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EX-21 - EXHIBIT 21 - ISABELLA BANK Corpisba_20151231xex21.htm
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EX-23 - EXHIBIT 23 - ISABELLA BANK Corpisba_20151231xex23.htm
EX-31.A - EXHIBIT 31.A - ISABELLA BANK Corpisba_20151231xex31a.htm
EX-31.B - EXHIBIT 31.B - ISABELLA BANK Corpisba_20151231xex31b.htm

SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
FORM 10-K
x
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934.
For the fiscal year ended December 31, 2015
OR
¨

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934.
For the transition period from              to             
Commission File Number: 0-18415

Isabella Bank Corporation
(Exact name of registrant as specified in its charter)
Michigan
 
38-2830092
(State or other jurisdiction of
incorporation or organization)
 
(I.R.S. Employer
identification No.)
401 North Main Street, Mount Pleasant, Michigan 48858
(Address of principal executive offices) (Zip Code)
Registrant’s telephone number, including area code (989) 772-9471
Securities registered pursuant to Section 12(b) of the Act:
Title of each class
 
Name of each exchange on which registered
Securities registered pursuant to Section 12(g) of the Act:
Common Stock - No Par Value
(Title of Class)
 
Indicated by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.    ¨  Yes    x  No
Indicated by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.     ¨  Yes    x  No
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.     x  Yes    ¨  No
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (Section 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    x  Yes    ¨  No
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.   ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definition of “accelerated filer”, “large accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act (Check One).
Large accelerated filer
 
¨
 
Accelerated filer
 
x
 
 
 
 
 
Non-accelerated filer
 
¨  (Do not check if a smaller reporting company)
 
Smaller reporting company
 
¨
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    ¨  Yes    ý  No
The aggregate market value of the voting stock held by non-affiliates of the registrant was $185,183,000 as of the last business day of the registrant’s most recently completed second fiscal quarter.
The number of common shares outstanding of the registrant’s Common Stock (no par value) was 7,804,287 as of March 7, 2016.
 
DOCUMENTS INCORPORATED BY REFERENCE
(Such documents are incorporated herein only to the extent specifically set forth in response to an item herein.)
Documents
 
Part of Form 10-K Incorporated into
Portions of the Isabella Bank Corporation Proxy Statement for its Annual Meeting of Shareholders to be held May 3, 2016
 
Part III

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ISABELLA BANK CORPORATION
ANNUAL REPORT ON FORM 10-K
Table of Contents
PART I
 
 
 
 
 
 
 
 
 
Item 1.
 
 
 
 
 
 
 
Item 1A.
 
 
 
 
 
 
 
Item 1B.
 
 
 
 
 
 
 
Item 2.
 
 
 
 
 
 
 
Item 3.
 
 
 
 
 
 
 
Item 4.
 
 
 
 
 
 
 
PART II
 
 
 
 
 
 
 
 
 
Item 5.
 
 
 
 
 
 
 
Item 6.
 
 
 
 
 
 
 
Item 7.
 
 
 
 
 
 
 
Item 7A.
 
 
 
 
 
 
 
Item 8.
 
 
 
 
 
 
 
Item 9.
 
 
 
 
 
 
 
Item 9A.
 
 
 
 
 
 
 
Item 9B.
 
 
 
 
 
 
 
PART III
 
 
 
 
 
 
 
 
Item 10.
 
 
 
 
 
 
 
Item 11.
 
 
 
 
 
 
 
Item 12.
 
 
 
 
 
 
 
Item 13.
 
 
 
 
 
 
 
Item 14.
 
 
 
 
 
 
 
PART IV
 
 
 
 
 
 
 
 
Item 15.
 
 
 
 
 
 
 
SIGNATURES
 
 
 


2


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 policy, 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 consolidated financial results, is included in our filings with the SEC.
Glossary of Acronyms and Abbreviations
The acronyms and abbreviations identified below may be used throughout this Annual Report on Form 10-K or in our other SEC filings. You may find it helpful to refer back to this page while reading this report.
AFS: Available-for-sale
 
GAAP: U.S. generally accepted accounting principles
ALLL: Allowance for loan and lease losses
 
GLB Act: Gramm-Leach-Bliley Act of 1999
AOCI: Accumulated other comprehensive income (loss)
 
IFRS: International Financial Reporting Standards
ASC: FASB Accounting Standards Codification
 
IRR: Interest rate risk
ASU: FASB Accounting Standards Update
 
JOBS Act: Jumpstart our Business Startups Act
ATM: Automated Teller Machine
 
LIBOR: London Interbank Offered Rate
BHC Act: Bank Holding Company Act of 1956
 
N/A: Not applicable
CFPB: Consumer Financial Protection Bureau
 
N/M: Not meaningful
CIK: Central Index Key
 
NASDAQ: NASDAQ Stock Market Index
CRA: Community Reinvestment Act
 
NASDAQ Banks: NASDAQ Bank Stock Index
DIF: Deposit Insurance Fund
 
NAV: Net asset value
DIFS: Department of Insurance and Financial Services
 
NOW: Negotiable order of withdrawal
Directors Plan: Isabella Bank Corporation and Related Companies Deferred Compensation Plan for Directors
 
NSF: Non-sufficient funds
Dividend Reinvestment Plan: Isabella Bank Corporation Stockholder Dividend Reinvestment Plan and Employee Stock Purchase Plan
 
OCI: Other comprehensive income (loss)
Dodd-Frank Act: Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010
 
OMSR: Originated mortgage servicing rights
ESOP: Employee stock ownership plan
 
OREO: Other real estate owned
Exchange Act: Securities Exchange Act of 1934
 
OTTI: Other-than-temporary impairment
FASB: Financial Accounting Standards Board
 
PBO: Projected benefit obligation
FDI Act: Federal Deposit Insurance Act
 
PCAOB: Public Company Accounting Oversight Board
FDIC: Federal Deposit Insurance Corporation
 
Rabbi Trust: A trust established to fund the Directors Plan
FFIEC: Federal Financial Institutions Examinations Council
 
SEC: U.S. Securities & Exchange Commission
FRB: Federal Reserve Bank
 
SOX: Sarbanes-Oxley Act of 2002
FHLB: Federal Home Loan Bank
 
TDR: Troubled debt restructuring
Freddie Mac: Federal Home Loan Mortgage Corporation
 
XBRL: eXtensible Business Reporting Language
FTE: Fully taxable equivalent
 
 


3


Restatement of Previously Filed Reports (Dollars in thousands)
Overview of Restatement
In this Annual Report on Form 10-K, certain prior period financial information has been restated due to an accounting correction. Impacted sections of this report include:
1.
Selected Financial Data in Item 6 for the years ended December 31, 2014, 2013, 2012, and 2011;
2.
Management’s Discussion and Analysis in Item 7 as it relates to the years ended December 31, 2014, 2013, 2012, and 2011 and interim periods ended September 30, 2015, June 30, 2015, and March 31, 2015;
3.
Financial Statements in Item 8:
a.
Consolidated Balance Sheet as of December 31, 2014, Consolidated Statements of Income for the years ended December 31, 2014 and 2013, and Consolidated Statements of Cash Flows for the years ended December 31, 2014 and 2013; and
b.
Notes to Consolidated Financial Statements as of, and for the years ended, December 31, 2014 and 2013.
Background of Restatement
The necessary restatement was identified by management in the fourth quarter of 2015 during the course of our preparation of the consolidated financial statements and evaluation of financial results as of and for the year ended December 31, 2015. The restatements relate to the accounting for deferred costs associated with originating loans (under ASC 310-20) and the proper classification of the net deferred costs recorded in gross loans within the consolidated balance sheets and as a deferral of compensation expenses within the consolidated statements of income. Prior to December 31, 2015, loan origination cost deferrals (under ASC 310-20) were reported in loan interest and fee income instead of as a reduction of compensation and benefits, which is included in other noninterest expenses. Additionally, net deferred asset balances (under ASC 310-20) prior to December 31, 2015 were reported in other assets on the consolidated balance sheets instead of reported in gross loans. Amortization of the net deferred asset balance was recognized appropriately in loan interest and fee income.
Impact of Restatement
The overall impact of the restatement on our consolidated financial position and results of operations is not believed to be material and as such, previously filed Annual Reports on Form 10-K and Quarterly reports on Form 10-Q for the periods affected by the restatement have not been amended. The determination of materiality was, in part, concluded based on the following observations:
No impact to net income for any prior periods;
No impact to earnings per share, other stock data, or dividend data for any prior periods;
No impact on total assets for any prior periods; and
No impact on retained earnings or total equity for any prior periods.
The impact to the consolidated balance sheet as of December 31, 2014 was a $2,968 increase in gross loans and a $2,968 decline in other assets. There were no other changes to the consolidated balance sheets for any prior periods.

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The following table sets forth the effects of the restatement on items within the Consolidated Statements of Income. Since the restatement did not impact net income, pre-tax and adjustments net of tax are not included.
 
December 31, 2014
 
December 31, 2013
 
Previously Reported
 
Restated
 
Previously Reported
 
Restated
Interest income
 
 
 
 
 
 
 
Loans, including fees
$
39,432

 
$
36,629

 
$
41,233

 
$
37,575

All other interest income
14,519

 
14,519

 
12,843

 
12,843

Total interest income
53,951

 
51,148

 
54,076

 
50,418

Total interest expense
9,970

 
9,970

 
11,021

 
11,021

Net interest income
43,981

 
41,178

 
43,055

 
39,397

Provision for loan losses
(668
)
 
(668
)
 
1,111

 
1,111

Net interest income after provision for loan losses
44,649

 
41,846

 
41,944

 
38,286

Total noninterest income
9,325

 
9,325

 
10,175

 
10,175

Noninterest expenses
 
 
 
 
 
 
 
Compensation and benefits
21,305

 
18,502

 
21,465

 
17,807

All other noninterest expenses
16,601

 
16,601

 
15,948

 
15,948

Total noninterest expenses
37,906

 
35,103

 
37,413

 
33,755

Federal income tax expense
2,344

 
2,344

 
2,196

 
2,196

Net income
$
13,724

 
$
13,724

 
$
12,510

 
$
12,510

As demonstrated above, loan interest and fee income and compensation and benefits were reduced by $2,803 and $3,658 during the years ended December 31, 2014 and 2013, respectively.
All amounts in this Annual Report on Form 10-K affected by the restatement adjustments reflect such amounts as restated.

5


PART I
Item 1. Business. (Dollars in thousands)
General
Isabella Bank Corporation is a registered financial services holding company that was incorporated in September 1988 under Michigan law. The Corporation's sole subsidiary, Isabella Bank, has 29 banking offices located throughout Clare, Gratiot, Isabella, Mecosta, Midland, Montcalm, and Saginaw counties. The area includes significant agricultural production, manufacturing, retail, gaming and tourism, and five colleges and universities.
As used in Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations as well as in Item 8. Financial Statements and Supplementary Data, 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 Corporation refers solely to the parent holding company, and Isabella Bank or the “Bank” refer to Isabella Bank Corporation’s subsidiary, Isabella Bank.
Our reportable segments are based on legal entities that account for at least 10% of net operating results. Retail banking operations for 2015, 2014, and 2013 represent approximately 90% or greater of total assets and operating results. As such, we have only one reportable segment.
We are a community bank with a focus on providing high quality, personalized service at a fair price. We offer a broad array of banking services to businesses, institutions, and individuals. We compete with other commercial banks, savings and loan associations, mortgage brokers, finance companies, credit unions, and retail brokerage firms.
Lending activities include loans for commercial and agricultural operating and real estate purposes, residential real estate loans, and consumer loans. We limit lending activities primarily to local markets and have not purchased any loans from the secondary market. We do not make loans to fund leveraged buyouts, have no foreign corporate or government loans, and have limited holdings of corporate debt securities. Our general lending philosophy is to limit concentrations to individuals and business segments. For additional information related to our lending strategies and policies, see “Note 5 – Loans and ALLL” of the “Notes to Consolidated Financial Statements” in Item 8. Financial Statements and Supplementary Data.
Deposit services offered include checking accounts, savings accounts, certificates of deposit, direct deposits, cash management services, mobile and internet banking, electronic bill pay services, and automated teller machines. We also offer full service trust and brokerage services.
As of December 31, 2015, we had 374 full-time equivalent employees. We provide group life, health, accident, disability, and other insurance programs as well as a number of other employee benefit programs. None of our workforce is subject to collective bargaining agreements.
Available Information
Our SEC filings (including our Annual Report on Form 10-K, Quarterly Reports on Form 10-Q, Definitive Proxy Statements, Current Reports on Form 8-K and amendments to those reports) are available through our website (www.isabellabank.com). We will provide paper copies of our SEC reports free of charge upon request of a shareholder.
The SEC maintains a website (www.sec.gov) that contains reports, proxy and information statements and other information regarding Isabella Bank Corporation (CIK #0000842517) and other issuers.
Supervision and Regulation
The earnings and growth of the banking industry and, therefore, our earnings are affected by the credit policies of monetary authorities, including the FRB. An important function of the FRB is to regulate the national supply of bank credit in order to combat recessions and curb inflationary pressures. Among the instruments of monetary policy used by the FRB to implement these objectives are open market operations in U.S. Treasury and U.S. Government Agency securities, changes in the discount rate on member bank borrowings, and changes in reserve requirements against member bank deposits. These methods are used in varying combinations to influence overall growth of bank loans, investments and deposits and also affect interest rates charged on loans or paid for deposits. The monetary policies of the FRB have had a significant effect on the operating results of commercial banks and related financial service providers in the past and are expected to continue to do so in the future. The effect of such policies upon our future business and earnings cannot be predicted.
We, as a financial holding company, are regulated under the BHC Act, and are subject to the supervision of the FRB. We are registered as a financial services holding company with the FRB and are subject to annual reporting requirements and

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inspections and audits. Under FRB policy, we are expected to act as a source of financial strength to the Bank and to commit resources to support its subsidiaries. This support may be required at times when, in the absence of such FRB policy, it would not otherwise be required to provide support.
Under Michigan law, if the capital of a Michigan state chartered bank has become impaired by losses or otherwise, the Commissioner of the DIFS may require that the deficiency in capital be met by assessment upon the bank’s shareholders pro rata on the amount of capital stock held by each, and if any such assessment is not paid by any shareholder within 30 days of the date of mailing of notice thereof to such shareholder, cause the sale of the stock of such shareholder to pay such assessment and the costs of sale of such stock.
Any capital loans by a bank holding company to any of its subsidiary banks are subordinate in right of payment to deposits and to certain other indebtedness of such subsidiary bank. In the event of a bank holding company’s bankruptcy, any commitment by the bank holding company to a federal bank regulatory agency to maintain the capital of a subsidiary bank will be assumed by the bankruptcy trustee and entitled to a priority of payment. This priority would apply to guarantees of capital plans under the FDIC Improvement Act of 1991.
SOX contains important requirements for public companies in the area of financial disclosure and corporate governance. In accordance with Section 302(a) of SOX, written certifications by our principal executive, financial, and accounting officers are required. These certifications attest that our quarterly and annual reports filed with the SEC do not contain any untrue statement of a material fact (see the certifications filed as Exhibits 31 (a) and (b) to this Form 10-K for such certification of consolidated financial statements and other information for this 2015 Form 10-K). We have also implemented a program designed to comply with Section 404 of SOX, which included the identification of significant processes and accounts, documentation of the design of control effectiveness over process and entity level controls, and testing of the operating effectiveness of key controls. See Item 9A. Controls and Procedures for our evaluation of disclosure controls and procedures and internal control over financial reporting.
Certain additional information concerning regulatory guidelines for capital adequacy and other regulatory matters is presented herein under the caption “Capital” in Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations and in “Note 15 – Commitments and Other Matters” and “Note 16 – Minimum Regulatory Capital Requirements” of the Notes to Consolidated Financial Statements in Item 8. Financial Statements and Supplementary Data.
Isabella Bank
The Bank is supervised and regulated by DIFS and the FRB. The agencies and federal and state laws extensively regulate various aspects of the banking business including, among other things, permissible types and amounts of loans, investments and other activities, capital adequacy, branching, interest rates on loans and deposits, and the safety and soundness of banking practices.
Our deposits are insured up to applicable limits by the DIF of the FDIC and are subject to deposit insurance assessments to maintain the DIF. The FDIC utilizes a risk-based assessment system that assesses insurance premiums based upon a risk matrix that takes into account assets and capital levels and supervisory ratings.
Banking laws and regulations restrict transactions by insured banks owned by a bank holding company, including loans to and certain purchases from the parent holding company, non-bank and bank subsidiaries of the parent holding company, principal shareholders, officers, directors and their affiliates, and investments by the subsidiary bank in the shares or securities of the parent holding company (or any of the other non-bank or bank affiliates), or acceptance of such shares or securities as collateral security for loans to any borrower.
The Bank is subject to legal limitations on the frequency and amount of dividends that can be paid to Isabella Bank Corporation. For example, a Michigan state chartered bank may not declare a cash dividend or a dividend in kind except out of net profits then on hand after deducting all losses and bad debts, and then only if it will have a surplus amounting to not less than 20% of its capital after the payment of the dividend. Moreover, a Michigan state chartered bank may not declare or pay any cash dividend or dividend in kind until the cumulative dividends on its preferred stock, if any, have been paid in full. Further, if the surplus of a Michigan state chartered bank is at any time less than the amount of its capital, before the declaration of a cash dividend or dividend in kind, it must transfer to surplus not less than 10% of its net profits for the preceding six months (in the case of quarterly or semi-annual dividends) or the preceding two consecutive six month periods (in the case of annual dividends).
The payment of dividends by Isabella Bank Corporation and the Bank is also affected by various regulatory requirements and policies, such as the requirement to keep adequate capital in compliance with regulatory guidelines. Federal laws impose further restrictions on the payment of dividends by insured banks that fail to meet specified capital levels. The FDIC may

7


prevent an insured bank from paying dividends if the bank is in default of payment of any assessment due to the FDIC. In addition, payment of dividends by a bank may be prevented by the applicable federal regulatory authority if such payment is determined, by reason of the financial condition of such bank, to be an unsafe and unsound banking practice. The FRB and the FDIC have issued policy statements providing that bank holding companies and insured banks should generally pay dividends only out of current operating earnings. Additionally, the FRB Board of Governors requires a bank holding company to notify the FRB prior to increasing its cash dividend by more than 10% over the prior year.
The aforementioned regulations and restrictions may limit our ability to obtain funds from the Bank for our cash needs, including payment of dividends and operating expenses.
The activities and operations of the Bank are also subject to various federal and state laws and regulations.
Item 1A. Risk Factors.
In the normal course of business we are exposed to various risks. These risks, if not managed correctly, could have a significant impact on our earnings, capital, share price, and ability to pay dividends. In order to effectively monitor and control the following risks, we utilize an enterprise risk model. We balance our strategic goals, including revenue and profitability objectives, with associated risks through the use of policies, systems, and procedures which have been adopted to identify, assess, control, monitor, and manage each risk area. We continually review the adequacy and effectiveness of these policies, systems, and procedures.
Our enterprise risk process covers each of the following areas.
Changes in credit quality and required allowance for loan and lease losses
To manage the credit risk arising from lending activities, our most significant source of credit risk, we maintain what we believe are sound underwriting policies and procedures. We continuously monitor asset quality in order to manage our credit risk to determine the appropriateness of valuation allowances. These valuation allowances take into consideration various factors including, but not limited to, local, regional, and national economic conditions.
We maintain an ALLL to reserve for estimated incurred loan losses and risks within our loan portfolio. The level of the ALLL reflects our evaluation of industry concentrations; specific credit risks; loan loss experience; loan portfolio quality; and economic, political and regulatory conditions. The determination of the appropriate level of the ALLL inherently involves a high degree of subjectivity and requires us to make significant estimates, all of which may undergo material changes.
Changes in economic conditions
An economic downturn within our local markets, as well as downturns in the state or national markets, could negatively impact household and corporate incomes. This could lead to decreased demand for both loan and deposit products and lead to an increase of customers who fail to pay interest or principal on their loans. We continually monitor key economic indicators in an effort to anticipate the possible effects of downturns in the local, regional, and national economies.
Our success depends primarily on the general economic conditions of the State of Michigan and the specific local markets in which we operate. Unlike larger national or other regional banks that are more geographically diversified, we provide banking and financial services to customers located primarily in the Clare, Gratiot, Isabella, Mecosta, Midland, Montcalm, and Saginaw counties in Michigan. The local economic conditions in these areas have a significant impact on the demand for our products and services, as well as the ability of our customers to repay loans, the value of the collateral securing loans, and the stability of our deposit funding sources. A significant decline in general economic conditions, caused by inflation, recession, acts of terrorism, outbreak of hostilities or other international or domestic occurrences, unemployment, changes in securities markets or other factors could impact these local economic conditions and, in turn, have a material adverse effect on our financial condition and results of operations.
Interest rate risk
IRR results from the timing differences in the maturity or repricing frequency of a financial institution’s interest earning assets and its interest bearing liabilities. We monitor the potential effects of changes in interest rates through simulations and gap analyses. To help mitigate the effects of changes in interest rates, we make significant efforts to stagger projected cash flows and maturities of interest sensitive assets and liabilities.

8


Liquidity risk
Liquidity risk is the risk to earnings or capital arising from our inability to meet our obligations when they come due without incurring unacceptable costs. Liquidity risk includes the inability to manage unplanned decreases or changes in funding sources, or failure to recognize or address changes in market conditions that affect the ability to liquidate assets quickly and with minimal loss in value. We have significant borrowing capacity through correspondent banks and the ability to sell certain investments to fund potential cash shortages, which we may use to help mitigate this risk.
The value of investment securities may be negatively impacted by fluctuations in the market
A volatile, illiquid market or decline in credit quality could require us to recognize an OTTI loss related to the investment securities held in our portfolio. We consider many factors in determining whether an OTTI exists including the length of time and extent to which fair value has been less than cost, the investment credit rating, and the probability that the issuer will be unable to pay the amount when due. The presence of these factors could lead to impairment charges. These risks are mitigated by the fact that we assert that we do not intend to sell the security in an unrealized loss position and it is more likely than not that we will not have to sell the security before recovery of its cost basis.
Operational risk
Operational risk is the risk of loss resulting from inadequate or failed internal processes, people, and systems, or external events and includes reputation risk and transaction risk. Reputation risk is developing and retaining marketplace confidence in handling customers’ financial transactions in an appropriate manner and protecting our safety and soundness. Transaction risk includes losses from fraud, error, the inability to deliver products or services, and loss or theft of information. Transaction risk also encompasses product development and delivery, transaction processing, information technology systems, and the internal control environment.
To minimize the potential losses due to operational risks, we have established a robust system of internal controls that is regularly tested by our internal audit department in conjunction with the services of certified public accounting firms who assists in performing such internal audit work. The focus of these internal audit procedures is to verify the validity and appropriateness of various transactions, processes, and controls. The results of these procedures are reported to our Audit Committee.
The adoption of, violations of, or nonconformance with laws, rules, regulations, or prescribed practices
The financial services industry and public companies are extensively regulated and must meet regulatory standards set by the FDIC, DIFS, FRB, FASB, SEC, PCAOB, the CFPB, and other regulatory bodies. Federal and state laws and regulations are designed primarily to protect the deposit insurance funds and consumers, and not necessarily to benefit our shareholders. The nature, extent, and timing of the adoption of significant new laws, changes in existing laws, or repeal of existing laws may have a material impact on our business, results of operations, and financial condition, the effect of which is impossible to predict at this time.
Our compliance department annually assesses the adequacy and effectiveness of our processes for controlling and managing our principal compliance risks.
We may not adjust to changes in the financial services industry
Our financial performance depends in part on our ability to maintain and grow our core deposit customer base and expand our financial services to our existing and new customers. The increasingly competitive environment is, in part, a result of changes in technology and product delivery systems and the accelerating pace of consolidation among financial service providers. New competitors may emerge to increase the degree of competition for our products and services. Financial services and products are also constantly changing. Our financial performance is also dependent upon customer demand for our products and services and our ability to develop and offer competitive financial products and services.
We may be required to recognize an impairment of goodwill
Goodwill represents the excess of the amounts paid to acquire subsidiaries over the fair value of their net assets at the date of acquisition. The majority of the recorded goodwill is related to acquisitions of other banks, which were subsequently merged into Isabella Bank. If it is determined that the goodwill has been impaired, we must write-down the goodwill by the amount of the impairment.

9


We may face pressure from purchasers of our residential mortgage loans to repurchase loans sold or reimburse purchasers for losses related to such loans
We generally sell the fixed rate long term residential mortgage loans we originate to the secondary market. In response to the recent economic downturn, the purchasers of residential mortgage loans, such as government sponsored entities, increased their efforts to require sellers of residential mortgage loans to either repurchase loans previously sold, or reimburse the purchasers for losses incurred on foreclosed loans due to actual or alleged failure to strictly conform to the terms of the contract.
Consumers may decide not to use banks to complete their financial transactions
Technology and other changes are allowing customers to complete financial transactions without the involvement of banks. For example, consumers can now pay bills and transfer funds directly without banks. The process of eliminating banks as intermediaries in financial transactions could result in the loss of fee income, as well as the loss of customer deposits and income generated from those deposits.
Changes to the financial services industry as a result of regulatory changes or actions, or significant litigation
The financial services industry is extensively regulated by state and federal regulation that governs almost all aspects of our operations. Laws and regulations may change from time to time and are primarily intended for the protection of consumers, depositors, and the deposit insurance fund. The impact of any changes to laws and regulations or other actions by regulatory agencies may negatively impact us or our ability to increase the value of our business. Regulatory authorities have extensive discretion in connection with their supervisory and enforcement activities, including the imposition of restrictions on the operation of an institution, the classification of assets by the institution and the appropriateness of an institution’s ALLL. Future regulatory changes or accounting pronouncements may increase our regulatory capital requirements or adversely affect our regulatory capital levels. Additionally, actions by regulatory agencies or significant litigation against us could require the dedication of significant time and resources to defending our business and may lead to penalties.
Unauthorized disclosure of sensitive or confidential client or customer information, whether through cyber attacks, breach of computer systems or otherwise
As part of our business, we collect and retain sensitive and confidential client and customer information on our behalf and on behalf of other third parties. Despite the security measures we have in place for our facilities and systems, and the security measures of our third party service providers, we may be vulnerable to cyber attacks, security breaches, acts of vandalism, computer viruses, misplaced or lost data, human errors or other similar events. Risks related to cybersecurity continue to evolve within the industry. We continually review and monitor information and data related to cybersecurity to detect and mitigate attacks. A cyber attack could disrupt our operations and have a material adverse effect on our business. Any security breach involving the misappropriation, loss or other unauthorized disclosure of confidential customer information, whether by us or by our vendors, could severely damage our reputation, expose us to the risks of litigation and liability, disrupt our operations and have a material adverse effect on our business.
Our estimates and assumptions may be incorrect
Our consolidated financial statements conform with GAAP, which require us to make estimates and assumptions that affect the amounts reported in the consolidated financial statements. These estimates are based on information available to us at the time the estimates are made. Actual results could differ from those estimates. For further discussion regarding significant accounting estimates, see “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.
Disruption of infrastructure
Our operations depend upon our technological and physical infrastructure, including our equipment and facilities. Extended disruption of our vital infrastructure by fire, power loss, natural disaster, telecommunications failure, computer hacking and viruses, or other events outside of our control, could have a significant impact on our operations. We have developed and tested disaster recovery plans, which provide detailed instructions covering all significant aspects of our operations.
Anti-takeover provisions
Our articles of incorporation include anti-takeover provisions that require a two-thirds majority vote to approve a sale of the Corporation. Additionally, changes to our articles of incorporation must be approved by a two-thirds majority vote of our shareholders. These provisions may make our stock less attractive to potential shareholders.

