Isabella Bank (ISBA) 10-Q for FY2020 Q2, filed Jul 31, 2020

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
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For the quarterly period ended June 30, 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
---	---	---
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification No.)

401 N. Main St, Mt. Pleasant, MI		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	¨

Non-accelerated filer	ý	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 7,978,097 as of July 28, 2020.

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ISABELLA BANK CORPORATION

QUARTERLY REPORT ON FORM 10-Q

Table of Contents

PART I – FINANCIAL INFORMATION		4

Item 1.	Financial Statements	4

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	36

Item 3.	Quantitative and Qualitative Disclosures About Market Risk	58

Item 4.	Controls and Procedures	58

PART II – OTHER INFORMATION		59

Item 1.	Legal Proceedings	59

Item 1A.	Risk Factors	59

Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	59

Item 3.	Defaults Upon Senior Securities	60

Item 4.	Mine Safety Disclosures	60

Item 5.	Other Information	60

Item 6.	Exhibits	60

SIGNATURES		61

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Forward Looking Statements

This report contains certain forward looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Rule 175 promulgated thereunder, and Section 21E of the Securities Exchange Act of 1934, as amended and Rule 3b-6 promulgated thereunder. We intend such forward looking statements to be covered by the safe harbor provisions for forward looking statements contained in the Private Securities Litigation Reform Act of 1995, and are included in this statement for purposes of these safe harbor provisions. Forward looking statements, which are based on certain assumptions and describe future plans, strategies and expectations, are generally identifiable by use of the words “believe”, “expect”, “intend”, “anticipate”, “estimate”, “project”, or similar expressions. Our ability to predict results or the actual effect of future plans or strategies is inherently uncertain. Factors which could have a material adverse effect on 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		GAAP: U.S. generally accepted accounting principles
AFS: Available-for-sale		IFRS: International Financial Reporting Standards
ALLL: Allowance for loan and lease losses		IRR: Interest rate risk
AOCI: Accumulated other comprehensive income		ISDA: International Swaps and Derivatives Association
ASC: FASB Accounting Standards Codification		LIBOR: London Interbank Offered Rate
ASU: FASB Accounting Standards Update		N/A: Not applicable
ATM: Automated teller machine		N/M: Not meaningful
BHC Act: Bank Holding Company Act of 1956		NAV: Net asset value
CARES Act: Coronavirus Aid, Relief, and Economic Security Act		NSF: Non-sufficient funds
CECL: Current expected credit losses		OCI: Other comprehensive income (loss)
CFPB: Consumer Financial Protection Bureau		OMSR: Originated mortgage servicing rights
CIK: Central Index Key		OREO: Other real estate owned
COVID-19: Coronavirus disease 2019		OTTI: Other-than-temporary impairment
CRA: Community Reinvestment Act		PBO: Projected benefit obligation
DIF: Deposit Insurance Fund		PCAOB: Public Company Accounting Oversight Board
DIFS: Department of Insurance and Financial Services		PPP: Paycheck Protection Program
Directors Plan: Isabella Bank Corporation and Related Companies Deferred Compensation Plan for Directors		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		RSP: Isabella Bank Corporation Restricted Stock Plan
Exchange Act: Securities Exchange Act of 1934		SBA: Small Business Administration
FASB: Financial Accounting Standards Board		SEC: U.S. Securities and Exchange Commission
FDIC: Federal Deposit Insurance Corporation		SOX: Sarbanes-Oxley Act of 2002
FFIEC: Federal Financial Institutions Examinations Council		Tax Act: Tax Cuts and Jobs Act, enacted December 22, 2017
FRB: Federal Reserve Bank		TDR: Troubled debt restructuring
FHLB: Federal Home Loan Bank		XBRL: eXtensible Business Reporting Language
Freddie Mac: Federal Home Loan Mortgage Corporation		Yield Curve: U.S. Treasury Yield Curve
FTE: Fully taxable equivalent

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PART I – FINANCIAL INFORMATION

Item 1. Financial Statements.

INTERIM CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)

(Dollars in thousands)

	June 30 2020	December 31 2019
ASSETS
Cash and cash equivalents
Cash and demand deposits due from banks	23,999	20,311
Interest bearing balances due from banks	85,385	40,261
Total cash and cash equivalents	109,384	60,572
AFS securities, at fair value	380,414	429,839
Mortgage loans AFS	5,451	904
Loans
Commercial	799,632	700,941
Agricultural	103,162	116,920
Residential real estate	307,926	298,569
Consumer	73,665	70,140
Gross loans	1,284,385	1,186,570
Less allowance for loan and lease losses	8,877	7,939
Net loans	1,275,508	1,178,631
Premises and equipment	25,742	26,242
Corporate owned life insurance policies	28,001	28,455
Accrued interest receivable	7,715	6,501
Equity securities without readily determinable fair values	21,660	21,629
Goodwill and other intangible assets	48,353	48,379
Other assets	10,999	13,046
TOTAL ASSETS	1,913,227	1,814,198
LIABILITIES AND SHAREHOLDERS’ EQUITY
Deposits
Noninterest bearing	340,321	249,152
Interest bearing demand deposits	263,567	229,865
Certificates of deposit under $250 and other savings	746,195	739,023
Certificates of deposit over $250	90,595	95,811
Total deposits	1,440,678	1,313,851
Borrowed funds	236,268	275,999
Accrued interest payable and other liabilities	16,290	14,166
Total liabilities	1,693,236	1,604,016
Shareholders’ equity
Common stock — no par value 15,000,000 shares authorized; issued and outstanding 7,977,019 shares (including 58,690 shares held in the Rabbi Trust) in 2020 and 7,910,804 shares (including 27,069 shares held in the Rabbi Trust) in 2019	141,701	141,069
Shares to be issued for deferred compensation obligations	4,822	5,043
Retained earnings	65,101	62,099
Accumulated other comprehensive income (loss)	8,367	1,971
Total shareholders’ equity	219,991	210,182
TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY	1,913,227	1,814,198

All values are in US Dollars.

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

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INTERIM CONDENSED CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)

(Dollars in thousands except per share amounts)

	Three Months Ended June 30			Six Months Ended June 30
	2020	2019		2020	2019
Interest income
Loans, including fees	13,297	13,587		26,551	26,478
AFS securities
Taxable	1,352	1,873		2,841	3,831
Nontaxable	986	1,207		2,039	2,460
Federal funds sold and other	234	148		639	527
Total interest income	15,869	16,815		32,070	33,296
Interest expense
Deposits	2,247	2,865		5,038	5,583
Borrowings	1,318	1,662		2,726	3,236
Total interest expense	3,565	4,527		7,764	8,819
Net interest income	12,304	12,288		24,306	24,477
Provision for loan losses	105	(179	)	893	(145	)
Net interest income after provision for loan losses	12,199	12,467		23,413	24,622
Noninterest income
Service charges and fees	1,386	1,540		2,739	3,001
Wealth management fees	656	780		1,228	1,457
Gains from redemption of corporate owned life insurance policies	349	—		873	—
Net gain on sale of mortgage loans	466	116		617	209
Earnings on corporate owned life insurance policies	189	201		371	374
Other	200	374		416	449
Total noninterest income	3,246	3,011		6,244	5,490
Noninterest expenses
Compensation and benefits	5,793	5,957		11,662	11,679
Furniture and equipment	1,431	1,409		2,892	2,903
Occupancy	912	834		1,779	1,764
Other	2,564	2,549		5,312	5,192
Total noninterest expenses	10,700	10,749		21,645	21,538
Income before federal income tax expense	4,745	4,729		8,012	8,574
Federal income tax expense	558	541		761	890
NET INCOME	4,187	4,188		7,251	7,684
Earnings per common share
Basic	0.53	0.53		0.91	0.97
Diluted	0.52	0.52		0.90	0.95
Cash dividends per common share	0.27	0.26		0.54	0.52

All values are in US Dollars.

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

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INTERIM CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (UNAUDITED)

(Dollars in thousands)

	Three Months Ended June 30				Six Months Ended June 30
	2020		2019		2020		2019
Net income	4,187		4,188		7,251		7,684
Unrealized gains (losses) on AFS securities arising during the period	2,059		4,876		8,370		10,830
Reclassification adjustment for net (gains) losses included in net income	—		—		(71	)	—
Tax effect ^(1)^	(379	)	(1,018	)	(1,772	)	(2,213	)
Unrealized gains (losses) on AFS securities, net of tax	1,680		3,858		6,527		8,617
Unrealized gains (losses) on derivative instruments arising during the period	(29	)	(127	)	(165	)	(208	)
Tax effect ^(1)^	6		26		34		43
Unrealized gains (losses) on derivative instruments, net of tax	(23	)	(101	)	(131	)	(165	)
Other comprehensive income (loss), net of tax	1,657		3,757		6,396		8,452
Comprehensive income (loss)	5,844		7,945		13,647		16,136

All values are in US Dollars.

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

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

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

(Dollars in thousands except per share amounts)

	Common Stock
	Common Shares<br>Outstanding		Amount		Common Shares to beIssued forDeferredCompensationObligations		RetainedEarnings		AccumulatedOtherComprehensiveIncome (Loss)		Totals
Balance, January 1, 2019	7,870,969		140,416		5,431		57,357		(7,685	)	195,519
Comprehensive income (loss)	—		—		—		7,684		8,452		16,136
Issuance of common stock	104,598		2,436		—		—		—		2,436
Common stock transferred from the Rabbi Trust to satisfy deferred compensation obligations	—		268		(268	)	—		—		—
Share-based payment awards under equity compensation plan	—		—		271		—		—		271
Common stock purchased for deferred compensation obligations	—		(816	)	—		—		—		(816	)
Common stock repurchased pursuant to publicly announced repurchase plan	(57,073	)	(1,339	)	—		—		—		(1,339	)
Cash dividends paid ($0.52 per common share)	—		—		—		(4,093	)	—		(4,093	)
Balance, June 30, 2019	7,918,494		140,965		5,434		60,948		767		208,114
Balance, January 1, 2020	7,910,804		141,069		5,043		62,099		1,971		210,182
Comprehensive income (loss)	—		—		—		7,251		6,396		13,647
Issuance of common stock	127,216		2,343		—		—		—		2,343
Common stock transferred from the Rabbi Trust to satisfy deferred compensation obligations	—		454		(454	)	—		—		—
Share-based payment awards under equity compensation plan	—		—		233		—		—		233
Common stock purchased for deferred compensation obligations	—		(970	)	—		—		—		(970	)
Common stock repurchased pursuant to publicly announced repurchase plan	(61,001	)	(1,195	)	—		—		—		(1,195	)
Cash dividends paid ($0.54 per common share)	—		—		—		(4,249	)	—		(4,249	)
Balance, June 30, 2020	7,977,019		141,701		4,822		65,101		8,367		219,991

All values are in US Dollars.

