Edgar Filing: ISABELLA BANK CORP

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Non-accelerated filer

¨ (Do not check if a smaller reporting company)

Smaller reporting company

10-Q

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q



ý	Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

For the quarterly period ended September 30, 2015



¨	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):

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). ¨ Yes ý No

The number of common shares outstanding of the registrant’s Common Stock (no par value) was 7,795,149 as of November 3, 2015.

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ISABELLA BANK CORPORATION

QUARTERLY REPORT ON FORM 10-Q

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PART I – FINANCIAL INFORMATION		4

Item 1.	Financial Statements	4

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	38

Item 3.	Quantitative and Qualitative Disclosures About Market Risk	60

Item 4.	Controls and Procedures	60

PART II – OTHER INFORMATION		61

Item 1.	Legal Proceedings	61

Item 1A.	Risk Factors	61

Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	61

Item 3.	Defaults Upon Senior Securities	61

Item 4.	Mine Safety Disclosures	61

Item 5.	Other Information	61

Item 6.	Exhibits	62

SIGNATURES		63

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Forward Looking Statements

This report contains certain forward looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. We intend such forward looking statements to be covered by the safe harbor provisions for forward looking statements contained in the Private Securities Litigation Reform Act of 1995, and are included in this statement for purposes of these safe harbor provisions. Forward looking statements, which are based on certain assumptions and describe future plans, strategies and expectations, are generally identifiable by use of the words “believe,” “expect,” “intend,” “anticipate,” “estimate,” “project,” or similar expressions. Our ability to predict results or the actual effect of future plans or strategies is inherently uncertain. Factors which could have a material adverse effect on the operations and future prospects include, but are not limited to, changes in: interest rates, general economic conditions, monetary and fiscal policy, the quality or composition of the loan or investment portfolios, demand for loan products, fluctuation in the value of collateral securing our loan portfolio, deposit flows, competition, demand for financial services in our market area, and accounting principles, policies and guidelines. These risks and uncertainties should be considered in evaluating forward looking statements and undue reliance should not be placed on such statements. Further information concerning our business, including additional factors that could materially affect our financial results, is included in our filings with the SEC.

Glossary of Acronyms and Abbreviations

The acronyms and abbreviations identified below may be used throughout this Quarterly Report on Form 10-Q, or in our other SEC filings. You may find it helpful to refer back to this page while reading this report.



AFS: Available-for-sale		GAAP: U.S. generally accepted accounting principles
ALLL: Allowance for loan and lease losses		GLB Act: Gramm-Leach-Bliley Act of 1999
AOCI: Accumulated other comprehensive income (loss)		IFRS: International Financial Reporting Standards
ASC: FASB Accounting Standards Codification		IRR: Interest rate risk
ASU: FASB Accounting Standards Update		JOBS Act: Jumpstart our Business Startups Act
ATM: Automated Teller Machine		LIBOR: London Interbank Offered Rate
BHC Act: Bank Holding Company Act of 1956		N/A: Not applicable
CFPB: Consumer Financial Protection Bureau		N/M: Not meaningful
CIK: Central Index Key		NASDAQ: NASDAQ Stock Market Index
CRA: Community Reinvestment Act		NASDAQ Banks: NASDAQ Bank Stock Index
DIF: Deposit Insurance Fund		NAV: Net asset value
DIFS: Department of Insurance and Financial Services		NOW: Negotiable order of withdrawal
Directors Plan: Isabella Bank Corporation and Related Companies Deferred Compensation Plan for Directors		NSF: Non-sufficient funds
Dividend Reinvestment Plan: Isabella Bank Corporation Stockholder Dividend Reinvestment Plan and Employee Stock Purchase Plan		OCI: Other comprehensive income (loss)
Dodd-Frank Act: Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010		OMSR: Originated mortgage servicing rights
ESOP: Employee stock ownership plan		OREO: Other real estate owned
Exchange Act: Securities Exchange Act of 1934		OTTI: Other-than-temporary impairment
FASB: Financial Accounting Standards Board		PBO: Projected benefit obligation
FDI Act: Federal Deposit Insurance Act		PCAOB: Public Company Accounting Oversight Board
FDIC: Federal Deposit Insurance Corporation		Rabbi Trust: A trust established to fund the Directors Plan
FFIEC: Federal Financial Institutions Examinations Council		SEC: U.S. Securities & Exchange Commission
FRB: Federal Reserve Bank		SOX: Sarbanes-Oxley Act of 2002
FHLB: Federal Home Loan Bank		TDR: Troubled debt restructuring
Freddie Mac: Federal Home Loan Mortgage Corporation		XBRL: eXtensible Business Reporting Language
FTE: Fully taxable equivalent

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PART I – FINANCIAL INFORMATION

Item 1. Financial Statements.

INTERIM CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)

(Dollars in thousands)



	September 30 2015		December 31 2014
ASSETS
Cash and cash equivalents
Cash and demand deposits due from banks	$	16,975	$	18,058
Interest bearing balances due from banks	1,347		1,848
Total cash and cash equivalents	18,322		19,906
AFS securities (amortized cost of $619,834 in 2015 and $561,893 in 2014)	628,612		567,534
Mortgage loans AFS	831		901
Loans
Commercial	433,069		431,961
Agricultural	116,293		104,721
Residential real estate	249,850		264,595
Consumer	34,135		32,305
Gross loans	833,347		833,582
Less allowance for loan and lease losses	8,200		10,100
Net loans	825,147		823,482
Premises and equipment	28,353		25,881
Corporate owned life insurance policies	26,222		25,152
Accrued interest receivable	6,992		5,851
Equity securities without readily determinable fair values	22,341		20,076
Goodwill and other intangible assets	48,875		46,128
Other assets	13,555		14,632
TOTAL ASSETS	$	1,619,250	$	1,549,543
LIABILITIES AND SHAREHOLDERS’ EQUITY
Deposits
Noninterest bearing	$	181,782	$	181,826
NOW accounts	197,476		190,984
Certificates of deposit under $100 and other savings	506,488		456,774
Certificates of deposit over $100	242,257		244,900
Total deposits	1,128,003		1,074,484
Borrowed funds	297,610		289,709
Accrued interest payable and other liabilities	10,639		10,756
Total liabilities	1,436,252		1,374,949
Shareholders’ equity
Common stock — no par value 15,000,000 shares authorized; issued and outstanding 7,765,333 shares (including 19,025 shares held in the Rabbi Trust) in 2015 and 7,776,274 shares (including 13,934 shares held in the Rabbi Trust) in 2014	138,321		138,755
Shares to be issued for deferred compensation obligations	4,544		4,242
Retained earnings	38,521		32,103
Accumulated other comprehensive income (loss)	1,612		(506		)
Total shareholders’ equity	182,998		174,594
TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY	$	1,619,250	$	1,549,543

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

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INTERIM CONDENSED CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)

(Dollars in thousands except per share amounts)



	Three Months Ended September 30						Nine Months Ended September 30
	2015			2014			2015			2014
Interest income
Loans, including fees	$	9,855		$	9,863		$	29,448		$	29,413
AFS securities
Taxable	2,310			2,016			6,655			6,007
Nontaxable	1,507			1,485			4,496			4,428
Federal funds sold and other	166			119			444			390
Total interest income	13,838			13,483			41,043			40,238
Interest expense
Deposits	1,480			1,562			4,405			4,767
Borrowings	1,100			936			3,181			2,699
Total interest expense	2,580			2,498			7,586			7,466
Net interest income	11,258			10,985			33,457			32,772
Provision for loan losses	(738		)	(162		)	(1,999		)	(604		)
Net interest income after provision for loan losses	11,996			11,147			35,456			33,376
Noninterest income
Service charges and fees	1,468			1,366			4,024			4,120
Net gain on sale of mortgage loans	157			170			472			436
Earnings on corporate owned life insurance policies	188			182			570			556
Net gains (losses) on sale of AFS securities	—			97			—			97
Other	1,288			401			2,792			1,690
Total noninterest income	3,101			2,216			7,858			6,899
Noninterest expenses
Compensation and benefits	5,621			5,174			16,420			16,045
Furniture and equipment	1,511			1,348			4,251			3,835
Occupancy	728			697			2,121			2,115
Other	2,172			2,295			5,938			6,305
Total noninterest expenses	10,032			9,514			28,730			28,300
Income before federal income tax expense	5,065			3,849			14,584			11,975
Federal income tax expense	1,002			444			2,750			1,696
NET INCOME	$	4,063		$	3,405		$	11,834		$	10,279
Earnings per common share
Basic	$	0.52		$	0.44		$	1.52		$	1.33
Diluted	$	0.51		$	0.43		$	1.49		$	1.30
Cash dividends per common share	$	0.24		$	0.22		$	0.70		$	0.66

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

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INTERIM CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (UNAUDITED)

(Dollars in thousands)



	Three Months Ended September 30						Nine Months Ended September 30
	2015			2014			2015			2014
Net income	$	4,063		$	3,405		$	11,834		$	10,279
Unrealized gains (losses) on AFS securities
Unrealized gains (losses) on AFS securities arising during the period	5,301			(1,326		)	3,137			8,642
Reclassification adjustment for net realized (gains) losses included in net income	—			(97		)	—			(97		)
Net unrealized gains (losses)	5,301			(1,423		)	3,137			8,545
Tax effect (1)	(1,818		)	469			(1,019		)	(2,690		)
Other comprehensive income (loss), net of tax	3,483			(954		)	2,118			5,855
Comprehensive income (loss)	$	7,546		$	2,451		$	13,952		$	16,134


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

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

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INTERIM CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY (UNAUDITED)

(Dollars in thousands except per share amounts)



	Common Stock
	Common Shares Outstanding		Amount			Common Shares to be Issued for Deferred Compensation Obligations			Retained Earnings			Accumulated Other Comprehensive Income (Loss)			Totals
Balance, January 1, 2014	7,723,023		$	137,580		$	4,148		$	25,222		$	(6,341	)	$	160,609
Comprehensive income (loss)	—		—			—			10,279			5,855			16,134
Issuance of common stock	122,261		2,845			—			—			—			2,845
Common stock issued for deferred compensation obligations	6,126		143			(143		)	—			—			—
Common stock transferred from the Rabbi Trust to satisfy deferred compensation obligations	—		258			(258		)	—			—			—
Share-based payment awards under equity compensation plan	—		—			382			—			—			382
Common stock purchased for deferred compensation obligations	—		(253		)	—			—			—			(253		)
Common stock repurchased pursuant to publicly announced repurchase plan	(110,680	)	(2,550		)	—			—			—			(2,550		)
Cash dividends paid ($0.66 per common share)	—		—			—			(5,091		)	—			(5,091		)
Balance, September 30, 2014	7,740,730		$	138,023		$	4,129		$	30,410		$	(486	)	$	172,076
Balance, January 1, 2015	7,776,274		$	138,755		$	4,242		$	32,103		$	(506	)	$	174,594
Comprehensive income (loss)	—		—			—			11,834			2,118			13,952
Issuance of common stock	142,388		3,310			—			—			—			3,310
Common stock issued for deferred compensation obligations	—		—			—			—			—			—
Common stock transferred from the Rabbi Trust to satisfy deferred compensation obligations	—		123			(123		)	—			—			—
Share-based payment awards under equity compensation plan	—		—			425			—			—			425
Common stock purchased for deferred compensation obligations	—		(279		)	—			—			—			(279		)
Common stock repurchased pursuant to publicly announced repurchase plan	(153,329	)	(3,588		)	—			—			—			(3,588		)
Cash dividends paid ($0.70 per common share)	—		—			—			(5,416		)	—			(5,416		)
Balance, September 30, 2015	7,765,333		$	138,321		$	4,544		$	38,521		$	1,612		$	182,998

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

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INTERIM CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)

(Dollars in thousands)



	Nine Months Ended September 30
	2015			2014
OPERATING ACTIVITIES
Net income	$	11,834		$	10,279
Reconciliation of net income to net cash provided by operating activities:
Provision for loan losses	(1,999		)	(604		)
Impairment of foreclosed assets	22			83
Depreciation	1,925			1,902
Amortization of OMSR	273			206
Amortization of acquisition intangibles	122			143
Net amortization of AFS securities	1,514			1,382
Net (gains) losses on sale of AFS securities	—			(97		)
Net gain on sale of mortgage loans	(472		)	(436		)
Increase in cash value of corporate owned life insurance policies	(570		)	(556		)
Share-based payment awards under equity compensation plan	425			382
Origination of loans held-for-sale	(36,140		)	(21,746		)
Proceeds from loan sales	36,682			22,865
Net changes in operating assets and liabilities which provided (used) cash:
Accrued interest receivable	(1,141		)	(1,464		)
Other assets	(5,633		)	(433		)
Accrued interest payable and other liabilities	(117		)	134
Net cash provided by (used in) operating activities	6,725			12,040
INVESTING ACTIVITIES
Activity in AFS securities
Sales	—			13,362
Maturities, calls, and principal payments	72,345			47,527
Purchases	(131,800		)	(116,647		)
Net loan principal (originations) collections	(709		)	(15,952		)
Proceeds from sales of foreclosed assets	1,305			1,482
Purchases of premises and equipment	(4,397		)	(2,026		)
Purchases of corporate owned life insurance policies	(500		)	—
Net cash provided by (used in) investing activities	(63,756		)	(72,254		)

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INTERIM CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (continued)

(Dollars in thousands)



	Nine Months Ended September 30
	2015			2014
FINANCING ACTIVITIES
Net increase (decrease) in deposits	$	53,519		$	38,124
Net increase (decrease) in borrowed funds	7,901			11,112
Cash dividends paid on common stock	(5,416		)	(5,091		)
Proceeds from issuance of common stock	3,310			2,845
Common stock repurchased	(3,588		)	(2,550		)
Common stock purchased for deferred compensation obligations	(279		)	(253		)
Net cash provided by (used in) financing activities	55,447			44,187
Increase (decrease) in cash and cash equivalents	(1,584		)	(16,027		)
Cash and cash equivalents at beginning of period	19,906			41,558
Cash and cash equivalents at end of period	$	18,322		$	25,531
SUPPLEMENTAL CASH FLOWS INFORMATION:
Interest paid	$	7,587		$	7,536
Federal income taxes paid	3,193			979
SUPPLEMENTAL NONCASH INFORMATION:
Transfers of loans to foreclosed assets	$	1,043		$	1,194

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

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NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

(Dollars in thousands except per share amounts)

Note 1 – Basis of Presentation

As used in these notes as well as in Management's Discussion and Analysis of Financial Condition and Results of Operations, references to “Isabella,” the “Corporation”, “we,” “our,” “us,” and similar terms refer to the consolidated entity consisting of Isabella Bank Corporation and its subsidiaries. Isabella Bank Corporation refers solely to the parent holding company, and Isabella Bank or the “Bank” refer to Isabella Bank Corporation’s subsidiary, Isabella Bank.

The accompanying unaudited interim condensed consolidated financial statements have been prepared in accordance with GAAP for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by GAAP for complete financial statements. In our opinion, all adjustments considered necessary for a fair presentation have been included. Operating results for the three and nine month periods ended September 30, 2015 are not necessarily indicative of the results that may be expected for the year ending December 31, 2015. For further information, refer to our Annual Report on Form 10-K for the year ended December 31, 2014.

Our accounting policies are materially the same as those discussed in Note 1 to the Consolidated Financial Statements included in our Annual Report on Form 10-K for the year ended December 31, 2014.

Note 2 – Computation of Earnings Per Common Share

Basic earnings per common share represents income available to common shareholders divided by the weighted average number of common shares outstanding during the period. Diluted earnings per common share reflects additional common shares that would have been outstanding if dilutive potential common shares had been issued. Potential common shares that may be issued relate solely to outstanding shares in the Directors Plan.



	Three Months Ended September 30				Nine Months Ended September 30
	2015		2014		2015		2014
Average number of common shares outstanding for basic calculation	7,768,230		7,733,362		7,773,655		7,725,706
Average potential effect of common shares in the Directors Plan (1)	178,882		170,897		177,531		170,955
Average number of common shares outstanding used to calculate diluted earnings per common share	7,947,112		7,904,259		7,951,186		7,896,661
Net income	$	4,063	$	3,405	$	11,834	$	10,279
Earnings per common share
Basic	$	0.52	$	0.44	$	1.52	$	1.33
Diluted	$	0.51	$	0.43	$	1.49	$	1.30


⁽¹⁾	Exclusive of shares held in the Rabbi Trust

Note 3 – Accounting Standards Updates

Recently Adopted Accounting Standards Updates

ASU No. 2014-04: “Reclassification of Residential Real Estate Collateralized Consumer Mortgage Loans upon Foreclosure (a consensus of the FASB Emerging Issues Task Force)”

In January 2014, ASU No. 2014-04 amended ASC Topic 310, "Receivables" to provide clarification as to when an in substance repossession or foreclosure occurs, that is, when a creditor should be considered to have received physical possession of residential real estate property collateralizing a consumer mortgage loan. Specifically, the update defined physical possession to appropriately derecognize the loan and recognize the real estate as OREO. The adoption of this ASU did not have a significant impact on our operations or financial statement disclosures.

ASU No. 2014-11: “Repurchase-to-Maturity Transactions, Repurchase Financings, and Disclosures”

In June 2014, ASU No. 2014-11 amended ASC Topic 860, “Transfers and Servicing” to address concerns that current accounting guidance distinguishes between repurchase agreements that settle at the same time as the maturity of the transferred financial asset and those that settle any time before maturity. The update changed the accounting for repurchase-to-maturity

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transactions to secured borrowing accounting and, for repurchase financing arrangements, separate accounting for a transfer of a financial asset executed contemporaneously with a repurchase agreement with the same counterparty, which resulted in secured borrowing accounting for the repurchase agreement. The adoption of this ASU did not have a significant impact on our operations or financial statement disclosures.

