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.
having a separate Chairman and Chief Executive Officer best serves the interest of the shareholders. The Board of Directors elects its chairperson at the first Board meeting following the annual meeting. Independent members of the Board of Directors meet without insider directors at least twice per year.
Management is responsible for the Corporation’s day to day risk management and the Board’s role is to engage in informed oversight. The Board utilizes committees to oversee risks associated with compensation, financial, and governance. Financial Group Information Services, the Corporation’s information processing subsidiary is responsible for overseeing risks associated with information technology. The Isabella Bank Board of Directors is responsible for overseeing credit, investment, interest rate, and trust risks. The chairpersons of the respective boards or committees report on their activities on a regular basis.
The Audit Committee is responsible for the integrity of the consolidated financial statements of the Corporation; the independent auditors’ qualifications and independence; the performance of the Corporation’s, and its subsidiaries’ internal audit function and independent auditors; the Corporation’s system of internal controls; the Corporation’s financial reporting and system of disclosure controls; and the compliance by the Corporation with legal and regulatory requirements and with the Corporation’s Code of Business Conduct and Ethics.
Committees of the Board of Directors and Meeting Attendance
The Board met 1314 times during 2009.2010. All incumbent directors attended 75% or more of the meetings held in 2009.2010. The Board has an Audit Committee, a Nominating and Corporate Governance Committee, and a Compensation and Human Resource Committee.
Audit Committee
The Audit Committee is composed of independent directors who meet the requirements for independence as defined in Rule 5605(a)(2)of the NASDAQ Marketplace Rules. Information regarding the functions performed by the Committee, its membership, and the number of meetings held during the year, is set forth in the “Report of the Audit Committee” included elsewhere in this annual proxy statement. The Audit Committee is governed by a written charter approved by the Board. The Audit Committee Charter is available on the Bank’s website, www.isabellabank.com, under the Investor Relations tab.
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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 by the Board. The current Committee also consists of directors Fabiano,Barnes, Hubscher, LaFramboise, and Maness.
Nominating and Corporate Governance Committee
The Corporation has a standing Nominating and Corporate Governance Committee consisting of independent directors who meet the requirements for independence as defined in Rule 5605(a)(2) of NASDAQ Marketplace Rules. The Committee consists of directors Caul, Fabiano, Maness, Manifold, StricklerMcGuire, and Weburg. The Nominating and Corporate Governance Committee held two meetingsone meeting in 2009, and2010, with all directors attended 75% or more of the meetings.meeting. The Board has approved a Nominating and Corporate Governance Committee Charter which is available on the Bank’s website www.isabellabank.com under the Investor Relations tab.
The Nominating and Corporate Governance Committee is responsible for evaluating and recommending individuals for nomination to the Board for approval. The 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. The Committee considers diversity in identifying members with respect to geographical markets served by the Corporation and the business experience of the nominee.
The Nominating and Corporate Governance Committee will consider as potential nominees, persons recommended by shareholders. Recommendations should be submitted in writing to the Secretary of the Corporation, 401 N. Main St., MountMt. Pleasant, Michigan 48858 and include the shareholder’s name, address and number of shares of the Corporation owned by the shareholder. The recommendation should also include the name, age, address and
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qualifications of the recommended candidate for nomination. Recommendations for the 20102012 Annual Meeting of Shareholders should be delivered no later than December 10, 2010.9, 2011. The Nominating and Corporate Governance Committee does not evaluate potential nominees for director differently based on whether they are recommended to the Nominating and Corporate Governance Committee by a shareholder or otherwise.
Compensation and Human Resource Committee
The Compensation and Human Resource Committee of the Corporation is responsible for reviewing and recommending to the Corporation’s Board the compensation of the PresidentChief Executive Officer and other executive officers of the Corporation, benefit plans and the overall percentage increase in salaries. The committee consists of independent directors, who meet the requirements for independence as defined in Rule 5605(a)(2) of the NASDAQ Marketplace Rules. The current Committee consists of directors Fabiano,Maness, Barnes, Caul, Fabiano, Hubscher, Kleinhardt, Kortes, LaFramboise, Manifold, McGuire, Maness, Manifold, Morey, Strickler, and Weburg. The Committee held two meetingsone meeting during 20092010 with all directors attending the meetings.meeting. This Committee is governed by a written charter approved by the Board that is available on the Bank’s website www.isabellabank.com under the Investor Relations tab.
Communications with the Board
Shareholders may communicate with the Corporation’s Board of Directors by sending written communications to the Corporation’s Secretary, Isabella Bank Corporation, 401 N. Main St., MountMt. Pleasant, Michigan 48858. Communications will be forwarded to the Board of Directors or the appropriate committee, as soon as practicable.
Code of Ethics
The Corporation has adopted a Code of Business Conduct and Ethics that is applicable to the Corporation’s Chief Executive Officer and the Chief Financial Officer. The Corporation’s Code of Business Conduct and Ethics is available on the Bank’s website www.isabellabank.com under the Investor Relations tab.
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Report of the Audit Committee
The Audit Committee oversees the Corporation’s financial reporting process on behalf of the Board. The 20092010 Committee consisted of directors Fabiano, Caul,Barnes, Hubscher, LaFramboise, Maness, Manifold McGuire, and Weburg.McGuire.
The Audit Committee is responsible for pre-approving all auditing services and permitted non-audit services over $5,000 for the Corporation by its independent auditors or any other auditing or accounting firm if those fees are reasonably expected to exceed 5.0% of the current year agreed upon fee for independent audit services, except as noted below. The Audit Committee has established general guidelines for the permissible scope and nature of any permitted non-audit services in connection with its annual review of the audit plan and reviews the guidelines with the Board of Directors.
Management has the primary responsibility for the consolidated financial statements and the reporting process including the systems of internal controls. In fulfilling its oversight responsibilities, the Audit Committee reviewed the audited consolidated financial statements in the Annual Report with management including a discussion of the quality, not just the acceptability, of the accounting principles, the reasonableness of significant judgments, and the clarity of disclosures in the consolidated financial statements. The Audit Committee also reviewed with management and the independent auditors, management’s assertion on the design and effectiveness of the Corporation’s internal control over financial reporting as of December 31, 2009.2010.
The Audit Committee reviewed with the Corporation’s independent auditors, who are responsible for expressing an opinion on the conformity of those audited consolidated financial statements with accounting principles generally accepted in the United States of America, their judgments as to the quality, not just the acceptability, of the Corporation’s accounting principles and such other matters as are required to be discussed with the Audit Committee by the standards of the Public Company Accounting Oversight Board (United States), including those described in AU Section 380 “Communication 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 accountants required by PCAOB Rule 3526, Communication with Audit Committees Concerning Independence, as may be modified or supplemented, and has discussed with the independent accountant the independent accountants’ independence.
The Audit Committee discussed with the Corporation’s internal and independent auditors the overall scope and plans for their respective audits. The Audit Committee meets with the internal and external independent auditors, with and without management present, to discuss the results of their examinations, their evaluations of the Corporation’s internal controls and the overall quality of the Corporation’s financial reporting process. The Audit Committee held sevensix meetings during 2009,2010, and all committee members attended 75% or more of the meetings.
In reliance on the reviews and discussions referred to above, the Audit Committee recommended to the Board of Directors (and the Board has approved) that the audited consolidated financial statements be included in the Annual Report onForm 10-K for the year ended December 31, 20092010 for filing with the Securities and Exchange Commission. The Audit Committee has appointed Rehmann Robson as the independent auditors for the 20102011 audit.
G. Charles Hubscher and Joseph LaFramboise became members of the Board and the Audit Committee as of January 1, 2010 and therefore did not participate in any of the reviews or other procedures set forth above with respect to the year ended December 31, 2009.
Respectfully submitted,
W. Joseph Manifold, Audit Committee Chairperson
James C. FabianoJeffrey J. Barnes
Sandra L. CaulG. Charles Hubscher
Joseph LaFramboise
David J. Maness
W. Michael McGuire
Dale D. Weburg
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Compensation Discussion and Analysis
The Compensation and Human Resource Committee (the “Committee”) is responsible for the compensation and benefits for the Chief Executive Officer, President, and executive officers of the Corporation. The Committee evaluates and approves the executive officer and senior management compensation plans, policies and programs of the Corporation and its affiliates. The Committee also evaluates and establishes the compensation of the Chief Executive Officer and President and Chief Financial Officer of the Corporation. The Chief Executive Officer, Richard J. Barz, conducts annual performance reviews for other Named Executive Officers, excluding himself. Mr. Barz recommends an appropriate salary increase to the Committee based on the performance review and the officer’s years of service along with competitive market data.
Compensation Objectives
The Committee considers asset growth with the safety and soundness objectives and earnings per share to be the primary ratios in measuring financial performance. The Corporation’s philosophy is to maximize long-term return to shareholders consistent with safe and sound banking practices, while maintaining the commitment to superior customer and community service. The Corporation believes 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 the Committee are to effectively balance salaries and potential compensation to an officer’s individual management responsibilities and encourage them to realize their potential for future contributions to the Corporation. The objectives are designed to attract and retain high performing executive officers who will lead the Corporation while attaining the Corporation’s earnings and performance goals.
What the Compensation Programs are Designed to Reward
The Corporation’s compensation programs are designed to reward dedicated and conscientious employment with the Corporation, loyalty in terms of continued employment, attainment of job related goals and overall profitability of the Corporation. In measuring an executive officer’s contributions to the Corporation, the Committee considers numerous factors including, among other things, the Corporation’s growth in terms of asset size and increase in earnings per share. In rewarding loyalty and long-term service, the Corporation provides attractive retirement benefits.
Review of Risks Associated with Compensation Plans
Based on an analysis conducted by management and reviewed by the Committee, management does not believe that the Corporation’s compensation programs for employees are reasonably likely to have a material short or long term adverse effect on the Corporation’s Results of Operation.
Use of Consultants
In 2010, the Committee directly engaged the services of Blanchard Chase, an outside compensation consulting firm, to assist with a total compensation review for the top two executive officers of the Corporation (CEO and President). Blanchard Chase is an independent consulting firm and does not perform any additional services for the Corporation or senior management. In addition, Blanchard Chase does not have any other personal or business relationships with any Board member or any officer of the Corporation. The Committee is continuing to work with Blanchard Chase on proxy support in 2011. During 2009, the Committee did not employ any services of outside compensation or benefit consultants to assist it in compensation-related initiatives.
Elements of Compensation
The Corporation’s executive compensation program has consisted primarily of base salary and benefits, annual cash bonus incentives, stock awardsdirector fees for insider directors, and participation in the Corporation’s retirement plans.
Why Each of the Elements of Compensation is Chosen
Base Salary and Benefitsare set to provide competitive levels of compensation to attract and retain officers with strong motivated leadership. Each officer’s performance, current compensation, and responsibilities within the Corporation are considered by the Committee when establishing base salaries. The Corporation also believes it is best to pay sufficient base salary because it believes an over-reliance on equity incentive compensation could
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potentially skew incentives toward short-term maximization of shareholder value as opposed to building long-term shareholder value. Base salary encourages management to operate the Corporation in a safe and sound manner even when incentive goals may prove unattainable.
Annual Performance Incentivesare used to reward executive officers for the Corporation’s overall financial performance. This element of the Corporation’s compensation programs is included in the overall compensation in
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order to reward employees above and beyond their base salaries when the Corporation’s performance and profitability exceed established annual targets. The inclusion of a modest incentive compensation encourages management to be more creative, diligent and exhaustive in managing the Corporation to achieve specific financial goals.goals without incurring inordinate risks.
Stock Awardsare also provided as they arePerformance incentives paid under the element of compensationExecutive Incentive Plan in 2010 were determined by reference to seven performance measures that is most effectiverelated to services performed in aligning2009. The maximum award that may be granted under the financial interests of management with those of shareholders and because stock awards are a traditional and well-proven element of compensation among community banks and bank holding companies. These stock awards are granted pursuantExecutive Incentive Plan to the Isabella Bank Corporation and Related Companies Deferred Compensation Plan for Directors (“Directors’ Plan”), under whicheach eligible executive officers elect to defer their director fees, which deferred fees are then converted, on a quarterly basis, into sharesemployee equals 10% of the Corporation’s common stock.employee’s base salary (the “Maximum Award”). The Corporation has established a Trust to fund the Directors’ Plan. The directorspayment of 35% of the CorporationMaximum Award was conditioned on the eligible employee accomplishing personal performance goals that were established by such employee’s supervisor as part of the employee’s annual performance review. Each of the employees who were eligible to participate in the Executive Incentive Plan in 2009 accomplished his or her personal performance goals and its subsidiaries are requiredwas accordingly paid 35% of the 2009 Maximum Award. The payment of the remaining 65% of the Maximum Award was conditioned on the achievement of Corporation-wide targets in the following six categories: (1) earnings per share (weighted 40%); (2) net operating expenses to defer at least 25%average assets (weighted 15%); (3) Fully Taxable Equivalent “FTE” net interest margin, excluding loan fees (weighted 15%); (4) in-market deposit growth (weighted 10%); (5) loan growth (weighted 10%); and (6) exceeding peer group return on average assets (weighted 10%). The following chart provides the 2009 target for each of their earned board fees into the Directors’ Plan.foregoing targets that were used to determine bonus awards that were paid in 2010, as well as the performance obtained for each target.
Executive Incentive Plan
| | | | | | | | | | | | | | | | | | | | |
| | 2009 Targets | | | 2009
| |
Target | | 25.00% | | | 50.00% | | | 75.00% | | | 100.00% | | | Performance | |
|
Earning per share | | $ | 0.90 | | | $ | 0.93 | | | $ | 0.96 | | | $ | 0.99 | | | $ | 1.04 | |
Net operating expenses to | | | | | | | | | | | | | | | | | | | | |
average assets | | | 1.66 | % | | | 1.65 | % | | | 1.64 | % | | | 1.63 | % | | | 1.71 | % |
FTE Net Interest Margin | | | 3.71 | % | | | 3.73 | % | | | 3.75 | % | | | 3.77 | % | | | 3.86 | % |
In market deposit growth | | | 4.50 | % | | | 5.00 | % | | | 5.50 | % | | | 6.00 | % | | | 1.87 | % |
Loan growth | | | 5.50 | % | | | 6.00 | % | | | 6.50 | % | | | 7.00 | % | | | 8.28 | % |
Exceeding peer group return | | | | | | | | | | | | | | | | | | | | |
on average assets | | | −0.26 | % | | | −0.25 | % | | | −0.25 | % | | | −0.24 | % | | | 0.91 | % |
Retirement Plans. The Corporation’s retirement plans are designed to assist executives in providing themselves with a financially secure retirement. The retirement plans include: a frozen defined benefit pension plan,plan; a 401(k) plan,plan; and a non-leveraged employee stock ownership plan (ESOP), which is frozen to new participants,participants; and a retirement bonus plan.
How the Corporation Chose Amounts for Each Element
The Committee’s approach to determining the annual base salary of executive officers is to offer competitive salaries in comparison with other comparable financial institutions. The Committee utilizes both an independent compensation survey prepared by SNL Financialconsultant, Blanchard Chase and a survey prepared by the Michigan Bankers Association of similar sized Michigan based institutions. Compensation for 2009The independent compensation consultant established a benchmark peer group of 20 mid-west financial institutions in non urban areas whose average assets size, number of branch locations, return on average assets and nonperforming assets that were comparable to Isabella Bank Corporation. The Michigan Bankers Association 2010 compensation survey was based on the compensation information provided by these organizations for 2008.2009. 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.
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The annual performance incentive is based on the achievement of goals set on individual performance and recognition of individual performance. A subjectivefor each individual. An analysis is conducted by the Chief Executive Officer. The Chief Executive Officer makes a recommendation to the Committee for the appropriate amount for each individual executive officer. The Committee reviews, modifies if necessary, and approves the recommendations of the Chief Executive Officer. The Committee reviews the performance of the Chief Executive Officer. The Committee uses the following factors as quantitative measures of corporate performance in determining annual cash bonus amounts to be paid:
| | |
| • | Peer group financial performance compensation |
|
| • | 1 and 5 year shareholder returns |
|
| • | Earnings per share and earnings per share growth |
|
| • | Budgeted as compared to actual annual operating performance |
|
| • | Community and industry involvement |
|
| • | Results of audit and regulatory exams |
|
| • | Other strategic goals as established by the board of directors |
While no particular weight is given to any specific factor, the Committee gives at least equal weight to the subjective analyses as described above.
Stock awards are granted pursuant to the Director’s Plan, under which participants elect to defer their director fees, which director fees are then converted, on a quarterly basis, into shares of the Corporation’s common stock based on the fair market value of a share of the Corporation’s common stock at that time. Shares of stock credited to a participant’s account under the Directors’ Plan are eligible for stock and cash dividends as payable.
Total compensation in 20092010 was based on the Committee targeting its executive officer’sChief Executive Officer’s and President & Chief Financial Officer’s compensation to approximate the median of the rangesrange provided by anthe independent consultant andcompensation consultant. Compensation for other named executive officers was based on the ranges provide by the Michigan Bankers Association surveys.
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Retirement plans. The Corporation has a 401(k) plan in which substantially all employees are eligible to participate. Employees may contribute up to 50% of their compensation subject to certain limits based on federal tax laws. As a result of the curtailment of the defined benefit plan noted below, the Corporation increased the contributions to the 401(k) plan effective January 1, 2007. The Corporation makes a annual 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 are 100% vested in the safe harbor contributions and are 0% vested through their first two years of employment and are 100% vested after 6 years through a laddered vesting schedule of service for matching contributions.
The Corporation maintains a non-leveraged employee stock ownership plan (ESOP) which covers substantially all of its employees. The plan was frozen effective December 31, 2006 to new participants. Contributions to the plan are discretionary and approved by the Board of Directors.
The Corporation maintains a plan for officers to provide death benefits to each participant. Insurance policies, designed primarily to fund death benefits, have been purchased on the life of each participant with the Corporation as the sole owner and beneficiary of the policies.
The retirement bonus plan is a nonqualified plan of deferred compensation benefits for eligible employees effective January 1, 2007. An initial amount has been credited for each eligible employee as of January 1, 2007. Subsequent amounts will be credited on each allocation date thereafter as defined in the plan. The amount of the initial allocation and the annual allocation are determined pursuant to the payment schedule adopted at the sole and exclusive discretion of the Board of Directors, as set forth in the plan.
In December 2006, the Board of Directors voted to curtail the defined benefit plan effective March 1, 2007. The effect of the curtailment was recognized in the first quarter of 2007 and the current participants’ accrued benefits were frozen as of March 1, 2007. Participation in the plan was limited to eligible employees as of December 31, 2006.
Other Benefits and Perquisites. Executive officers are eligible for all of the benefits made available to full-time employees of the Corporation (such as the 401(k) plan, employee stock purchase plan, health insurance, group term life insurance and disability insurance) on the same basis as other full-time employees and are subject to the same sick leave and other employee policies. The Corporation also provides its executive officers with certain additional benefits and perquisites, which it believes are appropriate in order to attract and retain the proper quality of talent for these positions and to recognize that similar executive benefits and perquisites are commonly offered by comparable financial institutions.
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A description and the cost to the Corporation of these perquisites are included in footnote two in the “Summary Compensation Table” appearing on page 14.
The Corporation believes that benefits and perquisites provided to its executive officers in 2010 represented a reasonable percentage of each executive’s total compensation package and was not inconsistent, in the aggregate, with perquisites provided to executive officers of comparable competing financial institutions.
The Corporation maintains a plan for qualified officers to provide death benefits to each participant. Insurance policies, designed primarily to fund death benefits, have been purchased on the life of each participant with the Corporation as the sole owner and beneficiary of the policies.
How Elements Fit into Overall Compensation Objectives
The elements of the Corporation’s compensation are structured to reward past and current performance, continued service and motivate its leaders to excel in the future. The Corporation’s salary compensation has generally been used to retain and attract motivated leadership. The Corporation intends to continually ensure salaries are sufficient to attract and retain exceptional officers. The Corporation’s cash bonus incentive rewards current performance based upon personal and corporate goals and targets. The Corporation makes stock awardsoffers the Isabella Bank Corporation and Related Companies Deferred Compensation Plan for Directors (the “Directors’ Plan”) to motivate its eligible officers to enhance value for shareholders by aligning the interests of management with those of its shareholders.
As part of its goal of attracting and retaining quality team members, the Corporation has developed competitive employee benefit plans that make it stand out from the rest of the competition.plans. Management feels that the combination of all of the plans listed above makes the Corporation’s total compensation packages attractive.
Compensation and Human ResourcesResource Committee Report
The following Report of the Compensation and Human Resource Committee 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 SECRegulation S-K with management, and based on such review and discussion, the Compensation and Human Resource Committee recommended to the Board of Directors that the Compensation Discussion and Analysis be included in this Proxy Statement and the Annual Report onForm 10-K.
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G. Charles Hubscher, Thomas L. Kleinhardt, Joseph LaFramboise and Dianne C. Morey became members of the Board and the Compensation and Human Resources Committee as of January 1, 2010 and therefore did not participate in any of the reviews or other procedures set forth above with respect to the year ended December 31, 2009.
Submitted by the Compensation and Human Resource Committee of Isabella Bank Corporation’s Board of Directors:
James C. Fabiano,David J. Maness, Chairperson
Jeffrey J. Barnes
Sandra L. Caul
Ted W. KortesJames C. Fabiano
David J. ManessG. Charles Hubscher
Thomas L. Kleinhardt
Joseph LaFramboise
W. Joseph Manifold
W. Michael McGuire
William J. StricklerDianne C, Morey
Dale D. Weburg
1113
Executive Officers
Executive Officers of the Corporation are compensated in accordance with their employment with the applicable entity. The following table shows information on compensation earned from the Corporation or its subsidiaries for each of the last three fiscal years ended December 31, 2009,2010, for the Chief Executive Officer, the Chief Financial Officer, and the Corporation’s three other most highly compensated executive officers.
Summary Compensation Table
| | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | Change in pension
| | | | | | | |
| | | | | | | | | | | | | | Value and
| | | | | | | |
| | | | | | | | | | | | | | Non-Qualified
| | | | | | | |
| | | | | | | | | | | | | | Deferred
| | | | | | | |
| | | | | | | | | | | | | | Compensation
| | | All Other
| | | | |
| | | | | Salary
| | | Bonus
| | | Stock Awards
| | | Earnings
| | | Compensation
| | | Total
| |
Name and Principal Position | | Year | | | ($)(1) | | | ($)(1) | | | ($) | | | ($) | | | ($)(2) | | | ($) | |
|
Richard J. Barz | | | 2009 | | | $ | 320,600 | | | $ | 9,625 | | | $ | 33,650 | | | $ | 46,219 | | | $ | 30,568 | | | $ | 440,662 | |
CEO Isabella Bank Corporation | | | 2008 | | | | 300,785 | | | | 9,100 | | | | 32,490 | | | | 72,622 | | | | 22,697 | | | | 437,694 | |
President and CEO Isabella Bank | | | 2007 | | | | 274,706 | | | | 7,875 | | | | 18,125 | | | | — | | | | 23,226 | | | | 323,932 | |
Dennis P. Angner | | | 2009 | | | | 311,375 | | | | 9,800 | | | | 48,050 | | | | 19,450 | | | | 25,252 | | | | 413,927 | |
President and CFO | | | 2008 | | | | 294,670 | | | | 9,450 | | | | 41,425 | | | | 28,089 | | | | 18,453 | | | | 392,087 | |
Isabella Bank Corporation | | | 2007 | | | | 288,101 | | | | 8,225 | | | | 26,280 | | | | (7,000 | ) | | | 18,715 | | | | 334,321 | |
Timothy M. Miller | | | 2009 | | | | 167,200 | | | | 7,319 | | | | 7,400 | | | | 2,765 | | | | 17,323 | | | | 202,007 | |
President of the Breckenridge | | | 2008 | | | | 160,145 | | | | 3,200 | | | | 6,715 | | | | 3,411 | | | | 14,127 | | | | 187,598 | |
Division of Isabella Bank | | | 2007 | | | | 155,171 | | | | — | | | | 7,880 | | | | (1,000 | ) | | | 14,167 | | | | 176,218 | |
Steven D. Pung | | | 2009 | | | | 126,200 | | | | 6,003 | | | | 900 | | | | 28,140 | | | | 18,468 | | | | 179,711 | |
Sr. Vice President and COO | | | 2008 | | | | 117,100 | | | | 3,785 | | | | 1,125 | | | | 45,884 | | | | 13,169 | | | | 181,063 | |
Isabella Bank | | | 2007 | | | | 108,100 | | | | 3,625 | | | | 1,800 | | | | — | | | | 14,194 | | | | 127,719 | |
Peggy L. Wheeler | | | 2009 | | | | 110,000 | | | | 5,348 | | | | — | | | | 9,000 | | | | 5,649 | | | | 129,997 | |
Sr. Vice President and Controller | | | 2008 | | | | 105,000 | | | | 3,500 | | | | — | | | | 13,000 | | | | 2,216 | | | | 123,716 | |
Isabella Bank Corporation | | | 2007 | | | | 100,000 | | | | 3,000 | | | | — | | | | (3,000 | ) | | | 2,023 | | | | 105,023 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | Change in pension
| | | | | | | | | | |
| | | | | | | | | | | Value and
| | | | | | | | | | |
| | | | | | | | | | | Non-Qualified
| | | | | | | | | | |
| | | | | | | | | | | Deferred
| | | | | | | | | | |
| | | | | | | | | | | Compensation
| | | All Other
| | | | | | | |
| | | | | Salary
| | | Bonus
| | | Earnings
| | | Compensation
| | | Total
| | | | |
Name and principal position | | Year | | | ($)(1) | | | ($) | | | ($)(2) | | | ($)(3) | | | ($) | | | | |
|
Richard J. Barz | | | 2010 | | | $ | 357,600 | | | $ | 24,706 | | | $ | 116,364 | | | $ | 34,856 | | | $ | 533,526 | | | | | |
CEO Isabella Bank Corporation | | | 2009 | | | | 354,250 | | | | 9,625 | | | | 90,184 | | | | 30,568 | | | | 484,627 | | | | | |
President and CEO Isabella Bank | | | 2008 | | | | 333,275 | | | | 9,100 | | | | 110,559 | | | | 22,697 | | | | 475,631 | | | | | |
Dennis P. Angner | | | 2010 | | | $ | 352,600 | | | $ | 24,706 | | | $ | 103,340 | | | $ | 27,922 | | | $ | 508,568 | | | | | |
President and CFO | | | 2009 | | | | 359,425 | | | | 9,800 | | | | 79,623 | | | | 25,252 | | | | 474,100 | | | | | |
Isabella Bank Corporation | | | 2008 | | | | 336,095 | | | | 9,450 | | | | 83,957 | | | | 18,453 | | | | 447,955 | | | | | |
Timothy M. Miller | | | 2010 | | | $ | 161,220 | | | $ | 12,370 | | | $ | 9,000 | | | $ | 32,798 | | | $ | 215,388 | | | | | |
President of the Breckenridge | | | 2009 | | | | 174,600 | | | | 7,319 | | | | 6,000 | | | | 17,323 | | | | 205,242 | | | | | |
Division of Isabella Bank | | | 2008 | | | | 166,860 | | | | 3,200 | | | | 11,000 | | | | 14,127 | | | | 195,187 | | | | | |
Steven D. Pung | | | 2010 | | | $ | 143,632 | | | $ | 10,572 | | | $ | 62,288 | | | $ | 32,886 | | | $ | 249,378 | | | | | |
Sr. Vice President and COO | | | 2009 | | | | 127,100 | | | | 6,003 | | | | 48,518 | | | | 18,468 | | | | 200,089 | | | | | |
Isabella Bank | | | 2008 | | | | 118,225 | | | | 3,785 | | | | 65,111 | | | | 13,169 | | | | 200,290 | | | | | |
David J. Reetz(4) | | | 2010 | | | $ | 123,910 | | | $ | 9,165 | | | $ | 36,429 | | | $ | 13,694 | | | $ | 183,198 | | | | | |
Sr. Vice President and CLO | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Isabella Bank | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | |
(1) | | Includes compensation voluntarily deferred under the Corporation’s 401(k) plan. Directors fees paid in cash are also included, for calendar years 2010, 2009 2008 and 20072008 respectively as follows: Richard J. Barz $52,600, $59,250, and $58,275; Dennis P. Angner $11,375, $14,670,$52,600, $59,425, and $23,870; Richard J. Barz $25,600, $25,785, and $20,475; and$56,095; Timothy M. Miller $19,500, $17,445,$11,300, $26,900, and $20,940.$24,160; and Steven D. Pung $900, $900, and $1,125. |
|
(2) | | Represents the aggregate change in the actuarial present value of the noted executive’s accumulated benefit under the Isabella Bank Corporation Pension Plan and the Isabella Bank Corporation Retirement Bonus Plan. |
|
(3) | | For all noted executives all other compensation includes 401(k) matching contributions. For Richard J. Barz, and Steven D. Pung, and David J. Reetz this also includes club dues and auto allowance. For Dennis P. Angner and Timothy M. Miller, this also includes auto allowance. |
|
(4) | | Not a named executive officer prior to 2010. |
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20092010 Pension Benefits
The following table indicates the present value of accumulated benefits as of December 31, 20092010 for each named executive in the summary compensation table.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | Number of
| | | | | | | | Number of
| | | | | |
| | | | Years of
| | Present
| | | | | | Years of
| | Present
| | | |
| | | | Credited
| | Value of
| | | | | | Vesting
| | Value of
| | | |
| | | | Service as
| | Accumulated
| | Payments
| | | | Service as of
| | Accumulated
| | Payments
| |
| | | | of 01/01/09
| | Benefit
| | During Last
| | | | 01/01/11
| | Benefit
| | During Last
| |
Name | | Plan name | | (#) | | ($) | | Fiscal Year | | Plan name | | (#) | | ($) | | Fiscal Year | |
|
Richard J. Barz | | Isabella Bank Corporation Pension Plan | | | 35 | | | $ | 681,000 | | | $ | — | | | Isabella Bank Corporation Pension Plan | | | 39 | | | $ | 762,000 | | | $ | — | |
| | Isabella Bank Corporation Retirement Bonus Plan | | | 35 | | | | 235,567 | | | | — | | | Isabella Bank Corporation Retirement Bonus Plan | | | 39 | | | | 270,931 | | | | — | |
Dennis P. Angner | | Isabella Bank Corporation Pension Plan | | | 23 | | | | 329,000 | | | | — | | | Isabella Bank Corporation Pension Plan | | | 27 | | | | 382,000 | | | | — | |
| | Isabella Bank Corporation Retirement Bonus Plan | | | 23 | | | | 225,193 | | | | — | | | Isabella Bank Corporation Retirement Bonus Plan | | | 27 | | | | 275,533 | | | | — | |
Timothy M. Miller | | Isabella Bank Corporation Pension Plan | | | 6 | | | | 70,000 | | | | — | | | Isabella Bank Corporation Pension Plan | | | 10 | | | | 79,000 | | | | — | |
| | | | | | | | | | | | | | — | |
Steven D. Pung | | Isabella Bank Corporation Pension Plan | | | 28 | | | | 342,000 | | | | — | | | Isabella Bank Corporation Pension Plan | | | 32 | | | | 384,000 | | | | — | |
| | Isabella Bank Corporation Retirement Bonus Plan | | | 28 | | | | 125,342 | | | | — | | | Isabella Bank Corporation Retirement Bonus Plan | | | 32 | | | | 145,630 | | | | | |
Peggy L. Wheeler | | Isabella Bank Corporation Pension Plan | | | 28 | | | | 88,000 | | | | — | | |
David J. Reetz | | | Isabella Bank Corporation Pension Plan | | | 24 | | | | 119,000 | | | | — | |
| | Isabella Bank Corporation Retirement Bonus Plan | | | 28 | | | | 56,910 | | | | — | | | Isabella Bank Corporation Retirement Bonus Plan | | | 24 | | | | 90,378 | | | | — | |
Defined benefit pension plan. The Corporation sponsors the Isabella Bank Corporation Pension Plan, a frozen defined benefit pension plan. In December 2006, the Board of Directors voted to curtail the defined benefit plan effective March 1, 2007. The effect of the curtailment which was recognized in the first quarter of 2007, froze the current participant’s accrued benefits as of March 1, 2007 and limited participation in the plan to eligible employees as of December 31, 2006. Due to the curtailment of the plan, the number of years of credited service was frozen. As such, the years of credited service for the plan may differ from the participant’s actual years of service with the Corporation.
Annual contributions are made to the plan as required by accepted actuarial principles, applicable federal tax laws, and expenses of operating and maintaining the plan. The amount of contributions on behalf of any one participant cannot be separately or individually computed.
Pension plan benefits are based on years of service and the employees’ five highest consecutive years of compensation out of the last ten years of service, effective through December 31, 2006.
A participant may earn a benefit for up to 35 years of accredited service. Earned benefits are 100 percent vested after five years of service. Benefit payments normally start when a participant reaches age 65. A participant with more than five years of service may elect to take early retirement benefits anytime after reaching age 55. Benefits payable under early retirement are reduced actuarially for each month prior to age 65 in which benefits begin.
Dennis P. Angner, Richard J. Barz, Timothy M. Miller, and Steven D. Pung are eligible for early retirement under the Isabella Bank Corporation Pension 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 by5/9% 5/9% for each of the first 60 months and5/18% 5/18% for each of the next 60 months that the benefit commencement date precedes the normal retirement date.
Retirement bonus plan. The Corporation sponsors the Isabella Bank Corporation Retirement Bonus Plan. The Retirement Bonus Plan is a nonqualified plan of deferred compensation benefits for eligible employees effective January 1, 2007. This plan is intended to provide eligible employees with additional retirement benefits. To be eligible, the employee needed to be employed by the Corporation on January 1, 2007, and be a participant in the Corporation’s frozen Executive Supplemental Income Agreement. Participants must also be an officer of the Corporation with at least 10 years of service as of December 31, 2006. The Corporation has sole and exclusive discretion to add new participants to the plan by authorizing such participation pursuant to action of the Corporation’s Board of Directors.
An initial amount has been credited for each eligible employee as of January 1, 2007. Subsequent amounts shall be credited on each allocation date thereafter as defined in the plan.Plan. The amount of the initial allocation and the
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annual allocation shall be determined pursuant to the payment schedule adopted by the sole and exclusive discretion of the Board, as set forth in the Plan.
Dennis P. Angner, Richard J. Barz, Timothy M. Miller, and Steven D. Pung are eligible for early retirement under the Isabella Bank Corporation Retirement Bonus 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.
20092010 Nonqualified Deferred Compensation
| | | | | | | | | | | | | | | | | | | | | | | | |
| | Executive
| | Aggregate
| | Aggregate
| | | Executive
| | Aggregate
| | Aggregate
| |
| | Contributions in
| | Earnings in
| | Balance at
| | | Contributions in
| | Earnings in
| | Balance at
| |
| | Last FY
| | Last FY
| | Last FYE
| | | Last FY
| | Last FY
| | Last FYE
| |
Name | | ($) | | ($) | | ($) | | | ($) | | ($) | | ($) | |
|
Richard J. Barz | | $ | 33,650 | | | $ | 2,217 | | | $ | 70,120 | | | $ | 30,650 | | | $ | 3,501 | | | $ | 97,379 | |
Dennis P. Angner | | | 48,050 | | | | 2,971 | | | | 94,933 | | | | 44,400 | | | | 4,836 | | | | 134,713 | |
Timothy M. Miller | | | 6,715 | | | | 631 | | | | 19,440 | | | | 3,500 | | | | 839 | | | | 21,990 | |
Steven D. Pung | | | 1,125 | | | | 139 | | | | 4,098 | | | | 900 | | | | 181 | | | | 4,799 | |
Peggy L. Wheeler | | | — | | | | — | | | | — | | |
David J. Reetz | | | | N/A | | | | N/A | | | | N/A | |
The directors of the Corporation and its subsidiaries are required to defer at least 25% of their earned board fees into the Directors’ Plan and may defer up to 100% of their earned fees based on their annual election. These amounts are reflected in the 20092010 nonqualified deferred compensation table above. Under the Directors’ Plan, these deferred fees are converted on a quarterly basis into shares of the Corporation’s common stock based on the fair market value of shares of the Corporation’s common stock at that time. Shares credited to a participant’s account are eligible for stock and cash dividends as payable.
Distribution 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 the Corporation’s common stock. Any Corporation common stock issued under the Directors’ Plan will be considered restricted stock under the Securities Act of 1933, as amended.
Potential Payments Upon Termination or Change in Control
The estimated payments payable to each named executive officer upon severance from employment, retirement, termination upon death or disability or termination following a change in control of the Corporation are described below. For all termination scenarios, the amounts assume such termination took place as of December 31, 2009.2010.
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. |
|
| • | 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, 2009,2010, 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 the Corporation’s life insurance plan or benefits under the Corporation’s 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:
| | | | | | | | | | | | | | | | |
| | While an
| | | | | While an
| | | |
| | Active
| | Subsequent to
| | | Active
| | Subsequent to
| |
Name | | Employee | | Retirement | | | Employee | | Retirement | |
|
Richard J. Barz | | $ | 590,000 | | | $ | 295,000 | | | $ | 610,000 | | | $ | 305,000 | |
Dennis P. Angner | | | 600,000 | | | | 300,000 | | | | 600,000 | | | | 300,000 | |
Timothy M. Miller | | | 295,400 | | | | 147,700 | | | | 299,800 | | | | 149,900 | |
Steven D. Pung | | | 252,400 | | | | 126,200 | | | | 285,400 | | | | 142,700 | |
Peggy L. Wheeler | | | 220,000 | | | | 110,000 | | |
David J. Reetz | | | | 247,800 | | | | 123,900 | |
Change in Control
The Corporation currently does not have a change in control agreement with any of the executive officers; provided, however, pursuant to the Retirement Bonus Plan each participant would become 100% vested in their benefit under the plan if, following a change in control, they voluntarily terminate employment or are terminated without just cause.
