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Exchange Act of 1934 (Amendment¨ Filed by the Registrant þ Filed by a Party other than the Registrant oCheck the appropriate box:oPreliminary Proxy Statement¨ oConfidential, for Use of the Commission Only (as permitted by Rule 14a-6(e)(2)) ý þDefinitive Proxy Statement ¨ oDefinitive Additional Materials ¨ oSoliciting Material Pursuant to §240.14a-12 ISABELLA BANK CORPORATION (Name of Registrant as Specified In Its Charter)(Name of Person(s) Filing Proxy Statement, if other than the Registrant) Payment of Filing Fee (Check the appropriate box):(Name of Registrant as Specified In Its Charter) (Name of Person(s) Filing Proxy Statement, if other than the Registrant) Payment of Filing Fee (Check the appropriate box): ý þNo fee required. ¨ oFee computed on table below per Exchange Act Rules 14a-6(i)(4) and 0-11. 1) Title of each class of securities to which transaction applies: 2) Aggregate number of securities to which transaction applies: 3) Per unit price or other underlying value of transaction computed pursuant to Exchange Act Rule 0-11 (set forth the amount on which the filing fee is calculated and state how it was determined): 4) Proposed maximum aggregate value of transaction: 5) Total fee paid: ¨ oFee paid previously with preliminary materials.¨ oCheck box if any part of the fee is offset as provided by Exchange Act Rule 0-11(a)(2) and identify the filing for which the offsetting fee was paid previously. Identify the previous filing by registration statement number, or the Form or Schedule and the date of its filing.1) Amount Previously Paid: 1) Amount Previously Paid:2) 2) Form, Schedule or Registration Statement No.:3) Filing Party: 3) Filing Party:4) 4) Date Filed:SEC 1913 (02-02) May 3, 2011April 30, 2014Tuesday, 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. 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.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. April 8, 2011March 31, 2014StSt.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.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.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.”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.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.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 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 Directorsthirteen (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. 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. 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.of Directors.Director’s QualificationsThe 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• 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• 2nominee 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.BankProfessionalsExpertiseAuditLeadershipDiversityBusinessStandingin FinancialCommitteeCivic andand Teamby Race,Geo-Entre-Segmentin Chosenor RelatedFinancialCommunityBuildingGender, orgraphicalTech-Market-Govern-preneurialHumanRepresent-Director Professional
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ationDavid J. Maness X X X X X X Dennis P. Angner X X X X X X X Dr. Jeffrey J. Barnes X X X X X X Richard J. Barz X X X X X X X Jae A. Evans X X X X X X X G. Charles Hubscher X X X X X X Thomas L. Kleinhardt X X X X X X X X Joseph LaFramboise X X X X X W. Joseph Manifold X X X X X X X W. Michael McGuire X X X X X X X X X Sarah R. Opperman X X X X X X X X Director Audit Nominating and Corporate Governance Compensation and Human Resource David J. Maness Dennis P. Angner Dr. Jeffrey J. Barnes X X Richard J. Barz Jae A. Evans G. Charles Hubscher X X Thomas L. Kleinhardt X Joseph LaFramboise X X X W. Joseph Manifold X X XXXXJeffrey J. BarnesXXXXXXRichard J. BarzXXXXXXXSandra L. CaulXXXXXXJames C. FabianoXXXXXXXG. Charles HubscherXXXXXXThomas L. KleinhardtXXXXXXXJoseph LaFramboiseXXXXXW. Joseph ManifoldXXXXXXXW. Michael McGuire X X Sarah R. Opperman X XXXXXXXDianne C. MoreyXXXXXXXDale D. WeburgXXXXXXThe following table identifies the individual members of our Board serving on each of these standing committees:NominatingCompensationand Corporateand HumanDirectorAuditGovernanceResourceDavid J. ManessXoXoXc,oDennis P. AngnerJeffrey J. BarnesXXRichard J. BarzSandra L. CaulXXJames C. FabianoXXG. Charles HubscherXXThomas L. KleinhardtXJoseph LaFramboiseXXW. Joseph ManifoldXcXXW. Michael McGuireXXXDianne C. MoreyXDale D. WeburgXcXC — Chairperson O — Ex-Officio NomineesNominee for TermsTerm Ending in 2014201555)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 of3 has served on the Central Michigan American Red Cross board for over 20 years.(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.(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.(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.(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.20122015(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 DevelopmentSandra 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.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 2013James 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 of4the 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.(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.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. of the Corporation serve at the pleasure of the Corporation’s Board of Directors.Board.Onon Executive Compensation 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:“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.• 5• 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 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 CompensationIn 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.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.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 that6Chairmanchairperson 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.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.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.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.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).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. by the Corporation and the business experience of the nominee.7recommended 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. 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..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.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..8Report6 Corporation’s financial reporting process on behalf of the Board. The 20102013 Committee consisted of directors Barnes, Hubscher, LaFramboise, Maness, Manifold, and McGuire.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.the Corporation’sour internal control over financial reporting as of December 31, 2010.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 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.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.9(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.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.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.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.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.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.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 could10BaseCompetitive 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 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 ElementTheIn prior years, the Committee utilizesutilized both an independentChaseConsulting 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.11annualpayment 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:2012 Targets 2012 Performance (1) Target % Obtained Target 25.00% 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 assets 1.60 % 1.57 % 1.54 % 1.51 % 1.45 % 100 % FTE Net Interest Margin 3.46 % 3.48 % 3.50 % 3.52 % 3.46 % 25 % In market deposit growth 4.50 % 5.00 % 5.50 % 6.00 % 6.10 % 100 % Loan growth 3.00 % 3.50 % 4.00 % 4.50 % 1.46 % — % Exceeding peer group return on average assets 1.32 % 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 Corporationprovides 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.12A 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.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.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.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. 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.of Directors that the Compensation Discussion and Analysis be included in this Proxy Statement and the Annual Report onForm 10-K.Isabella Bank Corporation’s Board of Directors:Sandra L. CaulJames C. FabianoDianne C, MoreySarah R. OppermanDale D. Weburg13Officers 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. Change in pension Value and Non-Qualified Deferred Compensation All Other Salary Bonus Earnings Compensation Total 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 position Year Salary
($) Bonus
($) Change in pension value and non-qualified deferred compensation earnings
($) All other compensation
($)(1) Total
($)Richard J. Barz 2013 $ 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 Corporation 2011 375,225 26,535 181,143 37,627 620,530 Jae A. Evans (2) 2013 $ 176,379 $ 13,320 $ — $ 30,832 $ 220,531 CEO 2012 Isabella Bank Corporation 2011 Dennis P. Angner 2013 $ 354,522 $ 25,121 $ 9,918 $ 29,775 $ 419,336 President and CFO 2012 357,335 23,628 131,266 28,208 540,437 Isabella Bank Corporation 2011 355,625 26,100 163,672 28,542 573,939 Steven D. Pung 2013 $ 227,675 $ 6,003 $ 6,629 $ 29,589 $ 269,896 President 2012 195,128 13,333 67,361 30,111 305,933 Isabella Bank 2011 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 COO 2012 Isabella Bank 2011 David J. Reetz 2013 $ 133,537 $ 10,598 $ (9,778 ) $ 16,604 $ 150,961 Sr. Vice President and CLO 2012 129,397 9,708 45,361 17,138 201,604 Isabella Bank 2011 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 $1,125.(2)Represents the aggregate change in the actuarial present value of the noted executive’s accumulated benefit under the Isabella Bank Corporation Pension Plan and the Isabella Bank Corporation Retirement Bonus Plan.(3)For all notednamed executives all other compensation includes 401(k) matching contributions. For Richard J. Barz, Jae A. Evans, Steven D. Pung, and David J. Reetz this also includes club dues and auto allowance. For Dennis P. Angner and Timothy M. Miller,Jerome E. Schwind, this also includes auto allowance.(4)(2) Not a named executive officer prior to 2010.2013. Director and advisory board fees ($) Name and principal position 2013 2012 2011 Richard J. Barz $ 46,525 $ 51,325 $ 50,225 Jae A. Evans 675 Dennis P. Angner 46,525 51,325 49,625 Steven D. Pung 12,675 900 900 Jerome E. Schwind 1,200 David J. Reetz N/A N/A N/A 142010 Pension Benefits Pension plan ($) Retirement plan ($) Name and principal position 2013 2012 2011 2013 2012 2011 Richard J. Barz $ (47,000 ) $ 83,000 $ 143,000 $ 44,140 $ 40,578 $ 38,143 Jae A. Evans N/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 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 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. Barz Isabella 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. Evans Isabella 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. Pung Isabella 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. Schwind Isabella 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 — 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.ofrelated to operating and maintaining the plan. The amount of contributions on behalf of any one participant cannot be separately or individually computed.effective through December 31, 2006.100 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. 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.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.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 the15by theat our sole and exclusive discretion, of the Board, as set forth in the Plan. 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 ($) ($) ($) Executive contributions in 2013
($) 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. Evans 675 560 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. Schwind 1,200 175 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.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.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.• 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.2010,2013, the named executive officers listed had no unused vacation days.16the Corporation’sour life insurance plan or benefits under the Corporation’sour disability plan as appropriate. While an Active Subsequent to 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. Schwind 301,600 150,800 David J. Reetz 247,800 123,900 267,000 133,500 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.of Directors during 2010.2013. Fees Earned or Paid in Cash Total ($) ($) 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. Lauer 18,263 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.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’s17common 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.The Corporation$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.Directors’Directors Plan as of December 31, 2010:March 17, 2014:Name # of Sharesshares ofNameStock Credited stock credited Dennis PP. Angner13,563 7,787Dr. Jeffrey J. Barnes 7,324 31,280Richard J. Barz — 5,629Sandra L. CaulJae A. Evans693 287,411James Fabiano756,559G. Charles Hubscher 10,923 71,357Thomas L. Kleinhardt 17,534 165,741Ted W. Kortes15,636Joseph LaFramboise 7,618 36,348David J. Maness 21,682 166,134W. Joseph Manifold 13,139 108,959W. Michael McGuire 7,201 84,660Dianne C. MoreySarah R. Opperman1,860 103,849William J. Strickler368,446Dale D. Weburg200,490TheIn 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 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.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 Owner Amount and Nature of Beneficial Ownership (1) Percent of Class McGuirk Investments 413,007 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. 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 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 Owner Amount and Nature of Beneficial Ownership (1) Percent of Class Dennis P. Angner 33,648 0.43 % Dr. Jeffrey J. Barnes 13,575 0.17 % Richard J. Barz 30,697 0.39 % Jae A. Evans 9,192 0.12 % G. Charles Hubscher 45,603 0.58 % Thomas L. Kleinhardt 66,719 0.85 % Joseph LaFramboise 8,821 0.11 % David J. Maness 23,636 0.30 % W. Joseph Manifold 17,989 0.23 % W. Michael McGuire 78,131 1.00 % Sarah R. Opperman 2,973 0.04 % Steven D. Pung 21,002 0.27 % David J. Reetz 9,343 0.12 % Jerome E. Schwind 1,163 0.01 % All Directors, nominees and Executive Officers as a Group (14) persons 362,492 4.62 % *(1)TrusteesESOP 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."19theour independent auditors of the Corporation for the year ending December 31, 2011. of Shareholders to respond to appropriate questions from shareholders and to make any comments Rehmann Robson LLC believes isare appropriate.P.C.LLCto 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 fees 29,425 28,250 Tax fees 27,095 25,950 Total $ 327,900 $ 317,380 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.the Corporation’sour employee benefit plans.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).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.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.2020102013 and 20092012 without pre-approval as required under the Corporation’s policies.pre-approval.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.The Corporation’sOur directors are encouraged to attend the annual meeting of shareholders. At the 20102013 annual meeting, all directors were in attendance.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.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.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.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.