Pending Accounting Standards Updates

ASU No. 2015-01: “Income Statement - Extraordinary and Unusual Items (Subtopic 225-20): Simplifying Income Statement Presentation by Eliminating the Concept of Extraordinary Items”

In January 2015, ASU No. 2015-01 amended ASC Topic 225, “Income Statement” to eliminate the concept of extraordinary items. The presentation and disclosure guidance for items that are unusual in nature or occur infrequently will be retained and will be expanded to include items that are both unusual in nature and infrequently occurring. The new authoritative guidance is effective for interim and annual periods beginning after December 15, 2015 and is not expected to have a significant impact on our operations or financial statement disclosures.

ASU No. 2015-02: “Consolidation (Topic 810): Amendments to the Consolidation Analysis”

In February 2015, ASU No. 2015-02 amended ASC Topic 810, “Consolidation” to provide consolidation guidance on legal entities when the reporting entity’s contractual rights do not give it the ability to act primarily on its own behalf, the reporting entity does not hold a majority of the legal entity’s voting rights, or the reporting entity is not exposed to a majority of the legal entity’s economic benefits or obligations. The amendments in this update affect reporting entities that are required to evaluate whether they should consolidate certain legal entities. All legal entities are subject to reevaluation under the revised consolidation model. Specifically, the amendments:


1.	Modify the evaluation of whether limited partnerships and similar legal entities are variable interest entities (VIEs) or voting interest entities.


2.	Eliminate the presumption that a general partner should consolidate a limited partnership.


3.	Affect the consolidation analysis of reporting entities that are involved with VIEs, particularly those that have fee arrangements and related party relationships.


4.	Provide a scope exception from consolidation guidance for reporting entities with interests in legal entities that are required to comply with or operate in accordance with requirements that are similar to those in Rule 2a-7 of the Investment Company Act of 1940 for registered money market funds.

The amendments of this update affect limited partnerships and similar legal entities including fees paid and fee arrangements on the primary beneficiary. The following three main provisions affect limited partnerships and similar legal entities:


1.	There is an additional requirement that limited partnerships and similar legal entities must meet to qualify as voting interest entities. A limited partnership must provide partners with either substantive kick-out rights or substantive participating rights over the general partner to meet this requirement.


2.	The specialized consolidation model and guidance for limited partnerships and similar legal entities have been eliminated. There is no longer a presumption that a general partner should consolidate a limited partnership.


3.	For limited partnerships and similar legal entities that qualify as voting interest entities, a limited partner with a controlling financial interest should consolidate a limited partnership. A controlling financial interest may be achieved through holding a limited partner interest that provides substantive kick-out rights.

The new authoritative guidance is effective for interim and annual periods beginning after December 15, 2015 and is not expected to have a significant impact on our operations or financial statement disclosures.

ASU No. 2015-05: “Intangibles-Goodwill and Other-Internal-Use Software (Subtopic 350-40): Customer’s Accounting for Fees Paid in a Cloud Computing Arrangement“

In April 2015, ASU No. 2015-05 amended ASC Topic 350, “Goodwill and Other” to provide guidance to customers about whether a cloud computing arrangement includes a software license. If a cloud computing arrangement includes a software license, then the customer should account for the software license element of the arrangement consistent with the acquisition of other software licenses. If a cloud computing arrangement does not include a software license, the customer should account for the arrangement as a service contract. The guidance will not change GAAP for a customer’s accounting for service contracts. The new authoritative guidance is effective for interim and annual periods beginning after December 15, 2015 and is not expected to have a significant impact on our operations or financial statement disclosures.

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ASU No. 2015-07: “Fair Value Measurement (Topic 820): Disclosures for Investments in Certain Entities That Calculate Net Asset Value per Share (or Its Equivalent)“

In May 2015, ASU No. 2015-07 amended ASC Topic 820, “Fair Value Measurement” to remove the requirement to categorize within the fair value hierarchy all investments for which fair value is measured using the net asset value per share practical expedient. The amendments also remove the requirement to make certain disclosures for all investments that are eligible to be measured at fair value using the net asset value per share practical expedient. Rather, those disclosures are limited to investments for which the entity has elected to measure the fair value using that practical expedient. The new authoritative guidance is effective for interim and annual periods beginning after December 15, 2015 and is not expected to have a significant impact on our operations or financial statement disclosures.

ASU No. 2015-14: “Revenue from Contracts with Customers (Topic 606): Deferral of the Effective Date“

In August 2015, ASU No. 2015-14 was issued to defer the effective date of ASU No. 2014-09, “Revenue from Contracts with Customers (Topic 606)” by one year. The new authoritative guidance is now effective for interim and annual periods beginning after December 15, 2017. The new authoritative guidance in ASU No. 2014-09 is not expected to have a significant impact on our operations or financial statement disclosures.

Note 4 – AFS Securities

The amortized cost and fair value of AFS securities, with gross unrealized gains and losses, are as follows at:



	September 30, 2015
	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses		Fair Value
Government sponsored enterprises	$	24,441	$	8	$	81	$	24,368
States and political subdivisions	226,045		6,950		621		232,374
Auction rate money market preferred	3,200		—		493		2,707
Preferred stocks	3,800		—		608		3,192
Mortgage-backed securities	232,279		2,599		620		234,258
Collateralized mortgage obligations	130,069		2,071		427		131,713
Total	$	619,834	$	11,628	$	2,850	$	628,612



	December 31, 2014
	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses		Fair Value
Government sponsored enterprises	$	24,597	$	10	$	471	$	24,136
States and political subdivisions	209,153		6,986		794		215,345
Auction rate money market preferred	3,200		—		581		2,619
Preferred stocks	6,800		31		691		6,140
Mortgage-backed securities	165,888		2,042		1,004		166,926
Collateralized mortgage obligations	152,255		1,533		1,420		152,368
Total	$	561,893	$	10,602	$	4,961	$	567,534

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



	Maturing								Securities with Variable Monthly Payments or Noncontractual Maturities
	Due in One Year or Less		After One Year But Within Five Years		After Five Years But Within Ten Years		After Ten Years				Total
Government sponsored enterprises	$	—	$	24,029	$	412	$	—	$	—	$	24,441
States and political subdivisions	28,965		66,644		93,713		36,723		—		226,045
Auction rate money market preferred	—		—		—		—		3,200		3,200
Preferred stocks	—		—		—		—		3,800		3,800
Mortgage-backed securities	—		—		—		—		232,279		232,279
Collateralized mortgage obligations	—		—		—		—		130,069		130,069
Total amortized cost	$	28,965	$	90,673	$	94,125	$	36,723	$	369,348	$	619,834
Fair value	$	29,014	$	93,015	$	97,509	$	37,204	$	371,870	$	628,612

Expected maturities for government sponsored enterprises and states and political subdivisions may differ from contractual maturities because issuers may have the right to call or prepay obligations.

As the auction rate money market preferred and preferred stocks have continual call dates, they are not reported by a specific maturity group. Because of their variable monthly payments, mortgage-backed securities and collateralized mortgage obligations are not reported by a specific maturity group.

A summary of the sales activity of AFS securities was as follows for the:



	Three Months Ended September 30		Nine Months Ended September 30
	2014		2014
Proceeds from sales of AFS securities	$	13,362	$	13,362
Gross realized gains (losses)	$	97	$	97
Applicable income tax expense (benefit)	$	33	$	33

We had no sales of AFS securities in the three and nine month periods ended September 30, 2015.

The cost basis used to determine the realized gains or losses of AFS securities sold was the amortized cost of the individual investment security as of the trade date.

Information pertaining to AFS securities with gross unrealized losses at September 30, 2015 and December 31, 2014, aggregated by investment category and length of time that individual securities have been in a continuous loss position, follows:



	September 30, 2015
	Less Than Twelve Months				Twelve Months or More
	Gross Unrealized Losses		Fair Value		Gross Unrealized Losses		Fair Value		Total Unrealized Losses
Government sponsored enterprises	$	—	$	—	$	81	$	23,915	$	81
States and political subdivisions	80		12,168		541		3,602		621
Auction rate money market preferred	—		—		493		2,707		493
Preferred stocks	—		—		608		3,192		608
Mortgage-backed securities	42		18,517		578		39,075		620
Collateralized mortgage obligations	3		7,920		424		28,190		427
Total	$	125	$	38,605	$	2,725	$	100,681	$	2,850
Number of securities in an unrealized loss position:			35				29		64

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	December 31, 2014
	Less Than Twelve Months				Twelve Months or More
	Gross Unrealized Losses		Fair Value		Gross Unrealized Losses		Fair Value		Total Unrealized Losses
Government sponsored enterprises	$	—	$	—	$	471	$	23,525	$	471
States and political subdivisions	48		5,323		746		17,416		794
Auction rate money market preferred	—		—		581		2,619		581
Preferred stocks	—		—		691		3,109		691
Mortgage-backed securities	5		9,456		999		52,407		1,004
Collateralized mortgage obligations	105		29,435		1,315		39,540		1,420
Total	$	158	$	44,214	$	4,803	$	138,616	$	4,961
Number of securities in an unrealized loss position:			22				72		94

As of September 30, 2015 and December 31, 2014, we conducted an analysis to determine whether any AFS securities currently in an unrealized loss position should be other-than-temporarily impaired. Such analyses considered, among other factors, the following criteria:


•	Has the value of the investment declined more than what is deemed to be reasonable based on a risk and maturity adjusted discount rate?


•	Is the investment credit rating below investment grade?


•	Is it probable the issuer will be unable to pay the amount when due?


•	Is it more likely than not that we will have to sell the security before recovery of its cost basis?


•	Has the duration of the investment been extended?

Based on our analyses, the fact that we have asserted that we do not have the intent to sell AFS securities in an unrealized loss position, and considering it is unlikely that we will have to sell any AFS securities in an unrealized loss position before recovery of their cost basis, we do not believe that the values of any AFS securities were other-than-temporarily impaired as of September 30, 2015, or December 31, 2014.

Note 5 – Loans and ALLL

We grant commercial, agricultural, residential real estate, and consumer loans to customers situated primarily in Clare, Gratiot, Isabella, Mecosta, Midland, Montcalm, and Saginaw counties in Michigan. The ability of the borrowers to honor their repayment obligations is often dependent upon the real estate, agricultural, light manufacturing, retail, gaming, tourism, higher education, and general economic conditions of this region. Substantially all of our consumer and residential real estate loans are secured by various items of property, while commercial loans are secured primarily by real estate, business assets, and personal guarantees; a portion of loans are unsecured.

Loans that we have the intent and ability to hold in our portfolio are reported at their outstanding principal balance adjusted for any charge-offs, the ALLL, and any deferred fees or costs. Interest income is accrued over the term of the loan based on the principal amount outstanding. Loan origination fees and certain direct loan origination costs are capitalized and recognized as a component of interest income over the term of the loan using the level yield method.

The accrual of interest on commercial, agricultural, and residential real estate loans is discontinued at the time the loan is 90 days or more past due unless the credit is well-secured and in the process of collection. Upon transferring the loans to nonaccrual status, we perform an evaluation to determine the net realizable value of the underlying collateral. This evaluation is used to help determine if any charge-offs are necessary. Consumer loans are typically charged-off no later than 180 days past due. Past due status is based on contractual terms of the loan. In all cases, loans are placed on nonaccrual status or charged-off at an earlier date if collection of principal or interest is considered doubtful.

For loans that are placed on nonaccrual status or charged-off, all interest accrued in the current calendar year, but not collected, is reversed against interest income while interest accrued in prior calendar years, but not collected, is charged against the ALLL. Loans may be returned to accrual status after six months of continuous performance.

Commercial and agricultural loans include loans for commercial real estate, commercial operating loans, farmland and agricultural production, and states and political subdivisions. Repayment of these loans is dependent upon the successful operation and management of a business. We minimize our risk by limiting the amount of direct credit exposure to any one borrower to $15,000. Borrowers with direct credit needs of more than $15,000 are serviced through the use of loan

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participations with other commercial banks. Commercial and agricultural real estate loans commonly require loan-to-value limits of 80% or less. Depending upon the type of loan, past credit history, and current operating results, we may require the borrower to pledge accounts receivable, inventory, and property and equipment. Personal guarantees are generally required from the owners of closely held corporations, partnerships, and sole proprietorships. In addition, we require annual financial statements, prepare cash flow analyses, and review credit reports.

We offer adjustable rate mortgages, construction loans, and fixed rate residential real estate loans which have amortization periods up to a maximum of 30 years. We consider the anticipated direction of interest rates, balance sheet duration, the sensitivity of our balance sheet to changes in interest rates, and overall loan demand to determine whether or not to sell fixed rate loans to Freddie Mac.

Our lending policies generally limit the maximum loan-to-value ratio on residential real estate loans to 97% of the lower of the appraised value of the property or the purchase price, with the condition that private mortgage insurance is required on loans with loan-to-value ratios in excess of 80%.

Underwriting criteria for residential real estate loans include:


•	Evaluation of the borrower’s ability to make monthly payments.


•	Evaluation of the value of the property securing the loan.


•	Ensuring the payment of principal, interest, taxes, and hazard insurance does not exceed 28% of a borrower’s gross income.


•	Ensuring all debt servicing does not exceed 36% of income.


•	Verification of acceptable credit reports.


•	Verification of employment, income, and financial information.

Appraisals are performed by independent appraisers and reviewed for appropriateness. All mortgage loan requests are reviewed by our mortgage loan committee or through a secondary market underwriting system; loans in excess of $500 require the approval of our Internal Loan Committee, the Executive Loan Committee, the Board of Directors’ Loan Committee, or the Board of Directors.

Consumer loans include secured and unsecured personal loans. Loans are amortized for a period of up to 12 years based on the age and value of the underlying collateral. The underwriting emphasis is on a borrower’s perceived intent and ability to pay rather than collateral value. No consumer loans are sold to the secondary market.

The ALLL is established as losses are estimated to have occurred through a provision for loan losses charged to earnings. Loan losses are charged against the ALLL when we believe the uncollectability of the loan balance is confirmed. Subsequent recoveries, if any, are credited to the ALLL.

The appropriateness of the ALLL is evaluated on a quarterly basis and is based upon a periodic review of the collectability of the loans in light of historical experience, the nature and volume of the loan portfolio, adverse situations that may affect the borrower’s ability to repay, estimated value of any underlying collateral, and prevailing economic conditions. This evaluation is inherently subjective as it requires estimates that are susceptible to significant revision as more information becomes available.

The primary factors behind the determination of the level of the ALLL are specific allocations for impaired loans, historical loss percentages, as well as unallocated components. Specific allocations for impaired loans are primarily determined based on the difference between the loan’s outstanding balance to the present value of expected future cash flows discounted at the loan’s effective interest rate, the loan’s obtainable market price, or the fair value of the collateral, less cost to sell. Historical loss allocations are calculated at the loan class and segment levels based on a migration analysis of the loan portfolio over the preceding five years. The unallocated component of the allowance reflects the margin of imprecision inherent in the underlying assumptions used in the methodologies for estimating specific and general losses in the portfolio.

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A summary of changes in the ALLL and the recorded investment in loans by segments follows:



	Allowance for Loan Losses
	Three Months Ended September 30, 2015
	Commercial			Agricultural		Residential Real Estate			Consumer			Unallocated			Total
July 1, 2015	$	3,483		$	363	$	3,514		$	591		$	1,049		$	9,000
Charge-offs	(61		)	—		(70		)	(79		)	—			(210		)
Recoveries	68			—		33			47			—			148
Provision for loan losses	(500		)	15		(164		)	(49		)	(40		)	(738		)
September 30, 2015	$	2,990		$	378	$	3,313		$	510		$	1,009		$	8,200



	Allowance for Loan Losses
	Nine Months Ended September 30, 2015
	Commercial			Agricultural		Residential Real Estate			Consumer			Unallocated			Total
January 1, 2015	$	3,823		$	216	$	4,238		$	645		$	1,178		$	10,100
Charge-offs	(89		)	—		(325		)	(252		)	—			(666		)
Recoveries	387			72		152			154			—			765
Provision for loan losses	(1,131		)	90		(752		)	(37		)	(169		)	(1,999		)
September 30, 2015	$	2,990		$	378	$	3,313		$	510		$	1,009		$	8,200



	Allowance for Loan Losses and Recorded Investment in Loans
	September 30, 2015
	Commercial		Agricultural		Residential Real Estate		Consumer		Unallocated		Total
ALLL
Individually evaluated for impairment	$	1,322	$	3	$	1,891	$	1	$	—	$	3,217
Collectively evaluated for impairment	1,668		375		1,422		509		1,009		4,983
Total	$	2,990	$	378	$	3,313	$	510	$	1,009	$	8,200
Loans
Individually evaluated for impairment	$	9,603	$	2,647	$	10,275	$	38			$	22,563
Collectively evaluated for impairment	423,466		113,646		239,575		34,097				810,784
Total	$	433,069	$	116,293	$	249,850	$	34,135			$	833,347



	Allowance for Loan Losses
	Three Months Ended September 30, 2014
	Commercial			Agricultural			Residential Real Estate			Consumer			Unallocated		Total
July 1, 2014	$	5,012		$	219		$	3,981		$	802		$	686	$	10,700
Charge-offs	(163		)	—			(180		)	(73		)	—		(416		)
Recoveries	171			—			68			39			—		278
Provision for loan losses	(704		)	(31		)	92			(47		)	528		(162		)
September 30, 2014	$	4,316		$	188		$	3,961		$	721		$	1,214	$	10,400