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

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INTERIM CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)

(Dollars in thousands)

	Six Months Ended June 30
	2020		2019
OPERATING ACTIVITIES
Net income	7,251		7,684
Reconciliation of net income to net cash provided by operating activities:
Undistributed earnings of equity securities without readily determinable fair values	(31	)	(76	)
Provision for loan losses	893		(145	)
Depreciation	1,319		1,476
Amortization of OMSR	302		118
Amortization of acquisition intangibles	26		38
Net amortization of AFS securities	925		882
Net gains on sale of AFS securities	(71	)	—
Net gain on sale of mortgage loans	(617	)	(209	)
OMSR impairment loss	316		44
Net gains on foreclosed assets	(43	)	(11	)
Increase in cash value of corporate owned life insurance policies, net of expenses	(233	)	(357	)
Gains from redemption of corporate owned life insurance policies	(873	)	—
Share-based payment awards under equity compensation plan	233		271
Origination of loans held-for-sale	(49,092	)	(14,110	)
Proceeds from loan sales	45,162		13,305
Net changes in operating assets and liabilities which provided (used) cash:
Accrued interest receivable	(1,214	)	735
Other assets	1,686		1,700
Accrued interest payable and other liabilities	667		756
Net cash provided by (used in) operating activities	6,606		12,101
INVESTING ACTIVITIES
Activity in AFS securities
Sales	26,855		—
Maturities, calls, and principal payments	47,027		43,296
Purchases	(17,012	)	(8,963	)
Net loan principal (originations) collections	(98,131	)	(48,585	)
Proceeds from sales of foreclosed assets	84		330
Purchases of premises and equipment	(819	)	(615	)
Purchases of corporate owned life insurance policies	(625	)	—
Proceeds from redemption of corporate owned life insurance policies	2,185		—
Funding of low income housing tax credit investments	(383	)	(149	)
Net cash provided by (used in) investing activities	(40,819	)	(14,686	)

All values are in US Dollars.

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INTERIM CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (continued)

(Dollars in thousands)

	Six Months Ended June 30
	2020		2019
FINANCING ACTIVITIES
Net increase (decrease) in deposits	126,827		(11,275	)
Net increase (decrease) in borrowed funds	(39,731	)	(19,837	)
Cash dividends paid on common stock	(4,249	)	(4,093	)
Proceeds from issuance of common stock	2,343		2,436
Common stock repurchased	(1,195	)	(1,339	)
Common stock purchased for deferred compensation obligations	(970	)	(816	)
Net cash provided by (used in) financing activities	83,025		(34,924	)
Increase (decrease) in cash and cash equivalents	48,812		(37,509	)
Cash and cash equivalents at beginning of period	60,572		73,471
Cash and cash equivalents at end of period	109,384		35,962
SUPPLEMENTAL CASH FLOWS INFORMATION:
Interest paid	7,957		8,760
SUPPLEMENTAL NONCASH INFORMATION:
Transfers of loans to foreclosed assets	361		477

All values are in US Dollars.

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)

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” refer to Isabella Bank Corporation’s subsidiary, Isabella 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 six-month periods ended June 30, 2020 are not necessarily indicative of the results that may be expected for the year ending December 31, 2020. For further information, refer to our Annual Report on Form 10-K for the year ended December 31, 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, 2019.

Reclassifications: Certain amounts reported in the interim 2019 consolidated financial statements have been reclassified to conform with the 2020 presentation.

Note 2 – Accounting Standards Updates

Recently Adopted

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 an 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 was effective January 1, 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 will review arrangements entered into prospectively. These changes are not expected to have a significant impact on our operating results or financial statement disclosures.

Pending

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 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; 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 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 was originally effective for interim and annual periods beginning after December 15, 2019. Effective October 16, 2019, the FASB approved and issued changes to the implementation date of this guidance for some filers. As a small 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 under the revised implementation date; currently we have no plans for early adoption. This guidance may have a significant impact on the results of 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. An internal committee was formed and is accountable for timely and accurate adoption of the guidance. A 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. 2018-14: “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.

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Note 3 – AFS Securities

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

	June 30, 2020
	AmortizedCost	GrossUnrealizedGains	GrossUnrealizedLosses	FairValue
States and political subdivisions	141,246	5,539	—	146,785
Auction rate money market preferred	3,200	—	221	2,979
Mortgage-backed securities	115,224	3,805	—	119,029
Collateralized mortgage obligations	106,586	5,035	—	111,621
Total	366,256	14,379	221	380,414

All values are in US Dollars.

	December 31, 2019
	AmortizedCost	GrossUnrealizedGains	GrossUnrealizedLosses	FairValue
States and political subdivisions	165,005	4,747	—	169,752
Auction rate money market preferred	3,200	—	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

All values are in US Dollars.

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

	Maturing				Securities with Variable Monthly Payments or Noncontractual Maturities
	Due inOne Yearor Less	After OneYear ButWithinFive Years	After FiveYears ButWithinTen Years	AfterTen Years		Total
States and political subdivisions	19,603	65,321	30,558	25,764	—	141,246
Auction rate money market preferred	—	—	—	—	3,200	3,200
Mortgage-backed securities	—	—	—	—	115,224	115,224
Collateralized mortgage obligations	—	—	—	—	106,586	106,586
Total amortized cost	19,603	65,321	30,558	25,764	225,010	366,256
Fair value	19,738	67,281	32,133	27,633	233,629	380,414

All values are in US Dollars.

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 June 30		Six Months Ended June 30
	2020	2019	2020	2019
Proceeds from sales of AFS securities	—	—	26,855	—
Realized gains (losses)	—	—	71	—
Applicable income tax expense (benefit)	—	—	15	—

All values are in US Dollars.

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

	June 30, 2020
	Less Than Twelve Months		Twelve Months or More
	GrossUnrealizedLosses	FairValue	GrossUnrealizedLosses	FairValue	Total<br>Unrealized<br>Losses
Auction rate money market preferred	—	—	221	2,979	221
Number of securities in an unrealized loss position:		—		2	2

All values are in US Dollars.

	December 31, 2019
	Less Than Twelve Months		Twelve Months or More
	GrossUnrealizedLosses	FairValue	GrossUnrealizedLosses	FairValue	TotalUnrealizedLosses
Auction rate money market preferred	—	—	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

All values are in US Dollars.

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 June 30, 2020 and December 31, 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 June 30, 2020 or December 31, 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 deferred fees or costs. 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 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 at an earlier date if collection of principal or interest is considered doubtful.

When a loan is placed in nonaccrual status, 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. 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. Borrowers with direct credit needs of more than $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 sheets. Under the participation agreement, we committed to a maximum outstanding aggregate amount of $50,000. The difference between our outstanding balance and the maximum outstanding aggregate amount is classified as “Unfunded commitments under lines of credit” in the “Contractual Obligations and Loan 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.

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.
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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. Full or partial loan balances are charged against the ALLL when we believe uncollectability is probable. Subsequent recoveries, if any, are credited to the 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 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.

While we have experienced fluctuations in credit quality indicators in recent periods, credit quality remained strong at June 30, 2020. However, the COVID-19 pandemic led to temporary closures of businesses throughout the communities in which we serve, which also led to increased unemployment. Therefore, we increased the ALLL during the first six months of 2020 to account for inherent risk of probable losses within the loan portfolio as of June 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 June 30, 2020
	Commercial		Agricultural		Residential Real Estate		Consumer		Unallocated	Total
April 1, 2020	2,375		490		1,717		961		3,154	8,697
Charge-offs	(1	)	(6	)	—		(59	)	—	(66	)
Recoveries	30		2		39		70		—	141
Provision for loan losses	(283	)	(130	)	(563	)	(147	)	1,228	105
June 30, 2020	2,121		356		1,193		825		4,382	8,877

All values are in US Dollars.

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	Allowance for Loan Losses
	Six Months Ended June 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	(5	)	(22	)	(15	)	(182	)	—	(224	)
Recoveries	52		35		66		116		—	269
Provision for loan losses	160		(291	)	(905	)	(31	)	1,960	893
June 30, 2020	2,121		356		1,193		825		4,382	8,877

All values are in US Dollars.

	Allowance for Loan Losses and Recorded Investment in Loans
	June 30, 2020
	Commercial	Agricultural	Residential Real Estate	Consumer	Unallocated	Total
ALLL
Individually evaluated for impairment	63	63	824	—	—	950
Collectively evaluated for impairment	2,058	293	369	825	4,382	7,927
Total	2,121	356	1,193	825	4,382	8,877
Loans
Individually evaluated for impairment	8,235	13,191	4,926	—		26,352
Collectively evaluated for impairment	791,397	89,971	303,000	73,665		1,258,033
Total	799,632	103,162	307,926	73,665		1,284,385

All values are in US Dollars.

	Allowance for Loan Losses
	Three Months Ended June 30, 2019
	Commercial		Agricultural		Residential Real Estate		Consumer		Unallocated	Total
April 1, 2019	2,248		775		2,305		891		2,179	8,398
Charge-offs	(105	)	(59	)	(94	)	(75	)	—	(333	)
Recoveries	22		—		91		38		—	151
Provision for loan losses	(85	)	(104	)	(420	)	73		357	(179	)
June 30, 2019	2,080		612		1,882		927		2,536	8,037

All values are in US Dollars.

	Allowance for Loan Losses
	Six Months Ended June 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	(113	)	(59	)	(96	)	(203	)	—	(471	)
Recoveries	73		1		118		86		—	278
Provision for loan losses	(443	)	(105	)	(132	)	187		348	(145	)
June 30, 2019	2,080		612		1,882		927		2,536	8,037

All values are in US Dollars.

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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	—	—	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	—		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

All values are in US Dollars.

The following tables display the internally assigned credit risk ratings for commercial and agricultural credit exposures as of:

	June 30, 2020
	Commercial				Agricultural
	Real Estate	Other	Advances to Mortgage Brokers	Total	Real Estate	Other	Total	Total
Rating
1 - Excellent	—	—	—	—	—	—	—	—
2 - High quality	3,004	18,584	—	21,588	836	13	849	22,437
3 - High satisfactory	90,236	65,092	46,767	202,095	16,983	5,528	22,511	224,606
4 - Low satisfactory	385,803	147,480	—	533,283	32,165	18,466	50,631	583,914
5 - Special mention	17,843	9,346	—	27,189	12,528	2,865	15,393	42,582
6 - Substandard	7,126	6,984	—	14,110	6,763	3,359	10,122	24,232
7 - Vulnerable	28	1,339	—	1,367	2,916	552	3,468	4,835
8 - Doubtful	—	—	—	—	188	—	188	188
9 - Loss	—	—	—	—	—	—	—	—
Total	504,040	248,825	46,767	799,632	72,379	30,783	103,162	902,794

All values are in US Dollars.

	December 31, 2019
	Commercial				Agricultural
	Real Estate	Other	Advances to Mortgage Brokers	Total	Real Estate	Other	Total	Total
Rating
1 - Excellent	—	390	—	390	—	—	—	390
2 - High quality	2,582	8,844	—	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	—	472,045	42,798	20,861	63,659	535,704
5 - Special mention	15,372	3,470	—	18,842	7,165	3,754	10,919	29,761
6 - Substandard	4,874	3,625	—	8,499	9,136	3,836	12,972	21,471
7 - Vulnerable	390	1,231	—	1,621	2,711	1,574	4,285	5,906
8 - Doubtful	—	—	—	—	—	—	—	—
9 - Loss	—	—	—	—	—	—	—	—
Total	510,153	155,265	35,523	700,941	80,027	36,893	116,920	817,861

All values are in US Dollars.

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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:

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.
---	---

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.
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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.
---	---

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 10-30 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.
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To be classified as less than satisfactory, only one of the following criteria must be met.

