UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

SCHEDULE 14A

Proxy Statement Pursuant to Section 14(a) of the
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Exchange Act of 1934 (Amendment
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ISABELLA BANK CORPORATION

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SEC 1913 (02-02)
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ISABELLA BANK CORPORATION
401 N. Main St.
Mt. Pleasant, Michigan 48858
NOTICE OF THE ANNUAL MEETING OF SHAREHOLDERS
To Be Held May 3, 2011April 30, 2014

Notice is hereby given that the Annual Meeting of Shareholders of Isabella Bank Corporation will be held on Tuesday, May 3, 2011Wednesday, April 30, 2014 at 5:00 p.m. Eastern StandardDaylight Time, at the Comfort Inn, 2424 S. Mission Street, Mt. Pleasant, Michigan. The meeting is for the purpose of considering and acting upon the following items of business:
1. The election of five directors.
2. To hold an advisory, non-binding vote on executive compensation of named executive officers.
3. To hold an advisory, non-binding vote on how frequently advisory votes on the executive compensation of named executive officers should be held.
4. To transact such other business as may properly come before the meeting, or any adjournment or adjournments thereof.
1.The election of five directors.
2.To hold an advisory, non-binding vote on executive compensation of named executive officers.
3.To transact such other business as may properly come before the meeting, or any adjournment or adjournments thereof.
The Board of Directors has fixed April 1, 2011March 17, 2014 as the record date for determination of shareholders entitled to notice of, and to vote at, the meeting or any adjournments thereof.
Your vote is important. Even if you plan to attend the meeting, please date and sign the enclosed proxy form, indicate your choice with respect to the matters to be voted upon, and return it promptly in the enclosed envelope. Note that if stock is held in more than one name, all parties should sign the proxy form.vote:
1.By mail: Indicate your choice with respect to the matters to be voted upon, sign, date, and return your proxy form in the enclosed envelope. Note that if stock is held in more than one name, all parties should sign the proxy form; or
2.By internet - www.proxyvote.com: Have your proxy form in hand when you access the web site and follow the instructions to obtain your records and to create an electronic voting instruction form; or
3.By phone - 1-800-690-6903 (toll-free): Have your proxy form in hand and then follow the instructions.
By order of the Board of Directors
-s- DEBRA CAMPBELL
Debra Campbell, Secretary
Dated: April 8, 2011March 31, 2014


Table of Contents

ISABELLA BANK CORPORATION
401 N. Main StSt.
Mt. Pleasant, Michigan 48858

PROXY STATEMENT
General Information
As used in this Proxy Statement, references to "the Corporation", “Isabella,” “we,” “our,” “us,” and similar terms refer to the consolidated entity consisting of Isabella Bank Corporation and its subsidiaries. Isabella Bank Corporation refers solely to the parent holding company, and the “Bank” refers to Isabella Bank Corporation’s subsidiary, Isabella Bank.
This Proxy Statement is furnished in connection with the solicitation of proxies, by the Board of Directors of Isabella Bank Corporation (the Corporation) a Michigan financial holding company, to be voted at theour Annual Meeting of Shareholders of the Corporation(the “Annual Meeting”) which is to be held on Tuesday, May 3, 2011Wednesday, April 30, 2014 at 5:00 p.m. at the Comfort Inn, 2424 S. Mission Street, Mt. Pleasant, Michigan, or at any adjournment or adjournments thereof, for the purposes set forth in the accompanying Notice of Annual Meeting of Shareholders and in this Proxy Statement.
This Proxy Statement has been mailed on April 8, 2011March 31, 2014 to all holders of record of common stock as of the record date. If a shareholder’s shares are held in the name of a broker, bank, or other nominee, then that party should give the shareholder instructions for voting the shareholder’s shares.
Voting at the Meeting
The Board of Directors of the Corporation hasWe have fixed the close of business on April 1, 2011March 17, 2014 as the record date for the determination of shareholders entitled to notice of, and to vote at, the Annual Meeting of Shareholders and any adjournment thereof. The Corporation hasWe have only one class of common stock and no preferred stock. As of April 1, 2011,March 17, 2014, there were 7,546,8667,707,524 shares of common stock of the Corporation outstanding. Each outstanding share entitles the holder thereof to one vote on each separate matter presented for vote at the meeting. ShareholdersYou may vote on matters that are properly presented at the meetingAnnual Meeting by either attending the meeting and casting a vote, or by signing and returning the enclosed proxy. Ifproxy, voting on the enclosedinternet, or voting by phone. You may change your vote or revoke your proxy is executed and returned, it may be revoked at any time before it is exercisedvoted at the meeting. All shareholdersAnnual Meeting by filing with the Corporation an instrument revoking it, filing a duly executed proxy bearing a later date (including a proxy given over the internet or by phone) or by attending the meeting and electing to vote in person. You are encouraged to date and sign the enclosed proxy, indicate their choice with respect to the matters to be voted upon, and return it to the Corporation.vote by mail, internet, or phone.
The CorporationWe will hold the Annual Meeting of Shareholders if holders of a majority of the Corporation’s shares of common stock entitled to vote are represented in person or by proxy at the meeting.proxy. If a shareholder signsyou sign and returnsreturn the proxy, those shares will be counted to determine whether the Corporation hasif there is a quorum, even if the shareholder abstainsyou abstain or failsfail to vote on any of the proposals listed on the proxy.proposals.
A shareholder’sYour broker may not vote on the election of directors or the advisory vote to approve the named executive officers’ compensation or the advisory vote on the frequency of the vote on named executive officers’officers' compensation if the shareholder doesyou do not furnish instructions for such proposals. A shareholderYou should use the voting instruction card provided by the institution that holds his or her sharesus to instruct the broker to vote the shares, or else the shareholder’syour shares will be considered “broker non-votes.”
Broker non-votes are shares held by brokers or nominees as to which voting instructions have not been received from the shares’ beneficial ownersowner or the personsindividual entitled to vote those shares and the broker or nominee does not have discretionary voting power under rules applicable to broker-dealers. Under these rules, proposals one, twoProposals 1 and three2 are not items on which brokerage firms may vote in their discretion on your behalf of their clients if such clientsunless you have not furnished voting instructions.
At this year’s annual meeting, shareholdersAnnual Meeting, you will elect fiveone director to serve for a term of one year and four directors to serve for a term of three years. In voting on the election of directors, a shareholderYou may vote in favor, of the nominees, vote against, or withhold votes as tofor any or all nominees, or vote against or withhold votes as to specific nominees. Directors are elected by a plurality of the votes cast at the annual meeting. This means that the nominees receiving the greatest number of votes will be elected. Shares not voted, including broker non-votes, have no effect on the election of directors.
elections.
In voting on the advisory, nonbinding proposal to approve the executive compensation described in this proxy statement, a shareholder may vote in favor of the advisory proposal, vote against the advisory proposal or abstain from voting. A majority of the shares represented at the annual meeting and entitled to vote on this advisory proposal must be voted in favor of the proposal for it to pass. While this vote is required by law, it will neither be

binding on the Board of Directors, nor will it create or imply any change in the fiduciary duties of, or impose any additional fiduciary duty on the Board of Directors. In counting votes on the advisory, nonbinding proposal to approve executive compensation matters, abstentions will have the same effect as a vote against the proposal and broker non-votes will have no effect on the outcome of the vote.

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In voting on the advisory, nonbinding proposal on how frequently a shareholder vote on executive compensation matters should be held, a shareholder may vote in favor
Table of holding such a vote once every year, once every two years or once every three years, or may abstain from voting. Generally, approval of any proposal presented to the Corporation’s shareholders requires the affirmative vote of a majority of the shares represented at the meeting and entitled to vote on the proposal. However, because this vote is advisory and nonbinding, if none of the vote frequency options receives the affirmative vote of a majority of the shares represented at the meeting and entitled to vote on the proposal, the vote frequency option receiving the greatest number of votes will be considered the frequency option recommended by the Corporation’s shareholders. Even though this vote will not be binding on the BoardContents

Proposal 1-Election of Directors and it will not create or imply any change in the fiduciary duties of, or impose any additional fiduciary duty on, the Board of Directors, the Board of Directors will take into account the outcome of this vote in making a determination on the frequency that advisory votes on the Corporation’s executive compensation will be included in the Corporation’s proxy statements. In counting votes on the advisory, nonbinding proposal on how frequently the shareholder vote on the Corporation’s executive compensation should be held, abstentions and broker non-votes will have no effect on the outcome of the vote.
Proposal 1-Election of Directors
The Board of Directors (the "Board") currently consists of thirteen (13)eleven (11) members and is divided into three classes, with the directors in eachthe class being electednoted below up for a term of three years.re-election at the Annual Meeting. On DecemberSeptember 15, 2013 Wilson C. Lauer passed away and on October 31, 2010,2013 Sandra L. Caul retired from the Board, resulting in accordance with the Corporation’s bylaws, William J. Strickler and Theodore W. Kortes retired as members of the Corporation’s Board of Directors and the number of directors wasbeing reduced to thirteen (13)ten (10). AtThe number of Board members was increased to its current level by the 2011appointment of Jae A. Evans to the Board on January 1, 2014. Dennis P. Angner, whose term expires at the Annual Meeting, of Shareholders five directors, Dennis P. Angner,has been nominated for election to a one year term through 2015 and Dr. Jeffrey J. Barnes, G. Charles Hubscher, David J. Maness, and W. Joseph Manifold, whose terms expire at the annual meeting,Annual Meeting, have been nominated for election to three year terms through 20142017 for the reasons described below.
Except as otherwise specified, in the proxy, proxies will be voted for election of the five nominees. If a nominee becomes unable or unwilling to serve, proxies will be voted for such other person, if any, as shall be designated by the Board of Directors.designated. However, the Corporation’s management now knowswe know of no reason to anticipate that this will occur. The five nominees for election as directors who receive the greatest number of votes cast will be elected directors. Each of the nominees has agreed to serve as a director if elected.
Nominees for election and current directors, are listed below. Also shown for each nominee and each current director is his or herincluding their principal occupation for the last five or more years, age, and length of service as a director, of the Corporation.are listed below.
The Board of DirectorsWe unanimously recommendsrecommend that shareholdersyou vote FOR the election of each of the five director nominees nominated by the nominees.
Director Qualifications
Board of Directors.
Director’s Qualifications
The members of the Corporation’s Board of Directors (the Board) are all wellhighly qualified to serve on the Board and represent our shareholders’your best interest. As described below, under the caption “Nominating and Corporate Governance Committee” the Board and Nominating and Corporate Governance Committee (the “Nominating Committee”)interests. We select nominees to the Board to establish a Board that is comprised of members who:
Have extensive business leadership
• Have extensive business leadership
• Bring a diverse perspective and experience
• Are independent and collegial
• Have high ethical standards and have demonstrated sound business judgment
• Are willing and able to commit the significant time and effort to effectively fulfill their responsibilities
• 
Bring a diverse perspective and experience
Are independent and collegial
Have high ethical standards and have demonstrated sound business judgment
Are willing and able to commit the significant time and effort to effectively fulfill their responsibilities
Are active in and knowledgeable of their respective communities


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Each nominee and current director nominee along with the other directors bringspossess these qualifications to the Board. They providequalities and provides a diverse complement of specific business skills, experience, and knowledge including extensive financial and accounting experience, knowledge of banking, small business operating experience, and specific knowledge of customer market segments including agriculture, oil and gas, health care, food and beverage, manufacturing, and retail.
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.
Bank
Professionals
Expertise
Audit
Leadership
Diversity
Business
Standing
in Financial
Committee
Civic and
and Team
by Race,
Geo-
Entre-
Segment
in Chosen
or Related
Financial
Community
Building
Gender, or
graphical
Tech-
Market-
Govern-
preneurial
Human
Represent-
DirectorProfessional
Standing
in Chosen
Field		 FieldExpertise
in  financial
or related
field		 Audit
Committee
Financial
Expert		 InvolvementCivic and
community
involvement		 SkillsCulturalLeadership
and team
building
skills		 Diversity
by race,
gender, or
cultural		Geo-
graphical
diversity		 Finance Tech-
nology		 Market-
ing		 Govern-
ance		 SkillsEntre-
preneurial
skills		 Human
Resources		 Bank
business
segment
represent-
ation
David J. ManessX

 X X 
 
 
 X 

 X 
 X
Dennis P. AngnerX X 
 X X 
 
 X X
X


Dr. Jeffrey J. BarnesX

XX
X



X
X
Richard J. BarzXX
XX

X
X

X
Jae A. EvansXX
XX

X
X

X
G. Charles HubscherXX
XX





X
X
Thomas L. KleinhardtX

XX
XX
X
X
X
Joseph LaFramboiseX

XX
X

X



W. Joseph ManifoldXXXXX

XX




W. Michael McGuireXXXXX
XXX
X


Sarah R. OppermanX

XXXX

X
X
X

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The following table identifies individual Board members serving on each of our standing committees:
DirectorAuditNominating and Corporate GovernanceCompensation and Human Resource
David J. Maness
 Xo
 Xo
 Xc
Dennis P. Angner


Dr. Jeffrey J. BarnesX
X
Richard J. Barz


Jae A. Evans


G. Charles HubscherX
X
Thomas L. Kleinhardt

X
Joseph LaFramboiseX X X
W. Joseph Manifold
 Xc
 X XXXXX
Jeffrey J. BarnesXXXXXX
Richard J. BarzXXXXXXX
Sandra L. CaulXXXXXX
James C. FabianoXXXXXXX
G. Charles HubscherXXXXXX
Thomas L. KleinhardtXXXXXXX
Joseph LaFramboiseXXXXX
W. Joseph ManifoldXXXXXXX
W. Michael McGuireX
 Xc
 X
Sarah R. Opperman
 
 XXXXXXXX
Dianne C. MoreyXXXXXXX
Dale D. WeburgXXXXXX
The following table identifies the individual members of our Board serving on each of these standing committees:
Nominating
Compensation
and Corporate
and Human
Director
AuditGovernanceResource
David J. ManessXoXoXc,o
Dennis P. Angner
Jeffrey J. BarnesXX
Richard J. Barz
Sandra L. CaulXX
James C. FabianoXX
G. Charles HubscherXX
Thomas L. KleinhardtX
Joseph LaFramboiseXX
W. Joseph ManifoldXcXX
W. Michael McGuireXXX
Dianne C. MoreyX
Dale D. WeburgXcX
C — Chairperson     
O — Ex-Officio     
Director NomineesNominee for TermsTerm Ending in 20142015
Dennis P. Angner (age 55)58) has been a director of theIsabella Bank Corporation and Isabellathe Bank (the Bank) since 2000. Mr. Angner has been principally employed by the Corporation since 1984 and has served as President of theIsabella Bank Corporation since December 30, 2001 and CFO since January 1, 2010. Mr. Angner served as Chief Executive Officer of theIsabella Bank Corporation from December 30, 2001 through December 31, 2009. He is thea past Chair of the Michigan Bankers Association and is currently serving as vice chairman of its taxation committee, is a member of


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the American Bankers Association Government Relations Council, and has served on the Central Michigan American Red Cross board for over 20 years.
Director Nominees for Terms Ending in 2017
Dr. Jeffrey J. Barnes(age 48) (age 51) has been a director of the Bank since September 2007 and was appointed to the Corporation’s Board of Directors effective January 1,Isabella Bank Corporation since 2010. Dr. Barnes is a physician and co-owner of Central Eye Consultants.shareholder in Lansing Ophthalmology PC. He is a former member of the Central Michigan Community Hospital Board of Directors.
G. Charles Hubscher(age 57) (age 60) has been a director of the Bank since May 2004 and was appointed to the Corporation’s Board of Directors effective January 1,Isabella Bank Corporation since 2010. Mr. Hubscher is the President of Hubscher and Son, Inc., a sand and gravel producer. He is a director of the National Stone and Gravel Association, the Michigan Aggregates Association, serves on the Board of Trustees for the Mt. Pleasant Area Community Foundation, and is a member of the Zoning Board of Appeals for Deerfield Township.
David J. Maness(age 57) (age 60) has been a director of the Bank since 2003 and of theIsabella Bank Corporation since 2004. Mr. Maness was electedhas served as chairman of the board for the Corporation and the Bank insince 2010. He is President of Maness Petroleum, a geological and geophysical consulting services company. Mr. Maness is currently serving as a director for the Michigan Oil & Gas Association, and he previously served on the Mt. Pleasant Public Schools Board of Education.
W. Joseph Manifold(age 59) (age 62) has been a director of theIsabella Bank Corporation since 2003 and of the Bank since January 1, 2010. Mr. Manifold is a Certified Public Accountant and CFO of Federal Broach Holdings LLC, a holding company which operates several manufacturing companies. Previously, he was a senior manager with Ernst & Young Certified Public Accounting firm working principally on external bank audits and was CFO of the Delfield Company. Prior to joining the Board, Mr. Manifold also served on the Isabella Community Credit Union Board and was Chairman of the Mt. Pleasant Public Schools Board of Education.
Current Directors with Terms Ending in 20122015
Richard J. Barz(age 62) (age 65) has been a director of the Bank since 2000 and of theIsabella Bank Corporation since 2002. Mr. Barz has been employed by the Corporation since 1972 and has beenretired as Chief Executive Officer of Isabella Bank Corporation on December 31, 2013 after over 41 years of service with the Corporation. Mr. Barz was Chief Executive Officer of Isabella Bank Corporation since January 1, 2010 and President and CEO of the Bank since December 2001. Priorfrom 2001 to his appointment as President and CEO, he served as Executive Vice President of the Bank.July 2012. Mr. Barz has been very active in community organizations and events. He is thea past chairman of the Central Michigan Community Hospital Board of Directors, is the current chairman of the Middle Michigan Development

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Corporation Board of Directors, and serves on several boards and committees for Central Michigan University and various volunteer organizations throughout mid-Michigan.
Jae A. Evans (age 57) was appointed a director of Isabella Bank Corporation and the Bank and elected Chief Executive Officer of Isabella Bank Corporation effective January 1, 2014. Mr. Evans has been employed by the Corporation since 2008 and has over 36 years of banking experience. He served as Chief Operations Officer of the Bank through December 31, 2013 and President of the Greenville Division of the Bank from January 1, 2008 to June 2011. Mr. Evans is a board member for The Community Bankers of Michigan, Art Reach of Mid Michigan, and is the chair of the EightCAP governing board. Mr Evans is also past vice-chair of the Carson City Hospital, was president of the Greenville Rotary Club, and just completed his term as chair of The Community Bankers of Michigan.
Sandra L. Caul(age 67)W. Michael McGuire (age 64) has been a director of theIsabella Bank since 1994 and of the Corporation since 2005. Ms. Caul is Vice Chairperson of the Central Michigan Community Hospital Board of Directors, Chairperson of the Mid Michigan Community College Advisory Board and board member for Central Michigan Community Mental Health Facilities. She also sits on the board of the Central Michigan American Red Cross. Ms. Caul retired in January 2005 as a state representative of the Michigan State House of Representatives. Ms. Caul is a registered nurse.
W. Michael McGuire(age 61) has been a director of the Corporation since 2007 and of the Bank since January 1, 2010. He is a director of the Farwell Division of the Bank. Mr. McGuire, is currently an attorney, andretired in August 2013 as the Director of the Office of the Corporate Secretary and Assistant Secretary of The Dow Chemical Company, a manufacturer of chemicals, plastics and agricultural products, headquartered in Midland, Michigan.
Current Directors with Terms Ending in 2016
Dianne C. Morey(age 64)Thomas L. Kleinhardt (age 59) has been a director of the Bank since December 2000 and was appointed to the Corporation’s Board of Directors effective January 1, 2010. Mrs. Morey is an owner of Bandit Industries, Inc., a forestry equipment manufacturer. She serves as a Trustee for the Mt. Pleasant Area Community Foundation.
Current Directors with Terms Ending in 2013
James C. Fabiano(age 67) has been a director of the Bank since 19791998 and of theIsabella Bank Corporation since 1988. He served as the Corporations’ chair from 2004 to 2010. Mr. Fabiano is Chairman and CEO of Fabiano Brothers, Inc., a wholesale beverage distributor operating in several counties throughout Michigan. Mr. Fabiano is a past recipient of


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the Mt. Pleasant Area Chamber of Commerce Citizen of the Year award. He is also a past Chairman of the Central Michigan University Board of Trustees.
Thomas L. Kleinhardt(age 56) has been a director of the Bank since October 1998 and was appointed to the Corporation’s Board of Directors effective January 1, 2010. Mr. Kleinhardt is President of McGuire Chevrolet, is active in the Clare Kiwanis Club, and coaches the girls Junior Varsity Basketball team at ClareFarwell High School.
Joseph LaFramboise(age 61) (age 64) has been a director of the Bank since September 2007 and was appointed to the Corporation’s Board of Directors effective January 1,Isabella Bank Corporation since 2010. He is a retired Sales and Marketing Executive of Ford Motor Company. Mr. LaFramboise is an Ambassador of Eagle Village in Evart, Michigan.
Dale D. Weburg(age 67)Sarah R. Opperman (age 54) has served asbeen a director of the Breckenridge DivisionBank and Isabella Bank Corporation since July 1, 2012. Ms. Opperman is the owner of Opperman Consulting, LLC, which provides public affairs counsel. She was previously employed for 28 years by The Dow Chemical Company, where she held leadership roles in public and government affairs. She was inducted into the CMU Journalism Hall of Fame and is a recipient of the Bank since 1987 andDow Genesis Award for Excellence in People Development. Ms. Opperman serves on the CMU Board of Trustees, the Bank and Corporation since 2000. Mr. Weburg is President of Weburg Farms, a cash crop farm operation. Mr. Weburg also serves as a trustee ofCMU Development Board, the Mid Michigan Health Corporate Board of Directors, and the Mid Michigan Health Fund Development Committee. She also served on the CMU Research Corporation Board of Gratiot Health System.
Directors.
Each of the directors has been engaged in their stated professions for more than five years.
Other Named Executive Officers
Timothy M. Miller(age 60), President of the Breckenridge Division of the Bank and a member of its Board of Directors, has been an employee of the Corporation since 1985. Steven D. Pung (age 61)64), Chief Operations OfficerPresident of the Bank and a member of the Board of Directors of Financial Group Information Services (a wholly owned subsidiary of theIsabella Bank Corporation) has been employed by the CorporationBank since 1978.1979. Jerome E. Schwind (age 47), Executive Vice President and Chief Operating Officer of the Bank, has been employed by the Bank since 1999. David J. Reetz (age 50)53), Senior Vice President and Chief Lending Officer of the Bank, has been employed by the CorporationBank since 1987.
All officers of the Corporation serve at the pleasure of the Corporation’s Board of Directors.Board.
Proposal 2-Advisory Vote Onon Executive Compensation
The compensation of the Corporation’s principal executive officer, retired principal executive officer, principal financial officer, and three other most highly compensated executive officers (named executive officers) is described below under the headings “Compensation Discussion and Analysis” and “Executive Officers”. Shareholders are urged to read these sections of this proxy statement, which discusses the Corporation’s compensation policies and procedures with respect to its named executive officers.

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

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

• 
The Corporation is not required to provide any severance or termination pay or benefits to any named executive officer;


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Each member of the Compensation and Human Resource Committee is independent under the applicable standards of the NASDAQ Stock Market Marketplace Rules;
The Compensation and Human Resource Committee continually monitors the Corporation’s performance and adjusts compensation practices accordingly; and
• Each member of the Compensation and Human Resource Committee is independent under the applicable standards of the NASDAQ Marketplace Rules;
• The Compensation and Human Resource Committee continually monitors the Corporation’s performance and adjusts compensation practices accordingly; and
• The Compensation and Human Resource Committee with the assistance of an independent compensation consulting firm regularly assesses the Corporation’s individual and total compensation programs against peer companies, the general marketplace and other industry data points.
The Compensation and Human Resource Committee regularly assesses the Corporation’s individual and total compensation programs against peer companies, the general marketplace and other industry data points.
          
Unless otherwise instructed, validly executed proxies will be voted “FOR” this resolution.

The Board of DirectorsWe unanimously recommendsrecommend that shareholdersyou vote FOR the nonbinding advisory resolution approving the executive compensation of the Corporation’s named executive officers.

Proposal 3-Frequency of Advisory Votes On Executive Compensation
In accordance with recently adopted changes to Section 14A of the Exchange Act, the Corporation is providing a shareholder advisory vote to approve the compensation of our named executive officers (thesay-on-pay advisory vote in Proposal 2 above) this year and will do so at least once every three years thereafter. Pursuant to recently adopted changes to Section 14A of the Exchange Act, at the 2011Annual Meeting, the Corporation is also asking shareholders to vote on whether futuresay-on-pay advisory votes on executive compensation should occur every year, every two years or every three years.
After careful consideration, the Board of Directors recommends that future shareholdersay-on-pay advisory votes on executive compensation be conducted every three years. Although the Board of Directors recommends asay-on-pay vote every three years, shareholders will be able to specify one of four choices for this proposal on the proxy card: one year, two years, three years or abstain. Shareholders are not voting to approve or disapprove the Board of Directors’ recommendation.
Although this advisory vote regarding the frequency ofsay-on-pay votes is non-binding on the Board of Directors, the Board of Directors and the Compensation and Human Resource Committee will review the voting results and take them into consideration when deciding how often to conduct futuresay-on-pay shareholder advisory votes.
Unless otherwise instructed, validly executed proxies will be voted “FOR” the Three Year frequency option.
The Board of Directors unanimously recommends that shareholders vote FOR the Three Year frequency option.
Corporate Governance
Director Independence
The Corporation hasWe have adopted the director independence standards as defined under Rule 5605(a)(2) of the NASDAQ Stock Market Marketplace Rules. The Board hasWe have determined that James C. Fabiano, Dale D. Weburg,Dr. Jeffrey J. Barnes, G. Charles Hubscher, Thomas L. Kleinhardt, Joseph LaFramboise, David J. Maness, W. Joseph Manifold, W. Michael McGuire, and Sarah R. Opperman are independent directors. Former directors Sandra L. Caul W. Michael McGuire, Thomas L. Kleinhardt, Joseph LaFramboise, Jeffreyand Wilson C. Lauer, were also determined to be independent directors. Richard J. Barnes, Dianne C. Morey, and G. Charles Hubscher areBarz is not independent directors.as he retired as CEO of Isabella Bank Corporation on December 31, 2013. Jae A. Evans is not independent as he is employed as CEO of Isabella Bank Corporation. Dennis P. Angner is not independent as he is employed as President and Chief Financial OfficerCFO of theIsabella Bank Corporation. Richard J. Barz is not independent as he is employed as Chief Executive Officer of the Corporation.
Board Leadership Structure and Risk Oversight
The Corporation’sOur Governance policyPolicy provides that only directors who are deemed to be independent as set forth by the NASDAQ Stock Market Marketplace Rules and SEC rules are eligible to hold the office of Chairman of the Board.chairperson. Additionally, the chairpersons of Board established committees must also be independent directors. It is the Board’sour belief that


6

having a separate Chairmanchairperson and Chief Executive OfficerCEO best serves the interest of the shareholders. The Board of Directors elects its chairperson at the first Board meeting following the annual meeting. Independent members of the Board of Directors meet without insiderinside directors at least twice per year.
Management is responsible for the Corporation’s day to dayour day-to-day risk management and the Board’s role is to engage in informed oversight. The Board utilizes committees to oversee risks associated with compensation financial, and governance. Financial Group Information Services, the Corporation’sour 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.
TheOur Audit Committee is responsible for overseeing the integrity of theour consolidated financial statements, of the Corporation; the independent auditors’ qualifications and independence;independence, the performance of the Corporation’s, and its subsidiaries’our internal audit function and those of independent auditors; the Corporation’sauditors, our system of internal controls; the Corporation’scontrols, our financial reporting and system of disclosure controls;controls, and theour compliance by the Corporation with legal and regulatory requirements and with the Corporation’sour Code of Business Conduct and Ethics.

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Committees of the Board of Directors and Meeting Attendance
The Board met 1412 times during 2010.2013. All incumbent directors attended 75% or more of the meetings held in 2010.2013. 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.directors. 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”“Audit Committee Report” included elsewhere in this annual proxy statement. The Audit Committee is governed by a written charter approved by the Board. The Audit Committee CharterBoard, which is available on the Bank’s website, website: www.isabellabank.com under the Investor Relations tab.
.
In accordance with the provisions of the Sarbanes — OxleySarbanes-Oxley Act of 2002, directors Manifold and McGuire meet the requirements of Audit Committee Financial Expert and have been so designated by the Board.designated. The Committee also consists of directors Barnes, Hubscher, LaFramboise, and Maness.Maness (ex-officio).
Nominating and Corporate Governance Committee
The Corporation hasWe have a standing Nominating and Corporate Governance Committee consisting of independent directors who meet the requirements for independence as defined in Rule 5605(a)(2) of NASDAQ Marketplace Rules.directors. The Committee consists of directors Caul, Fabiano,LaFramboise, Maness (ex-officio), Manifold, McGuire, and Weburg.McGuire. The Nominating and Corporate Governance Committee held one meeting in 2010,2013, with all directors attendedattending the meeting. The Board has approved a Nominating and Corporate Governance Committee Charter which is available on the Bank’s website 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 our geographical markets served by the Corporation and the business experience of the nominee.
The Nominating and Corporate Governance Committee will consider, as potential nominees persons recommended by shareholders. Recommendations should be submitted in writing to the Secretary of the Corporation, 401 N. Main St., Mt. 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


7

qualifications of the recommended candidate for nomination.candidate. Recommendations for the 20122015 Annual Meeting of Shareholders should be delivered no later than December 9, 2011.1, 2014. The Nominating and Corporate Governance Committee does not evaluateevaluates all potential director nominees for director differently based onin the same manner, whether theythe nominations are recommended to the Nominating and Corporate Governance Committee byreceived from a shareholder, or otherwise.
Compensation and Human Resource Committee
The Compensation and Human Resource Committee of the Corporation is responsible for reviewing and recommending to the Corporation’sour Board the compensation of the Chief Executive Officer and other executive officers, of the Corporation, benefit plans, and the overall percentage increase in salaries. The committee consists of independent directors who meet the requirements for independence as defined in Rule 5605(a) (2) of the NASDAQ Marketplace Rules. The Committee consists of directors Maness, Barnes, Caul, Fabiano, Hubscher, Kleinhardt, LaFramboise, Maness, Manifold, McGuire, Morey, and Weburg.Opperman. The Committeecommittee held onetwo meeting during 20102013 with all directors attending the meeting.in attendance. This Committee is governed by a written charter approved by the Board that is available on the Bank’s website 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 attention of the Corporation’s Secretary, Isabella Bank Corporation, 401 N. Main St., Mt. Pleasant, Michigan 48858.48858. Communications will be forwarded to the Board of Directors or the appropriate committee, as soon as practicable.
Code of Ethics
The Corporation has adopted aOur Code of Business Conduct and Ethics, thatwhich is applicable to the Corporation’s Chief Executive OfficerCEO and the Chief Financial Officer. The Corporation’s Code of Business Conduct and EthicsCFO, is available on the Bank’s website website: www.isabellabank.com under the Investor Relations tab..


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Report6
Table of the Contents

Audit Committee
Report
The Audit Committee oversees the Corporation’s financial reporting process on behalf of the Board. The 20102013 Committee consisted of directors Barnes, Hubscher, LaFramboise, Maness, Manifold, and McGuire.
The Audit Committee is responsible for pre-approving all auditing services and permitted non-audit services for the Corporation by itsour independent auditors, or any other auditing or accounting firm, if those fees are reasonably expected to exceed 5.0% of the current year agreed upon fee for independent audit services, except as noted below.services. The Audit Committee has established general guidelines for the permissible scope and nature of any permitted non-audit services in connection with its annual review of the audit plan and reviews the guidelines with the Board of Directors.
Board.
Management has the primary responsibility for the consolidated financial statements and the reporting process including the systems of internal controls. In fulfilling its oversight responsibilities, the Audit Committee reviewed the audited consolidated financial statements in the Annual Report with management including a discussion of the quality, not just the acceptability, of the accounting principles, the reasonableness of significant judgments, and the clarity of disclosures in the consolidated financial statements. The Audit Committee also reviewed with management and the independent auditors, management’s assertion on the design and effectiveness of the Corporation’sour internal control over financial reporting as of December 31, 2010.
2013.
The Audit Committee reviewed with the Corporation’sour independent auditors, who are responsible for expressing an opinion on the conformity of those audited consolidated financial statements with accounting principles generally accepted in the United States of America, their judgments as to the quality, not just the acceptability, of the Corporation’sour accounting principles and such other matters as are required to be discussed with the Audit Committee by the standards of the Public Company Accounting Oversight Board (United States), including those described in AU Section 380 “CommunicationAuditing Standard No. 16 “Communications with Audit Committees”, as may be modified or supplemented. In addition, the Audit Committee has received the written disclosures and the letter from the independent accountantsauditors required by PCAOB Rule 3526, Communication with Audit Committees Concerning Independence, as may be modified or supplemented, and has discussed with the independent accountantauditor the independent accountants’auditors’ independence.
The Audit Committee discussed with the Corporation’sour internal and independent auditors the overall scope and plans for their respective audits. The Audit Committee meets with the internal and external independent auditors, with and without management present, to discuss the results of their examinations, their evaluations of the Corporation’sour internal controls, and the overall quality of the Corporation’sour financial reporting process. The Audit Committee held sixfive meetings during 2010,2013, 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, 20102013 for filing with the Securities and Exchange Commission. The Audit Committee has appointed Rehmann Robson LLC as the independent auditors for the 20112014 audit.
Respectfully submitted,
W. Joseph Manifold, Audit Committee Chairperson
Dr. Jeffrey J. Barnes
G. Charles Hubscher
Joseph LaFramboise
David J. Maness (ex-officio)
W. Michael McGuire


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Compensation Discussion and Analysis
The Compensation and Human Resource Committee (the “Committee”) is responsible for reviewing and recommending to the Board the compensation and benefits for the Chief Executive Officer,CEO, President and CFO, and executive officers of the Corporation.officers. The Committee evaluates and approves theour executive officer and senior management compensation plans, policies, and programs of the Corporation and its affiliates.programs. The Chief Executive Officer, Richard J. Barz,CEO conducts annual performance reviews for Named Executive Officers,named executive officers, excluding himself. Mr. Barzhimself and recommends an appropriate salary to the Committee based on the performance review and the officer’s years of service along with competitive market data.
Compensation Objectives
The Committee considers asset growth with the safety and soundness objectives and earnings per share to be the primary ratios in measuring financial performance. The Corporation’sOur philosophy is to maximize long-term return to shareholders consistent with safe and sound banking practices, while maintaining the commitment to superior customer and community service. The Corporation believesWe believe that the performance of executive officers in managing the business should be the basis for determining overall compensation. Consideration is also given to overall economic conditions and current competitive forces in the market place. The objectives of the Committee are to effectively balance salaries and potential compensation to an officer’s individual management responsibilities and encourage each of them to realize their potential for future contributions to the Corporation.contributions. The objectives are designed to attract and retain high performing executive officers who will lead the Corporationprovide leadership while attaining the Corporation’s earnings and performance goals.
What the Compensation Programs are Designed to Reward
The Corporation’sOur compensation programs are designed to reward dedicated and conscientious employment, with the Corporation, loyalty in terms of continued employment, attainment of job related goals and overall profitability of the Corporation.profitability. In measuring an executive officer’s contributions, to the Corporation, the Committee considers numerous factors including, among other things, the Corporation’sour growth in terms of asset size and increase in earnings per share. In rewarding loyalty and long-term service, the Corporation provideswe provide attractive retirement benefits.
Review of Risks Associated with Compensation Plans
Based on an analysis conducted by management and reviewed by the Committee, management doeswe do not believe that the Corporation’s compensation programs for employees are reasonably likely to have a material short or long term adverse effect on the Corporation’s Results of Operation.our operating results.
Use of Consultants
In 2010,2012, the Committee directly engaged the services of Blanchard Chase,Consulting Group, an outsideindependent compensation consulting firm, to assist with a total compensation review for the top twothree executive officers of the Corporation (CEO, President and CFO, and Bank President). Blanchard Chase is an independent consulting firm andConsulting Group does not perform any additional services for the Corporationus or any members of senior management. In addition, Blanchard ChaseConsulting Group does not have any other personal or business relationships with any Board membermembers or any officer of the Corporation. The Committee is continuing to work with Blanchard Chase on proxy support in 2011.officers. During 2009,2013 and 2011, 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’sOur executive compensation program has consisted primarily of base salary and benefits, annual cash bonusperformance incentives, director fees for insider directors,benefits and perquisites, and participation in the Corporation’sour retirement plans.
How Elements Fit into Overall Compensation Objectives
Individual elements of our compensation objectives are structured to reward strong financial performance, continued service, and to incentivize our leaders to excel in the future. We continually review our compensation objectives to ensure that they are sufficient to attract and retain exceptional officers.
Why Each of the Elements of Compensation is Chosen and How We Determine Amounts for Each Element
Base Salary and BenefitsSalaries, which include director fees for certain executive officers, are set to provide competitive levels of compensation to attract and retain officers with strong motivated leadership.leadership skills. Each officer’s performance, current compensation, and responsibilities within the Corporation are considered by the Committee when establishing base salaries. The CorporationWe also believesbelieve it is best to pay sufficient base salary because it believeswe believe 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. BaseCompetitive 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 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 without incurring inordinate risks.
Performance incentives paid under the Executive Incentive Plan in 2010 were determined by reference to seven performance measures that related to services performed in 2009. The maximum award that may be granted under the Executive Incentive Plan to each eligible employee equals 10% of the employee’s base salary (the “Maximum Award”). The payment of 35% of the Maximum Award was conditioned on the eligible employee accomplishing personal performance goals that were established by such employee’s supervisor as part of the employee’s annual performance review. Each of the employees who were eligible to participate in the Executive Incentive Plan in 2009 accomplished his or her personal performance goals and was 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 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 the 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; a 401(k) plan; and a non-leveraged employee stock ownership plan (ESOP), which is frozen to new participants; and a retirement bonus plan.
How the Corporation 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. TheIn prior years, the Committee utilizesutilized both an independent

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compensation consultant, Blanchard ChaseConsulting Group, and a survey prepared by the Michigan Bankers Association of similar sized Michigan based financial institutions. The independent compensation consultant established a benchmark peer group of 20 mid-west15 midwest financial institutions in non urbannon-urban areas whosewith comparable average assets size ($900 million—$2 billion), number of branch locations, return on average assets (year-ended 2011 ROAA of .38% or greater), and nonperforming assets that were comparable to Isabella Bank Corporation.assets. The Michigan Bankers Association 20102012 compensation survey was based on the compensation information provided by these organizations for 2009.2011. Specific factors used to decide where an executive officer’s salary should be within the established range include the historical financial performance, financial performance outlook, years of service, and job performance. The Committee targeted total compensation for the CEO, the President & CFO, and Bank President to approximate the median of the range obtained from the Michigan Bankers Association compensation survey as well as any ranges obtained from the independent compensation consultant. Compensation for other named executive officers was based on the ranges provided by the Michigan Bankers Association survey.


11

Annual Performance Incentives are used to reward executive officers based on our overall financial performance. This element of the compensation program is included in the overall compensation in order to reward employees above and beyond their base salaries when our performance and profitability exceed established annual targets. The inclusion of this modest incentive encourages management to be creative and diligent in managing to achieve specific financial goals without incurring inordinate risks. Annual performance incentives paid in 2013 were determined by reference to seven performance measures that related to services performed in 2012. The maximum award that may be granted to each eligible employee equals 10% of the employee’s base salary (the “Maximum Award”).

The annualpayment of 35% of the Maximum Award (“personal performance incentivegoals”) is based on the achievement of goals set for each individual. An analysis is conducted by the Chief Executive Officer.CEO. The Chief Executive OfficerCEO makes a recommendation to the 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.CEO. The Committee reviews the performance of the Chief Executive Officer.CEO. 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
Each of the executive officers who were eligible to participate in 2012 accomplished their personal performance goals and were accordingly paid 35% of the 2012 Maximum Award in 2013.
The payment of the remaining 65% of the Maximum Award (“corporate performance goals”) was conditioned on the achievement of targets in the following six categories:
Earnings per share (weighted 40%).
Net operating expenses to average assets (weighted 15%).
Fully Taxable Equivalent (“FTE”) net interest margin, excluding loan fees (weighted 10%).
In-market deposit growth (weighted 10%).
Loan growth (weighted 15%).
Exceeding peer group return on average assets (weighted 10%).

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The following chart provides the 2012 target for each corporate performance goal, as well as the performance attained for each target.
  
2012 Targets 2012 Performance (1) Target % Obtained
Target25.00% 50.00% 75.00% 100.00% 
Earning per share$1.50
 $1.53
 $1.55
 $1.57
 $1.59
 100%
Net operating expenses to average assets1.60% 1.57% 1.54% 1.51% 1.45% 100%
FTE Net Interest Margin3.46% 3.48% 3.50% 3.52% 3.46% 25%
In market deposit growth4.50% 5.00% 5.50% 6.00% 6.10% 100%
Loan growth3.00% 3.50% 4.00% 4.50% 1.46% —%
Exceeding peer group return on average assets1.32% 1.35% 1.39% 1.42% 1.37% 50%
(1)• 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 directorsAdjusted for incentive calculation measures.
While no particular weight is given to any specific factor, the Committee gives at least equal weight to the subjective analyses as described above.
Total compensation in 2010 was based on the Committee targeting its Chief Executive Officer’s and President & Chief Financial Officer’s compensation to approximate the median of the range provided by the independent compensation consultant. Compensation for other named executive officers was based on the ranges provide by the Michigan Bankers Association surveys.
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 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
We also provides itsprovide our executive officers with certain additional benefits and perquisites, which it believeswe believe are appropriate in order to attract and retain the proper quality of talent for these positions and to recognize that similar executive benefits and perquisites are commonly offered by comparable financial institutions.


12

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 We maintain a plan for qualified officers to provide death benefits to each participant. Insurance policies, designed primarily to fund death benefits, have been purchased on the life of each participant with the CorporationBank as the sole owner and beneficiary of the policies. We believe that perquisites provided to our executive officers in 2013 represented a reasonable percentage of each executive’s total compensation package and are consistent, in the aggregate, with perquisites provided to executive officers of comparable financial institutions. A description and the cost of these perquisites are included in footnote 1 in the “Summary Compensation Table” appearing on page 12 and in the table outlining the change in pension value and non-qualified deferred compensation earnings table appearing on page 13.
Retirement Plans.    Our retirement plans are designed to assist executives in providing themselves with a financially secure retirement. The retirement plans include a 401(k) plan, a frozen defined benefit pension plan, a frozen non-leveraged employee stock ownership plan (ESOP), and a retirement bonus plan.
How Elements Fit into Overall Compensation ObjectivesWe have 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 plan was amended in 2013 to provide a matching safe harbor contribution for all eligible employees equal to 100% of the first 5.0% of an employee's compensation contributed to the Plan during the year. Employees are 100% vested in the safe harbor matching contributions.
For 2012 and 2011, we made a 3.0% safe harbor contribution for all eligible employees and matching contributions equal to 50% of the first 4.0% of an employee’s compensation contributed to the Plan during the year. Employees were 100% vested in the safe harbor contributions and were 0% vested through their first two years of employment and were 100% vested after 6 years of service for matching contributions.
Our defined benefit pension plan was curtailed effective March 1, 2007 and the current participants’ accrued benefits were frozen as of that date. Participation in the plan was limited to eligible employees as of December 31, 2006.
Our non-leveraged ESOP was frozen effective December 31, 2006 to new participants. Contributions to the plan are discretionary and approved by the Board.
The elementsretirement bonus plan is a nonqualified plan of deferred compensation benefits for eligible employees effective January 1, 2007. Benefit amounts are determined pursuant to the payment schedule adopted at the sole and exclusive discretion of the 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 offers the Isabella Bank Corporation and Related Companies Deferred Compensation Plan for Directors (the “Directors’ Plan”) to motivate its eligible officers to enhance value for shareholders by aligning the interestsBoard.

