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401 N. Main St.
Mt. Pleasant, Michigan 48858
NOTICE OF THE ANNUAL MEETING OF SHAREHOLDERS
To Be Held May 3, 20111, 2012
Notice is hereby given that the Annual Meeting of Shareholders of Isabella Bank Corporation will be held on Tuesday, May 3, 20111, 2012 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 fivethree directors.
2. To hold an advisory, non-binding vote on executive compensation of named executive officers.
The Board of Directors has fixed April 1, 2011March 28, 2012 as the record date for determination of shareholders entitled to notice of, and to vote at, the meeting or any adjournments thereof.
Your vote is important. Even if you plan to attend the meeting, please date and sign the enclosed proxy form, indicate your choice with respect to the matters to be voted upon, and return it promptly in the enclosed envelope. Note that if stock is held in more than one name, all parties should sign the proxy form.
By order of the Board of Directors
Debra Campbell, Secretary
Dated: April 8, 2011
March 28, 2012
401 N. Main St
Mt. Pleasant, Michigan 48858
PROXY STATEMENT
General Information
This Proxy Statement is furnished in connection with the solicitation of proxies by the Board of Directors of Isabella Bank Corporation (the Corporation), a Michigan financial holding company, to be voted at the Annual Meeting of Shareholders of the Corporation to be held on Tuesday, May 3, 20111, 2012 at 5:00 p.m. at the Comfort Inn, 2424 S. Mission Street, Mt. Pleasant, Michigan, or at any adjournment or adjournments thereof, for the purposes set forth in the accompanying Notice of Annual Meeting of Shareholders and in this Proxy Statement.
This Proxy Statement has been mailed on April 8, 20115, 2012 to all holders of record of common stock as of the record date. If a shareholder’s shares are held in the name of a broker, bank or other nominee, then that party should give the shareholder instructions for voting the shareholder’s shares.
Voting at the Meeting
The Board of Directors of the Corporation has fixed the close of business on April 1, 2011March 28, 2012 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 has only one class of common stock and no preferred stock. As of April 1, 2011,March 28, 2012, there were 7,546,8667,614,742 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. Shareholders may vote on matters that are properly presented at the meeting by either attending the meeting and casting a vote or by signing and returning the enclosed proxy. If the enclosed proxy is executed and returned, it may be revoked at any time before it is exercised at the meeting. All shareholders 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.
The Corporation 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. If a shareholder signs and returns the proxy, those shares will be counted to determine whether the Corporation has a quorum, even if the shareholder abstains or fails to vote on any of the proposals listed on the proxy.
A shareholder’s broker may not vote on the election of directors the advisory vote to approve the named executive officers’ compensation or the advisory vote on the frequency of the vote on named executive officers’ compensation if the shareholder does not furnish instructions for such proposals. A shareholder should use the voting instruction card provided by the institution that holds his or her shares to instruct the broker to vote the shares or else the shareholder’s shares will be considered “broker non-votes.”
Broker non-votes are shares held by brokers or nominees as to which voting instructions have not been received from the beneficial owners or the persons 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, proposalsproposal one two and three areis not itemsan item on which brokerage firms may vote in their discretion on behalf of their clients if such clients have not furnished voting instructions.
At this year’s annual meeting, shareholders will elect fivethree directors to serve for a term of three years. In voting on the election of directors, a shareholder may vote in favor of the nominees, vote against or withhold votes as to 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.
Proposal 1-Election of the advisory proposal, vote against the advisory proposal or abstain from voting. A majority of the shares represented at the annual meeting and entitled to vote on this advisory proposal must be voted in favor of the proposal for it to pass. While this vote is required by law, it will neither be
Except as otherwise specified in the proxy, proxies will be voted for election of the fivethree 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. However, the Corporation’s management now knows of no reason to anticipate that this will occur. The fivethree nominees for election as directors who receive the greatest number of votes cast will be elected directors. Each of the nominees has agreed to serve as a director if elected.
Nominees for election and current directors are listed below. Also shown for each nominee and each current director is his or her principal occupation for the last five or more years, age and length of service as a director of the Corporation.
The Board of Directors unanimously recommends that shareholders vote FOR the election of each of the fivethree director nominees nominated by the Board of Directors.
Director’s Qualifications
The members of the Corporation’s Board of Directors (the Board) are all well qualified to serve on the Board and represent our shareholders’ best interest. As described below, under the caption “Nominating and Corporate Governance Committee”, the Board and Nominating and Corporate Governance Committee (the “Nominating Committee”) select nominees to the Board to establish a Board that is comprised of members who:
Have extensive business leadership | ||
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Bring a diverse perspective and experience
Are independent and collegial
Have high ethical standards and have demonstrated sound business judgment
Are willing and able to commit the significant time and effort to effectively fulfill their responsibilities
Are active in and knowledgeable of their respective communities
Each director nominee along with the other directors brings these qualifications to the Board. They provide a diverse complement of specific business skills, experience, and knowledge including extensive financial and accounting experience, knowledge of banking, small business operating experience, and specific knowledge of customer market segments, including agriculture, oil and gas, health care, food and beverage, manufacturing, and retail.
The following describes the key qualifications each director brings to the Board, in addition to the general qualifications described above and the information included in the biographical summaries provided below.
Director | Professional Standing in Chosen Field | Expertise in financial or related field | Audit Committee Financial Expert | Civic and community involvement | Leadership and team building skills | Diversity by race, gender, or cultural | Geo- graphical diversity | Finance | Tech- nology | Market- ing | Govern- ance | Entre- preneurial skills | Human Resources | Bank business segment represent- ation | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
David J. Maness | X | X | X | X | X | X | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Dennis P. Angner | X | X | X | X | X | X | X | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Jeffrey J. Barnes | X | X | X | X | X | X | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Richard J. Barz | X | X | X | X | X | X | X | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Sandra L. Caul | X | X | X | X | X | X | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
James C. Fabiano | X | 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 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
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 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Dale D. Weburg | X | X | X | X | X | X | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
The following table identifies the individual members of our Board serving on each of these standing committees:
| Nominating | Compensation | |||||||||||||||||||||||||||||||||||||||||||||||||||||||
| and Corporate | and Human | |||||||||||||||||||||||||||||||||||||||||||||||||||||||
Director | Audit | Governance | Resource | |||||||||||||||||||||||||||||||||||||||||||||||||||||
David J. Maness | X | o | X | o | X | c,o | ||||||||||||||||||||||||||||||||||||||||||||||||||
Dennis P. Angner | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Jeffrey J. Barnes | X | X | ||||||||||||||||||||||||||||||||||||||||||||||||||||||
Richard J. Barz | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Sandra L. Caul | X | |||||||||||||||||||||||||||||||||||||||||||||||||||||||
James C. Fabiano | X | |||||||||||||||||||||||||||||||||||||||||||||||||||||||
G. Charles Hubscher | X | X | ||||||||||||||||||||||||||||||||||||||||||||||||||||||
Thomas L. Kleinhardt | X | |||||||||||||||||||||||||||||||||||||||||||||||||||||||
Joseph LaFramboise | X | X | X | |||||||||||||||||||||||||||||||||||||||||||||||||||||
W. Joseph Manifold | X | |||||||||||||||||||||||||||||||||||||||||||||||||||||||
| c | ||||||||||||||
| X | X | |||||||||||||
W. Michael McGuire | X | X | ||||||||||||
| c | X | |||||||||||||
Dale D. Weburg | X | |||||||||||||
C — Chairperson | ||||||||||||||
O — Ex-Officio | ||||||||||||||
Director Nominees for Terms Ending in 2015
Richard J. Barz (age 63) has been a director of Isabella Bank (the Bank) since 2000 and of the Corporation since 2002. Mr. Barz has been employed by the Corporation since 1972 and has been Chief Executive Officer of the Corporation since January 1, 2010 and President and CEO of the Bank since December 2001. Mr. Barz has been very active in community organizations and events. He is the past chairman of the Central Michigan Community Hospital Board of Directors, is the current chairman of the Middle Michigan Development Corporation Board of Directors, and serves on several boards and committees for Central Michigan University and various volunteer organizations throughout mid-Michigan.
Sandra L. Caul (age 68) has been a director of the 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, a board member for Central Michigan Community Mental Health Facilities, a member of the Central Michigan Health Advisory Board for Central Michigan University and Chairperson for the Central Michigan University College of Medicine regional division fund raising effort. 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 62) 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 and the Director of the Office of the Corporate Secretary and Assistant Secretary of The Dow Chemical Company, a manufacturer of chemicals, plastics and agricultural products, headquartered in Midland, Michigan.
Current Directors with Terms Ending in 2014
Dennis P. Angner (age 55)56) has been a director of the 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 the Corporation since December 30, 2001 and CFO since January 1, 2010. Mr. Angner served as Chief Executive Officer of the Corporation from December 30, 2001 through December 31, 2009. He is the past Chair of the Michigan Bankers Association and is currently serving as vice chairman of its taxation committee, is a member of
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Dr. Jeffrey J. Barnes(age 48) (age 49) has been a director of the Bank since September 2007 and was appointed to the Corporation’s Board of Directors effective January 1, 2010. Dr. Barnes is a physician and co-owner of Central Eye Consultants. He is a former member of the Central Michigan Community Hospital Board of Directors.
G. Charles Hubscher(age 57) (age 58) has been a director of the Bank since May 2004 and was appointed to the Corporation’s Board of Directors effective January 1, 2010. Mr. Hubscher is the President of Hubscher and Son, Inc., a sand and gravel producer. He is a director of the National Stone and Gravel Association, the Michigan Aggregates Association, serves on the Board of Trustees for the Mt. Pleasant Area Community Foundation, and is a member of the Zoning Board of Appeals for Deerfield Township.
David J. Maness(age 57) (age 58) has been a director of the Bank since 2003 and of the Corporation since 2004. Mr. Maness was elected chairman of the board for the Corporation and the Bank in 2010. He is President of Maness Petroleum, a geological and geophysical consulting services company. Mr. Maness is currently serving as a director for the Michigan Oil & Gas Association, and he previously served on the Mt. Pleasant Public Schools Board of Education.
W. Joseph Manifold(age 59) (age 60) has been a director of the Corporation since 2003 and of the Bank since January 1, 2010. Mr. Manifold is a Certified Public Accountant andthe CFO of Federal Broach Holdings LLC, a holding company which operates several manufacturing companies. Previously, he was a senior manager with Ernst & Young Certified Public Accounting firm working principally on external bank audits and was CFO of the Delfield Company. Prior to joining the Board, Mr. Manifold also served on the Isabella Community Credit Union Board and was Chairman of the Mt. Pleasant Public Schools Board of Education.
Current Directors with Terms Ending in 2013
James C. Fabiano(age 67) (age 68) has been a director of the Bank since 1979 and of the Corporation since 1988. He served as the Corporations’Corporation’s chair from 2004 to 2010. Mr. Fabiano is Chairman and CEO of Fabiano Brothers, Inc., a wholesale beverage distributor operating in several counties throughout Michigan. Mr. Fabiano is a past recipient of
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Thomas L. Kleinhardt(age 56) (age 57) has been a director of the Bank since October 1998 and was appointed to the Corporation’s Board of Directors effective January 1, 2010. Mr. Kleinhardt is President of McGuire Chevrolet, is active in the Clare Kiwanis Club, and coaches the girls Junior Varsity Basketball team at ClareFarwell High School.
Joseph LaFramboise(age 61) (age 62) has been a director of the Bank since September 2007, and was appointed to the Corporation’s Board of Directors effective January 1, 2010. He is a retired Sales and Marketing Executive of Ford Motor Company. Mr. LaFramboise is Ambassador of Eagle Village in Evart, Michigan.
Dale D. Weburg(age 67) (age 68) has served as a director of the Breckenridge Division of the Bank since 1987 and of 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 of the Board of Directors of Gratiot Health System.
Each of the directors has been engaged in their stated professions for more than five years.
Other Named Executive Officers
Timothy M. Miller(age 60), President of the Breckenridge Division of the Bank and a member of its Board of Directors, has been an employee of the Corporation since 1985. Steven D. Pung (age 61)62), Chief Operations OfficerExecutive Vice President of the Bank and a member of the Board of Directors of Financial Group Information Services (a wholly owned subsidiary of the Corporation) has been employed by the Corporation since 1978. 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. David J. Reetz (age 50)51), Senior Vice President and Chief Lending Officer of the Bank, has been employed by the Corporation since 1987.
All officers of the Corporation serve at the pleasure of the Corporation’s Board of Directors.
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Director Independence
The Corporation has adopted the director independence standards as defined under Rule 5605(a)(2) of the NASDAQ Marketplace Rules. The Board has determined that Jeffrey J. Barnes, Sandra L. Caul, James C. Fabiano, Dale D. Weburg,G. Charles Hubscher, Thomas L. Kleinhardt, Joseph LaFramboise, David J. Maness, W. Joseph
Manifold, Sandra L. Caul, W. Michael McGuire, Thomas L. Kleinhardt, Joseph LaFramboise, Jeffrey J. Barnes, Dianne C. Morey, and G. Charles HubscherDale D. Weburg are independent directors. Dennisdirectors. Richard J. Barz is not independent as he is employed as Chief Executive Officer of the Corporation.Dennis P. Angner is not independent as he is employed as President and Chief Financial Officer of the Corporation. Richard J. Barz is not independent as he is employed as Chief Executive Officer of the Corporation.
Board Leadership Structure and Risk Oversight
The Corporation’s Governance policy provides that only directors who are deemed to be independent as set forth by NASDAQ and SEC rules are eligible to hold the office of Chairman of the Board. Additionally, the chairpersons of Board established committees must also be independent directors. It is the Board’s belief that
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Management is responsible for the Corporation’s day to day risk management and the Board’s role is to engage in informed oversight. The Board utilizes committees to oversee risks associated with compensation, financial, and governance. Financial Group Information Services, the Corporation’s information processing subsidiary, is responsible for overseeing risks associated with information technology. The Isabella Bank Board of Directors is responsible for overseeing credit, investment, interest rate, and trust risks. The chairpersons of the respective boards or committees report on their activities on a regular basis.
The Audit Committee is responsible for the integrity of the consolidated financial statements of the Corporation; the independent auditors’ qualifications and independence; the performance of the Corporation’s, and its subsidiaries’, internal audit function and independent auditors; the Corporation’s system of internal controls; the Corporation’s financial reporting and system of disclosure controls; and the compliance by the Corporation with legal and regulatory requirements and with the Corporation’s Code of Business Conduct and Ethics.
Committees of the Board of Directors and Meeting Attendance
The Board met 1412 times during 2010.2011. All incumbent directors attended 75% or more of the meetings held in 2010.2011. The Board has an Audit Committee, a Nominating and Corporate Governance Committee, and a Compensation and Human Resource Committee.
Audit Committee
The Audit Committee is composed of independent directors who meet the requirements for independence as defined in Rule 5605(a)(2) of the NASDAQ Marketplace Rules. Information regarding the functions performed by the Committee, its membership, and the number of meetings held during the year, is set forth in the “Report of the Audit Committee” included elsewhere in this annual proxy statement. The Audit Committee is governed by a written charter approved by the Board. The Audit Committee Charter is available on the Bank’s websitewww.isabellabank.com under the Investor Relations tab.
In accordance with the provisions of the Sarbanes — Oxley Act of 2002, directors Manifold and McGuire meet the requirements of Audit Committee Financial Expert and have been so designated by the Board. The Committee also consists of directors Barnes, Hubscher, LaFramboise, and Maness.
Nominating and Corporate Governance Committee
The Corporation has a standing Nominating and Corporate Governance Committee consisting of independent directors who meet the requirements for independence as defined in Rule 5605(a)(2) of NASDAQ Marketplace Rules. The Committee consists of directors Caul, Fabiano,LaFramboise, Maness, Manifold, McGuire, and Weburg.McGuire. The Nominating and Corporate Governance Committee held one meetingtwo meetings in 2010,2011, with all directors attended the meeting.meetings. The Board has approved a Nominating and Corporate Governance Committee Charter which is available on the Bank’s websitewww.isabellabank.com under the Investor Relations tab.
The Nominating and Corporate Governance Committee is responsible for evaluating and recommending individuals for nomination to the Board for approval. The Committee in evaluating nominees, including incumbent directors and any nominees put forth by shareholders, considers business experience, skills, character, judgment, leadership experience, and their knowledge of the geographical markets, business segments or other criteria the Committee deems relevant and appropriate based on the current composition of the Board. The Committee considers diversity in identifying members with respect to geographical markets served by the Corporation and the business experience of the nominee.
The Nominating and Corporate Governance Committee will consider, as potential nominees persons recommended by shareholders. Recommendations should be submitted in writing to the Secretary of the Corporation, 401 N. Main St., Mt. Pleasant, Michigan 48858 and include the shareholder’s name, address and number of shares of the Corporation owned by the shareholder. The recommendation should also include the name, age, address and
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Compensation and Human Resource Committee
The Compensation and Human Resource Committee of the Corporation is responsible for reviewing and recommending to the Corporation’s Board the compensation of the 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, Manifold, McGuire, Morey, and Weburg. The Committee held one meetingtwo meetings during 20102011 with all directors attendingin attendance with the meeting.exception of Fabiano who was excused from one of the meetings. This Committee is governed by a written charter approved by the Board that is available on the Bank’s websitewww.isabellabank.com under the Investor Relations tab.
Communications with the Board
Shareholders may communicate with the Corporation’s Board of Directors by sending written communications to the attention of the Corporation’s Secretary, Isabella Bank Corporation, 401 N. Main St., Mt. Pleasant, Michigan 48858. Communications will be forwarded to the Board of Directors or the appropriate committee, as soon as practicable.
Code of Ethics
The Corporation has adopted a Code of Business Conduct and Ethics that is applicable to the Corporation’s Chief Executive Officer and the Chief Financial Officer. The Corporation’s Code of Business Conduct and Ethics is available on the Bank’s websitewww.isabellabank.com under the Investor Relations tab.
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The Audit Committee oversees the Corporation’s financial reporting process on behalf of the Board. The 20102011 Committee consisted of directors Barnes, Hubscher, LaFramboise, Maness, Manifold and McGuire.
The Audit Committee is responsible for pre-approving all auditing services and permitted non-audit services for the Corporation by its independent auditors or any other auditing or accounting firm if those fees are reasonably expected to exceed 5.0% of the current year agreed upon fee for independent audit services, except as noted below. The Audit Committee has established general guidelines for the permissible scope and nature of any permitted non-audit services in connection with its annual review of the audit plan and reviews the guidelines with the Board of Directors.
Management has the primary responsibility for the consolidated financial statements and the reporting process including the systems of internal controls. In fulfilling its oversight responsibilities, the Audit Committee reviewed the audited consolidated financial statements in the Annual Report with management including a discussion of the quality, not just the acceptability, of the accounting principles, the reasonableness of significant judgments, and the clarity of disclosures in the consolidated financial statements. The Audit Committee also reviewed with management and the independent auditors, management’s assertion on the design and effectiveness of the Corporation’s internal control over financial reporting as of December 31, 2010.
The Audit Committee reviewed with the Corporation’s independent auditors, who are responsible for expressing an opinion on the conformity of those audited consolidated financial statements with accounting principles generally accepted in the United States of America, their judgments as to the quality, not just the acceptability, of the Corporation’s accounting principles and such other matters as are required to be discussed with the Audit Committee by the standards of the Public Company Accounting Oversight Board (United States), including those described in AU Section 380 “Communication with Audit Committees”, as may be modified or supplemented. In addition, the Audit Committee has received the written disclosures and the letter from the independent accountants required by PCAOB Rule 3526, Communication with Audit Committees Concerning Independence, as may be modified or supplemented, and has discussed with the independent accountant the independent accountants’ independence.
The Audit Committee discussed with the Corporation’s internal and independent auditors the overall scope and plans for their respective audits. The Audit Committee meets with the internal and external independent auditors, with and without management present, to discuss the results of their examinations, their evaluations of the Corporation’s internal controls and the overall quality of the Corporation’s financial reporting process. The Audit Committee held six meetings during 2010,2011, and all committee members attended 75% or more of the meetings.
In reliance on the reviews and discussions referred to above, the Audit Committee recommended to the Board of Directors (and the Board has approved) that the audited consolidated financial statements be included in the Annual Report onForm 10-K for the year ended December 31, 20102011 for filing with the Securities and Exchange Commission. The Audit Committee has appointed Rehmann Robson, P.C. as the independent auditors for the 20112012 audit.
Respectfully submitted,
W. Joseph Manifold, Audit Committee Chairperson
Jeffrey J. Barnes
G. Charles Hubscher
Joseph LaFramboise
David J. Maness
W. Michael McGuire
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The Compensation and Human Resource Committee (the “Committee”) is responsible for reviewing and recommending the compensation and benefits for the Chief Executive Officer, President, and executive officers of the Corporation. The Committee evaluates and approves the executive officer and senior management compensation plans, policies and programs of the Corporation and its affiliates. The Chief Executive Officer, Richard J. Barz, conducts annual performance reviews for Named Executive Officers, excluding himself. Mr. Barz recommends an appropriate salary to the Committee based on the performance review and the officer’s years of service along with competitive market data.
Compensation Objectives
The Committee considers asset growth with the safety and soundness objectives and earnings per share to be the primary ratios in measuring financial performance. The Corporation’s philosophy is to maximize long-term return to shareholders consistent with safe and sound banking practices, while maintaining the commitment to superior customer and community service. The Corporation believes that the performance of executive officers in managing the business should be the basis for determining overall compensation. Consideration is also given to overall economic conditions and current competitive forces in the market place. The objectives of the Committee are to effectively balance salaries and potential compensation to an officer’s individual management responsibilities and encourage them to realize their potential for future contributions to the Corporation. The objectives are designed to attract and retain high performing executive officers who will lead the Corporation while attaining the Corporation’s earnings and performance goals.
What the Compensation Programs are Designed to Reward
The Corporation’s compensation programs are designed to reward dedicated and conscientious employment with the Corporation, loyalty in terms of continued employment, attainment of job related goals and overall profitability of the Corporation. In measuring an executive officer’s contributions to the Corporation, the Committee considers numerous factors including, among other things, the Corporation’s growth in terms of asset size and increase in earnings per share. In rewarding loyalty and long-term service, the Corporation provides attractive retirement benefits.
Review of Risks Associated with Compensation Plans
Based on an analysis conducted by management and reviewed by the Committee, management does not believe that the Corporation’s compensation programs for employees are reasonably likely to have a material short or long term adverse effect on the Corporation’s Results of Operation.
Use of Consultants
In 2010, the Committee directly engaged the services of Blanchard Chase (now Blanchard Consulting Group), an outside compensation consulting firm, to assist with a total compensation review for the top two executive officers of the Corporation (CEO and President). Blanchard ChaseConsulting Group is an independent consulting firm and does not perform any additional services for the Corporation or senior management. In addition, Blanchard ChaseConsulting Group does not have any other personal or business relationships with any Board member or any officer of the Corporation. The Committee is continuing to work with Blanchard Chase on proxy support in 2011. During 2009,2011, the Committee did not employ any services of outside compensation or benefit consultants to assist it in compensation-related initiatives.
Elements of Compensation
The Corporation’s executive compensation program has consisted primarily of base salary and benefits, annual cash bonus incentives, director fees for insider directors, and participation in the Corporation’s retirement plans.
Why Each of the Elements of Compensation is Chosen
Base Salary and Benefitsare set to provide competitive levels of compensation to attract and retain officers with strong motivated leadership. Each officer’s performance, current compensation, and responsibilities within the Corporation are considered by the Committee when establishing base salaries. The Corporation also believes
it is best to pay sufficient base salary because it believes an over-reliance on equity incentive compensation could
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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 20102011 were determined by reference to seven performance measures that related to services performed in 2009.2010. 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 20092010 accomplished his or her personal performance goals and was accordingly paid 35% of the 20092010 Maximum Award.Award in 2011. 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%10%); (3) Fully Taxable Equivalent “FTE” net interest margin, excluding loan fees (weighted 15%10%); (4) in-market deposit growth (weighted 10%20%); (5) loan growth (weighted 10%); and (6) exceeding peer group return on average assets (weighted 10%). The following chart provides the 20092010 target for each of the foregoing targets that were used to determine bonus awards that were paid in 2010,2011, as well as the performance obtained for each target.
Executive Incentive Plan
| 2009 Targets | 2009 | |||||||||||||||||||
Target | 25.00% | 50.00% | 75.00% | 100.00% | Performance | |||||||||||||||
| Earning per share | $ | 0.90 | $ | 0.93 | $ | 0.96 | $ | 0.99 | $ | 1.04 | ||||||||||
| Net operating expenses to | ||||||||||||||||||||
| average assets | 1.66 | % | 1.65 | % | 1.64 | % | 1.63 | % | 1.71 | % | ||||||||||
| FTE Net Interest Margin | 3.71 | % | 3.73 | % | 3.75 | % | 3.77 | % | 3.86 | % | ||||||||||
| In market deposit growth | 4.50 | % | 5.00 | % | 5.50 | % | 6.00 | % | 1.87 | % | ||||||||||
| Loan growth | 5.50 | % | 6.00 | % | 6.50 | % | 7.00 | % | 8.28 | % | ||||||||||
| Exceeding peer group return | ||||||||||||||||||||
| on average assets | −0.26 | % | −0.25 | % | −0.25 | % | −0.24 | % | 0.91 | % | ||||||||||
| 2010 Targets | 2010 Performance | |||||||||||||||||||
Target | 25.00% | 50.00% | 75.00% | 100.00% | ||||||||||||||||
Earning per share | $ | 1.15 | $ | 1.16 | $ | 1.18 | $ | 1.20 | $1.31 | |||||||||||
Net operating expenses to average assets | 1.71 | % | 1.70 | % | 1.69 | % | 1.68 | % | 1.65 | % | ||||||||||
FTE Net Interest Margin | 3.88 | % | 3.90 | % | 3.92 | % | 3.94 | % | 3.83 | % | ||||||||||
In market deposit growth | 4.50 | % | 5.00 | % | 5.50 | % | 6.00 | % | 12.19 | % | ||||||||||
Loan growth | 5.50 | % | 6.00 | % | 6.50 | % | 7.00 | % | 3.03 | % | ||||||||||
Exceeding peer group return on average assets | 0.26 | % | 0.26 | % | 0.27 | % | 0.28 | % | 0.77 | % | ||||||||||
Retirement Plans.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 ChoseDetermined Amounts for Each Element
The Committee’s approach to determining the annual base salary of executive officers is to offer competitive salaries in comparison with other comparable financial institutions. The Committee utilizes both an independent compensation consultant, Blanchard ChaseConsulting Group, and a survey prepared by the Michigan Bankers Association of similar sized Michigan based financial institutions. The independent compensation consultant established a benchmark peer group of 20 mid-west financial institutions in non urban areas whose average assets size, number of branch locations, return on average assets and nonperforming assets that were comparable to Isabella Bank Corporation. The Michigan Bankers Association 20102011 compensation survey was based on the compensation information provided by these organizations for 2009.2010. Specific factors used to decide
where an executive officer’s salary should be within the established range include the historical financial performance, financial performance outlook, years of service, and job performance.
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Peer group financial performance compensation
1 and 5 year shareholder returns
Earnings per share and earnings per share growth
Budgeted as compared to actual annual operating performance
Community and industry involvement
Results of audit and regulatory exams
Other strategic goals as established by the board of directors
While no particular weight is given to any specific factor, the Committee gives at least equal weight to the subjective analyses as described above.
Retirement plans.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 aan 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 beenwas credited for each eligible employee as of January 1, 2007. Subsequent amounts will behave been 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.Perquisites.Executive officers are eligible for all of the benefits made available to full-time employees of the Corporation (such as the 401(k) plan, employee stock purchase plan, health insurance, group term life insurance and disability insurance) on the same basis as other full-time employees and are subject to the same sick leave and other employee policies. The Corporation also provides its executive officers with
certain additional benefits and perquisites, which it believes are appropriate in order to attract and retain the proper quality of talent for these positions and to recognize that similar executive benefits and perquisites are commonly offered by comparable financial institutions.
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The Corporation believes that benefits and perquisites provided to its executive officers in 20102011 represented a reasonable percentage of each executive’s total compensation package and was not inconsistent, in the aggregate, with perquisites provided to executive officers of comparable competing financial institutions.
The Corporation maintains a plan for qualified officers to provide death benefits to each participant. Insurance policies, designed primarily to fund death benefits, have been purchased on the life of each participant with the Corporation as the sole owner and beneficiary of the policies.
How Elements Fit into Overall Compensation Objectives
The elements of the Corporation’s compensation are structured to reward past and current performance, continued service and to 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 interests of management with those of its shareholders.
As part of its goal of attracting and retaining quality team members, the Corporation has developed competitive employee benefit plans. Management feels that the combination of all of the plans listed above makes the Corporation’s total compensation packages attractive.
Compensation and Human Resource Committee Report
The following Report of the Compensation and Human Resource Committee does not constitute soliciting material and should not be deemed filed or incorporated by reference into any other Corporation filing under the Securities Act of 1933 or the Securities Exchange Act of 1934, except to the extent the Corporation specifically incorporates this Report by reference therein.
The Compensation and Human Resource Committee, which includes all of the independent directors of the Board, has reviewed and discussed the Compensation Discussion and Analysis required by Item 402(b) of SECRegulation S-K with management, and based on such review and discussion, the Compensation and Human Resource Committee recommended to the Board of Directors that the Compensation Discussion and Analysis be included in this Proxy Statement and the Annual Report onForm 10-K.
Submitted by the Compensation and Human Resource Committee of Isabella Bank Corporation’s Board of Directors:
David J. Maness, Chairperson
Jeffrey J. Barnes
Sandra L. Caul
James C. Fabiano
G. Charles Hubscher
Thomas L. Kleinhardt
Joseph LaFramboise
W. Joseph Manifold
W. Michael McGuire
Dale D. Weburg
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Executive Officers of the Corporation are compensated in accordance with their employment with the applicable entity. The following table shows information on compensation earned from the Corporation or its subsidiaries for each of the last three fiscal years ended December 31, 2010,2011, for the Chief Executive Officer, the Chief Financial Officer, and the Corporation’s three other most highly compensated executive officers.
Summary Compensation Table
| Change in pension | ||||||||||||||||||||||||||||
| Value and | ||||||||||||||||||||||||||||
| Non-Qualified | ||||||||||||||||||||||||||||
| Deferred | ||||||||||||||||||||||||||||
| Compensation | All Other | |||||||||||||||||||||||||||
| Salary | Bonus | Earnings | Compensation | Total | ||||||||||||||||||||||||
Name and principal position | Year | ($)(1) | ($) | ($)(2) | ($)(3) | ($) | ||||||||||||||||||||||
| Richard J. Barz | 2010 | $ | 357,600 | $ | 24,706 | $ | 116,364 | $ | 34,856 | $ | 533,526 | |||||||||||||||||
| CEO Isabella Bank Corporation | 2009 | 354,250 | 9,625 | 90,184 | 30,568 | 484,627 | ||||||||||||||||||||||
| President and CEO Isabella Bank | 2008 | 333,275 | 9,100 | 110,559 | 22,697 | 475,631 | ||||||||||||||||||||||
| Dennis P. Angner | 2010 | $ | 352,600 | $ | 24,706 | $ | 103,340 | $ | 27,922 | $ | 508,568 | |||||||||||||||||
| President and CFO | 2009 | 359,425 | 9,800 | 79,623 | 25,252 | 474,100 | ||||||||||||||||||||||
| Isabella Bank Corporation | 2008 | 336,095 | 9,450 | 83,957 | 18,453 | 447,955 | ||||||||||||||||||||||
| Timothy M. Miller | 2010 | $ | 161,220 | $ | 12,370 | $ | 9,000 | $ | 32,798 | $ | 215,388 | |||||||||||||||||
| President of the Breckenridge | 2009 | 174,600 | 7,319 | 6,000 | 17,323 | 205,242 | ||||||||||||||||||||||
| Division of Isabella Bank | 2008 | 166,860 | 3,200 | 11,000 | 14,127 | 195,187 | ||||||||||||||||||||||
| Steven D. Pung | 2010 | $ | 143,632 | $ | 10,572 | $ | 62,288 | $ | 32,886 | $ | 249,378 | |||||||||||||||||
| Sr. Vice President and COO | 2009 | 127,100 | 6,003 | 48,518 | 18,468 | 200,089 | ||||||||||||||||||||||
| Isabella Bank | 2008 | 118,225 | 3,785 | 65,111 | 13,169 | 200,290 | ||||||||||||||||||||||
| David J. Reetz(4) | 2010 | $ | 123,910 | $ | 9,165 | $ | 36,429 | $ | 13,694 | $ | 183,198 | |||||||||||||||||
| Sr. Vice President and CLO | ||||||||||||||||||||||||||||
| Isabella Bank | ||||||||||||||||||||||||||||
Name and principal position | Year | Salary ($)(1) | Bonus ($) | Change in pension value and non-qualified deferred compensation earnings ($)(2) | All other compensation ($)(3) | Total ($) | ||||||||||||||||||
Richard J. Barz | 2011 | $ | 375,225 | $ | 26,535 | $ | 181,143 | $ | 37,627 | $ | 620,530 | |||||||||||||
CEO Isabella Bank Corporation | 2010 | 357,600 | 24,706 | 116,364 | 34,856 | 533,526 | ||||||||||||||||||
President and CEO Isabella Bank | 2009 | 354,250 | 9,625 | 90,184 | 30,568 | 484,627 | ||||||||||||||||||
Dennis P. Angner | 2011 | $ | 355,625 | $ | 26,100 | $ | 163,672 | $ | 28,542 | $ | 573,939 | |||||||||||||
President and CFO | 2010 | 352,600 | 24,706 | 103,340 | 27,922 | 508,568 | ||||||||||||||||||
Isabella Bank Corporation | 2009 | 359,425 | 9,800 | 79,623 | 25,252 | 474,100 | ||||||||||||||||||
Steven D. Pung | 2011 | $ | 167,362 | $ | 12,719 | $ | 98,915 | $ | 27,732 | $ | 306,728 | |||||||||||||
Executive Vice President | 2010 | 143,632 | 10,572 | 62,288 | 32,886 | 249,378 | ||||||||||||||||||
Isabella Bank | 2009 | 127,100 | 6,003 | 48,518 | 18,468 | 200,089 | ||||||||||||||||||
Timothy M. Miller | 2011 | $ | 181,986 | $ | 13,046 | $ | 17,000 | $ | 15,070 | $ | 227,102 | |||||||||||||
President of the Breckenridge | 2010 | 179,309 | 12,370 | 9,000 | 14,709 | 215,388 | ||||||||||||||||||
Division of Isabella Bank | 2009 | 180,238 | 7,319 | 6,000 | 11,685 | 205,242 | ||||||||||||||||||
David J. Reetz(4) | 2011 | $ | 125,640 | $ | 8,612 | $ | 61,944 | $ | 15,077 | $ | 211,273 | |||||||||||||
Sr. Vice President and CLO | 2010 | 123,910 | 9,165 | 36,429 | 13,694 | 183,198 | ||||||||||||||||||
Isabella Bank | ||||||||||||||||||||||||
| (1) | Includes compensation voluntarily deferred under the Corporation’s 401(k) plan. Directors fees are also included, for calendar years 2011, 2010 | |
| (2) | Represents the aggregate non-cash change in the actuarial present value of the noted executive’s accumulated benefit under the Isabella Bank Corporation Pension Plan for calendar years 2011, 2010, and 2009 as follows: Richard J. Barz $143,000, $81,000, and $56,000; Dennis P. Angner $109,000, $53,000, and $32,000; Steven D. Pung $77,000, $42,000, $29,000; Timothy M. Miller $17,000, $9,000, and $6,000; David J. Reetz $43,000 and $19,000; this also includes the non-cash change in the Isabella Bank Corporation Retirement Bonus | |
| (3) | For all noted executives all other compensation includes 401(k) matching contributions. For Richard J. Barz, Steven D. Pung, and David J. Reetz this also includes club dues and auto allowance. For Dennis P. Angner and Timothy M. Miller, this also includes auto allowance. | |
| (4) | Not a named executive officer prior to 2010. |
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The following table indicates the present value of accumulated benefits as of December 31, 20102011 for each named executive in the summary compensation table.
| Number of | ||||||||||||||
| Years of | Present | |||||||||||||
| Vesting | Value of | |||||||||||||
| Service as of | Accumulated | Payments | ||||||||||||
| 01/01/11 | Benefit | During Last | ||||||||||||
Name | Plan name | (#) | ($) | Fiscal Year | ||||||||||
| Richard J. Barz | Isabella Bank Corporation Pension Plan | 39 | $ | 762,000 | $ | — | ||||||||
| Isabella Bank Corporation Retirement Bonus Plan | 39 | 270,931 | — | |||||||||||
| Dennis P. Angner | Isabella Bank Corporation Pension Plan | 27 | 382,000 | — | ||||||||||
| Isabella Bank Corporation Retirement Bonus Plan | 27 | 275,533 | — | |||||||||||
| Timothy M. Miller | Isabella Bank Corporation Pension Plan | 10 | 79,000 | — | ||||||||||
| — | ||||||||||||||
| Steven D. Pung | Isabella Bank Corporation Pension Plan | 32 | 384,000 | — | ||||||||||
| Isabella Bank Corporation Retirement Bonus Plan | 32 | 145,630 | ||||||||||||
| David J. Reetz | Isabella Bank Corporation Pension Plan | 24 | 119,000 | — | ||||||||||
| Isabella Bank Corporation Retirement Bonus Plan | 24 | 90,378 | — | |||||||||||
Name | Plan name | Number of years of vesting service as of 01/01/12 (#) | Present value of accumulated benefit ($) | Payments during last fiscal year | ||||||||
Richard J. Barz | Isabella Bank Corporation Pension Plan | 40 | $ | 905,000 | $ | — | ||||||
| Isabella Bank Corporation Retirement Bonus Plan | 40 | 309,074 | — | |||||||||
Dennis P. Angner | Isabella Bank Corporation Pension Plan | 28 | 491,000 | — | ||||||||
| Isabella Bank Corporation Retirement Bonus Plan | 28 | 330,205 | — | |||||||||
Steven D. Pung | Isabella Bank Corporation Pension Plan | 33 | 461,000 | — | ||||||||
| Isabella Bank Corporation Retirement Bonus Plan | 33 | 167,545 | — | |||||||||
Timothy M. | Isabella Bank Corporation Pension Plan | 11 | 96,000 | — | ||||||||
David J. Reetz | Isabella Bank Corporation Pension Plan | 25 | 162,000 | — | ||||||||
| Isabella Bank Corporation Retirement Bonus Plan | 25 | 109,322 | — | |||||||||
Defined benefit pension plan.plan. The Corporation sponsors the Isabella Bank Corporation Pension Plan, a frozen defined benefit pension plan. In December 2006, the Board of Directors voted to curtail the defined benefit plan effective March 1, 2007. The curtailment froze the current participant’s accrued benefits as of March 1, 2007 and limited participation in the plan to eligible employees as of December 31, 2006. Due to the curtailment of the plan, the number of years of credited service was frozen. As such, the years of credited service for the plan may differ from the participant’s actual years of service with the Corporation.
Annual contributions are made to the plan as required by accepted actuarial principles, applicable federal tax laws, and expenses of operating and maintaining the plan. The amount of contributions on behalf of any one participant cannot be separately or individually computed.
Pension plan benefits are based on years of service and the employees’ five highest consecutive years of compensation out of the last ten years of service, effective through December 31, 2006.
A participant may earn a benefit for up to 35 years of accredited service. Earned benefits are 100 percent vested after five years of service. Benefit payments normally start when a participant reaches age 65. A participant with more than five years of service may elect to take early retirement benefits anytime after reaching age 55. Benefits payable under early retirement are reduced actuarially for each month prior to age 65 in which benefits begin.
Dennis P. Angner, Richard J. Barz, Steven D. Pung, and Timothy M. Miller and Steven D. Pung are eligible for early retirement under the Isabella Bank Corporation Pension Plan. Under the provisions of the Plan, participants are eligible for early retirement after reaching the age of 55 with at least 5 years of service. The early retirement benefit amount is the accrued benefit payable at normal retirement date reduced 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.
Retirement bonus plan.plan. The Corporation sponsors the Isabella Bank Corporation Retirement Bonus Plan. The Retirement Bonus Plan is a nonqualified plan of deferred compensation benefits for eligible employees effective January 1, 2007. This plan is intended to provide eligible employees with additional retirement benefits. To be eligible, the employee needed to be employed by the Corporation on January 1, 2007, and be a participant in the Corporation’s frozen Executive Supplemental Income Agreement. Participants must also be an officer of the Corporation with at least 10 years of service as of December 31, 2006. The Corporation has sole and exclusive discretion to add new participants to the plan by authorizing such participation pursuant to action of the Corporation’s Board of Directors.
An initial amount has 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. The amount of the initial allocation and the
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Richard J. Barz, Timothy M. Miller,Dennis P. Angner, and Steven D. Pung are eligible for early retirement under the Isabella Bank Corporation Retirement Bonus Plan. Under the provisions of the plan, participants are eligible for early retirement upon attaining 55 years of age. There is no difference between the calculation of benefits payable upon early retirement and normal retirement.
20102011 Nonqualified Deferred Compensation
| Executive | Aggregate | Aggregate | ||||||||||
| Contributions in | Earnings in | Balance at | ||||||||||
| Last FY | Last FY | Last FYE | ||||||||||
Name | ($) | ($) | ($) | |||||||||
| Richard J. Barz | $ | 30,650 | $ | 3,501 | $ | 97,379 | ||||||
| Dennis P. Angner | 44,400 | 4,836 | 134,713 | |||||||||
| Timothy M. Miller | 3,500 | 839 | 21,990 | |||||||||
| Steven D. Pung | 900 | 181 | 4,799 | |||||||||
| David J. Reetz | N/A | N/A | N/A | |||||||||
Name | Executive contributions in last FY ($) | Aggregate earnings in last FY ($) | Aggregate balance at last FYE ($) | |||||||||
Richard J. Barz | $ | 29,462 | $ | 5,133 | $ | 176,837 | ||||||
Dennis P. Angner | 33,462 | 6,898 | 235,199 | |||||||||
Steven D. Pung | 900 | 238 | 7,998 | |||||||||
Timothy M. Miller | 3,337 | 1,080 | 36,297 | |||||||||
David J. Reetz | N/A | N/A | N/A | |||||||||
The directors of the Corporation and its subsidiaries are required to defer at least 25% of their earned board fees into the Directors’ Plan and may defer up to 100% of their earned fees based on their annual election. These amounts are reflected in the 20102011 nonqualified deferred compensation table above. Under the Directors’ Plan, these deferred fees are converted on a quarterly basis into shares of the Corporation’s common stock based on the fair market value of shares of the Corporation’s common stock at that time. Shares credited to a participant’s account are eligible for stock and cash dividends as payable.
Distribution from the Directors’ Plan occurs when the participant retires from the Board, attains age 70 or upon the occurrence of certain other events. Distributions must take the form of shares of the Corporation’s common stock. Any Corporation common stock issued under the Directors’ Plan will be considered restricted stock under the Securities Act of 1933, as amended.
Potential Payments Upon Termination or Change in Control
The estimated payments payable to each named executive officer upon severance from employment, retirement, termination upon death or disability or termination following a change in control of the Corporation are described below. For all termination scenarios, the amounts assume such termination took place as of December 31, 2010.
Any Severance of Employment
Regardless of the manner in which a named executive officer’s employment terminates, he or she is entitled to receive amounts earned during his or her term of employment. Such amounts include:
Amounts accrued and vested through the Defined Benefit Pension Plan.
Amounts accrued and vested through the Retirement Bonus Plan.
Amounts deferred in the Directors’ Plan.
Unused vacation pay.
Retirement
In the event of the retirement of an executive officer, the officer would receive the benefits identified above.
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In the event of death or disability of an executive officer, in addition to the benefits listed above, the executive officer will also receive payments under the Corporation’s life insurance plan or benefits under the Corporation’s disability plan as appropriate.
In addition to potential payments upon termination available to all employees, the estates for the executive officers listed below would receive the following payments upon death:
| While an | ||||||||
| Active | Subsequent to | |||||||
Name | Employee | Retirement | ||||||
| Richard J. Barz | $ | 610,000 | $ | 305,000 | ||||
| Dennis P. Angner | 600,000 | 300,000 | ||||||
| Timothy M. Miller | 299,800 | 149,900 | ||||||
| Steven D. Pung | 285,400 | 142,700 | ||||||
| David J. Reetz | 247,800 | 123,900 | ||||||
Name | While an Active Employee | Subsequent to Retirement | ||||||
Richard J. Barz | $ | 650,000 | $ | 325,000 | ||||
Dennis P. Angner | 612,000 | 306,000 | ||||||
Steven D. Pung | 333,000 | 166,500 | ||||||
Timothy M. Miller | 305,600 | 152,800 | ||||||
David J. Reetz | 251,200 | 125,600 | ||||||
Change in Control
The Corporation currently does not have a change in control agreement with any of the executive officers; provided, however, pursuant to the Retirement Bonus Plan each participant would become 100% vested in their benefit under the plan if, following a change in control, they voluntarily terminate employment or are terminated without just cause.
