result of COVID-19, led to financial stress for many businesses and their employees throughout the communities we serve.

The CARES Act, a massive and unprecedented federal government support program, was ~~enacted.~~enacted on March 27, 2020. It is a $2 trillion stimulus package intended to provide financial relief across the country. The ~~new law establishes~~CARES Act includes the PPP, which enables businesses to obtain a ~~flat corporate federal statutory income tax rate~~forgivable SBA loan to meet payroll, rent, utility, and mortgage interest obligations for the 24-week period following the loan origination, and re-open quickly once the public health crisis ends. The first applications for PPP funds, with a term of ~~21%, a decline from 34%, and eliminates~~two years, were accepted April 3, 2020. We are proud to facilitate SBA PPP loans to businesses throughout the ~~corporate alternative minimum tax. The new tax law provides~~communities in which we serve. As of September 30, 2020, we funded more than 950 SBA PPP loans for a ~~wide array~~total of ~~changes~~$99,459. Bank regulators issued an interim rule that neutralizes the regulatory capital effects by allowing a zero percent risk weight, for capital purposes, to loans originated under the PPP. The capital rule was issued April 9, 2020, with ~~only some believed~~an immediate effective date.

Many of our customers have expressed their general concern about the uncertain economic conditions, but it is premature to reasonably predict the magnitude of the impact. One measure we took to assist our customers included reduced service charges and fees on deposit accounts. Since the COVID-19 pandemic led to an increase in the need for electronic services and products, we elected to temporarily waive certain charges and fees to ease the financial stress of our customers. Other measures we have taken to assist our customers include loan programs that provide short-term payment relief. Under these programs, borrowers whose loans were in good standing as of March 1, 2020 could elect to defer full or partial payments for a ~~direct~~period not to exceed 180 days. As of September 30, 2020, we had active loan payment deferrals totaling $98,680, or 7.6% of gross loans. This compares favorably to $306,103, or 23.8% of gross loans as of June 30, 2020, as the majority of borrowers granted loan payment deferrals had reverted back to contractual payments as of September 30, 2020.

The extent to which COVID-19 impacts our business will depend on future developments, which are highly uncertain and cannot be predicted with any accuracy. Future developments include new information which may emerge concerning the severity of COVID-19 and the actions to contain the coronavirus or treat its impact, among others. We expect the significance of the COVID-19 pandemic, including the extent of its effect on our ~~federal income tax expense. Some~~financial and operational results, to be dictated by, among other factors, its duration, the success of ~~these changes include, but~~efforts to contain it and the impact of actions taken in response. Uncertainty created by the COVID-19 pandemic is pervasive, and the pandemic has impacted our operations, customers, and various areas of risk. With the uncertainty created by COVID-19, it's challenging to determine the full impact of the COVID-19 pandemic on our ongoing financial and operational results. We continue to closely monitor external events and are ~~not limited~~in continual discussion with our customers to ~~the following items: limits~~assess, prepare and respond to the deductions for net interest expense, immediate expense (for tax purposes) for certain qualified depreciable assets, elimination or reduction of certain deductions related to meals and entertainment expenses, and limits to the deductibility of deposit insurance premiums.conditions as they evolve.

Reclassifications

Certain amounts reported in the interim ~~2018~~2019 consolidated financial statements have been reclassified to conform to the ~~2019~~2020 presentation. ~~Other assets~~

Subsequent Events

We evaluated subsequent events after September 30, 2020 through the date our consolidated financial statements were issued for potential recognition and ~~other liabilities on~~disclosure. No subsequent events require financial statement recognition or disclosure between September 30, 2020 and the ~~interim condensed~~date our consolidated ~~balance sheets~~financial statements were ~~increased by $5,195 as~~issued.

Table of December 31, 2018 to reclassify pension and income tax related liabilities (pension: $3,470, income taxes $1,725). This resulted in a $5,195 increase in total assets and total liabilities as of December 31, 2018. All other balances and ratios were not materially impacted.Contents

Results of Operations

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


	September 30 2019			June 30 2019			March 31 2019			December 31 2018			September 30 2018				September 30 2020			June 30 2020			March 31 2020			December 31 2019			September 30 2019
INCOME STATEMENT DATA																INCOME STATEMENT DATA
Interest income	$	17,161		$	16,815		$	16,481		$	16,611		$	16,419		Interest income	$	15,700		$	15,869		$	16,201		$	16,849		$	17,161
Interest expense	4,550			4,527			4,292			4,258			4,231			Interest expense	3,203			3,565			4,199			4,492			4,550
Net interest income	12,611			12,288			12,189			12,353			12,188			Net interest income	12,497			12,304			12,002			12,357			12,611
Provision for loan losses	193			(179		)	34			342			(76		)	Provision for loan losses	516			105			788			(18)			193
Noninterest income	3,274			3,011			2,479			2,860			2,878			Noninterest income	4,060			3,246			2,998			(725)			3,274
Noninterest expenses	10,620			10,749			10,789			10,865			11,087			Noninterest expenses	10,950			10,700			10,945			10,892			10,620
Federal income tax expense	630			541			349			476			359
Federal income tax expense (benefit)																Federal income tax expense (benefit)	734			558			203			(140)			630
Net income	$	4,442		$	4,188		$	3,496		$	3,530		$	3,696		Net income	$	4,357		$	4,187		$	3,064		$	898		$	4,442
PER SHARE																PER SHARE
Basic earnings	$	0.56		$	0.53		$	0.44		$	0.45		$	0.47		Basic earnings	$	0.55		$	0.53		$	0.39		$	0.12		$	0.56
Diluted earnings	$	0.55		$	0.52		$	0.43		$	0.44		$	0.46		Diluted earnings	$	0.54		$	0.52		$	0.38		$	0.11		$	0.55
Dividends	$	0.26		$	0.26		$	0.26		$	0.26		$	0.26		Dividends	$	0.27		$	0.27		$	0.27		$	0.27		$	0.26
Tangible book value ⁽¹⁾	$	20.65		$	20.17		$	19.47		$	18.68		$	17.89
Tangible book value																Tangible book value	$	21.75		$	21.52		$	21.10		$	20.45		$	20.66
Quoted market value																Quoted market value
High	$	23.45		$	23.75		$	24.50		$	27.00		$	27.65		High	$	19.00		$	19.50		$	24.50		$	24.80		$	23.45
Low	$	22.01		$	22.25		$	22.25		$	22.50		$	26.05		Low	$	15.75		$	15.60		$	16.00		$	22.25		$	22.01
Close ⁽²⁾	$	22.30		$	23.25		$	23.75		$	22.56		$	26.75
Common shares outstanding ⁽²⁾	7,938,234			7,918,494			7,906,078			7,870,969			7,830,940
Close (1)																Close (1)	$	16.74		$	18.25		$	18.00		$	24.31		$	22.30
Common shares outstanding (1)																Common shares outstanding (1)	8,007,901			7,977,019			7,921,291			7,910,804			7,938,234
PERFORMANCE RATIOS																PERFORMANCE RATIOS
Return on average total assets	0.98		%	0.93		%	0.77		%	0.77		%	0.80		%	Return on average total assets	0.90		%	0.89		%	0.68		%	0.20		%	0.98		%
Return on average shareholders' equity	8.37		%	8.13		%	7.00		%	7.35		%	7.67		%	Return on average shareholders' equity	7.78		%	7.63		%	5.68		%	1.66		%	8.37		%
Return on average tangible shareholders' equity	11.08		%	10.61		%	8.97		%	9.20		%	9.75		%	Return on average tangible shareholders' equity	9.93		%	9.81		%	7.35		%	2.18		%	10.87		%
Net interest margin yield (FTE)	3.13		%	3.06		%	3.02		%	3.02		%	2.97		%	Net interest margin yield (FTE)	2.89		%	2.92		%	2.98		%	3.06		%	3.13		%
BALANCE SHEET DATA ⁽²⁾
BALANCE SHEET DATA (1)																BALANCE SHEET DATA (1)
Gross loans	$	1,191,804		$	1,176,622		$	1,144,832		$	1,128,707		$	1,139,930		Gross loans	$	1,303,308		$	1,284,385		$	1,175,936		$	1,186,570		$	1,191,804
AFS securities	$	445,529		$	470,449		$	494,842		$	494,834		$	501,139		AFS securities	$	363,054		$	380,414		$	407,189		$	429,839		$	445,529
Total assets	$	1,813,684		$	1,824,592		$	1,806,371		$	1,842,502		$	1,833,663		Total assets	$	1,971,697		$	1,913,227		$	1,815,904		$	1,814,198		$	1,813,684
Deposits	$	1,308,773		$	1,281,418		$	1,277,963		$	1,292,693		$	1,276,806		Deposits	$	1,495,095		$	1,440,678		$	1,322,083		$	1,313,851		$	1,308,773
Borrowed funds	$	277,386		$	320,462		$	311,684		$	340,299		$	359,776		Borrowed funds	$	238,349		$	236,268		$	263,171		$	275,999		$	277,386
Shareholders' equity	$	212,376		$	208,114		$	202,413		$	195,519		$	188,536		Shareholders' equity	$	222,545		$	219,991		$	215,498		$	210,182		$	212,376
Gross loans to deposits	91.06		%	91.82		%	89.58		%	87.31		%	89.28		%	Gross loans to deposits	87.17		%	89.15		%	88.95		%	90.31		%	91.06		%
ASSETS UNDER MANAGEMENT ⁽²⁾
ASSETS UNDER MANAGEMENT (1)																ASSETS UNDER MANAGEMENT (1)
Loans sold with servicing retained	$	258,873		$	257,062		$	259,127		$	259,481		$	257,400		Loans sold with servicing retained	$	289,524		$	263,332		$	257,285		$	259,375		$	258,873
Assets managed by our Investment and Trust Services Department	$	475,574		$	487,180		$	475,560		$	447,487		$	504,371
Assets managed by Isabella Wealth																Assets managed by Isabella Wealth	$	403,730		$	395,214		$	359,968		$	436,181		$	475,574
Total assets under management	$	2,548,131		$	2,568,834		$	2,541,058		$	2,549,470		$	2,595,434		Total assets under management	$	2,664,951		$	2,571,773		$	2,433,157		$	2,509,754		$	2,548,131
ASSET QUALITY ⁽²⁾
ASSET QUALITY (1)																ASSET QUALITY (1)
Nonperforming loans to gross loans	0.59		%	0.70		%	0.64		%	0.65		%	0.65		%	Nonperforming loans to gross loans	0.38		%	0.42		%	0.59		%	0.55		%	0.59		%
Nonperforming assets to total assets	0.41		%	0.48		%	0.43		%	0.42		%	0.42		%	Nonperforming assets to total assets	0.30		%	0.33		%	0.43		%	0.40		%	0.42		%
ALLL to gross loans	0.69		%	0.68		%	0.73		%	0.74		%	0.71		%	ALLL to gross loans	0.73		%	0.69		%	0.74		%	0.67		%	0.69		%
CAPITAL RATIOS ⁽²⁾
CAPITAL RATIOS (1)																CAPITAL RATIOS (1)
Shareholders' equity to assets	11.71		%	11.41		%	11.20		%	10.64		%	10.28		%	Shareholders' equity to assets	11.29		%	11.50		%	11.87		%	11.59		%	11.71		%
Tier 1 leverage	9.16		%	9.03		%	8.91		%	8.72		%	8.49		%	Tier 1 leverage	8.76		%	8.86		%	9.09		%	9.01		%	9.16		%
Common equity tier 1 capital	12.58		%	12.43		%	12.45		%	12.58		%	12.18		%	Common equity tier 1 capital	12.90		%	12.90		%	12.72		%	12.56		%	12.58		%
Tier 1 risk-based capital	12.58		%	12.43		%	12.45		%	12.58		%	12.18		%	Tier 1 risk-based capital	12.90		%	12.90		%	12.72		%	12.56		%	12.58		%
Total risk-based capital	13.21		%	13.06		%	13.12		%	13.26		%	12.83		%	Total risk-based capital	13.64		%	13.60		%	13.41		%	13.18		%	13.21		%

⁽¹⁾ ~~Tangible book value calculations include unrealized gain/loss on AFS securities.~~

⁽²⁾ At end of period

Table of Contents

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

September 30
2019 September 30
2018 September 30
2017 September 30
2016 September 30
2015
INCOME STATEMENT DATA
Interest income $ 50,457
$ 47,253
$ 43,335
$ 39,906
$ 38,479
Interest expense 13,369
11,373
9,059
8,039
7,586
Net interest income 37,088
35,880
34,276
31,867
30,893
Provision for loan losses 48
636
85
185
(1,999 )
Noninterest income 8,764
8,116
8,102
7,921
7,858
Noninterest expenses 32,158
31,982
29,597
27,731
26,166
Federal income tax expense ⁽¹⁾
1,520
887
2,180
1,855
2,750
Net income $ 12,126
$ 10,491

$ 10,516
$ 10,017
$ 11,834
PER SHARE
Basic earnings $ 1.53
$ 1.33
$ 1.34
$ 1.28
$ 1.52
Diluted earnings $ 1.50
$ 1.30
$ 1.31
$ 1.25
$ 1.49
Dividends $ 0.78
$ 0.78
$ 0.76
$ 0.73
$ 0.70
Tangible book value ⁽²⁾
$ 20.65
$ 17.89
$ 18.83
$ 18.70
$ 17.27
Quoted market value
High $ 24.50
$ 28.25
$ 29.10
$ 29.90
$ 23.85
Low $ 22.01
$ 26.05
$ 27.60
$ 27.25
$ 22.00
Close ⁽³⁾
$ 22.30
$ 26.75
$ 29.00
$ 27.70
$ 23.69
Common shares outstanding ⁽³⁾
7,938,234
7,830,940
7,856,664
7,833,481
7,765,333
PERFORMANCE RATIOS
Return on average total assets 0.89 % 0.77 % 0.79 % 0.80 % 1.00 %
Return on average shareholders' equity 7.85 % 7.22 % 7.18 % 6.90 % 8.80 %
Return on average tangible shareholders' equity 10.08 % 9.22 % 9.67 % 9.68 % 12.06 %
Net interest margin yield (FTE) ⁽¹⁾
3.07 % 2.97 % 3.03 % 3.00 % 3.12 %
BALANCE SHEET DATA ⁽³⁾

Gross loans $ 1,191,804
$ 1,139,930
$ 1,077,544
$ 989,366
$ 836,671
AFS securities $ 445,529
$ 501,139
$ 549,274
$ 560,641
$ 625,420
Total assets $ 1,813,684
$ 1,833,663
$ 1,791,967
$ 1,706,498
$ 1,619,250
Deposits $ 1,308,773
$ 1,276,806
$ 1,216,062
$ 1,175,833
$ 1,128,003
Borrowed funds $ 277,386
$ 359,776
$ 367,027
$ 325,409
$ 267,610
Shareholders' equity $ 212,376
$ 188,536
$ 196,463
$ 195,184
$ 182,998
Gross loans to deposits 91.06 % 89.28 % 88.61 % 84.14 % 74.17 %
ASSETS UNDER MANAGEMENT ⁽³⁾

