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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
SCHEDULE 14A
Proxy Statement Pursuant to Section 14(a) of the
Securities Exchange Act of 1934
(Amendment No.    )
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ý Definitive Proxy Statement
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¨ Soliciting Material Pursuant to §240.14a-12
ISABELLA BANK CORPORATION
(Name of Registrant as Specified In Its Charter)
(Name of Person(s) Filing Proxy Statement, if other than the Registrant)
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ISABELLA BANK CORPORATION
401 N. Main St.
Mt. Pleasant, Michigan 48858
NOTICE OF THE ANNUAL MEETING OF SHAREHOLDERS
To Be Held April 30, 2014May 2, 2017

Notice is hereby given that the Annual Meeting of Shareholders of Isabella Bank Corporation will be held on Wednesday, April 30, 2014Tuesday, May 2, 2017 at 5:00 p.m. Eastern Daylight Time, at the Comfort Inn Conference Center, 2424 S. Mission Street, Mt. Pleasant, Michigan. The meeting is for the purpose of considering and acting upon the following items of business:
1.The election of fivefour directors.
2.To hold an advisory, non-binding vote on executive compensation of named executive officers.
3.To hold an advisory, non-binding vote on how frequently advisory votes on the executive compensation of named executive officers should be held.
4.To transact such other business as may properly come before the meeting, or any adjournment or adjournments thereof.
The Board of Directors has fixed March 17, 20146, 2017 as the record date for determination of shareholders entitled to notice of, and to vote at, the meeting or any adjournments thereof.
Your vote is important. Even if you plan to attendBy order of the meeting, please vote:Board of Directors
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Debra Campbell, Secretary
Dated: March 20, 2017


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

Debra Campbell, Secretary
Dated: March 31, 2014

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ISABELLA BANK CORPORATION
401 N. Main St.
Mt. Pleasant, Michigan 48858
PROXY STATEMENT
General Information
As used in this Proxy Statement, references to "the Corporation", “Isabella,” “we,” “our,” “us,” and similar terms refer to the consolidated entity consisting of Isabella Bank Corporation and its subsidiaries.subsidiary, Isabella Bank. Isabella Bank Corporation refers solely to the parent holding company, and the “Bank” refers to Isabella Bank Corporation’s subsidiary, Isabella Bank.
This Proxy Statement is furnished in connection with the solicitation of proxies, to be voted at our Annual Meeting of Shareholders (the “Annual Meeting”) which is to be held on Wednesday, April 30, 2014Tuesday, May 2, 2017 at 5:00 p.m. at the Comfort Inn Conference Center, 2424 S. Mission Street, Mt. Pleasant, Michigan, or at any adjournment or adjournments thereof, for the purposes set forth in the accompanying Notice of the Annual Meeting of Shareholders and in this Proxy Statement.
This Proxy Statement has been mailed on March 31, 201420, 2017 to all holders of record of common stock as of the record date. If a shareholder’s shares are held in the name of a broker, bank, or other nominee, then that party should give the shareholder instructions for voting the shareholder’s shares.
Voting at the Meeting
We have fixed the close of business on March 17, 20146, 2017 as the record date for the determination of shareholders entitled to notice of, and to vote at, the Annual Meeting and any adjournment thereof. We have only one class of common stock and no preferred stock. As of March 17, 2014,6, 2017, there were 7,707,5247,832,108 shares of stock outstanding. Each outstanding share entitles the holder thereof to one vote on each separate matter presented for vote at the meeting. You may vote on matters that are properly presented at the Annual Meeting by attending the meeting and casting a vote, signing and returning the enclosed proxy, voting on the internet, or voting by phone. You may change your vote or revoke your proxy at any time before it is voted at the Annual Meeting by filing with the Corporation an instrument revoking it, filing a duly executed proxy bearing a later date (including a proxy given over the internet or by phone) or by attending the meeting and electing to vote in person. You are encouraged to vote by mail, internet, or phone.
We will hold the Annual Meeting if a majority of the shares of common stock entitled to vote are represented in person or by proxy. If you sign and return theexecute a proxy, those shares will be counted to determine if there is a quorum, even if you abstain or fail to vote on any of the proposals.
Your broker may not vote on the election of directors or the advisory vote to approve the named executive officers' compensationProposals 1-3 if you do not furnish instructions for such proposals. You should use the voting instruction card provided by us to instruct the broker to vote the shares, or else your shares will be considered “broker non-votes.” Broker non-votes are shares held by brokers or nominees as to which voting instructions have not been received from the shares’ beneficial owner or the individual entitled to vote those shares and the broker or nominee does not have discretionary voting power under rules applicable to broker-dealers. Under these rules, Proposals 1 and 21-3 are not items on which brokerage firms may vote in their discretion on your behalf unless you have furnished voting instructions.
At this year’s Annual Meeting, you will elect one director to serve for a term of one year and four directors to serve for a term of three years. You may vote in favor against, or withhold votes forabstain with respect to any or all nominees. Directors are elected by a plurality of the votes cast at the annual meeting. SharesAnnual Meeting. Abstentions and shares not voted, including broker non-votes, have no effect on the elections.
In voting on the advisory, nonbindingnon-binding proposal to approve the executive compensation described in this proxy statement, a shareholder may vote in favor of the advisory proposal, vote against the advisory proposal or abstain from voting. A majority of the shares represented at the annual meeting and entitled to vote on this advisory proposal must be voted in favor of the proposal for it to pass. While this vote is required by law, it will neither be binding on the Board of Directors, nor will it create or imply any change in the fiduciary duties of, or impose any additional fiduciary duty on the Board of Directors. In counting votes on the advisory, nonbindingnon-binding proposal to approve executive compensation matters, abstentions will have the same effect as a vote against the proposal and broker non-votes will have no effect on the outcome of the vote.
In voting on the advisory, non-binding proposal to approve the frequency of the advisory vote on executive compensation described in this proxy statement, a shareholder may vote for one year, two years or three years or may abstain from voting. The option of one year, two years or three years that receives a plurality of votes cast by shareholders will be the frequency for the advisory vote on executive compensation that has been selected by shareholders. While this vote is also required by law, it will neither be binding on the Board of Directors, nor will it create or imply any change in the fiduciary duties of, or impose any additional fiduciary duty on the Board of Directors. In counting votes on the advisory, non-binding proposal to approve the

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frequency of the advisory vote on executive compensation, abstentions and broker non-votes will have no effect on the outcome of the vote.
Proposal 1-Election1 - Election of Directors
The Board of Directors (the "Board") currently consists of eleven (11)twelve(12) members divided into three classes, with the directors in theeach class noted below upbeing elected for re-election ata term of three years. At the Annual Meeting. On September 15, 2013 Wilson C. Lauer passed away and on October 31, 2013 Sandra L. Caul retired from the Board, resulting in the number of directors being reduced to ten (10). The number of Board members was increased to its current level by the appointment of Jae A. Evans to the Board on January 1, 2014. Dennis P. Angner, whose term expires at the Annual Meeting, has been nominated for election to a one year term through 2015 and Dr. Jeffrey J. Barnes, G. Charles Hubscher, David J. Maness, and W. Joseph Manifold, whose terms expire at the Annual Meeting, have been nominated for election to three year termsserve through 2017 for the reasons described below.2020 Annual Meeting.
Except as otherwise specified, proxies will be voted for election of the fivefour nominees. If a nominee becomes unable or unwilling to serve, proxies will be voted for such other person, if any, as shall be designated. However, we know of no reason to anticipate that this will occur. The fivefour nominees who receive the greatest number of votes cast will be elected directors. Each of the nominees has agreed to serve as a director if elected.
Nominees and current directors, including their principal occupation for the last five or more years, age, and length of service as a director, are listed below.
We unanimously recommend that you vote FOR the election of each of the nominees.
Director Qualifications
Board members are highly qualified and represent your best interests. We select nominees who:
Have extensive business leadershipleadership.
Bring a diverse perspective and experienceexperience.
Are independentobjective and collegialcollegial.
Have high ethical standards and have demonstrated sound business judgmentjudgment.
Are willing and able to commit the significant time and effort to effectively fulfill their responsibilitiesresponsibilities.
Are active in and knowledgeable of their respective communitiescommunities.
Each nominee and current director possesspossesses these qualities and provides a diverse complement of specific business skills experience, and knowledge including extensive financial and accounting experience, knowledge of banking, small business operating experience, and specific knowledge of customer market segments including agriculture, oil and gas, health care, manufacturing, and retail.experience.
The following describes the key qualifications each director brings to the Board, in addition to the general qualifications described above and the information included in the biographical summaries provided below.
DirectorProfessional
Standing experience
in Chosenchosen
Fieldfield		 Expertise
in financial
or related
field		 Audit
Committee
Financial
Expert		 Civic and
community
involvement		 Leadership
and team
building
skills		 Diversity
by race,
gender, or
cultural		 Geo-
graphical
diversity		 Finance Tech-
nology		 Market-
ing		 Govern-
ance		 Entre-
preneurial
skills		 Human
Resources		 Bank
business
segment
represent-
ation
David J. ManessX 
 
 X X 
 
 
 X 
 
 X 
 X
Dennis P. AngnerX X 
 X X 
 
 X X 
 X 
 
 
Dr. Jeffrey J. BarnesX 
 
 X X 
 X 
 
 
 
 X 
 X
Richard J. BarzX X 
 X X 
 
 X 
 X 
X		 
 X 
Jae A. EvansX X 
 X X 
 
 X 
X		 X 
X		 
 X 
G. Charles HubscherX X 
 X X 
 
 
 
 
 
 X 
 X
Thomas L. KleinhardtX 
 
 X X 
 X X 
 X 
 X 
 X
Joseph LaFramboiseX 
 
 X X 
 X 
 
X		 X 
 
 
 
X
W. Joseph ManifoldX X X X X 
 
 X X 
 
 
 
 
X
W. Michael McGuireX X X X X 
 X X X 
 X 
 
 
X
Sarah R. OppermanX 
 
 X X X X 
 
 X 
 X 
 X
Gregory V. VarnerX

XX
X
X

X
X

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The following table identifies individual Board members serving on each of our standing committees:
DirectorAudit Nominating and Corporate Governance Compensation and Human ResourceInformation Technology
David J. Maness
Xo
 
Xo
 
Xc
Xo
Dennis P. Angner
 
 
X
Dr. Jeffrey J. Barnes
XX 
X
Richard J. Barz
 
X 
Jae A. Evans
 
 
X
G. Charles Hubscher
XX
Thomas L. KleinhardtX 
 X
Thomas L. Kleinhardt
 
X
Joseph LaFramboiseX
  X X
W. Joseph Manifold
Xc

  X X
W. Michael McGuireX  
Xc
 X
Xc
Sarah R. OppermanX
X
Gregory V. Varner
 
 X
C — Chairperson     
O — Ex-Officio     
Director NomineeNominees for TermTerms Ending in 20152020
Dr. Jeffrey J. Barnes (age 55) has been a director of the Bank since 2007 and of Isabella Bank Corporation since 2010. Dr. Barnes is a physician and shareholder in LO Eye Care PC. He is a former member of the Central Michigan Community Hospital Board of Directors.
G. Charles Hubscher (age 63) has been a director of the Bank since 2004 and of Isabella Bank Corporation since 2010. Mr. Hubscher is President of Hubscher and Son, Inc., a sand and gravel producer. He is a former director of the National Stone and Gravel Association, the Michigan Aggregates Association, serves on the Board of Trustees for the Mt. Pleasant Area Community Foundation, and is a member of the Zoning Board of Appeals for Deerfield Township.
David J. Maness (age 63) has been a director of the Bank since 2003 and of Isabella Bank Corporation since 2004. Mr. Maness has served as Chairman of the Board for the Corporation and the Bank since 2010. He is President of Maness Petroleum, a geological and geophysical consulting services company. Mr. Maness is currently serving as a director for the Michigan Oil & Gas Association, and he previously served on the Mt. Pleasant Public Schools Board of Education.
W. Joseph Manifold (age 65) has been a director of Isabella Bank Corporation since 2003 and of the Bank since 2010. Mr. Manifold retired as CFO of Federal Broach Holdings LLC, a holding company which operates several manufacturing companies. Previously, he was a senior manager with Ernst & Young Certified Public Accounting firm working principally on external bank audits and was CFO of the Delfield Company. Prior to joining the Board, Mr. Manifold served on the Isabella Community Credit Union Board and was President of the Mt. Pleasant Public Schools Board of Education.
Current Directors with Terms Ending in 2018
Dennis P. Angner (age 58)61) has been a director of Isabella Bank Corporation and the Bank since 2000. Mr. Angner has been principally employed by the Corporation since 1984 and has served as President of Isabella Bank Corporation since December 30, 2001 and CFO since January 1, 2010. Mr. Angner served as Chief Executive Officer of Isabella Bank Corporation from December 30, 2001 through December 31, 2009. He is a past Chair of the Michigan Bankers Association and is currently serving as vice chairmanChairman of its taxation committee, is a member of the American Bankers Association Government Relations Council, and served on the Central Michigan American Red Cross boardBoard for over 20 years.
Director Nominees for Terms Ending in 2017
Dr. Jeffrey J. Barnes (age 51) has been a director of the Bank since 2007 and of Isabella Bank Corporation since 2010. Dr. Barnes is a physician and shareholder in Lansing Ophthalmology PC. He is a former member of the Central Michigan Community Hospital Board of Directors.
G. Charles Hubscher (age 60) has been a director of the Bank since 2004 and of Isabella Bank Corporation since 2010. Mr. Hubscher is President of Hubscher and Son, Inc., a sand and gravel producer. He is a director of the National Stone and Gravel Association, the Michigan Aggregates Association, serves on the Board of Trustees for the Mt. Pleasant Area Community Foundation, and is a member of the Zoning Board of Appeals for Deerfield Township.
David J. Maness (age 60) has been a director of the Bank since 2003 and of Isabella Bank Corporation since 2004. Mr. Maness has served as chairman of the board for the Corporation and the Bank since 2010. He is President of Maness Petroleum, a geological and geophysical consulting services company. Mr. Maness is currently serving as a director for the Michigan Oil & Gas Association, and he previously served on the Mt. Pleasant Public Schools Board of Education.
W. Joseph Manifold (age 62) has been a director of Isabella Bank Corporation since 2003 and of the Bank since January 1, 2010. Mr. Manifold is CFO of Federal Broach Holdings LLC, a holding company which operates several manufacturing companies. Previously, he was a senior manager with Ernst & Young Certified Public Accounting firm working principally on external bank audits and was CFO of the Delfield Company. Prior to joining the Board, Mr. Manifold served on the Isabella Community Credit Union Board and was Chairman of the Mt. Pleasant Public Schools Board of Education.
Current Directors with Terms Ending in 2015
Richard J. Barz (age 65)68) has been a director of the Bank since 2000 and of Isabella Bank Corporation since 2002. Mr. Barz retired as Chief Executive Officer of Isabella Bank Corporation on December 31, 2013 after over 41 years of service with the Corporation. Mr. Barz was Chief Executive Officer of Isabella Bank Corporation sincefrom 2010 to 2013 and President and CEOChief Executive Officer of the Bank from 2001 to July 2012. Mr. Barz has been very active in community organizations and events. He is a past chairmanChairman of the Central Michigan Community Hospital Board of Directors, is the current chairmanChairman of the Middle Michigan Development

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Corporation Board of Directors, and serves on several boards and committees for Central Michigan University and various volunteer organizations throughout mid-Michigan.

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Jae A. Evans (age 57)60) was appointed a director of Isabella Bank Corporation and the Bank and elected Chief Executive Officer of Isabella Bank Corporation effective January 1, 2014. Mr. Evans has been employed by the Corporation since 2008 and has over 3640 years of banking experience. He served as Chief Operations Officer of the Bank throughfrom June 2011 to December 31, 2013 and President of the Greenville Division of the Bank from January 1, 2008 to June 2011. Mr. Evans iscurrently serves as a board member for The Community Bankers of Michigan, Art Reach of Mid Michigan, McLaren Central Michigan, is an incoming board member of the Central Michigan University Advancement Board, and is the chairChair of the EightCAP, Inc. governing board. MrMr. Evans is also past vice-chairVice Chair of the Carson City Hospital, was president of the Greenville Rotary Club, and just completed his term as chairpast Chair of The Community Bankers of Michigan.
W. Michael McGuire (age 64)67) has been a director of Isabella Bank Corporation since 2007 and of the Bank since January 1, 2010. Mr. McGuire, an attorney, retired in August 2013 as the Director of the Office of the Corporate Secretary and Assistant Secretary of The Dow Chemical Company, a manufacturer of chemicals, plastics and agricultural products, headquartered in Midland, Michigan.
Current Directors with Terms Ending in 20162019
Thomas L. Kleinhardt (age 59)62) has been a director of the Bank since 1998 and of Isabella Bank Corporation since 2010. Mr. Kleinhardt is President of McGuire Chevrolet, is active in the Clare Kiwanis Club, and coachesthe former coach of the girls Varsity Basketball team atfor both Farwell High School and Clare High School.
Joseph LaFramboise (age 64)67) has been a director of the Bank since 2007 and of Isabella Bank Corporation since 2010. He is a retired Sales and Marketing Executive of Ford Motor Company. Mr. LaFramboise is an Ambassador of Eagle Village in Evart, Michigan.
Sarah R. Opperman (age 54)57) has been a director of the Bank and Isabella Bank Corporation since July 1, 2012. Ms. Opperman is the owner of Opperman Consulting, LLC, which provides public affairs counsel.LLC. She previously was previously employed for 28 years by The Dow Chemical Company, where she held leadership roles in public and government affairs. She was inducted into the CMU Journalism Hall of Fame andMs. Opperman is a recipientmember of the Dow Genesis Award for Excellence in People Development. Ms. OppermanCentral Michigan University Advancement Board.  She also is Chair of the MidMichigan Health Foundation and serves as Treasurer on the CMUUnited Way of Midland County Board.
Gregory V. Varner (age 62) was appointed to the Boards of the Corporation and the Bank on August 26, 2015. Mr. Varner is the Research Director for the Michigan Bean Commission and currently serves as the Chair for the Breckenridge Division Board of Trustees, the CMU Development Board, the MidBank. He received a Bachelor of Science in Agricultural Education and a Master of Science in Crop Science from Michigan Health Corporate Board of Directors, and the Mid Michigan Health Fund Development Committee. She also served on the CMU Research Corporation Board of Directors.State University.
Each of the directors has been engaged in their stated professions for more than five years.years unless otherwise stated.
Other Named Executive Officers
Steven D. Pung (age 64), President of the Bank and a member of the Board of Directors of Financial Group Information Services (a wholly owned subsidiary of Isabella Bank Corporation) has been employed by the Bank since 1979. Jerome E. Schwind (age 47)50), Executive Vice President and Chief Operating Officer of the Bank, has been employed by the Bank since 1999. David J. Reetz (age 53)56), Senior Vice President and Chief Lending Officer of the Bank, has been employed by the Bank since 1987. Peggy L. Wheeler (age 57), Senior Vice President of Operations of the Bank, has been employed by the Bank since 1977.
All officers serve at the pleasure of the Board.
Proposal 2-Advisory2 - Advisory Vote on Executive Compensation
The compensation of the Corporation’s principal executive officer, retired principal executive officer, principal financial officer, and three other most highly compensated executive officers (named executive officers) is described below under the headings “Compensation Discussion and Analysis” and “Executive Officers”. Shareholders are urged to read these sections of this proxy statement, which discussesdiscuss the Corporation’s compensation policies and procedures with respect to its named executive officers.

In accordance with Section 14A of the Securities Exchange Act of 1934, as amended (the "Exchange Act") shareholders will be asked at the Annual Meeting to provide their support with respect to the compensation of the Corporation’s named executive officers by voting on the following advisory, non-binding resolution:
RESOLVED, that the shareholders of Isabella Bank Corporation approve, on an advisory basis, the compensation paid to the Corporation’s named executive officers, as disclosed pursuant to the compensation disclosure rules of the Securities and Exchange Commission, including the Compensation Discussion and Analysis, compensation tables and narrative discussion, for purposes of Section 14A of the Securities Exchange Act of 1934.

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The advisory vote on executive compensation, commonly referred to as a say-on-pay advisory vote, is non-binding on the Board of Directors.  Although non-binding, the Board of Directors and the Compensation and Human Resource Committee value constructive dialogue on executive compensation and other important governance topics with the Corporation’s shareholders and encourage all shareholders to vote their shares on this matter.  The Board of Directors and the Compensation and Human Resource Committee will review the voting results and take them into consideration when making future decisions regarding executive compensation programs. The Board believes shareholders should consider the following in determining whether to approve this proposal:

The Corporation is not required to provide any severance or termination pay or benefits to any named executive officer;
Each member of the Compensation and Human Resource Committee is independent under the applicable standards of the NASDAQ Stock Market Marketplace Rules;listing requirements;
The Compensation and Human Resource Committee continually monitors the Corporation’s performance and adjusts compensation practices accordingly; and
The Compensation and Human Resource Committee regularly assesses the Corporation’s individual and total compensation programs against peer companies, the general marketplace and other industry data points.
Unless otherwise instructed, validly executed proxies will be voted “FOR” this resolution.

We unanimously recommend that you vote FOR the nonbinding advisory resolution approving the executive compensation of the Corporation’s named executive officers.
Proposal 3 - Frequency of Advisory Votes On Executive Compensation
In accordance with Section 14A of the Exchange Act, the Corporation is providing a shareholder advisory vote to approve the compensation of our named executive officers (the say-on-pay advisory vote in Proposal 2 above) this year and will do so at least once every three years thereafter. Pursuant to Section 14A of the Exchange Act, at the 2017 Annual Meeting, the Corporation is also asking shareholders to vote on whether future say-on-pay advisory votes on executive compensation should occur every year, every two years or every three years.
After careful consideration, the Board of Directors recommends that future shareholder say-on-pay advisory votes on executive compensation be conducted every three years.
Although the Board of Directors recommends a say-on-pay vote every three years, shareholders will be able to specify one of four choices for this proposal on the proxy card: one year, two years, three years or abstain. Shareholders are not voting to approve or disapprove the Board of Directors’ recommendation. Although this advisory vote regarding the frequency of say-on-pay votes is non-binding on the Board of Directors, the Board of Directors and the Compensation and Human Resource Committee will review the voting results and take them into consideration when deciding how often to conduct future say-on-pay shareholder advisory votes.
Unless otherwise instructed, validly executed proxies will be voted “FOR” the Three Year frequency option.
We unanimously recommend that you vote FOR the Three Year frequency option.

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Corporate Governance
Director Independence
We have adopted the director independence standards as defined under of the NASDAQ Stock Market Marketplace Rules.listing requirements. We have determined that Dr. Jeffrey J. Barnes, Richard J. Barz, G. Charles Hubscher, Thomas L. Kleinhardt, Joseph LaFramboise, David J. Maness, W. Joseph Manifold, W. Michael McGuire, and Sarah R. Opperman, and Gregory V. Varner are independent directors. Former directors Sandra L. Caul and Wilson C. Lauer, were also determined to be independent directors. Richard J. Barz is not independent as he retired as CEO of Isabella Bank Corporation on December 31, 2013. Jae A. Evans is not independent as he is employed as CEO of Isabella Bank Corporation. Dennis P. Angner is not independent as he is employed as President and CFO of Isabella Bank Corporation.
Board Leadership Structure and Risk Oversight
Our Governance Policy provides that only directors who are deemed to be independent as set forth by the NASDAQ Stock Market Marketplace Ruleslisting requirements and SEC rules are eligible to hold the office of chairperson. Additionally, the chairpersons of Board established committees must also be independent directors. It is our belief that having a separate chairperson and CEO best serves the interest of the shareholders. The Board elects its chairperson at the first Board meeting following the annual meeting.Annual Meeting. Independent members of the Board meet without inside directors at least twice per year.
Management is responsible for our day-to-day risk management and the Board’s role is to engage in informed oversight. The Board utilizes committees to oversee risks associated with compensation, governance, and governance. Financial Group Information Services, our information processing subsidiary, is responsible for overseeing risks associated with information technology. The Isabella Bank Board of Directors is responsible for overseeing credit, investment, interest rate, and trust risks. The chairpersons of the respective boards or committees report on their activities on a regular basis.
Our Audit Committee is responsible for overseeing the integrity of our consolidated financial statements, the independent auditors’ qualifications and independence, the performance of our internal audit function and those of independent auditors, our system of internal controls, our financial reporting and system of disclosure controls, and our compliance with legal and regulatory requirements and with our Code of Business Conduct and Ethics.

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Committees of the Board of Directors and Meeting Attendance
The Board met 1213 times during 2013. All2016 and all incumbent directors attended 75% or more of the meetings held in 2013.for which they were a member. The Board has an Audit Committee, a Nominating and Corporate Governance Committee, and a Compensation and Human Resource Committee, and an Information Technology Committee.
Audit Committee
The Audit Committee is composed of independent directors. Information regarding the functions performed by the Audit Committee, its membership, and the number of meetings held during the year, is set forth in the “Audit Committee Report” included elsewhere in this proxy statement.Proxy Statement. The Audit Committee is governed by a written charter approved by the Board, which is available on the Bank’s website: www.isabellabank.com.
In accordance with the provisions of the Sarbanes-Oxley Act of 2002, directors Manifold and McGuire meet the requirements of Audit Committee Financial Expert and have been so designated. The Audit Committee also consists of directors Barnes, Hubscher,Kleinhardt, LaFramboise, and Maness (ex-officio)., and Opperman.
Nominating and Corporate Governance Committee
We have a standing Nominating and Corporate Governance Committee consisting of independent directors. The Committee consists of directors LaFramboise,Barnes, Hubscher, Maness (ex-officio), Manifold, and McGuire. The Nominating and Corporate Governance Committee held one meetingtwo meetings in 2013,2016, with all directorscommittee members attending the meeting.each meeting for which they were a member. The Board has approved a Nominating and Corporate Governance Committee Charter which is available on the Bank’s website: www.isabellabank.com.
The Nominating and Corporate Governance Committee is responsible for evaluating and recommending individuals for nomination to the Board for approval. TheThis Committee, in evaluating nominees, including incumbent directors and any nominees put forth by shareholders, considers business experience, skills, character, judgment, leadership experience, and their knowledge of the geographical markets, business segments or other criteria the Committee deems relevant and appropriate based on the current composition of the Board. TheThis Committee considers diversity in identifying members with respect to our geographical markets served and the business experience of the nominee.
The Nominating and Corporate Governance Committee will consider, as potential nominees, persons recommended by shareholders. Recommendations should be submitted in writing to the Secretary of the Corporation, 401 N. Main St., Mt. Pleasant, Michigan 48858 and include the shareholder’s name, address and number of shares of the Corporation owned by the

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shareholder. The recommendation should also include the name, age, address and qualifications of the candidate. Recommendations for the 20152018 Annual Meeting of Shareholders should be delivered no later than December 1, 2014.November 20, 2017. The Nominating and Corporate Governance Committee evaluates all potential director nominees in the same manner, whether the nominations are received from a shareholder, or otherwise.
Compensation and Human Resource Committee
The Compensation and Human Resource Committee is responsible for reviewing and recommending to ourthe Board the compensation of the Chief Executive Officer and other executive officers, benefit plans, and the overall percentage increase in salaries. The committeeThis Committee consists of independent directors Barnes, Barz, Hubscher, Kleinhardt, LaFramboise, Maness, Manifold, McGuire, Opperman, and Opperman.Varner. The committeeCompensation and Human Resource Committee held two meetingmeetings during 20132016 with all directorscommittee members in attendance.attendance for which they were a member. This Committee is governed by a written charter approved by the Board that is available on the Bank’s website: www.isabellabank.com.
Information Technology Committee
The Information Technology Committee is responsible for reviewing and monitoring information technology risks. Oversight includes customer data, physical and information security, disaster planning, equipment and programs, and the related audit process. This Committee consists of directors Angner, Evans, LaFramboise, Maness (ex-officio), Manifold, and McGuire. The Information Technology Committee held three meetings during 2016 and all committee members attended 75% or more of the meetings for which they were a member.
Communications with the Board
Shareholders may communicate with the Board by sending written communications to the attention of the Corporation’s Secretary, Isabella Bank Corporation, 401 N. Main St., Mt. Pleasant, Michigan 48858.48858. Communications will be forwarded to the Board or the appropriate committee, as soon as practicable.
Code of Ethics
Our Code of Business Conduct and Ethics, which is applicable to the CEO and CFO, is available on the Bank’s website: www.isabellabank.com.


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Audit Committee Report
The Audit Committee oversees the financial reporting process on behalf of the Board. The 20132016 Audit Committee consisted of directors Barnes, Hubscher,Kleinhardt, LaFramboise, Maness (ex-officio), Manifold, McGuire, and McGuire.Opperman.
The Audit Committee is responsible for pre-approving all auditing services and permitted non-audit services by our independent auditors, or any other auditing or accounting firm, if those fees are reasonably expected to exceed 5.0% of the current year agreed upon fee for independent audit services. The Audit Committee has established general guidelines for the permissible scope and nature of any permitted non-audit services in connection with its annual review of the audit plan and reviews the guidelines with the Board.
Management has the primary responsibility for the consolidated financial statements and the reporting process including the systems of internal controls. In fulfilling its oversight responsibilities, the Audit Committee reviewed the audited consolidated financial statements in the Annual Report with management including a discussion of the quality, not just the acceptability, of the accounting principles, the reasonableness of significant judgments, and the clarity of disclosures in the consolidated financial statements. The Audit Committee also reviewed with management and the independent auditors, management’s assertion on the design and effectiveness of our internal control over financial reporting as of December 31, 2013.2016.
The Audit Committee reviewed with our independent auditors, who are responsible for expressing an opinion on the conformity of those audited consolidated financial statements with accounting principles generally accepted in the United States of America, their judgments as to the quality, not just the acceptability, of our accounting principles and such other matters as are required to be discussed with the Audit Committee by the standards of the Public Company Accounting Oversight Board (United States), including those described in Auditing Standard No. 16 “Communications with Audit Committees”, as may be modified or supplemented. In addition, the Audit Committee has received the written disclosures and the letter from the independent auditors required by PCAOB Rule 3526, Communication with Audit Committees Concerning Independence, as may be modified or supplemented, and has discussed with the independent auditorauditors the independent auditors’ independence.
The Audit Committee discussed with our internal and independent auditors the overall scope and plans for their respective audits. The Audit Committee meets with the internal and external independent auditors, with and without management present, to discuss the results of their examinations, their evaluations of our internal controls, and the overall quality of our financial reporting process. The Audit Committee held five meetings during 2013,2016, and all committee members attended 75% or more of the meetings.meetings for which they were a member.
In reliance on the reviews and discussions referred to above, the Audit Committee recommended to the Board of Directors (and the Board has approved) that the audited consolidated financial statements be included in the Annual Report on Form 10-K for the year ended December 31, 20132016 for filing with the Securities and Exchange Commission. The Audit Committee has appointed Rehmann Robson LLC as the independent auditors for the 20142017 audit.
Respectfully submitted,
W. Joseph Manifold, Audit Committee Chairperson
Dr. Jeffrey J. Barnes
G. Charles Hubscher
Thomas L. Kleinhardt
Joseph LaFramboise
David J. Maness (ex-officio)
W. Michael McGuire

Sarah R. Opperman


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Compensation Discussion and Analysis
The Compensation and Human Resource Committee is responsible for reviewing and recommending to the Board the compensation and benefits for the CEO, President and CFO, and executive officers. TheThis Committee evaluates and approves our executive officer and senior management compensation plans, policies, and programs. The CEO conductsrecommends to this Committee an appropriate salary for the CFO and named executive officers based on their annual performance reviews for named executive officers, excluding himself and recommends an appropriate salary to the Committee based on the performance review and the officer’sofficers' years of service along with competitive market data.
Compensation Objectives
The Compensation and Human Resource Committee considers asset growth with the safety and soundness objectives and earnings per share to be the primary ratios in measuring financial performance. Our philosophy is to maximize long-term return to shareholders consistent with safe and sound banking practices, while maintaining the commitment to superior customer and community service. We believe that the performance of executive officers in managing the business should be the basis for determining overall compensation. Consideration is also given to overall economic conditions and current competitive forces in the market place. The objectives of thethis Committee are to effectively balance salaries and potential compensation to an officer’s individual management responsibilities and encourage each of them to realize their potential for future contributions. The objectives are designed to attract and retain high performing executive officers who will provide leadership while attaining earnings and performance goals.
What the Compensation Programs are Designed to Reward
Our compensation programs are designed to reward dedicated and conscientious employment, loyalty in terms of continued employment, attainment of job related goals and overall profitability. In measuring an executive officer’s contributions, the Compensation and Human Resource Committee considers numerous factors including, among other things, our growth in terms of asset size and increase in earnings per share. In rewarding loyalty and long-term service, we provide attractive retirement benefits.
Review of Risks Associated with Compensation Plans
Based on an analysis conducted by management and reviewed by the Compensation and Human Resource Committee, we do not believe that compensation programs for employees are reasonably likely to have a material short or long term adverse effect on our operating results.
Use of Consultants
In 2012,2016 and 2014, the Compensation and Human Resource Committee directly engaged the services of Blanchard Consulting Group, an independent compensation consulting firm, to assist with a total compensation review for the top threeCEO, President and CFO, Bank President, and executive officers of the Corporation (CEO, President and CFO, and Bank President).Corporation. Blanchard Consulting Group does not perform any additional services for us or any members of senior management. In addition, Blanchard Consulting Group does not have any other personal or business relationships with any Board members or officers. During 20132015, the Compensation and 2011, theHuman Resource Committee did not employ any services of outside compensation or benefit consultants to assist it in compensation-relatedcompensation related initiatives.
Elements of Compensation
Our executive compensation program has consisted primarily of base salary and benefits, annual performance incentives, benefits and perquisites, and participation in our retirement plans.
How Elements Fit into Overall Compensation Objectives
Individual elements of our compensation objectives are structured to reward strong financial performance, continued service, and to incentivize our leaders to excel in the future. We continually review our compensation objectives to ensure that they are sufficient to attract and retain exceptional officers.
Why Each of the Elements of Compensation is Chosen and How We Determine Amounts for Each Element
Base Salaries, which include director fees for certain executive officers, are set to provide competitive levels of compensation to attract and retain officers with strong leadership skills. Each officer’s performance, current compensation, and responsibilities are considered by the Compensation and Human Resource Committee when establishing base salaries. We also believe it is best to pay a sufficient base salary because we believe an over-reliance on equity incentive compensation could potentially skew incentives toward short-term maximization of shareholder value as opposed to building long-term shareholder

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value. Competitive base salary encourages management to operate in a safe and sound manner even when incentive goals may prove unattainable.
The Compensation and Human Resource Committee’s approach to determining the annual base salary of executive officers is to offer competitive salaries in comparison with other comparablesimilar financial institutions. In prior years, the2016 and 2014, this Committee utilized both an independent

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compensation consultant, Blanchard Consulting Group, and a survey prepared by the Michigan Bankers Association of similar sized Michigan based financial institutions. The independent compensation consultant established a benchmark peer group of 1525 midwest financial institutions in non-urban areas with comparable average assets size ($900 million—1.2 billion—$23 billion), number of branch locations, return on average assets, (year-ended 2011 ROAA of .38% or greater), and nonperforming assets. The Michigan Bankers Association 20122016 compensation survey was based on the compensation information provided by these organizations for 2011.2015. Specific factors used to decide where an executive officer’s salary should be within the established range include the historical financial performance, financial performance outlook, years of service, and job performance. The Compensation and Human Resource Committee targeted total compensation for the CEO, the President & CFO, and Bank President to approximateusing ranges obtained from the median of the range obtained fromindependent compensation consultant, the Michigan Bankers Association compensation survey as well as any ranges obtained from the independent compensation consultant.other published surveys and resources. Compensation for other named executive officers was based on the ranges provided by the Michigan Bankers Association survey. The Michigan Bankers Association survey was utilized in 2015 as well.
Annual Performance Incentives are used to reward executive officers based on our overall financial performance. This element of the compensation program is included in the overall compensation in order to reward employees above and beyond their base salaries when our performance and profitability exceed established annual targets. The inclusion of this modest incentive encourages management to be creative and diligent in managing to achieve specific financial goals without incurring inordinate risks. Annual performance incentives paid in 20132016 were determined by reference to sevenfour performance measures that related to services performed in 2012.2015. The maximum cash award that may be granted to each eligible employee equals 10% of the employee’s base salary (the “Maximum Award”).
The payment of 35% of the 10% Maximum Award (“personal performance goals”) is based on the achievement of goals set for each individual. An analysis is conducted by the CEO. The CEO makes a recommendation to the Compensation and Human Resource Committee for the appropriate amount for each individual executive officer. TheThis Committee reviews, modifies if necessary, and approves the recommendations of the CEO. TheThis Committee also reviews the performance of the CEO.
The Compensation and Human Resource Committee uses the following quantitative and qualitative factors as quantitative measures of corporate performance in determining annual cash bonus amounts to be paid:
Peer group financialDevelopment and implementation of strategic initiatives;
Results of actual annual operating performance compensation
1 and 5 year shareholder returns
Earnings per share and earnings per share growth
Budgeted as compared to actual annual operating performancebudget;
Community and industry involvementinvolvement;
Results of audit and regulatory examsexams; and
Other strategic goals as established by the BoardBoard.
Each of the executive officers who were eligible to participate in 20122015 accomplished their personal performance goals and were accordingly paid 35% of the 20122015 Maximum Award in 2013.2016.
The payment of the remaining 65% of the 10% Maximum Award (“corporate performance goals”) was conditioned on the achievement of targets in the following sixfour categories:
Earnings per share (weighted 40%).;
Net operating expenses to average assets (weighted 15%20%).;
Fully Taxable Equivalent (“FTE”) net interest margin, excluding loan fees (weighted 10%).
In-marketIn market deposit growth (weighted 10%20%).; and
Loan growth (weighted 15%20%).
Exceeding peer group return on average assets (weighted 10%).