Debra Campbell, Secretary2122SUMMARY 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. 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-sale GLB Act: Gramm-Leach-Bliley Act of 1999 ALLL: Allowance for loan and lease losses IFRS: International Financial Reporting Standards AOCI: Accumulated other comprehensive income (loss) IRR: Interest rate risk ASC: FASB Accounting Standards Codification JOBS Act: Jumpstart our Business Startups Act ASU: FASB Accounting Standards Update LIBOR: London Interbank Offered Rate ATM: Automated Teller Machine Moody’s: Moody’s Investors Service, Inc BHC Act: Bank Holding Company Act of 1956 N/A: Not applicable CFPB: Consumer Financial Protection Bureau N/M: Not meaningful CIK: Central Index Key NASDAQ: NASDAQ Stock Market Index CRA: Community Reinvestment Act NASDAQ Banks: NASDAQ Bank Stock Index DIF: Deposit Insurance Fund NAV: Net asset value DIFS: Department of Insurance and Financial Services NOW: Negotiable order of withdrawal Directors Plan: Isabella Bank Corporation and Related Companies Deferred Compensation Plan for Directors NSF: Non-sufficient funds Dividend Reinvestment Plan: Isabella Bank Corporation Stockholder Dividend Reinvestment Plan and Employee Stock Purchase Plan OCI: Other comprehensive income (loss) Dodd-Frank Act: Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 OMSRs: Originated mortgage servicing rights ESOP: Employee stock ownership plan OREO: Other real estate owned Exchange Act: Securities Exchange Act of 1934 OTC: Over-the-Counter FASB: Financial Accounting Standards Board OTTI: Other-than-temporary impairment FDI Act: Federal Deposit Insurance Act PBO: Projected benefit obligation FDIC: Federal Deposit Insurance Corporation PCAOB: Public Company Accounting Oversight Board FFIEC: Federal Financial Institutions Examinations Council Rabbi Trust: A trust established to fund the Directors Plan Fitch: Fitch Ratings SEC: U.S. Securities & Exchange Commission FRB: Federal Reserve Bank SOX: Sarbanes-Oxley Act of 2002 FHLB: Federal Home Loan Bank S&P: Standard & Poor's Freddie Mac: Federal Home Loan Mortgage Corporation TDR: Troubled debt restructuring FTE: Fully taxable equivalent XBRL: eXtensible Business Reporting Language GAAP: U.S. generally accepted accounting principles Number of
Shares Sale Price Low High 2013 First Quarter 54,741 $ 21.79 $ 25.10 Second Quarter 65,865 24.78 26.00 Third Quarter 105,540 23.49 25.50 Fourth Quarter 116,052 21.20 24.84 342,198 2012 First Quarter 64,873 $ 22.15 $ 24.25 Second Quarter 63,656 23.45 24.98 Third Quarter 97,706 22.50 24.90 Fourth Quarter 87,966 21.60 23.45 314,201 Per Share 2013 2012 First Quarter $ 0.21 $ 0.20 Second Quarter 0.21 0.20 Third Quarter 0.21 0.20 Fourth Quarter 0.21 0.20 Total $ 0.84 $ 0.80 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 - 23 4,400 $ 23.86 4,400 7,041 Additional Authorization (150,000 shares) 157,041 October 24 - 31 4,950 23.84 4,950 152,091 November 1 - 30 7,022 23.50 7,022 145,069 December 1 - 31 7,673 22.42 7,673 137,396 Balance, December 31 24,045 $ 23.29 24,045 137,396 Year ISBA NASDAQ NASDAQ
Banks12/31/2008 $ 100.00 $ 100.00 $ 100.00 12/31/2009 77.10 145.05 83.58 12/31/2010 73.40 171.14 95.29 12/31/2011 104.50 169.83 85.32 12/31/2012 99.30 199.89 101.15 12/31/2013 112.60 279.62 142.93 2013 2012 2011 2010 2009 INCOME STATEMENT DATA Interest income $ 54,076 $ 56,401 $ 57,905 $ 57,217 $ 58,105 Interest expense 11,021 13,423 16,203 17,204 19,839 Net interest income 43,055 42,978 41,702 40,013 38,266 Provision for loan losses 1,111 2,300 3,826 4,857 6,093 Noninterest income 10,175 11,530 8,218 9,300 10,156 Noninterest expenses 37,413 37,639 34,530 33,807 33,683 Federal income tax expense 2,196 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 earnings 1.59 1.56 1.31 1.17 1.01 Dividends 0.84 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 assets 1,493,137 1,430,639 1,337,925 1,225,810 1,143,944 Deposits 1,043,766 1,017,667 958,164 877,339 802,652 Shareholders' equity 160,609 164,489 154,783 145,161 140,803 Average balance Loans $ 790,132 $ 754,304 $ 743,441 $ 725,534 $ 725,299 Total assets 1,448,440 1,381,083 1,287,195 1,182,930 1,127,634 Deposits 1,025,088 984,927 927,186 840,392 786,714 Shareholders’ equity 163,010 160,682 151,379 145,304 137,910 PERFORMANCE RATIOS Return on average total assets 0.86 % 0.88 % 0.79 % 0.76 % 0.69 % Return on average shareholders' equity 7.67 % 7.60 % 6.74 % 6.22 % 5.66 % Return on average tangible equity 10.71 % 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 % 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
2012Total interest income $ 13,603 $ 13,505 $ 13,440 $ 13,528 $ 13,845 $ 14,164 $ 14,188 $ 14,204 Total interest expense 2,683 2,736 2,781 2,821 3,051 3,239 3,429 3,704 Net interest income 10,920 10,769 10,659 10,707 10,794 10,925 10,759 10,500 Provision for loan losses 245 351 215 300 1,200 200 439 461 Noninterest income 2,130 2,862 2,736 2,447 2,686 2,759 2,544 3,541 Noninterest expenses 9,578 9,320 9,324 9,191 9,750 9,128 9,188 9,573 Federal income tax expense 303 674 643 576 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 earnings 0.37 0.42 0.41 0.39 0.32 0.44 0.39 0.41 Dividends 0.21 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 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 /
RateINTEREST EARNING ASSETS Loans $ 790,132 $ 41,233 5.22 % $ 754,304 $ 43,396 5.75 % $ 743,441 $ 45,463 6.12 % Taxable investment securities 335,575 7,228 2.15 % 309,681 7,555 2.44 % 235,437 6,941 2.95 % Nontaxable investment securities 165,774 8,294 5.00 % 145,502 7,941 5.46 % 136,356 7,847 5.75 % Trading account securities 1,071 55 5.14 % 2,624 142 5.41 % 5,087 286 5.62 % Other 27,235 447 1.64 % 33,359 486 1.46 % 37,539 506 1.35 % Total earning assets 1,319,787 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 banks 18,162 19,409 20,195 Premises and equipment 25,993 25,244 24,397 Accrued income and other assets 96,375 103,368 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 deposits 242,777 366 0.15 % 214,958 451 0.21 % 192,999 488 0.25 % Time deposits 456,774 6,613 1.45 % 473,675 8,476 1.79 % 467,931 10,258 2.19 % Borrowed funds 251,590 3,881 1.54 % 225,689 4,292 1.90 % 198,828 5,268 2.65 % Total interest bearing liabilities 1,134,806 11,021 0.97 % 1,085,173 13,423 1.24 % 1,012,288 16,203 1.60 % NONINTEREST BEARING LIABILITIES Demand deposits 141,872 125,443 113,726 Other 8,752 9,785 9,802 Shareholders’ equity 163,010 160,682 151,379 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 % 2013 Compared to 2012
Increase (Decrease) Due to 2012 Compared to 2011
Increase (Decrease) Due toVolume Rate Net Volume Rate Net Changes in interest income Loans $ 1,996 $ (4,159 ) $ (2,163 ) $ 656 $ (2,723 ) $ (2,067 ) Taxable AFS securities 601 (928 ) (327 ) 1,945 (1,331 ) 614 Nontaxable AFS securities 1,049 (696 ) 353 511 (417 ) 94 Trading securities (80 ) (7 ) (87 ) (134 ) (10 ) (144 ) Other (96 ) 57 (39 ) (59 ) 39 (20 ) Total changes in interest income 3,470 (5,733 ) (2,263 ) 2,919 (4,442 ) (1,523 ) Changes in interest expense Interest bearing demand deposits 14 (57 ) (43 ) 22 (7 ) 15 Savings deposits 53 (138 ) (85 ) 52 (89 ) (37 ) Time deposits (293 ) (1,570 ) (1,863 ) 124 (1,906 ) (1,782 ) Borrowed funds 457 (868 ) (411 ) 647 (1,623 ) (976 ) Total changes in interest expense 231 (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 Average Yield / Rate for the Three Month Periods Ended: December 31
2013September 30
2013June 30
2013March 31
2013December 31
2012Total earning assets 4.30 % 4.31 % 4.35 % 4.41 % 4.61 % Total interest bearing liabilities 0.94 % 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 % Quarter to Date Net Interest Income December 31
2013 September 30
2013 June 30
2013 March 31
2013 December 31
2012Total interest income $ 13,603 $ 13,505 $ 13,440 $ 13,528 $ 13,845 Total interest expense 2,683 2,736 2,781 2,821 3,051 Net interest income $ 10,920 $ 10,769 $ 10,659 $ 10,707 $ 10,794 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 agricultural 907 1,672 1,984 3,731 3,081 Residential real estate 1,004 1,142 2,240 2,524 2,627 Consumer 429 542 552 596 934 Total loans charged-off 2,340 3,356 4,776 6,851 6,642 Recoveries Commercial and agricultural 363 240 461 453 623 Residential real estate 181 122 177 638 546 Consumer 249 255 314 297 377 Total recoveries 793 617 952 1,388 1,546 Provision for loan losses 1,111 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 outstanding 0.20 % 0.36 % 0.51 % 0.75 % 0.70 % ALLL as a % of loans at end of period 1.42 % 1.54 % 1.65 % 1.68 % 1.79 % December 31
2013 September 30
2013 June 30
2013 March 31
2013 December 31
2012Total loans charged-off $ 497 $ 602 $ 719 $ 522 $ 1,469 Total recoveries 152 151 295 195 143 Net loans charged-off 345 451 424 327 1,326 Net loans charged-off to average loans outstanding 0.04 % 0.06 % 0.05 % 0.04 % 0.17 % Provision for loan losses $ 245 $ 351 $ 215 $ 300 $ 1,200 Total Past Due and Nonaccrual December 31
2013 September 30
2013 June 30
2013 March 31
2013 December 31
2012Commercial and agricultural $ 3,621 $ 5,371 $ 4,962 $ 8,713 $ 7,271 Residential real estate 7,008 6,339 5,080 4,077 5,431 Consumer 259 152 104 212 199 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 estate 7,008 5,431 5,297 8,119 10,296 Consumer 259 199 186 309 460 Total $ 10,888 $ 12,901 $ 12,903 $ 18,034 $ 19,595 Accruing Interest Nonaccrual Total Number
of
Loans Balance Number
of
Loans Balance Number
of
Loans Balance January 1, 2012 112 $ 17,739 12 $ 1,017 124 $ 18,756 New modifications 58 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 status 2 131 (2 ) (131 ) — — Transfers to nonaccrual status (13 ) (1,686 ) 13 1,686 — — December 31, 2012 115 16,531 19 2,824 134 19,355 New modifications 76 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 status 2 133 (2 ) (133 ) — — Transfers to nonaccrual status (7 ) (419 ) 7 419 — — December 31, 2013 165 $ 24,423 15 $ 1,442 180 $ 25,865 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 days 2,158 37 2,195 158 561 719 1,564 344 1,908 Past due 60-89 days 575 — 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 days 175 26 201 107 80 187 Past due 60-89 days 102 — 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 2013 2012 Outstanding
Balance Unpaid
Principal
Balance Valuation
Allowance Outstanding
Balance Unpaid
Principal
Balance Valuation