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Table of management with those of its shareholders.Contents

As part of its goal of attracting and retaining quality team members, the Corporation has developed competitive employee benefit plans. Management feels that the combination of all of the plans listed above makes the Corporation’s total compensation packages attractive.
Compensation and Human Resource Committee Report
The following Report of the Compensation and Human Resource Committee Report does not constitute soliciting material and should not be deemed filed or incorporated by reference into any other Corporation filing under the Securities Act of 1933 or the Securities Exchange Act of 1934, except to the extent the Corporation specifically incorporates this Report by reference therein.
The Compensation and Human Resource Committee, which includes all of the independent directors of the Board, has reviewed and discussed the Compensation Discussion and Analysis required by Item 402(b) of 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.
Submitted by the Compensation and Human Resource Committee of Isabella Bank Corporation’s Board of Directors:
the Board:
David J. Maness, Chairperson
Dr. Jeffrey J. Barnes
Sandra L. Caul
James C. Fabiano
G. Charles Hubscher
Thomas L. Kleinhardt
Joseph LaFramboise
W. Joseph Manifold
W. Michael McGuire
Dianne C, MoreySarah R. Opperman
Dale D. Weburg


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Executive Officers
Executive Officers of the Corporationofficers are compensated in accordance with their employment with the applicable entity. The following table shows information on compensation earned from the Corporation or its subsidiaries forin each of the last three fiscal years ended December 31, 2010,2013, for the Chief Executive Officer,CEO, the Chief Financial Officer,retired CEO, the CFO, and the Corporation’sour three other most highly compensated executive officers.
Summary Compensation Table
                             
           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  $183,198     
Sr. Vice President and CLO                            
Isabella Bank                            
Name and principal positionYear Salary
($)		 Bonus
($)		 Change in pension value and non-qualified deferred compensation earnings
($)		 All other compensation
($)(1)		 Total
($)
Richard J. Barz2013 $406,522
 $28,358
 $(2,860) $35,771
 $467,791
CEO (retired)2012 396,325
 25,106
 123,578
 35,615
 580,624
Isabella Bank Corporation2011 375,225
 26,535
 181,143
 37,627
 620,530
            
Jae A. Evans (2)2013 $176,379
 $13,320
 $—
 $30,832
 $220,531
CEO2012 

 

 

 

 

Isabella Bank Corporation2011 

 

 

 

 

            
Dennis P. Angner2013 $354,522
 $25,121
 $9,918
 $29,775
 $419,336
President and CFO2012 357,335
 23,628
 131,266
 28,208
 540,437
Isabella Bank Corporation2011 355,625
 26,100
 163,672
 28,542
 573,939
            
Steven D. Pung2013 $227,675
 $6,003
 $6,629
 $29,589
 $269,896
President2012 195,128
 13,333
 67,361
 30,111
 305,933
Isabella Bank2011 167,362
 12,719
 98,915
 27,732
 306,728
            
Jerome E. Schwind (2)2013 $152,017
 $10,326
 $(9,000) $25,474
 $178,817
Executive Vice President and COO2012 

 

 

 

 

Isabella Bank2011 

 

 

 

 

            
David J. Reetz2013 $133,537
 $10,598
 $(9,778) $16,604
 $150,961
Sr. Vice President and CLO2012 129,397
 9,708
 45,361
 17,138
 201,604
Isabella Bank2011 125,640
 8,612
 61,944
 15,077
 211,273
(1)Includes compensation voluntarily deferred under the Corporation’s 401(k) plan. Directors fees are also included, for calendar years 2010, 2009 and 2008 respectively as follows: Richard J. Barz $52,600, $59,250, and $58,275; Dennis P. Angner $52,600, $59,425, and $56,095; Timothy M. Miller $11,300, $26,900, and $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 notednamed executives all other compensation includes 401(k) matching contributions. For Richard J. Barz, Jae A. Evans, Steven D. Pung, and David J. Reetz this also includes club dues and auto allowance. For Dennis P. Angner and Timothy M. Miller,Jerome E. Schwind, this also includes auto allowance.
(4)(2)Not a named executive officer prior to 2010.2013.

Executive officer salary includes compensation voluntarily deferred under our 401(k) plan. Director and advisory board fees are also included and are displayed in the following table for each the last three fiscal years ended December 31, 2013:
 Director and advisory board fees ($)
Name and principal position2013 2012 2011
Richard J. Barz$46,525
 $51,325
 $50,225
Jae A. Evans675
 
 
Dennis P. Angner46,525
 51,325
 49,625
Steven D. Pung12,675
 900
 900
Jerome E. Schwind1,200
 
 
David J. ReetzN/A
 N/A
 N/A
The change in pension value and non-qualified deferred compensation earnings, listed in the summary compensation table, represents the aggregate non-cash change in the actuarial present value of the noted executive’s accumulated benefit under the Isabella Bank Corporation Pension Plan and also includes the non-cash change in the Isabella Bank Corporation Retirement

14

12
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Bonus Plan. The following table provides the change in values for the last three fiscal years ended December 31, 2013:
2010 Pension Benefits
 Pension plan ($) Retirement plan ($)
Name and principal position2013 2012 2011 2013 2012 2011
Richard J. Barz$(47,000) $83,000
 $143,000
 $44,140
 $40,578
 $38,143
Jae A. EvansN/A
 

 

 N/A
 

 

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

 

David J. Reetz(32,000) 25,000
 43,000
 22,222
 20,361
 18,944
 
Pension Benefits
The following table indicates the present value of accumulated benefits as of December 31, 20102013 for each named executive in the summary compensation table.
              
   Number of
     
   Years of
 Present
   
   Vesting
 Value of
   
   Service as of
 Accumulated
 Payments
 
   01/01/11
 Benefit
 During Last
 
Name
 Plan name (#) ($) Fiscal Year Plan name Number of years of vesting service as of
01/01/13 (#)		 Present value of accumulated benefit
($)		 Payments during last fiscal year
Richard J. BarzIsabella Bank Corporation Pension Plan 42 $941,000
 $—
Isabella Bank Corporation Retirement Bonus Plan 42 393,792
 —
Richard J. Barz Isabella Bank Corporation Pension Plan  39  $762,000  $— 
Jae A. EvansIsabella Bank Corporation Pension Plan N/A 

 

 Isabella Bank Corporation Retirement Bonus Plan  39   270,931   — Isabella Bank Corporation Retirement Bonus Plan N/A 

 

Dennis P. Angner Isabella Bank Corporation Pension Plan  27   382,000   — Isabella Bank Corporation Pension Plan 30 485,000
 —
 Isabella Bank Corporation Retirement Bonus Plan  27   275,533   — Isabella Bank Corporation Retirement Bonus Plan 30 477,389
 —
Timothy M. Miller Isabella Bank Corporation Pension Plan  10   79,000   — 
Steven D. PungIsabella Bank Corporation Pension Plan 35 476,000
 —
            — Isabella Bank Corporation Retirement Bonus Plan 35 226,535
 —
Steven D. Pung Isabella Bank Corporation Pension Plan  32   384,000   — 
Jerome E. SchwindIsabella Bank Corporation Pension Plan 15 32,000
 —
 Isabella Bank Corporation Retirement Bonus Plan  32   145,630     Isabella Bank Corporation Retirement Bonus Plan N/A 

 

David J. Reetz Isabella Bank Corporation Pension Plan  24   119,000   — Isabella Bank Corporation Pension Plan 27 155,000
 —
 Isabella Bank Corporation Retirement Bonus Plan  24   90,378   — Isabella Bank Corporation Retirement Bonus Plan 27 151,905
 —
Defined benefit pension plan.  The Corporation sponsorsplan.    We sponsor the Isabella Bank Corporation Pension Plan, a frozen defined benefit pension plan. In December 2006, the Board of Directors voted to curtail the defined benefit planThe curtailment, which was effective March 1, 2007. The curtailment2007, froze the current participant’s accrued benefits as of March 1, 2007that date and limited participation in the plan to eligible employees as of December 31, 2006. Due to the curtailment of the plan, the number of years of credited service was frozen. As such, the years of credited service for the plan may differ from the participant’s actual years of service with the Corporation.
service.
Annual contributions are made to the plan as required by accepted actuarial principles, applicable federal tax laws, and to pay expenses ofrelated to operating and maintaining the plan. The amount of contributions on behalf of any one participant cannot be separately or individually computed.
Pension plan benefits are based on years of service and the employees’ five highest consecutive years of compensation out of the last ten years of service, effective through December 31, 2006.
A participant may earn a benefit for up to 35 years of accredited service. Earned benefits are 100 percent100% vested after five years of service. Benefit payments normally start when a participant reaches age 65. A participant with more than five years of service may elect to take early retirement benefits anytime after reaching age 55. Benefits payable under early retirement are reduced actuarially for each month prior to age 65 in which benefits begin.
Dennis P. Angner Richard J. Barz, Timothy M. Miller, and Steven D. Pung are eligible for early retirement under the Isabella Bank Corporation Pension Plan.plan. Under the provisions of the Plan,plan, participants are eligible for early retirement after reaching the age of 55 with at least 5 years of service. The early retirement benefit amount is the accrued benefit payable at normal retirement date reduced by 5/9% for each of the first 60 months and 5/18% for each of the next 60 months that the benefit commencement date precedes the normal retirement date.

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


15

annual allocation shall be determined pursuant to the payment schedule adopted by theat our sole and exclusive discretion, of the Board, as set forth in the Plan.
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.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.
2010 Nonqualified Deferred Compensation
            
 Executive
 Aggregate
 Aggregate
 
 Contributions in
 Earnings in
 Balance at
 
 Last FY
 Last FY
 Last FYE
 
Name
 ($) ($) ($) Executive contributions in 2013 
 ($)		 Aggregate earnings in 2013 
 ($)		 Aggregate 
 balance at December 31, 2013 
 ($)
Richard J. Barz $30,650  $3,501  $97,379 $24,800
 $8,224
 $247,250
Jae A. Evans675
 560
 16,536
Dennis P. Angner  44,400   4,836   134,713 29,400
 10,797
 323,482
Timothy M. Miller  3,500   839   21,990 
Steven D. Pung  900   181   4,799 12,675
 604
 22,273
Jerome E. Schwind1,200
 175
 5,225
David J. Reetz  N/A   N/A   N/A N/A
 N/A
 N/A
TheUnder the Deferred Compensation Plan for Directors ("Directors Plan"), named executive officers who serve as directors, of the Corporation and its subsidiaries are required to deferinvest at least 25% of their earned board fees into the Directors’ Planin our common stock and may deferinvest up to 100% of their earned fees based on their annual election. These amounts are reflected in the 2010 nonqualifiedabove table. These stock investments can be made either through deferred compensation table above. Underfees or through the Directors’purchase of shares through the Isabella Bank Corporation Stockholder Dividend Reinvestment and Employee Stock Purchase Plan these deferred("DRIP Plan"). Deferred fees, under the Directors Plan, are converted on a quarterly basis into shares of the Corporation’sour common stock based on the fair market value of shares of the Corporation’s common stock at that time. Shares credited to a participant’s account are eligible for stock and cash dividends as payable.
paid. DRIP Plan shares are purchased on a monthly basis pursuant to the DRIP Plan.
Distribution of deferred fees from the Directors’Directors Plan occurs when the participant retires from the Board, attains age 70, or upon the occurrence of certain other events. Distributions must take the form of shares of the Corporation’sour common stock. Any Corporation common stock issued under deferred fees from the Directors’Directors Plan will be considered restricted stock under the Securities Act of 1933, as amended. Common stock purchased through the DRIP Plan are not considered restricted stock under the Securities Act of 1933, as amended.
Potential Payments Upon Termination or Change in Control
The estimated paymentsamounts payable to each named executive officer upon severance from employment, retirement, termination upon death or disability or termination following a change in control of the Corporation are described below. For all termination scenarios, the amounts assume such termination took place as of December 31, 2010.2013.
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.
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, 2010,2013, the named executive officers listed had no unused vacation days.


16

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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’sour life insurance plan or benefits under the Corporation’sour disability plan as appropriate.
In addition to potential payments upon termination available to all employees, the estates for the executive officers listed below would receive the following payments upon death:
        
 While an
   
 Active
 Subsequent to
 
Name
 Employee Retirement While an Active Employee Subsequent to Retirement
Richard J. Barz $610,000  $305,000 N/A
 $360,000
Jae A. Evans$351,400
 175,700
Dennis P. Angner  600,000   300,000 616,000
 308,000
Timothy M. Miller  299,800   149,900 
Steven D. Pung  285,400   142,700 430,000
 215,000
Jerome E. Schwind301,600
 150,800
David J. Reetz  247,800   123,900 267,000
 133,500
Change in Control
The CorporationWe currently doesdo not have a change in control agreement with any of the executive officers; provided, however, pursuant to the Retirement Bonus Plan each participant would become 100% vested in their benefit under the plan if, following a change in control, they voluntarily terminate employment or are terminated without just cause.
Director Compensation
The following table summarizes the Compensation of each non-employee director who served on the Board of Directors during 2010.2013.
        
 Fees
   
 Earned or
   
 Paid in
   
 Cash
 Total
 
Name
 ($) ($) Fees paid in cash
($)		 Fees deferred under Directors Plan
($)		 Total fees earned
($)
Jeffrey J. Barnes  21,000   21,000 
Dr. Jeffrey J. Barnes$—
 $28,575
 $28,575
Sandra L. Caul  35,800   35,800 30,950
 —
 30,950
James Fabiano  40,915   40,915 
G. Charles Hubscher  25,950   25,950 —
 36,350
 36,350
Thomas L. Kleinhardt  29,450   29,450 —
 39,025
 39,025
Ted W. Kortes  31,100   31,100 
Joseph LaFramboise  27,900   27,900 15,120
 21,905
 37,025
Wilson C. Lauer18,263
 6,087
 24,350
David J. Maness  52,300   52,300 —
 50,550
 50,550
W. Joseph Manifold  29,146   29,146 —
 34,550
 34,550
W. Michael McGuire  31,800   31,800 27,862
 10,963
 38,825
Dianne C. Morey  18,850   18,850 
William J. Strickler  39,085   39,085 
Dale D. Weburg  36,400   36,400 
Sarah R. Opperman—
 29,050
 29,050
The CorporationWe paid a $14,000 retainer plus $1,350 per board meeting plus a retainer of $7,500 to external directors and a $6,000 retainer plus $1,350 per board meeting to inside directorseach member during 2010.2013. Members of the audit committeeAudit Committee were paid $350$600 per audit committee meeting attended.
Pursuant to the Directors’ Plan the directors Members of the CorporationNominating and its subsidiaries are required to defer at least 25%Corporate Governance Committee were paid $300 per meeting attended. The chairperson of their earned board fees. the Board is paid a retainer of $33,000 and the chairperson for the Audit Committee is paid a retainer of $4,000.
Under the Directors’Directors Plan, deferred directors’ fees are converted on a quarterly basis into shares of the Corporation’s common stock, based on the fair market value of a share of the Corporation’s


17

common stock at that time. Shares of stock credited to a participant’s account are eligible for cash and stock dividends as payable. Directors of the Corporation deferred $419,696 under the Directors’ Plan in 2010.
Uponupon a participant’s attainment of age 70, retirement from the Board, or the occurrence of certain other events, the participant isthey are eligible to receive a lump-sum, in-kind distribution of all of the stock that is then credited to his or hertheir account. The plan does not allow for cash settlement. Stock issued under the Directors’Directors Plan is restricted stock under the Securities Act of 1933, as amended.
The CorporationWe established a Rabbi Trust effective as of January 1, 2008 to fund the Directors’Directors Plan. The Rabbi Trust is an irrevocable grantor trust to which the Corporationwe may contribute assets for the limited purpose of funding a nonqualified deferred compensation plan. Although the Corporationwe may not reach the assets of the Rabbi Trust for any purpose other than meeting its obligations under the Directors’Directors Plan, the assets of the Rabbi Trust remain subject to the claims of the Corporation’sour creditors. The CorporationWe may contribute cash or common stock to the Rabbi Trust from time to time for the sole purpose of funding the Directors’Directors Plan. The Rabbi Trust will use any cash that the Corporationwe may contribute to purchase shares of the Corporation’sour common stock on the open market through the Corporation’sour brokerage services department.

15
The Corporation
Table of Contents

We transferred $492,958$409,163 to the Rabbi Trust in 2010,2013, which held 32,68612,761 shares of the Corporation’sour common stock for settlement as of December 31, 2010.2013. As of December 31, 2010,2013, there were 191,977172,550 shares of stock credited to participants’ accounts, which credits are unfunded as of such date to the extent that they are in excess of the stock and cash that has been credited to the Rabbi Trust. All amounts are unsecured claims against the Corporation’sour general assets. The net cost of this benefit to the Corporation was $165,353$147,480 in 2010.2013.
The following table displays the cumulative number of equity shares credited to the accounts of current directors pursuant to the terms of the Directors’Directors Plan as of December 31, 2010:March 17, 2014:
Name# of Sharesshares of
Name
Stock Credited
stock credited
Dennis PP. Angner13,5637,787
Dr. Jeffrey J. Barnes7,32431,280
Richard J. Barz—5,629
Sandra L. CaulJae A. Evans693287,411
James Fabiano756,559
G. Charles Hubscher10,92371,357
Thomas L. Kleinhardt17,534165,741
Ted W. Kortes15,636
Joseph LaFramboise7,61836,348
David J. Maness21,682166,134
W. Joseph Manifold13,139108,959
W. Michael McGuire7,20184,660
Dianne C. MoreySarah R. Opperman1,860103,849
William J. Strickler368,446
Dale D. Weburg200,490
Compensation and Human Resource Committee Interlocks and Insider Participation
TheIn 2013, the Compensation and Human Resource Committee members were directors Barnes, Caul, Hubscher, Kleinhardt, LaFramboise, Lauer, Maness, Manifold, McGuire and Opperman. No executive officer of the Corporation is responsible for reviewing and recommending to the Corporation’s Board theserves on any board of directors or compensation committee of any entity that compensates any member of the Chief Executive OfficerCompensation and other executive officers of the Corporation, benefit plans and the overall percentage increase in salaries. The committee consists of directors Maness, Barnes, Caul, Fabiano, Hubscher, Kleinhardt, LaFramboise, Manifold, McGuire, Morey, and Weburg.Human Resource Committee.


18

Indebtedness of and Transactions with Management
Certain directors and officers of the Corporation and members of their families were loan customers of Isabellathe Bank, or have been directors or officers of corporations, members or managers of limited liability companies, or partners of partnerships which have had transactions with the Bank. In management’sour opinion, all such transactions were made in the ordinary course of business and were substantially on the same terms, including collateral and interest rates, as those prevailing at the same time for comparable transactions with customers not related to the Bank. These transactions do not involve more than normal risk of collectability or present other unfavorable features. Total loans to these customers were approximately $4,347,000$4,178,000 as of December 31, 2010. The Corporation addresses2013. We address transactions with related parties in its‘our Code of Business Conduct and Ethics’policy.Ethics Policy. Conflicts of interest are prohibited, as a matter of Corporation policy, except under guidelinesboard approved by the Board of Directors or committees of the Board.guidelines.
Security Ownership of Certain Beneficial Owners and Management
AsThe following table sets forth certain information as of April 1, 2011March 17, 2014 as to the common stock of the Corporation does not haveowned of record or beneficially by any person who is known to the Corporation to be the beneficial owner of more than 5% of the common stock of the Corporation.
Name and Address of OwnerAmount and Nature of Beneficial Ownership (1) Percent of Class
McGuirk Investments413,007
 5.36%
P.O. Box 222
 
Mt. Pleasant, MI 48804-0222
 
(1)Beneficial ownership is defined by rules of the SEC and includes shares that the person has or shares voting or investment power over and shares that the person has a right to acquire within 60 days from March 17, 2014.

16
Table of Contents

The following table sets forth certain information as of April 1, 2011March 17, 2014 as to theour common stock of the Corporation owned beneficially by each director and director nominee, by each named executive officer, and by all directors, director nominees and executive officers of the Corporation as a group. The shares to be credited under the Directors’ Plan are not included in the table below.
                 
  Amount and Nature of Beneficial Ownership 
  Sole Voting
  Shared Voting
  Total
  Percentage of
 
  and Investment
  or Investment
  Beneficial
  Common Stock
 
Name of Owner
 Powers  Powers  Ownership  Outstanding 
 
Dennis P. Angner*  18,100   —   18,100   0.24%
Jeffrey J. Barnes  —   5,669   5,669   0.08%
Richard J. Barz*  20,325   —   20,325   0.27%
Sandra L. Caul  —   10,609   10,609   0.14%
James C. Fabiano  264,871   6,579   271,450   3.60%
G. Charles Hubscher  28,031   3,548   31,579   0.42%
Thomas L. Kleinhardt  —   31,179   31,179   0.41%
Joseph LaFramboise  —   910   910   0.01%
David J. Maness  466   1,135   1,601   0.02%
W. Joseph Manifold  2,089   —   2,089   0.03%
W. Michael McGuire  56,531   —   56,531   0.75%
Dianne C. Morey  —   40,283   40,283   0.53%
Dale D. Weburg  27,842   31,683   59,525   0.79%
Timothy M. Miller  215   3,330   3,545   0.05%
Steven D. Pung  9,422   8,236   17,658   0.23%
David J. Reetz  8,468   175   8,643   0.11%
                 
All Directors, nominees and Executive                
Officers as a Group (16 persons)  436,360   143,336   579,696   7.68%
                 
Name of OwnerAmount and Nature of Beneficial Ownership (1) Percent of Class
Dennis P. Angner33,648
 0.43%
Dr. Jeffrey J. Barnes13,575
 0.17%
Richard J. Barz30,697
 0.39%
Jae A. Evans9,192
 0.12%
G. Charles Hubscher45,603
 0.58%
Thomas L. Kleinhardt66,719
 0.85%
Joseph LaFramboise8,821
 0.11%
David J. Maness23,636
 0.30%
W. Joseph Manifold17,989
 0.23%
W. Michael McGuire78,131
 1.00%
Sarah R. Opperman2,973
 0.04%
Steven D. Pung21,002
 0.27%
David J. Reetz9,343
 0.12%
Jerome E. Schwind1,163
 0.01%
All Directors, nominees and Executive Officers as a Group (14) persons362,492
 4.62%
*(1)Trustees
Beneficial ownership is defined by rules of the ESOP who vote ESOP stock.SEC and includes shares that the person has or shares voting or investment power over and shares that the person has a right to acquire within 60 days from March 17, 2014. Totals for directors include shares of stock credited under the Directors Plan as of March 17, 2014 as disclosed in the table on page 16 above. Totals for named executive officers Steven D. Pung and Jerome E. Schwind include shares of stock credited under the Directors Plan as of March 17, 2014 as follows:  Mr. Pung, 934 shares; and Mr. Schwind, 219 shares. Participants in the Directors Plan have a right to acquire shares credited to their accounts upon a distributable event. A description of the Directors Plan under which these shares of stock were issued is set forth above in "Director Compensation."


19

Independent Registered Public Accounting Firm
The Audit Committee has appointed Rehmann Robson LLC as theour independent auditors of the Corporation for the year ending December 31, 2011.
2014.
A representative of Rehmann Robson LLC is expected to be present at the Annual Meeting of Shareholders to respond to appropriate questions from shareholders and to make any comments Rehmann Robson LLC believes isare appropriate.
Fees for Professional Services Provided by Rehmann Robson P.C.LLC
The following table shows the aggregate fees billed by Rehmann Robson LLC for the audit and other services provided to the Corporation for 2010 and 2009.for:
         
  2010  2009 
 
Audit fees $252,163  $291,497 
Audit related fees  39,089   40,135 
Tax fees  24,730   39,784 
Other professional services fees  —   — 
         
Total $315,982  $371,416 
         

2013 2012
Audit fees$271,380
 $263,180
Audit related fees29,425
 28,250
Tax fees27,095
 25,950
Total$327,900
 $317,380
The audit fees were for performing the integrated audit of the Corporation’sour consolidated annual financial statements and the audit of internal control over financial reportingattestation report related to the Federal Deposit Insurance Corporation Improvement Act, review of interim quarterly financial statements included in the Corporation’sour Forms 10-Q, and services that are normally provided by Rehmann Robson LLC 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.

17
Table of Contents

The audit related fees are typically for various discussions related to the adoption and interpretation of new accounting pronouncements. During 2013, this includes fees for procedures related to nonrecurring regulatory filings. Also included are fees for auditing of the Corporation’sour employee benefit plans.
The tax fees were for the preparation of the Corporation’s and its subsidiaries’our state and federal tax returns and for consultation with the Corporation on various tax matters. 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.LLC, other than the audit fees, are compatible with maintaining Rehmann Robson P.C.’sLLC’s independence and believes that the other services provided are compatible.
Pre-Approval Policies and Procedures
All audit and non-audit services over $5,000 to be performed by Rehmann Robson LLC must be approved in advance by the Audit Committee if those fees are reasonably expected to exceed 5.0% of the current year agreed upon fee for independent audit services. As permitted by the SEC’s rules, the Audit Committee has authorized its Chairpersonchairperson to pre-approve audit, audit-related, tax and non-audit services, provided that such approved service is reported to the full Audit Committee at its next meeting.
As early as practicable in each calendar year, the independent auditor provides to the Audit Committee a schedule of the audit and other services that the independent auditor expects to provide or may provide during the next twelve months. The schedule will be specific as to the nature of the proposed services, the proposed fees, timing, and other details that the Audit Committee may request. The Audit Committee will by resolution authorize or decline the proposed services. Upon approval, this schedule will serve as the budget for fees by specific activity or service for the next twelve months.
A schedule of additional services proposed to be provided by the independent auditor, or proposed revisions to services already approved, along with associated proposed fees, may be presented to the Audit Committee for their consideration and approval at any time. The schedule will be specific as to the nature of the proposed service, the


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 20102013 and 20092012 without pre-approval as required under the Corporation’s policies.pre-approval.
Shareholder Proposals
Any proposals which shareholders of the Corporationyou intend to present at the next annual meeting of the Corporation must be received before December 9, 20111, 2014 to be considered for inclusion in the Corporation’sour 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’sOur directors are encouraged to attend the annual meeting of shareholders. At the 20102013 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’sour directors and certain officers and persons who own more than ten percent10% of the Corporation’sour common stock, to file with the SEC initial reports of ownership and reports of changes in ownership of the Corporation’sour common stock. These officers, directors, and greater than ten percent10% shareholders are required by SEC regulation to furnish the Corporationus with copies of these reports.
To the Corporation’sour knowledge, based solely on review of the copies of such reports furnished, to the Corporation, during the year ended December 31, 20102013 all Section 16(a) filing requirements were satisfied, with respect to the applicable officers, directors, and greater than 10% beneficial owners with the exception of executive officers Steven D. Pung and David J. Reetz. Executive officers Pung and Reetz filed their Form 3s late on January 10, percent beneficial owners.2014.
Other Matters
TheWe will bear the cost of soliciting proxies will be borne by the Corporation.proxies. In addition to solicitation by mail, officers and other employees of the Corporation may solicit proxies by telephone or in person, without compensation other than their regular compensation.

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

-s- DEBRA CAMPBELL



Debra Campbell, Secretary


21

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Isabella Bank Corporation
Financial Information Index
Page Description
Page22
 
DescriptionCommon Stock and Dividend Information
2324
 
Summary of Selected Financial Data
2426
 Report of Independent Registered Public Accounting Firm
25
Consolidated Financial Statements
30
Notes to Consolidated Financial Statements
72
Management’s Discussion and Analysis of Financial Condition and Results of Operations
46
Quantitative and Qualitative Disclosures about Market Risk
49
Report of Independent Registered Public Accounting Firm
50
Consolidated Financial Statements
56
Notes to Consolidated Financial Statements
95
 Common Stock and Dividend Information
98
Shareholders’ Information

20


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Forward Looking Statements
SUMMARY OF SELECTED FINANCIAL DATAThis report contains certain forward looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. We intend such forward looking statements to be covered by the safe harbor provisions for forward looking statements contained in the Private Securities Litigation Reform Act of 1995, and is included in this statement for purposes of these safe harbor provisions. Forward looking statements, which are based on certain assumptions and describe future plans, strategies and expectations, are generally identifiable by use of the words “believe,” “expect,” “intend,” “anticipate,” “estimate,” “project,” or similar expressions. Our ability to predict results or the actual effect of future plans or strategies is inherently uncertain. Factors which could have a material adverse effect on the operations and future prospects include, but are not limited to, changes in: interest rates, general economic conditions, monetary and fiscal policies of the U.S. Government, including policies of the U.S. Treasury and the FRB, the quality or composition of the loan or investment portfolios, demand for loan products, fluctuation in the value of collateral securing our loan portfolio, deposit flows, competition, demand for financial services in our market area, and accounting principles, policies and guidelines. These risks and uncertainties should be considered in evaluating forward looking statements and undue reliance should not be placed on such statements. Further information concerning Isabella Bank Corporation and its business, including additional factors that could materially affect our financial results, is included in our filings with the SEC.
The acronyms and abbreviations identified below may be used throughout this report, or in our other filings. You may find it helpful to refer back to this page while reading this report.
                     
  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 
                                 
  2010  2009 
  4th  3rd  2nd  1st  4th  3rd  2nd  1st 
 
Quarterly Operating Results:                                
Total interest income $14,540  $14,306  $14,272  $14,099  $14,411  $14,516  $14,505  $14,673 
Interest expense  4,217   4,296   4,291   4,400   4,657   4,928   5,026   5,228 
                                 
Net interest income  10,323   10,010   9,981   9,699   9,754   9,588   9,479   9,445 
Provision for loan losses  1,626   968   1,056   1,207   1,544   1,542   1,535   1,472 
Noninterest income  2,629   2,634   1,870   2,167   2,102   2,566   3,131   2,357 
Noninterest expenses  8,558   8,620   8,275   8,354   8,176   7,995   8,468   9,044 
Net income  2,318   2,553   2,151   2,023   2,073   2,197   2,201   1,329 
Per Share of Common Stock:                                
Earnings per share                                
Basic $0.30  $0.34  $0.29  $0.27  $0.28  $0.29  $0.29  $0.18 
Diluted  0.30   0.33   0.28   0.26   0.27   0.28   0.29   0.17 
Cash dividends  0.18   0.18   0.18   0.18   0.32   0.13   0.13   0.12 
Book value (at quarter end)  19.23   19.59   19.39   18.89   18.69   18.97   18.06   18.01 
AFS: Available-for-saleGLB Act: Gramm-Leach-Bliley Act of 1999
ALLL: Allowance for loan and lease lossesIFRS: International Financial Reporting Standards
AOCI: Accumulated other comprehensive income (loss)IRR: Interest rate risk
ASC: FASB Accounting Standards CodificationJOBS Act: Jumpstart our Business Startups Act
ASU: FASB Accounting Standards UpdateLIBOR: London Interbank Offered Rate
ATM: Automated Teller MachineMoody’s: Moody’s Investors Service, Inc
BHC Act: Bank Holding Company Act of 1956N/A: Not applicable
CFPB: Consumer Financial Protection BureauN/M: Not meaningful
CIK: Central Index KeyNASDAQ: NASDAQ Stock Market Index
CRA: Community Reinvestment ActNASDAQ Banks: NASDAQ Bank Stock Index
DIF: Deposit Insurance FundNAV: Net asset value
DIFS: Department of Insurance and Financial ServicesNOW: Negotiable order of withdrawal
Directors Plan: Isabella Bank Corporation and Related Companies Deferred Compensation Plan for DirectorsNSF: Non-sufficient funds
Dividend Reinvestment Plan: Isabella Bank Corporation Stockholder Dividend Reinvestment Plan and Employee Stock Purchase PlanOCI: Other comprehensive income (loss)
Dodd-Frank Act: Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010OMSRs: Originated mortgage servicing rights
ESOP: Employee stock ownership planOREO: Other real estate owned
Exchange Act: Securities Exchange Act of 1934OTC: Over-the-Counter
FASB: Financial Accounting Standards BoardOTTI: Other-than-temporary impairment
FDI Act: Federal Deposit Insurance ActPBO: Projected benefit obligation
FDIC: Federal Deposit Insurance CorporationPCAOB: Public Company Accounting Oversight Board
FFIEC: Federal Financial Institutions Examinations CouncilRabbi Trust: A trust established to fund the Directors Plan
Fitch: Fitch RatingsSEC: U.S. Securities & Exchange Commission
FRB: Federal Reserve BankSOX: Sarbanes-Oxley Act of 2002
FHLB: Federal Home Loan BankS&P: Standard & Poor's
Freddie Mac: Federal Home Loan Mortgage CorporationTDR: Troubled debt restructuring
FTE: Fully taxable equivalentXBRL: eXtensible Business Reporting Language
GAAP: U.S. generally accepted accounting principles

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Common Stock and Dividend Information
Our common stock is traded in the over the counter market. The common stock is quoted on the OTCQB market tier of the OTC Markets Group Inc.’s ("OTC Markets") electronic quotation system (www.otcmarkets.com) under the symbol “ISBA”. Other trades in the common stock occur in privately negotiated transactions from time-to-time of which we may have little or no information.
Our authorized common stock consists of 15,000,000 shares, of which 7,723,023 shares are issued and outstanding as of December 31, 2013. As of that date, there were 3,080 shareholders of record.
We have reviewed the information available as to the range of reported high and low bid quotations, including high and low bid information as reported by OTC Markets. The following table sets forth our compilation of that information for the periods indicated. Price information obtained from OTC Markets reflects inter-dealer prices, without retail mark-up, mark-down, or commissions and may not necessarily represent actual transactions. The following compiled data is provided for information purposes only and should not be viewed as indicative of the actual or market value of our common stock.
 Number of
Shares		 Sale Price
 Low High
2013     
First Quarter54,741
 $21.79
 $25.10
Second Quarter65,865
 24.78
 26.00
Third Quarter105,540
 23.49
 25.50
Fourth Quarter116,052
 21.20
 24.84
 342,198
    
2012     
First Quarter64,873
 $22.15
 $24.25
Second Quarter63,656
 23.45
 24.98
Third Quarter97,706
 22.50
 24.90
Fourth Quarter87,966
 21.60
 23.45
 314,201
    
The following table sets forth the cash dividends paid for the following quarters:
 Per Share
 2013 2012
First Quarter$0.21
 $0.20
Second Quarter0.21
 0.20
Third Quarter0.21
 0.20
Fourth Quarter0.21
 0.20
Total$0.84
 $0.80
We have adopted and publicly announced a common stock repurchase plan. The plan was last amended on October 23, 2013, to allow for the repurchase of an additional 150,000 shares of common stock. These authorizations do not have expiration dates. As shares are repurchased under this plan, they are retired and revert back to the status of authorized, but unissued shares.

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

 

 

 157,041
October 24 - 314,950
 23.84
 4,950
 152,091
November 1 - 307,022
 23.50
 7,022
 145,069
December 1 - 317,673
 22.42
 7,673
 137,396
Balance, December 3124,045
 $23.29
 24,045
 137,396
Information concerning securities authorized for issuance under equity compensation plans appears under Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters included in our Annual Report on Form 10-K.
Stock Performance
The following graph compares the cumulative total shareholder return on our common stock for the last five years with the cumulative total return on (1) NASDAQ, which is comprised of all United States common shares traded on the NASDAQ and (2) the NASDAQ Banks, which is comprised of bank and bank holding company common shares traded on the NASDAQ over the same period. The graph assumes the value of an investment in ISBA and each index was $100 at December 31, 2008 and all dividends are reinvested.
 
Year ISBA NASDAQ NASDAQ
Banks
12/31/2008$100.00
 $100.00
 $100.00
12/31/200977.10
 145.05
 83.58
12/31/201073.40
 171.14
 95.29
12/31/2011104.50
 169.83
 85.32
12/31/201299.30
 199.89
 101.15
12/31/2013112.60
 279.62
 142.93

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Summary of Selected Financial Data
(Dollars in thousands except per share amounts)
 2013 2012 2011 2010 2009
INCOME STATEMENT DATA         
Interest income$54,076
 $56,401
 $57,905
 $57,217
 $58,105
Interest expense11,021
 13,423
 16,203
 17,204
 19,839
Net interest income43,055
 42,978
 41,702
 40,013
 38,266
Provision for loan losses1,111
 2,300
 3,826
 4,857
 6,093
Noninterest income10,175
 11,530
 8,218
 9,300
 10,156
Noninterest expenses37,413
 37,639
 34,530
 33,807
 33,683
Federal income tax expense2,196
 2,363
 1,354
 1,604
 846
Net income$12,510
 $12,206
 $10,210
 $9,045
 $7,800
PER SHARE         
Basic earnings$1.63
 $1.61
 $1.35
 $1.20
 $1.04
Diluted earnings1.59
 1.56
 1.31
 1.17
 1.01
Dividends0.84
 0.80
 0.76
 0.72
 0.70
Market value*23.85
 21.75
 23.70
 17.30
 18.95
Tangible book value*15.62
 14.72
 13.90
 13.22
 12.67
BALANCE SHEET DATA         
 At end of period         
Loans$808,037
 $772,753
 $750,291
 $735,304
 $723,316
Total assets1,493,137
 1,430,639
 1,337,925
 1,225,810
 1,143,944
Deposits1,043,766
 1,017,667
 958,164
 877,339
 802,652
Shareholders' equity160,609
 164,489
 154,783
 145,161
 140,803
Average balance         
Loans$790,132
 $754,304
 $743,441
 $725,534
 $725,299
Total assets1,448,440
 1,381,083
 1,287,195
 1,182,930
 1,127,634
Deposits1,025,088
 984,927
 927,186
 840,392
 786,714
Shareholders’ equity163,010
 160,682
 151,379
 145,304
 137,910
PERFORMANCE RATIOS         
Return on average total assets0.86% 0.88% 0.79% 0.76% 0.69%
Return on average shareholders' equity7.67% 7.60% 6.74% 6.22% 5.66%
Return on average tangible equity10.71% 11.41% 10.30% 9.51% 8.53%
Net interest margin yield (FTE)3.50% 3.70% 3.87% 4.04% 4.06%
Loan to deposit*77.42% 75.93% 78.31% 83.81% 90.12%
Nonperforming loans to total loans*0.42% 1.00% 0.95% 0.83% 1.28%
Nonperforming assets to total assets*0.32% 0.68% 0.67% 0.67% 0.91%
ALLL to nonperforming loans*339.63% 154.39% 173.10% 202.97% 139.71%
CAPITAL RATIOS         
Shareholders' equity to assets*10.76% 11.50% 11.57% 11.84% 12.31%
Tier 1 capital to average assets*8.46% 8.29% 8.18% 8.24% 8.60%
Tier 1 risk-based capital*13.67% 13.23% 12.92% 12.44% 12.80%
Total risk-based capital*14.92% 14.48% 14.17% 13.69% 14.06%
* At end of year

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The following table outlines our interim results of operations and key performance measures as of, and for the unaudited periods ended:
 Quarter to Date
 December 31
2013		 September 30
2013		 June 30
2013		 March 31
2013		 December 31
2012		 September 30
2012		 June 30
2012		 March 31
2012
Total interest income$13,603
 $13,505
 $13,440
 $13,528
 $13,845
 $14,164
 $14,188
 $14,204
Total interest expense2,683
 2,736
 2,781
 2,821
 3,051
 3,239
 3,429
 3,704
Net interest income10,920
 10,769
 10,659
 10,707
 10,794
 10,925
 10,759
 10,500
Provision for loan losses245
 351
 215
 300
 1,200
 200
 439
 461
Noninterest income2,130
 2,862
 2,736
 2,447
 2,686
 2,759
 2,544
 3,541
Noninterest expenses9,578
 9,320
 9,324
 9,191
 9,750
 9,128
 9,188
 9,573
Federal income tax expense303
 674
 643
 576
 19
 899
 672
 773
Net income$2,924
 $3,286
 $3,213
 $3,087
 $2,511
 $3,457
 $3,004
 $3,234
PER SHARE               
Basic earnings$0.38
 $0.43
 $0.42
 $0.40
 $0.33
 $0.45
 $0.40
 $0.43
Diluted earnings0.37
 0.42
 0.41
 0.39
 0.32
 0.44
 0.39
 0.41
Dividends0.21
 0.21
 0.21
 0.21
 0.20
 0.20
 0.20
 0.20
Market value*23.85
 24.85
 24.75
 25.00
 21.75
 22.50
 24.85
 24.00
Tangible book value*15.62
 15.43
 15.19
 14.95
 14.72
 14.65
 14.37
 14.15
* At end of period

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Management's Discussion and Analysis of Financial Condition and Results of Operations
ISABELLA BANK CORPORATION FINANCIAL REVIEW
(Dollars in thousands except per share amounts)
The following is management’s discussion and analysis of the financial condition and results of our operations. This discussion and analysis is intended to provide a better understanding of the consolidated financial statements and statistical data included elsewhere in our Annual Report on Form 10-K.
Executive Summary
During 2013, we earned a record $12,510, which was an increase of $304 from 2012. We enjoyed loan growth of $35,284 and an improvement in credit quality indicators. As of December 31, 2013, our total assets were $1.49 billion, and assets under management - which included loans sold and serviced, and assets managed by our Investment and Trust Services Department of $645.09 million - were $2.14 billion, which was a 4.13%increase in assets under management from December 31, 2012.
While competition for high quality loans has been intense, we have not relaxed our underwriting standards and we remain committed to core community banking principles and long term sustainable growth. This focus has enabled us to continue to meet the needs of the communities we serve, which translates into increased shareholder value. Our loan quality remains sound as evidenced by the relatively low percentage of loans classified as nonperforming. As of December 31, 2013, our ratio of nonperforming loans to total loans was 0.42%. In comparison, the average percentage for all bank holding companies in our peer group was 1.71% as of September 30, 2013 (peer group ratios are not yet available for December 31, 2013). In addition, our risk based capital to risk adjusted total assets ratio of 14.92% as of December 31, 2013 compares favorably to the 8.00% ratio required to be classified as adequately capitalized under the Federal Reserve Board's risk based capital rules.
In August 2013, we opened our latest branch in Big Rapids, Michigan. We are excited about our newest branch's growth potential and the new relationships that we have established. The new location has complemented our existing Big Rapids office and will provide additional shareholder value for years to come.
In order to preserve our culture and provide strong leadership for the future we emphasize succession planning. We have made significant investments in employee development and as a result, we have a tremendous amount of leadership and professional strength throughout our organization. The selection of Jae A. Evans, previously Isabella Bank's Chief Operations Officer, as Richard J. Barz's successor as CEO of Isabella Bank Corporation effective January 1, 2014 was no exception to this commitment. Mr. Evans has been with the Bank since 2008 and has more than 36 years of banking experience. Prior to his position as Chief Operations Officer, Mr. Evans served as the president of the Greenville Division of Isabella Bank. Mr. Barz continues to serve on the Board of Directors for both Isabella Bank and Isabella Bank Corporation.
Recent Legislation
The Health Care and Education Act of 2010, the Patient Protection and Affordable Care Act, the Dodd-Frank Act, and the JOBS Act, have already had, and are expected to continue to have, a negative impact on our operating results. Of these four acts, the Dodd-Frank Act has had the most significant impact. The Dodd-Frank Act established the CFPB which has made significant changes in the regulation of financial institutions aimed at strengthening the oversight of the federal government over the operation of the financial services sector and increasing the protection of consumers. As a result of the implementation of some of the provisions, we have had increases in operational costs and this trend is expected to continue.
The CFPB has begun to issue substantial proposed and final rules regarding consumer lending, including residential mortgage lending. These rules will likely further increase our compensation and outside advisor costs to ensure our compliance with the new regulations. In addition to increased costs, we anticipate that residential mortgage volume will likely decline in 2014 due to the strict underwriting standards that have removed business judgment from the underwriting process.
On July 2, 2013, the FRB published revised BASEL III Capital standards for banks. The rules redefine what is included or deducted from equity capital, changes risk weighting for certain on and off-balance sheet assets, increases the minimum required equity capital to be considered well capitalized, and introduces a capital cushion buffer. The rules, which will be gradually phased in between 2015 and 2019, are not expected to have a material impact on the Corporation.
Other
We have not received any notices of regulatory actions as of February 28, 2014.

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CRITICAL ACCOUNTING POLICIES
Our significant accounting policies are set forth in “Note 1 – Nature of Operations and Summary of Significant Accounting Policies” of the Notes to Consolidated Financial Statements. Of these significant accounting policies, we consider our policies regarding the ALLL, acquisition intangibles and goodwill, and the determination of the fair value and assessment of OTTI of investment securities to be our most critical accounting policies.
The ALLL requires our most subjective and complex judgment. Changes in economic conditions can have a significant impact on the ALLL and, therefore, the provision for loan losses and results of operations. We have developed policies and procedures for assessing the appropriateness of the ALLL, recognizing that this process requires a number of assumptions and estimates with respect to our loan portfolio. Our assessments may be impacted in future periods by changes in economic conditions, and the discovery of information with respect to borrowers which is not known to us at the time of the issuance of the consolidated financial statements. For additional discussion concerning our ALLL and related matters, see the detailed discussion to follow under the caption “Allowance for Loan and Lease Losses” and “Note 6 – Loans and ALLL” of the Notes to Consolidated Financial Statements.
U.S. generally accepted accounting principles require that we determine the fair value of the assets and liabilities of an acquired entity, and record their fair value on the date of acquisition. We employ a variety of measures in the determination of the fair value, including the use of discounted cash flow analysis, market appraisals, and projected future revenue streams. For certain items that we believe we have the appropriate expertise to determine the fair value, we may choose to use our own calculations of the value. In other cases, where the value is not easily determined, we consult with outside parties to determine the fair value of the identified asset or liability. Once valuations have been adjusted, the net difference between the price paid for the acquired entity and the net value of assets acquired on our balance sheet, including identifiable intangibles, is recorded as goodwill. Acquisition intangibles and goodwill are qualitatively evaluated to determine if it is more likely than not that the carrying balance is impaired on at least an annual basis.
We currently have both AFS and trading investment securities that are carried at fair value. Changes in the fair value of AFS investment securities are included as a component of other comprehensive income, while declines in the fair value of these securities below their cost that are other-than-temporary are reflected as realized losses in the consolidated statements of income. The change in value of trading investment securities is included in current earnings. We evaluate AFS securities for indications of losses that are considered other-than-temporary, if any, on a regular basis. The market values for AFS and trading investment securities are typically obtained from outside sources and applied to individual securities within the portfolio.

