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| ¨ | Definitive Additional Materials | |||
| ¨ | Soliciting Material Pursuant to §240.14a-12 | |||
ISABELLA BANK CORPORATION | ||||
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vote: March 31, 2014 vote by mail, internet, or phone. Have extensive business leadership Bring a diverse perspective and experience Are independent and collegial Have high ethical standards and have demonstrated sound business judgment Are willing and able to commit the significant time and effort to effectively fulfill their responsibilities Are active in and knowledgeable of their respective communities Director meeting. The Board has approved a Nominating and Corporate Governance Committee Charter which is available on the Bank’s Report Board. 2013. (ex-officio) 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 2013. Target Earning per share Net operating expenses to average assets FTE Net Interest Margin In market deposit growth Loan growth Exceeding peer group return on average assets 12 and in the table outlining the change in pension value and non-qualified deferred compensation earnings table appearing on page 13. Name and principal position Richard J. Barz CEO Isabella Bank Corporation Dennis P. Angner President and CFO Isabella Bank Corporation Steven D. Pung President Isabella Bank Timothy M. Miller President of the Breckenridge Division of Isabella Bank David J. Reetz Sr. Vice President and CLO Isabella BankMay 7, 2013April 30, 2014Tuesday, May 7, 2013Wednesday, April 30, 2014 at 5:00 p.m. Eastern Daylight 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 four directors.2. To transact such other business as may properly come before the meeting, or any adjournment or adjournments thereof.1. The election of five directors. 2. To hold an advisory, non-binding vote on executive compensation of named executive officers. 3. To transact such other business as may properly come before the meeting, or any adjournment or adjournments thereof. 26, 201317, 2014 as the record date for determination of shareholders entitled to notice of, and to vote at, the meeting or any adjournments thereof.date and sign the enclosed proxy form, indicate your choice with respect to the matters to be voted upon, and return it promptly in the enclosed envelope. Note that if stock is held in more than one name, all parties should sign the proxy form.1. By mail: Indicate your choice with respect to the matters to be voted upon, sign, date, and return your proxy form in the enclosed envelope. Note that if stock is held in more than one name, all parties should sign the proxy form; or 2. By internet - www.proxyvote.com: Have your proxy form in hand when you access the web site and follow the instructions to obtain your records and to create an electronic voting instruction form; or 3. By phone - 1-800-690-6903 (toll-free): Have your proxy form in hand and then follow the instructions. 
April 11, 2013the “Corporation”"the Corporation", “Isabella,” “we,” “our,” “us,” and similar terms refer solely to the parent holding company, Isabella Bank Corporation. References to the “Consolidated Corporation” refer to consolidated entity consisting of Isabella Bank Corporation and its subsidiaries,subsidiaries. Isabella Bank Corporation refers solely to the parent holding company, and references to “Isabella Bank” or the “Bank” referrefers to Isabella Bank Corporation’s subsidiary, Isabella Bank.Tuesday, May 7, 2013Wednesday, April 30, 2014 at 5:00 p.m. at the Comfort Inn, 2424 S. Mission Street, Mt. Pleasant, Michigan, or at any adjournment or adjournments thereof, for the purposes set forth in the accompanying Notice of Annual Meeting of Shareholders and in this Proxy Statement.April 11, 2013March 31, 2014 to all holders of record of common stock as of the record date. If a shareholder’s shares are held in the name of a broker, bank, or other nominee, then that party should give the shareholder instructions for voting the shareholder’s shares.26, 201317, 2014 as the record date for the determination of shareholders entitled to notice of, and to vote at, the Annual Meeting and any adjournment thereof. We have only one class of common stock and no preferred stock. As of March 26, 2013,17, 2014, there were 7,670,6697,707,524 shares of stock outstanding. Each outstanding share entitles the holder thereof to one vote on each separate matter presented for vote at the meeting. You may vote on matters that are properly presented at the Annual Meeting by either attending the meeting and casting a vote, or by signing and returning the enclosed proxy. Ifproxy, voting on the enclosedinternet, or voting by phone. You may change your vote or revoke your proxy is executed and returned, it may be revoked by you at any time before it is exercisedvoted at the Annual Meeting.Meeting by filing with the Corporation an instrument revoking it, filing a duly executed proxy bearing a later date (including a proxy given over the internet or by phone) or by attending the meeting and electing to vote in person. You are encouraged to date and sign the enclosed proxy, indicate your choice, and return it to us.ProposalProposals 1 isand 2 are not an itemitems on which brokerage firms may vote in their discretion on your behalf unless you have furnished voting instructions.Proposal 1-ElectionDirectorsOn December 19, 2012, James C. Fabianothe advisory proposal, vote against the advisory proposal or abstain from voting. A majority of the shares represented at the annual meeting and Dale D. Weburg retired fromentitled to vote on this advisory proposal must be voted in favor of the proposal for it to pass. While this vote is required by law, it will neither be binding on the Board of Directors, (the “Board”)nor will it create or imply any change in the fiduciary duties of, or impose any additional fiduciary duty on the Board of Directors. In counting votes on the advisory, nonbinding proposal to approve executive compensation matters, abstentions will have the same effect as a vote against the proposal and broker non-votes will have no effect on the numberoutcome of directors was reduced to 12. the vote.isof Directors (the "Board") currently consists of eleven (11) members divided into three classes, with the directors in eachthe class noted below up for re-election at the Annual Meeting. On September 15, 2013 Wilson C. Lauer passed away and on October 31, 2013 Sandra L. Caul retired from the Board, resulting in the number of directors being elected for areduced to ten (10). The number of Board members was increased to its current level by the appointment of Jae A. Evans to the Board on January 1, 2014. Dennis P. Angner, whose term of three years. Atexpires at the Annual Meeting, Thomas L. Kleinhardt,has been nominated for election to a one year term through 2015 and Dr. Jeffrey J. Barnes, G. Charles Hubscher, David J. Maness, and W. Joseph LaFramboise, Wilson C. Lauer, and Sarah R. Opperman,Manifold, whose terms expire at the Annual Meeting, have been nominated for election to three year terms through 20162017 for the reasons described below.fourfive nominees. If a nominee becomes unable or unwilling to serve, proxies will be voted for such other person, if any, as shall be designated. However, we know of no reason to anticipate that this will occur. The fourfive nominees who receive the greatest number of votes cast will be elected directors. Each of the nominees has agreed to serve as a director if elected.Professional
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and teamcommunitybuildinginvolvementskills LeadershipDiversityand teamby race,buildinggender, orskillscultural DiversityGeo-by race,graphicalgender, orculturaldiversity Geo-graphicaldiversityFinance FinanceTech-
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ationDavid J. Maness HumanResourcesX Bankbusinesssegmentrepresent-ation David J. Maness X X X X X Dennis P. Angner X X X X XDennis P. Angner X X X X Dr. Jeffrey J. Barnes X X X X X X Richard J. Barz X X Jeffrey J. Barnes X X X X X Jae A. Evans X X XRichard J. Barz X X X X X G. Charles Hubscher X X X X X X SandraThomas L. CaulX X X X X X X X Joseph LaFramboise X X X XG. Charles Hubscher X X W. Joseph Manifold X X X X X X X X Thomas L. KleinhardtX X X X X X X X X Sarah R. Opperman X X X Joseph LaFramboise X X X X X XWilson C. LauerXXXXXXW. Joseph ManifoldXXXXXXXW. Michael McGuireXXXXXXXXXSarah R. OppermanXXXXXXXXDirector Audit Nominating and Corporate Governance Compensation and Human Resource David J. Maness Nominating Xo Compensation Xo Dennis P. Angner Dr. Jeffrey J. Barnes X X Richard J. Barz Jae A. Evans G. Charles Hubscher X X Thomas L. Kleinhardt X Joseph LaFramboise X X X W. Joseph Manifold X X W. Michael McGuire X X Sarah R. Opperman X C — Chairperson and Corporateand HumanDirectorAuditGovernanceResourceDavid J. ManessXoXoXcDennis P. AngnerJeffrey J. BarnesXXRichard J. BarzSandra L. CaulXG. Charles HubscherXXThomas L. KleinhardtXJoseph LaFramboiseXO — Ex-Officio XX Wilson C. LauerXW. Joseph ManifoldXcXXW. Michael McGuireXXcXSarah R. OppermanXC — ChairpersonO — Ex-OfficioNomineesNominee for TermsTerm Ending in 20162015Thomas L. Kleinhardt (age 58) has been a director of theIsabella Bank since 1998 and was appointed to the Board effective January 1, 2010. Mr. Kleinhardt is President of McGuire Chevrolet, is active in the Clare Kiwanis Club, and coaches the girls Varsity Basketball team at Farwell High School.Joseph LaFramboise (age 63) has been a director of the Bank since 2007, and was appointed to the Board effective January 1, 2010. He is a retired Sales and Marketing Executive of Ford Motor Company. Mr. LaFramboise is an Ambassador of Eagle Village in Evart, Michigan.Wilson C. Lauer (age 63) was appointed to the Board on July 1, 2012. Mr. Lauer has served as a director for the Isabella Bank-Breckenridge Division Board since 1997 and owns Lauer Farms LLC, a 2,500 acre cash crop business. Mr. Lauer has served several different community organizations including the Ithaca School District Board, the Gratiot Economic Development Board, and Farm Bureau’s County and State Policy Development Committees.Sarah R. Opperman (age 53) was appointed to the Board on July 1, 2012. Ms. Opperman is the owner of Opperman Consulting, LLC, which provides public affairs counsel for corporate clients. She was previously employed for 28 years by The Dow Chemical Company, where she held leadership roles in public and government affairs. She was inducted into the CMU Journalism Hall of Fame and is a recipient of the Dow Genesis Award for Excellence in People Development. Ms. Opperman serves on the CMU Board of Trustees, the CMU Research Corporation Board of Directors, and the MidMichigan Health Corporate Board of Directors.Current Directors with Terms Ending in 2014Dennis P. Angner (age 57) has been a director of the Corporation and the Bank since 2000. Mr. Angner has been principally employed by the Consolidated Corporation since 1984 and has served as President of theIsabella Bank Corporation since December 30, 2001 and CFO since January 1, 2010. Mr. Angner served as Chief Executive Officer of theIsabella Bank Corporation from December 30, 2001 through December 31, 2009. He is a past Chair of the Michigan Bankers Association and is currently serving as vice chairman of its taxation committee, is a member of the American Bankers Association Government Relations Council, and served on the Central Michigan American Red Cross board for over 20 years.50)51) has been a director of the Bank since 2007 and of theIsabella Bank Corporation since 2010. Dr. Barnes is a physician and shareholder in Lansing Ophthalmology PC. He is a former member of the Central Michigan Community Hospital Board of Directors.59)60) has been a director of the Bank since 2004 and of theIsabella Bank Corporation since 2010. Mr. Hubscher is President of Hubscher and Son, Inc., a sand and gravel producer. He is a director of the National Stone and Gravel Association, the Michigan Aggregates Association, serves on the Board of Trustees for the Mt. Pleasant Area Community Foundation, and is a member of the Zoning Board of Appeals for Deerfield Township.59)60) has been a director of the Bank since 2003 and of theIsabella Bank Corporation since 2004. Mr. Maness has served as chairman of the board for the Corporation and the Bank since 2010. He is President of Maness Petroleum, a geological and geophysical consulting services company. Mr. Maness is currently serving as a director for the Michigan Oil & Gas Association, and he previously served on the Mt. Pleasant Public Schools Board of Education.61)62) has been a director of theIsabella Bank Corporation since 2003 and of the Bank since January 1, 2010. Mr. Manifold is CFO of Federal Broach Holdings LLC, a holding company which operates several manufacturing companies. Previously, he was a senior manager with Ernst & Young Certified Public Accounting firm working principally on external bank audits and was CFO of the Delfield Company. Prior to joining the Board, Mr. Manifold served on the Isabella Community Credit Union Board and was Chairman of the Mt. Pleasant Public Schools Board of Education.64)65) has been a director of the Bank since 2000 and of theIsabella Bank Corporation since 2002. Mr. Barz has been employed by the Consolidated Corporation since 1972 and has beenretired as Chief Executive Officer of Isabella Bank Corporation on December 31, 2013 after over 41 years of service with the Corporation. Mr. Barz was Chief Executive Officer of Isabella Bank Corporation since 2010 and President and CEO of the Bank from 2001 to July 2012. Mr. Barz has been very active in community organizations and events. He is a past chairman of the Central Michigan Community Hospital Board of Directors, is the current chairman of the Middle Michigan DevelopmentSandra L. Caul(age 69) (age 57) was appointed a director of Isabella Bank Corporation and the Bank and elected Chief Executive Officer of Isabella Bank Corporation effective January 1, 2014. Mr. Evans has been employed by the Corporation since 2008 and has over 36 years of banking experience. He served as Chief Operations Officer of the Bank through December 31, 2013 and President of the Greenville Division of the Bank from January 1, 2008 to June 2011. Mr. Evans is a board member for The Community Bankers of Michigan, Art Reach of Mid Michigan, and is the chair of the EightCAP governing board. Mr Evans is also past vice-chair of the Carson City Hospital, was president of the Greenville Rotary Club, and just completed his term as chair of The Community Bankers of Michigan.theIsabella Bank since 1994 and of the Corporation since 2005. Ms. Caul is Vice Chairperson of the Central Michigan Community Hospital Board of Directors, Chairperson of the Mid Michigan Community College Advisory Board, 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 63) has been a director of the Corporation since 2007 and of the Bank since January 1, 2010. Mr. McGuire, is currently an attorney, andretired in August 2013 as the Director of the Office of the Corporate Secretary and Assistant Secretary of The Dow Chemical Company, a manufacturer of chemicals, plastics and agricultural products, headquartered in Midland, Michigan.63)64), President of the Bank and a member of the Board of Directors of Financial Group Information Services (a wholly owned subsidiary of theIsabella Bank Corporation) has been employed by the Bank since 1978. Timothy M. Miller1979. Jerome E. Schwind (age 61)47), Executive Vice President of the Breckenridge Divisionand Chief Operating Officer of the Bank, and a member of its Board of Directors, has been an employee ofemployed by the Bank since 1985.1999. David J. Reetz (age 52)53), Senior Vice President and Chief Lending Officer of the Bank, has been employed by the Bank since 1987. Sandra L. Caul, G. Charles Hubscher, Thomas L. Kleinhardt, Joseph LaFramboise, Wilson C Lauer, David J. Maness, W. Joseph Manifold, W. Michael McGuire, and Sarah R. Opperman are independent directors. Former directors JamesSandra L. Caul and Wilson C. Fabiano and Dale D. Weburg, who retired from the Board on December 19, 2012,Lauer, were also determined to be independent directors. Richard J. Barz is not independent as he retired as CEO of Isabella Bank Corporation on December 31, 2013. Jae A. Evans is not independent as he is employed as CEO of the Corporation.DennisIsabella Bank Corporation. Dennis P. Angner is not independent as he is employed as President and CFO of theIsabella Bank Corporation.policyPolicy provides that only directors who are deemed to be independent as set forth by the NASDAQ Stock Market Marketplace Rules and SEC rules are eligible to hold the office of chairperson. Additionally, the chairpersons of Board established committees must also be independent directors. It is our belief that having a separate chairperson and CEO best serves the interest of the shareholders. The Board elects its chairperson at the first Board meeting following the annual meeting. Independent members of the Board meet without inside directors at least twice per year.2012.2013. All incumbent directors attended 75% or more of the meetings held in 2012.2013. The Board has an Audit Committee, a Nominating and Corporate Governance Committee, and a Compensation and Human Resource Committee.“Report of the Audit Committee”“Audit Committee Report” included elsewhere in this proxy statement. The Audit Committee is governed by a written charter approved by the Board, which is available on the Bank’s website:www.isabellabank.com.Sarbanes — OxleySarbanes-Oxley Act of 2002, directors Manifold and McGuire meet the requirements of Audit Committee Financial Expert and have been so designated. The Committee also consists of directors Barnes, Hubscher, LaFramboise, and Maness (ex-officio).2012,2013, with all directors attending thewebsitewebsite: www.isabellabank.com.20142015 Annual Meeting of Shareholders should be delivered no later than December 12, 2013.1, 2014. The Nominating and Corporate Governance Committee evaluates all potential director nominees in the same manner, whether the nominations are received from a shareholder, or otherwise. the our Board the compensation of the Chief Executive Officer and other executive officers, benefit plans, and the overall percentage increase in salaries. The committee consists of independent directors Maness, Barnes, Caul, Hubscher, Kleinhardt, LaFramboise, Lauer,Maness, Manifold, McGuire, and Opperman. The committee held two meetingsmeeting during 20122013 with all directors in attendance. This Committee is governed by a written charter approved by the Board that is available on the Bank’s websitewebsite: www.isabellabank.com.48858.48858. Communications will be forwarded to the Board or the appropriate committee, as soon as practicable.websitewebsite: www.isabellabank.com.Report620122013 Committee consisted of directors Barnes, Hubscher, LaFramboise, Maness, Manifold, and McGuire.services, except as noted below.services. The Audit Committee has established general guidelines for the permissible scope and nature of any permitted non-audit services in connection with its annual review of the audit plan and reviews the guidelines with the Board of Directors.the Corporation’sour internal control over financial reporting as of December 31, 2012.AU Section 380 “CommunicationAuditing Standard No. 16 “Communications with Audit Committees”, as may be modified or supplemented. In addition, the Audit Committee has received the written disclosures and the letter from the independent auditors required by PCAOB Rule 3526, Communication with Audit Committees Concerning Independence, as may be modified or supplemented, and has discussed with the independent auditor the independent auditors’ independence.2012,2013, and all committee members attended 75% or more of the meetings.20122013 for filing with the Securities and Exchange Commission. The Audit Committee has appointed Rehmann Robson LLC as the independent auditors for the 20132014 audit.Richard J. Barz, conducts annual performance reviews for Named Executive Officers,named executive officers, excluding himself. Mr. Barzhimself and recommends an appropriate salary to the Committee based on the performance review and the officer’s years of service along with competitive market data. Consolidated Corporation (CEO, President and CFO, and Bank President). Blanchard Consulting Group does not perform any additional services for us or any members of senior management. In addition, Blanchard Consulting Group does not have any other personal or business relationships with any Board members or officers. During 2013 and 2011, the Committee did not employ any services of outside compensation or benefit consultants to assist it in compensation-related initiatives.TheIn prior years, the Committee utilized both an independentmid-westmidwest financial institutions in non-urban areas with comparable average assets size ($900 million—$2 billion), number of branch locations, return on average assets (year-ended 2011 ROAA of .38% or greater), and nonperforming assets. The Michigan Bankers Association 2012 compensation survey was based on the compensation information provided by these organizations for 2011. Specific factors used to decide where an executive officer’s salary should be within the established range include the historical financial performance, financial performance outlook, years of service, and job performance. The Committee targeted total compensation for the CEO, the President & CFO, and Bank President to approximate the median of the range obtained from the Michigan Bankers Association compensation survey as well as any ranges obtained from the independent compensation consultant. Compensation for other named executive officers was based on the ranges provided by the Michigan Bankers Association survey.20122013 were determined by reference to seven performance measures that related to services performed in 2011.2012. The maximum award that may be granted to each eligible employee equals 10% of the employee’s base salary (the “Maximum Award”).20112012 accomplished their personal performance goals and were accordingly paid 35% of the 20112012 Maximum Award in 2012.(1)Earnings per share (weighted 40%).(2)Net operating expenses to average assets (weighted 15%).(3)Fully Taxable Equivalent (“FTE”) net interest margin, excluding loan fees (weighted 10%).(4)In-market deposit growth (weighted 10%).(5)Loan growth (weighted 15%).(6)Exceeding peer group return on average assets (weighted 10%).20112012 target for each corporate performance goal, as well as the performance attained for each target. 2011 Targets 2011
Performance Target %
Obtained 25.00% 50.00% 75.00% 100.00% $ 1.31 $ 1.33 $ 1.35 $ 1.37 $ 1.39 100 % 1.69 % 1.68 % 1.67 % 1.64 % 1.61 % 100 % 3.72 % 3.74 % 3.76 % 3.78 % 3.68 % 0 % 4.50 % 5.00 % 5.50 % 6.00 % 7.12 % 100 % 3.00 % 3.50 % 4.00 % 4.50 % 0.78 % 0 % 1.01 % 1.04 % 1.06 % 1.09 % 0.98 % 0 % 2012 Targets 2012 Performance (1) Target % Obtained Target 25.00% 50.00% 75.00% 100.00% Earning per share $ 1.50 $ 1.53 $ 1.55 $ 1.57 $ 1.59 100 % Net operating expenses to average assets 1.60 % 1.57 % 1.54 % 1.51 % 1.45 % 100 % FTE Net Interest Margin 3.46 % 3.48 % 3.50 % 3.52 % 3.46 % 25 % In market deposit growth 4.50 % 5.00 % 5.50 % 6.00 % 6.10 % 100 % Loan growth 3.00 % 3.50 % 4.00 % 4.50 % 1.46 % — % Exceeding peer group return on average assets 1.32 % 1.35 % 1.39 % 1.42 % 1.37 % 50 % (1) Adjusted for incentive calculation measures. 20122013 represented a reasonable percentage of each executive’s total compensation package and are consistent, in the aggregate, with perquisites provided to executive officers of comparable financial institutions. A description and the cost of these perquisites are included in footnotes 2 and 3footnote 1 in the “Summary Compensation Table” appearing on page 12.WeThe plan was amended in 2013 to provide a matching safe harbor contribution for all eligible employees equal to 100% of the first 5.0% of an annualemployee's compensation contributed to the Plan during the year. Employees are 100% vested in the safe harbor matching contributions. of compensation 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 planPlan during the year. Employees arewere 100% vested in the safe harbor contributions and arewere 0% vested through their first two years of employment and arewere 100% vested after 6 years through a laddered vesting schedule of service for matching contributions.Sandra L. CaulWilson C. Lauer2012,2013, for the CEO, the retired CEO, the CFO, and our three other most highly compensated executive officers. Year Salary
($)(1) Bonus ($) Change in pension
value and
non-qualified
deferred
compensation
earnings
($)(2) All other
compensation
($)(3) Total ($) 2012 $ 396,325 $ 25,106 $ 123,578 $ 35,615 $ 580,624 2011 375,225 26,535 181,143 37,627 620,530 2010 357,600 24,706 116,364 34,856 533,526 2012 $ 357,335 $ 23,628 $ 131,266 $ 28,208 $ 540,437 2011 355,625 26,100 163,672 28,542 573,939 2010 352,600 24,706 103,340 27,922 508,568 2012 $ 195,128 $ 13,333 $ 67,361 $ 30,111 $ 305,933 2011 167,362 12,719 98,915 27,732 249,378 2010 143,632 10,572 62,288 32,886 249,378 2012 $ 186,459 $ 11,804 $ 10,000 $ 16,676 $ 224,939 2011 181,986 13,046 17,000 15,070 227,102 2010 179,309 12,370 9,000 14,709 215,388 2012 $ 129,397 $ 9,708 $ 45,361 $ 17,138 $ 201,604 2011 125,640 8,612 61,944 15,077 211,273 2010 123,910 9,165 36,429 13,694 183,198 Name and principal position Year Salary
($) Bonus
($) Change in pension value and non-qualified deferred compensation earnings
($) All other compensation
($)(1) Total
($)Richard J. Barz 2013 $ 406,522 $ 28,358 $ (2,860 ) $ 35,771 $ 467,791 CEO (retired) 2012 396,325 25,106 123,578 35,615 580,624 Isabella Bank Corporation 2011 375,225 26,535 181,143 37,627 620,530 Jae A. Evans (2) 2013 $ 176,379 $ 13,320 $ — $ 30,832 $ 220,531 CEO 2012 Isabella Bank Corporation 2011 Dennis P. Angner 2013 $ 354,522 $ 25,121 $ 9,918 $ 29,775 $ 419,336 President and CFO 2012 357,335 23,628 131,266 28,208 540,437 Isabella Bank Corporation 2011 355,625 26,100 163,672 28,542 573,939 Steven D. Pung 2013 $ 227,675 $ 6,003 $ 6,629 $ 29,589 $ 269,896 President 2012 195,128 13,333 67,361 30,111 305,933 Isabella Bank 2011 167,362 12,719 98,915 27,732 306,728 Jerome E. Schwind (2) 2013 $ 152,017 $ 10,326 $ (9,000 ) $ 25,474 $ 178,817 Executive Vice President and COO 2012 Isabella Bank 2011 David J. Reetz 2013 $ 133,537 $ 10,598 $ (9,778 ) $ 16,604 $ 150,961 Sr. Vice President and CLO 2012 129,397 9,708 45,361 17,138 201,604 Isabella Bank 2011 125,640 8,612 61,944 15,077 211,273 (1)Includes compensation voluntarily deferred under our 401(k) plan. Directors fees are also included, for calendar years 2012, 2011 and 2010 respectively as follows: Richard J. Barz $51,325, $50,225, and $52,600; Dennis P. Angner $51,325, $49,625, and $52,600; Steven D. Pung $900, $900, and $900; and Timothy M. Miller $10,400, $10,650, and $11,300.(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 2012, 2011, and 2010 as follows: Richard J. Barz $83,000, $143,000, and $81,000; Dennis P. Angner $64,000, $109,000, and $53,000; Steven D. Pung $44,000, $77,000, and $42,000; Timothy M. Miller $10,000, $17,000, and $9,000; David J. Reetz $25,000, $43,000 and $19,000; this also includes the non-cash change in the Isabella Bank Corporation Retirement Bonus Plan for calendar years 2012, 2011, and 2010 as follows: Richard J. Barz $40,578, $38,143, and $35,364; Dennis P. Angner $67,266, $54,672, and $50,340; Steven D. Pung $23,361, $21,915, and $20,288; and David J. Reetz $20,361, $18,944 and $17,429.(3)(1)For all named executives all other compensation includes 401(k) matching contributions. For Richard J. Barz, Jae A. Evans, Steven D. Pung, and David J. Reetz this also includes club dues and auto allowance. For Dennis P. Angner and Timothy M. Miller,Jerome E. Schwind, this also includes auto allowance.
| (2) | Not a named executive officer prior to 2013. |
| Director and advisory board fees ($) | |||||||||||
| Name and principal position | 2013 | 2012 | 2011 | ||||||||
| Richard J. Barz | $ | 46,525 | $ | 51,325 | $ | 50,225 | |||||
| Jae A. Evans | 675 | ||||||||||
| Dennis P. Angner | 46,525 | 51,325 | 49,625 | ||||||||
| Steven D. Pung | 12,675 | 900 | 900 | ||||||||
| Jerome E. Schwind | 1,200 | ||||||||||
| David J. Reetz | N/A | N/A | N/A | ||||||||
| Pension plan ($) | Retirement plan ($) | ||||||||||||||||||||||
| Name and principal position | 2013 | 2012 | 2011 | 2013 | 2012 | 2011 | |||||||||||||||||
| Richard J. Barz | $ | (47,000 | ) | $ | 83,000 | $ | 143,000 | $ | 44,140 | $ | 40,578 | $ | 38,143 | ||||||||||
| Jae A. Evans | N/A | N/A | |||||||||||||||||||||
| Dennis P. Angner | (70,000 | ) | 64,000 | 109,000 | 79,918 | 67,266 | 54,672 | ||||||||||||||||
| Steven D. Pung | (29,000 | ) | 44,000 | 77,000 | 35,629 | 23,361 | 21,915 | ||||||||||||||||
| Jerome E. Schwind | (9,000 | ) | N/A | ||||||||||||||||||||
| David J. Reetz | (32,000 | ) | 25,000 | 43,000 | 22,222 | 20,361 | 18,944 | ||||||||||||||||
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 | 41 | $ | 988,000 | $ | — | ||||||
| Isabella Bank Corporation Retirement Bonus Plan | 41 | 349,652 | — | |||||||||
Dennis P. Angner | Isabella Bank Corporation Pension Plan | 29 | 555,000 | — | ||||||||
| Isabella Bank Corporation Retirement Bonus Plan | 29 | 397,471 | — | |||||||||
Steven D. Pung | Isabella Bank Corporation Pension Plan | 34 | 505,000 | — | ||||||||
| Isabella Bank Corporation Retirement Bonus Plan | 34 | 190,906 | — | |||||||||
Timothy M. Miller | Isabella Bank Corporation Pension Plan | 12 | 106,000 | — | ||||||||
David J. Reetz | Isabella Bank Corporation Pension Plan | 26 | 187,000 | — | ||||||||
| Isabella Bank Corporation Retirement Bonus Plan | 26 | 129,683 | — | |||||||||
| Name | Plan name | Number of years of vesting service as of 01/01/13 (#) | Present value of accumulated benefit ($) | Payments during last fiscal year | |||||||
| Richard J. Barz | Isabella Bank Corporation Pension Plan | 42 | $ | 941,000 | $ | — | |||||
| Isabella Bank Corporation Retirement Bonus Plan | 42 | 393,792 | — | ||||||||
| Jae A. Evans | Isabella Bank Corporation Pension Plan | N/A | |||||||||
| Isabella Bank Corporation Retirement Bonus Plan | N/A | ||||||||||
| Dennis P. Angner | Isabella Bank Corporation Pension Plan | 30 | 485,000 | — | |||||||
| Isabella Bank Corporation Retirement Bonus Plan | 30 | 477,389 | — | ||||||||
| Steven D. Pung | Isabella Bank Corporation Pension Plan | 35 | 476,000 | — | |||||||
| Isabella Bank Corporation Retirement Bonus Plan | 35 | 226,535 | — | ||||||||
| Jerome E. Schwind | Isabella Bank Corporation Pension Plan | 15 | 32,000 | — | |||||||
| Isabella Bank Corporation Retirement Bonus Plan | N/A | ||||||||||
| David J. Reetz | Isabella Bank Corporation Pension Plan | 27 | 155,000 | — | |||||||
| Isabella Bank Corporation Retirement Bonus Plan | 27 | 151,905 | — | ||||||||
Richard J. Barz,
Name | Executive contributions in last FY ($) | Aggregate earnings in last FY ($) | Aggregate balance at last FYE ($) | |||||||||
Richard J. Barz | $ | 30,012 | $ | 6,695 | $ | 195,952 | ||||||
Dennis P. Angner | 38,225 | 8,870 | 259,060 | |||||||||
Steven D. Pung | 900 | 292 | 8,431 | |||||||||
Timothy M. Miller | 3,275 | 1,289 | 36,904 | |||||||||
David J. Reetz | N/A | N/A | N/A | |||||||||
| Name | Executive contributions in 2013 ($) | Aggregate earnings in 2013 ($) | Aggregate balance at December 31, 2013 ($) | ||||||||
| Richard J. Barz | $ | 24,800 | $ | 8,224 | $ | 247,250 | |||||
| Jae A. Evans | 675 | 560 | 16,536 | ||||||||
| Dennis P. Angner | 29,400 | 10,797 | 323,482 | ||||||||
| Steven D. Pung | 12,675 | 604 | 22,273 | ||||||||
| Jerome E. Schwind | 1,200 | 175 | 5,225 | ||||||||
| David J. Reetz | N/A | N/A | N/A | ||||||||
DRIP Plan shares are purchased on a monthly basis pursuant to the DRIP Plan.
Common stock purchased through the DRIP Plan are not considered restricted stock under the Securities Act of 1933, as amended.