Director Compensation
The following table summarizes the Compensation of each non-employee director who served on the Board of Directors during 2010.
| Fees | ||||||||
| Earned or | ||||||||
| Paid in | ||||||||
| Cash | Total | |||||||
Name | ($) | ($) | ||||||
| Jeffrey J. Barnes | 21,000 | 21,000 | ||||||
| Sandra L. Caul | 35,800 | 35,800 | ||||||
| James Fabiano | 40,915 | 40,915 | ||||||
| G. Charles Hubscher | 25,950 | 25,950 | ||||||
| Thomas L. Kleinhardt | 29,450 | 29,450 | ||||||
| Ted W. Kortes | 31,100 | 31,100 | ||||||
| Joseph LaFramboise | 27,900 | 27,900 | ||||||
| David J. Maness | 52,300 | 52,300 | ||||||
| W. Joseph Manifold | 29,146 | 29,146 | ||||||
| W. Michael McGuire | 31,800 | 31,800 | ||||||
| Dianne C. Morey | 18,850 | 18,850 | ||||||
| William J. Strickler | 39,085 | 39,085 | ||||||
| Dale D. Weburg | 36,400 | 36,400 | ||||||
Fees earned or paid in | Total | |||||||
Name | ($) | ($) | ||||||
Jeffrey J. Barnes | 27,675 | 27,675 | ||||||
Sandra L. Caul | 32,675 | 32,675 | ||||||
James C. Fabiano | 32,550 | 32,550 | ||||||
G. Charles Hubscher | 32,375 | 32,375 | ||||||
Thomas L. Kleinhardt | 36,675 | 36,675 | ||||||
Joseph LaFramboise | 32,775 | 32,775 | ||||||
David J. Maness | 58,321 | 58,321 | ||||||
W. Joseph Manifold | 30,871 | 30,871 | ||||||
W. Michael McGuire | 35,050 | 35,050 | ||||||
Dianne C. Morey | 7,350 | 7,350 | ||||||
Dale D. Weburg | 36,425 | 36,425 | ||||||
The Corporation paid a $14,000 retainer plus $1,350 per board meeting plus a retainer of $6,000 to external directors and a $6,000 retainer plus $1,350 pereach board meeting to inside directorsmember during 2010.2011. Members of the audit committeeAudit Committee were paid $350$500 per audit committee meeting attended.
Pursuant to the Directors’ Plan the directors of the Corporation and its subsidiaries are required to defer at least 25% of their earned board fees. Under the Directors’ Plan, deferred directors’ fees are converted on a quarterly basis into shares of the Corporation’s common stock, based on the fair market value of a share of the Corporation’s
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Upon a participant’s attainment of age 70, retirement from the Board, or the occurrence of certain other events, the participant is eligible to receive a lump-sum, in-kind distribution of all of the stock that is then credited to his or her account. The plan does not allow for cash settlement. Stock issued under the Directors’ Plan is restricted stock under the Securities Act of 1933, as amended.
The Corporation established a Rabbi Trust (the Trust) effective as of January 1, 2008 to fund the Directors’ Plan. The Trust is an irrevocable grantor trust to which the Corporation may contribute assets for the limited purpose of funding a nonqualified deferred compensation plan. Although the Corporation may not reach the assets of the Trust for any purpose other than meeting its obligations under the Directors’ Plan, the assets of the Trust remain subject to the claims of the Corporation’s creditors. The Corporation may contribute cash or common stock to the Trust from time to time for the sole purpose of funding the Directors’ Plan. The Trust will use any cash that the Corporation may contribute to purchase shares of the Corporation’s common stock on the open market through the Corporation’s brokerage services department.
The Corporation transferred $492,958$440,155 to the Trust in 2010,2011, which held 32,68616,585 shares of the Corporation’s common stock for settlement as of December 31, 2010.2011. As of December 31, 2010,2011, there were 191,977201,438 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 Trust. All amounts are unsecured claims against the Corporation’s general assets. The net cost of this benefit to the Corporation was $165,353$183,703 in 2010.
The following table displays the number of equity shares credited to the accounts of active directors pursuant to the terms of the Directors’ Plan as of December 31, 2010:
Name | # of shares of stock credited | |||
Dennis P Angner | 9,924 | |||
Jeffrey J. Barnes | ||||
Richard J. | ||||
Sandra L. Caul | ||||
James C. Fabiano | ||||
G. Charles Hubscher | ||||
Thomas L. Kleinhardt | ||||
Joseph LaFramboise | ||||
David J. Maness | ||||
W. Joseph | ||||
W. Michael McGuire | ||||
Dale D. Weburg | ||||
Compensation and Human Resource Committee Interlocks and Insider Participation
The Compensation and Human Resource Committee of the Corporation is responsible for reviewing and recommending to the Corporation’s Board the compensation of the Chief Executive Officer 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.
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Certain directors and officers of the Corporation and members of their families were loan customers of Isabella Bank, or have been directors or officers of corporations, or partners of partnerships which have had transactions with the Bank. In management’s opinion, all such transactions were made in the ordinary course of business and were substantially on the same terms, including collateral and interest rates, as those prevailing at
the same time for comparable transactions with customers not related to the Bank. These transactions do not involve more than normal risk of collectability or present other unfavorable features. Total loans to these customers were approximately $4,347,000$3,728,000 as of December 31, 2010.2011. The Corporation addresses transactions with related parties in its‘Code of Business Conduct and Ethics’policy. Ethics Policy.Conflicts of interest are prohibited as a matter of Corporation policy, except under guidelines approved by the Board of Directors or committees of the Board.
Security Ownership of Certain Beneficial Owners and Management
As of April 1, 2011March 28, 2012 the Corporation does not have any person who is known to the Corporation to be the beneficial owner of more than 5% of the common stock of the Corporation.
The following table sets forth certain information as of April 1, 2011March 28, 2012 as to the common stock of the Corporation owned beneficially by each director and director nominee, by each named executive officer, and by all directors, director nominees and executive officers of the Corporation as a group. The shares to be credited under the Directors’ Plan are not included in the table below.
| Amount and Nature of Beneficial Ownership | ||||||||||||||||
| Sole Voting | Shared Voting | Total | Percentage of | |||||||||||||
| and Investment | or Investment | Beneficial | Common Stock | |||||||||||||
Name of Owner | Powers | Powers | Ownership | Outstanding | ||||||||||||
| Dennis P. Angner* | 18,100 | — | 18,100 | 0.24 | % | |||||||||||
| Jeffrey J. Barnes | — | 5,669 | 5,669 | 0.08 | % | |||||||||||
| Richard J. Barz* | 20,325 | — | 20,325 | 0.27 | % | |||||||||||
| Sandra L. Caul | — | 10,609 | 10,609 | 0.14 | % | |||||||||||
| James C. Fabiano | 264,871 | 6,579 | 271,450 | 3.60 | % | |||||||||||
| G. Charles Hubscher | 28,031 | 3,548 | 31,579 | 0.42 | % | |||||||||||
| Thomas L. Kleinhardt | — | 31,179 | 31,179 | 0.41 | % | |||||||||||
| Joseph LaFramboise | — | 910 | 910 | 0.01 | % | |||||||||||
| David J. Maness | 466 | 1,135 | 1,601 | 0.02 | % | |||||||||||
| W. Joseph Manifold | 2,089 | — | 2,089 | 0.03 | % | |||||||||||
| W. Michael McGuire | 56,531 | — | 56,531 | 0.75 | % | |||||||||||
| Dianne C. Morey | — | 40,283 | 40,283 | 0.53 | % | |||||||||||
| Dale D. Weburg | 27,842 | 31,683 | 59,525 | 0.79 | % | |||||||||||
| Timothy M. Miller | 215 | 3,330 | 3,545 | 0.05 | % | |||||||||||
| Steven D. Pung | 9,422 | 8,236 | 17,658 | 0.23 | % | |||||||||||
| David J. Reetz | 8,468 | 175 | 8,643 | 0.11 | % | |||||||||||
| All Directors, nominees and Executive | ||||||||||||||||
| Officers as a Group (16 persons) | 436,360 | 143,336 | 579,696 | 7.68 | % | |||||||||||
| Amount and Nature of Beneficial Ownership | ||||||||||||||||
Name of Owner | Sole Voting and Investment Powers | Shared Voting or Investment Powers | Total Beneficial Ownership | Percentage of Common Stock Outstanding | ||||||||||||
Dennis P. Angner* | 18,712 | — | 18,712 | 0.25 | % | |||||||||||
Jeffrey J. Barnes | — | 5,837 | 5,837 | 0.08 | % | |||||||||||
Richard J. Barz* | 18,911 | — | 18,911 | 0.25 | % | |||||||||||
Sandra L. Caul | — | 10,609 | 10,609 | 0.14 | % | |||||||||||
James C. Fabiano | 272,708 | 6,773 | 279,481 | 3.67 | % | |||||||||||
G. Charles Hubscher | 28,860 | 3,523 | 32,383 | 0.43 | % | |||||||||||
Thomas L. Kleinhardt | — | 31,546 | 31,546 | 0.41 | % | |||||||||||
Joseph LaFramboise | 200 | 937 | 1,137 | 0.01 | % | |||||||||||
David J. Maness | 480 | 1,274 | 1,754 | 0.02 | % | |||||||||||
W. Joseph Manifold | 2,107 | — | 2,107 | 0.03 | % | |||||||||||
W. Michael McGuire | 116,462 | — | 116,462 | 1.53 | % | |||||||||||
Dale D. Weburg | 28,665 | 32,620 | 61,285 | 0.80 | % | |||||||||||
Timothy M. Miller | 258 | 3,428 | 3,686 | 0.05 | % | |||||||||||
Steven D. Pung | 9,752 | 8,647 | 18,399 | 0.24 | % | |||||||||||
David J. Reetz | 8,871 | 181 | 9,051 | 0.12 | % | |||||||||||
|
|
|
|
|
|
|
| |||||||||
All Directors, nominees and Executive Officers as a Group (15) persons | 505,985 | 105,374 | 611,360 | 8.03 | % | |||||||||||
|
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| * | Trustees of the ESOP who vote ESOP stock. |
19
The Audit Committee has appointed Rehmann Robson, P.C. as the independent auditors of the Corporation for the year ending December 31, 2011.
A representative of Rehmann Robson, P.C. is expected to be present at the Annual Meeting of Shareholders to respond to appropriate questions from shareholders and to make any comments Rehmann Robson, P.C. believes isare appropriate.
Fees for Professional Services Provided by Rehmann Robson, P.C.
The following table shows the aggregate fees billed by Rehmann Robson, P.C. for the audit and other services provided to the Corporation for 20102011 and 2009.
| 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 | ||||
| 2011 | 2010 | |||||||||
Audit fees | $ | 253,920 | $ | 252,163 | ||||||
Audit related fees | 17,510 | 39,089 | ||||||||
Tax fees | 20,175 | 24,730 | ||||||||
|
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| |||||||
Total | $ | 291,605 | $ | 315,982 | ||||||
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The audit fees were for performing the integrated audit of the Corporation’s consolidated annual financial statements and the audit of internal control over financial reporting related to the Federal Deposit Insurance Corporation Improvement Act, review of interim quarterly financial statements included in the Corporation’sForms 10-Q, and services that are normally provided by Rehmann Robson, P.C. in connection with statutory and regulatory filings or engagements. The decline in audit fees from 2009 to 2010 is primarily related to the Corporations’ continued improvement in financial reporting and SOX 404 processes.
The audit related fees are typically for various discussions related to the adoption and interpretation of new accounting pronouncements. During 2010, this includes fees for procedures related to an SEC comment letter and other nonrecurring regulatory filings. Also included are fees for auditing of the Corporation’s employee benefit plans.
The tax fees were for the preparation of the Corporation’s and its subsidiaries’ state and federal tax returns and for consultation with the Corporation on various tax matters. During 2009 tax fees also included consulting related to the then new State of Michigan Business Tax (MBT).
The Audit Committee has considered whether the services provided by Rehmann Robson, P.C., other than the audit fees, are compatible with maintaining Rehmann Robson, P.C.’s independence and believes that the other services provided are compatible.
Pre-Approval Policies and Procedures
All audit and non-audit services over $5,000 to be performed by Rehmann Robson, P.C. must be approved in advance by the Audit Committee if those fees are reasonably expected to exceed 5.0% of the current year agreed upon fee for independent audit services. As permitted by the SEC’s rules, the Audit Committee has authorized its Chairperson to pre-approve audit, audit-related, tax and non-audit services, provided that such approved service is reported to the full Audit Committee at its next meeting.
As early as practicable in each calendar year, the independent auditor provides to the Audit Committee a schedule of the audit and other services that the independent auditor expects to provide or may provide during the next twelve months. The schedule will be specific as to the nature of the proposed services, the proposed fees, timing, and other details that the Audit Committee may request. The Audit Committee will by resolution authorize or decline the proposed services. Upon approval, this schedule will serve as the budget for fees by specific activity or service for the next twelve months.
A schedule of additional services proposed to be provided by the independent auditor, or proposed revisions to services already approved, along with associated proposed fees, may be presented to the Audit Committee for their consideration and approval at any time. The schedule will be specific as to the nature of the proposed service, the
20
Applicable SEC rules and regulations permit waiver of the pre-approval requirements for services other than audit, review or attest services if certain conditions are met. Out of the services characterized above as audit-related, tax and professional services, none were billed pursuant to these provisions in 20102011 and 20092010 without pre-approval as required under the Corporation’s policies.
Shareholder Proposals
Any proposals which shareholders of the Corporation intend to present at the next annual meeting of the Corporation must be received before December 9, 20116, 2012 to be considered for inclusion in the Corporation’s proxy statement and proxy for that meeting. Proposals should be made in accordance with Securities and Exchange CommissionRule 14a-8.
Directors’ Attendance at the Annual Meeting of Shareholders
The Corporation’s directors are encouraged to attend the annual meeting of shareholders. At the 20102011 annual meeting, all directors were in attendance.
Section 16(a) Beneficial Ownership Reporting Compliance
Section 16(a) of the Securities Exchange Act of 1934 requires the Corporation’s directors and certain officers and persons who own more than ten percent of the Corporation’s common stock, to file with the SEC initial reports of ownership and reports of changes in ownership of the Corporation’s common stock. These officers, directors, and greater than ten percent shareholders are required by SEC regulation to furnish the Corporation with copies of these reports.
To the Corporation’s knowledge, based solely on review of the copies of such reports furnished to the Corporation, during the year ended December 31, 20102011 all Section 16(a) filing requirements were satisfied, with respect to the applicable officers, directors, and greater than 10 percent beneficial owners.
Other Matters
The cost of soliciting proxies will be borne by the Corporation. In addition to solicitation by mail, officers and other employees of the Corporation may solicit proxies by telephone or in person, without compensation other than their regular compensation.
As to Other Business Which May Come Before the Meeting
Management of the Corporation does not intend to bring any other business before the meeting for action. However, if any other business should be presented for action, it is the intention of the persons named in the enclosed form of proxy to vote in accordance with their judgment on such business.
By order of the Board of Directors
Debra Campbell, Secretary
21
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| 73 | Management’s Discussion and Analysis of Financial Condition and Results of Operations | |||
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| 100 | ||||
22
| 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 | ||||||||||||||||||||||||
23
(Dollars in thousands except per share data)
| 2011 | 2010 | 2009 | 2008 | 2007 | ||||||||||||||||
INCOME STATEMENT DATA | ||||||||||||||||||||
Total interest income | $ | 57,905 | $ | 57,217 | $ | 58,105 | $ | 61,385 | $ | 53,972 | ||||||||||
Net interest income | 41,702 | 40,013 | 38,266 | 35,779 | 28,013 | |||||||||||||||
Provision for loan losses | 3,826 | 4,857 | 6,093 | 9,500 | 1,211 | |||||||||||||||
Net income | 10,210 | 9,045 | 7,800 | 4,101 | 7,930 | |||||||||||||||
BALANCE SHEET DATA | ||||||||||||||||||||
End of year assets | $ | 1,337,925 | $ | 1,225,810 | $ | 1,143,944 | $ | 1,139,263 | $ | 957,282 | ||||||||||
Daily average assets | 1,287,195 | 1,182,930 | 1,127,634 | 1,113,102 | 925,631 | |||||||||||||||
Daily average deposits | 927,186 | 840,392 | 786,714 | 817,041 | 727,762 | |||||||||||||||
Daily average loans/net | 730,919 | 712,272 | 712,965 | 708,434 | 596,739 | |||||||||||||||
Daily average equity | 145,725 | 139,855 | 139,810 | 143,626 | 119,246 | |||||||||||||||
PER SHARE DATA | ||||||||||||||||||||
Earnings per share | ||||||||||||||||||||
Basic | $ | 1.35 | $ | 1.20 | $ | 1.04 | $ | 0.55 | $ | 1.14 | ||||||||||
Diluted | 1.31 | 1.17 | 1.01 | 0.53 | 1.11 | |||||||||||||||
Cash dividends | 0.76 | 0.72 | 0.70 | 0.65 | 0.62 | |||||||||||||||
Book value (at year end) | 20.40 | 19.23 | 18.69 | 17.89 | 17.58 | |||||||||||||||
FINANCIAL RATIOS | ||||||||||||||||||||
Shareholders’ equity to assets (at year end) | 11.57 | % | 11.84 | % | 12.31 | % | 11.80 | % | 12.86 | % | ||||||||||
Return on average equity | 7.01 | 6.47 | 5.58 | 2.86 | 6.65 | |||||||||||||||
Return on average tangible equity | 10.30 | 9.55 | 8.53 | 4.41 | 8.54 | |||||||||||||||
Cash dividend payout to net income | 56.51 | 59.93 | 67.40 | 118.82 | 54.27 | |||||||||||||||
Return on average assets | 0.79 | 0.76 | 0.69 | 0.37 | 0.86 | |||||||||||||||
| 2011 | 2010 | |||||||||||||||||||||||||||||||
| 4th | 3rd | 2nd | 1st | 4th | 3rd | 2nd | 1st | |||||||||||||||||||||||||
Quarterly Operating Results: | ||||||||||||||||||||||||||||||||
Total interest income | $ | 14,466 | $ | 14,532 | $ | 14,669 | $ | 14,238 | $ | 14,540 | $ | 14,306 | $ | 14,272 | $ | 14,099 | ||||||||||||||||
Interest expense | 3,979 | 4,070 | 4,101 | 4,053 | 4,217 | 4,296 | 4,291 | 4,400 | ||||||||||||||||||||||||
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| |||||||||||||||||
Net interest income | 10,487 | 10,462 | 10,568 | 10,185 | 10,323 | 10,010 | 9,981 | 9,699 | ||||||||||||||||||||||||
Provision for loan losses | 1,443 | 963 | 603 | 817 | 1,626 | 968 | 1,056 | 1,207 | ||||||||||||||||||||||||
Noninterest income | 2,433 | 1,859 | 1,978 | 1,948 | 2,629 | 2,634 | 1,870 | 2,167 | ||||||||||||||||||||||||
Noninterest expenses | 8,651 | 8,513 | 8,779 | 8,587 | 8,558 | 8,620 | 8,275 | 8,354 | ||||||||||||||||||||||||
Net income | 2,711 | 2,511 | 2,672 | 2,316 | 2,318 | 2,553 | 2,151 | 2,023 | ||||||||||||||||||||||||
Per Share of Common Stock: | ||||||||||||||||||||||||||||||||
Earnings per share | ||||||||||||||||||||||||||||||||
Basic | $ | 0.36 | $ | 0.33 | $ | 0.35 | $ | 0.31 | $ | 0.30 | $ | 0.34 | $ | 0.29 | $ | 0.27 | ||||||||||||||||
Diluted | 0.35 | 0.32 | 0.34 | 0.30 | 0.30 | 0.33 | 0.28 | 0.26 | ||||||||||||||||||||||||
Cash dividends | 0.19 | 0.19 | 0.19 | 0.19 | 0.18 | 0.18 | 0.18 | 0.18 | ||||||||||||||||||||||||
Book value (at quarter end) | 20.40 | 20.53 | 20.00 | 19.52 | 19.23 | 19.59 | 19.39 | 18.89 | ||||||||||||||||||||||||
Shareholders and Board of Directors Isabella Bank Corporation Mount Pleasant, Michigan We have audited the accompanying consolidated balance sheets ofIsabella Bank Corporationas of December 31, We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement and whether effective internal control over financial reporting was maintained in all material respects. Our audits of the consolidated financial statements included examining, on a test basis, evidence supporting the amounts and disclosures in the consolidated financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material misstatement exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. We believe that our audits provide a reasonable basis for our opinion. A corporation’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of consolidated financial statements for external purposes in accordance with generally accepted accounting principles. A corporation’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the corporation; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of consolidated financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the corporation are being made only in accordance with authorizations of management and directors of the corporation; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the corporation’s assets that could have a material effect on the consolidated financial statements. Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position ofIsabella Bank Corporationas of December 31, Rehmann Robson, P.C. Saginaw, Michigan March REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRMReport of Independent Registered Public Accounting Firm20102011 and 2009,2010, 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, 2010.2011. We also have auditedIsabella Bank Corporation’sinternal control over financial reporting as of December 31, 2010,2011, based on criteria established in theInternal Control-Integrated Frameworkissued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).Isabella Bank Corporation’smanagement is responsible for these consolidated financial statements, for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting. Our responsibility is to express an opinion on these consolidated financial statements and an opinion on the effectiveness 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.20102011 and 2009,2010, and the consolidated results of their operations and their cash flows for each of the years in the three-year period ended December 31, 20102011 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, 2010,2011, based on the criteria established in theInternal Control-Integrated Frameworkissued by the Committee of Sponsoring Organizations (COSO) of the Treadway Commission.
8, 2011246, 2012
| December 31 | ||||||||
| 2010 | 2009 | |||||||
| (Dollars in thousands) | ||||||||
ASSETS | ||||||||
| Cash and cash equivalents | ||||||||
| Cash and demand deposits due from banks | $ | 16,978 | $ | 17,342 | ||||
| Interest bearing balances due from banks | 1,131 | 7,140 | ||||||
Total cash and cash equivalents | 18,109 | 24,482 | ||||||
| Certificates of deposit held in other financial institutions | 15,808 | 5,380 | ||||||
| Trading securities | 5,837 | 13,563 | ||||||
Available-for-sale investment securities (amortized cost of $329,435 in 2010 and $258,585 in 2009) | 330,724 | 259,066 | ||||||
Mortgage loansavailable-for-sale | 1,182 | 2,281 | ||||||
| Loans | ||||||||
| Agricultural | 71,446 | 64,845 | ||||||
| Commercial | 348,852 | 340,274 | ||||||
| Installment | 30,977 | 32,359 | ||||||
| Residential real estate mortgage | 284,029 | 285,838 | ||||||
Total loans | 735,304 | 723,316 | ||||||
| Less allowance for loan losses | 12,373 | 12,979 | ||||||
Net loans | 722,931 | 710,337 | ||||||
| Premises and equipment | 24,627 | 23,917 | ||||||
| Corporate owned life insurance | 17,466 | 16,782 | ||||||
| Accrued interest receivable | 5,456 | 5,832 | ||||||
| Equity securities without readily determinable fair values | 17,564 | 17,921 | ||||||
| Goodwill and other intangible assets | 47,091 | 47,429 | ||||||
| Other assets | 19,015 | 16,954 | ||||||
Total Assets | $ | 1,225,810 | $ | 1,143,944 | ||||
| LIABILITIES AND SHAREHOLDERS’ EQUITY | ||||||||
| Deposits | ||||||||
| Noninterest bearing | $ | 104,902 | $ | 96,875 | ||||
| NOW accounts | 142,259 | 128,111 | ||||||
| Certificates of deposit under $100 and other savings | 425,981 | 389,644 | ||||||
| Certificates of deposit over $100 | 204,197 | 188,022 | ||||||
Total deposits | 877,339 | 802,652 | ||||||
| Borrowed funds ($10,423 in 2010 and $17,804 in 2009 at fair value) | 194,917 | 193,101 | ||||||
| Accrued interest and other liabilities | 8,393 | 7,388 | ||||||
Total liabilities | 1,080,649 | 1,003,141 | ||||||
| Shareholders’ equity | ||||||||
| Common stock — no par value 15,000,000 shares authorized; issued and outstanding — 7,550,074 (including 32,686 shares to be issued) in 2010 and 7,535,193 (including 30,626 shares to be issued) in 2009 | 133,592 | 133,443 | ||||||
| Shares to be issued for deferred compensation obligations | 4,682 | 4,507 | ||||||
| Retained earnings | 8,596 | 4,972 | ||||||
| Accumulated other comprehensive loss | (1,709 | ) | (2,119 | ) | ||||
Total shareholders’ equity | 145,161 | 140,803 | ||||||
Total liabilities and shareholders’ equity | $ | 1,225,810 | $ | 1,143,944 | ||||
(Dollars in thousands)
| December 31, | ||||||||
| 2011 | 2010 | |||||||
ASSETS |
| |||||||
Cash and cash equivalents | ||||||||
Cash and demand deposits due from banks | $ | 24,514 | $ | 16,978 | ||||
Interest bearing balances due from banks | 4,076 | 1,131 | ||||||
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|
| |||||
Total cash and cash equivalents | 28,590 | 18,109 | ||||||
Certificates of deposit held in other financial institutions | 8,924 | 15,808 | ||||||
Trading securities | 4,710 | 5,837 | ||||||
Available-for-sale securities (amortized cost of $414,614 in 2011 and $329,435 in 2010) | 425,120 | 330,724 | ||||||
Mortgage loans available-for-sale | 3,205 | 1,182 | ||||||
Loans | ||||||||
Agricultural | 74,645 | 71,446 | ||||||
Commercial | 365,714 | 348,852 | ||||||
Consumer | 31,572 | 30,977 | ||||||
Residential real estate mortgage | 278,360 | 284,029 | ||||||
|
|
|
| |||||
Total loans | 750,291 | 735,304 | ||||||
Less allowance for loan losses | 12,375 | 12,373 | ||||||
|
|
|
| |||||
Net loans | 737,916 | 722,931 | ||||||
Premises and equipment | 24,626 | 24,627 | ||||||
Corporate owned life insurance | 22,075 | 17,466 | ||||||
Accrued interest receivable | 5,848 | 5,456 | ||||||
Equity securities without readily determinable fair values | 17,189 | 17,564 | ||||||
Goodwill and other intangible assets | 46,792 | 47,091 | ||||||
Other assets | 12,930 | 19,015 | ||||||
|
|
|
| |||||
TOTAL ASSETS | $ | 1,337,925 | $ | 1,225,810 | ||||
|
|
|
| |||||
LIABILITIES AND SHAREHOLDERS’ EQUITY |
| |||||||
Deposits | ||||||||
Noninterest bearing | $ | 119,072 | $ | 104,902 | ||||
NOW accounts | 163,653 | 142,259 | ||||||
Certificates of deposit under $100 and other savings | 440,123 | 425,981 | ||||||
Certificates of deposit over $100 | 235,316 | 204,197 | ||||||
|
|
|
| |||||
Total deposits | 958,164 | 877,339 | ||||||
Borrowed funds ($5,242 in 2011 and $10,423 in 2010 at fair value) | 216,136 | 194,917 | ||||||
Accrued interest payable and other liabilities | 8,842 | 8,393 | ||||||
|
|
|
| |||||
Total liabilities | 1,183,142 | 1,080,649 | ||||||
|
|
|
| |||||
Shareholders’ equity | ||||||||
Common stock — no par value 15,000,000 shares authorized; issued and outstanding 7,589,226 (including 16,585 shares held in the Rabbi Trust) in 2011 and 7,550,074 (including 32,686 shares held in the Rabbi Trust) in 2010 | 134,734 | 133,592 | ||||||
Shares to be issued for deferred compensation obligations | 4,524 | 4,682 | ||||||
Retained earnings | 13,036 | 8,596 | ||||||
Accumulated other comprehensive income (loss) | 2,489 | (1,709 | ) | |||||
|
|
|
| |||||
Total shareholders’ equity | 154,783 | 145,161 | ||||||
|
|
|
| |||||
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY | $ | 1,337,925 | $ | 1,225,810 | ||||
|
|
|
| |||||
The accompanying notes are an integral part of these consolidated financial statements.
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 | ||||||||||||
(Dollars in thousands except per share data)
| Common Stock Shares Outstanding | Common Stock | Shares to be Issued for Deferred Compensation Obligations | Retained Earnings | Accumulated Other Comprehensive (Loss) Income | Totals | |||||||||||||||||||
Balance, January 1, 2009 | 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 | |||||||||||||||||
Comprehensive income | — | — | — | 10,210 | 4,198 | 14,408 | ||||||||||||||||||
Issuance of common stock | 120,336 | 3,075 | — | — | — | 3,075 | ||||||||||||||||||
Common stock issued for deferred compensation obligations | 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 | |||||||||||||
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||
The accompanying notes are an integral part of these consolidated financial statements.
26
| Year Ended December 31 | ||||||||||||
| 2010 | 2009 | 2008 | ||||||||||
| (Dollars in thousands | ||||||||||||
| except per share data) | ||||||||||||
Interest income | ||||||||||||
| Loans, including fees | $ | 46,794 | $ | 47,706 | $ | 49,674 | ||||||
| Investment securities | ||||||||||||
| Taxable | 5,271 | 4,712 | 5,433 | |||||||||
| Nontaxable | 4,367 | 4,623 | 4,642 | |||||||||
| Trading account securities | 306 | 687 | 1,093 | |||||||||
| Federal funds sold and other | 479 | 377 | 543 | |||||||||
Total interest income | 57,217 | 58,105 | 61,385 | |||||||||
Interest expense | ||||||||||||
| Deposits | 11,530 | 13,588 | 19,873 | |||||||||
| Borrowings | 5,674 | 6,251 | 5,733 | |||||||||
Total interest expense | 17,204 | 19,839 | 25,606 | |||||||||
Net interest income | 40,013 | 38,266 | 35,779 | |||||||||
| Provision for loan losses | 4,857 | 6,093 | 9,500 | |||||||||
Net interest income after provision for loan losses | 35,156 | 32,173 | 26,279 | |||||||||
Noninterest income | ||||||||||||
| Service charges and fees | 6,480 | 6,913 | 6,370 | |||||||||
| Gain on sale of mortgage loans | 610 | 886 | 249 | |||||||||
| Net (loss) gain on trading securities | (94 | ) | 80 | 245 | ||||||||
| Net gain (loss) on borrowings measured at fair value | 227 | 289 | (641 | ) | ||||||||
Gain on sale ofavailable-for-sale investment securities | 348 | 648 | 24 | |||||||||
| Other | 1,729 | 1,340 | 1,555 | |||||||||
Total noninterest income | 9,300 | 10,156 | 7,802 | |||||||||
Noninterest expenses | ||||||||||||
| Compensation and benefits | 18,552 | 18,258 | 16,992 | |||||||||
| Occupancy | 2,351 | 2,170 | 2,035 | |||||||||
| Furniture and equipment | 4,344 | 4,146 | 3,849 | |||||||||
| FDIC insurance premiums | 1,254 | 1,730 | 313 | |||||||||
| Other | 7,306 | 7,379 | 7,515 | |||||||||
Total noninterest expenses | 33,807 | 33,683 | 30,704 | |||||||||
Income before federal income tax expense (benefit) | 10,649 | 8,646 | 3,377 | |||||||||
| Federal income tax expense (benefit) | 1,604 | 846 | (724 | ) | ||||||||
Net income | $ | 9,045 | $ | 7,800 | $ | 4,101 | ||||||
Earnings per share | ||||||||||||
| Basic | $ | 1.20 | $ | 1.04 | $ | 0.55 | ||||||
| Diluted | $ | 1.17 | $ | 1.01 | $ | 0.53 | ||||||
Cash dividends per basic share | $ | 0.72 | $ | 0.70 | $ | 0.65 | ||||||
(Dollars in thousands except per share data)
| Year Ended December 31 | ||||||||||||
| 2011 | 2010 | 2009 | ||||||||||
Interest income | ||||||||||||
Loans, including fees | $ | 45,463 | $ | 46,794 | $ | 47,706 | ||||||
Investment securities | ||||||||||||
Taxable | 6,941 | 5,271 | 4,712 | |||||||||
Nontaxable | 4,806 | 4,367 | 4,623 | |||||||||
Trading account securities | 189 | 306 | 687 | |||||||||
Federal funds sold and other | 506 | 479 | 377 | |||||||||
|
|
|
|
|
| |||||||
Total interest income | 57,905 | 57,217 | 58,105 | |||||||||
Interest expense | ||||||||||||
Deposits | 10,935 | 11,530 | 13,588 | |||||||||
Borrowings | 5,268 | 5,674 | 6,251 | |||||||||
|
|
|
|
|
| |||||||
Total interest expense | 16,203 | 17,204 | 19,839 | |||||||||
|
|
|
|
|
| |||||||
Net interest income | 41,702 | 40,013 | 38,266 | |||||||||
Provision for loan losses | 3,826 | 4,857 | 6,093 | |||||||||
|
|
|
|
|
| |||||||
Net interest income after provision for loan losses | 37,876 | 35,156 | 32,173 | |||||||||
Noninterest income | ||||||||||||
Service charges and fees | 6,118 | 6,480 | 6,913 | |||||||||
Gain on sale of mortgage loans | 538 | 610 | 886 | |||||||||
Net (loss) gain on trading securities | (78 | ) | (94 | ) | 80 | |||||||
Net gain on borrowings measured at fair value | 181 | 227 | 289 | |||||||||
Gain on sale of available-for-sale investment securities | 3 | 348 | 648 | |||||||||
Other | 1,456 | 1,729 | 1,340 | |||||||||
|
|
|
|
|
| |||||||
Total noninterest income | 8,218 | 9,300 | 10,156 | |||||||||
Noninterest expenses | ||||||||||||
Compensation and benefits | 19,292 | 18,552 | 18,258 | |||||||||
Occupancy | 2,470 | 2,351 | 2,170 | |||||||||
Furniture and equipment | 4,497 | 4,344 | 4,146 | |||||||||
FDIC insurance premiums | 1,086 | 1,254 | 1,730 | |||||||||
Other | 7,185 | 7,306 | 7,379 | |||||||||
|
|
|
|
|
| |||||||
Total noninterest expenses | 34,530 | 33,807 | 33,683 | |||||||||
|
|
|
|
|
| |||||||
Income before federal income tax expense | 11,564 | 10,649 | 8,646 | |||||||||
Federal income tax expense | 1,354 | 1,604 | 846 | |||||||||
|
|
|
|
|
| |||||||
NET INCOME | $ | 10,210 | $ | 9,045 | $ | 7,800 | ||||||
|
|
|
|
|
| |||||||
Earnings per share | ||||||||||||
Basic | $ | 1.35 | $ | 1.20 | $ | 1.04 | ||||||
|
|
|
|
|
| |||||||
Diluted | $ | 1.31 | $ | 1.17 | $ | 1.01 | ||||||
|
|
|
|
|
| |||||||
Cash dividends per basic share | $ | 0.76 | $ | 0.72 | $ | 0.70 | ||||||
|
|
|
|
|
| |||||||
The accompanying notes are an integral part of these consolidated financial statements.
27
| Year Ended December 31 | ||||||||||||
| 2010 | 2009 | 2008 | ||||||||||
| (Dollars in thousands) | ||||||||||||
Net income | $ | 9,045 | $ | 7,800 | $ | 4,101 | ||||||
Unrealized holding gains (losses) onavailable-for-sale securities: | ||||||||||||
| Unrealized gains (losses) arising during the year | 1,156 | 3,415 | (3,104 | ) | ||||||||
| Reclassification adjustment for net realized gains | ||||||||||||
| included in net income | (348 | ) | (648 | ) | (24 | ) | ||||||
| Net unrealized gains (losses) | 808 | 2,767 | (3,128 | ) | ||||||||
| Tax effect | (351 | ) | 436 | (643 | ) | |||||||
| Unrealized gains (losses), net of tax | 457 | 3,203 | (3,771 | ) | ||||||||
| (Increase) reduction of unrecognized pension costs | (72 | ) | 374 | (2,320 | ) | |||||||
| Tax effect | 25 | (127 | ) | 788 | ||||||||
| Net unrealized (loss) gain on defined benefit pension plan | (47 | ) | 247 | (1,532 | ) | |||||||
Other comprehensive income (loss), net of tax | 410 | 3,450 | (5,303 | ) | ||||||||
Comprehensive income (loss) | $ | 9,455 | $ | 11,250 | $ | (1,202 | ) | |||||
(Dollars in thousands)
| Year Ended December 31 | ||||||||||||
| 2011 | 2010 | 2009 | ||||||||||
Net income | $ | 10,210 | $ | 9,045 | $ | 7,800 | ||||||
|
|
|
|
|
| |||||||
Unrealized holding gains on available-for-sale securities: | ||||||||||||
Unrealized gains arising during the year | 9,220 | 1,156 | 3,415 | |||||||||
Reclassification adjustment for net realized gains included in net income | (3 | ) | (348 | ) | (648 | ) | ||||||
|
|
|
|
|
| |||||||
Net unrealized gains | 9,217 | 808 | 2,767 | |||||||||
Tax effect | (3,719 | ) | (351 | ) | 436 | |||||||
|
|
|
|
|
| |||||||
Unrealized gains, net of tax | 5,498 | 457 | 3,203 | |||||||||
|
|
|
|
|
| |||||||
(Increase) reduction of unrecognized pension costs | (1,971 | ) | (72 | ) | 374 | |||||||
Tax effect | 671 | 25 | (127 | ) | ||||||||
|
|
|
|
|
| |||||||
Net unrealized (loss) gain on defined benefit pension plan | (1,300 | ) | (47 | ) | 247 | |||||||
|
|
|
|
|
| |||||||
Other comprehensive income, net of tax | 4,198 | 410 | 3,450 | |||||||||
|
|
|
|
|
| |||||||
Comprehensive income | $ | 14,408 | $ | 9,455 | $ | 11,250 | ||||||
|
|
|
|
|
| |||||||
The accompanying notes are an integral part of these consolidated financial statements.
28
| Year Ended December 31 | ||||||||||||
| 2010 | 2009 | 2008 | ||||||||||
| (Dollars in thousands) | ||||||||||||
| (Unaudited) | ||||||||||||
Operating activities | ||||||||||||
| Net income | $ | 9,045 | $ | 7,800 | $ | 4,101 | ||||||
| Reconciliation of net income to net cash provided by operations: | ||||||||||||
| Provision for loan losses | 4,857 | 6,093 | 9,500 | |||||||||
| Impairment of foreclosed assets | 180 | 157 | 231 | |||||||||
| Depreciation | 2,522 | 2,349 | 2,171 | |||||||||
| Amortization and impairment of originated mortgage servicing rights | 543 | 683 | 346 | |||||||||
| Amortization of acquisition intangibles | 338 | 375 | 415 | |||||||||
Net amortization ofavailable-for-sale investment securities | 1,153 | 741 | 356 | |||||||||
Realized gain on sale ofavailable-for-sale investment securities | (348 | ) | (648 | ) | (24 | ) | ||||||
| Net unrealized losses (gains) on trading securities | 94 | (80 | ) | (245 | ) | |||||||
| Net gain on sale of mortgage loans | (610 | ) | (886 | ) | (249 | ) | ||||||
| Net unrealized (gains) losses on borrowings measured at fair value | (227 | ) | (289 | ) | 641 | |||||||
| Increase in cash value of corporate owned life insurance | (642 | ) | (641 | ) | (616 | ) | ||||||
| Realized gain on redemption of corporate owned life insurance | (21 | ) | — | — | ||||||||
| Share-based payment awards under equity compensation plan | 650 | 677 | 603 | |||||||||
| Deferred income tax expense (benefit) | 179 | (641 | ) | (1,812 | ) | |||||||
| Origination of loans held for sale | (72,106 | ) | (153,388 | ) | (33,353 | ) | ||||||
| Proceeds from loan sales | 73,815 | 152,891 | 34,918 | |||||||||
| Net changes in operating assets and liabilities which provided (used) cash: | ||||||||||||
| Trading securities | 7,632 | 8,292 | 8,513 | |||||||||
| Accrued interest receivable | 376 | 490 | 226 | |||||||||
| Other assets | (1,914 | ) | (6,331 | ) | (3,565 | ) | ||||||
| Accrued interest and other liabilities | 1,005 | 581 | (1,496 | ) | ||||||||
Net cash provided by operating activities | 26,521 | 18,225 | 20,661 | |||||||||
Investing activities | ||||||||||||
| Net change in certificates of deposit held in other financial institutions | (10,428 | ) | (4,805 | ) | 882 | |||||||
Activity inavailable-for-sale securities | ||||||||||||
| Maturities, calls, and sales | 85,273 | 130,580 | 66,387 | |||||||||
| Purchases | (156,928 | ) | (140,517 | ) | (96,168 | ) | ||||||
| Loan principal (originations) collections, net | (21,319 | ) | 4,437 | (42,700 | ) | |||||||
| Proceeds from sales of foreclosed assets | 2,778 | 4,145 | 2,310 | |||||||||
| Purchases of premises and equipment | (3,232 | ) | (3,035 | ) | (2,990 | ) | ||||||
| Bank acquisition, net of cash acquired | — | — | (9,465 | ) | ||||||||
| Cash contributed to title company joint venture formation | — | — | (4,542 | ) | ||||||||
| Purchases of corporate owned life insurance | (175 | ) | — | (1,560 | ) | |||||||
| Proceeds from the redemption of corporate owned life insurance | 154 | 11 | — | |||||||||
Net cash used in investing activities | (103,877 | ) | (9,184 | ) | (87,846 | ) | ||||||
Financing activities | ||||||||||||
| Acceptances and withdrawals of deposits, net | 74,687 | 27,022 | (47,892 | ) | ||||||||
| Advances (repayments) of borrowed funds | 2,043 | (28,960 | ) | 123,016 | ||||||||
| Cash dividends paid on common stock | (5,421 | ) | (5,256 | ) | (4,873 | ) | ||||||
| Proceeds from issuance of common stock | 2,208 | 2,479 | 2,476 | |||||||||
| Common stock repurchased | (2,020 | ) | (2,056 | ) | (6,440 | ) | ||||||
| Common stock purchased for deferred compensation obligations | (514 | ) | (767 | ) | (249 | ) | ||||||
Net cash provided by (used in) financing activities | 70,983 | (7,538 | ) | 66,038 | ||||||||
(Decrease) increase in cash and cash equivalents | (6,373 | ) | 1,503 | (1,147 | ) | |||||||
| Cash and cash equivalents at beginning of year | 24,482 | 22,979 | 24,126 | |||||||||
Cash and cash equivalents at end of year | $ | 18,109 | $ | 24,482 | $ | 22,979 | ||||||
| Supplemental cash flows information: | ||||||||||||
| Interest paid | $ | 17,344 | $ | 20,030 | $ | 25,556 | ||||||
| Federal income taxes paid | 1,261 | 2,237 | 1,155 | |||||||||
| Supplemental noncash information: | ||||||||||||
| Transfers of loans to foreclosed assets | $ | 3,868 | $ | 2,536 | $ | 3,398 | ||||||
| Common stock issued for deferred compenstion obligations | 475 | 185 | 360 | |||||||||
| Common stock repurchased from an associated grantor trust (Rabbi Trust) | (537 | ) | (331 | ) | (360 | ) | ||||||
(Dollars in thousands)
| Year Ended December 31 | ||||||||||||
| 2011 | 2010 | 2009 | ||||||||||
OPERATING ACTIVITIES | ||||||||||||
Net income | $ | 10,210 | $ | 9,045 | $ | 7,800 | ||||||
Reconciliation of net income to net cash provided by operations: | ||||||||||||
Provision for loan losses | 3,826 | 4,857 | 6,093 | |||||||||
Impairment of foreclosed assets | 82 | 180 | 157 | |||||||||
Depreciation | 2,521 | 2,522 | 2,349 | |||||||||
Amortization and impairment of originated mortgage servicing rights | 714 | 543 | 683 | |||||||||
Amortization of acquisition intangibles | 299 | 338 | 375 | |||||||||
Net amortization of available-for-sale securities | 1,689 | 1,153 | 741 | |||||||||
Gain on sale of available-for-sale securities | (3 | ) | (348 | ) | (648 | ) | ||||||
Net unrealized losses (gains) on trading securities | 78 | 94 | (80 | ) | ||||||||
Net gain on sale of mortgage loans | (538 | ) | (610 | ) | (886 | ) | ||||||
Net unrealized gains on borrowings measured at fair value | (181 | ) | (227 | ) | (289 | ) | ||||||
Increase in cash value of corporate owned life insurance | (609 | ) | (642 | ) | (641 | ) | ||||||
Realized gain on redemption of corporate owned life insurance | — | (21 | ) | — | ||||||||
Share-based payment awards under equity compensation plan | 615 | 650 | 677 | |||||||||
Deferred income tax expense (benefit) | 389 | 179 | (641 | ) | ||||||||
Origination of loans held for sale | (57,584 | ) | (72,106 | ) | (153,388 | ) | ||||||
Proceeds from loan sales | 56,099 | 73,815 | 152,891 | |||||||||
Net changes in operating assets and liabilities which provided (used) cash: | ||||||||||||
Trading securities | 1,049 | 7,632 | 8,292 | |||||||||
Accrued interest receivable | (392 | ) | 376 | 490 | ||||||||
Other assets | 147 | (1,914 | ) | (6,331 | ) | |||||||
Accrued interest payable and other liabilities | 449 | 1,005 | 581 | |||||||||
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Net cash provided by operating activities | 18,860 | 26,521 | 18,225 | |||||||||
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| |||||||
INVESTING ACTIVITIES | ||||||||||||
Net change in certificates of deposit held in other financial institutions | 6,884 | (10,428 | ) | (4,805 | ) | |||||||
Activity in available-for-sale securities | ||||||||||||
Maturities, calls, and sales | 78,152 | 85,273 | 130,580 | |||||||||
Purchases | (165,017 | ) | (156,928 | ) | (140,517 | ) | ||||||
Loan principal originations and collections, net | (20,743 | ) | (21,319 | ) | 4,437 | |||||||
Proceeds from sales of foreclosed assets | 2,041 | 2,778 | 4,145 | |||||||||
Purchases of premises and equipment | (2,520 | ) | (3,232 | ) | (3,035 | ) | ||||||
Purchases of corporate owned life insurance | (4,000 | ) | (175 | ) | — | |||||||
Proceeds from the redemption of corporate owned life insurance | — | 154 | 11 | |||||||||
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Net cash used in investing activities | (105,203 | ) | (103,877 | ) | (9,184 | ) | ||||||
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FINANCING ACTIVITIES | ||||||||||||
Acceptances and withdrawals of deposits, net | $ | 80,825 | $ | 74,687 | $ | 27,022 | ||||||
Increase (decrease) in other borrowed funds | 21,400 | 2,043 | (28,960 | ) | ||||||||
Cash dividends paid on common stock | (5,770 | ) | (5,421 | ) | (5,256 | ) | ||||||
Proceeds from issuance of common stock | 2,302 | 2,208 | 2,479 | |||||||||
Common stock repurchased | (1,507 | ) | (2,020 | ) | (2,056 | ) | ||||||
Common stock purchased for deferred compensation obligations | (426 | ) | (514 | ) | (767 | ) | ||||||
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Net cash provided by (used in) financing activities | 96,824 | 70,983 | (7,538 | ) | ||||||||
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INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS | 10,481 | (6,373 | ) | 1,503 | ||||||||
Cash and cash equivalents at beginning of period | 18,109 | 24,482 | 22,979 | |||||||||
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CASH AND CASH EQUIVALENTS AT END OF PERIOD | $ | 28,590 | $ | 18,109 | $ | 24,482 | ||||||
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SUPPLEMENTAL CASH FLOWS INFORMATION: | ||||||||||||
Interest paid | $ | 16,239 | $ | 17,344 | $ | 20,030 | ||||||
Federal income taxes paid | 878 | 1,261 | 2,237 | |||||||||
SUPPLEMENTAL NONCASH INFORMATION: | ||||||||||||
Transfers of loans to foreclosed assets | $ | 1,932 | $ | 3,868 | $ | 2,536 | ||||||
Common stock issued for deferred compensation obligations | 773 | 475 | 185 | |||||||||
Common stock repurchased from an associated grantor trust (Rabbi Trust) | (697 | ) | (537 | ) | (33 | ) | ||||||
The accompanying notes are an integral part of these consolidated financial statements.
