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ISABELLA BANK Corp - Quarter Report: 2015 June (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 June 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 7,786,962 as of July 27, 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 policies of the U.S. Government, including policies of the U.S. Treasury and the FRB, the quality or composition of the loan or investment portfolios, demand for loan products, fluctuation in the value of collateral securing our loan portfolio, deposit flows, competition, demand for financial services in our market area, and accounting principles, policies and guidelines. These risks and uncertainties should be considered in evaluating forward looking statements and undue reliance should not be placed on such statements. Further information concerning our business, including additional factors that could materially affect our financial results, is included in our filings with the SEC.
The acronyms and abbreviations identified below may be used throughout this 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)

June 30
2015
 
December 31
2014
ASSETS
 
 
 
Cash and cash equivalents
 
 
 
Cash and demand deposits due from banks
$
20,955

 
$
18,058

Interest bearing balances due from banks
8,686

 
1,268

Total cash and cash equivalents
29,641

 
19,326

Certificates of deposit held in other financial institutions
340

 
580

AFS securities (amortized cost of $591,841 in 2015 and $561,893 in 2014)
595,318

 
567,534

Mortgage loans AFS
1,029

 
901

Loans
 
 
 
Commercial
430,981

 
431,961

Agricultural
113,134

 
104,721

Residential real estate
250,208

 
264,595

Consumer
34,279

 
32,305

Gross loans
828,602

 
833,582

Less allowance for loan and lease losses
9,000

 
10,100

Net loans
819,602

 
823,482

Premises and equipment
26,155

 
25,881

Corporate owned life insurance policies
26,034

 
25,152

Accrued interest receivable
5,469

 
5,851

Equity securities without readily determinable fair values
21,142

 
20,076

Goodwill and other intangible assets
46,052

 
46,128

Other assets
16,193

 
14,632

TOTAL ASSETS
$
1,586,975

 
$
1,549,543

LIABILITIES AND SHAREHOLDERS’ EQUITY
 
 
 
Deposits
 
 
 
Noninterest bearing
$
182,259

 
$
181,826

NOW accounts
193,680

 
190,984

Certificates of deposit under $100 and other savings
468,773

 
456,774

Certificates of deposit over $100
245,757

 
244,900

Total deposits
1,090,469

 
1,074,484

Borrowed funds
307,599

 
289,709

Accrued interest payable and other liabilities
10,882

 
10,756

Total liabilities
1,408,950

 
1,374,949

Shareholders’ equity
 
 
 
Common stock — no par value 15,000,000 shares authorized; issued and outstanding 7,797,188 shares (including 14,215 shares held in the Rabbi Trust) in 2015 and 7,776,274 shares (including 13,934 shares held in the Rabbi Trust) in 2014
139,201

 
138,755

Shares to be issued for deferred compensation obligations
4,378

 
4,242

Retained earnings
36,317

 
32,103

Accumulated other comprehensive income (loss)
(1,871
)
 
(506
)
Total shareholders’ equity
178,025

 
174,594

TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY
$
1,586,975

 
$
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 
 June 30
 
Six Months Ended 
 June 30
 
2015
 
2014
 
2015
 
2014
Interest income
 
 
 
 
 
 
 
Loans, including fees
$
9,909

 
$
9,799

 
$
19,593

 
$
19,550

AFS securities
 
 
 
 
 
 
 
Taxable
2,238

 
1,993

 
4,345

 
3,991

Nontaxable
1,507

 
1,486

 
2,989

 
2,943

Federal funds sold and other
139

 
113

 
278

 
271

Total interest income
13,793

 
13,391

 
27,205

 
26,755

Interest expense
 
 
 
 
 
 
 
Deposits
1,459

 
1,589

 
2,925

 
3,205

Borrowings
1,059

 
879

 
2,081

 
1,763

Total interest expense
2,518

 
2,468

 
5,006

 
4,968

Net interest income
11,275

 
10,923

 
22,199

 
21,787

Provision for loan losses
(535
)
 
(200
)
 
(1,261
)
 
(442
)
Net interest income after provision for loan losses
11,810

 
11,123

 
23,460

 
22,229

Noninterest income
 
 
 
 
 
 
 
Service charges and fees
1,393

 
1,360

 
2,556

 
2,754

Net gain on sale of mortgage loans
166

 
151

 
315

 
266

Earnings on corporate owned life insurance policies
195

 
190

 
382

 
374

Other
875

 
733

 
1,504

 
1,289

Total noninterest income
2,629

 
2,434

 
4,757

 
4,683

Noninterest expenses
 
 
 
 
 
 
 
Compensation and benefits
5,374

 
5,385

 
10,799

 
10,871

Furniture and equipment
1,426

 
1,219

 
2,740

 
2,487

Occupancy
672

 
676

 
1,393

 
1,418

Other
1,892

 
2,020

 
3,766

 
4,010

Total noninterest expenses
9,364

 
9,300

 
18,698

 
18,786

Income before federal income tax expense
5,075

 
4,257

 
9,519

 
8,126

Federal income tax expense
977

 
692

 
1,748

 
1,252

NET INCOME
$
4,098

 
$
3,565

 
$
7,771

 
$
6,874

Earnings per common share
 
 
 
 
 
 
 
Basic
$
0.53

 
$
0.46

 
$
1.00

 
$
0.89

Diluted
$
0.52

 
$
0.45

 
$
0.98

 
$
0.87

Cash dividends per common share
$
0.23

 
$
0.22

 
$
0.46

 
$
0.44







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 
 June 30
 
Six Months Ended 
 June 30
 
2015
 
2014
 
2015
 
2014
Net income
$
4,098

 
$
3,565

 
$
7,771

 
$
6,874

Unrealized gains (losses) on AFS securities arising during the period
(6,520
)
 
4,448

 
(2,164
)
 
9,968

Tax effect (1)
2,165

 
(1,420
)
 
799

 
(3,159
)
Other comprehensive income (loss), net of tax
(4,355
)
 
3,028

 
(1,365
)
 
6,809

Comprehensive income (loss)
$
(257
)
 
$
6,593

 
$
6,406

 
$
13,683

(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)

 

 

 
6,874

 
6,809

 
13,683

Issuance of common stock
76,341

 
1,778

 

 

 

 
1,778

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

 

 
237

 

 

 
237

Common stock purchased for deferred compensation obligations

 
(166
)
 

 

 

 
(166
)
Common stock repurchased pursuant to publicly announced repurchase plan
(70,334
)
 
(1,648
)
 

 

 

 
(1,648
)
Cash dividends paid ($0.44 per common share)

 

 

 
(3,394
)
 

 
(3,394
)
Balance, June 30, 2014
7,735,156

 
$
137,945

 
$
3,984

 
$
28,702

 
$
468

 
$
171,099

Balance, January 1, 2015
7,776,274

 
$
138,755

 
$
4,242

 
$
32,103

 
$
(506
)
 
$
174,594

Comprehensive income (loss)

 

 

 
7,771

 
(1,365
)
 
6,406

Issuance of common stock
94,807

 
2,192

 

 

 

 
2,192

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

 

 
259

 

 

 
259

Common stock purchased for deferred compensation obligations

 
(165
)
 

 

 

 
(165
)
Common stock repurchased pursuant to publicly announced repurchase plan
(73,893
)
 
(1,704
)
 

 

 

 
(1,704
)
Cash dividends paid ($0.46 per common share)

 

 

 
(3,557
)
 

 
(3,557
)
Balance, June 30, 2015
7,797,188

 
$
139,201

 
$
4,378

 
$
36,317

 
$
(1,871
)
 
$
178,025










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)

Six Months Ended 
 June 30
 
2015
 
2014
OPERATING ACTIVITIES
 
 
 
Net income
$
7,771

 
$
6,874

Reconciliation of net income to net cash provided by operating activities:
 
 
 
Provision for loan losses
(1,261
)
 
(442
)
Impairment of foreclosed assets
22

 
63

Depreciation
1,272

 
1,242

Amortization of OMSR
186

 
139

Amortization of acquisition intangibles
76

 
95

Net amortization of AFS securities
986

 
920

Net unrealized (gains) losses on trading securities

 
5

Net gain on sale of mortgage loans
(315
)
 
(266
)
Increase in cash value of corporate owned life insurance policies
(382
)
 
(374
)
Share-based payment awards under equity compensation plan
259

 
237

Origination of loans held-for-sale
(25,231
)
 
(12,878
)
Proceeds from loan sales
25,418

 
13,908

Net changes in operating assets and liabilities which provided (used) cash:
 
 
 
Accrued interest receivable
382

 
(6
)
Other assets
(2,026
)
 
270

Accrued interest payable and other liabilities
126

 
1,215

Net cash provided by (used in) operating activities
7,283

 
11,002

INVESTING ACTIVITIES
 
 
 
Net change in certificates of deposit held in other financial institutions
240

 

Activity in AFS securities
 
 
 
Maturities, calls, and principal payments
42,200

 
32,354

Purchases
(73,134
)
 
(61,762
)
Net loan principal (originations) collections
4,332

 
(9,551
)
Proceeds from sales of foreclosed assets
799

 
1,140

Purchases of premises and equipment
(1,546
)
 
(1,224
)
Purchases of corporate owned life insurance policies
(500
)
 

Net cash provided by (used in) investing activities
(27,609
)
 
(39,043
)

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Table of Contents

INTERIM CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (continued)
(Dollars in thousands)
 
Six Months Ended 
 June 30
 
2015
 
2014
FINANCING ACTIVITIES
 
 
 
Net increase (decrease) in deposits
$
15,985

 
$
17,162

Net increase (decrease) in borrowed funds
17,890

 
131

Cash dividends paid on common stock
(3,557
)
 
(3,394
)
Proceeds from issuance of common stock
2,192

 
1,778

Common stock repurchased
(1,704
)
 
(1,648
)
Common stock purchased for deferred compensation obligations
(165
)
 
(166
)
Net cash provided by (used in) financing activities
30,641

 
13,863

Increase (decrease) in cash and cash equivalents
10,315

 
(14,178
)
Cash and cash equivalents at beginning of period
19,326

 
41,558

Cash and cash equivalents at end of period
$
29,641

 
$
27,380

SUPPLEMENTAL CASH FLOWS INFORMATION:
 
 
 
Interest paid
$
5,042

 
$
5,074

Federal income taxes paid
2,143

 
715

SUPPLEMENTAL NONCASH INFORMATION:
 
 
 
Transfers of loans to foreclosed assets
$
809

 
$
923





















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

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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,” “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 refers 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 six month periods ended June 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 the consolidated financial statements and footnotes thereto included in 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.
Earnings per common share have been computed based on the following:
 
Three Months Ended 
 June 30
 
Six Months Ended 
 June 30

2015
 
2014
 
2015
 
2014
Average number of common shares outstanding for basic calculation
7,779,365

 
7,722,367

 
7,776,413

 
7,721,814

Average potential effect of common shares in the Directors Plan (1)
176,690

 
168,715

 
176,845

 
170,984

Average number of common shares outstanding used to calculate diluted earnings per common share
7,956,055

 
7,891,082

 
7,953,258

 
7,892,798

Net income
$
4,098

 
$
3,565

 
$
7,771

 
$
6,874

Earnings per common share
 
 
 
 
 
 
 
Basic
$
0.53

 
$
0.46

 
$
1.00

 
$
0.89

Diluted
$
0.52

 
$
0.45

 
$
0.98

 
$
0.87

(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.

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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 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.
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.
ASU No. 2015-5: “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.