2013.
Amounts accrued and vested through the Defined Benefit Pension Plan.
Amounts accrued and vested through the Retirement Bonus Plan.
Amounts deferred in the Directors’Directors Plan.
Unused vacation pay.
Name Richard J. Barz Dennis P. Angner Steven D. Pung Timothy M. Miller David J. Reetz 2013. 2013. Name Dennis P. Angner Dr. Jeffrey J. Barnes Richard J. Barz G. Charles Hubscher Thomas L. Kleinhardt Joseph LaFramboise David J. Maness W. Joseph Manifold W. Michael McGuire Sarah R. Opperman No executive officer of the Corporation serves on any board of directors or compensation committee of any entity that compensates any member of the Compensation and Human Resource Committee. stock of the Corporation. Name of Owner Dennis P. Angner* Jeffrey J. Barnes Richard J. Barz* Sandra L. Caul G. Charles Hubscher Thomas L. Kleinhardt Joseph LaFramboise Wilson C. Lauer David J. Maness W. Joseph Manifold W. Michael McGuire Timothy M. Miller Sarah R. Opperman Steven D. Pung David J. Reetz All Directors, nominees and Executive Officers as a Group (15) persons 2014. Audit fees Audit related fees Tax fees Total for: January 10, 2014. INCOME STATEMENT DATA Interest income Interest expense Net interest income Provision for loan losses Noninterest income Noninterest expenses Federal income tax expense Net Income PER SHARE Basic earnings Diluted earnings Dividends Market value* Tangible book value* BALANCE SHEET DATA At end of period Loans Total assets Deposits Shareholders’ equity Average balance Loans Total assets Deposits Shareholders’ equity PERFORMANCE RATIOS Return on average total assets Return on average shareholders’ equity Return on average tangible equity Net interest margin yield (FTE) Loan to deposit* Nonperforming loans to total loans* Nonperforming assets to total assets* ALLL to nonperforming loans* CAPITAL RATIOS Shareholders’ equity to assets* Tier 1 capital to average assets* Tier 1 risk-based capital* Total risk-based capital* 4, 2014 ASSETS Cash and cash equivalents Cash and demand deposits due from banks Interest bearing balances due from banks Total cash and cash equivalents Certificates of deposit held in other financial institutions Trading securities AFS securities (amortized cost of $490,420 in 2012 and $414,614 in 2011) Mortgage loans available-for-sale Loans Commercial Agricultural Residential real estate Consumer Total loans Less allowance for loan losses Net loans Premises and equipment Corporate owned life insurance Accrued interest receivable Equity securities without readily determinable fair values Goodwill and other intangible assets Other assets TOTAL ASSETS LIABILITIES AND SHAREHOLDERS’ EQUITY Deposits Noninterest bearing NOW accounts Certificates of deposit under $100 and other savings Certificates of deposit over $100 Total deposits Borrowed funds ($0 in 2012 and $5,242 in 2011 at fair value) Accrued interest payable and other liabilities Total liabilities Shareholders’ equity Common stock — no par value 15,000,000 shares authorized; issued and outstanding 7,671,846 shares (including 5,130 shares held in the Rabbi Trust) in 2012 and 7,589,226 shares (including 16,585 shares held in the Rabbi Trust) in 2011 Shares to be issued for deferred compensation obligations Retained earnings Accumulated other comprehensive income Total shareholders’ equity TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY ) Balances, January 1, 2010 Comprehensive income Issuance of common stock Common stock issued for deferred compensation obligations Share based payment awards under equity compensation plan Common stock purchased for deferred compensation obligations Common stock repurchased pursuant to publicly announced repurchase plan Cash dividends ($0.72 per share) Balances, December 31, 2010 Comprehensive income Issuance of common stock Common stock issued for deferred compensation obligations Share based payment awards under equity compensation plan Common stock purchased for deferred compensation obligations Common stock repurchased pursuant to publicly announced repurchase plan Cash dividends ($0.76 per share) Balances, December 31, 2011 Comprehensive income Issuance of common stock Common stock issued for deferred compensation obligations Common stock transferred from the Rabbi Trust to satisfy deferred compensation obligations Share based payment awards under equity compensation plan Common stock purchased for deferred compensation obligations Common stock repurchased pursuant to publicly announced repurchase plan Cash dividends ($0.80 per share) Balances, December 31, 2012 ) Interest income Loans, including fees AFS securities Taxable Nontaxable Trading securities Federal funds sold and other Total interest income Interest expense Deposits Borrowings Total interest expense Net interest income Provision for loan losses Net interest income after provision for loan losses Noninterest income Service charges and fees Gain on sale of mortgage loans Gain on sale of available-for-sale investment securities Earnings on corporate owned life insurance policies Other Total noninterest income Noninterest expenses Compensation and benefits Occupancy Furniture and equipment Available-for-sale impairment loss Total other-than-temporary impairment loss Portion of loss reported in other comprehensive income Net available-for-sale impairment loss Other Total noninterest expenses Income before federal income tax expense Federal income tax expense NET INCOME Earnings per share Basic Diluted Cash dividends per basic share ) Net income Unrealized holding gains on available-for-sale securities: Unrealized gains arising during the year Reclassification adjustment for net realized gains included in net income Reclassification adjustment for impairment loss included in net income Net unrealized gains Tax effect(1) Unrealized gains, net of tax Increase in unrecognized pension costs Tax effect Net unrealized loss on defined benefit pension plan Other comprehensive income, net of tax Comprehensive income OPERATING ACTIVITIES Net income Reconciliation of net income to net cash provided by operations: Provision for loan losses Impairment of foreclosed assets Depreciation Amortization and impairment of originated mortgage servicing rights Amortization of acquisition intangibles Net amortization of available-for-sale securities Available-for-sale security impairment loss Gain on sale of available-for-sale securities Net unrealized losses on trading securities Net gain on sale of mortgage loans Net unrealized gains on borrowings measured at fair value Increase in cash value of corporate owned life insurance Realized gain on redemption of corporate owned life insurance Share-based payment awards under equity compensation plan Deferred income tax expense Origination of loans held for sale Proceeds from loan sales Net changes in operating assets and liabilities which provided (used) cash: Trading securities Accrued interest receivable Other assets Accrued interest payable and other liabilities Net cash provided by operating activities INVESTING ACTIVITIES Net change in certificates of deposit held in other financial institutions Activity in available-for-sale securities Sales Maturities and calls Purchases Loan principal originations, net Proceeds from sales of foreclosed assets Purchases of premises and equipment Purchases of corporate owned life insurance Net cash used in investing activities FINANCING ACTIVITIES Acceptances and withdrawals of deposits, net Increase in other borrowed funds Cash dividends paid on common stock Proceeds from issuance of common stock Common stock repurchased Common stock purchased for deferred compensation obligations Net cash provided by financing activities (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS Cash and cash equivalents at beginning of year CASH AND CASH EQUIVALENTS AT END OF YEAR SUPPLEMENTAL CASH FLOWS INFORMATION: Interest paid Federal income taxes paid SUPPLEMENTAL NONCASH INVESTING AND FINANCING INFORMATION: Transfers of loans to foreclosed assets Common stock issued for deferred compensation obligations Common stock repurchased from the Rabbi Trust Isabella Bank. 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. For loans that are placed on nonaccrual status or charged-off, all interest accrued in the current calendar year, but not collected, is reversed against interest income while interest accrued in prior calendar years, but not collected is charged against the ALLL. The interest on these loans is accounted for on the cash-basis, until qualifying for return to accrual status. Loans are returned to accrual status when all principal and interest amounts contractually due are brought current and future payments are reasonably assured. For impaired loans not classified as nonaccrual, interest income continues to be accrued over the term of the loan based on the principal amount outstanding. income, such as the cost to service, the discount rate, the custodial earnings rate, an inflation rate, ancillary income, prepayment speeds and default rates and losses. Federal Home Loan Bank Stock Investment in Corporate Settlement Solutions Federal Reserve Bank Stock Investment in Valley Financial Corporation Other Total Plans Average number of common shares outstanding for basic Average potential effect of shares in the Directors Average number of common shares outstanding used to calculate diluted earnings per common share Net income Earnings per share Basic Diluted Update Amounts Reclassified Out of Accumulated Other Comprehensive Income” AOCI (see " States and political subdivisions 31 2012 Government sponsored enterprises States and political subdivisions Auction rate money market preferred Preferred stocks Mortgage-backed securities Collateralized mortgage obligations Total Government sponsored enterprises States and political subdivisions Auction rate money market preferred Preferred stocks Mortgage-backed securities Collateralized mortgage obligations Total 31 Securities With Variable Monthly Payments or Government sponsored enterprises States and political subdivisions Auction rate money market preferred Preferred stocks Mortgage-backed securities Collateralized mortgage obligations Total amortized cost Fair value Proceeds from sales AFS of securities Gross realized gains Gross realized losses Net realized gains Applicable income tax expense 31 States and political subdivisions Auction rate money market preferred Preferred stocks Mortgage-backed securities Total Number of securities in an unrealized loss position: States and political subdivisions Auction rate money market preferred Preferred stocks Mortgage-backed securities Total Number of securities in an unrealized loss position: Has the value of the investment declined more than what is deemed to be reasonable based on a risk and maturity adjusted discount rate? Is the investment credit rating below investment grade? Is it probable the issuer will be unable to pay the amount when due? Is it more likely than not that we will Has the duration of the investment been extended? three month period ended Ratings Fitch S&P Seniority Discount rate Credit discount rate Average observed discounts based on closed transactions January 1, 2012 Additions to credit losses for which no previous OTTI was recognized December 31, 2012 for the years ended December 31: January 1, 2012 Loans charged off Recoveries Provision for loan losses December 31, 2012 ALLL Individually evaluated for impairment Collectively evaluated for impairment Total Loans Individually evaluated for impairment Collectively evaluated for impairment Total January 1, 2011 Loans charged off Recoveries Provision for loan losses December 31, 2011 As of December 31, 2011 ALLL Individually evaluated for impairment Collectively evaluated for impairment Total Loans Individually evaluated for impairment Collectively evaluated for impairment Total Rating 2 — High quality 3 — High satisfactory 4 — Low satisfactory 5 — Special mention 6 — Substandard 7 — Vulnerable 8 — Doubtful Total Rating 2 — High quality 3 — High satisfactory 4 — Low satisfactory 5 — Special mention 6 — Substandard 7 — Vulnerable 8 — Doubtful Total 31 High liquidity, strong cash flow, low leverage. Unquestioned ability to meet all obligations when due. Experienced management, with management succession in place. Secured by cash. Favorable liquidity and leverage ratios. Ability to meet all obligations when due. Management with successful track record. Steady and satisfactory earnings history. If loan is secured, collateral is of high quality and readily marketable. Access to alternative financing. Well defined primary and secondary source of repayment. If supported by guaranty, the financial strength and liquidity of the guarantor(s) are clearly evident. Working capital adequate to support operations. Cash flow sufficient to pay debts as scheduled. Management experience and depth appear favorable. Loan performing according to terms. If loan is secured, collateral is acceptable and loan is fully protected. Would include most start-up businesses. 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. Downward trend in sales, profit levels, and margins. Impaired working capital position. Cash flow is strained in order to meet debt repayment. Shrinking equity cushion. Diminishing primary source of repayment and questionable secondary source. Management abilities are questionable. Weak industry conditions. Litigation pending against the borrower. Collateral or guaranty offers limited protection. Negative debt service coverage, however the credit is well collateralized and payments are current. 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. 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. Normal operations are severely diminished or have ceased. Seriously impaired cash flow. Original repayment terms materially altered. Secondary source of repayment is inadequate. Survivability as a “going concern” is impossible. Collection process has begun. Bankruptcy petition has been filed. Judgments have been filed. Our primary credit quality Commercial Commercial real estate Commercial other Total commercial Agricultural Agricultural real estate Agricultural other Total agricultural Residential real estate Senior liens Junior liens Home equity lines of credit Total residential real estate Consumer Secured Unsecured Total consumer Total Commercial Commercial real estate Commercial other Total commercial Agricultural Agricultural real estate Agricultural other Total agricultural Residential real estate Senior liens Junior liens Home equity lines of credit Total residential real estate Consumer Secured Unsecured Total consumer Total 31: The following is a summary of information pertaining to impaired loans as of, and for the Impaired loans with a valuation allowance Commercial real estate Commercial other Agricultural real estate Agricultural other Residential real estate senior liens Residential real estate junior liens Total impaired loans with a valuation allowance Impaired loans without a valuation allowance Commercial real estate Commercial other Agricultural real estate Agricultural other Residential real estate senior liens Home equity lines of credit Consumer secured Total impaired loans without a valuation allowance Impaired loans Commercial Agricultural Residential real estate Consumer Total impaired loans Impaired loans with a valuation allowance Commercial real estate Commercial other Agricultural real estate Agricultural other Residential mortgage senior liens Residential mortgage junior liens Total impaired loans with a valuation allowance Impaired loans without a valuation allowance Commercial real estate Commercial other Agricultural real estate Agricultural other 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 31 Commercial Commercial real estate Commercial other Total commercial Agricultural other Residential real estate Senior liens Junior liens Total residential real estate Consumer Secured Unsecured Total consumer Total 31 Commercial Commercial real estate Commercial other Total commercial Agricultural other Residential real estate Senior liens Junior liens Total residential real estate Consumer secured Total Commercial Commercial real estate Commercial other Total commercial Agricultural other Residential real estate Senior liens Consumer Secured Unsecured Total consumer Total the years ended Commercial other Residential real estate senior liens Consumer secured Total Troubled debt restructurings 31 – Premises and Equipment Land Buildings and improvements Furniture and equipment Total Less: accumulated depreciation Premises and equipment, net Other Intangible Assets 2012. Core deposit premium resulting from acquisitions Year 2013 2014 2015 2016 2017 Thereafter – Deposits Year 2013 2014 2015 2016 2017 Thereafter 2011. FHLB advances Securities sold under agreements to repurchase without stated maturity dates Securities sold under agreements to repurchase with stated maturity dates Federal funds purchased Total 31 Fixed rate advances due 2012 One year putable fixed rate advances due 2012 Fixed rate advances due 2013 One year putable fixed rate advances due 2013 Fixed rate advances due 2014 Fixed rate advances due 2015 Fixed rate advances due 2016 Fixed rate advances due 2017 Fixed rate advances due 2018 Fixed rate advances due 2019 Fixed rate advances due 2020 Total 31 Repurchase agreements due 2012 Repurchase agreements due 2013 Repurchase agreements due 2014 Repurchase agreements due 2015 Total Securities sold under agreements to repurchase without stated maturity dates Federal funds purchased 31 Pledged to secure borrowed funds Pledged to secure repurchase agreements Pledged for public deposits and for other purposes necessary or required by law Total 31 Marketing and community relations Directors fees FDIC insurance premiums Audit fees Education and travel Consulting fees Printing and supplies Postage and freight Other losses Legal fees Amortization of deposit premium Foreclosed asset and collection State taxes All other Total other 31 Currently payable Deferred expense Income tax expense 31 Income taxes at 34% statutory rate Effect of nontaxable income Interest income on tax exempt municipal bonds Earnings on corporate owned life insurance Other Total effect of nontaxable income Effect of tax credits Effect of nondeductible expenses Income tax expense Significant components of our deferred tax assets and liabilities, included in other assets in the accompanying consolidated balance sheets, are as follows as of Deferred tax assets Allowance for loan losses Deferred directors’ fees Employee benefit plans Core deposit premium and acquisition expenses Net unrealized losses on trading securities Net unrecognized actuarial loss on pension plan Life insurance death benefit payable Alternative minimum tax Other Total deferred tax assets Deferred tax liabilities Prepaid pension cost Premises and equipment Accretion on securities Core deposit premium and acquisition expenses Net unrealized gains on available-for-sale securities Other Total deferred tax liabilities Net deferred tax assets 31 Unfunded commitments under lines of credit Commercial and standby letters of credit Commitments to grant loans – On-Balance Sheet Activities 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). $19,500. following tables. There are no conditions or events since the notifications that we believe has changed our categories. Our actual capital amounts and ratios are also presented in the table. December 31, 2012 Total capital to risk weighted assets Isabella Bank Consolidated Tier 1 capital to risk weighted assets Isabella Bank Consolidated Tier 1 capital to average assets Isabella Bank Consolidated December 31, 2011 Total capital to risk weighted assets Isabella Bank Consolidated Tier 1 capital to risk weighted assets Isabella Bank Consolidated Tier 1 capital to average assets Isabella Bank Consolidated 2007 Change in benefit obligation Benefit obligation, January 1 Interest cost Actuarial loss Benefits paid, including plan expenses Benefit obligation, December 31 Change in plan assets Fair value of plan assets, January 1 Investment return Contributions Benefits paid, including plan expenses Fair value of plan assets, December 31 Deficiency in funded status at December 31, included on the consolidated balance sheets in accrued interest payable and other liabilities Change in accrued pension benefit costs Accrued benefit cost at January 1 Contributions Net periodic cost for the year Net change in unrecognized actuarial loss and prior service cost Accrued pension benefit cost at December 31 31 Change in unrecognized pension cost Tax effect Net Interest cost on projected benefit obligation Expected return on plan assets Amortization of unrecognized actuarial net loss Total 31 2014. Discount rate Expected long-term rate of return 31 Discount rate Expected long-term return on plan assets Historical long term rates of return for broad asset classes. Actual past rates of return achieved by the plan. The general mix of assets held by the plan. The stated investment policy for the plan. Description Asset Category Short-term investments Common collective trusts Fixed income Equity investments 31 Year 2013 2014 2015 2016 2017 Years 2018 — 2022 2014. Interest cost on projected benefit obligation Expected return on plan assets Amortization of unrecognized actuarial net loss Net periodic benefit cost 31 Unissued Shares held in Rabbi Trust Total 31 2011. – Accumulated comprehensive income. Balance, January 1 New loans Repayments Balance, December 31 Ending assets Contributions 31 :The carrying amounts of cash and short term investments, including Federal funds sold, approximate fair values. As such, we classify cash and demand deposits due from banks as Level 1. :Interest bearing balances held in unaffiliated financial institutions include certificates of deposit and other short term interest bearing balances that mature within 3 Level 3 inputs — January 1, 2011 Calls Transfer to Level 1 inputs Transfer to Level 2 inputs Net unrealized losses on AFS securities Level 3 inputs — December 31, 2011 :Mortgage loans Valuation Fair Value Unobservable Range Discounted cash flow Discounted appraisal value of: Goodwill and other intangible :Acquisition intangibles and goodwill are evaluated for potential impairment on at least an annual basis. Acquisition intangibles and goodwill are typically qualitatively evaluated to determine if it is more likely than not that the carrying balance is impaired. If it is determined that the carrying balance of acquisition intangibles or goodwill is more likely than not to be impaired, we perform a cash flow valuation to determine the extent of the potential impairment. If the testing resulted in impairment, we would classify goodwill and other acquisition intangibles subjected to nonrecurring fair value adjustments as Level 3. During :The fair value of demand, savings, and money market deposits are, by definition, equal to the amount payable on demand at the reporting date (i.e., their carrying amounts), and are classified as Level 1. Fair values for variable rate certificates of deposit approximate their recorded carrying value. Fair values for fixed rate certificates of deposit are estimated using a discounted cash flow calculation that applies interest rates currently being offered on certificates to a schedule of aggregated expected monthly maturities on time deposits. As such, fixed rate certificates of deposit are classified as Level 2. :The carrying amounts of federal funds purchased, borrowings under overnight repurchase agreements, and other short-term borrowings maturing within ninety days approximate their fair values. The fair values of other borrowed funds are estimated using discounted cash flow analyses based on current incremental borrowing arrangements. As such, borrowed funds are classified as Level 2. Borrowings carried at fair value — beginning of year Paydowns and maturities Net unrealized change in fair value Borrowings carried at fair value — December 31 Unpaid principal balance — December 31 significant. Cash and demand deposits due from banks Certicates of deposit held in other financial institutions Mortgage loans available-for-sale Total loans Less allowance for loan losses Net loans Accrued interest receivable Equity securities without readily determinable fair values(1) Originated mortgage servicing rights Deposits without stated maturities Deposits with stated maturities Borrowed funds Accrued interest payable Cash and demand deposits due from banks Certicates of deposit held in other financial institutions Mortgage loans available-for-sale Total loans Less allowance for loan losses Net loans Accrued interest receivable Equity securities without readily determinable fair values(1) Originated mortgage servicing rights Deposits without stated maturities Deposits with stated maturities Borrowed funds Accrued interest payable Description Recurring items Trading securities States and political subdivisions Available-for-sale investment securities Government-sponsored enterprises States and political subdivisions Auction rate money market preferred Preferred stock Mortgage-backed Collateralized mortgage obligations Total available- Borrowed funds Nonrecurring items Impaired loans Originated mortgage servicing rights Foreclosed assets Percent of assets and liabilities measured at fair value Description Recurring items Trading securities Borrowed funds Nonrecurring items Foreclosed assets Originated mortgage servicing rights Total – Parent Company Only Financial Information Cash on deposit at subsidiary Bank Securities available for sale Investments in subsidiaries Premises and equipment Other assets TOTAL ASSETS Other liabilities Shareholders’ equity TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY Income Dividends from subsidiaries Interest income Management fee and other Total income Expenses Compensation and benefits Occupancy and equipment Audit fees Other Total expenses Income before income tax benefit and equity in undistributed earnings of subsidiaries Federal income tax benefit Undistributed earnings of subsidiaries Net income OPERATING ACTIVITIES Net income Adjustments to reconcile net income to cash provided by operations Undistributed earnings of subsidiaries Undistributed earnings of equity securities without readily determinable fair values Share-based payment awards Depreciation Net amortization of investment securities Deferred income tax expense (benefit) Changes in operating assets and liabilities which (used) provided cash Other assets Accrued interest and other liabilities NET CASH PROVIDED BY OPERATING ACTIVITIES INVESTING ACTIVITIES Activity in available-for-sale securities Maturities, calls, and sales Purchases (Purchases) sales of equipment and premises Advances to subsidiaries NET CASH (USED IN) PROVIDED BY INVESTING ACTIVITIES FINANCING ACTIVITIES Net (decrease) increase in other borrowed funds Cash dividends paid on common stock Proceeds from the issuance of common stock Common stock repurchased Common stock purchased for deferred compensation obligations NET CASH USED IN FINANCING ACTIVITIES (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS Cash and cash equivalents at beginning of year CASH AND CASH EQUIVALENTS AT END OF YEAR INTEREST EARNING ASSETS Loans Taxable investment securities Nontaxable investment securities Trading securities Other Total earning assets NONEARNING ASSETS Allowance for loan losses Cash and demand deposits due from banks Premises and equipment Accrued income and other assets Total assets INTEREST BEARING LIABILITIES Interest bearing demand deposits Savings deposits Time deposits Borrowed funds Total interest bearing liabilities NONINTEREST BEARING LIABILITIES Demand deposits Other Shareholders’ equity Total liabilities and shareholders’ equity Net interest income (FTE) Net yield on interest earning assets (FTE) CHANGES IN INTEREST INCOME: Loans Taxable AFS securities Nontaxable AFS securities Trading securities Other Total changes in interest income CHANGES IN INTEREST EXPENSE: Interest bearing demand deposits Savings deposits Time deposits Borrowed funds Total changes in interest expense Net change in interest margin (FTE) Total earning assets Total interest bearing liabilities Net yield on interest earning assets (FTE) ALLL — January 1 ALLL of acquired bank Loans charged-off Commercial and agricultural Residential real estate Consumer Total loans charged-off Recoveries Commercial and agricultural Residential real estate Consumer Total recoveries Provision for loan losses ALLL — December 31 Net loans charged-off Year to date average loans Net loans charged off to average loans outstanding Total loans ALLL as a % of loans Total loans charged-off Total recoveries Net loans charged-off Average loans outstanding Net loans charged-off to average loans outstanding Commercial and agricultural Residential real estate Consumer Total January 1, 2011 New modifications Principal payments and pay-offs Balances charged-off (1) Transfers to OREO Transfers to accrual status Transfers to nonaccrual status December 31, 2011 New modifications Principal payments and pay-offs Balances charged-off Transfers to OREO Transfers to accrual status Transfers to nonaccrual status December 31, 2012 Current Past due 30-59 days Past due 60-89 days Past due 90 days or more Total Current Past due 30-59 days Past due 60-89 days Past due 90 days or more Total TDR’s Commercial real estate Commercial other Agricultural real estate Agricultural other Residential real estate senior liens Residential real estate junior liens Consumer secured Total TDR’s Other impaired loans Commercial real estate Commercial other Agricultural real estate Agricultural other Residential real estate senior liens Residential real estate junior liens Home equity lines of credit Consumer secured Total other impaired loans Total impaired loans Nonaccrual loans Accruing loans past due 90 days or more Total nonperforming loans OREO Repossessed assets Total nonperforming assets Nonperforming loans as % of total loans Nonperforming assets as a % of total loans Commercial and agricultural Residential mortgage Borrower 1 Borrower 2 Borrower 3 Borrower 4 Other not individually significant Total Service charges and fees NSF and overdraft fees ATM and debit card fees Trust fees Mortgage servicing fees Service charges on deposit accounts Net originated mortgage servicing rights loss All other Total service charges and fees Gain on sale of mortgage loans Gain on sale of AFS securities Earnings on corporate owned life insurance policies Other Brokerage and advisory fees Corporate Settlement Solutions joint venture Gain on sale of OREO Net loss on trading securities Net gain on borrowings measured at fair value All other Total other Total noninterest income 2012,2013, the named executive officers listed had no unused vacation days. While an
