Isabella Bank Corp 10-Q for FY2020 Q1

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 March 31, 2020

or

¨	Transition Report Pursuant to Section 13 or 15(d) of The Securities Exchange Act of 1934

For the transition period from to

Commission File Number: 0-18415

Isabella Bank Corporation

(Exact name of registrant as specified in its charter)

Michigan		38-2830092
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(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 7,927,845 as of April 28, 2020.

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Table of Contents

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		35
Item 3.		Quantitative and Qualitative Disclosures About Market Risk		54
Item 4.		Controls and Procedures		54
PART II – OTHER INFORMATION				55
Item 1.		Legal Proceedings		55
Item 1A.		Risk Factors		55
Item 2.		Unregistered Sales of Equity Securities and Use of Proceeds		55
Item 3.		Defaults Upon Senior Securities		56
Item 4.		Mine Safety Disclosures		56
Item 5.		Other Information		56
Item 6.		Exhibits		56
SIGNATURES				57

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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		FTE: Fully taxable equivalent
AFS: Available-for-sale		GAAP: U.S. generally accepted accounting principles
ALLL: Allowance for loan and lease losses		IFRS: International Financial Reporting Standards
AOCI: Accumulated other comprehensive income		IRR: Interest rate risk
ASC: FASB Accounting Standards Codification		ISDA: International Swaps and Derivatives Association
ASU: FASB Accounting Standards Update		LIBOR: London Interbank Offered Rate
ATM: Automated teller machine		N/A: Not applicable
BHC Act: Bank Holding Company Act of 1956		N/M: Not meaningful
CARES Act: Coronavirus Aid, Relief, and Economic Security Act		NAV: Net asset value
CECL: Current expected credit losses		NSF: Non-sufficient funds
CFPB: Consumer Financial Protection Bureau		OCI: Other comprehensive income (loss)
CIK: Central Index Key		OMSR: Originated mortgage servicing rights
COVID-19: Coronavirus disease 2019		OREO: Other real estate owned
CRA: Community Reinvestment Act		OTTI: Other-than-temporary impairment
DIF: Deposit Insurance Fund		PBO: Projected benefit obligation
DIFS: Department of Insurance and Financial Services		PCAOB: Public Company Accounting Oversight Board
Directors Plan: Isabella Bank Corporation and Related Companies Deferred Compensation Plan for Directors		PPP: Paycheck Protection Program
Dividend Reinvestment Plan: Isabella Bank Corporation Stockholder Dividend Reinvestment Plan and Employee Stock Purchase Plan		Rabbi Trust: A trust established to fund our Directors 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

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PART I – FINANCIAL INFORMATION

Item 1. Financial Statements.

INTERIM CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)

(Dollars in thousands)

	March 31 2020			December 31 2019
ASSETS
Cash and cash equivalents
Cash and demand deposits due from banks	19,160			20,311
Interest bearing balances due from banks	77,591			40,261
Total cash and cash equivalents	96,751			60,572
AFS securities, at fair value	407,189			429,839
Mortgage loans AFS	1,228			904
Loans
Commercial	695,278			700,941
Agricultural	108,856			116,920
Residential real estate	302,016			298,569
Consumer	69,786			70,140
Gross loans	1,175,936			1,186,570
Less allowance for loan and lease losses	8,697			7,939
Net loans	1,167,239			1,178,631
Premises and equipment	25,946			26,242
Corporate owned life insurance policies	27,691			28,455
Accrued interest receivable	7,022			6,501
Equity securities without readily determinable fair values	21,535			21,629
Goodwill and other intangible assets	48,366			48,379
Other assets	12,937			13,046
TOTAL ASSETS	1,815,904			1,814,198
LIABILITIES AND SHAREHOLDERS’ EQUITY
Deposits
Noninterest bearing	249,424			249,152
Interest bearing demand deposits	237,392			229,865
Certificates of deposit under $250 and other savings	739,925			739,023
Certificates of deposit over $250	95,342			95,811
Total deposits	1,322,083			1,313,851
Borrowed funds	263,171			275,999
Accrued interest payable and other liabilities	15,152			14,166
Total liabilities	1,600,406			1,604,016
Shareholders’ equity
Common stock — no par value 15,000,000 shares authorized; issued and outstanding 7,921,291 shares (including 44,687 shares held in the Rabbi Trust) in 2020 and 7,910,804 shares (including 27,069 shares held in the Rabbi Trust) in 2019	140,945			141,069
Shares to be issued for deferred compensation obligations	4,802			5,043
Retained earnings	63,041			62,099
Accumulated other comprehensive income (loss)	6,710			1,971
Total shareholders’ equity	215,498			210,182
TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY	1,815,904			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 March 31
	2020			2019
Interest income
Loans, including fees	13,254			12,891
AFS securities
Taxable	1,489			1,958
Nontaxable	1,053			1,253
Federal funds sold and other	405			379
Total interest income	16,201			16,481
Interest expense
Deposits	2,791			2,718
Borrowings	1,408			1,574
Total interest expense	4,199			4,292
Net interest income	12,002			12,189
Provision for loan losses	788			34
Net interest income after provision for loan losses	11,214			12,155
Noninterest income
Service charges and fees	1,353			1,461
Investment and trust advisory fees	572			677
Gains from redemption of corporate owned life insurance policies	524			—
Earnings on corporate owned life insurance policies	182			184
Net gain on sale of mortgage loans	151			93
Other	216			75
Total noninterest income	2,998			2,490
Noninterest expenses
Compensation and benefits	5,869			5,722
Furniture and equipment	1,461			1,494
Occupancy	867			930
Other	2,748			2,654
Total noninterest expenses	10,945			10,800
Income before federal income tax expense	3,267			3,845
Federal income tax expense	203			349
NET INCOME	3,064			3,496
Earnings per common share
Basic	0.39			0.44
Diluted	0.38			0.43
Cash dividends per common share	0.27			0.26

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 March 31
	2020			2019
Net income	3,064			3,496
Unrealized gains (losses) on AFS securities arising during the period	6,311			5,954
Reclassification adjustment for net (gains) losses included in net income	(71	)		—
Tax effect ^(1)^	(1,393	)		(1,195	)
Unrealized gains (losses) on AFS securities, net of tax	4,847			4,759
Unrealized gains (losses) on derivative instruments arising during the period	(136	)		(81	)
Tax effect ^(1)^	28			17
Unrealized gains (losses) on derivative instruments, net of tax	(108	)		(64	)
Other comprehensive income (loss), net of tax	4,739			4,695
Comprehensive income (loss)	7,803			8,191

All values are in US Dollars.

^(1)^	See “Note 9 – 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)	—			—			—			3,496			4,695			8,191
Issuance of common stock	61,405			1,433			—			—			—			1,433
Common stock transferred from the Rabbi Trust to satisfy deferred compensation obligations	—			268			(268	)		—			—			—
Share-based payment awards under equity compensation plan	—			—			131			—			—			131
Common stock purchased for deferred compensation obligations	—			(186	)		—			—			—			(186	)
Common stock repurchased pursuant to publicly announced repurchase plan	(26,296	)		(632	)		—			—			—			(632	)
Cash dividends paid ($0.26 per common share)	—			—			—			(2,043	)		—			(2,043	)
Balance, March 31, 2019	7,906,078			141,299			5,294			58,810			(2,990	)		202,413
Balance, January 1, 2020	7,910,804			141,069			5,043			62,099			1,971			210,182
Comprehensive income (loss)	—			—			—			3,064			4,739			7,803
Issuance of common stock	69,907			1,330			—			—			—			1,330
Common stock transferred from the Rabbi Trust to satisfy deferred compensation obligations	—			364			(364	)		—			—			—
Share-based payment awards under equity compensation plan	—			—			123			—			—			123
Common stock purchased for deferred compensation obligations	—			(650	)		—			—			—			(650	)
Common stock repurchased pursuant to publicly announced repurchase plan	(59,420	)		(1,168	)		—			—			—			(1,168	)
Cash dividends paid ($0.27 per common share)	—			—			—			(2,122	)		—			(2,122	)
Balance, March 31, 2020	7,921,291			140,945			4,802			63,041			6,710			215,498

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)