10


Item 1B. Unresolved Staff Comments.
None.
Item 2. Properties.
Our executive offices are located at 401 North Main Street in Mount Pleasant, Michigan. In addition to this location, we own 29 branches, an operations center, a mortgage operations center, and a previous main office building. Our facilities current, planned, and best use is for conducting our current activities, with the exception of approximately 75% of our previous main office location and approximately 25% of the building that houses our mortgage processing operations which are leased to non-related parties. We continually monitor and assess the need for expansion and/or improvement for all facilities. In our opinion, each facility has sufficient capacity and is in good condition.
Item 3. Legal Proceedings.
We are not involved in any material legal proceedings. We are involved in ordinary, routine litigation incidental to our business; however, no such routine proceedings are expected to result in any material adverse effect on our consolidated operations, earnings, financial condition, or cash flows.
Item 4. Mine Safety Disclosures.
Not applicable.

11


PART II
Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities.
Common Stock and Dividend Information
Our authorized common stock consists of 15,000,000 shares, of which 7,799,867 shares are issued and outstanding as of December 31, 2015. As of that date, there were 3,044 shareholders of record.
Our common stock is traded in the over-the-counter market.  Our 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 our 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
Common Shares
 
Sale Price
 
Low
 
High
2015
 
 
 
 
 
First Quarter
81,754

 
$
22.00

 
$
23.50

Second Quarter
94,019

 
22.70

 
23.80

Third Quarter
143,183

 
22.75

 
23.85

Fourth Quarter
109,276

 
23.50

 
29.90

 
428,232

 
 
 
 
2014
 
 
 
 
 
First Quarter
79,719

 
$
22.25

 
$
23.94

Second Quarter
72,142

 
22.44

 
23.50

Third Quarter
94,422

 
21.73

 
24.00

Fourth Quarter
67,771

 
22.10

 
23.99

 
314,054

 
 
 
 
The following table sets forth the cash dividends paid for the following quarters:

Per Share
 
2015
 
2014
First Quarter
$
0.23

 
$
0.22

Second Quarter
0.23

 
0.22

Third Quarter
0.24

 
0.22

Fourth Quarter
0.24

 
0.23

Total
$
0.94

 
$
0.89

We have adopted and publicly announced a common stock repurchase plan. The plan was last amended on September 23, 2015, to allow for the repurchase of an additional 200,000 shares of common stock after that date. These authorizations do not have expiration dates. As shares are repurchased under this plan, they are retired and revert back to the status of authorized, but unissued shares.

12


The following table provides information for the unaudited three month period ended December 31, 2015, with respect to our common stock repurchase plan:

Common Shares Repurchased
 
Total Number of Common Shares Purchased as Part of Publicly Announced Plan or Program
 
Maximum Number of Common Shares That May Yet Be Purchased Under the Plans or Programs
 
Number
 
Average Price
Per Common Share
 
 
Balance, September 30
 
 
 
 
 
 
198,436

October 1 - 31
22,923

 
$
24.21

 
22,923

 
175,513

November 1 - 30
12,362

 
25.89

 
12,362

 
163,151

December 1 - 31
4,493

 
26.93

 
4,493

 
158,658

Balance, December 31
39,778

 
$
25.04

 
39,778

 
158,658

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, 2010 and all dividends are reinvested.
 
Year
 
ISBA
 
NASDAQ
 
NASDAQ
Banks
12/31/2010
 
$
100.00

 
$
100.00

 
$
100.00

12/31/2011
 
142.50

 
99.23

 
89.54

12/31/2012
 
135.30

 
116.79

 
106.15

12/31/2013
 
153.50

 
163.38

 
150.00

12/31/2014
 
150.50

 
187.43

 
157.22

12/31/2015
 
207.70

 
200.70

 
170.99


13


Item 6. Selected Financial Data.
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:

2015
 
2014
 
2013
 
2012
 
2011
INCOME STATEMENT DATA
 
 
 
 
 
 
 
 
 
Interest income
$
51,502

 
$
51,148

 
$
50,418

 
$
53,123

 
$
55,590

Interest expense
10,163

 
9,970

 
11,021

 
13,423

 
16,203

Net interest income
41,339

 
41,178

 
39,397

 
39,700

 
39,387

Provision for loan losses
(2,771
)
 
(668
)
 
1,111

 
2,300

 
3,826

Noninterest income
10,359

 
9,325

 
10,175

 
11,530

 
8,218

Noninterest expenses
36,051

 
35,103

 
33,755

 
34,361

 
32,215

Federal income tax expense
3,288

 
2,344

 
2,196

 
2,363

 
1,354

Net Income
$
15,130

 
$
13,724

 
$
12,510

 
$
12,206

 
$
10,210

PER SHARE
 
 
 
 
 
 
 
 
 
Basic earnings
$
1.95

 
$
1.77

 
$
1.63

 
$
1.61

 
$
1.35

Diluted earnings
$
1.90

 
$
1.74

 
$
1.59

 
$
1.56

 
$
1.31

Dividends
$
0.94

 
$
0.89

 
$
0.84

 
$
0.80

 
$
0.76

Tangible book value*
$
17.30

 
$
16.59

 
$
15.62

 
$
14.72

 
$
13.90

Quoted market value
 
 
 
 
 
 
 
 
 
High
$
29.90

 
$
24.00

 
$
26.00

 
$
24.98

 
$
24.45

Low
$
22.00

 
$
21.73

 
$
21.12

 
$
21.75

 
$
17.10

Close*
$
29.90

 
$
22.50

 
$
23.85

 
$
21.75

 
$
23.70

Common shares outstanding*
7,799,867

 
7,776,274

 
7,723,023

 
7,671,846

 
7,589,226

PERFORMANCE RATIOS
 
 
 
 
 
 
 
 
 
Return on average total assets
0.95
%
 
0.90
%
 
0.86
%
 
0.88
%
 
0.79
%
Return on average shareholders' equity
8.33
%
 
8.06
%
 
7.67
%
 
7.60
%
 
6.74
%
Return on average tangible shareholders' equity
11.46
%
 
10.80
%
 
10.71
%
 
11.41
%
 
10.30
%
Net interest margin yield (FTE)
3.10
%
 
3.24
%
 
3.22
%
 
3.43
%
 
3.67
%
BALANCE SHEET DATA*
 
 
 
 
 
 
 
 
 
Gross loans
$
850,492

 
$
836,550

 
$
810,777

 
$
774,627

 
$
751,610

AFS securities
$
660,136

 
$
567,534

 
$
512,062

 
$
504,010

 
$
425,120

Total assets
$
1,668,112

 
$
1,549,543

 
$
1,493,137

 
$
1,430,639

 
$
1,337,925

Deposits
$
1,164,563

 
$
1,074,484

 
$
1,043,766

 
$
1,017,667

 
$
958,164

Borrowed funds
$
309,732

 
$
289,709

 
$
279,326

 
$
241,001

 
$
216,136

Shareholders' equity
$
183,971

 
$
174,594

 
$
160,609

 
$
164,489

 
$
154,783

Gross loans to deposits
73.03
%
 
77.86
%
 
77.68
%
 
76.12
%
 
78.44
%
ASSETS UNDER MANAGEMENT*
 
 
 
 
 
 
 
 
 
Loans sold with servicing retained
$
287,029

 
$
288,639

 
$
293,665

 
$
303,425

 
$
302,636

Assets managed by our Investment and Trust Services Department
$
405,109

 
$
383,878

 
$
351,420

 
$
319,301

 
$
297,393

Total assets under management
$
2,360,250

 
$
2,222,060

 
$
2,138,222

 
$
2,053,365

 
$
1,937,954

ASSET QUALITY*
 
 
 
 
 
 
 
 
 
Nonperforming loans to gross loans
0.09
%
 
0.50
%
 
0.42
%
 
1.00
%
 
0.95
%
Nonperforming assets to total assets
0.07
%
 
0.33
%
 
0.32
%
 
0.68
%
 
0.67
%
ALLL to gross loans
0.87
%
 
1.21
%
 
1.42
%
 
1.54
%
 
1.65
%
CAPITAL RATIOS*
 
 
 
 
 
 
 
 
 
Shareholders' equity to assets
11.03
%
 
11.27
%
 
10.76
%
 
11.50
%
 
11.57
%
Tier 1 leverage
8.52
%
 
8.59
%
 
8.46
%
 
8.29
%
 
8.18
%
Common equity tier 1 capital
13.24
%
 
N/A

 
N/A

 
N/A

 
N/A

Tier 1 risk-based capital
13.24
%
 
14.08
%
 
13.68
%
 
13.24
%
 
12.93
%
Total risk-based capital
13.96
%
 
15.19
%
 
14.93
%
 
14.49
%
 
14.18
%
* At end of year

14


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
2015
 
September 30
2015
 
June 30
2015
 
March 31
2015
 
December 31
2014
 
September 30
2014
 
June 30
2014
 
March 31
2014
Total interest income
$
13,023

 
$
12,967

 
$
12,759

 
$
12,753

 
$
13,030

 
$
12,800

 
$
12,625

 
$
12,693

Total interest expense
2,577

 
2,580

 
2,518

 
2,488

 
2,504

 
2,498

 
2,468

 
2,500

Net interest income
10,446

 
10,387

 
10,241

 
10,265

 
10,526

 
10,302

 
10,157

 
10,193

Provision for loan losses
(772
)
 
(738
)
 
(535
)
 
(726
)
 
(64
)
 
(162
)
 
(200
)
 
(242
)
Noninterest income
2,501

 
3,101

 
2,629

 
2,128

 
2,426

 
2,216

 
2,434

 
2,249

Noninterest expenses
9,885

 
9,161

 
8,330

 
8,675

 
8,923

 
8,831

 
8,534

 
8,815

Federal income tax expense
538

 
1,002

 
977

 
771

 
648

 
444

 
692

 
560

Net income
$
3,296

 
$
4,063

 
$
4,098

 
$
3,673

 
$
3,445

 
$
3,405

 
$
3,565

 
$
3,309

PER SHARE
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Basic earnings
$
0.43

 
$
0.52

 
$
0.53

 
$
0.47

 
$
0.44

 
$
0.44

 
$
0.46

 
$
0.43

Diluted earnings
0.41

 
0.51

 
0.52

 
0.46

 
0.44

 
0.43

 
0.45

 
0.42

Dividends
0.24

 
0.24

 
0.23

 
0.23

 
0.23

 
0.22

 
0.22

 
0.22

Quoted Market value*
29.90

 
23.69

 
23.75

 
22.90

 
22.50

 
23.60

 
22.95

 
23.00

Tangible book value*
17.30

 
17.06

 
17.17

 
16.84

 
16.59

 
16.33

 
16.08

 
15.82

* At end of period
Reclassifications and Restatements: Certain amounts previously reported in the Results of Operations section of this report have been either reclassified or restated to conform with the 2015 presentation. For a complete overview on restatements impacting the Results of Operations, see pages 4 and 52 of this report.

15


Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations.
ISABELLA BANK CORPORATION FINANCIAL REVIEW
(Dollars in thousands except per share amounts)
The following is management’s discussion and analysis of 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 $15,130 and earnings per common share of $1.95 for the year ended December 31, 2015. Our continued strong earnings have primarily been the result of increased interest income and continued improvement in credit quality. The improvement in credit quality 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 $2,771 for the year ended December 31, 2015. Net loan recoveries during 2015 were $71 as compared to net loan charge-offs $732 in 2014. Additionally, we continue to see reductions in loans classified as less than satisfactory.
During the year, total assets grew by 7.65% to $1,668,112, and assets under management increased to $2,360,250 which includes loans sold and serviced and assets managed by our Investment and Trust Services Department of $692,138. In 2015, we had total loan growth of $13,942 which was driven by commercial and agricultural loan growth of $26,301. This was partially offset by declines in both residential real estate and consumer loans of $12,359 as new loan originations were less than principal payments by borrowers.
We increased our AFS securities portfolio by $92,602 during 2015 to continue providing growth in our balance sheet to increase interest income. Our net yield on interest earning assets of 3.10% remains at historically low levels. While we expect the Federal Reserve Bank to increase short term interest rates in 2016, 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 are committed to increasing earnings and dedicated to providing long term sustainable growth to enable us to increase shareholder value.
While we have been able to grow our commercial and agricultural loan portfolios, increasing our residential real estate and
consumer loan portfolios has been more challenging. To generate growth in these portfolios, we are implementing new
products, enhancing our marketing efforts, streamlining delivery channels for direct and indirect loans, and expanding our
service area. These initiatives are designed to attract new customers while expanding our relationships with current customers
to improve earnings.
Acquisitions
On July 31, 2015, we completed the acquisition of a branch from Flagstar Bank, FSB located in Saginaw, Michigan. In addition to real estate and equipment, we assumed deposit liabilities of $44,290 and recorded $156 of core deposit intangibles and $2,061 of goodwill, which represented the excess of the purchase price over the fair value of identifiable net assets acquired.
On August 28, 2015, we completed the acquisition of a branch from Independent Bank located in Midland, Michigan. In addition to real estate and equipment, we assumed $8,658 of deposit liabilities and recorded $50 of core deposit intangibles and $602 of goodwill, which represented the excess of the purchase price over the fair value of identifiable net assets acquired.

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. New regulations issued by the CFPB regarding consumer lending, including residential mortgage lending, have increased our compensation and outside advisor costs 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

16


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.
Reclassifications and Restatements: Certain amounts previously reported in the Management's Discussion and Analysis of Financial Condition and Results of Operations section of this report have been either reclassified or restated to conform with the 2015 presentation. For a complete overview on restatements impacting Management's Discussion and Analysis of Financial Condition and Results of Operations, see pages 4 and 52 of this report.
Other
We have not received any notices of regulatory actions as of February 19, 2016.
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.

17


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. Loans in nonaccrual status, for the purpose of the following computations, are included in the average loan balances. FRB and FHLB restricted equity holdings are included in accrued income and other assets.

Year Ended December 31
 
2015
 
2014
 
2013
 
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
$
829,903

 
$
35,853

 
4.32
%
 
$
816,105

 
$
36,629

 
4.49
%
 
$
792,430

 
$
37,575

 
4.74
%
Taxable investment securities
395,981

 
9,053

 
2.29
%
 
357,250

 
8,092

 
2.27
%
 
335,575

 
7,228

 
2.15
%
Nontaxable investment securities
205,242

 
9,870

 
4.81
%
 
194,751

 
9,877

 
5.07
%
 
165,774

 
8,294

 
5.00
%
Other
25,947

 
600

 
2.31
%
 
25,784

 
519

 
2.01
%
 
28,306

 
502

 
1.77
%
Total earning assets
1,457,073

 
55,376

 
3.80
%
 
1,393,890

 
55,117

 
3.95
%
 
1,322,085

 
53,599

 
4.05
%
NONEARNING ASSETS
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Allowance for loan losses
(9,275
)
 
 
 
 
 
(10,973
)
 
 
 
 
 
(11,877
)
 
 
 
 
Cash and demand deposits due from banks
17,925

 
 
 
 
 
18,552

 
 
 
 
 
18,162

 
 
 
 
Premises and equipment
26,968

 
 
 
 
 
25,957

 
 
 
 
 
25,993

 
 
 
 
Accrued income and other assets
98,805

 
 
 
 
 
94,754

 
 
 
 
 
94,077

 
 
 
 
Total assets
$
1,591,496

 
 
 
 
 
$
1,522,180

 
 
 
 
 
$
1,448,440

 
 
 
 
INTEREST BEARING LIABILITIES
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Interest bearing demand deposits
$
195,260

 
155

 
0.08
%
 
$
191,750

 
157

 
0.08
%
 
$
183,665

 
161

 
0.09
%
Savings deposits
293,703

 
449

 
0.15
%
 
260,469

 
374

 
0.14
%
 
242,777

 
366

 
0.15
%
Time deposits
433,409

 
5,246

 
1.21
%
 
448,971

 
5,764

 
1.28
%
 
456,774

 
6,613

 
1.45
%
Borrowed funds
295,641

 
4,313

 
1.46
%
 
274,080

 
3,675

 
1.34
%
 
251,590

 
3,881

 
1.54
%
Total interest bearing liabilities
1,218,013

 
10,163

 
0.83
%
 
1,175,270

 
9,970

 
0.85
%
 
1,134,806

 
11,021

 
0.97
%
NONINTEREST BEARING LIABILITIES
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Demand deposits
181,939

 
 
 
 
 
165,860

 
 
 
 
 
141,872

 
 
 
 
Other
10,001

 
 
 
 
 
10,773

 
 
 
 
 
8,752

 
 
 
 
Shareholders’ equity
181,543

 
 
 
 
 
170,277

 
 
 
 
 
163,010

 
 
 
 
Total liabilities and shareholders’ equity
$
1,591,496

 
 
 
 
 
$
1,522,180

 
 
 
 
 
$
1,448,440

 
 
 
 
Net interest income (FTE)
 
 
$
45,213

 
 
 
 
 
$
45,147

 
 
 
 
 
$
42,578

 
 
Net yield on interest earning assets (FTE)
 
 
 
 
3.10
%
 
 
 
 
 
3.24
%
 
 
 
 
 
3.22
%

18


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, which includes loan fees, 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.
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.
 
2015 Compared to 2014   Increase (Decrease) Due to
 
2014 Compared to 2013   Increase (Decrease) Due to

Volume
 
Rate
 
Net
 
Volume
 
Rate
 
Net
Changes in interest income
 
 
 
 
 
 
 
 
 
 
 
Loans
$
612

 
$
(1,388
)
 
$
(776
)
 
$
1,101

 
$
(2,047
)
 
$
(946
)
Taxable investment securities
885

 
76

 
961

 
480

 
384

 
864

Nontaxable investment securities
518

 
(525
)
 
(7
)
 
1,468

 
115

 
1,583

Other
3

 
78

 
81

 
(47
)
 
64

 
17

Total changes in interest income
2,018

 
(1,759
)
 
259

 
3,002

 
(1,484
)
 
1,518

Changes in interest expense
 
 
 
 
 
 
 
 
 
 
 
Interest bearing demand deposits
3

 
(5
)
 
(2
)
 
7

 
(11
)
 
(4
)
Savings deposits
50

 
25

 
75

 
26

 
(18
)
 
8

Time deposits
(195
)
 
(323
)
 
(518
)
 
(111
)
 
(738
)
 
(849
)
Borrowed funds
301

 
337

 
638

 
329

 
(535
)
 
(206
)
Total changes in interest expense
159

 
34

 
193

 
251

 
(1,302
)
 
(1,051
)
Net change in interest margin (FTE)
$
1,859

 
$
(1,793
)
 
$
66

 
$
2,751

 
$
(182
)
 
$
2,569

Our net yield on interest earning assets remains at historically low levels. 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 2016, 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 as fast as those of interest earning assets. Net interest income will increase only through continued balance sheet growth.
 
Average Yield / Rate for the Three Month Periods Ended:

December 31
2015
 
September 30
2015
 
June 30
2015
 
March 31
2015
 
December 31
2014
Total earning assets
3.73
%
 
3.79
%
 
3.81
%
 
3.88
%
 
3.97
%
Total interest bearing liabilities
0.83
%
 
0.84
%
 
0.84
%
 
0.84
%
 
0.85
%
Net yield on interest earning assets (FTE)
3.04
%
 
3.09
%
 
3.11
%
 
3.18
%
 
3.26
%

19


 
Quarter to Date Net Interest Income (FTE)

December 31
2015
 
September 30
2015
 
June 30
2015
 
March 31
2015
 
December 31
2014
Total interest income (FTE)
$
13,970

 
$
13,919

 
$
13,748

 
$
13,742

 
$
14,019

Total interest expense
2,577

 
2,580

 
2,518

 
2,488

 
2,504

Net interest income (FTE)
$
11,393

 
$
11,339

 
$
11,230

 
$
11,254

 
$
11,515

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
2015
 
September 30
2015
 
June 30
2015
 
March 31
2015
 
December 31
2014
Total charge-offs
$
238

 
$
210

 
$
296

 
$
160

 
$
351

Total recoveries
210

 
148

 
231

 
386

 
115

Net loan charge-offs
28

 
62

 
65

 
(226
)
 
236

Net loan charge-offs to average loans outstanding

 
0.01
 %
 
0.01
 %
 
(0.03
)%
 
0.03
 %
Provision for loan losses
$
(772
)
 
$
(738
)
 
$
(535
)
 
$
(726
)
 
$
(64
)
Provision for loan losses to average loans outstanding
(0.09
)%
 
(0.09
)%
 
(0.07
)%
 
(0.09
)%
 
(0.01
)%
ALLL
$
7,400

 
$
8,200

 
$
9,000

 
$
9,600

 
$
10,100

ALLL as a % of loans at end of period
0.87
 %
 
0.98
 %
 
1.08
 %
 
1.17
 %
 
1.21
 %
The following table summarizes our charge-off and recovery activity for the years ended December 31:

2015
 
2014
 
2013
 
2012
 
2011
ALLL at beginning of period
$
10,100

 
$
11,500

 
$
11,936

 
$
12,375

 
$
12,373

Charge-offs
 
 
 
 
 
 
 
 
 
Commercial and agricultural
134

 
590

 
907

 
1,672

 
1,984

Residential real estate
397

 
722

 
1,004

 
1,142

 
2,240

Consumer
373

 
316

 
429

 
542

 
552

Total charge-offs
904

 
1,628

 
2,340

 
3,356

 
4,776

Recoveries
 
 
 
 
 
 
 
 
 
Commercial and agricultural
549

 
550

 
363

 
240

 
461

Residential real estate
220

 
197

 
181

 
122

 
177

Consumer
206

 
149

 
249

 
255

 
314

Total recoveries
975

 
896

 
793

 
617

 
952

Provision for loan losses
(2,771
)
 
(668
)
 
1,111

 
2,300

 
3,826

ALLL at end of period
7,400

 
10,100

 
11,500

 
11,936

 
12,375

Net loan charge-offs
$
(71
)
 
$
732

 
$
1,547

 
$
2,739

 
$
3,824

Net loan charge-offs to average loans outstanding
(0.01
)%
 
0.09
%
 
0.20
%
 
0.36
%
 
0.51
%
ALLL as a% of loans at end of period
0.87
 %
 
1.21
%
 
1.42
%
 
1.54
%
 
1.65
%


20


As the level of net loans charged-off decline and credit quality indicators continue to improve, we have reduced the ALLL in
both amount and as a percentage of loans. While more volatile, loans individually evaluated for impairment have been relatively flat until the 4th quarter of 2015. The decline in loans collectively impaired illustrates the downward trend we are experiencing in our overall level of ALLL to gross loans. The following table illustrates our changes within the two main components of the ALLL.

December 31
2015
 
September 30
2015
 
June 30
2015
 
March 31
2015
 
December 31
2014
ALLL
 
 
 
 
 
 
 
 
 
Individually evaluated for impairment
$
2,820

 
$
3,217

 
$
3,202

 
$
3,361

 
$
3,427

Collectively evaluated for impairment
4,580

 
4,983

 
5,798

 
6,239

 
6,673

Total
$
7,400

 
$
8,200

 
$
9,000

 
$
9,600

 
$
10,100

ALLL to gross loans
 
 
 
 
 
 
 
 
 
Individually evaluated for impairment
0.33
%
 
0.38
%
 
0.38
%
 
0.41
%
 
0.41
%
Collectively evaluated for impairment
0.54
%
 
0.60
%
 
0.70
%
 
0.76
%
 
0.80
%
Total
0.87
%
 
0.98
%
 
1.08
%
 
1.17
%
 
1.21
%
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
Fluctuations in past due and nonaccrual status loans can have a significant impact on the ALLL. To determine the potential impact, and corresponding estimated losses, we analyze our historical loss trends on loans past due greater than 30 days and nonaccrual status loans. We monitor all loans that are past due and in nonaccrual status for indications of additional deterioration.

Total Past Due and Nonaccrual Loans as of December 31
 
2015
 
2014
 
2013
 
2012
 
2011
Commercial and agricultural
$
2,247

 
$
4,805

 
$
3,621

 
$
7,271

 
$
7,420

Residential real estate
2,520

 
4,181

 
7,008

 
5,431

 
5,297

Consumer
31

 
138

 
259

 
199

 
186

Total
$
4,798

 
$
9,124

 
$
10,888

 
$
12,901

 
$
12,903

Total past due and nonaccrual loans to gross loans
0.56
%
 
1.09
%
 
1.34
%
 
1.67
%
 
1.72
%
Declines in past due and nonaccrual status loans during 2015 are the result of improved loan performance. A summary of loans past due and in nonaccrual status, including the composition of the ending balance of nonaccrual status loans by type, is included in “Note 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 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 status. The majority of new modifications result in terms that satisfy our criteria for continued interest accrual. TDRs that have been placed on 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, 2015 or December 31, 2014.

