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ISABELLA BANK Corp - Quarter Report: 2015 September (Form 10-Q)

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
FORM 10-Q
 
ý
Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
For the quarterly period ended September 30, 2015
or
¨
Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
For the transition period from                      to                     
Commission File Number: 0-18415
 
Isabella Bank Corporation
(Exact name of registrant as specified in its charter)
 
Michigan
 
38-2830092
(State or other jurisdiction of
incorporation or organization)
 
(I.R.S. Employer
Identification No.)
 
 
 
401 N. Main St, Mt. Pleasant, MI
 
48858
(Address of principal executive offices)
 
(Zip code)
(989) 772-9471
(Registrant’s telephone number, including area code)
N/A
(Former name, former address and former fiscal year, if changed since last report)
 
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    ý  Yes    ¨  No
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (Section 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    ý  Yes    ¨  No
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer
 
¨
 
Accelerated filer
 
ý
 
 
 
 
 
Non-accelerated filer
 
¨  (Do not check if a smaller reporting company)
 
Smaller reporting company
 
¨
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).     ¨  Yes    ý  No
The number of common shares outstanding of the registrant’s Common Stock (no par value) was 7,795,149 as of November 3, 2015.


Table of Contents

ISABELLA BANK CORPORATION
QUARTERLY REPORT ON FORM 10-Q
Table of Contents
 
 
 
 
 
 
Item 1.
 
 
 
 
 
 
 
Item 2.
 
 
 
 
 
 
 
Item 3.
 
 
 
 
 
 
 
Item 4.
 
 
 
 
 
 
 
 
 
 
 
 
 
Item 1.
 
 
 
 
 
 
 
Item 1A.
 
 
 
 
 
 
 
Item 2.
 
 
 
 
 
 
 
Item 3.
 
 
 
 
 
 
 
Item 4.
 
 
 
 
 
 
 
Item 5.
 
 
 
 
 
 
 
Item 6.
 
 
 
 
 
 
 
 
 
 

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Table of Contents

Forward Looking Statements
This report contains certain forward looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. We intend such forward looking statements to be covered by the safe harbor provisions for forward looking statements contained in the Private Securities Litigation Reform Act of 1995, and are included in this statement for purposes of these safe harbor provisions. Forward looking statements, which are based on certain assumptions and describe future plans, strategies and expectations, are generally identifiable by use of the words “believe,” “expect,” “intend,” “anticipate,” “estimate,” “project,” or similar expressions. Our ability to predict results or the actual effect of future plans or strategies is inherently uncertain. Factors which could have a material adverse effect on the operations and future prospects include, but are not limited to, changes in: interest rates, general economic conditions, monetary and fiscal policy, the quality or composition of the loan or investment portfolios, demand for loan products, fluctuation in the value of collateral securing our loan portfolio, deposit flows, competition, demand for financial services in our market area, and accounting principles, policies and guidelines. These risks and uncertainties should be considered in evaluating forward looking statements and undue reliance should not be placed on such statements. Further information concerning our business, including additional factors that could materially affect our financial results, is included in our filings with the SEC.
Glossary of Acronyms and Abbreviations
The acronyms and abbreviations identified below may be used throughout this Quarterly Report on Form 10-Q, or in our other SEC filings. You may find it helpful to refer back to this page while reading this report.
AFS: Available-for-sale
 
GAAP: U.S. generally accepted accounting principles
ALLL: Allowance for loan and lease losses
 
GLB Act: Gramm-Leach-Bliley Act of 1999
AOCI: Accumulated other comprehensive income (loss)
 
IFRS: International Financial Reporting Standards
ASC: FASB Accounting Standards Codification
 
IRR: Interest rate risk
ASU: FASB Accounting Standards Update
 
JOBS Act: Jumpstart our Business Startups Act
ATM: Automated Teller Machine
 
LIBOR: London Interbank Offered Rate
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
 
OMSR: Originated mortgage servicing rights
ESOP: Employee stock ownership plan
 
OREO: Other real estate owned
Exchange Act: Securities Exchange Act of 1934
 
OTTI: Other-than-temporary impairment
FASB: Financial Accounting Standards Board
 
PBO: Projected benefit obligation
FDI Act: Federal Deposit Insurance Act
 
PCAOB: Public Company Accounting Oversight Board
FDIC: Federal Deposit Insurance Corporation
 
Rabbi Trust: A trust established to fund the Directors Plan
FFIEC: Federal Financial Institutions Examinations Council
 
SEC: U.S. Securities & Exchange Commission
FRB: Federal Reserve Bank
 
SOX: Sarbanes-Oxley Act of 2002
FHLB: Federal Home Loan Bank
 
TDR: Troubled debt restructuring
Freddie Mac: Federal Home Loan Mortgage Corporation
 
XBRL: eXtensible Business Reporting Language
FTE: Fully taxable equivalent
 
 

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Table of Contents

PART I – FINANCIAL INFORMATION
Item 1. Financial Statements.
INTERIM CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)
(Dollars in thousands)

September 30
2015
 
December 31
2014
ASSETS
 
 
 
Cash and cash equivalents
 
 
 
Cash and demand deposits due from banks
$
16,975

 
$
18,058

Interest bearing balances due from banks
1,347

 
1,848

Total cash and cash equivalents
18,322

 
19,906

AFS securities (amortized cost of $619,834 in 2015 and $561,893 in 2014)
628,612

 
567,534

Mortgage loans AFS
831

 
901

Loans
 
 
 
Commercial
433,069

 
431,961

Agricultural
116,293

 
104,721

Residential real estate
249,850

 
264,595

Consumer
34,135

 
32,305

Gross loans
833,347

 
833,582

Less allowance for loan and lease losses
8,200

 
10,100

Net loans
825,147

 
823,482

Premises and equipment
28,353

 
25,881

Corporate owned life insurance policies
26,222

 
25,152

Accrued interest receivable
6,992

 
5,851

Equity securities without readily determinable fair values
22,341

 
20,076

Goodwill and other intangible assets
48,875

 
46,128

Other assets
13,555

 
14,632

TOTAL ASSETS
$
1,619,250

 
$
1,549,543

LIABILITIES AND SHAREHOLDERS’ EQUITY
 
 
 
Deposits
 
 
 
Noninterest bearing
$
181,782

 
$
181,826

NOW accounts
197,476

 
190,984

Certificates of deposit under $100 and other savings
506,488

 
456,774

Certificates of deposit over $100
242,257

 
244,900

Total deposits
1,128,003

 
1,074,484

Borrowed funds
297,610

 
289,709

Accrued interest payable and other liabilities
10,639

 
10,756

Total liabilities
1,436,252

 
1,374,949

Shareholders’ equity
 
 
 
Common stock — no par value 15,000,000 shares authorized; issued and outstanding 7,765,333 shares (including 19,025 shares held in the Rabbi Trust) in 2015 and 7,776,274 shares (including 13,934 shares held in the Rabbi Trust) in 2014
138,321

 
138,755

Shares to be issued for deferred compensation obligations
4,544

 
4,242

Retained earnings
38,521

 
32,103

Accumulated other comprehensive income (loss)
1,612

 
(506
)
Total shareholders’ equity
182,998

 
174,594

TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY
$
1,619,250

 
$
1,549,543



See notes to interim condensed consolidated financial statements (unaudited).

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Table of Contents

INTERIM CONDENSED CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
(Dollars in thousands except per share amounts)

Three Months Ended 
 September 30
 
Nine Months Ended 
 September 30
 
2015
 
2014
 
2015
 
2014
Interest income
 
 
 
 
 
 
 
Loans, including fees
$
9,855

 
$
9,863

 
$
29,448

 
$
29,413

AFS securities
 
 
 
 
 
 
 
Taxable
2,310

 
2,016

 
6,655

 
6,007

Nontaxable
1,507

 
1,485

 
4,496

 
4,428

Federal funds sold and other
166

 
119

 
444

 
390

Total interest income
13,838

 
13,483

 
41,043

 
40,238

Interest expense
 
 
 
 
 
 
 
Deposits
1,480

 
1,562

 
4,405

 
4,767

Borrowings
1,100

 
936

 
3,181

 
2,699

Total interest expense
2,580

 
2,498

 
7,586

 
7,466

Net interest income
11,258

 
10,985

 
33,457

 
32,772

Provision for loan losses
(738
)
 
(162
)
 
(1,999
)
 
(604
)
Net interest income after provision for loan losses
11,996

 
11,147

 
35,456

 
33,376

Noninterest income
 
 
 
 
 
 
 
Service charges and fees
1,468

 
1,366

 
4,024

 
4,120

Net gain on sale of mortgage loans
157

 
170

 
472

 
436

Earnings on corporate owned life insurance policies
188

 
182

 
570

 
556

Net gains (losses) on sale of AFS securities

 
97

 

 
97

Other
1,288

 
401

 
2,792

 
1,690

Total noninterest income
3,101

 
2,216

 
7,858

 
6,899

Noninterest expenses
 
 
 
 
 
 
 
Compensation and benefits
5,621

 
5,174

 
16,420

 
16,045

Furniture and equipment
1,511

 
1,348

 
4,251

 
3,835

Occupancy
728

 
697

 
2,121

 
2,115

Other
2,172

 
2,295

 
5,938

 
6,305

Total noninterest expenses
10,032

 
9,514

 
28,730

 
28,300

Income before federal income tax expense
5,065

 
3,849

 
14,584

 
11,975

Federal income tax expense
1,002

 
444

 
2,750

 
1,696

NET INCOME
$
4,063

 
$
3,405

 
$
11,834

 
$
10,279

Earnings per common share
 
 
 
 
 
 
 
Basic
$
0.52

 
$
0.44

 
$
1.52

 
$
1.33

Diluted
$
0.51

 
$
0.43

 
$
1.49

 
$
1.30

Cash dividends per common share
$
0.24

 
$
0.22

 
$
0.70

 
$
0.66






See notes to interim condensed consolidated financial statements (unaudited).

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Table of Contents

INTERIM CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (UNAUDITED)
(Dollars in thousands)

Three Months Ended 
 September 30
 
Nine Months Ended 
 September 30
 
2015
 
2014
 
2015
 
2014
Net income
$
4,063

 
$
3,405

 
$
11,834

 
$
10,279

Unrealized gains (losses) on AFS securities
 
 
 
 
 
 
 
Unrealized gains (losses) on AFS securities arising during the period
5,301

 
(1,326
)
 
3,137

 
8,642

Reclassification adjustment for net realized (gains) losses included in net income

 
(97
)
 

 
(97
)
Net unrealized gains (losses)
5,301

 
(1,423
)
 
3,137

 
8,545

Tax effect (1)
(1,818
)
 
469

 
(1,019
)
 
(2,690
)
Other comprehensive income (loss), net of tax
3,483

 
(954
)
 
2,118

 
5,855

Comprehensive income (loss)
$
7,546

 
$
2,451

 
$
13,952

 
$
16,134

(1) 
See “Note 11 – Accumulated Other Comprehensive Income (Loss)” for tax effect reconciliation.






















See notes to interim condensed consolidated financial statements (unaudited).

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INTERIM CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY (UNAUDITED)
(Dollars in thousands except per share amounts)
 
Common Stock
 
 
 
 
 
 
 
 

Common Shares
Outstanding
 
Amount
 
Common Shares to be
Issued for
Deferred
Compensation
Obligations
 
Retained
Earnings
 
Accumulated
Other
Comprehensive
Income (Loss)
 
Totals
Balance, January 1, 2014
7,723,023

 
$
137,580

 
$
4,148

 
$
25,222

 
$
(6,341
)
 
$
160,609

Comprehensive income (loss)

 

 

 
10,279

 
5,855

 
16,134

Issuance of common stock
122,261

 
2,845

 

 

 

 
2,845

Common stock issued for deferred compensation obligations
6,126

 
143

 
(143
)
 

 

 

Common stock transferred from the Rabbi Trust to satisfy deferred compensation obligations

 
258

 
(258
)
 

 

 

Share-based payment awards under equity compensation plan

 

 
382

 

 

 
382

Common stock purchased for deferred compensation obligations

 
(253
)
 

 

 

 
(253
)
Common stock repurchased pursuant to publicly announced repurchase plan
(110,680
)
 
(2,550
)
 

 

 

 
(2,550
)
Cash dividends paid ($0.66 per common share)

 

 

 
(5,091
)
 

 
(5,091
)
Balance, September 30, 2014
7,740,730

 
$
138,023

 
$
4,129

 
$
30,410

 
$
(486
)
 
$
172,076

Balance, January 1, 2015
7,776,274

 
$
138,755

 
$
4,242

 
$
32,103

 
$
(506
)
 
$
174,594

Comprehensive income (loss)

 

 

 
11,834

 
2,118

 
13,952

Issuance of common stock
142,388

 
3,310

 

 

 

 
3,310

Common stock issued for deferred compensation obligations

 

 

 

 

 

Common stock transferred from the Rabbi Trust to satisfy deferred compensation obligations

 
123

 
(123
)
 

 

 

Share-based payment awards under equity compensation plan

 

 
425

 

 

 
425

Common stock purchased for deferred compensation obligations

 
(279
)
 

 

 

 
(279
)
Common stock repurchased pursuant to publicly announced repurchase plan
(153,329
)
 
(3,588
)
 

 

 

 
(3,588
)
Cash dividends paid ($0.70 per common share)

 

 

 
(5,416
)
 

 
(5,416
)
Balance, September 30, 2015
7,765,333

 
$
138,321

 
$
4,544

 
$
38,521

 
$
1,612

 
$
182,998










See notes to interim condensed consolidated financial statements (unaudited).

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Table of Contents

INTERIM CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(Dollars in thousands)

Nine Months Ended 
 September 30
 
2015
 
2014
OPERATING ACTIVITIES
 
 
 
Net income
$
11,834

 
$
10,279

Reconciliation of net income to net cash provided by operating activities:
 
 
 
Provision for loan losses
(1,999
)
 
(604
)
Impairment of foreclosed assets
22

 
83

Depreciation
1,925

 
1,902

Amortization of OMSR
273

 
206

Amortization of acquisition intangibles
122

 
143

Net amortization of AFS securities
1,514

 
1,382

Net (gains) losses on sale of AFS securities

 
(97
)
Net gain on sale of mortgage loans
(472
)
 
(436
)
Increase in cash value of corporate owned life insurance policies
(570
)
 
(556
)
Share-based payment awards under equity compensation plan
425

 
382

Origination of loans held-for-sale
(36,140
)
 
(21,746
)
Proceeds from loan sales
36,682

 
22,865

Net changes in operating assets and liabilities which provided (used) cash:
 
 
 
Accrued interest receivable
(1,141
)
 
(1,464
)
Other assets
(5,633
)
 
(433
)
Accrued interest payable and other liabilities
(117
)
 
134

Net cash provided by (used in) operating activities
6,725

 
12,040

INVESTING ACTIVITIES
 
 
 
Activity in AFS securities
 
 
 
Sales

 
13,362

Maturities, calls, and principal payments
72,345

 
47,527

Purchases
(131,800
)
 
(116,647
)
Net loan principal (originations) collections
(709
)
 
(15,952
)
Proceeds from sales of foreclosed assets
1,305

 
1,482

Purchases of premises and equipment
(4,397
)
 
(2,026
)
Purchases of corporate owned life insurance policies
(500
)
 

Net cash provided by (used in) investing activities
(63,756
)
 
(72,254
)

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Table of Contents

INTERIM CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (continued)
(Dollars in thousands)
 
Nine Months Ended 
 September 30
 
2015
 
2014
FINANCING ACTIVITIES
 
 
 
Net increase (decrease) in deposits
$
53,519

 
$
38,124

Net increase (decrease) in borrowed funds
7,901

 
11,112

Cash dividends paid on common stock
(5,416
)
 
(5,091
)
Proceeds from issuance of common stock
3,310

 
2,845

Common stock repurchased
(3,588
)
 
(2,550
)
Common stock purchased for deferred compensation obligations
(279
)
 
(253
)
Net cash provided by (used in) financing activities
55,447

 
44,187

Increase (decrease) in cash and cash equivalents
(1,584
)
 
(16,027
)
Cash and cash equivalents at beginning of period
19,906

 
41,558

Cash and cash equivalents at end of period
$
18,322

 
$
25,531

SUPPLEMENTAL CASH FLOWS INFORMATION:
 
 
 
Interest paid
$
7,587

 
$
7,536

Federal income taxes paid
3,193

 
979

SUPPLEMENTAL NONCASH INFORMATION:
 
 
 
Transfers of loans to foreclosed assets
$
1,043

 
$
1,194





















See notes to interim condensed consolidated financial statements (unaudited).

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Table of Contents

NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(Dollars in thousands except per share amounts)
Note 1 – Basis of Presentation
As used in these notes as well as in Management's Discussion and Analysis of Financial Condition and Results of Operations, references to “Isabella,” the “Corporation”, “we,” “our,” “us,” and similar terms refer to the consolidated entity consisting of Isabella Bank Corporation and its subsidiaries. Isabella Bank Corporation refers solely to the parent holding company, and Isabella Bank or the “Bank” refer to Isabella Bank Corporation’s subsidiary, Isabella Bank.
The accompanying unaudited interim condensed consolidated financial statements have been prepared in accordance with GAAP for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by GAAP for complete financial statements. In our opinion, all adjustments considered necessary for a fair presentation have been included. Operating results for the three and nine month periods ended September 30, 2015 are not necessarily indicative of the results that may be expected for the year ending December 31, 2015. For further information, refer to our Annual Report on Form 10-K for the year ended December 31, 2014.
Our accounting policies are materially the same as those discussed in Note 1 to the Consolidated Financial Statements included in our Annual Report on Form 10-K for the year ended December 31, 2014.
Note 2 – Computation of Earnings Per Common Share
Basic earnings per common share represents income available to common shareholders divided by the weighted average number of common shares outstanding during the period. Diluted earnings per common share reflects additional common shares that would have been outstanding if dilutive potential common shares had been issued. Potential common shares that may be issued relate solely to outstanding shares in the Directors Plan.
 
Three Months Ended 
 September 30
 
Nine Months Ended 
 September 30

2015
 
2014
 
2015
 
2014
Average number of common shares outstanding for basic calculation
7,768,230

 
7,733,362

 
7,773,655

 
7,725,706

Average potential effect of common shares in the Directors Plan (1)
178,882

 
170,897

 
177,531

 
170,955

Average number of common shares outstanding used to calculate diluted earnings per common share
7,947,112

 
7,904,259

 
7,951,186

 
7,896,661

Net income
$
4,063

 
$
3,405

 
$
11,834

 
$
10,279

Earnings per common share
 
 
 
 
 
 
 
Basic
$
0.52

 
$
0.44

 
$
1.52

 
$
1.33

Diluted
$
0.51

 
$
0.43

 
$
1.49

 
$
1.30

(1) 
Exclusive of shares held in the Rabbi Trust
Note 3 – Accounting Standards Updates
Recently Adopted Accounting Standards Updates
ASU No. 2014-04: “Reclassification of Residential Real Estate Collateralized Consumer Mortgage Loans upon Foreclosure (a consensus of the FASB Emerging Issues Task Force)
In January 2014, ASU No. 2014-04 amended ASC Topic 310, "Receivables" to provide clarification as to when an in substance repossession or foreclosure occurs, that is, when a creditor should be considered to have received physical possession of residential real estate property collateralizing a consumer mortgage loan. Specifically, the update defined physical possession to appropriately derecognize the loan and recognize the real estate as OREO. The adoption of this ASU did not have a significant impact on our operations or financial statement disclosures.
ASU No. 2014-11: “Repurchase-to-Maturity Transactions, Repurchase Financings, and Disclosures
In June 2014, ASU No. 2014-11 amended ASC Topic 860, “Transfers and Servicing” to address concerns that current accounting guidance distinguishes between repurchase agreements that settle at the same time as the maturity of the transferred financial asset and those that settle any time before maturity. The update changed the accounting for repurchase-to-maturity

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transactions to secured borrowing accounting and, for repurchase financing arrangements, separate accounting for a transfer of a financial asset executed contemporaneously with a repurchase agreement with the same counterparty, which resulted in secured borrowing accounting for the repurchase agreement. The adoption of this ASU did not have a significant impact on our operations or financial statement disclosures.
Pending Accounting Standards Updates
ASU No. 2015-01: “Income Statement - Extraordinary and Unusual Items (Subtopic 225-20): Simplifying Income Statement Presentation by Eliminating the Concept of Extraordinary Items
In January 2015, ASU No. 2015-01 amended ASC Topic 225, “Income Statement” to eliminate the concept of extraordinary items. The presentation and disclosure guidance for items that are unusual in nature or occur infrequently will be retained and will be expanded to include items that are both unusual in nature and infrequently occurring. The new authoritative guidance is effective for interim and annual periods beginning after December 15, 2015 and is not expected to have a significant impact on our operations or financial statement disclosures.
ASU No. 2015-02: “Consolidation (Topic 810): Amendments to the Consolidation Analysis
In February 2015, ASU No. 2015-02 amended ASC Topic 810, “Consolidation” to provide consolidation guidance on legal entities when the reporting entity’s contractual rights do not give it the ability to act primarily on its own behalf, the reporting entity does not hold a majority of the legal entity’s voting rights, or the reporting entity is not exposed to a majority of the legal entity’s economic benefits or obligations. The amendments in this update affect reporting entities that are required to evaluate whether they should consolidate certain legal entities. All legal entities are subject to reevaluation under the revised consolidation model. Specifically, the amendments:
1.
Modify the evaluation of whether limited partnerships and similar legal entities are variable interest entities (VIEs) or voting interest entities.
2.
Eliminate the presumption that a general partner should consolidate a limited partnership.
3.
Affect the consolidation analysis of reporting entities that are involved with VIEs, particularly those that have fee arrangements and related party relationships.
4.
Provide a scope exception from consolidation guidance for reporting entities with interests in legal entities that are required to comply with or operate in accordance with requirements that are similar to those in Rule 2a-7 of the Investment Company Act of 1940 for registered money market funds.
The amendments of this update affect limited partnerships and similar legal entities including fees paid and fee arrangements on the primary beneficiary. The following three main provisions affect limited partnerships and similar legal entities:
1.
There is an additional requirement that limited partnerships and similar legal entities must meet to qualify as voting interest entities. A limited partnership must provide partners with either substantive kick-out rights or substantive participating rights over the general partner to meet this requirement.
2.
The specialized consolidation model and guidance for limited partnerships and similar legal entities have been eliminated. There is no longer a presumption that a general partner should consolidate a limited partnership.
3.
For limited partnerships and similar legal entities that qualify as voting interest entities, a limited partner with a controlling financial interest should consolidate a limited partnership. A controlling financial interest may be achieved through holding a limited partner interest that provides substantive kick-out rights.
The new authoritative guidance is effective for interim and annual periods beginning after December 15, 2015 and is not expected to have a significant impact on our operations or financial statement disclosures.
ASU No. 2015-05: “Intangibles-Goodwill and Other-Internal-Use Software (Subtopic 350-40): Customer’s Accounting for Fees Paid in a Cloud Computing Arrangement“
In April 2015, ASU No. 2015-05 amended ASC Topic 350, “Goodwill and Other” to provide guidance to customers about whether a cloud computing arrangement includes a software license. If a cloud computing arrangement includes a software license, then the customer should account for the software license element of the arrangement consistent with the acquisition of other software licenses. If a cloud computing arrangement does not include a software license, the customer should account for the arrangement as a service contract. The guidance will not change GAAP for a customer’s accounting for service contracts. The new authoritative guidance is effective for interim and annual periods beginning after December 15, 2015 and is not expected to have a significant impact on our operations or financial statement disclosures.