	Three Months Ended March 31
	2020			2019
OPERATING ACTIVITIES
Net income	3,064			3,496
Reconciliation of net income to net cash provided by operating activities:
Undistributed earnings of equity securities without readily determinable fair values	94			57
Provision for loan losses	788			34
Depreciation	668			731
Amortization of OMSR	97			44
Amortization of acquisition intangibles	13			19
Net amortization of AFS securities	444			435
Net gains on sale of AFS securities	(71	)		—
Net gain on sale of mortgage loans	(151	)		(93	)
OMSR impairment loss	245			—
Net gains on foreclosed assets	(42	)		(33	)
Increase in cash value of corporate owned life insurance policies, net of expenses	(170	)		(173	)
Gains from redemption of corporate owned life insurance policies	(524	)		—
Share-based payment awards under equity compensation plan	123			131
Origination of loans held-for-sale	(8,890	)		(6,520	)
Proceeds from loan sales	8,717			6,826
Net changes in operating assets and liabilities which provided (used) cash:
Accrued interest receivable	(521	)		(823	)
Other assets	(379	)		(1,492	)
Accrued interest payable and other liabilities	(111	)		437
Net cash provided by (used in) operating activities	3,394			3,076
INVESTING ACTIVITIES
Activity in AFS securities
Sales	26,855			—
Maturities, calls, and principal payments	12,674			11,824
Purchases	(11,012	)		(6,313	)
Net loan principal (originations) collections	10,487			(16,373	)
Proceeds from sales of foreclosed assets	51			224
Purchases of premises and equipment	(372	)		(340	)
Proceeds from redemption of corporate owned life insurance policies	1,458			—
Funding of low income housing tax credit investments	(150	)		(117	)
Net cash provided by (used in) investing activities	39,991			(11,095	)

All values are in US Dollars.

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INTERIM CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (continued)

(Dollars in thousands)

	Three Months Ended March 31
	2020			2019
FINANCING ACTIVITIES
Net increase (decrease) in deposits	8,232			(14,730	)
Net increase (decrease) in borrowed funds	(12,828	)		(28,615	)
Cash dividends paid on common stock	(2,122	)		(2,043	)
Proceeds from issuance of common stock	1,330			1,433
Common stock repurchased	(1,168	)		(632	)
Common stock purchased for deferred compensation obligations	(650	)		(186	)
Net cash provided by (used in) financing activities	(7,206	)		(44,773	)
Increase (decrease) in cash and cash equivalents	36,179			(52,792	)
Cash and cash equivalents at beginning of period	60,572			73,471
Cash and cash equivalents at end of period	96,751			20,679
SUPPLEMENTAL CASH FLOWS INFORMATION:
Interest paid	4,214			4,227
SUPPLEMENTAL NONCASH INFORMATION:
Transfers of loans to foreclosed assets	117			237

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-month period ended March 31, 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 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 provides 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. Based on the prospective approach, we will review future arrangements to determine the appropriate treatment under this guidance. 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”

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 under GAAP; an entity generally only considers past events and current conditions in measuring the incurred loss.

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

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

Overall, the update will allow entities the ability to measure expected credit losses without the restriction of incurred or probable losses that exist under current GAAP. For users of the financial statements, the update requires disclosure of decision-useful information about the expected credit losses on financial instruments and other commitments to extend credit held by a reporting entity at each reporting date. The new authoritative guidance was originally effective for interim and annual periods beginning after December 15, 2019. Effective October 16, 2019, the FASB approved 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. A 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; 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:

	March 31, 2020
	AmortizedCost			GrossUnrealizedGains			GrossUnrealizedLosses			FairValue
States and political subdivisions	159,267			3,849			—			163,116
Auction rate money market preferred	3,200			—			474			2,726
Mortgage-backed securities	122,544			4,010			—			126,554
Collateralized mortgage obligations	110,079			4,714			—			114,793
Total	395,090			12,573			474			407,189

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 March 31, 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	27,544			69,886			38,580			23,257			—			159,267
Auction rate money market preferred	—			—			—			—			3,200			3,200
Mortgage-backed securities	—			—			—			—			122,544			122,544
Collateralized mortgage obligations	—			—			—			—			110,079			110,079
Total amortized cost	27,544			69,886			38,580			23,257			235,823			395,090
Fair value	27,616			71,184			39,799			24,517			244,073			407,189

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 March 31, 2020. There were no sales of AFS securities for the three months ended March 31, 2019.

	March 31 2020
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 March 31, 2020 and December 31, 2019, aggregated by investment category and length of time that individual securities have been in a continuous loss position. There were no AFS securities with gross unrealized losses in a continuous loss position less than twelve months at March 31, 2020.

	March 31, 2020
	Twelve Months or More
	GrossUnrealizedLosses			FairValue
Auction rate money market preferred	474			2,726
Number of securities in an unrealized loss position:				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 March 31, 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 March 31, 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 or charged-off at an earlier date if collection of principal or interest is considered doubtful.

When a loan is placed in nonaccrual status or charged-off, all interest accrued in the current calendar year, but not collected, is reversed against interest income while interest accrued in prior calendar years, but not collected, is charged against the ALLL. 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.
---	---

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 March 31, 2020. However, the COVID-19 pandemic has led to the temporary closure of businesses throughout the communities in which we serve, which has also led to increased unemployment. Therefore, we increased the ALLL during the quarter to account for inherent risk within the loan portfolio as of March 31, 2020. We continue to monitor the economic impact from COVID-19 as it relates to credit risk to ensure the ALLL is appropriate.

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

	Allowance for Loan Losses
	Three Months Ended March 31, 2020
	Commercial			Agricultural			Residential Real Estate			Consumer			Unallocated			Total
January 1, 2020	1,914			634			2,047			922			2,422			7,939
Charge-offs	(4	)		(16	)		(15	)		(123	)		—			(158	)
Recoveries	22			33			27			46			—			128
Provision for loan losses	443			(161	)		(342	)		116			732			788
March 31, 2020	2,375			490			1,717			961			3,154			8,697

All values are in US Dollars.

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	Allowance for Loan Losses and Recorded Investment in Loans
	March 31, 2020
	Commercial			Agricultural			Residential Real Estate			Consumer			Unallocated			Total
ALLL
Individually evaluated for impairment	179			78			1,052			—			—			1,309
Collectively evaluated for impairment	2,196			412			665			961			3,154			7,388
Total	2,375			490			1,717			961			3,154			8,697
Loans
Individually evaluated for impairment	8,598			13,660			5,374			3						27,635
Collectively evaluated for impairment	686,680			95,196			296,642			69,783						1,148,301
Total	695,278			108,856			302,016			69,786						1,175,936

All values are in US Dollars.

	Allowance for Loan Losses
	Three Months Ended March 31, 2019
	Commercial			Agricultural			Residential Real Estate			Consumer			Unallocated			Total
January 1, 2019	2,563			775			1,992			857			2,188			8,375
Charge-offs	(8	)		—			(2	)		(128	)		—			(138	)
Recoveries	51			1			27			48			—			127
Provision for loan losses	(358	)		(1	)		288			114			(9	)		34
March 31, 2019	2,248			775			2,305			891			2,179			8,398

All values are in US Dollars.

	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.

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

	March 31, 2020
	Commercial												Agricultural
	Real Estate			Other			Advances to Mortgage Brokers			Total			Real Estate			Other			Total			Total
Rating
1 - Excellent	—			10			—			10			—			—			—			10
2 - High quality	4,326			10,760			—			15,086			894			13			907			15,993
3 - High satisfactory	93,092			43,940			34,416			171,448			16,835			4,976			21,811			193,259
4 - Low satisfactory	381,334			92,789			—			474,123			42,602			19,671			62,273			536,396
5 - Special mention	15,404			3,530			—			18,934			5,601			2,164			7,765			26,699
6 - Substandard	7,177			6,857			—			14,034			8,236			3,258			11,494			25,528
7 - Vulnerable	29			1,339			—			1,368			2,839			1,579			4,418			5,786
8 - Doubtful	275			—			—			275			188			—			188			463
9 - Loss	—			—			—			—			—			—			—			—
Total	501,637			159,225			34,416			695,278			77,195			31,661			108,856			804,134

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.