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	Allowance for Loan Losses
	Nine Months Ended September 30, 2014
	Commercial			Agricultural			Residential Real Estate			Consumer			Unallocated		Total
January 1, 2014	$	6,048		$	434		$	3,845		$	639		$	534	$	11,500
Charge-offs	(434		)	(31		)	(557		)	(255		)	—		(1,277		)
Recoveries	477			—			190			114			—		781
Provision for loan losses	(1,775		)	(215		)	483			223			680		(604		)
September 30, 2014	$	4,316		$	188		$	3,961		$	721		$	1,214	$	10,400



	Allowance for Loan Losses and Recorded Investment in Loans
	December 31, 2014
	Commercial		Agricultural		Residential Real Estate		Consumer		Unallocated		Total
ALLL
Individually evaluated for impairment	$	1,283	$	—	$	2,143	$	1	$	—	$	3,427
Collectively evaluated for impairment	2,540		216		2,095		644		1,178		6,673
Total	$	3,823	$	216	$	4,238	$	645	$	1,178	$	10,100
Loans
Individually evaluated for impairment	$	12,029	$	1,595	$	12,160	$	64			$	25,848
Collectively evaluated for impairment	419,932		103,126		252,435		32,241				807,734
Total	$	431,961	$	104,721	$	264,595	$	32,305			$	833,582

The following table displays the credit quality indicators for commercial and agricultural credit exposures based on internally assigned credit risk ratings as of:



	September 30, 2015
	Commercial						Agricultural
	Real Estate		Other		Total		Real Estate		Other		Total
Rating
1 - Excellent	$	—	$	499	$	499	$	—	$	—	$	—
2 - High quality	6,684		8,131		14,815		4,534		2,308		6,842
3 - High satisfactory	101,450		31,355		132,805		29,181		12,885		42,066
4 - Low satisfactory	207,512		59,764		267,276		36,451		24,742		61,193
5 - Special mention	6,408		818		7,226		2,271		1,678		3,949
6 - Substandard	9,893		271		10,164		1,660		305		1,965
7 - Vulnerable	284		—		284		274		4		278
8 - Doubtful	—		—		—		—		—		—
Total	$	332,231	$	100,838	$	433,069	$	74,371	$	41,922	$	116,293

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	December 31, 2014
	Commercial						Agricultural
	Real Estate		Other		Total		Real Estate		Other		Total
Rating
1 - Excellent	$	—	$	492	$	492	$	—	$	—	$	—
2 - High quality	13,620		14,423		28,043		5,806		3,582		9,388
3 - High satisfactory	94,556		51,230		145,786		28,715		12,170		40,885
4 - Low satisfactory	184,000		49,869		233,869		33,361		17,560		50,921
5 - Special mention	8,456		1,322		9,778		1,607		65		1,672
6 - Substandard	11,055		123		11,178		1,602		147		1,749
7 - Vulnerable	2,687		116		2,803		106		—		106
8 - Doubtful	—		12		12		—		—		—
Total	$	314,374	$	117,587	$	431,961	$	71,197	$	33,524	$	104,721

Internally assigned credit risk ratings are reviewed, at a minimum, when loans are renewed or when management has knowledge of improvements or deterioration of the credit quality of individual credits. Descriptions of the internally assigned credit risk ratings for commercial and agricultural loans are as follows:

1. EXCELLENT – Substantially Risk Free

Credit has strong financial condition and solid earnings history, characterized by:


•	High liquidity, strong cash flow, low leverage.


•	Unquestioned ability to meet all obligations when due.


•	Experienced management, with management succession in place.


•	Secured by cash.

2. HIGH QUALITY – Limited Risk

Credit with sound financial condition and a positive trend in earnings supplemented by:


•	Favorable liquidity and leverage ratios.


•	Ability to meet all obligations when due.


•	Management with successful track record.


•	Steady and satisfactory earnings history.


•	If loan is secured, collateral is of high quality and readily marketable.


•	Access to alternative financing.


•	Well defined primary and secondary source of repayment.


•	If supported by guaranty, the financial strength and liquidity of the guarantor(s) are clearly evident.

3. HIGH SATISFACTORY – Reasonable Risk

Credit with satisfactory financial condition and further characterized by:


•	Working capital adequate to support operations.


•	Cash flow sufficient to pay debts as scheduled.


•	Management experience and depth appear favorable.


•	Loan performing according to terms.


•	If loan is secured, collateral is acceptable and loan is fully protected.

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4. LOW SATISFACTORY – Acceptable Risk

Credit with bankable risks, although some signs of weaknesses are shown:


•	Would include most start-up businesses.


•	Occasional instances of trade slowness or repayment delinquency – may have been 10-30 days slow within the past year.


•	Management’s abilities are apparent, yet unproven.


•	Weakness in primary source of repayment with adequate secondary source of repayment.


•	Loan structure generally in accordance with policy.


•	If secured, loan collateral coverage is marginal.


•	Adequate cash flow to service debt, but coverage is low.

To be classified as less than satisfactory, only one of the following criteria must be met.

5. SPECIAL MENTION – Criticized

Credit constitutes an undue and unwarranted credit risk but not to the point of justifying a classification of substandard. The credit risk may be relatively minor yet constitute an unwarranted risk in light of the circumstances surrounding a specific loan:


•	Downward trend in sales, profit levels, and margins.


•	Impaired working capital position.


•	Cash flow is strained in order to meet debt repayment.


•	Loan delinquency (30-60 days) and overdrafts may occur.


•	Shrinking equity cushion.


•	Diminishing primary source of repayment and questionable secondary source.


•	Management abilities are questionable.


•	Weak industry conditions.


•	Litigation pending against the borrower.


•	Collateral or guaranty offers limited protection.


•	Negative debt service coverage, however the credit is well collateralized and payments are current.

6. SUBSTANDARD – Classified

Credit where the borrower’s current net worth, paying capacity, and value of the collateral pledged is inadequate. There is a distinct possibility that we will implement collection procedures if the loan deficiencies are not corrected. In addition, the following characteristics may apply:


•	Sustained losses have severely eroded the equity and cash flow.


•	Deteriorating liquidity.


•	Serious management problems or internal fraud.


•	Original repayment terms liberalized.


•	Likelihood of bankruptcy.


•	Inability to access other funding sources.


•	Reliance on secondary source of repayment.


•	Litigation filed against borrower.


•	Collateral provides little or no value.


•	Requires excessive attention of the loan officer.


•	Borrower is uncooperative with loan officer.

7. VULNERABLE – Classified

Credit is considered “Substandard” and warrants placing on nonaccrual status. Risk of loss is being evaluated and exit strategy options are under review. Other characteristics that may apply:


•	Insufficient cash flow to service debt.


•	Minimal or no payments being received.


•	Limited options available to avoid the collection process.


•	Transition status, expect action will take place to collect loan without immediate progress being made.

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8. DOUBTFUL – Workout

Credit has all the weaknesses inherent in a “Substandard” loan with the added characteristic that collection and/or liquidation is pending. The possibility of a loss is extremely high, but its classification as a loss is deferred until liquidation procedures are completed, or reasonably estimable. Other characteristics that may apply:


•	Normal operations are severely diminished or have ceased.


•	Seriously impaired cash flow.


•	Original repayment terms materially altered.


•	Secondary source of repayment is inadequate.


•	Survivability as a “going concern” is impossible.


•	Collection process has begun.


•	Bankruptcy petition has been filed.


•	Judgments have been filed.


•	Portion of the loan balance has been charged-off.

Our primary credit quality indicator for residential real estate and consumer loans is the individual loan’s past due aging. The following tables summarize the past due and current loans as of:



	September 30, 2015
	Accruing Interest and Past Due:								Total Past Due and Nonaccrual
	30-59 Days		60-89 Days		90 Days or More		Nonaccrual		Total Past Due and Nonaccrual		Current		Total
Commercial
Commercial real estate	$	391	$	—	$	—	$	284	$	675	$	331,556	$	332,231
Commercial other	323		8		—		—		331		100,507		100,838
Total commercial	714		8		—		284		1,006		432,063		433,069
Agricultural
Agricultural real estate	—		—		—		274		274		74,097		74,371
Agricultural other	425		—		—		4		429		41,493		41,922
Total agricultural	425		—		—		278		703		115,590		116,293
Residential real estate
Senior liens	1,649		48		—		234		1,931		197,687		199,618
Junior liens	68		6		—		—		74		9,599		9,673
Home equity lines of credit	25		—		—		—		25		40,534		40,559
Total residential real estate	1,742		54		—		234		2,030		247,820		249,850
Consumer
Secured	56		—		—		—		56		30,186		30,242
Unsecured	4		—		—		—		4		3,889		3,893
Total consumer	60		—		—		—		60		34,075		34,135
Total	$	2,941	$	62	$	—	$	796	$	3,799	$	829,548	$	833,347

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	December 31, 2014
	Accruing Interest and Past Due:								Total Past Due and Nonaccrual
	30-59 Days		60-89 Days		90 Days or More		Nonaccrual		Total Past Due and 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.

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



	September 30, 2015						December 31, 2014
	Outstanding Balance		Unpaid Principal Balance		Valuation Allowance		Outstanding Balance		Unpaid Principal Balance		Valuation Allowance
Impaired loans with a valuation allowance
Commercial real estate	$	8,402	$	8,521	$	1,322	$	7,115	$	7,234	$	1,279
Commercial other	—		—		—		609		828		4
Agricultural real estate	—		—		—		—		—		—
Agricultural other	335		335		3		—		—		—
Residential real estate senior liens	10,008		10,878		1,864		11,645		12,782		2,015
Residential real estate junior liens	134		134		27		265		275		53
Home equity lines of credit	—		—		—		250		650		75
Consumer secured	38		38		1		54		54		1
Total impaired loans with a valuation allowance	18,917		19,906		3,217		19,938		21,823		3,427
Impaired loans without a valuation allowance
Commercial real estate	1,099		1,232				4,116		4,462
Commercial other	102		113				189		212
Agricultural real estate	1,980		1,980				1,529		1,529
Agricultural other	332		332				66		186
Home equity lines of credit	133		433				—		—
Consumer secured	—		—				10		10
Total impaired loans without a valuation allowance	3,646		4,090				5,910		6,399
Impaired loans
Commercial	9,603		9,866		1,322		12,029		12,736		1,283
Agricultural	2,647		2,647		3		1,595		1,715		—
Residential real estate	10,275		11,445		1,891		12,160		13,707		2,143
Consumer	38		38		1		64		64		1
Total impaired loans	$	22,563	$	23,996	$	3,217	$	25,848	$	28,222	$	3,427

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The following is a summary of information pertaining to impaired loans for the three and nine month periods ended:



	Three Months Ended September 30, 2015				Nine Months Ended September 30, 2015
	Average Outstanding Balance		Interest Income Recognized		Average Outstanding Balance		Interest Income Recognized
Impaired loans with a valuation allowance
Commercial real estate	$	7,532	$	112	$	7,287	$	295
Commercial other	280		—		481		19
Agricultural real estate	—		—		29		1
Agricultural other	168		4		56		4
Residential real estate senior liens	10,021		106		10,812		323
Residential real estate junior liens	138		1		197		15
Home equity lines of credit	—		—		42		—
Consumer secured	40		1		46		3
Total impaired loans with a valuation allowance	18,179		224		18,950		660
Impaired loans without a valuation allowance
Commercial real estate	1,432		28		2,356		163
Commercial other	83		2		94		7
Agricultural real estate	1,819		23		1,615		64
Agricultural other	494		5		300		13
Home equity lines of credit	136		4		149		14
Consumer secured	—		—		2		—
Total impaired loans without a valuation allowance	3,964		62		4,516		261
Impaired loans
Commercial	9,327		142		10,218		484
Agricultural	2,481		32		2,000		82
Residential real estate	10,295		111		11,200		352
Consumer	40		1		48		3
Total impaired loans	$	22,143	$	286	$	23,466	$	921

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	Three Months Ended September 30, 2014					Nine Months Ended September 30, 2014
	Average Outstanding Balance		Interest Income Recognized			Average Outstanding Balance		Interest Income Recognized
Impaired loans with a valuation allowance
Commercial real estate	$	7,063	$	106		$	6,822	$	291
Commercial other	589		11			746		40
Agricultural real estate	102		—			113		—
Agricultural other	—		—			—		—
Residential real estate senior liens	12,440		124			12,938		388
Residential real estate junior liens	167		(8		)	94		(7		)
Home equity lines of credit	310		2			220		13
Consumer secured	62		1			72		3
Total impaired loans with a valuation allowance	20,733		236			21,005		728
Impaired loans without a valuation allowance
Commercial real estate	4,594		69			5,396		262
Commercial other	314		5			397		12
Agricultural real estate	1,460		22			1,425		59
Agricultural other	43		1			112		29
Home equity lines of credit	—		—			32		—
Consumer secured	10		—			5		—
Total impaired loans without a valuation allowance	6,421		97			7,367		362
Impaired loans
Commercial	12,560		191			13,361		605
Agricultural	1,605		23			1,650		88
Residential real estate	12,917		118			13,284		394
Consumer	72		1			77		3
Total impaired loans	$	27,154	$	333		$	28,372	$	1,090

As of September 30, 2015 and December 31, 2014, we had committed to advance $2 and $0, respectively, in connection with impaired loans, which include TDRs.

Troubled Debt Restructurings

Loan modifications are considered to be TDRs when the modification includes terms outside of normal lending practices to a borrower who is experiencing financial difficulties.

Typical concessions granted include, but are not limited to:


1.	Agreeing to interest rates below prevailing market rates for debt with similar risk characteristics.


2.	Extending the amortization period beyond typical lending guidelines for loans with similar risk characteristics.


3.	Forgiving principal.


4.	Forgiving accrued interest.

To determine if a borrower is experiencing financial difficulties, factors we consider include:


1.	The borrower is currently in default on any of their debt.


2.	The borrower would likely default on any of their debt if the concession was not granted.


3.	The borrower’s cash flow was insufficient to service all of their debt if the concession was not granted.


4.	The borrower has declared, or is in the process of declaring, bankruptcy.


5.	The borrower is unlikely to continue as a going concern (if the entity is a business).

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The following is a summary of information pertaining to TDRs granted for the:



	Three Months Ended September 30, 2015					Nine Months Ended September 30, 2015
	Number of Loans	Pre-Modification Recorded Investment		Post-Modification Recorded Investment		Number of Loans	Pre-Modification Recorded Investment		Post-Modification Recorded Investment
Commercial other	3	$	1,926	$	1,926	8	$	2,511	$	2,511
Agricultural other	3	636		636		10	1,406		1,406
Residential real estate
Senior liens	1	151		151		5	599		599
Junior liens	—	—		—		1	30		30
Home equity lines of credit	—	—		—		1	94		94
Total residential real estate	1	151		151		7	723		723
Consumer unsecured	—	—		—		—	—		—
Total	7	$	2,713	$	2,713	25	$	4,640	$	4,640



	Three Months Ended September 30, 2014					Nine Months Ended September 30, 2014
	Number of Loans	Pre-Modification Recorded Investment		Post-Modification Recorded Investment		Number of Loans	Pre-Modification Recorded Investment		Post-Modification Recorded Investment
Commercial other	2	$	23	$	23	7	$	386	$	386
Agricultural other	1	49		49		1	49		49
Residential real estate
Senior liens	2	144		144		14	805		805
Junior liens	1	40		40		2	81		81
Home equity lines of credit	—	—		—		1	160		160
Total residential real estate	3	184		184		17	1,046		1,046
Consumer unsecured	1	10		10		4	18		18
Total	7	$	266	$	266	29	$	1,499	$	1,499

The following tables summarize concessions we granted to borrowers in financial difficulty for the:



	Three Months Ended September 30, 2015						Nine Months Ended September 30, 2015
	Below Market Interest Rate			Below Market Interest Rate and Extension of Amortization Period			Below Market Interest Rate			Below Market Interest Rate and Extension of Amortization Period
	Number of Loans	Pre-Modification Recorded Investment		Number of Loans	Pre-Modification Recorded Investment		Number of Loans	Pre-Modification Recorded Investment		Number of Loans	Pre-Modification Recorded Investment
Commercial other	3	$	1,926	—	$	—	6	$	2,180	2	$	331
Agricultural other	3	636		—	—		9	1,360		1	46
Residential real estate
Senior liens	1	151		—	—		2	201		3	398
Junior liens	—	—		—	—		—	—		1	30
Home equity lines of credit	—	—		—	—		—	—		1	94
Total residential real estate	1	151		—	—		2	201		5	522
Consumer unsecured	—	—		—	—		—	—		—	—
Total	7	$	2,713	—	$	—	17	$	3,741	8	$	899

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	Three Months Ended September 30, 2014						Nine Months Ended September 30, 2014
	Below Market Interest Rate			Below Market Interest Rate and Extension of Amortization Period			Below Market Interest Rate			Below Market Interest Rate and Extension of Amortization Period
	Number of Loans	Pre-Modification Recorded Investment		Number of Loans	Pre-Modification Recorded Investment		Number of Loans	Pre-Modification Recorded Investment		Number of Loans	Pre-Modification Recorded Investment
Commercial other	2	$	23	—	$	—	6	$	378	1	$	8
Agricultural other	—	—		1	49		—	—		1	49
Residential real estate
Senior liens	—	—		2	144		3	98		11	707
Junior liens	—	—		1	40		—	—		2	81
Home equity lines of credit	—	—		—	—		1	160		—	—
Total residential real estate	—	—		3	184		4	258		13	788
Consumer unsecured	1	10		—	—		3	15		1	3
Total	3	$	33	4	$	233	13	$	651	16	$	848

We did not restructure any loans by forgiving principal or accrued interest in the three and nine month periods ended September 30, 2015 or 2014.

Based on our historical loss experience, losses associated with TDRs are not significantly different than other impaired loans within the same loan segment. As such, TDRs, including TDRs that have been modified in the past 12 months that subsequently defaulted, are analyzed in the same manner as other impaired loans within their respective loan segment.