Loans sold with servicing retained $ 258,873
$ 257,400
$ 268,817
$ 275,037
$ 289,268
Assets managed by our Investment and Trust Services Department $ 475,574
$ 504,371
$ 467,601
$ 424,573
$ 392,124
Total assets under management $ 2,548,131
$ 2,595,434
$ 2,528,385
$ 2,406,108
$ 2,300,642
ASSET QUALITY ⁽³⁾

Nonperforming loans to gross loans 0.59 % 0.65 % 0.21 % 0.16 % 0.10 %
Nonperforming assets to total assets 0.41 % 0.42 % 0.14 % 0.11 % 0.09 %
ALLL to gross loans 0.69 % 0.71 % 0.71 % 0.79 % 0.98 %
CAPITAL RATIOS ⁽³⁾

Shareholders' equity to assets 11.71 % 10.28 % 10.96 % 11.44 % 11.30 %
Tier 1 leverage 9.16 % 8.49 % 8.50 % 8.59 % 8.54 %
Common equity tier 1 capital 12.58 % 12.18 % 12.20 % 12.41 % 13.57 %
Tier 1 risk-based capital 12.58 % 12.18 % 12.20 % 12.41 % 13.57 %
Total risk-based capital 13.21 % 12.83 % 12.84 % 13.10 % 14.20 %

⁽¹⁾ ~~Calculations are based on a federal income tax rate of 21% in 2018 and 2019 and 34% for all prior periods.~~

⁽²⁾ ~~Tangible book value calculations include unrealized gain/loss on AFS securities.~~


	September 30 2020			September 30 2019			September 30 2018
INCOME STATEMENT DATA
Interest income	$	47,770		$	50,457		$	47,253
Interest expense	10,967			13,369			11,373
Net interest income	36,803			37,088			35,880
Provision for loan losses	1,409			48			636
Noninterest income	10,304			8,764			8,116
Noninterest expenses	32,595			32,158			31,982
Federal income tax expense (benefit)	1,495			1,520			887
Net income	$	11,608		$	12,126		$	10,491
PER SHARE
Basic earnings	$	1.46		$	1.53		$	1.33
Diluted earnings	$	1.43		$	1.50		$	1.30
Dividends	$	0.81		$	0.78		$	0.78
Tangible book value	$	21.75		$	20.66		$	17.89
Quoted market value
High	$	24.50		$	24.50		$	28.25
Low	$	15.60		$	22.01		$	26.05
Close (1)	$	16.74		$	22.30		$	26.75
Common shares outstanding (1)	8,007,901			7,938,234			7,830,940
PERFORMANCE RATIOS
Return on average total assets	0.82		%	0.89		%	0.77		%
Return on average shareholders' equity	7.04		%	7.85		%	7.22		%
Return on average tangible shareholders' equity	9.05		%	10.29		%	9.69		%
Net interest margin yield (FTE)	2.93		%	3.07		%	2.97		%
BALANCE SHEET DATA (1)
Gross loans	$	1,303,308		$	1,191,804		$	1,139,930
AFS securities	$	363,054		$	445,529		$	501,139
Total assets	$	1,971,697		$	1,813,684		$	1,833,663
Deposits	$	1,495,095		$	1,308,773		$	1,276,806
Borrowed funds	$	238,349		$	277,386		$	359,776
Shareholders' equity	$	222,545		$	212,376		$	188,536
Gross loans to deposits	87.17		%	91.06		%	89.28		%
ASSETS UNDER MANAGEMENT (1)
Loans sold with servicing retained	$	289,524		$	258,873		$	257,400
Assets managed by Isabella Wealth	$	403,730		$	475,574		$	504,371
Total assets under management	$	2,664,951		$	2,548,131		$	2,595,434
ASSET QUALITY (1)
Nonperforming loans to gross loans	0.38		%	0.59		%	0.65		%
Nonperforming assets to total assets	0.30		%	0.42		%	0.42		%
ALLL to gross loans	0.73		%	0.69		%	0.71		%
CAPITAL RATIOS (1)
Shareholders' equity to assets	11.29		%	11.71		%	10.28		%
Tier 1 leverage	8.76		%	9.16		%	8.49		%
Common equity tier 1 capital	12.90		%	12.58		%	12.18		%
Tier 1 risk-based capital	12.90		%	12.58		%	12.18		%
Total risk-based capital	13.64		%	13.21		%	12.83		%

⁽³⁾(1) At end of period

Table of Contents

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 and FHLB restricted equity holdings are included in other interest earning assets.


	Three Months Ended
	September 30, 2020						June 30, 2020						September 30, 2019
	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	$	1,275,297	$	13,554	4.25	%	$	1,241,856	$	13,297	4.28	%	$	1,177,257	$	14,020	4.76	%
Taxable investment securities	223,119		1,071		1.92	%	237,769		1,352		2.27	%	288,374		1,691		2.35	%
Nontaxable investment securities	135,168		1,238		3.66	%	141,229		1,333		3.78	%	164,159		1,557		3.79	%
Fed funds sold	—		—		—	%	12		—		0.04	%	218		2		2.83	%
Other	140,042		164		0.47	%	111,702		234		0.84	%	32,694		297		3.63	%
Total earning assets	1,773,626		16,027		3.61	%	1,732,568		16,216		3.74	%	1,662,702		17,567		4.23	%
NONEARNING ASSETS
Allowance for loan losses	(8,996)						(8,769)						(8,072)
Cash and demand deposits due from banks	29,311						20,389						21,078
Premises and equipment	25,627						25,854						26,749
Accrued income and other assets	122,279						120,444						111,927
Total assets	$	1,941,847					$	1,890,486					$	1,814,384
INTEREST BEARING LIABILITIES
Interest bearing demand deposits	$	277,695	$	94	0.14	%	$	249,735	$	86	0.14	%	$	234,164	$	76	0.13	%
Savings deposits	462,867		173		0.15	%	447,416		257		0.23	%	381,458		644		0.68	%
Time deposits	375,916		1,729		1.84	%	387,636		1,904		1.96	%	429,407		2,260		2.11	%
Borrowed funds	235,583		1,207		2.05	%	253,838		1,318		2.08	%	300,120		1,570		2.09	%
Total interest bearing liabilities	1,352,061		3,203		0.95	%	1,338,625		3,565		1.07	%	1,345,149		4,550		1.35	%
NONINTEREST BEARING LIABILITIES
Demand deposits	349,212						317,035						242,092
Other	16,441						15,355						14,753
Shareholders’ equity	224,133						219,471						212,390
Total liabilities and shareholders’ equity	$	1,941,847					$	1,890,486					$	1,814,384
Net interest income (FTE)			$	12,824					$	12,651					$	13,017
Net yield on interest earning assets (FTE)					2.89	%					2.92	%					3.13	%

Table of Contents

Three Months Ended

September 30, 2019
June 30, 2019
September 30, 2018

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 $ 1,177,257

$ 14,020

4.76 %
$ 1,155,284

$ 13,587

4.70 %
$ 1,151,881

$ 12,833

4.46 %
Taxable investment securities 288,374

1,691

2.35 %
309,650

1,873

2.42 %
334,785

2,031

2.43 %
Nontaxable investment securities 164,159

1,557

3.79 %
172,400

1,623

3.77 %
188,885

1,755

3.72 %
Fed funds sold 218
2
2.83 % —
—
— % —
—
— %
Other 32,694

297

3.63 %
25,123

148

2.36 %
29,387

254

3.46 %
Total earning assets 1,662,702

17,567

4.23 %
1,662,457

17,231

4.15 %
1,704,938

16,873

3.96 %
NONEARNING ASSETS

Allowance for loan losses (8,072 )

(8,349 )

(8,213 )

Cash and demand deposits due from banks 21,078

19,089

20,291

Premises and equipment 26,749

27,326

28,310

Accrued income and other assets 111,927

107,046

94,518

Total assets $ 1,814,384

$ 1,807,569

$ 1,839,844

INTEREST BEARING LIABILITIES

Interest bearing demand deposits $ 234,164

$ 76

0.13 %
$ 230,238

$ 83

0.14 %
$ 233,485

$ 69

0.12 %
Savings deposits 381,458

644

0.68 %
374,750

586

0.63 %
362,505

450

0.50 %
Time deposits 429,407

2,260

2.11 %
430,098

2,196

2.04 %
454,456

1,917

1.69 %
Borrowed funds 300,120

1,570

2.09 %
321,958

1,662

2.06 %
363,544

1,795

1.98 %
Total interest bearing liabilities 1,345,149

4,550

1.35 %
1,357,044

4,527

1.33 %
1,413,990

4,231

1.20 %
NONINTEREST BEARING LIABILITIES

Demand deposits 242,092

230,203

226,238

Other 14,753

14,288

6,937

Shareholders’ equity 212,390

206,034

192,679

Total liabilities and shareholders’ equity $ 1,814,384

$ 1,807,569

$ 1,839,844

Net interest income (FTE)

$ 13,017

$ 12,704

$ 12,642

Net yield on interest earning assets (FTE)

3.13 %

3.06 %

2.97 %


	Nine Months Ended															Nine Months Ended
	September 30, 2019							September 30, 2018								September 30, 2020						September 30, 2019
	Average Balance			Tax Equivalent Interest		Average Yield / Rate		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															INTEREST EARNING ASSETS
Loans	$	1,154,715		$	40,498	4.68	%	$	1,114,683		$	36,205	4.33	%	Loans	$	1,228,579	$	40,105	4.35	%	$	1,154,715	$	40,498	4.68	%
Taxable investment securities	305,880			5,522		2.41	%	346,956			6,318		2.43	%
Taxable investment securities (1)															Taxable investment securities (1)	237,509		3,912		2.20	%	305,880		5,522		2.41	%
Nontaxable investment securities	172,091			4,867		3.77	%	194,361			5,456		3.74	%	Nontaxable investment securities	142,893		3,989		3.72	%	172,091		4,867		3.77	%
Fed funds sold	82			2		2.51	%	—			—		—	%	Fed funds sold	4		—		0.07	%	82		2		2.51	%
Other	32,846			824		3.34	%	22,010			716		4.34	%	Other	114,108		803		0.94	%	32,846		824		3.34	%
Total earning assets	1,665,614			51,713		4.14	%	1,678,010			48,695		3.87	%	Total earning assets	1,723,093		48,809		3.78	%	1,665,614		51,713		4.14	%
NONEARNING ASSETS															NONEARNING ASSETS
Allowance for loan losses	(8,274		)					(8,078		)					Allowance for loan losses	(8,580)						(8,274)
Cash and demand deposits due from banks	19,793							19,481							Cash and demand deposits due from banks	23,772						19,793
Premises and equipment	27,257							28,454							Premises and equipment	25,911						27,257
Accrued income and other assets	106,304							95,717							Accrued income and other assets	117,852						106,304
Total assets	$	1,810,694						$	1,813,584						Total assets	$	1,882,048					$	1,810,694
INTEREST BEARING LIABILITIES															INTEREST BEARING LIABILITIES
Interest bearing demand deposits	$	233,484		$	227	0.13	%	$	230,376		$	201	0.12	%	Interest bearing demand deposits	$	254,283	$	263	0.14	%	$	233,484	$	227	0.13	%
Savings deposits	379,116			1,845		0.65	%	360,295			1,169		0.43	%	Savings deposits	445,702		1,064		0.32	%	379,116		1,845		0.65	%
Time deposits	431,959			6,491		2.00	%	461,114			5,342		1.54	%	Time deposits	389,375		5,707		1.95	%	431,959		6,491		2.00	%
Borrowed funds	314,430			4,806		2.04	%	339,461			4,661		1.83	%	Borrowed funds	253,292		3,933		2.07	%	314,430		4,806		2.04	%
Total interest bearing liabilities	1,358,989			13,369		1.31	%	1,391,246			11,373		1.09	%	Total interest bearing liabilities	1,342,652		10,967		1.09	%	1,358,989		13,369		1.31	%
NONINTEREST BEARING LIABILITIES															NONINTEREST BEARING LIABILITIES
Demand deposits	232,996							221,423							Demand deposits	304,322						232,996
Other	12,665							7,272							Other	15,314						12,665
Shareholders’ equity	206,044							193,643							Shareholders’ equity	219,760						206,044
Total liabilities and shareholders’ equity	$	1,810,694						$	1,813,584						Total liabilities and shareholders’ equity	$	1,882,048					$	1,810,694
Net interest income (FTE)				$	38,344						$	37,322			Net interest income (FTE)			$	37,842					$	38,344
Net yield on interest earning assets (FTE)						3.07	%						2.97	%	Net yield on interest earning assets (FTE)					2.93	%					3.07	%

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. WeWhile we exert some control over these ~~factors; however,~~factors, 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.

Table of Contents

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~~Changes in interest due to volume and rate were determined as follows:

Volume—change in volume multiplied by the previous period's rate.

Rate—change in the FTE rate multiplied by the previous period's volume.

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.


	Three Months Ended September 30, 2019 Compared to June 30, 2019 Increase (Decrease) Due to									Three Months Ended September 30, 2019 Compared to September 30, 2018 Increase (Decrease) Due to									Nine Months Ended September 30, 2019 Compared to September 30, 2018 Increase (Decrease) Due to										Three Months Ended September 30, 2020 Compared to June 30, 2020 Increase (Decrease) Due to						Three Months Ended September 30, 2020 Compared to September 30, 2019 Increase (Decrease) Due to						Nine Months Ended September 30, 2020 Compared to September 30, 2019 Increase (Decrease) Due to
	Volume			Rate			Net			Volume			Rate			Net			Volume			Rate			Net				Volume		Rate		Net		Volume		Rate		Net		Volume		Rate		Net
Changes in interest income																												Changes in interest income
Loans	$	260		$	173		$	433		$	287		$	900		$	1,187		$	1,332		$	2,961		$	4,293		Loans	$	356	$	(99)	$	257	$	1,112	$	(1,578)	$	(466)	$	2,504	$	(2,897)	$	(393)
Taxable investment securities	(126		)	(56		)	(182		)	(274		)	(66		)	(340		)	(742		)	(54		)	(796		)	Taxable investment securities	(80)		(201)		(281)		(344)		(276)		(620)		(1,157)		(453)		(1,610)
Nontaxable investment securities	(78		)	12			(66		)	(234		)	36			(198		)	(630		)	41			(589		)	Nontaxable investment securities	(56)		(39)		(95)		(267)		(52)		(319)		(816)		(62)		(878)
Fed Funds Sold	2			—			2			2			—			2			2			—			2			Fed Funds Sold	—		—		—		(1)		(1)		(2)		(1)		(1)		(2)
Other	53			96			149			30			13			43			297			(189		)	108			Other	50		(120)		(70)		304		(437)		(133)		902		(923)		(21)
Total changes in interest income	111			225			336			(189		)	883			694			259			2,759			3,018			Total changes in interest income	270		(459)		(189)		804		(2,344)		(1,540)		1,432		(4,336)		(2,904)
Changes in interest expense																												Changes in interest expense
Interest bearing demand deposits	1			(8		)	(7		)	—			7			7			3			23			26			Interest bearing demand deposits	9		(1)		8		15		3		18		21		15		36
Savings deposits	11			47			58			25			169			194			64			612			676			Savings deposits	9		(93)		(84)		114		(585)		(471)		282		(1,063)		(781)
Time deposits	(4		)	68			64			(110		)	453			343			(355		)	1,504			1,149			Time deposits	(56)		(119)		(175)		(264)		(267)		(531)		(627)		(157)		(784)
Borrowed funds	(114		)	22			(92		)	(327		)	102			(225		)	(359		)	504			145			Borrowed funds	(94)		(17)		(111)		(331)		(32)		(363)		(948)		75		(873)
Total changes in interest expense	(106		)	129			23			(412		)	731			319			(647		)	2,643			1,996			Total changes in interest expense	(132)		(230)		(362)		(466)		(881)		(1,347)		(1,272)		(1,130)		(2,402)
Net change in interest margin (FTE)	$	217		$	96		$	313		$	223		$	152		$	375		$	906		$	116		$	1,022		Net change in interest margin (FTE)	$	402	$	(229)	$	173	$	1,270	$	(1,463)	$	(193)	$	2,704	$	(3,206)	$	(502)

~~Our~~The flattening of the yield curve and recent rate reductions placed pressure on our net interest margin and led to a decline in our net yield on interest earning assets. Given the uncertainty in rates and the economic environment as a result of COVID-19, improvement in our net yield on interest earning assets ~~has increased in recent periods. The continuing flattening~~could be gradual or may not occur during the remainder of ~~the yield curve and rising deposit rates has placed pressure on our net interest margin. Despite this pressure, we experienced improvement as a result~~2020.