AllowanceTDRs Commercial real estate $ 10,663 $ 11,193 $ 1,585 $ 9,227 $ 9,640 $ 1,333 Commercial other 1,310 1,340 62 1,167 1,197 38 Agricultural real estate 1,459 1,459 30 91 91 32 Agricultural other 79 199 — 569 689 59 Residential real estate senior liens 12,266 12,841 2,010 8,224 8,670 1,429 Residential real estate junior liens 20 20 4 21 57 4 Consumer secured 68 69 — 56 56 — Total TDRs 25,865 27,121 3,691 19,355 20,400 2,895 Other impaired loans Commercial real estate 1,707 2,193 330 1,817 2,304 320 Commercial other 136 217 58 2,245 2,376 359 Agricultural other — — — 63 63 — Residential real estate senior liens 1,795 2,473 268 2,226 3,002 354 Residential real estate junior liens 28 45 5 51 61 9 Home equity lines of credit 193 493 — 182 482 — Consumer secured 51 79 — 19 28 — Total other impaired loans 3,910 5,500 661 6,603 8,316 1,042 Total impaired loans $ 29,775 $ 32,621 $ 4,352 $ 25,958 $ 28,716 $ 3,937 2013 2012 2011 2010 2009 Nonaccrual loans $ 3,244 $ 7,303 $ 6,389 $ 5,610 $ 8,522 Accruing loans past due 90 days or more 142 428 760 486 768 Total nonperforming loans 3,386 7,731 7,149 6,096 9,290 Foreclosed assets 1,412 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 loans 0.42 % 1.00 % 0.95 % 0.83 % 1.28 % Nonperforming assets as a % of total assets 0.32 % 0.68 % 0.67 % 0.67 % 0.91 % 2013 2012 2011 2010 2009 Commercial and agricultural $ 833 $ 2,325 $ 520 $ 115 $ 1,692 Residential real estate 609 499 497 573 424 Total $ 1,442 $ 2,824 $ 1,017 $ 688 $ 2,116 2013 2012 2011 Outstanding
Balance Specific
Allocation Outstanding
Balance Specific
Allocation Outstanding
Balance Specific
AllocationBorrower 1 $ — $ — $ — (A) $ — $ 1,014 $ — (C) Borrower 2 — — — (B) — 1,900 — (D) Borrower 3 — (A) — 2,077 359 — — Borrower 4 — — — — — — Others not individually significant 3,244 5,226 3,475 Total $ 3,244 $ 7,303 $ 6,389 2010 2009 Outstanding
Balance Specific
Allocation Outstanding
Balance Specific
AllocationBorrower 1 $ — $ — $ — $ — Borrower 2 2,679 345 — — Borrower 3 — — — — Borrower 4 — (B) — 1,800 — (D) Others not individually significant 2,931 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.23REPORT 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 fees 1,944 1,874 70 3.74 % 1,736 138 7.95 % Trust fees 1,154 1,061 93 8.77 % 979 82 8.38 % Freddie Mac servicing fee 737 757 (20 ) (2.64 )% 732 25 3.42 % Service charges on deposit accounts 373 337 36 10.68 % 324 13 4.01 % Net OMSRs income (loss) 269 (89 ) 358 N/M (293 ) 204 (69.62 )% All other 116 125 (9 ) (7.20 )% 140 (15 ) (10.71 )% Total service charges and fees 6,836 6,432 404 6.28 % 6,118 314 5.13 % Gain on sale of mortgage loans 962 1,576 (614 ) (38.96 )% 538 1,038 N/M Earnings on corporate owned life insurance policies 732 698 34 4.87 % 609 89 14.61 % Gain (loss) on sale of AFS securities 171 1,119 (948 ) (84.72 )% 3 1,116 N/M Other Brokerage and advisory fees 704 574 130 22.65 % 545 29 5.32 % Gain on sale of OREO 286 220 66 30.00 % 62 158 N/M Corporate Settlement Solutions joint venture 143 504 (361 ) (71.63 )% (182 ) 686 N/M Other 341 407 (66 ) (16.22 )% 525 (118 ) (22.48 )% Total other 1,474 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 % Change Change 2013 2012 $ % 2011 $ % Compensation and benefits Employee salaries $ 15,677 $ 15,374 $ 303 1.97 % $ 14,377 $ 997 6.93 % Employee benefits 5,788 5,853 (65 ) (1.11 )% 4,915 938 19.08 % Total compensation and benefits 21,465 21,227 238 1.12 % 19,292 1,935 10.03 % Furniture and equipment Service contracts 2,277 1,995 282 14.14 % 1,898 97 5.11 % Depreciation 1,889 1,796 93 5.18 % 1,916 (120 ) (6.26 )% ATM and debit card fees 710 690 20 2.90 % 629 61 9.70 % All other 69 79 (10 ) (12.66 )% 54 25 46.30 % Total furniture and equipment 4,945 4,560 385 8.44 % 4,497 63 1.40 % Occupancy Outside services 671 605 66 10.91 % 587 18 3.07 % Depreciation 667 621 46 7.41 % 605 16 2.64 % Utilities 502 463 39 8.42 % 462 1 0.22 % Property taxes 499 501 (2 ) (0.40 )% 470 31 6.60 % All other 314 329 (15 ) (4.56 )% 346 (17 ) (4.91 )% Total occupancy 2,653 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 relations 1,131 1,965 (834 ) (42.44 )% 1,174 791 67.38 % FDIC insurance premiums 1,082 864 218 25.23 % 1,086 (222 ) (20.44 )% Directors fees 819 885 (66 ) (7.46 )% 842 43 5.11 % Audit and related fees 738 711 27 3.80 % 714 (3 ) (0.42 )% Education and travel 502 588 (86 ) (14.63 )% 526 62 11.79 % Loan underwriting fees 423 403 20 4.96 % 331 72 21.75 % Printing and supplies 396 424 (28 ) (6.60 )% 405 19 4.69 % Postage and freight 387 389 (2 ) (0.51 )% 388 1 0.26 % Legal fees 359 268 91 33.96 % 302 (34 ) (11.26 )% Consulting fees 315 482 (167 ) (34.65 )% 386 96 24.87 % Amortization of deposit premium 221 260 (39 ) (15.00 )% 299 (39 ) (13.04 )% Foreclosed asset and collection 211 202 9 4.46 % 576 (374 ) (64.93 )% State taxes 140 187 (47 ) (25.13 )% 57 130 N/M Other losses 109 300 (191 ) (63.67 )% 54 246 N/M All other 1,517 1,123 394 35.08 % 1,131 (8 ) (0.71 )% Total other 8,350 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 % Change 2013 2012 $ % ASSETS Cash and cash equivalents $ 41,558 $ 24,920 $ 16,638 66.77 % Certificates of deposit held in other financial institutions 580 4,465 (3,885 ) (87.01 )% Trading securities 525 1,573 (1,048 ) (66.62 )% AFS securities Amortized cost of AFS securities 517,614 490,420 27,194 5.55 % Unrealized gains (losses) on AFS securities (5,552 ) 13,590 (19,142 ) (140.85 )% AFS securities 512,062 504,010 8,052 1.60 % Mortgage loans AFS 1,104 3,633 (2,529 ) (69.61 )% Loans Gross loans 808,037 772,753 35,284 4.57 % Less allowance for loan and lease losses 11,500 11,936 (436 ) (3.65 )% Net loans 796,537 760,817 35,720 4.69 % Premises and equipment 25,719 25,787 (68 ) (0.26 )% Corporate owned life insurance policies 24,401 22,773 1,628 7.15 % Accrued interest receivable 5,442 5,227 215 4.11 % Equity securities without readily determinable fair values 18,293 18,118 175 0.97 % Goodwill and other intangible assets 46,311 46,532 (221 ) (0.47 )% Other assets 20,605 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 funds 279,326 241,001 38,325 15.90 % Accrued interest payable and other liabilities 9,436 7,482 1,954 26.12 % Total liabilities 1,332,528 1,266,150 66,378 5.24 % Shareholders’ equity 160,609 164,489 (3,880 ) (2.36 )% TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY $ 1,493,137 $ 1,430,639 $ 62,498 4.37 % 2013 2012 2011 Government sponsored enterprises $ 23,745 $ 25,776 $ 397 States and political subdivisions 201,988 182,743 174,938 Auction rate money market preferred 2,577 2,778 2,049 Preferred stocks 5,827 6,363 5,033 Mortgage-backed securities 144,115 155,345 143,602 Collateralized mortgage obligations 133,810 131,005 99,101 Total $ 512,062 $ 504,010 $ 425,120 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 subdivisions 961 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 2013 2012 2011 2010 2009 Commercial $ 392,104 $ 371,505 $ 365,714 $ 348,852 $ 340,274 Agricultural 92,589 83,606 74,645 71,446 64,845 Residential real estate 289,931 284,148 278,360 284,029 285,838 Consumer 33,413 33,494 31,572 30,977 32,359 Total $ 808,037 $ 772,753 $ 750,291 $ 735,304 $ 723,316 2013 2012 2011 $ Change % Change $ Change % Change $ Change % Change Commercial $ 20,599 5.54 % $ 5,791 1.58 % $ 16,862 4.83 % Agricultural 8,983 10.74 % 8,961 12.00 % 3,199 4.48 % Residential real estate 5,783 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 % 2013 2012 2011 2010 2009 Noninterest bearing demand deposits $ 158,428 $ 143,735 $ 119,072 $ 104,902 $ 96,875 Interest bearing demand deposits 192,089 181,259 163,653 142,259 128,111 Savings deposits 243,237 228,338 193,902 177,817 157,020 Certificates of deposit 362,473 376,790 395,777 386,435 356,594 Brokered certificates of deposit 56,329 55,348 54,326 53,748 50,933 Internet certificates of deposit 31,210 32,197 31,434 12,178 13,119 Total $ 1,043,766 $ 1,017,667 $ 958,164 $ 877,339 $ 802,652 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 deposits 10,830 5.97 % 17,606 10.76 % 21,394 15.04 % Savings deposits 14,899 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 deposit 981 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 % Maturity Within 3 months $ 33,773 Within 3 to 6 months 26,598 Within 6 to 12 months 48,345 Over 12 months 128,986 Total $ 237,702 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 maturities 207,278 140,040 85,550 17,144 450,012 Total deposits 801,032 140,040 85,550 17,144 1,043,766 Borrowed funds Short-term borrowings 106,025 — — — 106,025 Long-term borrowings 20,876 42,425 70,000 40,000 173,301 Total borrowed funds 126,901 42,425 70,000 40,000 279,326 Total contractual obligations $ 927,933 $ 182,465 $ 155,550 $ 57,144 $ 1,323,092 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 loans 29,096 — — — 29,096 Commercial and standby letters of credit 4,169 — — — 4,169 Total loan commitments $ 105,431 $ 31,141 $ 13,059 $ 5,593 $ 155,224 2013 2012 Required Equity Capital 13.67 % 13.23 % 4.00 % Secondary Capital 1.25 % 1.25 % 4.00 % Total Capital 14.92 % 14.48 % 8.00 % 0 to 3
Months 4 to 12
Months 1 to 5
Years Over 5
YearsInterest sensitive assets Trading securities $ 525 $ — $ — $ — AFS securities 44,680 87,212 226,963 153,207 Loans 188,897 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 deposits 61,029 146,624 225,215 17,144 Savings deposits 16,598 20,843 82,092 123,704 Interest bearing demand deposits 2,390 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 assets 2.54 % 1.93 % 12.96 % 10.23 % 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 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 activities 58,828 78,740 (19,912 ) Increase (decrease) in cash and cash equivalents 16,638 (3,670 ) 20,308 Cash and cash equivalents at beginning of period 24,920 28,590 (3,670 ) Cash and cash equivalents at end of period $ 41,558 $ 24,920 $ 16,638 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 )% 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 rates 0.25 % 1.15 % — — — — 0.27 % Trading securities $ 525 $ — $ — $ — $ — $ — $ 525 $ 525 Average interest rates 2.77 % — — — — — 2.77 % AFS securities $ 131,892 $ 73,723 $ 63,190 $ 52,078 $ 37,972 $ 153,207 $ 512,062 $ 512,062 Average interest rates 2.26 % 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 rates 5.31 % 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 rates 4.76 % 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 rates 0.43 % 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 rates 0.19 % 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 rates 0.89 % 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 rates 0.04 % 0.40 % — — — — 0.16 % 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 rates 0.86 % 0.35 % 1.25 % — — — 0.86 % Trading securities $ 1,051 $ 522 $ — $ — $ — $ — $ 1,573 $ 1,573 Average interest rates 2.68 % 2.54 % — — — — 2.63 % AFS securities $ 124,452 $ 83,606 $ 49,419 $ 42,655 $ 35,504 $ 168,374 $ 504,010 $ 504,010 Average interest rates 2.42 % 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 rates 5.74 % 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 rates 4.90 % 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 rates 0.46 % 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 rates 0.13 % 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 rates 1.13 % 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 rates 0.46 % 0.45 % — — — — 0.46 % 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.As discussed in Note 1 to the consolidated financial statements, effective January 1, 2008, the Corporation adopted ASC Topic 715,Compensation — Retirement Benefits.