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Distribution of Assets, Liabilities, and Shareholders' Equity; Interest Rates and Interest Differential
The following schedules present the daily average amount outstanding for each major category of interest earning assets, nonearning assets, interest bearing liabilities, and noninterest bearing liabilities for the last three years. These schedules also present an analysis of interest income and interest expense for the years indicated. All interest income is reported on a FTE basis using a 34% federal income tax rate. Nonaccruing loans, for the purpose of the following computations, are included in the average loan amounts outstanding. FRB and FHLB restricted equity holdings are included in accrued income and other assets.
 Year Ended December 31
 2013 2012 2011

Average
Balance		 Tax
Equivalent
Interest		 Average
Yield /
Rate		 Average
Balance		 Tax
Equivalent
Interest		 Average
Yield /
Rate		 Average
Balance		 Tax
Equivalent
Interest		 Average
Yield /
Rate
INTEREST EARNING ASSETS                 
Loans$790,132
 $41,233
 5.22% $754,304
 $43,396
 5.75% $743,441
 $45,463
 6.12%
Taxable investment securities335,575
 7,228
 2.15% 309,681
 7,555
 2.44% 235,437
 6,941
 2.95%
Nontaxable investment securities165,774
 8,294
 5.00% 145,502
 7,941
 5.46% 136,356
 7,847
 5.75%
Trading account securities1,071
 55
 5.14% 2,624
 142
 5.41% 5,087
 286
 5.62%
Other27,235
 447
 1.64% 33,359
 486
 1.46% 37,539
 506
 1.35%
Total earning assets1,319,787
 57,257
 4.34% 1,245,470
 59,520
 4.78% 1,157,860
 61,043
 5.27%
NONEARNING ASSETS                 
ALLL(11,877)     (12,408)     (12,522)    
Cash and demand deposits due from banks18,162
     19,409
     20,195
    
Premises and equipment25,993
     25,244
     24,397
    
Accrued income and other assets96,375
     103,368
     97,265
    
Total assets$1,448,440
     $1,381,083
     $1,287,195
    
INTEREST BEARING LIABILITIES                 
Interest bearing demand deposits$183,665
 161
 0.09% $170,851
 204
 0.12% $152,530
 189
 0.12%
Savings deposits242,777
 366
 0.15% 214,958
 451
 0.21% 192,999
 488
 0.25%
Time deposits456,774
 6,613
 1.45% 473,675
 8,476
 1.79% 467,931
 10,258
 2.19%
Borrowed funds251,590
 3,881
 1.54% 225,689
 4,292
 1.90% 198,828
 5,268
 2.65%
Total interest bearing liabilities1,134,806
 11,021
 0.97% 1,085,173
 13,423
 1.24% 1,012,288
 16,203
 1.60%
NONINTEREST BEARING LIABILITIES                 
Demand deposits141,872
     125,443
     113,726
    
Other8,752
     9,785
     9,802
    
Shareholders’ equity163,010
     160,682
     151,379
    
Total liabilities and shareholders’ equity$1,448,440
     $1,381,083
     $1,287,195
    
Net interest income (FTE)  $46,236
     $46,097
     $44,840
  
Net yield on interest earning assets (FTE)    3.50%     3.70%     3.87%

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Net Interest Income
Net interest income is the amount by which interest income on earning assets exceeds the interest expenses on interest bearing liabilities. Net interest income is influenced by changes in the balance and mix of assets and liabilities and market interest rates. We exert some control over these factors; however, FRB monetary policy and competition have a significant impact. Interest income includes loan fees of $3,182 in 2013, $3,178 in 2012, and $2,385 in 2011. For analytical purposes, net interest income is adjusted to an FTE basis by adding the income tax savings from interest on tax exempt loans, AFS securities, and trading securities, thus making year to year comparisons more meaningful.
Volume and Rate Variance Analysis
The following table sets forth the effect of volume and rate changes on interest income and expense for the periods indicated. For the purpose of this table, changes in interest due to volume and rate were determined as follows:
Volume—change in volume multiplied by the previous year’s rate.
Rate—change in the FTE rate multiplied by the previous year’s volume.
The change in interest due to both volume and rate has been allocated to volume and rate changes in proportion to the relationship of the absolute dollar amounts of the change in each.
 2013 Compared to 2012 
 Increase (Decrease) Due to		 2012 Compared to 2011 
 Increase (Decrease) Due to

Volume Rate Net Volume Rate Net
Changes in interest income           
Loans$1,996
 $(4,159) $(2,163) $656
 $(2,723) $(2,067)
Taxable AFS securities601
 (928) (327) 1,945
 (1,331) 614
Nontaxable AFS securities1,049
 (696) 353
 511
 (417) 94
Trading securities(80) (7) (87) (134) (10) (144)
Other(96) 57
 (39) (59) 39
 (20)
Total changes in interest income3,470
 (5,733) (2,263) 2,919
 (4,442) (1,523)
Changes in interest expense           
Interest bearing demand deposits14
 (57) (43) 22
 (7) 15
Savings deposits53
 (138) (85) 52
 (89) (37)
Time deposits(293) (1,570) (1,863) 124
 (1,906) (1,782)
Borrowed funds457
 (868) (411) 647
 (1,623) (976)
Total changes in interest expense231
 (2,633) (2,402) 845
 (3,625) (2,780)
Net change in interest margin (FTE)$3,239
 $(3,100) $139
 $2,074
 $(817) $1,257
As shown in the following table, we experienced significant downward pressure on our net yield on interest earning assets over the past 12 months. This pressure is a direct result of FRB monetary policy which has reduced yields on interest earning assets more than rates on interest bearing liabilities. The persistent low interest rate environment coupled with an increase in the concentration of AFS securities and trading securities as a percentage of earnings assets has also placed downward pressure on net interest margin yield.
 Average Yield / Rate for the Three Month Periods Ended:
 December 31
2013
September 30
2013
June 30
2013
March 31
2013
December 31
2012
Total earning assets4.30% 4.31% 4.35% 4.41% 4.61%
Total interest bearing liabilities0.94% 0.96% 0.99% 1.01% 1.12%
Net yield on interest earning assets (FTE)3.50% 3.48% 3.50% 3.54% 3.65%

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While there have been increases in long term interest rates, short and medium term interest rates continue to be at historically low levels. We do not anticipate any significant changes in net interest margin yield in the near future. Despite the challenging current interest rate environment, we anticipate net interest income and the net yield on interest earning assets (FTE) will modestly increase as most interest earning assets have already repriced at lower rates while some interest bearing liabilities will likely reprice at lower interest rates in coming periods. As shown in in the following table net interest income in the fourth quarter of 2013 exceeded net interest income in each of the previous four quarters.
 Quarter to Date Net Interest Income
 December 31
2013		 September 30
2013		 June 30
2013		 March 31
2013		 December 31
2012
Total interest income$13,603
 $13,505
 $13,440
 $13,528
 $13,845
Total interest expense2,683
 2,736
 2,781
 2,821
 3,051
Net interest income$10,920
 $10,769
 $10,659
 $10,707
 $10,794
Allowance for Loan and Lease Losses
The viability of any financial institution is ultimately determined by its management of credit risk. Loans represent our single largest concentration of risk. The ALLL is our estimation of losses within the existing loan portfolio. We allocate the ALLL throughout the loan portfolio based on our assessment of the underlying risks associated with each loan segment. Our assessments include allocations based on specific impairment valuation allowances, historical charge-offs, internally assigned credit ratings, and past due and nonaccrual balances. A portion of the ALLL is not allocated to any one loan segment, but is instead a reflection of other qualitative risks within the loan portfolio.
The following table summarizes our charge-off and recovery activity for the years ended December 31:

2013 2012 2011 2010 2009
ALLL at beginning of period$11,936
 $12,375
 $12,373
 $12,979
 $11,982
Loans charged-off         
Commercial and agricultural907
 1,672
 1,984
 3,731
 3,081
Residential real estate1,004
 1,142
 2,240
 2,524
 2,627
Consumer429
 542
 552
 596
 934
Total loans charged-off2,340
 3,356
 4,776
 6,851
 6,642
Recoveries         
Commercial and agricultural363
 240
 461
 453
 623
Residential real estate181
 122
 177
 638
 546
Consumer249
 255
 314
 297
 377
Total recoveries793
 617
 952
 1,388
 1,546
Provision for loan losses1,111
 2,300
 3,826
 4,857
 6,093
ALLL at end of period$11,500
 $11,936
 $12,375
 $12,373
 $12,979
Net loans charged-off$1,547
 $2,739
 $3,824
 $5,463
 $5,096
Net loans charged-off to average loans outstanding0.20% 0.36% 0.51% 0.75% 0.70%
ALLL as a % of loans at end of period1.42% 1.54% 1.65% 1.68% 1.79%
The following table summarizes our charge-off and recovery activity for the three months ended:
 December 31
2013		 September 30
2013		 June 30
2013		 March 31
2013		 December 31
2012
Total loans charged-off$497
 $602
 $719
 $522
 $1,469
Total recoveries152
 151
 295
 195
 143
Net loans charged-off345
 451
 424
 327
 1,326
Net loans charged-off to average loans outstanding0.04% 0.06% 0.05% 0.04% 0.17%
Provision for loan losses$245
 $351
 $215
 $300
 $1,200

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As the level of net loans charged-off has continued to decline since 2008, we have been able to gradually reduce the ALLL in both amount and as a percentage of loans. We anticipate 2014 net loans charged-off to approximate 2013 levels and, as such, we anticipate that the ALLL will approximate current levels. While overall net loans charged-off is likely to remain at current levels in the near future, charge-offs on residential real estate loans are anticipated to increase slightly as a percentage of net loans charged-off due to increased foreclosures as a result of the impact of the CFPB ability to repay rules. For further discussion of the allocation of the ALLL, see “Note 6 – Loans and ALLL” of the Notes to Consolidated Financial Statements.
Loans Past Due and Loans in Nonaccrual Status
Increases in past due and nonaccrual loans can have a significant impact on the ALLL. To determine the potential impact, and corresponding estimated losses, we analyze our historical loss trends on loans past due greater than 30 days and nonaccrual loans. We monitor all loans that are past due and in nonaccrual status for indicators of additional deterioration.
 Total Past Due and Nonaccrual

December 31
2013		 September 30
2013		 June 30
2013		 March 31
2013		 December 31
2012
Commercial and agricultural$3,621
 $5,371
 $4,962
 $8,713
 $7,271
Residential real estate7,008
 6,339
 5,080
 4,077
 5,431
Consumer259
 152
 104
 212
 199
Total$10,888
 $11,862
 $10,146
 $13,002
 $12,901
 Total Past Due and Nonaccrual as of December 31
 2013 2012 2011 2011 2009
Commercial and agricultural$3,621
 $7,271
 $7,420
 $9,606
 $8,839
Residential real estate7,008
 5,431
 5,297
 8,119
 10,296
Consumer259
 199
 186
 309
 460
Total$10,888
 $12,901
 $12,903
 $18,034
 $19,595
A summary of loans past due and in nonaccrual status, including the composition of the ending balance of nonaccrual loans by type, is included in “Note 6 – Loans and ALLL” of the Notes to Consolidated Financial Statements.
Troubled Debt Restructurings
We have taken a proactive approach to avoid foreclosures on borrowers who are willing to work with us in modifying their loans, thus making them more affordable. While this approach has allowed certain borrowers to develop a payment structure that will allow them to continue making payments in lieu of foreclosure, it has contributed to a significant increase in the level of loans classified as TDRs. The implementation of ASU No. 2011-02 “A Creditor’s Determination of Whether a Restructuring Is a Troubled Debt Restructuring” has also contributed to the increased level of TDRs. The modifications have been successful for us and our customers as very few of the modified loans have resulted in foreclosures. At the time of the TDR, the loan is reviewed to determine whether or not to classify the loan as accrual or nonaccrual. The majority of new modifications result in terms that satisfy our criteria for continued interest accrual. TDRs that have been placed in nonaccrual status may be placed back on accrual status after six months of continued performance.
We restructure debt with borrowers who due to temporary financial difficulties are unable to service their debt under the original terms. We may extend the amortization period, reduce interest rates, forgive principal, or a combination of these modifications. Typically, the modifications are for a period of five years or less. There were no TDRs that were Government sponsored as of December 31, 2013 or December 31, 2012.
Losses associated with TDRs, if any, are included in the estimation of the ALLL in the quarter in which a loan is identified as a TDR, and we review the ALLL estimation each reporting period to ensure its continued appropriateness.

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The following table provides a roll-forward of TDRs for the years ended December 31, 2012 and 2013:

Accruing Interest Nonaccrual Total

Number
of
Loans		 Balance Number
of
Loans		 Balance Number
of
Loans		 Balance
January 1, 2012112
 $17,739
 12
 $1,017
 124
 $18,756
New modifications58
 10,149
 9
 1,217
 67
 11,366
Principal payments—
 (1,578) —
 (287) —
 (1,865)
Loans paid-off(40) (7,719) (4) (158) (44) (7,877)
Partial charge-off—
 (231) —
 (40) —
 (271)
Balances charged-off(2) (140) (4) (100) (6) (240)
Transfers to OREO(2) (134) (5) (380) (7) (514)
Transfers to accrual status2
 131
 (2) (131) —
 —
Transfers to nonaccrual status(13) (1,686) 13
 1,686
 —
 —
December 31, 2012115
 16,531
 19
 2,824
 134
 19,355
New modifications76
 12,192
 5
 424
 81
 12,616
Principal payments—
 (891) —
 (292) —
 (1,183)
Loans paid-off(17) (2,844) (6) (800) (23) (3,644)
Partial charge-off—
 (79) —
 (477) —
 (556)
Balances charged-off(3) (167) (1) (27) (4) (194)
Transfers to OREO(1) (33) (7) (496) (8) (529)
Transfers to accrual status2
 133
 (2) (133) —
 —
Transfers to nonaccrual status(7) (419) 7
 419
 —
 —
December 31, 2013165
 $24,423
 15
 $1,442
 180
 $25,865
The following table summarizes our TDRs as of December 31:
 2013 2012 2011

Accruing
Interest		 Nonaccrual Total Accruing
Interest		 Nonaccrual Total Accruing
Interest		 Nonaccrual Total
Current$21,690
 $1,189
 $22,879
 $16,301
 $941
 $17,242
 $16,125
 $514
 $16,639
Past due 30-59 days2,158
 37
 2,195
 158
 561
 719
 1,564
 344
 1,908
Past due 60-89 days575
 —
 575
 72
 41
 113
 50
 85
 135
Past due 90 days or more—
 216
 216
 —
 1,281
 1,281
 —
 74
 74
Total$24,423
 $1,442
 $25,865
 $16,531
 $2,824
 $19,355
 $17,739
 $1,017
 $18,756
 2010 2009

Accruing
Interest		 Nonaccrual Total Accruing
Interest		 Nonaccrual Total
Current$4,798
 $499
 $5,297
 $2,754
 $786
 $3,540
Past due 30-59 days175
 26
 201
 107
 80
 187
Past due 60-89 days102
 —
 102
 —
 824
 824
Past due 90 days or more—
 163
 163
 —
 426
 426
Total$5,075
 $688
 $5,763
 $2,861
 $2,116
 $4,977
Additional disclosures about TDRs are included in “Note 6 – Loans and ALLL” of the Notes to Consolidated Financial Statements.

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Impaired Loans
The following is a summary of information pertaining to impaired loans as of December 31:
 2013 2012

Outstanding
Balance		 Unpaid
Principal
Balance		 Valuation
Allowance		 Outstanding
Balance		 Unpaid
Principal
Balance		 Valuation
Allowance
TDRs           
Commercial real estate$10,663
 $11,193
 $1,585
 $9,227
 $9,640
 $1,333
Commercial other1,310
 1,340
 62
 1,167
 1,197
 38
Agricultural real estate1,459
 1,459
 30
 91
 91
 32
Agricultural other79
 199
 —
 569
 689
 59
Residential real estate senior liens12,266
 12,841
 2,010
 8,224
 8,670
 1,429
Residential real estate junior liens20
 20
 4
 21
 57
 4
Consumer secured68
 69
 —
 56
 56
 —
Total TDRs25,865
 27,121
 3,691
 19,355
 20,400
 2,895
Other impaired loans           
Commercial real estate1,707
 2,193
 330
 1,817
 2,304
 320
Commercial other136
 217
 58
 2,245
 2,376
 359
Agricultural other—
 —
 —
 63
 63
 —
Residential real estate senior liens1,795
 2,473
 268
 2,226
 3,002
 354
Residential real estate junior liens28
 45
 5
 51
 61
 9
Home equity lines of credit193
 493
 —
 182
 482
 —
Consumer secured51
 79
 —
 19
 28
 —
Total other impaired loans3,910
 5,500
 661
 6,603
 8,316
 1,042
Total impaired loans$29,775
 $32,621
 $4,352
 $25,958
 $28,716
 $3,937
Additional disclosure related to impaired loans is included in “Note 6 – Loans and ALLL” of the Notes to Consolidated Financial Statements.
Nonperforming Assets
The following table summarizes our nonperforming assets as of December 31:
 2013 2012 2011 2010 2009
Nonaccrual loans$3,244
 $7,303
 $6,389
 $5,610
 $8,522
Accruing loans past due 90 days or more142
 428
 760
 486
 768
Total nonperforming loans3,386
 7,731
 7,149
 6,096
 9,290
Foreclosed assets1,412
 2,018
 1,876
 2,067
 1,157
Total nonperforming assets$4,798
 $9,749
 $9,025
 $8,163
 $10,447
Nonperforming loans as a % of total loans0.42% 1.00% 0.95% 0.83% 1.28%
Nonperforming assets as a % of total assets0.32% 0.68% 0.67% 0.67% 0.91%
After a loan is 90 days past due, it is generally placed in nonaccrual status unless it is well secured and in the process of collection. Upon transferring the loans to nonaccrual status, we perform an evaluation to determine the net realizable value of the underlying collateral. This evaluation is used to help determine if any charge-offs are necessary. Loans may be placed back on accrual status after six months of continued performance.
Included in the nonaccrual loan balances above were loans currently classified as TDRs as of December 31:
 2013 2012 2011 2010 2009
Commercial and agricultural$833
 $2,325
 $520
 $115
 $1,692
Residential real estate609
 499
 497
 573
 424
Total$1,442
 $2,824
 $1,017
 $688
 $2,116

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

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

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

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

 359
 —
 —

Borrower 4—

 —
 —

 —
 —
 —

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

 $—
 $—
 $—

Borrower 22,679

 345
 —
 —

Borrower 3—

 —
 —
 —

Borrower 4—
(B) —
 1,800
 —
(D)
Others not individually significant2,931
    6,722
   
Total$5,610
    $8,522
   
Retroactively restatedA -Transferred to accrual status.
B -Loan was partially charged-off with the remaining outstanding balance paid off by the customer.
C -No specific allocation as the net realizable value of the loan’s underlying collateral value exceeded the loan’s carrying balance.
D -No specific allocation established for this loan as it was charged down to reflect the 10% stock dividend, paid on February 29, 2008.current fair value of the underlying real estate.

Additional disclosures about nonaccrual loans are included in “Note 6 – Loans and ALLL” of the Notes to Consolidated Financial Statements.
We continue to devote considerable attention to identifying impaired loans and adjusting the net carrying value of these loans to their current net realizable values through the establishment of a specific reserve or the recording of a charge-off. We believe that all loans deemed to be impaired have been identified.
We believe that the level of the ALLL is appropriate as of December 31, 2013 and we will continue to closely monitor overall credit quality and our policies and procedures related to the analysis of the ALLL to ensure that the ALLL remains appropriate.

23

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Noninterest Income and Noninterest Expenses
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRMNoninterest income consists of service charges and fees, gains on sale of mortgage loans, earnings on corporate owned life insurance policies, gains and losses on sales of AFS securities, and other income. Significant account balances are highlighted in the following table with additional descriptions of significant fluctuations for the years ended December 31:
     Change   Change
 2013 2012 $ % 2011 $ %
Service charges and fees             
NSF and overdraft fees$2,243
 $2,367
 $(124) (5.24)% $2,500
 $(133) (5.32)%
ATM and debit card fees1,944
 1,874
 70
 3.74 % 1,736
 138
 7.95 %
Trust fees1,154
 1,061
 93
 8.77 % 979
 82
 8.38 %
Freddie Mac servicing fee737
 757
 (20) (2.64)% 732
 25
 3.42 %
Service charges on deposit accounts373
 337
 36
 10.68 % 324
 13
 4.01 %
Net OMSRs income (loss)269
 (89) 358
 N/M
 (293) 204
 (69.62)%
All other116
 125
 (9) (7.20)% 140
 (15) (10.71)%
Total service charges and fees6,836
 6,432
 404
 6.28 % 6,118
 314
 5.13 %
Gain on sale of mortgage loans962
 1,576
 (614) (38.96)% 538
 1,038
 N/M
Earnings on corporate owned life insurance policies732
 698
 34
 4.87 % 609
 89
 14.61 %
Gain (loss) on sale of AFS securities171
 1,119
 (948) (84.72)% 3
 1,116
 N/M
Other          
  
Brokerage and advisory fees704
 574
 130
 22.65 % 545
 29
 5.32 %
Gain on sale of OREO286
 220
 66
 30.00 % 62
 158
 N/M
Corporate Settlement Solutions joint venture143
 504
 (361) (71.63)% (182) 686
 N/M
Other341
 407
 (66) (16.22)% 525
 (118) (22.48)%
Total other1,474
 1,705
 (231) (13.55)% 950
 755
 79.47 %
Total noninterest income$10,175
 $11,530
 $(1,355) (11.75)% $8,218
 $3,312
 40.30 %

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


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Noninterest expenses include compensation and benefits, furniture and equipment, occupancy, net AFS security impairment loss, and other expenses. Significant account balances are highlighted in the following table with additional descriptions of significant fluctuations for the years ended December 31:
     Change   Change
 2013 2012 $ % 2011 $ %
Compensation and benefits             
Employee salaries$15,677
 $15,374
 $303
 1.97 % $14,377
 $997
 6.93 %
Employee benefits5,788
 5,853
 (65) (1.11)% 4,915
 938
 19.08 %
Total compensation and benefits21,465
 21,227
 238
 1.12 % 19,292
 1,935
 10.03 %
Furniture and equipment             
Service contracts2,277
 1,995
 282
 14.14 % 1,898
 97
 5.11 %
Depreciation1,889
 1,796
 93
 5.18 % 1,916
 (120) (6.26)%
ATM and debit card fees710
 690
 20
 2.90 % 629
 61
 9.70 %
All other69
 79
 (10) (12.66)% 54
 25
 46.30 %
Total furniture and equipment4,945
 4,560
 385
 8.44 % 4,497
 63
 1.40 %
Occupancy             
Outside services671
 605
 66
 10.91 % 587
 18
 3.07 %
Depreciation667
 621
 46
 7.41 % 605
 16
 2.64 %
Utilities502
 463
 39
 8.42 % 462
 1
 0.22 %
Property taxes499
 501
 (2) (0.40)% 470
 31
 6.60 %
All other314
 329
 (15) (4.56)% 346
 (17) (4.91)%
Total occupancy2,653
 2,519
 134
 5.32 % 2,470
 49
 1.98 %
Net AFS securities impairment loss—
 282
 (282) (100.00)% —
 282
 100.00 %
Other             
Marketing and community relations1,131
 1,965
 (834) (42.44)% 1,174
 791
 67.38 %
FDIC insurance premiums1,082
 864
 218
 25.23 % 1,086
 (222) (20.44)%
Directors fees819
 885
 (66) (7.46)% 842
 43
 5.11 %
Audit and related fees738
 711
 27
 3.80 % 714
 (3) (0.42)%
Education and travel502
 588
 (86) (14.63)% 526
 62
 11.79 %
Loan underwriting fees423
 403
 20
 4.96 % 331
 72
 21.75 %
Printing and supplies396
 424
 (28) (6.60)% 405
 19
 4.69 %
Postage and freight387
 389
 (2) (0.51)% 388
 1
 0.26 %
Legal fees359
 268
 91
 33.96 % 302
 (34) (11.26)%
Consulting fees315
 482
 (167) (34.65)% 386
 96
 24.87 %
Amortization of deposit premium221
 260
 (39) (15.00)% 299
 (39) (13.04)%
Foreclosed asset and collection211
 202
 9
 4.46 % 576
 (374) (64.93)%
State taxes140
 187
 (47) (25.13)% 57
 130
 N/M
Other losses109
 300
 (191) (63.67)% 54
 246
 N/M
All other1,517
 1,123
 394
 35.08 % 1,131
 (8) (0.71)%
Total other8,350
 9,051
 (701) (7.75)% 8,271
 780
 9.43 %
Total noninterest expenses$37,413
 $37,639
 $(226) (0.60)% $34,530
 $3,109
 9.00 %


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Significant changes in noninterest expenses are detailed below:
Employee salaries have increased as a result of normal merit increases and due to our continued growth. Employee benefit expenses increased in 2012 primarily as a result of increases in health care and retirement related expenses. Despite the increase in employee salaries in 2013, employee benefit expenses declined. This decline was the result of decreases in retirement related expenses. We anticipate that total employee benefits will increase moderately in 2014.
Service contracts have increased during 2013 due to costs related to data lines as well as increases in various other contracts as we continue to expand our on-line services offered to customers. Service contracts are expected to continue their increases in 2014.
During the first quarter of 2012, we recorded a credit impairment on an AFS security through earnings due to a bond being downgraded below investment grade. We continuously monitor the AFS security portfolio for other potential OTTI. For further discussion, see “Note 5 – AFS Securities” of the Notes to Consolidated Financial Statements.
We have consistently been a strong supporter of the various communities, schools, and charities in the markets we serve. We sponsor a foundation, which we established in 1996, that is funded by discretionary donations. The affiliated foundation provides centralized oversight for donations to organizations that benefit our communities. Included in marketing and community relations were discretionary donations to the foundation of $200, $850, and $250 for the years ended December 31, 2013, 2012, and 2011, respectively.
FDIC insurance premiums increased in 2013 as a result of us receiving less of a refund for prepaid FDIC insurance premiums than we had anticipated. FDIC insurance premiums are anticipated to decline slightly in 2014.
Audit and related fees fluctuate from period to period based on the timing of services performed. Audit and related fees are expected to approximate current levels in 2014.
We place a strong emphasis on employee development through continuous education. Education and travel expenses vary from year to year based on the timing of various programs that our employees attend. Education and travel expenses are expected to increase in 2014, but are not expected to exceed 2012 levels.
Legal fees increased in 2013 as a result of higher costs associated with filing documents with the SEC, primarily those associated with XBRL tagging as well as legal costs incurred in relation to loan collection efforts. We expect legal fees to approximate current levels for 2014.
During the first quarter of 2012, we incurred consulting fees to review our FHLB advances for potential restructuring options. These fees were also elevated in 2012 due to the engagement of consultants to review our loan prepayment and deposit decay assumptions and various information technology projects. Consulting fees are anticipated to approximate current levels in 2014.
Other losses increased significantly in 2012 primarily as a result of losses incurred related to fraudulent activities as well as losses related to the repurchase of a loan that we previously sold to a third party. While other losses fluctuate from period to period, they are expected to approximate current levels in 2014.
The fluctuations in all other expenses are spread throughout various categories, none of which are individually significant.

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

  
Amortized cost of AFS securities517,614
 490,420
 27,194
 5.55 %
Unrealized gains (losses) on AFS securities(5,552) 13,590
 (19,142) (140.85)%
AFS securities512,062
 504,010
 8,052
 1.60 %
Mortgage loans AFS1,104
 3,633
 (2,529) (69.61)%
Loans       
Gross loans808,037
 772,753
 35,284
 4.57 %
Less allowance for loan and lease losses11,500
 11,936
 (436) (3.65)%
Net loans796,537
 760,817
 35,720
 4.69 %
Premises and equipment25,719
 25,787
 (68) (0.26)%
Corporate owned life insurance policies24,401
 22,773
 1,628
 7.15 %
Accrued interest receivable5,442
 5,227
 215
 4.11 %
Equity securities without readily determinable fair values18,293
 18,118
 175
 0.97 %
Goodwill and other intangible assets46,311
 46,532
 (221) (0.47)%
Other assets20,605
 12,784
 7,821
 61.18 %
TOTAL ASSETS$1,493,137
 $1,430,639
 $62,498
 4.37 %
LIABILITIES AND SHAREHOLDERS’ EQUITY       
Liabilities       
Deposits$1,043,766
 $1,017,667
 $26,099
 2.56 %
Borrowed funds279,326
 241,001
 38,325
 15.90 %
Accrued interest payable and other liabilities9,436
 7,482
 1,954
 26.12 %
Total liabilities1,332,528
 1,266,150
 66,378
 5.24 %
Shareholders’ equity160,609
 164,489
 (3,880) (2.36)%
TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY$1,493,137
 $1,430,639
 $62,498
 4.37 %
As shown above, total assets have increased $62,498 since December 31, 2012. During 2013, we increased our cost basis of AFS securities by $27,194 while loans grew by $35,284. The increase in our AFS securities portfolio was partially offset by $19,142 in unrealized losses observed during the year. This balance sheet growth was funded by increases in both deposits and borrowed funds. While we do anticipate that generating quality loans will continue to be competitive, we expect that loans will continue to grow in 2014.
A discussion of changes in balance sheet amounts by major categories follows:
Certificates of deposit held in other financial institutions
During 2013, we reinvested maturities of certificates of deposit held in other financial institutions into AFS investment securities to increase net interest margins (as the yields on AFS investment securities exceeded the potential reinvestment rates for certificates of deposits held in other financial institutions during the year). This trend is likely to continue in 2014.


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Table of Contents

AFS investment securities
The primary objective of our investing activities is to provide for safety of the principal invested. Secondary considerations include the need for earnings, liquidity, and our overall exposure to changes in interest rates.
The following is a schedule of the carrying value of AFS investment securities as of December 31:

2013 2012 2011
Government sponsored enterprises$23,745
 $25,776
 $397
States and political subdivisions201,988
 182,743
 174,938
Auction rate money market preferred2,577
 2,778
 2,049
Preferred stocks5,827
 6,363
 5,033
Mortgage-backed securities144,115
 155,345
 143,602
Collateralized mortgage obligations133,810
 131,005
 99,101
Total$512,062
 $504,010
 $425,120
Excluding those holdings in government sponsored enterprises and municipalities within the State of Michigan, there were no investments in securities of any one issuer that exceeded 10% of shareholders’ equity. We have a policy prohibiting investments in securities that we deem are unsuitable due to their inherent credit or market risks. Prohibited investments include stripped mortgage backed securities, zero coupon bonds, nongovernment agency asset backed securities, and structured notes. Our holdings in mortgage-backed securities and collateralized mortgage obligations include only government agencies and government sponsored agencies as we hold no investments in private label mortgage-backed securities or collateralized mortgage obligations.
The following is a schedule of maturities of AFS investment securities and their weighted average yield as of December 31, 2013. Weighted average yields have been computed on an FTE basis using a tax rate of 34%. Our auction rate money market preferred is a long term floating rate instrument for which the interest rate is set at periodic auctions. At each successful auction, we have the option to sell the security at par value. Additionally, the issuers of auction rate securities generally have the right to redeem or refinance the debt. Because of their lack of contractual maturities, auction rate money market preferred and preferred stocks are not reported by a specific maturity group. Mortgage-backed securities and collateralized mortgage obligations are not reported by a specific maturity group due to their variable monthly payments. Expected maturities may differ from contractual maturities because issuers may have the right to call or prepay obligations.
 Maturing    

Within
One Year		 After One
Year But
Within
Five Years		 After Five
Years But
Within
Ten Years		 After
Ten Years		 Securities with
Variable  Monthly
Payments or
Noncontractual
Maturities
 Amount Yield (%) Amount Yield (%) Amount Yield (%) Amount Yield (%) Amount Yield (%)
Government sponsored enterprises$—
 — $73
 7.91 $23,672
 1.46 $—
 — $—
 —
States and political subdivisions961
 6.51 38,794
 4.76 98,965
 4.93 63,268
 4.10 —
 —
Mortgage-backed securities—
 — —
 — —
 — —
 — 144,115
 2.05
Collateralized mortgage obligations—
 — —
 — —
 — —
 — 133,810
 2.30
Auction rate money market preferred—
 — —
 — —
 — —
 — 2,577
 6.28
Preferred stocks—
 — —
 — —
 — —
 — 5,827
 5.80
Total$961
 6.51 $38,867
 4.77 $122,637
 4.26 $63,268
 4.10 $286,329
 2.28

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Table of Contents

Loans
Loans are the largest component of earning assets. The proper management of credit and market risk inherent in the loan portfolio is critical to our financial well-being. To control these risks, we have adopted strict underwriting standards. These standards include specific criteria against lending outside our defined market areas, lending limits to a single borrower, and strict loan to collateral value limits. We also monitor and limit loan concentrations to specific industries. We have no foreign loans and there were no concentrations greater than 10% of total loans that are not disclosed as a separate category in the following table.
The following table presents the composition of the loan portfolio for the years ended December 31:
 2013 2012 2011 2010 2009
Commercial$392,104
 $371,505
 $365,714
 $348,852
 $340,274
Agricultural92,589
 83,606
 74,645
 71,446
 64,845
Residential real estate289,931
 284,148
 278,360
 284,029
 285,838
Consumer33,413
 33,494
 31,572
 30,977
 32,359
Total$808,037
 $772,753
 $750,291
 $735,304
 $723,316
The following table presents the change in the loan portfolio categories for the years ended December 31:
 2013 2012 2011
 $ Change % Change $ Change % Change $ Change % Change
Commercial$20,599
 5.54 % $5,791
 1.58% $16,862
 4.83 %
Agricultural8,983
 10.74 % 8,961
 12.00% 3,199
 4.48 %
Residential real estate5,783
 2.04 % 5,788
 2.08% (5,669) (2.00)%
Consumer(81) (0.24)% 1,922
 6.09% 595
 1.92 %
Total$35,284
 4.57 % $22,462
 2.99% $14,987
 2.04 %
We expect loans to increase moderately in 2014, with most of the growth in commercial loans.
Equity securities without readily determinable fair values
Included in equity securities without readily determinable fair values are restricted securities, which are carried at cost and investments in unconsolidated entities accounted for under the equity method of accounting (see “Note 1 – Nature of Operations and Summary of Significant Accounting Policies” and “Note 20 – Fair Value” of the Notes to Consolidated Financial Statements).
Deposits
Deposits are our primary source of funding. The following table presents the composition of the deposit portfolio as of December 31:
 2013 2012 2011 2010 2009
Noninterest bearing demand deposits$158,428
 $143,735
 $119,072
 $104,902
 $96,875
Interest bearing demand deposits192,089
 181,259
 163,653
 142,259
 128,111
Savings deposits243,237
 228,338
 193,902
 177,817
 157,020
Certificates of deposit362,473
 376,790
 395,777
 386,435
 356,594
Brokered certificates of deposit56,329
 55,348
 54,326
 53,748
 50,933
Internet certificates of deposit31,210
 32,197
 31,434
 12,178
 13,119
Total$1,043,766
 $1,017,667
 $958,164
 $877,339
 $802,652

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The following table presents the change in the deposit categories for the years ended December 31:
 2013 2012 2011
 $ Change % Change $ Change % Change $ Change % Change
Noninterest bearing demand deposits$14,693
 10.22 % $24,663
 20.71 % $14,170
 13.51%
Interest bearing demand deposits10,830
 5.97 % 17,606
 10.76 % 21,394
 15.04%
Savings deposits14,899
 6.52 % 34,436
 17.76 % 16,085
 9.05%
Certificates of deposit(14,317) (3.80)% (18,987) (4.80)% 9,342
 2.42%
Brokered certificates of deposit981
 1.77 % 1,022
 1.88 % 578
 1.08%
Internet certificates of deposit(987) (3.07)% 763
 2.43 % 19,256
 158.12%
Total$26,099
 2.56 % $59,503
 6.21 % $80,825
 9.21%
We anticipate deposits to continue to increase in 2014. Growth in 2014 is anticipated to continue to come in the form of non-contractual deposits, while certificates of deposit are expected to approximate current levels.
The remaining maturity of time certificates and other time deposits of $100 or more as of December 31, 2013 was as follows:
Maturity 
Within 3 months$33,773
Within 3 to 6 months26,598
Within 6 to 12 months48,345
Over 12 months128,986
Total$237,702
Borrowed Funds
Borrowed funds include FHLB advances and securities sold under agreements to repurchase. The balance of borrowed funds fluctuates from period to period based on our funding needs including changes in loans, investments, and deposits. For additional disclosure related to borrowed funds, see “Note 10 – Borrowed Funds” of Notes to Consolidated Financial Statements.
Contractual Obligations and Loan Commitments
We have various financial obligations, including contractual obligations and commitments, which may require future cash payments. The following schedule summarizes our non-cancelable obligations and future minimum payments as of December 31, 2013:
 Minimum Payments Due by Period
 Due in
One Year
or Less		 After One
Year But
Within
Three Years		 After Three
Years But
Within
Five Years		 After
Five Years		 Total
Deposits         
Deposits with no stated maturity$593,754
 $—
 $—
 $—
 $593,754
Certificates of deposit with stated maturities207,278
 140,040
 85,550
 17,144
 450,012
Total deposits801,032
 140,040
 85,550
 17,144
 1,043,766
Borrowed funds         
Short-term borrowings106,025
 —
 —
 —
 106,025
Long-term borrowings20,876
 42,425
 70,000
 40,000
 173,301
Total borrowed funds126,901
 42,425
 70,000
 40,000
 279,326
Total contractual obligations$927,933
 $182,465
 $155,550
 $57,144
 $1,323,092

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We also have loan commitments that may impact liquidity. The following schedule summarizes our loan commitments and expiration dates by period as of December 31, 2013. Commitments to grant loans include loans to be sold to the secondary market. Since many of these commitments historically have expired without being drawn upon, the total amount of these commitments does not necessarily represent our future cash requirements.
 Expiration Dates by Period

Due in
One Year
or Less		 After One
Year But
Within
Three Years		 After Three
Years But
Within
Five Years		 After
Five
Years		 Total
Unused commitments under lines of credit$72,166
 $31,141
 $13,059
 $5,593
 $121,959
Commitments to grant loans29,096
 —
 —
 —
 29,096
Commercial and standby letters of credit4,169
 —
 —
 —
 4,169
Total loan commitments$105,431
 $31,141
 $13,059
 $5,593
 $155,224
For additional disclosure related to Contractual Obligations and Loan Commitments, see “Note 13 – Off-Balance-Sheet Activities” of the Notes to Consolidated Financial Statements.
Capital
Capital consists solely of common stock, retained earnings, and accumulated other comprehensive income (loss). We are currently authorized to raise capital through dividend reinvestment, employee and director stock purchases, and shareholder stock purchases. Pursuant to these authorizations, we issued 149,191 shares or $3,618 of common stock during 2013, and 124,530 shares or $2,898 of common stock in 2012. We also offer the Directors Plan in which participants either directly purchase stock or purchase stock units through deferred fees, in lieu of cash payments (see "Note 17 – Benefit Plans" of the Notes to Consolidated Financial Statements). Pursuant to this plan, we increased shareholders’ equity by $554 and $643 during 2013 and 2012, respectively.
We have approved a publicly announced common stock repurchase plan. Pursuant to this plan, we repurchased 98,014 shares or $2,375 of common stock compared to 83,586 shares for $1,980 during 2013 and 2012, respectively. As of December 31, 2013, we were authorized to repurchase up to an additional 137,396 shares of common stock.
There are no significant regulatory constraints placed on our capital. The FRB’s current recommended minimum primary capital to assets requirement is 6.00%. Our primary capital to adjusted average assets, which consists of shareholders' equity plus the ALLL acquisition intangibles, was 8.46% as of December 31, 2013.
The FRB has established a minimum risk based capital standard. Under this standard, a framework has been established that assigns risk weights to each category of on and off balance sheet items to arrive at risk adjusted total assets. Regulatory capital is divided by the risk adjusted assets with the resulting ratio compared to the minimum standard to determine whether a corporation has adequate capital. The minimum standard is 8.00%, of which at least 4.00% must consist of equity capital net of goodwill. The following table sets forth the percentages required under the Risk Based Capital guidelines and our values as of December 31:
 2013 2012 Required
Equity Capital13.67% 13.23% 4.00%
Secondary Capital1.25% 1.25% 4.00%
Total Capital14.92% 14.48% 8.00%
Secondary capital includes only the ALLL. The percentage for the secondary capital under the required column is the maximum amount allowed from all sources.
The FRB and FDIC also prescribe minimum capital requirements for Isabella Bank. At December 31, 2013, the Bank exceeded these minimum capital requirements. On July 2, 2013, the FRB published revised BASEL III Capital standards for banks. The rules redefine what is included or deducted from equity capital, changes risk weighting for certain on and off-balance sheet assets, increases the minimum required equity capital to be considered well capitalized, and introduces a capital cushion buffer. The rules, which will be gradually phased in between 2015 and 2019, are not expected to have a material impact on the Corporation. For further information regarding the Bank’s capital requirements, see “Note 16 – Minimum Regulatory Capital Requirements” of the Notes to Consolidated Financial Statements.