Active
Employee Subsequent to
Retirement $ 690,000 $ 345,000 612,000 306,000 388,400 194,200 314,000 157,000 258,800 129,400 Name While an Active Employee Subsequent to Retirement Richard J. Barz N/A $ 360,000 Jae A. Evans $ 351,400 175,700 Dennis P. Angner 616,000 308,000 Steven D. Pung 430,000 215,000 Jerome E. Schwind 301,600 150,800 David J. Reetz 267,000 133,500 2012.Feesearned orpaid incashName($)Jeffrey J. Barnes27,825Sandra L. Caul34,225James C. Fabiano35,525G. Charles Hubscher32,925Thomas L. Kleinhardt38,425Joseph LaFramboise34,425Wilson C. Lauer20,975David J. Maness57,925W. Joseph Manifold30,025W. Michael McGuire37,625Sarah R. Opperman14,325Dale D. Weburg37,325Name Fees paid in cash
($) Fees deferred under Directors Plan
($) Total fees earned
($)Dr. Jeffrey J. Barnes $ — $ 28,575 $ 28,575 Sandra L. Caul 30,950 — 30,950 G. Charles Hubscher — 36,350 36,350 Thomas L. Kleinhardt — 39,025 39,025 Joseph LaFramboise 15,120 21,905 37,025 Wilson C. Lauer 18,263 6,087 24,350 David J. Maness — 50,550 50,550 W. Joseph Manifold — 34,550 34,550 W. Michael McGuire 27,862 10,963 38,825 Sarah R. Opperman — 29,050 29,050 $6,000$7,500 to each member during 2012.2013. Members of the Audit Committee were paid $500$600 per audit committee meeting attended. Members of the Nominating and Corporate Governance Committee were paid $200$300 per meeting attended. The chairperson of the Board is paid a retainer of $39,000$33,000 and the chairperson for the Audit Committee is paid a retainer of $4,000.Pursuant to the Directors’ Plan, directors are required to defer at least 25% of board fees into the plan. Directors’Directors Plan, deferred directors’ fees are converted on a quarterly basis into shares of our common stock, based on the fair market value of a share of our common stock at that time. Shares of stock credited to a participant’s account are eligible for cash and stock dividends as paid. Directors deferred $458,893 under the Directors’ Plan in 2012.Uponupon a participant’s attainment of age 70, retirement from the Board, or the occurrence of certain other events, they are eligible to receive a lump-sum, in-kind distribution of all of the stock that is then credited to their account. The plan does not allow for cash settlement. Stock issued under the Directors’Directors Plan is restricted stock under the Securities Act of 1933, as amended.(the Trust) to fund the Directors’Directors Plan. The Rabbi Trust is an irrevocable grantor trust to which we may contribute assets for the limited purpose of funding a nonqualified deferred compensation plan. Although we may not reach the assets of the Rabbi Trust for any purpose other than meeting its obligations under the Directors’Directors Plan, the assets of the Rabbi Trust remain subject to the claims of our creditors. We may contribute cash or common stock to the Rabbi Trust from time to time for the sole purpose of funding the Directors’Directors Plan. The Rabbi Trust will use any cash that we may contribute to purchase shares of our common stock on the open market through our brokerage services department.$459,193$409,163 to the Rabbi Trust in 2012,2013, which held 5,13012,761 shares of our common stock for settlement as of December 31, 2012.2013. As of December 31, 2012,2013, there were 165,436172,550 shares of stock credited to participants’ accounts, which credits are unfunded as of such date to the extent that they are in excess of the stock and cash that has been credited to the Rabbi Trust. All amounts are unsecured claims against our general assets. The net cost of this benefit was $170,688$147,480 in 2012.activecurrent directors pursuant to the terms of the Directors’Directors Plan as of December 31, 2012:March 17, 2014:# of shares of
stock credited13,563 11,9117,324 5,914— 9,009Sandra L. Caul693 18,78310,923 9,07917,534 15,3587,618 6,476Wilson C. Lauer1,50121,682 18,89713,139 11,2917,201 6,5121,860 619Theis responsible for reviewing and recommending the compensation of the CEO and other executive officers, benefit plans and the overall percentage increase in salaries. The committee consists ofmembers were directors Maness, Barnes, Caul, Hubscher, Kleinhardt, LaFramboise, Lauer, Maness, Manifold, McGuire and Opperman.$6,598,000$4,178,000 as of December 31, 2012.2013. We address transactions with related parties in our Code of Business Conduct and Ethics Policy.Conflicts of interest are prohibited, except under board approved guidelines.As26, 2013, we do not have17, 2014 as to the common stock of the Corporation owned of record or beneficially by any person who is known to the Corporation to be the beneficial owner of more than 5% of ourthe common stock.Name and Address of Owner Amount and Nature of Beneficial Ownership (1) Percent of Class McGuirk Investments 413,007 5.36 % P.O. Box 222 Mt. Pleasant, MI 48804-0222 (1) Beneficial ownership is defined by rules of the SEC and includes shares that the person has or shares voting or investment power over and shares that the person has a right to acquire within 60 days from March 17, 2014. 26, 201317, 2014 as to our common stock owned beneficially by each director and director nominee, by each named executive officer, and by all directors, director nominees and executive officers as a group. The shares to be credited under the Directors’ Plan are not included in the table below. Amount and Nature of Beneficial Ownership Sole Voting
and Investment
Powers Shared Voting
or Investment
Powers Total
Beneficial
Ownership Percentage of
Common Stock
Outstanding 19,378 — 19,378 0.25 % — 6,040 6,040 0.08 % 19,579 — 19,579 0.26 % — 10,609 10,609 0.14 % 29,865 3,646 33,511 0.44 % — 31,991 31,991 0.42 % 200 969 1,169 0.02 % 187 — 187 0.00 % 497 1,100 1,597 0.02 % 4,827 — 4,827 0.06 % 116,462 — 116,462 1.52 % 287 3,723 4,010 0.05 % 449 — 449 0.01 % 10,092 9,115 19,207 0.25 % 9,100 187 9,287 0.12 % 210,923 67,380 278,303 3.64 % Name of Owner Amount and Nature of Beneficial Ownership (1) Percent of Class Dennis P. Angner 33,648 0.43 % Dr. Jeffrey J. Barnes 13,575 0.17 % Richard J. Barz 30,697 0.39 % Jae A. Evans 9,192 0.12 % G. Charles Hubscher 45,603 0.58 % Thomas L. Kleinhardt 66,719 0.85 % Joseph LaFramboise 8,821 0.11 % David J. Maness 23,636 0.30 % W. Joseph Manifold 17,989 0.23 % W. Michael McGuire 78,131 1.00 % Sarah R. Opperman 2,973 0.04 % Steven D. Pung 21,002 0.27 % David J. Reetz 9,343 0.12 % Jerome E. Schwind 1,163 0.01 % All Directors, nominees and Executive Officers as a Group (14) persons 362,492 4.62 % *Trustees(1) ESOP who vote ESOP stock.SEC and includes shares that the person has or shares voting or investment power over and shares that the person has a right to acquire within 60 days from March 17, 2014. Totals for directors include shares of stock credited under the Directors Plan as of March 17, 2014 as disclosed in the table on page 16 above. Totals for named executive officers Steven D. Pung and Jerome E. Schwind include shares of stock credited under the Directors Plan as of March 17, 2014 as follows: Mr. Pung, 934 shares; and Mr. Schwind, 219 shares. Participants in the Directors Plan have a right to acquire shares credited to their accounts upon a distributable event. A description of the Directors Plan under which these shares of stock were issued is set forth above in "Director Compensation."2013.for 2012 and 2011. 2012 2011 $ 263,180 $ 253,920 28,250 17,510 25,950 20,175 $ 317,380 $ 291,605 2013 2012 Audit fees $ 271,380 $ 263,180 Audit related fees 29,425 28,250 Tax fees 27,095 25,950 Total $ 327,900 $ 317,380 2012,2013, this includes fees for procedures related to nonrecurring regulatory filings. Also included are fees for auditing of our employee benefit plans.20122013 and 20112012 without pre-approval.12, 20131, 2014 to be considered for inclusion in our proxy statement and proxy for that meeting. Proposals should be made in accordance with Securities and Exchange Commission Rule 14a-8.20122013 annual meeting, all directors were in attendance.20122013 all Section 16(a) filing requirements were satisfied, with respect to the applicable officers, directors, and greater than 10% beneficial owners with the exception of directors Lauerexecutive officers Steven D. Pung and Opperman. Directors LauerDavid J. Reetz. Executive officers Pung and Opperman did not fileReetz filed their Form 3s which were duelate on July 16, 2012, until July 19, 2012.Page Description 21 22 23 28 74 97100 SUMMARY OF SELECTED FINANCIAL DATAAFS: Available-for-sale GLB Act: Gramm-Leach-Bliley Act of 1999 ALLL: Allowance for loan and lease losses IFRS: International Financial Reporting Standards AOCI: Accumulated other comprehensive income (loss) IRR: Interest rate risk ASC: FASB Accounting Standards Codification JOBS Act: Jumpstart our Business Startups Act ASU: FASB Accounting Standards Update LIBOR: London Interbank Offered Rate ATM: Automated Teller Machine Moody’s: Moody’s Investors Service, Inc BHC Act: Bank Holding Company Act of 1956 N/A: Not applicable CFPB: Consumer Financial Protection Bureau N/M: Not meaningful CIK: Central Index Key NASDAQ: NASDAQ Stock Market Index CRA: Community Reinvestment Act NASDAQ Banks: NASDAQ Bank Stock Index DIF: Deposit Insurance Fund NAV: Net asset value DIFS: Department of Insurance and Financial Services NOW: Negotiable order of withdrawal Directors Plan: Isabella Bank Corporation and Related Companies Deferred Compensation Plan for Directors NSF: Non-sufficient funds Dividend Reinvestment Plan: Isabella Bank Corporation Stockholder Dividend Reinvestment Plan and Employee Stock Purchase Plan OCI: Other comprehensive income (loss) Dodd-Frank Act: Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 OMSRs: Originated mortgage servicing rights ESOP: Employee stock ownership plan OREO: Other real estate owned Exchange Act: Securities Exchange Act of 1934 OTC: Over-the-Counter FASB: Financial Accounting Standards Board OTTI: Other-than-temporary impairment FDI Act: Federal Deposit Insurance Act PBO: Projected benefit obligation FDIC: Federal Deposit Insurance Corporation PCAOB: Public Company Accounting Oversight Board FFIEC: Federal Financial Institutions Examinations Council Rabbi Trust: A trust established to fund the Directors Plan Fitch: Fitch Ratings SEC: U.S. Securities & Exchange Commission FRB: Federal Reserve Bank SOX: Sarbanes-Oxley Act of 2002 FHLB: Federal Home Loan Bank S&P: Standard & Poor's Freddie Mac: Federal Home Loan Mortgage Corporation TDR: Troubled debt restructuring FTE: Fully taxable equivalent XBRL: eXtensible Business Reporting Language GAAP: U.S. generally accepted accounting principles Number of
Shares Sale Price Low High 2013 First Quarter 54,741 $ 21.79 $ 25.10 Second Quarter 65,865 24.78 26.00 Third Quarter 105,540 23.49 25.50 Fourth Quarter 116,052 21.20 24.84 342,198 2012 First Quarter 64,873 $ 22.15 $ 24.25 Second Quarter 63,656 23.45 24.98 Third Quarter 97,706 22.50 24.90 Fourth Quarter 87,966 21.60 23.45 314,201 Per Share 2013 2012 First Quarter $ 0.21 $ 0.20 Second Quarter 0.21 0.20 Third Quarter 0.21 0.20 Fourth Quarter 0.21 0.20 Total $ 0.84 $ 0.80 Shares Repurchased Total Number of Shares Purchased as Part of Publicly Announced Plan or Program Maximum Number of Shares That May Yet Be Purchased Under the Plans or Programs Number Average Price
Per Share Balance, September 30 11,441 October 1 - 23 4,400 $ 23.86 4,400 7,041 Additional Authorization (150,000 shares) 157,041 October 24 - 31 4,950 23.84 4,950 152,091 November 1 - 30 7,022 23.50 7,022 145,069 December 1 - 31 7,673 22.42 7,673 137,396 Balance, December 31 24,045 $ 23.29 24,045 137,396 
Year ISBA NASDAQ NASDAQ
Banks12/31/2008 $ 100.00 $ 100.00 $ 100.00 12/31/2009 77.10 145.05 83.58 12/31/2010 73.40 171.14 95.29 12/31/2011 104.50 169.83 85.32 12/31/2012 99.30 199.89 101.15 12/31/2013 112.60 279.62 142.93 data)amounts 2012 2011 2010 2009 2008 $ 56,401 $ 57,905 $ 57,217 $ 58,105 $ 61,385 13,423 16,203 17,204 19,839 25,606 42,978 41,702 40,013 38,266 35,779 2,300 3,826 4,857 6,093 9,500 11,530 8,218 9,300 10,156 7,802 37,639 34,530 33,807 33,683 30,704 2,363 1,354 1,604 846 (724 ) $ 12,206 $ 10,210 $ 9,045 $ 7,800 $ 4,101 $ 1.61 $ 1.35 $ 1.20 $ 1.04 $ 0.55 1.56 1.31 1.17 1.01 0.53 0.80 0.76 0.72 0.70 0.65 21.75 23.70 17.30 18.95 25.50 14.72 13.90 13.22 12.67 12.27 $ 772,753 $ 750,291 $ 735,304 $ 723,316 $ 735,385 1,430,639 1,337,925 1,225,810 1,143,944 1,139,263 1,017,667 958,164 877,339 802,652 775,630 164,489 154,783 145,161 140,803 134,476 $ 754,304 $ 743,441 $ 725,534 $ 725,299 $ 717,040 1,381,083 1,287,195 1,182,930 1,127,634 1,113,102 984,927 927,186 840,392 786,714 817,041 160,682 151,379 145,304 137,910 142,597 0.88 % 0.79 % 0.76 % 0.69 % 0.37 % 7.60 % 6.74 % 6.22 % 5.66 % 2.88 % 11.41 % 10.30 % 9.51 % 8.53 % 4.41 % 3.70 % 3.87 % 4.04 % 4.06 % 3.87 % 75.93 % 78.31 % 83.81 % 90.12 % 94.81 % 1.00 % 0.95 % 0.83 % 1.28 % 1.69 % 0.68 % 0.67 % 0.67 % 0.91 % 1.35 % 154.39 % 173.10 % 202.97 % 139.71 % 96.42 % 11.50 % 11.57 % 11.84 % 12.31 % 11.80 % 8.29 % 8.18 % 8.24 % 8.60 % 8.42 % 13.23 % 12.92 % 12.44 % 12.80 % 12.30 % 14.48 % 14.17 % 13.69 % 14.06 % 13.50 % 2013 2012 2011 2010 2009 INCOME STATEMENT DATA Interest income $ 54,076 $ 56,401 $ 57,905 $ 57,217 $ 58,105 Interest expense 11,021 13,423 16,203 17,204 19,839 Net interest income 43,055 42,978 41,702 40,013 38,266 Provision for loan losses 1,111 2,300 3,826 4,857 6,093 Noninterest income 10,175 11,530 8,218 9,300 10,156 Noninterest expenses 37,413 37,639 34,530 33,807 33,683 Federal income tax expense 2,196 2,363 1,354 1,604 846 Net income $ 12,510 $ 12,206 $ 10,210 $ 9,045 $ 7,800 PER SHARE Basic earnings $ 1.63 $ 1.61 $ 1.35 $ 1.20 $ 1.04 Diluted earnings 1.59 1.56 1.31 1.17 1.01 Dividends 0.84 0.80 0.76 0.72 0.70 Market value* 23.85 21.75 23.70 17.30 18.95 Tangible book value* 15.62 14.72 13.90 13.22 12.67 BALANCE SHEET DATA At end of period Loans $ 808,037 $ 772,753 $ 750,291 $ 735,304 $ 723,316 Total assets 1,493,137 1,430,639 1,337,925 1,225,810 1,143,944 Deposits 1,043,766 1,017,667 958,164 877,339 802,652 Shareholders' equity 160,609 164,489 154,783 145,161 140,803 Average balance Loans $ 790,132 $ 754,304 $ 743,441 $ 725,534 $ 725,299 Total assets 1,448,440 1,381,083 1,287,195 1,182,930 1,127,634 Deposits 1,025,088 984,927 927,186 840,392 786,714 Shareholders’ equity 163,010 160,682 151,379 145,304 137,910 PERFORMANCE RATIOS Return on average total assets 0.86 % 0.88 % 0.79 % 0.76 % 0.69 % Return on average shareholders' equity 7.67 % 7.60 % 6.74 % 6.22 % 5.66 % Return on average tangible equity 10.71 % 11.41 % 10.30 % 9.51 % 8.53 % Net interest margin yield (FTE) 3.50 % 3.70 % 3.87 % 4.04 % 4.06 % Loan to deposit* 77.42 % 75.93 % 78.31 % 83.81 % 90.12 % Nonperforming loans to total loans* 0.42 % 1.00 % 0.95 % 0.83 % 1.28 % Nonperforming assets to total assets* 0.32 % 0.68 % 0.67 % 0.67 % 0.91 % ALLL to nonperforming loans* 339.63 % 154.39 % 173.10 % 202.97 % 139.71 % CAPITAL RATIOS Shareholders' equity to assets* 10.76 % 11.50 % 11.57 % 11.84 % 12.31 % Tier 1 capital to average assets* 8.46 % 8.29 % 8.18 % 8.24 % 8.60 % Tier 1 risk-based capital* 13.67 % 13.23 % 12.92 % 12.44 % 12.80 % Total risk-based capital* 14.92 % 14.48 % 14.17 % 13.69 % 14.06 % Quarter to Date December 31
2013 September 30
2013 June 30
2013 March 31
2013 December 31
2012 September 30
2012 June 30
2012 March 31
2012Total interest income $ 13,603 $ 13,505 $ 13,440 $ 13,528 $ 13,845 $ 14,164 $ 14,188 $ 14,204 Total interest expense 2,683 2,736 2,781 2,821 3,051 3,239 3,429 3,704 Net interest income 10,920 10,769 10,659 10,707 10,794 10,925 10,759 10,500 Provision for loan losses 245 351 215 300 1,200 200 439 461 Noninterest income 2,130 2,862 2,736 2,447 2,686 2,759 2,544 3,541 Noninterest expenses 9,578 9,320 9,324 9,191 9,750 9,128 9,188 9,573 Federal income tax expense 303 674 643 576 19 899 672 773 Net income $ 2,924 $ 3,286 $ 3,213 $ 3,087 $ 2,511 $ 3,457 $ 3,004 $ 3,234 PER SHARE Basic earnings $ 0.38 $ 0.43 $ 0.42 $ 0.40 $ 0.33 $ 0.45 $ 0.40 $ 0.43 Diluted earnings 0.37 0.42 0.41 0.39 0.32 0.44 0.39 0.41 Dividends 0.21 0.21 0.21 0.21 0.20 0.20 0.20 0.20 Market value* 23.85 24.85 24.75 25.00 21.75 22.50 24.85 24.00 Tangible book value* 15.62 15.43 15.19 14.95 14.72 14.65 14.37 14.15 Year Ended December 31 2013 2012 2011 Average
Balance Tax
Equivalent
Interest Average
Yield /
Rate Average
Balance Tax
Equivalent
Interest Average
Yield /
Rate Average
Balance Tax
Equivalent
Interest Average
Yield /
RateINTEREST EARNING ASSETS Loans $ 790,132 $ 41,233 5.22 % $ 754,304 $ 43,396 5.75 % $ 743,441 $ 45,463 6.12 % Taxable investment securities 335,575 7,228 2.15 % 309,681 7,555 2.44 % 235,437 6,941 2.95 % Nontaxable investment securities 165,774 8,294 5.00 % 145,502 7,941 5.46 % 136,356 7,847 5.75 % Trading account securities 1,071 55 5.14 % 2,624 142 5.41 % 5,087 286 5.62 % Other 27,235 447 1.64 % 33,359 486 1.46 % 37,539 506 1.35 % Total earning assets 1,319,787 57,257 4.34 % 1,245,470 59,520 4.78 % 1,157,860 61,043 5.27 % NONEARNING ASSETS ALLL (11,877 ) (12,408 ) (12,522 ) Cash and demand deposits due from banks 18,162 19,409 20,195 Premises and equipment 25,993 25,244 24,397 Accrued income and other assets 96,375 103,368 97,265 Total assets $ 1,448,440 $ 1,381,083 $ 1,287,195 INTEREST BEARING LIABILITIES Interest bearing demand deposits $ 183,665 161 0.09 % $ 170,851 204 0.12 % $ 152,530 189 0.12 % Savings deposits 242,777 366 0.15 % 214,958 451 0.21 % 192,999 488 0.25 % Time deposits 456,774 6,613 1.45 % 473,675 8,476 1.79 % 467,931 10,258 2.19 % Borrowed funds 251,590 3,881 1.54 % 225,689 4,292 1.90 % 198,828 5,268 2.65 % Total interest bearing liabilities 1,134,806 11,021 0.97 % 1,085,173 13,423 1.24 % 1,012,288 16,203 1.60 % NONINTEREST BEARING LIABILITIES Demand deposits 141,872 125,443 113,726 Other 8,752 9,785 9,802 Shareholders’ equity 163,010 160,682 151,379 Total liabilities and shareholders’ equity $ 1,448,440 $ 1,381,083 $ 1,287,195 Net interest income (FTE) $ 46,236 $ 46,097 $ 44,840 Net yield on interest earning assets (FTE) 3.50 % 3.70 % 3.87 % 2013 Compared to 2012
Increase (Decrease) Due to 2012 Compared to 2011
Increase (Decrease) Due toVolume Rate Net Volume Rate Net Changes in interest income Loans $ 1,996 $ (4,159 ) $ (2,163 ) $ 656 $ (2,723 ) $ (2,067 ) Taxable AFS securities 601 (928 ) (327 ) 1,945 (1,331 ) 614 Nontaxable AFS securities 1,049 (696 ) 353 511 (417 ) 94 Trading securities (80 ) (7 ) (87 ) (134 ) (10 ) (144 ) Other (96 ) 57 (39 ) (59 ) 39 (20 ) Total changes in interest income 3,470 (5,733 ) (2,263 ) 2,919 (4,442 ) (1,523 ) Changes in interest expense Interest bearing demand deposits 14 (57 ) (43 ) 22 (7 ) 15 Savings deposits 53 (138 ) (85 ) 52 (89 ) (37 ) Time deposits (293 ) (1,570 ) (1,863 ) 124 (1,906 ) (1,782 ) Borrowed funds 457 (868 ) (411 ) 647 (1,623 ) (976 ) Total changes in interest expense 231 (2,633 ) (2,402 ) 845 (3,625 ) (2,780 ) Net change in interest margin (FTE) $ 3,239 $ (3,100 ) $ 139 $ 2,074 $ (817 ) $ 1,257 Average Yield / Rate for the Three Month Periods Ended: December 31
2013September 30
2013June 30
2013March 31
2013December 31
2012Total earning assets 4.30 % 4.31 % 4.35 % 4.41 % 4.61 % Total interest bearing liabilities 0.94 % 0.96 % 0.99 % 1.01 % 1.12 % Net yield on interest earning assets (FTE) 3.50 % 3.48 % 3.50 % 3.54 % 3.65 % Quarter to Date Net Interest Income December 31
2013 September 30
2013 June 30
2013 March 31
2013 December 31
2012Total interest income $ 13,603 $ 13,505 $ 13,440 $ 13,528 $ 13,845 Total interest expense 2,683 2,736 2,781 2,821 3,051 Net interest income $ 10,920 $ 10,769 $ 10,659 $ 10,707 $ 10,794 2013 2012 2011 2010 2009 ALLL at beginning of period $ 11,936 $ 12,375 $ 12,373 $ 12,979 $ 11,982 Loans charged-off Commercial and agricultural 907 1,672 1,984 3,731 3,081 Residential real estate 1,004 1,142 2,240 2,524 2,627 Consumer 429 542 552 596 934 Total loans charged-off 2,340 3,356 4,776 6,851 6,642 Recoveries Commercial and agricultural 363 240 461 453 623 Residential real estate 181 122 177 638 546 Consumer 249 255 314 297 377 Total recoveries 793 617 952 1,388 1,546 Provision for loan losses 1,111 2,300 3,826 4,857 6,093 ALLL at end of period $ 11,500 $ 11,936 $ 12,375 $ 12,373 $ 12,979 Net loans charged-off $ 1,547 $ 2,739 $ 3,824 $ 5,463 $ 5,096 Net loans charged-off to average loans outstanding 0.20 % 0.36 % 0.51 % 0.75 % 0.70 % ALLL as a % of loans at end of period 1.42 % 1.54 % 1.65 % 1.68 % 1.79 % December 31
2013 September 30
2013 June 30
2013 March 31
2013 December 31
2012Total loans charged-off $ 497 $ 602 $ 719 $ 522 $ 1,469 Total recoveries 152 151 295 195 143 Net loans charged-off 345 451 424 327 1,326 Net loans charged-off to average loans outstanding 0.04 % 0.06 % 0.05 % 0.04 % 0.17 % Provision for loan losses $ 245 $ 351 $ 215 $ 300 $ 1,200 Total Past Due and Nonaccrual December 31
2013 September 30
2013 June 30
2013 March 31
2013 December 31
2012Commercial and agricultural $ 3,621 $ 5,371 $ 4,962 $ 8,713 $ 7,271 Residential real estate 7,008 6,339 5,080 4,077 5,431 Consumer 259 152 104 212 199 Total $ 10,888 $ 11,862 $ 10,146 $ 13,002 $ 12,901 Total Past Due and Nonaccrual as of December 31 2013 2012 2011 2011 2009 Commercial and agricultural $ 3,621 $ 7,271 $ 7,420 $ 9,606 $ 8,839 Residential real estate 7,008 5,431 5,297 8,119 10,296 Consumer 259 199 186 309 460 Total $ 10,888 $ 12,901 $ 12,903 $ 18,034 $ 19,595 Accruing Interest Nonaccrual Total Number
of
Loans Balance Number
of
Loans Balance Number
of
Loans Balance January 1, 2012 112 $ 17,739 12 $ 1,017 124 $ 18,756 New modifications 58 10,149 9 1,217 67 11,366 Principal payments — (1,578 ) — (287 ) — (1,865 ) Loans paid-off (40 ) (7,719 ) (4 ) (158 ) (44 ) (7,877 ) Partial charge-off — (231 ) — (40 ) — (271 ) Balances charged-off (2 ) (140 ) (4 ) (100 ) (6 ) (240 ) Transfers to OREO (2 ) (134 ) (5 ) (380 ) (7 ) (514 ) Transfers to accrual status 2 131 (2 ) (131 ) — — Transfers to nonaccrual status (13 ) (1,686 ) 13 1,686 — — December 31, 2012 115 16,531 19 2,824 134 19,355 New modifications 76 12,192 5 424 81 12,616 Principal payments — (891 ) — (292 ) — (1,183 ) Loans paid-off (17 ) (2,844 ) (6 ) (800 ) (23 ) (3,644 ) Partial charge-off — (79 ) — (477 ) — (556 ) Balances charged-off (3 ) (167 ) (1 ) (27 ) (4 ) (194 ) Transfers to OREO (1 ) (33 ) (7 ) (496 ) (8 ) (529 ) Transfers to accrual status 2 133 (2 ) (133 ) — — Transfers to nonaccrual status (7 ) (419 ) 7 419 — — December 31, 2013 165 $ 24,423 15 $ 1,442 180 $ 25,865 2013 2012 2011 Accruing
Interest Nonaccrual Total Accruing
Interest Nonaccrual Total Accruing
Interest Nonaccrual Total Current $ 21,690 $ 1,189 $ 22,879 $ 16,301 $ 941 $ 17,242 $ 16,125 $ 514 $ 16,639 Past due 30-59 days 2,158 37 2,195 158 561 719 1,564 344 1,908 Past due 60-89 days 575 — 575 72 41 113 50 85 135 Past due 90 days or more — 216 216 — 1,281 1,281 — 74 74 Total $ 24,423 $ 1,442 $ 25,865 $ 16,531 $ 2,824 $ 19,355 $ 17,739 $ 1,017 $ 18,756 2010 2009 Accruing
Interest Nonaccrual Total Accruing
Interest Nonaccrual Total Current $ 4,798 $ 499 $ 5,297 $ 2,754 $ 786 $ 3,540 Past due 30-59 days 175 26 201 107 80 187 Past due 60-89 days 102 — 102 — 824 824 Past due 90 days or more — 163 163 — 426 426 Total $ 5,075 $ 688 $ 5,763 $ 2,861 $ 2,116 $ 4,977 2013 2012 Outstanding
Balance Unpaid
Principal
Balance Valuation
Allowance Outstanding
Balance Unpaid
Principal
Balance Valuation
AllowanceTDRs Commercial real estate $ 10,663 $ 11,193 $ 1,585 $ 9,227 $ 9,640 $ 1,333 Commercial other 1,310 1,340 62 1,167 1,197 38 Agricultural real estate 1,459 1,459 30 91 91 32 Agricultural other 79 199 — 569 689 59 Residential real estate senior liens 12,266 12,841 2,010 8,224 8,670 1,429 Residential real estate junior liens 20 20 4 21 57 4 Consumer secured 68 69 — 56 56 — Total TDRs 25,865 27,121 3,691 19,355 20,400 2,895 Other impaired loans Commercial real estate 1,707 2,193 330 1,817 2,304 320 Commercial other 136 217 58 2,245 2,376 359 Agricultural other — — — 63 63 — Residential real estate senior liens 1,795 2,473 268 2,226 3,002 354 Residential real estate junior liens 28 45 5 51 61 9 Home equity lines of credit 193 493 — 182 482 — Consumer secured 51 79 — 19 28 — Total other impaired loans 3,910 5,500 661 6,603 8,316 1,042 Total impaired loans $ 29,775 $ 32,621 $ 4,352 $ 25,958 $ 28,716 $ 3,937 2013 2012 2011 2010 2009 Nonaccrual loans $ 3,244 $ 7,303 $ 6,389 $ 5,610 $ 8,522 Accruing loans past due 90 days or more 142 428 760 486 768 Total nonperforming loans 3,386 7,731 7,149 6,096 9,290 Foreclosed assets 1,412 2,018 1,876 2,067 1,157 Total nonperforming assets $ 4,798 $ 9,749 $ 9,025 $ 8,163 $ 10,447 Nonperforming loans as a % of total loans 0.42 % 1.00 % 0.95 % 0.83 % 1.28 % Nonperforming assets as a % of total assets 0.32 % 0.68 % 0.67 % 0.67 % 0.91 % 2013 2012 2011 2010 2009 Commercial and agricultural $ 833 $ 2,325 $ 520 $ 115 $ 1,692 Residential real estate 609 499 497 573 424 Total $ 1,442 $ 2,824 $ 1,017 $ 688 $ 2,116 2013 2012 2011 Outstanding
Balance Specific
Allocation Outstanding
Balance Specific
Allocation Outstanding
Balance Specific
AllocationBorrower 1 $ — $ — $ — (A) $ — $ 1,014 $ — (C) Borrower 2 — — — (B) — 1,900 — (D) Borrower 3 — (A) — 2,077 359 — — Borrower 4 — — — — — — Others not individually significant 3,244 5,226 3,475 Total $ 3,244 $ 7,303 $ 6,389 2010 2009 Outstanding
Balance Specific
Allocation Outstanding
Balance Specific