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

1. EXCELLENT – Substantially Risk Free

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

•	High liquidity, strong cash flow, low leverage.
•	Unquestioned ability to meet all obligations when due.
---	---
•	Experienced management, with management succession in place.
---	---
•	Secured by cash.
---	---

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2. HIGH QUALITY – Limited Risk

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

•	Favorable liquidity and leverage ratios.
•	Ability to meet all obligations when due.
---	---
•	Management with successful track record.
---	---
•	Steady and satisfactory earnings history.
---	---
•	If loan is secured, collateral is of high quality and readily marketable.
---	---
•	Access to alternative financing.
---	---
•	Well defined primary and secondary source of repayment.
---	---
•	If supported by guaranty, the financial strength and liquidity of the guarantor(s) are clearly evident.
---	---

3. HIGH SATISFACTORY – Reasonable Risk

Credit with satisfactory financial condition and further characterized by:

•	Working capital adequate to support operations.
•	Cash flow sufficient to pay debts as scheduled.
---	---
•	Management experience and depth appear favorable.
---	---
•	Loan performing according to terms.
---	---
•	If loan is secured, collateral is acceptable and loan is fully protected.
---	---

4. LOW SATISFACTORY – Acceptable Risk

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

•	Would include most start-up businesses.
•	Occasional instances of trade slowness or repayment delinquency – may have been 10-30 days slow within the past year.
---	---
•	Management’s abilities are apparent yet unproven.
---	---
•	Weakness in primary source of repayment with adequate secondary source of repayment.
---	---
•	Loan structure generally in accordance with policy.
---	---
•	If secured, loan collateral coverage is marginal.
---	---

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

5. SPECIAL MENTION – Criticized

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

•	Downward trend in sales, profit levels, and margins.
•	Impaired working capital position.
---	---
•	Cash flow is strained in order to meet debt repayment.
---	---
•	Loan delinquency (30-60 days) and overdrafts may occur.
---	---
•	Shrinking equity cushion.
---	---
•	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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6. SUBSTANDARD – Classified

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

•	Sustained losses have severely eroded the equity and cash flow.
•	Deteriorating liquidity.
---	---
•	Serious management problems or internal fraud.
---	---
•	Original repayment terms liberalized.
---	---
•	Likelihood of bankruptcy.
---	---
•	Inability to access other funding sources.
---	---
•	Reliance on secondary source of repayment.
---	---
•	Litigation filed against borrower.
---	---
•	Interest non-accrual may be warranted.
---	---
•	Collateral provides little or no value.
---	---
•	Requires excessive attention of the loan officer.
---	---
•	Borrower is uncooperative with loan officer.
---	---

7. VULNERABLE – Classified

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

•	Insufficient cash flow to service debt.
•	Minimal or no payments being received.
---	---
•	Limited options available to avoid the collection process.
---	---
•	Transition status, expect action will take place to collect loan without immediate progress being made.
---	---

8. DOUBTFUL – Workout

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

•	Normal operations are severely diminished or have ceased.
•	Seriously impaired cash flow.
---	---
•	Original repayment terms materially altered.
---	---
•	Secondary source of repayment is inadequate.
---	---
•	Survivability as a “going concern” is impossible.
---	---
•	Collection process has begun.
---	---
•	Bankruptcy petition has been filed.
---	---
•	Judgments have been filed.
---	---
•	Portion of the loan balance has been charged-off.
---	---

9. LOSS – Charge-off

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

•	Liquidation or reorganization under Bankruptcy, with poor prospects of collection.
•	Fraudulently overstated assets and/or earnings.
---	---
•	Collateral has marginal or no value.
---	---
•	Debtor cannot be located.
---	---
•	Over 120 days delinquent.
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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:

	March 31, 2020
	Accruing Interestand Past Due:												Total Past Due and Nonaccrual
	30-59Days			60-89Days			90 Daysor More			Nonaccrual						Current			Total
Commercial
Commercial real estate	2,199			94			—			304			2,597			499,040			501,637
Commercial other	2,135			109			—			1,339			3,583			155,642			159,225
Advances to mortgage brokers	—			—			—			—			—			34,416			34,416
Total commercial	4,334			203			—			1,643			6,180			689,098			695,278
Agricultural
Agricultural real estate	233			—			—			3,027			3,260			73,935			77,195
Agricultural other	—			31			—			1,579			1,610			30,051			31,661
Total agricultural	233			31			—			4,606			4,870			103,986			108,856
Residential real estate
Senior liens	2,472			77			40			576			3,165			258,959			262,124
Junior liens	35			—			—			—			35			5,509			5,544
Home equity lines of credit	141			—			—			85			226			34,122			34,348
Total residential real estate	2,648			77			40			661			3,426			298,590			302,016
Consumer
Secured	356			—			—			—			356			66,105			66,461
Unsecured	7			—			—			3			10			3,315			3,325
Total consumer	363			—			—			3			366			69,420			69,786
Total	7,578			311			40			6,913			14,842			1,161,094			1,175,936

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.

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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. The following is a summary of impaired loans as of:

	March 31, 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	1,125			1,367			66			517			635			15
Commercial other	919			919			113			—			—			—
Agricultural real estate	2,247			2,297			70			1,509			1,509			12
Agricultural other	1,355			1,355			8			1,355			1,355			14
Residential real estate senior liens	5,285			5,713			1,052			5,401			5,830			1,073
Total impaired loans with a valuation allowance	10,931			11,651			1,309			8,782			9,329			1,114
Impaired loans without a valuation allowance
Commercial real estate	4,162			4,301						4,961			5,224
Commercial other	2,392			2,392						2,387			2,387
Agricultural real estate	7,192			7,192						8,372			8,422
Agricultural other	2,866			2,866						3,604			3,604
Home equity lines of credit	89			389						85			385
Consumer secured	3			3						—			—
Total impaired loans without a valuation allowance	16,704			17,143						19,409			20,022
Impaired loans
Commercial	8,598			8,979			179			7,865			8,246			15
Agricultural	13,660			13,710			78			14,840			14,890			26
Residential real estate	5,374			6,102			1,052			5,486			6,215			1,073
Consumer	3			3			—			—			—			—
Total impaired loans	27,635			28,794			1,309			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 March 31
	2020						2019
	Average Recorded Balance			Interest Income Recognized			Average Recorded Balance			Interest Income Recognized
Impaired loans with a valuation allowance
Commercial real estate	821			25			3,409			49
Commercial other	460			6			12			—
Agricultural real estate	1,878			24			390			6
Agricultural other	1,355			22			44			—
Residential real estate senior liens	5,343			55			6,682			68
Residential real estate junior liens	—			—			12			—
Total impaired loans with a valuation allowance	9,857			132			10,549			123
Impaired loans without a valuation allowance
Commercial real estate	4,562			59			3,287			53
Commercial other	2,390			15			2,970			21
Agricultural real estate	7,782			59			7,623			7
Agricultural other	3,235			7			6,087			70
Home equity lines of credit	87			6			43			6
Consumer secured	2			—			9			—
Total impaired loans without a valuation allowance	18,058			146			20,019			157
Impaired loans
Commercial	8,233			105			9,678			123
Agricultural	14,250			112			14,144			83
Residential real estate	5,430			61			6,737			74
Consumer	2			—			9			—
Total impaired loans	27,915			278			30,568			280

All values are in US Dollars.

As a result of line of credit agreements with borrowers, we had committed to advance $459 and $175 in additional funds to be disbursed in connection with impaired loans as of March 31, 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 March 31
	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			1			147			147
Agricultural other	2			593			593			2			523			523
Residential real estate	2			93			93			—			—			—
Total	6			1,649			1,649			3			670			670

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 March 31
	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			—			—			1			147
Agricultural other	—			—			2			593			—			—			2			523
Residential real estate	—			—			2			93			—			—			—			—
Total	1			919			5			730			—			—			3			670

All values are in US Dollars.

We did not restructure any loans by forgiving principal or accrued interest in the three-month periods ended March 31, 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-month periods ended March 31, 2020 and March 31, 2019 which were modified within 12 months prior to the default date.

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

	March 31 2020			December 31 2019
TDRs	24,117			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 who were in good standing as of March 1, 2020 can elect to defer full or partial payments for a 90-day period. 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.

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Note 5 – Borrowed Funds

Borrowed funds consist of the following obligations as of:

	March 31, 2020						December 31, 2019
	Amount			Rate			Amount			Rate
FHLB advances	235,000			2.34	%		245,000			2.32	%
Securities sold under agreements to repurchase without stated maturity dates	28,171			0.09	%		30,999			0.09	%
Total	263,171			2.10	%		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:

	March 31, 2020						December 31, 2019
	Amount			Rate			Amount			Rate
Fixed rate due 2020	45,000			2.28	%		55,000			2.18	%
Fixed rate due 2021	50,000			1.91	%		50,000			1.91	%
Variable rate due 2021 ^(1)^	10,000			1.99	%		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	235,000			2.34	%		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 $28,171 and $31,020 at March 31, 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-month periods ended March 31, 2020 and March 31, 2019. A summary of securities sold under repurchase agreements without stated maturity dates and federal funds purchased was as follows for the:

	Three Months Ended March 31
	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	32,236			30,923			0.10	%		37,441			34,987			0.10	%
Federal funds purchased	—			—			—	%		1,860			458			2.65	%

All values are in US Dollars.

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

	March 31 2020			December 31 2019
Pledged to secure borrowed funds	364,985			368,310
Pledged to secure repurchase agreements	28,171			31,020
Pledged for public deposits and for other purposes necessary or required by law	57,129			59,537
Total	450,285			458,867

All values are in US Dollars.