21


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, 2014 and 2015:

Accruing Interest
 
Nonaccrual
 
Total
 
Number
of
Loans
 
Balance
 
Number
of
Loans
 
Balance
 
Number
of
Loans
 
Balance
January 1, 2014
165

 
$
24,423

 
15

 
$
1,442

 
180

 
$
25,865

New modifications
30

 
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 status
5

 
502

 
(5
)
 
(502
)
 

 

Transfers to nonaccrual status
(9
)
 
(2,093
)
 
9

 
2,093

 

 

December 31, 2014
156

 
20,931

 
13

 
2,410

 
169

 
23,341

New modifications
28

 
6,490

 
4

 
491

 
32

 
6,981

Principal advances (payments)

 
(1,205
)
 

 
(1,002
)
 

 
(2,207
)
Loans paid-off
(26
)
 
(5,227
)
 
(7
)
 
(597
)
 
(33
)
 
(5,824
)
Partial charge-offs

 

 

 
(87
)
 

 
(87
)
Balances charged-off
(2
)
 
(83
)
 

 

 
(2
)
 
(83
)
Transfers to OREO

 

 
(6
)
 
(796
)
 
(6
)
 
(796
)
Transfers to accrual status
3

 
292

 
(3
)
 
(292
)
 

 

Transfers to nonaccrual status
(4
)
 
(267
)
 
4

 
267

 

 

December 31, 2015
155

 
$
20,931

 
5

 
$
394

 
160

 
$
21,325

The following table summarizes our TDRs as of December 31:

2015
 
2014
 
2013

Accruing
Interest
 
Nonaccrual
 
Total
 
Accruing
Interest
 
Nonaccrual
 
Total
 
Accruing
Interest
 
Nonaccrual
 
Total
Current
$
20,550

 
$
146

 
$
20,696

 
$
20,012

 
$
272

 
$
20,284

 
$
21,690

 
$
1,189

 
$
22,879

Past due 30-59 days
357

 

 
357

 
804

 
592

 
1,396

 
2,158

 
37

 
2,195

Past due 60-89 days
24

 

 
24

 
115

 
3

 
118

 
575

 

 
575

Past due 90 days or more

 
248

 
248

 

 
1,543

 
1,543

 

 
216

 
216

Total
$
20,931

 
$
394

 
$
21,325

 
$
20,931

 
$
2,410

 
$
23,341

 
$
24,423

 
$
1,442

 
$
25,865


2012
 
2011
 
Accruing
Interest
 
Nonaccrual
 
Total
 
Accruing
Interest
 
Nonaccrual
 
Total
Current
$
16,301

 
$
941

 
$
17,242

 
$
16,125

 
$
514

 
$
16,639

Past due 30-59 days
158

 
561

 
719

 
1,564

 
344

 
1,908

Past due 60-89 days
72

 
41

 
113

 
50

 
85

 
135

Past due 90 days or more

 
1,281

 
1,281

 

 
74

 
74

Total
$
16,531

 
$
2,824

 
$
19,355

 
$
17,739

 
$
1,017

 
$
18,756

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.

22


Impaired Loans
The following is a summary of information pertaining to impaired loans as of December 31:
 
2015
 
2014

Outstanding
Balance
 
Unpaid
Principal
Balance
 
Valuation
Allowance
 
Outstanding
Balance
 
Unpaid
Principal
Balance
 
Valuation
Allowance
TDRs
 
 
 
 
 
 
 
 
 
 
 
Commercial real estate
$
7,619

 
$
7,858

 
$
818

 
$
10,222

 
$
10,501

 
$
1,276

Commercial other
188

 
199

 
11

 
715

 
945

 
4

Agricultural real estate
3,549

 
3,549

 

 
1,423

 
1,423

 

Agricultural other
519

 
519

 
2

 
66

 
186

 

Residential real estate senior liens
9,155

 
9,457

 
1,851

 
10,462

 
11,019

 
1,847

Residential real estate junior liens
133

 
133

 
28

 
246

 
246

 
49

Home equity lines of credit
127

 
427

 

 
153

 
453

 
46

Consumer secured
35

 
35

 

 
54

 
54

 
1

Total TDRs
21,325

 
22,177

 
2,710

 
23,341

 
24,827

 
3,223

Other impaired loans
 
 
 
 
 
 
 
 
 
 
 
Commercial real estate
162

 
175

 

 
1,009

 
1,195

 
3

Commercial other

 

 

 
83

 
95

 

Agricultural real estate

 

 

 
106

 
106

 

Agricultural other

 

 

 

 

 

Residential real estate senior liens
841

 
1,308

 
108

 
1,183

 
1,763

 
168

Residential real estate junior liens
10

 
30

 
2

 
19

 
29

 
4

Home equity lines of credit

 
7

 

 
97

 
197

 
29

Consumer secured

 

 

 
10

 
10

 

Total other impaired loans
1,013

 
1,520

 
110

 
2,507

 
3,395

 
204

Total impaired loans
$
22,338

 
$
23,697

 
$
2,820

 
$
25,848

 
$
28,222

 
$
3,427

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

2015
 
2014
 
2013
 
2012
 
2011
Nonaccrual status loans
$
792

 
$
4,044

 
$
3,244

 
$
7,303

 
$
6,389

Accruing loans past due 90 days or more

 
148

 
142

 
428

 
760

Total nonperforming loans
792

 
4,192

 
3,386

 
7,731

 
7,149

Foreclosed assets
421

 
885

 
1,412

 
2,018

 
1,876

Total nonperforming assets
$
1,213

 
$
5,077

 
$
4,798

 
$
9,749

 
$
9,025

Nonperforming loans as a % of total loans
0.09
%
 
0.50
%
 
0.42
%
 
1.00
%
 
0.95
%
Nonperforming assets as a % of total assets
0.07
%
 
0.33
%
 
0.32
%
 
0.68
%
 
0.67
%
After a loan is 90 days past due, it is placed on nonaccrual status unless it is well secured and in the process of collection. Upon transferring a loan to nonaccrual status, we perform an evaluation to determine the net realizable value of the underlying collateral. This evaluation is used to help determine if any charge-offs are necessary. Loans may be placed back on accrual status after six months months of continued performance. Total nonperforming loans continue to improve with current levels reflecting historic lows.

23


Included in the nonaccrual loan balances above were loans currently classified as TDRs as of December 31:

2015
 
2014
 
2013
 
2012
 
2011
Commercial and agricultural
$
232

 
$
1,995

 
$
833

 
$
2,325

 
$
520

Residential real estate
162

 
262

 
609

 
499

 
497

Consumer

 
153

 

 

 

Total
$
394

 
$
2,410

 
$
1,442

 
$
2,824

 
$
1,017

Additional disclosures about nonaccrual status 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 we have identified all impaired loans as of December 31, 2015.
We believe that the level of the ALLL is appropriate as of December 31, 2015. We will continue to closely monitor overall credit quality indicators and our policies and procedures related to the analysis of the ALLL to ensure that the ALLL remains at the appropriate level.

24


Noninterest Income and Noninterest Expenses
Significant noninterest account balances are highlighted in the following table with additional descriptions of significant fluctuations for the years ended December 31:

 
 
 
 
Change
 
 
 
Change
 
2015
 
2014
 
$
 
%
 
2013
 
$
 
%
Service charges and fees
 
 
 
 
 
 
 
 
 
 
 
 
 
ATM and debit card fees
$
2,411

 
$
2,084

 
$
327

 
15.69
 %
 
$
1,944

 
$
140

 
7.20
 %
NSF and overdraft fees
1,855

 
2,156

 
(301
)
 
(13.96
)%
 
2,243

 
(87
)
 
(3.88
)%
Freddie Mac servicing fee
712

 
720

 
(8
)
 
(1.11
)%
 
737

 
(17
)
 
(2.31
)%
Service charges on deposit accounts
345

 
354

 
(9
)
 
(2.54
)%
 
373

 
(19
)
 
(5.09
)%
Net OMSR income (loss)
(14
)
 
(36
)
 
22

 
61.11
 %
 
269

 
(305
)
 
(113.38
)%
All other
128

 
133

 
(5
)
 
(3.76
)%
 
116

 
17

 
14.66
 %
Total service charges and fees
5,437

 
5,411

 
26

 
0.48
 %
 
5,682

 
(271
)
 
(4.77
)%
Net gain on sale of mortgage loans
573

 
514

 
59

 
11.48
 %
 
962

 
(448
)
 
(46.57
)%
Earnings on corporate owned life insurance policies
771

 
751

 
20

 
2.66
 %
 
732

 
19

 
2.60
 %
Net gains (losses) on sale of AFS securities
163

 
97

 
66

 
68.04
 %
 
171

 
(74
)
 
(43.27
)%
Other
 
 
 
 
 
 
 
 
 
 
 
 
 
Trust and brokerage advisory fees
2,161

 
2,069

 
92

 
4.45
 %
 
1,858

 
211

 
11.36
 %
Corporate Settlement Solutions joint venture
463

 
76

 
387

 
509.21
 %
 
143

 
(67
)
 
(46.85
)%
Other
791

 
407

 
384

 
94.35
 %
 
627

 
(220
)
 
(35.09
)%
Total other
3,415

 
2,552

 
863

 
33.82
 %
 
2,628

 
(76
)
 
(2.89
)%
Total noninterest income
$
10,359

 
$
9,325

 
$
1,034

 
11.09
 %
 
$
10,175

 
$
(850
)
 
(8.35
)%
Significant changes in noninterest income are detailed below:
ATM and debit card fees increased during 2015 as a result of marketing incentives. While we do not anticipate significant changes to our ATM and debit card fees, we do expect that fees will continue to increase in 2016 as the usage of ATM and debit cards continues to increase.
NSF and overdraft fees fluctuate from period-to-period based on customer activity as well as the number of business days in the period. We anticipate NSF and overdraft fees in 2016 to approximate 2015 levels.
Offering rates on residential mortgage loans, as well as the decline in loan demand, have been the most significant drivers behind fluctuations in the gain on sale of mortgage loans and net OMSR income (loss). Mortgage rates are expected to approximate current levels in the foreseeable future and purchase money mortgage activity is anticipated to increase as a result of our various initiatives to drive growth. As such, we anticipate increases in origination volumes and in turn, an increase in gains on sale of mortgage loans.
We are continually analyzing our AFS securities for potential sale opportunities. These analyses identified several securities that made economic sense to sell in 2015, 2014, and 2013.
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. We anticipate that these fees will continue to increase in 2016.
The increase in earnings from our Corporate Settlement Solutions joint venture during 2015 can be attributed to their expansion of national sales and maintaining consistent margins with the increased sales volume.
The fluctuations in all other income is spread throughout various categories, none of which are individually significant.

25


Significant noninterest expense account balances are highlighted in the following table with additional descriptions of significant fluctuations for the years ended December 31:

 
 
 
 
Change
 
 
 
Change
 
2015
 
2014
 
$
 
%
 
2013
 
$
 
%
Compensation and benefits
 
 
 
 
 
 
 
 
 
 
 
 
 
Employee salaries
$
13,760

 
$
13,311

 
$
449

 
3.37
 %
 
$
12,019

 
$
1,292

 
10.75
 %
Employee benefits
5,308

 
5,191

 
117

 
2.25
 %
 
5,788

 
(597
)
 
(10.31
)%
Total compensation and benefits
19,068

 
18,502

 
566

 
3.06
 %
 
17,807

 
695

 
3.90
 %
Furniture and equipment
 
 
 
 
 
 
 
 
 
 
 
 
 
Service contracts
2,932

 
2,542

 
390

 
15.34
 %
 
2,277

 
265

 
11.64
 %
Depreciation
1,949

 
1,850

 
99

 
5.35
 %
 
1,889

 
(39
)
 
(2.06
)%
ATM and debit card fees
742

 
722

 
20

 
2.77
 %
 
710

 
12

 
1.69
 %
All other
116

 
59

 
57

 
96.61
 %
 
69

 
(10
)
 
(14.49
)%
Total furniture and equipment
5,739

 
5,173

 
566

 
10.94
 %
 
4,945

 
228

 
4.61
 %
Occupancy
 
 
 
 
 
 
 
 
 
 
 
 
 
Depreciation
728

 
701

 
27

 
3.85
 %
 
667

 
34

 
5.10
 %
Outside services
701

 
718

 
(17
)
 
(2.37
)%
 
671

 
47

 
7.00
 %
Utilities
528

 
524

 
4

 
0.76
 %
 
502

 
22

 
4.38
 %
Property taxes
526

 
515

 
11

 
2.14
 %
 
499

 
16

 
3.21
 %
All other
351

 
340

 
11

 
3.24
 %
 
314

 
26

 
8.28
 %
Total occupancy
2,834

 
2,798

 
36

 
1.29
 %
 
2,653

 
145

 
5.47
 %
Other
 
 
 
 
 
 
 
 
 
 
 
 
 
Director fees
827

 
775

 
52

 
6.71
 %
 
819

 
(44
)
 
(5.37
)%
Audit and related fees
821

 
809

 
12

 
1.48
 %
 
738

 
71

 
9.62
 %
FDIC insurance premiums
813

 
842

 
(29
)
 
(3.44
)%
 
1,082

 
(240
)
 
(22.18
)%
Donations and community relations
808

 
1,004

 
(196
)
 
(19.52
)%
 
715

 
289

 
40.42
 %
Marketing costs
491

 
427

 
64

 
14.99
 %
 
416

 
11

 
2.64
 %
Legal fees
464

 
320

 
144

 
45.00
 %
 
359

 
(39
)
 
(10.86
)%
Education and travel
442

 
625

 
(183
)
 
(29.28
)%
 
502

 
123

 
24.50
 %
Printing and supplies
405

 
367

 
38

 
10.35
 %
 
396

 
(29
)
 
(7.32
)%
Postage and freight
377

 
397

 
(20
)
 
(5.04
)%
 
387

 
10

 
2.58
 %
Consulting fees
364

 
349

 
15

 
4.30
 %
 
315

 
34

 
10.79
 %
Loan underwriting fees
347

 
361

 
(14
)
 
(3.88
)%
 
423

 
(62
)
 
(14.66
)%
State taxes
218

 
171

 
47

 
27.49
 %
 
140

 
31

 
22.14
 %
Amortization of deposit premium
169

 
183

 
(14
)
 
(7.65
)%
 
221

 
(38
)
 
(17.19
)%
Other losses
150

 
250

 
(100
)
 
(40.00
)%
 
109

 
141

 
129.36
 %
Foreclosed asset and collection
53

 
122

 
(69
)
 
(56.56
)%
 
211

 
(89
)
 
(42.18
)%
All other
1,661

 
1,628

 
33

 
2.03
 %
 
1,517

 
111

 
7.32
 %
Total other
8,410

 
8,630

 
(220
)
 
(2.55
)%
 
8,350

 
280

 
3.35
 %
Total noninterest expenses
$
36,051

 
$
35,103

 
$
948

 
2.70
 %
 
$
33,755

 
$
1,348

 
3.99
 %

26


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 from 2013 to 2014, 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.
Service contracts include approximately $147 of conversion related costs incurred as a result of two branch acquisitions during the third quarter of 2015.
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 2016.
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 foundation provides centralized oversight for charitable donations to organizations that benefit our communities. Included in donations and community relations were discretionary donations to the foundation of $258, $500, and $200 for the years ended December 31, 2015, 2014, and 2013, respectively.
Legal fees include approximately $133 of legal service expense incurred as a result of two branch acquisitions during the third quarter of 2015. Legal fees are expected to approximate 2014 levels in 2016.
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.
Other losses increased significantly in 2014 primarily as a result of losses related to fraudulent activities associated with debit cards. Also contributing to losses in 2014 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 2015 levels in 2016.
The fluctuations in all other expenses are spread throughout various categories, none of which are individually significant.

27


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

2015
 
2014
 
$
 
%
ASSETS
 
 
 
 
 
 
 
Cash and cash equivalents
$
21,569

 
$
19,906

 
$
1,663

 
8.35
 %
AFS securities
 
 
 
 
 
 
 
Amortized cost of AFS securities
654,348

 
561,893

 
92,455

 
16.45
 %
Unrealized gains (losses) on AFS securities
5,788

 
5,641

 
147

 
2.61
 %
AFS securities
660,136

 
567,534

 
92,602

 
16.32
 %
Mortgage loans AFS
1,187

 
901

 
286

 
31.74
 %
Loans
 
 
 
 
 
 
 
Gross loans
850,492

 
836,550

 
13,942

 
1.67
 %
Less allowance for loan and lease losses
7,400

 
10,100

 
(2,700
)
 
(26.73
)%
Net loans
843,092

 
826,450

 
16,642

 
2.01
 %
Premises and equipment
28,331

 
25,881

 
2,450

 
9.47
 %
Corporate owned life insurance policies
26,423

 
25,152

 
1,271

 
5.05
 %
Accrued interest receivable
6,269

 
5,851

 
418

 
7.14
 %
Equity securities without readily determinable fair values
22,286

 
20,076

 
2,210

 
11.01
 %
Goodwill and other intangible assets
48,828

 
46,128

 
2,700

 
5.85
 %
Other assets
9,991

 
11,664

 
(1,673
)
 
(14.34
)%
TOTAL ASSETS
$
1,668,112

 
$
1,549,543

 
$
118,569

 
7.65
 %
LIABILITIES AND SHAREHOLDERS’ EQUITY
 
 
 
 
 
 
 
Liabilities
 
 
 
 
 
 
 
Deposits
$
1,164,563

 
$
1,074,484

 
$
90,079

 
8.38
 %
Borrowed funds
309,732

 
289,709

 
20,023

 
6.91
 %
Accrued interest payable and other liabilities
9,846

 
10,756

 
(910
)
 
(8.46
)%
Total liabilities
1,484,141

 
1,374,949

 
109,192

 
7.94
 %
Shareholders’ equity
183,971

 
174,594

 
9,377

 
5.37
 %
TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY
$
1,668,112

 
$
1,549,543

 
$
118,569

 
7.65
 %
As shown above, total assets have increased $118,569 since December 31, 2014. During 2015, we increased our cost basis of AFS securities by $92,455 while loans grew by $13,942. Included in the increase in our AFS securities portfolio was $147 increase in unrealized gains. This balance sheet growth was funded by increases in both deposits (through branch acquisitions) 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 2016.
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.
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 current interest rate environment has made it almost impossible to increase net interest income without increasing earning assets. As deposit growth outpaced loan demand in recent periods, we deployed funds from deposit growth into purchases of AFS securities to provide additional interest income. We anticipate that future increases in our AFS securities will be in the form of mortgage-backed securities and collateralized mortgage obligations.

28


The following is a schedule of the carrying value of AFS investment securities as of December 31:

2015
 
2014
 
2013
 
2012
 
2011
Government sponsored enterprises
$
24,345

 
$
24,136

 
$
23,745

 
$
25,776

 
$
397

States and political subdivisions
232,217

 
215,345

 
201,988

 
182,743

 
174,938

Auction rate money market preferred
2,866

 
2,619

 
2,577

 
2,778

 
2,049

Preferred stocks
3,299

 
6,140

 
5,827

 
6,363

 
5,033

Mortgage-backed securities
263,384

 
166,926

 
144,115

 
155,345

 
143,602

Collateralized mortgage obligations
134,025

 
152,368

 
133,810

 
131,005

 
99,101

Total
$
660,136

 
$
567,534

 
$
512,062

 
$
504,010

 
$
425,120

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.
The following is a schedule of maturities of AFS investment securities and their weighted average yield as of December 31, 2015. 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
$

 
 
$
23,963

 
1.45
 
$
382

 
2.05
 
$

 
 
$

 
States and political subdivisions
30,217

 
2.01
 
71,489

 
4.75
 
96,489

 
4.22
 
34,022

 
4.91
 

 
Mortgage-backed securities

 
 

 
 

 
 

 
 
263,384

 
2.28
Collateralized mortgage obligations

 
 

 
 

 
 

 
 
134,025

 
2.35
Auction rate money market preferred

 
 

 
 

 
 

 
 
2,866

 
6.35
Preferred stocks

 
 

 
 

 
 

 
 
3,299

 
5.44
Total
$
30,217

 
2.01
 
$
95,452

 
3.92
 
$
96,871

 
4.21
 
$
34,022

 
4.91
 
$
403,574

 
2.36

29


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:

2015
 
2014
 
2013
 
2012
 
2011
Commercial
$
448,381

 
$
433,270

 
$
393,164

 
$
372,332

 
$
366,440

Agricultural
115,911

 
104,721

 
92,589

 
83,606

 
74,645

Residential real estate
251,501

 
266,155

 
291,499

 
285,070

 
278,803

Consumer
34,699

 
32,404

 
33,525

 
33,619

 
31,722

Total
$
850,492

 
$
836,550

 
$
810,777

 
$
774,627

 
$
751,610

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

2015
 
2014
 
2013
 
$ Change
 
% Change
 
$ Change
 
% Change
 
$ Change
 
% Change
Commercial
$
15,111

 
3.49
 %
 
$
40,106

 
10.20
 %
 
$
20,832

 
5.60
 %
Agricultural
11,190

 
10.69
 %
 
12,132

 
13.10
 %
 
8,983

 
10.74
 %
Residential real estate
(14,654
)
 
(5.51
)%
 
(25,344
)
 
(8.69
)%
 
6,429

 
2.26
 %
Consumer
2,295

 
7.08
 %
 
(1,121
)
 
(3.34
)%
 
(94
)
 
(0.28
)%
Total
$
13,942

 
1.67
 %
 
$
25,773

 
3.18
 %
 
$
36,150

 
4.67
 %
While competition for commercial loans continues to be strong, we experienced growth in this segment of the portfolio during 2015 and anticipate strong growth in 2016. Residential real estate loans declined during 2015; however, we anticipate growth in 2016 as a result of initiatives designed to increase both loan volume and the number of originations.

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 20 – 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:

2015
 
2014
 
2013
 
2012
 
2011
Noninterest bearing demand deposits
$
191,376

 
$
181,826

 
$
158,428

 
$
143,735

 
$
119,072

Interest bearing demand deposits
212,666

 
190,984

 
192,089

 
181,259

 
163,653

Savings deposits
337,641

 
261,412

 
243,237

 
228,338

 
193,902

Certificates of deposit
324,101

 
339,824

 
362,473

 
376,790

 
395,777

Brokered certificates of deposit
73,815

 
72,134

 
56,329

 
55,348

 
54,326

Internet certificates of deposit
24,964

 
28,304

 
31,210

 
32,197

 
31,434

Total
$
1,164,563

 
$
1,074,484

 
$
1,043,766

 
$
1,017,667

 
$
958,164


30


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

2015
 
2014
 
2013
 
$ Change
 
% Change
 
$ Change
 
% Change
 
$ Change
 
% Change
Noninterest bearing demand deposits
$
9,550

 
5.25
 %
 
$
23,398

 
14.77
 %
 
$
14,693

 
10.22
 %
Interest bearing demand deposits
21,682

 
11.35
 %
 
(1,105
)
 
(0.58
)%
 
10,830

 
5.97
 %
Savings deposits
76,229

 
29.16
 %
 
18,175

 
7.47
 %
 
14,899

 
6.52
 %
Certificates of deposit
(15,723
)
 
(4.63
)%
 
(22,649
)
 
(6.25
)%
 
(14,317
)
 
(3.80
)%
Brokered certificates of deposit
1,681

 
2.33
 %
 
15,805

 
28.06
 %
 
981

 
1.77
 %
Internet certificates of deposit
(3,340
)
 
(11.80
)%
 
(2,906
)
 
(9.31
)%
 
(987
)
 
(3.07
)%
Total
$
90,079

 
8.38
 %
 
$
30,718

 
2.94
 %
 
$
26,099

 
2.56
 %
Deposit demand continues to be driven by non-contractual deposits while certificates of deposit gradually decline. Our significant growth in savings deposits during 2015 is the result of our recent branch acquisitions. In 2016, growth is anticipated to continue to come in the form of non-contractual deposits, while certificates of deposit are expected to continue to decline but at a slower rate than the past 5 years. We look to retain and attract new customers with the recent branch acquisitions to provide growth in deposits in future periods.

The remaining maturity of time certificates and other time deposits of $100 or more as of December 31, 2015 was as follows:
Maturity

Within 3 months
$
37,988

Within 3 to 6 months
17,377

Within 6 to 12 months
50,180

Over 12 months
133,183

Total
$
238,728

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. To provide balance sheet growth, we utilize borrowings and brokered deposits to fund earning assets.
The following table presents borrowed funds balances for the years ended December 31:

2015
 
2014
 
2013
 
2012
 
2011
FHLB advances
$
235,000

 
$
192,000

 
$
162,000

 
$
152,000

 
$
142,242

Securities sold under agreements to repurchase without stated maturity dates
70,532

 
95,070

 
106,025

 
66,147

 
57,198

Securities sold under agreements to repurchase with stated maturity dates

 
439

 
11,301

 
16,284

 
16,696

Federal funds purchased
4,200

 
2,200

 

 
6,570

 

Total
$
309,732

 
$
289,709

 
$
279,326

 
$
241,001

 
$
216,136

For additional disclosure related to borrowed funds, see “Note 10 – 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 and obligations related to other employee benefits. For more information on the defined benefit pension plan and other employee benefits, see "Note 17 – Benefit Plans" of the “Notes to Consolidated Financial Statements” in Item 8. Financial Statements and Supplementary Data.