Director Compensation
The following table summarizes the Compensation of each non-employee director who served on the Board of Directors during 2009.2010.
| | | | | | | | | | | | | | | | | |
| | | | | | Change in
| | | | |
| | | | | | Pension Value
| | | | |
| | | | | | and Non-
| | | | | | | | | | | |
| | Fees
| | | | Qualified
| | | | | Fees
| | | |
| | Earned or
| | | | Deferred
| | | | | Earned or
| | | |
| | Paid in
| | Stock
| | Compensation
| | | | | Paid in
| | | |
| | Cash
| | Awards
| | Earnings
| | Total
| | | Cash
| | Total
| |
Name | | ($) | | ($) | | ($) | | ($) | | | ($) | | ($) | |
|
Jeffrey J. Barnes | | $ | — | | | $ | 17,900 | | | $ | (3,564 | ) | | $ | 14,336 | | | | 21,000 | | | | 21,000 | |
Sandra L. Caul | | | 10,762 | | | | 30,063 | | | | (69,293 | ) | | | (28,468 | ) | | | 35,800 | | | | 35,800 | |
James Fabiano | | | — | | | | 55,100 | | | | (188,982 | ) | | | (133,882 | ) | | | 40,915 | | | | 40,915 | |
G. Charles Hubscher | | | — | | | | 24,200 | | | | (12,609 | ) | | | 11,591 | | | | 25,950 | | | | 25,950 | |
Thomas L. Kleinhardt | | | — | | | | 24,500 | | | | (37,979 | ) | | | (13,479 | ) | | | 29,450 | | | | 29,450 | |
Ted W. Kortes | | | 20,467 | | | | 8,933 | | | | (1,789 | ) | | | 27,611 | | | | 31,100 | | | | 31,100 | |
Joseph LaFramboise | | | — | | | | 22,350 | | | | (3,684 | ) | | | 18,666 | | | | 27,900 | | | | 27,900 | |
David J. Maness | | | — | | | | 44,375 | | | | (32,785 | ) | | | 11,590 | | | | 52,300 | | | | 52,300 | |
W. Joseph Manifold | | | — | | | | 27,375 | | | | (21,952 | ) | | | 5,423 | | | | 29,146 | | | | 29,146 | |
W. Michael McGuire | | | — | | | | 29,200 | | | | (14,910 | ) | | | 14,290 | | | | 31,800 | | | | 31,800 | |
Dianne C. Morey | | | — | | | | 19,050 | | | | (22,802 | ) | | | (3,752 | ) | | | 18,850 | | | | 18,850 | |
William J. Strickler | | | — | | | | 49,767 | | | | (85,814 | ) | | | (36,047 | ) | | | 39,085 | | | | 39,085 | |
Dale D. Weburg | | | — | | | | 35,775 | | | | (44,427 | ) | | | (8,652 | ) | | | 36,400 | | | | 36,400 | |
The Corporation paid a $6,000$14,000 retainer plus $1,000$1,350 per board meeting to itsexternal directors and a $6,000 retainer plus $1,350 per board meeting to inside directors during 2009 and $2252010. Members of the audit committee were paid $350 per audit committee meeting attended.
Pursuant to the Directors’ Plan the directors of the Corporation and its subsidiaries are required to defer at least 25% of their earned board fees. Under the Directors’ Plan, deferred directors’ fees are converted on a quarterly basis into shares of the Corporation’s common stock, based on the fair market value of a share of the Corporation’s
1517
common stock at that time. Shares of stock credited to a participant’s account are eligible for cash and stock dividends as payable. ParticipantsDirectors of the Corporation deferred $529,740$419,696 under the Directors’ Plan in 2009.2010.
Upon a participant’s attainment of age 70, retirement from the Board, or 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 credited to his or her 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.
The Corporation established a Trust effective as of January 1, 2008 to fund the Directors’ Plan. The Trust is an irrevocable grantor trust to which the Corporation may contribute assets for the limited purpose of funding a nonqualified deferred compensation plan. Although the Corporation may not reach the assets of the Trust for any purpose other than meeting its obligations under the Directors’ Plan, the assets of the Trust remain subject to the claims of the Corporation’s creditors. The Corporation may contribute cash or common stock to the Trust from time to time for the sole purpose of funding the Directors’ Plan. The Trust will use any cash that the Corporation may contribute to purchase shares of the Corporation’s common stock.stock on the open market through the Corporation’s brokerage services department.
The Corporation transferred $557,798$492,958 to the Trust in 2009,2010, which held 30,62632,686 shares of the Corporation’s common stock for settlement as of December 31, 2009.2010. As of December 31, 2009,2010, there were 186,279191,977 shares of stock credited to participants’ accounts, as adjusted for the 10% stock dividend paid on February 29, 2008, 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 Trust. All amounts are unsecured claims against the Corporation’s general assets. The net cost of this benefit to the Corporation was $139,109$165,353 in 2009.2010.
The following table displays the number of equity shares grantedcredited pursuant to the terms of the Directors’ Plan as of December 31, 2009:2010:
| | | | |
| | # of Shares of
| |
Name | | Stock GrantedCredited | |
|
Dennis P Angner | | | 5,0097,787 | |
Jeffrey J. Barnes | | | 1,65131,280 | |
Richard J. Barz | | | 3,7005,629 | |
Sandra L. Caul | | | 15,167287,411 | |
James Fabiano | | | 39,924756,559 | |
G. Charles Hubscher | | | 3,76671,357 | |
Thomas L. Kleinhardt | | | 8,746165,741 | |
Ted W. Kortes | | | 82515,636 | |
Joseph LaFramboise | | | 1,91836,348 | |
David J. Maness | | | 8,767166,134 | |
W. Joseph Manifold | | | 5,750108,959 | |
W. Michael McGuire | | | 4,46884,660 | |
Dianne C. Morey | | | 5,480103,849 | |
William J. Strickler | | | 19,443368,446 | |
Dale D. Weburg | | | 10,580200,490 | |
Compensation and Human Resource Committee Interlocks and Insider Participation
The Compensation and Human Resource Committee of the Corporation is responsible for reviewing and recommending to the Corporation’s Board the compensation of the PresidentChief Executive Officer and other executive officers of the Corporation, benefit plans and the overall percentage increase in salaries. The committee consists of directors Fabiano,Maness, Barnes, Caul, Fabiano, Hubscher, Kleinhardt, Kortes, LaFramboise, Maness, Manifold, McGuire, Morey, Strickler, and Weburg.
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Indebtedness of and Transactions with Management
Certain directors and officers of the Corporation and members of their families were loan customers of Isabella Bank, or have been directors or officers of corporations, or partners of partnerships which have had transactions with the Bank. In management’s 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 $4,142,000$4,347,000 as of December 31, 2009.2010. The Corporation addresses transactions with related parties in its‘Code of Business Conduct and Ethics’policy. Conflicts of interest are prohibited as a matter of Corporation policy, except under guidelines approved by the Board of Directors or committees of the Board.
Security Ownership of Certain Beneficial Owners and Management
As of March 31, 2010April 1, 2011 the Corporation does not have any person who is known to the Corporation to be the beneficial owner of more than 5% of the common stock of the Corporation.
The following table sets forth certain information as of March 31, 2010April 1, 2011 as to the common stock of the Corporation owned beneficially by each director and director nominee, by each named executive officer, and by all directors, director nominees and executive officers of the Corporation as a group. The shares to be granted from stock awardscredited under the Directors’ Plan are not included in the table below.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Amount and Nature of Beneficial Ownership | | | Amount and Nature of Beneficial Ownership | |
| | Sole Voting
| | Shared Voting
| | Total
| | Percentage of
| | | Sole Voting
| | Shared Voting
| | Total
| | Percentage of
| |
| | and Investment
| | and Investment
| | Beneficial
| | Common Stock
| | | and Investment
| | or Investment
| | Beneficial
| | Common Stock
| |
Name of Owner | | Powers | | Powers | | Ownership | | Outstanding | | | Powers | | Powers | | Ownership | | Outstanding | |
|
Dennis P. Angner* | | | 17,782 | | | | — | | | | 17,782 | | | | 0.24 | % | | | 18,100 | | | | — | | | | 18,100 | | | | 0.24 | % |
Jeffrey J. Barnes | | | — | | | | 5,439 | | | | 5,439 | | | | 0.07 | % | | | — | | | | 5,669 | | | | 5,669 | | | | 0.08 | % |
Richard J. Barz* | | | 19,997 | | | | — | | | | 19,997 | | | | 0.27 | % | | | 20,325 | | | | — | | | | 20,325 | | | | 0.27 | % |
Sandra L. Caul | | | — | | | | 10,390 | | | | 10,390 | | | | 0.14 | % | | | — | | | | 10,609 | | | | 10,609 | | | | 0.14 | % |
James C. Fabiano | | | 261,387 | | | | — | | | | 261,387 | | | | 3.47 | % | | | 264,871 | | | | 6,579 | | | | 271,450 | | | | 3.60 | % |
G. Charles Hubscher | | | 26,892 | | | | 3,283 | | | | 30,175 | | | | 0.40 | % | | | 28,031 | | | | 3,548 | | | | 31,579 | | | | 0.42 | % |
Thomas L. Kleinhardt | | | 10,065 | | | | — | | | | 10,065 | | | | 0.13 | % | | | — | | | | 31,179 | | | | 31,179 | | | | 0.41 | % |
Theodore W. Kortes | | | — | | | | 12,000 | | | | 12,000 | | | | 0.16 | % | |
Joseph LaFramboise | | | 728 | | | | — | | | | 728 | | | | 0.01 | % | | | — | | | | 910 | | | | 910 | | | | 0.01 | % |
David J. Maness | | | 447 | | | | — | | | | 447 | | | | 0.01 | % | | | 466 | | | | 1,135 | | | | 1,601 | | | | 0.02 | % |
W. Joseph Manifold | | | 565 | | | | — | | | | 565 | | | | 0.01 | % | | | 2,089 | | | | — | | | | 2,089 | | | | 0.03 | % |
W. Michael McGuire | | | 231,983 | | | | — | | | | 231,983 | | | | 3.08 | % | | | 56,531 | | | | — | | | | 56,531 | | | | 0.75 | % |
Dianne C. Morey | | | 38,647 | | | | — | | | | 38,647 | | | | 0.51 | % | | | — | | | | 40,283 | | | | 40,283 | | | | 0.53 | % |
William J. Strickler | | | 76,902 | | | | — | | | | 76,902 | | | | 1.02 | % | |
Dale D. Weburg | | | 26,711 | | | | 30,396 | | | | 57,107 | | | | 0.76 | % | | | 27,842 | | | | 31,683 | | | | 59,525 | | | | 0.79 | % |
Timothy M. Miller | | | 3,301 | | | | — | | | | 3,301 | | | | 0.04 | % | | | 215 | | | | 3,330 | | | | 3,545 | | | | 0.05 | % |
Steven D. Pung | | | 17,102 | | | | — | | | | 17,102 | | | | 0.23 | % | | | 9,422 | | | | 8,236 | | | | 17,658 | | | | 0.23 | % |
Peggy L. Wheeler | | | 4,270 | | | | 2,498 | | | | 6,768 | | | | 0.09 | % | |
David J. Reetz | | | | 8,468 | | | | 175 | | | | 8,643 | | | | 0.11 | % |
| | | | | | | | | | | | | | | | | | |
All Directors, nominees and Executive Officers as a Group (18 persons) | | | 736,779 | | | | 64,006 | | | | 800,785 | | | | 10.64 | % | |
All Directors, nominees and Executive | | | | | | | | | | | | | | | | | |
Officers as a Group (16 persons) | | | | 436,360 | | | | 143,336 | | | | 579,696 | | | | 7.68 | % |
| | | | | | | | | | |
| | |
* | | Trustees of the ESOP who vote ESOP stock. |
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Independent Registered Public Accounting Firm
The Audit Committee has appointed Rehmann Robson as the independent auditors of the Corporation for the year ending December 31, 2010.2011.
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A representative of Rehmann Robson is expected to be present at the Annual Meeting of Shareholders to respond to appropriate questions from shareholders and to make any comments they believeRehmann believes is appropriate.
Fees for Professional Services Provided by Rehmann Robson P.C.
The following table shows the aggregate fees billed by Rehmann Robson for the audit and other services provided to the Corporation for 20092010 and 2008.2009.
| | | | | | | | | | | | | | | | |
| | 2009 | | 2008 | | | 2010 | | 2009 | |
|
Audit fees | | $ | 288,810 | | | $ | 238,275 | | | $ | 252,163 | | | $ | 291,497 | |
Audit related fees | | | 22,860 | | | | 52,415 | | | | 39,089 | | | | 40,135 | |
Tax fees | | | 39,784 | | | | 65,257 | | | | 24,730 | | | | 39,784 | |
Other professional services fees | | | 10,675 | | | | 15,098 | | | | — | | | | — | |
| | | | | | | | | | |
Total | | $ | 362,129 | | | $ | 371,045 | | | $ | 315,982 | | | $ | 371,416 | |
| | | | | | | | | | |
The audit fees were for performing the integrated audit of the Corporation’s consolidated annual financial statements and the audit of internal control over financial reporting related to the Federal Deposit Insurance Corporation Improvement Act, (2009 only), review of interim quarterly financial statements included in the Corporation’sForms 10-Q, auditing of the Corporation’s employee benefit plans and services that are normally provided by Rehmann Robson in connection with statutory and regulatory filings or engagements. The decline in audit fees from 2009 to 2010 is primarily related to the Corporations’ continued improvement in financial reporting and SOX 404 processes.
The audit related fees are typically for various discussions related to the adoption and interpretation of new accounting pronouncements. During 2008, there were alsoAlso included are fees for regulatory filings and procedures related toauditing of the acquisition of Greenville Community Financial Corporation.Corporation’s employee benefit plans.
The tax fees were for the preparation of the CorporationCorporation’s and its subsidiaries’ state and federal tax returns and for consultation with the Corporation on various tax matters. The tax fees for 2008 include fees related to tax consulting for an audit conducted by the State of Michigan for Single Business Tax (SBT), the 2007 Greenville Community Financial Corporation final tax return preparation, and tax consulting related to the joint venture with CT/IBT Title (refer to Note 2 of the Corporation’s consolidated financial statements). During 2009 tax fees also included consulting related to the then new State of Michigan Business Tax (MBT).
The Audit Committee has considered whether the services provided by Rehmann Robson, P.C. other than the audit fees, are compatible with maintaining Rehmann Robson’sRobson, P.C.’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 must be approved in advance by the Audit Committee.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’s 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
18
consideration and approval at any time. The schedule will be specific as to the nature of the proposed service, the
20
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 20092010 and 20082009 without pre-approval as required under the Corporation’s policies.
Shareholder Proposals
Any proposals which shareholders of the Corporation intend to present at the next annual meeting of the Corporation must be received before December 10, 20109, 2011 to be considered for inclusion in the Corporation’s proxy statement and proxy for that meeting. Proposals should be made in accordance with Securities and Exchange CommissionRule 14a-8.
Directors’ Attendance at the Annual Meeting of Shareholders
The Corporation’s directors are encouraged to attend the annual meeting of shareholders. At the 20092010 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 the Corporation’s directors and certain officers and persons who own more than ten percent of the Corporation’s common stock, to file with the SEC initial reports of ownership and reports of changes in ownership of the Corporation’s common stock. These officers, directors, and greater than ten percent shareholders are required by SEC regulation to furnish the Corporation with copies of these reports.
To the Corporation’s knowledge, based solely on review of the copies of such reports furnished to the Corporation, during the year ended December 31, 20092010 all Section 16(a) filing requirements were satisfied, with respect to the applicable officers, directors, and greater than 10 percent beneficial owners.
Other Matters
The cost of soliciting proxies will be borne by the Corporation. In addition to solicitation by mail, officers and other employees of the Corporation may solicit proxies by telephone or in person, without compensation other than their regular compensation.
As to Other Business Which May Come Before the Meeting
Management of the Corporation does not intend to bring any other business before the meeting for action. However, if any other business should be presented for action, it is the intention of the persons named in the enclosed form of proxy to vote in accordance with their judgment on such business.
By order of the Board of Directors
Debra Campbell, Secretary
1921
Isabella Bank Corporation
Financial Information Index
2022
SUMMARY OF SELECTED FINANCIAL DATA
| | | | | | | | | | | | | | | | | | | | |
| | 2009 | | | 2008 | | | 2007 | | | 2006 | | | 2005 | |
| | (Dollars in thousands except per share data) | |
|
INCOME STATEMENT DATA | | | | | | | | | | | | | | | | | | | | |
Total interest income | | $ | 58,105 | | | $ | 61,385 | | | $ | 53,972 | | | $ | 44,709 | | | $ | 36,882 | |
Net interest income | | | 38,266 | | | | 35,779 | | | | 28,013 | | | | 24,977 | | | | 23,909 | |
Provision for loan losses | | | 6,093 | | | | 9,500 | | | | 1,211 | | | | 682 | | | | 777 | |
Net income | | | 7,800 | | | | 4,101 | | | | 7,930 | | | | 7,001 | | | | 6,776 | |
BALANCE SHEET DATA | | | | | | | | | | | | | | | | | | | | |
End of year assets | | $ | 1,143,944 | | | $ | 1,139,263 | | | $ | 957,282 | | | $ | 910,127 | | | $ | 741,654 | |
Daily average assets | | | 1,127,634 | | | | 1,113,102 | | | | 925,631 | | | | 800,174 | | | | 700,624 | |
Daily average deposits | | | 786,714 | | | | 817,041 | | | | 727,762 | | | | 639,046 | | | | 576,091 | |
Daily average loans/net | | | 712,965 | | | | 708,434 | | | | 596,739 | | | | 515,539 | | | | 459,310 | |
Daily average equity | | | 139,810 | | | | 143,626 | | | | 119,246 | | | | 91,964 | | | | 74,682 | |
PER SHARE DATA(1) | | | | | | | | | | | | | | | | | | | | |
Earnings per share | | | | | | | | | | | | | | | | | | | | |
Basic | | $ | 1.04 | | | $ | 0.55 | | | $ | 1.14 | | | $ | 1.12 | | | $ | 1.14 | |
Diluted | | | 1.01 | | | | 0.53 | | | | 1.11 | | | | 1.09 | | | | 1.14 | |
Cash dividends | | | 0.70 | | | | 0.65 | | | | 0.62 | | | | 0.58 | | | | 0.55 | |
Book value (at year end) | | | 18.69 | | | | 17.89 | | | | 17.58 | | | | 16.61 | | | | 13.44 | |
FINANCIAL RATIOS | | | | | | | | | | | | | | | | | | | | |
Shareholders’ equity to assets (at year end) | | | 12.31 | % | | | 11.80 | % | | | 12.86 | % | | | 12.72 | % | | | 10.91 | % |
Return on average equity | | | 5.58 | | | | 2.86 | | | | 6.65 | | | | 7.61 | | | | 9.07 | |
Return on average tangible equity | | | 8.54 | | | | 4.41 | | | | 8.54 | | | | 8.31 | | | | 9.12 | |
Cash dividend payout to net income | | | 67.40 | | | | 118.82 | | | | 54.27 | | | | 53.92 | | | | 48.02 | |
| | | | | | | | | | | | | | | | | | | | |
Return on average assets | | | 0.69 | | | | 0.37 | | | | 0.86 | | | | 0.87 | | | | 0.97 | |
| | | | | | | | | | | | | | | | | | | | |
| | 2010 | | | 2009 | | | 2008 | | | 2007 | | | 2006 | |
| | (Dollars in thousands except per share data) | |
|
INCOME STATEMENT DATA | | | | | | | | | | | | | | | | | | | | |
Total interest income | | $ | 57,217 | | | $ | 58,105 | | | $ | 61,385 | | | $ | 53,972 | | | $ | 44,709 | |
Net interest income | | | 40,013 | | | | 38,266 | | | | 35,779 | | | | 28,013 | | | | 24,977 | |
Provision for loan losses | | | 4,857 | | | | 6,093 | | | | 9,500 | | | | 1,211 | | | | 682 | |
Net income | | | 9,045 | | | | 7,800 | | | | 4,101 | | | | 7,930 | | | | 7,001 | |
BALANCE SHEET DATA | | | | | | | | | | | | | | | | | | | | |
End of year assets | | $ | 1,225,810 | | | $ | 1,143,944 | | | $ | 1,139,263 | | | $ | 957,282 | | | $ | 910,127 | |
Daily average assets | | | 1,182,930 | | | | 1,127,634 | | | | 1,113,102 | | | | 925,631 | | | | 800,174 | |
Daily average deposits | | | 840,392 | | | | 786,714 | | | | 817,041 | | | | 727,762 | | | | 639,046 | |
Daily average loans/net | | | 712,272 | | | | 712,965 | | | | 708,434 | | | | 596,739 | | | | 515,539 | |
Daily average equity | | | 139,855 | | | | 139,810 | | | | 143,626 | | | | 119,246 | | | | 91,964 | |
PER SHARE DATA(1) | | | | | | | | | | | | | | | | | | | | |
Earnings per share | | | | | | | | | | | | | | | | | | | | |
Basic | | $ | 1.20 | | | $ | 1.04 | | | $ | 0.55 | | | $ | 1.14 | | | $ | 1.12 | |
Diluted | | | 1.17 | | | | 1.01 | | | | 0.53 | | | | 1.11 | | | | 1.09 | |
Cash dividends | | | 0.72 | | | | 0.70 | | | | 0.65 | | | | 0.62 | | | | 0.58 | |
Book value (at year end) | | | 19.23 | | | | 18.69 | | | | 17.89 | | | | 17.58 | | | | 16.61 | |
FINANCIAL RATIOS | | | | | | | | | | | | | | | | | | | | |
Shareholders’ equity to assets (at year end) | | | 11.84 | % | | | 12.31 | % | | | 11.80 | % | | | 12.86 | % | | | 12.72 | % |
Return on average equity | | | 6.47 | | | | 5.58 | | | | 2.86 | | | | 6.65 | | | | 7.61 | |
Return on average tangible equity | | | 9.55 | | | | 8.53 | | | | 4.41 | | | | 8.54 | | | | 8.31 | |
Cash dividend payout to net income | | | 59.93 | | | | 67.40 | | | | 118.82 | | | | 54.27 | | | | 53.92 | |
Return on average assets | | | 0.76 | | | | 0.69 | | | | 0.37 | | | | 0.86 | | | | 0.87 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | 2009 | | 2008 | | | 2010 | | 2009 | |
| | 4th | | 3rd | | 2nd | | 1st | | 4th | | 3rd | | 2nd | | 1st | | | 4th | | 3rd | | 2nd | | 1st | | 4th | | 3rd | | 2nd | | 1st | |
|
Quarterly Operating Results: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Total interest income | | $ | 14,411 | | | $ | 14,516 | | | $ | 14,505 | | | $ | 14,673 | | | $ | 15,099 | | | $ | 15,401 | | | $ | 15,359 | | | $ | 15,526 | | | $ | 14,540 | | | $ | 14,306 | | | $ | 14,272 | | | $ | 14,099 | | | $ | 14,411 | | | $ | 14,516 | | | $ | 14,505 | | | $ | 14,673 | |
Interest expense | | | 4,657 | | | | 4,928 | | | | 5,026 | | | | 5,228 | | | | 5,836 | | | | 6,309 | | | | 6,379 | | | | 7,082 | | | | 4,217 | | | | 4,296 | | | | 4,291 | | | | 4,400 | | | | 4,657 | | | | 4,928 | | | | 5,026 | | | | 5,228 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Net interest income | | | 9,754 | | | | 9,588 | | | | 9,479 | | | | 9,445 | | | | 9,263 | | | | 9,092 | | | | 8,980 | | | | 8,444 | | | | 10,323 | | | | 10,010 | | | | 9,981 | | | | 9,699 | | | | 9,754 | | | | 9,588 | | | | 9,479 | | | | 9,445 | |
Provision for loan losses | | | 1,544 | | | | 1,542 | | | | 1,535 | | | | 1,472 | | | | 5,725 | | | | 975 | | | | 1,593 | | | | 1,207 | | | | 1,626 | | | | 968 | | | | 1,056 | | | | 1,207 | | | | 1,544 | | | | 1,542 | | | | 1,535 | | | | 1,472 | |
Noninterest income | | | 2,102 | | | | 2,566 | | | | 3,131 | | | | 2,357 | | | | 1,130 | | | | 2,377 | | | | 1,778 | | | | 2,517 | | | | 2,629 | | | | 2,634 | | | | 1,870 | | | | 2,167 | | | | 2,102 | | | | 2,566 | | | | 3,131 | | | | 2,357 | |
Noninterest expenses | | | 8,176 | | | | 7,995 | | | | 8,468 | | | | 9,044 | | | | 8,377 | | | | 7,430 | | | | 7,341 | | | | 7,556 | | | | 8,558 | | | | 8,620 | | | | 8,275 | | | | 8,354 | | | | 8,176 | | | | 7,995 | | | | 8,468 | | | | 9,044 | |
Net income (loss) | | | 2,073 | | | | 2,197 | | | | 2,201 | | | | 1,329 | | | | (2,041 | ) | | | 2,524 | | | | 1,691 | | | | 1,927 | | |
Net income | | | | 2,318 | | | | 2,553 | | | | 2,151 | | | | 2,023 | | | | 2,073 | | | | 2,197 | | | | 2,201 | | | | 1,329 | |
Per Share of Common Stock:(1) | Per Share of Common Stock:(1) | Per Share of Common Stock:(1) | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Earnings (loss) per share | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Earnings per share | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Basic | | $ | 0.28 | | | $ | 0.29 | | | $ | 0.29 | | | $ | 0.18 | | | $ | (0.28 | ) | | $ | 0.34 | | | $ | 0.23 | | | $ | 0.26 | | | $ | 0.30 | | | $ | 0.34 | | | $ | 0.29 | | | $ | 0.27 | | | $ | 0.28 | | | $ | 0.29 | | | $ | 0.29 | | | $ | 0.18 | |
Diluted | | | 0.27 | | | | 0.28 | | | | 0.29 | | | | 0.17 | | | | (0.27 | ) | | | 0.33 | | | | 0.22 | | | | 0.25 | | | | 0.30 | | | | 0.33 | | | | 0.28 | | | | 0.26 | | | | 0.27 | | | | 0.28 | | | | 0.29 | | | | 0.17 | |
Cash dividends | | | 0.32 | | | | 0.13 | | | | 0.13 | | | | 0.12 | | | | 0.29 | | | | 0.12 | | | | 0.12 | | | | 0.12 | | | | 0.18 | | | | 0.18 | | | | 0.18 | | | | 0.18 | | | | 0.32 | | | | 0.13 | | | | 0.13 | | | | 0.12 | |
Book value (at quarter end) | | | 18.69 | | | | 18.97 | | | | 18.06 | | | | 18.01 | | | | 17.89 | | | | 18.78 | | | | 18.75 | | | | 19.07 | | | | 19.23 | | | | 19.59 | | | | 19.39 | | | | 18.89 | | | | 18.69 | | | | 18.97 | | | | 18.06 | | | | 18.01 | |
| | |
(1) | | Retroactively restated for the 10% stock dividend, paid on February 29, 2008. |
2123
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Shareholders and Board of Directors
Isabella Bank Corporation
Mt.Mount Pleasant, Michigan
We have audited the accompanying consolidated balance sheets ofIsabella Bank Corporationas of December 31, 20092010 and 2008,2009, 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, 2009.2010. We also have auditedIsabella Bank Corporation’sinternal control over financial reporting as of December 31, 2009,2010, based on criteria established in theInternal Control-Integrated Frameworkissued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).Isabella Bank Corporation’smanagement is responsible for these consolidated financial statements, for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting. Our responsibility is to express an opinion on these consolidated financial statements and an opinion on the effectiveness of theIsabella Bank Corporation’sinternal 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.
As discussed in Note 1 to the consolidated financial statements, effective January 1, 2008, the Corporation adopted ASC Topic 715,Compensation — Retirement Benefits.
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.
As described in Note 1 to the consolidated financial statements, effective January 1, 2008 the Corporation adopted ASC Topic 715,Compensation — Retirement Benefits.Also, as described in Notes 17 and 20 to the consolidated financial statements, effective January 1, 2007 the Corporation elected the early adoption of ASC Topic 825,Financial Instrumentsand ASC Topic 820,Fair Value Measurements and Disclosures,and effective December 31, 2006 changed its method of accounting for defined benefit pension and other postretirement plans in accordance with ASC Topic 715,Compensation — Retirement Benefits.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position ofIsabella Bank Corporationas of December 31, 20092010 and 2008,2009, and the consolidated results of their operations and their cash flows for each of the years in the three-year period ended December 31, 20092010 in conformity with accounting principles generally accepted in the United States of America.
22
Also, in our opinionIsabella Bank Corporationmaintained, in all material respects, effective internal control over financial reporting as of December 31, 2009,2010, based on the criteria established in theInternal Control-Integrated Frameworkissued by the Committee of Sponsoring Organizations (COSO) of the Treadway Commission.
Rehmann Robson, P.C.
Saginaw, Michigan
March 11, 20108, 2011
2324
CONSOLIDATED BALANCE SHEETS
| | | | | | | | |
| | December 31 | |
| | 2009 | | | 2008 | |
| | (Dollars in thousands) | |
|
ASSETS |
Cash and cash equivalents | | $ | 22,706 | | | $ | 22,979 | |
Interest bearing balances held in other financial institutions | | | 7,156 | | | | 575 | |
Trading securities | | | 13,563 | | | | 21,775 | |
Investment securities available for sale (amortized cost of $258,585 in 2009 and $248,741 in 2008) | | | 259,066 | | | | 246,455 | |
Mortgage loans available for sale | | | 2,281 | | | | 898 | |
Net loans | | | | | | | | |
Loans | | | 723,316 | | | | 735,385 | |
Less allowance for loan losses | | | 12,979 | | | | 11,982 | |
| | | | | | | | |
Total net loans | | | 710,337 | | | | 723,403 | |
Premises and equipment | | | 23,917 | | | | 23,231 | |
Corporate-owned life insurance policies | | | 16,782 | | | | 16,152 | |
Accrued interest receivable | | | 5,832 | | | | 6,322 | |
Acquisition intangibles and goodwill, net | | | 47,429 | | | | 47,804 | |
Equity securities without readily determinable fair values | | | 17,921 | | | | 17,345 | |
Other assets | | | 16,954 | | | | 12,324 | |
| | | | | | | | |
Total assets | | $ | 1,143,944 | | | $ | 1,139,263 | |
| | | | | | | | |
|
LIABILITIES AND SHAREHOLDERS’ EQUITY |
Deposits | | | | | | | | |
Noninterest bearing | | $ | 96,875 | | | $ | 97,546 | |
NOW accounts | | | 128,111 | | | | 113,973 | |
Certificates of deposit and other savings | | | 389,644 | | | | 422,689 | |
Certificates of deposit over $100,000 | | | 188,022 | | | | 141,422 | |
| | | | | | | | |
Total deposits | | | 802,652 | | | | 775,630 | |
Borrowed funds ($17,804 in 2009 and $23,130 in 2008 at fair value) | | | 193,101 | | | | 222,350 | |
Accrued interest and other liabilities | | | 7,388 | | | | 6,807 | |
| | | | | | | | |
Total liabilities | | | 1,003,141 | | | | 1,004,787 | |
| | | | | | | | |
Shareholders’ Equity | | | | | | | | |
Common stock — no par value 15,000,000 shares authorized; outstanding — 7,535,193 (including 30,626 shares to be issued) in 2009 and 7,518,856 (including 5,248 shares to be issued) in 2008 | | | 133,443 | | | | 133,602 | |
Shares to be issued for deferred compensation obligations | | | 4,507 | | | | 4,015 | |
Retained earnings | | | 4,972 | | | | 2,428 | |
Accumulated other comprehensive loss | | | (2,119 | ) | | | (5,569 | ) |
| | | | | | | | |
Total shareholders’ equity | | | 140,803 | | | | 134,476 | |
| | | | | | | | |
Total liabilities and shareholders’ equity | | $ | 1,143,944 | | | $ | 1,139,263 | |
| | | | | | | | |
The accompanying notes are an integral part of these consolidated financial statements.
24
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY
| | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | Shares to be
| | | | | | | | | | |
| | | | | | | | Issued for
| | | | | | | | | | |
| | Common Stock
| | | | | | Deferred
| | | | | | Accumulated Other
| | | | |
| | Shares
| | | Common
| | | Compensation
| | | Retained
| | | Comprehensive
| | | | |
| | Outstanding | | | Stock | | | Obligations | | | Earnings | | | Loss | | | Totals | |
| | (Dollars in thousands except per share data) | |
|
Balance, January 1, 2007 | | | 6,335,861 | | | $ | 111,648 | | | $ | 3,137 | | | $ | 4,451 | | | $ | (3,487 | ) | | $ | 115,749 | |
Cumulative effect to apply ASC Topic 825, net of tax | | | — | | | | — | | | | — | | | | (1,050 | ) | | | 897 | | | | (153 | ) |
Comprehensive income | | | — | | | | — | | | | — | | | | 7,930 | | | | 2,324 | | | | 10,254 | |
Issuance of common stock | | | 63,233 | | | | 2,657 | | | | — | | | | — | | | | — | | | | 2,657 | |
Common stock issued for deferred compensation obligations | | | 8,246 | | | | 123 | | | | (123 | ) | | | — | | | | — | | | | — | |
Share-based payment awards under equity compensation plan | | | — | | | | — | | | | 758 | | | | — | | | | — | | | | 758 | |
Common stock repurchased pursuant to publicly announced repurchase plan | | | (43,220 | ) | | | (1,881 | ) | | | — | | | | — | | | | — | | | | (1,881 | ) |
Cash dividends ($0.62 per share) | | | — | | | | — | | | | — | | | | (4,304 | ) | | | — | | | | (4,304 | ) |
| | | | | | | | | | | | | | | | | | | | | | | | |
Balance, December 31, 2007 | | | 6,364,120 | | | | 112,547 | | | | 3,772 | | | | 7,027 | | | | (266 | ) | | | 123,080 | |
Cumulative effect to apply ASC Topic 715, net of tax | | | — | | | | — | | | | — | | | | (1,571 | ) | | | — | | | | (1,571 | ) |
Comprehensive loss | | | — | | | | — | | | | — | | | | 4,101 | | | | (5,303 | ) | | | (1,202 | ) |
Common stock dividends (10)% | | | 687,599 | | | | 30,256 | | | | — | | | | (30,256 | ) | | | — | | | | — | |
Regulatory capital transfer | | | — | | | | (28,000 | ) | | | — | | | | 28,000 | | | | — | | | | — | |
Bank acquisition | | | 514,809 | | | | 22,652 | | | | — | | | | — | | | | — | | | | 22,652 | |
Issuance of common stock | | | 73,660 | | | | 2,476 | | | | — | | | | — | | | | — | | | | 2,476 | |
Common stock issued for deferred compensation obligations | | | 27,004 | | | | 360 | | | | (360 | ) | | | — | | | | — | | | | — | |
Share-based payment awards under equity compensation plan | | | — | | | | — | | | | 603 | | | | — | | | | — | | | | 603 | |
Common stock purchased for deferred compensation obligations | | | — | | | | (249 | ) | | | — | | | | | | | | | | | | (249 | ) |
Common stock repurchased pursuant to publicly announced repurchase plan | | | (148,336 | ) | | | (6,440 | ) | | | — | | | | — | | | | — | | | | (6,440 | ) |
Cash dividends ($0.65 per share) | | | — | | | | — | | | | — | | | | (4,873 | ) | | | — | | | | (4,873 | ) |
| | | | | | | | | | | | | | | | | | | | | | | | |
Balance, December 31, 2008 | | | 7,518,856 | | | | 133,602 | | | | 4,015 | | | | 2,428 | | | | (5,569 | ) | | | 134,476 | |
Comprehensive income | | | — | | | | — | | | | — | | | | 7,800 | | | | 3,450 | | | | 11,250 | |
Issuance of common stock | | | 126,059 | | | | 2,664 | | | | — | | | | — | | | | — | | | | 2,664 | |
Common stock issued for deferred compensation obligations | | | 12,890 | | | | 331 | | | | (185 | ) | | | — | | | | — | | | | 146 | |
Share-based payment awards under equity compensation plan | | | — | | | | — | | | | 677 | | | | — | | | | — | | | | 677 | |
Common stock purchased for deferred compensation obligations | | | — | | | | (767 | ) | | | — | | | | — | | | | — | | | | (767 | ) |
Common stock repurchased pursuant to publicly announced repurchase plan | | | (122,612 | ) | | | (2,387 | ) | | | | | | | — | | | | — | | | | (2,387 | ) |
Cash dividends ($0.70 per share) | | | — | | | | — | | | | — | | | | (5,256 | ) | | | — | | | | (5,256 | ) |
| | | | | | | | | | | | | | | | | | | | | | | | |
Balance, December 31, 2009 | | | 7,535,193 | | | | 133,443 | | | | 4,507 | | | | 4,972 | | | | (2,119 | ) | | | 140,803 | |
| | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | |
| | December 31 | |
| | 2010 | | | 2009 | |
| | (Dollars in thousands) | |
|
ASSETS |
Cash and cash equivalents | | | | | | | | |
Cash and demand deposits due from banks | | $ | 16,978 | | | $ | 17,342 | |
Interest bearing balances due from banks | | | 1,131 | | | | 7,140 | |
| | | | | | | | |
Total cash and cash equivalents | | | 18,109 | | | | 24,482 | |
Certificates of deposit held in other financial institutions | | | 15,808 | | | | 5,380 | |
Trading securities | | | 5,837 | | | | 13,563 | |
Available-for-sale investment securities (amortized cost of $329,435 in 2010 and $258,585 in 2009) | | | 330,724 | | | | 259,066 | |
Mortgage loansavailable-for-sale | | | 1,182 | | | | 2,281 | |
Loans | | | | | | | | |
Agricultural | | | 71,446 | | | | 64,845 | |
Commercial | | | 348,852 | | | | 340,274 | |
Installment | | | 30,977 | | | | 32,359 | |
Residential real estate mortgage | | | 284,029 | | | | 285,838 | |
| | | | | | | | |
Total loans | | | 735,304 | | | | 723,316 | |
Less allowance for loan losses | | | 12,373 | | | | 12,979 | |
| | | | | | | | |
Net loans | | | 722,931 | | | | 710,337 | |
Premises and equipment | | | 24,627 | | | | 23,917 | |
Corporate owned life insurance | | | 17,466 | | | | 16,782 | |
Accrued interest receivable | | | 5,456 | | | | 5,832 | |
Equity securities without readily determinable fair values | | | 17,564 | | | | 17,921 | |
Goodwill and other intangible assets | | | 47,091 | | | | 47,429 | |
Other assets | | | 19,015 | | | | 16,954 | |
| | | | | | | | |
Total Assets | | $ | 1,225,810 | | | $ | 1,143,944 | |
| | | | | | | | |
|
LIABILITIES AND SHAREHOLDERS’ EQUITY |
Deposits | | | | | | | | |
Noninterest bearing | | $ | 104,902 | | | $ | 96,875 | |
NOW accounts | | | 142,259 | | | | 128,111 | |
Certificates of deposit under $100 and other savings | | | 425,981 | | | | 389,644 | |
Certificates of deposit over $100 | | | 204,197 | | | | 188,022 | |
| | | | | | | | |
Total deposits | | | 877,339 | | | | 802,652 | |
Borrowed funds ($10,423 in 2010 and $17,804 in 2009 at fair value) | | | 194,917 | | | | 193,101 | |
Accrued interest and other liabilities | | | 8,393 | | | | 7,388 | |
| | | | | | | | |
Total liabilities | | | 1,080,649 | | | | 1,003,141 | |
| | | | | | | | |
Shareholders’ equity | | | | | | | | |
Common stock — no par value 15,000,000 shares authorized; issued and outstanding — 7,550,074 (including 32,686 shares to be issued) in 2010 and 7,535,193 (including 30,626 shares to be issued) in 2009 | | | 133,592 | | | | 133,443 | |
Shares to be issued for deferred compensation obligations | | | 4,682 | | | | 4,507 | |
Retained earnings | | | 8,596 | | | | 4,972 | |
Accumulated other comprehensive loss | | | (1,709 | ) | | | (2,119 | ) |
| | | | | | | | |
Total shareholders’ equity | | | 145,161 | | | | 140,803 | |
| | | | | | | | |
Total liabilities and shareholders’ equity | | $ | 1,225,810 | | | $ | 1,143,944 | |
| | | | | | | | |
The accompanying notes are an integral part of these consolidated financial statements.