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

	March 31 2020			December 31 2019
States and political subdivisions	12,002			31,020
Mortgage-backed securities	9,492			—
Collateralized mortgage obligations	6,677			—
Total	28,171			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 required collateral.

As of March 31, 2020, we had the ability to borrow up to an additional $140,121, based on assets pledged as collateral. We had no investment securities that were restricted to be 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.

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

	March 31, 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		1.1		10,000			Other liabilities		(69	)

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.

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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 March 31
	2020			2019
Average number of common shares outstanding for basic calculation	7,892,421			7,888,885
Average potential effect of common shares in the Directors Plan ^(1)^	163,186			199,456
Average number of common shares outstanding used to calculate diluted earnings per common share	8,055,607			8,088,341
Net income	3,064			3,496
Earnings per common share
Basic	0.39			0.44
Diluted	0.38			0.43

All values are in US Dollars.

^(1)^	Exclusive of shares held in the Rabbi Trust

Note 7 – Other Noninterest Expenses

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

	Three Months Ended March 31
	2020			2019
Audit, consulting, and legal fees	433			453
Donations and community relations	330			140
ATM and debit card fees	323			248
Marketing costs	203			142
Memberships and subscriptions	199			167
Director fees	182			207
Loan underwriting fees	166			316
FDIC insurance premiums	156			170
Postage and freight	131			129
Education and travel	91			157
All other	534			525
Total other noninterest expenses	2,748			2,654

All values are in US Dollars.

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Note 8 – 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 March 31
	2020			2019
Income taxes at statutory rate	686			807
Effect of nontaxable income
Interest income on tax exempt municipal securities	(203	)		(244	)
Earnings on corporate owned life insurance policies	(148	)		(36	)
Other	(4	)		(4	)
Total effect of nontaxable income	(355	)		(284	)
Effect of nondeductible expenses	4			6
Effect of tax credits	(132	)		(180	)
Federal income tax expense	203			349

All values are in US Dollars.

Note 9 – Accumulated Other Comprehensive Income

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

	Three Months Ended March 31
	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	6,311			(136	)		—			6,175			5,954			(81	)		—			5,873
Amounts reclassified from AOCI	(71	)		—			—			(71	)		—			—			—			—
Subtotal	6,240			(136	)		—			6,104			5,954			(81	)		—			5,873
Tax effect	(1,393	)		28			—			(1,365	)		(1,195	)		17			—			(1,178	)
OCI, net of tax	4,847			(108	)		—			4,739			4,759			(64	)		—			4,695
Balance,<br>March 31	9,459			(54	)		(2,695	)		6,710			(441	)		192			(2,741	)		(2,990	)

All values are in US Dollars.

Included in OCI for the three-month periods ended March 31, 2020 and March 31, 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.

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

	Three Months Ended March 31
	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	(393	)		6,704			6,311			265			5,689			5,954
Reclassification adjustment for net (gains) losses included in net income	—			(71	)		(71	)		—			—			—
Net unrealized gains (losses)	(393	)		6,633			6,240			265			5,689			5,954
Tax effect	—			(1,393	)		(1,393	)		—			(1,195	)		(1,195	)
Unrealized gains (losses), net of tax	(393	)		5,240			4,847			265			4,494			4,759

All values are in US Dollars.

Note 10 – 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:

	March 31, 2020
Valuation Technique	Fair Value	Unobservable Input		Actual Range	Weighted Average
		Discount applied to collateral:
		Real Estate		20% - 30%	23%
		Equipment		20% - 40%	31%
Discounted value	$18,778	Cash crop inventory		40%	40%
		Livestock		30%	30%
		Other inventory		50%	50%
		Accounts receivable		25% - 50%	28%
	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:

	March 31, 2020
	CarryingValue			EstimatedFair Value			Level 1			Level 2			Level 3
ASSETS
Cash and cash equivalents	96,751			96,751			96,751			—			—
Mortgage loans AFS	1,228			1,242			—			1,242			—
Gross loans	1,175,936			1,172,598			—			—			1,172,598
Less allowance for loan and lease losses	8,697			8,697			—			—			8,697
Net loans	1,167,239			1,163,901			—			—			1,163,901
Accrued interest receivable	7,022			7,022			7,022			—			—
Equity securities without readily determinable fair values ^(1)^	21,535			N/A			—			—			—
OMSR	2,003			2,003			—			2,003			—
LIABILITIES
Deposits without stated maturities	922,023			922,023			922,023			—			—
Deposits with stated maturities	400,060			406,330			—			406,330			—
Borrowed funds	263,171			269,968			—			269,968			—
Accrued interest payable	845			845			845			—			—

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:

	March 31, 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	163,116			—			163,116			—			169,752			—			169,752			—
Auction rate money market preferred	2,726			—			2,726			—			3,119			—			3,119			—
Mortgage-backed securities	126,554			—			126,554			—			140,204			—			140,204			—
Collateralized mortgage obligations	114,793			—			114,793			—			116,764			—			116,764			—
Total AFS securities	407,189			—			407,189			—			429,839			—			429,839			—
Derivative instruments	69			—			69			—			67			—			67			—
Nonrecurring items
Impaired loans (net of the ALLL)	18,778			—			—			18,778			19,135			—			—			19,135
OMSR	2,003			—			2,003			—			2,264			—			2,264			—
Total	428,039			—			409,261			18,778			451,305			—			432,170			19,135
Percent of assets and liabilities measured at fair value				—	%		95.61	%		4.39	%					—	%		95.76	%		4.24	%

All values are in US Dollars.

We recorded an impairment related to OMSR of $245 and $0 through earnings for the three months ended March 31, 2020 and March 31, 2019. 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 March 31, 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 11 – Operating Segments

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

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Note 12 – Parent Company Only Financial Information

Interim Condensed Balance Sheets

	March 31 2020			December 31 2019
ASSETS
Cash on deposit at the Bank	216			1,360
Investments in subsidiaries	163,889			157,415
Premises and equipment	1,528			1,539
Other assets	49,892			49,887
TOTAL ASSETS	215,525			210,201
LIABILITIES AND SHAREHOLDERS’ EQUITY
Other liabilities	27			19
Shareholders' equity	215,498			210,182
TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY	215,525			210,201

All values are in US Dollars.

Interim Condensed Statements of Income

	Three Months Ended March 31
	2020			2019
Income
Dividends from subsidiaries	1,750			1,000
Interest income	1			2
Other income (loss)	1			(19	)
Total income	1,752			983
Expenses
Occupancy and equipment	15			15
Audit, consulting, and legal fees	132			130
Director fees	94			98
Other	293			290
Total expenses	534			533
Income before income tax benefit and equity in undistributed earnings of subsidiaries	1,218			450
Federal income tax benefit	112			115
Income before equity in undistributed earnings of subsidiaries	1,330			565
Undistributed earnings of subsidiaries	1,734			2,931
Net income	3,064			3,496

All values are in US Dollars.

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Interim Condensed Statements of Cash Flows

	Three Months Ended March 31
	2020			2019
Operating activities
Net income	3,064			3,496
Adjustments to reconcile net income to cash provided by operations
Undistributed earnings of subsidiaries	(1,734	)		(2,931	)
Undistributed earnings of equity securities without readily determinable fair values	94			57
Share-based payment awards under equity compensation plan	123			131
Depreciation	11			11
Changes in operating assets and liabilities which provided (used) cash
Other assets	(100	)		26
Other liabilities	8			800
Net cash provided by (used in) operating activities	1,466			1,590
Investing activities - none
Financing activities
Cash dividends paid on common stock	(2,122	)		(2,043	)
Proceeds from the issuance of common stock	1,330			1,433
Common stock repurchased	(1,168	)		(632	)
Common stock purchased for deferred compensation obligations	(650	)		(186	)
Net cash provided by (used in) financing activities	(2,610	)		(1,428	)
Increase (decrease) in cash and cash equivalents	(1,144	)		162
Cash and cash equivalents at beginning of period	1,360			2,499
Cash and cash equivalents at end of period	216			2,661

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-month periods ended March 31, 2020 and March 31, 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 months ended March 31, 2020, we reported net income of $3,064 and earnings per common share of $0.39. Net income and earnings per common share for the same period of 2019 were $3,496 and $0.44, respectively. A combination of reduced interest rates and loan volume were large drivers of a $280 decrease in interest income for the first three months of 2020 compared to the same period in 2019. Interest expense on deposits and borrowings decreased $93 for the three-month period ended March 31, 2020 compared to the same period in 2019 primarily due to reduced interest rates. Net interest income decreased by $187 for the three-month period ended March 31, 2020 in comparison to the same period in 2019. The provision for loan losses increased by $754 for the three-month period ended March 31, 2020 compared to the same period in 2019, as the result of increased economic and environmental risk factors, primarily driven by COVID-19, and an increase in impaired loan reserves. Noninterest income increased $508 during the first three months of 2020 compared to the same period in 2019, primarily as a result of a gain from the redemption of a corporate owned life insurance policy. Noninterest expenses for the first three months of 2020 modestly exceeded the same period in 2019 by $145, primarily due to compensation, community relations and donation-related expenses.

