ISABELLA BANK Corp - Quarter Report: 2019 September (Form 10-Q)

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q



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

For the quarterly period ended September 30, 2019



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

For the transition period from to

Commission File Number: 0-18415

Isabella Bank Corporation

(Exact name of registrant as specified in its charter)



Michigan		38-2830092
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification No.)

401 N. Main St, Mt. Pleasant, MI		48858
(Address of principal executive offices)		(Zip code)

(989) 772-9471

(Registrant’s telephone number, including area code)

N/A

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

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



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

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. ý Yes ¨ No

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). ý Yes ¨ No

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.



Large accelerated filer	¨	Accelerated filer	ý

Non-accelerated filer	¨	Smaller reporting company	ý

		Emerging growth company	¨

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.			¨

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). ¨ Yes ý No

The number of common shares outstanding of the registrant’s Common Stock (no par value) was 7,939,808 as of November 5, 2019.

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ISABELLA BANK CORPORATION

QUARTERLY REPORT ON FORM 10-Q

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PART I – FINANCIAL INFORMATION		4

Item 1.	Financial Statements	4

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	38

Item 3.	Quantitative and Qualitative Disclosures About Market Risk	59

Item 4.	Controls and Procedures	59

PART II – OTHER INFORMATION		60

Item 1.	Legal Proceedings	60

Item 1A.	Risk Factors	60

Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	60

Item 3.	Defaults Upon Senior Securities	60

Item 4.	Mine Safety Disclosures	60

Item 5.	Other Information	60

Item 6.	Exhibits	61

SIGNATURES		62

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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, the quality or composition of the loan or investment portfolio, demand for loan products, fluctuation in the value of collateral securing our loan portfolio, deposit flows, competition, cybersecurity risk, demand for financial services in our market area, and accounting principles, policies and guidelines. These risks and uncertainties should be considered in evaluating forward looking statements and undue reliance should not be placed on such statements. Further information concerning our business, including additional factors that could materially affect our financial results, is included in our filings with the SEC.

Glossary of Acronyms and Abbreviations

The acronyms and abbreviations identified below may be used throughout this Quarterly Report on Form 10-Q or in our other SEC filings. You may find it helpful to refer back to this page while reading this report.



ACL: Allowance for Credit Losses		GAAP: U.S. generally accepted accounting principles
AFS: Available-for-sale		GLB Act: Gramm-Leach-Bliley Act of 1999
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		JOBS Act: Jumpstart our Business Startups Act
ATM: Automated Teller Machine		LIBOR: London Interbank Offered Rate
BHC Act: Bank Holding Company Act of 1956		N/A: Not applicable
CECL: Current Expected Credit Losses		N/M: Not meaningful
CFPB: Consumer Financial Protection Bureau		NASDAQ: NASDAQ Stock Market Index
CIK: Central Index Key		NASDAQ Banks: NASDAQ Bank Stock Index
CRA: Community Reinvestment Act		NAV: Net asset value
DIF: Deposit Insurance Fund		NOW: Negotiable order of withdrawal
DIFS: Department of Insurance and Financial Services		NSF: Non-sufficient funds
Directors Plan: Isabella Bank Corporation and Related Companies Deferred Compensation Plan for Directors		OCI: Other comprehensive income (loss)
Dividend Reinvestment Plan: Isabella Bank Corporation Stockholder Dividend Reinvestment Plan and Employee Stock Purchase Plan		OMSR: Originated mortgage servicing rights
Dodd-Frank Act: Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010		OREO: Other real estate owned
ESOP: Employee Stock Ownership Plan		OTTI: Other-than-temporary impairment
Exchange Act: Securities Exchange Act of 1934		PBO: Projected benefit obligation
FASB: Financial Accounting Standards Board		PCAOB: Public Company Accounting Oversight Board
FDI Act: Federal Deposit Insurance Act		Rabbi Trust: A trust established to fund our Directors Plan
FDIC: Federal Deposit Insurance Corporation		SEC: U.S. Securities and Exchange Commission
FFIEC: Federal Financial Institutions Examinations Council		SOX: Sarbanes-Oxley Act of 2002
FRB: Federal Reserve Bank		Tax Act: Tax Cuts and Jobs Act, enacted December 22, 2017
FHLB: Federal Home Loan Bank		TDR: Troubled debt restructuring
Freddie Mac: Federal Home Loan Mortgage Corporation		XBRL: eXtensible Business Reporting Language
FTE: Fully taxable equivalent		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)



	September 30 2019		December 31 2018
ASSETS
Cash and cash equivalents
Cash and demand deposits due from banks	$	26,122	$	23,534
Interest bearing balances due from banks	8,209		49,937
Total cash and cash equivalents	34,331		73,471
AFS securities, at fair value	445,529		494,834
Mortgage loans AFS	1,912		358
Loans
Commercial	708,735		659,529
Agricultural	118,460		127,161
Residential real estate	292,311		275,343
Consumer	72,298		66,674
Gross loans	1,191,804		1,128,707
Less allowance for loan and lease losses	8,169		8,375
Net loans	1,183,635		1,120,332
Premises and equipment	26,350		27,815
Corporate owned life insurance policies	28,261		27,733
Accrued interest receivable	7,360		6,928
Equity securities without readily determinable fair values	25,130		24,948
Goodwill and other intangible assets	48,396		48,451
Other assets	12,780		17,632
TOTAL ASSETS	$	1,813,684	$	1,842,502
LIABILITIES AND SHAREHOLDERS’ EQUITY
Deposits
Noninterest bearing	$	242,179	$	236,534
NOW accounts	230,579		235,287
Certificates of deposit under $250 and other savings	749,736		744,944
Certificates of deposit over $250	86,279		75,928
Total deposits	1,308,773		1,292,693
Borrowed funds	277,386		340,299
Accrued interest payable and other liabilities	15,149		13,991
Total liabilities	1,601,308		1,646,983
Shareholders’ equity
Common stock — no par value 15,000,000 shares authorized; issued and outstanding 7,938,234 shares (including 44,189 shares held in the Rabbi Trust) in 2019 and 7,870,969 shares (including 16,673 shares held in the Rabbi Trust) in 2018	141,318		140,416
Shares to be issued for deferred compensation obligations	5,578		5,431
Retained earnings	63,334		57,357
Accumulated other comprehensive income (loss)	2,146		(7,685		)
Total shareholders’ equity	212,376		195,519
TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY	$	1,813,684	$	1,842,502

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 September 30					Nine Months Ended September 30
	2019		2018			2019		2018
Interest income
Loans, including fees	$	14,020	$	12,833		$	40,498	$	36,205
AFS securities
Taxable	1,691		2,031			5,522		6,263
Nontaxable	1,151		1,301			3,611		4,014
Federal funds sold and other	299		254			826		771
Total interest income	17,161		16,419			50,457		47,253
Interest expense
Deposits	2,980		2,436			8,563		6,712
Borrowings	1,570		1,795			4,806		4,661
Total interest expense	4,550		4,231			13,369		11,373
Net interest income	12,611		12,188			37,088		35,880
Provision for loan losses	193		(76		)	48		636
Net interest income after provision for loan losses	12,418		12,264			37,040		35,244
Noninterest income
Service charges and fees	1,705		1,557			4,706		4,533
Investment and Trust advisory fees	689		748			2,146		2,144
Earnings on corporate owned life insurance policies	190		185			564		551
Net gain on sale of mortgage loans	199		171			408		339
Net gains on foreclosed assets	202		23			213		34
Net gains on sale of AFS securities	6		—			6		—
Other	283		194			721		515
Total noninterest income	3,274		2,878			8,764		8,116
Noninterest expenses
Compensation and benefits	5,971		5,845			17,650		17,018
Furniture and equipment	1,427		1,473			4,330		4,459
Occupancy	830		870			2,594		2,501
Other	2,392		2,899			7,584		8,004
Total noninterest expenses	10,620		11,087			32,158		31,982
Income before federal income tax expense	5,072		4,055			13,646		11,378
Federal income tax expense	630		359			1,520		887
NET INCOME	$	4,442	$	3,696		$	12,126	$	10,491
Earnings per common share
Basic	$	0.56	$	0.47		$	1.53	$	1.33
Diluted	$	0.55	$	0.46		$	1.50	$	1.30
Cash dividends per common share	$	0.26	$	0.26		$	0.78	$	0.78

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


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

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 Outstanding		Amount			Common Shares to be Issued for Deferred Compensation Obligations			Retained Earnings			Accumulated Other Comprehensive Income (Loss)			Totals
Balance, January 1, 2018	7,857,293		$	140,277		$	5,502		$	51,728		$	(2,602	)	$	194,905
Comprehensive income (loss)	—		—			—			10,491			(9,774		)	717
Adoption of ASU 2016-01	—		—			—			(223		)	223			—
Issuance of common stock	189,074		5,093			—			—			—			5,093
Common stock transferred from the Rabbi Trust to satisfy deferred compensation obligations	—		612			(612		)	—			—			—
Share-based payment awards under equity compensation plan	—		—			449			—			—			449
Common stock purchased for deferred compensation obligations	—		(290		)	—			—			—			(290		)
Common stock repurchased pursuant to publicly announced repurchase plan	(215,427	)	(6,212		)	—			—			—			(6,212		)
Cash dividends paid ($0.78 per common share)	—		—			—			(6,126		)	—			(6,126		)
Balance, September 30, 2018	7,830,940		$	139,480		$	5,339		$	55,870		$	(12,153	)	$	188,536
Balance, January 1, 2019	7,870,969		$	140,416		$	5,431		$	57,357		$	(7,685	)	$	195,519
Comprehensive income (loss)	—		—			—			12,126			9,831			21,957
Issuance of common stock	159,521		3,672			—			—			—			3,672
Common stock transferred from the Rabbi Trust to satisfy deferred compensation obligations	—		268			(268		)	—			—			—
Share-based payment awards under equity compensation plan	—		—			415			—			—			415
Common stock purchased for deferred compensation obligations	—		(898		)	—			—			—			(898		)
Common stock repurchased pursuant to publicly announced repurchase plan	(92,256	)	(2,140		)	—			—			—			(2,140		)
Cash dividends paid ($0.78 per common share)	—		—			—			(6,149		)	—			(6,149		)
Balance, September 30, 2019	7,938,234		$	141,318		$	5,578		$	63,334		$	2,146		$	212,376

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

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INTERIM CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)

(Dollars in thousands)



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

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INTERIM CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (continued)

(Dollars in thousands)



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

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” refers to Isabella Bank Corporation’s subsidiary, Isabella Bank.