31


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, 2015:

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
$
741,683

 
$

 
$

 
$

 
$
741,683

Certificates of deposit with stated maturities
191,858

 
153,099

 
56,895

 
21,028

 
422,880

Total deposits
933,541

 
153,099

 
56,895

 
21,028

 
1,164,563

Borrowed funds
 
 
 
 
 
 
 
 
 
Short-term borrowings
74,732

 

 

 

 
74,732

Long-term borrowings
45,000

 
100,000

 
20,000

 
70,000

 
235,000

Total borrowed funds
119,732

 
100,000

 
20,000

 
70,000

 
309,732

Total contractual obligations
$
1,053,273

 
$
253,099

 
$
76,895

 
$
91,028

 
$
1,474,295

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, 2015. Commitments to grant loans include residential mortgage loans with the majority being loans committed 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
$
69,954

 
$
35,488

 
$
19,513

 
$
9,457

 
$
134,412

Commitments to grant loans
53,946

 

 

 

 
53,946

Commercial and standby letters of credit
915

 

 

 

 
915

Total loan commitments
$
124,815

 
$
35,488

 
$
19,513

 
$
9,457

 
$
189,273

For additional disclosure related to Contractual Obligations and Loan Commitments, see “Note 13 – 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 authorized to raise capital through dividend reinvestment, employee and director stock purchases, and shareholder stock purchases. Pursuant to these authorizations, we issued 216,700 shares or $5,201 of common stock during 2015, and 182,755 shares or $4,227 of common stock in 2014. 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 $550 and $495 during 2015 and 2014, respectively.
We have a publicly announced common stock repurchase plan. Pursuant to this plan, we repurchased 193,107 shares or $4,590 of common stock compared to 135,630 shares or $3,122 during 2015 and 2014, respectively. As of December 31, 2015, we were authorized to repurchase up to an additional 158,658 shares of common stock.
The FRB has established minimum risk based capital guidelines. Pursuant to these guidelines, a framework has been established that assigns risk weights to each category of on and off-balance-sheet items to arrive at risk adjusted total assets. Regulatory capital is divided by the risk adjusted assets with the resulting ratio compared to the minimum standard to determine whether a corporation has adequate capital. On July 2, 2013, the FRB published revised BASEL III Capital standards for banks. The final rules redefine what is included or deducted from equity capital, changes risk weighting for certain on and

32


off-balance sheet assets, increases the minimum required equity capital to be considered well capitalized, and introduces a capital cushion buffer. The rules, which are being 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.

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, or tier 1 leverage ratio, was 8.52% as of December 31, 2015.
Effective January 1, 2015, the minimum standard for primary, or tier 1, capital increased from 4.00% to 6.00%. The minimum standard for total capital remains at 8.00%. Also effective January 1, 2015 is the new common equity tier 1 capital ratio which has a minimum requirement of 4.50%. The following table sets forth the percentages required under the Risk Based Capital guidelines and our values as of December 31:

2015
 
2014
 
Required
Common equity tier 1 capital
13.24
%
 
N/A

 
4.50
%
 
 
 
 
 
 
Tier 1 capital
13.24
%
 
14.08
%
 
6.00
%
Tier 2 capital
0.72
%
 
1.11
%
 
2.00
%
Total Capital
13.96
%
 
15.19
%
 
8.00
%
Tier 2 capital, or 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, 2015, the Bank exceeded these minimum capital requirements. For further information regarding the Bank’s capital requirements, see “Note 16 – 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 20 – Fair Value” of the “Notes to Consolidated Financial Statements” in Item 8. Financial Statements and Supplementary Data.
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 following table, 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 $168,534 as of December 31, 2015, 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 $1,601 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, 2015, 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.

33


The following table shows the time periods and the amount of assets and liabilities available for interest rate repricing as of December 31, 2015. 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
$
35,776

 
$
112,916

 
$
347,042

 
$
164,402

Loans
204,408

 
79,477

 
409,031

 
156,784

Total
$
240,184

 
$
192,393

 
$
756,073

 
$
321,186

Interest sensitive liabilities
 
 
 
 
 
 
 
Borrowed funds
$
99,732

 
$
20,000

 
$
150,000

 
$
40,000

Time deposits
60,100

 
132,001

 
209,751

 
21,028

Savings
42,141

 
26,360

 
103,694

 
165,446

NOW
2,936

 
8,805

 
40,641

 
160,284

Total
$
204,909

 
$
187,166

 
$
504,086

 
$
386,758

Cumulative gap
$
35,275

 
$
40,502

 
$
292,489

 
$
226,917

Cumulative gap as a % of assets
2.11
%
 
2.43
%
 
17.53
%
 
13.60
%
The following table shows the maturity of commercial and agricultural loans outstanding at December 31, 2015. 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
$
78,188

 
$
310,530

 
$
175,574

 
$
564,292

Interest sensitivity
 
 
 
 
 
 
 
Loans maturing after one year that have:
 
 
 
 
 
 
 
Fixed interest rates
 
 
$
275,064

 
$
168,591

 
 
Variable interest rates
 
 
35,466

 
6,983

 
 
Total
 
 
$
310,530

 
$
175,574

 
 

34


Liquidity
Liquidity is monitored regularly by our Market Risk Committee, which consists of members of senior management. The committee reviews projected cash flows, key ratios, and liquidity available from both primary and secondary sources.
Our primary sources of liquidity are cash and cash equivalents and AFS securities. These categories totaled $681,705 or 40.87% of assets as of December 31, 2015 as compared to $587,440 or 37.91% as of December 31, 2014. 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 of AFS securities or loans as collateral. As of December 31, 2015, we had available lines of credit of $121,960.
The following table summarizes our sources and uses of cash for the years ended December 31:
 
2015
 
2014
 
$ Variance
Net cash provided by (used in) operating activities
$
12,090

 
$
17,562

 
$
(5,472
)
Net cash provided by (used in) investing activities
(113,499
)
 
(74,826
)
 
(38,673
)
Net cash provided by (used in) financing activities
103,072

 
35,032

 
68,040

Increase (decrease) in cash and cash equivalents
1,663

 
(22,232
)
 
23,895

Cash and cash equivalents January 1
19,906

 
42,138

 
(22,232
)
Cash and cash equivalents December 31
$
21,569

 
$
19,906

 
$
1,663

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 not have a significant 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, loan prepayments, and changes in funding sources. These forecasts are compared against net interest income projected in a stable interest rate environment. While many assets and liabilities reprice either at maturity or in accordance with their contractual terms, several balance sheet components demonstrate characteristics that require an evaluation to more accurately reflect their repricing behavior. Key assumptions in the simulation analysis include prepayments on loans, probable calls of investment securities, changes in market conditions, loan volumes and loan pricing, deposit sensitivity, and customer preferences. These assumptions are inherently uncertain as they are subject to fluctuation and revision in a dynamic 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.

35


Our interest rate sensitivity is estimated by first forecasting the next 12 and 24 months of net interest income under an assumed environment of a constant balance sheet and constant market interest rates (base case). We then compare the results of various simulation analyses to the base case. At December 31, 2015, 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 tables summarize our interest rate sensitivity for 12 and 24 months as of:
 
December 31, 2015
 
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
(2.08
)%
 
1.27
%
 
2.00
%
 
2.11
%
 
2.23
%
 
(1.77
)%
 
2.00
%
 
3.47
%
 
4.02
%
 
4.39
%
 
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
)%
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.

36


The following tables provide information about assets and liabilities that are sensitive to changes in interest rates as of December 31, 2015 and December 31, 2014. 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.

December 31, 2015
 
2016
 
2017
 
2018
 
2019
 
2020
 
Thereafter
 
Total
 
Fair Value
Rate sensitive assets
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Other interest bearing assets
$
2,659

 
$
100

 
$

 
$

 
$

 
$

 
$
2,759

 
$
2,758

Average interest rates
0.23
%
 
0.35
%
 

 

 

 

 
0.24
%
 
 
AFS securities
$
148,692

 
$
120,692

 
$
81,726

 
$
73,541

 
$
71,083

 
$
164,402

 
$
660,136

 
$
660,136

Average interest rates
2.16
%
 
2.11
%
 
2.18
%
 
2.25
%
 
2.37
%
 
2.43
%
 
2.25
%
 
 
Fixed interest rate loans (1)
$
116,143

 
$
130,873

 
$
103,265

 
$
83,457

 
$
91,436

 
$
156,784

 
$
681,958

 
$
670,864

Average interest rates
4.56
%
 
4.42
%
 
4.27
%
 
4.36
%
 
4.18
%
 
4.28
%
 
4.35
%
 
 
Variable interest rate loans (1)
$
61,672

 
$
24,289

 
$
24,359

 
$
14,398

 
$
16,842

 
$
26,974

 
$
168,534

 
$
168,534

Average interest rates
4.08
%
 
4.12
%
 
4.19
%
 
3.45
%
 
3.40
%
 
3.69
%
 
3.92
%
 
 
Rate sensitive liabilities
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Fixed rate borrowed funds
$
104,732

 
$
50,000

 
$
50,000

 
$
40,000

 
$
10,000

 
$
40,000

 
$
294,732

 
$
297,495

Average interest rates
0.47
%
 
1.56
%
 
2.16
%
 
2.35
%
 
1.98
%
 
2.67
%
 
1.55
%
 
 
Variable rate borrowed funds
$
15,000

 
$

 
$

 
$

 
$

 
$

 
$
15,000

 
$
15,000

Average interest rates
0.62
%
 

 

 

 

 

 
0.62
%
 
 
Savings and NOW accounts
$
80,242

 
$
42,064

 
$
37,773

 
$
33,950

 
$
30,548

 
$
325,730

 
$
550,307

 
$
550,307

Average interest rates
0.59
%
 
0.11
%
 
0.11
%
 
0.11
%
 
0.11
%
 
0.11
%
 
0.18
%
 
 
Fixed interest rate certificates of deposit
$
190,500

 
$
89,689

 
$
63,167

 
$
23,883

 
$
33,012

 
$
21,028

 
$
421,279

 
$
419,828

Average interest rates
0.92
%
 
1.26
%
 
1.27
%
 
1.50
%
 
1.59
%
 
1.84
%
 
1.18
%
 
 
Variable interest rate certificates of deposit
$
1,358

 
$
243

 
$

 
$

 
$

 
$

 
$
1,601

 
$
1,601

Average interest rates
0.49
%
 
0.40
%
 

 

 

 

 
0.48
%
 
 

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 rates
0.36
%
 

 
0.35
%
 

 

 

 
0.36
%
 
 
AFS securities
$
109,261

 
$
93,324

 
$
80,147

 
$
53,017

 
$
47,112

 
$
184,673

 
$
567,534

 
$
567,534

Average interest rates
2.22
%
 
2.26
%
 
2.32
%
 
2.39
%
 
2.46
%
 
2.62
%
 
2.41
%
 
 
Fixed interest rate loans (1)
$
121,996

 
$
98,865

 
$
128,954

 
$
91,854

 
$
71,293

 
$
151,156

 
$
664,118

 
$
657,985

Average interest rates
4.78
%
 
4.83
%
 
4.53
%
 
4.32
%
 
4.47
%
 
4.25
%
 
4.52
%
 
 
Variable interest rate loans (1)
$
71,435

 
$
26,938

 
$
19,836

 
$
13,929

 
$
14,706

 
$
25,588

 
$
172,432

 
$
172,432

Average interest rates
4.46
%
 
3.97
%
 
3.95
%
 
3.39
%
 
3.37
%
 
4.01
%
 
4.08
%
 
 
Rate sensitive liabilities
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Fixed rate borrowed funds
$
139,709

 
$
10,000

 
$
30,000

 
$
40,000

 
$
20,000

 
$
50,000

 
$
289,709

 
$
293,401

Average interest rates
0.33
%
 
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 rates
0.11
%
 
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 rates
0.96
%
 
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 rates
0.40
%
 
0.40
%
 

 

 

 

 
0.40
%
 
 
 (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.

37


Item 7A. Quantitative and Qualitative Disclosures About Market Risk.
The information presented in the section captioned “Market Risk” in Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations is incorporated herein by reference.
Item 8. Financial Statements and Supplementary Data.
The following consolidated financial statements accompanied by the report of our independent registered public accounting firm are set forth beginning on page 40 of this report:
Report of Independent Registered Public Accounting Firm
 
Consolidated Balance Sheets
 
Consolidated Statements of Changes in Shareholders’ Equity
 
Consolidated Statements of Income
 
Consolidated Statements of Comprehensive Income (Loss)
 
Consolidated Statements of Cash Flows
 
Notes to Consolidated Financial Statements
Supplementary data regarding quarterly results of operations is included in Item 6. Selected Financial Data.
Restatements: Certain amounts previously reported in the 2014 and 2013 consolidated financial statements have been restated. For a complete overview on restatements impacting the consolidated financial statements and the “Notes to Consolidated Financial Statements”, see the “Restatements” section of “Note 1 – Nature of Operations and Summary of Significant Accounting Policies” in the “Notes to Consolidated Financial Statements”.

38


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 of Isabella Bank Corporation as of December 31, 2015 and 2014, 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, 2015. We also have audited Isabella Bank Corporation’s internal control over financial reporting as of December 31, 2015, based on criteria established in the Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework) (the COSO criteria). Isabella Bank Corporation’s management 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 of Isabella 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 of Isabella Bank Corporation as of December 31, 2015 and 2014, and the consolidated results of their operations and their cash flows for each of the years in the three-year period ended December 31, 2015 in conformity with accounting principles generally accepted in the United States of America. Also, in our opinion Isabella Bank Corporation maintained, in all material respects, effective internal control over financial reporting as of December 31, 2015, based on the COSO criteria.



/s/Rehmann Robson LLC
Saginaw, Michigan
March 9, 2016


39


CONSOLIDATED BALANCE SHEETS
(Dollars in thousands)

December 31
 
2015
 
2014
ASSETS
 
 
 
Cash and cash equivalents
 
 
 
Cash and demand deposits due from banks
$
18,810

 
$
18,058

Interest bearing balances due from banks
2,759

 
1,848

Total cash and cash equivalents
21,569

 
19,906

AFS securities (amortized cost of $654,348 in 2015 and $561,893 in 2014)
660,136

 
567,534

Mortgage loans AFS
1,187

 
901

Loans
 
 
 
Commercial
448,381

 
433,270

Agricultural
115,911

 
104,721

Residential real estate
251,501

 
266,155

Consumer
34,699

 
32,404

Gross loans
850,492

 
836,550

Less allowance for loan and lease losses
7,400

 
10,100

Net loans
843,092

 
826,450

Premises and equipment
28,331

 
25,881

Corporate owned life insurance policies
26,423

 
25,152

Accrued interest receivable
6,269

 
5,851

Equity securities without readily determinable fair values
22,286

 
20,076

Goodwill and other intangible assets
48,828

 
46,128

Other assets
9,991

 
11,664

TOTAL ASSETS
$
1,668,112

 
$
1,549,543

LIABILITIES AND SHAREHOLDERS’ EQUITY
 
 
 
Deposits
 
 
 
Noninterest bearing
$
191,376

 
$
181,826

NOW accounts
212,666

 
190,984

Certificates of deposit under $100 and other savings
521,793

 
456,774

Certificates of deposit over $100
238,728

 
244,900

Total deposits
1,164,563

 
1,074,484

Borrowed funds
309,732

 
289,709

Accrued interest payable and other liabilities
9,846

 
10,756

Total liabilities
1,484,141

 
1,374,949

Shareholders’ equity
 
 
 
Common stock — no par value 15,000,000 shares authorized; issued and outstanding 7,799,867 shares (including 19,401 shares held in the Rabbi Trust) in 2015 and 7,776,274 shares (including 13,934 shares held in the Rabbi Trust) in 2014
139,198

 
138,755

Shares to be issued for deferred compensation obligations
4,592

 
4,242

Retained earnings
39,960

 
32,103

Accumulated other comprehensive income (loss)
221

 
(506
)
Total shareholders’ equity
183,971

 
174,594

TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY
$
1,668,112

 
$
1,549,543







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

40


CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY
(Dollars in thousands except per share amounts)
 
Common Stock
 
 
 
 
 
 
 
 

Common Shares
Outstanding
 
Amount
 
Common Shares to be
Issued for
Deferred
Compensation
Obligations
 
Retained
Earnings
 
Accumulated
Other
Comprehensive
Income (Loss)
 
Totals
Balance, January 1, 2013
7,671,846

 
$
136,580

 
$
3,734

 
$
19,168

 
$
5,007

 
$
164,489

Comprehensive income (loss)

 

 

 
12,510

 
(11,348
)
 
1,162

Issuance of common stock
149,191

 
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 paid ($0.84 per common share)

 

 

 
(6,456
)
 

 
(6,456
)
Balance, December 31, 2013
7,723,023

 
137,580

 
4,148

 
25,222

 
(6,341
)
 
160,609

Comprehensive income (loss)

 

 

 
13,724

 
5,835

 
19,559

Issuance of common stock
182,755

 
4,227

 

 

 

 
4,227

Common stock issued for deferred compensation obligations
6,126

 
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 paid ($0.89 per common share)

 

 

 
(6,843
)
 

 
(6,843
)
Balance, December 31, 2014
7,776,274

 
138,755

 
4,242

 
32,103

 
(506
)
 
174,594

Comprehensive income (loss)

 

 

 
15,130

 
727

 
15,857

Issuance of common stock
216,700

 
5,201

 

 

 

 
5,201

Common stock issued for deferred compensation obligations

 

 

 

 

 

Common stock transferred from the Rabbi Trust to satisfy deferred compensation obligations

 
200

 
(200
)
 

 

 

Share-based payment awards under equity compensation plan

 

 
550

 

 

 
550

Common stock purchased for deferred compensation obligations

 
(368
)
 

 

 

 
(368
)
Common stock repurchased pursuant to publicly announced repurchase plan
(193,107
)
 
(4,590
)
 

 

 

 
(4,590
)
Cash dividends paid ($0.94 per common share)

 

 

 
(7,273
)
 

 
(7,273
)
Balance, December 31, 2015
7,799,867

 
$
139,198

 
$
4,592

 
$
39,960

 
$
221

 
$
183,971

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

41


CONSOLIDATED STATEMENTS OF INCOME
(Dollars in thousands except per share amounts)

Year Ended December 31
 
2015
 
2014
 
2013
Interest income
 
 
 
 
 
Loans, including fees
$
35,853

 
$
36,629

 
$
37,575

AFS securities
 
 
 
 
 
Taxable
9,053

 
8,092

 
7,228

Nontaxable
5,996

 
5,911

 
5,132

Federal funds sold and other
600

 
516

 
483

Total interest income
51,502

 
51,148

 
50,418

Interest expense
 
 
 
 
 
Deposits
5,850

 
6,295

 
7,140

Borrowings
4,313

 
3,675

 
3,881

Total interest expense
10,163

 
9,970

 
11,021

Net interest income
41,339

 
41,178

 
39,397

Provision for loan losses
(2,771
)
 
(668
)
 
1,111

Net interest income after provision for loan losses
44,110

 
41,846

 
38,286

Noninterest income
 
 
 
 
 
Service charges and fees
5,437

 
5,411

 
5,682

Net gain on sale of mortgage loans
573

 
514

 
962

Earnings on corporate owned life insurance policies
771

 
751

 
732

Net gains (losses) on sale of AFS securities
163

 
97

 
171

Other
3,415

 
2,552

 
2,628

Total noninterest income
10,359

 
9,325

 
10,175

Noninterest expenses
 
 
 
 
 
Compensation and benefits
19,068

 
18,502

 
17,807

Furniture and equipment
5,739

 
5,173

 
4,945

Occupancy
2,834

 
2,798

 
2,653

Other
8,410

 
8,630

 
8,350

Total noninterest expenses
36,051

 
35,103

 
33,755

Income before federal income tax expense
18,418

 
16,068

 
14,706

Federal income tax expense
3,288

 
2,344

 
2,196

NET INCOME
$
15,130

 
$
13,724

 
$
12,510

Earnings per common share
 
 
 
 
 
Basic
$
1.95

 
$
1.77

 
$
1.63

Diluted
$
1.90

 
$
1.74

 
$
1.59

Cash dividends per common share
$
0.94

 
$
0.89

 
$
0.84














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

42


CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(Dollars in thousands)

Year Ended December 31
 
2015
 
2014
 
2013
Net income
$
15,130

 
$
13,724

 
$
12,510

Unrealized gains (losses) on AFS securities
 
 
 
 
 
Unrealized gains (losses) arising during the year
310

 
11,290

 
(18,971
)
Reclassification adjustment for net realized (gains) losses included in net income
(163
)
 
(97
)
 
(171
)
Net unrealized gains (losses)
147

 
11,193

 
(19,142
)
Tax effect (1)
87

 
(3,684
)
 
6,257

Unrealized gains (losses), net of tax
234

 
7,509

 
(12,885
)
Change in unrecognized pension cost on defined benefit pension plan
 
 
 
 
 
Change in unrecognized pension cost arising during the year
255

 
(2,836
)
 
2,120

Reclassification adjustment for net periodic benefit cost included in net income
492

 
300

 
208

Net change in unrecognized pension cost
747

 
(2,536
)
 
2,328

Tax effect
(254
)
 
862

 
(791
)
Change in unrealized pension cost, net of tax
493

 
(1,674
)
 
1,537

Other comprehensive income (loss), net of tax
727

 
5,835

 
(11,348
)
Comprehensive income (loss)
$
15,857

 
$
19,559

 
$
1,162

(1) 
See “Note 18 – 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.

43


CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in thousands)

Year Ended December 31
 
2015
 
2014
 
2013
OPERATING ACTIVITIES
 
 
 
 
 
Net income
$
15,130

 
$
13,724

 
$
12,510

Reconciliation of net income to net cash provided by operating activities:
 
 
 
 
 
Provision for loan losses
(2,771
)
 
(668
)
 
1,111

Impairment of foreclosed assets
99

 
123

 
156

Depreciation
2,677

 
2,551

 
2,556

Amortization of OMSR
340

 
265

 
522

Amortization of acquisition intangibles
169

 
183

 
221

Net amortization of AFS securities
2,074

 
1,830

 
2,028

Net (gains) losses on sale of AFS securities
(163
)
 
(97
)
 
(171
)
Net gain on sale of mortgage loans
(573
)
 
(514
)
 
(962
)
Increase in cash value of corporate owned life insurance policies
(771
)
 
(751
)
 
(732
)
Share-based payment awards under equity compensation plan
550

 
495

 
554

Deferred income tax (benefit) expense
1,692

 
207

 
(1,208
)
Origination of loans held-for-sale
(42,887
)
 
(28,135
)
 
(53,632
)
Proceeds from loan sales
43,174

 
28,852

 
57,123

Net changes in operating assets and liabilities which provided (used) cash:
 
 
 
 
 
Accrued interest receivable
(418
)
 
(409
)
 
(215
)
Other assets
(5,322
)
 
(1,392
)
 
1,792

Accrued interest payable and other liabilities
(910
)
 
1,298

 
1,954

Net cash provided by (used in) operating activities
12,090

 
17,562

 
23,607

INVESTING ACTIVITIES
 
 
 
 
 
Activity in AFS securities
 
 
 
 
 
Sales
1,319

 
13,362

 
16,229

Maturities, calls, and principal payments
90,036

 
68,188

 
86,225

Purchases
(185,721
)
 
(127,562
)
 
(131,505
)
Net loan principal (originations) collections
(15,029
)
 
(27,876
)
 
(39,369
)
Proceeds from sales of foreclosed assets
1,523

 
1,775

 
2,122

Purchases of premises and equipment
(5,127
)
 
(2,713
)
 
(2,488
)
Purchases of corporate owned life insurance policies
(500
)
 

 
(1,092
)
Proceeds from redemption of corporate owned life insurance policies

 

 
196

Net cash provided by (used in) investing activities
(113,499
)
 
(74,826
)
 
(69,682
)

44


CONSOLIDATED STATEMENTS OF CASH FLOWS (continued)
(Dollars in thousands)
 
Year Ended December 31
 
2015
 
2014
 
2013
FINANCING ACTIVITIES
 
 
 
 
 
Net increase (decrease) in deposits
90,079

 
30,718

 
26,099

Net increase (decrease) in borrowed funds
20,023

 
10,383

 
38,325

Cash dividends paid on common stock
(7,273
)
 
(6,843
)
 
(6,456
)
Proceeds from issuance of common stock
5,201

 
4,227

 
3,618

Common stock repurchased
(4,590
)
 
(3,122
)
 
(2,375
)
Common stock purchased for deferred compensation obligations
(368
)
 
(331
)
 
(383
)
Net cash provided by (used in) financing activities
103,072

 
35,032

 
58,828

Increase (decrease) in cash and cash equivalents
1,663

 
(22,232
)
 
12,753

Cash and cash equivalents at beginning of period
19,906

 
42,138

 
29,385

Cash and cash equivalents at end of period
21,569

 
$
19,906

 
$
42,138

SUPPLEMENTAL CASH FLOWS INFORMATION:
 
 
 
 
 
Interest paid
$
10,176

 
$
10,045

 
$
11,139

Income taxes paid
3,493

 
1,454

 
2,093

SUPPLEMENTAL NONCASH INFORMATION:
 
 
 
 
 
Transfers of loans to foreclosed assets
$
1,158

 
$
1,371

 
$
1,672



































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

45


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands except per share amounts)
Note 1 – 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, a financial services holding company, and its wholly owned subsidiary, Isabella Bank. All intercompany balances and accounts have been eliminated in consolidation. 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 Corporation refers solely to the parent holding company, and Isabella Bank or the “Bank” refer to Isabella Bank Corporation’s subsidiary, Isabella Bank.
For additional information, see “Note 19 – Related Party Transactions.”
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. Our banking subsidiary, Isabella Bank, offers banking services through 29 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 our principal markets. Our results of operations can be significantly affected by changes in interest rates and changes in the local economic environment.
USE OF ESTIMATES: In preparing consolidated financial statements in conformity with accounting principles generally accepted in the United States of America, we 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 ALLL, the fair value of AFS investment securities, and the valuation of goodwill and other intangible assets.
FAIR VALUE 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. We may choose to measure eligible items at fair value at specified election dates.
For assets and liabilities recorded at fair value, it is our 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, we 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.
We utilize fair value measurements to record fair value adjustments to certain assets and liabilities and to determine fair value disclosures. Investment securities AFS are recorded at fair value on a recurring basis. Additionally, from time-to-time, we may be required to record other assets and liabilities at fair value on a nonrecurring basis, such as mortgage loans AFS, impaired loans, foreclosed assets, 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-downs of individual assets.