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Fair Value
We utilize fair value measurements to record fair value adjustments to certain assets and liabilities and to determine fair value disclosures. Trading securities, AFS securities, and certain liabilities are recorded at fair value on a recurring basis. Additionally, from time-to-time, we may be required to record at fair value other assets on a nonrecurring basis, such as mortgage loans AFS, foreclosed assets, OMSRs, and certain other assets and liabilities. These nonrecurring fair value adjustments typically involve the application of lower of cost or market accounting or write-downs of individual assets.
For further information regarding fair value measurements, see “Note 1 – Nature of Operations and Summary of Significant Accounting Policies” and “Note 20 – Fair Value” of the Notes to Consolidated Financial Statements.
Interest Rate Sensitivity
Interest rate sensitivity is determined by the amount of earning assets and interest bearing liabilities repricing within a specific time period, and their relative sensitivity to a change in interest rates. We strive to achieve reasonable stability in the net interest margin through periods of changing interest rates. One tool we use to measure interest rate sensitivity is gap analysis. As shown in the table below, the gap analysis depicts our position for specific time periods and the cumulative gap as a percentage of total assets.
Trading securities are included in the 0 to 3 month time frame due to their repricing characteristics. Fixed interest rate AFS securities are scheduled according to their contractual maturity. Fixed rate loans are included in the appropriate time frame based on their scheduled amortization. Variable rate loans, which totaled $168,332 as of December 31, 2013, are included in the time frame of their earliest repricing. Time deposit liabilities are scheduled based on their contractual maturity except for variable rate time deposits in the amount of $1,139 that are included in the 0 to 3 month time frame.
Savings and NOW accounts have no contractual maturity date and are believed by us to be predominantly noninterest rate sensitive. These accounts have been classified in the gap table according to their estimated withdrawal rates based upon our analysis of deposit decay over the past five years. We believe this decay experience is consistent with our expectation for the future. As of December 31, 2013, we had a positive cumulative gap within one year. A positive gap position results when more assets, within a specified time frame, have the potential to mature or reprice than liabilities.
The following table shows the time periods and the amount of assets and liabilities available for interest rate repricing as of December 31, 2013. The interest rate sensitivity information for investment securities is based on the expected prepayments and call dates versus stated maturities. For purposes of this analysis, nonaccrual loans and the allowance for loan losses are excluded.
 0 to 3
Months		 4 to 12
Months		 1 to 5
Years		 Over 5
Years
Interest sensitive assets       
Trading securities$525
 $—
 $—
 $—
AFS securities44,680
 87,212
 226,963
 153,207
Loans188,897
 89,166
 390,793
 135,937
Total$234,102
 $176,378
 $617,756
 $289,144
Interest sensitive liabilities       
Borrowed funds$116,169
 $10,781
 $112,376
 $40,000
Time deposits61,029
 146,624
 225,215
 17,144
Savings deposits16,598
 20,843
 82,092
 123,704
Interest bearing demand deposits2,390
 7,169
 33,397
 149,133
Total$196,186
 $185,417
 $453,080
 $329,981
Cumulative gap$37,916
 $28,877
 $193,553
 $152,716
Cumulative gap as a % of assets2.54% 1.93% 12.96% 10.23%

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The following table shows the maturity of commercial and agricultural loans outstanding at December 31, 2013. Also provided are the amounts due after one year, classified according to the sensitivity to changes in interest rates.
 1 Year
or Less		 1 to 5
Years		 Over 5
Years		 Total
Commercial and agricultural$88,527
 $264,296
 $131,870
 $484,693
Interest sensitivity       
Loans maturing after one year that have:       
Fixed interest rates  $218,869
 $125,938
  
Variable interest rates  45,427
 5,932
  
Total  $264,296
 $131,870
  
Liquidity
Liquidity is monitored regularly by our Market Risk Committee, which consists of members of senior management. The committee reviews projected cash flows, key ratios, and liquidity available from both primary and secondary sources.
Our primary sources of liquidity are cash and cash equivalents, certificates of deposit held in other financial institutions, trading securities, and AFS securities. These categories totaled $554,725 or 37.15% of assets as of December 31, 2013 as compared to $534,968 or 37.39% as of December 31, 2012. Liquidity is important for financial institutions because of their need to meet loan funding commitments, depositor withdrawal requests, and various other commitments including expansion of operations, investment opportunities, and payment of cash dividends. Liquidity varies significantly daily, based on customer activity.
Our primary source of funds is deposit accounts. We also have the ability to borrow from the FHLB, the FRB, and through various correspondent banks in the form of federal funds purchased. These funding methods typically carry a higher interest rate than traditional market deposit accounts. Some borrowed funds, including FHLB advances, FRB Discount Window advances, and repurchase agreements, require us to pledge assets, typically in the form of certificates of deposits held in other financial institutions, trading securities, AFS securities, or loans as collateral. As of December 31, 2013, we had available lines of credit of $127,748.
The following table summarizes our sources and uses of cash for the years ended December 31:
 2013 2012 $ Variance
Net cash provided by (used in) operating activities$22,741
 $19,464
 $3,277
Net cash provided by (used in) investing activities(64,931) (101,874) 36,943
Net cash provided by (used in) financing activities58,828
 78,740
 (19,912)
Increase (decrease) in cash and cash equivalents16,638
 (3,670) 20,308
Cash and cash equivalents at beginning of period24,920
 28,590
 (3,670)
Cash and cash equivalents at end of period$41,558
 $24,920
 $16,638

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Quantitative and Qualitative Disclosures about Market Risk
Our primary market risks are interest rate risk and liquidity risk. We have no significant foreign exchange risk and do not utilize interest rate swaps or derivatives, except for interest rate locks and forward loan commitments, in the management of IRR. Any changes in foreign exchange rates or commodity prices would have an insignificant impact on our interest income and cash flows.
IRR is the exposure of our net interest income to changes in interest rates. IRR results from the difference in the maturity or repricing frequency of a financial institution's interest earning assets and its interest bearing liabilities. IRR is the fundamental method by which financial institutions earn income and create shareholder value. Excessive exposure to IRR could pose a significant risk to our earnings and capital.
The FRB has adopted a policy requiring us to effectively manage the various risks that can have a material impact on our safety and soundness. The risks include credit, interest rate, liquidity, operational, and reputational. We have policies, procedures, and internal controls for measuring and managing these risks. Specifically, our Funds Management policy and procedures include defining acceptable types and terms of investments and funding sources, liquidity requirements, limits on investments in long term assets, limiting the mismatch in repricing opportunity of assets and liabilities, and the frequency of measuring and reporting to our Board.
The primary technique to measure IRR is simulation analysis. Simulation analysis forecasts the effects on the balance sheet structure and net interest income under a variety of scenarios that incorporate changes in interest rates, the shape of yield curves, interest rate relationships, and loan prepayments. These forecasts are compared against net interest income projected in a stable interest rate environment. While many assets and liabilities reprice either at maturity or in accordance with their contractual terms, several balance sheet components demonstrate characteristics that require an evaluation to more accurately reflect their repricing behavior. Key assumptions in the simulation analysis include prepayments on loans, probable calls of investment securities, changes in market conditions, loan volumes and loan pricing, deposit sensitivity, and customer preferences. These assumptions are inherently uncertain as they are subject to fluctuation and revision in a dynamic environment. As a result, the simulation analysis cannot precisely forecast the impact of rising and falling interest rates on net interest income. Actual results will differ from simulated results due to many other factors, including changes in balance sheet components, interest rate changes, changes in market conditions, and management strategies.
Our interest rate sensitivity is estimated by first forecasting the next twelve months of net interest income under an assumed environment of a constant balance sheet and constant market interest rates (base case). We then compare the results of various simulation analyses to the base case. At December 31, 2013, we projected the change in net interest income during the next twelve months assuming market interest rates were to immediately decrease by 100 basis points and increase by 100, 200, 300, and 400 basis points in a parallel fashion over the entire yield curve during the same time period. We did not project scenarios showing decreases in interest rates beyond 100 basis points as this is considered extremely unlikely given current interest rate levels. These projections were based on our assets and liabilities remaining static over the next twelve months, while factoring in probable calls and prepayments of certain investment securities and real estate residential and consumer loans. While it is extremely unlikely that interest rates would immediately increase to these levels, we feel that these extreme scenarios help us identify potential gaps and mismatches in the repricing characteristics of assets and liabilities. We regularly monitor our forecasted net interest income sensitivity to ensure that it remains within established limits.
The following table summarizes our interest rate sensitivity as of:
 December 31, 2013
Immediate basis point change assumption (short-term)(100) 0 100 200 300 400
Percent change in net interest income vs. constant rates(2.85)% —
 0.25% (0.28)% (0.99)% (2.16)%
 December 31, 2012
Immediate basis point change assumption (short-term)(100) 0 100 200 300 400
Percent change in net interest income vs. constant rates(1.61)% —
 0.49% (1.58)% (1.74)% (2.16)%
The secondary method to measure IRR is gap analysis. Gap analysis measures the cash flows and/or the earliest repricing of our interest bearing assets and liabilities. This analysis is useful for measuring trends in the repricing characteristics of the balance sheet. Significant assumptions are required in this process because of the embedded repricing options contained in assets and liabilities. Residential real estate and consumer loans allow the borrower to repay the balance prior to maturity without penalty, while commercial and agricultural loans have prepayment penalties. The amount of prepayments is dependent upon many factors, including the interest rate of a given loan in comparison to the current offering rates, the level of sales of used homes, and the overall availability of credit in the market place. Generally, a decrease in interest rates will result in an

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increase in cash flows from these assets. A significant portion of our securities are callable or have prepayment options. The call and prepayment options are more likely to be exercised in a period of decreasing interest rates. Savings and demand accounts may generally be withdrawn on request without prior notice. The timing of cash flows from these deposits is estimated based on historical experience. Certificates of deposit have penalties that discourage early withdrawals.
The following tables provide information about assets and liabilities that are sensitive to changes in interest rates as of December 31, 2013 and December 31, 2012. The principal amounts of assets and time deposits maturing were calculated based on the contractual maturity dates. Savings and NOW accounts are based on management's estimate of their future cash flows. During the first quarter of 2012, we engaged the services of a third party to analyze our historical loan prepayment speeds and non-contractual deposit decay rates. We have reviewed the results of the analyses in detail and feel that it reasonably reflects the prepayment speeds and decay rates of our loan and deposit portfolios.

December 31, 2013
 2014 2015 2016 2017 2018 Thereafter Total Fair Value
Rate sensitive assets               
Other interest bearing assets$19,903
 $480
 $—
 $—
 $—
 $—
 $20,383
 $20,385
Average interest rates0.25% 1.15% —
 —
 —
 —
 0.27%  
Trading securities$525
 $—
 $—
 $—
 $—
 $—
 $525
 $525
Average interest rates2.77% —
 —
 —
 —
 —
 2.77%  
AFS securities$131,892
 $73,723
 $63,190
 $52,078
 $37,972
 $153,207
 $512,062
 $512,062
Average interest rates2.26% 2.23% 2.42% 2.48% 2.48% 2.80% 2.48%  
Fixed interest rate loans (1)$115,183
 $94,841
 $91,140
 $118,479
 $85,448
 $134,614
 $639,705
 $639,914
Average interest rates5.31% 5.17% 4.93% 4.53% 4.33% 4.33% 4.75%  
Variable interest rate loans (1)$69,036
 $29,460
 $20,332
 $14,208
 $15,699
 $19,597
 $168,332
 $168,332
Average interest rates4.76% 3.90% 4.06% 3.36% 3.35% 3.99% 4.19%  
Rate sensitive liabilities               
Borrowed funds$126,950
 $32,376
 $10,000
 $30,000
 $40,000
 $40,000
 $279,326
 $283,060
Average interest rates0.43% 0.86% 2.15% 1.95% 2.35% 3.02% 1.35%  
Savings and NOW accounts$47,000
 $33,569
 $30,200
 $27,198
 $24,522
 $272,837
 $435,326
 $435,326
Average interest rates0.19% 0.12% 0.11% 0.11% 0.11% 0.11% 0.12%  
Fixed interest rate certificates of deposit$206,514
 $81,038
 $58,627
 $46,336
 $39,214
 $17,144
 $448,873
 $451,664
Average interest rates0.89% 1.93% 1.95% 1.63% 1.34% 1.66% 1.36%  
Variable interest rate certificates of deposit$764
 $375
 $—
 $—
 $—
 $—
 $1,139
 $1,139
Average interest rates0.04% 0.40% —
 —
 —
 —
 0.16%  

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December 31, 2012
 2013 2014 2015 2016 2017 Thereafter Total Fair Value
Rate sensitive assets               
Other interest bearing assets$6,411
 $100
 $240
 $—
 $—
 $—
 $6,751
 $6,761
Average interest rates0.86% 0.35% 1.25% —
 —
 —
 0.86%  
Trading securities$1,051
 $522
 $—
 $—
 $—
 $—
 $1,573
 $1,573
Average interest rates2.68% 2.54% —
 —
 —
 —
 2.63%  
AFS securities$124,452
 $83,606
 $49,419
 $42,655
 $35,504
 $168,374
 $504,010
 $504,010
Average interest rates2.42% 2.30% 2.53% 2.82% 2.89% 2.48% 2.50%  
Fixed interest rate loans (1)$138,840
 $96,013
 $91,353
 $85,095
 $109,057
 $89,760
 $610,118
 $622,329
Average interest rates5.74% 5.62% 5.57% 5.21% 4.60% 4.63% 5.26%  
Variable interest rate loans (1)$64,482
 $28,076
 $24,669
 $12,650
 $22,061
 $10,697
 $162,635
 $162,635
Average interest rates4.90% 3.77% 3.96% 3.89% 3.36% 3.90% 4.21%  
Rate sensitive liabilities               
Borrowed funds$77,865
 $10,814
 $42,322
 $20,000
 $40,000
 $50,000
 $241,001
 $248,822
Average interest rates0.46% 0.65% 1.14% 2.67% 2.15% 3.03% 1.59%  
Savings and NOW accounts$35,796
 $32,794
 $29,476
 $26,520
 $23,885
 $261,126
 $409,597
 $409,597
Average interest rates0.13% 0.13% 0.12% 0.12% 0.12% 0.11% 0.12%  
Fixed interest rate certificates of deposit$204,972
 $76,373
 $71,685
 $51,232
 $40,523
 $18,399
 $463,184
 $471,479
Average interest rates1.13% 1.69% 2.10% 2.14% 1.72% 1.67% 1.55%  
Variable interest rate certificates of deposit$782
 $369
 $—
 $—
 $—
 $—
 $1,151
 $1,151
Average interest rates0.46% 0.45% —
 —
 —
 —
 0.46%  
 (1) The fair value reported is exclusive of the allocation of the ALLL.
We do not believe that there has been a material change in the nature or categories of our primary market risk exposure, or the particular markets that present the primary risk of loss. As of the date of this report, we do not know of or expect there to be any material change in the general nature of our primary market risk exposure in the near term. As of the date of this report, we do not expect to make material changes in those methods in the near term. We may change those methods in the future to adapt to changes in circumstances or to implement new techniques.

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Report of Independent Registered Public Accounting Firm
Shareholders and Board of Directors
Isabella Bank Corporation
Mount Pleasant, Michigan
We have audited the accompanying consolidated balance sheets ofIsabella Bank Corporationas of December 31, 20102013 and 2009,2012, 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, 2010.2013. We also have auditedIsabella Bank Corporation’sinternal control over financial reporting as of December 31, 2010,2013, based on criteria established in theInternal Control-Integrated Frameworkissued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO)(1992 framework) (the COSO criteria).Isabella Bank Corporation’smanagement is responsible for these consolidated financial statements, for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting. Our responsibility is to express an opinion on these consolidated financial statements and an opinion on the effectiveness ofIsabella Bank Corporation’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.
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, 20102013 and 2009,2012, and the consolidated results of their operations and their cash flows for each of the years in the three-year period ended December 31, 20102013 in conformity with accounting principles generally accepted in the United States of America. Also, in our opinionIsabella Bank Corporationmaintained, in all material respects, effective internal control over financial reporting as of December 31, 2010,2013, based on the criteria established in theInternal Control-Integrated Frameworkissued by the Committee of Sponsoring Organizations (COSO) of the Treadway Commission.COSO criteria.
-s- Rehmann Robson P.C.
Rehmann Robson P.C.
LLC
Saginaw, Michigan
March 8, 20114, 2014


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Consolidated Financial Statements
CONSOLIDATED BALANCE SHEETS
(Dollars in thousands)
         
  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 
         
 December 31
 2013 2012
ASSETS   
Cash and cash equivalents   
Cash and demand deposits due from banks$21,755
 $22,634
Interest bearing balances due from banks19,803
 2,286
Total cash and cash equivalents41,558
 24,920
Certificates of deposit held in other financial institutions580
 4,465
Trading securities525
 1,573
AFS securities (amortized cost of $517,614 in 2013 and $490,420 in 2012)512,062
 504,010
Mortgage loans AFS1,104
 3,633
Loans   
Commercial392,104
 371,505
Agricultural92,589
 83,606
Residential real estate289,931
 284,148
Consumer33,413
 33,494
Gross loans808,037
 772,753
Less allowance for loan and lease losses11,500
 11,936
Net loans796,537
 760,817
Premises and equipment25,719
 25,787
Corporate owned life insurance policies24,401
 22,773
Accrued interest receivable5,442
 5,227
Equity securities without readily determinable fair values18,293
 18,118
Goodwill and other intangible assets46,311
 46,532
Other assets20,605
 12,784
TOTAL ASSETS$1,493,137
 $1,430,639
LIABILITIES AND SHAREHOLDERS’ EQUITY   
Deposits   
Noninterest bearing$158,428
 $143,735
NOW accounts192,089
 181,259
Certificates of deposit under $100 and other savings455,547
 455,546
Certificates of deposit over $100237,702
 237,127
Total deposits1,043,766
 1,017,667
Borrowed funds279,326
 241,001
Accrued interest payable and other liabilities9,436
 7,482
Total liabilities1,332,528
 1,266,150
Shareholders’ equity   
Common stock — no par value 15,000,000 shares authorized; issued and outstanding 7,723,023 shares (including 12,761 shares held in the Rabbi Trust) in 2013 and 7,671,846 shares (including 5,130 shares held in the Rabbi Trust) in 2012137,580
 136,580
Shares to be issued for deferred compensation obligations4,148
 3,734
Retained earnings25,222
 19,168
Accumulated other comprehensive income (loss)(6,341) 5,007
Total shareholders’ equity160,609
 164,489
TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY$1,493,137
 $1,430,639
The accompanying notes are an integral part of these consolidated financial statements.


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CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY
(Dollars in thousands except per share amounts)
                         
        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 
                         
 Common Stock        
 Shares Outstanding Amount Shares to be
Issued for
Deferred
Compensation
Obligations		 Retained
Earnings		 Accumulated
Other
Comprehensive
Income (Loss)		 Totals
Balance, January 1, 20117,550,074
 $133,592
 $4,682
 $8,596
 $(1,709) $145,161
Comprehensive income (loss)—
 —
 —
 10,210
 4,198
 14,408
Issuance of common stock120,336
 3,075
 —
 —
 —
 3,075
Common stock issued for deferred compensation plan39,257
 697
 (773) —
 —
 (76)
Share-based payment awards under equity compensation plan—
 —
 615
 —
 —
 615
Common stock purchased for deferred compensation obligations—
 (426) —
 —
 —
 (426)
Common stock repurchased pursuant to publicly announced repurchase plan(120,441) (2,204) —
 —
 —
 (2,204)
Cash dividends ($0.76 per share)—
 —
 —
 (5,770) —
 (5,770)
Balance, December 31, 20117,589,226
 134,734
 4,524
 13,036
 2,489
 154,783
Comprehensive income (loss)—
 —
 —
 12,206
 2,518
 14,724
Issuance of common stock124,530
 2,898
 —
 —
 —
 2,898
Common stock issued for deferred compensation plan41,676
 814
 (814) —
 —
 —
Common stock transferred from the Rabbi Trust to satisfy deferred compensation obligations—
 619
 (619) —
 —
 —
Share-based payment awards under equity compensation plan—
 —
 643
 —
 —
 643
Common stock purchased for deferred compensation obligations—
 (505) —
 —
 —
 (505)
Common stock repurchased pursuant to publicly announced repurchase plan(83,586) (1,980) —
 —
 —
 (1,980)
Cash dividends ($0.80 per share)—
 —
 —
 (6,074) —
 (6,074)
Balance, December 31, 20127,671,846
 136,580
 3,734
 19,168
 5,007
 164,489
Comprehensive income (loss)—
 —
 —
 12,510
 (11,348) 1,162
Issuance of common stock149,191
 3,618
 —
 —
 —
 3,618
Common stock issued for deferred compensation plan—
 —
 —

—
 —
 —
Common stock transferred from the Rabbi Trust to satisfy deferred compensation obligations—
 140
 (140) —
 —
 —
Share-based payment awards under equity compensation plan—
 —
 554
 —
 —
 554
Common stock purchased for deferred compensation obligations—
 (383) —
 —
 —
 (383)
Common stock repurchased pursuant to publicly announced repurchase plan(98,014) (2,375) —
 —
 —
 (2,375)
Cash dividends ($0.84 per share)—
 —
 —
 (6,456) —
 (6,456)
Balance, December 31, 20137,723,023
 $137,580
 $4,148
 $25,222
 $(6,341) $160,609

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


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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 
             
(Dollars in thousands except per share amounts)
 Year Ended December 31
 2013 2012 2011
Interest income     
Loans, including fees$41,233
 $43,396
 $45,463
AFS securities     
Taxable7,228
 7,555
 6,941
Nontaxable5,132
 4,870
 4,806
Trading securities36
 94
 189
Federal funds sold and other447
 486
 506
Total interest income54,076
 56,401
 57,905
Interest expense     
Deposits7,140
 9,131
 10,935
Borrowings3,881
 4,292
 5,268
Total interest expense11,021
 13,423
 16,203
Net interest income43,055
 42,978
 41,702
Provision for loan losses1,111
 2,300
 3,826
Net interest income after provision for loan losses41,944
 40,678
 37,876
Noninterest income     
Service charges and fees6,836
 6,432
 6,118
Net gain on sale of mortgage loans962
 1,576
 538
Earnings on corporate owned life insurance policies732
 698
 609
Net gain (loss) on sale of AFS securities171
 1,119
 3
Other1,474
 1,705
 950
Total noninterest income10,175
 11,530
 8,218
Noninterest expenses     
Compensation and benefits21,465
 21,227
 19,292
Furniture and equipment4,945
 4,560
 4,497
Occupancy2,653
 2,519
 2,470
AFS securities impairment loss     
Total other-than-temporary impairment loss—
 486
 —
Portion of loss reported in other comprehensive income (loss)—
 (204) —
Net AFS securities impairment loss—
 282
 —
Other8,350
 9,051
 8,271
Total noninterest expenses37,413
 37,639
 34,530
Income before federal income tax expense14,706
 14,569
 11,564
Federal income tax expense2,196
 2,363
 1,354
NET INCOME$12,510
 $12,206
 $10,210
Earnings per share     
Basic$1.63
 $1.61
 $1.35
Diluted$1.59
 $1.56
 $1.31
Cash dividends per basic share$0.84
 $0.80
 $0.76




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


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CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(Dollars in thousands)
 Year Ended December 31
 2013 2012 2011
Net income$12,510
 $12,206
 $10,210
Unrealized gains (losses) on AFS securities     
Unrealized gains (losses) arising during the year(18,971) 3,921
 9,220
Reclassification adjustment for net realized (gains) losses included in net income(171) (1,119) (3)
Reclassification adjustment for impairment loss included in net income—
 282
 —
Net unrealized gains (losses)(19,142) 3,084
 9,217
Tax effect (1)6,257
 (348) (3,719)
Unrealized gains (losses), net of tax(12,885) 2,736
 5,498
Change in unrecognized pension cost on defined benefit pension plan     
Change in unrecognized pension cost arising during the year2,120
 (580) (2,109)
Reclassification adjustment for net periodic benefit cost included in net income208
 251
 138
Net change in unrecognized pension cost2,328
 (329) (1,971)
Tax effect(791) 111
 671
Change in unrealized pension cost, net of tax1,537
 (218) (1,300)
Other comprehensive income (loss), net of tax(11,348) 2,518
 4,198
Comprehensive income (loss)$1,162
 $14,724
 $14,408
 
(1)
See “Note 18 – Accumulated Other Comprehensive Income (Loss)” in the accompanying notes for tax effect reconciliation.
             
  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.


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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)
(Dollars in thousands)
 Year Ended December 31

2013 2012 2011
OPERATING ACTIVITIES     
Net income$12,510
 $12,206
 $10,210
Reconciliation of net income to net cash provided by operations:     
Provision for loan losses1,111
 2,300
 3,826
Impairment of foreclosed assets156
 166
 82
Depreciation2,556
 2,417
 2,521
Amortization of OMSRs522
 787
 714
Amortization of acquisition intangibles221
 260
 299
Net amortization of AFS securities2,028
 2,277
 1,689
AFS securities impairment loss—
 282
 —
Net (gain) loss on sale of AFS securities(171) (1,119) (3)
Net unrealized (gains) losses on trading securities28
 52
 78
Net gain on sale of mortgage loans(962) (1,576) (538)
Net unrealized (gains) losses on borrowings measured at fair value—
 (33) (181)
Increase in cash value of corporate owned life insurance policies(732) (698) (609)
Share-based payment awards under equity compensation plan554
 643
 615
Deferred income tax (benefit) expense(1,208) 616
 389
Origination of loans held-for-sale(53,632) (99,353) (57,584)
Proceeds from loan sales57,123
 100,501
 56,099
Net changes in operating assets and liabilities which provided (used) cash:     
Trading securities1,020
 3,085
 1,049
Accrued interest receivable(215) 621
 (392)
Other assets(122) (2,610) 147
Accrued interest payable and other liabilities1,954
 (1,360) 449
Net cash provided by (used in) operating activities22,741
 19,464
 18,860
INVESTING ACTIVITIES     
Net change in certificates of deposit held in other financial institutions3,885
 4,459
 6,884
Activity in AFS securities     
Sales16,229
 40,677
 8,877
Maturities and calls86,225
 89,112
 69,275
Purchases(131,505) (207,035) (165,017)
Loan principal originations, net(38,503) (27,103) (20,743)
Proceeds from sales of foreclosed assets2,122
 1,594
 2,041
Purchases of premises and equipment(2,488) (3,578) (2,520)
Purchases of corporate owned life insurance policies(1,092) —
 (4,000)
Proceeds from redemption of corporate owned life insurance policies196
 —
 —
Net cash provided by (used in) investing activities(64,931) (101,874) (105,203)

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CONSOLIDATED STATEMENTS OF CASH FLOWS (continued)
(Dollars in thousands)
 Year Ended December 31
 2013 2012 2011
FINANCING ACTIVITIES     
Acceptances and withdrawals of deposits, net$26,099
 $59,503
 $80,825
Increase (decrease) in borrowed funds38,325
 24,898
 21,400
Cash dividends paid on common stock(6,456) (6,074) (5,770)
Proceeds from issuance of common stock3,618
 2,898
 2,302
Common stock repurchased(2,375) (1,980) (1,507)
Common stock purchased for deferred compensation obligations(383) (505) (426)
Net cash provided by (used in) financing activities58,828
 78,740
 96,824
Increase (decrease) in cash and cash equivalents16,638
 (3,670) 10,481
Cash and cash equivalents at beginning of year24,920
 28,590
 18,109
Cash and cash equivalents at end of year$41,558
 $24,920
 $28,590
SUPPLEMENTAL CASH FLOWS INFORMATION:     
Interest paid$11,139
 $13,639
 $16,239
Federal income taxes paid2,093
 2,357
 878
SUPPLEMENTAL NONCASH INVESTING AND FINANCING INFORMATION:     
Transfers of loans to foreclosed assets$1,672
 $1,902
 $1,932


















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


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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands except per share amounts)amounts)

NOTE 1 —
Note 1 – Nature of Operations and Summary of Significant Accounting Policies
Nature of Operations and Summary of Significant Accounting Policies
Basis of Presentation and Consolidation: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”),and Financial Group Information Services, and IB&T Employee Leasing, LLC.Services. All intercompany balances and accounts have been eliminated in consolidation.
Nature of Operations:NATURE OF OPERATIONS:
Isabella Bank Corporation is a financial services holding company offering a wide array of financial products and services in several mid-Michigan counties. ItsOur banking subsidiary, Isabella Bank, offers banking services through 2527 locations, 24 hour banking services locally and nationally through shared automatic teller machines, 24 hour online banking, and direct deposits to businesses, institutions, and individuals. Lending services offered include commercial loans, agricultural loans, residential real estate loans, and consumer loans, student loans, and credit cards.loans. Deposit services include interest and noninterest bearing checking accounts, savings accounts, money market accounts, and certificates of deposit. Other related financial products include trust and investment services, safe deposit box rentals, and credit life insurance. Active competition, principally from other commercial banks, savings banks and credit unions, exists in all of the Corporation’sour principal markets. The Corporation’sOur results of operations can be significantly affected by changes in interest rates or changes in the local economic environment.
Financial Group Information Services provides information technology services to Isabella Bank Corporation and its subsidiaries.Isabella Bank.
See also "Note 19 – Related Party Transactions."
IB&T Employee Leasing provides payroll services, benefit administration, and other human resource services to Isabella Bank Corporation and its subsidiaries.
Use of Estimates:USE OF ESTIMATES:
In preparing consolidated financial statements in conformity with accounting principles generally accepted in the United States of America, management is required towe make estimates and assumptions that affect the reported amounts of assets and liabilities as of the date of the consolidated balance sheet and reported amounts of revenues and expenses during the reporting year. Actual results could differ from those estimates.
Material estimates that are particularly susceptible to significant change in the near term relate to the determination of the allowance for loan losses,ALLL, the fair value of certainavailable-for-saleAFS investment securities, the valuation of real estate acquired in connection with foreclosures or in satisfaction of loans, valuation of goodwill and other intangible assets, and the determinations of assumptions in accounting for the defined benefit pension 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.
Fair Value Measurements: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 CorporationWe may choose to measure eligible items at fair value at specified election dates. Unrealized gains and losses on items for which the fair value measurement option has been elected are reported in earnings at each subsequent reporting date. The fair value option (i) may be applied instrument by instrument, with certain exceptions, allowing the Corporation to record identical financial assets and liabilities at fair value or by another


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’sour policy to maximize the use of observable inputs and minimize the use of unobservable inputs when developing fair value measurements for those financial instruments for which there is an active market. In cases where the market for a financial asset or liability is not active, the Corporation includeswe include appropriate risk adjustments that market participants would make for nonperformance and liquidity risks when developing fair value measurements. Fair value measurements for assets and liabilities for which limited or no observable market data exists are accordingly based primarily upon estimates, are often calculated based on the economic and competitive environment, the characteristics of the asset or liability and other factors. Therefore, the results cannot be determined with precision and may not be realized in an actual sale or immediate settlement of the asset or liability. Additionally, there may be inherent weaknesses in any calculation technique, and changes in the underlying assumptions used, including discount rates and estimates of future cash flows, could significantly affect the results of current or future values.
The Corporation utilizesWe utilize fair value measurements to record fair value adjustments to certain assets and liabilities and to determine fair value disclosures. Investment securitiesavailable-for-sale, AFS and trading securities and certain liabilities are recorded at fair value on a recurring basis. Additionally, from time to time, the Corporationwe may be required to record other assets at fair value on a nonrecurring basis, such as mortgage loansavailable-for-sale, AFS, impaired loans, foreclosed assets, originated mortgage servicing rights,OMSRs, goodwill, and certain other assets and liabilities. These nonrecurring fair value adjustments typically involve the application of lower of cost or market accounting or write downswrite-downs of individual assets.

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Fair Value Hierarchy
Under fair value measurement and disclosure authoritative guidance, the Corporation groupswe group assets and liabilities measured at fair value into three levels, based on the markets in which the assets and liabilities are traded, and the reliability of the assumptions used to determine fair value, based on the prioritization of inputs in the valuation techniques. These levels are:
Level 1:  Valuation is based upon quoted prices for identical instruments traded in active markets.
Level 2:  Valuation is based upon quoted prices for similar instruments in active markets, quoted prices for identical or similar instruments in markets that are not active and model based valuation techniques for which all significant assumptions are observable in the market.
Level 3:  Valuation is generated from model based techniques that use at least one significant assumption not observable in the market. These unobservable assumptions reflect estimates of assumptions that market participants would use in pricing the asset or liability.
Level 1:Valuation is based upon quoted prices for identical instruments traded in active markets.
Level 2:Valuation is based upon quoted prices for similar instruments in active markets, quoted prices for identical or similar instruments in markets that are not active and model based valuation techniques for which all significant assumptions are observable in the market.
Level 3:Valuation is generated from model based techniques that use at least one significant assumption not observable in the market. These unobservable assumptions reflect estimates of assumptions that market participants would use in pricing the asset or liability.
The asset’s or liability’s fair value measurement level within the fair value hierarchy is based on the lowest level of any input that is significant to the fair value measurement. Valuation techniques maximize the use of observable inputs and minimize the use of unobservable inputs. Transfers between measurement levels are recognized at the end of reporting periods.
For a further discussion of fair value considerations, refer to Notes 19 to the consolidated financial statements.“Note 20 – Fair Value.”
Significant Group Concentrations of Credit Risk:SIGNIFICANT GROUP CONCENTRATIONS OF CREDIT RISK
: Most of the Corporation’sour activities conducted are with customers located within the central Michigan area. A significant amount of itsour outstanding loans are secured by commercial and residential real estate. Other than these types of loans, there is no significant concentration to any other industry or any one customer.
Cash and Cash Equivalents:CASH AND CASH EQUIVALENTS:
For purposes of the consolidated statements of cash flows, cash and cash equivalents include cash and balances due from banks, federal funds sold, and other deposit accounts. Generally, federal funds sold are for a one day


31

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
period. The Corporation maintainsWe maintain deposit accounts in various financial institutions which generally exceed federally insured limits or are not insured. Management doesWe do not believe the Company iswe are exposed to any significant interest, credit or other financial risk as a result of these deposits.
Certificates of Deposit Held in Other Financial Institutions:CERTIFICATES OF DEPOSIT HELD IN OTHER FINANCIAL INSTITUTIONS:
Certificates of deposits held in other financial institutions consist of interest bearing certificates of deposit that mature within 3 years and are carried at cost.
Trading Securities:TRADING SECURITIES:
The Corporation engages We engage in trading activities of itsour own accounts. Securities that are held principally for resale in the near term are recorded in the trading assets account at fair value with changes in fair value recorded in noninterest income. Interest income is included in net interest income.
AFS SECURITIES:Available-For-Sale Investment Securities:
All purchases Purchases of investment securities are generally classified asavailable-for-sale. AFS. However, classification of investmentwe may elect to classify securities as either held to maturity or trading may be elected by management of the Corporation.trading. Securities classified asavailable-for-sale AFS are recorded at fair value, with unrealized gains and losses, net of the effect of deferred income taxes, excluded from earnings and reported in other comprehensive income. AuctionIncluded in AFS securities are auction rate money market preferred securitiespreferreds and preferred stocksstocks. These investments are considered equity securities for federal income tax purposes, and as such, no estimated federal income tax impact is expected or recorded. Auction rate money market preferred securities and preferred stockstocks are recorded at fair value, with unrealized gains and losses considered 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 AFS securities are determined using the specific identification method.
InvestmentAFS securities are reviewed quarterly for possibleother-than-temporary impairment (OTTI). OTTI. In determining whether another-than-temporary impairment OTTI exists for debt securities, management mustwe assert that: (a) it doeswe do not have the intent to sell the security; and (b) it is more likely than not itwe will not have to sell the security before recovery of its cost basis. If these conditions are not met, the Corporation mustwe recognize another-than-temporary impairment OTTI charge through earnings for the difference between the debt security’s amortized cost basis and its fair value, and such amount is included in noninterest income. For debt securities that do not meet the above criteria, and the Corporation doeswe do not expect to recover the security’s amortized cost basis, the security is consideredother-than-temporarily impaired. For these debt securities, the Corporation separateswe separate the total impairment into the credit risk loss component and the amount of the loss related to market and other risk factors. In order to determine the amount of the credit loss for a debt security, the Corporation calculateswe calculate the recovery value by performing a discounted cash flow analysis based on the current cash flows and future cash flows management expectswe expect to recover. The amount of the totalother-than-temporary impairment OTTI related to the credit risk is recognized in earnings and is included in noninterest income. The amount of the totalother-than-temporary impairment OTTI related to other risk factors is recognized as a component of other comprehensive income. For debt securities that have recognized another-than-temporary impairment OTTI through earnings, if through subsequent evaluation there is a significant increase in the cash flow expected, the difference between the amortized cost basis and the cash flows expected to be collected is accreted as interest income.

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AFS equity securities are reviewed forother-than-temporary impairment OTTI at each reporting date. This evaluation considers a number of factors including, but not limited to, the length of time and extent to which the fair value has been less than cost, the financial condition and near term prospects of the issuer, and management’sour ability and intent to hold the securities until fair value recovers. If it is determined that management doeswe do 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:
Loans that management haswe have the intent and ability to hold for the foreseeable future or until maturity or payoff are reported at their outstanding principal balance adjusted for any charge-offs, the allowance for loans losses,ALLL, and any deferred fees or costs on originated loans. Interest income on loans is accrued over the term of the loan based on the principal amount outstanding. Loan origination fees and certain direct loan origination costs are capitalized and recognized as a component of interest income over the term of the loan using the constantlevel yield method.
The accrual of interest on mortgageagricultural, commercial and commercialmortgage loans is discontinued at the time the loan is 90 days or more past due unless the credit is well-securedwell secured and in the process of collection. Credit card loans and other personalConsumer 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 offcharged-off at an earlier date if collection of principal or interest is considered doubtful.
For loans that are placed on non-accrualnonaccrual status or charged off,charged-off, all interest accrued in the current calendar year, but not collected, is reversed against interest income while interest accrued in prior calendar years, but not collected is charged against the allowance for loan losses.ALLL. The interest on these loans is accounted for on the cash-basis, until qualifying for return to accrual status. Loans are returned to accrual status when all principal and interest amounts contractually due are brought current and future payments are reasonably assured. For impaired loans not classified as nonaccrual, interest income continues to be accrued over the term of the loan based on the principal amount outstanding.
Allowance for Loan Losses:ALLOWANCE FOR LOAN LOSSES:
The allowance for loan lossesALLL is established as losses are estimated to have occurred through a provision for loan losses charged to earnings. Loan losses are charged against the allowance when management believeswe believe the uncollectibilityuncollectability of the loan balance is confirmed. Subsequent recoveries, if any, are credited to the allowance.
The allowance for loan losses is evaluatedWe evaluate the ALLL on a regular basis by management and is based upon management’sour periodic review of the collectibilitycollectability of the loans in light of historical experience, the nature and volume of the loan portfolio, adverse situations that may affect the borrower’s ability to repay, estimated value of any underlying collateral and prevailing economic conditions. This evaluation is inherently subjective as it requires estimates that are susceptible to significant revision as more information becomes available.
The allowanceALLL consists of specific, general, and unallocated components. The specific component relates to loans that are deemed to be impaired. For such loans that are also analyzed for specific allowance allocations, an allowance is established when the discounted cash flows or collateral value or observable market price of the impaired loan is lower than the carrying value of that loan. The general component covers non classified loans and is based on historical loss experience. An unallocated component is maintained to cover uncertainties that management believeswe believe affect itsour estimate of probable losses based on qualitative factors. The unallocated component of the allowance reflects the margin of imprecision inherent in the underlying assumptions used in the methodologies for estimating specific and general losses in the portfolio.
Loans may be classified as impaired if they meet one or more of the following criteria:
1. There has been a chargeoff of its principal balance;
2. The loan has been classified as a troubled debt restructuring; or
3. The loan is in nonaccrual status.


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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
1.There has been a charge-off of its principal balance;
2.The loan has been classified as a TDR; or
3.The loan is in nonaccrual status.
Impairment is measured on a loan by loan basis for 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 loans for impairment allocations and related disclosures.
Loans Held for Sale:LOANS HELD FOR SALE:
Mortgage loans originated and intendedheld for sale inon the secondary market are carried at the lower of cost or fair value as determined by aggregating outstanding commitments from investors or current investor yield requirements. Net unrealized losses, if any, arewould be recognized throughas a valuation allowancecomponent of which the provision is accounted for in other noninterest expenses in the consolidated statements of income.
expenses.
Mortgage loans held for sale are sold with the mortgage servicing rights retained by the Corporation.us. The carrying value of mortgage loans sold is reduced by the cost allocated to the associated mortgage servicing rights. Gains or losses on sales of mortgage loans are recognized based on the difference between the selling price and the carrying value of the related mortgage loans sold.
Transfers of Financial Assets: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

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surrendered when 1) the assets have been legally isolated from the Corporation,us, 2) the transferee obtains the right (free of conditions that constrain it from taking advantage of the right) to pledge or exchange the transferred assets, and 3) the Corporation doeswe do not maintain effective control over the transferred assets through an agreement to repurchase them before their maturity. Other than servicing, as disclosed in Note 5, the Corporation haswe have 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:
Servicing assets are recognized as separate assets when rights are acquired through purchase or through sale of financial assets. The Corporation hasWe have no purchased servicing rights. For sales of mortgage loans, a portion of the cost of originating the loan is allocated to the servicing right based on relative fair value. Fair value is based on market prices for comparable mortgage servicing contracts, when available, or alternatively, is based on a valuation model that calculates the present value of estimated future net servicing income. The valuation model incorporates assumptions that market participants would use in estimating future net servicing income, such as the cost to service, the discount rate, the custodial earnings rate, an inflation rate, ancillary income, prepayment speeds and default rates and losses.
Servicing assets are evaluated for impairment based upon the fair value of the rights as compared to amortized cost. Impairment is determined by stratifying rights into tranches based on predominant risk characteristics, such as interest rate, loan type, and investor type. Impairment is recognized through a valuation allowance for an individual tranche, to the extent that fair value is less than the capitalized amount for the tranche. If the Corporationwe later determinesdetermine that all or a portion of the impairment no longer exists for a particular tranche, a reduction of the valuation allowance may be recorded as an increase to income. Capitalized servicing rights are reported in other assets and are amortized into noninterest income in proportion to, and over the period of, the estimated future net servicing income of the underlying financial assets.


34

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
The unpaid principal balance of mortgages serviced for others was $293,665 and $303,351 with capitalized servicing rights of $2,555 and $2,285 at December 31, 2013 and 2012, respectively.
Servicing fee income is recorded for fees earned for servicing loans for others. The fees are based on a contractual percentage of the outstanding principal; or a fixed amount per loan and are recorded as income when earned. We recorded servicing fee revenue of $737, $757, and $732 related to residential mortgage loans serviced for others during 2013, 2012, and 2011, respectively and is included in other noninterest income.
Loans Acquired Through Transfer:LOANS ACQUIRED THROUGH TRANSFER:
Authoritative accounting guidance related to acquired loans requires that a valuation allowance for loans acquired in a transfer, including in a business combination, reflect only losses incurred after acquisition, and should not be recorded at acquisition. This standard applies to any loan acquired in a transfer that shows evidence of credit quality deterioration since it was originated.
Foreclosed Assets:FORECLOSED ASSETS:
Assets acquired through, or in lieu of, loan foreclosure are held for sale and are initially recorded at the lower of the Corporation’sour carrying amount or fair value less estimated selling costs at the date of transfer, establishing a new cost basis. Any write downswrite-downs based on the asset’s fair value at the date of acquisition are charged to the allowance for loan losses.ALLL. After foreclosure, property held for sale is carried at the lower of the new cost basis or fair value less costs to sell. Impairment losses on property to be held and used are measured at the amount by which the carrying amount of property exceeds its fair value. Costs relating to holding these assets are expensed as incurred. Valuations areWe periodically performed by management,perform valuations and any subsequent write-downs are recorded as a charge to operations, if necessary, to reduce the carrying value of a property to the lower of the Corporation’sour carrying amount or fair value less costs to sell. Foreclosed assets of $2,067$1,412 and $1,157$2,018 as of December 31, 2013 and 2012, respectively, are included in Other Assets on the accompanying consolidated balance sheets.other assets.
Premises and Equipment:PREMISES AND EQUIPMENT:
Land is carried at cost. Buildings and equipment are carried at cost, less accumulated depreciation which is computed principally by the straight-line method based upon the estimated useful lives of the related assets, which range from 3 to 40 years. Major improvements are capitalized and appropriately amortized based upon the useful lives of the related assets or the expected terms of the leases, if shorter, using the straight-line method. Maintenance, repairs and minor alterations are charged to current operations as expenditures occur. ManagementWe annually reviewsreview these assets to determine whether carrying values have been impaired.
Fdic Insurance Premium:
In 2009, the Corporation was required to prepay quarterly FDIC risk-basedINSURANCE PREMIUM: Included in other assets were prepaid FDIC assessments for the fourth quarter of 2009$0 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$1,804 as of December 31, 20102013 and 2009, respectively, have been recorded as a prepaid asset in the accompanying consolidated balance sheets in Other Assets, and will be expensed on a ratable basis quarterly through December 31, 2012.2012, respectively.
Equity Securities Without Readily Determinable Fair Values:EQUITY SECURITIES WITHOUT READILY DETERMINABLE FAIR VALUES:
Included in equity securities without readily determinable fair values are restricted securities, whichour holdings in FHLB stock and FRB stock as well as our ownership interests in Corporate Settlement Solutions and Valley Financial Corporation. Our investment in Corporate Settlement Solutions, a title insurance company, was made in the 1st quarter 2008. We are carried at cost,not the managing entity of Corporate Settlement Solutions, LLC, and investmentsaccount for our investment in nonconsolidated entities accounted forthat entity under the equity method of accounting. Valley Financial Corporation is the parent company of 1st State Bank in Saginaw, Michigan, which is a bank that opened in 2005. We made investments in Valley Financial Corporation in 2004 and in 2007.


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Equity securities without readily determinable fair values consist of the following as of December 31:
         
  2010  2009 
 
Federal Home Loan Bank Stock $7,596  $7,960 
Investment in Corporate Settlement Solutions  6,793   6,782 
Federal Reserve Bank Stock  1,879   1,879 
Investment in Valley Financial Corporation  1,000   1,000 
Other  296   300 
         
Total $17,564  $17,921 
         
 2013 2012
FHLB Stock$8,100
 $7,850
Corporate Settlement Solutions, LLC6,970
 7,040
FRB Stock1,879
 1,879
Valley Financial Corporation1,000
 1,000
Other344
 349
Total$18,293
 $18,118
Stock Compensation Plans:EQUITY COMPENSATION PLAN:
At December 31, 2010,2013, the Isabella Bank Corporation and Related Companies Deferred CompensationDirectors Plan for Directors (the “Directors Plan”) had 224,663185,311 shares eligible to be issued to participants, for which an associated grantor trust (Rabbi Trust)the Rabbi Trust held 32,68612,761 shares. The CorporationWe had 216,905170,566 shares to be issued in 2009,2012, with 30,6265,130 shares held in the Rabbi Trust. Compensation costs relating to share based payment transactions are recognized inas the consolidated financial statements andservices are rendered, with the cost is measured based on the fair value of the equity or liability instruments issued. The Corporation hasissued (see “Note 17 – Benefit Plans”). We have no other share basedequity-based compensation plans.
Corporate Owned Life Insurance:CORPORATE OWNED LIFE INSURANCE:
The Corporation has We have purchased life insurance policies on key members of management. In the event of death of one of these individuals, the Corporationwe would receive a specified cash payment equal to the face value of the policy. Such policies are recorded at their cash surrender value, or the amount that can be realized on the balance sheet dates. Increases in cash surrender value in excess of single premiums paid are reported as Other Noninterest Income.other noninterest income.
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, 20102013 and 2009,2012, the present value of the post retirement benefits promisedpayable by the Corporationus to the covered employees was estimated to be $2,573$2,699 and $2,505,$2,657, respectively, and is included in Accrued Interestaccrued interest payable and Other Liabilities on the consolidated balance sheets.other liabilities. The periodic policy maintenance costs were $68$75, $24, and $45$60 for 20102013, 2012, and 2009, respectively.2011, respectively and is included in other noninterest expenses.
Acquisition Intangibles and Goodwill:ACQUISITION INTANGIBLES AND GOODWILL:
The Corporation We previously acquired branch facilities and related deposits in business combinations accounted for as a purchase. The acquisitions included amounts related to the valuation of customer deposit relationships (core deposit intangibles). Core deposit intangibles arising from acquisitions are included in Other Assetsgoodwill and other intangible assets are being amortized over their estimated lives.lives and evaluated for potential impairment on at least an annual basis. Goodwill which is included in Other Assets, represents the excess of purchase price over identifiable assets, is not amortized but is evaluated for impairment on at least annually, or on an interim basisannual basis. Acquisition intangibles and goodwill are typically qualitatively evaluated to determine if an event occurs or circumstances change that wouldit is more likely than not reducethat the carrying balance is impaired. If it is determined that the carrying balance is more likely than not to be impaired, we perform a cash flow valuation to determine the extent of the potential impairment. This valuation method requires a significant degree of our judgment. In the event the projected undiscounted net operating cash flows for these intangible assets are less than the carrying value, the asset is recorded at fair value ofas determined by the reporting unit below the carrying value.valuation model.
Off Balance Sheet Credit Related Financial Instruments:OFF BALANCE SHEET CREDIT RELATED FINANCIAL INSTRUMENTS:
In the ordinary course of business, the Corporation haswe have entered into commitments to extend credit, including commitments under credit card arrangements, home equity lines of credit, commercial letters of credit, and standby letters of credit. Such financial instruments are recorded only when funded.