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

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

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

Note 2 – Accounting Standards Updates

Recently Adopted Accounting Standards Updates

ASU No. 2016-02: “Leases (Topic 842)”

In February 2016, ASU No. 2016-02 was issued to create Topic 842 - Leases which requires recognition of lease assets and lease liabilities on the balance sheet for leases previously classified as operating leases. Accounting guidance is for both lessee and lessor accounting. Under lessee accounting, a lessee should recognize in the statement of financial position a liability to make lease payments (the lease liability) and a right-of-use asset representing its right to use the underlying asset for the lease term.

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

The accounting applied by a lessor is largely unchanged from that applied under previous GAAP. The new authoritative guidance was effective on January 1, 2019. We reviewed our lease agreements to determine the appropriate treatment under this guidance. These changes resulted in the recognition of a $72 operating lease asset and liability on the consolidated balance sheet as of January 1, 2019 which was restated prospectively. Given the current insignificant impact to our operating results, further financial statement disclosures were not considered necessary as of September 30, 2019.

Pending Accounting Standards Updates

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 includes 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

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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.

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 is effective for interim and annual periods beginning after December 15, 2019 and may have a significant impact on our operations and financial statement disclosures as well as that of the banking industry as a whole. Effective October 16, 2019, the FASB approved changes to the implementation date of this guidance. 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. While we will consider an early adoption of ASU 2016-13, we do not expect to early adopt effective January 1, 2020.

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 has developed a road map to implementation, and the committee is accountable for timely and accurate adoption of the guidance. A company that has focused on the ALLL for more than 10 years and serves hundreds of financial institutions has been engaged to provide us with education, advisory, and software solutions exclusively related to the ACL. We will run parallel processes which will help to ensure we are ready to calculate, review, and report the ACL by the required implementation date.

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

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

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

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

In August 2018, ASU No. 2018-14 was issued and provided 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.

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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.

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

Note 3 – AFS Securities

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



	September 30, 2019
	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses		Fair Value
States and political subdivisions	$	170,897	$	4,679	$	1	$	175,575
Auction rate money market preferred	3,200		—		111		3,089
Mortgage-backed securities	149,843		975		698		150,120
Collateralized mortgage obligations	115,452		1,501		208		116,745
Total	$	439,392	$	7,155	$	1,018	$	445,529



	December 31, 2018
	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses		Fair Value
Government sponsored enterprises	$	172	$	—	$	2	$	170
States and political subdivisions	188,992		2,125		251		190,866
Auction rate money market preferred	3,200		—		646		2,554
Mortgage-backed securities	189,688		76		5,280		184,484
Collateralized mortgage obligations	119,193		71		2,504		116,760
Total	$	501,245	$	2,272	$	8,683	$	494,834

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



	Maturing								Securities with Variable Monthly Payments or Noncontractual Maturities
	Due in One Year or Less		After One Year But Within Five Years		After Five Years But Within Ten Years		After Ten Years				Total
States and political subdivisions	$	29,273	$	70,436	$	44,018	$	27,170	$	—	$	170,897
Auction rate money market preferred	—		—		—		—		3,200		3,200
Mortgage-backed securities	—		—		—		—		149,843		149,843
Collateralized mortgage obligations	—		—		—		—		115,452		115,452
Total amortized cost	$	29,273	$	70,436	$	44,018	$	27,170	$	268,495	$	439,392
Fair value	$	29,378	$	71,963	$	45,538	$	28,696	$	269,954	$	445,529

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.

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

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



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

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



	September 30, 2019
	Less Than Twelve Months				Twelve Months or More
	Gross Unrealized Losses		Fair Value		Gross Unrealized Losses		Fair Value		Total Unrealized Losses
States and political subdivisions	$	1	$	797	$	—	$	—	$	1
Auction rate money market preferred	—		—		111		3,089		111
Mortgage-backed securities	4		5,943		694		66,703		698
Collateralized mortgage obligations	47		11,312		161		17,043		208
Total	$	52	$	18,052	$	966	$	86,835	$	1,018
Number of securities in an unrealized loss position:			10				23		33



	December 31, 2018
	Less Than Twelve Months				Twelve Months or More
	Gross Unrealized Losses		Fair Value		Gross Unrealized Losses		Fair Value		Total Unrealized Losses
Government sponsored enterprises	$	—	$	—	$	2	$	170	$	2
States and political subdivisions	83		14,732		168		15,090		251
Auction rate money market preferred	—		—		646		2,554		646
Mortgage-backed securities	896		43,485		4,384		124,253		5,280
Collateralized mortgage obligations	199		21,886		2,305		87,929		2,504
Total	$	1,178	$	80,103	$	7,505	$	229,996	$	8,683
Number of securities in an unrealized loss position:			66				102		168

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

As of September 30, 2019 and December 31, 2018, 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 AFS securities in an unrealized loss position, we do not believe that the values of any AFS securities are other-than-temporarily

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

Note 4 – Loans and ALLL

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

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

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. Personal guarantees are generally required from the owners of closely held corporations, partnerships, and sole proprietorships. In addition, we may require annual financial statements, prepare cash flow analyses, and review credit reports.

We entered into a mortgage purchase program in 2016 with a financial institution where we participate in advances to mortgage brokers (“advances”). The mortgage brokers originate residential mortgage loans with the intent to sell them on the secondary market. We participate in the advance to the mortgage broker, which is secured by the underlying mortgage loan, until it is ultimately sold on the secondary market. As such, the average life of each participated advance is approximately 20-30 days. Funds from the sale of the loan are used to pay off our participation in the advance to the mortgage broker. We classify these advances as commercial loans and include the outstanding balance in commercial loans on our consolidated balance sheet. 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 reviewed for appropriateness. Generally, mortgage loan requests are reviewed by our mortgage loan committee or through a secondary market underwriting system; loans in excess of $1,000 require the approval of our Internal Loan Committee, the Executive Loan Committee, the Board of Directors’ Loan Committee, or the Board of Directors.

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

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

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

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

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



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



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

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	Allowance for Loan Losses and Recorded Investment in Loans
	September 30, 2019
	Commercial		Agricultural		Residential Real Estate		Consumer		Unallocated		Total
ALLL
Individually evaluated for impairment	$	34	$	132	$	1,167	$	—	$	—	$	1,333
Collectively evaluated for impairment	2,026		423		702		1,020		2,665		6,836
Total	$	2,060	$	555	$	1,869	$	1,020	$	2,665	$	8,169
Loans
Individually evaluated for impairment	$	8,626	$	13,766	$	5,953	$	—			$	28,345
Collectively evaluated for impairment	700,109		104,694		286,358		72,298				1,163,459
Total	$	708,735	$	118,460	$	292,311	$	72,298			$	1,191,804



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



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



	Allowance for Loan Losses and Recorded Investment in Loans
	December 31, 2018
	Commercial		Agricultural		Residential Real Estate		Consumer		Unallocated		Total
ALLL
Individually evaluated for impairment	$	443	$	132	$	1,363	$	—	$	—	$	1,938
Collectively evaluated for impairment	2,120		643		629		857		2,188		6,437
Total	$	2,563	$	775	$	1,992	$	857	$	2,188	$	8,375
Loans
Individually evaluated for impairment	$	9,899	$	14,298	$	6,893	$	9			$	31,099
Collectively evaluated for impairment	649,630		112,863		268,450		66,665				1,097,608
Total	$	659,529	$	127,161	$	275,343	$	66,674			$	1,128,707

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



	September 30, 2019
	Commercial								Agricultural
	Real Estate		Other		Advances to Mortgage Brokers		Total		Real Estate		Other		Total		Total
Rating
1 - Excellent	$	—	$	10	$	—	$	10	$	—	$	—	$	—	$	10
2 - High quality	3,342		11,829		—		15,171		2,020		405		2,425		17,596
3 - High satisfactory	122,861		47,475		46,702		217,038		17,199		5,127		22,326		239,364
4 - Low satisfactory	358,474		89,422		—		447,896		45,622		20,746		66,368		514,264
5 - Special mention	16,623		6,127		—		22,750		8,313		4,317		12,630		35,380
6 - Substandard	3,761		477		—		4,238		6,342		3,849		10,191		14,429
7 - Vulnerable	390		1,242		—		1,632		2,744		1,776		4,520		6,152
8 - Doubtful	—		—		—		—		—		—		—		—
9 - Loss	—		—		—		—		—		—		—		—
Total	$	505,451	$	156,582	$	46,702	$	708,735	$	82,240	$	36,220	$	118,460	$	827,195



	December 31, 2018
	Commercial								Agricultural
	Real Estate		Other		Advances to Mortgage Brokers		Total		Real Estate		Other		Total		Total
Rating
1 - Excellent	$	21	$	31	$	—	$	52	$	51	$	28	$	79	$	131
2 - High quality	4,564		13,473		—		18,037		2,729		613		3,342		21,379
3 - High satisfactory	127,573		43,199		11,793		182,565		18,325		7,039		25,364		207,929
4 - Low satisfactory	344,920		84,634		—		429,554		46,636		19,344		65,980		495,534
5 - Special mention	12,847		5,287		—		18,134		10,520		5,624		16,144		34,278
6 - Substandard	7,428		2,002		—		9,430		6,343		4,960		11,303		20,733
7 - Vulnerable	334		1,423		—		1,757		2,716		2,233		4,949		6,706
8 - Doubtful	—		—		—		—		—		—		—		—
9 - Loss	—		—		—		—		—		—		—		—
Total	$	497,687	$	150,049	$	11,793	$	659,529	$	87,320	$	39,841	$	127,161	$	786,690