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The following chart provides the 20122015 target for each corporate performance goal as well asand the performance attained for each target.
  2015 Targets 2015 Performance (1) Target % Obtained
Target25.00% 50.00% 75.00% 100.00% 
Earnings per share$1.68
 $1.71
 $1.73
 $1.76
 $1.95
 100%
Net operating expenses to average assets1.70% 1.68% 1.66% 1.64% 1.66% 75%
In market deposit growth3.42% 3.67% 3.92% 4.17% 0.83% —%
Loan growth4.20% 4.45% 4.70% 4.95% 1.45% —%
(1) Adjusted for incentive calculation measures.

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2012 Targets 2012 Performance (1) Target % Obtained
Target25.00% 50.00% 75.00% 100.00% 
Earning per share$1.50
 $1.53
 $1.55
 $1.57
 $1.59
 100%
Net operating expenses to average assets1.60% 1.57% 1.54% 1.51% 1.45% 100%
FTE Net Interest Margin3.46% 3.48% 3.50% 3.52% 3.46% 25%
In market deposit growth4.50% 5.00% 5.50% 6.00% 6.10% 100%
Loan growth3.00% 3.50% 4.00% 4.50% 1.46% —%
Exceeding peer group return on average assets1.32% 1.35% 1.39% 1.42% 1.37% 50%

(1)Adjusted for incentive calculation measures.
In 2015, we adopted the stock award incentive plan, an equity-based bonus plan. Under the plan, we may award stock bonuses to the CEO, President and CFO, and the Bank’s president. The plan authorizes the issuance of vested stock to eligible employees worth up to 10% of the employee’s annualized base wages, on a calendar year basis. The plan imposes several conditions on the issuance of stock awards and transfers of shares granted under the plan are restricted. The stock bonuses awarded in 2016 were determined by reference to the same four performance measures used for the annual performance incentives that related to 2015 results and also the achievement of personal goals.
Benefits and Perquisites.    Executive officers are eligible for all of the benefits made available to full-time employees (such as health insurance, group term life insurance and disability insurance) on the same basis as other full-time employees and are subject to the same sick leave and other employee policies.
We also provide our executive officers with certain additional perquisites, which we believe are appropriate in order to attract and retain the proper quality of talent for these positions and to recognize that similar executive perquisites are commonly offered by comparable financial institutions. We maintain a plan for qualified officers to provide death benefits to each participant.participant which was amended in 2015 to modify certain participants' benefits and to update certain plan provisions. Insurance policies, designed primarily to fund death benefits, have been purchased on the life of each participant with the Bank as the sole owner and beneficiary of the policies. We believe that perquisites provided to our executive officers in 20132016 represented a reasonable percentage of each executive’s total compensation package and are consistent, in the aggregate, with perquisites provided to executive officers of comparable financial institutions. A description and the cost of these perquisites are included in footnote 12 in the “Summary“Summary Compensation Table”Table” appearing on page 12 and in13, the table outlining the change in pension value on page 14, and non-qualified deferred compensation earnings tablethe “Nonqualified Deferred Compensation Table” appearing on page 13.15.
Retirement Plans.    Our retirement plans are designed to assist executives in providing themselves with a financially secure retirement. The retirement plans include a 401(k) plan, a frozen defined benefit pension plan, a frozen non-leveraged employee stock ownership plan (ESOP)(“ESOP”), and a retirement bonus plan, a supplemental executive retirement plan, and a stock award incentive plan.
We haveprovide a 401(k) plan, in which substantially all employees are eligible to participate. Employees may contribute up to 50%100% of their compensation subject to certain limits based on federal tax laws. The 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 and 2011, 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.
Our defined benefit pension plan was curtailed effective March 1, 2007 and the current participants’ accrued benefits were frozen as of that date. Participation in the plan was limited to eligible employees as of December 31, 2006.
Our non-leveraged ESOP was frozen effective December 31, 2006 to new participants. Contributions to the plan are discretionary and approved by the Board. On December 21, 2016, the Board approved the termination of the ESOP effective December 31, 2016. Actual dissolution of the ESOP is anticipated to occur in mid-2017.
The retirement bonus plan is a nonqualified plan of deferred compensation benefits for eligible employees effective January 1, 2007. Benefit amounts are determined pursuant to the payment schedule adopted at the sole and exclusive discretion of the Board.
In 2015 we adopted the supplemental executive retirement plan, a nonqualified deferred compensation plan, authorizing annual and discretionary credits to a participant's plan account. Credits are pursuant to a participant's agreement which sets forth the amount and timing of any annual credits and the vesting, payment, “clawback” and other terms to which the credits are subject.

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Compensation and Human Resource Committee Report
The Compensation and Human Resource Committee Report does not constitute soliciting material and should not be deemed filed or incorporated by reference into any other Corporation filing under the Securities Act of 1933 or the Securities Exchange Act, of 1934, except to the extent the Corporation specifically incorporates this Report by reference therein.
The Compensation and Human Resource Committee, which includes all of the independent directors of the Board, has reviewed and discussed the Compensation Discussion and Analysis required by Item 402(b) of SEC Regulation S-K with management, and based on such review and discussion, the Compensation and Human Resource Committee recommended to the Board that the Compensation Discussion and Analysis be included in this Proxy Statement and the Annual Report on Form 10-K.*
Submitted by the Compensation and Human Resource Committee of the Board:
David J. Maness, Chairperson
Dr. Jeffrey J. Barnes
G. Charles Hubscher
Thomas L. Kleinhardt
Joseph LaFramboise
W. Joseph Manifold
W. Michael McGuire
Sarah R. Opperman
Gregory V. Varner

































* While Mr. Barz is an independent director and member of the Compensation and Human Resource Committee, he did not participate in the Compensation and Human Resource Committee review, discussion or recommendation with respect to matters covered by the Compensation and Human Resource Committee's report in this Proxy Statement because he did not become a member of the Committee until January of 2017.

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Executive Officers
Executive officers are compensated in accordance with their employment with the applicable entity. The following table shows information on compensation earned in each of the last three fiscal years ended December 31, 2013,2016, for the CEO, the retired CEO, the CFO, and our three other most highly compensated executive officers.
Summary Compensation Table
Name and principal positionYear Salary
($)		 Bonus
($)		 Change in pension value and non-qualified deferred compensation earnings
($)		 All other compensation
($)(1)		 Total
($)		Year Salary
($)(1)(5)		 Bonus
($)		 Stock Awards
($)		 Change in pension value and nonqualified deferred compensation earnings
($)(6)		 All other compensation
($)(2)		 Total
($)
Richard J. Barz2013 $406,522
 $28,358
 $(2,860) $35,771
 $467,791
CEO (retired)2012 396,325
 25,106
 123,578
 35,615
 580,624
Isabella Bank Corporation2011 375,225
 26,535
 181,143
 37,627
 620,530
          
Jae A. Evans (2)2013 $176,379
 $13,320
 $—
 $30,832
 $220,531
Jae A. Evans2016 $364,473
 $21,225
 $13,225
 $89,556
 $48,015
 $536,494
CEO2012 

 

 

 

 

2015 327,548
 17,894
 —
 77,800
 40,629
 463,871
Isabella Bank Corporation2011 

 

 

 

 

2014 302,472
 10,698
 —
 65,000
 36,703
 414,873
                      
Dennis P. Angner2013 $354,522
 $25,121
 $9,918
 $29,775
 $419,336
Dennis P. Angner (3)2016 $360,722
 $21,791
 $13,572
 $(525,749) $31,509
 $(98,155)
President and CFO2012 357,335
 23,628
 131,266
 28,208
 540,437
2015 353,956
 20,818
 —
 85,541
 30,014
 490,329
Isabella Bank Corporation2011 355,625
 26,100
 163,672
 28,542
 573,939
2014 365,542
 19,809
 —
 259,016
 26,582
 670,949
                      
Steven D. Pung2013 $227,675
 $6,003
 $6,629
 $29,589
 $269,896
President2012 195,128
 13,333
 67,361
 30,111
 305,933
Isabella Bank2011 167,362
 12,719
 98,915
 27,732
 306,728
          
Jerome E. Schwind (2)2013 $152,017
 $10,326
 $(9,000) $25,474
 $178,817
Executive Vice President and COO2012 

 

 

 

 

Jerome E. Schwind2016 $270,832
 $14,943
 $—
 $20,532
 $31,466
 $337,773
President and COO2015 217,992
 13,839
 —
 (2,000) 31,484
 261,315
Isabella Bank2011 

 

 

 

 

2014 219,176
 9,316
 —
 16,000
 28,766
 273,258
                      
David J. Reetz2013 $133,537
 $10,598
 $(9,778) $16,604
 $150,961
2016 $160,166
 $10,642
 $—
 $41,777
 $25,497
 $238,082
Sr. Vice President and CLO2012 129,397
 9,708
 45,361
 17,138
 201,604
2015 155,501
 10,082
 —
 17,417
 22,747
 205,747
Isabella Bank2011 125,640
 8,612
 61,944
 15,077
 211,273
2014 155,088
 8,981
 —
 90,237
 17,639
 271,945
            
Peggy L. Wheeler (4)2016 $138,020
 $9,481
 $—
 $29,518
 $14,635
 $191,654
Sr. Vice President of Operations2015 126,395
 8,119
 —
 9,015
 14,762
 158,291
Isabella Bank 

 
 
 

 

 

(1)
Salary amounts are paid on a bi-weekly basis which typically consists of 26 regular pay cycles during the calendar year. During the calendar year 2014, there was an additional bi-weekly pay cycle resulting in a total of 27 pays.
(2)
For all named executives all other compensation includes 401(k) matching contributions. For Richard J. Barz, Jae A. Evans, Steven D. Pung, andJerome E. Schwind, David J. Reetz, and Peggy L. Wheeler, this also includes club dues and auto allowance. For Dennis P. Angner, and Jerome E. Schwind, this also includes auto allowance.
(2)
(3)
Changes in pension value and nonqualified deferred compensation earnings in 2016 are the result of execution of domestic relations order for former spouse.
(4)
Not a named executive officer prior to 2013.2015.
(5)
Executive officer salary includes compensation voluntarily deferred under our 401(k) plan. Director and advisory board fees are also included and are displayed in the following table for each the last three fiscal years ended December 31, 2016:
Executive officer salary includes compensation voluntarily deferred under our 401(k) plan. Director and advisory board fees are also included and are displayed in the following table for each the last three fiscal years ended December 31, 2013:
Director and advisory board fees ($)Director and advisory board fees ($)
Name and principal position2013 2012 2011
Richard J. Barz$46,525
 $51,325
 $50,225
Name2016 2015 2014
Jae A. Evans675
 
 
$27,550
 $27,550
 $27,300
Dennis P. Angner46,525
 51,325
 49,625
43,475
 45,950
 45,700
Steven D. Pung12,675
 900
 900
Jerome E. Schwind1,200
 
 
23,500
 —
 —
David J. ReetzN/A
 N/A
 N/A
—
 —
 —
Peggy L. Wheeler—
 —
 —
(6)
Included in the change in pension value and nonqualified deferred compensation earnings is the aggregate non-cash change in the actuarial present value of the noted executive’s accumulated benefit under the Isabella Bank Corporation Pension Plan, the non-cash change in the Isabella Bank Corporation Retirement Bonus Plan, and the non-cash change in the Isabella Bank Corporation Supplemental Executive Retirement Plan ("SERP"). The following table provides the change in

The change in pension value and non-qualified deferred compensation earnings, listed in the summary compensation table, represents the aggregate non-cash change in the actuarial present value of the noted executive’s accumulated benefit under the Isabella Bank Corporation Pension Plan and also includes the non-cash change in the Isabella Bank Corporation Retirement

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Bonus Plan. The following table provides the change in values for the last three fiscal years ended December 31, 2013:2016:
 Pension plan ($) Retirement plan ($) SERP plan ($)
Name2016 2015 2014 2016 2015 2014 2016 2015 2014
Jae A. Evans (1)$—
 $—
 $—
 $—
 $—
 —
 $89,556
 $77,800
 $65,000
Dennis P. Angner (2)(304,000) (17,000) 173,000
 (221,749) 102,541
 86,016
 —
 —
 —
Jerome E. Schwind3,000
 (2,000) 16,000
 7,332
 —
 —
 10,200
 —
 —
David J. Reetz13,000
 (9,000) 66,000
 28,777
 26,417
 24,237
 —
 —
 —
Peggy L. Wheeler11,000
 (8,000) —
 18,518
 17,015
 —
 —
 —
 —
(1)
Jae A. Evans' employment began in 2008 which makes him ineligible for both the pension plan and retirement bonus plan.
(2)
Changes in pension plan and retirement plan values during 2016 are the result of execution of domestic relations order for former spouse.
Grants of Plan-Based Awards Table
The following table provides information on grants of plan-based awards under the stock award incentive plan during 2016:
 Pension plan ($) Retirement plan ($)
Name and principal position2013 2012 2011 2013 2012 2011
Richard J. Barz$(47,000) $83,000
 $143,000
 $44,140
 $40,578
 $38,143
Jae A. EvansN/A
 

 

 N/A
 

 

Dennis P. Angner(70,000) 64,000
 109,000
 79,918
 67,266
 54,672
Steven D. Pung(29,000) 44,000
 77,000
 35,629
 23,361
 21,915
Jerome E. Schwind(9,000) 
 
 N/A
 

 

David J. Reetz(32,000) 25,000
 43,000
 22,222
 20,361
 18,944
NameGrant date Number of shares of stock awarded Grant date fair value of stock awards
Jae A. Evans3/24/2016 482 $13,225
Dennis P. Angner3/24/2016 494 13,572
Options Exercised and Stock Vested Table
The following table provides information on vested shares pursuant to the stock award incentive plan as of December 31, 2016:
NameNumber of shares acquired on vesting Value Realized on Vesting
Jae A. Evans482 $13,225
Dennis P. Angner494 13,572
Pension Benefits
The following table indicates the present value of accumulated benefits as of December 31, 20132016 for each named executive officer in the summary compensation table.
NamePlan name Number of years of vesting service as of
01/01/13 (#)		 Present value of accumulated benefit
($)		 Payments during last fiscal yearPlan name Number of years of vesting service as of
01/01/16		 Present value of accumulated benefit
($)		 Payments during last fiscal year
Richard J. BarzIsabella Bank Corporation Pension Plan 42 $941,000
 $—

Isabella Bank Corporation Retirement Bonus Plan 42 393,792
 —
Jae A. EvansIsabella Bank Corporation Pension Plan N/A 

 

Isabella Bank Corporation Pension Plan N/A $—
 $—

Isabella Bank Corporation Retirement Bonus Plan N/A 

 

Isabella Bank Corporation Retirement Bonus Plan N/A —
 —
Dennis P. AngnerIsabella Bank Corporation Pension Plan 30 485,000
 —
Isabella Bank Corporation Pension Plan 33 337,000
 —

Isabella Bank Corporation Retirement Bonus Plan 30 477,389
 —
Steven D. PungIsabella Bank Corporation Pension Plan 35 476,000
 —

Isabella Bank Corporation Retirement Bonus Plan 35 226,535
 —
Isabella Bank Corporation Retirement Bonus Plan N/A 444,197
 —
Jerome E. SchwindIsabella Bank Corporation Pension Plan 15 32,000
 —
Isabella Bank Corporation Pension Plan 18 49,000
 —

Isabella Bank Corporation Retirement Bonus Plan N/A 

 

Isabella Bank Corporation Retirement Bonus Plan N/A —
 —
David J. ReetzIsabella Bank Corporation Pension Plan 27 155,000
 —
Isabella Bank Corporation Pension Plan 30 225,000
 —

Isabella Bank Corporation Retirement Bonus Plan 27 151,905
 —
Isabella Bank Corporation Retirement Bonus Plan N/A 231,336
 —
Peggy L. WheelerIsabella Bank Corporation Pension Plan 38 194,000
 —
Isabella Bank Corporation Retirement Bonus Plan N/A 159,172
 —

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Defined benefit pension plan.    We sponsor the Isabella Bank Corporation Pension Plan, a frozen defined benefit pension plan. The curtailment, which was effective March 1, 2007, froze the current participant’s accrued benefits as of that date and limited participation in the plan to eligible employees as of December 31, 2006. Due to the curtailment of the plan, the number of years of credited service was frozen. As such, the years of credited service for the plan may differ from the participant’s actual years of service.
Annual contributions are made to the plan as required by accepted actuarial principles, applicable federal tax laws, and to pay expenses related to operating and maintaining the plan. The amount of contributions on behalf of any one participant cannot be separately or individually computed.
Pension plan benefits are based on years of service and the employees’ five highest consecutive years of compensation out of the last ten years of service, through December 31, 2006.
A participant may earn a benefit for up to 35 years of accredited service. Earned benefits are 100% vested after five years of service. Benefit payments normally start when a participant reaches age 65. A participant with more than five years of service may elect to take early retirement benefits anytime after reaching age 55. Benefits payable under early retirement are reduced actuarially for each month prior to age 65 in which benefits begin.
Dennis P. Angner, David J. Reetz, and Steven D. PungPeggy L. Wheeler are eligible for early retirement under the plan. Under the provisions of the plan, participants are eligible for early retirement after reaching the age of 55 with at least 5 years of service. The early retirement benefit amount is the accrued benefit payable at normal retirement date reduced by 5/9% for each of the first 60 months and 5/18% for each of the next 60 months that the benefit commencement date precedes the normal retirement date.

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Retirement bonus plan.    We sponsor the Isabella Bank Corporation Retirement Bonus Plan. This nonqualified plan is intended to provide eligible employees with additional retirement benefits. To be eligible, the employee needed to be an employee on January 1, 2007, and be a participant in our frozen Executive Supplemental Income Agreement. Participants must also be an officer with at least 10 years of service as of December 31, 2006. We have sole and exclusive discretion to add new participants to the plan by authorizing such participation pursuant to action of the Board.
An initial amount was credited for each eligible employee as of January 1, 2007. Subsequent amounts have been credited on each allocation date thereafter as defined in the plan. The amount of the initial allocation and the annual allocation shall be determined pursuant to the payment schedule adopted at our sole and exclusive discretion, as set forth in the plan.
Dennis P. Angner, David J. Reetz, and Steven D. PungPeggy L. Wheeler are eligible for early retirement under the plan. Under the provisions of the plan, participants are eligible for early retirement upon attaining 55 years of age. There is no difference between the calculation of benefits payable upon early retirement and normal retirement.
Nonqualified Deferred Compensation Table
The following table shows information concerning non-qualified deferred compensation for 2016.
NameExecutive contributions in 2013 
 ($)		 Aggregate earnings in 2013 
 ($)		 Aggregate 
 balance at December 31, 2013 
 ($)		Executive 
contributions in 2016 
($) (1)		 Registrant 
contributions in 2016 
($) (2)		 Aggregate 
earnings in 2016 
($) (3)		 Aggregate 
balance at December 31, 2016 
($) (4)
Richard J. Barz$24,800
 $8,224
 $247,250
Jae A. Evans675
 560
 16,536
$—
 $85,000
 $6,508
 $289,065
Dennis P. Angner29,400
 10,797
 323,482
21,738
 —
 8,655
 255,914
Steven D. Pung12,675
 604
 22,273
Jerome E. Schwind1,200
 175
 5,225
23,500
 10,000
 967
 40,870
David J. ReetzN/A
 N/A
 N/A
—
 —
 —
 —
Peggy L. Wheeler—
 —
 —
 —
(1)
The amounts shown in this column are the amounts deferred by the officers under the Deferred Compensation Plan for Directors (“Directors Plan”) and are included in the “Salary” column in the Summary Compensation Table above.
(2)
The amounts shown in this column are the amounts we contributed to the officers’ account under the SERP. These amounts are not included in the Summary Compensation Table.
(3)
The amounts shown in this column are the earnings in the officers’ accounts under both the Directors Plan and the SERP. These amounts are not included in the Summary Compensation Table because the earnings are not preferential.
(4)
The amounts shown in this column are the combined balance of the applicable executive officers’ accounts under the Directors Plan and the SERP.

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Directors Plan. Under the Deferred CompensationDirectors Plan, for Directors ("Directors Plan"),directors, including named executive officers who serve as directors, are required to invest at least 25% of their board fees in our common stock and may invest up to 100% of their earned fees based on their annual election. These amounts are reflected in the above table. These stock investments can be made either through deferred fees or through the purchase of shares through the Isabella Bank Corporation Stockholder Dividend Reinvestment and Employee Stock Purchase Plan ("DRIP Plan"). Deferred fees, under the Directors Plan, are converted on a quarterly basis into shares of our common stock based on the fair market value of shares at that time. Shares credited to a participant’s account are eligible for stock and cash dividends as paid. DRIP Plan shares are purchased on a monthly basis pursuant to the DRIP Plan.
Distribution of deferred fees from the Directors Plan occurs when the participant retires from the Board, attains age 70, or upon the occurrence of certain other events. Distributions must take the form of shares of our common stock. Any common stock issued underfrom deferred fees fromunder the Directors Plan will be considered restricted stock under the Securities Act of 1933, as amended. Common stock purchased through the DRIP Plan are not considered restricted stock under the Securities Act of 1933, as amended.
SERP. Under the SERP, we may promise deferred compensation benefits to employees who are members of a select group of management or highly compensated employees, which may include the named executive officers. The SERP authorizes us to make annual and discretionary credits to a participant’s SERP account pursuant to a participation agreement with the participant that sets forth the amount and timing of any annual credits and the vesting, payment, “clawback” and other terms to which the credits are subject.
The SERP provides default terms that may be modified by a participant’s participation agreement, including default vesting, interest and payment terms. Under the SERP’s default vesting terms, a participant is initially unvested in the participant’s SERP account and becomes 100% vested upon attaining normal retirement age, retirement, involuntary separation from service without cause, death, disability or a change in control. Special vesting rules apply to amounts that are credited after a change in control. Under the SERP’s interest rule, a participant’s account balance is credited with interest annually, the rate of which may be changed and is initially based on the average rate paid on certificates of deposit with Isabella Bank, updated annually. Under the SERP’s default payment terms, a participant’s vested and nonforfeited account balance will be paid in a single cash lump sum within 90 days after the first to occur of the participant’s separation from service (subject to a 6-month delay for a “specified employee”), death, disability, or any date specified in the participant’s participation agreement. The SERP also includes restrictive covenants that restrict a participant’s ability to compete with us and certain other activities.

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Potential Payments Upon Termination or Change in Control
The estimated amounts payable to each named executive officer upon severance from employment, retirement, termination upon death or disability or termination following a change in control are described below. For all termination scenarios, the amounts assume such termination took place as of December 31, 2013.2016.
Any Severance of Employment
Regardless of the manner in which a named executive officer’s employment terminates, he or she is entitled to receive amounts earned during his or her term of employment. Such amounts include:
Amounts accrued and vested through the Defined Benefit Pension Plan.
Amounts accrued and vested through the Retirement Bonus Plan.
Amounts deferred in the Directors Plan.
Amounts vested through the Stock Award Incentive Plan.
Unused vacation pay.
Retirement
In the event of the retirement of an executive officer, the officer would receive the benefits identified above. As of December 31, 2013, the named executive officers listed had no unused vacation days.

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Death or Disability
In the event of death or disability of an executive officer, in addition to the benefits listed above, the executive officer will also receive payments under our life insurance plan or under our disability plan as appropriate.
In addition to potential payments upon termination available to all employees, the estates for the executive officers listed below would receive the following payments upon death:
NameWhile an Active Employee Subsequent to RetirementWhile an Active Employee Subsequent to Retirement
Richard J. BarzN/A
 $360,000
Jae A. Evans$351,400
 175,700
$673,846
 $336,923
Dennis P. Angner616,000
 308,000
634,494
 317,247
Steven D. Pung430,000
 215,000
Jerome E. Schwind301,600
 150,800
494,664
 247,332
David J. Reetz267,000
 133,500
320,332
 160,166
Peggy L. Wheeler276,040
 138,020
Change in Control
We currently do not have a change in control agreement with any of the executive officers; provided, however, pursuant to the Retirement Bonus Plan each participant would become 100% vested in their benefit under the plan if, following a change in control, they voluntarily terminate employment or are terminated without just cause. Similarly, under the SERP each participant would become 100% vested in their SERP account upon a change in control. Also, following a change in control, if a participant is involuntarily terminated without cause or voluntarily terminates for good reason all uncredited annual credits would be credited to his or her SERP account. If termination took place on December 31, 2016, that would have resulted in a credit to Jae Evans’ SERP account of $232,356 and Jerome Schwind's SERP account of $10,200.

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Director Compensation
The following table summarizes the Compensationcompensation of each non-employee director who served on the Board during 2013.2016.
NameFees paid in cash
($)		 Fees deferred under Directors Plan
($)		 Total fees earned
($)		Fees paid in cash
($)(1)		 Fees deferred under Directors Plan
($)(1)		 Total fees earned
($)
Dr. Jeffrey J. Barnes$—
 $28,575
 $28,575
$—
 $29,300
 $29,300
Sandra L. Caul30,950
 —
 30,950
Richard J. Barz32,500
 —
 32,500
G. Charles Hubscher—
 36,350
 36,350
—
 31,425
 31,425
Thomas L. Kleinhardt—
 39,025
 39,025
—
 38,150
 38,150
Joseph LaFramboise15,120
 21,905
 37,025
18,000
 21,550
 39,550
Wilson C. Lauer18,263
 6,087
 24,350
David J. Maness—
 50,550
 50,550
26,450
 26,450
 52,900
W. Joseph Manifold—
 34,550
 34,550
—
 39,600
 39,600
W. Michael McGuire27,862
 10,963
 38,825
28,763
 9,587
 38,350
Sarah R. Opperman—
 29,050
 29,050
27,637
 9,213
 36,850
Gregory V. Varner—
 45,400
 45,400
(1)
Directors electing to receive all fees in cash, resulting in no contributions to the Directors Plan, invest at least 25% of their board fees in our common stock under the DRIP Plan as described in our Directors Plan on page 15.
We paid $1,350 per board meeting plus a retainer of $7,500$10,000 to each member during 2013.2016. Members of the Audit Committee were paid $600$650 per audit committeeAudit Committee meeting attended. Members of the Nominating and Corporate Governance Committee were paid $300$350 per meeting attended. Members of the Information Technology Committee were paid $350 per meeting attended. The chairperson of the Board is paid a retainer of $33,000 and$35,000, the chairperson for the Audit Committee is paid a retainer of $4,000.$6,000, and the vice chairperson for the Audit Committee is paid a retainer of $2,000.
Under the Directors Plan, upon a participant’s attainment of age 70, retirement from the Board, or the occurrence of certain other events, they arethe participant is eligible to receive a lump-sum, in-kind distribution of all of the stock that is then credited to theirthe participant's account. The plan does not allow for cash settlement. Stock issued under the Directors Plan is restricted stock under the Securities Act of 1933, as amended.
We established a Rabbi Trust to fundsupplement 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 assets of the Rabbi Trust for any purpose other than meeting its obligations under the Directors Plan, the assets of the Rabbi Trust remain subject to the claims of our creditors. We may contribute cash or common stock to the Rabbi Trust from time to timetime-to-time for the sole purpose of funding the Directors Plan. The Rabbi Trust will use any cash that we may contribute to purchase shares of our common stock on the open market through our brokerage services department.market.

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We transferred $409,163$375,258 to the Rabbi Trust in 2013,2016, which held 12,76126,042 shares of our common stock for settlement as of December 31, 2013.2016. As of December 31, 2013,2016, there were 172,550187,428 shares of stock credited to participants’ accounts, which credits are unfunded as of such date to the extent that they are in excess of the stock and cash that has been credited to the Rabbi Trust. All amounts are unsecured claims against our general assets. The net cost of this benefit was $147,480$182,325 in 2013.2016.

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The following table displays the cumulative number of equity shares credited to the accounts of current directors pursuant to the terms of the Directors Plan as of March 17, 2014:6, 2017:
Name# of shares of stock credited
Dennis P. Angner13,5639,189
Dr. Jeffrey J. Barnes7,32412,086
Richard J. Barz—
Jae A. Evans6932,036
G. Charles Hubscher10,92316,795
Thomas L. Kleinhardt17,53424,217
Joseph LaFramboise7,61811,317
David J. Maness21,68227,556
W. Joseph Manifold13,13919,495
W. Michael McGuire7,2019,313
Sarah R. Opperman1,8602,415
Gregory V. Varner7,809
Compensation and Human Resource Committee Interlocks and Insider Participation
In 2013,2016, the Compensation and Human Resource Committee members were directors Barnes, Caul, Hubscher, Kleinhardt, LaFramboise, Lauer, Maness, Manifold, McGuire, Opperman, and Opperman.Varner. No executive officer of the Corporation serves on any board of directors or compensation committee of any entity that compensates any member of the Compensation and Human Resource Committee.
Indebtedness of and Transactions with Management
Certain directors and officers and members of their families were loan customers of the Bank, or have been directors or officers of corporations, members or managers of limited liability companies, or partners of partnerships which have had transactions with the Bank. In our opinion, all such transactions were made in the ordinary course of business and were substantially on the same terms, including collateral and interest rates, as those prevailing at the same time for comparable transactions with customers not related to the Bank. These transactions do not involve more than normal risk of collectability or present other unfavorable features. Total loans to these customers were approximately $4,178,000$3,946,000 as of December 31, 2013.2016. We address transactions with related parties in our Code of Business Conduct and Ethics Policy. Conflicts of interest are prohibited, except under board approved guidelines.

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Security Ownership of Certain Beneficial Owners and Management
The following table sets forth certain information as of March 17, 20146, 2017 as to the common stock of the Corporation owned of record or beneficially by any person who is known to the Corporation to be the beneficial owner of more than 5% of the common stock of the Corporation.
Name and Address of OwnerAmount and Nature of Beneficial Ownership (1) Percent of ClassAmount and Nature of Beneficial Ownership (1) Percent of Class
McGuirk Investments413,007
 5.36%
McGuirk Investments LLC401,684
 5.13%
P.O. Box 222
 

 
Mt. Pleasant, MI 48804-0222
 

 
(1)
Beneficial ownership is defined by rules of the SEC and includes shares that the person has or shares voting or investment power over and shares that the person has a right to acquire within 60 days from March 17, 2014.6, 2017.

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The following table sets forth certain information as of March 17, 20146, 2017 as to our common stock owned beneficially by each director and director nominee, by each named executive officer, and by all directors, director nominees and executive officers as a group.
Name of OwnerAmount and Nature of Beneficial Ownership (1) Percent of ClassAmount and Nature of Beneficial Ownership (1) Percent of Class
Dennis P. Angner33,648
 0.43%28,073
 0.35%
Dr. Jeffrey J. Barnes13,575
 0.17%19,072
 0.24%
Richard J. Barz30,697
 0.39%33,098
 0.41%
Jae A. Evans9,192
 0.12%12,988
 0.16%
G. Charles Hubscher45,603
 0.58%184,429
 2.31%
Thomas L. Kleinhardt66,719
 0.85%77,138
 0.97%
Joseph LaFramboise8,821
 0.11%12,638
 0.16%
David J. Maness23,636
 0.30%32,927
 0.41%
W. Joseph Manifold17,989
 0.23%24,421
 0.31%
W. Michael McGuire78,131
 1.00%106,219
 1.33%
Sarah R. Opperman2,973
 0.04%8,120
 0.10%
Steven D. Pung21,002
 0.27%
Gregory V. Varner8,824
 0.11%
David J. Reetz9,343
 0.12%10,181
 0.13%
Jerome E. Schwind1,163
 0.01%3,375
 0.04%
All Directors, nominees and Executive Officers as a Group (14) persons362,492
 4.62%
Peggy L. Wheeler10,385
 0.13%
All Directors, nominees and Executive Officers as a Group (15) persons571,888
 7.17%
(1)
Beneficial ownership is defined by rules of the SEC and includes shares that the person has or shares voting or investment power over and shares that the person has a right to acquire within 60 days from March 17, 2014.6, 2017. Totals for directors include shares of stock credited under the Directors Plan as of March 17, 20146, 2017 as disclosed in the table on page 16 above.18. Totals for named executive officers Steven D. Pung and officer Jerome E. Schwind include shares of stock credited under the Directors Plan as of March 17, 20146, 2017 as follows: Mr. Pung, 934 shares; and Mr. Schwind 2191,101 shares. Participants in the Directors Plan have a right to acquire shares credited to their accounts upon a distributable event. A description of the Directors Plan under which these shares of stock were issued is set forth above in "Director Compensation."

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Independent Registered Public Accounting Firm
The Audit Committee has appointed Rehmann Robson LLC as our independent auditors for the year ending December 31, 2014.2017.
A representative of Rehmann Robson LLC is expected to be present at the Annual Meeting to respond to appropriate questions from shareholders and to make any comments Rehmann Robson LLC believes are appropriate.
Fees for Professional Services Provided by Rehmann Robson LLC
The following table shows the aggregate fees billed by Rehmann Robson LLC for the audit and other services provided for:

2013 20122016 2015
Audit fees$271,380
 $263,180
$295,094
 $286,388
Audit related fees29,425
 28,250
28,500
 32,560
Tax fees27,095
 25,950
24,410
 28,484
Total$327,900
 $317,380
$348,004
 $347,432
The audit fees were for performing the integrated audit of our consolidated annual financial statements and the internal control attestation report related to the Federal Deposit Insurance Corporation Improvement Act, review of interim quarterly financial statements included in our Forms 10-Q, and services that are normally provided by Rehmann Robson LLC in connection with statutory and regulatory filings or engagements.

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The audit related fees are typically for various discussions related to the adoption and interpretation of new accounting pronouncements. During 2013,2016, this includes fees for procedures related to nonrecurring regulatory filings. Also included are fees for auditing of our employee benefit plans.
The tax fees were for the preparation of our state and federal tax returns and for consultation on various tax matters.
The Audit Committee has considered whether the services provided by Rehmann Robson LLC, other than the audit fees, are compatible with maintaining Rehmann Robson LLC’s independence and believes that the other services provided are compatible.
Pre-Approval Policies and Procedures
All audit and non-audit services over $5,000 to be performed by Rehmann Robson LLC must be approved in advance by the Audit Committee if those fees are reasonably expected to exceed 5.0% of the current year agreed upon fee for independent audit services. As permitted by the SEC’sSEC rules, the Audit Committee has authorized its chairperson to pre-approve audit, audit-related, tax and non-audit services, provided that such approved service is reported to the full Audit Committee at its next meeting.
As early as practicable in each calendar year, the independent auditor provides to the Audit Committee a schedule of the audit and other services that the independent auditor expects to provide or may provide during the next twelve months. The schedule will be specific as to the nature of the proposed services, the proposed fees, timing, and other details that the Audit Committee may request. The Audit Committee will by resolution authorize or decline the proposed services. Upon approval, this schedule will serve as the budget for fees by specific activity or service for the next twelve months.
A schedule of additional services proposed to be provided by the independent auditor, or proposed revisions to services already approved, along with associated proposed fees, may be presented to the Audit Committee for their consideration and approval at any time. The schedule will be specific as to the nature of the proposed service, the proposed fee, and other details that the Audit Committee may request. The Audit Committee will by resolution authorize or decline authorization for each proposed new service.
Applicable SEC rules and regulations permit waiver of the pre-approval requirements for services other than audit, review or attest services if certain conditions are met. Out of the services characterized above as audit-related, tax and professional services, none were billed pursuant to these provisions in 20132016 and 20122015 without pre-approval.

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Shareholder Proposals
Any proposals which you intend to present at the next annual meetingAnnual Meeting must be received before December 1, 2014November 20, 2017 to be considered for inclusion in our proxy statementProxy Statement and proxy for that meeting. Proposals should be made in accordance with Securities and Exchange Commission Rule 14a-8.
Directors’ Attendance at the Annual Meeting of Shareholders
Our directors are encouraged to attend the annual meeting of shareholders.Annual Meeting. At the 2013 annual meeting,2016 Annual Meeting, all directors were in attendance.
Section 16(a) Beneficial Ownership Reporting Compliance
Section 16(a) of the Securities Exchange Act of 1934 requires our directors and certain officers and persons who own more than 10% of our common stock, to file with the SEC initial reports of ownership and reports of changes in ownership of our common stock. These officers, directors, and greater than 10% shareholders are required by SEC regulation to furnish us with copies of these reports.
To our knowledge, based solely on review of the copies of such reports furnished, during the year ended December 31, 20132016 all Section 16(a) filing requirements were satisfied, with respect to the applicable officers, directors, and greater than 10% beneficial owners with the exception of the following: Director Opperman filed one late report for one reportable transaction and executive officers Steven D. Pung and David J. Reetz. Executive officers Pung and Reetzofficer Schwind filed their Form 3sone late on January 10, 2014.report for one reportable transaction.
Other Matters
We will bear the cost of soliciting proxies. In addition to solicitation by mail, officers and other employees may solicit proxies by telephone or in person, without compensation other than their regular compensation.