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 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.
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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.
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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.
---	---

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.
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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.
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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:

	June 30, 2020
	Accruing Interestand Past Due:				Total Past Due and Nonaccrual
	30-59Days	60-89Days	90 Daysor More	Nonaccrual		Current	Total
Commercial
Commercial real estate	51	46	53	28	178	503,862	504,040
Commercial other	220	249	—	1,339	1,808	247,017	248,825
Advances to mortgage brokers	—	—	—	—	—	46,767	46,767
Total commercial	271	295	53	1,367	1,986	797,646	799,632
Agricultural
Agricultural real estate	799	—	—	3,104	3,903	68,476	72,379
Agricultural other	—	—	—	552	552	30,231	30,783
Total agricultural	799	—	—	3,656	4,455	98,707	103,162
Residential real estate
Senior liens	74	—	—	184	258	270,436	270,694
Junior liens	3	—	—	—	3	4,715	4,718
Home equity lines of credit	11	—	—	112	123	32,391	32,514
Total residential real estate	88	—	—	296	384	307,542	307,926
Consumer
Secured	14	27	—	—	41	70,311	70,352
Unsecured	4	—	—	—	4	3,309	3,313
Total consumer	18	27	—	—	45	73,620	73,665
Total	1,176	322	53	5,319	6,870	1,277,515	1,284,385

All values are in US Dollars.

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	December 31, 2019
	Accruing Interestand Past Due:				Total Past Due and Nonaccrual
	30-59Days	60-89Days	90 Daysor More	Nonaccrual		Current	Total
Commercial
Commercial real estate	139	30	—	390	559	509,594	510,153
Commercial other	531	156	—	1,231	1,918	153,347	155,265
Advances to mortgage brokers	—	—	—	—	—	35,523	35,523
Total commercial	670	186	—	1,621	2,477	698,464	700,941
Agricultural
Agricultural real estate	—	—	—	2,711	2,711	77,316	80,027
Agricultural other	—	—	—	1,574	1,574	35,319	36,893
Total agricultural	—	—	—	4,285	4,285	112,635	116,920
Residential real estate
Senior liens	3,463	258	—	557	4,278	253,894	258,172
Junior liens	65	—	—	—	65	5,766	5,831
Home equity lines of credit	157	—	—	72	229	34,337	34,566
Total residential real estate	3,685	258	—	629	4,572	293,997	298,569
Consumer
Secured	68	—	—	—	68	66,547	66,615
Unsecured	3	—	—	—	3	3,522	3,525
Total consumer	71	—	—	—	71	70,069	70,140
Total	4,426	444	—	6,535	11,405	1,175,165	1,186,570

All values are in US Dollars.

Impaired Loans

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

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.
---	---

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.

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The following is a summary of impaired loans as of:

	June 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	1,045	1,287	63	517	635	15
Agricultural real estate	2,201	2,251	61	1,509	1,509	12
Agricultural other	1,355	1,355	2	1,355	1,355	14
Residential real estate senior liens	4,814	5,242	824	5,401	5,830	1,073
Total impaired loans with a valuation allowance	9,415	10,135	950	8,782	9,329	1,114
Impaired loans without a valuation allowance
Commercial real estate	3,930	4,004		4,961	5,224
Commercial other	3,260	3,260		2,387	2,387
Agricultural real estate	7,689	7,689		8,372	8,422
Agricultural other	1,946	1,946		3,604	3,604
Home equity lines of credit	112	112		85	385
Total impaired loans without a valuation allowance	16,937	17,011		19,409	20,022
Impaired loans
Commercial	8,235	8,551	63	7,865	8,246	15
Agricultural	13,191	13,241	63	14,840	14,890	26
Residential real estate	4,926	5,354	824	5,486	6,215	1,073
Total impaired loans	26,352	27,146	950	28,191	29,351	1,114

All values are in US Dollars.

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The following is a summary of impaired loans for the:

	Three Months Ended June 30
	2020			2019
	Average Recorded Balance	Interest Income Recognized		Average Recorded Balance	Interest Income Recognized
Impaired loans with a valuation allowance
Commercial real estate	1,085	21		2,497	7
Commercial other	460	—		11	—
Agricultural real estate	2,224	26		951	57
Agricultural other	1,355	20		641	9
Residential real estate senior liens	5,050	49		6,439	19
Residential real estate junior liens	—	—		12	—
Total impaired loans with a valuation allowance	10,174	116		10,551	92
Impaired loans without a valuation allowance
Commercial real estate	4,046	60		3,985	21
Commercial other	2,826	32		2,751	13
Agricultural real estate	7,441	87		7,307	58
Agricultural other	2,406	56		4,833	86
Home equity lines of credit	101	(1	)	34	—
Consumer secured	2	—		8	—
Total impaired loans without a valuation allowance	16,822	234		18,918	178
Impaired loans
Commercial	8,417	113		9,244	41
Agricultural	13,426	189		13,732	210
Residential real estate	5,151	48		6,485	19
Consumer	2	—		8	—
Total impaired loans	26,996	350		29,469	270

All values are in US Dollars.

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	Six Months Ended June 30
	2020		2019
	Average Recorded Balance	Interest Income Recognized	Average Recorded Balance	Interest Income Recognized
Impaired loans with a valuation allowance
Commercial real estate	951	46	2,952	56
Commercial other	460	6	11	—
Agricultural real estate	2,051	50	671	63
Agricultural other	1,355	42	343	9
Residential real estate senior liens	5,197	104	6,561	87
Residential real estate junior liens	—	—	12	—
Total impaired loans with a valuation allowance	10,014	248	10,550	215
Impaired loans without a valuation allowance
Commercial real estate	4,304	119	3,636	74
Commercial other	2,608	47	2,861	34
Agricultural real estate	7,612	146	7,465	65
Agricultural other	2,821	63	5,460	156
Home equity lines of credit	94	5	38	6
Consumer secured	2	—	8	—
Total impaired loans without a valuation allowance	17,441	380	19,468	335
Impaired loans
Commercial	8,323	218	9,460	164
Agricultural	13,839	301	13,939	293
Residential real estate	5,291	109	6,611	93
Consumer	2	—	8	—
Total impaired loans	27,455	628	30,018	550

All values are in US Dollars.

As a result of line of credit agreements with borrowers, we had committed to advance $331 and $175 in additional funds to be disbursed in connection with impaired loans as of June 30, 2020 and December 31, 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 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).
---	---

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The following is a summary of TDRs granted for the:

	Three Months Ended June 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	—	—	—	1	37	37
Agricultural other	2	1,768	1,768	1	1,311	1,311
Total	2	1,768	1,768	2	1,348	1,348

All values are in US Dollars.

	Six Months Ended June 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	2	963	963	2	184	184
Agricultural other	4	2,361	2,361	3	1,834	1,834
Residential real estate	2	93	93	—	—	—
Total	8	3,417	3,417	5	2,018	2,018

All values are in US Dollars.

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

	Three Months Ended June 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	—	—	—	—	—	—	1	37
Agricultural other	—	—	2	1,768	—	—	1	1,311
Total	—	—	2	1,768	—	—	2	1,348

All values are in US Dollars.

	Six Months Ended June 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	1	919	1	44	—	—	2	184
Agricultural other	—	—	4	2,361	—	—	3	1,834
Residential real estate	—	—	2	93	—	—	—	—
Total	1	919	7	2,498	—	—	5	2,018

All values are in US Dollars.

We did not restructure any loans by forgiving principal or accrued interest in the three and six-month periods ended June 30, 2020 or 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.

We had no loans that defaulted in the three and six-month periods ended June 30, 2020 and June 30, 2019 which were modified within 12 months prior to the default date.

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

	June 30 2020			December 31 2019
TDRs	23,185			24,737

All values are in US Dollars.

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. Bank regulators issued a statement on March 22, 2020, and a revised statement on April 7, 2020, which provides 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.

Note 5 – Borrowed Funds

Borrowed funds consist of the following obligations as of:

	June 30, 2020			December 31, 2019
	Amount	Rate		Amount	Rate
FHLB advances	205,000	2.25	%	245,000	2.32	%
Securities sold under agreements to repurchase without stated maturity dates	31,268	0.09	%	30,999	0.09	%
Total	236,268	1.96	%	275,999	2.07	%

All values are in US Dollars.

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:

	June 30, 2020			December 31, 2019
	Amount	Rate		Amount	Rate
Fixed rate due 2020	15,000	1.75	%	55,000	2.18	%
Fixed rate due 2021	50,000	1.91	%	50,000	1.91	%
Variable rate due 2021 ^(1)^	10,000	0.69	%	10,000	2.20	%
Fixed rate due 2022	20,000	1.97	%	20,000	1.97	%
Fixed rate due 2023	45,000	2.97	%	45,000	2.97	%
Fixed rate due 2024	55,000	2.68	%	55,000	2.68	%
Fixed rate due 2026	10,000	1.17	%	10,000	1.17	%
Total	205,000	2.25	%	245,000	2.32	%

All values are in US Dollars.

^(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 $31,291 and $31,020 at June 30, 2020 and December 31, 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. We had no FRB Discount Window advances during the three and six-month periods ended June 30, 2020 and June 30, 2019.

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A summary of securities sold under repurchase agreements without stated maturity dates and federal funds purchased was as follows for the:

	Three Months Ended June 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	32,319	31,036	0.10	%	26,761	26,569	0.09	%
Federal funds purchased	—	—	—	%	7,070	1,982	2.65	%

All values are in US Dollars.

	Six Months Ended June 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	32,319	30,980	0.10	%	37,441	30,755	0.04	%
Federal funds purchased	—	—	—	%	7,070	1,224	1.71	%

All values are in US Dollars.

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

	June 30 2020	December 31 2019
Pledged to secure borrowed funds	344,529	368,310
Pledged to secure repurchase agreements	31,291	31,020
Pledged for public deposits and for other purposes necessary or required by law	41,497	59,537
Total	417,317	458,867

All values are in US Dollars.

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

	June 30 2020	December 31 2019
States and political subdivisions	14,173	31,020
Mortgage-backed securities	9,852	—
Collateralized mortgage obligations	7,266	—
Total	31,291	31,020

All values are in US Dollars.

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 collateral requirements.

As of June 30, 2020, we had the ability to borrow up to an additional $144,495, based on assets pledged as collateral. We had no investment securities that were restricted from being pledged for specific purposes.

Derivative Instruments

We 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 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.

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

	June 30, 2020
	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	0.8	10,000	Other liabilities	(98	)

All values are in US Dollars.

	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	67

All values are in US Dollars.

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 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 June 30		Six Months Ended June 30
	2020	2019	2020	2019
Average number of common shares outstanding for basic calculation	7,924,318	7,910,512	7,927,298	7,895,610
Average potential effect of common shares in the Directors Plan ^(1)^	144,430	179,364	154,177	189,355
Average number of common shares outstanding used to calculate diluted earnings per common share	8,068,748	8,089,876	8,081,475	8,084,965
Net income	4,187	4,188	7,251	7,684
Earnings per common share
Basic	0.53	0.53	0.91	0.97
Diluted	0.52	0.52	0.90	0.95

All values are in US Dollars.