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:



	September 30, 2019
	Accruing Interest and Past Due:								Total Past Due and Nonaccrual
	30-59 Days		60-89 Days		90 Days or More		Nonaccrual				Current		Total
Commercial
Commercial real estate	$	791	$	282	$	—	$	390	$	1,463	$	503,988	$	505,451
Commercial other	451		19		—		1,242		1,712		154,870		156,582
Advances to mortgage brokers	—		—		—		—		—		46,702		46,702
Total commercial	1,242		301		—		1,632		3,175		705,560		708,735
Agricultural
Agricultural real estate	280		—		—		2,744		3,024		79,216		82,240
Agricultural other	—		—		—		1,776		1,776		34,444		36,220
Total agricultural	280		—		—		4,520		4,800		113,660		118,460
Residential real estate
Senior liens	301		593		40		736		1,670		248,995		250,665
Junior liens	—		6		—		—		6		6,106		6,112
Home equity lines of credit	249		—		—		74		323		35,211		35,534
Total residential real estate	550		599		40		810		1,999		290,312		292,311
Consumer
Secured	136		17		—		—		153		68,258		68,411
Unsecured	4		5		—		—		9		3,878		3,887
Total consumer	140		22		—		—		162		72,136		72,298
Total	$	2,212	$	922	$	40	$	6,962	$	10,136	$	1,181,668	$	1,191,804

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	December 31, 2018
	Accruing Interest and Past Due:								Total Past Due and Nonaccrual
	30-59 Days		60-89 Days		90 Days or More		Nonaccrual				Current		Total
Commercial
Commercial real estate	$	60	$	—	$	—	$	334	$	394	$	497,293	$	497,687
Commercial other	277		628		—		1,423		2,328		147,721		150,049
Advances to mortgage brokers	—		—		—		—		—		11,793		11,793
Total commercial	337		628		—		1,757		2,722		656,807		659,529
Agricultural
Agricultural real estate	428		—		—		2,716		3,144		84,176		87,320
Agricultural other	—		—		—		2,233		2,233		37,608		39,841
Total agricultural	428		—		—		4,949		5,377		121,784		127,161
Residential real estate
Senior liens	2,254		203		113		554		3,124		233,438		236,562
Junior liens	2		6		—		—		8		6,001		6,009
Home equity lines of credit	76		—		—		—		76		32,696		32,772
Total residential real estate	2,332		209		113		554		3,208		272,135		275,343
Consumer
Secured	95		—		—		—		95		62,721		62,816
Unsecured	10		—		—		—		10		3,848		3,858
Total consumer	105		—		—		—		105		66,569		66,674
Total	$	3,202	$	837	$	113	$	7,260	$	11,412	$	1,117,295	$	1,128,707

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.

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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 information pertaining to impaired loans as of:



	September 30, 2019						December 31, 2018
	Recorded Balance		Unpaid Principal Balance		Valuation Allowance		Recorded Balance		Unpaid Principal Balance		Valuation Allowance
Impaired loans with a valuation allowance
Commercial real estate	$	947	$	1,190	$	29	$	3,969	$	4,211	$	437
Commercial other	11		11		5		12		12		6
Agricultural real estate	1,512		1,512		101		392		392		112
Agricultural other	1,347		1,347		31		44		44		20
Residential real estate senior liens	5,845		6,315		1,165		6,834		7,289		1,361
Residential real estate junior liens	12		12		2		12		12		2
Total impaired loans with a valuation allowance	9,674		10,387		1,333		11,263		11,960		1,938
Impaired loans without a valuation allowance
Commercial real estate	5,139		5,278				2,794		2,947
Commercial other	2,529		2,529				3,124		3,231
Agricultural real estate	7,005		7,005				7,618		7,618
Agricultural other	3,902		3,902				6,244		6,287
Home equity lines of credit	96		396				47		347
Consumer secured	—		—				9		9
Total impaired loans without a valuation allowance	18,671		19,110				19,836		20,439
Impaired loans
Commercial	8,626		9,008		34		9,899		10,401		443
Agricultural	13,766		13,766		132		14,298		14,341		132
Residential real estate	5,953		6,723		1,167		6,893		7,648		1,363
Consumer	—		—		—		9		9		—
Total impaired loans	$	28,345	$	29,497	$	1,333	$	31,099	$	32,399	$	1,938

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



	Three Months Ended September 30
	2019				2018
	Average Recorded Balance		Interest Income Recognized		Average Recorded Balance		Interest Income Recognized
Impaired loans with a valuation allowance
Commercial real estate	$	1,546	$	2	$	4,195	$	14
Commercial other	11		—		778		16
Agricultural real estate	1,513		10		673		40
Agricultural other	1,292		11		324		45
Residential real estate senior liens	6,096		14		7,512		17
Residential real estate junior liens	12		—		18		—
Total impaired loans with a valuation allowance	10,470		37		13,500		132
Impaired loans without a valuation allowance
Commercial real estate	4,664		12		3,076		8
Commercial other	2,607		7		1,396		2
Agricultural real estate	6,995		45		7,193		137
Agricultural other	3,820		45		5,786		68
Home equity lines of credit	63		—		59		—
Consumer secured	4		—		11		—
Total impaired loans without a valuation allowance	18,153		109		17,521		215
Impaired loans
Commercial	8,828		21		9,445		40
Agricultural	13,620		111		13,976		290
Residential real estate	6,171		14		7,589		17
Consumer	4		—		11		—
Total impaired loans	$	28,623	$	146	$	31,021	$	347

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	Nine Months Ended September 30
	2019				2018
	Average Recorded Balance		Interest Income Recognized		Average Recorded Balance		Interest Income Recognized
Impaired loans with a valuation allowance
Commercial real estate	$	2,484	$	58	$	4,739	$	118
Commercial other	11		—		1,263		55
Agricultural real estate	951		73		584		46
Agricultural other	659		20		108		45
Residential real estate senior liens	6,406		101		7,694		107
Residential real estate junior liens	12		—		29		—
Total impaired loans with a valuation allowance	10,523		252		14,417		371
Impaired loans without a valuation allowance
Commercial real estate	3,979		86		2,763		55
Commercial other	2,776		41		1,297		21
Agricultural real estate	7,308		110		7,600		414
Agricultural other	4,913		201		4,105		219
Home equity lines of credit	47		6		68		5
Consumer secured	7		—		13		—
Total impaired loans without a valuation allowance	19,030		444		15,846		714
Impaired loans
Commercial	9,250		185		10,062		249
Agricultural	13,831		404		12,397		724
Residential real estate	6,465		107		7,791		112
Consumer	7		—		13		—
Total impaired loans	$	29,553	$	696	$	30,263	$	1,085

We had committed to advance $228 and $542 in connection with impaired loans, which includes TDRs, as of September 30, 2019 and December 31, 2018, 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).

Table of Contents

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



	Three Months Ended September 30
	2019					2018
	Number of Loans	Pre-Modification Recorded Investment		Post-Modification Recorded Investment		Number of Loans	Pre-Modification Recorded Investment		Post-Modification Recorded Investment
Agricultural other	1	$	25	$	25	7	$	1,327	$	1,327
Residential real estate	—	—		—		1	99		99
Total	1	$	25	$	25	8	$	1,426	$	1,426



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

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



	Three Months Ended September 30
	2019						2018
	Below Market Interest Rate			Below Market Interest Rate and Extension of Amortization Period			Below Market Interest Rate			Below Market Interest Rate and Extension of Amortization Period
	Number of Loans	Pre-Modification Recorded Investment		Number of Loans	Pre-Modification Recorded Investment		Number of Loans	Pre-Modification Recorded Investment		Number of Loans	Pre-Modification Recorded Investment
Agricultural other	1	$	25	—	$	—	5	$	476	2	$	851
Residential real estate	—	—		—	—		1	99		—	—
Total	1	$	25	—	$	—	6	$	575	2	$	851



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

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

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

We had no loans that defaulted in the three and nine month periods ended September 30, 2019 and 2018 which were modified within 12 months prior to the default date.

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



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

Note 5 – Equity Securities Without Readily Determinable Fair Values

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

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



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

Note 6 – Borrowed Funds

Borrowed funds consist of the following obligations as of:



	September 30, 2019				December 31, 2018
	Amount		Rate		Amount		Rate
FHLB advances	$	245,000	2.34	%	$	300,000	2.20	%
Securities sold under agreements to repurchase without stated maturity dates	32,386		0.11	%	40,299		0.11	%
Total	$	277,386	2.08	%	$	340,299	1.95	%

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

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



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


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

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

Securities sold under repurchase agreements without stated maturity dates, federal funds purchased, and FRB Discount Window advances generally mature within one to four days from the transaction date. The following tables provide a summary of securities sold under repurchase agreements without stated maturity dates and federal funds purchased. We had no FRB

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



	Three Months Ended September 30
	2019						2018
	Maximum Month End Balance		Average Balance		Weighted Average Interest Rate During the Period		Maximum Month End Balance		Average Balance		Weighted Average Interest Rate During the Period
Securities sold under agreements to repurchase without stated maturity dates	$	32,386	$	32,520	0.09	%	$	40,346	$	34,886	0.09	%
Federal funds purchased	—		317		2.61	%	—		1,375		1.90	%



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

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



	September 30 2019		December 31 2018
Pledged to secure borrowed funds	$	370,053	$	431,430
Pledged to secure repurchase agreements	32,405		40,316
Pledged for public deposits and for other purposes necessary or required by law	62,899		58,107
Total	$	465,357	$	529,853

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



	September 30 2019		December 31 2018
States and political subdivisions	$	32,405	$	23,268
Mortgage-backed securities	—		10,736
Collateralized mortgage obligations	—		6,312
Total	$	32,405	$	40,316

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

Derivative Instruments

We have entered into 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.