25
CONSOLIDATED STATEMENTS OF INCOMECHANGES IN SHAREHOLDERS’ EQUITY
| | | | | | | | | | | | |
| | Year Ended December 31 | |
| | 2009 | | | 2008 | | | 2007 | |
| | (Dollars in thousands
| |
| | except per share data) | |
|
Interest income | | | | | | | | | | | | |
Loans, including fees | | $ | 47,706 | | | $ | 49,674 | | | $ | 43,808 | |
Investment securities | | | | | | | | | | | | |
Taxable | | | 4,712 | | | | 5,433 | | | | 3,751 | |
Nontaxable | | | 4,623 | | | | 4,642 | | | | 3,657 | |
Trading account securities | | | 687 | | | | 1,093 | | | | 2,097 | |
Federal funds sold and other | | | 377 | | | | 543 | | | | 659 | |
| | | | | | | | | | | | |
Total interest income | | | 58,105 | | | | 61,385 | | | | 53,972 | |
Interest expense | | | | | | | | | | | | |
Deposits | | | 13,588 | | | | 19,873 | | | | 22,605 | |
Borrowings | | | 6,251 | | | | 5,733 | | | | 3,354 | |
| | | | | | | | | | | | |
Total interest expense | | | 19,839 | | | | 25,606 | | | | 25,959 | |
| | | | | | | | | | | | |
Net interest income | | | 38,266 | | | | 35,779 | | | | 28,013 | |
Provision for loan losses | | | 6,093 | | | | 9,500 | | | | 1,211 | |
| | | | | | | | | | | | |
Net interest income after provision for loan losses | | | 32,173 | | | | 26,279 | | | | 26,802 | |
Noninterest income | | | | | | | | | | | | |
Service charges and fees | | | 6,913 | | | | 6,370 | | | | 5,894 | |
Gain on sale of mortgage loans | | | 886 | | | | 249 | | | | 209 | |
Net gain on trading securities | | | 80 | | | | 245 | | | | 460 | |
Net gain (loss) on borrowings measured at fair value | | | 289 | | | | (641 | ) | | | (66 | ) |
Gain (loss) on sale of investment securities | | | 648 | | | | 24 | | | | (19 | ) |
Title insurance revenue (Note 2) | | | — | | | | 234 | | | | 2,192 | |
Other | | | 1,340 | | | | 1,321 | | | | 1,292 | |
| | | | | | | | | | | | |
Total noninterest income | | | 10,156 | | | | 7,802 | | | | 9,962 | |
Noninterest expenses | | | | | | | | | | | | |
Compensation and benefits | | | 18,258 | | | | 16,992 | | | | 15,618 | |
Occupancy | | | 2,170 | | | | 2,035 | | | | 1,766 | |
Furniture and equipment | | | 4,146 | | | | 3,849 | | | | 3,297 | |
FDIC insurance premiums | | | 1,730 | | | | 313 | | | | 95 | |
Other | | | 7,379 | | | | 7,515 | | | | 6,453 | |
| | | | | | | | | | | | |
Total noninterest expenses | | | 33,683 | | | | 30,704 | | | | 27,229 | |
Income before federal income tax expense (benefit) | | | 8,646 | | | | 3,377 | | | | 9,535 | |
Federal income tax expense (benefit) | | | 846 | | | | (724 | ) | | | 1,605 | |
| | | | | | | | | | | | |
Net income | | $ | 7,800 | | | $ | 4,101 | | | $ | 7,930 | |
| | | | | | | | | | | | |
Earnings per share | | | | | | | | | | | | |
Basic | | $ | 1.04 | | | $ | 0.55 | | | $ | 1.14 | |
| | | | | | | | | | | | |
Diluted | | $ | 1.01 | | | $ | 0.53 | | | $ | 1.11 | |
| | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | Shares to be
| | | | | | | | | | |
| | | | | | | | Issued for
| | | | | | | | | | |
| | Common Stock
| | | | | | Deferred
| | | | | | Accumulated Other
| | | | |
| | Shares
| | | Common
| | | Compensation
| | | Retained
| | | Comprehensive
| | | | |
| | Outstanding | | | Stock | | | Obligations | | | Earnings | | | Loss | | | Totals | |
| | (Dollars in thousands except per share data) | |
|
Balance, January 1, 2008 | | | 6,364,120 | | | $ | 112,547 | | | $ | 3,772 | | | $ | 7,027 | | | $ | (266 | ) | | $ | 123,080 | |
Cumulative effect to apply ASC Topic 715, net of tax | | | — | | | | — | | | | — | | | | (1,571 | ) | | | — | | | | (1,571 | ) |
Comprehensive loss | | | — | | | | — | | | | — | | | | 4,101 | | | | (5,303 | ) | | | (1,202 | ) |
Common stock dividends (10)% | | | 687,599 | | | | 30,256 | | | | — | | | | (30,256 | ) | | | — | | | | — | |
Regulatory capital transfer | | | — | | | | (28,000 | ) | | | — | | | | 28,000 | | | | — | | | | — | |
Bank acquisition | | | 514,809 | | | | 22,652 | | | | — | | | | — | | | | — | | | | 22,652 | |
Issuance of common stock | | | 73,660 | | | | 2,476 | | | | — | | | | — | | | | — | | | | 2,476 | |
Common stock issued for deferred compensation obligations | | | 27,004 | | | | 360 | | | | (360 | ) | | | — | | | | — | | | | — | |
Share-based payment awards under equity compensation plan | | | — | | | | — | | | | 603 | | | | — | | | | — | | | | 603 | |
Common stock purchased for deferred compensation obligations | | | — | | | | (249 | ) | | | — | | | | | | | | | | | | (249 | ) |
Common stock repurchased pursuant to publicly announced repurchase plan | | | (148,336 | ) | | | (6,440 | ) | | | — | | | | — | | | | — | | | | (6,440 | ) |
Cash dividends ($0.65 per share) | | | — | | | | — | | | | — | | | | (4,873 | ) | | | — | | | | (4,873 | ) |
| | | | | | | | | | | | | | | | | | | | | | | | |
Balance, December 31, 2008 | | | 7,518,856 | | | | 133,602 | | | | 4,015 | | | | 2,428 | | | | (5,569 | ) | | | 134,476 | |
Comprehensive income | | | — | | | | — | | | | — | | | | 7,800 | | | | 3,450 | | | | 11,250 | |
Issuance of common stock | | | 126,059 | | | | 2,664 | | | | — | | | | — | | | | — | | | | 2,664 | |
Common stock issued for deferred compensation obligations | | | 12,890 | | | | 331 | | | | (185 | ) | | | — | | | | — | | | | 146 | |
Share-based payment awards under equity compensation plan | | | — | | | | — | | | | 677 | | | | — | | | | — | | | | 677 | |
Common stock purchased for deferred compensation obligations | | | — | | | | (767 | ) | | | — | | | | | | | | | | | | (767 | ) |
Common stock repurchased pursuant to publicly announced repurchase plan | | | (122,612 | ) | | | (2,387 | ) | | | | | | | — | | | | — | | | | (2,387 | ) |
Cash dividends ($0.70 per share) | | | — | | | | — | | | | — | | | | (5,256 | ) | | | — | | | | (5,256 | ) |
| | | | | | | | | | | | | | | | | | | | | | | | |
Balance, December 31, 2009 | | | 7,535,193 | | | | 133,443 | | | | 4,507 | | | | 4,972 | | | | (2,119 | ) | | | 140,803 | |
Comprehensive income | | | — | | | | — | | | | — | | | | 9,045 | | | | 410 | | | | 9,455 | |
Issuance of common stock | | | 124,953 | | | | 2,683 | | | | — | | | | — | | | | — | | | | 2,683 | |
Common stock issued for deferred compensation obligations | | | 28,898 | | | | 537 | | | | (475 | ) | | | — | | | | — | | | | 62 | |
Share-based payment awards under equity compensation plan | | | — | | | | — | | | | 650 | | | | — | | | | — | | | | 650 | |
Common stock purchased for deferred compensation obligations | | | — | | | | (514 | ) | | | — | | | | — | | | | — | | | | (514 | ) |
Common stock repurchased pursuant to publicly announced repurchase plan | | | (138,970 | ) | | | (2,557 | ) | | | | | | | — | | | | — | | | | (2,557 | ) |
Cash dividends ($0.72 per share) | | | — | | | | — | | | | — | | | | (5,421 | ) | | | — | | | | (5,421 | ) |
| | | | | | | | | | | | | | | | | | | | | | | | |
Balance, December 31, 2010 | | | 7,550,074 | | | $ | 133,592 | | | $ | 4,682 | | | $ | 8,596 | | | $ | (1,709 | ) | | $ | 145,161 | |
| | | | | | | | | | | | | | | | | | | | | | | | |
The accompanying notes are an integral part of these consolidated financial statements.
26
CONSOLIDATED STATEMENTS OF INCOME
| | | | | | | | | | | | |
| | Year Ended December 31 | |
| | 2010 | | | 2009 | | | 2008 | |
| | (Dollars in thousands
| |
| | except per share data) | |
|
Interest income | | | | | | | | | | | | |
Loans, including fees | | $ | 46,794 | | | $ | 47,706 | | | $ | 49,674 | |
Investment securities | | | | | | | | | | | | |
Taxable | | | 5,271 | | | | 4,712 | | | | 5,433 | |
Nontaxable | | | 4,367 | | | | 4,623 | | | | 4,642 | |
Trading account securities | | | 306 | | | | 687 | | | | 1,093 | |
Federal funds sold and other | | | 479 | | | | 377 | | | | 543 | |
| | | | | | | | | | | | |
Total interest income | | | 57,217 | | | | 58,105 | | | | 61,385 | |
Interest expense | | | | | | | | | | | | |
Deposits | | | 11,530 | | | | 13,588 | | | | 19,873 | |
Borrowings | | | 5,674 | | | | 6,251 | | | | 5,733 | |
| | | | | | | | | | | | |
Total interest expense | | | 17,204 | | | | 19,839 | | | | 25,606 | |
| | | | | | | | | | | | |
Net interest income | | | 40,013 | | | | 38,266 | | | | 35,779 | |
Provision for loan losses | | | 4,857 | | | | 6,093 | | | | 9,500 | |
| | | | | | | | | | | | |
Net interest income after provision for loan losses | | | 35,156 | | | | 32,173 | | | | 26,279 | |
Noninterest income | | | | | | | | | | | | |
Service charges and fees | | | 6,480 | | | | 6,913 | | | | 6,370 | |
Gain on sale of mortgage loans | | | 610 | | | | 886 | | | | 249 | |
Net (loss) gain on trading securities | | | (94 | ) | | | 80 | | | | 245 | |
Net gain (loss) on borrowings measured at fair value | | | 227 | | | | 289 | | | | (641 | ) |
Gain on sale ofavailable-for-sale investment securities | | | 348 | | | | 648 | | | | 24 | |
Other | | | 1,729 | | | | 1,340 | | | | 1,555 | |
| | | | | | | | | | | | |
Total noninterest income | | | 9,300 | | | | 10,156 | | | | 7,802 | |
Noninterest expenses | | | | | | | | | | | | |
Compensation and benefits | | | 18,552 | | | | 18,258 | | | | 16,992 | |
Occupancy | | | 2,351 | | | | 2,170 | | | | 2,035 | |
Furniture and equipment | | | 4,344 | | | | 4,146 | | | | 3,849 | |
FDIC insurance premiums | | | 1,254 | | | | 1,730 | | | | 313 | |
Other | | | 7,306 | | | | 7,379 | | | | 7,515 | |
| | | | | | | | | | | | |
Total noninterest expenses | | | 33,807 | | | | 33,683 | | | | 30,704 | |
| | | | | | | | | | | | |
Income before federal income tax expense (benefit) | | | 10,649 | | | | 8,646 | | | | 3,377 | |
Federal income tax expense (benefit) | | | 1,604 | | | | 846 | | | | (724 | ) |
| | | | | | | | | | | | |
Net income | | $ | 9,045 | | | $ | 7,800 | | | $ | 4,101 | |
| | | | | | | | | | | | |
Earnings per share | | | | | | | | | | | | |
Basic | | $ | 1.20 | | | $ | 1.04 | | | $ | 0.55 | |
| | | | | | | | | | | | |
Diluted | | $ | 1.17 | | | $ | 1.01 | | | $ | 0.53 | |
| | | | | | | | | | | | |
Cash dividends per basic share | | $ | 0.72 | | | $ | 0.70 | | | $ | 0.65 | |
| | | | | | | | | | | | |
The accompanying notes are an integral part of these consolidated financial statements.
27
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
| | | | | | | | | | | | |
| | Year Ended December 31 | |
| | 2009 | | | 2008 | | | 2007 | |
| | (Dollars in thousands) | |
|
Net income | | $ | 7,800 | | | $ | 4,101 | | | $ | 7,930 | |
| | | | | | | | | | | | |
Unrealized holding gains (losses) onavailable-for-sale securities: | | | | | | | | | | | | |
Unrealized gains (losses) arising during the year | | | 3,415 | | | | (3,104 | ) | | | 614 | |
Reclassification adjustment for net realized (gains) losses included in net income | | | (648 | ) | | | (24 | ) | | | 19 | |
| | | | | | | | | | | | |
Net unrealized gains (losses) | | | 2,767 | | | | (3,128 | ) | | | 633 | |
Tax effect | | | 436 | | | | (643 | ) | | | (216 | ) |
| | | | | | | | | | | | |
Unrealized gains (losses), net of tax | | | 3,203 | | | | (3,771 | ) | | | 417 | |
| | | | | | | | | | | | |
Reduction (increase) of unrecognized pension cost | | | 374 | | | | (2,320 | ) | | | 2,890 | |
Tax effect | | | (127 | ) | | | 788 | | | | (983 | ) |
| | | | | | | | | | | | |
Net unrealized gain (loss) on defined benefit pension plan | | | 247 | | | | (1,532 | ) | | | 1,907 | |
| | | | | | | | | | | | |
Other comprehensive income (loss), net of tax | | | 3,450 | | | | (5,303 | ) | | | 2,324 | |
| | | | | | | | | | | | |
Comprehensive income (loss) | | $ | 11,250 | | | $ | (1,202 | ) | | $ | 10,254 | |
| | | | | | | | | | | | |
27
CONSOLIDATED STATEMENTS OF CASH FLOWS
| | | | | | | | | | | | |
| | Year Ended December 31 | |
| | 2009 | | | 2008 | | | 2007 | |
| | (Dollars in thousands) | |
|
Operating activities | | | | | | | | | | | | |
Net income | | $ | 7,800 | | | $ | 4,101 | | | $ | 7,930 | |
Reconciliation of net income to net cash provided by operations: | | | | | | | | | | | | |
Provision for loan losses | | | 6,093 | | | | 9,500 | | | | 1,211 | |
Provision for foreclosed asset losses | | | 157 | | | | 231 | | | | 109 | |
Depreciation | | | 2,349 | | | | 2,171 | | | | 1,960 | |
Amortization and impairment of mortgage servicing rights | | | 683 | | | | 346 | | | | 201 | |
Amortization of acquisition intangibles | | | 375 | | | | 415 | | | | 278 | |
Net amortization ofavailable-for-sale investment securities | | | 741 | | | | 356 | | | | 216 | |
Realized (gain) loss on sale ofavailable-for-sale investment securities | | | (648 | ) | | | (24 | ) | | | 19 | |
Unrealized gains on trading securities | | | (80 | ) | | | (245 | ) | | | (460 | ) |
Unrealized (gains) losses on borrowings measured at fair value | | | (289 | ) | | | 641 | | | | 66 | |
Increase in cash value of corporate owned life insurance policies | | | (641 | ) | | | (616 | ) | | | (432 | ) |
Share-based payment awards under equity compensation plan | | | 677 | | | | 603 | | | | 758 | |
Deferred income tax (benefit) expense | | | (641 | ) | | | (1,812 | ) | | | 301 | |
Net changes in operating assets and liabilities which provided (used) cash, net in 2008 of bank acquisition and joint venture formation: | | | | | | | | | | | | |
Trading securities | | | 8,292 | | | | 8,513 | | | | 53,235 | |
Mortgage loans available for sale | | | (1,383 | ) | | | 1,316 | | | | 520 | |
Accrued interest receivable | | | 490 | | | | 226 | | | | (183 | ) |
Other assets | | | (6,331 | ) | | | (3,565 | ) | | | (4,667 | ) |
Escrow funds payable | | | — | | | | (46 | ) | | | (504 | ) |
Accrued interest and other liabilities | | | 581 | | | | (1,450 | ) | | | (171 | ) |
| | | | | | | | | | | | |
Net cash provided by operating activities | | | 18,225 | | | | 20,661 | | | | 60,387 | |
Investing activities | | | | | | | | | | | | |
Net change in interest-bearing balances held in other financial institutions | | | (6,581 | ) | | | 882 | | | | 1,535 | |
Activity inavailable-for-sale securities | | | | | | | | | | | | |
Maturities, calls, and sales | | | 130,580 | | | | 66,387 | | | | 54,997 | |
Purchases | | | (140,517 | ) | | | (96,168 | ) | | | (132,115 | ) |
Loan principal collections (originations), net | | | 4,437 | | | | (42,700 | ) | | | (24,455 | ) |
Proceeds from sales of foreclosed assets | | | 4,145 | | | | 2,310 | | | | 662 | |
Purchases of premises and equipment | | | (3,035 | ) | | | (2,990 | ) | | | (3,722 | ) |
Bank acquisition, net of cash acquired | | | — | | | | (9,465 | ) | | | — | |
Cash contributed to title company joint venture formation | | | — | | | | (4,542 | ) | | | — | |
Redemption (purchase) of corporate owned life insurance policies | | | 11 | | | | (1,560 | ) | | | — | |
| | | | | | | | | | | | |
Net cash used in investing activities | | | (10,960 | ) | | | (87,846 | ) | | | (103,098 | ) |
Financing activities | | | | | | | | | | | | |
Net increase (decrease) in deposits | | | 27,022 | | | | (47,892 | ) | | | 7,633 | |
Net (decrease) increase in other borrowed funds | | | (28,960 | ) | | | 123,016 | | | | 34,365 | |
Cash dividends paid on common stock | | | (5,256 | ) | | | (4,873 | ) | | | (4,304 | ) |
Proceeds from issuance of common stock | | | 2,479 | | | | 2,476 | | | | 2,657 | |
Common stock repurchased | | | (2,056 | ) | | | (6,440 | ) | | | (1,881 | ) |
Common stock purchased for deferred compensation obligations | | | (767 | ) | | | (249 | ) | | | — | |
| | | | | | | | | | | | |
Net cash (used in) provided by financing activities | | | (7,538 | ) | | | 66,038 | | | | 38,470 | |
| | | | | | | | | | | | |
Decrease in cash and cash equivalents | | | (273 | ) | | | (1,147 | ) | | | (4,241 | ) |
Cash and cash equivalents at beginning of year | | | 22,979 | | | | 24,126 | | | | 28,367 | |
| | | | | | | | | | | | |
Cash and cash equivalents at end of year | | $ | 22,706 | | | $ | 22,979 | | | $ | 24,126 | |
| | | | | | | | | | | | |
Supplemental cash flows information: | | | | | | | | | | | | |
Interest paid | | $ | 20,030 | | | $ | 25,556 | | | $ | 25,872 | |
Federal income taxes paid | | | 2,237 | | | | 1,155 | | | | 1,776 | |
Transfer of loans to foreclosed assets | | | 2,536 | | | | 3,398 | | | | 1,295 | |
| | | | | | | | | | | | |
| | Year Ended December 31 | |
| | 2010 | | | 2009 | | | 2008 | |
| | (Dollars in thousands) | |
|
Net income | | $ | 9,045 | | | $ | 7,800 | | | $ | 4,101 | |
| | | | | | | | | | | | |
Unrealized holding gains (losses) onavailable-for-sale securities: | | | | | | | | | | | | |
Unrealized gains (losses) arising during the year | | | 1,156 | | | | 3,415 | | | | (3,104 | ) |
Reclassification adjustment for net realized gains | | | | | | | | | | | | |
included in net income | | | (348 | ) | | | (648 | ) | | | (24 | ) |
| | | | | | | | | | | | |
Net unrealized gains (losses) | | | 808 | | | | 2,767 | | | | (3,128 | ) |
Tax effect | | | (351 | ) | | | 436 | | | | (643 | ) |
| | | | | | | | | | | | |
Unrealized gains (losses), net of tax | | | 457 | | | | 3,203 | | | | (3,771 | ) |
| | | | | | | | | | | | |
(Increase) reduction of unrecognized pension costs | | | (72 | ) | | | 374 | | | | (2,320 | ) |
Tax effect | | | 25 | | | | (127 | ) | | | 788 | |
| | | | | | | | | | | | |
Net unrealized (loss) gain on defined benefit pension plan | | | (47 | ) | | | 247 | | | | (1,532 | ) |
| | | | | | | | | | | | |
Other comprehensive income (loss), net of tax | | | 410 | | | | 3,450 | | | | (5,303 | ) |
| | | | | | | | | | | | |
Comprehensive income (loss) | | $ | 9,455 | | | $ | 11,250 | | | $ | (1,202 | ) |
| | | | | | | | | | | | |
The accompanying notes are an integral part of these consolidated financial statements.
28
CONSOLIDATED STATEMENTS OF CASH FLOWS
| | | | | | | | | | | | |
| | Year Ended December 31 | |
| | 2010 | | | 2009 | | | 2008 | |
| | (Dollars in thousands)
| |
| | (Unaudited) | |
|
Operating activities | | | | | | | | | | | | |
Net income | | $ | 9,045 | | | $ | 7,800 | | | $ | 4,101 | |
Reconciliation of net income to net cash provided by operations: | | | | | | | | | | | | |
Provision for loan losses | | | 4,857 | | | | 6,093 | | | | 9,500 | |
Impairment of foreclosed assets | | | 180 | | | | 157 | | | | 231 | |
Depreciation | | | 2,522 | | | | 2,349 | | | | 2,171 | |
Amortization and impairment of originated mortgage servicing rights | | | 543 | | | | 683 | | | | 346 | |
Amortization of acquisition intangibles | | | 338 | | | | 375 | | | | 415 | |
Net amortization ofavailable-for-sale investment securities | | | 1,153 | | | | 741 | | | | 356 | |
Realized gain on sale ofavailable-for-sale investment securities | | | (348 | ) | | | (648 | ) | | | (24 | ) |
Net unrealized losses (gains) on trading securities | | | 94 | | | | (80 | ) | | | (245 | ) |
Net gain on sale of mortgage loans | | | (610 | ) | | | (886 | ) | | | (249 | ) |
Net unrealized (gains) losses on borrowings measured at fair value | | | (227 | ) | | | (289 | ) | | | 641 | |
Increase in cash value of corporate owned life insurance | | | (642 | ) | | | (641 | ) | | | (616 | ) |
Realized gain on redemption of corporate owned life insurance | | | (21 | ) | | | — | | | | — | |
Share-based payment awards under equity compensation plan | | | 650 | | | | 677 | | | | 603 | |
Deferred income tax expense (benefit) | | | 179 | | | | (641 | ) | | | (1,812 | ) |
Origination of loans held for sale | | | (72,106 | ) | | | (153,388 | ) | | | (33,353 | ) |
Proceeds from loan sales | | | 73,815 | | | | 152,891 | | | | 34,918 | |
Net changes in operating assets and liabilities which provided (used) cash: | | | | | | | | | | | | |
Trading securities | | | 7,632 | | | | 8,292 | | | | 8,513 | |
Accrued interest receivable | | | 376 | | | | 490 | | | | 226 | |
Other assets | | | (1,914 | ) | | | (6,331 | ) | | | (3,565 | ) |
Accrued interest and other liabilities | | | 1,005 | | | | 581 | | | | (1,496 | ) |
| | | | | | | | | | | | |
Net cash provided by operating activities | | | 26,521 | | | | 18,225 | | | | 20,661 | |
| | | | | | | | | | | | |
Investing activities | | | | | | | | | | | | |
Net change in certificates of deposit held in other financial institutions | | | (10,428 | ) | | | (4,805 | ) | | | 882 | |
Activity inavailable-for-sale securities | | | | | | | | | | | | |
Maturities, calls, and sales | | | 85,273 | | | | 130,580 | | | | 66,387 | |
Purchases | | | (156,928 | ) | | | (140,517 | ) | | | (96,168 | ) |
Loan principal (originations) collections, net | | | (21,319 | ) | | | 4,437 | | | | (42,700 | ) |
Proceeds from sales of foreclosed assets | | | 2,778 | | | | 4,145 | | | | 2,310 | |
Purchases of premises and equipment | | | (3,232 | ) | | | (3,035 | ) | | | (2,990 | ) |
Bank acquisition, net of cash acquired | | | — | | | | — | | | | (9,465 | ) |
Cash contributed to title company joint venture formation | | | — | | | | — | | | | (4,542 | ) |
Purchases of corporate owned life insurance | | | (175 | ) | | | — | | | | (1,560 | ) |
Proceeds from the redemption of corporate owned life insurance | | | 154 | | | | 11 | | | | — | |
| | | | | | | | | | | | |
Net cash used in investing activities | | | (103,877 | ) | | | (9,184 | ) | | | (87,846 | ) |
| | | | | | | | | | | | |
Financing activities | | | | | | | | | | | | |
Acceptances and withdrawals of deposits, net | | | 74,687 | | | | 27,022 | | | | (47,892 | ) |
Advances (repayments) of borrowed funds | | | 2,043 | | | | (28,960 | ) | | | 123,016 | |
Cash dividends paid on common stock | | | (5,421 | ) | | | (5,256 | ) | | | (4,873 | ) |
Proceeds from issuance of common stock | | | 2,208 | | | | 2,479 | | | | 2,476 | |
Common stock repurchased | | | (2,020 | ) | | | (2,056 | ) | | | (6,440 | ) |
Common stock purchased for deferred compensation obligations | | | (514 | ) | | | (767 | ) | | | (249 | ) |
| | | | | | | | | | | | |
Net cash provided by (used in) financing activities | | | 70,983 | | | | (7,538 | ) | | | 66,038 | |
| | | | | | | | | | | | |
(Decrease) increase in cash and cash equivalents | | | (6,373 | ) | | | 1,503 | | | | (1,147 | ) |
Cash and cash equivalents at beginning of year | | | 24,482 | | | | 22,979 | | | | 24,126 | |
| | | | | | | | | | | | |
Cash and cash equivalents at end of year | | $ | 18,109 | | | $ | 24,482 | | | $ | 22,979 | |
| | | | | | | | | | | | |
Supplemental cash flows information: | | | | | | | | | | | | |
Interest paid | | $ | 17,344 | | | $ | 20,030 | | | $ | 25,556 | |
Federal income taxes paid | | | 1,261 | | | | 2,237 | | | | 1,155 | |
Supplemental noncash information: | | | | | | | | | | | | |
Transfers of loans to foreclosed assets | | $ | 3,868 | | | $ | 2,536 | | | $ | 3,398 | |
Common stock issued for deferred compenstion obligations | | | 475 | | | | 185 | | | | 360 | |
Common stock repurchased from an associated grantor trust (Rabbi Trust) | | | (537 | ) | | | (331 | ) | | | (360 | ) |
The accompanying notes are an integral part of these consolidated financial statements.
29
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands except per share amounts)
| |
NoteNOTE 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 (the “Corporation”), a financial services holding company, and its wholly owned subsidiaries, Isabella Bank (the “Bank”), Financial Group Information Services, and IB&T Employee Leasing, LLC. All intercompany balances and accounts have been eliminated in consolidation.
Nature of Operations:
Isabella Bank Corporation is a financial services holding company offering a wide array of financial products and services in mid-Michigan.several mid-Michigan counties. Its banking subsidiary, Isabella Bank, offers banking services through 25 locations, 24 locations,24-hourhour banking services locally and nationally through shared automatic teller machines, 24 hour online banking, and direct deposits to businesses, institutions, and individuals. Lending services offered include commercial loans, agricultural loans, residential real estate loans, consumer loans, student loans, and credit cards. Deposit services include interest and noninterest bearing checking accounts, savings accounts, money market accounts, and certificates of deposit. Other related financial products include trust and investment services, safe deposit box rentals, and credit life insurance. Active competition, principally from other commercial banks, savings banks and credit unions, exists in all of the Bank’sCorporation’s principal markets. The Corporation’s results of operations can be significantly affected by changes in interest rates or changes in the local economic environment.
On January 1, 2008, the Corporation acquired 100 percent of Greenville Community Financial Corporation (GCFC). As a result of this acquisition, Greenville Community Bank, a wholly-owned subsidiary of GCFC, merged with and into the Bank (see Note 2 — “Business Combinations and Joint Venture Formation”).
On March 1, 2008, IBT Title and Insurance Agency, Inc. (IBT Title), a wholly owned subsidiary of Isabella Bank Corporation, merged its assets and liabilities with Corporate Title Agency, LLC (“Corporate Title”), a third-party title business based in Traverse City, Michigan, to form CT/IBT Title Agency, LLC. As a result of this transaction, the Corporation became a 50 percent joint venture owner in CT/IBT Title Agency, LLC. The joint venture is accounted for as an equity investment. The purpose of this joint venture was to help IBT Title and Insurance Agency, Inc. expand its service area and to take advantage of economies of scale (see Note 2 — “Business Combinations and Joint Venture Formation”).
Financial Group Information Services provides information technology services to Isabella Bank Corporation and its subsidiaries.
IB&T Employee Leasing provides payroll services, benefit administration, and other human resource services to Isabella Bank Corporation and its subsidiaries.
Use of Estimates:
In preparing consolidated financial statements in conformity with accounting principles generally accepted in the United States of America, management is required to make estimates and assumptions that affect the reported amounts of assets and liabilities as of the date of the consolidated balance sheet and reported amounts of revenues and expenses during the reporting year. Actual results could differ from those estimates.
Material estimates that are particularly susceptible to significant change in the near term relate to the determination of the allowance for loan losses, the fair value of certainavailable-for-saleinvestment securities, the valuation of real estate acquired in connection with foreclosures or in satisfaction of loans, valuation of goodwill and other intangible assets, and determinations of assumptions in accounting for the defined benefit pension plan, and other post-retirement liabilities.plan. In connection with the determination of the allowance for loan losses and the carrying value of foreclosed real estate, management obtains independent appraisals for significant properties.
29
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
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. The Corporation may choose to measure eligible items at fair value at specified election dates. Unrealized gains and losses on items for which the fair value measurement option has been elected are reported in earnings at each subsequent reporting date. The fair value option (i) may be applied instrument by instrument, with certain exceptions, allowing the Corporation to record identical financial assets and liabilities at fair value or by another
30
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
measurement basis permitted under generally accepted accounting principles, (ii) is irrevocable (unless a new election date occurs) and (iii) is applied only to entire instruments and not to portions of instruments.
For assets and liabilities recorded at fair value, it is the Corporation’s policy to maximize the use of observable inputs and minimize the use of unobservable inputs when developing fair value measurements for those financial instruments for which there is an active market. In cases where the market for a financial asset or liability is not active, the Corporation includes appropriate risk adjustments that market participants would make for nonperformance and liquidity risks when developing fair value measurements. Fair value measurements for assets and liabilities for which limited or no observable market data exists are accordingly based primarily upon estimates, are often calculated based on the economic and competitive environment, the characteristics of the asset or liability and other factors. Therefore, the results cannot be determined with precision and may not be realized in an actual sale or immediate settlement of the asset or liability. Additionally, there may be inherent weaknesses in any calculation technique, and changes in the underlying assumptions used, including discount rates and estimates of future cash flows, could significantly affect the results of current or future values.
The Corporation utilizes fair value measurements to record fair value adjustments to certain assets and liabilities and to determine fair value disclosures. Investment securitiesavailable-for-sale, trading securities, and certain liabilities are recorded at fair value on a recurring basis. Additionally, from time to time, the Corporation may be required to record other assets at fair value on a nonrecurring basis, such as mortgage loansavailable-for-sale, impaired loans, foreclosed assets, originated mortgage servicing rights, 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.
Fair Value Hierarchy
Under fair value measurement and disclosure authoritative guidance, the Corporation groups 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.
For a further discussion of Fair Value Measurement,fair value considerations, refer to Notes 20 and 2119 to the consolidated financial statements.
Significant Group Concentrations of Credit Risk:
Most of the Corporation’s activities conducted are with customers located within the central Michigan area. A significant amount of its 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, all of which have original maturity dates within ninety days.accounts. Generally, federal funds sold are for a one day
31
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
period. The Corporation maintains deposit accounts in various financial institutions which generally exceed federally insured limits or are not insured. Management does not believe the Company is exposed to any significant interest, credit or other financial risk as a result of these deposits.
Interest Bearing BalancesCertificates of Deposit Held in Other Financial Institutions:
Interest bearing balancesCertificates of deposits held in other financial institutions consist primarily of interest bearing certificates of deposit that mature within 3 years and are carried at cost.
Trading Securities:
The Corporation engages in trading activities of its own accounts. Securities that are held principally for resale in the near term are recorded in the trading assets account at fair value with changes in fair value recorded in noninterest income. Interest and dividends areincome is included in net interest income.
30
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Available-For-Sale Investment Securities:
All purchases of investment securities are generally classified asavailable-for-sale. However, classification of investment securities as either held to maturity or trading may be elected by management of the Corporation. Securities classified as“available-for-sale”,available-for-sale other than auction rate money market preferred securities and preferred stock, 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. Auction rate money market preferred securities and preferred stocks are considered equity securities for federal income tax purposes, as such, no estimated federal income tax impact is expected or recorded. Auction rate money market preferred securities and preferred stock are recorded at fair value, with unrealized gains and losses, considered notother-than-temporary, excluded from earnings and reported in other comprehensive income. Purchase premiums and discounts are recognized in interest income using the interest method over the terms of the securities. Realized gains and losses on the sale ofavailable-for-sale investment securities are determined using the specific identification method.