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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.
ASU No. 2015-7: “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.
Note 4 – AFS Securities
The amortized cost and fair value of AFS securities, with gross unrealized gains and losses, are as follows at:
 
June 30, 2015

Amortized
Cost
 
Gross
Unrealized
Gains
 
Gross
Unrealized
Losses
 
Fair
Value
Government sponsored enterprises
$
24,520

 
$
8

 
$
325

 
$
24,203

States and political subdivisions
212,152

 
5,550

 
1,055

 
216,647

Auction rate money market preferred
3,200

 

 
481

 
2,719

Preferred stocks
3,800

 

 
570

 
3,230

Mortgage-backed securities
210,615

 
1,298

 
1,719

 
210,194

Collateralized mortgage obligations
137,554

 
1,692

 
921

 
138,325

Total
$
591,841

 
$
8,548

 
$
5,071

 
$
595,318

 
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 June 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
$

 
$
24,068

 
$
452

 
$

 
$

 
$
24,520

States and political subdivisions
16,230

 
64,293

 
89,386

 
42,243

 

 
212,152

Auction rate money market preferred

 

 

 

 
3,200

 
3,200

Preferred stocks

 

 

 

 
3,800

 
3,800

Mortgage-backed securities

 

 

 

 
210,615

 
210,615

Collateralized mortgage obligations

 

 

 

 
137,554

 
137,554

Total amortized cost
$
16,230

 
$
88,361

 
$
89,838

 
$
42,243

 
$
355,169

 
$
591,841

Fair value
$
16,346


$
90,400


$
91,896


$
42,208


$
354,468

 
$
595,318

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.
Information pertaining to AFS securities with gross unrealized losses at June 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:
 
June 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
$

 
$

 
$
325

 
$
23,671

 
$
325

States and political subdivisions
494

 
26,761

 
561

 
3,259

 
1,055

Auction rate money market preferred

 

 
481

 
2,719

 
481

Preferred stocks

 

 
570

 
3,230

 
570

Mortgage-backed securities
740

 
91,235

 
979

 
40,154

 
1,719

Collateralized mortgage obligations
182

 
45,121

 
739

 
28,981

 
921

Total
$
1,416

 
$
163,117

 
$
3,655

 
$
102,014

 
$
5,071

Number of securities in an unrealized loss position:
 
 
103

 
 
 
28

 
131

 
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


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As of June 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 June 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 typically discontinued at the time the loan is 90 days or more past due unless the credit is well-secured and in the process of collection. 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. For impaired loans not classified as nonaccrual, interest income continues to be accrued over the term of the loan based on the principal amount outstanding.
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 often 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 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 as deemed necessary.
We offer adjustable rate mortgages, construction loans, and fixed rate residential real estate loans which typically have amortization periods up to a maximum of 30 years. Fixed rate residential real estate loans with an amortization of greater than 15 years are generally sold upon origination to Freddie Mac. Fixed rate residential real estate loans with an amortization of 15 years or less may be held in our portfolio or sold to Freddie Mac upon origination. We consider the direction of interest rates, the sensitivity of our balance sheet to changes in interest rates, and overall loan demand to determine whether or not to sell these loans to Freddie Mac.

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Table of Contents

Our lending policies generally limit the maximum loan-to-value ratio on residential real estate loans to 95% of the lower of the appraised value of the property or the purchase price, with the condition that private mortgage insurance is required on loans with loan-to-value ratios in excess of 80%. Substantially all loans upon origination have a loan to value ratio of less than 80%.
Underwriting criteria for residential real estate loans include:
Evaluation of the borrower’s ability to make monthly payments.
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 internally. All mortgage loan requests are reviewed by our mortgage loan committee or through a secondary market automated 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 ALLL is evaluated on a regular basis and is based upon a periodic review of the collectability of the loans in light of historical experience, the nature and volume of the loan portfolio, adverse situations that may affect the borrower’s ability to repay, estimated value of any underlying collateral, and prevailing economic conditions. This evaluation is inherently subjective as it requires estimates that are susceptible to significant revision as more information becomes available.
The primary factors behind the determination of the level of the ALLL are specific allocations for impaired loans, historical loss percentages, as well as unallocated components. Specific allocations for impaired loans are primarily determined based on the difference between the 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 were 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.
A summary of changes in the ALLL and the recorded investment in loans by segments follows:
 
Allowance for Loan Losses
 
Three Months Ended June 30, 2015

Commercial
 
Agricultural
 
Residential Real Estate
 
Consumer
 
Unallocated
 
Total
April 1, 2015
$
3,810

 
$
206

 
$
3,729

 
$
711

 
$
1,144

 
$
9,600

Charge-offs
(11
)
 

 
(205
)
 
(80
)
 

 
(296
)
Recoveries
106

 

 
86

 
39

 

 
231

Provision for loan losses
(422
)
 
157

 
(96
)
 
(79
)
 
(95
)
 
(535
)
June 30, 2015
$
3,483


$
363


$
3,514


$
591


$
1,049


$
9,000


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Table of Contents

 
Allowance for Loan Losses

Six Months Ended June 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
(28
)



(255
)

(173
)



(456
)
Recoveries
319


72


119


107




617

Provision for loan losses
(631
)

75


(588
)

12


(129
)

(1,261
)
June 30, 2015
$
3,483


$
363


$
3,514


$
591


$
1,049


$
9,000

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

Commercial
 
Agricultural
 
Residential Real Estate
 
Consumer
 
Unallocated
 
Total
ALLL
 
 
 
 
 
 
 
 
 
 
 
Individually evaluated for impairment
$
1,295

 
$

 
$
1,906

 
$
1

 
$

 
$
3,202

Collectively evaluated for impairment
2,188

 
363

 
1,608

 
590

 
1,049

 
5,798

Total
$
3,483

 
$
363

 
$
3,514

 
$
591

 
$
1,049

 
$
9,000

Loans
 
 
 
 
 
 
 
 
 
 
 
Individually evaluated for impairment
$
9,050

 
$
2,312

 
$
10,313

 
$
41

 
 
 
$
21,716

Collectively evaluated for impairment
421,931

 
110,822

 
239,895

 
34,238

 
 
 
806,886

Total
$
430,981

 
$
113,134

 
$
250,208

 
$
34,279

 
 
 
$
828,602

 
Allowance for Loan Losses
 
Three Months Ended June 30, 2014

Commercial
 
Agricultural
 
Residential Real Estate
 
Consumer
 
Unallocated
 
Total
April 1, 2014
$
4,814

 
$
425

 
$
4,727

 
$
630

 
$
504

 
$
11,100

Charge-offs
(79
)
 

 
(264
)
 
(68
)
 

 
(411
)
Recoveries
92

 

 
86

 
33

 

 
211

Provision for loan losses
185

 
(206
)
 
(568
)
 
207

 
182

 
(200
)
June 30, 2014
$
5,012


$
219


$
3,981


$
802


$
686


$
10,700

 
Allowance for Loan Losses
 
Six Months Ended June 30, 2014

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

 
$
434

 
$
3,845

 
$
639

 
$
534

 
$
11,500

Charge-offs
(271
)
 
(31
)
 
(377
)
 
(182
)
 

 
(861
)
Recoveries
306

 

 
122

 
75

 

 
503

Provision for loan losses
(1,071
)
 
(184
)
 
391

 
270

 
152

 
(442
)
June 30, 2014
$
5,012

 
$
219

 
$
3,981

 
$
802

 
$
686

 
$
10,700


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Table of Contents

 
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:
 
June 30, 2015
 
Commercial
 
Agricultural

Real Estate
 
Other
 
Total
 
Real Estate
 
Other
 
Total
Rating
 
 
 
 
 
 
 
 
 
 

1 - Excellent
$

 
$
492

 
$
492

 
$

 
$

 
$

2 - High quality
6,089

 
8,599

 
14,688

 
4,148

 
1,436

 
5,584

3 - High satisfactory
95,744

 
45,705

 
141,449

 
28,296

 
12,807

 
41,103

4 - Low satisfactory
197,605

 
57,353

 
254,958

 
36,822

 
23,792

 
60,614

5 - Special mention
7,101

 
808

 
7,909

 
2,188

 
1,278

 
3,466

6 - Substandard
10,278

 
280

 
10,558

 
1,801

 
292

 
2,093

7 - Vulnerable
927

 


 
927

 
274

 

 
274

8 - Doubtful

 

 

 

 

 

Total
$
317,744

 
$
113,237

 
$
430,981

 
$
73,529

 
$
39,605

 
$
113,134

 
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


17

Table of Contents

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 has 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.
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.

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Table of Contents

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.
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.

19

Table of Contents

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:
 
June 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
$
696

 
$
25

 
$

 
$
927

 
$
1,648

 
$
316,096

 
$
317,744

Commercial other
133

 
6

 

 

 
139

 
113,098

 
113,237

Total commercial
829

 
31

 

 
927

 
1,787

 
429,194

 
430,981

Agricultural
 
 
 
 
 
 
 
 
 
 
 
 
 
Agricultural real estate
21

 
138

 

 
274

 
433

 
73,096

 
73,529

Agricultural other
187

 

 

 

 
187

 
39,418

 
39,605

Total agricultural
208

 
138

 

 
274

 
620

 
112,514

 
113,134

Residential real estate
 
 
 
 
 
 
 
 
 
 
 
 
 
Senior liens
2,156

 
335

 
19

 
329

 
2,839

 
198,074

 
200,913

Junior liens
15

 
55

 

 

 
70

 
10,059

 
10,129

Home equity lines of credit
86

 

 

 

 
86

 
39,080

 
39,166

Total residential real estate
2,257

 
390

 
19

 
329

 
2,995

 
247,213

 
250,208

Consumer
 
 
 
 
 
 
 
 
 
 
 
 
 
Secured
96

 
22

 

 

 
118

 
30,141

 
30,259

Unsecured
8

 

 

 

 
8

 
4,012

 
4,020

Total consumer
104

 
22

 

 

 
126

 
34,153

 
34,279

Total
$
3,398

 
$
581

 
$
19

 
$
1,530

 
$
5,528

 
$
823,074

 
$
828,602


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 in nonaccrual status, interest income is recognized daily, as earned, according to the terms of the loan agreement. The following is a summary of information pertaining to impaired loans as of:
 
June 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
$
6,661

 
$
6,780

 
$
1,292

 
$
7,115

 
$
7,234

 
$
1,279

Commercial other
560

 
560

 
3

 
609

 
828

 
4

Agricultural real estate

 

 

 

 

 

Residential real estate senior liens
10,033

 
11,018

 
1,878

 
11,645

 
12,782

 
2,015

Residential real estate junior liens
141

 
151

 
28

 
265

 
275

 
53

Home equity lines of credit

 

 

 
250

 
650

 
75

Consumer secured
41

 
41

 
1

 
54

 
54

 
1

Total impaired loans with a valuation allowance
17,436

 
18,550

 
3,202

 
19,938

 
21,823

 
3,427

Impaired loans without a valuation allowance
 
 
 
 
 
 
 
 
 
 
 
Commercial real estate
1,765

 
1,898

 
 
 
4,116

 
4,462

 
 
Commercial other
64

 
75

 
 
 
189

 
212

 
 
Agricultural real estate
1,657

 
1,657

 
 
 
1,529

 
1,529

 
 
Agricultural other
655

 
655

 
 
 
66

 
186

 
 
Home equity lines of credit
139

 
439

 
 
 

 

 
 
Consumer secured

 

 
 
 
10

 
10

 
 
Total impaired loans without a valuation allowance
4,280

 
4,724

 
 
 
5,910

 
6,399

 
 
Impaired loans
 
 
 
 
 
 
 
 
 
 
 
Commercial
9,050

 
9,313

 
1,295

 
12,029

 
12,736

 
1,283

Agricultural
2,312

 
2,312

 

 
1,595

 
1,715

 

Residential real estate
10,313

 
11,608

 
1,906

 
12,160

 
13,707

 
2,143

Consumer
41

 
41

 
1

 
64

 
64

 
1

Total impaired loans
$
21,716

 
$
23,274

 
$
3,202

 
$
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 six month periods ended:
 
Three Months Ended 
 June 30, 2015
 
Six Months Ended 
 June 30, 2015

Average Outstanding Balance
 
Interest Income Recognized
 
Average Outstanding Balance
 
Interest Income Recognized
Impaired loans with a valuation allowance
 
 
 
 
 
 
 
Commercial real estate
$
7,052

 
$
92

 
$
7,163

 
$
183

Commercial other
569

 
9

 
581

 
19

Agricultural real estate
44

 

 
44

 
1

Residential real estate senior liens
10,805

 
99

 
11,208

 
217

Residential real estate junior liens
196

 
12

 
227

 
14

Home equity lines of credit

 

 
63

 

Consumer secured
46

 
1

 
49

 
2

Total impaired loans with a valuation allowance
18,712


213


19,335


436

Impaired loans without a valuation allowance
 
 
 
 
 
 
 
Commercial real estate
2,230

 
74

 
2,818

 
135

Commercial other
68

 
2

 
99

 
5

Agricultural real estate
1,545

 
20

 
1,513

 
41

Agricultural other
351

 
7

 
204

 
8

Home equity lines of credit
190

 
4

 
155

 
10

Consumer secured

 

 
3

 

Total impaired loans without a valuation allowance
4,384


107


4,792


199

Impaired loans
 
 
 
 
 
 
 
Commercial
9,919

 
177

 
10,661

 
342

Agricultural
1,940

 
27

 
1,761

 
50

Residential real estate
11,191

 
115

 
11,653

 
241

Consumer
46

 
1

 
52

 
2

Total impaired loans
$
23,096


$
320


$
24,127


$
635


23

Table of Contents

 
Three Months Ended 
 June 30, 2014
 
Six Months Ended 
 June 30, 2014

Average Outstanding Balance
 
Interest Income Recognized
 
Average Outstanding Balance
 
Interest Income Recognized
Impaired loans with a valuation allowance
 
 
 
