UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

SCHEDULE 14A

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ISABELLA BANK CORPORATION
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(Name of Person(s) Filing Proxy Statement, if other than the Registrant)
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SEC 1913 (02-02)    

  
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ISABELLA BANK CORPORATION

401 N. Main St.

Mt. Pleasant, Michigan 48858

NOTICE OF THE ANNUAL MEETING OF SHAREHOLDERS

To Be Held May 1, 20125, 2015

Notice is hereby given that the Annual Meeting of Shareholders of Isabella Bank Corporation will be held on Tuesday, May 1, 20125, 2015 at 5:00 p.m. Eastern Daylight Time, at the Comfort Inn Conference Center, 2424 S. Mission Street, Mt. Pleasant, Michigan. The meeting is for the purpose of considering and acting upon the following items of business:

1. The election of three directors.

2. To transact such other business as may properly come before the meeting, or any adjournment or adjournments thereof.

1.The election of four directors.
2.To transact such other business as may properly come before the meeting, or any adjournment or adjournments thereof.
The Board of Directors has fixed March 28, 201212, 2015 as the record date for determination of shareholders entitled to notice of, and to vote at, the meeting or any adjournments thereof.

Your vote is important. Even if you plan to attend the meeting, please date and sign the enclosed proxy form, indicate your choice with respect to the matters to be voted upon, and return it promptly in the enclosed envelope. Note that if stock is held in more than one name, all parties should sign the proxy form.

vote:

1.By mail: Indicate your choice with respect to the matters to be voted upon, sign, date, and return your proxy form in the enclosed envelope. Note that if stock is held in more than one name, all parties should sign the proxy form; or
2.By internet - www.proxyvote.com: Have your proxy form in hand when you access the web site and follow the instructions to obtain your records and to create an electronic voting instruction form; or
3.By phone - 1-800-690-6903 (toll-free): Have your proxy form in hand and then follow the instructions.
By order of the Board of Directors

Debra Campbell, Secretary

Dated: March 28, 2012

26, 2015



Table of Contents

ISABELLA BANK CORPORATION

401 N. Main StSt.

Mt. Pleasant, Michigan 48858

PROXY STATEMENT

General Information

As used in this Proxy Statement, references to "the Corporation", “Isabella,” “we,” “our,” “us,” and similar terms refer to the consolidated entity consisting of Isabella Bank Corporation and its subsidiary, Isabella Bank. Isabella Bank Corporation refers solely to the parent holding company, and the “Bank” refers to Isabella Bank.
This Proxy Statement is furnished in connection with the solicitation of proxies, by the Board of Directors of Isabella Bank Corporation (the Corporation), a Michigan financial holding company, to be voted at theour Annual Meeting of Shareholders of the Corporation(the “Annual Meeting”) which is to be held on Tuesday, May 1, 20125, 2015 at 5:00 p.m. at the Comfort Inn Conference Center, 2424 S. Mission Street, Mt. Pleasant, Michigan, or at any adjournment or adjournments thereof, for the purposes set forth in the accompanying Notice of the Annual Meeting of Shareholders and in this Proxy Statement.

This Proxy Statement has been mailed on April 5, 2012March 26, 2015 to all holders of record of common stock as of the record date. If a shareholder’s shares are held in the name of a broker, bank, or other nominee, then that party should give the shareholder instructions for voting the shareholder’s shares.

Voting at the Meeting

The Board of Directors of the Corporation has

We have fixed the close of business on March 28, 201212, 2015 as the record date for the determination of shareholders entitled to notice of, and to vote at, the Annual Meeting of Shareholders and any adjournment thereof. The Corporation hasWe have only one class of common stock and no preferred stock. As of March 28, 2012,12, 2015, there were 7,614,7427,804,200 shares of common stock of the Corporation outstanding. Each outstanding share entitles the holder thereof to one vote on each separate matter presented for vote at the meeting. ShareholdersYou may vote on matters that are properly presented at the meetingAnnual Meeting by either attending the meeting and casting a vote, or by signing and returning the enclosed proxy. Ifproxy, voting on the enclosedinternet, or voting by phone. You may change your vote or revoke your proxy is executed and returned, it may be revoked at any time before it is exercisedvoted at the meeting. All shareholdersAnnual Meeting by filing with the Corporation an instrument revoking it, filing a duly executed proxy bearing a later date (including a proxy given over the internet or by phone) or by attending the meeting and electing to vote in person. You are encouraged to date and sign the enclosed proxy, indicate their choice with respect to the matters to be voted upon, and return it to the Corporation.

The Corporationvote by mail, internet, or phone.

We will hold the Annual Meeting of Shareholders if holders of a majority of the Corporation’s shares of common stock entitled to vote are represented in person or by proxy at the meeting.proxy. If a shareholder signsyou sign and returnsreturn the proxy, those shares will be counted to determine whether the Corporation hasif there is a quorum, even if the shareholder abstainsyou abstain or failsfail to vote on any of the proposals listed on the proxy.

A shareholder’sproposals.

Your broker may not vote on the election of directors if the shareholder doesyou do not furnish instructions for such proposals. A shareholderYou should use the voting instruction card provided by the institution that holds his or her sharesus to instruct the broker to vote the shares, or else the shareholder’syour shares will be considered “broker non-votes.”

Broker non-votes are shares held by brokers or nominees as to which voting instructions have not been received from the shares’ beneficial ownersowner or the personsindividual entitled to vote those shares and the broker or nominee does not have discretionary voting power under rules applicable to broker-dealers. Under these rules, proposal oneProposal 1 is not an item on which brokerage firms may vote in their discretion on your behalf of their clients if such clientsunless you have not furnished voting instructions.

At this year’s annual meeting, shareholdersAnnual Meeting, you will elect threefour directors to serve for a term of three years. In voting on the election of directors, a shareholderYou may vote in favor, of the nominees, vote against, or withhold votes as tofor any or all nominees, or vote against or withhold votes as to specific nominees. Directors are elected by a plurality of the votes cast at the annual meeting. This means that the nominees receiving the greatest number of votes will be elected.Annual Meeting. Shares not voted, including broker non-votes, have no effect on the electionelections.

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Contents


Proposal 1-Election of Directors

The Board of Directors (the "Board") currently consists of 12eleven (11) members and is divided into three classes, with the directors in eachthe class being elected for a term of three years. On April 27, 2011, Dianne C. Morey resigned as a member of the Corporation’s Board of Directors and the number of directors was reduced to 12. At the 2012 Annual Meeting, of Shareholders three directors,Dennis P. Angner, Richard J. Barz, Sandra L. Caul,Jae A. Evans, and W. Michael McGuire, whose terms expire at the annual meeting,Annual Meeting, have been nominated for election to serve through 2015the 2018 Annual Meeting for the reasons described below.

Except as otherwise specified, in the proxy, proxies will be voted for election of the threefour nominees. If a nominee becomes unable or unwilling to serve, proxies will be voted for such other person, if any, as shall be designated by the Board of Directors.designated. However, the Corporation’s management now knowswe know of no reason to anticipate that this will occur. The threefour nominees for election as directors who receive the greatest number of votes cast will be elected directors. Each of the nominees has agreed to serve as a director if elected.

Nominees for election and current directors, are listed below. Also shown for each nominee and each current director is his or herincluding their principal occupation for the last five or more years, age, and length of service as a director, of the Corporation.

The Board of Directorsare listed below.

We unanimously recommendsrecommend that shareholdersyou vote FOR the election of each of the three director nominees nominated by the nominees.
Director Qualifications
Board of Directors.

Director’s Qualifications

The members of the Corporation’s Board of Directors (the Board) are all wellhighly qualified to serve on the Board and represent our shareholders’your best interest. As described below, under the caption “Nominating and Corporate Governance Committee”, the Board and Nominating and Corporate Governance Committee (the “Nominating Committee”)interests. We select nominees to the Board to establish a Board that is comprised of members who:

Have extensive business leadership

leadership.

Bring a diverse perspective and experience

experience.

Are independentobjective and collegial

collegial.

Have high ethical standards and have demonstrated sound business judgment

judgment.

Are willing and able to commit the significant time and effort to effectively fulfill their responsibilities

responsibilities.

Are active in and knowledgeable of their respective communities

communities.

Each nominee and current director nominee along with the other directors bringspossesses these qualifications to the Board. They providequalities and provides a diverse complement of specific business skills experience, and knowledge including extensive financial and accounting experience, knowledge of banking, small business operating experience, and specific knowledge of customer market segments, including agriculture, oil and gas, health care, food and beverage, manufacturing, and retail.

experience.

The following describes the key qualifications each director brings to the Board, in addition to the general qualifications described above and the information included in the biographical summaries provided below.

Director

Professional experience
in chosen
field		 ProfessionalExpertise
Standing
in Chosenfinancial
Fieldor related
field		 ExpertiseAudit
in  financialCommittee
or relatedFinancial
fieldExpert		 AuditCivic and
Committeecommunity
Financial
Expertinvolvement		 Civic Leadership
and team
communitybuilding
involvementskills		 LeadershipDiversity
and teamby race,
buildinggender, or
skillscultural		 DiversityGeo-
by race,graphical
gender, or
culturaldiversity		 Geo-
graphical
diversityFinance		 FinanceTech-
nology		 Tech-Market-
nologying		 Market-Govern-
ingance		 Govern-Entre-
ancepreneurial
skills		 Entre-Human
preneurial
skillsResources		 Bank
business
segment
represent-
ation
David J. ManessHuman
ResourcesX		 Bank
business
segment
represent-
ation		 

David J. Maness


 X X 
 

 X 

 X 
 X
Dennis P. AngnerX X 
 X X X
 

Dennis P. Angner


 X X
 X 
 

Dr. Jeffrey J. BarnesX

 X X
 X 
 
 

 X 
X
Richard J. BarzX X 
 X X 
 

Jeffrey J. Barnes


 X 
 X 

 X X
Jae A. EvansX X 
 X X X
 

Richard J. Barz


 X 
 X 
 
 X 
G. Charles HubscherX X 
 X X 





 X 
 X
Thomas L. KleinhardtX 

 X 

Sandra L. Caul

X		 
 X X 
 X 
 X 
X
Joseph LaFramboiseX

 X X 
 X 
 X

James C. Fabiano


 X 
 
 

W. Joseph ManifoldX X X X X 

 X X 
 



W. Michael McGuireX X X X X
 X X

G. Charles Hubscher

 X 
 X 
 

Sarah R. OppermanX

 X X X X 
 
 X X

Thomas L. Kleinhardt


 X 
 XXXXXX

Joseph LaFramboise

XXXXX

W. Joseph Manifold

XXXXXXX

W. Michael McGuire

XXXXXXXXX

Dale D. Weburg

XXXXXX


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The following table identifies the individual Board members of our Board serving on each of theseour standing committees:

DirectorAudit Nominating and Corporate Governance NominatingCompensation and Human Resource Information Technology
David J. Maness
CompensationXo
 
Xo
Xc
Xo
Dennis P. Angner



Dr. Jeffrey J. BarnesX
X
Richard J. Barz



Jae A. Evans



G. Charles HubscherX
X
Thomas L. Kleinhardt

X
Xc
Joseph LaFramboiseXXXX
W. Joseph Manifold
Xc
XX
W. Michael McGuireX
Xc
XX
Sarah R. Opperman

X
C — Chairperson     and Corporateand Human 

Director

AuditGovernanceResource

David J. Maness

XoXoXc,o

Dennis P. Angner

Jeffrey J. Barnes

XX

Richard J. Barz

Sandra L. Caul

X

James C. Fabiano

X

G. Charles Hubscher

XX

Thomas L. Kleinhardt

X

Joseph LaFramboise

XO — Ex-Officio   X   X

W. Joseph Manifold

XcXX

W. Michael McGuire

XXcX

Dale D. Weburg

X

C — Chairperson

O — Ex-Officio

Director Nominees for Terms Ending in 20152018
Dennis P. Angner

Richard J. Barz (age 63)59) has been a director of Isabella Bank (the Bank)Corporation and the Bank since 2000. Mr. Angner has been principally employed by the Corporation since 1984 and has served as President of Isabella Bank Corporation since December 30, 2001 and CFO since January 1, 2010. Mr. Angner served as Chief Executive Officer of Isabella Bank Corporation from December 30, 2001 through December 31, 2009. He is a past Chair of the Michigan Bankers Association and is currently serving as Chairman of its taxation committee, is a member of the American Bankers Association Government Relations Council, and served on the Central Michigan American Red Cross board for over 20 years.

Richard J. Barz (age 66) has been a director of the Bank since 2000 and of theIsabella Bank Corporation since 2002. Mr. Barz has been employed byretired as Chief Executive Officer of Isabella Bank Corporation on December 31, 2013 after over 41 years of service with the Corporation. Mr. Barz was Chief Executive Officer of Isabella Bank Corporation since 1972from 2010 to 2013 and has beenPresident and Chief Executive Officer of the Corporation since January 1, 2010 and President and CEO of the Bank since December 2001.from 2001 to July 2012. Mr. Barz has been very active in community organizations and events. He is thea past chairmanChairman of the Central Michigan Community Hospital Board of Directors, is the current chairmanChairman of the Middle Michigan Development Corporation Board of Directors, and serves on several boards and committees for Central Michigan University and various volunteer organizations throughout mid-Michigan.

Sandra L. CaulJae A. Evans (age 68)58) was appointed a director of Isabella Bank Corporation and the Bank and elected Chief Executive Officer of Isabella Bank Corporation effective January 1, 2014. Mr. Evans has been employed by the Corporation since 2008 and has over 38 years of banking experience. He served as Chief Operations Officer of the Bank from June 2011 to December 31, 2013 and President of the Greenville Division of the Bank from January 1, 2008 to June 2011. Mr. Evans is a board member for The Community Bankers of Michigan, Art Reach of Mid Michigan, and is the Chair of the EightCAP governing board. Mr. Evans is also past Vice Chair of the Carson City Hospital, was president of the Greenville Rotary Club, and past Chair of The Community Bankers of Michigan.
W. Michael McGuire (age 65) has been a director of theIsabella Bank since 1994 and of the Corporation since 2005. Ms. Caul is Vice Chairperson of the Central Michigan Community Hospital Board of Directors, Chairperson of the Mid Michigan Community College Advisory Board, a board member for Central Michigan Community Mental Health Facilities, a member of the Central Michigan Health Advisory Board for Central Michigan University and Chairperson for the Central Michigan University College of Medicine regional division fund raising effort. She also sits on the board of the Central Michigan American Red Cross. Ms. Caul retired in January 2005 as a state representative of the Michigan State House of Representatives. Ms. Caul is a registered nurse.

W. Michael McGuire (age 62) has been a director of the Corporation since 2007 and of the Bank since January 1, 2010. He is a director of the Farwell Division of the Bank. Mr. McGuire, is currently an attorney, andretired in August 2013 as the Director of the Office of the Corporate Secretary and Assistant Secretary of The Dow Chemical Company, a manufacturer of chemicals, plastics and agricultural products, headquartered in Midland, Michigan.

Current Directors with Terms Ending in 20142016
Thomas L. Kleinhardt

Dennis P. Angner (age 56) has been a director of the Corporation and the Bank since 2000. Mr. Angner has been principally employed by the Corporation since 1984 and has served as President of the Corporation since December 30, 2001 and CFO since January 1, 2010. Mr. Angner served as Chief Executive Officer of the Corporation from December 30, 2001 through December 31, 2009. He is the past Chair of the Michigan Bankers Association and is currently serving as vice chairman of its taxation committee, is a member of the American Bankers Association Government Relations Council, and served on the Central Michigan American Red Cross board for over 20 years.

Dr. Jeffrey J. Barnes (age 49)60) has been a director of the Bank since September1998 and of Isabella Bank Corporation since 2010. Mr. Kleinhardt is President of McGuire Chevrolet, is active in the Clare Kiwanis Club, and past coach of the girls Varsity Basketball team for both Farwell High School and Clare High School.

Joseph LaFramboise (age 65) has been a director of the Bank since 2007 and of Isabella Bank Corporation since 2010. He is a retired Sales and Marketing Executive of Ford Motor Company. Mr. LaFramboise is an Ambassador of Eagle Village in Evart, Michigan.

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Sarah R. Opperman (age 55) has been a director of the Bank and Isabella Bank Corporation since July 1, 2012. Ms. Opperman is the owner of Opperman Consulting, LLC, which provides public affairs counsel. She was appointed topreviously employed for 28 years by The Dow Chemical Company, where she held leadership roles in public and government affairs. Ms. Opperman is Vice Chair of the Corporation’sCMU Board of Trustees and chairs the Board's Finance and Facilities Committee.  She also is a member of the CMU Development Board.  She is a member of the Mid Michigan Health's Corporate Board of Directors, effective January 1,as well as its Continuing Care Board and Fund Development Committee.  Ms. Opperman also serves on the United Way of Midland County Board.  
Director Nominees for Terms Ending in 2017
Dr. Jeffrey J. Barnes (age 53) has been a director of the Bank since 2007 and of Isabella Bank Corporation since 2010. Dr. Barnes is a physician and co-owner of Central Eye Consultants.shareholder in Lansing Ophthalmology PC. He is a former member of the Central Michigan Community Hospital Board of Directors.

G. Charles Hubscher (age 58)61) has been a director of the Bank since May 2004 and was appointed to the Corporation’s Board of Directors effective January 1,Isabella Bank Corporation since 2010. Mr. Hubscher is the President of Hubscher and Son, Inc., a sand and gravel producer. He is a director of the National Stone and Gravel Association, the Michigan Aggregates Association, serves on the Board of Trustees for the Mt. Pleasant Area Community Foundation, and is a member of the Zoning Board of Appeals for Deerfield Township.

David J. Maness (age 58)61) has been a director of the Bank since 2003 and of theIsabella Bank Corporation since 2004. Mr. Maness was elected chairmanhas served as Chairman of the boardBoard for the Corporation and the Bank insince 2010. He is President of Maness Petroleum, a geological and geophysical consulting services company. Mr. Maness is currently serving as a director for the Michigan Oil & Gas Association, and he previously served on the Mt. Pleasant Public Schools Board of Education.

W. Joseph Manifold (age 60)63) has been a director of theIsabella Bank Corporation since 2003 and of the Bank since January 1, 2010. Mr. Manifold is the CFO of Federal Broach Holdings LLC, a holding company which operates several manufacturing companies. Previously, he was a senior manager with Ernst & Young Certified Public Accounting firm working principally on external bank audits and was CFO of the Delfield Company. Prior to joining the Board, Mr. Manifold also served on the Isabella Community Credit Union Board and was ChairmanPresident of the Mt. Pleasant Public Schools Board of Education.

Current Directors with Terms Ending in 2013

James C. Fabiano (age 68) has been a director of the Bank since 1979 and of the Corporation since 1988. He served as the Corporation’s chair from 2004 to 2010. Mr. Fabiano is Chairman and CEO of Fabiano Brothers, Inc., a beverage distributor operating in several counties throughout Michigan. Mr. Fabiano is a past recipient of the Mt. Pleasant Area Chamber of Commerce Citizen of the Year award. He is also a past Chairman of the Central Michigan University Board of Trustees.

Thomas L. Kleinhardt (age 57) has been a director of the Bank since October 1998 and was appointed to the Corporation’s Board of Directors effective January 1, 2010. Mr. Kleinhardt is President of McGuire Chevrolet, is active in the Clare Kiwanis Club, and coaches the girls Varsity Basketball team at Farwell High School.

Joseph LaFramboise (age 62) has been a director of the Bank since September 2007, and was appointed to the Corporation’s Board of Directors effective January 1, 2010. He is a retired Sales and Marketing Executive of Ford Motor Company. Mr. LaFramboise is Ambassador of Eagle Village in Evart, Michigan.

Dale D. Weburg (age 68) has served as a director of the Breckenridge Division of the Bank since 1987 and of the Bank and Corporation since 2000. Mr. Weburg is President of Weburg Farms, a cash crop farm operation. Mr. Weburg also serves as a trustee of the Board of Directors of Gratiot Health System.

Each of the directors has been engaged in their stated professions for more than five years.

Other Named Executive Officers

Steven D. Pung (age 62)65), Executive Vice President of the Bank, and a member of the Board of Directors of Financial Group Information Services (a wholly owned subsidiary of the Corporation) has been employed by the CorporationBank since 1978. Timothy M. Miller1979. Jerome E. Schwind (age 60)48), Executive Vice President of the Breckenridge Divisionand Chief Operating Officer of the Bank, and a member of its Board of Directors, has been an employee ofemployed by the CorporationBank since 1985.1999. David J. Reetz (age 51)54), Senior Vice President and Chief Lending Officer of the Bank, has been employed by the CorporationBank since 1987.

All officers of the Corporation serve at the pleasure of the Corporation’s BoardBoard.

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Table of Directors.

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Corporate Governance

Director Independence

The Corporation has

We have adopted the director independence standards as defined under Rule 5605(a)(2) of the NASDAQ Stock Market Marketplace Rules. The Board hasWe have determined that Dr. Jeffrey J. Barnes, Sandra L. Caul, James C. Fabiano, G. Charles Hubscher, Thomas L. Kleinhardt, Joseph LaFramboise, David J. Maness, W. Joseph

Manifold, W. Michael McGuire, and Dale D. WeburgSarah R. Opperman are independent directors. Richard J. Barz is not independent as he retired as CEO of Isabella Bank Corporation on December 31, 2013. Jae A. Evans is not independent as he is employed as Chief Executive OfficerCEO of the Corporation.DennisIsabella Bank Corporation. Dennis P. Angner is not independent as he is employed as President and Chief Financial OfficerCFO of theIsabella Bank Corporation.

Board Leadership Structure and Risk Oversight

The Corporation’s

Our Governance policyPolicy provides that only directors who are deemed to be independent as set forth by the NASDAQ Stock Market Marketplace Rules and SEC rules are eligible to hold the office of Chairman of the Board.chairperson. Additionally, the chairpersons of Board established committees must also be independent directors. It is the Board’sour belief that having a separate Chairmanchairperson and Chief Executive OfficerCEO best serves the interest of the shareholders. The Board of Directors elects its chairperson at the first Board meeting following the annual meeting.Annual Meeting. Independent members of the Board of Directors meet without insiderinside directors at least twice per year.

Management is responsible for the Corporation’s day to dayour day-to-day risk management and the Board’s role is to engage in informed oversight. The Board utilizes committees to oversee risks associated with compensation, financial,governance, and governance. Financial Group Information Services, the Corporation’s information processing subsidiary, is responsible for overseeing risks associated with information technology. The Isabella Bank Board of Directors is responsible for overseeing credit, investment, interest rate, and trust risks. The chairpersons of the respective boards or committees report on their activities on a regular basis.

The

Our Audit Committee is responsible for overseeing the integrity of theour consolidated financial statements, of the Corporation; the independent auditors’ qualifications and independence;independence, the performance of the Corporation’s, and its subsidiaries’,our internal audit function and those of independent auditors; the Corporation’sauditors, our system of internal controls; the Corporation’scontrols, our financial reporting and system of disclosure controls;controls, and theour compliance by the Corporation with legal and regulatory requirements and with the Corporation’sour Code of Business Conduct and Ethics.

Committees of the Board of Directors and Meeting Attendance

The Board met 1214 times during 2011.2014. All incumbent directors attended 75% or more of the meetings held in 2011.2014. The Board has an Audit Committee, a Nominating and Corporate Governance Committee, and a Compensation and Human Resource Committee, and an Information Technology Committee.

Audit Committee

The Audit Committee is composed of independent directors who meet the requirements for independence as defined in Rule 5605(a)(2) of the NASDAQ Marketplace Rules.directors. Information regarding the functions performed by the Audit Committee, its membership, and the number of meetings held during the year, is set forth in the “Report of the Audit Committee”“Audit Committee Report” included elsewhere in this annual proxy statement.Proxy Statement. The Audit Committee is governed by a written charter approved by the Board. The Audit Committee CharterBoard, which is available on the Bank’s websitewebsite: www.isabellabank.com under the Investor Relations tab.

.

In accordance with the provisions of the Sarbanes — OxleySarbanes-Oxley Act of 2002, directors Manifold and McGuire meet the requirements of Audit Committee Financial Expert and have been so designated by the Board.designated. The Audit Committee also consists of directors Barnes, Hubscher, LaFramboise, and Maness.

Maness (ex-officio).

Nominating and Corporate Governance Committee

The Corporation hasWe have a standing Nominating and Corporate Governance Committee consisting of independent directors who meet the requirements for independence as defined in Rule 5605(a)(2) of NASDAQ Marketplace Rules. The Committee consists of directors LaFramboise, Maness (ex-officio), Manifold, and McGuire. The Nominating and Corporate Governance Committee held two meetingsmeeting in 2011,2014, with all directors attendedcommittee members attending the meetings.meeting. The Board has approved a Nominating and Corporate Governance Committee Charter which is available on the Bank’s websitewebsite: www.isabellabank.com under the Investor Relations tab.

.

The Nominating and Corporate Governance Committee is responsible for evaluating and recommending individuals for nomination to the Board for approval. TheThis Committee in evaluating nominees, including incumbent directors and any nominees put forth by shareholders, considers business experience, skills, character, judgment, leadership experience, and their knowledge of the geographical markets, business segments or other criteria the Committee deems relevant and appropriate based on the current composition of the Board. TheThis Committee considers diversity in identifying members with respect to our geographical markets served by the Corporation and the business experience of the nominee.

The Nominating and Corporate Governance Committee will consider, as potential nominees, persons recommended by shareholders. Recommendations should be submitted in writing to the Secretary of the Corporation, 401 N. Main St., Mt.

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Pleasant, Michigan 48858 and include the shareholder’s name, address and number of shares of the Corporation owned by the shareholder. The recommendation should also include the name, age, address and qualifications of the recommended candidate for nomination.candidate. Recommendations for the 20132016 Annual Meeting of Shareholders should be delivered no later than December 6, 2012.November 27, 2015. The Nominating and Corporate Governance Committee does not evaluateevaluates all potential director nominees for director differently based onin the same manner, whether theythe nominations are recommended to the Nominating and Corporate Governance Committee, byreceived from a shareholder, or otherwise.

Compensation and Human Resource Committee

The Compensation and Human Resource Committee of the Corporation is responsible for reviewing and recommending to the Corporation’sour Board the compensation of the Chief Executive Officer and other executive officers, of the Corporation, benefit plans, and the overall percentage increase in salaries. The committeeThis Committee consists of independent directors who meet the requirements for independence as defined in Rule 5605(a) (2) of the NASDAQ Marketplace Rules. The Committee consists of directors Maness, Barnes, Caul, Fabiano, Hubscher, Kleinhardt, LaFramboise, Maness, Manifold, McGuire, and Weburg.Opperman. The Compensation and Human Resource Committee held twothree meetings during 20112014 with all directorscommittee members in attendance with the exception of Fabiano who was excused from one of the meetings.attendance. This Committee is governed by a written charter approved by the Board that is available on the Bank’s websitewebsite: www.isabellabank.com under.
Information Technology Committee
The Information Technology Committee is responsible for reviewing and monitoring information technology risks. Oversight includes customer data, physical and information security, disaster planning, equipment and programs, and the Investor Relations tab.

audit process. This Committee consists of directors Angner, Evans, Kleinhardt, LaFramboise, Maness (ex-officio), and McGuire and other members of senior management. The Information Technology Committee held two meetings during 2014 with all committee members in attendance.

Communications with the Board

Shareholders may communicate with the Corporation’s Board of Directors by sending written communications to the attention of the Corporation’s Secretary, Isabella Bank Corporation, 401 N. Main St., Mt. Pleasant, Michigan 48858. Communications will be forwarded to the Board or the appropriate committee, as soon as practicable.

Code of Ethics

The Corporation has adopted aOur Code of Business Conduct and Ethics, thatwhich is applicable to the Corporation’s Chief Executive OfficerCEO and the Chief Financial Officer. The Corporation’s Code of Business Conduct and EthicsCFO, is available on the Bank’s websitewebsite: www.isabellabank.com under the Investor Relations tab.

Report.



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Audit Committee

Report

The Audit Committee oversees the Corporation’s financial reporting process on behalf of the Board. The 20112014 Audit Committee consisted of directors Barnes, Hubscher, LaFramboise, Maness (ex-officio), Manifold, and McGuire.

The Audit Committee is responsible for pre-approving all auditing services and permitted non-audit services for the Corporation by itsour independent auditors, or any other auditing or accounting firm, if those fees are reasonably expected to exceed 5.0% of the current year agreed upon fee for independent audit services, except as noted below.services. The Audit Committee has established general guidelines for the permissible scope and nature of any permitted non-audit services in connection with its annual review of the audit plan and reviews the guidelines with the Board of Directors.

Board.

Management has the primary responsibility for the consolidated financial statements and the reporting process including the systems of internal controls. In fulfilling its oversight responsibilities, the Audit Committee reviewed the audited consolidated financial statements in the Annual Report with management including a discussion of the quality, not just the acceptability, of the accounting principles, the reasonableness of significant judgments, and the clarity of disclosures in the consolidated financial statements. The Audit Committee also reviewed with management and the independent auditors, management’s assertion on the design and effectiveness of the Corporation’sour internal control over financial reporting as of December 31, 2011.

2014.

The Audit Committee reviewed with the Corporation’sour independent auditors, who are responsible for expressing an opinion on the conformity of those audited consolidated financial statements with accounting principles generally accepted in the United States of America, their judgments as to the quality, not just the acceptability, of the Corporation’sour accounting principles and such other matters as are required to be discussed with the Audit Committee by the standards of the Public Company Accounting Oversight Board (United States), including those described in AU Section 380 “CommunicationAuditing Standard No. 16 “Communications with Audit Committees”, as may be modified or supplemented. In addition, the Audit Committee has received the written disclosures and the letter from the independent accountantsauditors required by PCAOB Rule 3526, Communication with Audit Committees Concerning Independence, as may be modified or supplemented, and has discussed with the independent accountantauditor the independent accountants’auditors’ independence.

The Audit Committee discussed with the Corporation’sour internal and independent auditors the overall scope and plans for their respective audits. The Audit Committee meets with the internal and external independent auditors, with and without management present, to discuss the results of their examinations, their evaluations of the Corporation’sour internal controls, and the overall quality of the Corporation’sour financial reporting process. The Audit Committee held sixfive meetings during 2011,2014, and all committee members attended 75% or more of the meetings.

In reliance on the reviews and discussions referred to above, the Audit Committee recommended to the Board of Directors (and the Board has approved) that the audited consolidated financial statements be included in the Annual Report on Form 10-K for the year ended December 31, 20112014 for filing with the Securities and Exchange Commission. The Audit Committee has appointed Rehmann Robson P.C.LLC as the independent auditors for the 20122015 audit.

Respectfully submitted,

W. Joseph Manifold, Audit Committee Chairperson

Dr. Jeffrey J. Barnes

G. Charles Hubscher

Joseph LaFramboise

David J. Maness

(ex-officio)

W. Michael McGuire



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Table of Contents

Compensation Discussion and Analysis

The Compensation and Human Resource Committee (the “Committee”) is responsible for reviewing and recommending to the Board the compensation and benefits for the Chief Executive Officer,CEO, President and CFO, and executive officers of the Corporation. Theofficers. This Committee evaluates and approves theour executive officer and senior management compensation plans, policies, and programs ofprograms. The CEO recommends to this Committee an appropriate salary for the CorporationCFO and its affiliates. The Chief Executive Officer, Richard J. Barz, conductsnamed executive officers based on their annual performance reviews for Named Executive Officers, excluding himself. Mr. Barz recommends an appropriate salary to the Committee based on the performance review and the officer’s years of service along with competitive market data.

Compensation Objectives

The Compensation and Human Resource Committee considers asset growth with the safety and soundness objectives and earnings per share to be the primary ratios in measuring financial performance. The Corporation’sOur philosophy is to maximize long-term return to shareholders consistent with safe and sound banking practices, while maintaining the commitment to superior customer and community service. The Corporation believesWe believe that the performance of executive officers in managing the business should be the basis for determining overall compensation. Consideration is also given to overall economic conditions and current competitive forces in the market place. The objectives of thethis Committee are to effectively balance salaries and potential compensation to an officer’s individual management responsibilities and encourage each of them to realize their potential for future contributions to the Corporation.contributions. The objectives are designed to attract and retain high performing executive officers who will lead the Corporationprovide leadership while attaining the Corporation’s earnings and performance goals.

What the Compensation Programs are Designed to Reward

The Corporation’s

Our compensation programs are designed to reward dedicated and conscientious employment, with the Corporation, loyalty in terms of continued employment, attainment of job related goals and overall profitability of the Corporation.profitability. In measuring an executive officer’s contributions, to the Corporation, theCompensation and Human Resource Committee considers numerous factors including, among other things, the Corporation’sour growth in terms of asset size and increase in earnings per share. In rewarding loyalty and long-term service, the Corporation provideswe provide attractive retirement benefits.

Review of Risks Associated with Compensation Plans

Based on an analysis conducted by management and reviewed by the Compensation and Human Resource Committee, management doeswe do not believe that the Corporation’s compensation programs for employees are reasonably likely to have a material short or long term adverse effect on the Corporation’s Results of Operation.

our operating results.

Use of Consultants

In 2010,2014 and 2012, the Compensation and Human Resource Committee directly engaged the services of Blanchard Chase (now Blanchard Consulting Group),Group, an outsideindependent compensation consulting firm, to assist with a total compensation review for the top twoCEO, President and CFO, and executive officers of the Corporation (CEO and President).Corporation. Blanchard Consulting Group is an independent consulting firm and does not perform any additional services for the Corporationus or any members of senior management. In addition, Blanchard Consulting Group does not have any other personal or business relationships with any Board membermembers or any officer ofofficers. During 2013, the Corporation. During 2011, theCompensation and Human Resource Committee did not employ any services of outside compensation or benefit consultants to assist it in compensation-relatedcompensation related initiatives.

Elements of Compensation

The Corporation’s

Our executive compensation program has consisted primarily of base salary and benefits, annual cash bonusperformance incentives, director fees for insider directors,benefits and perquisites, and participation in the Corporation’sour retirement plans.

How Elements Fit into Overall Compensation Objectives
Individual elements of our compensation objectives are structured to reward strong financial performance, continued service, and to incentivize our leaders to excel in the future. We continually review our compensation objectives to ensure that they are sufficient to attract and retain exceptional officers.
Why Each of the Elements of Compensation is Chosen

and How We Determine Amounts for Each Element

Base Salary and BenefitsSalaries, which include director fees for certain executive officers, are set to provide competitive levels of compensation to attract and retain officers with strong motivated leadership.leadership skills. Each officer’s performance, current compensation, and responsibilities within the Corporation are considered by the Compensation and Human Resource Committee when establishing base salaries. The CorporationWe also believes

believe it is best to pay sufficient base salary because it believeswe believe an over-reliance on equity incentive compensation could potentially skew incentives toward short-term maximization of shareholder value as opposed to building long-term shareholder


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value. BaseCompetitive base salary encourages management to operate the Corporation in a safe and sound manner even when incentive goals may prove unattainable.

Annual Performance Incentives are used to reward executive officers for the Corporation’s overall financial performance. This element of the Corporation’s compensation programs is included in the overall compensation in order to reward employees above

The Compensation and beyond their base salaries when the Corporation’s performance and profitability exceed established annual targets. The inclusion of a modest incentive compensation encourages management to be more creative, diligent and exhaustive in managing the Corporation to achieve specific financial goals without incurring inordinate risks.

Performance incentives paid under the Executive Incentive Plan in 2011 were determined by reference to seven performance measures that related to services performed in 2010. The maximum award that may be granted under the Executive Incentive Plan to each eligible employee equals 10% of the employee’s base salary (the “Maximum Award”). The payment of 35% of the Maximum Award was conditioned on the eligible employee accomplishing personal performance goals that were established by such employee’s supervisor as part of the employee’s annual performance review. Each of the employees who were eligible to participate in the Executive Incentive Plan in 2010 accomplished his or her personal performance goals and was accordingly paid 35% of the 2010 Maximum Award in 2011. The payment of the remaining 65% of the Maximum Award was conditioned on the achievement of Corporation-wide targets in the following six categories: (1) earnings per share (weighted 40%); (2) net operating expenses to average assets (weighted 10%); (3) Fully Taxable Equivalent “FTE” net interest margin, excluding loan fees (weighted 10%); (4) in-market deposit growth (weighted 20%); (5) loan growth (weighted 10%); and (6) exceeding peer group return on average assets (weighted 10%). The following chart provides the 2010 target for each of the foregoing targets that were used to determine bonus awards that were paid in 2011, as well as the performance obtained for each target.

Executive Incentive Plan

    2010 Targets  2010
Performance		 

Target

  25.00%  50.00%  75.00%  100.00%  

Earning per share

  $  1.15   $  1.16   $  1.18   $  1.20    $1.31  

Net operating expenses to average assets

   1.71%   1.70%   1.69%   1.68%   1.65% 

FTE Net Interest Margin

   3.88%   3.90%   3.92%   3.94%   3.83% 

In market deposit growth

   4.50%   5.00%   5.50%   6.00%   12.19% 

Loan growth

   5.50%   6.00%   6.50%   7.00%   3.03% 

Exceeding peer group return on average assets

   0.26%   0.26%   0.27%   0.28%   0.77% 

Retirement Plans.    The Corporation’s retirement plans are designed to assist executives in providing themselves with a financially secure retirement. The retirement plans include: a frozen defined benefit pension plan; a 401(k) plan; and a non-leveraged employee stock ownership plan (ESOP), which is frozen to new participants; and a retirement bonus plan.

How the Corporation Determined Amounts for Each Element

TheHuman Resource Committee’s approach to determining the annual base salary of executive officers is to offer competitive salaries in comparison with other comparable financial institutions. TheIn 2014 and 2012, this Committee utilizesutilized both an independent compensation consultant, Blanchard Consulting Group, and a survey prepared by the Michigan Bankers Association of similar sized Michigan based financial institutions. The independent compensation consultant established a benchmark peer group of 20 mid-west23 midwest financial institutions in non urbannon-urban areas whosewith comparable average assets size ($1 billion—$2.4 billion), number of branch locations, return on average assets, and nonperforming assets were comparable to Isabella Bank Corporation.assets. The Michigan Bankers Association 20112014 compensation survey was based on the compensation information provided by these organizations for 2010.2013. Specific factors used to decide

where an executive officer’s salary should be within the established range include the historical financial performance, financial performance outlook, years of service, and job performance. The Compensation and Human Resource Committee targetstargeted total compensation for the Chief Executive Officer andCEO, the President & Chief Financial Officer to approximate the median of the rangeCFO, and Bank President using ranges obtained from the Michigan Bankers Association compensation survey as well as any ranges obtained from the independent compensation consultants.consultant. Compensation for other named executive officers was based on the ranges provided by the Michigan Bankers Association survey.

The Michigan Bankers Association survey was utilized in 2013 as well.

Annual Performance Incentives are used to reward executive officers based on our overall financial performance. This element of the compensation program is included in the overall compensation in order to reward employees above and beyond their base salaries when our performance and profitability exceed established annual targets. The inclusion of this modest incentive encourages management to be creative and diligent in managing to achieve specific financial goals without incurring inordinate risks. Annual performance incentiveincentives paid in 2014 were determined by reference to six performance measures that related to services performed in 2013. The maximum award that may be granted to each eligible employee equals 10% of the employee’s base salary (the “Maximum Award”).
The payment of 35% of the Maximum Award (“personal performance goals”) is based on the achievement of goals set for each individual. An analysis is conducted by the Chief Executive Officer.CEO. The Chief Executive OfficerCEO makes a recommendation to the Compensation and Human Resource Committee for the appropriate amount for each individual executive officer. TheThis Committee reviews, modifies if necessary, and approves the recommendations of the Chief Executive Officer. TheCEO. This Committee also reviews the performance of the Chief Executive Officer.CEO. The Compensation and Human Resource Committee uses the following factors as quantitative measures of corporate performance in determining annual cash bonus amounts to be paid:

Peer group financial performance compensation

compensation;

1 and 5 year shareholder returns

returns;

Earnings per share and earnings per share growth

growth;

Budgeted as compared to actual annual operating performance

performance;

Community and industry involvement

involvement;

Results of audit and regulatory exams

exams; and

Other strategic goals as established by the boardBoard.

Each of directors

While no particular weight is given to any specific factor, the Committee gives at least equal weight to the subjective analyses as described above.

Retirement plans.    The Corporation has a 401(k) plan in which substantially all employees areexecutive officers who were eligible to participate. Employees may contribute up to 50% ofparticipate in 2013 accomplished their compensation subject to certain limits based on federal tax laws. As a resultpersonal performance goals and were accordingly paid 35% of the curtailment2013 Maximum Award in 2014.

The payment of the defined benefit plan noted below, the Corporation increased the contributions to the 401(k) plan effective January 1, 2007. The Corporation makes an annual 3.0% safe harbor contribution for all eligible employees and matching contributions equal to 50%remaining 65% of the first 4.0%Maximum Award (“corporate performance goals”) was conditioned on the achievement of an employee’s compensation contributed to the Plan during the year. Employees are 100% vestedtargets in the safe harbor contributionsfollowing six categories:
Earnings per share (weighted 40%);
Net operating expenses to average assets (weighted 20%);
Fully Taxable Equivalent (“FTE”) net interest margin, excluding loan fees (weighted 10%);
Loan growth (weighted 10%);
In-market deposit growth (weighted 10%); and are 0% vested through their first two years
Exceeding peer group return on average assets (weighted 10%).

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Table of employment and are 100% vested after 6 years through a laddered vesting schedule of service for matching contributions.

Contents


The Corporation maintains a non-leveraged employee stock ownership plan (ESOP) which was frozen effective December 31, 2006 to new participants. Contributions tofollowing chart provides the plan are discretionary and approved by the Board of Directors.

The retirement bonus plan is a nonqualified plan of deferred compensation benefits for eligible employees effective January 1, 2007. An initial amount was credited2013 target for each eligible employeecorporate performance goal, as of January 1, 2007. Subsequent amounts have been credited onwell as the performance attained for each allocation date thereafter as defined in the plan. The amount of the initial allocation and the annual allocation are determined pursuant to the payment schedule adopted at the sole and exclusive discretion of the Board of Directors, as set forth in the plan.

In December 2006, the Board of Directors voted to curtail the defined benefit plan effective March 1, 2007. The effect of the curtailment was recognized in the first quarter of 2007 and the current participants’ accrued benefits were frozen as of March 1, 2007. Participation in the plan was limited to eligible employees as of December 31, 2006.

target.

  2013 Targets 2013 Performance (1) Target % Obtained
Target25.00% 50.00% 75.00% 100.00% 
Earning per share$1.57
 $1.60
 $1.62
 $1.64
 $1.63
 75%
Net operating expenses to average assets1.64% 1.61% 1.58% 1.55% 1.62% 25%
FTE Net Interest Margin3.33% 3.35% 3.37% 3.39% 3.28% —%
In market deposit growth4.50% 5.00% 5.50% 6.00% 7.07% 100%
Loan growth4.00% 4.50% 5.00% 5.50% 1.81% —%
Exceeding peer group return on average assets1.32% 1.35% 1.39% 1.42% 1.28% —%
(1)Adjusted for incentive calculation measures.
Other Benefits and Perquisites.Perquisites.Executive officers are eligible for all of the benefits made available to full-time employees of the Corporation (such as the 401(k) plan, employee stock purchase plan, health insurance, group term life insurance and disability insurance) on the same basis as other full-time employees and are subject to the same sick leave and other employee policies. The Corporation
We also provides itsprovide our executive officers with

certain additional benefits and perquisites, which it believeswe believe are appropriate in order to attract and retain the proper quality of talent for these positions and to recognize that similar executive benefits and perquisites are commonly offered by comparable financial institutions.

A description and the cost to the Corporation of these perquisites are included in footnote two in the “Summary Compensation Table” appearing on page 15.

The Corporation believes that benefits and perquisites provided to its executive officers in 2011 represented a reasonable percentage of each executive’s total compensation package and was not inconsistent, in the aggregate, with perquisites provided to executive officers of comparable competing financial institutions.

The Corporation maintains We maintain a plan for qualified officers to provide death benefits to each participant. Insurance policies, designed primarily to fund death benefits, have been purchased on the life of each participant with the CorporationBank as the sole owner and beneficiary of the policies.

How Elements Fit into Overall We believe that perquisites provided to our executive officers in 2014 represented a reasonable percentage of each executive’s total compensation package and are consistent, in the aggregate, with perquisites provided to executive officers of comparable financial institutions. A description and the cost of these perquisites are included in footnote 1 in the “Summary Compensation ObjectivesTable” appearing on page 12, the table outlining the change in pension value on page 13, and the “Nonqualified Deferred Compensation Table” appearing on page 14.

Retirement Plans

.    Our retirement plans are designed to assist executives in providing themselves with a financially secure retirement. The elementsretirement plans include a 401(k) plan, a frozen defined benefit pension plan, a frozen non-leveraged employee stock ownership plan (“ESOP”), and a retirement bonus plan.

We have a 401(k) plan, in which substantially all employees are eligible to participate. Employees may contribute up to 100% of their compensation subject to certain limits based on federal tax laws. The plan was amended in 2013 to provide a matching safe harbor contribution for all eligible employees equal to 100% of the Corporation’sfirst 5.0% of an employee's compensation contributed to the Plan during the year. Employees are structured to reward past and current performance, continued service and to motivate its leaders to excel100% vested in the future. The Corporation’s salary compensation has generally been usedsafe harbor matching contributions.
For 2012, we made a 3.0% safe harbor contribution for all eligible employees and matching contributions equal to retain and attract motivated leadership. The Corporation intends to continually ensure salaries are sufficient to attract and retain exceptional officers. The Corporation’s cash bonus incentive rewards current performance based upon personal and corporate goals and targets. The Corporation offers the Isabella Bank Corporation and Related Companies Deferred Compensation Plan for Directors (the “Directors’ Plan”) to motivate its eligible officers to enhance value for shareholders by aligning the interests of management with those of its shareholders.

As part of its goal of attracting and retaining quality team members, the Corporation has developed competitive employee benefit plans. Management feels that the combination of all50% of the plans listed above makesfirst 4.0% of an employee’s compensation contributed to the Corporation’s totalPlan during the year. Employees were 100% vested in the safe harbor contributions and were 0% vested through their first two years of employment and were 100% vested after 6 years of service for matching contributions.

Our defined benefit pension plan was curtailed effective March 1, 2007 and the current participants’ accrued benefits were frozen as of that date. Participation in the plan was limited to eligible employees as of December 31, 2006.
Our non-leveraged ESOP was frozen effective December 31, 2006 to new participants. Contributions to the plan are discretionary and approved by the Board.
The retirement bonus plan is a nonqualified plan of deferred compensation packages attractive.

benefits for eligible employees effective January 1, 2007. Benefit amounts are determined pursuant to the payment schedule adopted at the sole and exclusive discretion of the Board.


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Compensation and Human Resource Committee Report

The following Report of the Compensation and Human Resource Committee Report does not constitute soliciting material and should not be deemed filed or incorporated by reference into any other Corporation filing under the Securities Act of 1933 or the Securities Exchange Act of 1934, except to the extent the Corporation specifically incorporates this Report by reference therein.

The Compensation and Human Resource Committee, which includes all of the independent directors of the Board, has reviewed and discussed the Compensation Discussion and Analysis required by Item 402(b) of SEC Regulation S-K with management, and based on such review and discussion, the Compensation and Human Resource Committee recommended to the Board of Directors that the Compensation Discussion and Analysis be included in this Proxy Statement and the Annual Report on Form 10-K.

Submitted by the Compensation and Human Resource Committee of Isabella Bank Corporation’s Board of Directors:

the Board:

David J. Maness, Chairperson

Dr. Jeffrey J. Barnes

Sandra L. Caul

James C. Fabiano

G. Charles Hubscher

Thomas L. Kleinhardt

Joseph LaFramboise

W. Joseph Manifold

W. Michael McGuire

Dale D. Weburg

Sarah R. Opperman


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Table of Contents

Executive Officers

Executive Officers of the Corporationofficers are compensated in accordance with their employment with the applicable entity. The following table shows information on compensation earned from the Corporation or its subsidiaries forin each of the last three fiscal years ended December 31, 2011,2014, for the Chief Executive Officer, the Chief Financial Officer,CEO, CFO, and the Corporation’sour three other most highly compensated executive officers.

Summary Compensation Table

Name and principal position

  Year   Salary
($)(1)		   Bonus ($)   Change in pension
value and
non-qualified
deferred
compensation
earnings
($)(2)		   All other
compensation
($)(3)		   Total
($)		 

Richard J. Barz

   2011    $375,225    $26,535    $181,143    $37,627    $620,530  

CEO Isabella Bank Corporation

   2010     357,600     24,706     116,364     34,856     533,526  

President and CEO Isabella Bank

   2009     354,250     9,625     90,184     30,568     484,627  

Dennis P. Angner

   2011    $355,625    $26,100    $163,672    $28,542    $573,939  

President and CFO

   2010     352,600     24,706     103,340     27,922     508,568  

Isabella Bank Corporation

   2009     359,425     9,800     79,623     25,252     474,100  

Steven D. Pung

   2011    $167,362    $12,719    $98,915    $27,732    $306,728  

Executive Vice President

   2010     143,632     10,572     62,288     32,886     249,378  

Isabella Bank

   2009     127,100     6,003     48,518     18,468     200,089  

Timothy M. Miller

   2011    $181,986    $13,046    $17,000    $15,070    $227,102  

President of the Breckenridge

   2010     179,309     12,370     9,000     14,709     215,388  

Division of Isabella Bank

   2009     180,238     7,319     6,000     11,685     205,242  

David J. Reetz(4)

   2011    $125,640    $8,612    $61,944    $15,077    $211,273  

Sr. Vice President and CLO

   2010     123,910     9,165     36,429     13,694     183,198  

Isabella Bank

            

Name and principal positionYear Salary
($)		 Bonus
($)		 Change in pension value and nonqualified deferred compensation earnings
($)		 All other compensation
($)(1)		 Total
($)
Jae A. Evans (2)2014 $302,472
 $10,698
 $65,000
 $36,703
 $414,873
CEO2013 176,379
 13,320
 —
 30,832
 220,531
Isabella Bank Corporation  

 

 

 

 

            
Dennis P. Angner2014 $365,542
 $19,809
 $259,016
 $26,582
 $670,949
President and CFO2013 354,522
 25,121
 9,918
 29,775
 419,336
Isabella Bank Corporation2012 357,335
 23,628
 131,266
 28,208
 540,437
            
Steven D. Pung2014 $262,953
 $13,814
 $153,870
 $34,673
 $465,310
President2013 227,675
 6,003
 6,629
 29,589
 269,896
Isabella Bank2012 195,128
 13,333
 67,361
 30,111
 305,933
            
Jerome E. Schwind (2)2014 $219,176
 $9,316
 $16,000
 $28,766
 $273,258
Executive Vice President and COO2013 152,017
 10,326
 (9,000) 25,474
 178,817
Isabella Bank  

 

 

 

 

            
David J. Reetz2014 $155,088
 $8,981
 $90,237
 $17,639
 $271,945
Sr. Vice President and CLO2013 133,537
 10,598
 (9,778) 16,604
 150,961
Isabella Bank2012 129,397
 9,708
 45,361
 17,138
 201,604
(1)Includes compensation voluntarily deferred under the Corporation’s 401(k) plan. Directors fees are also included, for calendar years 2011, 2010 and 2009 respectively as follows: Richard J. Barz $50,225, $52,600, and $59,250; Dennis P. Angner $49,625, $52,600, and $59,425; Steven D. Pung $900, $900, and $900; and Timothy M. Miller $10,650, $11,300, and $26,900.