36

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Federal Income Taxes:FEDERAL INCOME TAXES:
Deferred income tax assets and liabilities are determined using the liability (or balance sheet) method. Under this method, the net deferred tax assets or liability is determined based on the tax effects of the temporary differences between the book and tax bases on the various balance sheet assets and liabilities and gives current recognition to changes in tax rates and laws. ValuationsValuation 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 itsWe analyze our 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 hasWe have also elected to retain itsour existing accounting policy with respect to the treatment of interest and penalties attributable to income taxes, and continuescontinue to reflect any charges for such, to the extent they arise, as a component of itsour noninterest expensesexpenses.
Marketing Costs:MARKETING COSTS:
Marketing costs are expensed as incurred (see “Note 10)11 – Other Noninterest Expenses”).
RECLASSIFICATIONS: Certain amounts reported in the 2012 and 2011 consolidated financial statements have been reclassified to conform with the 2013 presentation.

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Note 2 – Computation of Earnings Per Share:Share
Basic earnings per share represents income available to common stockholdersshareholders divided by the weighted — average number of common shares issuedoutstanding during the 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.issued. Potential common shares that may be issued by the Corporation relate solely to outstanding shares in the Corporation’s Directors Plan (see , see "Note 16)17 – Benefit Plans."
Earnings per common share have been computed based on the following:
             
  2010  2009  2008 
 
Average number of common shares outstanding for basic calculation  7,541,676   7,517,276   7,492,677 
Average potential effect of shares in the Deferred Director fee plan(1)  187,744   181,319   184,473 
             
Average number of common shares outstanding used to calculate diluted earnings per common share  7,729,420   7,698,595   7,677,150 
             
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 
             
 2013 2012 2011
Average number of common shares outstanding for basic calculation7,694,392
 7,604,303
 7,572,841
Average potential effect of shares in the Directors Plan (1)168,948
 195,063
 194,634
Average number of common shares outstanding used to calculate diluted earnings per common share7,863,340
 7,799,366
 7,767,475
Net income$12,510
 $12,206
 $10,210
Earnings per share     
Basic$1.63
 $1.61
 $1.35
Diluted$1.59
 $1.56
 $1.31
(1)
Exclusive of shares held in the Rabbi Trust
Note 3 – Accounting Standards Updates
Reclassifications:Recently Adopted Accounting Standards Update
ASU No. 2013-02: “Comprehensive Income (Topic 220): Reporting of Amounts Reclassified Out of Accumulated Other Comprehensive Income”
Certain amounts reported in the 2009 and 2008 consolidated financial statements have been reclassified to conform with the 2010 presentation.
Recent Accounting Pronouncements:
FASBIn February 2013, ASU No. 2013-02 amended ASC Topic 310, “Receivables.” In April 2010, ASC Topic 310 was amended by Accounting Standards Update (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 Emerging Issues Task”),220, “Comprehensive Income” to clarify that individual loans accounted for


37

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 newrequire disclosures related to troubled debt restructurings which are not required to be reported untilreclassifications out of AOCI in one place. The ASU also requires the second quarterdisclosure of 2011.reclassifications out of AOCI by component. 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 newauthoritative guidance has significantly expanded the Corporation’s consolidated financial statement disclosures. (See Note 4)
FASB ASC Topic 350, “Intangibles — Goodwill and Other.” In December 2010, ASC Topic 350 was amended by ASUNo. 2010-28, “When to Perform Step 2 of the Goodwill Impairment Test for Reporting Units with Zero or Negative Carrying Amounts (a consensus of the FASB Emerging Issues Task Force)”, to address questions related to the testing for goodwill impairments for entities with goodwill with zero or negative carrying amounts. The new guidance is effective for interim and annual periods beginning after December 15, 20102012 and isdid not anticipated to have anya financial impact on the Corporation’s consolidated financial statements.
FASB ASC Topic 715, “Compensation — Retirement Benefits.” In January 2010, ASC Topic 715 was amended by ASUNo. 2010-06, “Improving Disclosures about Fair Value Measurements”, to changeCorporation, but increased the terminology for major categorieslevel of assets to classes of assets to correspond with the amendments to ASC Topic 820 (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 financial statements.
FASB ASC Topic 805, “Business Combinations.” In December 2010, ASC Topic 805 was amended by ASUNo. 2010-29,“Disclosure of Supplementary Pro Forma Information for Business Combinations (a consensus of the FASB Emerging Issues Task Force”, to address diversity in practice about the interpretation of the pro forma revenue and earnings disclosure requirements for business combinations. The new guidance is effective for business combinations for which the acquisition date is on or after the beginning of the first annual reporting period on or after December 15, 2010 and is not anticipated to impact the Corporation’s consolidated financial statements.
FASB ASC Topic 810, “Consolidation.” 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


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 was effective January 1, 2010 and had no impact on the Corporation’s consolidated financial statements.
FASB ASC Topic 820, “Fair Value Measurements and Disclosures.” In January 2010, ASC Topic 820 was amended by ASUNo. 2010-06, to add new disclosures for: (1) significant transfers in and out of Level 1 and Level 2 fair value measurements and the reasons for the transfers and (2) presenting separately information about purchases, sales, issuances and settlements for Level 3 fair value instruments (as opposed to reporting activity as net).
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 valuation techniques and inputs used to measure fair value for both recurring and nonrecurring fair value measurements.
The new authoritative guidance was effective for interim and annual 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 new guidance did not, and is not anticipated to, have a significant impact on the Corporation’s consolidated financial statements.
FASB ASC Topic 860, “Transfers and Servicing.” New authoritative accounting guidance under ASC Topic 860 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 financial assets. The new authoritative accounting guidance eliminates the concept of a “qualifying special 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 was effective January 1, 2010 and had no significant impact on the Corporation’s consolidated financial statements.AOCI (see "Note 18 – Accumulated Other Comprehensive Income (Loss)").
Note 4 – Trading Securities
NOTE 2 —Trading Securities
Trading securities, at fair value, consist of the following investments at December 31:31:
         
  2010  2009 
 
States and political subdivisions $5,837  $9,962 
Mortgage-backed  —   3,601 
         
Total
 $5,837  $13,563 
         
 2013 2012
States and political subdivisions$525
 $1,573
Included in the net trading losses of $94$28 during 2010,2013, were $74$6 of net unrealized trading losses on securities that relate to the Corporation’swere held in our trading portfolio as of December 31, 2010.2013. Included in net trading gainslosses of $80$52 during 2009,2012, were $38$18 of net unrealized trading gainslosses on securities that relate to the Corporation’swere held in our trading portfolio as of December 31, 2009.2012.


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Note 5 – AFS Securities
NOTE 3 —Available-for-Sale Investment Securities
The amortized cost and fair value ofavailable-for-saleAFS securities investment securities,, with gross unrealized gains and losses, are as follows as of December 31:
                 
  2010 
     Gross
  Gross
    
  Amortized
  Unrealized
  Unrealized
  Fair
 
  Cost  Gains  Losses  Value 
 
Government sponsored enterprises $5,394  $10  $—  $5,404 
States and political subdivisions  167,328   3,349   960   169,717 
Auction rate money market preferred  3,200   —   335   2,865 
Preferred stocks  7,800   —   864   6,936 
Mortgage-backed  101,096   1,633   514   102,215 
Collateralized mortgage obligations  44,617   103   1,133   43,587 
                 
Total
 $329,435  $5,095  $3,806  $330,724 
                 
                 
  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 pledgedavailable-for-sale and trading securities in the following amounts as of December 31:
         
  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  14,626   20,054 
         
Total
 $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)
 2013

Amortized
Cost		 Gross
Unrealized
Gains		 Gross
Unrealized
Losses		 Fair
Value
Government sponsored enterprises$24,860
 $7
 $1,122
 $23,745
States and political subdivisions200,323
 5,212
 3,547
 201,988
Auction rate money market preferred3,200
 —
 623
 2,577
Preferred stocks6,800
 20
 993
 5,827
Mortgage-backed securities147,292
 657
 3,834
 144,115
Collateralized mortgage obligations135,139
 1,016
 2,345
 133,810
Total$517,614
 $6,912
 $12,464

$512,062
 2012

Amortized
Cost		 Gross
Unrealized
Gains		 Gross
Unrealized
Losses		 Fair
Value
Government sponsored enterprises$25,668
 $108
 $—
 $25,776
States and political subdivisions174,118
 9,190
 565
 182,743
Auction rate money market preferred3,200
 —
 422
 2,778
Preferred stocks6,800
 —
 437
 6,363
Mortgage-backed securities152,256
 3,199
 110
 155,345
Collateralized mortgage obligations128,378
 2,627
 —
 131,005
Total$490,420
 $15,124
 $1,534
 $504,010
The amortized cost and fair value ofavailable-for-saleAFS securities securities by contractual maturity at December 31, 20102013 are as follows:
                         
  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 
                         
 Maturing Securities with Variable Monthly Payments or Noncontractual Maturities  

Due in
One Year
or Less		 After One
Year But
Within
Five Years		 After Five
Years But
Within
Ten Years		 After
Ten Years		  Total
Government sponsored enterprises$—
 $72
 $24,788
 $—
 $—
 $24,860
States and political subdivisions930
 37,672
 96,749
 64,972
 —
 200,323
Auction rate money market preferred—
 —
 —
 —
 3,200
 3,200
Preferred stocks—
 —
 —
 —
 6,800
 6,800
Mortgage-backed securities—
 —
 —
 —
 147,292
 147,292
Collateralized mortgage obligations—
 —
 —
 —
 135,139
 135,139
Total amortized cost$930
 $37,744
 $121,537
 $64,972
 $292,431
 $517,614
Fair value$961
 $38,867
 $122,637
 $63,268
 $286,329
 $512,062
Expected maturities for government sponsored enterprises and states and political subdivisions may differ from contractual maturities because issuers may have the right to call or prepay obligations.
As auction rate money market preferred and preferred stocks have continual call dates, they are not reported by a specific maturity group. Because of their variable monthly payments, auction rate money market preferreds, preferred stocks, mortgage-backed securities and collateralized mortgage obligations are not reported by a specific maturity group.

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A summary of the activity related to the salesales ofavailable-for-saleAFS securities debt securities is was as follows during the years ended December 31:31:
             
  2010  2009  2008 
 
Proceeds from sales of securities $18,303  $32,204  $6,096 
             
Gross realized gains $351  $648  $24 
Gross realized losses  (3)  —   — 
             
Net realized gains $348  $648  $24 
             
Applicable income tax expense $118  $220  $8 
             
 2013 2012 2011
Proceeds from sales of AFS securities$16,229
 $40,677
 $8,877
Gross realized gains (losses)$171
 $1,119
 $3
Applicable income tax expense (benefit)$58
 $380
 $1
The cost basis used to determine the realized gains or losses of AFS securities sold was the amortized cost of the individual investment security as of the trade date.


41

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Information pertaining toavailable-for-saleAFS securities securities with gross unrealized losses at December 31 aggregated by investment category and length of time that individual securities have been in a continuous loss position, follows:
 2013
 Less Than Twelve Months Twelve Months or More  

Gross
Unrealized
Losses		 Fair
Value		 Gross
Unrealized
Losses		 Fair
Value		 Total
Unrealized
Losses
Government sponsored enterprises$1,122
 $22,873
 $—
 $—
 $1,122
States and political subdivisions2,566
 42,593
 981
 6,115
 3,547
Auction rate money market preferred—
 —
 623
 2,577
 623
Preferred stocks—
 —
 993
 2,807
 993
Mortgage-backed securities2,424
 101,816
 1,410
 21,662
 3,834
Collateralized mortgage obligations2,345
 84,478
 —
 —
 2,345
Total$8,457
 $251,760
 $4,007
 $33,161
 $12,464
Number of securities in an unrealized loss position:  182
   19
 201
 2012
 Less Than Twelve Months Twelve Months or More  

Gross
Unrealized
Losses		 Fair
Value		 Gross
Unrealized
Losses		 Fair
Value		 Total
Unrealized
Losses
States and political subdivisions$80
 $5,019
 $485
 $2,352
 $565
Auction rate money market preferred—
 —
 422
 2,778
 422
Preferred stocks—
 —
 437
 3,363
 437
Mortgage-backed securities110
 25,499
 —
 —
 110
Total$190
 $30,518
 $1,344
 $8,493
 $1,534
Number of securities in an unrealized loss position:  15
   6
 21
                     
  December 31, 2010 
  Less Than Twelve Months  Over Twelve Months    
  Gross
     Gross
     Total
 
  Unrealized
  Fair
  Unrealized
  Fair
  Unrealized
 
  Losses  Value  Losses  Value  Losses 
 
States and political subdivisions $960  $29,409  $—  $—  $960 
Auction rate money market preferred  —   —   335   2,865   335 
Preferred stock  —   —   864   2,936   864 
Mortgage-backed  514   38,734   —   —   514 
Collateralized mortgage obligations  1,133   33,880   —   —   1,133 
                     
Total
 $2,607  $102,023  $1,199  $5,801  $3,806 
                     
Number of securities in an unrealized loss position:
      82       4   86 
                     
                     
  December 31, 2009 
  Less Than Twelve Months  Over Twelve Months    
  Gross
     Gross
     Total
 
  Unrealized
  Fair
  Unrealized
  Fair
  Unrealized
 
  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 
Auction rate money market preferred  —   —   227   2,973   227 
Preferred stocks  —   —   746   3,054   746 
Mortgage-backed  119   25,395   —   —   119 
Collateralized mortgage obligations  192   10,104   —   —   192 
                     
Total
 $2,889  $54,918  $1,027  $8,294  $3,916 
                     
Number of securities in an unrealized loss position:
      39       8   47 
                     
The Corporation 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 uncertainty, the trading for these securities has been limited. As a result of the limited trading of these securities, $7,800 converted to preferred stock with debt like characteristics in 2009.
Due to the limited trading activity of these securities, the fair values were estimated utilizing a discounted cash flow analysis as of December 31, 20102013 and December 31, 2009. These analyses considered creditworthiness of the counterparty, the timing of expected future cash flows, and 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 securities interest rates, they are currently lower than the offering 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 the underlying credit quality of the security. Additionally, none of these securities are deemed to be below investment grade, and management does not intend to sell the securities in an unrealized loss position, and it is more likely than not that the Corporation will not have to sell the securities before recovery of their cost basis. As a result, the Corporation has not recognized another-than-temporary2012 impairment related to these declines in fair value.


42

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
As of December 31, 2010 and December 31, 2009, management, we conducted an analysis to determine whether allany securities currently in an unrealized loss position including auction rate money market preferred securities and preferred stocks, should be consideredother-than-temporarily-impairedother-than-temporarily (OTTI). impaired. Such analyses considered, among other factors, the following criteria:
Has the value of the investment declined more than what is deemed to be reasonable based on a risk and maturity adjusted discount rate?
Is the investment credit rating below investment grade?
Is it probable the issuer will be unable to pay the amount when due?
Is it more likely than not that we will have to sell the security before recovery of its cost basis?
Has the duration of the investment been extended?
During the three month period ended March 31, 2012, we had one state issued student loan auction rate AFS investment security (which is included in states and political subdivisions) that was downgraded by Moody's from A3 to Caa3. As a result of this downgrade, we engaged the services of an independent investment valuation firm to estimate the amount of credit losses (if any) related to this particular issue as of March 31, 2012. The evaluation calculated a range of estimated credit losses utilizing two different bifurcation methods:
1) Discounted Cash Flow Method
2) Credit Yield Analysis Method

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The two methods were then weighted, with a higher weighting applied to the Discounted Cash Flow Method, to determine the estimated credit related impairment. As a result of this analysis, we recognized an OTTI of $282 in earnings in the three month period ended March 31, 2012.
A summary of key valuation assumptions used in the aforementioned analysis as of March 31, 2012, follows:
 • Has the value of the investment declined more than what is deemed to be reasonable based on a risk and maturity adjusted discount rate?Discounted Cash Flow Method
Ratings
FitchNot Rated
Moody'sCaa3
S&PA
SenioritySenior
Discount rateLIBOR + 6.35%
 
 • Is the investment credit rating below investment grade?Credit Yield Analysis Method
Credit discount rateLIBOR + 4.00%
Average observed discounts based on closed transactions• Is it probable that the issuer will be unable to pay the amount when due?
• Is it more likely than not that the Corporation will not have to sell the security before recovery of its cost basis?
• Has the duration of the investment been extended?14.00%
To test for additional impairment of this security as of December 31, 2013, we obtained another investment valuation (from the same firm engaged to perform the initial valuation as of March 31, 2012) as of December 31, 2013. Based on our analysis, no additional OTTI was indicated as of December 31, 2013.
The following table provides a roll-forward of credit related impairment recognized in earnings for the Corporation’syears ended December 31:
 2013 2012 2011
Balance at beginning of year$282
 $—
 $—
Additions to credit losses for which no previous OTTI was recognized—
 282
 —
Balance at end of year$282
 $282
 $—
Based on our analysis using the above criteria, the fact that management haswe have asserted that it doeswe do not have the intent to sell theseAFS securities in an unrealized loss position, and thatconsidering it is more likely than not the Corporationunlikely that we will not have to sell theAFS securities in an unrealized loss position before recovery of their cost basis, management doeswe do not believe that the values of any other AFS securities areother-than-temporarily impaired as of December 31, 20102013, or 2009.December 31, 2012.
Note 6 – Loans and ALLL
NOTE 4 —Loans and Allowance for Loan Losses
The Corporation grantsWe grant commercial, agricultural, consumerresidential real estate, and residentialconsumer loans to customers situated primarily in Clare, Gratiot, Isabella, Gratiot, Mecosta, Midland, Western Saginaw, Montcalm, and Southern ClareSaginaw counties in Michigan. The ability of the borrowers to honor their repayment obligations is often dependent upon the real estate, agricultural, light manufacturing, retail, gaming, and tourism, higher education, and general economic conditions of this region. Substantially all of theour consumer and residential mortgagereal estate loans are secured by various items of property, while commercial loans are secured primarily by real estate, business assets, and personal guarantees; a portion of loans are unsecured.
A summaryLoans that we have the intent and ability to hold in our portfolio are reported at their outstanding principal balance adjusted for any charge-offs, the ALLL, and any deferred fees or costs. Interest income on loans is accrued over the term of the major classifications of loans is as follows as of December 31:
         
  2010  2009 
 
Mortgage loans on real estate        
Residential 1-4 family $207,749  $207,560 
Commercial  239,810   224,176 
Agricultural  44,246   38,236 
Construction and land development  12,250   13,268 
Second mortgages  26,712   34,255 
Equity lines of credit  37,318   30,755 
         
Total mortgage loans  568,085   548,250 
Commercial and agricultural loans        
Commercial  109,042   116,098 
Agricultural production  27,200   26,609 
         
Total commercial and agricultural loans  136,242   142,707 
Consumer installment loans  30,977   32,359 
         
Total loans  735,304   723,316 
Less: allowance for loan losses  12,373   12,979 
         
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:
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 betweenprincipal amount outstanding. Loan origination fees and certain direct loan origination costs are capitalized and recognized as a component of interest income over 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 analysisterm of the loan portfoliousing the level yield method.
The accrual of interest on commercial, agricultural, and residential real estate loans is typically discontinued at the time the loan is 90 days or more past due unless the credit is well-secured and in the process of collection. Consumer loans are typically charged-off no later than 180 days past due. Past due status is based on contractual terms of the loan. In all cases, loans are placed on nonaccrual or charged-off at an earlier date if collection of principal or interest is considered doubtful.
For loans that are placed on nonaccrual status or charged-off, all interest accrued in the current calendar year, but not collected, is reversed against interest income while interest accrued in prior calendar years, but not collected, is charged against the ALLL. Loans are typically returned to accrual status after six months of continuous performance. For impaired loans not

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classified as nonaccrual, interest income continues to be accrued over the preceding three years.term of the loan based on the principal amount outstanding.
Commercial and agricultural loans include loans for commercial real estate, commercial operating loans, farmland and agricultural production, stateand states and political subdivisions, and commercial operating loans. The largest concentration of commercial loans is


44

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
commercial real estate.subdivisions. Repayment of commercialthese loans is often dependent upon the successful operation and management of a business; thus, these loans generally involve greater risk than other types of lending. The Corporation minimizes itsbusiness. We minimize our risk by limiting the amount of loanscredit exposure to any one borrower to $12,500.$12,500. Borrowers with credit needs of more than $12,500$12,500 are serviced through the use of loan participations with other commercial banks. All commercialCommercial and agricultural real estate loans generally require loan to valueloan-to-value limits of less than 80%. Depending upon the type of loan, past credit history, and current operating results, the Corporationwe may require the borrower to pledge accounts receivable, inventory, and fixed assets.property and equipment. Personal guarantees are generally required from the owners of closely held corporations, partnerships, and sole proprietorships. In addition, the Corporation requireswe require annual financial statements, preparesprepare cash flow analyses, and reviewsreview credit reports as deemed necessary.
First and second residential real estate mortgages are the single largest category of loans. The Corporation offersWe offer adjustable rate mortgages, fixed rate balloon mortgages, construction loans, 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.Freddie Mac. Fixed rate residential mortgagereal estate loans with an amortization of 15 years or less may be held in the Corporation’sour portfolio, held for future sale, or sold upon origination. Factors used in determining when to sell these mortgages include management’s judgment aboutWe consider the direction of interest rates, the Corporation’s need for fixed rate assetssensitivity of our balance sheet to changes in the management of its interest rate sensitivity,rates, and overall loan demand.demand to determine whether or not to sell these loans to Freddie Mac.
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.
LendingOur lending policies generally limit the maximum loan to valueloan-to-value ratio on residential mortgagesreal estate loans to 95% of the lower of the appraised value of the property or the purchase price, with the condition that private mortgage insurance is required on loans with loan to valueloan-to-value ratios in excess of 80%. Substantially all loans upon origination have a loan to value ratio of less than 80%. Underwriting criteria for residential real estate loans include: evaluation of the borrower’s ability to make monthly payments, the value of the property securing the loan, ensuring the payment of principal, interest, taxes, and hazard insurance does not exceed 28% of a borrower’s gross income, all debt servicing does not exceed 36% of income, acceptable credit reports, verification of employment, income, and financial information. Appraisals are performed by independent appraisers.appraisers and reviewed internally. All mortgage loan requests are reviewed by aour mortgage loan committee or through a secondary market automated underwriting system; loans in excess of $400$400 require the approval of the Bank’sour Internal Loan Committee, the Board of Directors,Directors’ Loan Committee, or its loan committee.the Board of Directors.
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 perceived intent and ability to pay rather than collateral value. No consumer loans are sold to the secondary market.

The ALLL is established as losses are estimated to have occurred through a provision for loan losses charged to earnings. Loan losses are charged against the ALLL when we believe the uncollectability of the loan balance is confirmed. Subsequent recoveries, if any, are credited to the ALLL.
The ALLL is evaluated on a regular basis and is based upon a periodic review of the collectability of the loans in light of historical experience, the nature and volume of the loan portfolio, adverse situations that may affect the borrower’s ability to repay, estimated value of any underlying collateral, and prevailing economic conditions. This evaluation is inherently subjective as it requires estimates that are susceptible to significant revision as more information becomes available.
The primary factors behind the determination of the level of the ALLL are specific allocations for impaired loans, historical loss percentages, as well as unallocated components. Specific allocations for impaired loans are primarily determined based on the difference between the net realizable value of the loan’s underlying collateral or the net present value of the projected payment stream and our recorded investment. Historical loss allocations were calculated at the loan class and segment levels based on a migration analysis of the loan portfolio over the preceding five years. An unallocated component is maintained to cover uncertainties that we believe affect our estimate of probable losses based on qualitative factors. The unallocated component of the allowance reflects the margin of imprecision inherent in the underlying assumptions used in the methodologies for estimating specific and general losses in the portfolio.

45

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)65
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A summary of changes in the ALLL and the recorded investment in loans by segments follows:
 Allowance for Loan Losses
 Year Ended December 31, 2013

Commercial Agricultural Residential Real Estate Consumer Unallocated Total
January 1, 2013$6,862
 $407
 $3,627
 $666
 $374
 $11,936
Loans charged-off(895) (12) (1,004) (429) —
 (2,340)
Recoveries363
 —
 181
 249
 —
 793
Provision for loan losses(282) 39
 1,041
 153
 160
 1,111
December 31, 2013$6,048
 $434
 $3,845
 $639
 $534
 $11,500
 Allowance for Loan Losses and Recorded Investment in Loans
 As of December 31, 2013
 Commercial Agricultural Residential Real Estate Consumer Unallocated Total
ALLL           
Individually evaluated for impairment$2,035
 $30
 $2,287
 $—
 $—
 $4,352
Collectively evaluated for impairment4,013
 404
 1,558
 639
 534
 7,148
Total$6,048
 $434
 $3,845
 $639
 $534
 $11,500
Loans           
Individually evaluated for impairment$13,816
 $1,538
 $14,302
 $119
   $29,775
Collectively evaluated for impairment378,288
 91,051
 275,629
 33,294
   778,262
Total$392,104
 $92,589
 $289,931
 $33,413
   $808,037
 Allowance for Loan Losses
 Year Ended December 31, 2012

Commercial Agricultural Residential Real Estate Consumer Unallocated Total
January 1, 2012$6,284
 $1,003
 $2,980
 $633
 $1,475
 $12,375
Loans charged-off(1,672) —
 (1,142) (542) —
 (3,356)
Recoveries240
 —
 122
 255
 —
 617
Provision for loan losses2,010
 (596) 1,667
 320
 (1,101) 2,300
December 31, 2012$6,862
 $407
 $3,627
 $666
 $374
 $11,936
 Allowance for Loan Losses and Recorded Investment in Loans
 As of December 31, 2012
 Commercial Agricultural Residential Real Estate Consumer Unallocated Total
ALLL           
Individually evaluated for impairment$2,050
 $91
 $1,796
 $—
 $—
 $3,937
Collectively evaluated for impairment4,812
 316
 1,831
 666
 374
 7,999
Total$6,862
 $407
 $3,627
 $666
 $374
 $11,936
Loans           
Individually evaluated for impairment$14,456
 $723
 $10,704
 $75
   $25,958
Collectively evaluated for impairment357,049
 82,883
 273,444
 33,419
   746,795
Total$371,505

$83,606
 $284,148
 $33,494
   $772,753

Credit Quality Indicators66
As
Table of Contents

The following table displays the credit quality indicators for commercial and agricultural credit exposures based on internally assigned credit ratings as of December 31 2010:
 2013
 Commercial Agricultural

Real Estate Other Total Real Estate Other Total
Rating          
2 - High quality$18,671
 $14,461
 $33,132
 $3,527
 $3,235
 $6,762
3 - High satisfactory91,323
 39,403
 130,726
 26,015
 17,000
 43,015
4 - Low satisfactory149,921
 43,809
 193,730
 26,874
 10,902
 37,776
5 - Special mention13,747
 1,843
 15,590
 1,609
 922
 2,531
6 - Substandard16,974
 473
 17,447
 1,232
 1,273
 2,505
7 - Vulnerable1,041
 238
 1,279
 —
 —
 —
8 - Doubtful183
 17
 200
 —
 —
 —
Total$291,860
 $100,244
 $392,104
 $59,257
 $33,332
 $92,589
 2012
 Commercial Agricultural

Real Estate Other Total Real Estate Other Total
Rating           
2 - High quality$25,209
 $15,536
 $40,745
 $2,955
 $2,313
 $5,268
3 - High satisfactory83,805
 28,974
 112,779
 16,972
 11,886
 28,858
4 - Low satisfactory127,423
 45,143
 172,566
 27,291
 15,437
 42,728
5 - Special mention16,046
 1,692
 17,738
 1,008
 3,191
 4,199
6 - Substandard20,029
 2,224
 22,253
 1,167
 1,217
 2,384
7 - Vulnerable1,512
 2,294
 3,806
 —
 —
 —
8 - Doubtful1,596
 22
 1,618
 —
 169
 169
Total$275,620
 $95,885
 $371,505
 $49,393
 $34,213
 $83,606
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 —1. EXCELLENT – Substantially Risk Free
Loans to borrowers with aCredit has strong financial condition and solid earnings history, characterized by:
• High liquidity, strong cash flow, low leverage.
• Unquestioned ability to meet all obligations when due.
• Experienced management, with management succession in place.
• Secured by cash.
2.  HIGH QUALITY — Limited Risk
LoansUnquestioned ability to borrowersmeet all obligations when due.
Experienced management, with amanagement succession in place.
Secured by cash.
2. HIGH QUALITY – Limited Risk
Credit with sound financial condition and has a positive trend in earnings supplemented by:
Favorable liquidity and leverage ratios.
• 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.

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)67
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3. HIGH SATISFACTORY – Reasonable Risk
3.  HIGH SATISFACTORY — Reasonable Risk
Loans to borrowersCredit 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
LoansCash flow sufficient to borrowers which are considered Bankablepay debts as scheduled.
Management experience and depth appear favorable.
Loan performing according to terms.
If loan is secured, collateral is acceptable and loan is fully protected.
4. LOW SATISFACTORY – Acceptable Risk
Credit with bankable risks, although some signs of weaknesses are shown:
• Would include mostWould include most start-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.
Occasional instances of trade slowness or repayment delinquency – may have been 10-30 days slow within the past year.
Management’s abilities are apparent, yet unproven.
Weakness in primary source of repayment with adequate secondary source of repayment.
Loan structure generally in accordance with policy.
If secured, loan collateral coverage is marginal.
Adequate cash flow to service debt, but coverage is low.
To be classified as less than satisfactory, only one of the following criteria must be met.
5.  SPECIAL MENTION-5. SPECIAL MENTION – Criticized
These borrowers constituteCredit constitutes an undue and unwarranted credit risk but not to the point of justifying a classification of substandard. The credit risk may be relatively minor yet constitute an unwarranted risk in light of the circumstances surrounding a specific loan:
Downward trend in sales, profit levels, and margins.
• 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

Cash flow is strained in order to meet debt repayment.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)Loan delinquency (30-60 days) and overdrafts may occur.
Shrinking equity cushion.
6.  SUBSTANDARD — Classified
Diminishing primary source of repayment and questionable secondary source.
A substandard loanManagement abilities are questionable.
Weak industry conditions.
Litigation pending against the borrower.
Collateral or guaranty offers limited protection.
Negative debt service coverage, however the credit is inadequately protected bywell collateralized and payments are current.
6. SUBSTANDARD – Classified
Credit where the borrower’s current net worth, and paying capacity, of the borrower orand value of the collateral pledged.pledged is inadequate. There is a distinct possibility that the Corporationwe will implement collection procedures if the loan deficiencies are not corrected. In addition, the following characteristics may apply:
• Sustained losses have severely eroded the equity and cash flow.
• Deteriorating liquidity.
• Serious management problems or internal fraud.
• Original repayment terms liberalized.
• Likelihood of bankruptcy.
• Inability to access other funding sources.
• Reliance on secondary source of repayment.
• Litigation filed against borrower.
• Collateral provides little or no value.
• Requires excessive attention of the loan officer.
• Borrower is uncooperative with loan officer.
7.  VULNERABLE — Classified
This classification includes substandard loans that warrantDeteriorating liquidity.
Serious management problems or internal fraud.
Original repayment terms liberalized.
Likelihood of bankruptcy.
Inability to access other funding sources.
Reliance on secondary source of repayment.
Litigation filed against borrower.
Collateral provides little or no value.
Requires excessive attention of the loan officer.
Borrower is uncooperative with loan officer.

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7. VULNERABLE – Classified
Credit is considered “Substandard” and warrants placing on nonaccrual. Risk of loss is being evaluated and exit strategy options are under review. Other characteristics that may apply:
• Insufficient cash flow to service debt.
• Minimal or no payments being received.
• Limited options available to avoid the collection process.
• Transition status, expect action will take place to collect loan without immediate progress being made.
8.  DOUBTFUL — Workout
A doubtfulMinimal or no payments being received.
Limited options available to avoid the collection process.
Transition status, expect action will take place to collect loan without immediate progress being made.
8. DOUBTFUL – Workout
Credit has all the weaknesses inherent in a substandard“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.
• 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

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.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)Portion of the loan balance has been charged-off.
9.  LOSS — Charge off
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’sOur primary credit quality indicatorsindicator 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 impairedtables summarize the past due and current loans as of and for the year, ended December 31 2010::
 2013
 Accruing Interest
and Past Due:		   Total Past Due and Nonaccrual    

30-59
Days		 60-89
Days		 90 Days
or More		 Nonaccrual  Current Total
Commercial             
Commercial real estate$1,226
 $296
 $—
 $1,136
 $2,658
 $289,202
 $291,860
Commercial other368
 15
 13
 238
 634
 99,610
 100,244
Total commercial1,594
 311
 13
 1,374
 3,292
 388,812
 392,104
Agricultural             
Agricultural real estate34
 295
 —
 —
 329
 58,928
 59,257
Agricultural other—
 —
 —
 —
 —
 33,332
 33,332
Total agricultural34
 295
 —
 —
 329
 92,260
 92,589
Residential real estate             
Senior liens3,441
 986
 129
 1,765
 6,321
 229,865
 236,186
Junior liens408
 44
 —
 29
 481
 13,074
 13,555
Home equity lines of credit181
 —
 —
 25
 206
 39,984
 40,190
Total residential real estate4,030
 1,030
 129
 1,819
 7,008
 282,923
 289,931
Consumer             
Secured167
 11
 —
 50
 228
 28,444
 28,672
Unsecured25
 5
 —
 1
 31
 4,710
 4,741
Total consumer192
 16
 —
 51
 259
 33,154
 33,413
Total$5,850
 $1,652
 $142
 $3,244
 $10,888
 $797,149
 $808,037
                     
  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 
                     

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 2012
 Accruing Interest
and Past Due:		   Total Past Due and Nonaccrual    

30-59
Days		 60-89
Days		 90 Days
or More		 Nonaccrual  Current Total
Commercial             
Commercial real estate$1,304
 $161
 $63
 $2,544
 $4,072
 $271,548
 $275,620
Commercial other606
 —
 40
 2,294
 2,940
 92,945
 95,885
Total commercial1,910
 161
 103
 4,838
 7,012
 364,493
 371,505
Agricultural             
Agricultural real estate—
 —
 —
 —
 —
 49,393
 49,393
Agricultural other90
 —
 —
 169
 259
 33,954
 34,213
Total agricultural90
 —
 —
 169
 259
 83,347
 83,606
Residential real estate             
Senior liens2,000
 346
 320
 2,064
 4,730
 223,532
 228,262
Junior liens232
 —
 —
 50
 282
 16,207
 16,489
Home equity lines of credit237
 —
 —
 182
 419
 38,978
 39,397
Total residential real estate2,469
 346
 320
 2,296
 5,431
 278,717
 284,148
Consumer             
Secured127
 33
 4
 —
 164
 28,118
 28,282
Unsecured31
 3
 1
 —
 35
 5,177
 5,212
Total consumer158
 36
 5
 —
 199
 33,295
 33,494
Total$4,627
 $543
 $428
 $7,303
 $12,901
 $759,852
 $772,753
Impaired Loans
Loans may be classified as impaired if they meet one or more of the following criteria:
1.
There has been a charge-off of its principal balance (in whole or in part),
2.
The loan has been classified as a TDR, or
3.
The loan is in nonaccrual status.
Impairment is measured on a loan-by-loan basis for commercial and agricultural loans by comparing the loan’s outstanding balance to the present value of expected future cash flows discounted at the loan’s effective interest rate, the loan’s obtainable market price, or the fair value of the collateral, less cost to sell, if the loan is collateral dependent. Large groups of smaller balance homogeneous loans are collectively evaluated for impairment. Impairment is measured on a loan-by-loan basis for residential real estate and consumer loans by comparing the loan’s outstanding balance to the present value of expected future cash flows discounted at the loan’s effective interest rate.

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We do not recognize interest income on impaired loans in nonaccrual status. For impaired loans not in nonaccrual status, interest income is recognized daily, as earned, according to the terms of the loan agreement. The following is a summary of information pertaining to impaired loans as of, and for the years ended, December 31:31:
 2013
 Outstanding Balance Unpaid Principal Balance Valuation Allowance Average Outstanding Balance Interest Income Recognized
Impaired loans with a valuation allowance         
Commercial real estate$6,748
 $6,888
 $1,915
 $7,256
 $400
Commercial other521
 521
 120
 879
 51
Agricultural real estate90
 90
 30
 91
 4
Agricultural other—
 —
 —
 53
 —
Residential real estate senior liens14,061
 15,315
 2,278
 11,111
 442
Residential real estate junior liens48
 64
 9
 80
 2
Total impaired loans with a valuation allowance21,468
 22,878
 4,352
 19,470
 899
Impaired loans without a valuation allowance         
Commercial real estate5,622
 6,499
   4,312
 337
Commercial other925
 1,035
   989
 83
Agricultural real estate1,370
 1,370
   320
 28
Agricultural other78
 198
   357
 (7)
Home equity lines of credit193
 493
   180
 16
Consumer secured119
 148
   72
 2
Total impaired loans without a valuation allowance8,307
 9,743
   6,230
 459
Impaired loans         
Commercial13,816
 14,943
 2,035
 13,436
 871
Agricultural1,538
 1,658
 30
 821
 25
Residential real estate14,302
 15,872
 2,287
 11,371
 460
Consumer119
 148
 —
 72
 2
Total impaired loans$29,775
 $32,621
 $4,352
 $25,700
 $1,358
         
  2009  2008 
 
Impaired loans with a valuation allowance $3,757  $7,378 
Impaired loans without a valuation allowance  8,897   6,465 
         
Total impaired loans $12,654  $13,843 
         
Valuation allowance related to impaired loans $612  $1,413 
Year to date average outstanding balance of impaired loans $13,249  $9,342 
Year to date interest income recognized on impaired loans $340  $171 

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 2012
 Outstanding Balance Unpaid Principal Balance Valuation Allowance Average Outstanding Balance Interest Income Recognized
Impaired loans with a valuation allowance         
Commercial real estate$7,295
 $7,536
 $1,653
 $6,155
 $237
Commercial other2,140
 2,140
 397
 1,437
 93
Agricultural real estate91
 91
 32
 413
 —
Agricultural other420
 420
 59
 1,555
 54
Residential real estate senior liens10,450
 11,672
 1,783
 8,861
 406
Residential real estate junior liens72
 118
 13
 134
 6
Total impaired loans with a valuation allowance20,468
 21,977
 3,937
 18,555
 796
Impaired loans without a valuation allowance         
Commercial real estate3,749
 4,408
   5,867
 321
Commercial other1,272
 1,433
   819
 87
Agricultural real estate—
 —
   183
 —
Agricultural other212
 332
   201
 4
Home equity lines of credit182
 482
   190
 16
Consumer secured75
 84
   90
 6
Total impaired loans without a valuation allowance5,490
 6,739
   7,350
 434
Impaired loans         
Commercial14,456
 15,517
 2,050
 14,278
 738
Agricultural723
 843
 91
 2,352
 58
Residential real estate10,704
 12,272
 1,796
 9,185
 428
Consumer75
 84
 —
 90
 6
Total impaired loans$25,958
 $28,716
 $3,937
 $25,905
 $1,230
As of December 31, 2013 and 2012, we had committed to advance $134 and $9, respectively, in connection with impaired loans, which include TDRs.
Troubled Debt Restructurings
Loan modifications are considered to be TDRs when the modification includes terms outside of normal lending practices to a borrower who is experiencing financial difficulties.
Typical concessions granted include, but are not limited to:
1.Agreeing to interest rates below prevailing market rates for debt with similar risk characteristics.
2.Extending the amortization period beyond typical lending guidelines for debt with similar risk characteristics.
3.Forbearance of principal.
4.Forbearance of accrued interest.
To determine if a borrower is experiencing financial difficulties, we consider if:
1.The borrower is currently in default on any of their debt.
2.The borrower would likely default on any of their debt if the concession was not granted.
3.The borrower’s cash flow was insufficient to service all of their debt if the concession was not granted.
4.The borrower has declared, or is in the process of declaring, bankruptcy.
5.The borrower is unlikely to continue as a going concern (if the entity is a business).

50

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)72
Table of Contents

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 committedinformation pertaining to be advancedTDRs granted in connection with impaired loans, which includes restructured loans.
Interest income is recognized 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 the loan agreement.
NOTE 5 —Servicing
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 $309,882 and $307,656 at December 31, 2010 and 2009, 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 48.72%, depending upon the stratification of the specific right and a weighted average default 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:
             
  2010  2009  2008 
 
Balance at beginning of year $2,620  $2,105  $2,198 
Mortgage servicing rights capitalized  4,445   4,370   3,079 
Accumulated amortization  (4,250)  (3,706)  (3,016)
Impairment valuation allowance  (148)  (149)  (156)
             
Balance at end of year
 $2,667  $2,620  $2,105 
             
Impairment losses (reversed) recognized $(1) $(7) $115 
             
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,:
 2013 2012
 Number of Loans Pre-Modification Recorded Investment Post-Modification Recorded Investment Number of Loans Pre-Modification Recorded Investment Post-Modification Recorded Investment
Commercial           
Commercial real estate—
 $—
 $—
 1
 $912
 $792
Commercial other18
 5,299
 5,103
 28
 6,437
 6,437
Total commercial18
 5,299
 5,103
 29
 7,349
 7,229
Agricultural other4
 1,379
 1,379
 7
 652
 652
Residential real estate           
Senior liens55
 6,069
 6,053
 29
 3,463
 3,463
Junior liens1
 20
 20
 1
 22
 22
Total residential real estate56
 6,089
 6,073
 30
 3,485
 3,485
Consumer           
Secured1
 27
 27
 1
 —
 —
Unsecured2
 34
 34
 —
 —
 —
Total consumer3
 61
 61
 1
 —
 —
Total81
 $12,828
 $12,616
 67
 $11,486
 $11,366
The following tables summarize concessions we granted to borrowers in financial difficulty in the years ended December 31:
 2013 2012

Below Market Interest Rate Below Market Interest Rate and Extension of Amortization Period Below Market Interest Rate Below Market Interest Rate and Extension of Amortization Period
 Number of Loans Pre-Modification Recorded Investment Number of Loans Pre-Modification Recorded Investment Number of Loans Pre-Modification Recorded Investment Number of Loans Pre-Modification Recorded Investment
Commercial               
Commercial real estate—
 $—
 —
 $—
 —
 $—
 1
 $912
Commercial other12
 3,070
 6
 2,229
 25
 4,924
 3
 1,513
Total commercial12
 3,070
 6
 2,229
 25
 4,924
 4
 2,425
Agricultural other4
 1,379
 —
 —
 6
 561
 1
 91
Residential real estate               
Senior liens24
 1,904
 31
 4,165
 17
 1,779
 12
 1,684
Junior liens—
 —
 1
 20
 —
 —
 1
 22
Total residential real estate24
 1,904
 32
 4,185
 17
 1,779
 13
 1,706
Consumer               
Secured1
 27
 —
 —
 1
 —
 —
 —
Unsecured1
 16
 1
 18
 —
 —
 —
 —
Total Consumer2
 43
 1
 18
 1
 —
 —
 —
Total42
 $6,396
 39
 $6,432
 49
 $7,264
 18
 $4,222
We did not restructure any loans through the forbearance of principal or accrued interest during 2013 or 2012.
Based on our historical loss experience, losses associated with TDRs are not significantly different than other impaired loans within the same loan segment. As such, TDRs, including TDRs that have been modified in the past 12 months that subsequently defaulted, are analyzed in the same manner as other impaired loans within their respective loan segment.