29
(Dollars in thousands except per share amounts)
NOTE 1 — NATURE OF OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION AND CONSOLIDATION:
Nature of Operations:NATURE OF OPERATIONS:
Financial Group Information Services provides information technology services to Isabella Bank Corporation and its subsidiaries.
IB&T Employee Leasing provides payroll services, benefit administration, and other human resource services to Isabella Bank Corporation and its subsidiaries.
Use of Estimates:USE OF ESTIMATES:
Material estimates that are particularly susceptible to significant change in the near term relate to the determination of the allowance for loan losses, the fair value of certainavailable-for-sale 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 determinations of assumptions in accounting for the defined benefit pension plan. In connection with the determination of the allowance for loan losses and the carrying value of foreclosed real estate, management obtains independent appraisals for significant properties.
Fair Value Measurements:FAIR VALUE MEASUREMENTS:
30
For assets and liabilities recorded at fair value, it is the Corporation’s policy to maximize the use of observable inputs and minimize the use of unobservable inputs when developing fair value measurements for those financial instruments for which there is an active market. In cases where the market for a financial asset or liability is not active, the Corporation includes appropriate risk adjustments that market participants would make for nonperformance and liquidity risks when developing fair value measurements. Fair value measurements for assets and liabilities for which limited or no observable market data exists are accordingly based primarily upon estimates, are often calculated based on the economic and competitive environment, the characteristics of the asset or liability and other factors. Therefore, the results cannot be determined with precision and may not be realized in an actual sale or immediate settlement of the asset or liability. Additionally, there may be inherent weaknesses in any calculation technique, and changes in the underlying assumptions used, including discount rates and estimates of future cash flows, could significantly affect the results of current or future values.
The Corporation utilizes fair value measurements to record fair value adjustments to certain assets and liabilities and to determine fair value disclosures. Investment securitiesavailable-for-sale, trading securities, and certain liabilities are recorded at fair value on a recurring basis. Additionally, from time to time, the Corporation may be required to record other assets at fair value on a nonrecurring basis, such as mortgage loansavailable-for-sale, impaired loans, foreclosed assets, originated mortgage servicing rights, goodwill, and certain other assets and liabilities. These nonrecurring fair value adjustments typically involve the application of lower of cost or market accounting or write downs of individual assets.
Fair Value Hierarchy
Under fair value measurement and disclosure authoritative guidance, the Corporation groups assets and liabilities measured at fair value into three levels, based on the markets in which the assets and liabilities are traded, and the reliability of the assumptions used to determine fair value, based on the prioritization of inputs in the valuation techniques. These levels are:
Level 1: Valuation is based upon quoted prices for identical instruments traded in active markets.
Level 2: Valuation is based upon quoted prices for similar instruments in active markets, quoted prices for identical or similar instruments in markets that are not active and model based valuation techniques for which all significant assumptions are observable in the market.
Level 3: Valuation is generated from model based techniques that use at least one significant assumption not observable in the market. These unobservable assumptions reflect estimates of assumptions that market participants would use in pricing the asset or liability.
The asset’s or liability’s fair value measurement level within the fair value hierarchy is based on the lowest level of any input that is significant to the fair value measurement. Valuation techniques maximize the use of observable inputs and minimize the use of unobservable inputs.
For a further discussion of fair value considerations, refer to Notes 19Note 20 to the consolidated financial statements.
Significant Group Concentrations of Credit Risk:SIGNIFICANT GROUP CONCENTRATIONS OF CREDIT RISK:
Cash and Cash Equivalents:CASH AND CASH EQUIVALENTS:
31
Certificates of Deposit Held in Other Financial Institutions:CERTIFICATES OF DEPOSIT HELD IN OTHER FINANCIAL INSTITUTIONS:
Trading Securities:TRADING SECURITIES:
Available-For-Sale Investment Securities:AVAILA
Investment securities are reviewed quarterly for possibleother-than-temporary impairment (OTTI)(“OTTI”). In determining whether another-than-temporary impairment exists for debt securities, management must assert that: (a) it does not have the intent to sell the security; and (b) it is more likely than not it will not have to sell the security before recovery of its cost basis. If these conditions are not met, the Corporation must recognize another-than-temporary impairment charge through earnings for the difference between the debt security’s amortized cost basis and its fair value, and such amount is included in noninterest income. For debt securities that do not meet the above criteria, and the Corporation does not expect to recover the security’s amortized cost basis, the security is consideredother-than-temporarily impaired. For these debt securities, the Corporation separates 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 calculates the recovery value by performing a discounted cash flow analysis based on the current cash flows and future cash flows management expects to recover. The amount of the totalother-than-temporary impairment related to the credit risk is recognized in earnings and is included in noninterest income. The amount of the totalother-than-temporary impairment related to other risk factors is recognized as a component of other comprehensive income. For debt securities that have recognized another-than-temporary impairment through earnings, if through subsequent evaluation there is a significant increase in the cash flow expected, the difference between the amortized cost basis and the cash flows expected to be collected is accreted as interest income.
Available-for-sale
equity securities are reviewed forother-than-temporary impairment at each reporting date. This evaluation considers a number of factors including, but not limited to, the length of time and extent to which the fair value has been less than cost, the financial condition and near term prospects of the issuer, and management’s ability and intent to hold the securities until fair value recovers. If it is determined that management does not have the ability and intent to hold the securities until recovery or that there are conditions that indicate that a security may32
Loans:LOANS:
The accrual of interest on mortgageagricultural, commercial and commercialmortgage loans is discontinued at the time the loan is 90 days or more past due unless the credit is well-securedwell secured and in the process of collection. Credit card loans and other personalConsumer loans are typically charged off no later than 180 days past due. Past due status is based on contractual terms of the loan. In all cases, loans are placed on nonaccrual or charged off at an earlier date if collection of principal or interest is considered doubtful.
For loans that are placed on non-accrual status or charged off, all interest accrued in the current calendar year, but not collected, is reversed against interest income while interest accrued in prior calendar years, but not collected is charged against the allowance for loan losses. The interest on these loans is accounted for on the cash-basis, until qualifying for return to accrual status. Loans are returned to accrual status when all principal and interest amounts contractually due are brought current and future payments are reasonably assured. For impaired loans not classified as nonaccrual, interest income continues to be accrued over the term of the loan based on the principal amount outstanding.
Allowance for Loan Losses:ALLOWANCE FOR LOAN LOSSES:
The allowance for loan losses is evaluated on a regular basis by management and is based upon management’s periodic review of the collectibility of the loans in light of historical experience, the nature and volume of the loan portfolio, adverse situations that may affect the borrower’s ability to repay, estimated value of any underlying collateral and prevailing economic conditions. This evaluation is inherently subjective as it requires estimates that are susceptible to significant revision as more information becomes available.
The allowance consists of specific, general and unallocated components. The specific component relates to loans that are 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 believes affect its estimate of probable losses based on qualitative factors. The unallocated component of the allowance reflects the margin of imprecision inherent in the underlying assumptions used in the methodologies for estimating specific and general losses in the portfolio.
Loans may be classified as impaired if they meet one or more of the following criteria:
1. There has been a chargeoff of its principal balance;
2. The loan has been classified as a troubled debt restructuring; or
3. The loan is in nonaccrual status.
33
Loans Held for Sale:LOANS HELD FOR SALE:
Mortgage loans held for sale are sold with the mortgage servicing rights retained by the Corporation. The carrying value of mortgage loans sold is reduced by the cost allocated to the associated mortgage servicing rights. Gains or losses on sales of mortgage loans are recognized based on the difference between the selling price and the carrying value of the related mortgage loans sold.
Transfers of Financial Assets:TRANSFERS OF FINANCIAL ASSETS:
Servicing:SERVICING:
Servicing assets are evaluated for impairment based upon the fair value of the rights as compared to amortized cost. Impairment is determined by stratifying rights into tranches based on predominant risk characteristics, such as interest rate, loan type, and investor type. Impairment is recognized through a valuation allowance for an individual tranche, to the extent that fair value is less than the capitalized amount for the tranche. If the Corporation later determines that all or a portion of the impairment no longer exists for a particular tranche, a reduction of the valuation allowance may be recorded as an increase to income. Capitalized servicing rights are reported in other assets and are amortized into noninterest income in proportion to, and over the period of, the estimated future net servicing income of the underlying financial assets.
34
Loans Acquired Through Transfer:LOANS ACQUIRED THROUGH TRANSFER:
Foreclosed Assets:FORECLOSED ASSETS:
Premises and Equipment:PREMISES AND EQUIPMENT:
if shorter, using the straight-line method. Maintenance, repairs and minor alterations are charged to current operations as expenditures occur. Management annually reviews these assets to determine whether carrying values have been impaired.
Fdic Insurance Premium:FDIC INSURANCE PREMIUM
Equity Securities Without Readily Determinable Fair Values:EQUITY SECURITIES WITHOUT READILY DETERMINABLE FAIR VALUES:
35
| 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 | ||||
| 2011 | 2010 | |||||||
Federal Home Loan Bank Stock | $ | 7,380 | $ | 7,596 | ||||
Investment in Corporate Settlement Solutions | 6,611 | 6,793 | ||||||
Federal Reserve Bank Stock | 1,879 | 1,879 | ||||||
Investment in Valley Financial Corporation | 1,000 | 1,000 | ||||||
Other | 319 | 296 | ||||||
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Total | $ | 17,189 | $ | 17,564 | ||||
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Stock Compensation Plans:EQUITY COMPENSATION PLAN:
Corporate Owned Life Insurance:CORPORATE OWNED LIFE INSURANCE:
As of December 31, 20102011 and 2009,2010, the present value of the post retirement benefits promisedpayable by the Corporation to the covered employees was estimated to be $2,573$2,633 and $2,505,$2,573, respectively, and is included in Accrued Interest Payable and Other Liabilities on the consolidated balance sheets. The periodic policy maintenance costs were $60 and $68 for 2011 and $45 for 2010, and 2009, respectively.
Acquisition Intangibles and Goodwill:ACQUISITION INTANGIBLES AND GOODWILL:
potential impairment. Acquisition intangibles are tested for impairment with a cash flow valuation. This valuation method requires a significant degree of management 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.
Off Balance Sheet Credit Related Financial Instruments:OFF BALANCE SHEET CREDIT RELATED FINANCIAL INSTRUMENTS:
36
The Corporation analyzes its filing positions in the jurisdictions where it is required to file income tax returns, as well as all open tax years in these jurisdictions. The Corporation has also elected to retain its existing accounting policy with respect to the treatment of interest and penalties attributable to income taxes, and continues to reflect any charges for such, to the extent they arise, as a component of its noninterest expenses
Marketing Costs:MARKETING COSTS:
RECLASSIFICATIONS: Certain amounts reported in the 2010 and 2009 consolidated financial statements have been reclassified to conform with the 2011 presentation.
Computation of Earnings Per Share:NOTE 2 — COMPUTATION OF EARNINGS PER SHARE
Basic earnings per share represents income available to common stockholdersshareholders divided by the weighted — average number of common shares issuedoutstanding during the period. Diluted earnings per share reflects additional common shares that would have been outstanding if dilutive potential common shares had been issued, as well as any adjustments to income that would result from the assumed issuance. Potential common shares that may be issued by the Corporation relate solely to outstanding shares in the Corporation’s Directors Plan, (seesee Note 16).
Earnings per common share have been computed based on the following:
| 2010 | 2009 | 2008 | ||||||||||
| Average number of common shares outstanding for basic calculation | 7,541,676 | 7,517,276 | 7,492,677 | |||||||||
| Average potential effect of shares in the Deferred Director fee plan(1) | 187,744 | 181,319 | 184,473 | |||||||||
| Average number of common shares outstanding used to calculate diluted earnings per common share | 7,729,420 | 7,698,595 | 7,677,150 | |||||||||
| Net income | $ | 9,045 | $ | 7,800 | $ | 4,101 | ||||||
Earnings per share | ||||||||||||
Basic | $ | 1.20 | $ | 1.04 | $ | 0.55 | ||||||
Diluted | $ | 1.17 | $ | 1.01 | $ | 0.53 | ||||||
| 2011 | 2010 | 2009 | ||||||||||
Average number of common shares outstanding for basic calculation | 7,572,841 | 7,541,676 | 7,517,276 | |||||||||
Average potential effect of shares in the Directors Plan(1) | 194,634 | 187,744 | 181,319 | |||||||||
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Average number of common shares outstanding used to calculate diluted earnings per common share | 7,767,475 | 7,729,420 | 7,698,595 | |||||||||
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Net income | $ | 10,210 | $ | 9,045 | $ | 7,800 | ||||||
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Earnings per share | ||||||||||||
Basic | $ | 1.35 | $ | 1.20 | $ | 1.04 | ||||||
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Diluted | $ | 1.31 | $ | 1.17 | $ | 1.01 | ||||||
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| (1) | Exclusive of shares held in the Rabbi Trust |
NOTE 3 — ACCOUNTING STANDARDS UPDATES
Reclassifications:Recently Adopted Accounting Standards Updates
Recent Accounting Pronouncements:
37
In January 1, 2010, and had no impact on the Corporation’s consolidated financial statements.
38
ASUNo. 2010-06 also clarifiesclarified 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, 2010after December 15, 2009 except for the disclosures about purchases, sales, issuances and settlements in the rollforward of activity in Level 3 fair value measurements, which willwas effective for interim and annual periods beginning after December 15, 2010. The new guidance did not have a significant impact on the Corporation’s consolidated financial statements.
ASU No. 2011-01: “Deferral of the Effective Date of Disclosures about Troubled Debt Restructurings in Update No. 2010-20.”
In January 2011, ASU No. 2011-01 amended ASC Topic 310, “Receivables” to temporarily delay the effective date of new disclosures related to troubled debt restructurings as required in ASU No. 2010-20, “Disclosures about the Credit Quality of Financing Receivables and the Allowance for Credit Losses”,which was initially intended to be effective January 1,for interim and annual periods ending after December 15, 2010. The effective date of the new disclosures about troubled debt restructurings was delayed to coordinate with the newly issued guidance for determining what constitutes a troubled debt restructuring (ASU No. 2011-02). The new disclosures were effective for interim and annual periods beginning on or after June 15, 2011 and increased the level of reporting disclosures related to troubled debt restructurings.
ASU No. 2011-02: “A Creditor’s Determination of Whether a Restructuring Is a Troubled Debt Restructuring.”
In April 2011, ASU No. 2011-02 amended ASC Topic 310, “Receivables” to clarify authoritative guidance as to what loan modifications constitute concessions, and would therefore be considered a troubled debt restructuring. Classification as a troubled debt restructuring will automatically classify such loans as impaired. ASU No. 2011-02 clarifies that:
If a debtor does not otherwise have access to funds at a market rate for debt with similar risk characteristics as the modified debt, the modification would be considered to be at a below-market rate, which may indicate that the creditor has granted a concession.
A modification that results in a temporary or permanent increase in the contractual interest rate cannot be presumed to be at a rate that is at or above a market rate and therefore could still be considered a concession.
A creditor must consider whether a borrower’s default is “probable” on any of its debt in the foreseeable future when assessing financial difficulty.
A modification that results in an insignificant delay in payments is not a concession.
In addition, ASU No. 2011-02 clarifies that a creditor is precluded from using the effective interest rate test in the debtor’s guidance on modification of payables (ASC Topic 470, “Debt”) when evaluating whether a modification constitutes a troubled debt restructuring. The new authoritative guidance was effective for interim
and annual periods beginning on or after June 15, 2011 and increased the volume of loans that the Corporation classified as troubled debt restructurings and required additional disclosures (see Note 6 – Loans and Allowance for Loan Losses).
ASU No. 2011-08: “Testing Goodwill for Impairment”
In September 2011, ASU No. 2011-08 amended ASC Topic 350, “Goodwill and Other” to simplify the testing of goodwill impairments. This update will allow for a qualitative assessment of goodwill to determine whether or not it is necessary to perform the two-step impairment test described in ASC Topic 350. While the new authoritative guidance is effective for fiscal years beginning after December 15, 2011, the Corporation elected to early adopt the guidance as of December 31, 2011. The new guidance did not have any impact on the Corporation’s consolidated financial statements.
Pending Accounting Standards Updates
ASU No. 2011-03: “Reconsideration of Effective Control for Repurchase Agreements”
In April 2011, ASU No. 2011-03 amended ASC Topic 310, “Transfers and Servicing” to eliminate from the assessment of effective control, the criteria calling for the transferor to have the ability to repurchase or redeem the financial assets on substantially the agreed upon terms, even in the event of the transferee’s default. The assessment of effective control should instead focus on the transferor’s contractual rights and obligations. The new authoritative guidance is effective for interim and annual periods beginning on or after December 15, 2011 and is not anticipatedexpected to impact the Corporation’s consolidated financial statements.
ASU No. 2011-04: “Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRS”
In May 2011, ASU No. 2011-04 amended ASC Topic 820, “Fair Value Measurement” to align fair value measurements and disclosures in U.S. Generally Accepted Accounting Principles (GAAP) and International Financial Reporting Standards (IFRS). The ASU changes the wording used to describe the requirements in GAAP for measuring fair value and disclosures about fair value.
The ASU clarifies the application of existing fair value measurements and disclosure requirements related to:
The application of highest and best use and valuation premise concepts.
Measuring the fair value of an instrument classified in a reporting entity’s stockholders’ equity.
Disclosure about fair value measurements within Level 3 of the fair value hierarchy.
The ASU also changes particular principles or requirements for measuring fair value and disclosing information measuring fair value and disclosures related to:
Measuring the fair value of financial instruments that are managed within a portfolio.
Application of premiums and discounts in a fair value measurement.
The new authoritative guidance is effective for interim and annual periods beginning on or after December 15, 2011 and is not expected to have a significant impact on the Corporation’s consolidated financial statements.
FASBASU No. 2011-05: “Presentation of Comprehensive Income”
In June 2011, ASU No. 2011-05 amended ASC Topic 860, “Transfers220, “Comprehensive Income” to improve the comparability, consistency, and Servicing.” New authoritative accounting guidance under ASC Topic 860 amends prior accounting guidance to enhance reporting about transferstransparency of financial assets, including securitizations,reporting and where companies have continuing exposure to increase the risks relatedprominence of items reported in other comprehensive income. In addition, to transferred financial assets. increase the prominence of items reported in other comprehensive income, and to facilitate the convergence of GAAP and IFRS, the FASB eliminated the option to present components of other comprehensive income as part of the statement of changes in shareholders’ equity.
The new authoritative accounting guidance eliminates the concept ofis effective for interim and annual periods beginning on or after December 15, 2011 and is not expected to have 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.
NOTE 4 — TRADING SECURITIES
Trading securities, at fair value, consist of the following investments at December 31:
| 2010 | 2009 | |||||||
| States and political subdivisions | $ | 5,837 | $ | 9,962 | ||||
| Mortgage-backed | — | 3,601 | ||||||
Total | $ | 5,837 | $ | 13,563 | ||||
| 2011 | 2010 | |||||||
States and political subdivisions | $ | 4,710 | $ | 5,837 | ||||
Included in the net trading losses of $94$78 during 2010,2011, were $74$60 of net trading losses on securities that relate to the Corporation’s trading portfolio as of December 31, 2010.2011. Included in net trading gains of $80$94 during 2009,2010, were $38$74 of net trading gains on securities that relate to the Corporation’s trading portfolio as of December 31, 2009.
39
NOTE 5 — AVAILABLE-FOR-SALE INVESTMENT SECURITIES
| 2010 | ||||||||||||||||
| Gross | Gross | |||||||||||||||
| Amortized | Unrealized | Unrealized | Fair | |||||||||||||
| Cost | Gains | Losses | Value | |||||||||||||
| Government sponsored enterprises | $ | 5,394 | $ | 10 | $ | — | $ | 5,404 | ||||||||
| States and political subdivisions | 167,328 | 3,349 | 960 | 169,717 | ||||||||||||
| Auction rate money market preferred | 3,200 | — | 335 | 2,865 | ||||||||||||
| Preferred stocks | 7,800 | — | 864 | 6,936 | ||||||||||||
| Mortgage-backed | 101,096 | 1,633 | 514 | 102,215 | ||||||||||||
| Collateralized mortgage obligations | 44,617 | 103 | 1,133 | 43,587 | ||||||||||||
Total | $ | 329,435 | $ | 5,095 | $ | 3,806 | $ | 330,724 | ||||||||
| 2009 | ||||||||||||||||
| Gross | Gross | |||||||||||||||
| Amortized | Unrealized | Unrealized | Fair | |||||||||||||
| Cost | Gains | Losses | Value | |||||||||||||
| Government sponsored enterprises | $ | 19,386 | $ | 127 | $ | 42 | $ | 19,471 | ||||||||
| States and political subdivisions | 150,688 | 3,632 | 2,590 | 151,730 | ||||||||||||
| Auction rate money market preferred | 3,200 | — | 227 | 2,973 | ||||||||||||
| Preferred stocks | 7,800 | — | 746 | 7,054 | ||||||||||||
| Mortgage-backed | 67,215 | 638 | 119 | 67,734 | ||||||||||||
| Collateralized mortgage obligations | 10,296 | — | 192 | 10,104 | ||||||||||||
Total | $ | 258,585 | $ | 4,397 | $ | 3,916 | $ | 259,066 | ||||||||
| 2010 | 2009 | |||||||
| Pledged to secure borrowed funds | $ | 86,788 | $ | 41,612 | ||||
| Pledged to secure repurchase agreements | 86,381 | 74,605 | ||||||
| Pledged for public deposits and for other purposes necessary or required by law | 14,626 | 20,054 | ||||||
Total | $ | 187,795 | $ | 136,271 | ||||
40
| 2011 | ||||||||||||||||
| Gross | Gross | |||||||||||||||
| Amortized | Unrealized | Unrealized | Fair | |||||||||||||
| Cost | Gains | Losses | Value | |||||||||||||
Government sponsored enterprises | $ | 395 | $ | 2 | $ | — | $ | 397 | ||||||||
States and political subdivisions | 166,832 | 8,157 | 51 | 174,938 | ||||||||||||
Auction rate money market preferred | 3,200 | — | 1,151 | 2,049 | ||||||||||||
Preferred stocks | 6,800 | — | 1,767 | 5,033 | ||||||||||||
Mortgage-backed securities | 140,842 | 2,807 | 47 | 143,602 | ||||||||||||
Collateralized mortgage obligations | 96,545 | 2,556 | — | 99,101 | ||||||||||||
|
|
|
|
|
|
|
| |||||||||
Total | $ | 414,614 | $ | 13,522 | $ | 3,016 | $ | 425,120 | ||||||||
|
|
|
|
|
|
|
| |||||||||
| 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 securities | 101,096 | 1,633 | 514 | 102,215 | ||||||||||||
Collateralized mortgage obligations | 44,617 | 103 | 1,133 | 43,587 | ||||||||||||
|
|
|
|
|
|
|
| |||||||||
Total | $ | 329,435 | $ | 5,095 | $ | 3,806 | $ | 330,724 | ||||||||
|
|
|
|
|
|
|
| |||||||||
| Maturing | Securities | |||||||||||||||||||||||
| After One | After Five | With | ||||||||||||||||||||||
| Due in | Year But | Years But | Variable | |||||||||||||||||||||
| One Year | Within | Within | After | Monthly | ||||||||||||||||||||
| or Less | Five Years | Ten Years | Ten Years | Payments | Total | |||||||||||||||||||
| Government sponsored enterprises | $ | — | $ | 5,000 | $ | 394 | $ | — | $ | — | $ | 5,394 | ||||||||||||
| States and political subdivisions | 14,061 | 33,702 | 85,757 | 33,808 | — | 167,328 | ||||||||||||||||||
| Auction rate money market preferred | — | — | — | — | 3,200 | 3,200 | ||||||||||||||||||
| Preferred stocks | — | — | — | — | 7,800 | 7,800 | ||||||||||||||||||
| Mortgage-backed | — | — | — | — | 101,096 | 101,096 | ||||||||||||||||||
| Collateralized mortgage obligations | — | — | — | — | 44,617 | 44,617 | ||||||||||||||||||
Total amortized cost | $ | 14,061 | $ | 38,702 | $ | 86,151 | $ | 33,808 | $ | 156,713 | $ | 329,435 | ||||||||||||
Fair value | $ | 14,132 | $ | 39,844 | $ | 87,660 | $ | 43,286 | $ | 145,802 | $ | 330,724 | ||||||||||||
| Maturing | Securities With Variable Monthly Payments or | |||||||||||||||||||||||
| After One | After Five | |||||||||||||||||||||||
| Due in | Year But | Years But | Continual | |||||||||||||||||||||
| One Year | Within | Within | After | Call | ||||||||||||||||||||
| or Less | Five Years | Ten Years | Ten Years | Dates | Total | |||||||||||||||||||
Government sponsored enterprises | $ | — | $ | — | $ | 395 | $ | — | $ | — | $ | 395 | ||||||||||||
States and political subdivisions | 8,381 | 34,610 | 87,436 | 36,405 | — | 166,832 | ||||||||||||||||||
Auction rate money market preferred | — | — | — | — | 3,200 | 3,200 | ||||||||||||||||||
Preferred stocks | — | — | — | — | 6,800 | 6,800 | ||||||||||||||||||
Mortgage-backed securities | — | — | — | — | 140,842 | 140,842 | ||||||||||||||||||
Collateralized mortgage obligations | — | — | — | — | 96,545 | 96,545 | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||
Total amortized cost | $ | 8,381 | $ | 34,610 | $ | 87,831 | $ | 36,405 | $ | 247,387 | $ | 414,614 | ||||||||||||
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||
Fair value | $ | 8,441 | $ | 35,904 | $ | 93,586 | $ | 37,404 | $ | 249,785 | $ | 425,120 | ||||||||||||
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||
Expected maturities for government sponsored enterprises and states and political subdivisions may differ from contractual maturities because issuers may have the right to call or prepay obligations.
As auction rate money market preferreds and preferred stocks have continual call dates, they are not reported by a specific maturity group. Because of their variable monthly payments, auction rate money market preferreds, preferred stocks, mortgage-backed securities and collateralized mortgage obligations are not reported by a specific maturity group.
A summary of the activity related to the sale ofavailable-for-sale debt securities is as follows during the years ended December 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 | ||||||
| 2011 | 2010 | 2009 | ||||||||||
Proceeds from sales of securities | $ | 8,877 | $ | 18,303 | $ | 32,204 | ||||||
|
|
|
|
|
| |||||||
Gross realized gains | $ | 3 | $ | 351 | $ | 648 | ||||||
Gross realized losses | — | (3 | ) | — | ||||||||
|
|
|
|
|
| |||||||
Net realized gains | $ | 3 | $ | 348 | $ | 648 | ||||||
|
|
|
|
|
| |||||||
Applicable income tax expense | $ | 1 | $ | 118 | $ | 220 | ||||||
|
|
|
|
|
| |||||||
The cost basis used to determine the realized gains or losses of securities sold was the amortized cost of the individual investment security as of the trade date.
41
| December 31, 2010 | ||||||||||||||||||||
| Less Than Twelve Months | Over Twelve Months | |||||||||||||||||||
| Gross | Gross | Total | ||||||||||||||||||
| Unrealized | Fair | Unrealized | Fair | Unrealized | ||||||||||||||||
| Losses | Value | Losses | Value | Losses | ||||||||||||||||
| States and political subdivisions | $ | 960 | $ | 29,409 | $ | — | $ | — | $ | 960 | ||||||||||
| Auction rate money market preferred | — | — | 335 | 2,865 | 335 | |||||||||||||||
| Preferred stock | — | — | 864 | 2,936 | 864 | |||||||||||||||
| Mortgage-backed | 514 | 38,734 | — | — | 514 | |||||||||||||||
| Collateralized mortgage obligations | 1,133 | 33,880 | — | — | 1,133 | |||||||||||||||
Total | $ | 2,607 | $ | 102,023 | $ | 1,199 | $ | 5,801 | $ | 3,806 | ||||||||||
Number of securities in an unrealized loss position: | 82 | 4 | 86 | |||||||||||||||||
| December 31, 2009 | ||||||||||||||||||||
| Less Than Twelve Months | Over Twelve Months | |||||||||||||||||||
| Gross | Gross | Total | ||||||||||||||||||
| Unrealized | Fair | Unrealized | Fair | Unrealized | ||||||||||||||||
| Losses | Value | Losses | Value | Losses | ||||||||||||||||
| Government sponsored enterprises | $ | 42 | $ | 7,960 | $ | — | $ | — | $ | 42 | ||||||||||
| States and political subdivisions | 2,536 | 11,459 | 54 | 2,267 | 2,590 | |||||||||||||||
| Auction rate money market preferred | — | — | 227 | 2,973 | 227 | |||||||||||||||
| Preferred stocks | — | — | 746 | 3,054 | 746 | |||||||||||||||
| Mortgage-backed | 119 | 25,395 | — | — | 119 | |||||||||||||||
| Collateralized mortgage obligations | 192 | 10,104 | — | — | 192 | |||||||||||||||
Total | $ | 2,889 | $ | 54,918 | $ | 1,027 | $ | 8,294 | $ | 3,916 | ||||||||||
Number of securities in an unrealized loss position: | 39 | 8 | 47 | |||||||||||||||||
| 2011 | ||||||||||||||||||||
| Less Than Twelve Months | Over Twelve Months | |||||||||||||||||||
| Gross | Gross | Total | ||||||||||||||||||
| Unrealized | Fair | Unrealized | Fair | Unrealized | ||||||||||||||||
| Losses | Value | Losses | Value | Losses | ||||||||||||||||
States and political subdivisions | $ | 51 | $ | 1,410 | $ | — | $ | — | $ | 51 | ||||||||||
Auction rate money market preferred | — | — | 1,151 | 2,049 | 1,151 | |||||||||||||||
Preferred stocks | — | — | 1,767 | 5,033 | 1,767 | |||||||||||||||
Mortgage-backed securities | 47 | 24,291 | — | — | 47 | |||||||||||||||
|
|
|
|
|
|
|
|
|
| |||||||||||
Total | $ | 98 | $ | 25,701 | $ | 2,918 | $ | 7,082 | $ | 3,016 | ||||||||||
|
|
|
|
|
|
|
|
|
| |||||||||||
Number of securities in an unrealized loss position: | 6 | 6 | 12 | |||||||||||||||||
|
|
|
|
|
| |||||||||||||||
| 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 stocks | — | — | 864 | 2,936 | 864 | |||||||||||||||
Mortgage-backed securities | 514 | 38,734 | — | — | 514 | |||||||||||||||
Collateralized mortgage obligations | 1,133 | 33,880 | — | — | 1,133 | |||||||||||||||
|
|
|
|
|
|
|
|
|
| |||||||||||
Total | $ | 2,607 | $ | 102,023 | $ | 1,199 | $ | 5,801 | $ | 3,806 | ||||||||||
|
|
|
|
|
|
|
|
|
| |||||||||||
Number of securities in an unrealized loss position: | 82 | 4 | 86 | |||||||||||||||||
|
|
|
|
|
| |||||||||||||||
As a result of market conditions associated with certain auction rate money market preferred investment security instruments, which are classified asavailable-for-salesecurities, and reflected at estimated fair value.$7,800 of the Corporation’s initial investment of $11,000 converted to preferred stocks with debt like characteristics in 2009. 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.
As of December 31, 2011 and December 31, 2010, management conducted an analysis to determine whether all securities currently in an unrealized loss position, including auction rate money market preferred securities and preferred stocks, should be considered other-than-temporarily-impaired (“OTTI”). Such analyses considered, among other factors, the following criteria:
Has the value of the investment declined more than what is deemed to be reasonable based on a risk and maturity adjusted discount rate?
Is the investment credit rating below investment grade?
Is it probable 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?
As of December 31, 2011, the Corporation held an auction rate money market preferred security and preferred stockstocks which declinedcontinued to be in fair valuean unrealized loss position as a result of the securitiessecurities’ interest rates, as they are currently lower than the offering rates of securities with similar characteristics. Despite the limited trading of these securities, managementManagement 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-temporary impairment related to these declines in fair value.
42
NOTE 6 — LOANS AND ALLOWANCE FOR LOAN LOSSES (ALLL)
The Corporation grants commercial, agricultural, consumerresidential, 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 the consumer and residential mortgage loans are secured by various items of property, while commercial loans are secured primarily by real estate, business assets, and personal guarantees; a portion of loans are unsecured.
Loans that management has the intent and ability to hold in its portfolio are reported at their outstanding principal balance adjusted for any charge-offs, the allowance for loans losses, and any deferred fees or costs. Interest income on loans is accrued over the term of the major classificationsloan based on the principal amount outstanding. Loan origination fees and certain direct loan origination costs are capitalized and recognized as a component of interest income over the term of the loan using the level yield method.
The accrual of interest on agricultural, commercial and mortgage loans is as follows astypically discontinued at the time the loan is 90 days or more past due unless the credit is well-secured and in the process of December 31:
| 2010 | 2009 | |||||||
| Mortgage loans on real estate | ||||||||
| Residential 1-4 family | $ | 207,749 | $ | 207,560 | ||||
| Commercial | 239,810 | 224,176 | ||||||
| Agricultural | 44,246 | 38,236 | ||||||
| Construction and land development | 12,250 | 13,268 | ||||||
| Second mortgages | 26,712 | 34,255 | ||||||
| Equity lines of credit | 37,318 | 30,755 | ||||||
| Total mortgage loans | 568,085 | 548,250 | ||||||
| Commercial and agricultural loans | ||||||||
| Commercial | 109,042 | 116,098 | ||||||
| Agricultural production | 27,200 | 26,609 | ||||||
| Total commercial and agricultural loans | 136,242 | 142,707 | ||||||
| Consumer installment loans | 30,977 | 32,359 | ||||||
| Total loans | 735,304 | 723,316 | ||||||
| Less: allowance for loan losses | 12,373 | 12,979 | ||||||
Net loans | $ | 722,931 | $ | 710,337 | ||||
43
on the cash basis, until qualifying for return to accrual status. Loans are returned to accrual status after six months of continuous performance. For impaired loans not classified as nonaccrual, interest income continues to be accrued over the
| Residential | ||||||||||||||||||||||||
| Commercial | Agricultural | Real Estate | Consumer | Unallocated | Total | |||||||||||||||||||
Allowance for loan losses | ||||||||||||||||||||||||
| January 1, 2010 | $ | 5,531 | $ | 731 | $ | 3,590 | $ | 626 | $ | 2,501 | $ | 12,979 | ||||||||||||
| Loans charged off | (3,731 | ) | — | (2,524 | ) | (596 | ) | — | (6,851 | ) | ||||||||||||||
| Recoveries | 452 | 1 | 638 | 297 | — | 1,388 | ||||||||||||||||||
| Provision for loan losses | 3,796 | 301 | 1,494 | 278 | (1,012 | ) | 4,857 | |||||||||||||||||
December 31, 2010 | $ | 6,048 | $ | 1,033 | $ | 3,198 | $ | 605 | $ | 1,489 | $ | 12,373 | ||||||||||||
Allowance for loan losses as of December 31, 2010 | ||||||||||||||||||||||||
| Individually evaluated for impairment | $ | 490 | $ | 558 | $ | 732 | $ | — | $ | — | $ | 1,780 | ||||||||||||
| Collectively evaluated for impairment | 5,558 | 475 | 2,466 | 605 | 1,489 | 10,593 | ||||||||||||||||||
Total | $ | 6,048 | $ | 1,033 | $ | 3,198 | $ | 605 | $ | 1,489 | $ | 12,373 | ||||||||||||
Loans as of December 31, 2010 | ||||||||||||||||||||||||
| Individually evaluated for impairment | $ | 4,890 | $ | 2,629 | $ | 4,866 | $ | — | $ | 12,385 | ||||||||||||||
| Collectively evaluated for impairment | 343,962 | 68,817 | 279,163 | 30,977 | 722,919 | |||||||||||||||||||
Total | $ | 348,852 | $ | 71,446 | $ | 284,029 | $ | 30,977 | $ | 735,304 | ||||||||||||||
| 2009 | 2008 | |||||||
| Balance at beginning of year | $ | 11,982 | $ | 7,301 | ||||
| Allowance of acquired bank | — | 822 | ||||||
| Loans charged off | (6,642 | ) | (6,325 | ) | ||||
| Recoveries | 1,546 | 684 | ||||||
| Provision charged to income | 6,093 | 9,500 | ||||||
Balance at end of year | $ | 12,979 | $ | 11,982 | ||||
Commercial and its recorded investment. Historical loss allocations are calculated at the loan class and segment levels based on a migration analysis of the loan portfolio over the preceding three years.
44
loan-to-value limits of less than 80%. Depending upon the type of loan, past credit history, and current operating results, the Corporation may require the borrower to pledge accounts receivable, inventory, and fixed assets.property and equipment. Personal guarantees are generally required from the owners of closely held corporations, partnerships, and sole proprietorships. In addition, the Corporation requires annual financial statements, prepares cash flow analyses, and reviews credit reports as deemed necessary.
The Corporation offers 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.Corporation. Fixed rate residential mortgage loans with an amortization of 15 years or less may be held in the Corporation’s portfolio, held for future sale, or sold upon origination. Factors used in determining when to sell these mortgages include management’s judgment about the direction of interest rates, the Corporation’s need for fixed rate assets in the management of its interest rate sensitivity, and overall loan demand.
Lending policies generally limit the maximum loan to valueloan-to-value ratio on residential mortgages to 95% of the lower of the appraised value of the property or the purchase price, with the condition that private mortgage insurance is required on loans with loan to value ratios in excess of 80%. Substantially all loans upon origination have a loan to value ratio of less than 80%. Underwriting criteria for residential real estate loans include: evaluation of the borrower’s ability to make monthly payments, the value of the property securing the loan, ensuring the payment of principal, interest, taxes, and hazard insurance does not exceed 28% of a borrower’s gross income, all debt servicing does not exceed 36% of income, acceptable credit reports, verification of employment, income, and financial information. Appraisals are performed by independent appraisers.appraisers and reviewed internally. All mortgage loan requests are reviewed by a mortgage loan committee or through a secondary market automated underwriting system; loans in excess of $400 require the approval of the Bank’s Internal Loan Committee, Board of Directors, or its loan committee.
Consumer loans granted include automobile loans, secured and unsecured personal loans, credit cards, student loans, and overdraft protection related loans. Loans are amortized generally for a period of up to 6 years. The underwriting emphasis is on a borrower’s perceived intent and ability to pay rather than collateral value. No consumer loans are sold to the secondary market.