 
 
 
 
Commercial real estate
$
6,644

 
$
91

 
$
6,701

 
$
185

Commercial other
852

 
11

 
825

 
29

Agricultural real estate
147

 
(1
)
 
118

 

Residential real estate senior liens
12,786

 
126

 
13,188

 
264

Residential real estate junior liens
68

 
1

 
57

 
1

Home equity lines of credit
265

 
10

 
175

 
11

Consumer secured
63

 
1

 
77

 
2

Total impaired loans with a valuation allowance
20,825

 
239

 
21,141

 
492

Impaired loans without a valuation allowance
 
 
 
 
 
 
 
Commercial real estate
5,819

 
91

 
5,797

 
193

Commercial other
286

 
1

 
438

 
7

Agricultural real estate
1,405

 
21

 
1,407

 
37

Agricultural other
131

 

 
146

 
28

Home equity lines of credit

 

 
48

 

Consumer secured
5

 

 
3

 

Total impaired loans without a valuation allowance
7,646

 
113

 
7,839

 
265

Impaired loans
 
 
 
 
 
 
 
Commercial
13,601

 
194

 
13,761

 
414

Agricultural
1,683

 
20

 
1,671

 
65

Residential real estate
13,119

 
137

 
13,468

 
276

Consumer
68

 
1

 
80

 
2

Total impaired loans
$
28,471


$
352


$
28,980


$
757

As of June 30, 2015 and December 31, 2014, we had committed to advance $19 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 June 30, 2015
 
Six Months Ended June 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
1

 
$
71

 
$
71

 
5

 
$
585

 
$
585

Agricultural other
7

 
770

 
770

 
7

 
770

 
770

Residential real estate
 
 
 
 
 
 
 
 
 
 
 
Senior liens
2

 
210

 
210

 
4

 
448

 
448

Junior liens
1

 
30

 
30

 
1

 
30

 
30

Home equity lines of credit

 

 

 
1

 
94

 
94

Total residential real estate
3

 
240

 
240

 
6

 
572

 
572

Consumer unsecured

 

 

 

 

 

Total
11

 
$
1,081

 
$
1,081

 
18

 
$
1,927

 
$
1,927

 
Three Months Ended June 30, 2014
 
Six Months Ended June 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
1

 
$
8

 
$
8

 
5

 
$
363

 
$
363

Agricultural other

 

 

 

 

 

Residential real estate
 
 
 
 
 
 
 
 
 
 
 
Senior liens
3

 
170

 
170

 
12

 
661

 
661

Junior liens
1

 
41

 
41

 
1

 
41

 
41

Home equity lines of credit
1

 
160

 
160

 
1

 
160

 
160

Total residential real estate
5

 
371

 
371

 
14

 
862

 
862

Consumer unsecured
2

 
8

 
8

 
3

 
8

 
8

Total
8

 
$
387

 
$
387

 
22

 
$
1,233

 
$
1,233

The following tables summarize concessions we granted to borrowers in financial difficulty for the:
 
Three Months Ended June 30, 2015
 
Six Months Ended June 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
1

 
$
71

 

 
$

 
3

 
$
254

 
2

 
$
331

Agricultural other
6

 
724

 
1

 
46

 
6

 
724

 
1

 
46

Residential real estate
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Senior liens

 

 
2

 
210

 
1

 
50

 
3

 
398

Junior liens

 

 
1

 
30

 

 

 
1

 
30

Home equity lines of credit

 

 

 

 

 

 
1

 
94

Total residential real estate

 

 
3

 
240

 
1

 
50

 
5

 
522

Consumer unsecured

 

 

 

 

 

 

 

Total
7

 
$
795

 
4

 
$
286

 
10

 
$
1,028

 
8

 
$
899


25

Table of Contents

 
Three Months Ended June 30, 2014
 
Six Months Ended June 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

 
$

 
1

 
$
8

 
4

 
$
355

 
1

 
$
8

Agricultural other

 

 

 

 

 

 

 

Residential real estate
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Senior liens
1

 
48

 
2

 
122

 
3

 
98

 
9

 
563

Junior liens

 

 
1

 
41

 

 

 
1

 
41

Home equity lines of credit
1

 
160

 

 

 
1

 
160

 

 

Total residential real estate
2

 
208

 
3

 
163

 
4

 
258

 
10

 
604

Consumer unsecured
1

 
5

 
1

 
3

 
2

 
5

 
1

 
3

Total
3

 
$
213

 
5

 
$
174

 
10

 
$
618

 
12

 
$
615

We did not restructure any loans by forgiving principal or accrued interest in the three and six month periods ended June 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 six month periods ended June 30, 2015, which were modified within 12 months prior to the default date.
 
Three Months Ended June 30, 2015
 
Six Months Ended June 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
Residential real estate junior liens
1

 
$
39

 
$
39

 
$

 
1

 
$
39

 
$
39

 
$

We had no loans that defaulted in the three and six month periods ended June 30, 2014, which were modified within 12 months prior to the default date.
The following is a summary of TDR loan balances as of:
 
June 30, 2015
 
December 31, 2014
TDRs
$
20,458

 
$
23,341

The following is a summary of foreclosed assets as of:

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

 
N/A

Foreclosed Assets
873

 
885

Total
$
873

 
$
885

(1) 
Disclosure requirement from the adoption of ASU No. 2014-04 on January 1, 2015. As such, measurement was applicable for December 31, 2014.
Consumer mortgage loans collateralized by residential real estate in the process of foreclosure were $5 as of June 30, 2015.

26

Table of Contents

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:

June 30
2015
 
December 31
2014
FHLB Stock
$
10,800

 
$
9,800

Corporate Settlement Solutions, LLC
7,005

 
6,936

FRB Stock
1,999

 
1,999

Valley Financial Corporation
1,000

 
1,000

Other
338

 
341

Total
$
21,142

 
$
20,076

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

Amount
 
Rate
 
Amount
 
Rate
FHLB advances
$
240,000

 
1.71
%
 
$
192,000

 
2.05
%
Securities sold under agreements to repurchase without stated maturity dates
67,599

 
0.12
%
 
95,070

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

 

 
439

 
3.25
%
Federal funds purchased

 

 
2,200

 
0.50
%
Total
$
307,599

 
1.36
%
 
$
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 maturity and weighted average interest rates of FHLB advances as of:
 
June 30, 2015
 
December 31, 2014

Amount
 
Rate
 
Amount
 
Rate
Fixed rate due 2015
$
30,000

 
0.68
%
 
$

 

Variable rate due 2015
35,000

 
0.44
%
 

 

Fixed rate due 2016
20,000

 
1.34
%
 
42,000

 
0.72
%
Variable rate due 2016
15,000

 
0.44
%
 
10,000

 
2.15
%
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
20,000

 
3.11
%
 
20,000

 
3.11
%
Fixed rate due 2020

 

 
10,000

 
1.98
%
Fixed rate due 2021
40,000

 
2.19
%
 
30,000

 
2.26
%
Fixed rate due 2023
10,000

 
3.90
%
 
10,000

 
3.90
%
Total
$
240,000

 
1.71
%
 
$
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 $67,661 and $94,537 at June 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:
 
June 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 six month periods ended:
 
Three Months Ended June 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
$
67,599

 
$
63,294

 
0.13
%
 
$
90,813

 
$
90,484

 
0.13
%
Federal funds purchased
12,600

 
5,770

 
0.52
%
 
16,500

 
6,849

 
0.48
%
 
Six Months Ended June 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

 
$
71,129

 
0.13
%
 
$
94,741

 
$
92,412

 
0.13
%
Federal funds purchased
12,600

 
5,738

 
0.50
%
 
16,500

 
6,305

 
0.47
%
We had pledged AFS securities and 1-4 family residential real estate loans in the following amounts at:

June 30
2015
 
December 31
2014
Pledged to secure borrowed funds
$
344,764

 
$
324,584

Pledged to secure repurchase agreements
67,661

 
94,537

Pledged for public deposits and for other purposes necessary or required by law
21,278

 
19,851

Total
$
433,703

 
$
438,972

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

June 30
2015
 
December 31
2014
States and political subdivisions
$
2,041

 
$
6,643

Mortgage-backed securities
24,146

 
29,655

Collateralized mortgage obligations
41,474

 
58,239

Total
$
67,661

 
$
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 June 30, 2015, we had the ability to borrow up to an additional $104,173, 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 
 June 30
 
Six Months Ended 
 June 30
 
2015
 
2014
 
2015
 
2014
Marketing and community relations
$
228

 
$
211

 
$
483

 
$
454

FDIC insurance premiums
203

 
221

 
415

 
423

Director fees
206

 
183

 
404

 
378

Audit and related fees
188

 
182

 
346

 
320

Education and travel
129

 
143

 
221

 
264

Printing and supplies
96

 
87

 
198

 
189

Postage and freight
92

 
90

 
190

 
198

Legal fees
93

 
106

 
152

 
160

Loan underwriting fees
62

 
92

 
150

 
187

Consulting fees
79

 
76

 
142

 
167

All other
516

 
629

 
1,065

 
1,270

Total other
$
1,892

 
$
2,020

 
$
3,766

 
$
4,010

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 
 June 30
 
Six Months Ended 
 June 30

2015
 
2014
 
2015
 
2014
Income taxes at 34% statutory rate
$
1,725

 
$
1,448

 
$
3,236

 
$
2,763

Effect of nontaxable income
 
 
 
 
 
 
 
Interest income on tax exempt municipal securities
(510
)
 
(503
)
 
(1,010
)
 
(997
)
Earnings on corporate owned life insurance policies
(66
)
 
(64
)
 
(130
)
 
(127
)
Effect of tax credits
(181
)
 
(191
)
 
(367
)
 
(388
)
Other
(26
)
 
(43
)
 
(52
)
 
(77
)
Total effect of nontaxable income
(783
)
 
(801
)
 
(1,559
)
 
(1,589
)
Effect of nondeductible expenses
35

 
45

 
71

 
78

Federal income tax expense
$
977

 
$
692

 
$
1,748

 
$
1,252

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.
Certificates of deposit held in other financial institutions: Certificates of deposit held in other financial institutions include certificates of deposit and other short term interest bearing balances that mature within 3 years. Fair value is determined using prices for similar assets with similar characteristics. As such, we classify certificates of deposits held in other financial institutions as Level 2.
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

29

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generally obtained from an independent third party. On a quarterly basis, we compare the values provided to alternative pricing sources.
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 what price secondary markets are currently offering for portfolios with similar characteristics. As such, we classify Mortgage loans AFS subject to nonrecurring fair value adjustments as Level 2.
Loans: 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 carry and sell an asset if it is determined that the collateral will be liquidated in connection with the ultimate settlement of the loan. We use these valuations to determine if any 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:

June 30, 2015
Valuation Technique
Fair Value
Unobservable Input
 
Range
 
 
Discount applied to collateral appraisal:
 
 
 
 
Real Estate
 
20% - 30%
 
 
Equipment
 
25% - 50%
Discounted appraisal value
$6,133
Cash crop inventory
 
40%
 
 
Other inventory
 
50% - 75%
 
 
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.

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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 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:
 
June 30, 2015
Valuation Technique
Fair Value
 
Unobservable Input
 
Range
 
 
 
Discount applied to collateral appraisal:
 
 
Discounted appraisal value
$
873

 
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.