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As to Other Business Which May Come Before the Meeting
We do not intend to bring any other business before the meeting for action. However, if any other business should be presented for action, it is the intention of the persons named in the enclosed form of proxy to vote in accordance with their judgment on such business.
By order of the Board of Directors

debracampbellsiga02.jpg
Debra Campbell, Secretary


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Isabella Bank Corporation
Financial Information Index
Page Description
2225
 
Common Stock and Dividend Information
2427
 
Summary of Selected Financial Data
2629
 
Management’s Discussion and Analysis of Financial Condition and Results of Operations
4649
 
Quantitative and Qualitative Disclosures about Market Risk
4952
 
Report of Independent Registered Public Accounting Firm
5053
 
Consolidated Financial Statements
5659
 
Notes to Consolidated Financial Statements
95102
 
Shareholders’ Information


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Forward Looking Statements
This report contains certain forward looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and 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 isare included in this statement for purposes of these safe harbor provisions. Forward looking statements, which are based on certain assumptions and describe future plans, strategies and expectations, are generally identifiable by use of the words “believe,” “expect,” “intend,” “anticipate,” “estimate,” “project,” or similar expressions. Our ability to predict results or the actual effect of future plans or strategies is inherently uncertain. Factors which could have a material adverse effect on the operations and future prospects include, but are not limited to, changes in: interest rates, general economic conditions, monetary and fiscal policies of the U.S. Government, including policies of the U.S. Treasury and the FRB,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 Isabella Bank Corporation and itsour business, including additional factors that could materially affect our consolidated financial results, is included in our filings with the SEC.
The acronyms and abbreviations identified below may be used throughout this report 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 GLB Act: Gramm-Leach-Bliley Act of 1999GAAP: U.S. generally accepted accounting principles
ALLL: Allowance for loan and lease losses IFRS: International Financial Reporting StandardsGLB Act: Gramm-Leach-Bliley Act of 1999
AOCI: Accumulated other comprehensive income (loss) IRR: Interest rate riskIFRS: International Financial Reporting Standards
ASC: FASB Accounting Standards CodificationIRR: Interest rate risk
ASU: FASB Accounting Standards Update JOBS Act: Jumpstart our Business Startups Act
ASU: FASB Accounting Standards UpdateATM: Automated Teller Machine LIBOR: London Interbank Offered Rate
ATM: Automated Teller MachineMoody’s: Moody’s Investors Service, Inc
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 OMSRs:OMSR: Originated mortgage servicing rights
ESOP: Employee stock ownership plan OREO: Other real estate owned
Exchange Act: Securities Exchange Act of 1934 OTC: Over-the-CounterOTTI: Other-than-temporary impairment
FASB: Financial Accounting Standards Board OTTI: Other-than-temporary impairmentPBO: Projected benefit obligation
FDI Act: Federal Deposit Insurance Act PBO: Projected benefit obligation
FDIC: Federal Deposit Insurance CorporationPCAOB: Public Company Accounting Oversight Board
FFIEC:FDIC: Federal Financial Institutions Examinations CouncilDeposit Insurance Corporation Rabbi Trust: A trust established to fund the Directors Plan
Fitch: Fitch RatingsFFIEC: 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 S&P: Standard & Poor'sTDR: Troubled debt restructuring
Freddie Mac: Federal Home Loan Mortgage Corporation TDR: Troubled debt restructuringXBRL: eXtensible Business Reporting Language
FTE: Fully taxable equivalent XBRL: eXtensible Business Reporting Language
GAAP: U.S. generally accepted accounting principles 

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Common Stock and Dividend Information
Our authorized common stock consists of 15,000,000 shares, of which 7,821,069 shares are issued and outstanding as of December 31, 2016. As of that date, there were 3,082 shareholders of record.
Our common stock is traded in the over the counterover-the-counter market.  TheOur common stock is quoted on the OTCQBOTCQX market tier of the OTC Markets Group Inc.’s ("OTC Markets") electronic quotation system (www.otcmarkets.com) under the symbol “ISBA”.  Other trades in theour common stock occur in privately negotiated transactions from time-to-time of which we may have little or no information.
Our authorized common stock consists of 15,000,000 shares, of which 7,723,023 shares are issued and outstanding as of December 31, 2013. As of that date, there were 3,080 shareholders of record.
We have reviewed the information available as to the range of reported high and low bid quotations, including high and low bid information as reported by OTC Markets. The following table sets forth our compilation of that information for the periods indicated. Price information obtained from OTC Markets reflects inter-dealer prices, without retail mark-up, mark-down, or commissions and may not necessarily represent actual transactions. The following compiled data is provided for information purposes only and should not be viewed as indicative of the actual or market value of our common stock.
Number of
Shares		 Sale PriceNumber of
Common Shares		 Sale Price
Low HighLow High
2013     
2016     
First Quarter54,741
 $21.79
 $25.10
81,184
 $27.25
 $29.90
Second Quarter65,865
 24.78
 26.00
47,680
 27.63
 28.25
Third Quarter105,540
 23.49
 25.50
71,614
 27.60
 28.08
Fourth Quarter116,052
 21.20
 24.84
53,496
 27.60
 28.35
342,198
    253,974
    
2012     
2015     
First Quarter64,873
 $22.15
 $24.25
81,754
 $22.00
 $23.50
Second Quarter63,656
 23.45
 24.98
94,019
 22.70
 23.80
Third Quarter97,706
 22.50
 24.90
143,183
 22.75
 23.85
Fourth Quarter87,966
 21.60
 23.45
109,276
 23.50
 29.90
314,201
    428,232
    
The following table sets forth the cash dividends paid for the following quarters:
Per SharePer Share
2013 20122016 2015
First Quarter$0.21
 $0.20
$0.24
 $0.23
Second Quarter0.21
 0.20
0.24
 0.23
Third Quarter0.21
 0.20
0.25
 0.24
Fourth Quarter0.21
 0.20
0.25
 0.24
Total$0.84
 $0.80
$0.98
 $0.94
We have adopted and publicly announced a common stock repurchase plan. The plan was last amended on October 23, 2013,December 21, 2016, to allow for the repurchase of an additional 150,000200,000 shares of common stock.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.

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The following table provides information for the unaudited three month period ended December 31, 2013,2016, with respect to theour common stock repurchase plan:
 Shares Repurchased Total Number of Shares Purchased as Part of Publicly Announced Plan or Program Maximum Number of Shares That May Yet Be Purchased Under the Plans or Programs
 Number Average Price
Per Share		  
Balance, September 30      11,441
October 1 - 234,400
 $23.86
 4,400
 7,041
Additional Authorization (150,000 shares)

 

 

 157,041
October 24 - 314,950
 23.84
 4,950
 152,091
November 1 - 307,022
 23.50
 7,022
 145,069
December 1 - 317,673
 22.42
 7,673
 137,396
Balance, December 3124,045
 $23.29
 24,045
 137,396

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      60,575
October 1 - 3119,538
 $27.79
 19,538
 41,037
November 1 - 3019,821
 27.80
 19,821
 21,216
December 1-2111,659
 28.13
 11,659
 9,557
Additional Authorization (200,000 shares)

 

 

 209,557
December 22 - 319,600
 28.02
 9,600
 199,957
Balance, December 3160,618
 $27.90
 60,618
 199,957
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 included in our Annual Report on Form 10-K.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 ISBAthe Corporation's common stock and each index was $100 at December 31, 20082011 and all dividends are reinvested.
 
nasdaqgrapha05.jpg 
Year ISBA NASDAQ NASDAQ
Banks		ISBA NASDAQ NASDAQ
Banks
12/31/2008$100.00
 $100.00
 $100.00
12/31/200977.10
 145.05
 83.58
12/31/201073.40
 171.14
 95.29
12/31/201112/31/2011104.50
 169.83
 85.32
$100.00
 $100.00
 $100.00
12/31/201212/31/201299.30
 199.89
 101.15
95.00
 117.70
 118.55
12/31/201312/31/2013112.60
 279.62
 142.93
107.70
 164.65
 167.52
12/31/2014105.60
 188.87
 175.58
12/31/2015145.80
 202.25
 190.97
12/31/2016140.60
 220.13
 262.04

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SummaryResults of Selected Financial Data
(DollarsOperations (Dollars in thousands except per share amountsamounts)
)The following table outlines the results of operations and provides certain key performance measures as of, and for the years ended, December 31:
2013 2012 2011 2010 20092016 2015 2014 2013 2012
INCOME STATEMENT DATA                  
Interest income$54,076
 $56,401
 $57,905
 $57,217
 $58,105
$53,666
 $51,502
 $51,148
 $50,418
 $53,123
Interest expense11,021
 13,423
 16,203
 17,204
 19,839
10,865
 10,163
 9,970
 11,021
 13,423
Net interest income43,055
 42,978
 41,702
 40,013
 38,266
42,801
 41,339
 41,178
 39,397
 39,700
Provision for loan losses1,111
 2,300
 3,826
 4,857
 6,093
(135) (2,771) (668) 1,111
 2,300
Noninterest income10,175
 11,530
 8,218
 9,300
 10,156
11,108
 10,359
 9,325
 10,175
 11,530
Noninterest expenses37,413
 37,639
 34,530
 33,807
 33,683
37,897
 36,051
 35,103
 33,755
 34,361
Federal income tax expense2,196
 2,363
 1,354
 1,604
 846
2,348
 3,288
 2,344
 2,196
 2,363
Net income$12,510
 $12,206
 $10,210
 $9,045
 $7,800
Net Income$13,799
 $15,130
 $13,724
 $12,510
 $12,206
PER SHARE                  
Basic earnings$1.63
 $1.61
 $1.35
 $1.20
 $1.04
$1.77
 $1.95
 $1.77
 $1.63
 $1.61
Diluted earnings1.59
 1.56
 1.31
 1.17
 1.01
$1.73
 $1.90
 $1.74
 $1.59
 $1.56
Dividends0.84
 0.80
 0.76
 0.72
 0.70
$0.98
 $0.94
 $0.89
 $0.84
 $0.80
Market value*23.85
 21.75
 23.70
 17.30
 18.95
Tangible book value*15.62
 14.72
 13.90
 13.22
 12.67
$18.16
 $17.30
 $16.59
 $15.62
 $14.72
BALANCE SHEET DATA         
At end of period         
Loans$808,037
 $772,753
 $750,291
 $735,304
 $723,316
Total assets1,493,137
 1,430,639
 1,337,925
 1,225,810
 1,143,944
Deposits1,043,766
 1,017,667
 958,164
 877,339
 802,652
Shareholders' equity160,609
 164,489
 154,783
 145,161
 140,803
Average balance         
Loans$790,132
 $754,304
 $743,441
 $725,534
 $725,299
Total assets1,448,440
 1,381,083
 1,287,195
 1,182,930
 1,127,634
Deposits1,025,088
 984,927
 927,186
 840,392
 786,714
Shareholders’ equity163,010
 160,682
 151,379
 145,304
 137,910
Quoted market value         
High$29.90
 $29.90
 $24.00
 $26.00
 $24.98
Low$27.25
 $22.00
 $21.73
 $21.12
 $21.75
Close*$27.85
 $29.90
 $22.50
 $23.85
 $21.75
Common shares outstanding*7,821,069
 7,799,867
 7,776,274
 7,723,023
 7,671,846
PERFORMANCE RATIOS                  
Return on average total assets0.86% 0.88% 0.79% 0.76% 0.69%0.82% 0.95% 0.90% 0.86% 0.88%
Return on average shareholders' equity7.67% 7.60% 6.74% 6.22% 5.66%7.12% 8.33% 8.06% 7.67% 7.60%
Return on average tangible equity10.71% 11.41% 10.30% 9.51% 8.53%
Return on average tangible shareholders' equity9.95% 11.46% 10.80% 10.71% 11.41%
Net interest margin yield (FTE)3.50% 3.70% 3.87% 4.04% 4.06%3.00% 3.10% 3.24% 3.22% 3.43%
Loan to deposit*77.42% 75.93% 78.31% 83.81% 90.12%
Nonperforming loans to total loans*0.42% 1.00% 0.95% 0.83% 1.28%
Nonperforming assets to total assets*0.32% 0.68% 0.67% 0.67% 0.91%
ALLL to nonperforming loans*339.63% 154.39% 173.10% 202.97% 139.71%
CAPITAL RATIOS         
Shareholders' equity to assets*10.76% 11.50% 11.57% 11.84% 12.31%
Tier 1 capital to average assets*8.46% 8.29% 8.18% 8.24% 8.60%
Tier 1 risk-based capital*13.67% 13.23% 12.92% 12.44% 12.80%
Total risk-based capital*14.92% 14.48% 14.17% 13.69% 14.06%
BALANCE SHEET DATA*         
Gross loans$1,010,615
 $850,492
 $836,550
 $810,777
 $774,627
AFS securities$558,096
 $660,136
 $567,534
 $512,062
 $504,010
Total assets$1,732,151
 $1,668,112
 $1,549,543
 $1,493,137
 $1,430,639
Deposits$1,195,040
 $1,164,563
 $1,074,484
 $1,043,766
 $1,017,667
Borrowed funds$337,694
 $309,732
 $289,709
 $279,326
 $241,001
Shareholders' equity$187,899
 $183,971
 $174,594
 $160,609
 $164,489
Gross loans to deposits84.57% 73.03% 77.86% 77.68% 76.12%
ASSETS UNDER MANAGEMENT*         
Loans sold with servicing retained$272,882
 $287,029
 $288,639
 $293,665
 $303,425
Assets managed by our Investment and Trust Services Department$427,693
 $405,109
 $383,878
 $351,420
 $319,301
Total assets under management$2,432,726
 $2,360,250
 $2,222,060
 $2,138,222
 $2,053,365
ASSET QUALITY*         
Nonperforming loans to gross loans0.17% 0.09% 0.50% 0.42% 1.00%
Nonperforming assets to total assets0.11% 0.07% 0.33% 0.32% 0.68%
ALLL to gross loans0.73% 0.87% 1.21% 1.42% 1.54%
CAPITAL RATIOS*         
Shareholders' equity to assets10.85% 11.03% 11.27% 10.76% 11.50%
Tier 1 leverage8.56% 8.52% 8.59% 8.46% 8.29%
Common equity tier 1 capital12.39% 13.44% N/A
 N/A
 N/A
Tier 1 risk-based capital12.39% 13.44% 14.08% 13.68% 13.24%
Total risk-based capital13.04% 14.17% 15.19% 14.93% 14.49%
* At end of year

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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
2016		 September 30
2016		 June 30
2016		 March 31
2016		 December 31
2015		 September 30
2015		 June 30
2015		 March 31
2015
Total interest income$13,760
 $13,607
 $13,218
 $13,081
 $13,023
 $12,967
 $12,759
 $12,753
Total interest expense2,826
 2,747
 2,678
 2,614
 2,577
 2,580
 2,518
 2,488
Net interest income10,934
 10,860
 10,540
 10,467
 10,446
 10,387
 10,241
 10,265
Provision for loan losses(320) 17
 12
 156
 (772) (738) (535) (726)
Noninterest income3,187
 2,946
 2,752
 2,223
 2,501
 3,101
 2,629
 2,128
Noninterest expenses10,166
 9,433
 9,218
 9,080
 9,885
 9,161
 8,330
 8,675
Federal income tax expense493
 763
 655
 437
 538
 1,002
 977
 771
Net income$3,782
 $3,593
 $3,407
 $3,017
 $3,296
 $4,063
 $4,098
 $3,673
PER SHARE               
Basic earnings$0.48
 $0.46
 $0.44
 $0.39
 $0.43
 $0.52
 $0.53
 $0.47
Diluted earnings0.47
 0.45
 0.43
 0.38
 0.41
 0.51
 0.52
 0.46
Dividends0.25
 0.25
 0.24
 0.24
 0.24
 0.24
 0.23
 0.23
Quoted market value*27.85
 27.70
 27.90
 28.25
 29.90
 23.69
 23.75
 22.90
Tangible book value*18.16
 17.93
 17.72
 17.47
 17.30
 17.06
 17.17
 16.84
 Quarter to Date
 December 31
2013		 September 30
2013		 June 30
2013		 March 31
2013		 December 31
2012		 September 30
2012		 June 30
2012		 March 31
2012
Total interest income$13,603
 $13,505
 $13,440
 $13,528
 $13,845
 $14,164
 $14,188
 $14,204
Total interest expense2,683
 2,736
 2,781
 2,821
 3,051
 3,239
 3,429
 3,704
Net interest income10,920
 10,769
 10,659
 10,707
 10,794
 10,925
 10,759
 10,500
Provision for loan losses245
 351
 215
 300
 1,200
 200
 439
 461
Noninterest income2,130
 2,862
 2,736
 2,447
 2,686
 2,759
 2,544
 3,541
Noninterest expenses9,578
 9,320
 9,324
 9,191
 9,750
 9,128
 9,188
 9,573
Federal income tax expense303
 674
 643
 576
 19
 899
 672
 773
Net income$2,924
 $3,286
 $3,213
 $3,087
 $2,511
 $3,457
 $3,004
 $3,234
PER SHARE               
Basic earnings$0.38
 $0.43
 $0.42
 $0.40
 $0.33
 $0.45
 $0.40
 $0.43
Diluted earnings0.37
 0.42
 0.41
 0.39
 0.32
 0.44
 0.39
 0.41
Dividends0.21
 0.21
 0.21
 0.21
 0.20
 0.20
 0.20
 0.20
Market value*23.85
 24.85
 24.75
 25.00
 21.75
 22.50
 24.85
 24.00
Tangible book value*15.62
 15.43
 15.19
 14.95
 14.72
 14.65
 14.37
 14.15
* At end of period

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Management's Discussion and Analysis of Financial Condition and Results of Operations
ISABELLA BANK CORPORATION FINANCIAL REVIEW
(Dollars in thousands except per share amounts)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 ourthis Annual Report on Form 10-K.
Executive Summary
During 2013, we earned a record $12,510, which was an increaseWe reported net income of $304 from 2012. We enjoyed$13,799 and earnings per common share of $1.77 for the year ended December 31, 2016. Our earnings have primarily been the result of increased interest income driven by outstanding loan growth of $35,284 and an improvement induring 2016. Our strong credit quality indicators. Asresulted 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 $135 for the year ended December 31, 2013, our2016. Net loan recoveries during 2016 were $135 as compared to net loan recoveries of $71 in 2015.
During the year, total assets were $1.49 billion,grew by 3.84% to $1,732,151, and assets under management -increased to $2,432,726 which includedincludes loans sold and serviced and assets managed by our Investment and Trust Services Department of $645.09 million - were $2.14 billion,$700,575. In 2016, we had total loan growth of $160,123 which was a 4.13%increasedriven by commercial and agricultural loan growth of $137,864. Also contributing to this growth in 2016 were increases in both residential real estate and consumer loans of $22,259.
Our net yield on interest earning assets under management from of 3.00% remains at historically low levels. While the FRB increased short term interest rates in December 31, 2012.
While competition for high quality2016 and projects increases in 2017, we do not anticipate 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 strategic growth in loans, has been intense, we have not relaxed our underwriting standardsinvestments, and we remainother income earning assets. We are committed to core community banking principlesincreasing earnings and long term sustainable growth. This focus has enabled us to continue to meet the needs of the communities we serve, which translates into increased shareholder value. Our loan quality remains sound as evidenced by the relatively low percentage of loans classified as nonperforming. As of December 31, 2013, our ratio of nonperforming loans to total loans was 0.42%. In comparison, the average percentage for all bank holding companiesvalue through growth in our peer group was 1.71% as of September 30, 2013 (peer group ratios are not yet available for December 31, 2013). In addition,loan portfolio, growth in our risk based capital to risk adjusted total assets ratio of 14.92% as of December 31, 2013 compares favorably to the 8.00% ratio required to be classified as adequately capitalized under the Federal Reserve Board's risk based capital rules.
In August 2013, we openedinvestment and trust services, and increasing our latest branch in Big Rapids, Michigan. We are excited about our newest branch's growth potential and the new relationships that we have established. The new location has complemented our existing Big Rapids office and will provide additional shareholder value for years to come.
In order to preserve our culture and provide strong leadership for the future we emphasize succession planning. We have made significant investments in employee development and as a result, we have a tremendous amount of leadership and professional strength throughout our organization. The selection of Jae A. Evans, previously Isabella Bank's Chief Operations Officer, as Richard J. Barz's successor as CEO of Isabella Bank Corporation effective January 1, 2014 was no exception to this commitment. Mr. Evans has been with the Bank since 2008 and has more than 36 years of banking experience. Prior to his position as Chief Operations Officer, Mr. Evans served as the president of the Greenville Division of Isabella Bank. Mr. Barz continues to serve on the Board of Directors for both Isabella Bank and Isabella Bank Corporation.geographical presence while managing operating costs.
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. As a result ofNew regulations issued by the implementation of some of the provisions, weCFPB regarding consumer lending, including residential mortgage lending, have had increases in operationalincreased our compensation and outside advisor costs and this trend is expected to continue.
The CFPB has begun to issue substantial proposed and final rules regarding consumer lending, including residential mortgage lending. These rules will likely further increase our compensation and outside advisor costs to ensure our compliance with the new regulations. In addition to increased costs, we anticipate that residential mortgage volume will likely decline in 2014 due to the strict underwriting standards that have removed business judgment from the underwriting process.
On July 2, 2013, the FRB published revised BASEL III Capital standards for banks. The rules redefine what is included or deducted from equity capital, changes risk weighting for certain on and off-balance sheet assets, increases the minimum required equity capital to be considered well capitalized, and introduces a capital cushion buffer. The rules, which will be gradually phased in between 2015 and 2019, are not expected to have a material impact on the Corporation.Corporation but will require us to hold more capital than we have historically.
Reclassifications
Certain amounts reported in management's discussion and analysis of financial condition and results of operations for 2015 and 2014 have been reclassified to conform with the 2016 presentation.
Other
We have not received any notices of regulatory actions as of February 28, 2014.23, 2017.

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Table of Contents

CRITICAL ACCOUNTING POLICIES
Our significant accounting policies are set forth in “Note“Note 1 – Nature of Operations and Summary of Significant Accounting Policies”Policies” of the Notes“Notes to Consolidated Financial Statements.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.

29

Table of Contents

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“Allowance for Loan and Lease Losses”Losses” and “Note 65 – Loans and ALLL” of the Notes“Notes to Consolidated Financial Statements.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.
We currently have both AFS and trading investment securities that are carried at fair value. Changesvalue with changes in the fair value of AFS investment securities are included as a component of other comprehensive income, while declinesincome. Declines in the fair value of theseAFS securities below their cost that are other-than-temporary are reflected as realized losses in the consolidated statements of income. The change in value of trading investment securities is included in current earnings. We evaluate AFS securities for indications of losses that are considered other-than-temporary, if any, on a regular basis. The market values for most AFS and trading investment securities are typically obtained from outside sources and applied to individual securities within the portfolio. Municipal securities for which no readily determinable market values are available are priced using fair value curves which most closely match the security's credit ratings and maturities.

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Distribution of Assets, Liabilities,Average Balances, Interest Rate, and Shareholders' Equity;Net Interest Rates and Interest DifferentialIncome
The following schedules present the daily average amount outstanding for each major category of interest earning assets, nonearningnon-earning 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 yearsperiods indicated. All interest income is reported on a FTE basis using a 34% federal income tax rate. Nonaccruing loans,Loans in nonaccrual status, for the purpose of the following computations, are included in the average loan amounts outstanding.balances. FRB and FHLB restricted equity holdings are included in accrued income and other assets.
Year Ended December 31Year Ended December 31
2013 2012 20112016 2015 2014

Average
Balance		 Tax
Equivalent
Interest		 Average
Yield /
Rate		 Average
Balance		 Tax
Equivalent
Interest		 Average
Yield /
Rate		 Average
Balance		 Tax
Equivalent
Interest		 Average
Yield /
Rate		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$790,132
 $41,233
 5.22% $754,304
 $43,396
 5.75% $743,441
 $45,463
 6.12%$922,333
 $38,537
 4.18% $829,903
 $35,853
 4.32% $816,105
 $36,629
 4.49%
Taxable investment securities335,575
 7,228
 2.15% 309,681
 7,555
 2.44% 235,437
 6,941
 2.95%392,810
 8,746
 2.23% 395,981
 9,053
 2.29% 357,250
 8,092
 2.27%
Nontaxable investment securities165,774
 8,294
 5.00% 145,502
 7,941
 5.46% 136,356
 7,847
 5.75%205,450
 9,351
 4.55% 205,242
 9,870
 4.81% 194,751
 9,877
 5.07%
Trading account securities1,071
 55
 5.14% 2,624
 142
 5.41% 5,087
 286
 5.62%
Other27,235
 447
 1.64% 33,359
 486
 1.46% 37,539
 506
 1.35%25,557
 668
 2.61% 25,947
 600
 2.31% 25,784
 519
 2.01%
Total earning assets1,319,787
 57,257
 4.34% 1,245,470
 59,520
 4.78% 1,157,860
 61,043
 5.27%1,546,150
 57,302
 3.71% 1,457,073
 55,376
 3.80% 1,393,890
 55,117
 3.95%
NONEARNING ASSETS                                  
ALLL(11,877)     (12,408)     (12,522)    
Allowance for loan losses(7,638)     (9,275)     (10,973)    
Cash and demand deposits due from banks18,162
     19,409
     20,195
    18,178
     17,925
     18,552
    
Premises and equipment25,993
     25,244
     24,397
    28,670
     26,968
     25,957
    
Accrued income and other assets96,375
     103,368
     97,265
    101,995
     98,805
     94,754
    
Total assets$1,448,440
     $1,381,083
     $1,287,195
    $1,687,355
     $1,591,496
     $1,522,180
    
INTEREST BEARING LIABILITIES                                  
Interest bearing demand deposits$183,665
 161
 0.09% $170,851
 204
 0.12% $152,530
 189
 0.12%$203,198
 163
 0.08% $195,260
 155
 0.08% $191,750
 157
 0.08%
Savings deposits242,777
 366
 0.15% 214,958
 451
 0.21% 192,999
 488
 0.25%336,859
 663
 0.20% 293,703
 449
 0.15% 260,469
 374
 0.14%
Time deposits456,774
 6,613
 1.45% 473,675
 8,476
 1.79% 467,931
 10,258
 2.19%429,731
 5,010
 1.17% 433,409
 5,246
 1.21% 448,971
 5,764
 1.28%
Borrowed funds251,590
 3,881
 1.54% 225,689
 4,292
 1.90% 198,828
 5,268
 2.65%319,049
 5,029
 1.58% 295,641
 4,313
 1.46% 274,080
 3,675
 1.34%
Total interest bearing liabilities1,134,806
 11,021
 0.97% 1,085,173
 13,423
 1.24% 1,012,288
 16,203
 1.60%1,288,837
 10,865
 0.84% 1,218,013
 10,163
 0.83% 1,175,270
 9,970
 0.85%
NONINTEREST BEARING LIABILITIES                                  
Demand deposits141,872
     125,443
     113,726
    194,892
     181,939
     165,860
    
Other8,752
     9,785
     9,802
    9,841
     10,001
     10,773
    
Shareholders’ equity163,010
     160,682
     151,379
    193,785
     181,543
     170,277
    
Total liabilities and shareholders’ equity$1,448,440
     $1,381,083
     $1,287,195
    $1,687,355
     $1,591,496
     $1,522,180
    
Net interest income (FTE)  $46,236
     $46,097
     $44,840
    $46,437
     $45,213
     $45,147
  
Net yield on interest earning assets (FTE)    3.50%     3.70%     3.87%    3.00%     3.10%     3.24%

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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. Interest income includes loan fees of $3,182 in 2013, $3,178 in 2012, and $2,385 in 2011. For analytical purposes, net interest income is adjusted to an FTE basis by adding the income tax savings from interest on tax exempt loans, AFS securities, and tradingnontaxable 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 year’speriod's FTE rate.
Rate—change in the FTE rate multiplied by the previous year’speriod'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.
2013 Compared to 2012 
 Increase (Decrease) Due to		 2012 Compared to 2011 
 Increase (Decrease) Due to		2016 Compared to 2015 
 Increase (Decrease) Due to		 2015 Compared to 2014 
 Increase (Decrease) Due to

Volume Rate Net Volume Rate NetVolume Rate Net Volume Rate Net
Changes in interest income                      
Loans$1,996
 $(4,159) $(2,163) $656
 $(2,723) $(2,067)$3,892
 $(1,208) $2,684
 $612
 $(1,388) $(776)
Taxable AFS securities601
 (928) (327) 1,945
 (1,331) 614
Nontaxable AFS securities1,049
 (696) 353
 511
 (417) 94
Trading securities(80) (7) (87) (134) (10) (144)
Taxable investment securities(72) (235) (307) 885
 76
 961
Nontaxable investment securities10
 (529) (519) 518
 (525) (7)
Other(96) 57
 (39) (59) 39
 (20)(9) 77
 68
 3
 78
 81
Total changes in interest income3,470
 (5,733) (2,263) 2,919
 (4,442) (1,523)3,821
 (1,895) 1,926
 2,018
 (1,759) 259
Changes in interest expense                      
Interest bearing demand deposits14
 (57) (43) 22
 (7) 15
6
 2
 8
 3
 (5) (2)
Savings deposits53
 (138) (85) 52
 (89) (37)72
 142
 214
 50
 25
 75
Time deposits(293) (1,570) (1,863) 124
 (1,906) (1,782)(44) (192) (236) (195) (323) (518)
Borrowed funds457
 (868) (411) 647
 (1,623) (976)355
 361
 716
 301
 337
 638
Total changes in interest expense231
 (2,633) (2,402) 845
 (3,625) (2,780)389
 313
 702
 159
 34
 193
Net change in interest margin (FTE)$3,239
 $(3,100) $139
 $2,074
 $(817) $1,257
$3,432
 $(2,208) $1,224
 $1,859
 $(1,793) $66
As shown in the following table, we experienced significant downward pressure on ourOur net yield on interest earning assets over the past 12 months. This pressure is a direct result of FRB monetary policy which has reduced yields on interest earning assets more than rates on interest bearing liabilities.remains at historically low levels. The persistent low interest rate environment coupled with an increase in thea high concentration of AFS securities and trading securities as a percentage of earningsearning assets has also placed downward pressure on net interest margin yield.margin. While the FRB increased short term interest rates in late 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 faster than 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:Average Yield / Rate for the Three Month Periods Ended:
December 31
2013
September 30
2013
June 30
2013
March 31
2013
December 31
2012		December 31
2016		 September 30
2016		 June 30
2016		 March 31
2016		 December 31
2015
Total earning assets4.30% 4.31% 4.35% 4.41% 4.61%3.73% 3.76% 3.66% 3.67% 3.73%
Total interest bearing liabilities0.94% 0.96% 0.99% 1.01% 1.12%0.87% 0.86% 0.83% 0.82% 0.83%
Net yield on interest earning assets (FTE)3.50% 3.48% 3.50% 3.54% 3.65%3.01% 3.05% 2.97% 2.98% 3.04%

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While there have been increases in long term interest rates, short and medium term interest rates continue to be at historically low levels. We do not anticipate any significant changes in net interest margin yield in the near future. Despite the challenging current interest rate environment, we anticipate net interest income and the net yield on interest earning assets (FTE) will modestly increase as most interest earning assets have already repriced at lower rates while some interest bearing liabilities will likely reprice at lower interest rates in coming periods. As shown in in the following table net interest income in the fourth quarter of 2013 exceeded net interest income in each of the previous four quarters.
 Quarter to Date Net Interest Income
 December 31
2013		 September 30
2013		 June 30
2013		 March 31
2013		 December 31
2012
Total interest income$13,603
 $13,505
 $13,440
 $13,528
 $13,845
Total interest expense2,683
 2,736
 2,781
 2,821
 3,051
Net interest income$10,920
 $10,769
 $10,659
 $10,707
 $10,794
 Quarter to Date Net Interest Income (FTE)

December 31
2016		 September 30
2016		 June 30
2016		 March 31
2016		 December 31
2015
Total interest income (FTE)$14,642
 $14,508
 $14,132
 $14,020
 $13,970
Total interest expense2,826
 2,747
 2,678
 2,614
 2,577
Net interest income (FTE)$11,816
 $11,761
 $11,454
 $11,406
 $11,393
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 withinthat reflects the loanmargin 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 charge-offALLL balances as of, and recovery activity for the years ended December 31:unaudited three month periods ended:

2013 2012 2011 2010 2009
ALLL at beginning of period$11,936
 $12,375
 $12,373
 $12,979
 $11,982
Loans charged-off         
Commercial and agricultural907
 1,672
 1,984
 3,731
 3,081
Residential real estate1,004
 1,142
 2,240
 2,524
 2,627
Consumer429
 542
 552
 596
 934
Total loans charged-off2,340
 3,356
 4,776
 6,851
 6,642
Recoveries         
Commercial and agricultural363
 240
 461
 453
 623
Residential real estate181
 122
 177
 638
 546
Consumer249
 255
 314
 297
 377
Total recoveries793
 617
 952
 1,388
 1,546
Provision for loan losses1,111
 2,300
 3,826
 4,857
 6,093
ALLL at end of period$11,500
 $11,936
 $12,375
 $12,373
 $12,979
Net loans charged-off$1,547
 $2,739
 $3,824
 $5,463
 $5,096
Net loans charged-off to average loans outstanding0.20% 0.36% 0.51% 0.75% 0.70%
ALLL as a % of loans at end of period1.42% 1.54% 1.65% 1.68% 1.79%

December 31
2016		 September 30
2016		 June 30
2016		 March 31
2016		 December 31
2015
Total charge-offs$236
 $131
 $208
 $341
 $238
Total recoveries156
 314
 296
 285
 210
Net loan charge-offs80
 (183) (88) 56
 28
Net loan charge-offs to average loans outstanding0.01 % (0.02)% (0.01)% 0.01% —
Provision for loan losses$(320) $17
 $12
 $156
 $(772)
Provision for loan losses to average loans outstanding(0.03)% —
 —
 0.02% (0.09)%
ALLL$7,400
 $7,800
 $7,600
 $7,500
 $7,400
ALLL as a % of loans at end of period0.73 % 0.79 % 0.83 % 0.86% 0.87 %
The following table summarizes our charge-off and recovery activity for the three months ended:years ended December 31:
 December 31
2013		 September 30
2013		 June 30
2013		 March 31
2013		 December 31
2012
Total loans charged-off$497
 $602
 $719
 $522
 $1,469
Total recoveries152
 151
 295
 195
 143
Net loans charged-off345
 451
 424
 327
 1,326
Net loans charged-off to average loans outstanding0.04% 0.06% 0.05% 0.04% 0.17%
Provision for loan losses$245
 $351
 $215
 $300
 $1,200

2016 2015 2014 2013 2012
ALLL at beginning of period$7,400
 $10,100
 $11,500
 $11,936
 $12,375
Charge-offs         
Commercial and agricultural57
 134
 590
 907
 1,672
Residential real estate574
 397
 722
 1,004
 1,142
Consumer285
 373
 316
 429
 542
Total charge-offs916
 904
 1,628
 2,340
 3,356
Recoveries         
Commercial and agricultural540
 549
 550
 363
 240
Residential real estate287
 220
 197
 181
 122
Consumer224
 206
 149
 249
 255
Total recoveries1,051
 975
 896
 793
 617
Provision for loan losses(135) (2,771) (668) 1,111
 2,300
ALLL at end of period7,400
 7,400
 10,100
 11,500
 11,936
Net loan charge-offs$(135) $(71) $732
 $1,547
 $2,739
Net loan charge-offs to average loans outstanding(0.01)% (0.01)% 0.09% 0.20% 0.36%
ALLL as a% of loans at end of period0.73 % 0.87 % 1.21% 1.42% 1.54%


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As the level of net loans charged-off has continued to decline since 2008,declines and credit quality indicators remain stable, we have been able to gradually reducereduced the ALLL in both amount and as a percentage of loans. We anticipate 2014 netWhile they can be more volatile, loans charged-offindividually evaluated for impairment have been steadily declining since December 31, 2015. The decline in loans collectively impaired illustrates the downward trend we are experiencing in our overall level of ALLL to approximate 2013 levels and, as such, we anticipate thatgross loans. The following table illustrates our changes within the ALLL will approximate current levels. While overall net loans charged-off is likely to remain at current levels in the near future, charge-offs on residential real estate loans are anticipated to increase slightly as a percentage of net loans charged-off due to increased foreclosures as a resulttwo main components of the impact of the CFPB ability to repay rules. ALLL.