	Average Yield / Rate for the Three-Month Periods Ended:
	September 30 2020		June 30 2020		March 31 2020		December 31 2019		September 30 2019
Total earning assets	3.61	%	3.74	%	3.99	%	4.13	%	4.23	%
Total interest bearing liabilities	0.95	%	1.07	%	1.26	%	1.34	%	1.35	%
Net yield on interest earning assets (FTE)	2.89	%	2.92	%	2.98	%	3.06	%	3.13	%


	Quarter to Date Net Interest Income (FTE)
	September 30 2020		June 30 2020		March 31 2020		December 31 2019		September 30 2019
Total interest income (FTE)	$	16,027	$	16,216	$	16,566	$	17,245	$	17,567
Total interest expense	3,203		3,565		4,199		4,492		4,550
Net interest income (FTE)	$	12,824	$	12,651	$	12,367	$	12,753	$	13,017

Table of ~~improved loan yields and a decline in high-cost deposits and borrowings.~~

Average Yield / Rate for the Three Month Periods Ended:

September 30
2019
June 30
2019
March 31
2019
December 31
2018
September 30
2018
Total earning assets 4.23 % 4.15 % 4.05 % 4.03 % 3.96 %
Total interest bearing liabilities 1.35 % 1.33 % 1.25 % 1.23 % 1.20 %
Net yield on interest earning assets (FTE) 3.13 %
3.06 % 3.02 % 3.02 % 2.97 %
Contents

Quarter to Date Net Interest Income (FTE)

September 30
2019 June 30
2019 March 31
2019 December 31
2018 September 30
2018
Total interest income (FTE) $ 17,567
$ 17,231
$ 16,915
$ 17,005
$ 16,873
Total interest expense 4,550
4,527
4,292
4,258
4,231
Net interest income (FTE) $ 13,017
$ 12,704
$ 12,623
$ 12,747
$ 12,642

Allowance for Loan and Lease Losses

The viability of any financial institution is ultimately determined by its management of credit risk. Loans represent our single largest concentration of risk. The ALLL is our estimation of incurred losses within the existing loan portfolio. We allocate the ALLL throughout the loan portfolio based on our assessment of the underlying risks associated ~~with~~within each loan segment. Our assessments include allocations based on specific impairment valuation allowances, historical ~~charge-off~~s,charge-offs, internally assigned credit risk ratings, and past due and nonaccrual balances. A portion of the ALLL is not allocated to any one loan segment, but is instead a representation of other qualitative risks that reflect the margin of imprecision inherent in the underlying assumptions used in the methodologies for estimating specific and general losses in the portfolio.

The following table summarizes our ~~charge-off~~s,charge-offs, recoveries, provision for loan losses, and ALLL balances as of, and for the:


	Three Months Ended September 30						Nine Months Ended September 30							Three Months Ended September 30						Nine Months Ended September 30
	2019			2018			2019			2018				2020			2019			2020			2019
ALLL at beginning of period	$	8,037		$	8,200		$	8,375		$	7,700		ALLL at beginning of period	$	8,877		$	8,037		$	7,939		$	8,375
Charge-offs													Charge-offs
Commercial	21			—			134			450			Commercial	2			21			7			134
Agricultural	1			7			60			51			Agricultural	—			1			22			60
Residential real estate	—			61			96			100			Residential real estate	13			—			28			96
Consumer	121			111			324			247			Consumer	31			121			213			324
Total charge-offs	143			179			614			848			Total charge-offs	46			143			270			614
Recoveries													Recoveries
Commercial	25			79			98			282			Commercial	81			25			133			98
Agricultural	1			1			2			2			Agricultural	2			1			37			2
Residential real estate	25			37			143			162			Residential real estate	36			25			102			143
Consumer	31			38			117			166			Consumer	40			31			156			117
Total recoveries	82			155			360			612			Total recoveries	159			82			428			360
Net loan charge-offs (recoveries)	61			24			254			236			Net loan charge-offs (recoveries)	(113)			61			(158)			254
Provision for loan losses	193			(76		)	48			636			Provision for loan losses	516			193			1,409			48
ALLL at end of period	$	8,169		$	8,100		$	8,169		$	8,100		ALLL at end of period	$	9,506		$	8,169		$	9,506		$	8,169
Net loan charge-offs (recoveries) to average loans outstanding	0.01		%	—		%	0.02		%	0.02		%	Net loan charge-offs (recoveries) to average loans outstanding	(0.01)		%	0.01		%	(0.01)		%	0.02		%

The following table summarizes our charge-offs, recoveries, provisions for loan losses, and ALLL balances as of, and for the ~~three month~~three-month periods ended:


	September 30 2019			June 30 2019			March 31 2019			December 31 2018			September 30 2018				September 30 2020			June 30 2020			March 31 2020			December 31 2019			September 30 2019
Total charge-offs	$	143		$	333		$	138		$	253		$	179		Total charge-offs	$	46		$	66		$	158		$	334		$	143
Total recoveries	82			151			127			186			155			Total recoveries	159			141			128			122			82
Net loan charge-offs (recoveries)	61			182			11			67			24			Net loan charge-offs (recoveries)	(113)			(75)			30			212			61
Net loan charge-offs (recoveries) to average loans outstanding	0.01		%	0.02		%	—		%	0.01		%	—		%	Net loan charge-offs (recoveries) to average loans outstanding	(0.01)		%	(0.01)		%	—		%	0.02		%	0.01		%
Provision for loan losses	$	193		$	(179	)	$	34		$	342		$	(76	)	Provision for loan losses	$	516		$	105		$	788		$	(18)		$	193
Provision for loan losses to average loans outstanding	0.02		%	(0.02		)%	—		%	0.03		%	(0.01		)%	Provision for loan losses to average loans outstanding	0.04		%	0.01		%	0.07		%	—		%	0.02		%
ALLL	$	8,169		$	8,037		$	8,398		$	8,375		$	8,100		ALLL	$	9,506		$	8,877		$	8,697		$	7,939		$	8,169
ALLL as a % of loans at end of period	0.69		%	0.68		%	0.73		%	0.74		%	0.71		%	ALLL as a % of loans at end of period	0.73		%	0.69		%	0.74		%	0.67		%	0.69		%

While we have experienced fluctuations in credit quality indicators in recent periods, credit quality ~~remains strong. Overall, our level~~remained strong at September 30, 2020. However, the COVID-19 pandemic led to the temporary and some permanent closures of ~~required reserve is modest due~~businesses throughout the communities in which we serve, which also led to ~~strong~~increased unemployment. We increased the ALLL during the first and third quarters of this year as a result of increased economic and environmental related risk factors, primarily driven by

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COVID-19. While these same risk factors resulted in an increase to the ALLL during the second quarter as well, improvement in credit quality indicators ~~low historical loss factors,~~ and ~~a low amount~~reserves for loans individually evaluated for impairment offset much of ~~net charge-offs.~~the increase.

The economic impact from the COVID-19 crisis could pose significant credit risk due to the potential inability of consumer and commercial borrowers to make contractual payments. In late March 2020, we implemented payment programs for borrowers to alleviate the financial setback due to the temporary closure of businesses and lost wages. These programs, along with the SBA PPP, could mask or delay the detection or reporting of deterioration in credit quality indicators. We continue to monitor the economic impact from COVID-19 as it relates to credit risk to ensure the ALLL is appropriate.

The following table illustrates ~~our changes within~~ the two main components of the ALLL as of:


	September 30 2019			June 30 2019			March 31 2019			December 31 2018			September 30 2018				September 30 2020			June 30 2020			March 31 2020			December 31 2019			September 30 2019
ALLL																ALLL
Individually evaluated for impairment	$	1,333		$	1,479		$	1,509		$	1,938		$	2,074		Individually evaluated for impairment	$	869		$	950		$	1,309		$	1,114		$	1,333
Collectively evaluated for impairment	6,836			6,558			6,889			6,437			6,026			Collectively evaluated for impairment	8,637			7,927			7,388			6,825			6,836
Total	$	8,169		$	8,037		$	8,398		$	8,375		$	8,100		Total	$	9,506		$	8,877		$	8,697		$	7,939		$	8,169
ALLL to gross loans																ALLL to gross loans
Individually evaluated for impairment	0.11		%	0.13		%	0.13		%	0.17		%	0.18		%	Individually evaluated for impairment	0.07		%	0.07		%	0.11		%	0.09		%	0.11		%
Collectively evaluated for impairment	0.58		%	0.55		%	0.60		%	0.57		%	0.53		%	Collectively evaluated for impairment	0.66		%	0.62		%	0.63		%	0.58		%	0.58		%
Total	0.69		%	0.68		%	0.73		%	0.74		%	0.71		%	Total	0.73		%	0.69		%	0.74		%	0.67		%	0.69		%

While we utilize our best judgment and information available, the ultimate adequacy of the ALLL is dependent upon a variety of factors beyond our control, including the performance of our borrowers, the economy, and changes in interest rates. We closely monitor overall credit quality indicators and our policies and procedures related to the analysis of the ALLL to ensure that the ALLL remains at an appropriate level.

For further discussion of the allocation of the ALLL, see “~~Note~~“Note 4 – Loans and ~~ALLL~~”ALLL” of our interim condensed consolidated financial statements.

Loans Past Due and Loans in Nonaccrual Status

Fluctuations in past due and nonaccrual status loans can have a significant impact on the ~~ALLL~~.ALLL. 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 status loans for indications of additional deterioration.


	Total Past Due and Nonaccrual Loans																Total Past Due and Nonaccrual Loans
	September 30 2019			June 30 2019			March 31 2019			December 31 2018			September 30 2018				September 30 2020			June 30 2020			March 31 2020			December 31 2019			September 30 2019
Commercial	$	3,175		$	2,243		$	5,299		$	2,722		$	3,084		Commercial	$	2,082		$	1,986		$	6,180		$	2,477		$	3,175
Agricultural	4,800			6,672			6,854			5,377			5,663			Agricultural	3,903			4,455			4,870			4,285			4,800
Residential real estate	1,999			1,690			6,063			3,208			3,137			Residential real estate	1,160			384			3,426			4,572			1,999
Consumer	162			94			152			105			68			Consumer	72			45			366			71			162
Total	$	10,136		$	10,699		$	18,368		$	11,412		$	11,952		Total	$	7,217		$	6,870		$	14,842		$	11,405		$	10,136
Total past due and nonaccrual loans to gross loans	0.85		%	0.91		%	1.60		%	1.01		%	1.05		%	Total past due and nonaccrual loans to gross loans	0.55		%	0.53		%	1.26		%	0.96		%	0.85		%

~~Past due and~~ ~~nonaccrual~~ ~~status loans have generally improved over the last year and continue to be at low levels as a result of strong repayment performance. We experienced an~~The increase in past due ~~commercial~~ and ~~residential real estate~~nonaccrual status loans during the first quarter of ~~2019.~~2020 was primarily the result of deterioration in credit quality for a small number of commercial loans. This ~~activity~~increase was ~~closely monitored by management and~~not a ~~high level of delinquent loan repayments were received in early April 2019. As such, levels normalized by the end~~result of the ~~second quarter~~economic impact of ~~2019 and management feels~~COVID-19 or any other apparent factor. During the ~~increase in commercial and residential mortgage loans~~last two quarters, past due and nonaccrual status loans declined in comparison to the recent periods.

We have implemented payment programs for borrowers to alleviate the financial setback due to the temporary closure of businesses and lost wages. These programs, along with the SBA PPP, could mask or delay the detection or reporting of deterioration in credit quality indicators such as the balance of ~~March 31, 2019 was not indicative of a trend.~~ past due and nonaccrual status loans.

A summary of loans past due and in nonaccrual status, including the composition of the ending balance of nonaccrual status loans by type, is included in “~~Note~~“Note 4 – Loans and ~~ALLL~~”ALLL” of our interim condensed consolidated financial statements.

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Troubled Debt Restructurings

We have taken a proactive approach to ~~avoid foreclosures on~~assist borrowers who are willing to work with us in modifying their loans, thus making them ~~more affordable.~~less likely to default, and to avoid foreclosure. This approach has permitted certain borrowers to ~~develop~~accept a payment structure that will allow them to continue making payments in lieu of foreclosure. The modifications have been successful for us and our customers as very few of the modified loans have resulted in foreclosures. The majority of ~~new~~ modifications result in terms that satisfy our criteria for continued interest accrual. TDRs that have been placed in nonaccrual status may be placed back on accrual status after six months of continued performance and achievement of current payment status.

We restructure debt with borrowers who, due to financial difficulties, are unable to service their debt under the original terms. We may extend the amortization period, reduce interest rates, allow ~~interest only~~temporary interest-only payment structures, forgive principal, forgive interest, or grant a combination of these modifications. Typically, the modifications are for a period of three years or less. There were no TDRs that were government sponsored as of September 30, ~~2019~~2020 or December 31, ~~2018~~.2019.

Losses associated with TDRs,, if any, are included in the estimation of the ALLL during the quarter in which a loan is identified as a TDR,, and we review the analysis of the ALLL estimation each reporting period thereafter to ensure its continued appropriateness.