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Accrued interest payable: The carrying amounts of accrued interest payable approximate fair value. As such, we classify accrued interest payable as Level 1.
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:
 
June 30, 2015

Carrying
Value
 
Estimated
Fair Value
 
(Level 1)
 
(Level 2)
 
(Level 3)
ASSETS
 
 
 
 
 
 
 
 
 
Cash and cash equivalents
$
29,641

 
$
29,641

 
$
29,641

 
$

 
$

Certificates of deposit held in other financial institutions
340

 
339

 

 
339

 

Mortgage loans AFS
1,029

 
1,046

 

 
1,046

 

Gross loans
828,602

 
820,828

 

 

 
820,828

Less allowance for loan and lease losses
9,000

 
9,000

 

 

 
9,000

Net loans
819,602

 
811,828

 

 

 
811,828

Accrued interest receivable
5,469

 
5,469

 
5,469

 

 

Equity securities without readily determinable fair values (1)
21,142

 
N/A

 

 

 

OMSR
2,492

 
2,499

 

 
2,499

 

LIABILITIES
 
 
 
 
 
 
 
 
 
Deposits without stated maturities
654,044

 
654,044

 
654,044

 

 

Deposits with stated maturities
436,425

 
436,241

 

 
436,241

 

Borrowed funds
307,599

 
310,913

 

 
310,913

 

Accrued interest payable
522

 
522

 
522

 

 


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December 31, 2014
 
Carrying
Value
 
Estimated
Fair Value
 
(Level 1)
 
(Level 2)
 
(Level 3)
ASSETS
 
 
 
 
 
 
 
 
 
Cash and cash equivalents
$
19,326

 
$
19,326

 
$
19,326

 
$

 
$

Certificates of deposit held in other financial institutions
580

 
579

 

 
579

 

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:
 
June 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
$
24,203

 
$

 
$
24,203

 
$

 
$
24,136

 
$

 
$
24,136

 
$

States and political subdivisions
216,647

 

 
216,647

 

 
215,345

 

 
215,345

 

Auction rate money market preferred
2,719

 

 
2,719

 

 
2,619

 

 
2,619

 

Preferred stocks
3,230

 
3,230

 

 

 
6,140

 
6,140

 

 

Mortgage-backed securities
210,194

 

 
210,194

 

 
166,926

 

 
166,926

 

Collateralized mortgage obligations
138,325

 

 
138,325

 

 
152,368

 

 
152,368

 

Total AFS securities
595,318

 
3,230

 
592,088

 

 
567,534

 
6,140

 
561,394

 

Nonrecurring items
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Impaired loans (net of the ALLL)
6,133

 

 

 
6,133

 
8,720

 

 

 
8,720

Foreclosed assets
873

 

 

 
873

 
885

 

 

 
885

Total
$
602,324

 
$
3,230

 
$
592,088

 
$
7,006

 
$
577,139

 
$
6,140

 
$
561,394

 
$
9,605

Percent of assets and liabilities measured at fair value
 
 
0.54
%
 
98.30
%
 
1.16
%
 
 
 
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 
 June 30
 
Six Months Ended 
 June 30
 
2015
 
2014
 
2015
 
2014
Nonrecurring items
 
 
 
 
 
 
 
Foreclosed assets
$
(22
)
 
$
(20
)
 
$
(22
)
 
$
(63
)
We had no assets or liabilities recorded at fair value with changes in fair value recognized through earnings, on a recurring basis, as of June 30, 2015.
Note 11 – Accumulated Other Comprehensive Income (Loss)
The following table summarizes the changes in AOCI by component for the:
 
Three Months Ended June 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, April 1
$
6,292

 
$
(3,808
)
 
$
2,484

 
$
(426
)
 
$
(2,134
)
 
$
(2,560
)
OCI before reclassifications
(6,520
)
 

 
(6,520
)
 
4,448

 

 
4,448

Amounts reclassified from AOCI

 

 

 

 

 

Subtotal
(6,520
)
 

 
(6,520
)
 
4,448

 

 
4,448

Tax effect
2,165

 

 
2,165

 
(1,420
)
 

 
(1,420
)
OCI, net of tax
(4,355
)
 

 
(4,355
)
 
3,028

 

 
3,028

Balance, June 30
$
1,937


$
(3,808
)

$
(1,871
)

$
2,602


$
(2,134
)

$
468

 
Six Months Ended June 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
(2,164
)
 

 
(2,164
)
 
9,968

 

 
9,968

Amounts reclassified from AOCI

 

 

 

 

 

Subtotal
(2,164
)
 

 
(2,164
)
 
9,968

 

 
9,968

Tax effect
799

 

 
799

 
(3,159
)
 

 
(3,159
)
OCI, net of tax
(1,365
)
 

 
(1,365
)
 
6,809

 

 
6,809

Balance, June 30
$
1,937

 
$
(3,808
)
 
$
(1,871
)
 
$
2,602

 
$
(2,134
)
 
$
468

Included in OCI for the three and six month periods ended June 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 June 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
$
190

 
$
(6,710
)
 
$
(6,520
)
 
$
298

 
$
4,150

 
$
4,448

Tax effect

 
2,165

 
2,165

 

 
(1,420
)
 
(1,420
)
Unrealized gains (losses), net of tax
$
190


$
(4,545
)

$
(4,355
)

$
298


$
2,730


$
3,028

 
Six Months Ended June 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
$
190

 
$
(2,354
)
 
$
(2,164
)
 
$
298

 
$
9,670

 
$
9,968

Tax effect

 
799

 
799

 

 
(3,159
)
 
(3,159
)
Unrealized gains (losses), net of tax
$
190

 
$
(1,555
)
 
$
(1,365
)
 
$
298

 
$
6,511

 
$
6,809


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Table of Contents

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

June 30
2015
 
December 31
2014
ASSETS
 
 
 
Cash on deposit at the Bank
$
3,486

 
$
1,035

AFS securities
261

 
3,294

Investments in subsidiaries
128,865

 
124,827

Premises and equipment
2,013

 
1,982

Other assets
52,929

 
53,228

TOTAL ASSETS
$
187,554

 
$
184,366

LIABILITIES AND SHAREHOLDERS’ EQUITY
 
 
 
Other liabilities
$
9,529

 
$
9,772

Shareholders' equity
178,025

 
174,594

TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY
$
187,554

 
$
184,366

Interim Condensed Statements of Income
 
Three Months Ended 
 June 30
 
Six Months Ended 
 June 30

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

 
$
1,500

 
$
3,300

 
$
3,000

Interest income
35

 
39

 
71

 
78

Management fee and other
1,602

 
722

 
3,054

 
1,228

Total income
3,337

 
2,261

 
6,425

 
4,306

Expenses
 
 
 
 
 
 
 
Compensation and benefits
1,240

 
772

 
2,430

 
1,604

Occupancy and equipment
401

 
107

 
811

 
221

Audit and related fees
114

 
98

 
215

 
169

Other
539

 
298

 
1,032

 
566

Total expenses
2,294

 
1,275

 
4,488

 
2,560

Income before income tax benefit and equity in undistributed earnings of subsidiaries
1,043

 
986

 
1,937

 
1,746

Federal income tax benefit
224

 
178

 
465

 
432

Income before equity in undistributed earnings of subsidiaries
1,267

 
1,164

 
2,402

 
2,178

Undistributed earnings of subsidiaries
2,831

 
2,401

 
5,369

 
4,696

Net income
$
4,098

 
$
3,565

 
$
7,771

 
$
6,874



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Table of Contents

Interim Condensed Statements of Cash Flows
 
Six Months Ended 
 June 30

2015
 
2014
Operating activities
 
 
 
Net income
$
7,771

 
$
6,874

Adjustments to reconcile net income to cash provided by operations
 
 
 
Undistributed earnings of subsidiaries
(5,369
)
 
(4,696
)
Undistributed earnings of equity securities without readily determinable fair values
(65
)
 
(10
)
Share-based payment awards
259

 
237

Depreciation
74

 
65

Net amortization of AFS securities

 
2

Changes in operating assets and liabilities which provided (used) cash
 
 
 
Other assets
364

 
(40
)
Accrued interest and other liabilities
(33
)
 
836

Net cash provided by (used in) operating activities
3,001

 
3,268

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

 

Purchases of premises and equipment
(105
)
 
(6
)
Net cash provided by (used in) investing activities
2,895

 
(6
)
Financing activities
 
 
 
Net increase (decrease) in borrowed funds
(211
)
 
600

Cash dividends paid on common stock
(3,557
)
 
(3,394
)
Proceeds from the issuance of common stock
2,192

 
1,778

Common stock repurchased
(1,704
)
 
(1,648
)
Common stock purchased for deferred compensation obligations
(165
)
 
(166
)
Net cash provided by (used in) financing activities
(3,445
)
 
(2,830
)
Increase (decrease) in cash and cash equivalents
2,451

 
432

Cash and cash equivalents at beginning of period
1,035

 
529

Cash and cash equivalents at end of period
$
3,486

 
$
961

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 June 30, 2015 and 2014 and each of the three and six 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 six month periods ended June 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 six month period ended June 30, 2015, we reported record net income of $4,098 and $7,771 and record earnings per common share of $0.53 and $1.00, respectively. Our increased earnings have primarily been the result of increased interest income and continued improvements in credit quality. Net loan recoveries during the first six months of 2015 were $161 versus net loans charged-off of $358 in the first six 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. 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 $1,261 reversal of provision for loan losses recorded in the six month period ended June 30, 2015.
During the six month period ended June 30, 2015, total assets grew by 2.42% to $1,586,975, and assets under management increased to $2,276,891 which includes loans sold and serviced, and assets managed by our Investment and Trust Services Department of $689,916. Total loans declined by $4,980 from December 31, 2014 which was driven by a $14,387 decline in residential real estate loans as demand continued to be soft. During the first six months of 2015, commercial and agricultural loans grew by $7,433.
We increased our AFS securities portfolio by $27,784 during the first six 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 3.41% remains historically low, it has stabilized. We anticipate the Federal Reserve Bank will increase short term interest rates slightly in the last months of 2015; therefore, we do not anticipate any significant improvements in our net yield on interest earning assets in the short term.
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 and retain current customers to improve earnings.

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.

Pending Acquisitions
The Bank has entered into agreements to purchase a branch from Flagstar Bank, FSB and a branch from Independent Bank. The Flagstar Bank branch is located in Saginaw, Michigan and the Independent Bank branch is located in Midland, Michigan. On June 25, 2015, the Federal Reserve Bank of Chicago, acting under authority delegated by the Board of Governors of the Federal Reserve System, approved both applications filed by the Bank. Subject to satisfaction of customary closing conditions, the Flagstar Bank branch purchase is expected to close on or about July 31, 2015 with the Independent Bank branch purchase expected to close on or before September 1, 2015.


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:

June 30
2015
 
March 31
2015
 
December 31
2014
 
September 30
2014
 
June 30
2014
INCOME STATEMENT DATA
 
 
 
 
 
 
 
 
 
Interest income
$
13,793

 
$
13,412

 
$
13,713

 
$
13,483

 
$
13,391

Interest expense
2,518

 
2,488

 
2,504

 
2,498

 
2,468

Net interest income
11,275

 
10,924

 
11,209

 
10,985

 
10,923

Provision for loan losses
(535
)
 
(726
)
 
(64
)
 
(162
)
 
(200
)
Noninterest income
2,629

 
2,128

 
2,426

 
2,216

 
2,434

Noninterest expenses
9,364

 
9,334

 
9,606

 
9,514

 
9,300

Federal income tax expense
977

 
771

 
648

 
444

 
692

Net Income
$
4,098

 
$
3,673

 
$
3,445

 
$
3,405

 
$
3,565

PER SHARE
 
 
 
 
 
 
 
 
 
Basic earnings
$
0.53

 
$
0.47

 
$
0.44

 
$
0.44

 
$
0.46

Diluted earnings
$
0.52

 
$
0.46

 
$
0.44

 
$
0.43

 
$
0.45

Dividends
$
0.23

 
$
0.23

 
$
0.23

 
$
0.22

 
$
0.22

Tangible book value*
$
17.17

 
$
16.84

 
$
16.59

 
$
16.33

 
$
16.08

Quoted market value
 
 
 
 
 
 
 
 
 
High
$
23.80

 
$
23.50

 
$
23.99

 
$
24.00

 
$
23.50

Low
$
22.70

 
$
22.00

 
$
22.10

 
$
21.73

 
$
22.44

Close*
$
23.75

 
$
22.90

 
$
22.50

 
$
23.60

 
$
22.95

Common shares outstanding*
7,797,188

 
7,781,820

 
7,776,274

 
7,740,730

 
7,735,156

PERFORMANCE RATIOS
 
 
 
 
 
 
 
 
 
Return on average total assets
1.04
%
 
0.95
%
 
0.90
%
 
0.89
%
 
0.95
%
Return on average shareholders' equity
9.11
%
 
8.27
%
 
8.06
%
 
7.91
%
 
8.43
%
Return on average tangible shareholders' equity
12.35
%
 
11.30
%
 
10.80
%
 
10.88
%
 
11.59
%
Net interest margin yield (FTE)
3.41
%
 
3.37
%
 
3.45
%
 
3.39
%
 
3.43
%
BALANCE SHEET DATA*
 
 
 
 
 
 
 
 
 