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Table of Contents

ASU No. 2015-07: “Fair Value Measurement (Topic 820): Disclosures for Investments in Certain Entities That Calculate Net Asset Value per Share (or Its Equivalent)“
In May 2015, ASU No. 2015-07 amended ASC Topic 820, “Fair Value Measurement” to remove the requirement to categorize within the fair value hierarchy all investments for which fair value is measured using the net asset value per share practical expedient. The amendments also remove the requirement to make certain disclosures for all investments that are eligible to be measured at fair value using the net asset value per share practical expedient. Rather, those disclosures are limited to investments for which the entity has elected to measure the fair value using that practical expedient. The new authoritative guidance is effective for interim and annual periods beginning after December 15, 2015 and is not expected to have a significant impact on our operations or financial statement disclosures.
ASU No. 2015-14: “Revenue from Contracts with Customers (Topic 606): Deferral of the Effective Date“
In August 2015, ASU No. 2015-14 was issued to defer the effective date of ASU No. 2014-09, “Revenue from Contracts with Customers (Topic 606)” by one year. The new authoritative guidance is now effective for interim and annual periods beginning after December 15, 2017. The new authoritative guidance in ASU No. 2014-09 is not expected to have a significant impact on our operations or financial statement disclosures.
Note 4 – AFS Securities
The amortized cost and fair value of AFS securities, with gross unrealized gains and losses, are as follows at:
 
September 30, 2015

Amortized
Cost
 
Gross
Unrealized
Gains
 
Gross
Unrealized
Losses
 
Fair
Value
Government sponsored enterprises
$
24,441

 
$
8

 
$
81

 
$
24,368

States and political subdivisions
226,045

 
6,950

 
621

 
232,374

Auction rate money market preferred
3,200

 

 
493

 
2,707

Preferred stocks
3,800

 

 
608

 
3,192

Mortgage-backed securities
232,279

 
2,599

 
620

 
234,258

Collateralized mortgage obligations
130,069

 
2,071

 
427

 
131,713

Total
$
619,834

 
$
11,628

 
$
2,850

 
$
628,612

 
December 31, 2014

Amortized
Cost
 
Gross
Unrealized
Gains
 
Gross
Unrealized
Losses
 
Fair
Value
Government sponsored enterprises
$
24,597

 
$
10

 
$
471

 
$
24,136

States and political subdivisions
209,153

 
6,986

 
794

 
215,345

Auction rate money market preferred
3,200

 

 
581

 
2,619

Preferred stocks
6,800

 
31

 
691

 
6,140

Mortgage-backed securities
165,888

 
2,042

 
1,004

 
166,926

Collateralized mortgage obligations
152,255

 
1,533

 
1,420

 
152,368

Total
$
561,893

 
$
10,602

 
$
4,961

 
$
567,534


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The amortized cost and fair value of AFS securities by contractual maturity at September 30, 2015 are as follows:
 
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
$

 
$
24,029

 
$
412

 
$

 
$

 
$
24,441

States and political subdivisions
28,965

 
66,644

 
93,713

 
36,723

 

 
226,045

Auction rate money market preferred

 

 

 

 
3,200

 
3,200

Preferred stocks

 

 

 

 
3,800

 
3,800

Mortgage-backed securities

 

 

 

 
232,279

 
232,279

Collateralized mortgage obligations

 

 

 

 
130,069

 
130,069

Total amortized cost
$
28,965

 
$
90,673

 
$
94,125

 
$
36,723

 
$
369,348

 
$
619,834

Fair value
$
29,014


$
93,015


$
97,509


$
37,204


$
371,870

 
$
628,612

Expected maturities for government sponsored enterprises and states and political subdivisions may differ from contractual maturities because issuers may have the right to call or prepay obligations.
As the auction rate money market preferred and preferred stocks have continual call dates, they are not reported by a specific maturity group. Because of their variable monthly payments, mortgage-backed securities and collateralized mortgage obligations are not reported by a specific maturity group.
A summary of the sales activity of AFS securities was as follows for the:
 
Three Months Ended 
 September 30
 
Nine Months Ended 
 September 30
 
2014
 
2014
Proceeds from sales of AFS securities
$
13,362

 
$
13,362

Gross realized gains (losses)
$
97

 
$
97

Applicable income tax expense (benefit)
$
33

 
$
33

We had no sales of AFS securities in the three and nine month periods ended September 30, 2015.
The cost basis used to determine the realized gains or losses of AFS securities sold was the amortized cost of the individual investment security as of the trade date.
Information pertaining to AFS securities with gross unrealized losses at September 30, 2015 and December 31, 2014, aggregated by investment category and length of time that individual securities have been in a continuous loss position, follows:
 
September 30, 2015
 
Less Than Twelve Months
 
Twelve Months or More
 
 

Gross
Unrealized
Losses
 
Fair
Value
 
Gross
Unrealized
Losses
 
Fair
Value
 
Total
Unrealized
Losses
Government sponsored enterprises
$

 
$

 
$
81

 
$
23,915

 
$
81

States and political subdivisions
80

 
12,168

 
541

 
3,602

 
621

Auction rate money market preferred

 

 
493

 
2,707

 
493

Preferred stocks

 

 
608

 
3,192

 
608

Mortgage-backed securities
42

 
18,517

 
578

 
39,075

 
620

Collateralized mortgage obligations
3

 
7,920

 
424

 
28,190

 
427

Total
$
125

 
$
38,605

 
$
2,725

 
$
100,681

 
$
2,850

Number of securities in an unrealized loss position:
 
 
35

 
 
 
29

 
64


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Table of Contents

 
December 31, 2014
 
Less Than Twelve Months
 
Twelve Months or More
 
 

Gross
Unrealized
Losses
 
Fair
Value
 
Gross
Unrealized
Losses
 
Fair
Value
 
Total
Unrealized
Losses
Government sponsored enterprises
$

 
$

 
$
471

 
$
23,525

 
$
471

States and political subdivisions
48

 
5,323

 
746

 
17,416

 
794

Auction rate money market preferred

 

 
581

 
2,619

 
581

Preferred stocks

 

 
691

 
3,109

 
691

Mortgage-backed securities
5

 
9,456

 
999

 
52,407

 
1,004

Collateralized mortgage obligations
105

 
29,435

 
1,315

 
39,540

 
1,420

Total
$
158

 
$
44,214

 
$
4,803

 
$
138,616

 
$
4,961

Number of securities in an unrealized loss position:
 
 
22

 
 
 
72

 
94

As of September 30, 2015 and December 31, 2014, we conducted an analysis to determine whether any AFS securities currently in an unrealized loss position should be other-than-temporarily impaired. Such analyses considered, among other factors, the following criteria:
Has the value of the investment declined more than what is deemed to be reasonable based on a risk and maturity adjusted discount rate?
Is the investment credit rating below investment grade?
Is it probable the issuer will be unable to pay the amount when due?
Is it more likely than not that we will have to sell the security before recovery of its cost basis?
Has the duration of the investment been extended?
Based on our analyses, the fact that we have asserted that we do not have the intent to sell AFS securities in an unrealized loss position, and considering it is unlikely that we will have to sell any AFS securities in an unrealized loss position before recovery of their cost basis, we do not believe that the values of any AFS securities were other-than-temporarily impaired as of September 30, 2015, or December 31, 2014.
Note 5 – Loans and ALLL
We grant commercial, agricultural, residential real estate, and consumer loans to customers situated primarily in Clare, Gratiot, Isabella, Mecosta, Midland, Montcalm, and Saginaw counties in Michigan. The ability of the borrowers to honor their repayment obligations is often dependent upon the real estate, agricultural, light manufacturing, retail, gaming, tourism, higher education, and general economic conditions of this region. Substantially all of our consumer and residential real estate loans are secured by various items of property, while commercial loans are secured primarily by real estate, business assets, and personal guarantees; a portion of loans are unsecured.
Loans that we have the intent and ability to hold in our portfolio are reported at their outstanding principal balance adjusted for any charge-offs, the ALLL, and any deferred fees or costs. Interest income is accrued over the term of the loan based on the principal amount outstanding. Loan origination fees and certain direct loan origination costs are capitalized and recognized as a component of interest income over the term of the loan using the level yield method.
The accrual of interest on commercial, agricultural, and residential real estate loans is discontinued at the time the loan is 90 days or more past due unless the credit is well-secured and in the process of collection. 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. Consumer loans are typically charged-off no later than 180 days past due. Past due status is based on contractual terms of the loan. In all cases, loans are placed on nonaccrual status or charged-off at an earlier date if collection of principal or interest is considered doubtful.
For loans that are placed on nonaccrual status or charged-off, all interest accrued in the current calendar year, but not collected, is reversed against interest income while interest accrued in prior calendar years, but not collected, is charged against the ALLL. Loans may be returned to accrual status after six months of continuous performance.
Commercial and agricultural loans include loans for commercial real estate, commercial operating loans, farmland and agricultural production, and states and political subdivisions. Repayment of these loans is dependent upon the successful operation and management of a business. We minimize our risk by limiting the amount of direct credit exposure to any one borrower to $15,000. Borrowers with direct credit needs of more than $15,000 are serviced through the use of loan

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Table of Contents

participations with other commercial banks. Commercial and agricultural real estate loans commonly require loan-to-value limits of 80% or less. Depending upon the type of loan, past credit history, and current operating results, we may require the 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.
We offer adjustable rate mortgages, construction loans, and fixed rate residential real estate loans which have amortization periods up to a maximum of 30 years. We consider the anticipated direction of interest rates, balance sheet duration, the sensitivity of our balance sheet to changes in interest rates, and overall loan demand to determine whether or not to sell fixed rate loans to Freddie Mac.
Our lending policies generally limit the maximum loan-to-value ratio on residential real estate loans to 97% of the lower of the appraised value of the property or the purchase price, with the condition that private mortgage insurance is required on loans with loan-to-value ratios in excess of 80%.
Underwriting criteria for residential real estate loans include:
Evaluation of the borrower’s ability to make monthly payments.
Evaluation of 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.
Ensuring all debt servicing does not exceed 36% of income.
Verification of acceptable credit reports.
Verification of employment, income, and financial information.

Appraisals are performed by independent appraisers and reviewed for appropriateness. All mortgage loan requests are reviewed by our mortgage loan committee or through a secondary market underwriting system; loans in excess of $500 require the approval of our Internal Loan Committee, the Executive Loan Committee, the Board of Directors’ Loan Committee, or the Board of Directors.
Consumer loans include secured and unsecured personal loans. Loans are amortized for a period of up to 12 years based on the age and value of the underlying collateral. The underwriting emphasis is on a borrower’s perceived intent and ability to pay rather than collateral value. No consumer loans are sold to the secondary market.
The ALLL is established as losses are estimated to have occurred through a provision for loan losses charged to earnings. Loan losses are charged against the ALLL when we believe the uncollectability of the loan balance is confirmed. Subsequent recoveries, if any, are credited to the ALLL.
The appropriateness of the ALLL is evaluated on a quarterly basis and is based upon a periodic review of the collectability of the loans in light of historical experience, the nature and volume of the loan portfolio, adverse situations that may affect the borrower’s ability to repay, estimated value of any underlying collateral, and prevailing economic conditions. This evaluation is inherently subjective as it requires estimates that are susceptible to significant revision as more information becomes available.
The primary factors behind the determination of the level of the ALLL are specific allocations for impaired loans, historical loss percentages, as well as unallocated components. Specific allocations for impaired loans are primarily determined based on the difference between the 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. Historical loss allocations are calculated at the loan class and segment levels based on a migration analysis of the loan portfolio over the preceding five years. 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.

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Table of Contents

A summary of changes in the ALLL and the recorded investment in loans by segments follows:
 
Allowance for Loan Losses
 
Three Months Ended September 30, 2015

Commercial
 
Agricultural
 
Residential Real Estate
 
Consumer
 
Unallocated
 
Total
July 1, 2015
$
3,483

 
$
363

 
$
3,514

 
$
591

 
$
1,049

 
$
9,000

Charge-offs
(61
)
 

 
(70
)
 
(79
)
 

 
(210
)
Recoveries
68

 

 
33

 
47

 

 
148

Provision for loan losses
(500
)
 
15

 
(164
)
 
(49
)
 
(40
)
 
(738
)
September 30, 2015
$
2,990


$
378


$
3,313


$
510


$
1,009


$
8,200

 
Allowance for Loan Losses

Nine Months Ended September 30, 2015

Commercial

Agricultural

Residential Real Estate

Consumer

Unallocated

Total
January 1, 2015
$
3,823


$
216


$
4,238


$
645


$
1,178


$
10,100

Charge-offs
(89
)



(325
)

(252
)



(666
)
Recoveries
387


72


152


154




765

Provision for loan losses
(1,131
)

90


(752
)

(37
)

(169
)

(1,999
)
September 30, 2015
$
2,990


$
378


$
3,313


$
510


$
1,009


$
8,200

 
Allowance for Loan Losses and Recorded Investment in Loans
 
September 30, 2015

Commercial
 
Agricultural
 
Residential Real Estate
 
Consumer
 
Unallocated
 
Total
ALLL
 
 
 
 
 
 
 
 
 
 
 
Individually evaluated for impairment
$
1,322

 
$
3

 
$
1,891

 
$
1

 
$

 
$
3,217

Collectively evaluated for impairment
1,668

 
375

 
1,422

 
509

 
1,009

 
4,983

Total
$
2,990

 
$
378

 
$
3,313

 
$
510

 
$
1,009

 
$
8,200

Loans
 
 
 
 
 
 
 
 
 
 
 
Individually evaluated for impairment
$
9,603

 
$
2,647

 
$
10,275

 
$
38

 
 
 
$
22,563

Collectively evaluated for impairment
423,466

 
113,646

 
239,575

 
34,097

 
 
 
810,784

Total
$
433,069

 
$
116,293

 
$
249,850

 
$
34,135

 
 
 
$
833,347

 
Allowance for Loan Losses
 
Three Months Ended September 30, 2014

Commercial
 
Agricultural
 
Residential Real Estate
 
Consumer
 
Unallocated
 
Total
July 1, 2014
$
5,012

 
$
219

 
$
3,981

 
$
802

 
$
686

 
$
10,700

Charge-offs
(163
)
 

 
(180
)
 
(73
)
 

 
(416
)
Recoveries
171

 

 
68

 
39

 

 
278

Provision for loan losses
(704
)
 
(31
)
 
92

 
(47
)
 
528

 
(162
)
September 30, 2014
$
4,316


$
188


$
3,961


$
721


$
1,214


$
10,400


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Table of Contents

 
Allowance for Loan Losses
 
Nine Months Ended September 30, 2014

Commercial
 
Agricultural
 
Residential Real Estate
 
Consumer
 
Unallocated
 
Total
January 1, 2014
$
6,048

 
$
434

 
$
3,845

 
$
639

 
$
534

 
$
11,500

Charge-offs
(434
)
 
(31
)
 
(557
)
 
(255
)
 

 
(1,277
)
Recoveries
477

 

 
190

 
114

 

 
781

Provision for loan losses
(1,775
)
 
(215
)
 
483

 
223

 
680

 
(604
)
September 30, 2014
$
4,316

 
$
188

 
$
3,961

 
$
721

 
$
1,214

 
$
10,400

 
Allowance for Loan Losses and Recorded Investment in Loans
 
December 31, 2014

Commercial
 
Agricultural
 
Residential Real Estate
 
Consumer
 
Unallocated
 
Total
ALLL
 
 
 
 
 
 
 
 
 
 
 
Individually evaluated for impairment
$
1,283

 
$

 
$
2,143

 
$
1

 
$

 
$
3,427

Collectively evaluated for impairment
2,540

 
216

 
2,095

 
644

 
1,178

 
6,673

Total
$
3,823

 
$
216

 
$
4,238

 
$
645

 
$
1,178

 
$
10,100

Loans
 
 
 
 
 
 
 
 
 
 
 
Individually evaluated for impairment
$
12,029

 
$
1,595

 
$
12,160

 
$
64

 
 
 
$
25,848

Collectively evaluated for impairment
419,932

 
103,126

 
252,435

 
32,241

 
 
 
807,734

Total
$
431,961


$
104,721

 
$
264,595

 
$
32,305

 
 
 
$
833,582

The following table displays the credit quality indicators for commercial and agricultural credit exposures based on internally assigned credit risk ratings as of:
 
September 30, 2015
 
Commercial
 
Agricultural

Real Estate
 
Other
 
Total
 
Real Estate
 
Other
 
Total
Rating
 
 
 
 
 
 
 
 
 
 

1 - Excellent
$

 
$
499

 
$
499

 
$

 
$

 
$

2 - High quality
6,684

 
8,131

 
14,815

 
4,534

 
2,308

 
6,842

3 - High satisfactory
101,450

 
31,355

 
132,805

 
29,181

 
12,885

 
42,066

4 - Low satisfactory
207,512

 
59,764

 
267,276

 
36,451

 
24,742

 
61,193

5 - Special mention
6,408

 
818

 
7,226

 
2,271

 
1,678

 
3,949

6 - Substandard
9,893

 
271

 
10,164

 
1,660

 
305

 
1,965

7 - Vulnerable
284

 

 
284

 
274

 
4

 
278

8 - Doubtful

 

 

 

 

 

Total
$
332,231

 
$
100,838

 
$
433,069

 
$
74,371

 
$
41,922

 
$
116,293


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Table of Contents

 
December 31, 2014
 
Commercial
 
Agricultural

Real Estate
 
Other
 
Total
 
Real Estate
 
Other
 
Total
Rating
 
 
 
 
 
 
 
 
 
 
 
1 - Excellent
$

 
$
492

 
$
492

 
$

 
$

 
$

2 - High quality
13,620

 
14,423

 
28,043

 
5,806

 
3,582

 
9,388

3 - High satisfactory
94,556

 
51,230

 
145,786

 
28,715

 
12,170

 
40,885

4 - Low satisfactory
184,000

 
49,869

 
233,869

 
33,361

 
17,560

 
50,921

5 - Special mention
8,456

 
1,322

 
9,778

 
1,607

 
65

 
1,672

6 - Substandard
11,055

 
123

 
11,178

 
1,602

 
147

 
1,749

7 - Vulnerable
2,687

 
116

 
2,803

 
106

 

 
106

8 - Doubtful

 
12

 
12

 

 

 

Total
$
314,374

 
$
117,587

 
$
431,961

 
$
71,197

 
$
33,524

 
$
104,721

Internally assigned credit risk ratings are reviewed, at a minimum, when loans are renewed or when management has knowledge of improvements or deterioration of the credit quality of individual credits. Descriptions of the internally assigned credit risk ratings for commercial and agricultural loans are as follows:
1. EXCELLENT – Substantially Risk Free
Credit has strong financial condition and solid earnings history, characterized by:
High liquidity, strong cash flow, low leverage.
Unquestioned ability to meet all obligations when due.
Experienced management, with management succession in place.
Secured by cash.
2. HIGH QUALITY – Limited Risk
Credit with sound financial condition and a positive trend in earnings supplemented by:
Favorable liquidity and leverage ratios.
Ability to meet all obligations when due.
Management with successful track record.
Steady and satisfactory earnings history.
If loan is secured, collateral is of high quality and readily marketable.
Access to alternative financing.
Well defined primary and secondary source of repayment.
If supported by guaranty, the financial strength and liquidity of the guarantor(s) are clearly evident.
3. HIGH SATISFACTORY – Reasonable Risk
Credit with satisfactory financial condition and further characterized by:
Working capital adequate to support operations.
Cash flow sufficient to pay debts as scheduled.
Management experience and depth appear favorable.
Loan performing according to terms.
If loan is secured, collateral is acceptable and loan is fully protected.