Investment securities are reviewed quarterly for possibleother-than-temporary impairment (OTTI). In determining whether an other than temporaryother-than-temporary impairment exists for debt securities, management must assert that: (a) it does not have the intent to sell the security; and (b) it is more likely than not it will not have to sell the security before recovery of its cost basis. Declines inIf these conditions are not met, the Corporation must recognize another-than-temporary impairment charge through earnings for the difference between the debt security’s amortized cost basis and its fair value, ofheld-to-maturityandavailable-for-sale such amount is included in noninterest income. For debt securities below theirthat do not meet the above criteria, and the Corporation does not expect to recover the security’s amortized cost that are deemed to be other than temporary are reflected in earnings as realized losses tobasis, the extentsecurity is consideredother-than-temporarily impaired. For these debt securities, the Corporation separates the total impairment isinto 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 losses.loss for a debt security, the Corporation calculates the recovery value by performing a discounted cash flow analysis based on the current cash flows and future cash flows management expects to recover. The amount of the totalother-than-temporary impairment related to the credit risk is recognized in earnings and is included in noninterest income. The amount of the totalother-than-temporaryimpairment related to other risk factors is recognized inas a component of other comprehensive income. For debt securities that have recognized another-than-temporary impairment through earnings, if through subsequent evaluation there is a significant increase in the cash flow expected, the difference between the amortized cost basis and the cash flows expected to be collected is accreted as interest income.
Available-for-sale equity securities are reviewed forother-than-temporary impairment at each reporting date. This evaluation considers a number of factors including, but not limited to, the length of time and extent to which the fair value has been less than cost, the financial condition and near term prospects of the issuer, and management’s ability and intent to hold the securities until fair value recovers. If it is determined that management does not have the ability and intent to hold the securities until recovery or that there are conditions that indicate that a security may
32
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
not recover in value then the difference between the fair value and the cost of the security is recognized in earnings and is included in noninterest income. No such losses were recognized in 2010, 2009, or 2008.
Loans:
Loans that management has 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,charge-offs, the allowance for loans losses, 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 constant yield method.
The accrual of interest on mortgage and commercial 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. Credit card loans and other personal loans are typically charged off no later than 180 days past due. Past due status is based on contractual terms of the loan. In all cases, loans are placed on nonaccrual or charged off at an earlier date if collection of principal or interest is considered doubtful.
For loans that are placed on non-accrual status or charged-off,charged off, all interest accrued in the current calendar year, but not collected, is reversed against interest income while interest accrued in prior calendar years, but not collected is charged against the allowance for loan losses. The interest on these loans is accounted for on the cash-basis, or cost-recovery method, until qualifying for return to accrual status. Loans are returned to accrual status when all principal and interest amounts contractually due are brought current and future payments are reasonably assured. For impaired loans not classified as nonaccrual, interest income continues to be accrued over the term of the loan based on the principal amount outstanding.
Allowance for Loan Losses:
The allowance for loan losses is established as losses are estimated to have occurred through a provision for loan losses charged to earnings. Loan losses are charged against the allowance when management believes the uncollectibility of the loan balance is confirmed. Subsequent recoveries, if any, are credited to the allowance.
The allowance for loan losses is evaluated on a regular basis by management and is based upon management’s periodic review of the collectibility 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 allowance consists of specific, general and unallocated components. The specific component relates to loans that are classified as either doubtful, substandard or special mention.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
31
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
coversnon-classified non classified loans and is based on historical loss experience. An unallocated component is maintained to cover uncertainties that management believes affect its 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.
ALoans may be classified as impaired if they meet one or more of the following criteria:
1. There has been a chargeoff of its principal balance;
2. The loan has been classified as a troubled debt restructuring; or
3. The loan is considered impaired when, based on current information and events, it is probable that the Bank will be unable to collect the scheduled payments of principal or interest when due according to the contractual terms of the loan agreement. Factors considered by management in determining impairment include payment status, collateral value, and the probability of collecting scheduled principal and interest payments when due. Loans that experience insignificant payment delays and payment shortfalls generally are not classified as impaired. Management determines the significance of payment delays and payment shortfalls on anonaccrual status.
33
case-by-caseNOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued) basis, taking into consideration all of the circumstance surrounding the loan and the borrower, including the length of the delay, the reason for the delay, the borrower’s prior payment record, and the amount of the shortfall in relation to the principal and interest owed.
Impairment is measured on a loan by loan basis for commercial and commercial real estate loans by either the present value of expected future cash flows discounted at the loan’s effective interest rate, the loan’s obtainable market price, or the fair value of the collateral, less cost to sell, if the loan is collateral dependent.
Large groups of smaller balance homogeneous loans are collectively evaluated for impairment. Accordingly, the Corporation does not separately identify individual consumer and residential loans for impairment allocations and related disclosures.
Loans Held for Sale:
Mortgage loans originated and intended for sale in 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, are recognized through a valuation allowance by charges toof which the provision is accounted for in other noninterest expenses in the consolidated statements of income.
Mortgage loans held for sale are sold with the mortgage servicing rights retained by the Bank.Corporation. 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 sold mortgage loans and mortgage loans held for sale, as described above, and participation loans are accounted for as sales when control over the assets has been surrendered. Control over transferred assets is determined to be surrendered when 1) the assets have been legally isolated from the Bank,Corporation, 2) the transferee obtains the right (free of conditions that constrain it from taking advantage of the right) to pledge or exchange the transferred assets and 3) the BankCorporation does not maintain effective control over the transferred assets through an agreement to repurchase them before their maturity. Other than servicing, as disclosed in Note 5, the Corporation has no substantive continuing involvement related to these loans. Servicing fee earned on such loans was $760, $724, and $627 for 2010, 2009, and 2008, respectively, and is included in other noninterest income.
Servicing:
Servicing assets are recognized as separate assets when rights are acquired through purchase or through sale of financial assets. The Corporation has no purchased servicing rights. For sales of mortgage loans, a portion of the cost of originating the loan is allocated to the servicing right based on relative fair value. Fair value is based on market prices for comparable mortgage servicing contracts, when available, or alternatively, is based on a valuation model that calculates the present value of estimated future net servicing income. The valuation model incorporates assumptions that market participants would use in estimating future net servicing income, such as the cost to service, the discount rate, the custodial earnings rate, an inflation rate, ancillary income, prepayment speeds and default rates and losses.
Servicing assets are evaluated for impairment based upon the fair value of the rights as compared to amortized cost. Impairment is determined by stratifying rights into tranches based on predominant risk characteristics, such as interest rate, loan type, and investor type. Impairment is recognized through a valuation allowance for an individual
32
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
tranche, to the extent that fair value is less than the capitalized amount for the tranche. If the Corporation later determines 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 non-interestnoninterest income in proportion to, and over the period of, the estimated future net servicing income of the underlying financial assets.
34
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Servicing fee income is recorded for fees earned for servicing loans for others. The fees are based on a contractual percentage of the outstanding principal; or a fixed amount per loan and are recorded as income when earned. The amortization of mortgage servicing rights is netted against loan servicing fee income, a component of 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. Included in the fair value adjustments of nonintangible net assets acquired from Greenville Community Financial Corporation (GCFC), was a reduction in the allowance for loan losses of $437. The $437 represented the identified impairments in GCFC’s loan portfolio as of December 31, 2007 (see Note 2).
Foreclosed Assets:
Assets acquired through, or in lieu, of loan foreclosure are held for sale and are initially recorded at the lower of the Bank’sCorporation’s carrying amount or fair value less estimated selling costs at the date of transfer, establishing a new cost basis. Any write-downswrite downs based on the asset’s fair value at the date of acquisition are charged to the allowance for loan losses. After foreclosure, property held for sale is carried at the lower of the new cost basis or fair value less costs to sell. Impairment losses on property to be held and used are measured at the amount by which the carrying amount of property exceeds its fair value. Costs relating to holding these assets are expensed as incurred. Valuations are periodically performed by management, and any subsequent write-downs are recorded as a charge to operations, if necessary, to reduce the carrying value of a property to the lower of the Bank’sCorporation’s carrying amount or fair value less costs to sell. Foreclosed assets of $1,157$2,067 and $2,923$1,157 are included in Other Assets on the accompanying consolidated balance sheets at December 31, 2009 and 2008, respectively.
Off-Balance-Sheet Credit Related Financial Instruments:
In the ordinary course of business, the Corporation has 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.sheets.
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 53 to 3040 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. Management annually reviews these assets to determine whether carrying values have been impaired.
Fdic Insurance Premium:
In 2009, the BankCorporation was required to prepay quarterly FDIC risk-based assessments for the fourth quarter of 2009 and each of the quarters in the years ending December 31, 2010, 2011 and 2012. The assessments for 2010 through 2012, which had a carrying balance of $3,586 and $4,737 as of December 31, 2010 and 2009, respectively, have been recorded as a prepaid asset in the
33
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
accompanying consolidated balance sheetsheets in Other Assets, and will be expensed on a ratable basis quarterly through December 31, 2012.
Equity Securities Without Readily Determinable Fair Values:
Included in equity securities without readily determinable fair values are restricted securities, which are carried at cost, and investments in nonconsolidated entities accounted for under the equity method of accounting.
35
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Equity securities without readily determinable fair values consist of the following as of December 31:
| | | | | | | | | | | | | | | | |
| | 2009 | | 2008 | | | 2010 | | 2009 | |
|
Federal Home Loan Bank Stock | | $ | 7,960 | | | $ | 7,460 | | | $ | 7,596 | | | $ | 7,960 | |
Investment in CT/IBT Title Agency, LLC | | | 6,782 | | | | 6,905 | | |
Investment in Corporate Settlement Solutions | | | | 6,793 | | | | 6,782 | |
Federal Reserve Bank Stock | | | 1,879 | | | | 1,879 | | | | 1,879 | | | | 1,879 | |
Investment in Valley Financial Corporation | | | 1,000 | | | | 1,000 | | | | 1,000 | | | | 1,000 | |
Other | | | 300 | | | | 101 | | | | 296 | | | | 300 | |
| | | | | | | | | | |
Total | | $ | 17,921 | | | $ | 17,345 | | | $ | 17,564 | | | $ | 17,921 | |
| | | | | | | | | | |
Stock Compensation Plans:
The Corporation’sAt December 31, 2010, the Isabella Bank Corporation and Related Companies Deferred Compensation Plan has 216,905for Directors (the “Directors Plan”) had 224,663 shares to be issued to participants, for which an associated grantor trust (Rabbi Trust) held 32,686 shares. The Corporation had 216,905 shares to be issued in 2009, with 30,626 shares.shares held in the Rabbi Trust. Compensation costs relating to share-basedshare based payment transactions are recognized in the consolidated financial statements and the cost is measured based on the fair value of the equity or liability instruments issued. The Corporation has no other share based compensation plans.
Corporate Owned Life Insurance:
The Corporation has purchased life insurance policies on key members of management. In the event of death of one of these individuals, the Corporation 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.
ASC Topic 715 was amended to require that the Corporation recognize a liability for any post retirement benefits provided by the Corporation, beginning January 1, 2008. As a result of the adoption of the new authoritative guidance, the Corporation recognized a liability of $1,571 as of January 1, 2008. As of December 31, 20092010 and 2008,2009, the present value of the post retirement benefits promised by the Corporation to the covered employees was estimated to be $2,573 and $2,505, respectively, and $2,460, respectively.is included in Accrued Interest and Other Liabilities on the consolidated balance sheets. The periodic policy maintenance costs were $68 and $45 for 2010 and $85 for 2009, and 2008, respectively.
Acquisition Intangibles and Goodwill:
Isabella BankThe Corporation previously acquired branch facilities and related deposits in business combinations accounted for as a purchase. On January 1, 2008, the Corporation acquired Greenville Community Financial Corporation (“GCFC”) resulting in identified core deposit intangibles and goodwill (see Note 2). The acquisition of the branchesacquisitions included amounts related to the valuation of customer deposit relationships (core deposit intangibles). Such coreCore deposit intangibles arising from acquisitions are included in Other Assets and are being amortized on the straight line basis over nine years. Core deposit intangibles arising from the acquisition of GCFC are being amortized on a 15 yearsum-of-year’s digits amortization schedule.their estimated lives. Goodwill, which is included in Other Assets, represents the excess of purchase price over identifiable assets, is included in Other Assets and is not amortized but is evaluated for impairment at least annually, or on an interim basis if an event occurs or circumstances change that would more likely than not reduce the fair value of the reporting unit below the carrying value.
Off Balance Sheet Credit Related Financial Instruments:
In the ordinary course of business, the Corporation has 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.
36
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Federal Income Taxes:
Deferred income tax assets and liabilities are determined using the liability (or balance sheet) method. Under this method, the net deferred tax assets or liability is determined based on the tax effects of the temporary differences between the book and tax bases on the various balance sheet assets and liabilities and gives current
34
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
recognition to changes in tax rates and laws. Valuations allowances are established, where necessary, to reduce deferred tax assets to the amount expected to be realized. Income tax expense is the tax payable or refundable for the year plus or minus the change during the year in deferred tax assets and liabilities.
The Corporation analyzes its filing positions in the jurisdictions where it is required to file income tax returns, as well as all open tax years in these jurisdictions. The Corporation has also elected to retain its existing accounting policy with respect to the treatment of interest and penalties attributable to income taxes, and continues to reflect any charges for such, to the extent they arise, as a component of its noninterest expenses
AdvertisingMarketing Costs:
AdvertisingMarketing costs are expensed as incurred (see Note 11)10).
Computation of Earnings Per Share:
Basic earnings per share represents income available to common stockholders divided by the weighted — average number of common shares issued during the period, which includes shares held in the Rabbi Trust controlled by the Corporation (see Note 17).period. Diluted earnings per share reflects additional common shares that would have been outstanding if dilutive potential common shares had been issued, as well as any adjustments to income that would result from the assumed issuance. Potential common shares that may be issued by the Corporation relate solely to outstanding shares in the Corporation’s Deferred Director fee planDirectors Plan (see Note 17)16).
Earnings per common share have been computed based on the following:
| | | | | | | | | | | | | | | | | | | | | | | | |
| | 2009 | | 2008 | | 2007 | | | 2010 | | 2009 | | 2008 | |
|
Average number of common shares outstanding for basic calculation(1) | | | 7,517,276 | | | | 7,492,677 | | | | 6,973,508 | | | | 7,541,676 | | | | 7,517,276 | | | | 7,492,677 | |
Average potential effect of shares in the Deferred Director fee plan(2)(1) | | | 181,319 | | | | 184,473 | | | | 197,055 | | | | 187,744 | | | | 181,319 | | | | 184,473 | |
| | | | | | | | | | | | | | |
Average number of common shares outstanding used to calculate diluted earnings per common share | | | 7,698,595 | | | | 7,677,150 | | | | 7,170,563 | | | | 7,729,420 | | | | 7,698,595 | | | | 7,677,150 | |
| | | | | | | | | | | | | | |
Net income | | $ | 7,800 | | | $ | 4,101 | | | $ | 7,930 | | | $ | 9,045 | | | $ | 7,800 | | | $ | 4,101 | |
| | | | | | | | | | | | | | |
Earnings per share | | | | | | | | | | | | | | | | | | | | | | | | |
Basic | | $ | 1.04 | | | $ | 0.55 | | | $ | 1.14 | | | $ | 1.20 | | | $ | 1.04 | | | $ | 0.55 | |
| | | | | | | | | | | | | | |
Diluted | | $ | 1.01 | | | $ | 0.53 | | | $ | 1.11 | | | $ | 1.17 | | | $ | 1.01 | | | $ | 0.53 | |
| | | | | | | | | | | | | | |
| | |
(1) | | As adjusted for the 10% stock dividend paid February 29, 2008 |
|
(2) | | Exclusive of shares held in the Rabbi Trust |
Reclassifications:
Certain amounts reported in the 20082009 and 20072008 consolidated financial statements have been reclassified to conform with the 20092010 presentation.
Recent Accounting Pronouncements:
On July 1, 2009, the FinancialFASB ASC Topic 310, “Receivables.” In April 2010, ASC Topic 310 was amended by Accounting Standards Board (FASB) completedUpdate (ASU)No. 2010-18, “Effect of a Loan Modification When the Loan Is Part of a Pool That Is Accounted for as a Single Asset — (a consensus of the FASB Accounting Standards Codification, “The FASB Codification”(ASC)Emerging Issues Task”), as the single source of authoritative U.S. generally accepted accounting principles (GAAP), superseding all then existing authoritative accounting and reporting standards, exceptto clarify that individual loans accounted for rules and interpretive releases for the SEC under authority of federal securities laws, which are sources of authoritative GAAP for Securities and Exchange Commission registrants. ASC Topic 105 reorganized the authoritative literature comprising GAAP into a topical format. ASC is now the source of authoritative GAAP recognized by the FASB to be applied by all nongovernmental entities. ASC was effective for the Corporation’s interim period ending September 30, 2009. The Codification did not change GAAP and, therefore, did not impact the Corporation’s financial statements. However, since it completely supersedes existing standards, it affected the way authoritative accounting pronouncements are referenced in the financial statements and other disclosure documents. Specifically, all references in this report to new or pending financial reporting standards, where deemed necessary, use the ASC Topic number.
3537
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
within pools are not to be removed from the pool solely as a result of modifications to the loan (including troubled debt restructurings). The new guidance was effective for interim and annual periods ending on or after July 15, 2010 and did not have a significant impact on the Corporation’s consolidated financial statements.
In July 2010, ASC Topic 310 was amended by ASUNo. 2010-20, “Disclosures about the Credit Quality of Financing Receivables and the Allowance for Credit Losses”to provide financial statement users greater transparency about the Corporation’s allowance for loan losses and the credit quality of its financing receivables. Existing disclosures are amended that required the Corporation to provide the following disclosure about its loan portfolio on a disaggregated basis: (1) a rollforward schedule of the allowance for loan losses from the beginning of the reporting period to the end of a reporting period on a portfolio segment basis, with the ending balance further disaggregated on the basis of the impairment method, (2) for each disaggregated ending balance in item (1), the related recorded investment in loans, (3) the nonaccrual status of loans by class of loans, and (4) impaired loans by class of loans.
The amendments in this update required the Corporation to provide the following additional disclosures about its loans: (1) credit quality indicators of financing receivables at the end of the reporting period by class of loans, (2) the aging of past due loans at the end of the reporting period by class of loans, (3) the nature and extent of troubled debt restructurings that occurred during the period by class of loans and their effect on the allowance for loan losses, (4) the nature and extent of financing receivables modified within the previous 12 months that defaulted during the period by class of financing receivables and their effect on the allowance for loan losses and (5) significant purchases and sales of loans during the period disaggregated by portfolio segment. The new disclosures as of the end of a reporting period were effective for interim and annual reporting periods ending on or after December 15, 2010, with the exception of the new disclosures related to troubled debt restructurings which are not required to be reported until the second quarter of 2011. The new disclosures about activity that occurs during a reporting period are effective for interim and annual reporting periods beginning on or after December 15, 2010. The new guidance has significantly expanded the Corporation’s consolidated financial statement disclosures. (See Note 4)
FASB ASC Topic 320, “Investments350, “Intangibles — DebtGoodwill and Equity Securities.Other.” New authoritative accounting guidance underIn December 2010, ASC Topic 320, “Investments — Debt and Equity Securities,” (i) changes existing guidance350 was amended by ASUNo. 2010-28, “When to Perform Step 2 of the Goodwill Impairment Test for determining whether an impairment is other than temporaryReporting Units with Zero or Negative Carrying Amounts (a consensus of the FASB Emerging Issues Task Force)”, to debt securities and (ii) replaces the existing requirement that the entity’s management assert it has both the intent and ability to hold an impaired security until recovery with a requirement that management assert: (a) it does not have the intent to sell the security; and (b) it is more likely than not it will not have to sell the security before recovery of its cost basis. Under ASC Topic 320, declines in the fair value ofheld-to-maturity andavailable-for-sale securities below their cost that are deemed to be other than temporary are reflected in earnings as realized lossesaddress questions related to the extent the impairment is related to credit risk.testing for goodwill impairments for entities with goodwill with zero or negative carrying amounts. The amount of the impairment related to other risk factors (interest rate and market) is recognized as a component of other comprehensive income. The Corporation adopted the provisions of the new authoritative accounting guidance under ASC Topic 320 during the first quarter of 2009. Adoption of the new guidance didis effective for interim and annual periods beginning after December 15, 2010 and is not significantlyanticipated to have any impact on the Corporation’s consolidated financial statements.
FASB ASC Topic 715, “Compensation — Retirement Benefits.” In December 2008, new authoritative guidance underJanuary 2010, ASC Topic 715 “Compensation — Retirement Benefits” was issued. ASC Topic 715 provides guidance relatedamended by ASUNo. 2010-06, “Improving Disclosures about Fair Value Measurements”, to an employer’s disclosures about plan assets of defined benefit pension or other post retirement benefit plans. Under ASC Topic 715, disclosures should provide users of financial statements with an understanding of how investment allocation decisions are made,change the factors that are pertinent to an understanding of investment policies and strategies, theterminology for major categories of plan assets to classes of assets to correspond with the inputs and valuation techniques usedamendments to measure the fair value of plan assets, the effect of fair value measurements using significant unobservable inputs on changes in plan assets for the period and significant concentrations of risk within plan assets. The disclosures required by ASC Topic 715 are included in820 (see below). The new guidance was effective for interim and annual periods ending on or after January 1, 2010 and had no impact on the Corporation’s consolidated 2009 financial statements (see Note 17).statements.
FASB ASC Topic 805, “Business Combinations.” On January 1, 2009, new authoritative accounting guidance underIn December 2010, ASC Topic 805 “Businesswas amended by ASUNo. 2010-29,“Disclosure of Supplementary Pro Forma Information for Business Combinations” became applicable (a consensus of the FASB Emerging Issues Task Force”, to address diversity in practice about the Corporation’s accountinginterpretation of the pro forma revenue and earnings disclosure requirements for business combinations. The new guidance is effective for business combinations closingfor which the acquisition date is on or after January 1, 2009. ASC Topic 805 applies to all transactions and other events in which one entity obtains control over one or more other businesses. ASC Topic 805 requires an acquirer, upon initially obtaining control of another entity, to recognize the assets, liabilities and any non-controlling interest in the acquiree at fair value asbeginning of the acquisition date. Contingent consideration is required to be recognizedfirst annual reporting period on or after December 15, 2010 and measured at fair value on the date of acquisition rather than at a later date when the amount of that consideration may be determinable beyond a reasonable doubt. This fair value approach replaces the cost-allocation process required under previous accounting guidance whereby the cost of an acquisition was allocated to the individual assets acquired and liabilities assumed based on their estimated fair value. ASC Topic 805 requires acquirers to expense acquisition-related costs as incurred rather than allocating such costs to the assets acquired and liabilities assumed, as was the case under prior accounting guidance. Assets acquired and liabilities assumed in a business combination that arise from contingencies are to be recognized at fair value if fair value can be reasonably estimated. If fair value of such an asset or liability cannot be reasonably estimated, the asset or liability would generally be recognized in accordance with ASC Topic 450, “Contingencies.” Under ASC Topic 805, the requirements of ASC Topic 420, “Exit or Disposal Cost Obligations,” would have to be met in order to accrue for a restructuring plan in purchase accounting. Pre-acquisition contingencies are to be recognized at fair value, unless it is a non-contractual contingency that is not likelyanticipated to materialize, in which case, nothing should be recognized in purchase accounting and, instead, that contingency would be subject to the probable and estimable recognition criteria of ASC Topic 450, “Contingencies.” Such guidance could have a material effect onimpact the Corporation’s accounting for any future business combination.consolidated financial statements.
FASB ASC Topic 810, “Consolidation.” New authoritative accounting guidance under ASC Topic 810, “Consolidation,” amended prior guidance to establish accounting and reporting standards for the non-controlling interest in a subsidiary and for the deconsolidation of a subsidiary. Under ASC Topic 810, a non controlling interest in a subsidiary, which is sometimes referred to as minority interest, is an ownership interest in the consolidated entity that should be reported as a component of equity in the consolidated financial statements. Among other requirements, ASC Topic 810 requires consolidated net income to be reported at amounts that include the amounts attributable to both the parent and the non-controlling interest. It also requires disclosure, on the face of the
36
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
consolidated income statement, of the amounts of consolidated net income attributable to the parent and to the non controlling interest. The new authoritative accounting guidance under ASC Topic 810 became effective for the Corporation on January 1, 2009 and did not impact the Corporation’s consolidated financial statements.
Further new authoritative accounting guidance under ASC Topic 810 amends prior guidance to change how a company determines when an entity that is insufficiently capitalized or is not controlled through voting (or similar rights) should be consolidated. The determination of whether a company is required to consolidate an entity is based on, among other factors, an entity’s purpose and design and a company’s ability to direct the activities of the entity that most significantly impact the entity’s economic performance. The new authoritative accounting guidance requires additional disclosures about the reporting entity’s involvement with variable-interest
38
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
variable interest entities and any significant changes in risk exposure due to that involvement as well as its affect on the entity’s financial statements. The new authoritative accounting guidance under ASC Topic 810 will bewas effective January 1, 2010 and is not expected to have a significanthad no impact on the Corporation’s consolidated financial statements.
FASB ASC Topic 820, “Fair Value Measurements and Disclosures.” New authoritative accounting guidance underIn January 2010, ASC Topic 820“Fair Value Measurements was amended by ASUNo. 2010-06, to add new disclosures for: (1) significant transfers in and Disclosures,” affirms that the objectiveout of Level 1 and Level 2 fair value whenmeasurements and the marketreasons for an asset is not active is the price that would be receivedtransfers and (2) presenting separately information about purchases, sales, issuances and settlements for Level 3 fair value instruments (as opposed to sellreporting activity as net).
ASUNo. 2010-06 also clarifies existing disclosures by requiring reporting entities to provide fair value measurement disclosures for each class of assets and liabilities and to provide disclosures about the asset in an orderly transaction,valuation techniques and clarifiesinputs used to measure fair value for both recurring and includes additional factors for determining whether there has been a significant decrease in market activity for an asset when the market for that asset is not active. ASC Topic 820 requires an entity to base its conclusion about whether a transaction was not orderly on the weight of the evidence. nonrecurring fair value measurements.
The new accountingauthoritative guidance amended prior guidance to expand certain disclosure requirements.was effective for interim and annual reporting periods beginning January 1, 2010 except for the disclosures about purchases, sales, issuances and settlements in the rollforward of activity in Level 3 fair value measurements, which will be effective January 1, 2011. The Corporation adopted the new authoritative accounting guidance under ASC Topic 820 during the first quarter of 2009. Adoption of the new guidance did not, significantly impact the Corporation’s financial statements.
Further new authoritative accounting guidance (Accounting Standards UpdateNo. 2009-5) under ASC Topic 820 provides guidance for measuring the fair value of a liability in circumstances in which a quoted price in an active market for the identical liabilityand is not available. In such instances, a reporting entity is requiredanticipated to, measure fair value utilizing a valuation technique that uses (i) the quoted price of the identical liability when traded as an asset, (ii) quoted prices for similar liabilities or similar liabilities when traded as assets, or (iii) another valuation technique that is consistent with the existing principles of ASC Topic 820, such as an income approach or market approach. The new authoritative accounting guidance also clarifies that when estimating the fair value of a liability, a reporting entity is not required to include a separate input or adjustment to other inputs relating to the existence of a restriction that prevents the transfer of the liability. The forgoing new authoritative accounting guidance under ASC Topic 820 was effective for the Corporation’s financial statements beginning October 1, 2009 and did not have a significant impact on the Corporation’s consolidated financial statements (seeNote 20- Financial Instruments Recorded at Fair Value).
FASB ASC Topic 825 “Financial Instruments.” New authoritative accounting guidance under ASC Topic 825,“Financial Instruments,” requires an entity to provide disclosures about the fair value of financial instruments in interim financial information and amends prior guidance to require those disclosures in summarized financial information at interim reporting periods. The Corporation implemented the required disclosures in its 2009 quarterly filings.
FASB ASC Topic 855, “Subsequent Events.” In March 2010, ASC Topic 855, “Subsequent Events” was amended by Accounting Standards Update (ASU)No. 2010-09 , “Amendments to Certain Recognition and Disclosure Requirements”, to exclude entities that file or furnishes financial statements with the SEC from disclosing the date through which subsequent events have been evaluated. The new authoritative guidance is effective immediately. Although the Corporation must continue to evaluate subsequent events through the date on which the consolidated financial statements are issued the Corporation is no longer required to disclose the date on which subsequent events have been evaluated.statements.
FASB ASC Topic 860, “Transfers and Servicing.” New authoritative accounting guidance under ASC Topic 860 “Transfers and Servicing,” amends prior accounting guidance to enhance reporting about transfers of financial assets, including securitizations, and where companies have continuing exposure to the risks related to transferred
37
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
financial assets. The new authoritative accounting guidance eliminates the concept of a “qualifying special-purposespecial purpose entity” and changes the requirements for derecognizing financial assets. The new authoritative accounting guidance also requires additional disclosures about all continuing involvements with transferred financial assets including information about gains and losses resulting from transfers during the period. The new authoritative accounting guidance under ASC Topic 860 will bewas effective January 1, 2010 and management is currently evaluatinghad no significant impact on the effects of the implementation of this standard.Corporation’s consolidated financial statements.
| |
NoteNOTE 2 — | Business Combinations and Joint Venture Formation |
Greenville Community Financial Corporation
Effective on the opening of business on January 1, 2008, Isabella Bank Corporation acquired 100 percent of Greenville Community Financial Corporation (GCFC). As a result of this acquisition, Greenville Community Bank, a wholly owned subsidiary of GCFC, merged with and into the Bank. Under the terms of the merger agreement, each share of GCFC common stock was automatically converted into the right to receive 0.6659 shares of Isabella Bank Corporation common stock and $14.70 per share in cash. Exclusive of the effects of the 10% stock dividend paid February 29, 2008, the Corporation issued 514,809 shares of Isabella Bank Corporation common stock valued at $22,652 and paid a total of $11,365 in cash to GCFC shareholders. The total consideration exchanged including the value of the common stock issued, cash paid to shareholders, plus $564 of cash paid for transaction costs resulted in a total purchase price of $34,581. The purchase price was determined using the latest Isabella Bank Corporation stock transaction price known to management as of November 27, 2007, the date of the merger agreement. The acquisition of Greenville has increased the overall market share for Isabella Bank Corporation in furtherance of the Bank’s strategic plan.
The following table summarizes the total purchase price of the transaction as well as adjustments to allocate the purchase price based on the preliminary estimates of fair values of the assets and liabilities of GCFC.
| | | | | | | | | | | | |
| | | | | Fair Value
| | | | |
| | | | | Adjustments of
| | | | |
| | Greenville
| | | Nonintangible
| | | Fair Value
| |
| | January 1,
| | | Net Assets
| | | of Net Assets
| |
| | 2008 | | | Acquired | | | Acquired | |
|
ASSETS | | | | | | | | | | | | |
Cash and cash equivalents | | $ | 2,339 | | | $ | — | | | $ | 2,339 | |
Federal funds sold | | | 125 | | | | — | | | | 125 | |
Trading securities | | | 4,979 | | | | — | | | | 4,979 | |
Securities available for sale | | | 7,007 | | | | — | | | | 7,007 | |
Loans, net | | | 88,613 | | | | (398 | ) | | | 88,215 | |
Bank premises and equipment | | | 2,054 | | | | 194 | | | | 2,248 | |
Other assets | | | 2,870 | | | | — | | | | 2,870 | |
| | | | | | | | | | | | |
Total assets acquired | | | 107,987 | | | | (204 | ) | | | 107,783 | |
| | | | | | | | | | | | |
LIABILITIES AND SHAREHOLDERS’ EQUITY | | | | | | | | | | | | |
Liabilities | | | | | | | | | | | | |
Deposits | | | 90,151 | | | | (102 | ) | | | 90,049 | |
Other borrowed funds | | | 5,625 | | | | 181 | | | | 5,806 | |
Accrued interest and other liabilities | | | 146 | | | | — | | | | 146 | |
| | | | | | | | | | | | |
Total liabilities assumed | | | 95,922 | | | | 79 | | | | 96,001 | |
| | | | | | | | | | | | |
Net assets acquired | | $ | 12,065 | | | $ | (283 | ) | | | 11,782 | |
| | | | | | | | | | | | |
Core deposit intangible | | | | | | | | | | | 1,480 | |
Goodwill | | | | | | | | | | | 21,319 | |
| | | | | | | | | | | | |
Total consideration paid | | | | | | | | | | $ | 34,581 | |
| | | | | | | | | | | | |
38
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
The fair value adjustments of tangible net assets acquired are being amortized over two years using the straight line amortization method. The core deposit intangible is being amortized using a 15 yearsum-of-the-years’ digits amortization schedule. Goodwill, which is not amortized, is tested for impairment at least annually. As the acquisition was considered a stock transaction, goodwill is not deductible for federal income tax purposes.
The 2009 and 2008 consolidated statements of income include the operating results of GCFC for the entire year.
The unaudited pro forma information presented in the following table has been prepared based on Isabella Bank Corporation’s historical results combined with GCFC. The information has been combined to present the results of operations as if the acquisition had occurred at the beginning of the earliest period presented. The pro forma results are not necessarily indicative of the results which would have actually been attained if the acquisition had been consummated in the past or what may be attained in the future:
| | | | |
| | Year Ended
| |
| | December 31 2007 | |
|
Net interest income | | $ | 31,579 | |
| | | | |
Net income | | $ | 8,631 | |
| | | | |
Basic earnings per share* | | $ | 1.10 | |
| | | | |
| | |
* | | As adjusted for the 10% stock dividend paid February 29, 2008. |
Title Company Joint Venture Formation
On March 1, 2008, IBT Title and Insurance Agency, Inc. (IBT Title), a wholly owned subsidiary of Isabella Bank Corporation, merged its assets and liabilities with Corporate Title Agency, LLC (“Corporate Title”), a third-party title business based in Traverse City, Michigan, to form CT/IBT Title Agency, LLC. As a result of this transaction, the Corporation became a 50 percent joint venture owner in CT/IBT Title Agency, LLC. The purpose of this joint venture is to help IBT Title and Insurance Agency, Inc. expand its service area and to take advantage of economies of scale. As the Corporation is a 50 percent owner of this new entity, revenues and expenses will now be recorded under the equity method and, as such, the Corporation’s share of the net income or loss from the joint venture included in other noninterest income. As of December 31, 2008, the Corporation had a recorded investment of $6,905 in the new entity. The following table summarizes the condensed balance sheet of IBT Title as of March 1,
39
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
2008. These amounts were excluded from the balance sheet detail of the Corporation and are now included in investment in equity securities without readily determinable fair values.
| | | | |
| | IBT Title
| |
| | March 1,
| |
| | 2008 | |
|
ASSETS | | | | |
Cash and cash equivalents | | $ | 4,542 | |
Premises and equipment | | | 2,352 | |
Other assets, including intangibles of $1,590 | | | 2,339 | |
| | | | |
Total assets | | | 9,233 | |
| | | | |
LIABILITIES AND SHAREHOLDERS’ EQUITY | | | | |
Liabilities | | | | |
Escrow funds | | $ | 1,866 | |
Other liabilities | | | 194 | |
| | | | |
Total liabilities | | | 2,060 | |
Total equity | | | 7,173 | |
| | | | |
Total liabilities & equity | | $ | 9,233 | |
| | | | |
The Corporation’s share of the joint venture’s operating results for the year ended December 31, 2009 and the ten-months ended December 31, 2008 was not significant.
| |
Note 3 — | Trading Securities |
Trading securities, at fair value, consist of the following investments at December 31:
| | | | | | | | | | | | | | | | |
| | 2009 | | 2008 | | | 2010 | | 2009 | |
|
Government-sponsored enterprises | | $ | — | | | $ | 4,014 | | |
States and political subdivisions | | | 9,962 | | | | 11,556 | | | $ | 5,837 | | | $ | 9,962 | |
Corporate | | | — | | | | 160 | | |
Mortgage-backed | | | 3,601 | | | | 6,045 | | | | — | | | | 3,601 | |
| | | | | | | | | | |
Total | | $ | 13,563 | | | $ | 21,775 | | | $ | 5,837 | | | $ | 13,563 | |
| | | | | | | | | | |
Included in the net trading losses of $94 during 2010, were $74 of net trading losses on securities that relate to the Corporation’s trading portfolio as of December 31, 2010. Included in net trading gains of $80 during 2009, were $38 of net trading gains on securities that relate to the Corporation’s trading portfolio as of December 31, 2009.