December 31
2016		 September 30
2016		 June 30
2016		 March 31
2016		 December 31
2015
ALLL         
Individually evaluated for impairment$2,371
 $2,523
 $2,602
 $2,731
 $2,820
Collectively evaluated for impairment5,029
 5,277
 4,998
 4,769
 4,580
Total$7,400
 $7,800
 $7,600
 $7,500
 $7,400
ALLL to gross loans         
Individually evaluated for impairment0.23% 0.26% 0.28% 0.31% 0.33%
Collectively evaluated for impairment0.50% 0.53% 0.55% 0.55% 0.54%
Total0.73% 0.79% 0.83% 0.86% 0.87%
For further discussion of the allocation of the ALLL,, see “Note 65 – Loans and ALLL” of the Notes“Notes to Consolidated Financial Statements.Statements” in Item 8. Financial Statements and Supplementary Data.
Loans Past Due and Loans in Nonaccrual Status
IncreasesFluctuations 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 indicatorsindications of additional deterioration.
 Total Past Due and Nonaccrual

December 31
2013		 September 30
2013		 June 30
2013		 March 31
2013		 December 31
2012
Commercial and agricultural$3,621
 $5,371
 $4,962
 $8,713
 $7,271
Residential real estate7,008
 6,339
 5,080
 4,077
 5,431
Consumer259
 152
 104
 212
 199
Total$10,888
 $11,862
 $10,146
 $13,002
 $12,901
 Total Past Due and Nonaccrual as of December 31
 2013 2012 2011 2011 2009
Commercial and agricultural$3,621
 $7,271
 $7,420
 $9,606
 $8,839
Residential real estate7,008
 5,431
 5,297
 8,119
 10,296
Consumer259
 199
 186
 309
 460
Total$10,888
 $12,901
 $12,903
 $18,034
 $19,595

Total Past Due and Nonaccrual Loans as of December 31
 2016 2015 2014 2013 2012
Commercial and agricultural$4,598
 $2,247
 $4,805
 $3,621
 $7,271
Residential real estate2,716
 2,520
 4,181
 7,008
 5,431
Consumer115
 31
 138
 259
 199
Total$7,429
 $4,798
 $9,124
 $10,888
 $12,901
Total past due and nonaccrual loans to gross loans0.74% 0.56% 1.09% 1.34% 1.67%
Past due and nonaccrual status loans continue to be below historical norms and 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 65 – Loans and ALLL” of the Notes“Notes to Consolidated Financial Statements.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 implementation of ASU No. 2011-02 “A Creditor’s Determination of Whether a Restructuring Is a Troubled Debt Restructuring” has also contributed to the increased level of TDRs.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.nonaccrual status. The majority of new modifications result in terms that satisfy our criteria for continued interest accrual. TDRs that have been placed inon 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, 20132016 or December 31, 2012.2015.
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.

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The following table providestables provide a roll-forward of TDRs for the years ended December 31, 20122015 and 2013:2016:

Accruing Interest Nonaccrual TotalAccruing Interest Nonaccrual Total

Number
of
Loans		 Balance Number
of
Loans		 Balance Number
of
Loans		 BalanceNumber
of
Loans		 Balance Number
of
Loans		 Balance Number
of
Loans		 Balance
January 1, 2012112
 $17,739
 12
 $1,017
 124
 $18,756
January 1, 2015156
 $20,931
 13
 $2,410
 169
 $23,341
New modifications58
 10,149
 9
 1,217
 67
 11,366
28
 6,490
 4
 491
 32
 6,981
Principal payments—
 (1,578) —
 (287) —
 (1,865)
Principal advances (payments)—
 (1,205) —
 (1,002) —
 (2,207)
Loans paid-off(40) (7,719) (4) (158) (44) (7,877)(26) (5,227) (7) (597) (33) (5,824)
Partial charge-off—
 (231) —
 (40) —
 (271)
Partial charge-offs—
 —
 —
 (87) —
 (87)
Balances charged-off(2) (140) (4) (100) (6) (240)(2) (83) —
 —
 (2) (83)
Transfers to OREO(2) (134) (5) (380) (7) (514)—
 —
 (6) (796) (6) (796)
Transfers to accrual status2
 131
 (2) (131) —
 —
3
 292
 (3) (292) —
 —
Transfers to nonaccrual status(13) (1,686) 13
 1,686
 —
 —
(4) (267) 4
 267
 —
 —
December 31, 2012115
 16,531
 19
 2,824
 134
 19,355
December 31, 2015155
 20,931
 5
 394
 160
 21,325
New modifications76
 12,192
 5
 424
 81
 12,616
16
 3,362
 2
 459
 18
 3,821
Principal payments—
 (891) —
 (292) —
 (1,183)
Principal advances (payments)—
 (1,036) —
 (37) —
 (1,073)
Loans paid-off(17) (2,844) (6) (800) (23) (3,644)(15) (2,105) (1) (221) (16) (2,326)
Partial charge-off—
 (79) —
 (477) —
 (556)
Partial charge-offs—
 —
 —
 (133) —
 (133)
Balances charged-off(3) (167) (1) (27) (4) (194)(3) (197) —
 —
 (3) (197)
Transfers to OREO(1) (33) (7) (496) (8) (529)—
 —
 (1) (35) (1) (35)
Transfers to accrual status2
 133
 (2) (133) —
 —
5
 340
 (5) (340) —
 —
Transfers to nonaccrual status(7) (419) 7
 419
 —
 —
(5) (702) 5
 702
 —
 —
December 31, 2013165
 $24,423
 15
 $1,442
 180
 $25,865
December 31, 2016153
 $20,593
 5
 $789
 158
 $21,382
The following table summarizes our TDRs as of December 31:
2013 2012 20112016 2015 2014

Accruing
Interest		 Nonaccrual Total Accruing
Interest		 Nonaccrual Total Accruing
Interest		 Nonaccrual TotalAccruing
Interest		 Nonaccrual Total Accruing
Interest		 Nonaccrual Total Accruing
Interest		 Nonaccrual Total
Current$21,690
 $1,189
 $22,879
 $16,301
 $941
 $17,242
 $16,125
 $514
 $16,639
$17,557
 $559
 $18,116
 $20,550
 $146
 $20,696
 $20,012
 $272
 $20,284
Past due 30-59 days2,158
 37
 2,195
 158
 561
 719
 1,564
 344
 1,908
2,898
 230
 3,128
 357
 —
 357
 804
 592
 1,396
Past due 60-89 days575
 —
 575
 72
 41
 113
 50
 85
 135
138
 —
 138
 24
 —
 24
 115
 3
 118
Past due 90 days or more—
 216
 216
 —
 1,281
 1,281
 —
 74
 74
—
 —
 —
 —
 248
 248
 —
 1,543
 1,543
Total$24,423
 $1,442
 $25,865
 $16,531
 $2,824
 $19,355
 $17,739
 $1,017
 $18,756
$20,593
 $789
 $21,382
 $20,931
 $394
 $21,325
 $20,931
 $2,410
 $23,341
2010 20092013 2012

Accruing
Interest		 Nonaccrual Total Accruing
Interest		 Nonaccrual TotalAccruing
Interest		 Nonaccrual Total Accruing
Interest		 Nonaccrual Total
Current$4,798
 $499
 $5,297
 $2,754
 $786
 $3,540
$21,690
 $1,189
 $22,879
 $16,301
 $941
 $17,242
Past due 30-59 days175
 26
 201
 107
 80
 187
2,158
 37
 2,195
 158
 561
 719
Past due 60-89 days102
 —
 102
 —
 824
 824
575
 —
 575
 72
 41
 113
Past due 90 days or more—
 163
 163
 —
 426
 426
—
 216
 216
 —
 1,281
 1,281
Total$5,075
 $688
 $5,763
 $2,861
 $2,116
 $4,977
$24,423
 $1,442
 $25,865
 $16,531
 $2,824
 $19,355
Additional disclosures about TDRs are included in “Note 65 – Loans and ALLL” of the Notes“Notes to Consolidated Financial Statements.Statements” in Item 8. Financial Statements and Supplementary Data.

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Impaired Loans
The following is a summary of information pertaining to impaired loans as of December 31:
2013 20122016 2015

Outstanding
Balance		 Unpaid
Principal
Balance		 Valuation
Allowance		 Outstanding
Balance		 Unpaid
Principal
Balance		 Valuation
Allowance		Outstanding
Balance		 Unpaid
Principal
Balance		 Valuation
Allowance		 Outstanding
Balance		 Unpaid
Principal
Balance		 Valuation
Allowance
TDRs                      
Commercial real estate$10,663
 $11,193
 $1,585
 $9,227
 $9,640
 $1,333
$6,264
 $6,383
 $713
 $7,619
 $7,858
 $818
Commercial other1,310
 1,340
 62
 1,167
 1,197
 38
1,444
 1,455
 25
 188
 199
 11
Agricultural real estate1,459
 1,459
 30
 91
 91
 32
4,037
 4,037
 —
 3,549
 3,549
 —
Agricultural other79
 199
 —
 569
 689
 59
1,380
 1,380
 1
 519
 519
 2
Residential real estate senior liens12,266
 12,841
 2,010
 8,224
 8,670
 1,429
8,058
 8,437
 1,539
 9,155
 9,457
 1,851
Residential real estate junior liens20
 20
 4
 21
 57
 4
71
 71
 13
 133
 133
 28
Home equity lines of credit102
 402
 —
 127
 427
 —
Consumer secured68
 69
 —
 56
 56
 —
26
 26
 —
 35
 35
 —
Total TDRs25,865
 27,121
 3,691
 19,355
 20,400
 2,895
21,382
 22,191
 2,291
 21,325
 22,177
 2,710
Other impaired loans                      
Commercial real estate1,707
 2,193
 330
 1,817
 2,304
 320
151
 226
 3
 162
 175
 —
Commercial other136
 217
 58
 2,245
 2,376
 359
—
 —
 —
 —
 —
 —
Agricultural real estate—
 —
 —
 —
 —
 —
Agricultural other—
 —
 —
 63
 63
 —
128
 128
 —
 —
 —
 —
Residential real estate senior liens1,795
 2,473
 268
 2,226
 3,002
 354
406
 612
 76
 841
 1,308
 108
Residential real estate junior liens28
 45
 5
 51
 61
 9
1
 11
 1
 10
 30
 2
Home equity lines of credit193
 493
 —
 182
 482
 —
—
 —
 —
 —
 7
 —
Consumer secured51
 79
 —
 19
 28
 —
—
 —
 —
 —
 —
 —
Total other impaired loans3,910
 5,500
 661
 6,603
 8,316
 1,042
686
 977
 80
 1,013
 1,520
 110
Total impaired loans$29,775
 $32,621
 $4,352
 $25,958
 $28,716
 $3,937
$22,068
 $23,168
 $2,371
 $22,338
 $23,697
 $2,820
Additional disclosure related to impaired loans is included in “Note 65 – Loans and ALLL” of the Notes“Notes to Consolidated Financial Statements.Statements” in Item 8. Financial Statements and Supplementary Data.
Nonperforming Assets
The following table summarizes our nonperforming assets as of December 31:
2013 2012 2011 2010 20092016 2015 2014 2013 2012
Nonaccrual loans$3,244
 $7,303
 $6,389
 $5,610
 $8,522
Nonaccrual status loans$1,060
 $792
 $4,044
 $3,244
 $7,303
Accruing loans past due 90 days or more142
 428
 760
 486
 768
633
 —
 148
 142
 428
Total nonperforming loans3,386
 7,731
 7,149
 6,096
 9,290
1,693
 792
 4,192
 3,386
 7,731
Foreclosed assets1,412
 2,018
 1,876
 2,067
 1,157
231
 421
 885
 1,412
 2,018
Total nonperforming assets$4,798
 $9,749
 $9,025
 $8,163
 $10,447
$1,924
 $1,213
 $5,077
 $4,798
 $9,749
Nonperforming loans as a % of total loans0.42% 1.00% 0.95% 0.83% 1.28%0.17% 0.09% 0.50% 0.42% 1.00%
Nonperforming assets as a % of total assets0.32% 0.68% 0.67% 0.67% 0.91%0.11% 0.07% 0.33% 0.32% 0.68%
After a loan is 90 days past due, it is generally placed inon nonaccrual status unless it is well secured and in the process of collection. Upon transferring the loansa 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. Current levels of nonperforming loans continue to reflect historic lows.

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Included in the nonaccrual loan balances above were loans currently classified as TDRs as of December 31:
 2013 2012 2011 2010 2009
Commercial and agricultural$833
 $2,325
 $520
 $115
 $1,692
Residential real estate609
 499
 497
 573
 424
Total$1,442
 $2,824
 $1,017
 $688
 $2,116

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Table of Contents

Nonaccrual TDRs increased in 2012 as a result of two large TDRs that were granted during the year. These relationships had a balance of $756 and $1,710 as of December 31, 2013 and 2012, respectively.
The following table lists individually significant commercial and agricultural loan relationships in nonaccrual status. To be classified as individually significant, the recorded investment in nonaccrual loans to each borrower must have exceeded $1,000 as of the end of each period.
 2013 2012 2011

Outstanding
Balance		 Specific
Allocation		 Outstanding
Balance		 Specific
Allocation		 Outstanding
Balance		 Specific
Allocation
Borrower 1$—

 $—
 $—
(A) $—
 $1,014
 $—
(C)
Borrower 2—

 —
 —
(B) —
 1,900
 —
(D)
Borrower 3—
(A) —
 2,077

 359
 —
 —

Borrower 4—

 —
 —

 —
 —
 —

Others not individually significant3,244
    5,226
    3,475
   
Total$3,244
    $7,303
    $6,389
   
 2010 2009
 Outstanding
Balance		 Specific
Allocation		 Outstanding
Balance		 Specific
Allocation
Borrower 1$—

 $—
 $—
 $—

Borrower 22,679

 345
 —
 —

Borrower 3—

 —
 —
 —

Borrower 4—
(B) —
 1,800
 —
(D)
Others not individually significant2,931
    6,722
   
Total$5,610
    $8,522
   
A -Transferred to accrual status.
B -Loan was partially charged-off with the remaining outstanding balance paid off by the customer.
C -No specific allocation as the net realizable value of the loan’s underlying collateral value exceeded the loan’s carrying balance.
D -No specific allocation established for this loan as it was charged down to reflect the current fair value of the underlying real estate.

2016 2015 2014 2013 2012
Commercial and agricultural$405
 $232
 $1,995
 $833
 $2,325
Residential real estate384
 162
 262
 609
 499
Consumer—
 —
 153
 —
 —
Total$789
 $394
 $2,410
 $1,442
 $2,824
Additional disclosures about nonaccrual status loans are included in “Note 65 – Loans and ALLL”of the Notes“Notes to Consolidated Financial Statements.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.charge-off. We believe that we have identified all impaired loans deemed to be impaired have been identified.as of December 31, 2016.
We believe that the level of the ALLL is appropriate as of December 31, 2013 and we2016. 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 appropriate.at the appropriate level.

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Noninterest Income and Noninterest Expenses
Noninterest income consists of service charges and fees, gains on sale of mortgage loans, earnings on corporate owned life insurance policies, gains and losses on sales of AFS securities, and other income. Significant noninterest account balances are highlighted in the following table with additional descriptions of significant fluctuations for the years ended December 31:
    Change   Change    Change   Change
2013 2012 $ % 2011 $ %2016 2015 $ % 2014 $ %
Service charges and fees                          
ATM and debit card fees$2,444
 $2,411
 $33
 1.37 % $2,084
 $327
 15.69 %
NSF and overdraft fees$2,243
 $2,367
 $(124) (5.24)% $2,500
 $(133) (5.32)%1,815
 1,855
 (40) (2.16)% 2,156
 (301) (13.96)%
ATM and debit card fees1,944
 1,874
 70
 3.74 % 1,736
 138
 7.95 %
Trust fees1,154
 1,061
 93
 8.77 % 979
 82
 8.38 %
Freddie Mac servicing fee737
 757
 (20) (2.64)% 732
 25
 3.42 %696
 712
 (16) (2.25)% 720
 (8) (1.11)%
Service charges on deposit accounts373
 337
 36
 10.68 % 324
 13
 4.01 %349
 345
 4
 1.16 % 354
 (9) (2.54)%
Net OMSRs income (loss)269
 (89) 358
 N/M
 (293) 204
 (69.62)%
Net OMSR income (loss)(199) (14) (185) N/M
 (36) 22
 61.11 %
All other116
 125
 (9) (7.20)% 140
 (15) (10.71)%125
 128
 (3) (2.34)% 133
 (5) (3.76)%
Total service charges and fees6,836
 6,432
 404
 6.28 % 6,118
 314
 5.13 %5,230
 5,437
 (207) (3.81)% 5,411
 26
 0.48 %
Gain on sale of mortgage loans962
 1,576
 (614) (38.96)% 538
 1,038
 N/M
Net gain on sale of mortgage loans651
 573
 78
 13.61 % 514
 59
 11.48 %
Earnings on corporate owned life insurance policies732
 698
 34
 4.87 % 609
 89
 14.61 %761
 771
 (10) (1.30)% 751
 20
 2.66 %
Gain (loss) on sale of AFS securities171
 1,119
 (948) (84.72)% 3
 1,116
 N/M
Net gains (losses) on sale of AFS securities245
 163
 82
 50.31 % 97
 66
 68.04 %
Other          
               
Brokerage and advisory fees704
 574
 130
 22.65 % 545
 29
 5.32 %
Gain on sale of OREO286
 220
 66
 30.00 % 62
 158
 N/M
Trust and brokerage advisory fees2,705
 2,161
 544
 25.17 % 2,069
 92
 4.45 %
Corporate Settlement Solutions joint venture143
 504
 (361) (71.63)% (182) 686
 N/M
415
 463
 (48) (10.37)% 76
 387
 509.21 %
Other341
 407
 (66) (16.22)% 525
 (118) (22.48)%1,101
 791
 310
 39.19 % 407
 384
 94.35 %
Total other1,474
 1,705
 (231) (13.55)% 950
 755
 79.47 %4,221
 3,415
 806
 23.60 % 2,552
 863
 33.82 %
Total noninterest income$10,175
 $11,530
 $(1,355) (11.75)% $8,218
 $3,312
 40.30 %$11,108
 $10,359
 $749
 7.23 % $9,325
 $1,034
 11.09 %

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Table of Contents

Significant changes in noninterest income are detailed below:
We continuously analyze various fees related to deposit accounts including service charges and NSF and overdraft fees. Based on these analyses, we make any necessary adjustments to ensure that our fee structure is within the range of our competitors, while at the same time making sure that the fees remain fair to deposit customers. NSF and overdraft fees represent the largest single component of service charges and fees. While we have experienced significant increases in deposit accounts, NSF and overdraft fees continue to decline. This decline has primarily been the result of reduced overdraft activity by our customers. We expect this trend to continue.
As customers continue to increase their dependence on ATM and debit cards,card fees fluctuate from period-to-period based on usage of ATM and debit cards. While we have seen a corresponding increase in fees. We do not anticipate significant changes to our ATM and debit fee structure; however,card fees, we do expect that these fees will continue to increase in 2017 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 2017 to approximate 2016 levels.
Offering rates on residential mortgage loans and increased prepayment speeds have been the most significant drivers behind the fluctuations in net OMSR income (loss). We anticipate increases in our originations in purchase money mortgage activity as a result of our various initiatives to drive growth. Additionally, we anticipate increased mortgage rates; therefore, we anticipate net OMSR income to improve into 2017.
We are continually analyzing our AFS securities for potential sale opportunities. Securities with unrealized gains and less than desirable yields may be sold for funding and profitability purposes. During the second quarter of 2016, we identified several mortgage-backed securities that were desirable to be sold and recognized gains with these sales. We will continue to analyze our AFS securities portfolio for potential sale opportunities in 2017 and sell AFS securities when appropriate.
In recent periods, we have invested considerable efforts to increase our market share in trust and brokerage and advisory services. These efforts have translated into increases in trust fees and brokerage and advisory fees. We expect this trend to continue.anticipate that these fees in 2017 will approximate 2016 levels.
Offering rates on residential mortgage loansIncluded in other income in 2016 is the most significant driver behind fluctuations in thea $469 gain on salea redemption of mortgage loans and net OMSRs income (loss). As offering rates increase, we typically experience reductions in the gain on sale of mortgage loans. Offsetting these declines are increases in the value of our mortgage servicing portfolio, leading to the increase in net OMSRs income. As mortgage rates are not expected to noticeably decline in the foreseeable future and purchase money mortgage activity will likely remain soft, we expect mortgage origination volumes to significantly decline in 2014 leading to further declines in the gain on sale of mortgage loans.
We are continually analyzing our AFS securities for potential sale opportunities. These analyses identified several mortgage-backed securities pools in 2013 and 2012 that made economic sense to sell. We do not anticipate any significant investment sales during 2014.
Earnings on corporatea bank owned life insurance policies increased in 2012 as a result of the purchase of an additional $4,000 in policies in the third quarter of 2011. Future earnings are expected to approximate current levels.
As property values and the facts and circumstances surrounding each property vary, gains or losses from the sale of OREO fluctuates from year to year. We do not anticipate any significant gains or losses on assets currently included in OREO.
Income from the joint venture in Corporate Settlement Solutions has declined in 2013 as a result of the decline in mortgage loan refinancing activity. Additionally, Corporate Settlement Solutions has increased staffing levels to expand its national operations. We expect 2014 earnings to approximate current levels.
Thepolicy. All other fluctuations in all other income is spread throughout various categories, none of which are individually significant. We do not anticipate any significant fluctuations from current levels in 2014.


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Noninterest expenses include compensation and benefits, furniture and equipment, occupancy, net AFS security impairment loss, and other expenses. 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    Change   Change
2013 2012 $ % 2011 $ %2016 2015 $ % 2014 $ %
Compensation and benefits                          
Employee salaries$15,677
 $15,374
 $303
 1.97 % $14,377
 $997
 6.93 %$13,941
 $13,760
 $181
 1.32 % $13,311
 $449
 3.37 %
Employee benefits5,788
 5,853
 (65) (1.11)% 4,915
 938
 19.08 %5,541
 5,309
 232
 4.37 % 5,191
 118
 2.27 %
Total compensation and benefits21,465
 21,227
 238
 1.12 % 19,292
 1,935
 10.03 %19,482
 19,069
 413
 2.17 % 18,502
 567
 3.06 %
Furniture and equipment                          
Service contracts2,277
 1,995
 282
 14.14 % 1,898
 97
 5.11 %3,061
 2,951
 110
 3.73 % 2,542
 409
 16.09 %
Depreciation1,889
 1,796
 93
 5.18 % 1,916
 (120) (6.26)%2,039
 1,949
 90
 4.62 % 1,850
 99
 5.35 %
ATM and debit card fees710
 690
 20
 2.90 % 629
 61
 9.70 %887
 742
 145
 19.54 % 722
 20
 2.77 %
All other69
 79
 (10) (12.66)% 54
 25
 46.30 %175
 244
 (69) (28.28)% 223
 21
 9.42 %
Total furniture and equipment4,945
 4,560
 385
 8.44 % 4,497
 63
 1.40 %6,162
 5,886
 276
 4.69 % 5,337
 549
 10.29 %
Occupancy                          
Depreciation782
 728
 54
 7.42 % 701
 27
 3.85 %
Outside services671
 605
 66
 10.91 % 587
 18
 3.07 %740
 701
 39
 5.56 % 718
 (17) (2.37)%
Depreciation667
 621
 46
 7.41 % 605
 16
 2.64 %
Property taxes554
 526
 28
 5.32 % 515
 11
 2.14 %
Utilities502
 463
 39
 8.42 % 462
 1
 0.22 %551
 528
 23
 4.36 % 524
 4
 0.76 %
Property taxes499
 501
 (2) (0.40)% 470
 31
 6.60 %
All other314
 329
 (15) (4.56)% 346
 (17) (4.91)%600
 554
 46
 8.30 % 521
 33
 6.33 %
Total occupancy2,653
 2,519
 134
 5.32 % 2,470
 49
 1.98 %3,227
 3,037
 190
 6.26 % 2,979
 58
 1.95 %
Net AFS securities impairment loss—
 282
 (282) (100.00)% —
 282
 100.00 %
Other                          
Marketing and community relations1,131
 1,965
 (834) (42.44)% 1,174
 791
 67.38 %
Audit and related fees944
 889
 55
 6.19 % 809
 80
 9.89 %
Director fees851
 827
 24
 2.90 % 775
 52
 6.71 %
Consulting fees800
 487
 313
 64.27 % 349
 138
 39.54 %
OTTI on AFS securities770
 —
 770
 N/M
 —
 —
 — %
FDIC insurance premiums1,082
 864
 218
 25.23 % 1,086
 (222) (20.44)%719
 813
 (94) (11.56)% 842
 (29) (3.44)%
Directors fees819
 885
 (66) (7.46)% 842
 43
 5.11 %
Audit and related fees738
 711
 27
 3.80 % 714
 (3) (0.42)%
Marketing costs586
 497
 89
 17.91 % 427
 70
 16.39 %
Donations and community relations582
 841
 (259) (30.80)% 1,004
 (163) (16.24)%
Education and travel502
 588
 (86) (14.63)% 526
 62
 11.79 %536
 343
 193
 56.27 % 461
 (118) (25.60)%
Loan underwriting fees423
 403
 20
 4.96 % 331
 72
 21.75 %535
 347
 188
 54.18 % 361
 (14) (3.88)%
Postage and freight396
 381
 15
 3.94 % 397
 (16) (4.03)%
Printing and supplies396
 424
 (28) (6.60)% 405
 19
 4.69 %391
 461
 (70) (15.18)% 367
 94
 25.61 %
Postage and freight387
 389
 (2) (0.51)% 388
 1
 0.26 %
Legal fees359
 268
 91
 33.96 % 302
 (34) (11.26)%208
 295
 (87) (29.49)% 320
 (25) (7.81)%
Consulting fees315
 482
 (167) (34.65)% 386
 96
 24.87 %
Amortization of deposit premium221
 260
 (39) (15.00)% 299
 (39) (13.04)%162
 169
 (7) (4.14)% 183
 (14) (7.65)%
Foreclosed asset and collection211
 202
 9
 4.46 % 576
 (374) (64.93)%
State taxes140
 187
 (47) (25.13)% 57
 130
 N/M
Other losses109
 300
 (191) (63.67)% 54
 246
 N/M
241
 150
 91
 60.67 % 250
 (100) (40.00)%
All other1,517
 1,123
 394
 35.08 % 1,131
 (8) (0.71)%1,305
 1,559
 (254) (16.29)% 1,740
 (181) (10.40)%
Total other8,350
 9,051
 (701) (7.75)% 8,271
 780
 9.43 %9,026
 8,059
 967
 12.00 % 8,285
 (226) (2.73)%
Total noninterest expenses$37,413
 $37,639
 $(226) (0.60)% $34,530
 $3,109
 9.00 %$37,897
 $36,051
 $1,846
 5.12 % $35,103
 $948
 2.70 %


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Significant changes in noninterest expenses are detailed below:
We acquired two branches in mid-2015 which resulted in increased expenses in 2016 for most of the categories presented above. None of the increases are individually significant.
Employee salaries haveConsulting fees in 2016 increased as a result of normal merit increases and dueoutsourced operational functions related to our continued growth. Employee benefit expenses increasedinvestment and trust services, consulting services to streamline processes, and talent recruitment services. Fees in 2012 primarily as a result of increases in health care and retirement related expenses. Despite the increase in employee salaries in 2013, employee benefit expenses declined. This decline was the result of decreases in retirement related expenses. We anticipate that total employee benefits will increase moderately in 2014.
Service contracts have increased during 2013 due to costs related to data lines as well as increases in various other contracts as we continue to expand our on-line services offered to customers. Service contracts2017 are expected to continue their increases in 2014.
approximate 2016 levels.
During the firstfourth quarter of 2012,2016, we recorded a credit impairment onidentified an AFS security through earnings due to a bond being downgraded below investment grade. We continuously monitor the AFS security portfolio for other potential that was impaired which resulted in an OTTI. For further discussion, see “Note 5 – AFS Securities” expense of the Notes to Consolidated Financial Statements.
$770.
We have consistently been a strong supporter of the various communities, schools, and charities in the markets we serve. We sponsor a foundation, which we established in 1996, that is funded by discretionary donations. The affiliated foundation provides centralized oversight for donations to organizations that benefit our communities. Included in marketingdonations and community relations were discretionary donations to the foundationThe Isabella Bank Foundation, a non-controlled affiliated entity, of $200, $850,$258 and $250$500 for the years ended December 31, 2013, 2012,2015, and 2011,2014, respectively.
FDIC insurance premiums increased in 2013 as a result of us receiving less of a refund for prepaid FDIC insurance premiums than we had anticipated. FDIC insurance premiums are anticipated to decline slightly in 2014.
Audit Donations and related feescommunity relations fluctuate from period to period based on the timing of services performed. Audit and related fees areperiod-to-period with 2017 expenses expected to approximate current levels in 2014.
2016 levels.
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. Education and travel expensesExpenses in 2017 are expected to approximate 2016 levels.
The increase in 2014, butloan underwriting fees is related to the increase in loan volume throughout 2016. Loan underwriting fees are not expected to exceed 2012 levels.
approximate 2016 levels in 2017.
Legal fees increased in 20132015 include approximately $133 of legal service expense incurred as a result of higher costs associated with filing documents withtwo branch acquisitions during the SEC, primarily those associated with XBRL tagging as well as legal costs incurred in relation to loan collection efforts. We expect legal fees to approximate current levels for 2014.
During the firstthird quarter of 2012, we incurred consultingthat year. Legal fees to review our FHLB advances for potential restructuring options. These fees were also elevated in 2012 due to the engagement of consultants to review our loan prepayment and deposit decay assumptions and various information technology projects. Consulting fees are anticipated to approximate current levels in 2014.
Other losses increased significantly in 2012 primarily as a result of losses incurred related to fraudulent activities as well as losses related to the repurchase of a loan that we previously sold to a third party. While other losses fluctuate from period to period, they are expected to approximate current2016 levels in 2014.2017.
The fluctuations in all other expenses are spread throughout various categories, none of which are individually significant.

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Analysis of Changes in Financial Condition
The following table shows the composition and changes in our balance sheet as of December 31:
    Change    Change
2013 2012 $ %2016 2015 $ %
ASSETS              
Cash and cash equivalents$41,558
 $24,920
 $16,638
 66.77 %$22,894
 $21,569
 $1,325
 6.14 %
Certificates of deposit held in other financial institutions580
 4,465
 (3,885) (87.01)%
Trading securities525
 1,573
 (1,048) (66.62)%
AFS securities    

         
Amortized cost of AFS securities517,614
 490,420
 27,194
 5.55 %557,648
 654,348
 (96,700) (14.78)%
Unrealized gains (losses) on AFS securities(5,552) 13,590
 (19,142) (140.85)%448
 5,788
 (5,340) (92.26)%
AFS securities512,062
 504,010
 8,052
 1.60 %558,096
 660,136
 (102,040) (15.46)%
Mortgage loans AFS1,104
 3,633
 (2,529) (69.61)%1,816
 1,187
 629
 52.99 %
Loans              
Gross loans808,037
 772,753
 35,284
 4.57 %1,010,615
 850,492
 160,123
 18.83 %
Less allowance for loan and lease losses11,500
 11,936
 (436) (3.65)%7,400
 7,400
 —
 —
Net loans796,537
 760,817
 35,720
 4.69 %1,003,215
 843,092
 160,123
 18.99 %
Premises and equipment25,719
 25,787
 (68) (0.26)%29,314
 28,331
 983
 3.47 %
Corporate owned life insurance policies24,401
 22,773
 1,628
 7.15 %26,300
 26,423
 (123) (0.47)%
Accrued interest receivable5,442
 5,227
 215
 4.11 %6,580
 6,269
 311
 4.96 %
Equity securities without readily determinable fair values18,293
 18,118
 175
 0.97 %21,694
 22,286
 (592) (2.66)%
Goodwill and other intangible assets46,311
 46,532
 (221) (0.47)%48,666
 48,828
 (162) (0.33)%
Other assets20,605
 12,784
 7,821
 61.18 %13,576
 9,991
 3,585
 35.88 %
TOTAL ASSETS$1,493,137
 $1,430,639
 $62,498
 4.37 %$1,732,151
 $1,668,112
 $64,039
 3.84 %
LIABILITIES AND SHAREHOLDERS’ EQUITY              
Liabilities              
Deposits$1,043,766
 $1,017,667
 $26,099
 2.56 %$1,195,040
 $1,164,563
 $30,477
 2.62 %
Borrowed funds279,326
 241,001
 38,325
 15.90 %337,694
 309,732
 27,962
 9.03 %
Accrued interest payable and other liabilities9,436
 7,482
 1,954
 26.12 %11,518
 9,846
 1,672
 16.98 %
Total liabilities1,332,528
 1,266,150
 66,378
 5.24 %1,544,252
 1,484,141
 60,111
 4.05 %
Shareholders’ equity160,609
 164,489
 (3,880) (2.36)%187,899
 183,971
 3,928
 2.14 %
TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY$1,493,137
 $1,430,639
 $62,498
 4.37 %$1,732,151
 $1,668,112
 $64,039
 3.84 %
As shown above, total assets have increased $62,498$64,039 since December 31, 2012. During 2013, we increased our cost basis2015 which was primarily driven by loan growth of $160,123. This growth was funded by the sale of AFS securities by $27,194 while loans grew by $35,284. The increase in our AFS securities portfolio was partially offset by $19,142 in unrealized losses observed during the year. This balance sheet growth was funded byand increases in both deposits and borrowed funds. While we do anticipate that generating quality loans will continue to be competitive, we expect that loans will continue to grow in 2014.2017.
A discussion of changes in balance sheet amounts by major categories follows:
Certificates of depositCash and cash equivalents
Included in cash and cash equivalents are funds held in other financial institutions
During 2013, we reinvested maturities of certificates of deposit held in other financial institutions into AFS investment securities to increase net interest margins (as the yields on AFS investment securities exceeded the potential reinvestment rates for certificates of deposits held in other financial institutions during the year). This trend is likely to continue in 2014.


39with
FRB which fluctuate from period-to-period.
Table of Contents

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 loan demand outpaced deposit growth in recent periods, we sold AFS securities to provide funding. We anticipate that future increases in our AFS securities will be in the form of mortgage-backed securities and collateralized mortgage obligations.

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

2013 2012 20112016 2015 2014 2013 2012
Government sponsored enterprises$23,745
 $25,776
 $397
$10,259
 $24,345
 $24,136
 $23,745
 $25,776
States and political subdivisions201,988
 182,743
 174,938
212,919
 232,217
 215,345
 201,988
 182,743
Auction rate money market preferred2,577
 2,778
 2,049
2,794
 2,866
 2,619
 2,577
 2,778
Preferred stocks5,827
 6,363
 5,033
3,425
 3,299
 6,140
 5,827
 6,363
Mortgage-backed securities144,115
 155,345
 143,602
227,256
 263,384
 166,926
 144,115
 155,345
Collateralized mortgage obligations133,810
 131,005
 99,101
101,443
 134,025
 152,368
 133,810
 131,005
Total$512,062
 $504,010
 $425,120
$558,096
 $660,136
 $567,534
 $512,062
 $504,010
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, 2013.2016. 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    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		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 (%)Amount Yield (%) Amount Yield (%) Amount Yield (%) Amount Yield (%) Amount Yield (%)
Government sponsored enterprises$—
 — $73
 7.91 $23,672
 1.46 $—
 — $—
 —$32
 7.91 $9,936
 2.01 $291
 2.05 $—
 — $—
 —
States and political subdivisions961
 6.51 38,794
 4.76 98,965
 4.93 63,268
 4.10 —
 —27,672
 2.25 72,622
 4.52 84,408
 4.18 28,217
 4.72 —
 —
Mortgage-backed securities—
 — —
 — —
 — —
 — 144,115
 2.05—
 — —
 — —
 — —
 — 227,256
 2.34
Collateralized mortgage obligations—
 — —
 — —
 — —
 — 133,810
 2.30—
 — —
 — —
 — —
 — 101,443
 2.38
Auction rate money market preferred—
 — —
 — —
 — —
 — 2,577
 6.28—
 — —
 — —
 — —
 — 2,794
 6.29
Preferred stocks—
 — —
 — —
 — —
 — 5,827
 5.80—
 — —
 — —
 — —
 — 3,425
 5.44
Total$961
 6.51 $38,867
 4.77 $122,637
 4.26 $63,268
 4.10 $286,329
 2.28$27,704
 2.26 $82,558
 4.22 $84,699
 4.17 $28,217
 4.72 $334,918
 2.42

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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 which include specific criteria against lending outside our defined market areas, lending limits to a single borrower, and strict loan to collateral value limits.limits, and a defined market area. 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:
2013 2012 2011 2010 20092016 2015 2014 2013 2012
Commercial$392,104
 $371,505
 $365,714
 $348,852
 $340,274
$575,664
 $448,381
 $433,270
 $393,164
 $372,332
Agricultural92,589
 83,606
 74,645
 71,446
 64,845
126,492
 115,911
 104,721
 92,589
 83,606
Residential real estate289,931
 284,148
 278,360
 284,029
 285,838
266,050
 251,501
 266,155
 291,499
 285,070
Consumer33,413
 33,494
 31,572
 30,977
 32,359
42,409
 34,699
 32,404
 33,525
 33,619
Total$808,037
 $772,753
 $750,291
 $735,304
 $723,316
$1,010,615
 $850,492
 $836,550
 $810,777
 $774,627
The following table presents the change in the loan portfolio categories for the years ended December 31:
2013 2012 20112016 2015 2014
$ Change % Change $ Change % Change $ Change % Change$ Change % Change $ Change % Change $ Change % Change
Commercial$20,599
 5.54 % $5,791
 1.58% $16,862
 4.83 %$127,283
 28.39% $15,111
 3.49 % $40,106
 10.20 %
Agricultural8,983
 10.74 % 8,961
 12.00% 3,199
 4.48 %10,581
 9.13% 11,190
 10.69 % 12,132
 13.10 %
Residential real estate5,783
 2.04 % 5,788
 2.08% (5,669) (2.00)%14,549
 5.78% (14,654) (5.51)% (25,344) (8.69)%
Consumer(81) (0.24)% 1,922
 6.09% 595
 1.92 %7,710
 22.22% 2,295
 7.08 % (1,121) (3.34)%
Total$35,284
 4.57 % $22,462
 2.99% $14,987
 2.04 %$160,123
 18.83% $13,942
 1.67 % $25,773
 3.18 %
We expectWhile competition for commercial loans continues to be strong, we experienced significant growth in this segment of the portfolio during 2016 and anticipate strong growth in 2017. Residential real estate and consumer loans increased during 2016 and we anticipate continued growth in 2017 as a result of initiatives implemented during 2016 designed to increase moderately in 2014, with most of the growth in commercial loans.loan volume.