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Following is a summary of loans that defaulted in the years ended December 31, which were modified within 12 months prior to the default date:
 2013 2012
 Number of Loans Pre-
Default
Recorded
Investment		 Charge-off Recorded Upon Default Post-
Default
Recorded
Investment		 Number of Loans Pre-
Default
Recorded
Investment		 Charge-off Recorded Upon Default Post-
Default
Recorded
Investment
Commercial other—
 $—
 $—
 $—
 5
 $342
 $143
 $199
Residential real estate senior liens1
 62
 11
 51
 1
 47
 43
 4
Consumer secured—
 —
 —
 —
 1
 8
 8
 —
Consumer unsecured1
 16
 16
 —
 —
 —
 —
 —
Total2
 $78
 $27
 $51
 7
 $397
 $194
 $203
The following is a summary of TDR loan balances as of December 31:
 2013 2012
TDRs$25,865
 $19,355
Note 7 – Premises and 2008, respectively.Equipment
NOTE 6 —Premises and Equipment
A summary of premises and equipment at December 31 follows:
         
  2010  2009 
 
Land $4,694  $4,614 
Buildings and improvements  21,502   20,478 
Furniture and equipment  25,822   24,284 
         
Total  52,018   49,376 
Less: accumulated depreciation  27,391   25,459 
         
Premises and equipment, net
 $24,627  $23,917 
         

2013 2012
Land$5,429
 $5,435
Buildings and improvements24,765
 22,705
Furniture and equipment30,128
 29,755
Total60,322
 57,895
Less: accumulated depreciation34,603
 32,108
Premises and equipment, net$25,719
 $25,787
Depreciation expense amounted to $2,522, $2,349$2,556, $2,417, and $2,171$2,521 in 2010, 2009,2013, 2012, and 2008,2011, respectively.


51

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
NOTE 7 —Note 8 – Goodwill and Other Intangible Assets
The carrying amount of goodwill was $45,618 at December 31, 20102013 and 2009.2012.
Identifiable intangible assets at year end were as follows:follows as of December 31:
 2013
 Gross
Intangible
Assets		 Accumulated
Amortization		 Net
Intangible
Assets
Core deposit premium resulting from acquisitions$5,373
 $4,680
 $693
 2012
 Gross
Intangible
Assets		 Accumulated
Amortization		 Net
Intangible
Assets
Core deposit premium resulting from acquisitions$5,373
 $4,459
 $914
             
  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 
             
             
  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,$221, $260, and $415$299 in 2010, 2009,2013, 2012, and 2008,2011, respectively.

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Estimated amortization expense associated with identifiable intangibles for each of the next five years succeeding December 31, 2010,2013, and thereafter is as follows:
2014$183
2015145
2016106
201774
201862
Thereafter123
Total$693
     
Year
 Amount 
 
2011 $299 
2012  260 
2013  221 
2014  183 
2015  145 
Thereafter  365 
     
  $1,473 
     
Note 9 – Deposits
NOTE 8 —Deposits
Scheduled maturities of time deposits for the next five years, and thereafter, are as follows:
     
Year
 Amount 
 
2011 $216,927 
2012  113,999 
2013  44,269 
2014  31,414 
2015  39,474 
Thereafter  6,278 
     
  $452,361 
     
2014$207,278
201581,413
201658,627
201746,336
201839,214
Thereafter17,144
Total$450,012
Interest expense on time deposits greater than $100 was $4,427$3,203 in 2010, $5,2462013, $3,854 in 2009,2012, and $6,525$4,302 in 2008.2011.

Note 10 – Borrowed Funds
52

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
NOTE 9 —Borrowed Funds
Borrowed funds consist of the following obligations at December 31:31:
                 
  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%
                 
 2013 2012
 Amount Rate Amount Rate
FHLB advances$162,000
 2.02% $152,000
 2.05%
Securities sold under agreements to repurchase without stated maturity dates106,025
 0.13% 66,147
 0.15%
Securities sold under agreements to repurchase with stated maturity dates11,301
 3.30% 16,284
 3.57%
Federal funds purchased—
 —
 6,570
 0.50%
Total$279,326
 1.35% $241,001
 1.59%
The Federal Home Loan Bank borrowingsFHLB advances are collateralized by a blanket lien on all qualified 1-to-41-4 family mortgageresidential real estate loans and U.S. governmentcertain mortgage-backed securities and federal agency securities.collateralized mortgage obligations. Advances are also secured by our holdings of FHLB stock owned by the Corporation.
The Corporation stock. As of December 31, 2013, we had the ability to borrow up to an additional $122,960,$127,748, based on the assets currently pledged as collateral. The Corporation has pledged eligible mortgage loansDuring the first quarter of 2013 and investment securities as collateral for any such borrowings.2012, we reduced funding costs by modifying the term of $30,000 and $60,000, respectively, of FHLB advances.

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The maturity and weighted average interest rates of FHLB advances are as follows as of December 31:31:
                 
  2010  2009 
  Amount  Rate  Amount  Rate 
 
Fixed rate advances due 2010 $—   —  $28,320   4.52%
One year putable advances due 2010  —   —   6,000   5.31%
Fixed rate advances due 2011  10,086   3.96%  10,206   3.96%
One year putable advances due 2011  1,000   4.75%  1,000   4.75%
Fixed rate advances due 2012  17,000   2.97%  17,000   2.97%
One year putable advances due 2012  15,000   4.10%  15,000   4.10%
Fixed rate advances due 2013  5,337   4.14%  5,278   4.14%
One year putable advances due 2013  5,000   3.15%  5,000   3.15%
Fixed rate advances due 2014  25,000   3.16%  15,000   3.63%
Fixed rate advances due 2015  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%
                 


53

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
 2013 2012

Amount Rate Amount Rate
Fixed rate advances due 2014$10,000
 0.48% $10,000
 0.48%
Fixed rate advances due 201532,000
 0.84% 42,000
 1.12%
Fixed rate advances due 201610,000
 2.15% 10,000
 2.15%
Fixed rate advances due 201730,000
 1.95% 40,000
 2.15%
Fixed rate advances due 201840,000
 2.35% 20,000
 2.86%
Fixed rate advances due 201920,000
 3.11% 20,000
 3.73%
Fixed rate advances due 202010,000
 1.98% 10,000
 1.98%
Fixed rate advances due 202310,000
 3.90% —
 —
Total$162,000
 2.02% $152,000
 2.05%
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 securities underlying the agreements have a carrying value and a fair value of $86,381$148,930 and $74,605$143,322 at December 31, 20102013 and 2009,2012, respectively. Such securities remain under the control of the Corporation. The Corporationour control. We may be required to provide additional collateral based on the fair value of underlying securities.
The maturity and weighted average interest rates of securities sold under agreements to repurchase with stated maturity dates are as follows at December 31:
 2013 2012
 Amount Rate Amount Rate
Repurchase agreements due 2013$—
 —
 $5,000
 4.51%
Repurchase agreements due 201410,876
 3.30% 10,872
 3.15%
Repurchase agreements due 2015425
 3.25% 412
 3.25%
Total$11,301
 3.30% $16,284
 3.57%
Securities sold under repurchase agreements without stated maturity dates, federal funds purchased, and Federal Reserve Bank discount windowFRB Discount Window advances generally mature within one to four days from the transaction date. The following table provides a summary of short termshort-term borrowings for the years ended December 31:31:
 2013 2012
 Maximum Month End Balance Average Balance Weighted Average Interest Rate During the Period Maximum Month End Balance Average Balance Weighted Average Interest Rate During the Period
Securities sold under agreements to repurchase without stated maturity dates$106,025
 $74,602
 0.15% $66,117
 $57,466
 0.20%
Federal funds purchased13,700
 4,445
 0.61% 17,900
 3,836
 0.47%
                         
  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 
We had pledged certificates of deposit held in other financial institutions, trading securities, AFS securities, and 1-4 family residential real estate loans in the following amounts at December 31:

 2013 2012
Pledged to secure borrowed funds$320,173
 $308,628
Pledged to secure repurchase agreements148,930
 143,322
Pledged for public deposits and for other purposes necessary or required by law20,922
 22,955
Total$490,025
 $474,905
We had no investment securities that are restricted to be pledged for specific purposes.

54

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)76
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Note 11 – Other Noninterest Expenses
NOTE 10 —Other Noninterest Expenses
A summary of expenses included in Other Noninterest Expenses areother noninterest expenses is as follows for the yearyears ended December 31:31:

2013 2012 2011
Marketing and community relations$1,131
 $1,965
 $1,174
FDIC insurance premiums1,082
 864
 1,086
Directors fees819
 885
 842
Audit and related fees738
 711
 714
Education and travel502
 588
 526
Loan underwriting fees423
 403
 331
Printing and supplies396
 424
 405
Postage and freight387
 389
 388
Legal fees359
 268
 302
Consulting fees315
 482
 386
Amortization of deposit premium221
 260
 299
Foreclosed asset and collection211
 202
 576
State taxes140
 187
 57
Other losses109
 300
 54
All other1,517
 1,123
 1,131
Total other$8,350
 $9,051
 $8,271
             
  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 
             
Note 12 – Federal Income Taxes
NOTE 11 —Federal Income Taxes
Components of the consolidated provision (benefit) for federal income taxes are as follows for the yearyears ended December 31:31:
             
  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)
             

2013 2012 2011
Currently payable$3,404
 $1,747
 $965
Deferred (benefit) expense(1,208) 616
 389
Income tax expense$2,196
 $2,363
 $1,354
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 taxestax expense is as follows for the years ended December 31:31:
            
 2010 2009 2008 
2013 2012 2011
Income taxes at 34% statutory rate $3,621  $2,940  $1,148 $5,000
 $4,953
 $3,932
Effect of nontaxable income                 
Interest income on tax exempt municipal bonds  (1,565)  (1,680)  (1,713)
Earnings on corporate owned life insurance  (225)  (218)  (106)
Interest income on tax exempt municipal securities(1,746) (1,675) (1,687)
Earnings on corporate owned life insurance policies(249) (238) (207)
Other  (395)  (383)  (269)(154) (147) (65)
       
Total effect of nontaxable income  (2,185)  (2,281)  (2,088)(2,149) (2,060) (1,959)
Effect of tax credits(801) (667) (793)
Effect of nondeductible expenses  168   187   216 146
 137
 174
       
Income tax expense (benefit)
 $1,604  $846  $(724)
       
Federal income tax expense$2,196
 $2,363
 $1,354


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Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for federal income tax purposes.


55

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Significant components of the Corporation’sour deferred tax assets and liabilities, included in other assets in the accompanying consolidated balance sheets, are as follows as of December 31:31:
        
 2010 2009 
2013 2012
Deferred tax assets
           
Allowance for loan losses $3,270  $3,482 $2,988
 $3,133
Deferred directors’ fees  2,364   2,251 2,313
 2,100
Employee benefit plans  122   132 257
 189
Core deposit premium and acquisition expenses  694   310 971
 892
Net unrealized losses on trading securities  400   23 360
 351
Net unrecognized actuarial loss on pension plan  1,109   1,084 
Net unrecognized actuarial losses on pension plan1,100
 1,891
Net unrealized losses on available-for-sale securities1,345
 —
Life insurance death benefit payable  804   804 804
 804
Alternative minimum tax  686   619 729
 729
Other  219   504 321
 195
     
Total deferred tax assets
  9,668   9,209 11,188
 10,284
     
Deferred tax liabilities
           
Prepaid pension cost  851   900 1,023
 1,021
Premises and equipment  902   665 449
 724
Accretion on securities  36   54 42
 37
Core deposit premium and acquisition expenses  1,000   642 1,229
 1,203
Net unrealized gains onavailable-for-sale securities
  847   494 —
 4,912
Other  518   435 547
 1,163
     
Total deferred tax liabilities
  4,154   3,190 3,290
 9,060
     
Net deferred tax assets
 $5,514  $6,019 $7,898
 $1,224
     
The Corporation and its subsidiariesWe are subject to U.S. federal income tax. The Corporation istax; however, we are no longer subject to examination by taxing authorities for years before 2007.2010. There are no material uncertain tax positions requiring recognition in the Company’sour consolidated financial statements. The Corporation doesWe do not expect the total amount of unrecognized tax benefits to significantly increase in the next twelve months.
The Corporation recognizesWe recognize interestand/or penalties related to income tax matters in income tax expense. The Corporation doesWe do not have any amounts accrued for interest and penalties at December 31, 20102013 and is2012 and we not aware of any claims for such amounts by federal income tax authorities.
Note 13 – Off-Balance-Sheet Activities
Included in other comprehensive income for the years ended December 31, 2010 and 2009 are the changes in unrealized losses of $226 and unrealized gains of $4,048, 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 12 —Off-Balance-Sheet Activities
Credit-Related Financial Instruments
The Corporation isWe are party to credit related financial instruments with off-balance-sheet risk. These financial instruments are entered into in the normal course of business to meet the financing needs of itsour customers. These financial instruments, which include commitments to extend credit and standby letters of credit, involve, to varying degrees, elements of credit and interest rate riskIRR in excess of the amounts recognized in the consolidated balance sheets. The contract or notional amounts of these instruments reflect the extent of involvement the Corporation haswe have in a particular class of financial instrument.
 December 31
 2013 2012
Unfunded commitments under lines of credit$121,959
 $115,233
Commercial and standby letters of credit4,169
 3,935
Commitments to grant loans29,096
 40,507


56

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)78
Table of Contents
         
  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. TheThese commitments for equity lines of credit may expire without being drawn upon. These lines of credit are uncollateralized and usuallyTherefore, the total commitment amounts do not contain a specified maturity date and may not be drawn upon to the total extent to which the Corporation is committed. A majority of such commitments are at fixed rates of interest; a portion is unsecured.
necessarily represent future cash requirements.
Commercial and standby letters of credit are conditional commitments we issued by the Corporation to guarantee the performance of a customer to a third party. Those guarantees are primarily issued to support private borrowing arrangements, including commercial paper, bond financing, and similar transactions.
These commitments to extend credit and letters of credit mature within one year. The credit risk involved in these transactions is essentially the same as that involved in extending loans to customers. The Corporation evaluatesWe evaluate each customer’s credit worthiness on acase-by-case basis. The amount of collateral obtained, if deemedwe deem necessary by the Corporation upon the extension of credit, is based on management’sour credit evaluation of the borrower. While the Corporation considerswe consider standby letters of credit to be guarantees, the amount of the liability related to such guarantees on the commitment date is not significant and a liability related to such guarantees is not recorded on the consolidated balance sheets.
Commitments to extend creditgrant loans are agreements to lend to a customer as long as there is no violation of any condition established in the contract. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. The 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 deemedwe deem necessary, by the Corporation, is based on management’sour credit evaluation of the customer. Commitments to grant loans include loans committed to be sold to the secondary market.
The Corporation’sOur 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 bycould be up to the contractual notional amount of those instruments. The Corporation usesWe use the same credit policies in deciding to make these commitments as it doeswe do for extending loans to customers. No significant losses are anticipated as a result of these commitments.
NOTE 13 —Note 14 – On-Balance Sheet Activities
Derivative Loan Commitments
Mortgage loan commitments are referred to as derivative loan commitments if the loan that will result from exercise of the commitment will be held for sale upon funding. The Corporation entersWe enter into commitments to fund residential mortgage loans at specific times in the future, with the intention that these loans will subsequently be sold in the secondary market. A mortgage loan commitment binds the Corporationus to lend funds to a potential borrower at a specified interest rate within a specified period of time, generally up to 60 days after inception of the rate lock.
Outstanding derivative loan commitments expose the Corporationus to the risk that the price of the loans arising from the exercise of the loan commitment might decline from the inception of the rate lock to funding of the loan due to increases in mortgage interest rates. If interest rates increase, the value of these loan commitments decreases. Conversely, if interest rates decrease, the value of these loan commitments increases.increase. The notional amount of undesignated interest rate lock commitments was $547$182 and $760$1,912 at December 31, 20102013 and 2009,2012, 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 utilizeswe utilize both “mandatory delivery” and “best efforts” forward loan sale commitments to mitigate the risk of potential decreases in the values of loan that would result from the exercise of the derivative loan commitments.
With a “mandatory delivery” contract, the Corporation commitswe commit to deliver a certain principal amount of mortgage loans to an investor at a specified price on or before a specified date. If the Corporation failswe fail to deliver the amount of mortgages necessary to fulfill the commitment by the specified date, it iswe are obligated to pay a “pair-off” fee, based on then current market prices, to the investor to compensate the investor for the shortfall.
With a “best efforts” contract, the Corporation commitswe commit to deliver an individual mortgage loan of a specified principal amount and quality to an investor if the loan to the underlying borrower closes. Generally, the price the investor will pay the seller for an individual loan is specified prior to the loan being funded (e.g. on the same day the lender commits to lend funds to a potential borrower).
The Corporation expectsWe expect that these forward loan sale commitments will experience changes in fair value opposite to the change in fair value of derivative loan commitments. The notional amount of undesignated forward loan sale commitments was $1,729$1,286 and $3,041$5,545 at December 31, 20102013 and 2009,2012, respectively.
The fair values of the rate lock loan commitments related to the origination of mortgage loans that will be held for sale and the forward loan sale commitments are deemed insignificant by management and, accordingly, are not recorded in the accompanyingour consolidated financial statements.

79
NOTE 14 —

Note 15 – Commitments and Other Matters
Commitments and Other Matters
Banking regulations require the Bankus to maintain cash reserve balances in currency or as deposits with the Federal Reserve Bank.FRB. At December 31, 20102013 and 2009,2012, the reserve balances amounted to $470$910 and $687,$885, respectively.
Banking regulations limit the transfer of assets in the form of dividends, loans, or advances from the Bank to the Corporation. At December 31, 2010,2013, substantially all of the Bank’s assets were restricted from transfer to the Corporation in the form of loans or advances. Consequently, bankBank dividends are the principal source of funds for the Corporation. Payment of dividends without regulatory approval is limited to the current yearsyear’s retained net income plus retained net income for the preceding two years, less any required transfers to common stock. At January 1, 2011,2014, the amount available to the Corporation for dividends from the Bank, without regulatory approval, was approximately $8,435.$19,500.
Note 15 —Note 16 – Minimum Regulatory Capital Requirements
Minimum Regulatory Capital Requirements
The Corporation (on a consolidated basis) and the Bank are subject to various regulatory capital requirements administered by the Federal Reserve BankFRB and the Federal Deposit Insurance Corporation (The Regulators).FDIC. Failure to meet minimum capital requirements can initiate mandatory and possibly additional discretionary actions by The Regulatorsthe FRB and the FDIC that if undertaken, could have a material effect on the Corporation’s and Bank’sour financial statements. Under regulatory capital adequacy guidelines and the regulatory framework for prompt corrective action, the Corporation and the Bankwe must meet specific capital guidelines that include quantitative measures of their assets, liabilities, capital, and certain off-balance-sheet items, as calculated under regulatory accounting standards. The Bank’sOur capital amounts and classifications are also subject to qualitative judgments by The Regulatorsthe FRB and the FDIC about components, risk weightings, and other factors. Prompt corrective action provisions are not applicable to bank holding companies.
Quantitative measures established by regulation to ensure capital adequacy require the Corporation and the Bankus to maintain minimum amounts and ratios (set forth in the following table) of total and Tier 1 capital (as defined in the regulations) to risk-weighted assets (as defined) and Tier 1 capital to average assets (as defined).


58

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Management believes, We believe, as of December 31, 20102013 and 2009,2012, that the Corporation and the Bankwe met all capital adequacy requirements to which they are subject.requirements.
As of December 31, 2010,2013, the most recent notifications from The Regulatorsthe FRB and the FDIC categorized the Bankus as well capitalized under the regulatory framework for prompt corrective action. To be categorized as well capitalized, an institution must maintain total risk-based, Tier 1 risk-based, and Tier 1 leverage ratios as set forth in the following tables. There are no conditions or events since the notifications that management believeswe believe has changed the Bank’sour categories. The Corporation’s and the Bank’sOur actual capital amounts (in thousands) and ratios are also presented in the table.
 Actual Minimum
Capital
Requirement		 Minimum
To Be Well
Capitalized Under
Prompt Corrective
Action Provisions
 Amount Ratio Amount Ratio Amount Ratio
December 31, 2013           
Total capital to risk weighted assets           
Isabella Bank$120,067
 13.84% $69,390
 8.00% $86,738
 10.00%
Consolidated131,398
 14.92
 70,452
 8.00
 N/A
 N/A
Tier 1 capital to risk weighted assets           
Isabella Bank109,217
 12.59
 34,695
 4.00
 52,043
 6.00
Consolidated120,384
 13.67
 35,226
 4.00
 N/A
 N/A
Tier 1 capital to average assets           
Isabella Bank109,217
 7.75
 56,403
 4.00
 70,504
 5.00
Consolidated120,384
 8.46
 56,932
 4.00
 N/A
 N/A
 
                         
      Minimum to be
      Well Capitalized
    Minimum
 Under Prompt
    Capital
 Corrective Action
  Actual Requirement Provisions
  Amount Ratio Amount Ratio Amount Ratio
 
December 31, 2010
                        
Total capital to risk weighted assets                        
Isabella Bank $98,566   12.8% $61,642   8.0% $77,053   10.0%
Consolidated  106,826   13.7   62,423   8.0   N/A   N/A 
Tier 1 capital to risk weighted assets                        
Isabella Bank  88,901   11.5   30,821   4.0   46,232   6.0 
Consolidated  97,040   12.4   31,212   4.0   N/A   N/A 
Tier 1 capital to average assets                        
Isabella Bank  88,901   7.6   46,653   4.0   58,316   5.0 
Consolidated  97,040   8.2   47,116   4.0   N/A   N/A 

80
Table of Contents

                         
      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 
 Actual Minimum
Capital
Requirement		 Minimum
To Be Well
Capitalized Under
Prompt Corrective
Action Provisions
 Amount Ratio Amount Ratio Amount Ratio
December 31, 2012           
Total capital to risk weighted assets           
Isabella Bank$112,498
 13.40% $67,150
 8.00% $83,937
 10.00%
Consolidated123,388
 14.48
 68,161
 8.00
 N/A
 N/A
Tier 1 capital to risk weighted assets           
Isabella Bank101,988
 12.15
 33,575
 4.00
 50,362
 6.00
Consolidated112,722
 13.23
 34,080
 4.00
 N/A
 N/A
Tier 1 capital to average assets           
Isabella Bank101,988
 7.57
 53,916
 4.00
 67,395
 5.00
Consolidated112,722
 8.29
 54,411
 4.00
 N/A
 N/A
Note 16 —
Note 17 – Benefit Plans
Benefit Plans
401(k) Plan
The Corporation hasWe have 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 makesplan was amended in 2013 to provide a matching safe harbor contribution for all eligible employees equal to 100% of the first 5.0% of an employee's compensation contributed to the Plan during the year. Employees are 100% vested in the safe harbor matching contributions.
For 2012 and 2011, we made a 3.0% safe harbor contribution for all eligible employees and matching contributions equal to 50% of the first 4.0% of an employee’s compensation contributed to the Plan during the year. Employees arewere 100% vested in the safe harbor contributions and arewere 0% vested through their first two years of employment and arewere 100% vested after


59

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
6 years of service for matching contributions.
For the year ended December 31, 2010, 20092013, 2012 and 2008,2011, expenses attributable to the Plan were $625, $617,$608, $662, and $543$652, respectively.
Defined Benefit Pension Plan
The Corporation hasWe maintain a non-contributorynoncontributory defined benefit pension plan, which was curtailed in 2007. Due toeffective March 1, 2007. As a result of the curtailment, future salary increases will not beare no longer considered (the projected benefit obligation is equal to the accumulated benefit obligation), and theplan benefits are based on years of service and the employees’individual employee’s five highest consecutive years of compensation out of the last ten years of service rendered through March 1, 2007.2007.

81
Table of Contents

Changes in the projected benefit obligation and plan assets during each year, the funded status of the plan, and the net amount recognized on the Corporation’sour consolidated balance sheets using an actuarial measurement date of December 31, are summarized as follows during the years ended December 31:31:
 2013 2012
Change in benefit obligation   
Benefit obligation, January 1$12,209
 $11,334
Interest cost450
 470
Actuarial (gain) loss(1,294) 888
Benefits paid, including plan expenses(633) (483)
Benefit obligation, December 3110,732
 12,209
Change in plan assets   
Fair value of plan assets, January 19,650
 8,603
Investment return1,276
 778
Contributions215
 752
Benefits paid, including plan expenses(633) (483)
Fair value of plan assets, December 3110,508
 9,650
Deficiency in funded status at December 31, included on the consolidated balance sheets in accrued interest payable and other liabilities$(224) $(2,559)

2013 2012
Change in accrued pension benefit costs   
Accrued benefit cost at January 1$(2,559) $(2,731)
Contributions215
 752
Net periodic benefit cost(208) (251)
Net change in unrecognized actuarial loss and prior service cost2,328
 (329)
Accrued pension benefit cost at December 31$(224) $(2,559)
         
  2010  2009 
 
Change in benefit obligation        
Benefit obligation, January 1 $8,897  $8,436 
Interest cost  531   504 
Actuarial loss  679   392 
Benefits paid, including plan expenses  (447)  (435)
         
Benefit obligation, December 31
  9,660   8,897 
         
Change in plan assets        
Fair value of plan assets, January 1  8,355   7,669 
Investment return  945   1,121 
Contributions  47   — 
Benefits paid, including plan expenses  (447)  (435)
         
Fair value of plan assets, December 31
  8,900   8,355 
         
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 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  (72)  374 
         
Accrued pension benefit cost at December 31
 $(760) $(542)
         
Amounts recognized as a component of other comprehensive lossOCI consist of the following amounts during the years ended December 31:
            
 2010 2009 2008 
2013 2012 2011
Change in unrecognized pension cost $(72) $374  $(2,320)
Net change in unrecognized actuarial loss and prior service cost$2,328
 $(329) $(1,971)
Tax effect  25   (127)  788 (791) 111
 671
       
Net
 $(47) $247  $(1,532)$1,537
 $(218) $(1,300)
       
The accumulated benefit obligation was $9,660 and $8,897 at December 31, 2010 and 2009, respectively.
The Company hasWe have recorded the funded status of the Plan in itsour consolidated balance sheets. The Company adjustsWe adjust the underfunded status in a liability account to reflect the current funded status of the plan. Any gains or


60

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
losses that arise during the periodyear but are not recognized as components of net periodic benefit cost will beare recognized as a component of other comprehensive income (loss). The components of net periodic benefit cost are as follows for the years ended December 31:31:
             
  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)
             
 2013 2012 2011
Interest cost on benefit obligation$450
 $470
 $507
Expected return on plan assets(572) (511) (522)
Amortization of unrecognized actuarial net loss330
 292
 153
Net periodic benefit cost$208
 $251
 $138
Accumulated other comprehensive lossincome at December 31, 20102013 includes net unrecognized actuarial lossespension costs before income taxes of $3,262,$3,234, of which $138$40 is expected to be amortized into benefit cost during 2011.2014.
The actuarial assumptions used in determining the projected benefit obligation andare as follows for the actualyears ended December 31:
 2013 2012 2011
Discount rate4.64% 3.75% 4.22%
Expected long-term rate of return6.00% 6.00% 6.00%

82

The actuarial weighted average assumptions used in determining the net periodic pension costs are as follows for the yearyears ended December 31:
             
  2010 2009 2008
 
Discount rate  6.10%  5.87%  6.10%
Expected long-term rate of return  6.00%  6.00%  7.00%
 2013 2012 2011
Discount rate3.75% 4.22% 5.36%
Expected long-term return on plan assets6.00% 6.00% 6.00%
As a result of the curtailment of the Plan, there is no rate of compensation increase considered in the above assumptions.
The expected long term rate of return is an estimate of anticipated future long term rates of return on plan assets as measured on a market value basis. Factors considered in arriving at this assumption include:
Historical long term rates of return for broad asset classes.
• 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.
• 
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’sOur overall investment strategy is to moderately grow the portfolio by investing 50% of the portfolio in equity securities and 50% in fixed income securities. This strategy is designed to generate a long term rate of return of 8.7%6.0%. Equity securities primarily consist of the S&P 500 Index with a smaller allocation to the Small Cap and International Index. Fixed income securities are invested in the Bond Market Index. The Plan has appropriate assets invested in short term investments to meet near-term benefit payments.
The asset mix and the sector weighting of the investments are determined by theour pension committee, which is comprised of members of management ofour management. To manage the Corporation. Consultations are held withPlan, we retain a third party investment advisor retained by the Corporation to manage the Plan. The Corporation reviewsconduct consultations. We review the performance of the advisor no less thanat least annually.


61

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
The fair values of the Corporation’sour pension plan assets by asset category were as follows as of December 31:31:
                
 2010 2009 
Description
 Total (Level 2) Total (Level 2) 
2013 2012
Asset Category                

Total (Level 2) Total (Level 2)
Short-term investments $108  $108  $70  $70 $142
 $142
 $80
 $80
Common collective trusts                       
Fixed income  4,470   4,470   4,826   4,826 5,064
 5,064
 4,832
 4,832
Equity investments  4,322   4,322   3,459   3,459 5,302
 5,302
 4,738
 4,738
         
 $8,900  $8,900  $8,355  $8,355 
         
Total$10,508
 $10,508
 $9,650
 $9,650
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, 20102013 and 2009:2012:
• 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.
Common collective trusts: These investments are public investment securities valued using the NAV provided by a third party investment advisor. The Corporation doesNAV is quoted on a private market that is not active; however, the unit price is based on underlying investments which are traded on an active market.
We do not anticipate making any contributions to the plan in 2011.2014.
Estimated future benefit payments are as follows for the next ten years:
     
Year
 Amount
 
2011 $393 
2012  406 
2013  404 
2014  497 
2015  542 
Years 2016 — 2020  3,038 
The components of projected net periodic benefit cost are as follows for the year ended ending December 31:31, 2014:
Interest cost on projected benefit obligation$486
Expected return on plan assets(615)
Amortization of unrecognized actuarial net loss169
Net periodic benefit cost$40
     
  2011 
 
Interest cost on projected benefit obligation  507 
Expected return on plan assets  (522)
Amortization of unrecognized actuarial net loss  153 
     
Net periodic benefit cost
 $138 
     

83

Estimated future benefit payments are as follows for the next ten years:
2014$518
2015551
2016549
2017577
2018575
2019 - 20233,312
Equity Compensation Plan
Pursuant to the terms of the Isabella Bank Corporation and Related Companies Deferred CompensationDirectors Plan, for Directors (the “Directors Plan”),our directors of the Corporation and its subsidiaries are required to deferinvest at least 25% of their earned board fees intoin our common stock. These stock investments can be made either through deferred fees or through the purchase of shares through the Isabella Bank Corporation Stockholder Dividend Reinvestment and Employee Stock Purchase Plan ("DRIP Plan"). Deferred fees, under the Directors Plan. The feesPlan, are converted on a quarterly basis into the Corporation’sshares of our common stock 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 retirementDRIP Plan shares are purchased on a monthly basis pursuant to the DRIP Plan.
Distribution of deferred fees from the Directors Plan occurs when the participant retires from the board or upon the occurrence of certain other events, theevents. The participant is eligible to receive a lump-sum, in-kind, distribution of all of the stock that is then in his or her account, and any unconverted cash will be converted to and rounded up to whole shares of stock and distributed, as well. The Directors Plan does not allow for cash settlement, and therefore, such share 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 the Directors Plan. The CorporationWe may also purchase shares of common stock on the open market to meet itsour obligations under the Directors Plan.
In 2008,We maintain the Corporation established a Rabbi Trust effective as of July 1, 2008, to fund the Directors Plan. AThe Rabbi Trust is an irrevocable grantor trust to which the Corporationwe may contribute assets for the limited purpose of funding a nonqualified deferred compensation plan. Although the Corporationwe may not reach the assets of the Rabbi Trust (“Trust”) for any purpose other than meeting itsour obligations under the Directors Plan, the assets of the Rabbi Trust remain subject to the claims of the Corporation’sour creditors and are included in the consolidated financial statements. The CorporationWe may contribute cash or common stock to the Rabbi Trust from time to time for the sole purpose of funding the Directors Plan. The Rabbi Trust will use any cash that the Corporationwe contributed to purchase shares of the Corporation’sour common stock on the open market through the Corporation’sour brokerage services department.
The components of shares eligible to be issued under the Directors Plan were as follows as of December 31:31:
                
 2010 2009 
 Eligible
 Market
 Eligible
 Market
 
 Shares Value Shares Value 2013 2012
Eligible
Shares		 Market
Value		 Eligible
Shares		 Market
Value
Unissued  191,977  $3,321   186,279  $3,530 172,550
 $4,115
 165,436
 $3,598
Shares held in Rabbi Trust  32,686   565   30,626   580 12,761
 304
 5,130
 112
         
Total
  224,663  $3,886   216,905  $4,110 185,311
 $4,419
 170,566
 $3,710
         
Other Employee Benefit Plans
The Corporation maintains aWe maintain two nonqualified supplementary employee retirement plan (“SERP”) for qualified officersplans to provide supplemental retirement benefits to each participant.specified participants. Expenses related to this programthese programs for 2010, 2009,2013, 2012 and 20082011 were $218, $219,$375, $382, and $206,$444, respectively, and are being recognized over the participants’ expected years of service. As
We maintain 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 plannon-leveraged ESOP which cover substantially all of its employees. Effective December 31, 2006, the ESOP was frozen to new participants.participants on December 31, 2006. Contributions to the plansplan are discretionary and are approved by the Board of Directors and recorded as compensation expense. During 2009,2012, the Board of Directors approved a contribution of $50$75 to the plan. ExpensesESOP. We made no contributions in 2013 or 2011. Compensation cost related to the plansplan for 2010, 2009,2013, 2012 and 2008 were $0, $50,2011 was $29, $102, and $0,$20, respectively. Total allocated shares outstanding related to the ESOP at December 31, 2010, 2009,2013, 2012, and 20082011 were 246,419, 271,421,241,958, 246,404, and 271,520,246,404, respectively. Such shares are included in the computation of dividends and earnings per share in each of the respective years.
The Corporation maintainsWe maintain a self fundedself-funded medical plan under which the Corporation iswe are responsible for the first $50$75 per year of claims made by a covered family. Medical claims are subject to a lifetime maximum of $5,000 per covered individual. Expenses are accrued based on estimates of the aggregate liability for claims incurred and the Corporation’sour experience. Expenses were $2,101$2,698 in 2010, $2,1552013, $2,534 in 20092012 and $2,110$2,045 in 2008.2011.

84

Note 18 – Accumulated Other Comprehensive Income (Loss)
The Corporation maintains the Isabella Bank Corporation Stockholder Dividend Reinvestment Plan and Employee Stock Purchase Plan (the “Dividend Reinvestment Plan”). The dividend reinvestment feature of the Dividend Reinvestment Plan allows shareholders to purchase previously unissued Isabella Bank Corporation common shares using dividends paid on shares held in the plan. The employee stock purchase feature of the Dividend Reinvestment Plan allows employees and directors to purchase Isabella Bank Corporation common stock through payroll deduction. The shareholder stock purchase feature of the Dividend Reinvestment Plan enables existing shareholders to purchase additional shares of the Corporation’s stock directly from the Corporation. The number of shares reserved for issuance under 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)AOCI
Note 17 —Accumulated Other Comprehensive Loss
Comprehensive loss includes net income as well as unrealized gains and losses, net of tax, onavailable-for-sale AFS investment securities owned and changes in the funded status of the Corporation’sour defined benefit pension plan, which are excluded from net income. Unrealized investmentAFS securities gains and losses and changes in the funded status of the pension plan, net of tax, are excluded from net income, and are reflected as a direct charge or credit to shareholders’ equity. Comprehensive income (loss) and the related components are disclosed in the accompanying consolidated statements of comprehensive incomeincome.
The following table summarizes the changes in AOCI by component for each of the years ended December 31 (net of tax):
  Unrealized
Holding Gains
(Losses) on
AFS
Securities		 Change in Unrecognized Pension Cost on Defined
Benefit
Pension Plan		 Total
Balance, January 1, 2011$444
 $(2,153) $(1,709)
OCI before reclassifications9,220
 (2,109) 7,111
Amounts reclassified from AOCI(3) 138
 135
Subtotal9,217
 (1,971) 7,246
Tax effect(3,719) 671
 (3,048)
OCI, net of tax5,498
 (1,300) 4,198
Balance, December 31, 20115,942
 (3,453) 2,489
OCI before reclassifications3,921
 (580) 3,341
Amounts reclassified from AOCI(837) 251
 (586)
Subtotal3,084
 (329) 2,755
Tax effect(348) 111
 (237)
OCI, net of tax2,736
 (218) 2,518
Balance, December 31, 20128,678
 (3,671) 5,007
OCI before reclassifications(18,971) 2,120
 (16,851)
Amounts reclassified from AOCI(171) 208
 37
Subtotal(19,142) 2,328
 (16,814)
Tax effect6,257
 (791) 5,466
OCI, net of tax(12,885) 1,537
 (11,348)
Balance, December 31, 2013$(4,207) $(2,134) $(6,341)
Included in OCI for the years ended December 31, 2010, 2009,2013 and 2008.2012 are changes in unrealized holding gains and losses related to auction rate money market preferred and preferred stocks. For federal income tax purposes, these securities are considered equity investments. As such, no deferred federal income taxes related to unrealized holding gains or losses are expected or recorded.

85
The following is a
Table of Contents

A summary of the components comprisingof unrealized holding gains on AFS securities included in OCI follows for the balanceyears ended December 31:
 2013 2012 2011

Auction Rate Money Market Preferred and Preferred Stocks All Other AFS securities Total Auction Rate Money Market Preferred and Preferred Stocks All Other AFS securities Total Auction Rate Money Market Preferred and Preferred Stocks All Other AFS securities Total
Unrealized gains (losses) arising during the period$(737) $(18,234) $(18,971) $2,059
 $1,862
 $3,921
 $(1,719) $10,939
 $9,220
Reclassification adjustment for net realized (gains) losses included in net income—
 (171) (171) —
 (1,119) (1,119) —
 (3) (3)
Reclassification adjustment for impairment loss included in net income—
 —
 —
 —
 282
 282
 —
 —
 —
Net unrealized gains (losses)(737) (18,405) (19,142) 2,059
 1,025
 3,084
 (1,719) 10,936
 9,217
Tax effect—
 6,257
 6,257
 —
 (348) (348) —
 (3,719) (3,719)
Unrealized gains (losses), net of tax$(737) $(12,148) $(12,885) $2,059
 $677
 $2,736
 $(1,719) $7,217
 $5,498
The following table details reclassification adjustments and the related affected line items on our consolidated statements of accumulated other comprehensive loss reported onincome for the consolidated balance sheets asyears ended December 31:
Details about AOCI componentsAmount
Reclassified from
AOCI		 Affected Line Item in the
Consolidated
Statements of Income
 2013 2012 2011  
Unrealized holding gains (losses) on AFS securities       
 $171
 $1,119
 $3
 Net gain (loss) on sale of AFS securities
 —
 (282) —
 Net AFS impairment loss
 171
 837
 3
 Income before federal income tax expense
 58
 285
 1
 Federal income tax expense
 $113
 $552
 $2
 Net income
        
Change in unrecognized pension cost on defined benefit pension plan       
 $208
 $251
 $138
 Compensation and benefits
 71
 85
 47
 Federal income tax expense
 $137
 $166
 $91
 Net income

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Note 19 – Related Party Transactions
         
  2010  2009 
 
Unrealized gains (losses) onavailable-for-sale investment securities
 $444  $(13)
Unrecognized pension costs  (2,153)  (2,106)
         
Accumulated other comprehensive loss
 $(1,709) $(2,119)
         
Note 18 —Related Party Transactions
In the ordinary course of business, the Corporation grantswe grant loans to principal officers and directors and their affiliates (including their families and companies in which they have 10% or more ownership). Annual activity duringconsisted of the following for the years ended December 31 consisted of the following::
        
 2010 2009 
2013 2012
Balance, beginning of year $4,142  $4,011 
Balance, January 1$6,598
 $3,728
New loans  3,038   5,033 2,373
 8,435
Repayments  (2,833)  (4,902)(4,793) (5,565)
     
Balance, ending of year $4,347  $4,142 
     
Balance, December 31$4,178
 $6,598
Total deposits of these principal officers and directors and their affiliates amounted to $11,556$6,158 and $7,090$6,871 at December 31, 20102013 and 2009,2012, respectively. In addition, Isabella Bank Corporation’s Employee Stock Ownership Planthe ESOP held deposits with the Bank aggregating $254$292 and $219,$517, respectively, at December 31, 20102013 and 2009.2012.
From time-to-time, we make charitable donations to the Isabella Bank Foundation (the “Foundation”), which is an affiliated nonprofit entity formed for the purpose of distributing charitable donations to recipient organizations generally located in the communities we service. Donations are expensed when committed to the Foundation. The assets and transactions of the Foundation are not included in our consolidated financial statements.
Note 19 —
Assets of the Foundation include cash and cash equivalents, certificates of deposit, and shares of Isabella Bank Corporation common stock. The Foundation owned 16,850 and 0 shares of our stock as of December 31, 2013 and 2012, respectively. Such shares are included in the computation of dividends and earnings per share.
The following table displays ending asset balances of, and our donations to, the Foundation as of, and for the years ended, December 31:
 2013 2012 2011
Ending assets$1,815
 $1,766
 $1,150
Donations$200
 $850
 $250
Note 20 – Fair Value
Estimated Fair Values of Financial Instruments Not Recorded at Fair Value in their Entirety on a Recurring Basis
Disclosure of the estimated fair values of financial instruments, which differ from carrying values, often requires the use of estimates. In cases where quoted market values in an active market are not available, the Corporation uses present value techniques and other valuation methods to estimate the fair values of its financial instruments. These valuation methods require considerable judgment and the resulting estimates of fair value can be significantly affected by the assumptions made and methods used.


64

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
The carrying amount and estimated fair value of financial instruments not recorded at fair value in their entirety on a recurring basis on the Corporation’s consolidated balance sheets are as follows as of 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
The table below presents the recorded amount of assets and liabilities measured at fair value 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 Corporation had no assets or liabilities measured utilizing Level 1 valuation techniques.
Following is a description of the valuation methodologies, and key inputs, used to measure financial assets and liabilities recorded at fair value, as well as a description of the methods and significant assumptions used to estimate fair value disclosures for financial instruments not recorded at fair value in their entirety on a recurring basis. For financial assets and liabilities recorded at fair value, the description includes an indication of the level of the fair value hierarchy in which the assets or liabilities are classified.
Cash and demand deposits due from banks:cash equivalents
:The carrying amounts of cash and short term investments, including Federal funds sold, approximate fair values. As such, we classify cash and demand deposits due from banks as Level 1.
Certificates of deposit held in other financial institutions: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.years. Fair value is determined using prices for similar assets with similar characteristics. As such, we classify certificates of deposits held in other financial institutions as Level 2.
InvestmentAFS and trading securities:
Investment AFS and trading securities are recorded at fair value on a recurring basis. Level 1 fair value measurement is based upon quoted prices for identical instruments. Level 2 fair value measurement is based upon quoted prices if available.for similar instruments. If quoted prices are not available, fair values are measured using independent pricing models or other model based valuation techniques such as the present value of future cash flows, adjusted for the security’s credit rating, prepayment assumptions and other factors such as credit loss and liquidity assumptions. The values for Level 1 and Level 2 investment securities include bonds issued by government sponsored enterprises, states and political subdivisions, mortgage-backed securities, and collateralized mortgage obligations issued by government sponsored enterprises.
Securities classified as Level 3 include securities in less liquid markets and include auction rate money market preferred securities and preferred stocks. Due to the limited trading activity of these securities, the fair values were estimated utilizing a discounted cash flow analysis as of December 31, 2010 and 2009. These analyses considered creditworthiness of the counterparty, the investment grade, the timing of expected future cash flows, and 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 wereare generally obtained from publishedan independent third party. On a quarterly basis, we compare the values provided to alternative pricing sources. All securities have call dates within the next year. The Corporation calculated the present value assuming a 30 year nonamortizing balloon using weighted average discount rates between 3.88% and 6.87% as of December 31, 2010.
Mortgage loans AFSavailable-for-sale::
Mortgage loans AFSavailable-for-sale are carried at the lower of cost or marketfair value. The fair value of mortgageMortgage loans AFSavailable-for-sale are based on what price secondary markets are currently offering for portfolios with similar characteristics. As such, the Corporation classifieswe classify Mortgage loans subjectedAFS subject to nonrecurring fair value adjustments as Level 2.