Gross loans
$
828,602

 
$
815,468

 
$
833,582

 
$
822,299

 
$
816,307

AFS securities
$
595,318

 
$
605,208

 
$
567,534

 
$
575,080

 
$
550,518

Total assets
$
1,586,975

 
$
1,571,575

 
$
1,549,543

 
$
1,553,974

 
$
1,522,135

Deposits
$
1,090,469

 
$
1,098,655

 
$
1,074,484

 
$
1,081,890

 
$
1,060,928

Borrowed funds
$
307,599

 
$
283,321

 
$
289,709

 
$
290,438

 
$
279,457

Shareholders' equity
$
178,025

 
$
179,653

 
$
174,594

 
$
172,076

 
$
171,099

Gross loans to deposits
75.99
%
 
74.22
%
 
77.58
%
 
76.01
%
 
76.94
%
ASSETS UNDER MANAGEMENT*
 
 
 
 
 
 
 
 
 
Loans sold with servicing retained
$
289,089

 
$
288,448

 
$
288,639

 
$
290,697

 
$
290,590

Assets managed by our Investment and Trust Services Department
$
400,827

 
$
396,802

 
$
383,878

 
$
374,878

 
$
374,092

Total assets under management
$
2,276,891

 
$
2,256,825

 
$
2,222,060

 
$
2,219,549

 
$
2,186,817

ASSET QUALITY*
 
 
 
 
 
 
 
 
 
Nonperforming loans to gross loans
0.19
%
 
0.44
%
 
0.50
%
 
0.57
%
 
0.58
%
Nonperforming assets to total assets
0.15
%
 
0.27
%
 
0.33
%
 
0.37
%
 
0.38
%
ALLL to gross loans
1.09
%
 
1.18
%
 
1.21
%
 
1.26
%
 
1.31
%
CAPITAL RATIOS*
 
 
 
 
 
 
 
 
 
Shareholders' equity to assets
11.22
%
 
11.43
%
 
11.27
%
 
11.07
%
 
11.24
%
Tier 1 leverage
8.77
%
 
8.74
%
 
8.59
%
 
8.47
%
 
8.50
%
Common equity tier 1 capital
13.71
%
 
13.70
%
 
N/A

 
N/A

 
N/A

Tier 1 risk-based capital
13.71
%
 
13.70
%
 
14.08
%
 
13.86
%
 
13.84
%
Total risk-based capital
14.63
%
 
14.70
%
 
15.18
%
 
15.11
%
 
15.09
%
* 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 six month periods ended:
 
June 30
2015
 
June 30
2014
 
June 30
2013
 
June 30
2012
 
June 30
2011
INCOME STATEMENT DATA
 
 
 
 
 
 
 
 
 
Interest income
$
27,205

 
$
26,755

 
$
26,968

 
$
28,392

 
$
28,907

Interest expense
5,006

 
4,968

 
5,602

 
7,133

 
8,154

Net interest income
22,199

 
21,787

 
21,366

 
21,259

 
20,753

Provision for loan losses
(1,261
)
 
(442
)
 
515

 
900

 
1,420

Noninterest income
4,757

 
4,683

 
5,183

 
6,085

 
3,926

Noninterest expenses
18,698

 
18,786

 
18,515

 
18,761

 
17,366

Federal income tax expense
1,748

 
1,252

 
1,219

 
1,445

 
905

Net Income
$
7,771

 
$
6,874


$
6,300

 
$
6,238

 
$
4,988

PER SHARE
 
 
 
 
 
 
 
 
 
Basic earnings
$
1.00

 
$
0.89

 
$
0.82

 
$
0.82

 
$
0.66

Diluted earnings
$
0.98

 
$
0.87

 
$
0.80

 
$
0.80

 
$
0.64

Dividends
$
0.46

 
$
0.44

 
$
0.42

 
$
0.40

 
$
0.38

Tangible book value*
$
17.17

 
$
16.08

 
$
15.19

 
$
14.37

 
$
13.54

Quoted market value
 
 
 
 
 
 
 
 
 
High
$
23.80

 
$
23.94

 
$
26.00

 
$
24.98

 
$
19.25

Low
$
22.00

 
$
22.52

 
$
21.60

 
$
22.30

 
$
17.10

Close*
$
23.75

 
$
22.95

 
$
24.75

 
$
24.85

 
$
17.48

Common shares outstanding*
7,797,188

 
7,735,156

 
7,703,589

 
7,602,545

 
7,575,676

PERFORMANCE RATIOS
 
 
 
 
 
 
 
 
 
Return on average total assets
1.00
%
 
0.91
%
 
0.88
%
 
0.92
%
 
0.79
%
Return on average shareholders' equity
8.69
%
 
8.24
%
 
7.63
%
 
8.03
%
 
6.83
%
Return on average tangible shareholders' equity
11.71
%
 
11.17
%
 
10.98
%
 
11.66
%
 
10.12
%
Net interest margin yield (FTE)
3.39
%
 
3.42
%
 
3.52
%
 
3.71
%
 
3.93
%
BALANCE SHEET DATA*
 
 
 
 
 
 
 
 
 
Gross loans
$
828,602

 
$
816,307

 
$
803,452

 
$
754,952

 
$
746,294

AFS securities
$
595,318

 
$
550,518

 
$
499,424

 
$
504,010

 
$
380,225

Total assets
$
1,586,975

 
$
1,522,135

 
$
1,451,415

 
$
1,381,496

 
$
1,281,270

Deposits
$
1,090,469

 
$
1,060,928

 
$
1,021,424

 
$
978,828

 
$
924,199

Borrowed funds
$
307,599

 
$
279,457

 
$
262,460

 
$
234,132

 
$
196,480

Shareholders' equity
$
178,025

 
$
171,099

 
$
159,288

 
$
159,855

 
$
151,514

Gross loans to deposits
75.99
%
 
76.94
%
 
78.66
%
 
77.13
%
 
80.75
%
ASSETS UNDER MANAGEMENT*
 
 
 
 
 
 
 
 
 
Loans sold with servicing retained
$
289,089

 
$
290,590

 
$
295,047

 
$
306,337

 
$
305,487

Assets managed by our Investment and Trust Services Department
$
400,827

 
$
374,092

 
$
336,132

 
$
311,760

 
$
301,434

Total assets under management
$
2,276,891

 
$
2,186,817

 
$
2,082,594

 
$
1,999,593

 
$
1,888,191

ASSET QUALITY*
 
 
 
 
 
 
 
 
 
Nonperforming loans to gross loans
0.19
%
 
0.58
%
 
0.52
%
 
0.86
%
 
0.90
%
Nonperforming assets to total assets
0.15
%
 
0.38
%
 
0.36
%
 
0.64
%
 
0.67
%
ALLL to gross loans
1.09
%
 
1.31
%
 
1.46
%
 
1.63
%
 
1.66
%
CAPITAL RATIOS*
 
 
 
 
 
 
 
 
 
Shareholders' equity to assets
11.22
%
 
11.24
%
 
10.97
%
 
11.57
%
 
11.83
%
Tier 1 leverage
8.77
%
 
8.50
%
 
8.38
%
 
8.24
%
 
8.16
%
Common equity tier 1 capital
13.71
%
 
N/A

 
N/A

 
N/A

 
N/A

Tier 1 risk-based capital
13.71
%
 
13.84
%
 
13.59
%
 
13.19
%
 
12.52
%
Total risk-based capital
14.63
%
 
15.09
%
 
14.84
%
 
14.44
%
 
13.77
%
* 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
 
June 30, 2015
 
March 31, 2015
 
June 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
$
819,507

 
$
9,909

 
4.84
%
 
$
822,059

 
$
9,684

 
4.71
%
 
$
808,541

 
$
9,799

 
4.85
%
Taxable investment securities
393,313

 
2,238

 
2.28
%
 
370,586

 
2,107

 
2.27
%
 
353,878

 
1,993

 
2.25
%
Nontaxable investment securities
201,841

 
2,496

 
4.95
%
 
197,597

 
2,471

 
5.00
%
 
194,307

 
2,376

 
4.89
%
Other
25,195

 
139

 
2.21
%
 
24,421

 
139

 
2.28
%
 
21,593

 
114

 
2.11
%
Total earning assets
1,439,856

 
14,782

 
4.11
%
 
1,414,663

 
14,401

 
4.07
%
 
1,378,319

 
14,282

 
4.14
%
NONEARNING ASSETS
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Allowance for loan losses
(9,575
)
 
 
 
 
 
(10,308
)
 
 
 
 
 
(11,208
)
 
 
 
 
Cash and demand deposits due from banks
17,406

 
 
 
 
 
17,624

 
 
 
 
 
17,403

 
 
 
 
Premises and equipment
26,231

 
 
 
 
 
26,307

 
 
 
 
 
25,960

 
 
 
 
Accrued income and other assets
100,937

 
 
 
 
 
100,761

 
 
 
 
 
97,187

 
 
 
 
Total assets
$
1,574,855

 
 
 
 
 
$
1,549,047

 
 
 
 
 
$
1,507,661

 
 
 
 
INTEREST BEARING LIABILITIES
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Interest bearing demand deposits
$
190,957

 
37

 
0.08
%
 
$
194,636

 
39

 
0.08
%
 
$
192,798

 
39

 
0.08
%
Savings deposits
277,049

 
96

 
0.14
%
 
270,792

 
92

 
0.14
%
 
257,628

 
91

 
0.14
%
Time deposits
436,244

 
1,326

 
1.22
%
 
437,210

 
1,335

 
1.22
%
 
455,592

 
1,459

 
1.28
%
Borrowed funds
299,987

 
1,059

 
1.41
%
 
283,535

 
1,022

 
1.44
%
 
263,606

 
879

 
1.33
%
Total interest bearing liabilities
1,204,237

 
2,518

 
0.84
%
 
1,186,173

 
2,488

 
0.84
%
 
1,169,624

 
2,468

 
0.84
%
NONINTEREST BEARING LIABILITIES
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Demand deposits
179,733

 
 
 
 
 
174,037

 
 
 
 
 
158,804

 
 
 
 
Other
10,873

 
 
 
 
 
11,087

 
 
 
 
 
10,166

 
 
 
 
Shareholders’ equity
180,012

 
 
 
 
 
177,750

 
 
 
 
 
169,067

 
 
 
 
Total liabilities and shareholders’ equity
$
1,574,855

 
 
 
 
 
$
1,549,047

 
 
 
 
 
$
1,507,661

 
 
 
 
Net interest income (FTE)
 
 
$
12,264

 
 
 
 
 
$
11,913

 
 
 
 
 
$
11,814

 
 
Net yield on interest earning assets (FTE)
 
 
 
 
3.41
%
 
 
 
 
 
3.37
%
 
 
 
 
 
3.43
%

41

Table of Contents

 
Six Months Ended
 
June 30, 2015
 
June 30, 2014

Average
Balance
 
Tax
Equivalent
Interest
 
Average
Yield /
Rate
 
Average
Balance
 
Tax
Equivalent
Interest
 
Average
Yield /
Rate
INTEREST EARNING ASSETS
 
 
 
 
 
 
 
 
 
 
 
Loans
$
820,783

 
$
19,593

 
4.77
%
 
$
807,177

 
$
19,550

 
4.84
%
Taxable investment securities
381,950

 
4,345

 
2.28
%
 
353,446

 
3,991

 
2.26
%
Nontaxable investment securities
199,719

 
4,981

 
4.99
%
 
191,654

 
4,703

 
4.91
%
Other
24,808

 
278

 
2.24
%
 
24,361

 
274

 
2.25
%
Total earning assets
1,427,260

 
29,197

 
4.09
%
 
1,376,638

 
28,518

 
4.14
%
NONEARNING ASSETS
 
 
 
 
 
 
 
 
 
 
 
Allowance for loan losses
(9,942
)
 
 
 
 
 
(11,421
)
 
 
 
 
Cash and demand deposits due from banks
17,516

 
 
 
 
 
17,546

 
 
 
 
Premises and equipment
26,269

 
 
 
 
 
25,989

 
 
 
 
Accrued income and other assets
100,849

 
 
 
 
 
95,946

 
 
 
 
Total assets
$
1,561,952

 
 
 
 
 
$
1,504,698

 
 
 
 
INTEREST BEARING LIABILITIES
 
 
 
 
 
 
 
 
 
 
 
Interest bearing demand deposits
$
192,797

 
76

 
0.08
%
 
$
195,287

 
80

 
0.08
%
Savings deposits
273,921

 
188

 
0.14
%
 
255,304

 
185

 
0.14
%
Time deposits
436,727

 
2,661

 
1.22
%
 
453,472

 
2,940

 
1.30
%
Borrowed funds
291,761

 
2,081

 
1.43
%
 
266,808

 
1,763

 
1.32
%
Total interest bearing liabilities
1,195,206

 
5,006

 
0.84
%
 
1,170,871

 
4,968

 
0.85
%
NONINTEREST BEARING LIABILITIES
 
 
 