Table of Contents

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

September 30, 2019

Pay Rate

Receive Rate

Remaining Life (Years)

Notional Amount

Balance Sheet Location

Fair Value

Derivatives designated as hedging instruments

Cash Flow Hedges:

Interest rate swaps

1.56

3-Month LIBOR

1.6

10,000

Other Assets

December 31, 2018

Pay Rate

Receive Rate

Remaining Life (Years)

Notional Amount

Balance Sheet Location

Fair Value

Derivatives designated as hedging instruments

Cash Flow Hedges:

Interest rate swaps

1.56

3-Month LIBOR

2.3

10,000

Other Assets

323

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

Note 7 – Revenue

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

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

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



	Three Months Ended September 30				Nine Months Ended September 30
	2019		2018		2019		2018
Debit card income	$	672	$	600	$	1,912	$	1,809
Trust service fees	566		562		1,677		1,628
Investment advisory fees	123		186		469		516
Service charges and fees related to deposit accounts	78		83		236		250
Total	$	1,439	$	1,431	$	4,294	$	4,203

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

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Note 8 – Other Noninterest Expenses

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



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

Note 9 – Federal Income Taxes

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



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

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Note 10 – Computation of Earnings Per Common Share

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

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



	Three Months Ended September 30				Nine Months Ended September 30
	2019		2018		2019		2018
Average number of common shares outstanding for basic calculation	7,925,332		7,851,448		7,904,568		7,876,941
Average potential effect of common shares in the Directors Plan ⁽¹⁾	181,536		200,597		186,720		199,488
Average number of common shares outstanding used to calculate diluted earnings per common share	8,106,868		8,052,045		8,091,288		8,076,429
Net income	$	4,442	$	3,696	$	12,126	$	10,491
Earnings per common share
Basic	$	0.56	$	0.47	$	1.53	$	1.33
Diluted	$	0.55	$	0.46	$	1.50	$	1.30


⁽¹⁾	Exclusive of shares held in the Rabbi Trust

Note 11 – Accumulated Other Comprehensive Income

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



	Three Months Ended September 30
	2019												2018
	Unrealized Gains (Losses) on AFS Securities			Unrealized Gains (Losses) on Derivative Instruments			Defined Benefit Pension Plan			Total			Unrealized Gains (Losses) on AFS Securities			Unrealized Gains (Losses) on Derivative Instruments			Defined Benefit Pension Plan			Total
Balance, July 1	$	3,417		$	91		$	(2,741	)	$	767		$	(7,295	)	$	351		$	(3,223	)	$	(10,167	)
OCI before reclassifications	1,724			(37		)	—			1,687			(2,513		)	7			—			(2,506		)
Amounts reclassified from AOCI	(6		)	—			—			(6		)	—			—			—			—
Subtotal	1,718			(37		)	—			1,681			(2,513		)	7			—			(2,506		)
Tax effect	(310		)	8			—			(302		)	522			(2		)	—			520
OCI, net of tax	1,408			(29		)	—			1,379			(1,991		)	5			—			(1,986		)
Balance, September 30	$	4,825		$	62		$	(2,741	)	$	2,146		$	(9,286	)	$	356		$	(3,223	)	$	(12,153	)

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	Nine Months Ended September 30
	2019												2018
	Unrealized Gains (Losses) on AFS Securities			Unrealized Gains (Losses) on Derivative Instruments			Defined Benefit Pension Plan			Total			Unrealized Gains (Losses) on AFS Securities			Unrealized Gains (Losses) on Derivative Instruments			Defined Benefit Pension Plan			Total
Balance, January 1	$	(5,200	)	$	256		$	(2,741	)	$	(7,685	)	$	391		$	230		$	(3,223	)	$	(2,602	)
OCI before reclassifications	12,554			(245		)	—			12,309			(12,548		)	160			—			(12,388		)
Amounts reclassified from AOCI	(6		)	—			—			(6		)	—			—			—			—
Subtotal	12,548			(245		)	—			12,303			(12,548		)	160			—			(12,388		)
Tax effect	(2,523		)	51			—			(2,472		)	2,648			(34		)	—			2,614
OCI, net of tax	10,025			(194		)	—			9,831			(9,900		)	126			—			(9,774		)
Adoption of ASU 2016-01	—			—			—			—			223			—			—			223
Balance, September 30	$	4,825		$	62		$	(2,741	)	$	2,146		$	(9,286	)	$	356		$	(3,223	)	$	(12,153	)

Included in OCI for the three and nine month periods ended September 30, 2019 and 2018 are changes in unrealized gains and losses related to auction rate money market preferred stocks. These investments, for federal income tax purposes, have no deferred federal income taxes related to unrealized gains or losses given the nature of the investments.

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



	Three Months Ended September 30
	2019								2018
	Auction Rate Money Market Preferred Stocks		All Other AFS Securities			Total			Auction Rate Money Market Preferred and Preferred Stocks			All Other AFS Securities			Total
Unrealized gains (losses) arising during the period	$	240	$	1,484		$	1,724		$	(27	)	$	(2,486	)	$	(2,513	)
Reclassification adjustment for net (gains) losses included in net income	—		(6		)	(6		)	—			—			—
Net unrealized gains (losses)	240		1,478			1,718			(27		)	(2,486		)	(2,513		)
Tax effect	—		(310		)	(310		)	—			522			522
Unrealized gains (losses), net of tax	$	240	$	1,168		$	1,408		$	(27	)	$	(1,964	)	$	(1,991	)



	Nine Months Ended September 30
	2019								2018
	Auction Rate Money Market Preferred Stocks		All Other AFS Securities			Total			Auction Rate Money Market Preferred and Preferred Stocks		All Other AFS Securities			Total
Unrealized gains (losses) arising during the period	$	535	$	12,019		$	12,554		$	59	$	(12,607	)	$	(12,548	)
Reclassification adjustment for net (gains) losses included in net income	—		(6		)	(6		)	—		—			—
Net unrealized gains (losses)	535		12,013			12,548			59		(12,607		)	(12,548		)
Tax effect	—		(2,523		)	(2,523		)	—		2,648			2,648
Unrealized gains (losses), net of tax	$	535	$	9,490		$	10,025		$	59	$	(9,959	)	$	(9,900	)

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Note 12 – 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, from time-to-time, loans are classified as impaired and a specific allowance for loan losses may be established. Loans for which it is probable that payment of interest and principal will be significantly different than the contractual terms of the original loan agreement are considered impaired. Once a loan is identified as impaired, we measure the estimated impairment. The fair value of impaired loans is estimated using one of several methods, including the present value of expected future cash flows discounted at the loan’s effective interest rate, or the fair value of the collateral, less costs to sell, if the loan is collateral dependent. Those impaired loans not requiring an allowance represent loans for which the fair value of the expected repayments or collateral exceed the recorded investments in such loans.

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

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



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



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

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

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

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

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

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

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

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



	September 30, 2019
	Carrying Value		Estimated Fair Value		Level 1		Level 2		Level 3
ASSETS
Cash and cash equivalents	$	34,331	$	34,331	$	34,331	$	—	$	—
Mortgage loans AFS	1,912		1,928		—		1,928		—
Gross loans	1,191,804		1,175,721		—		—		1,175,721
Less allowance for loan and lease losses	8,169		8,169		—		—		8,169
Net loans	1,183,635		1,167,552		—		—		1,167,552
Accrued interest receivable	7,360		7,360		7,360		—		—
Equity securities without readily determinable fair values ⁽¹⁾	25,130		N/A		—		—		—
OMSR	2,375		2,375		—		2,375		—
LIABILITIES
Deposits without stated maturities	882,688		882,688		882,688		—		—
Deposits with stated maturities	426,085		427,536		—		427,536		—
Borrowed funds	277,386		280,203		—		280,203		—
Accrued interest payable	870		870		870		—		—



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


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

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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:



	September 30, 2019											December 31, 2018
	Total		Level 1			Level 2			Level 3			Total		Level 1			Level 2			Level 3
Recurring items
AFS securities
Government-sponsored enterprises	$	—	$	—		$	—		$	—		$	170	$	—		$	170		$	—
States and political subdivisions	175,575		—			175,575			—			190,866		—			190,866			—
Auction rate money market preferred	3,089		—			3,089			—			2,554		—			2,554			—
Mortgage-backed securities	150,120		—			150,120			—			184,484		—			184,484			—
Collateralized mortgage obligations	116,745		—			116,745			—			116,760		—			116,760			—
Total AFS securities	445,529		—			445,529			—			494,834		—			494,834			—
Derivative instruments	78		—			78			—			323		—			323			—
Nonrecurring items
Impaired loans (net of the ALLL)	18,940		—			—			18,940			20,045		—			—			20,045
Total	$	464,547	$	—		$	445,607		$	18,940		$	515,202	$	—		$	495,157		$	20,045
Percent of assets and liabilities measured at fair value			—		%	95.92		%	4.08		%			—		%	96.11		%	3.89		%

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

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Note 13 – Parent Company Only Financial Information

Interim Condensed Balance Sheets



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

Interim Condensed Statements of Income



	Three Months Ended September 30					Nine Months Ended September 30
	2019		2018			2019		2018
Income
Dividends from subsidiaries	$	2,400	$	4,900		$	5,500	$	10,900
Interest income	1		1			5		1
Other income	181		812			394		2,342
Total income	2,582		5,713			5,899		13,243
Expenses
Compensation and benefits	—		1,068			—		3,227
Occupancy and equipment	15		129			44		378
Audit, consulting, and legal fees	110		154			355		586
Director fees	90		106			277		313
Other	254		142			872		450
Total expenses	469		1,599			1,548		4,954
Income before income tax benefit and equity in undistributed earnings of subsidiaries	2,113		4,114			4,351		8,289
Federal income tax benefit	60		165			239		545
Income before equity in undistributed earnings of subsidiaries	2,173		4,279			4,590		8,834
Undistributed earnings of subsidiaries	2,269		(583		)	7,536		1,657
Net income	$	4,442	$	3,696		$	12,126	$	10,491