(2)Represents the aggregate non-cash change in the actuarial present value of the noted executive’s accumulated benefit under the Isabella Bank Corporation Pension Plan for calendar years 2011, 2010, and 2009 as follows: Richard J. Barz $143,000, $81,000, and $56,000; Dennis P. Angner $109,000, $53,000, and $32,000; Steven D. Pung $77,000, $42,000, $29,000; Timothy M. Miller $17,000, $9,000, and $6,000; David J. Reetz $43,000 and $19,000; this also includes the non-cash change in the Isabella Bank Corporation Retirement Bonus Plan for calendar years 2011, 2010, and 2009 as follows: Richard J. Barz $38,143, $35,364, $34,184; Dennis P. Angner $54,672, $50,340, and $47,623; Steven D. Pung $21,915, $20,288, and $19,518; and David J. Reetz $18,944 and $17,429.

(3)(1)For all notednamed executives all other compensation includes 401(k) matching contributions. For Richard J. Barz,Jae A. Evans, Steven D. Pung, and David J. Reetz this also includes club dues and auto allowance. For Dennis P. Angner and Timothy M. Miller,Jerome E. Schwind, this also includes auto allowance.

(4)
(2)Not a named executive officer prior to 2010.2013.

2011Executive officer salary includes compensation voluntarily deferred under our 401(k) plan. Director and advisory board fees are also included and are displayed in the following table for each the last three fiscal years ended December 31, 2014:
 Director and advisory board fees ($)
Name and principal position2014
2013
2012
Jae A. Evans$27,300
 $675
 
Dennis P. Angner45,700
 46,525
 51,325
Steven D. Pung24,100
 12,675
 900
Jerome E. Schwind—
 1,200
 
David J. Reetz—
 —
 —

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The change in pension value and nonqualified deferred compensation earnings, listed in the summary compensation table, represents the aggregate non-cash change in the actuarial present value of the noted executive’s accumulated benefit under the Isabella Bank Corporation Pension Plan and also includes the non-cash change in the Isabella Bank Corporation Retirement Bonus Plan. The following table provides the change in values for the last three fiscal years ended December 31, 2014:
 Pension plan ($) Retirement plan ($)
Name and principal position2014 2013 2012 2014 2013 2012
Jae A. Evans—
 —
 

 65,000
 —
 

Dennis P. Angner173,000
 (70,000) 64,000
 86,016
 79,918
 67,266
Steven D. Pung126,000
 (29,000) 44,000
 27,870
 35,629
 23,361
Jerome E. Schwind16,000
 (9,000) 
 —
 —
 

David J. Reetz66,000
 (32,000) 25,000
 24,237
 22,222
 20,361
Pension Benefits

The following table indicates the present value of accumulated benefits as of December 31, 20112014 for each named executive officer in the summary compensation table.

Name

  

Plan name

  Number of
years of
vesting
service as of
01/01/12 (#)		  Present
value of
accumulated
benefit
($)		   Payments
during last
fiscal year		 

Richard J. Barz

  Isabella Bank Corporation Pension Plan  40  $905,000    $—  
  Isabella Bank Corporation Retirement Bonus Plan  40   309,074     —  

Dennis P. Angner

  Isabella Bank Corporation Pension Plan  28   491,000     —  
  Isabella Bank Corporation Retirement Bonus Plan  28   330,205     —  

Steven D. Pung

  Isabella Bank Corporation Pension Plan  33   461,000     —  
  Isabella Bank Corporation Retirement Bonus Plan  33   167,545     —  

Timothy M.
Miller

  Isabella Bank Corporation Pension Plan  11   96,000     —  

David J. Reetz

  Isabella Bank Corporation Pension Plan  25   162,000     —  
  Isabella Bank Corporation Retirement Bonus Plan  25   109,322     —  

NamePlan name Number of years of vesting service as of
01/01/14		 Present value of accumulated benefit
($)		 Payments during last fiscal year
Jae A. EvansIsabella Bank Corporation Pension Plan — —
 —
 Isabella Bank Corporation Retirement Bonus Plan N/A 65,000
 —
Dennis P. AngnerIsabella Bank Corporation Pension Plan 31 658,000
 —
 Isabella Bank Corporation Retirement Bonus Plan N/A 563,405
 —
Steven D. PungIsabella Bank Corporation Pension Plan 36 602,000
 —
 Isabella Bank Corporation Retirement Bonus Plan N/A 254,405
 —
Jerome E. SchwindIsabella Bank Corporation Pension Plan 16 48,000
 —
 Isabella Bank Corporation Retirement Bonus Plan N/A —
 —
David J. ReetzIsabella Bank Corporation Pension Plan 28 221,000
 —
 Isabella Bank Corporation Retirement Bonus Plan N/A 176,142
 —
Defined benefit pension plan.    The Corporation sponsorsWe sponsor the Isabella Bank Corporation Pension Plan, a frozen defined benefit pension plan. In December 2006, the Board of Directors voted to curtail the defined benefit planThe curtailment, which was effective March 1, 2007. The curtailment2007, froze the current participant’s accrued benefits as of March 1, 2007that date and limited participation in the plan to eligible employees as of December 31, 2006. Due to the curtailment of the plan, the number of years of credited service was frozen. As such, the years of credited service for the plan may differ from the participant’s actual years of service with the Corporation.service.

Annual contributions are made to the plan as required by accepted actuarial principles, applicable federal tax laws, and to pay expenses ofrelated to operating and maintaining the plan. The amount of contributions on behalf of any one participant cannot be separately or individually computed.

Pension plan benefits are based on years of service and the employees’ five highest consecutive years of compensation out of the last ten years of service, effective through December 31, 2006.

A participant may earn a benefit for up to 35 years of accredited service. Earned benefits are 100 percent100% vested after five years of service. Benefit payments normally start when a participant reaches age 65. A participant with more than five years of service may elect to take early retirement benefits anytime after reaching age 55. Benefits payable under early retirement are reduced actuarially for each month prior to age 65 in which benefits begin.

Dennis P. Angner Richard J. Barz,and Steven D. Pung and Timothy M. Miller are eligible for early retirement under the Isabella Bank Corporation Pension Plan.plan. Under the provisions of the Plan,plan, participants are eligible for early retirement after reaching the age of 55 with at least 5 years of service. The early retirement benefit amount is the accrued benefit payable at normal retirement date reduced by 5/9% for each of the first 60 months and 5/18% for each of the next 60 months that the benefit commencement date precedes the normal retirement date.


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Table of Contents

Retirement bonus plan.    The Corporation sponsorsWe sponsor the Isabella Bank Corporation Retirement Bonus Plan. The Retirement Bonus Plan is aThis nonqualified plan of deferred compensation benefits for eligible employees effective January 1, 2007. This plan is intended to provide eligible employees with additional retirement benefits. To be eligible, the employee needed to be employed by the Corporationan employee on January 1, 2007, and be a participant in the Corporation’sour frozen Executive Supplemental Income Agreement. Participants must also be an officer of the Corporation with at least 10 years of service as of December 31, 2006. The Corporation hasWe have sole and exclusive discretion to add new participants to the plan by authorizing such participation pursuant to action of the Corporation’s Board of Directors.Board.

An initial amount was credited for each eligible employee as of January 1, 2007. Subsequent amounts have been credited on each allocation date thereafter as defined in the Plan.plan. The amount of the initial allocation and the annual allocation shall be determined pursuant to the payment schedule adopted by theat our sole and exclusive discretion, of the Board, as set forth in the Plan.

Richard J. Barz, plan.

Dennis P. Angner and Steven D. Pung are eligible for early retirement under the Isabella Bank Corporation Retirement Bonus Plan.plan. Under the provisions of the plan, participants are eligible for early retirement upon attaining 55 years of age. There is no difference between the calculation of benefits payable upon early retirement and normal retirement.

2011 Nonqualified Deferred Compensation Table

Name

  Executive
contributions in
last FY
($)		   Aggregate
earnings in
last FY ($)		   Aggregate
balance at
last FYE
($)		 

Richard J. Barz

  $29,462    $5,133    $176,837  

Dennis P. Angner

   33,462     6,898     235,199  

Steven D. Pung

   900     238     7,998  

Timothy M. Miller

   3,337     1,080     36,297  

David J. Reetz

   N/A     N/A     N/A  

The directors of

NameExecutive contributions in 2014 
($)		 Aggregate earnings in 2014 
($)		 Aggregate 
balance at December 31, 2014 
($)
Jae A. Evans13,764
 974
 29,811
Dennis P. Angner27,564
 12,940
 344,246
Steven D. Pung24,100
 1,439
 45,651
Jerome E. Schwind—
 198
 5,120
David J. Reetz—
 —
 —
Under the Corporation and its subsidiariesDeferred Compensation Plan for Directors ("Directors Plan"), named executive officers who serve as directors, are required to deferinvest at least 25% of their earned board fees into the Directors’ Planin our common stock and may deferinvest up to 100% of their earned fees based on their annual election. These amounts are reflected in the 2011 nonqualifiedabove table. These stock investments can be made either through deferred compensation table above. Underfees or through the Directors’purchase of shares through the Isabella Bank Corporation Stockholder Dividend Reinvestment and Employee Stock Purchase Plan these deferred("DRIP Plan"). Deferred fees, under the Directors Plan, are converted on a quarterly basis into shares of the Corporation’sour common stock based on the fair market value of shares of the Corporation’s common stock at that time. Shares credited to a participant’s account are eligible for stock and cash dividends as payable.

paid. DRIP Plan shares are purchased on a monthly basis pursuant to the DRIP Plan.

Distribution of deferred fees from the Directors’Directors Plan occurs when the participant retires from the Board, attains age 70, or upon the occurrence of certain other events. Distributions must take the form of shares of the Corporation’sour common stock. Any Corporation common stock issued under deferred fees from the Directors’Directors Plan will be considered restricted stock under the Securities Act of 1933, as amended.

Common stock purchased through the DRIP Plan are not considered restricted stock under the Securities Act of 1933, as amended.

Potential Payments Upon Termination or Change in Control

The estimated paymentsamounts payable to each named executive officer upon severance from employment, retirement, termination upon death or disability or termination following a change in control of the Corporation are described below. For all termination scenarios, the amounts assume such termination took place as of December 31, 2011.

2014.

Any Severance of Employment

Regardless of the manner in which a named executive officer’s employment terminates, he or she is entitled to receive amounts earned during his or her term of employment. Such amounts include:

Amounts accrued and vested through the Defined Benefit Pension Plan.

Amounts accrued and vested through the Retirement Bonus Plan.

Amounts deferred in the Directors’Directors Plan.

Unused vacation pay.

Retirement

In the event of the retirement of an executive officer, the officer would receive the benefits identified above. As

14

Table of December 31, 2011, the named executive officers listed had no unused vacation days.

Contents


Death or Disability

In the event of death or disability of an executive officer, in addition to the benefits listed above, the executive officer will also receive payments under the Corporation’sour life insurance plan or benefits under the Corporation’sour disability plan as appropriate.

In addition to potential payments upon termination available to all employees, the estates for the executive officers listed below would receive the following payments upon death:

Name

  While an
Active
Employee		   Subsequent to
Retirement		 

Richard J. Barz

  $650,000    $325,000  

Dennis P. Angner

   612,000     306,000  

Steven D. Pung

   333,000     166,500  

Timothy M. Miller

   305,600     152,800  

David J. Reetz

   251,200     125,600  

NameWhile an Active Employee Subsequent to Retirement
Jae A. Evans$530,000
 $265,000
Dennis P. Angner616,000
 308,000
Steven D. Pung460,000
 230,000
Jerome E. Schwind422,000
 211,000
David J. Reetz298,000
 149,000
Change in Control

The Corporation

We currently doesdo not have a change in control agreement with any of the executive officers; provided, however, pursuant to the Retirement Bonus Plan each participant would become 100% vested in their benefit under the plan if, following a change in control, they voluntarily terminate employment or are terminated without just cause.

Director Compensation

The following table summarizes the Compensationcompensation of each non-employee director who served on the Board of Directors during 2011.

   

Fees

earned or

paid in
cash

   Total 

Name

  ($)   ($) 

Jeffrey J. Barnes

   27,675     27,675  

Sandra L. Caul

   32,675     32,675  

James C. Fabiano

   32,550     32,550  

G. Charles Hubscher

   32,375     32,375  

Thomas L. Kleinhardt

   36,675     36,675  

Joseph LaFramboise

   32,775     32,775  

David J. Maness

   58,321     58,321  

W. Joseph Manifold

   30,871     30,871  

W. Michael McGuire

   35,050     35,050  

Dianne C. Morey

   7,350     7,350  

Dale D. Weburg

   36,425     36,425  

The Corporation2014.

NameFees paid in cash
($)(1)		 Fees deferred under Directors Plan
($)(1)		 Total fees earned
($)
Dr. Jeffrey J. Barnes$675
 $29,925
 $30,600
Richard J. Barz29,200
 —
 29,200
G. Charles Hubscher675
 36,025
 36,700
Thomas L. Kleinhardt675
 34,025
 34,700
Joseph LaFramboise16,155
 20,945
 37,100
David J. Maness26,286
 25,614
 51,900
W. Joseph Manifold675
 34,525
 35,200
W. Michael McGuire25,963
 10,337
 36,300
Sarah R. Opperman31,000
 —
 31,000
(1)Directors electing to receive all fees in cash, resulting in no contributions to the Directors Plan, invest at least 25% of their board fees in our common stock under the DRIP Plan as described in our Directors Plan on page 14.
We paid $1,350 per board meeting plus a retainer of $6,000$7,500 to each board member during 2011.2014. Members of the Audit Committee were paid $500$600 per audit committeeAudit Committee meeting attended. Members of the Nominating and Corporate Governance Committee were paid $200$300 per meeting attended. Members of the Information Technology Committee were paid $225 per meeting attended plus a retainer of $1,000. The Chairchairperson of the Board is paid a retainer of $33,000, and the Chairchairperson for the Audit Committee is paid a retainer of $4,000. Fees$4,000, and the vice chairperson for the Audit Committee is paid to Dianne C. Morey during 2011 were significantly less than the other directors due to her resignation from the Corporation’s Boarda retainer of Directors on April 27, 2011.

Pursuant to the Directors’ Plan the directors of the Corporation and its subsidiaries are required to defer at least 25% of their earned board fees. $2,000.

Under the Directors’Directors Plan, deferred directors’ fees are converted on a quarterly basis into shares of the Corporation’s common stock, based on the fair market value of a share of the Corporation’s common stock at that time. Shares of stock credited to a participant’s account are eligible for cash and stock dividends as payable. Directors of the Corporation deferred $444,905 under the Directors’ Plan in 2011.

Uponupon a participant’s attainment of age 70, retirement from the Board, or the occurrence of certain other events, the participant isthey are eligible to receive a lump-sum, in-kind distribution of all of the stock that is then credited to his or hertheir account. The plan does not allow for cash settlement. Stock issued under the Directors’Directors Plan is restricted stock under the Securities Act of 1933, as amended.

The Corporation

We established a Rabbi Trust (the Trust) effective as of January 1, 2008 to fund the Directors’Directors Plan. The Rabbi Trust is an irrevocable grantor trust to which the Corporationwe may contribute assets for the limited purpose of funding a nonqualified deferred compensation plan. Although the Corporationwe may not reach the assets of the Rabbi Trust for any purpose other than meeting its obligations under the Directors’Directors Plan, the assets of the Rabbi Trust remain subject to the claims of the Corporation’sour creditors. The CorporationWe may contribute cash or common stock to the Rabbi Trust from time to time-to-

15

Table of Contents

time for the sole purpose of funding the Directors’Directors Plan. The Rabbi Trust will use any cash that the Corporationwe may contribute to purchase shares of the Corporation’sour common stock on the open market through the Corporation’s brokerage services department.

The Corporationmarket.

We transferred $440,155$338,649 to the Rabbi Trust in 2011,2014, which held 16,58513,934 shares of the Corporation’sour common stock for settlement as of December 31, 2011.2014. As of December 31, 2011,2014, there were 201,438173,435 shares of stock credited to participants’ accounts, which credits are unfunded as of such date to the extent that they are in excess of the stock and cash that has been credited to the Rabbi Trust. All amounts are unsecured claims against the Corporation’sour general assets. The net cost of this benefit to the Corporation was $183,703$154,107 in 2011.

2014.

The following table displays the cumulative number of equity shares credited to the accounts of activecurrent directors pursuant to the terms of the Directors’Directors Plan as of December 31, 2011:

March 12, 2015:

Name

# of shares of
stock credited

Dennis PP. Angner

15,3009,924

Dr. Jeffrey J. Barnes

8,9224,561

Richard J. Barz

—7,461

Sandra L. Caul

Jae A. Evans		1,32517,806

James C. Fabiano

47,518

G. Charles Hubscher

12,9297,406

Thomas L. Kleinhardt

19,70813,251

Joseph LaFramboise

8,8325,416

David J. Maness

23,64715,858

W. Joseph Manifold

15,1659,667

W. Michael McGuire

7,9345,845

Dale D. Weburg

Sarah R. Opperman		1,93215,651

Compensation and Human Resource Committee Interlocks and Insider Participation

The

In 2014, the Compensation and Human Resource Committee members were directors Barnes, Hubscher, Kleinhardt, LaFramboise, Maness, Manifold, McGuire and Opperman. No executive officer of the Corporation is responsible for reviewing and recommending to the Corporation’s Board theserves on any board of directors or compensation committee of any entity that compensates any member of the Chief Executive OfficerCompensation and other executive officers of the Corporation, benefit plans and the overall percentage increase in salaries. The committee consists of directors Maness, Barnes, Caul, Fabiano, Hubscher, Kleinhardt, LaFramboise, Manifold, McGuire, and Weburg.

Human Resource Committee.

Indebtedness of and Transactions with Management

Certain directors and officers of the Corporation and members of their families were loan customers of Isabellathe Bank, or have been directors or officers of corporations, members or managers of limited liability companies, or partners of partnerships which have had transactions with the Bank. In management’sour opinion, all such transactions were made in the ordinary course of business and were substantially on the same terms, including collateral and interest rates, as those prevailing at

the same time for comparable transactions with customers not related to the Bank. These transactions do not involve more than normal risk of collectability or present other unfavorable features. Total loans to these customers were approximately $3,728,000$3,822,000 as of December 31, 2011. The Corporation addresses2014. We address transactions with related parties in itsour Code of Business Conduct and Ethics Policy.Conflicts of interest are prohibited, as a matter of Corporation policy, except under guidelinesboard approved by the Board of Directors or committees of the Board.guidelines.

Security Ownership of Certain Beneficial Owners and Management

As

The following table sets forth certain information as of March 28, 201212, 2015 as to the common stock of the Corporation does not haveowned of record or beneficially by any person who is known to the Corporation to be the beneficial owner of more than 5% of the common stock of the Corporation.

Name and Address of OwnerAmount and Nature of Beneficial Ownership (1) Percent of Class
McGuirk Investments LLC412,557
 5.29%
P.O. Box 222
 
Mt. Pleasant, MI 48804-0222
 
(1)Beneficial ownership is defined by rules of the SEC and includes shares that the person has or shares voting or investment power over and shares that the person has a right to acquire within 60 days from March 12, 2015.

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Table of Contents

The following table sets forth certain information as of March 28, 201212, 2015 as to theour common stock of the Corporation owned beneficially by each director and director nominee, by each named executive officer, and by all directors, director nominees and executive officers of the Corporation as a group. The shares to be credited under the Directors’ Plan are not included in the table below.

  Amount and Nature of Beneficial Ownership 

Name of Owner

 Sole Voting
and  Investment
Powers		   Shared Voting
or Investment
Powers		   Total
Beneficial
Ownership		   Percentage of
Common  Stock
Outstanding		 

Dennis P. Angner*

  18,712     —     18,712     0.25% 

Jeffrey J. Barnes

  —     5,837     5,837     0.08% 

Richard J. Barz*

  18,911     —     18,911     0.25% 

Sandra L. Caul

  —     10,609     10,609     0.14% 

James C. Fabiano

  272,708     6,773     279,481     3.67% 

G. Charles Hubscher

  28,860     3,523     32,383     0.43% 

Thomas L. Kleinhardt

  —     31,546     31,546     0.41% 

Joseph LaFramboise

  200     937     1,137     0.01% 

David J. Maness

  480     1,274     1,754     0.02% 

W. Joseph Manifold

  2,107     —     2,107     0.03% 

W. Michael McGuire

  116,462     —     116,462     1.53% 

Dale D. Weburg

  28,665     32,620     61,285     0.80% 

Timothy M. Miller

  258     3,428     3,686     0.05% 

Steven D. Pung

  9,752     8,647     18,399     0.24% 

David J. Reetz

  8,871     181     9,051     0.12% 
 

 

 

   

 

 

   

 

 

   

 

 

 

All Directors, nominees and Executive

Officers as a Group (15) persons

  505,985     105,374     611,360     8.03% 
 

 

 

   

 

 

   

 

 

   

 

 

 

Name of OwnerAmount and Nature of Beneficial Ownership (1) Percent of Class
Dennis P. Angner36,186
 0.46%
Dr. Jeffrey J. Barnes15,415
 0.19%
Richard J. Barz31,490
 0.40%
Jae A. Evans10,202
 0.13%
G. Charles Hubscher168,716
 2.13%
Thomas L. Kleinhardt69,422
 0.88%
Joseph LaFramboise10,074
 0.13%
David J. Maness26,692
 0.34%
W. Joseph Manifold20,040
 0.25%
W. Michael McGuire78,864
 1.00%
Sarah R. Opperman4,998
 0.06%
Steven D. Pung23,066
 0.29%
David J. Reetz9,503
 0.12%
Jerome E. Schwind1,440
 0.02%
All Directors, nominees and Executive Officers as a Group (14) persons506,108
 6.40%
*Trustees
(1)Beneficial ownership is defined by rules of the ESOP who vote ESOP stock.SEC and includes shares that the person has or shares voting or investment power over and shares that the person has a right to acquire within 60 days from March 12, 2015. Totals for directors include shares of stock credited under the Directors Plan as of March 12, 2015 as disclosed in the table on page 16 above. Totals for named executive officers Steven D. Pung and Jerome E. Schwind include shares of stock credited under the Directors Plan as of March 12, 2015 as follows:  Mr. Pung, 2,029 shares; and Mr. Schwind, 228 shares. Participants in the Directors Plan have a right to acquire shares credited to their accounts upon a distributable event. A description of the Directors Plan under which these shares of stock were issued is set forth above in "Director Compensation."

Independent Registered Public Accounting Firm

The Audit Committee has appointed Rehmann Robson P.C.LLC as theour independent auditors of the Corporation for the year ending December 31, 2012.

2015.

A representative of Rehmann Robson P.C.LLC is expected to be present at the Annual Meeting of Shareholders to respond to appropriate questions from shareholders and to make any comments Rehmann Robson P.C.LLC believes are appropriate.

Fees for Professional Services Provided by Rehmann Robson P.C.

LLC

The following table shows the aggregate fees billed by Rehmann Robson P.C.LLC for the audit and other services provided to the Corporation for 2011 and 2010.

  2011  2010

Audit fees

  $253,920    $252,163 

Audit related fees

   17,510     39,089 

Tax fees

   20,175     24,730 
  

 

 

    

 

 

 

Total

  $291,605    $315,982 
  

 

 

    

 

 

 

for:


2014 2013
Audit fees$278,178
 $271,380
Audit related fees18,760
 29,425
Tax fees24,210
 27,095
Total$321,148
 $327,900
The audit fees were for performing the integrated audit of the Corporation’sour consolidated annual financial statements and the audit of internal control over financial reportingattestation report related to the Federal Deposit Insurance Corporation Improvement Act, review of interim quarterly financial statements included in the Corporation’sour Forms 10-Q, and services that are normally provided by Rehmann Robson P.C.LLC in connection with statutory and regulatory filings or engagements.


17

Table of Contents

The audit related fees are typically for various discussions related to the adoption and interpretation of new accounting pronouncements. During 2010,2014, this includes fees for procedures related to an SEC comment letter and other nonrecurring regulatory filings. Also included are fees for auditing of the Corporation’sour employee benefit plans.

The tax fees were for the preparation of the Corporation’s and its subsidiaries’our state and federal tax returns and for consultation with the Corporation on various tax matters.

The Audit Committee has considered whether the services provided by Rehmann Robson P.C.,LLC, other than the audit fees, are compatible with maintaining Rehmann Robson P.C.’sLLC’s independence and believes that the other services provided are compatible.

Pre-Approval Policies and Procedures

All audit and non-audit services over $5,000 to be performed by Rehmann Robson P.C.LLC must be approved in advance by the Audit Committee if those fees are reasonably expected to exceed 5.0% of the current year agreed upon fee for independent audit services. As permitted by the SEC’sSEC rules, the Audit Committee has authorized its Chairpersonchairperson to pre-approve audit, audit-related, tax and non-audit services, provided that such approved service is reported to the full Audit Committee at its next meeting.

As early as practicable in each calendar year, the independent auditor provides to the Audit Committee a schedule of the audit and other services that the independent auditor expects to provide or may provide during the next twelve months. The schedule will be specific as to the nature of the proposed services, the proposed fees, timing, and other details that the Audit Committee may request. The Audit Committee will by resolution authorize or decline the proposed services. Upon approval, this schedule will serve as the budget for fees by specific activity or service for the next twelve months.

A schedule of additional services proposed to be provided by the independent auditor, or proposed revisions to services already approved, along with associated proposed fees, may be presented to the Audit Committee for their consideration and approval at any time. The schedule will be specific as to the nature of the proposed service, the proposed fee, and other details that the Audit Committee may request. The Audit Committee will by resolution authorize or decline authorization for each proposed new service.

Applicable SEC rules and regulations permit waiver of the pre-approval requirements for services other than audit, review or attest services if certain conditions are met. Out of the services characterized above as audit-related, tax and professional services, none were billed pursuant to these provisions in 20112014 and 20102013 without pre-approval as required under the Corporation’s policies.

pre-approval.

Shareholder Proposals

Any proposals which shareholders of the Corporationyou intend to present at the next annual meeting of the CorporationAnnual Meeting must be received before December 6, 2012November 27, 2015 to be considered for inclusion in the Corporation’s proxy statementour Proxy Statement and proxy for that meeting. Proposals should be made in accordance with Securities and Exchange Commission Rule 14a-8.

Directors’ Attendance at the Annual Meeting of Shareholders

The Corporation’s

Our directors are encouraged to attend the annual meeting of shareholders.Annual Meeting. At the 2011 annual meeting,2014 Annual Meeting, all directors were in attendance, with the exception of Fabiano.

Dr. Barnes.

Section 16(a) Beneficial Ownership Reporting Compliance

Section 16(a) of the Securities Exchange Act of 1934 requires the Corporation’sour directors and certain officers and persons who own more than ten percent10% of the Corporation’sour common stock, to file with the SEC initial reports of ownership and reports of changes in ownership of the Corporation’sour common stock. These officers, directors, and greater than ten percent10% shareholders are required by SEC regulation to furnish the Corporationus with copies of these reports.

To the Corporation’sour knowledge, based solely on review of the copies of such reports furnished, to the Corporation, during the year ended December 31, 20112014 all Section 16(a) filing requirements were satisfied, with respect to the applicable officers, directors, and greater than 10 percent10% beneficial owners.

owners with the exception of the following: Director Barz filed one late report for two reportable transactions, Director Hubscher filed two late reports for one reportable transaction, and Director Opperman filed one late report for two reportable transactions.

Other Matters

The

We will bear the cost of soliciting proxies will be borne by the Corporation.proxies. In addition to solicitation by mail, officers and other employees of the Corporation may solicit proxies by telephone or in person, without compensation other than their regular compensation.


18

Table of Contents

As to Other Business Which May Come Before the Meeting

Management of the Corporation does

We do not intend to bring any other business before the meeting for action. However, if any other business should be presented for action, it is the intention of the persons named in the enclosed form of proxy to vote in accordance with their judgment on such business.

By order of the Board of Directors

Debra Campbell, Secretary




19

Table of Contents

Isabella Bank Corporation

Financial Information Index

Page Description
  21
22
 

Common Stock and Dividend Information
24
Summary of Selected Financial Data

  22
26
 

Report of Independent Registered Public Accounting Firm

  23

Consolidated Financial Statements

  28

Notes to Consolidated Financial Statements

  73

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

  97
46
 

Common StockQuantitative and Dividend InformationQualitative Disclosures about Market Risk

100
49
 

Report of Independent Registered Public Accounting Firm
50
Consolidated Financial Statements
56
Notes to Consolidated Financial Statements
94
Shareholders’ Information



20

SUMMARY OF SELECTED
Table of Contents

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 Section 21E of the Securities Exchange Act of 1934, as amended. 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, monetary and fiscal policies of the U.S. Government, including policies of the U.S. Treasury and the FRB, the quality or composition of the loan or investment portfolios, demand for loan products, fluctuation in the value of collateral securing our loan portfolio, deposit flows, competition, 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.
The acronyms and abbreviations identified below may be used throughout this Annual Report on Form 10-K or in our other filings. You may find it helpful to refer back to this page while reading this report.
AFS: Available-for-saleGAAP: U.S. generally accepted accounting principles
ALLL: Allowance for loan and lease lossesGLB Act: Gramm-Leach-Bliley Act of 1999
AOCI: Accumulated other comprehensive income (loss)IFRS: International Financial Reporting Standards
ASC: FASB Accounting Standards CodificationIRR: Interest rate risk
ASU: FASB Accounting Standards UpdateJOBS Act: Jumpstart our Business Startups Act
ATM: Automated Teller MachineLIBOR: London Interbank Offered Rate
BHC Act: Bank Holding Company Act of 1956N/A: Not applicable
CFPB: Consumer Financial Protection BureauN/M: Not meaningful
CIK: Central Index KeyNASDAQ: NASDAQ Stock Market Index
CRA: Community Reinvestment ActNASDAQ Banks: NASDAQ Bank Stock Index
DIF: Deposit Insurance FundNAV: Net asset value
DIFS: Department of Insurance and Financial ServicesNOW: Negotiable order of withdrawal
Directors Plan: Isabella Bank Corporation and Related Companies Deferred Compensation Plan for DirectorsNSF: Non-sufficient funds
Dividend Reinvestment Plan: Isabella Bank Corporation Stockholder Dividend Reinvestment Plan and Employee Stock Purchase PlanOCI: Other comprehensive income (loss)
Dodd-Frank Act: Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010OMSR: Originated mortgage servicing rights
ESOP: Employee stock ownership planOREO: Other real estate owned
Exchange Act: Securities Exchange Act of 1934OTTI: Other-than-temporary impairment
FASB: Financial Accounting Standards BoardPBO: Projected benefit obligation
FDI Act: Federal Deposit Insurance ActPCAOB: Public Company Accounting Oversight Board
FDIC: Federal Deposit Insurance CorporationRabbi Trust: A trust established to fund the Directors Plan
FFIEC: Federal Financial Institutions Examinations CouncilSEC: U.S. Securities & Exchange Commission
FRB: Federal Reserve BankSOX: Sarbanes-Oxley Act of 2002
FHLB: Federal Home Loan BankTDR: Troubled debt restructuring
Freddie Mac: Federal Home Loan Mortgage CorporationXBRL: eXtensible Business Reporting Language
FTE: Fully taxable equivalent


21

Table of Contents

Common Stock and Dividend Information
Our authorized common stock consists of 15,000,000 shares, of which 7,776,274 shares are issued and outstanding as of December 31, 2014. As of that date, there were 3,056 shareholders of record.
Our common stock is traded in the over the counter market.  The common stock is quoted on the OTCQX market tier of the OTC Markets Group Inc.’s ("OTC Markets") electronic quotation system (www.otcmarkets.com) under the symbol “ISBA”.  Other trades in the common stock occur in privately negotiated transactions from time-to-time of which we may have little or no information.
We have reviewed the information available as to the range of reported high and low bid quotations, including high and low bid information as reported by OTC Markets. The following table sets forth our compilation of that information for the periods indicated. Price information obtained from OTC Markets reflects inter-dealer prices, without retail mark-up, mark-down, or commissions and may not necessarily represent actual transactions. The following compiled data is provided for information purposes only and should not be viewed as indicative of the actual or market value of our common stock.

Number of
Shares		 Sale Price
 Low High
2014     
First Quarter79,719
 $22.25
 $23.94
Second Quarter72,142
 22.44
 23.50
Third Quarter94,422
 21.73
 24.00
Fourth Quarter67,771
 22.10
 23.99
 314,054
    
2013     
First Quarter54,741
 $21.55
 $25.10
Second Quarter65,865
 24.65
 26.00
Third Quarter105,540
 23.40
 25.50
Fourth Quarter116,052
 21.12
 24.84
 342,198
    
The following table sets forth the cash dividends paid for the following quarters:

Per Share
 2014 2013
First Quarter$0.22
 $0.21
Second Quarter0.22
 0.21
Third Quarter0.22
 0.21
Fourth Quarter0.23
 0.21
Total$0.89
 $0.84
We have adopted and publicly announced a common stock repurchase plan. The plan was last amended on October 22, 2014, to allow for the repurchase of an additional 150,000 shares of common stock. These authorizations do not have expiration dates. As shares are repurchased under this plan, they are retired and revert back to the status of authorized, but unissued shares.

22

Table of Contents

The following table provides information for the unaudited three month period ended December 31, 2014, with respect to the common stock repurchase plan:

Shares Repurchased Total Number of Shares Purchased as Part of Publicly Announced Plan or Program Maximum Number of Shares That May Yet Be Purchased Under the Plans or Programs
 Number Average Price
Per Share		  
Balance, September 30      26,716
October 1 - 223,600
 $23.61
 3,600
 23,116
Additional Authorization (150,000 shares)

 

 

 173,116
October 23 - 312,707
 23.27
 2,707
 170,409
November 1 - 307,257
 22.87
 7,257
 163,152
December 1 - 3111,386
 22.66
 11,386
 151,766
Balance, December 3124,950
 $22.93
 24,950
 151,766
Information concerning securities authorized for issuance under equity compensation plans appears under Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters.
Stock Performance
The following graph compares the cumulative total shareholder return on our common stock for the last five years with the cumulative total return on (1) NASDAQ, which is comprised of all United States common shares traded on the NASDAQ and (2) the NASDAQ Banks, which is comprised of bank and bank holding company common shares traded on the NASDAQ over the same period. The graph assumes the value of an investment in the Corporation's common stock and each index was $100 at December 31, 2009 and all dividends are reinvested.
 
Year ISBA NASDAQ NASDAQ
Banks
12/31/2009 $100.00
 $100.00
 $100.00
12/31/2010 95.20
 117.99
 114.01
12/31/2011 135.70
 117.08
 102.08
12/31/2012 128.80
 137.80
 121.02
12/31/2013 146.20
 192.78
 171.02
12/31/2014 143.30
 221.15
 179.24

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Table of Contents

Results of Operations (Dollars in thousands except per share amounts)
The following table outlines the results of operations and provides certain key performance measures as of, and for the years ended, December 31:

2014 2013 2012 2011 2010
INCOME STATEMENT DATA         
Interest income$53,951
 $54,076
 $56,401
 $57,905
 $57,217
Interest expense9,970
 11,021
 13,423
 16,203
 17,204
Net interest income43,981
 43,055
 42,978
 41,702
 40,013
Provision for loan losses(668) 1,111
 2,300
 3,826
 4,857
Noninterest income9,325
 10,175
 11,530
 8,218
 9,300
Noninterest expenses37,906
 37,413
 37,639
 34,530
 33,807
Federal income tax expense2,344
 2,196
 2,363
 1,354
 1,604
Net Income$13,724
 $12,510
 $12,206
 $10,210
 $9,045
PER SHARE         
Basic earnings$1.77
 $1.63
 $1.61
 $1.35
 $1.20
Diluted earnings$1.74
 $1.59
 $1.56
 $1.31
 $1.17
Dividends$0.89
 $0.84
 $0.80
 $0.76
 $0.72
Tangible book value*$16.59
 $15.62
 $14.72
 $13.90
 $13.22
Quoted market value         
High$24.00
 $26.00
 $24.98
 $24.45
 $19.00
Low$21.73
 $21.12
 $21.75
 $17.10
 $15.75
Close*$22.50
 $23.85
 $21.75
 $23.70
 $17.30
Common shares outstanding*7,776,274
 7,723,023
 7,671,846
 7,589,226
 7,550,074
PERFORMANCE RATIOS         
Return on average total assets0.90% 0.86% 0.88% 0.79% 0.76%
Return on average shareholders' equity8.06% 7.67% 7.60% 6.74% 6.22%
Return on average tangible shareholders' equity10.80% 10.71% 11.41% 10.30% 9.51%
Net interest margin yield (FTE)3.45% 3.50% 3.70% 3.87% 4.04%
BALANCE SHEET DATA*         
Gross loans$833,582
 $808,037
 $772,753
 $750,291
 $735,304
AFS securities$567,534
 $512,062
 $504,010
 $425,120
 $330,724
Total assets$1,549,543
 $1,493,137
 $1,430,639
 $1,337,925
 $1,225,810
Deposits$1,074,484
 $1,043,766
 $1,017,667
 $958,164
 $877,339
Borrowed funds$289,709
 $279,326
 $241,001
 $216,136
 $194,917
Shareholders' equity$174,594
 $160,609
 $164,489
 $154,783
 $145,161
Gross loans to deposits77.58% 77.42% 75.93% 78.31% 83.81%
ASSETS UNDER MANAGEMENT*         
Loans sold with servicing retained$288,639
 $293,665
 $303,425
 $302,636
 $312,252
Assets managed by our Investment and Trust Services Department$383,878
 $351,420
 $319,301
 $297,393
 $307,983
Total assets under management$2,222,060
 $2,138,222
 $2,053,365
 $1,937,954
 $1,846,045
ASSET QUALITY*         
Nonperforming loans to gross loans0.50% 0.42% 1.00% 0.95% 0.83%
Nonperforming assets to total assets0.33% 0.32% 0.68% 0.67% 0.67%
ALLL to gross loans1.21% 1.42% 1.54% 1.65% 1.68%
CAPITAL RATIOS*         
Shareholders' equity to assets11.27% 10.76% 11.50% 11.57% 11.84%
Tier 1 capital to average assets8.59% 8.46% 8.29% 8.18% 8.24%
Tier 1 risk-based capital14.08% 13.67% 13.23% 12.92% 12.44%
Total risk-based capital15.18% 14.92% 14.48% 14.17% 13.69%
* At end of year


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Table of Contents

The following table outlines our interim results of operations and key performance measures as of, and for the unaudited periods ended:

Quarter to Date
 December 31
2014		 September 30
2014		 June 30
2014		 March 31
2014		 December 31
2013		 September 30
2013		 June 30
2013		 March 31
2013
Total interest income$13,713
 $13,483
 $13,391
 $13,364
 $13,603
 $13,505
 $13,440
 $13,528
Total interest expense2,504
 2,498
 2,468
 2,500
 2,683
 2,736
 2,781
 2,821
Net interest income11,209
 10,985
 10,923
 10,864
 10,920
 10,769
 10,659
 10,707
Provision for loan losses(64) (162) (200) (242) 245
 351
 215
 300
Noninterest income2,426
 2,216
 2,434
 2,249
 2,130
 2,862
 2,736
 2,447
Noninterest expenses9,606
 9,514
 9,300
 9,486
 9,578
 9,320
 9,324
 9,191
Federal income tax expense648
 444
 692
 560
 303
 674
 643
 576
Net income$3,445
 $3,405
 $3,565
 $3,309
 $2,924
 $3,286
 $3,213
 $3,087
PER SHARE               
Basic earnings$0.44
 $0.44
 $0.46
 $0.43
 $0.38
 $0.43
 $0.42
 $0.40
Diluted earnings0.44
 0.43
 0.45
 0.42
 0.37
 0.42
 0.41
 0.39
Dividends0.23
 0.22
 0.22
 0.22
 0.21
 0.21
 0.21
 0.21
Quoted Market value*22.50
 23.60
 22.95
 23.00
 23.85
 24.85
 24.75
 25.00
Tangible book value*16.59
 16.33
 16.08
 15.82
 15.62
 15.43
 15.19
 14.95
* At end of period


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Table of Contents

Management's Discussion and Analysis of Financial Condition and Results of Operations
ISABELLA BANK CORPORATION FINANCIAL DATA

REVIEW

(Dollars in thousands except per share data)amounts)
The following is management’s discussion and analysis of the financial condition and results of our operations. This discussion and analysis is intended to provide a better understanding of the consolidated financial statements and statistical data included elsewhere in this Annual Report on Form 10-K.
Executive Summary
We reported record net income of $13,724 and earnings per common share of $1.77 for the year ended

   2011  2010  2009  2008  2007 

INCOME STATEMENT DATA

      

Total interest income

  $57,905   $57,217   $58,105   $61,385   $53,972  

Net interest income

   41,702    40,013    38,266    35,779    28,013  

Provision for loan losses

   3,826    4,857    6,093    9,500    1,211  

Net income

   10,210    9,045    7,800    4,101    7,930  

BALANCE SHEET DATA

      

End of year assets

  $1,337,925   $1,225,810   $1,143,944   $1,139,263   $957,282  

Daily average assets

   1,287,195    1,182,930    1,127,634    1,113,102    925,631  

Daily average deposits

   927,186    840,392    786,714    817,041    727,762  

Daily average loans/net

   730,919    712,272    712,965    708,434    596,739  

Daily average equity

   145,725    139,855    139,810    143,626    119,246  

PER SHARE DATA

      

Earnings per share

      

Basic

  $1.35   $1.20   $1.04   $0.55   $1.14  

Diluted

   1.31    1.17    1.01    0.53    1.11  

Cash dividends

   0.76    0.72    0.70    0.65    0.62  

Book value (at year end)

   20.40    19.23    18.69    17.89    17.58  

FINANCIAL RATIOS

      

Shareholders’ equity to assets (at year end)

   11.57%   11.84%   12.31%   11.80%   12.86% 

Return on average equity

   7.01    6.47    5.58    2.86    6.65  

Return on average tangible equity

   10.30    9.55    8.53    4.41    8.54  

Cash dividend payout to net income

   56.51    59.93    67.40    118.82    54.27  

Return on average assets

   0.79    0.76    0.69    0.37    0.86  

  2011  2010 
   4th  3rd  2nd  1st  4th  3rd  2nd  1st 

Quarterly Operating Results:

        

Total interest income

 $14,466   $14,532   $14,669   $14,238   $14,540   $14,306   $14,272   $14,099  

Interest expense

  3,979    4,070    4,101    4,053    4,217    4,296    4,291    4,400  
 

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Net interest income

  10,487    10,462    10,568    10,185    10,323    10,010    9,981    9,699  

Provision for loan losses

  1,443    963    603    817    1,626    968    1,056    1,207  

Noninterest income

  2,433    1,859    1,978    1,948    2,629    2,634    1,870    2,167  

Noninterest expenses

  8,651    8,513    8,779    8,587    8,558    8,620    8,275    8,354  

Net income

  2,711    2,511    2,672    2,316    2,318    2,553    2,151    2,023  

Per Share of Common Stock:

        

Earnings per share

        

Basic

 $0.36   $0.33   $0.35   $0.31   $0.30   $0.34   $0.29   $0.27  

Diluted

  0.35    0.32    0.34    0.30    0.30    0.33    0.28    0.26  

Cash dividends

  0.19    0.19    0.19    0.19    0.18    0.18    0.18    0.18  

Book value (at quarter end)

  20.40    20.53    20.00    19.52    19.23    19.59    19.39    18.89  

December 31, 2014. Our continued strong earnings have primarily been the result of a continued improvement in credit quality indicators. These improvements resulted in a decline in the level of the ALLL in both amount and as a percentage of gross loans, resulting in a reversal of provision for loan losses of $668 for the year ended December 31, 2014. Net loan charge-offs during 2014 were $732 as compared to $1,547 in 2013 which is a 52.68% decline. Additionally, we continue to see reductions in loans classified as less than satisfactory.

During the year, total assets grew by 3.78% to $1,549,543, and assets under management increased to $2,222,060 which includes loans sold and serviced, and assets managed by our Investment and Trust Services Department of $672,517. We enjoyed total loan growth of $25,545 which was driven by commercial and agricultural loan growth of $51,989. This was partially offset by declines in both residential real estate and consumer loans of $26,444 as demand for residential real estate loans continued to be soft and the market for consumer loans continued to be dominated by automobile manufacturers.
While our net yield on interest earning assets of 3.45% remains historically low, it has stabilized. The low net yield on interest earning assets is a direct result of Federal Reserve Bank monetary policy. While we expect the Federal Reserve Bank to increase short term interest rates in 2015, we do not anticipate any significant improvements in our net yield on interest earning assets as the rates paid on interest bearing liabilities will likely increase faster than those of interest earning assets. Net interest income will increase only through continued growth in loans, investments, and other income earning assets.
We anticipate that competition for commercial loans will continue to be significant, residential mortgage loan activity will remain soft, and growing our deposit base will be challenging throughout the foreseeable future. Despite these challenges, our unwavering commitment to core community banking principles and long term sustainable growth has, and will continue to, enable us to meet the needs of the communities we serve and increase shareholder value.
Recent Legislation
The Health Care and Education Act of 2010, the Patient Protection and Affordable Care Act, the Dodd-Frank Act, and the JOBS Act, have already had, and are expected to continue to have, a negative impact on our operating results. Of these four acts, the Dodd-Frank Act has had the most significant impact. The Dodd-Frank Act established the CFPB which has made significant changes in the regulation of financial institutions aimed at strengthening the oversight of the federal government over the operation of the financial services sector and increasing the protection of consumers. Rules issued by the CFPB regarding consumer lending, including residential mortgage lending have increased our compensation and outside advisor costs to ensure our compliance with the new regulations and this trend is expected to continue.
On July 2, 2013, the FRB published revised BASEL III Capital standards for banks. The rules redefine what is included or deducted from equity capital, changes risk weighting for certain on and off-balance sheet assets, increases the minimum required equity capital to be considered well capitalized, and introduces a capital cushion buffer. The rules, which will be gradually phased in between 2015 and 2019, are not expected to have a material impact on the Corporation but will require us to hold more capital than we have historically.
Other
We have not received any notices of regulatory actions as of February 27, 2015.


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Table of Contents

CRITICAL ACCOUNTING POLICIES
Our significant accounting policies are set forth in “Note 1 – Nature of Operations and Summary of Significant Accounting Policies” of the “Notes to Consolidated Financial Statements” in Item 8. Financial Statements and Supplementary Data. Of these significant accounting policies, we consider our policies regarding the ALLL, acquisition intangibles and goodwill, and the determination of the fair value and assessment of OTTI of investment securities to be our most critical accounting policies.
The ALLL requires our most subjective and complex judgment. Changes in economic conditions can have a significant impact on the ALLL and, therefore, the provision for loan losses and results of operations. We have developed policies and procedures for assessing the appropriateness of the ALLL, recognizing that this process requires a number of assumptions and estimates with respect to our loan portfolio. Our assessments may be impacted in future periods by changes in economic conditions, and the discovery of information with respect to borrowers which is not known to us at the time of the issuance of the consolidated financial statements. For additional discussion concerning our ALLL and related matters, see the detailed discussion to follow under the caption “Allowance for Loan and Lease Losses” and “Note 5 – Loans and ALLL” of the “Notes to Consolidated Financial Statements” in Item 8. Financial Statements and Supplementary Data.
U.S. generally accepted accounting principles require that we determine the fair value of the assets and liabilities of an acquired entity, and record their fair value on the date of acquisition. We employ a variety of measures in the determination of the fair value, including the use of discounted cash flow analysis, market appraisals, and projected future revenue streams. For certain items that we believe we have the appropriate expertise to determine the fair value, we may choose to use our own calculations of the value. In other cases, where the value is not easily determined, we consult with outside parties to determine the fair value of the identified asset or liability. Once valuations have been adjusted, the net difference between the price paid for the acquired entity and the net value of assets acquired on our balance sheet, including identifiable intangibles, is recorded as goodwill. Acquisition intangibles and goodwill are qualitatively evaluated to determine if it is more likely than not that the carrying balance is impaired on at least an annual basis.
AFS securities are carried at fair value with changes in the fair value included as a component of other comprehensive income. Declines in the fair value of AFS securities below their cost that are other-than-temporary are reflected as realized losses in the consolidated statements of income. We evaluate AFS securities for indications of losses that are considered other-than-temporary, if any, on a regular basis. The market values for AFS investment securities are typically obtained from outside sources and applied to individual securities within the portfolio.


27

Table of Contents

Average Balances, Interest Rate, and Net Interest Income
The following schedules present the daily average amount outstanding for each major category of interest earning assets, nonearning assets, interest bearing liabilities, and noninterest bearing liabilities for the last three years. 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 34% federal income tax rate. Nonaccrual loans, for the purpose of the following computations, are included in the average loan balances. FRB and FHLB restricted equity holdings are included in accrued income and other assets.