45
The ALLL is established as losses are estimated to have occurred through a provision for loan losses charged to earnings. Loan losses are charged against the ALLL when management believes the uncollectibility of the loan balance is confirmed. Subsequent recoveries, if any, are credited to the allowance.The ALLL is evaluated on a regular basis by management and is based upon management’s periodic review of the collectibility of the loans in light of historical experience, the nature and volume of the loan portfolio, adverse situations that may affect the borrower’s ability to repay, estimated value of any underlying collateral, and prevailing economic conditions. This evaluation is inherently subjective as it requires estimates that are susceptible to significant revision as more information becomes available.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)Allowance for Loan Losses
A summary of changes in the allowance for loan losses (ALLL) and the recorded investment in loans by segments follows:
| Allowance for Credit Losses and Recorded Investment in Loans | ||||||||||||||||||||||||
| Year Ended December 31, 2011 | ||||||||||||||||||||||||
| Commercial | Agricultural | Residential Real Estate | Consumer | Unallocated | Total | |||||||||||||||||||
Allowance for loan losses | ||||||||||||||||||||||||
January 1, 2011 | $ | 6,048 | $ | 1,033 | $ | 3,198 | $ | 605 | $ | 1,489 | $ | 12,373 | ||||||||||||
Loans charged off | (1,863 | ) | (121 | ) | (2,240 | ) | (552 | ) | — | (4,776 | ) | |||||||||||||
Recoveries | 460 | 1 | 177 | 314 | — | 952 | ||||||||||||||||||
Provision for loan losses | 1,639 | 90 | 1,845 | 266 | (14 | ) | 3,826 | |||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||
December 31, 2011 | $ | 6,284 | $ | 1,003 | $ | 2,980 | $ | 633 | $ | 1,475 | $ | 12,375 | ||||||||||||
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||
Allowance for loan losses as of December 31, 2011 | ||||||||||||||||||||||||
Individually evaluated for impairment | $ | 2,152 | $ | 822 | $ | 1,146 | $ | — | $ | — | $ | 4,120 | ||||||||||||
Collectively evaluated for impairment | 4,132 | 181 | 1,834 | 633 | 1,475 | 8,255 | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||
Total | $ | 6,284 | $ | 1,003 | $ | 2,980 | $ | 633 | $ | 1,475 | $ | 12,375 | ||||||||||||
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||
Loans as of December 31, 2011 | ||||||||||||||||||||||||
Individually evaluated for impairment | $ | 14,097 | $ | 3,384 | $ | 7,664 | $ | 105 | $ | 25,250 | ||||||||||||||
Collectively evaluated for impairment | 351,617 | 71,261 | 270,696 | 31,467 | 725,041 | |||||||||||||||||||
|
|
|
|
|
|
|
|
|
| |||||||||||||||
Total | $ | 365,714 | $ | 74,645 | $ | 278,360 | $ | 31,572 | $ | 750,291 | ||||||||||||||
|
|
|
|
|
|
|
|
|
| |||||||||||||||
Allowance for Credit Losses and Recorded Investment in Loans Allowance for loan losses January 1, 2010 Loans charged off Recoveries Provision for loan losses December 31, 2010 Allowance for loan losses as of December 31, 2010 Individually evaluated for impairment Collectively evaluated for impairment Total Loans as of December 31, 2010 Individually evaluated for impairment Collectively evaluated for impairment Total Year Ended December 31, 2010 Commercial Agricultural Residential
Real Estate Consumer Unallocated Total $ 5,531 $ 731 $ 3,590 $ 626 $ 2,501 $ 12,979 (3,731 ) — (2,524 ) (596 ) — (6,851 ) 452 1 638 297 — 1,388 3,796 301 1,494 278 (1,012 ) 4,857 $ 6,048 $ 1,033 $ 3,198 $ 605 $ 1,489 $ 12,373 $ 490 $ 558 $ 732 $ — $ — $ 1,780 5,558 475 2,466 605 1,489 10,593 $ 6,048 $ 1,033 $ 3,198 $ 605 $ 1,489 $ 12,373 $ 4,939 $ 2,196 $ 4,865 $ 48 $ 12,048 343,913 69,250 279,164 30,929 723,256 $ 348,852 $ 71,446 $ 284,029 $ 30,977 $ 735,304
Following is a summary of changes in the ALLL for the year ended December 31, 2009:
January 1, 2009 | $ | 11,982 | ||
Loans charged off | (6,642 | ) | ||
Recoveries | 1,546 | |||
Provision for loan losses | 6,093 | |||
|
| |||
December 31, 2009 | $ | 12,979 | ||
|
|
Credit Quality IndicatorsAs
The following table displays the credit quality indicators for commercial and agricultural credit exposures based on internally assigned credit ratings as of December 31, 2010
| Commercial | Agricultural | |||||||||||||||||||||||
| Real Estate | Other | Total | Real Estate | Other | Total | |||||||||||||||||||
| Rating | ||||||||||||||||||||||||
| 2 — High quality | $ | 10,995 | $ | 13,525 | $ | 24,520 | $ | 3,792 | $ | 1,134 | $ | 4,926 | ||||||||||||
| 3 — High satisfactory | 74,912 | 30,322 | 105,234 | 11,247 | 3,235 | 14,482 | ||||||||||||||||||
| 4 — Low satisfactory | 119,912 | 57,403 | 177,315 | 22,384 | 14,862 | 37,246 | ||||||||||||||||||
| 5 — Special mention | 19,560 | 6,507 | 26,067 | 4,169 | 3,356 | 7,525 | ||||||||||||||||||
| 6 — Substandard | 10,234 | 1,104 | 11,338 | 2,654 | 4,613 | 7,267 | ||||||||||||||||||
| 7 — Vulnerable | 3,339 | 54 | 3,393 | — | — | — | ||||||||||||||||||
| 8 — Doubtful | 858 | 127 | 985 | — | — | — | ||||||||||||||||||
Total | $ | 239,810 | $ | 109,042 | $ | 348,852 | $ | 44,246 | $ | 27,200 | $ | 71,446 | ||||||||||||
| 2011 | ||||||||||||||||||||||||
| Commercial | Agricultural | |||||||||||||||||||||||
| Real Estate | Other | Total | Real Estate | Other | Total | |||||||||||||||||||
Rating | ||||||||||||||||||||||||
2 — High quality | $ | 11,113 | $ | 11,013 | $ | 22,126 | $ | 3,583 | $ | 1,390 | $ | 4,973 | ||||||||||||
3 — High satisfactory | 90,064 | 29,972 | 120,036 | 11,154 | 5,186 | 16,340 | ||||||||||||||||||
4 — Low satisfactory | 118,611 | 57,572 | 176,183 | 24,253 | 15,750 | 40,003 | ||||||||||||||||||
5 — Special mention | 15,482 | 4,200 | 19,682 | 3,863 | 2,907 | 6,770 | ||||||||||||||||||
6 — Substandard | 19,017 | 4,819 | 23,836 | 1,640 | 4,314 | 5,954 | ||||||||||||||||||
7 — Vulnerable | 187 | — | 187 | — | — | — | ||||||||||||||||||
8 — Doubtful | 3,621 | 43 | 3,664 | 190 | 415 | 605 | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||
Total | $ | 258,095 | $ | 107,619 | $ | 365,714 | $ | 44,683 | $ | 29,962 | $ | 74,645 | ||||||||||||
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||
| 2010 | ||||||||||||||||||||||||
| Commercial | Agricultural | |||||||||||||||||||||||
| Real Estate | Other | Total | Real Estate | Other | Total | |||||||||||||||||||
Rating | ||||||||||||||||||||||||
2 — High quality | $ | 10,995 | $ | 13,525 | $ | 24,520 | $ | 3,792 | $ | 1,134 | $ | 4,926 | ||||||||||||
3 — High satisfactory | 74,912 | 30,322 | 105,234 | 11,247 | 3,235 | 14,482 | ||||||||||||||||||
4 — Low satisfactory | 119,912 | 57,403 | 177,315 | 22,384 | 14,862 | 37,246 | ||||||||||||||||||
5 — Special mention | 19,560 | 6,507 | 26,067 | 4,169 | 3,356 | 7,525 | ||||||||||||||||||
6 — Substandard | 10,234 | 1,104 | 11,338 | 2,654 | 4,613 | 7,267 | ||||||||||||||||||
7 — Vulnerable | 3,339 | 54 | 3,393 | — | — | — | ||||||||||||||||||
8 — Doubtful | 858 | 127 | 985 | — | — | — | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||
Total | $ | 239,810 | $ | 109,042 | $ | 348,852 | $ | 44,246 | $ | 27,200 | $ | 71,446 | ||||||||||||
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||
Internally assigned risk ratings are reviewed, at a minimum, when loans are renewed or when management has knowledge of improvements or deterioration of the credit quality of individual credits. Descriptions of the internally assigned risk ratings for commercial and agricultural loans are as follows:
1. EXCELLENT — Substantially Risk Free
Credit has strong financial condition and solid earnings history, characterized by:
High liquidity, strong cash flow, low leverage.
Unquestioned ability | ||
Experienced management, with amanagement succession in place.
Secured by cash.
2.HIGH QUALITY — Limited Risk
Credit with sound financial condition and has a positive trend in earnings supplemented by:
Favorable liquidity and leverage ratios.
Ability to meet all obligations when due. | ||
46
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.
3. HIGH SATISFACTORY — Reasonable Risk
Working capital adequate | ||
Cash flow sufficient to pay debts as scheduled.
Management experience and depth appear favorable.
Loan performing according to terms.
If loan is secured, collateral is acceptable and loan is fully protected.
4. LOW SATISFACTORY — Acceptable Risk
Credit with bankable risks, although some signs of weaknesses are shown:
Would include most start-up businesses.
Occasional instances of trade slowness or repayment delinquency — may have been 10-30 days slow within the past year.
Management’s abilities are apparent, yet unproven.
Weakness in primary source of repayment with adequate secondary source of repayment.
Loan structure generally in accordance with policy.
If secured, loan collateral coverage is marginal.
Adequate cash flow to service debt, but coverage is low.
To be classified as less than satisfactory, only one of the following criteria must be met.
5. SPECIAL MENTION — Criticized
Credit constitutes an undue and unwarranted credit risk but not to the point of justifying a classification of substandard. The credit risk may be relatively minor yet constitute an unwarranted risk in light of the circumstances surrounding a specific loan:
Downward trend in sales, profit levels and margins.
Impaired working capital position.
Cash flow is strained in order to meet debt repayment. Loan delinquency (30-60 days) and overdrafts may occur. | ||
47
Shrinking equity cushion.
Diminishing primary source of repayment and questionable secondary source.
Management abilities are questionable.
Weak industry conditions.
Litigation pending against the borrower.
Collateral / guaranty offers limited protection.
Negative debt service coverage, however the credit is well collateralized and payments are current.
6. SUBSTANDARD — Classified
Sustained losses have severely eroded the equity and cash flow.
Deteriorating liquidity.
Serious management problems or internal fraud.
Original repayment terms liberalized.
Likelihood of bankruptcy.
Inability to access other funding sources.
Reliance on secondary source of repayment.
Litigation filed against borrower.
Collateral provides little or no value.
Requires excessive attention of the loan officer.
Borrower is uncooperative with loan officer.
7. VULNERABLE — Classified
Credit is considered “Substandard” and warrants placing on nonaccrual. Risk of loss is being evaluated and exit strategy options are under review. Other characteristics that may apply:
Insufficient cash flow to service debt.
Minimal or no payments being received.
Limited options available to avoid the collection process.
Transition status, expect action will take place to collect loan without immediate progress being made.
8. DOUBTFUL — Workout
Credit has all the weaknesses inherent in a substandard“Substandard” loan with the added characteristic that collectionand/or liquidation is pending. The possibility of a loss is extremely high, but its classification as a loss is deferred until liquidation procedures are completed, or reasonably estimable. Other characteristics that may apply:
Normal operations are severely diminished or have ceased.
Seriously impaired cash flow.
Original repayment terms materially altered. Secondary source of repayment is inadequate. | ||
48
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.
9. LOSS — Charge off
Liquidation or reorganization under bankruptcy, with poor prospects of collection.
Fraudulently overstated assets and/or earnings.
Collateral has marginal or no value.
Debtor cannot be located.
Over 120 days delinquent.
The Corporation’s primary credit quality indicators for residential real estate and consumer loans is the individual loan’s past due aging.
| Accruing Interest | Total | |||||||||||||||||||||||
| and Past Due: | Past Due | |||||||||||||||||||||||
| 30-89 | 90 Days | and | ||||||||||||||||||||||
| Days | or More | Nonaccrual | Nonaccrual | Current | Total | |||||||||||||||||||
| Commercial | ||||||||||||||||||||||||
| Commercial real estate | $ | 4,814 | $ | 125 | $ | 4,001 | $ | 8,940 | $ | 230,870 | $ | 239,810 | ||||||||||||
| Commercial other | 381 | — | 139 | 520 | 108,522 | 109,042 | ||||||||||||||||||
| Total commercial | 5,195 | 125 | 4,140 | 9,460 | 339,392 | 348,852 | ||||||||||||||||||
| Agricultural | ||||||||||||||||||||||||
| Agricultural real estate | 92 | — | — | 92 | 44,154 | 44,246 | ||||||||||||||||||
| Agricultural other | 4 | 50 | — | 54 | 27,146 | 27,200 | ||||||||||||||||||
| Total agricultural | 96 | 50 | — | 146 | 71,300 | 71,446 | ||||||||||||||||||
| Residential mortgage | ||||||||||||||||||||||||
| Senior liens | 5,265 | 310 | 1,421 | 6,996 | 213,003 | 219,999 | ||||||||||||||||||
| Junior liens | 476 | — | 49 | 525 | 26,187 | 26,712 | ||||||||||||||||||
| Home equity lines of credit | 598 | — | — | 598 | 36,720 | 37,318 | ||||||||||||||||||
| Total residential mortgage | 6,339 | 310 | 1,470 | 8,119 | 275,910 | 284,029 | ||||||||||||||||||
| Consumer | ||||||||||||||||||||||||
| Secured | 298 | — | — | 298 | 24,781 | 25,079 | ||||||||||||||||||
| Unsecured | 10 | 1 | — | 11 | 5,887 | 5,898 | ||||||||||||||||||
| Total consumer | 308 | 1 | — | 309 | 30,668 | 30,977 | ||||||||||||||||||
Total | $ | 11,938 | $ | 486 | $ | 5,610 | $ | 18,034 | $ | 717,270 | $ | 735,304 | ||||||||||||
| �� | ||||||||||||||||||||||||
December 31, 2009 | $ | 10,305 | $ | 768 | $ | 8,522 | $ | 19,595 | $ | 703,721 | $ | 723,316 | ||||||||||||
December 31, 2008 | $ | 14,906 | $ | 1,251 | $ | 11,175 | $ | 27,332 | $ | 708,053 | $ | 735,385 | ||||||||||||
49
| December 31, 2010 | 2010 Year to Date | |||||||||||||||||||
| Unpaid | Average | Interest | ||||||||||||||||||
| Outstanding | Principal | Valuation | Outstanding | Income | ||||||||||||||||
| Balance | Balance | Allowance | Balance | Recognized | ||||||||||||||||
Impaired loans with a valuation allowance | ||||||||||||||||||||
| Commercial real estate | $ | 3,010 | $ | 4,110 | $ | 472 | $ | 2,482 | $ | 90 | ||||||||||
| Commercial other | 18 | 18 | 18 | 259 | 1 | |||||||||||||||
| Agricultural other | 2,196 | 2,196 | 558 | 1,098 | 143 | |||||||||||||||
| Residential mortgage senior liens | 4,292 | 5,236 | 698 | 5,045 | 187 | |||||||||||||||
| Residential mortgage junior liens | 172 | 250 | 34 | 205 | 7 | |||||||||||||||
| Consumer | — | — | — | 12 | — | |||||||||||||||
Total impaired loans with a valuation allowance | $ | 9,688 | $ | 11,810 | $ | 1,780 | $ | 9,101 | $ | 428 | ||||||||||
Impaired loans without a valuation allowance | ||||||||||||||||||||
| Commercial real estate | $ | 1,742 | $ | 2,669 | $ | 2,738 | $ | 147 | ||||||||||||
| Commercial other | 169 | 269 | 145 | 20 | ||||||||||||||||
| Agricultural real estate | — | — | 106 | — | ||||||||||||||||
| Residential mortgage senior liens | 401 | 501 | 201 | 26 | ||||||||||||||||
| Home equity lines of credit | — | — | 8 | — | ||||||||||||||||
| Consumer secured | 48 | 85 | 55 | 5 | ||||||||||||||||
Total impaired loans without a valuation allowance | $ | 2,360 | $ | 3,524 | $ | 3,253 | $ | 198 | ||||||||||||
Impaired loans | ||||||||||||||||||||
| Commercial | $ | 4,939 | $ | 7,066 | $ | 490 | $ | 5,624 | $ | 258 | ||||||||||
| Agricultural | 2,196 | 2,196 | 558 | 1,204 | 143 | |||||||||||||||
| Residential mortgage | 4,865 | 5,987 | 732 | 5,459 | 220 | |||||||||||||||
| Consumer | 48 | 85 | — | 67 | 5 | |||||||||||||||
Total impaired loans | $ | 12,048 | $ | 15,334 | $ | 1,780 | $ | 12,354 | $ | 626 | ||||||||||
| 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 | ||||
50
| 2010 | 2009 | 2008 | ||||||||||
| Total restructured loans | 5,763 | $ | 4,977 | $ | 4,550 | |||||||
| 2011 | ||||||||||||||||||||||||
| Accruing Interest and Past Due: | Nonaccrual | Total Past Due and Nonaccrual | Current | Total | ||||||||||||||||||||
| 30-89 | 90 Days | |||||||||||||||||||||||
| Days | or More | |||||||||||||||||||||||
Commercial | ||||||||||||||||||||||||
Commercial real estate | $ | 1,721 | $ | 364 | $ | 4,176 | $ | 6,261 | $ | 251,834 | $ | 258,095 | ||||||||||||
Commercial other | 426 | 3 | 25 | 454 | 107,165 | 107,619 | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||
Total commercial | 2,147 | 367 | 4,201 | 6,715 | 358,999 | 365,714 | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||
Agricultural | ||||||||||||||||||||||||
Agricultural real estate | — | 99 | 189 | 288 | 44,395 | 44,683 | ||||||||||||||||||
Agricultural other | 2 | — | 415 | 417 | 29,545 | 29,962 | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||
Total agricultural | 2 | 99 | 604 | 705 | 73,940 | 74,645 | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||
Residential mortgage | ||||||||||||||||||||||||
Senior liens | 3,004 | 124 | 1,292 | 4,420 | 213,181 | 217,601 | ||||||||||||||||||
Junior liens | 235 | 40 | 94 | 369 | 20,877 | 21,246 | ||||||||||||||||||
Home equity lines of credit | 185 | 125 | 198 | 508 | 39,005 | 39,513 | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||
Total residential mortgage | 3,424 | 289 | 1,584 | 5,297 | 273,063 | 278,360 | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||
Consumer | ||||||||||||||||||||||||
Secured | 158 | 5 | — | 163 | 26,011 | 26,174 | ||||||||||||||||||
Unsecured | 23 | — | — | 23 | 5,375 | 5,398 | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||
Total consumer | 181 | 5 | — | 186 | 31,386 | 31,572 | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||
Total | $ | 5,754 | $ | 760 | $ | 6,389 | $ | 12,903 | $ | 737,388 | $ | 750,291 | ||||||||||||
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||
Commercial Commercial real estate Commercial other Total commercial Agricultural Agricultural real estate Agricultural other Total agricultural Residential mortgage Senior liens Junior liens Home equity lines of credit Total residential mortgage Consumer Secured Unsecured Total consumer Total December 31, 2009 2010 Accruing Interest
and Past Due: Nonaccrual Total
Past Due
and
Nonaccrual Current Total 30-89 90 Days Days or More $ 4,814 $ 125 $ 4,001 $ 8,940 $ 230,870 $ 239,810 381 — 139 520 108,522 109,042 5,195 125 4,140 9,460 339,392 348,852 92 — — 92 44,154 44,246 4 50 — 54 27,146 27,200 96 50 — 146 71,300 71,446 5,265 310 1,421 6,996 213,003 219,999 476 — 49 525 26,187 26,712 598 — — 598 36,720 37,318 6,339 310 1,470 8,119 275,910 284,029 298 — — 298 24,781 25,079 10 1 — 11 5,887 5,898 308 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
Impaired Loans
As a result of adopting the amendments in ASU No. 2011-02, the Corporation reassessed all loan restructurings that occurred on or after January 1, 2011 for identification as troubled debt restructurings (TDR’s). The Corporation identified as TDR’s certain loans for which the allowance for loan losses had previously been measured under a general allowance for loan losses methodology. Upon identifying those loans as TDR’s, the Corporation classified them as impaired. The amendments in ASU No. 2011-02 require retrospective application of the impairment measurement guidance for those loans newly identified as impaired during the period. The Corporation’s recorded investment in loans for which the allowance for credit losses was previously measured under a general allowance for credit losses methodology and are committednow impaired was $5,136, with a specific valuation allowance of $1,022 as of December 31, 2011.
Loans may be classified as impaired if they meet one or more of the following criteria:
1. There has been a chargeoff of its principal balance (in whole or in part);
2. The loan has been classified as a TDR; or
3. The loan is in nonaccrual status.
Impairment is measured on a loan by loan basis for commercial, commercial real estate loans, agricultural, or agricultural mortgage 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 be advanced in connection with impairedsell, if the loan is collateral dependent. Large groups of smaller balance homogeneous 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.
The following table summarizesis a summary of information pertaining to impaired loans as of and for the carrying value and changes therein of mortgage servicing rights includedyear ended December 31:
| 2011 | 2011 Year to Date | |||||||||||||||||||
| Outstanding Balance | Unpaid Principal Balance | Valuation Allowance | Average Outstanding Balance | Interest Income Recognized | ||||||||||||||||
Impaired loans with a valuation allowance | ||||||||||||||||||||
Commercial real estate | $ | 5,014 | $ | 5,142 | $ | 1,881 | $ | 4,012 | $ | 247 | ||||||||||
Commercial other | 734 | 734 | 271 | 376 | 25 | |||||||||||||||
Agricultural real estate | — | — | — | 9 | — | |||||||||||||||
Agricultural other | 2,689 | 2,689 | 822 | 2,443 | 138 | |||||||||||||||
Residential mortgage senior liens | 7,269 | 8,825 | 1,111 | 5,781 | 331 | |||||||||||||||
Residential mortgage junior liens | 195 | 260 | 35 | 184 | 11 | |||||||||||||||
|
|
|
|
|
|
|
|
|
| |||||||||||
Total impaired loans with a valuation allowance | 15,901 | 17,650 | 4,120 | 12,805 | 752 | |||||||||||||||
|
|
|
|
|
|
|
|
|
| |||||||||||
Impaired loans without a valuation allowance | ||||||||||||||||||||
Commercial real estate | 7,984 | 10,570 | 4,863 | 375 | ||||||||||||||||
Commercial other | 365 | 460 | 267 | 10 | ||||||||||||||||
Agricultural real estate | 190 | 190 | 180 | — | ||||||||||||||||
Agricultural other | 505 | 625 | 253 | 18 | ||||||||||||||||
Residential mortgage senior liens | 2 | 2 | 202 | — | ||||||||||||||||
Home equity lines of credit | 198 | 498 | 99 | 12 | ||||||||||||||||
Consumer secured | 105 | 114 | 77 | 4 | ||||||||||||||||
|
|
|
|
|
|
|
| |||||||||||||
Total impaired loans without a valuation allowance | 9,349 | 12,459 | 5,941 | 419 | ||||||||||||||||
|
|
|
|
|
|
|
|
|
| |||||||||||
Impaired loans | ||||||||||||||||||||
Commercial | 14,097 | 16,906 | 2,152 | 9,518 | 657 | |||||||||||||||
Agricultural | 3,384 | 3,504 | 822 | 2,885 | 156 | |||||||||||||||
Residential mortgage | 7,664 | 9,585 | 1,146 | 6,266 | 354 | |||||||||||||||
Consumer | 105 | 114 | — | 77 | 4 | |||||||||||||||
|
|
|
|
|
|
|
|
|
| |||||||||||
Total impaired loans | $ | 25,250 | $ | 30,109 | $ | 4,120 | $ | 18,746 | $ | 1,171 | ||||||||||
|
|
|
|
|
|
|
|
|
| |||||||||||
Impaired loans with a valuation allowance Commercial real estate Commercial other Agricultural other Residential mortgage senior liens Residential mortgage junior liens Consumer Total impaired loans with a valuation allowance Impaired loans without a valuation allowance Commercial real estate Commercial other Agricultural real estate Residential mortgage senior liens Home equity lines of credit Consumer secured Total impaired loans without a valuation allowance Impaired loans Commercial Agricultural Residential mortgage Consumer Total impaired loans 2010 2010 Year to Date Outstanding
Balance Unpaid
Principal
Balance Valuation
Allowance Average
Outstanding
Balance Interest
Income
Recognized $ 3,010 $ 4,110 $ 472 $ 2,482 $ 90 18 18 18 259 1 2,196 2,196 558 1,098 143 4,292 5,236 698 5,045 187 172 250 34 205 7 — — — 12 — 9,688 11,810 1,780 9,101 428 1,742 2,669 2,738 147 169 269 145 20 — — 106 — 401 501 201 26 — — 8 — 48 85 55 5 2,360 3,524 3,253 198 4,939 7,066 490 5,624 258 2,196 2,196 558 1,204 143 4,865 5,987 732 5,459 220 48 85 — 67 5 $ 12,048 $ 15,334 $ 1,780 $ 12,354 $ 626
| 2009 | ||||
Impaired loans with a valuation allowance | $ | 3,757 | ||
Impaired loans without a valuation allowance | 8,897 | |||
|
| |||
Total impaired loans | $ | 12,654 | ||
|
| |||
Valuation allowance related to impaired loans | $ | 612 | ||
Year to date average outstanding balance of impaired loans | $ | 13,249 | ||
Year to date interest income recognized on impared loans | $ | 340 | ||
The Corporation had committed to advance $243 in Other Assetsconnection with impaired loans, which include TDR’s, as of December 31:
| 2010 | 2009 | 2008 | ||||||||||
| Balance at beginning of year | $ | 2,620 | $ | 2,105 | $ | 2,198 | ||||||
| Mortgage servicing rights capitalized | 4,445 | 4,370 | 3,079 | |||||||||
| Accumulated amortization | (4,250 | ) | (3,706 | ) | (3,016 | ) | ||||||
| Impairment valuation allowance | (148 | ) | (149 | ) | (156 | ) | ||||||
Balance at end of year | $ | 2,667 | $ | 2,620 | $ | 2,105 | ||||||
| Impairment losses (reversed) recognized | $ | (1 | ) | $ | (7 | ) | $ | 115 | ||||
Troubled Debt Restructurings
Loan modifications are considered to be TDR’s when the modification includes terms outside of normal lending practices to a borrower who is experiencing financial difficulties.
Typical concessions granted include, but are not limited to:
1. Agreeing to interest rates below prevailing market rates for debt with similar risk characteristics.
2. Extending the amortization period beyond typical lending guidelines for debt with similar risk characteristics.
3. Forbearance of principal.
4. Forbearance of accrued interest.
To determine if a borrower is experiencing financial difficulties, the Corporation considers if:
1. The borrower is currently in default on any of their debt.
2. ��It is likely that the borrower would default on any of their debt if the concession was not granted.
3. The borrower’s cash flow was sufficient 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 a going concern (if the entity is a business).
The following is a summary of information pertaining to TDR’s during 2011:
| Number of Loans | Pre- Modification Recorded Investment | Post- Modification Recorded Investment | ||||||||||
Commercial | ||||||||||||
Commercial real estate | 1 | $ | 408 | $ | 408 | |||||||
Commercial other | 42 | 12,575 | 12,132 | |||||||||
|
|
|
|
|
| |||||||
Total commercial | 43 | 12,983 | 12,540 | |||||||||
|
|
|
|
|
| |||||||
Agricultural other | 8 | 1,321 | 1,321 | |||||||||
Residential mortgage senior liens | 36 | 3,915 | 3,865 | |||||||||
Consumer | ||||||||||||
Secured | 7 | 69 | 69 | |||||||||
Unsecured | 2 | 20 | 20 | |||||||||
|
|
|
|
|
| |||||||
Total consumer | 9 | 89 | 89 | |||||||||
|
|
|
|
|
| |||||||
Total | $ | 96 | $ | 18,308 | $ | 17,815 | ||||||
|
|
|
|
|
| |||||||
The following tables summarize concessions granted by the Corporation to borrowers in financial difficulties during 2011:
| 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 | |||||||||||||
Commercial | ||||||||||||||||
Commercial real estate | 1 | $ | 408 | — | $ | — | ||||||||||
Commercial other | 38 | 9,932 | 4 | 2,643 | ||||||||||||
|
|
|
|
|
|
|
| |||||||||
Total commercial | 39 | 10,340 | 4 | 2,643 | ||||||||||||
|
|
|
|
|
|
|
| |||||||||
Agricultural other | 8 | 1,321 | — | — | ||||||||||||
Residential mortgage Senior liens | 19 | 2,161 | 17 | 1,754 | ||||||||||||
Consumer | ||||||||||||||||
Secured | 6 | 65 | 1 | 4 | ||||||||||||
Unsecured | — | — | 2 | 20 | ||||||||||||
|
|
|
|
|
|
|
| |||||||||
Total consumer | 6 | 65 | 3 | 24 | ||||||||||||
|
|
|
|
|
|
|
| |||||||||
Total | 72 | $ | 13,887 | 24 | $ | 4,421 | ||||||||||
|
|
|
|
|
|
|
| |||||||||
The Corporation recorded servicing fee revenuedid not restructure any loans through the forbearance of $760, $724, and $627 related to residential mortgageprincipal or accrued interest during 2011.
Based on the Corporation’s historical loss experience, losses associated with TDR’s are not significantly different than other impaired loans serviced for others duringwithin the years endedsame loan segment. As such, TDR’s, including TDR’s that have been modified in the past 12 months that subsequently defaulted, are analyzed in the same manner as other impaired loans within their respective loan segment. The Corporation had no loans that were modified as troubled debt restructurings since January 1, 2010 that subsequently defaulted.
The following is a summary of TDR loan balances as of December 31, 2010, 2009, and 2008, respectively.
| 2011 | 2010 | 2009 | ||||||||||
Troubled debt restructurings | $ | 18,756 | $ | 5,763 | $ | 4,977 | ||||||
NOTE 7 — PREMISES AND EQUIPMENT
A summary of premises and equipment at December 31 follows:
| 2010 | 2009 | |||||||
| Land | $ | 4,694 | $ | 4,614 | ||||
| Buildings and improvements | 21,502 | 20,478 | ||||||
| Furniture and equipment | 25,822 | 24,284 | ||||||
| Total | 52,018 | 49,376 | ||||||
| Less: accumulated depreciation | 27,391 | 25,459 | ||||||
Premises and equipment, net | $ | 24,627 | $ | 23,917 | ||||
| 2011 | 2010 | |||||||
Land | $ | 5,174 | $ | 4,694 | ||||
Buildings and improvements | 22,397 | 21,502 | ||||||
Furniture and equipment | 26,926 | 25,822 | ||||||
|
|
|
| |||||
Total | 54,497 | 52,018 | ||||||
Less: accumulated depreciation | 29,871 | 27,391 | ||||||
|
|
|
| |||||
Premises and equipment, net | $ | 24,626 | $ | 24,627 | ||||
|
|
|
| |||||
Depreciation expense amounted to $2,521, $2,522 and $2,349 in 2011, 2010, and $2,171 in 2010, 2009, and 2008, respectively.
51
NOTE 8 — GOODWILL AND OTHER INTANGIBLE ASSETS
Identifiable intangible assets at year end were as follows:
| 2010 | ||||||||||||
| Gross | Net | �� | ||||||||||
| Intangible | Accumulated | Intangible | ||||||||||
| Assets | Amortization | Assets | ||||||||||
| Core deposit premium resulting from acquisitions | 5,373 | 3,900 | 1,473 | |||||||||
Total | $ | 5,373 | $ | 3,900 | $ | 1,473 | ||||||
| 2009 | ||||||||||||
| Gross | Net | |||||||||||
| Intangible | Accumulated | Intangible | ||||||||||
| Assets | Amortization | Assets | ||||||||||
| Core deposit premium resulting from acquisitions | 5,373 | 3,562 | 1,811 | |||||||||
Total | $ | 5,373 | $ | 3,562 | $ | 1,811 | ||||||
| 2011 | ||||||||||||
| Gross Intangible Assets | Accumulated Amortization | Net Intangible Assets | ||||||||||
Core deposit premium resulting from acquisitions | $ | 5,373 | $ | 4,199 | $ | 1,174 | ||||||
| 2010 | ||||||||||||
| Gross Intangible Assets | Accumulated Amortization | Net Intangible Assets | ||||||||||
Core deposit premium resultingfrom acquisitions | $ | 5,373 | $ | 3,900 | $ | 1,473 | ||||||
Amortization expense associated with identifiable intangible assets was $299, $338, and $375 in 2011, 2010, and $415 in 2010, 2009, and 2008, respectively.
Estimated amortization expense associated with identifiable intangibles for each of the next five years succeeding December 31, 2010,2011, and thereafter is as follows:
Year | Amount | |||
| 2011 | $ | 299 | ||
| 2012 | 260 | |||
| 2013 | 221 | |||
| 2014 | 183 | |||
| 2015 | 145 | |||
| Thereafter | 365 | |||
| $ | 1,473 | |||
Year | Amount | |||
2012 | $ | 260 | ||
2013 | 221 | |||
2014 | 183 | |||
2015 | 145 | |||
2016 | 106 | |||
Thereafter | 259 | |||
|
| |||
| $ | 1,174 | |||
|
| |||
NOTE 9 — DEPOSITS
Scheduled maturities of time deposits for the next five years, and thereafter, are as follows:
Year | Amount | |||
| 2011 | $ | 216,927 | ||
| 2012 | 113,999 | |||
| 2013 | 44,269 | |||
| 2014 | 31,414 | |||
| 2015 | 39,474 | |||
| Thereafter | 6,278 | |||
| $ | 452,361 | |||
Year | Amount | |||
2012 | $ | 265,299 | ||
2013 | 63,290 | |||
2014 | 46,802 | |||
2015 | 55,493 | |||
2016 | 43,601 | |||
Thereafter | 7,052 | |||
|
| |||
| $ | 481,537 | |||
|
| |||
Interest expense on time deposits greater than $100 was $4,302 in 2011, $4,427 in 2010, and $5,246 in 2009, and $6,525 in 2008.
522009.
NOTE 10 — BORROWED FUNDS
| 2010 | 2009 | |||||||||||||||
| Amount | Rate | Amount | Rate | |||||||||||||
| Federal Home Loan Bank advances | $ | 113,423 | 3.64 | % | $ | 127,804 | 4.11 | % | ||||||||
| Securities sold under agreements to repurchase | ||||||||||||||||
| without stated maturity dates | 45,871 | 0.25 | % | 37,797 | 0.30 | % | ||||||||||
| Securities sold under agreements to repurchase | ||||||||||||||||
| with stated maturity dates | 19,623 | 3.01 | % | 20,000 | 3.72 | % | ||||||||||
| Federal funds purchased | 16,000 | 0.60 | % | — | — | |||||||||||
| Federal Reserve Bank discount window advance | — | — | 7,500 | 0.75 | % | |||||||||||
Total | $ | 194,917 | 2.53 | % | $ | 193,101 | 3.19 | % | ||||||||
| 2011 | 2010 | |||||||||||||||
| Amount | Rate | Amount | Rate | |||||||||||||
Federal Home Loan Bank advances | $ | 142,242 | 3.16 | % | $ | 113,423 | 3.64 | % | ||||||||
Securities sold under agreements to repurchase without stated maturity dates | 57,198 | 0.25 | % | 45,871 | 0.25 | % | ||||||||||
Securities sold under agreements to repurchase with stated maturity dates | 16,696 | 3.51 | % | 19,623 | 3.28 | % | ||||||||||
Federal funds purchased | — | — | 16,000 | 0.60 | % | |||||||||||
|
|
|
|
|
|
|
| |||||||||
Total | $ | 216,136 | 2.42 | % | $ | 194,917 | 2.56 | % | ||||||||
|
|
|
|
|
|
|
| |||||||||
The Federal Home Loan Bank borrowings are collateralized by U.S. government and federal agency securities and a blanket lien on all qualified 1-to-4 family mortgage loans and U.S. government and federal agency securities.loans. Advances are also secured by FHLB stock owned by the Corporation.
The maturity and weighted average interest rates of FHLB advances are as follows as of December 31:
| 2010 | 2009 | |||||||||||||||
| Amount | Rate | Amount | Rate | |||||||||||||
| Fixed rate advances due 2010 | $ | — | — | $ | 28,320 | 4.52 | % | |||||||||
| One year putable advances due 2010 | — | — | 6,000 | 5.31 | % | |||||||||||
| Fixed rate advances due 2011 | 10,086 | 3.96 | % | 10,206 | 3.96 | % | ||||||||||
| One year putable advances due 2011 | 1,000 | 4.75 | % | 1,000 | 4.75 | % | ||||||||||
| Fixed rate advances due 2012 | 17,000 | 2.97 | % | 17,000 | 2.97 | % | ||||||||||
| One year putable advances due 2012 | 15,000 | 4.10 | % | 15,000 | 4.10 | % | ||||||||||
| Fixed rate advances due 2013 | 5,337 | 4.14 | % | 5,278 | 4.14 | % | ||||||||||
| One year putable advances due 2013 | 5,000 | 3.15 | % | 5,000 | 3.15 | % | ||||||||||
| Fixed rate advances due 2014 | 25,000 | 3.16 | % | 15,000 | 3.63 | % | ||||||||||
| Fixed rate advances due 2015 | 25,000 | 4.63 | % | 25,000 | 4.63 | % | ||||||||||
| Fixed rate advances due 2017 | 10,000 | 2.35 | % | — | — | |||||||||||
Total | $ | 113,423 | 3.64 | % | $ | 127,804 | 4.11 | % | ||||||||
53
| 2011 | 2010 | |||||||||||||||
| Amount | Rate | Amount | Rate | |||||||||||||
Fixed rate advances due 2011 | $ | — | — | $ | 10,086 | 3.96 | % | |||||||||
One year putable advances due 2011 | — | — | 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 | 5,242 | 4.14 | % | 5,337 | 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 | % | 25,000 | 3.16 | % | ||||||||||
Fixed rate advances due 2015 | 45,000 | 3.30 | % | 25,000 | 4.63 | % | ||||||||||
Fixed rate advances due 2016 | 10,000 | 2.15 | % | — | — | |||||||||||
Fixed rate advances due 2017 | 20,000 | 2.56 | % | 10,000 | 2.35 | % | ||||||||||
|
|
|
|
|
|
|
| |||||||||
Total | $ | 142,242 | 3.16 | % | $ | 113,423 | 3.64 | % | ||||||||
|
|
|
|
|
|
|
| |||||||||
| 2010 | 2009 | |||||||||||||||
| Amount | Rate | Amount | Rate | |||||||||||||
| Repurchase agreements due 2010 | $ | — | — | $ | 5,000 | 4.00 | % | |||||||||
| Repurchase agreements due 2011 | 858 | 1.51 | % | — | — | |||||||||||
| Repurchase agreements due 2012 | 1,013 | 2.21 | % | — | — | |||||||||||
| Repurchase agreements due 2013 | 5,127 | 4.45 | % | 5,000 | 4.51 | % | ||||||||||
| Repurchase agreements due 2014 | 12,087 | 3.00 | % | 10,000 | 3.19 | % | ||||||||||
| Repurchase agreements due 2015 | 538 | 3.25 | % | — | — | |||||||||||
Total | $ | 19,623 | 3.01 | % | $ | 20,000 | 3.72 | % | ||||||||
The maturity and weighted average interest rates of securities sold under agreements to repurchase with stated maturity dates are as follows at December 31:
| 2011 | 2010 | |||||||||||||||
| Amount | Rate | Amount | Rate | |||||||||||||
Repurchase agreements due 2011 | $ | — | — | $ | 858 | 1.51 | % | |||||||||
Repurchase agreements due 2012 | 428 | 2.08 | % | 1,013 | 2.21 | % | ||||||||||
Repurchase agreements due 2013 | 5,000 | 4.51 | % | 5,127 | 4.45 | % | ||||||||||
Repurchase agreements due 2014 | 10,869 | 3.12 | % | 12,087 | 3.00 | % | ||||||||||
Repurchase agreements due 2015 | 399 | 3.25 | % | 538 | 3.25 | % | ||||||||||
|
|
|
|
|
|
|
| |||||||||
Total | $ | 16,696 | 3.51 | % | $ | 19,623 | 3.28 | % | ||||||||
|
|
|
|
|
|
|
| |||||||||
Securities sold under repurchase agreements without stated maturity dates, federal funds purchased, and Federal Reserve Bank discount window advances generally mature within one to four days from the transaction date. The following table provides a summary of short term borrowings for the years ended December 31:
| 2010 | 2009 | |||||||||||||||||||||||
| Maximum | YTD | Weighted Average | Maximum | YTD | Weighted Average | |||||||||||||||||||
| Month-End | Average | Interest Rate | Month-End | Average | Interest Rate | |||||||||||||||||||
| Balance | Balance | During the Year | Balance | Balance | During the Year | |||||||||||||||||||
| Securities sold under agreements to repurchase witout stated maturity dates | $ | 56,410 | $ | 44,974 | 0.29 | % | $ | 51,269 | $ | 38,590 | 0.32 | % | ||||||||||||
| Federal funds purchased | 16,000 | 333 | 0.60 | % | 13,200 | 1,635 | 0.50 | % | ||||||||||||||||
| Federal Reserve Bank discount window advance | 7,500 | 103 | 0.75 | 7,500 | 41 | 0.75 | ||||||||||||||||||
54
| 2011 | 2010 | |||||||||||||||||||||||
| Maximum Month-End Balance | YTD Average Balance | Weighted Average Interest Rate During the Period | Maximum Month-End Balance | YTD Average Balance | Weighted Average Interest Rate During the Period | |||||||||||||||||||
Securities sold under agreements to repurchase without stated maturity dates | $ | 57,198 | $ | 45,397 | 0.25 | % | $ | 56,410 | $ | 44,974 | 0.28 | % | ||||||||||||
Federal funds purchased | 18,300 | 3,467 | 0.51 | % | 16,000 | 333 | 0.60 | % | ||||||||||||||||
Federal Reserve Bank discount window advance | — | — | — | 7,500 | 103 | 0.75 | % | |||||||||||||||||
The Corporation had pledged certificates of deposit held in other financial institutions, trading securities, available-for-sale securities, and 1-4 family mortgage loans in the following amounts at December 31:
| 2011 | 2010 | |||||||
Pledged to secure borrowed funds | $ | 292,092 | $ | 297,297 | ||||
Pledged to secure repurchase agreements | 99,869 | 86,381 | ||||||
Pledged for public deposits and for other purposes necessary or required by law | 26,761 | 14,626 | ||||||
|
|
|
| |||||
Total | $ | 418,722 | $ | 398,304 | ||||
|
|
|
| |||||
The Corporation had no investment securities that are restricted to be pledged for specific purposes.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTSNOTE 11 — (Continued)OTHER NONINTEREST EXPENSES
A summary of expenses included in Other Noninterest Expenses are as follows for the year ended December 31:
| 2010 | 2009 | 2008 | ||||||||||
| Marketing and community relations | $ | 1,093 | $ | 894 | $ | 921 | ||||||
| Foreclosed asset and collection | 710 | 546 | 565 | |||||||||
| Directors fees | 887 | 923 | 867 | |||||||||
| Audit and SOX compliance fees | 916 | 831 | 698 | |||||||||
| Education and travel | 499 | 395 | 491 | |||||||||
| Printing and supplies | 420 | 529 | 508 | |||||||||
| Postage and freight | 382 | 415 | 419 | |||||||||
| Legal fees | 338 | 375 | 415 | |||||||||
| Amortization of deposit premium | 395 | 472 | 523 | |||||||||
| Consulting fees | 167 | 201 | 298 | |||||||||
| All other | 1,499 | 1,798 | 1,810 | |||||||||
Total other | $ | 7,306 | $ | 7,379 | $ | 7,515 | ||||||
| 2011 | 2010 | 2009 | ||||||||||
Marketing and community relations | $ | 1,174 | $ | 1,093 | $ | 894 | ||||||
Directors fees | 842 | 887 | 923 | |||||||||
Audit and SOX compliance fees | 714 | 710 | 546 | |||||||||
Foreclosed asset and collection | 576 | 916 | 831 | |||||||||
Education and travel | 526 | 499 | 395 | |||||||||
Printing and supplies | 405 | 420 | 529 | |||||||||
Postage and freight | 388 | 395 | 472 | |||||||||
Consulting fees | 386 | 167 | 201 | |||||||||
Legal fees | 302 | 382 | 415 | |||||||||
Amortization of deposit premium | 299 | 338 | 375 | |||||||||
All other | 1,573 | 1,499 | 1,798 | |||||||||
|
|
|
|
|
| |||||||
Total other | $ | 7,185 | $ | 7,306 | $ | 7,379 | ||||||
|
|
|
|
|
| |||||||
NOTE 12 — FEDERAL INCOME TAXES
Components of the consolidated provision (benefit) for income taxes are as follows for the year ended December 31:
| 2010 | 2009 | 2008 | ||||||||||
| Currently payable | $ | 1,425 | $ | 1,487 | $ | 1,088 | ||||||
| Deferred expense (benefit) | 179 | (641 | ) | (1,812 | ) | |||||||
Income tax expense (benefit) | $ | 1,604 | $ | 846 | $ | (724 | ) | |||||
| 2011 | 2010 | 2009 | ||||||||||
Currently payable | $ | 965 | $ | 1,425 | $ | 1,487 | ||||||
Deferred expense (benefit) | 389 | 179 | (641 | ) | ||||||||
|
|
|
|
|
| |||||||
Income tax expense | $ | 1,354 | $ | 1,604 | $ | 846 | ||||||
|
|
|
|
|
| |||||||
The reconciliation of the provision (benefit) for federal income taxes and the amount computed at the federal statutory tax rate of 34% of income before federal income taxes is as follows for the years ended December 31:
| 2010 | 2009 | 2008 | ||||||||||
| Income taxes at 34% statutory rate | $ | 3,621 | $ | 2,940 | $ | 1,148 | ||||||
| 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 | ) | ||||||
| Other | (395 | ) | (383 | ) | (269 | ) | ||||||
| Total effect of nontaxable income | (2,185 | ) | (2,281 | ) | (2,088 | ) | ||||||
| Effect of nondeductible expenses | 168 | 187 | 216 | |||||||||
Income tax expense (benefit) | $ | 1,604 | $ | 846 | $ | (724 | ) | |||||
| 2011 | 2010 | 2009 | ||||||||||
Income taxes at 34% statutory rate | $ | 3,932 | $ | 3,621 | $ | 2,940 | ||||||
Effect of nontaxable income | ||||||||||||
Interest income on tax exempt municipal bonds | (1,687 | ) | (1,565 | ) | (1,680 | ) | ||||||
Earnings on corporate owned life insurance | (207 | ) | (225 | ) | (218 | ) | ||||||
Other | (65 | ) | (132 | ) | (249 | ) | ||||||
|
|
|
|
|
| |||||||
Total effect of nontaxable income | (1,959 | ) | (1,922 | ) | (2,147 | ) | ||||||
Effect of tax credits | (793 | ) | (263 | ) | (134 | ) | ||||||
Effect of nondeductible expenses | 174 | 168 | 187 | |||||||||
|
|
|
|
|
| |||||||
Income tax expense | $ | 1,354 | $ | 1,604 | $ | 846 | ||||||
|
|
|
|
|
| |||||||
Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for federal income tax purposes.