The following tables provide roll-forwards of TDRs for the:

Three Months Ended September 30, 2019
Accruing Interest Nonaccrual Total
Number
of
Loans Balance Number
of
Loans Balance Number
of
Loans Balance
July 1, 2019 122
$ 20,310
22
$ 5,655
144
$ 25,965
New modifications 1
25
—
—
1
25
Principal advances (payments) —
(260 ) —
(120 ) —
(380 )
Loans paid off (4 ) (294 ) (2 ) (617 ) (6 ) (911 )
Partial charge-offs —
—
—
—
—
—
Transfers to accrual status 8
1,142
(8 ) (1,142 ) —
—
Transfers to nonaccrual status (1 ) (30 ) 1
30
—
—
September 30, 2019 126
$ 20,893
13
$ 3,806
139
$ 24,699

Nine Months Ended September 30, 2019
Accruing Interest Nonaccrual Total
Number
of
Loans Balance Number
of
Loans Balance Number
of
Loans Balance
January 1, 2019 133
$ 23,400
28
$ 3,551
161
$ 26,951
New modifications 6
2,043
—
—
6
2,043
Principal advances (payments) —
(980 ) —
(380 ) —
(1,360 )
Loans paid off (16 ) (1,487 ) (11 ) (1,335 ) (27 ) (2,822 )
Partial charge-offs —
—
—
(65 ) —
(65 )
Transfers to OREO —
—
(1 ) (48 ) (1 ) (48 )
Transfers to accrual status 9
1,219
(9 ) (1,219 ) —
—
Transfers to nonaccrual status (6 ) (3,302 ) 6
3,302
—
—
September 30, 2019 126
$ 20,893
13
$ 3,806
139
$ 24,699


	Three Months Ended September 30, 2020
	Accruing Interest			Nonaccrual			Total
	Number of Loans	Balance		Number of Loans	Balance		Number of Loans	Balance
July 1, 2020	111	$	20,589	5	$	2,596	116	$	23,185
New modifications	3	3,630		1	110		4	3,740
Principal advances (payments)	—	(206)		—	(9)		—	(215)
Loans paid off	(7)	(756)		—	—		(7)	(756)
September 30, 2020	107	$	23,257	6	$	2,697	113	$	25,954


	Nine Months Ended September 30, 2020
	Accruing Interest			Nonaccrual			Total
	Number of Loans	Balance		Number of Loans	Balance		Number of Loans	Balance
January 1, 2020	122	$	21,194	9	$	3,543	131	$	24,737
New modifications	10	6,554		2	603		12	7,157
Principal advances (payments)	—	(1,280)		—	(139)		—	(1,419)
Loans paid off	(26)	(3,315)		(2)	(850)		(28)	(4,165)
Transfers to OREO	—	—		(2)	(356)		(2)	(356)
Transfers to accrual status	1	104		(1)	(104)		—	—
September 30, 2020	107	$	23,257	6	$	2,697	113	$	25,954


	Three Months Ended September 30, 2019
	Accruing Interest			Nonaccrual			Total
	Number of Loans	Balance		Number of Loans	Balance		Number of Loans	Balance
July 1, 2019	122	$	20,310	22	$	5,655	144	$	25,965
New modifications	1	25		—	—		1	25
Principal advances (payments)	—	(260)		—	(120)		—	(380)
Loans paid off	(4)	(294)		(2)	(617)		(6)	(911)
Transfers to accrual status	8	1,142		(8)	(1,142)		—	—
Transfers to nonaccrual status	(1)	(30)		1	30		—	—
September 30, 2019	126	$	20,893	13	$	3,806	139	$	24,699

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	Nine Months Ended September 30, 2019
	Accruing Interest			Nonaccrual			Total
	Number of Loans	Balance		Number of Loans	Balance		Number of Loans	Balance
January 1, 2019	133	$	23,400	28	$	3,551	161	$	26,951
New modifications	6	2,043		—	—		6	2,043
Principal advances (payments)	—	(980)		—	(380)		—	(1,360)
Loans paid off	(16)	(1,487)		(11)	(1,335)		(27)	(2,822)
Partial charge-offs	—	—		—	(65)		—	(65)
Transfers to OREO	—	—		(1)	(48)		(1)	(48)
Transfers to accrual status	9	1,219		(9)	(1,219)		—	—
Transfers to nonaccrual status	(6)	(3,302)		6	3,302		—	—
September 30, 2019	126	$	20,893	13	$	3,806	139	$	24,699

Three Months Ended September 30, 2018
Accruing Interest Nonaccrual Total
Number
of
Loans Balance Number
of
Loans Balance Number
of
Loans Balance
July 1, 2018 142
$ 23,730
21
$ 4,071
163
$ 27,801
New modifications 3
950
5
476
8
1,426
Principal advances (payments) —
(557 ) —
(46 ) —
(603 )
Loans paid off (6 ) (244 ) (2 ) (363 ) (8 ) (607 )
Partial charge-offs —
—
—
(7 ) —
(7 )
Transfers to nonaccrual status (2 ) (111 ) 2
111
—
—
September 30, 2018 137
$ 23,768
26
$ 4,242
163
$ 28,010

Nine Months Ended September 30, 2018
Accruing Interest Nonaccrual Total
Number
of
Loans Balance Number
of
Loans Balance Number
of
Loans Balance
January 1, 2018 147
$ 23,284
13
$ 2,913
160
$ 26,197
New modifications 25
6,514
9
1,133
34
7,647
Principal advances (payments) —
(878 ) —
(621 ) —
(1,499 )
Loans paid off (28 ) (3,942 ) (3 ) (386 ) (31 ) (4,328 )
Partial charge-offs —
—
—
(7 ) —
(7 )
Transfers to nonaccrual status (7 ) (1,210 ) 7
1,210
—
—
September 30, 2018 137
$ 23,768
26
$ 4,242
163
$ 28,010

The following table summarizes our TDRs as of:


	September 30, 2019						December 31, 2018										September 30, 2020						December 31, 2019
	Accruing Interest		Nonaccrual		Total		Accruing Interest		Nonaccrual		Total		Total Change				Accruing Interest		Nonaccrual		Total		Accruing Interest		Nonaccrual		Total		Total Change
Current	$	20,634	$	508	$	21,142	$	21,794	$	2,673	$	24,467	$	(3,325	)	Current	$	23,150	$	591	$	23,741	$	20,847	$	507	$	21,354	$	2,387
Past due 30-59 days	259		3,298		3,557		899		—		899		2,658			Past due 30-59 days	66		—		66		346		—		346		(280)
Past due 60-89 days	—		—		—		707		—		707		(707		)	Past due 60-89 days	41		2,106		2,147		1		—		1		2,146
Past due 90 days or more	—		—		—		—		878		878		(878		)	Past due 90 days or more	—		—		—		—		3,036		3,036		(3,036)
Total	$	20,893	$	3,806	$	24,699	$	23,400	$	3,551	$	26,951	$	(2,252	)	Total	$	23,257	$	2,697	$	25,954	$	21,194	$	3,543	$	24,737	$	1,217

Additional disclosures about TDRs are included in “~~Note~~“Note 4 – Loans and ~~ALLL~~”ALLL” of our interim condensed consolidated financial statements.

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Impaired Loans

The following is a summary of information pertaining to impaired loans as of:


	September 30, 2019						December 31, 2018							September 30, 2020						December 31, 2019
	Recorded Balance		Unpaid Principal Balance		Valuation Allowance		Recorded Balance		Unpaid Principal Balance		Valuation Allowance			Recorded Balance		Unpaid Principal Balance		Valuation Allowance		Recorded Balance		Unpaid Principal Balance		Valuation Allowance
TDRs													TDRs
Commercial real estate	$	5,929	$	6,249	$	29	$	6,507	$	6,840	$	437	Commercial real estate	$	4,579	$	4,833	$	57	$	5,325	$	5,643	$	15
Commercial other	1,299		1,299		—		1,713		1,713		—		Commercial other	5,398		5,398		2		1,156		1,156		—
Agricultural real estate	8,001		8,001		101		7,452		7,452		112		Agricultural real estate	8,894		8,893		60		9,182		9,181		12
Agricultural other	4,554		4,554		11		5,288		5,331		—		Agricultural other	3,033		3,033		2		4,421		4,421		14
Residential real estate senior liens	4,883		5,164		971		5,923		6,205		1,181		Residential real estate senior liens	4,050		4,244		687		4,641		4,923		922
Residential real estate junior liens	12		12		2		12		12		2
Home equity lines of credit	21		321		—		47		347		—		Home equity lines of credit	—		—		—		12		312		—
Consumer secured	—		—		—		9		9		—
Total TDRs	24,699		25,600		1,114		26,951		27,909		1,732		Total TDRs	25,954		26,401		808		24,737		25,636		963
Other impaired loans													Other impaired loans
Commercial real estate	157		219		—		256		318		—		Commercial real estate	143		206		—		153		216		—
Commercial other	1,241		1,241		5		1,423		1,530		6		Commercial other	1,231		1,231		—		1,231		1,231		—
Agricultural real estate	516		516		—		557		558		—		Agricultural real estate	707		757		5		699		750		—
Agricultural other	695		695		20		1,001		1,000		20		Agricultural other	269		269		—		538		538		—
Residential real estate senior liens	962		1,151		194		911		1,084		180		Residential real estate senior liens	335		482		56		760		907		151
Residential real estate junior liens	—		—		—		—		—		—
Home equity lines of credit	75		75		—		—		—		—		Home equity lines of credit	—		—		—		73		73		—
Total other impaired loans	3,646		3,897		219		4,148		4,490		206		Total other impaired loans	2,685		2,945		61		3,454		3,715		151
Total impaired loans	$	28,345	$	29,497	$	1,333	$	31,099	$	32,399	$	1,938	Total impaired loans	$	28,639	$	29,346	$	869	$	28,191	$	29,351	$	1,114

We continue to devote considerable attention to identifying impaired loans and adjusting the net carrying value of these loans to their current net realizable values through the establishment of a specific reserve or the recognition of a charge-off.

Additional disclosures related to impaired loans are included in “~~Note~~“Note 4 – Loans and ~~ALLL~~”ALLL” of our interim condensed consolidated financial statements.

~~Nonperforming~~ ~~Assets~~

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Nonperforming Assets

The following table summarizes our nonperforming assets as of:


	September 30 2019			June 30 2019			March 31 2019			December 31 2018			September 30 2018				September 30 2020			June 30 2020			March 31 2020			December 31 2019			September 30 2019
Nonaccrual status loans	$	6,962		$	8,107		$	7,260		$	7,260		$	7,136		Nonaccrual status loans	$	4,946		$	5,319		$	6,913		$	6,535		$	6,962
Accruing loans past due 90 days or more	40			110			30			113			274			Accruing loans past due 90 days or more	—			53			40			—			40
Total nonperforming loans	7,002			8,217			7,290			7,373			7,410			Total nonperforming loans	4,946			5,372			6,953			6,535			7,002
Foreclosed assets	468			513			401			355			305			Foreclosed assets	651			776			564			456			468
Debt securities																Debt securities	230			230			230			230			230
Total nonperforming assets	$	7,470		$	8,730		$	7,691		$	7,728		$	7,715		Total nonperforming assets	$	5,827		$	6,378		$	7,747		$	7,221		$	7,700
Nonperforming loans as a % of total loans	0.59		%	0.70		%	0.64		%	0.65		%	0.65		%	Nonperforming loans as a % of total loans	0.38		%	0.42		%	0.59		%	0.55		%	0.59		%
Nonperforming assets as a % of total assets	0.41		%	0.48		%	0.43		%	0.42		%	0.42		%	Nonperforming assets as a % of total assets	0.30		%	0.33		%	0.43		%	0.40		%	0.42		%

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. While the level of nonperforming loans has fluctuated in recent periods, it remains low in comparison to peer banks. ~~Recent fluctuations in nonaccrual loans have been concentrated in our agricultural portfolio as a result of the challenges facing much of the agricultural industry.~~

The following ~~tables summarize~~table summarizes nonaccrual loans as of:


	September 30 2019		June 30 2019		March 31 2019		December 31 2018		September 30 2018			September 30 2020		June 30 2020		March 31 2020		December 31 2019		September 30 2019
Commercial	$	1,632	$	1,692	$	1,931	$	1,757	$	1,140	Commercial	$	1,364	$	1,367	$	1,643	$	1,621	$	1,632
Agricultural	4,520		5,532		4,757		4,949		5,298		Agricultural	3,538		3,656		4,606		4,285		4,520
Residential real estate	810		883		572		554		698		Residential real estate	44		296		661		629		810
Consumer											Consumer	—		—		3		—		—
Total	$	6,962	$	8,107	$	7,260	$	7,260	$	7,136	Total	$	4,946	$	5,319	$	6,913	$	6,535	$	6,962

Included in the nonaccrual loan balances above were loans currently classified as TDR as of:


	September 30 2019		June 30 2019		March 31 2019		December 31 2018		September 30 2018			September 30 2020		June 30 2020		March 31 2020		December 31 2019		September 30 2019
Commercial	$	390	$	450	$	515	$	160	$	723	Commercial	$	134	$	28	$	304	$	390	$	390
Agricultural	3,309		5,096		3,199		3,391		3,237		Agricultural	2,563		2,568		3,441		3,048		3,309
Residential real estate	107		109		111		—		282		Residential real estate	—		—		104		105		107
Total	$	3,806	$	5,655	$	3,825	$	3,551	$	4,242	Total	$	2,697	$	2,596	$	3,849	$	3,543	$	3,806

Additional disclosures about nonaccrual status loans are included in “~~Note~~“Note 4 – Loans and ~~ALLL~~”ALLL” of our interim condensed consolidated financial statements.