As of March 31, 2020, total assets and assets under management were $1,815,904 and $2,433,157, respectively. Assets under management include loans sold and serviced of $257,285 and investment and trust assets managed by Isabella Wealth of $359,968, 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 $22,650 since December 31, 2019, primarily as result of the sale of AFS securities. As a result of 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 March 31, 2020 totaled $1,175,936. During the first three months of 2020, gross loans decreased $10,634 which was largely driven by a decline in our agricultural loan portfolio. Total deposits increased $8,232 during the first quarter of 2020, primarily due to increases in interest bearing demand and savings deposits, and totaled $1,322,083 as of March 31, 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 2.98% for the three months ended March 31, 2020. This compares to 3.02% for the three months ended March 31, 2019. Management has implemented various initiatives to improve our net yield on interest earning assets, which include enhanced pricing strategies related to loan and deposit products and a reduced reliance on borrowings 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 investment and trust services, increasing our presence within our geographical footprint, and managing operating costs.

Recent Events and Legislation

Unexpected and unprecedented changes have occurred during the quarter as the result of COVID-19. COVID-19 is a new strain of coronavirus that spreads easily from person to person. The 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 limits gatherings and travel, and requires workers who are not necessary to sustain or protect life to stay home. The Michigan stay-at-home order has since been extended to May 15. The orders, as the result of COVID-19, have led to financial stress for many businesses and workers throughout the communities we serve.

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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 small businesses to obtain a forgivable SBA loan to meet payroll, rent, utility, and mortgage interest obligations for the 8-week period following the loan origination, and re-open quickly once the public health crisis ends. The first applications for PPP funds were accepted April 3, 2020. We are proud to facilitate SBA PPP loans to businesses throughout the communities in which we serve.

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, and is effective immediately.

We have held discussions with many of our customers and they have expressed their general concern about the uncertain economic conditions, yet we believe it is premature to predict the magnitude of the impact at this point. Measures we have taken to assist our customers include loan programs that provide short-term payment relief. Under these programs, borrowers who were in good standing as of March 1, 2020 can elect to defer full or partial payments for a 90-day period. 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 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. 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 will likely impact our operations, customers, and various areas of risk; however, we are not able at this time to estimate the 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 March 31, 2020 through the date the consolidated financial statements were issued for potential recognition and disclosure. Other than those noted in the Recent Events and Legislation section of this report, no subsequent events require financial statement recognition or disclosure between March 31, 2020 and the date the 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:

	March 31 2020			December 31 2019			September 30 2019			June 30 2019			March 31 2019
INCOME STATEMENT DATA
Interest income	16,201			16,849			17,161			16,815			16,481
Interest expense	4,199			4,492			4,550			4,527			4,292
Net interest income	12,002			12,357			12,611			12,288			12,189
Provision for loan losses	788			(18	)		193			(179	)		34
Noninterest income	2,998			(725	)		3,274			3,011			2,490
Noninterest expenses	10,945			10,892			10,620			10,749			10,800
Federal income tax expense (benefit)	203			(140	)		630			541			349
Net income	3,064			898			4,442			4,188			3,496
PER SHARE
Basic earnings	0.39			0.12			0.56			0.53			0.44
Diluted earnings	0.38			0.11			0.55			0.52			0.43
Dividends	0.27			0.27			0.26			0.26			0.26
Tangible book value	21.10			20.45			20.66			20.17			19.47
Quoted market value
High	24.50			24.80			23.45			23.75			24.50
Low	16.00			22.25			22.01			22.25			22.25
Close ^(1)^	18.00			24.31			22.30			23.25			23.75
Common shares outstanding ^(1)^	7,921,291			7,910,804			7,938,234			7,918,494			7,906,078
PERFORMANCE RATIOS
Return on average total assets	0.68	%		0.20	%		0.98	%		0.93	%		0.77	%
Return on average shareholders' equity	5.68	%		1.66	%		8.37	%		8.13	%		7.00	%
Return on average tangible shareholders' equity	7.35	%		2.18	%		10.87	%		10.67	%		9.29	%
Net interest margin yield (FTE)	2.98	%		3.06	%		3.13	%		3.06	%		3.02	%
BALANCE SHEET DATA ^(1)^
Gross loans	1,175,936			1,186,570			1,191,804			1,176,622			1,144,832
AFS securities	407,189			429,839			445,529			470,449			494,842
Total assets	1,815,904			1,814,198			1,813,684			1,824,592			1,806,974
Deposits	1,322,083			1,313,851			1,308,773			1,281,418			1,277,963
Borrowed funds	263,171			275,999			277,386			320,462			311,684
Shareholders' equity	215,498			210,182			212,376			208,114			202,413
Gross loans to deposits	88.95	%		90.31	%		91.06	%		91.82	%		89.58	%
ASSETS UNDER MANAGEMENT ^(1)^
Loans sold with servicing retained	257,285			259,375			258,873			257,062			259,127
Assets managed by Isabella Wealth	359,968			436,181			475,574			487,180			475,560
Total assets under management	2,433,157			2,509,754			2,548,131			2,568,834			2,541,661
ASSET QUALITY ^(1)^
Nonperforming loans to gross loans	0.59	%		0.55	%		0.59	%		0.70	%		0.64	%
Nonperforming assets to total assets	0.43	%		0.40	%		0.42	%		0.49	%		0.44	%
ALLL to gross loans	0.74	%		0.67	%		0.69	%		0.68	%		0.73	%
CAPITAL RATIOS ^(1)^
Shareholders' equity to assets	11.87	%		11.59	%		11.71	%		11.41	%		11.20	%
Tier 1 leverage	9.09	%		9.01	%		9.16	%		9.03	%		8.91	%
Common equity tier 1 capital	12.72	%		12.56	%		12.58	%		12.43	%		12.45	%
Tier 1 risk-based capital	12.72	%		12.56	%		12.58	%		12.43	%		12.45	%
Total risk-based capital	13.41	%		13.18	%		13.21	%		13.06	%		13.12	%

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 three-month periods ended:

	March 31 2020			March 31 2019			March 31 2018
INCOME STATEMENT DATA
Interest income	16,201			16,481			15,121
Interest expense	4,199			4,292			3,401
Net interest income	12,002			12,189			11,720
Provision for loan losses	788			34			384
Noninterest income	2,998			2,490			2,487
Noninterest expenses	10,945			10,800			10,096
Federal income tax expense (benefit)	203			349			265
Net income	3,064			3,496			3,462
PER SHARE
Basic earnings	0.39			0.44			0.44
Diluted earnings	0.38			0.43			0.43
Dividends	0.27			0.26			0.26
Tangible book value	21.10			19.47			19.16
Quoted market value
High	24.50			24.50			28.25
Low	16.00			22.25			26.11
Close ^(1)^	18.00			23.75			27.40
Common shares outstanding ^(1)^	7,921,291			7,906,078			7,894,341
PERFORMANCE RATIOS
Return on average total assets	0.68	%		0.77	%		0.77	%
Return on average shareholders' equity	5.68	%		7.00	%		7.11	%
Return on average tangible shareholders' equity	1.84	%		9.29	%		9.23	%
Net interest margin yield (FTE)	2.98	%		3.02	%		2.95	%
BALANCE SHEET DATA ^(1)^
Gross loans	1,175,936			1,144,832			1,093,002
AFS securities	407,189			494,842			547,762
Total assets	1,815,904			1,806,974			1,799,592
Deposits	1,322,083			1,277,963			1,297,868
Borrowed funds	263,171			311,684			303,113
Shareholders' equity	215,498			202,413			191,090
Gross loans to deposits	88.95	%		89.58	%		84.22	%
ASSETS UNDER MANAGEMENT ^(1)^
Loans sold with servicing retained	257,285			259,127			262,541
Assets managed by Isabella Wealth	359,968			475,560			470,578
Total assets under management	2,433,157			2,541,661			2,532,711
ASSET QUALITY ^(1)^
Nonperforming loans to gross loans	0.59	%		0.64	%		0.63	%
Nonperforming assets to total assets	0.43	%		0.44	%		0.41	%
ALLL to gross loans	0.74	%		0.73	%		0.75	%
CAPITAL RATIOS ^(1)^
Shareholders' equity to assets	11.87	%		11.20	%		10.62	%
Tier 1 leverage	9.09	%		8.91	%		8.69	%
Common equity tier 1 capital	12.72	%		12.45	%		12.34	%
Tier 1 risk-based capital	12.72	%		12.45	%		12.34	%
Total risk-based capital	13.41	%		13.12	%		13.01	%