AllocationBorrower 1 $ — $ — $ — $ — Borrower 2 2,679 345 — — Borrower 3 — — — — Borrower 4 — (B) — 1,800 — (D) Others not individually significant 2,931 6,722 Total $ 5,610 $ 8,522 *At endA - Transferred to accrual status. B - Loan was partially charged-off with the remaining outstanding balance paid off by the customer. C - No specific allocation as the net realizable value of periodthe loan’s underlying collateral value exceeded the loan’s carrying balance.D - No specific allocation established for this loan as it was charged down to reflect the current fair value of the underlying real estate. Change Change 2013 2012 $ % 2011 $ % Service charges and fees NSF and overdraft fees $ 2,243 $ 2,367 $ (124 ) (5.24 )% $ 2,500 $ (133 ) (5.32 )% ATM and debit card fees 1,944 1,874 70 3.74 % 1,736 138 7.95 % Trust fees 1,154 1,061 93 8.77 % 979 82 8.38 % Freddie Mac servicing fee 737 757 (20 ) (2.64 )% 732 25 3.42 % Service charges on deposit accounts 373 337 36 10.68 % 324 13 4.01 % Net OMSRs income (loss) 269 (89 ) 358 N/M (293 ) 204 (69.62 )% All other 116 125 (9 ) (7.20 )% 140 (15 ) (10.71 )% Total service charges and fees 6,836 6,432 404 6.28 % 6,118 314 5.13 % Gain on sale of mortgage loans 962 1,576 (614 ) (38.96 )% 538 1,038 N/M Earnings on corporate owned life insurance policies 732 698 34 4.87 % 609 89 14.61 % Gain (loss) on sale of AFS securities 171 1,119 (948 ) (84.72 )% 3 1,116 N/M Other Brokerage and advisory fees 704 574 130 22.65 % 545 29 5.32 % Gain on sale of OREO 286 220 66 30.00 % 62 158 N/M Corporate Settlement Solutions joint venture 143 504 (361 ) (71.63 )% (182 ) 686 N/M Other 341 407 (66 ) (16.22 )% 525 (118 ) (22.48 )% Total other 1,474 1,705 (231 ) (13.55 )% 950 755 79.47 % Total noninterest income $ 10,175 $ 11,530 $ (1,355 ) (11.75 )% $ 8,218 $ 3,312 40.30 % Change Change 2013 2012 $ % 2011 $ % Compensation and benefits Employee salaries $ 15,677 $ 15,374 $ 303 1.97 % $ 14,377 $ 997 6.93 % Employee benefits 5,788 5,853 (65 ) (1.11 )% 4,915 938 19.08 % Total compensation and benefits 21,465 21,227 238 1.12 % 19,292 1,935 10.03 % Furniture and equipment Service contracts 2,277 1,995 282 14.14 % 1,898 97 5.11 % Depreciation 1,889 1,796 93 5.18 % 1,916 (120 ) (6.26 )% ATM and debit card fees 710 690 20 2.90 % 629 61 9.70 % All other 69 79 (10 ) (12.66 )% 54 25 46.30 % Total furniture and equipment 4,945 4,560 385 8.44 % 4,497 63 1.40 % Occupancy Outside services 671 605 66 10.91 % 587 18 3.07 % Depreciation 667 621 46 7.41 % 605 16 2.64 % Utilities 502 463 39 8.42 % 462 1 0.22 % Property taxes 499 501 (2 ) (0.40 )% 470 31 6.60 % All other 314 329 (15 ) (4.56 )% 346 (17 ) (4.91 )% Total occupancy 2,653 2,519 134 5.32 % 2,470 49 1.98 % Net AFS securities impairment loss — 282 (282 ) (100.00 )% — 282 100.00 % Other Marketing and community relations 1,131 1,965 (834 ) (42.44 )% 1,174 791 67.38 % FDIC insurance premiums 1,082 864 218 25.23 % 1,086 (222 ) (20.44 )% Directors fees 819 885 (66 ) (7.46 )% 842 43 5.11 % Audit and related fees 738 711 27 3.80 % 714 (3 ) (0.42 )% Education and travel 502 588 (86 ) (14.63 )% 526 62 11.79 % Loan underwriting fees 423 403 20 4.96 % 331 72 21.75 % Printing and supplies 396 424 (28 ) (6.60 )% 405 19 4.69 % Postage and freight 387 389 (2 ) (0.51 )% 388 1 0.26 % Legal fees 359 268 91 33.96 % 302 (34 ) (11.26 )% Consulting fees 315 482 (167 ) (34.65 )% 386 96 24.87 % Amortization of deposit premium 221 260 (39 ) (15.00 )% 299 (39 ) (13.04 )% Foreclosed asset and collection 211 202 9 4.46 % 576 (374 ) (64.93 )% State taxes 140 187 (47 ) (25.13 )% 57 130 N/M Other losses 109 300 (191 ) (63.67 )% 54 246 N/M All other 1,517 1,123 394 35.08 % 1,131 (8 ) (0.71 )% Total other 8,350 9,051 (701 ) (7.75 )% 8,271 780 9.43 % Total noninterest expenses $ 37,413 $ 37,639 $ (226 ) (0.60 )% $ 34,530 $ 3,109 9.00 % Change 2013 2012 $ % ASSETS Cash and cash equivalents $ 41,558 $ 24,920 $ 16,638 66.77 % Certificates of deposit held in other financial institutions 580 4,465 (3,885 ) (87.01 )% Trading securities 525 1,573 (1,048 ) (66.62 )% AFS securities Amortized cost of AFS securities 517,614 490,420 27,194 5.55 % Unrealized gains (losses) on AFS securities (5,552 ) 13,590 (19,142 ) (140.85 )% AFS securities 512,062 504,010 8,052 1.60 % Mortgage loans AFS 1,104 3,633 (2,529 ) (69.61 )% Loans Gross loans 808,037 772,753 35,284 4.57 % Less allowance for loan and lease losses 11,500 11,936 (436 ) (3.65 )% Net loans 796,537 760,817 35,720 4.69 % Premises and equipment 25,719 25,787 (68 ) (0.26 )% Corporate owned life insurance policies 24,401 22,773 1,628 7.15 % Accrued interest receivable 5,442 5,227 215 4.11 % Equity securities without readily determinable fair values 18,293 18,118 175 0.97 % Goodwill and other intangible assets 46,311 46,532 (221 ) (0.47 )% Other assets 20,605 12,784 7,821 61.18 % TOTAL ASSETS $ 1,493,137 $ 1,430,639 $ 62,498 4.37 % LIABILITIES AND SHAREHOLDERS’ EQUITY Liabilities Deposits $ 1,043,766 $ 1,017,667 $ 26,099 2.56 % Borrowed funds 279,326 241,001 38,325 15.90 % Accrued interest payable and other liabilities 9,436 7,482 1,954 26.12 % Total liabilities 1,332,528 1,266,150 66,378 5.24 % Shareholders’ equity 160,609 164,489 (3,880 ) (2.36 )% TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY $ 1,493,137 $ 1,430,639 $ 62,498 4.37 % 2013 2012 2011 Government sponsored enterprises $ 23,745 $ 25,776 $ 397 States and political subdivisions 201,988 182,743 174,938 Auction rate money market preferred 2,577 2,778 2,049 Preferred stocks 5,827 6,363 5,033 Mortgage-backed securities 144,115 155,345 143,602 Collateralized mortgage obligations 133,810 131,005 99,101 Total $ 512,062 $ 504,010 $ 425,120 Maturing Within
One Year After One
Year But
Within
Five Years After Five
Years But
Within
Ten Years After
Ten Years Securities with
Variable Monthly
Payments or
Noncontractual
Maturities Amount Yield (%) Amount Yield (%) Amount Yield (%) Amount Yield (%) Amount Yield (%) Government sponsored enterprises $ — — $ 73 7.91 $ 23,672 1.46 $ — — $ — — States and political subdivisions 961 6.51 38,794 4.76 98,965 4.93 63,268 4.10 — — Mortgage-backed securities — — — — — — — — 144,115 2.05 Collateralized mortgage obligations — — — — — — — — 133,810 2.30 Auction rate money market preferred — — — — — — — — 2,577 6.28 Preferred stocks — — — — — — — — 5,827 5.80 Total $ 961 6.51 $ 38,867 4.77 $ 122,637 4.26 $ 63,268 4.10 $ 286,329 2.28 2013 2012 2011 2010 2009 Commercial $ 392,104 $ 371,505 $ 365,714 $ 348,852 $ 340,274 Agricultural 92,589 83,606 74,645 71,446 64,845 Residential real estate 289,931 284,148 278,360 284,029 285,838 Consumer 33,413 33,494 31,572 30,977 32,359 Total $ 808,037 $ 772,753 $ 750,291 $ 735,304 $ 723,316 2013 2012 2011 $ Change % Change $ Change % Change $ Change % Change Commercial $ 20,599 5.54 % $ 5,791 1.58 % $ 16,862 4.83 % Agricultural 8,983 10.74 % 8,961 12.00 % 3,199 4.48 % Residential real estate 5,783 2.04 % 5,788 2.08 % (5,669 ) (2.00 )% Consumer (81 ) (0.24 )% 1,922 6.09 % 595 1.92 % Total $ 35,284 4.57 % $ 22,462 2.99 % $ 14,987 2.04 % 2013 2012 2011 2010 2009 Noninterest bearing demand deposits $ 158,428 $ 143,735 $ 119,072 $ 104,902 $ 96,875 Interest bearing demand deposits 192,089 181,259 163,653 142,259 128,111 Savings deposits 243,237 228,338 193,902 177,817 157,020 Certificates of deposit 362,473 376,790 395,777 386,435 356,594 Brokered certificates of deposit 56,329 55,348 54,326 53,748 50,933 Internet certificates of deposit 31,210 32,197 31,434 12,178 13,119 Total $ 1,043,766 $ 1,017,667 $ 958,164 $ 877,339 $ 802,652 2013 2012 2011 $ Change % Change $ Change % Change $ Change % Change Noninterest bearing demand deposits $ 14,693 10.22 % $ 24,663 20.71 % $ 14,170 13.51 % Interest bearing demand deposits 10,830 5.97 % 17,606 10.76 % 21,394 15.04 % Savings deposits 14,899 6.52 % 34,436 17.76 % 16,085 9.05 % Certificates of deposit (14,317 ) (3.80 )% (18,987 ) (4.80 )% 9,342 2.42 % Brokered certificates of deposit 981 1.77 % 1,022 1.88 % 578 1.08 % Internet certificates of deposit (987 ) (3.07 )% 763 2.43 % 19,256 158.12 % Total $ 26,099 2.56 % $ 59,503 6.21 % $ 80,825 9.21 % Maturity Within 3 months $ 33,773 Within 3 to 6 months 26,598 Within 6 to 12 months 48,345 Over 12 months 128,986 Total $ 237,702 Minimum Payments Due by Period Due in
One Year
or Less After One
Year But
Within
Three Years After Three
Years But
Within
Five Years After
Five Years Total Deposits Deposits with no stated maturity $ 593,754 $ — $ — $ — $ 593,754 Certificates of deposit with stated maturities 207,278 140,040 85,550 17,144 450,012 Total deposits 801,032 140,040 85,550 17,144 1,043,766 Borrowed funds Short-term borrowings 106,025 — — — 106,025 Long-term borrowings 20,876 42,425 70,000 40,000 173,301 Total borrowed funds 126,901 42,425 70,000 40,000 279,326 Total contractual obligations $ 927,933 $ 182,465 $ 155,550 $ 57,144 $ 1,323,092 Expiration Dates by Period Due in
One Year
or Less After One
Year But
Within
Three Years After Three
Years But
Within
Five Years After
Five
Years Total Unused commitments under lines of credit $ 72,166 $ 31,141 $ 13,059 $ 5,593 $ 121,959 Commitments to grant loans 29,096 — — — 29,096 Commercial and standby letters of credit 4,169 — — — 4,169 Total loan commitments $ 105,431 $ 31,141 $ 13,059 $ 5,593 $ 155,224 2013 2012 Required Equity Capital 13.67 % 13.23 % 4.00 % Secondary Capital 1.25 % 1.25 % 4.00 % Total Capital 14.92 % 14.48 % 8.00 % 0 to 3
Months 4 to 12
Months 1 to 5
Years Over 5
YearsInterest sensitive assets Trading securities $ 525 $ — $ — $ — AFS securities 44,680 87,212 226,963 153,207 Loans 188,897 89,166 390,793 135,937 Total $ 234,102 $ 176,378 $ 617,756 $ 289,144 Interest sensitive liabilities Borrowed funds $ 116,169 $ 10,781 $ 112,376 $ 40,000 Time deposits 61,029 146,624 225,215 17,144 Savings deposits 16,598 20,843 82,092 123,704 Interest bearing demand deposits 2,390 7,169 33,397 149,133 Total $ 196,186 $ 185,417 $ 453,080 $ 329,981 Cumulative gap $ 37,916 $ 28,877 $ 193,553 $ 152,716 Cumulative gap as a % of assets 2.54 % 1.93 % 12.96 % 10.23 % 1 Year
or Less 1 to 5
Years Over 5
Years Total Commercial and agricultural $ 88,527 $ 264,296 $ 131,870 $ 484,693 Interest sensitivity Loans maturing after one year that have: Fixed interest rates $ 218,869 $ 125,938 Variable interest rates 45,427 5,932 Total $ 264,296 $ 131,870 2013 2012 $ Variance Net cash provided by (used in) operating activities $ 22,741 $ 19,464 $ 3,277 Net cash provided by (used in) investing activities (64,931 ) (101,874 ) 36,943 Net cash provided by (used in) financing activities 58,828 78,740 (19,912 ) Increase (decrease) in cash and cash equivalents 16,638 (3,670 ) 20,308 Cash and cash equivalents at beginning of period 24,920 28,590 (3,670 ) Cash and cash equivalents at end of period $ 41,558 $ 24,920 $ 16,638 December 31, 2013 Immediate basis point change assumption (short-term) (100) 0 100 200 300 400 Percent change in net interest income vs. constant rates (2.85 )% — 0.25 % (0.28 )% (0.99 )% (2.16 )% December 31, 2012 Immediate basis point change assumption (short-term) (100) 0 100 200 300 400 Percent change in net interest income vs. constant rates (1.61 )% — 0.49 % (1.58 )% (1.74 )% (2.16 )% December 31, 2013 2014 2015 2016 2017 2018 Thereafter Total Fair Value Rate sensitive assets Other interest bearing assets $ 19,903 $ 480 $ — $ — $ — $ — $ 20,383 $ 20,385 Average interest rates 0.25 % 1.15 % — — — — 0.27 % Trading securities $ 525 $ — $ — $ — $ — $ — $ 525 $ 525 Average interest rates 2.77 % — — — — — 2.77 % AFS securities $ 131,892 $ 73,723 $ 63,190 $ 52,078 $ 37,972 $ 153,207 $ 512,062 $ 512,062 Average interest rates 2.26 % 2.23 % 2.42 % 2.48 % 2.48 % 2.80 % 2.48 % Fixed interest rate loans (1) $ 115,183 $ 94,841 $ 91,140 $ 118,479 $ 85,448 $ 134,614 $ 639,705 $ 639,914 Average interest rates 5.31 % 5.17 % 4.93 % 4.53 % 4.33 % 4.33 % 4.75 % Variable interest rate loans (1) $ 69,036 $ 29,460 $ 20,332 $ 14,208 $ 15,699 $ 19,597 $ 168,332 $ 168,332 Average interest rates 4.76 % 3.90 % 4.06 % 3.36 % 3.35 % 3.99 % 4.19 % Rate sensitive liabilities Borrowed funds $ 126,950 $ 32,376 $ 10,000 $ 30,000 $ 40,000 $ 40,000 $ 279,326 $ 283,060 Average interest rates 0.43 % 0.86 % 2.15 % 1.95 % 2.35 % 3.02 % 1.35 % Savings and NOW accounts $ 47,000 $ 33,569 $ 30,200 $ 27,198 $ 24,522 $ 272,837 $ 435,326 $ 435,326 Average interest rates 0.19 % 0.12 % 0.11 % 0.11 % 0.11 % 0.11 % 0.12 % Fixed interest rate certificates of deposit $ 206,514 $ 81,038 $ 58,627 $ 46,336 $ 39,214 $ 17,144 $ 448,873 $ 451,664 Average interest rates 0.89 % 1.93 % 1.95 % 1.63 % 1.34 % 1.66 % 1.36 % Variable interest rate certificates of deposit $ 764 $ 375 $ — $ — $ — $ — $ 1,139 $ 1,139 Average interest rates 0.04 % 0.40 % — — — — 0.16 % December 31, 2012 2013 2014 2015 2016 2017 Thereafter Total Fair Value Rate sensitive assets Other interest bearing assets $ 6,411 $ 100 $ 240 $ — $ — $ — $ 6,751 $ 6,761 Average interest rates 0.86 % 0.35 % 1.25 % — — — 0.86 % Trading securities $ 1,051 $ 522 $ — $ — $ — $ — $ 1,573 $ 1,573 Average interest rates 2.68 % 2.54 % — — — — 2.63 % AFS securities $ 124,452 $ 83,606 $ 49,419 $ 42,655 $ 35,504 $ 168,374 $ 504,010 $ 504,010 Average interest rates 2.42 % 2.30 % 2.53 % 2.82 % 2.89 % 2.48 % 2.50 % Fixed interest rate loans (1) $ 138,840 $ 96,013 $ 91,353 $ 85,095 $ 109,057 $ 89,760 $ 610,118 $ 622,329 Average interest rates 5.74 % 5.62 % 5.57 % 5.21 % 4.60 % 4.63 % 5.26 % Variable interest rate loans (1) $ 64,482 $ 28,076 $ 24,669 $ 12,650 $ 22,061 $ 10,697 $ 162,635 $ 162,635 Average interest rates 4.90 % 3.77 % 3.96 % 3.89 % 3.36 % 3.90 % 4.21 % Rate sensitive liabilities Borrowed funds $ 77,865 $ 10,814 $ 42,322 $ 20,000 $ 40,000 $ 50,000 $ 241,001 $ 248,822 Average interest rates 0.46 % 0.65 % 1.14 % 2.67 % 2.15 % 3.03 % 1.59 % Savings and NOW accounts $ 35,796 $ 32,794 $ 29,476 $ 26,520 $ 23,885 $ 261,126 $ 409,597 $ 409,597 Average interest rates 0.13 % 0.13 % 0.12 % 0.12 % 0.12 % 0.11 % 0.12 % Fixed interest rate certificates of deposit $ 204,972 $ 76,373 $ 71,685 $ 51,232 $ 40,523 $ 18,399 $ 463,184 $ 471,479 Average interest rates 1.13 % 1.69 % 2.10 % 2.14 % 1.72 % 1.67 % 1.55 % Variable interest rate certificates of deposit $ 782 $ 369 $ — $ — $ — $ — $ 1,151 $ 1,151 Average interest rates 0.46 % 0.45 % — — — — 0.46 % 20122013 and 2011,2012, and the related consolidated statements of changes in shareholders’ equity, income, comprehensive income, and cash flows for each of the years in the three-year period ended December 31, 2012.2013. We also have auditedIsabella Bank Corporation’sinternal control over financial reporting as of December 31, 2012,2013, based on criteria established in theInternal Control-Integrated Frameworkissued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO)(1992 framework) (the COSO criteria).Isabella Bank Corporation’smanagement is responsible for these consolidated financial statements, for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting. Our responsibility is to express an opinion on these consolidated financial statements and an opinion on the effectiveness ofIsabella Bank Corporation’s internal control over financial reporting, based on our audits.20122013 and 2011,2012, and the consolidated results of their operations and their cash flows for each of the years in the three-year period ended December 31, 20122013 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, 2012,2013, based on criteria established in theInternal Control-Integrated Frameworkissued by the Committee of Sponsoring Organizations (COSO) of the Treadway Commission.COSO criteria.
11, 2013thousands)thousands December 31, 2013 2012 2011 $ 22,634 $ 24,514 2,286 4,076 24,920 28,590 4,465 8,924 1,573 4,710 504,010 425,120 3,633 3,205 371,505 365,714 83,606 74,645 284,148 278,360 33,494 31,572 772,753 750,291 11,936 12,375 760,817 737,916 25,787 24,626 22,773 22,075 5,227 5,848 18,118 17,189 46,532 46,792 12,784 12,930 $ 1,430,639 $ 1,337,925 $ 143,735 $ 119,072 181,259 163,653 455,546 440,123 237,127 235,316 1,017,667 958,164 241,001 216,136 7,482 8,842 1,266,150 1,183,142 136,580 134,734 3,734 4,524 19,168 13,036 5,007 2,489 164,489 154,783 $ 1,430,639 $ 1,337,925 December 31 2013 2012 ASSETS Cash and cash equivalents Cash and demand deposits due from banks $ 21,755 $ 22,634 Interest bearing balances due from banks 19,803 2,286 Total cash and cash equivalents 41,558 24,920 Certificates of deposit held in other financial institutions 580 4,465 Trading securities 525 1,573 AFS securities (amortized cost of $517,614 in 2013 and $490,420 in 2012) 512,062 504,010 Mortgage loans AFS 1,104 3,633 Loans Commercial 392,104 371,505 Agricultural 92,589 83,606 Residential real estate 289,931 284,148 Consumer 33,413 33,494 Gross loans 808,037 772,753 Less allowance for loan and lease losses 11,500 11,936 Net loans 796,537 760,817 Premises and equipment 25,719 25,787 Corporate owned life insurance policies 24,401 22,773 Accrued interest receivable 5,442 5,227 Equity securities without readily determinable fair values 18,293 18,118 Goodwill and other intangible assets 46,311 46,532 Other assets 20,605 12,784 TOTAL ASSETS $ 1,493,137 $ 1,430,639 LIABILITIES AND SHAREHOLDERS’ EQUITY Deposits Noninterest bearing $ 158,428 $ 143,735 NOW accounts 192,089 181,259 Certificates of deposit under $100 and other savings 455,547 455,546 Certificates of deposit over $100 237,702 237,127 Total deposits 1,043,766 1,017,667 Borrowed funds 279,326 241,001 Accrued interest payable and other liabilities 9,436 7,482 Total liabilities 1,332,528 1,266,150 Shareholders’ equity Common stock — no par value 15,000,000 shares authorized; issued and outstanding 7,723,023 shares (including 12,761 shares held in the Rabbi Trust) in 2013 and 7,671,846 shares (including 5,130 shares held in the Rabbi Trust) in 2012 137,580 136,580 Shares to be issued for deferred compensation obligations 4,148 3,734 Retained earnings 25,222 19,168 Accumulated other comprehensive income (loss) (6,341 ) 5,007 Total shareholders’ equity 160,609 164,489 TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY $ 1,493,137 $ 1,430,639 data)amounts Common Stock
Shares
Outstanding Common
Stock Shares to be
Issued for
Deferred
Compensation
Obligations Retained
Earnings Accumulated Other
Comprehensive
(Loss) Income Totals 7,535,193 $ 133,443 $ 4,507 $ 4,972 $ (2,119 ) $ 140,803 — — — 9,045 410 9,455 124,953 2,683 — — — 2,683 28,898 537 (475 ) — — 62 — — 650 — — 650 — (514 ) — (514 ) (138,970 ) (2,557 ) — — (2,557 ) — — — (5,421 ) — (5,421 ) 7,550,074 133,592 4,682 8,596 (1,709 ) 145,161 — — — 10,210 4,198 14,408 120,336 3,075 — — — 3,075 39,257 697 (773 ) — — (76 ) — — 615 — — 615 — (426 ) — — — (426 ) (120,441 ) (2,204 ) — — (2,204 ) — — — (5,770 ) — (5,770 ) 7,589,226 134,734 4,524 13,036 2,489 154,783 — — — 12,206 2,518 14,724 124,530 2,898 — — — 2,898 41,676 814 (814 ) — — — — 619 (619 ) — — — — — 643 — — 643 — (505 ) — — — (505 ) (83,586 ) (1,980 ) — — — (1,980 ) — — — (6,074 ) — (6,074 ) 7,671,846 $ 136,580 $ 3,734 $ 19,168 $ 5,007 $ 164,489 Common Stock Shares Outstanding Amount Shares to be
Issued for
Deferred
Compensation
Obligations Retained
Earnings Accumulated
Other
Comprehensive
Income (Loss) Totals Balance, January 1, 2011 7,550,074 $ 133,592 $ 4,682 $ 8,596 $ (1,709 ) $ 145,161 Comprehensive income (loss) — — — 10,210 4,198 14,408 Issuance of common stock 120,336 3,075 — — — 3,075 Common stock issued for deferred compensation plan 39,257 697 (773 ) — — (76 ) Share-based payment awards under equity compensation plan — — 615 — — 615 Common stock purchased for deferred compensation obligations — (426 ) — — — (426 ) Common stock repurchased pursuant to publicly announced repurchase plan (120,441 ) (2,204 ) — — — (2,204 ) Cash dividends ($0.76 per share) — — — (5,770 ) — (5,770 ) Balance, December 31, 2011 7,589,226 134,734 4,524 13,036 2,489 154,783 Comprehensive income (loss) — — — 12,206 2,518 14,724 Issuance of common stock 124,530 2,898 — — — 2,898 Common stock issued for deferred compensation plan 41,676 814 (814 ) — — — Common stock transferred from the Rabbi Trust to satisfy deferred compensation obligations — 619 (619 ) — — — Share-based payment awards under equity compensation plan — — 643 — — 643 Common stock purchased for deferred compensation obligations — (505 ) — — — (505 ) Common stock repurchased pursuant to publicly announced repurchase plan (83,586 ) (1,980 ) — — — (1,980 ) Cash dividends ($0.80 per share) — — — (6,074 ) — (6,074 ) Balance, December 31, 2012 7,671,846 136,580 3,734 19,168 5,007 164,489 Comprehensive income (loss) — — — 12,510 (11,348 ) 1,162 Issuance of common stock 149,191 3,618 — — — 3,618 Common stock issued for deferred compensation plan — — — — — — Common stock transferred from the Rabbi Trust to satisfy deferred compensation obligations — 140 (140 ) — — — Share-based payment awards under equity compensation plan — — 554 — — 554 Common stock purchased for deferred compensation obligations — (383 ) — — — (383 ) Common stock repurchased pursuant to publicly announced repurchase plan (98,014 ) (2,375 ) — — — (2,375 ) Cash dividends ($0.84 per share) — — — (6,456 ) — (6,456 ) Balance, December 31, 2013 7,723,023 $ 137,580 $ 4,148 $ 25,222 $ (6,341 ) $ 160,609 data)amounts Year Ended December 31 2012 2011 2010 $ 43,396 $ 45,463 $ 46,794 7,555 6,941 5,271 4,870 4,806 4,367 94 189 306 486 506 479 56,401 57,905 57,217 9,131 10,935 11,530 4,292 5,268 5,674 13,423 16,203 17,204 42,978 41,702 40,013 2,300 3,826 4,857 40,678 37,876 35,156 6,432 6,118 6,480 1,576 538 610 1,119 3 348 698 609 663 1,705 950 1,199 11,530 8,218 9,300 21,227 19,292 18,552 2,519 2,470 2,351 4,560 4,497 4,344 486 — — (204 ) — — 282 — — 9,051 8,271 8,560 37,639 34,530 33,807 14,569 11,564 10,649 2,363 1,354 1,604 $ 12,206 $ 10,210 $ 9,045 $ 1.61 $ 1.35 $ 1.20 $ 1.56 $ 1.31 $ 1.17 $ 0.80 $ 0.76 $ 0.72 Year Ended December 31 2013 2012 2011 Interest income Loans, including fees $ 41,233 $ 43,396 $ 45,463 AFS securities Taxable 7,228 7,555 6,941 Nontaxable 5,132 4,870 4,806 Trading securities 36 94 189 Federal funds sold and other 447 486 506 Total interest income 54,076 56,401 57,905 Interest expense Deposits 7,140 9,131 10,935 Borrowings 3,881 4,292 5,268 Total interest expense 11,021 13,423 16,203 Net interest income 43,055 42,978 41,702 Provision for loan losses 1,111 2,300 3,826 Net interest income after provision for loan losses 41,944 40,678 37,876 Noninterest income Service charges and fees 6,836 6,432 6,118 Net gain on sale of mortgage loans 962 1,576 538 Earnings on corporate owned life insurance policies 732 698 609 Net gain (loss) on sale of AFS securities 171 1,119 3 Other 1,474 1,705 950 Total noninterest income 10,175 11,530 8,218 Noninterest expenses Compensation and benefits 21,465 21,227 19,292 Furniture and equipment 4,945 4,560 4,497 Occupancy 2,653 2,519 2,470 AFS securities impairment loss Total other-than-temporary impairment loss — 486 — Portion of loss reported in other comprehensive income (loss) — (204 ) — Net AFS securities impairment loss — 282 — Other 8,350 9,051 8,271 Total noninterest expenses 37,413 37,639 34,530 Income before federal income tax expense 14,706 14,569 11,564 Federal income tax expense 2,196 2,363 1,354 NET INCOME $ 12,510 $ 12,206 $ 10,210 Earnings per share Basic $ 1.63 $ 1.61 $ 1.35 Diluted $ 1.59 $ 1.56 $ 1.31 Cash dividends per basic share $ 0.84 $ 0.80 $ 0.76 thousands)thousands Year Ended December 31 2012 2011 2010 $ 12,206 $ 10,210 $ 9,045 3,921 9,220 1,156 (1,119 ) (3 ) (348 ) 282 — — 3,084 9,217 808 (348 ) (3,719 ) (351 ) 2,736 5,498 457 (329 ) (1,971 ) (72 ) 111 671 25 (218 ) (1,300 ) (47 ) 2,518 4,198 410 $ 14,724 $ 14,408 $ 9,455 Year Ended December 31 2013 2012 2011 Net income $ 12,510 $ 12,206 $ 10,210 Unrealized gains (losses) on AFS securities Unrealized gains (losses) arising during the year (18,971 ) 3,921 9,220 Reclassification adjustment for net realized (gains) losses included in net income (171 ) (1,119 ) (3 ) Reclassification adjustment for impairment loss included in net income — 282 — Net unrealized gains (losses) (19,142 ) 3,084 9,217 Tax effect (1) 6,257 (348 ) (3,719 ) Unrealized gains (losses), net of tax (12,885 ) 2,736 5,498 Change in unrecognized pension cost on defined benefit pension plan Change in unrecognized pension cost arising during the year 2,120 (580 ) (2,109 ) Reclassification adjustment for net periodic benefit cost included in net income 208 251 138 Net change in unrecognized pension cost 2,328 (329 ) (1,971 ) Tax effect (791 ) 111 671 Change in unrealized pension cost, net of tax 1,537 (218 ) (1,300 ) Other comprehensive income (loss), net of tax (11,348 ) 2,518 4,198 Comprehensive income (loss) $ 1,162 $ 14,724 $ 14,408 (1) “Note 12 — Federal“Note 18 – Accumulated Other Comprehensive Income Taxes”(Loss)” in the accompanying notes for tax effect reconciliation.thousands)thousands Year Ended December 31 2012 2011 2010 $ 12,206 $ 10,210 $ 9,045 2,300 3,826 4,857 166 82 180 2,417 2,521 2,522 787 714 543 260 299 338 2,277 1,689 1,153 282 — — (1,119 ) (3 ) (348 ) 52 78 94 (1,576 ) (538 ) (610 ) (33 ) (181 ) (227 ) (698 ) (609 ) (642 ) — — (21 ) 643 615 650 616 389 179 (99,353 ) (57,584 ) (72,106 ) 100,501 56,099 73,815 3,085 1,049 7,632 621 (392 ) 376 (2,610 ) 147 (1,914 ) (1,360 ) 449 1,005 19,464 18,860 26,521 4,459 6,884 (10,428 ) 40,677 8,877 18,303 89,112 69,275 66,970 (207,035 ) (165,017 ) (156,928 ) (27,103 ) (20,743 ) (21,319 ) 1,594 2,041 2,778 (3,578 ) (2,520 ) (3,232 ) — (4,000 ) (175 ) (101,874 ) (105,203 ) (103,877 ) 59,503 80,825 $ 74,687 24,898 21,400 2,043 (6,074 ) (5,770 ) (5,421 ) 2,279 2,302 2,208 (1,361 ) (1,507 ) (2,020 ) (505 ) (426 ) (514 ) 78,740 96,824 70,983 (3,670 ) 10,481 (6,373 ) 28,590 18,109 24,482 $ 24,920 $ 28,590 $ 18,109 $ 13,639 $ 16,239 $ 17,344 2,357 878 1,261 $ 1,902 $ 1,932 $ 3,868 619 773 475 (619 ) (697 ) (537 ) See) Year Ended December 31 2013 2012 2011 OPERATING ACTIVITIES Net income $ 12,510 $ 12,206 $ 10,210 Reconciliation of net income to net cash provided by operations: Provision for loan losses 1,111 2,300 3,826 Impairment of foreclosed assets 156 166 82 Depreciation 2,556 2,417 2,521 Amortization of OMSRs 522 787 714 Amortization of acquisition intangibles 221 260 299 Net amortization of AFS securities 2,028 2,277 1,689 AFS securities impairment loss — 282 — Net (gain) loss on sale of AFS securities (171 ) (1,119 ) (3 ) Net unrealized (gains) losses on trading securities 28 52 78 Net gain on sale of mortgage loans (962 ) (1,576 ) (538 ) Net unrealized (gains) losses on borrowings measured at fair value — (33 ) (181 ) Increase in cash value of corporate owned life insurance policies (732 ) (698 ) (609 ) Share-based payment awards under equity compensation plan 554 643 615 Deferred income tax (benefit) expense (1,208 ) 616 389 Origination of loans held-for-sale (53,632 ) (99,353 ) (57,584 ) Proceeds from loan sales 57,123 100,501 56,099 Net changes in operating assets and liabilities which provided (used) cash: Trading securities 1,020 3,085 1,049 Accrued interest receivable (215 ) 621 (392 ) Other assets (122 ) (2,610 ) 147 Accrued interest payable and other liabilities 1,954 (1,360 ) 449 Net cash provided by (used in) operating activities 22,741 19,464 18,860 INVESTING ACTIVITIES Net change in certificates of deposit held in other financial institutions 3,885 4,459 6,884 Activity in AFS securities Sales 16,229 40,677 8,877 Maturities and calls 86,225 89,112 69,275 Purchases (131,505 ) (207,035 ) (165,017 ) Loan principal originations, net (38,503 ) (27,103 ) (20,743 ) Proceeds from sales of foreclosed assets 2,122 1,594 2,041 Purchases of premises and equipment (2,488 ) (3,578 ) (2,520 ) Purchases of corporate owned life insurance policies (1,092 ) — (4,000 ) Proceeds from redemption of corporate owned life insurance policies 196 — — Net cash provided by (used in) investing activities (64,931 ) (101,874 ) (105,203 ) Year Ended December 31 2013 2012 2011 FINANCING ACTIVITIES Acceptances and withdrawals of deposits, net $ 26,099 $ 59,503 $ 80,825 Increase (decrease) in borrowed funds 38,325 24,898 21,400 Cash dividends paid on common stock (6,456 ) (6,074 ) (5,770 ) Proceeds from issuance of common stock 3,618 2,898 2,302 Common stock repurchased (2,375 ) (1,980 ) (1,507 ) Common stock purchased for deferred compensation obligations (383 ) (505 ) (426 ) Net cash provided by (used in) financing activities 58,828 78,740 96,824 Increase (decrease) in cash and cash equivalents 16,638 (3,670 ) 10,481 Cash and cash equivalents at beginning of year 24,920 28,590 18,109 Cash and cash equivalents at end of year $ 41,558 $ 24,920 $ 28,590 SUPPLEMENTAL CASH FLOWS INFORMATION: Interest paid $ 11,139 $ 13,639 $ 16,239 Federal income taxes paid 2,093 2,357 878 SUPPLEMENTAL NONCASH INVESTING AND FINANCING INFORMATION: Transfers of loans to foreclosed assets $ 1,672 $ 1,902 $ 1,932 to interim condensedare an integral part of these consolidated financial statements.amounts)amountsNOTE)— NATURE OF OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES– Nature of Operations and Summary of Significant Accounting Policies2627 locations, 24 hour banking services locally and nationally through shared automatic teller machines, 24 hour online banking, and direct deposits to businesses, institutions, and individuals. Lending services offered include commercial loans, agricultural loans, residential real estate loans, and consumer loans. Deposit services include interest and noninterest bearing checking accounts, savings accounts, money market accounts, and certificates of deposit. Other related financial products include trust and investment services, safe deposit box rentals, and credit life insurance. Active competition, principally from other commercial banks, savings banks and credit unions, exists in all of our principal markets. Our results of operations can be significantly affected by changes in interest rates or changes in the local economic environment.our subsidiaries. are required to make estimates and assumptions that affect the reported amounts of assets and liabilities as of the date of the consolidated balance sheet and reported amounts of revenues and expenses during the reporting year. Actual results could differ from those estimates.certain AFS investment securities, the valuation of real estate acquired in connection with foreclosures or in satisfaction of loans, valuation of goodwill and other intangible assets, and the determinations of assumptions in accounting for the defined benefit pension plan.MEASUREMENTS:MEASUREMENTS: Fair value refers to the price that would be received to sell an asset or paid to transfer a liability (an exit price) in an orderly transaction between market participants in the market in which the reporting entity transacts such sales or transfers based on the assumptions market participants would use when pricing an asset or liability. Assumptions are developed based on prioritizing information within a fair value hierarchy that gives the highest priority to quoted prices in active markets and the lowest priority to unobservable data, such as the reporting entity’s own data. We may choose to measure eligible items at fair value at specified election dates. Unrealized gains and losses on items for which the fair value measurement option has been elected are reported in earnings at each subsequent reporting date. The fair value option (i) may be applied instrument by instrument, with certain exceptions, allowing us to record identical financial assets and liabilities at fair value or by another measurement basis permitted under generally accepted accounting principles, (ii) is irrevocable (unless a new election date occurs) and (iii) is applied only to entire instruments and not to portions of instruments. and certain liabilities are recorded at fair value on a recurring basis. Additionally, from time to time, we may be required to record other assets at fair value on a nonrecurring basis, such as mortgage loans AFS, impaired loans, foreclosed assets, OMSR,OMSRs, goodwill, and certain other assets and liabilities. These nonrecurring fair value adjustments typically