^(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 June 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 June 30		Six Months Ended June 30
	2020	2019	2020	2019
Audit, consulting, and legal fees	498	453	931	906
ATM and debit card fees	328	298	651	546
Marketing costs	265	171	468	313
Donations and community relations	105	190	435	330
Loan underwriting fees	212	168	378	484
Director fees	177	190	359	397
Memberships and subscriptions	159	176	358	343
FDIC insurance premiums	144	162	300	332
Postage and freight	121	121	252	250
All other	555	620	1,180	1,291
Total other noninterest expenses	2,564	2,549	5,312	5,192

All values are in US Dollars.

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 June 30				Six Months Ended June 30
	2020		2019		2020		2019
Income taxes at statutory rate	997		994		1,683		1,801
Effect of nontaxable income
Interest income on tax exempt municipal securities	(191	)	(236	)	(394	)	(480	)
Earnings on corporate owned life insurance policies	(113	)	(43	)	(261	)	(79	)
Other	(4	)	(4	)	(8	)	(8	)
Total effect of nontaxable income	(308	)	(283	)	(663	)	(567	)
Effect of nondeductible expenses	3		7		7		13
Effect of tax credits	(134	)	(177	)	(266	)	(357	)
Federal income tax expense	558		541		761		890

All values are in US Dollars.

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Note 10 – Accumulated Other Comprehensive Income

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

	Three Months Ended June 30
	2020								2019
	UnrealizedGains(Losses) onAFSSecurities		UnrealizedGains(Losses) on Derivative Instruments		DefinedBenefitPension Plan		Total		UnrealizedGains(Losses) onAFSSecurities		UnrealizedGains(Losses) on Derivative Instruments		DefinedBenefitPension Plan		Total
Balance, April 1	9,459		(54	)	(2,695	)	6,710		(441	)	192		(2,741	)	(2,990	)
OCI before reclassifications	2,059		(29	)	—		2,030		4,876		(127	)	—		4,749
Tax effect	(379	)	6		—		(373	)	(1,018	)	26		—		(992	)
OCI, net of tax	1,680		(23	)	—		1,657		3,858		(101	)	—		3,757
Balance,<br>June 30	11,139		(77	)	(2,695	)	8,367		3,417		91		(2,741	)	767

All values are in US Dollars.

	Six Months Ended June 30
	2020								2019
	UnrealizedGains(Losses) onAFSSecurities		UnrealizedGains(Losses) on Derivative Instruments		DefinedBenefitPension Plan		Total		UnrealizedGains(Losses) onAFSSecurities		UnrealizedGains(Losses) on Derivative Instruments		DefinedBenefitPension Plan		Total
Balance, January 1	4,612		54		(2,695	)	1,971		(5,200	)	256		(2,741	)	(7,685	)
OCI before reclassifications	8,370		(165	)	—		8,205		10,830		(208	)	—		10,622
Amounts reclassified from AOCI	(71	)	—		—		(71	)	—		—		—		—
Subtotal	8,299		(165	)	—		8,134		10,830		(208	)	—		10,622
Tax effect	(1,772	)	34		—		(1,738	)	(2,213	)	43		—		(2,170	)
OCI, net of tax	6,527		(131	)	—		6,396		8,617		(165	)	—		8,452
Balance,<br>June 30	11,139		(77	)	(2,695	)	8,367		3,417		91		(2,741	)	767

All values are in US Dollars.

Included in OCI for the three and six-month periods ended June 30, 2020 and June 30, 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 the investments.

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

	Three Months Ended June 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	253	1,806		2,059		30	4,846		4,876
Tax effect	—	(379	)	(379	)	—	(1,018	)	(1,018	)
Unrealized gains (losses), net of tax	253	1,427		1,680		30	3,828		3,858

All values are in US Dollars.

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	Six Months Ended June 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	(140	)	8,510		8,370		295	10,535		10,830
Reclassification adjustment for net (gains) losses included in net income	—		(71	)	(71	)	—	—		—
Net unrealized gains (losses)	(140	)	8,439		8,299		295	10,535		10,830
Tax effect	—		(1,772	)	(1,772	)	—	(2,213	)	(2,213	)
Unrealized gains (losses), net of tax	(140	)	6,667		6,527		295	8,322		8,617

All values are in US Dollars.

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 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.

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.

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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:

	June 30, 2020
Valuation Technique	Fair Value	Unobservable Input		Actual Range	Weighted Average
		Discount applied to collateral:
		Real Estate		20% - 30%	22%
		Equipment		20% - 40%	30%
Discounted value	$18,073	Cash crop inventory		40%	40%
		Livestock		30%	30%
		Other inventory		50%	50%
		Accounts receivable		25% - 50%	25%
	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:

	June 30, 2020
	CarryingValue	EstimatedFair Value	Level 1	Level 2	Level 3
ASSETS
Cash and cash equivalents	109,384	109,384	109,384	—	—
Mortgage loans AFS	5,451	5,523	—	5,523	—
Gross loans	1,284,385	1,284,003	—	—	1,284,003
Less allowance for loan and lease losses	8,877	8,877	—	—	8,877
Net loans	1,275,508	1,275,126	—	—	1,275,126
Accrued interest receivable	7,715	7,715	7,715	—	—
Equity securities without readily determinable fair values ^(1)^	21,660	N/A	—	—	—
OMSR	1,914	1,914	—	1,914	—
LIABILITIES
Deposits without stated maturities	1,062,055	1,062,055	1,062,055	—	—
Deposits with stated maturities	378,623	387,322	—	387,322	—
Borrowed funds	236,268	245,093	—	245,093	—
Accrued interest payable	667	667	667	—	—

All values are in US Dollars.

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

All values are in US Dollars.

^(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.

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Financial Instruments Recorded at Fair Value

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

	June 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	146,785	—		146,785		—		169,752	—		169,752		—
Auction rate money market preferred	2,979	—		2,979		—		3,119	—		3,119		—
Mortgage-backed securities	119,029	—		119,029		—		140,204	—		140,204		—
Collateralized mortgage obligations	111,621	—		111,621		—		116,764	—		116,764		—
Total AFS securities	380,414	—		380,414		—		429,839	—		429,839		—
Derivative instruments	98	—		98		—		67	—		67		—
Nonrecurring items
Impaired loans (net of the ALLL)	18,073	—		—		18,073		19,135	—		—		19,135
OMSR	1,914	—		1,914		—		2,264	—		2,264		—
Total	400,499	—		382,426		18,073		451,305	—		432,170		19,135
Percent of assets and liabilities measured at fair value		—	%	95.49	%	4.51	%		—	%	95.76	%	4.24	%

All values are in US Dollars.

We recorded an impairment related to OMSR of $316 and $44 through earnings for the six-month period ended June 30, 2020 and June 30, 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 June 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 12 – Operating Segments

Our reportable segments are based on legal entities that account for at least 10% of net operating results. The Bank as of June 30, 2020 and December 31, 2019 and for the three and six-month periods ended June 30, 2020 and June 30, 2019, represent approximately 90% or more of our consolidated total assets and operating results. As such, no additional segment reporting is presented.

Note 13 – Parent Company Only Financial Information

Interim Condensed Balance Sheets

	June 30 2020	December 31 2019
ASSETS
Cash on deposit at the Bank	176	1,360
Investments in subsidiaries	168,247	157,415
Premises and equipment	1,516	1,539
Other assets	50,087	49,887
TOTAL ASSETS	220,026	210,201
LIABILITIES AND SHAREHOLDERS’ EQUITY
Other liabilities	35	19
Shareholders' equity	219,991	210,182
TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY	220,026	210,201

All values are in US Dollars.

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Interim Condensed Statements of Income

	Three Months Ended June 30		Six Months Ended June 30
	2020	2019	2020	2019
Income
Dividends from subsidiaries	1,850	2,100	3,600	3,100
Interest income	—	2	1	4
Other income (loss)	126	232	127	213
Total income	1,976	2,334	3,728	3,317
Expenses
Occupancy and equipment	15	14	30	29
Audit, consulting, and legal fees	175	115	307	245
Director fees	89	89	183	187
Other	310	328	603	618
Total expenses	589	546	1,123	1,079
Income before income tax benefit and equity in undistributed earnings of subsidiaries	1,387	1,788	2,605	2,238
Federal income tax benefit	97	64	209	179
Income before equity in undistributed earnings of subsidiaries	1,484	1,852	2,814	2,417
Undistributed earnings of subsidiaries	2,703	2,336	4,437	5,267
Net income	4,187	4,188	7,251	7,684

All values are in US Dollars.

Interim Condensed Statements of Cash Flows

	Six Months Ended June 30
	2020		2019
Operating activities
Net income	7,251		7,684
Adjustments to reconcile net income to cash provided by operations
Undistributed earnings of subsidiaries	(4,437	)	(5,267	)
Undistributed earnings of equity securities without readily determinable fair values	(31	)	(76	)
Share-based payment awards under equity compensation plan	233		271
Depreciation	23		23
Changes in operating assets and liabilities which provided (used) cash
Other assets	(168	)	5
Other liabilities	16		682
Net cash provided by (used in) operating activities	2,887		3,322
Investing activities - none
Financing activities
Cash dividends paid on common stock	(4,249	)	(4,093	)
Proceeds from the issuance of common stock	2,343		2,436
Common stock repurchased	(1,195	)	(1,339	)
Common stock purchased for deferred compensation obligations	(970	)	(816	)
Net cash provided by (used in) financing activities	(4,071	)	(3,812	)
Increase (decrease) in cash and cash equivalents	(1,184	)	(490	)
Cash and cash equivalents at beginning of period	1,360		2,499
Cash and cash equivalents at end of period	176		2,009

All values are in US Dollars.

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

ISABELLA BANK CORPORATION FINANCIAL REVIEW

(Dollars in thousands except per share amounts)

The following is management's discussion and analysis of our financial condition and results of operations for the unaudited three and six-month periods ended June 30, 2020 and June 30, 2019. This analysis should be read in conjunction with our Annual Report on Form 10-K for the year ended December 31, 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 six months ended June 30, 2020, we reported net income of $4,187 and $7,251 and earnings per common share of $0.53 and $0.91, respectively. Net income and earnings per common share for the same periods of 2019 were $4,188 and $7,684 and $0.53 and $0.97, respectively. A decline in the interest rate environment was a large driver of a $1,226 decrease in interest income for the first six months of 2020 compared to the same period in 2019. Interest expense on deposits and borrowings decreased $1,055 for the six-month period ended June 30, 2020 compared to the same period in 2019 primarily due to reduced interest rates and reduced reliance on higher-cost borrowings. Net interest income decreased by $171 for the six-month period ended June 30, 2020 in comparison to the same period in 2019. The provision for loan losses increased by $1,038 for the six-month period ended June 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 $754 during the first six months of 2020 compared to the same period in 2019, mainly as a result of gains from the redemption of corporate owned life insurance policies. Noninterest expenses for the first six months of 2020 exceeded the same period in 2019 by $107, primarily due to community relations and donation-related expenses.

As of June 30, 2020, total assets and assets under management were $1,913,227 and $2,571,773, respectively. Assets under management include loans sold and serviced of $263,332 and investment and trust assets managed by Isabella Wealth of $395,214, in addition to assets on our consolidated balance sheet. In 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 declined $49,425 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 over a year, the opportunity to identify new investment securities for purchase at an acceptable yield has been minimal. Loans outstanding as of June 30, 2020 totaled $1,284,385. During the first six months of 2020, gross loans increased $97,815 which was largely driven by SBA PPP loans. Total deposits increased $126,827 during the first six months of 2020, primarily due to increases in interest bearing demand and savings deposits, and totaled $1,440,678 as of June 30, 2020. 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 2.92% and 2.95% for the three and six months ended June 30, 2020. This compares to 3.06% and 3.04% for the three and six months ended June 30, 2019. Management has put in place strategic programs focused on improving our net yield on interest earning assets, which includes enhanced pricing related to loans and deposits and a reduced reliance on 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 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 wealth management services, increasing our presence within our geographical footprint, and managing operating costs.