Year Ended December 31
 2014 2013 2012
 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$813,202
 $39,432
 4.85% $790,132
 $41,233
 5.22% $754,304
 $43,396
 5.75%
Taxable investment securities357,250
 8,092
 2.27% 335,575
 7,228
 2.15% 309,681
 7,555
 2.44%
Nontaxable investment securities194,751
 9,877
 5.07% 165,774
 8,294
 5.00% 145,502
 7,941
 5.46%
Trading securities174
 9
 5.17% 1,071
 55
 5.14% 2,624
 142
 5.41%
Other25,610
 510
 1.99% 27,235
 447
 1.64% 33,359
 486
 1.46%
Total earning assets1,390,987
 57,920
 4.16% 1,319,787
 57,257
 4.34% 1,245,470
 59,520
 4.78%
NONEARNING ASSETS                 
Allowance for loan losses(10,973)     (11,877)     (12,408)    
Cash and demand deposits due from banks18,552
     18,162
     19,409
    
Premises and equipment25,957
     25,993
     25,244
    
Accrued income and other assets97,657
     96,375
     103,368
    
Total assets$1,522,180
     $1,448,440
     $1,381,083
    
INTEREST BEARING LIABILITIES                 
Interest bearing demand deposits$191,750
 157
 0.08% $183,665
 161
 0.09% $170,851
 204
 0.12%
Savings deposits260,469
 374
 0.14% 242,777
 366
 0.15% 214,958
 451
 0.21%
Time deposits448,971
 5,764
 1.28% 456,774
 6,613
 1.45% 473,675
 8,476
 1.79%
Borrowed funds274,080
 3,675
 1.34% 251,590
 3,881
 1.54% 225,689
 4,292
 1.90%
Total interest bearing liabilities1,175,270
 9,970
 0.85% 1,134,806
 11,021
 0.97% 1,085,173
 13,423
 1.24%
NONINTEREST BEARING LIABILITIES                 
Demand deposits165,860
     141,872
     125,443
    
Other10,773
     8,752
     9,785
    
Shareholders’ equity170,277
     163,010
     160,682
    
Total liabilities and shareholders’ equity$1,522,180
     $1,448,440
     $1,381,083
    
Net interest income (FTE)  $47,950
     $46,236
     $46,097
  
Net yield on interest earning assets (FTE)    3.45%     3.50%     3.70%

28

Table of Contents

Net Interest Income
Net interest income is the amount by which interest income on earning assets exceeds the interest expenses on interest bearing liabilities. Net interest income is influenced by changes in the balance and mix of assets and liabilities and 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 adding the income tax savings from interest on tax exempt loans, and nontaxable investment securities, thus making year to year comparisons more meaningful. Included in interest income are loan fees which are displayed in the following table for the years ended December 31:
 2014 2013 2012
Loan fees$2,199
 $3,182
 $3,178
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 FTE 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.
 2014 Compared to 2013 
 Increase (Decrease) Due to		 2013 Compared to 2012 
 Increase (Decrease) Due to

Volume Rate Net Volume Rate Net
Changes in interest income           
Loans$1,179
 $(2,980) $(1,801) $1,996
 $(4,159) $(2,163)
Taxable investment securities480
 384
 864
 601
 (928) (327)
Nontaxable investment securities1,468
 115
 1,583
 1,049
 (696) 353
Trading securities(46) —
 (46) (80) (7) (87)
Other(28) 91
 63
 (96) 57
 (39)
Total changes in interest income3,053
 (2,390) 663
 3,470
 (5,733) (2,263)
Changes in interest expense           
Interest bearing demand deposits7
 (11) (4) 14
 (57) (43)
Savings deposits26
 (18) 8
 53
 (138) (85)
Time deposits(111) (738) (849) (293) (1,570) (1,863)
Borrowed funds329
 (535) (206) 457
 (868) (411)
Total changes in interest expense251
 (1,302) (1,051) 231
 (2,633) (2,402)
Net change in interest margin (FTE)$2,802
 $(1,088) $1,714
 $3,239
 $(3,100) $139
Our net yield on interest earning assets remains at historically low levels which is a direct result of FRB monetary policy. The persistent low interest rate environment coupled with an increase in the concentration of AFS securities as a percentage of earning assets has also placed downward pressure on net interest margin yield. While we anticipate that the FRB will increase short term interest rates in 2015, we do not expect any significant change in our net yield on interest earning assets as the rates paid on interest bearing liabilities will likely increase faster than those of interest earning assets. Net interest income will increase only through continued balance sheet growth.
 Average Yield / Rate for the Unaudited Three Month Periods Ended:

December 31
2014		 September 30
2014		 June 30
2014		 March 31
2014		 December 31
2013
Total earning assets4.17% 4.10% 4.14% 4.14% 4.30%
Total interest bearing liabilities0.85% 0.85% 0.84% 0.85% 0.94%
Net yield on interest earning assets (FTE)3.46% 3.39% 3.43% 3.42% 3.50%

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 Quarter to Date (Unaudited) Net Interest Income (FTE)

December 31
2014		 September 30
2014		 June 30
2014		 March 31
2014		 December 31
2013
Total interest income (FTE)$14,702
 $14,357
 $14,282
 $14,242
 $14,441
Total interest expense2,504
 2,498
 2,468
 2,500
 2,683
Net interest income (FTE)$12,198
 $11,859
 $11,814
 $11,742
 $11,758
One of the the primary contributors to the decline in the net yield on interest earning assets during 2014 was a drastic decline in loan fees. Loan fees have declined as the demand for residential mortgage loans has diminished and the competition for commercial loans remains intense. As shown in the following table, the net yield on interest earning assets and net interest income excluding the impact of loan fees (FTE) has remained essentially unchanged since the fourth quarter of 2013. The following table displays unaudited data for the three month periods ended:

December 31
2014		 September 30
2014		 June 30
2014		 March 31
2014		 December 31
2013
Net interest income (FTE)$12,198
 $11,859
 $11,814
 $11,742
 $11,758
Less loan fees669
 488
 566
 476
 761
Net interest income excluding loan fees (FTE)$11,529
 $11,371
 $11,248
 $11,266
 $10,997
Net yield on interest earning assets excluding loan fees (FTE)3.27% 3.25% 3.26% 3.28% 3.27%
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 reflection of other qualitative risks that reflects 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, provisions for loan losses, and ALLL balances as of, and for the unaudited three month periods ended:

December 31
2014		 September 30
2014		 June 30
2014		 March 31
2014		 December 31
2013
Total charge-offs$351
 $416
 $411
 $450
 $497
Total recoveries115
 278
 211
 292
 152
Net loan charge-offs236
 138
 200
 158
 345
Net loan charge-offs to average loans outstanding0.03 % 0.02 % 0.02 % 0.02 % 0.04%
Provision for loan losses$(64) $(162) $(200) $(242) $245
Provision for loan losses to average loans outstanding(0.01)% (0.02)% (0.02)% (0.03)% 0.03%
ALLL$10,100
 $10,400
 $10,700
 $11,100
 $11,500
ALLL as a% of loans at end of period1.21 % 1.26 % 1.31 % 1.37 % 1.42%

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The following table summarizes our charge-off and recovery activity for the years ended December 31:

2014 2013 2012 2011 2010
ALLL at beginning of period$11,500
 $11,936
 $12,375
 $12,373
 $12,979
Charge-offs         
Commercial and agricultural590
 907
 1,672
 1,984
 3,731
Residential real estate722
 1,004
 1,142
 2,240
 2,524
Consumer316
 429
 542
 552
 596
Total charge-offs1,628
 2,340
 3,356
 4,776
 6,851
Recoveries         
Commercial and agricultural550
 363
 240
 461
 453
Residential real estate197
 181
 122
 177
 638
Consumer149
 249
 255
 314
 297
Total recoveries896
 793
 617
 952
 1,388
Provision for loan losses(668) 1,111
 2,300
 3,826
 4,857
ALLL at end of period10,100
 11,500
 11,936
 12,375
 12,373
Net loan charge-offs$732
 $1,547
 $2,739
 $3,824
 $5,463
Net loan charge-offs to average loans outstanding0.09% 0.20% 0.36% 0.51% 0.75%
ALLL as a% of loans at end of period1.21% 1.42% 1.54% 1.65% 1.68%
As the level of net loan charge-offs continues to decline and credit quality indicators continue to improve, we have reduced the ALLL in both amount and as a percentage of loans. For further discussion of the allocation of the ALLL, see “Note 5 – Loans and ALLL” of the “Notes to Consolidated Financial Statements” in Item 8. Financial Statements and Supplementary Data.
Loans Past Due and Loans in Nonaccrual Status
Increases in past due and nonaccrual 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 loans. We monitor all loans that are past due and in nonaccrual status for indications of additional deterioration.

Total Past Due and Nonaccrual
 December 31
2014		 September 30
2014		 June 30
2014		 March 31
2014		 December 31
2013
Commercial and agricultural$4,805
 $3,904
 $5,045
 $4,986
 $3,621
Residential real estate4,181
 4,011
 4,613
 7,067
 7,008
Consumer138
 134
 98
 113
 259
Total$9,124
 $8,049
 $9,756
 $12,166
 $10,888

Total Past Due and Nonaccrual as of December 31
 2014 2013 2012 2011 2010
Commercial and agricultural$4,805
 $3,621
 $7,271
 $7,420
 $9,606
Residential real estate4,181
 7,008
 5,431
 5,297
 8,119
Consumer138
 259
 199
 186
 309
Total$9,124
 $10,888
 $12,901
 $12,903
 $18,034
Declines in past due and nonaccrual loans during 2014 are the result of strengthened loan performance. A summary of loans past due and in nonaccrual status, including the composition of the ending balance of nonaccrual loans by type, is included in “Note 5 – Loans and ALLL” of the “Notes to Consolidated Financial Statements” in Item 8. Financial Statements and Supplementary Data.
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. While this approach has allowed certain borrowers to develop a payment structure

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that will allow them to continue making payments in lieu of foreclosure, it has contributed to a significant increase in the level of loans classified as TDRs. The modifications have been successful for us and our customers as very few of the modified loans have resulted in foreclosures. At the time of the TDR, the loan is reviewed to determine whether or not to classify the loan as accrual or nonaccrual. 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.
We restructure debt with borrowers who due to temporary financial difficulties are unable to service their debt under the original terms. We may extend the amortization period, reduce interest rates, forgive principal, forgive interest, or a combination of these modifications. Typically, the modifications are for a period of five years or less. There were no TDRs that were Government sponsored as of December 31, 2014 or December 31, 2013.
Losses associated with TDRs, if any, are included in the estimation of the ALLL in the quarter in which a loan is identified as a TDR, and we review the analysis of the ALLL estimation each reporting period to ensure its continued appropriateness.
The following tables provide a roll-forward of TDRs for the years ended December 31, 2013 and 2014:

Accruing Interest Nonaccrual Total
 Number
of
Loans		 Balance Number
of
Loans		 Balance Number
of
Loans		 Balance
January 1, 2013115
 $16,531
 19
 $2,824
 134
 $19,355
New modifications76
 12,192
 5
 424
 81
 12,616
Principal advances (payments)—
 (891) —
 (292) —
 (1,183)
Loans paid-off(17) (2,844) (6) (800) (23) (3,644)
Partial charge-offs—
 (79) —
 (477) —
 (556)
Balances charged-off(3) (167) (1) (27) (4) (194)
Transfers to OREO(1) (33) (7) (496) (8) (529)
Transfers to accrual status2
 133
 (2) (133) —
 —
Transfers to nonaccrual status(7) (419) 7
 419
 —
 —
December 31, 2013165
 24,423
 15
 1,442
 180
 25,865
New modifications30
 2,647
 5
 367
 35
 3,014
Principal advances (payments)—
 (1,501) —
 (254) —
 (1,755)
Loans paid-off(32) (2,964) (3) (90) (35) (3,054)
Partial charge-offs—
 (70) —
 (193) —
 (263)
Balances charged-off(3) (13) (3) (115) (6) (128)
Transfers to OREO—
 —
 (5) (338) (5) (338)
Transfers to accrual status5
 502
 (5) (502) —
 —
Transfers to nonaccrual status(9) (2,093) 9
 2,093
 —
 —
December 31, 2014156
 $20,931
 13
 $2,410
 169
 $23,341
The following table summarizes our TDRs as of December 31:

2014 2013 2012

Accruing
Interest		 Nonaccrual Total Accruing
Interest		 Nonaccrual Total Accruing
Interest		 Nonaccrual Total
Current20,012
 272
 20,284
 21,690
 1,189
 22,879
 16,301
 941
 17,242
Past due 30-59 days804
 592
 1,396
 2,158
 37
 2,195
 158
 561
 719
Past due 60-89 days115
 3
 118
 575
 —
 575
 72
 41
 113
Past due 90 days or more—
 1,543
 1,543
 —
 216
 216
 —
 1,281
 1,281
Total20,931
 2,410
 23,341
 24,423
 1,442
 25,865
 16,531
 2,824
 19,355

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2011 2010
 Accruing
Interest		 Nonaccrual Total Accruing
Interest		 Nonaccrual Total
Current16,125
 514
 16,639
 4,798
 499
 5,297
Past due 30-59 days1,564
 344
 1,908
 175
 26
 201
Past due 60-89 days50
 85
 135
 102
 —
 102
Past due 90 days or more—
 74
 74
 —
 163
 163
Total17,739
 1,017
 18,756
 5,075
 688
 5,763
Additional disclosures about TDRs are included in “Note 5 – Loans and ALLL” of the “Notes to Consolidated Financial Statements” in Item 8. Financial Statements and Supplementary Data.
Impaired Loans
The following is a summary of information pertaining to impaired loans as of December 31:
 2014 2013

Outstanding
Balance		 Unpaid
Principal
Balance		 Valuation
Allowance		 Outstanding
Balance		 Unpaid
Principal
Balance		 Valuation
Allowance
TDRs           
Commercial real estate$10,222
 $10,501
 $1,276
 $10,663
 $11,193
 $1,585
Commercial other715
 945
 4
 1,310
 1,340
 62
Agricultural real estate1,423
 1,423
 —
 1,459
 1,459
 30
Agricultural other66
 186
 —
 79
 199
 —
Residential real estate senior liens10,462
 11,019
 1,847
 12,266
 12,841
 2,010
Residential real estate junior liens246
 246
 49
 20
 20
 4
Home equity lines of credit153
 453
 46
 —
 —
 —
Consumer secured54
 54
 1
 68
 69
 —
Total TDRs23,341
 24,827
 3,223
 25,865
 27,121
 3,691
Other impaired loans           
Commercial real estate1,009
 1,195
 3
 1,707
 2,193
 330
Commercial other83
 95
 —
 136
 217
 58
Agricultural real estate106
 106
 —
 —
 —
 —
Agricultural other—
 —
 —
 —
 —
 —
Residential real estate senior liens1,183
 1,763
 168
 1,795
 2,473
 268
Residential real estate junior liens19
 29
 4
 28
 45
 5
Home equity lines of credit97
 197
 29
 193
 493
 —
Consumer secured10
 10
 —
 51
 79
 —
Total other impaired loans2,507
 3,395
 204
 3,910
 5,500
 661
Total impaired loans$25,848
 $28,222
 $3,427
 $29,775
 $32,621
 $4,352
Additional disclosure related to impaired loans is included in “Note 5 – Loans and ALLL” of the “Notes to Consolidated Financial Statements” in Item 8. Financial Statements and Supplementary Data.

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Nonperforming Assets
The following table summarizes our nonperforming assets as of December 31:

2014 2013 2012 2011 2010
Nonaccrual loans$4,044
 $3,244
 $7,303
 $6,389
 $5,610
Accruing loans past due 90 days or more148
 142
 428
 760
 486
Total nonperforming loans4,192
 3,386
 7,731
 7,149
 6,096
Foreclosed assets885
 1,412
 2,018
 1,876
 2,067
Total nonperforming assets$5,077
 $4,798
 $9,749
 $9,025
 $8,163
Nonperforming loans as a % of total loans0.50% 0.42% 1.00% 0.95% 0.83%
Nonperforming assets as a % of total assets0.33% 0.32% 0.68% 0.67% 0.67%
After a loan is 90 days past due, it is generally placed in nonaccrual status unless it is well secured and in the process of collection. Upon transferring the loans 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 any charge-offs are necessary. Loans may be placed back on accrual status after six months months of continued performance.
Included in the nonaccrual loan balances above were loans currently classified as TDRs as of December 31:

2014 2013 2012 2011 2010
Commercial and agricultural$1,995
 $833
 $2,325
 $520
 $115
Residential real estate262
 609
 499
 497
 573
Consumer153
 —
 —
 —
 —
Total$2,410
 $1,442
 $2,824
 $1,017
 $688
Additional disclosures about nonaccrual loans are included in “Note 5 – Loans and ALLL”of the “Notes to Consolidated Financial Statements” in Item 8. Financial Statements and Supplementary Data.
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 believe that all loans deemed to be impaired have been identified.
We believe that the level of the ALLL is appropriate as of December 31, 2014 and we will continue to closely monitor overall credit quality and our policies and procedures related to the analysis of the ALLL to ensure that the ALLL remains appropriate.


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Noninterest Income and Noninterest Expenses
Noninterest income consists of service charges and fees, gains on sale of mortgage loans, earnings on corporate owned life insurance policies, gains and losses on sales of AFS securities, and other income. Significant account balances are highlighted in the following table with additional descriptions of significant fluctuations for the years ended December 31:

    Change   Change
 2014 2013 $ % 2012 $ %
Service charges and fees             
NSF and overdraft fees$2,156
 $2,243
 $(87) (3.88)% $2,367
 $(124) (5.24)%
ATM and debit card fees2,084
 1,944
 140
 7.20 % 1,874
 70
 3.74 %
Freddie Mac servicing fee720
 737
 (17) (2.31)% 757
 (20) (2.64)%
Service charges on deposit accounts354
 373
 (19) (5.09)% 337
 36
 10.68 %
Net OMSR income (loss)(36) 269
 (305) (113.38)% (89) 358
 N/M
All other133
 116
 17
 14.66 % 125
 (9) (7.20)%
Total service charges and fees5,411
 5,682
 (271) (4.77)% 5,371
 311
 5.79 %
Gain on sale of mortgage loans514
 962
 (448) (46.57)% 1,576
 (614) (38.96)%
Earnings on corporate owned life insurance policies751
 732
 19
 2.60 % 698
 34
 4.87 %
Gains (losses) on sale of AFS securities97
 171
 (74) (43.27)% 1,119
 (948) (84.72)%
Other             
Trust and brokerage advisory fees2,069
 1,858
 211
 11.36 % 1,635
 223
 13.64 %
Other483
 770
 (287) (37.27)% 1,131
 (361) (31.92)%
Total other2,552
 2,628
 (76) (2.89)% 2,766
 (138) (4.99)%
Total noninterest income$9,325
 $10,175
 $(850) (8.35)% $11,530
 $(1,355) (11.75)%
Significant changes in noninterest income are detailed below:
As customers continue to increase their dependence on ATM and debit cards, we have realized a corresponding increase in fees. We do not anticipate significant changes to our ATM and debit fee structure; however, we do expect that these fees will continue to increase as the usage of ATM and debit cards increase.
Offering rates on residential mortgage loans, as well as the decline in loan demand, are the most significant drivers behind fluctuations in the gain on sale of mortgage loans and net OMSR income (loss). As a result of the lack of demand in residential mortgage loan originations, we are experiencing declines in both the gain on sale of mortgage loans and net OMSR income (loss). As mortgage rates are expected to approximate current levels in the foreseeable future and purchase money mortgage activity will likely remain soft, we do not anticipate any significant changes in origination volumes or the gain on sale of mortgage loans.
We are continually analyzing our AFS securities for potential sale opportunities. These analyses identified several mortgage-backed securities pools in 2014, 2013, and 2012 that made economic sense to sell.
In recent periods, we have invested considerable efforts to increase our market share in trust and brokerage advisory services. These efforts have translated into increases in trust fees and brokerage and advisory fees.
The fluctuations in all other income is spread throughout various categories, none of which are individually significant.

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Noninterest expenses include compensation and benefits, furniture and equipment, occupancy, net AFS security impairment loss, and other expenses. Significant account balances are highlighted in the following table with additional descriptions of significant fluctuations for the years ended December 31:

    Change   Change
 2014 2013 $ % 2012 $ %
Compensation and benefits             
Employee salaries$16,114
 $15,677
 $437
 2.79 % $15,374
 $303
 1.97 %
Employee benefits5,191
 5,788
 (597) (10.31)% 5,853
 (65) (1.11)%
Total compensation and benefits21,305
 21,465
 (160) (0.75)% 21,227
 238
 1.12 %
Furniture and equipment             
Service contracts2,542
 2,277
 265
 11.64 % 1,995
 282
 14.14 %
Depreciation1,850
 1,889
 (39) (2.06)% 1,796
 93
 5.18 %
ATM and debit card fees722
 710
 12
 1.69 % 690
 20
 2.90 %
All other59
 69
 (10) (14.49)% 79
 (10) (12.66)%
Total furniture and equipment5,173
 4,945
 228
 4.61 % 4,560
 385
 8.44 %
Occupancy             
Outside services718
 671
 47
 7.00 % 605
 66
 10.91 %
Depreciation701
 667
 34
 5.10 % 621
 46
 7.41 %
Utilities524
 502
 22
 4.38 % 463
 39
 8.42 %
Property taxes515
 499
 16
 3.21 % 501
 (2) (0.40)%
All other340
 314
 26
 8.28 % 329
 (15) (4.56)%
Total occupancy2,798
 2,653
 145
 5.47 % 2,519
 134
 5.32 %
Net AFS securities impairment loss—
 —
 —
 —
 282
 (282) (100.00)%
Other             
Marketing and community relations1,431
 1,131
 300
 26.53 % 1,965
 (834) (42.44)%
FDIC insurance premiums842
 1,082
 (240) (22.18)% 864
 218
 25.23 %
Audit and related fees809
 738
 71
 9.62 % 711
 27
 3.80 %
Director fees775
 819
 (44) (5.37)% 885
 (66) (7.46)%
Education and travel625
 502
 123
 24.50 % 588
 (86) (14.63)%
Postage and freight397
 387
 10
 2.58 % 389
 (2) (0.51)%
Printing and supplies367
 396
 (29) (7.32)% 424
 (28) (6.60)%
Loan underwriting fees361
 423
 (62) (14.66)% 403
 20
 4.96 %
Consulting fees349
 315
 34
 10.79 % 482
 (167) (34.65)%
Legal fees320
 359
 (39) (10.86)% 268
 91
 33.96 %
Other losses250
 109
 141
 129.36 % 300
 (191) (63.67)%
Amortization of deposit premium183
 221
 (38) (17.19)% 260
 (39) (15.00)%
State taxes171
 140
 31
 22.14 % 187
 (47) (25.13)%
Foreclosed asset and collection122
 211
 (89) (42.18)% 202
 9
 4.46 %
All other1,628
 1,517
 111
 7.32 % 1,123
 394
 35.08 %
Total other8,630
 8,350
 280
 3.35 % 9,051
 (701) (7.75)%
Total noninterest expenses$37,906
 $37,413
 $493
 1.32 % $37,639
 $(226) (0.60)%

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Significant changes in noninterest expenses are detailed below:
Employee salaries have increased as a result of normal merit increases and additional staffing required by our continued growth. The decline in employee benefits is related to health care costs as a result of lower than anticipated claims. Employee benefits are expected to increase moderately in future periods as a result of anticipated increases in health care costs.
We have consistently been a strong supporter of the various communities, schools, and charities in the markets we serve. We sponsor a foundation, which we established in 1996, that is funded by discretionary donations. The affiliated foundation provides centralized oversight for donations to organizations that benefit our communities. Included in marketing and community relations were discretionary donations to the foundation of $500, $200, and $850 for the years ended December 31, 2014, 2013, and 2012, respectively.
FDIC insurance premiums were elevated in 2013 due to us receiving less of a refund for prepaid FDIC insurance premiums than we had anticipated. FDIC insurance premiums have returned to normalized levels and are anticipated to approximate current levels in 2015.
We place a strong emphasis on employee development through continuous education. Education and travel expenses vary from year to year based on the timing of various programs that our employees attend.
Loan underwriting fees have declined in 2014 as a result of declines in residential real estate loan originations.
Other losses increased significantly in 2014 primarily as a result of losses incurred related to fraudulent activities. Also contributing to losses in both 2014 and 2012 were losses related to the repurchase of loans that we previously sold to a third party. While other losses fluctuate from period to period, they are expected to approximate 2013 levels in 2015.
The fluctuations in all other expenses are spread throughout various categories, none of which are individually significant.


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Analysis of Changes in Financial Condition
The following table shows the composition and changes in our balance sheet as of December 31:
     Change

2014 2013 $ %
ASSETS       
Cash and cash equivalents$19,326
 $41,558
 $(22,232) (53.50)%
Certificates of deposit held in other financial institutions580
 580
 —
 —
Trading securities—
 525
 (525) (100.00)%
AFS securities       
Amortized cost of AFS securities561,893
 517,614
 44,279
 8.55 %
Unrealized Gains (losses) on AFS securities5,641
 (5,552) 11,193
 N/M
AFS securities567,534
 512,062
 55,472
 10.83 %
Mortgage loans AFS901
 1,104
 (203) (18.39)%
Loans    

  
Gross loans833,582
 808,037
 25,545
 3.16 %
Less allowance for loan and lease losses10,100
 11,500
 (1,400) (12.17)%
Net loans823,482
 796,537
 26,945
 3.38 %
Premises and equipment25,881
 25,719
 162
 0.63 %
Corporate owned life insurance policies25,152
 24,401
 751
 3.08 %
Accrued interest receivable5,851
 5,442
 409
 7.52 %
Equity securities without readily determinable fair values20,076
 18,293
 1,783
 9.75 %
Goodwill and other intangible assets46,128
 46,311
 (183) (0.40)%
Other assets14,632
 20,605
 (5,973) (28.99)%
TOTAL ASSETS$1,549,543
 $1,493,137
 $56,406
 3.78 %
LIABILITIES AND SHAREHOLDERS’ EQUITY       
Liabilities       
Deposits$1,074,484
 $1,043,766
 $30,718
 2.94 %
Borrowed funds289,709
 279,326
 10,383
 3.72 %
Accrued interest payable and other liabilities10,756
 9,436
 1,320
 13.99 %
Total liabilities1,374,949
 1,332,528
 42,421
 3.18 %
Shareholders’ equity174,594
 160,609
 13,985
 8.71 %
TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY$1,549,543
 $1,493,137
 $56,406
 3.78 %
As shown above, total assets have increased $56,406 since December 31, 2013. During 2014, we increased our cost basis of AFS securities by $44,279 while loans grew by $25,545. Contributing to the increase in our AFS securities portfolio were $11,193 in unrealized gains observed during the year. This balance sheet growth was funded by increases in both deposits and borrowed funds. While we do anticipate that generating quality loans will continue to be competitive, we expect that loans will continue to grow in 2015.
A discussion of changes in balance sheet amounts by major categories follows:
Cash and cash equivalents
Included in cash and cash equivalents are funds held with FRB which fluctuate from period-to-period.
Certificates of deposit held in other financial institutions
As certificates of deposit held in other financial institutions mature, the funds are reinvested into AFS investment securities to increase net interest margins (as the yields on AFS investment securities exceeded the potential reinvestment rates for

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certificates of deposits held in other financial institutions during the year). While there were no maturities in 2014 to reinvest, the maturities in 2015 will likely continue this trend.
AFS investment securities
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 following is a schedule of the carrying value of AFS investment securities as of December 31:

2014 2013 2012 2011 2010
Government sponsored enterprises$24,136
 $23,745
 $25,776
 $397
 $5,404
States and political subdivisions215,345
 201,988
 182,743
 174,938
 169,717
Auction rate money market preferred2,619
 2,577
 2,778
 2,049
 2,865
Preferred stocks6,140
 5,827
 6,363
 5,033
 6,936
Mortgage-backed securities166,926
 144,115
 155,345
 143,602
 102,215
Collateralized mortgage obligations152,368
 133,810
 131,005
 99,101
 43,587
Total$567,534
 $512,062
 $504,010
 $425,120
 $330,724
Excluding those holdings in government sponsored enterprises and municipalities within the State of Michigan, there were no investments in securities of any one issuer that exceeded 10% of shareholders’ equity. We have a policy prohibiting investments in securities that we deem are unsuitable due to their inherent credit or market risks. Prohibited investments include stripped mortgage backed securities, zero coupon bonds, nongovernment agency asset backed securities, and structured notes. Our holdings in mortgage-backed securities and collateralized mortgage obligations include only government agencies and government sponsored agencies as we hold no investments in private label mortgage-backed securities or collateralized mortgage obligations.

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The following is a schedule of maturities of AFS investment securities and their weighted average yield as of December 31, 2014. Weighted average yields have been computed on an FTE basis using a tax rate of 34%. Our auction rate money market preferred is a long term floating rate instrument for which the interest rate is set at periodic auctions. At each successful auction, we have the option to sell the security at par value. Additionally, the issuers of auction rate securities generally have the right to redeem or refinance the debt. Because of their lack of contractual maturities, auction rate money market preferred and preferred stocks are not reported by a specific maturity group. Mortgage-backed securities and collateralized mortgage obligations are not reported by a specific maturity group due to their variable monthly payments. Expected maturities may differ from contractual maturities because issuers may have the right to call or prepay obligations.
 Maturing    
 Within
One Year		 After One
Year But
Within
Five Years		 After Five
Years But
Within
Ten Years		 After
Ten Years		 Securities with
Variable  Monthly
Payments or
Noncontractual
Maturities
 Amount Yield (%) Amount Yield (%) Amount Yield (%) Amount Yield (%) Amount Yield (%)
Government sponsored enterprises$—
 — $18,765
 1.46 $5,371
 1.51 $—
 — $—
 —
States and political subdivisions13,975
 2.61 58,229
 4.95 100,619
 4.44 42,522
 4.59 —
 —
Mortgage-backed securities—
 — —
 — —
 — —
 — 166,926
 2.19
Collateralized mortgage obligations—
 — —
 — —
 — —
 — 152,368
 2.29
Auction rate money market preferred—
 — —
 — —
 — —
 — 2,619
 6.35
Preferred stocks—
 — —
 — —
 — —
 — 6,140
 5.78
Total$13,975
 2.61 $76,994
 4.10 $105,990
 4.29 $42,522
 4.59 $328,053
 2.34
Loans
Loans are the largest component of earning assets. The proper management of credit and market risk inherent in the loan portfolio is critical to our financial well-being. To control these risks, we have adopted strict underwriting standards. These standards include specific criteria against lending outside our defined market areas, lending limits to a single borrower, and strict loan to collateral value limits. We also monitor and limit loan concentrations to specific industries. We have no foreign loans and there were no concentrations greater than 10% of total loans that are not disclosed as a separate category in the following table.
The following table presents the composition of the loan portfolio for the years ended December 31:

2014 2013 2012 2011 2010
Commercial$431,961
 $392,104
 $371,505
 $365,714
 $348,852
Agricultural104,721
 92,589
 83,606
 74,645
 71,446
Residential real estate264,595
 289,931
 284,148
 278,360
 284,029
Consumer32,305
 33,413
 33,494
 31,572
 30,977
Total$833,582
 $808,037
 $772,753
 $750,291
 $735,304

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The following table presents the change in the loan portfolio categories for the years ended December 31:

2014 2013 2012
 $ Change % Change $ Change % Change $ Change % Change
Commercial$39,857
 10.16 % $20,599
 5.54 % $5,791
 1.58%
Agricultural12,132
 13.10 % 8,983
 10.74 % 8,961
 12.00%
Residential real estate(25,336) (8.74)% 5,783
 2.04 % 5,788
 2.08%
Consumer(1,108) (3.32)% (81) (0.24)% 1,922
 6.09%
Total$25,545
 3.16 % $35,284
 4.57 % $22,462
 2.99%
We continue to see declines in residential real estate loans which have been offset by increases in commercial and agricultural loans. This trend is likely to continue as the demand for residential real estate loans is anticipated to remain soft due to continuing uncertainty in the residential real estate markets, increases in interest rates, and the implementation of CFPB underwriting guidelines. We expect loans to increase moderately in 2015, with most of the growth in commercial loans.
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 (see “Note 1 – Nature of Operations and Summary of Significant Accounting Policies” and “Note 19 – Fair Value” of the “Notes to Consolidated Financial Statements” in Item 8. Financial Statements and Supplementary Data).
Deposits
Deposits are our primary source of funding. The following table presents the composition of the deposit portfolio as of December 31:

2014 2013 2012 2011 2010
Noninterest bearing demand deposits$181,826
 $158,428
 $143,735
 $119,072
 $104,902
Interest bearing demand deposits190,984
 192,089
 181,259
 163,653
 142,259
Savings deposits261,412
 243,237
 228,338
 193,902
 177,817
Certificates of deposit339,824
 362,473
 376,790
 395,777
 386,435
Brokered certificates of deposit72,134
 56,329
 55,348
 54,326
 53,748
Internet certificates of deposit28,304
 31,210
 32,197
 31,434
 12,178
Total$1,074,484
 $1,043,766
 $1,017,667
 $958,164
 $877,339
The following table presents the change in the deposit categories for the years ended December 31:

2014 2013 2012
 $ Change % Change $ Change % Change $ Change % Change
Noninterest bearing demand deposits$23,398
 14.77 % $14,693
 10.22 % $24,663
 20.71 %
Interest bearing demand deposits(1,105) (0.58)% 10,830
 5.97 % 17,606
 10.76 %
Savings deposits18,175
 7.47 % 14,899
 6.52 % 34,436
 17.76 %
Certificates of deposit(22,649) (6.25)% (14,317) (3.80)% (18,987) (4.80)%
Brokered certificates of deposit15,805
 28.06 % 981
 1.77 % 1,022
 1.88 %
Internet certificates of deposit(2,906) (9.31)% (987) (3.07)% 763
 2.43 %
Total$30,718
 2.94 % $26,099
 2.56 % $59,503
 6.21 %
Overall, deposits continued to grow during 2014. As a result of the current interest rate environment, we continue to see declines in certificates of deposits, but these declines have been offset by increases in noninterest bearing demand deposits and savings accounts. We expect this trend to continue for the foreseeable future. Growth is anticipated to continue to come in the form of non-contractual deposits, while certificates of deposit are expected to approximate current levels.

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The remaining maturity of time certificates and other time deposits of $100 or more as of December 31, 2014 was as follows:
Maturity
Within 3 months$42,416
Within 3 to 6 months22,303
Within 6 to 12 months55,257
Over 12 months124,924
Total$244,900
Borrowed Funds
Borrowed funds include FHLB advances and securities sold under agreements to repurchase. The balance of borrowed funds fluctuates from period to period based on our funding needs including changes in loans, investments, and deposits. The current interest rate environment has made it almost impossible to increase net interest income without increasing earning assets. As deposit growth has generally outpaced loan demand, we continue to deploy deposits into purchases of AFS securities to provide additional interest income. In addition to utilizing deposits, we also utilize borrowings and brokered deposits to fund earning assets.
The following table presents borrowed funds balances for the years ended December 31:

2014 2013 2012 2011 2010
FHLB advances$192,000
 $162,000
 $152,000
 $142,242
 $113,423
Securities sold under agreements to repurchase without stated maturity dates95,070
 106,025
 66,147
 57,198
 45,871
Securities sold under agreements to repurchase with stated maturity dates439
 11,301
 16,284
 16,696
 19,623
Federal funds purchased2,200
 —
 6,570
 —
 16,000
Total$289,709
 $279,326
 $241,001
 $216,136
 $194,917
For additional disclosure related to borrowed funds, see “Note 9 – Borrowed Funds” of “Notes to Consolidated Financial Statements” in Item 8. Financial Statements and Supplementary Data.
Accrued interest payable and other liabilities
Included in accrued interest payable and other liabilities are obligations related to our defined benefit pension plan. Our liability related to the plan increased in 2014 as a result of changes in mortality tables and discount rates used to determine the current benefit obligation. For more information on the defined benefit pension plan, see "Note 16 – Benefit Plans" of the “Notes to Consolidated Financial Statements” in Item 8. Financial Statements and Supplementary Data).


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Contractual Obligations and Loan Commitments
We have various financial obligations, including contractual obligations and commitments, which may require future cash payments. The following schedule summarizes our non-cancelable obligations and future minimum payments as of December 31, 2014:

Minimum Payments Due by Period
 Due in
One Year
or Less		 After One
Year But
Within
Three Years		 After Three
Years But
Within
Five Years		 After
Five Years		 Total
Deposits         
Deposits with no stated maturity$634,222
 $—
 $—
 $—
 $634,222
Certificates of deposit with stated maturities217,505
 131,583
 73,451
 17,723
 440,262
Total deposits851,727
 131,583
 73,451
 17,723
 1,074,484
Borrowed funds         
Short-term borrowings97,270
 —
 —
 —
 97,270
Long-term borrowings42,439
 40,000
 60,000
 50,000
 192,439
Total borrowed funds139,709
 40,000
 60,000
 50,000
 289,709
Total contractual obligations$991,436
 $171,583
 $133,451
 $67,723
 $1,364,193
We also have loan commitments that may impact liquidity. The following schedule summarizes our loan commitments and expiration dates by period as of December 31, 2014. Commitments to grant loans include loans to be sold to the secondary market. Since many of these commitments historically have expired without being drawn upon, the total amount of these commitments does not necessarily represent our future cash requirements.

Expiration Dates by Period
 Due in
One Year
or Less		 After One
Year But
Within
Three Years		 After Three
Years But
Within
Five Years		 After
Five
Years		 Total
Unused commitments under lines of credit$68,056
 $27,330
 $18,527
 $3,022
 $116,935
Commitments to grant loans13,988
 —
 —
 —
 13,988
Commercial and standby letters of credit4,985
 —
 —
 —
 4,985
Total loan commitments$87,029
 $27,330
 $18,527
 $3,022
 $135,908
For additional disclosure related to Contractual Obligations and Loan Commitments, see “Note 12 – Off-Balance-Sheet Activities” of the “Notes to Consolidated Financial Statements” in Item 8. Financial Statements and Supplementary Data.

Capital
Capital consists solely of common stock, retained earnings, and accumulated other comprehensive income (loss). We are currently authorized to raise capital through dividend reinvestment, employee and director stock purchases, and shareholder stock purchases. Pursuant to these authorizations, we issued 182,755 shares or $4,227 of common stock during 2014, and 149,191 shares or $3,618 of common stock in 2013. We also offer the Directors Plan in which participants either directly purchase stock or purchase stock units through deferred fees, in lieu of cash payments. Pursuant to this plan, we increased shareholders’ equity by $495 and $554 during 2014 and 2013, respectively.
We have approved a publicly announced common stock repurchase plan. Pursuant to this plan, we repurchased 135,630 shares or $3,122 of common stock compared to 98,014 shares for $2,375 during 2014 and 2013, respectively. As of December 31, 2014, we were authorized to repurchase up to an additional 151,766 shares of common stock.
There are no significant regulatory constraints placed on our capital. The FRB’s current recommended minimum primary capital to assets requirement is 6.00%. Our primary capital to adjusted average assets, which consists of shareholders' equity plus the ALLL acquisition intangibles, was 8.59% as of December 31, 2014.

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The FRB has established minimum risk based capital guidelines. Pursuant to these guidelines, a framework has been established that assigns risk weights to each category of on and off balance sheet items to arrive at risk adjusted total assets. Regulatory capital is divided by the risk adjusted assets with the resulting ratio compared to the minimum standard to determine whether a corporation has adequate capital. The minimum standard is 8.00%, of which at least 4.00% must consist of equity capital net of goodwill. The following table sets forth the percentages required under the Risk Based Capital guidelines and our values as of:

2014 2013 Required
Equity Capital14.08% 13.67% 4.00%
Secondary Capital1.10% 1.25% 4.00%
Total Capital15.18% 14.92% 8.00%
Secondary capital includes only the ALLL. The percentage for the secondary capital under the required column is the maximum amount allowed from all sources.
The FRB and FDIC also prescribe minimum capital requirements for Isabella Bank. At December 31, 2014, the Bank exceeded these minimum capital requirements. On July 2, 2013, the FRB published revised BASEL III Capital standards for banks. The rules redefine what is included or deducted from equity capital, changes risk weighting for certain on and off-balance sheet assets, increases the minimum required equity capital to be considered well capitalized, and introduces a capital cushion buffer. The rules, which will be gradually phased in between 2015 and 2019, are not expected to have a material impact on the Corporation but will require us to hold more capital than we have historically. For further information regarding the Bank’s capital requirements, see “Note 15 – Minimum Regulatory Capital Requirements” of the “Notes to Consolidated Financial Statements” in Item 8. Financial Statements and Supplementary Data.
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 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, 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 1 – Nature of Operations and Summary of Significant Accounting Policies” and “Note 19 – Fair Value” of the “Notes to Consolidated Financial Statements” in Item 8. Financial Statements and Supplementary Data.

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Interest Rate Sensitivity
Interest rate sensitivity is determined by the amount of earning assets and interest bearing liabilities repricing within a specific time period, and their relative sensitivity to a change in interest rates. We strive to achieve reasonable stability in the net interest margin through periods of changing interest rates. One tool we use to measure interest rate sensitivity is gap analysis. As shown in the table below, the gap analysis depicts our position for specific time periods and the cumulative gap as a percentage of total assets.
Fixed interest rate AFS securities are scheduled according to their contractual maturity. Fixed rate loans are included in the appropriate time frame based on their scheduled amortization. Variable rate loans, which totaled $172,432 as of December 31, 2014, are included in the time frame of their earliest repricing. Time deposit liabilities are scheduled based on their contractual maturity except for variable rate time deposits in the amount of $1,123 that are included in the 0 to 3 month time frame.
Savings and NOW accounts have no contractual maturity date and are believed by us to be predominantly noninterest rate sensitive. These accounts have been classified in the gap table according to their estimated withdrawal rates based upon our analysis of deposit decay over the past five years. We believe this decay experience is consistent with our expectation for the future. As of December 31, 2014, we had a positive cumulative gap within one year. A positive gap position results when more assets, within a specified time frame, have the potential to mature or reprice than liabilities.
The following table shows the time periods and the amount of assets and liabilities available for interest rate repricing as of December 31, 2014. The interest rate sensitivity information for investment securities is based on the expected prepayments and call dates versus stated maturities. For purposes of this analysis, nonaccrual loans and the ALLL are excluded.

0 to 3
Months		 4 to 12
Months		 1 to 5
Years		 Over 5
Years
Interest sensitive assets       
AFS securities$23,984
 $85,277
 $273,600
 $184,673
Loans203,326
 84,090
 390,966
 151,156
Total$227,310
 $169,367
 $664,566
 $335,829
Interest sensitive liabilities       
Borrowed funds$117,709
 $22,000
 $100,000
 $50,000
Time deposits68,939
 149,036
 204,564
 17,723
Savings7,360
 22,619
 88,940
 142,493
NOW2,604
 7,812
 36,104
 144,464
Total$196,612
 $201,467
 $429,608
 $354,680
Cumulative gap$30,698
 $(1,402) $233,556
 $214,705
Cumulative gap as a % of assets1.98% (0.09)% 15.07% 13.86%
The following table shows the maturity of commercial and agricultural loans outstanding at December 31, 2014. Also provided are the amounts due after one year, classified according to the sensitivity to changes in interest rates.

1 Year
or Less		 1 to 5
Years		 Over 5
Years		 Total
Commercial and agricultural$96,084
 $269,425
 $171,173
 $536,682
Interest sensitivity       
Loans maturing after one year that have:       
Fixed interest rates  $231,583
 $166,707
  
Variable interest rates  37,842
 4,466
  
Total  $269,425
 $171,173
  


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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, certificates of deposit held in other financial institutions, and AFS securities. These categories totaled $587,440 or 37.91% of assets as of December 31, 2014 as compared to $554,725 or 37.15% as of December 31, 2013. 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 varies significantly daily, based on customer activity.
Our primary source of funds is deposit accounts. We also have the ability to borrow from the FHLB, 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. Some borrowed funds, including FHLB advances, FRB Discount Window advances, and repurchase agreements, require us to pledge assets, typically in the form AFS securities or loans as collateral. As of December 31, 2014, we had available lines of credit of $112,301.
The following table summarizes our sources and uses of cash for the years ended December 31:
 2014 2013 $ Variance
Net cash provided by (used in) operating activities$17,334
 $22,741
 $(5,407)
Net cash provided by (used in) investing activities(74,598) (64,931) (9,667)
Net cash provided by (used in) financing activities35,032
 58,828
 (23,796)
Increase (decrease) in cash and cash equivalents(22,232) 16,638
 (38,870)
Cash and cash equivalents January 141,558
 24,920
 16,638
Cash and cash equivalents December 31$19,326
 $41,558
 $(22,232)
Quantitative and Qualitative Disclosures about Market Risk
Our primary market risks are interest rate risk and liquidity risk. We have no significant foreign exchange risk and do not utilize interest rate swaps or derivatives, except for interest rate locks and forward loan commitments, in the management of IRR. Any changes in foreign exchange rates or commodity prices would have an insignificant impact on our interest income and cash flows.
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 opportunity 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, and loan prepayments. These forecasts are compared against net interest income projected in a stable interest rate environment. While many assets and liabilities reprice either at maturity or in accordance with their contractual terms, several balance sheet components demonstrate characteristics that require an evaluation to more accurately reflect their repricing behavior. Key assumptions in the simulation analysis include prepayments on loans, probable calls of investment securities, changes in market conditions, loan volumes and loan pricing, deposit sensitivity, and customer preferences. These assumptions are inherently uncertain as they are subject to fluctuation and revision in a dynamic 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

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simulation analyses to the base case. At December 31, 2014, 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 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. We did not project scenarios showing decreases in interest rates beyond 100 basis points as this is considered extremely unlikely given current interest rate levels. 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 real estate residential 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 table summarizes our interest rate sensitivity for 12 and 24 months as of:
 December 31, 2014
 12 Months 24 Months
Immediate basis point change assumption (short-term)(100) 100 200 300 400 (100) 100 200 300 400
Percent change in net interest income vs. constant rates(1.66)% 0.29% 0.45% (3.18)% (4.39)% (1.83)% 0.25% 1.04% (2.70)% (3.98)%
 December 31, 2013
 12 Months 24 Months
Immediate basis point change assumption (short-term)(100) 100 200 300 400 (100) 100 200 300 400
Percent change in net interest income vs. constant rates(2.85)% 0.25% (0.28)% (0.99)% (2.16)% (3.24)% 0.04% 0.29% 0.41% (0.35)%
Gap analysis, the secondary method to measure IRR, measures the cash flows and/or the earliest repricing of our interest bearing assets and liabilities. This analysis is useful for measuring trends in the repricing characteristics of the balance sheet. Significant assumptions are required in this process because of the embedded repricing options contained in assets and liabilities. Residential real estate and consumer loans allow the borrower to repay the balance prior to maturity without penalty, while commercial and agricultural loans have prepayment penalties. The amount of prepayments is dependent upon many factors, including the interest rate of a given loan in comparison to the current offering rates, the level of sales of used homes, and the overall availability of credit in the market place. Generally, a decrease in interest rates will result in an increase in cash flows from these assets. A significant portion of our securities are callable or have prepayment options. The call and prepayment options are more likely to be exercised in a period of decreasing interest rates. Savings and demand accounts may generally be withdrawn on request without prior notice. The timing of cash flows from these deposits is estimated based on historical experience. Certificates of deposit have penalties that discourage early withdrawals.
The following tables provide information about assets and liabilities that are sensitive to changes in interest rates as of December 31, 2014 and December 31, 2013. The principal amounts of investments, loans, other interest earning assets, borrowings, and time deposits maturing were calculated based on the contractual maturity dates. Estimated cash flows for savings and NOW accounts are based on our estimated deposit decay rates.

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December 31, 2014
 2015 2016 2017 2018 2019 Thereafter Total Fair Value
Rate sensitive assets               
Other interest bearing assets$1,748
 $—
 $100
 $—
 $—
 $—
 $1,848
 $1,847
Average interest rates0.36% —
 0.35% —
 —
 —
 0.36%  
Trading securities$—
 $—
 $—
 $—
 $—
 $—
 $—
 $—
Average interest rates—
 —
 —
 —
 —
 —
 —
  
AFS securities$109,261
 $93,324
 $80,147
 $53,017
 $47,112
 $184,673
 $567,534
 $567,534
Average interest rates2.22% 2.26% 2.32% 2.39% 2.46% 2.62% 2.41%  
Fixed interest rate loans (1)$119,028
 $98,865
 $128,954
 $91,854
 $71,293
 $151,156
 $661,150
 $655,017
Average interest rates4.90% 4.83% 4.53% 4.32% 4.47% 4.25% 4.54%  
Variable interest rate loans (1)$71,435
 $26,938
 $19,836
 $13,929
 $14,706
 $25,588
 $172,432
 $172,432
Average interest rates4.46% 3.97% 3.95% 3.39% 3.37% 4.01% 4.08%  
Rate sensitive liabilities               
Borrowed funds$139,709
 $10,000
 $30,000
 $40,000
 $20,000
 $50,000
 $289,709
 $293,401
Average interest rates0.33% 2.15% 1.95% 2.35% 3.11% 2.53% 1.41%  
Savings and NOW accounts$40,395
 $36,417
 $32,717
 $29,423
 $26,487
 $286,957
 $452,396
 $452,396
Average interest rates0.11% 0.11% 0.11% 0.11% 0.11% 0.10% 0.11%  
Fixed interest rate certificates of deposit$216,852
 $74,722
 $56,391
 $50,550
 $22,901
 $17,723
 $439,139
 $439,841
Average interest rates0.96% 1.66% 1.47% 1.31% 1.48% 1.77% 1.25%  
Variable interest rate certificates of deposit$653
 $470
 $—
 $—
 $—
 $—
 $1,123
 $1,123
Average interest rates0.40% 0.40% —
 —
 —
 —
 0.40%  

December 31, 2013
 2014 2015 2016 2017 2018 Thereafter Total Fair Value
Rate sensitive assets               
Other interest bearing assets$19,903
 $480
 $—
 $—
 $—
 $—
 $20,383
 $20,385
Average interest rates0.25% 1.15% —
 —
 —
 —
 0.27%  
Trading securities$525
 $—
 $—
 $—
 $—
 $—
 $525
 $525
Average interest rates2.77% —
 —
 —
 —
 —
 2.77%  
AFS securities$131,892
 $73,723
 $63,190
 $52,078
 $37,972
 $153,207
 $512,062
 $512,062
Average interest rates2.26% 2.23% 2.42% 2.48% 2.48% 2.80% 2.48%  
Fixed interest rate loans (1)$115,183
 $94,841
 $91,140
 $118,479
 $85,448
 $134,614
 $639,705
 $639,914
Average interest rates5.31% 5.17% 4.93% 4.53% 4.33% 4.33% 4.75%  
Variable interest rate loans (1)$69,036
 $29,460
 $20,332
 $14,208
 $15,699
 $19,597
 $168,332
 $168,332
Average interest rates4.76% 3.90% 4.06% 3.36% 3.35% 3.99% 4.19%  
Rate sensitive liabilities               
Borrowed funds$126,950
 $32,376
 $10,000
 $30,000
 $40,000
 $40,000
 $279,326
 $283,060
Average interest rates0.43% 0.86% 2.15% 1.95% 2.35% 3.02% 1.35%  
Savings and NOW accounts$47,000
 $33,569
 $30,200
 $27,198
 $24,522
 $272,837
 $435,326
 $435,326
Average interest rates0.19% 0.12% 0.11% 0.11% 0.11% 0.11% 0.12%  
Fixed interest rate certificates of deposit$206,514
 $81,038
 $58,627
 $46,336
 $39,214
 $17,144
 $448,873
 $451,664
Average interest rates0.89% 1.93% 1.95% 1.63% 1.34% 1.66% 1.36%  
Variable interest rate certificates of deposit$764
 $375
 $—
 $—
 $—
 $—
 $1,139
 $1,139
Average interest rates0.04% 0.40% —
 —
 —
 —
 0.16%  
(1) The fair value reported is exclusive of the allocation of the ALLL.
We do not believe that 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. As of the date of this report, 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. As of the date of this report, we do not expect to make material changes in those methods in the near term. We may change those methods in the future to adapt to changes in circumstances or to implement new techniques.

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Report of Independent Registered Public Accounting Firm

Shareholders and Board of Directors

Isabella Bank Corporation

Mount Pleasant, Michigan

We have audited the accompanying consolidated balance sheets ofIsabella Bank Corporationas of December 31, 20112014 and 2010,2013, and the related consolidated statements of changes in shareholders’ equity, income, comprehensive income, and cash flows for each of the years in the three-year period ended December 31, 2011.2014. We also have auditedIsabella Bank Corporation’sinternal control over financial reporting as of December 31, 2011,2014, based on criteria established in theInternal Control-Integrated Frameworkissued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO)(2013 framework) (the COSO criteria).Isabella Bank Corporation’smanagement is responsible for these consolidated financial statements, for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting. Our responsibility is to express an opinion on these consolidated financial statements and an opinion on the effectiveness ofIsabella Bank Corporation’s internal control over financial reporting, based on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement and whether effective internal control over financial reporting was maintained in all material respects. Our audits of the consolidated financial statements included examining, on a test basis, evidence supporting the amounts and disclosures in the consolidated financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material misstatement exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. We believe that our audits provide a reasonable basis for our opinion.

A corporation’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of consolidated financial statements for external purposes in accordance with generally accepted accounting principles. A corporation’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the corporation; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of consolidated financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the corporation are being made only in accordance with authorizations of management and directors of the corporation; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the corporation’s assets that could have a material effect on the consolidated financial statements.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position ofIsabella Bank Corporation as of December 31, 20112014 and 2010,2013, and the consolidated results of their operations and their cash flows for each of the years in the three-year period ended December 31, 20112014 in conformity with accounting principles generally accepted in the United States of America. Also, in our opinionIsabella Bank Corporationmaintained, in all material respects, effective internal control over financial reporting as of December 31, 2011,2014, based on the criteria established in theInternal Control-Integrated Frameworkissued by the Committee of Sponsoring Organizations (COSO) of the Treadway Commission.COSO criteria.

LOGO


Rehmann Robson P.C.