involve the application of lower of cost or market accounting or write downswrite-downs of individual assets.Level 1: Valuation is based upon quoted prices for identical instruments traded in active markets.Level 2: Valuation is based upon quoted prices for similar instruments in active markets, quoted prices for identical or similar instruments in markets that are not active and model based valuation techniques for which all significant assumptions are observable in the market.Level 3: Valuation is generated from model based techniques that use at least one significant assumption not observable in the market. These unobservable assumptions reflect estimates of assumptions that market participants would use in pricing the asset or liability.Level 1: Valuation is based upon quoted prices for identical instruments traded in active markets. Level 2: Valuation is based upon quoted prices for similar instruments in active markets, quoted prices for identical or similar instruments in markets that are not active and model based valuation techniques for which all significant assumptions are observable in the market. Level 3: Valuation is generated from model based techniques that use at least one significant assumption not observable in the market. These unobservable assumptions reflect estimates of assumptions that market participants would use in pricing the asset or liability. “Note“Note 20 —– Fair Value.Value.”RISK:RISK: Most of our activities conducted are with customers located within the central Michigan area. A significant amount of our outstanding loans are secured by commercial and residential real estate. Other than these types of loans, there is no significant concentration to any other industry or any one customer. must assert that: (a) we do not have the intent to sell the security; and (b) it is more likely than not we will not have to sell the security before recovery of its cost basis. If these conditions are not met, we must recognize an OTTI charge through earnings for the difference between the debt security’s amortized cost basis and its fair value, and such amount is included in noninterest income. For debt securities that do not meet the above criteria, and we do not expect to recover the security’s amortized cost basis, the security is considered other-than-temporarily impaired. For these debt securities, we separate the total impairment into the credit risk loss component and the amount of the loss related to market and other risk factors. In order to determine the amount of the credit loss for a debt security, we calculate the recovery value by performing a discounted cash flow analysis based on the current cash flows and future cash flows we expect to recover. The amount of the total OTTI related to the credit risk is recognized in earnings and is included in noninterest income. The amount of the total OTTI related to other risk factors is recognized as a component of other comprehensive income. For debt securities that have recognized an OTTI through earnings, if through subsequent evaluation there is a significant increase in the cash flow expected, the difference between the amortized cost basis and the cash flows expected to be collected is accreted as interest income.uncollectibilityuncollectability of the loan balance is confirmed. Subsequent recoveries, if any, are credited to the allowance.1. There has been a charge-off of its principal balance;2. The loan has been classified as a TDR; or3. The loan is in nonaccrual status.1. There has been a charge-off of its principal balance; 2. The loan has been classified as a TDR; or 3. The loan is in nonaccrual status. for commercial and agricultural loans by either the present value of expected future cash flows discounted at the loan’s effective interest rate, the loan’s obtainable market price, or the fair value of the collateral, less cost to sell, if the loan is collateral dependent. Large groups of smaller balance homogeneous loans are collectively evaluated for impairment.inon the secondary market are carried at the lower of cost or fair value as determined by aggregating outstanding commitments from investors or current investor yield requirements. Net unrealized losses, if any, would be recognized as a component of other noninterest expenses.SERVICING: Servicing assets are recognized as separate assets when rights are acquired through purchase or through sale of financial assets. We have no purchased servicing rights. For sales of mortgage loans, a portion of the cost of originating the loan is allocated to the servicing right based on relative fair value. Fair value is based on market prices for comparable mortgage servicing contracts, when available, or alternatively, is based on a valuation model that calculates the present value of estimated future net servicing income. The valuation model incorporates assumptions that market participants would use in estimating future net servicing$303,351$293,665 and $304,626$303,351 with capitalized servicing rights of $2,285$2,555 and $2,374$2,285 at December 31, 2013 and 2012, and 2011, respectively.$732, and $760$732 related to residential mortgage loans serviced for others during 2013, 2012, 2011, and 2010,2011, respectively and is included in other noninterest income.$2,018$1,412 and $1,876$2,018 as of December 31, 20122013 and 2011,2012, respectively, are included in other assets.PREMIUM:PREMIUM: Included in other assets were prepaid FDIC assessments of $1,804$0 and $2,588$1,804 as of December 31, 2013 and 2012, and 2011, respectively.Stockstock and FRB Stockstock as well as our ownership interests in Corporate Settlement Solutions and Valley Financial Corporation. TheOur investment in Corporate Settlement Solutions, a title insurance company, was made in the 1st quarter 2007. The Corporation is2008. We are not the managing entity of Corporate Settlement Solutions, LLC, and accountsaccount for itsour investment in that entity under the equity method of accounting. Valley Financial Corporation is the parent company of 1st State Bank in Saginaw, Michigan, which is a de novo bank that opened in 2005. The CorporationWe made investments in Valley Financial Corporation in 2004 and in 2007. 2012 2011 $ 7,850 $ 7,380 7,040 6,611 1,879 1,879 1,000 1,000 349 319 $ 18,118 $ 17,189 2013 2012 FHLB Stock $ 8,100 $ 7,850 Corporate Settlement Solutions, LLC 6,970 7,040 FRB Stock 1,879 1,879 Valley Financial Corporation 1,000 1,000 Other 344 349 Total $ 18,293 $ 18,118 2012,2013, the Directors Plan had 170,566185,311 shares eligible to be issued to participants, for which the Rabbi Trust held 5,13012,761 shares. We had 218,023170,566 shares to be issued in 2011,2012, with 16,5855,130 shares held in the Rabbi Trust. Compensation costs relating to share based payment transactions are recognized as the services are rendered, with the cost measured based on the fair value of the equity or liability instruments issued (see “Note“Note 17 —– Benefit Plans”Plans”). We have no other equity-based compensation plans.20122013 and 2011,2012, the present value of the post retirement benefits payable by us to the covered employees was estimated to be $2,657$2,699 and $2,633,$2,657, respectively, and is included in accrued interest payable and other liabilities .liabilities. The periodic policy maintenance costs were $75, $24, and $60 for 2013, 2012, and $68 for 2012, 2011, and 2010, respectively and is included in other noninterest expenses.“Note“Note 11 —– Other Noninterest Expenses”Expenses”).20112012 and 20102011 consolidated financial statements have been reclassified to conform with the 20122013 presentation.NOTE60— COMPUTATION OF EARNINGS PER SHARE– Computation of Earnings Per Shareyear.period. Diluted earnings per share reflects additional common shares that would have been outstanding if dilutive potential common shares had been issued, as well as any adjustments to income that would result from the assumed issuance.issued. Potential common shares that we may issuebe issued relate solely to outstanding shares in the Directors Plan, see “Note"Note 17 —– Benefit Plans.” 2012 2011 2010
calculation 7,604,303 7,572,841 7,541,676
Plan(1) 195,063 194,634 187,744 7,799,366 7,767,475 7,729,420 $ 12,206 $ 10,210 $ 9,045 $ 1.61 $ 1.35 $ 1.20 $ 1.56 $ 1.31 $ 1.17 2013 2012 2011 Average number of common shares outstanding for basic calculation 7,694,392 7,604,303 7,572,841 Average potential effect of shares in the Directors Plan (1) 168,948 195,063 194,634 Average number of common shares outstanding used to calculate diluted earnings per common share 7,863,340 7,799,366 7,767,475 Net income $ 12,510 $ 12,206 $ 10,210 Earnings per share Basic $ 1.63 $ 1.61 $ 1.35 Diluted $ 1.59 $ 1.56 $ 1.31 (1)NOTENote 3 — ACCOUNTING STANDARDS UPDATES– Accounting Standards UpdatesUpdates2011-03:“Reconsideration2013-02: “Comprehensive Income (Topic 220): Reporting of Effective Control for Repurchase Agreements”April 2011,February 2013, ASU No. 2011-032013-02 amended ASC Topic 310, “Transfers and Servicing”220, “Comprehensive Income” to eliminate fromrequire disclosures related to reclassifications out of AOCI in one place. The ASU also requires the assessmentdisclosure 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 eventreclassifications out of the transferee’s default. The assessment of effective control should instead focus on the transferor’s contractual rights and obligations.AOCI by component. The new authoritative guidance was effective for interim and annual periods beginning on or after December 15, 2011 and did not impact our 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 GAAP and 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 shareholders’ 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 was effective for interim and annual periods beginning on or after December 15, 20112012 and did not have a financial impact on the Corporation, but increased the level of disclosures related to fair value measurements in our consolidated financial statements in 2012.ASU No. 2011-05:“Presentation ofNote 18 – Accumulated Other Comprehensive Income”Income (Loss)In June 2011, ASU No. 2011-05 amended ASC Topic 220, “Comprehensive Income” to improve the comparability, consistency, and transparency of financial reporting and to increase the prominence of items reported in other comprehensive income. In addition, to 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 guidance was effective for interim and annual periods beginning on or after December 15, 2011 and did not have an impact on our consolidated financial statements as we have historically elected to present a separate statement of comprehensive income.ASU No. 2012-02:“Intangibles — Goodwill and Other (Topic 350): Testing Indefinite-Lived Intangible Assets for Impairment”").In August 2012, ASU No. 2012-02 amended ASC Topic 350, “Goodwill and Other” to simplify the testing of intangible assets with indefinite lives. This update will allow for a qualitative assessment of intangible assets with indefinite lives to determine whether or not it is necessary to perform the impairment test described in ASC Topic 350. While the new authoritative guidance was effective for fiscal years beginning after September 15, 2012, we elected to early adopt the guidance as of December 31, 2012. This standard did not have any impact on our consolidated financial statements.Pending Accounting Standards UpdatesASU No. 2012-06:“Business Combinations (Topic 805): Subsequent Accounting for an Indemnification Asset Recognized at the Acquisition Date as a Result of a Government-Assisted Acquisition of a Financial Institution”In October 2012, ASU No. 2012-06 amended ASC Topic 805, “Business Combinations” to clarify the applicable guidance for subsequently measuring an indemnification asset recognized as part of a government assisted acquisition of a financial institution. The new authoritative guidance is effective for fiscal years beginning after December 15, 2012 and at this time is not expected to have any impact on our consolidated financial statements.NOTENote 4 — TRADING SECURITIES– Trading Securities31: 2012 2011 $ 1,573 $ 4,710 2013 2012 States and political subdivisions $ 525 $ 1,573 $52$28 during 2012,2013, were $18$6 of net unrealized trading losses on securities that relate towere held in our trading portfolio as of December 31, 2012.2013. Included in net trading gainslosses of $78$52 during 2011,2012, were $60$18 of net unrealized trading gainslosses on securities that relate towere held in our trading portfolio as of December 31, 2011.NOTE.—– AFS SECURITIESSecurities31: 2012 Gross Gross Amortized Unrealized Unrealized Fair Cost Gains Losses Value $ 25,668 $ 108 $ — $ 25,776 174,118 9,190 565 182,743 3,200 — 422 2,778 6,800 — 437 6,363 152,256 3,199 110 155,345 128,378 2,627 — 131,005 $ 490,420 $ 15,124 $ 1,534 $ 504,010 2011 Gross Gross Amortized Unrealized Unrealized Fair Cost Gains Losses Value $ 395 $ 2 $ — $ 397 166,832 8,157 51 174,938 3,200 — 1,151 2,049 6,800 — 1,767 5,033 140,842 2,807 47 143,602 96,545 2,556 — 99,101 $ 414,614 $ 13,522 $ 3,016 $ 425,120 2013 Amortized
Cost Gross
Unrealized
Gains Gross
Unrealized
Losses Fair
ValueGovernment sponsored enterprises $ 24,860 $ 7 $ 1,122 $ 23,745 States and political subdivisions 200,323 5,212 3,547 201,988 Auction rate money market preferred 3,200 — 623 2,577 Preferred stocks 6,800 20 993 5,827 Mortgage-backed securities 147,292 657 3,834 144,115 Collateralized mortgage obligations 135,139 1,016 2,345 133,810 Total $ 517,614 $ 6,912 $ 12,464 $ 512,062 2012 Amortized
Cost Gross
Unrealized
Gains Gross
Unrealized
Losses Fair
ValueGovernment sponsored enterprises $ 25,668 $ 108 $ — $ 25,776 States and political subdivisions 174,118 9,190 565 182,743 Auction rate money market preferred 3,200 — 422 2,778 Preferred stocks 6,800 — 437 6,363 Mortgage-backed securities 152,256 3,199 110 155,345 Collateralized mortgage obligations 128,378 2,627 — 131,005 Total $ 490,420 $ 15,124 $ 1,534 $ 504,010 20122013 are as follows: Maturing After One After Five Due in Year But Years But One Year Within Within After Noncontractual or Less Five Years Ten Years Ten Years Maturities Total $ — $ 72 $ 25,596 $ — $ — $ 25,668 11,670 36,157 86,062 40,229 — 174,118 — — — — 3,200 3,200 — — — — 6,800 6,800 — — — — 152,256 152,256 — — — — 128,378 128,378 $ 11,670 $ 36,229 $ 111,658 $ 40,229 $ 290,634 $ 490,420 $ 11,746 $ 37,759 $ 117,884 $ 41,130 $ 295,491 $ 504,010 Maturing Securities with Variable Monthly Payments or Noncontractual Maturities Due in
One Year
or Less After One
Year But
Within
Five Years After Five
Years But
Within
Ten Years After
Ten Years Total Government sponsored enterprises $ — $ 72 $ 24,788 $ — $ — $ 24,860 States and political subdivisions 930 37,672 96,749 64,972 — 200,323 Auction rate money market preferred — — — — 3,200 3,200 Preferred stocks — — — — 6,800 6,800 Mortgage-backed securities — — — — 147,292 147,292 Collateralized mortgage obligations — — — — 135,139 135,139 Total amortized cost $ 930 $ 37,744 $ 121,537 $ 64,972 $ 292,431 $ 517,614 Fair value $ 961 $ 38,867 $ 122,637 $ 63,268 $ 286,329 $ 512,062 preferredspreferred and preferred stocks have noncontractual maturitiescontinual call dates, they are not reported by a specific maturity group. Because of their variable monthly payments, mortgage-backed securities and collateralized mortgage obligations are not reported by a specific maturity group.the salesales of AFS securities is was as follows during the years ended December 31: 2012 2011 2010 $ 40,677 $ 8,877 $ 18,303 $ 1,119 $ 3 $ 351 — — (3 ) $ 1,119 $ 3 $ 348 $ 380 $ 1 $ 118 2013 2012 2011 Proceeds from sales of AFS securities $ 16,229 $ 40,677 $ 8,877 Gross realized gains (losses) $ 171 $ 1,119 $ 3 Applicable income tax expense (benefit) $ 58 $ 380 $ 1 2012 Less Than Twelve Months Over Twelve Months Gross Gross Total Unrealized Fair Unrealized Fair Unrealized Losses Value Losses Value Losses $ 80 $ 5,019 $ 485 $ 2,352 $ 565 — — 422 2,778 422 — — 437 3,363 437 110 25,499 — — 110 $ 190 $ 30,518 $ 1,344 $ 8,493 $ 1,534 15 6 21 2011 Less Than Twelve Months Over Twelve Months Gross Gross Total Unrealized Fair Unrealized Fair Unrealized Losses Value Losses Value Losses $ 51 $ 1,410 $ — $ — $ 51 — — 1,151 2,049 1,151 — — 1,767 5,033 1,767 47 24,291 — — 47 $ 98 $ 25,701 $ 2,918 $ 7,082 $ 3,016 6 6 12 2013 Less Than Twelve Months Twelve Months or More Gross
Unrealized
Losses Fair
Value Gross
Unrealized
Losses Fair
Value Total
Unrealized
LossesGovernment sponsored enterprises $ 1,122 $ 22,873 $ — $ — $ 1,122 States and political subdivisions 2,566 42,593 981 6,115 3,547 Auction rate money market preferred — — 623 2,577 623 Preferred stocks — — 993 2,807 993 Mortgage-backed securities 2,424 101,816 1,410 21,662 3,834 Collateralized mortgage obligations 2,345 84,478 — — 2,345 Total $ 8,457 $ 251,760 $ 4,007 $ 33,161 $ 12,464 Number of securities in an unrealized loss position: 182 19 201 2012 Less Than Twelve Months Twelve Months or More Gross
Unrealized
Losses Fair
Value Gross
Unrealized
Losses Fair
Value Total
Unrealized
LossesStates and political subdivisions $ 80 $ 5,019 $ 485 $ 2,352 $ 565 Auction rate money market preferred — — 422 2,778 422 Preferred stocks — — 437 3,363 437 Mortgage-backed securities 110 25,499 — — 110 Total $ 190 $ 30,518 $ 1,344 $ 8,493 $ 1,534 Number of securities in an unrealized loss position: 15 6 21 20122013 and 2011,2012, we conducted an analysis to determine whether any AFS securities currently in an unrealized loss position should be considered OTTI.other-than-temporarily impaired. Such analyses considered, among other factors, the following criteria: not have to sell the security before recovery of its cost basis?Moody’sMoody's from A3 to Caa3. As a result of this downgrade, we engaged the services of an independent investment valuation firm to estimate the amount of credit losses (if any) related to this particular issue as of March 31, 2012.2012. The evaluation calculated a range of estimated credit losses utilizing two different bifurcation methods:EstimatedDiscounted Cash Flow Method and Method. MethodEstimatedDiscounted Cash Flow Method, to determine the estimated credit related impairment. As a result of this analysis, we recognized an OTTI of $282$282 in earnings in the first quarter of 2012. Discounted
Cash Flow Method Not Rated Moody’sMoody's Caa3 A Senior LIBOR + 5.64%6.35% Credit Yield
Analysis MethodLIBOR + 4.00% 17.06%14.00%2012,2013, we obtained another investment valuation (from the same independent firm engaged to perform the initial valuation as of March 31, 2012)2012) as of December 31, 2012.2013. Based on the resultsour analysis, no additional OTTI was indicated as of this valuation, no additional OTTI was indicated.A rollforwardon AFS securities was as follows: $ — 282 $ 282 There were no credit losses recognized in earnings on AFS securities during 2011. 2013 2012 2011 Balance at beginning of year $ 282 $ — $ — Additions to credit losses for which no previous OTTI was recognized — 282 — Balance at end of year $ 282 $ 282 $ — theseAFS securities in an unrealized loss position, and our testing thatconsidering it is unlikely that we will have to sell theAFS securities in an unrealized loss position before recovery of their cost basis, we do not believe that the values of any other AFS securities are other-than-temporarily impaired as of December 31, 2013, or December 31, 2012 or December 31, 2011.NOTE.— LOANS AND ALLOWANCE FOR LOAN LOSSES– Loans and ALLLand tourism, higher education, and general economic conditions of this region. Substantially all of theour consumer and residential real estate loans are secured by various items of property, while commercial and agricultural loans are secured primarily by real estate, business assets, and personal guarantees; a portion of loans are unsecured.business; thus, these loans generally involve greater risk than other types of lending.business. We minimize our risk by limiting the amount of loanscredit exposure to any one borrower to $12,500.$12,500. Borrowers with credit needs of more than $12,500$12,500 are serviced through the use of loan participations with other commercial banks. Commercial and agricultural real estate loans generally require loan-to-value limits of less than 80% or less.. Depending upon the type of loan, past credit history, and current operating results, we may require borrowersthe borrower to pledge accounts receivable, inventory, and property and equipment. Personal guarantees are generally required from the owners of closely held corporations, partnerships, and sole proprietorships. In addition, we require annual financial statements, prepare cash flow analyses, and review credit reports as deemed necessary.FHLMC.Freddie Mac. Fixed rate residential real estate loans with an amortization of 15 years or less may be held in our portfolio, held for future sale, or sold upon origination. We consider the direction of interest rates, the sensitivity of our balance sheet to changes in interest rates, and overall loan demand to determine whether or not to sell these loans to FHLMC.Freddie Mac.loan to valueloan-to-value ratios in excess of 80%. Substantially all loans upon origination have a loan to value ratio of less than 80%. Underwriting criteria for residential real estate loans include: evaluation of the borrower’s ability to make monthly payments, the value of the property securing the loan, ensuring the payment of principal, interest, taxes, and hazard insurance does not exceed 28% of a borrower’s gross income, all debt servicing does not exceed 36% of income, acceptable credit reports, verification of employment, income, and financial information. Appraisals are performed by independent appraisers and reviewed internally. All mortgage loan requests are reviewed by our mortgage loan committee or through a secondary market automated underwriting system; loans in excess of $400$400 require the approval of our Internal Loan Committee, the Board of Directors’ Loan Committee, or the Board of Directors.uncollectibilityuncollectability of the loan balance is confirmed. Subsequent recoveries, if any, are credited to the ALLL.ALLL.collectibilitycollectability of the loans in light of historical experience, the nature and volume of the loan portfolio, adverse situations that may affect the borrower’s ability to repay, estimated value of any underlying collateral, and prevailing economic conditions. This evaluation is inherently subjective as it requires estimates that are susceptible to significant revision as more information becomes available.fourfive years. An unallocated component is maintained to cover uncertainties that we believe affect our estimate of probable losses based on qualitative factors. The unallocated component of the allowance reflects the margin of imprecision inherent in the underlying assumptions used in the methodologies for estimating specific and general losses in the portfolio.Allowance for Loan Losses Year Ended December 31, 2012 Commercial Agricultural Residential
Real
Estate Consumer Unallocated Total $ 6,284 $ 1,003 $ 2,980 $ 633 $ 1,475 $ 12,375 (1,672 ) — (1,142 ) (542 ) — (3,356 ) 240 — 122 255 — 617 2,010 (596 ) 1,667 320 (1,101 ) 2,300 $ 6,862 $ 407 $ 3,627 $ 666 $ 374 $ 11,936 Allowance for Loan Losses and Recorded Investment in Loans As of December 31, 2012 Commercial Agricultural Residential
Real
Estate Consumer Unallocated Total $ 2,050 $ 91 $ 1,796 $ — $ — $ 3,937 4,812 316 1,831 666 374 7,999 $ 6,862 $ 407 $ 3,627 $ 666 $ 374 $ 11,936 $ 14,456 $ 723 $ 10,704 $ 75 $ 25,958 357,049 82,883 273,444 33,419 746,795 $ 371,505 $ 83,606 $ 284,148 $ 33,494 $ 772,753 Allowance for Loan Losses Year Ended December 31, 2011 Commercial Agricultural Residential
Real
Estate Consumer Unallocated Total $ 6,048 $ 1,033 $ 3,198 $ 605 $ 1,489 $ 12,373 (1,863 ) (121 ) (2,240 ) (552 ) — (4,776 ) 460 1 177 314 — 952 1,639 90 1,845 266 (14 ) 3,826 $ 6,284 $ 1,003 $ 2,980 $ 633 $ 1,475 $ 12,375 Allowance for Loan Losses and Recorded Investment in Loans Commercial Agricultural Residential
Real
Estate Consumer Unallocated Total $ 2,152 $ 822 $ 1,146 $ — $ — $ 4,120 4,132 181 1,834 633 1,475 8,255 $ 6,284 $ 1,003 $ 2,980 $ 633 $ 1,475 $ 12,375 $ 14,097 $ 3,384 $ 7,664 $ 105 $ 25,250 351,617 71,261 270,696 31,467 725,041 $ 365,714 $ 74,645 $ 278,360 $ 31,572 $ 750,291 Allowance for Loan Losses Year Ended December 31, 2013 Commercial Agricultural Residential Real Estate Consumer Unallocated Total January 1, 2013 $ 6,862 $ 407 $ 3,627 $ 666 $ 374 $ 11,936 Loans charged-off (895 ) (12 ) (1,004 ) (429 ) — (2,340 ) Recoveries 363 — 181 249 — 793 Provision for loan losses (282 ) 39 1,041 153 160 1,111 December 31, 2013 $ 6,048 $ 434 $ 3,845 $ 639 $ 534 $ 11,500 Allowance for Loan Losses and Recorded Investment in Loans As of December 31, 2013 Commercial Agricultural Residential Real Estate Consumer Unallocated Total ALLL Individually evaluated for impairment $ 2,035 $ 30 $ 2,287 $ — $ — $ 4,352 Collectively evaluated for impairment 4,013 404 1,558 639 534 7,148 Total $ 6,048 $ 434 $ 3,845 $ 639 $ 534 $ 11,500 Loans Individually evaluated for impairment $ 13,816 $ 1,538 $ 14,302 $ 119 $ 29,775 Collectively evaluated for impairment 378,288 91,051 275,629 33,294 778,262 Total $ 392,104 $ 92,589 $ 289,931 $ 33,413 $ 808,037 Allowance for Loan Losses Year Ended December 31, 2012 Commercial Agricultural Residential Real Estate Consumer Unallocated Total January 1, 2012 $ 6,284 $ 1,003 $ 2,980 $ 633 $ 1,475 $ 12,375 Loans charged-off (1,672 ) — (1,142 ) (542 ) — (3,356 ) Recoveries 240 — 122 255 — 617 Provision for loan losses 2,010 (596 ) 1,667 320 (1,101 ) 2,300 December 31, 2012 $ 6,862 $ 407 $ 3,627 $ 666 $ 374 $ 11,936 Allowance for Loan Losses and Recorded Investment in Loans As of December 31, 2012 Commercial Agricultural Residential Real Estate Consumer Unallocated Total ALLL Individually evaluated for impairment $ 2,050 $ 91 $ 1,796 $ — $ — $ 3,937 Collectively evaluated for impairment 4,812 316 1,831 666 374 7,999 Total $ 6,862 $ 407 $ 3,627 $ 666 $ 374 $ 11,936 Loans Individually evaluated for impairment $ 14,456 $ 723 $ 10,704 $ 75 $ 25,958 Collectively evaluated for impairment 357,049 82,883 273,444 33,419 746,795 Total $ 371,505 $ 83,606 $ 284,148 $ 33,494 $ 772,753 31: 2012 Commercial Agricultural Real Estate Other Total Real Estate Other Total $ 25,209 $ 15,536 $ 40,745 $ 2,955 $ 2,313 $ 5,268 83,805 28,974 112,779 16,972 11,886 28,858 127,423 45,143 172,566 27,291 15,437 42,728 16,046 1,692 17,738 1,008 3,191 4,199 20,029 2,224 22,253 1,167 1,217 2,384 1,512 2,294 3,806 — — — 1,596 22 1,618 — 169 169 $ 275,620 $ 95,885 $ 371,505 $ 49,393 $ 34,213 $ 83,606 2011 Commercial Agricultural Real Estate Other Total Real Estate Other Total $ 11,113 $ 11,013 $ 22,126 $ 3,583 $ 1,390 $ 4,973 90,064 29,972 120,036 11,154 5,186 16,340 118,611 57,572 176,183 24,253 15,750 40,003 15,482 4,200 19,682 3,863 2,907 6,770 19,017 4,819 23,836 1,640 4,314 5,954 187 — 187 — — — 3,621 43 3,664 190 415 605 $ 258,095 $ 107,619 $ 365,714 $ 44,683 $ 29,962 $ 74,645 2013 Commercial Agricultural Real Estate Other Total Real Estate Other Total Rating 2 - High quality $ 18,671 $ 14,461 $ 33,132 $ 3,527 $ 3,235 $ 6,762 3 - High satisfactory 91,323 39,403 130,726 26,015 17,000 43,015 4 - Low satisfactory 149,921 43,809 193,730 26,874 10,902 37,776 5 - Special mention 13,747 1,843 15,590 1,609 922 2,531 6 - Substandard 16,974 473 17,447 1,232 1,273 2,505 7 - Vulnerable 1,041 238 1,279 — — — 8 - Doubtful 183 17 200 — — — Total $ 291,860 $ 100,244 $ 392,104 $ 59,257 $ 33,332 $ 92,589 2012 Commercial Agricultural Real Estate Other Total Real Estate Other Total Rating 2 - High quality $ 25,209 $ 15,536 $ 40,745 $ 2,955 $ 2,313 $ 5,268 3 - High satisfactory 83,805 28,974 112,779 16,972 11,886 28,858 4 - Low satisfactory 127,423 45,143 172,566 27,291 15,437 42,728 5 - Special mention 16,046 1,692 17,738 1,008 3,191 4,199 6 - Substandard 20,029 2,224 22,253 1,167 1,217 2,384 7 - Vulnerable 1,512 2,294 3,806 — — — 8 - Doubtful 1,596 22 1,618 — 169 169 Total $ 275,620 $ 95,885 $ 371,505 $ 49,393 $ 34,213 $ 83,606 —– Substantially Risk Free—– Limited Risk—– Reasonable Risk—– Acceptable Risk—– may have been 10-3010-30 days slow within the past year.—– Criticized(30-60(30-60 days) and overdrafts may occur.—– Classified—– Classified—– Workoutcharged-off.charged-off.9. LOSS — Charge offCredits are considered uncollectible and of such little value that their continuance as bankable assets is not warranted. This classification is for charged off loans but does not mean that the asset has absolutely no recovery or salvage value. These loans are further characterized by:Liquidation or reorganization under bankruptcy, with poor prospects of collection.Fraudulently overstated assets and/or earnings.Collateral has marginal or no value.Debtor cannot be located.Over 120 days delinquent.indicatorsindicator for residential real estate and consumer loans is the individual loan’s past due aging. The following tables summarize ourthe past due and current loans as of December 31: 2012 Accruing Interest
and Past Due: Nonaccrual Total
Past Due
and
Nonaccrual Current Total 30-59
Days 60-89
Days 90 Days