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“Note 1 – Nature of Operations and Summary of Significant Accounting Policies”Policies” and “Note 20 – Fair Value”Value” of the Notes“Notes to Consolidated Financial Statements)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:
2013 2012 2011 2010 20092016 2015 2014 2013 2012
Noninterest bearing demand deposits$158,428
 $143,735
 $119,072
 $104,902
 $96,875
$205,071
 $191,376
 $181,826
 $158,428
 $143,735
Interest bearing demand deposits192,089
 181,259
 163,653
 142,259
 128,111
209,325
 212,666
 190,984
 192,089
 181,259
Savings deposits243,237
 228,338
 193,902
 177,817
 157,020
347,230
 337,641
 261,412
 243,237
 228,338
Certificates of deposit362,473
 376,790
 395,777
 386,435
 356,594
321,914
 324,101
 339,824
 362,473
 376,790
Brokered certificates of deposit56,329
 55,348
 54,326
 53,748
 50,933
88,632
 73,815
 72,134
 56,329
 55,348
Internet certificates of deposit31,210
 32,197
 31,434
 12,178
 13,119
22,868
 24,964
 28,304
 31,210
 32,197
Total$1,043,766
 $1,017,667
 $958,164
 $877,339
 $802,652
$1,195,040
 $1,164,563
 $1,074,484
 $1,043,766
 $1,017,667

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The following table presents the change in the deposit categories for the years ended December 31:
2013 2012 20112016 2015 2014
$ Change % Change $ Change % Change $ Change % Change$ Change % Change $ Change % Change $ Change % Change
Noninterest bearing demand deposits$14,693
 10.22 % $24,663
 20.71 % $14,170
 13.51%$13,695
 7.16 % $9,550
 5.25 % $23,398
 14.77 %
Interest bearing demand deposits10,830
 5.97 % 17,606
 10.76 % 21,394
 15.04%(3,341) (1.57)% 21,682
 11.35 % (1,105) (0.58)%
Savings deposits14,899
 6.52 % 34,436
 17.76 % 16,085
 9.05%9,589
 2.84 % 76,229
 29.16 % 18,175
 7.47 %
Certificates of deposit(14,317) (3.80)% (18,987) (4.80)% 9,342
 2.42%(2,187) (0.67)% (15,723) (4.63)% (22,649) (6.25)%
Brokered certificates of deposit981
 1.77 % 1,022
 1.88 % 578
 1.08%14,817
 20.07 % 1,681
 2.33 % 15,805
 28.06 %
Internet certificates of deposit(987) (3.07)% 763
 2.43 % 19,256
 158.12%(2,096) (8.40)% (3,340) (11.80)% (2,906) (9.31)%
Total$26,099
 2.56 % $59,503
 6.21 % $80,825
 9.21%$30,477
 2.62 % $90,079
 8.38 % $30,718
 2.94 %
We anticipateDeposit demand continues to be driven by non-contractual deposits, to continue to increase in 2014. Growth in 2014 is anticipated to continue to come in the form of non-contractualsuch as demand and savings deposits, while certificates of deposit are expectedand Internet certificates of deposit have gradually declined. Our significant growth in savings deposits during 2015 was the result of branch acquisitions. We look to approximate current levels.retain and attract new customers with the recent branch acquisitions to provide growth in deposits in future periods. Brokered certificates of deposit offer another source of funding and fluctuate from period-to-period based on our funding needs, including changes in assets such as loans and investments.
The remaining maturity of time certificates and other time deposits of $100 or more as of December 31, 20132016 was as follows:
Maturity 
Within 3 months$33,773
$39,898
Within 3 to 6 months26,598
14,352
Within 6 to 12 months48,345
56,191
Over 12 months128,986
149,984
Total$237,702
$260,425
Borrowed Funds
Borrowed funds include FHLB advances and securities sold under agreements to repurchase. The balance of borrowed funds fluctuates from period to periodperiod-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:

2016 2015 2014 2013 2012
FHLB advances$270,000
 $235,000
 $192,000
 $162,000
 $152,000
Securities sold under agreements to repurchase without stated maturity dates60,894
 70,532
 95,070
 106,025
 66,147
Securities sold under agreements to repurchase with stated maturity dates—
 —
 439
 11,301
 16,284
Federal funds purchased6,800
 4,200
 2,200
 —
 6,570
Total$337,694
 $309,732
 $289,709
 $279,326
 $241,001
For additional disclosure related to borrowed funds, see “Note 10 – Borrowed Funds”Funds” of Notes“Notes to Consolidated Financial Statements.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.

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Contractual Obligations and Loan Commitments
We have various financial obligations, including contractual obligations and commitments, which may require future cash payments. The following schedule summarizes our non-cancelable obligations and future minimum payments as of December 31, 2013:2016:
Minimum Payments Due by PeriodMinimum 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		 TotalDue 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$593,754
 $—
 $—
 $—
 $593,754
$761,626
 $—
 $—
 $—
 $761,626
Certificates of deposit with stated maturities207,278
 140,040
 85,550
 17,144
 450,012
196,467
 127,159
 84,907
 24,881
 433,414
Total deposits801,032
 140,040
 85,550
 17,144
 1,043,766
958,093
 127,159
 84,907
 24,881
 1,195,040
Borrowed funds                  
Short-term borrowings106,025
 —
 —
 —
 106,025
67,694
 —
 —
 —
 67,694
Long-term borrowings20,876
 42,425
 70,000
 40,000
 173,301
70,000
 110,000
 70,000
 20,000
 270,000
Total borrowed funds126,901
 42,425
 70,000
 40,000
 279,326
137,694
 110,000
 70,000
 20,000
 337,694
Total contractual obligations$927,933
 $182,465
 $155,550
 $57,144
 $1,323,092
$1,095,787
 $237,159
 $154,907
 $44,881
 $1,532,734

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Table of Contents

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, 2013.2016. 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 PeriodExpiration 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		 TotalDue 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$72,166
 $31,141
 $13,059
 $5,593
 $121,959
$85,112
 $55,992
 $16,749
 $10,987
 $168,840
Commitments to grant loans29,096
 —
 —
 —
 29,096
29,339
 —
 —
 —
 29,339
Commercial and standby letters of credit4,169
 —
 —
 —
 4,169
1,223
 —
 —
 —
 1,223
Total loan commitments$105,431
 $31,141
 $13,059
 $5,593
 $155,224
$115,674
 $55,992
 $16,749
 $10,987
 $199,402
For additional disclosure related to Contractual Obligations and Loan Commitments, see “Note 13 – Off-Balance-Sheet Activities”Activities” of the Notes“Notes to Consolidated Financial Statements.
Capital
Statements” in Item 8. Financial Statements and Supplementary Data.
Capital
Capital consists solely of common stock, retained earnings, and accumulated other comprehensive income (loss). We are currently authorized to raise capital through dividend reinvestment, employee and director stock purchases, and shareholder stock purchases. Pursuant to these authorizations, we issued 149,191179,903 shares or $3,618$5,023 of common stock during 2013,2016, and 124,530216,700 shares or $2,898$5,201 of common stock in 2012.2015. 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 (see "Note 17 – Benefit Plans" of the Notes to Consolidated Financial Statements).payments. Pursuant to this plan, we increased shareholders’ equity by $554$573 and $643$550 during 20132016 and 2012,2015, respectively.
We have approved a publicly announced common stock repurchase plan. Pursuant to this plan, we repurchased 98,014158,701 shares or $2,375$4,440 of common stock compared to 83,586during 2016 and 193,107 shares for $1,980or $4,590 during 2013 and 2012, respectively.2015. As of December 31, 2013,2016, we were authorized to repurchase up to an additional 137,396199,957 shares of common stock.
There are no significant regulatory constraints placed on our capital. The FRB’s current recommended minimum primary capital to assets requirement is 6.00%. Our primary capital to adjusted average assets, which consists of shareholders' equity plus the ALLL acquisition intangibles, was 8.46% as of December 31, 2013.
The FRB has established a minimum risk based capital standard. Under this standard,guidelines. Pursuant to these guidelines, a framework has been established that assigns risk weights to each category of on and off balance sheetoff-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

45

Table of Contents

off-balance sheet assets, increases the minimum required equity capital to be considered well capitalized, and introduces a capital conservation 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 8.56% as of December 31, 2016.
Effective January 1, 2015, the minimum standard for primary, or Tier 1, capital increased from 4.00% to 6.00%. The minimum standard is for total capital remained at 8.00%,. Also effective January 1, 2015 was the new common equity tier 1 capital ratio which had a minimum requirement of 4.50%. Beginning on January 1, 2016, the capital conservation buffer went into effect which at least 4.00% must consist of equity capital net of goodwill.further increased the required levels. The following table sets forth the percentages required under the Risk Based Capital guidelines and our values as of December 31:
 2013 2012 Required
Equity Capital13.67% 13.23% 4.00%
Secondary Capital1.25% 1.25% 4.00%
Total Capital14.92% 14.48% 8.00%
 2016 2015

Actual Required Actual Required
Common equity tier 1 capital12.39% 5.125% 13.44% 4.50%
        
Tier 1 capital12.39% 6.625% 13.44% 6.00%
Tier 2 capital0.65% 2.000% 0.73% 2.00%
Total Capital13.04% 8.625% 14.17% 8.00%
SecondaryTier 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, 2013,2016, the Bank exceeded these minimum capital requirements.On July 2, 2013, the FRB published revised BASEL III Capital standards for banks. The rules redefine what is included or deducted from equity capital, changes risk weighting for certain on and off-balance sheet assets, increases the minimum required equity capital to be considered well capitalized, and introduces a capital cushion buffer. The rules, which will be gradually phased in between 2015 and 2019, are not expected to have a material impact on the Corporation. For further information regarding the Bank’s capital requirements, see “Note 16 – Minimum Regulatory Capital Requirements”Requirements” of the Notes“Notes to Consolidated Financial Statements.Statements” in Item 8. Financial Statements and Supplementary Data.

43

Fair Value
We utilize fair value measurements to record fair value adjustments to certain assets and liabilities and to determine fair value disclosures. Trading securities, 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, impaired loans, foreclosed assets, OMSRsOMSR, 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“Note 1 – Nature of Operations and Summary of Significant Accounting Policies”Policies” and “Note 20 – Fair Value”Value” of the Notes“Notes to Consolidated Financial Statements.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, below, the gap analysis depicts our position for specific time periods and the cumulative gap as a percentage of total assets.
Trading securities are included in the 0 to 3 month time frame due to their repricing characteristics. Fixed interest rate 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 $168,332$212,240 as of December 31, 2013,2016, 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 $1,139$2,988 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, 2013,2016, 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.

46


The following table shows the time periods and the amount of assets and liabilities available for interest rate repricing as of December 31, 2013.2016. The interest rate sensitivity information for investment securities is based on the expected prepayments and call dates versus stated maturities. For purposes of this analysis, nonaccrual loans and the allowance for loan lossesALLL are excluded.
0 to 3
Months		 4 to 12
Months		 1 to 5
Years		 Over 5
Years		0 to 3
Months		 4 to 12
Months		 1 to 5
Years		 Over 5
Years
Interest sensitive assets              
Trading securities$525
 $—
 $—
 $—
AFS securities44,680
 87,212
 226,963
 153,207
$27,546
 $86,701
 $266,277
 $177,572
Loans188,897
 89,166
 390,793
 135,937
279,954
 91,190
 439,251
 199,160
Total$234,102
 $176,378
 $617,756
 $289,144
$307,500
 $177,891
 $705,528
 $376,732
Interest sensitive liabilities              
Borrowed funds$116,169
 $10,781
 $112,376
 $40,000
$97,694
 $40,000
 $180,000
 $20,000
Time deposits61,029
 146,624
 225,215
 17,144
68,705
 129,672
 210,156
 24,881
Savings deposits16,598
 20,843
 82,092
 123,704
Interest bearing demand deposits2,390
 7,169
 33,397
 149,133
Savings46,418
 26,878
 105,675
 168,259
NOW2,919
 8,757
 40,325
 157,324
Total$196,186
 $185,417
 $453,080
 $329,981
$215,736
 $205,307
 $536,156
 $370,464
Cumulative gap$37,916
 $28,877
 $193,553
 $152,716
$91,764
 $64,348
 $233,720
 $239,988
Cumulative gap as a % of assets2.54% 1.93% 12.96% 10.23%5.30% 3.71% 13.49% 13.85%

44

The following table shows the maturity of commercial and agricultural loans outstanding at December 31, 2013.2016. 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		 Total1 Year
or Less		 1 to 5
Years		 Over 5
Years		 Total
Commercial and agricultural$88,527
 $264,296
 $131,870
 $484,693
$115,973
 $363,221
 $222,962
 $702,156
Interest sensitivity              
Loans maturing after one year that have:              
Fixed interest rates  $218,869
 $125,938
    $300,999
 $215,298
  
Variable interest rates  45,427
 5,932
    62,222
 7,664
  
Total  $264,296
 $131,870
    $363,221
 $222,962
  

47


Liquidity
Liquidity is monitored regularly by our Market Risk Committee, which consists of members of senior management. The committee reviews projected cash flows, key ratios, and liquidity available from both primary and secondary sources.
Our primary sources of liquidity are cash and cash equivalents certificates of deposit held in other financial institutions, trading securities, and unencumbered AFS securities. These categories totaled $554,725$307,112 or 37.15%17.73% of assets as of December 31, 20132016 as compared to $534,968$387,707 or 37.39%23.24% as of December 31, 2012.2015. 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.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 certificates of deposits held in other financial institutions, trading securities, AFS securities or loans as collateral. As of December 31, 2013,2016, we had available lines of credit of $127,748.$99,118.
The following table summarizes our sources and uses of cash for the years ended December 31:31:
2013 2012 $ Variance2016 2015 $ Variance
Net cash provided by (used in) operating activities$22,741
 $19,464
 $3,277
$19,162
 $12,090
 $7,072
Net cash provided by (used in) investing activities(64,931) (101,874) 36,943
(68,831) (113,499) 44,668
Net cash provided by (used in) financing activities58,828
 78,740
 (19,912)50,994
 103,072
 (52,078)
Increase (decrease) in cash and cash equivalents16,638
 (3,670) 20,308
1,325
 1,663
 (338)
Cash and cash equivalents at beginning of period24,920
 28,590
 (3,670)
Cash and cash equivalents at end of period$41,558
 $24,920
 $16,638
Cash and cash equivalents January 121,569
 19,906
 1,663
Cash and cash equivalents December 31$22,894
 $21,569
 $1,325

4548


Quantitative and Qualitative Disclosures about Market Risk
Our primary market risks are interest rate risk and liquidity risk. We have no significant foreign exchange risk, and do not utilize interest rate swaps or derivatives, except for interest rate locks and forward loan commitments, in the management of IRR. Any changes in foreign exchange rates or commodity prices would not have an insignificanta 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 loan prepayments.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.
Our interest rate sensitivity is estimated by first forecasting the next twelve12 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, 2013,2016, we projected the change in net interest income during the next twelve12 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 twelve12 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 forecastedprojected net interest income sensitivity to ensure that it remains within established limits.
The following table summarizes As of December 31, 2016, our interest rate sensitivity results were within Board approved limits.
The following tables summarize our interest rate sensitivity for 12 and 24 months as of:
 December 31, 2013
Immediate basis point change assumption (short-term)(100) 0 100 200 300 400
Percent change in net interest income vs. constant rates(2.85)% —
 0.25% (0.28)% (0.99)% (2.16)%
 December 31, 2012
Immediate basis point change assumption (short-term)(100) 0 100 200 300 400
Percent change in net interest income vs. constant rates(1.61)% —
 0.49% (1.58)% (1.74)% (2.16)%
The
 December 31, 2016
 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(4.49)% 2.19% 4.31% 5.68% 6.67% (5.32)% 2.64% 5.01% 6.33% 6.75%

49


 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%
Gap analysis, the secondary method to measure IRR, is gap analysis. Gap analysis 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

46

increase in cash flows from these assets. A significant portion of our securities are callable or have prepayment options. The call and prepayment options are more likely to be exercised in a period of decreasing interest rates. Savings and demand accounts may generally be withdrawn on request without prior notice. The timing of cash flows from these deposits is estimated based on historical experience. Certificates of deposit have penalties that discourage early withdrawals.
The following tables provide information about assets and liabilities that are sensitive to changes in interest rates as of December 31, 20132016 and December 31, 2012.2015. The principal amounts of investments, loans, other interest earning assets, borrowings, and time deposits maturing were calculated based on the contractual maturity dates. SavingsEstimated cash flows for savings and NOW accounts are based on management's estimate of their future cash flows. During the first quarter of 2012, we engaged the services of a third party to analyze our historical loan prepayment speeds and non-contractualestimated deposit decay rates. We have reviewed the results of the analyses in detail and feel that it reasonably reflects the prepayment speeds and decay rates of our loan and deposit portfolios.

December 31, 2013December 31, 2016
2014 2015 2016 2017 2018 Thereafter Total Fair Value2017 2018 2019 2020 2021 Thereafter Total Fair Value
Rate sensitive assets                              
Other interest bearing assets$19,903
 $480
 $—
 $—
 $—
 $—
 $20,383
 $20,385
$2,727
 $—
 $—
 $—
 $—
 $—
 $2,727
 $2,727
Average interest rates0.25% 1.15% —
 —
 —
 —
 0.27%  
Trading securities$525
 $—
 $—
 $—
 $—
 $—
 $525
 $525
Average interest rates2.77% —
 —
 —
 —
 —
 2.77%  0.34% —
 —
 —
 —
 —
 0.34%  
AFS securities$131,892
 $73,723
 $63,190
 $52,078
 $37,972
 $153,207
 $512,062
 $512,062
$114,247
 $71,220
 $64,931
 $63,150
 $66,976
 $177,572
 $558,096
 $558,096
Average interest rates2.26% 2.23% 2.42% 2.48% 2.48% 2.80% 2.48%  2.35% 2.38% 2.45% 2.64% 2.57% 2.50% 2.47%  
Fixed interest rate loans (1)$115,183
 $94,841
 $91,140
 $118,479
 $85,448
 $134,614
 $639,705
 $639,914
$159,964
 $115,741
 $103,514
 $107,185
 $112,811
 $199,160
 $798,375
 $778,769
Average interest rates5.31% 5.17% 4.93% 4.53% 4.33% 4.33% 4.75%  4.15% 4.25% 4.34% 4.16% 4.15% 4.10% 4.18%  
Variable interest rate loans (1)$69,036
 $29,460
 $20,332
 $14,208
 $15,699
 $19,597
 $168,332
 $168,332
$69,024
 $29,179
 $38,248
 $16,179
 $23,632
 $35,978
 $212,240
 $212,240
Average interest rates4.76% 3.90% 4.06% 3.36% 3.35% 3.99% 4.19%  4.83% 4.32% 4.16% 3.62% 3.74% 3.86% 4.26%  
Rate sensitive liabilities                              
Borrowed funds$126,950
 $32,376
 $10,000
 $30,000
 $40,000
 $40,000
 $279,326
 $283,060
Fixed rate borrowed funds$137,694
 $50,000
 $60,000
 $10,000
 $50,000
 $20,000
 $327,694
 $326,975
Average interest rates0.83% 2.16% 1.99% 1.98% 1.91% 2.54% 1.55%  
Variable rate borrowed funds$—
 $—
 $—
 $—
 $10,000
 $—
 $10,000
 $10,000
Average interest rates0.43% 0.86% 2.15% 1.95% 2.35% 3.02% 1.35%  —
 —
 —
 —
 1.21% —
 1.21%  
Savings and NOW accounts$47,000
 $33,569
 $30,200
 $27,198
 $24,522
 $272,837
 $435,326
 $435,326
$84,972
 $42,596
 $38,220
 $34,326
 $30,858
 $325,583
 $556,555
 $556,555
Average interest rates0.19% 0.12% 0.11% 0.11% 0.11% 0.11% 0.12%  0.57% 0.12% 0.11% 0.11% 0.11% 0.11% 0.18%  
Fixed interest rate certificates of deposit$206,514
 $81,038
 $58,627
 $46,336
 $39,214
 $17,144
 $448,873
 $451,664
$195,389
 $80,139
 $45,110
 $33,929
 $50,978
 $24,881
 $430,426
 $427,100
Average interest rates0.89% 1.93% 1.95% 1.63% 1.34% 1.66% 1.36%  0.86% 1.18% 1.35% 1.58% 1.68% 1.84% 1.18%  
Variable interest rate certificates of deposit$764
 $375
 $—
 $—
 $—
 $—
 $1,139
 $1,139
$1,078
 $1,910
 $—
 $—
 $—
 $—
 $2,988
 $2,988
Average interest rates0.04% 0.40% —
 —
 —
 —
 0.16%  0.62% 0.99% —
 —
 —
 —
 0.85%  

4750



December 31, 2012December 31, 2015
2013 2014 2015 2016 2017 Thereafter Total Fair Value2016 2017 2018 2019 2020 Thereafter Total Fair Value
Rate sensitive assets                              
Other interest bearing assets$6,411
 $100
 $240
 $—
 $—
 $—
 $6,751
 $6,761
$2,659
 $100
 $—
 $—
 $—
 $—
 $2,759
 $2,758
Average interest rates0.86% 0.35% 1.25% —
 —
 —
 0.86%  
Trading securities$1,051
 $522
 $—
 $—
 $—
 $—
 $1,573
 $1,573
Average interest rates2.68% 2.54% —
 —
 —
 —
 2.63%  0.23% 0.35% —
 —
 —
 —
 0.24%  
AFS securities$124,452
 $83,606
 $49,419
 $42,655
 $35,504
 $168,374
 $504,010
 $504,010
$148,692
 $120,692
 $81,726
 $73,541
 $71,083
 $164,402
 $660,136
 $660,136
Average interest rates2.42% 2.30% 2.53% 2.82% 2.89% 2.48% 2.50%  2.16% 2.11% 2.18% 2.25% 2.37% 2.43% 2.25%  
Fixed interest rate loans (1)$138,840
 $96,013
 $91,353
 $85,095
 $109,057
 $89,760
 $610,118
 $622,329
$116,143
 $130,873
 $103,265
 $83,457
 $91,436
 $156,784
 $681,958
 $670,864
Average interest rates5.74% 5.62% 5.57% 5.21% 4.60% 4.63% 5.26%  4.56% 4.42% 4.27% 4.36% 4.18% 4.28% 4.35%  
Variable interest rate loans (1)$64,482
 $28,076
 $24,669
 $12,650
 $22,061
 $10,697
 $162,635
 $162,635
$61,672
 $24,289
 $24,359
 $14,398
 $16,842
 $26,974
 $168,534
 $168,534
Average interest rates4.90% 3.77% 3.96% 3.89% 3.36% 3.90% 4.21%  4.08% 4.12% 4.19% 3.45% 3.40% 3.69% 3.92%  
Rate sensitive liabilities                              
Borrowed funds$77,865
 $10,814
 $42,322
 $20,000
 $40,000
 $50,000
 $241,001
 $248,822
Fixed rate borrowed funds$104,732
 $50,000
 $50,000
 $40,000
 $10,000
 $40,000
 $294,732
 $297,495
Average interest rates0.47% 1.56% 2.16% 2.35% 1.98% 2.67% 1.55%  
Variable rate borrowed funds$15,000
 $—
 $—
 $—
 $—
 $—
 $15,000
 $15,000
Average interest rates0.46% 0.65% 1.14% 2.67% 2.15% 3.03% 1.59%  0.62% —
 —
 —
 —
 —
 0.62%  
Savings and NOW accounts$35,796
 $32,794
 $29,476
 $26,520
 $23,885
 $261,126
 $409,597
 $409,597
$80,242
 $42,064
 $37,773
 $33,950
 $30,548
 $325,730
 $550,307
 $550,307
Average interest rates0.13% 0.13% 0.12% 0.12% 0.12% 0.11% 0.12%  0.59% 0.11% 0.11% 0.11% 0.11% 0.11% 0.18%  
Fixed interest rate certificates of deposit$204,972
 $76,373
 $71,685
 $51,232
 $40,523
 $18,399
 $463,184
 $471,479
$190,500
 $89,689
 $63,167
 $23,883
 $33,012
 $21,028
 $421,279
 $419,828
Average interest rates1.13% 1.69% 2.10% 2.14% 1.72% 1.67% 1.55%  0.92% 1.26% 1.27% 1.50% 1.59% 1.84% 1.18%  
Variable interest rate certificates of deposit$782
 $369
 $—
 $—
 $—
 $—
 $1,151
 $1,151
$1,358
 $243
 $—
 $—
 $—
 $—
 $1,601
 $1,601
Average interest rates0.46% 0.45% —
 —
 —
 —
 0.46%  0.49% 0.40% —
 —
 —
 —
 0.48%  
 (1) The fair value reported is exclusive of the allocation of the ALLL.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.


4851


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, 20132016 and 2012,2015, 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, 2013.2016. We also have audited Isabella Bank Corporation’s internal control over financial reporting as of December 31, 2013,2016, based on criteria established in the Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (1992(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, 20132016 and 2012,2015, and the consolidated results of their operations and their cash flows for each of the years in the three-year period ended December 31, 20132016 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, 2013,2016, based on the COSO criteria.

rehmannrobsonllca03.jpg
Rehmann Robson LLC
Saginaw, Michigan
March 4, 20147, 2017


4952


Consolidated Financial Statements
CONSOLIDATED BALANCE SHEETS
(Dollars in thousands)thousands)
December 31December 31
2013 20122016 2015
ASSETS      
Cash and cash equivalents      
Cash and demand deposits due from banks$21,755
 $22,634
$20,167
 $18,810
Interest bearing balances due from banks19,803
 2,286
2,727
 2,759
Total cash and cash equivalents41,558
 24,920
22,894
 21,569
Certificates of deposit held in other financial institutions580
 4,465
Trading securities525
 1,573
AFS securities (amortized cost of $517,614 in 2013 and $490,420 in 2012)512,062
 504,010
AFS securities (amortized cost of $557,648 in 2016 and $654,348 in 2015)558,096
 660,136
Mortgage loans AFS1,104
 3,633
1,816
 1,187
Loans      
Commercial392,104
 371,505
575,664
 448,381
Agricultural92,589
 83,606
126,492
 115,911
Residential real estate289,931
 284,148
266,050
 251,501
Consumer33,413
 33,494
42,409
 34,699
Gross loans808,037
 772,753
1,010,615
 850,492
Less allowance for loan and lease losses11,500
 11,936
7,400
 7,400
Net loans796,537
 760,817
1,003,215
 843,092
Premises and equipment25,719
 25,787
29,314
 28,331
Corporate owned life insurance policies24,401
 22,773
26,300
 26,423
Accrued interest receivable5,442
 5,227
6,580
 6,269
Equity securities without readily determinable fair values18,293
 18,118
21,694
 22,286
Goodwill and other intangible assets46,311
 46,532
48,666
 48,828
Other assets20,605
 12,784
13,576
 9,991
TOTAL ASSETS$1,493,137
 $1,430,639
$1,732,151
 $1,668,112
LIABILITIES AND SHAREHOLDERS’ EQUITY      
Deposits      
Noninterest bearing$158,428
 $143,735
$205,071
 $191,376
NOW accounts192,089
 181,259
209,325
 212,666
Certificates of deposit under $100 and other savings455,547
 455,546
520,219
 521,793
Certificates of deposit over $100237,702
 237,127
260,425
 238,728
Total deposits1,043,766
 1,017,667
1,195,040
 1,164,563
Borrowed funds279,326
 241,001
337,694
 309,732
Accrued interest payable and other liabilities9,436
 7,482
11,518
 9,846
Total liabilities1,332,528
 1,266,150
1,544,252
 1,484,141
Shareholders’ equity      
Common stock — no par value 15,000,000 shares authorized; issued and outstanding 7,723,023 shares (including 12,761 shares held in the Rabbi Trust) in 2013 and 7,671,846 shares (including 5,130 shares held in the Rabbi Trust) in 2012137,580
 136,580
Common stock — no par value 15,000,000 shares authorized; issued and outstanding 7,821,069 shares (including 26,042 shares held in the Rabbi Trust) in 2016 and 7,799,867 shares (including 19,401 shares held in the Rabbi Trust) in 2015139,525
 139,198
Shares to be issued for deferred compensation obligations4,148
 3,734
5,038
 4,592
Retained earnings25,222
 19,168
46,114
 39,960
Accumulated other comprehensive income (loss)(6,341) 5,007
(2,778) 221
Total shareholders’ equity160,609
 164,489
187,899
 183,971
TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY$1,493,137
 $1,430,639
$1,732,151
 $1,668,112




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

5053


CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY
(Dollars in thousands except per share amountsamounts))
Common Stock        Common Stock        
Shares Outstanding Amount Shares to be
Issued for
Deferred
Compensation
Obligations		 Retained
Earnings		 Accumulated
Other
Comprehensive
Income (Loss)		 TotalsCommon Shares
Outstanding		 Amount Common Shares to be
Issued for
Deferred
Compensation
Obligations		 Retained
Earnings		 Accumulated
Other
Comprehensive
Income (Loss)		 Totals
Balance, January 1, 20117,550,074
 $133,592
 $4,682
 $8,596
 $(1,709) $145,161
Balance, January 1, 20147,723,023
 $137,580
 $4,148
 $25,222
 $(6,341) $160,609
Comprehensive income (loss)—
 —
 —
 10,210
 4,198
 14,408
—
 —
 —
 13,724
 5,835
 19,559
Issuance of common stock120,336
 3,075
 —
 —
 —
 3,075
182,755
 4,227
 —
 —
 —
 4,227
Common stock issued for deferred compensation plan39,257
 697
 (773) —
 —
 (76)
Share-based payment awards under equity compensation plan—
 —
 615
 —
 —
 615
Common stock purchased for deferred compensation obligations—
 (426) —
 —
 —
 (426)
Common stock repurchased pursuant to publicly announced repurchase plan(120,441) (2,204) —
 —
 —
 (2,204)
Cash dividends ($0.76 per share)—
 —
 —
 (5,770) —
 (5,770)
Balance, December 31, 20117,589,226
 134,734
 4,524
 13,036
 2,489
 154,783
Comprehensive income (loss)—
 —
 —
 12,206
 2,518
 14,724
Issuance of common stock124,530
 2,898
 —
 —
 —
 2,898
Common stock issued for deferred compensation plan41,676
 814
 (814) —
 —
 —
Common stock issued for deferred compensation obligations6,126
 143
 (143) —
 —
 —
Common stock transferred from the Rabbi Trust to satisfy deferred compensation obligations—
 619
 (619) —
 —
 —
—
 258
 (258) —
 —
 —
Share-based payment awards under equity compensation plan—
 —
 643
 —
 —
 643
—
 —
 495
 —
 —
 495
Common stock purchased for deferred compensation obligations—
 (505) —
 —
 —
 (505)—
 (331) —
 —
 —
 (331)
Common stock repurchased pursuant to publicly announced repurchase plan(83,586) (1,980) —
 —
 —
 (1,980)(135,630) (3,122) —
 —
 —
 (3,122)
Cash dividends ($0.80 per share)—
 —
 —
 (6,074) —
 (6,074)
Balance, December 31, 20127,671,846
 136,580
 3,734
 19,168
 5,007
 164,489
Cash dividends paid ($0.89 per common share)—
 —
 —
 (6,843) —
 (6,843)
Balance, December 31, 20147,776,274
 138,755
 4,242
 32,103
 (506) 174,594
Comprehensive income (loss)—
 —
 —
 12,510
 (11,348) 1,162
—
 —
 —
 15,130
 727
 15,857
Issuance of common stock149,191
 3,618
 —
 —
 —
 3,618
216,700
 5,201
 —
 —
 —
 5,201
Common stock issued for deferred compensation plan—
 —
 —

—
 —
 —
Common stock issued for deferred compensation obligations—
 —
 —
 —
 —
 —
Common stock transferred from the Rabbi Trust to satisfy deferred compensation obligations—
 140
 (140) —
 —
 —
—
 200
 (200) —
 —
 —
Share-based payment awards under equity compensation plan—
 —
 554
 —
 —
 554
—
 —
 550
 —
 —
 550
Common stock purchased for deferred compensation obligations—
 (383) —
 —
 —
 (383)—
 (368) —
 —
 —
 (368)
Common stock repurchased pursuant to publicly announced repurchase plan(98,014) (2,375) —
 —
 —
 (2,375)(193,107) (4,590) —
 —
 —
 (4,590)
Cash dividends ($0.84 per share)—
 —
 —
 (6,456) —
 (6,456)
Balance, December 31, 20137,723,023
 $137,580
 $4,148
 $25,222
 $(6,341) $160,609
Cash dividends paid ($0.94 per common share)—
 —
 —
 (7,273) —
 (7,273)
Balance, December 31, 20157,799,867
 139,198
 4,592
 39,960
 221
 183,971
Comprehensive income (loss)—
 —
 —
 13,799
 (2,999) 10,800
Issuance of common stock179,903
 5,023
 —
 —
 —
 5,023
Common stock issued for deferred compensation obligations—
 —
 —
 —
 —
 —
Common stock transferred from the Rabbi Trust to satisfy deferred compensation obligations—
 127
 (127) —
 —
 —
Share-based payment awards under equity compensation plan—
 —
 573
 —
 —
 573
Common stock purchased for deferred compensation obligations—
 (383) —
 —
 —
 (383)
Common stock repurchased pursuant to publicly announced repurchase plan(158,701) (4,440) —
 —
 —
 (4,440)
Cash dividends paid ($0.98 per common share)—
 —
 —
 (7,645) —
 (7,645)
Balance, December 31, 20167,821,069
 $139,525
 $5,038
 $46,114
 $(2,778) $187,899

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


5154


CONSOLIDATED STATEMENTS OF INCOME
(Dollars in thousands except per share amounts)amounts)
Year Ended December 31Year Ended December 31
2013 2012 20112016 2015 2014
Interest income          
Loans, including fees$41,233
 $43,396
 $45,463
$38,537
 $35,853
 $36,629
AFS securities          
Taxable7,228
 7,555
 6,941
8,746
 9,053
 8,092
Nontaxable5,132
 4,870
 4,806
5,715
 5,996
 5,911
Trading securities36
 94
 189
Federal funds sold and other447
 486
 506
668
 600
 516
Total interest income54,076
 56,401
 57,905
53,666
 51,502
 51,148
Interest expense          
Deposits7,140
 9,131
 10,935
5,836
 5,850
 6,295
Borrowings3,881
 4,292
 5,268
5,029
 4,313
 3,675
Total interest expense11,021
 13,423
 16,203
10,865
 10,163
 9,970
Net interest income43,055
 42,978
 41,702
42,801
 41,339
 41,178
Provision for loan losses1,111
 2,300
 3,826
(135) (2,771) (668)
Net interest income after provision for loan losses41,944
 40,678
 37,876
42,936
 44,110
 41,846
Noninterest income          
Service charges and fees6,836
 6,432
 6,118
5,230
 5,437
 5,411
Net gain on sale of mortgage loans962
 1,576
 538
651
 573
 514
Earnings on corporate owned life insurance policies732
 698
 609
761
 771
 751
Net gain (loss) on sale of AFS securities171
 1,119
 3
Net gains on sale of AFS securities245
 163
 97
Other1,474
 1,705
 950
4,221
 3,415
 2,552
Total noninterest income10,175
 11,530
 8,218
11,108
 10,359
 9,325
Noninterest expenses          
Compensation and benefits21,465
 21,227
 19,292
19,482
 19,069
 18,502
Furniture and equipment4,945
 4,560
 4,497
6,162
 5,886
 5,337
Occupancy2,653
 2,519
 2,470
3,227
 3,037
 2,979
AFS securities impairment loss     
Total other-than-temporary impairment loss—
 486
 —
Portion of loss reported in other comprehensive income (loss)—
 (204) —
Net AFS securities impairment loss—
 282
 —
Other8,350
 9,051
 8,271
9,026
 8,059
 8,285
Total noninterest expenses37,413
 37,639
 34,530
37,897
 36,051
 35,103
Income before federal income tax expense14,706
 14,569
 11,564
16,147
 18,418
 16,068
Federal income tax expense2,196
 2,363
 1,354
2,348
 3,288
 2,344
NET INCOME$12,510
 $12,206
 $10,210
$13,799
 $15,130
 $13,724
Earnings per share     
Earnings per common share     
Basic$1.63
 $1.61
 $1.35
$1.77
 $1.95
 $1.77
Diluted$1.59
 $1.56
 $1.31
$1.73
 $1.90
 $1.74
Cash dividends per basic share$0.84
 $0.80
 $0.76
Cash dividends per common share$0.98
 $0.94
 $0.89













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


5255


CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(Dollars in thousands)thousands)
Year Ended December 31Year Ended December 31
2013 2012 20112016 2015 2014
Net income$12,510
 $12,206
 $10,210
$13,799
 $15,130
 $13,724
Unrealized gains (losses) on AFS securities          
Unrealized gains (losses) arising during the year(18,971) 3,921
 9,220
Unrealized gains (losses) arising during the period(5,865) 310
 11,290
Reclassification adjustment for net realized (gains) losses included in net income(171) (1,119) (3)(245) (163) (97)
Reclassification adjustment for impairment loss included in net income—
 282
 —
770
 —
 —
Net unrealized gains (losses)(19,142) 3,084
 9,217
Comprehensive income (loss) before income tax (expense) benefit(5,340) 147
 11,193
Tax effect (1)6,257
 (348) (3,719)1,834
 87
 (3,684)
Unrealized gains (losses), net of tax(12,885) 2,736
 5,498
Unrealized gains (losses) on AFS securities, net of tax(3,506) 234
 7,509
Unrealized gains (losses) on derivative instruments     
Unrealized gains (losses) on derivative instruments arising during the period248
 —
 —
Tax effect(84) —
 —
Unrealized gains (losses) on AFS securities, net of tax164
 —
 —
Change in unrecognized pension cost on defined benefit pension plan          
Change in unrecognized pension cost arising during the year2,120
 (580) (2,109)
Change in unrecognized pension cost arising during the period282
 255
 (2,836)
Reclassification adjustment for net periodic benefit cost included in net income208
 251
 138
238
 492
 300
Net change in unrecognized pension cost2,328
 (329) (1,971)520
 747
 (2,536)
Tax effect(791) 111
 671
(177) (254) 862
Change in unrealized pension cost, net of tax1,537
 (218) (1,300)343
 493
 (1,674)
Other comprehensive income (loss), net of tax(11,348) 2,518
 4,198
(2,999) 727
 5,835
Comprehensive income (loss)$1,162
 $14,724
 $14,408
$10,800
 $15,857
 $19,559
(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.