~~We continue to devote considerable attention to identifying impaired loans and adjusting the net carrying value~~

Table of ~~these loans to their current net realizable values through the establishment of a specific reserve or the recording of a~~ ~~charge-off. We have identified all impaired loans as of September 30, 2019.~~Contents

~~The level of the~~ ~~ALLL~~ ~~is appropriate as of~~ ~~September 30, 2019. We closely monitor overall credit quality indicators and our policies and procedures related to the analysis of the~~ ~~ALLL~~ ~~to ensure that the~~ ~~ALLL~~ ~~remains at an appropriate level.~~

Noninterest Income and Noninterest Expenses

Significant noninterest income balances are highlighted in the following tables for the:

Three Months Ended September 30
Change
2019 2018 $ %
Service charges and fees $ 1,705
$ 1,557
$ 148
9.51 %
Investment and Trust advisory fees 689
748
(59 ) (7.89 )%
Earnings on corporate owned life insurance policies 190
185
5
2.70 %
Net gain on sale of mortgage loans 199
171
28
16.37 %
Net gains on foreclosed assets 202
23
179
778.26 %
Net gains on sale of AFS securities 6
—
6
N/M
Other
Corporate Settlement Solutions joint venture 181
120
61
50.83 %
All other 102
74
28
37.84 %
Total other 283
194
89
45.88 %
Total noninterest income $ 3,274
$ 2,878
$ 396
13.76 %

Nine Months Ended September 30
Change
2019 2018 $ %
Service charges and fees $ 4,706
$ 4,533
$ 173
3.82 %
Investment and Trust advisory fees 2,146
2,144
2
0.09 %
Earnings on corporate owned life insurance policies 564
551
13
2.36 %
Net gain on sale of mortgage loans 408
339
69
20.35 %
Net gains on foreclosed assets 213
34
179
526.47 %
Net gains on sale of AFS securities 6
—
6
N/M
Other
Corporate Settlement Solutions joint venture 394
274
120
43.80 %
All other 327
241
86
35.68 %
Total other 721
515
206
40.00 %
Total noninterest income $ 8,764
$ 8,116
$ 648
7.98 %


	Three Months Ended September 30
					Change
	2020		2019		$		%
Service charges and fees
ATM and debit card fees	$	1,003	$	867	$	136	15.69	%
Service charges and fees on deposit accounts	436		621		(185)		(29.79)	%
Freddie Mac servicing fee	162		160		2		1.25	%
Net OMSR income (loss)	271		(22)		293		N/M
Other fees for customer services	78		79		(1)		(1.27)	%
Total service charges and fees	1,950		1,705		245		14.37	%
Wealth management fees	649		689		(40)		(5.81)	%
Net gain on sale of mortgage loans	1,036		199		837		420.60	%
Earnings on corporate owned life insurance policies	187		190		(3)		(1.58)	%
All other	238		491		(253)		(51.53)	%
Total noninterest income	$	4,060	$	3,274	$	786	24.01	%

~~Service charges and fees include ATM and debit card fees, NSF and overdraft fees, loan servicing fee income, OMSR income and other deposit account fees.~~


	Nine Months Ended September 30
					Change
	2020		2019		$		%
Service charges and fees
ATM and debit card fees	$	2,680	$	2,332	$	348	14.92	%
Service charges and fees on deposit accounts	1,373		1,717		(344)		(20.03)	%
Freddie Mac servicing fee	476		471		5		1.06	%
Net OMSR income (loss)	(79)		(60)		(19)		(31.67)	%
Other fees for customer services	239		246		(7)		(2.85)	%
Total service charges and fees	4,689		4,706		(17)		(0.36)	%
Wealth management fees	1,877		2,146		(269)		(12.53)	%
Net gain on sale of mortgage loans	1,653		408		1,245		305.15	%
Gains from redemption of corporate owned life insurance policies	873		—		873		N/M
Earnings on corporate owned life insurance policies	558		564		(6)		(1.06)	%
All other	654		940		(286)		(30.43)	%
Total noninterest income	$	10,304	$	8,764	$	1,540	17.57	%

ATM and debit card fees fluctuate from ~~period-to-period~~period to period based primarily on usage. While we do not anticipate significant changes to our ATM and debit card fee structure, we do expect that fee income will continue to increase during the remainder of 2020 as the usage of ATM and debit ~~cards.~~ cards continues to increase.

Service charges and fees on deposit accounts have declined as a result of waived fees. In response to COVID-19, which has led to an increase in the need for electronic services and products, we elected to temporarily waive certain charges and fees to ease the financial stress of our customers. Overall, 2020 income may decrease when compared to 2019.

OMSR income results are driven, in part, by changes in offering rates on residential mortgage loans, anticipated prepayments in the servicing-retained portfolio, and the volume of loans within the servicing-retained portfolio. Increased prepayment speeds, as a result of a decline in interest rates, were the primary driver of the losses recognized during the first and second quarters of the year. During the third quarter, prepayment speeds decreased and the volume of loans serviced increased. As ~~such, OMSR~~a result, income increased during ~~2019 could~~the third quarter. Income during the remainder of 2020 may continue to experience fluctuations and ~~may not exceed 2018 OMSR~~could vary from 2019 levels based on changes in the various factors driving income. ~~Service charges and~~

Table of Contents

The decrease in wealth management fees, primarily during the first quarter of this year, was driven by a reduction in the market value of investment assets under management. While strategic additions to staff have already led to new accounts with Isabella Wealth, wealth management fees during the remainder of 2020 may not exceed 2019 ~~are expected~~levels due to ~~exceed 2018 income due primarily to ATM and debit card fees.~~

We are continually analyzing our AFS securities portfolio for potential sale opportunities. Securities with unrealized gains or less than desirable yields may be sold for funding and profitability purposes. During the ~~third quarter of 2019, we identified securities that were desirable to be sold and recognized net gains with these sales.~~

~~Income related to our joint venture~~uncertainty in ~~Corporate Settlement Solutions increased during 2019~~the stock market as a result of ~~new customers, increased volume from existing customers,~~COVID-19.

Net gain on sale of mortgage loans fluctuates primarily as the result of a change in the amount of loans sold. The amount of loans sold can fluctuate based on customer demand and ~~reduced expenses.~~balance sheet management strategies. We experienced a significant increase in loan demand during the second and third quarters, which led to an increase in the balance of loans sold during the year. As ~~a result, income during 2019~~such, net gain on sale of mortgage loans is expected to exceed ~~2018 income.~~2019 during 2020.

~~Net gains on foreclosed assets~~ ~~fluctuate from time-to-time~~We recognized income during the first and ~~are based on~~second quarters of 2020 due to the ~~level~~redemption of ~~activity~~corporate owned life insurance policies in ~~foreclosures and properties owned.~~connection with the passing of two retired bank employees.

The fluctuations in all other income are spread throughout various categories, none of which are individually significant.

Table of Contents

Significant noninterest expense balances are highlighted in the following tables for the:

Three Months Ended September 30
Change
2019 2018 $ %
Compensation and benefits $ 5,971
$ 5,845
$ 126
2.16 %
Furniture and equipment 1,427
1,473
(46 ) (3.12 )%
Occupancy 830
870
(40 ) (4.60 )%
Other
Audit, consulting, and legal fees 508
566
(58 ) (10.25 )%
ATM and debit card fees 308
246
62
25.20 %
Loan underwriting fees 185
339
(154 ) (45.43 )%
Donations and community relations 330
141
189
134.04 %
Director fees 195
212
(17 ) (8.02 )%
Marketing costs 248
285
(37 ) (12.98 )%
Memberships and subscriptions 176
153
23
15.03 %
Education and travel 72
130
(58 ) (44.62 )%
FDIC insurance premiums (282 ) 185
(467 ) (252.43 )%
All other 652
642
10
1.56 %
Total other 2,392
2,899
(507 ) (17.49 )%
Total noninterest expenses $ 10,620
$ 11,087
$ (467 ) (4.21 )%


	Nine Months Ended September 30										Three Months Ended September 30
					Change										Change
	2019		2018		$			%			2020		2019		$		%
Compensation and benefits	$	17,650	$	17,018	$	632		3.71	%	Compensation and benefits	$	6,101	$	5,971	$	130	2.18	%
Furniture and equipment	4,330		4,459		(129		)	(2.89	)%	Furniture and equipment	1,426		1,427		(1)		(0.07)	%
Occupancy	2,594		2,501		93			3.72	%	Occupancy	889		830		59		7.11	%
Other										Other
Audit, consulting, and legal fees	1,424		1,745		(321		)	(18.40	)%	Audit, consulting, and legal fees	417		500		(83)		(16.60)	%
ATM and debit card fees	854		712		142			19.94	%	ATM and debit card fees	373		308		65		21.10	%
Marketing costs										Marketing costs	209		248		(39)		(15.73)	%
Loan underwriting fees	669		653		16			2.45	%	Loan underwriting fees	199		185		14		7.57	%
Donations and community relations	660		502		158			31.47	%	Donations and community relations	131		330		(199)		(60.30)	%
Memberships and subscriptions										Memberships and subscriptions	188		176		12		6.82	%
Director fees	592		643		(51		)	(7.93	)%	Director fees	168		195		(27)		(13.85)	%
Marketing costs	561		544		17			3.13	%
Memberships and subscriptions	519		422		97			22.99	%
Education and travel	285		346		(61		)	(17.63	)%
FDIC insurance premiums	50		505		(455		)	(90.10	)%	FDIC insurance premiums	159		(282)		441		N/M
Postage and freight										Postage and freight	118		112		6		5.36	%
All other	1,970		1,932		38			1.97	%	All other	572		620		(48)		(7.74)	%
Total other	7,584		8,004		(420		)	(5.25	)%
Total other noninterest expenses										Total other noninterest expenses	2,534		2,392		142		5.94	%
Total noninterest expenses	$	32,158	$	31,982	$	176		0.55	%	Total noninterest expenses	$	10,950	$	10,620	$	330	3.11	%

The increase in compensation and benefits expense is primarily related to increased expenses to our employee incentive plans which required additional expenses during the second and third quarters of 2019. As a result, compensation and benefits expense in 2019 is expected to exceed 2018 levels.

Audit, consulting, and legal fees in 2018 included one-time charges related to income tax strategies. As a result, 2019 expenses were less than 2018 year-to-date and this trend is expected for the remainder of 2019.

Donations and community relations increased during 2019 as result of initiatives designed to deepen and strengthen our relationship with the communities in which we operate and serve. Some of these initiatives include volunteering our time and making monetary contributions. We anticipate donations and community relations expenses in 2019 to exceed 2018 expenses.

Loan underwriting fees increased during the second half of 2018 and continued in the first quarter of 2019 as a result of new loan products, including first time home buyer and down payment assistance programs designed to generate residential mortgage growth. Loan underwriting fees in 2019 are not expected to exceed 2018 levels based on availability of products during 2019.


	Nine Months Ended September 30
					Change
	2020		2019		$		%
Compensation and benefits	$	17,763	$	17,650	$	113	0.64	%
Furniture and equipment	4,318		4,330		(12)		(0.28)	%
Occupancy	2,668		2,594		74		2.85	%
Other
Audit, consulting, and legal fees	1,348		1,406		(58)		(4.13)	%
ATM and debit card fees	1,024		854		170		19.91	%
Marketing costs	677		561		116		20.68	%
Loan underwriting fees	577		669		(92)		(13.75)	%
Donations and community relations	566		660		(94)		(14.24)	%
Memberships and subscriptions	546		519		27		5.20	%
Director fees	527		592		(65)		(10.98)	%
FDIC insurance premiums	459		50		409		N/M
Postage and freight	370		362		8		2.21	%
All other	1,752		1,911		(159)		(8.32)	%
Total other noninterest expenses	7,846		7,584		262		3.45	%
Total noninterest expenses	$	32,595	$	32,158	$	437	1.36	%

As a result of ana $440 assessment credit received during the third quarter of 2019, ~~of $440,~~ FDIC insurance premiums declined ~~and as~~during 2019. As a result, FDIC insurance premiums for 2019 were significantly lower than expenses for ~~2019 are not likely to exceed 2018 levels.~~2020.

The fluctuations in all other expenses are spread throughout various categories, none of which are individually significant.

Table of Contents

Analysis of Changes in Financial Condition


	September 30 2019		December 31 2018			$ Change			% Change (unannualized)			September 30 2020		December 31 2019		$ Change		% Change (unannualized)
ASSETS											ASSETS
Cash and cash equivalents	$	34,331	$	73,471		$	(39,140	)	(53.27	)%	Cash and cash equivalents	$	165,749	$	60,572	$	105,177	173.64	%
AFS securities											AFS securities
Amortized cost of AFS securities	439,392		501,245			(61,853		)	(12.34	)%	Amortized cost of AFS securities	348,962		423,980		(75,018)		(17.69)	%
Unrealized gains (losses) on AFS securities	6,137		(6,411		)	12,548			N/M		Unrealized gains (losses) on AFS securities	14,092		5,859		8,233		140.52	%
AFS securities	445,529		494,834			(49,305		)	(9.96	)%	AFS securities	363,054		429,839		(66,785)		(15.54)	%
Mortgage loans AFS	1,912		358			1,554			N/M		Mortgage loans AFS	4,661		904		3,757		N/M
Loans											Loans
Gross loans	1,191,804		1,128,707			63,097			5.59	%	Gross loans	1,303,308		1,186,570		116,738		9.84	%
Less allowance for loan and lease losses	8,169		8,375			(206		)	(2.46	)%	Less allowance for loan and lease losses	9,506		7,939		1,567		19.74	%
Net loans	1,183,635		1,120,332			63,303			5.65	%	Net loans	1,293,802		1,178,631		115,171		9.77	%
Premises and equipment	26,350		27,815			(1,465		)	(5.27	)%	Premises and equipment	25,749		26,242		(493)		(1.88)	%
Corporate owned life insurance policies	28,261		27,733			528			1.90	%	Corporate owned life insurance policies	28,169		28,455		(286)		(1.01)	%
Accrued interest receivable	7,360		6,928			432			6.24	%	Accrued interest receivable	8,458		6,501		1,957		30.10	%
Equity securities without readily determinable fair values	25,130		24,948			182			0.73	%	Equity securities without readily determinable fair values	21,690		21,629		61		0.28	%
Goodwill and other intangible assets	48,396		48,451			(55		)	(0.11	)%	Goodwill and other intangible assets	48,341		48,379		(38)		(0.08)	%
Other assets	12,780		17,632			(4,852		)	(27.52	)%	Other assets	12,024		13,046		(1,022)		(7.83)	%
TOTAL ASSETS	$	1,813,684	$	1,842,502		$	(28,818	)	(1.56	)%	TOTAL ASSETS	$	1,971,697	$	1,814,198	$	157,499	8.68	%
LIABILITIES AND SHAREHOLDERS’ EQUITY											LIABILITIES AND SHAREHOLDERS’ EQUITY
Liabilities											Liabilities
Deposits	$	1,308,773	$	1,292,693		$	16,080		1.24	%	Deposits	$	1,495,095	$	1,313,851	$	181,244	13.79	%
Borrowed funds	277,386		340,299			(62,913		)	(18.49	)%	Borrowed funds	238,349		275,999		(37,650)		(13.64)	%
Accrued interest payable and other liabilities	15,149		13,991			1,158			8.28	%	Accrued interest payable and other liabilities	15,708		14,166		1,542		10.89	%
Total liabilities	1,601,308		1,646,983			(45,675		)	(2.77	)%	Total liabilities	1,749,152		1,604,016		145,136		9.05	%
Shareholders’ equity	212,376		195,519			16,857			8.62	%	Shareholders’ equity	222,545		210,182		12,363		5.88	%
TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY	$	1,813,684	$	1,842,502		$	(28,818	)	(1.56	)%	TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY	$	1,971,697	$	1,814,198	$	157,499	8.68	%

As shown above, total assets ~~declined $28,818 since~~increased $157,499 from December 31, ~~2018 which was primarily driven by a decline in cash~~2019. Cash and cash equivalents increased as a result of maturities and ~~AFS securities. In the current interest rate environment, we have elected to use excess funds and proceeds from the sale~~sales of AFS securities ~~to lend~~ and ~~reduce borrowed funds. As a result, the investment portfolio declined due to sales and normal calls and maturities.~~an increase in customer deposits during 2020. We experienced ~~loan growth of $63,097~~a $116,738 increase in loans during the first nine months of ~~2019~~2020 which was largely driven by ~~growth~~SBA PPP loans in ~~our~~the commercial loan portfolio.