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
	March 31, 2020									December 31, 2019									March 31, 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	1,168,070			13,254			4.54	%		1,184,449			13,694			4.62	%		1,131,093			12,891			4.56	%
Taxable investment securities	251,797			1,489			2.37	%		269,691			1,663			2.47	%		319,962			1,958			2.45	%
Nontaxable investment securities	152,368			1,418			3.72	%		160,022			1,513			3.78	%		179,887			1,687			3.75	%
Fed funds sold	—			—			—	%		11			—			1.46	%		26			—			—	%
Other	90,297			405			1.79	%		55,471			375			2.70	%		40,809			379			3.71	%
Total earning assets	1,662,532			16,566			3.99	%		1,669,644			17,245			4.13	%		1,671,777			16,915			4.05	%
NONEARNING ASSETS
Allowance for loan losses	(7,968	)								(8,205	)								(8,406	)
Cash and demand deposits due from banks	21,556									20,838									19,194
Premises and equipment	26,252									26,377									27,710
Accrued income and other assets	110,786									113,383									99,758
Total assets	1,813,158									1,822,037									1,810,033
INTEREST BEARING LIABILITIES
Interest bearing demand deposits	235,161			83			0.14	%		221,924			78			0.14	%		236,074			68			0.12	%
Savings deposits	426,634			634			0.59	%		417,623			727			0.70	%		381,134			615			0.65	%
Time deposits	404,717			2,074			2.05	%		423,177			2,240			2.12	%		436,448			2,035			1.87	%
Borrowed funds	270,648			1,408			2.08	%		276,574			1,447			2.09	%		321,445			1,574			1.96	%
Total interest bearing liabilities	1,337,160			4,199			1.26	%		1,339,298			4,492			1.34	%		1,375,101			4,292			1.25	%
NONINTEREST BEARING LIABILITIES
Demand deposits	246,262									251,596									226,425
Other	14,130									15,359									8,878
Shareholders’ equity	215,606									215,784									199,629
Total liabilities and shareholders’ equity	1,813,158									1,822,037									1,810,033
Net interest income (FTE)				12,367									12,753									12,623
Net yield on interest earning assets (FTE)							2.98	%								3.06	%								3.02	%

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 March 31, 2020 Compared to December 31, 2019 Increase (Decrease) Due to									Three Months Ended March 31, 2020 Compared to March 31, 2019 Increase (Decrease) Due to
	Volume			Rate			Net			Volume			Rate			Net
Changes in interest income
Loans	(188	)		(252	)		(440	)		420			(57	)		363
Taxable investment securities	(108	)		(66	)		(174	)		(405	)		(64	)		(469	)
Nontaxable investment securities	(72	)		(23	)		(95	)		(256	)		(13	)		(269	)
Other	184			(154	)		30			293			(267	)		26
Total changes in interest income	(184	)		(495	)		(679	)		52			(401	)		(349	)
Changes in interest expense
Interest bearing demand deposits	5			—			5			—			15			15
Savings deposits	15			(108	)		(93	)		70			(51	)		19
Time deposits	(96	)		(70	)		(166	)		(154	)		193			39
Borrowed funds	(31	)		(8	)		(39	)		(260	)		94			(166	)
Total changes in interest expense	(107	)		(186	)		(293	)		(344	)		251			(93	)
Net change in interest margin (FTE)	(77	)		(309	)		(386	)		396			(652	)		(256	)

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:
	March 31<br>2020			December 31<br>2019			September 30<br>2019			June 30<br>2019			March 31<br>2019
Total earning assets	3.99	%		4.13	%		4.23	%		4.15	%		4.05	%
Total interest bearing liabilities	1.26	%		1.34	%		1.35	%		1.33	%		1.25	%
Net yield on interest earning assets (FTE)	2.98	%		3.06	%		3.13	%		3.06	%		3.02	%
	Quarter to Date Net Interest Income (FTE)
---	---	---	---	---	---	---	---	---	---	---	---	---	---	---
	March 31 2020			December 31 2019			September 30 2019			June 30 2019			March 31 2019
Total interest income (FTE)	16,566			17,245			17,567			17,231			16,915
Total interest expense	4,199			4,492			4,550			4,527			4,292
Net interest income (FTE)	12,367			12,753			13,017			12,704			12,623

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 March 31
	2020			2019
ALLL at beginning of period	7,939			8,375
Charge-offs
Commercial	4			8
Agricultural	16			—
Residential real estate	15			2
Consumer	123			128
Total charge-offs	158			138
Recoveries
Commercial	22			51
Agricultural	33			1
Residential real estate	27			27
Consumer	46			48
Total recoveries	128			127
Net loan charge-offs (recoveries)	30			11
Provision for loan losses	788			34
ALLL at end of period	8,697			8,398
Net loan charge-offs (recoveries) to average loans outstanding	—	%		—	%

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:

	March 31 2020			December 31 2019			September 30 2019			June 30 2019			March 31 2019
Total charge-offs	158			334			143			333			138
Total recoveries	128			122			82			151			127
Net loan charge-offs (recoveries)	30			212			61			182			11
Net loan charge-offs (recoveries) to average loans outstanding	—	%		0.02	%		0.01	%		0.02	%		—	%
Provision for loan losses	788			(18	)		193			(179	)		34
Provision for loan losses to average loans outstanding	0.07	%		—	%		0.02	%		(0.02	)%		—	%
ALLL	8,697			7,939			8,169			8,037			8,398
ALLL as a % of loans at end of period	0.74	%		0.67	%		0.69	%		0.68	%		0.73	%

All values are in US Dollars.

While we have experienced fluctuations in credit quality indicators in recent periods, credit quality remained strong at March 31, 2020. However, the COVID-19 pandemic has led to the temporary closure of businesses throughout the communities in which we serve, which has also led to increased unemployment. We increased the ALLL during the quarter as a result of increased economic and environmental risk factors, primarily driven by COVID-19. 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

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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:

	March 31 2020			December 31 2019			September 30 2019			June 30 2019			March 31 2019
ALLL
Individually evaluated for impairment	1,309			1,114			1,333			1,479			1,509
Collectively evaluated for impairment	7,388			6,825			6,836			6,558			6,889
Total	8,697			7,939			8,169			8,037			8,398
ALLL to gross loans
Individually evaluated for impairment	0.11	%		0.09	%		0.11	%		0.13	%		0.13	%
Collectively evaluated for impairment	0.63	%		0.58	%		0.58	%		0.55	%		0.60	%
Total	0.74	%		0.67	%		0.69	%		0.68	%		0.73	%

All values are in US Dollars.

The level of the ALLL is appropriate as of March 31, 2020. 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
	March 31 2020			December 31 2019			September 30 2019			June 30 2019			March 31 2019
Commercial	6,180			2,477			3,175			2,243			5,299
Agricultural	4,870			4,285			4,800			6,672			6,854
Residential real estate	3,426			4,572			1,999			1,690			6,063
Consumer	366			71			162			94			152
Total	14,842			11,405			10,136			10,699			18,368
Total past due and nonaccrual loans to gross loans	1.26	%		0.96	%		0.85	%		0.91	%		1.60	%

All values are in US Dollars.

Past due and nonaccrual status loans increased in 2020 primarily as a result of deterioration in credit quality for a small number of commercial loans. The increase did not result from the economic impact of COVID-19 or any other apparent factor. As such, we do not believe this activity to be indicative of a trend in past due levels.

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 more collectible. 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 March 31, 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 March 31, 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	5			1,156			1			493			6			1,649
Principal advances (payments)	—			(984	)		—			(106	)		—			(1,090	)
Loans paid off	(13	)		(1,098	)		—			—			(13	)		(1,098	)
Transfers to OREO	—			—			(1	)		(81	)		(1	)		(81	)
March 31, 2020	114			20,268			9			3,849			123			24,117

All values are in US Dollars.

	Three Months Ended March 31, 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	3			670			—			—			3			670
Principal advances (payments)	—			(340	)		—			(127	)		—			(467	)
Loans paid off	(6	)		(799	)		(3	)		(177	)		(9	)		(976	)
Transfers to OREO	—			—			(1	)		(48	)		(1	)		(48	)
Transfers to nonaccrual status	(2	)		(626	)		2			626			—			—
March 31, 2019	128			22,305			26			3,825			154			26,130

All values are in US Dollars.