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Table of Contents

4. LOW SATISFACTORY – Acceptable Risk
Credit with bankable risks, although some signs of weaknesses are shown:
Would include most start-up businesses.
Occasional instances of trade slowness or repayment delinquency – may have been 10-30 days slow within the past year.
Management’s abilities are apparent, yet unproven.
Weakness in primary source of repayment with adequate secondary source of repayment.
Loan structure generally in accordance with policy.
If secured, loan collateral coverage is marginal.
Adequate cash flow to service debt, but coverage is low.
To be classified as less than satisfactory, only one of the following criteria must be met.
5. SPECIAL MENTION – Criticized
Credit constitutes an undue and unwarranted credit risk but not to the point of justifying a classification of substandard. The credit risk may be relatively minor yet constitute an unwarranted risk in light of the circumstances surrounding a specific loan:
Downward trend in sales, profit levels, and margins.
Impaired working capital position.
Cash flow is strained in order to meet debt repayment.
Loan delinquency (30-60 days) and overdrafts may occur.
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.
6. SUBSTANDARD – Classified
Credit where the borrower’s current net worth, paying capacity, and value of the collateral pledged is inadequate. There is a distinct possibility that we will implement collection procedures if the loan deficiencies are not corrected. In addition, the following characteristics may apply:
Sustained losses have severely eroded the equity and cash flow.
Deteriorating liquidity.
Serious management problems or internal fraud.
Original repayment terms liberalized.
Likelihood of bankruptcy.
Inability to access other funding sources.
Reliance on secondary source of repayment.
Litigation filed against borrower.
Collateral provides little or no value.
Requires excessive attention of the loan officer.
Borrower is uncooperative with loan officer.
7. VULNERABLE – Classified
Credit is considered “Substandard” and warrants placing on nonaccrual status. Risk of loss is being evaluated and exit strategy options are under review. Other characteristics that may apply:
Insufficient cash flow to service debt.
Minimal or no payments being received.
Limited options available to avoid the collection process.
Transition status, expect action will take place to collect loan without immediate progress being made.

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Table of Contents

8. DOUBTFUL – Workout
Credit has all the weaknesses inherent in a “Substandard” loan with the added characteristic that collection and/or liquidation is pending. The possibility of a loss is extremely high, but its classification as a loss is deferred until liquidation procedures are completed, or reasonably estimable. Other characteristics that may apply:
Normal operations are severely diminished or have ceased.
Seriously impaired cash flow.
Original repayment terms materially altered.
Secondary source of repayment is inadequate.
Survivability as a “going concern” is impossible.
Collection process has begun.
Bankruptcy petition has been filed.
Judgments have been filed.
Portion of the loan balance has been charged-off.
Our primary credit quality indicator for residential real estate and consumer loans is the individual loan’s past due aging. The following tables summarize the past due and current loans as of:
 
September 30, 2015
 
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
$
391

 
$

 
$

 
$
284

 
$
675

 
$
331,556

 
$
332,231

Commercial other
323

 
8

 

 

 
331

 
100,507

 
100,838

Total commercial
714

 
8

 

 
284

 
1,006

 
432,063

 
433,069

Agricultural
 
 
 
 
 
 
 
 
 
 
 
 
 
Agricultural real estate

 

 

 
274

 
274

 
74,097

 
74,371

Agricultural other
425

 

 

 
4

 
429

 
41,493

 
41,922

Total agricultural
425

 

 

 
278

 
703

 
115,590

 
116,293

Residential real estate
 
 
 
 
 
 
 
 
 
 
 
 
 
Senior liens
1,649

 
48

 

 
234

 
1,931

 
197,687

 
199,618

Junior liens
68

 
6

 

 

 
74

 
9,599

 
9,673

Home equity lines of credit
25

 

 

 

 
25

 
40,534

 
40,559

Total residential real estate
1,742

 
54

 

 
234

 
2,030

 
247,820

 
249,850

Consumer
 
 
 
 
 
 
 
 
 
 
 
 
 
Secured
56

 

 

 

 
56

 
30,186

 
30,242

Unsecured
4

 

 

 

 
4

 
3,889

 
3,893

Total consumer
60

 

 

 

 
60

 
34,075

 
34,135

Total
$
2,941

 
$
62

 
$

 
$
796

 
$
3,799

 
$
829,548

 
$
833,347


20

Table of Contents

 
December 31, 2014
 
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
$
1,155

 
$
282

 
$

 
$
2,764

 
$
4,201

 
$
310,173

 
$
314,374

Commercial other
153

 
24

 
2

 
116

 
295

 
117,292

 
117,587

Total commercial
1,308

 
306

 
2

 
2,880

 
4,496

 
427,465

 
431,961

Agricultural
 
 
 
 
 
 
 
 
 
 
 
 
 
Agricultural real estate
101

 

 

 
106

 
207

 
70,990

 
71,197

Agricultural other
102

 

 

 

 
102

 
33,422

 
33,524

Total agricultural
203

 

 

 
106

 
309

 
104,412

 
104,721

Residential real estate
 
 
 
 
 
 
 
 
 
 
 
 
 
Senior liens
1,821

 
425

 
146

 
668

 
3,060

 
210,138

 
213,198

Junior liens
235

 
18

 

 
130

 
383

 
10,750

 
11,133

Home equity lines of credit
468

 
20

 

 
250

 
738

 
39,526

 
40,264

Total residential real estate
2,524

 
463

 
146

 
1,048

 
4,181

 
260,414

 
264,595

Consumer
 
 
 
 
 
 
 
 
 
 
 
 
 
Secured
107

 
2

 

 
10

 
119

 
28,229

 
28,348

Unsecured
19

 

 

 

 
19

 
3,938

 
3,957

Total consumer
126

 
2

 

 
10

 
138

 
32,167

 
32,305

Total
$
4,161

 
$
771

 
$
148

 
$
4,044

 
$
9,124

 
$
824,458

 
$
833,582

Impaired Loans
Loans may be classified as impaired if they meet one or more of the following criteria:
1.
There has been a charge-off of its principal balance (in whole or in part);
2.
The loan has been classified as a TDR; or
3.
The loan is in nonaccrual status.
Impairment is measured on a loan-by-loan basis for commercial and agricultural loans by comparing the loan’s outstanding balance to the present value of expected future cash flows discounted at the loan’s effective interest rate, the loan’s obtainable market price, or the fair value of the collateral, less cost to sell, if the loan is collateral dependent. Large groups of smaller balance homogeneous loans are collectively evaluated for impairment. Impairment is measured on a loan-by-loan basis for residential real estate and consumer loans by comparing the loan’s unpaid principal balance to the present value of expected future cash flows discounted at the loan’s effective interest rate.

21

Table of Contents

We do not recognize interest income on impaired loans in nonaccrual status. For impaired loans not classified as nonaccrual, interest income is recognized daily, as earned, according to the terms of the loan agreement and the principal amount outstanding. The following is a summary of information pertaining to impaired loans as of:
 
September 30, 2015
 
December 31, 2014

Outstanding Balance
 
Unpaid Principal Balance
 
Valuation Allowance
 
Outstanding Balance
 
Unpaid Principal Balance
 
Valuation Allowance
Impaired loans with a valuation allowance
 
 
 
 
 
 
 
 
 
 
 
Commercial real estate
$
8,402

 
$
8,521

 
$
1,322

 
$
7,115

 
$
7,234

 
$
1,279

Commercial other

 

 

 
609

 
828

 
4

Agricultural real estate

 

 

 

 

 

Agricultural other
335

 
335

 
3

 

 

 

Residential real estate senior liens
10,008

 
10,878

 
1,864

 
11,645

 
12,782

 
2,015

Residential real estate junior liens
134

 
134

 
27

 
265

 
275

 
53

Home equity lines of credit

 

 

 
250

 
650

 
75

Consumer secured
38

 
38

 
1

 
54

 
54

 
1

Total impaired loans with a valuation allowance
18,917

 
19,906

 
3,217

 
19,938

 
21,823

 
3,427

Impaired loans without a valuation allowance
 
 
 
 
 
 
 
 
 
 
 
Commercial real estate
1,099

 
1,232

 
 
 
4,116

 
4,462

 
 
Commercial other
102

 
113

 
 
 
189

 
212

 
 
Agricultural real estate
1,980

 
1,980

 
 
 
1,529

 
1,529

 
 
Agricultural other
332

 
332

 
 
 
66

 
186

 
 
Home equity lines of credit
133

 
433

 
 
 

 

 
 
Consumer secured

 

 
 
 
10

 
10

 
 
Total impaired loans without a valuation allowance
3,646

 
4,090

 
 
 
5,910

 
6,399

 
 
Impaired loans
 
 
 
 
 
 
 
 
 
 
 
Commercial
9,603

 
9,866

 
1,322

 
12,029

 
12,736

 
1,283

Agricultural
2,647

 
2,647

 
3

 
1,595

 
1,715

 

Residential real estate
10,275

 
11,445

 
1,891

 
12,160

 
13,707

 
2,143

Consumer
38

 
38

 
1

 
64

 
64

 
1

Total impaired loans
$
22,563

 
$
23,996

 
$
3,217

 
$
25,848

 
$
28,222

 
$
3,427


22

Table of Contents

The following is a summary of information pertaining to impaired loans for the three and nine month periods ended:
 
Three Months Ended 
 September 30, 2015
 
Nine Months Ended 
 September 30, 2015

Average Outstanding Balance
 
Interest Income Recognized
 
Average Outstanding Balance
 
Interest Income Recognized
Impaired loans with a valuation allowance
 
 
 
 
 
 
 
Commercial real estate
$
7,532

 
$
112

 
$
7,287

 
$
295

Commercial other
280

 

 
481

 
19

Agricultural real estate

 

 
29

 
1

Agricultural other
168

 
4

 
56

 
4

Residential real estate senior liens
10,021

 
106

 
10,812

 
323

Residential real estate junior liens
138

 
1

 
197

 
15

Home equity lines of credit

 

 
42

 

Consumer secured
40

 
1

 
46

 
3

Total impaired loans with a valuation allowance
18,179


224


18,950


660

Impaired loans without a valuation allowance
 
 
 
 
 
 
 
Commercial real estate
1,432

 
28

 
2,356

 
163

Commercial other
83

 
2

 
94

 
7

Agricultural real estate
1,819

 
23

 
1,615

 
64

Agricultural other
494

 
5

 
300

 
13

Home equity lines of credit
136

 
4

 
149

 
14

Consumer secured

 

 
2

 

Total impaired loans without a valuation allowance
3,964


62


4,516


261

Impaired loans
 
 
 
 
 
 
 
Commercial
9,327

 
142

 
10,218

 
484

Agricultural
2,481

 
32

 
2,000

 
82

Residential real estate
10,295

 
111

 
11,200

 
352

Consumer
40

 
1

 
48

 
3

Total impaired loans
$
22,143


$
286


$
23,466


$
921


23

Table of Contents

 
Three Months Ended 
 September 30, 2014
 
Nine Months Ended 
 September 30, 2014

Average Outstanding Balance
 
Interest Income Recognized
 
Average Outstanding Balance
 
Interest Income Recognized
Impaired loans with a valuation allowance
 
 
 
 
 
 
 
Commercial real estate
$
7,063

 
$
106

 
$
6,822

 
$
291

Commercial other
589

 
11

 
746

 
40

Agricultural real estate
102

 

 
113

 

Agricultural other

 

 

 

Residential real estate senior liens
12,440

 
124

 
12,938

 
388

Residential real estate junior liens
167

 
(8
)
 
94

 
(7
)
Home equity lines of credit
310

 
2

 
220

 
13

Consumer secured
62

 
1

 
72

 
3

Total impaired loans with a valuation allowance
20,733

 
236

 
21,005

 
728

Impaired loans without a valuation allowance
 
 
 
 
 
 
 
Commercial real estate
4,594

 
69

 
5,396

 
262

Commercial other
314

 
5

 
397

 
12

Agricultural real estate
1,460

 
22

 
1,425

 
59

Agricultural other
43

 
1

 
112

 
29

Home equity lines of credit

 

 
32

 

Consumer secured
10

 

 
5

 

Total impaired loans without a valuation allowance
6,421

 
97

 
7,367

 
362

Impaired loans
 
 
 
 
 
 
 
Commercial
12,560

 
191

 
13,361

 
605

Agricultural
1,605

 
23

 
1,650

 
88

Residential real estate
12,917

 
118

 
13,284

 
394

Consumer
72

 
1

 
77

 
3

Total impaired loans
$
27,154


$
333


$
28,372


$
1,090

As of September 30, 2015 and December 31, 2014, we had committed to advance $2 and $0, respectively, in connection with impaired loans, which include TDRs.
Troubled Debt Restructurings
Loan modifications are considered to be TDRs when the modification includes terms outside of normal lending practices to a borrower who is experiencing financial difficulties.
Typical concessions granted include, but are not limited to:
1.
Agreeing to interest rates below prevailing market rates for debt with similar risk characteristics.
2.
Extending the amortization period beyond typical lending guidelines for loans with similar risk characteristics.
3.
Forgiving principal.
4.
Forgiving accrued interest.
To determine if a borrower is experiencing financial difficulties, factors we consider include:
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).


24

Table of Contents

The following is a summary of information pertaining to TDRs granted for the:
 
Three Months Ended September 30, 2015
 
Nine Months Ended September 30, 2015

Number of Loans
 
Pre-Modification Recorded Investment
 
Post-Modification Recorded Investment
 
Number of Loans
 
Pre-Modification Recorded Investment
 
Post-Modification Recorded Investment
Commercial other
3

 
$
1,926

 
$
1,926

 
8

 
$
2,511

 
$
2,511

Agricultural other
3

 
636

 
636

 
10

 
1,406

 
1,406

Residential real estate
 
 
 
 
 
 
 
 
 
 
 
Senior liens
1

 
151

 
151

 
5

 
599

 
599

Junior liens

 

 

 
1

 
30

 
30

Home equity lines of credit

 

 

 
1

 
94

 
94

Total residential real estate
1

 
151

 
151

 
7

 
723

 
723

Consumer unsecured

 

 

 

 

 

Total
7

 
$
2,713

 
$
2,713

 
25

 
$
4,640

 
$
4,640

 
Three Months Ended September 30, 2014
 
Nine Months Ended September 30, 2014
 
Number of Loans
 
Pre-Modification Recorded Investment
 
Post-Modification Recorded Investment
 
Number of Loans
 
Pre-Modification Recorded Investment
 
Post-Modification Recorded Investment
Commercial other
2

 
$
23

 
$
23

 
7

 
$
386

 
$
386

Agricultural other
1

 
49

 
49

 
1

 
49

 
49

Residential real estate
 
 
 
 
 
 
 
 
 
 
 
Senior liens
2

 
144

 
144

 
14

 
805

 
805

Junior liens
1

 
40

 
40

 
2

 
81

 
81

Home equity lines of credit

 

 

 
1

 
160

 
160

Total residential real estate
3

 
184

 
184

 
17

 
1,046

 
1,046

Consumer unsecured
1

 
10

 
10

 
4

 
18

 
18

Total
7

 
$
266

 
$
266

 
29

 
$
1,499

 
$
1,499

The following tables summarize concessions we granted to borrowers in financial difficulty for the:
 
Three Months Ended September 30, 2015
 
Nine Months Ended September 30, 2015

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 other
3

 
$
1,926

 

 
$

 
6

 
$
2,180

 
2

 
$
331

Agricultural other
3

 
636

 

 

 
9

 
1,360

 
1

 
46

Residential real estate
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Senior liens
1

 
151

 

 

 
2

 
201

 
3

 
398

Junior liens

 

 

 

 

 

 
1

 
30

Home equity lines of credit

 

 

 

 

 

 
1

 
94

Total residential real estate
1

 
151

 

 

 
2

 
201

 
5

 
522

Consumer unsecured

 

 

 

 

 

 

 

Total
7

 
$
2,713

 

 
$

 
17

 
$
3,741

 
8

 
$
899


25

Table of Contents

 
Three Months Ended September 30, 2014
 
Nine Months Ended September 30, 2014

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 other
2

 
$
23

 

 
$

 
6

 
$
378

 
1

 
$
8

Agricultural other

 

 
1

 
49

 

 

 
1

 
49

Residential real estate
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Senior liens

 

 
2

 
144

 
3

 
98

 
11

 
707

Junior liens

 

 
1

 
40

 

 

 
2

 
81

Home equity lines of credit

 

 

 

 
1

 
160

 

 

Total residential real estate

 

 
3

 
184

 
4

 
258

 
13

 
788

Consumer unsecured
1

 
10

 

 

 
3

 
15

 
1

 
3

Total
3

 
$
33

 
4

 
$
233

 
13

 
$
651

 
16

 
$
848

We did not restructure any loans by forgiving principal or accrued interest in the three and nine month periods ended September 30, 2015 or 2014.
Based on our historical loss experience, losses associated with TDRs are not significantly different than other impaired loans within the same loan segment. As such, TDRs, including TDRs that have been modified in the past 12 months that subsequently defaulted, are analyzed in the same manner as other impaired loans within their respective loan segment.
Following is a summary of loans that defaulted in the three and nine month periods ended September 30, 2015 and 2014, which were modified within 12 months prior to the default date.
 
Three Months Ended September 30, 2015
 
Nine Months Ended September 30, 2015
 
Number of Loans
 
Pre-
Default
Recorded
Investment
 
Charge-Off
Recorded
Upon
Default
 
Post-
Default
Recorded
Investment
 
Number of Loans
 
Pre-
Default
Recorded
Investment
 
Charge-Off
Recorded
Upon
Default
 
Post-
Default
Recorded
Investment
Commercial other
1

 
$
216

 
$
25

 
$
191

 
1

 
$
216

 
$
25

 
$
191

 
Three Months Ended September 30, 2014
 
Nine Months Ended September 30, 2014
 
Number of Loans
 
Pre-
Default
Recorded
Investment
 
Charge-Off
Recorded
Upon
Default
 
Post-
Default
Recorded
Investment
 
Number of Loans
 
Pre-
Default
Recorded
Investment
 
Charge-Off
Recorded
Upon
Default
 
Post-
Default
Recorded
Investment
Consumer unsecured
2

 
$
7

 
$
7

 
$

 
2

 
$
7

 
$
7

 
$

The following is a summary of TDR loan balances as of:
 
September 30, 2015
 
December 31, 2014
TDRs
$
21,457

 
$
23,341

The following is a summary of foreclosed assets as of:

September 30, 2015
 
December 31, 2014
Consumer mortgage loans collateralized by residential real estate foreclosed as a result of obtaining physical possession (1)
$
190

 
N/A

All other foreclosed assets
411

 
885

Total
$
601

 
$
885

(1) 
Disclosure requirement from the adoption of ASU No. 2014-04 on January 1, 2015. As such, measurement was not applicable for December 31, 2014.

26

Table of Contents

Consumer mortgage loans collateralized by residential real estate in the process of foreclosure were $181 as of September 30, 2015.
Note 6 – Equity Securities Without Readily Determinable Fair Values
Included in equity securities without readily determinable fair values are restricted securities, which are carried at cost, and investments in unconsolidated entities accounted for under the equity method of accounting.
Equity securities without readily determinable fair values consist of the following as of:

September 30
2015
 
December 31
2014
FHLB Stock
$
11,700

 
$
9,800

Corporate Settlement Solutions, LLC
7,304

 
6,936

FRB Stock
1,999

 
1,999

Valley Financial Corporation
1,000

 
1,000

Other
338

 
341

Total
$
22,341

 
$
20,076

Note 7 – Borrowed Funds
Borrowed funds consist of the following obligations as of:
 
September 30, 2015
 
December 31, 2014

Amount
 
Rate
 
Amount
 
Rate
FHLB advances
$
215,000

 
1.97
%
 
$
192,000

 
2.05
%
Securities sold under agreements to repurchase without stated maturity dates
69,510

 
0.12
%
 
95,070

 
0.14
%
Securities sold under agreements to repurchase with stated maturity dates

 

 
439

 
3.25
%
Federal funds purchased
13,100

 
0.39
%
 
2,200

 
0.50
%
Total
$
297,610

 
1.47
%
 
$
289,709

 
1.41
%
FHLB advances are collateralized by a blanket lien on all qualified 1-4 family residential real estate loans, specific AFS securities, and FHLB stock.
The following table lists the maturities and weighted average interest rates of FHLB advances as of:
 
September 30, 2015
 
December 31, 2014

Amount
 
Rate
 
Amount
 
Rate
Fixed rate due 2015
$
20,000

 
0.88
%
 
$
42,000

 
0.72
%
Variable rate due 2015
10,000

 
0.49
%
 

 

Fixed rate due 2016
10,000

 
2.15
%
 
10,000

 
2.15
%
Variable rate due 2016
15,000

 
0.49
%
 

 

Fixed rate due 2017
30,000

 
1.95
%
 
30,000

 
1.95
%
Fixed rate due 2018
40,000

 
2.35
%
 
40,000

 
2.35
%
Fixed rate due 2019
40,000

 
2.35
%
 
20,000

 
3.11
%
Fixed rate due 2020
10,000

 
1.98
%
 
10,000

 
1.98
%
Fixed rate due 2021
30,000

 
2.26
%
 
30,000

 
2.26
%
Fixed rate due 2023
10,000

 
3.90
%
 
10,000

 
3.90
%
Total
$
215,000

 
1.97
%
 
$
192,000

 
2.05
%
Securities sold under agreements to repurchase are classified as secured borrowings and are reflected at the amount of cash received in connection with the transaction. The securities underlying the agreements have a carrying value and a fair value of $69,564 and $94,537 at September 30, 2015 and December 31, 2014, respectively. Such securities remain under our control. We may be required to provide additional collateral based on the fair value of underlying securities.