46


Fair Value Hierarchy
Under fair value measurement and disclosure authoritative guidance, we group assets and liabilities measured at fair value into three levels, based on the markets in which the assets and liabilities are traded, and the reliability of the assumptions used to determine fair value, based on the prioritization of inputs in the valuation techniques. These levels are:
Level 1:
Valuation is based upon quoted prices for identical instruments traded in active markets.
Level 2:
Valuation is based upon quoted prices for similar instruments in active markets, quoted prices for identical or similar instruments in markets that are not active and model based valuation techniques for which all significant assumptions are observable in the market.
Level 3:
Valuation is generated from model based techniques that use at least one significant assumption not observable in the market. These unobservable assumptions reflect estimates of assumptions that market participants would use in pricing the asset or liability.
The asset’s or liability’s fair value measurement level within the fair value hierarchy is based on the lowest level of any input that is significant to the fair value measurement. Valuation techniques maximize the use of observable inputs and minimize the use of unobservable inputs. Transfers between measurement levels are recognized at the end of reporting periods.
For further discussion of fair value considerations, refer to “Note 20 – Fair Value.”
SIGNIFICANT GROUP CONCENTRATIONS OF CREDIT RISK: Most of our activities conducted are with customers located within the central Michigan area. A significant amount of our 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 day period. We maintain deposit accounts in various financial institutions which generally exceed federally insured limits or are not insured. We do not believe we are exposed to any significant interest, credit or other financial risk as a result of these deposits.
AFS SECURITIES: Purchases of investment securities are generally classified as AFS. However, we may elect to classify securities as either held to maturity or trading. Securities classified as AFS 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. Included in AFS securities are auction rate money market preferreds and preferred stocks. 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 stocks are recorded at fair value, with unrealized gains and losses 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 AFS securities are determined using the specific identification method.
AFS securities are reviewed quarterly for possible OTTI. In determining whether an OTTI exists for debt securities, we assert that: (a) we do not have the intent to sell the security; and (b) it is more likely than not we will not have to sell the security before recovery of its cost basis. If these conditions are not met, we recognize an OTTI 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 we do not expect to recover the security’s amortized cost basis, the security is considered other-than-temporarily impaired. For these debt securities, we 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, we calculate the recovery value by performing a discounted cash flow analysis based on the current cash flows and future cash flows we expect to recover. The amount of the total OTTI related to the credit risk is recognized in earnings and is included in noninterest income. The amount of the total OTTI related to other risk factors is recognized as a component of other comprehensive income. For debt securities that have recognized an OTTI 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.
AFS equity securities are reviewed for OTTI 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 our ability and intent to hold the securities until fair value recovers. If it is determined that we 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.

47


LOANS: Loans that we 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 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-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-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, all interest accrued in the current calendar year, but not collected, is reversed against interest income while interest accrued in prior calendar years, but not collected is charged against the ALLL. 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 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 allowance when we believe the uncollectability of the loan balance is confirmed. Subsequent recoveries, if any, are credited to the allowance.
We evaluate the ALLL on a regular basis which is based upon our periodic review of the collectability 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 ALLL 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 we believe affect our 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 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 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 held for sale on 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, would be recognized as a component of other noninterest expenses.
Mortgage loans held for sale are sold with the mortgage servicing rights retained by 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.
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 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) we do not maintain effective control over the transferred assets through an agreement to repurchase them before their maturity. Other than servicing, we 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. We have no purchased servicing rights. For sales of mortgage loans, a portion of the cost of originating the

48


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 we later determine 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 $287,029 and $288,639 with capitalized servicing rights of $2,505 and $2,519 at December 31, 2015 and 2014, 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. We recorded servicing fee revenue of $712, $720, and $737 related to residential mortgage loans serviced for others during 2015, 2014, and 2013, respectively, which is included in other noninterest income.
FORECLOSED ASSETS: Assets acquired through, or in lieu of, loan foreclosure are held for sale and are initially recorded at the lower of our carrying amount or fair value less estimated selling costs at the date of transfer, establishing a new cost basis. Any write-downs based on the asset’s fair value at the date of acquisition are charged to the 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. We periodically 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 our carrying amount or fair value less costs to sell. Foreclosed assets of $421 and $885 as of December 31, 2015 and 2014, respectively, are included in 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. We annually review these assets to determine whether carrying values have been impaired.
EQUITY SECURITIES WITHOUT READILY DETERMINABLE FAIR VALUES: Included in equity securities without readily determinable fair values are our 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 not the managing entity of Corporate Settlement Solutions, LLC, and account for our investment in that 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.
Equity securities without readily determinable fair values consist of the following as of December 31:

2015
 
2014
FHLB Stock
$
11,700

 
$
9,800

Corporate Settlement Solutions, LLC
7,249

 
6,936

FRB Stock
1,999

 
1,999

Valley Financial Corporation
1,000

 
1,000

Other
338

 
341

Total
$
22,286

 
$
20,076

EQUITY COMPENSATION PLAN: At December 31, 2015, the Directors Plan had 200,017 shares eligible to be issued to participants, for which the Rabbi Trust held 19,401 shares. We had 187,369 shares to be issued in 2014, with 13,934 shares held in the Rabbi Trust. Compensation costs relating to share based payment transactions are recognized as the services are

49


rendered, with the cost measured based on the fair value of the equity or liability instruments issued (see “Note 17 – Benefit Plans”). We have no other equity-based compensation plans.
CORPORATE OWNED LIFE INSURANCE: We have purchased life insurance policies on key members of management. In the event of death of one of these individuals, we 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.
As of December 31, 2015 and 2014, the present value of the post retirement benefits payable by us to the covered employees was estimated to be $2,853 and $2,782, respectively, and is included in accrued interest payable and other liabilities. The periodic policy maintenance costs were $71, $83, and $75 for 2015, 2014, and 2013, respectively and are included in other noninterest expenses.
ACQUISITION INTANGIBLES AND GOODWILL: 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 goodwill and other intangible assets are being amortized over their estimated lives and evaluated for potential impairment on at least an annual basis. Goodwill, which represents the excess of the purchase price over identifiable assets, is not amortized but is evaluated for 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 is more likely than not to be impaired, we perform a cash flow valuation to determine the extent of the potential impairment. This valuation method requires a significant degree of our 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, we 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 basis 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.
We analyze our filing positions in the jurisdictions where we are required to file income tax returns, as well as all open tax years in these jurisdictions. We have also elected to retain our existing accounting policy with respect to the treatment of interest and penalties attributable to income taxes, and continue to reflect any charges for such, to the extent they arise, as a component of our 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 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 17 – Benefit Plans."
MARKETING COSTS: Marketing costs are expensed as incurred (see “Note 11 – Other Noninterest Expenses”).
RECLASSIFICATIONS: Certain amounts reported in the 2014 and 2013 consolidated financial statements have been reclassified to conform with the 2015 presentation.

50


RESTATEMENTS: In this Annual Report on Form 10-K, certain prior period financial information has been restated due to an accounting correction. Impacted sections of the Consolidated Financial Statements include:
1.
Consolidated Balance Sheet as of December 31, 2014, Consolidated Statements of Income for the years ended December 31, 2014 and 2013, and Consolidated Statements of Cash Flows for the years ended December 31, 2014 and 2013; and
2.
Notes to Consolidated Financial Statements as of, and for the years ended, December 31, 2014 and 2013.
Background of Restatement
The necessary restatement was identified by management in the fourth quarter of 2015 during the course of our preparation of the consolidated financial statements and evaluation of financial results as of and for the year ended December 31, 2015. The restatements relate to the accounting for deferred costs associated with originating loans (under ASC 310-20) and the proper classification of the net deferred costs recorded in gross loans within the consolidated balance sheets and as a deferral of compensation expenses within the consolidated statements of income. Prior to December 31, 2015, loan origination cost deferrals (under ASC 310-20) were reported in loan interest and fee income instead of as a reduction of compensation and benefits, which is included in other noninterest expenses. Additionally, net deferred asset balances (under ASC 310-20) prior to December 31, 2015 were reported in other assets on the consolidated balance sheets instead of reported in gross loans. Amortization of the net deferred asset balance was recognized appropriately in loan interest and fee income.
Impact of Restatement
The overall impact of the restatement on our consolidated financial position and results of operations is not believed to be material and as such, previously filed Annual Reports on Form 10-K and Quarterly reports on Form 10-Q for the periods affected by the restatement have not been amended. The determination of materiality was, in part, concluded based on the following observations:
No impact to net income for any prior periods;
No impact to earnings per share, other stock data, or dividend data for any prior periods;
No impact on total assets for any prior periods; and
No impact on retained earnings or total equity for any prior periods.
The impact to the consolidated balance sheet as of December 31, 2014 was a $2,968 increase in gross loans and a $2,968 decline in other assets. There were no other changes to the consolidated balance sheets for any prior periods.
The following table sets forth the effects of the restatement on items within the Consolidated Statements of Income. Since the restatement did not impact net income, pre-tax and adjustments net of tax are not included.
 
December 31, 2014
 
December 31, 2013
 
Previously Reported
 
Restated
 
Previously Reported
 
Restated
Interest income
 
 
 
 
 
 
 
Loans, including fees
$
39,432

 
$
36,629

 
$
41,233

 
$
37,575

All other interest income
14,519

 
14,519

 
12,843

 
12,843

Total interest income
53,951

 
51,148

 
54,076

 
50,418

Total interest expense
9,970

 
9,970

 
11,021

 
11,021

Net interest income
43,981

 
41,178

 
43,055

 
39,397

Provision for loan losses
(668
)
 
(668
)
 
1,111

 
1,111

Net interest income after provision for loan losses
44,649

 
41,846

 
41,944

 
38,286

Total noninterest income
9,325

 
9,325

 
10,175

 
10,175

Noninterest expenses
 
 
 
 
 
 
 
Compensation and benefits
21,305

 
18,502

 
21,465

 
17,807

All other noninterest expenses
16,601

 
16,601

 
15,948

 
15,948

Total noninterest expenses
37,906

 
35,103

 
37,413

 
33,755

Federal income tax expense
2,344

 
2,344

 
2,196

 
2,196

Net income
$
13,724

 
$
13,724

 
$
12,510

 
$
12,510

As demonstrated above, loan interest and fee income and compensation and benefits were reduced by $2,803 and $3,658 during the years ended December 31, 2014 and 2013, respectively.
All amounts in this Annual Report on Form 10-K affected by the restatement adjustments reflect such amounts as restated.

51


Note 2 – 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. Potential common shares that may be issued relate solely to outstanding shares in the Directors Plan, see “Note 17 – Benefit Plans.”
Earnings per common share have been computed based on the following:

2015
 
2014
 
2013
Average number of common shares outstanding for basic calculation
7,775,988

 
7,734,161

 
7,694,392

Average potential effect of common shares in the Directors Plan (1)
177,988

 
171,393

 
168,948

Average number of common shares outstanding used to calculate diluted earnings per common share
7,953,976

 
7,905,554

 
7,863,340

Net income
$
15,130

 
$
13,724

 
$
12,510

Earnings per common share
 
 
 
 
 
Basic
$
1.95

 
$
1.77

 
$
1.63

Diluted
$
1.90

 
$
1.74

 
$
1.59

(1) 
Exclusive of shares held in the Rabbi Trust
Note 3 – Accounting Standards Updates
Recently Adopted Accounting Standards Updates
ASU No. 2014-04: “Reclassification of Residential Real Estate Collateralized Consumer Mortgage Loans upon Foreclosure (a consensus of the FASB Emerging Issues Task Force)
In January 2014, ASU No. 2014-04 amended ASC Topic 310, "Receivables" to provide clarification as to 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. Specifically, the update defined physical possession to appropriately derecognize the loan and recognize the real estate as OREO. The adoption of this ASU did not have a significant impact on our operations or financial statement disclosures.
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 changed 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 resulted in secured borrowing accounting for the repurchase agreement. The adoption of this ASU did not have a significant impact on our operations or financial statement disclosures.
Pending Accounting Standards Updates
ASU No. 2015-01: “Income Statement - Extraordinary and Unusual Items (Subtopic 225-20): Simplifying Income Statement Presentation by Eliminating the Concept of Extraordinary Items
In January 2015, ASU No. 2015-01 amended ASC Topic 225, “Income Statement” to eliminate the concept of extraordinary items. The presentation and disclosure guidance for items that are unusual in nature or occur infrequently will be retained and will be expanded to include items that are both unusual in nature and infrequently occurring. The new authoritative guidance is effective for interim and annual periods beginning after December 15, 2015 and is not expected to have a significant impact on our operations or financial statement disclosures.
ASU No. 2015-02: “Consolidation (Topic 810): Amendments to the Consolidation Analysis
In February 2015, ASU No. 2015-02 amended ASC Topic 810, “Consolidation” to provide consolidation guidance on legal entities when the reporting entity’s contractual rights do not give it the ability to act primarily on its own behalf, the reporting entity does not hold a majority of the legal entity’s voting rights, or the reporting entity is not exposed to a majority of the legal entity’s economic benefits or obligations. The amendments in this update affect reporting entities that are required to evaluate

52


whether they should consolidate certain legal entities. All legal entities are subject to reevaluation under the revised consolidation model. Specifically, the amendments:
1.
Modify the evaluation of whether limited partnerships and similar legal entities are variable interest entities (VIEs) or voting interest entities.
2.
Eliminate the presumption that a general partner should consolidate a limited partnership.
3.
Affect the consolidation analysis of reporting entities that are involved with VIEs, particularly those that have fee arrangements and related party relationships.
4.
Provide a scope exception from consolidation guidance for reporting entities with interests in legal entities that are required to comply with or operate in accordance with requirements that are similar to those in Rule 2a-7 of the Investment Company Act of 1940 for registered money market funds.
The amendments of this update affect limited partnerships and similar legal entities including fees paid and fee arrangements on the primary beneficiary. The following three main provisions affect limited partnerships and similar legal entities:
1.
There is an additional requirement that limited partnerships and similar legal entities must meet to qualify as voting interest entities. A limited partnership must provide partners with either substantive kick-out rights or substantive participating rights over the general partner to meet this requirement.
2.
The specialized consolidation model and guidance for limited partnerships and similar legal entities have been eliminated. There is no longer a presumption that a general partner should consolidate a limited partnership.
3.
For limited partnerships and similar legal entities that qualify as voting interest entities, a limited partner with a controlling financial interest should consolidate a limited partnership. A controlling financial interest may be achieved through holding a limited partner interest that provides substantive kick-out rights.
The new authoritative guidance is effective for interim and annual periods beginning after December 15, 2015 and is not expected to have a significant impact on our operations or financial statement disclosures.
ASU No. 2015-05: “Intangibles-Goodwill and Other-Internal-Use Software (Subtopic 350-40): Customer’s Accounting for Fees Paid in a Cloud Computing Arrangement“
In April 2015, ASU No. 2015-05 amended ASC Topic 350, “Goodwill and Other” to provide guidance to customers about whether a cloud computing arrangement includes a software license. If a cloud computing arrangement includes a software license, then the customer should account for the software license element of the arrangement consistent with the acquisition of other software licenses. If a cloud computing arrangement does not include a software license, the customer should account for the arrangement as a service contract. The guidance will not change GAAP for a customer’s accounting for service contracts. The new authoritative guidance is effective for interim and annual periods beginning after December 15, 2015 and is not expected to have a significant impact on our operations or financial statement disclosures.
ASU No. 2015-07: “Fair Value Measurement (Topic 820): Disclosures for Investments in Certain Entities That Calculate Net Asset Value per Share (or Its Equivalent)“
In May 2015, ASU No. 2015-07 amended ASC Topic 820, “Fair Value Measurement” to remove the requirement to categorize within the fair value hierarchy all investments for which fair value is measured using the net asset value per share practical expedient. The amendments also remove the requirement to make certain disclosures for all investments that are eligible to be measured at fair value using the net asset value per share practical expedient. Rather, those disclosures are limited to investments for which the entity has elected to measure the fair value using that practical expedient. The new authoritative guidance is effective for interim and annual periods beginning after December 15, 2015 and is not expected to have a significant impact on our operations or financial statement disclosures.
ASU No. 2015-14: “Revenue from Contracts with Customers (Topic 606): Deferral of the Effective Date“
In August 2015, ASU No. 2015-14 was issued to defer the effective date of ASU No. 2014-09, “Revenue from Contracts with Customers (Topic 606)” by one year. The new authoritative guidance is now effective for interim and annual periods beginning after December 15, 2017. The new authoritative guidance is not expected to have a significant impact on our operations or financial statement disclosures.

53


ASU No. 2015-16: “Business Combinations (Topic 805): Simplifying the Accounting for Measurement-Period Adjustments“
In September 2015, ASU No. 2015-16 was issued to require that an acquirer recognize adjustments to provisional amounts that are identified during the measurement period in the reporting period in which the adjustment amounts are determined. The update requires that the acquirer record, in the same period’s financial statements, the effect on earnings of changes in depreciation, amortization, or other income effects, if any, as a result of the change to the provisional amounts, calculated as if the accounting had been completed at the acquisition date. To simplify the accounting for adjustments made to provisional amounts recognized in a business combination, the amendments in this update eliminate the requirement to retrospectively account for those adjustments. The new authoritative guidance is effective for interim and annual periods beginning after December 15, 2015 and is not expected to have a significant impact on our operations or financial statement disclosures.
ASU No. 2016-01: “Financial Instruments - Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Liabilities“
In January 2016, ASU No. 2016-01 set forth the following: 1) requires equity investments, with certain exceptions, to be measured at fair value with changes in fair value recognized in net income; 2) simplifies the impairment assessment of equity investments without readily determinable fair values by requiring a qualitative assessment to identify impairment and when an impairment exists, an entity is required to measure the investment at fair value; 3) for public entities, eliminates the requirement to disclose the method(s) and significant assumptions used to estimate the fair value that is required to be disclosed for financial instruments measured at amortized cost on the balance sheet; (4) for public entities, requires the use of exit price notion when measuring the fair value of financial instruments for disclosure purposes; (5) requires an entity to present separately in other comprehensive income, the portion of the total change in the fair value of a liability resulting from a change in the instrument-specific credit risk when the entity has elected to measure the liability at fair value in accordance with the fair value option for financial instruments; (6) requires separate presentation of financial assets and financial liabilities by measurement category and form of financial asset on the balance sheet or the accompanying notes to the financial statements; and (8) clarifies that an entity should evaluate the need for a valuation allowance on a deferred tax asset related to available-for-sale securities in combination with the entity's other deferred tax assets. The new authoritative guidance is effective for interim and annual periods beginning after December 15, 2017 and is not expected to have a significant impact on our operations or financial statement disclosures.
Note 4 – AFS Securities
The amortized cost and fair value of AFS securities, with gross unrealized gains and losses, are as follows as of December 31:
 
2015

Amortized
Cost
 
Gross
Unrealized
Gains
 
Gross
Unrealized
Losses
 
Fair
Value
Government sponsored enterprises
$
24,407

 
$
13

 
$
75

 
$
24,345

States and political subdivisions
224,752

 
7,511

 
46

 
232,217

Auction rate money market preferred
3,200

 

 
334

 
2,866

Preferred stocks
3,800

 

 
501

 
3,299

Mortgage-backed securities
264,109

 
1,156

 
1,881

 
263,384

Collateralized mortgage obligations
134,080

 
1,136

 
1,191

 
134,025

Total
$
654,348

 
$
9,816

 
$
4,028

 
$
660,136

 
2014

Amortized
Cost
 
Gross
Unrealized
Gains
 
Gross
Unrealized
Losses
 
Fair
Value
Government sponsored enterprises
$
24,597

 
$
10

 
$
471

 
$
24,136

States and political subdivisions
209,153

 
6,986

 
794

 
215,345

Auction rate money market preferred
3,200

 

 
581

 
2,619

Preferred stocks
6,800

 
31

 
691

 
6,140

Mortgage-backed securities
165,888

 
2,042

 
1,004

 
166,926

Collateralized mortgage obligations
152,255

 
1,533

 
1,420

 
152,368

Total
$
561,893

 
$
10,602

 
$
4,961

 
$
567,534


54


The amortized cost and fair value of AFS securities by contractual maturity at December 31, 2015 are as follows:
 
Maturing
 
Securities with Variable Monthly Payments or Noncontractual Maturities
 
 

Due in
One Year
or Less
 
After One
Year But
Within
Five Years
 
After Five
Years But
Within
Ten Years
 
After
Ten Years
 
 
Total
Government sponsored enterprises
$

 
$
24,029

 
$
378

 
$

 
$

 
$
24,407

States and political subdivisions
30,174

 
69,245

 
92,561

 
32,772

 

 
224,752

Auction rate money market preferred

 

 

 

 
3,200

 
3,200

Preferred stocks

 

 

 

 
3,800

 
3,800

Mortgage-backed securities

 

 

 

 
264,109

 
264,109

Collateralized mortgage obligations

 

 

 

 
134,080

 
134,080

Total amortized cost
$
30,174

 
$
93,274

 
$
92,939

 
$
32,772

 
$
405,189

 
$
654,348

Fair value
$
30,217

 
$
95,452

 
$
96,871

 
$
34,022

 
$
403,574

 
$
660,136

Expected maturities for government sponsored enterprises and states and political subdivisions may differ from contractual maturities because issuers may have the right to call or prepay obligations.
As the auction rate money market preferred 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.
A summary of the sales activity of AFS securities was as follows during the years ended December 31:
 
2015
 
2014
 
2013
Proceeds from sales of AFS securities
$
1,319

 
$
13,362

 
$
16,229

Gross realized gains (losses)
$
163

 
$
97

 
$
171

Applicable income tax expense (benefit)
$
55

 
$
33

 
$
58

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 AFS 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:
 
2015
 
Less Than Twelve Months
 
Twelve Months or More
 
 

Gross
Unrealized
Losses
 
Fair
Value
 
Gross
Unrealized
Losses
 
Fair
Value
 
Total
Unrealized
Losses
Government sponsored enterprises
$

 
$

 
$
75

 
$
4,925

 
$
75

States and political subdivisions
14

 
3,355

 
32

 
2,623

 
46

Auction rate money market preferred

 

 
334

 
2,866

 
334

Preferred stocks

 

 
501

 
3,299

 
501

Mortgage-backed securities
882

 
131,885

 
999

 
37,179

 
1,881

Collateralized mortgage obligations
415

 
53,441

 
776

 
26,717

 
1,191

Total
$
1,311

 
$
188,681

 
$
2,717

 
$
77,609

 
$
4,028

Number of securities in an unrealized loss position:
 
 
36

 
 
 
26

 
62


55


 
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 subdivisions
48

 
5,323

 
746

 
17,416

 
794

Auction rate money market preferred

 

 
581

 
2,619

 
581

Preferred stocks

 

 
691

 
3,109

 
691

Mortgage-backed securities
5

 
9,456

 
999

 
52,407

 
1,004

Collateralized mortgage obligations
105

 
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

As of December 31, 2015 and 2014, we conducted an analysis to determine whether any securities currently in an unrealized loss position, should be other-than-temporarily impaired. Such analyses considered, among other factors, the following criteria:
Has the value of the investment declined more than what is deemed to be reasonable based on a risk and maturity adjusted discount rate?
Is the investment credit rating below investment grade?
Is it probable the issuer will be unable to pay the amount when due?
Is it more likely than not that we will have to sell the security before recovery of its cost basis?
Has the duration of the investment been extended?
During the three month period ended March 31, 2012, we had one state issued student loan auction rate AFS investment security (which is included in states and political subdivisions) that was downgraded by Moody's from A3 to Caa3. As a result of this downgrade, we engaged the services of an independent investment valuation firm to estimate the amount of credit losses (if any) related to this particular issue as of 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 Discounted Cash Flow Method, to determine the estimated credit related impairment. As a result of this analysis, we recognized an OTTI of $282 in earnings in the three month period ended March 31, 2012.
A summary of key valuation assumptions used in the aforementioned analysis as of March 31, 2012, follows:
 
Discounted Cash Flow Method
Ratings
 
Fitch
Not Rated
Moody's
Caa3
S&P
A
Seniority
Senior
Discount rate
LIBOR + 6.35%
 
 
 
Credit Yield Analysis Method
Credit discount rate
LIBOR + 4.00%
Average observed discounts based on closed transactions
14.00%

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To test for additional impairment of this security, we obtained investment valuations (from the same firm engaged to perform the initial valuation as of March 31, 2012) on a quarterly basis until the security was sold on November 25, 2015. Based on our analyses, no additional OTTI was recorded while the security was held. The following table provides a roll-forward of credit related impairment recognized in earnings for the years ended December 31:

2015
 
2014
 
2013
Balance at beginning of year
$
282

 
$
282

 
$
282

Additions to credit losses for which no previous OTTI was recognized

 

 

Reductions for credit losses realized on securities sold during the quarter
(282
)
 

 

Balance at end of year
$

 
$
282

 
$
282

Based on our analyses, the fact that we have asserted that we do not have the intent to sell AFS securities in an unrealized loss position, and considering it is unlikely that we will have to sell any AFS securities in an unrealized loss position before recovery of their cost basis, we do not believe that the values of any AFS securities were other-than-temporarily impaired as of December 31, 2015, or December 31, 2014.
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, manufacturing, retail, gaming, tourism, higher education, and general economic conditions of this region. Substantially all of our consumer and residential real estate loans are secured by various items of property, while commercial loans are secured primarily by real estate, business assets, and personal guarantees; a portion of loans are unsecured.
Loans that we have the intent and ability to hold in our portfolio are reported at their outstanding principal balance adjusted for any charge-offs, the ALLL, and any deferred fees or costs. Interest income is accrued over the term of the loan based on the principal amount outstanding. Loan origination fees and certain direct loan origination costs are capitalized and recognized as a component of interest income over the term of the loan using the level yield method.
The accrual of interest on commercial, agricultural, and residential real estate 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. 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. Consumer loans are typically charged-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 status or charged-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, all interest accrued in the current calendar year, but not collected, is reversed against interest income while interest accrued in prior calendar years, but not collected, is charged against the ALLL. Loans may be returned to accrual status after six months of continuous performance.
Commercial and agricultural loans include loans for commercial real estate, commercial operating loans, farmland and agricultural production, and states and political subdivisions. Repayment of these loans is dependent upon the successful operation and management of a business. We minimize our risk by limiting the amount of direct credit exposure to any one borrower to $15,000. Borrowers with direct credit needs of more than $15,000 are serviced through the use of loan participations with other commercial banks. Commercial and agricultural real estate loans commonly require loan-to-value limits of 80% or less. Depending upon the type of loan, past credit history, and current operating results, we may require the borrower to pledge accounts receivable, inventory, and property and equipment. Personal guarantees are generally required from the owners of closely held corporations, partnerships, and sole proprietorships. In addition, we require annual financial statements, prepare cash flow analyses, and review credit reports.
We offer adjustable rate mortgages, construction loans, and fixed rate residential real estate loans which have amortization periods up to a maximum of 30 years. We consider the anticipated direction of interest rates, balance sheet duration, the sensitivity of our balance sheet to changes in interest rates, and overall loan demand to determine whether or not to sell fixed rate loans to Freddie Mac.
Our lending policies generally limit the maximum loan-to-value ratio on residential real estate loans to 97% 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-value ratios in excess of 80%.