The following table outlines the changes in ~~loans:~~loan balances:


	September 30 2020		December 31 2019		$ Change		% Change (unannualized)
Commercial	$	821,102	$	700,941	$	120,161	17.14	%
Agricultural	102,263		116,920		(14,657)		(12.54)	%
Residential real estate	304,559		298,569		5,990		2.01	%
Consumer	75,384		70,140		5,244		7.48	%
Total	$	1,303,308	$	1,186,570	$	116,738	9.84	%

Table of Contents

September 30
2019 December 31
2018 $ Change % Change
(unannualized)
Commercial $ 708,735
$ 659,529
$ 49,206
7.46 %
Agricultural 118,460
127,161
(8,701 ) (6.84 )%
Residential real estate 292,311
275,343
16,968
6.16 %
Consumer 72,298
66,674
5,624
8.44 %
Total $ 1,191,804
$ 1,128,707
$ 63,097
5.59 %

The following table displays loan balances as of:


	September 30 2019		June 30 2019		March 31 2019		December 31 2018		September 30 2018			September 30 2020		June 30 2020		March 31 2020		December 31 2019		September 30 2019
Commercial	$	708,735	$	701,954	$	677,554	$	659,529	$	668,915	Commercial	$	821,102	$	799,632	$	695,278	$	700,941	$	708,735
Agricultural	118,460		120,363		123,393		127,161		129,232		Agricultural	102,263		103,162		108,856		116,920		118,460
Residential real estate	292,311		283,285		276,776		275,343		276,904		Residential real estate	304,559		307,926		302,016		298,569		292,311
Consumer	72,298		71,020		67,109		66,674		64,879		Consumer	75,384		73,665		69,786		70,140		72,298
Total	$	1,191,804	$	1,176,622	$	1,144,832	$	1,128,707	$	1,139,930	Total	$	1,303,308	$	1,284,385	$	1,175,936	$	1,186,570	$	1,191,804

~~While~~The competition for commercial loan opportunities continues to be strong ~~we experienced~~in the current interest rate environment. Growth during the second quarter of 2020 was driven primarily by SBA PPP loans while growth during the third quarter was largely driven by an increase in ~~this segment~~advances to mortgage brokers. As a result of the short-term nature of SBA PPP loans, the commercial loan portfolio ~~during the last 12 months and do not expect significant change~~could decline during the remainder of ~~2019. Over~~2020. During the ~~last~~third quarter, and over the past 12 months, agricultural loans have declined ~~each quarter and while we do not anticipate significant declines, we do expect this trend~~due to ~~continue during~~ the ~~remainder of 2019.~~competitive environment. Residential real estate and consumer loans ~~have~~ experienced overall growth ~~over~~during the ~~last year and continued growth is~~past year. While residential real estate loans declined during the third quarter, further declines are not expected during the remainder of ~~2019.~~2020. Growth is expected to continue in the consumer loan portfolio during the remainder of 2020.

The following table outlines the changes in ~~deposits:~~

deposit balances:


	September 30 2019		December 31 2018		$ Change			% Change (unannualized)			September 30 2020		December 31 2019		$ Change		% Change (unannualized)
Noninterest bearing demand deposits	$	242,179	$	236,534	$	5,645		2.39	%	Noninterest bearing demand deposits	$	353,082	$	249,152	$	103,930	41.71	%
Interest bearing demand deposits	230,579		235,287		(4,708		)	(2.00	)%	Interest bearing demand deposits	287,809		229,865		57,944		25.21	%
Savings deposits	409,930		387,252		22,678			5.86	%	Savings deposits	474,483		427,215		47,268		11.06	%
Certificates of deposit	357,984		358,127		(143		)	(0.04	)%	Certificates of deposit	354,210		365,049		(10,839)		(2.97)	%
Brokered certificates of deposit	52,744		62,148		(9,404		)	(15.13	)%	Brokered certificates of deposit	14,029		27,458		(13,429)		(48.91)	%
Internet certificates of deposit	15,357		13,345		2,012			15.08	%	Internet certificates of deposit	11,482		15,112		(3,630)		(24.02)	%
Total	$	1,308,773	$	1,292,693	$	16,080		1.24	%	Total	$	1,495,095	$	1,313,851	$	181,244	13.79	%

The following table displays deposit balances as of:


	September 30 2019		June 30 2019		March 31 2019		December 31 2018		September 30 2018			September 30 2020		June 30 2020		March 31 2020		December 31 2019		September 30 2019
Noninterest bearing demand deposits	$	242,179	$	244,240	$	229,865	$	236,534	$	229,269	Noninterest bearing demand deposits	$	353,082	$	340,321	$	249,424	$	249,152	$	242,179
Interest bearing demand deposits	230,579		228,704		236,997		235,287		235,529		Interest bearing demand deposits	287,809		263,567		237,392		229,865		230,579
Savings deposits	409,930		378,988		385,617		387,252		359,720		Savings deposits	474,483		458,167		435,207		427,215		409,930
Certificates of deposit	357,984		359,945		361,716		358,127		353,974		Certificates of deposit	354,210		352,118		358,534		365,049		357,984
Brokered certificates of deposit	52,744		57,773		50,273		62,148		84,720		Brokered certificates of deposit	14,029		14,029		27,458		27,458		52,744
Internet certificates of deposit	15,357		11,768		13,495		13,345		13,594		Internet certificates of deposit	11,482		12,476		14,068		15,112		15,357
Total	$	1,308,773	$	1,281,418	$	1,277,963	$	1,292,693	$	1,276,806	Total	$	1,495,095	$	1,440,678	$	1,322,083	$	1,313,851	$	1,308,773

~~While total~~Deposit growth during the second and third quarters of 2020 was largely driven by SBA PPP loan and government stimulus funds. Total deposits have ~~fluctuated~~increased over the past 12 months ~~we experienced~~with significant growth in non-contractual deposits, such as ~~noninterest bearing~~ demand and savings deposits. This trend is anticipated to continue during the remainder of 2020 as the financial markets continue to exhibit significant signs of instability. We ~~also~~ experienced ~~marginal growth~~fluctuations in certificates of deposit over the past ~~year.~~year while higher-cost brokered certificates of deposit have significantly declined. Brokered certificates of deposit offer another source of funding and may fluctuate from ~~period-to-period~~period to period based on our funding needs, including changes in assets such as loans and investments. ~~In recent periods,~~During 2019 and 2020, we used excess ~~liquidity~~funds to reduce ~~high-cost~~higher-cost deposits, such as brokered certificates of deposit.

Table of Contents

The primary objective of our investing activities is to provide for safety of the principal invested. Secondary considerations include ~~the need for~~providing earnings and liquidity ~~and~~while managing our overall exposure to changes in interest rates. The current flat yield curve encourages using excess ~~liquidity~~funds to reduce ~~high-cost~~higher-cost borrowings and therefore, AFS securities balances are not expected to rise significantly in the near term. The following table displays fair values of AFS securities as of:


												September 30 2020		June 30 2020		March 31 2020		December 31 2019		September 30 2019
	September 30 2019		June 30 2019		March 31 2019		December 31 2018		September 30 2018
Government sponsored enterprises	$	—	$	160	$	165	$	170	$	180
States and political subdivisions	175,575		176,742		191,266		190,866		193,957		States and political subdivisions	$	148,401	$	146,785	$	163,116	$	169,752	$	175,575
Auction rate money market preferred	3,089		2,849		2,819		2,554		3,108		Auction rate money market preferred	3,194		2,979		2,726		3,119		3,089
Mortgage-backed securities	150,120		173,340		181,138		184,484		188,136		Mortgage-backed securities	104,165		119,029		126,554		140,204		150,120
Collateralized mortgage obligations	116,745		117,358		119,454		116,760		115,758		Collateralized mortgage obligations	107,294		111,621		114,793		116,764		116,745
Total	$	445,529	$	470,449	$	494,842	$	494,834	$	501,139	Total	$	363,054	$	380,414	$	407,189	$	429,839	$	445,529

Borrowed funds include FHLB advances, securities sold under agreements to repurchase, and federal funds purchased. The balance of borrowed funds fluctuates from ~~period-to-period~~period to period based on our funding needs that arise from changes in loans, investments, and deposits. To provide balance sheet growth, we may utilize borrowings and brokered deposits to fund earning assets. The following table displays borrowed funds balances as of:


	September 30 2019		June 30 2019		March 31 2019		December 31 2018		September 30 2018			September 30 2020		June 30 2020		March 31 2020		December 31 2019		September 30 2019
FHLB advances	$	245,000	$	295,000	$	280,000	$	300,000	$	320,000	FHLB advances	$	205,000	$	205,000	$	235,000	$	245,000	$	245,000
Securities sold under agreements to repurchase without stated maturity dates	32,386		25,462		29,824		40,299		39,776		Securities sold under agreements to repurchase without stated maturity dates	33,349		31,268		28,171		30,999		32,386
Federal funds purchased	—		—		1,860		—		—
Total	$	277,386	$	320,462	$	311,684	$	340,299	$	359,776	Total	$	238,349	$	236,268	$	263,171	$	275,999	$	277,386

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.

~~The following table summarizes our credit related financial instruments with off-balance-sheet risk as of:~~

September 30
2019 December 31
2018
Unfunded commitments under lines of credit $ 192,385
$ 199,652
Commitments to grant loans 23,026
13,225
Commercial and standby letters of credit 4,498
1,723
Total $ 219,909
$ 214,600

Unfunded commitments under lines of credit are commitments for possible future extensions of credit to existing customers. These commitments may expire without being drawn upon and do not necessarily represent future cash requirements. Advances to mortgage brokers are also included in unfunded commitments under lines of credit. The unfunded commitment amount is the difference between our outstanding balances and the maximum outstanding aggregate amount.

Commitments to grant loans are agreements to lend to a customer as long as there is no violation of any condition established in the contract. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. The amount of collateral obtained, if it is deemed necessary, is based on management’s credit evaluation of the customer. Commitments to grant loans include residential mortgage loans that may be committed to be sold to the secondary market.

Commercial and standby letters of credit are conditional commitments issued to guarantee the performance of a customer to a third party. Those guarantees are primarily issued to support private borrowing arrangements, including commercial paper, bond financing, and similar transactions. These commitments to extend credit and letters of credit generally mature within one year. The credit risk involved in these transactions is essentially the same as that involved in extending loans to customers. We evaluate each customer's credit worthiness on a case-by-case basis. The amount of collateral obtained, if deemed necessary upon the extension of credit, is based on a credit evaluation of the borrower. While we consider standby letters of credit to be

guarantees, the amount of the liability related to such guarantees on the commitment date is not significant and a liability related to such guarantees is not recorded on the consolidated balance sheets.

Our exposure to credit-related loss in the event of nonperformance by the counter parties 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 as we do for extending loans to customers. No significant losses are anticipated as a result of these commitments.

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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 ~~159,521~~184,144 shares or ~~$3,672~~$3,274 of common stock during the first nine months of ~~2019~~,2020, as compared to ~~189,074~~159,521 shares or ~~$5,093~~$3,672 of common stock during the same period in ~~2018~~.2019. We also 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 ~~$415~~$334 and ~~$449~~$415 during the ~~nine~~ ~~month~~nine-month periods ended September 30, ~~2019~~2020 and ~~2018~~,2019, respectively.

We have publicly announced a common stock repurchase plan. Pursuant to this plan, we repurchased ~~92,256~~87,047 shares or ~~$2,140~~$1,619 of common stock during the first nine months of ~~2019~~2020 and ~~215,427~~92,256 shares or ~~$6,212~~$2,140 during the first nine months of ~~2018~~.2019. As of September 30, ~~2019~~,2020, we were authorized to repurchase up to an additional ~~75,398~~160,859 shares of common stock.

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. ~~On July 2, 2013, the FRB published revised BASEL III Capital standards for banks.~~

The ~~final rules redefined what is included or deducted from~~common equity tier 1 capital ~~changed risk weighting for certain on and off-balance sheet assets, increased the~~ratio has a minimum ~~required equity capital to be considered well capitalized, and introduced a capital conservation buffer.~~requirement of 4.50%. The ~~rules, which were gradually phased in between 2015 and 2019, did not have a material impact on the Corporation but do require us to hold more capital than has historically been required.~~

~~Effective January 1, 2015, the~~ minimum standard for primary, or Tier 1 capital ~~increased from 4.00% to~~is 6.00%~~. The~~ and the minimum standard for total capital is 8.00%. ~~Also effective January 1, 2015 was~~The minimum requirements presented below include the ~~new common equity tier 1~~minimum required capital ~~ratio which had a minimum requirement of 4.50%. Beginning~~levels based on ~~January 1, 2016~~ the ~~capital conservation buffer went into effect which increased~~Basel III Capital Rules. Capital requirements to be considered well capitalized are based upon prompt corrective action regulations, as amended to reflect the ~~required levels each year through 2019.~~changes under the Basel III Capital Rules. The following table sets forth ~~the minimum percentages required under the Risk Based Capital guidelines~~these requirements and our ratios as of:


	September 30, 2019						December 31, 2018							September 30, 2020						December 31, 2019
	Actual		Minimum Required - BASEL III		Required to be Considered Well Capitalized		Actual		Minimum Required - BASEL III		Required to be Considered Well Capitalized			Actual		Minimum Required - BASEL III		Required to be Considered Well Capitalized		Actual		Minimum Required - BASEL III		Required to be Considered Well Capitalized
Common equity tier 1 capital	12.58	%	7.00	%	6.50	%	12.58	%	6.375	%	6.50	%	Common equity tier 1 capital	12.90	%	7.00	%	6.50	%	12.56	%	7.000	%	6.50	%
Tier 1 capital	12.58	%	8.50	%	8.00	%	12.58	%	7.875	%	8.00	%	Tier 1 capital	12.90	%	8.50	%	8.00	%	12.56	%	8.500	%	8.00	%
Total capital	13.21	%	10.50	%	10.00	%	13.26	%	9.875	%	10.00	%	Total capital	13.64	%	10.50	%	10.00	%	13.18	%	10.500	%	10.00	%
Tier 1 leverage	9.16	%	4.00	%	5.00	%	8.72	%	4.00	%	5.00	%	Tier 1 leverage	8.76	%	4.00	%	5.00	%	9.01	%	4.00	%	5.00	%

There are no significant regulatory constraints placed on our capital. At September 30, ~~2019, all regulatory capital ratios for~~2020, the Bank exceeded ~~the~~ minimum ~~thresholds to be considered a “well capitalized” institution.~~capital requirements.