27

Table of Contents

The following table lists the maturity and weighted average interest rates of securities sold under agreements to repurchase with stated maturity dates as of:
 
September 30, 2015
 
December 31, 2014
 
Amount
 
Rate
 
Amount
 
Rate
Repurchase agreements due 2015
$

 
 
$
439

 
3.25
%
Securities sold under repurchase agreements without stated maturity dates, federal funds purchased, and FRB Discount Window advances generally mature within one to four days from the transaction date. The following table provides a summary of securities sold under repurchase agreements without stated maturity dates, federal funds purchased, and FRB Discount Window advances borrowings for the three and nine month periods ended:
 
Three Months Ended September 30
 
2015
 
2014
 
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
$
71,170

 
$
68,963

 
0.13
%
 
$
91,472

 
$
88,906

 
0.13
%
Federal funds purchased
13,100

 
7,265

 
0.51
%
 
17,700

 
2,252

 
0.48
%
 
Nine Months Ended September 30
 
2015
 
2014

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
$
84,859

 
$
70,399

 
0.13
%
 
$
94,741

 
$
91,231

 
0.13
%
Federal funds purchased
13,100

 
6,253

 
0.50
%
 
17,700

 
4,939

 
0.48
%
We had pledged AFS securities and 1-4 family residential real estate loans in the following amounts at:

September 30
2015
 
December 31
2014
Pledged to secure borrowed funds
$
344,385

 
$
324,584

Pledged to secure repurchase agreements
69,564

 
94,537

Pledged for public deposits and for other purposes necessary or required by law
24,321

 
19,851

Total
$
438,270

 
$
438,972

AFS securities pledged to repurchase agreements without stated maturity dates consisted of the following at:

September 30
2015
 
December 31
2014
States and political subdivisions
$
2,811

 
$
6,643

Mortgage-backed securities
23,008

 
29,655

Collateralized mortgage obligations
43,745

 
58,239

Total
$
69,564

 
$
94,537

AFS securities pledged to repurchase agreements are monitored to ensure the appropriate level is collateralized. In the event of maturities, calls, significant principal repayments, or significant decline in market values, we have adequate levels of available AFS securities to pledge to satisfy required collateral.
As of September 30, 2015, we had the ability to borrow up to an additional $140,938, based on assets pledged as collateral. We had no investment securities that are restricted to be pledged for specific purposes.

28

Table of Contents

Note 8 – Other Noninterest Expenses
A summary of expenses included in other noninterest expenses is as follows for the:

Three Months Ended 
 September 30
 
Nine Months Ended 
 September 30
 
2015
 
2014
 
2015
 
2014
FDIC insurance premiums
$
204

 
$
196

 
$
619

 
$
619

Director fees
204

 
191

 
608

 
569

Audit and related fees
189

 
185

 
535

 
505

Donations and community relations
155

 
391

 
412

 
606

Marketing costs
124

 
121

 
350

 
360

Education and travel
90

 
154

 
311

 
418

Printing and supplies
111

 
89

 
309

 
278

Postage and freight
94

 
105

 
284

 
303

Legal fees
121

 
88

 
273

 
248

Consulting fees
122

 
96

 
264

 
263

Loan underwriting fees
98

 
83

 
248

 
270

All other
660

 
596

 
1,725

 
1,866

Total other
$
2,172

 
$
2,295

 
$
5,938

 
$
6,305

Note 9 – Federal Income Taxes
The reconciliation of the provision for federal income taxes and the amount computed at the federal statutory tax rate of 34% of income before federal income tax expense is as follows for the:
 
Three Months Ended 
 September 30
 
Nine Months Ended 
 September 30

2015
 
2014
 
2015
 
2014
Income taxes at 34% statutory rate
$
1,723

 
$
1,309

 
$
4,959

 
$
4,072

Effect of nontaxable income
 
 
 
 
 
 
 
Interest income on tax exempt municipal securities
(509
)
 
(501
)
 
(1,519
)
 
(1,498
)
Earnings on corporate owned life insurance policies
(64
)
 
(62
)
 
(194
)
 
(189
)
Effect of tax credits
(175
)
 
(187
)
 
(542
)
 
(575
)
Other
(18
)
 
(158
)
 
(70
)
 
(235
)
Total effect of nontaxable income
(766
)
 
(908
)
 
(2,325
)
 
(2,497
)
Effect of nondeductible expenses
45

 
43

 
116

 
121

Federal income tax expense
$
1,002

 
$
444

 
$
2,750

 
$
1,696

Note 10 – Fair Value
Following is a description of the valuation methodologies, key inputs, and an indication of the level of the fair value hierarchy in which the assets or liabilities are classified.
Cash and cash equivalents: The carrying amounts of cash and demand deposits due from banks and interest bearing balances due from banks approximate fair values. As such, we classify cash and cash equivalents as Level 1.
AFS securities: AFS 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.

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Table of Contents

Mortgage loans AFS: Mortgage loans AFS are carried at the lower of cost or fair value. The fair value of Mortgage loans AFS are based on the 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: For variable rate loans with no significant change in credit risk, fair values are based on carrying values. Fair values for fixed rate loans are estimated using discounted cash flow analyses, using interest rates currently being offered for loans with similar terms to borrowers of similar credit quality. The resulting amounts are adjusted to estimate the effect of changes in the credit quality of borrowers since the loans were originated. As such, we classify loans as Level 3 assets.
We do not record loans at fair value on a recurring basis. However, from time-to-time, loans are classified as impaired and a specific allowance for loan loss 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 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. 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.
We review the net realizable values of the underlying collateral for collateral dependent impaired loans on at least a quarterly basis for all loan types. To determine the collateral value, we utilize independent appraisals, broker price opinions, or internal evaluations. We review these valuations 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 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 specific reserves or charge-offs 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.
The following tables list the quantitative fair value information about impaired loans as of:

September 30, 2015
Valuation Technique
Fair Value
Unobservable Input
 
Range
 
 
Discount applied to collateral appraisal:
 
 
 
 
Real Estate
 
20% - 30%
 
 
Equipment
 
30% - 35%
Discounted appraisal value
$7,629
Cash crop inventory
 
40%
 
 
Other inventory
 
50% - 75%
 
 
Furniture, fixtures & equipment
 
35% - 45%
 
 
Accounts receivable
 
50%
 
 
Liquor license
 
75%

December 31, 2014
Valuation Technique
Fair Value
Unobservable Input
 
Range
 
 
Discount applied to collateral appraisal:
 
 
 
 
Real Estate
 
20% - 25%
 
 
Equipment
 
30% - 40%
Discounted appraisal value
$8,720
Cash crop inventory
 
40%
 
 
Other inventory
 
75%
 
 
Accounts receivable
 
50%
 
 
Liquor license
 
75%
Discount factors with ranges are based on the age of the independent appraisal, broker price opinion, or internal evaluation.
Accrued interest receivable: The carrying amounts of accrued interest receivable approximate fair value. As such, we classify accrued interest receivable as Level 1.
Equity securities without readily determinable fair values: Included in equity securities without readily determinable fair values are FHLB stock and FRB stock as well as our ownership interests in Corporate Settlement Solutions, LLC and Valley Financial

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Table of Contents

Corporation. The investment in Corporate Settlement Solutions, LLC, a title insurance company, was made in the first quarter 2008 and we account for our investment under the equity method of accounting. Valley Financial Corporation is the parent company of 1st State Bank in Saginaw, Michigan, which is a community bank that opened in 2005. We made investments in Valley Financial Corporation in 2004 and in 2007 and we account for our investment under the cost method of accounting.
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 2015 and 2014, there were no impairments recorded on equity securities without readily determinable fair values.
Foreclosed assets: Upon transfer from the loan portfolio, foreclosed assets (which are included in other assets) are adjusted to and subsequently carried at the lower of carrying value or fair value less costs to sell. Net realizable value is based upon independent market prices, appraised values of the collateral, or management’s estimation of the value of the collateral. Due to the inherent level of estimation in the valuation process, we classify foreclosed assets as nonrecurring Level 3.
The table below lists the quantitative fair value information related to foreclosed assets as of:
 
September 30, 2015
Valuation Technique
Fair Value
 
Unobservable Input
 
Range
 
 
 
Discount applied to collateral appraisal:
 
 
Discounted appraisal value
$
601

 
Real Estate
 
20% - 30%
 
December 31, 2014
Valuation Technique
Fair Value
 
Unobservable Input
 
Range
 
 
 
Discount applied to collateral appraisal:
 
 
Discounted appraisal value
$
885

 
Real Estate
 
20% - 25%
Discount factors with ranges are based on the age of the independent appraisal, broker price opinion, or internal evaluations.
Goodwill and other intangible assets: Acquisition intangibles and goodwill are evaluated for potential impairment on at least an annual basis. Acquisition intangibles and goodwill are typically qualitatively evaluated to determine if it is more likely than not that the carrying balance is impaired. If it is determined that the carrying balance of acquisition intangibles or goodwill is more likely than not to be impaired, we perform a cash flow valuation to determine the extent of the potential impairment. If the testing resulted in impairment, we would classify goodwill and other acquisition intangibles subjected to nonrecurring fair value adjustments as Level 3. During 2015 and 2014, there were no impairments recorded on goodwill and other acquisition intangibles.
OMSR: OMSR (which are included in other assets) are subject to impairment testing. To test for impairment, we utilize a discounted cash flow analysis using interest rates and prepayment speed assumptions currently quoted for comparable instruments and discount rates. If the valuation model reflects a value less than the carrying value, OMSR are adjusted to fair value through a valuation allowance as determined by the model. As such, we classify OMSR subject to nonrecurring fair value adjustments as Level 2.
Deposits: The fair value of demand, savings, and money market deposits are equal to their carrying amounts and are classified as Level 1. Fair values for variable rate certificates of deposit approximate their carrying value. Fair values for fixed rate certificates of deposit are estimated using a discounted cash flow calculation that applies interest rates currently being offered on certificates to a schedule of aggregated expected monthly maturities on time deposits. As such, fixed rate certificates of deposit are classified as Level 2.
Borrowed funds: 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.
Accrued interest payable: The carrying amounts of accrued interest payable approximate fair value. As such, we classify accrued interest payable as Level 1.

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Table of Contents

Commitments to extend credit, standby letters of credit, and undisbursed loans: Our commitments to extend credit, standby letters of credit, and undisbursed funds have no carrying amount and are estimated to have no realizable fair value. Historically, a majority of the unused commitments to extend credit have not been drawn upon and, generally, we do not receive fees in connection with these commitments other than standby letter of credit fees, which are not significant.
The preceding methods described may produce a fair value calculation that may not be indicative of net realizable value or reflective of future fair values. Although we believe our valuation methods are appropriate and consistent with other market participants, the use of different methodologies or assumptions to determine the fair value of certain financial instruments could result in a different fair value measurement.
Estimated Fair Values of Financial Instruments Not Recorded at Fair Value in their Entirety on a Recurring Basis
Disclosure of the estimated fair values of financial instruments, which differ from carrying values, often requires the use of estimates. In cases where quoted market values in an active market are not available, we use present value techniques and other valuation methods to estimate the fair values of our financial instruments. These valuation methods require considerable judgment and the resulting estimates of fair value can be significantly affected by the assumptions made and methods used.
The carrying amount and estimated fair value of financial instruments not recorded at fair value in their entirety on a recurring basis were as follows as of:
 
September 30, 2015

Carrying
Value
 
Estimated
Fair Value
 
(Level 1)
 
(Level 2)
 
(Level 3)
ASSETS
 
 
 
 
 
 
 
 
 
Cash and cash equivalents
$
18,322

 
$
18,322

 
$
18,322

 
$

 
$

Mortgage loans AFS
831

 
844

 

 
844

 

Gross loans
833,347

 
825,436

 

 

 
825,436

Less allowance for loan and lease losses
8,200

 
8,200

 

 

 
8,200

Net loans
825,147

 
817,236

 

 

 
817,236

Accrued interest receivable
6,992

 
6,992

 
6,992

 

 

Equity securities without readily determinable fair values (1)
22,341

 
N/A

 

 

 

OMSR
2,458

 
2,458

 

 
2,458

 

LIABILITIES
 
 
 
 
 
 
 
 
 
Deposits without stated maturities
695,848

 
695,848

 
695,848

 

 

Deposits with stated maturities
432,155

 
431,177

 

 
431,177

 

Borrowed funds
297,610

 
301,410

 

 
301,410

 

Accrued interest payable
557

 
557

 
557

 

 


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Table of Contents

 
December 31, 2014
 
Carrying
Value
 
Estimated
Fair Value
 
(Level 1)
 
(Level 2)
 
(Level 3)
ASSETS
 
 
 
 
 
 
 
 
 
Cash and cash equivalents
$
19,906

 
$
19,906

 
$
19,906

 
$

 
$

Mortgage loans AFS
901

 
911

 

 
911

 

Gross loans
833,582

 
827,449

 

 

 
827,449

Less allowance for loan and lease losses
10,100

 
10,100

 

 

 
10,100

Net loans
823,482

 
817,349

 

 

 
817,349

Accrued interest receivable
5,851

 
5,851

 
5,851

 

 

Equity securities without readily determinable fair values (1)
20,076

 
N/A

 

 

 

OMSR
2,519

 
2,554

 

 
2,554

 

LIABILITIES
 
 
 
 
 
 
 
 
 
Deposits without stated maturities
634,222

 
634,222

 
634,222

 

 

Deposits with stated maturities
440,262

 
440,964

 

 
440,964

 

Borrowed funds
289,709

 
293,401

 

 
293,401

 

Accrued interest payable
558

 
558

 
558

 

 

(1) 
Due to the characteristics of equity securities without readily determinable fair values, they are not disclosed under a specific fair value hierarchy. If we were to record an impairment adjustment related to these securities, such amount would be classified as a nonrecurring Level 3 fair value adjustment.
Financial Instruments Recorded at Fair Value
The table below presents the recorded amount of assets and liabilities measured at fair value on:
 
September 30, 2015
 
December 31, 2014

Total
 
(Level 1)
 
(Level 2)
 
(Level 3)
 
Total
 
(Level 1)
 
(Level 2)
 
(Level 3)
Recurring items
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
AFS securities
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Government-sponsored enterprises
$
24,368

 
$

 
$
24,368

 
$

 
$
24,136

 
$

 
$
24,136

 
$

States and political subdivisions
232,374

 

 
232,374

 

 
215,345

 

 
215,345

 

Auction rate money market preferred
2,707

 

 
2,707

 

 
2,619

 

 
2,619

 

Preferred stocks
3,192

 
3,192

 

 

 
6,140

 
6,140

 

 

Mortgage-backed securities
234,258

 

 
234,258

 

 
166,926

 

 
166,926

 

Collateralized mortgage obligations
131,713

 

 
131,713

 

 
152,368

 

 
152,368

 

Total AFS securities
628,612

 
3,192

 
625,420

 

 
567,534

 
6,140

 
561,394

 

Nonrecurring items
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Impaired loans (net of the ALLL)
7,629

 

 

 
7,629

 
8,720

 

 

 
8,720

Foreclosed assets
601

 

 

 
601

 
885

 

 

 
885

Total
$
636,842

 
$
3,192

 
$
625,420

 
$
8,230

 
$
577,139

 
$
6,140

 
$
561,394

 
$
9,605

Percent of assets and liabilities measured at fair value
 
 
0.50
%
 
98.21
%
 
1.29
%
 
 
 
1.06
%
 
97.27
%
 
1.67
%

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Table of Contents

The following table provides a summary of the changes in fair value of assets and liabilities recorded at fair value, for which gains or losses were recognized through earnings on a nonrecurring basis, in the:
 
Three Months Ended 
 September 30
 
Nine Months Ended 
 September 30
 
2015
 
2014
 
2015
 
2014
Nonrecurring items
 
 
 
 
 
 
 
Foreclosed assets
$

 
$
(20
)
 
$
(22
)
 
$
(83
)
We had no assets or liabilities recorded at fair value with changes in fair value recognized through earnings, on a recurring basis, as of September 30, 2015.
Note 11 – Accumulated Other Comprehensive Income (Loss)
The following table summarizes the changes in AOCI by component for the:
 
Three Months Ended September 30
 
2015
 
2014

Unrealized
Holding Gains
(Losses) on
AFS
Securities
 
Defined
Benefit
Pension Plan
 
Total
 
Unrealized
Holding Gains
(Losses) on
AFS
Securities
 
Defined
Benefit
Pension Plan
 
Total
Balance, July 1
$
1,937

 
$
(3,808
)
 
$
(1,871
)
 
$
2,602

 
$
(2,134
)
 
$
468

OCI before reclassifications
5,301

 

 
5,301

 
(1,326
)
 

 
(1,326
)
Amounts reclassified from AOCI

 

 

 
(97
)
 

 
(97
)
Subtotal
5,301

 

 
5,301

 
(1,423
)
 

 
(1,423
)
Tax effect
(1,818
)
 

 
(1,818
)
 
469

 

 
469

OCI, net of tax
3,483

 

 
3,483

 
(954
)
 

 
(954
)
Balance, September 30
$
5,420


$
(3,808
)

$
1,612


$
1,648


$
(2,134
)

$
(486
)
 
Nine Months Ended September 30
 
2015
 
2014

Unrealized
Holding Gains
(Losses) on
AFS
Securities
 
Defined
Benefit
Pension Plan
 
Total
 
Unrealized
Holding Gains
(Losses) on
AFS
Securities
 
Defined
Benefit
Pension Plan
 
Total
Balance, January 1
$
3,302

 
$
(3,808
)
 
$
(506
)
 
$
(4,207
)
 
$
(2,134
)
 
$
(6,341
)
OCI before reclassifications
3,137

 

 
3,137

 
8,642

 

 
8,642

Amounts reclassified from AOCI

 

 

 
(97
)
 

 
(97
)
Subtotal
3,137

 

 
3,137

 
8,545

 

 
8,545

Tax effect
(1,019
)
 

 
(1,019
)
 
(2,690
)
 

 
(2,690
)
OCI, net of tax
2,118

 

 
2,118

 
5,855

 

 
5,855

Balance, September 30
$
5,420

 
$
(3,808
)
 
$
1,612

 
$
1,648

 
$
(2,134
)
 
$
(486
)
Included in OCI for the three and nine month periods ended September 30, 2015 and 2014 are changes in unrealized holding gains and losses related to auction rate money market preferred and preferred stocks. For federal income tax purposes, these securities are considered equity investments. As such, no deferred federal income taxes related to unrealized holding gains or losses are expected or recorded.