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.P.C.8, 20114, 201424 December 31 2010 2009 (Dollars in thousands) 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 18,109 24,482 Certificates of deposit held in other financial institutions 15,808 5,380 Trading securities 5,837 13,563 330,724 259,066 1,182 2,281 Loans Agricultural 71,446 64,845 Commercial 348,852 340,274 Installment 30,977 32,359 Residential real estate mortgage 284,029 285,838 735,304 723,316 Less allowance for loan losses 12,373 12,979 722,931 710,337 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 $ 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 $100 204,197 188,022 877,339 802,652 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 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 ) 145,161 140,803 $ 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 banks 19,803 2,286 Total cash and cash equivalents 41,558 24,920 Certificates of deposit held in other financial institutions 580 4,465 Trading securities 525 1,573 AFS securities (amortized cost of $517,614 in 2013 and $490,420 in 2012) 512,062 504,010 Mortgage loans AFS 1,104 3,633 Loans Commercial 392,104 371,505 Agricultural 92,589 83,606 Residential real estate 289,931 284,148 Consumer 33,413 33,494 Gross loans 808,037 772,753 Less allowance for loan and lease losses 11,500 11,936 Net loans 796,537 760,817 Premises and equipment 25,719 25,787 Corporate owned life insurance policies 24,401 22,773 Accrued interest receivable 5,442 5,227 Equity securities without readily determinable fair values 18,293 18,118 Goodwill and other intangible assets 46,311 46,532 Other assets 20,605 12,784 TOTAL ASSETS $ 1,493,137 $ 1,430,639 LIABILITIES AND SHAREHOLDERS’ EQUITY Deposits Noninterest bearing $ 158,428 $ 143,735 NOW accounts 192,089 181,259 Certificates of deposit under $100 and other savings 455,547 455,546 Certificates of deposit over $100 237,702 237,127 Total deposits 1,043,766 1,017,667 Borrowed funds 279,326 241,001 Accrued interest payable and other liabilities 9,436 7,482 Total liabilities 1,332,528 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 2012 137,580 136,580 Shares to be issued for deferred compensation obligations 4,148 3,734 Retained earnings 25,222 19,168 Accumulated other comprehensive income (loss) (6,341 ) 5,007 Total shareholders’ equity 160,609 164,489 TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY $ 1,493,137 $ 1,430,639 25 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, 2011 7,550,074 $ 133,592 $ 4,682 $ 8,596 $ (1,709 ) $ 145,161 Comprehensive income (loss) — — — 10,210 4,198 14,408 Issuance of common stock 120,336 3,075 — — — 3,075 Common stock issued for deferred compensation plan 39,257 697 (773 ) — — (76 ) Share-based payment awards under equity compensation plan — — 615 — — 615 Common stock purchased for deferred compensation obligations — (426 ) — — — (426 ) Common stock repurchased pursuant to publicly announced repurchase plan (120,441 ) (2,204 ) — — — (2,204 ) Cash dividends ($0.76 per share) — — — (5,770 ) — (5,770 ) Balance, December 31, 2011 7,589,226 134,734 4,524 13,036 2,489 154,783 Comprehensive income (loss) — — — 12,206 2,518 14,724 Issuance of common stock 124,530 2,898 — — — 2,898 Common stock issued for deferred compensation plan 41,676 814 (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, 2012 7,671,846 136,580 3,734 19,168 5,007 164,489 Comprehensive income (loss) — — — 12,510 (11,348 ) 1,162 Issuance of common stock 149,191 3,618 — — — 3,618 Common stock issued for deferred compensation 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, 2013 7,723,023 $ 137,580 $ 4,148 $ 25,222 $ (6,341 ) $ 160,609 26(Dollars in thousands except per share amounts) Year Ended December 31 2010 2009 2008 (Dollars in thousands except per share data) 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 57,217 58,105 61,385 Deposits 11,530 13,588 19,873 Borrowings 5,674 6,251 5,733 17,204 19,839 25,606 40,013 38,266 35,779 Provision for loan losses 4,857 6,093 9,500 35,156 32,173 26,279 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 ) 348 648 24 Other 1,729 1,340 1,555 9,300 10,156 7,802 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 33,807 33,683 30,704 10,649 8,646 3,377 Federal income tax expense (benefit) 1,604 846 (724 ) $ 9,045 $ 7,800 $ 4,101 Basic $ 1.20 $ 1.04 $ 0.55 Diluted $ 1.17 $ 1.01 $ 0.53 $ 0.72 $ 0.70 $ 0.65 Year Ended December 31 2013 2012 2011 Interest income Loans, including fees $ 41,233 $ 43,396 $ 45,463 AFS securities Taxable 7,228 7,555 6,941 Nontaxable 5,132 4,870 4,806 Trading securities 36 94 189 Federal funds sold and other 447 486 506 Total interest income 54,076 56,401 57,905 Interest expense Deposits 7,140 9,131 10,935 Borrowings 3,881 4,292 5,268 Total interest expense 11,021 13,423 16,203 Net interest income 43,055 42,978 41,702 Provision for loan losses 1,111 2,300 3,826 Net interest income after provision for loan losses 41,944 40,678 37,876 Noninterest income Service charges and fees 6,836 6,432 6,118 Net gain on sale of mortgage loans 962 1,576 538 Earnings on corporate owned life insurance policies 732 698 609 Net gain (loss) on sale of AFS securities 171 1,119 3 Other 1,474 1,705 950 Total noninterest income 10,175 11,530 8,218 Noninterest expenses Compensation and benefits 21,465 21,227 19,292 Furniture and equipment 4,945 4,560 4,497 Occupancy 2,653 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 — Other 8,350 9,051 8,271 Total noninterest expenses 37,413 37,639 34,530 Income before federal income tax expense 14,706 14,569 11,564 Federal income tax expense 2,196 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 27 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 year 2,120 (580 ) (2,109 ) Reclassification adjustment for net periodic benefit cost included in net income 208 251 138 Net change in unrecognized pension cost 2,328 (329 ) (1,971 ) Tax effect (791 ) 111 671 Change in unrealized pension cost, net of tax 1,537 (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) Year Ended December 31 2010 2009 2008 (Dollars in thousands) $ 9,045 $ 7,800 $ 4,101 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 ) 410 3,450 (5,303 ) $ 9,455 $ 11,250 $ (1,202 ) 28(Dollars in thousands) Year Ended December 31 2010 2009 2008 (Dollars in thousands) (Unaudited) 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 1,153 741 356 (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 ) 26,521 18,225 20,661 Net change in certificates of deposit held in other financial institutions (10,428 ) (4,805 ) 882 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 — (103,877 ) (9,184 ) (87,846 ) 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 ) 70,983 (7,538 ) 66,038 (6,373 ) 1,503 (1,147 ) Cash and cash equivalents at beginning of year 24,482 22,979 24,126 $ 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 ) 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 losses 1,111 2,300 3,826 Impairment of foreclosed assets 156 166 82 Depreciation 2,556 2,417 2,521 Amortization of OMSRs 522 787 714 Amortization of acquisition intangibles 221 260 299 Net amortization of AFS securities 2,028 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 securities 28 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 plan 554 643 615 Deferred income tax (benefit) expense (1,208 ) 616 389 Origination of loans held-for-sale (53,632 ) (99,353 ) (57,584 ) Proceeds from loan sales 57,123 100,501 56,099 Net changes in operating assets and liabilities which provided (used) cash: Trading securities 1,020 3,085 1,049 Accrued interest receivable (215 ) 621 (392 ) Other assets (122 ) (2,610 ) 147 Accrued interest payable and other liabilities 1,954 (1,360 ) 449 Net cash provided by (used in) operating activities 22,741 19,464 18,860 INVESTING ACTIVITIES Net change in certificates of deposit held in other financial institutions 3,885 4,459 6,884 Activity in AFS securities Sales 16,229 40,677 8,877 Maturities and calls 86,225 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 assets 2,122 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 policies 196 — — Net cash provided by (used in) investing activities (64,931 ) (101,874 ) (105,203 ) 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 funds 38,325 24,898 21,400 Cash dividends paid on common stock (6,456 ) (6,074 ) (5,770 ) Proceeds from issuance of common stock 3,618 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 activities 58,828 78,740 96,824 Increase (decrease) in cash and cash equivalents 16,638 (3,670 ) 10,481 Cash and cash equivalents at beginning of year 24,920 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 paid 2,093 2,357 878 SUPPLEMENTAL NONCASH INVESTING AND FINANCING INFORMATION: Transfers of loans to foreclosed assets $ 1,672 $ 1,902 $ 1,932 29amounts)amounts)NOTE 1 —Nature of Operations and Summary of Significant Accounting PoliciesBasis of Presentation and Consolidation:BASIS OF PRESENTATION AND CONSOLIDATION: (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: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.its subsidiaries.Isabella Bank.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: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.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 MEASUREMENTSThe 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 another30NOTES 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.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.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. 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 RISKthe 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:31NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)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: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.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.Available-for-sale57other-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 may32NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued) No such losses were recognized in 2010, 2009, or 2008.Loans:LOANS: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.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.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: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.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.1. There has been a chargeoff of its principal balance;2. The loan has been classified as a troubled debt restructuring; or3. The loan is in nonaccrual status.33NOTES 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. 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. Accordingly, the Corporation does not separately identify individual consumer loans for impairment allocations and related disclosures.Loans Held for Sale:LOANS HELD FOR SALE: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.