 
 
 
 
 
 
 
 
Demand deposits
176,885

 
 
 
 
 
156,990

 
 
 
 
Other
10,980

 
 
 
 
 
10,014

 
 
 
 
Shareholders’ equity
178,881

 
 
 
 
 
166,823

 
 
 
 
Total liabilities and shareholders’ equity
$
1,561,952

 
 
 
 
 
$
1,504,698

 
 
 
 
Net interest income (FTE)
 
 
$
24,191

 
 
 
 
 
$
23,550

 
 
Net yield on interest earning assets (FTE)
 
 
 
 
3.39
%
 
 
 
 
 
3.42
%
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 six month periods ended:
 
Three Months Ended
 
Six Months Ended
 
June 30
2015
 
March 31
2015
 
June 30
2014
 
June 30
2015
 
June 30
2014
Loan fees
$
772

 
$
507

 
$
566

 
$
1,279

 
$
1,042


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 
 June 30, 2015 Compared to 
 March 31, 2015 
 Increase (Decrease) Due to
 
Three Months Ended 
 June 30, 2015 Compared to 
 June 30, 2014 
 Increase (Decrease) Due to
 
Six Months Ended 
 June 30, 2015 Compared to 
 June 30, 2014 
 Increase (Decrease) Due to

Volume
 
Rate
 
Net
 
Volume
 
Rate
 
Net
 
Volume
 
Rate
 
Net
Changes in interest income
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Loans
$
(30
)
 
$
255

 
$
225

 
$
133

 
$
(23
)
 
$
110

 
$
327

 
$
(284
)
 
$
43

Taxable investment securities
129

 
2

 
131

 
224

 
21

 
245

 
324

 
30

 
354

Nontaxable investment securities
53

 
(28
)
 
25

 
93

 
27

 
120

 
200

 
78

 
278

Other
4

 
(4
)
 

 
20

 
5

 
25

 
5

 
(1
)
 
4

Total changes in interest income
156

 
225

 
381

 
470

 
30

 
500

 
856

 
(177
)
 
679

Changes in interest expense
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Interest bearing demand deposits
(1
)
 
(1
)
 
(2
)
 

 
(2
)
 
(2
)
 
(1
)
 
(3
)
 
(4
)
Savings deposits
2

 
2

 
4

 
7

 
(2
)
 
5

 
13

 
(10
)
 
3

Time deposits
(3
)
 
(6
)
 
(9
)
 
(61
)
 
(72
)
 
(133
)
 
(106
)
 
(173
)
 
(279
)
Borrowed funds
58

 
(21
)
 
37

 
126

 
54

 
180

 
172

 
146

 
318

Total changes in interest expense
56

 
(26
)
 
30

 
72

 
(22
)
 
50

 
78

 
(40
)
 
38

Net change in interest margin (FTE)
$
100

 
$
251

 
$
351

 
$
398

 
$
52

 
$
450

 
$
778

 
$
(137
)
 
$
641

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 strength in the economic 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:

June 30
2015

March 31
2015

December 31
2014

September 30
2014

June 30
2014
Total earning assets
4.11
%
 
4.07
%
 
4.17
%
 
4.10
%
 
4.14
%
Total interest bearing liabilities
0.84
%
 
0.84
%
 
0.85
%
 
0.85
%
 
0.84
%
Net yield on interest earning assets (FTE)
3.41
%

3.37
%
 
3.46
%
 
3.39
%
 
3.43
%

43

Table of Contents

 
Quarter to Date Net Interest Income (FTE)

June 30
2015
 
March 31
2015
 
December 31
2014
 
September 30
2014
 
June 30
2014
Total interest income (FTE)
$
14,782

 
$
14,401

 
$
14,702

 
$
14,357

 
$
14,282

Total interest expense
2,518

 
2,488

 
2,504

 
2,498

 
2,468

Net interest income (FTE)
$
12,264

 
$
11,913

 
$
12,198

 
$
11,859

 
$
11,814

One of the the primary contributors 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. Additionally, the decline in loans as a percentage of total earning assets during 2015 has negatively impacted our net yield on interest earning assets. The following table displays data for the three month periods ended:

June 30
2015
 
March 31
2015
 
December 31
2014
 
September 30
2014
 
June 30
2014
Net interest income (FTE)
$
12,264

 
$
11,913

 
$
12,198

 
$
11,859

 
$
11,814

Less loan fees
772

 
507

 
669

 
488

 
566

Net interest income excluding loan fees (FTE)
$
11,492

 
$
11,406

 
$
11,529

 
$
11,371

 
$
11,248

Net yield on interest earning assets excluding loan fees (FTE)
3.19
%
 
3.23
%
 
3.27
%
 
3.25
%
 
3.26
%
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 six month periods ended June 30:
 
Three Months Ended 
 June 30
 
Six Months Ended 
 June 30

2015
 
2014
 
2015
 
2014
ALLL at beginning of period
$
9,600

 
$
11,100

 
$
10,100

 
$
11,500

Charge-offs
 
 
 
 
 
 
 
Commercial and agricultural
11

 
79

 
28

 
302

Residential real estate
205

 
264

 
255

 
377

Consumer
80

 
68

 
173

 
182

Total charge-offs
296

 
411

 
456

 
861

Recoveries
 
 
 
 
 
 
 
Commercial and agricultural
106

 
92

 
391

 
306

Residential real estate
86

 
86

 
119

 
122

Consumer
39

 
33

 
107

 
75

Total recoveries
231

 
211

 
617

 
503

Net loan charge-offs
65

 
200

 
(161
)
 
358

Provision for loan losses
(535
)
 
(200
)
 
(1,261
)
 
(442
)
ALLL at end of period
$
9,000

 
$
10,700

 
$
9,000

 
$
10,700

Net loan charge-offs to average loans outstanding
0.01
%
 
0.02
%
 
(0.02
)%
 
0.04
%

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:

June 30
2015
 
March 31
2015
 
December 31
2014
 
September 30
2014
 
June 30
2014
Total charge-offs
$
296

 
$
160

 
$
351

 
$
416

 
$
411

Total recoveries
231

 
386

 
115

 
278

 
211

Net loan charge-offs
65

 
(226
)
 
236

 
138

 
200

Net loan charge-offs to average loans outstanding
0.01
 %
 
(0.03
)%
 
0.03
 %
 
0.02
 %
 
0.02
 %
Provision for loan losses
$
(535
)
 
$
(726
)
 
$
(64
)
 
$
(162
)
 
$
(200
)
Provision for loan losses to average loans outstanding
(0.07
)%
 
(0.09
)%
 
(0.01
)%
 
(0.02
)%
 
(0.02
)%
ALLL
$
9,000

 
$
9,600

 
$
10,100

 
$
10,400

 
$
10,700

ALLL as a% of loans at end of period
1.09
 %
 
1.18
 %
 
1.21
 %
 
1.26
 %
 
1.31
 %
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 has contributing to the decline in the ALLL as a percentage of 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

June 30
2015
 
March 31
2015
 
December 31
2014
 
September 30
2014
 
June 30
2014
Commercial and agricultural
$
2,407

 
$
4,017

 
$
4,805

 
$
3,904

 
$
5,045

Residential real estate
2,995

 
2,965

 
4,181

 
4,011

 
4,613

Consumer
126

 
106

 
138

 
134

 
98

Total
$
5,528

 
$
7,088

 
$
9,124

 
$
8,049

 
$
9,756

Total past due and nonaccrual loans to gross loans
0.67
%
 
0.87
%
 
1.09
%
 
0.98
%
 
1.20
%
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.
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 June 30, 2015 or December 31, 2014.

45

Table of Contents

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 June 30, 2015
 
Accruing Interest
 
Nonaccrual
 
Total
 
Number
of
Loans
 
Balance
 
Number
of
Loans
 
Balance
 
Number
of
Loans
 
Balance
April 1, 2015
152

 
$
20,255

 
11

 
$
2,133

 
163

 
$
22,388

New modifications
11

 
1,081

 

 

 
11

 
1,081

Principal advances (payments)

 
(527
)
 

 
(388
)
 

 
(915
)
Loans paid-off
(7
)
 
(1,458
)
 
(3
)
 
(96
)
 
(10
)
 
(1,554
)
Partial charge-offs

 

 

 
(15
)
 

 
(15
)
Balances charged-off
(1
)
 
(39
)
 

 

 
(1
)
 
(39
)
Transfers to OREO

 

 
(2
)
 
(488
)
 
(2
)
 
(488
)
Transfers to accrual status
2

 
262

 
(2
)
 
(262
)
 

 

Transfers to nonaccrual status
(1
)
 
(56
)
 
1

 
56

 

 

June 30, 2015
156


$
19,518


5


$
940


161


$
20,458


Six Months Ended June 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
16

 
1,606

 
2

 
321

 
18

 
1,927

Principal advances (payments)

 
(725
)
 

 
(425
)
 

 
(1,150
)
Loans paid-off
(15
)
 
(2,378
)
 
(6
)
 
(596
)
 
(21
)
 
(2,974
)
Partial charge-offs

 

 

 
(62
)
 

 
(62
)
Balances charged-off
(1
)
 
(39
)
 

 

 
(1
)
 
(39
)
Transfers to OREO

 

 
(4
)
 
(585
)
 
(4
)
 
(585
)
Transfers to accrual status
2

 
262

 
(2
)
 
(262
)
 

 

Transfers to nonaccrual status
(2
)
 
(139
)
 
2

 
139

 

 

June 30, 2015
156

 
$
19,518

 
5

 
$
940

 
161

 
$
20,458


Three Months Ended June 30, 2014
 
Accruing Interest
 
Nonaccrual
 
Total
 
Number
of
Loans
 
Balance
 
Number
of
Loans
 
Balance
 
Number
of
Loans
 
Balance
April 1, 2014
165

 
$
22,954

 
16

 
$
2,679

 
181

 
$
25,633

New modifications
6

 
218

 
2

 
169

 
8

 
387

Principal advances (payments)

 
(809
)
 

 
(45
)
 

 
(854
)
Loans paid-off
(5
)
 
(552
)
 
(2
)
 
(88
)
 
(7
)
 
(640
)
Partial charge-offs

 
(70
)
 

 
(100
)
 

 
(170
)
Balances charged-off

 

 

 

 

 

Transfers to OREO

 

 
(2
)
 
(164
)
 
(2
)
 
(164
)
Transfers to accrual status
1

 
263

 
(1
)
 
(263
)
 

 

Transfers to nonaccrual status
(5
)
 
(739
)
 
5

 
739

 

 

June 30, 2014
162


$
21,265


18


$
2,927


180


$
24,192


46

Table of Contents


Six Months Ended June 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
18

 
988

 
4

 
245

 
22

 
1,233

Principal advances (payments)

 
(1,082
)
 

 
(74
)
 

 
(1,156
)
Loans paid-off
(15
)
 
(1,270
)
 
(2
)
 
(88
)
 
(17
)
 
(1,358
)
Partial charge-offs

 
(70
)
 

 
(118
)
 

 
(188
)
Balances charged-off
(1
)
 
(6
)
 

 

 
(1
)
 
(6
)
Transfers to OREO

 

 
(4
)
 
(198
)
 
(4
)
 
(198
)
Transfers to accrual status
3

 
320

 
(3
)
 
(320
)
 

 

Transfers to nonaccrual status
(8
)
 
(2,038
)
 
8

 
2,038

 

 

June 30, 2014
162

 
$
21,265

 
18

 
$
2,927

 
180

 
$
24,192

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

Accruing
Interest
 
Nonaccrual
 
Total
 
Accruing
Interest
 
Nonaccrual
 
Total
 
Total
Change
Current
$
18,638

 
$
250

 
$
18,888

 
$
20,012

 
$
272

 
$
20,284

 
$
(1,396
)
Past due 30-59 days
729

 

 
729

 
804

 
592

 
1,396

 
(667
)
Past due 60-89 days
150

 

 
150

 
115

 
3

 
118

 
32

Past due 90 days or more

 
691

 
691

 

 
1,543

 
1,543

 
(852
)
Total
$
19,517

 
$
941

 
$
20,458

 
$
20,931

 
$
2,410

 
$
23,341

 
$
(2,883
)
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:
 
June 30, 2015
 
December 31, 2014

Outstanding
Balance
 
Unpaid
Principal
Balance
 
Valuation
Allowance
 
Outstanding
Balance
 
Unpaid
Principal
Balance
 
Valuation
Allowance
TDRs
 
 
 
 
 
 
 
 
 
 
 