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Table of Contents

A summary of the components of unrealized holding gains on AFS securities included in OCI follows for the:
 
Three Months Ended September 30
 
2015
 
2014

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
$
140

 
$
5,161

 
$
5,301

 
$
253

 
$
(1,579
)
 
$
(1,326
)
Reclassification adjustment for net realized (gains) losses included in net income

 

 

 

 
(97
)
 
(97
)
Net unrealized gains (losses)
140

 
5,161

 
5,301

 
253

 
(1,676
)
 
(1,423
)
Tax effect

 
(1,818
)
 
(1,818
)
 

 
469

 
469

Unrealized gains (losses), net of tax
$
140


$
3,343


$
3,483


$
253


$
(1,207
)

$
(954
)
 
Nine Months Ended September 30
 
2015
 
2014

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
$
140

 
$
2,997

 
$
3,137

 
$
253

 
$
8,389

 
$
8,642

Reclassification adjustment for net realized (gains) losses included in net income

 

 

 

 
(97
)
 
(97
)
Net unrealized gains (losses)
140

 
2,997

 
3,137

 
253

 
8,292

 
8,545

Tax effect

 
(1,019
)
 
(1,019
)
 

 
(2,690
)
 
(2,690
)
Unrealized gains (losses), net of tax
$
140

 
$
1,978

 
$
2,118

 
$
253

 
$
5,602

 
$
5,855


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Table of Contents

Note 12 – Parent Company Only Financial Information
Interim Condensed Balance Sheets

September 30
2015
 
December 31
2014
ASSETS
 
 
 
Cash on deposit at the Bank
$
2,522

 
$
1,035

AFS securities
259

 
3,294

Investments in subsidiaries
134,670

 
124,827

Premises and equipment
2,015

 
1,982

Other assets
53,188

 
53,228

TOTAL ASSETS
$
192,654

 
$
184,366

LIABILITIES AND SHAREHOLDERS’ EQUITY
 
 
 
Other liabilities
$
9,656

 
$
9,772

Shareholders' equity
182,998

 
174,594

TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY
$
192,654

 
$
184,366

Interim Condensed Statements of Income
 
Three Months Ended 
 September 30
 
Nine Months Ended 
 September 30

2015
 
2014
 
2015
 
2014
Income
 
 
 
 
 
 
 
Dividends from subsidiaries
$
1,700

 
$
1,750

 
$
5,000

 
$
4,750

Interest income
4

 
36

 
75

 
114

Management fee and other
1,859

 
717

 
4,913

 
1,945

Total income
3,563

 
2,503

 
9,988

 
6,809

Expenses
 
 
 
 
 
 
 
Compensation and benefits
1,228

 
866

 
3,658

 
2,470

Occupancy and equipment
415

 
293

 
1,226

 
514

Audit and related fees
101

 
109

 
316

 
278

Other
501

 
360

 
1,533

 
926

Total expenses
2,245

 
1,628

 
6,733

 
4,188

Income before income tax benefit and equity in undistributed earnings of subsidiaries
1,318

 
875

 
3,255

 
2,621

Federal income tax benefit
123

 
298

 
588

 
730

Income before equity in undistributed earnings of subsidiaries
1,441

 
1,173

 
3,843

 
3,351

Undistributed earnings of subsidiaries
2,622

 
2,232

 
7,991

 
6,928

Net income
$
4,063

 
$
3,405

 
$
11,834

 
$
10,279



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Table of Contents

Interim Condensed Statements of Cash Flows
 
Nine Months Ended 
 September 30

2015
 
2014
Operating activities
 
 
 
Net income
$
11,834

 
$
10,279

Adjustments to reconcile net income to cash provided by operations
 
 
 
Undistributed earnings of subsidiaries
(7,991
)
 
(6,928
)
Undistributed earnings of equity securities without readily determinable fair values
(364
)
 
231

Share-based payment awards under equity compensation plan
425

 
382

Depreciation
113

 
109

Net amortization of AFS securities

 
1

Changes in operating assets and liabilities which provided (used) cash
 
 
 
Other assets
406

 
89

Accrued interest and other liabilities
94

 
1,242

Net cash provided by (used in) operating activities
4,517

 
5,405

Investing activities
 
 
 
Maturities, calls, principal payments, and sales of AFS securities
3,000

 
250

Purchases of premises and equipment
(146
)
 
(23
)
Net (advances to) repayments from subsidiaries
300

 
641

Net cash provided by (used in) investing activities
3,154

 
868

Financing activities
 
 
 
Net increase (decrease) in borrowed funds
(211
)
 
600

Cash dividends paid on common stock
(5,416
)
 
(5,091
)
Proceeds from the issuance of common stock
3,310

 
2,845

Common stock repurchased
(3,588
)
 
(2,550
)
Common stock purchased for deferred compensation obligations
(279
)
 
(253
)
Net cash provided by (used in) financing activities
(6,184
)
 
(4,449
)
Increase (decrease) in cash and cash equivalents
1,487

 
1,824

Cash and cash equivalents at beginning of period
1,035

 
529

Cash and cash equivalents at end of period
$
2,522

 
$
2,353

Note 13 – Operating Segments
Our reportable segments are based on legal entities that account for at least 10% of net operating results. The operations of the Bank as of September 30, 2015 and 2014 and each of the three and nine month periods then ended, represent approximately 90% or more of our consolidated total assets and operating results. As such, no additional segment reporting is presented.

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Table of Contents

Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations.
ISABELLA BANK CORPORATION FINANCIAL REVIEW
(Dollars in thousands except per share amounts)
This section reviews our financial condition and results of our operations for the unaudited three and nine month periods ended September 30, 2015 and 2014. This analysis should be read in conjunction with our 2014 Annual Report on Form 10-K and with the unaudited interim condensed consolidated financial statements and notes, beginning on page 4 of this report.
Executive Summary
During the three and nine month periods ended September 30, 2015, we reported net income of $4,063 and $11,834 and earnings per common share of $0.52 and $1.52, respectively. Our strong earnings have primarily been the result of increased interest income and continued improvements in credit quality. Net loan recoveries during the first nine months of 2015 were $99 versus net loans charged-off of $496 in the first nine months of 2014. In addition, we continue to see reductions in loans classified as less than satisfactory as well as those past due and in nonaccrual status which have reached record lows. These factors required a reduction in the level of the ALLL in both amount and as a percentage of gross loans which resulted in a $1,999 reversal of provision for loan losses recorded in the nine month period ended September 30, 2015.
During the nine month period ended September 30, 2015, total assets grew by 4.50% to $1,619,250, and assets under management increased to $2,300,642 which includes loans sold and serviced, and assets managed by our Investment and Trust Services Department of $681,392. Total loans declined by $235 from December 31, 2014 which has been driven by a $14,745 decline in residential real estate loans as demand continued to be soft. Offsetting this decline is commercial and agricultural loan growth of $12,680 during the first nine months of 2015.
We increased our AFS securities portfolio by $61,078 during the first nine months of 2015 to continue to provide growth in our balance sheet to increase interest income. While our net yield on interest earning assets of 3.37% remains historically low, it has stabilized. Net interest income will increase only through continued growth in loans, investments, and other income earning assets. We are committed to increasing earnings and dedicated to providing long term sustainable growth to enable us to increase shareholder value.
While we have been able to grow our commercial and agricultural loan portfolios, increasing our residential real estate and consumer loan portfolios has been more challenging. To generate growth in these portfolios, we are implementing new products, enhancing our marketing efforts, streamlining delivery channels for direct and indirect loans, and expanding our service area. These initiatives are designed to attract new customers while expanding our relationships with current customers to improve earnings.

Recent Acquisitions
On July 31, 2015, we completed the acquisition of a branch from Flagstar Bank, FSB located in Saginaw, Michigan. In addition to real estate and equipment, we assumed deposit liabilities of $44,290 and recorded $156 of core deposit intangibles and $2,061 of goodwill, which represented the excess of the purchase price over the fair value of identifiable net assets acquired.
On August 28, 2015, we completed the acquisition of a branch from Independent Bank located in Midland, Michigan. In addition to real estate and equipment, we assumed $8,658 of deposit liabilities and recorded $50 of core deposit intangibles and $602 of goodwill, which represented the excess of the purchase price over the fair value of identifiable net assets acquired.

38

Table of Contents

Results of Operations

The following table outlines our results of operations and provides certain performance measures as of, and for the three month periods ended:

September 30
2015
 
June 30
2015
 
March 31
2015
 
December 31
2014
 
September 30
2014
INCOME STATEMENT DATA
 
 
 
 
 
 
 
 
 
Interest income
$
13,838

 
$
13,793

 
$
13,412

 
$
13,713

 
$
13,483

Interest expense
2,580

 
2,518

 
2,488

 
2,504

 
2,498

Net interest income
11,258

 
11,275

 
10,924

 
11,209

 
10,985

Provision for loan losses
(738
)
 
(535
)
 
(726
)
 
(64
)
 
(162
)
Noninterest income
3,101

 
2,629

 
2,128

 
2,426

 
2,216

Noninterest expenses
10,032

 
9,364

 
9,334

 
9,606

 
9,514

Federal income tax expense
1,002

 
977

 
771

 
648

 
444

Net Income
$
4,063

 
$
4,098

 
$
3,673

 
$
3,445

 
$
3,405

PER SHARE
 
 
 
 
 
 
 
 
 
Basic earnings
$
0.52

 
$
0.53

 
$
0.47

 
$
0.44

 
$
0.44

Diluted earnings
$
0.51

 
$
0.52

 
$
0.46

 
$
0.44

 
$
0.43

Dividends
$
0.24

 
$
0.23

 
$
0.23

 
$
0.23

 
$
0.22

Tangible book value*
$
17.06

 
$
17.17

 
$
16.84

 
$
16.59

 
$
16.33

Quoted market value
 
 
 
 
 
 
 
 
 
High
$
23.85

 
$
23.80

 
$
23.50

 
$
23.99

 
$
24.00

Low
$
22.75

 
$
22.70

 
$
22.00

 
$
22.10

 
$
21.73

Close*
$
23.69

 
$
23.75

 
$
22.90

 
$
22.50

 
$
23.60

Common shares outstanding*
7,765,333

 
7,797,188

 
7,781,820

 
7,776,274

 
7,740,730

PERFORMANCE RATIOS
 
 
 
 
 
 
 
 
 
Return on average total assets
1.01
%
 
1.04
%
 
0.95
%
 
0.90
%
 
0.89
%
Return on average shareholders' equity
9.03
%
 
9.11
%
 
8.27
%
 
8.06
%
 
7.91
%
Return on average tangible shareholders' equity
12.18
%
 
12.35
%
 
11.30
%
 
10.80
%
 
10.88
%
Net interest margin yield (FTE)
3.33
%
 
3.41
%
 
3.37
%
 
3.45
%
 
3.39
%
BALANCE SHEET DATA*
 
 
 
 
 
 
 
 
 
Gross loans
$
833,347

 
$
828,602

 
$
815,468

 
$
833,582

 
$
822,299

AFS securities
$
628,612

 
$
595,318

 
$
605,208

 
$
567,534

 
$
575,080

Total assets
$
1,619,250

 
$
1,586,975

 
$
1,571,575

 
$
1,549,543

 
$
1,553,974

Deposits
$
1,128,003

 
$
1,090,469

 
$
1,098,655

 
$
1,074,484

 
$
1,081,890

Borrowed funds
$
297,610

 
$
307,599

 
$
283,321

 
$
289,709

 
$
290,438

Shareholders' equity
$
182,998

 
$
178,025

 
$
179,653

 
$
174,594

 
$
172,076

Gross loans to deposits
73.88
%
 
75.99
%
 
74.22
%
 
77.58
%
 
76.01
%
ASSETS UNDER MANAGEMENT*
 
 
 
 
 
 
 
 
 
Loans sold with servicing retained
$
289,268

 
$
289,089

 
$
288,448

 
$
288,639

 
$
290,697

Assets managed by our Investment and Trust Services Department
$
392,124

 
$
400,827

 
$
396,802

 
$
383,878

 
$
374,878

Total assets under management
$
2,300,642

 
$
2,276,891

 
$
2,256,825

 
$
2,222,060

 
$
2,219,549

ASSET QUALITY*
 
 
 
 
 
 
 
 
 
Nonperforming loans to gross loans
0.10
%
 
0.19
%
 
0.44
%
 
0.50
%
 
0.57
%
Nonperforming assets to total assets
0.09
%
 
0.15
%
 
0.27
%
 
0.33
%
 
0.37
%
ALLL to gross loans
0.98
%
 
1.09
%
 
1.18
%
 
1.21
%
 
1.26
%
CAPITAL RATIOS*
 
 
 
 
 
 
 
 
 
Shareholders' equity to assets
11.30
%
 
11.22
%
 
11.43
%
 
11.27
%
 
11.07
%
Tier 1 leverage
8.54
%
 
8.77
%
 
8.74
%
 
8.59
%
 
8.47
%
Common equity tier 1 capital
13.36
%
 
13.71
%
 
13.70
%
 
N/A

 
N/A

Tier 1 risk-based capital
13.36
%
 
13.71
%
 
13.70
%
 
14.08
%
 
13.86
%
Total risk-based capital
14.19
%
 
14.63
%
 
14.70
%
 
15.18
%
 
15.11
%
* At end of period

39

Table of Contents

The following table outlines our results of operations and provides certain performance measures as of, and for the nine month periods ended:
 
September 30
2015
 
September 30
2014
 
September 30
2013
 
September 30
2012
 
September 30
2011
INCOME STATEMENT DATA
 
 
 
 
 
 
 
 
 
Interest income
$
41,043

 
$
40,238

 
$
40,473

 
$
42,556

 
$
43,439

Interest expense
7,586

 
7,466

 
8,338

 
10,372

 
12,224

Net interest income
33,457

 
32,772

 
32,135

 
32,184

 
31,215

Provision for loan losses
(1,999
)
 
(604
)
 
866

 
1,100

 
2,383

Noninterest income
7,858

 
6,899

 
8,045

 
8,844

 
5,785

Noninterest expenses
28,730

 
28,300

 
27,835

 
27,889

 
25,879

Federal income tax expense
2,750

 
1,696

 
1,893

 
2,344

 
1,239

Net Income
$
11,834

 
$
10,279


$
9,586

 
$
9,695

 
$
7,499

PER SHARE
 
 
 
 
 
 
 
 
 
Basic earnings
$
1.52

 
$
1.33

 
$
1.25

 
$
1.28

 
$
0.99

Diluted earnings
$
1.49

 
$
1.30

 
$
1.22

 
$
1.24

 
$
0.97

Dividends
$
0.70

 
$
0.66

 
$
0.63

 
$
0.60

 
$
0.57

Tangible book value*
$
17.06

 
$
16.33

 
$
15.43

 
$
14.65

 
$
13.70

Quoted market value
 
 
 
 
 
 
 
 
 
High
$
23.85

 
$
24.00

 
$
26.00

 
$
24.98

 
$
19.25

Low
$
22.00

 
$
21.73

 
$
21.55

 
$
22.30

 
$
17.10

Close*
$
23.69

 
$
23.60

 
$
24.85

 
$
22.50

 
$
18.75

Common shares outstanding*
7,765,333

 
7,740,730

 
7,709,781

 
7,611,350

 
7,578,257

PERFORMANCE RATIOS
 
 
 
 
 
 
 
 
 
Return on average total assets
1.00
%
 
0.90
%
 
0.89
%
 
0.94
%
 
0.79
%
Return on average shareholders' equity
8.80
%
 
8.13
%
 
7.84
%
 
8.37
%
 
6.84
%
Return on average tangible shareholders' equity
12.06
%
 
10.95
%
 
11.02
%
 
11.96
%
 
10.17
%
Net interest margin yield (FTE)
3.37
%
 
3.41
%
 
3.50
%
 
3.72
%
 
3.90
%
BALANCE SHEET DATA*
 
 
 
 
 
 
 
 
 
Gross loans
$
833,347

 
$
822,299

 
$
807,849

 
$
766,751

 
$
750,163

AFS securities
$
628,612

 
$
575,080

 
$
501,057

 
$
467,414

 
$
415,879

Total assets
$
1,619,250

 
$
1,553,974

 
$
1,459,341

 
$
1,389,138

 
$
1,324,093

Deposits
$
1,128,003

 
$
1,081,890

 
$
1,023,931

 
$
989,491

 
$
942,441

Borrowed funds
$
297,610

 
$
290,438

 
$
266,001

 
$
226,580

 
$
216,888

Shareholders' equity
$
182,998

 
$
172,076

 
$
161,305

 
$
164,147

 
$
155,579

Gross loans to deposits
73.88
%
 
76.01
%
 
78.90
%
 
77.49
%
 
79.60
%
ASSETS UNDER MANAGEMENT*
 
 
 
 
 
 
 
 
 
Loans sold with servicing retained
$
289,268

 
$
290,697

 
$
294,999

 
$
304,523

 
$
303,063

Assets managed by our Investment and Trust Services Department
$
392,124

 
$
374,878

 
$
351,505

 
$
321,661

 
$
284,286

Total assets under management
$
2,300,642

 
$
2,219,549

 
$
2,105,845

 
$
2,015,322

 
$
1,911,442

ASSET QUALITY*
 
 
 
 
 
 
 
 
 
Nonperforming loans to gross loans
0.10
%
 
0.57
%
 
0.53
%
 
0.98
%
 
0.81
%
Nonperforming assets to total assets
0.09
%
 
0.37
%
 
0.37
%
 
0.68
%
 
0.61
%
ALLL to gross loans
0.98
%
 
1.26
%
 
1.44
%
 
1.57
%
 
1.65
%
CAPITAL RATIOS*
 
 
 
 
 
 
 
 
 
Shareholders' equity to assets
11.30
%
 
11.07
%
 
11.05
%
 
11.82
%
 
11.75
%
Tier 1 leverage
8.54
%
 
8.47
%
 
8.45
%
 
8.27
%
 
8.10
%
Common equity tier 1 capital
13.36
%
 
N/A

 
N/A

 
N/A

 
N/A

Tier 1 risk-based capital
13.36
%
 
13.86
%
 
13.75
%
 
13.35
%
 
12.43
%
Total risk-based capital
14.19
%
 
15.11
%
 
15.00
%
 
14.60
%
 
13.68
%
* At end of period

40

Table of Contents

Average Balances, Interest Rate, and Net Interest Income
The following schedules present the daily average amount outstanding for each major category of interest earning assets, nonearning assets, interest bearing liabilities, and noninterest bearing liabilities. These schedules also present an analysis of interest income and interest expense for the periods indicated. All interest income is reported on a FTE basis using a 34% federal income tax rate. Loans in nonaccrual status, for the purpose of the following computations, are included in the average loan balances. FRB and FHLB restricted equity holdings are included in accrued income and other assets.
The following table displays the results for the:
 
Three Months Ended
 
September 30, 2015
 
June 30, 2015
 
September 30, 2014

Average
Balance
 
Tax
Equivalent
Interest
 
Average
Yield /
Rate
 
Average
Balance
 
Tax
Equivalent
Interest
 
Average
Yield /
Rate
 
Average
Balance
 
Tax
Equivalent
Interest
 
Average
Yield /
Rate
INTEREST EARNING ASSETS
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Loans
$
828,240

 
$
9,855

 
4.76
%
 
$
819,507

 
$
9,909

 
4.84
%
 
$
817,364

 
$
9,863

 
4.83
%
Taxable investment securities
402,993

 
2,310

 
2.29
%
 
393,313

 
2,238

 
2.28
%
 
358,547

 
2,016

 
2.25
%
Nontaxable investment securities
207,443

 
2,459

 
4.74
%
 
201,841

 
2,496

 
4.95
%
 
196,522

 
2,359

 
4.80
%
Other
27,689

 
166

 
2.40
%
 
25,195

 
139

 
2.21
%
 
28,431

 
119

 
1.67
%
Total earning assets
1,466,365

 
14,790

 
4.03
%
 
1,439,856

 
14,782

 
4.11
%
 
1,400,864

 
14,357

 
4.10
%
NONEARNING ASSETS
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Allowance for loan losses
(9,007
)
 
 
 
 
 
(9,575
)
 
 
 
 
 
(10,705
)
 
 
 
 
Cash and demand deposits due from banks
18,442

 
 
 
 
 
17,406

 
 
 
 
 
20,360

 
 
 
 
Premises and equipment
26,904

 
 
 
 
 
26,231

 
 
 
 
 
25,872

 
 
 
 
Accrued income and other assets
102,047

 
 
 
 
 
100,937

 
 
 
 
 
98,853

 
 
 
 
Total assets
$
1,604,751

 
 
 
 
 
$
1,574,855

 
 
 
 
 
$
1,535,244

 
 
 
 
INTEREST BEARING LIABILITIES
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Interest bearing demand deposits
$
198,351

 
40

 
0.08
%
 
$
190,957

 
37

 
0.08
%
 
$
193,659

 
40

 
0.08
%
Savings deposits
306,816

 
123

 
0.16
%
 
277,049

 
96

 
0.14
%
 
265,814

 
94

 
0.14
%
Time deposits
434,103

 
1,317

 
1.21
%
 
436,244

 
1,326

 
1.22
%
 
447,046

 
1,428

 
1.28
%
Borrowed funds
292,858

 
1,100

 
1.50
%
 
299,987

 
1,059

 
1.41
%
 
274,358

 
936

 
1.36
%
Total interest bearing liabilities
1,232,128

 
2,580

 
0.84
%
 
1,204,237

 
2,518

 
0.84
%
 
1,180,877

 
2,498

 
0.85
%
NONINTEREST BEARING LIABILITIES
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Demand deposits
181,289

 
 
 
 
 
179,733

 
 
 
 
 
171,085

 
 
 
 
Other
11,357

 
 
 
 
 
10,873

 
 
 
 
 
11,114

 
 
 
 
Shareholders’ equity
179,977

 
 
 
 
 
180,012

 
 
 
 
 
172,168

 
 
 
 
Total liabilities and shareholders’ equity
$
1,604,751

 
 
 
 
 
$
1,574,855

 
 
 
 
 
$
1,535,244

 
 
 
 
Net interest income (FTE)
 
 
$
12,210

 
 
 
 
 
$
12,264

 
 
 
 
 
$
11,859

 
 
Net yield on interest earning assets (FTE)
 
 
 
 
3.33
%
 
 
 
 
 
3.41
%
 
 
 
 
 
3.39
%

41

Table of Contents

 
Nine Months Ended
 
September 30, 2015
 
September 30, 2014

Average
Balance
 
Tax
Equivalent
Interest
 
Average
Yield /
Rate
 
Average
Balance
 
Tax
Equivalent
Interest
 
Average
Yield /
Rate
INTEREST EARNING ASSETS
 
 
 
 
 
 
 