or More $ 1,304 $ 161 $ 63 $ 2,544 $ 4,072 $ 271,548 $ 275,620 606 — 40 2,294 2,940 92,945 95,885 1,910 161 103 4,838 7,012 364,493 371,505 — — — — — 49,393 49,393 90 — — 169 259 33,954 34,213 90 — — 169 259 83,347 83,606 2,000 346 320 2,064 4,730 223,532 228,262 232 — — 50 282 16,207 16,489 237 — — 182 419 38,978 39,397 2,469 346 320 2,296 5,431 278,717 284,148 127 33 4 — 164 28,118 28,282 31 3 1 — 35 5,177 5,212 158 36 5 — 199 33,295 33,494 $ 4,627 $ 543 $ 428 $ 7,303 $ 12,901 $ 759,852 $ 772,753 2011 Accruing Interest
and Past Due: Nonaccrual Total
Past Due
and
Nonaccrual Current Total 30-59
Days 60-89
Days 90 Days
or More $ 1,721 $ — $ 364 $ 4,176 $ 6,261 $ 251,834 $ 258,095 388 38 3 25 454 107,165 107,619 2,109 38 367 4,201 6,715 358,999 365,714 — — 99 189 288 44,395 44,683 — 2 — 415 417 29,545 29,962 — 2 99 604 705 73,940 74,645 2,668 336 124 1,292 4,420 213,181 217,601 203 32 40 94 369 20,877 21,246 185 — 125 198 508 39,005 39,513 3,056 368 289 1,584 5,297 273,063 278,360 127 31 5 — 163 26,011 26,174 20 3 — — 23 5,375 5,398 147 34 5 — 186 31,386 31,572 $ 5,312 $ 442 $ 760 $ 6,389 $ 12,903 $ 737,388 $ 750,291 2013 Accruing Interest
and Past Due: Total Past Due and Nonaccrual 30-59
Days 60-89
Days 90 Days
or More Nonaccrual Current Total Commercial Commercial real estate $ 1,226 $ 296 $ — $ 1,136 $ 2,658 $ 289,202 $ 291,860 Commercial other 368 15 13 238 634 99,610 100,244 Total commercial 1,594 311 13 1,374 3,292 388,812 392,104 Agricultural Agricultural real estate 34 295 — — 329 58,928 59,257 Agricultural other — — — — — 33,332 33,332 Total agricultural 34 295 — — 329 92,260 92,589 Residential real estate Senior liens 3,441 986 129 1,765 6,321 229,865 236,186 Junior liens 408 44 — 29 481 13,074 13,555 Home equity lines of credit 181 — — 25 206 39,984 40,190 Total residential real estate 4,030 1,030 129 1,819 7,008 282,923 289,931 Consumer Secured 167 11 — 50 228 28,444 28,672 Unsecured 25 5 — 1 31 4,710 4,741 Total consumer 192 16 — 51 259 33,154 33,413 Total $ 5,850 $ 1,652 $ 142 $ 3,244 $ 10,888 $ 797,149 $ 808,037 2012 Accruing Interest
and Past Due: Total Past Due and Nonaccrual 30-59
Days 60-89
Days 90 Days
or More Nonaccrual Current Total Commercial Commercial real estate $ 1,304 $ 161 $ 63 $ 2,544 $ 4,072 $ 271,548 $ 275,620 Commercial other 606 — 40 2,294 2,940 92,945 95,885 Total commercial 1,910 161 103 4,838 7,012 364,493 371,505 Agricultural Agricultural real estate — — — — — 49,393 49,393 Agricultural other 90 — — 169 259 33,954 34,213 Total agricultural 90 — — 169 259 83,347 83,606 Residential real estate Senior liens 2,000 346 320 2,064 4,730 223,532 228,262 Junior liens 232 — — 50 282 16,207 16,489 Home equity lines of credit 237 — — 182 419 38,978 39,397 Total residential real estate 2,469 346 320 2,296 5,431 278,717 284,148 Consumer Secured 127 33 4 — 164 28,118 28,282 Unsecured 31 3 1 — 35 5,177 5,212 Total consumer 158 36 5 — 199 33,295 33,494 Total $ 4,627 $ 543 $ 428 $ 7,303 $ 12,901 $ 759,852 $ 772,753 1. There has been a charge-off of its principal balance (in whole or in part);2. The loan has been classified as a TDR; or3. The loan is in nonaccrual status.1. 2. 3. loan by loanloan-by-loan basis for commercial commercial real estate loans,and agricultural or agricultural mortgage loans by comparing the loan’s outstanding balance to the present value of expected future cash flows discounted at the loan’s effective interest rate, the loan’s obtainable market price, or the fair value of the collateral, less cost to sell, if the loan is collateral dependent. Large groups of smaller balance homogeneous loans are collectively evaluated for impairment.Interest Impairment is measured on a is recognized on impaired loans in nonaccrual status on the cash basis, but only after all principal has been collected. status. For impaired loans not in nonaccrual status, interest income is recognized daily, as earned, according to the terms of the loan agreement.yearyears ended, 31: 2012 Outstanding
Balance Unpaid
Principal
Balance Valuation
Allowance Average
Outstanding
Balance Interest
Income
Recognized $ 7,295 $ 7,536 $ 1,653 $ 6,155 $ 237 2,140 2,140 397 1,437 93 91 91 32 413 — 420 420 59 1,555 54 10,450 11,654 1,783 8,860 405 72 118 13 134 6 20,468 21,959 3,937 18,554 795 3,749 4,408 5,867 321 1,272 1,433 819 87 — — 183 — 212 332 201 4 — 18 1 1 182 482 190 16 75 84 90 6 5,490 6,757 7,351 435 14,456 15,517 2,050 14,278 738 723 843 91 2,352 58 10,704 12,272 1,796 9,185 428 75 84 — 90 6 $ 25,958 $ 28,716 $ 3,937 $ 25,905 $ 1,230 2011 Outstanding
Balance Unpaid
Principal
Balance Valuation
Allowance Average
Outstanding
Balance Interest
Income
Recognized $ 5,014 $ 5,142 $ 1,881 $ 4,012 $ 247 734 734 271 376 25 — — — 9 — 2,689 2,689 822 2,443 138 7,269 8,825 1,111 5,781 331 195 260 35 184 11 15,901 17,650 4,120 12,805 752 7,984 10,570 4,863 375 365 460 267 10 190 190 180 — 505 625 253 18 2 2 202 — 198 498 99 12 105 114 77 4 9,349 12,459 5,941 419 14,097 16,906 2,152 9,518 657 3,384 3,504 822 2,885 156 7,664 9,585 1,146 6,266 354 105 114 — 77 4 $ 25,250 $ 30,109 $ 4,120 $ 18,746 $ 1,171 2013 Outstanding Balance Unpaid Principal Balance Valuation Allowance Average Outstanding Balance Interest Income Recognized Impaired loans with a valuation allowance Commercial real estate $ 6,748 $ 6,888 $ 1,915 $ 7,256 $ 400 Commercial other 521 521 120 879 51 Agricultural real estate 90 90 30 91 4 Agricultural other — — — 53 — Residential real estate senior liens 14,061 15,315 2,278 11,111 442 Residential real estate junior liens 48 64 9 80 2 Total impaired loans with a valuation allowance 21,468 22,878 4,352 19,470 899 Impaired loans without a valuation allowance Commercial real estate 5,622 6,499 4,312 337 Commercial other 925 1,035 989 83 Agricultural real estate 1,370 1,370 320 28 Agricultural other 78 198 357 (7 ) Home equity lines of credit 193 493 180 16 Consumer secured 119 148 72 2 Total impaired loans without a valuation allowance 8,307 9,743 6,230 459 Impaired loans Commercial 13,816 14,943 2,035 13,436 871 Agricultural 1,538 1,658 30 821 25 Residential real estate 14,302 15,872 2,287 11,371 460 Consumer 119 148 — 72 2 Total impaired loans $ 29,775 $ 32,621 $ 4,352 $ 25,700 $ 1,358 2012 Outstanding Balance Unpaid Principal Balance Valuation Allowance Average Outstanding Balance Interest Income Recognized Impaired loans with a valuation allowance Commercial real estate $ 7,295 $ 7,536 $ 1,653 $ 6,155 $ 237 Commercial other 2,140 2,140 397 1,437 93 Agricultural real estate 91 91 32 413 — Agricultural other 420 420 59 1,555 54 Residential real estate senior liens 10,450 11,672 1,783 8,861 406 Residential real estate junior liens 72 118 13 134 6 Total impaired loans with a valuation allowance 20,468 21,977 3,937 18,555 796 Impaired loans without a valuation allowance Commercial real estate 3,749 4,408 5,867 321 Commercial other 1,272 1,433 819 87 Agricultural real estate — — 183 — Agricultural other 212 332 201 4 Home equity lines of credit 182 482 190 16 Consumer secured 75 84 90 6 Total impaired loans without a valuation allowance 5,490 6,739 7,350 434 Impaired loans Commercial 14,456 15,517 2,050 14,278 738 Agricultural 723 843 91 2,352 58 Residential real estate 10,704 12,272 1,796 9,185 428 Consumer 75 84 — 90 6 Total impaired loans $ 25,958 $ 28,716 $ 3,937 $ 25,905 $ 1,230 20122013 and 2011,2012, we had committed to advance $9$134 and $243,$9, respectively, in connection with impaired loans, which include TDR’s.TDRs.TDR’sTDRs when the modification includes terms outside of normal lending practices to a borrower who is experiencing financial difficulties.1. Agreeing to interest rates below prevailing market rates for debt with similar risk characteristics.2. Extending the amortization period beyond typical lending guidelines for debt with similar risk characteristics.3. Forbearance of principal.4. Forbearance of accrued interest.1. Agreeing to interest rates below prevailing market rates for debt with similar risk characteristics. 2. Extending the amortization period beyond typical lending guidelines for debt with similar risk characteristics. 3. Forbearance of principal. 4. Forbearance of accrued interest. 1. 1. The borrower is currently in default on any of their debt. 2. The borrower would likely default on any of their debt if the concession was not granted. 3. The borrower’s cash flow was insufficient to service all of their debt if the concession was not granted. 4. The borrower has declared, or is in the process of declaring, bankruptcy. 5. The borrower is unlikely to continue as a going concern (if the entity is a business). TDR’sTDRs granted in the years ended December 31: 2012 2011 Number
of
Loans Pre-
Modification
Recorded
Investment Post-
Modification
Recorded
Investment Number
of
Loans Pre-
Modification
Recorded
Investment Post-
Modification
Recorded
Investment 1 $ 912 $ 792 1 $ 408 $ 408 28 6,437 6,437 42 12,575 12,132 29 7,349 7,229 43 12,983 12,540 7 652 652 8 1,321 1,321 29 3,463 3,463 36 3,915 3,865 1 22 22 — — — 30 3,485 3,485 36 3,915 3,865 1 — — 7 69 69 — — — 2 20 20 1 — �� — 9 89 89 67 $ 11,486 $ 11,366 96 $ 18,308 $ 17,815 2013 2012 Number of Loans Pre-Modification Recorded Investment Post-Modification Recorded Investment Number of Loans Pre-Modification Recorded Investment Post-Modification Recorded Investment Commercial Commercial real estate — $ — $ — 1 $ 912 $ 792 Commercial other 18 5,299 5,103 28 6,437 6,437 Total commercial 18 5,299 5,103 29 7,349 7,229 Agricultural other 4 1,379 1,379 7 652 652 Residential real estate Senior liens 55 6,069 6,053 29 3,463 3,463 Junior liens 1 20 20 1 22 22 Total residential real estate 56 6,089 6,073 30 3,485 3,485 Consumer Secured 1 27 27 1 — — Unsecured 2 34 34 — — — Total consumer 3 61 61 1 — — Total 81 $ 12,828 $ 12,616 67 $ 11,486 $ 11,366 during 2012: Below Market
Interest Rate Extension of
Amortization Period Below Market
Interest Rate and
Extension of
Amortization Period Number
of
Loans Pre-
Modification
Recorded
Investment Number
of
Loans Pre-
Modification
Recorded
Investment Number
of
Loans Pre-
Modification
Recorded
Investment — $ — — $ — 1 $ 912 25 4,924 1 1,368 2 145 25 4,924 1 1,368 3 1,057 6 561 1 91 — — 17 1,779 3 521 9 1,163 — — — — 1 22 17 1,779 3 521 10 1,185 1 — — — — — 49 $ 7,264 5 $ 1,980 13 $ 2,242 The following tables summarize concessions we granted to borrowers in financial difficulty during 2011: Below Market
Interest Rate Extension of
Amortization Period Below Market
Interest Rate and
Extension of
Amortization Period Number
of
Loans Pre-
Modification
Recorded
Investment Number
of
Loans Pre-
Modification
Recorded
Investment Number
of
Loans Pre-
Modification
Recorded
Investment 1 $ 408 — $ — — $ — 38 9,932 — — 4 2,643 39 10,340 — — 4 2,643 8 1,321 — — — — 19 2,161 — — 17 1,754 6 65 — — 1 4 — — — — 2 20 6 65 — — 3 24 72 $ 13,887 — $ — 24 $ 4,421 2013 2012 Below Market Interest Rate Below Market Interest Rate and Extension of Amortization Period Below Market Interest Rate Below Market Interest Rate and Extension of Amortization Period Number of Loans Pre-Modification Recorded Investment Number of Loans Pre-Modification Recorded Investment Number of Loans Pre-Modification Recorded Investment Number of Loans Pre-Modification Recorded Investment Commercial Commercial real estate — $ — — $ — — $ — 1 $ 912 Commercial other 12 3,070 6 2,229 25 4,924 3 1,513 Total commercial 12 3,070 6 2,229 25 4,924 4 2,425 Agricultural other 4 1,379 — — 6 561 1 91 Residential real estate Senior liens 24 1,904 31 4,165 17 1,779 12 1,684 Junior liens — — 1 20 — — 1 22 Total residential real estate 24 1,904 32 4,185 17 1,779 13 1,706 Consumer Secured 1 27 — — 1 — — — Unsecured 1 16 1 18 — — — — Total Consumer 2 43 1 18 1 — — — Total 42 $ 6,396 39 $ 6,432 49 $ 7,264 18 $ 4,222 and 2011..TDR’sTDRs are not significantly different than other impaired loans within the same loan segment. As such, TDR’s,TDRs, including TDR’sTDRs 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.during 2012,in the years ended December 31, which were modified within 12 months prior to the default date: Number
of
Loans Pre-
Default
Recorded
Investment Charge-Off
Recorded
Upon
Default Post-
Default
Recorded
Investment 5 $ 342 $ 143 $ 199 1 47 43 4 1 8 8 — 7 $ 397 $ 194 $ 203 We had no loans that defaulted during 2011, which were modified within 12 months prior to the default date. 2013 2012 Number of Loans Pre-
Default
Recorded
Investment Charge-off Recorded Upon Default Post-
Default
Recorded
Investment Number of Loans Pre-
Default
Recorded
Investment Charge-off Recorded Upon Default Post-
Default
Recorded
InvestmentCommercial other — $ — $ — $ — 5 $ 342 $ 143 $ 199 Residential real estate senior liens 1 62 11 51 1 47 43 4 Consumer secured — — — — 1 8 8 — Consumer unsecured 1 16 16 — — — — — Total 2 $ 78 $ 27 $ 51 7 $ 397 $ 194 $ 203 31: 2012 2011 $ 19,355 $ 18,756 NOTE: 2013 2012 TDRs $ 25,865 $ 19,355 — PREMISES AND EQUIPMENT 2012 2011 $ 5,435 $ 5,174 22,705 22,397 29,755 26,926 57,895 54,497 32,108 29,871 $ 25,787 $ 24,626 2013 2012 Land $ 5,429 $ 5,435 Buildings and improvements 24,765 22,705 Furniture and equipment 30,128 29,755 Total 60,322 57,895 Less: accumulated depreciation 34,603 32,108 Premises and equipment, net $ 25,719 $ 25,787 $2,522 in 2012, 2011, respectively.2010, respectively.NOTE 8 — GOODWILL AND OTHER INTANGIBLE ASSETS20122013 and 2011.at year end were as follows:follows as of December 31: 2013 Gross
Intangible
Assets Accumulated
Amortization Net
Intangible
AssetsCore deposit premium resulting from acquisitions $ 5,373 $ 4,680 $ 693 2012 Gross
Intangible
Assets Accumulated
Amortization Net
Intangible
AssetsCore deposit premium resulting from acquisitions $ 5,373 $ 4,459 $ 914 2011 Gross
Intangible
Assets Accumulated
Amortization Net
Intangible
Assets $ 5,373 $ 4,199 $ 1,174 $338 in 2012, 2011, and 2010, respectively.2012,2013, and thereafter is as follows: Amount $ 221 183 145 106 74 185 $ 914 NOTE2014 $ 183 2015 145 2016 106 2017 74 2018 62 Thereafter 123 Total $ 693 — DEPOSITS Amount $ 205,754 76,742 71,685 51,232 40,523 18,399 $ 464,335 2014 $ 207,278 2015 81,413 2016 58,627 2017 46,336 2018 39,214 Thereafter 17,144 Total $ 450,012 2011, and $4,427 in 2010.NOTENote 10 — BORROWED FUNDS– Borrowed Funds31: 2012 2011 Amount Rate Amount Rate $ 152,000 2.05 % $ 142,242 3.16 % 66,147 0.15 % 57,198 0.25 % 16,284 3.57 % 16,696 3.51 % 6,570 0.50 % — — $ 241,001 1.59 % $ 216,136 2.42 % 2013 2012 Amount Rate Amount Rate FHLB advances $ 162,000 2.02 % $ 152,000 2.05 % Securities sold under agreements to repurchase without stated maturity dates 106,025 0.13 % 66,147 0.15 % Securities sold under agreements to repurchase with stated maturity dates 11,301 3.30 % 16,284 3.57 % Federal funds purchased — — 6,570 0.50 % Total $ 279,326 1.35 % $ 241,001 1.59 % borrowings advances are collateralized by U.S. government and federal agency securities and a blanket lien on all qualified 1-to-41-4 family residential real estate loans and certain mortgage-backed securities and collateralized mortgage loans.obligations. Advances are also secured by our holdings of FHLB stock that we own. stock. As of December 31, 2013, we had the ability to borrow up to an additional $127,748, based on assets pledged as collateral. During the first quarter of 2013 and 2012, we had total unused linesreduced funding costs by modifying the term of credit$30,000 and $60,000, respectively, of $108,646.FHLB advances.31: 2012 2011 Amount Rate Amount Rate $ — — $ 17,000 2.97 % — — 15,000 4.10 % — — 5,242 4.14 % — — 5,000 3.15 % 10,000 0.48 % 25,000 3.16 % 42,000 1.12 % 45,000 3.30 % 10,000 2.15 % 10,000 2.15 % 40,000 2.15 % 20,000 2.56 % 20,000 2.86 % — — 20,000 3.73 % — — 10,000 1.98 % — — $ 152,000 2.05 % $ 142,242 3.16 % 2013 2012 Amount Rate Amount Rate Fixed rate advances due 2014 $ 10,000 0.48 % $ 10,000 0.48 % Fixed rate advances due 2015 32,000 0.84 % 42,000 1.12 % Fixed rate advances due 2016 10,000 2.15 % 10,000 2.15 % Fixed rate advances due 2017 30,000 1.95 % 40,000 2.15 % Fixed rate advances due 2018 40,000 2.35 % 20,000 2.86 % Fixed rate advances due 2019 20,000 3.11 % 20,000 3.73 % Fixed rate advances due 2020 10,000 1.98 % 10,000 1.98 % Fixed rate advances due 2023 10,000 3.90 % — — Total $ 162,000 2.02 % $ 152,000 2.05 % hadhave a carrying value and a fair value of $143,322$148,930 and $99,869$143,322 at December 31, 20122013 and 2011,2012, respectively. Such securities remain under our control. We may be required to provide additional collateral based on the fair value of underlying securities. 2012 2011 Amount Rate Amount Rate $ — — $ 428 2.08 % 5,000 4.51 % 5,000 4.51 % 10,872 3.15 % 10,869 3.12 % 412 3.25 % 399 3.25 % $ 16,284 3.57 % $ 16,696 3.51 % 2013 2012 Amount Rate Amount Rate Repurchase agreements due 2013 $ — — $ 5,000 4.51 % Repurchase agreements due 2014 10,876 3.30 % 10,872 3.15 % Repurchase agreements due 2015 425 3.25 % 412 3.25 % Total $ 11,301 3.30 % $ 16,284 3.57 % discount windowDiscount Window advances generally mature within one to four days from the transaction date. The following table provides a summary of short termshort-term borrowings for the years ended December 31: 2012 2011 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 $ 66,147 $ 57,466 0.20 % $ 57,198 $ 45,397 0.25 % 17,900 3,386 0.47 % 18,300 3,467 0.51 % 2013 2012 Maximum Month End Balance Average Balance Weighted Average Interest Rate During the Period Maximum Month End Balance Average Balance Weighted Average Interest Rate During the Period Securities sold under agreements to repurchase without stated maturity dates $ 106,025 $ 74,602 0.15 % $ 66,117 $ 57,466 0.20 % Federal funds purchased 13,700 4,445 0.61 % 17,900 3,836 0.47 % mortgageresidential real estate loans in the following amounts at December 31: 2012 2011 $ 308,628 $ 292,092 143,322 99,869 22,955 26,761 $ 474,905 $ 418,722 2013 2012 Pledged to secure borrowed funds $ 320,173 $ 308,628 Pledged to secure repurchase agreements 148,930 143,322 Pledged for public deposits and for other purposes necessary or required by law 20,922 22,955 Total $ 490,025 $ 474,905 NOTE76— OTHER NONINTEREST EXPENSES– Other Noninterest Expenses31: 2012 2011 2010 $ 1,965 $ 1,174 $ 1,093 885 842 887 864 1,086 1,254 711 714 710 588 526 499 482 386 167 424 405 420 389 388 395 300 54 72 268 302 382 260 299 338 202 576 916 187 57 51 1,526 1,462 1,376 $ 9,051 $ 8,271 $ 8,560 NOTE:2013 2012 2011 Marketing and community relations $ 1,131 $ 1,965 $ 1,174 FDIC insurance premiums 1,082 864 1,086 Directors fees 819 885 842 Audit and related fees 738 711 714 Education and travel 502 588 526 Loan underwriting fees 423 403 331 Printing and supplies 396 424 405 Postage and freight 387 389 388 Legal fees 359 268 302 Consulting fees 315 482 386 Amortization of deposit premium 221 260 299 Foreclosed asset and collection 211 202 576 State taxes 140 187 57 Other losses 109 300 54 All other 1,517 1,123 1,131 Total other $ 8,350 $ 9,051 $ 8,271 — FEDERAL INCOME TAXES– Federal Income Taxesyearyears ended December 31: 2012 2011 2010 $ 1,747 $ 965 $ 1,425 616 389 179 $ 2,363 $ 1,354 $ 1,604 2013 2012 2011 Currently payable $ 3,404 $ 1,747 $ 965 Deferred (benefit) expense (1,208 ) 616 389 Income tax expense $ 2,196 $ 2,363 $ 1,354 taxestax expense is as follows for the years ended December 31: 2012 2011 2010 $ 4,953 $ 3,932 $ 3,621 (1,675 ) (1,687 ) (1,565 ) (238 ) (207 ) (225 ) (147 ) (65 ) (132 ) (2,060 ) (1,959 ) (1,922 ) (667 ) (793 ) (263 ) 137 174 168 $ 2,363 $ 1,354 $ 1,604 Included in OCI are unrealized gains (losses) on auction rate money market preferred and preferred stocks. For federal income tax purposes, these securities are considered equity investments. As such, no deferred federal income taxes related to unrealized holding gains or losses are expected or recorded.A summary312013 2012 2011 Income taxes at 34% statutory rate $ 5,000 $ 4,953 $ 3,932 Effect of nontaxable income Interest income on tax exempt municipal securities (1,746 ) (1,675 ) (1,687 ) Earnings on corporate owned life insurance policies (249 ) (238 ) (207 ) Other (154 ) (147 ) (65 ) Total effect of nontaxable income (2,149 ) (2,060 ) (1,959 ) Effect of tax credits (801 ) (667 ) (793 ) Effect of nondeductible expenses 146 137 174 Federal income tax expense $ 2,196 $ 2,363 $ 1,354 31: 2012 2011 $ 3,133 $ 3,278 2,100 2,384 189 158 892 800 351 364 1,891 1,780 804 804 729 729 195 260 10,284 10,557 1,021 851 724 992 37 34 1,203 1,102 4,912 4,564 1,163 937 9,060 8,480 $ 1,224 $ 2,077 2013 2012 Deferred tax assets Allowance for loan losses $ 2,988 $ 3,133 Deferred directors’ fees 2,313 2,100 Employee benefit plans 257 189 Core deposit premium and acquisition expenses 971 892 Net unrealized losses on trading securities 360 351 Net unrecognized actuarial losses on pension plan 1,100 1,891 Net unrealized losses on available-for-sale securities 1,345 — Life insurance death benefit payable 804 804 Alternative minimum tax 729 729 Other 321 195 Total deferred tax assets 11,188 10,284 Deferred tax liabilities Prepaid pension cost 1,023 1,021 Premises and equipment 449 724 Accretion on securities 42 37 Core deposit premium and acquisition expenses 1,229 1,203 Net unrealized gains on available-for-sale securities — 4,912 Other 547 1,163 Total deferred tax liabilities 3,290 9,060 Net deferred tax assets $ 7,898 $ 1,224 2009.2010. There are no material uncertain tax positions requiring recognition in our consolidated financial statements. We do not expect the total amount of unrecognized tax benefits to significantly increase in the next twelve months.20122013 and 20112012 and we not aware of any claims for such amounts by federal income tax authorities.NOTENote 13 — OFF-BALANCE-SHEET ACTIVITIES– Off-Balance-Sheet Activities December 31 2012 2011 $ 115,233 $ 102,822 3,935 4,461 40,507 21,806 December 31 2013 2012 Unfunded commitments under lines of credit $ 121,959 $ 115,233 Commercial and standby letters of credit 4,169 3,935 Commitments to grant loans 29,096 40,507 NOTE— ON-BALANCE SHEET ACTIVITIES$1,912$182 and $875$1,912 at December 31, 2013 and 2012, and 2011, respectively.$5,545$1,286 and $4,080$5,545 at December 31, 2013 and 2012, and 2011, respectively.NOTE79— COMMITMENTS AND OTHER MATTERS– Commitments and Other Matters20122013 and 2011,2012, the reserve balances amounted to $910 and $885, and $821, respectively.2012,2013, substantially all of the Bank’s assets were restricted from transfer to the Corporation in the form of loans or advances. Consequently, Bank dividends are the principal source of funds for the Corporation. Payment of dividends without regulatory approval is limited to the current year’s retained net income plus retained net income for the preceding two years, less any required transfers to common stock. At January 1, 2013,2014, the amount available to the Corporation for dividends from the Bank, without regulatory approval, was approximately $17,000.NOTENote 16 — MINIMUM REGULATORY CAPITAL REQUIREMENTS– Minimum Regulatory Capital Requirements20122013 and 2011,2012, that we met all capital adequacy requirements.2012,2013, the most recent notifications from the FRB and the FDIC categorized us as well capitalized under the regulatory framework for prompt corrective action. To be categorized as well capitalized, an institution must maintain total risk-based, Tier 1 risk-based, and Tier 1 leverage ratios as set forth in the Actual Minimum
Capital
Requirement Minimum To Be
Well Capitalized
Under Prompt
Corrective Action
Provisions Amount Ratio Amount Ratio Amount Ratio $ 112,498 13.40 % $ 67,150 8.00 % $ 83,937 10.00 % 123,388 14.48 68,161 8.00 N/A N/A 101,988 12.15 33,575 4.00 50,362 6.00 112,722 13.23 34,080 4.00 N/A N/A 101,988 7.57 53,916 4.00 67,395 5.00 112,722 8.29 54,411 4.00 N/A N/A Actual Minimum
Capital
Requirement Minimum To Be
Well Capitalized
Under Prompt
Corrective Action
Provisions Amount Ratio Amount Ratio Amount Ratio $ 104,542 13.06 % $ 64,028 8.00 % $ 80,035 10.00 % 115,172 14.17 65,009 8.00 N/A N/A 94,508 11.81 32,014 4.00 48,021 6.00 104,987 12.92 32,505 4.00 N/A N/A 94,508 7.44 50,808 4.00 63,510 5.00 104,987 8.18 51,317 4.00 N/A N/A Actual Minimum
Capital
Requirement Minimum
To Be Well
Capitalized Under
Prompt Corrective
Action Provisions Amount Ratio Amount Ratio Amount Ratio December 31, 2013 Total capital to risk weighted assets Isabella Bank $ 120,067 13.84 % $ 69,390 8.00 % $ 86,738 10.00 % Consolidated 131,398 14.92 70,452 8.00 N/A N/A Tier 1 capital to risk weighted assets Isabella Bank 109,217 12.59 34,695 4.00 52,043 6.00 Consolidated 120,384 13.67 35,226 4.00 N/A N/A Tier 1 capital to average assets Isabella Bank 109,217 7.75 56,403 4.00 70,504 5.00 Consolidated 120,384 8.46 56,932 4.00 N/A N/A NOTE80 Actual Minimum
Capital
Requirement Minimum
To Be Well
Capitalized Under
Prompt Corrective
Action Provisions Amount Ratio Amount Ratio Amount Ratio December 31, 2012 Total capital to risk weighted assets Isabella Bank $ 112,498 13.40 % $ 67,150 8.00 % $ 83,937 10.00 % Consolidated 123,388 14.48 68,161 8.00 N/A N/A Tier 1 capital to risk weighted assets Isabella Bank 101,988 12.15 33,575 4.00 50,362 6.00 Consolidated 112,722 13.23 34,080 4.00 N/A N/A Tier 1 capital to average assets Isabella Bank 101,988 7.57 53,916 4.00 67,395 5.00 Consolidated 112,722 8.29 54,411 4.00 N/A N/A — BENEFIT PLANS– Benefit PlansWeThe plan was amended in 2013 to provide a matching safe harbor contribution for all eligible employees equal to 100% of the first 5.0% of an employee's compensation contributed to the Plan during the year. Employees are 100% vested in the safe harbor matching contributions.arewere 100% vested in the safe harbor contributions and arewere 0% vested through their first two years of employment and arewere 100% vested after 6 years of service for matching contributions. 2011 and 2010,2011, expenses attributable to the Plan were $608, $662, and $652, and $625, respectively.havemaintain a non-contributorynoncontributory defined benefit pension plan, which was curtailed in 2007. Due toeffective March 1, 2007. As a result of the curtailment, future salary increases will not beare no longer considered (the projected benefit obligation is equal to the accumulated benefit obligation), and theplan benefits are based on years of service and the employees’individual employee’s five highest consecutive years of compensation out of the last ten years of service rendered through March 1, 2007.31: 2012 2011 $ 11,334 $ 9,660 470 507 888 1,750 (483 ) (583 ) 12,209 11,334 8,603 8,900 778 148 752 138 (483 ) (583 ) 9,650 8,603 $ (2,559 ) $ (2,731 ) 2012 2011 $ (2,731 ) $ (760 ) 752 138 (251 ) (138 ) (329 ) (1,971 ) $ (2,559 ) $ (2,731 ) 2013 2012 Change in benefit obligation Benefit obligation, January 1 $ 12,209 $ 11,334 Interest cost 450 470 Actuarial (gain) loss (1,294 ) 888 Benefits paid, including plan expenses (633 ) (483 ) Benefit obligation, December 31 10,732 12,209 Change in plan assets Fair value of plan assets, January 1 9,650 8,603 Investment return 1,276 778 Contributions 215 752 Benefits paid, including plan expenses (633 ) (483 ) Fair value of plan assets, December 31 10,508 9,650 Deficiency in funded status at December 31, included on the consolidated balance sheets in accrued interest payable and other liabilities $ (224 ) $ (2,559 ) 2013 2012 Change in accrued pension benefit costs Accrued benefit cost at January 1 $ (2,559 ) $ (2,731 ) Contributions 215 752 Net periodic benefit cost (208 ) (251 ) Net change in unrecognized actuarial loss and prior service cost 2,328 (329 ) Accrued pension benefit cost at December 31 $ (224 ) $ (2,559 ) other comprehensive incomeOCI consist of the following amounts during the years ended December 31: 2012 2011 2010 $ (329 ) $ (1,971 ) $ (72 ) 111 671 25 $ (218 ) $ (1,300 ) $ (47 ) The accumulated benefit obligation was $12,209 and $11,334 at 2012 and 2011, respectively.: 2013 2012 2011 Net change in unrecognized actuarial loss and prior service cost $ 2,328 $ (329 ) $ (1,971 ) Tax effect (791 ) 111 671 Net $ 1,537 $ (218 ) $ (1,300 ) periodyear but are not recognized as components of net periodic benefit cost will beare recognized as a component of other comprehensive income (loss). The components of net periodic benefit cost are as follows for the years ended December 31: 2012 2011 2010 $ 470 $ 507 $ 531 (511 ) (522 ) (491 ) 292 153 153 $ 251 $ 138 $ 193 2013 2012 2011 Interest cost on benefit obligation $ 450 $ 470 $ 507 Expected return on plan assets (572 ) (511 ) (522 ) Amortization of unrecognized actuarial net loss 330 292 153 Net periodic benefit cost $ 208 $ 251 $ 138 20122013 includes net unrecognized pension costs before income taxes of $5,562,$3,234, of which $208$40 is expected to be amortized into benefit cost during 2013.projected benefit obligation are as follows for the yearyears ended December 31: 2012 2011 2010 3.75 % 4.22 % 5.36 % 6.00 % 6.00 % 6.00 % 2013 2012 2011 Discount rate 4.64 % 3.75 % 4.22 % Expected long-term rate of return 6.00 % 6.00 % 6.00 % yearyears ended December 31: 2012 2011 2010 4.22 % 5.36 % 6.10 % 6.00 % 6.00 % 6.00 % 2013 2012 2011 Discount rate 3.75 % 4.22 % 5.36 % Expected long-term return on plan assets 6.00 % 6.00 % 6.00 % no less thanat least annually.31: 2012 2011 Total (Level 2) Total (Level 2) $ 80 $ 80 $ 16 $ 16 4,832 4,832 4,357 4,357 4,738 4,738 4,230 4,230 $ 9,650 $ 9,650 $ 8,603 $ 8,603 2013 2012 Total (Level 2) Total (Level 2) Short-term investments $ 142 $ 142 $ 80 $ 80 Common collective trusts Fixed income 5,064 5,064 4,832 4,832 Equity investments 5,302 5,302 4,738 4,738 Total $ 10,508 $ 10,508 $ 9,650 $ 9,650 20122013 and 2011:•Short-term investments: Shares of a money market portfolio, which is valued using amortized cost, which approximates fair value.