Commercial real estate
$
8,315

 
$
8,554

 
$
1,292

 
$
10,222

 
$
10,501

 
$
1,276

Commercial other
624

 
635

 
3

 
715

 
945

 
4

Agricultural real estate
1,382

 
1,382

 

 
1,423

 
1,423

 

Agricultural other
655

 
655

 

 
66

 
186

 

Residential real estate senior liens
9,167

 
9,578

 
1,775

 
10,462

 
11,019

 
1,847

Residential real estate junior liens
135

 
135

 
27

 
246

 
246

 
49

Home equity lines of credit
139

 
439

 

 
153

 
453

 
46

Consumer secured
41

 
41

 
1

 
54

 
54

 
1

Total TDRs
20,458

 
21,419

 
3,098

 
23,341

 
24,827

 
3,223

Other impaired loans
 
 
 
 
 
 
 
 
 
 
 
Commercial real estate
111

 
124

 

 
1,009

 
1,195

 
3

Commercial other

 

 

 
83

 
95

 

Agricultural real estate
275

 
275

 

 
106

 
106

 

Agricultural other

 

 

 

 

 

Residential real estate senior liens
867

 
1,440

 
103

 
1,183

 
1,763

 
168

Residential real estate junior liens
5

 
16

 
1

 
19

 
29

 
4

Home equity lines of credit

 

 

 
97

 
197

 
29

Consumer secured

 

 

 
10

 
10

 

Total other impaired loans
1,258

 
1,855

 
104

 
2,507

 
3,395

 
204

Total impaired loans
$
21,716

 
$
23,274

 
$
3,202

 
$
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:

June 30
2015
 
March 31
2015
 
December 31
2014
 
September 30
2014
 
June 30
2014
Nonaccrual status loans
$
1,530

 
$
3,422

 
$
4,044

 
$
4,496

 
$
4,587

Accruing loans past due 90 days or more
19

 
173

 
148

 
164

 
119

Total nonperforming loans
1,549

 
3,595

 
4,192

 
4,660

 
4,706

Foreclosed assets
873

 
717

 
885

 
1,041

 
1,132

Total nonperforming assets
$
2,422

 
$
4,312

 
$
5,077

 
$
5,701

 
$
5,838

Nonperforming loans as a % of total loans
0.19
%
 
0.44
%
 
0.50
%
 
0.57
%
 
0.58
%
Nonperforming assets as a % of total assets
0.15
%
 
0.27
%
 
0.33
%
 
0.37
%
 
0.38
%
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 pre-recessionary levels.

48

Table of Contents

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

June 30
2015
 
December 31
2014
Commercial and agricultural
$
854

 
$
1,995

Residential real estate
87

 
262

Consumer

 
153

Total
$
941

 
$
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 all loans deemed to be impaired have been identified.
We believe that the level of the ALLL is appropriate as of June 30, 2015 and we will continue to closely monitor overall credit quality and our policies and procedures related to the analysis of the ALLL to ensure that the ALLL remains appropriate.
Noninterest Income and Noninterest Expenses
Noninterest income consists of service charges and fees, gains on sale of mortgage loans, earnings on corporate owned life insurance policies, and other income. Significant account balances are highlighted in the following table with additional descriptions of significant fluctuations:
 
Three Months Ended June 30

 
 
 
 
Change
 
2015
 
2014
 
$
 
%
Service charges and fees
 
 
 
 
 
 
 
ATM and debit card fees
$
564

 
$
534

 
$
30

 
5.62
 %
NSF and overdraft fees
453

 
552

 
(99
)
 
(17.93
)%
Freddie Mac servicing fee
180

 
180

 

 

Service charges on deposit accounts
88

 
89

 
(1
)
 
(1.12
)%
Net OMSR income (loss)
77

 
(28
)
 
105

 
N/M

All other
31

 
33

 
(2
)
 
(6.06
)%
Total service charges and fees
1,393

 
1,360

 
33

 
2.43
 %
Net gain on sale of mortgage loans
166

 
151

 
15

 
9.93
 %
Earnings on corporate owned life insurance policies
195

 
190

 
5

 
2.63
 %
Other
 
 
 
 
 
 
 
Trust and brokerage advisory fees
590

 
519

 
71

 
13.68
 %
Other
285

 
214

 
71

 
33.18
 %
Total other
875

 
733

 
142

 
19.37
 %
Total noninterest income
$
2,629


$
2,434


$
195


8.01
 %

49

Table of Contents


Six Months Ended June 30
 
 
 
 
 
Change
 
2015
 
2014
 
$
 
%
Service charges and fees
 
 
 
 
 
 
 
ATM and debit card fees
$
1,090

 
$
1,021

 
$
69

 
6.76
 %
NSF and overdraft fees
900

 
1,065

 
(165
)
 
(15.49
)%
Freddie Mac servicing fee
359

 
363

 
(4
)
 
(1.10
)%
Service charges on deposit accounts
170

 
175

 
(5
)
 
(2.86
)%
Net OMSR income (loss)
(27
)
 
63

 
(90
)
 
(142.86
)%
All other
64

 
67

 
(3
)
 
(4.48
)%
Total service charges and fees
2,556

 
2,754

 
(198
)
 
(7.19
)%
Net gain on sale of mortgage loans
315

 
266

 
49

 
18.42
 %
Earnings on corporate owned life insurance policies
382

 
374

 
8

 
2.14
 %
Other
 
 
 
 
 
 
 
Trust and brokerage advisory fees
1,102

 
1,026

 
76

 
7.41
 %
Other
402

 
263

 
139

 
52.85
 %
Total other
1,504

 
1,289

 
215

 
16.68
 %
Total noninterest income
$
4,757

 
$
4,683

 
$
74

 
1.58
 %
Significant changes in noninterest income are detailed below:
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 approximate 2014 levels 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 such, we anticipate increases in origination volumes and in turn, gains on sale of mortgage loans.
The fluctuations in all other income is spread throughout various categories, none of which are individually significant.

50

Table of Contents

Noninterest expenses include compensation and benefits, furniture and equipment, occupancy, and other expenses. Significant account balances are highlighted in the following table with additional descriptions of significant fluctuations:

Three Months Ended June 30
 
 
 
 
 
Change
 
2015
 
2014
 
$
 
%
Compensation and benefits
 
 
 
 
 
 
 
Employee salaries
$
4,225

 
$
4,046

 
$
179

 
4.42
 %
Employee benefits
1,149

 
1,339

 
(190
)
 
(14.19
)%
Total compensation and benefits
5,374

 
5,385

 
(11
)
 
(0.20
)%
Furniture and equipment
 
 
 
 
 
 
 
Service contracts
769

 
591

 
178

 
30.12
 %
Depreciation
442

 
449

 
(7
)
 
(1.56
)%
ATM and debit card fees
177

 
166

 
11

 
6.63
 %
All other
38

 
13

 
25

 
192.31
 %
Total furniture and equipment
1,426

 
1,219

 
207

 
16.98
 %
Occupancy
 
 
 
 
 
 
 
Outside services
186

 
168

 
18

 
10.71
 %
Depreciation
176

 
174

 
2

 
1.15
 %
Utilities
114

 
119

 
(5
)
 
(4.20
)%
Property taxes
133

 
131

 
2

 
1.53
 %
All other
63

 
84

 
(21
)
 
(25.00
)%
Total occupancy
672

 
676

 
(4
)
 
(0.59
)%
Other
 
 
 
 
 
 
 
Marketing and community relations
228

 
211

 
17

 
8.06
 %
FDIC insurance premiums
203

 
221

 
(18
)
 
(8.14
)%
Director fees
206

 
183

 
23

 
12.57
 %
Audit and related fees
188

 
182

 
6

 
3.30
 %
Education and travel
129

 
143

 
(14
)
 
(9.79
)%
Printing and supplies
96

 
87

 
9

 
10.34
 %
Postage and freight
92

 
90

 
2

 
2.22
 %
Legal fees
93

 
106

 
(13
)
 
(12.26
)%
Loan underwriting fees
62

 
92

 
(30
)
 
(32.61
)%
Consulting fees
79

 
76

 
3

 
3.95
 %
All other
516

 
629

 
(113
)
 
(17.97
)%
Total other
1,892

 
2,020

 
(128
)
 
(6.34
)%
Total noninterest expenses
$
9,364


$
9,300


$
64

 
0.69
 %


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Table of Contents


Six Months Ended June 30
 
 
 
 
 
Change
 
2015
 
2014
 
$
 
%
Compensation and benefits
 
 
 
 
 
 
 
Employee salaries
$
8,325

 
$
8,088

 
$
237

 
2.93
 %
Employee benefits
2,474

 
2,783

 
(309
)
 
(11.10
)%
Total compensation and benefits
10,799

 
10,871

 
(72
)
 
(0.66
)%
Furniture and equipment
 
 
 
 
 
 
 
Service contracts
1,440

 
1,211

 
229

 
18.91
 %
Depreciation
917

 
894

 
23

 
2.57
 %
ATM and debit card fees
332

 
354

 
(22
)
 
(6.21
)%
All other
51

 
28

 
23

 
82.14
 %
Total furniture and equipment
2,740

 
2,487

 
253

 
10.17
 %
Occupancy
 
 
 
 
 
 
 
Outside services
375

 
375

 

 

Depreciation
355

 
348

 
7

 
2.01
 %
Utilities
274

 
275

 
(1
)
 
(0.36
)%
Property taxes
265

 
265

 

 

All other
124

 
155

 
(31
)
 
(20.00
)%
Total occupancy
1,393

 
1,418

 
(25
)
 
(1.76
)%
Other
 
 
 
 
 
 
 
Marketing and community relations
483

 
454

 
29

 
6.39
 %
FDIC insurance premiums
415

 
423

 
(8
)
 
(1.89
)%
Director fees
404

 
378

 
26

 
6.88
 %
Audit and related fees
346

 
320

 
26

 
8.13
 %
Education and travel
221

 
264

 
(43
)
 
(16.29
)%
Printing and supplies
198

 
189

 
9

 
4.76
 %
Postage and freight
190

 
198

 
(8
)
 
(4.04
)%
Legal fees
152

 
160

 
(8
)
 
(5.00
)%
Loan underwriting fees
150

 
187

 
(37
)
 
(19.79
)%
Consulting fees
142

 
167

 
(25
)
 
(14.97
)%
All other
1,065

 
1,270

 
(205
)
 
(16.14
)%
Total other
3,766

 
4,010

 
(244
)
 
(6.08
)%
Total noninterest expenses
$
18,698

 
$
18,786

 
$
(88
)
 
(0.47
)%
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 $130 of conversion related costs incurred on our upcoming branch acquisitions. Additional costs related to these acquisitions are expected in the remainder of 2015.
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

June 30
2015
 
December 31
2014
 
$ Change
 
% Change
(unannualized)
ASSETS
 
 
 
 
 
 
 
Cash and cash equivalents
$
29,641

 
$
19,326

 
$
10,315

 
53.37
 %
Certificates of deposit held in other financial institutions
340

 
580

 
(240
)
 
(41.38
)%
AFS securities
 
 
 
 
 
 
 
Amortized cost of AFS securities
591,841

 
561,893

 
29,948

 
5.33
 %
Unrealized gains (losses) on AFS securities
3,477

 
5,641

 
(2,164
)
 
(38.36
)%
AFS securities
595,318

 
567,534

 
27,784

 
4.90
 %
Mortgage loans AFS
1,029

 
901

 
128

 
14.21
 %
Loans
 
 
 
 


 
 
Gross loans
828,602

 
833,582

 
(4,980
)
 
(0.60
)%
Less allowance for loan and lease losses
9,000

 
10,100

 
(1,100
)
 
(10.89
)%
Net loans
819,602

 
823,482

 
(3,880
)
 
(0.47
)%
Premises and equipment
26,155

 
25,881

 
274

 
1.06
 %
Corporate owned life insurance policies
26,034

 
25,152

 
882

 
3.51
 %
Accrued interest receivable
5,469

 
5,851

 
(382
)
 
(6.53
)%
Equity securities without readily determinable fair values
21,142

 
20,076

 
1,066

 
5.31
 %
Goodwill and other intangible assets
46,052

 
46,128

 
(76
)
 
(0.16
)%
Other assets
16,193

 
14,632

 
1,561

 
10.67
 %
TOTAL ASSETS
$
1,586,975

 
$
1,549,543

 
$
37,432

 
2.42
 %
LIABILITIES AND SHAREHOLDERS’ EQUITY
 
 
 
 
 
 
 
Liabilities
 
 
 
 
 
 
 