LLC

Saginaw, Michigan

March 6, 2012

9, 2015


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Consolidated Financial Statements
CONSOLIDATED BALANCE SHEETS

(Dollars in thousands)

   December 31, 
   2011   2010 

ASSETS

  

Cash and cash equivalents

    

Cash and demand deposits due from banks

  $24,514    $16,978  

Interest bearing balances due from banks

   4,076     1,131  
  

 

 

   

 

 

 

Total cash and cash equivalents

   28,590     18,109  

Certificates of deposit held in other financial institutions

   8,924     15,808  

Trading securities

   4,710     5,837  

Available-for-sale securities (amortized cost of $414,614 in 2011 and $329,435 in 2010)

   425,120     330,724  

Mortgage loans available-for-sale

   3,205     1,182  

Loans

    

Agricultural

   74,645     71,446  

Commercial

   365,714     348,852  

Consumer

   31,572     30,977  

Residential real estate mortgage

   278,360     284,029  
  

 

 

   

 

 

 

Total loans

   750,291     735,304  

Less allowance for loan losses

   12,375     12,373  
  

 

 

   

 

 

 

Net loans

   737,916     722,931  

Premises and equipment

   24,626     24,627  

Corporate owned life insurance

   22,075     17,466  

Accrued interest receivable

   5,848     5,456  

Equity securities without readily determinable fair values

   17,189     17,564  

Goodwill and other intangible assets

   46,792     47,091  

Other assets

   12,930     19,015  
  

 

 

   

 

 

 

TOTAL ASSETS

  $1,337,925    $1,225,810  
  

 

 

   

 

 

 

LIABILITIES AND SHAREHOLDERS’ EQUITY

  

Deposits

    

Noninterest bearing

  $119,072    $104,902  

NOW accounts

   163,653     142,259  

Certificates of deposit under $100 and other savings

   440,123     425,981  

Certificates of deposit over $100

   235,316     204,197  
  

 

 

   

 

 

 

Total deposits

   958,164     877,339  

Borrowed funds ($5,242 in 2011 and $10,423 in 2010 at fair value)

   216,136     194,917  

Accrued interest payable and other liabilities

   8,842     8,393  
  

 

 

   

 

 

 

Total liabilities

   1,183,142     1,080,649  
  

 

 

   

 

 

 

Shareholders’ equity

    

Common stock — no par value 15,000,000 shares authorized; issued and outstanding 7,589,226 (including 16,585 shares held in the Rabbi Trust) in 2011 and 7,550,074 (including 32,686 shares held in the Rabbi Trust) in 2010

   134,734     133,592  

Shares to be issued for deferred compensation obligations

   4,524     4,682  

Retained earnings

   13,036     8,596  

Accumulated other comprehensive income (loss)

   2,489     (1,709) 
  

 

 

   

 

 

 

Total shareholders’ equity

   154,783     145,161  
  

 

 

   

 

 

 

TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY

  $1,337,925    $1,225,810  
  

 

 

   

 

 

 


December 31
 2014 2013
ASSETS   
Cash and cash equivalents   
Cash and demand deposits due from banks$18,058
 $21,755
Interest bearing balances due from banks1,268
 19,803
Total cash and cash equivalents19,326
 41,558
Certificates of deposit held in other financial institutions580
 580
Trading securities—
 525
AFS securities (amortized cost of $561,893 in 2014 and $517,614 in 2013)567,534
 512,062
Mortgage loans AFS901
 1,104
Loans   
Commercial431,961
 392,104
Agricultural104,721
 92,589
Residential real estate264,595
 289,931
Consumer32,305
 33,413
Gross loans833,582
 808,037
Less allowance for loan and lease losses10,100
 11,500
Net loans823,482
 796,537
Premises and equipment25,881
 25,719
Corporate owned life insurance policies25,152
 24,401
Accrued interest receivable5,851
 5,442
Equity securities without readily determinable fair values20,076
 18,293
Goodwill and other intangible assets46,128
 46,311
Other assets14,632
 20,605
TOTAL ASSETS$1,549,543
 $1,493,137
LIABILITIES AND SHAREHOLDERS’ EQUITY   
Deposits   
Noninterest bearing$181,826
 $158,428
NOW accounts190,984
 192,089
Certificates of deposit under $100 and other savings456,774
 455,547
Certificates of deposit over $100244,900
 237,702
Total deposits1,074,484
 1,043,766
Borrowed funds289,709
 279,326
Accrued interest payable and other liabilities10,756
 9,436
Total liabilities1,374,949
 1,332,528
Shareholders’ equity   
Common stock — no par value 15,000,000 shares authorized; issued and outstanding 7,776,274 shares (including 13,934 shares held in the Rabbi Trust) in 2014 and 7,723,023 shares (including 12,761 shares held in the Rabbi Trust) in 2013138,755
 137,580
Shares to be issued for deferred compensation obligations4,242
 4,148
Retained earnings32,103
 25,222
Accumulated other comprehensive income (loss)(506) (6,341)
Total shareholders’ equity174,594
 160,609
TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY$1,549,543
 $1,493,137

The accompanying notes are an integral part of these consolidated financial statements.


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CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS'SHAREHOLDERS’ EQUITY

(Dollars in thousands except per share data)amounts)

  Common Stock
Shares
Outstanding		  Common
Stock		  Shares to be
Issued for
Deferred
Compensation
Obligations		  Retained
Earnings		  Accumulated Other
Comprehensive
(Loss) Income		  Totals 

Balance, January 1, 2009

  7,518,856   $133,602   $4,015   $2,428   $(5,569)  $134,476  

Comprehensive income

  —    —    —    7,800    3,450    11,250  

Issuance of common stock

  126,059    2,664    —    —    —    2,664  

Common stock issued for deferred compensation obligations

  12,890    331    (185)   —    —    146  

Share based payment awards under equity compensation plan

  —    —    677    —    —    677  

Common stock purchased for deferred compensation obligations

  —    (767)   —      (767) 

Common stock repurchased pursuant to publicly announced repurchase plan

  (122,612)   (2,387)    —    —    (2,387) 

Cash dividends ($0.70 per share)

  —    —    —    (5,256)   —    (5,256) 
 

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Balance, December 31, 2009

  7,535,193    133,443    4,507    4,972    (2,119)   140,803  

Comprehensive income

  —    —    —    9,045    410    9,455  

Issuance of common stock

  124,953    2,683    —    —    —    2,683  

Common stock issued for deferred compensation obligations

  28,898    537    (475)   —    —    62  

Share based payment awards under equity compensation plan

  —    —    650    —    —    650  

Common stock purchased for deferred compensation obligations

  —    (514)   —      (514) 

Common stock repurchased pursuant to publicly announced repurchase plan

  (138,970)   (2,557)    —    —    (2,557) 

Cash dividends ($0.72 per share)

  —    —    —    (5,421)   —    (5,421) 
 

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Balance, December 31, 2010

  7,550,074    133,592    4,682    8,596    (1,709)   145,161  

Comprehensive income

  —    —    —    10,210    4,198    14,408  

Issuance of common stock

  120,336    3,075    —    —    —    3,075  

Common stock issued for deferred compensation obligations

  39,257    697    (773)   —    —    (76) 

Share based payment awards under equity compensation plan

  —    —    615    —    —    615  

Common stock purchased for deferred compensation obligations

  —    (426)   —    —    —    (426) 

Common stock repurchased pursuant to publicly announced repurchase plan

  (120,441)   (2,204)    —    —    (2,204) 

Cash dividends ($0.76 per share)

  —    —    —    (5,770)   —    (5,770) 
 

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Balance, December 31, 2011

  7,589,226   $134,734   $4,524   $13,036   $2,489   $154,783  
 

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

 Common Stock        

Shares
Outstanding		 Amount Shares to be
Issued for
Deferred
Compensation
Obligations		 Retained
Earnings		 Accumulated
Other
Comprehensive
Income (Loss)		 Totals
Balance, January 1, 20127,589,226
 $134,734
 $4,524
 $13,036
 $2,489
 $154,783
Comprehensive income (loss)—
 —
 —
 12,206
 2,518
 14,724
Issuance of common stock124,530
 2,898
 —
 —
 —
 2,898
Common stock issued for deferred compensation obligations41,676
 814
 (814) —
 —
 —
Common stock transferred from the Rabbi Trust to satisfy deferred compensation obligations—
 619
 (619) —
 —
 —
Share-based payment awards under equity compensation plan—
 —
 643
 —
 —
 643
Common stock purchased for deferred compensation obligations—
 (505) —
 —
 —
 (505)
Common stock repurchased pursuant to publicly announced repurchase plan(83,586) (1,980) —
 —
 —
 (1,980)
Cash dividends ($0.80 per share)—
 —
 —
 (6,074) —
 (6,074)
Balance, December 31, 20127,671,846
 136,580
 3,734
 19,168
 5,007
 164,489
Comprehensive income (loss)—
 —
 —
 12,510
 (11,348) 1,162
Issuance of common stock149,191
 3,618
 —
 —
 —
 3,618
Common stock issued for deferred compensation obligations—
 —
 —
 —
 —
 —
Common stock transferred from the Rabbi Trust to satisfy deferred compensation obligations—
 140
 (140) —
 —
 —
Share-based payment awards under equity compensation plan—
 —
 554
 —
 —
 554
Common stock purchased for deferred compensation obligations—
 (383) —
 —
 —
 (383)
Common stock repurchased pursuant to publicly announced repurchase plan(98,014) (2,375) —
 —
 —
 (2,375)
Cash dividends ($0.84 per share)—
 —
 —
 (6,456) —
 (6,456)
Balance, December 31, 20137,723,023
 137,580
 4,148
 25,222
 (6,341) 160,609
Comprehensive income (loss)—
 —
 —
 13,724
 5,835
 19,559
Issuance of common stock182,755
 4,227
 —
 —
 —
 4,227
Common stock issued for deferred compensation obligations6,126
 143
 (143) —
 —
 —
Common stock transferred from the Rabbi Trust to satisfy deferred compensation obligations—
 258
 (258) —
 —
 —
Share-based payment awards under equity compensation plan—
 —
 495
 —
 —
 495
Common stock purchased for deferred compensation obligations—
 (331) —
 —
 —
 (331)
Common stock repurchased pursuant to publicly announced repurchase plan(135,630) (3,122) —
 —
 —
 (3,122)
Cash dividends ($0.89 per share)—
 —
 —
 (6,843) —
 (6,843)
Balance, December 31, 20147,776,274
 $138,755
 $4,242
 $32,103
 $(506) $174,594
The accompanying notes are an integral part of these consolidated financial statements.


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CONSOLIDATED STATEMENTS OF INCOME

(Dollars in thousands except per share data)amounts)

   Year Ended December 31 
   2011  2010  2009 

Interest income

    

Loans, including fees

  $45,463   $46,794   $47,706  

Investment securities

    

Taxable

   6,941    5,271    4,712  

Nontaxable

   4,806    4,367    4,623  

Trading account securities

   189    306    687  

Federal funds sold and other

   506    479    377  
  

 

 

  

 

 

  

 

 

 

Total interest income

   57,905    57,217    58,105  

Interest expense

    

Deposits

   10,935    11,530    13,588  

Borrowings

   5,268    5,674    6,251  
  

 

 

  

 

 

  

 

 

 

Total interest expense

   16,203    17,204    19,839  
  

 

 

  

 

 

  

 

 

 

Net interest income

   41,702    40,013    38,266  

Provision for loan losses

   3,826    4,857    6,093  
  

 

 

  

 

 

  

 

 

 

Net interest income after provision for loan losses

   37,876    35,156    32,173  

Noninterest income

    

Service charges and fees

   6,118    6,480    6,913  

Gain on sale of mortgage loans

   538    610    886  

Net (loss) gain on trading securities

   (78)   (94)   80  

Net gain on borrowings measured at fair value

   181    227    289  

Gain on sale of available-for-sale investment securities

   3    348    648  

Other

   1,456    1,729    1,340  
  

 

 

  

 

 

  

 

 

 

Total noninterest income

   8,218    9,300    10,156  

Noninterest expenses

    

Compensation and benefits

   19,292    18,552    18,258  

Occupancy

   2,470    2,351    2,170  

Furniture and equipment

   4,497    4,344    4,146  

FDIC insurance premiums

   1,086    1,254    1,730  

Other

   7,185    7,306    7,379  
  

 

 

  

 

 

  

 

 

 

Total noninterest expenses

   34,530    33,807    33,683  
  

 

 

  

 

 

  

 

 

 

Income before federal income tax expense

   11,564    10,649    8,646  

Federal income tax expense

   1,354    1,604    846  
  

 

 

  

 

 

  

 

 

 

NET INCOME

  $10,210   $9,045   $7,800  
  

 

 

  

 

 

  

 

 

 

Earnings per share

    

Basic

  $1.35   $1.20   $1.04  
  

 

 

  

 

 

  

 

 

 

Diluted

  $1.31   $1.17   $1.01  
  

 

 

  

 

 

  

 

 

 

Cash dividends per basic share

  $0.76   $0.72   $0.70  
  

 

 

  

 

 

  

 

 

 


Year Ended December 31
 2014 2013 2012
Interest income     
Loans, including fees$39,432
 $41,233
 $43,396
AFS securities     
Taxable8,092
 7,228
 7,555
Nontaxable5,911
 5,132
 4,870
Trading securities6
 36
 94
Federal funds sold and other510
 447
 486
Total interest income53,951
 54,076
 56,401
Interest expense     
Deposits6,295
 7,140
 9,131
Borrowings3,675
 3,881
 4,292
Total interest expense9,970
 11,021
 13,423
Net interest income43,981
 43,055
 42,978
Provision for loan losses(668) 1,111
 2,300
Net interest income after provision for loan losses44,649
 41,944
 40,678
Noninterest income     
Service charges and fees5,411
 5,682
 5,371
Net gain on sale of mortgage loans514
 962
 1,576
Earnings on corporate owned life insurance policies751
 732
 698
Net gains (losses) on sale of AFS securities97
 171
 1,119
Other2,552
 2,628
 2,766
Total noninterest income9,325
 10,175
 11,530
Noninterest expenses     
Compensation and benefits21,305
 21,465
 21,227
Furniture and equipment5,173
 4,945
 4,560
Occupancy2,798
 2,653
 2,519
AFS securities impairment loss     
Total other-than-temporary impairment loss—
 —
 486
Portion of loss reported in other comprehensive income (loss)—
 —
 (204)
Net AFS securities impairment loss—
 —
 282
Other8,630
 8,350
 9,051
Total noninterest expenses37,906
 37,413
 37,639
Income before federal income tax expense16,068
 14,706
 14,569
Federal income tax expense2,344
 2,196
 2,363
NET INCOME$13,724
 $12,510
 $12,206
Earnings per common share     
Basic$1.77
 $1.63
 $1.61
Diluted$1.74
 $1.59
 $1.56
Cash dividends per common share$0.89
 $0.84
 $0.80





The accompanying notes are an integral part of these consolidated financial statements.


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CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(LOSS)

(Dollars in thousands)

   Year Ended December 31 
   2011  2010  2009 

Net income

  $10,210   $9,045   $7,800  
  

 

 

  

 

 

  

 

 

 

Unrealized holding gains on available-for-sale securities:

    

Unrealized gains arising during the year

   9,220    1,156    3,415  

Reclassification adjustment for net realized gains included in net income

   (3)   (348)   (648) 
  

 

 

  

 

 

  

 

 

 

Net unrealized gains

   9,217    808    2,767  

Tax effect

   (3,719)   (351)   436  
  

 

 

  

 

 

  

 

 

 

Unrealized gains, net of tax

   5,498    457    3,203  
  

 

 

  

 

 

  

 

 

 

(Increase) reduction of unrecognized pension costs

   (1,971)   (72)   374  

Tax effect

   671    25    (127) 
  

 

 

  

 

 

  

 

 

 

Net unrealized (loss) gain on defined benefit pension plan

   (1,300)   (47)   247  
  

 

 

  

 

 

  

 

 

 

Other comprehensive income, net of tax

   4,198    410    3,450  
  

 

 

  

 

 

  

 

 

 

Comprehensive income

  $14,408   $9,455   $11,250  
  

 

 

  

 

 

  

 

 

 


Year Ended December 31
 2014 2013 2012
Net income$13,724
 $12,510
 $12,206
Unrealized gains (losses) on AFS securities     
Unrealized gains (losses) arising during the year11,290
 (18,971) 3,921
Reclassification adjustment for net realized (gains) losses included in net income(97) (171) (1,119)
Reclassification adjustment for impairment loss included in net income—
 —
 282
Net unrealized gains (losses)11,193
 (19,142) 3,084
Tax effect (1)(3,684) 6,257
 (348)
Unrealized gains (losses), net of tax7,509
 (12,885) 2,736
Change in unrecognized pension cost on defined benefit pension plan     
Change in unrecognized pension cost arising during the year(2,836) 2,120
 (580)
Reclassification adjustment for net periodic benefit cost included in net income300
 208
 251
Net change in unrecognized pension cost(2,536) 2,328
 (329)
Tax effect862
 (791) 111
Change in unrealized pension cost, net of tax(1,674) 1,537
 (218)
Other comprehensive income (loss), net of tax5,835
 (11,348) 2,518
Comprehensive income (loss)19,559
 1,162
 14,724
(1)
See “Note 17 – Accumulated Other Comprehensive Income (Loss)” in the accompanying notes to consolidated financial statements for tax effect reconciliation.
















The accompanying notes are an integral part of these consolidated financial statements.


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CONSOLIDATED STATEMENTS OF CASH FLOWS

(Dollars in thousands)

   Year Ended December 31 
   2011  2010  2009 

OPERATING ACTIVITIES

    

Net income

  $10,210   $9,045   $7,800  

Reconciliation of net income to net cash provided by operations:

    

Provision for loan losses

   3,826    4,857    6,093  

Impairment of foreclosed assets

   82    180    157  

Depreciation

   2,521    2,522    2,349  

Amortization and impairment of originated mortgage servicing rights

   714    543    683  

Amortization of acquisition intangibles

   299    338    375  

Net amortization of available-for-sale securities

   1,689    1,153    741  

Gain on sale of available-for-sale securities

   (3)   (348)   (648) 

Net unrealized losses (gains) on trading securities

   78    94    (80) 

Net gain on sale of mortgage loans

   (538)   (610)   (886) 

Net unrealized gains on borrowings measured at fair value

   (181)   (227)   (289) 

Increase in cash value of corporate owned life insurance

   (609)   (642)   (641) 

Realized gain on redemption of corporate owned life insurance

   —    (21)   —  

Share-based payment awards under equity compensation plan

   615    650    677  

Deferred income tax expense (benefit)

   389    179    (641) 

Origination of loans held for sale

   (57,584)   (72,106)   (153,388) 

Proceeds from loan sales

   56,099    73,815    152,891  

Net changes in operating assets and liabilities which provided (used) cash:

    

Trading securities

   1,049    7,632    8,292  

Accrued interest receivable

   (392)   376    490  

Other assets

   147    (1,914)   (6,331) 

Accrued interest payable and other liabilities

   449    1,005    581  
  

 

 

  

 

 

  

 

 

 

Net cash provided by operating activities

   18,860    26,521    18,225  
  

 

 

  

 

 

  

 

 

 

INVESTING ACTIVITIES

    

Net change in certificates of deposit held in other financial institutions

   6,884    (10,428)   (4,805) 

Activity in available-for-sale securities

    

Maturities, calls, and sales

   78,152    85,273    130,580  

Purchases

   (165,017)   (156,928)   (140,517) 

Loan principal originations and collections, net

   (20,743)   (21,319)   4,437  

Proceeds from sales of foreclosed assets

   2,041    2,778    4,145  

Purchases of premises and equipment

   (2,520)   (3,232)   (3,035) 

Purchases of corporate owned life insurance

   (4,000)   (175)   —  

Proceeds from the redemption of corporate owned life insurance

   —    154    11  
  

 

 

  

 

 

  

 

 

 

Net cash used in investing activities

   (105,203)   (103,877)   (9,184) 
  

 

 

  

 

 

  

 

 

 

FINANCING ACTIVITIES

    

Acceptances and withdrawals of deposits, net

  $80,825   $74,687   $27,022  

Increase (decrease) in other borrowed funds

   21,400    2,043    (28,960) 

Cash dividends paid on common stock

   (5,770)   (5,421)   (5,256) 

Proceeds from issuance of common stock

   2,302    2,208    2,479  

Common stock repurchased

   (1,507)   (2,020)   (2,056) 

Common stock purchased for deferred compensation obligations

   (426)   (514)   (767) 
  

 

 

  

 

 

  

 

 

 

Net cash provided by (used in) financing activities

   96,824    70,983    (7,538) 
  

 

 

  

 

 

  

 

 

 

INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS

   10,481    (6,373)   1,503  

Cash and cash equivalents at beginning of period

   18,109    24,482    22,979  
  

 

 

  

 

 

  

 

 

 

CASH AND CASH EQUIVALENTS AT END OF PERIOD

  $28,590   $18,109   $24,482  
  

 

 

  

 

 

  

 

 

 

SUPPLEMENTAL CASH FLOWS INFORMATION:

    

Interest paid

  $16,239   $17,344   $20,030  

Federal income taxes paid

   878    1,261    2,237  

SUPPLEMENTAL NONCASH INFORMATION:

    

Transfers of loans to foreclosed assets

  $1,932   $3,868   $2,536  

Common stock issued for deferred compensation obligations

   773    475    185  

Common stock repurchased from an associated grantor trust (Rabbi Trust)

   (697)   (537)   (33) 


Year Ended December 31
 2014 2013 2012
OPERATING ACTIVITIES     
Net income$13,724
 $12,510
 $12,206
Reconciliation of net income to net cash provided by operating activities:     
Provision for loan losses(668) 1,111
 2,300
Impairment of foreclosed assets123
 156
 166
Depreciation2,551
 2,556
 2,417
Amortization of OMSR265
 522
 787
Amortization of acquisition intangibles183
 221
 260
Net amortization of AFS securities1,830
 2,028
 2,277
AFS securities impairment loss—
 —
 282
Net (gains) losses on sale of AFS securities(97) (171) (1,119)
Net unrealized (gains) losses on trading securities5
 28
 52
Net gain on sale of mortgage loans(514) (962) (1,576)
Net unrealized (gains) losses on borrowings measured at fair value—
 —
 (33)
Increase in cash value of corporate owned life insurance policies(751) (732) (698)
Share-based payment awards under equity compensation plan495
 554
 643
Deferred income tax (benefit) expense207
 (1,208) 616
Origination of loans held-for-sale(28,135) (53,632) (99,353)
Proceeds from loan sales28,852
 57,123
 100,501
Net changes in operating assets and liabilities which provided (used) cash:
 
  
Trading securities520
 1,020
 3,085
Accrued interest receivable(409) (215) 621
Other assets(2,145) (122) (2,610)
Accrued interest payable and other liabilities1,298
 1,954
 (1,360)
Net cash provided by (used in) operating activities17,334
 22,741
 19,464
INVESTING ACTIVITIES     
Net change in certificates of deposit held in other financial institutions—
 3,885
 4,459
Activity in AFS securities     
Sales13,362
 16,229
 40,677
Maturities, calls, and principal repayments68,188
 86,225
 89,112
Purchases(127,562) (131,505) (207,035)
Loan principal (originations) collections, net(27,648) (38,503) (27,103)
Proceeds from sales of foreclosed assets1,775
 2,122
 1,594
Purchases of premises and equipment(2,713) (2,488) (3,578)
Purchases of corporate owned life insurance policies—
 (1,092) —
Proceeds from redemption of corporate owned life insurance policies—
 196
 —
Net cash provided by (used in) investing activities(74,598) (64,931) (101,874)

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CONSOLIDATED STATEMENTS OF CASH FLOWS (continued)
(Dollars in thousands)
 Year Ended December 31
 2014 2013 2012
FINANCING ACTIVITIES     
Net increase (decrease) in deposits30,718
 26,099
 59,503
Increase (decrease) in borrowed funds10,383
 38,325
 24,898
Cash dividends paid on common stock(6,843) (6,456) (6,074)
Proceeds from issuance of common stock4,227
 3,618
 2,898
Common stock repurchased(3,122) (2,375) (1,980)
Common stock purchased for deferred compensation obligations(331) (383) (505)
Net cash provided by (used in) financing activities35,032
 58,828
 78,740
Increase (decrease) in cash and cash equivalents(22,232) 16,638
 (3,670)
Cash and cash equivalents at beginning of year41,558
 24,920
 28,590
Cash and cash equivalents at end of year$19,326
 $41,558
 $24,920
SUPPLEMENTAL CASH FLOWS INFORMATION:     
Interest paid$10,045
 $11,139
 $13,639
Federal income taxes paid1,454
 2,093
 2,357
SUPPLEMENTAL NONCASH INFORMATION:     
Transfers of loans to foreclosed assets$1,371
 $1,672
 $1,902

































The accompanying notes are an integral part of these consolidated financial statements.


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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Dollars in thousands except per share amounts)

NOTE

Note 1 — NATURE OF OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

– Nature of Operations and Summary of Significant Accounting Policies

BASIS OF PRESENTATION AND CONSOLIDATION: The consolidated financial statements include the accounts of Isabella Bank Corporation, (the “Corporation”), a financial services holding company, and its wholly owned subsidiaries,subsidiary, Isabella Bank (the “Bank”), Financial Group Information Services, and IB&T Employee Leasing, LLC.Bank. All intercompany balances and accounts have been eliminated in consolidation.

NATURE OF OPERATIONS: Isabella Bank Corporation is a financial services holding company offering a wide array of financial products and services in several mid-Michigan counties. ItsOur banking subsidiary, Isabella Bank, offers banking services through 2527 locations, 24 hour banking services locally and nationally through shared automatic teller machines, 24 hour online banking, mobile banking, and direct deposits to businesses, institutions, and individuals. Lending services offered include commercial loans, agricultural loans, residential real estate loans, and consumer loans. Deposit services include interest and noninterest bearing checking accounts, savings accounts, money market accounts, and certificates of deposit. Other related financial products include trust and investment services, safe deposit box rentals, and credit life insurance. Active competition, principally from other commercial banks, savings banks and credit unions, exists in all of the Corporation’sour principal markets. The Corporation’sOur results of operations can be significantly affected by changes in interest rates or changes in the local economic environment.

Financial Group Information Services provides

For additional information, technology services to Isabella Bank Corporation and its subsidiaries.

IB&T Employee Leasing provides payroll services, benefit administration, and other human resource services to Isabella Bank Corporation and its subsidiaries.

see “Note 18 – Related Party Transactions.”

USE OF ESTIMATES: In preparing consolidated financial statements in conformity with accounting principles generally accepted in the United States of America, management is required towe make estimates and assumptions that affect the reported amounts of assets and liabilities as of the date of the consolidated balance sheet and reported amounts of revenues and expenses during the reporting year. Actual results could differ from those estimates.

Material estimates that are particularly susceptible to significant change in the near term relate to the determination of the allowance for loan losses,ALLL, the fair value of certain available-for-saleAFS investment securities, and the valuation of real estate acquired in connection with foreclosures or in satisfaction of loans, valuation of goodwill and other intangible assets, and determinations of assumptions in accounting for the defined benefit pension plan.

assets.

FAIR VALUE MEASUREMENTS:MEASUREMENTS: Fair value refers to the price that would be received to sell an asset or paid to transfer a liability (an exit price) in an orderly transaction between market participants in the market in which the reporting entity transacts such sales or transfers based on the assumptions market participants would use when pricing an asset or liability. Assumptions are developed based on prioritizing information within a fair value hierarchy that gives the highest priority to quoted prices in active markets and the lowest priority to unobservable data, such as the reporting entity’s own data. The CorporationWe may choose to measure eligible items at fair value at specified election dates. Unrealized gains and losses on items for which the fair value measurement option has been elected are reported in earnings at each subsequent reporting date. The fair value option (i) may be applied instrument by instrument, with certain exceptions, allowing the Corporation to record identical financial assets and liabilities at fair value or by another measurement basis permitted under generally accepted accounting principles, (ii) is irrevocable (unless a new election date occurs) and (iii) is applied only to entire instruments and not to portions of instruments.

For assets and liabilities recorded at fair value, it is the Corporation’sour policy to maximize the use of observable inputs and minimize the use of unobservable inputs when developing fair value measurements for those financial instruments for which there is an active market. In cases where the market for a financial asset or liability is not active, the Corporation includeswe include appropriate risk adjustments that market participants would make for nonperformance and liquidity risks when developing fair value measurements. Fair value measurements for assets and liabilities for which limited or no observable market data exists are accordingly based primarily upon estimates, are often calculated based on the economic and competitive environment, the characteristics of the asset or liability and other factors. Therefore, the results cannot be determined with precision and may not be realized in an actual sale or immediate settlement of the asset or liability. Additionally, there may be inherent weaknesses in any calculation technique, and changes in the underlying assumptions used, including discount rates and estimates of future cash flows, could significantly affect the results of current or future values.

The Corporation utilizes

We utilize fair value measurements to record fair value adjustments to certain assets and liabilities and to determine fair value disclosures. Investment securities available-for-sale, trading securities, and certain liabilitiesAFS are recorded at fair value on a recurring basis. Additionally, from time to time, the Corporationtime-to-time, we may be required to record other assets and liabilities at fair value on a nonrecurring basis, such as mortgage loans available-for-sale,AFS, impaired loans, foreclosed assets, originated mortgage servicing rights,OMSR, goodwill, and certain other assets and liabilities. These nonrecurring fair value adjustments typically involve the application of lower of cost or market accounting or write downswrite-downs of individual assets.


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Fair Value Hierarchy

Under fair value measurement and disclosure authoritative guidance, the Corporation groupswe 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.

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.

For a further discussion of fair value considerations, refer to Note 20 to the consolidated financial statements.

“Note 19 – Fair Value.”

SIGNIFICANT GROUP CONCENTRATIONS OF CREDIT RISK:RISK: Most of the Corporation’sour activities conducted are with customers located within the central Michigan area. A significant amount of itsour outstanding loans are secured by commercial and residential real estate. Other than these types of loans, there is no significant concentration to any other industry or any one customer.

CASH AND CASH EQUIVALENTS: For purposes of the consolidated statements of cash flows, cash and cash equivalents include cash and balances due from banks, federal funds sold, and other deposit accounts. Generally, federal funds sold are for a one dayP1D period. The Corporation maintainsWe maintain deposit accounts in various financial institutions which generally exceed federally insured limits or are not insured. Management doesWe do not believe the Company iswe are exposed to any significant interest, credit or other financial risk as a result of these deposits.

CERTIFICATES OF DEPOSIT HELD IN OTHER FINANCIAL INSTITUTIONS: Certificates of deposits held in other financial institutions consist of interest bearing certificates of deposit that mature within 3with terms of three years or less and are carried at cost.

TRADINGAFS SECURITIES:    The Corporation engages in trading activities of its own accounts. Securities that are held principally for resale in the near term are recorded in the trading assets account at fair value with changes in fair value recorded in noninterest income. Interest income is included in net interest income.

AVAILABLE-FOR-SALE INVESTMENT SECURITIES:    All purchases Purchases of investment securities are generally classified as available-for-sale.AFS. However, classification of investmentwe may elect to classify securities as either held to maturity or trading may be elected by management of the Corporation.trading. Securities classified as available-for-saleAFS are recorded at fair value, with unrealized gains and losses, net of the effect of deferred income taxes, excluded from earnings and reported in other comprehensive income. AuctionIncluded in AFS securities are auction rate money market preferred securitiespreferreds and preferred stocksstocks. These investments are considered equity securities for federal income tax purposes, and as such, no estimated federal income tax impact is expected or recorded. Auction rate money market preferred securities and preferred stockstocks are recorded at fair value, with unrealized gains and losses considered not other-than-temporary, excluded from earnings and reported in other comprehensive income. Purchase premiums and discounts are recognized in interest income using the interest method over the terms of the securities. Realized gains and losses on the sale of available-for-sale investmentAFS securities are determined using the specific identification method.

Investment

AFS securities are reviewed quarterly for possible other-than-temporary impairment (“OTTI”).OTTI. In determining whether an other-than-temporary impairmentOTTI exists for debt securities, management mustwe assert that: (a) it doeswe do not have the intent to sell the security; and (b) it is more likely than not itwe will not have to sell the security before recovery of its cost basis. If these conditions are not met, the Corporation mustwe recognize an other-than-temporary impairmentOTTI charge through earnings for the difference between the debt security’s amortized cost basis and its fair value, and such amount is included in noninterest income. For debt securities that do not meet the above criteria, and the Corporation doeswe do not expect to recover the security’s amortized cost basis, the security is considered other-than-temporarily impaired. For these debt securities, the Corporation separateswe separate the total impairment into the credit risk loss component and the amount of the loss related to market and other risk factors. In order to determine the amount of the credit loss for a debt security, the Corporation calculateswe calculate the recovery value by performing a discounted cash flow analysis based on the current cash flows and future cash flows management expectswe expect to recover. The amount of the total other-than-temporary impairmentOTTI related to the credit risk is recognized in earnings and is included in noninterest income. The amount of the total other-than-temporary impairmentOTTI related to other risk factors is recognized as a component of other comprehensive income. For debt securities that have recognized an other-than-temporary impairmentOTTI through earnings, if through subsequent evaluation there is a significant increase in the cash flow expected, the difference between the amortized cost basis and the cash flows expected to be collected is accreted as interest income.

Available-for-sale

AFS equity securities are reviewed for other-than-temporary impairmentOTTI at each reporting date. This evaluation considers a number of factors including, but not limited to, the length of time and extent to which the fair value has been less than cost, the financial condition and near term prospects of the issuer, and management’sour ability and intent to hold the securities until fair value recovers. If it is determined that management doeswe

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do not have the ability and intent to hold the securities until recovery or that there are conditions that indicate that a security may not recover in value then the difference between the fair value and the cost of the security is recognized in earnings and is included in noninterest income. No such losses for debt or equity securities were recognized in 2011, 2010, or 2009.

LOANS: Loans that management haswe have the intent and ability to hold for the foreseeable future or until maturity or payoff are reported at their outstanding principal balance adjusted for any charge-offs, the allowance for loans losses,ALLL, and any deferred fees or costs on originated loans. Interest income on loans 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 level yield method.

The accrual of interest on agricultural, commercial and mortgage loans is discontinued at the time the loan is 90 days or more past due unless the credit is well secured and in the process of collection. Consumer loans are typically charged offcharged-off no later than 180 days past due. Past due status is based on contractual terms of the loan. In all cases, loans are placed on nonaccrual or charged offcharged-off at an earlier date if collection of principal or interest is considered doubtful.

For loans that are placed on non-accrualnonaccrual status or charged off,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 allowance for loan losses.ALLL. The interest on these loans is accounted for on the cash-basis, until qualifying for return to accrual status. Loans are returned to accrual status when all principal and interest amounts contractually due are brought current and future payments are reasonably assured. For impaired loans not classified as nonaccrual, interest income continues to be accrued over the term of the loan based on the principal amount outstanding.

ALLOWANCE FOR LOAN LOSSES: The allowance for loan lossesALLL is established as losses are estimated to have occurred through a provision for loan losses charged to earnings. Loan losses are charged against the allowance when management believeswe believe the uncollectibilityuncollectability of the loan balance is confirmed. Subsequent recoveries, if any, are credited to the allowance.

The allowance for loan losses is evaluated

We evaluate the ALLL on a regular basis by management and is based upon management’sour periodic review of the collectibilitycollectability of the loans in light of 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 allowanceALLL consists of specific, general, and unallocated components. The specific component relates to loans that are deemed to be impaired. For such loans that are also analyzed for specific allowance allocations, an allowance is established when the discounted cash flows or collateral value or observable market price of the impaired loan is lower than the carrying value of that loan. The general component covers non classified loans and is based on historical loss experience. An unallocated component is maintained to cover uncertainties that management believeswe believe affect itsour estimate of probable losses based on qualitative factors. 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.

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

1.  There has been a chargeoff of its principal balance;

2.  The loan has been classified as a troubled debt restructuring; or

3.  The loan is in nonaccrual status.

1.There has been a charge-off of its principal balance;
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 agricultural and commercial loans by either the present value of expected future cash flows discounted at the loan’s effective interest rate, the loan’s obtainable market price, or the fair value of the collateral, less cost to sell, if the loan is collateral dependent. Large groups of smaller balance homogeneous loans are collectively evaluated for impairment.

LOANS HELD FOR SALE: Mortgage loans originated and intendedheld for sale inon the secondary market are carried at the lower of cost or fair value as determined by aggregating outstanding commitments from investors or current investor yield requirements. Net unrealized losses, if any, arewould be recognized throughas a valuation allowancecomponent of which the provision is accounted for in other noninterest expenses in the consolidated statements of income.expenses.

Mortgage loans held for sale are sold with the mortgage servicing rights retained by the Corporation.us. The carrying value of mortgage loans sold is reduced by the cost allocated to the associated mortgage servicing rights. Gains or losses on sales of mortgage loans are recognized based on the difference between the selling price and the carrying value of the related mortgage loans sold.


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TRANSFERS OF FINANCIAL ASSETS: Transfers of financial assets, including mortgage loans and participation loans are accounted for as sales when control over the assets has been surrendered. Control over transferred assets is determined to be surrendered when 1) the assets have been legally isolated from the Corporation,us, 2) the transferee obtains the right (free of conditions that constrain it from taking advantage of the right) to pledge or exchange the transferred assets, and 3) the Corporation doeswe do not maintain effective control over the transferred assets through an agreement to repurchase them before their maturity. Other than servicing, the Corporation haswe have no substantive continuing involvement related to these loans.

SERVICING: Servicing assets are recognized as separate assets when rights are acquired through purchase or through sale of financial assets. The Corporation hasWe have no purchased servicing rights. For sales of mortgage loans, a portion of the cost of originating the loan is allocated to the servicing right based on relative fair value. Fair value is based on market prices for comparable mortgage servicing contracts, when available, or alternatively, is based on a valuation model that calculates the present value of estimated future net servicing income. The valuation model incorporates assumptions that market participants would use in estimating future net servicing income, such as the cost to service, the discount rate, the custodial earnings rate, an inflation rate, ancillary income, prepayment speeds and default rates and losses.

Servicing assets are evaluated for impairment based upon the fair value of the rights as compared to amortized cost. Impairment is determined by stratifying rights into tranches based on predominant risk characteristics, such as interest rate, loan type, and investor type. Impairment is recognized through a valuation allowance for an individual tranche, to the extent that fair value is less than the capitalized amount for the tranche. If the Corporationwe later determinesdetermine that all or a portion of the impairment no longer exists for a particular tranche, a reduction of the valuation allowance may be recorded as an increase to income. Capitalized servicing rights are reported in other assets and are amortized into noninterest income in proportion to, and over the period of, the estimated future net servicing income of the underlying financial assets. The unpaid principal balance of mortgages serviced for others was $304,626$288,639 and $309,882$293,665 with capitalized servicing rights of $2,374$2,519 and $2,667$2,555 at December 31, 20112014 and 2010,2013, respectively.

Servicing fee income is recorded for fees earned for servicing loans for others. The fees are based on a contractual percentage of the outstanding principal; or a fixed amount per loan and are recorded as income when earned. The CorporationWe recorded servicing fee revenue of $732, $760,$720, $737, and $724$757 related to residential mortgage loans serviced for others during 2011, 2010,2014, 2013, and 2009,2012, respectively, andwhich is included in other non interestnoninterest income.

LOANS ACQUIRED THROUGH TRANSFER:    Authoritative accounting guidance related to acquired loans requires that a valuation allowance for loans acquired in a transfer, including in a business combination, reflect only losses incurred after acquisition, and should not be recorded at acquisition. This standard applies to any loan acquired in a transfer that shows evidence of credit quality deterioration since it was originated.

FORECLOSED ASSETS: Assets acquired through, or in lieu of, loan foreclosure are held for sale and are initially recorded at the lower of the Corporation’sour carrying amount or fair value less estimated selling costs at the date of transfer, establishing a new cost basis. Any write downswrite-downs based on the asset’s fair value at the date of acquisition are charged to the allowance for loan losses.ALLL. After foreclosure, property held for sale is carried at the lower of the new cost basis or fair value less costs to sell. Impairment losses on property to be held and used are measured at the amount by which the carrying amount of property exceeds its fair value. Costs relating to holding these assets are expensed as incurred. Valuations areWe periodically performed by management,perform valuations and any subsequent write-downs are recorded as a charge to operations, if necessary, to reduce the carrying value of a property to the lower of the Corporation’sour carrying amount or fair value less costs to sell. Foreclosed assets of $1,876$885 and $2,067$1,412 as of December 31, 20112014 and 2010,2013, respectively, are included in Other Assets on the accompanying consolidated balance sheets.other assets.

PREMISES AND EQUIPMENT: Land is carried at cost. Buildings and equipment are carried at cost, less accumulated depreciation which is computed principally by the straight-line method based upon the estimated useful lives of the related assets, which range from 3 to 40 years. Major improvements are capitalized and appropriately amortized based upon the useful lives of the related assets or the expected terms of the leases,

if shorter, using the straight-line method. Maintenance, repairs and minor alterations are charged to current operations as expenditures occur. ManagementWe annually reviewsreview these assets to determine whether carrying values have been impaired.

FDIC INSURANCE PREMIUM:    In 2009, the Corporation was required to prepay quarterly FDIC risk-based assessments for the fourth quarter of 2009 and each of the quarters in the years ending December 31, 2010, 2011 and 2012. The assessments for 2010 through 2012, which had a carrying balance of $2,588 and $3,586 as of December 31, 2011 and 2010, respectively, have been recorded as a prepaid asset in the accompanying consolidated balance sheets in Other Assets, and will be expensed on a ratable basis quarterly through December 31, 2012.

EQUITY SECURITIES WITHOUT READILY DETERMINABLE FAIR VALUES:Included in equity securities without readily determinable fair values are restricted securities, whichour holdings in FHLB stock and FRB stock as well as our ownership interests in Corporate Settlement Solutions, LLC and Valley Financial Corporation. Our investment in Corporate Settlement Solutions, LLC, a title insurance company, was made in the 1st quarter of 2008. We are carried at cost,not the managing entity of Corporate Settlement Solutions, LLC, and investmentsaccount for our investment in nonconsolidated entities accounted forthat entity under the equity method of accounting.

Valley Financial Corporation is the parent company of 1st State Bank in Saginaw, Michigan, which is a bank that opened in 2005. We made investments in Valley Financial Corporation in 2004 and in 2007.


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Equity securities without readily determinable fair values consist of the following as of December 31:

   2011   2010 

Federal Home Loan Bank Stock

  $7,380    $7,596  

Investment in Corporate Settlement Solutions

   6,611     6,793  

Federal Reserve Bank Stock

   1,879     1,879  

Investment in Valley Financial Corporation

   1,000     1,000  

Other

   319     296  
  

 

 

   

 

 

 

Total

  $17,189    $17,564  
  

 

 

   

 

 

 


2014 2013
FHLB Stock$9,800
 $8,100
Corporate Settlement Solutions, LLC6,936
 6,970
FRB Stock1,999
 1,879
Valley Financial Corporation1,000
 1,000
Other341
 344
Total$20,076
 $18,293
EQUITY COMPENSATION PLAN:At December 31, 2011,2014, the Isabella Bank Corporation and Related Companies Deferred CompensationDirectors Plan for Directors (the “Directors Plan”) had 218,023187,369 shares eligible to be issued to participants, for which an associated grantor trust (Rabbi Trust)the Rabbi Trust held 16,58513,934 shares. The CorporationWe had 224,663185,311 shares to be issued in 2010,2013, with 32,68612,761 shares held in the Rabbi Trust. Compensation costs relating to share based payment transactions are recognized in the consolidated financial statements as the services are rendered, with the cost measured based on the fair value of the equity or liability instruments issued (see “Equity Compensation Plan” in Note 17.“Note 16 – Benefit Plans”) The Corporation has. We have no other share-basedequity-based compensation plans.

CORPORATE OWNED LIFE INSURANCE:The Corporation has We have purchased life insurance policies on key members of management. In the event of death of one of these individuals, the Corporationwe would receive a specified cash payment equal to the face value of the policy. Such policies are recorded at their cash surrender value, or the amount that can be realized on the balance sheet dates. Increases in cash surrender value in excess of single premiums paid are reported as Other Noninterest Income.other noninterest income.

As of December 31, 20112014 and 2010,2013, the present value of the post retirement benefits payable by the Corporationus to the covered employees was estimated to be $2,633$2,782 and $2,573,$2,699, respectively, and is included in Accrued Interest Payableaccrued interest payable and Other Liabilities on the consolidated balance sheets.other liabilities. The periodic policy maintenance costs were $60$83, $75, and $68$24 for 20112014, 2013, and 2010, respectively.

2012, respectively and is included in other noninterest expenses.

ACQUISITION INTANGIBLES AND GOODWILL:    The Corporation We previously acquired branch facilities and related deposits in business combinations accounted for as a purchase. The acquisitions included amounts related to the valuation of customer deposit relationships (core deposit intangibles). Core deposit intangibles arising from acquisitions are included in Other Assetsgoodwill and other intangible assets are being amortized over their estimated lives and evaluated for potential impairment on at least an annual basis. Goodwill which is included in Other Assets, represents the excess of purchase price over identifiable assets, is not amortized but is evaluated for impairment on at least an annual basis. Goodwill isAcquisition intangibles and goodwill are typically qualitatively evaluated to determine if it is more likely than not that the carrying balance is impaired. If it is determined that the carrying balance of goodwill is more likely than not to be impaired, management performswe perform a cash flow valuation to determine the extent of the

potential impairment. Acquisition intangibles are tested for impairment with a cash flow valuation. This valuation method requires a significant degree of managementour judgment. In the event the projected undiscounted net operating cash flows for these intangible assets are less than the carrying value, the asset is recorded at fair value as determined by the valuation model.

OFF BALANCE SHEET CREDIT RELATED FINANCIAL INSTRUMENTS: In the ordinary course of business, the Corporation haswe have entered into commitments to extend credit, including commitments under credit card arrangements, home equity lines of credit, commercial letters of credit, and standby letters of credit. Such financial instruments are recorded only when funded.

FEDERAL INCOME TAXES: Deferred income tax assets and liabilities are determined using the liability (or balance sheet) method. Under this method, the net deferred tax assets or liability is determined based on the tax effects of the temporary differences between the book and tax bases on the various balance sheet assets and liabilities and gives current recognition to changes in tax rates and laws. Valuation allowances are established, where necessary, to reduce deferred tax assets to the amount expected to be realized. Income tax expense is the tax payable or refundable for the year plus or minus the change during the year in deferred tax assets and liabilities.

The Corporation analyzes its

We analyze our filing positions in the jurisdictions where it iswe are required to file income tax returns, as well as all open tax years in these jurisdictions. The Corporation hasWe have also elected to retain itsour existing accounting policy with respect to the treatment of interest and penalties attributable to income taxes, and continuescontinue to reflect any charges for such, to the extent they arise, as a component of itsour noninterest expenses.

DEFINED BENEFIT PENSION PLAN: We maintain a noncontributory defined benefit pension plan, which was curtailed effective March 1, 2007. Defined benefit pension plan expenses are included in “compensation and benefits" on the consolidated statements of income and are funded consistent with the requirements of federal laws and regulations. The current benefit obligation is included in "accrued interest payable and other liabilities" on the consolidated balance sheets. Inherent in the determination of defined benefit pension costs are assumptions concerning future events that will affect the amount and timing of required benefit payments under the plan. These assumptions include demographic assumptions such as mortality, a discount rate used to determine the current benefit obligation and a long-term expected rate of return on plan assets. Net

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periodic benefit cost includes interest cost based on the assumed discount rate, an expected return on plan assets based on an actuarially derived market-related value of assets, and amortization of unrecognized net actuarial gains or losses. Actuarial gains and losses result from experience different from that assumed and from changes in assumptions (excluding asset gains and losses not yet reflected in market-related value). Amortization of actuarial gains and losses is included as a component of net periodic defined benefit pension cost.
For additional information, see "Note 16 – Benefit Plans."
MARKETING COSTS:Marketing costs are expensed as incurred (see Note 11)“Note 10 – Other Noninterest Expenses”).

RECLASSIFICATIONS: Certain amounts reported in the 20102013 and 20092012 consolidated financial statements have been reclassified to conform with the 20112014 presentation.

NOTE

Note 2 — COMPUTATION OF EARNINGS PER SHARE

– 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 reflects additional common shares that would have been outstanding if dilutive potential common shares had been issued, as well as any adjustments to income that would result from the assumed issuance.issued. Potential common shares that may be issued by the Corporation relate solely to outstanding shares in the Directors Plan, see Note 17.

“Note 16 – Benefit Plans.”

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

   2011   2010   2009 

Average number of common shares outstanding for basic calculation

   7,572,841     7,541,676     7,517,276  

Average potential effect of shares in the Directors Plan(1)

   194,634     187,744     181,319  
  

 

 

   

 

 

   

 

 

 

Average number of common shares outstanding used to calculate diluted earnings per common share

   7,767,475     7,729,420     7,698,595  
  

 

 

   

 

 

   

 

 

 

Net income

  $10,210    $9,045    $7,800  
  

 

 

   

 

 

   

 

 

 

Earnings per share

      

Basic

  $1.35    $1.20    $1.04  
  

 

 

   

 

 

   

 

 

 

Diluted

  $1.31    $1.17    $1.01  
  

 

 

   

 

 

   

 

 

 


2014 2013 2012
Average number of common shares outstanding for basic calculation7,734,161
 7,694,392
 7,604,303
Average potential effect of common shares in the Directors Plan (1)171,393
 168,948
 195,063
Average number of common shares outstanding used to calculate diluted earnings per common share7,905,554
 7,863,340
 7,799,366
Net income$13,724
 $12,510
 $12,206
Earnings per common share     
Basic$1.77
 $1.63
 $1.61
Diluted$1.74
 $1.59
 $1.56
(1)
(1)
Exclusive of shares held in the Rabbi Trust

NOTE

Note 3 — ACCOUNTING STANDARDS UPDATES

Recently Adopted Accounting Standards Updates

Accounting Standards Update (ASU) No. 2010-06:“Improving Disclosures about Fair Value Measurement”

In January 2010, ASU No. 2010-06 amended Accounting Standards Codification (ASC) Topic 820 “Fair Value Measurements and Disclosures” to add new disclosures for: (1) significant transfers in and out of Level 1 and Level 2 fair value measurements and the reasons for the transfers and (2) presenting separately information about purchases, sales, issuances and settlements for Level 3 fair value instruments (as opposed to reporting activity as net).

ASU No. 2010-06 also clarified existing disclosures by requiring reporting entities to provide fair value measurement disclosures for each class of assets and liabilities and to provide disclosures about the valuation techniques and inputs used to measure fair value for both recurring and nonrecurring fair value measurements.

The new authoritative guidance was effective for interim and annual periods beginning after December 15, 2009 except for the disclosures about purchases, sales, issuances and settlements in the rollforward of activity in Level 3 fair value measurements, which was effective for interim and annual periods beginning after December 15, 2010. The new guidance did not have a significant impact on the Corporation’s consolidated financial statements.

ASU No. 2011-01: “Deferral of the Effective Date of Disclosures about Troubled Debt Restructurings in Update No. 2010-20.”

In January 2011, ASU No. 2011-01 amended ASC Topic 310, “Receivables” to temporarily delay the effective date of new disclosures related to troubled debt restructurings as required in ASU No. 2010-20, “Disclosures about the Credit Quality of Financing Receivables and the Allowance for Credit Losses”,which was initially intended to be effective for interim and annual periods ending after December 15, 2010. The effective date of the new disclosures about troubled debt restructurings was delayed to coordinate with the newly issued guidance for determining what constitutes a troubled debt restructuring (ASU No. 2011-02). The new disclosures were effective for interim and annual periods beginning on or after June 15, 2011 and increased the level of reporting disclosures related to troubled debt restructurings.

ASU No. 2011-02: “A Creditor’s Determination of Whether a Restructuring Is a Troubled Debt Restructuring.”