~~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, impaired 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 12 – Fair Value” of our interim condensed consolidated financial statements.~~

Liquidity

Liquidity is monitored regularly by our ~~Market Risk Committee,~~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 cash and cash equivalents and unencumbered AFS securities. These categories totaled ~~$267,167~~$388,301 or ~~14.73%~~19.69% of assets as of September 30, ~~2019~~,2020, compared to ~~$256,583~~$291,190 or ~~13.93%~~16.05% as of December 31, ~~2018~~.2019. The increase in the amount and percentage of primary liquidity is a direct result of ~~our unencumbered~~ ~~AFS~~ ~~securities' sale, maturity~~an increase in market deposits and ~~principal payment activity during 2019.~~a deliberate reduction in non-market funding which required collateralization. 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. ~~Liquidity~~Based on these same factors, daily liquidity could vary ~~significantly daily, based on customer activity.~~significantly.

Deposit accounts are our primary source of funds. Our secondary sources include the ability to borrow from the FHLB,, from the FRB,, and through various correspondent banks in the form of federal funds purchased and a line of credit. These funding methods typically carry a higher interest rate than traditional market deposit accounts. In recent periods, we have elected to use excess funds and proceeds from the sale of AFS securities to reduce borrowings and other ~~higher cost~~higher-cost funding sources. Some borrowed funds, including FHLB advances, FRB Discount Window advances, and repurchase agreements, require us to pledge assets, typically in the form of AFS securities or loans, as collateral. As of September 30, ~~2019~~,2020, we had available lines of credit of ~~$137,016~~.$150,819.

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Our stress testing of liquidity increased during 2020 and continues to evolve due to economic uncertainly as a result of COVID-19. Our liquidity position remained strong at the end of the third quarter of 2020 which is illustrated in the following table:


	September 30 2020
Total cash and cash equivalents	$	165,749
Available lines of credit
Fed funds lines with correspondent banks	93,000
FHLB borrowings	42,174
FRB Discount Window	10,645
Other lines of credit	5,000
Total available lines of credit	150,819
Unencumbered lendable value of FRB collateral, estimated1	178,000
Total cash and liquidity	$	494,568

(1)Includes estimated unencumbered lendable value of FHLB collateral of $127,000

The following table summarizes our sources and uses of cash for the ~~nine~~ ~~month~~nine-month period ended September 30:30:


	2020		2019		$ Variance
Net cash provided by (used in) operating activities	$	10,936	$	17,083	$	(6,147)
Net cash provided by (used in) investing activities	(43,370)		(3,875)		(39,495)
Net cash provided by (used in) financing activities	137,611		(52,348)		189,959
Increase (decrease) in cash and cash equivalents	105,177		(39,140)		144,317
Cash and cash equivalents January 1	60,572		73,471		(12,899)
Cash and cash equivalents September 30	$	165,749	$	34,331	$	131,418

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, impaired 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 11 – Fair Value” of our interim condensed consolidated financial statements.

2019 2018 $ Variance
Net cash provided by (used in) operating activities $ 17,083
$ 14,250
$ 2,833
Net cash provided by (used in) investing activities (3,875 ) (15,457 ) 11,582
Net cash provided by (used in) financing activities (52,348 ) 18,911
(71,259 )
Increase (decrease) in cash and cash equivalents (39,140 ) 17,704
(56,844 )
Cash and cash equivalents January 1 73,471
30,848
42,623
Cash and cash equivalents September 30 $ 34,331
$ 48,552
$ (14,221 )

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Market Risk

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. 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 usbanks to effectively manage the various risks that can have a material impact on ~~our~~ 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 Funds Management 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.

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.

Our interest rate sensitivity is estimated by first forecasting the next 12 and 24 months of net interest income under an assumed environment of a constant balance sheet and constant market interest rates (base case). We then compare the results of various simulation analyses to the base case. At ~~September 30, 2019~~, we projected the change in net interest income during the next 12 and 24 months assuming market interest rates were to immediately decrease by 100 and 200 basis points and increase by 100, 200, 300, and 400 basis points in a parallel fashion over the entire yield curve during the same time period. These projections were based on our assets and liabilities remaining static over the next 12 and 24 months, while factoring in probable calls and prepayments of certain investment securities and residential real estate and consumer loans. While it is extremely unlikely that interest rates would immediately increase to these levels, we feel that these extreme scenarios help us identify potential gaps and mismatches in the repricing characteristics of assets and liabilities. We regularly monitor our projected net interest income sensitivity to ensure that it remains within established limits.

~~The following tables summarize~~Gap analysis, the secondary method to measure IRR, measures the cash flows and/or the earliest repricing of our interest ~~rate sensitivity for the next 12 and 24 months as of:~~

September 30, 2019

12 Months
Immediate basis point change assumption (short-term) -200 -100 +100 +200 +300 +400
Percent change in net interest income vs. constant rates (2.80 )% (2.44 )% 3.34 % 6.72 % 10.90 % 14.79 %

24 Months
Immediate basis point change assumption (short-term) -200 -100 +100 +200 +300 +400
Percent change in net interest income vs. constant rates (2.76 )% (3.06 )% 4.50 % 8.98 % 13.97 % 18.31 %

December 31, 2018
12 Months
Immediate basis point change assumption (short-term) -200 -100 +100 +200 +300 +400
Percent change in net interest income vs. constant rates (4.90 )% (2.85 )% 1.06 % 2.67 % 5.15 % 6.22 %

24 Months
Immediate basis point change assumption (short-term) -200 -100 +100 +200 +300 +400
Percent change in net interest income vs. constant rates (6.76 )% (4.04 )% 1.83 % 3.82 % 6.53 % 6.54 %

~~The following tables provide information about~~bearing assets and ~~liabilities that~~liabilities. This analysis is useful for measuring trends in the repricing characteristics of the balance sheet. Significant assumptions are ~~sensitive~~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 ~~changes~~repay the balance prior to maturity without penalty, while commercial and agricultural loans may have prepayment penalties. The amount of prepayments is dependent upon many factors, including the interest rate of a given loan in comparison to the current offering rates, the level of home sales, and the overall availability of credit in the market place. Generally, a decrease in interest rates aswill result in an increase in cash flows from these assets. A significant portion of ~~September 30, 2019~~our securities are callable or have prepayment options. The call and ~~December 31, 2018.~~prepayment options are more likely to be exercised in a period of decreasing interest rates. Savings and demand accounts may generally be withdrawn on request without prior notice. The ~~principal amounts~~timing of ~~investments, loans, other interest earning assets, borrowings, and time~~cash flows from these deposits ~~maturing were calculated~~is estimated based on ~~the contractual maturity dates. Fair values for loans do not reflect the exit price notion as previously disclosed. Estimated cash flows for savings and NOW accounts are based on our estimated~~historical experience. Certificates of deposit ~~decay rates.~~

September 30, 2019
2020 2021 2022 2023 2024 Thereafter Total Fair Value
Rate sensitive assets
Other interest bearing assets $ 8,209
$ —
$ —
$ —
$ —
$ —
$ 8,209
$ 8,208
Average interest rates 1.92 % — % — % — % — % — % 1.92 %
AFS securities $ 95,014
$ 72,254
$ 67,433
$ 56,051
$ 37,808
$ 116,969
$ 445,529
$ 445,529
Average interest rates 2.46 % 2.49 % 2.39 % 2.47 % 2.55 % 2.47 % 2.47 %
Fixed interest rate loans ⁽¹⁾
$ 193,214
$ 148,665
$ 119,322
$ 124,411
$ 72,901
$ 161,010
$ 819,523
$ 802,738
Average interest rates 4.21 % 4.45 % 4.42 % 4.53 % 4.43 % 4.21 % 4.35 %
Variable interest rate loans ⁽¹⁾
$ 67,164
$ 45,547
$ 51,877
$ 22,117
$ 22,927
$ 162,649
$ 372,281
$ 366,512
Average interest rates 5.79 % 5.34 % 5.47 % 5.06 % 5.09 % 4.64 % 5.10 %
Rate sensitive liabilities
Fixed rate borrowed funds $ 72,386
$ 35,000
$ 50,000
$ 45,000
$ 55,000
$ 10,000
$ 267,386
$ 270,139
Average interest rates 1.34 % 1.78 % 1.97 % 2.97 % 2.68 % 1.17 % 2.06 %
Variable rate borrowed funds $ —
$ 10,000
$ —
$ —
$ —
$ —
$ 10,000
$ 10,064
Average interest rates — % 2.82 % — % — % — % — % 2.82 %
Savings and NOW accounts $ 57,586
$ 52,311
$ 46,863
$ 42,016
$ 37,706
$ 404,027
$ 640,509
$ 640,509
Average interest rates 0.57 % 0.56 % 0.56 % 0.55 % 0.55 % 0.49 % 0.52 %
Fixed interest rate certificates of deposit $ 197,849
$ 94,512
$ 71,565
$ 32,180
$ 21,589
$ 3,579
$ 421,274
$ 422,752
Average interest rates 1.96 % 2.25 % 2.27 % 2.27 % 2.36 % 1.88 % 2.13 %
Variable interest rate certificates of deposit $ 3,104
$ 1,707
$ —
$ —
$ —
$ —
$ 4,811
$ 4,784
Average interest rates 1.32 % 1.31 % — % — % — % — % 1.31 %

⁽¹⁾ ~~The fair value reported is exclusive of the allocation of the~~ ~~ALLL~~.have penalties that discourage early withdrawals.

December 31, 2018
2019 2020 2021 2022 2023 Thereafter Total Fair Value
Rate sensitive assets
Other interest bearing assets $ 49,837
$ 100
$ —
$ —
$ —
$ —
$ 49,937
$ 49,937
Average interest rates 1.85 % 1.72 % — % — % — % — % 1.85 %
AFS securities $ 84,691
$ 77,165
$ 70,081
$ 70,033
$ 59,541
$ 133,323
$ 494,834
$ 494,834
Average interest rates 2.49 % 2.62 % 2.60 % 2.43 % 2.52 % 2.75 % 2.59 %
Fixed interest rate loans ⁽¹⁾
$ 152,336
$ 118,585
$ 142,107
$ 113,587
$ 119,069
$ 188,082
$ 833,766
$ 792,394
Average interest rates 4.44 % 4.37 % 4.34 % 4.46 % 4.49 % 4.23 % 4.38 %
Variable interest rate loans ⁽¹⁾
$ 70,336
$ 30,855
$ 42,968
$ 22,766
$ 18,685
$ 109,331
$ 294,941
$ 287,196
Average interest rates 6.14 % 5.75 % 5.76 % 5.22 % 5.01 % 4.16 % 5.16 %
Rate sensitive liabilities
Fixed rate borrowed funds $ 140,299
$ 55,000
$ 50,000
$ 20,000
$ 35,000
$ 30,000
$ 330,299
$ 323,903
Average interest rates 1.41 % 2.18 % 1.91 % 1.97 % 3.17 % 2.36 % 1.92 %
Variable rate borrowed funds $ —
$ —
$ 10,000
$ —
$ —
$ —
$ 10,000
$ 9,926
Average interest rates — % — % 2.62 % — % — % — % 2.62 %
Savings and NOW accounts $ 55,248
$ 49,944
$ 44,783
$ 40,191
$ 36,105
$ 396,268
$ 622,539
$ 622,539
Average interest rates 0.52 % 0.51 % 0.50 % 0.50 % 0.49 % 0.44 % 0.46 %
Fixed interest rate certificates of deposit $ 227,451
$ 54,051
$ 65,036
$ 41,502
$ 31,714
$ 6,968
$ 426,722
$ 419,116
Average interest rates 1.63 % 1.90 % 2.09 % 1.99 % 2.23 % 2.14 % 1.82 %
Variable interest rate certificates of deposit $ 4,898
$ 2,000
$ —
$ —
$ —
$ —
$ 6,898
$ 6,877
Average interest rates 2.32 % 2.61 % — % — % — % — % 2.40 %

⁽¹⁾ ~~The fair value reported is exclusive of the allocation of the~~ ~~ALLL~~.

~~We do not believe there has been a material change in the nature or categories of our~~Our primary market risk ~~exposure, or~~exposures related to the ~~particular markets that present the primary risk~~COVID-19 crisis remain uncertain. A review 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 are ongoing and modeling is incorporating additional assumptions to account for this uncertainty related to this crisis. Repricing, cash flows, and prepayment projections for loans and mortgage-backed securities are not expected to behave as they would be expected to in a more stable interest rate environment. The SBA PPP loan is a new instrument and has payment characteristics that are still uncertain. In late March 2020, we implemented loan payment programs for customers to alleviate the ~~near term.~~financial setback caused by the temporary closure of businesses and lost wages. Under these programs, borrowers whose loans were in good standing as of March 1, 2020 could elect to defer full or partial payments for a short period of time. Customer deposit flows may experience unusual fluctuations due to government support programs, customer and business stress, and general money supply. We ~~may change those methods in~~continue to closely monitor customer and economic indicators to develop more precise market risk assumptions as the ~~future~~economic impact of this crisis begins to ~~adapt to changes in circumstances or to implement new techniques.~~reveal itself.

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Item 3. Quantitative and Qualitative Disclosures about Market Risk.

The information presented in the section captioned “~~Market Risk~~”“Market Risk” in Management's Discussion and Analysis of Financial Condition and Results of Operations is incorporated herein by reference.

Item 4. Controls and Procedures.

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 September 30, ~~2019~~,2020, 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 September 30, ~~2019~~,2020, 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 likely to materially affect, our internal control over financial reporting.

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PART II – OTHER INFORMATION

Item 1. Legal Proceedings.

We are not involved in any material legal proceedings. We are involved in ordinary, routine litigation incidental to our business; however, no such routine proceedings are expected to result in any material adverse effect on operations, earnings, financial condition, or cash flows.

Item 1A. Risk Factors.

~~There~~Other than the addition of risk related to COVID-19, as described below, there have been no material changes to the risk factors disclosed in Item 1A in our Annual Report on Form 10-K for the year ended December 31, ~~2018~~.2019.

The COVID-19 pandemic may adversely affect our business

Unexpected and unprecedented changes have occurred during the year as the result of COVID-19. This aggressive and persistent virus causes a respiratory disease that currently has no approved vaccine or antiviral treatment and can result in serious illness or death. The World Health Organization has declared the situation a global pandemic.

The pandemic has created significant market volatility, economic uncertainty, and disruption to normal business operations around the world, with slowdowns and shutdowns affecting entire industries. The Michigan governor issued on March 23, 2020 a stay-at-home order, which limited gatherings and travel, and required those in select businesses who were not deemed essential to sustain or protect life to stay home. The Michigan stay-at-home order was in effect until early June. The orders led to financial stress for many businesses and their employees throughout the communities we serve.