39
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
| |
Note 4NOTE 3 — | Available-for-SaleInvestment Securities |
The amortized cost and fair value ofavailable-for-sale investment securities, available for sale, with gross unrealized gains and losses, are as follows as of December 31:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | 2009 | | | 2010 | |
| | | | Gross
| | Gross
| | | | | | | Gross
| | Gross
| | | |
| | Amortized
| | Unrealized
| | Unrealized
| | Fair
| | | Amortized
| | Unrealized
| | Unrealized
| | Fair
| |
| | Cost | | Gains | | Losses | | Value | | | Cost | | Gains | | Losses | | Value | |
|
Government-sponsored enterprises | | $ | 19,386 | | | $ | 127 | | | $ | 42 | | | $ | 19,471 | | |
Government sponsored enterprises | | | $ | 5,394 | | | $ | 10 | | | $ | — | | | $ | 5,404 | |
States and political subdivisions | | | 150,688 | | | | 3,632 | | | | 2,590 | | | | 151,730 | | | | 167,328 | | | | 3,349 | | | | 960 | | | | 169,717 | |
Auction rate money market preferred | | | 3,200 | | | | — | | | | 227 | | | | 2,973 | | | | 3,200 | | | | — | | | | 335 | | | | 2,865 | |
Preferred stocks | | | 7,800 | | | | — | | | | 746 | | | | 7,054 | | | | 7,800 | | | | — | | | | 864 | | | | 6,936 | |
Mortgage-backed | | | 67,215 | | | | 638 | | | | 119 | | | | 67,734 | | | | 101,096 | | | | 1,633 | | | | 514 | | | | 102,215 | |
Collateralized mortgage obligations | | | 10,296 | | | | — | | | | 192 | | | | 10,104 | | | | 44,617 | | | | 103 | | | | 1,133 | | | | 43,587 | |
| | | | | | | | | | | | | | | | | | |
Total | | $ | 258,585 | | | $ | 4,397 | | | $ | 3,916 | | | $ | 259,066 | | | $ | 329,435 | | | $ | 5,095 | | | $ | 3,806 | | | $ | 330,724 | |
| | | | | | | | | | | | | | | | | | |
40
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
| | | | | | | | | | | | | | | | |
| | 2008 | |
| | | | | Gross
| | | Gross
| | | | |
| | Amortized
| | | Unrealized
| | | Unrealized
| | | Fair
| |
| | Cost | | | Gains | | | Losses | | | Value | |
|
U.S. Government and federal agencies | | $ | 3,999 | | | $ | 84 | | | $ | — | | | $ | 4,083 | |
Government-sponsored enterprises | | | 61,919 | | | | 1,070 | | | | 1 | | | | 62,988 | |
States and political subdivisions | | | 148,186 | | | | 1,808 | | | | 671 | | | | 149,323 | |
Corporate market preferred | | | 7,145 | | | | — | | | | — | | | | 7,145 | |
Auction rate money | | | 11,000 | | | | — | | | | 5,021 | | | | 5,979 | |
Mortgage-backed | | | 16,492 | | | | 445 | | | | — | | | | 16,937 | |
| | | | | | | | | | | | | | | | |
Total | | $ | 248,741 | | | $ | 3,407 | | | $ | 5,693 | | | $ | 246,455 | |
| | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | |
| | 2009 | |
| | | | | Gross
| | | Gross
| | | | |
| | Amortized
| | | Unrealized
| | | Unrealized
| | | Fair
| |
| | Cost | | | Gains | | | Losses | | | Value | |
|
Government sponsored enterprises | | $ | 19,386 | | | $ | 127 | | | $ | 42 | | | $ | 19,471 | |
States and political subdivisions | | | 150,688 | | | | 3,632 | | | | 2,590 | | | | 151,730 | |
Auction rate money market preferred | | | 3,200 | | | | — | | | | 227 | | | | 2,973 | |
Preferred stocks | | | 7,800 | | | | — | | | | 746 | | | | 7,054 | |
Mortgage-backed | | | 67,215 | | | | 638 | | | | 119 | | | | 67,734 | |
Collateralized mortgage obligations | | | 10,296 | | | | — | | | | 192 | | | | 10,104 | |
| | | | | | | | | | | | | | | | |
Total | | $ | 258,585 | | | $ | 4,397 | | | $ | 3,916 | | | $ | 259,066 | |
| | | | | | | | | | | | | | | | |
The Corporation had pledged investmentsavailable-for-sale and trading securities in the following amounts as of December 31:
| | | | | | | | | | | | | | | | |
| | 2009 | | 2008 | | | 2010 | | 2009 | |
|
Pledged to secure borrowed funds | | | $ | 86,788 | | | $ | 41,612 | |
Pledged to secure repurchase agreements | | | | 86,381 | | | | 74,605 | |
Pledged for public deposits and for other purposes necessary or required by law | | $ | 61,666 | | | $ | 18,000 | | | | 14,626 | | | | 20,054 | |
Pledged to secure repurchase agreements | | | 74,605 | | | | 64,876 | | |
| | | | | | | | | | |
Total | | $ | 136,271 | | | $ | 82,876 | | | $ | 187,795 | | | $ | 136,271 | |
| | | | | | | | | | |
While borrowed funds increased $1,816 since December 31, 2009, the Corporation increased the level of securities pledged to secure other borrowed funds and repurchase agreements by $51,524 in the same period. The additional pledging has enhanced the Corporation’s liquidity position as it allows for an increased availability of borrowed funds.
40
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
The amortized cost and fair value ofavailable-for-sale securities by contractual maturity at December 31, 20092010 are as follows:
| | | | | | | | |
| | Amortized
| | | Fair
| |
| | Cost | | | Value | |
|
Within 1 year | | $ | 7,852 | | | $ | 7,922 | |
Over 1 year through 5 years | | | 61,992 | | | | 63,414 | |
After 5 years through 10 years | | | 65,292 | | | | 66,783 | |
Over 10 years | | | 45,938 | | | | 43,109 | |
| | | | | | | | |
| | | 181,074 | | | | 181,228 | |
Mortgage-backed securities | | | 67,215 | | | | 67,734 | |
Collateralized mortgage obligations | | | 10,296 | | | | 10,104 | |
| | | | | | | | |
| | $ | 258,585 | | | $ | 259,066 | |
| | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | |
| | Maturing | | | Securities
| | | | |
| | | | | After One
| | | After Five
| | | | | | With
| | | | |
| | Due in
| | | Year But
| | | Years But
| | | | | | Variable
| | | | |
| | One Year
| | | Within
| | | Within
| | | After
| | | Monthly
| | | | |
| | or Less | | | Five Years | | | Ten Years | | | Ten Years | | | Payments | | | Total | |
|
Government sponsored enterprises | | $ | — | | | $ | 5,000 | | | $ | 394 | | | $ | — | | | $ | — | | | $ | 5,394 | |
States and political subdivisions | | | 14,061 | | | | 33,702 | | | | 85,757 | | | | 33,808 | | | | — | | | | 167,328 | |
Auction rate money market preferred | | | — | | | | — | | | | — | | | | — | | | | 3,200 | | | | 3,200 | |
Preferred stocks | | | — | | | | — | | | | — | | | | — | | | | 7,800 | | | | 7,800 | |
Mortgage-backed | | | — | | | | — | | | | — | | | | — | | | | 101,096 | | | | 101,096 | |
Collateralized mortgage obligations | | | — | | | | — | | | | — | | | | — | | | | 44,617 | | | | 44,617 | |
| | | | | | | | | | | | | | | | | | | | | | | | |
Total amortized cost | | $ | 14,061 | | | $ | 38,702 | | | $ | 86,151 | | | $ | 33,808 | | | $ | 156,713 | | | $ | 329,435 | |
| | | | | | | | | | | | | | | | | | | | | | | | |
Fair value | | $ | 14,132 | | | $ | 39,844 | | | $ | 87,660 | | | $ | 43,286 | | | $ | 145,802 | | | $ | 330,724 | |
| | | | | | | | | | | | | | | | | | | | | | | | |
Expected maturities may differ from contractual maturities because issuers may have the right to call or prepay obligations.
Because of their variable monthly payments, auction rate money market preferreds, preferred stocks, mortgage-backed securities and collateralized mortgage obligations are not reported by a specific maturity group.
41
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
A summary of the activity related to the sale ofavailable-for-sale debt securities is as follows during the years ended December 31:
| | | | | | | | | | | | | | | | | | | | | | | | |
| | 2009 | | 2008 | | 2007 | | | 2010 | | 2009 | | 2008 | |
|
Proceeds from sales of securities | | $ | 32,204 | | | $ | 6,096 | | | $ | 5,396 | | | $ | 18,303 | | | $ | 32,204 | | | $ | 6,096 | |
| | | | | | | | | | | | | | |
Gross realized gains | | $ | 648 | | | $ | 24 | | | $ | 12 | | | $ | 351 | | | $ | 648 | | | $ | 24 | |
Gross realized losses | | | — | | | | — | | | | (31 | ) | | | (3 | ) | | | — | | | | — | |
| | | | | | | | | | | | | | |
Net realized gains (losses) | | $ | 648 | | | $ | 24 | | | $ | (19 | ) | |
Net realized gains | | | $ | 348 | | | $ | 648 | | | $ | 24 | |
| | | | | | | | | | | | | | |
Applicable income tax (expense) benefit | | $ | (220 | ) | | $ | (8 | ) | | $ | 6 | | |
Applicable income tax expense | | | $ | 118 | | | $ | 220 | | | $ | 8 | |
| | | | | | | | | | | | | | |
The cost basis used to determine the realized gains or losses of securities sold was the amortized cost of the individual investment security as of the trade date.
41
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Information pertaining toavailable-for-sale securities with gross unrealized losses at December 31 aggregated by investment category and length of time that individual securities have been in continuous loss position, follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | December 31, 2009 | | | December 31, 2010 | |
| | Less Than Twelve Months | | Over Twelve Months | | | | | Less Than Twelve Months | | Over Twelve Months | | | |
| | Gross
| | | | Gross
| | | | Total
| | | Gross
| | | | Gross
| | | | Total
| |
| | Unrealized
| | Fair
| | Unrealized
| | Fair
| | Unrealized
| | | Unrealized
| | Fair
| | Unrealized
| | Fair
| | Unrealized
| |
| | Losses | | Value | | Losses | | Value | | Losses | | | Losses | | Value | | Losses | | Value | | Losses | |
|
Government-sponsored enterprises | | $ | 42 | | | $ | 7,960 | | | $ | — | | | $ | — | | | $ | 42 | | |
States and political subdivisions | | | 2,536 | | | | 11,459 | | | | 54 | | | | 2,267 | | | | 2,590 | | | $ | 960 | | | $ | 29,409 | | | $ | — | | | $ | — | | | $ | 960 | |
Auction rate money market preferred | | | — | | | | — | | | | 227 | | | | 2,973 | | | | 227 | | | | — | | | | — | | | | 335 | | | | 2,865 | | | | 335 | |
Preferred stocks | | | — | | | | — | | | | 746 | | | | 3,054 | | | | 746 | | |
Preferred stock | | | | — | | | | — | | | | 864 | | | | 2,936 | | | | 864 | |
Mortgage-backed | | | 119 | | | | 25,395 | | | | — | | | | — | | | | 119 | | | | 514 | | | | 38,734 | | | | — | | | | — | | | | 514 | |
Collateralized mortgage obligations | | | 192 | | | | 10,104 | | | | — | | | | — | | | | 192 | | | | 1,133 | | | | 33,880 | | | | — | | | | — | | | | 1,133 | |
| | | | | | | | | | | | | | | | | | | | | | |
Total | | $ | 2,889 | | | $ | 54,918 | | | $ | 1,027 | | | $ | 8,294 | | | $ | 3,916 | | | $ | 2,607 | | | $ | 102,023 | | | $ | 1,199 | | | $ | 5,801 | | | $ | 3,806 | |
| | | | | | | | | | | | | | | | | | | | | | |
Number of securities in an unrealized loss position: | | | | | | | | 82 | | | | | | | | 4 | | | | 86 | |
| | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | December 31, 2008 | | | December 31, 2009 | |
| | Less Than Twelve Months | | Over Twelve Months | | | | | Less Than Twelve Months | | Over Twelve Months | | | |
| | Gross
| | | | Gross
| | | | Total
| | | Gross
| | | | Gross
| | | | Total
| |
| | Unrealized
| | Fair
| | Unrealized
| | Fair
| | Unrealized
| | | Unrealized
| | Fair
| | Unrealized
| | Fair
| | Unrealized
| |
| | Losses | | Value | | Losses | | Value | | Losses | | | Losses | | Value | | Losses | | Value | | Losses | |
|
Government-sponsored enterprises | | $ | 1 | | | $ | 999 | | | $ | — | | | $ | — | | | $ | 1 | | |
| | | | | | | | | | | | | | | | | | | | | |
Government sponsored enterprises | | | $ | 42 | | | $ | 7,960 | | | $ | — | | | $ | — | | | $ | 42 | |
States and political subdivisions | | | 620 | | | | 27,015 | | | | 51 | | | | 2,705 | | | | 671 | | | | 2,536 | | | | 11,459 | | | | 54 | | | | 2,267 | | | | 2,590 | |
Auction rate money market preferred | | | 5,021 | | | | 5,979 | | | | — | | | | — | | | | 5,021 | | | | — | | | | — | | | | 227 | | | | 2,973 | | | | 227 | |
Preferred stocks | | | | — | | | | — | | | | 746 | | | | 3,054 | | | | 746 | |
Mortgage-backed | | | | 119 | | | | 25,395 | | | | — | | | | — | | | | 119 | |
Collateralized mortgage obligations | | | | 192 | | | | 10,104 | | | | — | | | | — | | | | 192 | |
| | | | | | | | | | | | | | | | | | | | | | |
Total | | $ | 5,642 | | | $ | 33,993 | | | $ | 51 | | | $ | 2,705 | | | $ | 5,693 | | | $ | 2,889 | | | $ | 54,918 | | | $ | 1,027 | | | $ | 8,294 | | | $ | 3,916 | |
| | | | | | | | | | | | | | | | | | | | | | |
Number of securities in an unrealized loss position: | | | | | | | | 39 | | | | | | | | 8 | | | | 47 | |
| | | | | | | | |
The Corporation has invested $11,000 in auction rate money market preferred investment security instruments, which are classified asavailable-for-sale securities and reflected at estimated fair value. Due to credit market concentrations and general uncertainty, in credit markets,the trading for these investments have become illiquid.securities has been limited. As a result of the illiquiditylimited trading of the markets for these securities, $7,800 converted to preferred stock with debt like characteristics in 2009.
Due to the illiquiditylimited trading activity of these securities, the fair values were estimated utilizing a discounted cash flow analysis or other type of valuation adjustment methodology as of December 31, 20092010 and 2008.December 31, 2009. These analyses consider, among other factors, the collateral underlying the security investments, theconsidered creditworthiness of the counterparty, the timing of expected future cash flows, estimatesand the current volume of trading activity. As of December 31, 2010, the Corporation held an auction rate money market preferred security and preferred stock which declined in fair value as a result of the next timesecurities interest rates, they are currently lower than the security is expectedoffering rates of securities with similar characteristics. Despite the limited trading of these securities, management has determined that any declines in the fair value of these securities are the result of changes in interest rates and not risks related to have a successful auction,the underlying credit quality of the security. Additionally, none of these securities are deemed to be below investment grade, and the fact that the management asserts that it does not intend to sell the securitysecurities in an unrealized loss position, and it is more likely than not itthat the Corporation will not have to sell the securities before recovery of itstheir cost basis. These securities were also compared, when possible,As a result, the Corporation has not recognized another-than-temporary impairment related to other securities with similar characteristics.these declines in fair value.
42
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Due to the lackAs of marketability of certain investments,December 31, 2010 and December 31, 2009, management conducted an analysis to determine whether all securities currently in an unrealized loss position, including auction rate money market preferred securities and preferred stocks, should be consideredother-than-temporarily-impaired (OTTI). Such analyses included,considered, among other factors, the following criteria:
| | |
| • | Has the value of the investment declined more than 20%what is deemed to be reasonable based on a risk and maturity adjusted discount rate? |
|
| • | Is the investment credit rating below investment grade? |
|
| • | Is it probable that the issuer will be unable to pay the amount when due? |
|
| • | Does management assert its ability and intentIs it more likely than not that the Corporation will not have to holdsell the security until maturity?before recovery of its cost basis? |
|
| • | Has the duration of the investment been extended by more than 7 years?extended? |
Based on the Corporation’s analysis using the above criteria, and the fact that management has asserted that it does not have the intent to sell these securities in an unrealized loss position, and that it is more likely than not the Corporation will not have to sell the securities before recovery of its losstheir cost basis, management does not believe that the values of these or any other securities areother-than-temporarily impaired as of December 31, 20092010 or 2008.2009.
| |
Note 5NOTE 4 — | Loans and Allowance for Loan Losses |
The BankCorporation grants commercial, agricultural, consumer and residential loans to customers situated primarily in Isabella, Gratiot, Mecosta, Southwestern Midland, Western Saginaw, Montcalm and Southern Clare counties in Michigan. The ability of the borrowers to honor their repayment obligations is often dependent upon the real estate, agricultural, light manufacturing, retail, gaming and tourism, higher education, and general economic conditions of this region. Substantially all of the consumer and residential mortgage 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.
A summary of the major classifications of loans is as follows as of December 31:
| | | | | | | | | | | | | | | | |
| | 2009 | | 2008 | | | 2010 | | 2009 | |
|
Mortgage loans on real estate | | | | | | | | | | | | | | | | |
Residential 1-4 family | | $ | 207,560 | | | $ | 231,705 | | | $ | 207,749 | | | $ | 207,560 | |
Commercial | | | 224,176 | | | | 200,398 | | | | 239,810 | | | | 224,176 | |
Agricultural | | | 38,236 | | | | 31,656 | | | | 44,246 | | | | 38,236 | |
Construction and land development | | | 13,268 | | | | 16,571 | | | | 12,250 | | | | 13,268 | |
Second mortgages | | | 34,255 | | | | 46,103 | | | | 26,712 | | | | 34,255 | |
Equity lines of credit | | | 30,755 | | | | 25,018 | | | | 37,318 | | | | 30,755 | |
| | | | | | | | | | |
Total mortgage loans | | | 548,250 | | | | 551,451 | | | | 568,085 | | | | 548,250 | |
Commercial and agricultural loans | | | | | | | | | | | | | | | | |
Commercial | | | 116,098 | | | | 124,408 | | | | 109,042 | | | | 116,098 | |
Agricultural production | | | 26,609 | | | | 26,347 | | | | 27,200 | | | | 26,609 | |
| | | | | | | | | | |
Total commercial and agricultural loans | | | 142,707 | | | | 150,755 | | | | 136,242 | | | | 142,707 | |
Consumer installment loans | | | 32,359 | | | | 33,179 | | | | 30,977 | | | | 32,359 | |
| | | | | | | | | | |
Total loans | | | 723,316 | | | | 735,385 | | | | 735,304 | | | | 723,316 | |
Less: allowance for loan losses | | | 12,979 | | | | 11,982 | | | | 12,373 | | | | 12,979 | |
| | | | | | | | | | |
Loans, net | | $ | 710,337 | | | $ | 723,403 | | |
Net loans | | | $ | 722,931 | | | $ | 710,337 | |
| | | | | | | | | | |
43
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
A summary of changes in the allowance for loan losses by loan segments follows:
| | | | | | | | | | | | |
| | Year Ended December 31 | |
| | 2009 | | | 2008 | | | 2007 | |
|
Balance at beginning of year | | $ | 11,982 | | | $ | 7,301 | | | $ | 7,605 | |
Allowance of acquired bank | | | — | | | | 822 | | | | — | |
Loans charged off | | | (6,642 | ) | | | (6,325 | ) | | | (2,146 | ) |
Recoveries | | | 1,546 | | | | 684 | | | | 631 | |
Provision charged to income | | | 6,093 | | | | 9,500 | | | | 1,211 | |
| | | | | | | | | | | | |
Balance at end of year | | $ | 12,979 | | | $ | 11,982 | | | $ | 7,301 | |
| | | | | | | | | | | | |
Allowance for Credit Losses and Recorded Investment in Financing Receivables
For the Year Ended December 31, 2010
| | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | Residential
| | | | | | | | | | |
| | Commercial | | | Agricultural | | | Real Estate | | | Consumer | | | Unallocated | | | Total | |
|
Allowance for loan losses | | | | | | | | | | | | | | | | | | | | | | | | |
January 1, 2010 | | $ | 5,531 | | | $ | 731 | | | $ | 3,590 | | | $ | 626 | | | $ | 2,501 | | | $ | 12,979 | |
Loans charged off | | | (3,731 | ) | | | — | | | | (2,524 | ) | | | (596 | ) | | | — | | | | (6,851 | ) |
Recoveries | | | 452 | | | | 1 | | | | 638 | | | | 297 | | | | — | | | | 1,388 | |
Provision for loan losses | | | 3,796 | | | | 301 | | | | 1,494 | | | | 278 | | | | (1,012 | ) | | | 4,857 | |
| | | | | | | | | | | | | | | | | | | | | | | | |
December 31, 2010 | | $ | 6,048 | | | $ | 1,033 | | | $ | 3,198 | | | $ | 605 | | | $ | 1,489 | | | $ | 12,373 | |
| | | | | | | | | | | | | | | | | | | | | | | | |
Allowance for loan losses as of December 31, 2010 | | | | | | | | | | | | | | | | | | | | | | | | |
Individually evaluated for impairment | | $ | 490 | | | $ | 558 | | | $ | 732 | | | $ | — | | | $ | — | | | $ | 1,780 | |
Collectively evaluated for impairment | | | 5,558 | | | | 475 | | | | 2,466 | | | | 605 | | | | 1,489 | | | | 10,593 | |
| | | | | | | | | | | | | | | | | | | | | | | | |
Total | | $ | 6,048 | | | $ | 1,033 | | | $ | 3,198 | | | $ | 605 | | | $ | 1,489 | | | $ | 12,373 | |
| | | | | | | | | | | | | | | | | | | | | | | | |
Loans as of December 31, 2010 | | | | | | | | | | | | | | | | | | | | | | | | |
Individually evaluated for impairment | | $ | 4,890 | | | $ | 2,629 | | | $ | 4,866 | | | $ | — | | | | | | | $ | 12,385 | |
Collectively evaluated for impairment | | | 343,962 | | | | 68,817 | | | | 279,163 | | | | 30,977 | | | | | | | | 722,919 | |
| | | | | | | | | | | | | | | | | | | | | | | | |
Total | | $ | 348,852 | | | $ | 71,446 | | | $ | 284,029 | | | $ | 30,977 | | | | | | | $ | 735,304 | |
| | | | | | | | | | | | | | | | | | | | | | | | |
Following is a summary of changes in the allowance for loan losses for the years ended December 31:
| | | | | | | | |
| | 2009 | | | 2008 | |
|
Balance at beginning of year | | $ | 11,982 | | | $ | 7,301 | |
Allowance of acquired bank | | | — | | | | 822 | |
Loans charged off | | | (6,642 | ) | | | (6,325 | ) |
Recoveries | | | 1,546 | | | | 684 | |
Provision charged to income | | | 6,093 | | | | 9,500 | |
| | | | | | | | |
Balance at end of year | | $ | 12,979 | | | $ | 11,982 | |
| | | | | | | | |
The primary factors behind the determination of the level of the allowance for loan losses (ALLL) are specific allocations for impaired loans, historical loss percentages, as well as current economic conditions. Specific allocations for impaired loans are primarily determined based on the difference between the net realizable value of the loan’s underlying collateral or the net present value of the projected payment stream and its recorded investment. Historical loss allocations are calculated at the loan class and segment levels based on a migration analysis of the loan portfolio over the preceding three years.
Commercial loans include loans for commercial real estate, farmland and agricultural production, state and political subdivisions, and commercial operating loans. The largest concentration of commercial loans is
44
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
commercial real estate. Repayment of commercial loans is often dependent upon the successful operation and management of a business; thus, these loans generally involve greater risk than other types of lending. The Corporation minimizes its risk by limiting the amount of loans to any one borrower to $12,500. Borrowers with credit needs of more than $12,500 are serviced through the use of loan participations with other commercial banks. All commercial real estate loans require loan to value limits of less than 80%. Depending upon the type of loan, past credit history, and current operating results, the Corporation may require the borrower to pledge accounts receivable, inventory, and fixed assets. Personal guarantees are generally required from the owners of closely held corporations, partnerships, and proprietorships. In addition, the Corporation requires annual financial statements, prepares cash flow analyses, and reviews credit reports as deemed necessary.
First and second residential real estate mortgages are the single largest category of loans. The Corporation offers adjustable rate mortgages, fixed rate balloon mortgages, and fixed rate mortgage 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 the Federal Home Loan Mortgage Association. Fixed rate residential mortgage loans with an amortization of 15 years or less may be held in the Corporation’s portfolio, held for future sale, or sold upon origination. Factors used in determining when to sell these mortgages include management’s judgment about the direction of interest rates, the Corporation’s need for fixed rate assets in the management of its interest rate sensitivity, and overall loan demand.
Construction and land development loans consist primarily of 1 to 4 family residential properties. These loans primarily have a 6 to 9 month maturity and are made using the same underwriting criteria as residential mortgages. Loan proceeds are disbursed in increments as construction progresses and inspections warrant. Construction loans are typically converted to permanent loans at the completion of construction.
Lending policies generally limit the maximum loan to value ratio on residential mortgages to 95% of the lower of the appraised value of the property or the purchase price, with the condition that private mortgage insurance is required on loans with loan to value ratios in excess of 80%. Substantially all loans upon origination have a loan to value ratio of less than 80%. Underwriting criteria for residential real estate loans include: evaluation of the borrower’s ability to make monthly payments, the value of the property securing the loan, ensuring the payment of principal, interest, taxes, and hazard insurance does not exceed 28% of a borrower’s gross income, all debt servicing does not exceed 36% of income, acceptable credit reports, verification of employment, income, and financial information. Appraisals are performed by independent appraisers. All mortgage loan requests are reviewed by a mortgage loan committee or through a secondary market automated underwriting system; loans in excess of $400 require the approval of the Bank’s Internal Loan Committee, Board of Directors, or its loan committee.
Consumer loans granted include automobile loans, secured and unsecured personal loans, credit cards, student loans, and overdraft protection related loans. Loans are amortized generally for a period of up to 6 years. The underwriting emphasis is on a borrower’s ability to pay rather than collateral value. No consumer loans are sold to the secondary market.
45
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Credit Quality Indicators
As of December 31, 2010
Commercial and Agricultural Credit Exposure
Credit Risk Profile by Internally Assigned Credit Rating
| | | | | | | | | | | | | | | | | | | | | | | | |
| | Commercial | | | Agricultural | |
| | Real Estate | | | Other | | | Total | | | Real Estate | | | Other | | | Total | |
|
Rating | | | | | | | | | | | | | | | | | | | | | | | | |
2 — High quality | | $ | 10,995 | | | $ | 13,525 | | | $ | 24,520 | | | $ | 3,792 | | | $ | 1,134 | | | $ | 4,926 | |
3 — High satisfactory | | | 74,912 | | | | 30,322 | | | | 105,234 | | | | 11,247 | | | | 3,235 | | | | 14,482 | |
4 — Low satisfactory | | | 119,912 | | | | 57,403 | | | | 177,315 | | | | 22,384 | | | | 14,862 | | | | 37,246 | |
5 — Special mention | | | 19,560 | | | | 6,507 | | | | 26,067 | | | | 4,169 | | | | 3,356 | | | | 7,525 | |
6 — Substandard | | | 10,234 | | | | 1,104 | | | | 11,338 | | | | 2,654 | | | | 4,613 | | | | 7,267 | |
7 — Vulnerable | | | 3,339 | | | | 54 | | | | 3,393 | | | | — | | | | — | | | | — | |
8 — Doubtful | | | 858 | | | | 127 | | | | 985 | | | | — | | | | — | | | | — | |
| | | | | | | | | | | | | | | | | | | | | | | | |
Total | | $ | 239,810 | | | $ | 109,042 | | | $ | 348,852 | | | $ | 44,246 | | | $ | 27,200 | | | $ | 71,446 | |
| | | | | | | | | | | | | | | | | | | | | | | | |
Internally assigned 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 risk ratings for commercial and agricultural loans are as follows:
| |
1. | EXCELLENT — Substantially Risk Free |
Loans to borrowers with a 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 |
Loans to borrowers with a sound financial condition and positive trend in earnings supplemented by:
| | |
| • | Favorable liquidity and leverage ratios. |
|
| • | Ability to meet all obligations when due. |
|
| • | Management with successful track record. |
|
| • | Steady and satisfactory earnings history. |
|
| • | If loan is secured, collateral is of high quality and readily marketable. |
|
| • | Access to alternative financing. |
|
| • | Well defined primary and secondary source of repayment. |
|
| • | If supported by guaranty, the financial strength and liquidity of the guarantor(s) are clearly evident. |
46
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
| |
3. | HIGH SATISFACTORY — Reasonable Risk |
Loans to borrowers with a 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 |
Loans to borrowers which are considered Bankable risks, although some signs of weaknesses are shown:
| | |
| • | Would include moststart-up businesses. |
|
| • | Occasional instances of trade slowness or repayment delinquency — may have been10-30 days slow within the past year. |
|
| • | Management abilities 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 |
These borrowers constitute an undue and unwarranted credit risk but not to the point of justifying a classification of substandard. The credit risk may be relatively minor yet constitute an unwarranted risk in light of the circumstances surrounding a specific loan:
| | |
| • | Downward trend in sales, profit levels and margins. |
|
| • | Impaired working capital position. |
|
| • | Cash flow is strained in order to meet debt repayment. |
|
| • | Loan delinquency(30-60 days) and overdrafts may occur. |
|
| • | Shrinking equity cushion. |
|
| • | Diminishing primary source of repayment and questionable secondary source. |
|
| • | Management abilities are questionable. |
|
| • | Weak industry conditions. |
|
| • | Litigation pending against the borrower. |
|
| • | Loan may need to be restructured to improve collateral position or reduce payments. |
|
| • | Collateral / guaranty offers limited protection. |
|
| • | Negative debt service coverage however well collateralized and payments current. |
47
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
| |
6. | SUBSTANDARD — Classified |
A substandard loan is inadequately protected by the current net worth and paying capacity of the borrower or of the collateral pledged. There is a distinct possibility that the Corporation will implement collection procedures if the loan deficiencies are not corrected. In addition, the following characteristics may apply:
| | |
| • | Sustained losses have severely eroded the equity and cash flow. |
|
| • | Deteriorating liquidity. |
|
| • | Serious management problems or internal fraud. |
|
| • | Original repayment terms liberalized. |
|
| • | Likelihood of bankruptcy. |
|
| • | Inability to access other funding sources. |
|
| • | Reliance on secondary source of repayment. |
|
| • | Litigation filed against borrower. |
|
| • | Collateral provides little or no value. |
|
| • | Requires excessive attention of the loan officer. |
|
| • | Borrower is uncooperative with loan officer. |
| |
7. | VULNERABLE — Classified |
This classification includes substandard loans that warrant placing on nonaccrual. Risk of loss is being evaluated and exit strategy options are under review. Other characteristics that may apply:
| | |
| • | Insufficient cash flow to service debt. |
|
| • | Minimal or no payments being received. |
|
| • | Limited options available to avoid the collection process. |
|
| • | Transition status, expect action will take place to collect loan without immediate progress being made. |
A doubtful loan has all the weaknesses inherent in a substandard loan with the added characteristic that collectionand/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. |
48
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Loans classified loss are considered uncollectible and of such little value that their continuance as bankable assets is not warranted. This classification is for charged off loans but does not mean that the asset has absolutely no recovery or salvage value. These loans are further characterized by:
| | |
| • | Liquidation or reorganization under Bankruptcy, with poor prospects of collection. |
|
| • | Fraudulently overstated assetsand/or earnings. |
|
| • | Collateral has marginal or no value. |
|
| • | Debtor cannot be located. |
|
| • | Over 120 days delinquent. |
The Corporation’s primary credit quality indicators for residential real estate and consumer loans is the individual loan’s past due aging.
Age Analysis of Past Due Loans
As of December 31, 2010
| | | | | | | | | | | | | | | | | | | | | | | | |
| | Accruing Interest
| | | | | | Total
| | | | | | | |
| | and Past Due: | | | | | | Past Due
| | | | | | | |
| | 30-89
| | | 90 Days
| | | | | | and
| | | | | | | |
| | Days | | | or More | | | Nonaccrual | | | Nonaccrual | | | Current | | | Total | |
|
Commercial | | | | | | | | | | | | | | | | | | | | | | | | |
Commercial real estate | | $ | 4,814 | | | $ | 125 | | | $ | 4,001 | | | $ | 8,940 | | | $ | 230,870 | | | $ | 239,810 | |
Commercial other | | | 381 | | | | — | | | | 139 | | | | 520 | | | | 108,522 | | | | 109,042 | |
| | | | | | | | | | | | | | | | | | | | | | | | |
Total commercial | | | 5,195 | | | | 125 | | | | 4,140 | | | | 9,460 | | | | 339,392 | | | | 348,852 | |
| | | | | | | | | | | | | | | | | | | | | | | | |
Agricultural | | | | | | | | | | | | | | | | | | | | | | | | |
Agricultural real estate | | | 92 | | | | — | | | | — | | | | 92 | | | | 44,154 | | | | 44,246 | |
Agricultural other | | | 4 | | | | 50 | | | | — | | | | 54 | | | | 27,146 | | | | 27,200 | |
| | | | | | | | | | | | | | | | | | | | | | | | |
Total agricultural | | | 96 | | | | 50 | | | | — | | | | 146 | | | | 71,300 | | | | 71,446 | |
| | | | | | | | | | | | | | | | | | | | | | | | |
Residential mortgage | | | | | | | | | | | | | | | | | | | | | | | | |
Senior liens | | | 5,265 | | | | 310 | | | | 1,421 | | | | 6,996 | | | | 213,003 | | | | 219,999 | |
Junior liens | | | 476 | | | | — | | | | 49 | | | | 525 | | | | 26,187 | | | | 26,712 | |
Home equity lines of credit | | | 598 | | | | — | | | | — | | | | 598 | | | | 36,720 | | | | 37,318 | |
| | | | | | | | | | | | | | | | | | | | | | | | |
Total residential mortgage | | | 6,339 | | | | 310 | | | | 1,470 | | | | 8,119 | | | | 275,910 | | | | 284,029 | |
| | | | | | | | | | | | | | | | | | | | | | | | |
Consumer | | | | | | | | | | | | | | | | | | | | | | | | |
Secured | | | 298 | | | | — | | | | — | | | | 298 | | | | 24,781 | | | | 25,079 | |
Unsecured | | | 10 | | | | 1 | | | | — | | | | 11 | | | | 5,887 | | | | 5,898 | |
| | | | | | | | | | | | | | | | | | | | | | | | |
Total consumer | | | 308 | | | | 1 | | | | — | | | | 309 | | | | 30,668 | | | | 30,977 | |
| | | | | | | | | | | | | | | | | | | | | | | | |
Total | | $ | 11,938 | | | $ | 486 | | | $ | 5,610 | | | $ | 18,034 | | | $ | 717,270 | | | $ | 735,304 | |
| | | | | | | | | | | | | | | | | | �� | | | | | | |
December 31, 2009 | | $ | 10,305 | | | $ | 768 | | | $ | 8,522 | | | $ | 19,595 | | | $ | 703,721 | | | $ | 723,316 | |
| | | | | | | | | | | | | | | | | | | | | | | | |
December 31, 2008 | | $ | 14,906 | | | $ | 1,251 | | | $ | 11,175 | | | $ | 27,332 | | | $ | 708,053 | | | $ | 735,385 | |
| | | | | | | | | | | | | | | | | | | | | | | | |
49
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
The following is a summary of information pertaining to impaired loans as of, and for the year, ended December 31, 2010:
| | | | | | | | | | | | | | | | | | | | |
| | December 31, 2010 | | | 2010 Year to Date | |
| | | | | Unpaid
| | | | | | Average
| | | Interest
| |
| | Outstanding
| | | Principal
| | | Valuation
| | | Outstanding
| | | Income
| |
| | Balance | | | Balance | | | Allowance | | | Balance | | | Recognized | |
|
Impaired loans with a valuation allowance | | | | | | | | | | | | | | | | | | | | |
Commercial real estate | | $ | 3,010 | | | $ | 4,110 | | | $ | 472 | | | $ | 2,482 | | | $ | 90 | |
Commercial other | | | 18 | | | | 18 | | | | 18 | | | | 259 | | | | 1 | |
Agricultural other | | | 2,196 | | | | 2,196 | | | | 558 | | | | 1,098 | | | | 143 | |
Residential mortgage senior liens | | | 4,292 | | | | 5,236 | | | | 698 | | | | 5,045 | | | | 187 | |
Residential mortgage junior liens | | | 172 | | | | 250 | | | | 34 | | | | 205 | | | | 7 | |
Consumer | | | — | | | | — | | | | — | | | | 12 | | | | — | |
| | | | | | | | | | | | | | | | | | | | |
Total impaired loans with a valuation allowance | | $ | 9,688 | | | $ | 11,810 | | | $ | 1,780 | | | $ | 9,101 | | | $ | 428 | |
| | | | | | | | | | | | | | | | | | | | |
Impaired loans without a valuation allowance | | | | | | | | | | | | | | | | | | | | |
Commercial real estate | | $ | 1,742 | | | $ | 2,669 | | | | | | | $ | 2,738 | | | $ | 147 | |
Commercial other | | | 169 | | | | 269 | | | | | | | | 145 | | | | 20 | |
Agricultural real estate | | | — | | | | — | | | | | | | | 106 | | | | — | |
Residential mortgage senior liens | | | 401 | | | | 501 | | | | | | | | 201 | | | | 26 | |
Home equity lines of credit | | | — | | | | — | | | | | | | | 8 | | | | — | |
Consumer secured | | | 48 | | | | 85 | | | | | | | | 55 | | | | 5 | |
| | | | | | | | | | | | | | | | | | | | |
Total impaired loans without a valuation allowance | | $ | 2,360 | | | $ | 3,524 | | | | | | | $ | 3,253 | | | $ | 198 | |
| | | | | | | | | | | | | | | | | | | | |
Impaired loans | | | | | | | | | | | | | | | | | | | | |
Commercial | | $ | 4,939 | | | $ | 7,066 | | | $ | 490 | | | $ | 5,624 | | | $ | 258 | |
Agricultural | | | 2,196 | | | | 2,196 | | | | 558 | | | | 1,204 | | | | 143 | |
Residential mortgage | | | 4,865 | | | | 5,987 | | | | 732 | | | | 5,459 | | | | 220 | |
Consumer | | | 48 | | | | 85 | | | | — | | | | 67 | | | | 5 | |
| | | | | | | | | | | | | | | | | | | | |
Total impaired loans | | $ | 12,048 | | | $ | 15,334 | | | $ | 1,780 | | | $ | 12,354 | | | $ | 626 | |
| | | | | | | | | | | | | | | | | | | | |
The following is a summary of information pertaining to impaired loans atas of, and for the years ended, December 31:
| | | | | | | | | | | | | | | | | | | | |
| | 2009 | | 2008 | | 2007 | | | 2009 | | 2008 | |
|
Impaired loans with a valuation allowance | | $ | 3,757 | | | $ | 7,378 | | | $ | — | | | $ | 3,757 | | | $ | 7,378 | |
Impaired loans without a valuation allowance | | | 8,897 | | | | 6,465 | | | | 4,841 | | | | 8,897 | | | | 6,465 | |
| | | | | | | | | | | | |
Total impaired loans | | $ | 12,654 | | | $ | 13,843 | | | $ | 4,841 | | | $ | 12,654 | | | $ | 13,843 | |
| | | | | | | | | | | | |
Valuation allowance related to impaired loans | | $ | 612 | | | $ | 1,413 | | | $ | — | | | $ | 612 | | | $ | 1,413 | |
Total restructured loans | | $ | 4,977 | | | $ | 4,550 | | | $ | 685 | | |
Total nonaccrual loans | | $ | 8,522 | | | $ | 11,175 | | | $ | 4,156 | | |
Average investment in impaired loans | | $ | 13,249 | | | $ | 9,342 | | | $ | 4,491 | | |
Interest income recognized on impaired loans | | $ | 340 | | | $ | 171 | | | $ | 55 | | |
Year to date average outstanding balance of impaired loans | | | $ | 13,249 | | | $ | 9,342 | |
Year to date interest income recognized on impaired loans | | | $ | 340 | | | $ | 171 | |
50
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
The following is a summary of restructured loans as of December 31:
| | | | | | | | | | | | |
| | 2010 | | 2009 | | 2008 |
|
Total restructured loans | | | 5,763 | | | $ | 4,977 | | | $ | 4,550 | |
No additional funds are committed to be advanced in connection with impaired loans, which includes restructured loans.