In April 2011, ASU No. 2011-02 amended ASC Topic 310, “Receivables” to clarify authoritative guidance as to what loan modifications constitute concessions, and would therefore be considered a troubled debt restructuring. Classification as a troubled debt restructuring will automatically classify such loans as impaired. ASU No. 2011-02 clarifies that:

If a debtor does not otherwise have access to funds at a market rate for debt with similar risk characteristics as the modified debt, the modification would be considered to be at a below-market rate, which may indicate that the creditor has granted a concession.

A modification that results in a temporary or permanent increase in the contractual interest rate cannot be presumed to be at a rate that is at or above a market rate and therefore could still be considered a concession.

A creditor must consider whether a borrower’s default is “probable” on any of its debt in the foreseeable future when assessing financial difficulty.

A modification that results in an insignificant delay in payments is not a concession.

In addition, ASU No. 2011-02 clarifies that a creditor is precluded from using the effective interest rate test in the debtor’s guidance on modification of payables (ASC Topic 470, “Debt”) when evaluating whether a modification constitutes a troubled debt restructuring. The new authoritative guidance was effective for interim

and annual periods beginning on or after June 15, 2011 and increased the volume of loans that the Corporation classified as troubled debt restructurings and required additional disclosures (see Note 6 – Loans and Allowance for Loan Losses).

ASU No. 2011-08: “Testing Goodwill for Impairment”

In September 2011, ASU No. 2011-08 amended ASC Topic 350, “Goodwill and Other” to simplify the testing of goodwill impairments. This update will allow for a qualitative assessment of goodwill to determine whether or not it is necessary to perform the two-step impairment test described in ASC Topic 350. While the new authoritative guidance is effective for fiscal years beginning after December 15, 2011, the Corporation elected to early adopt the guidance as of December 31, 2011. The new guidance did not have any impact on the Corporation’s consolidated financial statements.

Pending Accounting Standards Updates

ASU No. 2011-03: “Reconsideration2014-01: “Accounting for Investments in Qualified Affordable Housing Projects (a consensus of Effective Control for Repurchase Agreementsthe FASB Emerging Issues Task Force)”

In April 2011,January 2014, ASU No. 2011-032014-01 amended ASC Topic 310, “Transfers and Servicing”323, “Investments" to eliminate fromallow investors in low income housing tax credits to use the assessment of effective control,proportional amortization method if the following criteria calling forare met:
It is probable that the transferortax credits allocable to the investor will be available.
The investor does not have the ability to repurchase or redeemexercise significant influence over the operating and financial assetspolicies of the limited liability entity.
Substantially all of the projected benefits are from tax credits and other tax benefits (e.g., operating losses).
The investor’s projected yield is based solely on substantially the agreed upon terms, evencash flows from the tax credits and other tax benefits are positive.
The investor is a limited liability investor in the event oflimited liability entity for both legal and tax purposes, and the transferee’s default. The assessment of effective control should instead focus oninvestor’s liability is limited to its capital investment.
Investors that do not meet the transferor’s contractual rights and obligations.above criteria must utilize the cost method or equity method in accordance with previously issued authoritative accounting guidance. The new authoritative guidance is effective for interim and annual periods beginning on or after December 15, 20112014 and is not expected to have a significant impact the Corporation’s consolidated financial statements.

on our operations.

ASU No. 2011-04: “Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRS2014-04: “Reclassification of Residential Real Estate Collateralized Consumer Mortgage Loans upon Foreclosure (a consensus of the FASB Emerging Issues Task Force)”

In May 2011,January 2014, ASU No. 2011-042014-04 amended ASC Topic 820, “Fair Value Measurement”310, “Receivables” to align fair value measurementsreduce diversity by clarifying when an in substance repossession or foreclosure occurs, that is, when a creditor should be considered to have received physical possession of residential real estate property collateralizing a consumer mortgage loan such that the loan receivable should be

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derecognized and disclosures in U.S. Generally Accepted Accounting Principles (GAAP) and International Financial Reporting Standards (IFRS). The ASU changes the wording used to describe the requirements in GAAP for measuring fair value and disclosures about fair value.

The ASU clarifies the application of existing fair value measurements and disclosure requirements related to:

The application of highest and best use and valuation premise concepts.

Measuring the fair value of an instrument classified in a reporting entity’s stockholders’ equity.

Disclosure about fair value measurements within Level 3 of the fair value hierarchy.

The ASU also changes particular principles or requirements for measuring fair value and disclosing information measuring fair value and disclosures related to:

Measuring the fair value of financial instruments that are managed within a portfolio.

Application of premiums and discounts in a fair value measurement.

real estate property recognized. The new authoritative guidance is effective for interim and annual periods beginning on or after December 15, 20112014 and is not expected to have a significant impact on the Corporation’s consolidated financial statements.

our operations.

ASU No. 2011-05: “Presentation of Comprehensive Income”

2014-09: “Revenue from Contracts with Customers”

In June 2011,May 2014, ASU No. 2011-05 amended ASC2014-09 created new Topic 220, “Comprehensive Income”606 to improve the comparability,provide a common revenue standard to achieve consistency and transparencyclarification to the revenue recognition principles. The guidance outlines steps to achieve the core principle which states that an entity should recognize revenue to depict the transfer of financial reportingpromised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. These steps consist of: (1) identify the contract(s) with a customer, (2) identify the performance obligations in the contract, (3) determine the transaction price, (4) allocate the transaction price to the performance obligations in the contract, and to increase(5) recognize revenue when (or as) the prominence of items reported in other comprehensive income. In addition, to increase the prominence of items reported in other comprehensive income, and to facilitate the convergence of GAAP and IFRS, the FASB eliminated the option to present components of other comprehensive income as part of the statement of changes in shareholders’ equity.

entity satisfies a performance obligation. The new authoritative guidance is effective for interim and annual periods beginning on or after December 15, 20112016 and is not expected to have a significant impact on Corporation’s consolidatedour operations.

ASU No. 2014-11: “Repurchase-to-Maturity Transactions, Repurchase Financings, and Disclosures”
In June 2014, ASU No. 2014-11 amended ASC Topic 860, “Transfers and Servicing” to address concerns that current accounting guidance distinguishes between repurchase agreements that settle at the same time as the maturity of the transferred financial asset and those that settle any time before maturity. The update changes the accounting for repurchase-to-maturity transactions to secured borrowing accounting and, for repurchase financing arrangements, separate accounting for a transfer of a financial asset executed contemporaneously with a repurchase agreement with the same counterparty, which will result in secured borrowing accounting for the repurchase agreement. The new authoritative guidance is effective for interim and annual periods beginning after December 15, 2014 and is not expected to impact our financial statement disclosures.
ASU No. 2014-14: “Classification of Certain Government-Guaranteed Mortgage Loans upon Foreclosure (a consensus of the FASB Emerging Issues Task Force)”
In August 2014, ASU No. 2014-14 amended ASC Topic 310, “Receivables” to provide specific guidance on how to classify and measure foreclosed loans that are government guaranteed. The update requires that a mortgage loan be derecognized and that a separate other receivable be recognized upon foreclosure if the following conditions are met:
The loan has a government guarantee that is not separable from the loan before foreclosure.
At the time of foreclosure, the creditor has the intent to convey the real estate property to the guarantor and make a claim on the guarantee, and the creditor has the ability to recover under that claim.
At the time of foreclosure, any amount of the claim that is determined on the basis of the fair value of the real estate is fixed.
Upon foreclosure, the separate other receivable should be measured based on the amount of the loan balance (principal and interest) expected to be recovered from the guarantor. The new authoritative guidance is effective for interim and annual periods beginning after December 15, 2014 and is not expected to have a significant impact on our operations.
ASU No. 2014-15: “Disclosure of Uncertainties about an Entity’s Ability to Continue as a Going Concern”
In August 2014, ASU No. 2014-15 amended ASC Topic 205, “Presentation of Financial Statements” to provide guidance on how to determine whether to disclose relevant conditions or events that raise substantial doubt about the entity's ability to continue as a going concern. If conditions or events raise substantial doubt about an entity’s ability to continue as a going concern, financial statements sincewould continue to be prepared under the Corporation has always elected to presentgoing concern assumption; however, disclosures may be necessary depending upon the conditions or events raising substantial doubt. Additionally, if identified substantial doubt is not alleviated after consideration of management’s plans, an entity should include a separate statement of comprehensive income.

NOTE 4 — TRADING SECURITIES

Trading securities, at fair value, consist of the following investments at December 31:

   2011   2010 

States and political subdivisions

  $4,710    $5,837  

Included in the net trading lossesfootnotes indicating that there is substantial doubt about the entity’s ability to continue as a going concern within one year after the date that the financial statements are issued (or available to be issued). The new authoritative guidance is effective for annual and interim periods beginning after December 15, 2016 and is not expected to impact our financial statement disclosures.


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Table of $78 during 2011, were $60 of net trading losses on securities that relate to the Corporation’s trading portfolio as of December 31, 2011. Included in net trading gains of $94 during 2010, were $74 of net trading gains on securities that relate to the Corporation’s trading portfolio as of December 31, 2010.

Contents


Note 4 – AFS Securities
NOTE 5 — AVAILABLE-FOR-SALE INVESTMENT SECURITIES

The amortized cost and fair value of available-for-sale investmentAFS securities, with gross unrealized gains and losses, are as follows as of December 31:

   2011 
       Gross   Gross     
   Amortized   Unrealized   Unrealized   Fair 
   Cost   Gains   Losses   Value 

Government sponsored enterprises

  $395    $2    $—    $397  

States and political subdivisions

   166,832     8,157     51     174,938  

Auction rate money market preferred

   3,200     —     1,151     2,049  

Preferred stocks

   6,800     —     1,767     5,033  

Mortgage-backed securities

   140,842     2,807     47     143,602  

Collateralized mortgage obligations

   96,545     2,556     —     99,101  
  

 

 

   

 

 

   

 

 

   

 

 

 

Total

  $414,614    $13,522    $3,016    $425,120  
  

 

 

   

 

 

   

 

 

   

 

 

 

   2010 
       Gross   Gross     
   Amortized   Unrealized   Unrealized   Fair 
   Cost   Gains   Losses   Value 

Government sponsored enterprises

  $5,394    $10    $—    $5,404  

States and political subdivisions

   167,328     3,349     960     169,717  

Auction rate money market preferred

   3,200     —     335     2,865  

Preferred stocks

   7,800     —     864     6,936  

Mortgage-backed securities

   101,096     1,633     514     102,215  

Collateralized mortgage obligations

   44,617     103     1,133     43,587  
  

 

 

   

 

 

   

 

 

   

 

 

 

Total

  $329,435    $5,095    $3,806    $330,724  
  

 

 

   

 

 

   

 

 

   

 

 

 

 2014

Amortized
Cost		 Gross
Unrealized
Gains		 Gross
Unrealized
Losses		 Fair
Value
Government sponsored enterprises$24,597
 $10
 $471
 $24,136
States and political subdivisions209,153
 6,986
 794
 215,345
Auction rate money market preferred3,200
 —
 581
 2,619
Preferred stocks6,800
 31
 691
 6,140
Mortgage-backed securities165,888
 2,042
 1,004
 166,926
Collateralized mortgage obligations152,255
 1,533
 1,420
 152,368
Total$561,893
 $10,602
 $4,961
 $567,534
 2013

Amortized
Cost		 Gross
Unrealized
Gains		 Gross
Unrealized
Losses		 Fair
Value
Government sponsored enterprises$24,860
 $7
 $1,122
 $23,745
States and political subdivisions200,323
 5,212
 3,547
 201,988
Auction rate money market preferred3,200
 —
 623
 2,577
Preferred stocks6,800
 20
 993
 5,827
Mortgage-backed securities147,292
 657
 3,834
 144,115
Collateralized mortgage obligations135,139
 1,016
 2,345
 133,810
Total$517,614
 $6,912
 $12,464
 $512,062
The amortized cost and fair value of available-for-saleAFS securities by contractual maturity at December 31, 20112014 are as follows:

   Maturing   

Securities

With

Variable

Monthly

Payments

or

     
       After One   After Five           
   Due in   Year But   Years But       Continual     
   One Year   Within   Within   After   Call     
   or Less   Five Years   Ten Years   Ten Years   Dates   Total 

Government sponsored enterprises

  $—    $—    $395    $—    $—    $395  

States and political subdivisions

   8,381     34,610     87,436     36,405     —     166,832  

Auction rate money market preferred

   —     —     —     —     3,200     3,200  

Preferred stocks

   —     —     —     —     6,800     6,800  

Mortgage-backed securities

   —     —     —     —     140,842     140,842  

Collateralized mortgage obligations

   —     —     —     —     96,545     96,545  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total amortized cost

  $8,381    $34,610    $87,831    $36,405    $247,387    $414,614  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Fair value

  $8,441    $35,904    $93,586    $37,404    $249,785    $425,120  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 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
Government sponsored enterprises$—
 $19,068
 $5,529
 $—
 $—
 $24,597
States and political subdivisions13,943
 56,317
 97,295
 41,598
 —
 209,153
Auction rate money market preferred—
 —
 —
 —
 3,200
 3,200
Preferred stocks—
 —
 —
 —
 6,800
 6,800
Mortgage-backed securities—
 —
 —
 —
 165,888
 165,888
Collateralized mortgage obligations—
 —
 —
 —
 152,255
 152,255
Total amortized cost$13,943
 $75,385
 $102,824
 $41,598
 $328,143
 $561,893
Fair value$13,975
 $76,994
 $105,990
 $42,522
 $328,053
 $567,534
Expected maturities for government sponsored enterprises and states and political subdivisions may differ from contractual maturities because issuers may have the right to call or prepay obligations.

As the auction rate money market preferredspreferred and preferred stocks 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.


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A summary of the sales activity related to the sale of available-for-sale debtAFS securities is was as follows during the years ended December 31:

   2011   2010  2009 

Proceeds from sales of securities

  $8,877    $18,303   $32,204  
  

 

 

   

 

 

  

 

 

 

Gross realized gains

  $3    $351   $648  

Gross realized losses

   —     (3)   —  
  

 

 

   

 

 

  

 

 

 

Net realized gains

  $3    $348   $648  
  

 

 

   

 

 

  

 

 

 

Applicable income tax expense

  $1    $118   $220  
  

 

 

   

 

 

  

 

 

 

 2014 2013 2012
Proceeds from sales of AFS securities$13,362
 $16,229
 $40,677
Gross realized gains (losses)$97
 $171
 $1,119
Applicable income tax expense (benefit)$33
 $58
 $380
The cost basis used to determine the realized gains or losses of AFS securities sold was the amortized cost of the individual investment security as of the trade date.

Information pertaining to available-for-saleAFS securities with gross unrealized losses at December 31 aggregated by investment category and length of time that individual securities have been in a continuous loss position, follows:

   2011 
   Less Than Twelve Months   Over Twelve Months     
   Gross       Gross       Total 
   Unrealized   Fair   Unrealized   Fair   Unrealized 
   Losses   Value   Losses   Value   Losses 

States and political subdivisions

  $51    $1,410    $—    $—    $51  

Auction rate money market preferred

   —     —     1,151     2,049     1,151  

Preferred stocks

   —     —     1,767     5,033     1,767  

Mortgage-backed securities

   47     24,291     —     —     47  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total

  $98    $25,701    $2,918    $7,082    $3,016  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Number of securities in an unrealized loss position:

     6       6     12  
    

 

 

     

 

 

   

 

 

 

   2010 
   Less Than Twelve Months   Over Twelve Months     
   Gross       Gross       Total 
   Unrealized   Fair   Unrealized   Fair   Unrealized 
   Losses   Value   Losses   Value   Losses 

States and political subdivisions

  $960    $29,409    $—    $—    $960  

Auction rate money market preferred

   —     —     335     2,865     335  

Preferred stocks

   —     —     864     2,936     864  

Mortgage-backed securities

   514     38,734     —     —     514  

Collateralized mortgage obligations

   1,133     33,880     —     —     1,133  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total

  $2,607    $102,023    $1,199    $5,801    $3,806  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Number of securities in an unrealized loss position:

     82       4     86  
    

 

 

     

 

 

   

 

 

 

 2014
 Less Than Twelve Months Twelve Months or More  

Gross
Unrealized
Losses		 Fair
Value		 Gross
Unrealized
Losses		 Fair
Value		 Total
Unrealized
Losses
Government sponsored enterprises$—
 $—
 $471
 $23,525
 $471
States and political subdivisions48
 5,323
 746
 17,416
 794
Auction rate money market preferred—
 —
 581
 2,619
 581
Preferred stocks—
 —
 691
 3,109
 691
Mortgage-backed securities5
 9,456
 999
 52,407
 1,004
Collateralized mortgage obligations105
 29,435
 1,315
 39,540
 1,420
Total$158
 $44,214
 $4,803
 $138,616
 $4,961
Number of securities in an unrealized loss position:  22
   72
 94
 2013
 Less Than Twelve Months Twelve Months or More  

Gross
Unrealized
Losses		 Fair
Value		 Gross
Unrealized
Losses		 Fair
Value		 Total
Unrealized
Losses
Government sponsored enterprises$1,122
 $22,873
 $—
 $—
 $1,122
States and political subdivisions2,566
 42,593
 981
 6,115
 3,547
Auction rate money market preferred—
 —
 623
 2,577
 623
Preferred stocks—
 —
 993
 2,807
 993
Mortgage-backed securities2,424
 101,816
 1,410
 21,662
 3,834
Collateralized mortgage obligations2,345
 84,478
 —
 —
 2,345
Total$8,457
 $251,760
 $4,007
 $33,161
 $12,464
Number of securities in an unrealized loss position:  182
   19
 201
As a result of market conditions associated with certain auction rate money market preferred investment securities, $7,800 of the Corporation’s initial investment of $11,000 converted to preferred stocks with debt like characteristics in 2009. Due to the limited trading of these securities in 2009 and 2010, the Corporation utilized a discounted cash flow analysis to determine fair values on December 31, 2010. This analysis considered the creditworthiness of the counterparty, the timing of expected future cash flows, the current volume of trading activity,2014 and recent trade prices. The discount rates used were determined by using the interest rates of similarly rated financial institution’s debt based on the weighted average of a range of terms for corporate bond interest rates, which were obtained from published sources and ranged from 3.90% to 6.90% as of December 31, 2010. During 2011, the markets for these securities have normalized and established regular trading patterns. As such, the Corporation determined the fair value for these securities based on quoted prices for identical securities, or based on quoted prices for similar securities as of December 31, 2011.

As of December 31, 2011 and December 31, 2010, management2013, we conducted an analysis to determine whether allany securities currently in an unrealized loss position, including auction rate money market preferred securities and preferred stocks, should be considered other-than-temporarily-impaired (“OTTI”).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 that the issuer will be unable to pay the amount when due?

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

Has the duration of the investment been extended?

As of December

During the three month period ended March 31, 2011, the Corporation held an2012, we had one state issued student loan auction rate money market preferredAFS investment security (which is included in states and preferred stocks which continuedpolitical subdivisions) that was downgraded by Moody's from A3 to be in an unrealized loss position asCaa3. As a result of this downgrade, we engaged the securities’ interest rates,services of an independent investment valuation firm to estimate the amount of credit losses

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(if any) related to this particular issue as they are currently lower thanof March 31, 2012. The evaluation calculated a range of estimated credit losses utilizing two different bifurcation methods:
1) Discounted Cash Flow Method
2) Credit Yield Analysis Method
The two methods were then weighted, with a higher weighting applied to the offering ratesDiscounted Cash Flow Method, to determine the estimated credit related impairment. As a result of securities with similar characteristics. Management has determined that any declinesthis analysis, we recognized an OTTI of $282 in earnings in the fair valuethree month period ended March 31, 2012.
A summary of these securities arekey valuation assumptions used in the resultaforementioned analysis as of changesMarch 31, 2012, follows:
Discounted Cash Flow Method
Ratings
FitchNot Rated
Moody'sCaa3
S&PA
SenioritySenior
Discount rateLIBOR + 6.35%
Credit Yield Analysis Method
Credit discount rateLIBOR + 4.00%
Average observed discounts based on closed transactions14.00%
To test for additional impairment of this security as of December 31, 2014, we obtained another investment valuation (from the same firm engaged to perform the initial valuation as of March 31, 2012) as of December 31, 2014. Based on our analysis, no additional OTTI was indicated as of December 31, 2014.
The following table provides a roll-forward of credit related impairment recognized in interest rates andearnings for the years ended December 31:

2014 2013 2012
Balance at beginning of year$282
 $282
 $—
Additions to credit losses for which no previous OTTI was recognized—
 —
 282
Balance at end of year$282
 $282
 $282
Based on our analyses, the fact that we have asserted that we do not risks related tohave the underlying credit quality of the security. Additionally, none of these securities are deemed to be below investment grade, management does not intendintent to sell theAFS securities in an unrealized loss position, and considering it is more likely than notunlikely that the Corporationwe will not have to sell theAFS securities before recovery of their cost basis. As a result, the Corporation has not recognized an other-than-temporary impairment related to these declines in fair value.

Based on the Corporation’s analysis using the above criteria, the fact that management has asserted that it does not have the intent to sell these securities in an unrealized loss position and that it is more likely than not the Corporation will not have to sell the securities before recovery of their cost basis, management doeswe do not believe that the values of any suchAFS securities are other-than-temporarily impaired as of as of December 31, 20112014, or 2010.

NOTE 6 — LOANS AND ALLOWANCE FOR LOAN LOSSES (ALLL)December 31, 2013

The Corporation grants.

Note 5 – 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, light manufacturing, retail, gaming, and tourism, higher education, and general economic conditions of this region. Substantially all of theour consumer and residential mortgagereal 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 management haswe have the intent and ability to hold in itsour portfolio are reported at their outstanding principal balance adjusted for any charge-offs, the allowance for loans losses,ALLL, and any deferred fees or costs. Interest income on loans 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 level yield method.

The accrual of interest on commercial, agricultural, commercial and mortgageresidential real estate loans is typically discontinued at the time the loan is 90 days or more past due unless the credit is well-secured and in the process of collection. Upon transferring the loans

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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 any charge-offs are necessary. Consumer loans are typically charged offcharged-off no later than 180 days past due. Past due status is based on contractual terms of the loan. In all cases, loans are placed on nonaccrual or charged offcharged-off at an earlier date if collection of principal or interest is considered doubtful.

For loans that are placed on nonaccrual status or charged off,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 allowance for loan losses. The interest on these loans is accounted for on the cash basis, until qualifying for return to accrual status.ALLL. Loans are typically returned to accrual status after six months of continuous performance. For impaired loans not classified as nonaccrual, interest income continues to be accrued over the term of the loan based on the principal amount outstanding.

Commercial and agricultural loans include loans for commercial real estate, commercial operating loans, farmland and agricultural production, and statestates and political subdivisions. Repayment of these loans is often dependent upon the successful operation and management of a business; thus, these loans generally involve greater risk than other types of lending. The Corporation minimizes itsbusiness. We minimize our risk by limiting the amount of loanscredit exposure to any one borrower to $12,500.$15,000. Borrowers with credit needs of more than $12,500$15,000 are serviced through the use of loan participations with other commercial banks. Commercial and agricultural real estate loans generally require

loan-to-value limits of less than 80%. Depending upon the type of loan, past credit history, and current operating results, the Corporationwe may require the borrower to pledge accounts receivable, inventory, and property and equipment. Personal guarantees are generally required from the owners of closely held corporations, partnerships, and sole proprietorships. In addition, the Corporation requireswe require annual financial statements, preparesprepare cash flow analyses, and reviewsreview credit reports as deemed necessary.

The Corporation offers

We offer adjustable rate mortgages, fixed rate balloon mortgages, construction loans, and fixed rate mortgageresidential real estate loans which typically have amortization periods up to a maximum of 30 years. Fixed rate residential real estate loans with an amortization of greater than 15 years are generally sold upon origination to the Federal Home Loan Mortgage Corporation.Freddie Mac. Fixed rate residential mortgagereal estate loans with an amortization of 15 years or less may be held in the Corporation’sour portfolio held for future sale, or sold to Freddie Mac upon origination. Factors used in determining when to sell these mortgages include management’s judgment aboutWe consider the direction of interest rates, the Corporation’s need for fixed rate assetssensitivity of our balance sheet to changes in the management of its interest rate sensitivity,rates, and overall loan demand.

Lendingdemand to determine whether or not to sell these loans to Freddie Mac.

Our lending policies generally limit the maximum loan-to-value ratio on residential mortgagesreal estate loans to 95% of the lower of the appraised value of the property or the purchase price, with the condition that private mortgage insurance is required on loans with loan to valueloan-to-value ratios in excess of 80%. Substantially all loans upon origination have a loan to value ratio of less than 80%. Underwriting criteria for residential real estate loans include: evaluation of the borrower’s ability to make monthly payments, 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, all debt servicing does not exceed 36% of income, acceptable credit reports, verification of employment, income, and financial information. Appraisals are performed by independent appraisers and reviewed internally. All mortgage loan requests are reviewed by aour mortgage loan committee or through a secondary market automated underwriting system; loans in excess of $400$500 require the approval of the Bank’sour Internal Loan Committee, the Executive Loan Committee, the Board of Directors,Directors’ Loan Committee, or the Board of Director’s Loan Committee.

Directors.

Consumer loans include automobile loans, secured and unsecured personal loans, and overdraft protection related loans. Loans are amortized generally for a period of up to 6 years.12 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 management believeswe believe the uncollectibilityuncollectability of the loan balance is confirmed. Subsequent recoveries, if any, are credited to the allowance.

ALLL.

The ALLL is evaluated on a regular basis by management and is based upon management’sa periodic review of the collectibilitycollectability of the loans in light of 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 net realizableloan’s outstanding balance to the present value of expected future cash flows discounted at the loan’s effective interest rate, the loan’s obtainable market price, or the fair value of the loan’s underlying collateral, or the net present value of the projected payment stream and its recorded investment.less cost to sell. Historical loss allocations arewere calculated at the loan class and segment levels based on a migration analysis of the loan portfolio over the preceding threefive years. An unallocated component is maintained to cover uncertainties that management believeswe believe affect itsour estimate of probable losses based on qualitative factors. 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.


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Allowance for Loan Losses

A summary of changes in the allowance for loan losses (ALLL)ALLL and the recorded investment in loans by segments follows:

Allowance for Credit Losses and Recorded Investment in Loans 
Year Ended December 31, 2011 
   Commercial  Agricultural  Residential
Real
Estate		  Consumer  Unallocated  Total 

Allowance for loan losses

       

January 1, 2011

  $6,048   $1,033   $3,198   $605   $1,489   $12,373  

Loans charged off

   (1,863)   (121)   (2,240)   (552)   —    (4,776) 

Recoveries

   460    1    177    314    —    952  

Provision for loan losses

   1,639    90    1,845    266    (14)   3,826  
  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

December 31, 2011

  $6,284   $1,003   $2,980   $633   $1,475   $12,375  
  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Allowance for loan losses as of December 31, 2011

       

Individually evaluated for impairment

  $2,152   $822   $1,146   $—   $—   $4,120  

Collectively evaluated for impairment

   4,132    181    1,834    633    1,475    8,255  
  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Total

  $6,284   $1,003   $2,980   $633   $1,475   $12,375  
  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Loans as of December 31, 2011

       

Individually evaluated for impairment

  $14,097   $3,384   $7,664   $105    $25,250  

Collectively evaluated for impairment

   351,617    71,261    270,696    31,467     725,041  
  

 

 

  

 

 

  

 

 

  

 

 

   

 

 

 

Total

  $365,714   $74,645   $278,360   $31,572    $750,291  
  

 

 

  

 

 

  

 

 

  

 

 

   

 

 

 

Allowance for Credit Losses and Recorded Investment in Loans

 
Year Ended December 31, 2010 
   Commercial  Agricultural   Residential
Real Estate		  Consumer  Unallocated  Total 

Allowance for loan losses

        

January 1, 2010

  $5,531   $731    $3,590   $626   $2,501   $12,979  

Loans charged off

   (3,731)   —     (2,524)   (596)   —    (6,851) 

Recoveries

   452    1     638    297    —    1,388  

Provision for loan losses

   3,796    301     1,494    278    (1,012)   4,857  
  

 

 

  

 

 

   

 

 

  

 

 

  

 

 

  

 

 

 

December 31, 2010

  $6,048   $1,033    $3,198   $605   $1,489   $12,373  
  

 

 

  

 

 

   

 

 

  

 

 

  

 

 

  

 

 

 

Allowance for loan losses as of December 31, 2010

        

Individually evaluated for impairment

  $490   $558    $732   $—   $—   $1,780  

Collectively evaluated for impairment

   5,558    475     2,466    605    1,489    10,593  
  

 

 

  

 

 

   

 

 

  

 

 

  

 

 

  

 

 

 

Total

  $6,048   $1,033    $3,198   $605   $1,489   $12,373  
  

 

 

  

 

 

   

 

 

  

 

 

  

 

 

  

 

 

 

Loans as of December 31, 2010

        

Individually evaluated for impairment

  $4,939   $2,196    $4,865   $48    $12,048  

Collectively evaluated for impairment

   343,913    69,250     279,164    30,929     723,256  
  

 

 

  

 

 

   

 

 

  

 

 

   

 

 

 

Total

  $348,852   $71,446    $284,029   $30,977    $735,304  
  

 

 

  

 

 

   

 

 

  

 

 

   

 

 

 

Following is a summary


Allowance for Loan Losses
 Year Ended December 31, 2014
 Commercial Agricultural Residential Real Estate Consumer Unallocated Total
January 1, 2014$6,048
 $434
 $3,845
 $639
 $534
 $11,500
Charge-offs(559) (31) (722) (316) —
 (1,628)
Recoveries550
 —
 197
 149
 —
 896
Provision for loan losses(2,216) (187) 918
 173
 644
 (668)
December 31, 2014$3,823
 $216
 $4,238
 $645
 $1,178
 $10,100

Allowance for Loan Losses and Recorded Investment in Loans
 As of December 31, 2014
 Commercial Agricultural Residential Real Estate Consumer Unallocated Total
ALLL           
Individually evaluated for impairment$1,283
 $—
 $2,143
 $1
 $—
 $3,427
Collectively evaluated for impairment2,540
 216
 2,095
 644
 1,178
 6,673
Total$3,823
 $216
 $4,238
 $645
 $1,178
 $10,100
Loans           
Individually evaluated for impairment$12,029
 $1,595
 $12,160
 $64
   $25,848
Collectively evaluated for impairment419,932
 103,126
 252,435
 32,241
   807,734
Total$431,961
 $104,721
 $264,595
 $32,305
   $833,582
 Allowance for Loan Losses
 Year Ended December 31, 2013

Commercial Agricultural Residential Real Estate Consumer Unallocated Total
January 1, 2013$6,862
 $407
 $3,627
 $666
 $374
 $11,936
Charge-offs(895) (12) (1,004) (429) —
 (2,340)
Recoveries363
 —
 181
 249
 —
 793
Provision for loan losses(282) 39
 1,041
 153
 160
 1,111
December 31, 2013$6,048
 $434
 $3,845
 $639
 $534
 $11,500

Allowance for Loan Losses and Recorded Investment in Loans
 As of December 31, 2013
 Commercial Agricultural Residential Real Estate Consumer Unallocated Total
ALLL           
Individually evaluated for impairment$2,035
 $30
 $2,287
 $—
 $—
 $4,352
Collectively evaluated for impairment4,013
 404
 1,558
 639
 534
 7,148
Total$6,048
 $434
 $3,845
 $639
 $534
 $11,500
Loans           
Individually evaluated for impairment$13,816
 $1,538
 $14,302
 $119
   $29,775
Collectively evaluated for impairment378,288
 91,051
 275,629
 33,294
   778,262
Total$392,104
 $92,589
 $289,931
 $33,413
   $808,037

67

Table of changes in the ALLL for the year ended December 31, 2009:

January 1, 2009

  $11,982  

Loans charged off

   (6,642) 

Recoveries

   1,546  

Provision for loan losses

   6,093  
  

 

 

 

December 31, 2009

  $12,979  
  

 

 

 

Contents


Credit Quality Indicators

The following table displays the credit quality indicators for commercial and agricultural credit exposures based on internally assigned credit risk ratings as of December 31:

   2011 
   Commercial   Agricultural 
   Real Estate   Other   Total   Real Estate   Other   Total 

Rating

            

2 — High quality

  $11,113    $11,013    $22,126    $3,583    $1,390    $4,973  

3 — High satisfactory

   90,064     29,972     120,036     11,154     5,186     16,340  

4 — Low satisfactory

   118,611     57,572     176,183     24,253     15,750     40,003  

5 — Special mention

   15,482     4,200     19,682     3,863     2,907     6,770  

6 — Substandard

   19,017     4,819     23,836     1,640     4,314     5,954  

7 — Vulnerable

   187     —     187     —     —     —  

8 — Doubtful

   3,621     43     3,664     190     415     605  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total

  $258,095    $107,619    $365,714    $44,683    $29,962    $74,645  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

   2010 
   Commercial   Agricultural 
   Real Estate   Other   Total   Real Estate   Other   Total 

Rating

            

2 — High quality

  $10,995    $13,525    $24,520    $3,792    $1,134    $4,926  

3 — High satisfactory

   74,912     30,322     105,234     11,247     3,235     14,482  

4 — Low satisfactory

   119,912     57,403     177,315     22,384     14,862     37,246  

5 — Special mention

   19,560     6,507     26,067     4,169     3,356     7,525  

6 — Substandard

   10,234     1,104     11,338     2,654     4,613     7,267  

7 — Vulnerable

   3,339     54     3,393     —     —     —  

8 — Doubtful

   858     127     985     —     —     —  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total

  $239,810    $109,042    $348,852    $44,246    $27,200    $71,446  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 2014
 Commercial Agricultural

Real Estate Other Total Real Estate Other Total
Rating           
1 - Excellent$—
 $492
 $492
 $—
 $—
 $—
2 - High quality13,620
 14,423
 28,043
 5,806
 3,582
 9,388
3 - High satisfactory94,556
 51,230
 145,786
 28,715
 12,170
 40,885
4 - Low satisfactory184,000
 49,869
 233,869
 33,361
 17,560
 50,921
5 - Special mention8,456
 1,322
 9,778
 1,607
 65
 1,672
6 - Substandard11,055
 123
 11,178
 1,602
 147
 1,749
7 - Vulnerable2,687
 116
 2,803
 106
 —
 106
8 - Doubtful—
 12
 12
 —
 —
 —
Total$314,374
 $117,587
 $431,961
 $71,197
 $33,524
 $104,721
 2013
 Commercial Agricultural

Real Estate Other Total Real Estate Other Total
Rating           
1 - Excellent$—
 $—
 $—
 $—
 $—
 $—
2 - High quality18,671
 14,461
 33,132
 3,527
 3,235
 6,762
3 - High satisfactory91,323
 39,403
 130,726
 26,015
 17,000
 43,015
4 - Low satisfactory149,921
 43,809
 193,730
 26,874
 10,902
 37,776
5 - Special mention13,747
 1,843
 15,590
 1,609
 922
 2,531
6 - Substandard16,974
 473
 17,447
 1,232
 1,273
 2,505
7 - Vulnerable1,041
 238
 1,279
 —
 —
 —
8 - Doubtful183
 17
 200
 —
 —
 —
Total$291,860
 $100,244
 $392,104
 $59,257
 $33,332
 $92,589
Internally assigned credit risk ratings are reviewed, at a minimum, when loans are renewed or when management has knowledge of improvements or deterioration of the credit quality of individual credits. Descriptions of the internally assigned credit risk ratings for commercial and agricultural loans are as follows:

1. EXCELLENT —– Substantially Risk Free

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

High liquidity, strong cash flow, low leverage.

Unquestioned ability to meet all obligations when due.

Experienced management, with management succession in place.

Secured by cash.

2.HIGH QUALITY —– Limited Risk

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

Favorable liquidity and leverage ratios.

Ability to meet all obligations when due.

Management with successful track record.

Steady and satisfactory earnings history.

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

Access to alternative financing.

Well defined primary and secondary source of repayment.

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


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Table of Contents

3.HIGH SATISFACTORY —– Reasonable Risk

Credit with satisfactory financial condition and further characterized by:

Working capital adequate to support operations.

Cash flow sufficient to pay debts as scheduled.

Management experience and depth appear favorable.

Loan performing according to terms.

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

4. LOW SATISFACTORY —– Acceptable Risk

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

Would include most start-up businesses.

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

Management’s abilities are apparent, yet unproven.

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

Loan structure generally in accordance with policy.

If secured, loan collateral coverage is marginal.

Adequate cash flow to service debt, but coverage is low.

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 constitute an unwarranted risk in light of the circumstances surrounding a specific loan:

Downward trend in sales, profit levels, and margins.

Impaired working capital position.

Cash flow is strained in order to meet debt repayment.

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

Shrinking equity cushion.

Diminishing primary source of repayment and questionable secondary source.

Management abilities are questionable.

Weak industry conditions.

Litigation pending against the borrower.

Collateral /or guaranty offers limited protection.

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

6. SUBSTANDARD —– Classified

Credit where the borrower’s current net worth, paying capacity, and value of the collateral pledged is inadequate. There is a distinct possibility that the Corporationwe will implement collection procedures if the loan deficiencies are not corrected. 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.

Collateral provides little or no value.

Requires excessive attention of the loan officer.

Borrower is uncooperative with loan officer.


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Table of Contents

7.VULNERABLE —– Classified

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

Insufficient cash flow to service debt.

Minimal or no payments being received.

Limited options available to avoid the collection process.

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

8. DOUBTFUL —– Workout

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

Normal operations are severely diminished or have ceased.

Seriously impaired cash flow.

Original repayment terms materially altered.

Secondary source of repayment is inadequate.

Survivability as a “going concern” is impossible.

Collection process has begun.

Bankruptcy petition has been filed.

Judgments have been filed.

Portion of the loan balance has been charged-off.

charged-off.

9.    LOSS — Charge off

Credits are 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.

The Corporation’sOur primary credit quality indicatorsindicator for residential real estate and consumer loans is the individual loan’s past due aging. The following tables summarize the Corporation’s past due and current loans as of December 31:

   2011 
   Accruing Interest
and Past Due:		   Nonaccrual   Total
Past Due
and
Nonaccrual		   Current   Total 
          
  30-89   90 Days         
  Days   or More         

Commercial

            

Commercial real estate

  $1,721    $364    $4,176    $6,261    $251,834    $258,095  

Commercial other

   426     3     25     454     107,165     107,619  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total commercial

   2,147     367     4,201     6,715     358,999     365,714  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Agricultural

            

Agricultural real estate

   —     99     189     288     44,395     44,683  

Agricultural other

   2     —     415     417     29,545     29,962  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total agricultural

   2     99     604     705     73,940     74,645  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Residential mortgage

            

Senior liens

   3,004     124     1,292     4,420     213,181     217,601  

Junior liens

   235     40     94     369     20,877     21,246  

Home equity lines of credit

   185     125     198     508     39,005     39,513  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total residential mortgage

   3,424     289     1,584     5,297     273,063     278,360  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Consumer

            

Secured

   158     5     —     163     26,011     26,174  

Unsecured

   23     —     —     23     5,375     5,398  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total consumer

   181     5     —     186     31,386     31,572  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total

  $5,754    $760    $6,389    $12,903    $737,388    $750,291  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

   2010 
   Accruing Interest
and Past Due:		   Nonaccrual   Total
Past Due
and
Nonaccrual		   Current   Total 
          
  30-89   90 Days         
  Days   or More         

Commercial

            

Commercial real estate

  $4,814    $125    $4,001    $8,940    $230,870    $239,810  

Commercial other

   381     —     139     520     108,522     109,042  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total commercial

   5,195     125     4,140     9,460     339,392     348,852  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Agricultural

            

Agricultural real estate

   92     —     —     92     44,154     44,246  

Agricultural other

   4     50     —     54     27,146     27,200  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total agricultural

   96     50     —     146     71,300     71,446  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Residential mortgage

            

Senior liens

   5,265     310     1,421     6,996     213,003     219,999  

Junior liens

   476     —     49     525     26,187     26,712  

Home equity lines of credit

   598     —     —     598     36,720     37,318  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total residential mortgage

   6,339     310     1,470     8,119     275,910     284,029  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Consumer

            

Secured

   298     —     —     298     24,781     25,079  

Unsecured

   10     1     —     11     5,887     5,898  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total consumer

   308     1     —     309     30,668     30,977  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total

  $11,938    $486    $5,610    $18,034    $717,270    $735,304  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

December 31, 2009

  $10,305    $768    $8,522    $19,595    $703,721    $723,316  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 2014
 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$1,155
 $282
 $—
 $2,764
 $4,201
 $310,173
 $314,374
Commercial other153
 24
 2
 116
 295
 117,292
 117,587
Total commercial1,308
 306
 2
 2,880
 4,496
 427,465
 431,961
Agricultural             
Agricultural real estate101
 —
 —
 106
 207
 70,990
 71,197
Agricultural other102
 —
 —
 —
 102
 33,422
 33,524
Total agricultural203
 —
 —
 106
 309
 104,412
 104,721
Residential real estate             
Senior liens1,821
 425
 146
 668
 3,060
 210,138
 213,198
Junior liens235
 18
 —
 130
 383
 10,750
 11,133
Home equity lines of credit468
 20
 —
 250
 738
 39,526
 40,264
Total residential real estate2,524
 463
 146
 1,048
 4,181
 260,414
 264,595
Consumer             
Secured107
 2
 —
 10
 119
 28,229
 28,348
Unsecured19
 —
 —
 —
 19
 3,938
 3,957
Total consumer126
 2
 —
 10
 138
 32,167
 32,305
Total$4,161
 $771
 $148
 $4,044
 $9,124
 $824,458
 $833,582

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Table of Contents

 2013
 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$1,226
 $296
 $—
 $1,136
 $2,658
 $289,202
 $291,860
Commercial other368
 15
 13
 238
 634
 99,610
 100,244
Total commercial1,594
 311
 13
 1,374
 3,292
 388,812
 392,104
Agricultural             
Agricultural real estate34
 295
 —
 —
 329
 58,928
 59,257
Agricultural other—
 —
 —
 —
 —
 33,332
 33,332
Total agricultural34
 295
 —
 —
 329
 92,260
 92,589
Residential real estate             
Senior liens3,441
 986
 129
 1,765
 6,321
 229,865
 236,186
Junior liens408
 44
 —
 29
 481
 13,074
 13,555
Home equity lines of credit181
 —
 —
 25
 206
 39,984
 40,190
Total residential real estate4,030
 1,030
 129
 1,819
 7,008
 282,923
 289,931
Consumer             
Secured167
 11
 —
 50
 228
 28,444
 28,672
Unsecured25
 5
 —
 1
 31
 4,710
 4,741
Total consumer192
 16
 —
 51
 259
 33,154
 33,413
Total$5,850
 $1,652
 $142
 $3,244
 $10,888
 $797,149
 $808,037
Impaired Loans

As a result of adopting the amendments in ASU No. 2011-02, the Corporation reassessed all loan restructurings that occurred on or after January 1, 2011 for identification as troubled debt restructurings (TDR’s). The Corporation identified as TDR’s certain loans for which the allowance for loan losses had previously been measured under a general allowance for loan losses methodology. Upon identifying those loans as TDR’s, the Corporation classified them as impaired. The amendments in ASU No. 2011-02 require retrospective application of the impairment measurement guidance for those loans newly identified as impaired during the period. The Corporation’s recorded investment in loans for which the allowance for credit losses was previously measured under a general allowance for credit losses methodology and are now impaired was $5,136, with a specific valuation allowance of $1,022 as of December 31, 2011.

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

1.   There has been a chargeoff 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.

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 loanloan-by-loan basis for commercial commercial real estate loans,and agricultural or agricultural mortgage loans by eithercomparing the loan’s outstanding balance to the present value of expected future cash flows discounted at the loan’s effective interest rate, the loan’s obtainable market price, or the fair value of the collateral, less cost to sell, if the loan is collateral dependent. Large groups of smaller balance homogeneous loans are collectively evaluated for impairment.

Interest Impairment is measured on a loan-by-loan basis for residential real estate and consumer loans 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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Table of Contents

We do not recognize interest income is recognized on impaired loans in nonaccrual status on the cash basis, but only after all principal has been collected. status. For impaired loans not in nonaccrual status, interest income is recognized daily, as earned, according to the terms of the loan agreement.

The following is a summary of information pertaining to impaired loans as of, and for the yearyears ended, December 31:

   2011   2011 Year to Date 
   Outstanding
Balance		   Unpaid
Principal
Balance		   Valuation
Allowance		   Average
Outstanding
Balance		   Interest
Income
Recognized		 

Impaired loans with a valuation allowance

          

Commercial real estate

  $5,014    $5,142    $1,881    $4,012    $247  

Commercial other

   734     734     271     376     25  

Agricultural real estate

   —     —     —     9     —  

Agricultural other

   2,689     2,689     822     2,443     138  

Residential mortgage senior liens

   7,269     8,825     1,111     5,781     331  

Residential mortgage junior liens

   195     260     35     184     11  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total impaired loans with a valuation allowance

   15,901     17,650     4,120     12,805     752  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Impaired loans without a valuation allowance

          

Commercial real estate

   7,984     10,570       4,863     375  

Commercial other

   365     460       267     10  

Agricultural real estate

   190     190       180     —  

Agricultural other

   505     625       253     18  

Residential mortgage senior liens

   2     2       202     —  

Home equity lines of credit

   198     498       99     12  

Consumer secured

   105     114       77     4  
  

 

 

   

 

 

     

 

 

   

 

 

 

Total impaired loans without a valuation allowance

   9,349     12,459       5,941     419  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Impaired loans

          

Commercial

   14,097     16,906     2,152     9,518     657  

Agricultural

   3,384     3,504     822     2,885     156  

Residential mortgage

   7,664     9,585     1,146     6,266     354  

Consumer

   105     114     —     77     4  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total impaired loans

  $25,250    $30,109    $4,120    $18,746    $1,171  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

   2010   2010 Year to Date 
   Outstanding
Balance		   Unpaid
Principal
Balance		   Valuation
Allowance		   Average
Outstanding
Balance		   Interest
Income
Recognized		 

Impaired loans with a valuation allowance

          

Commercial real estate

  $3,010    $4,110    $472    $2,482    $90  

Commercial other

   18     18     18     259     1  

Agricultural other

   2,196     2,196     558     1,098     143  

Residential mortgage senior liens

   4,292     5,236     698     5,045     187  

Residential mortgage junior liens

   172     250     34     205     7  

Consumer

   —     —     —     12     —  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total impaired loans with a valuation allowance

   9,688     11,810     1,780     9,101     428  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Impaired loans without a valuation allowance

          

Commercial real estate

   1,742     2,669       2,738     147  

Commercial other

   169     269       145     20  

Agricultural real estate

   —     —       106     —  

Residential mortgage senior liens

   401     501       201     26  

Home equity lines of credit

   —     —       8     —  

Consumer secured

   48     85       55     5  
  

 

 

   

 

 

     

 

 

   

 

 

 

Total impaired loans without a valuation allowance

   2,360     3,524       3,253     198  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Impaired loans

          

Commercial

   4,939     7,066     490     5,624     258  

Agricultural

   2,196     2,196     558     1,204     143  

Residential mortgage

   4,865     5,987     732     5,459     220  

Consumer

   48     85     —     67     5  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total impaired loans

  $12,048    $15,334    $1,780    $12,354    $626  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

   2009 

Impaired loans with a valuation allowance

  $3,757  

Impaired loans without a valuation allowance

   8,897  
  

 

 

 

Total impaired loans

  $12,654  
  

 

 

 

Valuation allowance related to impaired loans

  $612  

Year to date average outstanding balance of impaired loans

  $13,249  

Year to date interest income recognized on impared loans

  $340  

The Corporation

 2014

Outstanding Balance Unpaid Principal Balance Valuation Allowance Average Outstanding Balance Interest Income Recognized
Impaired loans with a valuation allowance         
Commercial real estate$7,115
 $7,234
 $1,279
 $6,958
 $392
Commercial other609
 828
 4
 704
 51
Agricultural real estate—
 —
 —
 85
 —
Agricultural other—
 —
 —
 —
 —
Residential real estate senior liens11,645
 12,782
 2,015
 12,713
 509
Residential real estate junior liens265
 275
 53
 133
 —
Home equity lines of credit250
 650
 75
 229
 21
Consumer secured54
 54
 1
 68
 4
Total impaired loans with a valuation allowance19,938
 21,823
 3,427
 20,890
 977
Impaired loans without a valuation allowance         
Commercial real estate4,116
 4,462
   4,997
 309
Commercial other189
 212
   360
 17
Agricultural real estate1,529
 1,529
   1,455
 89
Agricultural other66
 186
   100
 30
Home equity lines of credit—
 —
   24
 —
Consumer secured10
 10
   6
 —
Total impaired loans without a valuation allowance5,910
 6,399
 

 6,942
 445
Impaired loans         
Commercial12,029
 12,736
 1,283
 13,019
 769
Agricultural1,595
 1,715
 —
 1,640
 119
Residential real estate12,160
 13,707
 2,143
 13,099
 530
Consumer64
 64
 1
 74
 4
Total impaired loans$25,848
 $28,222
 $3,427
 $27,832
 $1,422

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Table of Contents

 2013

Outstanding Balance Unpaid Principal Balance Valuation Allowance Average Outstanding Balance Interest Income Recognized
Impaired loans with a valuation allowance         
Commercial real estate$6,748
 $6,888
 $1,915
 $7,256
 $400
Commercial other521
 521
 120
 879
 51
Agricultural real estate90
 90
 30
 91
 4
Agricultural other—
 —
 —
 53
 —
Residential real estate senior liens14,061
 15,315
 2,278
 11,111
 442
Residential real estate junior liens48
 64
 9
 80
 2
Home equity lines of credit—
 —
 —
 —
 —
Consumer secured—
 —
 —
 —
 —
Total impaired loans with a valuation allowance21,468
 22,878
 4,352
 19,470
 899
Impaired loans without a valuation allowance         
Commercial real estate5,622
 6,499
   4,312
 337
Commercial other925
 1,035
   989
 83
Agricultural real estate1,370
 1,370
   320
 28
Agricultural other78
 198
   357
 (7)
Home equity lines of credit193
 493
   180
 16
Consumer secured119
 148
   72
 2
Total impaired loans without a valuation allowance8,307
 9,743
   6,230
 459
Impaired loans         
Commercial13,816
 14,943
 2,035
 13,436
 871
Agricultural1,538
 1,658
 30
 821
 25
Residential real estate14,302
 15,872
 2,287
 11,371
 460
Consumer119
 148
 —
 72
 2
Total impaired loans$29,775
 $32,621
 $4,352
 $25,700
 $1,358
As of December 31, 2014 and December 31, 2013, we had committed to advance $243$0 and $134, respectively, in connection with impaired loans, which include TDR’s, as of December 31, 2011. No additional funds were committed to be advanced in connection with impaired loans, as of December 31, 2010.

TDRs.

Troubled Debt Restructurings

Loan modifications are considered to be TDR’sTDRs 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:

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

2.  Extending the amortization period beyond typical lending guidelines for debt with similar risk characteristics.

3.  Forbearance of principal.

4.  Forbearance of accrued interest.

1.Agreeing to interest rates below prevailing market rates for debt with similar risk characteristics.
2.Extending the amortization period beyond typical lending guidelines for loans with similar risk characteristics.
3.Forgiving principal.
4.Forgiving accrued interest.
To determine if a borrower is experiencing financial difficulties, the Corporation considers if:

1.  factors we consider include:

1.The borrower is currently in default on any of their debt.
2.The borrower would likely default on any of their debt if the concession was not granted.
3.The borrower’s cash flow was insufficient to service all of their debt if the concession was not granted.
4.The borrower has declared, or is in the process of declaring, bankruptcy.
5.The borrower is unlikely to continue as a going concern (if the entity is a business).

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Table of their debt.

2. ��It is likely that the borrower would default on any of their debt if the concession was not granted.