5356


CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in thousands)thousands)
Year Ended December 31Year Ended December 31

2013 2012 20112016 2015 2014
OPERATING ACTIVITIES          
Net income$12,510
 $12,206
 $10,210
$13,799
 $15,130
 $13,724
Reconciliation of net income to net cash provided by operations:     
Reconciliation of net income to net cash provided by operating activities:     
Provision for loan losses1,111
 2,300
 3,826
(135) (2,771) (668)
Impairment of foreclosed assets156
 166
 82
10
 99
 123
Depreciation2,556
 2,417
 2,521
2,821
 2,677
 2,551
Amortization of OMSRs522
 787
 714
Amortization of OMSR394
 340
 265
Amortization of acquisition intangibles221
 260
 299
162
 169
 183
Net amortization of AFS securities2,028
 2,277
 1,689
2,747
 2,074
 1,830
AFS securities impairment loss—
 282
 —
Net (gain) loss on sale of AFS securities(171) (1,119) (3)
Net unrealized (gains) losses on trading securities28
 52
 78
AFS security impairment loss770
 —
 —
Net (gains) losses on sale of AFS securities(245) (163) (97)
Net gain on sale of mortgage loans(962) (1,576) (538)(651) (573) (514)
Net unrealized (gains) losses on borrowings measured at fair value—
 (33) (181)
Increase in cash value of corporate owned life insurance policies(732) (698) (609)(761) (771) (751)
Gains from redemption of corporate owned life insurance policies(469) —
 —
Share-based payment awards under equity compensation plan554
 643
 615
573
 550
 495
Deferred income tax (benefit) expense(1,208) 616
 389
(282) 1,692
 207
Origination of loans held-for-sale(53,632) (99,353) (57,584)(33,089) (42,887) (28,135)
Proceeds from loan sales57,123
 100,501
 56,099
33,111
 43,174
 28,852
Net changes in operating assets and liabilities which provided (used) cash:          
Trading securities1,020
 3,085
 1,049
Accrued interest receivable(215) 621
 (392)(311) (418) (409)
Other assets(122) (2,610) 147
(954) (5,322) (1,392)
Accrued interest payable and other liabilities1,954
 (1,360) 449
1,672
 (910) 1,298
Net cash provided by (used in) operating activities22,741
 19,464
 18,860
19,162
 12,090
 17,562
INVESTING ACTIVITIES          
Net change in certificates of deposit held in other financial institutions3,885
 4,459
 6,884
Activity in AFS securities          
Sales16,229
 40,677
 8,877
35,664
 1,319
 13,362
Maturities and calls86,225
 89,112
 69,275
Maturities, calls, and principal payments137,278
 90,036
 68,188
Purchases(131,505) (207,035) (165,017)(79,514) (185,721) (127,562)
Loan principal originations, net(38,503) (27,103) (20,743)
Net loan principal (originations) collections(160,294) (15,029) (27,876)
Proceeds from sales of foreclosed assets2,122
 1,594
 2,041
486
 1,523
 1,775
Purchases of premises and equipment(2,488) (3,578) (2,520)(3,804) (5,127) (2,713)
Purchases of corporate owned life insurance policies(1,092) —
 (4,000)—
 (500) —
Proceeds from redemption of corporate owned life insurance policies196
 —
 —
1,353
 —
 —
Net cash provided by (used in) investing activities(64,931) (101,874) (105,203)(68,831) (113,499) (74,826)

5457


CONSOLIDATED STATEMENTS OF CASH FLOWS (continued)
(Dollars in thousands)thousands)
Year Ended December 31Year Ended December 31
2013 2012 20112016 2015 2014
FINANCING ACTIVITIES          
Acceptances and withdrawals of deposits, net$26,099
 $59,503
 $80,825
Increase (decrease) in borrowed funds38,325
 24,898
 21,400
Net increase (decrease) in deposits30,477
 90,079
 30,718
Net increase (decrease) in borrowed funds27,962
 20,023
 10,383
Cash dividends paid on common stock(6,456) (6,074) (5,770)(7,645) (7,273) (6,843)
Proceeds from issuance of common stock3,618
 2,898
 2,302
5,023
 5,201
 4,227
Common stock repurchased(2,375) (1,980) (1,507)(4,440) (4,590) (3,122)
Common stock purchased for deferred compensation obligations(383) (505) (426)(383) (368) (331)
Net cash provided by (used in) financing activities58,828
 78,740
 96,824
50,994
 103,072
 35,032
Increase (decrease) in cash and cash equivalents16,638
 (3,670) 10,481
1,325
 1,663
 (22,232)
Cash and cash equivalents at beginning of year24,920
 28,590
 18,109
Cash and cash equivalents at end of year$41,558
 $24,920
 $28,590
Cash and cash equivalents at beginning of period21,569
 19,906
 42,138
Cash and cash equivalents at end of period$22,894
 $21,569
 $19,906
SUPPLEMENTAL CASH FLOWS INFORMATION:          
Interest paid$11,139
 $13,639
 $16,239
$10,836
 $10,176
 $10,045
Federal income taxes paid2,093
 2,357
 878
SUPPLEMENTAL NONCASH INVESTING AND FINANCING INFORMATION:     
Income taxes paid1,415
 3,493
 1,454
SUPPLEMENTAL NONCASH INFORMATION:     
Transfers of loans to foreclosed assets$1,672
 $1,902
 $1,932
$306
 $1,158
 $1,371


































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


5558


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands except per share amounts)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 subsidiaries,subsidiary, Isabella Bank and Financial Group Information Services.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 2729 locations and a loan production office, 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 orand changes in the local economic environment.
Financial Group Information Services provides information technology services to Isabella Bank Corporation and Isabella Bank.
See also "Note 19 – Related Party Transactions."
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, and the determinations of assumptions in accounting for the defined benefit pension plan.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 and trading securities are recorded at fair value on a recurring basis. Additionally, from time to time,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, OMSRs,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.

5659


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.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.
CERTIFICATES OF DEPOSIT HELD IN OTHER FINANCIAL INSTITUTIONS: Certificates of deposits held in other financial institutions consist of interest bearing certificates of deposit that mature within 3 years and are carried at cost.
TRADING SECURITIES: We engage in trading activities of our own accounts. Securities that are held principally for resale in the near term are recorded in the trading assets account at fair value with changes in fair value recorded in noninterest income. Interest income is included in net interest income.
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.

57

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.

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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 offcharged-off no later than 180 days past due. Past due status is based on contractual terms of the loan. In all cases, loans are placed on nonaccrual or charged-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 AND LEASE 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 andwhich 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

58

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

61


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 $293,665$272,882 and $303,351$287,029 with capitalized servicing rights of $2,555$2,306 and $2,285$2,505 at December 31, 20132016 and 2012,2015, 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 $737, $757,$696, $712, and $732$720 related to residential mortgage loans serviced for others during 2013, 2012,2016, 2015, and 2011,2014, respectively, andwhich is included in other noninterest income.
LOANS ACQUIRED THROUGH TRANSFER: Authoritative accounting guidance related to acquired loans requires that a valuation allowance for loans acquired in a transfer, including in a business combination, reflect only losses incurred after acquisition, and should not be recorded at acquisition. This standard applies to any loan acquired in a transfer that shows evidence of credit quality deterioration since it was originated.
FORECLOSED ASSETS: Assets acquired through, or in lieu of, loan foreclosure are held for sale and are initially recorded at the lower of 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 $1,412$231 and $2,018$421 as of December 31, 20132016 and 2012,2015, 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.
FDIC INSURANCE PREMIUM: Included in other assets were prepaid FDIC assessments of $0 and $1,804 as of December 31, 2013 and 2012, respectively.
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, LLCand Valley Financial Corporation.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. In 2016, we sold all shares of Valley Financial Corporation common stock.

59
Table of Contents

Equity securities without readily determinable fair values consist of the following as of December 31:
2013 20122016 2015
FHLB Stock$8,100
 $7,850
$11,900
 $11,700
Corporate Settlement Solutions, LLC6,970
 7,040
7,461
 7,249
FRB Stock1,879
 1,879
1,999
 1,999
Valley Financial Corporation1,000
 1,000
—
 1,000
Other344
 349
334
 338
Total$18,293
 $18,118
$21,694
 $22,286
EQUITY COMPENSATION PLAN: At December 31, 2013,2016, the Directors Plan had 185,311213,470 shares eligible to be issued to participants, for which the Rabbi Trust held 12,76126,042 shares. We had 170,566200,017 shares to be issued in 2012,2015, with 5,13019,401 shares held in the Rabbi Trust. Compensation costs relating to share based payment transactions are recognized as the services are

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rendered, with the cost measured based on the fair value of the equity or liability instruments issued (see “Note 17 – Benefit Plans”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, 20132016 and 2012,2015, the present value of the post retirement benefits payable by us to the covered employees was estimated to be $2,699$2,174 and $2,657,$2,853, respectively, and is included in accrued interest payable and other liabilities. The periodic policy maintenance costs were $75, $24,$(8), $71, and $60$83 for 2013, 2012,2016, 2015, and 2011,2014, respectively and isare 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 basesbasis 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 it iswe 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”Expenses”).
RECLASSIFICATIONS: Certain amounts reported in the 20122015 and 20112014 consolidated financial statements have been reclassified to conform with the 20132016 presentation.

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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.Plans."
Earnings per common share have been computed based on the following:
2013 2012 20112016 2015 2014
Average number of common shares outstanding for basic calculation7,694,392
 7,604,303
 7,572,841
7,813,739
 7,775,988
 7,734,161
Average potential effect of shares in the Directors Plan (1)168,948
 195,063
 194,634
Average potential effect of common shares in the Directors Plan (1)185,611
 177,988
 171,393
Average number of common shares outstanding used to calculate diluted earnings per common share7,863,340
 7,799,366
 7,767,475
7,999,350
 7,953,976
 7,905,554
Net income$12,510
 $12,206
 $10,210
$13,799
 $15,130
 $13,724
Earnings per share     
Earnings per common share     
Basic$1.63
 $1.61
 $1.35
$1.77
 $1.95
 $1.77
Diluted$1.59
 $1.56
 $1.31
$1.73
 $1.90
 $1.74
(1) 
Exclusive of shares held in the Rabbi Trust
Note 3 – Accounting Standards Updates
Recently AdoptedPending Accounting Standards UpdateUpdates
ASU No. 2013-02: “Comprehensive Income (Topic 220)2016-01: “Financial Instruments - Overall (Subtopic 825-10): ReportingRecognition and Measurement of Amounts Reclassified Out of Accumulated Other Comprehensive Income”Financial Assets and Liabilities”
In February 2013,January 2016, ASU No. 2013-02 amended ASC Topic 220, “Comprehensive Income”2016-01 set forth the following: 1) requires equity investments, with certain exceptions, to require disclosuresbe 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 7) clarifies that an entity should evaluate the need for a valuation allowance on a deferred tax asset related to reclassifications out of AOCIavailable-for-sale securities in one place. The ASU also requirescombination with the disclosure of reclassifications out of AOCI by component.entity's other deferred tax assets. The new authoritative guidance wasis effective for interim and annual periods beginning after December 15, 20122017 and didis not expected to have a financialsignificant impact on our operations or financial statement disclosures.
ASU No. 2016-02: “Leases (Topic 842)”
In February 2016, ASU No. 2016-02 was issued to create Topic 842 - Leases which will require recognition of lease assets and lease liabilities on the Corporation, but increasedbalance sheet for leases previously classified as operating leases. Accounting guidance is set forth for both lessee and lessor accounting. Under lessee accounting, a lessee should recognize in the levelstatement of disclosures relatedfinancial position a liability to AOCI (see "Note 18 – Accumulated Other Comprehensive Income (Loss)").
Note 4 – Trading Securities
make lease payments (the lease liability) and a right-of-use asset representing its right to use the underlying asset for the lease term.
Trading securities,For finance leases, a lessee is required to do the following: 1) recognize a right-of-use asset and a lease liability, initially measured at fairthe present value consist of the following investmentslease payments, in the statement of financial position; 2) recognize interest on the lease liability separately from amortization of the right-of-use asset in the statement of comprehensive income; and 3) classify repayments of the principal portion of the lease liability within financing activities and payments of interest on the lease liability and variable lease payments within operating activities in the statement of cash flows. For operating leases, a lessee is required to do the following: 1) recognize a right-of-use asset and a lease liability, initially measured at December 31:
the present value of the lease payments, in the statement of financial position; 2) recognize a single lease cost, calculated so that the cost of the lease is
 2013 2012
States and political subdivisions$525
 $1,573

Included in net trading losses of $28 during 2013, were $6 of net unrealized trading losses on securities that were held in our trading portfolio as of December 31, 2013. Included in net trading losses of $52 during 2012, were $18 of net unrealized trading losses on securities that were held in our trading portfolio as of December 31, 2012.
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allocated over the lease term on a generally straight-line basis; and 3) classify all cash payments within operating activities in the statement of cash flows.
The accounting applied by a lessor is largely unchanged from that applied under previous GAAP. The new authoritative guidance is effective for interim and annual periods beginning after December 15, 2018 and is not expected to have a significant impact on our operations or financial statement disclosures.
ASU No. 2016-05: “Derivatives and Hedging (Topic 815): Effect of Derivative Contract Novations on Existing Hedge Accounting Relationships”
In March 2016, ASU No. 2016-05 was issued to clarify designation of a hedging instrument when there is a change in counterparty. A change in the counterparty to a derivative instrument that has been designated as the hedging instrument under Topic 815 does not, in and of itself, require dedesignation of that hedging relationship provided that all other hedge accounting criteria continue to be met. The new authoritative guidance is effective for interim and annual periods beginning after December 15, 2016 and is not expected to have a significant impact on our operations or financial statement disclosures.
ASU No. 2016-07: “Investments - Equity Method and Joint Ventures (Topic 323): Simplifying the Transition of the Equity Method of Accounting”
In March 2016, ASU No. 2016-07 was issued and eliminates the requirement that when an investment qualifies for use of the equity method as a result of an increase in the level of ownership interest or degree of influence, an investor must adjust the investment, results of operations, and retained earnings retroactively on a step-by-step basis as if the equity method had been in effect during all previous periods that the investment had been held. Additionally, the update requires that the equity method investor add the cost of acquiring the additional interest in the investee to the current basis of the investor’s previously held interest and adopt the equity method of accounting as of the date the investment becomes qualified for equity method accounting. Therefore, upon qualifying for the equity method of accounting, no retroactive adjustment of the investment is required. The new authoritative guidance is effective for interim and annual periods beginning after December 15, 2016 and is not expected to have a significant impact on our operations or financial statement disclosures.
ASU No. 2016-09: “Compensation - Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting”
In March 2016, ASU No. 2016-09 updated several aspects of the accounting for share-based payment transactions, including the income tax consequences, classification of awards as either equity or liabilities, and classification on the statement of cash flows. The new authoritative guidance is effective for interim and annual periods beginning after December 15, 2016 and is not expected to have a significant impact on our operations or financial statement disclosures.
ASU No. 2016-13: “Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments”
In June 2016, ASU No. 2016-13 updated the measurement for credit losses for AFS debt securities and assets measured at amortized cost which include loans, trade receivables, and any other financial assets with the contractual right to receive cash. Current GAAP requires an “incurred loss” methodology for recognizing credit losses that delays recognition until it is probable a loss has been incurred. Under the incurred loss approach, entities are limited to a probable initial recognition threshold when credit losses are measured under GAAP; an entity generally only considers past events and current conditions in measuring the incurred loss.
In the new guidance, the incurred loss impairment methodology in current GAAP is replaced with a methodology that reflects expected credit losses. This methodology requires consideration of a broader range of reasonable and supportable information to calculate credit loss estimates. The measurement of expected credit losses is based on relevant information about past events, including historical experience, current conditions, and reasonable and supportable forecasts that affect the collectability of the reported amount. An entity must use judgment in determining the relevant information and estimation methods that are appropriate in its circumstances which applies to assets measured either collectively or individually.
The update allows an entity to revert to historical loss information that is reflective of the contractual term (considering the effect of prepayments) for periods that are beyond the time frame for which the entity is able to develop reasonable and supportable forecasts. In addition, the disclosures of credit quality indicators in relation to the amortized cost of financing receivables, a current disclosure requirement, are further disaggregated by year of origination (or vintage). The vintage information will be useful for financial statement users to better assess changes in underwriting standards and credit quality trends in asset portfolios over time and the effect of those changes on credit losses.


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Overall, the update will allow entities the ability to measure expected credit losses without the restriction of incurred or probable losses that exist under current GAAP. For users of the financial statements, the update provides decision-useful information about the expected credit losses on financial instruments and other commitments to extend credit held by a reporting entity at each reporting date. The new authoritative guidance is effective for interim and annual periods beginning after December 15, 2019 and is expected to have a significant impact on our operations and financial statement disclosures as well as that of the banking industry as a whole.
ASU No. 2016-15: “Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments”
In August 2016, ASU No. 2016-15 was issued to provide guidance on eight specific cash flow issues: 1) debt prepayment or debt extinguishment costs; 2) settlement of zero-coupon debt instruments or other debt instruments with coupon interest rates that are insignificant in relation to the effective interest rate of the borrowing; 3) contingent consideration payments made after a business combination; 4) proceeds from the settlement of insurance claims; 5) proceeds from the settlement of corporate-owned life insurance policies; 6) including bank-owned life insurance policies; 7) distributions received from equity method investees, beneficial interests in securitization transactions; and 8) separately identifiable cash flows and application of the predominance principle. 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.
ASU No. 2016-16: “Income Taxes (Topic 740): Intra-Entity Transfers of Assets Other Than Inventory”
In October 2016, ASU No. 2016-16 was issued to improve the accounting for the income tax consequences of intra-entity transfers of assets other than inventory. The new guidance eliminates the requirement of the sale of the asset to recognize current and deferred income taxes. Instead, current and deferred income taxes will be recognized on an intra-entity transfer of an asset other than inventory when the transfer occurs. 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.
ASU No. 2016-17: “Consolidation (Topic 810): Interests Held through Related Parties That Are under Common Control”
In October 2016, ASU No. 2016-17 was issued to amend the previous consolidation guidance on how a reporting entity that is the single decision maker of a variable interest entity (VIE) should treat indirect interests in the entity held through related parties that are under common control with the reporting entity when determining whether it is the primary beneficiary of that VIE. In the amendment, a single decision maker is not required to consider indirect interests held through related parties that are under common control with the single decision maker to be the equivalent of direct interests in their entirety. Instead, a single decision maker is required to include those interests on a proportionate basis consistent with indirect interests held through other related parties. The new authoritative guidance is effective for interim and annual periods beginning after December 15, 2016 and is not expected to have an impact on our operations or financial statement disclosures.
ASU No. 2016-18: “Statement of Cash Flows (Topic 230): Restricted Cash”
In November 2016, ASU No. 2016-18 was issued to provide guidance on the classification and presentation of changes in restricted cash on the statement of cash flows under Topic 230. The new guidance requires that a statement of cash flows explain the change during the period in the total of cash, cash equivalents, and amounts generally described as restricted cash or restricted cash equivalents. Additionally, amounts generally described as restricted cash and restricted cash equivalents should be included with cash and cash equivalents when reconciling the beginning-of-period and end-of-period total amounts shown on the statement of cash flows. The new authoritative guidance is effective for interim and annual periods beginning after December 15, 2017 and is not expected to have an impact on our operations or financial statement disclosures.

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Note 54 – AFS Securities
The amortized cost and fair value of AFS securities, with gross unrealized gains and losses, are as follows as of December 31:31:
20132016

Amortized
Cost		 Gross
Unrealized
Gains		 Gross
Unrealized
Losses		 Fair
Value		Amortized
Cost		 Gross
Unrealized
Gains		 Gross
Unrealized
Losses		 Fair
Value
Government sponsored enterprises$24,860
 $7
 $1,122
 $23,745
$10,258
 $3
 $2
 $10,259
States and political subdivisions200,323
 5,212
 3,547
 201,988
208,977
 4,262
 320
 212,919
Auction rate money market preferred3,200
 —
 623
 2,577
3,200
 —
 406
 2,794
Preferred stocks6,800
 20
 993
 5,827
3,800
 —
 375
 3,425
Mortgage-backed securities147,292
 657
 3,834
 144,115
229,593
 581
 2,918
 227,256
Collateralized mortgage obligations135,139
 1,016
 2,345
 133,810
101,820
 600
 977
 101,443
Total$517,614
 $6,912
 $12,464

$512,062
$557,648
 $5,446
 $4,998
 $558,096
20122015

Amortized
Cost		 Gross
Unrealized
Gains		 Gross
Unrealized
Losses		 Fair
Value		Amortized
Cost		 Gross
Unrealized
Gains		 Gross
Unrealized
Losses		 Fair
Value
Government sponsored enterprises$25,668
 $108
 $—
 $25,776
$24,407
 $13
 $75
 $24,345
States and political subdivisions174,118
 9,190
 565
 182,743
224,752
 7,511
 46
 232,217
Auction rate money market preferred3,200
 —
 422
 2,778
3,200
 —
 334
 2,866
Preferred stocks6,800
 —
 437
 6,363
3,800
 —
 501
 3,299
Mortgage-backed securities152,256
 3,199
 110
 155,345
264,109
 1,156
 1,881
 263,384
Collateralized mortgage obligations128,378
 2,627
 —
 131,005
134,080
 1,136
 1,191
 134,025
Total$490,420
 $15,124
 $1,534
 $504,010
$654,348
 $9,816
 $4,028
 $660,136
The amortized cost and fair value of AFS securities by contractual maturity at December 31, 20132016 are as follows:
Maturing Securities with Variable Monthly Payments or Noncontractual Maturities  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		 TotalDue 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$—
 $72
 $24,788
 $—
 $—
 $24,860
$32
 $9,938
 $288
 $—
 $—
 $10,258
States and political subdivisions930
 37,672
 96,749
 64,972
 —
 200,323
27,633
 71,126
 82,468
 27,750
 —
 208,977
Auction rate money market preferred—
 —
 —
 —
 3,200
 3,200
—
 —
 —
 —
 3,200
 3,200
Preferred stocks—
 —
 —
 —
 6,800
 6,800
—
 —
 —
 —
 3,800
 3,800
Mortgage-backed securities—
 —
 —
 —
 147,292
 147,292
—
 —
 —
 —
 229,593
 229,593
Collateralized mortgage obligations—
 —
 —
 —
 135,139
 135,139
—
 —
 —
 —
 101,820
 101,820
Total amortized cost$930
 $37,744
 $121,537
 $64,972
 $292,431
 $517,614
$27,665
 $81,064
 $82,756
 $27,750
 $338,413
 $557,648
Fair value$961
 $38,867
 $122,637
 $63,268
 $286,329
 $512,062
$27,704
 $82,558
 $84,699
 $28,217
 $334,918
 $558,096
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.

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A summary of the sales activity related to sales of AFS securities was as follows during the years ended December 31:31:
2013 2012 20112016 2015 2014
Proceeds from sales of AFS securities$16,229
 $40,677
 $8,877
$35,664
 $1,319
 $13,362
Gross realized gains (losses)$171
 $1,119
 $3
$245
 $163
 $97
Applicable income tax expense (benefit)$58
 $380
 $1
$83
 $55
 $33
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 pertainingThe following information pertains 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:position.
20132016
Less Than Twelve Months Twelve Months or More  Less Than Twelve Months Twelve Months or More  

Gross
Unrealized
Losses		 Fair
Value		 Gross
Unrealized
Losses		 Fair
Value		 Total
Unrealized
Losses		Gross
Unrealized
Losses		 Fair
Value		 Gross
Unrealized
Losses		 Fair
Value		 Total
Unrealized
Losses
Government sponsored enterprises$1,122
 $22,873
 $—
 $—
 $1,122
$2
 $9,936
 $—
 $—
 $2
States and political subdivisions2,566
 42,593
 981
 6,115
 3,547
311
 21,800
 9
 355
 320
Auction rate money market preferred—
 —
 623
 2,577
 623
—
 —
 406
 2,794
 406
Preferred stocks—
 —
 993
 2,807
 993
—
 —
 375
 3,425
 375
Mortgage-backed securities2,424
 101,816
 1,410
 21,662
 3,834
2,918
 175,212
 —
 —
 2,918
Collateralized mortgage obligations2,345
 84,478
 —
 —
 2,345
628
 51,466
 349
 11,381
 977
Total$8,457
 $251,760
 $4,007
 $33,161
 $12,464
$3,859
 $258,414
 $1,139
 $17,955
 $4,998
Number of securities in an unrealized loss position:  182
   19
 201
  104
   9
 113
20122015
Less Than Twelve Months Twelve Months or More  Less Than Twelve Months Twelve Months or More  

Gross
Unrealized
Losses		 Fair
Value		 Gross
Unrealized
Losses		 Fair
Value		 Total
Unrealized
Losses		Gross
Unrealized
Losses		 Fair
Value		 Gross
Unrealized
Losses		 Fair
Value		 Total
Unrealized
Losses
Government sponsored enterprises$—
 $—
 $75
 $4,925
 $75
States and political subdivisions$80
 $5,019
 $485
 $2,352
 $565
14
 3,355
 32
 2,623
 46
Auction rate money market preferred—
 —
 422
 2,778
 422
—
 —
 334
 2,866
 334
Preferred stocks—
 —
 437
 3,363
 437
—
 —
 501
 3,299
 501
Mortgage-backed securities110
 25,499
 —
 —
 110
882
 131,885
 999
 37,179
 1,881
Collateralized mortgage obligations415
 53,441
 776
 26,717
 1,191
Total$190
 $30,518
 $1,344
 $8,493
 $1,534
$1,311
 $188,681
 $2,717
 $77,609
 $4,028
Number of securities in an unrealized loss position:  15
   6
 21
  36
   26
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As of December 31, 20132016 and 2012,2015, 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,fourth quarter of 2016, we had identified 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 municipal bond as other-than-temporarily impaired. While management estimated the OTTI to Caa3. As a result of this downgrade,be realized, we also 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
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amount of impairment as of December 31, 2016. The valuation calculated the estimated market value utilizing two different approaches:
1) Market - Appraisal and Comparable Investments
2) Income - Discounted Cash Flow Method
The two methods were then weighted, with a higher weighting applied to the Discounted Cash Flow Method,Market approach, to determine the estimated credit related impairment. As a result of this analysis, we recognized an OTTI of $282$770 in earnings infor the three month periodyear 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
FitchNot Rated
Moody'sCaa3
S&PA
SenioritySenior
Discount rateLIBOR + 6.35%
Credit Yield Analysis Method
Credit discount rateLIBOR + 4.00%
Average observed discounts based on closed transactions14.00%
To test for additional impairment of this security as of December 31, 2013, we obtained another investment valuation (from the same firm engaged to perform the initial valuation as of March 31, 2012) as of December 31, 2013. Based on our analysis, no additional OTTI was indicated as of December 31, 2013.
2016. The following table provides a roll-forward of credit related impairment recognizedrecorded in earnings for the years ended December 31:
2013 2012 20112016 2015 2014
Balance at beginning of year$282
 $—
 $—
$—
 $282
 $282
Additions to credit losses for which no previous OTTI was recognized—
 282
 —
770
 —
 —
Reductions for credit losses realized on securities sold during the quarter—
 (282) —
Balance at end of year$282
 $282
 $—
$770
 $—
 $282
Based on our analysis using the above criteria,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 other AFS securities are other-than-temporarily impaired as of December 31, 2013,2016, or December 31, 2012.2015, with the exception of the one municipal bond discussed above.
Note 65 – Loans and ALLL
We grant commercial, agricultural, residential real estate, and consumer loans to customers situated primarily in Clare, Gratiot, Isabella, Mecosta, Midland, Montcalm, and Saginaw counties in Michigan. The ability of the borrowers to honor their repayment obligations is often dependent upon the real estate, agricultural, light manufacturing, retail, gaming, 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 on loans is accrued over the term of the loan based on the principal amount outstanding. Loan origination fees and certain direct loan origination costs are capitalized and recognized as a component of interest income over the term of the loan using the level yield method.
The accrual of interest on commercial, agricultural, and residential real estate loans is typically discontinued at the time the loan is 90 days or more past due unless the credit is well-secured and in the process of collection. Upon transferring the loans 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 are typicallymay be returned to accrual status after six months of continuous performance. For impaired loans not

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classified as nonaccrual, interest income continues to be accrued over the term of the loan based on the principal amount outstanding.
Commercial and agricultural loans include loans for commercial real estate, commercial operating loans, advances to mortgage brokers, farmland and agricultural production, and states and political subdivisions. Repayment of these loans is often 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 $12,500.$15,000. Borrowers with direct credit needs of more than $12,500$15,000 are serviced through the use of loan participations with other commercial banks. Commercial and agricultural real estate loans generallycommonly require loan-to-value limits of less than 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 reportsreports.
We entered into a mortgage purchase program in 2016 with a financial institution where we participate in advances to mortgage brokers ("advances"). The mortgage brokers originate residential mortgage loans with the intent to sell on the secondary market. We participate in the advance to the mortgage broker, which is secured by the underlying mortgage loan, until it is ultimately sold on the secondary market. As such, the average life of each participated advance is approximately 20-30 days.

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Funds from the sale of the loan are used to payoff our participation in the advance to the mortgage broker. We classify these advances as deemed necessary.commercial loans and include the outstanding balance in commercial loans on our balance sheet. Under the participation agreement, we committed to a maximum outstanding aggregate amount of $30,000. The difference between our outstanding balances and the maximum outstanding aggregate amount are classified as “Unfunded commitments under lines of credit” in the “Contractual Obligations and Loan Commitments” section of the Management's Discussion and Analysis of Financial Condition and Results of Operations of this report.
We offer adjustable rate mortgages, fixed rate balloon mortgages, construction loans, and fixed rate mortgageresidential real estate loans which typically have amortization periods up to a maximum of 30 years. Fixed rate loans with an amortization of greater than 15 years are generally sold upon origination to Freddie Mac. Fixed rate residential real estate loans with an amortization of 15 years or less may be held in our portfolio, held for future sale, or sold upon origination. 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 thesefixed rate loans to Freddie Mac.
Our lending policies generally limit the maximum loan-to-value ratio on residential real estate loans to 95%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%.80%. Substantially all loans upon origination have a loan to value ratio of less than 80%.
Underwriting criteria for residential real estate loans include: evaluation
Evaluation of the borrower’s ability to make monthly payments,payments.
Evaluation of the value of the property securing the loan, ensuringloan.
Ensuring the payment of principal, interest, taxes, and hazard insurance does not exceed 28% of a borrower’s gross income,income.
Ensuring all debt servicing does not exceed 36% of income,income.
Verification of acceptable credit reports, verificationreports.
Verification of employment, income, and financial information.
Appraisals are performed by independent appraisers and reviewed internally.for appropriateness. All mortgage loan requests are reviewed by our mortgage loan committee or through a secondary market automated underwriting system; loans in excess of $400$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 automobile loans, secured and unsecured personal loans, and overdraft protection related loans. Loans are amortized generally for a period of up to 6 years.12 years based on the age and value of the underlying collateral. The underwriting emphasis is on a borrower’s perceived intent and ability to pay rather than collateral value. No consumer loans are sold to the secondary market.
The ALLL is established as losses are estimated to have occurred through a provision for loan losses charged to earnings. Loan losses are charged against the ALLL when 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 regularquarterly 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 net realizableloan’s outstanding balance to the present value of expected future cash flows discounted at the loan’s effective interest rate, the loan’s obtainable market price, or the fair value of the loan’s underlying collateral, or the net present value of the projected payment stream and our recorded investment.less cost to sell. Historical loss allocations wereare calculated at the loan class and segment levels based on a migration analysis of the loan portfolio, with the exception of advances to mortgage brokers, over the preceding five years. An unallocated componentWith no historical losses on advances to mortgage brokers, there is maintained to cover uncertainties that we believe affect our estimate of probable lossesno allocation in the commercial segment displayed below based on qualitativehistorical loss 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.