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Interim Condensed Statements of Cash Flows



	Nine Months Ended September 30
	2019			2018
Operating activities
Net income	$	12,126		$	10,491
Adjustments to reconcile net income to cash provided by operations
Undistributed earnings of subsidiaries	(7,536		)	(1,657		)
Undistributed earnings of equity securities without readily determinable fair values	(182		)	(143		)
Share-based payment awards under equity compensation plan	415			449
Depreciation	34			98
Changes in operating assets and liabilities which provided (used) cash
Other assets	(35		)	1,080
Other liabilities	641			(597		)
Net cash provided by (used in) operating activities	5,463			9,721
Investing activities
Sales (purchases) of premises and equipment	—			(79		)
Net cash provided by (used in) investing activities	—			(79		)
Financing activities
Cash dividends paid on common stock	(6,149		)	(6,126		)
Proceeds from the issuance of common stock	3,672			5,093
Common stock repurchased	(2,140		)	(6,212		)
Common stock purchased for deferred compensation obligations	(898		)	(290		)
Net cash provided by (used in) financing activities	(5,515		)	(7,535		)
Increase (decrease) in cash and cash equivalents	(52		)	2,107
Cash and cash equivalents at beginning of period	2,499			185
Cash and cash equivalents at end of period	$	2,447		$	2,292

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

Note 14 – Operating Segments

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

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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)

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

Executive Summary

During the three and nine months ended September 30, 2019, we reported net income of $4,442 and $12,126 and earnings per common share of $0.56 and $1.53, respectively. Net income and earnings per common share for the same periods of 2018 were $3,696 and $10,491 and $0.47 and $1.33, respectively. A combination of improved yields and growth in our loan portfolio over the past twelve months were large drivers of a $3,204 increase in interest income for the first nine months of 2019 compared to the same period in 2018. Interest expense on deposits and borrowings increased $1,996 for the nine month period ended September 30, 2019 when compared to the same period in 2018 primarily due to higher interest rates. Noninterest income increased $648 during the first nine months of 2019 when compared to the same period in 2018 as we experienced an increase in debit card transaction fees and gains related to foreclosed assets. Noninterest expenses for the first nine months of 2019 exceeded noninterest expenses for the same period in 2018 by $176. Expenses related to our employee incentive plans account for a portion of this increase, which was partially offset by an FDIC assessment credit, reduced audit and consulting fees, and ongoing cost control initiatives. These initiatives include managing employee turnover, capital expenditures and vendor costs.

As of September 30, 2019, total assets and assets under management were $1,813,684 and $2,548,131, respectively. Assets under management include loans sold and serviced of $258,873 and assets managed by our Investment and Trust Services Department of $475,574, in addition to assets on our consolidated balance sheet. As a result of the flat yield curve that has existed for several months, the opportunity to identify new investment securities for purchase at an acceptable yield has been minimal. Therefore, our securities portfolio has declined $49,305 since December 31, 2018. Based on strategic objectives, we utilized this available cash flow to reduce borrowings as they mature and other high-cost funding sources, resulting in a decline in total assets as of September 30, 2019 when compared to December 31, 2018. Loans outstanding as of September 30, 2019 totaled $1,191,804. During the first nine months of 2019, gross loans increased $63,097 which was largely driven by growth in our commercial loan portfolio. Total deposits increased $16,080 during the year, primarily due to increases in savings and trust related deposits, and totaled $1,308,773 as of September 30, 2019. 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 3.13% and 3.07% for the three and nine months ended September 30, 2019, respectively. This compares to 2.97% in both the three and nine months ended September 30, 2018. Management has implemented various initiatives which, over time, are expected to continue to improve our net yield on interest earning assets. These initiatives included transitioning a larger percentage of assets from lower yielding investment securities to higher yielding loan opportunities, continued growth of the loan portfolio, reduced reliance on borrowings and brokered deposits, and enhanced pricing strategies related to loan and deposit products. 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 Legislation

On December 22, 2017, the Tax Act was enacted. The new law establishes a flat corporate federal statutory income tax rate of 21%, a decline from 34%, and eliminates the corporate alternative minimum tax. The new tax law provides for a wide array of changes with only some believed to have a direct impact on our federal income tax expense. Some of these changes include, but are not limited to, the following items: limits to the deductions for net interest expense, immediate expense (for tax purposes) for certain qualified depreciable assets, elimination or reduction of certain deductions related to meals and entertainment expenses, and limits to the deductibility of deposit insurance premiums.

Reclassifications

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

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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:



	September 30 2019			June 30 2019			March 31 2019			December 31 2018			September 30 2018
INCOME STATEMENT DATA
Interest income	$	17,161		$	16,815		$	16,481		$	16,611		$	16,419
Interest expense	4,550			4,527			4,292			4,258			4,231
Net interest income	12,611			12,288			12,189			12,353			12,188
Provision for loan losses	193			(179		)	34			342			(76		)
Noninterest income	3,274			3,011			2,479			2,860			2,878
Noninterest expenses	10,620			10,749			10,789			10,865			11,087
Federal income tax expense	630			541			349			476			359
Net income	$	4,442		$	4,188		$	3,496		$	3,530		$	3,696
PER SHARE
Basic earnings	$	0.56		$	0.53		$	0.44		$	0.45		$	0.47
Diluted earnings	$	0.55		$	0.52		$	0.43		$	0.44		$	0.46
Dividends	$	0.26		$	0.26		$	0.26		$	0.26		$	0.26
Tangible book value ⁽¹⁾	$	20.65		$	20.17		$	19.47		$	18.68		$	17.89
Quoted market value
High	$	23.45		$	23.75		$	24.50		$	27.00		$	27.65
Low	$	22.01		$	22.25		$	22.25		$	22.50		$	26.05
Close ⁽²⁾	$	22.30		$	23.25		$	23.75		$	22.56		$	26.75
Common shares outstanding ⁽²⁾	7,938,234			7,918,494			7,906,078			7,870,969			7,830,940
PERFORMANCE RATIOS
Return on average total assets	0.98		%	0.93		%	0.77		%	0.77		%	0.80		%
Return on average shareholders' equity	8.37		%	8.13		%	7.00		%	7.35		%	7.67		%
Return on average tangible shareholders' equity	11.08		%	10.61		%	8.97		%	9.20		%	9.75		%
Net interest margin yield (FTE)	3.13		%	3.06		%	3.02		%	3.02		%	2.97		%
BALANCE SHEET DATA ⁽²⁾
Gross loans	$	1,191,804		$	1,176,622		$	1,144,832		$	1,128,707		$	1,139,930
AFS securities	$	445,529		$	470,449		$	494,842		$	494,834		$	501,139
Total assets	$	1,813,684		$	1,824,592		$	1,806,371		$	1,842,502		$	1,833,663
Deposits	$	1,308,773		$	1,281,418		$	1,277,963		$	1,292,693		$	1,276,806
Borrowed funds	$	277,386		$	320,462		$	311,684		$	340,299		$	359,776
Shareholders' equity	$	212,376		$	208,114		$	202,413		$	195,519		$	188,536
Gross loans to deposits	91.06		%	91.82		%	89.58		%	87.31		%	89.28		%
ASSETS UNDER MANAGEMENT ⁽²⁾
Loans sold with servicing retained	$	258,873		$	257,062		$	259,127		$	259,481		$	257,400
Assets managed by our Investment and Trust Services Department	$	475,574		$	487,180		$	475,560		$	447,487		$	504,371
Total assets under management	$	2,548,131		$	2,568,834		$	2,541,058		$	2,549,470		$	2,595,434
ASSET QUALITY ⁽²⁾
Nonperforming loans to gross loans	0.59		%	0.70		%	0.64		%	0.65		%	0.65		%
Nonperforming assets to total assets	0.41		%	0.48		%	0.43		%	0.42		%	0.42		%
ALLL to gross loans	0.69		%	0.68		%	0.73		%	0.74		%	0.71		%
CAPITAL RATIOS ⁽²⁾
Shareholders' equity to assets	11.71		%	11.41		%	11.20		%	10.64		%	10.28		%
Tier 1 leverage	9.16		%	9.03		%	8.91		%	8.72		%	8.49		%
Common equity tier 1 capital	12.58		%	12.43		%	12.45		%	12.58		%	12.18		%
Tier 1 risk-based capital	12.58		%	12.43		%	12.45		%	12.58		%	12.18		%
Total risk-based capital	13.21		%	13.06		%	13.12		%	13.26		%	12.83		%

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

⁽²⁾ 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 nine month periods ended:



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

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

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

⁽³⁾ 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
	September 30, 2019							June 30, 2019							September 30, 2018
	Average Balance			Tax Equivalent Interest		Average Yield / Rate		Average Balance			Tax Equivalent Interest		Average Yield / Rate		Average Balance			Tax Equivalent Interest		Average Yield / Rate
INTEREST EARNING ASSETS
Loans	$	1,177,257		$	14,020	4.76	%	$	1,155,284		$	13,587	4.70	%	$	1,151,881		$	12,833	4.46	%
Taxable investment securities	288,374			1,691		2.35	%	309,650			1,873		2.42	%	334,785			2,031		2.43	%
Nontaxable investment securities	164,159			1,557		3.79	%	172,400			1,623		3.77	%	188,885			1,755		3.72	%
Fed funds sold	218			2		2.83	%	—			—		—	%	—			—		—	%
Other	32,694			297		3.63	%	25,123			148		2.36	%	29,387			254		3.46	%
Total earning assets	1,662,702			17,567		4.23	%	1,662,457			17,231		4.15	%	1,704,938			16,873		3.96	%
NONEARNING ASSETS
Allowance for loan losses	(8,072		)					(8,349		)					(8,213		)
Cash and demand deposits due from banks	21,078							19,089							20,291
Premises and equipment	26,749							27,326							28,310
Accrued income and other assets	111,927							107,046							94,518
Total assets	$	1,814,384						$	1,807,569						$	1,839,844
INTEREST BEARING LIABILITIES
Interest bearing demand deposits	$	234,164		$	76	0.13	%	$	230,238		$	83	0.14	%	$	233,485		$	69	0.12	%
Savings deposits	381,458			644		0.68	%	374,750			586		0.63	%	362,505			450		0.50	%
Time deposits	429,407			2,260		2.11	%	430,098			2,196		2.04	%	454,456			1,917		1.69	%
Borrowed funds	300,120			1,570		2.09	%	321,958			1,662		2.06	%	363,544			1,795		1.98	%
Total interest bearing liabilities	1,345,149			4,550		1.35	%	1,357,044			4,527		1.33	%	1,413,990			4,231		1.20	%
NONINTEREST BEARING LIABILITIES
Demand deposits	242,092							230,203							226,238
Other	14,753							14,288							6,937
Shareholders’ equity	212,390							206,034							192,679
Total liabilities and shareholders’ equity	$	1,814,384						$	1,807,569						$	1,839,844
Net interest income (FTE)				$	13,017						$	12,704						$	12,642
Net yield on interest earning assets (FTE)						3.13	%						3.06	%						2.97	%

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	Nine Months Ended
	September 30, 2019							September 30, 2018
	Average Balance			Tax Equivalent Interest		Average Yield / Rate		Average Balance			Tax Equivalent Interest		Average Yield / Rate
INTEREST EARNING ASSETS
Loans	$	1,154,715		$	40,498	4.68	%	$	1,114,683		$	36,205	4.33	%
Taxable investment securities	305,880			5,522		2.41	%	346,956			6,318		2.43	%
Nontaxable investment securities	172,091			4,867		3.77	%	194,361			5,456		3.74	%
Fed funds sold	82			2		2.51	%	—			—		—	%
Other	32,846			824		3.34	%	22,010			716		4.34	%
Total earning assets	1,665,614			51,713		4.14	%	1,678,010			48,695		3.87	%
NONEARNING ASSETS
Allowance for loan losses	(8,274		)					(8,078		)
Cash and demand deposits due from banks	19,793							19,481
Premises and equipment	27,257							28,454
Accrued income and other assets	106,304							95,717
Total assets	$	1,810,694						$	1,813,584
INTEREST BEARING LIABILITIES
Interest bearing demand deposits	$	233,484		$	227	0.13	%	$	230,376		$	201	0.12	%
Savings deposits	379,116			1,845		0.65	%	360,295			1,169		0.43	%
Time deposits	431,959			6,491		2.00	%	461,114			5,342		1.54	%
Borrowed funds	314,430			4,806		2.04	%	339,461			4,661		1.83	%
Total interest bearing liabilities	1,358,989			13,369		1.31	%	1,391,246			11,373		1.09	%
NONINTEREST BEARING LIABILITIES
Demand deposits	232,996							221,423
Other	12,665							7,272
Shareholders’ equity	206,044							193,643
Total liabilities and shareholders’ equity	$	1,810,694						$	1,813,584
Net interest income (FTE)				$	38,344						$	37,322
Net yield on interest earning assets (FTE)						3.07	%						2.97	%

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. For the purpose of this table, changes in interest due to volume and rate were determined as follows:

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

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

The change in interest due to both volume and rate has been allocated to volume and rate changes in proportion to the relationship of the absolute dollar amounts of the change in each.



	Three Months Ended September 30, 2019 Compared to June 30, 2019 Increase (Decrease) Due to									Three Months Ended September 30, 2019 Compared to September 30, 2018 Increase (Decrease) Due to									Nine Months Ended September 30, 2019 Compared to September 30, 2018 Increase (Decrease) Due to
	Volume			Rate			Net			Volume			Rate			Net			Volume			Rate			Net
Changes in interest income
Loans	$	260		$	173		$	433		$	287		$	900		$	1,187		$	1,332		$	2,961		$	4,293
Taxable investment securities	(126		)	(56		)	(182		)	(274		)	(66		)	(340		)	(742		)	(54		)	(796		)
Nontaxable investment securities	(78		)	12			(66		)	(234		)	36			(198		)	(630		)	41			(589		)
Fed Funds Sold	2			—			2			2			—			2			2			—			2
Other	53			96			149			30			13			43			297			(189		)	108
Total changes in interest income	111			225			336			(189		)	883			694			259			2,759			3,018
Changes in interest expense
Interest bearing demand deposits	1			(8		)	(7		)	—			7			7			3			23			26
Savings deposits	11			47			58			25			169			194			64			612			676
Time deposits	(4		)	68			64			(110		)	453			343			(355		)	1,504			1,149
Borrowed funds	(114		)	22			(92		)	(327		)	102			(225		)	(359		)	504			145
Total changes in interest expense	(106		)	129			23			(412		)	731			319			(647		)	2,643			1,996
Net change in interest margin (FTE)	$	217		$	96		$	313		$	223		$	152		$	375		$	906		$	116		$	1,022

Our net yield on interest earning assets has increased in recent periods. The continuing flattening of the yield curve and rising deposit rates has placed pressure on our net interest margin. Despite this pressure, we experienced improvement as a result of improved loan yields and a decline in high-cost deposits and borrowings.



	Average Yield / Rate for the Three Month Periods Ended:
	September 30 2019		June 30 2019		March 31 2019		December 31 2018		September 30 2018
Total earning assets	4.23	%	4.15	%	4.05	%	4.03	%	3.96	%
Total interest bearing liabilities	1.35	%	1.33	%	1.25	%	1.23	%	1.20	%
Net yield on interest earning assets (FTE)	3.13	%	3.06	%	3.02	%	3.02	%	2.97	%



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

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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 September 30						Nine Months Ended September 30
	2019			2018			2019			2018
ALLL at beginning of period	$	8,037		$	8,200		$	8,375		$	7,700
Charge-offs
Commercial	21			—			134			450
Agricultural	1			7			60			51
Residential real estate	—			61			96			100
Consumer	121			111			324			247
Total charge-offs	143			179			614			848
Recoveries
Commercial	25			79			98			282
Agricultural	1			1			2			2
Residential real estate	25			37			143			162
Consumer	31			38			117			166
Total recoveries	82			155			360			612
Net loan charge-offs (recoveries)	61			24			254			236
Provision for loan losses	193			(76		)	48			636
ALLL at end of period	$	8,169		$	8,100		$	8,169		$	8,100
Net loan charge-offs (recoveries) to average loans outstanding	0.01		%	—		%	0.02		%	0.02		%

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



	September 30 2019			June 30 2019			March 31 2019			December 31 2018			September 30 2018
Total charge-offs	$	143		$	333		$	138		$	253		$	179
Total recoveries	82			151			127			186			155
Net loan charge-offs (recoveries)	61			182			11			67			24
Net loan charge-offs (recoveries) to average loans outstanding	0.01		%	0.02		%	—		%	0.01		%	—		%
Provision for loan losses	$	193		$	(179	)	$	34		$	342		$	(76	)
Provision for loan losses to average loans outstanding	0.02		%	(0.02		)%	—		%	0.03		%	(0.01		)%
ALLL	$	8,169		$	8,037		$	8,398		$	8,375		$	8,100
ALLL as a % of loans at end of period	0.69		%	0.68		%	0.73		%	0.74		%	0.71		%

While we have experienced fluctuations in credit quality indicators in recent periods, credit quality remains strong. Overall, our level of required reserve is modest due to strong credit quality indicators, low historical loss factors, and a low amount of net charge-offs.

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



	September 30 2019			June 30 2019			March 31 2019			December 31 2018			September 30 2018
ALLL
Individually evaluated for impairment	$	1,333		$	1,479		$	1,509		$	1,938		$	2,074
Collectively evaluated for impairment	6,836			6,558			6,889			6,437			6,026
Total	$	8,169		$	8,037		$	8,398		$	8,375		$	8,100
ALLL to gross loans
Individually evaluated for impairment	0.11		%	0.13		%	0.13		%	0.17		%	0.18		%
Collectively evaluated for impairment	0.58		%	0.55		%	0.60		%	0.57		%	0.53		%
Total	0.69		%	0.68		%	0.73		%	0.74		%	0.71		%

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
	September 30 2019			June 30 2019			March 31 2019			December 31 2018			September 30 2018
Commercial	$	3,175		$	2,243		$	5,299		$	2,722		$	3,084
Agricultural	4,800			6,672			6,854			5,377			5,663
Residential real estate	1,999			1,690			6,063			3,208			3,137
Consumer	162			94			152			105			68
Total	$	10,136		$	10,699		$	18,368		$	11,412		$	11,952
Total past due and nonaccrual loans to gross loans	0.85		%	0.91		%	1.60		%	1.01		%	1.05		%

Past due and nonaccrual status loans have generally improved over the last year and continue to be at low levels as a result of strong repayment performance. We experienced an increase in past due commercial and residential real estate loans during the first quarter of 2019. This activity was closely monitored by management and a high level of delinquent loan repayments were received in early April 2019. As such, levels normalized by the end of the second quarter of 2019 and management feels the increase in commercial and residential mortgage loans past due as of March 31, 2019 was not indicative of a trend. 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 affordable. This approach has permitted certain borrowers to develop a payment structure that will allow them to continue making payments in lieu of foreclosure. The modifications have been successful for us and our customers as very few of the modified loans have resulted in foreclosures. The majority of new modifications result in terms that satisfy our criteria for continued interest accrual. TDRs that have been placed in nonaccrual status may be placed back on accrual status after six months of continued performance and achievement of current payment status.