3.  The borrower’s cash flow was sufficient to service all of their debt if the concession was not granted.

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

5.  The borrower is a going concern (if the entity is a business).

Contents


The following is a summary of information pertaining to TDR’s during 2011:

   Number
of
Loans		   Pre-
Modification
Recorded
Investment		   Post-
Modification
Recorded
Investment		 

Commercial

      

Commercial real estate

   1    $408    $408  

Commercial other

   42     12,575     12,132  
  

 

 

   

 

 

   

 

 

 

Total commercial

   43     12,983     12,540  
  

 

 

   

 

 

   

 

 

 

Agricultural other

   8     1,321     1,321  

Residential mortgage senior liens

   36     3,915     3,865  

Consumer

      

Secured

   7     69     69  

Unsecured

   2     20     20  
  

 

 

   

 

 

   

 

 

 

Total consumer

   9     89     89  
  

 

 

   

 

 

   

 

 

 

Total

  $96    $18,308    $17,815  
  

 

 

   

 

 

   

 

 

 

TDRs granted in the years ended December 31:

 2014 2013

Number of Loans Pre-Modification Recorded Investment Post-Modification Recorded Investment Number of Loans Pre-Modification Recorded Investment Post-Modification Recorded Investment
Commercial other9
 $1,533
 $1,533
 18
 $5,299
 $5,103
Agricultural other1
 49
 49
 4
 1,379
 1,379
Residential real estate           
Senior liens15
 1,011
 1,011
 55
 6,069
 6,053
Junior liens4
 233
 233
 1
 20
 20
Home equity lines of credit1
 160
 160
 —
 —
 —
Total residential real estate20
 1,404
 1,404
 56
 6,089
 6,073
Consumer           
Secured—
 —
 —
 1
 27
 27
Unsecured4
 18
 18
 2
 34
 34
Total consumer4
 18
 18
 3
 61
 61
Total34
 $3,004
 $3,004
 81
 $12,828
 $12,616
The following tables summarize concessions we granted by the Corporation to borrowers in financial difficulties during 2011:

   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		 

Commercial

        

Commercial real estate

   1    $408     —    $—  

Commercial other

   38     9,932     4     2,643  
  

 

 

   

 

 

   

 

 

   

 

 

 

Total commercial

   39     10,340     4     2,643  
  

 

 

   

 

 

   

 

 

   

 

 

 

Agricultural other

   8     1,321     —     —  

Residential mortgage Senior liens

   19     2,161     17     1,754  

Consumer

        

Secured

   6     65     1     4  

Unsecured

   —     —     2     20  
  

 

 

   

 

 

   

 

 

   

 

 

 

Total consumer

   6     65     3     24  
  

 

 

   

 

 

   

 

 

   

 

 

 

Total

   72    $13,887     24    $4,421  
  

 

 

   

 

 

   

 

 

   

 

 

 

The Corporationdifficulty in the years ended December 31:

 2014 2013

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 other8
 $1,525
 1
 $8
 12
 $3,070
 6
 $2,229
Agricultural other—
 —
 1
 49
 4
 1,379
 —
 —
Residential real estate               
Senior liens3
 97
 12
 914
 24
 1,904
 31
 4,165
Junior liens2
 152
 2
 81
 —
 —
 1
 20
Home equity lines of credit1
 160
 —
 —
 —
 —
 —
 —
Total residential real estate6
 409
 14
 995
 24
 1,904
 32
 4,185
Consumer               
Secured—
 —
 —
 —
 1
 27
 —
 —
Unsecured3
 15
 1
 3
 1
 16
 1
 18
Total Consumer3
 15
 1
 3
 2
 43
 1
 18
Total17
 $1,949
 17
 $1,055
 42
 $6,396
 39
 $6,432
We did not restructure any loans through the forbearance ofby forgiving principal or accrued interest during 2011.

2014 or 2013.

Based on the Corporation’sour historical loss experience, losses associated with TDR’sTDRs are not significantly different than other impaired loans within the same loan segment. As such, TDR’s,TDRs, including TDR’sTDRs 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. The Corporation had no

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Table of Contents

Following is a summary of loans that defaulted in the years ended December 31, which were modified as troubled debt restructurings since January 1, 2010 that subsequently defaulted.

within 12 months prior to the default date:

 2014 2013

Number of Loans Pre-
Default
Recorded
Investment		 Charge-Off
Recorded
Upon
Default		 Post-
Default
Recorded
Investment		 Number of Loans Pre-
Default
Recorded
Investment		 Charge-Off
Recorded
Upon
Default		 Post-
Default
Recorded
Investment
Residential real estate senior liens—
 $—
 $—
 $—
 1
 $62
 $11
 $51
Consumer unsecured2
 7
 7
 —
 1
 16
 16
 —
Total2
 $7
 $7
 $—
 2
 $78
 $27
 $51
The following is a summary of TDR loan balances as of December 31:

   2011   2010   2009 

Troubled debt restructurings

  $18,756    $5,763    $4,977  

 2014 2013
TDRs$23,341
 $25,865
Note 6 – Premises and Equipment
NOTE 7 — PREMISES AND EQUIPMENT

A summary of premises and equipment at December 31 follows:

   2011   2010 

Land

  $5,174    $4,694  

Buildings and improvements

   22,397     21,502  

Furniture and equipment

   26,926     25,822  
  

 

 

   

 

 

 

Total

   54,497     52,018  

Less: accumulated depreciation

   29,871     27,391  
  

 

 

   

 

 

 

Premises and equipment, net

  $24,626    $24,627  
  

 

 

   

 

 

 


2014 2013
Land$5,429
 $5,429
Buildings and improvements25,441
 24,765
Furniture and equipment31,011
 30,128
Total61,881
 60,322
Less: accumulated depreciation36,000
 34,603
Premises and equipment, net$25,881
 $25,719
Depreciation expense amounted to $2,521, $2,522$2,551, $2,556, and $2,349$2,417 in 2011, 2010,2014, 2013, and 2009,2012, respectively.

NOTE 8 — GOODWILL AND OTHER INTANGIBLE ASSETS

Note 7 – Goodwill and Other Intangible Assets
The carrying amount of goodwill was $45,618 at December 31, 20112014 and 2010.

2013.

Identifiable intangible assets at year end were as follows:

   2011 
   Gross
Intangible
Assets		   Accumulated
Amortization		   Net
Intangible
Assets		 

Core deposit premium resulting from acquisitions

  $5,373    $4,199    $1,174  

   2010 
   Gross
Intangible
Assets		   Accumulated
Amortization		   Net
Intangible
Assets		 

Core deposit premium resultingfrom acquisitions

  $5,373    $3,900    $1,473  

follows as of December 31:

 2014
 Gross
Intangible
Assets		 Accumulated
Amortization		 Net
Intangible
Assets
Core deposit premium resulting from acquisitions$5,373
 $4,863
 $510
 2013
 Gross
Intangible
Assets		 Accumulated
Amortization		 Net
Intangible
Assets
Core deposit premium resulting from acquisitions$5,373
 $4,680
 $693
Amortization expense associated with identifiable intangible assets was $299, $338,$183, $221, and $375$260 in 2011, 2010,2014, 2013, and 2009,2012, respectively.


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Table of Contents

Estimated amortization expense associated with identifiable intangibles for each of the next five years succeeding December 31, 2011,2014, and thereafter is as follows:

Year

  Amount 

2012

  $260  

2013

   221  

2014

   183  

2015

   145  

2016

   106  

Thereafter

   259  
  

 

 

 
  $1,174  
  

 

 

 


Estimated Amortization Expense
2015$145
2016106
201774
201862
201949
Thereafter74
Total$510
Note 8 – Deposits
NOTE 9 — DEPOSITS

Scheduled maturities of time deposits for the next five years, and thereafter, are as follows:

Year

  Amount 

2012

  $265,299  

2013

   63,290  

2014

   46,802  

2015

   55,493  

2016

   43,601  

Thereafter

   7,052  
  

 

 

 
  $481,537  
  

 

 

 


Scheduled Maturities of Time Deposits
2015$217,505
201675,192
201756,391
201850,550
201922,901
Thereafter17,723
Total$440,262
Interest expense on time deposits greater than $100 was $4,302$2,920 in 2011, $4,4272014, $3,203 in 2010,2013 and $5,246$3,854 in 2009.

2012.

Note 9 – Borrowed Funds
NOTE 10 — BORROWED FUNDS

Borrowed funds consist of the following obligations at December 31:

   2011  2010 
   Amount   Rate  Amount   Rate 

Federal Home Loan Bank advances

  $142,242     3.16%  $113,423     3.64% 

Securities sold under agreements to repurchase without stated maturity dates

   57,198     0.25%   45,871     0.25% 

Securities sold under agreements to repurchase with stated maturity dates

   16,696     3.51%   19,623     3.28% 

Federal funds purchased

   —     —    16,000     0.60% 
  

 

 

   

 

 

  

 

 

   

 

 

 

Total

  $216,136     2.42%  $194,917     2.56% 
  

 

 

   

 

 

  

 

 

   

 

 

 

The Federal Home Loan Bank borrowings

 2014 2013

Amount Rate Amount Rate
FHLB advances$192,000
 2.05% $162,000
 2.02%
Securities sold under agreements to repurchase without stated maturity dates95,070
 0.14% 106,025
 0.13%
Securities sold under agreements to repurchase with stated maturity dates439
 3.25% 11,301
 3.30%
Federal funds purchased2,200
 0.50% —
 —
Total$289,709
 1.41% $279,326
 1.35%
FHLB advances are collateralized by U.S. government and federal agency securities and a blanket lien on all qualified 1-to-41-4 family mortgage loans. Advances are also secured by residential real estate loans, AFS securities, and FHLB stock owned by the Corporation. stock.

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Table of Contents

The Corporation hadfollowing table lists the ability to borrow up to an additional $110,069, based on the assets currently pledged as collateral.

The maturity and weighted average interest rates of FHLB advances are as follows as of December 31:

   2011  2010 
   Amount   Rate  Amount   Rate 

Fixed rate advances due 2011

  $—     —   $10,086     3.96% 

One year putable advances due 2011

   —     —    1,000     4.75% 

Fixed rate advances due 2012

   17,000     2.97%   17,000     2.97% 

One year putable advances due 2012

   15,000     4.10%   15,000     4.10% 

Fixed rate advances due 2013

   5,242     4.14%   5,337     4.14% 

One year putable advances due 2013

   5,000     3.15%   5,000     3.15% 

Fixed rate advances due 2014

   25,000     3.16%   25,000     3.16% 

Fixed rate advances due 2015

   45,000     3.30%   25,000     4.63% 

Fixed rate advances due 2016

   10,000     2.15%   —     —  

Fixed rate advances due 2017

   20,000     2.56%   10,000     2.35% 
  

 

 

   

 

 

  

 

 

   

 

 

 

Total

  $142,242     3.16%  $113,423     3.64% 
  

 

 

   

 

 

  

 

 

   

 

 

 

 2014 2013

Amount Rate Amount Rate
Fixed rate advances due 2014$—
 —
 $10,000
 0.48%
Fixed rate advances due 201542,000
 0.72% 32,000
 0.84%
Fixed rate advances due 201610,000
 2.15% 10,000
 2.15%
Fixed rate advances due 201730,000
 1.95% 30,000
 1.95%
Fixed rate advances due 201840,000
 2.35% 40,000
 2.35%
Fixed rate advances due 201920,000
 3.11% 20,000
 3.11%
Fixed rate advances due 202010,000
 1.98% 10,000
 1.98%
Fixed rate advances due 202130,000
 2.26% —
 —
Fixed rate advances due 202310,000
 3.90% 10,000
 3.90%
Total$192,000
 2.05% $162,000
 2.02%
Securities sold under agreements to repurchase are classified as secured borrowings. Securities sold under agreements to repurchase without stated maturity dates generally mature within one to four days from the transaction date. Securities sold under agreements to repurchaseborrowings 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 $99,869$135,222 and $86,381$148,930 at December 31, 20112014 and 2010,2013, respectively. Such securities remain under the control of the Corporation. The Corporationour control. We may be required to provide additional collateral based on the fair value of underlying securities.

The following table lists the maturity and weighted average interest rates of securities sold under agreements to repurchase with stated maturity dates are as follows at December 31:

   2011  2010 
   Amount   Rate  Amount   Rate 

Repurchase agreements due 2011

  $—     —   $858     1.51% 

Repurchase agreements due 2012

   428     2.08%   1,013     2.21% 

Repurchase agreements due 2013

   5,000     4.51%   5,127     4.45% 

Repurchase agreements due 2014

   10,869     3.12%   12,087     3.00% 

Repurchase agreements due 2015

   399     3.25%   538     3.25% 
  

 

 

   

 

 

  

 

 

   

 

 

 

Total

  $16,696     3.51%  $19,623     3.28% 
  

 

 

   

 

 

  

 

 

   

 

 

 

 2014 2013
 Amount Rate Amount Rate
Repurchase agreements due 2014$—
 —
 $10,876
 3.30%
Repurchase agreements due 2015439
 3.25% 425
 3.25%
Total$439
 3.25% $11,301
 3.30%
Securities sold under repurchase agreements without stated maturity dates, federal funds purchased, and Federal Reserve Bank discount windowFRB Discount Window advances generally mature within one to four days from the transaction date. The following table provides a summary of short termsecurities sold under repurchase agreements without stated maturity dates, federal funds purchased, and FRB Discount Window advances borrowings for the years ended December 31:

   2011  2010 
   Maximum
Month-End
Balance		   YTD
Average
Balance		   Weighted Average
Interest Rate
During the Period		  Maximum
Month-End
Balance		   YTD
Average
Balance		   Weighted Average
Interest Rate
During the Period		 

Securities sold under agreements to repurchase without stated maturity dates

  $57,198    $45,397     0.25%  $56,410    $44,974     0.28% 

Federal funds purchased

   18,300     3,467     0.51%   16,000     333     0.60% 

Federal Reserve Bank discount window advance

   —     —     —    7,500     103     0.75% 

The Corporation

 2014 2013
 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$95,070
 $91,422
 0.13% $106,025
 $74,602
 0.15%
Federal funds purchased17,700
 4,589
 0.48% 13,700
 4,445
 0.61%
We had pledged certificates of deposit held in other financial institutions, trading securities, available-for-saleAFS securities, and 1-4 family mortgageresidential real estate loans in the following amounts at December 31:

   2011   2010 

Pledged to secure borrowed funds

  $292,092    $297,297  

Pledged to secure repurchase agreements

   99,869     86,381  

Pledged for public deposits and for other purposes necessary or required by law

   26,761     14,626  
  

 

 

   

 

 

 

Total

  $418,722    $398,304  
  

 

 

   

 

 

 

The Corporation


2014 2013
Pledged to secure borrowed funds$324,584
 $320,173
Pledged to secure repurchase agreements135,222
 148,930
Pledged for public deposits and for other purposes necessary or required by law19,851
 20,922
Total$479,657
 $490,025
As of December 31, 2014, we had the ability to borrow up to an additional $112,301, based on assets pledged as collateral. We had no investment securities that are restricted to be pledged for specific purposes.



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Note 10 – Other Noninterest Expenses
NOTE 11 — OTHER NONINTEREST EXPENSES

A summary of expenses included in Other Noninterest Expenses areother noninterest expenses is as follows for the yearyears ended December 31:

   2011   2010   2009 

Marketing and community relations

  $1,174    $1,093    $894  

Directors fees

   842     887     923  

Audit and SOX compliance fees

   714     710     546  

Foreclosed asset and collection

   576     916     831  

Education and travel

   526     499     395  

Printing and supplies

   405     420     529  

Postage and freight

   388     395     472  

Consulting fees

   386     167     201  

Legal fees

   302     382     415  

Amortization of deposit premium

   299     338     375  

All other

   1,573     1,499     1,798  
  

 

 

   

 

 

   

 

 

 

Total other

  $7,185    $7,306    $7,379  
  

 

 

   

 

 

   

 

 

 


2014 2013 2012
Marketing and community relations$1,431
 $1,131
 $1,965
FDIC insurance premiums842
 1,082
 864
Audit and related fees809
 738
 711
Director fees775
 819
 885
Education and travel625
 502
 588
Postage and freight397
 387
 389
Printing and supplies367
 396
 424
Loan underwriting fees361
 423
 403
Consulting fees349
 315
 482
Legal fees320
 359
 268
Other losses250
 109
 300
Amortization of deposit premium183
 221
 260
State taxes171
 140
 187
Foreclosed asset and collection122
 211
 202
All other1,628
 1,517
 1,123
Total other$8,630
 $8,350
 $9,051
Note 11 – Federal Income Taxes
NOTE 12 — FEDERAL INCOME TAXES

Components of the consolidated provision for federal income taxes are as follows for the yearyears ended December 31:

   2011   2010   2009 

Currently payable

  $965    $1,425    $1,487  

Deferred expense (benefit)

   389     179     (641) 
  

 

 

   

 

 

   

 

 

 

Income tax expense

  $1,354    $1,604    $846  
  

 

 

   

 

 

   

 

 

 


2014 2013 2012
Currently payable$2,159
 $3,404
 $1,747
Deferred (benefit) expense185
 (1,208) 616
Income tax expense$2,344
 $2,196
 $2,363

The reconciliation of the provision for federal income taxes and the amount computed at the federal statutory tax rate of 34% of income before federal income taxestax expense is as follows for the yearsyear ended December 31:

   2011  2010  2009 

Income taxes at 34% statutory rate

  $3,932   $3,621   $2,940  

Effect of nontaxable income

    

Interest income on tax exempt municipal bonds

   (1,687)   (1,565)   (1,680) 

Earnings on corporate owned life insurance

   (207)   (225)   (218) 

Other

   (65)   (132)   (249) 
  

 

 

  

 

 

  

 

 

 

Total effect of nontaxable income

   (1,959)   (1,922)   (2,147) 

Effect of tax credits

   (793)   (263)   (134) 

Effect of nondeductible expenses

   174    168    187  
  

 

 

  

 

 

  

 

 

 

Income tax expense

  $1,354   $1,604   $846  
  

 

 

  

 

 

  

 

 

 


2014 2013 2012
Income taxes at 34% statutory rate$5,463
 $5,000
 $4,953
Effect of nontaxable income     
Interest income on tax exempt municipal securities(1,999) (1,746) (1,675)
Earnings on corporate owned life insurance policies(255) (249) (238)
Other(263) (154) (147)
Total effect of nontaxable income(2,517) (2,149) (2,060)
Effect of nondeductible expenses156
 146
 137
Effect of tax credits(758) (801) (667)
Federal income tax expense$2,344
 $2,196
 $2,363

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Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for federal income tax purposes. Significant components of the Corporation'sour deferred tax assets and liabilities, included in other assets in the accompanying consolidated balance sheets, are as follows as of December 31:

   2011   2010 

Deferred tax assets

    

Allowance for loan losses

  $3,278    $3,270  

Deferred directors’ fees

   2,384     2,364  

Employee benefit plans

   158     122  

Core deposit premium and acquisition expenses

   800     694  

Net unrealized losses on trading securities

   364     400  

Net unrecognized actuarial loss on pension plan

   1,780     1,109  

Life insurance death benefit payable

   804     804  

Alternative minimum tax

   729     686  

Other

   260     219  
  

 

 

   

 

 

 

Total deferred tax assets

   10,557     9,668  
  

 

 

   

 

 

 

Deferred tax liabilities

    

Prepaid pension cost

   851     851  

Premises and equipment

   992     902  

Accretion on securities

   34     36  

Core deposit premium and acquisition expenses

   1,102     1,000  

Net unrealized gains on available-for-sale securities

   4,564     847  

Other

   937     518  
  

 

 

   

 

 

 

Total deferred tax liabilities

   8,480     4,154  
  

 

 

   

 

 

 

Net deferred tax assets

  $2,077    $5,514  
  

 

 

   

 

 

 

The Corporation and its subsidiaries


2014 2013
Deferred tax assets   
Allowance for loan losses$2,507
 $2,988
Deferred directors’ fees2,414
 2,313
Employee benefit plans255
 257
Core deposit premium and acquisition expenses1,037
 971
Net unrealized losses on trading securities361
 360
Net unrecognized actuarial losses on pension plan1,962
 1,100
Net unrealized losses on available-for-sale securities—
 1,345
Life insurance death benefit payable804
 804
Alternative minimum tax650
 729
Other203
 321
Total deferred tax assets10,193
 11,188
Deferred tax liabilities   
Prepaid pension cost989
 1,023
Premises and equipment247
 449
Accretion on securities49
 42
Core deposit premium and acquisition expenses1,229
 1,229
Net unrealized gains on available-for-sale securities2,339
 —
Other449
 547
Total deferred tax liabilities5,302
 3,290
Net deferred tax assets$4,891
 $7,898
We are subject to U.S. federal income tax. The Corporation istax; however, we are no longer subject to examination by taxing authorities for years before 2008.2011. There are no material uncertain tax positions requiring recognition in the Corporation’sour consolidated financial statements. The Corporation doesWe do not expect the total amount of unrecognized tax benefits to significantly increase in the next twelve months.

The Corporation recognizes

We recognize interest and/or penalties related to income tax matters in income tax expense. The Corporation doesWe do not have any amounts accrued for interest and penalties at December 31, 20112014 and 20102013 and iswe not aware of any claims for such amounts by federal income tax authorities.

Included in other comprehensive income for 2011 and 2010 are the changes in unrealized losses of $1,719 and unrealized losses of $226, respectively, related to auction rate money market securities and preferred stock. For federal income tax purposes, these securities are considered equity investments for which no federal deferred income taxes are expected or recorded.

NOTE 13 — OFF-BALANCE-SHEET ACTIVITIES

Note 12 – Off-Balance-Sheet Activities
Credit-Related Financial Instruments

The Corporation is

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 itsour customers. These financial instruments, which include commitments to extend credit and standby letters of credit, involve, to

varying degrees, elements of credit and interest rate riskIRR in excess of the amounts recognized in the consolidated balance sheets. The contract or notional amounts of these instruments reflect the extent of involvement the Corporation haswe have in a particular class of financial instrument.

   Contract Amount 
   2011   2010 

Unfunded commitments under lines of credit

  $102,822    $110,201  

Commercial and standby letters of credit

   4,461     4,881  

Commitments to grant loans

   21,806     13,382  

 December 31
 2014 2013
Unfunded commitments under lines of credit$116,935
 $121,959
Commercial and standby letters of credit4,985
 4,169
Commitments to grant loans13,988
 29,096
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. Therefore, the total commitment amounts do not necessarily represent future cash requirements.


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Commercial and standby letters of credit are conditional commitments we issued by the Corporation 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 mature within one year. The credit risk involved in these transactions is essentially the same as that involved in extending loans to customers. The Corporation evaluatesWe evaluate each customer'scustomer’s credit worthiness on a case-by-case basis. The amount of collateral obtained, if deemedwe deem necessary by the Corporation upon the extension of credit, is based on management'sour credit evaluation of the borrower. While the Corporation considerswe consider standby letters of credit to be guarantees, the amount of the liability related to such guarantees on the commitment date is not significant and a liability related to such guarantees is not recorded on the consolidated balance sheets.

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 deemedwe deem necessary, by the Corporation, is based on management’sour credit evaluation of the customer. Commitments to grant loans include loans committed to be sold to the secondary market.

The Corporation’s

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. The Corporation usesWe use the same credit policies in deciding to make these commitments as it doeswe do for extending loans to customers. No significant losses are anticipated as a result of these commitments.

NOTE 14 — ON-BALANCE SHEET ACTIVITIES

Note 13 – On-Balance Sheet Activities
Derivative Loan Commitments

Mortgage loan commitments are referred to as derivative loan commitments if the loan that will result from exercise of the commitment will be held for sale upon funding. The Corporation entersWe enter into commitments to fund residential mortgage loans at specific times in the future, with the intention that these loans will subsequently be sold in the secondary market. A mortgage loan commitment binds the Corporationus to lend funds to a potential borrower at a specified interest rate within a specified period of time, generally up to 60 days after inception of the rate lock.

Outstanding derivative loan commitments expose the Corporationus to the risk that the price of the loans arising from the exercise of the loan commitment might decline from the inception of the rate lock to funding of the loan due to increases in mortgage interest rates. If interest rates increase, the value of these loan commitments decreases. Conversely, if interest rates decrease, the value of these loan commitments increases.increase. The notional amount of undesignated interest rate lock commitments was $875$632 and $547$182 at December 31, 20112014 and 2010,2013, respectively.

Forward Loan Sale Commitments

To protect against the price risk inherent in derivative loan commitments, the Corporation utilizeswe utilize both “mandatory delivery” and “best efforts” forward loan sale commitments to mitigate the risk of potential decreases in the values of loan that would result from the exercise of the derivative loan commitments.

With a “mandatory delivery” contract, the Corporation commitswe commit to deliver a certain principal amount of mortgage loans to an investor at a specified price on or before a specified date. If the Corporation failswe fail to deliver the amount of mortgages necessary to fulfill the commitment by the specified date, it iswe are obligated to pay a “pair-off” fee, based on then current market prices, to the investor to compensate the investor for the shortfall.

With a “best efforts” contract, the Corporation commitswe commit to deliver an individual mortgage loan of a specified principal amount and quality to an investor if the loan to the underlying borrower closes. Generally, the price the investor will pay the seller for an individual loan is specified prior to the loan being funded (e.g. on the same day the lender commits to lend funds to a potential borrower).

The Corporation expects

We expect that these forward loan sale commitments will experience changes in fair value opposite to the change in fair value of derivative loan commitments. The notional amount of undesignated forward loan sale commitments was $4,080$1,533 and $1,729$1,286 at December 31, 20112014 and 2010,2013, respectively.

The fair values of the rate lock loan commitments related to the origination of mortgage loans that will be held for sale and the forward loan sale commitments are deemed insignificant by management and, accordingly, are not recorded in the accompanyingour consolidated financial statements.

NOTE 15 — COMMITMENTS AND OTHER MATTERS


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Note 14 – Commitments and Other Matters
Banking regulations require the Bankus to maintain cash reserve balances in currency or as deposits with the Federal Reserve Bank.FRB. At December 31, 20112014 and 2010,2013, the reserve balances amounted to $821$963 and $470,$910, respectively.

Banking regulations limit the transfer of assets in the form of dividends, loans, or advances from the Bank to the Corporation. At December 31, 2011,2014, substantially all of the Bank’s assets were restricted from transfer to the Corporation in the form of loans or advances. Consequently, bankBank dividends are the principal source of funds for the Corporation. Payment of dividends without regulatory approval is limited to the current yearsyear’s retained net income plus retained net income for the preceding two years, less any required transfers to common stock. At January 1, 2012,2015, the amount available to the Corporation for dividends from the Bank, without regulatory approval, was approximately $13,235.

NOTE 16 — MINIMUM REGULATORY CAPITAL REQUIREMENTS

$22,800.

Note 15 – Minimum Regulatory Capital Requirements
The Corporation (on a consolidated basis) and the Bank are subject to various regulatory capital requirements administered by the Federal Reserve BankFRB and the Federal Deposit Insurance Corporation (the “Regulators”).FDIC. Failure to meet minimum capital requirements can initiate mandatory and possibly additional discretionary actions by the RegulatorsFRB and the FDIC that if undertaken, could have a material effect on the Corporation's and Bank’sour financial statements. Under regulatory capital adequacy guidelines and the regulatory framework for prompt corrective action, the Corporation and the Bankwe must meet specific capital guidelines that include quantitative measures of their assets, liabilities, capital, and certain off-balance-sheet items, as calculated under regulatory accounting standards. The Bank’sOur capital amounts and classifications are also subject to qualitative judgments by the RegulatorsFRB and the FDIC about components, risk weightings, and other factors. Prompt corrective action provisions are not applicable to bank holding companies.

Quantitative measures established by regulation to ensure capital adequacy require the Corporation and the Bankus to maintain minimum amounts and ratios (set forth in the following table) of total and Tier 1 capital (as defined in the regulations) to risk-weighted assets (as defined) and Tier 1 capital to average assets (as defined). Management believes,We believe, as of December 31, 20112014 and 2010,2013, that the Corporation and the Bankwe met all capital adequacy requirements to which they are subject.

requirements.

As of December 31, 2011,2014, the most recent notifications from the RegulatorsFRB and the FDIC categorized the Bankus as well capitalized under the regulatory framework for prompt corrective action. To be categorized as well capitalized, an institution must maintain total risk-based, Tier 1 risk-based, and Tier 1 leverage ratios as set forth in the following tables. There are no conditions or events since the notifications that management believeswe believe has changed the Bank’sour categories. The Corporation's and the Bank'sOur actual capital amounts and ratios are also presented in the table.

   Actual  Minimum
Capital
Requirement		  Minimum To Be
Well Capitalized
Under Prompt
Corrective Action
Provisions		 
   Amount   Ratio  Amount   Ratio  Amount   Ratio 

December 31, 2011

          

Total capital to risk weighted assets

          

Isabella Bank

  $104,542     13.06%  $64,028     8.00%  $80,035     10.00% 

Consolidated

   115,172     14.17    65,009     8.00    N/A     N/A  

Tier 1 capital to risk weighted assets

          

Isabella Bank

   94,508     11.81    32,014     4.00    48,021     6.00  

Consolidated

   104,987     12.92    32,505     4.00    N/A     N/A  

Tier 1 capital to average assets

          

Isabella Bank

   94,508     7.44    50,808     4.00    63,510     5.00  

Consolidated

   104,987     8.18    51,317     4.00    N/A     N/A  
   Actual  Minimum
Capital
Requirement		  Minimum To Be
Well Capitalized
Under Prompt
Corrective Action
Provisions		 
   Amount   Ratio  Amount   Ratio  Amount   Ratio 

December 31, 2010

          

Total capital to risk weighted assets

          

Isabella Bank

  $98,566     12.79%  $61,642     8.00%  $77,053     10.00% 

Consolidated

   108,978     13.97    62,423     8.00    N/A     N/A  

Tier 1 capital to risk weighted assets

          

Isabella Bank

   88,901     11.54    30,821     4.00    46,232     6.00  

Consolidated

   99,192     12.71    31,212     4.00    N/A     N/A  

Tier 1 capital to average assets

          

Isabella Bank

   88,901     7.62    46,653     4.00    58,316     5.00  

Consolidated

   99,192     8.42    47,116     4.00    N/A     N/A  

NOTE 17 — BENEFIT PLANS

 Actual Minimum
Capital
Requirement		 Minimum
To Be Well
Capitalized Under
Prompt Corrective
Action Provisions
 Amount Ratio Amount Ratio Amount Ratio
December 31, 2014           
Total capital to risk weighted assets           
Isabella Bank$128,074
 14.16% $72,341
 8.00% $90,426
 10.00%
Consolidated138,820
 15.18
 73,170
 8.00
 N/A
 N/A
Tier 1 capital to risk weighted assets           
Isabella Bank117,974
 13.05
 36,170
 4.00
 54,255
 6.00
Consolidated128,720
 14.08
 36,585
 4.00
 N/A
 N/A
Tier 1 capital to average assets           
Isabella Bank117,974
 7.96
 59,297
 4.00
 74,121
 5.00
Consolidated128,720
 8.59
 59,908
 4.00
 N/A
 N/A

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 Actual Minimum
Capital
Requirement		 Minimum
To Be Well
Capitalized Under
Prompt Corrective
Action Provisions
 Amount Ratio Amount Ratio Amount Ratio
December 31, 2013           
Total capital to risk weighted assets           
Isabella Bank$120,067
 13.84% $69,390
 8.00% $86,738
 10.00%
Consolidated131,398
 14.92
 70,452
 8.00
 N/A
 N/A
Tier 1 capital to risk weighted assets           
Isabella Bank109,217
 12.59
 34,695
 4.00
 52,043
 6.00
Consolidated120,384
 13.67
 35,226
 4.00
 N/A
 N/A
Tier 1 capital to average assets           
Isabella Bank109,217
 7.75
 56,403
 4.00
 70,504
 5.00
Consolidated120,384
 8.46
 56,932
 4.00
 N/A
 N/A
Note 16 – Benefit Plans
401(k) Plan

The Corporation has

We have a 401(k) plan in which substantially all employees are eligible to participate. Employees may contribute up to 50%100% of their compensation subject to certain limits based on federal tax laws. The Corporation makesplan was amended in 2013 to provide a matching safe harbor contribution for all eligible employees equal to 100% of the first 5.0% of an employee's compensation contributed to the Plan during the year. Employees are 100% vested in the safe harbor matching contributions.
For 2012, we made a 3.0% safe harbor contribution for all eligible employees and matching contributions equal to 50% of the first 4.0% of an employee’s compensation contributed to the Plan during the year. Employees arewere 100% vested in the safe harbor contributions and arewere 0% vested through their first two years of employment and arewere 100% vested after 6 years of service for matching contributions.
For 2011, 20102014, 2013 and 2009,2012, expenses attributable to the Plan were $652, $625,$655, $608, and $617,$662, respectively.

Defined Benefit Pension Plan

The Corporation has

We maintain a non-contributorynoncontributory defined benefit pension plan, which was curtailed ineffective March 1, 2007. Due toAs a result of the curtailment, future salary increases will not beare no longer considered (the projected benefit obligation is equal to the accumulated benefit obligation), and theplan benefits are based on years of service and the employees'individual employee’s five highest consecutive years of compensation out of the last ten years of service rendered through March 1, 2007.


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Changes in the projected benefit obligation and plan assets during each year, the funded status of the plan, and the net amount recognized on the Corporation'sour consolidated balance sheets using an actuarial measurement date of December 31, are summarized as follows during the years ended December 31:

   2011  2010 

Change in benefit obligation

   

Benefit obligation, January 1

  $9,660   $8,897  

Interest cost

   507    531  

Actuarial loss

   1,750    679  

Benefits paid, including plan expenses

   (583)   (447) 
  

 

 

  

 

 

 

Benefit obligation, December 31

   11,334    9,660  
  

 

 

  

 

 

 

Change in plan assets

   

Fair value of plan assets, January 1

   8,900    8,355  

Investment return

   148    945  

Contributions

   138    47  

Benefits paid, including plan expenses

   (583)   (447) 
  

 

 

  

 

 

 

Fair value of plan assets, December 31

   8,603    8,900  
  

 

 

  

 

 

 

Deficiency in funded status at December 31, included on the consolidated balance sheets in accrued interest payable and other liabilities

  $(2,731)  $(760) 
  

 

 

  

 

 

 

   2011  2010 

Change in accrued pension benefit costs

   

Accrued benefit cost at January 1

  $(760)  $(542) 

Contributions

   138    47  

Net periodic cost for the year

   (138)   (193) 

Net change in unrecognized actuarial loss and prior service cost

   (1,971)   (72) 
  

 

 

  

 

 

 

Accrued pension benefit cost at December 31

  $(2,731)  $(760) 
  

 

 

  

 

 

 

Amounts recognized as a component of other comprehensive income (loss) consist of the following amounts during the years ended December 31:

   2011  2010  2009 

Change in unrecognized pension cost

  $(1,971)  $(72)  $374  

Tax effect

   671    25    (127) 
  

 

 

  

 

 

  

 

 

 

Net

  $(1,300)  $(47)  $247  
  

 

 

  

 

 

  

 

 

 

The accumulated benefit obligation was $11,334 and $9,660 at December 31, 2011 and 2010, respectively.

The Company has


2014 2013
Change in benefit obligation   
Benefit obligation, January 1$10,732
 $12,209
Interest cost486
 450
Actuarial (gain) loss3,049
 (1,294)
Benefits paid, including plan expenses(1,017) (633)
Benefit obligation, December 3113,250
 10,732
Change in plan assets   
Fair value of plan assets, January 110,508
 9,650
Investment return699
 1,276
Contributions200
 215
Benefits paid, including plan expenses(1,017) (633)
Fair value of plan assets, December 3110,390
 10,508
Deficiency in funded status at December 31, included on the consolidated balance sheets in accrued interest payable and other liabilities$(2,860) $(224)

2014 2013
Change in accrued pension benefit costs   
Accrued benefit cost at January 1$(224) $(2,559)
Contributions200
 215
Net periodic benefit cost(300) (208)
Net change in unrecognized actuarial loss and prior service cost(2,536) 2,328
Accrued pension benefit cost at December 31$(2,860) $(224)
We have recorded the funded status of the Plan in itsour consolidated balance sheets. The Company adjustsWe adjust the underfunded status in a liability account to reflect the current funded status of the plan. Our liability increased in 2014 as a result of changes in mortality tables and discount rates used to determine the current benefit obligation. Any gains or

losses that arise during the periodyear but are not recognized as components of net periodic benefit cost will beare recognized as a component of other comprehensive income (loss). The components of net periodic benefit cost are as follows for the years ended December 31:

   2011  2010  2009 

Net periodic benefit cost

    

Interest cost on projected benefit obligation

  $507   $531   $504  

Expected return on plan assets

   (522)   (491)   (524) 

Amortization of unrecognized actuarial net loss

   153    153    169  
  

 

 

  

 

 

  

 

 

 

Net periodic benefit cost

  $138   $193   $149  
  

 

 

  

 

 

  

 

 

 


2014 2013 2012
Interest cost on benefit obligation$486
 $450
 $470
Expected return on plan assets(615) (572) (511)
Amortization of unrecognized actuarial net loss169
 330
 292
Settlement loss260
 —
 —
Net periodic benefit cost$300
 $208
 $251
During 2014, an additional settlement loss of $260 was recognized in connection with lump-sum benefits distributions. Many plan participants elect to receive their retirement benefit payments in the form of lump-sum settlements. Pro rata settlement losses, which can occasionally occur as a result of these lump sum distributions, are recognized only in years when the total of such distributions exceed the sum of the service and interest expense components of net periodic benefit cost.
Accumulated other comprehensive income (loss) at December 31, 20112014 includes net unrecognized actuarial lossespension costs before income taxes of $5,233,$5,770, of which $253$241 is expected to be amortized into benefit cost during 2012.

2015.

The actuarial assumptions used in determining the projected benefit obligation are as follows for the yearyears ended December 31:

   2011  2010  2009 

Discount rate

   4.22%   5.36%   5.87% 

Expected long-term rate of return

   6.00%   6.00%   6.00% 


2014 2013 2012
Discount rate3.80% 4.64% 3.75%
Expected long-term rate of return6.00% 6.00% 6.00%

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The actuarial weighted average assumptions used in determining the net periodic pension costs are as follows for the yearyears ended December 31:

   2011  2010  2009 

Discount rate

   5.36%   6.10%   5.87% 

Expected long-term return on plan assets

   6.00%   6.00%   6.00% 


2014 2013 2012
Discount rate4.64% 3.75% 4.22%
Expected long-term return on plan assets6.00% 6.00% 6.00%
As a result of the curtailment of the Plan, there is no rate of compensation increase considered in the above assumptions.

The expected long term rate of return is an estimate of anticipated future long term rates of return on plan assets as measured on a market value basis. Factors considered in arriving at this assumption include:

Historical longerlong term rates of return for broad asset classes.

Actual past rates of return achieved by the plan.

The general mix of assets held by the plan.

The stated investment policy for the plan.

The selected rate of return is net of anticipated investment related expenses.

Plan Assets

The Corporation’s

Our overall investment strategy is to moderately grow the portfolio by investing 50% of the portfolio in equity securities and 50% in fixed income securities. This strategy is designed to generate a long term rate of return of 6.0%6.00%.  Equity securities primarily consist of the S&P 500 Index with a smaller allocation to the Small Cap and International Index.  Fixed income securities are invested in the Bond Market Index.  The Plan has appropriate assets invested in short term investments to meet near-term benefit payments.

The asset mix and the sector weighting of the investments are determined by theour pension committee, which is comprised of members of management ofour management. To manage the Corporation. Consultations are held withPlan, we retain a third party investment advisor retained by the Corporation to manage the Plan. The Corporation reviewsconduct consultations. We review the performance of the advisor no less thanat least annually.

The fair values of the Corporation’sour pension plan assets by asset category were as follows as of December 31:

   2011   2010 

Description

  Total   (Level 2)   Total   (Level 2) 

Asset Category

        

Short-term investments

  $16    $16    $108    $108  

Common collective trusts

        

Fixed income

   4,357     4,357     4,470     4,470  

Equity investments

   4,230     4,230     4,322     4,322  
  

 

 

   

 

 

   

 

 

   

 

 

 
  $8,603    $8,603    $8,900    $8,900  
  

 

 

   

 

 

   

 

 

   

 

 

 

 2014 2013

Total (Level 2) Total (Level 2)
Short-term investments$804
 $804
 $142
 $142
Common collective trusts       
Fixed income4,738
 4,738
 5,064
 5,064
Equity investments4,848
 4,848
 5,302
 5,302
Total$10,390
 $10,390
 $10,508
 $10,508
The following is a description of the valuation methodologies used for assets measured at fair value. There have been no changes in the methodologies used at December 31, 20112014 and 2010:

•

Short-term investments:    Shares of a money market portfolio, which is valued using amortized cost, which approximates fair value.

•

Common collective trusts:    These investments are public investment securities valued using the net asset value (“NAV”)2013:

Short-term investments: Shares of a money market portfolio, which is valued using amortized cost, which approximates fair value.
Common collective trusts: These investments are public investment securities valued using the NAV provided by a third party investment advisor. The NAV is quoted on a private market that is not active; however, the unit price is based on underlying investments which are traded on an active market.

The Corporation anticipatesNAV is quoted on a private market that is not active; however, the unit price is based on underlying investments which are traded on an active market.

We do not anticipate any contributions of $135 to the plan in 2012.

Estimated future benefit payments are as follows for the next ten years:

Year

  Amount 

2012

  $416  

2013

   415  

2014

   508  

2015

   554  

2016

   559  

Years 2017 — 2021

   3,155  

2015.

The components of projected net periodic benefit cost are as follows for the year ended December 31:

   2012 

Interest cost on projected benefit obligation

  $470  

Expected return on plan assets

   (508) 

Amortization of unrecognized actuarial net loss

   291  
  

 

 

 

Net periodic benefit cost

  $253  
  

 

 

 

ending:


December 31, 2015
Interest cost on projected benefit obligation$493
Expected return on plan assets(607)
Amortization of unrecognized actuarial net loss355
Net periodic benefit cost$241

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Estimated future benefit payments are as follows for the next ten years:
 Estimated Benefit Payments
2015$535
2016526
2017555
2018559
2019604
2020 - 20243,425
Equity Compensation Plan

Pursuant to the terms of the Isabella Bank Corporation and Related Companies Deferred CompensationDirectors Plan, for Directors (the “Directors Plan”),our directors of the Corporation and its subsidiaries are required to deferinvest at least 25% of their earned board fees intoin our common stock. These stock investments can be made either through deferred fees or through the purchase of shares through the Dividend Reinvestment Plan. Deferred fees, under the Directors Plan. The feesPlan, are converted on a quarterly basis into the shares of the Corporation'sour common stock based on the fair value of a share of common stock as of the relevant valuation date. Stock credited to a participant'sparticipant’s account is eligible for stock and cash dividends as declared. Upon retirementDividend Reinvestment Plan shares are purchased on a monthly basis pursuant to the Dividend Reinvestment Plan.
Distribution of deferred fees from the boardDirectors Plan occurs when the participant retires from the Board or upon the occurrence of certain other events, theevents. The participant is eligible to receive a lump-sum, in-kind, distribution of all of the stock that is then in his or her account, and any unconverted cash will be converted to and rounded up to whole shares of stock and distributed, as well. The Directors Plan does not allow for cash settlement, and therefore, such share-based payment awards qualify for classification as equity. All authorized but unissued shares of common stock are eligible for issuance under the Directors Plan. The CorporationWe may also purchase shares of common stock on the open market to meet itsour obligations under the Directors Plan.

The Corporation maintains a

We maintain the Rabbi Trust to fund the Directors Plan. AThe Rabbi Trust is an irrevocable grantor trust to which the Corporationwe may contribute assets for the limited purpose of funding a nonqualified deferred compensation plan. Although the Corporationwe may not reach the assets of the Rabbi Trust (“Trust”) for any purpose other than meeting itsour obligations under the Directors Plan, the assets of the Rabbi Trust remain subject to the claims of the Corporation'sour creditors and are included in the consolidated financial statements. The CorporationWe may contribute cash or common stock to the Rabbi Trust from time to time for the sole purpose of funding the Directors Plan. The Rabbi Trust will use any cash that the Corporationwe contributed to purchase shares of the Corporation'sour common stock on the open market through the Corporation'sour brokerage services department.

The components of shares eligible to be issued under the Directors Plan were as follows as of December 31:

   2011   2010 
   Eligible   Fair   Eligible   Fair 
   Shares   Value   Shares   Value 

Unissued

   201,438    $4,774     191,977    $3,321  

Shares held in Rabbi Trust

   16,585     393     32,686     565  
  

 

 

   

 

 

   

 

 

   

 

 

 

Total

   218,023    $5,167     224,663    $3,886  
  

 

 

   

 

 

   

 

 

   

 

 

 


2014 2013
 Eligible
Shares		 Market
Value		 Eligible
Shares		 Market
Value
Unissued173,435
 $3,902
 172,550
 $4,115
Shares held in Rabbi Trust13,934
 314
 12,761
 304
Total187,369
 $4,216
 185,311
 $4,419
Other Employee Benefit Plans

The Corporation maintains

We maintain two nonqualified supplementary employee retirement plans to provide supplemental retirement benefits to specified participants. Expenses related to these programs for 2011, 2010,2014, 2013 and 20092012 were $444, $363,$372, $375, and $343,$382, respectively, and are being recognized over the participants'participants’ expected years of service.

The Corporation maintains

We maintain a non-leveraged employee stock ownership plan (“ESOP”) and a profit sharing planESOP which was frozen to new participants on December 31, 2006. Contributions to the plansplan are discretionary and are approved by the Board of Directors and recorded as compensation expense. During 2009,2012, the Board of Directors approved a contribution of $50$75 to the ESOP. The CorporationWe made no contributions in 20102014 or 2011.2013. Compensation cost related to the plansplan for 2011, 2010,2014, 2013 and 2009 were $20, $0,2012 was $23, $29, and $50,$102, respectively. Total allocated shares outstanding related to the ESOP at December 31, 2011, 2010,2014, 2013, and 20092012 were 246,404, 246,419,241,958, 241,958, and 271,421,246,404, respectively. Such shares are included in the computation of dividends and earnings per share in each of the respective years.

The Corporation maintains


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We maintain a self-funded medical plan under which the Corporation iswe are responsible for the first $50$75 per year of claims made by a covered family. Medical claims are subject to a lifetime maximum of $5,000 per covered individual. Expenses are accrued based on estimates of the aggregate liability for claims incurred and the Corporation'sour experience. Expenses were $2,045$1,786 in 2011, $2,1012014, $2,698 in 20102013 and $2,155$2,534 in 2009.

The Corporation maintains the Isabella Bank Corporation Stockholder Dividend Reinvestment Plan and Employee Stock Purchase Plan (the “Dividend Reinvestment Plan”). The dividend reinvestment feature of the Dividend Reinvestment Plan allows shareholders to purchase previously unissued Isabella Bank Corporation common shares using dividends paid on shares held in the plan. The employee stock purchase feature of the Dividend Reinvestment Plan allows employees and directors to purchase Isabella Bank Corporation common stock through payroll deduction. The shareholder stock purchase feature of the Dividend Reinvestment Plan enables existing shareholders to purchase additional shares of the Corporation’s stock directly from the Corporation. The number of shares reserved for issuance under these plans were 885,000, with 197,719 shares unissued at December 31, 2011. During 2011, 2010 and 2009, 115,359, 124,904, and 126,874 shares were issued for $2,192, $2,203, and $2,396, respectively, in cash pursuant to these plans.

NOTE 18 — ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS)

2012.

Note 17 – Accumulated Other Comprehensive income (loss)Income (Loss)
AOCI includes net income as well as unrealized gains and losses, net of tax, on available-for-saleAFS investment securities owned and changes in the funded status of the Corporation’sour defined benefit pension plan, which are excluded from net income. Unrealized investmentAFS securities gains and losses and changes in the funded status of the pension plan, net of tax, are excluded from net income, and are reflected as a

direct charge or credit to shareholders’ equity. Comprehensive income (loss) and the related components are disclosed in the accompanying consolidated statements of comprehensive incomeincome.

The following table summarizes the changes in AOCI by component for each of the years ended December 31 2011, 2010,(net of tax):

Unrealized
Holding Gains
(Losses) on
AFS
Securities		 Change in Unrecognized Pension Cost on Defined
Benefit
Pension Plan		 Total
Balance, January 1, 2012$5,942
 $(3,453) $2,489
OCI before reclassifications3,921
 (580) 3,341
Amounts reclassified from AOCI(837) 251
 (586)
Subtotal3,084
 (329) 2,755
Tax effect(348) 111
 (237)
OCI, net of tax2,736
 (218) 2,518
Balance, December 31, 20128,678
 (3,671) 5,007
OCI before reclassifications(18,971) 2,120
 (16,851)
Amounts reclassified from AOCI(171) 208
 37
Subtotal(19,142) 2,328
 (16,814)
Tax effect6,257
 (791) 5,466
OCI, net of tax(12,885) 1,537
 (11,348)
Balance, December 31, 2013(4,207) (2,134) (6,341)
OCI before reclassifications11,290
 (2,836) 8,454
Amounts reclassified from AOCI(97) 300
 203
Subtotal11,193
 (2,536) 8,657
Tax effect(3,684) 862
 (2,822)
OCI, net of tax7,509
 (1,674) 5,835
Balance, December 31, 2014$3,302
 $(3,808) $(506)
Included in OCI for the years ended December 31, 2014 and 2009.

The following is a2013 are changes in unrealized holding gains and losses related to auction rate money market preferred and preferred stocks. For federal income tax purposes, these securities are considered equity investments. As such, no deferred federal income taxes related to unrealized holding gains or losses are expected or recorded.


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A summary of the components comprisingof unrealized holding gains on AFS securities included in OCI follows for the balanceyears ended December 31:
 2014 2013 2012

Auction Rate Money Market Preferred and Preferred Stocks All Other AFS Securities Total Auction Rate Money Market Preferred and 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$355
 $10,935
 $11,290
 $(737) $(18,234) $(18,971) $2,059
 $1,862
 $3,921
Reclassification adjustment for net realized (gains) losses included in net income—
 (97) (97) —
 (171) (171) —
 (1,119) (1,119)
Reclassification adjustment for impairment loss included in net income—
 —
 —
 —
 —
 —
 —
 282
 282
Net unrealized gains (losses)355
 10,838
 11,193
 (737) (18,405) (19,142) 2,059
 1,025
 3,084
Tax effect—
 (3,684) (3,684) —
 6,257
 6,257
 —
 (348) (348)
Unrealized gains (losses), net of tax$355
 $7,154
 $7,509
 $(737) $(12,148) $(12,885) $2,059
 $677
 $2,736
The following table details reclassification adjustments and the related affected line items in our consolidated statements of accumulated other comprehensive income (loss) reported onfor the consolidated balance sheets asyears ended December 31:
Details about AOCI componentsAmount
Reclassified from
AOCI		 Affected Line Item in the
Consolidated
Statements of Income

2014 2013 2012  
Unrealized holding gains (losses) on AFS securities       
 $97
 $171
 $1,119
 Net gains (losses) on sale of AFS securities
 —
 —
 (282) Net AFS impairment loss
 97
 171
 837
 Income before federal income tax expense
 33
 58
 285
 Federal income tax expense
 $64
 $113
 $552
 Net income
        
Change in unrecognized pension cost on defined benefit pension plan       
 $300
 $208
 $251
 Compensation and benefits
 102
 71
 85
 Federal income tax expense
 $198
 $137
 $166
 Net income

87

Table of December 31 (presented net of tax):

   2011  2010 

Unrealized gains on available-for-sale investment securities

  $5,942   $444  

Unrecognized pension costs

   (3,453)   (2,153) 
  

 

 

  

 

 

 

Accumulated other comprehensive income (loss)

  $2,489   $(1,709) 
  

 

 

  

 

 

 

Contents


Note 18 – Related Party Transactions
NOTE 19 — RELATED PARTY TRANSACTIONS

In the ordinary course of business, the Corporation grantswe grant loans to principal officers and directors and their affiliates (including their families and companies in which they have 10% or more ownership). Annual activity duringconsisted of the following for the years ended December 31 consisted of the following:

   2011  2010 

Balance, beginning of year

  $4,347   $4,142  

New loans

   1,800    3,038  

Repayments

   (2,419)   (2,833) 
  

 

 

  

 

 

 

Balance, ending of year

  $3,728   $4,347  
  

 

 

  

 

 

 

31:


2014 2013
Balance, January 1$4,178
 $6,598
New loans1,475
 2,373
Repayments(1,831) (4,793)
Balance, December 31$3,822
 $4,178
Total deposits of these principal officers and directors and their affiliates amounted to $7,664$5,861 and $11,556$6,158 at December 31, 20112014 and 2010,2013, respectively. In addition, Isabella Bank Corporation’s Employee Stock Ownership Planthe ESOP held deposits with the Bank aggregating $275$392 and $254,$292, respectively, at December 31, 20112014 and 2010.