Recent Events and Legislation

Restricted Stock Plan: On June 24, 2020 we adopted the 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.

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 June 30, 2020, we did not believe

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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 on March 27, 2020. It is a $2 trillion stimulus package intended to provide financial relief across the country. The CARES Act includes the PPP, which enables businesses to obtain a 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 two years, were accepted April 3, 2020. We are proud to facilitate SBA PPP loans to businesses throughout the communities in which we serve. As of June 30, 2020, we funded more than 950 SBA PPP loans for a total of $99,450.

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 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 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 period not to exceed 180 days. Bank regulators issued a statement on March 22, 2020, and a revised statement on April 7, 2020, which provides 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. These programs, along with the SBA PPP, could mask or delay the detection or reporting of deterioration in credit quality indicators.

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, 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.

Reclassifications

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

Subsequent Events

We evaluated subsequent events after June 30, 2020 through the date our consolidated financial statements were issued for potential recognition and disclosure. No subsequent events require financial statement recognition or disclosure between June 30, 2020 and the date our consolidated financial statements were issued.

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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 periods ended:

	June 30 2020		March 31 2020		December 31 2019		September 30 2019		June 30 2019
INCOME STATEMENT DATA
Interest income	15,869		16,201		16,849		17,161		16,815
Interest expense	3,565		4,199		4,492		4,550		4,527
Net interest income	12,304		12,002		12,357		12,611		12,288
Provision for loan losses	105		788		(18	)	193		(179	)
Noninterest income	3,246		2,998		(725	)	3,274		3,011
Noninterest expenses	10,700		10,945		10,892		10,620		10,749
Federal income tax expense (benefit)	558		203		(140	)	630		541
Net income	4,187		3,064		898		4,442		4,188
PER SHARE
Basic earnings	0.53		0.39		0.12		0.56		0.53
Diluted earnings	0.52		0.38		0.11		0.55		0.52
Dividends	0.27		0.27		0.27		0.26		0.26
Tangible book value	21.52		21.10		20.45		20.66		20.17
Quoted market value
High	19.50		24.50		24.80		23.45		23.75
Low	15.60		16.00		22.25		22.01		22.25
Close ^(1)^	18.25		18.00		24.31		22.30		23.25
Common shares outstanding ^(1)^	7,977,019		7,921,291		7,910,804		7,938,234		7,918,494
PERFORMANCE RATIOS
Return on average total assets	0.89	%	0.68	%	0.20	%	0.98	%	0.93	%
Return on average shareholders' equity	7.63	%	5.68	%	1.66	%	8.37	%	8.13	%
Return on average tangible shareholders' equity	9.81	%	7.35	%	2.18	%	10.87	%	10.67	%
Net interest margin yield (FTE)	2.92	%	2.98	%	3.06	%	3.13	%	3.06	%
BALANCE SHEET DATA ^(1)^
Gross loans	1,284,385		1,175,936		1,186,570		1,191,804		1,176,622
AFS securities	380,414		407,189		429,839		445,529		470,449
Total assets	1,913,227		1,815,904		1,814,198		1,813,684		1,824,592
Deposits	1,440,678		1,322,083		1,313,851		1,308,773		1,281,418
Borrowed funds	236,268		263,171		275,999		277,386		320,462
Shareholders' equity	219,991		215,498		210,182		212,376		208,114
Gross loans to deposits	89.15	%	88.95	%	90.31	%	91.06	%	91.82	%
ASSETS UNDER MANAGEMENT ^(1)^
Loans sold with servicing retained	263,332		257,285		259,375		258,873		257,062
Assets managed by Isabella Wealth	395,214		359,968		436,181		475,574		487,180
Total assets under management	2,571,773		2,433,157		2,509,754		2,548,131		2,568,834
ASSET QUALITY ^(1)^
Nonperforming loans to gross loans	0.42	%	0.59	%	0.55	%	0.59	%	0.70	%
Nonperforming assets to total assets	0.33	%	0.43	%	0.40	%	0.42	%	0.49	%
ALLL to gross loans	0.69	%	0.74	%	0.67	%	0.69	%	0.68	%
CAPITAL RATIOS ^(1)^
Shareholders' equity to assets	11.50	%	11.87	%	11.59	%	11.71	%	11.41	%
Tier 1 leverage	8.86	%	9.09	%	9.01	%	9.16	%	9.03	%
Common equity tier 1 capital	12.90	%	12.72	%	12.56	%	12.58	%	12.43	%
Tier 1 risk-based capital	12.90	%	12.72	%	12.56	%	12.58	%	12.43	%
Total risk-based capital	13.60	%	13.41	%	13.18	%	13.21	%	13.06	%

All values are in US Dollars.

^(1)^ At end of period

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

	June 30 2020		June 30 2019		June 30 2018
INCOME STATEMENT DATA
Interest income	32,070		33,296		30,834
Interest expense	7,764		8,819		7,142
Net interest income	24,306		24,477		23,692
Provision for loan losses	893		(145	)	712
Noninterest income	6,244		5,490		5,238
Noninterest expenses	21,645		21,538		20,895
Federal income tax expense (benefit)	761		890		528
Net income	7,251		7,684		6,795
PER SHARE
Basic earnings	0.91		0.97		0.86
Diluted earnings	0.90		0.95		0.84
Dividends	0.54		0.52		0.52
Tangible book value	21.52		20.17		18.09
Quoted market value
High	24.50		24.50		28.25
Low	15.60		22.25		26.11
Close ^(1)^	18.25		23.25		26.65
Common shares outstanding ^(1)^	7,977,019		7,918,494		7,933,250
PERFORMANCE RATIOS
Return on average total assets	0.78	%	0.85	%	0.75	%
Return on average shareholders' equity	6.67	%	7.58	%	7.00	%
Return on average tangible shareholders' equity	4.30	%	9.73	%	8.92	%
Net interest margin yield (FTE)	2.95	%	3.04	%	2.95	%
BALANCE SHEET DATA ^(1)^
Gross loans	1,284,385		1,176,622		1,151,756
AFS securities	380,414		470,449		524,108
Total assets	1,913,227		1,824,592		1,836,955
Deposits	1,440,678		1,281,418		1,274,762
Borrowed funds	236,268		320,462		362,496
Shareholders' equity	219,991		208,114		191,949
Gross loans to deposits	89.15	%	91.82	%	90.35	%
ASSETS UNDER MANAGEMENT ^(1)^
Loans sold with servicing retained	263,332		257,062		257,865
Assets managed by Isabella Wealth	395,214		487,180		494,533
Total assets under management	2,571,773		2,568,834		2,589,353
ASSET QUALITY ^(1)^
Nonperforming loans to gross loans	0.42	%	0.70	%	0.58	%
Nonperforming assets to total assets	0.33	%	0.49	%	0.38	%
ALLL to gross loans	0.69	%	0.68	%	0.71	%
CAPITAL RATIOS ^(1)^
Shareholders' equity to assets	11.50	%	11.41	%	10.45	%
Tier 1 leverage	8.86	%	9.03	%	8.71	%
Common equity tier 1 capital	12.90	%	12.43	%	12.11	%
Tier 1 risk-based capital	12.90	%	12.43	%	12.11	%
Total risk-based capital	13.60	%	13.06	%	12.76	%

All values are in US Dollars.

^(1)^ At end of period

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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
	June 30, 2020					March 31, 2020					June 30, 2019
	AverageBalance		TaxEquivalentInterest	Average<br>Yield /<br>Rate		AverageBalance		TaxEquivalentInterest	Average<br>Yield /<br>Rate		AverageBalance		TaxEquivalentInterest	Average<br>Yield /<br>Rate
INTEREST EARNING ASSETS
Loans	1,241,856		13,297	4.28	%	1,168,070		13,254	4.54	%	1,155,284		13,587	4.70	%
Taxable investment securities	237,769		1,352	2.27	%	251,797		1,489	2.37	%	309,650		1,873	2.42	%
Nontaxable investment securities	141,229		1,333	3.78	%	152,368		1,418	3.72	%	172,400		1,623	3.77	%
Fed funds sold	12		—	0.04	%	—		—	—	%	—		—	—	%
Other	111,702		234	0.84	%	90,297		405	1.79	%	25,123		148	2.36	%
Total earning assets	1,732,568		16,216	3.74	%	1,662,532		16,566	3.99	%	1,662,457		17,231	4.15	%
NONEARNING ASSETS
Allowance for loan losses	(8,769	)				(7,968	)				(8,349	)
Cash and demand deposits due from banks	20,389					21,556					19,089
Premises and equipment	25,854					26,252					27,326
Accrued income and other assets	120,444					110,786					107,046
Total assets	1,890,486					1,813,158					1,807,569
INTEREST BEARING LIABILITIES
Interest bearing demand deposits	249,735		86	0.14	%	235,161		83	0.14	%	230,238		83	0.14	%
Savings deposits	447,416		257	0.23	%	426,634		634	0.59	%	374,750		586	0.63	%
Time deposits	387,636		1,904	1.96	%	404,717		2,074	2.05	%	430,098		2,196	2.04	%
Borrowed funds	253,838		1,318	2.08	%	270,648		1,408	2.08	%	321,958		1,662	2.06	%
Total interest bearing liabilities	1,338,625		3,565	1.07	%	1,337,160		4,199	1.26	%	1,357,044		4,527	1.33	%
NONINTEREST BEARING LIABILITIES
Demand deposits	317,035					246,262					230,203
Other	15,355					14,130					14,288
Shareholders’ equity	219,471					215,606					206,034
Total liabilities and shareholders’ equity	1,890,486					1,813,158					1,807,569
Net interest income (FTE)			12,651					12,367					12,704
Net yield on interest earning assets (FTE)				2.92	%				2.98	%				3.06	%

All values are in US Dollars.

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	Six Months Ended
	June 30, 2020					June 30, 2019
	AverageBalance		TaxEquivalentInterest	Average<br>Yield /<br>Rate		AverageBalance		TaxEquivalentInterest	Average<br>Yield /<br>Rate
INTEREST EARNING ASSETS
Loans	1,204,961		26,551	4.41	%	1,143,255		26,478	4.63	%
Taxable investment securities ^(1)^	244,783		2,841	2.32	%	314,778		3,831	2.43	%
Nontaxable investment securities	146,799		2,751	3.75	%	176,123		3,310	3.76	%
Fed funds sold	6		—	0.07	%	13		—	2.39	%
Other	101,000		639	1.27	%	32,923		527	3.20	%
Total earning assets	1,697,549		32,782	3.86	%	1,667,092		34,146	4.10	%
NONEARNING ASSETS
Allowance for loan losses	(8,368	)				(8,378	)
Cash and demand deposits due from banks	20,972					19,140
Premises and equipment	26,052					27,517
Accrued income and other assets	115,615					103,473
Total assets	1,851,820					1,808,844
INTEREST BEARING LIABILITIES
Interest bearing demand deposits	242,448		169	0.14	%	233,139		151	0.13	%
Savings deposits	437,025		891	0.41	%	377,926		1,201	0.64	%
Time deposits	396,178		3,978	2.01	%	433,255		4,231	1.95	%
Borrowed funds	262,244		2,726	2.08	%	321,703		3,236	2.01	%
Total interest bearing liabilities	1,337,895		7,764	1.16	%	1,366,023		8,819	1.29	%
NONINTEREST BEARING LIABILITIES
Demand deposits	281,638					228,382
Other	14,747					11,594
Shareholders’ equity	217,540					202,845
Total liabilities and shareholders’ equity	1,851,820					1,808,844
Net interest income (FTE)			25,018					25,327
Net yield on interest earning assets (FTE)				2.95	%				3.04	%

All values are in US Dollars.