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: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 bethe 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: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.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.34NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)Loans Acquired Through Transfer:LOANS ACQUIRED THROUGH TRANSFER:Foreclosed Assets:FORECLOSED ASSETS: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: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: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 2007.35NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)59 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, LLC 6,970 7,040 FRB Stock 1,879 1,879 Valley Financial Corporation 1,000 1,000 Other 344 349 Total $ 18,293 $ 18,118 Stock Compensation Plans:EQUITY COMPENSATION PLAN: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: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.36NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)Federal Income Taxes:FEDERAL INCOME TAXES: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:10)11 – Other Noninterest Expenses”).Share:Sharestockholdersshareholders 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." 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 $ 1.20 $ 1.04 $ 0.55 $ 1.17 $ 1.01 $ 0.53 2013 2012 2011 Average number of common shares outstanding for basic calculation 7,694,392 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 share 7,863,340 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 Reclassifications:Recently Adopted Accounting Standards UpdateCertain 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 for37NOTES 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 with38NOTES 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 2 —Trading Securities31:31: 2010 2009 States and political subdivisions $ 5,837 $ 9,962 Mortgage-backed — 3,601 $ 5,837 $ 13,563 2013 2012 States and political subdivisions $ 525 $ 1,573 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, 2009.2012.39NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)61NOTE 3 —Available-for-Sale Investment Securitiesavailable-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 $ 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 $ 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 $ 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.40NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued) 2013 Amortized
Cost Gross
Unrealized
Gains Gross
Unrealized
Losses Fair
ValueGovernment sponsored enterprises $ 24,860 $ 7 $ 1,122 $ 23,745 States and political subdivisions 200,323 5,212 3,547 201,988 Auction rate money market preferred 3,200 — 623 2,577 Preferred stocks 6,800 20 993 5,827 Mortgage-backed securities 147,292 657 3,834 144,115 Collateralized mortgage obligations 135,139 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
ValueGovernment sponsored enterprises $ 25,668 $ 108 $ — $ 25,776 States and political subdivisions 174,118 9,190 565 182,743 Auction rate money market preferred 3,200 — 422 2,778 Preferred stocks 6,800 — 437 6,363 Mortgage-backed securities 152,256 3,199 110 155,345 Collateralized mortgage obligations 128,378 2,627 — 131,005 Total $ 490,420 $ 15,124 $ 1,534 $ 504,010 available-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 $ 14,061 $ 38,702 $ 86,151 $ 33,808 $ 156,713 $ 329,435 $ 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 subdivisions 930 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 auction rate money market preferreds, preferred stocks, mortgage-backed securities and collateralized mortgage obligations are not reported by a specific maturity group.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 41NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)available-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
LossesGovernment sponsored enterprises $ 1,122 $ 22,873 $ — $ — $ 1,122 States and political subdivisions 2,566 42,593 981 6,115 3,547 Auction rate money market preferred — — 623 2,577 623 Preferred stocks — — 993 2,807 993 Mortgage-backed securities 2,424 101,816 1,410 21,662 3,834 Collateralized mortgage obligations 2,345 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
LossesStates 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 securities 110 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 $ 2,607 $ 102,023 $ 1,199 $ 5,801 $ 3,806 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 $ 2,889 $ 54,918 $ 1,027 $ 8,294 $ 3,916 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.42NOTES 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?Discounted Cash Flow MethodRatings Fitch Not Rated Moody's Caa3 S&P A Seniority Senior Discount rate LIBOR + 6.35% • Is the investment credit rating below investment grade?Credit Yield Analysis MethodCredit discount rate LIBOR + 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%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 $ — 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 4 —Loans and Allowance for Loan LossesThe 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 $ 722,931 $ 710,337 43NOTES 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 ReceivablesFor the Year Ended December 31, 2010 Residential Commercial Agricultural Real Estate Consumer Unallocated Total 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 $ 6,048 $ 1,033 $ 3,198 $ 605 $ 1,489 $ 12,373 Individually evaluated for impairment $ 490 $ 558 $ 732 $ — $ — $ 1,780 Collectively evaluated for impairment 5,558 475 2,466 605 1,489 10,593 $ 6,048 $ 1,033 $ 3,198 $ 605 $ 1,489 $ 12,373 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 $ 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 $ 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.preceding three years.term of the loan based on the principal amount outstanding.stateand states and political subdivisions, and commercial operating loans. The largest concentration of commercial loans is44NOTES 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. 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.45NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)65 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 ) Recoveries 363 — 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 impairment 4,013 404 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 impairment 378,288 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 ) Recoveries 240 — 122 255 — 617 Provision for loan losses 2,010 (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 impairment 4,812 316 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 impairment 357,049 82,883 273,444 33,419 746,795 Total $ 371,505 $ 83,606 $ 284,148 $ 33,494 $ 772,753 Credit Quality Indicators66As 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 satisfactory 91,323 39,403 130,726 26,015 17,000 43,015 4 - Low satisfactory 149,921 43,809 193,730 26,874 10,902 37,776 5 - Special mention 13,747 1,843 15,590 1,609 922 2,531 6 - Substandard 16,974 473 17,447 1,232 1,273 2,505 7 - Vulnerable 1,041 238 1,279 — — — 8 - Doubtful 183 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 satisfactory 83,805 28,974 112,779 16,972 11,886 28,858 4 - Low satisfactory 127,423 45,143 172,566 27,291 15,437 42,728 5 - Special mention 16,046 1,692 17,738 1,008 3,191 4,199 6 - Substandard 20,029 2,224 22,253 1,167 1,217 2,384 7 - Vulnerable 1,512 2,294 3,806 — — — 8 - Doubtful 1,596 22 1,618 — 169 169 Total $ 275,620 $ 95,885 $ 371,505 $ 49,393 $ 34,213 $ 83,606 Commercial and Agricultural Credit ExposureCredit 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 — — — $ 239,810 $ 109,042 $ 348,852 $ 44,246 $ 27,200 $ 71,446 1. EXCELLENT —1. EXCELLENT – Substantially Risk FreeLoans 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 RiskLoansUnquestioned ability to borrowersmeet all obligations when due.amanagement succession in place.• 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.46NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)673. HIGH SATISFACTORY — Reasonable RiskLoans 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 RiskLoansCash flow sufficient to borrowers which are considered Bankablepay debts as scheduled.• 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.5. SPECIAL MENTION-5. SPECIAL MENTION – CriticizedThese 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.• • 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.47NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)Loan delinquency (30-60 days) and overdrafts may occur.6. SUBSTANDARD — ClassifiedA substandard loanManagement abilities are questionable.inadequately protected bywell collateralized and payments are current.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 — ClassifiedThis classification includes substandard loans that warrantDeteriorating liquidity.• 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 — WorkoutA doubtfulMinimal or no payments being received.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.• • 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.48NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)Portion of the loan balance has been charged-off.9. LOSS — Charge offLoans 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 LoansAs 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 $ 11,938 $ 486 $ 5,610 $ 18,034 $ 717,270 $ 735,304 �� $ 10,305 $ 768 $ 8,522 $ 19,595 $ 703,721 $ 723,316 $ 14,906 $ 1,251 $ 11,175 $ 27,332 $ 708,053 $ 735,385 49NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)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 other 368 15 13 238 634 99,610 100,244 Total commercial 1,594 311 13 1,374 3,292 388,812 392,104 Agricultural Agricultural real estate 34 295 — — 329 58,928 59,257 Agricultural other — — — — — 33,332 33,332 Total agricultural 34 295 — — 329 92,260 92,589 Residential real estate Senior liens 3,441 986 129 1,765 6,321 229,865 236,186 Junior liens 408 44 — 29 481 13,074 13,555 Home equity lines of credit 181 — — 25 206 39,984 40,190 Total residential real estate 4,030 1,030 129 1,819 7,008 282,923 289,931 Consumer Secured 167 11 — 50 228 28,444 28,672 Unsecured 25 5 — 1 31 4,710 4,741 Total consumer 192 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 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 — $ 9,688 $ 11,810 $ 1,780 $ 9,101 $ 428 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 $ 2,360 $ 3,524 $ 3,253 $ 198 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 $ 12,048 $ 15,334 $ 1,780 $ 12,354 $ 626 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 other 606 — 40 2,294 2,940 92,945 95,885 Total commercial 1,910 161 103 4,838 7,012 364,493 371,505 Agricultural Agricultural real estate — — — — — 49,393 49,393 Agricultural other 90 — — 169 259 33,954 34,213 Total agricultural 90 — — 169 259 83,347 83,606 Residential real estate Senior liens 2,000 346 320 2,064 4,730 223,532 228,262 Junior liens 232 — — 50 282 16,207 16,489 Home equity lines of credit 237 — — 182 419 38,978 39,397 Total residential real estate 2,469 346 320 2,296 5,431 278,717 284,148 Consumer Secured 127 33 4 — 164 28,118 28,282 Unsecured 31 3 1 — 35 5,177 5,212 Total consumer 158 36 5 — 199 33,295 33,494 Total $ 4,627 $ 543 $ 428 $ 7,303 $ 12,901 $ 759,852 $ 772,753 1. 