55
| 2010 | 2009 | |||||||
Deferred tax assets | ||||||||
| Allowance for loan losses | $ | 3,270 | $ | 3,482 | ||||
| Deferred directors’ fees | 2,364 | 2,251 | ||||||
| Employee benefit plans | 122 | 132 | ||||||
| Core deposit premium and acquisition expenses | 694 | 310 | ||||||
| Net unrealized losses on trading securities | 400 | 23 | ||||||
| Net unrecognized actuarial loss on pension plan | 1,109 | 1,084 | ||||||
| Life insurance death benefit payable | 804 | 804 | ||||||
| Alternative minimum tax | 686 | 619 | ||||||
| Other | 219 | 504 | ||||||
Total deferred tax assets | 9,668 | 9,209 | ||||||
Deferred tax liabilities | ||||||||
| Prepaid pension cost | 851 | 900 | ||||||
| Premises and equipment | 902 | 665 | ||||||
| Accretion on securities | 36 | 54 | ||||||
| Core deposit premium and acquisition expenses | 1,000 | 642 | ||||||
Net unrealized gains onavailable-for-sale securities | 847 | 494 | ||||||
| Other | 518 | 435 | ||||||
Total deferred tax liabilities | 4,154 | 3,190 | ||||||
Net deferred tax assets | $ | 5,514 | $ | 6,019 | ||||
| 2011 | 2010 | |||||||
Deferred tax assets | ||||||||
Allowance for loan losses | $ | 3,278 | $ | 3,270 | ||||
Deferred directors’ fees | 2,384 | 2,364 | ||||||
Employee benefit plans | 158 | 122 | ||||||
Core deposit premium and acquisition expenses | 800 | 694 | ||||||
Net unrealized losses on trading securities | 364 | 400 | ||||||
Net unrecognized actuarial loss on pension plan | 1,780 | 1,109 | ||||||
Life insurance death benefit payable | 804 | 804 | ||||||
Alternative minimum tax | 729 | 686 | ||||||
Other | 260 | 219 | ||||||
|
|
|
| |||||
Total deferred tax assets | 10,557 | 9,668 | ||||||
|
|
|
| |||||
Deferred tax liabilities | ||||||||
Prepaid pension cost | 851 | 851 | ||||||
Premises and equipment | 992 | 902 | ||||||
Accretion on securities | 34 | 36 | ||||||
Core deposit premium and acquisition expenses | 1,102 | 1,000 | ||||||
Net unrealized gains on available-for-sale securities | 4,564 | 847 | ||||||
Other | 937 | 518 | ||||||
|
|
|
| |||||
Total deferred tax liabilities | 8,480 | 4,154 | ||||||
|
|
|
| |||||
Net deferred tax assets | $ | 2,077 | $ | 5,514 | ||||
|
|
|
| |||||
The Corporation and its subsidiaries are subject to U.S. federal income tax. The Corporation is no longer subject to examination by taxing authorities for years before 2007.2008. There are no material uncertain tax positions requiring recognition in the Company’sCorporation’s consolidated financial statements. The Corporation does not expect the total amount of unrecognized tax benefits to significantly increase in the next twelve months.
The Corporation recognizes interestand/or penalties related to income tax matters in income tax expense. The Corporation does not have any amounts accrued for interest and penalties at December 31, 2011 and 2010 and is not aware of any claims for such amounts by federal income tax authorities.
Included in other comprehensive income for the years ended December 31,2011 and 2010 and 2009 are the changes in unrealized losses of $226$1,719 and unrealized gainslosses of $4,048,$226, 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 13 — OFF-BALANCE-SHEET ACTIVITIES
|
The Corporation is party to credit related financial instruments with off-balance-sheet risk. These financial instruments are entered into in the normal course of business to meet the financing needs of its customers. These financial instruments, which include commitments to extend credit and standby letters of credit, involve, to
varying degrees, elements of credit and interest rate risk in excess of the amounts recognized in the consolidated balance sheets. The contract or notional amounts of these instruments reflect the extent of involvement the Corporation has in a particular class of financial instrument.
56
| Contract Amount | ||||||||
| 2011 | 2010 | |||||||
Unfunded commitments under lines of credit | $ | 102,822 | $ | 110,201 | ||||
Commercial and standby letters of credit | 4,461 | 4,881 | ||||||
Commitments to grant loans | 21,806 | 13,382 | ||||||
| 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 and standby letters of credit are conditional commitments issued by the Corporation to guarantee the performance of a customer to a third party. Those guarantees are primarily issued to support private borrowing arrangements, including commercial paper, bond financing, and similar transactions.
Commitments to extend creditgrant loans are agreements to lend to a customer as long as there is no violation of any condition established in the contract. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. The commitments may expire without being drawn upon. Therefore, the total commitment amounts do not necessarily represent future cash requirements. The amount of collateral obtained, if it is deemed necessary by the Corporation, is based on management’s credit evaluation of the customer.
The Corporation’s exposure to credit-related loss in the event of nonperformance by the counter parties to the financial instruments for commitments to extend credit and standby letters of credit is represented bycould be up to the contractual notional amount of those instruments. The Corporation uses the same credit policies in deciding to make these commitments as it does for extending loans to customers. No significant losses are anticipated as a result of these commitments.
NOTE 14 — ON-BALANCE SHEET ACTIVITIES
|
Mortgage loan commitments are referred to as derivative loan commitments if the loan that will result from exercise of the commitment will be held for sale upon funding. The Corporation enters into commitments to fund residential mortgage loans at specific times in the future, with the intention that these loans will subsequently be sold in the secondary market. A mortgage loan commitment binds the Corporation to lend funds to a potential borrower at a specified interest rate within a specified period of time, generally up to 60 days after inception of the rate lock.
Outstanding derivative loan commitments expose the Corporation to the risk that the price of the loans arising from the exercise of the loan commitment might decline from the inception of the rate lock to funding of the loan due to increases in mortgage interest rates. If interest rates increase, the value of these loan commitments decreases. Conversely, if interest rates decrease, the value of these loan commitments increases. The notional amount of undesignated interest rate lock commitments was $547$875 and $760$547 at December 31, 2011 and 2010, and 2009, respectively.
57
To protect against the price risk inherent in derivative loan commitments, the Corporation utilizes both “mandatory delivery” and “best efforts” forward loan sale commitments to mitigate the risk of potential decreases in the values of loan that would result from the exercise of the derivative loan commitments.
With a “mandatory delivery” contract, the Corporation commits to deliver a certain principal amount of mortgage loans to an investor at a specified price on or before a specified date. If the Corporation fails to deliver the amount of mortgages necessary to fulfill the commitment by the specified date, it is obligated to pay a “pair-off” fee, based on then current market prices, to the investor to compensate the investor for the shortfall.
With a “best efforts” contract, the Corporation commits to deliver an individual mortgage loan of a specified principal amount and quality to an investor if the loan to the underlying borrower closes. Generally, the price the investor will pay the seller for an individual loan is specified prior to the loan being funded (e.g. on the same day the lender commits to lend funds to a potential borrower).
The Corporation expects that these forward loan sale commitments will experience changes in fair value opposite to the change in fair value of derivative loan commitments. The notional amount of undesignated forward loan sale commitments was $1,729$4,080 and $3,041$1,729 at December 31, 2011 and 2010, and 2009, respectively.
The fair values of the rate lock loan commitments related to the origination of mortgage loans that will be held for sale and the forward loan sale commitments are deemed insignificant by management and, accordingly, are not recorded in the accompanying consolidated financial statements.
NOTE 15 — COMMITMENTS AND OTHER MATTERS
Banking regulations require the Bank to maintain cash reserve balances in currency or as deposits with the Federal Reserve Bank. At December 31, 20102011 and 2009,2010, the reserve balances amounted to $821 and $470, and $687, respectively.
Banking regulations limit the transfer of assets in the form of dividends, loans, or advances from the Bank to the Corporation. At December 31, 2010,2011, substantially all of the Bank’s assets were restricted from transfer to the Corporation in the form of loans or advances. Consequently, bank dividends are the principal source of funds for the Corporation. Payment of dividends without regulatory approval is limited to the current years retained net income plus retained net income for the preceding two years, less any required transfers to common stock. At January 1, 2011,2012, the amount available for dividends without regulatory approval was approximately $8,435.
NOTE 16 — MINIMUM REGULATORY CAPITAL REQUIREMENTS
The Corporation (on a consolidated basis) and the Bank are subject to various regulatory capital requirements administered by the Federal Reserve Bank and the Federal Deposit Insurance Corporation (The Regulators)(the “Regulators”). Failure to meet minimum capital requirements can initiate mandatory and possibly additional discretionary actions by Thethe Regulators that if undertaken, could have a material effect on the Corporation’sCorporation's and Bank’s financial statements. Under regulatory capital adequacy guidelines and the regulatory framework for prompt corrective action, the Corporation and the Bank must meet specific capital guidelines that include quantitative measures of their assets, liabilities, capital, and certain off-balance-sheet items, as calculated under regulatory accounting standards. The Bank’s capital amounts and classifications are also subject to qualitative judgments by Thethe Regulators about components, risk weightings, and other factors. Prompt corrective action provisions are not applicable to bank holding companies.
Quantitative measures established by regulation to ensure capital adequacy require the Corporation and the Bank to maintain minimum amounts and ratios (set forth in the following table) of total and Tier 1 capital (as defined in the regulations) to risk-weighted assets (as defined) and Tier 1 capital to average assets (as defined).
58
As of December 31, 2010,2011, the most recent notifications from Thethe Regulators categorized the Bank as well capitalized under the regulatory framework for prompt corrective action. To be categorized as well capitalized, an institution must maintain total risk-based, Tier 1 risk-based, and Tier 1 leverage ratios as set forth in the following tables. There are no conditions or events since the notifications that management believes has changed the Bank’s categories. The Corporation’sCorporation's and the Bank’sBank's actual capital amounts (in thousands) and ratios are also presented in the table.
| Minimum to be | ||||||||||||||||||||||||
| Well Capitalized | ||||||||||||||||||||||||
| Minimum | Under Prompt | |||||||||||||||||||||||
| Capital | Corrective Action | |||||||||||||||||||||||
| Actual | Requirement | Provisions | ||||||||||||||||||||||
| Amount | Ratio | Amount | Ratio | Amount | Ratio | |||||||||||||||||||
December 31, 2010 | ||||||||||||||||||||||||
| Total capital to risk weighted assets | ||||||||||||||||||||||||
| Isabella Bank | $ | 98,566 | 12.8 | % | $ | 61,642 | 8.0 | % | $ | 77,053 | 10.0 | % | ||||||||||||
| Consolidated | 106,826 | 13.7 | 62,423 | 8.0 | N/A | N/A | ||||||||||||||||||
| Tier 1 capital to risk weighted assets | ||||||||||||||||||||||||
| Isabella Bank | 88,901 | 11.5 | 30,821 | 4.0 | 46,232 | 6.0 | ||||||||||||||||||
| Consolidated | 97,040 | 12.4 | 31,212 | 4.0 | N/A | N/A | ||||||||||||||||||
| Tier 1 capital to average assets | ||||||||||||||||||||||||
| Isabella Bank | 88,901 | 7.6 | 46,653 | 4.0 | 58,316 | 5.0 | ||||||||||||||||||
| Consolidated | 97,040 | 8.2 | 47,116 | 4.0 | N/A | N/A | ||||||||||||||||||
| Minimum to be | ||||||||||||||||||||||||
| Well Capitalized | ||||||||||||||||||||||||
| Minimum | Under Prompt | |||||||||||||||||||||||
| Capital | Corrective Action | |||||||||||||||||||||||
| Actual | Requirement | Provisions | ||||||||||||||||||||||
| Amount | Ratio | Amount | Ratio | Amount | Ratio | |||||||||||||||||||
December 31, 2009 | ||||||||||||||||||||||||
| Total capital to risk weighted assets | ||||||||||||||||||||||||
| Isabella Bank | $ | 93,079 | 12.9 | % | $ | 57,713 | 8.0 | % | $ | 72,141 | 10.0 | % | ||||||||||||
| Consolidated | 102,285 | 14.1 | 58,213 | 8.0 | N/A | N/A | ||||||||||||||||||
| Tier 1 capital to risk weighted assets | ||||||||||||||||||||||||
| Isabella Bank | 84,012 | 11.6 | 28,856 | 4.0 | 43,285 | 6.0 | ||||||||||||||||||
| Consolidated | 93,141 | 12.8 | 29,106 | 4.0 | N/A | N/A | ||||||||||||||||||
| Tier 1 capital to average assets | ||||||||||||||||||||||||
| Isabella Bank | 84,012 | 7.8 | 42,813 | 4.0 | 53,516 | 5.0 | ||||||||||||||||||
| Consolidated | 93,141 | 8.6 | 43,326 | 4.0 | N/A | N/A | ||||||||||||||||||
NOTE 17 — BENEFIT 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. The Corporation makes a 3.0% safe harbor contribution for all eligible employees and matching contributions equal to 50% of the first 4.0% of an employee’s compensation contributed to the Plan during the year. Employees are 100% vested in the safe harbor contributions and are 0% vested through their first two years of employment and are 100% vested after
59
Defined Benefit Pension Plan
The Corporation has a non-contributory defined benefit pension plan which was curtailed in 2007. Due to the curtailment, future salary increases will not be considered and the benefits are based on years of service and the employees’employees' five highest consecutive years of compensation out of the last ten years of service rendered through March 1, 2007.
Changes in the projected benefit obligation and plan assets during each year, the funded status of the plan, and the net amount recognized on the Corporation’sCorporation's consolidated balance sheets using an actuarial measurement date of December 31, are summarized as follows during the years ended December 31:
| 2010 | 2009 | |||||||
| Change in benefit obligation | ||||||||
| Benefit obligation, January 1 | $ | 8,897 | $ | 8,436 | ||||
| Interest cost | 531 | 504 | ||||||
| Actuarial loss | 679 | 392 | ||||||
| Benefits paid, including plan expenses | (447 | ) | (435 | ) | ||||
Benefit obligation, December 31 | 9,660 | 8,897 | ||||||
| Change in plan assets | ||||||||
| Fair value of plan assets, January 1 | 8,355 | 7,669 | ||||||
| Investment return | 945 | 1,121 | ||||||
| Contributions | 47 | — | ||||||
| Benefits paid, including plan expenses | (447 | ) | (435 | ) | ||||
Fair value of plan assets, December 31 | 8,900 | 8,355 | ||||||
Deficiency in funded status at December 31, included on the consolidated balance sheets in accrued interest and other liabilities | $ | (760 | ) | $ | (542 | ) | ||
| Change in accrued pension benefit costs | ||||||||
| Accrued benefit cost at January 1 | $ | (542 | ) | $ | (767 | ) | ||
| Contributions | 47 | — | ||||||
| Net periodic cost for the year | (193 | ) | (149 | ) | ||||
| Net change in unrecognized actuarial loss and prior service cost | (72 | ) | 374 | |||||
Accrued pension benefit cost at December 31 | $ | (760 | ) | $ | (542 | ) | ||
| 2011 | 2010 | |||||||
Change in benefit obligation | ||||||||
Benefit obligation, January 1 | $ | 9,660 | $ | 8,897 | ||||
Interest cost | 507 | 531 | ||||||
Actuarial loss | 1,750 | 679 | ||||||
Benefits paid, including plan expenses | (583 | ) | (447 | ) | ||||
|
|
|
| |||||
Benefit obligation, December 31 | 11,334 | 9,660 | ||||||
|
|
|
| |||||
Change in plan assets | ||||||||
Fair value of plan assets, January 1 | 8,900 | 8,355 | ||||||
Investment return | 148 | 945 | ||||||
Contributions | 138 | 47 | ||||||
Benefits paid, including plan expenses | (583 | ) | (447 | ) | ||||
|
|
|
| |||||
Fair value of plan assets, December 31 | 8,603 | 8,900 | ||||||
|
|
|
| |||||
Deficiency in funded status at December 31, included on the consolidated balance sheets in accrued interest payable and other liabilities | $ | (2,731 | ) | $ | (760 | ) | ||
|
|
|
| |||||
| 2011 | 2010 | |||||||
Change in accrued pension benefit costs | ||||||||
Accrued benefit cost at January 1 | $ | (760 | ) | $ | (542 | ) | ||
Contributions | 138 | 47 | ||||||
Net periodic cost for the year | (138 | ) | (193 | ) | ||||
Net change in unrecognized actuarial loss and prior service cost | (1,971 | ) | (72 | ) | ||||
|
|
|
| |||||
Accrued pension benefit cost at December 31 | $ | (2,731 | ) | $ | (760 | ) | ||
|
|
|
| |||||
Amounts recognized as a component of other comprehensive lossincome (loss) consist of the following amounts during the years ended December 31 :
| 2010 | 2009 | 2008 | ||||||||||
| Change in unrecognized pension cost | $ | (72 | ) | $ | 374 | $ | (2,320 | ) | ||||
| Tax effect | 25 | (127 | ) | 788 | ||||||||
Net | $ | (47 | ) | $ | 247 | $ | (1,532 | ) | ||||
| 2011 | 2010 | 2009 | ||||||||||
Change in unrecognized pension cost | $ | (1,971 | ) | $ | (72 | ) | $ | 374 | ||||
Tax effect | 671 | 25 | (127 | ) | ||||||||
|
|
|
|
|
| |||||||
Net | $ | (1,300 | ) | $ | (47 | ) | $ | 247 | ||||
|
|
|
|
|
| |||||||
The accumulated benefit obligation was $9,660$11,334 and $8,897$9,660 at December 31, 2011 and 2010, and 2009, respectively.
The Company has recorded the funded status of the Plan in its consolidated balance sheets. The Company adjusts the underfunded status in a liability account to reflect the current funded status of the plan. Any gains or
60
| 2010 | 2009 | 2008 | ||||||||||
Net periodic benefit cost (income) | ||||||||||||
| Interest cost on projected benefit obligation | $ | 531 | $ | 504 | $ | 503 | ||||||
| Expected return on plan assets | (491 | ) | (524 | ) | (659 | ) | ||||||
| Amortization of unrecognized actuarial net loss | 153 | 169 | 4 | |||||||||
Net periodic benefit cost (income) | $ | 193 | $ | 149 | $ | (152 | ) | |||||
| 2011 | 2010 | 2009 | ||||||||||
Net periodic benefit cost | ||||||||||||
Interest cost on projected benefit obligation | $ | 507 | $ | 531 | $ | 504 | ||||||
Expected return on plan assets | (522 | ) | (491 | ) | (524 | ) | ||||||
Amortization of unrecognized actuarial net loss | 153 | 153 | 169 | |||||||||
|
|
|
|
|
| |||||||
Net periodic benefit cost | $ | 138 | $ | 193 | $ | 149 | ||||||
|
|
|
|
|
| |||||||
Accumulated other comprehensive lossincome (loss) at December 31, 20102011 includes net unrecognized actuarial losses before income taxes of $3,262,$5,233, of which $138$253 is expected to be amortized into benefit cost during 2011.
The actuarial assumptions used in determining the projected benefit obligation andare as follows for the actualyear ended December 31:
| 2011 | 2010 | 2009 | ||||||||||
Discount rate | 4.22 | % | 5.36 | % | 5.87 | % | ||||||
Expected long-term rate of return | 6.00 | % | 6.00 | % | 6.00 | % | ||||||
The actuarial weighted average assumptions used in determining the net periodic pension costs are as follows for the year 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 | % | ||||||
| 2011 | 2010 | 2009 | ||||||||||
Discount rate | 5.36 | % | 6.10 | % | 5.87 | % | ||||||
Expected long-term return on plan assets | 6.00 | % | 6.00 | % | 6.00 | % | ||||||
As a result of the curtailment of the Plan, there is no rate of compensation increase considered in the above assumptions.
The expected long term rate of return is an estimate of anticipated future long term rates of return on plan assets as measured on a market value basis. Factors considered in arriving at this assumption include:
Historical longer term rates of return for broad asset classes.
Actual past rates of return achieved by the plan.
The general mix of assets held by the plan.
The stated investment policy for the plan.
The selected rate of return is net of anticipated investment related expenses.
Plan Assets
The Corporation’s overall investment strategy is to moderately grow the portfolio by investing 50% of the portfolio in equity securities and 50% in fixed income securities. This strategy is designed to generate a long term rate of return of 8.7%6.0%. Equity securities primarily consist of the S&P 500 Index with a smaller allocation to the Small Cap and International Index. Fixed income securities are invested in the Bond Market Index. The Plan has appropriate assets invested in short term investments to meet near-term benefit payments.
The asset mix and the sector weighting of the investments are determined by the pension committee, which is comprised of members of management of the Corporation. Consultations are held with a third party investment advisor retained by the Corporation to manage the Plan. The Corporation reviews the performance of the advisor no less than annually.
61
| 2010 | 2009 | |||||||||||||||
Description | Total | (Level 2) | Total | (Level 2) | ||||||||||||
| Asset Category | ||||||||||||||||
| Short-term investments | $ | 108 | $ | 108 | $ | 70 | $ | 70 | ||||||||
| Common collective trusts | ||||||||||||||||
| Fixed income | 4,470 | 4,470 | 4,826 | 4,826 | ||||||||||||
| Equity investments | 4,322 | 4,322 | 3,459 | 3,459 | ||||||||||||
| $ | 8,900 | $ | 8,900 | $ | 8,355 | $ | 8,355 | |||||||||
| 2011 | 2010 | |||||||||||||||
Description | Total | (Level 2) | Total | (Level 2) | ||||||||||||
Asset Category | ||||||||||||||||
Short-term investments | $ | 16 | $ | 16 | $ | 108 | $ | 108 | ||||||||
Common collective trusts | ||||||||||||||||
Fixed income | 4,357 | 4,357 | 4,470 | 4,470 | ||||||||||||
Equity investments | 4,230 | 4,230 | 4,322 | 4,322 | ||||||||||||
|
|
|
|
|
|
|
| |||||||||
| $ | 8,603 | $ | 8,603 | $ | 8,900 | $ | 8,900 | |||||||||
|
|
|
|
|
|
|
| |||||||||
The following is a description of the valuation methodologies used for assets measured at fair value. There have been no changes in the methodologies used at December 31, 20102011 and 2009:
| • | Short-term investments: Shares of a money market portfolio, which is valued using amortized cost, which approximates fair value. | ||
| • | Common collective trusts:These investments are public investment securities valued using the net asset value (“NAV”) provided by a third party investment advisor. The NAV is quoted on a private market that is not active; however, the unit price is based on underlying investments which are traded on an active market. |
The Corporation does not anticipate making anyanticipates contributions of $135 to the plan in 2011.
Estimated future benefit payments are as follows for the next ten years:
Year | Amount | |||
| 2011 | $ | 393 | ||
| 2012 | 406 | |||
| 2013 | 404 | |||
| 2014 | 497 | |||
| 2015 | 542 | |||
| Years 2016 — 2020 | 3,038 | |||
Year | Amount | |||
2012 | $ | 416 | ||
2013 | 415 | |||
2014 | 508 | |||
2015 | 554 | |||
2016 | 559 | |||
Years 2017 — 2021 | 3,155 | |||
The components of projected net periodic benefit cost are as follows for the year ended December 31:
| 2011 | ||||
| Interest cost on projected benefit obligation | 507 | |||
| Expected return on plan assets | (522 | ) | ||
| Amortization of unrecognized actuarial net loss | 153 | |||
Net periodic benefit cost | $ | 138 | ||
| 2012 | ||||
Interest cost on projected benefit obligation | $ | 470 | ||
Expected return on plan assets | (508 | ) | ||
Amortization of unrecognized actuarial net loss | 291 | |||
|
| |||
Net periodic benefit cost | $ | 253 | ||
|
| |||
Equity Compensation Plan
Pursuant to the terms of the Isabella Bank Corporation and Related Companies Deferred Compensation Plan for Directors (the “Directors Plan”), directors of the Corporation and its subsidiaries are required to defer at least 25% of their earned board fees into the Directors Plan. The fees are converted on a quarterly basis into the Corporation’sshares of the Corporation's 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’sparticipant's account is eligible for stock and cash dividends as declared. Upon retirement from the board or the occurrence of certain other events, the participant is eligible to receive a lump-sum, in-kind, distribution of all of the stock that is then in his or her account, and any unconverted cash will be converted to and rounded up to whole shares of stock and distributed, as well. The Directors Plan does not allow for cash settlement, and therefore, such share basedshare-based payment awards qualify for classification as equity. All authorized but unissued
62
The Corporation establishedmaintains a Rabbi Trust effective as of July 1, 2008, to fund the Directors Plan. A Rabbi Trust is an irrevocable grantor trust to which the Corporation may contribute assets for the limited purpose of funding a nonqualified deferred compensation plan. Although the Corporation may not reach the assets of the Rabbi Trust (“Trust”) for any purpose other than meeting its obligations under the Directors Plan, the assets of the Trust remain subject to the claims of the Corporation’sCorporation's creditors and are included in the consolidated financial statements. The Corporation may contribute cash or common stock to the Trust from time to time for the sole purpose of funding the Directors Plan. The Trust will use any cash that the Corporation contributed to purchase shares of the Corporation’sCorporation's common stock on the open market through the Corporation’sCorporation's brokerage services department.
The components of shares eligible to be issued under the Directors Plan were as follows as of December 31:
| 2010 | 2009 | |||||||||||||||
| Eligible | Market | Eligible | Market | |||||||||||||
| Shares | Value | Shares | Value | |||||||||||||
| Unissued | 191,977 | $ | 3,321 | 186,279 | $ | 3,530 | ||||||||||
| Shares held in Rabbi Trust | 32,686 | 565 | 30,626 | 580 | ||||||||||||
Total | 224,663 | $ | 3,886 | 216,905 | $ | 4,110 | ||||||||||
| 2011 | 2010 | |||||||||||||||
| Eligible | Fair | Eligible | Fair | |||||||||||||
| Shares | Value | Shares | Value | |||||||||||||
Unissued | 201,438 | $ | 4,774 | 191,977 | $ | 3,321 | ||||||||||
Shares held in Rabbi Trust | 16,585 | 393 | 32,686 | 565 | ||||||||||||
|
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|
|
|
|
|
| |||||||||
Total | 218,023 | $ | 5,167 | 224,663 | $ | 3,886 | ||||||||||
|
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| |||||||||
Other Employee Benefit Plans
The Corporation maintains atwo 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 2011, 2010, and 2009 were $444, $363, and 2008 were $218, $219, and $206,$343, respectively, and are being recognized over the participants’participants' expected years of service. As a result of curtailing the Corporation’s defined benefit plan, the Corporation established an additional SERP to maintain the benefit levels for all employees that were at least forty years old and had at least 15 years of service. The cost to provide this benefit was $145, $124 and $128 for 2010, 2009 and 2008, respectively.
The Corporation maintains a non leveragednon-leveraged employee stock ownership plan (ESOP)(“ESOP”) and a profit sharing plan 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 plans are discretionary and are approved by the Board of Directors and recorded as compensation expense. During 2009, the Board of Directors approved a contribution of $50 to the plan. ExpensesESOP. The Corporation made no contributions in 2010 or 2011. Compensation cost related to the plans for 2011, 2010, and 2009 were $20, $0, and 2008 were $0, $50, and $0, respectively. Total allocated shares outstanding related to the ESOP at December 31, 2011, 2010, and 2009 were 246,404, 246,419, and 2008 were 246,419, 271,421, and 271,520, respectively. Such shares are included in the computation of dividends and earnings per share in each of the respective years.
The Corporation maintains a self fundedself-funded medical plan under which the Corporation is responsible for the first $50 per year of claims made by a covered family. Medical claims are subject to a lifetime maximum of $5,000 per covered individual. Expenses are accrued based on estimates of the aggregate liability for claims incurred and the Corporation’sCorporation's experience. Expenses were $2,045 in 2011, $2,101 in 2010 and $2,155 in 2009 and $2,110 in 2008.
The Corporation maintains the Isabella Bank Corporation Stockholder Dividend Reinvestment Plan and Employee Stock Purchase Plan (the “Dividend Reinvestment Plan”). The dividend reinvestment feature of the Dividend Reinvestment Plan allows shareholders to purchase previously unissued Isabella Bank Corporation common shares using dividends paid on shares held 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 arethese plans were 885,000, with 313,078197,719 shares unissued at December 31, 2010.2011. During 2011, 2010 and 2009, and 2008,115,359, 124,904, shares were issued for $2,203,and 126,874 shares were issued for $2,396$2,192, $2,203, and 78,994 shares were issued for $2,879,$2,396, respectively, in cash pursuant to these plans.
63
NOTE 18 — ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS)
direct charge or credit to shareholders’ equity. Comprehensive income (loss) and the related components are disclosed in the accompanying consolidated statements of comprehensive income for each of the years ended December 31, 2011, 2010, 2009, and 2008.
The following is a summary of the components comprising the balance of accumulated other comprehensive lossincome (loss) reported on the consolidated balance sheets as of December 31 (presented net of tax):
| 2010 | 2009 | |||||||
Unrealized gains (losses) onavailable-for-sale investment securities | $ | 444 | $ | (13 | ) | |||
| Unrecognized pension costs | (2,153 | ) | (2,106 | ) | ||||
Accumulated other comprehensive loss | $ | (1,709 | ) | $ | (2,119 | ) | ||
| 2011 | 2010 | |||||||
Unrealized gains on available-for-sale investment securities | $ | 5,942 | $ | 444 | ||||
Unrecognized pension costs | (3,453 | ) | (2,153 | ) | ||||
|
|
|
| |||||
Accumulated other comprehensive income (loss) | $ | 2,489 | $ | (1,709 | ) | |||
|
|
|
| |||||
NOTE 19 — RELATED PARTY TRANSACTIONS
In the ordinary course of business, the Corporation grants loans to principal officers and directors and their affiliates (including their families and companies in which they have 10% or more ownership). Annual activity during the years ended December 31 consisted of the following:
| 2010 | 2009 | |||||||
| Balance, beginning of year | $ | 4,142 | $ | 4,011 | ||||
| New loans | 3,038 | 5,033 | ||||||
| Repayments | (2,833 | ) | (4,902 | ) | ||||
| Balance, ending of year | $ | 4,347 | $ | 4,142 | ||||
| 2011 | 2010 | |||||||
Balance, beginning of year | $ | 4,347 | $ | 4,142 | ||||
New loans | 1,800 | 3,038 | ||||||
Repayments | (2,419 | ) | (2,833 | ) | ||||
|
|
|
| |||||
Balance, ending of year | $ | 3,728 | $ | 4,347 | ||||
|
|
|
| |||||
Total deposits of these principal officers and directors and their affiliates amounted to $11,556$7,664 and $7,090$11,556 at December 31, 20102011 and 2009,2010, respectively. In addition, Isabella Bank Corporation’s Employee Stock Ownership Plan held deposits with the Bank aggregating $254$275 and $219,$254, respectively, at December 31, 20102011 and 2009.
| 2010. NOTE 20 — FAIR VALUE
|
Disclosure of the estimated fair values of financial instruments, which differ from carrying values, often requires the use of estimates. In cases where quoted market values in an active market are not available, the Corporation uses present value techniques and other valuation methods to estimate the fair values of its financial instruments. These valuation methods require considerable judgment and the resulting estimates of fair value can be significantly affected by the assumptions made and methods used.
64
| 2010 | 2009 | |||||||||||||||
| Estimated | Carrying | Estimated | Carrying | |||||||||||||
| Fair Value | Value | Fair Value | Value | |||||||||||||
ASSETS | ||||||||||||||||
| Cash and demand deposits due from banks | $ | 18,109 | $ | 18,109 | $ | 24,482 | $ | 24,482 | ||||||||
| Certicates of deposit held in other financial institutions | 15,908 | 15,808 | 5,380 | 5,380 | ||||||||||||
Mortgage loansavailable-for-sale | 1,182 | 1,182 | 2,294 | 2,281 | ||||||||||||
| Net loans | 734,634 | 722,931 | 719,604 | 710,337 | ||||||||||||
| Accrued interest receivable | 5,456 | 5,456 | 5,832 | 5,832 | ||||||||||||
| Equity securities without readily determinable fair values | 17,564 | 17,564 | 17,921 | 17,921 | ||||||||||||
| Originated mortgage servicing rights | 2,673 | 2,667 | 2,620 | 2,620 | ||||||||||||
| LIABILITIES | ||||||||||||||||
| Deposits with no stated maturities | 424,978 | 424,978 | 382,006 | 382,006 | ||||||||||||
| Deposits with stated maturities | 454,332 | 452,361 | 424,048 | 420,646 | ||||||||||||
| Borrowed funds | 190,180 | 184,494 | 177,375 | 175,297 | ||||||||||||
| Accrued interest payable | 1,003 | 1,003 | 1,143 | 1,143 | ||||||||||||
| 2011 | 2010 | |||||||||||||||
| Estimated | Carrying | Estimated | Carrying | |||||||||||||
| Fair Value | Value | Fair Value | Value | |||||||||||||
ASSETS |
| |||||||||||||||
Cash and demand deposits due from banks | $ | 28,590 | $ | 28,590 | $ | 18,109 | $ | 18,109 | ||||||||
Certicates of deposit held in other financial institutions | 8,977 | 8,924 | 15,908 | 15,808 | ||||||||||||
Mortgage loans available-for-sale | 3,252 | 3,205 | 1,182 | 1,182 | ||||||||||||
Net loans | 756,802 | 737,916 | 734,634 | 722,931 | ||||||||||||
Accrued interest receivable | 5,848 | 5,848 | 5,456 | 5,456 | ||||||||||||
Equity securities without readily determinable fair values | 17,189 | 17,189 | 17,564 | 17,564 | ||||||||||||
Originated mortgage servicing rights | 2,374 | 2,374 | 2,673 | 2,667 | ||||||||||||
LIABILITIES |
| |||||||||||||||
Deposits without stated maturities | 476,627 | 476,627 | 424,978 | 424,978 | ||||||||||||
Deposits with stated maturities | 499,644 | 481,537 | 454,332 | 452,361 | ||||||||||||
Borrowed funds | 222,538 | 210,894 | 190,180 | 184,494 | ||||||||||||
Accrued interest payable | 967 | 967 | 1,003 | 1,003 | ||||||||||||
Financial Instruments Recorded at Fair Value
The table below presents the recorded amount of assets and liabilities measured at fair value on December 31:
| 2010 | 2009 | |||||||||||||||||||||||
Description | Total | (Level 2) | (Level 3) | Total | (Level 2) | (Level 3) | ||||||||||||||||||
Recurring items | ||||||||||||||||||||||||
| Trading securities | ||||||||||||||||||||||||
| States and political subdivisions | $ | 5,837 | $ | 5,837 | $ | — | $ | 9,962 | $ | 9,962 | $ | — | ||||||||||||
| Mortgage-backed | — | — | — | 3,601 | 3,601 | — | ||||||||||||||||||
| Total trading securities | 5,837 | 5,837 | — | 13,563 | 13,563 | — | ||||||||||||||||||
Available-for-sale investment securities | ||||||||||||||||||||||||
| Government-sponsored enterprises | 5,404 | 5,404 | — | 19,471 | 19,471 | — | ||||||||||||||||||
| States and political subdivisions | 169,717 | 169,717 | — | 151,730 | 151,730 | — | ||||||||||||||||||
| Auction rate money market preferred | 2,865 | — | 2,865 | 2,973 | — | 2,973 | ||||||||||||||||||
| Preferred stock | 6,936 | — | 6,936 | 7,054 | — | 7,054 | ||||||||||||||||||
| Mortgage-backed | 102,215 | 102,215 | — | 67,734 | 67,734 | — | ||||||||||||||||||
| Collateralized mortgage obligations | 43,587 | 43,587 | — | 10,104 | 10,104 | — | ||||||||||||||||||
Totalavailable-for-sale investment securities | 330,724 | 320,923 | 9,801 | 259,066 | 249,039 | 10,027 | ||||||||||||||||||
| Borrowed funds | 10,423 | 10,423 | — | 17,804 | 17,804 | — | ||||||||||||||||||
Nonrecurring items | ||||||||||||||||||||||||
Mortgage loansavailable-for-sale | 1,182 | 1,182 | — | 2,281 | 2,281 | — | ||||||||||||||||||
| Impaired loans | 12,048 | — | 12,048 | 12,654 | — | 12,654 | ||||||||||||||||||
| Originated mortgage servicing rights | 2,667 | 2,667 | — | 2,620 | 2,620 | — | ||||||||||||||||||
| Foreclosed assets | 2,067 | 2,067 | — | 1,157 | 1,157 | — | ||||||||||||||||||
| $ | 364,948 | $ | 343,099 | $ | 21,849 | $ | 309,145 | $ | 286,464 | $ | 22,681 | |||||||||||||
| Percent of assets and liabilities measured at fair value | 94.01 | % | 5.99 | % | 92.66 | % | 7.34 | % | ||||||||||||||||
65
| 2011 | 2010 | |||||||||||||||||||||||||||
Description | Total | (Level 1) | (Level 2) | (Level 3) | Total | (Level 2) | (Level 3) | |||||||||||||||||||||
Recurring items | ||||||||||||||||||||||||||||
Trading securities | ||||||||||||||||||||||||||||
States and political subdivisions | $ | 4,710 | $ | — | 4,710 | $ | — | $ | 5,837 | $ | 5,837 | $ | — | |||||||||||||||
Available-for-sale investment securities | ||||||||||||||||||||||||||||
Government-sponsored enterprises | 397 | — | 397 | — | 5,404 | 5,404 | — | |||||||||||||||||||||
States and political subdivisions | 174,938 | — | 174,938 | — | 169,717 | 169,717 | — | |||||||||||||||||||||
Auction rate money market preferred | 2,049 | — | 2,049 | — | 2,865 | — | 2,865 | |||||||||||||||||||||
Preferred stock | 5,033 | 5,033 | — | — | 6,936 | — | 6,936 | |||||||||||||||||||||
Mortgage-backed | 143,602 | — | 143,602 | — | 102,215 | 102,215 | — | |||||||||||||||||||||
Collateralized mortgage obligations | 99,101 | — | 99,101 | — | 43,587 | 43,587 | — | |||||||||||||||||||||
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Total available-for-sale investment securities | 425,120 | 5,033 | 420,087 | — | 330,724 | 320,923 | 9,801 | |||||||||||||||||||||
Borrowed funds | 5,242 | — | 5,242 | — | 10,423 | 10,423 | — | |||||||||||||||||||||
Nonrecurring items | ||||||||||||||||||||||||||||
Impaired loans | 25,250 | — | 25,250 | 12,048 | — | 12,048 | ||||||||||||||||||||||
Originated mortgage servicing rights | 2,374 | — | 2,374 | — | 2,667 | 2,667 | — | |||||||||||||||||||||
Foreclosed assets | 1,876 | — | 1,876 | — | 2,067 | 2,067 | — | |||||||||||||||||||||
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| $ | 464,572 | $ | 5,033 | $ | 434,289 | $ | 25,250 | $ | 363,766 | $ | 341,917 | $ | 21,849 | |||||||||||||||
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Percent of assets and liabilities measured at fair value | 1.08 | % | 93.48 | % | 5.44 | % | 93.99 | % | 6.01 | % | ||||||||||||||||||
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Cash and demand deposits due from banks:
The carrying amounts of cash and short term investments, including Federal funds sold, approximate fair values.
Certificates of deposit held in other financial institutions:
Interest bearing balances held in unaffiliated financial institutions include certificates of deposit and other short term interest bearing balances that mature within 3 years. Fair value is determined using prices for similar assets with similar characteristics.
Investment securities:
Investment 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. Level 2 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 includein 2010 included securities in less liquid markets and includeincluded auction rate money market preferred securities and preferred stocks. Due to the limited trading activity of these securities during 2010, the fair values were estimated utilizingCorporation utilized a discounted cash flow analysis as ofto determine fair values on December 31, 2010 and 2009. These analyses2010. This analysis considered the creditworthiness of the counterparty, the investment grade, the timing of expected future cash flows, and the current volume of trading activity.activity, and recent trade prices. The discount rates used were determined by using the interest rates of similarly rated financial institutionsinstitution 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%sources and 6.87%ranged from 3.90% to 6.90% as of December 31, 2010.
The table below represents the activity in auction rate money market preferred available-for-sale investment securities measured with Level 3 inputs on a recurring basis for the years ended December 31:
| 2011 | 2010 | |||||||
Level 3 inputs — January 1 | $ | 2,865 | $ | 2,973 | ||||
Transfer to Level 2 inputs | (2,049 | ) | — | |||||
Net unrealized losses on available-for-sale investment securities | (816 | ) | (108 | ) | ||||
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| |||||
Level 3 inputs — December 31 | $ | — | $ | 2,865 | �� | |||
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| |||||
The table below represents the activity in preferred stock available-for-sale investment securities measured with Level 3 inputs on a recurring basis for the years ended December 31:
| 2011 | 2010 | |||||||
Level 3 inputs — January 1 | $ | 6,936 | $ | 7,054 | ||||
Calls | (1,000 | ) | — | |||||
Transfer to Level 1 inputs | (5,033 | ) | — | |||||
Net unrealized losses on available-for-sale investment securities | (903 | ) | (118 | ) | ||||
|
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| |||||
Level 3 inputs — December 31 | $ | — | $ | 6,936 | ||||
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| |||||
Mortgage loansavailable-for-sale:
Mortgage loansavailable-for-sale are carried at the lower of cost or marketfair value. The fair value of mortgage loansavailable-for-sale are based on what price secondary markets are currently offering for portfolios with similar characteristics. As such, the Corporation classifies loans subjected to nonrecurring fair value adjustments as Level 2.
Loans:
For variable rate loans with no significant change in credit risk, fair values are based on carrying values. Fair values for fixed rate loans are estimated using discounted cash flow analyses, using interest rates currently being offered for loans with similar terms to borrowers of similar credit quality. The resulting amounts are adjusted to estimate the effect of changes in the credit quality of borrowers since the loans were originated.
66
The Corporation reviews 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 utilizes independent appraisals, broker price opinions, or internal evaluations. These valuations are reviewed to determine whether an additional discount should be applied given the age of market information that may have been considered as well as other factors such as costs to carry and sell an asset if it is determined that the collateral will be liquidated in connection with the ultimate settlement of the loan. The Corporation uses this valuationthese valuations to determine if any charge offs or specific reserves are necessary. The Corporation may obtain new valuations in certain circumstances, including when there has been significant deterioration in the condition of the collateral, if the foreclosure process has begun, or if the existing valuation is deemed to be outdated.
Impaired loans where an allowance is established based on the net realizable value of collateral require classification in the fair value hierarchy. When the fair value of the collateral is based on an observable market price or a current appraisal value, the Corporation records the loan as nonrecurring Level 2. When a current appraised value is not available or management determines the fair value of collateral is further impaired below the appraised value, the Corporation records the impaired loans as nonrecurring Level 3.
Accrued interest:
The carrying amounts of accrued interest approximate fair value.
Goodwill and other intangible assets:
Acquisition intangibles and goodwill are subjectevaluated for potential impairment on at least an annual basis. Goodwill is typically qualitatively evaluated to impairment testing. A projecteddetermine if it is more likely than not that the carrying balance is impaired. If it is determined that the carrying balance of goodwill is more likely than not to be impaired,
management performs a cash flow valuation method is used into determine the completionextent of the potential impairment. Acquisition intangibles are tested for impairment testing.with a cash flow valuation. This valuation method requires a significant degree of management judgment. In the event the projected undiscounted net operating cash flows for these intangible assets are less than the carrying value, the asset is recorded at fair value as determined by the valuation model. If the testing resulted in impairment, the Corporation would classify goodwill and other acquisition intangibles subjected to nonrecurring fair value adjustments as Level 3. DuringFor the years ended December 31, 2011 and 2010, and 2009, there were no impairments recorded on goodwill and other acquisition intangibles.
Equity securities without readily determinable fair values:
The Corporation has investments in equity securities without readily determinable fair values as well as investments in joint ventures. The assets are individually reviewed for impairment on an annual basis, or more frequently if an indication of impairment exists, by comparing the carrying value to the estimated fair value. The lack of an independent source to validate fair value estimates, including the impact of future capital calls and transfer restrictions, is an inherent limitation in the valuation process. The Corporation classifies nonmarketable equity securities and its investments in joint ventures subjected to nonrecurring fair value adjustments as Level 3. DuringFor the years ended December 31, 2011 and 2010, and 2009, there were no impairments recorded on equity securities without readily determinable fair values.
67
Upon transfer from the loan portfolio, foreclosed assets are adjusted to and subsequently carried at the lower of carrying value or fair value less costs to sell. Net realizable value is based upon independent market prices, appraised values of the collateral, or management’s estimation of the value of the collateral and as such, the Corporation classifies foreclosed assets as a nonrecurring Level 2. When management determines that the net realizable value of the collateral is further impaired below the appraised value but there is no observable market price, the Corporation records the foreclosed asset as nonrecurring Level 3.