The following table summarizes our TDRs as of:

	March 31, 2020									December 31, 2019
	AccruingInterest			Nonaccrual			Total			AccruingInterest			Nonaccrual			Total			TotalChange
Current	19,842			493			20,335			20,847			507			21,354			(1,019	)
Past due 30-59 days	386			104			490			346			—			346			144
Past due 60-89 days	—			—			—			1			—			1			(1	)
Past due 90 days or more	40			3,252			3,292			—			3,036			3,036			256
Total	20,268			3,849			24,117			21,194			3,543			24,737			(620	)

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:

	March 31, 2020									December 31, 2019
	RecordedBalance			UnpaidPrincipalBalance			ValuationAllowance			RecordedBalance			UnpaidPrincipalBalance			ValuationAllowance
TDRs
Commercial real estate	5,136			5,455			66			5,325			5,643			15
Commercial other	1,972			1,972			113			1,156			1,156			—
Agricultural real estate	8,816			8,816			67			9,182			9,181			12
Agricultural other	3,679			3,679			8			4,421			4,421			14
Residential real estate senior liens	4,510			4,792			898			4,641			4,923			922
Home equity lines of credit	4			304			—			12			312			—
Total TDRs	24,117			25,018			1,152			24,737			25,636			963
Other impaired loans
Commercial real estate	151			213			—			153			216			—
Commercial other	1,339			1,339			—			1,231			1,231			—
Agricultural real estate	623			673			3			699			750			—
Agricultural other	542			542			—			538			538			—
Residential real estate senior liens	775			921			154			760			907			151
Home equity lines of credit	85			85			—			73			73			—
Consumer secured	3			3			—			—			—			—
Total other impaired loans	3,518			3,776			157			3,454			3,715			151
Total impaired loans	27,635			28,794			1,309			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.

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.

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:

	March 31 2020			December 31 2019			September 30 2019			June 30 2019			March 31 2019
Nonaccrual status loans	6,913			6,535			6,962			8,107			7,260
Accruing loans past due 90 days or more	40			—			40			110			30
Total nonperforming loans	6,953			6,535			7,002			8,217			7,290
Foreclosed assets	564			456			468			513			401
Debt securities	230			230			230			230			230
Total nonperforming assets	7,747			7,221			7,700			8,960			7,921
Nonperforming loans as a % of total loans	0.59	%		0.55	%		0.59	%		0.70	%		0.64	%
Nonperforming assets as a % of total assets	0.43	%		0.40	%		0.42	%		0.49	%		0.44	%

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:

	March 31 2020			December 31 2019			September 30 2019			June 30 2019			March 31 2019
Commercial	1,643			1,621			1,632			1,692			1,931
Agricultural	4,606			4,285			4,520			5,532			4,757
Residential real estate	661			629			810			883			572
Consumer	3			—			—			—			—
Total	6,913			6,535			6,962			8,107			7,260

All values are in US Dollars.

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

	March 31 2020			December 31 2019			September 30 2019			June 30 2019			March 31 2019
Commercial	304			390			390			450			515
Agricultural	3,441			3,048			3,309			5,096			3,199
Residential real estate	104			105			107			109			111
Total	3,849			3,543			3,806			5,655			3,825

All values are in US Dollars.

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.

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 March 31
							Change
	2020			2019						%
Service charges and fees
ATM and debit card fees	794			685			109			15.91	%
Service charges and fees on deposit accounts	587			530			57			10.75	%
Freddie Mac servicing fee	159			150			9			6.00	%
Net OMSR income (loss)	(261	)		12			(273	)		N/M
Other fees for customer services	74			84			(10	)		(11.90	)%
Total service charges and fees	1,353			1,461			(108	)		(7.39	)%
Investment and trust advisory fees	572			677			(105	)		(15.51	)%
Gains from redemption of corporate owned life insurance policies	524			—			524			N/M
Earnings on corporate owned life insurance policies	182			184			(2	)		(1.09	)%
Net gain on sale of mortgage loans	151			93			58			62.37	%
Other
Net gains on sale of AFS securities	71			—			71			N/M
All other	145			75			70			93.33	%
Total other	216			75			141			188.00	%
Total noninterest income	2,998			2,490			508			20.40	%

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.

OMSR income results are driven, in part, by changes in offering rates on residential mortgage loans, anticipated prepayments in the servicing-retained portfolio, and the volume of loans within the servicing-retained portfolio. Increased prepayment speeds, as a result of a decline in interest rates, were the primary driver of the losses recognized during the first quarter. Income during 2020 could experience fluctuations and could vary from 2019 levels.

The decrease in investment and trust advisory fees was driven by a reduction in trust-related assets, which resulted significantly from a decline in the stock market during the first quarter of 2020. With the uncertainty in the stock market as a result of COVID-19, investment and trust advisory fees during the remainder of 2020 may not exceed 2019 levels.

We recognized a gain during the first quarter of 2020 due to the redemption of a corporate owned life insurance policy in connection with the passing of a retired executive 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. As such, net gain on sale of mortgage loans will continue to fluctuate in comparison to 2019 during the remainder of 2020.

We are continually analyzing our AFS securities portfolio for potential sale opportunities. Securities with unrealized gains or less than desirable yields may be sold for funding and profitability purposes. During the first quarter of 2020, we identified $26,855 in securities that were desirable to be sold and recognized net gains of $71 with these sales. We anticipate taking this same approach of analyzing our AFS securities portfolio for potential sale opportunities during the remainder of 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 March 31
							Change
	2020			2019						%
Compensation and benefits	5,869			5,722			147			2.57	%
Furniture and equipment	1,461			1,494			(33	)		(2.21	)%
Occupancy	867			930			(63	)		(6.77	)%
Other
Audit, consulting, and legal fees	433			453			(20	)		(4.42	)%
Donations and community relations	330			140			190			135.71	%
ATM and debit card fees	323			248			75			30.24	%
Marketing costs	203			142			61			42.96	%
Memberships and subscriptions	199			167			32			19.16	%
Director fees	182			207			(25	)		(12.08	)%
Loan underwriting fees	166			316			(150	)		(47.47	)%
FDIC insurance premiums	156			170			(14	)		(8.24	)%
Postage and freight	131			129			2			1.55	%
Education and travel	91			157			(66	)		(42.04	)%
All other	534			525			9			1.71	%
Total other noninterest expenses	2,748			2,654			94			3.54	%
Total noninterest expenses	10,945			10,800			145			1.34	%

All values are in US Dollars.

Donations and community relations increased during 2020 as a result of initiatives designed to deepen and strengthen our relationship with the communities in which we operate and serve which includes an expanded footprint. 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 expenses, donations and community relations during the remainder of 2020 are not expected to exceed 2019 levels.

Loan underwriting fees were higher during the first quarter 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.

Education and travel expenses fluctuate based on the timing of trainings and seminars. Beginning in mid-March of 2020, travel declined due to COVID-19 and recommendations by the Center for Disease Control to limit in-person gatherings. With the recent stay-at-home order in the State of Michigan due to COVID-19, education and travel expenses during the remainder of 2020 may decline in comparison to 2019 levels.

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

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Analysis of Changes in Financial Condition

	March 31 2020			December 31 2019			Change			% Change<br>(unannualized)
ASSETS
Cash and cash equivalents	96,751			60,572			36,179			59.73	%
AFS securities
Amortized cost of AFS securities	395,090			423,980			(28,890	)		(6.81	)%
Unrealized gains (losses) on AFS securities	12,099			5,859			6,240			106.50	%
AFS securities	407,189			429,839			(22,650	)		(5.27	)%
Mortgage loans AFS	1,228			904			324			35.84	%
Loans
Gross loans	1,175,936			1,186,570			(10,634	)		(0.90	)%
Less allowance for loan and lease losses	8,697			7,939			758			9.55	%
Net loans	1,167,239			1,178,631			(11,392	)		(0.97	)%
Premises and equipment	25,946			26,242			(296	)		(1.13	)%
Corporate owned life insurance policies	27,691			28,455			(764	)		(2.68	)%
Accrued interest receivable	7,022			6,501			521			8.01	%
Equity securities without readily determinable fair values	21,535			21,629			(94	)		(0.43	)%
Goodwill and other intangible assets	48,366			48,379			(13	)		(0.03	)%
Other assets	12,937			13,046			(109	)		(0.84	)%
TOTAL ASSETS	1,815,904			1,814,198			1,706			0.09	%
LIABILITIES AND SHAREHOLDERS’ EQUITY
Liabilities
Deposits	1,322,083			1,313,851			8,232			0.63	%
Borrowed funds	263,171			275,999			(12,828	)		(4.65	)%
Accrued interest payable and other liabilities	15,152			14,166			986			6.96	%
Total liabilities	1,600,406			1,604,016			(3,610	)		(0.23	)%
Shareholders’ equity	215,498			210,182			5,316			2.53	%
TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY	1,815,904			1,814,198			1,706			0.09	%

All values are in US Dollars.