 
 
 
 
Loans
$
823,269

 
$
29,448

 
4.77
%
 
$
810,572

 
$
29,413

 
4.84
%
Taxable investment securities
388,964

 
6,655

 
2.28
%
 
355,146

 
6,007

 
2.26
%
Nontaxable investment securities
202,294

 
7,423

 
4.89
%
 
193,276

 
7,056

 
4.87
%
Other
25,769

 
444

 
2.30
%
 
25,717

 
393

 
2.04
%
Total earning assets
1,440,296

 
43,970

 
4.07
%
 
1,384,711

 
42,869

 
4.13
%
NONEARNING ASSETS
 
 
 
 
 
 
 
 
 
 
 
Allowance for loan losses
(9,630
)
 
 
 
 
 
(11,182
)
 
 
 
 
Cash and demand deposits due from banks
17,824

 
 
 
 
 
18,484

 
 
 
 
Premises and equipment
26,481

 
 
 
 
 
25,950

 
 
 
 
Accrued income and other assets
101,248

 
 
 
 
 
96,915

 
 
 
 
Total assets
$
1,576,219

 
 
 
 
 
$
1,514,878

 
 
 
 
INTEREST BEARING LIABILITIES
 
 
 
 
 
 
 
 
 
 
 
Interest bearing demand deposits
$
194,648

 
116

 
0.08
%
 
$
194,744

 
120

 
0.08
%
Savings deposits
284,886

 
311

 
0.15
%
 
258,807

 
279

 
0.14
%
Time deposits
435,853

 
3,978

 
1.22
%
 
451,329

 
4,368

 
1.29
%
Borrowed funds
292,127

 
3,181

 
1.45
%
 
269,325

 
2,699

 
1.34
%
Total interest bearing liabilities
1,207,514

 
7,586

 
0.84
%
 
1,174,205

 
7,466

 
0.85
%
NONINTEREST BEARING LIABILITIES
 
 
 
 
 
 
 
 
 
 
 
Demand deposits
178,353

 
 
 
 
 
161,688

 
 
 
 
Other
11,106

 
 
 
 
 
10,380

 
 
 
 
Shareholders’ equity
179,246

 
 
 
 
 
168,605

 
 
 
 
Total liabilities and shareholders’ equity
$
1,576,219

 
 
 
 
 
$
1,514,878

 
 
 
 
Net interest income (FTE)
 
 
$
36,384

 
 
 
 
 
$
35,403

 
 
Net yield on interest earning assets (FTE)
 
 
 
 
3.37
%
 
 
 
 
 
3.41
%
Net Interest Income
Net interest income is the amount by which interest income on earning assets exceeds the interest expenses on interest bearing liabilities. Net interest income is influenced by changes in the balance and mix of assets and liabilities and market interest rates. We exert some control over these factors; however, FRB monetary policy and competition have a significant impact. For analytical purposes, net interest income is adjusted to an FTE basis by adding the income tax savings from interest on tax exempt loans, and nontaxable investment securities, thus making year to year comparisons more meaningful. Included in interest income are loan fees which are displayed in the following table for the three and nine month periods ended:
 
Three Months Ended
 
Nine Months Ended
 
September 30
2015
 
June 30
2015
 
September 30
2014
 
September 30
2015
 
September 30
2014
Loan fees
$
613

 
$
772

 
$
488

 
$
1,892

 
$
1,530


42

Table of Contents

Volume and Rate Variance Analysis
The following table sets forth the effect of volume and rate changes on interest income and expense for the periods indicated. For the purpose of this table, changes in interest due to volume and rate were determined as follows:
Volume—change in volume multiplied by the previous period's rate.
Rate—change in the FTE rate multiplied by the previous period's volume.
The change in interest due to both volume and rate has been allocated to volume and rate changes in proportion to the relationship of the absolute dollar amounts of the change in each.
 
Three Months Ended 
 September 30, 2015 Compared to 
 June 30, 2015 
 Increase (Decrease) Due to
 
Three Months Ended 
 September 30, 2015 Compared to 
 September 30, 2014 
 Increase (Decrease) Due to
 
Nine Months Ended 
 September 30, 2015 Compared to 
 September 30, 2014 
 Increase (Decrease) Due to

Volume
 
Rate
 
Net
 
Volume
 
Rate
 
Net
 
Volume
 
Rate
 
Net
Changes in interest income
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Loans
$
105

 
$
(159
)
 
$
(54
)
 
$
130

 
$
(138
)
 
$
(8
)
 
$
457

 
$
(422
)
 
$
35

Taxable investment securities
55

 
17

 
72

 
254

 
40

 
294

 
578

 
70

 
648

Nontaxable investment securities
68

 
(105
)
 
(37
)
 
130

 
(30
)
 
100

 
331

 
36

 
367

Other
14

 
13

 
27

 
(3
)
 
50

 
47

 
1

 
50

 
51

Total changes in interest income
242

 
(234
)
 
8

 
511

 
(78
)
 
433

 
1,367

 
(266
)
 
1,101

Changes in interest expense
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Interest bearing demand deposits
1

 
2

 
3

 
1

 
(1
)
 

 

 
(4
)
 
(4
)
Savings deposits
11

 
16

 
27

 
16

 
13

 
29

 
28

 
4

 
32

Time deposits
(6
)
 
(3
)
 
(9
)
 
(41
)
 
(70
)
 
(111
)
 
(147
)
 
(243
)
 
(390
)
Borrowed funds
(26
)
 
67

 
41

 
66

 
98

 
164

 
238

 
244

 
482

Total changes in interest expense
(20
)
 
82

 
62

 
42

 
40

 
82

 
119

 
1

 
120

Net change in interest margin (FTE)
$
262

 
$
(316
)
 
$
(54
)
 
$
469

 
$
(118
)
 
$
351

 
$
1,248

 
$
(267
)
 
$
981

Our net yield on interest earning assets remains at historically low levels. The persistent low interest rate environment coupled with an increase in the concentration of AFS securities as a percentage of earning assets has also placed downward pressure on net interest margin yield. While we anticipate that the FRB will increase short term interest rates in late 2015, we do not anticipate the increase to be significant due to lack of underlying economic strength in the environment. As such, we do not expect any significant change in our yield on interest earning assets and will continue to see compression on margins as the rates paid on interest bearing liabilities will likely increase faster than those of interest earning assets. We will continue our strategy of balance sheet growth to provide net interest income in future periods.
 
Average Yield / Rate for the Three Month Periods Ended:

September 30
2015

June 30
2015

March 31
2015

December 31
2014

September 30
2014
Total earning assets
4.03
%
 
4.11
%
 
4.07
%
 
4.17
%
 
4.10
%
Total interest bearing liabilities
0.84
%
 
0.84
%
 
0.84
%
 
0.85
%
 
0.85
%
Net yield on interest earning assets (FTE)
3.33
%

3.41
%
 
3.37
%
 
3.46
%
 
3.39
%

43

Table of Contents

 
Quarter to Date Net Interest Income (FTE)

September 30
2015
 
June 30
2015
 
March 31
2015
 
December 31
2014
 
September 30
2014
Total interest income (FTE)
$
14,790

 
$
14,782

 
$
14,401

 
$
14,702

 
$
14,357

Total interest expense
2,580

 
2,518

 
2,488

 
2,504

 
2,498

Net interest income (FTE)
$
12,210

 
$
12,264

 
$
11,913

 
$
12,198

 
$
11,859

Also contributing to the decline in the net yield on interest earning assets in the past year is the decline in loan fees. While loan fees are improving, they remain at low levels as a result of the soft demand for residential mortgage loans and the intense competition for commercial loans. The following table displays data for the three month periods ended:

September 30
2015
 
June 30
2015
 
March 31
2015
 
December 31
2014
 
September 30
2014
Net interest income (FTE)
$
12,210

 
$
12,264

 
$
11,913

 
$
12,198

 
$
11,859

Less loan fees
613

 
772

 
507

 
669

 
488

Net interest income excluding loan fees (FTE)
$
11,597

 
$
11,492

 
$
11,406

 
$
11,529

 
$
11,371

Net yield on interest earning assets excluding loan fees (FTE)
3.16
%
 
3.19
%
 
3.23
%
 
3.27
%
 
3.25
%
Allowance for Loan and Lease Losses
The viability of any financial institution is ultimately determined by its management of credit risk. Loans represent our single largest concentration of risk. The ALLL is our estimation of incurred losses within the existing loan portfolio. We allocate the ALLL throughout the loan portfolio based on our assessment of the underlying risks associated with each loan segment. Our assessments include allocations based on specific impairment valuation allowances, historical charge-offs, internally assigned credit risk ratings, and past due and nonaccrual balances. A portion of the ALLL is not allocated to any one loan segment, but is instead a reflection of other qualitative risks that reflects the margin of imprecision inherent in the underlying assumptions used in the methodologies for estimating specific and general losses in the portfolio.
The following table summarizes our charge-offs, recoveries, provisions for loan losses, and ALLL balances as of, and for the three and nine month periods ended September 30:
 
Three Months Ended 
 September 30
 
Nine Months Ended 
 September 30

2015
 
2014
 
2015
 
2014
ALLL at beginning of period
$
9,000

 
$
10,700

 
$
10,100

 
$
11,500

Charge-offs
 
 
 
 
 
 
 
Commercial and agricultural
61

 
163

 
89

 
465

Residential real estate
70

 
180

 
325

 
557

Consumer
79

 
73

 
252

 
255

Total charge-offs
210

 
416

 
666

 
1,277

Recoveries
 
 
 
 
 
 
 
Commercial and agricultural
68

 
171

 
459

 
477

Residential real estate
33

 
68

 
152

 
190

Consumer
47

 
39

 
154

 
114

Total recoveries
148

 
278

 
765

 
781

Net loan charge-offs
62

 
138

 
(99
)
 
496

Provision for loan losses
(738
)
 
(162
)
 
(1,999
)
 
(604
)
ALLL at end of period
$
8,200

 
$
10,400

 
$
8,200

 
$
10,400

Net loan charge-offs to average loans outstanding
0.01
%
 
0.02
%
 
(0.01
)%
 
0.06
%

44

Table of Contents

The following table summarizes our charge-offs, recoveries, provisions for loan losses, and ALLL balances as of, and for the three month periods ended:

September 30
2015
 
June 30
2015
 
March 31
2015
 
December 31
2014
 
September 30
2014
Total charge-offs
$
210

 
$
296

 
$
160

 
$
351

 
$
416

Total recoveries
148

 
231

 
386

 
115

 
278

Net loan charge-offs
62

 
65

 
(226
)
 
236

 
138

Net loan charge-offs to average loans outstanding
0.01
 %
 
0.01
 %
 
(0.03
)%
 
0.03
 %
 
0.02
 %
Provision for loan losses
$
(738
)
 
$
(535
)
 
$
(726
)
 
$
(64
)
 
$
(162
)
Provision for loan losses to average loans outstanding
(0.09
)%
 
(0.07
)%
 
(0.09
)%
 
(0.01
)%
 
(0.02
)%
ALLL
$
8,200

 
$
9,000

 
$
9,600

 
$
10,100

 
$
10,400

ALLL as a % of loans at end of period
0.98
 %
 
1.09
 %
 
1.18
 %
 
1.21
 %
 
1.26
 %
As the level of net loans charged-off decline and credit quality indicators continue to improve, we have reduced the ALLL in both amount and as a percentage of loans. Soft loan growth during the year also contributed to the decline in the ALLL as a percentage of loans. The following table illustrates our changes within the two main components of the ALLL.

September 30
2015
 
June 30
2015
 
March 31
2015
 
December 31
2014
 
September 30
2014
ALLL
 
 
 
 
 
 
 
 
 
Individually evaluated for impairment
$
3,217

 
$
3,202

 
$
3,361

 
$
3,427

 
$
3,654

Collectively evaluated for impairment
4,983

 
5,798

 
6,239

 
6,673

 
6,746

Total
$
8,200

 
$
9,000

 
$
9,600

 
$
10,100

 
$
10,400

ALLL to gross loans
 
 
 
 
 
 
 
 
 
Individually evaluated for impairment
0.39
%
 
0.39
%
 
0.41
%
 
0.41
%
 
0.44
%
Collectively evaluated for impairment
0.59
%
 
0.70
%
 
0.77
%
 
0.80
%
 
0.82
%
Total
0.98
%
 
1.09
%
 
1.18
%
 
1.21
%
 
1.26
%
While more volatile, loans individually evaluated for impairment have been relatively flat in recent quarters. The decline in loans collectively impaired illustrates the downward trend we are experiencing in our overall level of ALLL to gross loans.
For further discussion of the allocation of the ALLL, see “Note 5 – Loans and ALLL” of our interim condensed consolidated financial statements.
Loans Past Due and Loans in Nonaccrual Status
Fluctuations in past due and nonaccrual status loans can have a significant impact on the ALLL. To determine the potential impact, and corresponding estimated losses, we analyze our historical loss trends on loans past due greater than 30 days and nonaccrual status loans. We monitor all loans that are past due and in nonaccrual status for indications of additional deterioration.
 
Total Past Due and Nonaccrual

September 30
2015
 
June 30
2015
 
March 31
2015
 
December 31
2014
 
September 30
2014
Commercial and agricultural
$
1,709

 
$
2,407

 
$
4,017

 
$
4,805

 
$
3,904

Residential real estate
2,030

 
2,995

 
2,965

 
4,181

 
4,011

Consumer
60

 
126

 
106

 
138

 
134

Total
$
3,799

 
$
5,528

 
$
7,088

 
$
9,124

 
$
8,049

Total past due and nonaccrual loans to gross loans
0.46
%
 
0.67
%
 
0.87
%
 
1.09
%
 
0.98
%
Declines in past due and nonaccrual status loans are the result of strengthened loan performance. A summary of loans past due and in nonaccrual status, including the composition of the ending balance of nonaccrual status loans by type, is included in “Note 5 – Loans and ALLL” of our interim condensed consolidated financial statements.

45

Table of Contents

Troubled Debt Restructurings
We have taken a proactive approach to avoid foreclosures on borrowers who are willing to work with us in modifying their loans, thus making them more affordable. While this approach has allowed certain borrowers to develop a payment structure that will allow them to continue making payments in lieu of foreclosure, it has contributed to a significant increase in the level of loans classified as TDRs. The modifications have been successful for us and our customers as very few of the modified loans have resulted in foreclosures. At the time of the TDR, the loan is reviewed to determine whether or not to classify the loan as accrual or nonaccrual status. The majority of new modifications result in terms that satisfy our criteria for continued interest accrual. TDRs that have been placed on 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, forgive interest, or a combination of these modifications. Typically, the modifications are for a period of five years or less. There were no TDRs that were Government sponsored as of September 30, 2015 or December 31, 2014.
Losses associated with TDRs, if any, are included in the estimation of the ALLL in the quarter in which a loan is identified as a TDR, and we review the analysis of the ALLL estimation each reporting period to ensure its continued appropriateness.
The following tables provide a roll-forward of TDRs for the:

Three Months Ended September 30, 2015
 
Accruing Interest
 
Nonaccrual
 
Total
 
Number
of
Loans
 
Balance
 
Number
of
Loans
 
Balance
 
Number
of
Loans
 
Balance
July 1, 2015
156

 
$
19,518

 
5

 
$
940

 
161

 
$
20,458

New modifications
5

 
2,543

 
2

 
170

 
7

 
2,713

Principal advances (payments)

 
(308
)
 

 
(552
)
 

 
(860
)
Loans paid-off
(4
)
 
(638
)
 
(1
)
 
(1
)
 
(5
)
 
(639
)
Partial charge-offs

 

 

 
(25
)
 

 
(25
)
Balances charged-off

 

 

 

 

 

Transfers to OREO

 

 
(1
)
 
(190
)
 
(1
)
 
(190
)
Transfers to accrual status
1

 
30

 
(1
)
 
(30
)
 

 

Transfers to nonaccrual status
(1
)
 
(21
)
 
1

 
21

 

 

September 30, 2015
157


$
21,124


5


$
333


162


$
21,457


Nine Months Ended September 30, 2015
 
Accruing Interest
 
Nonaccrual
 
Total
 
Number
of
Loans
 
Balance
 
Number
of
Loans
 
Balance
 
Number
of
Loans
 
Balance
January 1, 2015
156

 
$
20,931

 
13

 
$
2,410

 
169

 
$
23,341

New modifications
21

 
4,149

 
4

 
491

 
25

 
4,640

Principal advances (payments)

 
(1,033
)
 

 
(977
)
 

 
(2,010
)
Loans paid-off
(19
)
 
(3,016
)
 
(7
)
 
(597
)
 
(26
)
 
(3,613
)
Partial charge-offs

 

 

 
(87
)
 

 
(87
)
Balances charged-off
(1
)
 
(39
)
 

 

 
(1
)
 
(39
)
Transfers to OREO

 

 
(5
)
 
(775
)
 
(5
)
 
(775
)
Transfers to accrual status
3

 
292

 
(3
)
 
(292
)
 

 

Transfers to nonaccrual status
(3
)
 
(160
)
 
3

 
160

 

 

September 30, 2015
157

 
$
21,124

 
5

 
$
333

 
162

 
$
21,457


46

Table of Contents


Three Months Ended September 30, 2014
 
Accruing Interest
 
Nonaccrual
 
Total
 
Number
of
Loans
 
Balance
 
Number
of
Loans
 
Balance
 
Number
of
Loans
 
Balance
July 1, 2014
162

 
$
21,265

 
18

 
$
2,927

 
180

 
$
24,192

New modifications
7

 
266

 

 

 
7

 
266

Principal advances (payments)

 
(241
)
 

 
34

 

 
(207
)
Loans paid-off
(5
)
 
(101
)
 
(1
)
 
(2
)
 
(6
)
 
(103
)
Partial charge-offs

 

 

 
(75
)
 

 
(75
)
Balances charged-off
(2
)
 
(7
)
 
(1
)
 
(51
)
 
(3
)
 
(58
)
Transfers to OREO

 

 

 

 

 

Transfers to accrual status
1

 
109

 
(1
)
 
(109
)
 

 

Transfers to nonaccrual status
(1
)
 
(55
)
 
1

 
55

 

 

September 30, 2014
162


$
21,236


16


$
2,779


178


$
24,015


Nine Months Ended September 30, 2014
 
Accruing Interest
 
Nonaccrual
 
Total
 
Number
of
Loans
 
Balance
 
Number
of
Loans
 
Balance
 
Number
of
Loans
 
Balance
January 1, 2014
165

 
$
24,423

 
15

 
$
1,442

 
180

 
$
25,865

New modifications
25

 
1,254

 
4

 
245

 
29

 
1,499

Principal advances (payments)

 
(1,323
)
 

 
(40
)
 

 
(1,363
)
Loans paid-off
(20
)
 
(1,371
)
 
(3
)
 
(90
)
 
(23
)
 
(1,461
)
Partial charge-offs

 
(70
)
 

 
(193
)
 

 
(263
)
Balances charged-off
(3
)
 
(13
)
 
(1
)
 
(51
)
 
(4
)
 
(64
)
Transfers to OREO

 

 
(4
)
 
(198
)
 
(4
)
 
(198
)
Transfers to accrual status
4

 
429

 
(4
)
 
(429
)
 

 

Transfers to nonaccrual status
(9
)
 
(2,093
)
 
9

 
2,093

 

 

September 30, 2014
162

 
$
21,236

 
16

 
$
2,779

 
178

 
$
24,015

The following table summarizes our TDRs as of:
 
September 30, 2015
 
December 31, 2014
 
 

Accruing
Interest
 
Nonaccrual
 
Total
 
Accruing
Interest
 
Nonaccrual
 
Total
 
Total
Change
Current
$
20,352

 
$
170

 
$
20,522

 
$
20,012

 
$
272

 
$
20,284

 
$
238

Past due 30-59 days
727

 

 
727

 
804

 
592

 
1,396

 
(669
)
Past due 60-89 days
45

 

 
45

 
115

 
3

 
118

 
(73
)
Past due 90 days or more

 
163

 
163

 

 
1,543

 
1,543

 
(1,380
)
Total
$
21,124

 
$
333

 
$
21,457

 
$
20,931

 
$
2,410

 
$
23,341

 
$
(1,884
)
Additional disclosures about TDRs are included in “Note 5 – Loans and ALLL” of our interim condensed consolidated financial statements.