The followingInterest income is a summaryrecognized on impaired loans in nonaccrual status on the cash basis, but only after all principal has been collected. For impaired loans not in nonaccrual status, interest income is recognized daily as it’s earned according to the terms of loans accruing interest past due 90 days or more at December 31:
| | | | | | | | | | | | |
| | 2009 | | 2008 | | 2007 |
|
Accruing loans past due 90 days or more | | $ | 768 | | | $ | 1,251 | | | $ | 1,185 | |
the loan agreement.
Residential mortgage loans serviced for others are not included in the accompanying consolidated balance sheets. The unpaid principal balance of mortgages serviced for others was $307,656, $254,495,$309,882 and $255,839$307,656 at December 31, 2009, 2008,2010 and 20072009, respectively. The fair value of servicing rights was determined using discount rates ranging from 7.50% to 9.00%, prepayment speeds ranging from 6.00% to 45.72%48.72%, depending upon the stratification of the specific right and a weighted average default rates ranging from 0.0% to 25.7%rate of 0.4%. Servicing loans for others generally consists of collecting mortgage payments, maintaining escrow accounts, disbursing payments to investors and taxing authorities, and foreclosure processing.
The following table summarizes the carrying value and changes therein of mortgage servicing rights included in Other Assets as of December 31:
| | | | | | | | | | | | | | | | | | | | | | | | |
| | 2009 | | 2008 | | 2007 | | | 2010 | | 2009 | | 2008 | |
|
Balance at beginning of year | | $ | 2,105 | | | $ | 2,198 | | | $ | 2,155 | | | $ | 2,620 | | | $ | 2,105 | | | $ | 2,198 | |
Mortgage servicing rights capitalized | | | 4,370 | | | | 3,079 | | | | 2,869 | | | | 4,445 | | | | 4,370 | | | | 3,079 | |
Accumulated amortization | | | (3,706 | ) | | | (3,016 | ) | | | (2,785 | ) | | | (4,250 | ) | | | (3,706 | ) | | | (3,016 | ) |
Impairment valuation allowance | | | (149 | ) | | | (156 | ) | | | (41 | ) | | | (148 | ) | | | (149 | ) | | | (156 | ) |
| | | | | | | | | | | | | | |
Balance at end of year | | $ | 2,620 | | | $ | 2,105 | | | $ | 2,198 | | | $ | 2,667 | | | $ | 2,620 | | | $ | 2,105 | |
| | | | | | | | | | | | | | |
Impairment losses (reversed) recognized | | $ | (7 | ) | | $ | 115 | | | $ | 5 | | | $ | (1 | ) | | $ | (7 | ) | | $ | 115 | |
| | | | | | | | | | | | | | |
44
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
The Corporation recorded servicing fee revenue of $760, $724, and $627 related to residential mortgage loans serviced for others during the years ended December 31, 2010, 2009, and 2008, respectively.
| |
Note 7NOTE 6 — | Premises and Equipment |
A summary of premises and equipment at December 31 follows:
| | | | | | | | | | | | | | | | |
| | 2009 | | 2008 | | | 2010 | | 2009 | |
|
Land | | $ | 4,614 | | | $ | 4,665 | | | $ | 4,694 | | | $ | 4,614 | |
Buildings and improvements | | | 20,478 | | | | 18,653 | | | | 21,502 | | | | 20,478 | |
Furniture and equipment | | | 24,284 | | | | 23,043 | | | | 25,822 | | | | 24,284 | |
| | | | | | | | | | |
Total | | | 49,376 | | | | 46,361 | | | | 52,018 | | | | 49,376 | |
Less: Accumulated depreciation | | | 25,459 | | | | 23,130 | | |
Less: accumulated depreciation | | | | 27,391 | | | | 25,459 | |
| | | | | | | | | | |
Premises and equipment, net | | $ | 23,917 | | | $ | 23,231 | | | $ | 24,627 | | | $ | 23,917 | |
| | | | | | | | | | |
Depreciation expense amounted to $2,522, $2,349 and $2,171 in 2010, 2009, and $1,960 in 2009, 2008, and 2007, respectively.
51
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
| |
Note 8NOTE 7 — | Goodwill and Other Intangible Assets |
The change in the carrying amount of goodwill for the year is as follows:
| | | | | | | | |
| | 2009 | | | 2008 | |
|
Balance at January 1 | | $ | 45,618 | | | $ | 25,889 | |
Goodwill identified in GCFC acquisition (See Note 2) | | | — | | | | 21,319 | |
Reclassification for goodwill contributed to CT/IBT Title Agency, LLC joint venture (See Note 2) | | | — | | | | (1,590 | ) |
| | | | | | | | |
Balance at December 31 | | $ | 45,618 | | | $ | 45,618 | |
| | | | | | | | |
was $45,618 at December 31, 2010 and 2009.
Identifiable intangible assets at year end were as follows:
| | | | | | | | | | | | |
| | 2009 | |
| | Gross
| | | | | | Net
| |
| | Intangible
| | | Accumulated
| | | Intangible
| |
| | Assets | | | Amortization | | | Assets | |
|
Core deposit premium resulting from the Greenville acquisition in 2008 | | $ | 1,480 | | | $ | 358 | | | $ | 1,122 | |
Core deposit premium resulting from previous acquisitions | | | 3,893 | | | | 3,204 | | | | 689 | |
| | | | | | | | | | | | |
Total | | $ | 5,373 | | | $ | 3,562 | | | $ | 1,811 | |
| | | | | | | | | | | | |
| | | | | | | | | | | | |
| | 2010 | |
| | Gross
| | | | | | Net
| �� |
| | Intangible
| | | Accumulated
| | | Intangible
| |
| | Assets | | | Amortization | | | Assets | |
|
Core deposit premium resulting from acquisitions | | | 5,373 | | | | 3,900 | | | | 1,473 | |
| | | | | | | | | | | | |
Total | | $ | 5,373 | | | $ | 3,900 | | | $ | 1,473 | |
| | | | | | | | | | | | |
| | | | | | | | | | | | |
| | 2008 | |
| | Gross
| | | | | | Net
| |
| | Intangible
| | | Accumulated
| | | Intangible
| |
| | Assets | | | Amortization | | | Assets | |
|
Core deposit premium resulting from the Greenville acquisition in 2008 | | | 1,480 | | | $ | 185 | | | $ | 1,295 | |
Core deposit premium resulting from previous acquisitions | | | 3,893 | | | | 3,002 | | | | 891 | |
| | | | | | | | | | | | |
Total | | $ | 5,373 | | | $ | 3,187 | | | $ | 2,186 | |
| | | | | | | | | | | | |
| | | | | | | | | | | | |
| | 2009 | |
| | Gross
| | | | | | Net
| |
| | Intangible
| | | Accumulated
| | | Intangible
| |
| | Assets | | | Amortization | | | Assets | |
|
Core deposit premium resulting from acquisitions | | | 5,373 | | | | 3,562 | | | | 1,811 | |
| | | | | | | | | | | | |
Total | | $ | 5,373 | | | $ | 3,562 | | | $ | 1,811 | |
| | | | | | | | | | | | |
Amortization expense associated with identifiable intangible assets was $338, $375, and $415 in 2010, 2009, and $278 in 2009, 2008, and 2007, respectively.
45
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Estimated amortization expense associated with identifiable intangibles for each of the next five years succeeding December 31, 2010, and thereafter is as follows:
| | | | | | | | |
Year | | Amount | | | Amount | |
|
2010 | | $ | 338 | | |
2011 | | | 299 | | | $ | 299 | |
2012 | | | 261 | | | | 260 | |
2013 | | | 221 | | | | 221 | |
2014 | | | 183 | | | | 183 | |
2015 | | | | 145 | |
Thereafter | | | 509 | | | | 365 | |
| | | | | | |
| | $ | 1,811 | | | $ | 1,473 | |
| | | | | | |
Scheduled maturities of time deposits for the next five years, and thereafter, are as follows:
| | | | | | | | |
Year | | Amount | | | Amount | |
|
2010 | | $ | 269,257 | | |
2011 | | | 47,053 | | | $ | 216,927 | |
2012 | | | 53,054 | | | | 113,999 | |
2013 | | | 32,959 | | | | 44,269 | |
2014 | | | 16,273 | | | | 31,414 | |
2015 | | | | 39,474 | |
Thereafter | | | 2,050 | | | | 6,278 | |
| | | | | | |
| | $ | 420,646 | | | $ | 452,361 | |
| | | | | | |
Interest expense on time deposits greater than $100 was $4,427 in 2010, $5,246 in 2009, and $6,525 in 2008, and $6,649 in 2007.2008.
52
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
| |
Note 10NOTE 9 — | Borrowed Funds |
Borrowed funds consist of the following obligations at December 31:
| | | | | | | | |
| | 2009 | | | 2008 | |
|
Federal Home Loan Bank advances | | $ | 127,804 | | | $ | 150,220 | |
Securities sold under agreements to repurchase without stated maturity dates | | | 37,797 | | | | 42,430 | |
Securities sold under agreements to repurchase with stated maturity dates | | | 20,000 | | | | 20,000 | |
Federal Reserve Bank discount window advance | | | 7,500 | | | | — | |
Federal Funds purchased | | | — | | | | 9,700 | |
| | | | | | | | |
| | $ | 193,101 | | | $ | 222,350 | |
| | | | | | | | |
| | | | | | | | | | | | | | | | |
| | 2010 | | | 2009 | |
| | Amount | | | Rate | | | Amount | | | Rate | |
|
Federal Home Loan Bank advances | | $ | 113,423 | | | | 3.64 | % | | $ | 127,804 | | | | 4.11 | % |
Securities sold under agreements to repurchase | | | | | | | | | | | | | | | | |
without stated maturity dates | | | 45,871 | | | | 0.25 | % | | | 37,797 | | | | 0.30 | % |
Securities sold under agreements to repurchase | | | | | | | | | | | | | | | | |
with stated maturity dates | | | 19,623 | | | | 3.01 | % | | | 20,000 | | | | 3.72 | % |
Federal funds purchased | | | 16,000 | | | | 0.60 | % | | | — | | | | — | |
Federal Reserve Bank discount window advance | | | — | | | | — | | | | 7,500 | | | | 0.75 | % |
| | | | | | | | | | | | | | | | |
Total | | $ | 194,917 | | | | 2.53 | % | | $ | 193,101 | | | | 3.19 | % |
| | | | | | | | | | | | | | | | |
The Federal Home Loan Bank borrowings are collateralized by a blanket lien on all qualified 1-to-4 family whole mortgage loans and U.S. government and federal agency securities. Advances are also secured by FHLB stock owned by the Bank.Corporation.
46
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)The Corporation had the ability to borrow up to an additional $122,960, based on the assets currently pledged as collateral. The Corporation has pledged eligible mortgage loans and investment securities as collateral for any such borrowings.
The maturity and weighted average interest rates of FHLB advances are as follows as of December 31:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | 2009 | | 2008 | | | 2010 | | 2009 | |
| | Amount | | Rate | | Amount | | Rate | | | Amount | | Rate | | Amount | | Rate | |
|
Fixed rate advances due 2009 | | $ | — | | | | — | | | $ | 42,215 | | | | 1.89 | % | |
Fixed rate advances due 2010 | | | 28,320 | | | | 4.52 | % | | | 29,516 | | | | 4.58 | % | | $ | — | | | | — | | | $ | 28,320 | | | | 4.52 | % |
One year putable advances due 2010 | | | 6,000 | | | | 5.31 | % | | | 5,000 | | | | 5.18 | % | | | — | | | | — | | | | 6,000 | | | | 5.31 | % |
Fixed rate advances due 2011 | | | 10,206 | | | | 3.96 | % | | | 10,225 | | | | 3.96 | % | | | 10,086 | | | | 3.96 | % | | | 10,206 | | | | 3.96 | % |
One year putable advances due 2011 | | | 1,000 | | | | 4.75 | % | | | 1,000 | | | | 4.75 | % | | | 1,000 | | | | 4.75 | % | | | 1,000 | | | | 4.75 | % |
Fixed rate advances due 2012 | | | 17,000 | | | | 2.97 | % | | | 17,000 | | | | 4.19 | % | | | 17,000 | | | | 2.97 | % | | | 17,000 | | | | 2.97 | % |
One year putable advances due 2012 | | | 15,000 | | | | 4.10 | % | | | 5,000 | | | | 4.07 | % | | | 15,000 | | | | 4.10 | % | | | 15,000 | | | | 4.10 | % |
Fixed rate advances due 2013 | | | 5,278 | | | | 4.14 | % | | | — | | | | — | | | | 5,337 | | | | 4.14 | % | | | 5,278 | | | | 4.14 | % |
One year putable advances due 2013 | | | 5,000 | | | | 3.15 | % | | | 10,264 | | | | 3.66 | % | | | 5,000 | | | | 3.15 | % | | | 5,000 | | | | 3.15 | % |
Fixed rate advances due 2014 | | | 15,000 | | | | 3.63 | % | | | 5,000 | | | | 4.38 | % | | | 25,000 | | | | 3.16 | % | | | 15,000 | | | | 3.63 | % |
Fixed rate advances due 2015 | | | 25,000 | | | | 4.63 | % | | | 25,000 | | | | 4.63 | % | | | 25,000 | | | | 4.63 | % | | | 25,000 | | | | 4.63 | % |
Fixed rate advances due 2017 | | | | 10,000 | | | | 2.35 | % | | | — | | | | — | |
| | | | | | | | | | | | | | | | | | |
Total | | | $ | 113,423 | | | | 3.64 | % | | $ | 127,804 | | | | 4.11 | % |
| | $ | 127,804 | | | | 4.11 | % | | $ | 150,220 | | | | 3.68 | % | | | | | | | | | |
| | | | | | | | | | |
53
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
The maturity and weighted average interest rates of securities sold under agreements to repurchase with stated maturity dates are as follows at December 31:
| | | | | | | | | | | | | | | | |
| | 2010 | | | 2009 | |
| | Amount | | | Rate | | | Amount | | | Rate | |
|
Repurchase agreements due 2010 | | $ | — | | | | — | | | $ | 5,000 | | | | 4.00 | % |
Repurchase agreements due 2011 | | | 858 | | | | 1.51 | % | | | — | | | | — | |
Repurchase agreements due 2012 | | | 1,013 | | | | 2.21 | % | | | — | | | | — | |
Repurchase agreements due 2013 | | | 5,127 | | | | 4.45 | % | | | 5,000 | | | | 4.51 | % |
Repurchase agreements due 2014 | | | 12,087 | | | | 3.00 | % | | | 10,000 | | | | 3.19 | % |
Repurchase agreements due 2015 | | | 538 | | | | 3.25 | % | | | — | | | | — | |
| | | | | | | | | | | | | | | | |
Total | | $ | 19,623 | | | | 3.01 | % | | $ | 20,000 | | | | 3.72 | % |
| | | | | | | | | | | | | | | | |
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 repurchase are reflected at the amount of cash received in connection with the transaction. The U.S. government agency securities underlying the agreements have a carrying value and a fair value of $74,605$86,381 and $64,876$74,605 at December 31, 20092010 and 2008,2009, respectively. Such securities remain under the control of the Corporation. The Corporation may be required to provide additional collateral based on the fair value of underlying securities.
The maturity and weighted average interest rates of securitiesSecurities sold under repurchase agreements to repurchase withwithout stated maturity dates, are as follows atfederal funds purchased, and Federal Reserve Bank discount window advances generally mature within one to four days from the transaction date. The following table provides a summary of short term borrowings for the years ended December 31:
| | | | | | | | | | | | | | | | |
| | 2009 | | | 2008 | |
| | Amount | | | Rate | | | Amount | | | Rate | |
|
Repurchase agreements due 2010 | | $ | 5,000 | | | | 4.00 | % | | $ | 5,000 | | | | 4.00 | % |
Repurchase agreements due 2013 | | | 5,000 | | | | 4.51 | % | | | 5,000 | | | | 4.51 | % |
Repurchase agreements due 2014 | | | 10,000 | | | | 3.19 | % | | | 10,000 | | | | 3.19 | % |
| | | | | | | | | | | | | | | | |
| | $ | 20,000 | | | | 3.72 | % | | $ | 20,000 | | | | 3.72 | % |
| | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | |
| | 2010 | | 2009 |
| | Maximum
| | YTD
| | Weighted Average
| | Maximum
| | YTD
| | Weighted Average
|
| | Month-End
| | Average
| | Interest Rate
| | Month-End
| | Average
| | Interest Rate
|
| | Balance | | Balance | | During the Year | | Balance | | Balance | | During the Year |
|
Securities sold under agreements to repurchase witout stated maturity dates | | $ | 56,410 | | | $ | 44,974 | | | | 0.29 | % | | $ | 51,269 | | | $ | 38,590 | | | | 0.32 | % |
Federal funds purchased | | | 16,000 | | | | 333 | | | | 0.60 | % | | | 13,200 | | | | 1,635 | | | | 0.50 | % |
Federal Reserve Bank discount window advance | | | 7,500 | | | | 103 | | | | 0.75 | | | | 7,500 | | | | 41 | | | | 0.75 | |
54
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
| |
Note 11NOTE 10 — | Other Noninterest Expenses |
A summary of expenses included in Other Noninterest Expenses are as follows for the year ended December 31:
| | | | | | | | | | | | |
| | 2009 | | | 2008 | | | 2007 | |
|
Director fees | | $ | 923 | | | $ | 867 | | | $ | 796 | |
Marketing and advertising | | | 833 | | | | 844 | | | | 670 | |
Foreclosed asset and collection | | | 831 | | | | 698 | | | | 269 | |
Other, not individually significant | | | 4,792 | | | | 5,106 | | | | 4,718 | |
| | | | | | | | | | | | |
| | $ | 7,379 | | | $ | 7,515 | | | $ | 6,453 | |
| | | | | | | | | | | | |
| | | | | | | | | | | | |
| | 2010 | | | 2009 | | | 2008 | |
|
Marketing and community relations | | $ | 1,093 | | | $ | 894 | | | $ | 921 | |
Foreclosed asset and collection | | | 710 | | | | 546 | | | | 565 | |
Directors fees | | | 887 | | | | 923 | | | | 867 | |
Audit and SOX compliance fees | | | 916 | | | | 831 | | | | 698 | |
Education and travel | | | 499 | | | | 395 | | | | 491 | |
Printing and supplies | | | 420 | | | | 529 | | | | 508 | |
Postage and freight | | | 382 | | | | 415 | | | | 419 | |
Legal fees | | | 338 | | | | 375 | | | | 415 | |
Amortization of deposit premium | | | 395 | | | | 472 | | | | 523 | |
Consulting fees | | | 167 | | | | 201 | | | | 298 | |
All other | | | 1,499 | | | | 1,798 | | | | 1,810 | |
| | | | | | | | | | | | |
Total other | | $ | 7,306 | | | $ | 7,379 | | | $ | 7,515 | |
| | | | | | | | | | | | |
Individual items disclosed represent at least 1% of gross income in any one of the years ended December 31, 2009, 2008 and 2007.
47
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
| |
Note 12NOTE 11 — | Federal Income Taxes |
Components of the consolidated provision (benefit) for income taxes are as follows for the year ended December 31:
| | | | | | | | | | | | |
| | 2009 | | | 2008 | | | 2007 | |
|
Currently payable | | $ | 1,487 | | | $ | 1,088 | | | $ | 1,304 | |
Deferred (benefit) expense | | | (641 | ) | | | (1,812 | ) | | | 301 | |
| | | | | | | | | | | | |
Federal income tax expense (benefit) | | $ | 846 | | | $ | (724 | ) | | $ | 1,605 | |
| | | | | | | | | | | | |
| | | | | | | | | | | | |
| | 2010 | | | 2009 | | | 2008 | |
|
Currently payable | | $ | 1,425 | | | $ | 1,487 | | | $ | 1,088 | |
Deferred expense (benefit) | | | 179 | | | | (641 | ) | | | (1,812 | ) |
| | | | | | | | | | | | |
Income tax expense (benefit) | | $ | 1,604 | | | $ | 846 | | | $ | (724 | ) |
| | | | | | | | | | | | |
The reconciliation of the provision (benefit) for federal income taxes and the amount computed at the federal statutory tax rate of 34% of income before federal income tax (benefit) expensetaxes is as follows for the yearyears ended December 31:
| | | | | | | | | | | | | | | | | | | | | | | | |
| | 2009 | | 2008 | | 2007 | | | 2010 | | 2009 | | 2008 | |
|
Income taxes at 34% statutory rate | | $ | 2,940 | | | $ | 1,148 | | | $ | 3,242 | | | $ | 3,621 | | | $ | 2,940 | | | $ | 1,148 | |
Effect of nontaxable income | | | (2,265 | ) | | | (2,088 | ) | | | (1,782 | ) | | | | | | | | | | | | |
Interest income on tax exempt municipal bonds | | | | (1,565 | ) | | | (1,680 | ) | | | (1,713 | ) |
Earnings on corporate owned life insurance | | | | (225 | ) | | | (218 | ) | | | (106 | ) |
Other | | | | (395 | ) | | | (383 | ) | | | (269 | ) |
| | | | | | | | |
Total effect of nontaxable income | | | | (2,185 | ) | | | (2,281 | ) | | | (2,088 | ) |
Effect of nondeductible expenses | | | 171 | | | | 216 | | | | 145 | | | | 168 | | | | 187 | | | | 216 | |
| | | | | | | | | | | | | | |
Federal income tax expense (benefit) | | $ | 846 | | | $ | (724 | ) | | $ | 1,605 | | |
Income tax expense (benefit) | | | $ | 1,604 | | | $ | 846 | | | $ | (724 | ) |
| | | | | | | | | | | | | | |
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.
55
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Significant components of the Corporation’s deferred tax assets and liabilities, included in other assets in the accompanying consolidated balance sheets, are as follows as of December 31:
| | | | | | | | | | | | | | | | |
| | 2009 | | 2008 | | | 2010 | | 2009 | |
|
Deferred tax assets | | | | | | | | | | | | | | | | |
Allowance for loan losses | | $ | 3,482 | | | $ | 3,145 | | | $ | 3,270 | | | $ | 3,482 | |
Deferred directors’ fees | | | 2,251 | | | | 1,930 | | | | 2,364 | | | | 2,251 | |
Employee benefit plans | | | 132 | | | | 80 | | | | 122 | | | | 132 | |
Core deposit premium and acquisition expenses | | | 310 | | | | 252 | | | | 694 | | | | 310 | |
Net unrealized losses on trading securities | | | 23 | | | | 32 | | | | 400 | | | | 23 | |
Net unrecognized actuarial loss on pension plan | | | 1,084 | | | | 1,211 | | | | 1,109 | | | | 1,084 | |
Life insurance death benefit payable | | | 804 | | | | 804 | | | | 804 | | | | 804 | |
Alternative minimum tax | | | | 686 | | | | 619 | |
Other | | | 1,123 | | | | 860 | | | | 219 | | | | 504 | |
| | | | | | | | | | |
Total deferred tax assets | | | 9,209 | | | | 8,314 | | | | 9,668 | | | | 9,209 | |
| | | | | | | | | | |
Deferred tax liabilities | | | | | | | | | | | | | | | | |
Prepaid pension cost | | | 900 | | | | 951 | | | | 851 | | | | 900 | |
Premises and equipment | | | 665 | | | | 620 | | | | 902 | | | | 665 | |
Accretion on securities | | | 54 | | | | 45 | | | | 36 | | | | 54 | |
Core deposit premium and acquisition expenses | | | 642 | | | | 506 | | | | 1,000 | | | | 642 | |
Net unrealized gains onavailable-for-sale securities | | | 494 | | | | 930 | | | | 847 | | | | 494 | |
Other | | | 435 | | | | 193 | | | | 518 | | | | 435 | |
| | | | | | | | | | |
Total deferred tax liabilities | | | 3,190 | | | | 3,245 | | | | 4,154 | | | | 3,190 | |
| | | | | | | | | | |
Net deferred tax assets | | $ | 6,019 | | | $ | 5,069 | | | $ | 5,514 | | | $ | 6,019 | |
| | | | | | | | | | |
The Corporation and its subsidiaries are subject to U.S. federal income tax. The Corporation is no longer subject to examination by taxing authorities for years before 2006.2007. There are no material uncertain tax positions
48
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
requiring recognition in the Company’s consolidated financial statements. The Corporation does not expect the total amount of unrecognized tax benefits to significantly increase in the next twelve months.
The Corporation recognizes interestand/or penalties related to income tax matters in income tax expense. The Corporation does not have any amounts accrued for interest and penalties at December 31, 20092010 and is not aware of any claims for such amounts by federal income tax authorities.
Included in other comprehensive income for the yearyears ended December 31, 2010 and 2009 are the changes in unrealized losses of $226 and 2008 are unrealized gains of $4,048, and unrealized losses of $5,021, respectively, related to auction rate money market securities and preferred stock. For federal income tax purposes, these securities are considered equity investments for which no federal deferred income taxes are expected or recorded.
| |
Note 13NOTE 12 — | Off-Balance-Sheet Activities |
Credit-Related Financial Instruments
The Corporation is 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 its customers. These financial instruments, which include commitments to extend credit and standby letters of credit, involve, to varying degrees, elements of credit and interest rate risk in excess of the amounts recognized in the consolidated balance sheets. The contract or notional amounts of these instruments reflect the extent of involvement the Corporation has in a particular class of financial instrument.
| | | | | | | | |
| | Contract Amount | |
| | 2009 | | | 2008 | |
|
Unfunded commitments under lines of credit | | $ | 111,711 | | | $ | 106,861 | |
Commercial and standby letters of credit | | | 6,509 | | | | 6,429 | |
Commitments to grant loans | | | 9,645 | | | | 10,228 | |
56
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
| | | | | | | | |
| | Contract Amount |
| | 2010 | | 2009 |
|
Unfunded commitments under lines of credit | | $ | 110,201 | | | $ | 111,711 | |
Commercial and standby letters of credit | | | 4,881 | | | | 6,509 | |
Commitments to grant loans | | | 13,382 | | | | 9,645 | |
Unfunded commitments under commercial lines of credit, revolving credit home equity lines of credit and overdraft protection agreements are commitments for possible future extensions of credit to existing customers. The commitments for equity lines of credit may expire without being drawn upon. These lines of credit are uncollateralized and usually do not contain a specified maturity date and may not be drawn upon to the total extent to which the BankCorporation is committed. A majority of such commitments are at fixed rates of interest; a portion is unsecured.
Commercial and standby letters of credit are conditional commitments issued by the Corporation to guarantee the performance of a customer to a third party. Those guarantees are primarily issued to support private borrowing arrangements, including commercial paper, bond financing, and similar transactions.
These commitments to extend credit and letters of credit mature within one year. The credit risk involved in these transactions is essentially the same as that involved in extending loans to customers. The Corporation evaluates each customer’s credit worthiness on acase-by-case basis. The amount of collateral obtained, if deemed necessary by the Corporation upon the extension of credit, is based on management’s credit evaluation of the borrower. While the Corporation considers 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 extend credit 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 commitments may expire without being drawn upon. Therefore, the total commitment amounts do not necessarily represent future cash requirements. The amount of collateral obtained, if it is deemed necessary by the Bank,Corporation, is based on management’s credit evaluation of the customer.
The Corporation’s 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 is represented by the contractual notional amount of those instruments. The Corporation uses the same credit policies in deciding to make these
49
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
commitments as it does for extending loans to customers. No significant losses are anticipated as a result of these commitments.
| |
Note 14NOTE 13 — | On-Balance Sheet Activities |
Derivative Loan Commitments
Mortgage loan commitments are referred to as derivative loan commitments if the loan that will result from exercise of the commitment will be held for sale upon funding. The Corporation enters into commitments to fund residential mortgage loans at specific times in the future, with the intention that these loans will subsequently be sold in the secondary market. A mortgage loan commitment binds the Corporation to lend funds to a potential borrower at a specified interest rate within a specified period of time, generally up to 60 days after inception of the rate lock.
Outstanding derivative loan commitments expose the Corporation to the risk that the price of the loans arising from the exercise of the loan commitment might decline from the inception of the rate lock to funding of the loan due to increases in mortgage interest rates. If interest rates increase, the value of these loan commitments decreases. Conversely, if interest rates decrease, the value of these loan commitments increases. The notional amount of undesignated interest rate lock commitments was $760$547 and $334$760 at December 31, 2010 and 2009, and 2008, respectively.
57
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Forward Loan Sale Commitments
To protect against the price risk inherent in derivative loan commitments, the Corporation utilizes both “mandatory delivery” and “best efforts” forward loan sale commitments to mitigate the risk of potential decreases in the values of loan that would result from the exercise of the derivative loan commitments.
With a “mandatory delivery” contract, the Corporation commits to deliver a certain principal amount of mortgage loans to an investor at a specified price on or before a specified date. If the Corporation fails to deliver the amount of mortgages necessary to fulfill the commitment by the specified date, it is obligated to pay a “pair-off” fee, based on then current market prices, to the investor to compensate the investor for the shortfall.
With a “best efforts” contract, the Corporation commits to deliver an individual mortgage loan of a specified principal amount and quality to an investor if the loan to the underlying borrower closes. Generally, the price the investor will pay the seller for an individual loan is specified prior to the loan being funded (e.g. on the same day the lender commits to lend funds to a potential borrower).
The Corporation expects that these forward loan sale commitments will experience changes in fair value opposite to the change in fair value of derivatederivative loan commitments. The notional amount of undesignated forward loan sale commitments was $3,041$1,729 and $1,232$3,041 at December 31, 20092010 and 2008,2009, respectively.
The fair values of the rate lock loan commitments related to the origination of mortgage loans that will be held for sale and the forward loan sale commitments are deemed insignificant by management and, accordingly, are not recorded in the accompanying consolidated financial statements.
| |
Note 15NOTE 14 — | Commitments and Other Matters |
Banking regulations require banksthe Bank to maintain cash reserve balances in currency or as deposits with the Federal Reserve Bank. At December 31, 20092010 and 2008,2009, the reserve balances amounted to $470 and $687, and $700, respectively.
Isabella Bank sponsors the IBT Foundation (the “Foundation”), which is a nonprofit entity formed for the purpose of distributing charitable donations to recipient organizations generally located in the communities serviced by Isabella Bank. The Bank periodically makes charitable contributions in the form of cash transfers to the Foundation. The Foundation is administered by members of the Isabella Bank Board of Directors. The assets and transactions of the Foundation are not included in the consolidated financial statements of Isabella Bank Corporation. During 2009, 2008, and 2007, the Corporation contributed $140, $78, and $0 respectively to the Foundation. The assets of the Foundation as of December 31, 2009 and 2008 were $985 and $953, respectively.
50
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Banking regulations limit the transfer of assets in the form of dividends, loans, or advances from the Bank to the Corporation. At December 31, 2009,2010, 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 years retained net income plus retained net income for the preceding two years, less any required transfers to common stock. At January 1, 2010,2011, the amount available for dividends without regulatory approval was approximately $10,591.
The Bank has obtained approval to borrow up to an additional $13,849 from the Federal Home Loan Bank (FHLB) of Indianapolis, based on the assets currently pledged as collateral. Under the terms of the agreement, the Bank may obtain advances at the stated rate at the time of the borrowings. The Bank has pledged eligible mortgage loans and U.S. Treasury and governmental agencies as collateral for any such borrowings.$8,435.
| |
Note 1615 — | Minimum Regulatory Capital Requirements |
The Corporation (on a consolidated basis) and the Bank are subject to various regulatory capital requirements administered by the Federal Reserve Bank and the Federal Deposit Insurance Corporation (The Regulators). Failure to meet minimum capital requirements can initiate mandatory and possibly additional discretionary actions by The Regulators that if undertaken, could have a material effect on the Corporation’s and Bank’s financial statements. Under regulatory capital adequacy guidelines and the regulatory framework for prompt corrective action, the Corporation and the Bank must meet specific capital guidelines that include quantitative measures of their assets, liabilities, capital, and certain off-balance-sheet items, as calculated under regulatory accounting standards. The Bank’s capital amounts and classifications are also subject to qualitative judgments by The Regulators about components, risk weightings, and other factors. Prompt corrective action provisions are not applicable to bank holding companies.
Quantitative measures established by regulation to ensure capital adequacy require the Corporation and the Bank to maintain minimum amounts and ratios (set forth in the following table) of total and Tier 1 capital (as defined in the regulations) to risk-weighted assets (as defined) and Tier 1 capital to average assets (as defined).
58
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Management believes, as of December 31, 20092010 and 2008,2009, that the Corporation and the Bank met all capital adequacy requirements to which they are subject.
As of December 31, 2009,2010, the most recent notifications from The Regulators categorized the Bank as well capitalized under the regulatory framework for prompt corrective action. To be categorized as well capitalized, an institution must maintain total risk-based, Tier 1 risk-based, and Tier 1 leverage ratios as set forth in the following tables. There are no conditions or events since the notifications that management believes has changed the Bank’s categories. The Corporation’s and the Bank’s actual capital amounts (in thousands) and ratios are also presented in the table.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | Minimum to be
| | | | | | | Minimum to be
|
| | | | Minimum
| | Well Capitalized
| | | | | | | Well Capitalized
|
| | | | Capital
| | Under Prompt Corrective Action
| | | | | Minimum
| | Under Prompt
|
| | Actual | | Requirement | | Provisions | | | | | Capital
| | Corrective Action
|
| | Amount | | Ratio | | Amount | | Ratio | | Amount | | Ratio | | | Actual | | Requirement | | Provisions |
| | Amount | | Ratio | | Amount | | Ratio | | Amount | | Ratio |
December 31, 2009 | | | | | | | | | | | | | | | | | | | | | | | | | |
| |
December 31, 2010 | | | | | | | | | | | | | | | | | | | |
Total capital to risk weighted assets | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Isabella Bank | | $ | 93,079 | | | | 12.9 | % | | $ | 57,713 | | | | 8.0 | % | | $ | 72,141 | | | | 10.0 | % | | $ | 98,566 | | | | 12.8 | % | | $ | 61,642 | | | | 8.0 | % | | $ | 77,053 | | | | 10.0 | % |
Consolidated | | | 102,285 | | | | 14.1 | | | | 58,213 | | | | 8.0 | | | | N/A | | | | N/A | | | | 106,826 | | | | 13.7 | | | | 62,423 | | | | 8.0 | | | | N/A | | | | N/A | |
Tier 1 capital to risk weighted assets | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Isabella Bank | | | 84,012 | | | | 11.6 | | | | 28,856 | | | | 4.0 | | | | 43,285 | | | | 6.0 | | | | 88,901 | | | | 11.5 | | | | 30,821 | | | | 4.0 | | | | 46,232 | | | | 6.0 | |
Consolidated | | | 93,141 | | | | 12.8 | | | | 29,106 | | | | 4.0 | | | | N/A | | | | N/A | | | | 97,040 | | | | 12.4 | | | | 31,212 | | | | 4.0 | | | | N/A | | | | N/A | |
Tier 1 capital to average assets | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Isabella Bank | | | 84,012 | | | | 7.8 | | | | 42,813 | | | | 4.0 | | | | 53,516 | | | | 5.0 | | | | 88,901 | | | | 7.6 | | | | 46,653 | | | | 4.0 | | | | 58,316 | | | | 5.0 | |
Consolidated | | | 93,141 | | | | 8.6 | | | | 43,326 | | | | 4.0 | | | | N/A | | | | N/A | | | | 97,040 | | | | 8.2 | | | | 47,116 | | | | 4.0 | | | | N/A | | | | N/A | |
| | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | Minimum to be
|
| | | | | | Well Capitalized
|
| | | | Minimum
| | Under Prompt
|
| | | | Capital
| | Corrective Action
|
| | Actual | | Requirement | | Provisions |
| | Amount | | Ratio | | Amount | | Ratio | | Amount | | Ratio |
|
December 31, 2009 | | | | | | | | | | | | | | | | | | | | | | | | |
Total capital to risk weighted assets | | | | | | | | | | | | | | | | | | | | | | | | |
Isabella Bank | | $ | 93,079 | | | | 12.9 | % | | $ | 57,713 | | | | 8.0 | % | | $ | 72,141 | | | | 10.0 | % |
Consolidated | | | 102,285 | | | | 14.1 | | | | 58,213 | | | | 8.0 | | | | N/A | | | | N/A | |
Tier 1 capital to risk weighted assets | | | | | | | | | | | | | | | | | | | | | | | | |
Isabella Bank | | | 84,012 | | | | 11.6 | | | | 28,856 | | | | 4.0 | | | | 43,285 | | | | 6.0 | |
Consolidated | | | 93,141 | | | | 12.8 | | | | 29,106 | | | | 4.0 | | | | N/A | | | | N/A | |
Tier 1 capital to average assets | | | | | | | | | | | | | | | | | | | | | | | | |
Isabella Bank | | | 84,012 | | | | 7.8 | | | | 42,813 | | | | 4.0 | | | | 53,516 | | | | 5.0 | |
Consolidated | | | 93,141 | | | | 8.6 | | | | 43,326 | | | | 4.0 | | | | N/A | | | | N/A | |
401(k) Plan
The Corporation has a 401(k) plan in which substantially all employees are eligible to participate. Employees may contribute up to 50% of their compensation subject to certain limits based on federal tax laws. The Corporation makes 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 are 100% vested in the safe harbor contributions and are 0% vested through their first two years of employment and are 100% vested after
5159
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
| | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | Minimum to be
| |
| | | | | Minimum
| | | Well Capitalized
| |
| | | | | Capital
| | | Under Prompt Corrective Action
| |
| | Actual | | | Requirement | | | Provisions | |
| | Amount | | | Ratio | | | Amount | | | Ratio | | | Amount | | | Ratio | |
|
December 31, 2008 | | | | | | | | | | | | | | | | | | | | | | | | |
Total capital to risk weighted assets | | | | | | | | | | | | | | | | | | | | | | | | |
Isabella Bank | | $ | 89,192 | | | | 12.4 | % | | $ | 57,666 | | | | 8.0 | % | | $ | 72,082 | | | | 10.0 | % |
Consolidated | | | 98,867 | | | | 13.5 | | | | 58,484 | | | | 8.0 | | | | N/A | | | | N/A | |
Tier 1 capital to risk weighted assets | | | | | | | | | | | | | | | | | | | | | | | | |
Isabella Bank | | | 80,145 | | | | 11.1 | | | | 28,833 | | | | 4.0 | | | | 43,249 | | | | 6.0 | |
Consolidated | | | 89,694 | | | | 12.3 | | | | 29,242 | | | | 4.0 | | | | N/A | | | | N/A | |
Tier 1 capital to average assets | | | | | | | | | | | | | | | | | | | | | | | | |
Isabella Bank | | | 80,145 | | | | 7.4 | | | | 43,069 | | | | 4.0 | | | | 53,836 | | | | 5.0 | |
Consolidated | | | 89,694 | | | | 8.4 | | | | 42,603 | | | | 4.0 | | | | N/A | | | | N/A | |
6 years of service for matching contributions. For the year ended December 31, 2010, 2009 and 2008, expenses attributable to the Plan were $625, $617, and $543 respectively.
| |
Note 17 — | Employee Benefit Plans |
Defined Benefit Pension Plan
The Corporation has a non-contributory defined benefit pension plan covering substantially all of its employees. In December 2006, the Board of Directors voted to curtail the defined benefit plan effective March 1, 2007. The effect of the curtailment, which was recognizedcurtailed in the first quarter of 2007, suspended the current participant’s accrued benefits as of March 1, 2007 and limited participation in the plan to eligible employees as of December 31, 2006.2007. Due to the curtailment, future salary increases will not be considered and the benefits are based on years of service and the employees’ five highest consecutive years of compensation out of the last ten years of service rendered through March 1, 2007.