As shown above, total assets were relatively unchanged from December 31, 2019. Cash and cash equivalents increased as a result of the sale of AFS securities and an increase in customer deposits during the first quarter of 2020. We experienced a $10,634 decrease in loans during the first three months of 2020 which was largely driven by a decline in our agricultural loan portfolio.

The following table outlines the changes in loan balances:

	March 31 2020			December 31 2019			Change			% Change<br>(unannualized)
Commercial	695,278			700,941			(5,663	)		(0.81	)%
Agricultural	108,856			116,920			(8,064	)		(6.90	)%
Residential real estate	302,016			298,569			3,447			1.15	%
Consumer	69,786			70,140			(354	)		(0.50	)%
Total	1,175,936			1,186,570			(10,634	)		(0.90	)%

All values are in US Dollars.

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The following table displays loan balances as of:

	March 31 2020			December 31 2019			September 30 2019			June 30 2019			March 31 2019
Commercial	695,278			700,941			708,735			701,954			677,554
Agricultural	108,856			116,920			118,460			120,363			123,393
Residential real estate	302,016			298,569			292,311			283,285			276,776
Consumer	69,786			70,140			72,298			71,020			67,109
Total	1,175,936			1,186,570			1,191,804			1,176,622			1,144,832

All values are in US Dollars.

The competition for commercial loan opportunities continues to be strong in the current interest rate environment. While we experienced a decline in this segment of the portfolio during the first quarter, we expect growth in the commercial loan portfolio during the remainder of 2020 due to our participation in the SBA PPP, in addition to continuing to provide attractive and competitive loan products. During the first 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:

	March 31 2020			December 31 2019			Change			% Change<br>(unannualized)
Noninterest bearing demand deposits	249,424			249,152			272			0.11	%
Interest bearing demand deposits	237,392			229,865			7,527			3.27	%
Savings deposits	435,207			427,215			7,992			1.87	%
Certificates of deposit	358,534			365,049			(6,515	)		(1.78	)%
Brokered certificates of deposit	27,458			27,458			—			—	%
Internet certificates of deposit	14,068			15,112			(1,044	)		(6.91	)%
Total	1,322,083			1,313,851			8,232			0.63	%

All values are in US Dollars.

The following table displays deposit balances as of:

	March 31 2020			December 31 2019			September 30 2019			June 30 2019			March 31 2019
Noninterest bearing demand deposits	249,424			249,152			242,179			244,240			229,865
Interest bearing demand deposits	237,392			229,865			230,579			228,704			236,997
Savings deposits	435,207			427,215			409,930			378,988			385,617
Certificates of deposit	358,534			365,049			357,984			359,945			361,716
Brokered certificates of deposit	27,458			27,458			52,744			57,773			50,273
Internet certificates of deposit	14,068			15,112			15,357			11,768			13,495
Total	1,322,083			1,313,851			1,308,773			1,281,418			1,277,963

All values are in US Dollars.

Total deposits have steadily increased over the past 12 months with significant growth in non-contractual deposits, such as noninterest bearing demand and savings deposits. This trend is anticipated to continue during the remainder of 2020 as the financial markets continue to exhibit significant signs of instability. We 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, 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 as a result of the current interest rate environment. The following table displays fair values of AFS securities as of:

	March 31 2020			December 31 2019			September 30 2019			June 30 2019			March 31 2019
Government sponsored enterprises	—			—			—			160			165
States and political subdivisions	163,116			169,752			175,575			176,742			191,266
Auction rate money market preferred	2,726			3,119			3,089			2,849			2,819
Mortgage-backed securities	126,554			140,204			150,120			173,340			181,138
Collateralized mortgage obligations	114,793			116,764			116,745			117,358			119,454
Total	407,189			429,839			445,529			470,449			494,842

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:

	March 31 2020			December 31 2019			September 30 2019			June 30 2019			March 31 2019
FHLB advances	235,000			245,000			245,000			295,000			280,000
Securities sold under agreements to repurchase without stated maturity dates	28,171			30,999			32,386			25,462			29,824
Federal funds purchased	—			—			—			—			1,860
Total	263,171			275,999			277,386			320,462			311,684

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 69,907 shares or $1,330 of common stock during the first three months of 2020, as compared to 61,405 shares or $1,433 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 $123 and $131 during the three-month periods ended March 31, 2020 and March 31, 2019, respectively.

We have publicly announced a common stock repurchase plan. Pursuant to this plan, we repurchased 59,420 shares or $1,168 of common stock during the first three months of 2020 and 26,296 shares or $632 during the first three months of 2019. As of March 31, 2020, we were authorized to repurchase up to an additional 188,486 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:

	March 31, 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	12.72	%		7.00	%		6.50	%		12.56	%		7.000	%		6.50	%
Tier 1 capital	12.72	%		8.50	%		8.00	%		12.56	%		8.500	%		8.00	%
Total capital	13.41	%		10.50	%		10.00	%		13.18	%		10.500	%		10.00	%
Tier 1 leverage	9.09	%		4.00	%		5.00	%		9.01	%		4.00	%		5.00	%

There are no significant regulatory constraints placed on our capital. At March 31, 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 $310,622 or 17.11% of assets as of March 31, 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 March 31, 2020, we had available lines of credit of $140,121.

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

	March 31 2020
Total cash and cash equivalents	96,751
Available lines of credit
Fed funds lines with correspondent banks	93,000
FHLB borrowings	30,319
FRB Discount Window	11,802
Other lines of credit	5,000
Total available lines of credit	140,121
Unencumbered lendable value of FRB collateral, estimated^1^	170,000
Total cash and liquidity	406,872

All values are in US Dollars.

^(1)^	Includes estimated unencumbered lendable value of FHLB collateral of $120,000

The following table summarizes our sources and uses of cash for the three-month period ended March 31:

	2020			2019			Variance
Net cash provided by (used in) operating activities	3,394			3,076			318
Net cash provided by (used in) investing activities	39,991			(11,095	)		51,086
Net cash provided by (used in) financing activities	(7,206	)		(44,773	)		37,567
Increase (decrease) in cash and cash equivalents	36,179			(52,792	)		88,971
Cash and cash equivalents January 1	60,572			73,471			(12,899	)
Cash and cash equivalents March 31	96,751			20,679			76,072

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 10 – 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 exposure 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. SBA PPP loans and FRB PPP Lending Facility borrowings are new instruments and have 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 who were in good standing as of March 1, 2020 can elect to defer full or partial payments for a 90-day period. Our expectations regarding loan payments after the 90-day period is uncertain. 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 March 31, 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 March 31, 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 quarter as the result of COVID-19. COVID-19 is a new strain of coronavirus that spreads easily from person to person. The 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 limits gatherings and travel, and requires workers who are not necessary to sustain or protect life to stay home. The Michigan stay-at-home order has since been extended to May 15. The orders have led to financial stress for many businesses and workers 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. 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 will likely impact our operations, customers, vendors and various areas of risk. Other areas of risk include, but are not limited to, cybersecurity, credit, interest rate, litigation and risk related to vendor services. With the uncertainty created by COVID-19, we are not able at this time to estimate the 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 March 31, 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, December 31										247,906
January 1 - 31	3,973			24.16			3,973			243,933
February 1 - 29	3,322			24.08			3,322			240,611
March 1 -31	52,125			19.01			52,125			188,486
Balance, March 31	59,420			19.64			59,420			188,486

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.

		Isabella Bank Corporation
Date:	April 29, 2020			/s/ Jae A. Evans
				Jae A. Evans
				President, Chief Executive Officer
				(Principal Executive Officer)
Date:	April 29, 2020			/s/ Neil M. McDonnell
				Neil M. McDonnell
				Chief Financial Officer
				(Principal Financial Officer)

57

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:	April 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.
---	---
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:	April 29, 2020		/s/ Neil M. McDonnell
---	---	---	---
			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 March 31, 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.
---	---
/s/ Jae A. Evans
---	---
President, Chief Executive Officer
(Principal Executive Officer)
April 29, 2020
/s/ Neil M. McDonnell
Chief Financial Officer
(Principal Financial Officer)
April 29, 2020