Following is a summary of loans that defaulted in the three and nine month periods ended September 30, 2015 and 2014, which were modified within 12 months prior to the default date.



	Three Months Ended September 30, 2015							Nine Months Ended September 30, 2015
	Number of Loans	Pre- Default Recorded Investment		Charge-Off Recorded Upon Default		Post- Default Recorded Investment		Number of Loans	Pre- Default Recorded Investment		Charge-Off Recorded Upon Default		Post- Default Recorded Investment
Commercial other	1	$	216	$	25	$	191	1	$	216	$	25	$	191



	Three Months Ended September 30, 2014							Nine Months Ended September 30, 2014
	Number of Loans	Pre- Default Recorded Investment		Charge-Off Recorded Upon Default		Post- Default Recorded Investment		Number of Loans	Pre- Default Recorded Investment		Charge-Off Recorded Upon Default		Post- Default Recorded Investment
Consumer unsecured	2	$	7	$	7	$	—	2	$	7	$	7	$	—

The following is a summary of TDR loan balances as of:



	September 30, 2015		December 31, 2014
TDRs	$	21,457	$	23,341

The following is a summary of foreclosed assets as of:



	September 30, 2015		December 31, 2014
Consumer mortgage loans collateralized by residential real estate foreclosed as a result of obtaining physical possession (1)	$	190	N/A
All other foreclosed assets	411		885
Total	$	601	$	885


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

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Consumer mortgage loans collateralized by residential real estate in the process of foreclosure were $181 as of September 30, 2015.

Note 6 – Equity Securities Without Readily Determinable Fair Values

Included in equity securities without readily determinable fair values are restricted securities, which are carried at cost, and investments in unconsolidated entities accounted for under the equity method of accounting.

Equity securities without readily determinable fair values consist of the following as of:



	September 30 2015		December 31 2014
FHLB Stock	$	11,700	$	9,800
Corporate Settlement Solutions, LLC	7,304		6,936
FRB Stock	1,999		1,999
Valley Financial Corporation	1,000		1,000
Other	338		341
Total	$	22,341	$	20,076

Note 7 – Borrowed Funds

Borrowed funds consist of the following obligations as of:



	September 30, 2015				December 31, 2014
	Amount		Rate		Amount		Rate
FHLB advances	$	215,000	1.97	%	$	192,000	2.05	%
Securities sold under agreements to repurchase without stated maturity dates	69,510		0.12	%	95,070		0.14	%
Securities sold under agreements to repurchase with stated maturity dates	—		—		439		3.25	%
Federal funds purchased	13,100		0.39	%	2,200		0.50	%
Total	$	297,610	1.47	%	$	289,709	1.41	%

FHLB advances are collateralized by a blanket lien on all qualified 1-4 family residential real estate loans, specific AFS securities, and FHLB stock.

The following table lists the maturities and weighted average interest rates of FHLB advances as of:



	September 30, 2015				December 31, 2014
	Amount		Rate		Amount		Rate
Fixed rate due 2015	$	20,000	0.88	%	$	42,000	0.72	%
Variable rate due 2015	10,000		0.49	%	—		—
Fixed rate due 2016	10,000		2.15	%	10,000		2.15	%
Variable rate due 2016	15,000		0.49	%	—		—
Fixed rate due 2017	30,000		1.95	%	30,000		1.95	%
Fixed rate due 2018	40,000		2.35	%	40,000		2.35	%
Fixed rate due 2019	40,000		2.35	%	20,000		3.11	%
Fixed rate due 2020	10,000		1.98	%	10,000		1.98	%
Fixed rate due 2021	30,000		2.26	%	30,000		2.26	%
Fixed rate due 2023	10,000		3.90	%	10,000		3.90	%
Total	$	215,000	1.97	%	$	192,000	2.05	%

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

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The following table lists the maturity and weighted average interest rates of securities sold under agreements to repurchase with stated maturity dates as of:



	September 30, 2015			December 31, 2014
	Amount		Rate	Amount		Rate
Repurchase agreements due 2015	$	—	—	$	439	3.25	%

Securities sold under repurchase agreements without stated maturity dates, federal funds purchased, and FRB Discount Window advances generally mature within one to four days from the transaction date. The following table provides a summary of securities sold under repurchase agreements without stated maturity dates, federal funds purchased, and FRB Discount Window advances borrowings for the three and nine month periods ended:



	Three Months Ended September 30
	2015						2014
	Maximum Month End Balance		Average Balance		Weighted Average Interest Rate During the Period		Maximum Month End Balance		Average Balance		Weighted Average Interest Rate During the Period
Securities sold under agreements to repurchase without stated maturity dates	$	71,170	$	68,963	0.13	%	$	91,472	$	88,906	0.13	%
Federal funds purchased	13,100		7,265		0.51	%	17,700		2,252		0.48	%



	Nine Months Ended September 30
	2015						2014
	Maximum Month End Balance		Average Balance		Weighted Average Interest Rate During the Period		Maximum Month End Balance		Average Balance		Weighted Average Interest Rate During the Period
Securities sold under agreements to repurchase without stated maturity dates	$	84,859	$	70,399	0.13	%	$	94,741	$	91,231	0.13	%
Federal funds purchased	13,100		6,253		0.50	%	17,700		4,939		0.48	%

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



	September 30 2015		December 31 2014
Pledged to secure borrowed funds	$	344,385	$	324,584
Pledged to secure repurchase agreements	69,564		94,537
Pledged for public deposits and for other purposes necessary or required by law	24,321		19,851
Total	$	438,270	$	438,972

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



	September 30 2015		December 31 2014
States and political subdivisions	$	2,811	$	6,643
Mortgage-backed securities	23,008		29,655
Collateralized mortgage obligations	43,745		58,239
Total	$	69,564	$	94,537

AFS securities pledged to repurchase agreements are monitored to ensure the appropriate level is collateralized. In the event of maturities, calls, significant principal repayments, or significant decline in market values, we have adequate levels of available AFS securities to pledge to satisfy required collateral.

As of September 30, 2015, we had the ability to borrow up to an additional $140,938, based on assets pledged as collateral. We had no investment securities that are restricted to be pledged for specific purposes.

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Note 8 – Other Noninterest Expenses

A summary of expenses included in other noninterest expenses is as follows for the:



	Three Months Ended September 30				Nine Months Ended September 30
	2015		2014		2015		2014
FDIC insurance premiums	$	204	$	196	$	619	$	619
Director fees	204		191		608		569
Audit and related fees	189		185		535		505
Donations and community relations	155		391		412		606
Marketing costs	124		121		350		360
Education and travel	90		154		311		418
Printing and supplies	111		89		309		278
Postage and freight	94		105		284		303
Legal fees	121		88		273		248
Consulting fees	122		96		264		263
Loan underwriting fees	98		83		248		270
All other	660		596		1,725		1,866
Total other	$	2,172	$	2,295	$	5,938	$	6,305

Note 9 – Federal Income Taxes

The reconciliation of the provision for federal income taxes and the amount computed at the federal statutory tax rate of 34% of income before federal income tax expense is as follows for the:



	Three Months Ended September 30						Nine Months Ended September 30
	2015			2014			2015			2014
Income taxes at 34% statutory rate	$	1,723		$	1,309		$	4,959		$	4,072
Effect of nontaxable income
Interest income on tax exempt municipal securities	(509		)	(501		)	(1,519		)	(1,498		)
Earnings on corporate owned life insurance policies	(64		)	(62		)	(194		)	(189		)
Effect of tax credits	(175		)	(187		)	(542		)	(575		)
Other	(18		)	(158		)	(70		)	(235		)
Total effect of nontaxable income	(766		)	(908		)	(2,325		)	(2,497		)
Effect of nondeductible expenses	45			43			116			121
Federal income tax expense	$	1,002		$	444		$	2,750		$	1,696

Note 10 – Fair Value

Following is a description of the valuation methodologies, key inputs, and an indication of the level of the fair value hierarchy in which the assets or liabilities are classified.

Cash and cash equivalents: The carrying amounts of cash and demand deposits due from banks and interest bearing balances due from banks approximate fair values. As such, we classify cash and cash equivalents as Level 1.

AFS securities: AFS securities are recorded at fair value on a recurring basis. Level 1 fair value measurement is based upon quoted prices for identical instruments. Level 2 fair value measurement is based upon quoted prices for similar instruments. If quoted prices are not available, fair values are measured using independent pricing models or other model based valuation techniques such as the present value of future cash flows, adjusted for the security’s credit rating, prepayment assumptions and other factors such as credit loss and liquidity assumptions. The values for Level 1 and Level 2 investment securities are generally obtained from an independent third party. On a quarterly basis, we compare the values provided to alternative pricing sources.

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Mortgage loans AFS: Mortgage loans AFS are carried at the lower of cost or fair value. The fair value of Mortgage loans AFS are based on the price secondary markets are currently offering for portfolios with similar characteristics. As such, we classify Mortgage loans AFS subject to nonrecurring fair value adjustments as Level 2.

Loans: For variable rate loans with no significant change in credit risk, fair values are based on carrying values. Fair values for fixed rate loans are estimated using discounted cash flow analyses, using interest rates currently being offered for loans with similar terms to borrowers of similar credit quality. The resulting amounts are adjusted to estimate the effect of changes in the credit quality of borrowers since the loans were originated. As such, we classify loans as Level 3 assets.

We do not record loans at fair value on a recurring basis. However, from time-to-time, loans are classified as impaired and a specific allowance for loan loss may be established. Loans for which it is probable that payment of interest and principal will be significantly different than the contractual terms of the original loan agreement are considered impaired. Once a loan is identified as impaired, we measure the estimated impairment. The fair value of impaired loans is estimated using one of several methods, including the present value of expected future cash flows discounted at the loan’s effective interest rate, the loan’s obtainable market price, or the fair value of the collateral, less cost to sell, if the loan is collateral dependent. Those impaired loans not requiring an allowance represent loans for which the fair value of the expected repayments or collateral exceed the recorded investments in such loans.

We review the net realizable values of the underlying collateral for collateral dependent impaired loans on at least a quarterly basis for all loan types. To determine the collateral value, we utilize independent appraisals, broker price opinions, or internal evaluations. We review these valuations to determine whether an additional discount should be applied given the age of market information that may have been considered as well as other factors such as costs to sell an asset if it is determined that the collateral will be liquidated in connection with the ultimate settlement of the loan. We use these valuations to determine if any specific reserves or charge-offs are necessary. We may obtain new valuations in certain circumstances, including when there has been significant deterioration in the condition of the collateral, if the foreclosure process has begun, or if the existing valuation is deemed to be outdated.

The following tables list the quantitative fair value information about impaired loans as of:



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



	December 31, 2014
Valuation Technique	Fair Value	Unobservable Input	Range
		Discount applied to collateral appraisal:
		Real Estate	20% - 25%
		Equipment	30% - 40%
Discounted appraisal value	$8,720	Cash crop inventory	40%
		Other inventory	75%
		Accounts receivable	50%
		Liquor license	75%

Discount factors with ranges are based on the age of the independent appraisal, broker price opinion, or internal evaluation.

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

Equity securities without readily determinable fair values: Included in equity securities without readily determinable fair values are FHLB stock and FRB stock as well as our ownership interests in Corporate Settlement Solutions, LLC and Valley Financial

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Corporation. The investment in Corporate Settlement Solutions, LLC, a title insurance company, was made in the first quarter 2008 and we account for our investment under the equity method of accounting. Valley Financial Corporation is the parent company of 1st State Bank in Saginaw, Michigan, which is a community bank that opened in 2005. We made investments in Valley Financial Corporation in 2004 and in 2007 and we account for our investment under the cost method of accounting.

The lack of an active market, or other independent sources to validate fair value estimates coupled with the impact of future capital calls and transfer restrictions, is an inherent limitation in the valuation process. As the fair values of these investments are not readily determinable, they are not disclosed under a specific fair value hierarchy; however, they are reviewed quarterly for impairment. If we were to record an impairment adjustment related to these securities, it would be classified as a nonrecurring Level 3 fair value adjustment. During 2015 and 2014, there were no impairments recorded on equity securities without readily determinable fair values.

Foreclosed assets: Upon transfer from the loan portfolio, foreclosed assets (which are included in other assets) are adjusted to and subsequently carried at the lower of carrying value or fair value less costs to sell. Net realizable value is based upon independent market prices, appraised values of the collateral, or management’s estimation of the value of the collateral. Due to the inherent level of estimation in the valuation process, we classify foreclosed assets as nonrecurring Level 3.

The table below lists the quantitative fair value information related to foreclosed assets as of:



	September 30, 2015
Valuation Technique	Fair Value		Unobservable Input	Range
			Discount applied to collateral appraisal:
Discounted appraisal value	$	601	Real Estate	20% - 30%



	December 31, 2014
Valuation Technique	Fair Value		Unobservable Input	Range
			Discount applied to collateral appraisal:
Discounted appraisal value	$	885	Real Estate	20% - 25%

Discount factors with ranges are based on the age of the independent appraisal, broker price opinion, or internal evaluations.

Goodwill and other intangible assets: Acquisition intangibles and goodwill are evaluated for potential impairment on at least an annual basis. Acquisition intangibles and goodwill are typically qualitatively evaluated to determine if it is more likely than not that the carrying balance is impaired. If it is determined that the carrying balance of acquisition intangibles or goodwill is more likely than not to be impaired, we perform a cash flow valuation to determine the extent of the potential impairment. If the testing resulted in impairment, we would classify goodwill and other acquisition intangibles subjected to nonrecurring fair value adjustments as Level 3. During 2015 and 2014, there were no impairments recorded on goodwill and other acquisition intangibles.

OMSR: OMSR (which are included in other assets) are subject to impairment testing. To test for impairment, we utilize a discounted cash flow analysis using interest rates and prepayment speed assumptions currently quoted for comparable instruments and discount rates. If the valuation model reflects a value less than the carrying value, OMSR are adjusted to fair value through a valuation allowance as determined by the model. As such, we classify OMSR subject to nonrecurring fair value adjustments as Level 2.

Deposits: The fair value of demand, savings, and money market deposits are equal to their carrying amounts and are classified as Level 1. Fair values for variable rate certificates of deposit approximate their carrying value. Fair values for fixed rate certificates of deposit are estimated using a discounted cash flow calculation that applies interest rates currently being offered on certificates to a schedule of aggregated expected monthly maturities on time deposits. As such, fixed rate certificates of deposit are classified as Level 2.

Borrowed funds: The carrying amounts of federal funds purchased, borrowings under overnight repurchase agreements, and other short-term borrowings maturing within ninety days approximate their fair values. The fair values of other borrowed funds are estimated using discounted cash flow analyses based on current incremental borrowing arrangements. As such, borrowed funds are classified as Level 2.

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

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Commitments to extend credit, standby letters of credit, and undisbursed loans: Our commitments to extend credit, standby letters of credit, and undisbursed funds have no carrying amount and are estimated to have no realizable fair value. Historically, a majority of the unused commitments to extend credit have not been drawn upon and, generally, we do not receive fees in connection with these commitments other than standby letter of credit fees, which are not significant.

The preceding methods described may produce a fair value calculation that may not be indicative of net realizable value or reflective of future fair values. Although we believe our valuation methods are appropriate and consistent with other market participants, the use of different methodologies or assumptions to determine the fair value of certain financial instruments could result in a different fair value measurement.

Estimated Fair Values of Financial Instruments Not Recorded at Fair Value in their Entirety on a Recurring Basis

Disclosure of the estimated fair values of financial instruments, which differ from carrying values, often requires the use of estimates. In cases where quoted market values in an active market are not available, we use present value techniques and other valuation methods to estimate the fair values of our financial instruments. These valuation methods require considerable judgment and the resulting estimates of fair value can be significantly affected by the assumptions made and methods used.

The carrying amount and estimated fair value of financial instruments not recorded at fair value in their entirety on a recurring basis were as follows as of:



	September 30, 2015
	Carrying Value		Estimated Fair Value		(Level 1)		(Level 2)		(Level 3)
ASSETS
Cash and cash equivalents	$	18,322	$	18,322	$	18,322	$	—	$	—
Mortgage loans AFS	831		844		—		844		—
Gross loans	833,347		825,436		—		—		825,436
Less allowance for loan and lease losses	8,200		8,200		—		—		8,200
Net loans	825,147		817,236		—		—		817,236
Accrued interest receivable	6,992		6,992		6,992		—		—
Equity securities without readily determinable fair values (1)	22,341		N/A		—		—		—
OMSR	2,458		2,458		—		2,458		—
LIABILITIES
Deposits without stated maturities	695,848		695,848		695,848		—		—
Deposits with stated maturities	432,155		431,177		—		431,177		—
Borrowed funds	297,610		301,410		—		301,410		—
Accrued interest payable	557		557		557		—		—

Table of Contents



	December 31, 2014
	Carrying Value		Estimated Fair Value		(Level 1)		(Level 2)		(Level 3)
ASSETS
Cash and cash equivalents	$	19,906	$	19,906	$	19,906	$	—	$	—
Mortgage loans AFS	901		911		—		911		—
Gross loans	833,582		827,449		—		—		827,449
Less allowance for loan and lease losses	10,100		10,100		—		—		10,100
Net loans	823,482		817,349		—		—		817,349
Accrued interest receivable	5,851		5,851		5,851		—		—
Equity securities without readily determinable fair values (1)	20,076		N/A		—		—		—
OMSR	2,519		2,554		—		2,554		—
LIABILITIES
Deposits without stated maturities	634,222		634,222		634,222		—		—
Deposits with stated maturities	440,262		440,964		—		440,964		—
Borrowed funds	289,709		293,401		—		293,401		—
Accrued interest payable	558		558		558		—		—


⁽¹⁾	Due to the characteristics of equity securities without readily determinable fair values, they are not disclosed under a specific fair value hierarchy. If we were to record an impairment adjustment related to these securities, such amount would be classified as a nonrecurring Level 3 fair value adjustment.