2012:•Common collective trusts: These investments are public investment securities valued using the NAV provided by a third party investment advisor. The NAV is quoted on a private market that is not active; however, the unit price is based on underlying investments which are traded on an active market. of $215 to the plan in 2013.Estimated future benefit payments are as follows for the next ten years: Amount $ 432 526 567 567 593 3,281 31: 2013 $ 450 (572 ) 330 $ 208 Interest cost on projected benefit obligation $ 486 Expected return on plan assets (615 ) Amortization of unrecognized actuarial net loss 169 Net periodic benefit cost $ 40 2014 $ 518 2015 551 2016 549 2017 577 2018 575 2019 - 2023 3,312 deferinvest at least 25% of their earned board fees intoin our common stock. These stock investments can be made either through deferred fees or through the purchase of shares through the Isabella Bank Corporation Stockholder Dividend Reinvestment and Employee Stock Purchase Plan ("DRIP Plan"). Deferred fees, under the Directors Plan. The feesPlan, are converted on a quarterly basis into shares of our common stock based on the fair value of a share of common stock as of the relevant valuation date. Stock credited to a participant’s account is eligible for stock and cash dividends as declared. Upon retirementDRIP Plan shares are purchased on a monthly basis pursuant to the DRIP Plan.events, theevents. The participant is eligible to receive a lump-sum, in-kind, distribution of all of the stock that is then in his or her account, and any unconverted cash will be converted to and rounded up to whole shares of stock and distributed, as well. The Directors Plan does not allow for cash settlement, and therefore, such share-based payment awards qualify for classification as equity. All authorized but unissued shares of common stock are eligible for issuance under the Directors Plan. We may also purchase shares of common stock on the open market to meet our obligations under the Directors Plan.31: 2012 2011 Eligible Market Eligible Market Shares Value Shares Value 165,436 $ 3,598 201,438 $ 4,774 5,130 112 16,585 393 170,566 $ 3,710 218,023 $ 5,167 2013 2012 Eligible
Shares Market
Value Eligible
Shares Market
ValueUnissued 172,550 $ 4,115 165,436 $ 3,598 Shares held in Rabbi Trust 12,761 304 5,130 112 Total 185,311 $ 4,419 170,566 $ 3,710 2010 were $382, $444, and $363, respectively, and are being recognized over the participants’ expected years of service.Prior to 2012, the most recent contribution was $50 in 2009. We made no contributions in 20112013 or 2010.2011. Compensation cost related to the plan for 2013, 2012 and 2011 was $29, $102, and 2010 was $102, $20, and $0, respectively. Total allocated shares outstanding related to the ESOP at December 31, 2013, 2012, and 2011 and 2010 were 246,404,241,958, 246,404, and 246,419,246,404, respectively. Such shares are included in the computation of dividends and earnings per share in each of the respective years.2011 and $2,101 in 2010.NOTE84— ACCUMULATED OTHER COMPREHENSIVE INCOMEother comprehensive incomeOther Comprehensive Income (Loss)comprehensive.is atable summarizes the changes in AOCI by component for the years ended December 31 (net of tax): Unrealized
Holding Gains
(Losses) on
AFS
Securities Change in Unrecognized Pension Cost on Defined
Benefit
Pension Plan Total Balance, January 1, 2011 $ 444 $ (2,153 ) $ (1,709 ) OCI before reclassifications 9,220 (2,109 ) 7,111 Amounts reclassified from AOCI (3 ) 138 135 Subtotal 9,217 (1,971 ) 7,246 Tax effect (3,719 ) 671 (3,048 ) OCI, net of tax 5,498 (1,300 ) 4,198 Balance, December 31, 2011 5,942 (3,453 ) 2,489 OCI before reclassifications 3,921 (580 ) 3,341 Amounts reclassified from AOCI (837 ) 251 (586 ) Subtotal 3,084 (329 ) 2,755 Tax effect (348 ) 111 (237 ) OCI, net of tax 2,736 (218 ) 2,518 Balance, December 31, 2012 8,678 (3,671 ) 5,007 OCI before reclassifications (18,971 ) 2,120 (16,851 ) Amounts reclassified from AOCI (171 ) 208 37 Subtotal (19,142 ) 2,328 (16,814 ) Tax effect 6,257 (791 ) 5,466 OCI, net of tax (12,885 ) 1,537 (11,348 ) Balance, December 31, 2013 $ (4,207 ) $ (2,134 ) $ (6,341 ) comprisingof unrealized holding gains on AFS securities included in OCI follows for the balanceyears ended December 31: 2013 2012 2011 Auction Rate Money Market Preferred and Preferred Stocks All Other AFS securities Total Auction Rate Money Market Preferred and Preferred Stocks All Other AFS securities Total Auction Rate Money Market Preferred and Preferred Stocks All Other AFS securities Total Unrealized gains (losses) arising during the period $ (737 ) $ (18,234 ) $ (18,971 ) $ 2,059 $ 1,862 $ 3,921 $ (1,719 ) $ 10,939 $ 9,220 Reclassification adjustment for net realized (gains) losses included in net income — (171 ) (171 ) — (1,119 ) (1,119 ) — (3 ) (3 ) Reclassification adjustment for impairment loss included in net income — — — — 282 282 — — — Net unrealized gains (losses) (737 ) (18,405 ) (19,142 ) 2,059 1,025 3,084 (1,719 ) 10,936 9,217 Tax effect — 6,257 6,257 — (348 ) (348 ) — (3,719 ) (3,719 ) Unrealized gains (losses), net of tax $ (737 ) $ (12,148 ) $ (12,885 ) $ 2,059 $ 677 $ 2,736 $ (1,719 ) $ 7,217 $ 5,498 accumulated other comprehensive income (loss) reported onfor the consolidated balance sheets as of years ended December 31 (presented net:Details about AOCI components Amount
Reclassified from
AOCI Affected Line Item in the
Consolidated
Statements of Income 2013 2012 2011 Unrealized holding gains (losses) on AFS securities $ 171 $ 1,119 $ 3 Net gain (loss) on sale of AFS securities — (282 ) — Net AFS impairment loss 171 837 3 Income before federal income tax expense 58 285 1 Federal income tax expense $ 113 $ 552 $ 2 Net income Change in unrecognized pension cost on defined benefit pension plan $ 208 $ 251 $ 138 Compensation and benefits 71 85 47 Federal income tax expense $ 137 $ 166 $ 91 Net income NOTENote 19 — RELATED PARTY TRANSACTIONS– Related Party Transactionsduringconsisted of the following for the years ended December 31 consisted of the following: 2012 2011 $ 3,728 $ 4,347 8,435 1,800 (5,565 ) (2,419 ) $ 6,598 $ 3,728 2013 2012 Balance, January 1 $ 6,598 $ 3,728 New loans 2,373 8,435 Repayments (4,793 ) (5,565 ) Balance, December 31 $ 4,178 $ 6,598 and $7,664 at December 31, 20122013 and 2011,2012, respectively. In addition, the ESOP held deposits with the Bank aggregating $517$292 and $275,$517, respectively, at December 31, 20122013 and 2011.2012.time to time,time-to-time, we make charitable donations to the Isabella Bank Foundation (the “Foundation”), which is an affiliated nonprofit entity formed for the purpose of distributing charitable donations to recipient organizations generally located in the communities we service. Donations are expensed when committed to the Foundation as they are non-refundable.Foundation. The assets and transactions of the Foundation are not included in our consolidated financial statements.contributionsdonations to, the Foundation as of, and for the years ended, December 31: 2012 2011 2010 $ 1,766 $ 1,150 $ 1,108 $ 850 $ 250 $ 250 NOTE: 2013 2012 2011 Ending assets $ 1,815 $ 1,766 $ 1,150 Donations $ 200 $ 850 $ 250 — FAIR VALUE– Fair Valuedemand deposits due from banks:cash equivalentsinstitutions:institutionsyears.years. Fair value is determined using prices for similar assets with similar characteristics. As such, we classify certificates of deposits held in other financial institutions as Level 2.InvestmentAFS and trading securities:Investment AFS and trading securities are recorded at fair value on a recurring basis. Level 1 fair value measurement is based upon quoted prices for identical instruments. Level 2 fair value measurement is based upon quoted prices for similar instruments. If quoted prices are not available, fair values are measured using independent pricing models or other model based valuation techniques such as the present value of future cash flows, adjusted for the security’s credit rating, prepayment assumptions and other factors such as credit loss and liquidity assumptions. The values for Level 1 and Level 2 investment securities are generally obtained from an independent third party. On a quarterly basis, we compare the values provided to alternative pricing sources.Due to the limited trading activity of certain auction rate money market preferred securities and preferred stocks, we measured these securities using Level 3 inputs as of December 31, 2010. As the markets for these securities normalized and established regular trading patterns, we measured preferred stocks utilizing Level 1 inputs and the auction rate money market preferred security utilizing Level 2 inputs as of December 31, 2011 and continued to measure at these levels as of December 31, 2012.The table below represents the activity in auction rate money market preferred and preferred stock AFS securities measured with Level 3 inputs on a recurring basis for the year ended December 31, 2011: Auction Rate
Money Market
Preferred Preferred
Stocks $ 2,865 $ 6,936 — (1,000 ) — (5,033 ) (2,049 ) — (816 ) (903 ) $ — $ — We had no financial instruments measured with Level 3 inputs on a recurring basis during 2012.available-for-sale:AFSavailable-for-saleAFS are carried at the lower of cost or fair value. The fair value of mortgageMortgage loans available-for-saleAFS are based on what price secondary markets are currently offering for portfolios with similar characteristics. As such, we classify Mortgage loans AFS subject to nonrecurring fair value adjustments as Level 2.Loans:87Upon reviewing our assumptions related to the estimation of the fair value of loans, we transferred loans with an estimated fair value of $751,009 as of December 31, 2012 from nonrecurring Level 2 assets to nonrecurring Level 3 assets. As such, we classify loans as levelLevel 3 assets.time to time,time-to-time, loans are classified as impaired and a specific allowance for loan losses may be established. Loans for which it is probable that payment of interest and principal will be significantly different than the contractual terms of the original loan agreement are considered impaired. Once a loan is identified as impaired, we measure the estimated impairment. The fair value of impaired loans is estimated using one of several methods, including collateral value, market value of similar debt, enterprise value, liquidation value, or discounted cash flows. Those impaired loans not requiring an allowance represent loans for which the fair value of the expected repayments or collateral exceed the recorded investments in such loans.management utilizeswe utilize independent appraisals, broker price opinions, or internal evaluations. TheseWe review these valuations are reviewed to determine whether an additional discount should be applied given the age of market information that may have been considered as well as other factors such as costs to carry and sell an asset if it is determined that the collateral will be liquidated in connection with the ultimate settlement of the loan. We use these valuations to determine if any charge offscharge-offs or specific reserves are necessary. We may obtain new valuations in certain circumstances, including when there has been significant deterioration in the condition of the collateral, if the foreclosure process has begun, or if the existing valuation is deemed to be outdated.Impairedwhereas of December 31: 2013 Valuation Techniques Fair Value Unobservable Input Range Discounted cash flow $11,521 Duration of cash flows: 98 - 120 Months Reduction in interest rate from original loan terms: 3.25% - 7.57% Discount applied to collateral appraisal: Real Estate 20% - 30% Equipment 50% Discounted appraisal value $13,902 Livestock 50% Cash crop inventory 50% Other inventory 75% Accounts receivable 75% 2012 Valuation Techniques Fair Value Unobservable Input Range Discounted cash flow $8,726 Duration of cash flows: 14-120 Months Reduction in interest rate from original loan terms: 5.00% - 6.25% Discount applied to collateral appraisal: Real Estate 20% - 30% Equipment 50% Discounted appraisal value $13,295 Livestock 50% Cash crop inventory 50% Other inventory 75% Accounts receivable 75% allowanceactive market, or other independent sources to validate fair value estimates coupled with the impact of future capital calls and transfer restrictions, is established basedan inherent limitation in the valuation process. As the fair values of these investments are not readily determinable, they are not disclosed under a specific fair value hierarchy; however, they are reviewed quarterly for impairment. If we were to record an impairment adjustment related to these securities, it would be classified as a nonrecurring Level 3 fair value adjustment. During 2013 and 2012, there were no impairments recorded on equity securities without readily determinable fair values.netloan portfolio, foreclosed assets (which are included in other assets) are adjusted to and subsequently carried at the lower of carrying value or fair value less costs to sell. Net realizable value is based upon independent market prices, appraised values of the collateral, require classification inor management’s estimation of the fair value hierarchy.of the collateral. Due to the inherent level of estimation in the valuation process, we record impaired loansforeclosed assets as nonrecurring Level 3.information about impaired loans measured utilizing Level 3 fair value measurementsinformation related to foreclosed assets as of December 31, 2012:
Techniques
Input Duration of cash flows 14 — 120 Months $10,522 Reduction in interest rate from original loan terms 5.00% — 6.25% Discount applied to collateral appraisal: Real Estate 20% — 30% Equipment 50% $11,499 Livestock 50% Cash crop inventory 50% Other inventory 75% Accounts receivable 75% December 31, 2013 Valuation Techniques Fair Value Unobservable Input Range Discount applied to collateral appraisal: Discounted appraisal value $ 1,412 Real Estate 20% - 30% December 31, 2012 Valuation Techniques Fair Value Unobservable Input Range Discount applied to collateral appraisal: Discounted appraisal value $ 2,018 Real Estate 20% - 30% Accrued interest:The carrying amounts of accrued interest approximate fair value. As such, we classify accrued interest as Level 1.assets:assets20122013 and 20112012, there were no impairments recorded on goodwill and other acquisition intangibles.Equity securities without readily determinable fair values:OMSRsIncluded:OMSRs (which are included in equity securities without readily determinable fair valuesother assets) are FHLB Stock and FRB Stock as well as our ownership interests in Corporate Settlement Solutions and Valley Financial Corporation. The investment in Corporate Settlement Solutions, a title insurance company, was made in the 1st quarter 2007. The Corporation is not the managing entity of Corporate Settlement Solutions, LLC, and accounts for its investment in that entity under the equity method of accounting. Valley Financial Corporation is the parent company of 1st State Bank in Saginaw, Michigan, which is a de novo bank that opened in 2005. The Corporation made investments in Valley Financial Corporation in 2004 and in 2007.The lack of an active market, or other independent sources to validate fair value estimates coupled with the impact of future capital calls and transfer restrictions, is an inherent limitation in the valuation process. As the fair values of these investments are not readily determinable, they are not disclosed under a specific fair value hierarchy; however, they are reviewed quarterly for impairment. If we were to record an impairment adjustment related to these securities, it would be classified as a nonrecurring Level 3 fair value adjustment. During 2012 and 2011, there were no impairments recorded on equity securities without readily determinable fair values.Foreclosed assets:Upon transfer from the loan portfolio, foreclosed assets are adjusted to and subsequently carried at the lower of carrying value or fair value less costs to sell. Net realizable value is based upon independent market prices, appraised values of the collateral, or management’s estimation of the value of the collateral. Upon reviewing our assumptions related to the estimation of the fair value of loans, we transferred foreclosed assets with an estimated fair value of $2,018 as of December 31, 2012 from nonrecurring Level 2 assets to nonrecurring Level 3 assets. Due to the inherent level of estimation in the valuation process, we record foreclosed assets as nonrecurring Level 3.The table below lists the quantitative information related to foreclosed assets measured utilizing Level 3 fair value measurements as of December 31, 2012:Valuation TechniqueFair ValueUnobservable InputRangeDiscount applied tocollateral appraisal:Discounted appraisal value$2,018Real Estate20%—30%Equipment ��50%Originated mortgage servicing rights:OMSR is subject to impairment testing. A valuation model, which utilizesTo test for impairment, we utilize a discounted cash flow analysis using interest rates and prepayment speed assumptions currently quoted for comparable instruments and a discount rate determined by management, is used for impairment testing.rates. If the valuation model reflects a value less than the carrying value, originated mortgage servicing rightsOMSRs are adjusted to fair value through a valuation allowance as determined by the model. As such, we classify loan servicing rightsOMSRs subject to nonrecurring fair value adjustments as Level 2.Deposits:Depositsfunds:fundsvalue as of December 31, 2011.value. These borrowings were recorded at fair value on a recurring basis, with the fair value measurement estimated using discounted cash flow analysis based on current incremental borrowing rates for similar types of borrowing arrangements. Changes in the fair value of these borrowings are included in noninterest income. As such, other borrowed funds are classified as Level 2.yearsyear ended December 31: 2012 2011 $ 5,242 $ 10,423 (5,209 ) (5,000 ) (33 ) (181 ) $ — $ 5,242 $ — $ 5,000 2012 Borrowings carried at fair value - beginning of year $ 5,242 Paydowns and maturities (5,209 ) Net unrealized change in fair value (33 ) Borrowings carried at fair value - December 31 $ — Unpaid principal balance - December 31 $ — Fair values for off balance sheet lending Our commitments to extend credit, standby letters of credit, and undisbursed funds have no carrying amount and are based on fees currently chargedestimated to enter into similar agreements, taking into consideration the remaining termshave no realizable fair value. Historically, a majority of the agreementsunused commitments to extend credit have not been drawn upon and, the counterparties’ credit standings. Asgenerally, we do not chargereceive fees for lendingin connection with these commitments outstanding, it isother than standby letter of credit fees, which are not practicable to estimate the fair value of these instruments.Furthermore, althoughAlthough we believe our valuation methods are appropriate and consistent with other market participants, the use of different methodologies or assumptions to determine the fair value of certain financial instruments could result in a different fair value measurement. 2012 Carrying
Value Estimated
Fair Value (Level 1) (Level 2) (Level 3) ASSETS $ 24,920 $ 24,920 $ 24,920 $ — $ — 4,465 4,475 — 4,475 — 3,633 3,680 — 3,680 — 772,753 784,964 — — 784,964 (11,936 ) (11,936 ) — — (311,936 ) 760,817 773,028 — — 773,028 5,227 5,227 5,227 — — 18,118 18,118 — — — 2,285 2,285 — 2,285 — LIABILITIES 553,332 553,332 553,332 — — 464,335 472,630 — 472,630 — 241,001 248,822 — 248,822 — 751 751 751 — — 2011 Carrying
Value Estimated
Fair Value (Level 1) (Level 2) (Level 3) ASSETS $ 28,590 $ 28,590 $ 28,590 $ — $ — 8,924 8,977 — 8,977 — 3,205 3,252 — 3,252 — 750,291 769,177 — 743,927 25,250 (12,375 ) (12,375 ) — (8,255 ) (4,120 ) 737,916 756,802 — 735,672 21,130 5,848 5,848 5,848 — — 17,189 17,189 — — — 2,374 2,374 — 2,374 — LIABILITIES 476,627 476,627 476,627 — — 481,537 499,644 — 499,644 — 210,894 222,538 — 222,538 — 967 967 967 — — 2013 Carrying
Value Estimated
Fair Value (Level 1) (Level 2) (Level 3) ASSETS Cash and cash equivalents $ 41,558 $ 41,558 $ 41,558 $ — $ — Certificates of deposit held in other financial institutions 580 582 — 582 — Mortgage loans AFS 1,104 1,123 — 1,123 — Total loans 808,037 808,246 — — 808,246 Less allowance for loan and lease losses (11,500 ) (11,500 ) — — (11,500 ) Net loans 796,537 796,746 — — 796,746 Accrued interest receivable 5,442 5,442 5,442 — — Equity securities without readily determinable fair values (1) 18,293 18,293 — — — OMSRs 2,555 2,667 — 2,667 — LIABILITIES Deposits without stated maturities 593,754 593,754 593,754 — — Deposits with stated maturities 450,012 452,803 — 452,803 — Borrowed funds 279,326 283,060 — 283,060 — Accrued interest payable 633 633 633 — — 2012 Carrying
Value Estimated
Fair Value (Level 1) (Level 2) (Level 3) ASSETS Cash and cash equivalents $ 24,920 $ 24,920 $ 24,920 $ — $ — Certificates of deposit held in other financial institutions 4,465 4,475 — 4,475 — Mortgage loans AFS 3,633 3,680 — 3,680 — Total loans 772,753 784,964 — — 784,964 Less allowance for loan and lease losses (11,936 ) (11,936 ) — — (11,936 ) Net loans 760,817 773,028 — — 773,028 Accrued interest receivable 5,227 5,227 5,227 — — Equity securities without readily determinable fair values (1) 18,118 18,118 — — — OMSRs 2,285 2,285 — 2,285 — LIABILITIES Deposits without stated maturities 553,332 553,332 553,332 — — Deposits with stated maturities 464,335 472,630 — 472,630 — Borrowed funds 241,001 248,822 — 248,822 — Accrued interest payable 751 751 751 — — Due to the characteristics of equity securities without readily determinable fair values, they are not disclosed under a specific fair value hierarchy. If we were to record an impairment adjustment related to these securities, such amount would be classified as a nonrecurring Level 3 fair value adjustment. 2012 2011 Total (Level 1) (Level 2) (Level 3) Total (Level 1) (Level 2) (Level 3) $ 1,573 $ — $ 1,573 $ — $ 4,710 $ 4,710 $ — 25,776 — 25,776 — 397 397 — 182,743 — 182,743 — 174,938 174,938 — 2,778 — 2,778 — 2,049 2,049 — 6,363 6,363 — — 5,033 5,033 — — 155,345 — 155,345 — 143,602 143,602 — 131,005 — 131,005 — 99,101 99,101 —
for-sale
investment
securities 504,010 6,363 497,647 — 425,120 5,033 420,087 — — — — — 5,242 — 5,242 — 22,021 — — 22,021 21,130 — — 21,130 2,285 — 2,285 — 2,374 — 2,374 — 2,018 — — 2,018 1,876 — 1,876 — $ 531,907 $ 6,363 $ 501,505 $ 24,039 $ 460,452 $ 5,033 $ 434,289 $ 21,130 1.20 % 94.28 % 4.52 % 1.09 % 94.32 % 4.59 % 2013 2012 Total (Level 1) (Level 2) (Level 3) Total (Level 1) (Level 2) (Level 3) Recurring items Trading securities States and political subdivisions $ 525 $ — $ 525 $ — $ 1,573 $ — $ 1,573 $ — AFS securities Government-sponsored enterprises 23,745 — 23,745 — 25,776 — 25,776 — States and political subdivisions 201,988 — 201,988 — 182,743 — 182,743 — Auction rate money market preferred 2,577 — 2,577 — 2,778 — 2,778 — Preferred stocks 5,827 5,827 — — 6,363 6,363 — — Mortgage-backed securities 144,115 — 144,115 — 155,345 — 155,345 — Collateralized mortgage obligations 133,810 — 133,810 — 131,005 — 131,005 — Total AFS securities 512,062 5,827 506,235 — 504,010 6,363 497,647 — Nonrecurring items Impaired loans (net of the ALLL) 25,423 — — 25,423 22,021 — — 22,021 Foreclosed assets 1,412 — — 1,412 2,018 — — 2,018 $ 539,422 $ 5,827 $ 506,760 $ 26,835 $ 529,622 $ 6,363 $ 499,220 $ 24,039 Percent of assets and liabilities measured at fair value 1.08 % 93.95 % 4.97 % 1.20 % 94.26 % 4.54 % an impairment,gains or reduction of an impairment, waslosses were recognized in the years ended December 31: 2012 2011 Trading
Losses Other Gains
and (Losses) Total Trading
Losses Other Gains
and (Losses) Total $ (52 ) $ — $ (52 ) $ (78 ) $ — $ (78 ) — 33 33 — 181 181 — (166 ) (166 ) — (82 ) (82 ) — (58 ) (58 ) — (243 ) (243 ) $ (52 ) $ (191 ) $ (243 ) $ (78 ) $ (144 ) $ (222 ) 2013 2012 Trading
Losses Other Gains
(Losses) Total Trading
Losses Other Gains
(Losses) Total Recurring items Trading securities $ (28 ) $ — $ (28 ) $ (52 ) $ — $ (52 ) Borrowed funds — — — — 33 33 Nonrecurring items Foreclosed assets — (156 ) (156 ) — (166 ) (166 ) Total $ (28 ) $ (156 ) $ (184 ) $ (52 ) $ (133 ) $ (185 ) NOTE92— PARENT COMPANY ONLY FINANCIAL INFORMATION December 31 2012 2011 ASSETS $ 332 $ 1,474 3,939 3,567 115,781 106,463 2,041 1,916 52,398 52,060 $ 174,491 $ 165,480 LIABILITIES AND SHAREHOLDERS’ EQUITY $ 10,002 $ 10,697 164,489 154,783 $ 174,491 $ 165,480 December 31 2013 2012 ASSETS Cash on deposit at the Bank $ 529 $ 332 AFS securities 3,542 3,939 Investments in subsidiaries 110,192 115,781 Premises and equipment 2,013 2,041 Other assets 54,223 52,398 TOTAL ASSETS $ 170,499 $ 174,491 LIABILITIES AND SHAREHOLDERS’ EQUITY Other liabilities $ 9,890 $ 10,002 Shareholders' equity 160,609 164,489 TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY $ 170,499 $ 174,491 Year Ended December 31 2012 2011 2010 $ 6,125 $ 6,500 $ 6,250 174 128 72 2,037 1,201 1,340 8,336 7,829 7,662 2,424 2,267 2,286 370 370 356 351 378 476 945 1,089 932 4,090 4,104 4,050 4,246 3,725 3,612 673 958 896 4,919 4,683 4,508 7,287 5,527 4,537 $ 12,206 $ 10,210 $ 9,045 Year Ended December 31 2013 2012 2011 Income Dividends from subsidiaries $ 7,000 $ 6,125 $ 6,500 Interest income 161 174 128 Management fee and other 2,146 2,037 1,201 Total income 9,307 8,336 7,829 Expenses Compensation and benefits 2,811 2,424 2,267 Occupancy and equipment 476 370 370 Audit and related fees 345 351 378 Other 958 945 1,089 Total expenses 4,590 4,090 4,104 Income before income tax benefit and equity in undistributed earnings of subsidiaries 4,717 4,246 3,725 Federal income tax benefit 790 673 958 Income before income tax benefit and equity in undistributed earnings of subsidiaries 5,507 4,919 4,683 Undistributed earnings of subsidiaries 7,003 7,287 5,527 Net income $ 12,510 $ 12,206 $ 10,210 Year Ended December 31 2012 2011 2010 $ 12,206 $ 10,210 $ 9,045 (7,287 ) (5,527 ) (4,537 ) (459 ) 160 (7 ) 643 615 650 114 123 147 4 7 5 425 (48 ) (172 ) (513 ) 7 305 (98 ) 757 1,883 5,035 6,304 7,319 370 585 110 — (3,000 ) — (239 ) (87 ) 247 (50 ) — (250 ) 81 (2,502 ) 107 (597 ) 2,772 (1,550 ) (6,074 ) (5,770 ) (5,421 ) 2,279 2,302 2,208 (1,361 ) (1,507 ) (2,020 ) (505 ) (426 ) (514 ) (6,258 ) (2,629 ) (7,297 ) (1,142 ) 1,173 129 1,474 301 172 $ 332 $ 1,474 $ 301 Year Ended December 31 2013 2012 2011 Operating Activities Net income $ 12,510 $ 12,206 $ 10,210 Adjustments to reconcile net income to cash provided by operations Undistributed earnings of subsidiaries (7,003 ) (7,287 ) (5,527 ) Undistributed earnings of equity securities without readily determinable fair values 74 (459 ) 160 Share-based payment awards 554 643 615 Depreciation 174 114 123 Net amortization of AFS securities 2 4 7 Deferred income tax expense (benefit) (305 ) 425 (48 ) Changes in operating assets and liabilities which used cash Other assets (51 ) (513 ) 7 Accrued interest and other liabilities 1,238 (98 ) 757 Net cash provided by (used in) operating activities 7,193 5,035 6,304 Investing activities Maturities, calls, and sales of AFS securities 395 370 585 Purchases — — (3,000 ) Purchases of equipment and premises (146 ) (239 ) (87 ) Advances to subsidiaries, net of repayments (299 ) (50 ) — Net cash provided by (used in) investing activities (50 ) 81 (2,502 ) Financing activities Net increase (decrease) in borrowed funds (1,350 ) (597 ) 2,772 Cash dividends paid on common stock (6,456 ) (6,074 ) (5,770 ) Proceeds from the issuance of common stock 3,618 2,898 2,302 Common stock repurchased (2,375 ) (1,980 ) (1,507 ) Common stock purchased for deferred compensation obligations (383 ) (505 ) (426 ) Net cash provided by (used in) investing activities (6,946 ) (6,258 ) (2,629 ) Increase (decrease) in cash and cash equivalents 197 (1,142 ) 1,173 Cash and cash equivalents at beginning of year 332 1,474 301 Cash and cash equivalents at end of year $ 529 $ 332 $ 1,474 NOTENote 22 — OPERATING SEGMENTS– Operating Segments10 percent10% of net operating results. Retail bankingThe operations for of the Bank as of December 31, 2013, 2012 2011, and 20102011 represent approximately 90% or greatermore of our consolidated total assets and operating results. As such, no additional segment informationreporting is presented.Management’s Discussion and AnalysisFinancial Condition and Results of OperationsISABELLA BANK CORPORATION FINANCIAL REVIEW(Dollars in thousands except per share data)The following is management’s discussion and analysis of the financial condition and results of our operations. This discussion and analysis is intended to provide a better understanding of the consolidated financial statements and statistical data included elsewhere in the Annual Report.Executive SummaryDespite the challenges and uncertainty of the current economic environment, we are pleased to report our strongest earnings ever. There continues to be slight improvements in the local, regional, and national economies, but a large degree of economic uncertainty remains. Our continued success throughout these challenging times is a direct result of our unwavering focus on community banking principles, prudent underwriting standards, and long term sustainable growth. This focus has enabled us to continue to meet the needs of the communities we serve. Carefully managed growth is an important part of our strategy to maintain shareholder value. We are excited about the prospects of our new Freeland, Michigan office which was