Net interest income is the amount by which interest income on earning assets exceeds the interest expense on interest bearing liabilities. Net interest income is influenced by changes in the balance and mix of assets and liabilities, as well as market interest rates. We exert some control over these factors; however, FRB monetary policy and competition have a significant impact. For analytical purposes, net interest income is adjusted to an FTE basis by including the income tax savings from interest on tax exempt loans and nontaxable investment securities, thus making year to year comparisons more meaningful.

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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. 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 June 30, 2020 Compared to March 31, 2020 Increase (Decrease) Due to						Three Months Ended June 30, 2020 Compared to June 30, 2019 Increase (Decrease) Due to						Six Months Ended June 30, 2020 Compared to June 30, 2019 Increase (Decrease) Due to
	Volume		Rate		Net		Volume		Rate		Net		Volume		Rate		Net
Changes in interest income
Loans	812		(769	)	43		976		(1,266	)	(290	)	1,393		(1,320	)	73
Taxable investment securities	(81	)	(56	)	(137	)	(414	)	(107	)	(521	)	(819	)	(171	)	(990	)
Nontaxable investment securities	(105	)	20		(85	)	(294	)	4		(290	)	(550	)	(9	)	(559	)
Other	80		(251	)	(171	)	233		(147	)	86		580		(468	)	112
Total changes in interest income	706		(1,056	)	(350	)	501		(1,516	)	(1,015	)	604		(1,968	)	(1,364	)
Changes in interest expense
Interest bearing demand deposits	5		(2	)	3		7		(4	)	3		6		12		18
Savings deposits	29		(406	)	(377	)	97		(426	)	(329	)	167		(477	)	(310	)
Time deposits	(86	)	(84	)	(170	)	(211	)	(81	)	(292	)	(370	)	117		(253	)
Borrowed funds	(87	)	(3	)	(90	)	(354	)	10		(344	)	(615	)	105		(510	)
Total changes in interest expense	(139	)	(495	)	(634	)	(461	)	(501	)	(962	)	(812	)	(243	)	(1,055	)
Net change in interest margin (FTE)	845		(561	)	284		962		(1,015	)	(53	)	1,416		(1,725	)	(309	)

All values are in US Dollars.

The flattening of the yield curve and recent rate reductions placed pressure on our net interest margin, and we experienced 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 may not occur during the remainder of 2020.

	Average Yield / Rate for the Three-Month Periods Ended:
	June 30<br>2020			March 31<br>2020			December 31<br>2019			September 30<br>2019			June 30<br>2019
Total earning assets	3.74	%		3.99	%		4.13	%		4.23	%		4.15	%
Total interest bearing liabilities	1.07	%		1.26	%		1.34	%		1.35	%		1.33	%
Net yield on interest earning assets (FTE)	2.92	%		2.98	%		3.06	%		3.13	%		3.06	%
	Quarter to Date Net Interest Income (FTE)
---	---	---	---	---	---	---	---	---	---	---	---	---	---	---
	June 30 2020			March 31 2020			December 31 2019			September 30 2019			June 30 2019
Total interest income (FTE)	16,216			16,566			17,245			17,567			17,231
Total interest expense	3,565			4,199			4,492			4,550			4,527
Net interest income (FTE)	12,651			12,367			12,753			13,017			12,704

All values are in US Dollars.

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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 each loan segment. Our assessments include allocations based on specific impairment valuation allowances, historical 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-offs, recoveries, provision for loan losses, and ALLL balances as of, and for the:

	Three Months Ended June 30				Six Months Ended June 30
	2020		2019		2020		2019
ALLL at beginning of period	8,697		8,398		7,939		8,375
Charge-offs
Commercial	1		105		5		113
Agricultural	6		59		22		59
Residential real estate	—		94		15		96
Consumer	59		75		182		203
Total charge-offs	66		333		224		471
Recoveries
Commercial	30		22		52		73
Agricultural	2		—		35		1
Residential real estate	39		91		66		118
Consumer	70		38		116		86
Total recoveries	141		151		269		278
Net loan charge-offs (recoveries)	(75	)	182		(45	)	193
Provision for loan losses	105		(179	)	893		(145	)
ALLL at end of period	8,877		8,037		8,877		8,037
Net loan charge-offs (recoveries) to average loans outstanding	(0.01	)%	0.02	%	—	%	0.02	%

All values are in US Dollars.

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

	June 30 2020		March 31 2020		December 31 2019		September 30 2019		June 30 2019
Total charge-offs	66		158		334		143		333
Total recoveries	141		128		122		82		151
Net loan charge-offs (recoveries)	(75	)	30		212		61		182
Net loan charge-offs (recoveries) to average loans outstanding	(0.01	)%	—	%	0.02	%	0.01	%	0.02	%
Provision for loan losses	105		788		(18	)	193		(179	)
Provision for loan losses to average loans outstanding	0.01	%	0.07	%	—	%	0.02	%	(0.02	)%
ALLL	8,877		8,697		7,939		8,169		8,037
ALLL as a % of loans at end of period	0.69	%	0.74	%	0.67	%	0.69	%	0.68	%

All values are in US Dollars.

While we have experienced fluctuations in credit quality indicators in recent periods, credit quality remained strong at June 30, 2020. However, the COVID-19 pandemic led to the temporary closure of businesses throughout the communities in which we serve, which also led to increased unemployment. We increased the ALLL during the first quarter as a result of increased economic and environmental risk factors, primarily driven by COVID-19. While these same factors resulted in an increase to

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the ALLL during the second quarter as well, improvement in credit quality indicators and reserves for loans individually evaluated for impairment offset much of 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 the two main components of the ALLL as of:

	June 30 2020		March 31 2020		December 31 2019		September 30 2019		June 30 2019
ALLL
Individually evaluated for impairment	950		1,309		1,114		1,333		1,479
Collectively evaluated for impairment	7,927		7,388		6,825		6,836		6,558
Total	8,877		8,697		7,939		8,169		8,037
ALLL to gross loans
Individually evaluated for impairment	0.07	%	0.11	%	0.09	%	0.11	%	0.13	%
Collectively evaluated for impairment	0.62	%	0.63	%	0.58	%	0.58	%	0.55	%
Total	0.69	%	0.74	%	0.67	%	0.69	%	0.68	%

All values are in US Dollars.

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 4 – Loans and 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. 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
	June 30 2020		March 31 2020		December 31 2019		September 30 2019		June 30 2019
Commercial	1,986		6,180		2,477		3,175		2,243
Agricultural	4,455		4,870		4,285		4,800		6,672
Residential real estate	384		3,426		4,572		1,999		1,690
Consumer	45		366		71		162		94
Total	6,870		14,842		11,405		10,136		10,699
Total past due and nonaccrual loans to gross loans	0.53	%	1.26	%	0.96	%	0.85	%	0.91	%

All values are in US Dollars.

The increase in past due and nonaccrual status loans during the first quarter of 2020 was primarily the result of deterioration in credit quality for a small number of commercial loans. This increase was not a result of the economic impact of COVID-19 or any other apparent factor. During the second quarter of 2020, 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.

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 4 – Loans and 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 borrowers who are willing to work with us in modifying their loans, thus making them less likely to default. This approach has permitted certain borrowers to 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 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 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 June 30, 2020 or December 31, 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 June 30, 2020
	Accruing Interest				Nonaccrual				Total
	Number<br>of<br>Loans		Balance		Number<br>of<br>Loans		Balance		Number<br>of<br>Loans		Balance
April 1, 2020	114		20,268		9		3,849		123		24,117
New modifications	2		1,768		—		—		2		1,768
Principal advances (payments)	—		(90	)	—		(24	)	—		(114	)
Loans paid off	(6	)	(1,461	)	(2	)	(850	)	(8	)	(2,311	)
Transfers to OREO	—		—		(1	)	(275	)	(1	)	(275	)
Transfers to accrual status	1		104		(1	)	(104	)	—		—
June 30, 2020	111		20,589		5		2,596		116		23,185

All values are in US Dollars.

	Six Months Ended June 30, 2020
	Accruing Interest				Nonaccrual				Total
	Number<br>of<br>Loans		Balance		Number<br>of<br>Loans		Balance		Number<br>of<br>Loans		Balance
January 1, 2020	122		21,194		9		3,543		131		24,737
New modifications	7		2,924		1		493		8		3,417
Principal advances (payments)	—		(1,074	)	—		(130	)	—		(1,204	)
Loans paid off	(19	)	(2,559	)	(2	)	(850	)	(21	)	(3,409	)
Transfers to OREO	—		—		(2	)	(356	)	(2	)	(356	)
Transfers to accrual status	1		104		(1	)	(104	)	—		—
June 30, 2020	111		20,589		5		2,596		116		23,185

All values are in US Dollars.

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	Three Months Ended June 30, 2019
	Accruing Interest				Nonaccrual				Total
	Number<br>of<br>Loans		Balance		Number<br>of<br>Loans		Balance		Number<br>of<br>Loans		Balance
April 1, 2019	128		22,305		26		3,825		154		26,130
New modifications	2		1,348		—		—		2		1,348
Principal advances (payments)	—		(380	)	—		(133	)	—		(513	)
Loans paid off	(6	)	(394	)	(6	)	(541	)	(12	)	(935	)
Partial charge-offs	—		—		—		(65	)	—		(65	)
Transfers to accrual status	1		77		(1	)	(77	)	—		—
Transfers to nonaccrual status	(3	)	(2,646	)	3		2,646		—		—
June 30, 2019	122		20,310		22		5,655		144		25,965

All values are in US Dollars.

	Six Months Ended June 30, 2019
	Accruing Interest				Nonaccrual				Total
	Number<br>of<br>Loans		Balance		Number<br>of<br>Loans		Balance		Number<br>of<br>Loans		Balance
January 1, 2019	133		23,400		28		3,551		161		26,951
New modifications	5		2,018		—		—		5		2,018
Principal advances (payments)	—		(720	)	—		(260	)	—		(980	)
Loans paid off	(12	)	(1,193	)	(9	)	(718	)	(21	)	(1,911	)
Partial charge-offs	—		—		—		(65	)	—		(65	)
Transfers to OREO	—		—		(1	)	(48	)	(1	)	(48	)
Transfers to accrual status	1		77		(1	)	(77	)	—		—
Transfers to nonaccrual status	(5	)	(3,272	)	5		3,272		—		—
June 30, 2019	122		20,310		22		5,655		144		25,965

All values are in US Dollars.