Financial Instruments Recorded at Fair Value

The table below presents the recorded amount of assets and liabilities measured at fair value on:



	September 30, 2015											December 31, 2014
	Total		(Level 1)			(Level 2)			(Level 3)			Total		(Level 1)			(Level 2)			(Level 3)
Recurring items
AFS securities
Government-sponsored enterprises	$	24,368	$	—		$	24,368		$	—		$	24,136	$	—		$	24,136		$	—
States and political subdivisions	232,374		—			232,374			—			215,345		—			215,345			—
Auction rate money market preferred	2,707		—			2,707			—			2,619		—			2,619			—
Preferred stocks	3,192		3,192			—			—			6,140		6,140			—			—
Mortgage-backed securities	234,258		—			234,258			—			166,926		—			166,926			—
Collateralized mortgage obligations	131,713		—			131,713			—			152,368		—			152,368			—
Total AFS securities	628,612		3,192			625,420			—			567,534		6,140			561,394			—
Nonrecurring items
Impaired loans (net of the ALLL)	7,629		—			—			7,629			8,720		—			—			8,720
Foreclosed assets	601		—			—			601			885		—			—			885
Total	$	636,842	$	3,192		$	625,420		$	8,230		$	577,139	$	6,140		$	561,394		$	9,605
Percent of assets and liabilities measured at fair value			0.50		%	98.21		%	1.29		%			1.06		%	97.27		%	1.67		%

Table of Contents

The following table provides a summary of the changes in fair value of assets and liabilities recorded at fair value, for which gains or losses were recognized through earnings on a nonrecurring basis, in the:



	Three Months Ended September 30					Nine Months Ended September 30
	2015		2014			2015			2014
Nonrecurring items
Foreclosed assets	$	—	$	(20	)	$	(22	)	$	(83	)

We had no assets or liabilities recorded at fair value with changes in fair value recognized through earnings, on a recurring basis, as of September 30, 2015.

Note 11 – Accumulated Other Comprehensive Income (Loss)

The following table summarizes the changes in AOCI by component for the:



	Three Months Ended September 30
	2015									2014
	Unrealized Holding Gains (Losses) on AFS Securities			Defined Benefit Pension Plan			Total			Unrealized Holding Gains (Losses) on AFS Securities			Defined Benefit Pension Plan			Total
Balance, July 1	$	1,937		$	(3,808	)	$	(1,871	)	$	2,602		$	(2,134	)	$	468
OCI before reclassifications	5,301			—			5,301			(1,326		)	—			(1,326		)
Amounts reclassified from AOCI	—			—			—			(97		)	—			(97		)
Subtotal	5,301			—			5,301			(1,423		)	—			(1,423		)
Tax effect	(1,818		)	—			(1,818		)	469			—			469
OCI, net of tax	3,483			—			3,483			(954		)	—			(954		)
Balance, September 30	$	5,420		$	(3,808	)	$	1,612		$	1,648		$	(2,134	)	$	(486	)



	Nine Months Ended September 30
	2015									2014
	Unrealized Holding Gains (Losses) on AFS Securities			Defined Benefit Pension Plan			Total			Unrealized Holding Gains (Losses) on AFS Securities			Defined Benefit Pension Plan			Total
Balance, January 1	$	3,302		$	(3,808	)	$	(506	)	$	(4,207	)	$	(2,134	)	$	(6,341	)
OCI before reclassifications	3,137			—			3,137			8,642			—			8,642
Amounts reclassified from AOCI	—			—			—			(97		)	—			(97		)
Subtotal	3,137			—			3,137			8,545			—			8,545
Tax effect	(1,019		)	—			(1,019		)	(2,690		)	—			(2,690		)
OCI, net of tax	2,118			—			2,118			5,855			—			5,855
Balance, September 30	$	5,420		$	(3,808	)	$	1,612		$	1,648		$	(2,134	)	$	(486	)

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

Table of Contents

A summary of the components of unrealized holding gains on AFS securities included in OCI follows for the:



	Three Months Ended September 30
	2015								2014
	Auction Rate Money Market Preferred and Preferred Stocks		All Other AFS Securities			Total			Auction Rate Money Market Preferred and Preferred Stocks		All Other AFS Securities			Total
Unrealized gains (losses) arising during the period	$	140	$	5,161		$	5,301		$	253	$	(1,579	)	$	(1,326	)
Reclassification adjustment for net realized (gains) losses included in net income	—		—			—			—		(97		)	(97		)
Net unrealized gains (losses)	140		5,161			5,301			253		(1,676		)	(1,423		)
Tax effect	—		(1,818		)	(1,818		)	—		469			469
Unrealized gains (losses), net of tax	$	140	$	3,343		$	3,483		$	253	$	(1,207	)	$	(954	)



	Nine Months Ended September 30
	2015								2014
	Auction Rate Money Market Preferred and Preferred Stocks		All Other AFS Securities			Total			Auction Rate Money Market Preferred and Preferred Stocks		All Other AFS Securities			Total
Unrealized gains (losses) arising during the period	$	140	$	2,997		$	3,137		$	253	$	8,389		$	8,642
Reclassification adjustment for net realized (gains) losses included in net income	—		—			—			—		(97		)	(97		)
Net unrealized gains (losses)	140		2,997			3,137			253		8,292			8,545
Tax effect	—		(1,019		)	(1,019		)	—		(2,690		)	(2,690		)
Unrealized gains (losses), net of tax	$	140	$	1,978		$	2,118		$	253	$	5,602		$	5,855

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Note 12 – Parent Company Only Financial Information

Interim Condensed Balance Sheets



	September 30 2015		December 31 2014
ASSETS
Cash on deposit at the Bank	$	2,522	$	1,035
AFS securities	259		3,294
Investments in subsidiaries	134,670		124,827
Premises and equipment	2,015		1,982
Other assets	53,188		53,228
TOTAL ASSETS	$	192,654	$	184,366
LIABILITIES AND SHAREHOLDERS’ EQUITY
Other liabilities	$	9,656	$	9,772
Shareholders' equity	182,998		174,594
TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY	$	192,654	$	184,366

Interim Condensed Statements of Income



	Three Months Ended September 30				Nine Months Ended September 30
	2015		2014		2015		2014
Income
Dividends from subsidiaries	$	1,700	$	1,750	$	5,000	$	4,750
Interest income	4		36		75		114
Management fee and other	1,859		717		4,913		1,945
Total income	3,563		2,503		9,988		6,809
Expenses
Compensation and benefits	1,228		866		3,658		2,470
Occupancy and equipment	415		293		1,226		514
Audit and related fees	101		109		316		278
Other	501		360		1,533		926
Total expenses	2,245		1,628		6,733		4,188
Income before income tax benefit and equity in undistributed earnings of subsidiaries	1,318		875		3,255		2,621
Federal income tax benefit	123		298		588		730
Income before equity in undistributed earnings of subsidiaries	1,441		1,173		3,843		3,351
Undistributed earnings of subsidiaries	2,622		2,232		7,991		6,928
Net income	$	4,063	$	3,405	$	11,834	$	10,279

Table of Contents

Interim Condensed Statements of Cash Flows



	Nine Months Ended September 30
	2015			2014
Operating activities
Net income	$	11,834		$	10,279
Adjustments to reconcile net income to cash provided by operations
Undistributed earnings of subsidiaries	(7,991		)	(6,928		)
Undistributed earnings of equity securities without readily determinable fair values	(364		)	231
Share-based payment awards under equity compensation plan	425			382
Depreciation	113			109
Net amortization of AFS securities	—			1
Changes in operating assets and liabilities which provided (used) cash
Other assets	406			89
Accrued interest and other liabilities	94			1,242
Net cash provided by (used in) operating activities	4,517			5,405
Investing activities
Maturities, calls, principal payments, and sales of AFS securities	3,000			250
Purchases of premises and equipment	(146		)	(23		)
Net (advances to) repayments from subsidiaries	300			641
Net cash provided by (used in) investing activities	3,154			868
Financing activities
Net increase (decrease) in borrowed funds	(211		)	600
Cash dividends paid on common stock	(5,416		)	(5,091		)
Proceeds from the issuance of common stock	3,310			2,845
Common stock repurchased	(3,588		)	(2,550		)
Common stock purchased for deferred compensation obligations	(279		)	(253		)
Net cash provided by (used in) financing activities	(6,184		)	(4,449		)
Increase (decrease) in cash and cash equivalents	1,487			1,824
Cash and cash equivalents at beginning of period	1,035			529
Cash and cash equivalents at end of period	$	2,522		$	2,353

Note 13 – Operating Segments

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

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Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations.

ISABELLA BANK CORPORATION FINANCIAL REVIEW

(Dollars in thousands except per share amounts)

This section reviews our financial condition and results of our operations for the unaudited three and nine month periods ended September 30, 2015 and 2014. This analysis should be read in conjunction with our 2014 Annual Report on Form 10-K and with the unaudited interim condensed consolidated financial statements and notes, beginning on page 4 of this report.

Executive Summary

During the three and nine month periods ended September 30, 2015, we reported net income of $4,063 and $11,834 and earnings per common share of $0.52 and $1.52, respectively. Our strong earnings have primarily been the result of increased interest income and continued improvements in credit quality. Net loan recoveries during the first nine months of 2015 were $99 versus net loans charged-off of $496 in the first nine months of 2014. In addition, we continue to see reductions in loans classified as less than satisfactory as well as those past due and in nonaccrual status which have reached record lows. These factors required a reduction in the level of the ALLL in both amount and as a percentage of gross loans which resulted in a $1,999 reversal of provision for loan losses recorded in the nine month period ended September 30, 2015.

During the nine month period ended September 30, 2015, total assets grew by 4.50% to $1,619,250, and assets under management increased to $2,300,642 which includes loans sold and serviced, and assets managed by our Investment and Trust Services Department of $681,392. Total loans declined by $235 from December 31, 2014 which has been driven by a $14,745 decline in residential real estate loans as demand continued to be soft. Offsetting this decline is commercial and agricultural loan growth of $12,680 during the first nine months of 2015.

We increased our AFS securities portfolio by $61,078 during the first nine months of 2015 to continue to provide growth in our balance sheet to increase interest income. While our net yield on interest earning assets of 3.37% remains historically low, it has stabilized. Net interest income will increase only through continued growth in loans, investments, and other income earning assets. We are committed to increasing earnings and dedicated to providing long term sustainable growth to enable us to increase shareholder value.

While we have been able to grow our commercial and agricultural loan portfolios, increasing our residential real estate and consumer loan portfolios has been more challenging. To generate growth in these portfolios, we are implementing new products, enhancing our marketing efforts, streamlining delivery channels for direct and indirect loans, and expanding our service area. These initiatives are designed to attract new customers while expanding our relationships with current customers to improve earnings.

Recent Acquisitions

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

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

Table of Contents

Results of Operations

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



	September 30 2015			June 30 2015			March 31 2015			December 31 2014			September 30 2014
INCOME STATEMENT DATA
Interest income	$	13,838		$	13,793		$	13,412		$	13,713		$	13,483
Interest expense	2,580			2,518			2,488			2,504			2,498
Net interest income	11,258			11,275			10,924			11,209			10,985
Provision for loan losses	(738		)	(535		)	(726		)	(64		)	(162		)
Noninterest income	3,101			2,629			2,128			2,426			2,216
Noninterest expenses	10,032			9,364			9,334			9,606			9,514
Federal income tax expense	1,002			977			771			648			444
Net Income	$	4,063		$	4,098		$	3,673		$	3,445		$	3,405
PER SHARE
Basic earnings	$	0.52		$	0.53		$	0.47		$	0.44		$	0.44
Diluted earnings	$	0.51		$	0.52		$	0.46		$	0.44		$	0.43
Dividends	$	0.24		$	0.23		$	0.23		$	0.23		$	0.22
Tangible book value*	$	17.06		$	17.17		$	16.84		$	16.59		$	16.33
Quoted market value
High	$	23.85		$	23.80		$	23.50		$	23.99		$	24.00
Low	$	22.75		$	22.70		$	22.00		$	22.10		$	21.73
Close*	$	23.69		$	23.75		$	22.90		$	22.50		$	23.60
Common shares outstanding*	7,765,333			7,797,188			7,781,820			7,776,274			7,740,730
PERFORMANCE RATIOS
Return on average total assets	1.01		%	1.04		%	0.95		%	0.90		%	0.89		%
Return on average shareholders' equity	9.03		%	9.11		%	8.27		%	8.06		%	7.91		%
Return on average tangible shareholders' equity	12.18		%	12.35		%	11.30		%	10.80		%	10.88		%
Net interest margin yield (FTE)	3.33		%	3.41		%	3.37		%	3.45		%	3.39		%
BALANCE SHEET DATA*
Gross loans	$	833,347		$	828,602		$	815,468		$	833,582		$	822,299
AFS securities	$	628,612		$	595,318		$	605,208		$	567,534		$	575,080
Total assets	$	1,619,250		$	1,586,975		$	1,571,575		$	1,549,543		$	1,553,974
Deposits	$	1,128,003		$	1,090,469		$	1,098,655		$	1,074,484		$	1,081,890
Borrowed funds	$	297,610		$	307,599		$	283,321		$	289,709		$	290,438
Shareholders' equity	$	182,998		$	178,025		$	179,653		$	174,594		$	172,076
Gross loans to deposits	73.88		%	75.99		%	74.22		%	77.58		%	76.01		%
ASSETS UNDER MANAGEMENT*
Loans sold with servicing retained	$	289,268		$	289,089		$	288,448		$	288,639		$	290,697
Assets managed by our Investment and Trust Services Department	$	392,124		$	400,827		$	396,802		$	383,878		$	374,878
Total assets under management	$	2,300,642		$	2,276,891		$	2,256,825		$	2,222,060		$	2,219,549
ASSET QUALITY*
Nonperforming loans to gross loans	0.10		%	0.19		%	0.44		%	0.50		%	0.57		%
Nonperforming assets to total assets	0.09		%	0.15		%	0.27		%	0.33		%	0.37		%
ALLL to gross loans	0.98		%	1.09		%	1.18		%	1.21		%	1.26		%
CAPITAL RATIOS*
Shareholders' equity to assets	11.30		%	11.22		%	11.43		%	11.27		%	11.07		%
Tier 1 leverage	8.54		%	8.77		%	8.74		%	8.59		%	8.47		%
Common equity tier 1 capital	13.36		%	13.71		%	13.70		%	N/A			N/A
Tier 1 risk-based capital	13.36		%	13.71		%	13.70		%	14.08		%	13.86		%
Total risk-based capital	14.19		%	14.63		%	14.70		%	15.18		%	15.11		%

* At end of period

Table of Contents

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



	September 30 2015			September 30 2014			September 30 2013			September 30 2012			September 30 2011
INCOME STATEMENT DATA
Interest income	$	41,043		$	40,238		$	40,473		$	42,556		$	43,439
Interest expense	7,586			7,466			8,338			10,372			12,224
Net interest income	33,457			32,772			32,135			32,184			31,215
Provision for loan losses	(1,999		)	(604		)	866			1,100			2,383
Noninterest income	7,858			6,899			8,045			8,844			5,785
Noninterest expenses	28,730			28,300			27,835			27,889			25,879
Federal income tax expense	2,750			1,696			1,893			2,344			1,239
Net Income	$	11,834		$	10,279		$	9,586		$	9,695		$	7,499
PER SHARE
Basic earnings	$	1.52		$	1.33		$	1.25		$	1.28		$	0.99
Diluted earnings	$	1.49		$	1.30		$	1.22		$	1.24		$	0.97
Dividends	$	0.70		$	0.66		$	0.63		$	0.60		$	0.57
Tangible book value*	$	17.06		$	16.33		$	15.43		$	14.65		$	13.70
Quoted market value
High	$	23.85		$	24.00		$	26.00		$	24.98		$	19.25
Low	$	22.00		$	21.73		$	21.55		$	22.30		$	17.10
Close*	$	23.69		$	23.60		$	24.85		$	22.50		$	18.75
Common shares outstanding*	7,765,333			7,740,730			7,709,781			7,611,350			7,578,257
PERFORMANCE RATIOS
Return on average total assets	1.00		%	0.90		%	0.89		%	0.94		%	0.79		%
Return on average shareholders' equity	8.80		%	8.13		%	7.84		%	8.37		%	6.84		%
Return on average tangible shareholders' equity	12.06		%	10.95		%	11.02		%	11.96		%	10.17		%
Net interest margin yield (FTE)	3.37		%	3.41		%	3.50		%	3.72		%	3.90		%
BALANCE SHEET DATA*
Gross loans	$	833,347		$	822,299		$	807,849		$	766,751		$	750,163
AFS securities	$	628,612		$	575,080		$	501,057		$	467,414		$	415,879
Total assets	$	1,619,250		$	1,553,974		$	1,459,341		$	1,389,138		$	1,324,093
Deposits	$	1,128,003		$	1,081,890		$	1,023,931		$	989,491		$	942,441
Borrowed funds	$	297,610		$	290,438		$	266,001		$	226,580		$	216,888
Shareholders' equity	$	182,998		$	172,076		$	161,305		$	164,147		$	155,579
Gross loans to deposits	73.88		%	76.01		%	78.90		%	77.49		%	79.60		%
ASSETS UNDER MANAGEMENT*
Loans sold with servicing retained	$	289,268		$	290,697		$	294,999		$	304,523		$	303,063
Assets managed by our Investment and Trust Services Department	$	392,124		$	374,878		$	351,505		$	321,661		$	284,286
Total assets under management	$	2,300,642		$	2,219,549		$	2,105,845		$	2,015,322		$	1,911,442
ASSET QUALITY*
Nonperforming loans to gross loans	0.10		%	0.57		%	0.53		%	0.98		%	0.81		%
Nonperforming assets to total assets	0.09		%	0.37		%	0.37		%	0.68		%	0.61		%
ALLL to gross loans	0.98		%	1.26		%	1.44		%	1.57		%	1.65		%
CAPITAL RATIOS*
Shareholders' equity to assets	11.30		%	11.07		%	11.05		%	11.82		%	11.75		%
Tier 1 leverage	8.54		%	8.47		%	8.45		%	8.27		%	8.10		%
Common equity tier 1 capital	13.36		%	N/A			N/A			N/A			N/A
Tier 1 risk-based capital	13.36		%	13.86		%	13.75		%	13.35		%	12.43		%
Total risk-based capital	14.19		%	15.11		%	15.00		%	14.60		%	13.68		%

* At end of period

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Average Balances, Interest Rate, and Net Interest Income

The following schedules present the daily average amount outstanding for each major category of interest earning assets, nonearning assets, interest bearing liabilities, and noninterest bearing liabilities. These schedules also present an analysis of interest income and interest expense for the periods indicated. All interest income is reported on a FTE basis using a 34% federal income tax rate. Loans in nonaccrual status, for the purpose of the following computations, are included in the average loan balances. FRB and FHLB restricted equity holdings are included in accrued income and other assets.