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

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

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



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



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

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



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

The following table summarizes our TDRs as of:



	September 30, 2019						December 31, 2018
	Accruing Interest		Nonaccrual		Total		Accruing Interest		Nonaccrual		Total		Total Change
Current	$	20,634	$	508	$	21,142	$	21,794	$	2,673	$	24,467	$	(3,325	)
Past due 30-59 days	259		3,298		3,557		899		—		899		2,658
Past due 60-89 days	—		—		—		707		—		707		(707		)
Past due 90 days or more	—		—		—		—		878		878		(878		)
Total	$	20,893	$	3,806	$	24,699	$	23,400	$	3,551	$	26,951	$	(2,252	)

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:



	September 30, 2019						December 31, 2018
	Recorded Balance		Unpaid Principal Balance		Valuation Allowance		Recorded Balance		Unpaid Principal Balance		Valuation Allowance
TDRs
Commercial real estate	$	5,929	$	6,249	$	29	$	6,507	$	6,840	$	437
Commercial other	1,299		1,299		—		1,713		1,713		—
Agricultural real estate	8,001		8,001		101		7,452		7,452		112
Agricultural other	4,554		4,554		11		5,288		5,331		—
Residential real estate senior liens	4,883		5,164		971		5,923		6,205		1,181
Residential real estate junior liens	12		12		2		12		12		2
Home equity lines of credit	21		321		—		47		347		—
Consumer secured	—		—		—		9		9		—
Total TDRs	24,699		25,600		1,114		26,951		27,909		1,732
Other impaired loans
Commercial real estate	157		219		—		256		318		—
Commercial other	1,241		1,241		5		1,423		1,530		6
Agricultural real estate	516		516		—		557		558		—
Agricultural other	695		695		20		1,001		1,000		20
Residential real estate senior liens	962		1,151		194		911		1,084		180
Residential real estate junior liens	—		—		—		—		—		—
Home equity lines of credit	75		75		—		—		—		—
Total other impaired loans	3,646		3,897		219		4,148		4,490		206
Total impaired loans	$	28,345	$	29,497	$	1,333	$	31,099	$	32,399	$	1,938

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:



	September 30 2019			June 30 2019			March 31 2019			December 31 2018			September 30 2018
Nonaccrual status loans	$	6,962		$	8,107		$	7,260		$	7,260		$	7,136
Accruing loans past due 90 days or more	40			110			30			113			274
Total nonperforming loans	7,002			8,217			7,290			7,373			7,410
Foreclosed assets	468			513			401			355			305
Total nonperforming assets	$	7,470		$	8,730		$	7,691		$	7,728		$	7,715
Nonperforming loans as a % of total loans	0.59		%	0.70		%	0.64		%	0.65		%	0.65		%
Nonperforming assets as a % of total assets	0.41		%	0.48		%	0.43		%	0.42		%	0.42		%

The accrual of interest on commercial and agricultural loans, as well as residential real estate loans, is discontinued at the time a loan is 90 days or more past due unless the credit is well-secured and in the process of short-term collection. Upon transferring a loan to nonaccrual status, we perform an evaluation to determine the net realizable value of the underlying collateral. This evaluation is used to help determine if a charge-off is necessary. Consumer loans are typically charged-off no later than 180 days past due. Loans may be placed back on accrual status after six months of continued performance and achievement of current payment status. While the level of nonperforming loans has fluctuated in recent periods, it remains low in comparison to peer banks. Recent fluctuations in nonaccrual loans have been concentrated in our agricultural portfolio as a result of the challenges facing much of the agricultural industry.

The following tables summarize nonaccrual loans as of:



	September 30 2019		June 30 2019		March 31 2019		December 31 2018		September 30 2018
Commercial	$	1,632	$	1,692	$	1,931	$	1,757	$	1,140
Agricultural	4,520		5,532		4,757		4,949		5,298
Residential real estate	810		883		572		554		698
Total	$	6,962	$	8,107	$	7,260	$	7,260	$	7,136

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



	September 30 2019		June 30 2019		March 31 2019		December 31 2018		September 30 2018
Commercial	$	390	$	450	$	515	$	160	$	723
Agricultural	3,309		5,096		3,199		3,391		3,237
Residential real estate	107		109		111		—		282
Total	$	3,806	$	5,655	$	3,825	$	3,551	$	4,242

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

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 recording of a charge-off. We have identified all impaired loans as of September 30, 2019.

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

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Noninterest Income and Noninterest Expenses

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



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



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

Service charges and fees include ATM and debit card fees, NSF and overdraft fees, loan servicing fee income, OMSR income and other deposit account fees. ATM and debit card fees fluctuate from period-to-period based primarily on usage of ATM and debit cards. 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. As such, OMSR income during 2019 could experience fluctuations and may not exceed 2018 OMSR income. Service charges and fees during the remainder of 2019 are expected to exceed 2018 income due primarily to ATM and debit card fees.

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

Income related to our joint venture in Corporate Settlement Solutions increased during 2019 as a result of new customers, increased volume from existing customers, and reduced expenses. As a result, income during 2019 is expected to exceed 2018 income.

Net gains on foreclosed assets fluctuate from time-to-time and are based on the level of activity in foreclosures and properties owned.

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



	Nine Months Ended September 30
					Change
	2019		2018		$			%
Compensation and benefits	$	17,650	$	17,018	$	632		3.71	%
Furniture and equipment	4,330		4,459		(129		)	(2.89	)%
Occupancy	2,594		2,501		93			3.72	%
Other
Audit, consulting, and legal fees	1,424		1,745		(321		)	(18.40	)%
ATM and debit card fees	854		712		142			19.94	%
Loan underwriting fees	669		653		16			2.45	%
Donations and community relations	660		502		158			31.47	%
Director fees	592		643		(51		)	(7.93	)%
Marketing costs	561		544		17			3.13	%
Memberships and subscriptions	519		422		97			22.99	%
Education and travel	285		346		(61		)	(17.63	)%
FDIC insurance premiums	50		505		(455		)	(90.10	)%
All other	1,970		1,932		38			1.97	%
Total other	7,584		8,004		(420		)	(5.25	)%
Total noninterest expenses	$	32,158	$	31,982	$	176		0.55	%

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

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

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

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

As a result of an assessment credit received during the third quarter of 2019 of $440, FDIC insurance premiums declined and as a result, expenses for 2019 are not likely to exceed 2018 levels.

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

Analysis of Changes in Financial Condition



	September 30 2019		December 31 2018			$ Change			% Change (unannualized)
ASSETS
Cash and cash equivalents	$	34,331	$	73,471		$	(39,140	)	(53.27	)%
AFS securities
Amortized cost of AFS securities	439,392		501,245			(61,853		)	(12.34	)%
Unrealized gains (losses) on AFS securities	6,137		(6,411		)	12,548			N/M
AFS securities	445,529		494,834			(49,305		)	(9.96	)%
Mortgage loans AFS	1,912		358			1,554			N/M
Loans
Gross loans	1,191,804		1,128,707			63,097			5.59	%
Less allowance for loan and lease losses	8,169		8,375			(206		)	(2.46	)%
Net loans	1,183,635		1,120,332			63,303			5.65	%
Premises and equipment	26,350		27,815			(1,465		)	(5.27	)%
Corporate owned life insurance policies	28,261		27,733			528			1.90	%
Accrued interest receivable	7,360		6,928			432			6.24	%
Equity securities without readily determinable fair values	25,130		24,948			182			0.73	%
Goodwill and other intangible assets	48,396		48,451			(55		)	(0.11	)%
Other assets	12,780		17,632			(4,852		)	(27.52	)%
TOTAL ASSETS	$	1,813,684	$	1,842,502		$	(28,818	)	(1.56	)%
LIABILITIES AND SHAREHOLDERS’ EQUITY
Liabilities
Deposits	$	1,308,773	$	1,292,693		$	16,080		1.24	%
Borrowed funds	277,386		340,299			(62,913		)	(18.49	)%
Accrued interest payable and other liabilities	15,149		13,991			1,158			8.28	%
Total liabilities	1,601,308		1,646,983			(45,675		)	(2.77	)%
Shareholders’ equity	212,376		195,519			16,857			8.62	%
TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY	$	1,813,684	$	1,842,502		$	(28,818	)	(1.56	)%

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

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The following table outlines the changes in loans:



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

The following table displays loan balances as of:



	September 30 2019		June 30 2019		March 31 2019		December 31 2018		September 30 2018
Commercial	$	708,735	$	701,954	$	677,554	$	659,529	$	668,915
Agricultural	118,460		120,363		123,393		127,161		129,232
Residential real estate	292,311		283,285		276,776		275,343		276,904
Consumer	72,298		71,020		67,109		66,674		64,879
Total	$	1,191,804	$	1,176,622	$	1,144,832	$	1,128,707	$	1,139,930

While competition for commercial loan opportunities continues to be strong, we experienced growth in this segment of the portfolio during the last 12 months and do not expect significant change during the remainder of 2019. Over the last 12 months agricultural loans have declined each quarter and while we do not anticipate significant declines, we do expect this trend to continue during the remainder of 2019. Residential real estate and consumer loans have experienced growth over the last year and continued growth is expected during the remainder of 2019.