47

Table of Contents

Impaired Loans
The following is a summary of information pertaining to impaired loans as of:
 
September 30, 2015
 
December 31, 2014

Outstanding
Balance
 
Unpaid
Principal
Balance
 
Valuation
Allowance
 
Outstanding
Balance
 
Unpaid
Principal
Balance
 
Valuation
Allowance
TDRs
 
 
 
 
 
 
 
 
 
 
 
Commercial real estate
$
9,264

 
$
9,503

 
$
1,322

 
$
10,222

 
$
10,501

 
$
1,276

Commercial other
102

 
113

 

 
715

 
945

 
4

Agricultural real estate
1,876

 
1,876

 

 
1,423

 
1,423

 

Agricultural other
663

 
663

 
3

 
66

 
186

 

Residential real estate senior liens
9,247

 
9,603

 
1,780

 
10,462

 
11,019

 
1,847

Residential real estate junior liens
134

 
134

 
27

 
246

 
246

 
49

Home equity lines of credit
133

 
433

 

 
153

 
453

 
46

Consumer secured
38

 
38

 
1

 
54

 
54

 
1

Total TDRs
21,457

 
22,363

 
3,133

 
23,341

 
24,827

 
3,223

Other impaired loans
 
 
 
 
 
 
 
 
 
 
 
Commercial real estate
237

 
250

 

 
1,009

 
1,195

 
3

Commercial other

 

 

 
83

 
95

 

Agricultural real estate
104

 
104

 

 
106

 
106

 

Agricultural other
4

 
4

 

 

 

 

Residential real estate senior liens
761

 
1,275

 
84

 
1,183

 
1,763

 
168

Residential real estate junior liens

 

 

 
19

 
29

 
4

Home equity lines of credit

 

 

 
97

 
197

 
29

Consumer secured

 

 

 
10

 
10

 

Total other impaired loans
1,106

 
1,633

 
84

 
2,507

 
3,395

 
204

Total impaired loans
$
22,563

 
$
23,996

 
$
3,217

 
$
25,848

 
$
28,222

 
$
3,427

Additional disclosure related to impaired loans is included in “Note 5 – Loans and ALLL” of our interim condensed consolidated financial statements.
Nonperforming Assets
The following table summarizes our nonperforming assets as of:

September 30
2015
 
June 30
2015
 
March 31
2015
 
December 31
2014
 
September 30
2014
Nonaccrual status loans
$
796

 
$
1,530

 
$
3,422

 
$
4,044

 
$
4,496

Accruing loans past due 90 days or more

 
19

 
173

 
148

 
164

Total nonperforming loans
796

 
1,549

 
3,595

 
4,192

 
4,660

Foreclosed assets
601

 
873

 
717

 
885

 
1,041

Total nonperforming assets
$
1,397

 
$
2,422

 
$
4,312

 
$
5,077

 
$
5,701

Nonperforming loans as a % of total loans
0.10
%
 
0.19
%
 
0.44
%
 
0.50
%
 
0.57
%
Nonperforming assets as a % of total assets
0.09
%
 
0.15
%
 
0.27
%
 
0.33
%
 
0.37
%
After a loan is 90 days past due, it is placed on nonaccrual status unless it is well secured and in the process of collection. Upon transferring the loans to nonaccrual status, we perform an evaluation to determine the net realizable value of the underlying collateral. This evaluation is used to help determine if any charge-offs are necessary. Loans may be placed back on accrual status after six months of continued performance. Total nonperforming loans continue to improve with current levels reflecting historic lows.

48

Table of Contents

Included in the nonaccrual loan balances above were loans currently classified as TDRs as of:

September 30
2015
 
December 31
2014
Commercial and agricultural
$
256

 
$
1,995

Residential real estate
77

 
262

Consumer

 
153

Total
$
333

 
$
2,410

Additional disclosures about nonaccrual status loans are included in “Note 5 – Loans and ALLL” of our interim condensed consolidated financial statements.
We continue to devote considerable attention to identifying impaired loans and adjusting the net carrying value of these loans to their current net realizable values through the establishment of a specific reserve or the recording of a charge-off. We believe that we have identified all impaired loans as of September 30, 2015.
We believe that the level of the ALLL is appropriate as of September 30, 2015. We will continue to closely monitor overall credit quality indicators and our policies and procedures related to the analysis of the ALLL to ensure that the ALLL remains at the appropriate level.
Noninterest Income and Noninterest Expenses
Significant noninterest account balances are highlighted in the following table with additional descriptions of significant fluctuations:
 
Three Months Ended September 30

 
 
 
 
Change
 
2015
 
2014
 
$
 
%
Service charges and fees
 
 
 
 
 
 
 
ATM and debit card fees
$
708

 
$
538

 
$
170

 
31.60
 %
NSF and overdraft fees
492

 
565

 
(73
)
 
(12.92
)%
Freddie Mac servicing fee
179

 
178

 
1

 
0.56
 %
Service charges on deposit accounts
88

 
92

 
(4
)
 
(4.35
)%
Net OMSR income (loss)
(34
)
 
(41
)
 
7

 
N/M

All other
35

 
34

 
1

 
2.94
 %
Total service charges and fees
1,468

 
1,366

 
102

 
7.47
 %
Net gain on sale of mortgage loans
157

 
170

 
(13
)
 
(7.65
)%
Earnings on corporate owned life insurance policies
188

 
182

 
6

 
3.30
 %
Net gains (losses) on sale of AFS securities

 
97

 
(97
)
 
(100.00
)%
Other
 
 
 
 
 
 
 
Trust and brokerage advisory fees
538

 
506

 
32

 
6.32
 %
Corporate Settlement Solutions joint venture
399

 
(180
)
 
579

 
N/M

Other
351

 
75

 
276

 
368.00
 %
Total other
1,288

 
401

 
887

 
221.20
 %
Total noninterest income
$
3,101


$
2,216


$
885


39.94
 %

49

Table of Contents


Nine Months Ended September 30
 
 
 
 
 
Change
 
2015
 
2014
 
$
 
%
Service charges and fees
 
 
 
 
 
 
 
ATM and debit card fees
$
1,798

 
$
1,559

 
$
239

 
15.33
 %
NSF and overdraft fees
1,392

 
1,630

 
(238
)
 
(14.60
)%
Freddie Mac servicing fee
538

 
541

 
(3
)
 
(0.55
)%
Service charges on deposit accounts
258

 
267

 
(9
)
 
(3.37
)%
Net OMSR income (loss)
(61
)
 
22

 
(83
)
 
(377.27
)%
All other
99

 
101

 
(2
)
 
(1.98
)%
Total service charges and fees
4,024

 
4,120

 
(96
)
 
(2.33
)%
Net gain on sale of mortgage loans
472

 
436

 
36

 
8.26
 %
Earnings on corporate owned life insurance policies
570

 
556

 
14

 
2.52
 %
Net gains (losses) on sale of AFS securities

 
97

 
(97
)
 
(100.00
)%
Other
 
 
 
 
 
 
 
Trust and brokerage advisory fees
1,640

 
1,532

 
108

 
7.05
 %
Corporate Settlement Solutions joint venture
518

 
(117
)
 
635

 
N/M

Other
634

 
275

 
359

 
130.55
 %
Total other
2,792

 
1,690

 
1,102

 
65.21
 %
Total noninterest income
$
7,858

 
$
6,899

 
$
959

 
13.90
 %
Significant changes in noninterest income are detailed below:
ATM and debit card fees increased during 2015 as a result of marketing incentives. While we do not anticipate significant changes to our ATM and debit fees, we do expect that fees will continue to increase in the remainder of 2015 as the usage of ATM and debit cards continues to increase.
NSF and overdraft fees fluctuate from period-to-period based on customer activity as well as the number of business days in the period. We anticipate fees to continue to decline for the remainder of 2015.
Offering rates on residential mortgage loans, as well as the decline in loan demand, have been the most significant drivers behind fluctuations in the gain on sale of mortgage loans and net OMSR income (loss). Mortgage rates are expected to approximate current levels in the foreseeable future and purchase money mortgage activity is anticipated to increase as a result of our various initiatives to drive growth. As such, we anticipate increases in origination volumes and in turn, gains on sale of mortgage loans.
The increase in earnings from our Corporate Settlement Solutions joint venture during 2015 can be attributed to two initiatives - expansion of national sales and maintaining consistent margins with the increased sales volume. Income for the remainder of 2015 is expected to continue to increase.
The fluctuations in all other income is spread throughout various categories, none of which are individually significant.

50

Table of Contents

Significant noninterest expense account balances are highlighted in the following table with additional descriptions of significant fluctuations:

Three Months Ended September 30
 
 
 
 
 
Change
 
2015
 
2014
 
$
 
%
Compensation and benefits
 
 
 
 
 
 
 
Employee salaries
$
4,298

 
$
4,026

 
$
272

 
6.76
 %
Employee benefits
1,323

 
1,148

 
175

 
15.24
 %
Total compensation and benefits
5,621

 
5,174

 
447

 
8.64
 %
Furniture and equipment
 
 
 
 
 
 
 
Service contracts
780

 
660

 
120

 
18.18
 %
Depreciation
473

 
485

 
(12
)
 
(2.47
)%
ATM and debit card fees
232

 
188

 
44

 
23.40
 %
All other
26

 
15

 
11

 
73.33
 %
Total furniture and equipment
1,511

 
1,348

 
163

 
12.09
 %
Occupancy
 
 
 
 
 
 
 
Outside services
167

 
168

 
(1
)
 
(0.60
)%
Depreciation
180

 
175

 
5

 
2.86
 %
Utilities
130

 
128

 
2

 
1.56
 %
Property taxes
135

 
131

 
4

 
3.05
 %
All other
116

 
95

 
21

 
22.11
 %
Total occupancy
728

 
697

 
31

 
4.45
 %
Other
 
 
 
 
 
 
 
FDIC insurance premiums
204

 
196

 
8

 
4.08
 %
Director fees
204

 
191

 
13

 
6.81
 %
Audit and related fees
189

 
185

 
4

 
2.16
 %
Donations and community relations
155

 
391

 
(236
)
 
(60.36
)%
Marketing costs
124

 
121

 
3

 
2.48
 %
Education and travel
90

 
154

 
(64
)
 
(41.56
)%
Printing and supplies
111

 
89

 
22

 
24.72
 %
Postage and freight
94

 
105

 
(11
)
 
(10.48
)%
Legal fees
121

 
88

 
33

 
37.50
 %
Consulting fees
122

 
96

 
26

 
27.08
 %
Loan underwriting fees
98

 
83

 
15

 
18.07
 %
All other
660

 
596

 
64

 
10.74
 %
Total other
2,172

 
2,295

 
(123
)
 
(5.36
)%
Total noninterest expenses
$
10,032


$
9,514


$
518

 
5.44
 %


51

Table of Contents


Nine Months Ended September 30
 
 
 
 
 
Change
 
2015
 
2014
 
$
 
%
Compensation and benefits
 
 
 
 
 
 
 
Employee salaries
$
12,623

 
$
12,114

 
$
509

 
4.20
 %
Employee benefits
3,797

 
3,931

 
(134
)
 
(3.41
)%
Total compensation and benefits
16,420

 
16,045

 
375

 
2.34
 %
Furniture and equipment
 
 
 
 
 
 
 
Service contracts
2,220

 
1,871

 
349

 
18.65
 %
Depreciation
1,390

 
1,379

 
11

 
0.80
 %
ATM and debit card fees
564

 
542

 
22

 
4.06
 %
All other
77

 
43

 
34

 
79.07
 %
Total furniture and equipment
4,251

 
3,835

 
416

 
10.85
 %
Occupancy
 
 
 
 
 
 
 
Outside services
542

 
543

 
(1
)
 
(0.18
)%
Depreciation
535

 
523

 
12

 
2.29
 %
Utilities
404

 
403

 
1

 
0.25
 %
Property taxes
400

 
396

 
4

 
1.01
 %
All other
240

 
250

 
(10
)
 
(4.00
)%
Total occupancy
2,121

 
2,115

 
6

 
0.28
 %
Other
 
 
 
 
 
 
 
FDIC insurance premiums
619

 
619

 

 

Director fees
608

 
569

 
39

 
6.85
 %
Audit and related fees
535

 
505

 
30

 
5.94
 %
Donations and community relations
412

 
606

 
(194
)
 
(32.01
)%
Marketing costs
350

 
360

 
(10
)
 
(2.78
)%
Education and travel
311

 
418

 
(107
)
 
(25.60
)%
Printing and supplies
309

 
278

 
31

 
11.15
 %
Postage and freight
284

 
303

 
(19
)
 
(6.27
)%
Legal fees
273

 
248

 
25

 
10.08
 %
Consulting fees
264

 
263

 
1

 
0.38
 %
Loan underwriting fees
248

 
270

 
(22
)
 
(8.15
)%
All other
1,725

 
1,866

 
(141
)
 
(7.56
)%
Total other
5,938

 
6,305

 
(367
)
 
(5.82
)%
Total noninterest expenses
$
28,730

 
$
28,300

 
$
430

 
1.52
 %
Significant changes in noninterest expenses are detailed below:
The decline in employee benefits is related to health care costs as a result of lower than anticipated claims. Employee benefits are expected to remain at current levels for the remainder of 2015.
Service contracts include approximately $147 of conversion related costs incurred as a result of our recent branch acquisitions. Additional costs related to these acquisitions are not expected to be significant during the remainder of 2015.
We have consistently been a strong supporter of the various communities, schools, and charities in the markets we serve. We sponsor a foundation, which we established in 1996, that is funded by discretionary donations. The affiliated foundation provides centralized oversight for donations to organizations that benefit our communities. Included in Donations and community relations expense are discretionary donations to the foundation of $0 and $250 for the nine month periods ended September 30, 2015 and 2014, respectively.
The fluctuations in all other expenses are spread throughout various categories, none of which are individually significant.

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Table of Contents

Analysis of Changes in Financial Condition

September 30
2015
 
December 31
2014
 
$ Change
 
% Change
(unannualized)
ASSETS
 
 
 
 
 
 
 
Cash and cash equivalents
$
18,322

 
$
19,906

 
$
(1,584
)
 
(7.96
)%
AFS securities
 
 
 
 
 
 
 
Amortized cost of AFS securities
619,834

 
561,893

 
57,941

 
10.31
 %
Unrealized gains (losses) on AFS securities
8,778

 
5,641

 
3,137

 
55.61
 %
AFS securities
628,612

 
567,534

 
61,078

 
10.76
 %
Mortgage loans AFS
831

 
901

 
(70
)
 
(7.77
)%
Loans
 
 
 
 


 
 
Gross loans
833,347

 
833,582

 
(235
)
 
(0.03
)%
Less allowance for loan and lease losses
8,200

 
10,100

 
(1,900
)
 
(18.81
)%
Net loans
825,147

 
823,482

 
1,665

 
0.20
 %
Premises and equipment
28,353

 
25,881

 
2,472

 
9.55
 %
Corporate owned life insurance policies
26,222

 
25,152

 
1,070

 
4.25
 %
Accrued interest receivable
6,992

 
5,851

 
1,141

 
19.50
 %
Equity securities without readily determinable fair values
22,341

 
20,076

 
2,265

 
11.28
 %
Goodwill and other intangible assets
48,875

 
46,128

 
2,747

 
5.96
 %
Other assets
13,555

 
14,632

 
(1,077
)
 
(7.36
)%
TOTAL ASSETS
$
1,619,250

 
$
1,549,543

 
$
69,707

 
4.50
 %
LIABILITIES AND SHAREHOLDERS’ EQUITY
 
 
 
 
 
 
 
Liabilities
 
 
 
 
 
 
 
Deposits
$
1,128,003

 
$
1,074,484

 
$
53,519

 
4.98
 %
Borrowed funds
297,610

 
289,709

 
7,901

 
2.73
 %
Accrued interest payable and other liabilities
10,639

 
10,756

 
(117
)
 
(1.09
)%
Total liabilities
1,436,252

 
1,374,949

 
61,303

 
4.46
 %
Shareholders’ equity
182,998

 
174,594

 
8,404

 
4.81
 %
TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY
$
1,619,250

 
$
1,549,543

 
$
69,707

 
4.50
 %
The following table outlines the changes in loans:

September 30
2015
 
December 31
2014
 
$ Change
 
% Change
(unannualized)
Commercial
$
433,069

 
$
431,961

 
$
1,108

 
0.26
 %
Agricultural
116,293

 
104,721

 
11,572

 
11.05
 %
Residential real estate
249,850

 
264,595

 
(14,745
)
 
(5.57
)%
Consumer
34,135

 
32,305

 
1,830

 
5.66
 %
Total
$
833,347

 
$
833,582

 
$
(235
)
 
(0.03
)%
The following table displays loan balances as of:

September 30
2015
 
June 30
2015
 
March 31
2015
 
December 31
2014
 
September 30
2014
Commercial
$
433,069

 
$
430,981

 
$
418,311

 
$
431,961

 
$
416,824

Agricultural
116,293

 
113,134

 
107,299

 
104,721

 
101,795

Residential real estate
249,850

 
250,208

 
257,516

 
264,595

 
271,033

Consumer
34,135

 
34,279

 
32,342

 
32,305

 
32,647

Total
$
833,347

 
$
828,602

 
$
815,468

 
$
833,582

 
$
822,299


53

Table of Contents

While competition for commercial loans continues to be strong, we experienced growth in this segment of the portfolio during the third quarter of 2015 and anticipate continued growth in the remainder of 2015. Residential real estate loans were relatively flat and we anticipate growth in the remainder of 2015 as a result of initiatives designed to increase loan volume and the number of originations.
The following table outlines the changes in deposits:

September 30
2015
 
December 31
2014
 
$ Change
 
% Change
(unannualized)
Noninterest bearing demand deposits
$
181,782

 
$
181,826

 
$
(44
)
 
(0.02
)%
Interest bearing demand deposits
197,476

 
190,984

 
6,492

 
3.40
 %
Savings deposits
316,590

 
261,412

 
55,178

 
21.11
 %
Certificates of deposit
328,806

 
339,824

 
(11,018
)
 
(3.24
)%
Brokered certificates of deposit
76,948

 
72,134

 
4,814

 
6.67
 %
Internet certificates of deposit
26,401

 
28,304

 
(1,903
)
 
(6.72
)%
Total
$
1,128,003

 
$
1,074,484

 
$
53,519

 
4.98
 %
The following table displays deposit balances as of:

September 30
2015
 
June 30
2015
 
March 31
2015
 
December 31
2014
 
September 30
2014
Noninterest bearing demand deposits
$
181,782

 
$
182,259

 
$
176,160

 
$
181,826

 
$
175,634

Interest bearing demand deposits
197,476

 
193,680

 
197,364

 
190,984

 
192,211

Savings deposits
316,590

 
278,105

 
286,741

 
261,412

 
269,475

Certificates of deposit
328,806

 
330,226

 
333,554

 
339,824

 
341,153

Brokered certificates of deposit
76,948

 
78,853

 
76,671

 
72,134

 
74,132

Internet certificates of deposit
26,401

 
27,346

 
28,165

 
28,304

 
29,285

Total
$
1,128,003

 
$
1,090,469

 
$
1,098,655

 
$
1,074,484

 
$
1,081,890

Deposit demand continues to be driven by non-contractual deposits while certificates of deposit gradually decline. We anticipate this trend to continue in future periods. Our significant growth in savings deposits during the third quarter is the result of our recent branch acquisitions and without these deposits, total deposits would have declined. We look to retain and attract new customers with the recent branch acquisitions to provide growth in deposits in future periods.
The current interest rate environment has made it almost impossible to increase net interest income without increasing earning assets. As deposit growth outpaced loan demand in recent periods, we deployed funds from deposit growth into purchases of AFS securities to provide additional interest income. In addition to utilizing deposits, we have also utilized borrowings and brokered deposits to fund earning assets. We anticipate that future increases in our AFS securities will be in the form of mortgage-backed securities and collateralized mortgage obligations. The following table displays fair values of AFS securities as of:

September 30
2015
 
June 30
2015
 
March 31
2015
 
December 31
2014
 
September 30
2014
Government sponsored enterprises
$
24,368

 
$
24,203

 
$
24,397

 
$
24,136

 
$
23,917

States and political subdivisions
232,374

 
216,647

 
222,479

 
215,345

 
223,545

Auction rate money market preferred
2,707

 
2,719

 
2,775

 
2,619

 
2,863

Preferred stocks
3,192

 
3,230

 
6,324

 
6,140

 
6,173

Mortgage-backed securities
234,258

 
210,194

 
201,997

 
166,926

 
170,767

Collateralized mortgage obligations
131,713

 
138,325

 
147,236

 
152,368

 
147,815

Total
$
628,612

 
$
595,318

 
$
605,208

 
$
567,534

 
$
575,080


54

Table of Contents

The following table displays borrowed funds balances as of:

September 30
2015
 
June 30
2015
 
March 31
2015
 
December 31
2014
 
September 30
2014
FHLB advances
$
215,000

 
$
240,000

 
$
217,000

 
$
192,000

 
$
182,000

Securities sold under agreements to repurchase without stated maturity dates
69,510

 
67,599

 
66,321

 
95,070

 
89,535

Securities sold under agreements to repurchase with stated maturity dates

 

 

 
439

 
1,203

Federal funds purchased
13,100

 

 

 
2,200

 
17,700

Total
$
297,610

 
$
307,599

 
$
283,321

 
$
289,709

 
$
290,438

Capital
Capital consists solely of common stock, retained earnings, and accumulated other comprehensive income (loss). We are authorized to raise capital through dividend reinvestment, employee and director stock purchases, and shareholder stock purchases. Pursuant to these authorizations, we issued 142,388 shares or $3,310 of common stock during the first nine months of 2015, as compared to 122,261 shares or $2,845 of common stock during the same period in 2014. We also offer the Directors Plan in which participants either directly purchase stock or purchase stock units through deferred fees, in lieu of cash payments. Pursuant to this plan, we increased shareholders’ equity by $425 and $382 during the nine month periods ended September 30, 2015 and 2014, respectively.
We have approved a publicly announced common stock repurchase plan. Pursuant to this plan, we repurchased 153,329 shares or $3,588 of common stock compared to 110,680 shares for $2,550 during the first nine months of 2015 and 2014, respectively. As of September 30, 2015, we were authorized to repurchase up to an additional 198,436 shares of common stock.
The FRB has established minimum risk based capital guidelines. Pursuant to these guidelines, a framework has been established that assigns risk weights to each category of on and off-balance-sheet items to arrive at risk adjusted total assets. Regulatory capital is divided by the risk adjusted assets with the resulting ratio compared to the minimum standard to determine whether a corporation has adequate capital. On July 2, 2013, the FRB published revised BASEL III Capital standards for banks. The final rules redefine what is included or deducted from equity capital, changes risk weighting for certain on and off-balance sheet assets, increases the minimum required equity capital to be considered well capitalized, and introduces a capital cushion buffer. The rules, which are being gradually phased in between 2015 and 2019, are not expected to have a material impact on the Corporation but will require us to hold more capital than we have historically.
There are no significant regulatory constraints placed on our capital. The FRB’s current recommended minimum primary capital to assets requirement is 6.00%. Our primary capital to adjusted average assets, or tier 1 leverage ratio, was 8.54% as of September 30, 2015.
Effective January 1, 2015, the minimum standard for primary, or tier 1, capital increased from 4.00% to 6.00%. The minimum standard for total capital remains at 8.00%. Also effective January 1, 2015 is the new common equity tier 1 capital ratio which has a minimum requirement of 4.50%. The following table sets forth the percentages required under the Risk Based Capital guidelines and our values as of:

September 30
2015
 
December 31
2014
 
Required
Common equity tier 1 capital
13.36
%
 
N/A

 
4.50
%
 
 
 
 
 
 
Tier 1 capital
13.36
%
 
14.08
%
 
6.00
%
Tier 2 capital
0.83
%
 
1.10
%
 
2.00
%
Total Capital
14.19
%
 
15.18
%
 
8.00
%
Tier 2 capital, or secondary capital, includes only the ALLL. The percentage for the secondary capital under the required column is the maximum amount allowed from all sources.
The FRB and FDIC also prescribe minimum capital requirements for Isabella Bank. At September 30, 2015, the Bank exceeded these minimum capital requirements.