The following table displays the results for the:



	Three Months Ended
	September 30, 2015							June 30, 2015							September 30, 2014
	Average Balance			Tax Equivalent Interest		Average Yield / Rate		Average Balance			Tax Equivalent Interest		Average Yield / Rate		Average Balance			Tax Equivalent Interest		Average Yield / Rate
INTEREST EARNING ASSETS
Loans	$	828,240		$	9,855	4.76	%	$	819,507		$	9,909	4.84	%	$	817,364		$	9,863	4.83	%
Taxable investment securities	402,993			2,310		2.29	%	393,313			2,238		2.28	%	358,547			2,016		2.25	%
Nontaxable investment securities	207,443			2,459		4.74	%	201,841			2,496		4.95	%	196,522			2,359		4.80	%
Other	27,689			166		2.40	%	25,195			139		2.21	%	28,431			119		1.67	%
Total earning assets	1,466,365			14,790		4.03	%	1,439,856			14,782		4.11	%	1,400,864			14,357		4.10	%
NONEARNING ASSETS
Allowance for loan losses	(9,007		)					(9,575		)					(10,705		)
Cash and demand deposits due from banks	18,442							17,406							20,360
Premises and equipment	26,904							26,231							25,872
Accrued income and other assets	102,047							100,937							98,853
Total assets	$	1,604,751						$	1,574,855						$	1,535,244
INTEREST BEARING LIABILITIES
Interest bearing demand deposits	$	198,351		40		0.08	%	$	190,957		37		0.08	%	$	193,659		40		0.08	%
Savings deposits	306,816			123		0.16	%	277,049			96		0.14	%	265,814			94		0.14	%
Time deposits	434,103			1,317		1.21	%	436,244			1,326		1.22	%	447,046			1,428		1.28	%
Borrowed funds	292,858			1,100		1.50	%	299,987			1,059		1.41	%	274,358			936		1.36	%
Total interest bearing liabilities	1,232,128			2,580		0.84	%	1,204,237			2,518		0.84	%	1,180,877			2,498		0.85	%
NONINTEREST BEARING LIABILITIES
Demand deposits	181,289							179,733							171,085
Other	11,357							10,873							11,114
Shareholders’ equity	179,977							180,012							172,168
Total liabilities and shareholders’ equity	$	1,604,751						$	1,574,855						$	1,535,244
Net interest income (FTE)				$	12,210						$	12,264						$	11,859
Net yield on interest earning assets (FTE)						3.33	%						3.41	%						3.39	%

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	Nine Months Ended
	September 30, 2015							September 30, 2014
	Average Balance			Tax Equivalent Interest		Average Yield / Rate		Average Balance			Tax Equivalent Interest		Average Yield / Rate
INTEREST EARNING ASSETS
Loans	$	823,269		$	29,448	4.77	%	$	810,572		$	29,413	4.84	%
Taxable investment securities	388,964			6,655		2.28	%	355,146			6,007		2.26	%
Nontaxable investment securities	202,294			7,423		4.89	%	193,276			7,056		4.87	%
Other	25,769			444		2.30	%	25,717			393		2.04	%
Total earning assets	1,440,296			43,970		4.07	%	1,384,711			42,869		4.13	%
NONEARNING ASSETS
Allowance for loan losses	(9,630		)					(11,182		)
Cash and demand deposits due from banks	17,824							18,484
Premises and equipment	26,481							25,950
Accrued income and other assets	101,248							96,915
Total assets	$	1,576,219						$	1,514,878
INTEREST BEARING LIABILITIES
Interest bearing demand deposits	$	194,648		116		0.08	%	$	194,744		120		0.08	%
Savings deposits	284,886			311		0.15	%	258,807			279		0.14	%
Time deposits	435,853			3,978		1.22	%	451,329			4,368		1.29	%
Borrowed funds	292,127			3,181		1.45	%	269,325			2,699		1.34	%
Total interest bearing liabilities	1,207,514			7,586		0.84	%	1,174,205			7,466		0.85	%
NONINTEREST BEARING LIABILITIES
Demand deposits	178,353							161,688
Other	11,106							10,380
Shareholders’ equity	179,246							168,605
Total liabilities and shareholders’ equity	$	1,576,219						$	1,514,878
Net interest income (FTE)				$	36,384						$	35,403
Net yield on interest earning assets (FTE)						3.37	%						3.41	%

Net Interest Income

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



	Three Months Ended						Nine Months Ended
	September 30 2015		June 30 2015		September 30 2014		September 30 2015		September 30 2014
Loan fees	$	613	$	772	$	488	$	1,892	$	1,530

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Volume and Rate Variance Analysis

The following table sets forth the effect of volume and rate changes on interest income and expense for the periods indicated. For the purpose of this table, changes in interest due to volume and rate were determined as follows:

Volume—change in volume multiplied by the previous period's rate.

Rate—change in the FTE rate multiplied by the previous period's volume.

The change in interest due to both volume and rate has been allocated to volume and rate changes in proportion to the relationship of the absolute dollar amounts of the change in each.



	Three Months Ended September 30, 2015 Compared to June 30, 2015 Increase (Decrease) Due to									Three Months Ended September 30, 2015 Compared to September 30, 2014 Increase (Decrease) Due to									Nine Months Ended September 30, 2015 Compared to September 30, 2014 Increase (Decrease) Due to
	Volume			Rate			Net			Volume			Rate			Net			Volume			Rate			Net
Changes in interest income
Loans	$	105		$	(159	)	$	(54	)	$	130		$	(138	)	$	(8	)	$	457		$	(422	)	$	35
Taxable investment securities	55			17			72			254			40			294			578			70			648
Nontaxable investment securities	68			(105		)	(37		)	130			(30		)	100			331			36			367
Other	14			13			27			(3		)	50			47			1			50			51
Total changes in interest income	242			(234		)	8			511			(78		)	433			1,367			(266		)	1,101
Changes in interest expense
Interest bearing demand deposits	1			2			3			1			(1		)	—			—			(4		)	(4		)
Savings deposits	11			16			27			16			13			29			28			4			32
Time deposits	(6		)	(3		)	(9		)	(41		)	(70		)	(111		)	(147		)	(243		)	(390		)
Borrowed funds	(26		)	67			41			66			98			164			238			244			482
Total changes in interest expense	(20		)	82			62			42			40			82			119			1			120
Net change in interest margin (FTE)	$	262		$	(316	)	$	(54	)	$	469		$	(118	)	$	351		$	1,248		$	(267	)	$	981

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



	Average Yield / Rate for the Three Month Periods Ended:
	September 30 2015		June 30 2015		March 31 2015		December 31 2014		September 30 2014
Total earning assets	4.03	%	4.11	%	4.07	%	4.17	%	4.10	%
Total interest bearing liabilities	0.84	%	0.84	%	0.84	%	0.85	%	0.85	%
Net yield on interest earning assets (FTE)	3.33	%	3.41	%	3.37	%	3.46	%	3.39	%

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	Quarter to Date Net Interest Income (FTE)
	September 30 2015		June 30 2015		March 31 2015		December 31 2014		September 30 2014
Total interest income (FTE)	$	14,790	$	14,782	$	14,401	$	14,702	$	14,357
Total interest expense	2,580		2,518		2,488		2,504		2,498
Net interest income (FTE)	$	12,210	$	12,264	$	11,913	$	12,198	$	11,859

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



	September 30 2015			June 30 2015			March 31 2015			December 31 2014			September 30 2014
Net interest income (FTE)	$	12,210		$	12,264		$	11,913		$	12,198		$	11,859
Less loan fees	613			772			507			669			488
Net interest income excluding loan fees (FTE)	$	11,597		$	11,492		$	11,406		$	11,529		$	11,371
Net yield on interest earning assets excluding loan fees (FTE)	3.16		%	3.19		%	3.23		%	3.27		%	3.25		%

Allowance for Loan and Lease Losses

The viability of any financial institution is ultimately determined by its management of credit risk. Loans represent our single largest concentration of risk. The ALLL is our estimation of incurred losses within the existing loan portfolio. We allocate the ALLL throughout the loan portfolio based on our assessment of the underlying risks associated with each loan segment. Our assessments include allocations based on specific impairment valuation allowances, historical charge-offs, internally assigned credit risk ratings, and past due and nonaccrual balances. A portion of the ALLL is not allocated to any one loan segment, but is instead a reflection of other qualitative risks that reflects the margin of imprecision inherent in the underlying assumptions used in the methodologies for estimating specific and general losses in the portfolio.

The following table summarizes our charge-offs, recoveries, provisions for loan losses, and ALLL balances as of, and for the three and nine month periods ended September 30:



	Three Months Ended September 30						Nine Months Ended September 30
	2015			2014			2015			2014
ALLL at beginning of period	$	9,000		$	10,700		$	10,100		$	11,500
Charge-offs
Commercial and agricultural	61			163			89			465
Residential real estate	70			180			325			557
Consumer	79			73			252			255
Total charge-offs	210			416			666			1,277
Recoveries
Commercial and agricultural	68			171			459			477
Residential real estate	33			68			152			190
Consumer	47			39			154			114
Total recoveries	148			278			765			781
Net loan charge-offs	62			138			(99		)	496
Provision for loan losses	(738		)	(162		)	(1,999		)	(604		)
ALLL at end of period	$	8,200		$	10,400		$	8,200		$	10,400
Net loan charge-offs to average loans outstanding	0.01		%	0.02		%	(0.01		)%	0.06		%

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



	September 30 2015			June 30 2015			March 31 2015			December 31 2014			September 30 2014
Total charge-offs	$	210		$	296		$	160		$	351		$	416
Total recoveries	148			231			386			115			278
Net loan charge-offs	62			65			(226		)	236			138
Net loan charge-offs to average loans outstanding	0.01		%	0.01		%	(0.03		)%	0.03		%	0.02		%
Provision for loan losses	$	(738	)	$	(535	)	$	(726	)	$	(64	)	$	(162	)
Provision for loan losses to average loans outstanding	(0.09		)%	(0.07		)%	(0.09		)%	(0.01		)%	(0.02		)%
ALLL	$	8,200		$	9,000		$	9,600		$	10,100		$	10,400
ALLL as a % of loans at end of period	0.98		%	1.09		%	1.18		%	1.21		%	1.26		%

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



	September 30 2015			June 30 2015			March 31 2015			December 31 2014			September 30 2014
ALLL
Individually evaluated for impairment	$	3,217		$	3,202		$	3,361		$	3,427		$	3,654
Collectively evaluated for impairment	4,983			5,798			6,239			6,673			6,746
Total	$	8,200		$	9,000		$	9,600		$	10,100		$	10,400
ALLL to gross loans
Individually evaluated for impairment	0.39		%	0.39		%	0.41		%	0.41		%	0.44		%
Collectively evaluated for impairment	0.59		%	0.70		%	0.77		%	0.80		%	0.82		%
Total	0.98		%	1.09		%	1.18		%	1.21		%	1.26		%

While more volatile, loans individually evaluated for impairment have been relatively flat in recent quarters. The decline in loans collectively impaired illustrates the downward trend we are experiencing in our overall level of ALLL to gross loans.

For further discussion of the allocation of the ALLL, see “Note 5 – Loans and ALLL” of our interim condensed consolidated financial statements.

Loans Past Due and Loans in Nonaccrual Status

Fluctuations in past due and nonaccrual status loans can have a significant impact on the ALLL. To determine the potential impact, and corresponding estimated losses, we analyze our historical loss trends on loans past due greater than 30 days and nonaccrual status loans. We monitor all loans that are past due and in nonaccrual status for indications of additional deterioration.



	Total Past Due and Nonaccrual
	September 30 2015			June 30 2015			March 31 2015			December 31 2014			September 30 2014
Commercial and agricultural	$	1,709		$	2,407		$	4,017		$	4,805		$	3,904
Residential real estate	2,030			2,995			2,965			4,181			4,011
Consumer	60			126			106			138			134
Total	$	3,799		$	5,528		$	7,088		$	9,124		$	8,049
Total past due and nonaccrual loans to gross loans	0.46		%	0.67		%	0.87		%	1.09		%	0.98		%

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

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Troubled Debt Restructurings

We have taken a proactive approach to avoid foreclosures on borrowers who are willing to work with us in modifying their loans, thus making them more affordable. While this approach has allowed certain borrowers to develop a payment structure that will allow them to continue making payments in lieu of foreclosure, it has contributed to a significant increase in the level of loans classified as TDRs. The modifications have been successful for us and our customers as very few of the modified loans have resulted in foreclosures. At the time of the TDR, the loan is reviewed to determine whether or not to classify the loan as accrual or nonaccrual status. The majority of new modifications result in terms that satisfy our criteria for continued interest accrual. TDRs that have been placed on nonaccrual status may be placed back on accrual status after six months of continued performance.

We restructure debt with borrowers who, due to temporary financial difficulties, are unable to service their debt under the original terms. We may extend the amortization period, reduce interest rates, forgive principal, forgive interest, or a combination of these modifications. Typically, the modifications are for a period of five years or less. There were no TDRs that were Government sponsored as of September 30, 2015 or December 31, 2014.

Losses associated with TDRs, if any, are included in the estimation of the ALLL in the quarter in which a loan is identified as a TDR, and we review the analysis of the ALLL estimation each reporting period to ensure its continued appropriateness.

The following tables provide a roll-forward of TDRs for the:



	Three Months Ended September 30, 2015
	Accruing Interest					Nonaccrual					Total
	Number of Loans		Balance			Number of Loans		Balance			Number of Loans		Balance
July 1, 2015	156		$	19,518		5		$	940		161		$	20,458
New modifications	5		2,543			2		170			7		2,713
Principal advances (payments)	—		(308		)	—		(552		)	—		(860		)
Loans paid-off	(4	)	(638		)	(1	)	(1		)	(5	)	(639		)
Partial charge-offs	—		—			—		(25		)	—		(25		)
Balances charged-off	—		—			—		—			—		—
Transfers to OREO	—		—			(1	)	(190		)	(1	)	(190		)
Transfers to accrual status	1		30			(1	)	(30		)	—		—
Transfers to nonaccrual status	(1	)	(21		)	1		21			—		—
September 30, 2015	157		$	21,124		5		$	333		162		$	21,457



	Nine Months Ended September 30, 2015
	Accruing Interest					Nonaccrual					Total
	Number of Loans		Balance			Number of Loans		Balance			Number of Loans		Balance
January 1, 2015	156		$	20,931		13		$	2,410		169		$	23,341
New modifications	21		4,149			4		491			25		4,640
Principal advances (payments)	—		(1,033		)	—		(977		)	—		(2,010		)
Loans paid-off	(19	)	(3,016		)	(7	)	(597		)	(26	)	(3,613		)
Partial charge-offs	—		—			—		(87		)	—		(87		)
Balances charged-off	(1	)	(39		)	—		—			(1	)	(39		)
Transfers to OREO	—		—			(5	)	(775		)	(5	)	(775		)
Transfers to accrual status	3		292			(3	)	(292		)	—		—
Transfers to nonaccrual status	(3	)	(160		)	3		160			—		—
September 30, 2015	157		$	21,124		5		$	333		162		$	21,457

Table of Contents



	Three Months Ended September 30, 2014
	Accruing Interest					Nonaccrual					Total
	Number of Loans		Balance			Number of Loans		Balance			Number of Loans		Balance
July 1, 2014	162		$	21,265		18		$	2,927		180		$	24,192
New modifications	7		266			—		—			7		266
Principal advances (payments)	—		(241		)	—		34			—		(207		)
Loans paid-off	(5	)	(101		)	(1	)	(2		)	(6	)	(103		)
Partial charge-offs	—		—			—		(75		)	—		(75		)
Balances charged-off	(2	)	(7		)	(1	)	(51		)	(3	)	(58		)
Transfers to OREO	—		—			—		—			—		—
Transfers to accrual status	1		109			(1	)	(109		)	—		—
Transfers to nonaccrual status	(1	)	(55		)	1		55			—		—
September 30, 2014	162		$	21,236		16		$	2,779		178		$	24,015



	Nine Months Ended September 30, 2014
	Accruing Interest					Nonaccrual					Total
	Number of Loans		Balance			Number of Loans		Balance			Number of Loans		Balance
January 1, 2014	165		$	24,423		15		$	1,442		180		$	25,865
New modifications	25		1,254			4		245			29		1,499
Principal advances (payments)	—		(1,323		)	—		(40		)	—		(1,363		)
Loans paid-off	(20	)	(1,371		)	(3	)	(90		)	(23	)	(1,461		)
Partial charge-offs	—		(70		)	—		(193		)	—		(263		)
Balances charged-off	(3	)	(13		)	(1	)	(51		)	(4	)	(64		)
Transfers to OREO	—		—			(4	)	(198		)	(4	)	(198		)
Transfers to accrual status	4		429			(4	)	(429		)	—		—
Transfers to nonaccrual status	(9	)	(2,093		)	9		2,093			—		—
September 30, 2014	162		$	21,236		16		$	2,779		178		$	24,015

The following table summarizes our TDRs as of:



	September 30, 2015						December 31, 2014
	Accruing Interest		Nonaccrual		Total		Accruing Interest		Nonaccrual		Total		Total Change
Current	$	20,352	$	170	$	20,522	$	20,012	$	272	$	20,284	$	238
Past due 30-59 days	727		—		727		804		592		1,396		(669		)
Past due 60-89 days	45		—		45		115		3		118		(73		)
Past due 90 days or more	—		163		163		—		1,543		1,543		(1,380		)
Total	$	21,124	$	333	$	21,457	$	20,931	$	2,410	$	23,341	$	(1,884	)

Additional disclosures about TDRs are included in “Note 5 – Loans and ALLL” of our interim condensed consolidated financial statements.