The following table summarizes our TDRs as of:

	June 30, 2020			December 31, 2019
	AccruingInterest	Nonaccrual	Total	AccruingInterest	Nonaccrual	Total	TotalChange
Current	20,402	488	20,890	20,847	507	21,354	(464	)
Past due 30-59 days	134	—	134	346	—	346	(212	)
Past due 60-89 days	—	2,108	2,108	1	—	1	2,107
Past due 90 days or more	53	—	53	—	3,036	3,036	(2,983	)
Total	20,589	2,596	23,185	21,194	3,543	24,737	(1,552	)

All values are in US Dollars.

Additional disclosures about TDRs are included in “Note 4 – Loans and 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:

	June 30, 2020			December 31, 2019
	RecordedBalance	UnpaidPrincipalBalance	ValuationAllowance	RecordedBalance	UnpaidPrincipalBalance	ValuationAllowance
TDRs
Commercial real estate	4,828	5,082	63	5,325	5,643	15
Commercial other	1,921	1,921	—	1,156	1,156	—
Agricultural real estate	9,185	9,185	58	9,182	9,181	12
Agricultural other	2,918	2,918	2	4,421	4,421	14
Residential real estate senior liens	4,333	4,615	742	4,641	4,923	922
Home equity lines of credit	—	—	—	12	312	—
Total TDRs	23,185	23,721	865	24,737	25,636	963
Other impaired loans
Commercial real estate	147	209	—	153	216	—
Commercial other	1,339	1,339	—	1,231	1,231	—
Agricultural real estate	705	755	3	699	750	—
Agricultural other	383	383	—	538	538	—
Residential real estate senior liens	481	627	82	760	907	151
Home equity lines of credit	112	112	—	73	73	—
Total other impaired loans	3,167	3,425	85	3,454	3,715	151
Total impaired loans	26,352	27,146	950	28,191	29,351	1,114

All values are in US Dollars.

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 4 – Loans and ALLL” of our interim condensed consolidated financial statements.

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Nonperforming Assets

The following table summarizes our nonperforming assets as of:

	June 30 2020		March 31 2020		December 31 2019		September 30 2019		June 30 2019
Nonaccrual status loans	5,319		6,913		6,535		6,962		8,107
Accruing loans past due 90 days or more	53		40		—		40		110
Total nonperforming loans	5,372		6,953		6,535		7,002		8,217
Foreclosed assets	776		564		456		468		513
Debt securities	230		230		230		230		230
Total nonperforming assets	6,378		7,747		7,221		7,700		8,960
Nonperforming loans as a % of total loans	0.42	%	0.59	%	0.55	%	0.59	%	0.70	%
Nonperforming assets as a % of total assets	0.33	%	0.43	%	0.40	%	0.42	%	0.49	%

All values are in US Dollars.

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 table summarizes nonaccrual loans as of:

	June 30 2020	March 31 2020	December 31 2019	September 30 2019	June 30 2019
Commercial	1,367	1,643	1,621	1,632	1,692
Agricultural	3,656	4,606	4,285	4,520	5,532
Residential real estate	296	661	629	810	883
Consumer	—	3	—	—	—
Total	5,319	6,913	6,535	6,962	8,107

All values are in US Dollars.

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

	June 30 2020	March 31 2020	December 31 2019	September 30 2019	June 30 2019
Commercial	28	304	390	390	450
Agricultural	2,568	3,441	3,048	3,309	5,096
Residential real estate	—	104	105	107	109
Total	2,596	3,849	3,543	3,806	5,655

All values are in US Dollars.

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

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Noninterest Income and Noninterest Expenses

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

	Three Months Ended June 30
					Change
	2020		2019				%
Service charges and fees
ATM and debit card fees	883		780		103		13.21	%
Service charges and fees on deposit accounts	350		566		(216	)	(38.16	)%
Freddie Mac servicing fee	155		161		(6	)	(3.73	)%
Net OMSR income (loss)	(89	)	(50	)	(39	)	(78.00	)%
Other fees for customer services	87		83		4		4.82	%
Total service charges and fees	1,386		1,540		(154	)	(10.00	)%
Wealth management fees	656		780		(124	)	(15.90	)%
Gains from redemption of corporate owned life insurance policies	349		—		349		N/M
Net gain on sale of mortgage loans	466		116		350		301.72	%
Earnings on corporate owned life insurance policies	189		201		(12	)	(5.97	)%
All other	200		374		(174	)	(46.52	)%
Total noninterest income	3,246		3,011		235		7.80	%

All values are in US Dollars.

	Six Months Ended June 30
					Change
	2020		2019				%
Service charges and fees
ATM and debit card fees	1,677		1,465		212		14.47	%
Service charges and fees on deposit accounts	937		1,096		(159	)	(14.51	)%
Freddie Mac servicing fee	314		311		3		0.96	%
Net OMSR income (loss)	(350	)	(38	)	(312	)	(821.05	)%
Other fees for customer services	161		167		(6	)	(3.59	)%
Total service charges and fees	2,739		3,001		(262	)	(8.73	)%
Wealth management fees	1,228		1,457		(229	)	(15.72	)%
Gains from redemption of corporate owned life insurance policies	873		—		873		N/M
Net gain on sale of mortgage loans	617		209		408		195.22	%
Earnings on corporate owned life insurance policies	371		374		(3	)	(0.80	)%
All other	416		449		(33	)	(7.35	)%
Total noninterest income	6,244		5,490		754		13.73	%

All values are in US Dollars.

ATM and debit card fees fluctuate from period to period based primarily on usage of ATM and debit cards. 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 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 year. Income during 2020 could experience fluctuations and could vary from 2019 levels.

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The decrease in wealth management fees was driven by a reduction in the market value of investment assets under management. With the uncertainty in the stock market as a result of COVID-19, wealth management fees during the remainder of 2020 may not exceed 2019 levels.

We recognized gains during the first and second quarters of 2020 due to the redemption of corporate owned life insurance policies in connection with the passing of a retired executive officer and a retired loan officer.

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 balance sheet management strategies. We experienced a significant increase in loan demand which led to an increase in the balance of loans sold during the year. As such, net gain on sale of mortgage loans is expected to exceed 2019 during 2020.

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

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

	Three Months Ended June 30
			Change
	2020	2019			%
Compensation and benefits	5,793	5,957	(164	)	(2.75	)%
Furniture and equipment	1,431	1,409	22		1.56	%
Occupancy	912	834	78		9.35	%
Other
Audit, consulting, and legal fees	498	453	45		9.93	%
ATM and debit card fees	328	298	30		10.07	%
Marketing costs	265	171	94		54.97	%
Donations and community relations	105	190	(85	)	(44.74	)%
Loan underwriting fees	212	168	44		26.19	%
Director fees	177	190	(13	)	(6.84	)%
Memberships and subscriptions	159	176	(17	)	(9.66	)%
FDIC insurance premiums	144	162	(18	)	(11.11	)%
Postage and freight	121	121	—		—	%
All other	555	620	(65	)	(10.48	)%
Total other noninterest expenses	2,564	2,549	15		0.59	%
Total noninterest expenses	10,700	10,749	(49	)	(0.46	)%

All values are in US Dollars.

	Six Months Ended June 30
			Change
	2020	2019			%
Compensation and benefits	11,662	11,679	(17	)	(0.15	)%
Furniture and equipment	2,892	2,903	(11	)	(0.38	)%
Occupancy	1,779	1,764	15		0.85	%
Other
Audit, consulting, and legal fees	931	906	25		2.76	%
ATM and debit card fees	651	546	105		19.23	%
Marketing costs	468	313	155		49.52	%
Donations and community relations	435	330	105		31.82	%
Loan underwriting fees	378	484	(106	)	(21.90	)%
Director fees	359	397	(38	)	(9.57	)%
Memberships and subscriptions	358	343	15		4.37	%
FDIC insurance premiums	300	332	(32	)	(9.64	)%
Postage and freight	252	250	2		0.80	%
All other	1,180	1,291	(111	)	(8.60	)%
Total other noninterest expenses	5,312	5,192	120		2.31	%
Total noninterest expenses	21,645	21,538	107		0.50	%

All values are in US Dollars.

Marketing costs increased during 2020 as a result of new campaigns, Isabella Wealth branding and increased disclosure mailings. Marketing costs can fluctuate from period to period based primarily on campaigns and other initiatives. As a result, 2020 expense may exceed expense from 2019.

Donations and community relations expense increased during 2020 as a result of initiatives designed to deepen and strengthen our relationship with the communities in which we operate and serve. In addition to providing monetary contributions, some of these initiatives include volunteering our time, which is not a component of donations and community relations costs. While these discretionary contributions incurred in 2020 resulted in increased expense, donations and community relations during the remainder of 2020 are not expected to exceed 2019 levels.

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Loan underwriting fees were higher during the first half of 2019 as a result of new loan products, including first time home buyer and down payment assistance programs, that are no longer offered. Loan underwriting fees during 2020 are not expected to exceed 2019 levels.

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

Analysis of Changes in Financial Condition

	June 30 2020	December 31 2019	Change		% Change<br>(unannualized)
ASSETS
Cash and cash equivalents	109,384	60,572	48,812		80.59	%
AFS securities
Amortized cost of AFS securities	366,256	423,980	(57,724	)	(13.61	)%
Unrealized gains (losses) on AFS securities	14,158	5,859	8,299		141.65	%
AFS securities	380,414	429,839	(49,425	)	(11.50	)%
Mortgage loans AFS	5,451	904	4,547		N/M
Loans
Gross loans	1,284,385	1,186,570	97,815		8.24	%
Less allowance for loan and lease losses	8,877	7,939	938		11.82	%
Net loans	1,275,508	1,178,631	96,877		8.22	%
Premises and equipment	25,742	26,242	(500	)	(1.91	)%
Corporate owned life insurance policies	28,001	28,455	(454	)	(1.60	)%
Accrued interest receivable	7,715	6,501	1,214		18.67	%
Equity securities without readily determinable fair values	21,660	21,629	31		0.14	%
Goodwill and other intangible assets	48,353	48,379	(26	)	(0.05	)%
Other assets	10,999	13,046	(2,047	)	(15.69	)%
TOTAL ASSETS	1,913,227	1,814,198	99,029		5.46	%
LIABILITIES AND SHAREHOLDERS’ EQUITY
Liabilities
Deposits	1,440,678	1,313,851	126,827		9.65	%
Borrowed funds	236,268	275,999	(39,731	)	(14.40	)%
Accrued interest payable and other liabilities	16,290	14,166	2,124		14.99	%
Total liabilities	1,693,236	1,604,016	89,220		5.56	%
Shareholders’ equity	219,991	210,182	9,809		4.67	%
TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY	1,913,227	1,814,198	99,029		5.46	%

All values are in US Dollars.

As shown above, total assets increased $99,029 from December 31, 2019. Cash and cash equivalents increased as a result of maturities and sales of AFS securities and an increase in customer deposits during 2020. We experienced a $97,815 increase in loans during the first six months of 2020 which was largely driven by SBA PPP loans in the commercial loan portfolio.

The following table outlines the changes in loan balances:

	June 30 2020	December 31 2019	Change		% Change<br>(unannualized)
Commercial	799,632	700,941	98,691		14.08	%
Agricultural	103,162	116,920	(13,758	)	(11.77	)%
Residential real estate	307,926	298,569	9,357		3.13	%
Consumer	73,665	70,140	3,525		5.03	%
Total	1,284,385	1,186,570	97,815		8.24	%

All values are in US Dollars.