The following table outlines the changes in deposits:



	September 30 2019		December 31 2018		$ Change			% Change (unannualized)
Noninterest bearing demand deposits	$	242,179	$	236,534	$	5,645		2.39	%
Interest bearing demand deposits	230,579		235,287		(4,708		)	(2.00	)%
Savings deposits	409,930		387,252		22,678			5.86	%
Certificates of deposit	357,984		358,127		(143		)	(0.04	)%
Brokered certificates of deposit	52,744		62,148		(9,404		)	(15.13	)%
Internet certificates of deposit	15,357		13,345		2,012			15.08	%
Total	$	1,308,773	$	1,292,693	$	16,080		1.24	%

The following table displays deposit balances as of:



	September 30 2019		June 30 2019		March 31 2019		December 31 2018		September 30 2018
Noninterest bearing demand deposits	$	242,179	$	244,240	$	229,865	$	236,534	$	229,269
Interest bearing demand deposits	230,579		228,704		236,997		235,287		235,529
Savings deposits	409,930		378,988		385,617		387,252		359,720
Certificates of deposit	357,984		359,945		361,716		358,127		353,974
Brokered certificates of deposit	52,744		57,773		50,273		62,148		84,720
Internet certificates of deposit	15,357		11,768		13,495		13,345		13,594
Total	$	1,308,773	$	1,281,418	$	1,277,963	$	1,292,693	$	1,276,806

While total deposits have fluctuated over the past 12 months, we experienced growth in non-contractual deposits, such as noninterest bearing demand and savings deposits. We also experienced marginal growth in certificates of deposit over the past year. 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. In recent periods, we used excess liquidity to reduce high-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 the need for earnings, liquidity, and our overall exposure to changes in interest rates. The current flat yield curve encourages using excess liquidity to reduce high-cost borrowings and therefore, AFS securities balances are not expected to rise significantly in the near term. The following table displays fair values of AFS securities as of:



	September 30 2019		June 30 2019		March 31 2019		December 31 2018		September 30 2018
Government sponsored enterprises	$	—	$	160	$	165	$	170	$	180
States and political subdivisions	175,575		176,742		191,266		190,866		193,957
Auction rate money market preferred	3,089		2,849		2,819		2,554		3,108
Mortgage-backed securities	150,120		173,340		181,138		184,484		188,136
Collateralized mortgage obligations	116,745		117,358		119,454		116,760		115,758
Total	$	445,529	$	470,449	$	494,842	$	494,834	$	501,139

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. The following table displays borrowed funds balances as of:



	September 30 2019		June 30 2019		March 31 2019		December 31 2018		September 30 2018
FHLB advances	$	245,000	$	295,000	$	280,000	$	300,000	$	320,000
Securities sold under agreements to repurchase without stated maturity dates	32,386		25,462		29,824		40,299		39,776
Federal funds purchased	—		—		1,860		—		—
Total	$	277,386	$	320,462	$	311,684	$	340,299	$	359,776

Contractual Obligations and Loan Commitments

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

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



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

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

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

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

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

Our exposure to credit-related loss in the event of nonperformance by the counter parties to the financial instruments for commitments to extend credit and standby letters of credit could be up to the contractual notional amount of those instruments. We use the same credit policies as we do for extending loans to customers. No significant losses are anticipated as a result of these commitments.

Capital

Capital consists solely of common stock, retained earnings, and accumulated other comprehensive income (loss). We are authorized to raise capital through dividend reinvestment, employee and director stock purchases, and shareholder stock purchases. Pursuant to these authorizations, we issued 159,521 shares or $3,672 of common stock during the first nine months of 2019, as compared to 189,074 shares or $5,093 of common stock during the same period in 2018. We also offer the Directors Plan in which participants purchase stock units through deferred fees, in lieu of cash payments. Pursuant to this plan, we increased shareholders’ equity by $415 and $449 during the nine month periods ended September 30, 2019 and 2018, respectively.

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

The FRB has established minimum risk based capital guidelines. Pursuant to these guidelines, a framework has been established that assigns risk weights to each category of on and off-balance-sheet items to arrive at risk adjusted total assets. Regulatory capital is divided by the risk adjusted assets with the resulting ratio compared to the minimum standard to determine whether a corporation has adequate capital. On July 2, 2013, the FRB published revised BASEL III Capital standards for banks. The final rules redefined what is included or deducted from equity capital, changed risk weighting for certain on and off-balance sheet assets, increased the minimum required equity capital to be considered well capitalized, and introduced a capital conservation buffer. The rules, which were gradually phased in between 2015 and 2019, did not have a material impact on the Corporation but do require us to hold more capital than has historically been required.

Effective January 1, 2015, the minimum standard for primary, or Tier 1 capital, increased from 4.00% to 6.00%. The minimum standard for total capital is 8.00%. Also effective January 1, 2015 was the new common equity tier 1 capital ratio which had a minimum requirement of 4.50%. Beginning on January 1, 2016 the capital conservation buffer went into effect which increased the required levels each year through 2019. The following table sets forth the minimum percentages required under the Risk Based Capital guidelines and our ratios as of:



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

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

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Fair Value

We utilize fair value measurements to record fair value adjustments to certain assets and liabilities and to determine fair value disclosures. AFS securities, cash flow hedge derivative instruments and certain liabilities are recorded at fair value on a recurring basis. Additionally, from time-to-time, we may be required to record at fair value other assets on a nonrecurring basis, such as mortgage loans AFS, impaired loans, goodwill, foreclosed assets, OMSR, and certain other assets and liabilities. These nonrecurring fair value adjustments typically involve the application of lower of cost or market accounting or write downs of individual assets.

For further information regarding fair value measurements see “Note 12 – Fair Value” of our interim condensed consolidated financial statements.

Liquidity

Liquidity is monitored regularly by our Market Risk Committee, which consists of members of senior management. The committee reviews projected cash flows, key ratios, and liquidity available from both primary and secondary sources.

Our primary sources of liquidity are cash and cash equivalents and unencumbered AFS securities. These categories totaled $267,167 or 14.73% of assets as of September 30, 2019, compared to $256,583 or 13.93% as of December 31, 2018. The increase in the percentage of primary liquidity is a direct result of our unencumbered AFS securities' sale, maturity and principal payment activity during 2019. Liquidity is important for financial institutions because of their need to meet loan funding commitments, depositor withdrawal requests, and various other commitments including expansion of operations, investment opportunities, and payment of cash dividends. Liquidity could vary significantly daily, based on customer activity.

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 September 30, 2019, we had available lines of credit of $137,016.

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



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

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 us to effectively manage the various risks that can have a material impact on our safety and soundness. The risks include credit, interest rate, liquidity, operational, and reputational. We have policies, procedures, and internal controls for measuring and managing these risks. Specifically, our Funds Management policy and procedures include defining acceptable types and terms of investments and funding sources, liquidity requirements, limits on investments in long-term assets, limiting the mismatch in repricing opportunities of assets and liabilities, and the frequency of measuring and reporting to our Board.

The primary technique to measure IRR is simulation analysis. Simulation analysis forecasts the effects on the balance sheet structure and net interest income under a variety of scenarios that incorporate changes in interest rates, the shape of yield curves, interest rate relationships, loan prepayments, and funding sources. These forecasts are compared against net interest income projected in a stable interest rate environment. While many assets and liabilities reprice either at maturity or in

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accordance with their contractual terms, several balance sheet components demonstrate characteristics that require an evaluation to more accurately reflect their repricing behavior. Key assumptions in the simulation analysis include prepayments on loans, probable calls of investment securities, changes in market conditions, loan volumes and loan pricing, deposit sensitivity, and customer preferences. These assumptions are inherently uncertain as they are subject to fluctuation and revision in a dynamic rate environment. As a result, the simulation analysis cannot precisely forecast the impact of rising and falling interest rates on net interest income. Actual results will differ from simulated results due to many other factors, including changes in balance sheet components, interest rate changes, changes in market conditions, and management strategies.

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

The following tables summarize our interest rate sensitivity for the next 12 and 24 months as of:



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

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



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

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

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The following tables provide information about assets and liabilities that are sensitive to changes in interest rates as of September 30, 2019 and December 31, 2018. The principal amounts of investments, loans, other interest earning assets, borrowings, and time deposits maturing were calculated based on the contractual maturity dates. Fair values for loans do not reflect the exit price notion as previously disclosed. Estimated cash flows for savings and NOW accounts are based on our estimated deposit decay rates.



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

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

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

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

We do not believe there has been a material change in the nature or categories of our primary market risk exposure, or the particular markets that present the primary risk of loss. We do not know of or expect there to be any material change in the general nature of our primary market risk exposure in the near term, and we do not expect to make material changes to our market risk methods in the near term. We may change those methods in the future to adapt to changes in circumstances or to implement new techniques.

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 September 30, 2019, pursuant to Exchange Act Rule 13a-15. Based upon that evaluation, the Principal Executive Officer and Principal Financial Officer concluded that our disclosure controls and procedures as of September 30, 2019, were effective to ensure that information required to be disclosed in reports that we file or submit under the Exchange Act are recorded, processed, summarized and reported within the time periods specified in SEC rules and forms.

CHANGES IN INTERNAL CONTROL OVER FINANCIAL REPORTING

During the most recent fiscal quarter, no change occurred in our internal control over financial reporting that materially affected, or is likely to materially affect, our internal control over financial reporting.

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PART II – OTHER INFORMATION

Item 1. Legal Proceedings.

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

Item 1A. Risk Factors.

There have been no material changes to the risk factors disclosed in Item 1A in our Annual Report on Form 10-K for the year ended December 31, 2018.

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 August 22, 2018, to allow for the repurchase of an additional 200,000 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 September 30, 2019, with respect to this plan:



	Common Shares Repurchased			Total Number of Common Shares Purchased as Part of Publicly Announced Plan or Program	Maximum Number of Common Shares That May Yet Be Purchased Under the Plans or Programs
	Number	Average Price Per Common Share
Balance, June 30					110,582
July 1 - 31	10,220	$	23.09	10,220	100,362
August 1 - 31	2,285	22.32		2,285	98,077
September 1 - 30	22,679	22.62		22,679	75,398
Balance, September 30	35,184	$	22.74	35,184	75,398

Item 3. Defaults Upon Senior Securities.

Not applicable.

Item 4. Mine Safety Disclosures.

Not applicable.

Item 5. Other Information.

Not applicable.

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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:	November 6, 2019		/s/ Jae A. Evans
			Jae A. Evans
			President, Chief Executive Officer
			(Principal Executive Officer)

Date:	November 6, 2019		/s/ Neil M. McDonnell
			Neil M. McDonnell
			Chief Financial Officer
			(Principal Financial Officer)