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Impaired Loans

The following is a summary of information pertaining to impaired loans as of:



	September 30, 2015						December 31, 2014
	Outstanding Balance		Unpaid Principal Balance		Valuation Allowance		Outstanding Balance		Unpaid Principal Balance		Valuation Allowance
TDRs
Commercial real estate	$	9,264	$	9,503	$	1,322	$	10,222	$	10,501	$	1,276
Commercial other	102		113		—		715		945		4
Agricultural real estate	1,876		1,876		—		1,423		1,423		—
Agricultural other	663		663		3		66		186		—
Residential real estate senior liens	9,247		9,603		1,780		10,462		11,019		1,847
Residential real estate junior liens	134		134		27		246		246		49
Home equity lines of credit	133		433		—		153		453		46
Consumer secured	38		38		1		54		54		1
Total TDRs	21,457		22,363		3,133		23,341		24,827		3,223
Other impaired loans
Commercial real estate	237		250		—		1,009		1,195		3
Commercial other	—		—		—		83		95		—
Agricultural real estate	104		104		—		106		106		—
Agricultural other	4		4		—		—		—		—
Residential real estate senior liens	761		1,275		84		1,183		1,763		168
Residential real estate junior liens	—		—		—		19		29		4
Home equity lines of credit	—		—		—		97		197		29
Consumer secured	—		—		—		10		10		—
Total other impaired loans	1,106		1,633		84		2,507		3,395		204
Total impaired loans	$	22,563	$	23,996	$	3,217	$	25,848	$	28,222	$	3,427

Additional disclosure related to impaired loans is included in “Note 5 – Loans and ALLL” of our interim condensed consolidated financial statements.

Nonperforming Assets

The following table summarizes our nonperforming assets as of:



	September 30 2015			June 30 2015			March 31 2015			December 31 2014			September 30 2014
Nonaccrual status loans	$	796		$	1,530		$	3,422		$	4,044		$	4,496
Accruing loans past due 90 days or more	—			19			173			148			164
Total nonperforming loans	796			1,549			3,595			4,192			4,660
Foreclosed assets	601			873			717			885			1,041
Total nonperforming assets	$	1,397		$	2,422		$	4,312		$	5,077		$	5,701
Nonperforming loans as a % of total loans	0.10		%	0.19		%	0.44		%	0.50		%	0.57		%
Nonperforming assets as a % of total assets	0.09		%	0.15		%	0.27		%	0.33		%	0.37		%

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

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



	September 30 2015		December 31 2014
Commercial and agricultural	$	256	$	1,995
Residential real estate	77		262
Consumer	—		153
Total	$	333	$	2,410

Additional disclosures about nonaccrual status loans are included in “Note 5 – Loans and ALLL” of our interim condensed consolidated financial statements.

We continue to devote considerable attention to identifying impaired loans and adjusting the net carrying value of these loans to their current net realizable values through the establishment of a specific reserve or the recording of a charge-off. We believe that we have identified all impaired loans as of September 30, 2015.

We believe that the level of the ALLL is appropriate as of September 30, 2015. We will continue to closely monitor overall credit quality indicators and our policies and procedures related to the analysis of the ALLL to ensure that the ALLL remains at the appropriate level.

Noninterest Income and Noninterest Expenses

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



	Three Months Ended September 30
							Change
	2015			2014			$			%
Service charges and fees
ATM and debit card fees	$	708		$	538		$	170		31.60	%
NSF and overdraft fees	492			565			(73		)	(12.92	)%
Freddie Mac servicing fee	179			178			1			0.56	%
Service charges on deposit accounts	88			92			(4		)	(4.35	)%
Net OMSR income (loss)	(34		)	(41		)	7			N/M
All other	35			34			1			2.94	%
Total service charges and fees	1,468			1,366			102			7.47	%
Net gain on sale of mortgage loans	157			170			(13		)	(7.65	)%
Earnings on corporate owned life insurance policies	188			182			6			3.30	%
Net gains (losses) on sale of AFS securities	—			97			(97		)	(100.00	)%
Other
Trust and brokerage advisory fees	538			506			32			6.32	%
Corporate Settlement Solutions joint venture	399			(180		)	579			N/M
Other	351			75			276			368.00	%
Total other	1,288			401			887			221.20	%
Total noninterest income	$	3,101		$	2,216		$	885		39.94	%

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	Nine Months Ended September 30
							Change
	2015			2014			$			%
Service charges and fees
ATM and debit card fees	$	1,798		$	1,559		$	239		15.33	%
NSF and overdraft fees	1,392			1,630			(238		)	(14.60	)%
Freddie Mac servicing fee	538			541			(3		)	(0.55	)%
Service charges on deposit accounts	258			267			(9		)	(3.37	)%
Net OMSR income (loss)	(61		)	22			(83		)	(377.27	)%
All other	99			101			(2		)	(1.98	)%
Total service charges and fees	4,024			4,120			(96		)	(2.33	)%
Net gain on sale of mortgage loans	472			436			36			8.26	%
Earnings on corporate owned life insurance policies	570			556			14			2.52	%
Net gains (losses) on sale of AFS securities	—			97			(97		)	(100.00	)%
Other
Trust and brokerage advisory fees	1,640			1,532			108			7.05	%
Corporate Settlement Solutions joint venture	518			(117		)	635			N/M
Other	634			275			359			130.55	%
Total other	2,792			1,690			1,102			65.21	%
Total noninterest income	$	7,858		$	6,899		$	959		13.90	%

Significant changes in noninterest income are detailed below:


•	ATM and debit card fees increased during 2015 as a result of marketing incentives. While we do not anticipate significant changes to our ATM and debit fees, we do expect that fees will continue to increase in the remainder of 2015 as the usage of ATM and debit cards continues to increase.


•	NSF and overdraft fees fluctuate from period-to-period based on customer activity as well as the number of business days in the period. We anticipate fees to continue to decline for the remainder of 2015.

•

Offering rates on residential mortgage loans, as well as the decline in loan demand, have been the most significant drivers behind fluctuations in the gain on sale of mortgage loans and net OMSR income (loss). Mortgage rates are expected to approximate current levels in the foreseeable future and purchase money mortgage activity is anticipated to increase as a result of our various initiatives to drive growth. As such, we anticipate increases in origination volumes and in turn, gains on sale of mortgage loans.


•	The increase in earnings from our Corporate Settlement Solutions joint venture during 2015 can be attributed to two initiatives - expansion of national sales and maintaining consistent margins with the increased sales volume. Income for the remainder of 2015 is expected to continue to increase.


•	The fluctuations in all other income is spread throughout various categories, none of which are individually significant.

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



	Three Months Ended September 30
					Change
	2015		2014		$			%
Compensation and benefits
Employee salaries	$	4,298	$	4,026	$	272		6.76	%
Employee benefits	1,323		1,148		175			15.24	%
Total compensation and benefits	5,621		5,174		447			8.64	%
Furniture and equipment
Service contracts	780		660		120			18.18	%
Depreciation	473		485		(12		)	(2.47	)%
ATM and debit card fees	232		188		44			23.40	%
All other	26		15		11			73.33	%
Total furniture and equipment	1,511		1,348		163			12.09	%
Occupancy
Outside services	167		168		(1		)	(0.60	)%
Depreciation	180		175		5			2.86	%
Utilities	130		128		2			1.56	%
Property taxes	135		131		4			3.05	%
All other	116		95		21			22.11	%
Total occupancy	728		697		31			4.45	%
Other
FDIC insurance premiums	204		196		8			4.08	%
Director fees	204		191		13			6.81	%
Audit and related fees	189		185		4			2.16	%
Donations and community relations	155		391		(236		)	(60.36	)%
Marketing costs	124		121		3			2.48	%
Education and travel	90		154		(64		)	(41.56	)%
Printing and supplies	111		89		22			24.72	%
Postage and freight	94		105		(11		)	(10.48	)%
Legal fees	121		88		33			37.50	%
Consulting fees	122		96		26			27.08	%
Loan underwriting fees	98		83		15			18.07	%
All other	660		596		64			10.74	%
Total other	2,172		2,295		(123		)	(5.36	)%
Total noninterest expenses	$	10,032	$	9,514	$	518		5.44	%

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	Nine Months Ended September 30
					Change
	2015		2014		$			%
Compensation and benefits
Employee salaries	$	12,623	$	12,114	$	509		4.20	%
Employee benefits	3,797		3,931		(134		)	(3.41	)%
Total compensation and benefits	16,420		16,045		375			2.34	%
Furniture and equipment
Service contracts	2,220		1,871		349			18.65	%
Depreciation	1,390		1,379		11			0.80	%
ATM and debit card fees	564		542		22			4.06	%
All other	77		43		34			79.07	%
Total furniture and equipment	4,251		3,835		416			10.85	%
Occupancy
Outside services	542		543		(1		)	(0.18	)%
Depreciation	535		523		12			2.29	%
Utilities	404		403		1			0.25	%
Property taxes	400		396		4			1.01	%
All other	240		250		(10		)	(4.00	)%
Total occupancy	2,121		2,115		6			0.28	%
Other
FDIC insurance premiums	619		619		—			—
Director fees	608		569		39			6.85	%
Audit and related fees	535		505		30			5.94	%
Donations and community relations	412		606		(194		)	(32.01	)%
Marketing costs	350		360		(10		)	(2.78	)%
Education and travel	311		418		(107		)	(25.60	)%
Printing and supplies	309		278		31			11.15	%
Postage and freight	284		303		(19		)	(6.27	)%
Legal fees	273		248		25			10.08	%
Consulting fees	264		263		1			0.38	%
Loan underwriting fees	248		270		(22		)	(8.15	)%
All other	1,725		1,866		(141		)	(7.56	)%
Total other	5,938		6,305		(367		)	(5.82	)%
Total noninterest expenses	$	28,730	$	28,300	$	430		1.52	%

Significant changes in noninterest expenses are detailed below:


•	The decline in employee benefits is related to health care costs as a result of lower than anticipated claims. Employee benefits are expected to remain at current levels for the remainder of 2015.


•	Service contracts include approximately $147 of conversion related costs incurred as a result of our recent branch acquisitions. Additional costs related to these acquisitions are not expected to be significant during the remainder of 2015.

•

We have consistently been a strong supporter of the various communities, schools, and charities in the markets we serve. We sponsor a foundation, which we established in 1996, that is funded by discretionary donations. The affiliated foundation provides centralized oversight for donations to organizations that benefit our communities. Included in Donations and community relations expense are discretionary donations to the foundation of $0 and $250 for the nine month periods ended September 30, 2015 and 2014, respectively.


•	The fluctuations in all other expenses are spread throughout various categories, none of which are individually significant.

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Analysis of Changes in Financial Condition



	September 30 2015		December 31 2014		$ Change			% Change (unannualized)
ASSETS
Cash and cash equivalents	$	18,322	$	19,906	$	(1,584	)	(7.96	)%
AFS securities
Amortized cost of AFS securities	619,834		561,893		57,941			10.31	%
Unrealized gains (losses) on AFS securities	8,778		5,641		3,137			55.61	%
AFS securities	628,612		567,534		61,078			10.76	%
Mortgage loans AFS	831		901		(70		)	(7.77	)%
Loans
Gross loans	833,347		833,582		(235		)	(0.03	)%
Less allowance for loan and lease losses	8,200		10,100		(1,900		)	(18.81	)%
Net loans	825,147		823,482		1,665			0.20	%
Premises and equipment	28,353		25,881		2,472			9.55	%
Corporate owned life insurance policies	26,222		25,152		1,070			4.25	%
Accrued interest receivable	6,992		5,851		1,141			19.50	%
Equity securities without readily determinable fair values	22,341		20,076		2,265			11.28	%
Goodwill and other intangible assets	48,875		46,128		2,747			5.96	%
Other assets	13,555		14,632		(1,077		)	(7.36	)%
TOTAL ASSETS	$	1,619,250	$	1,549,543	$	69,707		4.50	%
LIABILITIES AND SHAREHOLDERS’ EQUITY
Liabilities
Deposits	$	1,128,003	$	1,074,484	$	53,519		4.98	%
Borrowed funds	297,610		289,709		7,901			2.73	%
Accrued interest payable and other liabilities	10,639		10,756		(117		)	(1.09	)%
Total liabilities	1,436,252		1,374,949		61,303			4.46	%
Shareholders’ equity	182,998		174,594		8,404			4.81	%
TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY	$	1,619,250	$	1,549,543	$	69,707		4.50	%

The following table outlines the changes in loans:



	September 30 2015		December 31 2014		$ Change			% Change (unannualized)
Commercial	$	433,069	$	431,961	$	1,108		0.26	%
Agricultural	116,293		104,721		11,572			11.05	%
Residential real estate	249,850		264,595		(14,745		)	(5.57	)%
Consumer	34,135		32,305		1,830			5.66	%
Total	$	833,347	$	833,582	$	(235	)	(0.03	)%

The following table displays loan balances as of:



	September 30 2015		June 30 2015		March 31 2015		December 31 2014		September 30 2014
Commercial	$	433,069	$	430,981	$	418,311	$	431,961	$	416,824
Agricultural	116,293		113,134		107,299		104,721		101,795
Residential real estate	249,850		250,208		257,516		264,595		271,033
Consumer	34,135		34,279		32,342		32,305		32,647
Total	$	833,347	$	828,602	$	815,468	$	833,582	$	822,299

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

The following table outlines the changes in deposits:



	September 30 2015		December 31 2014		$ Change			% Change (unannualized)
Noninterest bearing demand deposits	$	181,782	$	181,826	$	(44	)	(0.02	)%
Interest bearing demand deposits	197,476		190,984		6,492			3.40	%
Savings deposits	316,590		261,412		55,178			21.11	%
Certificates of deposit	328,806		339,824		(11,018		)	(3.24	)%
Brokered certificates of deposit	76,948		72,134		4,814			6.67	%
Internet certificates of deposit	26,401		28,304		(1,903		)	(6.72	)%
Total	$	1,128,003	$	1,074,484	$	53,519		4.98	%

The following table displays deposit balances as of:



	September 30 2015		June 30 2015		March 31 2015		December 31 2014		September 30 2014
Noninterest bearing demand deposits	$	181,782	$	182,259	$	176,160	$	181,826	$	175,634
Interest bearing demand deposits	197,476		193,680		197,364		190,984		192,211
Savings deposits	316,590		278,105		286,741		261,412		269,475
Certificates of deposit	328,806		330,226		333,554		339,824		341,153
Brokered certificates of deposit	76,948		78,853		76,671		72,134		74,132
Internet certificates of deposit	26,401		27,346		28,165		28,304		29,285
Total	$	1,128,003	$	1,090,469	$	1,098,655	$	1,074,484	$	1,081,890

Deposit demand continues to be driven by non-contractual deposits while certificates of deposit gradually decline. We anticipate this trend to continue in future periods. Our significant growth in savings deposits during the third quarter is the result of our recent branch acquisitions and without these deposits, total deposits would have declined. We look to retain and attract new customers with the recent branch acquisitions to provide growth in deposits in future periods.

The current interest rate environment has made it almost impossible to increase net interest income without increasing earning assets. As deposit growth outpaced loan demand in recent periods, we deployed funds from deposit growth into purchases of AFS securities to provide additional interest income. In addition to utilizing deposits, we have also utilized borrowings and brokered deposits to fund earning assets. We anticipate that future increases in our AFS securities will be in the form of mortgage-backed securities and collateralized mortgage obligations. The following table displays fair values of AFS securities as of:



	September 30 2015		June 30 2015		March 31 2015		December 31 2014		September 30 2014
Government sponsored enterprises	$	24,368	$	24,203	$	24,397	$	24,136	$	23,917
States and political subdivisions	232,374		216,647		222,479		215,345		223,545
Auction rate money market preferred	2,707		2,719		2,775		2,619		2,863
Preferred stocks	3,192		3,230		6,324		6,140		6,173
Mortgage-backed securities	234,258		210,194		201,997		166,926		170,767
Collateralized mortgage obligations	131,713		138,325		147,236		152,368		147,815
Total	$	628,612	$	595,318	$	605,208	$	567,534	$	575,080

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The following table displays borrowed funds balances as of:



	September 30 2015		June 30 2015		March 31 2015		December 31 2014		September 30 2014
FHLB advances	$	215,000	$	240,000	$	217,000	$	192,000	$	182,000
Securities sold under agreements to repurchase without stated maturity dates	69,510		67,599		66,321		95,070		89,535
Securities sold under agreements to repurchase with stated maturity dates	—		—		—		439		1,203
Federal funds purchased	13,100		—		—		2,200		17,700
Total	$	297,610	$	307,599	$	283,321	$	289,709	$	290,438

Capital

Capital consists solely of common stock, retained earnings, and accumulated other comprehensive income (loss). We are authorized to raise capital through dividend reinvestment, employee and director stock purchases, and shareholder stock purchases. Pursuant to these authorizations, we issued 142,388 shares or $3,310 of common stock during the first nine months of 2015, as compared to 122,261 shares or $2,845 of common stock during the same period in 2014. We also offer the Directors Plan in which participants either directly purchase stock or purchase stock units through deferred fees, in lieu of cash payments. Pursuant to this plan, we increased shareholders’ equity by $425 and $382 during the nine month periods ended September 30, 2015 and 2014, respectively.