Originated mortgage servicing rights:
Originated mortgage servicing rights are subject to impairment testing. A valuation model, which utilizes a discounted cash flow analysis using interest rates and prepayment speed assumptions currently quoted for comparable instruments and a discount rate determined by management, is used for impairment testing. If the valuation model reflects a value less than the carrying value, originated mortgage servicing rights are adjusted to fair value through a valuation allowance as determined by the model. As such, the Corporation classifies loan servicing rights subject to nonrecurring fair value adjustments as Level 2.
Deposits:
Demand, savings, and money market deposits are, by definition, equal to the amount payable on demand at the reporting date (i.e., their carrying amounts). Fair values for variable rate certificates of deposit approximate their recorded carrying value. Fair values for fixed rate certificates of deposit are estimated using a discounted cash flow calculation that applies interest rates currently being offered on certificates to a schedule of aggregated expected monthly maturities on time deposits.
Borrowed funds:
The carrying amounts of federal funds purchased, borrowings under overnight repurchase agreements, and other short-term borrowings maturing within ninety days approximate their fair values. The fair values of the Corporation’s other borrowed funds are estimated using discounted cash flow analyses based on the Corporation’s current incremental borrowing arrangements.
The Corporation has elected to measure a portion of borrowed funds at fair value. These borrowings are recorded at fair value on a recurring basis, with the fair value measurement estimated using discounted cash flow analysis based on the Corporation’s current incremental borrowingsborrowing rates for similar types of borrowing arrangements. Changes in the fair value of these borrowings are included in noninterest income. As such, the Corporation classifies other borrowed funds as Level 2.
Commitments to extend credit, standby letters of credit and undisbursed loans:
Fair values for off balance sheet lending commitments are based on fees currently charged to enter into similar agreements, taking into consideration the remaining terms of the agreements and the counterparties’counterparties' credit standings. The Corporation does not charge fees for lending commitments; thus it is not practicable to estimate the fair value of these instruments.
The preceding methods described may produce a fair value calculation that may not be indicative of net realizable value or reflective of future fair values. Furthermore, although the Corporation believes its valuation methods are appropriate and consistent with other market participants, the use of different methodologies or assumptions to determine the fair value of certain financial instruments could result in a different fair value measurement.
68
| 2010 | 2009 | |||||||
| Level 3 inputs — January 1 | $ | 10,027 | $ | 5,979 | ||||
Net unrealized (losses) gains onavailable-for-sale investment securities | (226 | ) | 4,048 | |||||
| Level 3 inputs — December 31 | $ | 9,801 | $ | 10,027 | ||||
| Year Ended December 31 | ||||||||||||||||||||||||
| 2010 | 2009 | |||||||||||||||||||||||
| Trading | Trading | |||||||||||||||||||||||
| Gains and | Other Gains | Gains and | Other Gains | |||||||||||||||||||||
Description | (Losses) | and (Losses) | Total | (Losses) | and (Losses) | Total | ||||||||||||||||||
Recurring items | ||||||||||||||||||||||||
| Trading securities | $ | (94 | ) | $ | — | $ | (94 | ) | $ | 80 | $ | — | $ | 80 | ||||||||||
| Borrowed funds | — | 227 | 227 | — | 289 | 289 | ||||||||||||||||||
Nonrecurring items | ||||||||||||||||||||||||
| Foreclosed assets | — | (180 | ) | (180 | ) | — | (157 | ) | (157 | ) | ||||||||||||||
| Originated mortgage servicing rights | — | 1 | 1 | — | 7 | 7 | ||||||||||||||||||
Total | $ | (94 | ) | $ | 48 | $ | (46 | ) | $ | 80 | $ | 139 | $ | 219 | ||||||||||
| Year Ended December 31 | ||||||||||||||||||||||||
| 2011 | 2010 | |||||||||||||||||||||||
Description | Trading Gains and (Losses) | Other Gains and (Losses) | Total | Trading Gains and (Losses) | Other Gains and (Losses) | Total | ||||||||||||||||||
Recurring items | ||||||||||||||||||||||||
Trading securities | $ | (78 | ) | $ | — | $ | (78 | ) | $ | (94 | ) | $ | — | $ | (94 | ) | ||||||||
Borrowed funds | — | 181 | 181 | — | 227 | 227 | ||||||||||||||||||
Nonrecurring items | ||||||||||||||||||||||||
Foreclosed assets | — | (82 | ) | (82 | ) | — | (180 | ) | (180 | ) | ||||||||||||||
Originated mortgage servicing rights | — | (243 | ) | (243 | ) | — | 1 | 1 | ||||||||||||||||
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Total | $ | (78 | ) | $ | (144 | ) | $ | (222 | ) | $ | (94 | ) | $ | 48 | $ | (46 | ) | |||||||
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The activity in borrowings which the Corporation has elected to carry at fair value was as follows for the years ended December 31:
| 2010 | 2009 | |||||||
| Borrowings carried at fair value — January 1 | $ | 17,804 | $ | 23,130 | ||||
| Paydowns and maturities | (7,154 | ) | (5,037 | ) | ||||
| Net change in fair value | (227 | ) | (289 | ) | ||||
Borrowings carried at fair value — December 31 | $ | 10,423 | $ | 17,804 | ||||
Unpaid principal balance — December 31 | $ | 10,000 | $ | 17,154 | ||||
69
| 2011 | 2010 | |||||||
Borrowings carried at fair value — beginning of year | $ | 10,423 | $ | 17,804 | ||||
Paydowns and maturities | (5,000 | ) | (7,154 | ) | ||||
Net change in fair value | (181 | ) | (227 | ) | ||||
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| |||||
Borrowings carried at fair value — December 31 | $ | 5,242 | $ | 10,423 | ||||
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Unpaid principal balance — December 31 | $ | 5,000 | $ | 10,000 | ||||
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NOTE 21 — PARENT COMPANY ONLY FINANCIAL INFORMATION
| December 31 | ||||||||
| 2010 | 2009 | |||||||
ASSETS | ||||||||
| Cash on deposit at subsidiary Bank | $ | 301 | $ | 172 | ||||
| Securities available for sale | 1,929 | 2,073 | ||||||
| Investments in subsidiaries | 94,668 | 89,405 | ||||||
| Premises and equipment | 1,952 | 2,346 | ||||||
| Other assets | 53,481 | 53,644 | ||||||
Total Assets | $ | 152,331 | $ | 147,640 | ||||
| LIABILITIES AND SHAREHOLDERS’ EQUITY | ||||||||
| Other liabilities | $ | 7,170 | $ | 6,837 | ||||
| Shareholders’ equity | 145,161 | 140,803 | ||||||
Total Liabilities And Shareholders’ Equity | $ | 152,331 | $ | 147,640 | ||||
| December 31 | ||||||||
| 2011 | 2010 | |||||||
| ASSETS | ||||||||
Cash on deposit at subsidiary Bank | $ | 1,474 | $ | 301 | ||||
Securities available for sale | 3,567 | 1,929 | ||||||
Investments in subsidiaries | 106,463 | 94,668 | ||||||
Premises and equipment | 1,916 | 1,952 | ||||||
Other assets | 52,060 | 53,481 | ||||||
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TOTAL ASSETS | $ | 165,480 | $ | 152,331 | ||||
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| LIABILITIES AND SHAREHOLDERS’ EQUITY | ||||||||
Other liabilities | $ | 10,697 | $ | 7,170 | ||||
Shareholders’ equity | 154,783 | 145,161 | ||||||
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| |||||
TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY | $ | 165,480 | $ | 152,331 | ||||
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Condensed Statements of Income
| Year Ended December 31 | ||||||||||||
| 2010 | 2009 | 2008 | ||||||||||
| Income | ||||||||||||
| Dividends from subsidiaries | $ | 6,250 | $ | 6,100 | $ | 5,800 | ||||||
| Interest income | 72 | 77 | 88 | |||||||||
| Management fee and other | 1,340 | 993 | 1,011 | |||||||||
Total income | 7,662 | 7,170 | 6,899 | |||||||||
| Expenses | ||||||||||||
| Salaries and benefits | 2,286 | 2,112 | 1,819 | |||||||||
| Occupancy and equipment | 356 | 430 | 435 | |||||||||
| Audit and SOX compliance fees | 476 | 291 | 376 | |||||||||
| Other | 932 | 1,074 | 1,359 | |||||||||
Total expenses | 4,050 | 3,907 | 3,989 | |||||||||
| Income before income tax benefit and equity in undistributed earnings of subsidiaries | 3,612 | 3,263 | 2,910 | |||||||||
| Federal income tax benefit | 896 | 976 | 905 | |||||||||
| 4,508 | 4,239 | 3,815 | ||||||||||
| Undistributed earnings of subsidiaries | 4,537 | 3,561 | 286 | |||||||||
Net income | $ | 9,045 | $ | 7,800 | $ | 4,101 | ||||||
70
| Year Ended December 31 | ||||||||||||
| 2011 | 2010 | 2009 | ||||||||||
Income | ||||||||||||
Dividends from subsidiaries | $ | 6,500 | $ | 6,250 | $ | 6,100 | ||||||
Interest income | 128 | 72 | 77 | |||||||||
Management fee and other | 1,201 | 1,340 | 993 | |||||||||
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Total income | 7,829 | 7,662 | 7,170 | |||||||||
Expenses | ||||||||||||
Salaries and benefits | 2,267 | 2,286 | 2,112 | |||||||||
Occupancy and equipment | 370 | 356 | 430 | |||||||||
Audit and SOX compliance fees | 378 | 476 | 291 | |||||||||
Other | 1,089 | 932 | 1,074 | |||||||||
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| |||||||
Total expenses | 4,104 | 4,050 | 3,907 | |||||||||
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| |||||||
Income before income tax benefit and equity in undistributed earnings of subsidiaries | 3,725 | 3,612 | 3,263 | |||||||||
Federal income tax benefit | 958 | 896 | 976 | |||||||||
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| |||||||
| 4,683 | 4,508 | 4,239 | ||||||||||
Undistributed earnings of subsidiaries | 5,527 | 4,537 | 3,561 | |||||||||
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| |||||||
Net income | $ | 10,210 | $ | 9,045 | $ | 7,800 | ||||||
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| |||||||
| Year Ended December 31 | ||||||||||||
| 2010 | 2009 | 2008 | ||||||||||
Operating Activities | ||||||||||||
| Net income | $ | 9,045 | $ | 7,800 | $ | 4,101 | ||||||
| Adjustments to reconcile net income to cash provided by operations | ||||||||||||
| Undistributed earnings of subsidiaries | (4,537 | ) | (3,561 | ) | (286 | ) | ||||||
| Share based payment awards | 650 | 677 | 603 | |||||||||
| Depreciation | 147 | 163 | 294 | |||||||||
| Net amortization of investment securities | 5 | 6 | 5 | |||||||||
| Deferred income tax (benefit) expense | (172 | ) | (570 | ) | 162 | |||||||
| Changes in operating assets and liabilities which provided (used) cash | ||||||||||||
| Other assets | 298 | (748 | ) | (816 | ) | |||||||
| Accrued interest and other liabilities | 1,883 | 517 | 583 | |||||||||
Net Cash Provided by Operating Activities | 7,319 | 4,284 | 4,646 | |||||||||
Investing Activities | ||||||||||||
Activity inavailable-for-sale securities | ||||||||||||
| Maturities, calls, and sales | 110 | 110 | 110 | |||||||||
| Sales (purchases) of equipment and premises | 247 | (466 | ) | 1,300 | ||||||||
| Advances to subsidiaries | (250 | ) | — | (11,927 | ) | |||||||
Net Cash Provided by (Used in) Investing Activities | 107 | (356 | ) | (10,517 | ) | |||||||
Financing Activities | ||||||||||||
| Net (decrease) increase in other borrowed funds | (1,550 | ) | 700 | 1,836 | ||||||||
| Cash dividends paid on common stock | (5,421 | ) | (5,256 | ) | (4,873 | ) | ||||||
| Proceeds from the issuance of common stock | 2,208 | 2,479 | 2,476 | |||||||||
| Common stock repurchased | (2,020 | ) | (2,056 | ) | (6,440 | ) | ||||||
| Common stock purchased for deferred compensation obligations | (514 | ) | (767 | ) | (249 | ) | ||||||
Net Cash Used in Financing Activities | (7,297 | ) | (4,900 | ) | (7,250 | ) | ||||||
Increase (Decrease) in Cash and Cash Equivalents | 129 | (972 | ) | (13,121 | ) | |||||||
| Cash and cash equivelants at beginning of year | 172 | 1,144 | 14,265 | |||||||||
Cash And Cash Equivalents at End of Year | $ | 301 | $ | 172 | $ | 1,144 | ||||||
| Year Ended December 31 | ||||||||||||
| 2011 | 2010 | 2009 | ||||||||||
OPERATING ACTIVITIES | ||||||||||||
Net income | $ | 10,210 | $ | 9,045 | $ | 7,800 | ||||||
Adjustments to reconcile net income to cash provided by operations | ||||||||||||
Undistributed earnings of subsidiaries | (5,527 | ) | (4,537 | ) | (3,561 | ) | ||||||
Share-based payment awards | 615 | 650 | 677 | |||||||||
Depreciation | 123 | 147 | 163 | |||||||||
Net amortization of investment securities | 7 | 5 | 6 | |||||||||
Deferred income tax benefit | (48 | ) | (172 | ) | (570 | ) | ||||||
Changes in operating assets and liabilities which provided (used) cash | ||||||||||||
Other assets | 167 | 298 | (748 | ) | ||||||||
Accrued interest and other liabilities | 757 | 1,883 | 517 | |||||||||
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| |||||||
NET CASH PROVIDED BY OPERATING ACTIVITIES | 6,304 | 7,319 | 4,284 | |||||||||
INVESTING ACTIVITIES | ||||||||||||
Activity in available-for-sale securities | ||||||||||||
Maturities, calls, and sales | 585 | 110 | 110 | |||||||||
Purchases | (3,000 | ) | — | — | ||||||||
(Purchases) sales of equipment and premises | (87 | ) | 247 | (466 | ) | |||||||
Advances to subsidiaries | — | (250 | ) | — | ||||||||
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NET CASH (USED IN) PROVIDED BY INVESTING ACTIVITIES | (2,502 | ) | 107 | (356 | ) | |||||||
FINANCING ACTIVITIES | ||||||||||||
Net increase (decrease) in other borrowed funds | 2,772 | (1,550 | ) | 700 | ||||||||
Cash dividends paid on common stock | (5,770 | ) | (5,421 | ) | (5,256 | ) | ||||||
Proceeds from the issuance of common stock | 2,302 | 2,208 | 2,479 | |||||||||
Common stock repurchased | (1,507 | ) | (2,020 | ) | (2,056 | ) | ||||||
Common stock purchased for deferred compensation obligations | (426 | ) | (514 | ) | (767 | ) | ||||||
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NET CASH USED IN FINANCING ACTIVITIES | (2,629 | ) | (7,297 | ) | (4,900 | ) | ||||||
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INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS | 1,173 | 129 | (972 | ) | ||||||||
Cash and cash equivelants at beginning of year | 301 | 172 | 1,144 | |||||||||
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CASH AND CASH EQUIVALENTS AT END OF YEAR | $ | 1,474 | $ | 301 | $ | 172 | ||||||
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NOTE 22 — OPERATING SEGMENTS
The Corporation’s reportable segments are based on legal entities that account for at least 10 percent of net operating results. Retail banking operations for 2011, 2010, 2009, and 20082009 represent approximately 90% or greater of the Corporation’s total assets and operating results. As such, no additional segment information is presented.
71
ISABELLA BANK CORPORATION FINANCIAL REVIEW
(All dollars in thousands)
The following is management’s discussion and analysis of the financial condition and results of operations for Isabella Bank Corporation. This discussion and analysis is intended to provide a better understanding of the consolidated financial statements and statistical data included elsewhere in the Annual Report.
Executive Summary
Isabella Bank Corporation, as well as all other financial institutions in Michigan and across the entire country, continues to experience the negative impacts on its operations from the recentpersistent weak economy. The current economic recession and the subsequent recovery. This recession, which began in the fourth quarter of 2008,environment has resulted inled to 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
In spite of the economic downturn that they have halted foreclosures due to a failure to properly preparehas occurred over the documents to complete the foreclosure process. Isabella Bank Corporation has, to its knowledge, materially complied with all laws governing foreclosures.
New Branch Office
The recently passed Health Care and Education Act of 2010 and the Patient Protection and Affordable Care Act could have a significant impact on the Corporation’s operating results in future periods. Aside from the potential increases in the Corporation’s health care costs, the implementation of the new rules and requirements is likely to require a substantial commitment from the Corporation’s management.
The recently enacted Dodd-Frank Act is very broad and complex legislation that puts in place a sweeping new financial services framework that is likely to have significant regulatory and legal consequences and will likely impact the Corporation’s future operating results. Implementation of the Act will require compliance with numerous new regulations, which will increase compliance and documentation costs. For more information, see the summary of the Dodd-Frank Act under the heading “Regulation” in Item 1, included“Supervision and Regulation” in the Corporation’s 20102011 annual report onForm 10-K.
Shareholder Stock Purchase ProgramOther
The Corporation has not received any notices of regulatory actions as of February 28, 2011.
72
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 adequacyappropriateness 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 testedevaluated 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 available-for-sale 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.
Due to the limited trading of certain auction rate money market preferred investment security instruments, which are classified asavailable-for-salesecurities and reflected at estimated fair value. Due to credit market uncertainty,preferred stocks during 2010, 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.
732011.
INTEREST RATE AND INTEREST DIFFERENTIAL
The following schedules present the daily average amount outstanding for each major category of interest earning assets, nonearning assets, interest bearing liabilities, and noninterest bearing liabilities for the last three years. This scheduleThese schedules also presents an analysis of interest income and interest expense for the periods indicated. All interest income is reported on a fully taxable equivalent (FTE) basis using a 34% federal income tax rate. Nonaccruing loans, for the purpose of the following computations, are included in the average loan amounts outstanding. Federal Reserve and Federal Home Loan Bank stock holdings which are restricted are included in Other Assets.
| Year Ended | ||||||||||||||||||||||||||||||||||||
| December 31, 2010 | December 31, 2009 | December 31, 2008 | ||||||||||||||||||||||||||||||||||
| Tax | Average | Tax | Average | Tax | Average | |||||||||||||||||||||||||||||||
| Average | Equivalent | Yield/ | Average | Equivalent | Yield/ | Average | Equivalent | Yield/ | ||||||||||||||||||||||||||||
| Balance | Interest | Rate | Balance | Interest | Rate | Balance | Interest | Rate | ||||||||||||||||||||||||||||
INTEREST EARNING ASSETS | ||||||||||||||||||||||||||||||||||||
| Loans | $ | 725,534 | $ | 46,794 | 6.45 | % | $ | 725,299 | $ | 47,706 | 6.58 | % | $ | 717,040 | $ | 49,674 | 6.93 | % | ||||||||||||||||||
| Taxable investment securities | 160,514 | 5,271 | 3.28 | % | 119,063 | 4,712 | 3.96 | % | 108,919 | 5,433 | 4.99 | % | ||||||||||||||||||||||||
| Nontaxable investment securities | 120,999 | 7,095 | 5.86 | % | 121,676 | 7,217 | 5.93 | % | 121,220 | 7,218 | 5.95 | % | ||||||||||||||||||||||||
| Trading account securities | 8,097 | 436 | 5.38 | % | 17,279 | 856 | 4.95 | % | 26,618 | 1,305 | 4.90 | % | ||||||||||||||||||||||||
| Federal funds sold | — | — | — | 842 | 1 | 0.12 | % | 5,198 | 110 | 2.12 | % | |||||||||||||||||||||||||
| Other | 45,509 | 479 | 1.05 | % | 27,433 | 376 | 1.37 | % | 17,600 | 433 | 2.46 | % | ||||||||||||||||||||||||
Total earning assets | 1,060,653 | 60,075 | 5.66 | % | 1,011,592 | 60,868 | 6.02 | % | 996,595 | 64,173 | 6.44 | % | ||||||||||||||||||||||||
NON EARNING ASSETS | ||||||||||||||||||||||||||||||||||||
| Allowance for loan losses | (13,262 | ) | (12,334 | ) | (8,606 | ) | ||||||||||||||||||||||||||||||
| Cash and demand deposits due from banks | 18,070 | 18,190 | 18,582 | |||||||||||||||||||||||||||||||||
| Premises and equipment | 24,624 | 23,810 | 22,905 | |||||||||||||||||||||||||||||||||
| Accrued income and other assets | 92,845 | 86,376 | 83,626 | |||||||||||||||||||||||||||||||||
Total assets | $ | 1,182,930 | $ | 1,127,634 | $ | 1,113,102 | ||||||||||||||||||||||||||||||
INTEREST BEARING LIABILITIES | ||||||||||||||||||||||||||||||||||||
| Interest bearing demand deposits | $ | 137,109 | 151 | 0.11 | % | $ | 116,412 | 146 | 0.13 | % | $ | 114,889 | 813 | 0.71 | % | |||||||||||||||||||||
| Savings deposits | 169,579 | 391 | 0.23 | % | 177,538 | 399 | 0.22 | % | 213,410 | 2,439 | 1.14 | % | ||||||||||||||||||||||||
| Time deposits | 430,892 | 10,988 | 2.55 | % | 398,356 | 13,043 | 3.27 | % | 393,190 | 16,621 | 4.23 | % | ||||||||||||||||||||||||
| Borrowed funds | 188,512 | 5,674 | 3.01 | % | 193,922 | 6,251 | 3.22 | % | 145,802 | 5,733 | 3.93 | % | ||||||||||||||||||||||||
Total interest bearing liabilities | 926,092 | 17,204 | 1.86 | % | 886,228 | 19,839 | 2.24 | % | 867,291 | 25,606 | 2.95 | % | ||||||||||||||||||||||||
NONINTEREST BEARING LIABILITIES | ||||||||||||||||||||||||||||||||||||
| Demand deposits | 102,812 | 94,408 | 95,552 | |||||||||||||||||||||||||||||||||
| Other | 14,171 | 7,188 | 6,633 | |||||||||||||||||||||||||||||||||
| Shareholders’ equity | 139,855 | 139,810 | 143,626 | |||||||||||||||||||||||||||||||||
Total liabilities and shareholders’ equity | $ | 1,182,930 | $ | 1,127,634 | $ | 1,113,102 | ||||||||||||||||||||||||||||||
Net interest income (FTE) | $ | 42,871 | $ | 41,029 | $ | 38,567 | ||||||||||||||||||||||||||||||
Net yield on interest earning assets (FTE) | 4.04 | % | 4.06 | % | 3.87 | % | ||||||||||||||||||||||||||||||
74
| Year Ended December 31 | ||||||||||||||||||||||||||||||||||||
| 2011 | 2010 | 2009 | ||||||||||||||||||||||||||||||||||
| Average Balance | Tax Equivalent Interest | Average Yield/ Rate | Average Balance | Tax Equivalent Interest | Average Yield/ Rate | Average Balance | Tax Equivalent Interest | Average Yield/ Rate | ||||||||||||||||||||||||||||
INTEREST EARNING ASSETS | ||||||||||||||||||||||||||||||||||||
Loans | $ | 743,441 | $ | 45,463 | 6.12 | % | $ | 725,534 | $ | 46,794 | 6.45 | % | $ | 725,299 | $ | 47,706 | 6.58 | % | ||||||||||||||||||
Taxable investment securities | 235,437 | 6,941 | 2.95 | % | 160,514 | 5,271 | 3.28 | % | 119,063 | 4,712 | 3.96 | % | ||||||||||||||||||||||||
Nontaxable investment securities | 136,356 | 7,847 | 5.75 | % | 120,999 | 7,095 | 5.86 | % | 121,676 | 7,217 | 5.93 | % | ||||||||||||||||||||||||
Trading account securities | 5,087 | 286 | 5.62 | % | 8,097 | 436 | 5.38 | % | 17,279 | 856 | 4.95 | % | ||||||||||||||||||||||||
Federal funds sold | — | — | — | — | — | — | 842 | 1 | 0.12 | % | ||||||||||||||||||||||||||
Other | 37,539 | 506 | 1.35 | % | 45,509 | 479 | 1.05 | % | 27,433 | 376 | 1.37 | % | ||||||||||||||||||||||||
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Total earning assets | 1,157,860 | 61,043 | 5.27 | % | 1,060,653 | 60,075 | 5.66 | % | 1,011,592 | 60,868 | 6.02 | % | ||||||||||||||||||||||||
NONEARNING ASSETS | ||||||||||||||||||||||||||||||||||||
Allowance for loan losses | (12,522 | ) | (13,262 | ) | (12,334 | ) | ||||||||||||||||||||||||||||||
Cash and demand deposits due from banks | 20,195 | 18,070 | 18,190 | |||||||||||||||||||||||||||||||||
Premises and equipment | 24,397 | 24,624 | 23,810 | |||||||||||||||||||||||||||||||||
Accrued income and other assets | 97,265 | 92,845 | 86,376 | |||||||||||||||||||||||||||||||||
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Total assets | $ | 1,287,195 | $ | 1,182,930 | $ | 1,127,634 | ||||||||||||||||||||||||||||||
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INTEREST BEARING LIABILITIES | ||||||||||||||||||||||||||||||||||||
Interest bearing demand deposits | $ | 152,530 | 189 | 0.12 | % | $ | 137,109 | 151 | 0.11 | % | $ | 116,412 | 146 | 0.13 | % | |||||||||||||||||||||
Savings deposits | 192,999 | 488 | 0.25 | % | 169,579 | 391 | 0.23 | % | 177,538 | 399 | 0.22 | % | ||||||||||||||||||||||||
Time deposits | 467,931 | 10,258 | 2.19 | % | 430,892 | 10,988 | 2.55 | % | 398,356 | 13,043 | 3.27 | % | ||||||||||||||||||||||||
Borrowed funds | 198,828 | 5,268 | 2.65 | % | 188,512 | 5,674 | 3.01 | % | 193,922 | 6,251 | 3.22 | % | ||||||||||||||||||||||||
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Total interest bearing liabilities | 1,012,288 | 16,203 | 1.60 | % | 926,092 | 17,204 | 1.86 | % | 886,228 | 19,839 | 2.24 | % | ||||||||||||||||||||||||
NONINTEREST BEARING LIABILITIES | ||||||||||||||||||||||||||||||||||||
Demand deposits | 113,726 | 102,812 | 94,408 | |||||||||||||||||||||||||||||||||
Other | 15,456 | 14,171 | 7,188 | |||||||||||||||||||||||||||||||||
Shareholders’ equity | 145,725 | 139,855 | 139,810 | |||||||||||||||||||||||||||||||||
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Total liabilities and shareholders’ equity | $ | 1,287,195 | $ | 1,182,930 | $ | 1,127,634 | ||||||||||||||||||||||||||||||
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Net interest income (FTE) | $ | 44,840 | $ | 42,871 | $ | 41,029 | ||||||||||||||||||||||||||||||
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Net yield on interest earning assets (FTE) | 3.87 | % | 4.04 | % | 4.06 | % | ||||||||||||||||||||||||||||||
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The Corporation derives the majority of its gross income from interest earned on loans and investments, while its most significant expense is the interest cost incurred for funds used. Net interest income is the amount by which interest income on earning assets exceeds the interest cost of deposits and borrowings. Net interest income is influenced by changes in the balance and mix of assets and liabilities and market interest rates. Management exerts some control over these factors; however, Federal Reserve monetary policy and competition have a significant impact. Interest income includes loan fees of $2,385 in 2011, $2,196 in 2010, and $1,963 in 2009, and $1,808 in 2008.
2009. For analytical purposes, net interest income is adjusted to a “taxable equivalent” basis by adding the
income tax savings from interest on tax exempt loans and securities, thus making year to year comparisons more meaningful.
VOLUME AND RATE VARIANCE ANALYSIS
The following table details the dollar amount of changes in FTE net interest income for each major category of interest earning assets and interest bearing liabilities and the amount of change attributable to changes in average balances (volume) or average rates. The change in interest due to both volume and rate has been allocated to volume and rate changes in proportion to the relationship of the absolute dollar amounts of the change in each.
| 2010 Compared to 2009 | 2009 Compared to 2008 | |||||||||||||||||||||||
| Increase (Decrease) Due to | Increase (Decrease) Due to | |||||||||||||||||||||||
| Volume | Rate | Net | Volume | Rate | Net | |||||||||||||||||||
CHANGES IN INTEREST INCOME: | ||||||||||||||||||||||||
| Loans | $ | 15 | $ | (927 | ) | $ | (912 | ) | $ | 567 | $ | (2,535 | ) | $ | (1,968 | ) | ||||||||
| Taxable investment securities | 1,453 | (894 | ) | 559 | 474 | (1,195 | ) | (721 | ) | |||||||||||||||
| Nontaxable investment securities | (40 | ) | (82 | ) | (122 | ) | 27 | (28 | ) | (1 | ) | |||||||||||||
| Trading account securities | (489 | ) | 69 | (420 | ) | (463 | ) | 14 | (449 | ) | ||||||||||||||
| Federal funds sold | (1 | ) | — | (1 | ) | (51 | ) | (58 | ) | (109 | ) | |||||||||||||
| Other | 205 | (102 | ) | 103 | 182 | (239 | ) | (57 | ) | |||||||||||||||
Total changes in interest income | 1,143 | (1,936 | ) | (793 | ) | 736 | (4,041 | ) | (3,305 | ) | ||||||||||||||
CHANGES IN INTEREST EXPENSE: | ||||||||||||||||||||||||
| Interest bearing demand deposits | 24 | (19 | ) | 5 | 11 | (678 | ) | (667 | ) | |||||||||||||||
| Savings deposits | (18 | ) | 10 | (8 | ) | (353 | ) | (1,687 | ) | (2,040 | ) | |||||||||||||
| Time deposits | 1,002 | (3,057 | ) | (2,055 | ) | 216 | (3,794 | ) | (3,578 | ) | ||||||||||||||
| Borrowed funds | (171 | ) | (406 | ) | (577 | ) | 1,672 | (1,154 | ) | 518 | ||||||||||||||
Total changes in interest expense | 837 | (3,472 | ) | (2,635 | ) | 1,546 | (7,313 | ) | (5,767 | ) | ||||||||||||||
Net change in interest margin (FTE) | $ | 306 | $ | 1,536 | $ | 1,842 | $ | (810 | ) | $ | 3,272 | $ | 2,462 | |||||||||||
| 2011 Compared to 2010 Increase (Decrease) Due to | 2010 Compared to 2009 Increase (Decrease) Due to | |||||||||||||||||||||||
| Volume | Rate | Net | Volume | Rate | Net | |||||||||||||||||||
CHANGES IN INTEREST INCOME: | ||||||||||||||||||||||||
Loans | $ | 1,136 | $ | (2,467 | ) | $ | (1,331 | ) | $ | 15 | $ | (927 | ) | $ | (912 | ) | ||||||||
Taxable investment securities | 2,254 | (584 | ) | 1,670 | 1,453 | (894 | ) | 559 | ||||||||||||||||
Nontaxable investment securities | 886 | (134 | ) | 752 | (40 | ) | (82 | ) | (122 | ) | ||||||||||||||
Trading account securities | (168 | ) | 18 | (150 | ) | (489 | ) | 69 | (420 | ) | ||||||||||||||
Federal funds sold | — | — | — | (1 | ) | — | (1 | ) | ||||||||||||||||
Other | (93 | ) | 120 | 27 | 205 | (102 | ) | 103 | ||||||||||||||||
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Total changes in interest income | 4,015 | (3,047 | ) | 968 | 1,143 | (1,936 | ) | (793 | ) | |||||||||||||||
CHANGES IN INTEREST EXPENSE: | ||||||||||||||||||||||||
Interest bearing demand deposits | 18 | 20 | 38 | 24 | (19 | ) | 5 | |||||||||||||||||
Savings deposits | 57 | 40 | 97 | (18 | ) | 10 | (8 | ) | ||||||||||||||||
Time deposits | 894 | (1,624 | ) | (730 | ) | 1,002 | (3,057 | ) | (2,055 | ) | ||||||||||||||
Borrowed funds | 299 | (705 | ) | (406 | ) | (171 | ) | (406 | ) | (577 | ) | |||||||||||||
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Total changes in interest expense | 1,268 | (2,269 | ) | (1,001 | ) | 837 | (3,472 | ) | (2,635 | ) | ||||||||||||||
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Net change in interest margin (FTE) | $ | 2,747 | $ | (778 | ) | $ | 1,969 | $ | 306 | $ | 1,536 | $ | 1,842 | |||||||||||
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During 2011, average interest earning assets increased by $97,207. This increase resulted in 2010,$4,015 of additional interest income which exceeded the $1,842 increase$3,047 decrease in FTEinterest income caused by declines in interest rates. Interest bearing liabilities increased $86,196 at a cost of $1,268 while the decline in rates, mostly those on time deposits and borrowed funds, decreased interest expense by $2,269. The diminished interest income earned on assets resulted in a 0.17% decline in the net interest income was primarily the result of interest rates on interest bearing liabilities decreasing faster than rates earned on interest earning assets. The Corporationyield. Management anticipates that net interest margin yield will decline slightly during 20112012 due to the following factors:
Based on the current economic conditions, management does not anticipate any changes in the target Fed funds rate in the foreseeable future. As such, changes in market rates may be unlikely. However, it is likely that the Corporation may see declines in the rates earned on interest earning assets as 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 risk are currently priced at or below the Corporation’s current net yield on interest earning assets. Most of the potential declines would arise out of the Corporation’s investment portfolio as the majority of securities that are called or mature in 2012 will be reinvested at significantly lower rates.
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 balloon mortgages, which are held on the Corporation’s consolidated balance sheet. As these balloon mortgages have paid off, the proceeds from these loans have been reinvested (typically in the form of available-for-sale investment securities) at lower interest rates which has adversely impacted interest income.
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 | ||
75
| Year Ended December 31 | ||||||||||||||||||||
| 2010 | 2009 | 2008 | 2007 | 2006 | ||||||||||||||||
| Allowance for loan losses — January 1 | $ | 12,979 | $ | 11,982 | $ | 7,301 | $ | 7,605 | $ | 6,899 | ||||||||||
| Allowance of acquired bank | — | — | 822 | — | 726 | |||||||||||||||
| Loans charged off | ||||||||||||||||||||
| Commercial and agricultural | 3,731 | 3,081 | 2,137 | 905 | 368 | |||||||||||||||
| Real estate mortgage | 2,524 | 2,627 | 3,334 | 659 | 252 | |||||||||||||||
| Consumer | 596 | 934 | 854 | 582 | 529 | |||||||||||||||
Total loans charged off | 6,851 | 6,642 | 6,325 | 2,146 | 1,149 | |||||||||||||||
| Recoveries | ||||||||||||||||||||
| Commercial and agricultural | 453 | 623 | 160 | 297 | 136 | |||||||||||||||
| Real estate mortgage | 638 | 546 | 240 | 49 | 53 | |||||||||||||||
| Consumer | 297 | 377 | 284 | 285 | 258 | |||||||||||||||
Total recoveries | 1,388 | 1,546 | 684 | 631 | 447 | |||||||||||||||
| Net loans charged off | 5,463 | 5,096 | 5,641 | 1,515 | 702 | |||||||||||||||
| Provision charged to income | 4,857 | 6,093 | 9,500 | 1,211 | 682 | |||||||||||||||
Allowance for loan losses — December 31 | $ | 12,373 | $ | 12,979 | $ | 11,982 | $ | 7,301 | $ | 7,605 | ||||||||||
Year to date average loans | $ | 725,534 | $ | 725,299 | $ | 717,040 | $ | 604,342 | $ | 522,726 | ||||||||||
Net loans charged off to average loans outstanding | 0.75 | % | 0.70 | % | 0.79 | % | 0.25 | % | 0.13 | % | ||||||||||
Total amount of loans outstanding | $ | 735,304 | $ | 723,316 | $ | 735,385 | $ | 612,687 | $ | 591,042 | ||||||||||
Allowance for loan losses as a % of loans | 1.68 | % | 1.79 | % | 1.63 | % | 1.19 | % | 1.29 | % | ||||||||||
76
| 2011 |
| 2010 |
| 2009 |
| 2008 |
| 2007 | ||||||||||||||||||||
Allowance for loan losses — January 1 | $ | 12,373 | $ | 12,979 | $ | 11,982 | $ | 7,301 | $ | 7,605 | ||||||||||||||||||
Allowance of acquired bank | — | — | — | 822 | — | |||||||||||||||||||||||
Loans charged off | ||||||||||||||||||||||||||||
Commercial and agricultural | 1,984 | 3,731 | 3,081 | 2,137 | 905 | |||||||||||||||||||||||
Real estate mortgage | 2,240 | 2,524 | 2,627 | 3,334 | 659 | |||||||||||||||||||||||
Consumer | 552 | 596 | 934 | 854 | 582 | |||||||||||||||||||||||
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Total loans charged off | 4,776 | 6,851 | 6,642 | 6,325 | 2,146 | |||||||||||||||||||||||
Recoveries | ||||||||||||||||||||||||||||
Commercial and agricultural | 461 | 453 | 623 | 160 | 297 | |||||||||||||||||||||||
Real estate mortgage | 177 | 638 | 546 | 240 | 49 | |||||||||||||||||||||||
Consumer | 314 | 297 | 377 | 284 | 285 | |||||||||||||||||||||||
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Total recoveries | 952 | 1,388 | 1,546 | 684 | 631 | |||||||||||||||||||||||
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Net loans charged off | 3,824 | 5,463 | 5,096 | 5,641 | 1,515 | |||||||||||||||||||||||
Provision charged to income | 3,826 | 4,857 | 6,093 | 9,500 | 1,211 | |||||||||||||||||||||||
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Allowance for loan losses — | $ | 12,375 | $ | 12,373 | $ | 12,979 | $ | 11,982 | $ | 7,301 | ||||||||||||||||||
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Year to date average loans | $ | 743,441 | $ | 725,534 | $ | 725,299 | $ | 717,040 | $ | 604,342 | ||||||||||||||||||
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Net loans charged off to average loans outstanding | 0.51 | % | 0.75 | % | 0.70 | % | 0.79 | % | 0.25 | % | ||||||||||||||||||
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Total amount of loans outstanding | $ | 750,291 | $ | 735,304 | $ | 723,316 | $ | 735,385 | $ | 612,687 | ||||||||||||||||||
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Allowance for loan losses as a % of loans | 1.65 | % | 1.68 | % | 1.79 | % | 1.63 | % | 1.19 | % | ||||||||||||||||||
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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 for either for trading or its own portfolio that would be classified as subprime, nor has it originated adjustable rate mortgages 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 20102011 to 2009,2010, net loans charged off increaseddecreased by $367.$1,639. 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. While there have been marked improvements in the level of net loans charged off, which has contributed to the Corporation’s ability to reduce its provision for loan losses, in 2010 when comparedthe overall local, regional and national economies have yet 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,losses, 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 —6 – Loans and Allowance for Loan Losses” to the Corporation’s consolidated financial statements.
Loans Past Due and Loans in Nonaccrual Status
Increases in past due and nonaccrual loans can have a significant impact on the ALLL.allowance for loan losses. To determine the potential impact, and corresponding estimated losses, management analyzes its historical loss trends on loans past due30-89 days, 90 days or more, and nonaccrual loans.
The following tables summarize the Corporation’s past due and nonaccrual loans as of December 31:
| Total Past Due and Nonaccrual | ||||||||||||||||||||
| 2010 | 2009 | 2008 | 2007 | 2006 | ||||||||||||||||
| Commercial and agricultural | $ | 9,606 | $ | 8,839 | $ | 13,958 | $ | 8,746 | $ | 7,213 | ||||||||||
| Residential mortgage | 8,119 | 10,296 | 12,418 | 8,357 | 4,631 | |||||||||||||||
| Consumer installment | 309 | 460 | 956 | 617 | 360 | |||||||||||||||
| $ | 18,034 | $ | 19,595 | $ | 27,332 | $ | 17,720 | $ | 12,204 | |||||||||||
| 2010 | ||||||||||||||||
| Accruing Loans Past Due | Total | |||||||||||||||
| Greater | Past Due | |||||||||||||||
| Than | and | |||||||||||||||
| 30-89 Days | 90 Days | Nonaccrual | Nonaccrual | |||||||||||||
| Commercial and agricultural | 5,291 | 175 | 4,140 | $ | 9,606 | |||||||||||
| Residential mortgage | 6,339 | 310 | 1,470 | 8,119 | ||||||||||||
| Consumer installment | 308 | 1 | — | 309 | ||||||||||||
| $ | 11,938 | $ | 486 | $ | 5,610 | $ | 18,034 | |||||||||
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| Total Past Due and Nonaccrual | ||||||||||||||||||||
| 2011 | 2010 | 2009 | 2008 | 2007 | ||||||||||||||||
Commercial and agricultural | $ | 7,420 | $ | 9,606 | $ | 8,839 | $ | 13,958 | $ | 8,746 | ||||||||||
Residential mortgage | 5,297 | 8,119 | 10,296 | 12,418 | 8,357 | |||||||||||||||
Consumer installment | 186 | 309 | 460 | 956 | 617 | |||||||||||||||
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| $ | 12,903 | $ | 18,034 | $ | 19,595 | $ | 27,332 | $ | 17,720 | |||||||||||
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| 2011 | ||||||||||||||||
Total Past Due and | ||||||||||||||||
| Accruing Loans Past Due | ||||||||||||||||
| 90 Days | ||||||||||||||||
| 30-89 Days | or More | Nonaccrual | Nonaccrual | |||||||||||||
Commercial and agricultural | $ | 2,149 | $ | 466 | $ | 4,805 | $ | 7,420 | ||||||||
Residential mortgage | 3,424 | 289 | 1,584 | 5,297 | ||||||||||||
Consumer installment | 181 | 5 | — | 186 | ||||||||||||
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| $ | 5,754 | $ | 760 | $ | 6,389 | $ | 12,903 | |||||||||
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| 2010 | ||||||||||||||||
Total Past Due and | ||||||||||||||||
| Accruing Loans Past Due | ||||||||||||||||
| 90 Days | ||||||||||||||||
| 30-89 Days | or More | 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 | ||||||||||||
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| $ | 11,938 | $ | 486 | $ | 5,610 | $ | 18,034 | |||||||||
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Troubled Debt Restructurings
| 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 | |||||||||
| 2010 | 2009 | 2008 | 2007 | 2006 | ||||||||||||||||||||||||||||||||||||||||
| Accruing | Non- | Accruing | Non- | Accruing | Non- | Accruing | Accruing | |||||||||||||||||||||||||||||||||||||
| Interest | accrual | Total | Interest | accrual | Total | Interest | accrual | Total | Interest | Interest | ||||||||||||||||||||||||||||||||||
| Current | $ | 4,798 | $ | 499 | $ | 5,297 | $ | 2,754 | $ | 786 | $ | 3,540 | $ | 2,297 | $ | 1,355 | $ | 3,652 | $ | 517 | $ | 640 | ||||||||||||||||||||||
Past due30-89 days | 277 | 26 | 303 | 107 | 904 | 1,011 | 268 | — | 268 | 115 | 57 | |||||||||||||||||||||||||||||||||
| Past due 90 days or more | — | 163 | 163 | — | 426 | 426 | — | 630 | 630 | 53 | — | |||||||||||||||||||||||||||||||||
Total | $ | 5,075 | $ | 688 | $ | 5,763 | $ | 2,861 | $ | 2,116 | $ | 4,977 | $ | 2,565 | $ | 1,985 | $ | 4,550 | $ | 685 | $ | 697 | ||||||||||||||||||||||
| 2011 | 2010 | 2009 | 2008 | 2007 | ||||||||||||||||||||||||||||||||||||||||||||||||
| Accruing Interest | Non- accrual | Total | Accruing Interest | Non- accrual | Total | Accruing Interest | Non- accrual | Total | Accruing Interest | Non- accrual | Total | Accruing Interest | ||||||||||||||||||||||||||||||||||||||||
Current | $ | 16,125 | $ | 514 | $ | 16,639 | $ | 4,798 | $ | 499 | $ | 5,297 | $ | 2,754 | $ | 786 | $ | 3,540 | $ | 2,297 | $ | 1,355 | $ | 3,652 | $ | 517 | ||||||||||||||||||||||||||
Past due 30-89 days | 1,614 | 429 | 2,043 | 277 | 26 | 303 | 107 | 904 | 1,011 | 268 | — | 268 | 115 | |||||||||||||||||||||||||||||||||||||||
Past due 90 days or more | — | 74 | 74 | — | 163 | 163 | — | 426 | 426 | — | 630 | 630 | 53 | |||||||||||||||||||||||||||||||||||||||
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Total | $ | 17,739 | $ | 1,017 | $ | 18,756 | $ | 5,075 | $ | 688 | $ | 5,763 | $ | 2,861 | $ | 2,116 | $ | 4,977 | $ | 2,565 | $ | 1,985 | $ | 4,550 | $ | 685 | ||||||||||||||||||||||||||
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The Corporation had no restructured loanstroubled debt restructurings in nonaccrual status as of December 31, 20072007.