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The following table displays loan balances as of:

	June 30 2020	March 31 2020	December 31 2019	September 30 2019	June 30 2019
Commercial	799,632	695,278	700,941	708,735	701,954
Agricultural	103,162	108,856	116,920	118,460	120,363
Residential real estate	307,926	302,016	298,569	292,311	283,285
Consumer	73,665	69,786	70,140	72,298	71,020
Total	1,284,385	1,175,936	1,186,570	1,191,804	1,176,622

All values are in US Dollars.

The competition for commercial loan opportunities continues to be strong in the current interest rate environment. Growth during the second quarter of 2020 was driven primarily by SBA PPP loans. As a result of the short-term nature of SBA PPP loans, we expect the commercial loan portfolio to decline during the remainder of 2020. During the second quarter of 2020, and over the past 12 months, agricultural loans have declined. Residential real estate and consumer loans experienced growth over the past year and continued growth is expected during the remainder of 2020.

The following table outlines the changes in deposit balances:

	June 30 2020	December 31 2019	Change		% Change<br>(unannualized)
Noninterest bearing demand deposits	340,321	249,152	91,169		36.59	%
Interest bearing demand deposits	263,567	229,865	33,702		14.66	%
Savings deposits	458,167	427,215	30,952		7.25	%
Certificates of deposit	352,118	365,049	(12,931	)	(3.54	)%
Brokered certificates of deposit	14,029	27,458	(13,429	)	(48.91	)%
Internet certificates of deposit	12,476	15,112	(2,636	)	(17.44	)%
Total	1,440,678	1,313,851	126,827		9.65	%

All values are in US Dollars.

The following table displays deposit balances as of:

	June 30 2020	March 31 2020	December 31 2019	September 30 2019	June 30 2019
Noninterest bearing demand deposits	340,321	249,424	249,152	242,179	244,240
Interest bearing demand deposits	263,567	237,392	229,865	230,579	228,704
Savings deposits	458,167	435,207	427,215	409,930	378,988
Certificates of deposit	352,118	358,534	365,049	357,984	359,945
Brokered certificates of deposit	14,029	27,458	27,458	52,744	57,773
Internet certificates of deposit	12,476	14,068	15,112	15,357	11,768
Total	1,440,678	1,322,083	1,313,851	1,308,773	1,281,418

All values are in US Dollars.

Deposit growth during the second quarter of 2020 was largely driven by SBA PPP loan and government stimulus funds. Total deposits have increased over the past 12 months with significant growth in non-contractual deposits, such as 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 experienced fluctuations in certificates of deposit over the past year while brokered certificates of deposit have significantly declined. Brokered certificates of deposit offer another source of funding and may fluctuate from period to period based on our funding needs, including changes in assets such as loans and investments. During 2019 and 2020, we used excess funds to reduce higher-cost deposits, such as brokered certificates of deposit.

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The primary objective of our investing activities is to provide for safety of the principal invested. Secondary considerations include providing earnings and liquidity while managing our overall exposure to changes in interest rates. The current flat yield curve encourages using excess funds to reduce 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:

	June 30 2020	March 31 2020	December 31 2019	September 30 2019	June 30 2019
Government sponsored enterprises	—	—	—	—	160
States and political subdivisions	146,785	163,116	169,752	175,575	176,742
Auction rate money market preferred	2,979	2,726	3,119	3,089	2,849
Mortgage-backed securities	119,029	126,554	140,204	150,120	173,340
Collateralized mortgage obligations	111,621	114,793	116,764	116,745	117,358
Total	380,414	407,189	429,839	445,529	470,449

All values are in US Dollars.

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 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:

	June 30 2020	March 31 2020	December 31 2019	September 30 2019	June 30 2019
FHLB advances	205,000	235,000	245,000	245,000	295,000
Securities sold under agreements to repurchase without stated maturity dates	31,268	28,171	30,999	32,386	25,462
Total	236,268	263,171	275,999	277,386	320,462

All values are in US Dollars.

Contractual Obligations and Loan Commitments

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

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

Our exposure to credit-related loss in the event of nonperformance by the 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 127,216 shares or $2,343 of common stock during the first six months of 2020, as compared to 104,598 shares or $2,436 of common stock during the same period in 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 $233 and $271 during the six-month periods ended June 30, 2020 and June 30, 2019, respectively.

We have publicly announced a common stock repurchase plan. Pursuant to this plan, we repurchased 61,001 shares or $1,195 of common stock during the first six months of 2020 and 57,073 shares or $1,339 during the first six months of 2019. As of June 30, 2020, we were authorized to repurchase up to an additional 186,905 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.

The common equity tier 1 capital ratio has a minimum requirement of 4.50%. The minimum standard for primary, or Tier 1 capital is 6.00% and the minimum standard for total capital is 8.00%. The minimum requirements presented below include the minimum required capital levels based on the Basel III Capital Rules. Capital requirements to be considered well capitalized are based upon prompt corrective action regulations, as amended to reflect the changes under the Basel III Capital Rules. The following table sets forth these requirements and our ratios as of:

	June 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
Common equity tier 1 capital	12.90	%	7.00	%	6.50	%	12.56	%	7.000	%	6.50	%
Tier 1 capital	12.90	%	8.50	%	8.00	%	12.56	%	8.500	%	8.00	%
Total capital	13.60	%	10.50	%	10.00	%	13.18	%	10.500	%	10.00	%
Tier 1 leverage	8.86	%	4.00	%	5.00	%	9.01	%	4.00	%	5.00	%

There are no significant regulatory constraints placed on our capital. At June 30, 2020, the Bank exceeded minimum capital requirements.

Liquidity

Liquidity is monitored regularly by our Market Risk Committee, 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 $346,508 or 18.11% of assets as of June 30, 2020, compared to $291,190 or 16.05% as of December 31, 2019. The increase in the amount and percentage of primary liquidity is a direct result of an increase in market deposits and 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. Based on these same factors, daily liquidity could vary 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 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 June 30, 2020, we had available lines of credit of $144,495.

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Our stress testing of liquidity increased and our liquidity position strengthened at the end of the second quarter of 2020 as the COVID-19 crisis ensued. The following table outlines our total cash and liquidity as of:

	June 30 2020
Total cash and cash equivalents	109,384
Available lines of credit
Fed funds lines with correspondent banks	93,000
FHLB borrowings	35,233
FRB Discount Window	11,262
Other lines of credit	5,000
Total available lines of credit	144,495
Unencumbered lendable value of FRB collateral, estimated^1^	196,000
Total cash and liquidity	449,879

All values are in US Dollars.

^(1)^	Includes estimated unencumbered lendable value of FHLB collateral of $144,000

The following table summarizes our sources and uses of cash for the six-month period ended June 30:

	2020		2019		Variance
Net cash provided by (used in) operating activities	6,606		12,101		(5,495	)
Net cash provided by (used in) investing activities	(40,819	)	(14,686	)	(26,133	)
Net cash provided by (used in) financing activities	83,025		(34,924	)	117,949
Increase (decrease) in cash and cash equivalents	48,812		(37,509	)	86,321
Cash and cash equivalents January 1	60,572		73,471		(12,899	)
Cash and cash equivalents June 30	109,384		35,962		73,422

All values are in US Dollars.

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.

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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 banks to effectively manage the various risks that can have a material impact on safety and soundness. The risks include credit, interest rate, liquidity, operational, and reputational. We have policies, procedures, and internal controls for measuring and managing these risks. Specifically, our 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. We regularly monitor our projected net interest income sensitivity to ensure that it remains within established limits.

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

Our primary market risk exposures with the onset of the COVID-19 crisis is uncertain. A review of 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 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 continue to closely monitor customer and economic indicators to develop more precise market risk assumptions as the economic impact of this crisis begins to reveal itself.

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Item 3. Quantitative and Qualitative Disclosures about Market Risk.

The information presented in the section captioned “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 June 30, 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 June 30, 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.

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, 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.

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

(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 December 23, 2019, to allow for the repurchase of an additional 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 period ended June 30, 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 PricePer Common Share
Balance, March 31				188,486
April 1 - 30	664	16.57	664	187,822
May 1 - 31	229	17.47	229	187,593
June 1 -30	688	17.44	688	186,905
Balance, June 30	1,581	17.08	1,581	186,905

All values are in US Dollars.

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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

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.
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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.



Date:	July 29, 2020	/s/ Jae A. Evans
		Jae A. Evans
		President, Chief Executive Officer
		(Principal Executive Officer)

Date:	July 29, 2020	/s/ Neil M. McDonnell
		Neil M. McDonnell
		Chief Financial Officer
		(Principal Financial Officer)

Exhibit

Exhibit 31(a)

I, Jae A. Evans, certify that:

1.	I have reviewed this Quarterly Report on Form 10-Q of Isabella Bank Corporation (the “registrant”).
2.	Based on my knowledge, this Quarterly Report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this Quarterly Report.
---	---
3.	Based on my knowledge, the consolidated financial statements, and other financial information included in this Quarterly Report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this Quarterly Report.
---	---
4.	The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
---	---
a)	designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under my supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this Quarterly Report is being prepared;
---	---
b)	designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under my supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of consolidated financial statements for external purposes in accordance with generally accepted accounting principles;
---	---
c)	evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
---	---
d)	disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and
---	---
5.	The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of registrant’s board of directors:
---	---
a)	all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
---	---
b)	any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.
---	---
Date:	July 29, 2020		/s/ Jae A. Evans
---	---	---	---
			President, Chief Executive Officer
			(Principal Executive Officer)

Exhibit

Exhibit 31(b)

I, Neil M. McDonnell, certify that:

1.	I have reviewed this Quarterly Report on Form 10-Q of Isabella Bank Corporation (the “registrant”).
2.	Based on my knowledge, this Quarterly Report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this Quarterly Report.
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3.	Based on my knowledge, the consolidated financial statements, and other financial information included in this Quarterly Report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this Quarterly Report.
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4.	The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
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a)	designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under my supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this Quarterly Report is being prepared;
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b)	designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under my supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of consolidated financial statements for external purposes in accordance with generally accepted accounting principles;
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c)	evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
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d)	disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and
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5.	The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of registrant’s board of directors:
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a)	all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
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b)	any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.
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Date:	July 29, 2020		/s/ Neil M. McDonnell
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			Chief Financial Officer
			(Principal Financial Officer)

Exhibit

Exhibit 32

CERTIFICATION PURSUANT TO

18 U.S.C. SECTION 1350,

AS ADOPTED PURSUANT TO

SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

In connection with the Quarterly Report of Isabella Bank Corporation (the “Corporation”) on Form 10-Q for the quarterly period ended June 30, 2020 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), Jae A. Evans, President and Chief Executive Officer and Neil M. McDonnell, Chief Financial Officer of the Corporation, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that:

(1)	The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and
(2)	The information contained in the Report fairly presents, in all material respects, the consolidated financial condition and results of operations of the Corporation.
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/s/ Jae A. Evans
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President, Chief Executive Officer
(Principal Executive Officer)
July 29, 2020

/s/ Neil M. McDonnell
Chief Financial Officer
(Principal Financial Officer)
July 29, 2020

Isabella Bank Corp 10-Q for FY2020 Q2

About this 10-Q

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