The curtailment resulted in a reduction in 2007 of $2,939 in the projected benefit obligation, which served to reduce unrecognized net actuarial loss of $2,939, a component of accumulated other comprehensive loss.
Subsequent to the decision to curtail the defined benefit plan, the Corporation decided to increase the contributions to the Corporation’s 401(k) plan effective January 1, 2007 (see “Other Employee Benefit Plans” on page 69).
52
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Changes in the projected benefit obligation and plan assets during each year, the funded status of the plan, and the net amount recognized on the Corporation’s consolidated balance sheets using an actuarial measurement date of December 31, are summarized as follows during the years ended December 31:
| | | | | | | | | | | | | | | | |
| | 2009 | | 2008 | | | 2010 | | 2009 | |
|
Change in benefit obligation | | | | | | | | | | | | | | | | |
Benefit obligation, January 1 | | $ | 8,436 | | | $ | 8,206 | | | $ | 8,897 | | | $ | 8,436 | |
Interest cost | | | 504 | | | | 503 | | | | 531 | | | | 504 | |
Actuarial loss | | | 392 | | | | 356 | | | | 679 | | | | 392 | |
Benefits paid, including plan expenses | | | (435 | ) | | | (629 | ) | | | (447 | ) | | | (435 | ) |
| | | | | | | | | | |
Benefit obligation, December 31 | | | 8,897 | | | | 8,436 | | | | 9,660 | | | | 8,897 | |
| | | | | | | | | | |
Change in plan assets | | | | | | | | | | | | | | | | |
Fair value of plan assets, January 1 | | | 7,669 | | | | 9,607 | | | | 8,355 | | | | 7,669 | |
Investment return (loss) | | | 1,121 | | | | (1,309 | ) | |
Investment return | | | | 945 | | | | 1,121 | |
Contributions | | | | 47 | | | | — | |
Benefits paid, including plan expenses | | | (435 | ) | | | (629 | ) | | | (447 | ) | | | (435 | ) |
| | | | | | |
Fair value of plan assets, December 31 | | | 8,355 | | | | 7,669 | | | | 8,900 | | | | 8,355 | |
| | | | | | | | | | |
Deficiency in funded status at December 31, included in other liabilities on the balance sheets | | $ | (542 | ) | | $ | (767 | ) | |
Deficiency in funded status at December 31, included on the consolidated balance sheets in accrued interest and other liabilities | | | $ | (760 | ) | | $ | (542 | ) |
| | | | | | | | | | |
Change in accrued pension benefit costs | | | | | | | | | | | | | | | | |
(Accrued) prepaid benefit cost at January 1 | | $ | (767 | ) | | $ | 1,401 | | |
Net periodic benefit (cost) income for the year | | | (149 | ) | | | 152 | | |
Accrued benefit cost at January 1 | | | $ | (542 | ) | | $ | (767 | ) |
Contributions | | | | 47 | | | | — | |
Net periodic cost for the year | | | | (193 | ) | | | (149 | ) |
Net change in unrecognized actuarial loss and prior service cost | | | 374 | | | | (2,320 | ) | | | (72 | ) | | | 374 | |
| | | | | | | | | | |
Accrued pension benefit cost at December 31 | | $ | (542 | ) | | $ | (767 | ) | | $ | (760 | ) | | $ | (542 | ) |
| | | | | | | | | | |
Amounts recognized as a component of accumulated other comprehensive loss consist of:of the following amounts during the years ended December 31 :
| | | | | | | | | | | | | | | | | | | | | | | | |
| | December 31 | | | 2010 | | 2009 | | 2008 | |
| | 2009 | | 2008 | | 2007 | |
| |
Unrecognized pension cost | | $ | 374 | | | $ | (2,320 | ) | | $ | 2,890 | | |
Change in unrecognized pension cost | | | $ | (72 | ) | | $ | 374 | | | $ | (2,320 | ) |
Tax effect | | | (127 | ) | | | 788 | | | | (983 | ) | | | 25 | | | | (127 | ) | | | 788 | |
| | | | | | | | | | | | | | |
Net | | $ | 247 | | | $ | (1,532 | ) | | $ | 1,907 | | | $ | (47 | ) | | $ | 247 | | | $ | (1,532 | ) |
| | | | | | | | | | | | | | |
The accumulated benefit obligation was $8,897$9,660 and $8,436$8,897 at December 31, 20092010 and 2008,2009, respectively.
The componentsCompany has recorded the funded status of net periodic benefit cost and other pension related amounts recognizedthe Plan in other comprehensive income (loss) are as follows forits consolidated balance sheets. The Company adjusts the years ended December 31:
| | | | | | | | | | | | |
| | 2009 | | | 2008 | | | 2007 | |
|
Net periodic benefit cost (income) | | | | | | | | | | | | |
Service cost on benefits earned for services rendered during the year | | $ | — | | | $ | — | | | $ | 109 | |
Interest cost on projected benefit obligation | | | 503 | | | | 503 | | | | 489 | |
Expected return on plan assets | | | (524 | ) | | | (659 | ) | | | (628 | ) |
Amortization of unrecognized actuarial net loss | | | 170 | | | | 4 | | | | 32 | |
| | | | | | | | | | | | |
Net periodic benefit cost (income) | | $ | 149 | | | $ | (152 | ) | | $ | 2 | |
| | | | | | | | | | | | |
Accumulated other comprehensive loss at December 31, 2009 includes net unrecognized actuarial lossesunderfunded status in a liability account to reflect the current funded status of $3,190, of which $153 is expected to be amortized into benefit cost during 2010.the plan. Any gains or
5360
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Actuariallosses that arise during the period but are not recognized as components of net periodic benefit cost will be recognized as a component of other comprehensive income (loss). The components of net periodic benefit cost are as follows for the years ended December 31:
| | | | | | | | | | | | |
| | 2010 | | | 2009 | | | 2008 | |
|
Net periodic benefit cost (income) | | | | | | | | | | | | |
Interest cost on projected benefit obligation | | $ | 531 | | | $ | 504 | | | $ | 503 | |
Expected return on plan assets | | | (491 | ) | | | (524 | ) | | | (659 | ) |
Amortization of unrecognized actuarial net loss | | | 153 | | | | 169 | | | | 4 | |
| | | | | | | | | | | | |
Net periodic benefit cost (income) | | $ | 193 | | | $ | 149 | | | $ | (152 | ) |
| | | | | | | | | | | | |
Accumulated other comprehensive loss at December 31, 2010 includes net unrecognized actuarial losses before income taxes of $3,262, of which $138 is expected to be amortized into benefit cost during 2011.
The actuarial assumptions used in determining the projected benefit obligation are as follows forand the year ended December 31:
| | | | | | | | | | | | |
| | 2009 | | 2008 | | 2007 |
|
Weighted average discount rate | | | 5.87 | % | | | 6.10 | % | | | 6.44 | % |
Expected long-term rate of return | | | 6.00 | % | | | 7.00 | % | | | 7.00 | % |
The actual weighted average assumptions used in determining the net periodic pension costs are as follows for the year ended December 31:
| | | | | | | | | | | | | | | | | | |
| | 2009 | | 2008 | | 2007 | | 2010 | | 2009 | | 2008 |
|
Discount rate | | | 5.87 | % | | | 6.10 | % | | | 6.44 | % | | | 6.10 | % | | | 5.87 | % | | | 6.10 | % |
Expected long-term return on plan assets | | | 6.00 | % | | | 7.00 | % | | | 7.00 | % | |
Expected long-term rate of return | | | | 6.00 | % | | | 6.00 | % | | | 7.00 | % |
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 longer term rates of return for broad asset classes. |
|
| • | Actual past rates of return achieved by the plan. |
|
| • | The general mix of assets held by the plan. |
|
| • | The stated investment policy for the plan. |
The selected rate of return is net of anticipated investment related expenses.
Plan Assets
The Corporation’s overall investment strategy is to conservativelymoderately grow the portfolio by investing 40%50% of the portfolio in equity securities and 60%50% in fixed income securities. This strategy is designed to generate a long term rate of return of 6.0%8.7%. 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 the pension committee, which is comprised of members of management of the Corporation. Consultations are held with a third party investment advisor retained by the Corporation to manage the Plan. The Corporation reviews the performance of the advisor no less than annually.
61
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
The fair values of the Corporation’s pension plan assets by asset category were as follows as of December 31, 2009 by asset category are as follows:31:
| | | | | | | | | |
| | Fair Value Measurements at
| | | | | | | | | | | | | | | | | |
| | December 31, 2009 | | | 2010 | | 2009 | |
Description | | Total | | (Level 2) | | | Total | | (Level 2) | | Total | | (Level 2) | |
|
Asset Category | | | | | | | | | | | | | | | | | | | | | | | | |
Short-term investments | | $ | 70 | | | $ | 70 | | | $ | 108 | | | $ | 108 | | | $ | 70 | | | $ | 70 | |
Common collective trusts | | | | | | | | | | | | | | | | | | | | | | | | |
Fixed income | | | 4,826 | | | | 4,826 | | | | 4,470 | | | | 4,470 | | | | 4,826 | | | | 4,826 | |
Equity investments | | | 3,459 | | | | 3,459 | | | | 4,322 | | | | 4,322 | | | | 3,459 | | | | 3,459 | |
| | | | | | | | | | | | | | |
| | $ | 8,355 | | | $ | 8,355 | | | $ | 8,900 | | | $ | 8,900 | | | $ | 8,355 | | | $ | 8,355 | |
| | | | | | | | | | | | | | |
54
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
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, 20092010 and 2008:2009:
| | |
| • | Short-term investments: Shares of a money market portfolio, which is valued using amortized cost, which approximates fair value. |
|
| • | Common collective trusts: These investments are public investment securities valued using the net asset value (“NAV”) provided by a third party investment advisor. The NAV is quoted on a private market that is not active; however, the unit price is based on underlying investments which are traded on an active market. |
The Corporation expects to contribute $47does not anticipate making any contributions to the pension plan in 2010.2011.
Estimated future benefit payments are as follows for the next ten years:
| | | | | | | | |
Year | | Amount | | Amount |
|
2010 | | $ | 389 | | |
2011 | | | 386 | | | $ | 393 | |
2012 | | | 405 | | | | 406 | |
2013 | | | 404 | | | | 404 | |
2014 | | | 495 | | | | 497 | |
Years 2015 - 2019 | | | 2,908 | | |
2015 | | | | 542 | |
Years 2016 — 2020 | | | | 3,038 | |
The components of projected net periodic benefit cost are as follows for the year ended December 31:
| | | | | | | | |
| | 2010 | | | 2011 | |
|
Interest cost on projected benefit obligation | | | 531 | | | | 507 | |
Expected return on plan assets | | | (491 | ) | | | (522 | ) |
Amortization of unrecognized actuarial net loss | | | 153 | | | | 153 | |
| | | | | | |
Net periodic benefit cost | | $ | 193 | | | $ | 138 | |
| | | | | | |
Other Employee Benefit Plans
The Corporation maintains a nonqualified supplementary employee retirement plan (SERP) for qualified officers to provide supplemental retirement benefits to each participant. Expenses related to this program for 2009, 2008, and 2007 were $219, $206, and $202, respectively, and are being recognized over the participants’ expected years of service. As a result of curtailing Isabella Bank Corporation’s defined benefit plan in March 2007, the Corporation established an additional SERP to maintain the benefit levels for all employees that were at least forty years old and had at least 15 years of service. The cost to provide this benefit was $124, $128 and $120 for 2009, 2008 and 2007, respectively.
The Corporation maintains a non-leveraged employee stock ownership plan (ESOP) and a profit sharing plan which cover substantially all of its employees. Effective December 31, 2006, the ESOP was frozen to new participants. Contributions to the plans are discretionary and are approved by the Board of Directors and recorded as compensation expense. In 2009 the Board approved a contribution to the ESOP of $50. Expenses related to the plans for 2009, 2008, and 2007 were $50, $0, and $115, respectively. Total allocated shares outstanding related to the ESOP at December 31, 2009, 2008, and 2007 were 271,421, 271,520, and 149,154, respectively, were included in the computation of dividends and earnings per share in each of the respective years and have not been adjusted for the 10% stock dividend paid February 29, 2008.
The Corporation maintains a self-funded medical plan under which the Corporation is responsible for the first $50 per year of claims made by a covered family. Medical claims are subject to a lifetime maximum of $5,000 per covered individual. Expenses are accrued based on estimates of the aggregate liability for claims incurred and the Corporation’s experience. Expenses were $2,155 in 2009, $2,110 in 2008 and $1,804 in 2007.
55
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
The Corporation offers dividend reinvestment, and employee and director stock purchase plans. The dividend reinvestment plan allows shareholders to purchase previously unissued Isabella Bank Corporation common shares. The stock purchase plan allows employees and directors to purchase Isabella Bank Corporation common stock through payroll deduction. The number of shares reserved for issuance under these plans are 635,000, with 187,982 shares unissued at December 31, 2009, as adjusted for the 10% stock dividend paid February 29, 2008. During 2009, 2008 and 2007, 126,874 shares were issued for $2,396, 78,994 shares were issued for $2,879 and 63,233 shares were issued for $2,657, respectively, in cash pursuant to these plans, exclusive of the effects of the 10% stock dividend paid February 29, 2008.
401(k) Plan
The Corporation has a 401(k) plan in which substantially all employees are eligible to participate. Employees may contribute up to 50% of their compensation subject to certain limits based on federal tax laws. The Corporation makes 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 are 100% vested in the safe harbor contributions and are 0% vested through their first two years of employment and are 100% vested after 6 years of service for matching contributions.
As a result of the curtailment of the defined benefit plan noted above, the Corporation decided to increase the contributions to the Corporation’s 401(k) plan effective January 1, 2007. For the year ended December 31, 2009, 2008 and 2007, expenses attributable to the Plan were $617, $543 and $439 respectively.
Equity Compensation Plan
Pursuant to the terms of the Isabella Bank Corporation and Related Companies Deferred Compensation Plan for Directors (the “Plan”“Directors Plan”), directors of the Corporation and its subsidiaries are required to defer at least 25% of their earned board fees tointo the Directors Plan. The fees are converted toon a quarterly basis into the Corporation’s common stock units based on the fair market 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. Upon retirement from the board or 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 as modified does not allow for cash settlement, and therefore, such share-basedshare based payment awards qualify for classification as equity. All authorized but unissued
62
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
shares of common stock are eligible for issuance under thisthe Directors Plan. The Corporation may also purchase shares of common stock fromon the open market to meet its obligations under the Plan. As of December 31, 2009 and 2008, the Plan had 186,279 unissued shares valued at $3,530 and 186,766 unissued shares valued at $3,766, respectively, as adjusted for the 10% stock dividend paid on February 29, 2008, pursuant to the antidilution provisions required by theDirectors Plan.
On December 17,In 2008, the Corporation established a Rabbi Trust effective as of July 1, 2008, to fund the Directors Plan. A Rabbi Trust is an irrevocable grantor trust to which the Corporation may contribute assets for the limited purpose of funding a nonqualified deferred compensation plan. Although the Corporation may not reach the assets of the Rabbi Trust (“Trust”) for any purpose other than meeting its obligations under the Directors Plan, the assets of the trustTrust remain subject to the claims of the Corporation’s creditors and are included in the consolidated financial statements. The Corporation may contribute cash or common stock to the trustTrust from time to time for the sole purpose of funding the Directors Plan. The trustTrust will use any cash that the Corporation contributed to purchase shares of the Corporation’s common stock on the open market through the Corporation’s brokerage services department.
AsThe components of shares eligible to be issued under the Directors Plan were as follows as of December 31:
| | | | | | | | | | | | | | | | |
| | 2010 | | | 2009 | |
| | Eligible
| | | Market
| | | Eligible
| | | Market
| |
| | Shares | | | Value | | | Shares | | | Value | |
|
Unissued | | | 191,977 | | | $ | 3,321 | | | | 186,279 | | | $ | 3,530 | |
Shares held in Rabbi Trust | | | 32,686 | | | | 565 | | | | 30,626 | | | | 580 | |
| | | | | | | | | | | | | | | | |
Total | | | 224,663 | | | $ | 3,886 | | | | 216,905 | | | $ | 4,110 | |
| | | | | | | | | | | | | | | | |
Other Employee Benefit Plans
The Corporation maintains a nonqualified supplementary employee retirement plan (“SERP”) for qualified officers to provide supplemental retirement benefits to each participant. Expenses related to this program for 2010, 2009, and 2008 were $218, $219, and $206, respectively, and are being recognized over the participants’ expected years of service. As a result of curtailing the Corporation’s defined benefit plan, the Corporation established an additional SERP to maintain the benefit levels for all employees that were at least forty years old and had at least 15 years of service. The cost to provide this benefit was $145, $124 and $128 for 2010, 2009 and 2008, respectively.
The Corporation maintains a non leveraged employee stock ownership plan (ESOP) and a profit sharing plan which cover substantially all of its employees. Effective December 31, 2006, the ESOP was frozen to new participants. Contributions to the plans are discretionary and are approved by the Board of Directors and recorded as compensation expense. During 2009, the TrustBoard of Directors approved a contribution of $50 to the plan. Expenses related to the plans for 2010, 2009, and 2008 were $0, $50, and $0, respectively. Total allocated shares outstanding related to the ESOP at December 31, 2010, 2009, and 2008 were 246,419, 271,421, and 271,520, respectively. Such shares are included in the computation of dividends and earnings per share in each of the respective years.
The Corporation maintains a self funded medical plan under which the Corporation is responsible for the first $50 per year of claims made by a covered family. Medical claims are subject to a lifetime maximum of $5,000 per covered individual. Expenses are accrued based on estimates of the aggregate liability for claims incurred and the Corporation’s experience. Expenses were $2,101 in 2010, $2,155 in 2009 and $2,110 in 2008.
The Corporation maintains the Isabella Bank Corporation Stockholder Dividend Reinvestment Plan and Employee Stock Purchase Plan (the “Dividend Reinvestment Plan”). The dividend reinvestment feature of the Dividend Reinvestment Plan allows shareholders to purchase previously unissued Isabella Bank Corporation common shares using dividends paid on shares held 30,626in the plan. The employee stock purchase feature of the Dividend Reinvestment Plan allows employees and directors to purchase Isabella Bank Corporation common stock through payroll deduction. The shareholder stock purchase feature of the Dividend Reinvestment Plan enables existing shareholders to purchase additional shares of the Corporation’s common stock directly from the Corporation. The number of shares reserved for settlement.issuance under this plan are 885,000, with 313,078 shares unissued at December 31, 2010. During 2010, 2009 and 2008, 124,904 shares were issued for $2,203, 126,874 shares were issued for $2,396 and 78,994 shares were issued for $2,879, respectively, in cash pursuant to these plans.
63
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
| |
Note 1817 — | Accumulated Other Comprehensive Income (Loss)Loss |
Comprehensive income (loss)loss includes net income as well as unrealized gains and losses, net of tax, onavailable-for-sale investment securities owned and changes in the funded status of the Corporation’s defined benefit pension plan, which are excluded from net income. Unrealized investment securities gains and losses and changes
56
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS��— (Continued)
in the funded status of the pension plan, net of tax, are excluded from net income, and are reflected as a direct charge or credit to shareholders’ equity. Comprehensive income (loss) and the related components are disclosed in the accompanying consolidated statements of comprehensive income for each of the years ended December 31, 2010, 2009, 2008, and 2007.2008.
The following is a summary of the components comprising the balance of accumulated other comprehensive loss reported on the consolidated balance sheets as of December 31 (presented net of tax):
| | | | | | | | | | | | | | | | |
| | 2009 | | 2008 | | | 2010 | | 2009 | |
|
Unrealized losses onavailable-for-sale investment securities | | $ | (13 | ) | | $ | (3,216 | ) | |
Unrealized gains (losses) onavailable-for-sale investment securities | | | $ | 444 | | | $ | (13 | ) |
Unrecognized pension costs | | | (2,106 | ) | | | (2,353 | ) | | | (2,153 | ) | | | (2,106 | ) |
| | | | | | | | | | |
Accumulated other comprehensive loss | | $ | (2,119 | ) | | $ | (5,569 | ) | | $ | (1,709 | ) | | $ | (2,119 | ) |
| | | | | | | | | | |
| |
Note 1918 — | Related Party Transactions |
In the ordinary course of business, the BankCorporation grants loans to principal officers and directors and their affiliates (including their families and companies in which they have 10% or more ownership). Annual activity during the years ended December 31 consisted of the following:
| | | | | | | | | | | | | | | | |
| | 2009 | | 2008 | | | 2010 | | 2009 | |
|
Beginning balance | | $ | 4,011 | | | $ | 10,461 | | |
Balance, beginning of year | | | $ | 4,142 | | | $ | 4,011 | |
New loans | | | 5,033 | | | | 3,488 | | | | 3,038 | | | | 5,033 | |
Repayments | | | (4,902 | ) | | | (9,938 | ) | | | (2,833 | ) | | | (4,902 | ) |
| | | | | | | | | | |
Ending balance | | $ | 4,142 | | | $ | 4,011 | | |
Balance, ending of year | | | $ | 4,347 | | | $ | 4,142 | |
| | | | | | | | | | |
Total deposits of these principal officers and directors and their affiliates amounted to $7,090$11,556 and $8,317$7,090 at December 31, 20092010 and 2008,2009, respectively. In addition, Isabella Bank Corporation’s Employee Stock Ownership Plan (Note 17) held deposits with the Bank aggregating $219$254 and $370,$219, respectively, at December 31, 20092010 and 2008.2009.
| |
Note 2019 — | Financial Instruments Recorded at Fair Value |
In February 2007,Estimated Fair Values of Financial Instruments Not Recorded at Fair Value in their Entirety on a Recurring Basis
Disclosure of the FASB issued ASC Topic 825, “Financial Instruments”. ASC Topic 825 expandsestimated fair values of financial instruments, which differ from carrying values, often requires the use of fair value accounting but doesestimates. In cases where quoted market values in an active market are not affect existing standards which require assets or liabilities to be carried at fair value. Under ASC Topic 825,available, the Corporation may electuses present value techniques and other valuation methods to measure manyestimate the fair values of its financial instrumentsinstruments. These valuation methods require considerable judgment and certain other assets and liabilities at fair value (“fair value option” — FVO). The fair value measurement option is not allowed for deposit or withdrawable on demand liabilities. If the useresulting estimates of fair value is elected, any upfront costs and fees related to the instrument mustcan be recognized in earnings and cannot be deferred, e.g., debt issue costs. The fair value election is irrevocable and is generally made on aninstrument-by-instrument basis, even if the Corporation has similar instruments that it elects not to measure based on fair value. At the adoption date, unrealized gains and losses on existing items for which fair value has been elected are reported as a cumulative adjustment to beginning retained earnings as of January 1, 2007. Subsequent to the adoption of ASC Topic 825, changes in fair value are recognized in earnings. Although ASC Topic 825 is effective for fiscal years beginning after November 15, 2007 and would have been required to be adoptedsignificantly affected by the Corporation in the first quarter of fiscal 2008, the Corporation elected to early adopt ASC Topic 825 effective January 1, 2007, the impact of which is detailed in the table below.
As shown in the following table, the Corporation elected to transfer $77,839 of its $213,450available-for-sale securities investment portfolio to trading status to facilitate more active trading of these securities. In determining whichavailable-for-sale securities to transfer, the Corporation considered interest rates, duration, marketability,assumptions made and balance sheet management strategies. The securities transferred included obligations of US Government Agencies, variable rate Federal National Mortgage Association and Federal Home Loan Mortgage Corporation mortgage backed securities, taxable municipal bonds, and a limited number of tax exempt bonds.methods used.
5764
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
The Corporation also elected to report $7,256 of long-term, relatively high interest rate, Federal Home Loan Bank advances at theircarrying amount and estimated fair value upon the early adoption of ASC Topic 825 to provide a hedge against significant movement in interest rates.
| | | | | | | | | | | | |
| | Balance Sheet
| | | Net Gain / (Loss)
| | | Balance Sheet
| |
| | 1/1/2007 Prior to
| | | Upon Adoption of
| | | 1/1/2007 After
| |
| | Adoption of FVO | | | FVO | | | Adoption of FVO | |
|
Investment securities | | $ | 79,198 | | | $ | (1,359 | ) | | $ | 77,839 | |
FHLB borrowings included in other borrowed funds | | | (7,256 | ) | | | (232 | ) | | | (7,488 | ) |
| | | | | | | | | | | | |
Pretax cumulative loss effect of adoption of the fair value option | | | | | | | (1,591 | ) | | | | |
Increase in deferred tax asset | | | | | | | 541 | | | | | |
Cumulative loss effect of adoption of the fair value option (charged as a reduction to retained earnings as of January 1, 2007) | | | | | | $ | (1,050 | ) | | | | |
| | | | | | | | | | | | |
The Corporation utilizes fair value measurements to record fair value adjustments to certain assets and liabilities and to determine fair value disclosures. Securitiesavailable-for-sale, trading securities and certain liabilities arefinancial instruments not recorded at fair value in their entirety on a recurring basis. Additionally, from time to time,basis on the Corporation may be required to record at fair value other assets on a nonrecurring basis, suchCorporation’s consolidated balance sheets are as loansheld-for-sale, impaired loans, foreclosed assets, mortgage servicing rights and certain other assets and liabilities. These nonrecurring fair value adjustments typically involve the applicationfollows as of lower of cost or market accounting or write-downs of individual assets.December 31:
| | | | | | | | | | | | | | | | |
| | 2010 | | | 2009 | |
| | Estimated
| | | Carrying
| | | Estimated
| | | Carrying
| |
| | Fair Value | | | Value | | | Fair Value | | | Value | |
|
ASSETS |
Cash and demand deposits due from banks | | $ | 18,109 | | | $ | 18,109 | | | $ | 24,482 | | | $ | 24,482 | |
Certicates of deposit held in other financial institutions | | | 15,908 | | | | 15,808 | | | | 5,380 | | | | 5,380 | |
Mortgage loansavailable-for-sale | | | 1,182 | | | | 1,182 | | | | 2,294 | | | | 2,281 | |
Net loans | | | 734,634 | | | | 722,931 | | | | 719,604 | | | | 710,337 | |
Accrued interest receivable | | | 5,456 | | | | 5,456 | | | | 5,832 | | | | 5,832 | |
Equity securities without readily determinable fair values | | | 17,564 | | | | 17,564 | | | | 17,921 | | | | 17,921 | |
Originated mortgage servicing rights | | | 2,673 | | | | 2,667 | | | | 2,620 | | | | 2,620 | |
|
LIABILITIES |
Deposits with no stated maturities | | | 424,978 | | | | 424,978 | | | | 382,006 | | | | 382,006 | |
Deposits with stated maturities | | | 454,332 | | | | 452,361 | | | | 424,048 | | | | 420,646 | |
Borrowed funds | | | 190,180 | | | | 184,494 | | | | 177,375 | | | | 175,297 | |
Accrued interest payable | | | 1,003 | | | | 1,003 | | | | 1,143 | | | | 1,143 | |
Financial Instruments Recorded at Fair Value Hierarchy
Under fair value measurement and disclosure authoritative guidance,The table below presents the Corporation groupsrecorded amount of assets and liabilities measured at fair value into three levels, based on December 31:
| | | | | | | | | | | | | | | | | | | | | | | | |
| | 2010 | | | 2009 | |
Description | | Total | | | (Level 2) | | | (Level 3) | | | Total | | | (Level 2) | | | (Level 3) | |
|
Recurring items | | | | | | | | | | | | | | | | | | | | | | | | |
Trading securities | | | | | | | | | | | | | | | | | | | | | | | | |
States and political subdivisions | | $ | 5,837 | | | $ | 5,837 | | | $ | — | | | $ | 9,962 | | | $ | 9,962 | | | $ | — | |
Mortgage-backed | | | — | | | | — | | | | — | | | | 3,601 | | | | 3,601 | | | | — | |
| | | | | | | | | | | | | | | | | | | | | | | | |
Total trading securities | | | 5,837 | | | | 5,837 | | | | — | | | | 13,563 | | | | 13,563 | | | | — | |
| | | | | | | | | | | | | | | | | | | | | | | | |
Available-for-sale investment securities | | | | | | | | | | | | | | | | | | | | | | | | |
Government-sponsored enterprises | | | 5,404 | | | | 5,404 | | | | — | | | | 19,471 | | | | 19,471 | | | | — | |
States and political subdivisions | | | 169,717 | | | | 169,717 | | | | — | | | | 151,730 | | | | 151,730 | | | | — | |
Auction rate money market preferred | | | 2,865 | | | | — | | | | 2,865 | | | | 2,973 | | | | — | | | | 2,973 | |
Preferred stock | | | 6,936 | | | | — | | | | 6,936 | | | | 7,054 | | | | — | | | | 7,054 | |
Mortgage-backed | | | 102,215 | | | | 102,215 | | | | — | | | | 67,734 | | | | 67,734 | | | | — | |
Collateralized mortgage obligations | | | 43,587 | | | | 43,587 | | | | — | | | | 10,104 | | | | 10,104 | | | | — | |
| | | | | | | | | | | | | | | | | | | | | | | | |
Totalavailable-for-sale investment securities | | | 330,724 | | | | 320,923 | | | | 9,801 | | | | 259,066 | | | | 249,039 | | | | 10,027 | |
Borrowed funds | | | 10,423 | | | | 10,423 | | | | — | | | | 17,804 | | | | 17,804 | | | | — | |
Nonrecurring items | | | | | | | | | | | | | | | | | | | | | | | | |
Mortgage loansavailable-for-sale | | | 1,182 | | | | 1,182 | | | | — | | | | 2,281 | | | | 2,281 | | | | — | |
Impaired loans | | | 12,048 | | | | — | | | | 12,048 | | | | 12,654 | | | | — | | | | 12,654 | |
Originated mortgage servicing rights | | | 2,667 | | | | 2,667 | | | | — | | | | 2,620 | | | | 2,620 | | | | — | |
Foreclosed assets | | | 2,067 | | | | 2,067 | | | | — | | | | 1,157 | | | | 1,157 | | | | — | |
| | | | | | | | | | | | | | | | | | | | | | | | |
| | $ | 364,948 | | | $ | 343,099 | | | $ | 21,849 | | | $ | 309,145 | | | $ | 286,464 | | | $ | 22,681 | |
| | | | | | | | | | | | | | | | | | | | | | | | |
Percent of assets and liabilities measured at fair value | | | | | | | 94.01 | % | | | 5.99 | % | | | | | | | 92.66 | % | | | 7.34 | % |
| | | | | | | | | | | | | | | | | | | | | | | | |
65
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
As of December 31, 2010 and 2009, the markets in which theCorporation had no assets andor liabilities are traded and the reliability of the assumptions used to determine fair value, based on the prioritization of inputs in themeasured utilizing Level 1 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 assets 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 used need to maximize the use of observable inputs and minimize the use of unobservable inputs.
Following is a description of the valuation methodologies and key inputs used to measure financial assets and liabilities recorded at fair value, as well as a description of the methods and significant assumptions used to estimate fair value disclosures for financial instruments not recorded at fair value in their entirety on a recurring basis. For financial assets and liabilities recorded at fair value, the description includes an indication of the level of the fair value hierarchy in which the assets or liabilities are classifiedclassified.
58
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)Cash and demand deposits due from banks:
The carrying amounts of cash and short term investments, including Federal funds sold, approximate fair values.
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.
Investment Securities:securities:
Investment securities are recorded at fair value on a recurring basis. FairLevel 2 fair value measurement is based upon quoted prices, if available. If quoted prices are not available, fair values are measured using independent pricing models or other model-basedmodel based valuation techniques such as the present value of future cash flows, adjusted for the security’s credit rating, prepayment assumptions and other factors such as credit loss and liquidity assumptions. Level 2 securities include U.S. Treasury securities,bonds issued by government sponsored enterprises, states and political subdivisions, mortgage-backed securities, and collateralized mortgage obligations issued by government-sponsored entities, municipal bonds and corporate debt securities in active markets. government sponsored enterprises.
Securities classified as Level 3 include securities in less liquid markets including illiquid markets in some instances, and include auction rate money market preferred securities and preferred stocks.
The Corporation invested $11,000 in auction rate money market preferred investment security instruments, which are classified asavailable-for-sale securities and reflected at fair value. Due to continuing uncertainty in credit markets, these investments are illiquid. As a result of the illiquidity of the markets for these securities, $7,800 converted to preferred stock with debt like characteristics in 2009.
Due to the illiquiditylimited trading activity of these securities, these assets were classified as Level 3 during 2008. Thethe fair values of these securities arewere estimated utilizing a discounted cash flow analysis or other type of valuation adjustment methodology as of December 31, 20092010 and 2008.2009. These analyses consider, among other factors, the collateral underlying the security investments, theconsidered creditworthiness of the counterparty, the investment grade, the timing of expected future cash flows, estimatesand the current volume of trading activity. The discount rates used were determined by using the interest rates of similarly rated financial institutions debt based on the weighted average of a range of terms for corporate bond interest rates, which were obtained from published sources. All securities have call dates within the next timeyear. The Corporation calculated the security is expected to havepresent value assuming a successful auction,30 year nonamortizing balloon using weighted average discount rates between 3.88% and the fact that the management asserts that it does not intend to sell the security in an unrealized loss position and it is more likely than not it will not have to sell the securities before recovery6.87% as of its cost basis, as further described in Note 4 of Notes to Consolidated Financial Statements.December 31, 2010.
Mortgage LoansloansAvailable-for-Sale:available-for-sale:
Loans available for saleMortgage loansavailable-for-sale are carried at the lower of cost or market value. The fair value of mortgage loansheld-for-saleavailable-for-sale isare based on what price secondary markets are currently offering for portfolios with similar characteristics. As such, the Corporation classifies loans subjected to nonrecurring fair value adjustments as Level 2 valuation.2.
Loans:
For variable rate loans with no significant change in credit risk, fair values are based on carrying values. Fair values for fixed rate loans are estimated using discounted cash flow analyses, using interest rates currently being offered for loans with similar terms to borrowers of similar credit quality. The resulting amounts are adjusted to estimate the effect of changes in the credit quality of borrowers since the loans were originated.