2. 3. 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 other 521 521 120 879 51 Agricultural real estate 90 90 30 91 4 Agricultural other — — — 53 — Residential real estate senior liens 14,061 15,315 2,278 11,111 442 Residential real estate junior liens 48 64 9 80 2 Total impaired loans with a valuation allowance 21,468 22,878 4,352 19,470 899 Impaired loans without a valuation allowance Commercial real estate 5,622 6,499 4,312 337 Commercial other 925 1,035 989 83 Agricultural real estate 1,370 1,370 320 28 Agricultural other 78 198 357 (7 ) Home equity lines of credit 193 493 180 16 Consumer secured 119 148 72 2 Total impaired loans without a valuation allowance 8,307 9,743 6,230 459 Impaired loans Commercial 13,816 14,943 2,035 13,436 871 Agricultural 1,538 1,658 30 821 25 Residential real estate 14,302 15,872 2,287 11,371 460 Consumer 119 148 — 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 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 other 2,140 2,140 397 1,437 93 Agricultural real estate 91 91 32 413 — Agricultural other 420 420 59 1,555 54 Residential real estate senior liens 10,450 11,672 1,783 8,861 406 Residential real estate junior liens 72 118 13 134 6 Total impaired loans with a valuation allowance 20,468 21,977 3,937 18,555 796 Impaired loans without a valuation allowance Commercial real estate 3,749 4,408 5,867 321 Commercial other 1,272 1,433 819 87 Agricultural real estate — — 183 — Agricultural other 212 332 201 4 Home equity lines of credit 182 482 190 16 Consumer secured 75 84 90 6 Total impaired loans without a valuation allowance 5,490 6,739 7,350 434 Impaired loans Commercial 14,456 15,517 2,050 14,278 738 Agricultural 723 843 91 2,352 58 Residential real estate 10,704 12,272 1,796 9,185 428 Consumer 75 84 — 90 6 Total impaired loans $ 25,958 $ 28,716 $ 3,937 $ 25,905 $ 1,230 1. Agreeing to interest rates below prevailing market rates for debt with similar risk characteristics. 2. Extending the amortization period beyond typical lending guidelines for debt with similar risk characteristics. 3. Forbearance of principal. 4. Forbearance of accrued interest. 1. 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). 50NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)72restructured 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 —ServicingResidential 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 ) $ 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 other 18 5,299 5,103 28 6,437 6,437 Total commercial 18 5,299 5,103 29 7,349 7,229 Agricultural other 4 1,379 1,379 7 652 652 Residential real estate Senior liens 55 6,069 6,053 29 3,463 3,463 Junior liens 1 20 20 1 22 22 Total residential real estate 56 6,089 6,073 30 3,485 3,485 Consumer Secured 1 27 27 1 — — Unsecured 2 34 34 — — — Total consumer 3 61 61 1 — — Total 81 $ 12,828 $ 12,616 67 $ 11,486 $ 11,366 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 other 12 3,070 6 2,229 25 4,924 3 1,513 Total commercial 12 3,070 6 2,229 25 4,924 4 2,425 Agricultural other 4 1,379 — — 6 561 1 91 Residential real estate Senior liens 24 1,904 31 4,165 17 1,779 12 1,684 Junior liens — — 1 20 — — 1 22 Total residential real estate 24 1,904 32 4,185 17 1,779 13 1,706 Consumer Secured 1 27 — — 1 — — — Unsecured 1 16 1 18 — — — — Total Consumer 2 43 1 18 1 — — — Total 42 $ 6,396 39 $ 6,432 49 $ 7,264 18 $ 4,222 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
InvestmentCommercial other — $ — $ — $ — 5 $ 342 $ 143 $ 199 Residential real estate senior liens 1 62 11 51 1 47 43 4 Consumer secured — — — — 1 8 8 — Consumer unsecured 1 16 16 — — — — — Total 2 $ 78 $ 27 $ 51 7 $ 397 $ 194 $ 203 2013 2012 TDRs $ 25,865 $ 19,355 2008, respectively.EquipmentNOTE 6 —Premises and Equipment 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 $ 24,627 $ 23,917 2013 2012 Land $ 5,429 $ 5,435 Buildings and improvements 24,765 22,705 Furniture and equipment 30,128 29,755 Total 60,322 57,895 Less: accumulated depreciation 34,603 32,108 Premises and equipment, net $ 25,719 $ 25,787 $2,522, $2,349$2,556, $2,417, and $2,171$2,521 in 2010, 2009,2013, 2012, and 2008,2011, respectively.51NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)NOTE 7 —Note 8 – Goodwill and Other Intangible Assets 20102013 and 2009.2012.at year end were as follows:follows as of December 31: 2013 Gross
Intangible
Assets Accumulated
Amortization Net
Intangible
AssetsCore deposit premium resulting from acquisitions $ 5,373 $ 4,680 $ 693 2012 Gross
Intangible
Assets Accumulated
Amortization Net
Intangible
AssetsCore 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 $ 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 $ 5,373 $ 3,562 $ 1,811 $338, $375,$221, $260, and $415$299 in 2010, 2009,2013, 2012, and 2008,2011, respectively.2010,2013, and thereafter is as follows:2014 $ 183 2015 145 2016 106 2017 74 2018 62 Thereafter 123 Total $ 693 Amount 2011 $ 299 2012 260 2013 221 2014 183 2015 145 Thereafter 365 $ 1,473 NOTE 8 —Deposits Amount 2011 $ 216,927 2012 113,999 2013 44,269 2014 31,414 2015 39,474 Thereafter 6,278 $ 452,361 2014 $ 207,278 2015 81,413 2016 58,627 2017 46,336 2018 39,214 Thereafter 17,144 Total $ 450,012 $4,427$3,203 in 2010, $5,2462013, $3,854 in 2009,2012, and $6,525$4,302 in 2008.2011.52NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)NOTE 9 —Borrowed Funds31:31: 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 % $ 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 dates 106,025 0.13 % 66,147 0.15 % Securities sold under agreements to repurchase with stated maturity dates 11,301 3.30 % 16,284 3.57 % Federal funds purchased — — 6,570 0.50 % Total $ 279,326 1.35 % $ 241,001 1.59 % 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.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 % — — $ 113,423 3.64 % $ 127,804 4.11 % 53NOTES 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 2015 32,000 0.84 % 42,000 1.12 % Fixed rate advances due 2016 10,000 2.15 % 10,000 2.15 % Fixed rate advances due 2017 30,000 1.95 % 40,000 2.15 % Fixed rate advances due 2018 40,000 2.35 % 20,000 2.86 % Fixed rate advances due 2019 20,000 3.11 % 20,000 3.73 % Fixed rate advances due 2020 10,000 1.98 % 10,000 1.98 % Fixed rate advances due 2023 10,000 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 % — — $ 19,623 3.01 % $ 20,000 3.72 % $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. 2013 2012 Amount Rate Amount Rate Repurchase agreements due 2013 $ — — $ 5,000 4.51 % Repurchase agreements due 2014 10,876 3.30 % 10,872 3.15 % Repurchase agreements due 2015 425 3.25 % 412 3.25 % Total $ 11,301 3.30 % $ 16,284 3.57 % 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 purchased 13,700 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 2013 2012 Pledged to secure borrowed funds $ 320,173 $ 308,628 Pledged to secure repurchase agreements 148,930 143,322 Pledged for public deposits and for other purposes necessary or required by law 20,922 22,955 Total $ 490,025 $ 474,905 54NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)76NOTE 10 —Other Noninterest ExpensesOther 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 premiums 1,082 864 1,086 Directors fees 819 885 842 Audit and related fees 738 711 714 Education and travel 502 588 526 Loan underwriting fees 423 403 331 Printing and supplies 396 424 405 Postage and freight 387 389 388 Legal fees 359 268 302 Consulting fees 315 482 386 Amortization of deposit premium 221 260 299 Foreclosed asset and collection 211 202 576 State taxes 140 187 57 Other losses 109 300 54 All other 1,517 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 $ 7,306 $ 7,379 $ 7,515 NOTE 11 —Federal Income Taxes(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 ) $ 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 (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 $ 1,604 $ 846 $ (724 ) Federal income tax expense $ 2,196 $ 2,363 $ 1,354 55NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)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 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 plan 1,100 1,891 Net unrealized losses on available-for-sale securities 1,345 — Life insurance death benefit payable 804 804 804 804 Alternative minimum tax 686 619 729 729 Other 219 504 321 195 9,668 9,209 11,188 10,284 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 1,203 847 494 — 4,912 Other 518 435 547 1,163 4,154 3,190 3,290 9,060 $ 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.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 ActivitiesThe 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 credit 4,169 3,935 Commitments to grant loans 29,096 40,507 56NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)78 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 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. 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.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.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 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.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.57NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)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.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.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 accompanyingour consolidated financial statements.NOTE 14 —Commitments and Other Mattersthe 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.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 RequirementsMinimum Regulatory Capital RequirementsFederal 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.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).58NOTES 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.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 % Consolidated 131,398 14.92 70,452 8.00 N/A N/A Tier 1 capital to risk weighted assets Isabella Bank 109,217 12.59 34,695 4.00 52,043 6.00 Consolidated 120,384 13.67 35,226 4.00 N/A N/A Tier 1 capital to average assets Isabella Bank 109,217 7.75 56,403 4.00 70,504 5.00 Consolidated 120,384 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 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 Minimum to be Well Capitalized Minimum Under Prompt Capital Corrective Action Actual Requirement Provisions Amount Ratio Amount Ratio Amount Ratio 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 % Consolidated 123,388 14.48 68,161 8.00 N/A N/A Tier 1 capital to risk weighted assets Isabella Bank 101,988 12.15 33,575 4.00 50,362 6.00 Consolidated 112,722 13.23 34,080 4.00 N/A N/A Tier 1 capital to average assets Isabella Bank 101,988 7.57 53,916 4.00 67,395 5.00 Consolidated 112,722 8.29 54,411 4.00 N/A N/A Note 16 —Benefit PlansThe 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.arewere 100% vested in the safe harbor contributions and arewere 0% vested through their first two years of employment and arewere 100% vested after59NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)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.