As a result of adopting the amendments in ASU No. 2011-02, the Corporation reassessed all loan restructurings that occurred on 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 restructuringsmodifications have allowed borrowers to develop a payment structure that will allow them to continue making payments in lieu of foreclosure. Restructured loansTroubled debt restructurings that have been placed in nonaccrual status may be placed back on accrual status after six months of continuouscontinued performance.
Loan modifications are considered to be classified as a restructured loan,TDR’s when the concessions grantedmodification results in terms outside of normal lending practices to a customerborrower who is experiencing financial difficulty must meet one of the following criteria:
Typical concessions granted include, but are not limited to:
1. Reduction of the statedAgreeing to interest rate related to the sole purpose of providing payment and reliefrates below prevailing market rates for the remaining original life of the debt.
2. Extension ofExtending the amortization period beyond typical lending guidelines.
3. Forbearance of principal.
4. Forbearance of accrued interest.
To determine if a borrower is experiencing financial difficulties, the Corporation considers if:
1. The borrower is currently in default on any of their debt.
2. It is likely that the borrower would default on any of their debt if the concession was not granted.
3. The borrower’s cash flow was sufficient to service all of their debt if the concession was not granted.
4. The borrower has declared, or is in the process of declaring, bankruptcy.
5. The borrower is unlikely to continue as a going concern (if the entity is a business).
The 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 | ||||||||||||||||
| 2011 | ||||||||||||||||
| 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 | |||||||||||||
Commercial | ||||||||||||||||
Commercial real estate | 1 | $ | 408 | — | $ | — | ||||||||||
Commercial other | 38 | 9,932 | 4 | 2,643 | ||||||||||||
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Total commercial | 39 | 10,340 | 4 | 2,643 | ||||||||||||
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Agricultural other | 8 | 1,321 | — | — | ||||||||||||
Residential mortgage | ||||||||||||||||
Senior liens | 19 | 2,161 | 17 | 1,754 | ||||||||||||
Consumer | ||||||||||||||||
Secured | 6 | 65 | 1 | 4 | ||||||||||||
Unsecured | — | — | 2 | 20 | ||||||||||||
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Total consumer | 6 | 65 | 3 | 24 | ||||||||||||
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Total | 72 | $ | 13,887 | 24 | $ | 4,421 | ||||||||||
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The Corporation did not restructuredrestructure any loans as a result of athrough the forbearance of principal or accrued interest.
78
Nonperforming Assets
The following table summarizes the Corporation’s nonperforming assets as of December 31:
| 2010 | 2009 | 2008 | 2007 | 2006 | ||||||||||||||||
| Nonaccrual loans | $ | 5,610 | $ | 8,522 | $ | 11,175 | $ | 4,156 | $ | 3,444 | ||||||||||
| Accruing loans past due 90 days or more | 486 | 768 | 1,251 | 1,727 | 1,185 | |||||||||||||||
Total nonperforming loans | 6,096 | 9,290 | 12,426 | 5,883 | 4,629 | |||||||||||||||
| Other real estate owned | 2,039 | 1,141 | 2,770 | 1,376 | 562 | |||||||||||||||
| Repossessed assets | 28 | 16 | 153 | — | — | |||||||||||||||
Total nonperforming assets | $ | 8,163 | $ | 10,447 | $ | 15,349 | $ | 7,259 | $ | 5,191 | ||||||||||
Nonperforming loans as a % of total loans | 0.83 | % | 1.28 | % | 1.69 | % | 0.96 | % | 0.78 | % | ||||||||||
Nonperforming assets as a % of total assets | 0.67 | % | 0.91 | % | 1.35 | % | 0.76 | % | 0.57 | % | ||||||||||
| 2011 | 2010 | 2009 | 2008 | 2007 | ||||||||||||||||
Nonaccrual loans | $ | 6,389 | $ | 5,610 | $ | 8,522 | $ | 11,175 | $ | 4,156 | ||||||||||
Accruing loans past due 90 days or more | 760 | 486 | 768 | 1,251 | 1,727 | |||||||||||||||
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Total nonperforming loans | 7,149 | 6,096 | 9,290 | 12,426 | 5,883 | |||||||||||||||
Other real estate owned | 1,867 | 2,039 | 1,141 | 2,770 | 1,376 | |||||||||||||||
Repossessed assets | 9 | 28 | 16 | 153 | — | |||||||||||||||
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Total nonperforming assets | $ | 9,025 | $ | 8,163 | $ | 10,447 | $ | 15,349 | $ | 7,259 | ||||||||||
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Nonperforming loans as a % of total loans | 0.95 | % | 0.83 | % | 1.28 | % | 1.69 | % | 0.96 | % | ||||||||||
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Nonperforming assets as a % of total assets | 0.67 | % | 0.67 | % | 0.91 | % | 1.35 | % | 0.76 | % | ||||||||||
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Loans are placed in nonaccrual status when the foreclosure process has begun, generally after a loan is 90 days past due, unless such loan isthey are 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 | |||||||||||
| 2011 | 2010 | 2009 | 2008 | 2007 | ||||||||||||||||
Commercial and agricultural | $ | 4,805 | $ | 4,140 | $ | 5,810 | $ | 8,059 | $ | 1,959 | ||||||||||
Residential mortgage | 1,584 | 1,470 | 2,657 | 3,092 | 2,185 | |||||||||||||||
Consumer installment | — | — | 55 | 24 | 12 | |||||||||||||||
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| $ | 6,389 | $ | 5,610 | $ | 8,522 | $ | 11,175 | $ | 4,156 | |||||||||||
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Included in nonaccrual commercial and agricultural loans was one creditloan with a balance of $1,900 as of December 31, 2011 and $2,679 as of December 31, 2010. This credit is secured by unsold condominiums and undeveloped commercialAs of December 31, 2011, there was no specific allocation established for this loan as it has been charged down to reflect the current market value of the real estate, for whichwhile there has beenwas a specific allocation established in the amount of $345.$345 as of December 31, 2010. Nonaccrual commercial and agricultural loans also included one loan with a balance of $1,014 as of December 31, 2011, for which there was no specific allocation established as the net realizable value of the loan’s underlying collateral exceeded the loan’s outstanding balance. 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, 2011, 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 | |||||||
| 2011 | 2010 | 2009 | 2008 | |||||||||||||
Commercial and agricultural | $ | 520 | $ | 115 | $ | 1,692 | $ | 1,985 | ||||||||
Residential mortgage | 497 | 573 | 424 | — | ||||||||||||
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| $ | 1,017 | $ | 688 | $ | 2,116 | $ | 1,985 | |||||||||
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The Corporation had no restructured loans in nonaccrual status as of December 31, 2007 or 2006.
The Corporation has devoted considerable attention to identifying impaired loans and adjusting the net carrying value of these loans to their current net realizable values through the establishment of a specific reserve or
79
Based on management’s analysis, the allowance for loan losses is considered appropriate as of December 31, 2010.2011. Management will continue to closely monitor its overall credit quality during 2011 to ensure that the allowance for loan losses remains appropriate.
Noninterest Income
The following table shows the changes in noninterest income between the years ended December 31, 2010, 2009, and 2008 respectively.
| Year Ended December 31 | ||||||||||||||||||||||||||||
| Change | Change | |||||||||||||||||||||||||||
| 2010 | 2009 | $ | % | 2008 | $ | % | ||||||||||||||||||||||
| Service charges and fees | ||||||||||||||||||||||||||||
| NSF and overdraft fees | $ | 2,809 | $ | 3,187 | $ | (378 | ) | −11.9 | % | $ | 3,413 | $ | (226 | ) | −6.6 | % | ||||||||||||
| ATM and debit card fees | 1,492 | 1,218 | 274 | 22.5 | % | 1,029 | 189 | 18.4 | % | |||||||||||||||||||
| Trust fees | 896 | 814 | 82 | 10.1 | % | 886 | (72 | ) | −8.1 | % | ||||||||||||||||||
| Freddie Mac servicing fee | 760 | 724 | 36 | 5.0 | % | 627 | 97 | 15.5 | % | |||||||||||||||||||
| Service charges on deposit accounts | 333 | 344 | (11 | ) | −3.2 | % | 372 | (28 | ) | −7.5 | % | |||||||||||||||||
| Net originated mortgage servicing | ||||||||||||||||||||||||||||
| rights income (loss) | 47 | 514 | (467 | ) | −90.9 | % | (92 | ) | 606 | N/M | ||||||||||||||||||
| All other | 143 | 112 | 31 | 27.7 | % | 135 | (23 | ) | −17.0 | % | ||||||||||||||||||
Total service charges and fees | 6,480 | 6,913 | (433 | ) | −6.3 | % | 6,370 | 543 | 8.5 | % | ||||||||||||||||||
| Gain on sale of mortgage loans | 610 | 886 | (276 | ) | −31.2 | % | 249 | 637 | N/M | |||||||||||||||||||
| Net (loss) gain on trading securities | (94 | ) | 80 | (174 | ) | N/M | 245 | (165 | ) | −67.3 | % | |||||||||||||||||
| Net gain (loss) on borrowings measured at fair value | 227 | 289 | (62 | ) | −21.5 | % | (641 | ) | 930 | N/M | ||||||||||||||||||
Gain on sale ofavailable-for-sale investment securities | 348 | 648 | (300 | ) | −46.3 | % | 24 | 624 | N/M | |||||||||||||||||||
| Other | ||||||||||||||||||||||||||||
| Earnings on corporate owned life insurance policies | 663 | 641 | 22 | 3.4 | % | 616 | 25 | 4.1 | % | |||||||||||||||||||
| Brokerage and advisory fees | 573 | 521 | 52 | 10.0 | % | 480 | 41 | 8.5 | % | |||||||||||||||||||
| All other | 493 | 178 | 315 | 177.0 | % | 459 | (281 | ) | −61.2 | % | ||||||||||||||||||
Total other | 1,729 | 1,340 | 389 | 29.0 | % | 1,555 | (215 | ) | −13.8 | % | ||||||||||||||||||
Total noninterest income | $ | 9,300 | $ | 10,156 | $ | (856 | ) | −8.4 | % | $ | 7,802 | $ | 2,354 | 30.2 | % | |||||||||||||
| Change | Change | |||||||||||||||||||||||||||
| 2011 | 2010 | $ | % | 2009 | $ | % | ||||||||||||||||||||||
Service charges and fees | ||||||||||||||||||||||||||||
NSF and overdraft fees | $ | 2,500 | $ | 2,809 | $ | (309 | ) | –11.0 | % | $ | 3,187 | $ | (378 | ) | –11.9 | % | ||||||||||||
ATM and debit card fees | 1,736 | 1,492 | 244 | 16.4 | % | 1,218 | 274 | 22.5 | % | |||||||||||||||||||
Trust fees | 979 | 896 | 83 | 9.3 | % | 814 | 82 | 10.1 | % | |||||||||||||||||||
Mortgage servicing fees | 732 | 760 | (28 | ) | –3.7 | % | 724 | 36 | 5.0 | % | ||||||||||||||||||
Service charges on deposit accounts | 324 | 333 | (9 | ) | –2.7 | % | 344 | (11 | ) | –3.2 | % | |||||||||||||||||
Net originated mortgage servicing rights (loss) income | (293 | ) | 47 | (340 | ) | N/M | 514 | (467 | ) | –90.9 | % | |||||||||||||||||
All other | 140 | 143 | (3 | ) | –2.1 | % | 112 | 31 | 27.7 | % | ||||||||||||||||||
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Total service charges and fees | 6,118 | 6,480 | (362 | ) | –5.6 | % | 6,913 | (433 | ) | –6.3 | % | |||||||||||||||||
Gain on sale of mortgage loans | 538 | 610 | (72 | ) | –11.8 | % | 886 | (276 | ) | –31.2 | % | |||||||||||||||||
Net (loss) gain on trading securities | (78 | ) | (94 | ) | 16 | 17.0 | % | 80 | (174 | ) | N/M | |||||||||||||||||
Net gain on borrowings measured at fair value | 181 | 227 | (46 | ) | –20.3 | % | 289 | (62 | ) | –21.5 | % | |||||||||||||||||
Gain on sale of available-for-sale investment securities | 3 | 348 | (345 | ) | –99.1 | % | 648 | (300 | ) | –46.3 | % | |||||||||||||||||
Other | ||||||||||||||||||||||||||||
Earnings on corporate owned life insurance policies | 609 | 663 | (54 | ) | –8.1 | % | 641 | 22 | 3.4 | % | ||||||||||||||||||
Brokerage and advisory fees | 545 | 573 | (28 | ) | –4.9 | % | 521 | 52 | 10.0 | % | ||||||||||||||||||
Corporate Settlement Solutions joint venture | (182 | ) | 11 | (193 | ) | N/M | (122 | ) | 133 | N/M | ||||||||||||||||||
All other | 484 | 482 | 2 | 0.4 | % | 300 | 182 | 60.7 | % | |||||||||||||||||||
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Total other | 1,456 | 1,729 | (273 | ) | –15.8 | % | 1,340 | 389 | 29.0 | % | ||||||||||||||||||
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Total noninterest income | $ | 8,218 | $ | 9,300 | $ | (1,082 | ) | –11.6 | % | $ | 10,156 | $ | (856 | ) | –8.4 | % | ||||||||||||
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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 steadily declining over the past two years, with the decline accelerating in the third quarter of 2010 as a result of new regulatory guidance issued by the Federal Reserve Bank. The Corporation anticipates that NSF and overdraft fees will approximate current levels in 2012.
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.
Trust fees have increased primarily due to increases in the size of the managed portfolio. As management anticipates continued growth in trust services, it anticipates trust fees to continue to increase in 2012.
Net originated mortgage servicing rights (OMSR) represent the fair value of servicing rights of loans sold to the secondary market, with changes in the fair value recorded in earnings. Changes in the fair
value of |
80
81
As a result of lower than normal residential mortgage rates, the Corporation experienced increases in the volume of loans sold to the secondary market during 2009, leading to a corresponding increase in gains from the sale of mortgage loans in 2009. As the demand for new mortgages declined in 2010 and 2011, so did the gain from the sale of mortgage loans. The Corporation anticipates that the gain on sale of mortgages will remain at the current levels in 2012.
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 2012 as significant interest rate changes are not expected.
The Corporation continually analyzes its available-for-sale investment portfolio for advantageous selling opportunities.
The Corporation’s earnings from its joint venture in Corporate Settlement Solutions (a title insurance agency) have been negatively impacted by expenses incurred to enhance the services offered as well as expand their market area.
The fluctuations in all other income are spread throughout various categories, none of which are individually significant.
The following table shows the changes in noninterest expenses between the years ended December 31, 2010, 2009, and 2008 respectively.
| Year Ended December 31 | ||||||||||||||||||||||||||||
| Change | Change | |||||||||||||||||||||||||||
| 2010 | 2009 | $ | % | 2008 | $ | % | ||||||||||||||||||||||
Compensation and benefits | ||||||||||||||||||||||||||||
| Leased employee salaries | $ | 13,697 | $ | 13,494 | $ | 203 | 1.5 | % | $ | 12,465 | $ | 1,029 | 8.3 | % | ||||||||||||||
| Leased employee benefits | 4,837 | 4,745 | 92 | 1.9 | % | 4,502 | 243 | 5.4 | % | |||||||||||||||||||
| All other | 18 | 19 | (1 | ) | −5.3 | % | 25 | (6 | ) | −24.0 | % | |||||||||||||||||
Total compensation and benefits | 18,552 | 18,258 | 294 | 1.6 | % | 16,992 | 1,266 | 7.5 | % | |||||||||||||||||||
| Occupancy | ||||||||||||||||||||||||||||
| Depreciation | 584 | 546 | 38 | 7.0 | % | 508 | 38 | 7.5 | % | |||||||||||||||||||
| Outside services | 524 | 433 | 91 | 21.0 | % | 492 | (59 | ) | −12.0 | % | ||||||||||||||||||
| Property taxes | 505 | 439 | 66 | 15.0 | % | 411 | 28 | 6.8 | % | |||||||||||||||||||
| Utilities | 423 | 393 | 30 | 7.6 | % | 366 | 27 | 7.4 | % | |||||||||||||||||||
| Building repairs | 243 | 288 | (45 | ) | −15.6 | % | 202 | 86 | 42.6 | % | ||||||||||||||||||
| All other | 72 | 71 | 1 | 1.4 | % | 56 | 15 | 26.8 | % | |||||||||||||||||||
Total occupancy | 2,351 | 2,170 | 181 | 8.3 | % | 2,035 | 135 | 6.6 | % | |||||||||||||||||||
| Furniture and equipment | ||||||||||||||||||||||||||||
| Depreciation | 1,938 | 1,803 | 135 | 7.5 | % | 1,663 | 140 | 8.4 | % | |||||||||||||||||||
| Computer/service contracts | 1,779 | 1,676 | 103 | 6.1 | % | 1,565 | 111 | 7.1 | % | |||||||||||||||||||
| ATM and debit card fees | 595 | 621 | (26 | ) | −4.2 | % | 570 | 51 | 8.9 | % | ||||||||||||||||||
| All other | 32 | 46 | (14 | ) | −30.4 | % | 51 | (5 | ) | −9.8 | % | |||||||||||||||||
Total furniture and equipment | 4,344 | 4,146 | 198 | 4.8 | % | 3,849 | 297 | 7.7 | % | |||||||||||||||||||
FDIC insurance premiums | 1,254 | 1,730 | (476 | ) | −27.5 | % | 313 | 1,417 | N/M | |||||||||||||||||||
| Other | ||||||||||||||||||||||||||||
| Marketing and community relations | 1,093 | 894 | 199 | 22.3 | % | 921 | (27 | ) | −2.9 | % | ||||||||||||||||||
| Foreclosed asset and collection | 710 | 546 | 164 | 30.0 | % | 565 | (19 | ) | −3.4 | % | ||||||||||||||||||
| Directors fees | 887 | 923 | (36 | ) | −3.9 | % | 867 | 56 | 6.5 | % | ||||||||||||||||||
| Audit and SOX compliance fees | 916 | 831 | 85 | 10.2 | % | 698 | 133 | 19.1 | % | |||||||||||||||||||
| Education and travel | 499 | 395 | 104 | 26.3 | % | 491 | (96 | ) | −19.6 | % | ||||||||||||||||||
| Printing and supplies | 420 | 529 | (109 | ) | −20.6 | % | 508 | 21 | 4.1 | % | ||||||||||||||||||
| Postage and freight | 382 | 415 | (33 | ) | −8.0 | % | 419 | (4 | ) | −1.0 | % | |||||||||||||||||
| Legal fees | 338 | 375 | (37 | ) | −9.9 | % | 415 | (40 | ) | −9.6 | % | |||||||||||||||||
| Amortization of deposit premium | 395 | 472 | (77 | ) | −16.3 | % | 523 | (51 | ) | −9.8 | % | |||||||||||||||||
| Consulting fees | 167 | 201 | (34 | ) | −16.9 | % | 298 | (97 | ) | −32.6 | % | |||||||||||||||||
| All other | 1,499 | 1,798 | (299 | ) | −16.6 | % | 1,810 | (12 | ) | −0.7 | % | |||||||||||||||||
Total other | 7,306 | 7,379 | (73 | ) | −1.0 | % | 7,515 | (136 | ) | −1.8 | % | |||||||||||||||||
Total noninterest expenses | $ | 33,807 | $ | 33,683 | $ | 124 | 0.4 | % | $ | 30,704 | $ | 2,979 | 9.7 | % | ||||||||||||||
82
| Change | Change | |||||||||||||||||||||||||||
| 2011 | 2010 | $ | % | 2009 | $ | % | ||||||||||||||||||||||
Compensation and benefits | ||||||||||||||||||||||||||||
Leased employee salaries | $ | 14,377 | $ | 13,697 | $ | 680 | 5.0 | % | $ | 13,494 | $ | 203 | 1.5 | % | ||||||||||||||
Leased employee benefits | 4,902 | 4,837 | 65 | 1.3 | % | 4,745 | 92 | 1.9 | % | |||||||||||||||||||
All other | 13 | 18 | (5 | ) | –27.8 | % | 19 | (1 | ) | –5.3 | % | |||||||||||||||||
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Total compensation and benefits | 19,292 | 18,552 | 740 | 4.0 | % | 18,258 | 294 | 1.6 | % | |||||||||||||||||||
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Occupancy | ||||||||||||||||||||||||||||
Property taxes | 470 | 505 | (35 | ) | –6.9 | % | 439 | 66 | 15.0 | % | ||||||||||||||||||
Utilities | 462 | 423 | 39 | 9.2 | % | 393 | 30 | 7.6 | % | |||||||||||||||||||
Outside services | 587 | 524 | 63 | 12.0 | % | 433 | 91 | 21.0 | % | |||||||||||||||||||
Depreciation | 605 | 584 | 21 | 3.6 | % | 546 | 38 | 7.0 | % | |||||||||||||||||||
Building repairs | 262 | 243 | 19 | 7.8 | % | 288 | (45 | ) | –15.6 | % | ||||||||||||||||||
All other | 84 | 72 | 12 | 16.7 | % | 71 | 1 | 1.4 | % | |||||||||||||||||||
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Total occupancy | 2,470 | 2,351 | 119 | 5.1 | % | 2,170 | 181 | 8.3 | % | |||||||||||||||||||
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Furniture and equipment | ||||||||||||||||||||||||||||
Depreciation | 1,916 | 1,938 | (22 | ) | –1.1 | % | 1,803 | 135 | 7.5 | % | ||||||||||||||||||
Computer/service contracts | 1,898 | 1,779 | 119 | 6.7 | % | 1,676 | 103 | 6.1 | % | |||||||||||||||||||
ATM and debit card fees | 629 | 595 | 34 | 5.7 | % | 621 | (26 | ) | –4.2 | % | ||||||||||||||||||
All other | 54 | 32 | 22 | 68.8 | % | 46 | (14 | ) | –30.4 | % | ||||||||||||||||||
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Total furniture and equipment | 4,497 | 4,344 | 153 | 3.5 | % | 4,146 | 198 | 4.8 | % | |||||||||||||||||||
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FDIC insurance premiums | 1,086 | 1,254 | (168 | ) | –13.4 | % | 1,730 | (476 | ) | –27.5 | % | |||||||||||||||||
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Other | ||||||||||||||||||||||||||||
Marketing and community relations | 1,174 | 1,093 | 81 | 7.4 | % | 894 | 199 | 22.3 | % | |||||||||||||||||||
Foreclosed asset and collection | 576 | �� | 916 | (340 | ) | –37.1 | % | 831 | 85 | 10.2 | % | |||||||||||||||||
Legal fees | 302 | 382 | (80 | ) | –20.9 | % | 415 | (33 | ) | –8.0 | % | |||||||||||||||||
Audit and SOX compliance fees | 714 | 710 | 4 | 0.6 | % | 546 | 164 | 30.0 | % | |||||||||||||||||||
Consulting fees | 386 | 167 | 219 | 131.1 | % | 201 | (34 | ) | –16.9 | % | ||||||||||||||||||
Directors fees | 842 | 887 | (45 | ) | –5.1 | % | 923 | (36 | ) | –3.9 | % | |||||||||||||||||
Amortization of deposit premium | 299 | 338 | (39 | ) | –11.5 | % | 375 | (37 | ) | –9.9 | % | |||||||||||||||||
Education and travel | 526 | 499 | 27 | 5.4 | % | 395 | 104 | 26.3 | % | |||||||||||||||||||
Postage and freight | 388 | 395 | (7 | ) | –1.8 | % | 472 | (77 | ) | –16.3 | % | |||||||||||||||||
Printing and supplies | 405 | 420 | (15 | ) | –3.6 | % | 529 | (109 | ) | –20.6 | % | |||||||||||||||||
All other | 1,573 | 1,499 | 74 | 4.9 | % | 1,798 | (299 | ) | –16.6 | % | ||||||||||||||||||
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Total other | 7,185 | 7,306 | (121 | ) | –1.7 | % | 7,379 | (73 | ) | –1.0 | % | |||||||||||||||||
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Total noninterest expenses | $ | 34,530 | $ | 33,807 | $ | 723 | 2.1 | % | $ | 33,683 | $ | 124 | 0.4 | % | ||||||||||||||
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Leased employee salaries increased during 2011 due to annual merit increases and staff additions. These staff additions have allowed the Corporation to continue to grow as well as to comply with new regulations, including the Dodd-Frank Act. Leased employee benefits fluctuate from period to period primarily as a result of changes in health care related expenses. The Corporation anticipates adding to staffing levels in 2012 to ensure compliance with new regulations set forth in the Dodd-Frank Act, which is estimated to increase salary and benefits by $331.
FDIC insurance premium expense decreased in 2011 due to changes to the assessment rates on April 1, 2011. Premiums declined between 2009 and 2010 as a result of an FDIC special assessment of $479 in September 2009. Management expects FDIC insurance premiums to decline slightly in 2012 due to the changes in assessment rates.
The increase in marketing and community relations in 2011 was primarily the result of a new initiative to track customer service satisfaction as well as the enhancement of the Corporation’s website. The increase in marketing and community relations expenses in 2010 was primarily related to an increase in charitable contributions. Charitable contributions were essentially unchanged between 2010 and 2011 with no significant changes expected in 2012. While foreclosed asset and collection expenses remain at historically high levels, they have declined significantly from 2010. Management anticipates that these expenses will approximate current levels in 2012. The Corporation’s legal expenses can fluctuate from period to period based on the volume of foreclosures as well as expenses | ||
Audit and SOX compliance fees fluctuate due to the timing of the performance of recurring audit procedures.
Director fees declined in 2011 due to the retirement of several directors. Director fees are expected to approximate current levels in 2012.
The Corporation places a strong emphasis on customer service. To help enhance customer service satisfaction, the Corporation has made a significant investment in various training programs. These programs coupled with the customer service tracking initiative (noted above) will increase service levels which will increase shareholder value. Management expects that education related expenses to remain at current levels in 2012.
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 tax exempt incomethe Corporation’s customer’s usage of electronic statements.
Printing and supplies expenses have steadily declined since 2009 as the Corporation has instituted a percentage of net income. A reconcilement of actual federal income tax expense reported anddocument imaging solution decreasing the amount computed atof paper and related supplies. Management anticipates this trend to continue in 2012.
The increase in consulting fees is due to succession planning for key executives to help the federal statutory rateBoard of 34% is foundDirectors and management identify, attract, and retain future leaders.
The fluctuations in Note 11, “Federal Income Taxes”all other expenses are spread throughout various categories, none of Notes to Consolidated Financial Statements.
83which are individually significant.
| December 31 | ||||||||||||||||
| 2010 | 2009 | $ Change | % Change | |||||||||||||
ASSETS | ||||||||||||||||
| Cash and cash equivalents | $ | 18,109 | $ | 24,482 | $ | (6,373 | ) | −26.03 | % | |||||||
| Certificates of deposit held in other financial institutions | 15,808 | 5,380 | 10,428 | 193.83 | % | |||||||||||
| Trading securities | 5,837 | 13,563 | (7,726 | ) | −56.96 | % | ||||||||||
Available-for-sale investment securities | 330,724 | 259,066 | 71,658 | 27.66 | % | |||||||||||
Mortgage loansavailable-for-sale | 1,182 | 2,281 | (1,099 | ) | −48.18 | % | ||||||||||
| Loans | 735,304 | 723,316 | 11,988 | 1.66 | % | |||||||||||
| Allowance for loan losses | (12,373 | ) | (12,979 | ) | 606 | −4.67 | % | |||||||||
| Premises and equipment | 24,627 | 23,917 | 710 | 2.97 | % | |||||||||||
| Goodwill and other intangible assets | 47,091 | 47,429 | (338 | ) | −0.71 | % | ||||||||||
| Equity securities without readily determinable fair values | 17,564 | 17,921 | (357 | ) | −1.99 | % | ||||||||||
| Other assets | 41,937 | 39,568 | 2,369 | 5.99 | % | |||||||||||
Total Assets | $ | 1,225,810 | $ | 1,143,944 | $ | 81,866 | 7.16 | % | ||||||||
| LIABILITIES AND SHAREHOLDERS’ EQUITY | ||||||||||||||||
Liabilities | ||||||||||||||||
| Deposits | $ | 877,339 | $ | 802,652 | $ | 74,687 | 9.31 | % | ||||||||
| Borrowed funds | 194,917 | 193,101 | 1,816 | 0.94 | % | |||||||||||
| Accrued interest and other liabilities | 8,393 | 7,388 | 1,005 | 13.60 | % | |||||||||||
Total liabilities | 1,080,649 | 1,003,141 | 77,508 | 7.73 | % | |||||||||||
Shareholders’ equity | 145,161 | 140,803 | 4,358 | 3.10 | % | |||||||||||
Total liabilities and shareholders’ equity | $ | 1,225,810 | $ | 1,143,944 | $ | 81,866 | 7.16 | % | ||||||||
The following table shows the composition and changes in the Corporation’s balance sheet as of December 31:
| Change | ||||||||||||||||
| 2011 | 2010 | $ | % | |||||||||||||
ASSETS | ||||||||||||||||
Cash and cash equivalents | $ | 28,590 | $ | 18,109 | $ | 10,481 | 57.88 | % | ||||||||
Certificates of deposit held in other financial institutions | 8,924 | 15,808 | (6,884 | ) | –43.55 | % | ||||||||||
Trading securities | 4,710 | 5,837 | (1,127 | ) | –19.31 | % | ||||||||||
Available-for-sale securities | 425,120 | 330,724 | 94,396 | 28.54 | % | |||||||||||
Mortgage loans available-for-sale | 3,205 | 1,182 | 2,023 | 171.15 | % | |||||||||||
Loans | 750,291 | 735,304 | 14,987 | 2.04 | % | |||||||||||
Allowance for loan losses | (12,375 | ) | (12,373 | ) | (2 | ) | 0.02 | % | ||||||||
Premises and equipment | 24,626 | 24,627 | (1 | ) | 0.00 | % | ||||||||||
Corporate owned life insurance | 22,075 | 17,466 | 4,609 | 26.39 | % | |||||||||||
Accrued interest receivable | 5,848 | 5,456 | 392 | 7.18 | % | |||||||||||
Equity securities without readily determinable fair values | 17,189 | 17,564 | (375 | ) | –2.14 | % | ||||||||||
Goodwill and other intangible assets | 46,792 | 47,091 | (299 | ) | –0.63 | % | ||||||||||
Other assets | 12,930 | 19,015 | (6,085 | ) | –32.00 | % | ||||||||||
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TOTAL ASSETS | $ | 1,337,925 | $ | 1,225,810 | $ | 112,115 | 9.15 | % | ||||||||
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LIABILITIES AND SHAREHOLDERS’ EQUITY | ||||||||||||||||
Liabilities | ||||||||||||||||
Deposits | $ | 958,164 | $ | 877,339 | $ | 80,825 | 9.21 | % | ||||||||
Borrowed funds | 216,136 | 194,917 | 21,219 | 10.89 | % | |||||||||||
Accrued interest payable and other liabilities | 8,842 | 8,393 | 449 | 5.35 | % | |||||||||||
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Total liabilities | 1,183,142 | 1,080,649 | 102,493 | 9.48 | % | |||||||||||
Shareholders’ equity | 154,783 | 145,161 | 9,622 | 6.63 | % | |||||||||||
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TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY | $ | 1,337,925 | $ | 1,225,810 | $ | 112,115 | 9.15 | % | ||||||||
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As shown above, the Corporation has intentionallyenjoyed strong balance sheet growth since December 31, 2010. The primary driver behind this growth was excellent demand for deposit products. As loan demand did not keep pace with the increase in deposits, the Corporation increased its balance sheet through the acquisition ofholdings in available-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:
Certificates of deposit held in other financial institutions
During 2011, the Corporation reinvested maturities of certificates of deposit held in other financial institutions into available-for-sale investment securities to increase net interest margins (as the yields on available-for-sale investment securities exceeded the potential reinvestment rates for certificates of deposits held in other financial institutions during the year). This trend is likely to continue in 2012.
Trading securities
Trading securities are carried at fair value. The Corporation’s overall intent is to maintain a trading portfolio to enhance the ongoing restructuring of assets and liabilities as part of our interest rate risk management
objectives (See Note 24 “Trading Securities” of the Consolidated Financial Statements). Due to the current interest rate environment, the Corporation has allowed this balance to decline.
84
| 2010 | 2009 | 2008 | ||||||||||
| Government sponsored enterprises | $ | — | $ | — | $ | 4,014 | ||||||
| States and political subdivisions | 5,837 | 9,962 | 11,556 | |||||||||
| Corporate | — | — | 160 | |||||||||
| Mortgage-backed | — | 3,601 | 6,045 | |||||||||
Total | $ | 5,837 | $ | 13,563 | $ | 21,775 | ||||||
| 2011 | 2010 | 2009 | ||||||||||
States and political subdivisions | $ | 4,710 | $ | 5,837 | $ | 9,962 | ||||||
Mortgage-backed | — | — | 3,601 | |||||||||
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Total | $ | 4,710 | $ | 5,837 | $ | 13,563 | ||||||
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Available-for-sale investment securities
The primary objective of the Corporation’s investing activities is to provide for safety of the principal invested. Secondary considerations include the need for earnings, liquidity, and the Corporation’s overall exposure to changes in interest rates. Securities currently classified asavailable-for-sale are stated at fair value.
The following is a schedule of the carrying value of investment securitiesavailable-for-sale as of December 31:
| 2010 | 2009 | 2008 | ||||||||||
| U.S. Government and federal agencies | $ | — | $ | — | $ | 4,083 | ||||||
| Government sponsored enterprises | 5,404 | 19,471 | 62,988 | |||||||||
| States and political subdivisions | 169,717 | 151,730 | 149,323 | |||||||||
| Corporate | — | — | 7,145 | |||||||||
| Auction rate money market preferred | 2,865 | 2,973 | 5,979 | |||||||||
| Preferred stocks | 6,936 | 7,054 | — | |||||||||
| Mortgage-backed | 102,215 | 67,734 | 16,937 | |||||||||
| Collateralized mortgage obligations | 43,587 | 10,104 | — | |||||||||
Total | $ | 330,724 | $ | 259,066 | $ | 246,455 | ||||||
| 2011 | 2010 | 2009 | ||||||||||
Government sponsored enterprises | $ | 397 | $ | 5,404 | $ | 19,471 | ||||||
States and political subdivisions | 174,938 | 169,717 | 151,730 | |||||||||
Auction rate money market preferred | 2,049 | 2,865 | 2,973 | |||||||||
Preferred stocks | 5,033 | 6,936 | 7,054 | |||||||||
Mortgage-backed securities | 143,602 | 102,215 | 67,734 | |||||||||
Collateralized mortgage obligations | 99,101 | 43,587 | 10,104 | |||||||||
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| |||||||
Total | $ | 425,120 | $ | 330,724 | $ | 259,066 | ||||||
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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 carryingfair value) and their weighted average yield as of December 31, 2010.2011. 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 auctionAuction rate money market preferred securities and preferred stock. Auction rate debt and auction rate preferred securities are long term floating rate instruments for which interest rates are set at periodic auctions. At each successful auction, the Corporation has the option to sell the security at par value. Additionally,
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obligations are not reported by a specific maturity group. Expected maturities may differ significantly from contractual maturities because issuers may have the contractual term.
| Maturing | ||||||||||||||||||||||||||||||||||||||||
| After One | After Five | |||||||||||||||||||||||||||||||||||||||
| Year But | Years But | |||||||||||||||||||||||||||||||||||||||
| Within | Within | Within | After | Securities with | ||||||||||||||||||||||||||||||||||||
| One Year | Five Years | Ten Years | Ten Years | Variable Payments | ||||||||||||||||||||||||||||||||||||
| Amount | Yield (%) | Amount | Yield (%) | Amount | Yield (%) | Amount | Yield (%) | Amount | Yield (%) | |||||||||||||||||||||||||||||||
| Government sponsored enterprises | $ | — | — | $ | 5,007 | 2.02 | $ | 397 | 7.91 | $ | — | — | $ | — | — | |||||||||||||||||||||||||
| States and political subdivisions | 14,132 | 3.51 | 34,837 | 3.73 | 87,263 | 3.74 | 33,485 | 2.09 | — | — | ||||||||||||||||||||||||||||||
| Mortgage-backed | — | — | — | — | 53,738 | 2.54 | 48,477 | 2.66 | — | — | ||||||||||||||||||||||||||||||
| Collateralized mortgage obligations | — | — | — | — | — | — | — | — | 43,587 | 2.59 | ||||||||||||||||||||||||||||||
| Auction rate money market preferred | — | — | — | — | — | — | — | — | 2,865 | 4.86 | ||||||||||||||||||||||||||||||
| Preferred stocks | — | — | — | — | — | — | — | — | 6,936 | 4.60 | ||||||||||||||||||||||||||||||
Total | $ | 14,132 | 3.51 | $ | 39,844 | 3.53 | $ | 141,398 | 3.29 | $ | 81,962 | 2.43 | $ | 53,388 | 2.98 | |||||||||||||||||||||||||
| 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 Continual Call Dates | ||||||||||||||||||||||||||||||||||||
| Amount | Yield (%) | Amount | Yield (%) | Amount | Yield (%) | Amount | Yield (%) | Amount | Yield (%) | |||||||||||||||||||||||||||||||
Government sponsored enterprises | $ | — | — | $ | — | — | $ | 397 | 7.91 | $ | — | — | $ | — | — | |||||||||||||||||||||||||
States and political subdivisions | 8,441 | 3.24 | 35,904 | 4.12 | 93,189 | 3.87 | 37,404 | 2.84 | — | — | ||||||||||||||||||||||||||||||
Mortgage-backed securities | — | — | 271 | 5.68 | 73,974 | 1.91 | 69,357 | 1.97 | — | — | ||||||||||||||||||||||||||||||
Collateralized mortgage | — | — | — | — | — | — | — | — | 99,101 | 2.76 | ||||||||||||||||||||||||||||||
obligations | ||||||||||||||||||||||||||||||||||||||||
Auction rate money | — | — | — | — | — | — | — | — | 2,049 | 4.92 | ||||||||||||||||||||||||||||||
market preferred | ||||||||||||||||||||||||||||||||||||||||
Preferred stocks | — | — | — | — | — | — | — | — | 5,033 | 4.30 | ||||||||||||||||||||||||||||||
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Total | $ | 8,441 | 3.24 | $ | 36,175 | 4.13 | $ | 167,560 | 3.01 | $ | 106,761 | 2.28 | $ | 106,183 | 2.88 | |||||||||||||||||||||||||
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Loans
The largest component of earning assets is loans. The proper management of credit and market risk inherent in the loan portfolio is critical to the financial well beingwell-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 | |||||||||||
| 2011 | 2010 | 2009 | 2008 | 2007 | ||||||||||||||||
Commercial | $ | 365,714 | $ | 348,852 | $ | 340,274 | $ | 324,806 | $ | 238,306 | ||||||||||
Agricultural | 74,645 | 71,446 | 64,845 | 58,003 | 47,407 | |||||||||||||||
Residential real estate mortgage | 278,360 | 284,029 | 285,838 | 319,397 | 297,937 | |||||||||||||||
Installment | 31,572 | 30,977 | 32,359 | 33,179 | 29,037 | |||||||||||||||
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| $ | 750,291 | $ | 735,304 | $ | 723,316 | $ | 735,385 | $ | 612,687 | |||||||||||
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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 | % | ||||||||||||
86
| 2011 | 2010 | 2009 | ||||||||||||||||||||||
| $ Change | % Change | $ Change | % Change | $ Change | % Change | |||||||||||||||||||
Commercial | $ | 16,862 | 4.8 | % | $ | 8,578 | 2.5 | % | $ | 15,468 | 4.8 | % | ||||||||||||
Agricultural | 3,199 | 4.5 | % | 6,601 | 10.2 | % | 6,842 | 11.8 | % | |||||||||||||||
Residential real estate mortgage | (5,669 | ) | –2.0 | % | (1,809 | ) | –0.6 | % | (33,559 | ) | –10.5 | % | ||||||||||||
Installment | 595 | 1.9 | % | (1,382 | ) | –4.3 | % | (820 | ) | –2.5 | % | |||||||||||||
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| $ | 14,987 | 2.0 | % | $ | 11,988 | 1.7 | % | $ | (12,069 | ) | –1.6 | % | ||||||||||||
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Corporate owned life insurance
During the third quarter of 2011, the Corporation purchased an additional $4,000 of corporate owned life insurance policies. The Corporation purchased these additional policies to provide additional coverage for key employees, while also generating ongoing earnings as the cash surrender values of the policies increase.
Equity securities without readily determinable fair values
Included in equity securities without readily determinable fair values are restricted securities, which are carried at cost and investments in nonconsolidated entities accounted for under the equity method of accounting.
| 2010 | 2009 | |||||||
| Federal Home Loan Bank Stock | $ | 7,596 | $ | 7,960 | ||||
| Investment in Corporate Settlement Solutions | 6,793 | 6,782 | ||||||
| Federal Reserve Bank Stock | 1,879 | 1,879 | ||||||
| Investment in Valley Financial Corporation | 1,000 | 1,000 | ||||||
| Other | 296 | 300 | ||||||
Total | $ | 17,564 | $ | 17,921 | ||||
Deposits
The main source of funds for the Corporation is deposits. The following table presents the composition of the deposit portfolio as of December 31:
| 2010 | 2009 | 2008 | 2007 | 2006 | ||||||||||||||||
| Noninterest bearing deposits | $ | 104,902 | $ | 96,875 | $ | 97,546 | $ | 84,846 | $ | 83,902 | ||||||||||
| Interest bearing demand deposits | 142,259 | 128,111 | 113,973 | 105,526 | 111,406 | |||||||||||||||
| Savings deposits | 177,817 | 157,020 | 182,523 | 196,682 | 178,001 | |||||||||||||||
| Certificates of deposit | 386,435 | 356,594 | 340,976 | 311,976 | 320,226 | |||||||||||||||
| Brokered certificates of deposit | 53,748 | 50,933 | 28,185 | 28,197 | 27,446 | |||||||||||||||
| Internet certificates of deposit | 12,178 | 13,119 | 12,427 | 6,246 | 4,859 | |||||||||||||||
Total | $ | 877,339 | $ | 802,652 | $ | 775,630 | $ | 733,473 | $ | 725,840 | ||||||||||
| 2011 | 2010 | 2009 | 2008 | 2007 | ||||||||||||||||
Noninterest bearing deposits | $ | 119,072 | $ | 104,902 | $ | 96,875 | $ | 97,546 | $ | 84,846 | ||||||||||
Interest bearing demand deposits | 163,653 | 142,259 | 128,111 | 113,973 | 105,526 | |||||||||||||||
Savings deposits | 193,902 | 177,817 | 157,020 | 182,523 | 196,682 | |||||||||||||||
Certificates of deposit | 395,777 | 386,435 | 356,594 | 340,976 | 311,976 | |||||||||||||||
Brokered certificates of deposit | 54,326 | 53,748 | 50,933 | 28,185 | 28,197 | |||||||||||||||
Internet certificates of deposit | 31,434 | 12,178 | 13,119 | 12,427 | 6,246 | |||||||||||||||
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Total | $ | 958,164 | $ | 877,339 | $ | 802,652 | $ | 775,630 | $ | 733,473 | ||||||||||
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The following table presents the change in the deposit categories for the years ended December 31:
| 2010 | 2009 | 2008 | ||||||||||||||||||||||
| $ Change | % Change | $ Change | % Change | $ Change | % Change | |||||||||||||||||||
| Noninterest bearing deposits | $ | 8,027 | 8.3 | % | $ | (671 | ) | −0.7 | % | $ | 12,700 | 15.0 | % | |||||||||||
| Interest bearing demand deposits | 14,148 | 11.0 | % | 14,138 | 12.4 | % | 8,447 | 8.0 | % | |||||||||||||||
| Savings deposits | 20,797 | 13.2 | % | (25,503 | ) | −14.0 | % | (14,159 | ) | −7.2 | % | |||||||||||||
| Certificates of deposit | 29,841 | 8.4 | % | 15,618 | 4.6 | % | 29,000 | 9.3 | % | |||||||||||||||
| Brokered certificates of deposit | 2,815 | 5.5 | % | 22,748 | 80.7 | % | (12 | ) | 0.0 | % | ||||||||||||||
| Internet certificates of deposit | (941 | ) | −7.2 | % | 692 | 5.6 | % | 6,181 | 99.0 | % | ||||||||||||||
Total | $ | 74,687 | 9.3 | % | $ | 27,022 | 3.5 | % | $ | 42,157 | 5.7 | % | ||||||||||||
| 2011 | 2010 | 2009 | ||||||||||||||||||||||
| $ Change | % Change | $ Change | % Change | $ Change | % Change | |||||||||||||||||||
Noninterest bearing deposits | $ | 14,170 | 13.5% | $ | 8,027 | 8.3% | $ | (671 | ) | –0.7% | ||||||||||||||
Interest bearing demand deposits | 21,394 | 15.0% | 14,148 | 11.0% | 14,138 | 12.4% | ||||||||||||||||||
Savings deposits | 16,085 | 9.0% | 20,797 | 13.2% | (25,503 | ) | –14.0% | |||||||||||||||||
Certificates of deposit | 9,342 | 2.4% | 29,841 | 8.4% | 15,618 | 4.6% | ||||||||||||||||||
Brokered certificates of deposit | 578 | 1.1% | 2,815 | 5.5% | 22,748 | 80.7% | ||||||||||||||||||
Internet certificates of deposit | 19,256 | 158.1% | (941 | ) | –7.2% | 692 | 5.6% | |||||||||||||||||
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Total | $ | 80,825 | 9.2% | $ | 74,687 | 9.3% | $ | 27,022 | 3.5% | |||||||||||||||
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As shown in the preceding table, the Corporation has enjoyedexperienced strong deposit growth duringsince December 30, 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. ManagementWhile management anticipates that deposits will continue to grow in 2011.