Deposits
$
1,090,469

 
$
1,074,484

 
$
15,985

 
1.49
 %
Borrowed funds
307,599

 
289,709

 
17,890

 
6.18
 %
Accrued interest payable and other liabilities
10,882

 
10,756

 
126

 
1.17
 %
Total liabilities
1,408,950

 
1,374,949

 
34,001

 
2.47
 %
Shareholders’ equity
178,025

 
174,594

 
3,431

 
1.97
 %
TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY
$
1,586,975

 
$
1,549,543

 
$
37,432

 
2.42
 %
The following table outlines the changes in loans:

June 30
2015
 
December 31
2014
 
$ Change
 
% Change
(unannualized)
Commercial
$
430,981

 
$
431,961

 
$
(980
)
 
(0.23
)%
Agricultural
113,134

 
104,721

 
8,413

 
8.03
 %
Residential real estate
250,208

 
264,595

 
(14,387
)
 
(5.44
)%
Consumer
34,279

 
32,305

 
1,974

 
6.11
 %
Total
$
828,602

 
$
833,582

 
$
(4,980
)
 
(0.60
)%

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Table of Contents

The following table displays loan balances as of:

June 30
2015
 
March 31
2015
 
December 31
2014
 
September 30
2014
 
June 30
2014
Commercial
$
430,981

 
$
418,311

 
$
431,961

 
$
416,824

 
$
407,791

Agricultural
113,134

 
107,299

 
104,721

 
101,795

 
97,661

Residential real estate
250,208

 
257,516

 
264,595

 
271,033

 
278,545

Consumer
34,279

 
32,342

 
32,305

 
32,647

 
32,310

Total
$
828,602

 
$
815,468

 
$
833,582

 
$
822,299

 
$
816,307

While competition for commercial loans continues to be strong, we did experience commercial loan growth in the second quarter of 2015 and anticipate continued growth in the remainder of 2015. We have experienced significant declines in residential real estate loans but 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:

June 30
2015
 
December 31
2014
 
$ Change
 
% Change
(unannualized)
Noninterest bearing demand deposits
$
182,259

 
$
181,826

 
$
433

 
0.24
 %
Interest bearing demand deposits
193,680

 
190,984

 
2,696

 
1.41
 %
Savings deposits
278,105

 
261,412

 
16,693

 
6.39
 %
Certificates of deposit
330,226

 
339,824

 
(9,598
)
 
(2.82
)%
Brokered certificates of deposit
78,853

 
72,134

 
6,719

 
9.31
 %
Internet certificates of deposit
27,346

 
28,304

 
(958
)
 
(3.38
)%
Total
$
1,090,469

 
$
1,074,484

 
$
15,985

 
1.49
 %
The following table displays deposit balances as of:

June 30
2015
 
March 31
2015
 
December 31
2014
 
September 30
2014
 
June 30
2014
Noninterest bearing demand deposits
$
182,259

 
$
176,160

 
$
181,826

 
$
175,634

 
$
162,537

Interest bearing demand deposits
193,680

 
197,364

 
190,984

 
192,211

 
186,705

Savings deposits
278,105

 
286,741

 
261,412

 
269,475

 
260,038

Certificates of deposit
330,226

 
333,554

 
339,824

 
341,153

 
346,200

Brokered certificates of deposit
78,853

 
76,671

 
72,134

 
74,132

 
75,031

Internet certificates of deposit
27,346

 
28,165

 
28,304

 
29,285

 
30,417

Total
$
1,090,469

 
$
1,098,655

 
$
1,074,484

 
$
1,081,890

 
$
1,060,928

Overall, deposits have grown considerably since June 30, 2014. As a result of the current interest rate environment, we continue to experience declines in certificates of deposits; however, these declines have been offset by increases in noninterest bearing demand deposits, interest bearing demand deposits, and savings accounts. We expect this trend to continue for the foreseeable future.

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Table of Contents

The current interest rate environment has made it almost impossible to increase net interest income without increasing earning assets. As deposit growth has generally outpaced loan demand, we deploy funds from deposit growth into purchases of AFS securities to provide additional interest income. In addition to utilizing deposits, we also acquire 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:

June 30
2015
 
March 31
2015
 
December 31
2014
 
September 30
2014
 
June 30
2014
Government sponsored enterprises
$
24,203

 
$
24,397

 
$
24,136

 
$
23,917

 
$
24,104

States and political subdivisions
216,647

 
222,479

 
215,345

 
223,545

 
214,210

Auction rate money market preferred
2,719

 
2,775

 
2,619

 
2,863

 
2,867

Preferred stocks
3,230

 
6,324

 
6,140

 
6,173

 
6,214

Mortgage-backed securities
210,194

 
201,997

 
166,926

 
170,767

 
162,992

Collateralized mortgage obligations
138,325

 
147,236

 
152,368

 
147,815

 
140,131

Total
$
595,318

 
$
605,208

 
$
567,534

 
$
575,080

 
$
550,518

The following table displays borrowed funds balances as of:

June 30
2015
 
March 31
2015
 
December 31
2014
 
September 30
2014
 
June 30
2014
FHLB advances
$
240,000

 
$
217,000

 
$
192,000

 
$
182,000

 
$
182,000

Securities sold under agreements to repurchase without stated maturity dates
67,599

 
66,321

 
95,070

 
89,535

 
87,058

Securities sold under agreements to repurchase with stated maturity dates

 

 
439

 
1,203

 
1,199

Federal funds purchased

 

 
2,200

 
17,700

 
9,200

Total
$
307,599

 
$
283,321

 
$
289,709

 
$
290,438

 
$
279,457

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 94,807 shares or $2,192 of common stock during the first six months of 2015, as compared to 76,341 shares or $1,778 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 $259 and $237 during the six month periods ended June 30, 2015 and 2014, respectively.
We have approved a publicly announced common stock repurchase plan. Pursuant to this plan, we repurchased 73,893 shares or $1,704 of common stock compared to 70,334 shares for $1,648 during the first six months of 2015 and 2014, respectively. As of June 30, 2015, we were authorized to repurchase up to an additional 77,873 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 8.77% as of June 30, 2015.

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Table of Contents

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:

June 30
2015
 
December 31
2014
 
Required
Common equity tier 1 capital
13.71
%
 
N/A

 
4.50
%
 
 
 
 
 
 
Tier 1 capital
13.71
%
 
14.08
%
 
6.00
%
Tier 2 capital
0.92
%
 
1.10
%
 
2.00
%
Total Capital
14.63
%
 
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 June 30, 2015, the Bank exceeded these minimum capital requirements.
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:

June 30
2015
 
December 31
2014
Unfunded commitments under lines of credit
$
122,243

 
$
116,935

Commercial and standby letters of credit
2,985

 
4,985

Commitments to grant loans
38,195

 
13,988

Total
$
163,423

 
$
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.

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Table of Contents

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.
Liquidity
Liquidity is monitored regularly by our Market Risk Committee, which consists of members of senior management. The committee reviews projected cash flows, key ratios, and liquidity available from both primary and secondary sources.
Our primary sources of liquidity are cash and cash equivalents, certificates of deposit held in other financial institutions, and AFS securities. These categories totaled $625,299 or 39.40% of assets as of June 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 AFS securities or loans, as collateral. As of June 30, 2015, we had available lines of credit of $104,173.
The following table summarizes our sources and uses of cash for the six month periods ended June 30:
 
2015
 
2014
 
$ Variance
Net cash provided by (used in) operating activities
$
7,283

 
$
11,002

 
$
(3,719
)
Net cash provided by (used in) investing activities
(27,609
)
 
(39,043
)
 
11,434

Net cash provided by (used in) financing activities
30,641

 
13,863

 
16,778

Increase (decrease) in cash and cash equivalents
10,315

 
(14,178
)
 
24,493

Cash and cash equivalents January 1
19,326

 
41,558

 
(22,232
)
Cash and cash equivalents June 30
$
29,641

 
$
27,380

 
$
2,261

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

57

Table of Contents

a stable interest rate environment. While many assets and liabilities reprice either at maturity or in accordance with their contractual terms, several balance sheet components demonstrate characteristics that require an evaluation to more accurately reflect their repricing behavior. Key assumptions in the simulation analysis include prepayments on loans, probable calls of investment securities, changes in market conditions, loan volumes and loan pricing, deposit sensitivity, and customer preferences. These assumptions are inherently uncertain as they are subject to fluctuation and revision in a dynamic environment. As a result, the simulation analysis cannot precisely forecast the impact of rising and falling interest rates on net interest income. Actual results will differ from simulated results due to many other factors, including changes in balance sheet components, interest rate changes, changes in market conditions, and management strategies.
Our interest rate sensitivity is estimated by first forecasting the next 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 June 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:

June 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
(1.83
)%
 
0.23
%
 
0.30
%
 
(0.54
)%
 
(1.24
)%
 
(1.84
)%
 
0.07
%
 
0.74
%
 
(0.04
)%
 
(0.79
)%
 
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
)%

58

Table of Contents

The following tables provide information about assets and liabilities that are sensitive to changes in interest rates as of June 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.

June 30, 2015
 
2016
 
2017
 
2018
 
2019
 
2020
 
Thereafter
 
Total
 
Fair Value
Rate sensitive assets
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Other interest bearing assets
$
8,926

 
$
100

 
$

 
$

 
$

 
$

 
$
9,026

 
$
9,025

Average interest rates
0.27
%
 
0.35
%
 

 

 

 

 
0.27
%
 
 
AFS securities
$
129,875

 
$
115,129

 
$
73,060

 
$
64,227

 
$
65,825

 
$
147,202

 
$
595,318

 
$
595,318

Average interest rates
2.28
%
 
2.12
%
 
2.19
%
 
2.27
%
 
2.44
%
 
2.51
%
 
2.31
%
 
 
Fixed interest rate loans (1)
$
113,702

 
$
118,954

 
$
117,805

 
$
82,209

 
$
83,796

 
$
140,721

 
$
657,187

 
$
649,413

Average interest rates
4.89
%
 
4.56
%
 
4.36
%
 
4.38
%
 
4.26
%
 
4.28
%
 
4.46
%
 
 
Variable interest rate loans (1)
$
67,101

 
$
22,866

 
$
25,134

 
$
12,596

 
$
16,818

 
$
26,900

 
$
171,415

 
$
171,415

Average interest rates
9.05
%
 
3.93
%
 
3.96
%
 
3.40
%
 
3.42
%
 
3.98
%
 
5.85
%
 
 
Rate sensitive liabilities
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Borrowed funds
$
157,599

 
$
30,000

 
$
40,000

 
$
30,000

 
$
10,000

 
$
40,000

 
$
307,599

 
$
310,913

Average interest rates
0.35
%
 
1.88
%
 
2.46
%
 
2.72
%
 
1.98

 
2.67
%
 
1.36
%
 
 
Savings and NOW accounts
$
85,663

 
$
37,162

 
$
33,265

 
$
29,804

 
$
26,721

 
$
259,170

 
$
471,785

 
$
471,785

Average interest rates
0.13
%
 
0.11
%
 
0.11
%
 
0.11
%
 
0.11
%
 
0.10
%
 
0.11
%
 
 
Fixed interest rate certificates of deposit
$
194,613

 
$
87,491

 
$
77,240

 
$
30,943

 
$
27,998

 
$
17,035

 
$
435,320

 
$
435,136

Average interest rates
0.99
%
 
1.41
%
 
1.29
%
 
1.41
%
 
1.54
%
 
1.82
%
 
1.23
%
 
 
Variable interest rate certificates of deposit
$
699

 
$
406

 
$

 
$

 
$

 
$

 
$
1,105

 
$
1,105

Average interest rates
0.40
%
 
0.40
%
 

 

 

 

 
0.40
%
 
 

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 June 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 June 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 October 22, 2014, to allow for the repurchase of an additional 150,000 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 June 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, March 31
 
 
 
 
 
 
116,095

April 1 - 30
16,125

 
$
22.95

 
16,125

 
99,970

May 1 - 31
14,133

 
23.21

 
14,133

 
85,837

June 1 - 30
7,964

 
23.48

 
7,964

 
77,873

Balance, June 30
38,222

 
$
23.15

 
38,222

 
77,873

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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Table of Contents

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:
July 29, 2015
 
 
/s/ Jae A. Evans
 
 
 
 
Jae A. Evans
 
 
 
 
Chief Executive Officer
 
 
 
 
(Principal Executive Officer)
 
 
 
 
Date:
July 29, 2015
 
 
/s/ Dennis P. Angner
 
 
 
 
Dennis P. Angner
 
 
 
 
President, Chief Financial Officer
 
 
 
 
(Principal Financial Officer, Principal Accounting Officer)

63