6570


A summary of changes in the ALLL and the recorded investment in loans by segments follows:
 Allowance for Loan Losses
 Year Ended December 31, 2013

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

Allowance for Loan Losses
 Year Ended December 31, 2016
 Commercial Agricultural Residential Real Estate Consumer Unallocated Total
January 1, 2016$2,171
 $329
 $3,330
 $522
 $1,048
 $7,400
Charge-offs(57) —
 (574) (285) —
 (916)
Recoveries448
 92
 287
 224
 —
 1,051
Provision for loan losses(748) 463
 (379) 163
 366
 (135)
December 31, 2016$1,814
 $884
 $2,664
 $624
 $1,414
 $7,400
 Allowance for Loan Losses and Recorded Investment in Loans
 As of December 31, 2013
 Commercial Agricultural Residential Real Estate Consumer Unallocated Total
ALLL           
Individually evaluated for impairment$2,035
 $30
 $2,287
 $—
 $—
 $4,352
Collectively evaluated for impairment4,013
 404
 1,558
 639
 534
 7,148
Total$6,048
 $434
 $3,845
 $639
 $534
 $11,500
Loans           
Individually evaluated for impairment$13,816
 $1,538
 $14,302
 $119
   $29,775
Collectively evaluated for impairment378,288
 91,051
 275,629
 33,294
   778,262
Total$392,104
 $92,589
 $289,931
 $33,413
   $808,037
 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)
Recoveries477
 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
 Allowance for Loan Losses
 Year Ended December 31, 2012

Commercial Agricultural Residential Real Estate Consumer Unallocated Total
January 1, 2012$6,284
 $1,003
 $2,980
 $633
 $1,475
 $12,375
Loans charged-off(1,672) —
 (1,142) (542) —
 (3,356)
Recoveries240
 —
 122
 255
 —
 617
Provision for loan losses2,010
 (596) 1,667
 320
 (1,101) 2,300
December 31, 2012$6,862
 $407
 $3,627
 $666
 $374
 $11,936

Allowance for Loan Losses and Recorded Investment in Loans
 As of December 31, 2016
 Commercial Agricultural Residential Real Estate Consumer Unallocated Total
ALLL           
Individually evaluated for impairment$741
 $1
 $1,629
 $—
 $—
 $2,371
Collectively evaluated for impairment1,073
 883
 1,035
 624
 1,414
 5,029
Total$1,814
 $884
 $2,664
 $624
 $1,414
 $7,400
Loans           
Individually evaluated for impairment$7,859
 $5,545
 $8,638
 $26
   $22,068
Collectively evaluated for impairment567,805
 120,947
 257,412
 42,383
   988,547
Total$575,664
 $126,492
 $266,050
 $42,409
   $1,010,615
Allowance for Loan Losses and Recorded Investment in LoansAllowance for Loan Losses and Recorded Investment in Loans
As of December 31, 2012As of December 31, 2015
Commercial Agricultural Residential Real Estate Consumer Unallocated TotalCommercial Agricultural Residential Real Estate Consumer Unallocated Total
ALLL                      
Individually evaluated for impairment$2,050
 $91
 $1,796
 $—
 $—
 $3,937
$829
 $2
 $1,989
 $—
 $—
 $2,820
Collectively evaluated for impairment4,812
 316
 1,831
 666
 374
 7,999
1,342
 327
 1,341
 522
 1,048
 4,580
Total$6,862
 $407
 $3,627
 $666
 $374
 $11,936
$2,171
 $329
 $3,330
 $522
 $1,048
 $7,400
Loans                      
Individually evaluated for impairment$14,456
 $723
 $10,704
 $75
   $25,958
$7,969
 $4,068
 $10,266
 $35
   $22,338
Collectively evaluated for impairment357,049
 82,883
 273,444
 33,419
   746,795
440,412
 111,843
 241,235
 34,664
   828,154
Total$371,505

$83,606
 $284,148
 $33,494
   $772,753
$448,381
 $115,911
 $251,501
 $34,699
   $850,492

6671


The following table displays the credit quality indicators for commercial and agricultural credit exposures based on internally assigned credit risk ratings as of December 31:31:
20132016
Commercial AgriculturalCommercial Agricultural  

Real Estate Other Total Real Estate Other TotalReal Estate Other Advances to Mortgage Brokers Total Real Estate Other Total Total
Rating          
               
1 - Excellent$28
 $438
 $—
 $466
 $—
 $—
 $—
 $466
2 - High quality$18,671
 $14,461
 $33,132
 $3,527
 $3,235
 $6,762
11,821
 12,091
 19,688
 43,600
 3,566
 1,426
 4,992
 48,592
3 - High satisfactory91,323
 39,403
 130,726
 26,015
 17,000
 43,015
103,529
 41,982
 —
 145,511
 21,657
 11,388
 33,045
 178,556
4 - Low satisfactory149,921
 43,809
 193,730
 26,874
 10,902
 37,776
299,317
 74,432
 —
 373,749
 48,955
 22,715
 71,670
 445,419
5 - Special mention13,747
 1,843
 15,590
 1,609
 922
 2,531
3,781
 1,178
 —
 4,959
 6,009
 3,085
 9,094
 14,053
6 - Substandard16,974
 473
 17,447
 1,232
 1,273
 2,505
5,901
 1,474
 —
 7,375
 3,650
 3,508
 7,158
 14,533
7 - Vulnerable1,041
 238
 1,279
 —
 —
 —
4
 —
 —
 4
 —
 533
 533
 537
8 - Doubtful183
 17
 200
 —
 —
 —
—
 —
 —
 —
 —
 —
 —
 —
Total$291,860
 $100,244
 $392,104
 $59,257
 $33,332
 $92,589
$424,381
 $131,595
 $19,688
 $575,664
 $83,837
 $42,655
 $126,492
 $702,156
20122015  
Commercial AgriculturalCommercial Agricultural  

Real Estate Other Total Real Estate Other TotalReal Estate Other Advances to Mortgage Brokers Total Real Estate Other Total Total
Rating                          
1 - Excellent$—
 $499
 $—
 $499
 $—
 $—
 $—
 $499
2 - High quality$25,209
 $15,536
 $40,745
 $2,955
 $2,313
 $5,268
7,397
 11,263
 —
 18,660
 4,647
 2,150
 6,797
 25,457
3 - High satisfactory83,805
 28,974
 112,779
 16,972
 11,886
 28,858
99,136
 29,286
 —
 128,422
 28,886
 13,039
 41,925
 170,347
4 - Low satisfactory127,423
 45,143
 172,566
 27,291
 15,437
 42,728
222,431
 62,987
 —
 285,418
 37,279
 22,166
 59,445
 344,863
5 - Special mention16,046
 1,692
 17,738
 1,008
 3,191
 4,199
4,501
 473
 —
 4,974
 3,961
 1,875
 5,836
 10,810
6 - Substandard20,029
 2,224
 22,253
 1,167
 1,217
 2,384
9,941
 256
 —
 10,197
 1,623
 139
 1,762
 11,959
7 - Vulnerable1,512
 2,294
 3,806
 —
 —
 —
211
 —
 —
 211
 146
 —
 146
 357
8 - Doubtful1,596
 22
 1,618
 —
 169
 169
—
 —
 —
 —
 —
 —
 —
 —
Total$275,620
 $95,885
 $371,505
 $49,393
 $34,213
 $83,606
$343,617
 $104,764
 $—
 $448,381
 $76,542
 $39,369
 $115,911
 $564,292
Internally assigned credit risk ratings are reviewed, at a minimum, when loans are renewed or when management has knowledge of improvements or deterioration of the credit quality of individual credits. Descriptions of the internally assigned credit risk ratings for commercial and agricultural loans are as follows:
1. EXCELLENT – Substantially Risk Free
Credit has strong financial condition and solid earnings history, characterized by:
High liquidity, strong cash flow, low leverage.
Unquestioned ability to meet all obligations when due.
Experienced management, with management succession in place.
Secured by cash.
2. HIGH QUALITY – Limited Risk
Credit with sound financial condition and has a positive trend in earnings supplemented by:
Favorable liquidity and leverage ratios.
Ability to meet all obligations when due.
Management with successful track record.
Steady and satisfactory earnings history.

72


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.

67

3.HIGH SATISFACTORY – Reasonable Risk
Credit with satisfactory financial condition and further characterized by:
Working capital adequate to support operations.
Cash flow sufficient to pay debts as scheduled.
Management experience and depth appear favorable.
Loan performing according to terms.
If loan is secured, collateral is acceptable and loan is fully protected.
4. LOW SATISFACTORY – Acceptable Risk
Credit with bankable risks, although some signs of weaknesses are shown:
Would include most start-up businesses.
Occasional instances of trade slowness or repayment delinquency – may have been 10-3010-30 days slow within the past year.
Management’s abilities are apparent, yet unproven.
Weakness in primary source of repayment with adequate secondary source of repayment.
Loan structure generally in accordance with policy.
If secured, loan collateral coverage is marginal.
Adequate cash flow to service debt, but coverage is low.
To be classified as less than satisfactory, only one of the following criteria must be met.
5. SPECIAL MENTION – Criticized
Credit constitutes an undue and unwarranted credit risk but not to the point of justifying a classification of substandard. The credit risk may be relatively minor yet constitute an unwarranted risk in light of the circumstances surrounding a specific loan:
Downward trend in sales, profit levels, and margins.
Impaired working capital position.
Cash flow is strained in order to meet debt repayment.
Loan delinquency (30-60(30-60 days) and overdrafts may occur.
Shrinking equity cushion.
Diminishing primary source of repayment and questionable secondary source.
Management abilities are questionable.
Weak industry conditions.
Litigation pending against the borrower.
Collateral or guaranty offers limited protection.
Negative debt service coverage, however the credit is well collateralized and payments are current.
6. SUBSTANDARD – Classified
Credit where the borrower’s current net worth, paying capacity, and value of the collateral pledged is inadequate. There is a distinct possibility that 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.

73


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.

68

7.VULNERABLE – Classified
Credit is considered “Substandard” and warrants placing on nonaccrual.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.

74


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 31:31:
20132016
Accruing Interest
and Past Due:		   Total Past Due and Nonaccrual    Accruing Interest
and Past Due:		   Total Past Due and Nonaccrual    

30-59
Days		 60-89
Days		 90 Days
or More		 Nonaccrual Current Total30-59
Days		 60-89
Days		 90 Days
or More		 Nonaccrual Current Total
Commercial                          
Commercial real estate$1,226
 $296
 $—
 $1,136
 $2,658
 $289,202
 $291,860
$1,580
 $—
 $35
 $4
 $1,619
 $422,762
 $424,381
Commercial other368
 15
 13
 238
 634
 99,610
 100,244
1,693
 35
 —
 —
 1,728
 129,867
 131,595
Advances to mortgage brokers—
 —
 —
 —
 —
 19,688
 19,688
Total commercial1,594
 311
 13
 1,374
 3,292
 388,812
 392,104
3,273
 35
 35
 4
 3,347
 572,317
 575,664
Agricultural                          
Agricultural real estate34
 295
 —
 —
 329
 58,928
 59,257
191
 —
 508
 —
 699
 83,138
 83,837
Agricultural other—
 —
 —
 —
 —
 33,332
 33,332
19
 —
 —
 533
 552
 42,103
 42,655
Total agricultural34
 295
 —
 —
 329
 92,260
 92,589
210
 —
 508
 533
 1,251
 125,241
 126,492
Residential real estate                          
Senior liens3,441
 986
 129
 1,765
 6,321
 229,865
 236,186
1,638
 174
 22
 498
 2,332
 216,681
 219,013
Junior liens408
 44
 —
 29
 481
 13,074
 13,555
15
 —
 —
 25
 40
 8,317
 8,357
Home equity lines of credit181
 —
 —
 25
 206
 39,984
 40,190
270
 6
 68
 —
 344
 38,336
 38,680
Total residential real estate4,030
 1,030
 129
 1,819
 7,008
 282,923
 289,931
1,923
 180
 90
 523
 2,716
 263,334
 266,050
Consumer                          
Secured167
 11
 —
 50
 228
 28,444
 28,672
110
 —
 —
 —
 110
 38,582
 38,692
Unsecured25
 5
 —
 1
 31
 4,710
 4,741
5
 —
 —
 —
 5
 3,712
 3,717
Total consumer192
 16
 —
 51
 259
 33,154
 33,413
115
 —
 —
 —
 115
 42,294
 42,409
Total$5,850
 $1,652
 $142
 $3,244
 $10,888
 $797,149
 $808,037
$5,521
 $215
 $633
 $1,060
 $7,429
 $1,003,186
 $1,010,615

6975


20122015
Accruing Interest
and Past Due:		   Total Past Due and Nonaccrual    Accruing Interest
and Past Due:		   Total Past Due and Nonaccrual    

30-59
Days		 60-89
Days		 90 Days
or More		 Nonaccrual Current Total30-59
Days		 60-89
Days		 90 Days
or More		 Nonaccrual Current Total
Commercial                          
Commercial real estate$1,304
 $161
 $63
 $2,544
 $4,072
 $271,548
 $275,620
$505
 $281
 $—
 $211
 $997
 $342,620
 $343,617
Commercial other606
 —
 40
 2,294
 2,940
 92,945
 95,885
18
 —
 —
 —
 18
 104,746
 104,764
Advances to mortgage brokers—
 —
 —
 —
 —
 —
 —
Total commercial1,910
 161
 103
 4,838
 7,012
 364,493
 371,505
523
 281
 —
 211
 1,015
 447,366
 448,381
Agricultural                          
Agricultural real estate—
 —
 —
 —
 —
 49,393
 49,393
196
 890
 —
 146
 1,232
 75,310
 76,542
Agricultural other90
 —
 —
 169
 259
 33,954
 34,213
—
 —
 —
 —
 —
 39,369
 39,369
Total agricultural90
 —
 —
 169
 259
 83,347
 83,606
196
 890
 —
 146
 1,232
 114,679
 115,911
Residential real estate                          
Senior liens2,000
 346
 320
 2,064
 4,730
 223,532
 228,262
1,551
 261
 —
 429
 2,241
 199,622
 201,863
Junior liens232
 —
 —
 50
 282
 16,207
 16,489
40
 8
 —
 6
 54
 9,325
 9,379
Home equity lines of credit237
 —
 —
 182
 419
 38,978
 39,397
225
 —
 —
 —
 225
 40,034
 40,259
Total residential real estate2,469
 346
 320
 2,296
 5,431
 278,717
 284,148
1,816
 269
 —
 435
 2,520
 248,981
 251,501
Consumer                          
Secured127
 33
 4
 —
 164
 28,118
 28,282
27
 —
 —
 —
 27
 30,839
 30,866
Unsecured31
 3
 1
 —
 35
 5,177
 5,212
4
 —
 —
 —
 4
 3,829
 3,833
Total consumer158
 36
 5
 —
 199
 33,295
 33,494
31
 —
 —
 —
 31
 34,668
 34,699
Total$4,627
 $543
 $428
 $7,303
 $12,901
 $759,852
 $772,753
$2,566
 $1,440
 $—
 $792
 $4,798
 $845,694
 $850,492
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,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 outstandingunpaid principal balance to the present value of expected future cash flows discounted at the loan’s effective interest rate.

7076


We do not recognize interest income on impaired loans in nonaccrual status. For impaired loans not inclassified as nonaccrual status,, interest income is recognized daily, as earned, according to the terms of the loan agreement.agreement and the principal amount outstanding. The following is a summary ofsummarizes information pertaining to impaired loans as of, and for the years ended, December 31:31:
20132016
Outstanding Balance Unpaid Principal Balance Valuation Allowance Average Outstanding Balance Interest Income RecognizedOutstanding Balance Unpaid Principal Balance Valuation Allowance Average Outstanding Balance Interest Income Recognized
Impaired loans with a valuation allowance                  
Commercial real estate$6,748
 $6,888
 $1,915
 $7,256
 $400
$5,811
 $5,992
 $716
 $5,746
 $343
Commercial other521
 521
 120
 879
 51
1,358
 1,358
 25
 568
 27
Agricultural real estate90
 90
 30
 91
 4
—
 —
 —
 91
 6
Agricultural other—
 —
 —
 53
 —
134
 134
 1
 92
 2
Residential real estate senior liens14,061
 15,315
 2,278
 11,111
 442
8,464
 9,049
 1,615
 9,214
 362
Residential real estate junior liens48
 64
 9
 80
 2
72
 82
 14
 113
 3
Home equity lines of credit—
 —
 —
 —
 —
Consumer secured—
 —
 —
 —
 —
Total impaired loans with a valuation allowance21,468
 22,878
 4,352
 19,470
 899
15,839
 16,615
 2,371
 15,824
 743
Impaired loans without a valuation allowance                  
Commercial real estate5,622
 6,499
   4,312
 337
604
 617
   895
 69
Commercial other925
 1,035
   989
 83
86
 97
   87
 8
Agricultural real estate1,370
 1,370
   320
 28
4,037
 4,037
   3,515
 182
Agricultural other78
 198
   357
 (7)1,374
 1,374
   708
 42
Home equity lines of credit193
 493
   180
 16
102
 402
   115
 16
Consumer secured119
 148
   72
 2
26
 26
   32
 3
Total impaired loans without a valuation allowance8,307
 9,743
   6,230
 459
6,229
 6,553
 

 5,352
 320
Impaired loans                  
Commercial13,816
 14,943
 2,035
 13,436
 871
7,859
 8,064
 741
 7,296
 447
Agricultural1,538
 1,658
 30
 821
 25
5,545
 5,545
 1
 4,406
 232
Residential real estate14,302
 15,872
 2,287
 11,371
 460
8,638
 9,533
 1,629
 9,442
 381
Consumer119
 148
 —
 72
 2
26
 26
 —
 32
 3
Total impaired loans$29,775
 $32,621
 $4,352
 $25,700
 $1,358
$22,068
 $23,168
 $2,371
 $21,176
 $1,063

7177


20122015
Outstanding Balance Unpaid Principal Balance Valuation Allowance Average Outstanding Balance Interest Income RecognizedOutstanding Balance Unpaid Principal Balance Valuation Allowance Average Outstanding Balance Interest Income Recognized
Impaired loans with a valuation allowance                  
Commercial real estate$7,295
 $7,536
 $1,653
 $6,155
 $237
$5,659
 $5,777
 $818
 $7,221
 $376
Commercial other2,140
 2,140
 397
 1,437
 93
8
 8
 11
 362
 19
Agricultural real estate91
 91
 32
 413
 —
—
 —
 —
 22
 1
Agricultural other420
 420
 59
 1,555
 54
335
 335
 2
 126
 8
Residential real estate senior liens10,450
 11,672
 1,783
 8,861
 406
9,996
 10,765
 1,959
 10,610
 425
Residential real estate junior liens72
 118
 13
 134
 6
143
 163
 30
 183
 16
Home equity lines of credit—
 —
 —
 31
 —
Consumer secured—
 —
 —
 39
 3
Total impaired loans with a valuation allowance20,468
 21,977
 3,937
 18,555
 796
16,141
 17,048
 2,820
 18,594
 848
Impaired loans without a valuation allowance                  
Commercial real estate3,749
 4,408
   5,867
 321
2,122
 2,256
   2,170
 201
Commercial other1,272
 1,433
   819
 87
180
 191
   106
 11
Agricultural real estate—
 —
   183
 —
3,549
 3,549
   1,903
 95
Agricultural other212
 332
   201
 4
184
 184
   290
 15
Home equity lines of credit182
 482
   190
 16
127
 434
   144
 18
Consumer secured75
 84
   90
 6
35
 35
   6
 1
Total impaired loans without a valuation allowance5,490
 6,739
   7,350
 434
6,197
 6,649
   4,619
 341
Impaired loans                  
Commercial14,456
 15,517
 2,050
 14,278
 738
7,969
 8,232
 829
 9,859
 607
Agricultural723
 843
 91
 2,352
 58
4,068
 4,068
 2
 2,341
 119
Residential real estate10,704
 12,272
 1,796
 9,185
 428
10,266
 11,362
 1,989
 10,968
 459
Consumer75
 84
 —
 90
 6
35
 35
 —
 45
 4
Total impaired loans$25,958
 $28,716
 $3,937
 $25,905
 $1,230
$22,338
 $23,697
 $2,820
 $23,213
 $1,189
As of December 31, 2013 and 2012, weWe had committed to advance $134$117 and $9, respectively,$0 in connection with impaired loans, which include TDRs,. as of December 31, 2016 and 2015, respectively.
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 debt with similar risk characteristics.
3.Forbearance of principal.
4.Forbearance of accrued interest.
Agreeing to interest rates below prevailing market rates for debt with similar risk characteristics.
Extending the amortization period beyond typical lending guidelines for loans with similar risk characteristics.
Forgiving principal.
Forgiving accrued interest.
To determine if a borrower is experiencing financial difficulties, factors we consider if: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).
The borrower is currently in default on any of their debt.
The borrower would likely default on any of their debt if the concession was not granted.
The borrower’s cash flow was insufficient to service all of their debt if the concession was not granted.
The borrower has declared, or is in the process of declaring, bankruptcy.
The borrower is unlikely to continue as a going concern (if the entity is a business).

7278


The following is a summary of information pertaining to TDRs granted in the years ended December 31:31:
2013 20122016 2015
Number of Loans Pre-Modification Recorded Investment Post-Modification Recorded Investment Number of Loans Pre-Modification Recorded Investment Post-Modification Recorded InvestmentNumber of Loans Pre-Modification Recorded Investment Post-Modification Recorded Investment Number of Loans Pre-Modification Recorded Investment Post-Modification Recorded Investment
Commercial           
Commercial real estate—
 $—
 $—
 1
 $912
 $792
Commercial other18
 5,299
 5,103
 28
 6,437
 6,437
6
 $2,066
 $2,066
 13
 $3,073
 $3,073
Total commercial18
 5,299
 5,103
 29
 7,349
 7,229
Agricultural other4
 1,379
 1,379
 7
 652
 652
7
 1,610
 1,610
 11
 3,106
 3,106
Residential real estate                      
Senior liens55
 6,069
 6,053
 29
 3,463
 3,463
4
 143
 143
 6
 678
 678
Junior liens1
 20
 20
 1
 22
 22
—
 —
 —
 1
 30
 30
Home equity lines of credit—
 —
 —
 1
 94
 94
Total residential real estate56
 6,089
 6,073
 30
 3,485
 3,485
4
 143
 143
 8
 802
 802
Consumer           
Secured1
 27
 27
 1
 —
 —
Unsecured2
 34
 34
 —
 —
 —
Total consumer3
 61
 61
 1
 —
 —
Consumer unsecured1
 2
 2
 —
 —
 —
Total81
 $12,828
 $12,616
 67
 $11,486
 $11,366
18
 $3,821
 $3,821
 32
 $6,981
 $6,981
The following tables summarize concessions we granted to borrowers in financial difficulty in the years ended December 31:31:
2013 20122016 2015

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 PeriodBelow 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 InvestmentNumber 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               
Commercial real estate—
 $—
 —
 $—
 —
 $—
 1
 $912
Commercial other12
 3,070
 6
 2,229
 25
 4,924
 3
 1,513
—
 $—
 6
 $2,066
 11
 $2,742
 2
 $331
Total commercial12
 3,070
 6
 2,229
 25
 4,924
 4
 2,425
Agricultural other4
 1,379
 —
 —
 6
 561
 1
 91
2
 419
 5
 1,191
 9
 1,360
 2
 1,746
Residential real estate                              
Senior liens24
 1,904
 31
 4,165
 17
 1,779
 12
 1,684
2
 27
 2
 116
 3
 280
 3
 398
Junior liens—
 —
 1
 20
 —
 —
 1
 22
—
 —
 —
 —
 —
 —
 1
 30
Home equity lines of credit—
 —
 —
 —
 —
 —
 1
 94
Total residential real estate24
 1,904
 32
 4,185
 17
 1,779
 13
 1,706
2
 27
 2
 116
 3
 280
 5
 522
Consumer               
Secured1
 27
 —
 —
 1
 —
 —
 —
Unsecured1
 16
 1
 18
 —
 —
 —
 —
Total Consumer2
 43
 1
 18
 1
 —
 —
 —
Consumer unsecured—
 —
 1
 2
 —
 —
 —
 —
Total42
 $6,396
 39
 $6,432
 49
 $7,264
 18
 $4,222
4
 $446
 14
 $3,375
 23
 $4,382
 9
 $2,599
We did not restructure any loans through the forbearance ofby forgiving principal or accrued interest during 20132016 or 2012.2015.
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.

73

We had no loans that defaulted in the year ended December 31, 2016 which were modified within 12 months prior to the default date. Following is a summary of loans that defaulted in the yearsyear ended December 31,, 2015, which were modified within 12 months prior to the default date:
 2013 2012
 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—
 $—
 $—
 $—
 5
 $342
 $143
 $199
Residential real estate senior liens1
 62
 11
 51
 1
 47
 43
 4
Consumer secured—
 —
 —
 —
 1
 8
 8
 —
Consumer unsecured1
 16
 16
 —
 —
 —
 —
 —
Total2
 $78
 $27
 $51
 7
 $397
 $194
 $203

Number of Loans Pre-
Default
Recorded
Investment		 Charge-Off
Recorded
Upon
Default		 Post-
Default
Recorded
Investment
Commercial other1
 $216
 $25
 $191
Residential real estate junior liens1
 39
 39
 —
Total2
 $255
 $64
 $191

79


The following is a summary of TDR loan balances as of December 31:31:
 2013 2012
TDRs$25,865
 $19,355
 2016 2015
TDRs$21,382
 $21,325
Note 76 – Premises and Equipment
A summary of premises and equipment at December 31 follows:

2013 20122016 2015
Land$5,429
 $5,435
$6,336
 $6,190
Buildings and improvements24,765
 22,705
28,941
 27,580
Furniture and equipment30,128
 29,755
33,125
 31,568
Total60,322
 57,895
68,402
 65,338
Less: accumulated depreciation34,603
 32,108
39,088
 37,007
Premises and equipment, net$25,719
 $25,787
$29,314
 $28,331
Depreciation expense amounted to $2,556, $2,417,$2,821, $2,677, and $2,521$2,551 in 2013, 2012,2016, 2015, and 2011,2014, respectively.
Note 87 – Goodwill and Other Intangible Assets
The carrying amount of goodwill was $45,618$48,282 at December 31, 20132016 and 2012.2015.
Identifiable intangible assets were as follows as of December 31:
 2013
 Gross
Intangible
Assets		 Accumulated
Amortization		 Net
Intangible
Assets
Core deposit premium resulting from acquisitions$5,373
 $4,680
 $693
 2016
 Gross
Intangible
Assets		 Accumulated
Amortization		 Net
Intangible
Assets
Core deposit premium resulting from acquisitions$5,579
 $5,195
 $384
 2012
 Gross
Intangible
Assets		 Accumulated
Amortization		 Net
Intangible
Assets
Core deposit premium resulting from acquisitions$5,373
 $4,459
 $914
 2015
 Gross
Intangible
Assets		 Accumulated
Amortization		 Net
Intangible
Assets
Core deposit premium resulting from acquisitions$5,579
 $5,033
 $546
Amortization expense associated with identifiable intangible assets was $221, $260,$162, $169, and $299$183 in 2013, 2012,2016, 2015, and 2011,2014, respectively.

74

Estimated amortization expense associated with identifiable intangibles for each of the next five years succeeding December 31, 2013,2016, and thereafter is as follows:
2014$183
2015145
2016106

Estimated Amortization Expense
201774
$119
201862
96
201971
202048
202129
Thereafter123
21
Total$693
$384

80


Note 8 – Foreclosed Assets
Foreclosed assets are included in other assets in the consolidated balance sheets and consist of other real estate owned and repossessed assets. The following is a summary of foreclosed assets as of December 31:

2016 2015
Consumer mortgage loans collateralized by residential real estate foreclosed as a result of obtaining physical possession$18
 $—
All other foreclosed assets213
 421
Total$231
 $421
Below is a summary of changes in foreclosed assets during the years ended December 31:

2016 2015
Balance, January 1$421
 $885
Properties transferred306
 1,158
Impairments(10) (99)
Proceeds from sale(486) (1,523)
Balance, December 31$231
 $421
There were $18 and $56 consumer mortgage loans collateralized by residential real estate in the process of foreclosure as of December 31, 2016 and 2015.
Note 9 – Deposits
Scheduled maturities of time deposits for the next five years, and thereafter, are as follows:
2014$207,278
201581,413
201658,627

Scheduled Maturities of Time Deposits
201746,336
$196,467
201839,214
82,049
201945,110
202033,929
202150,978
Thereafter17,144
24,881
Total$450,012
$433,414
Interest expense on time deposits greater than $100 was $3,203$2,937 in 2013, $3,8542016, $2,806 in 2012,2015 and $4,302$2,920 in 2011.2014.
Note 10 – Borrowed Funds
Borrowed funds consist of the following obligations at December 31:31:
2013 20122016 2015
Amount Rate Amount RateAmount Rate Amount Rate
FHLB advances$162,000
 2.02% $152,000
 2.05%$270,000
 1.82% $235,000
 1.93%
Securities sold under agreements to repurchase without stated maturity dates106,025
 0.13% 66,147
 0.15%60,894
 0.13% 70,532
 0.12%
Securities sold under agreements to repurchase with stated maturity dates11,301
 3.30% 16,284
 3.57%
Federal funds purchased—
 —
 6,570
 0.50%6,800
 1.00% 4,200
 0.75%
Total$279,326
 1.35% $241,001
 1.59%$337,694
 1.50% $309,732
 1.50%
The FHLB advances are collateralized by a blanket lien on all qualified 1-4 family residential real estate loans, and certain mortgage-backedspecific AFS securities, and collateralized mortgage obligations. Advances are also secured by our holdings of FHLB stock. As of December 31, 2013, we had the ability to borrow up to an additional $127,748, based on assets pledged as collateral. During the first quarter of 2013 and 2012, we reduced funding costs by modifying the term of $30,000 and $60,000, respectively, of FHLB advances.

7581


The maturityfollowing table lists the maturities and weighted average interest rates of FHLB advances are as follows as of December 31:31:
 2013 2012

Amount Rate Amount Rate
Fixed rate advances due 2014$10,000
 0.48% $10,000
 0.48%
Fixed rate advances due 201532,000
 0.84% 42,000
 1.12%
Fixed rate advances due 201610,000
 2.15% 10,000
 2.15%
Fixed rate advances due 201730,000
 1.95% 40,000
 2.15%
Fixed rate advances due 201840,000
 2.35% 20,000
 2.86%
Fixed rate advances due 201920,000
 3.11% 20,000
 3.73%
Fixed rate advances due 202010,000
 1.98% 10,000
 1.98%
Fixed rate advances due 202310,000
 3.90% —
 —
Total$162,000
 2.02% $152,000
 2.05%
 2016 2015

Amount Rate Amount Rate
Fixed rate due 2016$—
 —
 $30,000
 1.25%
Variable rate due 2016—
 —
 15,000
 0.62%
Fixed rate due 201770,000
 1.39% 50,000
 1.56%
Fixed rate due 201850,000
 2.16% 50,000
 2.16%
Fixed rate due 201960,000
 1.99% 40,000
 2.35%
Fixed rate due 202010,000
 1.98% 10,000
 1.98%
Fixed rate due 202150,000
 1.91% 30,000
 2.26%
Variable rate due 2021 1
10,000
 1.21% —
 —
Fixed rate due 202310,000
 3.90% 10,000
 3.90%
Fixed rate due 202610,000
 1.17% —
 —
Total$270,000
 1.82% $235,000
 1.93%
(1)
Hedged advance (see "Derivative Instruments" section below)
Securities sold under agreements to repurchase are classified as secured borrowings. Securities sold under agreements to repurchase without stated maturity dates generally mature within one to four days from the transaction date. Securities sold under agreements to repurchaseborrowings and are reflected at the amount of cash received in connection with the transaction. The securities underlying the agreements have a carrying value and a fair value of $148,930$60,918 and $143,322$70,555 at December 31, 20132016 and 2012,2015, respectively. Such securities remain under our control. We may be required to provide additional collateral based on the fair value of underlying securities.
The maturity and weighted average interest rates of securities sold under agreements to repurchase with stated maturity dates are as follows at December 31:
 2013 2012
 Amount Rate Amount Rate
Repurchase agreements due 2013$—
 —
 $5,000
 4.51%
Repurchase agreements due 201410,876
 3.30% 10,872
 3.15%
Repurchase agreements due 2015425
 3.25% 412
 3.25%
Total$11,301
 3.30% $16,284
 3.57%
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 short-term borrowingssecurities sold under repurchase agreements without stated maturity dates and federal funds purchased. We had no FRB Discount Window advances for the years ended December 31,: 2016 and 2015.
2013 2012December 31, 2016 December 31, 2015
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 PeriodMaximum 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$106,025
 $74,602
 0.15% $66,117
 $57,466
 0.20%$61,783
 $57,702
 0.09% $84,859
 $70,368
 0.13%
Federal funds purchased13,700
 4,445
 0.61% 17,900
 3,836
 0.47%27,300
 8,546
 0.60% 13,100
 5,783
 0.50%
We had pledged certificates of deposit held in other financial institutions, trading securities, AFS securities and 1-4 family residential real estate loans in the following amounts at December 31:31:
2013 20122016 2015
Pledged to secure borrowed funds$320,173
 $308,628
$363,427
 $339,078
Pledged to secure repurchase agreements148,930
 143,322
60,918
 70,555
Pledged for public deposits and for other purposes necessary or required by law20,922
 22,955
33,916
 39,038
Total$490,025
 $474,905
$458,261
 $448,671
AFS securities pledged to repurchase agreements without stated maturity dates consisted of the following at December 31:

2016 2015
States and political subdivisions$5,676
 $3,639
Mortgage-backed securities11,383
 23,075
Collateralized mortgage obligations43,859
 43,841
Total$60,918
 $70,555
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 AFS securities available to pledge to satisfy required collateral.

82

Table of Contents

As of December 31, 2016, we had the ability to borrow up to an additional $99,118, based on assets pledged as collateral. We had no investment securities that are restricted to be pledged for specific purposes.

76
Derivative Instruments
During the second quarter of 2016, we began to enter into interest rate swaps to manage exposure to interest rate risk and variability in cash flows. The interest rate swaps, associated with our variable rate borrowings, are designated upon inception as cash flow hedges of forecasted interest payments. We enter into LIBOR-based interest rate swaps that involve the receipt of variable amounts in exchange for fixed rate payments, in effect converting variable rate debt to fixed rate debt.
Cash flow hedges are assessed for effectiveness using regression analysis. The effective portion of changes in fair value are recorded in OCI and subsequently reclassified into interest expense in the same period in which the related interest on the variable rate borrowings affects earnings. In the event that a portion of the changes in fair value were determined to be ineffective, the ineffective amount would be recorded in earnings.
The following table provides information on derivatives related to variable rate borrowings as of December 31, 2016.
 Pay Rate Receive Rate Remaining Life (Years) Notional Amount Balance Sheet Location Fair Value
Derivatives designated as hedging instruments           
Cash Flow Hedges:           
Interest rate swaps1.56% 3-Month LIBOR 4.3 $10,000
 Other Assets $248
Derivatives contain an element of credit risk which arises from the possibility that we will incur a loss as a result of a counterparty failing to meet its contractual obligations. Credit risk is minimized through counterparty collateral, transaction limits and monitoring procedures. We also manage dealer credit risk by entering into interest rate derivatives only with primary and highly rated counterparties, the use of ISDA master agreements and counterparties limits. We do not anticipate any losses from failure of interest rate derivative counterparties to honor their obligations.
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Note 11 – Other Noninterest Expenses
A summary of expenses included in other noninterest expenses is as follows for the years ended December 31:31:

2013 2012 20112016 2015 2014
Marketing and community relations$1,131
 $1,965
 $1,174
Audit and related fees$944
 $889
 $809
Director fees851
 827
 775
Consulting fees800
 487
 349
OTTI on AFS securities770
 —
 —
FDIC insurance premiums1,082
 864
 1,086
719
 813
 842
Directors fees819
 885
 842
Audit and related fees738
 711
 714
Marketing costs586
 497
 427
Donations and community relations582
 841
 1,004
Education and travel502
 588
 526
536
 343
 461
Loan underwriting fees423
 403
 331
535
 347
 361
Postage and freight396
 381
 397
Printing and supplies396
 424
 405
391
 461
 367
Postage and freight387
 389
 388
Legal fees359
 268
 302
208
 295
 320
Consulting fees315
 482
 386
Amortization of deposit premium221
 260
 299
162
 169
 183
Foreclosed asset and collection211
 202
 576
State taxes140
 187
 57
Other losses109
 300
 54
241
 150
 250
All other1,517
 1,123
 1,131
1,305
 1,559
 1,740
Total other$8,350
 $9,051
 $8,271
$9,026
 $8,059
 $8,285

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

2013 2012 20112016 2015 2014
Currently payable$3,404
 $1,747
 $965
$2,630
 $1,596
 $2,159
Deferred (benefit) expense(1,208) 616
 389
Deferred expense (benefit)(282) 1,692
 185
Income tax expense$2,196
 $2,363
 $1,354
$2,348
 $3,288
 $2,344

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 yearsyear ended December 31:31:

2013 2012 20112016 2015 2014
Income taxes at 34% statutory rate$5,000
 $4,953
 $3,932
$5,490
 $6,262
 $5,463
Effect of nontaxable income          
Interest income on tax exempt municipal securities(1,746) (1,675) (1,687)(1,938) (2,026) (1,999)
Earnings on corporate owned life insurance policies(249) (238) (207)(419) (262) (255)
Other(154) (147) (65)(154) (88) (263)
Total effect of nontaxable income(2,149) (2,060) (1,959)(2,511) (2,376) (2,517)
Effect of nondeductible expenses143
 157
 156
Effect of tax credits(801) (667) (793)(774) (755) (758)
Effect of nondeductible expenses146
 137
 174
Federal income tax expense$2,196
 $2,363
 $1,354
$2,348
 $3,288
 $2,344


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Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for federal income tax purposes. Significant components of our deferred tax assets and liabilities, included in other assets in the accompanying consolidated balance sheets, are as follows as of December 31:31:
2013 20122016 2015
Deferred tax assets      
Allowance for loan losses$2,988
 $3,133
$1,576
 $1,582
Deferred directors’ fees2,313
 2,100
2,758
 2,549
Employee benefit plans257
 189
115
 229
Core deposit premium and acquisition expenses971
 892
1,157
 1,098
Net unrealized losses on trading securities360
 351
Net unrecognized actuarial losses on pension plan1,100
 1,891
1,531
 1,708
Net unrealized losses on available-for-sale securities1,345
 —
Life insurance death benefit payable804
 804
804
 804
Alternative minimum tax729
 729
717
 650
Other321
 195
618
 53
Total deferred tax assets11,188
 10,284
9,276
 8,673
Deferred tax liabilities      
Prepaid pension cost1,023
 1,021
809
 890
Premises and equipment449
 724
115
 166
Accretion on securities42
 37
58
 55
Core deposit premium and acquisition expenses1,229
 1,203
1,403
 1,289
Net unrealized gains on available-for-sale securities—
 4,912
418
 2,252
Net unrealized gains on derivative instruments84
 —
Other547
 1,163
1,502
 989
Total deferred tax liabilities3,290
 9,060
4,389
 5,641
Net deferred tax assets$7,898
 $1,224
$4,887
 $3,032

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We are subject to U.S. federal income tax; however, we are no longer subject to examination by taxing authorities for years before 2010.2013. 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, 20132016 and 20122015 and we not aware of any claims for such amounts by federal income tax authorities.
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.
The following table summarizes our credit related financial instruments with off-balance-sheet risk as of:
December 31December 31
2013 20122016 2015
Unfunded commitments under lines of credit$121,959
 $115,233
$168,840
 $134,412
Commercial and standby letters of credit4,169
 3,935
1,223
 915
Commitments to grant loans29,096
 40,507
29,339
 53,946

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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 amountsupon and do not necessarily represent future cash requirements. Advances to mortgage brokers are also included in unfunded commitments under lines of credit. The balance is the difference between our outstanding balances and maximum outstanding aggregate amount.
Commitments to grant loans are agreements to lend to a customer as long as there is no violation of any condition established in the contract. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. The amount of collateral obtained, if we deem necessary, is based on management's credit evaluation of the customer. Commitments to grant loans include residential mortgage loans with the majority being loans committed to be sold to the secondary market.
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 generally mature within one year. The credit risk involved in these transactions is essentially the same as that involved in extending loans to customers. We evaluate each customer’s credit worthiness on a case-by-case basis. The amount of collateral obtained, if 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.

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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 $182$750 and $1,912$234 at December 31, 20132016 and 2012,2015, 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.
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 $1,286$1,877 and $5,545$1,421 at December 31, 20132016 and 2012,2015, 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.