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Table of Contents

Contractual Obligations and Loan Commitments
We are party to credit related financial instruments with off-balance-sheet risk. These financial instruments are entered into in the normal course of business to meet the financing needs of our customers. These financial instruments involve, to varying degrees, elements of credit and interest rate risk in excess of the amounts recognized in the consolidated balance sheets. The contract or notional amounts of these instruments reflect the extent of involvement we have in a particular class of financial instrument.
The following table summarizes our credit related financial instruments with off-balance-sheet risk as of:

September 30
2015
 
December 31
2014
Unfunded commitments under lines of credit
$
130,146

 
$
116,935

Commercial and standby letters of credit
2,727

 
4,985

Commitments to grant loans
40,162

 
13,988

Total
$
173,035

 
$
135,908

Unfunded commitments under lines of credit are commitments for possible future extensions of credit to existing customers. These commitments may expire without being drawn upon and do not necessarily represent future cash requirements.
Commercial and standby letters of credit are conditional commitments issued to guarantee the performance of a customer to a third party. Those guarantees are primarily issued to support private borrowing arrangements, including commercial paper, bond financing, and similar transactions. These commitments to extend credit and letters of credit generally mature within one year. The credit risk involved in these transactions is essentially the same as that involved in extending loans to customers. We evaluate each customer's credit worthiness on a case-by-case basis. The amount of collateral obtained, if deemed necessary upon the extension of credit, is based on a credit evaluation of the borrower. While we consider standby letters of credit to be guarantees, the amount of the liability related to such guarantees on the commitment date is not significant and a liability related to such guarantees is not recorded on the consolidated balance sheets.
Commitments to grant loans are agreements to lend to a customer as long as there is no violation of any condition established in the contract. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. The amount of collateral obtained, if it is deemed necessary, is based on management’s credit evaluation of the customer. Commitments to grant loans include residential mortgage loans with the majority being loans committed to be sold to the secondary market.
Our exposure to credit-related loss in the event of nonperformance by the counter parties to the financial instruments for commitments to extend credit and standby letters of credit could be up to the contractual notional amount of those instruments. We use the same credit policies as we do for extending loans to customers. No significant losses are anticipated as a result of these commitments.
Fair Value
We utilize fair value measurements to record fair value adjustments to certain assets and liabilities and to determine fair value disclosures. AFS securities and certain liabilities are recorded at fair value on a recurring basis. Additionally, from time-to-time, we may be required to record at fair value other assets on a nonrecurring basis, such as mortgage loans AFS, foreclosed assets, OMSR, and certain other assets and liabilities. These nonrecurring fair value adjustments typically involve the application of lower of cost or market accounting or write-downs of individual assets.
For further information regarding fair value measurements see “Note 10 – Fair Value” of our notes to the interim condensed consolidated financial statements.

56

Table of Contents

Liquidity
Liquidity is monitored regularly by our Market Risk Committee, which consists of members of senior management. The committee reviews projected cash flows, key ratios, and liquidity available from both primary and secondary sources.
Our primary sources of liquidity are cash and cash equivalents and AFS securities. These categories totaled $646,934 or 39.95% of assets as of September 30, 2015 as compared to $587,440 or 37.91% as of December 31, 2014. Liquidity is important for financial institutions because of their need to meet loan funding commitments, depositor withdrawal requests, and various other commitments including expansion of operations, investment opportunities, and payment of cash dividends. Liquidity varies significantly daily, based on customer activity.
Our primary source of funds is through deposit accounts. We also have the ability to borrow from the FHLB, the FRB, and through various correspondent banks in the form of federal funds purchased and a line of credit. These funding methods typically carry a higher interest rate than traditional market deposit accounts. Some borrowed funds, including FHLB advances, FRB Discount Window advances, and repurchase agreements, require us to pledge assets, typically in the form of AFS securities or loans, as collateral. As of September 30, 2015, we had available lines of credit of $140,938.
The following table summarizes our sources and uses of cash for the nine month periods ended September 30:
 
2015
 
2014
 
$ Variance
Net cash provided by (used in) operating activities
$
6,725

 
$
12,040

 
$
(5,315
)
Net cash provided by (used in) investing activities
(63,756
)
 
(72,254
)
 
8,498

Net cash provided by (used in) financing activities
55,447

 
44,187

 
11,260

Increase (decrease) in cash and cash equivalents
(1,584
)
 
(16,027
)
 
14,443

Cash and cash equivalents January 1
19,906

 
41,558

 
(21,652
)
Cash and cash equivalents September 30
$
18,322

 
$
25,531

 
$
(7,209
)
Market Risk
Our primary market risks are interest rate risk and liquidity risk. We have no significant foreign exchange risk and do not utilize interest rate swaps or derivatives, except for interest rate locks and forward loan commitments, in the management of IRR. Any changes in foreign exchange rates or commodity prices would have an insignificant impact on our interest income and cash flows.
IRR is the exposure of our net interest income to changes in interest rates. IRR results from the difference in the maturity or repricing frequency of a financial institution's interest earning assets and its interest bearing liabilities. IRR is the fundamental method by which financial institutions earn income and create shareholder value. Excessive exposure to IRR could pose a significant risk to our earnings and capital.
The FRB has adopted a policy requiring us to effectively manage the various risks that can have a material impact on our safety and soundness. The risks include credit, interest rate, liquidity, operational, and reputational. We have policies, procedures, and internal controls for measuring and managing these risks. Specifically, our Funds Management policy and procedures include defining acceptable types and terms of investments and funding sources, liquidity requirements, limits on investments in long term assets, limiting the mismatch in repricing opportunity of assets and liabilities, and the frequency of measuring and reporting to our Board.
The primary technique to measure IRR is simulation analysis. Simulation analysis forecasts the effects on the balance sheet structure and net interest income under a variety of scenarios that incorporate changes in interest rates, the shape of yield curves, interest rate relationships, and loan prepayments. These forecasts are compared against net interest income projected in a stable interest rate environment. While many assets and liabilities reprice either at maturity or in accordance with their contractual terms, several balance sheet components demonstrate characteristics that require an evaluation to more accurately reflect their repricing behavior. Key assumptions in the simulation analysis include prepayments on loans, probable calls of investment securities, changes in market conditions, loan volumes and loan pricing, deposit sensitivity, and customer preferences. These assumptions are inherently uncertain as they are subject to fluctuation and revision in a dynamic environment. As a result, the simulation analysis cannot precisely forecast the impact of rising and falling interest rates on net interest income. Actual results will differ from simulated results due to many other factors, including changes in balance sheet components, interest rate changes, changes in market conditions, and management strategies.

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Our interest rate sensitivity is estimated by first forecasting the next 12 and 24 months of net interest income under an assumed environment of a constant balance sheet and constant market interest rates (base case). We then compare the results of various simulation analyses to the base case. At September 30, 2015, we projected the change in net interest income during the next 12 and 24 months assuming market interest rates were to immediately decrease by 100 basis points and increase by 100, 200, 300, and 400 basis points in a parallel fashion over the entire yield curve during the same time period. We did not project scenarios showing decreases in interest rates beyond 100 basis points as this is considered extremely unlikely given current interest rate levels. These projections were based on our assets and liabilities remaining static over the next 12 and 24 months, while factoring in probable calls and prepayments of certain investment securities and real estate residential and consumer loans. While it is extremely unlikely that interest rates would immediately increase to these levels, we feel that these extreme scenarios help us identify potential gaps and mismatches in the repricing characteristics of assets and liabilities. We regularly monitor our projected net interest income sensitivity to ensure that it remains within established limits.
The following tables summarize our interest rate sensitivity for the 12 and 24 months as of:

September 30, 2015

12 Months

24 Months
Immediate basis point change assumption (short-term)
-100
 
+100
 
+200
 
+300
 
+400
 
-100
 
+100
 
+200
 
+300
 
+400
Percent change in net interest income vs. constant rates
(1.76
)%
 
0.15
%
 
0.22
%
 
(0.77
)%
 
(1.83
)%
 
(1.67
)%
 
0.18
%
 
1.13
%
 
0.44
%
 
(0.39
)%
 
December 31, 2014
 
12 Months
 
24 Months
Immediate basis point change assumption (short-term)
-100
 
+100
 
+200
 
+300
 
+400
 
-100
 
+100
 
+200
 
+300
 
+400
Percent change in net interest income vs. constant rates
(1.66
)%
 
0.29
%
 
0.45
%
 
(3.18
)%
 
(4.39
)%
 
(1.83
)%
 
0.25
%
 
1.04
%
 
(2.70
)%
 
(3.98
)%

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The following tables provide information about assets and liabilities that are sensitive to changes in interest rates as of September 30, 2015 and December 31, 2014. The principal amounts of investments, loans, other interest earning assets, borrowings, and time deposits maturing were calculated based on the contractual maturity dates. Estimated cash flows for savings and NOW accounts are based on our estimated deposit decay rates.

September 30, 2015
 
2016
 
2017
 
2018
 
2019
 
2020
 
Thereafter
 
Total
 
Fair Value
Rate sensitive assets
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Other interest bearing assets
$
1,247

 
$
100

 
$

 
$

 
$

 
$

 
$
1,347

 
$
1,346

Average interest rates
0.19
%
 
0.35
%
 

 

 

 

 
0.21
%
 
 
AFS securities
$
166,350

 
$
100,673

 
$
76,077

 
$
65,786

 
$
67,401

 
$
152,325

 
$
628,612

 
$
628,612

Average interest rates
2.03
%
 
2.27
%
 
2.18
%
 
2.27
%
 
2.38
%
 
2.39
%
 
2.24
%
 
 
Fixed interest rate loans (1)
$
114,549

 
$
122,992

 
$
110,203

 
$
83,248

 
$
84,135

 
$
155,614

 
$
670,741

 
$
662,830

Average interest rates
4.86
%
 
4.47
%
 
4.28
%
 
4.39
%
 
4.20
%
 
4.30
%
 
4.42
%
 
 
Variable interest rate loans (1)
$
61,361

 
$
21,067

 
$
28,260

 
$
14,065

 
$
15,987

 
$
21,866

 
$
162,606

 
$
162,606

Average interest rates
4.73
%
 
3.91
%
 
4.00
%
 
3.37
%
 
3.40
%
 
3.63
%
 
4.10
%
 
 
Rate sensitive liabilities
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Borrowed funds
$
137,610

 
$
30,000

 
$
40,000

 
$
40,000

 
$
10,000

 
$
40,000

 
$
297,610

 
$
301,410

Average interest rates
0.48
%
 
1.95
%
 
2.35
%
 
2.35
%
 
1.98
%
 
2.67
%
 
1.48
%
 
 
Savings and NOW accounts
$
128,827

 
$
37,344

 
$
33,412

 
$
29,915

 
$
26,805

 
$
257,763

 
$
514,066

 
$
514,066

Average interest rates
0.41
%
 
0.11
%
 
0.11
%
 
0.11
%
 
0.11
%
 
0.10
%
 
0.18
%
 
 
Fixed interest rate certificates of deposit
$
191,097

 
$
94,897

 
$
69,775

 
$
25,709

 
$
29,428

 
$
19,638

 
$
430,544

 
$
429,566

Average interest rates
0.94
%
 
1.33
%
 
1.30
%
 
1.42
%
 
1.58
%
 
1.83
%
 
1.20
%
 
 
Variable interest rate certificates of deposit
$
1,183

 
$
428

 
$

 
$

 
$

 
$

 
$
1,611

 
$
1,611

Average interest rates
0.51
%
 
0.40
%
 

 

 

 

 
0.48
%
 
 

December 31, 2014
 
2015
 
2016
 
2017
 
2018
 
2019
 
Thereafter
 
Total
 
Fair Value
Rate sensitive assets
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Other interest bearing assets
$
1,748

 
$

 
$
100

 
$

 
$

 
$

 
$
1,848

 
$
1,847

Average interest rates
0.36
%
 

 
0.35
%
 

 

 

 
0.36
%
 
 
AFS securities
$
109,261

 
$
93,324

 
$
80,147

 
$
53,017

 
$
47,112

 
$
184,673

 
$
567,534

 
$
567,534

Average interest rates
2.22
%
 
2.26
%
 
2.32
%
 
2.39
%
 
2.46
%
 
2.62
%
 
2.41
%
 
 
Fixed interest rate loans (1)
$
119,028

 
$
98,865

 
$
128,954

 
$
91,854

 
$
71,293

 
$
151,156

 
$
661,150

 
$
655,017

Average interest rates
4.90
%
 
4.83
%
 
4.53
%
 
4.32
%
 
4.47
%
 
4.25
%
 
4.54
%
 
 
Variable interest rate loans (1)
$
71,435

 
$
26,938

 
$
19,836

 
$
13,929

 
$
14,706

 
$
25,588

 
$
172,432

 
$
172,432

Average interest rates
4.46
%
 
3.97
%
 
3.95
%
 
3.39
%
 
3.37
%
 
4.01
%
 
4.08
%
 
 
Rate sensitive liabilities
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Borrowed funds
$
139,709

 
$
10,000

 
$
30,000

 
$
40,000

 
$
20,000

 
$
50,000

 
$
289,709

 
$
293,401

Average interest rates
0.33
%
 
2.15
%
 
1.95
%
 
2.35
%
 
3.11
%
 
2.53
%
 
1.41
%
 
 
Savings and NOW accounts
$
40,395

 
$
36,417

 
$
32,717

 
$
29,423

 
$
26,487

 
$
286,957

 
$
452,396

 
$
452,396

Average interest rates
0.11
%
 
0.11
%
 
0.11
%
 
0.11
%
 
0.11
%
 
0.10
%
 
0.11
%
 
 
Fixed interest rate certificates of deposit
$
216,852

 
$
74,722

 
$
56,391

 
$
50,550

 
$
22,901

 
$
17,723

 
$
439,139

 
$
439,841

Average interest rates
0.96
%
 
1.66
%
 
1.47
%
 
1.31
%
 
1.48
%
 
1.77
%
 
1.25
%
 
 
Variable interest rate certificates of deposit
$
653

 
$
470

 
$

 
$

 
$

 
$

 
$
1,123

 
$
1,123

Average interest rates
0.40
%
 
0.40
%
 

 

 

 

 
0.40
%
 
 
 (1) The fair value reported is exclusive of the allocation of the ALLL.
We do not believe that there has been a material change in the nature or categories of our primary market risk exposure, or the particular markets that present the primary risk of loss. As of the date of this report, we do not know of or expect there to be any material change in the general nature of our primary market risk exposure in the near term. As of the date of this report, we do not expect to make material changes in those methods in the near term. We may change those methods in the future to adapt to changes in circumstances or to implement new techniques.

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Item 3. Quantitative and Qualitative Disclosures about Market Risk.
The information presented in the section captioned “Market Risk” in Management's Discussion and Analysis of Financial Condition and Results of Operations is incorporated herein by reference.
Item 4. Controls and Procedures.
DISCLOSURE CONTROLS AND PROCEDURES
We carried out an evaluation, under the supervision and with the participation of the Principal Executive Officer and Principal Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures (as such term is defined in Rules 13a-15(e) and 15(d)-15(e) under the Exchange Act) as of September 30, 2015, pursuant to Exchange Act Rule 13a-15. Based upon that evaluation, the Principal Executive Officer and Principal Financial Officer concluded that our disclosure controls and procedures as of September 30, 2015, were effective to ensure that information required to be disclosed in reports that we file or submit under the Exchange Act are recorded, processed, summarized and reported within the time periods specified in SEC rules and forms.
CHANGES IN INTERNAL CONTROL OVER FINANCIAL REPORTING
During the most recent fiscal quarter, no change occurred in our internal control over financial reporting that materially affected, or is likely to materially effect, our internal control over financial reporting.


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Table of Contents

PART II – OTHER INFORMATION
Item 1. Legal Proceedings.
We are not involved in any material legal proceedings. We are involved in ordinary, routine litigation incidental to our business; however, no such routine proceedings are expected to result in any material adverse effect on operations, earnings, financial condition, or cash flows.
Item 1A. Risk Factors.
There have been no material changes to the risk factors disclosed in Item 1A in our Annual Report on Form 10-K for the year ended December 31, 2014.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.
(A)
None
(B)
None
(C)
Repurchases of Common Stock
We have adopted and publicly announced a common stock repurchase plan. The plan was last amended on September 23, 2015, to allow for the repurchase of an additional 200,000 shares of common stock after that date. These authorizations do not have expiration dates. As common shares are repurchased under this plan, they are retired and revert back to the status of authorized, but unissued common shares.
The following table provides information for the three month period ended September 30, 2015, with respect to this plan:
 
Common Shares Repurchased
 
Total Number of Common Shares Purchased as Part of Publicly Announced Plan or Program
 
Maximum Number of Common Shares That May Yet Be Purchased Under the Plans or Programs

Number
 
Average Price
Per Common Share
 
 
Balance, June 30
 
 
 
 
 
 
77,873

July 1 - 31
25,977

 
$
24.18

 
25,977

 
51,896

August 1 - 31
25,379

 
23.25

 
25,379

 
26,517

September 1 - 22
15,000

 
23.80

 
15,000

 
11,517

Additional Authorization (200,000 shares)


 


 


 
211,517

September 23 - 30
13,081

 
23.62

 
13,081

 
198,436

Balance, September 30
79,437

 
$
23.72

 
79,437

 
198,436

Item 3. Defaults Upon Senior Securities.
Not applicable.
Item 4. Mine Safety Disclosures.
Not applicable.
Item 5. Other Information.
Not applicable.

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Table of Contents

Item 6. Exhibits
(a) Exhibits
Exhibit Number
 
Exhibits
 
 
 
31(a)
 
Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 by the Principal Executive Officer
 
 
 
31(b)
 
Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 by the Principal Financial Officer
 
 
 
32
 
Section 1350 Certification of Principal Executive Officer and Principal Financial Officer
 
 
 
101.1*
 
101.INS (XBRL Instance Document)
 
 
 
 
 
101.SCH (XBRL Taxonomy Extension Schema Document)
 
 
 
 
 
101.CAL (XBRL Calculation Linkbase Document)
 
 
 
 
 
101.LAB (XBRL Taxonomy Label Linkbase Document)
 
 
 
 
 
101.DEF (XBRL Taxonomy Linkbase Document)
 
 
 
 
 
101.PRE (XBRL Taxonomy Presentation Linkbase Document)
*
In accordance with Rule 406T of Regulations S-T, the XBRL related information shall not be deemed to be “filed” for purposes of Section 18 of the Exchange Act, or otherwise subject to the liability of that section, and shall not be part of any registration statement or other document filed under the Securities Act or the Exchange Act, except as shall be expressly set forth by specific reference in such filing.


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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
 
 
Isabella Bank Corporation
 
 
 
 
Date:
November 5, 2015
 
 
/s/ Jae A. Evans
 
 
 
 
Jae A. Evans
 
 
 
 
Chief Executive Officer
 
 
 
 
(Principal Executive Officer)
 
 
 
 
Date:
November 5, 2015
 
 
/s/ Dennis P. Angner
 
 
 
 
Dennis P. Angner
 
 
 
 
President, Chief Financial Officer
 
 
 
 
(Principal Financial Officer, Principal Accounting Officer)

63