87

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


66

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued) As such, we classify loans as Level 3 assets.
The Corporation doesWe do not record loans at fair value on a recurring basis. However, from time to time, a loan is consideredtime-to-time, loans are classified as impaired and a specific allowance for loan losses may be established. Loans for which it is probable that payment of interest and principal will be significantly different than the contractual terms of the original loan agreement are considered impaired. Once a loan is identified as impaired, management measureswe measure the estimated impairment. The fair value of impaired loans is estimated using one of several methods, including collateral value, market value of similar debt, enterprise value, liquidation value, or 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.
The Corporation reviewsWe review the net realizable values of the underlying collateral for collateral dependent impaired loans on at least a quarterly basis for all loan types. To determine the collateral value, management utilizeswe utilize independent appraisals, broker price opinions, or internal evaluations. TheseWe review these valuations are reviewed to determine whether an additional discount should be applied given the age of market information that may have been considered as well as other factors such as costs to carry and sell an asset if it is determined that the collateral will be liquidated in connection with the ultimate settlement of the loan. The Corporation uses this valuationWe use these valuations to determine if any charge offscharge-offs or specific reserves are necessary. The CorporationWe may obtain new valuations in certain circumstances, including when there has been significant deterioration in the condition of the collateral, if the foreclosure process has begun, or if the existing valuation is deemed to be outdated.
Impaired loans where an allowance is established based onThe following tables list the net realizable value of collateral require classification in thequantitative 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 collateral is further impaired below the appraised value, the Corporation records theinformation about impaired loans as nonrecurring Level 3.of December 31:
 2013
Valuation TechniquesFair Value Unobservable Input Range
Discounted cash flow$11,521 Duration of cash flows: 98 - 120 Months
   Reduction in interest rate from original loan terms: 3.25% - 7.57%
   Discount applied to collateral appraisal:  
   Real Estate 20% - 30%
   Equipment 50%
Discounted appraisal value$13,902 Livestock 50%
   Cash crop inventory 50%
   Other inventory 75%
   Accounts receivable 75%
 2012
Valuation TechniquesFair Value Unobservable Input Range
Discounted cash flow$8,726 Duration of cash flows: 14-120 Months
   Reduction in interest rate from original loan terms: 5.00% - 6.25%
   Discount applied to collateral appraisal:  
   Real Estate 20% - 30%
   Equipment 50%
Discounted appraisal value$13,295 Livestock 50%
   Cash crop inventory 50%
   Other inventory 75%
   Accounts receivable 75%
Accrued interest:interest receivable
:The carrying amounts of accrued interest receivable approximate fair value.
Goodwill and other intangible assets:
Acquisition intangibles and goodwill 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 As such, we classify goodwill and other acquisition intangibles subjected to nonrecurring fair value adjustmentsaccrued interest receivable as Level 3. During 2010 and 2009, there were no impairments recorded on goodwill and other acquisition intangibles.1.

88

Equity securities without readily determinable fair values:values
The Corporation has investments: Included in equity securities without readily determinable fair values are FHLB stock and FRB stock as well as our ownership interests in Corporate Settlement Solutions, LLC and Valley Financial Corporation. The investment in Corporate Settlement Solutions, LLC, a title insurance company, was made in the first quarter 2007. We are not the managing entity of Corporate Settlement Solutions, LLC, and therefore, we account for our investment under the equity method of accounting. Valley Financial Corporation is the parent company of 1st State Bank in Saginaw, Michigan, which is a de novo bank that opened in 2005. We made 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. Valley Financial Corporation in 2004 and in 2007.
The lack of an active market, or other independent sourcesources to validate fair value estimates includingcoupled with the impact of future capital calls and transfer restrictions, is an inherent limitation in the valuation process. The Corporation classifies nonmarketable equity securities and itsAs the fair values of these investments in joint ventures subjected to nonrecurringare not readily determinable, they are not disclosed under a specific fair value adjustmentshierarchy; however, they are reviewed quarterly for impairment. If we were to record an impairment adjustment related to these securities, it would be classified as a nonrecurring Level 3.3 fair value adjustment. During 20102013 and 2009,2012, there were no impairments recorded on equity securities without readily determinable fair values.


67

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Foreclosed assets:assets
: Upon transfer from the loan portfolio, foreclosed assets (which are included in other assets) are adjusted to and subsequently carried at the lower of carrying value or fair value less costs to sell. Net realizable value is based upon independent market prices, appraised values of the collateral, or management’s estimation of the value of the collateral and as such,collateral. Due to the Corporation classifiesinherent level of estimation in the valuation process, we record foreclosed assets as a nonrecurring Level 2. When management determines that the net realizable value of the collateral is further impaired below the appraised value but there is no observable market price, the Corporation records the foreclosed asset as nonrecurring Level 3.
The table below lists the quantitative fair value information related to foreclosed assets as of:
 December 31, 2013
Valuation TechniquesFair Value Unobservable Input Range
   Discount applied to collateral appraisal:  
Discounted appraisal value$1,412
 Real Estate 20% - 30%
Originated mortgage servicing rights:
 December 31, 2012
Valuation TechniquesFair Value Unobservable Input Range
   Discount applied to collateral appraisal:  
Discounted appraisal value$2,018
 Real Estate 20% - 30%
Goodwill and other intangible assets: Acquisition intangibles and goodwill are evaluated for potential impairment on at least an annual basis. Acquisition intangibles and goodwill are typically qualitatively evaluated to determine if it is more likely than not that the carrying balance is impaired. If it is determined that the carrying balance of acquisition intangibles or goodwill is more likely than not to be impaired, we perform a cash flow valuation to determine the extent of the potential impairment. If the testing resulted in impairment, we would classify goodwill and other acquisition intangibles subjected to nonrecurring fair value adjustments as Level 3. During 2013 and 2012, there were no impairments recorded on goodwill and other acquisition intangibles.
Originated mortgage servicing rightsOMSRs:OMSRs (which are included in other assets) are subject to impairment testing. A valuation model, which utilizesTo test for impairment, we utilize a discounted cash flow analysis using interest rates and prepayment speed assumptions currently quoted for comparable instruments and a discount rate determined by management, is used for impairment testing.rates. If the valuation model reflects a value less than the carrying value, originated mortgage servicing rightsOMSRs are adjusted to fair value through a valuation allowance as determined by the model. As such, the Corporation classifies loan servicing rightswe classify OMSRs subject to nonrecurring fair value adjustments as Level 2.
Deposits:Deposits
Demand,: The fair value of demand, savings, and money market deposits are, by definition, equal to the amount payable on demand at the reporting date (i.e., their carrying amounts)., and are classified as Level 1. Fair values for variable rate certificates of deposit approximate their recorded carrying value. Fair values for fixed rate certificates of deposit are estimated using a discounted cash flow calculation that applies interest rates currently being offered on certificates to a schedule of aggregated expected monthly maturities on time deposits. As such, fixed rate certificates of deposit are classified as Level 2.
Borrowed funds:funds
:The carrying amounts of federal funds purchased, borrowings under overnight repurchase agreements, and other short-term borrowings maturing within ninety days approximate their fair values. The fair values of the Corporation’s other borrowed funds are estimated using discounted cash flow analyses based on the Corporation’s current incremental borrowing arrangements. As such, borrowed funds are classified as Level 2.

89
The Corporation has
Table of Contents

We previously elected to measure a portion of borrowed funds at fair value. These borrowings arewere 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 borrowingsborrowing rates for similar types of borrowing arrangements. Changes in the fair value of these borrowings are included in noninterest income.
The activity in borrowings which we have elected to carry at fair value was as follows for the year ended December 31:
 2012
Borrowings carried at fair value - beginning of year$5,242
Paydowns and maturities(5,209)
Net unrealized change in fair value(33)
Borrowings carried at fair value - December 31$—
Unpaid principal balance - December 31$—
Accrued interest payable: The carrying amounts of accrued interest payable approximate fair value. As such, the Corporation classifies other borrowed fundswe classify accrued interest payable as Level 2.1.
Commitments to extend credit, standby letters of credit, and undisbursed loans:
Fair values for off balance sheet lending Our commitments to extend credit, standby letters of credit, and undisbursed funds have no carrying amount and are based on fees currently chargedestimated to enter into similar agreements, taking into consideration the remaining termshave no realizable fair value. Historically, a majority of the agreementsunused commitments to extend credit have not been drawn upon and, the counterparties’generally, we do not receive fees in connection with these commitments other than standby letter of credit standings. The Corporation doesfees, which are not charge fees for lending commitments; thus it is not practicable to estimate the fair value of these instruments.
significant.
The preceding methods described may produce a fair value calculation that may not be indicative of net realizable value or reflective of future fair values. Furthermore, although the Corporation believes itsAlthough we believe our valuation methods are appropriate and consistent with other market participants, the use of different methodologies or assumptions to determine the fair value of certain financial instruments could result in a different fair value measurement.

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

68

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)90

The table below represents the activitycarrying amount and estimated fair value of financial instruments not recorded at fair value inavailable-for-sale investment securities measured with Level 3 inputs their entirety on a recurring basis foron our consolidated balance sheets are as follows as of as of December 31:
 2013
 Carrying
Value		 Estimated
Fair Value		 (Level 1) (Level 2) (Level 3)
ASSETS         
Cash and cash equivalents$41,558
 $41,558
 $41,558
 $—
 $—
Certificates of deposit held in other financial institutions580
 582
 —
 582
 —
Mortgage loans AFS1,104
 1,123
 —
 1,123
 —
Total loans808,037
 808,246
 —
 —
 808,246
Less allowance for loan and lease losses(11,500) (11,500) —
 —
 (11,500)
Net loans796,537
 796,746
 —
 —
 796,746
Accrued interest receivable5,442
 5,442
 5,442
 —
 —
Equity securities without readily determinable fair values (1)18,293
 18,293
 —
 —
 —
OMSRs2,555
 2,667
 —
 2,667
 —
LIABILITIES         
Deposits without stated maturities593,754
 593,754
 593,754
 —
 —
Deposits with stated maturities450,012
 452,803
 —
 452,803
 —
Borrowed funds279,326
 283,060
 —
 283,060
 —
Accrued interest payable633
 633
 633
 —
 —
 2012
 Carrying
Value		 Estimated
Fair Value		 (Level 1) (Level 2) (Level 3)
ASSETS         
Cash and cash equivalents$24,920
 $24,920
 $24,920
 $—
 $—
Certificates of deposit held in other financial institutions4,465
 4,475
 —
 4,475
 —
Mortgage loans AFS3,633
 3,680
 —
 3,680
 —
Total loans772,753
 784,964
 —
 —
 784,964
Less allowance for loan and lease losses(11,936) (11,936) —
 —
 (11,936)
Net loans760,817
 773,028
 —
 —
 773,028
Accrued interest receivable5,227
 5,227
 5,227
 —
 —
Equity securities without readily determinable fair values (1)18,118
 18,118
 —
 —
 —
OMSRs2,285
 2,285
 —
 2,285
 —
LIABILITIES         
Deposits without stated maturities553,332
 553,332
 553,332
 —
 —
Deposits with stated maturities464,335
 472,630
 —
 472,630
 —
Borrowed funds241,001
 248,822
 —
 248,822
 —
Accrued interest payable751
 751
 751
 —
 —
(1)
Due to the characteristics of equity securities without readily determinable fair values, they are not disclosed under a specific fair value hierarchy. If we were to record an impairment adjustment related to these securities, such amount would be classified as a nonrecurring Level 3 fair value adjustment.

91

Financial Instruments Recorded at Fair Value
The table below presents the years endedrecorded amount of assets and liabilities measured at fair value on December 31:
         
  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 
         
 2013 2012
 Total (Level 1) (Level 2) (Level 3) Total (Level 1) (Level 2) (Level 3)
Recurring items               
Trading securities               
States and political subdivisions$525
 $—
 $525
 $—
 $1,573
 $—
 $1,573
 $—
AFS securities               
Government-sponsored enterprises23,745
 —
 23,745
 —
 25,776
 —
 25,776
 —
States and political subdivisions201,988
 —
 201,988
 —
 182,743
 —
 182,743
 —
Auction rate money market preferred2,577
 —
 2,577
 —
 2,778
 —
 2,778
 —
Preferred stocks5,827
 5,827
 —
 —
 6,363
 6,363
 —
 —
Mortgage-backed securities144,115
 —
 144,115
 —
 155,345
 —
 155,345
 —
Collateralized mortgage obligations133,810
 —
 133,810
 —
 131,005
 —
 131,005
 —
Total AFS securities512,062
 5,827
 506,235
 —
 504,010
 6,363
 497,647
 —
Nonrecurring items               
Impaired loans (net of the ALLL)25,423
 —
 —
 25,423
 22,021
 —
 —
 22,021
Foreclosed assets1,412
 —
 —
 1,412
 2,018
 —
 —
 2,018
 $539,422
 $5,827
 $506,760
 $26,835
 $529,622
 $6,363
 $499,220
 $24,039
Percent of assets and liabilities measured at fair value  1.08% 93.95% 4.97%   1.20% 94.26% 4.54%
The following table provides a summary of the changes in fair value of assets and liabilities recorded at fair value through earnings on a recurring basis and changes in assets and liabilities recorded at fair value on a nonrecurring basis, for which an impairment,gains or reduction of an impairment, waslosses were 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:
 2013 2012

Trading
Losses		 Other Gains
(Losses)		 Total Trading
Losses		 Other Gains
(Losses)		 Total
Recurring items           
Trading securities$(28) $—
 $(28) $(52) $—
 $(52)
Borrowed funds—
 —
 —
 —
 33
 33
Nonrecurring items          
Foreclosed assets—
 (156) (156) —
 (166) (166)
Total$(28) $(156) $(184) $(52) $(133) $(185)
         
  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)92

Note 21 – Parent Company Only Financial Information
Note 20 —Parent Company Only Financial Information
Condensed Balance Sheets
        
 December 31 
 2010 2009 December 31
2013 2012
ASSETS
ASSETS
   
Cash on deposit at subsidiary Bank $301  $172 
Securities available for sale  1,929   2,073 
Cash on deposit at the Bank$529
 $332
AFS securities3,542
 3,939
Investments in subsidiaries  94,668   89,405 110,192
 115,781
Premises and equipment  1,952   2,346 2,013
 2,041
Other assets  53,481   53,644 54,223
 52,398
     
Total Assets
 $152,331  $147,640 
     
TOTAL ASSETS$170,499
 $174,491
LIABILITIES AND SHAREHOLDERS’ EQUITYLIABILITIES AND SHAREHOLDERS’ EQUITY   
Other liabilities $7,170  $6,837 $9,890
 $10,002
Shareholders’ equity  145,161   140,803 
     
Total Liabilities And Shareholders’ Equity
 $152,331  $147,640 
     
Shareholders' equity160,609
 164,489
TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY$170,499
 $174,491
Condensed Statements of Income
 Year Ended December 31

2013 2012 2011
Income     
Dividends from subsidiaries$7,000
 $6,125
 $6,500
Interest income161
 174
 128
Management fee and other2,146
 2,037
 1,201
Total income9,307
 8,336
 7,829
Expenses     
Compensation and benefits2,811
 2,424
 2,267
Occupancy and equipment476
 370
 370
Audit and related fees345
 351
 378
Other958
 945
 1,089
Total expenses4,590
 4,090
 4,104
Income before income tax benefit and equity in undistributed earnings of subsidiaries4,717
 4,246
 3,725
Federal income tax benefit790
 673
 958
Income before income tax benefit and equity in undistributed earnings of subsidiaries5,507
 4,919
 4,683
Undistributed earnings of subsidiaries7,003
 7,287
 5,527
Net income$12,510
 $12,206
 $10,210
             
  Year Ended December 31 
  2010  2009  2008 
 
Income            
Dividends from subsidiaries $6,250  $6,100  $5,800 
Interest income  72   77   88 
Management fee and other  1,340   993   1,011 
             
Total income
  7,662   7,170   6,899 
Expenses            
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  3,612   3,263   2,910 
Federal income tax benefit  896   976   905 
             
   4,508   4,239   3,815 
Undistributed earnings of subsidiaries  4,537   3,561   286 
             
Net income
 $9,045  $7,800  $4,101 
             


70

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)93

Condensed Statements of Cash Flows
 Year Ended December 31
 2013 2012 2011
Operating Activities     
Net income$12,510
 $12,206
 $10,210
Adjustments to reconcile net income to cash provided by operations     
Undistributed earnings of subsidiaries(7,003) (7,287) (5,527)
Undistributed earnings of equity securities without readily determinable fair values74
 (459) 160
Share-based payment awards554
 643
 615
Depreciation174
 114
 123
Net amortization of AFS securities2
 4
 7
Deferred income tax expense (benefit)(305) 425
 (48)
Changes in operating assets and liabilities which used cash     
Other assets(51) (513) 7
Accrued interest and other liabilities1,238
 (98) 757
Net cash provided by (used in) operating activities7,193
 5,035
 6,304
Investing activities     
Maturities, calls, and sales of AFS securities395
 370
 585
Purchases—
 —
 (3,000)
Purchases of equipment and premises(146) (239) (87)
Advances to subsidiaries, net of repayments(299) (50) —
Net cash provided by (used in) investing activities(50) 81
 (2,502)
Financing activities     
Net increase (decrease) in borrowed funds(1,350) (597) 2,772
Cash dividends paid on common stock(6,456) (6,074) (5,770)
Proceeds from the issuance of common stock3,618
 2,898
 2,302
Common stock repurchased(2,375) (1,980) (1,507)
Common stock purchased for deferred compensation obligations(383) (505) (426)
Net cash provided by (used in) investing activities(6,946) (6,258) (2,629)
Increase (decrease) in cash and cash equivalents197
 (1,142) 1,173
Cash and cash equivalents at beginning of year332
 1,474
 301
Cash and cash equivalents at end of year$529
 $332
 $1,474
             
  Year Ended December 31 
  2010  2009  2008 
 
Operating Activities
            
Net income $9,045  $7,800  $4,101 
Adjustments to reconcile net income to cash provided by operations            
Undistributed earnings of subsidiaries  (4,537)  (3,561)  (286)
Share based payment awards  650   677   603 
Depreciation  147   163   294 
Net amortization of investment securities  5   6   5 
Deferred income tax (benefit) expense  (172)  (570)  162 
Changes in operating assets and liabilities which provided (used) cash            
Other assets  298   (748)  (816)
Accrued interest and other liabilities  1,883   517   583 
             
Net Cash Provided by Operating Activities
  7,319   4,284   4,646 
Investing Activities
            
Activity inavailable-for-sale securities
            
Maturities, calls, and sales  110   110   110 
Sales (purchases) of equipment and premises  247   (466)  1,300 
Advances to subsidiaries  (250)  —   (11,927)
             
Net Cash Provided by (Used in) Investing Activities
  107   (356)  (10,517)
Financing Activities
            
Net (decrease) increase in other borrowed funds  (1,550)  700   1,836 
Cash dividends paid on common stock  (5,421)  (5,256)  (4,873)
Proceeds from the 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 Used in Financing Activities
  (7,297)  (4,900)  (7,250)
             
Increase (Decrease) in Cash and Cash Equivalents
  129   (972)  (13,121)
Cash and cash equivelants at beginning of year  172   1,144   14,265 
             
Cash And Cash Equivalents at End of Year
 $301  $172  $1,144 
             
Note 22 – Operating Segments
Note 21 —Operating Segments
The Corporation’sOur reportable segments are based on legal entities that account for at least 10 percent10% of net operating results. Retail bankingThe operations for 2010, 2009,of the Bank as of December 31, 2013, 2012 and 20082011 represent approximately 90% or greatermore of the Corporation’sour consolidated total assets and operating results. As such, no additional segment informationreporting is presented.


71

94

Management’s Discussion and AnalysisTable of Financial Condition and Results of OperationsContents

ISABELLA BANK CORPORATION FINANCIAL REVIEW
(All dollars in thousands)
The following is management’s discussion and analysis of the financial condition and results of operations for Isabella Bank Corporation. This discussion and analysis is intended to provide a better understanding of the consolidated financial statements and statistical data included elsewhere in the Annual Report.
Executive Summary
Isabella Bank Corporation, as well as all other financial institutions in Michigan and across the entire country, continues to experience the negative impacts on its operations from the recent economic recession and the subsequent recovery. This recession, which began in the fourth quarter of 2008, has resulted in historically high levels of loan delinquencies and nonaccrual loans, which have translated into increases in net loans charged off and foreclosed asset and collection expenses. Additionally, 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 represented 0.83% of total loans as of December 31, 2010 which declined from 1.28% as of December 31, 2009. The ratio of nonperforming loans to total loans for all banks in the Corporation’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) was 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 Midland, Michigan in the third quarter of 2010. The new full service office will expand the Corporation’s presence in the Midland area as a source for both 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 require 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 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 more information regarding that amendment, see 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 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 detailed discussion 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 areother-than-temporary are reflected as realized losses in the consolidated statements of income. The change in value of trading investment securities is included in current earnings. Management evaluates securities for indications of losses that are consideredother-than-temporary, if any, on a regular basis. The market values foravailable-for-sale and trading investment securities are typically obtained from outside sources and applied to individual securities within the portfolio.
The Corporation 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 uncertainty, the trading for these securities has been limited. As a result of the limited trading of these securities, $7,800 converted to preferred stock with debt like characteristics in 2009.
Due to the limited trading activity of these securities, the fair values were estimated utilizing a discounted cash flow analysis as of December 31, 2010 and December 31, 2009. These analyses considered creditworthiness of the counterparty, the timing of expected future cash flows, and 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 year. The Corporation calculated the present value assuming a 30 year nonamortizing balloon using weighted average discount rates between 3.88% and 6.87% as of December 31, 2010.
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 securities’ interest rates, as they are currently lower than the offering 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 the underlying credit quality of the security. Additionally, none of these securities are deemed to be below investment grade, and management does not intend to sell the securities in an unrealized loss position, and it is more likely than not that the Corporation will not have to sell the securities before recovery of their cost basis. As


73

a result, the Corporation has not recognized another-than-temporary impairment related to these declines in fair value.
DISTRIBUTION OF ASSETS, LIABILITIES, AND SHAREHOLDERS’ EQUITY
INTEREST RATE AND INTEREST DIFFERENTIAL
The following schedules present the daily average amount outstanding for each major category of interest earning assets, nonearning assets, interest bearing liabilities, and noninterest bearing liabilities for the last three years. This schedule also presents an analysis of interest income and interest expense for the periods indicated. All interest income is reported on a fully taxable equivalent (FTE) basis using a 34% federal income tax rate. Nonaccruing loans, for the purpose of the following computations, are included in the average loan amounts outstanding. Federal Reserve and Federal Home Loan Bank stock holdings which are restricted are included in Other Assets.
                                     
  Year Ended 
  December 31, 2010  December 31, 2009  December 31, 2008 
     Tax
  Average
     Tax
  Average
     Tax
  Average
 
  Average
  Equivalent
  Yield/
  Average
  Equivalent
  Yield/
  Average
  Equivalent
  Yield/
 
  Balance  Interest  Rate  Balance  Interest  Rate  Balance  Interest  Rate 
 
INTEREST EARNING ASSETS
                                    
Loans $725,534  $46,794   6.45% $725,299  $47,706   6.58% $717,040  $49,674   6.93%
Taxable investment securities  160,514   5,271   3.28%  119,063   4,712   3.96%  108,919   5,433   4.99%
Nontaxable investment securities  120,999   7,095   5.86%  121,676   7,217   5.93%  121,220   7,218   5.95%
Trading account securities  8,097   436   5.38%  17,279   856   4.95%  26,618   1,305   4.90%
Federal funds sold  —   —   —   842   1   0.12%  5,198   110   2.12%
Other  45,509   479   1.05%  27,433   376   1.37%  17,600   433   2.46%
                                     
Total earning assets
  1,060,653   60,075   5.66%  1,011,592   60,868   6.02%  996,595   64,173   6.44%
NON EARNING ASSETS
                                    
Allowance for loan losses  (13,262)          (12,334)          (8,606)        
Cash and demand deposits due from banks  18,070           18,190           18,582         
Premises and equipment  24,624           23,810           22,905         
Accrued income and other assets  92,845           86,376           83,626         
                                     
Total assets
 $1,182,930          $1,127,634          $1,113,102         
                                     
INTEREST BEARING LIABILITIES
                                    
Interest bearing demand deposits $137,109   151   0.11% $116,412   146   0.13% $114,889   813   0.71%
Savings deposits  169,579   391   0.23%  177,538   399   0.22%  213,410   2,439   1.14%
Time deposits  430,892   10,988   2.55%  398,356   13,043   3.27%  393,190   16,621   4.23%
Borrowed funds  188,512   5,674   3.01%  193,922   6,251   3.22%  145,802   5,733   3.93%
                                     
Total interest bearing liabilities
  926,092   17,204   1.86%  886,228   19,839   2.24%  867,291   25,606   2.95%
NONINTEREST BEARING LIABILITIES
                                    
Demand deposits  102,812           94,408           95,552         
Other  14,171           7,188           6,633         
Shareholders’ equity  139,855           139,810           143,626         
                                     
Total liabilities and shareholders’ equity
 $1,182,930          $1,127,634          $1,113,102         
                                     
Net interest income (FTE)
     $42,871          $41,029          $38,567     
                                     
Net yield on interest earning assets (FTE)
          4.04%          4.06%          3.87%
                                     


74

Net Interest Income
The Corporation derives the majority of its gross income from interest earned on loans and investments, while its most significant expense is the interest cost incurred for funds used. Net interest income is the amount by which interest income on earning assets exceeds the interest cost of deposits and borrowings. Net interest income is influenced by changes in the balance and mix of assets and liabilities and market interest rates. Management exerts some control over these factors; however, Federal Reserve monetary policy and competition have a significant impact. Interest income includes loan fees of $2,196, in 2010, $1,963 in 2009, and $1,808 in 2008. For analytical purposes, net interest income is adjusted to a “taxable equivalent” basis by adding the income tax savings from interest on tax exempt loans and securities, thus making year to year comparisons more meaningful.
VOLUME AND RATE VARIANCE ANALYSIS
The following table details the dollar amount of changes in FTE net interest income for each major category of interest earning assets and interest bearing liabilities and the amount of change attributable to changes in average balances (volume) or average rates. The change in interest due to both volume and rate has been allocated to volume and rate changes in proportion to the relationship of the absolute dollar amounts of the change in each.
                         
  2010 Compared to 2009
  2009 Compared to 2008
 
  Increase (Decrease) Due to  Increase (Decrease) Due to 
  Volume  Rate  Net  Volume  Rate  Net 
 
CHANGES IN INTEREST INCOME:
                        
Loans $15  $(927) $(912) $567  $(2,535) $(1,968)
Taxable investment securities  1,453   (894)  559   474   (1,195)  (721)
Nontaxable investment securities  (40)  (82)  (122)  27   (28)  (1)
Trading account securities  (489)  69   (420)  (463)  14   (449)
Federal funds sold  (1)  —   (1)  (51)  (58)  (109)
Other  205   (102)  103   182   (239)  (57)
                         
Total changes in interest income
  1,143   (1,936)  (793)  736   (4,041)  (3,305)
CHANGES IN INTEREST EXPENSE:
                        
Interest bearing demand deposits  24   (19)  5   11   (678)  (667)
Savings deposits  (18)  10   (8)  (353)  (1,687)  (2,040)
Time deposits  1,002   (3,057)  (2,055)  216   (3,794)  (3,578)
Borrowed funds  (171)  (406)  (577)  1,672   (1,154)  518 
                         
Total changes in interest expense
  837   (3,472)  (2,635)  1,546   (7,313)  (5,767)
                         
Net change in interest margin (FTE)
 $306  $1,536  $1,842  $(810) $3,272  $2,462 
                         
Despite a $49,061 increase in interest earning assets in 2010, the $1,842 increase in FTE net interest income was primarily the result of interest rates on interest bearing liabilities decreasing faster than rates earned on interest earning assets. The Corporation anticipates that net interest margin yield will decline slightly during 2011 due to the following factors:
• While the Corporation’s liability sensitive balance sheet has allowed it to benefit from decreases in interest rates, it also makes the Corporation sensitive to increases in deposit and borrowing rates. As part of the Corporation’s goal to minimize the potential negative impacts of possible increases in future interest rates, management is actively working to lengthen the terms of its interest bearing liabilities. This lengthening has increased the Corporation’s cost of funding, reducing net interest income in the short term.
• Based on the current economic conditions, management does not anticipate any changes in the target Fed funds rate in the foreseeable future. As such, the Corporation does not anticipate significant, if any, changes in market rates. However, there is the potential for declines in rates earned on interest earning assets. Most of the potential declines would arise out of the Corporation’s investment portfolio, due to securities which may be called or will mature in 2011, as these funds will likely be reinvested at significantly lower rates.


75

• Interest rates on residential mortgage loans remain at or near historical lows. This rate environment has led to strong consumer demand for fixed rate mortgage products which are generally sold to the secondary market. As a result, there has been a significant decline in three and five year balloon mortgages, which are held on the Corporation’s balance sheet. As these balloon mortgages have paid off, the proceeds from these loans have been reinvested (typically in the form ofavailable-for-sale investment securities) at lower interest rates which has adversely impacted interest income.
• Loan growth has been minimal during 2010. As a result, funds were reinvested from higher yielding loans into lower yielding investments.
• The interest rates on many types of loans including home equity lines of credit, residential balloon mortgages, variable rate commercial lines of credit, and investment securities with acceptable credit and interest rate risks are currently priced at or below the Corporation’s current net yield on interest earning assets. In order to earn additional net interest income, the Corporation is continuing to extend loans and purchase investments that will increase net income but decrease net interest margin yield.
ALLOWANCE FOR LOAN LOSSES
The viability of any financial institution is ultimately determined by its management of credit risk. Loans outstanding represent the Corporation’s single largest concentration of risk. The allowance for loan losses (“ALLL”) is management’s estimation of losses in the existing loan portfolio. Factors used to evaluate the loan portfolio, and thus to determine the current charge to expense, include recent loan loss history, financial condition of borrowers, amount of nonperforming and impaired loans, overall economic conditions, and other factors.
The following schedule shows the composition of the provision for loan losses and the allowance for loan losses.
                     
  Year Ended December 31 
  2010  2009  2008  2007  2006 
 
Allowance for loan losses — January 1 $12,979  $11,982  $7,301  $7,605  $6,899 
Allowance of acquired bank  —   —   822   —   726 
Loans charged off                    
Commercial and agricultural  3,731   3,081   2,137   905   368 
Real estate mortgage  2,524   2,627   3,334   659   252 
Consumer  596   934   854   582   529 
                     
Total loans charged off
  6,851   6,642   6,325   2,146   1,149 
Recoveries                    
Commercial and agricultural  453   623   160   297   136 
Real estate mortgage  638   546   240   49   53 
Consumer  297   377   284   285   258 
                     
Total recoveries
  1,388   1,546   684   631   447 
                     
Net loans charged off  5,463   5,096   5,641   1,515   702 
Provision charged to income  4,857   6,093   9,500   1,211   682 
                     
Allowance for loan losses — December 31
 $12,373  $12,979  $11,982  $7,301  $7,605 
                     
Year to date average loans
 $725,534  $725,299  $717,040  $604,342  $522,726 
                     
Net loans charged off to average loans outstanding
  0.75%  0.70%  0.79%  0.25%  0.13%
                     
Total amount of loans outstanding
 $735,304  $723,316  $735,385  $612,687  $591,042 
                     
Allowance for loan losses as a % of loans
  1.68%  1.79%  1.63%  1.19%  1.29%
                     


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As a result of the recent economic recession, residential real estate values in the Corporation’s market areas have declined. These declines are the result of increases in the inventory of unsold homes. This increased inventory is partially the result of the inability of potential home buyers to obtain financing due to the tightening of loan underwriting criteria by many financial institutions, brokers and government sponsored agencies and uncertainties associated with industry wide concerns over the foreclosure process. While the Corporation has maintained traditional lending standards, the decline in real estate values has had an adverse impact on customers who are experiencing financial difficulties. Historically, customers who experienced difficulties were able to sell their properties for more than the loan balance owed. The steep decline in real estate values has diminished homeowner equity and led borrowers who are experiencing financial difficulties to default on their mortgage loans.
The Corporation originates and sells fixed rate residential real estate mortgages to the Federal Home Loan Mortgage Corporation (Freddie Mac). The Corporation has not originated loans either for trading or its own portfolio that would be classified as subprime or financed loans for more than 80% of market value unless insured by private third party insurance.
As shown in the preceding table, when comparing 2010 to 2009, net loans charged off increased by $367. This increase is primarily related to one loan, for which a charge off of $1,000 was recorded in the fourth quarter of 2010. Despite the increase in net loans charged off, the overall improvement in the credit quality of the Corporation’s loan portfolio has allowed the Corporation to reduce its provision for loan losses in 2010 when compared to 2009.
The Corporation allocates the allowance throughout its loan portfolio based on management’s assessment of the underlying risks associated with each loan segment. Management’s assessments include allocations based on specific impairment allocations, historical loss histories, internally assigned credit ratings, and past due and nonaccrual balances. A portion of the allowance for loan losses is not allocated to any one loan segment, but is instead a reflection of other qualitative risks within the Corporation’s loan portfolio.
For further discussion on the allocation of the allowance for loan losses, see “Note 4 — Loans and Allowance for Loan Losses” to the Corporation’s consolidated financial statements.
Loans Past Due and Loans in Nonaccrual Status
Increases in past due and nonaccrual loans can have a significant impact on the ALLL. To determine the potential impact, and corresponding estimated losses, management analyzes its historical loss trends on loans past due30-89 days, 90 days or more, and nonaccrual loans.
The following tables summarize the Corporation’s past due and nonaccrual loans as of December 31:
                     
  Total Past Due and Nonaccrual 
  2010  2009  2008  2007  2006 
 
Commercial and agricultural $9,606  $8,839  $13,958  $8,746  $7,213 
Residential mortgage  8,119   10,296   12,418   8,357   4,631 
Consumer installment  309   460   956   617   360 
                     
  $18,034  $19,595  $27,332  $17,720  $12,204 
                     
                 
  2010 
  Accruing Loans Past Due     Total
 
     Greater
     Past Due
 
     Than
     and
 
  30-89 Days  90 Days  Nonaccrual  Nonaccrual 
 
Commercial and agricultural  5,291   175   4,140  $9,606 
Residential mortgage  6,339   310   1,470   8,119 
Consumer installment  308   1   —   309 
                 
  $11,938  $486  $5,610  $18,034 
                 


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  2009 
  Accruing Loans Past Due     Total
 
     Greater
     Past Due
 
     Than
     and
 
  30-89 Days  90 Days  Nonaccrual  Nonaccrual 
 
Commercial and agricultural  2,567   462   5,810  $8,839 
Residential mortgage  7,352   287   2,657   10,296 
Consumer installment  386   19   55   460 
                 
  $10,305  $768  $8,522  $19,595 
                 
Restructured Loans
The following table summarizes the Corporation’s restructured loans as of December 31:
                                             
  2010  2009  2008  2007  2006 
  Accruing
  Non-
     Accruing
  Non-
     Accruing
  Non-
     Accruing
  Accruing
 
  Interest  accrual  Total  Interest  accrual  Total  Interest  accrual  Total  Interest  Interest 
 
Current $4,798  $499  $5,297  $2,754  $786  $3,540  $2,297  $1,355  $3,652  $517  $640 
Past due30-89 days
  277   26   303   107   904   1,011   268   —   268   115   57 
Past due 90 days or more  —   163   163   —   426   426   —   630   630   53   — 
                                             
Total
 $5,075  $688  $5,763  $2,861  $2,116  $4,977  $2,565  $1,985  $4,550  $685  $697 
                                             
The Corporation had no restructured loans in nonaccrual status as of December 31, 2007 or 2006.
The Corporation has taken aggressive actions to avoid foreclosures on borrowers who are willing to work with the Corporation in modifying their loans, thus making them more affordable. These loan restructurings have allowed borrowers to develop a payment structure that will allow them to continue making payments in lieu of foreclosure. Restructured loans that have been placed in nonaccrual status may be placed back on accrual status after six months of continuous performance.
To be classified as a restructured loan, the concessions granted to a customer who is experiencing financial difficulty must meet one of the following criteria:
1. Reduction of the stated interest rate related to the sole purpose of providing payment and relief for the remaining original life of the debt.
2. Extension of the amortization period beyond typical lending guidelines.
3. Forbearance of principal.
4. Forbearance of accrued interest.
The following table displays the results of the Corporation’s efforts related to loans restructured since December 31, 2008:
                         
  Successful  Unsuccessful  Total 
  Number of
  Amount of
  Number of
  Amount of
  Number of
  Amount of
 
  Loans  Loans  Loans  Loans  Loans  Loans 
 
Reduction in interest rate  2  $275   1  $132   3  $407 
Extension of amortization  29   6,235   2   68   31   6,303 
Reduction in interest rate and                        
extension of amortization  33   4,196   —   —   33   4,196 
                         
   64  $10,706   3  $200   67  $10,906 
                         
Since December 31, 2008, the Corporation has not restructured any loans as a result of a forbearance of principal or accrued interest.

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The Corporation has restructured $10,906 of loans since December 31, 2008 and had $5,763 of loans classified as restructured as of December 31, 2010. While the number of loans restructured has increased in 2010, it is a reflection of the Corporation’s efforts to work with customers to modify the terms of their loan agreements and an indicator that the local economy remains under stress.
Nonperforming Assets
The following table summarizes the Corporation’s nonperforming assets as of December 31:
                     
  2010  2009  2008  2007  2006 
 
Nonaccrual loans $5,610  $8,522  $11,175  $4,156  $3,444 
Accruing loans past due 90 days or more  486   768   1,251   1,727   1,185 
                     
Total nonperforming loans
  6,096   9,290   12,426   5,883   4,629 
Other real estate owned  2,039   1,141   2,770   1,376   562 
Repossessed assets  28   16   153   —   — 
                     
Total nonperforming assets
 $8,163  $10,447  $15,349  $7,259  $5,191 
                     
Nonperforming loans as a % of total loans
  0.83%  1.28%  1.69%  0.96%  0.78%
                     
Nonperforming assets as a % of total assets
  0.67%  0.91%  1.35%  0.76%  0.57%
                     
Loans are placed in nonaccrual status when the foreclosure process has begun, generally after a loan is 90 days past due, unless such loan is well secured and in the process of collection. Upon transferring the loans to nonaccrual status, an evaluation to determine the net realizable value of the underlying collateral is performed. This evaluation is used to help determine if any charge downs are necessary. Loans may be placed back on accrual status after six months of continued performance.
The following table summarizes the Corporation’s nonaccrual loan balances by type as of December 31:
                     
  2010  2009  2008  2007  2006 
 
Commercial and agricultural $4,140  $5,810  $8,059  $1,959  $2,887 
Residential mortgage  1,470   2,657   3,092   2,185   557 
Consumer installment  —   55   24   12   — 
                     
  $5,610  $8,522  $11,175  $4,156  $3,444 
                     
Included in nonaccrual commercial and agricultural loans was one credit with a balance of $2,679 as of December 31, 2010. This credit is secured by unsold condominiums and undeveloped commercial real estate for which there has been a specific allocation established in the amount of $345. Commercial and agricultural nonaccrual loans included one credit with a balance of $1,800 as of December 31, 2009 which was subsequently transferred to other real estate owned in the third quarter of 2010. There were no other individually significant credits included in nonaccrual loans as of December 31, 2010, 2009, 2008, 2007, or 2006.
Included in the nonaccrual loan balances above were credits currently classified as restructured loans as of December 31:
             
  2010  2009  2008 
 
Commercial and agricultural $115  $1,692  $1,985 
Residential mortgage  573   424   — 
             
  $688  $2,116  $1,985 
             
The Corporation had no restructured loans in nonaccrual status as of December 31, 2007 or 2006.
The Corporation has devoted considerable attention to identifying impaired loans and adjusting the net carrying value of these loans to their current net realizable values through the establishment of a specific reserve or


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the recording of a charge off. To management’s knowledge, there are no other loans which cause management to have serious doubts as to the ability of a borrower to comply with their loan repayment terms. A continued decline in real estate values may require further write downs of loans in foreclosure and other real estate owned and could potentially have an adverse impact on the Corporation’s financial performance.
Based on management’s analysis, the allowance for loan losses is considered appropriate as of December 31, 2010. Management will continue to closely monitor its overall credit quality during 2011 to ensure that the allowance for loan losses remains appropriate.
Noninterest Income
The following table shows the changes in noninterest income between the years ended December 31, 2010, 2009, and 2008 respectively.
                             
  Year Ended December 31 
        Change     Change 
  2010  2009  $  %  2008  $  % 
 
Service charges and fees                            
NSF and overdraft fees $2,809  $3,187  $(378)  −11.9% $3,413  $(226)  −6.6%
ATM and debit card fees  1,492   1,218   274   22.5%  1,029   189   18.4%
Trust fees  896   814   82   10.1%  886   (72)  −8.1%
Freddie Mac servicing fee  760   724   36   5.0%  627   97   15.5%
Service charges on deposit accounts  333   344   (11)  −3.2%  372   (28)  −7.5%
Net originated mortgage servicing                            
rights income (loss)  47   514   (467)  −90.9%  (92)  606   N/M 
All other  143   112   31   27.7%  135   (23)  −17.0%
                             
Total service charges and fees
  6,480   6,913   (433)  −6.3%  6,370   543   8.5%
Gain on sale of mortgage loans  610   886   (276)  −31.2%  249   637   N/M 
Net (loss) gain on trading securities  (94)  80   (174)  N/M   245   (165)  −67.3%
Net gain (loss) on borrowings measured at fair value  227   289   (62)  −21.5%  (641)  930   N/M 
Gain on sale ofavailable-for-sale investment securities
  348   648   (300)  −46.3%  24   624   N/M 
Other                            
Earnings on corporate owned life insurance policies  663   641   22   3.4%  616   25   4.1%
Brokerage and advisory fees  573   521   52   10.0%  480   41   8.5%
All other  493   178   315   177.0%  459   (281)  −61.2%
                             
Total other
  1,729   1,340   389   29.0%  1,555   (215)  −13.8%
                             
Total noninterest income
 $9,300  $10,156  $(856)  −8.4% $7,802  $2,354   30.2%
                             
Significant changes in noninterest income are detailed below:
• Management continuously analyzes various fees related to deposit accounts including: service charges and NSF and overdraft fees. Based on these analyses, the Corporation makes any necessary adjustments to ensure that its fee structure is within the range of its competitors, while at the same time making sure that the fees remain fair to deposit customers. NSF and overdraft fees have been declining over the past two years, and declined further in the third quarter and fourth quarters of 2010 as a result of new regulatory rules issued by the Federal Reserve Bank being implemented related to NSF and overdraft fees. The Corporation anticipates that NSF and overdraft fees will decline further in 2011 as a result of this recent rule making.


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• The increases in ATM and debit card fees are primarily the result of the increased usage of debit cards by customers. As management does not anticipate any significant changes to the ATM and debit card fee structures, these fees are expected to continue to increase as the usage of debit cards increases.
• As a result of lower than normal residential mortgage rates, the Corporation experienced increases in the volume of loans sold to Freddie Mac beginning in the fourth quarter of 2008. This high volume led to increases in gains from the sale of mortgage loans in 2009. The volume of new mortgage activity has returned to more normal levels in 2010, leading to a decline in the gain on sale of mortgage loans. Despite the increase in the balance of serviced loans, the Corporation recorded only modest increases in the value of its originated mortgage servicing rights (“OMSR”) portfolio in 2010 as rates remained at historically low levels. As interest rates are expected to increase, the Corporation anticipates that Freddie Mac servicing fees and net OMSR income will increase in 2011, while the gains from the sale of mortgage loans will likely decline.
• Fluctuations in the gains and losses related to trading securities and borrowings carried at fair value are caused by interest rate variances. Management does not anticipate any significant fluctuations in net trading activities in 2011 as significant interest rate changes are not expected.
• The Corporation does not anticipate any significant sales ofavailable-for-sale investment securities in 2011.
• Fees generated from brokerage and advisory services have been steadily increasing for the past few years. This has been the result of staff additions as well as a conscious effort by management to expand the Corporation’s presence in its local market. Management anticipates brokerage and advisory fees to increase further in 2011.
• The fluctuation in all other income in 2010 is due partially to a $133 increase in earnings from the Corporation’s investment in Corporate Settlement Solutions. The remainder of the difference is spread throughout the various categories, none of which are individually significant.


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Noninterest Expenses
The following table shows the changes in noninterest expenses between the years ended December 31, 2010, 2009, and 2008 respectively.
                             