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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, 20132016 and 2012,2015, the reserve balances amounted to $910$1,273 and $885,$1,169, 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, 2013,2016, 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, 2014,2017, the amount available to the Corporation for dividends from the Bank, without regulatory approval, was approximately $19,500.$25,600.
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 Tiercommon equity tier 1 capital (as defined in the regulations) to risk-weighted assets (as defined) and Tiertier 1 capital to average assets (as defined). We believe, as of December 31, 20132016 and 2012,2015, 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

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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 remained at 8.00%. Also effective January 1, 2015 was the new common equity tier 1 capital ratio which had a minimum requirement of 4.50%. The capital conservative buffer requirement began on January 1, 2016 which required a 0.625% addition to the tier 1, minimum, and common equity tier 1 capital ratio. The capital conservative buffer will continue to increase capital ratios each year through 2019.
As of December 31, 2013,2016 and 2015, 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 hashave 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		Actual Minimum
Capital
Requirement		 Minimum To Be Well
Capitalized Under Prompt
Corrective Action Provisions
Amount Ratio Amount Ratio Amount RatioAmount Ratio Amount Ratio Amount Ratio
December 31, 2013           
Total capital to risk weighted assets           
December 31, 2016           
Common equity Tier 1 capital to risk weighted assets           
Isabella Bank$120,067
 13.84% $69,390
 8.00% $86,738
 10.00%$132,900
 11.69% $45,462
 5.125% $68,193
 6.50%
Consolidated131,398
 14.92
 70,452
 8.00
 N/A
 N/A
142,165
 12.39% 45,881
 5.125% N/A
 N/A
Tier 1 capital to risk weighted assets                      
Isabella Bank109,217
 12.59
 34,695
 4.00
 52,043
 6.00
132,900
 11.69% 45,462
 6.625% 68,193
 8.00%
Consolidated120,384
 13.67
 35,226
 4.00
 N/A
 N/A
142,165
 12.39% 45,881
 6.625% N/A
 N/A
Total capital to risk weighted assets           
Isabella Bank140,300
 12.34% 90,923
 8.625% 113,654
 10.00%
Consolidated149,565
 13.04% 91,761
 8.625% N/A
 N/A
Tier 1 capital to average assets                      
Isabella Bank109,217
 7.75
 56,403
 4.00
 70,504
 5.00
132,900
 8.06% 65,972
 4.00% 82,465
 5.00%
Consolidated120,384
 8.46
 56,932
 4.00
 N/A
 N/A
142,165
 8.56% 66,449
 4.00% N/A
 N/A


8087


Actual Minimum
Capital
Requirement		 Minimum
To Be Well
Capitalized Under
Prompt Corrective
Action Provisions		Actual Minimum
Capital
Requirement		 Minimum To Be Well
Capitalized Under Prompt Corrective Action Provisions
Amount Ratio Amount Ratio Amount RatioAmount Ratio Amount Ratio Amount Ratio
December 31, 2012           
Total capital to risk weighted assets           
December 31, 2015           
Common equity Tier 1 capital to risk weighted assets           
Isabella Bank$112,498
 13.40% $67,150
 8.00% $83,937
 10.00%$124,917
 12.50% $39,985
 4.50% $59,977
 6.50%
Consolidated123,388
 14.48
 68,161
 8.00
 N/A
 N/A
135,250
 13.44% 40,282
 4.50% N/A
 N/A
Tier 1 capital to risk weighted assets                      
Isabella Bank101,988
 12.15
 33,575
 4.00
 50,362
 6.00
124,917
 12.50% 39,985
 6.00% 59,977
 8.00%
Consolidated112,722
 13.23
 34,080
 4.00
 N/A
 N/A
135,250
 13.44% 40,282
 6.00% N/A
 N/A
Total capital to risk weighted assets           
Isabella Bank132,317
 13.24% 79,970
 8.00% 99,962
 10.00%
Consolidated142,650
 14.17% 80,564
 8.00% N/A
 N/A
Tier 1 capital to average assets                      
Isabella Bank101,988
 7.57
 53,916
 4.00
 67,395
 5.00
124,917
 7.93% 63,032
 4.00% 78,790
 5.00%
Consolidated112,722
 8.29
 54,411
 4.00
 N/A
 N/A
135,250
 8.52% 63,524
 4.00% N/A
 N/A

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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 50%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, and 2011, 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 2013, 20122016, 2015 and 2011,2014, expenses attributable to the Plan were $608, $662,$686, $664, and $652,$655, respectively.
Defined Benefit Pension Plan
We maintain a noncontributory defined benefit pension plan, which was curtailed effective March 1, 2007.2007. 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, 2007.2007.

81

Changes in the projected benefit obligation and plan assets during each year, the funded status of the plan, and the net amount recognized onin our consolidated balance sheets using an actuarial measurement date of December 31,, are summarized as follows during the years ended December 31:31:
2013 20122016 2015
Change in benefit obligation      
Benefit obligation, January 1$12,209
 $11,334
$11,977
 $13,250
Interest cost450
 470
485
 494
Actuarial (gain) loss(1,294) 888
(328) (744)
Benefits paid, including plan expenses(633) (483)(686) (1,023)
Benefit obligation, December 3110,732
 12,209
11,448
 11,977
Change in plan assets      
Fair value of plan assets, January 19,650
 8,603
9,572
 10,390
Investment return1,276
 778
439
 5
Contributions215
 752
—
 200
Benefits paid, including plan expenses(633) (483)(686) (1,023)
Fair value of plan assets, December 3110,508
 9,650
9,325
 9,572
Deficiency in funded status at December 31, included on the consolidated balance sheets in accrued interest payable and other liabilities$(224) $(2,559)$(2,123) $(2,405)

2013 20122016 2015
Change in accrued pension benefit costs      
Accrued benefit cost at January 1$(2,559) $(2,731)$(2,405) $(2,860)
Contributions215
 752
—
 200
Net periodic benefit cost(208) (251)(238) (492)
Net change in unrecognized actuarial loss and prior service cost2,328
 (329)520
 747
Accrued pension benefit cost at December 31$(224) $(2,559)$(2,123) $(2,405)
Amounts recognized as a component of OCI consist of the following amounts during the years ended December 31:
 2013 2012 2011
Net change in unrecognized actuarial loss and prior service cost$2,328
 $(329) $(1,971)
Tax effect(791) 111
 671
Net$1,537
 $(218) $(1,300)
We have recorded the funded status of the Planplan in our consolidated balance sheets. We adjust the underfunded status in a liability account to reflect the current funded status of the plan. 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).

89


The components of net periodic benefit cost are as follows for the years ended December 31:31:
2013 2012 20112016 2015 2014
Interest cost on benefit obligation$450
 $470
 $507
$485
 $494
 $486
Expected return on plan assets(572) (511) (522)(560) (607) (615)
Amortization of unrecognized actuarial net loss330
 292
 153
313
 355
 169
Settlement loss—
 250
 260
Net periodic benefit cost$208
 $251
 $138
$238
 $492
 $300
During 2016, 2015 and 2014, additional settlement loss of $0, $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, 20132016 includes net unrecognized pension costs before income taxes of $3,234,$4,503, of which $40$178 is expected to be amortized into benefit cost during 2014.2017.
The actuarial assumptions used in determining the benefit obligation are as follows for the years ended December 31:31:
2013 2012 20112016 2015 2014
Discount rate4.64% 3.75% 4.22%3.96% 4.13% 3.80%
Expected long-term rate of return6.00% 6.00% 6.00%6.00% 6.00% 6.00%

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The actuarial weighted average assumptions used in determining the net periodic pension costs are as follows for the years ended December 31:
2013 2012 20112016 2015 2014
Discount rate3.75% 4.22% 5.36%4.13% 3.80% 4.64%
Expected long-term return on plan assets6.00% 6.00% 6.00%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 6.0%6.00%.  Equity securities primarily consist of the S&P 500 Index with a smaller allocation to the Small Cap and International Index.  Fixed income securities are invested in the Bond Market Index.  The Plan has appropriate assets invested in short term investments to meet near-term benefit payments.
The asset mix and the sector weighting of the investments are determined by 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.

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The fair values of our pension plan assets by asset category were as follows as of December 31:31:
2013 20122016 2015

Total (Level 2) Total (Level 2)Total (Level 2) Total (Level 2)
Short-term investments$142
 $142
 $80
 $80
$130
 $130
 $157
 $157
Common collective trusts              
Fixed income5,064
 5,064
 4,832
 4,832
4,579
 4,579
 4,662
 4,662
Equity investments5,302
 5,302
 4,738
 4,738
4,616
 4,616
 4,753
 4,753
Total$10,508
 $10,508
 $9,650
 $9,650
$9,325
 $9,325
 $9,572
 $9,572
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, 20132016 and 2012:2015:
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 do not anticipate any contributions to the planPlan in 2014.2017 to approximate net contribution costs.
The components of projected net periodic benefit cost are as follows for the year ending December 31, 2014:ending:
December 31, 2017
Interest cost on projected benefit obligation$486
$444
Expected return on plan assets(615)(545)
Amortization of unrecognized actuarial net loss169
279
Net periodic benefit cost$40
$178

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Estimated future benefit payments are as follows for the next ten years:
2014$518
2015551
2016549
2017577
2018575
2019 - 20233,312
 Estimated Benefit Payments
2017$460
2018462
2019505
2020551
2021605
2022 - 20263,059
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 Isabella Bank Corporation Stockholder Dividend Reinvestment and Employee Stock Purchase Plan ("DRIP Plan").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. DRIPDividend Reinvestment Plan shares are purchased on a monthly basis pursuant to the DRIPDividend Reinvestment Plan.
Distribution of deferred fees from the Directors Plan occurs when the participant retires from the boardBoard 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. AllWe may use authorized but unissued shares of common stock are eligible for issuance under the Directors Plan. We may alsoor 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

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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 timetime-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 31:31:
2013 20122016 2015
Eligible
Shares		 Market
Value		 Eligible
Shares		 Market
Value		Eligible
Shares		 Market
Value		 Eligible
Shares		 Market
Value
Unissued172,550
 $4,115
 165,436
 $3,598
187,428
 $5,220
 180,616
 $5,400
Shares held in Rabbi Trust12,761
 304
 5,130
 112
26,042
 725
 19,401
 580
Total185,311
 $4,419
 170,566
 $3,710
213,470
 $5,945
 200,017
 $5,980
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 2013, 20122016, 2015 and 20112014 were $375, $382,$430, $379, and $444,$372, 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. During 2012, the Board of Directors approved a contribution of $75 to the ESOP. We made no contributions to the ESOP in 2013 or 2011.2016, 2015 and 2014. Compensation cost related to the plan for 2013, 20122016, 2015 and 20112014 was $29, $102,$33, $32, and $20,$23, respectively. Total allocated shares outstanding related to the ESOP at December 31, 2013, 2012,2016, 2015, and 20112014 were 241,958, 246,404,204,669, 217,064, and 246,404,241,958, respectively. Such shares are included in the computation of dividends and earnings per share in each of the respective years. On December 21, 2016, the Board approved the termination of the ESOP effective December 31, 2016. Actual dissolution of the ESOP is anticipated to occur in mid-2017.
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 $2,698$2,150 in 2013, $2,5342016, $1,695 in 20122015 and $2,045$1,786 in 2011.2014.

8492


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		 TotalUnrealized
Holding Gains
(Losses) on
AFS
Securities		 Unrealized
Gains
(Losses) on Derivative Instruments		 Change in Unrecognized Pension Cost on Defined
Benefit
Pension Plan		 Total
Balance, January 1, 2011$444
 $(2,153) $(1,709)
Balance, January 1, 2014$(4,207) $—
 $(2,134) $(6,341)
OCI before reclassifications9,220
 (2,109) 7,111
11,290
 —
 (2,836) 8,454
Amounts reclassified from AOCI(3) 138
 135
(97) —
 300
 203
Subtotal9,217
 (1,971) 7,246
11,193
 —
 (2,536) 8,657
Tax effect(3,719) 671
 (3,048)(3,684) —
 862
 (2,822)
OCI, net of tax5,498
 (1,300) 4,198
7,509
 —
 (1,674) 5,835
Balance, December 31, 20115,942
 (3,453) 2,489
Balance, December 31, 20143,302
 —
 (3,808) (506)
OCI before reclassifications3,921
 (580) 3,341
310
 —
 255
 565
Amounts reclassified from AOCI(837) 251
 (586)(163) —
 492
 329
Subtotal3,084
 (329) 2,755
147
 —
 747
 894
Tax effect(348) 111
 (237)87
 —
 (254) (167)
OCI, net of tax2,736
 (218) 2,518
234
 —
 493
 727
Balance, December 31, 20128,678
 (3,671) 5,007
Balance, December 31, 20153,536
 —
 (3,315) 221
OCI before reclassifications(18,971) 2,120
 (16,851)(5,865) 248
 282
 (5,335)
Amounts reclassified from AOCI(171) 208
 37
525
 —
 238
 763
Subtotal(19,142) 2,328
 (16,814)(5,340) 248
 520
 (4,572)
Tax effect6,257
 (791) 5,466
1,834
 (84) (177) 1,573
OCI, net of tax(12,885) 1,537
 (11,348)(3,506) 164
 343
 (2,999)
Balance, December 31, 2013$(4,207) $(2,134) $(6,341)
Balance, December 31, 2016$30
 $164
 $(2,972) $(2,778)
Included in OCI for the years ended December 31, 20132016 and 20122015 are changes in unrealized holding gains and losses related to auction rate money market preferred and preferred stocks. For federal income tax purposes, these securities are considered equity investments. As such, no deferred federal income taxes related to unrealized holding gains or losses are expected or recorded.

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A summary of the components of unrealized holding gains on AFS securities included in OCI follows for the years ended December 31:31:
2013 2012 20112016 2015 2014

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 TotalAuction 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$(737) $(18,234) $(18,971) $2,059
 $1,862
 $3,921
 $(1,719) $10,939
 $9,220
$54
 $(5,919) $(5,865) $406
 $(96) $310
 $355
 $10,935
 $11,290
Reclassification adjustment for net realized (gains) losses included in net income—
 (171) (171) —
 (1,119) (1,119) —
 (3) (3)—
 (245) (245) —
 (163) (163) —
 (97) (97)
Reclassification adjustment for impairment loss included in net income—
 —
 —
 —
 282
 282
 —
 —
 —
—
 770
 770
 —
 —
 —
 —
 —
 —
Net unrealized gains (losses)(737) (18,405) (19,142) 2,059
 1,025
 3,084
 (1,719) 10,936
 9,217
54
 (5,394) (5,340) 406
 (259) 147
 355
 10,838
 11,193
Tax effect—
 6,257
 6,257
 —
 (348) (348) —
 (3,719) (3,719)—
 1,834
 1,834
 —
 87
 87
 —
 (3,684) (3,684)
Unrealized gains (losses), net of tax$(737) $(12,148) $(12,885) $2,059
 $677
 $2,736
 $(1,719) $7,217
 $5,498
$54
 $(3,560) $(3,506) $406
 $(172) $234
 $355
 $7,154
 $7,509
The following table details reclassification adjustments and the related affected line items onin our consolidated statements of income for the years ended December 31:31:
Details about AOCI componentsAmount
Reclassified from
AOCI		 Affected Line Item in the
Consolidated
Statements of Income		Amount
Reclassified from
AOCI		 Affected Line Item in the
Consolidated
Statements of Income
2013 2012 2011 2016 2015 2014 
Unrealized holding gains (losses) on AFS securities            
$171
 $1,119
 $3
 Net gain (loss) on sale of AFS securities$245
 $163
 $97
 Net gains on sale of AFS securities
—
 (282) —
 Net AFS impairment loss(770) —
 —
 Other noninterest expenses
171
 837
 3
 Income before federal income tax expense(525) 163
 97
 Income before federal income tax expense
58
 285
 1
 Federal income tax expense(179) 55
 33
 Federal income tax expense (benefit)
$113
 $552
 $2
 Net income$(346) $108
 $64
 Net income
            
Change in unrecognized pension cost on defined benefit pension plan            
$208
 $251
 $138
 Compensation and benefits$238
 $492
 $300
 Compensation and benefits
71
 85
 47
 Federal income tax expense81
 167
 102
 Federal income tax expense
$137
 $166
 $91
 Net income$157
 $325
 $198
 Net income

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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 31:31:
2013 20122016 2015
Balance, January 1$6,598
 $3,728
$4,021
 $3,822
New loans2,373
 8,435
1,097
 2,779
Repayments(4,793) (5,565)(1,172) (2,580)
Balance, December 31$4,178
 $6,598
$3,946
 $4,021
Total deposits of these principal officers and directors and their affiliates amounted to $6,158$5,770 and $6,871$5,625 at December 31, 20132016 and 2012,2015, respectively. In addition, the ESOP held deposits with the Bank aggregating $292$290 and $517,$143, respectively, at December 31, 20132016 and 2012.2015.
From time-to-time, we make charitable donations to theThe Isabella Bank Foundation (the “Foundation”), which is ana non-controlled affiliated nonprofit entity formed for the purpose of distributing charitable donations to recipient organizations generally located in the communities we service. DonationsOur 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 16,85044,350 and 044,350 shares of our common stock as of December 31, 20132016 and 2012,2015, respectively. Such shares are included in the computation of dividends and earnings per share.
The following table displays endingtotal asset balances of, and our donations to, the Foundation as of, and for the years ended, December 31:31:
2013 2012 20112016 2015 2014
Ending assets$1,815
 $1,766
 $1,150
Total assets$2,213
 $2,435
 $2,090
Donations$200
 $850
 $250
$—
 $258
 $500
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 short term investments, including Federal funds sold,demand deposits due from banks and interest bearing balances due from banks approximate fair values. As such, we classify cash and demand deposits due from bankscash equivalents as Level 1.
Certificates of deposit held in other financial institutions: Interest bearing balances held in unaffiliated financial institutions include certificates of deposit and other short term interest bearing balances that mature within 3 years. Fair value is determined using prices for similar assets with similar characteristics. As such, we classify certificates of deposits held in other financial institutions as Level 2.
AFS and trading securities: AFS and trading 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 Mortgagemortgage loans AFS are based on whatthe price secondary markets are currently offering for portfolios with similar characteristics. As such, we classify Mortgagemortgage loans AFS subject to nonrecurring fair value adjustments as Level 2.

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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 losses may be established. Loans for which it is probable that payment of interest and principal will be significantly different than the contractual terms of the original loan agreement are considered impaired. Once a loan is

95


identified as impaired, we measure the estimated impairment. The fair value of impaired loans is estimated using one of several methods, including collateral value, marketthe present value of similar debt, enterpriseexpected future cash flows discounted at the loan’s effective interest rate, the loan’s obtainable market price, or the fair value liquidation value, or discounted cash flows.of the collateral, less cost to sell, if the loan is collateral dependent. Those impaired loans not requiring an allowance represent loans for which the fair value of the expected repayments or collateral exceed the recorded investments in such loans.
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 carry and 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 charge-offsspecific reserves or specific reservescharge-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 31:31:
 2013
Valuation TechniquesFair Value Unobservable Input Range
Discounted cash flow$11,521 Duration of cash flows: 98 - 120 Months
   Reduction in interest rate from original loan terms: 3.25% - 7.57%
   Discount applied to collateral appraisal:  
   Real Estate 20% - 30%
   Equipment 50%
Discounted appraisal value$13,902 Livestock 50%
   Cash crop inventory 50%
   Other inventory 75%
   Accounts receivable 75%

2016
Valuation TechniqueFair ValueUnobservable InputRange
Discount applied to collateral appraisal:
Real Estate20% - 30%
Discounted appraisal value$9,166Equipment20% - 45%
Cash crop inventory30% - 40%
Liquor license75%


Furniture, fixtures & equipment
45%
 2012
Valuation TechniquesFair Value Unobservable Input Range
Discounted cash flow$8,726 Duration of cash flows: 14-120 Months
   Reduction in interest rate from original loan terms: 5.00% - 6.25%
   Discount applied to collateral appraisal:  
   Real Estate 20% - 30%
   Equipment 50%
Discounted appraisal value$13,295 Livestock 50%
   Cash crop inventory 50%
   Other inventory 75%
   Accounts receivable 75%

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

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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 minority 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 2007. We are not the managing entity of Corporate Settlement Solutions, LLC,2008 and therefore, we account for our investment under the equity method of accounting. Valley Financial Corporation is the parent company of 1st State Bank in Saginaw, Michigan, which is a de novocommunity bank that opened in 2005. We made investments in Valley Financial Corporation in 2004 and in 2007.2007 and sold all shares in 2016. We accounted 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 20132016 and 2012,2015, 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 recordclassify foreclosed assets as nonrecurring Level 3.
The table below lists the quantitative fair value information related to foreclosed assets as of:
December 31, 2013December 31, 2016
Valuation TechniquesFair Value Unobservable Input Range
Valuation TechniqueFair Value Unobservable Input Range
  Discount applied to collateral appraisal:   Discount applied to collateral appraisal: 
Discounted appraisal value$1,412
 Real Estate 20% - 30%$231
 Real Estate 20% - 30%
December 31, 2012December 31, 2015
Valuation TechniquesFair Value Unobservable Input Range
Valuation TechniqueFair Value Unobservable Input Range
  Discount applied to collateral appraisal:   Discount applied to collateral appraisal: 
Discounted appraisal value$2,018
 Real Estate 20% - 30%$421
 Real Estate 20% - 30%
Discount factors with ranges are based on the age of the independent appraisal, broker price opinion, or internal evaluations.
Goodwill and other intangible assets: Acquisition intangibles and goodwill are evaluated for potential impairment on at least an annual basis. Acquisition intangibles and goodwill are typically qualitatively evaluated to determine if it is more likely than not that the carrying balance is impaired. If it is determined that the carrying balance of acquisition intangibles or goodwill is more likely than not to be impaired, we perform a cash flow valuation to determine the extent of the potential impairment. If the testing resulted in impairment, we would classify goodwill and other acquisition intangibles subjected to nonrecurring fair value adjustments as Level 3. During 20132016 and 2012,2015, there were no impairments recorded on goodwill and other acquisition intangibles.
OMSRsOMSR: OMSRsOMSR (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, OMSRsOMSR are adjusted to fair value through a valuation allowance as determined by the model. As such, we classify OMSRsOMSR subject to nonrecurring fair value adjustments as Level 2.
Deposits: The fair value of demand, savings, and money market deposits are by definition, equal to the amount payable on demand at the reporting date (i.e., their carrying amounts),amounts and are classified as Level 1. Fair values for variable rate certificates of deposit approximate their recorded carrying value. Fair values for fixed rate certificates of deposit are estimated using a discounted cash flow calculation that applies interest rates currently being offered on certificates to a schedule of aggregated expected monthly maturities on time deposits. As such, fixed rate certificates of deposit are classified as Level 2.
Borrowed funds: 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.

89

We previously elected to measure a portion of borrowed funds at fair value. These borrowings were recorded at fair value on a recurring basis, with the fair value measurement estimated using discounted cash flow analysis based on current incremental borrowing rates for similar types of borrowing arrangements. Changes in the fair value of these borrowings are included in noninterest income.
The activity in borrowings which we have elected to carry at fair value was as follows for the year ended December 31:
 2012
Borrowings carried at fair value - beginning of year$5,242
Paydowns and maturities(5,209)
Net unrealized change in fair value(33)
Borrowings carried at fair value - December 31$—
Unpaid principal balance - December 31$—
Accrued interest payable: The carrying amounts of accrued interest payable approximate fair value. As such, we classify accrued interest payable as Level 1.
Derivative instruments: Derivative instruments, consisting solely of interest rate swaps, are recorded at fair value on a recurring basis. Derivatives qualifying as cash flow hedges, when highly effective, are reported at fair value in other assets or other liabilities on our Consolidated Balance Sheets with changes in value recorded in OCI. Should the hedge no longer be considered effective, the ineffective portion of the change in fair value is recorded directly in earnings in the period in which the change occurs. The fair value of a derivative is determined by quoted market prices and model based valuation techniques. As such, we classify derivative instruments as Level 2.
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.

97


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.
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.

90

The carrying amount and estimated fair value of financial instruments not recorded at fair value in their entirety on a recurring basis on our consolidated balance sheets arewere as follows as of as of December 31:
 2013
 Carrying
Value		 Estimated
Fair Value		 (Level 1) (Level 2) (Level 3)
ASSETS         
Cash and cash equivalents$41,558
 $41,558
 $41,558
 $—
 $—
Certificates of deposit held in other financial institutions580
 582
 —
 582
 —
Mortgage loans AFS1,104
 1,123
 —
 1,123
 —
Total loans808,037
 808,246
 —
 —
 808,246
Less allowance for loan and lease losses(11,500) (11,500) —
 —
 (11,500)
Net loans796,537
 796,746
 —
 —
 796,746
Accrued interest receivable5,442
 5,442
 5,442
 —
 —
Equity securities without readily determinable fair values (1)18,293
 18,293
 —
 —
 —
OMSRs2,555
 2,667
 —
 2,667
 —
LIABILITIES         
Deposits without stated maturities593,754
 593,754
 593,754
 —
 —
Deposits with stated maturities450,012
 452,803
 —
 452,803
 —
Borrowed funds279,326
 283,060
 —
 283,060
 —
Accrued interest payable633
 633
 633
 —
 —
20122016
Carrying
Value		 Estimated
Fair Value		 (Level 1) (Level 2) (Level 3)Carrying
Value		 Estimated
Fair Value		 (Level 1) (Level 2) (Level 3)
ASSETS                  
Cash and cash equivalents$24,920
 $24,920
 $24,920
 $—
 $—
$22,894
 $22,894
 $22,894
 $—
 $—
Certificates of deposit held in other financial institutions4,465
 4,475
 —
 4,475
 —
Mortgage loans AFS3,633
 3,680
 —
 3,680
 —
1,816
 1,836
 —
 1,836
 —
Total loans772,753
 784,964
 —
 —
 784,964
Gross loans1,010,615
 991,009
 —
 —
 991,009
Less allowance for loan and lease losses(11,936) (11,936) —
 —
 (11,936)7,400
 7,400
 —
 —
 7,400
Net loans760,817
 773,028
 —
 —
 773,028
1,003,215
 983,609
 —
 —
 983,609
Accrued interest receivable5,227
 5,227
 5,227
 —
 —
6,580
 6,580
 6,580
 —
 —
Equity securities without readily determinable fair values (1)18,118
 18,118
 —
 —
 —
21,694
 N/A
 —
 —
 —
OMSRs2,285
 2,285
 —
 2,285
 —
OMSR2,306
 2,306
 —
 2,306
 —
LIABILITIES           
      
Deposits without stated maturities553,332
 553,332
 553,332
 —
 —
761,626
 761,626
 761,626
 —
 —
Deposits with stated maturities464,335
 472,630
 —
 472,630
 —
433,414
 430,088
 —
 430,088
 —
Borrowed funds241,001
 248,822
 —
 248,822
 —
337,694
 326,975
 —
 326,975
 —
Accrued interest payable751
 751
 751
 —
 —
574
 574
 574
 —
 —

98


 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 AFS1,187
 1,210
 —
 1,210
 —
Gross loans850,492
 839,398
 —
 —
 839,398
Less allowance for loan and lease losses7,400
 7,400
 —
 —
 7,400
Net loans843,092
 831,998
 —
 —
 831,998
Accrued interest receivable6,269
 6,269
 6,269
 —
 —
Equity securities without readily determinable fair values (1)22,286
 N/A
 —
 —
 —
OMSR2,505
 2,518
 —
 2,518
 —
LIABILITIES         
Deposits without stated maturities741,683
 741,683
 741,683
 —
 —
Deposits with stated maturities422,880
 421,429
 —
 421,429
 —
Borrowed funds309,732
 297,495
 —
 297,495
 —
Accrued interest payable545
 545
 545
 —
 —
(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.

91

Financial Instruments Recorded at Fair Value
The table below presents the recorded amount of assets and liabilities measured at fair value on December 31:
2013 20122016 2015
Total (Level 1) (Level 2) (Level 3) Total (Level 1) (Level 2) (Level 3)Total (Level 1) (Level 2) (Level 3) Total (Level 1) (Level 2) (Level 3)
Recurring items                              
Trading securities               
States and political subdivisions$525
 $—
 $525
 $—
 $1,573
 $—
 $1,573
 $—
AFS securities                              
Government-sponsored enterprises23,745
 —
 23,745
 —
 25,776
 —
 25,776
 —
$10,259
 $—
 $10,259
 $—
 $24,345
 $—
 $24,345
 $—
States and political subdivisions201,988
 —
 201,988
 —
 182,743
 —
 182,743
 —
212,919
 —
 212,919
 —
 232,217
 —
 232,217
 —
Auction rate money market preferred2,577
 —
 2,577
 —
 2,778
 —
 2,778
 —
2,794
 —
 2,794
 —
 2,866
 —
 2,866
 —
Preferred stocks5,827
 5,827
 —
 —
 6,363
 6,363
 —
 —
3,425
 3,425
 —
 —
 3,299
 3,299
 —
 —
Mortgage-backed securities144,115
 —
 144,115
 —
 155,345
 —
 155,345
 —
227,256
 —
 227,256
 —
 263,384
 —
 263,384
 —
Collateralized mortgage obligations133,810
 —
 133,810
 —
 131,005
 —
 131,005
 —
101,443
 —
 101,443
 —
 134,025
 —
 134,025
 —
Total AFS securities512,062
 5,827
 506,235
 —
 504,010
 6,363
 497,647
 —
558,096
 3,425
 554,671
 —
 660,136
 3,299
 656,837
 —
Derivative instruments248
 —
 248
 —
 —
 —
 —
 —
Nonrecurring items                              
Impaired loans (net of the ALLL)25,423
 —
 —
 25,423
 22,021
 —
 —
 22,021
9,166
 —
 —
 9,166
 9,301
 —
 —
 9,301
Foreclosed assets1,412
 —
 —
 1,412
 2,018
 —
 —
 2,018
231
 —
 —
 231
 421
 —
 —
 421
$539,422
 $5,827
 $506,760
 $26,835
 $529,622
 $6,363
 $499,220
 $24,039
Total$567,741
 $3,425
 $554,919
 $9,397
 $669,858
 $3,299
 $656,837
 $9,722
Percent of assets and liabilities measured at fair value  1.08% 93.95% 4.97%   1.20% 94.26% 4.54%  0.60% 97.74% 1.66%   0.49% 98.06% 1.45%

99


The following table provides a summary of the changes in fair value of assets and liabilities recorded at fair value, through earnings on a recurring basis and changes in assets and liabilities recorded at fair value on a nonrecurring basis, for which gains or losses were recognized through earnings on a nonrecurring basis, in the years ended December 31:
 2013 2012

Trading
Losses		 Other Gains
(Losses)		 Total Trading
Losses		 Other Gains
(Losses)		 Total
Recurring items           
Trading securities$(28) $—
 $(28) $(52) $—
 $(52)
Borrowed funds—
 —
 —
 —
 33
 33
Nonrecurring items          
Foreclosed assets—
 (156) (156) —
 (166) (166)
Total$(28) $(156) $(184) $(52) $(133) $(185)
 2016 2015
Nonrecurring items   
Foreclosed assets$(10) $(99)

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, 2016.
92

Note 21 – Parent Company Only Financial Information
Condensed Balance Sheets
December 31December 31
2013 20122016 2015
ASSETS      
Cash on deposit at the Bank$529
 $332
$1,297
 $4,125
AFS securities3,542
 3,939
251
 257
Investments in subsidiaries110,192
 115,781
138,549
 133,883
Premises and equipment2,013
 2,041
1,991
 2,014
Other assets54,223
 52,398
52,846
 53,396
TOTAL ASSETS$170,499
 $174,491
$194,934
 $193,675
LIABILITIES AND SHAREHOLDERS’ EQUITY      
Other liabilities$9,890
 $10,002
$7,035
 $9,704
Shareholders' equity160,609
 164,489
187,899
 183,971
TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY$170,499
 $174,491
$194,934
 $193,675
Condensed Statements of Income
Year Ended December 31Year Ended December 31

2013 2012 20112016 2015 2014
Income          
Dividends from subsidiaries$7,000
 $6,125
 $6,500
$7,400
 $8,000
 $7,000
Interest income161
 174
 128
14
 78
 150
Management fee and other2,146
 2,037
 1,201
6,574
 6,331
 3,665
Total income9,307
 8,336
 7,829
13,988
 14,409
 10,815
Expenses          
Compensation and benefits2,811
 2,424
 2,267
4,898
 5,110
 3,688
Occupancy and equipment476
 370
 370
1,696
 1,634
 1,082
Audit and related fees345
 351
 378
536
 452
 404
Other958
 945
 1,089
2,120
 2,160
 1,395
Total expenses4,590
 4,090
 4,104
9,250
 9,356
 6,569
Income before income tax benefit and equity in undistributed earnings of subsidiaries4,717
 4,246
 3,725
4,738
 5,053
 4,246
Federal income tax benefit790
 673
 958
1,058
 991
 940
Income before income tax benefit and equity in undistributed earnings of subsidiaries5,507
 4,919
 4,683
Income before equity in undistributed earnings of subsidiaries5,796
 6,044
 5,186
Undistributed earnings of subsidiaries7,003
 7,287
 5,527
8,003
 9,086
 8,538
Net income$12,510
 $12,206
 $10,210
$13,799
 $15,130
 $13,724


93100


Condensed Statements of Cash Flows
Year Ended December 31Year Ended December 31
2013 2012 20112016 2015 2014
Operating Activities     
Operating activities     
Net income$12,510
 $12,206
 $10,210
$13,799
 $15,130
 $13,724
Adjustments to reconcile net income to cash provided by operations          
Undistributed earnings of subsidiaries(7,003) (7,287) (5,527)(8,003) (9,086) (8,538)
Undistributed earnings of equity securities without readily determinable fair values74
 (459) 160
791
 (310) 37
Share-based payment awards554
 643
 615
Share-based payment awards under equity compensation plan573
 550
 495
Depreciation174
 114
 123
156
 154
 144
Net amortization of AFS securities2
 4
 7
—
 —
 1
Deferred income tax expense (benefit)(305) 425
 (48)147
 131
 (159)
Changes in operating assets and liabilities which used cash     
Changes in operating assets and liabilities which provided (used) cash     
Other assets(51) (513) 7
(44) 506
 145
Accrued interest and other liabilities1,238
 (98) 757
(2,669) 142
 1,516
Net cash provided by (used in) operating activities7,193
 5,035
 6,304
4,750
 7,217
 7,365
Investing activities          
Maturities, calls, and sales of AFS securities395
 370
 585
Purchases—
 —
 (3,000)
Purchases of equipment and premises(146) (239) (87)
Advances to subsidiaries, net of repayments(299) (50) —
Maturities, calls, principal payments, and sales of AFS securities—
 3,000
 250
Purchases of premises and equipment(133) (186) (81)
Net (advances to) repayments from subsidiaries—
 300
 641
Net cash provided by (used in) investing activities(50) 81
 (2,502)(133) 3,114
 810
Financing activities          
Net increase (decrease) in borrowed funds(1,350) (597) 2,772
—
 (211) (1,600)
Cash dividends paid on common stock(6,456) (6,074) (5,770)(7,645) (7,273) (6,843)
Proceeds from the issuance of common stock3,618
 2,898
 2,302
5,023
 5,201
 4,227
Common stock repurchased(2,375) (1,980) (1,507)(4,440) (4,590) (3,122)
Common stock purchased for deferred compensation obligations(383) (505) (426)(383) (368) (331)
Net cash provided by (used in) investing activities(6,946) (6,258) (2,629)
Net cash provided by (used in) financing activities(7,445) (7,241) (7,669)
Increase (decrease) in cash and cash equivalents197
 (1,142) 1,173
(2,828) 3,090
 506
Cash and cash equivalents at beginning of year332
 1,474
 301
Cash and cash equivalents at end of year$529
 $332
 $1,474
Cash and cash equivalents at beginning of period4,125
 1,035
 529
Cash and cash equivalents at end of period$1,297
 $4,125
 $1,035
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, 2013, 20122016, 2015, and 20112014 represent approximately 90% or more of our consolidated total assets and operating results. As such, no additional segment reporting is presented.

94101


SHAREHOLDERS’ INFORMATION
Annual Meeting
The Annual Meeting of Shareholders will be held at 5:00 p.m., Wednesday, April 30, 2014,Tuesday, May 2, 2017, Comfort Inn Conference Center, 2424 S. Mission Street, Mt. Pleasant, Michigan.
Financial Information and Form 10-K
Copies of the 20132016 Annual Report, Isabella Bank Corporation Form 10-K, and other financial information not contained herein are available on the Bank’s website (www.isabellabank.com) under the Investors tab, or may be obtained, without charge, by writing to:
Debra Campbell
Secretary
Isabella Bank Corporation
401 N. Main St.
Mt. Pleasant, Michigan 48858
Mission Statement
To create an operating environment that will provide shareholders with sustained growth in their investment while maintaining our independence and subsidiaries’ autonomy.
Equal Employment Opportunity
The equal employment opportunity clauses in Section 202 of the Executive Order 11246, as amended; 38 USC 2012, 4212,
Vietnam Era Veterans Readjustment Act of 1974; Section 503 of the Rehabilitation Act of 1973, as amended; relative to equal
employment opportunity and implementing rules and regulations of the Secretary of Labor are adhered to and supported by
Isabella Bank Corporation, and its subsidiaries.


95102


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