57


Underwriting criteria for residential real estate loans include:
Evaluation of the borrower’s ability to make monthly payments.
Evaluation of the value of the property securing the loan.
Ensuring the payment of principal, interest, taxes, and hazard insurance does not exceed 28% of a borrower’s gross income.
Ensuring all debt servicing does not exceed 36% of income.
Verification of acceptable credit reports.
Verification of employment, income, and financial information.
Appraisals are performed by independent appraisers and reviewed for appropriateness. All mortgage loan requests are reviewed by our mortgage loan committee or through a secondary market underwriting system; loans in excess of $500 require the approval of our Internal Loan Committee, the Executive Loan Committee, the Board of Directors’ Loan Committee, or the Board of Directors.
Consumer loans include secured and unsecured personal loans. Loans are amortized for a period of up to 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 we believe the uncollectability of the loan balance is confirmed. Subsequent recoveries, if any, are credited to the ALLL.
The appropriateness of the ALLL is evaluated on a quarterly basis and is based upon a periodic review of the collectability 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 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. Historical loss allocations are calculated at the loan class and segment levels based on a migration analysis of the loan portfolio over the preceding five years. The unallocated component of the allowance reflects the margin of imprecision inherent in the underlying assumptions used in the methodologies for estimating specific and general losses in the portfolio.
A summary of changes in the ALLL and the recorded investment in loans by segments follows:

Allowance for Loan Losses
 
Year Ended December 31, 2015
 
Commercial
 
Agricultural
 
Residential Real Estate
 
Consumer
 
Unallocated
 
Total
January 1, 2015
$
3,821

 
$
216

 
$
4,235

 
$
645

 
$
1,183

 
$
10,100

Charge-offs
(89
)
 
(45
)
 
(397
)
 
(373
)
 

 
(904
)
Recoveries
477

 
72

 
220

 
206

 

 
975

Provision for loan losses
(2,038
)
 
86

 
(728
)
 
44

 
(135
)
 
(2,771
)
December 31, 2015
$
2,171

 
$
329

 
$
3,330

 
$
522

 
$
1,048

 
$
7,400


58



Allowance for Loan Losses and Recorded Investment in Loans
 
As of December 31, 2015
 
Commercial
 
Agricultural
 
Residential Real Estate
 
Consumer
 
Unallocated
 
Total
ALLL
 
 
 
 
 
 
 
 
 
 
 
Individually evaluated for impairment
$
829

 
$
2

 
$
1,989

 
$

 
$

 
$
2,820

Collectively evaluated for impairment
1,342

 
327

 
1,341

 
522

 
1,048

 
4,580

Total
$
2,171

 
$
329

 
$
3,330

 
$
522

 
$
1,048

 
$
7,400

Loans
 
 
 
 
 
 
 
 
 
 
 
Individually evaluated for impairment
$
7,969

 
$
4,068

 
$
10,266

 
$
35

 
 
 
$
22,338

Collectively evaluated for impairment
440,412

 
111,843

 
241,235

 
34,664

 
 
 
828,154

Total
$
448,381

 
$
115,911

 
$
251,501

 
$
34,699

 
 
 
$
850,492

 
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
)
Recoveries
550

 

 
197

 
149

 

 
896

Provision for loan losses
(2,218
)
 
(187
)
 
915

 
173

 
649

 
(668
)
December 31, 2014
$
3,821

 
$
216

 
$
4,235

 
$
645

 
$
1,183

 
$
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 impairment
2,538

 
216

 
2,092

 
644

 
1,183

 
6,673

Total
$
3,821

 
$
216

 
$
4,235

 
$
645

 
$
1,183

 
$
10,100

Loans
 
 
 
 
 
 
 
 
 
 
 
Individually evaluated for impairment
$
12,029

 
$
1,595

 
$
12,160

 
$
64

 
 
 
$
25,848

Collectively evaluated for impairment
421,241

 
103,126

 
253,995

 
32,340

 
 
 
810,702

Total
$
433,270

 
$
104,721

 
$
266,155

 
$
32,404

 
 
 
$
836,550


59


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:
 
2015
 
Commercial
 
Agricultural

Real Estate
 
Other
 
Total
 
Real Estate
 
Other
 
Total
Rating
 
 
 
 
 
 
 
 
 
 
 
1 - Excellent
$

 
$
499

 
$
499

 
$

 
$

 
$

2 - High quality
7,397

 
11,263

 
18,660

 
4,647

 
2,150

 
6,797

3 - High satisfactory
99,136

 
29,286

 
128,422

 
28,886

 
13,039

 
41,925

4 - Low satisfactory
222,431

 
62,987

 
285,418

 
37,279

 
22,166

 
59,445

5 - Special mention
4,501

 
473

 
4,974

 
3,961

 
1,875

 
5,836

6 - Substandard
9,941

 
256

 
10,197

 
1,623

 
139

 
1,762

7 - Vulnerable
211

 

 
211

 
146

 

 
146

8 - Doubtful

 

 

 

 

 

Total
$
343,617

 
$
104,764

 
$
448,381

 
$
76,542

 
$
39,369

 
$
115,911

 
2014
 
Commercial
 
Agricultural

Real Estate
 
Other
 
Total
 
Real Estate
 
Other
 
Total
Rating
 
 
 
 
 
 
 
 
 
 
 
1 - Excellent
$

 
$
492

 
$
492

 
$

 
$

 
$

2 - High quality
13,620

 
14,423

 
28,043

 
5,806

 
3,582

 
9,388

3 - High satisfactory
94,556

 
51,230

 
145,786

 
28,715

 
12,170

 
40,885

4 - Low satisfactory
184,000

 
51,178

 
235,178

 
33,361

 
17,560

 
50,921

5 - Special mention
8,456

 
1,322

 
9,778

 
1,607

 
65

 
1,672

6 - Substandard
11,055

 
123

 
11,178

 
1,602

 
147

 
1,749

7 - Vulnerable
2,687

 
116

 
2,803

 
106

 

 
106

8 - Doubtful

 
12

 
12

 

 

 

Total
$
314,374

 
$
118,896

 
$
433,270

 
$
71,197

 
$
33,524

 
$
104,721

Internally assigned credit risk ratings are reviewed, at a minimum, when loans are renewed or when management has knowledge of improvements or deterioration of the credit quality of individual credits. Descriptions of the internally assigned credit risk ratings for commercial and agricultural loans are as follows:
1. EXCELLENT – Substantially Risk Free
Credit has strong financial condition and solid earnings history, characterized by:
High liquidity, strong cash flow, low leverage.
Unquestioned ability to meet all obligations when due.
Experienced management, with management succession in place.
Secured by cash.
2. HIGH QUALITY – Limited Risk
Credit with sound financial condition and a positive trend in earnings supplemented by:
Favorable liquidity and leverage ratios.
Ability to meet all obligations when due.
Management with successful track record.
Steady and satisfactory earnings history.
If loan is secured, collateral is of high quality and readily marketable.
Access to alternative financing.
Well defined primary and secondary source of repayment.
If supported by guaranty, the financial strength and liquidity of the guarantor(s) are clearly evident.

60


3. HIGH SATISFACTORY – Reasonable Risk
Credit with satisfactory financial condition and further characterized by:
Working capital adequate to support operations.
Cash flow sufficient to pay debts as scheduled.
Management experience and depth appear favorable.
Loan performing according to terms.
If loan is secured, collateral is acceptable and loan is fully protected.
4. LOW SATISFACTORY – Acceptable Risk
Credit with bankable risks, although some signs of weaknesses are shown:
Would include most start-up businesses.
Occasional instances of trade slowness or repayment delinquency – may have been 10-30 days slow within the past year.
Management’s abilities are apparent, yet unproven.
Weakness in primary source of repayment with adequate secondary source of repayment.
Loan structure generally in accordance with policy.
If secured, loan collateral coverage is marginal.
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 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 we 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.

61


7. VULNERABLE – Classified
Credit is considered “Substandard” and warrants placing on nonaccrual status. Risk of loss is being evaluated and exit strategy options are under review. Other characteristics that may apply:
Insufficient cash flow to service debt.
Minimal or no payments being received.
Limited options available to avoid the collection process.
Transition status, expect action will take place to collect loan without immediate progress being made.
8. DOUBTFUL – Workout
Credit has all the weaknesses inherent in a “Substandard” loan with the added characteristic that collection and/or liquidation is pending. The possibility of a loss is extremely high, but its classification as a loss is deferred until liquidation procedures are completed, or reasonably estimable. Other characteristics that may apply:
Normal operations are severely diminished or have ceased.
Seriously impaired cash flow.
Original repayment terms materially altered.
Secondary source of repayment is inadequate.
Survivability as a “going concern” is impossible.
Collection process has begun.
Bankruptcy petition has been filed.
Judgments have been filed.
Portion of the loan balance has been charged-off.
Our primary credit quality indicator for residential real estate and consumer loans is the individual loan’s past due aging. The following tables summarize the past due and current loans as of December 31:
 
2015
 
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
$
505

 
$
281

 
$

 
$
211

 
$
997

 
$
342,620

 
$
343,617

Commercial other
18

 

 

 

 
18

 
104,746

 
104,764

Total commercial
523

 
281

 

 
211

 
1,015

 
447,366

 
448,381

Agricultural
 
 
 
 
 
 
 
 
 
 
 
 
 
Agricultural real estate
196

 
890

 

 
146

 
1,232

 
75,310

 
76,542

Agricultural other

 

 

 

 

 
39,369

 
39,369

Total agricultural
196

 
890

 

 
146

 
1,232

 
114,679

 
115,911

Residential real estate
 
 
 
 
 
 
 
 
 
 
 
 
 
Senior liens
1,551

 
261

 

 
429

 
2,241

 
199,622

 
201,863

Junior liens
40

 
8

 

 
6

 
54

 
9,325

 
9,379

Home equity lines of credit
225

 

 

 

 
225

 
40,034

 
40,259

Total residential real estate
1,816

 
269

 

 
435

 
2,520

 
248,981

 
251,501

Consumer
 
 
 
 
 
 
 
 
 
 
 
 
 
Secured
27

 

 

 

 
27

 
30,839

 
30,866

Unsecured
4

 

 

 

 
4

 
3,829

 
3,833

Total consumer
31

 

 

 

 
31

 
34,668

 
34,699

Total
$
2,566

 
$
1,440

 
$

 
$
792

 
$
4,798

 
$
845,694

 
$
850,492


62


 
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 other
153

 
24

 
2

 
116

 
295

 
118,601

 
118,896

Total commercial
1,308

 
306

 
2

 
2,880

 
4,496

 
428,774

 
433,270

Agricultural
 
 
 
 
 
 
 
 
 
 
 
 
 
Agricultural real estate
101

 

 

 
106

 
207

 
70,990

 
71,197

Agricultural other
102

 

 

 

 
102

 
33,422

 
33,524

Total agricultural
203

 

 

 
106

 
309

 
104,412

 
104,721

Residential real estate
 
 
 
 
 
 
 
 
 
 
 
 
 
Senior liens
1,821

 
425

 
146

 
668

 
3,060

 
211,698

 
214,758

Junior liens
235

 
18

 

 
130

 
383

 
10,750

 
11,133

Home equity lines of credit
468

 
20

 

 
250

 
738

 
39,526

 
40,264

Total residential real estate
2,524

 
463

 
146

 
1,048

 
4,181

 
261,974

 
266,155

Consumer
 
 
 
 
 
 
 
 
 
 
 
 
 
Secured
107

 
2

 

 
10

 
119

 
28,328

 
28,447

Unsecured
19

 

 

 

 
19

 
3,938

 
3,957

Total consumer
126

 
2

 

 
10

 
138

 
32,266

 
32,404

Total
$
4,161

 
$
771

 
$
148

 
$
4,044

 
$
9,124

 
$
827,426

 
$
836,550

Impaired Loans
Loans may be classified as impaired if they meet one or more of the following criteria:
1.
There has been a charge-off of its principal balance (in whole or in part);
2.
The loan has been classified as a TDR; or
3.
The loan is in nonaccrual status.
Impairment is measured on a loan-by-loan basis for commercial and agricultural loans by comparing the loan’s outstanding balance to the present value of expected future cash flows discounted at the loan’s effective interest rate, 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. 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.

63


We do not recognize interest income on impaired loans in nonaccrual status. For impaired loans not classified as nonaccrual, interest income is recognized daily, as earned, according to the terms of the loan agreement and the principal amount outstanding. The following summarizes information pertaining to impaired loans as of, and for the years ended, December 31:
 
2015

Outstanding Balance
 
Unpaid Principal Balance
 
Valuation Allowance
 
Average Outstanding Balance
 
Interest Income Recognized
Impaired loans with a valuation allowance
 
 
 
 
 
 
 
 
 
Commercial real estate
$
5,659

 
$
5,777

 
$
818

 
$
7,221

 
$
376

Commercial other
8

 
8

 
11

 
362

 
19

Agricultural real estate

 

 

 
22

 
1

Agricultural other
335

 
335

 
2

 
126

 
8

Residential real estate senior liens
9,996

 
10,765

 
1,959

 
10,610

 
425

Residential real estate junior liens
143

 
163

 
30

 
183

 
16

Home equity lines of credit

 

 

 
31

 

Consumer secured

 

 

 
39

 
3

Total impaired loans with a valuation allowance
16,141

 
17,048

 
2,820

 
18,594

 
848

Impaired loans without a valuation allowance
 
 
 
 
 
 
 
 
 
Commercial real estate
2,122

 
2,256

 
 
 
2,170

 
201

Commercial other
180

 
191

 
 
 
106

 
11

Agricultural real estate
3,549

 
3,549

 
 
 
1,903

 
95

Agricultural other
184

 
184

 
 
 
290

 
15

Home equity lines of credit
127

 
434

 
 
 
144

 
18

Consumer secured
35

 
35

 
 
 
6

 
1

Total impaired loans without a valuation allowance
6,197

 
6,649

 


 
4,619

 
341

Impaired loans
 
 
 
 
 
 
 
 
 
Commercial
7,969

 
8,232

 
829

 
9,859

 
607

Agricultural
4,068

 
4,068

 
2

 
2,341

 
119

Residential real estate
10,266

 
11,362

 
1,989

 
10,968

 
459

Consumer
35

 
35

 

 
45

 
4

Total impaired loans
$
22,338

 
$
23,697

 
$
2,820

 
$
23,213

 
$
1,189


64


 
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 other
609

 
828

 
4

 
704

 
51

Agricultural real estate

 

 

 
85

 

Agricultural other

 

 

 

 

Residential real estate senior liens
11,645

 
12,782

 
2,015

 
12,713

 
509

Residential real estate junior liens
265

 
275

 
53

 
133

 

Home equity lines of credit
250

 
650

 
75

 
229

 
21

Consumer secured
54

 
54

 
1

 
68

 
4

Total impaired loans with a valuation allowance
19,938

 
21,823

 
3,427

 
20,890

 
977

Impaired loans without a valuation allowance
 
 
 
 
 
 
 
 
 
Commercial real estate
4,116

 
4,462

 
 
 
4,997

 
309

Commercial other
189

 
212

 
 
 
360

 
17

Agricultural real estate
1,529

 
1,529

 
 
 
1,455

 
89

Agricultural other
66

 
186

 
 
 
100

 
30

Home equity lines of credit

 

 
 
 
24

 

Consumer secured
10

 
10

 
 
 
6

 

Total impaired loans without a valuation allowance
5,910

 
6,399

 
 
 
6,942

 
445

Impaired loans
 
 
 
 
 
 
 
 
 
Commercial
12,029

 
12,736

 
1,283

 
13,019

 
769

Agricultural
1,595

 
1,715

 

 
1,640

 
119

Residential real estate
12,160

 
13,707

 
2,143

 
13,099

 
530

Consumer
64

 
64

 
1

 
74

 
4

Total impaired loans
$
25,848

 
$
28,222

 
$
3,427

 
$
27,832

 
$
1,422

We had committed to advance $0 in connection with impaired loans, which include TDRs, as of December 31, 2015 and 2014.
Troubled Debt Restructurings
Loan modifications are considered to be TDRs 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 loans with similar risk characteristics.
3.
Forgiving principal.
4.
Forgiving accrued interest.
To determine if a borrower is experiencing financial difficulties, 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).

65


The following is a summary of information pertaining to TDRs granted in the years ended December 31:
 
2015
 
2014

Number of Loans
 
Pre-Modification Recorded Investment
 
Post-Modification Recorded Investment
 
Number of Loans
 
Pre-Modification Recorded Investment
 
Post-Modification Recorded Investment
Commercial other
13

 
$
3,073

 
$
3,073

 
9

 
$
1,533

 
$
1,533

Agricultural other
11

 
3,106

 
3,106

 
1

 
49

 
49

Residential real estate
 
 
 
 
 
 
 
 
 
 
 
Senior liens
6

 
678

 
678

 
15

 
1,011

 
1,011

Junior liens
1

 
30

 
30

 
4

 
233

 
233

Home equity lines of credit
1

 
94

 
94

 
1

 
160

 
160

Total residential real estate
8

 
802

 
802

 
20

 
1,404

 
1,404

Consumer unsecured

 

 

 
4

 
18

 
18

Total
32

 
$
6,981

 
$
6,981

 
34

 
$
3,004

 
$
3,004

The following tables summarize concessions we granted to borrowers in financial difficulty in the years ended December 31:
 
2015
 
2014

Below Market Interest Rate
 
Below Market Interest Rate and Extension of Amortization Period
 
Below Market Interest Rate
 
Below Market Interest Rate and Extension of Amortization Period
 
Number of Loans
 
Pre-Modification Recorded Investment
 
Number of Loans
 
Pre-Modification Recorded Investment
 
Number of Loans
 
Pre-Modification Recorded Investment
 
Number of Loans
 
Pre-Modification Recorded Investment
Commercial other
11

 
$
2,742

 
2

 
$
331

 
8

 
$
1,525

 
1

 
$
8

Agricultural other
9

 
1,360

 
2

 
1,746

 

 

 
1

 
49

Residential real estate
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Senior liens
3

 
280

 
3

 
398

 
3

 
97

 
12

 
914

Junior liens

 

 
1

 
30

 
2

 
152

 
2

 
81

Home equity lines of credit

 

 
1

 
94

 
1

 
160

 

 

Total residential real estate
3

 
280

 
5

 
522

 
6

 
409

 
14

 
995

Consumer unsecured

 

 

 

 
3

 
15

 
1

 
3

Total
23

 
$
4,382

 
9

 
$
2,599

 
17

 
$
1,949

 
17

 
$
1,055

We did not restructure any loans by forgiving principal or accrued interest during 2015 or 2014.
Based on our historical loss experience, losses associated with TDRs are not significantly different than other impaired loans within the same loan segment. As such, TDRs, including TDRs that have been modified in the past 12 months that subsequently defaulted, are analyzed in the same manner as other impaired loans within their respective loan segment.
Following is a summary of loans that defaulted in the years ended December 31, which were modified within 12 months prior to the default date:
 
2015
 
2014

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
Commercial other
1

 
$
216

 
$
25

 
$
191

 

 
$

 
$

 
$

Residential real estate junior liens
1

 
39

 
39

 

 

 

 

 

Consumer unsecured

 

 

 

 
2

 
7

 
7

 

Total
2

 
$
255

 
$
64

 
$
191

 
2

 
$
7

 
$
7

 
$


66


The following is a summary of TDR loan balances as of December 31:
 
2015
 
2014
TDRs
$
21,325

 
$
23,341

Note 6 – Premises and Equipment
A summary of premises and equipment at December 31 follows:

2015
 
2014
Land
$
6,190

 
$
5,429

Buildings and improvements
27,580

 
25,441

Furniture and equipment
31,568

 
31,011

Total
65,338

 
61,881

Less: accumulated depreciation
37,007

 
36,000

Premises and equipment, net
$
28,331

 
$
25,881

Depreciation expense amounted to $2,677, $2,551, and $2,556 in 2015, 2014, and 2013, respectively.
Note 7 – Goodwill and Other Intangible Assets
The carrying amount of goodwill was $48,282 at December 31, 2015 and $45,618 at December 31, 2014. Branch acquisitions during 2015 provided $2,664 of additional goodwill.
Identifiable intangible assets were as follows as of December 31:
 
2015
 
Gross
Intangible
Assets
 
Accumulated
Amortization
 
Net
Intangible
Assets
Core deposit premium resulting from acquisitions
$
5,579

 
$
5,033

 
$
546

 
2014
 
Gross
Intangible
Assets
 
Accumulated
Amortization
 
Net
Intangible
Assets
Core deposit premium resulting from acquisitions
$
5,373

 
$
4,863

 
$
510

Branch acquisitions during 2015 resulted in $206 of core deposit premiums. Amortization expense associated with identifiable intangible assets was $169, $183, and $221 in 2015, 2014, and 2013, respectively.
Estimated amortization expense associated with identifiable intangibles for each of the next five years succeeding December 31, 2015, and thereafter is as follows:

Estimated Amortization Expense
2016
$
163

2017
119

2018
96

2019
71

2020
48

Thereafter
49

Total
$
546


67


Note 8 – Foreclosed Assets
The following is a summary of foreclosed assets as of December 31:

2015
 
2014
Consumer mortgage loans collateralized by residential real estate foreclosed as a result of obtaining physical possession (1)
$

 
N/A

All other foreclosed assets
421

 
885

Total
$
421

 
$
885

(1) 
Disclosure requirement from the adoption of ASU No. 2014-04 on January 1, 2015. As such, measurement was not applicable for December 31, 2014.
Changes in foreclosed assets are summarized as follows during the years ended December 31:

2015
 
2014
Balance, January 1
$
885

 
$
1,412

Properties transferred
1,158

 
1,371

Impairments
(99
)
 
(123
)
Proceeds from sale
(1,523
)
 
(1,775
)
Balance, December 31
$
421

 
$
885

Consumer mortgage loans collateralized by residential real estate in the process of foreclosure were $56 as of December 31, 2015.
Note 9 – Deposits
Scheduled maturities of time deposits for the next five years, and thereafter, are as follows:

Scheduled Maturities of Time Deposits
2016
$
191,858

2017
89,932

2018
63,167

2019
23,883

2020
33,012

Thereafter
21,028

Total
$
422,880

Interest expense on time deposits greater than $100 was $2,806 in 2015, $2,920 in 2014 and $3,203 in 2013.
Note 10 – Borrowed Funds
Borrowed funds consist of the following obligations at December 31:
 
2015
 
2014

Amount
 
Rate
 
Amount
 
Rate
FHLB advances
$
235,000

 
1.93
%
 
$
192,000

 
2.05
%
Securities sold under agreements to repurchase without stated maturity dates
70,532

 
0.12
%
 
95,070

 
0.14
%
Securities sold under agreements to repurchase with stated maturity dates

 

 
439

 
3.25
%
Federal funds purchased
4,200

 
0.75
%
 
2,200

 
0.50
%
Total
$
309,732

 
1.50
%
 
$
289,709

 
1.41
%
FHLB advances are collateralized by a blanket lien on all qualified 1-4 family residential real estate loans, specific AFS securities, and FHLB stock.