  Year Ended December 31 
        Change     Change 
  2010  2009  $  %  2008  $  % 
 
Compensation and benefits
                            
Leased employee salaries $13,697  $13,494  $203   1.5% $12,465  $1,029   8.3%
Leased employee benefits  4,837   4,745   92   1.9%  4,502   243   5.4%
All other  18   19   (1)  −5.3%  25   (6)  −24.0%
                             
Total compensation and benefits
  18,552   18,258   294   1.6%  16,992   1,266   7.5%
                             
Occupancy                            
Depreciation  584   546   38   7.0%  508   38   7.5%
Outside services  524   433   91   21.0%  492   (59)  −12.0%
Property taxes  505   439   66   15.0%  411   28   6.8%
Utilities  423   393   30   7.6%  366   27   7.4%
Building repairs  243   288   (45)  −15.6%  202   86   42.6%
All other  72   71   1   1.4%  56   15   26.8%
                             
Total occupancy
  2,351   2,170   181   8.3%  2,035   135   6.6%
                             
Furniture and equipment                            
Depreciation  1,938   1,803   135   7.5%  1,663   140   8.4%
Computer/service contracts  1,779   1,676   103   6.1%  1,565   111   7.1%
ATM and debit card fees  595   621   (26)  −4.2%  570   51   8.9%
All other  32   46   (14)  −30.4%  51   (5)  −9.8%
                             
Total furniture and equipment
  4,344   4,146   198   4.8%  3,849   297   7.7%
                             
FDIC insurance premiums
  1,254   1,730   (476)  −27.5%  313   1,417   N/M 
                             
Other                            
Marketing and community relations  1,093   894   199   22.3%  921   (27)  −2.9%
Foreclosed asset and collection  710   546   164   30.0%  565   (19)  −3.4%
Directors fees  887   923   (36)  −3.9%  867   56   6.5%
Audit and SOX compliance fees  916   831   85   10.2%  698   133   19.1%
Education and travel  499   395   104   26.3%  491   (96)  −19.6%
Printing and supplies  420   529   (109)  −20.6%  508   21   4.1%
Postage and freight  382   415   (33)  −8.0%  419   (4)  −1.0%
Legal fees  338   375   (37)  −9.9%  415   (40)  −9.6%
Amortization of deposit premium  395   472   (77)  −16.3%  523   (51)  −9.8%
Consulting fees  167   201   (34)  −16.9%  298   (97)  −32.6%
All other  1,499   1,798   (299)  −16.6%  1,810   (12)  −0.7%
                             
Total other
  7,306   7,379   (73)  −1.0%  7,515   (136)  −1.8%
                             
Total noninterest expenses
 $33,807  $33,683  $124   0.4% $30,704  $2,979   9.7%
                             


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Significant changes in noninterest expenses are detailed below:
• Leased employee salaries have remained essentially unchanged from 2009. During 2009, the Corporation incurred increased overtime costs related to the large volume of mortgage refinancing activity. While the demand for mortgage refinancing has reduced, the reduction in overtime has been offset by annual merit increases and the continued growth of the Corporation. Leased employee benefits fluctuate from period to period primarily as a result of changes in health care related expenses. The Corporation does not anticipate any significant changes in leased employee salaries or benefit expenses in 2011.
• FDIC insurance premium expense decreased primarily when the year ended December 31, 2010 is compared to the same period in 2009 as a result of an FDIC special assessment of $479, which was paid in September 2009. Management expects FDIC insurance premiums to approximate current levels for 2011.
• The increase in marketing and community relations expenses in 2010 is primarily related to the Corporation making a contribution of $250 to the IBT Foundation, compared to $140 in 2009 and $0 in 2008.
• Audit and SOX compliance fees fluctuate due to the timing of the performance of recurring audit procedures.
• Director fees declined in 2010 due to Corporation implementing a policy whereby the membership on the Isabella Bank and Isabella Bank Corporation’s board of directors is identical; no significant change is expected in 2011.
• Printing and supplies expenses were historically high in the first three months of 2009 as a result of the Corporation increasing inventories of various supplies. Printing and supplies expenses are expected to approximate current levels in 2011.
• The Corporation places a strong emphasis on customer service. In February 2010, all of the Corporation’s employees attended a special customer service seminar. This seminar coupled with increases in expenditures for executive leadership training led to increases in education expenses during 2010. Management expects that education related expenses may decline slightly in 2011.
• Postage and freight expenses have declined, and are expected to continue to decline, as a result of fewer special mailings as well as an increase in the Corporation’s customers usage of electronic statements.
• The Corporation’s legal expenses can fluctuate from period to period based on the volume of foreclosures as well as expenses related to the Corporation’s ongoing operations, including regulatory compliance. At this time, the Corporation is not aware of any significant legal matters, and as such expects that legal expenses should approximate current levels in 2011.
• The fluctuations in all other expenses are spread throughout various categories, none of which are individually significant.
Federal Income Taxes
Federal income tax expense (benefit) for 2010 was $1,604 or 15.1% of pre-tax income compared to $846 or 9.8% of income in 2009 and ($724) or (21.4%) in 2008. The primary factor behind the effective rate in 2008 is related to the increase in tax exempt income as a percentage of net income. A reconcilement of actual federal income tax expense reported and the amount computed at the federal statutory rate of 34% is found in Note 11, “Federal Income Taxes” of Notes to Consolidated Financial Statements.


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ANALYSIS OF CHANGES IN FINANCIAL CONDITION
                 
  December 31       
  2010  2009  $ Change  % Change 
 
ASSETS
Cash and cash equivalents $18,109  $24,482  $(6,373)  −26.03%
Certificates of deposit held in other financial institutions  15,808   5,380   10,428   193.83%
Trading securities  5,837   13,563   (7,726)  −56.96%
Available-for-sale investment securities
  330,724   259,066   71,658   27.66%
Mortgage loansavailable-for-sale
  1,182   2,281   (1,099)  −48.18%
Loans  735,304   723,316   11,988   1.66%
Allowance for loan losses  (12,373)  (12,979)  606   −4.67%
Premises and equipment  24,627   23,917   710   2.97%
Goodwill and other intangible assets  47,091   47,429   (338)  −0.71%
Equity securities without readily determinable fair values  17,564   17,921   (357)  −1.99%
Other assets  41,937   39,568   2,369   5.99%
                 
Total Assets
 $1,225,810  $1,143,944  $81,866   7.16%
                 
 
LIABILITIES AND SHAREHOLDERS’ EQUITY
Liabilities
                
Deposits $877,339  $802,652  $74,687   9.31%
Borrowed funds  194,917   193,101   1,816   0.94%
Accrued interest and other liabilities  8,393   7,388   1,005   13.60%
                 
Total liabilities
  1,080,649   1,003,141   77,508   7.73%
Shareholders’ equity
  145,161   140,803   4,358   3.10%
                 
Total liabilities and shareholders’ equity
 $1,225,810  $1,143,944  $81,866   7.16%
                 
As shown above, the Corporation has intentionally increased its balance sheet through the acquisition ofavailable-for-sale investment securities and certificates of deposit held in other financial institutions, which is consistent with its plan to increase net interest income. These purchases were funded primarily with retail deposit growth.Available-for-sale investment securities are expected to continue to increase in 2011. Overall changes in deposit accounts and demand for loans are the primary reasons for fluctuations in cash and cash equivalents. As the Corporation has increased its investment securities, it has reduced its interest bearing balances, which is included in cash and cash equivalents.
A discussion of changes in balance sheet amounts by major categories follows:
Trading securities
Trading securities are carried at fair value. The Corporation’s overall intent is to maintain a trading portfolio to enhance the ongoing restructuring of assets and liabilities as part of our interest rate risk management objectives (See Note 2 “Trading Securities” of the Consolidated Financial Statements). Due to the current interest rate environment, the Corporation has allowed this balance to decline.


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The following is a schedule of the carrying value of trading securities as of December 31:
             
  2010  2009  2008 
 
Government sponsored enterprises $—  $—  $4,014 
States and political subdivisions  5,837   9,962   11,556 
Corporate  —   —   160 
Mortgage-backed  —   3,601   6,045 
             
Total
 $5,837  $13,563  $21,775 
             
Available-for-sale investment securities
The primary objective of the Corporation’s investing activities is to provide for safety of the principal invested. Secondary considerations include the need for earnings, liquidity, and the Corporation’s overall exposure to changes in interest rates. Securities currently classified asavailable-for-sale are stated at fair value.
The following is a schedule of the carrying value of investment securitiesavailable-for-sale as of December 31:
             
  2010  2009  2008 
 
U.S. Government and federal agencies $—  $—  $4,083 
Government sponsored enterprises  5,404   19,471   62,988 
States and political subdivisions  169,717   151,730   149,323 
Corporate  —   —   7,145 
Auction rate money market preferred  2,865   2,973   5,979 
Preferred stocks  6,936   7,054   — 
Mortgage-backed  102,215   67,734   16,937 
Collateralized mortgage obligations  43,587   10,104   — 
             
Total
 $330,724  $259,066  $246,455 
             
Excluding those holdings in government sponsored enterprises and municipalities within the state of Michigan, there were no investments in securities of any one issuer that exceeded 10% of shareholders’ equity. The Corporation has a policy prohibiting investments in securities that it deems are unsuitable due to their inherent credit or market risks. Prohibited investments include stripped mortgage backed securities, zero coupon bonds, nongovernment agency asset backed securities, and structured notes. The Corporation’s holdings in mortgage-backed securities and collateralized mortgage obligations include only government agencies and government sponsored agencies as the Corporation holds no investments in private label mortgage-backed securities or collateralized mortgage obligations.
The following is a schedule of maturities ofavailable-for-sale investment securities (at carrying value) and their weighted average yield as of December 31, 2010. Weighted average yields have been computed on a fully taxable-equivalent basis using a tax rate of 34%. Mortgage-backed securities and collateralized mortgage obligations are included in maturity categories based on their stated maturity date. Expected maturities may differ from contractual maturities because issuers may have the right to call or prepay obligations. Trading securities have been excluded as they are not expected to be held to maturity. Included in the contractual maturity distribution in the following table are auction rate money market preferred securities and preferred stock. Auction rate debt and auction rate preferred securities are long term floating rate instruments for which interest rates are set at periodic auctions. At each successful auction, the Corporation has the option to sell the security at par value. Additionally,


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the issuers of auction rate securities generally have the right to redeem or refinance the debt. As a result, the expected life of auction rate securities may differ significantly from the contractual term.
                                         
  Maturing 
     After One
  After Five
       
     Year But
  Years But
       
  Within
  Within
  Within
  After
  Securities with
 
  One Year  Five Years  Ten Years  Ten Years  Variable Payments 
  Amount  Yield (%)  Amount  Yield (%)  Amount  Yield (%)  Amount  Yield (%)  Amount  Yield (%) 
 
Government sponsored enterprises $—   —  $5,007   2.02  $397   7.91  $—   —  $—   — 
States and political subdivisions  14,132   3.51   34,837   3.73   87,263   3.74   33,485   2.09   —   — 
Mortgage-backed  —   —   —   —   53,738   2.54   48,477   2.66   —   — 
Collateralized mortgage obligations  —   —   —   —   —   —   —   —   43,587   2.59 
Auction rate money market preferred  —   —   —   —   —   —   —   —   2,865   4.86 
Preferred stocks  —   —   —   —   —   —   —   —   6,936   4.60 
                                         
Total
 $14,132   3.51  $39,844   3.53  $141,398   3.29  $81,962   2.43  $53,388   2.98 
                                         
Loans
The largest component of earning assets is loans. The proper management of credit and market risk inherent in the loan portfolio is critical to the financial well being of the Corporation. To control these risks, the Corporation has adopted strict underwriting standards. These standards include specific criteria against lending outside the Corporation’s defined market areas, lending limits to a single borrower, and strict loan to collateral value limits. The Corporation also monitors and limits loan concentrations extended to distressed industries. The Corporation has no foreign loans and there were no concentrations greater than 10% of total loans that are not disclosed as a separate category in the following table.
The following table presents the composition of the loan portfolio for the years ended December 31:
                     
  2010  2009  2008  2007  2006 
 
Commercial $348,852  $340,274  $324,806  $238,306  $212,701 
Agricultural  71,446   64,845   58,003   47,407   47,302 
Residential real estate mortgage  284,029   285,838   319,397   297,937   300,650 
Installment  30,977   32,359   33,179   29,037   30,389 
                     
  $735,304  $723,316  $735,385  $612,687  $591,042 
                     
The following table presents the change in the loan categories for the years ended December 31:
                         
  2010  2009  2008 
  $ Change  % Change  $ Change  % Change  $ Change  % Change 
 
Commercial $8,578   2.5% $15,468   4.8% $86,500   36.3%
Agricultural  6,601   10.2%  6,842   11.8%  10,596   22.4%
Residential real estate mortgage  (1,809)  −0.6%  (33,559)  −10.5%  21,460   7.2%
Installment  (1,382)  −4.3%  (820)  −2.5%  4,142   14.3%
                         
  $11,988   1.7% $(12,069)  −1.6% $122,698   20.0%
                         
The growth in commercial and agricultural loans is a result of the Corporation’s efforts to increase these segments of the loan portfolio as a percentage of total loans. A significant portion of this growth has been driven by the Corporation’s new business development team.
As rates in 2010 on residential mortgages were comparable to the rates in 2009, residential mortgage refinancing activity stabilized which resulted in a decrease in loans sold to the secondary market. As a result of this decline in loans sold, the residential real estate portfolio remained stable in 2010 as compared to the significant


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declines noted in 2009. Refinancing activity resulted in a net increase of $2,226 in the balance of residential mortgage loans sold to the secondary market in 2010 compared to a net increase of $53,161 in 2009.
A substantial portion of the increase in total loans as of December 31, 2008 compared to December 31, 2007 was a result of the acquisition of Greenville Financial Corporation in January 2008. Pursuant to the acquisition, the Corporation purchased gross loans totaling $88,613.
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.
Equity securities without readily determinable fair values consist of the following as of December 31:
         
  2010  2009 
 
Federal Home Loan Bank Stock $7,596  $7,960 
Investment in Corporate Settlement Solutions  6,793   6,782 
Federal Reserve Bank Stock  1,879   1,879 
Investment in Valley Financial Corporation  1,000   1,000 
Other  296   300 
         
Total
 $17,564  $17,921 
         
Deposits
The main source of funds for the Corporation is deposits. The following table presents the composition of the deposit portfolio as of December 31:
                     
  2010  2009  2008  2007  2006 
 
Noninterest bearing deposits $104,902  $96,875  $97,546  $84,846  $83,902 
Interest bearing demand deposits  142,259   128,111   113,973   105,526   111,406 
Savings deposits  177,817   157,020   182,523   196,682   178,001 
Certificates of deposit  386,435   356,594   340,976   311,976   320,226 
Brokered certificates of deposit  53,748   50,933   28,185   28,197   27,446 
Internet certificates of deposit  12,178   13,119   12,427   6,246   4,859 
                     
Total
 $877,339  $802,652  $775,630  $733,473  $725,840 
                     
The following table presents the change in the deposit categories for the years ended December 31:
                         
  2010  2009  2008 
  $ Change  % Change  $ Change  % Change  $ Change  % Change 
 
Noninterest bearing deposits $8,027   8.3% $(671)  −0.7% $12,700   15.0%
Interest bearing demand deposits  14,148   11.0%  14,138   12.4%  8,447   8.0%
Savings deposits  20,797   13.2%  (25,503)  −14.0%  (14,159)  −7.2%
Certificates of deposit  29,841   8.4%  15,618   4.6%  29,000   9.3%
Brokered certificates of deposit  2,815   5.5%  22,748   80.7%  (12)  0.0%
Internet certificates of deposit  (941)  −7.2%  692   5.6%  6,181   99.0%
                         
Total
 $74,687   9.3% $27,022   3.5% $42,157   5.7%
                         
As shown in the preceding table, the Corporation has enjoyed strong deposit growth during 2010. This growth was the result of the Corporation offering products with competitive rates and terms, as well as focused marketing efforts to increase deposit market share in the communities served. Management anticipates that deposits will continue to grow in 2011.


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A substantial portion of the increase in total deposits as of December 31, 2008 compared to December 31, 2007 was a result of the acquisition of Greenville Community Financial Corporation (GCFC) in January 2008. Pursuant to the acquisition, the Corporation purchased deposits totaling $90,151. Exclusive of the GCFC acquisition, deposits decreased $47,994 when December 31, 2008 is compared to December 31, 2007. This decline was the result of increased competition with other depository institutions as well as declines in brokered certificates of deposit and internet certificates of deposit.
The following table shows the average balances and corresponding interest rates paid on deposit accounts as of December 31:
                         
  2010  2009  2008 
  Amount  Rate  Amount  Rate  Amount  Rate 
 
Noninterest bearing demand deposits $102,812   —  $94,408   —  $95,552   — 
Interest bearing demand deposits  137,109   0.11%  116,412   0.13%  114,889   0.71%
Savings deposits  169,579   0.23%  177,538   0.22%  213,410   1.14%
Time deposits  430,892   2.55%  398,356   3.27%  393,190   4.23%
                         
Total
 $840,392      $786,714      $817,041     
                         
The remaining maturity of time certificates and other time deposits of $100 or more as of December 31, 2010 was as follows:
     
Maturity    
Within 3 months $35,935 
Within 3 to 6 months  20,695 
Within 6 to 12 months  49,207 
Over 12 months  98,360 
     
Total
 $204,197 
     
Borrowed Funds
The following table summarizes the Corporation’s borrowings as of December 31:
                 
  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%
                 


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The maturity and weighted average interest rates of FHLB advances are as follows as of December 31:
                 
  2010  2009 
  Amount  Rate  Amount  Rate 
 
Fixed rate advances due 2010 $—   —  $28,320   4.52%
One year putable advances due 2010  —   —   6,000   5.31%
Fixed rate advances due 2011  10,086   3.96%  10,206   3.96%
One year putable advances due 2011  1,000   4.75%  1,000   4.75%
Fixed rate advances due 2012  17,000   2.97%  17,000   2.97%
One year putable advances due 2012  15,000   4.10%  15,000   4.10%
Fixed rate advances due 2013  5,337   4.14%  5,278   4.14%
One year putable advances due 2013  5,000   3.15%  5,000   3.15%
Fixed rate advances due 2014  25,000   3.16%  15,000   3.63%
Fixed rate advances due 2015  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%
                 
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%
                 
Contractual Obligations and Loan Commitments
The Corporation has various financial obligations, including contractual obligations and commitments, which may require future cash payments. The following schedule summarizes the Corporation’s non cancelable obligations and future minimum payments as of December 31, 2010:
                     
  Minimum Payments Due by Period 
     After One
  After Three
       
  Due in
  Year But
  Year But
       
  One Year
  Within
  Within
  After
    
  or Less  Three Years  Five Years  Five Years  Total 
 
Deposits with no stated maturity $424,978  $—  $—  $—  $424,978 
Certificates of deposit with stated maturities  216,927   158,268   70,888   6,278   452,361 
                     
Borrowed funds                    
Short term borrowings  61,871   —   —   —   61,871 
Long term borrowings  11,944   48,477   62,625   10,000   133,046 
                     
Total borrowed funds  73,815   48,477   62,625   10,000   194,917 
                     
Total contractual obligations
 $715,720  $206,745  $133,513  $16,278  $1,072,256 
                     


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The Corporation also has loan commitments that may impact liquidity. The following schedule summarizes the Corporation’s loan commitments and expiration dates by period as of December 31, 2010. Since many of these commitments historically have expired without being drawn upon, the total amount of these commitments does not necessarily represent future cash requirements of the Corporation.
                     
  Expiration Dates by Period 
     After One
  After Three
       
  Due in
  Year But
  Year But
       
  One Year
  Within
  Within
  After
    
  or Less  Three Years  Five Years  Five Years  Total 
 
Unused commitments to extend credit $65,717  $24,364  $14,847  $5,273  $110,201 
Undisbursed loans  13,382   —   —   —   13,382 
Standby letters of credit  4,881   —   —   —   4,881 
                     
Total loan commitments
 $83,980  $24,364  $14,847  $5,273  $128,464 
                     
Capital
The capital of the Corporation consists primarily of common stock, including shares to be issued, retained earnings, and accumulated other comprehensive loss. The Corporation offers dividend reinvestment and employee, director, and shareholder stock purchase plans. Under the provisions of these plans, the Corporation issued 122,113 shares of common stock generating $2,164 of capital during 2010, and 126,874 shares of common stock generating $2,396 of capital in 2009. The Corporation also generates capital through the Isabella Bank Corporation and Related Companies Deferred Compensation Plan for Directors (the “Directors Plan”), its equity compensation plan (See Note 16 “Benefit Plans” of Notes to Consolidated Financial Statements). Pursuant to this plan, the Corporation generated $650 and $677 of capital in 2010 and 2009, respectively.
The Board of Directors has adopted a common stock repurchase plan. This plan was approved to enable the Corporation to repurchase the Corporation’s common stock for reissuance to the dividend reinvestment plan, the employee stock purchase plan and for distributions from the Directors Plan. During 2010 and 2009 the Corporation repurchased 138,970 shares of common stock at an average price of $18.40 and 122,612 shares of common stock at an average price of $19.47, respectively.
Accumulated other comprehensive loss decreased $410 in 2010 and consists of $457 of unrealized gains onavailable-for-sale investment securities which was offset by a $47 increase in unrecognized pension cost. These amounts are net of tax.
The Federal Reserve Board’s current recommended minimum primary capital to assets requirement is 6.0%. The Corporation’s primary capital to average assets ratio, which consists of shareholders’ equity plus the allowance for loan losses less acquisition intangibles, was 8.24% at year end 2010. There are no commitments for significant capital expenditures.
The Federal Reserve Board has established a minimum risk based capital standard. Under this standard, a framework has been established that assigns risk weights to each category of on and off-balance-sheet items to arrive at risk adjusted total assets. Regulatory capital is divided by the risk adjusted assets with the resulting ratio compared to the minimum standard to determine whether a corporation has adequate capital. The minimum standard is 8%, of which at least 4% must consist of equity capital net of goodwill. The following table sets forth the percentages required under the Risk Based Capital guidelines and the Corporation’s values at:
             
  December 31 
  2010  2009  Required 
 
Equity Capital  12.44%  12.80%  4.00%
Secondary Capital  1.25%  1.25%  4.00%
             
Total Capital
  13.69%  14.05%  8.00%
             
Isabella Bank Corporation’s secondary capital includes only the allowance for loan losses. The percentage for the secondary capital under the required column is the maximum amount allowed from all sources.


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The Federal Reserve Board also prescribes minimum capital requirements for the Corporation’s subsidiary Bank. At December 31, 2010, the Bank exceeded these minimums. For further information regarding the Bank’s capital requirements, refer to Note 15 “Minimum Regulatory Capital Requirements” of the Notes to Consolidated Financial Statements,
Fair Value
The Corporation utilizes fair value measurements to record fair value adjustments to certain assets and liabilities and to determine fair value disclosures. 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 at fair value other assets on a nonrecurring basis, such as loansheld-for-sale, foreclosed assets, originated mortgage servicing rights, and certain other assets and liabilities. These nonrecurring fair value adjustments typically involve the application of lower of cost or market accounting or write-downs of individual assets.
The table below represents the activity in Level 3 inputs measured on a recurring basis for the year ended December 31:
         
  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 
         
For further information regarding fair value measurements see Note 1, “Nature of Operations and Summary of Significant Accounting Policies” and Note 19, “Fair Value” of the Consolidated Financial Statements.
Interest Rate Sensitivity
Interest rate sensitivity is determined by the amount of earning assets and interest bearing liabilities repricing within a specific time period, and their relative sensitivity to a change in interest rates. Management strives to achieve reasonable stability in the net interest margin through periods of changing interest rates. One tool used by management to measure interest rate sensitivity is gap analysis. As shown in the following table, the gap analysis depicts the Corporation’s position for specific time periods and the cumulative gap as a percentage of total assets.
Trading securities are included in the 0 to 3 month time frame due to their repricing characteristics. Fixed interest rate investment securities are scheduled according to their contractual maturity. Fixed rate loans are included in the appropriate time frame based on their scheduled amortization. Variable rate loans , which totaled $143,572 as of December 31, 2010, are included in the time frame of their earliest repricing. Time deposit liabilities are scheduled based on their contractual maturity except for variable rate time deposits in the amount of $1,940 that are included in the 0 to 3 month time frame.
Savings, NOW accounts, and money market accounts have no contractual maturity date and are believed to be predominantly noninterest rate sensitive by management. These accounts have been classified in the gap table according to their estimated withdrawal rates based upon management’s analysis of deposit runoff over the past five years. Management believes this runoff experience is consistent with its expectation for the future. As of December 31, 2010, the Corporation had a negative cumulative gap within one year. A negative gap position results when more liabilities, within a specified time frame, mature or reprice than assets.
The following table shows the time periods and the amount of assets and liabilities available for interest rate repricing as of December 31, 2010. The interest rate sensitivity information for investment securities is based on the


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expected prepayments and call dates versus stated maturities. For purposes of this analysis, nonaccrual loans and the allowance for loan losses are excluded.
                 
  0 to 3
  4 to 12
  1 to 5
  Over 5
 
  Months  Months  Years  Years 
 
Interest Sensitive Assets                
Trading securities $5,837  $—  $—  $— 
Investment securities  17,405   47,247   129,688   136,384 
Loans  168,790   94,739   401,106   65,059 
                 
Total
 $192,032  $141,986  $530,794  $201,443 
                 
Interest Sensitive Liabilities                
Borrowed funds $63,421  $10,730  $110,766  $10,000 
Time deposits  67,036   150,552   228,495   6,278 
Savings  10,770   33,671   107,557   25,819 
Interest bearing demand  7,432   22,405   79,827   32,595 
                 
Total
 $148,659  $217,358  $526,645  $74,692 
                 
Cumulative gap (deficiency) $43,373  $(31,999) $(27,850) $98,901 
Cumulative gap (deficiency) as a % of assets  3.54%  (2.61)%  (2.27) %  8.07%
The following table shows the maturity of commercial and agricultural loans outstanding at December 31, 2010. Also provided are the amounts due after one year, classified according to the sensitivity to changes in interest rates.
                 
  1 Year
  1 to 5
  Over 5
    
  or Less  Years  Years  Total 
 
Commercial and agricultural $102,027  $296,042  $22,229  $420,298 
                 
Interest Sensitivity                
Loans maturing after one year that have:                
Fixed interest rates     $253,106  $20,346     
Variable interest rates      42,936   1,883     
                 
Total
     $296,042  $22,229     
                 
Liquidity
Liquidity is monitored regularly by the Corporation’s Market Risk Committee, which consists of members of senior management. The committee reviews projected cash flows, key ratios, and liquidity available from both primary and secondary sources.
The primary sources of the Corporation’s liquidity are cash and cash equivalents, trading securities, andavailable-for-sale investment securities, excluding auction rate money market preferred securities and preferred stock due to their illiquidity. These categories totaled $360,677 or 29.4% of assets as of December 31, 2010 as compared to $292,464 or 25.6% in 2009. Liquidity is important for financial institutions because of their need to meet loan funding commitments, depositor withdrawal requests, and various other commitments discussed in the accompanying notes to consolidated financial statements. Liquidity varies significantly daily, based on customer activity.


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The following table summarizes the Corporation’s sources and uses of cash for the years ended December 31:
             
  2010  2009  $ Variance 
 
Net cash provided by operating activities $26,521  $18,225  $8,296 
Net cash used in investing activities  (103,877)  (9,184)  (94,693)
Net cash provided by (used in) financing activities  70,983   (7,538)  78,521 
             
(Decrease) Increase in cash and cash equivalents  (6,373)  1,503   (7,876)
Cash and cash equivalents January 1  24,482   22,979   1,503 
             
Cash and cash equivalents December 31 $18,109  $24,482  $(6,373)
             
The primary source of funds for the Corporation is deposits. The Corporation emphasizes interest bearing time deposits as part of its funding strategy. The Corporation also seeks noninterest bearing deposits, or checking accounts, to expand its customer base, while reducing the Corporation’s cost of funds.
The Corporation has the ability to borrow from the Federal Home Loan Bank, the Federal Reserve Bank, and through various correspondent banks as federal funds. These funding methods typically carry a higher interest rate than traditional market deposit accounts. Some borrowed funds, including Federal Home Loan Bank Advances, Federal Reserve Bank Discount Window Advances, and repurchase agreements, require the Corporation to pledge assets, typically in the form of investment securities or loans, as collateral.
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.
Quantitative and Qualitative Disclosures about Market Risk
The Corporation’s primary market risks are interest rate risk and liquidity risk. The Corporation has no significant foreign exchange risk, holds limited loans outstanding, and does not utilize interest rate swaps or derivatives, except for interest rate locks and forward loan commitments, in the management of its interest rate risk. Any changes in foreign exchange rates or commodity prices would have an insignificant impact on the Corporation’s interest income and cash flows. The Corporation does have a significant amount of loans extended to borrowers in agricultural production. The cash flow of such borrowers and ability to service debt is largely dependent on commodity prices. The Corporation mitigates these risks by using conservative price and production yields when calculating a borrower’s available cash flow to service their debt.
Interest rate risk (“IRR”) is the exposure of the Corporation’s net interest income, its primary source of income, to changes in interest rates. IRR results from the difference in the maturity or repricing frequency of a financial institution’s interest earning assets and its interest bearing liabilities. IRR is the fundamental method in which financial institutions earn income and create shareholder value. Excessive exposure to IRR could pose a significant risk to the Corporation’s earnings and capital.
The Federal Reserve Board, the Corporation’s primary Federal regulator, has adopted a policy requiring the Board of Directors and senior management to effectively manage the various risks that can have a material impact on the safety and soundness of the Corporation. The risks include credit, interest rate, liquidity, operational, and reputational. The Corporation has policies, procedures and internal controls for measuring and managing these risks. Specifically, the IRR policy and procedures include defining acceptable types and terms of investments and funding sources, liquidity requirements, limits on investments in long term assets, limiting the mismatch in repricing opportunity of assets and liabilities, and the frequency of measuring and reporting to the Board of Directors.
The Corporation uses several techniques to manage IRR. The first method is gap analysis. Gap analysis measures the cash flowsand/or the earliest repricing of the Corporation’s interest bearing assets and liabilities. This analysis is useful for measuring trends in the repricing characteristics of the balance sheet. Significant assumptions are required in this process because of the imbedded repricing options contained in assets and liabilities. A substantial portion of the Corporation’s assets are invested in loans and investment securities with issuer call options. Residential real estate and other consumer loans have imbedded options that allow the borrower to repay


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the balance prior to maturity without penalty, while commercial and agricultural loans have prepayment penalties. The amount of prepayments is dependent upon many factors, including the interest rate of a given loan in comparison to the current interest rate for residential mortgages, the level of sales of used homes, and the overall availability of credit in the market place. Generally, a decrease in interest rates will result in an increase in the Corporation’s cash flows from these assets. A significant portion of the Corporation’s securities are callable or subject to prepayment. The call option is more likely to be exercised in a period of decreasing interest rates. Investment securities, other than those that are callable, do not have any significant imbedded options. Savings and checking deposits may generally be withdrawn on request without prior notice. The timing of cash flows from these deposits is estimated based on historical experience. Time deposits have penalties that discourage early withdrawals.
The second technique used in the management of IRR is to combine the projected cash flows and repricing characteristics generated by the gap analysis and the interest rates associated with those cash flows to project future interest income. By changing the amount and timing of the cash flows and the repricing interest rates of those cash flows, the Corporation can project the effect of changing interest rates on its interest income. Based on the projections prepared for the year ended December 31, 2010, the Corporation’s net interest income would decrease during a period of increasing interest rates.
The following tables provide information about the Corporation’s assets and liabilities that are sensitive to changes in interest rates as of December 31, 2010 and 2009. The Corporation has no interest rate swaps, futures contracts, or other derivative financial options. The principal amounts of assets and time deposits maturing were calculated based on the contractual maturity dates. Savings and NOW accounts are based on management’s estimate of their future cash flows.
                                 
  December 31, 2010  Fair Value
 
  2011  2012  2013  2014  2015  Thereafter  Total  12/31/10 
  (Dollars in thousands) 
 
Rate sensitive assets                                
Other interest bearing assets $10,550  $5,429  $960  $—  $—  $—  $16,939  $17,039 
Average interest rates  0.96%  1.82%  2.16%  —   —   —   1.30%    
Trading securities $1,918  $2,366  $1,031  $522  $—  $—  $5,837  $5,837 
Average interest rates  3.46%  2.31%  2.42%  2.47%  —   —   2.72%    
Fixed interest rate securities $64,652  $42,984  $32,871  $29,395  $24,438  $136,384  $330,724  $330,724 
Average interest rates  3.68%  3.42%  3.30%  3.33%  3.28%  3.13%  3.32%    
Fixed interest rate loans $128,277  $121,434  $140,019  $67,423  $68,569  $66,010  $591,732  $603,435 
Average interest rates  6.80%  6.63%  6.26%  6.47%  6.08%  5.83%  6.41%    
Variable interest rate loans $59,536  $17,306  $22,523  $15,118  $18,830  $10,259  $143,572  $143,572 
Average interest rates  4.94%  4.76%  4.27%  3.78%  3.69%  5.21%  4.55%    
Rate sensitive liabilities                                
Borrowed funds $74,151  $33,013  $15,127  $37,087  $25,539  $10,000  $194,917  $200,603 
Average interest rates  0.62%  3.46%  2.55%  3.11%  4.60%  2.35%  2.33%    
Savings and NOW accounts $74,278  $73,818  $53,174  $35,872  $24,520  $58,414  $320,076  $320,076 
Average interest rates  0.21%  0.21%  0.20%  0.19%  0.18%  0.15%  0.19%    
Fixed interest rate time deposits $215,648  $113,338  $44,269  $31,414  $39,474  $6,278  $450,421  $452,392 
Average interest rates  1.79%  2.67%  3.35%  2.86%  2.97%  3.26%  2.36%    
Variable interest rate time deposits $1,279  $661  $—  $—  $—  $—  $1,940  $1,940 
Average interest rates  1.21%  1.06%  —   —   —   —   1.16%    


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  December 31, 2009  Fair Value
 
  2010  2011  2012  2013  2014  Thereafter  Total  12/31/09 
 
Rate sensitive assets                                
Other interest bearing assets $10,360  $960  $1,200  $—  $—  $—  $12,520  $12,520 
Average interest rates  1.13%  2.29%  2.64%  —   —   —   1.36%    
Trading securities $7,139  $2,043  $2,546  $1,094  $570  $171  $13,563  $13,563 
Average interest rates  2.84%  2.42%  2.28%  2.53%  2.66%  4.86%  2.66%    
Fixed interest rate securities $68,078  $35,401  $21,540  $20,369  $20,431  $93,247  $259,066  $259,066 
Average interest rates  3.53%  3.51%  3.59%  3.65%  3.63%  3.58%  3.57%    
Fixed interest rate loans $133,703  $111,981  $118,749  $109,754  $62,280  $48,764  $585,231  $594,498 
Average interest rates  6.64%  6.85%  6.72%  6.50%  6.61%  6.01%  6.61%    
Variable interest rate loans $60,727  $17,695  $13,799  $16,357  $16,940  $12,567  $138,085  $138,085 
Average interest rates  5.00%  4.69%  4.79%  3.83%  3.74%  5.35%  4.68%    
Rate sensitive liabilities                                
Borrowed funds $85,101  $11,000  $32,000  $15,000  $5,000  $45,000  $193,101  $195,179 
Average interest rates  2.28%  4.04%  3.50%  3.93%  4.38%  4.01%  3.17%    
Savings and NOW accounts $78,383  $65,107  $44,439  $30,095  $20,609  $46,498  $285,131  $285,131 
Average interest rates  0.15%  0.15%  0.15%  0.14%  0.15%  0.13%  0.15%    
Fixed interest rate time deposits $268,005  $46,484  $53,054  $32,959  $16,273  $2,050  $418,825  $422,227 
Average interest rates  2.26%  3.59%  3.47%  3.83%  3.09%  3.35%  2.72%    
Variable interest rate time deposits $1,252  $569  $—  $—  $—  $—  $1,821  $1,821 
Average interest rates  1.56%  1.40%  —   —   —   —   1.51%    
Forward Looking Statements
This report contains certain forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. The Corporation intends such forward-looking statements to be covered by the safe harbor provisions for forward-looking statements contained in the Private Securities Reform Act of 1995, and is including this statement for purposes of these safe harbor provisions. Forward-looking statements, which are based on certain assumptions and describe future plans, strategies and expectations of the Corporation, are generally identifiable by use of the words “believe,” “expect,” “intend,” “anticipate,” “estimate,” “project,” or similar expressions. The Corporation’s ability to predict results or the actual effect of future plans or strategies is inherently uncertain. Factors which could have a material adverse effect on the operations and future prospects of the Corporation and the subsidiaries include, but are not limited to, changes in interest rates, general economic conditions, legislative/regulatory changes, monetary and fiscal policies of the U.S. Government including policies of the U.S. Treasury, the Federal Reserve Board, the Federal Deposit Insurance Corporation, the quality or composition of the loan or investment portfolios, demand for loan products, deposit flows, competition, demand for financial services in the Corporation’s market area, and accounting principles, policies and guidelines. These risks and uncertainties should be considered in evaluating forward-looking statements and undue reliance should not be placed on such statements. Further information concerning the Corporation and its business, including additional factors that could materially affect the Corporation’s financial results, is included in the Corporation’s filings with the Securities and Exchange Commission.
COMMON STOCK AND DIVIDEND INFORMATION
The Corporation’s common stock is traded in the over the counter (“OTC”) market. The common stock has been quoted on the OTC Pink market tier of the OTC Markets Group, Inc’s electronic quotation system (the “Pink Sheets”) under the symbol “ISBA” since August of 2008 and under the symbol “IBTM” prior to August of 2008. Other trades in the common stock occur in privately negotiated transactions from time to time of which the Corporation may have little or no information.
Management has reviewed the information available as to the range of reported high and low bid quotations, including high and low bid information as reported by Pink Sheets and closing price information as reported by the parties to privately negotiated transactions. The following table sets forth management’s compilation of that information for the periods indicated. Price information obtained from Pink Sheets reflects inter dealer prices, without retail mark up, mark down or commissions and may not necessarily represent actual transactions. Price information obtained from parties to privately negotiated transactions reflects actual closing prices that were

95

disclosed to the Corporation, which management has not independently verified. The following compiled data is provided for information purposes only and should not be viewed as indicative of the actual or market value of the Corporation’s common stock.
             
  Number of
  Sale Price 
Period
 Shares  Low  High 
 
2010            
First Quarter  45,695  $16.75  $19.00 
Second Quarter  64,290   17.00   18.50 
Third Quarter  53,897   16.05   17.99 
Fourth Quarter  56,534   16.57   18.30 
             
   220,416         
             
2009            
First Quarter  61,987   14.99   25.51 
Second Quarter  91,184   15.85   20.75 
Third Quarter  66,399   17.50   19.50 
Fourth Quarter  76,985   14.00   19.25 
             
   296,555         
             
The following table sets forth the cash dividends paid for the following quarters:
         
  Per Share 
  2010  2009 
 
First Quarter $0.18  $0.12 
Second Quarter  0.18   0.13 
Third Quarter  0.18   0.13 
Fourth Quarter  0.18   0.32 
         
Total
 $0.72  $0.70 
         
Isabella Bank Corporation’s authorized common stock consists of 15,000,000 shares, of which 7,550,074 shares are issued and outstanding as of December 31, 2010. As of that date, there were 3,011 shareholders of record.
The Board of Directors has adopted a common stock repurchase plan. On June 23, 2010, the Board of Directors amended the plan to allow for the repurchase of an additional 100,000 shares of the Corporation’s common stock. These authorizations do not have expiration dates. As shares are repurchased under this plan, they revert back to the status of authorized, but unissued shares.
The following table provides information for the three month period ended December 31, 2010, with respect to this plan:
                 
        Total Number of
    
        Shares Purchased
  Maximum Number of
 
  Shares Repurchased  as Part of Publicly
  Shares That May Yet Be
 
     Average Price
  Announced Plan
  Purchased Under the
 
  Number  Per Share  or Program  Plans or Programs 
 
Balance, September 30, 2010              59,131 
October 1 - 31, 2010  5,224  $17.23   5,224   53,907 
November 1 - 30, 2010  7,773   17.37   7,773   46,134 
December 1 - 31, 2010  6,697   16.87   6,697   39,437 
                 
Balance, December 31, 2010
  19,694  $17.16   19,694   39,437 
                 
Information concerning Securities Authorized for Issuance Under Equity Compensation Plans appears under “Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Shareholder Matters” included in the Corporation’s 2010 annual report onForm 10-K.


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Stock Performance
The following graph compares the cumulative total shareholder return on Corporation common stock for the last five years with the cumulative total return on (1) the NASDAQ Stock Market Index, which is comprised of all United States common shares traded on the NASDAQ and (2) the NASDAQ Bank Stock Index, which is comprised of bank and bank holding company common shares traded on the NASDAQ over the same period. The graph assumes the value of an investment in the Corporation and each index was $100 at December 31, 2005 and all dividends are reinvested.
Stock Performance
Five-Year Total Return
(PERFORMANCE GRAPH)
The dollar values for total shareholder return plotted in the graph above are shown in the table below:
Comparison of Five Year Cumulative
Among Isabella Bank Corporation, NASDAQ Stock Market,
and NASDAQ Bank Stock
             
  Isabella Bank
     NASDAQ
 
Year
 Corporation  NASDAQ  Banks 
 
12/31/2005  100.0   100.0   100.0 
12/31/2006  111.6   110.3   113.6 
12/31/2007  113.3   122.1   91.4 
12/31/2008  73.8   73.5   72.0 
12/31/2009  56.9   106.6   60.2 
12/31/2010  54.2   125.8   68.6 


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SHAREHOLDERS’ INFORMATION
Annual Meeting
The Annual Meeting of Shareholders will be held at 5:00 p.m., Tuesday, May 3, 2011,Wednesday, April 30, 2014, Comfort Inn, 2424 S. Mission Street, Mt. Pleasant, Michigan.
Financial Information andForm 10-K
Copies of the 20102013 Annual Report, Isabella Bank CorporationForm 10-K, and other financial information not contained herein are available on the Bank’s website (www.isabellabank.com)(www.isabellabank.com) under the Investor RelationsInvestors tab, or may be obtained, without charge, by writing to:
Debra Campbell
Secretary
Isabella Bank Corporation
401 N. Main St.
Mt. Pleasant, Michigan 48858
Mission Statement
To create an operating environment that will provide shareholders with sustained growth in their investment while maintaining our independence and subsidiaries’ autonomy.
Equal Employment Opportunity
The equal employment opportunity clauses in Section 202 of the Executive Order 11246, as amended; 38 USC 2012, Vietnam Era Veterans Readjustment Act of 1974; Section 503 of the Rehabilitation Act of 1973, as amended; relative to equal employment opportunity and implementing rules and regulations of the Secretary of Labor are adhered to and supported by Isabella Bank Corporation, and its subsidiaries.


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(ISABELLA LOGO)95
PROXY CARD
THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS
The undersigned hereby appoints Sandra L. Caul, James C. Fabiano, and Joseph LaFramboise as proxies, each with the power to appoint his/her substitute, and hereby authorizes them to represent and to vote as designated below, all the sharesTable of Common StockContents


Table of lsabella Bank Corporation that the undersigned is eligible to vote as of April 1, 2011 at the annual meeting of shareholders to be held on May3,2011 or any adjournments thereof.Contents

PROPOSAL 1--ELECTION OF DIRECTORS: Proposal to elect the following five (5) persons as directors. Please mark the appropriate box for each director-nominee.

FORAGAINSTWITHHOLD AUTHORITY
Dennis P. Angner
Jeffrey J. Barnes
G. Charles Hubscher
David J. Maness
W. Joseph Manifold
PROPOSAL 2--ADVISORY VOTE ON EXECUTIVE COMPENSATION: Proposal to adopt an advisory (non-binding) resolution regarding named executive officer compensation.
FORAGAINSTWITHHOLD AUTHORITY
ooo
PROPOSAL 3:--FREQUENCY OF ADVISORY VOTE ON EXECUTIVE COMPENSATION: Proposal to adopt an advisory (non- binding) resolution on the frequency of shareholder votes regarding named executive officer compensation.
ONETWOTHREE
YEARYEARSYEARSWITHHOLD AUTHORITY
oooo
The Board of Directors Recommends a Vote“FOR” Proposals 1 and 2, and for the 3-year frequency on Proposal 3.
This proxy, when properly executed, will be voted in the manner directed herein by the undersigned shareholder. IF NO DIRECTION IS MADE, THIS PROXY WILL BE VOTED “FOR” PROPOSALS 1 AND 2, AND FOR THE 3-YEAR FREQUENCY ON PROPOSAL 3. The shares represented by this proxy will be voted in the discretion of the proxies on any other matters which may come before the meeting.
Please sign below as your name appears on the label. When shares are held by joint tenants, both should sign. When signing as attorney, executor, administrator, trustee or guardian, please give full title as such. If a corporation, please sign full corporate name by the President or other authorized officer. If a partnership, please sign in partnership name by authorized person.
Dated:, 2011
Please mark, sign, date and return               Signature
Proxy card promptly using the enclosed
Envelope.
               Signature (if held jointly)
ISABELLA BANK CORPORATION  401 N Main St, Mount Pleasant, Ml 48858    www.isabellabank.com