opened in October 2012. The new location complements our existing office locations, increases our brand awareness in the Freeland area, and is expected to provide additional shareholder value for years to come.Recent LegislationThe Health Care and Education Act of 2010, the Patient Protection and Affordable Care Act, the Dodd-Frank Act, and the JOBS Act, have had, and are expected to continue to have, a significant impact on our operating results in future periods. While the legislation has been passed for these acts, much of the regulations have yet to be written. As such, the extent of the potential impact on our operations has yet to be determined. Of these three acts, the Dodd-Frank Act has had, and is likely to have, the most significant impact. This particular Act made sweeping changes in the regulation of financial institutions aimed at strengthening the operation of the financial services sector. As a result of the implementation of some of the provisions, we have had increases in compensation costs and this trend is expected to continue.In June 2012, the FFIEC proposed new capital requirements for all financial institutions. In general, the proposal adds a new capital standard of equity capital to assets and increases the minimum capital ratios to be considered well capitalized. While these proposals are not yet final, they could significantly impact our capital requirements, which could impact our ability to pay dividends.OtherWe have not received any notices of regulatory actions as of March 1, 2013.CRITICAL ACCOUNTING POLICIES:Our significant accounting policies are set forth in “Note 1 — Nature of Operations and Summary of Significant Accounting Policies” of the Consolidated Financial Statements. Of these significant accounting policies, we consider our policies regarding the ALLL, acquisition intangibles and goodwill, and the determination of the fair value and assessment of OTTI of investment securities to be our most critical accounting policies.The ALLL requires our most subjective and complex judgment. Changes in economic conditions can have a significant impact on the ALLL and, therefore, the provision for loan losses and results of operations. We have developed policies and procedures for assessing the appropriateness of the ALLL, recognizing that this process requires a number of assumptions and estimates with respect to our loan portfolio. Our assessments may be impacted in future periods by changes in economic conditions, and the discovery of information with respect to borrowers which is not known to us at the time of the issuance of the consolidated financial statements. Foradditional discussion concerning our ALLL and related matters, see the detailed discussion to follow under the heading “Allowance for Loan Losses” and “Note 6 — Loans and Allowance for Loan Losses” of the Notes to Consolidated Financial Statements.United States generally accepted accounting principles require that we determine the fair value of the assets and liabilities of an acquired entity, and record their fair value on the date of acquisition. We employ a variety of measures in the determination of the fair value, including the use of discounted cash flow analysis, market appraisals, and projected future revenue streams. For certain items that we believe we have the appropriate expertise to determine the fair value, we may choose to use our own calculations of the value. In other cases, where the value is not easily determined, we consult with outside parties to determine the fair value of the identified asset or liability. Once valuations have been adjusted, the net difference between the price paid for the acquired entity and the net value of assets acquired on our balance sheet, including identifiable intangibles, is recorded as goodwill. Acquisition intangibles and goodwill are qualitatively evaluated to determine if it is more likely than not that the carrying balance is impaired on a quarterly basis.We currently have both AFS and trading investment securities that are carried at fair value. Changes in the fair value of AFS investment securities are included as a component of other comprehensive income, while declines in the fair value of these securities below their cost that are other-than-temporary are reflected as realized losses in the consolidated statements of income. The change in value of trading investment securities is included in current earnings. We evaluate AFS securities for indications of losses that are considered other-than-temporary, if any, on a regular basis. The market values for AFS and trading investment securities are typically obtained from outside sources and applied to individual securities within the portfolio.DISTRIBUTION OF ASSETS, LIABILITIES, AND SHAREHOLDERS’ EQUITY INTEREST RATE AND INTEREST DIFFERENTIALThe following schedules present the daily average amount outstanding for each major category of interest earning assets, nonearning assets, interest bearing liabilities, and noninterest bearing liabilities for the last three years. These schedules also present an analysis of interest income and interest expense for the years indicated. All interest income is reported on an FTE basis using a 34% federal income tax rate. Nonaccruing loans, for the purpose of the following computations, are included in the average loan amounts outstanding. FRB and FHLB stock holdings, which are restricted, are included in accrued income and other assets. Year Ended December 31 2012 2011 2010 Average
Balance Tax
Equivalent
Interest Average
Yield/
Rate Average
Balance Tax
Equivalent
Interest Average
Yield/
Rate Average
Balance Tax
Equivalent
Interest Average
Yield/
Rate $ 754,304 $ 43,396 5.75 % $ 743,441 $ 45,463 6.12 % $ 725,534 $ 46,794 6.45 % 309,681 7,555 2.44 % 235,437 6,941 2.95 % 160,514 5,271 3.28 % 145,502 7,941 5.46 % 136,356 7,847 5.75 % 120,999 7,095 5.86 % 2,624 142 5.41 % 5,087 286 5.62 % 8,097 436 5.38 % 33,359 486 1.46 % 37,539 506 1.35 % 45,509 479 1.05 % 1,245,470 59,520 4.78 % 1,157,860 61,043 5.27 % 1,060,653 60,075 5.66 % (12,408 ) (12,522 ) (13,262 ) 19,409 20,195 18,070 25,244 24,397 24,624 103,368 97,265 92,845 $ 1,381,083 $ 1,287,195 $ 1,182,930 $ 170,851 204 0.12 % $ 152,530 189 0.12 % $ 137,109 151 0.11 % 214,958 451 0.21 % 192,999 488 0.25 % 169,579 391 0.23 % 473,675 8,476 1.79 % 467,931 10,258 2.19 % 430,892 10,988 2.55 % 225,689 4,292 1.90 % 198,828 5,268 2.65 % 188,512 5,674 3.01 % 1,085,173 13,423 1.24 % 1,012,288 16,203 1.60 % 926,092 17,204 1.86 % 125,443 113,726 102,812 9,785 9,802 8,722 160,682 151,379 145,304 $ 1,381,083 $ 1,287,195 $ 1,182,930 $ 46,097 $ 44,840 $ 42,871 3.70 % 3.87 % 4.04 % Net Interest IncomeOur primary sources of revenues are interest earned on loans and investments, while our most significant expense is interest expense on deposits and borrowings. Net interest income is the amount by which interest income on earning assets exceeds the interest expenses on interest bearing liabilities. Net interest income is influenced by changes in the balance and mix of assets and liabilities and market interest rates. We exert some control over these factors; however, FRB monetary policy and competition have a significant impact. Interest income includes loan fees of $3,178 in 2012, $2,385 in 2011, and $2,196 in 2010. For analytical purposes, netinterest income is adjusted to an FTE basis by adding the income tax savings from interest on tax exempt securities, thus making year to year comparisons more meaningful.VOLUME AND RATE VARIANCE ANALYSISThe following table details the dollar amount of changes in FTE net interest income for each major category of interest earning assets and interest bearing liabilities and the amount of change attributable to changes in average balances (volume) or average rates. The change in interest due to both volume and rate has been allocated to volume and rate changes in proportion to the relationship of the absolute dollar amounts of the change in each. 2012 Compared to 2011
Increase (Decrease) Due to 2011 Compared to 2010
Increase (Decrease) Due to Volume Rate Net Volume Rate Net $ 656 $ (2,723 ) $ (2,067 ) $ 1,136 $ (2,467 ) $ (1,331 ) 1,945 (1,331 ) 614 2,254 (584 ) 1,670 511 (417 ) 94 886 (134 ) 752 (134 ) (10 ) (144 ) (168 ) 18 (150 ) (59 ) 39 (20 ) (93 ) 120 27 2,919 (4,442 ) (1,523 ) 4,015 (3,047 ) 968 22 (7 ) 15 18 20 38 52 (89 ) (37 ) 57 40 97 124 (1,906 ) (1,782 ) 894 (1,624 ) (730 ) 647 (1,623 ) (976 ) 299 (705 ) (406 ) 845 (3,625 ) (2,780 ) 1,268 (2,269 ) (1,001 ) $ 2,074 $ (817 ) $ 1,257 $ 2,747 $ (778 ) $ 1,969 We, like all financial institutions, are experiencing downward pressure on our net yield on interest earning assets. This pressure is a direct result of FRB monetary policy which has reduced yields on interest earning assets more than rates on interest bearing liabilities. A key benchmark for lending is the 10 year US Treasury, which is currently trading below 2.0%. As a result of the persistent low interest rate environment, our net yield on interest earning assets is at historically low levels. However, as shown in the following table, our net yield on interest earning assets remained relatively flat throughout 2012. This is a direct result of our restructuring of $60,000 of FHLB advances in the first quarter of 2012, which reduced 2012 interest expense by approximately $450. Average Yield/Rate For The Three Month Periods Ended: December 31
2012 September 30
2012 June 30
2012 March 31
2012 December 31
2011 4.61 % 4.76 % 4.84 % 4.91 % 5.12 % 1.12 % 1.18 % 1.27 % 1.38 % 1.53 % 3.65 % 3.73 % 3.73 % 3.70 % 3.78 % Given that the historically low interest rate environment is expected to continue for the foreseeable future, the net yield on interest earning assets is not likely to increase in future periods. We anticipate continued reduction in rates earned on loans without a proportionate decline in funding rates. Any additional interest income will most likely be contingent upon increases in volume and probably at interest margins lower than those earned in the fourth quarter of 2012.Allowance for Loan LossesThe viability of any financial institution is ultimately determined by its management of credit risk. Loans outstanding represent our single largest concentration of risk. The ALLL is our estimation of probable losses inherent in the existing loan portfolio. We allocate the ALLL throughout the loan portfolio based on our assessment of the underlying risks associated with each loan segment. Our assessments include allocations based on specific impairment allocations, historical losses, internally assigned credit ratings, and past due and nonaccrual balances. A portion of the ALLL is not specifically allocated to any one loan segment, but is instead a reflection of other qualitative risks within the loan portfolio.The following table summarizes our charge-off and recovery activity for the years ended December 31: 2012 2011 2010 2009 2008 $ 12,375 $ 12,373 $ 12,979 $ 11,982 $ 7,301 — — — — 822 1,672 1,984 3,731 3,081 2,137 1,142 2,240 2,524 2,627 3,334 542 552 596 934 854 3,356 4,776 6,851 6,642 6,325 240 461 453 623 160 122 177 638 546 240 255 314 297 377 284 617 952 1,388 1,546 684 2,300 3,826 4,857 6,093 9,500 $ 11,936 $ 12,375 $ 12,373 $ 12,979 $ 11,982 $ 2,739 $ 3,824 $ 5,463 $ 5,096 $ 5,641 754,304 743,441 725,534 725,299 717,040 0.36 % 0.51 % 0.75 % 0.70 % 0.79 % $ 772,753 $ 750,291 $ 735,304 $ 723,316 $ 735,385 1.54 % 1.65 % 1.68 % 1.79 % 1.63 % The following table summarizes our charge-off and recovery activity for the three months ended: Three Months Ended December 31
2012 September 30
2012 June 30
2012 March 31
2012 December 31
2011 $ 1,469 $ 611 $ 621 $ 655 $ 1,170 143 155 125 194 202 1,326 456 496 461 968 764,004 761,069 748,223 743,921 749,840 0.17 % 0.06 % 0.07 % 0.06 % 0.13 % In the fourth quarter of 2012, we experienced a significant increase in charge-offs. Of the $1,469 of total loans charged-off during the quarter, $356 had previously been identified through specific impairment valuation allowances. The remaining charge-offs were identified in the fourth quarter as part of our credit risk management process. Of those not previously identified as impaired, two charge-offs totaling $357 individually exceeded $100.Despite the increase in loans charged-off in the fourth quarter of 2012, the level of net loans charged-off has continued to trend downward since 2008. This trend, coupled with declines in loans past due and in nonaccrual status, has allowed us to reduce our provision, and has led to a decline in the ALLL in both amount and as a percentage of loans. For further discussion of the allocation of the ALLL, see “Note 6 — Loans and Allowance for Loan Losses” to the consolidated financial statements.Loans Past Due in Nonaccrual StatusIncreases in past due and nonaccrual loans can have a significant impact on the ALLL. To determine the potential impact, and corresponding estimated losses, we analyze our historical loss trends on loans past due 30-89 days, 90 days or more, and nonaccrual loans. We monitor all loans that are past due and in nonaccrual status for indicators of additional deterioration.The following tables summarize our past due and nonaccrual loans as of December 31: Total Past Due and Nonaccrual 2012 2011 2010 2009 2008 $ 7,271 $ 7,420 $ 9,606 $ 8,839 $ 13,958 5,431 5,297 8,119 10,296 12,418 199 186 309 460 956 $ 12,901 $ 12,903 $ 18,034 $ 19,595 $ 27,332 A summary of loans past due and in nonaccrual status, including the composition of the ending balance of nonaccrual loans by type, is included in “Note 6 — Loans and Allowance for Loan Losses” of the Notes to Consolidated Financial Statements.Troubled Debt RestructuringsWe have taken a proactive approach to avoid foreclosures on borrowers who are willing to work with us in modifying their loans, thus making them more affordable. While this approach has allowed certain borrowers to develop a payment structure that will allow them to continue making payments in lieu of foreclosure, it has contributed to a significant increase in the level of loans classified as TDR. The implementation of ASU No. 2011-02“A Creditor’s Determination of Whether a Restructuring Is a Troubled Debt Restructuring” has also contributed to the increased level of TDR’s. The modifications have been extremely successful for us and our customers as very few of the modified loans have resulted in foreclosures. At the time of the TDR, the loan is reviewed to determine whether or not to classify the loan as accrual or nonaccrual. The majority of new modifications result in terms that satisfy our criteria for continued interest accrual. TDR’s that have been placed in nonaccrual status may be placed back on accrual status after six months of continued performance.We restructure debt with borrowers who due to temporary financial difficulties are unable to service their debt under the original terms. We may extend the amortization period, reduce interest rates, forgive principal, or a combination of these modifications. Typically, the modifications are for a period of five years or less. There are no TDR’s that were Government sponsored as of December 31, 2012.Losses associated with TDR’s, if any, are included in the estimation of the ALLL in the quarter in which a loan is identified as a TDR, and we review the ALLL estimation each reporting period to ensure its continued appropriateness.The following tables provide a roll-forward of TDR’s for the years ended December 31, 2011 and 2012: Accruing Interest Nonaccrual Total Number
of Number
of Number
of Loans Balance Loans Balance Loans Balance 35 $ 5,075 10 $ 688 45 $ 5,763 93 17,334 3 481 96 17,815 (12 ) (4,381 ) (2 ) (254 ) (14 ) (4,635 ) — (15 ) — (51 ) — (66 ) (2 ) (35 ) (1 ) (86 ) (3 ) (121 ) 2 54 (2 ) (54 ) — — (4 ) (293 ) 4 293 — — 112 17,739 12 1,017 124 18,756 51 8,658 16 2,708 67 11,366 (41 ) (9,312 ) (3 ) (595 ) (44 ) (9,907 ) (2 ) (246 ) (4 ) (196 ) (6 ) (442 ) (4 ) (173 ) (3 ) (245 ) (7 ) (418 ) 2 130 (2 ) (130 ) — — (3 ) (265 ) 3 265 — — 115 $ 16,531 19 $ 2,824 134 $ 19,355 (1)Balances charged-off represent a partial charge off. As such, the number of loans was unaffected.The following table summarizes our TDR’s as of December 31: 2012 2011 2010 Accruing Non- Accruing Non- Accruing Non- Interest accrual Total Interest accrual Total Interest accrual Total $ 16,301 $ 941 $ 17,242 $ 16,125 $ 514 $ 16,639 $ 4,798 $ 499 $ 5,297 158 561 719 1,564 344 1,908 175 26 201 72 41 113 50 85 135 102 — 102 — 1,281 1,281 — 74 74 — 163 163 $ 16,531 $ 2,824 $ 19,355 $ 17,739 $ 1,017 $ 18,756 $ 5,075 $ 688 $ 5,763 2009 2008 Accruing Non- Accruing Non- Interest accrual Total Interest accrual Total $ 2,754 $ 786 $ 3,540 $ 2,297 $ 1,355 $ 3,652 107 80 187 268 — 268 — 824 824 — — — — 426 426 — 630 630 $ 2,861 $ 2,116 $ 4,977 $ 2,565 $ 1,985 $ 4,550 Additional disclosures about TDR’s are included in “Note 6 — Loans and Allowance for Loan Losses” of the Notes to Consolidated Financial Statements.Impaired LoansThe following is a summary of information pertaining to impaired loans as of and for the year ended December 31: 2012 2011 Unpaid Unpaid Outstanding Principal Valuation Outstanding Principal Valuation Balance Balance Allowance Balance Balance Allowance $ 9,227 $ 9,640 $ 1,333 $ 8,862 $ 9,055 $ 1,853 1,167 1,197 38 1,047 1,078 271 91 91 32 — — — 569 689 59 2,779 2,779 822 8,224 8,670 1,429 5,882 6,377 922 21 57 4 101 137 18 56 56 — 85 85 — 19,355 20,400 2,895 18,756 19,511 3,886 1,817 2,304 320 4,136 6,657 28 2,245 2,376 359 52 116 — — — — 190 190 — 63 63 — 415 535 — 2,226 3,002 354 1,389 2,450 189 51 61 9 94 123 17 182 482 — 198 498 — 19 28 — 20 29 — 6,603 8,316 1,042 6,494 10,598 234 �� $ 25,958 $ 28,716 $ 3,937 $ 25,250 $ 30,109 $ 4,120 Additional disclosure related to impaired loans is included in “Note 6 — Loans and Allowance for Loan Losses” of the Notes to Consolidated Financial Statements.Nonperforming AssetsThe following table summarizes our nonperforming assets as of December 31: 2012 2011 2010 2009 2008 $ 7,303 $ 6,389 $ 5,610 $ 8,522 $ 11,175 428 760 486 768 1,251 7,731 7,149 6,096 9,290 12,426 2,008 1,867 2,039 1,141 2,770 10 9 28 16 153 $ 9,749 $ 9,025 $ 8,163 $ 10,447 $ 15,349 1.00 % 0.95 % 0.83 % 1.28 % 1.69 % 0.68 % 0.67 % 0.67 % 0.91 % 1.35 % Loans are placed in nonaccrual status when the foreclosure process has begun, generally after a loan is 90 days past due, unless they are well secured. Upon transferring the loans to nonaccrual status, we perform an evaluation to determine the net realizable value of the underlying collateral. This evaluation is used to help determine if any charge offs are necessary. Loans may be placed back on accrual status after six months of continued performance.Included in the nonaccrual loan balances above were credits classified as TDR’s as of December 31: 2012 2011 2010 2009 2008 $ 2,325 $ 520 $ 115 $ 1,692 $ 1,985 499 497 573 424 — $ 2,824 $ 1,017 $ 688 $ 2,116 $ 1,985 Nonaccrual TDR’s increased in 2012 as a result of two large TDR’s that were granted during 2012. These relationships had a balance of $1,710 as of December 31, 2012.The following table lists individually significant commercial and agricultural loan relationships in nonaccrual. To be classified as individually significant, the recorded investment in nonaccrual loans to each borrower must have exceeded $1,000 as of the end of each period. 2012 2011 2010 2009 Oustanding Specific Oustanding Specific Oustanding Specific Oustanding Specific Balance Allocation Balance Allocation Balance Allocation Balance Allocation $ — (A) $ — $ 1,014 $ — (C) $ — $ — $ — $ — — (B) — 1,900 — (D) 2,679 345 — — 2,077 359 — — — — — — — — — — — (B) — 1,800 — (D) 5,226 3,475 2,931 6,722 $ 7,303 $ 6,389 $ 5,610 $ 8,522 A — Transferred to accrual status.B — Loan was partially charged-off with the remaining outstanding balance paid off by the customer.C — No specific allocation as the net realizable value of the loan’s underlying collateral value exceeded the loan’s carrying balance.D — No specific allocation established for this loan as it was charged down to reflect the current fair value of the underlying real estate.There were no other individually significant credits included in nonaccrual loans as of December 31, 2012, 2011, 2010, 2009, or 2008.We continue to devote considerable attention to identifying impaired loans and adjusting the net carrying value of these loans to their current net realizable values through the establishment of a specific reserve or the recording of a charge off. We believe that all loans deemed to be impaired have been identified.We believe that the level of the ALLL is appropriate as of December 31, 2012 and we will continue to closely monitor overall credit quality and our policies and procedures related to the analysis of the ALLL to ensure that the ALLL remains appropriate.NONINTEREST INCOME AND EXPENSESNoninterest IncomeThe following table shows the changes in noninterest income between the years ended December 31: Change Change 2012 2011 $ % 2010 $ % $ 2,367 $ 2,500 $ (133 ) –5.3 % $ 2,809 $ (309 ) –11.0 % 1,874 1,736 138 7.9 % 1,492 244 16.4 % 1,061 979 82 8.4 % 896 83 9.3 % 757 732 25 3.4 % 760 (28 ) –3.7 % 337 324 13 4.0 % 333 (9 ) –2.7 % (89 ) (293 ) 204 69.6 % 47 (340 ) N/M 125 140 (15 ) –10.7 % 143 (3 ) –2.1 % 6,432 6,118 314 5.1 % 6,480 (362 ) –5.6 % 1,576 538 1,038 N/M 610 (72 ) –11.8 % 1,119 3 1,116 N/M 348 (345 ) N/M 698 609 89 14.6 % 663 (54 ) –8.1 % 574 545 29 5.3 % 573 (28 ) –4.9 % 504 (182 ) 686 N/M 11 (193 ) N/M 220 62 158 N/M 12 50 N/M (52 ) (78 ) 26 33.3 % (94 ) 16 17.0 % 33 181 (148 ) –81.8 % 227 (46 ) –20.3 % 426 422 4 0.9 % 470 (48 ) –10.2 % 1,705 950 755 79.5 % 1,199 (249 ) –20.8 % $ 11,530 $ 8,218 $ 3,312 40.3 % $ 9,300 $ (1,082 ) –11.6 % Significant changes in noninterest income are detailed below:We continuously analyze various fees related to deposit accounts including service charges and NSF and overdraft fees. Based on these analyses, we make any necessary adjustments to ensure that our fee structure is within the range of our competitors, while at the same time making sure that the fees remain fair to deposit customers. NSF and overdraft fees represent the largest single component of service charges and fees. While we have experienced significant increases in deposit accounts, NSF and overdraft fees have declined. This decline has been the result of reduced overdraft activity by our customers as well as changes in banking regulations. Despite increasing our per item NSF and overdraft fees in December 2012, we expect this downward trend to continue into the foreseeable future.As customers continue to increase their dependence on ATM and debit cards, we have seen a corresponding increase in fees. We do not anticipate significant changes to our ATM and debit fee structure; however, we do expect that these fees will continue to increase as the usage of debit cards increases.In recent periods, we have invested considerable efforts to increase our market share in trust and brokerage and advisory services. These efforts have translated into increases in revenues and we expect this trend to continue in future periods.Historically low offering rates on residential real estate loans have led to a significant increase in the level of refinancing activity. This increase in activity has resulted in substantial increases in the gain on sale of mortgage loans, while contributing to fluctuations in the value of our OMSR portfolio. We anticipate that mortgage refinancing activity will decline in 2013.We are continually analyzing our AFS security portfolio for potential sale opportunities. During the first quarter of 2012, we identified several pools of mortgage-backed securities with significant unrealized gains. As the interest rates of the underlying mortgages were significantly higher than the current offering rates for similar mortgages, we elected to realize these gains through the sales of such securities as the investments would have likely been paid off in the near term through refinancing activity. In the third quarter of 2012, we elected to sell some additional mortgage-backed securities as their current prepayment characteristics had resulted in less than acceptable yields. We do not anticipate any significant investment sales during 2013.Earnings on corporate owned life insurance policies have increased from 2011 as a result of the purchase of an additional $4,000 in policies in the third quarter of 2011. Future earnings are expected to approximate current levels.In 2011, Corporate Settlement Solutions invested significant resources to expand and enhance their services offered. While these efforts reduced earnings in 2011, they have led to the significant increase in earnings in 2012. We expect future earnings to approximate current levels.As market conditions have improved, we have been able to sell some of our OREO properties at gains. As property values and the facts and circumstances surrounding each property vary, this amount will fluctuate. We do not anticipate any assets currently included in OREO to generate significant gains or losses in future periods.Fluctuations in the gains and losses related to trading securities and borrowings measured at fair value are caused by interest rate variances. As we do not anticipate any significant changes to interest rates in the foreseeable future, we do not anticipate any large fluctuations in future periods.The fluctuation in all other income is spread throughout various categories, none of which are individually significant. We do not anticipate any significant fluctuations from current levels in 2013.
Noninterest Expenses
The following table shows the changes in noninterest expenses between the years ended December 31:
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| 2012 | 2011 | $ | % | 2010 | $ | % | ||||||||||||||||||||||
Compensation and benefits | ||||||||||||||||||||||||||||
Employee salaries | $ | 15,374 | $ | 14,377 | $ | 997 | 6.9 | % | $ | 13,697 | $ | 680 | 5.0 | % | ||||||||||||||
Employee benefits | 5,842 | 4,902 | 940 | 19.2 | % | 4,837 | 65 | 1.3 | % | |||||||||||||||||||
All other | 11 | 13 | (2 | ) | –15.4 | % | 18 | (5 | ) | –27.8 | % | |||||||||||||||||
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Total compensation and benefits | 21,227 | 19,292 | 1,935 | 10.0 | % | 18,552 | 740 | 4.0 | % | |||||||||||||||||||
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Occupancy | ||||||||||||||||||||||||||||
Property taxes | 501 | 470 | 31 | 6.6 | % | 505 | (35 | ) | –6.9 | % | ||||||||||||||||||
Utilities | 463 | 462 | 1 | 0.2 | % | 423 | 39 | 9.2 | % | |||||||||||||||||||
Outside services | 605 | 587 | 18 | 3.1 | % | 524 | 63 | 12.0 | % | |||||||||||||||||||
Depreciation | 621 | 605 | 16 | 2.6 | % | 584 | 21 | 3.6 | % | |||||||||||||||||||
Building repairs | 244 | 262 | (18 | ) | –6.9 | % | 243 | 19 | 7.8 | % | ||||||||||||||||||
All other | 85 | 84 | 1 | 1.2 | % | 72 | 12 | 16.7 | % | |||||||||||||||||||
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Total occupancy | 2,519 | 2,470 | 49 | 2.0 | % | 2,351 | 119 | 5.1 | % | |||||||||||||||||||
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Furniture and equipment | ||||||||||||||||||||||||||||
Depreciation | 1,796 | 1,916 | (120 | ) | –6.3 | % | 1,938 | (22 | ) | –1.1 | % | |||||||||||||||||
Computer/service contracts | 1,995 | 1,898 | 97 | 5.1 | % | 1,779 | 119 | 6.7 | % | |||||||||||||||||||
ATM and debit card fees | 690 | 629 | 61 | 9.7 | % | 595 | 34 | 5.7 | % | |||||||||||||||||||
All other | 79 | 54 | 25 | 46.3 | % | 32 | 22 | 68.8 | % | |||||||||||||||||||
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Total furniture and equipment | 4,560 | 4,497 | 63 | 1.4 | % | 4,344 | 153 | 3.5 | % | |||||||||||||||||||
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Net AFS impairment loss | 282 | — | 282 | N/M | — | — | N/M | |||||||||||||||||||||
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Other | ||||||||||||||||||||||||||||
Marketing and community relations | 1,965 | 1,174 | 791 | 67.4 | % | 1,093 | 81 | 7.4 | % | |||||||||||||||||||
Directors fees | 885 | 842 | 43 | 5.1 | % | 887 | (45 | ) | –5.1 | % | ||||||||||||||||||
FDIC insurance premiums | 864 | 1,086 | (222 | ) | –20.4 | % | 1,254 | (168 | ) | –13.4 | % | |||||||||||||||||
Audit fees | 711 | 714 | (3 | ) | –0.4 | % | 710 | 4 | 0.6 | % | ||||||||||||||||||
Education and travel | 588 | 526 | 62 | 11.8 | % | 499 | 27 | 5.4 | % | |||||||||||||||||||
Consulting fees | 482 | 386 | 96 | 24.9 | % | 167 | 219 | 131.1 | % | |||||||||||||||||||
Printing and supplies | 424 | 405 | 19 | 4.7 | % | 420 | (15 | ) | –3.6 | % | ||||||||||||||||||
Postage and freight | 389 | 388 | 1 | 0.3 | % | 395 | (7 | ) | –1.8 | % | ||||||||||||||||||
Other losses | 300 | 54 | 246 | N/M | 72 | (18 | ) | –25.0 | % | |||||||||||||||||||
Legal fees | 268 | 302 | (34 | ) | –11.3 | % | 382 | (80 | ) | –20.9 | % | |||||||||||||||||
Amortization of deposit premium | 260 | 299 | (39 | ) | –13.0 | % | 338 | (39 | ) | –11.5 | % | |||||||||||||||||
Foreclosed asset and collection | 202 | 576 | (374 | ) | –64.9 | % | 916 | (340 | ) | –37.1 | % | |||||||||||||||||
State taxes | 187 | 57 | 130 | N/M | 51 | 6 | 11.8 | % | ||||||||||||||||||||
All other | 1,526 | 1,462 | 64 | 4.4 | % | 1,376 | 86 | 6.3 | % | |||||||||||||||||||
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Total other | 9,051 | 8,271 | 780 | 9.4 | % | 8,560 | (289 | ) | –3.4 | % | ||||||||||||||||||
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Total noninterest expenses | $ | 37,639 | $ | 34,530 | $ | 3,109 | 9.0 | % | $ | 33,807 | $ | 723 | 2.1 | % | ||||||||||||||
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