68


The following table lists the maturities and weighted average interest rates of FHLB advances as of December 31:
 
2015
 
2014

Amount
 
Rate
 
Amount
 
Rate
Fixed rate due 2015
$

 

 
$
42,000

 
0.72
%
Fixed rate due 2016
30,000

 
1.25
%
 
10,000

 
2.15
%
Variable rate due 2016
15,000

 
0.62
%
 

 

Fixed rate due 2017
50,000

 
1.56
%
 
30,000

 
1.95
%
Fixed rate due 2018
50,000

 
2.16
%
 
40,000

 
2.35
%
Fixed rate due 2019
40,000

 
2.35
%
 
20,000

 
3.11
%
Fixed rate due 2020
10,000

 
1.98
%
 
10,000

 
1.98
%
Fixed rate due 2021
30,000

 
2.26
%
 
30,000

 
2.26
%
Fixed rate due 2023
10,000

 
3.90
%
 
10,000

 
3.90
%
Total
$
235,000

 
1.93
%
 
$
192,000

 
2.05
%
Securities sold under agreements to repurchase are classified as secured borrowings and are reflected at the amount of cash received in connection with the transaction. The securities underlying the agreements have a carrying value and a fair value of $70,555 and $94,537 at December 31, 2015 and 2014, respectively. Such securities remain under our 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 at December 31:
 
2015
 
2014
 
Amount
 
Rate
 
Amount
 
Rate
Repurchase agreements due 2015

 
 
439

 
3.25
%
Total
$

 
 
$
439

 
3.25
%
Securities sold under repurchase agreements without stated maturity dates, federal funds purchased, and FRB Discount Window advances generally mature within one to four days from the transaction date. The following table provides a summary of securities sold under repurchase agreements without stated maturity dates, federal funds purchased, and FRB Discount Window advances for the years ended December 31:
 
2015
 
2014
 
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
$
84,859

 
$
70,368

 
0.13
%
 
$
95,070

 
$
91,422

 
0.13
%
Federal funds purchased
13,100

 
5,783

 
0.50
%
 
17,700

 
4,589

 
0.48
%
We had pledged AFS securities and 1-4 family residential real estate loans in the following amounts at December 31:

2015
 
2014
Pledged to secure borrowed funds
$
339,078

 
$
324,584

Pledged to secure repurchase agreements
70,555

 
94,537

Pledged for public deposits and for other purposes necessary or required by law
39,038

 
19,851

Total
$
448,671

 
$
438,972


69


AFS securities pledged to repurchase agreements without stated maturity dates consisted of the following at December 31:

2015
 
2014
States and political subdivisions
$
3,639

 
$
6,643

Mortgage-backed securities
23,075

 
29,655

Collateralized mortgage obligations
43,841

 
58,239

Total
$
70,555

 
$
94,537

AFS securities pledged to repurchase agreements are monitored to ensure the appropriate level is collateralized. In the event of maturities, calls, significant principal repayments, or significant decline in market values, we have adequate levels of available AFS securities to pledge to satisfy required collateral.
As of December 31, 2015, we had the ability to borrow up to an additional $121,960, based on assets pledged as collateral. We had no investment securities that are restricted to be pledged for specific purposes.
Note 11 – Other Noninterest Expenses
A summary of expenses included in other noninterest expenses is as follows for the years ended December 31:

2015
 
2014
 
2013
Director fees
$
827

 
$
775

 
$
819

Audit and related fees
821

 
809

 
738

FDIC insurance premiums
813

 
842

 
1,082

Donations and community relations
808

 
1,004

 
715

Marketing costs
491

 
427

 
416

Legal fees
464

 
320

 
359

Education and travel
442

 
625

 
502

Printing and supplies
405

 
367

 
396

Postage and freight
377

 
397

 
387

Consulting fees
364

 
349

 
315

Loan underwriting fees
347

 
361

 
423

State taxes
218

 
171

 
140

Amortization of deposit premium
169

 
183

 
221

Other losses
150

 
250

 
109

Foreclosed asset and collection
53

 
122

 
211

All other
1,661

 
1,628

 
1,517

Total other
$
8,410

 
$
8,630

 
$
8,350

Note 12 – Federal Income Taxes
Components of the consolidated provision for federal income taxes are as follows for the years ended December 31:

2015
 
2014
 
2013
Currently payable
$
1,596

 
$
2,159

 
$
3,404

Deferred expense (benefit)
1,692

 
185

 
(1,208
)
Income tax expense
$
3,288

 
$
2,344

 
$
2,196



70


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 tax expense is as follows for the year ended December 31:

2015
 
2014
 
2013
Income taxes at 34% statutory rate
$
6,262

 
$
5,463

 
$
5,000

Effect of nontaxable income
 
 
 
 
 
Interest income on tax exempt municipal securities
(2,026
)
 
(1,999
)
 
(1,746
)
Earnings on corporate owned life insurance policies
(262
)
 
(255
)
 
(249
)
Other
(88
)
 
(263
)
 
(154
)
Total effect of nontaxable income
(2,376
)
 
(2,517
)
 
(2,149
)
Effect of nondeductible expenses
157

 
156

 
146

Effect of tax credits
(755
)
 
(758
)
 
(801
)
Federal income tax expense
$
3,288

 
$
2,344

 
$
2,196

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 our deferred tax assets and liabilities, included in other assets in the accompanying consolidated balance sheets, are as follows as of December 31:

2015
 
2014
Deferred tax assets
 
 
 
Allowance for loan losses
$
1,582

 
$
2,507

Deferred directors’ fees
2,549

 
2,414

Employee benefit plans
229

 
255

Core deposit premium and acquisition expenses
1,098

 
1,037

Net unrecognized actuarial losses on pension plan
1,708

 
1,962

Life insurance death benefit payable
804

 
804

Alternative minimum tax
650

 
650

Other
53

 
564

Total deferred tax assets
8,673

 
10,193

Deferred tax liabilities
 
 
 
Prepaid pension cost
890

 
989

Premises and equipment
166

 
247

Accretion on securities
55

 
49

Core deposit premium and acquisition expenses
1,289

 
1,229

Net unrealized gains on available-for-sale securities
2,252

 
2,339

Other
989

 
449

Total deferred tax liabilities
5,641

 
5,302

Net deferred tax assets
$
3,032

 
$
4,891

We are subject to U.S. federal income tax; however, we are no longer subject to examination by taxing authorities for years before 2012. There are no material uncertain tax positions requiring recognition in our consolidated financial statements. We do not expect the total amount of unrecognized tax benefits to significantly increase in the next twelve months.
We recognize interest and/or penalties related to income tax matters in income tax expense. We do not have any amounts accrued for interest and penalties at December 31, 2015 and 2014 and we not aware of any claims for such amounts by federal income tax authorities.

71


Note 13 – Off-Balance-Sheet Activities
Credit-Related Financial Instruments
We are party to credit related financial instruments with off-balance-sheet risk. These financial instruments are entered into in the normal course of business to meet the financing needs of our customers. These financial instruments, which include commitments to extend credit and standby letters of credit, involve, to varying degrees, elements of credit and IRR in excess of the amounts recognized in the consolidated balance sheets. The contract or notional amounts of these instruments reflect the extent of involvement we have in a particular class of financial instrument.
 
December 31
 
2015
 
2014
Unfunded commitments under lines of credit
$
134,412

 
$
116,935

Commercial and standby letters of credit
915

 
4,985

Commitments to grant loans
53,946

 
13,988

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.
Commercial and standby letters of credit are conditional commitments we issued to guarantee the performance of a customer to a third party. Those guarantees are primarily issued to support private borrowing arrangements, including commercial paper, bond financing, and similar transactions. These commitments to extend credit and letters of credit mature within one year. The credit risk involved in these transactions is essentially the same as that involved in extending loans to customers. We evaluate each customer’s credit worthiness on a case-by-case basis. The amount of collateral obtained, if we deem necessary upon the extension of credit, is based on our credit evaluation of the borrower. While we consider standby letters of credit to be guarantees, the amount of the liability related to such guarantees on the commitment date is not significant and a liability related to such guarantees is not recorded on the consolidated balance sheets.
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 we deem necessary, is based on our credit evaluation of the customer. Commitments to grant loans include loans committed to be sold to the secondary market.
Our exposure to credit-related loss in the event of nonperformance by the counter parties to the financial instruments for commitments to extend credit and standby letters of credit could be up to the contractual notional amount of those instruments. We use the same credit policies in deciding to make these commitments as we do for extending loans to customers. No significant losses are anticipated as a result of these commitments.
Note 14 – 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. We 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 us 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 us 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 increase. The notional amount of undesignated interest rate lock commitments was $234 and $632 at December 31, 2015 and 2014, respectively.
Forward Loan Sale Commitments
To protect against the price risk inherent in derivative loan commitments, we 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.

72


With a “mandatory delivery” contract, we commit to deliver a certain principal amount of mortgage loans to an investor at a specified price on or before a specified date. If we fail to deliver the amount of mortgages necessary to fulfill the commitment by the specified date, we 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, we 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).
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 $1,421 and $1,533 at December 31, 2015 and 2014, 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 our consolidated financial statements.
Note 15 – Commitments and Other Matters
Banking regulations require us to maintain cash reserve balances in currency or as deposits with the FRB. At December 31, 2015 and 2014, the reserve balances amounted to $1,169 and $963, 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, 2015, substantially all of the Bank’s assets were restricted from transfer to the Corporation in the form of loans or advances. Consequently, Bank dividends are the principal source of funds for the Corporation. Payment of dividends without regulatory approval is limited to the current year’s retained net income plus retained net income for the preceding two years, less any required transfers to common stock. At January 1, 2015, the amount available to the Corporation for dividends from the Bank, without regulatory approval, was approximately $24,700.
Note 16 – Minimum Regulatory Capital Requirements
The Corporation (on a consolidated basis) and the Bank are subject to various regulatory capital requirements administered by the FRB and the FDIC. Failure to meet minimum capital requirements can initiate mandatory and possibly additional discretionary actions by the FRB and the FDIC that if undertaken, could have a material effect on our financial statements. Under regulatory capital adequacy guidelines and the regulatory framework for prompt corrective action, we must meet specific capital guidelines that include quantitative measures of assets, liabilities, capital, and certain off-balance-sheet items, as calculated under regulatory accounting standards. Our capital amounts and classifications are also subject to qualitative judgments by the FRB 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 us to maintain minimum amounts and ratios (set forth in the following table) of total, tier 1 capital, and common equity tier 1 capital (as defined in the regulations) to risk-weighted assets (as defined) and tier 1 capital to average assets (as defined). We believe, as of December 31, 2015 and 2014, that we met all capital adequacy requirements.
The FRB has established minimum risk based capital guidelines. Pursuant to these guidelines, a framework has been established that assigns risk weights to each category of on and off-balance-sheet items to arrive at risk adjusted total assets. Regulatory capital is divided by the risk adjusted assets with the resulting ratio compared to the minimum standard to determine whether a corporation has adequate capital. On July 2, 2013, the FRB published revised BASEL III Capital standards for banks. The final rules 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 are being 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.

Effective January 1, 2015, the minimum standard for primary, or tier 1, capital increased from 4.00% to 6.00%. The minimum standard for total capital remains at 8.00%. Also effective January 1, 2015 is the new common equity tier 1 capital ratio which has a minimum requirement of 4.50%.

73


As of December 31, 2015 and 2014, the most recent notifications from the FRB and the FDIC categorized us 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, Common Equity Tier 1, and Tier 1 leverage ratios as set forth in the following tables. There are no conditions or events since the notifications that we believe have changed our categories. Our 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, 2015
 
 
 
 
 
 
 
 
 
 
 
Common Equity Tier 1 capital to risk weighted assets
 
 
 
 
 
 
 
 
 
 
 
Isabella Bank
$
124,917

 
12.31
%
 
$
40,589

 
4.50
%
 
$
60,883

 
6.50
%
Consolidated
135,250

 
13.24
%
 
40,886

 
4.50
%
 
N/A

 
N/A

Tier 1 capital to risk weighted assets
 
 
 
 
 
 
 
 
 
 
 
Isabella Bank
124,917

 
12.31
%
 
40,589

 
6.00
%
 
60,883

 
8.00
%
Consolidated
135,250

 
13.24
%
 
40,886

 
6.00
%
 
N/A

 
N/A

Total capital to risk weighted assets
 
 
 
 
 
 
 
 
 
 
 
Isabella Bank
132,317

 
13.04
%
 
81,178

 
8.00
%
 
101,472

 
10.00
%
Consolidated
142,650

 
13.96
%
 
81,772

 
8.00
%
 
N/A

 
N/A

Tier 1 capital to average assets
 
 
 
 
 
 
 
 
 
 
 
Isabella Bank
124,917

 
7.93
%
 
63,032

 
4.00
%
 
78,790

 
5.00
%
Consolidated
135,250

 
8.52
%
 
63,524

 
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, 2014
 
 
 
 
 
 
 
 
 
 
 
Total capital to risk weighted assets
 
 
 
 
 
 
 
 
 
 
 
Isabella Bank
$
128,074

 
14.18
%
 
$
72,278

 
8.00
%
 
$
90,348

 
10.00
%
Consolidated
138,820

 
15.19
%
 
73,108

 
8.00
%
 
N/A

 
N/A

Tier 1 capital to risk weighted assets
 
 
 
 
 
 
 
 
 
 
 
Isabella Bank
117,974

 
13.06
%
 
36,139

 
4.00
%
 
54,209

 
6.00
%
Consolidated
128,720

 
14.08
%
 
36,554

 
4.00
%
 
N/A

 
N/A

Tier 1 capital to average assets
 
 
 
 
 
 
 
 
 
 
 
Isabella Bank
117,974

 
7.96
%
 
59,297

 
4.00
%
 
74,121

 
5.00
%
Consolidated
128,720

 
8.59
%
 
59,908

 
4.00
%
 
N/A

 
N/A


74


Note 17 – Benefit Plans
401(k) 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 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 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.
For 2015, 2014 and 2013, expenses attributable to the Plan were $664, $655, and $608, respectively.
Defined Benefit Pension Plan
We maintain a noncontributory defined benefit pension plan, which was curtailed effective March 1, 2007. As a result of the curtailment, future salary increases are no longer considered (the projected benefit obligation is equal to the accumulated benefit obligation), and plan benefits are based on years of service and the individual employee’s five highest consecutive years of compensation out of the last ten years of service through March 1, 2007.
Changes in the projected benefit obligation and plan assets during each year, the funded status of the plan, and the net amount recognized in our consolidated balance sheets using an actuarial measurement date of December 31, are summarized as follows during the years ended December 31:

2015
 
2014
Change in benefit obligation
 
 
 
Benefit obligation, January 1
$
13,250

 
$
10,732

Interest cost
494

 
486

Actuarial (gain) loss
(744
)
 
3,049

Benefits paid, including plan expenses
(1,023
)
 
(1,017
)
Benefit obligation, December 31
11,977

 
13,250

Change in plan assets
 
 
 
Fair value of plan assets, January 1
10,390

 
10,508

Investment return
5

 
699

Contributions
200

 
200

Benefits paid, including plan expenses
(1,023
)
 
(1,017
)
Fair value of plan assets, December 31
9,572

 
10,390

Deficiency in funded status at December 31, included on the consolidated balance sheets in accrued interest payable and other liabilities
$
(2,405
)
 
$
(2,860
)

2015
 
2014
Change in accrued pension benefit costs
 
 
 
Accrued benefit cost at January 1
$
(2,860
)
 
$
(224
)
Contributions
200

 
200

Net periodic benefit cost
(492
)
 
(300
)
Net change in unrecognized actuarial loss and prior service cost
747

 
(2,536
)
Accrued pension benefit cost at December 31
$
(2,405
)
 
$
(2,860
)

75


We have recorded the funded status of the Plan in our consolidated balance sheets. We 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 year but are not recognized as components of net periodic benefit cost are 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:

2015
 
2014
 
2013
Interest cost on benefit obligation
$
494

 
$
486

 
$
450

Expected return on plan assets
(607
)
 
(615
)
 
(572
)
Amortization of unrecognized actuarial net loss
355

 
169

 
330

Settlement loss
250

 
260

 

Net periodic benefit cost
$
492

 
$
300

 
$
208

During 2015 and 2014, additional settlement loss of $250 and $260 were 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 at December 31, 2015 includes net unrecognized pension costs before income taxes of $5,022, of which $238 is expected to be amortized into benefit cost during 2016.
The actuarial assumptions used in determining the benefit obligation are as follows for the years ended December 31:

2015
 
2014
 
2013
Discount rate
4.13
%
 
3.80
%
 
4.64
%
Expected long-term rate of return
6.00
%
 
6.00
%
 
6.00
%
The actuarial weighted average assumptions used in determining the net periodic pension costs are as follows for the years ended December 31:

2015
 
2014
 
2013
Discount rate
3.80
%
 
4.64
%
 
3.75
%
Expected long-term return on plan assets
6.00
%
 
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 long 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
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 6.00%.  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 our pension committee, which is comprised of members of our management. To manage the Plan, we retain a third party investment advisor to conduct consultations. We review the performance of the advisor at least annually.

76


The fair values of our pension plan assets by asset category were as follows as of December 31:
 
2015
 
2014

Total
 
(Level 2)
 
Total
 
(Level 2)
Short-term investments
$
157

 
$
157

 
$
804

 
$
804

Common collective trusts
 
 
 
 
 
 
 
Fixed income
4,662

 
4,662

 
4,738

 
4,738

Equity investments
4,753

 
4,753

 
4,848

 
4,848

Total
$
9,572

 
$
9,572

 
$
10,390

 
$
10,390

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, 2015 and 2014:
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.
We anticipate contributions to the Plan in 2016 to approximate net contribution costs.
The components of projected net periodic benefit cost are as follows for the year ending:

December 31, 2016
Interest cost on projected benefit obligation
$
484

Expected return on plan assets
(559
)
Amortization of unrecognized actuarial net loss
313

Net periodic benefit cost
$
238

Estimated future benefit payments are as follows for the next ten years:
 
 
Estimated Benefit Payments
2016
 
$
500

2017
 
527

2018
 
529

2019
 
570

2020
 
614

2021 - 2025
 
3,290

Equity Compensation Plan
Pursuant to the terms of the Directors Plan, our directors are required to invest at least 25% of their board fees in 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, are converted on a quarterly basis into shares of our common stock based on the fair value of a share of common stock as of the relevant valuation date. Stock credited to a participant’s account is eligible for stock and cash dividends as declared. Dividend Reinvestment Plan shares are purchased on a monthly basis pursuant to the Dividend Reinvestment Plan.
Distribution of deferred fees from the Directors Plan occurs when the participant retires from the Board or upon the occurrence of certain other events. 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. We may use authorized but unissued shares or purchase shares of common stock on the open market to meet our obligations under the Directors Plan.
We maintain the Rabbi Trust to fund the Directors Plan. The Rabbi Trust is an irrevocable grantor trust to which we may contribute assets for the limited purpose of funding a nonqualified deferred compensation plan. Although we may not reach the

77


assets of the Rabbi Trust for any purpose other than meeting our obligations under the Directors Plan, the assets of the Rabbi Trust remain subject to the claims of our creditors and are included in the consolidated financial statements. We 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 we contributed to purchase shares of our common stock on the open market through our brokerage services department. Shares held in the Rabbi Trust are included in the calculation of earnings per share.
The components of shares eligible to be issued under the Directors Plan were as follows as of December 31:

2015
 
2014
 
Eligible
Shares
 
Market
Value
 
Eligible
Shares
 
Market
Value
Unissued
180,616

 
$
5,400

 
173,435

 
$
3,902

Shares held in Rabbi Trust
19,401

 
580

 
13,934

 
314

Total
200,017

 
$
5,980

 
187,369

 
$
4,216

Other Employee Benefit Plans
We maintain two nonqualified supplementary employee retirement plans to provide supplemental retirement benefits to specified participants. Expenses related to these programs for 2015, 2014 and 2013 were $379, $372, and $375, respectively, and are being recognized over the participants’ expected years of service.
We maintain a non-leveraged ESOP which was frozen to new participants on December 31, 2006. Contributions to the plan are discretionary and are approved by the Board of Directors and recorded as compensation expense. We made no contributions to the ESOP in 2015, 2014 and 2013. Compensation cost related to the plan for 2015, 2014 and 2013 was $32, $23, and $29, respectively. Total allocated shares outstanding related to the ESOP at December 31, 2015, 2014, and 2013 were 217,064, 241,958, and 241,958, respectively. Such shares are included in the computation of dividends and earnings per share in each of the respective years.
We maintain a self-funded medical plan under which we are responsible for the first $75 per year of claims made by a covered family. Expenses are accrued based on estimates of the aggregate liability for claims incurred and our experience. Expenses were $1,695 in 2015, $1,786 in 2014 and $2,698 in 2013.

78


Note 18 – Accumulated Other Comprehensive Income (Loss)
AOCI includes net income as well as unrealized gains and losses, net of tax, on AFS investment securities owned and changes in the funded status of our defined benefit pension plan, which are excluded from net income. Unrealized AFS 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 consolidated statements of comprehensive income.
The following table summarizes the changes in AOCI by component for the years ended December 31 (net of tax):

Unrealized
Holding Gains
(Losses) on
AFS
Securities
 
Change in Unrecognized Pension Cost on Defined
Benefit
Pension Plan
 
Total
Balance, January 1, 2013
$
8,678

 
$
(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 effect
6,257

 
(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 reclassifications
11,290

 
(2,836
)
 
8,454

Amounts reclassified from AOCI
(97
)
 
300

 
203

Subtotal
11,193

 
(2,536
)
 
8,657

Tax effect
(3,684
)
 
862

 
(2,822
)
OCI, net of tax
7,509

 
(1,674
)
 
5,835

Balance, December 31, 2014
3,302

 
(3,808
)
 
(506
)
OCI before reclassifications
310

 
255

 
565

Amounts reclassified from AOCI
(163
)
 
492

 
329

Subtotal
147

 
747

 
894

Tax effect
87

 
(254
)
 
(167
)
OCI, net of tax
234

 
493

 
727

Balance, December 31, 2015
$
3,536

 
$
(3,315
)
 
$
221

Included in OCI for the years ended December 31, 2015 and 2014 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.

79


A summary of the components of unrealized holding gains on AFS securities included in OCI follows for the years ended December 31:
 
2015
 
2014
 
2013

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
$
406

 
$
(96
)
 
$
310

 
$
355

 
$
10,935

 
$
11,290

 
$
(737
)
 
$
(18,234
)
 
$
(18,971
)
Reclassification adjustment for net realized (gains) losses included in net income

 
(163
)
 
(163
)
 

 
(97
)
 
(97
)
 

 
(171
)
 
(171
)
Net unrealized gains (losses)
406

 
(259
)
 
147

 
355

 
10,838

 
11,193

 
(737
)
 
(18,405
)
 
(19,142
)
Tax effect

 
87

 
87

 

 
(3,684
)
 
(3,684
)
 

 
6,257

 
6,257

Unrealized gains (losses), net of tax
$
406

 
$
(172
)
 
$
234

 
$
355

 
$
7,154

 
$
7,509

 
$
(737
)
 
$
(12,148
)
 
$
(12,885
)
The following table details reclassification adjustments and the related affected line items in our consolidated statements of income for the years ended December 31:
Details about AOCI components
Amount
Reclassified from
AOCI
 
Affected Line Item in the
Consolidated
Statements of Income

2015
 
2014
 
2013
 
 
Unrealized holding gains (losses) on AFS securities
 
 
 
 
 
 
 
 
$
163

 
$
97

 
$
171

 
Net gains (losses) on sale of AFS securities
 
55

 
33

 
58

 
Federal income tax expense
 
$
108

 
$
64

 
$
113

 
Net income
 
 
 
 
 
 
 
 
Change in unrecognized pension cost on defined benefit pension plan
 
 
 
 
 
 
 
 
$
492

 
$
300

 
$
208

 
Compensation and benefits
 
167

 
102

 
71

 
Federal income tax expense
 
$
325

 
$
198

 
$
137

 
Net income

80


Note 19 – Related Party Transactions
In the ordinary course of business, we 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 consisted of the following for the years ended December 31:

2015
 
2014
Balance, January 1
$
3,822

 
$
4,178

New loans
2,779

 
1,475

Repayments
(2,580
)
 
(1,831
)
Balance, December 31
$
4,021

 
$
3,822

Total deposits of these principal officers and directors and their affiliates amounted to $5,625 and $5,861 at December 31, 2015 and 2014, respectively. In addition, the ESOP held deposits with the Bank aggregating $143 and $392, respectively, at December 31, 2015 and 2014.
From time-to-time, we make charitable donations to the Isabella Bank & Trust Foundation (the “Foundation”), which is an affiliated nonprofit entity formed for the purpose of distributing charitable donations to recipient organizations generally located in the communities we service. Our donations are expensed when committed to the Foundation. The assets and transactions of the Foundation are not included in our consolidated financial statements.
Assets of the Foundation include cash and cash equivalents, certificates of deposit, and shares of Isabella Bank Corporation common stock. The Foundation owned 44,350 and 34,350 shares of our common stock as of December 31, 2015 and 2014, 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:
 
2015
 
2014
 
2013
Total assets
$
2,435

 
$
2,090

 
$
1,815

Donations
$
258

 
$
500

 
$
200

Note 20 – Fair Value
Following is a description of the valuation methodologies, key inputs, and an indication of the level of the fair value hierarchy in which the assets or liabilities are classified.
Cash and cash equivalents: The carrying amounts of cash and 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.
AFS securities: AFS securities are recorded at fair value on a recurring basis. Level 1 fair value measurement is based upon quoted prices for identical instruments. Level 2 fair value measurement is based upon quoted prices for similar instruments. If quoted prices are not available, fair values are measured using independent pricing models or other model based valuation techniques such as the present value of future cash flows, adjusted for the security’s credit rating, prepayment assumptions and other factors such as credit loss and liquidity assumptions. The values for Level 1 and Level 2 investment securities are generally obtained from an independent third party. On a quarterly basis, we compare the values provided to alternative pricing sources.
Mortgage loans AFS: Mortgage loans AFS are carried at the lower of cost or fair value. The fair value of Mortgage loans AFS are based on the price secondary markets are currently offering for portfolios with similar characteristics. As such, we classify Mortgage loans AFS subject to nonrecurring fair value adjustments as Level 2.
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. 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, loans are classified as impaired and a specific allowance for loan loss 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

81


identified as impaired, we measure the estimated impairment. The fair value of impaired loans is estimated using one of several methods, including the present value of expected future cash flows discounted at the loan’s effective interest rate, the loan’s obtainable market price, or the fair value 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.
We review the net realizable values of the underlying collateral for collateral dependent impaired loans on at least a quarterly basis for all loan types.  To determine the collateral value, we utilize independent appraisals, broker price opinions, or internal evaluations.  We review these valuations to determine whether an additional discount should be applied given the age of market information that may have been considered as well as other factors such as costs to sell an asset if it is determined that the collateral will be liquidated in connection with the ultimate settlement of the loan. We use these valuations to determine if any specific reserves or charge-offs are necessary. We may obtain new valuations in certain circumstances, including when there has been significant deterioration in the condition of the collateral, if the foreclosure process has begun, or if the existing valuation is deemed to be outdated.
The following tables list the quantitative fair value information about impaired loans as of December 31:

2015
Valuation Technique
Fair Value
Unobservable Input
 
Range
 
 
Discount applied to collateral appraisal:
 
 
 
 
Real Estate
 
20% - 30%
 
 
Equipment
 
20% - 35%
Discounted appraisal value
$9,301
Cash crop inventory
 
40%
 
 
Other inventory
 
50%
 
 
Accounts receivable
 
50%
 
 
Liquor license
 
75%
 
 
Furniture, fixtures & equipment
 
35% - 45%

2014
Valuation Technique
Fair Value
Unobservable Input
 
Range
 
 
Discount applied to collateral appraisal:
 
 
 
 
Real Estate
 
20% - 25%
 
 
Equipment
 
30% - 40%
Discounted appraisal value
$8,720
Cash crop inventory
 
40%
 
 
Other inventory
 
75%
 
 
Accounts receivable
 
50%
 
 
Liquor license
 
75%
Discount factors with ranges are based on the age of the independent appraisal, broker price opinion, or internal evaluation.
Accrued interest receivable: The carrying amounts of accrued interest receivable approximate fair value. As such, we classify accrued interest receivable as Level 1.
Equity securities without readily determinable fair values: 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 and 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 Valley Financial Corporation in 2004 and in 2007 and we account for our investment under the equity method of accounting.
The lack of an active market, or other independent sources to validate fair value estimates coupled with the impact of future capital calls and transfer restrictions, is an inherent limitation in the valuation process. As the fair values of these investments are not readily determinable, they are not disclosed under a specific fair value hierarchy; 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 fair value adjustment. During 2015 and 2014, there were no impairments recorded on equity securities without readily determinable fair values.