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.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 cost 450 470 Actuarial (gain) loss (1,294 ) 888 Benefits paid, including plan expenses (633 ) (483 ) Benefit obligation, December 31 10,732 12,209 Change in plan assets Fair value of plan assets, January 1 9,650 8,603 Investment return 1,276 778 Contributions 215 752 Benefits paid, including plan expenses (633 ) (483 ) Fair value of plan assets, December 31 10,508 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 ) Contributions 215 752 Net periodic benefit cost (208 ) (251 ) Net change in unrecognized actuarial loss and prior service cost 2,328 (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 ) 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 ) 8,900 8,355 $ (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 $ (760 ) $ (542 ) 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 $ (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 or60NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)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 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 $ 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 loss 330 292 153 Net periodic benefit cost $ 208 $ 251 $ 138 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.projected benefit obligation andare as follows for the actualyears ended December 31: 2013 2012 2011 Discount rate 4.64 % 3.75 % 4.22 % Expected long-term rate of return 6.00 % 6.00 % 6.00 % 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 rate 3.75 % 4.22 % 5.36 % Expected long-term return on plan assets 6.00 % 6.00 % 6.00 % • Historical longer term rates of return for broad asset classes.• Actual past rates of return achieved by the plan.• The general mix of assets held by the plan.• The 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.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.61NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)the Corporation’sour pension plan assets by asset category were as follows as of December 31:31: 2010 2009 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 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.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. making any contributions to the plan in 2011.2014.Estimated future benefit payments are as follows for the next ten years: Amount 2011 $ 393 2012 406 2013 404 2014 497 2015 542 Years 2016 — 2020 3,038 ended ending December 31:31, 2014:Interest cost on projected benefit obligation $ 486 Expected return on plan assets (615 ) Amortization of unrecognized actuarial net loss 169 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 $ 138 2014 $ 518 2015 551 2016 549 2017 577 2018 575 2019 - 2023 3,312 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.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 unissued62NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)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.31:31: 2010 2009 Eligible Market Eligible Market Shares Value Shares Value 2013 2012 Eligible
Shares Market
Value Eligible
Shares Market
ValueUnissued 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 5,130 112 224,663 $ 3,886 216,905 $ 4,110 185,311 $ 4,419 170,566 $ 3,710 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. Asresult 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.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.63NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)AOCINote 17 —Accumulated Other Comprehensive LossComprehensive 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. 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 reclassifications 9,220 (2,109 ) 7,111 Amounts reclassified from AOCI (3 ) 138 135 Subtotal 9,217 (1,971 ) 7,246 Tax effect (3,719 ) 671 (3,048 ) OCI, net of tax 5,498 (1,300 ) 4,198 Balance, December 31, 2011 5,942 (3,453 ) 2,489 OCI before reclassifications 3,921 (580 ) 3,341 Amounts reclassified from AOCI (837 ) 251 (586 ) Subtotal 3,084 (329 ) 2,755 Tax effect (348 ) 111 (237 ) OCI, net of tax 2,736 (218 ) 2,518 Balance, December 31, 2012 8,678 (3,671 ) 5,007 OCI before reclassifications (18,971 ) 2,120 (16,851 ) Amounts reclassified from AOCI (171 ) 208 37 Subtotal (19,142 ) 2,328 (16,814 ) Tax effect 6,257 (791 ) 5,466 OCI, net of tax (12,885 ) 1,537 (11,348 ) Balance, December 31, 2013 $ (4,207 ) $ (2,134 ) $ (6,341 ) 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.The following is acomprisingof 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 accumulated other comprehensive loss reported onincome for the consolidated balance sheets asyears ended December 31:Details about AOCI components Amount
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 2010 2009 $ 444 $ (13 ) Unrecognized pension costs (2,153 ) (2,106 ) $ (1,709 ) $ (2,119 ) Note 18 —Related Party Transactionsthe 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 $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.Estimated Fair Values of Financial Instruments Not Recorded at Fair Value in their Entirety on a Recurring BasisDisclosure 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.64NOTES 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 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 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 ValueThe table below presents the recorded amount of assets and liabilities measured at fair value on December 31: 2010 2009 Total (Level 2) (Level 3) Total (Level 2) (Level 3) 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 — 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 — 330,724 320,923 9,801 259,066 249,039 10,027 Borrowed funds 10,423 10,423 — 17,804 17,804 — 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 % 65NOTES 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.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.demand deposits due from banks:cash equivalentsinstitutions:institutionsyears.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.available-for-sale::available-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.Loans:Loans66NOTES 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 Techniques Fair 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 Techniques Fair 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% interest:interest receivableGoodwill 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.values:valuesThe 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.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.67NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)assets:assetscollateral 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. December 31, 2013 Valuation Techniques Fair 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 Techniques Fair Value Unobservable Input Range Discount applied to collateral appraisal: Discounted appraisal value $ 2,018 Real Estate 20% - 30% 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:DepositsDemand,: 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.funds:funds 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.The Corporation hasarewere 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. 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 $ — the Corporation classifies other borrowed fundswe classify accrued interest payable as Level 2.1.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.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.68NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)90table 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 institutions 580 582 — 582 — Mortgage loans AFS 1,104 1,123 — 1,123 — Total loans 808,037 808,246 — — 808,246 Less allowance for loan and lease losses (11,500 ) (11,500 ) — — (11,500 ) Net loans 796,537 796,746 — — 796,746 Accrued interest receivable 5,442 5,442 5,442 — — Equity securities without readily determinable fair values (1) 18,293 18,293 — — — OMSRs 2,555 2,667 — 2,667 — LIABILITIES Deposits without stated maturities 593,754 593,754 593,754 — — Deposits with stated maturities 450,012 452,803 — 452,803 — Borrowed funds 279,326 283,060 — 283,060 — Accrued interest payable 633 633 633 — — 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 institutions 4,465 4,475 — 4,475 — Mortgage loans AFS 3,633 3,680 — 3,680 — Total loans 772,753 784,964 — — 784,964 Less allowance for loan and lease losses (11,936 ) (11,936 ) — — (11,936 ) Net loans 760,817 773,028 — — 773,028 Accrued interest receivable 5,227 5,227 5,227 — — Equity securities without readily determinable fair values (1) 18,118 18,118 — — — OMSRs 2,285 2,285 — 2,285 — LIABILITIES Deposits without stated maturities 553,332 553,332 553,332 — — Deposits with stated maturities 464,335 472,630 — 472,630 — Borrowed funds 241,001 248,822 — 248,822 — Accrued interest payable 751 751 751 — — 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. 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 (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 enterprises 23,745 — 23,745 — 25,776 — 25,776 — States and political subdivisions 201,988 — 201,988 — 182,743 — 182,743 — Auction rate money market preferred 2,577 — 2,577 — 2,778 — 2,778 — Preferred stocks 5,827 5,827 — — 6,363 6,363 — — Mortgage-backed securities 144,115 — 144,115 — 155,345 — 155,345 — Collateralized mortgage obligations 133,810 — 133,810 — 131,005 — 131,005 — Total AFS securities 512,062 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 assets 1,412 — — 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 % 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 (Losses) and (Losses) Total (Losses) and (Losses) Total Trading securities $ (94 ) $ — $ (94 ) $ 80 $ — $ 80 Borrowed funds — 227 227 — 289 289 Foreclosed assets — (180 ) (180 ) — (157 ) (157 ) Originated mortgage servicing rights — 1 1 — 7 7 $ (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 ) $ 10,423 $ 17,804 $ 10,000 $ 17,154 69NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)92Note 20 —Parent Company Only Financial Information December 31 2010 2009 December 31 2013 2012 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 securities 3,542 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 $ 152,331 $ 147,640 TOTAL ASSETS $ 170,499 $ 174,491 LIABILITIES AND SHAREHOLDERS’ EQUITY LIABILITIES AND SHAREHOLDERS’ EQUITY Other liabilities $ 7,170 $ 6,837 $ 9,890 $ 10,002 Shareholders’ equity 145,161 140,803 $ 152,331 $ 147,640 Shareholders' equity 160,609 164,489 TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY $ 170,499 $ 174,491 Year Ended December 31 2013 2012 2011 Income Dividends from subsidiaries $ 7,000 $ 6,125 $ 6,500 Interest income 161 174 128 Management fee and other 2,146 2,037 1,201 Total income 9,307 8,336 7,829 Expenses Compensation and benefits 2,811 2,424 2,267 Occupancy and equipment 476 370 370 Audit and related fees 345 351 378 Other 958 945 1,089 Total expenses 4,590 4,090 4,104 Income before income tax benefit and equity in undistributed earnings of subsidiaries 4,717 4,246 3,725 Federal income tax benefit 790 673 958 Income before income tax benefit and equity in undistributed earnings of subsidiaries 5,507 4,919 4,683 Undistributed earnings of subsidiaries 7,003 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 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 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 $ 9,045 $ 7,800 $ 4,101 70NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)93 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 values 74 (459 ) 160 Share-based payment awards 554 643 615 Depreciation 174 114 123 Net amortization of AFS securities 2 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 liabilities 1,238 (98 ) 757 Net cash provided by (used in) operating activities 7,193 5,035 6,304 Investing activities Maturities, calls, and sales of AFS securities 395 370 585 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 stock 3,618 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 equivalents 197 (1,142 ) 1,173 Cash and cash equivalents at beginning of year 332 1,474 301 Cash and cash equivalents at end of year $ 529 $ 332 $ 1,474 Year Ended December 31 2010 2009 2008 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 7,319 4,284 4,646 Maturities, calls, and sales 110 110 110 Sales (purchases) of equipment and premises 247 (466 ) 1,300 Advances to subsidiaries (250 ) — (11,927 ) 107 (356 ) (10,517 ) 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 ) (7,297 ) (4,900 ) (7,250 ) 129 (972 ) (13,121 ) Cash and cash equivelants at beginning of year 172 1,144 14,265 $ 301 $ 172 $ 1,144 Note 21 —Operating SegmentsThe 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.71Management’s Discussion and AnalysisTable of Financial Condition and Results of OperationsContentsISABELLA 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 SummaryIsabella 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 OfficeAs 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 LegislationThe 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 ProgramThe 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.OtherThe Corporation has not received any notices of regulatory actions as of February 28, 2011.72Critical 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. As73a result, the Corporation has not recognized another-than-temporary impairment related to these declines in fair value.DISTRIBUTION OF ASSETS, LIABILITIES, AND SHAREHOLDERS’ EQUITYINTEREST RATE AND INTEREST DIFFERENTIALThe 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 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 % 1,060,653 60,075 5.66 % 1,011,592 60,868 6.02 % 996,595 64,173 6.44 % 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 $ 1,182,930 $ 1,127,634 $ 1,113,102 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 % 926,092 17,204 1.86 % 886,228 19,839 2.24 % 867,291 25,606 2.95 % Demand deposits 102,812 94,408 95,552 Other 14,171 7,188 6,633 Shareholders’ equity 139,855 139,810 143,626 $ 1,182,930 $ 1,127,634 $ 1,113,102 $ 42,871 $ 41,029 $ 38,567 4.04 % 4.06 % 3.87 % 74Net Interest IncomeThe 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 ANALYSISThe 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 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 ) 1,143 (1,936 ) (793 ) 736 (4,041 ) (3,305 ) 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 ) 518 837 (3,472 ) (2,635 ) 1,546 (7,313 ) (5,767 ) $ 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 LOSSESThe 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 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 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 $ 12,373 $ 12,979 $ 11,982 $ 7,301 $ 7,605 $ 725,534 $ 725,299 $ 717,040 $ 604,342 $ 522,726 0.75 % 0.70 % 0.79 % 0.25 % 0.13 % $ 735,304 $ 723,316 $ 735,385 $ 612,687 $ 591,042 1.68 % 1.79 % 1.63 % 1.19 % 1.29 % 76As 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 StatusIncreases 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 77 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 LoansThe 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 $ 640 277 26 303 107 904 1,011 268 — 268 115 57 Past due 90 days or more — 163 163 — 426 426 — 630 630 53 — $ 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.78The 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 AssetsThe 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 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 — — $ 8,163 $ 10,447 $ 15,349 $ 7,259 $ 5,191 0.83 % 1.28 % 1.69 % 0.96 % 0.78 % 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 or79the 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 IncomeThe 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 % 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 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 % 1,729 1,340 389 29.0 % 1,555 (215 ) −13.8 % $ 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.80• 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.81Noninterest ExpensesThe 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 $ % 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 % 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 % 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 % 4,344 4,146 198 4.8 % 3,849 297 7.7 % 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 % 7,306 7,379 (73 ) −1.0 % 7,515 (136 ) −1.8 % $ 33,807 $ 33,683 $ 124 0.4 % $ 30,704 $ 2,979 9.7 % 82Significant 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 TaxesFederal 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.83ANALYSIS OF CHANGES IN FINANCIAL CONDITION December 31 2010 2009 $ Change % Change 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 % 330,724 259,066 71,658 27.66 % 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 % $ 1,225,810 $ 1,143,944 $ 81,866 7.16 % LIABILITIES AND SHAREHOLDERS’ EQUITY 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 % 1,080,649 1,003,141 77,508 7.73 % 145,161 140,803 4,358 3.10 % $ 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 securitiesTrading 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.84The 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 $ 5,837 $ 13,563 $ 21,775 Available-for-sale investment securitiesThe 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 — $ 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,85the 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 $ 14,132 3.51 $ 39,844 3.53 $ 141,398 3.29 $ 81,962 2.43 $ 53,388 2.98 LoansThe 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 significant86declines 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 valuesIncluded 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 $ 17,564 $ 17,921 DepositsThe 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 $ 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 % $ 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 2011.87A 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 % $ 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 $ 204,197 Borrowed FundsThe 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 % $ 194,917 2.53 % $ 193,101 3.19 % 88The 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 % — — $ 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 % — — $ 19,623 3.01 % $ 20,000 3.72 % Contractual Obligations and Loan CommitmentsThe 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 $ 715,720 $ 206,745 $ 133,513 $ 16,278 $ 1,072,256 89The 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 $ 83,980 $ 24,364 $ 14,847 $ 5,273 $ 128,464 CapitalThe 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 % 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.90The 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 ValueThe 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 (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 SensitivityInterest 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 the91expected 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 $ 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 $ 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 $ 296,042 $ 22,229 LiquidityLiquidity 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.92The 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 RiskThe 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 repay93the 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 % 94 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 StatementsThis 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 INFORMATIONThe 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 were95disclosed to the Corporation, which management has not independently verified. The following compiled data is provided for information purposes only and should not be viewed as indicative of the actual or market value of the Corporation’s common stock. Number of Sale Price Shares Low High 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 $ 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 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.96Stock PerformanceThe 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 PerformanceFive-Year Total ReturnThe dollar values for total shareholder return plotted in the graph above are shown in the table below:Comparison of Five Year CumulativeAmong Isabella Bank Corporation, NASDAQ Stock Market,and NASDAQ Bank Stock Isabella Bank NASDAQ 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 97Tuesday, May 3, 2011,Wednesday, April 30, 2014, Comfort Inn, 2424 S. Mission Street, Mt. Pleasant, Michigan.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:9895PROXY CARDTHIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF DIRECTORSThe 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 StockContentsPROPOSAL 1--ELECTION OF DIRECTORS: Proposal to elect the following five (5) persons as directors. Please mark the appropriate box for each director-nominee.FORAGAINSTWITHHOLD AUTHORITYDennis P. AngnerJeffrey J. BarnesG. Charles HubscherDavid J. ManessW. Joseph ManifoldPROPOSAL 2--ADVISORY VOTE ON EXECUTIVE COMPENSATION: Proposal to adopt an advisory (non-binding) resolution regarding named executive officer compensation.FORAGAINSTWITHHOLD AUTHORITYoooPROPOSAL 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.ONETWOTHREEYEARYEARSYEARSWITHHOLD AUTHORITYooooThe 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:, 2011Please mark, sign, date and return SignatureProxy card promptly using the enclosedEnvelope. Signature (if held jointly)ISABELLA BANK CORPORATION 401 N Main St, Mount Pleasant, Ml 48858 www.isabellabank.com