66
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
The Corporation does not record loans at fair value on a recurring basis. However, from time to time, a loan is considered impaired and a specific allowance for loan losses ismay be established. Loans for which it is probable that payment of interest and principal will not be made in accordance withsignificantly different than the contractual terms of the original loan agreement are considered impaired. Once a loan is identified as individually impaired, management measures the estimated impairment. The fair value of impaired loans is estimated using one of several methods, including collateral value, market value of similar debt, enterprise value, liquidation value, andor discounted cash flows. 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. At December 31, 2009,
The Corporation reviews the net realizable values of the underlying collateral for collateral dependent impaired loans were evaluated based on at least a quarterly basis for all loan types. To determine the faircollateral value, management utilizes independent appraisals, broker price opinions, or internal evaluations. These valuations are reviewed to determine whether an additional discount should be applied given the age of market information that may have been considered as well as other factors such as costs to carry and sell an asset if it is determined that the collateral will be liquidated in connection with the ultimate settlement of the loan. The Corporation uses this valuation to determine if any charge offs or specific reserves are necessary. The Corporation 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 based onif the net present value of their expected cash flows. existing valuation is deemed to be outdated.
Impaired loans where an allowance is established based on the fairnet realizable value of collateral require classification in the fair value hierarchy. When the fair value of the collateral is based on an observable market price or a current appraisal value, the Corporation records the loan as nonrecurring Level 2. When a current appraised value is not available or management determines the fair value of the collateral is further impaired below the appraised value, and there is no observable market price, or the impairment is determined using the net present value of the expected cash flows, the Corporation classifiesrecords the impaired loanloans as nonrecurring Level 3 valuation.3.
Foreclosed Assets:
Upon transfer from the loan portfolio, foreclosed assets are adjusted to and subsequently carried at the lower of carrying value or fair value less estimated costs to sell. Fair value is based upon independent market prices, appraised values of the collateral or management’s estimation of the value of the collateral and as such, the Corporation classifies foreclosed assets as nonrecurring level 2 valuation. When a current appraisal is not available
59
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
or management determines the fair value of the collateral is further impaired below the appraised value and there is no observable market price, the Corporation records the foreclosed asset as nonrecurring level 3 valuation.
Equity Securities Without Readily Determinable Fair Values:Accrued interest:
The Corporation has investments in equity securities without readily determinablecarrying amounts of accrued interest approximate fair values as well as an investment in a joint venture. The assets are individually reviewed for impairment on an annual basis by comparing the carrying value to the estimated fair value. The lack of an independent source to validate fair value estimates, including the impact of future capital calls and transfer restrictions, is an inherent limitation in the valuation process. The Corporation classifies nonmarketable equity securities and its investment in a joint venture subjected to nonrecurring fair value adjustments as Level 3 valuation. During 2009 and 2008, there were no impairments recorded on equity securities without readily determinable fair values.
Mortgage Servicing Rights:Goodwill and other intangible assets:
Loan servicing rights are subject to impairment testing. A valuation model, which utilizes a discounted cash flow analysis using interest ratesAcquisition intangibles and prepayment speed assumptions currently quoted for comparable instruments and a discount rate determined by management, is used for impairment testing. If the valuation model reflects a value less than the carrying value, mortgage servicing rights are adjusted to fair value through a valuation allowance as determined by the model. As such, the Corporation classifies loan servicing rights subjected to nonrecurring fair value adjustments as Level 2 valuation.
Acquisition Intangibles and Goodwill:
Intangible assetsgoodwill are subject to impairment testing. A projected cash flow valuation method is used in the completion of impairment testing. This valuation method requires a significant degree of management judgment. In the event the projected undiscounted net operating cash flows are less than the carrying value, the asset is recorded at fair value as determined by the valuation model. If the testing resulted in impairment, the Corporation would classify goodwill and other intangible assetsacquisition intangibles subjected to nonrecurring fair value adjustments as Level 3 valuation.3. During 20092010 and 2008,2009, there were no impairments recorded on goodwill and other acquisition intangible assets.intangibles.
Other Borrowed Funds:Equity securities without readily determinable fair values:
The Corporation has investments in equity securities without readily determinable fair values as well as investments in joint ventures. The assets are individually reviewed for impairment on an annual basis by comparing the carrying value to the estimated fair value. The lack of an independent source to validate fair value estimates, including the impact of future capital calls and transfer restrictions, is an inherent limitation in the valuation process. The Corporation classifies nonmarketable equity securities and its investments in joint ventures subjected to nonrecurring fair value adjustments as Level 3. During 2010 and 2009, there were no impairments recorded on equity securities without readily determinable fair values.
67
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Foreclosed assets:
Upon transfer from the loan portfolio, foreclosed assets are adjusted to and subsequently carried at the lower of carrying value or fair value less costs to sell. Net realizable value is based upon independent market prices, appraised values of the collateral, or management’s estimation of the value of the collateral and as such, the Corporation classifies foreclosed assets as a nonrecurring Level 2. When management determines that the net realizable value of the collateral is further impaired below the appraised value but there is no observable market price, the Corporation records the foreclosed asset as nonrecurring Level 3.
Originated mortgage servicing rights:
Originated mortgage servicing rights are subject to impairment testing. A valuation model, which utilizes a discounted cash flow analysis using interest rates and prepayment speed assumptions currently quoted for comparable instruments and a discount rate determined by management, is used for impairment testing. If the valuation model reflects a value less than the carrying value, originated mortgage servicing rights are adjusted to fair value through a valuation allowance as determined by the model. As such, the Corporation classifies loan servicing rights subject to nonrecurring fair value adjustments as Level 2.
Deposits:
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). 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.
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 the Corporation’s other borrowed funds are estimated using discounted cash flow analyses based on the Corporation’s current incremental borrowing arrangements.
The Corporation has elected to measure a portion of other borrowed funds at their fair value. These borrowings are recorded at fair value on a recurring basis, with the fair value measurement estimated using discounted cash flow analysis based on the Corporation’s current incremental borrowings rates for similar types of borrowing arrangements. Changes in the fair value of these borrowings are included in noninterest income. As such, the Corporation classifies other borrowed funds as Level 2 valuation.
The preceding methods described may produce a fair value calculation that may not be indicative of net realizable value or reflective of future fair values. Furthermore, although the Company believes its 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 at the reporting date.
60
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
The table below represents the activity in Level 3 inputs measured on a recurring basis for the year ended December 31:
| | | | | | | | |
| | 2009 | | | 2008 | |
|
Level 3 inputs — January 1 | | $ | 5,021 | | | $ | — | |
Transfers of securities into level 3 due to changes in the observability of significant inputs (illiquid markets) | | | — | | | | 11,000 | |
Net unrealized gains (losses) onavailable-for-sale investment securities | | | 5,006 | | | | (5,979 | ) |
| | | | | | | | |
Level 3 inputs — December 31 | | $ | 10,027 | | | $ | 5,021 | |
| | | | | | | | |
The tables below present the recorded amount of assets and liabilities measured at fair value on December 31:
| | | | | | | | | | | | | | | | | | | | | | | | |
| | 2009 | | | 2008 | |
Description | | Total | | | (Level 2) | | | (Level 3) | | | Total | | | (Level 2) | | | (Level 3) | |
|
Recurring Items | | | | | | | | | | | | | | | | | | | | | | | | |
Trading securities | | | | | | | | | | | | | | | | | | | | | | | | |
Government-sponsored enterprises | | $ | — | | | $ | — | | | $ | — | | | $ | 4,014 | | | $ | 4,014 | | | $ | — | |
States and political subdivisions | | | 9,962 | | | | 9,962 | | | | — | | | | 11,556 | | | | 11,556 | | | | — | |
Corporate | | | — | | | | — | | | | — | | | | 160 | | | | 160 | | | | — | |
Mortgage-backed | | | 3,601 | | | | 3,601 | | | | — | | | | 6,045 | | | | 6,045 | | | | — | |
| | | | | | | | | | | | | | | | | | | | | | | | |
Total trading securities | | | 13,563 | | | | 13,563 | | | | — | | | | 21,775 | | | | 21,775 | | | | — | |
| | | | | | | | | | | | | | | | | | | | | | | | |
Available-for-sale investment securities | | | | | | | | | | | | | | | | | | | | | | | | |
U.S. Government and federal agencies | | | — | | | | — | | | | — | | | | 4,083 | | | | 4,083 | | | | — | |
Government-sponsored enterprises | | | 19,471 | | | | 19,471 | | | | — | | | | 62,988 | | | | 62,988 | | | | — | |
States and political sub divisions | | | 151,730 | | | | 151,730 | | | | — | | | | 149,323 | | | | 149,323 | | | | — | |
Corporate | | | — | | | | — | | | | — | | | | 7,145 | | | | 7,145 | | | | — | |
Auction rate money market preferred | | | 2,973 | | | | — | | | | 2,973 | | | | 5,979 | | | | — | | | | 5,979 | |
Preferred stock | | | 7,054 | | | | — | | | | 7,054 | | | | — | | | | — | | | | — | |
Mortgage-backed | | | 67,734 | | | | 67,734 | | | | — | | | | 16,937 | | | | 16,937 | | | | — | |
Collateralized mortgage obligations | | | 10,104 | | | | 10,104 | | | | — | | | | — | | | | — | | | | — | |
| | | | | | | | | | | | | | | | | | | | | | | | |
Totalavailable-for-sale investment securities | | | 259,066 | | | | 249,039 | | | | 10,027 | | | | 246,455 | | | | 240,476 | | | | 5,979 | |
Mortgage loans available for sale | | | 2,281 | | | | 2,281 | | | | — | | | | 898 | | | | 898 | | | | — | |
Borrowed funds | | | 17,804 | | | | 17,804 | | | | — | | | | 23,130 | | | | 23,130 | | | | — | |
Nonrecurring Items | | | | | | | | | | | | | | | | | | | | | | | | |
Impaired loans | | | 12,654 | | | | — | | | | 12,654 | | | | 13,843 | | | | — | | | | 13,843 | |
Mortgage servicing rights | | | 2,620 | | | | 2,620 | | | | — | | | | 2,105 | | | | 2,105 | | | | — | |
Foreclosed assets | | | 1,157 | | | | 1,157 | | | | — | | | | 2,923 | | | | 2,923 | | | | — | |
| | | | | | | | | | | | | | | | | | | | | | | | |
| | $ | 309,145 | | | $ | 286,464 | | | $ | 22,681 | | | $ | 311,129 | | | $ | 291,307 | | | $ | 19,822 | |
| | | | | | | | | | | | | | | | | | | | | | | | |
Percent of assets and liabilities measured at fair value | | | | | | | 92.66 | % | | | 7.34 | % | | | | | | | 93.63 | % | | | 6.37 | % |
| | | | | | | | | | | | | | | | | | | | | | | | |
In certain previousForm 10-Q andForm 10-K filings the Corporation disclosed that a portion of trading securities,available-for-sale investment securities and other borrowed funds were measured at Level 1 and at Level 3. The Corporation recently determined that documentation provided to the Corporation by its third party securities pricing vendor more closely reflects a Level 2 categorization than Level 1 and Level 3 as previously reported. No significant measurement methodology changes have been made by the Corporation’s securities pricing vendor. As a result, $10,175 of trading securities, $89,507 ofavailable-for-sale investment securities and $23,130 of other borrowed funds were reclassified from Level 1 to Level 2 classification as of December 31, 2008.
61
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Furthermore, $14,370 ofavailable-for-sale investment securities were reclassified from Level 3 to Level 2 classification as of December 31, 2008
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 impairment was recognized in the years ended December 31, 2009 and 2008, are summarized as follows:
| | | | | | | | | | | | | | | | | | | | | | | | |
| | 2009 | | | 2008 | |
| | Trading
| | | | | | | | | Trading
| | | | | | | |
| | Gains and
| | | Other Gains
| | | | | | Gains and
| | | Other Gains
| | | | |
Description | | (Losses) | | | and (Losses) | | | Total | | | (Losses) | | | and (Losses) | | | Total | |
|
Recurring Items | | | | | | | | | | | | | | | | | | | | | | | | |
Trading securities | | $ | 80 | | | $ | — | | | $ | 80 | | | $ | 245 | | | $ | — | | | $ | 245 | |
Other borrowed funds | | | — | | | | 289 | | | | 289 | | | | — | | | | (641 | ) | | | (641 | ) |
Nonrecurring Items | | | | | | | | | | | | | | | | | | | | | | | | |
Impaired loans | | | — | | | | — | | | | — | | | | — | | | | (71 | ) | | | (71 | ) |
Mortgage servicing rights | | | — | | | | 7 | | | | 7 | | | | — | | | | (115 | ) | | | (115 | ) |
Foreclosed assets | | | — | | | | (157 | ) | | | (157 | ) | | | — | | | | (231 | ) | | | (231 | ) |
| | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | $ | 219 | | | | | | | | | | | $ | (813 | ) |
| | | | | | | | | | | | | | | | | | | | | | | | |
During 2008, primarily as a result of declines in the rates offered on new residential mortgage loans, the Corporation recorded impairment charges of $115 related to the carrying value of its mortgage servicing rights, in accordance with authoritative guidance related to mortgage servicing assets. This decline in offering rates decreased the expected lives of the loans serviced and in turn decreased the value of the serving rights.
The impairment charges to foreclosed assets were the result of the real estate held declining in value subsequent to the properties being transferred to other real estate.
The activity in the trading portfolio of investment securities was as follows for the years ended December 31:
| | | | | | | | |
| | 2009 | | | 2008 | |
|
Purchases | | $ | — | | | $ | 11,010 | |
Sales, calls, and maturities | | | (8,292 | ) | | | (14,544 | ) |
Net change in fair market value | | | 80 | | | | 245 | |
| | | | | | | | |
Total | | $ | (8,212 | ) | | $ | (3,289 | ) |
| | | | | | | | |
The net gain on trading securities representsmark-to-market adjustments. Included in the net trading gains of $80 during 2009, was $38 of net trading gains on securities that were held in the Corporation’s trading portfolio as of December 31, 2009.
The activity in borrowings carried at fair value was as follows for years ended December 31, 2009 and 2008:
| | | | | | | | |
| | 2009 | | | 2008 | |
|
Issuances | | $ | — | | | $ | 15,000 | |
Sales, calls, and maturities | | | (5,037 | ) | | | (34 | ) |
Net change in fair value | | | (289 | ) | | | 641 | |
| | | | | | | | |
Total | | $ | (5,326 | ) | | $ | 15,607 | |
| | | | | | | | |
| |
Note 21 — | Fair Values of Financial Instruments |
The fair value of a financial instrument is the current amount that would be exchanged between willing parties, other than in a forced liquidation. Fair value is best determined based upon quoted market prices. However, in many
62
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
instances, there are no quoted market prices for the Corporation’s various financial instruments. In cases where quoted market prices are not available, fair values are based on estimates using present value or other valuation techniques. Those techniques are significantly affected by the assumptions used, including the discount rate and estimates of future cash flows. Accordingly, the estimated amounts provided herein do not necessarily indicate amounts which could be realized in a current exchange. Furthermore, as the Corporation typically holds the majority of its financial instruments until maturity, it does not expect to realize all of the estimated amounts disclosed. The disclosures also do not include estimated fair value amounts for items which are not defined as financial instruments, but which have significant value. These include such items as core deposit intangibles, the future earnings of significant customer relationships and the value of other fee generating businesses. The Corporation believes the imprecision of an estimate could be significant.
The following methods and assumptions were used by the Corporation in estimating fair value disclosures for financial instruments.
Cash and cash equivalents:
The carrying amounts of cash and short-term instrument, including Federal funds sold, approximate fair values.
Interest bearing balances held in other financial institutions:
Interest bearing balances held in other financial institutions include certificates of deposit and other short term interest bearing balances that mature within 3 years. The fair values of these instruments approximate the carrying amounts.
Investment securities:
Investment securities are recorded at fair value on a recurring basis. Fair value measurement is based upon quoted prices, if available. 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.
Mortgage loans available for sale:
Fair values of mortgage loans available for sale are based on commitments on hand from investors or prevailing market prices.
Loans:
For variable-rate loans that reprice frequently and with no significant change in credit risk, fair values are based on carrying values. Fair values for other loans (e.g. , real estate mortgage, agricultural, commercial, and installment) 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 declines, if any, in the credit quality of borrowers since the loans were originated. Fair values for non-performing loans are estimated using discounted cash flow analyses or underlying collateral values, where applicable.
Mortgage servicing rights:
The carrying amounts for mortgage servicing rights are reported in the consolidated balance sheets under “Other Assets”. Fair value is determined using prices for similar assets with similar characteristics when applicable, or based upon discounted cash flow analyses.
63
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Deposits:
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). 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.
Short-term borrowings:
The carrying amounts of federal funds purchased, borrowings under repurchase agreements, and other short-term borrowings maturing within ninety days approximate their fair values. Fair values of other short-term borrowings are estimated using discounted cash flow analyses based on the Corporation’s current incremental borrowing rates for similar types of borrowings arrangements.
Borrowings:
The carrying amounts of federal funds purchased, borrowings under repurchase agreements, and other short-term borrowings maturing within ninety days approximate their fair values. The fair values of the Corporation’s other borrowings are estimated using discounted cash flow analyses based on the Corporation’s current incremental borrowing arrangements.
Accrued interest:
The carrying amounts of accrued interest approximate fair value.
Derivative financial instruments:
Fair values for derivative loan commitments and forward loan sale commitments are based on fair values of the underlying mortgage loans and the probability of such commitments being exercised.2.
Commitments to extend credit, standby letters of credit and undisbursed loans:
Fair values for off-balance-sheetoff balance sheet lending commitments are based on fees currently charged to enter into similar agreements, taking into consideration the remaining terms of the agreements and the counterparties’ credit standings. The Corporation does not charge fees for lending commitments; thus it is not practicable to estimate the fair value of these instruments.
The preceding methods described may produce a fair value calculation that may not be indicative of net realizable value or reflective of future fair values. Furthermore, although the Corporation believes its 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.
6468
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
The following sets forthtable below represents the estimated fair value and recorded carrying values ofactivity inavailable-for-sale investment securities measured with Level 3 inputs on a recurring basis for the Corporation’s financial instruments as ofyears ended December 31:
| | | | | | | | | | | | | | | | |
| | 2009 | | | 2008 | |
| | Estimated
| | | Carrying
| | | Estimated
| | | Carrying
| |
| | Fair Value | | | Value | | | Fair Value | | | Value | |
|
ASSETS |
Cash and demand deposits due from banks | | $ | 22,706 | | | $ | 22,706 | | | $ | 22,979 | | | $ | 22,979 | |
Interest bearing balances held in other financial institutions | | | 7,156 | | | | 7,156 | | | | 575 | | | | 575 | |
Trading securities | | | 13,563 | | | | 13,563 | | | | 21,775 | | | | 21,775 | |
Investment securities available for sale | | | 259,066 | | | | 259,066 | | | | 246,455 | | | | 246,455 | |
Mortgage loans available for sale | | | 2,294 | | | | 2,281 | | | | 905 | | | | 898 | |
Net loans | | | 719,604 | | | | 710,337 | | | | 743,110 | | | | 723,403 | |
Accrued interest receivable | | | 5,832 | | | | 5,832 | | | | 6,322 | | | | 6,322 | |
Mortgage servicing rights | | | 2,620 | | | | 2,620 | | | | 2,105 | | | | 2,105 | |
Foreclosed assets | | | 1,157 | | | | 1,157 | | | | 2,923 | | | | 2,923 | |
|
LIABILITIES |
Deposits with no stated maturities | | | 382,006 | | | | 382,006 | | | | 394,042 | | | | 394,042 | |
Deposits with stated maturities | | | 424,048 | | | | 420,646 | | | | 387,291 | | | | 381,588 | |
Borrowed funds | | | 195,179 | | | | 193,101 | | | | 230,130 | | | | 222,350 | |
Accrued interest payable | | | 1,143 | | | | 1,143 | | | | 1,334 | | | | 1,334 | |
| | | | | | | | |
| | 2010 | | | 2009 | |
|
Level 3 inputs — January 1 | | $ | 10,027 | | | $ | 5,979 | |
Net unrealized (losses) gains onavailable-for-sale investment securities | | | (226 | ) | | | 4,048 | |
| | | | | | | | |
Level 3 inputs — December 31 | | $ | 9,801 | | | $ | 10,027 | |
| | | | | | | | |
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 an impairment, or reduction of an impairment, was recognized in 2010 and 2009, are summarized as follows:
| | | | | | | | | | | | | | | | | | | | | | | | |
| | Year Ended December 31 | |
| | 2010 | | | 2009 | |
| | Trading
| | | | | | | | | Trading
| | | | | | | |
| | Gains and
| | | Other Gains
| | | | | | Gains and
| | | Other Gains
| | | | |
Description | | (Losses) | | | and (Losses) | | | Total | | | (Losses) | | | and (Losses) | | | Total | |
|
Recurring items | | | | | | | | | | | | | | | | | | | | | | | | |
Trading securities | | $ | (94 | ) | | $ | — | | | $ | (94 | ) | | $ | 80 | | | $ | — | | | $ | 80 | |
Borrowed funds | | | — | | | | 227 | | | | 227 | | | | — | | | | 289 | | | | 289 | |
Nonrecurring items | | | | | | | | | | | | | | | | | | | | | | | | |
Foreclosed assets | | | — | | | | (180 | ) | | | (180 | ) | | | — | | | | (157 | ) | | | (157 | ) |
Originated mortgage servicing rights | | | — | | | | 1 | | | | 1 | | | | — | | | | 7 | | | | 7 | |
| | | | | | | | | | | | | | | | | | | | | | | | |
Total | | $ | (94 | ) | | $ | 48 | | | $ | (46 | ) | | $ | 80 | | | $ | 139 | | | $ | 219 | |
| | | | | | | | | | | | | | | | | | | | | | | | |
The activity in borrowings which the Corporation has elected to carry at fair value was as follows for the years ended December 31:
| | | | | | | | |
| | 2010 | | | 2009 | |
|
Borrowings carried at fair value — January 1 | | $ | 17,804 | | | $ | 23,130 | |
Paydowns and maturities | | | (7,154 | ) | | | (5,037 | ) |
Net change in fair value | | | (227 | ) | | | (289 | ) |
| | | | | | | | |
Borrowings carried at fair value — December 31 | | $ | 10,423 | | | $ | 17,804 | |
| | | | | | | | |
Unpaid principal balance — December 31 | | $ | 10,000 | | | $ | 17,154 | |
| | | | | | | | |
69
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
| |
Note 2220 — | Parent Company Only Financial Information |
Condensed Balance Sheets
| | | | | | | | | | | | | | | | |
| | December 31 | | | December 31 | |
| | 2009 | | 2008 | | | 2010 | | 2009 | |
|
ASSETS | ASSETS | ASSETS |
Cash on deposit at subsidiary Bank | | $ | 172 | | | $ | 1,144 | | | $ | 301 | | | $ | 172 | |
Securities available for sale | | | 2,073 | | | | 2,140 | | | | 1,929 | | | | 2,073 | |
Investments in subsidiaries | | | 89,405 | | | | 82,673 | | | | 94,668 | | | | 89,405 | |
Premises and equipment | | | 2,346 | | | | 2,043 | | | | 1,952 | | | | 2,346 | |
Other assets | | | 53,644 | | | | 52,096 | | | | 53,481 | | | | 53,644 | |
| | | | | | | | | | |
Total Assets | | $ | 147,640 | | | $ | 140,096 | | | $ | 152,331 | | | $ | 147,640 | |
| | | | | | | | | | |
| LIABILITIES AND SHAREHOLDERS’ EQUITY | Other liabilities | | $ | 6,837 | | | $ | 5,620 | | | $ | 7,170 | | | $ | 6,837 | |
Shareholders’ equity | | | 140,803 | | | | 134,476 | | | | 145,161 | | | | 140,803 | |
| | | | | | | | | | |
Total Liabilities and Shareholders’ Equity | | $ | 147,640 | | | $ | 140,096 | | |
Total Liabilities And Shareholders’ Equity | | | $ | 152,331 | | | $ | 147,640 | |
| | | | | | | | | | |
65
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Condensed Statements of Income
| | | | | | | | | | | | | | | | | | | | | | | | |
| | Year Ended December 31 | | | Year Ended December 31 | |
| | 2009 | | 2008 | | 2007 | | | 2010 | | 2009 | | 2008 | |
|
Income | | | | | | | | | | | | | | | | | | | | | | | | |
Dividends from subsidiaries | | $ | 6,100 | | | $ | 5,800 | | | $ | 15,975 | | | $ | 6,250 | | | $ | 6,100 | | | $ | 5,800 | |
Interest income | | | 77 | | | | 88 | | | | 177 | | | | 72 | | | | 77 | | | | 88 | |
Management fee and other | | | 993 | | | | 1,011 | | | | 1,517 | | | | 1,340 | | | | 993 | | | | 1,011 | |
| | | | | | | | | | | | | | |
Total income | | | 7,170 | | | | 6,899 | | | | 17,669 | | | | 7,662 | | | | 7,170 | | | | 6,899 | |
Expenses | | | 3,907 | | | | 3,989 | | | | 3,890 | | | | | | | | | | | | | |
Salaries and benefits | | | | 2,286 | | | | 2,112 | | | | 1,819 | |
Occupancy and equipment | | | | 356 | | | | 430 | | | | 435 | |
Audit and SOX compliance fees | | | | 476 | | | | 291 | | | | 376 | |
Other | | | | 932 | | | | 1,074 | | | | 1,359 | |
| | | | | | | | |
Total expenses | | | | 4,050 | | | | 3,907 | | | | 3,989 | |
| | | | | | | | | | | | | | |
Income before income tax benefit and equity in undistributed earnings of subsidiaries | | | 3,263 | | | | 2,910 | | | | 13,779 | | | | 3,612 | | | | 3,263 | | | | 2,910 | |
Federal income tax benefit | | | 976 | | | | 905 | | | | 773 | | | | 896 | | | | 976 | | | | 905 | |
| | | | | | | | | | | | | | |
| | | 4,239 | | | | 3,815 | | | | 14,552 | | | | 4,508 | | | | 4,239 | | | | 3,815 | |
Undistributed earnings (distributions in excess of earnings) of subsidiaries | | | 3,561 | | | | 286 | | | | (6,622 | ) | |
Undistributed earnings of subsidiaries | | | | 4,537 | | | | 3,561 | | | | 286 | |
| | | | | | | | | | | | | | |
Net income | | $ | 7,800 | | | $ | 4,101 | | | $ | 7,930 | | | $ | 9,045 | | | $ | 7,800 | | | $ | 4,101 | |
| | | | | | | | | | | | | | |
6670
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Condensed Statements of Cash Flows
| | | | | | | | | | | | | | | | | | | | | | | | |
| | Year Ended December 31 | | | Year Ended December 31 | |
| | 2009 | | 2008 | | 2007 | | | 2010 | | 2009 | | 2008 | |
|
Operating Activities | | | | | | | | | | | | | | | | | | | | | | | | |
Net income | | $ | 7,800 | | | $ | 4,101 | | | $ | 7,930 | | | $ | 9,045 | | | $ | 7,800 | | | $ | 4,101 | |
Adjustments to reconcile net income to cash provided by operations | | | | | | | | | | | | | | | | | | | | | | | | |
Undistributed earnings of subsidiaries | | | (3,561 | ) | | | (286 | ) | | | 6,622 | | | | (4,537 | ) | | | (3,561 | ) | | | (286 | ) |
Share based payment awards | | | 677 | | | | 603 | | | | 758 | | | | 650 | | | | 677 | | | | 603 | |
Depreciation | | | 163 | | | | 294 | | | | 592 | | | | 147 | | | | 163 | | | | 294 | |
Net amortization of investment securities | | | 6 | | | | 5 | | | | 4 | | | | 5 | | | | 6 | | | | 5 | |
Deferred income tax (benefit) expense | | | (570 | ) | | | 162 | | | | (165 | ) | | | (172 | ) | | | (570 | ) | | | 162 | |
Changes in operating assets and liabilities which provided (used) cash | | | | | | | | | | | | | | | | | | | | | | | | |
Interest receivable | | | — | | | | 1 | | | | (2 | ) | |
Other assets | | | (748 | ) | | | (817 | ) | | | (776 | ) | | | 298 | | | | (748 | ) | | | (816 | ) |
Accrued interest and other expenses | | | 517 | | | | 583 | | | | (389 | ) | |
Accrued interest and other liabilities | | | | 1,883 | | | | 517 | | | | 583 | |
| | | | | | | | | | | | | | |
Net Cash Provided by Operating Activities | | | 4,284 | | | | 4,646 | | | | 14,574 | | | | 7,319 | | | | 4,284 | | | | 4,646 | |
Investing Activities | | | | | | | | | | | | | | | | | | | | | | | | |
Activity inavailable-for-sale securities | | | | | | | | | | | | | | | | | | | | | | | | |
Maturities, calls, and sales | | | 110 | | | | 110 | | | | 595 | | | | 110 | | | | 110 | | | | 110 | |
Purchases | | | — | | | | — | | | | (266 | ) | |
(Purchases) sales of equipment and premises | | | (466 | ) | | | 1,300 | | | | (1,135 | ) | |
Sales (purchases) of equipment and premises | | | | 247 | | | | (466 | ) | | | 1,300 | |
Advances to subsidiaries | | | — | | | | (11,927 | ) | | | (50 | ) | | | (250 | ) | | | — | | | | (11,927 | ) |
| | | | | | | | | | | | | | |
Net Cash Used in Investing Activities | | | (356 | ) | | | (10,517 | ) | | | (856 | ) | |
Net Cash Provided by (Used in) Investing Activities | | | | 107 | | | | (356 | ) | | | (10,517 | ) |
Financing Activities | | | | | | | | | | | | | | | | | | | | | | | | |
Net increase in other borrowed funds | | | 700 | | | | 1,836 | | | | — | | |
Net (decrease) increase in other borrowed funds | | | | (1,550 | ) | | | 700 | | | | 1,836 | |
Cash dividends paid on common stock | | | (5,256 | ) | | | (4,873 | ) | | | (4,304 | ) | | | (5,421 | ) | | | (5,256 | ) | | | (4,873 | ) |
Proceeds from the issuance of common stock | | | 2,479 | | | | 2,476 | | | | 2,657 | | | | 2,208 | | | | 2,479 | | | | 2,476 | |
Common stock repurchased | | | (2,056 | ) | | | (6,440 | ) | | | (1,881 | ) | | | (2,020 | ) | | | (2,056 | ) | | | (6,440 | ) |
Common stock purchased for deferred compensation obligations | | | (767 | ) | | | (249 | ) | | | — | | | | (514 | ) | | | (767 | ) | | | (249 | ) |
| | | | | | | | | | | | | | |
Net Cash Used in Financing Activities | | | (4,900 | ) | | | (7,250 | ) | | | (3,528 | ) | | | (7,297 | ) | | | (4,900 | ) | | | (7,250 | ) |
| | | | | | | | | | | | | | |
(Decrease) Increase in Cash and Cash Equivalents | | | (972 | ) | | | (13,121 | ) | | | 10,190 | | |
Increase (Decrease) in Cash and Cash Equivalents | | | | 129 | | | | (972 | ) | | | (13,121 | ) |
Cash and cash equivelants at beginning of year | | | 1,144 | | | | 14,265 | | | | 4,075 | | | | 172 | | | | 1,144 | | | | 14,265 | |
| | | | | | | | | | | | | | |
Cash and Cash Equivalents at End of Year | | $ | 172 | | | $ | 1,144 | | | $ | 14,265 | | |
Cash And Cash Equivalents at End of Year | | | $ | 301 | | | $ | 172 | | | $ | 1,144 | |
| | | | | | | | | | | | | | |
| |
Note 2321 — | Operating Segments |
The Corporation’s reportable segments are based on legal entities that account for at least 10 percent of net operating results. Retail banking operations for 2010, 2009, 2008, and 20072008 represent approximately 90% or greater of the Corporation’s total assets and operating results. As such, no additional segment information is presented.
6771
Management’s Discussion and Analysis of Financial Condition and Results of OpearationsOperations
ISABELLA BANK CORPORATION FINANCIAL REVIEW
(All dollars in thousands)
The following is management’s discussion and analysis of the financial condition and results of operations for Isabella Bank Corporation (the “Corporation”).Corporation. This discussion and analysis is intended to provide a better understanding of the consolidated financial statements and statistical data included elsewhere in the Annual Report. The Corporation’s acquisition of Greenville Community Financial
Executive Summary
Isabella Bank Corporation, as well as all other financial institutions in January 2008 was accounted for as a purchase transaction,Michigan and as such,across the related results ofentire country, continues to experience the negative impacts on its operations are included from the date of acquisition. See “Note 2 — Business Combinationsrecent economic recession and Joint Venture Formation” in the accompanying Notes to Consolidated Financial Statements included elsewhere in the report.
The currentsubsequent recovery. This recession, which began in the fourth quarter of 2008, continued to negatively impact the Corporation’s overall profitability throughout 2009 ashas resulted in historically high levels of loan delinquencies and nonaccrual loans, which have translated into high levels ofincreases in net loans charged off and foreclosed asset and collection related expenses. AlthoughAdditionally, there have been announcements by several large banks stating that they have halted foreclosures due to a failure to properly prepare the documents to complete the foreclosure process. Isabella Bank Corporation has, to its knowledge, materially complied with all laws governing foreclosures.
Despite the recent economic downturn, the Corporation continues to be profitable, with net income of $9,045 for the year ended December 31, 2010. The Corporation’s nonperforming loans remain at historically high levels, they haverepresented 0.83% of total loans as of December 31, 2010 which declined $3,136 from last year. This improvement, coupled with a decline in net loans charged off, enabled the Corporation to reduce its provision for loan losses in1.28% as of December 31, 2009. The reductionratio of nonperforming loans to total loans for all banks in the provision for loan losses along with an increasedCorporation’s peer group was 3.71% as of September 30, 2010 (December 31, 2010 peer group ratios are not yet available). The Corporation’s interest margins also continue to be strong, as the net yield on interest earning assets (on a fully tax equivalent basis) resultedwas 4.04% for the year ended December 31, 2010.
New Branch Office
As part of the Corporation’s effort to expand its market area, the Corporation opened a new branch in net incomeMidland, Michigan in the third quarter of $7,8002010. The new full service office will expand the Corporation’s presence in the Midland area as a source for 2009, as comparedboth commercial and consumer loans and deposits.
Recent Legislation
The recently passed Health Care and Education Act of 2010 and the Patient Protection and Affordable Care Act could have a significant impact on the Corporation’s operating results in future periods. Aside from the potential increases in the Corporation’s health care costs, the implementation of the new rules and requirements is likely to $4,101require a substantial commitment from the Corporation’s management.
The recently enacted Dodd-Frank Act is very broad and complex legislation that puts in place a sweeping new financial services framework that is likely to have significant regulatory and legal consequences and will likely impact the Corporation’s future operating results. Implementation of the Act will require compliance with numerous new regulations, which will increase compliance and documentation costs. For more information, see the summary of the Dodd-Frank Act under the heading “Regulation” in Item 1, included in the Corporation’s 2010 annual report onForm 10-K.
In September 2010, Congress passed and the President signed into law the Small Business Lending Bill which includes access to capital for 2008.community banks. The Corporation continues to be well capitalized and profitable and is not expecting to participate in the program.
Shareholder Stock Purchase Program
The Corporation recently amended its Dividend Reinvestment and Employee Stock Purchase Plan to allow for any current shareholders to purchase additional shares of the Corporation’s stock directly from the Corporation beginning in the fourth quarter of 2010. For further detailed discussion and analysis,more information regarding that amendment, see below.theForm S-3D that the Corporation filed with the SEC on October 1, 2010.
Other
The Corporation has not received any notices of regulatory actions as of December 31, 2009.February 28, 2011.
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Critical Accounting Policies:
The Corporation’s significant accounting policies are set forth in Note 1 of the Consolidated Financial Statements. Of these significant accounting policies, the Corporation considers its policies regarding the allowance for loan losses, acquisition intangibles, and the determination of the fair value of investment securities to be its most critical accounting policies.
The allowance for loan losses requires management’s most subjective and complex judgment. Changes in economic conditions can have a significant impact on the allowance for loan losses and, therefore, the provision for loan losses and results of operations. The Corporation has developed appropriate policies and procedures for assessing the adequacy of the allowance for loan losses, recognizing that this process requires a number of assumptions and estimates with respect to its loan portfolio. The Corporation’s assessments may be impacted in future periods by changes in economic conditions, and the discovery of information with respect to borrowers which is not known to management at the time of the issuance of the consolidated financial statements. For additional discussion concerning the Corporation’s allowance for loan losses and related matters, see the Provision for Loan Lossesdetailed discussion below.to follow.
United States generally accepted accounting principles require that the Corporation determine the fair value of the assets and liabilities of an acquired entity, and record their fair value on the date of acquisition. The Corporation employs a variety of measures in the determination of the fair value, including the use of discounted cash flow analysis, market appraisals, and projected future revenue streams. For certain items that management believes it has the appropriate expertise to determine the fair value, management may choose to use its own calculations of the value. In other cases, where the value is not easily determined, the Corporation consults with outside parties to determine the fair value of the identified asset or liability. Once valuations have been adjusted, the net difference between the price paid for the acquired entity and the value of its balance sheet, including identifiable intangibles, is recorded as goodwill. This goodwill is not amortized, but is tested for impairment on at least an annual basis.
The Corporation currently has bothavailable-for-sale and trading investment securities that are carried at fair value. Changes in the fair value ofavailable-for-sale investment securities are included as a component of other comprehensive income, while declines in the fair value of these securities below their cost that are other than temporaryother-than-temporary are reflected as realized losses.losses in the consolidated statements of income. The change in value of trading investment securities is included in current earnings. Management evaluates securities for indications of losses that are consideredother-than-temporary, if any, on a regular basis.
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