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Foreclosed 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. Due to the inherent level of estimation in the valuation process, we classify foreclosed assets as nonrecurring Level 3.
The table below lists the quantitative fair value information related to foreclosed assets as of:
 
December 31, 2015
Valuation Technique
Fair Value
 
Unobservable Input
 
Range
 
 
 
Discount applied to collateral appraisal:
 
 
Discounted appraisal value
$
421

 
Real Estate
 
20% - 30%
 
December 31, 2014
Valuation Technique
Fair Value
 
Unobservable Input
 
Range
 
 
 
Discount applied to collateral appraisal:
 
 
Discounted appraisal value
$
885

 
Real Estate
 
20% - 25%
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 2015 and 2014, there were no impairments recorded on goodwill and other acquisition intangibles.
OMSR: OMSR (which are included in other assets) are subject to impairment testing. To test for impairment, we utilize a discounted cash flow analysis using interest rates and prepayment speed assumptions currently quoted for comparable instruments and discount rates. If the valuation model reflects a value less than the carrying value, OMSR are adjusted to fair value through a valuation allowance as determined by the model. As such, we classify OMSR subject to nonrecurring fair value adjustments as Level 2.
Deposits: The fair value of demand, savings, and money market deposits are equal to their carrying amounts and are classified as Level 1. Fair values for variable rate certificates of deposit approximate their 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: 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 other borrowed funds are estimated using discounted cash flow analyses based on current incremental borrowing arrangements. As such, borrowed funds are classified as Level 2.
Accrued interest payable: The carrying amounts of accrued interest payable approximate fair value. As such, we classify accrued interest payable as Level 1.
Commitments to extend credit, standby letters of credit, and undisbursed loans: Our commitments to extend credit, standby letters of credit, and undisbursed funds have no carrying amount and are estimated to have no realizable fair value. Historically, a majority of the unused commitments to extend credit have not been drawn upon and, generally, we do not receive fees in connection with these commitments other than standby letter of credit fees, which are not significant.
The preceding methods described may produce a fair value calculation that may not be indicative of net realizable value or reflective of future fair values. Although we believe our valuation methods are appropriate and consistent with other market participants, the use of different methodologies or assumptions to determine the fair value of certain financial instruments could result in a different fair value measurement.

83


Estimated Fair Values of Financial Instruments Not Recorded at Fair Value in their Entirety on a Recurring Basis
Disclosure of the estimated fair values of financial instruments, which differ from carrying values, often requires the use of estimates. In cases where quoted market values in an active market are not available, we use present value techniques and other valuation methods to estimate the fair values of our financial instruments. These valuation methods require considerable judgment and the resulting estimates of fair value can be significantly affected by the assumptions made and methods used.
The carrying amount and estimated fair value of financial instruments not recorded at fair value in their entirety on a recurring basis were as follows as of December 31:
 
2015

Carrying
Value
 
Estimated
Fair Value
 
(Level 1)
 
(Level 2)
 
(Level 3)
ASSETS
 
 
 
 
 
 
 
 
 
Cash and cash equivalents
$
21,569

 
$
21,569

 
$
21,569

 
$

 
$

Mortgage loans AFS
1,187

 
1,210

 

 
1,210

 

Gross loans
850,492

 
839,398

 

 

 
839,398

Less allowance for loan and lease losses
7,400

 
7,400

 

 

 
7,400

Net loans
843,092

 
831,998

 

 

 
831,998

Accrued interest receivable
6,269

 
6,269

 
6,269

 

 

Equity securities without readily determinable fair values (1)
22,286

 
N/A

 

 

 

OMSR
2,505

 
2,518

 

 
2,518

 

LIABILITIES
 
 

 
 
 
 
 
 
Deposits without stated maturities
741,683

 
741,683

 
741,683

 

 

Deposits with stated maturities
422,880

 
421,429

 

 
421,429

 

Borrowed funds
309,732

 
297,495

 

 
297,495

 

Accrued interest payable
545

 
545

 
545

 

 

 
2014
 
Carrying
Value
 
Estimated
Fair Value
 
(Level 1)
 
(Level 2)
 
(Level 3)
ASSETS
 
 
 
 
 
 
 
 
 
Cash and cash equivalents
$
19,906

 
$
19,906

 
$
19,906

 
$

 
$

Mortgage loans AFS
901

 
911

 

 
911

 

Gross loans
836,550

 
830,417

 

 

 
830,417

Less allowance for loan and lease losses
10,100

 
10,100

 

 

 
10,100

Net loans
826,450

 
820,317

 

 

 
820,317

Accrued interest receivable
5,851

 
5,851

 
5,851

 

 

Equity securities without readily determinable fair values (1)
20,076

 
N/A

 

 

 

OMSR
2,519

 
2,554

 

 
2,554

 

LIABILITIES
 
 
 
 
 
 
 
 
 
Deposits without stated maturities
634,222

 
634,222

 
634,222

 

 

Deposits with stated maturities
440,262

 
440,964

 

 
440,964

 

Borrowed funds
289,709

 
293,401

 

 
293,401

 

Accrued interest payable
558

 
558

 
558

 

 

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

84


Financial Instruments Recorded at Fair Value
The table below presents the recorded amount of assets and liabilities measured at fair value on December 31:
 
2015
 
2014

Total
 
(Level 1)
 
(Level 2)
 
(Level 3)
 
Total
 
(Level 1)
 
(Level 2)
 
(Level 3)
Recurring items
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
AFS securities
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Government-sponsored enterprises
$
24,345

 
$

 
$
24,345

 
$

 
$
24,136

 
$

 
$
24,136

 
$

States and political subdivisions
232,217

 

 
232,217

 

 
215,345

 

 
215,345

 

Auction rate money market preferred
2,866

 

 
2,866

 

 
2,619

 

 
2,619

 

Preferred stocks
3,299

 
3,299

 

 

 
6,140

 
6,140

 

 

Mortgage-backed securities
263,384

 

 
263,384

 

 
166,926

 

 
166,926

 

Collateralized mortgage obligations
134,025

 

 
134,025

 

 
152,368

 

 
152,368

 

Total AFS securities
660,136

 
3,299

 
656,837

 

 
567,534

 
6,140

 
561,394

 

Nonrecurring items
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Impaired loans (net of the ALLL)
9,301

 

 

 
9,301

 
8,720

 

 

 
8,720

Foreclosed assets
421

 

 

 
421

 
885

 

 

 
885

Total
$
669,858

 
$
3,299

 
$
656,837

 
$
9,722

 
$
577,139

 
$
6,140

 
$
561,394

 
$
9,605

Percent of assets and liabilities measured at fair value
 
 
0.49
%
 
98.06
%
 
1.45
%
 
 
 
1.06
%
 
97.27
%
 
1.67
%
The following table provides a summary of the changes in fair value of assets and liabilities recorded at fair value, for which gains or losses were recognized through earnings on a nonrecurring basis, in the years ended December 31:
 
2015
 
2014
Nonrecurring items
 
 
 
Foreclosed assets
$
(99
)
 
$
(123
)
We had no assets or liabilities recorded at fair value with changes in fair value recognized through earnings, on a recurring basis, as of December 31, 2015.

85


Note 21 – Parent Company Only Financial Information
Condensed Balance Sheets
 
December 31

2015
 
2014
ASSETS
 
 
 
Cash on deposit at the Bank
$
4,125

 
$
1,035

AFS securities
257

 
3,294

Investments in subsidiaries
133,883

 
124,827

Premises and equipment
2,014

 
1,982

Other assets
53,396

 
53,228

TOTAL ASSETS
$
193,675

 
$
184,366

LIABILITIES AND SHAREHOLDERS’ EQUITY
 
 
 
Other liabilities
$
9,704

 
$
9,772

Shareholders' equity
183,971

 
174,594

TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY
$
193,675

 
$
184,366

Condensed Statements of Income
 
Year Ended December 31

2015
 
2014
 
2013
Income
 
 
 
 
 
Dividends from subsidiaries
$
8,000

 
$
7,000

 
$
7,000

Interest income
78

 
150

 
161

Management fee and other
6,331

 
3,665

 
2,146

Total income
14,409

 
10,815

 
9,307

Expenses
 
 
 
 
 
Compensation and benefits
5,110

 
3,688

 
2,811

Occupancy and equipment
1,634

 
1,082

 
476

Audit and related fees
452

 
404

 
345

Other
2,160

 
1,395

 
958

Total expenses
9,356

 
6,569

 
4,590

Income before income tax benefit and equity in undistributed earnings of subsidiaries
5,053

 
4,246

 
4,717

Federal income tax benefit
991

 
940

 
790

Income before equity in undistributed earnings of subsidiaries
6,044

 
5,186

 
5,507

Undistributed earnings of subsidiaries
9,086

 
8,538

 
7,003

Net income
$
15,130

 
$
13,724

 
$
12,510



86


Condensed Statements of Cash Flows
 
Year Ended December 31

2015
 
2014
 
2013
Operating activities
 
 
 
 
 
Net income
$
15,130

 
$
13,724

 
$
12,510

Adjustments to reconcile net income to cash provided by operations
 
 
 
 
 
Undistributed earnings of subsidiaries
(9,086
)
 
(8,538
)
 
(7,003
)
Undistributed earnings of equity securities without readily determinable fair values
(310
)
 
37

 
74

Share-based payment awards under equity compensation plan
550

 
495

 
554

Depreciation
154

 
144

 
174

Net amortization of AFS securities

 
1

 
2

Deferred income tax expense (benefit)
131

 
(159
)
 
(305
)
Changes in operating assets and liabilities which provided (used) cash
 
 
 
 
 
Other assets
506

 
145

 
(51
)
Accrued interest and other liabilities
142

 
1,516

 
1,238

Net cash provided by (used in) operating activities
7,217

 
7,365

 
7,193

Investing activities
 
 
 
 
 
Maturities, calls, principal payments, and sales of AFS securities
3,000

 
250

 
395

Purchases of premises and equipment
(186
)
 
(81
)
 
(146
)
Net (advances to) repayments from subsidiaries
300

 
641

 
(299
)
Net cash provided by (used in) investing activities
3,114

 
810

 
(50
)
Financing activities
 
 
 
 
 
Net increase (decrease) in borrowed funds
(211
)
 
(1,600
)
 
(1,350
)
Cash dividends paid on common stock
(7,273
)
 
(6,843
)
 
(6,456
)
Proceeds from the issuance of common stock
5,201

 
4,227

 
3,618

Common stock repurchased
(4,590
)
 
(3,122
)
 
(2,375
)
Common stock purchased for deferred compensation obligations
(368
)
 
(331
)
 
(383
)
Net cash provided by (used in) financing activities
(7,241
)
 
(7,669
)
 
(6,946
)
Increase (decrease) in cash and cash equivalents
3,090

 
506

 
197

Cash and cash equivalents at beginning of period
1,035

 
529

 
332

Cash and cash equivalents at end of period
$
4,125

 
$
1,035

 
$
529

Note 22 – Operating Segments
Our reportable segments are based on legal entities that account for at least 10% of net operating results. The operations of the Bank as of December 31, 2015, 2014, and 2013 represent approximately 90% or more of our consolidated total assets and operating results. As such, no additional segment reporting is presented.

87


Item 9. Changes in and Disagreements With Accountants on Accounting and Financial Disclosure.
None.
Item 9A. Controls and Procedures.
DISCLOSURE CONTROLS AND PROCEDURES
We carried out an evaluation, under the supervision and with the participation of the Principal Executive Officer and Principal Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures (as such term is defined in Rules 13a-15(e) and 15(d)-15(e) under the Exchange Act) as of December 31, 2015, pursuant to Exchange Act Rule 13a-15. Based upon that evaluation, the Principal Executive Officer and Principal Financial Officer concluded that our disclosure controls and procedures as of December 31, 2015, were effective to ensure that information required to be disclosed in reports that we file or submit under the Exchange Act are recorded, processed, summarized and reported within the time periods specified in SEC rules and forms.
CHANGES IN INTERNAL CONTROL OVER FINANCIAL REPORTING
We also conducted an evaluation of internal control over financial reporting to determine whether any changes occurred during the quarter ended December 31, 2015, that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting. Based on this evaluation, we have concluded that there have been no such changes during the quarter ended December 31, 2015.
Management’s Report on Internal Control Over Financial Reporting
We are responsible for the preparation and integrity of our published consolidated financial statements. The consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America and, accordingly, include amounts based on judgments and estimates. We also prepared the other information included in the Annual Report on Form 10-K and are responsible for the accuracy and consistency with the consolidated financial statements.
We are responsible for establishing and maintaining a system of internal control over financial reporting, which is intended to provide reasonable assurance to our management and Board of Directors regarding the reliability of our consolidated financial statements. The system includes but is not limited to:
A documented organizational structure and division of responsibility;
Established policies and procedures, including a code of conduct to foster a strong ethical climate which is communicated throughout our Corporation;
Internal auditors that monitor the operation of the internal control system and report findings and recommendations to management and the Audit Committee;
Procedures for taking action in response to an internal audit finding or recommendation;
Regular reviews of our consolidated financial statements by qualified individuals; and
The careful selection, training and development of our people.
There are inherent limitations in the effectiveness of any system of internal control, including the possibility of human error and the circumvention or overriding of controls. Also, the effectiveness of an internal control system may change over time. We have implemented a system of internal control that was 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.
We have assessed our internal control system in relation to criteria for effective internal control over financial reporting described in “Internal Control-Integrated Framework” issued by the Committee of Sponsoring Organizations (2013 framework) of the Treadway Commission.
Based upon these criteria, we believe that, as of December 31, 2015, our system of internal control over financial reporting was effective.
Our independent registered public accounting firm, Rehmann Robson LLC ("Rehmann"), has audited our 2015 consolidated financial statements and internal control over financial reporting as of December 31, 2015. Rehmann was given unrestricted access to all financial records and related data, including minutes of all meetings of stockholders, the Board of Directors and committees of the Board. Rehmann has issued an unqualified audit opinion on our 2015 consolidated financial statements as a result of the integrated audit and an unqualified opinion on the effectiveness of our internal controls as of December 31, 2015.

88


Isabella Bank Corporation
By:
/s/ Jae A. Evans
Jae A. Evans
Chief Executive Officer
(Principal Executive Officer)
March 9, 2016
 
/s/ Dennis P. Angner
Dennis P. Angner
President and Chief Financial Officer
(Principal Financial Officer, Principal Accounting Officer)
March 9, 2016
Item 9B. Other Information.
None.

89


PART III
Item 10. Directors, Executive Officers and Corporate Governance.
For information concerning our directors and certain executive officers, see “Election of Directors” and “Section 16(a) Beneficial Ownership Reporting Compliance” in our Proxy Statement for the Annual Meeting of Shareholders to be held May 3, 2016 (“Proxy Statement”) which is incorporated herein by reference.
For Information concerning our Audit Committee financial experts, see “Committees of the Board of Directors and Meeting Attendance” in the Proxy Statement which is incorporated herein by reference.
We have adopted a Code of Business Conduct and Ethics that applies to our Chief Executive Officer and Chief Financial Officer. We shall provide to any person without charge upon request, a copy of our Code of Business Conduct and Ethics. Written requests should be sent to: Secretary, Isabella Bank Corporation, 401 North Main Street, Mount Pleasant, Michigan 48858.
Item 11. Executive Compensation.
For information concerning executive compensation, see “Executive Officers,” “Compensation Committee Report,” “Compensation Committee Interlocks and Insider Participation,” “Compensation Discussion and Analysis,” and “Remuneration of Directors” in the Proxy Statement which is incorporated herein by reference.
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters.
For information concerning the security ownership of certain owners and management, see “Security Ownership of Certain Beneficial Owners and Management” in the Proxy Statement which is incorporated herein by reference.
Equity Compensation Plan Information
The following table provides information as of December 31, 2015, with respect to compensation plans under which our common shares are authorized for issuance to directors, officers or employees in exchange for consideration in the form of goods or services.
Plan Category
Number of Securities
to be Issued
Upon Exercise of
Outstanding
Options, Warrants,
and Rights
(A)
 
Weighted Average
Exercise Price
of Outstanding
Options, Warrants,
and Rights
(B)
 
Number of  Securities
Remaining
Available for Future
Issuance Under Equity
Compensation Plans
(Excluding Securities
Reflected in Column (A))
(C)
Equity compensation plans approved by

 
 
 
 
 
 
Shareholders: None

 

 
 

 
Equity compensation plans not approved by shareholders (1) (2):
 
 
 
 
 
 
 
Deferred director compensation plan
180,616

 
(1
)
(2)
 
(1
)
(2)
Total
180,616

 
 
 
 
 
 
 
(1)
Pursuant to the terms of the Directors Plan, our directors are required to invest at least 25% of their board fees in 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, are converted on a quarterly basis into stock units of our common stock based on the fair value of a share of common stock as of the relevant valuation date. Stock credited to a participant’s account is eligible for stock and cash dividends as declared. Dividend Reinvestment Plan shares are purchased on a monthly basis pursuant to the Dividend Reinvestment Plan.
Distribution of deferred fees from the Directors Plan occurs when the participant retires from the board or upon the occurrence of certain other events. 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. We may use authorized but unissued shares or purchase shares of common stock on the open market to meet our obligations under the Directors Plan. As of December 31, 2015, the Directors Plan had 200,017 shares eligible to be distributed under the Directors Plan.

90


(2)
The Rabbi Trust holds 19,401 shares for the benefit of participants pursuant to the Directors Plan.  Accordingly, such shares are not included in the number of securities issuable in column (A) or the weighted average price calculation in column (B), nor are potential future contributions included in column (C).
Item 13. Certain Relationships and Related Transactions, and Director Independence.
For information, see “Indebtedness of and Transactions with Management” and “Election of Directors” in the Proxy Statement, which is incorporated herein by reference.
Item 14. Principal Accountant Fees and Services.
For information concerning the principal accountant fees and services see “Fees for Professional Services Provided by Rehmann Robson LLC” and “Pre-approval Policies and Procedures” in the Proxy Statement which is incorporated herein by reference.

91


PART IV
Item 15. Exhibits and Financial Statement Schedules.
(a)
 
(1)
Financial Statements:  The following documents are filed as part of Item 8 of this report:
 
 
 
 
 
 
 
Report of Independent Registered Public Accounting Firm
 
 
 
Consolidated Balance Sheets
 
 
 
Consolidated Statements of Changes in Shareholders’ Equity
 
 
 
Consolidated Statements of Income
 
 
 
Consolidated Statements of Comprehensive Income (Loss)
 
 
 
Consolidated Statements of Cash Flows
 
 
 
Notes to Consolidated Financial Statements
 
 
 
 
 
 
(2)
Financial Statement Schedules: All schedules are omitted because they are neither applicable nor required, or because the required information is included in the consolidated financial statements or related notes.
 
 
 
 
 
 
(3)
See the exhibits listed below under Item 15(b):
 
 
 
 
(b)
 
The following exhibits required by Item 601 of Regulation S-K are filed as part of this report:
 
 
 
 
 
 
3(a)
Amended Articles of Incorporation (1)
 
 
3(b)
Amendment to the Articles of Incorporation (2)
 
 
3(c)
Amendment to the Articles of Incorporation (3)
 
 
3(d)
Amendment to the Articles of Incorporation (4)
 
 
3(e)
Amendment to the Articles of Incorporation (8)
 
 
3(f)
Amended Bylaws (6)
 
 
3(g)
Amendment to Bylaws (7)
 
 
3(h)
Amendment to Bylaws (10)
 
 
3(i)
Amendment to Bylaws (11)
 
 
10(a)
Isabella Bank Corporation and Related Companies Deferred Compensation Plan for Directors (9)*
 
 
10(b)
Amendment to Isabella Bank Corporation and Related Companies Deferred Compensation Plan for Directors (12)*
 
 
10(c)
Isabella Bank Corporation Split Dollar Plan (13)*
 
 
10(d)
Isabella Bank Corporation Retirement Bonus Plan (9)*
 
 
10(e)
Isabella Bank Corporation Supplemental Executive Retirement Plan (14)*
 
 
10(f)
Isabella Bank Corporation Stock Award Incentive Plan (15)*
 
 
14
Code of Business Conduct and Ethics (5)
 
 
21
Subsidiaries of the Registrant
 
 
23
Consent of Rehmann Robson LLC, Independent Registered Public Accounting Firm
 
 
31(a)
Certification pursuant to section 302 of the Sarbanes-Oxley Act of 2002 by the Chief Executive Officer
 
 
31(b)
Certification pursuant to section 302 of the Sarbanes-Oxley Act of 2002 by the Chief Financial Officer
 
 
32
Section 1350 Certification of Chief Executive Officer and Chief Financial Officer
 
 
101.INS
XBRL Interactive Data File**
 
 
101.SCH
XBRL Interactive Data File**
 
 
101.CAL
XBRL Interactive Data File**
 
 
101.LAB
XBRL Interactive Data File**
 
 
101.PRE
XBRL Interactive Data File**
 
 
101.DEF
XBRL Interactive Data File**

92


*
 
Management Contract or Compensatory Plan or Arrangement.
**
 
As provided by Rule 406T in Regulation S-T, this information is furnished and not filed for purposes of Sections 11 and 12 of the Securities Act of 1933 and Section 18 of the Exchange Act
(1)
 
Previously filed as an Exhibit to the Isabella Bank Corporation Form 10-K, filed March 12, 1991, and incorporated herein by reference
(2)
 
Previously filed as an Exhibit to the Isabella Bank Corporation Form 10-K, filed March 26, 1994, and incorporated herein by reference.
(3)
 
Previously filed as an Exhibit to Isabella Bank Corporation Form 10-K, filed March 22, 2000, and incorporated herein by reference.
(4)
 
Previously filed as an Exhibit to Isabella Bank Corporation Form 10-K, filed March 27, 2001, and incorporated herein by reference.
(5)
 
Previously filed as an Exhibit to Isabella Bank Corporation Form 8-K, filed April 25, 2006, and incorporated herein by reference.
(6)
 
Previously filed as an Exhibit to Isabella Bank Corporation Form 10-K, filed March 16, 2005, and incorporated herein by reference.
(7)
 
Previously filed as an Exhibit to Isabella Bank Corporation Form 8-K, filed November 22, 2006, and incorporated herein by reference.
(8)
 
Previously filed as an Exhibit to Isabella Bank Corporation Form 8-K, filed May 16, 2008, and incorporated herein by reference.
(9)
 
Previously filed as an Exhibit to Isabella Bank Corporation Form 8-K, filed December 19, 2008, and incorporated herein by reference.
(10)
 
Previously filed as an Exhibit to Isabella Bank Corporation Form 8-K, filed August 28, 2009, and incorporated herein by reference.
(11)
 
Previously filed as an Exhibit to Isabella Bank Corporation Form 8-K, filed December 23, 2009, and incorporated herein by reference.
(12)
 
Previously filed as an Exhibit to Isabella Bank Corporation Form 8-K, filed August 30, 2013, and incorporated herein by reference.
(13)
 
Previously filed as an Exhibit to Isabella Bank Corporation Form 8-K, filed March 31, 2015, and incorporated herein by reference.
(14)
 
Previously filed as an Exhibit to Isabella Bank Corporation Form 8-K, filed April 27, 2015, and incorporated herein by reference.
(15)
 
Previously filed as an Exhibit to Isabella Bank Corporation Form 8-K, filed May 6, 2015, and incorporated herein by reference.

93


SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
ISABELLA BANK CORPORATION
(Registrant)
By:
 
/s/ Jae A. Evans
 
Date:
 
March 9, 2016
 
 
Jae A. Evans
 
 
 
 
 
 
Chief Executive Officer
 
 
 
 
 
 
(Principal Executive Officer)
 
 
 
 
Pursuant to the requirements of the Exchange Act, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
Signatures
 
Capacity
 
Date
 
 
 
 
 
/s/ Dennis P. Angner
 
Chief Financial Officer (Principal Financial
Officer, Principal Accounting Officer)
and Director
 
March 9, 2016
Dennis P. Angner
 
 
 
 
 
 
 
 
/s/ Dr. Jeffrey J. Barnes
 
Director
 
March 9, 2016
Dr. Jeffrey J. Barnes
 
 
 
 
 
 
 
 
 
/s/ Richard J. Barz
 
Director
 
March 9, 2016
Richard J. Barz
 
 
 
 
 
 
 
 
 
/s/ Jae A. Evans
 
Chief Executive Officer and Director
 
March 9, 2016
Jae A. Evans
 
 
 
 
 
 
 
 
 
/s/ G. Charles Hubscher
 
Director
 
March 9, 2016
G. Charles Hubscher
 
 
 
 
 
 
 
 
 
/s/ Thomas L. Kleinhardt
 
Director
 
March 9, 2016
Thomas L. Kleinhardt
 
 
 
 
 
 
 
 
 
/s/ Joseph LaFramboise
 
Director
 
March 9, 2016
Joseph LaFramboise
 
 
 
 
 
 
 
 
 
/s/ David J. Maness
 
Director
 
March 9, 2016
David J. Maness
 
 
 
 
 
 
 
 
 
/s/ W. Joseph Manifold
 
Director
 
March 9, 2016
W. Joseph Manifold
 
 
 
 
 
 
 
 
 
/s/ W. Michael McGuire
 
Director
 
March 9, 2016
W. Michael McGuire
 
 
 
 
 
 
 
 
 
/s/ Sarah R. Opperman
 
Director
 
March 9, 2016
Sarah R. Opperman
 
 
 
 
 
 
 
 
 
/s/ Gregory V. Varner
 
Director
 
March 9, 2016
Gregory V. Varner
 
 
 
 

94