The extent to which COVID-19 impacts our business will depend on future developments, which are highly uncertain and cannot be predicted with any accuracy. Future developments include new information which may emerge concerning the severity of COVID-19 and the actions to contain the coronavirus or treat its impact, among others. We expect the significance of the COVID-19 pandemic, including the extent of its effect on our financial and operational results, to be dictated by, among other factors, its duration, the success of efforts to contain it and the impact of actions taken in response. Uncertainty created by the COVID-19 pandemic is pervasive, and the pandemic has impacted our operations, customers, vendors and various areas of risk. Other areas of risk may include, but are not limited to, cybersecurity, credit, interest rate, litigation and risk related to vendor services. With the uncertainty created by COVID-19, it's challenging to determine the full impact of the COVID-19 pandemic on our ongoing financial and operational results. We continue to closely monitor external events and are in continual discussion with our customers to assess, prepare and respond to conditions as they evolve.

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.


~~(A)~~	~~None~~


~~(B)~~	~~None~~


~~(C)~~	~~Repurchases of Common Stock~~

(A)None

(B)None

(C)Repurchases of Common Stock

We have adopted and publicly announced a common stock repurchase plan. The plan was last amended on ~~August 22, 2018~~,December 23, 2019, to allow for the repurchase of an additional ~~200,000~~250,000 shares of common stock after that date. These authorizations do not have expiration dates. As common shares are repurchased under this plan, they are retired and revert back to the status of authorized, but unissued common shares.

The following table provides information for the ~~three month~~three-month period ended September 30, ~~2019~~,2020, with respect to this plan:


	Common Shares Repurchased			Total Number of Common Shares Purchased as Part of Publicly Announced Plan or Program	Maximum Number of Common Shares That May Yet Be Purchased Under the Plans or Programs
	Number	Average Price Per Common Share
Balance, June 30					186,905
July 1 - 31	634	$	17.35	634	186,271
August 1 - 31	5,583	16.66		5,583	180,688
September 1 -30	19,829	16.14		19,829	160,859
Balance, September 30	26,046	$	16.28	26,046	160,859

Common Shares Repurchased Total Number of Common Shares Purchased as Part of Publicly Announced Plan or Program Maximum Number of Common Shares That May Yet Be Purchased Under the Plans or Programs

Number Average Price
Per Common Share
Balance, June 30 110,582
July 1 - 31 10,220
$ 23.09
10,220
100,362
August 1 - 31 2,285
22.32
2,285
98,077
September 1 - 30 22,679
22.62
22,679
75,398
Balance, September 30 35,184
$ 22.74
35,184
75,398

Table of Contents

Item 3. Defaults Upon Senior Securities.

Not applicable.

Item 4. Mine Safety Disclosures.

Not applicable.

Item 5. Other Information.

Not applicable.

Item 6. Exhibits.

(a) Exhibits


Exhibit Number		Exhibits

~~Exhibit Number~~	~~Exhibits~~

31(a)	Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 by the Principal Executive Officer

31(b)		Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 by the Principal Financial Officer

32		Section 1350 Certification of Principal Executive Officer and Principal Financial Officer

101.1*		101.INS (XBRL Instance Document)

		101.SCH (XBRL Taxonomy Extension Schema Document)

		101.CAL (XBRL Calculation Linkbase Document)

		101.LAB (XBRL Taxonomy Label Linkbase Document)

		101.DEF (XBRL Taxonomy Linkbase Document)

		101.PRE (XBRL Taxonomy Presentation Linkbase Document)

In accordance with Rule 406T of Regulations S-T, the XBRL related information shall not be deemed to be “filed” for purposes of Section 18 of the Exchange Act, or otherwise subject to the liability of that section, and shall not be part of any registration statement or other document filed under the Securities Act or the Exchange Act, except as shall be expressly set forth by specific reference in such filing.

* In accordance with Rule 406T of Regulations S-T, the XBRL related information shall not be deemed to be “filed” for purposes of Section 18 of the Exchange Act, or otherwise subject to the liability of that section, and shall not be part of any registration statement or other document filed under the Securities Act or the Exchange Act, except as shall be expressly set forth by specific reference in such filing.

Table of Contents

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

Isabella Bank Corporation

Date:

October 28, 2020

/s/ Jae A. Evans

Jae A. Evans

President, Chief Executive Officer

(Principal Executive Officer)

Date:

October 28, 2020

~~Isabella Bank Corporation~~

~~Date:~~

~~November 6, 2019~~

~~/s/ Jae A. Evans~~

~~Jae A. Evans~~

~~President, Chief Executive Officer~~

~~(Principal Executive Officer)~~

~~Date:~~

~~November 6, 2019~~

/s/ Neil M. McDonnell

Neil M. McDonnell

Chief Financial Officer

(Principal Financial Officer)



	Allowance for Loan Losses
	Three Months Ended September 30, 2018
	Commercial			Agricultural			Residential Real Estate			Consumer			Unallocated		Total
July 1, 2018	$	2,197		$	982		$	2,167		$	882		$	1,972	$	8,200
Charge-offs	—			(7		)	(61		)	(111		)	—		(179		)
Recoveries	79			1			37			38			—		155
Provision for loan losses	(255		)	(194		)	239			93			41		(76		)
September 30, 2018	$	2,021		$	782		$	2,382		$	902		$	2,013	$	8,100



	Allowance for Loan Losses
	Nine Months Ended September 30, 2018
	Commercial			Agricultural			Residential Real Estate			Consumer			Unallocated		Total
January 1, 2018	$	1,706		$	611		$	2,563		$	900		$	1,920	$	7,700
Charge-offs	(450		)	(51		)	(100		)	(247		)	—		(848		)
Recoveries	282			2			162			166			—		612
Provision for loan losses	483			220			(243		)	83			93		636
September 30, 2018	$	2,021		$	782		$	2,382		$	902		$	2,013	$	8,100



	September 30 2019		December 31 2018
FHLB Stock	$	15,050	$	15,050
Corporate Settlement Solutions, LLC	7,747		7,565
FRB Stock	1,999		1,999
Other	334		334
Total	$	25,130	$	24,948



	September 30 2019			September 30 2018			September 30 2017			September 30 2016			September 30 2015
INCOME STATEMENT DATA
Interest income	$	50,457		$	47,253		$	43,335		$	39,906		$	38,479
Interest expense	13,369			11,373			9,059			8,039			7,586
Net interest income	37,088			35,880			34,276			31,867			30,893
Provision for loan losses	48			636			85			185			(1,999		)
Noninterest income	8,764			8,116			8,102			7,921			7,858
Noninterest expenses	32,158			31,982			29,597			27,731			26,166
Federal income tax expense ⁽¹⁾	1,520			887			2,180			1,855			2,750
Net income	$	12,126		$	10,491		$	10,516		$	10,017		$	11,834
PER SHARE
Basic earnings	$	1.53		$	1.33		$	1.34		$	1.28		$	1.52
Diluted earnings	$	1.50		$	1.30		$	1.31		$	1.25		$	1.49
Dividends	$	0.78		$	0.78		$	0.76		$	0.73		$	0.70
Tangible book value ⁽²⁾	$	20.65		$	17.89		$	18.83		$	18.70		$	17.27
Quoted market value
High	$	24.50		$	28.25		$	29.10		$	29.90		$	23.85
Low	$	22.01		$	26.05		$	27.60		$	27.25		$	22.00
Close ⁽³⁾	$	22.30		$	26.75		$	29.00		$	27.70		$	23.69
Common shares outstanding ⁽³⁾	7,938,234			7,830,940			7,856,664			7,833,481			7,765,333
PERFORMANCE RATIOS
Return on average total assets	0.89		%	0.77		%	0.79		%	0.80		%	1.00		%
Return on average shareholders' equity	7.85		%	7.22		%	7.18		%	6.90		%	8.80		%
Return on average tangible shareholders' equity	10.08		%	9.22		%	9.67		%	9.68		%	12.06		%
Net interest margin yield (FTE) ⁽¹⁾	3.07		%	2.97		%	3.03		%	3.00		%	3.12		%
BALANCE SHEET DATA ⁽³⁾
Gross loans	$	1,191,804		$	1,139,930		$	1,077,544		$	989,366		$	836,671
AFS securities	$	445,529		$	501,139		$	549,274		$	560,641		$	625,420
Total assets	$	1,813,684		$	1,833,663		$	1,791,967		$	1,706,498		$	1,619,250
Deposits	$	1,308,773		$	1,276,806		$	1,216,062		$	1,175,833		$	1,128,003
Borrowed funds	$	277,386		$	359,776		$	367,027		$	325,409		$	267,610
Shareholders' equity	$	212,376		$	188,536		$	196,463		$	195,184		$	182,998
Gross loans to deposits	91.06		%	89.28		%	88.61		%	84.14		%	74.17		%
ASSETS UNDER MANAGEMENT ⁽³⁾
Loans sold with servicing retained	$	258,873		$	257,400		$	268,817		$	275,037		$	289,268
Assets managed by our Investment and Trust Services Department	$	475,574		$	504,371		$	467,601		$	424,573		$	392,124
Total assets under management	$	2,548,131		$	2,595,434		$	2,528,385		$	2,406,108		$	2,300,642
ASSET QUALITY ⁽³⁾
Nonperforming loans to gross loans	0.59		%	0.65		%	0.21		%	0.16		%	0.10		%
Nonperforming assets to total assets	0.41		%	0.42		%	0.14		%	0.11		%	0.09		%
ALLL to gross loans	0.69		%	0.71		%	0.71		%	0.79		%	0.98		%
CAPITAL RATIOS ⁽³⁾
Shareholders' equity to assets	11.71		%	10.28		%	10.96		%	11.44		%	11.30		%
Tier 1 leverage	9.16		%	8.49		%	8.50		%	8.59		%	8.54		%
Common equity tier 1 capital	12.58		%	12.18		%	12.20		%	12.41		%	13.57		%
Tier 1 risk-based capital	12.58		%	12.18		%	12.20		%	12.41		%	13.57		%
Total risk-based capital	13.21		%	12.83		%	12.84		%	13.10		%	14.20		%



	Three Months Ended
	September 30, 2019							June 30, 2019							September 30, 2018
	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	$	1,177,257		$	14,020	4.76	%	$	1,155,284		$	13,587	4.70	%	$	1,151,881		$	12,833	4.46	%
Taxable investment securities	288,374			1,691		2.35	%	309,650			1,873		2.42	%	334,785			2,031		2.43	%
Nontaxable investment securities	164,159			1,557		3.79	%	172,400			1,623		3.77	%	188,885			1,755		3.72	%
Fed funds sold	218			2		2.83	%	—			—		—	%	—			—		—	%
Other	32,694			297		3.63	%	25,123			148		2.36	%	29,387			254		3.46	%
Total earning assets	1,662,702			17,567		4.23	%	1,662,457			17,231		4.15	%	1,704,938			16,873		3.96	%
NONEARNING ASSETS
Allowance for loan losses	(8,072		)					(8,349		)					(8,213		)
Cash and demand deposits due from banks	21,078							19,089							20,291
Premises and equipment	26,749							27,326							28,310
Accrued income and other assets	111,927							107,046							94,518
Total assets	$	1,814,384						$	1,807,569						$	1,839,844
INTEREST BEARING LIABILITIES
Interest bearing demand deposits	$	234,164		$	76	0.13	%	$	230,238		$	83	0.14	%	$	233,485		$	69	0.12	%
Savings deposits	381,458			644		0.68	%	374,750			586		0.63	%	362,505			450		0.50	%
Time deposits	429,407			2,260		2.11	%	430,098			2,196		2.04	%	454,456			1,917		1.69	%
Borrowed funds	300,120			1,570		2.09	%	321,958			1,662		2.06	%	363,544			1,795		1.98	%
Total interest bearing liabilities	1,345,149			4,550		1.35	%	1,357,044			4,527		1.33	%	1,413,990			4,231		1.20	%
NONINTEREST BEARING LIABILITIES
Demand deposits	242,092							230,203							226,238
Other	14,753							14,288							6,937
Shareholders’ equity	212,390							206,034							192,679
Total liabilities and shareholders’ equity	$	1,814,384						$	1,807,569						$	1,839,844
Net interest income (FTE)				$	13,017						$	12,704						$	12,642
Net yield on interest earning assets (FTE)						3.13	%						3.06	%						2.97	%



	September 30, 2019
	12 Months
Immediate basis point change assumption (short-term)	-200		-100		+100		+200		+300		+400
Percent change in net interest income vs. constant rates	(2.80	)%	(2.44	)%	3.34	%	6.72	%	10.90	%	14.79	%

	24 Months
Immediate basis point change assumption (short-term)	-200		-100		+100		+200		+300		+400
Percent change in net interest income vs. constant rates	(2.76	)%	(3.06	)%	4.50	%	8.98	%	13.97	%	18.31	%



	September 30, 2019
	2020			2021			2022			2023			2024			Thereafter			Total			Fair Value
Rate sensitive assets
Other interest bearing assets	$	8,209		$	—		$	—		$	—		$	—		$	—		$	8,209		$	8,208
Average interest rates	1.92		%	—		%	—		%	—		%	—		%	—		%	1.92		%
AFS securities	$	95,014		$	72,254		$	67,433		$	56,051		$	37,808		$	116,969		$	445,529		$	445,529
Average interest rates	2.46		%	2.49		%	2.39		%	2.47		%	2.55		%	2.47		%	2.47		%
Fixed interest rate loans ⁽¹⁾	$	193,214		$	148,665		$	119,322		$	124,411		$	72,901		$	161,010		$	819,523		$	802,738
Average interest rates	4.21		%	4.45		%	4.42		%	4.53		%	4.43		%	4.21		%	4.35		%
Variable interest rate loans ⁽¹⁾	$	67,164		$	45,547		$	51,877		$	22,117		$	22,927		$	162,649		$	372,281		$	366,512
Average interest rates	5.79		%	5.34		%	5.47		%	5.06		%	5.09		%	4.64		%	5.10		%
Rate sensitive liabilities
Fixed rate borrowed funds	$	72,386		$	35,000		$	50,000		$	45,000		$	55,000		$	10,000		$	267,386		$	270,139
Average interest rates	1.34		%	1.78		%	1.97		%	2.97		%	2.68		%	1.17		%	2.06		%
Variable rate borrowed funds	$	—		$	10,000		$	—		$	—		$	—		$	—		$	10,000		$	10,064
Average interest rates	—		%	2.82		%	—		%	—		%	—		%	—		%	2.82		%
Savings and NOW accounts	$	57,586		$	52,311		$	46,863		$	42,016		$	37,706		$	404,027		$	640,509		$	640,509
Average interest rates	0.57		%	0.56		%	0.56		%	0.55		%	0.55		%	0.49		%	0.52		%
Fixed interest rate certificates of deposit	$	197,849		$	94,512		$	71,565		$	32,180		$	21,589		$	3,579		$	421,274		$	422,752
Average interest rates	1.96		%	2.25		%	2.27		%	2.27		%	2.36		%	1.88		%	2.13		%
Variable interest rate certificates of deposit	$	3,104		$	1,707		$	—		$	—		$	—		$	—		$	4,811		$	4,784
Average interest rates	1.32		%	1.31		%	—		%	—		%	—		%	—		%	1.31		%