87
The following table shows the average balances and corresponding interest rates paid on deposit accounts as of December 31:
| 2010 | 2009 | 2008 | ||||||||||||||||||||||
| Amount | Rate | Amount | Rate | Amount | Rate | |||||||||||||||||||
| Noninterest bearing demand deposits | $ | 102,812 | — | $ | 94,408 | — | $ | 95,552 | — | |||||||||||||||
| Interest bearing demand deposits | 137,109 | 0.11 | % | 116,412 | 0.13 | % | 114,889 | 0.71 | % | |||||||||||||||
| Savings deposits | 169,579 | 0.23 | % | 177,538 | 0.22 | % | 213,410 | 1.14 | % | |||||||||||||||
| Time deposits | 430,892 | 2.55 | % | 398,356 | 3.27 | % | 393,190 | 4.23 | % | |||||||||||||||
Total | $ | 840,392 | $ | 786,714 | $ | 817,041 | ||||||||||||||||||
| 2011 | 2010 | 2009 | ||||||||||||||||||||||
| Amount | Rate | Amount | Rate | Amount | Rate | |||||||||||||||||||
Noninterest bearing demand deposits | $ | 113,726 | — | $ | 102,812 | — | $ | 94,408 | — | |||||||||||||||
Interest bearing demand deposits | 152,530 | 0.12 | % | 137,109 | 0.11 | % | 116,412 | 0.13 | % | |||||||||||||||
Savings deposits | 192,999 | 0.25 | % | 169,579 | 0.23 | % | 177,538 | 0.22 | % | |||||||||||||||
Time deposits | 467,931 | 2.19 | % | 430,892 | 2.55 | % | 398,356 | 3.27 | % | |||||||||||||||
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Total | $ | 927,186 | $ | 840,392 | $ | 786,714 | ||||||||||||||||||
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The remaining maturity of time certificates and other time deposits of $100 or more as of December 31, 20102011 was as follows:
| Maturity | ||||
| Within 3 months | $ | 35,935 | ||
| Within 3 to 6 months | 20,695 | |||
| Within 6 to 12 months | 49,207 | |||
| Over 12 months | 98,360 | |||
Total | $ | 204,197 | ||
| Maturity | ||||
Within 3 months | $ | 42,270 | ||
Within 3 to 6 months | 25,357 | |||
Within 6 to 12 months | 63,423 | |||
Over 12 months | 104,266 | |||
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Total | $ | 235,316 | ||
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Borrowed Funds
The following table summarizes the Corporation’s borrowings as of December 31:
| 2010 | 2009 | |||||||||||||||
| Amount | Rate | Amount | Rate | |||||||||||||
| Federal Home Loan Bank advances | $ | 113,423 | 3.64 | % | $ | 127,804 | 4.11 | % | ||||||||
| Securities sold under agreements to repurchase | ||||||||||||||||
| without stated maturity dates | 45,871 | 0.25 | % | 37,797 | 0.30 | % | ||||||||||
| Securities sold under agreements to repurchase | ||||||||||||||||
| with stated maturity dates | 19,623 | 3.01 | % | 20,000 | 3.72 | % | ||||||||||
| Federal funds purchased | 16,000 | 0.60 | % | — | — | |||||||||||
| Federal Reserve Bank discount window advance | — | — | 7,500 | 0.75 | % | |||||||||||
Total | $ | 194,917 | 2.53 | % | $ | 193,101 | 3.19 | % | ||||||||
88
| 2011 | 2010 | |||||||||||||||
| Amount | Rate | Amount | Rate | |||||||||||||
Federal Home Loan Bank advances | $ | 142,242 | 3.16 | % | $ | 113,423 | 3.64 | % | ||||||||
Securities sold under agreements to repurchase without stated maturity dates | 57,198 | 0.25 | % | 45,871 | 0.25 | % | ||||||||||
Securities sold under agreements to repurchase with stated maturity dates | 16,696 | 3.51 | % | 19,623 | 3.28 | % | ||||||||||
Federal funds purchased | — | — | 16,000 | 0.60 | % | |||||||||||
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Total | $ | 216,136 | 2.42 | % | $ | 194,917 | 2.56 | % | ||||||||
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| 2010 | 2009 | |||||||||||||||
| Amount | Rate | Amount | Rate | |||||||||||||
| Fixed rate advances due 2010 | $ | — | — | $ | 28,320 | 4.52 | % | |||||||||
| One year putable advances due 2010 | — | — | 6,000 | 5.31 | % | |||||||||||
| Fixed rate advances due 2011 | 10,086 | 3.96 | % | 10,206 | 3.96 | % | ||||||||||
| One year putable advances due 2011 | 1,000 | 4.75 | % | 1,000 | 4.75 | % | ||||||||||
| Fixed rate advances due 2012 | 17,000 | 2.97 | % | 17,000 | 2.97 | % | ||||||||||
| One year putable advances due 2012 | 15,000 | 4.10 | % | 15,000 | 4.10 | % | ||||||||||
| Fixed rate advances due 2013 | 5,337 | 4.14 | % | 5,278 | 4.14 | % | ||||||||||
| One year putable advances due 2013 | 5,000 | 3.15 | % | 5,000 | 3.15 | % | ||||||||||
| Fixed rate advances due 2014 | 25,000 | 3.16 | % | 15,000 | 3.63 | % | ||||||||||
| Fixed rate advances due 2015 | 25,000 | 4.63 | % | 25,000 | 4.63 | % | ||||||||||
| Fixed rate advances due 2017 | 10,000 | 2.35 | % | — | — | |||||||||||
Total | $ | 113,423 | 3.64 | % | $ | 127,804 | 4.11 | % | ||||||||
| 2011 | 2010 | |||||||||||||||
| Amount | Rate | Amount | Rate | |||||||||||||
Fixed rate advances due 2011 | $ | — | — | $ | 10,086 | 3.96 | % | |||||||||
One year putable advances due 2011 | — | — | 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 | 5,242 | 4.14 | % | 5,337 | 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 | % | 25,000 | 3.16 | % | ||||||||||
Fixed rate advances due 2015 | 45,000 | 3.30 | % | 25,000 | 4.63 | % | ||||||||||
Fixed rate advances due 2016 | 10,000 | 2.15 | % | — | — | |||||||||||
Fixed rate advances due 2017 | 20,000 | 2.56 | % | 10,000 | 2.35 | % | ||||||||||
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Total | $ | 142,242 | 3.16 | % | $ | 113,423 | 3.64 | % | ||||||||
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The maturity and weighted average interest rates of securities sold under agreements to repurchase with stated maturity dates are as follows at December 31:
| 2010 | 2009 | |||||||||||||||
| Amount | Rate | Amount | Rate | |||||||||||||
| Repurchase agreements due 2010 | $ | — | — | $ | 5,000 | 4.00 | % | |||||||||
| Repurchase agreements due 2011 | 858 | 1.51 | % | — | — | |||||||||||
| Repurchase agreements due 2012 | 1,013 | 2.21 | % | — | — | |||||||||||
| Repurchase agreements due 2013 | 5,127 | 4.45 | % | 5,000 | 4.51 | % | ||||||||||
| Repurchase agreements due 2014 | 12,087 | 3.00 | % | 10,000 | 3.19 | % | ||||||||||
| Repurchase agreements due 2015 | 538 | 3.25 | % | — | — | |||||||||||
Total | $ | 19,623 | 3.01 | % | $ | 20,000 | 3.72 | % | ||||||||
| 2011 | 2010 | |||||||||||||||
| Amount | Rate | Amount | Rate | |||||||||||||
Repurchase agreements due 2011 | $ | — | — | $ | 858 | 1.51 | % | |||||||||
Repurchase agreements due 2012 | 428 | 2.08 | % | 1,013 | 2.21 | % | ||||||||||
Repurchase agreements due 2013 | 5,000 | 4.51 | % | 5,127 | 4.45 | % | ||||||||||
Repurchase agreements due 2014 | 10,869 | 3.12 | % | 12,087 | 3.00 | % | ||||||||||
Repurchase agreements due 2015 | 399 | 3.25 | % | 538 | 3.25 | % | ||||||||||
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|
|
| |||||||||
Total | $ | 16,696 | 3.51 | % | $ | 19,623 | 3.28 | % | ||||||||
|
|
|
|
|
|
|
| |||||||||
Contractual Obligations and Loan Commitments
The Corporation has various financial obligations, including contractual obligations and commitments, which may require future cash payments. The following schedule summarizes the Corporation’s non cancelablenon-cancelable obligations and future minimum payments as of December 31, 2010:
| Minimum Payments Due by Period | ||||||||||||||||||||
| After One | After Three | |||||||||||||||||||
| Due in | Year But | Year But | ||||||||||||||||||
| One Year | Within | Within | After | |||||||||||||||||
| or Less | Three Years | Five Years | Five Years | Total | ||||||||||||||||
| Deposits with no stated maturity | $ | 424,978 | $ | — | $ | — | $ | — | $ | 424,978 | ||||||||||
| Certificates of deposit with stated maturities | 216,927 | 158,268 | 70,888 | 6,278 | 452,361 | |||||||||||||||
| Borrowed funds | ||||||||||||||||||||
| Short term borrowings | 61,871 | — | — | — | 61,871 | |||||||||||||||
| Long term borrowings | 11,944 | 48,477 | 62,625 | 10,000 | 133,046 | |||||||||||||||
| Total borrowed funds | 73,815 | 48,477 | 62,625 | 10,000 | 194,917 | |||||||||||||||
Total contractual obligations | $ | 715,720 | $ | 206,745 | $ | 133,513 | $ | 16,278 | $ | 1,072,256 | ||||||||||
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| Minimum Payments Due by Period | ||||||||||||||||||||
| After One | After Three | |||||||||||||||||||
| Due in | Year But | Years But | ||||||||||||||||||
| One Year | Within | Within | After | |||||||||||||||||
| or Less | Three Years | Five Years | Five Years | Total | ||||||||||||||||
Deposits with no stated maturity | $ | 476,627 | $ | — | $ | — | $ | — | $ | 476,627 | ||||||||||
Certificates of deposit with stated maturities | 265,299 | 110,092 | 99,094 | 7,052 | 481,537 | |||||||||||||||
|
|
|
|
|
|
|
|
|
| |||||||||||
Borrowed funds | ||||||||||||||||||||
Short term borrowings | 57,198 | — | — | — | 57,198 | |||||||||||||||
Long term borrowings | 32,428 | 96,510 | 10,000 | 20,000 | 158,938 | |||||||||||||||
|
|
|
|
|
|
|
|
|
| |||||||||||
Total borrowed funds | 89,626 | 96,510 | 10,000 | 20,000 | 216,136 | |||||||||||||||
|
|
|
|
|
|
|
|
|
| |||||||||||
Total contractual obligations | $ | 831,552 | $ | 206,602 | $ | 109,094 | $ | 27,052 | $ | 1,174,300 | ||||||||||
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|
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| |||||||||||
| Expiration Dates by Period | ||||||||||||||||||||
| After One | After Three | |||||||||||||||||||
| Due in | Year But | Year But | ||||||||||||||||||
| One Year | Within | Within | After | |||||||||||||||||
| or Less | Three Years | Five Years | Five Years | Total | ||||||||||||||||
| Unused commitments to extend credit | $ | 65,717 | $ | 24,364 | $ | 14,847 | $ | 5,273 | $ | 110,201 | ||||||||||
| Undisbursed loans | 13,382 | — | — | — | 13,382 | |||||||||||||||
| Standby letters of credit | 4,881 | — | — | — | 4,881 | |||||||||||||||
Total loan commitments | $ | 83,980 | $ | 24,364 | $ | 14,847 | $ | 5,273 | $ | 128,464 | ||||||||||
| Expiration Dates by Period | ||||||||||||||||||||
| After One | After Three | |||||||||||||||||||
| Due in | Year But | Years But | ||||||||||||||||||
| One Year | Within | Within | After | |||||||||||||||||
| or Less | Three Years | Five Years | Five Years | Total | ||||||||||||||||
Unused commitments to extend credit | $ | 61,415 | $ | 27,740 | $ | 10,591 | $ | 3,076 | $ | 102,822 | ||||||||||
Undisbursed loans | 21,806 | — | — | — | 21,806 | |||||||||||||||
Standby letters of credit | 4,461 | — | — | — | 4,461 | |||||||||||||||
|
|
|
|
|
|
|
|
|
| |||||||||||
Total loan commitments | $ | 87,682 | $ | 27,740 | $ | 10,591 | $ | 3,076 | $ | 129,089 | ||||||||||
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| |||||||||||
Capital
The capital of the Corporation consists primarily of common stock, including shares to be issued, retained earnings, and accumulated other comprehensive loss.income. The Corporation offers dividend reinvestment and employee, director, and shareholder stock purchase plans. Under the provisions of these plans, the Corporation issued 122,113115,359 shares of common stock generating $2,164$2,192 of capital during 2010,2011, and 126,874124,904 shares of common stock generating $2,396$2,203 of capital in 2009.2010. 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 1617 “Benefit Plans” of Notes to Consolidated Financial Statements). Pursuant to this plan, the Corporation generated $650$615 and $677$650 of capital in 2011 and 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 20102011 and 20092010 the Corporation repurchased 120,441 shares of common stock at an average price of $18.30 and 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$4,198 in 20102011 and consists of $457$5,498 of unrealized gains onavailable-for-sale investment securities which was offset by a $47$1,300 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 primaryTier 1 capital to average assets ratio, which consists of shareholders’ equity plus the allowance for loan losses less goodwill and acquisition intangibles, was 8.24%8.18% at year end 2010.December 31, 2011. 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.goodwill and acquisition intangibles. The following table sets forth the percentages required under the Risk Based Capital guidelines and the Corporation’s values at:
| December 31 | ||||||||||||
| 2010 | 2009 | Required | ||||||||||
| Equity Capital | 12.44 | % | 12.80 | % | 4.00 | % | ||||||
| Secondary Capital | 1.25 | % | 1.25 | % | 4.00 | % | ||||||
Total Capital | 13.69 | % | 14.05 | % | 8.00 | % | ||||||
| 2011 | 2010 | Required | ||||||||||
Equity Capital | 12.92 | % | 12.72 | % | 4.00 | % | ||||||
Secondary Capital | 1.25 | % | 1.25 | % | 4.00 | % | ||||||
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| |||||||
Total Capital | 14.17 | % | 13.97 | % | 8.00 | % | ||||||
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| |||||||
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.
90
Fair Value
The Corporation utilizes fair value measurements to record fair value adjustments to certain assets and liabilities and to determine fair value disclosures. Securitiesavailable-for-sale, trading securities, and certain liabilities are recorded at fair value on a recurring basis. Additionally, from time to time, the Corporation may be required to record at fair value other assets on a nonrecurring basis, such as loansheld-for-sale, foreclosed assets, originated mortgage servicing rights, and certain other assets and liabilities. These nonrecurring fair value adjustments typically involve the application of lower of cost or market accounting or write-downs of individual assets.
The table below represents the activity in Level 3 inputs measured on a recurring basis for the year ended December 31:
| 2010 | 2009 | |||||||
| Level 3 inputs — January 1 | $ | 10,027 | $ | 5,979 | ||||
Net unrealized (losses) gains onavailable-for-sale investment securities | (226 | ) | 4,048 | |||||
| Level 3 inputs — December 31 | $ | 9,801 | $ | 10,027 | ||||
| 2011 | 2010 | |||||||
Level 3 inputs — January 1 | $ | 9,801 | $ | 10,027 | ||||
Calls | (1,000 | ) | — | |||||
Transfer to Level 1 inputs | (5,033 | ) | — | |||||
Transfer to Level 2 inputs | (2,049 | ) | — | |||||
Net unrealized losses on available-for-sale investment securities | (1,719 | ) | (226 | ) | ||||
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| |||||
Level 3 inputs — December 31 | $ | — | $ | 9,801 | ||||
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Securities classified as Level 3 in 2010 included securities in less liquid markets and included auction rate money market preferred securities and preferred stocks. Due to the limited trading of these securities during 2010, the Corporation utilized a discounted cash flow analysis to determine fair values on December 31, 2010. This analysis considered the creditworthiness of the counterparty, the timing of expected future cash flows, the current volume of trading activity, and recent trade prices. The discount rates used were determined by using the interest rates of similarly rated financial institution debt based on the weighted average of a range of terms for corporate bond interest rates, which were obtained from published sources and ranged from 3.90% to 6.90% as of
December 31, 2010. During 2011, the markets for these securities have normalized and established regular trading patterns. As a result of this normalization, the Corporation measured preferred stocks with fair values of $5,033 utilizing Level 1 inputs and auction rate money market preferred securities with fair values of $2,049 utilizing Level 2 inputs based on the trade price of similar securities as of December 31, 2011.
For further information regarding fair value measurements see Note 1, “Nature of Operations and Summary of Significant Accounting Policies” and Note 19,20, “Fair Value” of the Consolidated Financial Statements.
Interest Rate Sensitivity
Interest rate sensitivity is determined by the amount of earning assets and interest bearing liabilities repricing within a specific time period, and their relative sensitivity to a change in interest rates. Management strives to achieve reasonable stability in the net interest margin through periods of changing interest rates. One tool used by management to measure interest rate sensitivity is gap analysis. As shown in the following table, the gap analysis depicts the Corporation’s position for specific time periods and the cumulative gap as a percentage of total assets.
Trading securities are included in the 0 to 3 month time frame due to their repricing characteristics. Fixed interest rate investment securities are scheduled according to their contractual maturity. Fixed rate loans are included in the appropriate time frame based on their scheduled amortization. Variable rate loans, , which totaled $143,572$162,653 as of December 31, 2010,2011, 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$1,559 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, 2010,2011, 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, 2010.2011. The interest rate sensitivity information for investment securities is based on the
91
| 0 to 3 | 4 to 12 | 1 to 5 | Over 5 | |||||||||||||
| Months | Months | Years | Years | |||||||||||||
| Interest Sensitive Assets | ||||||||||||||||
| Trading securities | $ | 5,837 | $ | — | $ | — | $ | — | ||||||||
| Investment securities | 17,405 | 47,247 | 129,688 | 136,384 | ||||||||||||
| Loans | 168,790 | 94,739 | 401,106 | 65,059 | ||||||||||||
Total | $ | 192,032 | $ | 141,986 | $ | 530,794 | $ | 201,443 | ||||||||
| Interest Sensitive Liabilities | ||||||||||||||||
| Borrowed funds | $ | 63,421 | $ | 10,730 | $ | 110,766 | $ | 10,000 | ||||||||
| Time deposits | 67,036 | 150,552 | 228,495 | 6,278 | ||||||||||||
| Savings | 10,770 | 33,671 | 107,557 | 25,819 | ||||||||||||
| Interest bearing demand | 7,432 | 22,405 | 79,827 | 32,595 | ||||||||||||
Total | $ | 148,659 | $ | 217,358 | $ | 526,645 | $ | 74,692 | ||||||||
| Cumulative gap (deficiency) | $ | 43,373 | $ | (31,999 | ) | $ | (27,850 | ) | $ | 98,901 | ||||||
| Cumulative gap (deficiency) as a % of assets | 3.54 | % | (2.61 | )% | (2.27 | ) % | 8.07 | % | ||||||||
| 0 to 3 | 4 to 12 | 1 to 5 | Over 5 | |||||||||||||
| Months | Months | Years | Years | |||||||||||||
Interest sensitive assets | ||||||||||||||||
Trading securities | $ | 4,710 | $ | — | $ | — | $ | — | ||||||||
Investment securities | 40,976 | 63,583 | 182,965 | 137,596 | ||||||||||||
Loans | 59,872 | 147,565 | 459,290 | 77,175 | ||||||||||||
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|
|
|
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|
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| |||||||||
Total | $ | 105,558 | $ | 211,148 | $ | 642,255 | $ | 214,771 | ||||||||
|
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|
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|
|
| |||||||||
Interest sensitive liabilities | ||||||||||||||||
Borrowed funds | $ | 67,440 | $ | 22,429 | $ | 106,267 | $ | 20,000 | ||||||||
Time deposits | 74,500 | 191,206 | 208,779 | 7,052 | ||||||||||||
Savings | 19,591 | 47,365 | 103,845 | 23,101 | ||||||||||||
Interest bearing demand | 15,621 | 38,273 | 82,568 | 27,191 | ||||||||||||
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|
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|
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| |||||||||
Total | $ | 177,152 | $ | 299,273 | $ | 501,459 | $ | 77,344 | ||||||||
|
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| |||||||||
Cumulative gap | $ | (71,594 | ) | $ | (159,719 | ) | $ | (18,923 | ) | $ | 118,504 | |||||
Cumulative gap as a % of assets | (5.35 | )% | (11.94 | )% | (1.41 | )% | 8.86 | % | ||||||||
The following table shows the maturity of commercial and agricultural loans outstanding at December 31, 2010.2011. Also provided are the amounts due after one year, classified according to the sensitivity to changes in interest rates.
| 1 Year | 1 to 5 | Over 5 | ||||||||||||||
| or Less | Years | Years | Total | |||||||||||||
| Commercial and agricultural | $ | 102,027 | $ | 296,042 | $ | 22,229 | $ | 420,298 | ||||||||
| Interest Sensitivity | ||||||||||||||||
| Loans maturing after one year that have: | ||||||||||||||||
| Fixed interest rates | $ | 253,106 | $ | 20,346 | ||||||||||||
| Variable interest rates | 42,936 | 1,883 | ||||||||||||||
Total | $ | 296,042 | $ | 22,229 | ||||||||||||
| 1 Year | 1 to 5 | Over 5 | ||||||||||||||
| or Less | Years | Years | Total | |||||||||||||
Commercial and agricultural | $ | 120,463 | $ | 276,367 | $ | 43,529 | $ | 440,359 | ||||||||
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| |||||||||
Interest sensitivity | ||||||||||||||||
Loans maturing after one year that have: | ||||||||||||||||
Fixed interest rates | $ | 238,963 | $ | 32,178 | ||||||||||||
Variable interest rates | 37,404 | 11,351 | ||||||||||||||
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| |||||||||||||
Total | $ | 276,367 | $ | 43,529 | ||||||||||||
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Liquidity
Liquidity is monitored regularly by the Corporation’s Market Risk Committee, which consists of members of senior management. The committee reviews projected cash flows, key ratios, and liquidity available from both primary and secondary sources.
The primary sources of the Corporation’s liquidity are cash and cash equivalents, certificates of deposit held in other financial institutions, trading securities, andavailable-for-sale investment securities, excluding auction rate money market preferred securities and preferred stock as of December 31, 2010 due to their illiquidity. These categories totaled $360,677$467,344 or 29.4%34.9% of assets as of December 31, 20102011 as compared to $292,464$360,677 or 25.6%29.4% in 2009.2010. 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.
92
| 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 | ) | |||||
| 2011 | 2010 | $Variance | ||||||||||
Net cash provided by operating activities | $ | 18,860 | $ | 26,521 | $ | (7,661 | ) | |||||
Net cash used in investing activities | (105,203 | ) | (103,877 | ) | (1,326 | ) | ||||||
Net cash provided by financing activities | 96,824 | 70,983 | 25,841 | |||||||||
|
|
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|
|
| |||||||
Increase (decrease) in cash and cash equivalents | 10,481 | (6,373 | ) | 16,854 | ||||||||
Cash and cash equivalents January 1 | 18,109 | 24,482 | (6,373 | ) | ||||||||
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| |||||||
Cash and cash equivalents December 31 | $ | 28,590 | $ | 18,109 | $ | 10,481 | ||||||
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| |||||||
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.funds purchased. 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 certificates of deposits held in other financial institutions, investment securities, or loans as collateral.
The Corporation had the ability to borrow up to an additional $122,960,$110,069, based on the assets currently pledged as collateral. The Corporation has pledged eligible mortgage loans and investment securities as collateral for any such borrowings.
Quantitative and Qualitative Disclosures about Market Risk
The Corporation’s primary market risks are interest rate risk and liquidity risk. The Corporation has no significant foreign exchange risk holds limited loans outstanding, and does not utilize interest rate swaps or derivatives, except for interest rate locks and forward loan commitments, in the management of its interest rate risk. Any changes in foreign exchange rates or commodity prices would have an insignificant impact on the Corporation’s interest income and cash flows. The Corporation does have a significant amount of loans extended to borrowers in agricultural production. The cash flow of such borrowers and ability to service debt is largely dependent on commodity prices. The Corporation mitigates these risks by using conservative price and production yields when calculating a borrower’s available cash flow to service their debt.
Interest rate risk (“IRR”) is the exposure of the Corporation’s net interest income, its primary source of income, to changes in interest rates. IRR results from the difference in the maturity or repricing frequency of a financial institution’s interest earning assets and its interest bearing liabilities. IRR is the fundamental method in which financial institutions earn income and create shareholder value. Excessive exposure to IRR could pose a significant risk to the Corporation’s earnings and capital.
The Federal Reserve Board, the Corporation’s primary Federal regulator, has adopted a policy requiring the Board of Directors and senior management to effectively manage the various risks that can have a material impact on the safety and soundness of the Corporation. The risks include credit, interest rate, liquidity, operational, and reputational. The Corporation has policies, procedures, and internal controls for measuring and managing these risks. Specifically, the IRR policy and procedures include defining acceptable types and terms of investments and funding sources, liquidity requirements, limits on investments in long term assets, limiting the mismatch in repricing opportunity of assets and liabilities, and the frequency of measuring and reporting to the Board of Directors.
The Corporation uses several techniques to manage IRR. The first method is gap analysis. Gap analysis measures the cash flowsand/or the earliest repricing of the Corporation’s interest bearing assets and liabilities. This analysis is useful for measuring trends in the repricing characteristics of the balance sheet. Significant assumptions are required in this process because of the imbedded repricing options contained in assets and liabilities. A substantial portion of the Corporation’s assets are invested in loans and investment securities with issuer call options. Residential real estate and other consumer loans have imbedded options that allow the borrower to repay
93
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, 2010,2011, the Corporation’s net interest income would decrease slightly 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, 20102011 and 2009.2010. 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 payment and maturity dates. Savings and NOW accounts are based on management’s estimate of their future cash flows.
| December 31, 2010 | Fair Value | |||||||||||||||||||||||||||||||
| 2011 | 2012 | 2013 | 2014 | 2015 | Thereafter | Total | 12/31/10 | |||||||||||||||||||||||||
| (Dollars in thousands) | ||||||||||||||||||||||||||||||||
| Rate sensitive assets | ||||||||||||||||||||||||||||||||
| Other interest bearing assets | $ | 10,550 | $ | 5,429 | $ | 960 | $ | — | $ | — | $ | — | $ | 16,939 | $ | 17,039 | ||||||||||||||||
| Average interest rates | 0.96 | % | 1.82 | % | 2.16 | % | — | — | — | 1.30 | % | |||||||||||||||||||||
| Trading securities | $ | 1,918 | $ | 2,366 | $ | 1,031 | $ | 522 | $ | — | $ | — | $ | 5,837 | $ | 5,837 | ||||||||||||||||
| Average interest rates | 3.46 | % | 2.31 | % | 2.42 | % | 2.47 | % | — | — | 2.72 | % | ||||||||||||||||||||
| Fixed interest rate securities | $ | 64,652 | $ | 42,984 | $ | 32,871 | $ | 29,395 | $ | 24,438 | $ | 136,384 | $ | 330,724 | $ | 330,724 | ||||||||||||||||
| Average interest rates | 3.68 | % | 3.42 | % | 3.30 | % | 3.33 | % | 3.28 | % | 3.13 | % | 3.32 | % | ||||||||||||||||||
| Fixed interest rate loans | $ | 128,277 | $ | 121,434 | $ | 140,019 | $ | 67,423 | $ | 68,569 | $ | 66,010 | $ | 591,732 | $ | 603,435 | ||||||||||||||||
| Average interest rates | 6.80 | % | 6.63 | % | 6.26 | % | 6.47 | % | 6.08 | % | 5.83 | % | 6.41 | % | ||||||||||||||||||
| Variable interest rate loans | $ | 59,536 | $ | 17,306 | $ | 22,523 | $ | 15,118 | $ | 18,830 | $ | 10,259 | $ | 143,572 | $ | 143,572 | ||||||||||||||||
| Average interest rates | 4.94 | % | 4.76 | % | 4.27 | % | 3.78 | % | 3.69 | % | 5.21 | % | 4.55 | % | ||||||||||||||||||
| Rate sensitive liabilities | ||||||||||||||||||||||||||||||||
| Borrowed funds | $ | 74,151 | $ | 33,013 | $ | 15,127 | $ | 37,087 | $ | 25,539 | $ | 10,000 | $ | 194,917 | $ | 200,603 | ||||||||||||||||
| Average interest rates | 0.62 | % | 3.46 | % | 2.55 | % | 3.11 | % | 4.60 | % | 2.35 | % | 2.33 | % | ||||||||||||||||||
| Savings and NOW accounts | $ | 74,278 | $ | 73,818 | $ | 53,174 | $ | 35,872 | $ | 24,520 | $ | 58,414 | $ | 320,076 | $ | 320,076 | ||||||||||||||||
| Average interest rates | 0.21 | % | 0.21 | % | 0.20 | % | 0.19 | % | 0.18 | % | 0.15 | % | 0.19 | % | ||||||||||||||||||
| Fixed interest rate time deposits | $ | 215,648 | $ | 113,338 | $ | 44,269 | $ | 31,414 | $ | 39,474 | $ | 6,278 | $ | 450,421 | $ | 452,392 | ||||||||||||||||
| Average interest rates | 1.79 | % | 2.67 | % | 3.35 | % | 2.86 | % | 2.97 | % | 3.26 | % | 2.36 | % | ||||||||||||||||||
| Variable interest rate time deposits | $ | 1,279 | $ | 661 | $ | — | $ | — | $ | — | $ | — | $ | 1,940 | $ | 1,940 | ||||||||||||||||
| Average interest rates | 1.21 | % | 1.06 | % | — | — | — | — | 1.16 | % | ||||||||||||||||||||||
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| (dollars in thousands) | December 31, 2011 | Fair Value | ||||||||||||||||||||||||||||||
| 2012 | 2013 | 2014 | 2015 | 2016 | Thereafter | Total | 12/31/11 | |||||||||||||||||||||||||
Rate sensitive assets | ||||||||||||||||||||||||||||||||
Other interest bearing assets | $ | 8,775 | $ | 4,125 | $ | 100 | $ | — | $ | — | $ | — | $ | 13,000 | $ | 13,053 | ||||||||||||||||
Average interest rates | 1.18 | % | 1.33 | % | 0.35 | % | — | — | — | 1.22 | % | |||||||||||||||||||||
Trading securities | $ | 3,156 | $ | 1,031 | $ | 523 | $ | — | $ | — | $ | — | $ | 4,710 | $ | 4,710 | ||||||||||||||||
Average interest rates | 3.34 | % | 2.48 | % | 2.49 | % | 3.06 | % | ||||||||||||||||||||||||
Fixed interest rate securities | $ | 104,559 | $ | 61,421 | $ | 48,659 | $ | 37,777 | $ | 35,108 | $ | 137,596 | $ | 425,120 | $ | 425,120 | ||||||||||||||||
Average interest rates | 2.98 | % | 2.84 | % | 2.91 | % | 2.93 | % | 3.21 | % | 3.01 | % | 2.98 | % | ||||||||||||||||||
Fixed interest rate loans | $ | 141,867 | $ | 140,390 | $ | 90,852 | $ | 75,690 | $ | 76,985 | $ | 61,854 | $ | 587,638 | $ | 606,524 | ||||||||||||||||
Average interest rates | 6.24 | % | 6.08 | % | 5.94 | % | 5.99 | % | 5.40 | % | 5.15 | % | 5.90 | % | ||||||||||||||||||
Variable interest rate loans | $ | 70,783 | $ | 25,267 | $ | 20,803 | $ | 18,853 | $ | 11,631 | $ | 15,316 | $ | 162,653 | $ | 162,653 | ||||||||||||||||
Average interest rates | 5.87 | % | 3.97 | % | 4.05 | % | 3.68 | % | 4.00 | % | 3.98 | % | 4.78 | % | ||||||||||||||||||
Rate sensitive liabilities | ||||||||||||||||||||||||||||||||
Borrowed funds | $ | 89,869 | $ | 15,000 | $ | 25,869 | $ | 45,398 | $ | 20,000 | $ | 20,000 | $ | 216,136 | $ | 227,780 | ||||||||||||||||
Average interest rates | 1.42 | % | 3.93 | % | 3.13 | % | 3.30 | % | 2.67 | % | 2.56 | % | 2.41 | % | ||||||||||||||||||
Savings and NOW accounts | $ | 120,850 | $ | 78,313 | $ | 51,291 | $ | 34,006 | $ | 22,803 | $ | 50,292 | $ | 357,555 | $ | 357,555 | ||||||||||||||||
Average interest rates | 0.20 | % | 0.19 | % | 0.18 | % | 0.17 | % | 0.15 | % | 0.15 | % | 0.18 | % | ||||||||||||||||||
Fixed interest rate time deposits | $ | 264,147 | $ | 62,883 | $ | 46,802 | $ | 55,493 | $ | 43,601 | $ | 7,052 | $ | 479,978 | $ | 498,085 | ||||||||||||||||
Average interest rates | 1.61 | % | 2.67 | % | 2.33 | % | 2.56 | % | 2.41 | % | 1.48 | % | 2.00 | % | ||||||||||||||||||
Variable interest rate time deposits | $ | 1,152 | $ | 407 | $ | — | $ | — | $ | — | $ | — | $ | 1,559 | $ | 1,559 | ||||||||||||||||
Average interest rates | 0.67 | % | 0.69 | % | — | — | — | — | 0.68 | % | ||||||||||||||||||||||
| December 31, 2010 | Fair Value | |||||||||||||||||||||||||||||||
| 2011 | 2012 | 2013 | 2014 | 2015 | Thereafter | Total | 12/31/10 | |||||||||||||||||||||||||
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 | % | ||||||||||||||||||||||
| 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 | % | ||||||||||||||||||||||
This report contains certain forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. The Corporation
intends such forward-looking statements to be covered by the safe harbor provisions for forward-looking statements contained in the Private Securities Reform Act of 1995, and is including this statement for purposes of these safe harbor provisions. Forward-looking statements, which are based on certain assumptions and describe future plans, strategies and expectations of the Corporation, are generally identifiable by use of the words “believe,” “expect,” “intend,” “anticipate,” “estimate,” “project,” or similar expressions. The Corporation’s ability to predict results or the actual effect of future plans or strategies is inherently uncertain. Factors which could have a material adverse effect on the operations and future prospects of the Corporation and the subsidiaries include, but are not limited to, changes in interest rates, general economic conditions, legislative/regulatory changes, monetary and fiscal policies of the U.S. Government including policies of the U.S. Treasury, the Federal Reserve Board, the Federal Deposit Insurance Corporation, the quality or composition of the loan or investment portfolios, demand for loan products, deposit flows, competition, demand for financial services in the Corporation’s market area, and accounting principles, policies and guidelines. These risks and uncertainties should be considered in evaluating forward-looking statements and undue reliance should not be placed on such statements. Further information concerning the Corporation and its business, including additional factors that could materially affect the Corporation’s financial results, is included in the Corporation’s filings with the Securities and Exchange Commission.
The Corporation’s common stock is traded in the over the counter 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 COMMON STOCK AND DIVIDEND INFORMATIONCommon Stock and Dividend Information(“OTC”) market. The common stock has beenis quoted on the OTC Pink marketOTCQB tier of the OTC Markets Group, Inc’sInc.’s electronic quotation system (the “Pink Sheets”)(www.otcmarkets.com) 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.Pink SheetsOTC Markets 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 SheetsOTC Markets 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 were95
| Number of | Sale Price | |||||||||||
Period | Shares | Low | High | |||||||||
| 2010 | ||||||||||||
| First Quarter | 45,695 | $ | 16.75 | $ | 19.00 | |||||||
| Second Quarter | 64,290 | 17.00 | 18.50 | |||||||||
| Third Quarter | 53,897 | 16.05 | 17.99 | |||||||||
| Fourth Quarter | 56,534 | 16.57 | 18.30 | |||||||||
| 220,416 | ||||||||||||
| 2009 | ||||||||||||
| First Quarter | 61,987 | 14.99 | 25.51 | |||||||||
| Second Quarter | 91,184 | 15.85 | 20.75 | |||||||||
| Third Quarter | 66,399 | 17.50 | 19.50 | |||||||||
| Fourth Quarter | 76,985 | 14.00 | 19.25 | |||||||||
| 296,555 | ||||||||||||
| Number of | Sale Price | |||||||||||
| Shares | Low | High | ||||||||||
2011 | ||||||||||||
First Quarter | 48,909 | $ | 17.00 | $ | 19.75 | |||||||
Second Quarter | 65,090 | 17.00 | 18.50 | |||||||||
Third Quarter | 92,953 | 17.41 | 18.95 | |||||||||
Fourth Quarter | 106,210 | 17.74 | 24.45 | |||||||||
|
| |||||||||||
| 313,162 | ||||||||||||
|
| |||||||||||
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 | ||||||||||||
|
| |||||||||||
The following table sets forth the cash dividends paid for the following quarters:
| Per Share | ||||||||
| 2010 | 2009 | |||||||
| First Quarter | $ | 0.18 | $ | 0.12 | ||||
| Second Quarter | 0.18 | 0.13 | ||||||
| Third Quarter | 0.18 | 0.13 | ||||||
| Fourth Quarter | 0.18 | 0.32 | ||||||
Total | $ | 0.72 | $ | 0.70 | ||||
| Per Share | ||||||||
| 2011 | 2010 | |||||||
First Quarter | $ | 0.19 | $ | 0.18 | ||||
Second Quarter | 0.19 | 0.18 | ||||||
Third Quarter | 0.19 | 0.18 | ||||||
Fourth Quarter | 0.19 | 0.18 | ||||||
|
|
|
| |||||
Total | $ | 0.76 | $ | 0.72 | ||||
|
|
|
| |||||
Isabella Bank Corporation’s authorized common stock consists of 15,000,000 shares, of which 7,550,0747,589,226 shares are issued and outstanding as of December 31, 2010.2011. As of that date, there were 3,0113,043 shareholders of record.
The Board of Directors has adoptedauthorized a common stock repurchase plan. On June 23, 2010,April 27, 2011, 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, 2010,2011, with respect to this plan:
| Total Number of | ||||||||||||||||
| Shares Purchased | Maximum Number of | |||||||||||||||
| Shares Repurchased | as Part of Publicly | Shares That May Yet Be | ||||||||||||||
| Average Price | Announced Plan | Purchased Under the | ||||||||||||||
| Number | Per Share | or Program | Plans or Programs | |||||||||||||
| Balance, September 30, 2010 | 59,131 | |||||||||||||||
| October 1 - 31, 2010 | 5,224 | $ | 17.23 | 5,224 | 53,907 | |||||||||||
| November 1 - 30, 2010 | 7,773 | 17.37 | 7,773 | 46,134 | ||||||||||||
| December 1 - 31, 2010 | 6,697 | 16.87 | 6,697 | 39,437 | ||||||||||||
Balance, December 31, 2010 | 19,694 | $ | 17.16 | 19,694 | 39,437 | |||||||||||
Total Number of Shares Purchased as Part of Publicly Announced Plan | ||||||||||||||||
Maximum Number of Shares That May Yet Be Purchased Under the | ||||||||||||||||
| Shares Repurchased | ||||||||||||||||
| Average Price | ||||||||||||||||
| Number | Per Share | or Program | Plans or Programs | |||||||||||||
Balance, September 30, 2011 | 62,729 | |||||||||||||||
October 1 — 31, 2011 | 7,934 | $ | 18.78 | 7,934 | 54,795 | |||||||||||
November 1 — 30, 2011 | 1,481 | 19.58 | 1,481 | 53,314 | ||||||||||||
December 1 — 31, 2011 | 34,318 | 18.50 | 34,318 | 18,996 | ||||||||||||
|
|
|
|
|
|
|
| |||||||||
Balance, December 31, 2011 | 43,733 | $ | 18.59 | 43,733 | 18,996 | |||||||||||
|
|
|
|
|
|
|
| |||||||||
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 elsewhere in the Corporation’s 2010 annual report onForm 10-K.
96
The following graph compares the cumulative total shareholder return on Corporation common stock for the last five years with the cumulative total return on (1) the NASDAQ Stock Market Index (“NASDAQ”), which is comprised of all United States common shares traded on the NASDAQ and (2) the NASDAQ Bank Stock Index (“NASDAQ Banks”), which is comprised of bank and bank holding company common shares traded on the NASDAQ over the same period. The graph assumes the value of an investment in the Corporation and each index was $100 at December 31, 20052006 and all dividends are reinvested.
Stock Performance
Five-Year Total Return
The dollar values for total shareholder return plotted in the graph above are shown in the table below:
Comparison of Five Year Cumulative
Among Isabella Bank Corporation, NASDAQ Stock Market,
and NASDAQ Bank Stock
| Isabella Bank | NASDAQ | |||||||||||
Year | Corporation | NASDAQ | Banks | |||||||||
| 12/31/2005 | 100.0 | 100.0 | 100.0 | |||||||||
| 12/31/2006 | 111.6 | 110.3 | 113.6 | |||||||||
| 12/31/2007 | 113.3 | 122.1 | 91.4 | |||||||||
| 12/31/2008 | 73.8 | 73.5 | 72.0 | |||||||||
| 12/31/2009 | 56.9 | 106.6 | 60.2 | |||||||||
| 12/31/2010 | 54.2 | 125.8 | 68.6 | |||||||||
97
Year | Isabella Bank Corporation | NASDAQ | NASDAQ Banks | |||
12/31/2006 | 100.0 | 100.0 | 100.0 | |||
12/31/2007 | 101.6 | 110.6 | 80.4 | |||
12/31/2008 | 66.1 | 66.6 | 63.3 | |||
12/31/2009 | 51.0 | 96.6 | 52.9 | |||
12/31/2010 | 48.5 | 114.0 | 60.4 | |||
12/31/2011 | 69.1 | 113.1 | 54.0 |
Annual Meeting
The Annual Meeting of Shareholders will be held at 5:00 p.m., Tuesday, May 3, 2011,1, 2012, Comfort Inn, 2424 S. Mission Street, Mt. Pleasant, Michigan.
Financial Information andForm 10-K
Copies of the 20102011 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 Relations tab, or may be obtained, without charge, by writing to:
Debra Campbell
Secretary
Isabella Bank Corporation
401 N. Main St.
Mt. Pleasant, Michigan 48858
Mission Statement
To create an operating environment that will provide shareholders with sustained growth in their investment while maintaining our independence and subsidiaries’ autonomy.
Equal Employment Opportunity
The equal employment opportunity clauses in Section 202 of the Executive Order 11246, as amended; 38 USC 2012, Vietnam Era Veterans Readjustment Act of 1974; Section 503 of the Rehabilitation Act of 1973, as amended; relative to equal employment opportunity and implementing rules and regulations of the Secretary of Labor are adhered to and supported by Isabella Bank Corporation, and its subsidiaries.
98
THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS
The undersigned hereby appoints Sandra L. Caul,Jeffrey J. Barnes, 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 shares of Common Stock of lsabellaIsabella Bank Corporation that the undersigned is eligible to vote as of April 1, 2011March 28, 2012 at the annual meeting of shareholders to be held on May3,2011 1, 2012 or any adjournments thereof.
PROPOSAL 1--ELECTION—ELECTION OF DIRECTORS: Proposal to elect the following five (5)three (3) persons as directors. Please mark the appropriate box for each director-nominee.
| FOR | ||||||||||||
| AGAINST | WITHHOLD AUTHORITY | |||||||||||
| ¨ | ¨ | ¨ | ||||||||||
| Sandra L. Caul | ¨ | ¨ | ||||||||||
| ¨ | ||||||||||||
| W. | ¨ | ¨ | ¨ | |||||||||
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“FOR THE 3-YEAR FREQUENCY ONNOMINEES LISTED UNDER PROPOSAL 3.1”. 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.below. 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:, 2012 | Signature | |||||||||
Please mark, sign, date, and return Proxy card promptly using the enclosed envelope. | ||||||||||
| Signature (if held jointly) | ||||||||||