We have approved a publicly announced common stock repurchase plan. Pursuant to this plan, we repurchased 153,329 shares or $3,588 of common stock compared to 110,680 shares for $2,550 during the first nine months of 2015 and 2014, respectively. As of September 30, 2015, we were authorized to repurchase up to an additional 198,436 shares of common stock.

The FRB has established minimum risk based capital guidelines. Pursuant to these guidelines, a framework has been established that assigns risk weights to each category of on and off-balance-sheet items to arrive at risk adjusted total assets. Regulatory capital is divided by the risk adjusted assets with the resulting ratio compared to the minimum standard to determine whether a corporation has adequate capital. On July 2, 2013, the FRB published revised BASEL III Capital standards for banks. The final rules redefine what is included or deducted from equity capital, changes risk weighting for certain on and off-balance sheet assets, increases the minimum required equity capital to be considered well capitalized, and introduces a capital cushion buffer. The rules, which are being gradually phased in between 2015 and 2019, are not expected to have a material impact on the Corporation but will require us to hold more capital than we have historically.

There are no significant regulatory constraints placed on our capital. The FRB’s current recommended minimum primary capital to assets requirement is 6.00%. Our primary capital to adjusted average assets, or tier 1 leverage ratio, was 8.54% as of September 30, 2015.

Effective January 1, 2015, the minimum standard for primary, or tier 1, capital increased from 4.00% to 6.00%. The minimum standard for total capital remains at 8.00%. Also effective January 1, 2015 is the new common equity tier 1 capital ratio which has a minimum requirement of 4.50%. The following table sets forth the percentages required under the Risk Based Capital guidelines and our values as of:



	September 30 2015		December 31 2014		Required
Common equity tier 1 capital	13.36	%	N/A		4.50	%

Tier 1 capital	13.36	%	14.08	%	6.00	%
Tier 2 capital	0.83	%	1.10	%	2.00	%
Total Capital	14.19	%	15.18	%	8.00	%

Tier 2 capital, or secondary capital, includes only the ALLL. The percentage for the secondary capital under the required column is the maximum amount allowed from all sources.

The FRB and FDIC also prescribe minimum capital requirements for Isabella Bank. At September 30, 2015, the Bank exceeded these minimum capital requirements.

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Contractual Obligations and Loan Commitments

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

The following table summarizes our credit related financial instruments with off-balance-sheet risk as of:



	September 30 2015		December 31 2014
Unfunded commitments under lines of credit	$	130,146	$	116,935
Commercial and standby letters of credit	2,727		4,985
Commitments to grant loans	40,162		13,988
Total	$	173,035	$	135,908

Unfunded commitments under lines of credit are commitments for possible future extensions of credit to existing customers. These commitments may expire without being drawn upon and do not necessarily represent future cash requirements.

Commercial and standby letters of credit are conditional commitments issued to guarantee the performance of a customer to a third party. Those guarantees are primarily issued to support private borrowing arrangements, including commercial paper, bond financing, and similar transactions. These commitments to extend credit and letters of credit generally mature within one year. The credit risk involved in these transactions is essentially the same as that involved in extending loans to customers. We evaluate each customer's credit worthiness on a case-by-case basis. The amount of collateral obtained, if deemed necessary upon the extension of credit, is based on a credit evaluation of the borrower. While we consider standby letters of credit to be guarantees, the amount of the liability related to such guarantees on the commitment date is not significant and a liability related to such guarantees is not recorded on the consolidated balance sheets.

Commitments to grant loans are agreements to lend to a customer as long as there is no violation of any condition established in the contract. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. The amount of collateral obtained, if it is deemed necessary, is based on management’s credit evaluation of the customer. Commitments to grant loans include residential mortgage loans with the majority being loans committed to be sold to the secondary market.

Our exposure to credit-related loss in the event of nonperformance by the counter parties to the financial instruments for commitments to extend credit and standby letters of credit could be up to the contractual notional amount of those instruments. We use the same credit policies as we do for extending loans to customers. No significant losses are anticipated as a result of these commitments.

Fair Value

We utilize fair value measurements to record fair value adjustments to certain assets and liabilities and to determine fair value disclosures. AFS securities and certain liabilities are recorded at fair value on a recurring basis. Additionally, from time-to-time, we may be required to record at fair value other assets on a nonrecurring basis, such as mortgage loans AFS, foreclosed assets, OMSR, and certain other assets and liabilities. These nonrecurring fair value adjustments typically involve the application of lower of cost or market accounting or write-downs of individual assets.

For further information regarding fair value measurements see “Note 10 – Fair Value” of our notes to the interim condensed consolidated financial statements.

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Liquidity

Liquidity is monitored regularly by our Market Risk Committee, which consists of members of senior management. The committee reviews projected cash flows, key ratios, and liquidity available from both primary and secondary sources.

Our primary sources of liquidity are cash and cash equivalents and AFS securities. These categories totaled $646,934 or 39.95% of assets as of September 30, 2015 as compared to $587,440 or 37.91% as of December 31, 2014. Liquidity is important for financial institutions because of their need to meet loan funding commitments, depositor withdrawal requests, and various other commitments including expansion of operations, investment opportunities, and payment of cash dividends. Liquidity varies significantly daily, based on customer activity.

Our primary source of funds is through deposit accounts. We also have the ability to borrow from the FHLB, the FRB, and through various correspondent banks in the form of federal funds purchased and a line of credit. These funding methods typically carry a higher interest rate than traditional market deposit accounts. Some borrowed funds, including FHLB advances, FRB Discount Window advances, and repurchase agreements, require us to pledge assets, typically in the form of AFS securities or loans, as collateral. As of September 30, 2015, we had available lines of credit of $140,938.

The following table summarizes our sources and uses of cash for the nine month periods ended September 30:



	2015			2014			$ Variance
Net cash provided by (used in) operating activities	$	6,725		$	12,040		$	(5,315	)
Net cash provided by (used in) investing activities	(63,756		)	(72,254		)	8,498
Net cash provided by (used in) financing activities	55,447			44,187			11,260
Increase (decrease) in cash and cash equivalents	(1,584		)	(16,027		)	14,443
Cash and cash equivalents January 1	19,906			41,558			(21,652		)
Cash and cash equivalents September 30	$	18,322		$	25,531		$	(7,209	)

Market Risk

Our primary market risks are interest rate risk and liquidity risk. We have no significant foreign exchange risk and do not utilize interest rate swaps or derivatives, except for interest rate locks and forward loan commitments, in the management of IRR. Any changes in foreign exchange rates or commodity prices would have an insignificant impact on our interest income and cash flows.

IRR is the exposure of our net interest income to changes in interest rates. IRR results from the difference in the maturity or repricing frequency of a financial institution's interest earning assets and its interest bearing liabilities. IRR is the fundamental method by which financial institutions earn income and create shareholder value. Excessive exposure to IRR could pose a significant risk to our earnings and capital.

The FRB has adopted a policy requiring us to effectively manage the various risks that can have a material impact on our safety and soundness. The risks include credit, interest rate, liquidity, operational, and reputational. We have policies, procedures, and internal controls for measuring and managing these risks. Specifically, our Funds Management policy and procedures include defining acceptable types and terms of investments and funding sources, liquidity requirements, limits on investments in long term assets, limiting the mismatch in repricing opportunity of assets and liabilities, and the frequency of measuring and reporting to our Board.

The primary technique to measure IRR is simulation analysis. Simulation analysis forecasts the effects on the balance sheet structure and net interest income under a variety of scenarios that incorporate changes in interest rates, the shape of yield curves, interest rate relationships, and loan prepayments. These forecasts are compared against net interest income projected in a stable interest rate environment. While many assets and liabilities reprice either at maturity or in accordance with their contractual terms, several balance sheet components demonstrate characteristics that require an evaluation to more accurately reflect their repricing behavior. Key assumptions in the simulation analysis include prepayments on loans, probable calls of investment securities, changes in market conditions, loan volumes and loan pricing, deposit sensitivity, and customer preferences. These assumptions are inherently uncertain as they are subject to fluctuation and revision in a dynamic environment. As a result, the simulation analysis cannot precisely forecast the impact of rising and falling interest rates on net interest income. Actual results will differ from simulated results due to many other factors, including changes in balance sheet components, interest rate changes, changes in market conditions, and management strategies.

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

The following tables summarize our interest rate sensitivity for the 12 and 24 months as of:



	September 30, 2015
	12 Months										24 Months
Immediate basis point change assumption (short-term)	-100		+100		+200		+300		+400		-100		+100		+200		+300		+400
Percent change in net interest income vs. constant rates	(1.76	)%	0.15	%	0.22	%	(0.77	)%	(1.83	)%	(1.67	)%	0.18	%	1.13	%	0.44	%	(0.39	)%



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

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



	September 30, 2015
	2016			2017			2018			2019			2020			Thereafter			Total			Fair Value
Rate sensitive assets
Other interest bearing assets	$	1,247		$	100		$	—		$	—		$	—		$	—		$	1,347		$	1,346
Average interest rates	0.19		%	0.35		%	—			—			—			—			0.21		%
AFS securities	$	166,350		$	100,673		$	76,077		$	65,786		$	67,401		$	152,325		$	628,612		$	628,612
Average interest rates	2.03		%	2.27		%	2.18		%	2.27		%	2.38		%	2.39		%	2.24		%
Fixed interest rate loans (1)	$	114,549		$	122,992		$	110,203		$	83,248		$	84,135		$	155,614		$	670,741		$	662,830
Average interest rates	4.86		%	4.47		%	4.28		%	4.39		%	4.20		%	4.30		%	4.42		%
Variable interest rate loans (1)	$	61,361		$	21,067		$	28,260		$	14,065		$	15,987		$	21,866		$	162,606		$	162,606
Average interest rates	4.73		%	3.91		%	4.00		%	3.37		%	3.40		%	3.63		%	4.10		%
Rate sensitive liabilities
Borrowed funds	$	137,610		$	30,000		$	40,000		$	40,000		$	10,000		$	40,000		$	297,610		$	301,410
Average interest rates	0.48		%	1.95		%	2.35		%	2.35		%	1.98		%	2.67		%	1.48		%
Savings and NOW accounts	$	128,827		$	37,344		$	33,412		$	29,915		$	26,805		$	257,763		$	514,066		$	514,066
Average interest rates	0.41		%	0.11		%	0.11		%	0.11		%	0.11		%	0.10		%	0.18		%
Fixed interest rate certificates of deposit	$	191,097		$	94,897		$	69,775		$	25,709		$	29,428		$	19,638		$	430,544		$	429,566
Average interest rates	0.94		%	1.33		%	1.30		%	1.42		%	1.58		%	1.83		%	1.20		%
Variable interest rate certificates of deposit	$	1,183		$	428		$	—		$	—		$	—		$	—		$	1,611		$	1,611
Average interest rates	0.51		%	0.40		%	—			—			—			—			0.48		%



	December 31, 2014
	2015			2016			2017			2018			2019			Thereafter			Total			Fair Value
Rate sensitive assets
Other interest bearing assets	$	1,748		$	—		$	100		$	—		$	—		$	—		$	1,848		$	1,847
Average interest rates	0.36		%	—			0.35		%	—			—			—			0.36		%
AFS securities	$	109,261		$	93,324		$	80,147		$	53,017		$	47,112		$	184,673		$	567,534		$	567,534
Average interest rates	2.22		%	2.26		%	2.32		%	2.39		%	2.46		%	2.62		%	2.41		%
Fixed interest rate loans (1)	$	119,028		$	98,865		$	128,954		$	91,854		$	71,293		$	151,156		$	661,150		$	655,017
Average interest rates	4.90		%	4.83		%	4.53		%	4.32		%	4.47		%	4.25		%	4.54		%
Variable interest rate loans (1)	$	71,435		$	26,938		$	19,836		$	13,929		$	14,706		$	25,588		$	172,432		$	172,432
Average interest rates	4.46		%	3.97		%	3.95		%	3.39		%	3.37		%	4.01		%	4.08		%
Rate sensitive liabilities
Borrowed funds	$	139,709		$	10,000		$	30,000		$	40,000		$	20,000		$	50,000		$	289,709		$	293,401
Average interest rates	0.33		%	2.15		%	1.95		%	2.35		%	3.11		%	2.53		%	1.41		%
Savings and NOW accounts	$	40,395		$	36,417		$	32,717		$	29,423		$	26,487		$	286,957		$	452,396		$	452,396
Average interest rates	0.11		%	0.11		%	0.11		%	0.11		%	0.11		%	0.10		%	0.11		%
Fixed interest rate certificates of deposit	$	216,852		$	74,722		$	56,391		$	50,550		$	22,901		$	17,723		$	439,139		$	439,841
Average interest rates	0.96		%	1.66		%	1.47		%	1.31		%	1.48		%	1.77		%	1.25		%
Variable interest rate certificates of deposit	$	653		$	470		$	—		$	—		$	—		$	—		$	1,123		$	1,123
Average interest rates	0.40		%	0.40		%	—			—			—			—			0.40		%

⁽¹⁾ The fair value reported is exclusive of the allocation of the ALLL.

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

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Item 3. Quantitative and Qualitative Disclosures about Market Risk.

The information presented in the section captioned “Market Risk” in Management's Discussion and Analysis of Financial Condition and Results of Operations is incorporated herein by reference.

Item 4. Controls and Procedures.

DISCLOSURE CONTROLS AND PROCEDURES

We carried out an evaluation, under the supervision and with the participation of the Principal Executive Officer and Principal Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures (as such term is defined in Rules 13a-15(e) and 15(d)-15(e) under the Exchange Act) as of September 30, 2015, pursuant to Exchange Act Rule 13a-15. Based upon that evaluation, the Principal Executive Officer and Principal Financial Officer concluded that our disclosure controls and procedures as of September 30, 2015, were effective to ensure that information required to be disclosed in reports that we file or submit under the Exchange Act are recorded, processed, summarized and reported within the time periods specified in SEC rules and forms.

CHANGES IN INTERNAL CONTROL OVER FINANCIAL REPORTING

During the most recent fiscal quarter, no change occurred in our internal control over financial reporting that materially affected, or is likely to materially effect, our internal control over financial reporting.

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PART II – OTHER INFORMATION

Item 1. Legal Proceedings.

We are not involved in any material legal proceedings. We are involved in ordinary, routine litigation incidental to our business; however, no such routine proceedings are expected to result in any material adverse effect on operations, earnings, financial condition, or cash flows.

Item 1A. Risk Factors.

There have been no material changes to the risk factors disclosed in Item 1A in our Annual Report on Form 10-K for the year ended December 31, 2014.

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.


(A)	None


(B)	None


(C)	Repurchases of Common Stock

We have adopted and publicly announced a common stock repurchase plan. The plan was last amended on September 23, 2015, to allow for the repurchase of an additional 200,000 shares of common stock after that date. These authorizations do not have expiration dates. As common shares are repurchased under this plan, they are retired and revert back to the status of authorized, but unissued common shares.

The following table provides information for the three month period ended September 30, 2015, with respect to this plan:



	Common Shares Repurchased			Total Number of Common Shares Purchased as Part of Publicly Announced Plan or Program	Maximum Number of Common Shares That May Yet Be Purchased Under the Plans or Programs
	Number	Average Price Per Common Share
Balance, June 30					77,873
July 1 - 31	25,977	$	24.18	25,977	51,896
August 1 - 31	25,379	23.25		25,379	26,517
September 1 - 22	15,000	23.80		15,000	11,517
Additional Authorization (200,000 shares)					211,517
September 23 - 30	13,081	23.62		13,081	198,436
Balance, September 30	79,437	$	23.72	79,437	198,436

Item 3. Defaults Upon Senior Securities.

Not applicable.

Item 4. Mine Safety Disclosures.

Not applicable.

Item 5. Other Information.

Not applicable.

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Item 6. Exhibits

(a) Exhibits



Exhibit Number		Exhibits

31(a)		Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 by the Principal Executive Officer

31(b)		Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 by the Principal Financial Officer

32		Section 1350 Certification of Principal Executive Officer and Principal Financial Officer

101.1*		101.INS (XBRL Instance Document)

		101.SCH (XBRL Taxonomy Extension Schema Document)

		101.CAL (XBRL Calculation Linkbase Document)

		101.LAB (XBRL Taxonomy Label Linkbase Document)

		101.DEF (XBRL Taxonomy Linkbase Document)

		101.PRE (XBRL Taxonomy Presentation Linkbase Document)

In accordance with Rule 406T of Regulations S-T, the XBRL related information shall not be deemed to be “filed” for purposes of Section 18 of the Exchange Act, or otherwise subject to the liability of that section, and shall not be part of any registration statement or other document filed under the Securities Act or the Exchange Act, except as shall be expressly set forth by specific reference in such filing.

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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.



		Isabella Bank Corporation

Date:	November 5, 2015		/s/ Jae A. Evans
			Jae A. Evans
			Chief Executive Officer
			(Principal Executive Officer)

Date:	November 5, 2015		/s/ Dennis P. Angner
			Dennis P. Angner
			President, Chief Financial Officer
			(Principal Financial Officer, Principal Accounting Officer)