NOTE 20 — FAIR VALUE

Estimated Fair Values2013.

From time-to-time, we make charitable donations to the Isabella Bank Foundation (the “Foundation”), which is an affiliated nonprofit entity formed for the purpose of Financial Instruments Not Recorded at Fair Valuedistributing charitable donations to recipient organizations generally located in their Entirety on a Recurring Basis

Disclosurethe communities we service. Donations are expensed when committed to the Foundation. The assets and transactions 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 marketFoundation are not available,included in our consolidated financial statements.

Assets of the Foundation include cash and cash equivalents, certificates of deposit, and shares of Isabella Bank Corporation uses present value techniquescommon stock. The Foundation owned 34,350 and other valuation methods to estimate the fair values16,850 shares of its 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 on the Corporation’s consolidated balance sheets are as followsour common stock as of December 31, 2014 and 2013, respectively. Such shares are included in the computation of dividends and earnings per share.

The following table displays total asset balances of, and our donations to, the Foundation as of, and for the years ended, December 31:

   2011   2010 
   Estimated   Carrying   Estimated   Carrying 
   Fair Value   Value   Fair Value   Value 

ASSETS

  

Cash and demand deposits due from banks

  $28,590    $28,590    $18,109    $18,109  

Certicates of deposit held in other financial institutions

   8,977     8,924     15,908     15,808  

Mortgage loans available-for-sale

   3,252     3,205     1,182     1,182  

Net loans

   756,802     737,916     734,634     722,931  

Accrued interest receivable

   5,848     5,848     5,456     5,456  

Equity securities without readily determinable fair values

   17,189     17,189     17,564     17,564  

Originated mortgage servicing rights

   2,374     2,374     2,673     2,667  

LIABILITIES

  

Deposits without stated maturities

   476,627     476,627     424,978     424,978  

Deposits with stated maturities

   499,644     481,537     454,332     452,361  

Borrowed funds

   222,538     210,894     190,180     184,494  

Accrued interest payable

   967     967     1,003     1,003  

 2014 2013 2012
Total assets$2,090
 $1,815
 $1,766
Donations$500
 $200
 $850
Financial Instruments Recorded atNote 19 – Fair Value

The table below presents the recorded amount of assets and liabilities measured at fair value on December 31:

  2011  2010 

Description

 Total  (Level 1)  (Level 2)  (Level 3)  Total  (Level 2)  (Level 3) 

Recurring items

       

Trading securities

       

States and political subdivisions

 $4,710   $—    4,710   $—   $5,837   $5,837   $—  

Available-for-sale investment securities

       

Government-sponsored enterprises

  397    —    397    —    5,404    5,404    —  

States and political subdivisions

  174,938    —    174,938    —    169,717    169,717    —  

Auction rate money market preferred

  2,049    —    2,049    —    2,865    —    2,865  

Preferred stock

  5,033    5,033    —    —    6,936    —    6,936  

Mortgage-backed

  143,602    —    143,602    —    102,215    102,215    —  

Collateralized mortgage obligations

  99,101    —    99,101    —    43,587    43,587    —  
 

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Total available-for-sale investment securities

  425,120    5,033    420,087    —    330,724    320,923    9,801  

Borrowed funds

  5,242    —    5,242    —    10,423    10,423    —  

Nonrecurring items

       

Impaired loans

  25,250     —    25,250    12,048    —    12,048  

Originated mortgage servicing rights

  2,374    —    2,374    —    2,667    2,667    —  

Foreclosed assets

  1,876    —    1,876    —    2,067    2,067    —  
 

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 
 $464,572   $5,033   $434,289   $25,250   $363,766   $341,917   $21,849  
 

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Percent of assets and liabilities measured at fair value

   1.08%   93.48%   5.44%    93.99%   6.01% 
  

 

 

  

 

 

  

 

 

   

 

 

  

 

 

 

Following is a description of the valuation methodologies, and key inputs, used to measure financial assets and liabilities recorded at fair value, as well as a description of the methods and significant assumptions used to estimate fair value disclosures for financial instruments not recorded at fair value in their entirety on a recurring basis. For financial assets and liabilities recorded at fair value, the description includes an indication of the level of the fair value hierarchy in which the assets or liabilities are classified.

Cash and demand deposits due from banks:cash equivalents

:The carrying amounts of cash and short term investments, including Federal funds sold,demand deposits due from banks and interest bearing balances due from banks approximate fair values.

As such, we classify cash and cash equivalents as Level 1.

Certificates of deposit held in other financial institutions:institutions

Interest bearing balances: Certificates of deposit held in unaffiliatedother financial institutionsinclude certificates of deposit and other short term interest bearing balances that mature within 3 years.years. Fair value is determined using prices for similar assets with similar characteristics.

As such, we classify certificates of deposits held in other financial institutions as Level 2.

InvestmentAFS securities:

Investment 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. Level 2 securities include bonds issued by government sponsored enterprises, states and political subdivisions, mortgage-backed securities, collateralized mortgage obligations issued by government sponsored enterprises, and auction rate money market preferred securities. The values for Level 1 and Level 2 investment securities are generally obtained from an independent third party. On a quarterly basis, management compareswe compare the values provided to alternative pricing sources.

Securities classified as Level 3 in 2010 included securities in less liquid markets and included auction rate money market preferred securities and preferred stocks. Due to the limited trading of these securities during 2010, the Corporation utilized a discounted cash flow analysis to determine fair values on December 31, 2010. This analysis considered the creditworthiness of the counterparty, the timing of expected future cash flows, the current volume of trading activity, and recent trade prices. The discount rates used were determined by using the interest rates of similarly rated financial institution debt based on the weighted average of a range of terms for corporate bond interest rates, which were obtained from published sources and ranged from 3.90% to 6.90% as of December 31, 2010. During 2011, the markets for these securities have normalized and established regular trading patterns. As a result of this normalization, the Corporation measured preferred stocks with fair values of $5,033 utilizing Level 1 inputs and auction rate money market preferred securities with fair values of $2,049 utilizing Level 2 inputs based on the trade price of similar securities as of December 31, 2011.

The table below represents the activity in auction rate money market preferred available-for-sale investment securities measured with Level 3 inputs on a recurring basis for the years ended December 31:

   2011  2010 

Level 3 inputs — January 1

  $2,865   $2,973  

Transfer to Level 2 inputs

   (2,049)   —  

Net unrealized losses on available-for-sale investment securities

   (816)   (108) 
  

 

 

  

 

 

 

Level 3 inputs — December 31

  $—   $2,865 ��
  

 

 

  

 

 

 

The table below represents the activity in preferred stock available-for-sale investment securities measured with Level 3 inputs on a recurring basis for the years ended December 31:

   2011  2010 

Level 3 inputs — January 1

  $6,936   $7,054  

Calls

   (1,000)   —  

Transfer to Level 1 inputs

   (5,033)   —  

Net unrealized losses on available-for-sale investment securities

   (903)   (118) 
  

 

 

  

 

 

 

Level 3 inputs — December 31

  $—   $6,936  
  

 

 

  

 

 

 

Mortgage loans available-for-sale:AFS

:Mortgage loans available-for-saleAFS are carried at the lower of cost or fair value. The fair value of mortgageMortgage loans available-for-saleAFS are based on what price secondary markets are currently offering for portfolios with similar characteristics. As such, the Corporation classifieswe classify Mortgage loans subjectedAFS subject to nonrecurring fair value adjustments as Level 2.


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Table of Contents

Loans:Loans

:For variable rate loans with no significant change in credit risk, fair values are based on carrying values. Fair values for fixed rate loans are estimated using discounted cash flow analyses, using interest rates currently being offered for loans with similar terms to borrowers of similar credit quality. The resulting amounts are adjusted to estimate the effect of changes in the credit quality of borrowers since the loans were originated.

The Corporation does As such, we classify loans as Level 3 assets.

We do not record loans at fair value on a recurring basis. However, from time to time, a loan is consideredtime-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, management measureswe measure the estimated impairment. The fair value of impaired loans is estimated using one of several methods, including collateral value, marketthe present value of similar debt, enterpriseexpected future cash flows discounted at the loan’s effective interest rate, the loan’s obtainable market price, or the fair value liquidation value, or discounted cash flows.of the collateral, less cost 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.

The Corporation reviews

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, management utilizeswe utilize independent appraisals, broker price opinions, or internal evaluations.  TheseWe review these valuations are reviewed 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 carry and sell an asset if it is determined that the collateral will be liquidated in connection with the ultimate settlement of the loan. The Corporation usesWe use these valuations to determine if any charge offs or specific reserves or charge-offsare necessary. The CorporationWe 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.

Impaired

The following tables list the quantitative fair value information about impaired loans where an allowance is establishedas of December 31:

2014
Valuation TechniquesFair ValueUnobservable Input Range
  Discount applied to collateral appraisal:  
  Real Estate 20% - 25%
  Equipment 30% - 40%
Discounted appraisal value$8,720Cash crop inventory 40%
  Other inventory 75%
  Accounts receivable 50%
  Liquor license 75%

2013
Valuation TechniquesFair ValueUnobservable Input Range
  Discount applied to collateral appraisal:  
  Real Estate 20% - 30%
  Equipment 50%
Discounted appraisal value$13,902Livestock 50%
  Cash crop inventory 50%
  Other inventory 75%
  Accounts receivable 75%
Discount factors with ranges are based on the net realizable value of collateral require classification in the fair value hierarchy. When the fair valueage of the collateral is based on an observable marketindependent appraisal, broker price opinion, or a current appraisal value, the Corporation records the loan as nonrecurring Level 2. When a current appraised value is not available or management determines the fair value of collateral is further impaired below the appraised value, the Corporation records the impaired loans as nonrecurring Level 3.

internal evaluations.

Accrued interest:interest receivable

:The carrying amounts of accrued interest receivable approximate fair value.

Goodwill and other intangible assets:

Acquisition intangibles and goodwill are evaluated for potential impairment on at least an annual basis. Goodwill is typically qualitatively evaluated to determine if it is more likely than not that the carrying balance is impaired. If it is determined that the carrying balance of goodwill is more likely than not to be impaired,

management performs a cash flow valuation to determine the extent of the potential impairment. Acquisition intangibles are tested for impairment with a cash flow valuation. This valuation method requires a significant degree of management judgment. In the event the projected undiscounted net operating cash flows for these intangible assets are less than the carrying value, the asset is recorded at fair value as determined by the valuation model. If the testing resulted in impairment, the Corporation would As such, we classify goodwill and other acquisition intangibles subjected to nonrecurring fair value adjustmentsaccrued interest receivable as Level 3. For the years ended December 31, 2011 and 2010, there were no impairments recorded on goodwill and other acquisition intangibles.

1.

Equity securities without readily determinable fair values:values

The Corporation has investments: Included in equity securities without readily determinable fair values are FHLB stock and FRB stock as well as our ownership interests in Corporate Settlement Solutions, LLC and Valley Financial Corporation. The investment in Corporate Settlement Solutions, LLC, a title insurance company, was made in the first quarter 2008. We are not the managing entity of Corporate Settlement Solutions, LLC, and therefore, we account for our investment under the equity method of accounting. Valley Financial Corporation is the parent company of 1st State Bank in Saginaw, Michigan, which is a community bank that opened in 2005. We made investments in joint ventures. The assets are individually reviewed for impairment on an annual basis, or more frequently if an indicationValley Financial Corporation in 2004 and in 2007.


89

Table of impairment exists, by comparing the carrying value to the estimated fair value. Contents

The lack of an active market, or other independent sourcesources to validate fair value estimates includingcoupled with the impact of future capital calls and transfer restrictions, is an inherent limitation in the valuation process. The Corporation classifies nonmarketable equity securities and itsAs the fair values of these investments in joint ventures subjected to nonrecurringare not readily determinable, they are not disclosed under a specific fair value adjustmentshierarchy; however, they are reviewed quarterly for impairment. If we were to record an impairment adjustment related to these securities, it would be classified as a nonrecurring Level 3. For the years ended December 31, 20113 fair value adjustment. During 2014 and 2010,2013, there were no impairments recorded on equity securities without readily determinable fair values.

Foreclosed assets:assets

: Upon transfer from the loan portfolio, foreclosed assets (which are included in other assets) are adjusted to and subsequently carried at the lower of carrying value or fair value less costs to sell. Net realizable value is based upon independent market prices, appraised values of the collateral, or management’s estimation of the value of the collateral and as such,collateral. Due to the Corporation classifiesinherent level of estimation in the valuation process, we record foreclosed assets as a nonrecurring Level 2. When management determines that the net realizable value of the collateral is further impaired below the appraised value but there is no observable market price, the Corporation records the foreclosed asset as nonrecurring Level 3.

Originated mortgage servicing rights:The table below lists the quantitative fair value information related to foreclosed assets as of:

Originated mortgage servicing rights

 December 31, 2014
Valuation TechniquesFair Value Unobservable Input Range
   Discount applied to collateral appraisal:  
Discounted appraisal value$885
 Real Estate 20% - 25%
 December 31, 2013
Valuation TechniquesFair Value Unobservable Input Range
   Discount applied to collateral appraisal:  
Discounted appraisal value$1,412
 Real Estate 20% - 30%
Discount factors with ranges are based on the age of the independent appraisal, broker price opinion, or internal evaluations.
Goodwill and other intangible assets: Acquisition intangibles and goodwill are evaluated for potential impairment on at least an annual basis. Acquisition intangibles and goodwill are typically qualitatively evaluated to determine if it is more likely than not that the carrying balance is impaired. If it is determined that the carrying balance of acquisition intangibles or goodwill is more likely than not to be impaired, we perform a cash flow valuation to determine the extent of the potential impairment. If the testing resulted in impairment, we would classify goodwill and other acquisition intangibles subjected to nonrecurring fair value adjustments as Level 3. During 2014 and 2013, there were no impairments recorded on goodwill and other acquisition intangibles.
OMSR:OMSR (which are included in other assets) are subject to impairment testing. A valuation model, which utilizesTo test for impairment, we utilize a discounted cash flow analysis using interest rates and prepayment speed assumptions currently quoted for comparable instruments and a discount rate determined by management, is used for impairment testing.rates. If the valuation model reflects a value less than the carrying value, originated mortgage servicing rightsOMSR are adjusted to fair value through a valuation allowance as determined by the model. As such, the Corporation classifies loan servicing rightswe classify OMSR subject to nonrecurring fair value adjustments as Level 2.

Deposits:Deposits

Demand,: The fair value of demand, savings, and money market deposits are, by definition, equal to the amount payable on demand at the reporting date (i.e., their carrying amounts).amounts and are classified as Level 1. Fair values for variable rate certificates of deposit approximate their recorded carrying value. Fair values for fixed rate certificates of deposit are estimated using a discounted cash flow calculation that applies interest rates currently being offered on certificates to a schedule of aggregated expected monthly maturities on time deposits.

As such, fixed rate certificates of deposit are classified as Level 2.

Borrowed funds:funds

:The carrying amounts of federal funds purchased, borrowings under overnight repurchase agreements, and other short-term borrowings maturing within ninety days approximate their fair values. The fair values of the Corporation’s other borrowed funds are estimated using discounted cash flow analyses based on the Corporation’s current incremental borrowing arrangements.

The Corporation has elected to measure a portion of As such, borrowed funds atare classified as Level 2.

Accrued interest payable: The carrying amounts of accrued interest payable approximate fair value. These borrowings are recorded at fair value on a recurring basis, with the fair value measurement estimated using discounted cash flow analysis based on the Corporation’s current incremental borrowing rates for similar types of borrowing arrangements. Changes in the fair value of these borrowings are included in noninterest income. As such, the Corporation classifies other borrowed fundswe classify accrued interest payable as Level 2.

1.

Commitments to extend credit, standby letters of credit, and undisbursed loans:

Fair values for off balance sheet lending Our commitments to extend credit, standby letters of credit, and undisbursed funds have no carrying amount and are based on fees currently chargedestimated to enter into similar agreements, taking into consideration the remaining termshave no realizable fair value. Historically, a majority of the agreementsunused commitments to extend credit have not been drawn upon and, the counterparties'generally, we do not receive fees in connection with these commitments other than standby letter of credit standings. The Corporation doesfees, which are not charge fees for lending commitments; thus it is not practicable to estimate the fair valuesignificant.


90

Table of these instruments.

Contents


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. Furthermore, although the Corporation believes itsAlthough 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.

The changes

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.


91

Table of assets and liabilities recorded at fair value through earnings on a recurring basis and changes in assets and liabilities recorded at fair value on a nonrecurring basis, for which an impairment, or reduction of an impairment, was recognized in 2011 and 2010, are summarized as follows:

   Year Ended December 31 
   2011  2010 

Description

 Trading
Gains and
(Losses)		  Other Gains
and (Losses)		  Total  Trading
Gains and
(Losses)		  Other Gains
and (Losses)		  Total 

Recurring items

      

Trading securities

 $(78)  $—   $(78)  $(94)  $—   $(94) 

Borrowed funds

  —    181    181    —    227    227  

Nonrecurring items

      

Foreclosed assets

  —    (82)   (82)   —    (180)   (180) 

Originated mortgage servicing rights

  —    (243)   (243)   —    1    1  
 

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Total

 $(78)  $(144)  $(222)  $(94)  $48   $(46) 
 

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

The activity in borrowings which the Corporation has elected to carry at fair value was as follows for the years ended December 31:

   2011  2010 

Borrowings carried at fair value — beginning of year

  $10,423   $17,804  

Paydowns and maturities

   (5,000)   (7,154) 

Net change in fair value

   (181)   (227) 
  

 

 

  

 

 

 

Borrowings carried at fair value — December 31

  $5,242   $10,423  
  

 

 

  

 

 

 

Unpaid principal balance — December 31

  $5,000   $10,000  
  

 

 

  

 

 

 

NOTE 21 — PARENT COMPANY ONLY FINANCIAL INFORMATION

Contents


Note 20 – Parent Company Only Financial Information
Condensed Balance Sheets

    December 31 
   2011   2010 
ASSETS  

Cash on deposit at subsidiary Bank

  $1,474    $301  

Securities available for sale

   3,567     1,929  

Investments in subsidiaries

   106,463     94,668  

Premises and equipment

   1,916     1,952  

Other assets

   52,060     53,481  
  

 

 

   

 

 

 

TOTAL ASSETS

  $165,480    $152,331  
  

 

 

   

 

 

 
LIABILITIES AND SHAREHOLDERS’ EQUITY  

Other liabilities

  $10,697    $7,170  

Shareholders’ equity

   154,783     145,161  
  

 

 

   

 

 

 

TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY

  $165,480    $152,331  
  

 

 

   

 

 

 

 December 31

2014 2013
ASSETS   
Cash on deposit at the Bank$1,035
 $529
AFS securities3,294
 3,542
Investments in subsidiaries124,827
 110,192
Premises and equipment1,982
 2,013
Other assets53,228
 54,223
TOTAL ASSETS$184,366
 $170,499
LIABILITIES AND SHAREHOLDERS’ EQUITY   
Other liabilities$9,772
 $9,890
Shareholders' equity174,594
 160,609
TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY$184,366
 $170,499
Condensed Statements of Income

    Year Ended December 31 
   2011   2010   2009 

Income

      

Dividends from subsidiaries

  $6,500    $6,250    $6,100  

Interest income

   128     72     77  

Management fee and other

   1,201     1,340     993  
  

 

 

   

 

 

   

 

 

 

Total income

   7,829     7,662     7,170  

Expenses

      

Salaries and benefits

   2,267     2,286     2,112  

Occupancy and equipment

   370     356     430  

Audit and SOX compliance fees

   378     476     291  

Other

   1,089     932     1,074  
  

 

 

   

 

 

   

 

 

 

Total expenses

   4,104     4,050     3,907  
  

 

 

   

 

 

   

 

 

 

Income before income tax benefit and equity in undistributed earnings of subsidiaries

   3,725     3,612     3,263  

Federal income tax benefit

   958     896     976  
  

 

 

   

 

 

   

 

 

 
   4,683     4,508     4,239  

Undistributed earnings of subsidiaries

   5,527     4,537     3,561  
  

 

 

   

 

 

   

 

 

 

Net income

  $10,210    $9,045    $7,800  
  

 

 

   

 

 

   

 

 

 

 Year Ended December 31

2014 2013 2012
Income     
Dividends from subsidiaries$7,000
 $7,000
 $6,125
Interest income150
 161
 174
Management fee and other3,665
 2,146
 2,037
Total income10,815
 9,307
 8,336
Expenses     
Compensation and benefits3,688
 2,811
 2,424
Occupancy and equipment1,082
 476
 370
Audit and related fees404
 345
 351
Other1,395
 958
 945
Total expenses6,569
 4,590
 4,090
Income before income tax benefit and equity in undistributed earnings of subsidiaries4,246
 4,717
 4,246
Federal income tax benefit940
 790
 673
Income before equity in undistributed earnings of subsidiaries5,186
 5,507
 4,919
Undistributed earnings of subsidiaries8,538
 7,003
 7,287
Net income$13,724
 $12,510
 $12,206


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Table of Contents

Condensed Statements of Cash Flows

   Year Ended December 31 
  2011  2010  2009 

OPERATING ACTIVITIES

   

Net income

 $10,210   $9,045   $7,800  

Adjustments to reconcile net income to cash provided by operations

   

Undistributed earnings of subsidiaries

  (5,527)   (4,537)   (3,561) 

Share-based payment awards

  615    650    677  

Depreciation

  123    147    163  

Net amortization of investment securities

  7    5    6  

Deferred income tax benefit

  (48)   (172)   (570) 

Changes in operating assets and liabilities which provided (used) cash

   

Other assets

  167    298    (748) 

Accrued interest and other liabilities

  757    1,883    517  
 

 

 

  

 

 

  

 

 

 

NET CASH PROVIDED BY OPERATING ACTIVITIES

  6,304    7,319    4,284  

INVESTING ACTIVITIES

   

Activity in available-for-sale securities

   

Maturities, calls, and sales

  585    110    110  

Purchases

  (3,000)   —    —  

(Purchases) sales of equipment and premises

  (87)   247    (466) 

Advances to subsidiaries

  —    (250)   —  
 

 

 

  

 

 

  

 

 

 

NET CASH (USED IN) PROVIDED BY INVESTING ACTIVITIES

  (2,502)   107    (356) 

FINANCING ACTIVITIES

   

Net increase (decrease) in other borrowed funds

  2,772    (1,550)   700  

Cash dividends paid on common stock

  (5,770)   (5,421)   (5,256) 

Proceeds from the issuance of common stock

  2,302    2,208    2,479  

Common stock repurchased

  (1,507)   (2,020)   (2,056) 

Common stock purchased for deferred compensation obligations

  (426)   (514)   (767) 
 

 

 

  

 

 

  

 

 

 

NET CASH USED IN FINANCING ACTIVITIES

  (2,629)   (7,297)   (4,900) 
 

 

 

  

 

 

  

 

 

 

INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS

  1,173    129    (972) 

Cash and cash equivelants at beginning of year

  301    172    1,144  
 

 

 

  

 

 

  

 

 

 

CASH AND CASH EQUIVALENTS AT END OF YEAR

 $1,474   $301   $172  
 

 

 

  

 

 

  

 

 

 

 Year Ended December 31

2014 2013 2012
Operating activities     
Net income$13,724
 $12,510
 $12,206
Adjustments to reconcile net income to cash provided by operations     
Undistributed earnings of subsidiaries(8,538) (7,003) (7,287)
Undistributed earnings of equity securities without readily determinable fair values37
 74
 (459)
Share-based payment awards495
 554
 643
Depreciation144
 174
 114
Net amortization of AFS securities1
 2
 4
Deferred income tax expense (benefit)(159) (305) 425
Changes in operating assets and liabilities which provided (used) cash     
Other assets145
 (51) (513)
Accrued interest and other liabilities1,516
 1,238
 (98)
Net cash provided by (used in) operating activities7,365
 7,193
 5,035
Investing activities     
Maturities, calls, principal repayments, and sales of AFS securities250
 395
 370
Purchases of premises and equipment(81) (146) (239)
Advances to subsidiaries, net of repayments641
 (299) (50)
Net cash provided by (used in) investing activities810
 (50) 81
Financing activities     
Net increase (decrease) in borrowed funds(1,600) (1,350) (597)
Cash dividends paid on common stock(6,843) (6,456) (6,074)
Proceeds from the issuance of common stock4,227
 3,618
 2,898
Common stock repurchased(3,122) (2,375) (1,980)
Common stock purchased for deferred compensation obligations(331) (383) (505)
Net cash provided by (used in) financing activities(7,669) (6,946) (6,258)
Increase (decrease) in cash and cash equivalents506
 197
 (1,142)
Cash and cash equivalents at beginning of year529
 332
 1,474
Cash and cash equivalents at end of year$1,035
 $529
 $332
NOTE 22 — OPERATING SEGMENTSNote 21 – Operating Segments

The Corporation’s

Our reportable segments are based on legal entities that account for at least 10 percent10% of net operating results. Retail bankingThe operations for 2011, 2010,of the Bank as of December 31, 2014, 2013, and 20092012 represent approximately 90% or greatermore of the Corporation’sour consolidated total assets and operating results. As such, no additional segment informationreporting is presented.


93

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

ISABELLA BANK CORPORATION FINANCIAL REVIEW

(All dollars in thousands)

The following is management’s discussion and analysis of the financial condition and results of operations for Isabella Bank Corporation. This discussion and analysis is intended to provide a better understanding of the consolidated financial statements and statistical data included elsewhere in the Annual Report.

Executive Summary

Isabella Bank Corporation, as well as all other financial institutions in Michigan and across the entire country, continues to experience the negative impacts on its operations from the persistent weak economy. The current economic environment has led to historically high levels of loans charged off and foreclosed asset and collection expenses.

In spite of the economic downturn that has occurred over the past few years, the Corporation continues to be profitable, with net income of $10,210 for the year ended December 31, 2011. Not only has the Corporation remained profitable, its loan quality also compares well to its peers as its ratio of nonperforming loans to total loans was 0.95% as of December 31, 2011 compared to 3.26% for all bank holding companies in the Corporation’s peer group as of September 30, 2011 (December 31, 2011 peer group ratios are not yet available). The Corporation’s interest margins also continue to be strong, as the net yield on interest earning assets (on a fully taxable equivalent basis) was 3.87% for the year ended December 31, 2011.

Recent Legislation

The Health Care and Education Act of 2010 and the Patient Protection and Affordable Care Act could have a significant impact on the Corporation’s operating results in future periods. Aside from the potential increases in the Corporation’s health care costs, the implementation of the new rules and requirements is likely to require a substantial commitment from the Corporation’s management.

The Dodd-Frank Act is very broad and complex legislation that puts in place a sweeping new financial services framework that is likely to have significant regulatory and legal consequences and will likely impact the Corporation’s future operating results. Implementation of the Act will require compliance with numerous new regulations, which will increase compliance and documentation costs. For more information, see the summary of the Dodd-Frank Act under the heading “Supervision and Regulation” in the Corporation’s 2011 annual report on Form 10-K.

Other

The Corporation has not received any notices of regulatory actions as of February 16, 2012.

CRITICAL ACCOUNTING POLICIES:

The Corporation’s significant accounting policies are set forth in Note 1 of the Consolidated Financial Statements. Of these significant accounting policies, the Corporation considers its policies regarding the allowance for loan losses, acquisition intangibles, and the determination of the fair value and assessment of other-than-temporary impairment of investment securities to be its most critical accounting policies.

The allowance for loan losses requires management’s most subjective and complex judgment. Changes in economic conditions can have a significant impact on the allowance for loan losses and, therefore, the provision for loan losses and results of operations. The Corporation has developed appropriate policies and procedures for assessing the appropriateness of the allowance for loan losses, recognizing that this process requires a number of assumptions and estimates with respect to its loan portfolio. The Corporation’s assessments may be impacted in future periods by changes in economic conditions, and the discovery of information with respect to borrowers which is not known to management at the time of the issuance of the consolidated financial statements. For additional discussion concerning the Corporation’s allowance for loan losses and related matters, see the detailed discussion to follow under the heading “Allowance for Loan Losses”.

United States generally accepted accounting principles require that the Corporation determine the fair value of the assets and liabilities of an acquired entity, and record their fair value on the date of acquisition. The

Corporation employs a variety of measures in the determination of the fair value, including the use of discounted cash flow analysis, market appraisals, and projected future revenue streams. For certain items that management believes it has the appropriate expertise to determine the fair value, management may choose to use its own calculations of the value. In other cases, where the value is not easily determined, the Corporation consults with outside parties to determine the fair value of the identified asset or liability. Once valuations have been adjusted, the net difference between the price paid for the acquired entity and the value of its balance sheet, including identifiable intangibles, is recorded as goodwill. This goodwill is not amortized, but is evaluated for impairment on at least an annual basis.

The Corporation currently has both available-for-sale and trading investment securities that are carried at fair value. Changes in the fair value of available-for-sale investment securities are included as a component of other comprehensive income, while declines in the fair value of these securities below their cost that are other-than-temporary are reflected as realized losses in the consolidated statements of income. The change in value of trading investment securities is included in current earnings. Management evaluates available-for-sale securities for indications of losses that are considered other-than-temporary, if any, on a regular basis. The market values for available-for-sale and trading investment securities are typically obtained from outside sources and applied to individual securities within the portfolio.

Due to the limited trading of certain auction rate money market preferred securities and preferred stocks during 2010, the Corporation utilized a discounted cash flow analysis to determine fair values on December 31, 2010. This analysis considered the creditworthiness of the counterparty, the timing of expected future cash flows, the current volume of trading activity, and recent trade prices. The discount rates used were determined by using the interest rates of similarly rated financial institution debt based on the weighted average of a range of terms for corporate bond interest rates, which were obtained from published sources and ranged from 3.90% to 6.90% as of December 31, 2010. During 2011, the markets for these securities have normalized and established regular trading patterns. As such, the Corporation determined the fair value for these securities based on quoted prices for identical securities, or based on quoted prices for similar securities as of December 31, 2011.

DISTRIBUTION OF ASSETS, LIABILITIES, AND SHAREHOLDERS’ EQUITY

INTEREST RATE AND INTEREST DIFFERENTIAL

The following schedules present the daily average amount outstanding for each major category of interest earning assets, nonearning assets, interest bearing liabilities, and noninterest bearing liabilities for the last three years. These schedules also presents an analysis of interest income and interest expense for the periods indicated. All interest income is reported on a fully taxable equivalent (FTE) basis using a 34% federal income tax rate. Nonaccruing loans, for the purpose of the following computations, are included in the average loan amounts outstanding. Federal Reserve and Federal Home Loan Bank stock holdings which are restricted are included in accrued income and other assets.

   Year Ended December 31 
   2011  2010  2009 
   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

 $743,441   $45,463    6.12%  $725,534   $46,794    6.45%  $725,299   $47,706    6.58% 

Taxable investment securities

  235,437    6,941    2.95%   160,514    5,271    3.28%   119,063    4,712    3.96% 

Nontaxable investment securities

  136,356    7,847    5.75%   120,999    7,095    5.86%   121,676    7,217    5.93% 

Trading account securities

  5,087    286    5.62%   8,097    436    5.38%   17,279    856    4.95% 

Federal funds sold

  —    —    —    —    —    —    842    1    0.12% 

Other

  37,539    506    1.35%   45,509    479    1.05%   27,433    376    1.37% 
 

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Total earning assets

  1,157,860    61,043    5.27%   1,060,653    60,075    5.66%   1,011,592    60,868    6.02% 

NONEARNING ASSETS

         

Allowance for loan losses

  (12,522)     (13,262)     (12,334)   

Cash and demand deposits due from banks

  20,195      18,070      18,190    

Premises and equipment

  24,397      24,624      23,810    

Accrued income and other assets

  97,265      92,845      86,376    
 

 

 

    

 

 

    

 

 

   

Total assets

 $1,287,195     $1,182,930     $1,127,634    
 

 

 

    

 

 

    

 

 

   

INTEREST BEARING LIABILITIES

         

Interest bearing demand deposits

 $152,530    189    0.12%  $137,109    151    0.11%  $116,412    146    0.13% 

Savings deposits

  192,999    488    0.25%   169,579    391    0.23%   177,538    399    0.22% 

Time deposits

  467,931    10,258    2.19%   430,892    10,988    2.55%   398,356    13,043    3.27% 

Borrowed funds

  198,828    5,268    2.65%   188,512    5,674    3.01%   193,922    6,251    3.22% 
 

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Total interest bearing liabilities

  1,012,288    16,203    1.60%   926,092    17,204    1.86%   886,228    19,839    2.24% 

NONINTEREST BEARING LIABILITIES

         

Demand deposits

  113,726      102,812      94,408    

Other

  15,456      14,171      7,188    

Shareholders’ equity

  145,725      139,855      139,810    
 

 

 

    

 

 

    

 

 

   

Total liabilities and shareholders’ equity

 $1,287,195     $1,182,930     $1,127,634    
 

 

 

    

 

 

    

 

 

   

Net interest income (FTE)

  $44,840     $42,871     $41,029   
  

 

 

  

 

 

   

 

 

  

 

 

   

 

 

  

 

 

 

Net yield on interest earning assets (FTE)

    3.87%     4.04%     4.06% 
   

 

 

    

 

 

    

 

 

 

Net Interest Income

The Corporation derives the majority of its gross income from interest earned on loans and investments, while its most significant expense is the interest cost incurred for funds used. Net interest income is the amount by which interest income on earning assets exceeds the interest cost of deposits and borrowings. Net interest income is influenced by changes in the balance and mix of assets and liabilities and market interest rates. Management exerts some control over these factors; however, Federal Reserve monetary policy and competition have a significant impact. Interest income includes loan fees of $2,385 in 2011, $2,196 in 2010, and $1,963 in

2009. For analytical purposes, net interest income is adjusted to a “taxable equivalent” basis by adding the

income tax savings from interest on tax exempt loans and securities, thus making year to year comparisons more meaningful.

VOLUME AND RATE VARIANCE ANALYSIS

The following table details the dollar amount of changes in FTE net interest income for each major category of interest earning assets and interest bearing liabilities and the amount of change attributable to changes in average balances (volume) or average rates. 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.

   2011 Compared to 2010
Increase (Decrease) Due to		  2010 Compared to 2009
Increase (Decrease) Due to		 
   Volume  Rate  Net  Volume  Rate  Net 

CHANGES IN INTEREST INCOME:

       

Loans

  $1,136   $(2,467)  $(1,331)  $15   $(927)  $(912) 

Taxable investment securities

   2,254    (584)   1,670    1,453    (894)   559  

Nontaxable investment securities

   886    (134)   752    (40)   (82)   (122) 

Trading account securities

   (168)   18    (150)   (489)   69    (420) 

Federal funds sold

   —    —    —    (1)   —    (1) 

Other

   (93)   120    27    205    (102)   103  
  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Total changes in interest income

   4,015    (3,047)   968    1,143    (1,936)   (793) 

CHANGES IN INTEREST EXPENSE:

       

Interest bearing demand deposits

   18    20    38    24    (19)   5  

Savings deposits

   57    40    97    (18)   10    (8) 

Time deposits

   894    (1,624)   (730)   1,002    (3,057)   (2,055) 

Borrowed funds

   299    (705)   (406)   (171)   (406)   (577) 
  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Total changes in interest expense

   1,268    (2,269)   (1,001)   837    (3,472)   (2,635) 
  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Net change in interest margin (FTE)

  $2,747   $(778)  $1,969   $306   $1,536   $1,842  
  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

During 2011, average interest earning assets increased by $97,207. This increase resulted in $4,015 of additional interest income which exceeded the $3,047 decrease in interest income caused by declines in interest rates. Interest bearing liabilities increased $86,196 at a cost of $1,268 while the decline in rates, mostly those on time deposits and borrowed funds, decreased interest expense by $2,269. The diminished interest income earned on assets resulted in a 0.17% decline in the net interest yield. Management anticipates that net interest margin yield will decline slightly during 2012 due to the following factors:

Contents

Based on the current economic conditions, management does not anticipate any changes in the target Fed funds rate in the foreseeable future. As such, changes in market rates may be unlikely. However, it is likely that the Corporation may see declines in the rates earned on interest earning assets as the interest rates on many types of loans including home equity lines of credit, residential balloon mortgages, variable rate commercial lines of credit, and investment securities with acceptable credit and interest rate risk are currently priced at or below the Corporation’s current net yield on interest earning assets. Most of the potential declines would arise out of the Corporation’s investment portfolio as the majority of securities that are called or mature in 2012 will be reinvested at significantly lower rates.

Interest rates on residential mortgage loans remain at or near historical lows. This rate environment has led to strong consumer demand for fixed rate mortgage products which are generally sold to the secondary market. As a result, there has been a significant decline in balloon mortgages, which are held on the Corporation’s consolidated balance sheet. As these balloon mortgages have paid off, the proceeds from these loans have been reinvested (typically in the form of available-for-sale investment securities) at lower interest rates which has adversely impacted interest income.

While the Corporation’s liability sensitive balance sheet has allowed it to benefit from decreases in interest rates, it also makes the Corporation sensitive to increases in deposit and borrowing rates. As part

of the Corporation’s goal to minimize the potential negative impacts of possible increases in future interest rates, management has been, and continues to be, actively working to lengthen the terms of its interest bearing liabilities. This lengthening has increased the Corporation’s cost of funding, reducing net interest income in the short term.

Allowance for Loan Losses

The viability of any financial institution is ultimately determined by its management of credit risk. Loans outstanding represent the Corporation’s single largest concentration of risk. The allowance for loan losses is management’s estimation of probable losses inherent in the existing loan portfolio. Factors used to evaluate the loan portfolio, and thus to determine the current charge to expense, include recent loan loss history, financial condition of borrowers, amount of nonperforming and impaired loans, overall economic conditions and other factors. The following schedule summarizes the Corporation’s chargeoff and recovery activity for the years ended December 31:

  2011  

 

 2010  

 

 2009  

 

 2008  

 

  2007 

Allowance for loan losses — January 1

 $12,373    $12,979    $11,982    $7,301     $7,605  

Allowance of acquired bank

  —     —     —     822      —  

Loans charged off

          

Commercial and agricultural

  1,984     3,731     3,081     2,137      905  

Real estate mortgage

  2,240     2,524     2,627     3,334      659  

Consumer

  552     596     934     854      582  
 

 

 

  

 

 

 

 

  

 

 

 

 

  

 

 

 

 

  

 

  

 

 

 

Total loans charged off

  4,776     6,851     6,642     6,325      2,146  

Recoveries

          

Commercial and agricultural

  461     453     623     160      297  

Real estate mortgage

  177     638     546     240      49  

Consumer

  314     297     377     284      285  
 

 

 

  

 

 

 

 

  

 

 

 

 

  

 

 

 

 

  

 

  

 

 

 

Total recoveries

  952     1,388     1,546     684      631  
 

 

 

  

 

 

 

 

  

 

 

 

 

  

 

 

 

 

  

 

  

 

 

 

Net loans charged off

  3,824     5,463     5,096     5,641      1,515  

Provision charged to income

  3,826     4,857     6,093     9,500      1,211  
 

 

 

  

 

 

 

 

  

 

 

 

 

  

 

 

 

 

  

 

  

 

 

 

Allowance for loan losses —
December 31

 $12,375    $12,373    $12,979    $11,982     $7,301  
 

 

 

  

 

 

 

 

  

 

 

 

 

  

 

 

 

 

  

 

  

 

 

 

Year to date average loans

 $743,441    $725,534    $725,299    $717,040     $604,342  
 

 

 

  

 

 

 

 

  

 

 

 

 

  

 

 

 

 

  

 

  

 

 

 

Net loans charged off to average loans outstanding

  0.51%    0.75%    0.70%    0.79%     0.25% 
 

 

 

  

 

 

 

 

  

 

 

 

 

  

 

 

 

 

  

 

  

 

 

 

Total amount of loans outstanding

 $750,291    $735,304    $723,316    $735,385     $612,687  
 

 

 

  

 

 

 

 

  

 

 

 

 

  

 

 

 

 

  

 

  

 

 

 

Allowance for loan losses as a % of loans

  1.65%    1.68%    1.79%    1.63%     1.19% 
 

 

 

  

 

 

 

 

  

 

 

 

 

  

 

 

 

 

  

 

  

 

 

 

The Corporation originates and sells fixed rate residential real estate mortgages to the Federal Home Loan Mortgage Corporation (Freddie Mac). The Corporation has not originated loans for either trading or its own portfolio that would be classified as subprime, nor has it originated adjustable rate mortgages or financed loans for more than 80% of market value unless insured by private third party insurance.

As shown in the preceding table, when comparing 2011 to 2010, net loans charged off decreased by $1,639. This improvement allowed the Corporation to reduce its provision for loan losses. While there have been marked improvements in the level of net loans charged off, which has contributed to the Corporation’s ability to reduce its provision for loan losses, the overall local, regional and national economies have yet to show consistent improvement.

The Corporation allocates the allowance throughout its loan portfolio based on management’s assessment of the underlying risks associated with each loan segment. Management’s assessments include allocations based on specific impairment allocations, historical losses, internally assigned credit ratings, and past due and nonaccrual balances. A portion of the allowance for loan losses is not allocated to any one loan segment, but is instead a reflection of other qualitative risks within the Corporation’s loan portfolio.

For further discussion on the allocation of the allowance for loan losses, see “Note 6 – Loans and Allowance for Loan Losses” to the Corporation’s consolidated financial statements.

Loans Past Due and Loans in Nonaccrual Status

Increases in past due and nonaccrual loans can have a significant impact on the allowance for loan losses. To determine the potential impact, and corresponding estimated losses, management analyzes its historical loss trends on loans past due 30-89 days, 90 days or more, and nonaccrual loans.

The following tables summarize the Corporation’s past due and nonaccrual loans as of December 31:

   Total Past Due and Nonaccrual 
   2011   2010   2009   2008   2007 

Commercial and agricultural

  $7,420    $9,606    $8,839    $13,958    $8,746  

Residential mortgage

   5,297     8,119     10,296     12,418     8,357  

Consumer installment

   186     309     460     956     617  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
  $12,903    $18,034    $19,595    $27,332    $17,720  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

   2011 
               

Total

Past Due

and

 
   Accruing Loans Past Due       
       90 Days       
   30-89 Days   or More   Nonaccrual   Nonaccrual 

Commercial and agricultural

  $2,149    $466    $4,805    $7,420  

Residential mortgage

   3,424     289     1,584     5,297  

Consumer installment

   181     5     —     186  
  

 

 

   

 

 

   

 

 

   

 

 

 
  $5,754    $760    $6,389    $12,903  
  

 

 

   

 

 

   

 

 

   

 

 

 

   2010 
               

Total

Past Due

and

 
   Accruing Loans Past Due       
       90 Days       
   30-89 Days   or More   Nonaccrual   Nonaccrual 

Commercial and agricultural

  $5,291    $175    $4,140    $9,606  

Residential mortgage

   6,339     310     1,470     8,119  

Consumer installment

   308     1     —     309  
  

 

 

   

 

 

   

 

 

   

 

 

 
  $11,938    $486    $5,610    $18,034  
  

 

 

   

 

 

   

 

 

   

 

 

 

Troubled Debt Restructurings

The following table summarizes the Corporation’s troubled debt restructurings as of December 31:

  2011  2010  2009  2008  2007 
  Accruing
Interest		  Non-
accrual		  Total  Accruing
Interest		  Non-
accrual		  Total  Accruing
Interest		  Non-
accrual		  Total  Accruing
Interest		  Non-
accrual		  Total  Accruing
Interest		 

Current

 $16,125   $514   $16,639   $4,798   $499   $5,297   $2,754   $786   $3,540   $2,297   $1,355   $3,652   $517  

Past due 30-89 days

  1,614    429    2,043    277    26    303    107    904    1,011    268    —    268    115  

Past due 90 days or more

  —    74    74    —    163    163    —    426    426    —    630    630    53  
 

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Total

 $17,739   $1,017   $18,756   $5,075   $688   $5,763   $2,861   $2,116   $4,977   $2,565   $1,985   $4,550   $685  
 

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

The Corporation had no troubled debt restructurings in nonaccrual status as of December 31, 2007.

As a result of adopting the amendments in ASU No. 2011-02, the Corporation reassessed all loan restructurings that occurred on or after January 1, 2011 for identification as troubled debt restructurings (TDR’s). The Corporation identified as TDR’s certain loans for which the allowance for loan losses had previously been measured under a general allowance for loan losses methodology. Upon identifying those loans as TDR’s, the Corporation identified them as impaired. The amendments in ASU No. 2011-02 require prospective application of the impairment measurement guidance for those loans newly identified as impaired. The Corporation’s recorded investment in loans for which the allowance for credit losses was previously measured under a general allowance for credit losses methodology and are now impaired was $5,136, with a specific valuation allowance of $1,022 as of December 31, 2011.

The Corporation has taken aggressive actions to avoid foreclosures on borrowers who are willing to work with the Corporation in modifying their loans, thus making them more affordable. These loan modifications have allowed borrowers to develop a payment structure that will allow them to continue making payments in lieu of foreclosure. Troubled debt restructurings that have been placed in nonaccrual status may be placed back on accrual status after six months of continued performance.

Loan modifications are considered to be TDR’s when the modification results in terms outside of normal lending practices to a borrower who is experiencing financial difficulties.

Typical concessions granted include, but are not limited to:

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

2. Extending the amortization period beyond typical lending guidelines for debt with similar risk characteristics.

3. Forbearance of principal.

4. Forbearance of accrued interest.

To determine if a borrower is experiencing financial difficulties, the Corporation considers if:

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

2. It is likely that the borrower would default on any of their debt if the concession was not granted.

3. The borrower’s cash flow was sufficient to service all of their debt if the concession was not granted.

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

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

The following tables summarize concessions granted by the Corporation to borrowers experiencing financial difficulties in the year ended December 31:

   2011 
   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		 

Commercial

        

Commercial real estate

   1    $408     —    $—  

Commercial other

   38     9,932     4     2,643  
  

 

 

   

 

 

   

 

 

   

 

 

 

Total commercial

   39     10,340     4     2,643  
  

 

 

   

 

 

   

 

 

   

 

 

 

Agricultural other

   8     1,321     —     —  

Residential mortgage

        

Senior liens

   19     2,161     17     1,754  

Consumer

        

Secured

   6     65     1     4  

Unsecured

   —     —     2     20  
  

 

 

   

 

 

   

 

 

   

 

 

 

Total consumer

   6     65     3     24  
  

 

 

   

 

 

   

 

 

   

 

 

 

Total

   72    $13,887     24    $4,421  
  

 

 

   

 

 

   

 

 

   

 

 

 

The Corporation did not restructure any loans through the forbearance of principal or accrued interest during 2011.

The Corporation has been successful in its efforts to restructure loans to reduce foreclosures. Of the 163 troubled debt restructurings granted since December 31, 2008, only 6 have defaulted.

Nonperforming Assets

The following table summarizes the Corporation’s nonperforming assets as of December 31:

   2011  2010  2009  2008  2007 

Nonaccrual loans

  $6,389   $5,610   $8,522   $11,175   $4,156  

Accruing loans past due 90 days or more

   760    486    768    1,251    1,727  
  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Total nonperforming loans

   7,149    6,096    9,290    12,426    5,883  

Other real estate owned

   1,867    2,039    1,141    2,770    1,376  

Repossessed assets

   9    28    16    153    —  
  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Total nonperforming assets

  $9,025   $8,163   $10,447   $15,349   $7,259  
  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Nonperforming loans as a % of total loans

   0.95%   0.83%   1.28%   1.69%   0.96% 
  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Nonperforming assets as a % of total assets

   0.67%   0.67%   0.91%   1.35%   0.76% 
  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Loans are placed in nonaccrual status when the foreclosure process has begun, generally after a loan is 90 days past due, unless they are well secured and in the process of collection. Upon transferring the loans to nonaccrual status, an evaluation to determine the net realizable value of the underlying collateral is performed. This evaluation is used to help determine if any charge downs are necessary. Loans may be placed back on accrual status after six months of continued performance.

The following table summarizes the Corporation’s nonaccrual loan balances by type as of December 31:

   2011   2010   2009   2008   2007 

Commercial and agricultural

  $4,805    $4,140    $5,810    $8,059    $1,959  

Residential mortgage

   1,584     1,470     2,657     3,092     2,185  

Consumer installment

   —     —     55     24     12  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
  $6,389    $5,610    $8,522    $11,175    $4,156  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Included in nonaccrual commercial and agricultural loans was one loan with a balance of $1,900 as of December 31, 2011 and $2,679 as of December 31, 2010. As of December 31, 2011, there was no specific allocation established for this loan as it has been charged down to reflect the current market value of the real estate, while there was a specific allocation established in the amount of $345 as of December 31, 2010. Nonaccrual commercial and agricultural loans also included one loan with a balance of $1,014 as of December 31, 2011, for which there was no specific allocation established as the net realizable value of the loan’s underlying collateral exceeded the loan’s outstanding balance. Commercial and agricultural nonaccrual loans included one credit with a balance of $1,800 as of December 31, 2009 which was subsequently transferred to other real estate owned in the third quarter of 2010. There were no other individually significant credits included in nonaccrual loans as of December 31, 2011, 2010, 2009, 2008, or 2007.

Included in the nonaccrual loan balances above were credits currently classified as restructured loans as of December 31:

   2011   2010   2009   2008 

Commercial and agricultural

  $520    $115    $1,692    $1,985  

Residential mortgage

   497     573     424     —  
  

 

 

   

 

 

   

 

 

   

 

 

 
  $1,017    $688    $2,116    $1,985  
  

 

 

   

 

 

   

 

 

   

 

 

 

The Corporation had no restructured loans in nonaccrual status as of December 31, 2007.

The Corporation has devoted 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. To management’s knowledge, all loans that are deemed to be impaired have been recognized. A continued decline in real estate values may require further write downs of loans in foreclosure and other real estate owned and could potentially have an adverse impact on the Corporation’s financial performance.

Based on management’s analysis, the allowance for loan losses is considered appropriate as of December 31, 2011. Management will continue to closely monitor its overall credit quality to ensure that the allowance for loan losses remains appropriate.

Noninterest Income

The following table shows the changes in noninterest income between the years ended December 31:

         Change     Change 
   2011  2010  $  %  2009  $  % 

Service charges and fees

        

NSF and overdraft fees

  $2,500   $2,809   $(309)   –11.0%  $3,187   $(378)   –11.9% 

ATM and debit card fees

   1,736    1,492    244    16.4%   1,218    274    22.5% 

Trust fees

   979    896    83    9.3%   814    82    10.1% 

Mortgage servicing fees

   732    760    (28)   –3.7%   724    36    5.0% 

Service charges on deposit accounts

   324    333    (9)   –2.7%   344    (11)   –3.2% 

Net originated mortgage servicing rights (loss) income

   (293)   47    (340)   N/M    514    (467)   –90.9% 

All other

   140    143    (3)   –2.1%   112    31    27.7% 
  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Total service charges and fees

   6,118    6,480    (362)   –5.6%   6,913    (433)   –6.3% 

Gain on sale of mortgage loans

   538    610    (72)   –11.8%   886    (276)   –31.2% 

Net (loss) gain on trading securities

   (78)   (94)   16    17.0%   80    (174)   N/M  

Net gain on borrowings measured at fair value

   181    227    (46)   –20.3%   289    (62)   –21.5% 

Gain on sale of available-for-sale investment securities

   3    348    (345)   –99.1%   648    (300)   –46.3% 

Other

        

Earnings on corporate owned life insurance policies

   609    663    (54)   –8.1%   641    22    3.4% 

Brokerage and advisory fees

   545    573    (28)   –4.9%   521    52    10.0% 

Corporate Settlement Solutions joint venture

   (182)   11    (193)   N/M    (122)   133    N/M  

All other

   484    482    2    0.4%   300    182    60.7% 
  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Total other

   1,456    1,729    (273)   –15.8%   1,340    389    29.0% 
  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Total noninterest income

  $8,218   $9,300   $(1,082)   –11.6%  $10,156   $(856)   –8.4% 
  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Significant changes in noninterest income are detailed below:

Management continuously analyzes various fees related to deposit accounts including service charges and NSF and overdraft fees. Based on these analyses, the Corporation makes any necessary adjustments to ensure that its fee structure is within the range of its competitors, while at the same time making sure that the fees remain fair to deposit customers. NSF and overdraft fees have been steadily declining over the past two years, with the decline accelerating in the third quarter of 2010 as a result of new regulatory guidance issued by the Federal Reserve Bank. The Corporation anticipates that NSF and overdraft fees will approximate current levels in 2012.

The increases in ATM and debit card fees are primarily the result of the increased usage of debit cards by customers. As management does not anticipate any significant changes to the ATM and debit card fee structures, these fees are expected to continue to increase as the usage of debit cards increases.

Trust fees have increased primarily due to increases in the size of the managed portfolio. As management anticipates continued growth in trust services, it anticipates trust fees to continue to increase in 2012.

Net originated mortgage servicing rights (OMSR) represent the fair value of servicing rights of loans sold to the secondary market, with changes in the fair value recorded in earnings. Changes in the fair

value of OMSR are primarily driven by fluctuations in the balance of loans sold to the secondary market and by offering rates on new residential mortgages. The losses incurred in 2011 were a result of historically low interest rates which increases the likelihood of refinancing activity, thus reducing the value of OMSR.

As a result of lower than normal residential mortgage rates, the Corporation experienced increases in the volume of loans sold to the secondary market during 2009, leading to a corresponding increase in gains from the sale of mortgage loans in 2009. As the demand for new mortgages declined in 2010 and 2011, so did the gain from the sale of mortgage loans. The Corporation anticipates that the gain on sale of mortgages will remain at the current levels in 2012.

Fluctuations in the gains and losses related to trading securities and borrowings carried at fair value are caused by interest rate variances. Management does not anticipate any significant fluctuations in net trading activities in 2012 as significant interest rate changes are not expected.

The Corporation continually analyzes its available-for-sale investment portfolio for advantageous selling opportunities.

The Corporation’s earnings from its joint venture in Corporate Settlement Solutions (a title insurance agency) have been negatively impacted by expenses incurred to enhance the services offered as well as expand their market area.

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

Noninterest Expenses

The following table shows the changes in noninterest expenses between the years ended December 31:

           Change      Change 
   2011   2010   $  %  2009   $  % 

Compensation and benefits

           

Leased employee salaries

  $14,377    $13,697    $680    5.0%  $13,494    $203    1.5% 

Leased employee benefits

   4,902     4,837     65    1.3%   4,745     92    1.9% 

All other

   13     18     (5)   –27.8%   19     (1)   –5.3% 
  

 

 

   

 

 

   

 

 

  

 

 

  

 

 

   

 

 

  

 

 

 

Total compensation and benefits

   19,292     18,552     740    4.0%   18,258     294    1.6% 
  

 

 

   

 

 

   

 

 

  

 

 

  

 

 

   

 

 

  

 

 

 

Occupancy

           

Property taxes

   470     505     (35)   –6.9%   439     66    15.0% 

Utilities

   462     423     39    9.2%   393     30    7.6% 

Outside services

   587     524     63    12.0%   433     91    21.0% 

Depreciation

   605     584     21    3.6%   546     38    7.0% 

Building repairs

   262     243     19    7.8%   288     (45)   –15.6% 

All other

   84     72     12    16.7%   71     1    1.4% 
  

 

 

   

 

 

   

 

 

  

 

 

  

 

 

   

 

 

  

 

 

 

Total occupancy

   2,470     2,351     119    5.1%   2,170     181    8.3% 
  

 

 

   

 

 

   

 

 

  

 

 

  

 

 

   

 

 

  

 

 

 

Furniture and equipment

           

Depreciation

   1,916     1,938     (22)   –1.1%   1,803     135    7.5% 

Computer/service contracts

   1,898     1,779     119    6.7%   1,676     103    6.1% 

ATM and debit card fees

   629     595     34    5.7%   621     (26)   –4.2% 

All other

   54     32     22    68.8%   46     (14)   –30.4% 
  

 

 

   

 

 

   

 

 

  

 

 

  

 

 

   

 

 

  

 

 

 

Total furniture and equipment

   4,497     4,344     153    3.5%   4,146     198    4.8% 
  

 

 

   

 

 

   

 

 

  

 

 

  

 

 

   

 

 

  

 

 

 

FDIC insurance premiums

   1,086     1,254     (168)   –13.4%   1,730     (476)   –27.5% 
  

 

 

   

 

 

   

 

 

  

 

 

  

 

 

   

 

 

  

 

 

 

Other

           

Marketing and community relations

   1,174     1,093     81    7.4%   894     199    22.3% 

Foreclosed asset and collection

   576   �� 916     (340)   –37.1%   831     85    10.2% 

Legal fees

   302     382     (80)   –20.9%   415     (33)   –8.0% 

Audit and SOX compliance fees

   714     710     4    0.6%   546     164    30.0% 

Consulting fees

   386     167     219    131.1%   201     (34)   –16.9% 

Directors fees

   842     887     (45)   –5.1%   923     (36)   –3.9% 

Amortization of deposit premium

   299     338     (39)   –11.5%   375     (37)   –9.9% 

Education and travel

   526     499     27    5.4%   395     104    26.3% 

Postage and freight

   388     395     (7)   –1.8%   472     (77)   –16.3% 

Printing and supplies

   405     420     (15)   –3.6%   529     (109)   –20.6% 

All other

   1,573     1,499     74    4.9%   1,798     (299)   –16.6% 
  

 

 

   

 

 

   

 

 

  

 

 

  

 

 

   

 

 

  

 

 

 

Total other

   7,185     7,306     (121)   –1.7%   7,379     (73)   –1.0% 
  

 

 

   

 

 

   

 

 

  

 

 

  

 

 

   

 

 

  

 

 

 

Total noninterest expenses

  $34,530    $33,807    $723    2.1%  $33,683    $124    0.4% 
  

 

 

   

 

 

   

 

 

  

 

 

  

 

 

   

 

 

  

 

 

 

Significant changes in noninterest expenses are detailed below:

Leased employee salaries increased during 2011 due to annual merit increases and staff additions. These staff additions have allowed the Corporation to continue to grow as well as to comply with new regulations, including the Dodd-Frank Act. Leased employee benefits fluctuate from period to period primarily as a result of changes in health care related expenses. The Corporation anticipates adding to staffing levels in 2012 to ensure compliance with new regulations set forth in the Dodd-Frank Act, which is estimated to increase salary and benefits by $331.

FDIC insurance premium expense decreased in 2011 due to changes to the assessment rates on April 1, 2011. Premiums declined between 2009 and 2010 as a result of an FDIC special assessment of $479 in September 2009. Management expects FDIC insurance premiums to decline slightly in 2012 due to the changes in assessment rates.

The increase in marketing and community relations in 2011 was primarily the result of a new initiative to track customer service satisfaction as well as the enhancement of the Corporation’s website. The increase in marketing and community relations expenses in 2010 was primarily related to an increase in charitable contributions. Charitable contributions were essentially unchanged between 2010 and 2011 with no significant changes expected in 2012.

While foreclosed asset and collection expenses remain at historically high levels, they have declined significantly from 2010. Management anticipates that these expenses will approximate current levels in 2012.

The Corporation’s legal expenses can fluctuate from period to period based on the volume of foreclosures as well as expenses related to the Corporation’s ongoing operations, including regulatory compliance. The Corporation does not anticipate any significant fluctuations in legal expenses in 2012.

Audit and SOX compliance fees fluctuate due to the timing of the performance of recurring audit procedures.

Director fees declined in 2011 due to the retirement of several directors. Director fees are expected to approximate current levels in 2012.

The Corporation places a strong emphasis on customer service. To help enhance customer service satisfaction, the Corporation has made a significant investment in various training programs. These programs coupled with the customer service tracking initiative (noted above) will increase service levels which will increase shareholder value. Management expects that education related expenses to remain at current levels in 2012.

Postage and freight expenses have declined, and are expected to continue to decline, as a result of fewer special mailings as well as an increase in the Corporation’s customer’s usage of electronic statements.

Printing and supplies expenses have steadily declined since 2009 as the Corporation has instituted a document imaging solution decreasing the amount of paper and related supplies. Management anticipates this trend to continue in 2012.

The increase in consulting fees is due to succession planning for key executives to help the Board of Directors and management identify, attract, and retain future leaders.

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

ANALYSIS OF CHANGES IN FINANCIAL CONDITION

The following table shows the composition and changes in the Corporation’s balance sheet as of December 31:

         Change 
   2011  2010  $  % 

ASSETS

     

Cash and cash equivalents

  $28,590   $18,109   $10,481    57.88% 

Certificates of deposit held in other financial institutions

   8,924    15,808    (6,884)   –43.55% 

Trading securities

   4,710    5,837    (1,127)   –19.31% 

Available-for-sale securities

   425,120    330,724    94,396    28.54% 

Mortgage loans available-for-sale

   3,205    1,182    2,023    171.15% 

Loans

   750,291    735,304    14,987    2.04% 

Allowance for loan losses

   (12,375)   (12,373)   (2)   0.02% 

Premises and equipment

   24,626    24,627    (1)   0.00% 

Corporate owned life insurance

   22,075    17,466    4,609    26.39% 

Accrued interest receivable

   5,848    5,456    392    7.18% 

Equity securities without readily determinable fair values

   17,189    17,564    (375)   –2.14% 

Goodwill and other intangible assets

   46,792    47,091    (299)   –0.63% 

Other assets

   12,930    19,015    (6,085)   –32.00% 
  

 

 

  

 

 

  

 

 

  

 

 

 

TOTAL ASSETS

  $1,337,925   $1,225,810   $112,115    9.15% 
  

 

 

  

 

 

  

 

 

  

 

 

 

LIABILITIES AND SHAREHOLDERS’ EQUITY

     

Liabilities

     

Deposits

  $958,164   $877,339   $80,825    9.21% 

Borrowed funds

   216,136    194,917    21,219    10.89% 

Accrued interest payable and other liabilities

   8,842    8,393    449    5.35% 
  

 

 

  

 

 

  

 

 

  

 

 

 

Total liabilities

   1,183,142    1,080,649    102,493    9.48% 

Shareholders’ equity

   154,783    145,161    9,622    6.63% 
  

 

 

  

 

 

  

 

 

  

 

 

 

TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY

  $1,337,925   $1,225,810   $112,115    9.15% 
  

 

 

  

 

 

  

 

 

  

 

 

 

As shown above, the Corporation enjoyed strong balance sheet growth since December 31, 2010. The primary driver behind this growth was excellent demand for deposit products. As loan demand did not keep pace with the increase in deposits, the Corporation increased its holdings in available-for-sale investment securities.

A discussion of changes in balance sheet amounts by major categories follows:

Certificates of deposit held in other financial institutions

During 2011, the Corporation reinvested maturities of certificates of deposit held in other financial institutions into available-for-sale investment securities to increase net interest margins (as the yields on available-for-sale investment securities exceeded the potential reinvestment rates for certificates of deposits held in other financial institutions during the year). This trend is likely to continue in 2012.

Trading securities

Trading securities are carried at fair value. The Corporation’s overall intent is to maintain a trading portfolio to enhance the ongoing restructuring of assets and liabilities as part of our interest rate risk management

objectives (See Note 4 “Trading Securities” of the Consolidated Financial Statements). Due to the current interest rate environment, the Corporation has allowed this balance to decline.

The following is a schedule of the carrying value of trading securities as of December 31:

   2011   2010   2009 

States and political subdivisions

  $4,710    $5,837    $9,962  

Mortgage-backed

   —     —     3,601  
  

 

 

   

 

 

   

 

 

 

Total

  $4,710    $5,837    $13,563  
  

 

 

   

 

 

   

 

 

 

Available-for-sale investment securities

The primary objective of the Corporation’s investing activities is to provide for safety of the principal invested. Secondary considerations include the need for earnings, liquidity, and the Corporation’s overall exposure to changes in interest rates. Securities currently classified as available-for-sale are stated at fair value.

The following is a schedule of the carrying value of investment securities available-for-sale as of December 31:

   2011   2010   2009 

Government sponsored enterprises

  $397    $5,404    $19,471  

States and political subdivisions

   174,938     169,717     151,730  

Auction rate money market preferred

   2,049     2,865     2,973  

Preferred stocks

   5,033     6,936     7,054  

Mortgage-backed securities

   143,602     102,215     67,734  

Collateralized mortgage obligations

   99,101     43,587     10,104  
  

 

 

   

 

 

   

 

 

 

Total

  $425,120    $330,724    $259,066  
  

 

 

   

 

 

   

 

 

 

Excluding those holdings in government sponsored enterprises and municipalities within the state of Michigan, there were no investments in securities of any one issuer that exceeded 10% of shareholders’ equity. The Corporation has a policy prohibiting investments in securities that it deems are unsuitable due to their inherent credit or market risks. Prohibited investments include stripped mortgage backed securities, zero coupon bonds, nongovernment agency asset backed securities, and structured notes. The Corporation’s holdings in mortgage-backed securities and collateralized mortgage obligations include only government agencies and government sponsored agencies as the Corporation holds no investments in private label mortgage-backed securities or collateralized mortgage obligations.

The following is a schedule of maturities of available-for-sale investment securities (at fair value) and their weighted average yield as of December 31, 2011. Weighted average yields have been computed on a fully taxable-equivalent basis using a tax rate of 34%. Auction rate money market preferred securities are long term floating rate instruments for which interest rates are set at periodic auctions. At each successful auction, the Corporation has the option to sell the security at par value. Additionally, the issuers of auction rate securities generally have the right to redeem or refinance the debt. Because of their variable monthly payments, auction rate money market preferreds, preferred stocks, mortgage-backed securities, and collateralized mortgage

obligations are not reported by a specific maturity group. Expected maturities may differ from contractual maturities because issuers may have the right to call or prepay obligations.

  Maturing       
  Within
One Year		  After One
Year But
Within
Five Years		  After Five
Years But
Within
Ten Years		  After
Ten Years		  Securities with
Variable Monthly
Payments or
Continual
Call Dates		 
  Amount  Yield (%)  Amount  Yield (%)  Amount  Yield (%)  Amount  Yield (%)  Amount  Yield (%) 

Government sponsored enterprises

 $—    —   $—    —   $397    7.91   $—    —   $—    —  

States and political subdivisions

  8,441    3.24    35,904    4.12    93,189    3.87    37,404    2.84    —    —  

Mortgage-backed securities

  —    —    271    5.68    73,974    1.91    69,357    1.97    —    —  

Collateralized mortgage

  —    —    —    —    —    —    —    —    99,101    2.76  

obligations

          

Auction rate money

  —    —    —    —    —    —    —    —    2,049    4.92  

market preferred

          

Preferred stocks

  —    —    —    —    —    —    —    —    5,033    4.30  
 

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Total

 $8,441    3.24   $36,175    4.13   $167,560    3.01   $106,761    2.28   $106,183    2.88  
 

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Loans

The largest component of earning assets is loans. The proper management of credit and market risk inherent in the loan portfolio is critical to the financial well-being of the Corporation. To control these risks, the Corporation has adopted strict underwriting standards. These standards include specific criteria against lending outside the Corporation’s defined market areas, lending limits to a single borrower, and strict loan to collateral value limits. The Corporation also monitors and limits loan concentrations extended to distressed industries. The Corporation has no foreign loans and there were no concentrations greater than 10% of total loans that are not disclosed as a separate category in the following table.

The following table presents the composition of the loan portfolio for the years ended December 31:

   2011   2010   2009   2008   2007 

Commercial

  $365,714    $348,852    $340,274    $324,806    $238,306  

Agricultural

   74,645     71,446     64,845     58,003     47,407  

Residential real estate mortgage

   278,360     284,029     285,838     319,397     297,937  

Installment

   31,572     30,977     32,359     33,179     29,037  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
  $750,291    $735,304    $723,316    $735,385    $612,687  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

The following table presents the change in the loan categories for the years ended December 31:

   2011  2010  2009 
   $ Change  % Change  $ Change  % Change  $ Change  % Change 

Commercial

  $16,862    4.8%  $8,578    2.5%  $15,468    4.8% 

Agricultural

   3,199    4.5%   6,601    10.2%   6,842    11.8% 

Residential real estate mortgage

   (5,669)   –2.0%   (1,809)   –0.6%   (33,559)   –10.5% 

Installment

   595    1.9%   (1,382)   –4.3%   (820)   –2.5% 
  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 
  $14,987    2.0%  $11,988    1.7%  $(12,069)   –1.6% 
  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

A substantial portion of the increase in total loans as of December 31, 2008 compared to December 31, 2007 was a result of the acquisition of Greenville Financial Corporation in January 2008. Pursuant to the acquisition, the Corporation purchased gross loans totaling $88,613.

Corporate owned life insurance

During the third quarter of 2011, the Corporation purchased an additional $4,000 of corporate owned life insurance policies. The Corporation purchased these additional policies to provide additional coverage for key employees, while also generating ongoing earnings as the cash surrender values of the policies increase.

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 nonconsolidated entities accounted for under the equity method of accounting (see Note 1 “Nature of Operations and Summary of Significant Accounting Policies” of Notes to Consolidated Financial Statements).

Deposits

The main source of funds for the Corporation is deposits. The following table presents the composition of the deposit portfolio as of December 31:

   2011   2010   2009   2008   2007 

Noninterest bearing deposits

  $119,072    $104,902    $96,875    $97,546    $84,846  

Interest bearing demand deposits

   163,653     142,259     128,111     113,973     105,526  

Savings deposits

   193,902     177,817     157,020     182,523     196,682  

Certificates of deposit

   395,777     386,435     356,594     340,976     311,976  

Brokered certificates of deposit

   54,326     53,748     50,933     28,185     28,197  

Internet certificates of deposit

   31,434     12,178     13,119     12,427     6,246  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total

  $958,164    $877,339    $802,652    $775,630    $733,473  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

The following table presents the change in the deposit categories for the years ended December 31:

   2011   2010   2009 
   $ Change   % Change   $ Change  % Change   $ Change  % Change 

Noninterest bearing deposits

  $14,170     13.5%    $8,027    8.3%    $(671)   –0.7%  

Interest bearing demand deposits

   21,394     15.0%     14,148    11.0%     14,138    12.4%  

Savings deposits

   16,085     9.0%     20,797    13.2%     (25,503)   –14.0%  

Certificates of deposit

   9,342     2.4%     29,841    8.4%     15,618    4.6%  

Brokered certificates of deposit

   578     1.1%     2,815    5.5%     22,748    80.7%  

Internet certificates of deposit

   19,256     158.1%     (941)   –7.2%     692    5.6%  
  

 

 

   

 

 

   

 

 

  

 

 

   

 

 

  

 

 

 

Total

  $80,825     9.2%    $74,687    9.3%    $27,022    3.5%  
  

 

 

   

 

 

   

 

 

  

 

 

   

 

 

  

 

 

 

As shown in the preceding table, the Corporation has experienced strong deposit growth since December 30, 2010. This growth was the result of the Corporation offering products with competitive rates and terms, as well as focused marketing efforts to increase deposit market share in the communities served. While management anticipates that deposits will continue to increase in 2012, it is expected to be at a lower rate than 2011.

The following table shows the average balances and corresponding interest rates paid on deposit accounts as of December 31:

   2011  2010  2009 
   Amount   Rate  Amount   Rate  Amount   Rate 

Noninterest bearing demand deposits

  $113,726     —   $102,812     —   $94,408     —  

Interest bearing demand deposits

   152,530     0.12%   137,109     0.11%   116,412     0.13% 

Savings deposits

   192,999     0.25%   169,579     0.23%   177,538     0.22% 

Time deposits

   467,931     2.19%   430,892     2.55%   398,356     3.27% 
  

 

 

    

 

 

    

 

 

   

Total

  $927,186     $840,392     $786,714    
  

 

 

    

 

 

    

 

 

   

The remaining maturity of time certificates and other time deposits of $100 or more as of December 31, 2011 was as follows:

Maturity    

Within 3 months

  $42,270  

Within 3 to 6 months

   25,357  

Within 6 to 12 months

   63,423  

Over 12 months

   104,266  
  

 

 

 

Total

  $235,316  
  

 

 

 

Borrowed Funds

The following table summarizes the Corporation’s borrowings as of December 31:

   2011  2010 
   Amount   Rate  Amount   Rate 

Federal Home Loan Bank advances

  $142,242     3.16%  $113,423     3.64% 

Securities sold under agreements to repurchase without stated maturity dates

   57,198     0.25%   45,871     0.25% 

Securities sold under agreements to repurchase with stated maturity dates

   16,696     3.51%   19,623     3.28% 

Federal funds purchased

   —     —    16,000     0.60% 
  

 

 

   

 

 

  

 

 

   

 

 

 

Total

  $216,136     2.42%  $194,917     2.56% 
  

 

 

   

 

 

  

 

 

   

 

 

 

The maturity and weighted average interest rates of FHLB advances are as follows as of December 31:

   2011  2010 
   Amount   Rate  Amount   Rate 

Fixed rate advances due 2011

  $—     —   $10,086     3.96% 

One year putable advances due 2011

   —     —    1,000     4.75% 

Fixed rate advances due 2012

   17,000     2.97%   17,000     2.97% 

One year putable advances due 2012

   15,000     4.10%   15,000     4.10% 

Fixed rate advances due 2013

   5,242     4.14%   5,337     4.14% 

One year putable advances due 2013

   5,000     3.15%   5,000     3.15% 

Fixed rate advances due 2014

   25,000     3.16%   25,000     3.16% 

Fixed rate advances due 2015

   45,000     3.30%   25,000     4.63% 

Fixed rate advances due 2016

   10,000     2.15%   —     —  

Fixed rate advances due 2017

   20,000     2.56%   10,000     2.35% 
  

 

 

   

 

 

  

 

 

   

 

 

 

Total

  $142,242     3.16%  $113,423     3.64% 
  

 

 

   

 

 

  

 

 

   

 

 

 

The maturity and weighted average interest rates of securities sold under agreements to repurchase with stated maturity dates are as follows at December 31:

   2011  2010 
   Amount   Rate  Amount   Rate 

Repurchase agreements due 2011

  $—     —   $858     1.51% 

Repurchase agreements due 2012

   428     2.08%   1,013     2.21% 

Repurchase agreements due 2013

   5,000     4.51%   5,127     4.45% 

Repurchase agreements due 2014

   10,869     3.12%   12,087     3.00% 

Repurchase agreements due 2015

   399     3.25%   538     3.25% 
  

 

 

   

 

 

  

 

 

   

 

 

 

Total

  $16,696     3.51%  $19,623     3.28% 
  

 

 

   

 

 

  

 

 

   

 

 

 

Contractual Obligations and Loan Commitments

The Corporation has various financial obligations, including contractual obligations and commitments, which may require future cash payments. The following schedule summarizes the Corporation’s non-cancelable obligations and future minimum payments as of December 31, 2011:

   Minimum Payments Due by Period 
       After One   After Three         
   Due in   Year But   Years But         
   One Year   Within   Within   After     
   or Less   Three Years   Five Years   Five Years   Total 

Deposits with no stated maturity

  $476,627    $—    $—    $—    $476,627  

Certificates of deposit with stated maturities

   265,299     110,092     99,094     7,052     481,537  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Borrowed funds

          

Short term borrowings

   57,198     —     —     —     57,198  

Long term borrowings

   32,428     96,510     10,000     20,000     158,938  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total borrowed funds

   89,626     96,510     10,000     20,000     216,136  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total contractual obligations

  $831,552    $206,602    $109,094    $27,052    $1,174,300  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

The Corporation also has loan commitments that may impact liquidity. The following schedule summarizes the Corporation’s loan commitments and expiration dates by period as of December 31, 2011. Since many of these commitments historically have expired without being drawn upon, the total amount of these commitments does not necessarily represent future cash requirements of the Corporation.

   Expiration Dates by Period 
       After One   After Three         
   Due in   Year But   Years But         
   One Year   Within   Within   After     
   or Less   Three Years   Five Years   Five Years   Total 

Unused commitments to extend credit

  $61,415    $27,740    $10,591    $3,076    $102,822  

Undisbursed loans

   21,806     —     —     —     21,806  

Standby letters of credit

   4,461     —     —     —     4,461  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total loan commitments

  $87,682    $27,740    $10,591    $3,076    $129,089  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Capital

The capital of the Corporation consists primarily of common stock, including shares to be issued, retained earnings, and accumulated other comprehensive income. The Corporation offers dividend reinvestment and employee, director, and shareholder stock purchase plans. Under the provisions of these plans, the Corporation issued 115,359 shares of common stock generating $2,192 of capital during 2011, and 124,904 shares of common stock generating $2,203 of capital in 2010. The Corporation also generates capital through the Isabella Bank Corporation and Related Companies Deferred Compensation Plan for Directors (the “Directors Plan”), its equity compensation plan (See Note 17 “Benefit Plans” of Notes to Consolidated Financial Statements). Pursuant to this plan, the Corporation generated $615 and $650 of capital in 2011 and 2010, respectively.

The Board of Directors has adopted a common stock repurchase plan. This plan was approved to enable the Corporation to repurchase the Corporation’s common stock for reissuance to the dividend reinvestment plan, the employee stock purchase plan and for distributions from the Directors Plan. During 2011 and 2010 the Corporation repurchased 120,441 shares of common stock at an average price of $18.30 and 138,970 shares of common stock at an average price of $18.40, respectively.

Accumulated other comprehensive loss decreased $4,198 in 2011 and consists of $5,498 of unrealized gains on available-for-sale investment securities which was offset by a $1,300 increase in unrecognized pension cost. These amounts are net of tax.

The Federal Reserve Board’s current recommended minimum primary capital to assets requirement is 6.0%. The Corporation’s Tier 1 capital to average assets ratio, which consists of shareholders’ equity plus the allowance for loan losses less goodwill and acquisition intangibles, was 8.18% at December 31, 2011. There are no commitments for significant capital expenditures.

The Federal Reserve Board has established a minimum risk based capital standard. Under this standard, a framework has been established that assigns risk weights to each category of on and off-balance-sheet items to arrive at risk adjusted total assets. Regulatory capital is divided by the risk adjusted assets with the resulting ratio compared to the minimum standard to determine whether a corporation has adequate capital. The minimum standard is 8%, of which at least 4% must consist of equity capital net of goodwill and acquisition intangibles. The following table sets forth the percentages required under the Risk Based Capital guidelines and the Corporation’s values at December 31:

   2011  2010  Required 

Equity Capital

   12.92%   12.72%   4.00% 

Secondary Capital

   1.25%   1.25%   4.00% 
  

 

 

  

 

 

  

 

 

 

Total Capital

   14.17%   13.97%   8.00% 
  

 

 

  

 

 

  

 

 

 

Isabella Bank Corporation’s secondary capital includes only the allowance for loan losses. The percentage for the secondary capital under the required column is the maximum amount allowed from all sources.

The Federal Reserve Board also prescribes minimum capital requirements for the Corporation’s subsidiary Bank. At December 31, 2011, the Bank exceeded these minimums. For further information regarding the Bank’s capital requirements, refer to Note 16 “Minimum Regulatory Capital Requirements” of the Notes to Consolidated Financial Statements,

Fair Value

The Corporation utilizes fair value measurements to record fair value adjustments to certain assets and liabilities and to determine fair value disclosures. Securities available-for-sale, trading securities, and certain liabilities are recorded at fair value on a recurring basis. Additionally, from time to time, the Corporation may be required to record at fair value other assets on a nonrecurring basis, such as loans held-for-sale, foreclosed assets, originated mortgage servicing rights, 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.

The table below represents the activity in Level 3 inputs measured on a recurring basis for the year ended December 31:

   2011  2010 

Level 3 inputs — January 1

  $9,801   $10,027  

Calls

   (1,000)   —  

Transfer to Level 1 inputs

   (5,033)   —  

Transfer to Level 2 inputs

   (2,049)   —  

Net unrealized losses on available-for-sale investment securities

   (1,719)   (226) 
  

 

 

  

 

 

 

Level 3 inputs — December 31

  $—   $9,801  
  

 

 

  

 

 

 

Securities classified as Level 3 in 2010 included securities in less liquid markets and included auction rate money market preferred securities and preferred stocks. Due to the limited trading of these securities during 2010, the Corporation utilized a discounted cash flow analysis to determine fair values on December 31, 2010. This analysis considered the creditworthiness of the counterparty, the timing of expected future cash flows, the current volume of trading activity, and recent trade prices. The discount rates used were determined by using the interest rates of similarly rated financial institution debt based on the weighted average of a range of terms for corporate bond interest rates, which were obtained from published sources and ranged from 3.90% to 6.90% as of

December 31, 2010. During 2011, the markets for these securities have normalized and established regular trading patterns. As a result of this normalization, the Corporation measured preferred stocks with fair values of $5,033 utilizing Level 1 inputs and auction rate money market preferred securities with fair values of $2,049 utilizing Level 2 inputs based on the trade price of similar securities as of December 31, 2011.

For further information regarding fair value measurements see Note 1, “Nature of Operations and Summary of Significant Accounting Policies” and Note 20, “Fair Value” of the Consolidated Financial Statements.

Interest Rate Sensitivity

Interest rate sensitivity is determined by the amount of earning assets and interest bearing liabilities repricing within a specific time period, and their relative sensitivity to a change in interest rates. Management strives to achieve reasonable stability in the net interest margin through periods of changing interest rates. One tool used by management to measure interest rate sensitivity is gap analysis. As shown in the following table, the gap analysis depicts the Corporation’s position for specific time periods and the cumulative gap as a percentage of total assets.

Trading securities are included in the 0 to 3 month time frame due to their repricing characteristics. Fixed interest rate investment securities are scheduled according to their contractual maturity. Fixed rate loans are included in the appropriate time frame based on their scheduled amortization. Variable rate loans, which totaled $162,653 as of December 31, 2011, are included in the time frame of their earliest repricing. Time deposit liabilities are scheduled based on their contractual maturity except for variable rate time deposits in the amount of $1,559 that are included in the 0 to 3 month time frame.

Savings, NOW accounts, and money market accounts have no contractual maturity date and are believed to be predominantly noninterest rate sensitive by management. These accounts have been classified in the gap table according to their estimated withdrawal rates based upon management’s analysis of deposit runoff over the past five years. Management believes this runoff experience is consistent with its expectation for the future. As of December 31, 2011, the Corporation had a negative cumulative gap within one year. A negative gap position results when more liabilities, within a specified time frame, mature or reprice than assets.

The following table shows the time periods and the amount of assets and liabilities available for interest rate repricing as of December 31, 2011. The interest rate sensitivity information for investment securities is based on the expected prepayments and call dates versus stated maturities. For purposes of this analysis, nonaccrual loans and the allowance for loan losses are excluded.

   0 to 3  4 to 12  1 to 5  Over 5 
   Months  Months  Years  Years 

Interest sensitive assets

     

Trading securities

  $4,710   $—   $—   $—  

Investment securities

   40,976    63,583    182,965    137,596  

Loans

   59,872    147,565    459,290    77,175  
  

 

 

  

 

 

  

 

 

  

 

 

 

Total

  $105,558   $211,148   $642,255   $214,771  
  

 

 

  

 

 

  

 

 

  

 

 

 

Interest sensitive liabilities

     

Borrowed funds

  $67,440   $22,429   $106,267   $20,000  

Time deposits

   74,500    191,206    208,779    7,052  

Savings

   19,591    47,365    103,845    23,101  

Interest bearing demand

   15,621    38,273    82,568    27,191  
  

 

 

  

 

 

  

 

 

  

 

 

 

Total

  $177,152   $299,273   $501,459   $77,344  
  

 

 

  

 

 

  

 

 

  

 

 

 

Cumulative gap

  $(71,594)  $(159,719)  $(18,923)  $118,504  

Cumulative gap as a % of assets

   (5.35)%   (11.94)%   (1.41)%   8.86% 

The following table shows the maturity of commercial and agricultural loans outstanding at December 31, 2011. Also provided are the amounts due after one year, classified according to the sensitivity to changes in interest rates.

   1 Year   1 to 5   Over 5     
   or Less   Years   Years   Total 

Commercial and agricultural

  $120,463    $276,367    $43,529    $440,359  
  

 

 

   

 

 

   

 

 

   

 

 

 

Interest sensitivity

        

Loans maturing after one year that have:

        

Fixed interest rates

    $238,963    $32,178    

Variable interest rates

     37,404     11,351    
    

 

 

   

 

 

   

Total

    $276,367    $43,529    
    

 

 

   

 

 

   

Liquidity

Liquidity is monitored regularly by the Corporation’s 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.

The primary sources of the Corporation’s liquidity are cash and cash equivalents, certificates of deposit held in other financial institutions, trading securities, and available-for-sale investment securities, excluding auction rate money market preferred securities and preferred stock as of December 31, 2010 due to their illiquidity. These categories totaled $467,344 or 34.9% of assets as of December 31, 2011 as compared to $360,677 or 29.4% in 2010. Liquidity is important for financial institutions because of their need to meet loan funding commitments, depositor withdrawal requests, and various other commitments discussed in the accompanying notes to consolidated financial statements. Liquidity varies significantly daily, based on customer activity.

The following table summarizes the Corporation’s sources and uses of cash for the years ended December 31:

   2011  2010  $Variance 

Net cash provided by operating activities

  $18,860   $26,521   $(7,661) 

Net cash used in investing activities

   (105,203)   (103,877)   (1,326) 

Net cash provided by financing activities

   96,824    70,983    25,841  
  

 

 

  

 

 

  

 

 

 

Increase (decrease) in cash and cash equivalents

   10,481    (6,373)   16,854  

Cash and cash equivalents January 1

   18,109    24,482    (6,373) 
  

 

 

  

 

 

  

 

 

 

Cash and cash equivalents December 31

  $28,590   $18,109   $10,481  
  

 

 

  

 

 

  

 

 

 

The primary source of funds for the Corporation is deposits. The Corporation emphasizes interest bearing time deposits as part of its funding strategy. The Corporation also seeks noninterest bearing deposits, or checking accounts, to expand its customer base, while reducing the Corporation’s cost of funds.

The Corporation has the ability to borrow from the Federal Home Loan Bank, the Federal Reserve Bank, and through various correspondent banks as federal funds purchased. These funding methods typically carry a higher interest rate than traditional market deposit accounts. Some borrowed funds, including Federal Home Loan Bank Advances, Federal Reserve Bank Discount Window Advances, and repurchase agreements, require the Corporation to pledge assets, typically in the form of certificates of deposits held in other financial institutions, investment securities, or loans as collateral.

The Corporation had the ability to borrow up to an additional $110,069, based on the assets currently pledged as collateral. The Corporation has pledged eligible mortgage loans and investment securities as collateral for any such borrowings.

Quantitative and Qualitative Disclosures about Market Risk

The Corporation’s primary market risks are interest rate risk and liquidity risk. The Corporation has no significant foreign exchange risk and does not utilize interest rate swaps or derivatives, except for interest rate locks and forward loan commitments, in the management of its interest rate risk. Any changes in foreign exchange rates or commodity prices would have an insignificant impact on the Corporation’s interest income and cash flows. The Corporation does have a significant amount of loans extended to borrowers in agricultural production. The cash flow of such borrowers and ability to service debt is largely dependent on commodity prices. The Corporation mitigates these risks by using conservative price and production yields when calculating a borrower’s available cash flow to service their debt.

Interest rate risk (“IRR”) is the exposure of the Corporation’s net interest income, its primary source of 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 in which financial institutions earn income and create shareholder value. Excessive exposure to IRR could pose a significant risk to the Corporation’s earnings and capital.

The Federal Reserve Board, the Corporation’s primary Federal regulator, has adopted a policy requiring the Board of Directors and senior management to effectively manage the various risks that can have a material impact on the safety and soundness of the Corporation. The risks include credit, interest rate, liquidity, operational, and reputational. The Corporation has policies, procedures, and internal controls for measuring and managing these risks. Specifically, the IRR 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 opportunity of assets and liabilities, and the frequency of measuring and reporting to the Board of Directors.

The Corporation uses several techniques to manage IRR. The first method is gap analysis. Gap analysis measures the cash flows and/or the earliest repricing of the Corporation’s interest bearing assets and liabilities. This analysis is useful for measuring trends in the repricing characteristics of the balance sheet. Significant assumptions are required in this process because of the imbedded repricing options contained in assets and liabilities. A substantial portion of the Corporation’s assets are invested in loans and investment securities with issuer call options. Residential real estate and other consumer loans have imbedded options that allow the borrower to repay the balance prior to maturity without penalty, while commercial and agricultural loans have prepayment penalties. The amount of prepayments is dependent upon many factors, including the interest rate of a given loan in comparison to the current interest rate for residential mortgages, the level of sales of used homes, and the overall availability of credit in the market place. Generally, a decrease in interest rates will result in an increase in the Corporation’s cash flows from these assets. A significant portion of the Corporation’s securities are callable or subject to prepayment. The call option is more likely to be exercised in a period of decreasing interest rates. Investment securities, other than those that are callable, do not have any significant imbedded options. Savings and checking deposits may generally be withdrawn on request without prior notice. The timing of cash flows from these deposits is estimated based on historical experience. Time deposits have penalties that discourage early withdrawals.

The second technique used in the management of IRR is to combine the projected cash flows and repricing characteristics generated by the gap analysis and the interest rates associated with those cash flows to project future interest income. By changing the amount and timing of the cash flows and the repricing interest rates of those cash flows, the Corporation can project the effect of changing interest rates on its interest income. Based on the projections prepared for the year ended December 31, 2011, the Corporation’s net interest income would decrease slightly during a period of increasing interest rates.

The following tables provide information about the Corporation’s assets and liabilities that are sensitive to changes in interest rates as of December 31, 2011 and 2010. The Corporation has no interest rate swaps, futures contracts, or other derivative financial options. The principal amounts of assets and time deposits maturing were

calculated based on the contractual payment and maturity dates. Savings and NOW accounts are based on management’s estimate of their future cash flows.

(dollars in thousands) December 31, 2011  Fair Value 
  2012  2013  2014  2015  2016  Thereafter  Total  12/31/11 

Rate sensitive assets

        

Other interest bearing assets

 $8,775   $4,125   $100   $—   $—   $—   $13,000   $13,053  

Average interest rates

  1.18%   1.33%   0.35%   —    —    —    1.22%  

Trading securities

 $3,156   $1,031   $523   $—   $—   $—   $4,710   $4,710  

Average interest rates

  3.34%   2.48%   2.49%      3.06%  

Fixed interest rate securities

 $104,559   $61,421   $48,659   $37,777   $35,108   $137,596   $425,120   $425,120  

Average interest rates

  2.98%   2.84%   2.91%   2.93%   3.21%   3.01%   2.98%  

Fixed interest rate loans

 $141,867   $140,390   $90,852   $75,690   $76,985   $61,854   $587,638   $606,524  

Average interest rates

  6.24%   6.08%   5.94%   5.99%   5.40%   5.15%   5.90%  

Variable interest rate loans

 $70,783   $25,267   $20,803   $18,853   $11,631   $15,316   $162,653   $162,653  

Average interest rates

  5.87%   3.97%   4.05%   3.68%   4.00%   3.98%   4.78%  

Rate sensitive liabilities

        

Borrowed funds

 $89,869   $15,000   $25,869   $45,398   $20,000   $20,000   $216,136   $227,780  

Average interest rates

  1.42%   3.93%   3.13%   3.30%   2.67%   2.56%   2.41%  

Savings and NOW accounts

 $120,850   $78,313   $51,291   $34,006   $22,803   $50,292   $357,555   $357,555  

Average interest rates

  0.20%   0.19%   0.18%   0.17%   0.15%   0.15%   0.18%  

Fixed interest rate time deposits

 $264,147   $62,883   $46,802   $55,493   $43,601   $7,052   $479,978   $498,085  

Average interest rates

  1.61%   2.67%   2.33%   2.56%   2.41%   1.48%   2.00%  

Variable interest rate time deposits

 $1,152   $407   $—   $—   $—   $—   $1,559   $1,559  

Average interest rates

  0.67%   0.69%   —    —    —    —    0.68%  

  December 31, 2010  Fair Value 
  2011  2012  2013  2014  2015  Thereafter  Total  12/31/10 

Rate sensitive assets

        

Other interest bearing assets

 $10,550   $5,429   $960   $—   $—   $—   $16,939   $17,039  

Average interest rates

  0.96%   1.82%   2.16%   —    —    —    1.30%  

Trading securities

 $1,918   $2,366   $1,031   $522   $—   $—   $5,837   $5,837  

Average interest rates

  3.46%   2.31%   2.42%   2.47%   —    —    2.72%  

Fixed interest rate securities

 $64,652   $42,984   $32,871   $29,395   $24,438   $136,384   $330,724   $330,724  

Average interest rates

  3.68%   3.42%   3.30%   3.33%   3.28%   3.13%   3.32%  

Fixed interest rate loans

 $128,277   $121,434   $140,019   $67,423   $68,569   $66,010   $591,732   $603,435  

Average interest rates

  6.80%   6.63%   6.26%   6.47%   6.08%   5.83%   6.41%  

Variable interest rate loans

 $59,536   $17,306   $22,523   $15,118   $18,830   $10,259   $143,572   $143,572  

Average interest rates

  4.94%   4.76%   4.27%   3.78%   3.69%   5.21%   4.55%  

Rate sensitive liabilities

        

Borrowed funds

 $74,151   $33,013   $15,127   $37,087   $25,539   $10,000   $194,917   $200,603  

Average interest rates

  0.62%   3.46%   2.55%   3.11%   4.60%   2.35%   2.33%  

Savings and NOW accounts

 $74,278   $73,818   $53,174   $35,872   $24,520   $58,414   $320,076   $320,076  

Average interest rates

  0.21%   0.21%   0.20%   0.19%   0.18%   0.15%   0.19%  

Fixed interest rate time deposits

 $215,648   $113,338   $44,269   $31,414   $39,474   $6,278   $450,421   $452,392  

Average interest rates

  1.79%   2.67%   3.35%   2.86%   2.97%   3.26%   2.36%  

Variable interest rate time deposits

 $1,279   $661   $—   $—   $—   $—   $1,940   $1,940  

Average interest rates

  1.21%   1.06%   —    —    —    —    1.16%  

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 Section 21E of the Securities Exchange Act of 1934, as amended. The Corporation

intends such forward-looking statements to be covered by the safe harbor provisions for forward-looking statements contained in the Private Securities Reform Act of 1995, and is including 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 of the Corporation, are generally identifiable by use of the words “believe,” “expect,” “intend,” “anticipate,” “estimate,” “project,” or similar expressions. The Corporation’s 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 of the Corporation and the subsidiaries include, but are not limited to, changes in interest rates, general economic conditions, legislative/regulatory changes, monetary and fiscal policies of the U.S. Government including policies of the U.S. Treasury, the Federal Reserve Board, the Federal Deposit Insurance Corporation, the quality or composition of the loan or investment portfolios, demand for loan products, deposit flows, competition, demand for financial services in the Corporation’s 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 the Corporation and its business, including additional factors that could materially affect the Corporation’s financial results, is included in the Corporation’s filings with the Securities and Exchange Commission.

Common Stock and Dividend Information

The Corporation’s common stock is traded in the over the counter market. The common stock is quoted on the OTCQB tier of the OTC Markets Group, Inc.’s electronic quotation system (www.otcmarkets.com) under the symbol “ISBA”. Other trades in the common stock occur in privately negotiated transactions from time to time of which the Corporation may have little or no information.

Management has reviewed the information available as to the range of reported high and low bid quotations, including high and low bid information as reported by OTC Markets and as reported by the parties to privately negotiated transactions. The following table sets forth management’s compilation of that information for the periods indicated. Price information obtained from OTC Markets reflects inter dealer prices, without retail mark up, mark down or commissions and may not necessarily represent actual transactions. Price information obtained from parties to privately negotiated transactions reflects actual closing prices that were disclosed to the Corporation, which management has not independently verified. The following compiled data is provided for information purposes only and should not be viewed as indicative of the actual or market value of the Corporation’s common stock.

   Number of   Sale Price 
   Shares   Low   High 

2011

      

First Quarter

   48,909    $17.00    $19.75  

Second Quarter

   65,090     17.00     18.50  

Third Quarter

   92,953     17.41     18.95  

Fourth Quarter

   106,210     17.74     24.45  
  

 

 

     
   313,162      
  

 

 

     

2010

      

First Quarter

   45,695    $16.75    $19.00  

Second Quarter

   64,290     17.00     18.50  

Third Quarter

   53,897     16.05     17.99  

Fourth Quarter

   56,534     16.57     18.30  
  

 

 

     
   220,416      
  

 

 

     

The following table sets forth the cash dividends paid for the following quarters:

   Per Share 
   2011   2010 

First Quarter

  $0.19    $0.18  

Second Quarter

   0.19     0.18  

Third Quarter

   0.19     0.18  

Fourth Quarter

   0.19     0.18  
  

 

 

   

 

 

 

Total

  $0.76    $0.72  
  

 

 

   

 

 

 

Isabella Bank Corporation’s authorized common stock consists of 15,000,000 shares, of which 7,589,226 shares are issued and outstanding as of December 31, 2011. As of that date, there were 3,043 shareholders of record.

The Board of Directors has authorized a common stock repurchase plan. On April 27, 2011, the Board of Directors amended the plan to allow for the repurchase of an additional 100,000 shares of the Corporation’s common stock. These authorizations do not have expiration dates. As shares are repurchased under this plan, they revert back to the status of authorized, but unissued shares.

The following table provides information for the three month period ended December 31, 2011, with respect to this plan:

           

Total Number of

Shares Purchased

as Part of Publicly

Announced Plan

     
             

Maximum Number of

Shares That May Yet Be

Purchased Under the

 
   Shares Repurchased     
       Average Price     
   Number   Per Share   or Program   Plans or Programs 

Balance, September 30, 2011

         62,729  

October 1 — 31, 2011

   7,934    $18.78     7,934     54,795  

November 1 — 30, 2011

   1,481     19.58     1,481     53,314  

December 1 — 31, 2011

   34,318     18.50     34,318     18,996  
  

 

 

   

 

 

   

 

 

   

 

 

 

Balance, December 31, 2011

   43,733    $18.59     43,733     18,996  
  

 

 

   

 

 

   

 

 

   

 

 

 

Information concerning Securities Authorized for Issuance Under Equity Compensation Plans appears under “Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Shareholder Matters” included elsewhere in the Corporation’s annual report on Form 10-K.

Stock Performance

The following graph compares the cumulative total shareholder return on Corporation common stock for the last five years with the cumulative total return on (1) the NASDAQ Stock Market Index (“NASDAQ”), which is comprised of all United States common shares traded on the NASDAQ and (2) the NASDAQ Bank Stock Index (“NASDAQ Banks”), which is comprised of bank and bank holding company common shares traded on the NASDAQ over the same period. The graph assumes the value of an investment in the Corporation and each index was $100 at December 31, 2006 and all dividends are reinvested.

Stock Performance

Five-Year Total Return

LOGO

The dollar values for total shareholder return plotted in the graph above are shown in the table below:

Comparison of Five Year Cumulative

Among Isabella Bank Corporation, NASDAQ Stock Market,

and NASDAQ Bank Stock

Year

  Isabella Bank
Corporation		  NASDAQ  NASDAQ
Banks

12/31/2006

  100.0  100.0  100.0

12/31/2007

  101.6  110.6  80.4

12/31/2008

  66.1  66.6  63.3

12/31/2009

  51.0  96.6  52.9

12/31/2010

  48.5  114.0  60.4

12/31/2011

  69.1  113.1  54.0

SHAREHOLDERS’ INFORMATION

Annual Meeting

The Annual Meeting of Shareholders will be held at 5:00 p.m., Tuesday, May 1, 2012,5, 2015, Comfort Inn Conference Center, 2424 S. Mission Street, Mt. Pleasant, Michigan.

Financial Information and Form 10-K

Copies of the 20112014 Annual Report, Isabella Bank Corporation Form 10-K, and other financial information not contained herein are available on the Bank’s website (www.isabellabank.com) under the Investor RelationsInvestors tab, or may be obtained, without charge, by writing to:

Debra Campbell

Secretary

Isabella Bank Corporation

401 N. Main St.

Mt. Pleasant, Michigan 48858

Mission Statement

To create an operating environment that will provide shareholders with sustained growth in their investment while maintaining our independence and subsidiaries’ autonomy.

Equal Employment Opportunity

The equal employment opportunity clauses in Section 202 of the Executive Order 11246, as amended; 38 USC 2012, Vietnam Era Veterans Readjustment Act of 1974; Section 503 of the Rehabilitation Act of 1973, as amended; relative to equal employment opportunity and implementing rules and regulations of the Secretary of Labor are adhered to and supported by Isabella Bank Corporation, and its subsidiaries.

PROXY CARD

THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS

The undersigned hereby appoints Jeffrey J. Barnes, James C. Fabiano, and Joseph LaFramboise as proxies, each with the power to appoint his/her substitute, and hereby authorizes them to represent and to vote as designated below, all the shares



94

Table of Common StockContents




Table of Isabella Bank Corporation that the undersigned is eligible to vote as of March 28, 2012 at the annual meeting of shareholders to be held on May 1, 2012 or any adjournments thereof.

PROPOSAL 1—ELECTION OF DIRECTORS: Proposal to elect the following three (3) persons as directors. Please mark the appropriate box for each director-nominee.

        FOR                AGAINST        WITHHOLD AUTHORITY
Richard J. Barz¨¨¨
Sandra L. Caul¨¨¨
W. Michael McGuire¨¨¨

This proxy, when properly executed, will be voted in the manner directed herein by the undersigned shareholder. IF NO DIRECTION IS MADE, THIS PROXY WILL BE VOTED “FOR THE NOMINEES LISTED UNDER PROPOSAL 1”. The shares represented by this proxy will be voted in the discretion of the proxies on any other matters which may come before the meeting.

Please sign as your name appears below. When shares are held by joint tenants, both should sign. When signing as attorney, executor, administrator, trustee or guardian, please give full title as such. If a corporation, please sign full corporate name by the President or other authorized officer. If a partnership, please sign in partnership name by authorized person.

Dated:, 2012            Signature

Please mark, sign, date, and return

Proxy card promptly using the enclosed envelope.

            Signature (if held jointly)

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